<PAGE>
As filed with the Securities and Exchange Commission on June 18, 1999
File No. 70-______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
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
Executive Vice President,
General Counsel and Secretary
LG&E Energy Corp.
220 West Main Street
Louisville, Kentucky 40232
(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
Gardner, Carton & Douglas
321 North Clark Street, Suite 3400
Chicago, Illinois 60610
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
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) WKEC..........................................................................7
2. Description of Energy Sales and Facilities.............................................8
(a) LG&E..........................................................................8
(i) Energy Sales..........................................................8
(ii) Electric Generating Facilities........................................8
(iii) Electric Transmission and Other Facilities............................9
(iv) Fuel Sources..........................................................9
(v) Gas Facilities........................................................9
(b) Kentucky Utilities...........................................................10
(i) Energy Sales.........................................................10
(ii) Electric Generating Facilities.......................................10
(iii) Electric Transmission and Other Facilities...........................11
(iv) Fuel Sources.........................................................11
(c) WKEC.........................................................................12
(i) Energy Sales.........................................................12
(ii) Electric Generating Facilities.......................................12
(iii) Electric Transmission and Other Facilities...........................12
(iv) Fuel Services........................................................13
3. Electric Coordination.................................................................13
4. Non-Utility Interests of LG&E Energy and WKEC.........................................14
(a) LG&E Energy..................................................................14
(b) WKEC.........................................................................15
C. Description of Transaction and Statement as to Consideration...................................15
1. Background............................................................................15
2. Merger Agreement......................................................................19
3. Management of LG&E Energy Following the Transaction...................................19
Item 2. Fees, Commissions and Expenses.................................................................19
Item 3. Applicable Statutory Provisions................................................................20
A. Section 10(b)..................................................................................21
1. Section 10(b)(1)......................................................................21
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(a) Interlocking Relations.......................................................21
(b) Concentration of Control.....................................................21
2. Section 10(b)(2)......................................................................24
(a) Reasonableness of Consideration..............................................24
(b) Reasonableness of Fees.......................................................24
3. Section 10(b)(3)......................................................................25
B. Section 10(c)..................................................................................25
1. Section 10(c)(1)......................................................................26
(a) Compliance With Section 8....................................................26
(b) No Detriment to the Carrying Out of Section 11...............................26
2. Section 10(c)(2)......................................................................28
C. Section 10(f)..................................................................................30
D. Section 3(a)(1)................................................................................30
E. Section 3(a)(2)................................................................................31
Item 4. Regulatory Approvals...........................................................................32
A. Antitrust......................................................................................32
B. Federal Power Act..............................................................................32
C. State Public Utility Regulation................................................................33
Item 5. Procedure......................................................................................33
Item 6. Exhibits and Financial Statements..............................................................33
A. Exhibits.......................................................................................33
B. Financial Statements...........................................................................34
Item 7. Information as to Environmental Effects........................................................36
</TABLE>
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 indirect
acquisition by LG&E Energy Corp. ("LG&E Energy") of a reconstituted Western
Kentucky Energy Corp. ("WKEC"), pursuant to a merger of WKEC, WKE Corp. and
WKE Station Two Inc. ("Station Two Sub"), with WKEC as the surviving
corporation (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, and all of the
common stock of Kentucky Utilities Company, a Kentucky and Virginia
corporation ("Kentucky Utilities"), an electric 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. 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.
WKE Corp. currently is an indirect wholly-owned subsidiary of LG&E
Energy. WKE Corp. also is the parent company of WKEC and Station Two Sub. WKE
Corp., WKEC and Station Two Sub were all formed in connection with a series
of transactions involving Big Rivers Electric Corporation ("Big Rivers").
Pursuant to these transactions, WKEC leased the generating facilities of Big
Rivers and agreed to operate these facilities. Station Two Sub agreed to
operate a generating facility of the City of Henderson, Kentucky that was
previously operated by Big Rivers. Their affiliate, LG&E Energy Marketing,
Inc. ("LEM"), agreed to purchase electricity from the Big Rivers' facilities
and the City of Henderson's facility. The electricity from the City of
Henderson was previously purchased by Big Rivers. WKE Corp. agreed to lease
certain assets other than those used in the production of electricity and to
provide certain management service to its subsidiaries. These transactions,
which are collectively referred to as the "Big Rivers Transactions," took
effect in July 1998. Because the generating facilities of the City of
Henderson serve retail customers, WKEC could not operate these facilities and
still maintain its status as an EWG. Therefore, a decision was made to
separate the duties and responsibilities relating to the Big Rivers'
facilities and the City of Henderson facilities even though these duties were
previously performed by one company, Big Rivers. Generally, WKEC leases and
operates the Big Rivers' facilities and Station Two Sub operates the City of
Henderson's facility. WKEC currently is certified as an EWG and Station Two
Sub has received a no-action letter from the Staff of the Commission
confirming that Station Two Sub's activities would not cause it to be deemed
an electric utility company under the Act.
LG&E Energy has now determined that the separation of the duties and
responsibilities among WKE Corp., WKEC, Station Two Sub and another
affiliate, LEM, and the constraints imposed upon WKEC in order to maintain
its certification as an EWG have led to numerous operational inefficiencies.
Consequently, LG&E Energy now desires to combine WKE Corp.,
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WKEC and Station Two Sub, with WKEC as the surviving corporation, and
possibly to transfer certain related contracts for the sale of energy,
capacity and ancillary services from LEM to WKEC. This Transaction is
intended to simplify and consolidate responsibility within a single company,
WKEC, for operation and management of all of the generating assets in Western
Kentucky that are operated by LG&E Energy affiliates, and for the sale of
power and ancillary services from those facilities. The Transaction will
eliminate redundancies and inefficiencies, thereby promoting economies of
scale. For example, the Transaction will promote more efficient use of the
labor force currently divided among WKE Corp., WKEC and Station Two Sub, and
will eliminate the need to maintain separate computer systems and books and
records for each of those companies. Following the Transaction, the surviving
entity will cease to meet the requirements of being an EWG(1), will decertify
as an EWG and will become an electric utility company under the Act.
Therefore, consummation of the Transaction will result in the indirect
acquisition of an electric utility company by LG&E Energy.
The Transaction and the Big Rivers Transactions that preceded it are
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 believes that the Transaction offers significant
operational and financial benefits to the Company and its shareholders, as
well as to the employees, customers and the communities in which they do
business.
Certain elements of the Transaction have been approved by the
Federal Energy Regulatory Commission (the "FERC"). In addition, WKE Corp.,
WKEC and Station Two Sub possess various 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 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 indirect acquisition by LG&E
Energy pursuant to the Transaction described herein of all of the issued and
outstanding common stock of WKEC 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 and its wholly-owned
subsidiary, LG&E Capital Corp., 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.
WKE Corp., WKEC and Station Two Sub will enter into a merger
agreement whereby WKE Corp. and Station Two Sub will be merged into WKEC,
with WKEC as the surviving corporation.
- --------------------------
(1) As indicated above, the City of Henderson's facility serves retail
customers and, therefore, WKEC will no longer qualify as an EWG when it
assumes Station Two Sub's responsibilities to operate the City's
facility.
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Upon completion of the Transaction, LG&E Energy will directly own LG&E,
a combination electric and gas public utility company, Kentucky Utilities, an
electric public utility company, and WKEC, 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 WKEC, LG&E, Kentucky Utilities and their respective interests in OVEC and
EEI, will continue to own all of its existing non-utility subsidiaries. See
Exhibit E-9 for the corporate structure to be in effect upon consummation of the
Transaction.
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 and by order of the Commission in LG&E ENERGY
CORP., Holding Co. Act Release No. 26866, 67 SEC Docket 107 (April 30, 1998).
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-1 and
E-2.
LG&E is engaged primarily in the generation, transmission and
distribution of electricity to approximately 360,000 customers in Louisville
and adjacent areas in Kentucky. LG&E's service area covers approximately 700
square miles in 17 counties in Kentucky and has an estimated population of
one million. LG&E also purchases, distributes and sells natural gas to
approximately 289,000 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
Public Service Commission ("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.
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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, 1998, LG&E derived less than .15% 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).
LG&E Energy also owns all of the outstanding common stock of
Kentucky Utilities, an electric utility company under the Act. Kentucky
Utilities is engaged in producing, transmitting and selling electric energy
to about 449,000 customers in over 600 communities and adjacent suburban and
rural areas in 77 counties in central, southeastern and western Kentucky, and
to about 29,000 customers in 5 counties in southwestern Virginia. In
Virginia, 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-4.
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 State Corporation Commission ("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 Regulatory Authority 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 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
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161 kilovolt ("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, 1998, Kentucky Utilities derived less than 3% of its net income
from its share of the earnings of EEI and OVEC. For more information
concerning EEI, SEE CENTRAL ILLINOIS PUBLIC SERVICE CO., Holding Co. 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. 13,781, 38 S.E.C. 658 (Nov. 28, 1958).
While LG&E and Kentucky Utilities are currently the only subsidiaries
of LG&E Energy that are public-utility companies 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,
1998, approximately 16% of LG&E Energy's consolidated operating revenues and
18% of its consolidated operating income were derived from the non-utility
businesses. As of December 31, 1998, approximately 20% of LG&E Energy's
consolidated assets were invested in non-utility businesses. For the twelve
months ended March 31, 1999, approximately 19% of LG&E Energy's consolidated
operating revenues and 23% of its consolidated operating income were derived
from non-utility businesses. As of March 31, 1999, approximately 22% 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 April 30, 1999, there
were 129,677,030 shares of LG&E Energy Common Stock outstanding. LG&E Energy
has no preferred stock outstanding. As of April 30, 1999, there was a total
of 1,610,287 shares of LG&E preferred stock outstanding, under three separate
series. As of April 30, 1999, there were 400,000 shares of Kentucky Utilities
preferred stock outstanding. LG&E Energy's and LG&E's principal executive
office is located at 220 West Main Street, Louisville, Kentucky 40202.
Kentucky Utilities' principal executive office is located at One Quality
Street, Lexington, Kentucky 40507. Copies of the Articles of Incorporation of
LG&E Energy, LG&E and Kentucky Utilities are incorporated by reference as
Exhibit A-1, Exhibit A-2 and Exhibit A-3.
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On a consolidated basis, LG&E Energy's operating revenues and operating
income for the twelve months ended December 31, 1998, were $2.002 billion and
$384 million, respectively, consisting of the following (before intercompany
eliminations):
($ in millions)
<TABLE>
<CAPTION>
Operating Operating
Revenues Income
--------- ----------
<S> <C> <C>
LG&E
Electric $659 $152
Gas 192 8
Kentucky Utilities (electric) 810 157
LG&E Capital 346 105
</TABLE>
Consolidated assets of LG&E Energy and its subsidiaries as of December 31, 1998
were approximately $4.8 billion, consisting of $3.0 billion in net electric
utility property, plant and equipment; $300 million in net gas utility property,
plant and equipment; and $1.5 billion in other corporate assets.
On a consolidated basis, LG&E Energy's unaudited operating revenue and operating
income for the twelve months ended March 31, 1999, were $2.1 billion and $407.5
million, respectively, consisting of the following (before intercompany
eliminations):
($ in millions)
<TABLE>
<CAPTION>
Operating Operating
Revenues Income
--------- ----------
<S> <C> <C>
LG&E
Electric $669 $145
Gas 175 6
Kentucky Utilities 844 163
LG&E Capital 440 132
</TABLE>
Unaudited consolidated assets of LG&E Energy and its subsidiaries as of March
31, 1999, were approximately $4.8 billion, consisting of $2.9 billion in net
electric utility property, plant and equipment; $300 million in net gas utility
property, plant and equipment; and $1.6 billion in other corporate assets.
More detailed information concerning LG&E Energy and its subsidiaries
is contained in: (i) LG&E Energy's Annual Report on Form 10-K for the year ended
December 31, 1998, its
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Annual Report to Shareholders for the year ended December 31, 1998, and its
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, and all
of which are incorporated by reference as Exhibits H-1, H-3 and H-5,
respectively, (ii) LG&E's Annual Report on Form 10-K for the year ended
December 31, 1998, and its Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, which are incorporated by reference as Exhibits H-2 and
H-6, respectively, and (iii) Kentucky Utilities Annual Report on Form 10-K
for the year ended December 31, 1998, and its Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, which are incorporated by reference as
Exhibits H-4 and H-7.
(b) WKEC
As indicated above, LG&E Energy and its non-utility affiliates, WKE
Corp., WKEC and Station Two Sub, entered into the Big Rivers Transactions in
July 1998. The Big Rivers Transactions emanated out of bankruptcy proceedings
relating to Big Rivers, an electric cooperative that was operating under
Chapter 11 of the Bankruptcy Code. The purpose of the Big Rivers Transactions
was to allow Big Rivers to emerge from bankruptcy as a financially viable
utility capable of fulfilling its responsibilities toward its member
cooperatives at rates materially lower than those that were in effect at the
time. To that end, WKEC entered into a 25 year lease arrangement with Big
Rivers pursuant to which WKEC leases all of Big Rivers' electric generating
facilities and conducts the day to day operation of the facilities. WKEC also
sells the power generated by the Big Rivers facilities to LEM, which is
obligated to supply energy to Big Rivers and certain of its member
cooperatives. LEM may resell to others the excess power. Big Rivers continues
to own the generating facilities and owns and operates all its transmission
facilities to meet the electricity requirements of its member cooperatives.
Big Rivers also provides transmission access and services to LEM over Big
Rivers' transmission facilities. WKEC is an EWG under the Act.
Prior to the Big Rivers Transactions, Big Rivers operated and
maintained an electric generating facility of the City of Henderson, Kentucky
and purchased a substantial portion of the output of the City's facility
under various contracts with the City. As indicated above, the City's
facility serves retail customers and, therefore, in order for WKEC to qualify
as an EWG it could not operate the City's facility. Accordingly, a separate
entity, Station Two Sub, was created and, as part of the Big Rivers
Transactions, substantially all of Big Rivers' rights and obligations under
the contracts between Big Rivers and the City regarding the operation and
maintenance of the City's facility and the disposition of excess power from
such facility were assigned to, and assumed by, Station Two Sub. The rights
and obligations to purchase and take title to the excess power were, in turn,
assigned by Station Two Sub to LEM.
Because the Big Rivers Transactions were not effective until July
1998, operating results for WKEC, WKE Corp. and Station Two Sub are not
available for any periods prior to July 1, 1998. For the quarter ended March
31, 1999, WKEC's operating revenues and operating loss (on a pro forma basis)
were approximately $60 million and $511,000, respectively.
The total assets of WKEC as of March 31, 1999 (on a pro forma
basis), were approximately $186 million.
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2. Description of Energy Sales and Facilities
(a) LG&E
(i) Energy Sales
For the year ended December 31, 1998, and the twelve months ended March
31, 1999, 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, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Mwh of electric energy sold (including amounts 15,874 16,263
delivered in interchange) - in thousands
MMcf of gas distributed at retail (including 50,222 48,290
transported gas)
</TABLE>
(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 March 31, 1999, LG&E owned the
following electric generating stations:
<TABLE>
<CAPTION>
Year in
Steam Stations: Service Capability Rating (Mw)
------- ----------------------
<S> <C> <C>
Mill Creek-Kosmosdale, Ky.
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>
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(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 1998 electric system peak load for LG&E was 2,427 Mw and occurred
on August 25, 1998, exclusive of off-system transactions. For the year ended
December 31, 1998, approximately 84% of the kilowatt hour ("Kwh") sales of LG&E
was obtained from coal-fired generation, 14% from purchases and approximately 1%
from hydro and oil and gas-fired generation.
(iii) Electric Transmission and Other Facilities
As of December 31, 1998, 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, 1998, 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-3.
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, 1998, which is incorporated by reference as Exhibit H-2.
(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.
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(b) Kentucky Utilities
(i) Energy Sales
For the year ended December 31, 1998, and the twelve months ended March
31, 1999, Kentucky Utilities sold the following amounts of electric energy (at
retail or wholesale):
<TABLE>
<CAPTION>
Year-ended Twelve Months Ended
December 31, 1998 March 31, 1999
----------------- ------------------
<S> <C> <C>
Mwh of electric energy sold 23,124 24,705,113
(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 March 31,
1999, Kentucky Utilities owned the following electric generating stations:
<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
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Steam Stations: Year in Service Capability Rating (Mw)
--------------- ----------------------
<S> <C> <C>
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 9% of Kentucky
Utilities net system output during 1998.
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 1998.
The 1998 electric system peak load for Kentucky Utilities was 3,559 Mw
and occurred on August 25, 1998. For the year ended December 31, 1998,
approximately 73% of Kwh sales of Kentucky Utilities was obtained from
coal-fired generation, approximately 26% from purchases and less than 1% from
other generation.
(iii) Electric Transmission and Other Facilities
As of December 31, 1998, 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, 1998, 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-5.
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 98% of Kentucky
Utilities' net kilowatt-hour generation for 1998. Kentucky Utilities' average
cost of coal is set forth in its Annual
11
<PAGE>
Report on Form 10-K for the year ended December 31, 1998, which is
incorporated by reference as Exhibit H-4.
(c) WKEC
(i) Energy Sales
For the quarter ended March 31, 1999, LEM sold 404,063 Mwh of electric
energy at wholesale from the electric generating facilities of Big Rivers and
the City of Henderson.
(ii) Electric Generating Facilities
WKEC's and Station Two Sub's electric generating system consists of 10
units at 5 generating stations. None of such units are owned by WKEC or Station
Two Sub. The two units at the City of Henderson's Station Two Facility are
neither leased nor owned by Station Two Sub, but only operated by Station Two
Sub. The remainder of the units are leased by WKEC. At March 31, 1999, WKEC and
Station Two Sub leased and/or operated the following electric generating
stations:
<TABLE>
<CAPTION>
Station Type Year in Service Capability Rating (Mw)
------- ---- --------------- ----------------------
<S> <C> <C> <C>
Kenneth C. Coleman
Unit 1 coal fired/steam November 1969 150
Unit 2 coal fired/steam September 1970 150
Unit 3 coal fired/steam January 1972 155
---
455
Robert D. Green
Unit 1 coal fired/steam December 1979 231
Unit 2 coal fired/steam January 1981 223
---
454
D.B. Wilson
Unit 1 coal fired/steam November 1986 420
Reid
Unit 1 coal-fired/steam January 1966 65
Unit 2 combustion turbine March 1976 65
---
130
City of Henderson Station Two
Unit 1 coal-fired/steam June 1973 153
Unit 2 coal-fired/steam April 1974 159
---
312
</TABLE>
(iii) Electric Transmission and Other Facilities
WKEC neither owns nor leases any transmission or distribution systems or
properties. Big Rivers provides transmission service to WKEC and LEM pursuant to
contract. WKEC has an agreement with Big Rivers to interconnect with the Big
Rivers system and LEM (which sells the
12
<PAGE>
power generated by WKEC and at Station Two) also has contracted with Big
Rivers for firm point-to-point and network transmission service, pursuant to
Big Rivers' open access transmission tariff on file with FERC. As described
below, Big Rivers' transmission system is interconnected to both the LG&E and
Kentucky Utilities transmission systems.
(iv) Fuel Services
Coal-fired generating units provided more than 99% of WKEC's and
Station Two Sub's net Kwh generation for the first quarter of 1999.
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, 1998, 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 $659 15,873,788
Kentucky Utilities $810 23,123,607
WKEC(2) $122 5,531,858
TOTAL $1591 44,529,253
</TABLE>
The following table sets forth certain unaudited information with respect to the
electric utility operations of LG&E Energy for the three months ended March 31,
1999, adjusted to give effect to the Transaction (before intercompany
eliminations).
<TABLE>
<CAPTION>
Electric Operating Kwh of Electric Energy Sales
Revenues (including amounts delivered
($ in millions) in interchange)
--------------- ---------------
<S> <C> <C>
LG&E $151 3,983,461
Kentucky Utilities $217 6,449,535
WKEC $ 60 2,846,494
TOTAL $428 13,279,490
</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 also are
already physically interconnected to Big Rivers' transmission system (which
serves WKEC) through transmission lines that they own, including
- ------------------------
(2) Numbers provided for WKEC are estimates only. WKEC's operations did not
commence until July 1998.
13
<PAGE>
one 138 Kv line to LG&E and one 138 Kv line and one 161 Kv line to Kentucky
Utilities. LG&E, Kentucky Utilities and Big Rivers are three 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 have developed
a Power Supply System Agreement pursuant to which they designate an operating
committee to coordinate joint planning for new facilities, load responsibility,
reserve levels and maintenance schedules. The Agreement establishes the terms
for intercompany exchanges of energy, joint dispatch of generating facilities
and provision of emergency service. Pursuant to a Transmission Coordination
Agreement, the transmission systems of LG&E and Kentucky Utilities are operated
as a single control area from a common transmission center and are governed by a
single system open access tariff offering both network service and
point-to-point service on their combined transmission facilities. Although the
LG&E and Kentucky Utilities systems are being operated as a single system,
economically dispatched, due to regulatory constraints, the system of WKEC will
not be operated as a single system, economically dispatched with the LG&E and
Kentucky Utilities system. Absent these regulatory constraints, however, the
WKEC system would be capable of being operated as a single system, economically
dispatched with the LG&E and Kentucky Utilities system.
LG&E and Kentucky Utilities are also each directly interconnected to
numerous other neighboring utilities. In addition to its direct interconnections
with Kentucky Utilities and Big Rivers, LG&E is also directly interconnected
with 9 neighboring utilities: PSI Energy, The Cincinnati Gas & Electric Company,
Southern Indiana Gas and Electric Company, American Electric Power (Indiana
Michigan Power Company), OVEC, 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 and Big Rivers, Kentucky
Utilities is directly interconnected with 10 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 and Wabash Valley Power
Association. In addition to its direct interconnections with LG&E and Kentucky
Utilities, Big Rivers/WKEC is also directly interconnected with 5 neighboring
utilities: Tennessee Valley Authority, Southern Indiana Gas and Electric
Company, Hoosier Energy Rural Electric Cooperative, Southern Illinois Power
Cooperative and Henderson Municipal Power and Light.
All of the above interconnections are depicted on the map attached as
Exhibit E-2.
4. Non-Utility Interests of LG&E Energy and WKEC
(a) LG&E Energy
In addition to LG&E and Kentucky Utilities, LG&E Energy has two other
first-tier subsidiaries, LG&E Energy Foundation and LG&E Capital both of which
are wholly-owned.
14
<PAGE>
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, including WKEC
and Station Two Sub.
Through its subsidiaries, LG&E Capital has interests in and operates
electric power plants in several states 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 three natural gas distribution
companies in Argentina, each of which is a FUCO. LG&E Capital is involved
through various subsidiaries in energy marketing and trading and with respect to
natural gas, LG&E Capital also is involved through subsidiaries in the
gathering, processing, storage and transportation of natural gas. Effective June
30, 1998, LG&E Energy discontinued its merchant trading and sales business and
announced its plans to sell its natural gas gathering and processing business.
LG&E Energy, however, intends to maintain the technical systems and personnel
necessary to engage in power marketing sales from assets it owns or controls,
including LG&E, Kentucky Utilities and WKEC.
On a pro forma basis, taking into account the Transaction, LG&E
Energy's non-utility subsidiaries and investments constituted approximately 16%
of LG&E Energy's consolidated assets as of December 31, 1998. LG&E Energy's
non-utility subsidiaries provided approximately 15% of LG&E Energy's operating
income for the year ended December 31, 1998. As of March 31, 1999, LG&E Energy's
non-utility subsidiaries and investments constituted approximately 18% of LG&E
Energy's consolidated assets and, for the twelve-months ended March 31, 1999,
provided approximately 21% of LG&E Energy's total operating income.
(b) WKEC
As indicated above, WKEC currently is an EWG and Station Two Sub is not
an electric utility company under the Act. Following the Transaction, however,
WKEC will decertify as an EWG and become an electric utility company under the
Act. At such time, WKEC will have no subsidiaries.
C. Description of Transaction and Statement as to Consideration
1. Background
Big Rivers is a rural electric cooperative utility, which provides
generating and transmission services to its four owner members. Each of its
members is a rural electric cooperative utility engaged in the distribution of
electricity and collectively they serve approximately 92,000 customer members in
22 western Kentucky counties.
Big Rivers began experiencing financial problems in the mid-1980's
shortly after completing construction of its newest generating station, the
Wilson Generating Station ("Wilson"). Those problems were precipitated by a
number of factors, including the relatively
15
<PAGE>
high cost of Wilson, a significant reduction in load growth, and claims by
two aluminum smelters (the "Smelters") being served by Big Rivers' member
cooperatives that significant rate increases would render their operations
noncompetitive in world markets and drive them out of business. Big Rivers
was eventually able to negotiate a debt restructuring agreement with its
creditors which the Kentucky Public Service Commission approved in 1987 along
with higher rates for all customers, including new rates for the Smelters
which varied with the price of aluminum.
The revenue levels necessary to satisfy Big Rivers' debts as
restructured in 1987 could not be achieved solely from power sales to its four
member cooperatives. Rather, additional revenues were needed from the sale of
increasing levels of power to non-member wholesale customers. Unfortunately, the
wholesale market for power was soft during this time and Big Rivers' sales
efforts were unsuccessful in producing the revenue levels necessary. By the
early 1990's Big Rivers recognized that it would soon be in a default position
and it began discussions with the Rural Utilities Service on the need for
further debt restructuring.
Big Rivers' fortunes also changed from bad to worse during this period
with criminal and civil investigations and trials involving bribes and kickbacks
in connection with its coal contracts and a former general manager. In an effort
to find a long-term solution to its mounting financial problems, Big Rivers
hired a "turn-around" specialist to advise and assist management in pursuing
available business options. This action led to Big Rivers' solicitation of
business offers and the eventual decision in early 1996 to pursue a business
arrangement with PacifiCorp Holdings, Inc. ("PacifiCorp"). Under the terms of
that transaction, a subsidiary of PacifiCorp would lease Big Rivers' generating
units for 25 years and sell back to Big Rivers certain quantities of power at
pre-established prices. While negotiating the terms of this transaction, Big
Rivers was also negotiating with its major creditors to achieve a consensual
restructuring of its debts and with the Smelters (which were the system's two
largest retail customers) to achieve long-term rate reductions and rate
stability. When its efforts to achieve a consensual debt restructuring were
unsuccessful, Big Rivers filed on September 25, 1996 a petition for
reorganization under Chapter 11 of the Bankruptcy Code.
Big Rivers' Plan of Reorganization, as originally filed with the
Bankruptcy Court on January 22, 1997, included the lease transaction with
PacifiCorp and lower electric rates that had been negotiated with the two
Smelters, one large non-smelter industrial customer and the four member
cooperatives. During the following month the Bankruptcy Court initiated an
auction process to determine whether the PacifiCorp lease was providing maximum
value to the Big Rivers' estate. The only entity to submit a bid in this process
was LG&E Energy. On March 19, 1997 the Bankruptcy Court accepted LG&E Energy's
lease proposal (referred to above as the Big Rivers' Transactions) on the basis
that it would provide greater value to the Big Rivers' estate. Pursuant to
LG&E's lease proposal, subsidiaries of LG&E Energy would lease and operate the
Big Rivers Facilities and would operate the City's Facility as described above.
Their affiliate, LEM, agreed to purchase electricity from the Big Rivers
facilities and the City's Facility. The transactions set forth in LG&E Energy's
lease proposal are collectively referred to as the "Big Rivers Transactions."
16
<PAGE>
Big Rivers' Plan of Reorganization, as amended, which now included a
lease transaction with the various subsidiaries of LG&E Energy and the lower
rates previously negotiated with certain customers, was approved by the
Bankruptcy Court on June 9, 1997. On June 30, 1997, Big Rivers and the various
subsidiaries of LG&E Energy filed with the Kentucky Commission for approval of
those aspects of the proposed Big Rivers Transactions that were subject to its
jurisdiction; in particular, the lease by Big Rivers of its generating
facilities, the restructuring of Big Rivers' rates and the findings necessary
under Section 32(c) of the 1935 Act to permit those facilities to be operated by
an EWG. After 5 days of hearings in November 1997, the Kentucky Commission
directed the parties to renegotiate provisions relating to the sharing of
certain potential "unforeseen costs" that might arise from environmental,
regulatory or legislative changes. After extensive negotiations, the parties
refiled the proposed transaction documents with the Kentucky Commission in
February 1998, although at that time several issues remained unresolved. The
primary changes between November and February were to transfer to LEM the
responsibility of directly supplying to two member cooperatives the power
necessary for those member cooperatives to serve their smelter customers and a
reallocation of certain financial responsibilities among the parties. An
additional day of hearings was held in March 1998 concerning the new proposals.
Amended, executed documents were filed with the Kentucky Commission in April
1998. On April 30, 1998, the Kentucky Commission issued an order approving Big
Rivers' proposal to lease its generating facilities to WKEC, finding that Big
Rivers' facilities were "eligible facilities" as required by Section 32(c) of
the 1935 Act, and approving in principle the parties' proposed resolution to the
"unforeseen cost" issue, subject to filing of final documents. THE APPLICATION
OF BIG RIVERS ELEC. CORP., LOUISVILLE GAS AND ELEC. CO, WESTERN KENTUCKY ENERGY
CORP., WESTERN KENTUCKY LEASING CORP., AND LG&E STATION TWO INC. FOR APPROVAL OF
WHOLESALE RATE ADJUSTMENT FOR BIG RIVERS ELEC. CORP. AND FOR APPROVAL OF
TRANSACTION, Case No. 97-204, Order (KPSC, Apr. 30, 1998). However, the Kentucky
Commission remained dissatisfied with certain aspects of the proposed rates that
the member cooperatives proposed to pay for power, which costs would be
passed-through to the member cooperatives' customers, and therefore rejected
certain aspects of the parties' proposal. ID.
In response, commencing May 15, 1998, the parties filed with the
Kentucky Commission certain additional documents and amendments to documents
previously filed that modified the transaction as necessary to address the
Kentucky Commission's concerns. Final approval was issued by the Kentucky
Commission on July 14, 1998, which approval was conditioned on the parties
making one further amendment relating to the sharing of certain unforeseen
costs. THE APPLICATION OF BIG RIVERS ELEC. CORP. FOR APPROVAL OF THE 1998
AMENDMENTS TO STATION TWO CONTRACTS BETWEEN BIG RIVERS ELEC. CORP. AND THE CITY
OF HENDERSON, KENTUCKY AND THE UTIL. COMM'N OF THE CITY OF HENDERSON, Case No.
98-267, Order (KPSC, July 14, 1998). The parties made the requisite adjustment.
Thus, the Big Rivers Transactions were thoroughly reviewed by the Kentucky
Commission and its concerns addressed in full.(3)
- ------------------------
(3) After modifications were made to the Big Rivers Transactions in
response to the requests made by the Kentucky Commission discussed
above, Big Rivers modified its Plan of Reorganization, as amended, to
reflect the changes to the Big Rivers Transactions. On June 1, 1998,
the Bankruptcy Court, again with the support of Big Rivers' primary
creditor and ratepayer constituencies, approved the modifications to
Big Rivers' Plan of Reorganization and the Big Rivers Transactions.
17
<PAGE>
In April 1998, as supplemented on June 9, 1998, to include revisions
made to accommodate the concerns of the Kentucky Commission, the LG&E Energy
subsidiaries requested that FERC disclaim jurisdiction over WKEC's lease of
Big Rivers' generation facilities and Station Two Sub's operation of Station
Two and grant LEM authority to sell ancillary services at cost-based rates.
These requests were granted by FERC on June 29, 1998. WESTERN KENTUCKY ENERGY
CORP., 83 FERC PARA 61,336 (1998). On July 8, 1998, FERC granted WKEC's
application for EWG status, which had been submitted on April 30, 1998 and
amended on May 7, 1998, June 15, 1998 and July 2, 1998. WESTERN KENTUCKY
ENERGY CORP., 84 FERC PARA 62,027 (1998). Authorization for Station Two Sub
and WKEC to sell power at market-based rates had been granted on February 25,
1998 (although Station Two Sub has never exercised such right and, as
discussed below, has filed with FERC notification of cancellation of its
market-based rate schedule, which was accepted effective February 4, 1999).
WKE STATION TWO INC., 82 FERC PARA 61,178 (1998). Letter Order, WKE STATION
TWO INC., ET AL., Docket No. ER99-1735-000 (issued March 16, 1999). LG&E
Energy also submitted a request for and received a No-Action Letter from the
Staff of the Commission regarding the status of Station Two Sub and LEM under
the Act. The Big Rivers Transactions, as modified to meet the Kentucky
Commission's directives, were then consummated in July 1998.
At the time the Big Rivers Transactions were structured in March
1997, a decision was made to separate the duties, responsibilities and
employees relating to the Big Rivers' facilities and the City's Facility. At
the time this decision was made, it was believed that the Big Rivers'
facilities and City's Facility could be operated efficiently in this manner.
After approximately eight months of operation of the Big Rivers'
facilities and the City's Facility, LG&E Energy has now determined that the
separation of the duties, responsibilities and employees among WKE Corp.,
WKEC, Station Two Sub and LEM have led to numerous operational inefficiencies
and duplication of effort. These inefficiencies and duplications have caused
LG&E Energy to determine that the Big Rivers Transactions, as presently
constituted, are not achieving the level of savings that they should be
producing. Consequently, through the Transaction, LG&E Energy now desires to
combine WKE Corp., WKEC and Station Two Sub, with WKEC as the surviving
corporation, and to transfer certain contracts relating solely to the Big
Rivers Transactions for the sale of energy, capacity and ancillary services
from LEM to WKEC. The Transaction is intended to simplify and consolidate
responsibility within a single company, WKEC, for operation and management of
all of the Big Rivers' facilities and the City's facility, and for the sale
of power and ancillary services from those facilities.
The Transaction will eliminate redundancies and inefficiencies,
thereby promoting economies of scale. For example, the Transaction will
promote more efficient use of the labor force currently divided among WKE
Corp., WKEC and Station Two Sub. Currently, employees of WKEC-operated plants
cannot be reassigned to Station Two Sub on a temporary basis without placing
WKEC's EWG status at risk. Thus, when Station Two Sub needs additional
assistance for a special maintenance project or to temporarily replace
employees missing work, Station Two Sub must rely on more costly outside
contractors. If WKEC and Station Two Sub were a single company, additional
help would generally be reassigned to Station Two Sub from another plant (and
Station Two Sub employees could be assigned elsewhere as needed). The
Transaction also is expected to eliminate inefficiencies in purchasing.
Currently, all material inventory must be
18
<PAGE>
assigned to one of the three entities. The computer software system does not
allow employees of one entity to check on availability of material allocated
to one of the other entities. This can result in inefficient inventory
management and potentially higher purchasing costs. Consolidation of WKE
Corp., WKEC and Station Two Sub also will eliminate the need to maintain
separate computer systems and books and records for each of those companies.
The Big Rivers Transactions were instrumental in the financial
recovery of Big Rivers, and have made possible the provision of reliable,
lower cost services for the benefit of ratepayers in the Western Kentucky
region. The Transaction will further these goals. The role of the three
subsidiaries of LG&E Energy in the reorganization of Big Rivers was a
necessary piece in a complicated series of interrelated agreements that all
have the ultimate objective of assisting Big Rivers to emerge from
bankruptcy. Consequently, the Transaction and the Big Rivers Transactions are
expected to produce substantial benefits to the public, investors and
consumers. Among other things, LG&E Energy believes that the Transaction
offers significant operational and financial benefits to LG&E Energy and its
shareholders, as well as to the employees, customers and the communities in
which they do business.
2. Merger Agreement
Assuming approval of this Application-Declaration, WKE Corp.,
WKEC and Station Two Sub will enter into a merger agreement. Pursuant to this
merger agreement, each of WKE Corp. and Station Two Sub will be merged into
WKEC, with WKEC as the surviving corporation.
3. Management of LG&E Energy Following the Transaction
The officers and directors of LG&E Energy, LG&E and Kentucky
Utilities will be unaffected by the Transaction. It is expected that following
the Transaction, the officers and directors of WKEC will be the same persons who
served as officers and directors of WKEC prior to the Transaction.
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the Transaction are estimated as follows:
<TABLE>
<S> <C>
Accountant's fees.............................................$ 0
----------
Legal fees and expenses relating to the Act...................$ 35,000
----------
Other legal fees and expenses.................................$ 15,000
----------
19
<PAGE>
Other expenses relating to the Transaction
and miscellaneous...............................................$ 0
----------
TOTAL(4) ......................................................$ 50,000
----------
</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 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.
Following the Transaction, WKEC also will be a "public utility company" 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 Kentucky Utilities
(and, indirectly, EEI and OVEC), and, as a result of the Transaction will
acquire more than five percent of the voting securities of WKEC, 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;
- ------------------------
(4) Preliminary estimate.
20
<PAGE>
- 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.
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
Interlocking relationships already exist among LG&E Energy, WKEC, WKE
Corp. and Station Two Sub. By its nature, any merger of affiliates will not have
the effect of creating greater interlocking relationships than currently exist.
Even these existing links, however, 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
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 consolidation of WKE Corp., WKEC and Station Two Sub make
clear that whatever interlocking relationships may continue to exist from the
Big Rivers Transactions are not detrimental.
(b) Concentration of Control
As is evident from the discussion above, the Transaction is purely an
internal consolidation of affiliated companies. It will not involve the
acquisition of any interest in any
21
<PAGE>
non-affiliate. Therefore, the Transaction will have absolutely no effect on
the concentration of control. Moreover, the FERC and the Kentucky Public
Service Commission, in separate prior proceedings considered the possible
anti-competitive effects of the assumption by LG&E Energy of operational
control of the Big Rivers and City of Henderson generating facilities and the
sale of power therefrom by LEM. In particular, in approving the LG&E
Energy/KU Energy merger, the FERC took into account the effect on competition
of the proposed Big Rivers Transactions. The FERC found that there would be
no adverse effect on competition. No material change in facts has occurred
since the date of the FERC approval that would alter that conclusion. The
purely internal consolidation contemplated by the Transaction will have no
effect on competition. FERC has subsequently approved the consolidation of
WKE Corp., WKEC and Station Two Sub and the acquisition by WKEC, the
surviving corporation, of certain tariffs, contracts and service agreements
held by LEM. In connection with this approval, no new market power analysis
was prepared and none was requested by FERC.
Even if one were to disregard the fact that this Transaction is a
purely internal consolidation and undertake the analysis anew, the
Transaction would not tend toward the concentration of control, 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).
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 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 Transaction 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. Additionally, this internal consolidation will not
make the LG&E Energy system more complex and irrational, but will in fact
make the LG&E Energy system more simple and will result in fewer affiliate
transactions.
Size: While the Transaction 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 809,000 electric customers and 289,000 gas
customers in one state, Kentucky, and 29,000 electric customers in Virginia.
As of March 31, 1999, the combined consolidated unaudited assets of LG&E
Energy totaled approximately $4.8 billion and, for the three months ended
March 31, 1999, combined unaudited operating revenues totaled approximately
$565 million. As of March 31, 1999, the combined summer generating capacity
of LG&E and Kentucky Utilities (including their share of OVEC and EEI
capacity) and WKEC totaled 11,100 Mw.
The Commission has approved a number of acquisitions involving
larger utilities. SEE, E.G., SEMPRA ENERGY, Holding Co. Act Release No.
26890, 67 S.E.C. Docket 994, (June 26, 1998); AMEREN CORPORATION, Holding Co.
Act Release No. 26809, 66 S.E.C. Docket 485 (December 30, 1997); NEW CENTURY
ENERGIES, INC., Holding Co. Act Release No. 26748, 65
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<PAGE>
S.E.C. Docket 304, (Aug. 1, 1997); TUC HOLDING COMPANY ET AL., Holding Co.
Act Release No. 26749, 65 S.E.C. Docket 326, (Aug. 1, 1997); HOUSTON
INDUSTRIES INCORPORATED ET AL., Holding Co. Act Release No. 26744, 65 S.E.C.
Docket 83, (July 24, 1997); CINERGY CORP., Holding Co. Act Release No. 26146,
57 S.E.C. Docket 2353, (Oct. 21, 1994); ENTERGY CORPORATION ET AL., Holding
Co. Act Release No. 25952, 55 S.E.C. Docket 2035, (Dec. 17, 1993); NORTHEAST
UTILITIES, SUPRA; CENTERIOR ENERGY CORP., Holding Co. Act Release No. 24073,
35 S.E.C. Docket 769 (April 29, 1986); IN THE MATTER OF AMERICAN ELECTRIC
POWER COMPANY, INC., SUPRA. 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
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 report issued by the Division of Investment Management in
June 1995 entitled "The Regulation of Public Utility Holding Companies" (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.(5)
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 and generally more efficient operations,
all of which are described by the Commission in IN THE MATTER OF AMERICAN
ELECTRIC POWER COMPANY, SUPRA, at 1309. Among other things, the Transaction
is expected to eliminate redundancies and inefficiencies, thereby promoting
economies of scale, reducing labor costs and reducing corporate and
administrative expenses. These expected economies and efficiencies from the
Transaction are described in greater detail in Item 3.B.2(a) below.
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
- ------------------------
(5) 1995 Report at 65-66.
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<PAGE>
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
1282. Prior to the consummation of the Big Rivers Transactions in July 1998,
LG&E Energy filed a Notification and Report Form with the Department of
Justice and the Federal Trade Commission pursuant to the HSR Act describing
the effects of the Big Rivers Transactions on competition in the relevant
market. The purely internal consolidation does not change in any material
manner the analysis of the competitive effects.
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 Transaction under
Section 10(b)(2) if it finds that the consideration to be paid in connection
with the Transaction, 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...."
(a) Reasonableness of Consideration
LG&E Energy believes that standards of Section 10(b)(2)
regarding consideration are satisfied in the present case for the following
reasons.
First, no additional consideration will be paid as a result of the
Transaction. As part of LG&E Energy's initial arrangement with Big Rivers,
LG&E Energy and its affiliates agreed to pay Big Rivers $55.9 million for the
first two years and $31 million for each of the remaining 23 years of the 25
year lease of the generating facilities.
(b) Reasonableness of Fees
As set forth on page 19, the total fees and expenses to be incurred
in connection with this Transaction are expected to be less than $50,000.
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). 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.
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<PAGE>
3. 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, will be identical to
its capital structure prior to the Transaction and will be substantially
similar to the capital structure approved by the Commission in other orders,
including the Commission's recent order in the LG&E Energy/KU Energy merger.
SEE, E.G., LG&E ENERGY CORP., SUPRA; 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.
The capital structure of LG&E Energy as of March 31, 1999 is as follows
LG&E Energy Capital Structure
(dollars in millions)
<TABLE>
<S> <C>
Common stock equity $1,259
Preferred stock 135
Long-term debt 1,511
-----
Total 2,905
</TABLE>
LG&E Energy's common equity to total capitalization ratio of 43% 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 Transaction is entirely consistent
with the proper functioning of the LG&E Energy holding company system.
LG&E's, Kentucky Utilities' and WKEC's utility operations will be capable of
integration. Further, the combination will result in substantial, otherwise
unavailable, savings and benefits that will improve the efficiency of their
respective systems.
B. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the
provisions of Section 10(b), the Commission shall not approve:
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<PAGE>
(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(6); 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 or the Transaction. The Big Rivers Transactions were
approved by the Kentucky Commission in July 1998. As this Transaction is purely
an internal consolidation, no further authorization from the Kentucky Commission
is required.
(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
"functionally related" businesses(7), 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(b)(1) of the Act requires a registered holding company, with
limited exceptions, to limit its operations to "a single integrated public
utility system, and to such other
- ------------------------
(6) By their terms, Sections 8 and 11 only apply to registered holding
companies and are therefore inapplicable at present to LG&E Energy,
since it is not a registered holding company. Also, under the present
transaction structure, LG&E Energy will remain an exempt holding
company after consummation of the Transaction.
(7) SEE MISSISSIPPI POWER & LIGHT CO. S.E.C. No-Action Letter [1982
Transfer Binder] Fed. Sec. L. Rep. (CCH) PARA 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 [1982-1983 Transfer Binder] Fed.
Sec. L. Rep. (CCH) PARA 77,328 at 78,224 (Oct. 27, 1982) (("functional
relationship") test requires that acquisition be "reasonably
incidental" or "economically necessary" to operations of utility
systems).
26
<PAGE>
business as are reasonably incidental, or economically necessary or
appropriate to the operations of such integrated public utility system." The
combined utility assets (LG&E, Kentucky Utilities and WKEC) of LG&E Energy
following the Transaction will not together technically constitute an
integrated public utility system within the meaning of the Act. Instead, the
LG&E/Kentucky Utilities system and the WKEC system will each remain an
integrated public utility system within the meaning of section 2(a)(29)(A) of
the Act.
LG&E and Kentucky Utilities are currently, and following the
Transaction will continue to be, economically operated as a single
interconnected and coordinated system, economically dispatched. The two
companies are interconnected by a transmission system that allows the
transfer of power between LG&E and Kentucky Utilities to achieve production
cost savings. LG&E and Kentucky Utilities were recently determined by the
Commission to be an integrated electric system.(8) As indicated above, the
LG&E/Kentucky Utilities system and the WKEC system are (i) physically
interconnected through two 138 Kv lines and one 161 Kv line and (ii) serve
adjacent areas, predominantly within the Commonwealth of Kentucky. Although
the WKEC system would be physically capable of being fully integrated and
economically dispatched with the LG&E/Kentucky Utilities system, due to
unique regulatory constraints, it is expected that following the Transaction,
WKEC will continue to be dispatched separately from LG&E and Kentucky
Utilities. WKEC, however, will have firm point-to-point and network
transmission access to Big Rivers transmission system (which is already
physically interconnected with each of LG&E and Kentucky Utilities) pursuant
to contract and Big Rivers' open access transmission tariff on file with FERC.
Section 11, however, 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.(9) 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."(10) 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.
- ------------------------
(8) LG&E ENERGY CORP., Holding Co. Act Release No. 26866, 67 SEC Docket 107
(April 30, 1998).
(9) SEE E.G., CMP GROUP, INC., ET AL, Holding Co. Act Release No. 26977, 69
S.E.C. Docket 329 (Feb. 12, 1999); PP&L RESOURCES, INC., ET AL, Holding
Co. Act Release No. 26905, 67 S.E.C. Docket 1685 (August 12, 1998); BL
HOLDING CORP., Holding Co. Act Release No. 26875, 67 S.E.C. Docket 404
(May 15, 1998); 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.)
(10) GAZ METROPOLITAIN INC., SUPRA, note 9, at 193.
27
<PAGE>
Generally, section 11(b)(1) permits 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. As previously indicated,
however, section 11(b)(1) by its terms 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 integration of
contiguous utility properties and the holding company will be exempt from
registration under section 3 of the Act following the acquisition."(11) The
Transaction meets these conditions for approval.
In this matter, there will be DE FACTO integration of the combined
utility properties. The respective service territories of the systems are
adjacent/contiguous. LG&E Energy will provide the two systems with
administrative services, including centralized accounting, human resources
and corporate reporting services. The Transaction will not 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
Transaction should have no effect upon the ability of state and local
ratemaking authorities to carry out their statutory duties.
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. SEE, E.G. CMP GROUP,
INC., ET AL, SUPRA, note 9; BL HOLDING CORP., SUPRA, note 9; TUC HOLDING
COMPANY ET AL., SUPRA; WPL HOLDINGS, INC.(12); DOMINION RESOURCES, INC.,
SUPRA; NEW CENTURY ENERGIES, supra, note 9. In light of this Commission
precedent involving combination gas and electric companies, and in light of
the Commission's recent approval of the combination of the electric utility
system of Kentucky Utilities with the combination electric and gas system of
LG&E, the Transaction clearly satisfies the requirements of Section 10(c)(1).
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 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."(13) The Transaction
- ------------------------
(11) TUC HOLDING COMPANY ET AL., SUPRA at 306, citing GAZ METROPOLITAIN,
INC., Holding Co. Act Release No. 26170 (Nov. 23, 1994). See also, CMP
GROUP, INC., ET AL, SUPRA, note 9; PP&L RESOURCES, INC., ET AL, SUPRA,
note 9 and BL HOLDING CORP., SUPRA, note 9.
(12) 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.
(13) TUC HOLDING COMPANY ET AL., SUPRA at 306, citing GAZ METROPOLITAIN,
INC., SUPRA, note 9.
28
<PAGE>
clearly satisfies this requirement as it will produce benefits to the
electric utility business of WKEC.
The Transaction will produce economies and efficiencies
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.
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, and integration; and (2)
corporate and administration programs.
Corporate and Operations Labor Costs Savings: LG&E Energy believes
that a net reduction in labor costs can be achieved as a result of the
Transaction through better utilization of workforce. Currently, employees of
WKEC-operated plants cannot be reassigned to Station Two Sub on a temporary
basis without placing WKEC's EWG status at risk. Thus, when Station Two Sub
needs additional assistance for a special maintenance project or to
temporarily replace employees missing work, Station Two Sub must rely on more
costly outside contractors. If WKEC and Station Two Sub were a single
company, additional help could generally be reassigned to Station Two Sub
from another plant (and Station Two Sub employees could be assigned elsewhere
as needed).
Corporate and Administrative Programs: LG&E Energy believes that a
reduction in corporate and administrative programs can be achieved through
the consolidation of overlapping or duplicative programs (some of which are
performed in triplicate) and expenses. Specific areas in which savings are
expected to occur include accounting systems, inventory control systems,
other computer and information systems, and payroll.
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. The consolidated
operations of WKEC also will remain subject to the same regulatory
authorities by which the operations of WKE Corp., WKEC and Station Two Sub
are presently regulated, namely the FERC. All required regulatory approvals
for consummation of this Transaction will be obtained.
29
<PAGE>
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, LG&E Energy intends 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 and its wholly-owned subsidiary, LG&E Capital
Corp., will be exempt from all provisions of the Act except Section 9(a)(2). As
indicated above, LG&E and Kentucky Utilities are each public utility companies
and first-tier subsidiaries of LG&E Energy. Following the Transaction, WKEC will
be a public utility company and a first-tier subsidiary of LG&E Capital Corp.
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, LG&E Capital Corp. and each of its material public utility
subsidiaries(14) following the Transaction will be Kentucky corporations
operating primarily in Kentucky. LG&E Energy and LG&E Capital Corp. therefore
will meet the second part of the Section 3(a)(1) test.
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,(15) but has also considered out-
- ------------------------
(14) Although EEI is and will be a subsidiary of LG&E Energy following
consummation of the Transaction and is not a Kentucky corporation, the
Commission recently determined that it will not be a material public
utility subsidiary of LG&E Energy. LG&E ENERGY CORP., SUPRA. Neither
OVEC nor IKEC is a "subsidiary" of LG&E Energy because LG&E Energy's
total indirect ownership of OVEC is only 7.4%.
(15) 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.
30
<PAGE>
of-state service area, customers, property, generation and sales.(16) 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.(17) Furthermore, the
Commission has issued orders granting exemptions under Section 3(a)(1) to
holding companies with out-of-state revenues of up to 19.8%.(18)
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, 1998, less than 5.0% of the system's consolidated utility
revenues, none of its retail natural gas sales and less than 6.0% of its
sales of electricity by revenues would be from utility operations outside of
Kentucky.(19) 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).(20)
As discussed above, the consolidation of WKEC, WKE Corp. and Station
Two Sub, and the combination of their electric properties with the gas and
electric properties in the LG&E Energy system in this case will not raise
competitive or other public interest concerns. Accordingly, there is no basis
for the Commission to withhold the exemption based on the "unless and except"
clause.
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
- ----------------------
(16) 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.
(17) 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%).
(18) SEE NIPSCO INDUSTRIES, INC., Holding Co. Act Release No. 26975, 69 SEC
Docket 245 (February 10, 1999).
(19) For this purpose, electric utility revenues do not include electric
sales by exempt wholesale generators and revenues from other operations
that are not "utility" operations within the meaning of Section 2(a)(5)
of the Act.
(20) SEE SUPRA notes 17 and 18 and accompanying text.
31
<PAGE>
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.
The Commission recently confirmed that Kentucky Utilities was exempt under
Section 3(a)(2), the Transaction does not involve Kentucky Utilities or its
subsidiaries in any way and there has been no other change in the facts relating
to Kentucky Utilities that would warrant a change in that determination. 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 expects 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, Kentucky Utilities, WKEC 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 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. The Transaction, however, does not require an HSR Act filing because
the combination involves wholly-owned subsidiaries of a single holding company.
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 April 5, 1999, Applicant received FERC
approval of the Transaction under Section 203 and Part 33 of the FERC's
regulations and on March 16, 1999 its filing under Section 205 of the Federal
Power Act to reassign certain rate tariffs and related service agreements to
WKEC from LEM, was accepted for filing.
32
<PAGE>
C. State Public Utility Regulation
No state regulatory body or agency has jurisdiction over the
Transaction and no approval from any such state regulatory body or agency is
necessary or required in order to consummate the Transaction.
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
The Commission is respectfully requested to issue and publish
not later than July 6, 1999, the requisite notice under Rule 23 with respect to
the filing of the Application-Declaration, such notice to specify a date not
later than July 21, 1999, by which comments must be entered and a date not later
than July 22, 1999, as the date after which an order of the Commission granting
and permitting this Application-Declaration to become effective may be entered
by the Commission.
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 4.1 to Form 8-K of LG&E Energy dated May 6,
1998, 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 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)
A-4 Amended and Restated Articles of Incorporation of WKEC as to
be in effect following the Transaction (to be filed by
Amendment)
B-1 Agreement and Plan of Merger (to be filed by Amendment)
D-1.1 Application Before the FERC (to be filed by Amendment)
E-1 Map of LG&E electric service area (to be filed by Amendment)
E-2 Map of LG&E gas service area (to be filed by Amendment)
E-3 Map of LG&E transmission system (included in Exhibit E-1)
E-4 Map of electric service area of Kentucky Utilities (to be
filed by Amendment)
E-5 Map of Kentucky Utilities transmission system (included in
Exhibit E-4)
33
<PAGE>
E-6 Map of Big Rivers transmission system (to be filed by
Amendment)
E-7 Map showing interconnections of LG&E, Kentucky Utilities and
WKEC (included in Exhibit E-1)
E-8 LG&E Energy corporate chart (to be filed by Amendment)
E-9 Pro Forma LG&E Energy Corporate Chart (to be filed by
Amendment)
F-1 Preliminary opinion of counsel to LG&E Energy (to be filed by
Amendment)
F-2 Past-tense opinion of counsel (to be filed by Amendment)
H-1 Annual Report of LG&E Energy on Form 10-K for the year ended
December 31, 1998 (File No. 1-10568 and incorporated herein by
reference)
H-2 Annual Report of LG&E on Form 10-K for the year ended December
31, 1998 (File No. 2-26720 and incorporated herein by
reference)
H-3 LG&E Energy 1998 Annual Report to Shareholders (File No.
1-10568 and incorporated herein by reference)
H-4 Annual Report on Form 10-K of Kentucky Utilities for the year
ended December 31, 1998 (File No. 1-3464 and incorporated
herein by reference)
H-5 Quarterly Report of LG&E Energy on Form 10-Q for the quarter
ended March 31, 1999 (File No. 1-10568 and incorporated herein
by reference)
H-6 Quarterly Report of LG&E on Form 10-Q for the quarter ended
March 31, 1999 (File No. 2-26720 and incorporated herein by
reference)
H-7 Quarterly Report of Kentucky Utilities on Form 10-Q for the
quarter ended March 31, 1998 (File No. 1-3464 and incorporated
herein by reference)
I-1 Notice of the Transaction
B. Financial Statements
FS-1 LG&E Energy Consolidated Balance Sheet as of December 31, 1998
(see Form 10-K for the year ended December 31, 1998 of LG&E
Energy (Exhibit H-1 hereto))
FS-2 LG&E Energy Corp. Consolidated Statements of Income for its
last three fiscal years (see Form 10-K for the year ended
December 31, 1998 of LG&E Energy (Exhibit H-1 hereto))
FS-3 LG&E Consolidated Balance Sheet as of December 31, 1998 (see
Annual Report of LG&E on Form 10-K for the year ended December
31, 1998 (Exhibit H-2 hereto))
FS-4 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, 1998 (Exhibit H-2 hereto))
FS-5 Kentucky Utilities Consolidated Balance Sheet as of December
31, 1998 (see Annual Report of Kentucky Utilities on Form 10-K
for the year ended December 31, 1998 (Exhibit H-4 hereto))
FS-6 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, 1998
(Exhibit H-4 hereto))
FS-7 WKEC Unaudited Pro Forma Balance Sheet as of March 31, 1999
(to be filed by Amendment)
34
<PAGE>
FS-8 WKEC Unaudited Pro Forma Statements of Income for the three
months ended March 31, 1999 (to be filed by Amendment)
35
<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.
36
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this Application-Declaration to
be signed on its behalf by the undersigned thereunto duly authorized.
LG&E ENERGY CORP.
BY: /s/ R. Foster Duncan
--------------------------
Chief Financial Officer
Date: June 18, 1999
37
<PAGE>
Index of Exhibits
EXHIBIT - DESCRIPTION - TRANSMISSION METHOD
<TABLE>
<CAPTION>
Method
of Filing Number Description
- --------- ------ -----------
<S> <C> <C>
A-1 Amended and Restated Articles of
Incorporation of LG&E Energy (filed as
Exhibit 4.1 to Form 8-K of LG&E Energy dated
May 6, 1998, 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 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
A-4 Amended and Restated Articles of
Incorporation of WKEC as to be in effect
following the Transaction (to be filed by
Amendment)
B-1 Agreement and Plan of Merger (to be filed
by Amendment)
D-1.1 Application Before the FERC (to be filed by
Amendment)
E-1 Map of LG&E electric service area (to be
filed by Amendment)
E-2 Map of LG&E gas service area (to be filed
by Amendment)
E-3 Map of LG&E transmission system (included
in Exhibit E-3)
E-4 Map of electric service area of Kentucky
Utilities (to be filed by Amendment)
E-5 Map of Kentucky Utilities transmission
system (included in Exhibit E-4)
E-6 Map of Big Rivers transmission system (to be
filed by Amendment)
E-7 Map showing interconnections of LG&E,
Kentucky Utilities and WKEC (included in
Exhibit E-1)
E-8 LG&E Energy corporate chart (to be filed
by Amendment)
E-9 Pro Forma LG&E Energy Corporate Chart (to be
filed by Amendment)
F-1 Preliminary opinion of counsel to LG&E
Energy (to be filed by Amendment)
F-2 Past-tense opinion of counsel (to be filed
by Amendment)
H-1 Annual Report of LG&E Energy on Form 10-K
for the year ended December 31, 1998 (File
No. 1-10568 and incorporated herein by
reference)
H-2 Annual Report of LG&E on Form 10-K for the
year ended December 31, 1998 (File No.
2-26720 and incorporated herein by
reference)
38
<PAGE>
Method
of Filing Number Description
- --------- ------ -----------
H-3 LG&E Energy 1998 Annual Report to
Shareholders (File No. 1-10568 and
incorporated herein by reference)
H-4 Annual Report on Form 10-K of Kentucky
Utilities for the year ended December 31,
1998 (File No. 1-3464 and incorporated
herein by reference)
H-5 Quarterly Report of LG&E Energy on Form 10-Q
for the quarter ended March 31, 1999 (File
No. 1-10568 and incorporated herein by
reference)
H-6 Quarterly Report of LG&E on Form 10-Q for
the quarter ended March 31, 1999 (File No.
2-26720 and incorporated herein by
reference)
H-7 Quarterly Report of Kentucky Utilities on
Form 10-Q for the quarter ended March 31,
1998 (File No. 1-3464 and incorporated
herein by reference)
DT I-1 Notice of the Transaction
FS-1 LG&E Energy Consolidated Balance Sheet as of
December 31, 1998 (see Form 10-K for the
year ended December 31, 1998 of LG&E Energy
(Exhibit H-1 hereto))
FS-2 LG&E Energy Corp. Consolidated Statements of
Income for its last three fiscal years (see
Form 10-K for the year ended December 31,
1998 of LG&E Energy (Exhibit H-1 hereto))
FS-3 LG&E Consolidated Balance Sheet as of
December 31, 1998 (see Annual Report of LG&E
on Form 10-K for the year ended December 31,
1998 (Exhibit H-2 hereto))
FS-4 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, 1998 (Exhibit H-2
hereto))
FS-5 Kentucky Utilities Consolidated Balance
Sheet as of December 31, 1998 (see Annual
Report of Kentucky Utilities on Form 10-K
for the year ended December 31, 1998
(Exhibit H-4 hereto))
FS-6 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,
1998 (Exhibit H-4 hereto))
FS-7 WKEC Unaudited Pro Forma Balance Sheet as of
March 31, 1999 (to be filed by Amendment)
FS-8 WKEC Unaudited Pro Forma Statements of
Income for the three months ended March 31,
1999 (to be filed by Amendment)
</TABLE>
39
<PAGE>
EXHIBIT I-1
SECURITIES AND EXCHANGE COMMISSION
(RELEASE NO. 35-________)
FILING UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
____________, 1999
LG&E ENERGY CORP. (70-_____)
Notice is hereby given that the following filing has been made with the
Commission pursuant to provisions of the Act and rules promulgated
thereunder. All interested persons are referred to the
application-declaration for complete statements of the proposed
transaction(s) summarized below. The application-declaration is available
for public inspection through the Commission's Office of the Public
Reference.
Interested persons wishing to comment or request a hearing on the
application-declaration should submit their views in writing by _______, 1999
to the Secretary, Securities and Exchange Commission, Washington, D.C.
20549, and serve a copy on the relevant applicant(s) and/or declarant(s) at
the address(es) specified below. Proof of service (by affidavit or, in the
case of an attorney at law, by certificates) should be filed with the
request. Any request for hearing should identify specifically the issues of
fact or law that are disputed. A person who so requests will be notified of
any hearing, if ordered, and will receive a copy of any notice or order
issued in the matter. After ______, 1999, the application-declaration, as
filed or as amended, may be granted and/or permitted to become effective.
LG&E Energy Corp. ("LG&E Energy"), a Kentucky corporation located at 220
West Main Street, Louisville, Kentucky 40232, is a holding company exempt
under Section 3(a)(1) and by order of the Commission (HCAR 26966) from all
provisions of the Act except Section 9(a)(2). LG&E Energy has filed an
application-declaration for an order under Sections 9(a)(2) and 10 of the Act
authorizing its proposed indirect acquisition of a reconstituted Western
Kentucky Energy Corp. ("WKEC"), pursuant to a merger of WKEC, WKE Corp. and
WKE Station Two Inc. ("Station Two Sub"), with WKEC as the surviving
corporation (the "Transaction"). The application-declaration also requests
(i) an order under Section 3(a)(1) of the Act declaring LG&E Energy and its
wholly-owned subsidiary, LG&E Capital Corp., exempt from all provisions
thereof except Section 9(a)(2) and (ii) an order under Section 3(a)(2) of the
Act declaring LG&E Energy's subsidiary, Kentucky Utilities Company, exempt
from all provisions thereof except Section 9(a)(2).
WKE Corp. currently is an indirect wholly-owned subsidiary of LG&E
Energy. WKE Corp. also is the parent company of WKEC and Station Two Sub.
WKE Corp., WKEC and Station Two Sub were all formed in connection with a
series of transactions involving Big Rivers Electric Corporation ("Big
Rivers"). Pursuant to these transactions, WKEC leased the generating
facilities of Big Rivers and agreed to operate these facilities. Station Two
Sub agreed to operate a generating facility of the City of Henderson,
Kentucky that was previously operated by Big
1
<PAGE>
Rivers. Their affiliate, LG&E Energy Marketing, Inc. ("LEM"), agreed to
purchase electricity from the Big Rivers' facilities and the City of
Henderson's facility. The electricity from the City of Henderson was
previously purchased by Big Rivers. These transactions took effect in
July 1998. Because the generating facilities of the City of Henderson serve
retail customers, WKEC could not operate these facilities and still maintain
its status as an EWG. Therefore, a decision was made to separate the duties
and responsibilities relating to the Big Rivers' facilities and the City of
Henderson facilities even though these dutiies were previously performed by
one company, Big Rivers. Generally, WKEC leases and operates the Big Rivers'
facilities and Station Two Sub operates the City of Henderson's facility.
WKEC currently is certified as an EWG and Station Two Sub has received a
no-action letter from the Staff of the Commission confirming that Station Two
Sub's activities would not cause it to be deemed an electric utility company
under the Act.
LG&E Energy has now determined that the separation of the duties and
responsibilities among WKE Corp., WKEC, Station Two Sub and another
affiliate, LEM, and the constraints imposed upon WKEC in order to maintain
its certification as an EWG have led to numerous operational inefficiencies.
Consequently, LG&E Energy now desires to combine WKE Corp., WKEC and Station
Two Sub, with WKEC as the surviving corporation, and possibly to transfer
certain related contracts for the sale of energy, capacity and ancillary
services from LEM to WKEC. This Transaction is intended to simplify and
consolidate responsibility within a single company, WKEC, for operation and
management of all of the generating assets in Western Kentucky that are
operated by LG&E Energy affiliates, and for the sale of power and ancillary
services from those facilities. The Transaction will eliminate redundancies
and inefficiencies, thereby promoting economies of scale. Following the
Transaction, the surviving entity will cease to meet the requirements of
being an EWG(1), will decertify as an EWG and will become an electric
utility company under the Act. Therefore, consummation of the Transaction
will result in the indirect acquisition of an electric utility company by
LG&E Energy.
Currently, LG&E Energy owns all of the outstanding common stock of
Louisville Gas and Electric Company ("LG&E"), a Kentucky corporation. LG&E
is engaged primarily in the generation, transmission and distribution of
electricity to approximately 360,000 customers in Louisville and adjacent
areas in Kentucky. LG&E's service area covers approximately 700 square miles
in 17 counties in Kentucky and has an estimated population of one million.
LG&E also purchases, distributes and sells natural gas to approximately
289,000 customers within this service area 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.
LG&E owns 4.9% of the common stock of Ohio Valley Electric Corporation
("OVEC"), which has one wholly-owned subsidiary, Indiana-Kentucky Electric
Corp. ("IKEC"). For each of
- ----------------------
(1) As indicated above, the City of Henderson's facility serves retail
customers and, therefore, WKEC will no longer qualify as an EWG when it
assumes Station Two Sub's responsibilities to operate the City's facility.
2
<PAGE>
the three years in the period ended December 31, 1998, LG&E derived less than
0.15% of its income from its share of the earnings of OVEC.
LG&E Energy also owns all of the outstanding common stock of Kentucky
Utilities, an electric utility company under the Act. Kentucky Utilities is
engaged in producing, transmitting and selling electric energy to about
449,000 customers in over 600 communities and adjacent suburban and rural
areas in 77 counties in central, southeastern and western Kentucky, and to
about 29,000 customers in 5 counties in southwestern Virginia. In Virginia,
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.
Kentucky Utilities owns 2.5% of the common stock of OVEC, which company
is described 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 kilovolt ("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, 1998, Kentucky Utilities derived less than 3% of
its net income from its share of the earnings of EEI and OVEC.
While LG&E and Kentucky Utilities are currently the only subsidiaries of
LG&E Energy that are public-utility companies 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. For the year-ended December 31, 1998,
approximately 16% of LG&E Energy's consolidated operating revenues and 18% of
its consolidated operating income were derived from the non-utility
businesses. As of December 31, 1998, approximately 20% of LG&E Energy's
consolidated assets were invested in non-utility businesses. For the twelve
months ended March 31, 1999, approximately 19% of LG&E Energy's consolidated
operating revenues and 23% of its consolidated operating income were derived
from non-utility businesses. As of March 31, 1999, approximately 22% of LG&E
Energy's consolidated assets were invested in non-utility businesses.
For the year ended December 31, 1998, LG&E Energy's operating revenues
on a consolidated basis were $2.002 billion of which approximately $659
million was derived from LG&E's electric operations, $192 million was derived
from LG&E's gas operations and $810 million was derived from Kentucky
Utilities' electric operations. Consolidated assets for LG&E Energy and its
subsidiaries as of December 31, 1998 were approximately $4.8 billion, of
which approximately $3.0 billion consisted of electric utility assets and
$300 million consisted of gas
3
<PAGE>
utility assets. As of April 30, 1999, there were 129,677,030 outstanding
shares of the common stock of LG&E Energy.
The application-declaration states that the Transaction is expected to
result in substantial benefits to the public, investors and consumers,
including significant economies of scale, reduced labor costs and reduced
corporate and administrative expenses through the elimination of redundancies
and inefficiencies. For example, the Transaction will promote more efficient
use of the labor force currently divided among WKE Corp., WKEC and Station
Two Sub, and will eliminate the need to maintain separate computer systems
and books and records for each of those companies.
Following consummation of the Transaction, LG&E Energy states that it
will continue to be an exempt holding company under the Act, and LG&E Capital
Corp. will become an exempt holding company under the Act, because LG&E
Energy, LG&E Capital Corp. and each of its public utility subsidiaries from
which it derives a material part of its income will be Kentucky corporations,
will continue to be predominantly intrastate in character and will continue
to conduct their utility businesses substantially within the Commonwealth of
Kentucky.
LG&E Energy also states that following the Transaction, Kentucky
Utilities will continue to be an exempt holding company under the Act because
Kentucky Utilities is predominantly a public utility company whose
operations, as such, do not extend beyond the Commonwealth of Kentucky and
states contiguous thereto.
For the Commission, by the Division of Investment Management, pursuant
to delegated authority.
4
