<PAGE>
Exhibit D-2.2
[LOGOS OF COMMONWEALTH OF KENTUCKY]
COMMONWEALTH OF KENTUCKY
PUBLIC SERVICE COMMISSION
211 SOWER BOULEVARD
POST OFFICE BOX 615
FRANKFORT, KY. 40602
(502) 564-3940
CERTIFICATE OF SERVICE
----------------------
RE: Case No. 2000-095
LOUISVILLE GAS AND ELECTRIC COMPANY
I, Stephanie Bell, Secretary of the Public Service Commission, hereby
certify that the enclosed attested copy of the Commission's Order in the above
case was served upon the following by U.S. Mail on May 15, 2000.
See attached parties of record.
/s/ Stephanie Bell
Stephanie Bell
Secretary of the Commission
SB/hv
Enclosure
<PAGE>
Ronald Willhite
Vice President Regulatory Affairs
220 W. Main Street
P.O. Box 32010
Louisville, KY. 40232 2010
Honorable Kendrick R. Riggs
Counsel for PowerGen, LG&E Energy,
LG&E, KU
Ogden Newell & Welch
1700 Citizens Plaza
500 West Jefferson Street
Louisville, KY. 40202 2874
Honorable David Jackson
General Counsel and Company Sec
PowerGen plc
53 New Broad Street
London, UK. EC2 1SL
Honorable John R. McCall
Executive VP, General Counsel,
Corporate Secretary
LG&E Energy Corp.
220 West Main Street
Louisville, KY. 40202
Honorable Elizabeth E. Blackford
Assistant Attorney General
1024 Capital Center Drive
Frankfort, KY. 40601
Mr. Robert L. Madison
5407 Baywood Drive
Louisville, KY. 40241 1318
Mr. David Spainhoward
Big Rivers Electric Corporation
P.O. Box 24
201 Third Street
Henderson, KY. 42419 0024
Honorable James M. Miller
Attorney for Big Rivers
Sullivan, Mountjoy, Stainback
& Miller, P.S.C.
100 St. Ann Building
P.O. Box 727
Owensboro, KY. 42302 0727
Honorable Anthony G. Martin
Counsel for CAC
P.O. Box 1812
Lexington, KY. 40588
Mr. Jack Burch
Ms. Julia Thome
Community Action Council
892 Georgetown Street
P.O. Box 11610
Lexington, KY. 40576
Honorable David F. Boehm
Honorable Michael L. Kurtz
Attorneys for KIUC
Boehm, Kurtz & Lowry
2110 CBLD Center
36 East Seventh Street
Cincinnati, OH. 45202
Honorable Don Meade
Counsel for IBEW, Local 2100
Priddy, Isenberg, Miller & Meade
800 Republic Bldg.
429 W. Muhammad Ali Blvd.
Louisville, KY. 40202
Mr. Dean Stanley
President and CEO
Kenergy Corp.
Post Office Box 18
Henderson, KY. 42419 0018
Honorable Frank N. King
Counsel for Kenergy Corp.
Dorsey, King, Gray & Norment
318 Second Street
Henderson, KY. 42420
Honorable Richard S. Taylor
Counsel for N. American Stainless
315 High Street
Frankfort, KY. 40601
Honorable William H. Jones
Counsel Attorney for N. American Stainless
Vantwerp, Monge, Jones & Edwards
1544 Winchester Avenue, 5th Floor
P.O. Box 1111
Ashland, KY. 41105 1111
Honorable James W. Brew
Counsel for N. American Stainless
Brickfield, Burchett & Ritts, P.C.
1025 Thomas Jefferson Street, N.W.
Eighth Floor, West Tower
Washington, DC. 20007
Honorable David C. Brown
Counsel for Alcan Aluminum Corp.
Stites & Harbison
400 West Market Street, Suite 1800
Louisville, KY. 40202 3352
Honorable Edward W. Gardner
Counsel for Lexington-Fayette Urban
County Government
Department of Law
200 East Main Street
Lexington, KY. 40507
Honorable Carol Raskin
Attorney for POWER & MHNA
Legal Aid Society, Inc.
425 West Muhammad Ali Boulevard
Louisville, KY. 40202
Mr. Robert L. Madison
5407 Baywood Drive
Louisville, KY. 40241 1318
<PAGE>
Mr. Stanley K. Conn
Director of Power Production
Owensboro Municipal Utilities
2070 Tamarack Road
P.O. Box 806
Owensboro, KY. 42301
Honorable Patrick D. Pace
Attorney for OMU
Kamuf, Yewell & Pace
221 West Second Street
Owensboro, KY. 42302
Douglas M. Brooks
Senior Counsel Specialist-Regulatory
LG&E Energy Corp.
220 West Main St.
P.O. Box 32030
Louisville, KY. 40232
Honorable Joe F. Childers
Attorney for KACA
201 West Short Street
Suite 310
Lexington, KY. 40507
Charles A. Lile
Senior Corporate Counsel
East Kentucky Power Cooperative
4775 Lexington Rd.
P.O. Box 707
Winchester, KY. 40392 0707
Mr. Gary Crawford
Vice President
East Kentucky Power Cooperative,Inc.
4775 Lexington Road
P.O. Box 707
Winchester, KY. 40391
Honorable Dale Henley
General Counsel
East Kentucky Power Cooperative,Inc.
4775 Lexington Road
P.O. Box 707
Winchester, KY. 40391
Richard T. Miller
Attorney for LG&E Energy Corp.
Swidler Berlin Shereff Friedman, LLP
3000 K. St. NW
Suite 300
Washington, DC. 20007 5116
<PAGE>
COMMONWEALTH OF KENTUCKY
BEFORE THE PUBLIC SERVICE COMMISSION
In the Matter of:
JOINT APPLICATION OF POWERGEN PLC, )
LG&E ENERGY CORP., LOUISV1LLE GAS AND ) CASE NO.
ELECTRIC COMPANY, AND KENTUCKY ) 2000-095
UTILITIES COMPANY FOR APPROVAL )
OF A MERGER )
INDEX
-----
PAGE
OVERVIEW OF THE TRANSACTION ...................................................3
STATUTORY STANDARD FOR MERGER .................................................7
MERGER BENEFITS ...............................................................7
MERGER COMMITMENTS ............................................................9
DIRECTORS AND ADVISORY BOARD .................................................11
FINANCIAL ISSUES .............................................................13
TRANSACTION COSTS ............................................................16
DIVIDEND POLICY ..............................................................17
BEST PRACTICES ...............................................................19
OBLIGATION TO SERVE AND CUSTOMER SERVICE ISSUES ..............................20
Native Load/Reserve Margin ...............................................20
Service Quality ..........................................................23
Customer Service Issues ..................................................23
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Customer Service Performance Standards ...................................27
PRESERVATION OF ASSETS .......................................................28
ECONOMIC/COMMUNITY DEVELOPMENT ...............................................29
RESEARCH AND DEVELOPMENT .....................................................32
REGULATORY CONCERNS ..........................................................33
REPORT1NG ISSUES .............................................................36
SUMMARY OF FINDINGS ..........................................................38
ORDERING PARAGRAPHS ..........................................................41
APPENDIX A
APPENDIX B
<PAGE>
COMMONWEALTH OF KENTUCKY
BEFORE THE PUBLIC SERVICE COMMISSION
In the Matter of:
JOINT APPLICATlON OF POWERGEN PLC, )
LG&E ENERGY CORP., LOUISVILLE GAS AND ) CASE NO.
ELECTRIC COMPANY, AND KENTUCKY ) 2000-095
UTILITIES COMPANY FOR APPROVAL )
OF A MERGER )
ORDER
-----
On March 15, 2000, PowerGen plc ("PowerGen"), LG&E Energy Corp. ("LG&E
Energy"), Louisville Gas and Electric Company ("LG&E"), and Kentucky Utilities
Company ("KU") (collectively "Applicants") filed a joint application pursuant to
KRS 278.020(4) and 278.020(5) for approval of the transfer of ownership and
control of LG&E and KU to PowerGen in accordance with an Agreement and Plan of
Merger dated February 27, 2000 ("Merger Agreement").
PowerGen is a public limited company formed under the laws of England and
Wales and is engaged in regulated and unregulated power activities around the
world. PowerGen is a holding company whose subsidiaries own and operate
co-generation projects, nine power stations in England and Wales, a regulated
electric distribution utility known as East Midlands Electricity ("East
Midlands"), and develop independent power projects in Europe, India, and the
Asian Pacific area. LG&E Energy is a holding company for numerous subsidiaries
engaged in co-generation, independent power projects, exempt wholesale
generation, and the ownership and operation of retail electric and gas
distribution utilities known as LG&E and KU.
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The Applicants gave advance notice of their target filing date and in
reliance thereon, the Commission established a procedural schedule on March 10,
2000. The procedural schedule was designed to allow for an investigation of the
merits of the merger and the issuance of a final Order within the 60-day time
limit prescribed in KRS 278.020(5). That procedural schedule provided for two
rounds of discovery, an opportunity for intervenors to file testimony, a public
hearing, and an opportunity to file post-hearing briefs.
The Commission granted full intervention to the following persons: Attorney
General's Office of Rate Intervention ("AG"); Lexington-Fayette Urban County
Government; Owensboro Municipal Utilities ("OMU"); Big Rivers Electric
Corporation ("Big Rivers"); East Kentucky Power Cooperative, Inc.; Kenergy Corp.
("Kenergy"); International Brotherhood of Electrical Workers, Local 2100;
Kentucky Industrial Utility Customers; North American Stainless, L.P. ("NAS");
Metro Human Needs Alliance and People Organized and Working for Energy Reform
(collectively "MHNA/POWER"); Community Action Council of Lexington-Fayette,
Bourbon, Harrison and Nicholas Counties, Inc. ("CAC"); Kentucky Association for
Community Action, Inc.; Alcan Aluminum Corporation ("Alcan"); and Robert
Madison. An informal conference was held on March 20, 2000 and a public hearing
was held on April 19-21, 2000 at the Commission's offices in Frankfort,
Kentucky. Post-hearing briefs were filed on May 1, 2000.
On May 12, 2000, Gallatin Steel Company filed a motion to intervene and
tendered a brief. Considering that these documents were received one business
day before the expiration of the 60-day time limit and that neither the parties
nor the
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Commission has had adequate time to review them, the motion should be denied as
untimely and the brief rejected.
OVERVIEW OF THE TRANSACTION
---------------------------
The merger is intended to allow LG&E Energy and its utility subsidiaries,
LG&E and KU, to become part of a larger, international enterprise that will be
well positioned to serve customers during the accelerating changes occurring in
the energy industry worldwide. More specifically, LG&E and KU contend that the
merger of LG&E Energy with PowerGen will provide the size and scale that have
become critical and necessary prerequisites to success in an energy industry
that continues to face continuing deregulation, regulatory change, and
increasing competition. By becoming part of the PowerGen group, LG&E and KU
believe that they will be better able to utilize beneficial developments in
transmission and distribution technology, information systems, and capital
markets. PowerGen's experience in the United Kingdom and other countries
worldwide is expected to assist LG&E's and KU's efforts in currently competitive
wholesale markets, as well as to prepare the utilities to better compete and
serve customers should retail restructuring occur. The merger will create an
international company with consolidated assets in excess of $11.95 billion and
consolidated revenues in excess of $8.7 billion.1
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1 See Applicants' Response to MHNA/POWER First Request for Information,
---
Item 35, "LG&E Press Release," Appendix III, pages 19-21. The "Pro Forma
Statement of Combined Profit and Loss Accounts of the Enlarged Group" shows an
enlarged group net turnover, or consolidated revenues, of (pound)5.438 billion,
or $8.7 billion, using a conversion of (pound)1 = $1.60. The "Pro Forma
Statement of Combined Net Assets of the Enlarged Group" shows an enlarged group
total assets of (pound)7.47 billion, or $11.95 billion, using a conversion of
(pound)1 = $1.60.
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LG&E and KU further contend that the merger will result in the sharing of
best practices to provide the best possible service to customers at the lowest
cost. By merging, LG&E and KU will become part of an entity that they believe
has the size, resources, scale, and experience to succeed in the evolving energy
industry. After the merger, the customers of LG&E and KU should continue to
receive the same level of quality energy services and to do business with their
respective utilities as before the merger. After the merger, PowerGen will make,
or cause LG&E and KU to continue to make, contributions in Kentucky that equal
or exceed pre-merger normal levels for charitable, community development, and
related activities. LG&E and KU pledge continued support for economic
development within the communities they serve and throughout Kentucky and
anticipate being better able to attract economic development to Kentucky through
broader contacts worldwide. PowerGen pledged to maintain without change for at
least two years pension and medical benefits for retirees and employee benefits
in general.
Pursuant to the merger, PowerGen will acquire 100 percent of all
outstanding shares and share options of LG&E Energy common stock in an all-cash
transaction. The holders of LG&E Energy common stock will not become
shareholders of PowerGen, but instead will be paid $24.85 cash per share by
PowerGen. Upon the completion of the merger, there will be no publicly traded
shares of LG&E Energy stock. However, LG&E Energy will continue to own 100
percent of the issued and outstanding common stock of LG&E and KU, and LG&E's
and KU's current outstanding preferred stock totaling $135 million will not be
changed, converted, or otherwise exchanged as a result of the merger.
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The cost of acquiring the LG&E Energy common stock will be financed by
PowerGen through a $4.0 billion loan. Originally underwritten by five leading
international banks, the loan has now been syndicated with 24 additional banks.
PowerGen will also assume all the debt of LG&E Energy and its subsidiaries,
which totaled approximately $2.2 billion as of December 31, 1999. Thus, the
total value of the acquisition is $5.4 billion.
Under the terms of the Merger Agreement, LG&E Energy will become an
indirect subsidiary of PowerGen. There will be additional companies between
PowerGen and LG&E Energy, and these intermediate companies will be, directly or
indirectly, wholly owned by PowerGen and will have no public or private
institutional equity or debt holders.2 Upon completion of the merger, PowerGen
and these intermediate companies will become registered public utility holding
companies under the Public Utility Holding Company Act of 1935 ("PUHCA"). LG&E
Energy, LG&E, and KU will become part of PowerGen's registered holding company
system. It is anticipated that LG&E Energy and KU will remain exempt holding
companies under PUHCA. LG&E will continue. its corporate existence under the
laws of Kentucky, while KU will continue its dual corporate existence under the
laws of Kentucky and Virginia.
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2 Transcript of Evidence ("T.E."), Vol. 11, April 20, 2000, at 105-107.
Three of the intermediate companies will be incorporated under the laws of
England and Wales, three under the laws of Luxembourg, one under the laws of
Delaware, and one under the laws of Kentucky.
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LG&E Energy currently has 5 first tier subsidiaries3 and, in order to
comply with PUHCA, will add LG&E Energy Services, Inc. ("LG&E Services"). LG&E
Services will be a service company, created to provide utility and non-utility
subsidiaries and affiliates in the PowerGen group with administrative,
management, and support services pursuant to a service agreement. The Securities
and Exchange Commission ("SEC") will have regulatory authority regarding the
governance of LG&E Services and the allocation of costs to the operating
utilities.
LG&E's existing thirteen-member Board of Directors will be dissolved and
replaced with a three-member board and an Advisory Board of indeterminate size.
PowerGen intends to retain the existing LG&E Energy, LG&E, and KU senior
management team.
On February 25, 2000, the current directors of PowerGen and LG&E Energy
approved the Merger Agreement, and they executed that agreement on February 27,
2000. PowerGen has scheduled its shareholder vote for June 5, 2000, while LG&E
Energy has scheduled its shareholder vote for June 7, 2000.
PowerGen now has no business presence in the United States. Thus, the
merger will not result in the elimination or consolidation of duplicative
functions or operations. Consequently, cost savings from the merger are
anticipated to be minimal. However, the Applicants do intend to review all areas
of LG&E's and KU's operations to determine whether efficiencies can be achieved
by adopting the practices of other businesses. Despite the absence of
substantial, quantifiable merger savings, the
-------------------
3 The first tier subsidiaries of LG&E Energy are LG&E, KU, LG&E Capital
Corp., LG&E Energy Marketing, Inc., and LG&E Energy Foundation, Inc. ("LG&E
Energy Foundation").
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Applicants stress that ratepayers and the public will receive significant
benefits from this merger due to Kentucky's retention of the existing
headquarters of LG&E Energy, LG&E, and KU, and Kentucky's selection as the
headquarters for PowerGen's United States operations.
STATUTORY STANDARD FOR MERGER
-----------------------------
Under KRS 278.020(4), no person may acquire or transfer control of a
utility until the Commission has determined that the acquirer has the financial,
technical, and managerial abilities to provide reasonable service. In addition,
under KRS 278.020(5), no individual may acquire control of a utility unless the
Commission has determined that the acquisition is made in accordance with the
law, for a proper purpose, and is consistent with the public interest.
MERGER BENEFITS
---------------
The Applicants have stressed that while the merger of LG&E Energy and KU
Energy Corp. created savings, known as "synergies," due to the integration of
two independent utilities, the PowerGen acquisition will not create any similar
savings. Since PowerGen's and LG&E Energy's operations are on different
continents, neither physical nor functional integration is possible. Savings in
some areas due to the merger, such as in shareholder services, will likely be
offset by increased costs, such as those associated with complying with PUHCA.
Any savings actually realized will be flowed through to electric ratepayers
through the operation of the Earnings Sharing
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Mechanism ("ESM").4 No similar mechanism now exists for LG&E's gas ratepayers,
although the Applicants indicated a willingness to consider such a mechanism for
gas operations.
The Applicants also expected potential savings to be achieved through
efficiencies that would result from implementing "world-class best practices."
These savings, referred to by the Applicants as "developed savings," were not
quantifiable and could be achieved by LG&E and KU absent a merger with PowerGen.
While this merger lacks any real savings created by integrating the merger
partners, the Applicants have prominently and repeatedly touted the merger as
benefiting ratepayers and the public through a commitment to maintain corporate
headquarters in Kentucky.
Specifically, the Applicants have committed to maintaining KU's
headquarters in Lexington, Kentucky and LG&E Energy's and LG&E's headquarters in
Louisville, Kentucky. They also state that they will establish PowerGen's United
States headquarters in Louisville, Kentucky. The Commission finds that retaining
these headquarters in Kentucky is indeed significant. Having corporate officers
and senior management working and living in the communities served by LG&E and
KU helps ensure that service quality remains at superior levels and economic
development in Kentucky is given a top priority.
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4 See Case No. 98-426, Application of Louisville Gas and Electric Company
---
for Approval of An Alternative Method of Regulation of Its Rates and Service,
and Case No. 98-474, The Application of Kentucky Utilities Company for Approval
of An Alternative Method of Regulation of Its Rates and Service. The Commission
offered LG&E and KU an alternative to traditional regulation in the form of an
optional ESM plan, which the companies both accepted.
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<PAGE>
The Applicants' testimony clearly demonstrated the importance of keeping
these headquarters in Kentucky.5 For this reason the Commission was very
concerned that the Applicants were unwilling to tie this commitment to a term of
years. When asked about the term of this commitment, the Applicants would say
only that "in the absence of unforeseen circumstances," the headquarters will
remain here "for the foreseeable future."6 The Commission finds unacceptable
such a vague, indefinite commitment with respect to this most important aspect
of public interest. PowerGen has already committed to maintain and support for a
period of 10 years the relationship between LG&E and KU with the communities
that each serves.7 If the Applicants are unwilling to provide a similar
long-term commitment to maintain their corporate headquarters in Kentucky, the
merger is not consistent with the public interest. Therefore, the merger will be
approved only upon the condition that the Applicants commit to maintain for at
least 10 years the LG&E Energy, LG&E, and KU headquarters in Louisville and
Lexington and PowerGen's United States headquarters in Louisville, Kentucky.
This commitment must be absolute and unequivocal.
MERGER COMMITMENTS
------------------
Throughout this proceeding, the Applicants have made numerous commitments
relating to their operations after the merger. They have attempted through these
commitments to address many of the concerns that were expressed and implied by
the
-------------------
5 T.E., Vol. III, April 21, 2000, at 70-71.
6 Response to the Commission's March 24, 2000 Order, Item 56.
7 T.E., Vol. I, April 19, 2000, at 185.
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Commission and the intervenors.8 During the public hearing, the Applicants
stated that they would honor and be bound by these commitments without regard
to whether they are specified in an ordering paragraph.9
The commitments offered by the Applicants cover a wide range of subjects
and interests. Many of them have been rephrased and restated in response to
particular inquiries raised. A detailed review of the commitments indicates that
several of the expressed commitments do not sufficiently address specific issues
and concerns raised in this case.
The Commission has reviewed all of the proposed commitments, and has
determined that several deal with concerns that should be expressed specifically
in this Order. The Commission has modified or refined several of the Applicants'
commitments to reflect concerns that we have, and several of these concerns are
discussed elsewhere in this Order. Attached to this Order in Appendix A is a
listing of commitments identified by the Commission as addressing significant
concerns and issues raised by the PowerGen acquisition. The Commission's
approval of the acquisition will be conditioned upon the Applicants' written
acceptance of those commitments.
One commitment worth noting is PowerGen's proposal to enhance LG&E's and
KU's community and governmental relations, including semi-annual meetings by
PowerGen's Chief Executive Officer ("CEO") with the Commission. PowerGen's
-------------------
8 The Joint Applicants' Post-Hearing Brief contains an appendix listing 49
commitments made during this proceeding.
9 T.E., Vol. III, April 21, 2000, at 8-9.
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commitment to creating and maintaining an ongoing dialogue with this Commission
was underscored by the forthright testimony of its CEO, as well as by his
active participation in these proceedings. This commitment should contribute to
productive and progressive management that will enhance the standing of KU and
LG&E as we enter the new millennium.
DIRECTORS AND ADVISORY BOARD
----------------------------
Under the terms of the Merger Agreement, PowerGen's ten-member board of
directors will be enlarged to allow for the appointment of LG&E Energy's CEO to
that board. PowerGen has committed that there will be a seat on the PowerGen
board filled by a United States citizen.10 The existing thirteen-member LG&E
Energy Board will be replaced by a three-member Board composed of the CEOs of
LG&E Energy and PowerGen and another individual associated with PowerGen.
Similar compositions for the boards of LG&E and KU are expected.
PowerGen also proposes creating an Advisory Board, with its membership
coming from the pre-merger LG&E Energy Board of Directors. The Advisory Board is
to provide advice concerning the operations of LG&E Energy and its subsidiaries,
business and regulatory developments in the United States, and other such
matters as the Advisory Board, PowerGen, and LG&E Energy should mutually agree.
Mr. Wallis stated that he would chair the Advisory Board.11 Since the Advisory
Board will be established to advise LG&E Energy and PowerGen, those two
entities, rather than
-------------------
10 Joint Applicants' Post-Hearing Brief at 18.
11 T.E., Vol. I, April 19, 2000, at 157-158.
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LG&E or KU, will share the full cost of the board.12 PowerGen has indicated that
it will consult with the Commission about the composition of the Advisory Board
and the arrangements made for the Advisory Board before any final decision is
made.13
The decisions made by the boards of each of the Applicants have the
potential to substantially affect the quality of utility service furnished to
Kentucky customers. In particular, the dividend and investment policies
established by the PowerGen board will set the tone for such policies of the
subsidiary boards. For this reason it is essential to the public interest that
LG&E and KU have a voice on the PowerGen Board. While the Applicants have
committed to dedicating a seat on the PowerGen Board to a citizen of the United
States, that individual must also reside within the LG&E or KU service
territories to ensure that Kentucky's interests are adequately heard by an
intentional board of directors.
Concerning the Advisory Board, given the role that board is designed to
fill, the Commission does not believe it is appropriate for it to exercise any
approval over the composition of that board. However, considering the
international nature of the PowerGen Board and its great distance from Kentucky,
the Commission suggests that the Applicants establish an advisory board for LG&E
and KU. Such a board could be invaluable in identifying timely issues of
importance to ratepayers and bringing those issues to the attention of the
Boards of LG&E Energy and PowerGen for appropriate action.
-------------------
12 Response to the Commission's March 24, 2000 Order, Item 21(e).
13 Joint Applicants' Post-Hearing Brief at 19.
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Considering the nature of the LG&E and KU service territories, this
advisory board should have a membership that is representative of the broad and
diverse population served, including a cross-section of rural and urban customer
representatives. To ensure that this board is truly advisory, it should not
include members of any of the Applicants' other Boards. While it may be
beneficial for this advisory board to meet with the LG&E Energy Board, all
concerns, suggestions, recommendations, and other advice of this board should be
submitted in writing to the LG&E Energy or PowerGen Board, as appropriate.
FINANCIAL ISSUES
----------------
The Applicants have made numerous commitments relating to financial issues.
Due to the importance of maintaining the financial condition of LG&E and KU,
significant portions of Appendices A and B to this Order address financial
issues. While there are narratives contained in the appendices, the Commission
finds that several of these significant issues warrant discussion here.
Many of the concerns, conditions, and requirements set forth in the Orders
in Case Nos. 10296,/14/ 89-374,/15/ and 97-300/16/ addressed financial resource
issues of
-------------------
14 Case No. 10296, The Application of Kentucky Utilities Company to Enter
Into an Agreement and Plan of Exchange and to Carry Out Certain Transactions in
Connection Therewith, final Order dated October 6, 1988.
15 Case No. 89-374, Application of Louisville Gas and Electric Company for
an Order Approving an Agreement and Plan of Exchange and to Carry Out Certain
Transactions in Connection Therewith, final Order dated May 25, 1990.
16 Case No. 97-300, Joint Application of Louisville Gas and Electric
Company and Kentucky Utilities Company for Approval of Merger, final Order dated
September 12, 1997.
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balanced capital structures, dividend policy, provision of capital resources,
and debt guarantees. All of these issues take on a heightened level of
importance in this case, particularly due to the international nature of the
transaction. The Applicants have committed to accept and adhere to all
conditions and requirements expressed in those previous Commission Orders. The
written acceptance of those conditions has been incorporated into the
Commission's conditional approval of this merger.
The cost of the Applicants' merger has been examined extensively in this
proceeding. One of the major costs is the premium PowerGen is paying for LG&E
Energy's common stock. PowerGen's acquisition of the common stock of LG&E Energy
will be at a price of $24.85 per share. This represents a 58 percent premium
over the price per share on February 25, 2000, the last trading day prior to the
announcement of the merger and places the value of equity, on a fully diluted
basis, at $3.2 billion.
While the Commission must determine whether the proposed merger is
consistent with the public interest, it is up to the LG&E Energy shareholders to
decide whether the share price offered by PowerGen is reasonable. The impact on
each investor may be materially different based on the price originally paid per
share, the length of time held, the investment objective sought to be achieved,
and the particular tax consequences of the transaction. LG&E Energy has
scheduled a shareholder meeting on June 7, 2000 to solicit shareholders' votes
on the merger. Thus, shareholders will make the final decision on whether the
PowerGen acquisition is in their collective best interests.
PowerGen, LG&E Energy, LG&E, and KU, through various statements, have
committed that LG&E and KU ratepayers will incur no additional costs,
liabilities, or
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obligations as a result of the acquisition. These commitments have been
incorporated into the conditions in Appendix A to this Order.
Of particular concern is the issue of "push down" accounting which would
require LG&E and KU to record a portion of the goodwill resulting from the
premium paid by PowerGen for the LG&E Energy stock. The Commission strongly
opposes that accounting treatment here due to the potential adverse financial
impact on LG&E, KU, and their respective ratepayers. Based on a SEC Staff
Accounting Bulletin, LG&E and KU believe they will not be required to record on
their books any goodwill arising from the PowerGen transaction.17 Based on this
SEC statement, the Commission agrees with LG&E and KU that "push down"
accounting for the goodwill is not required, and has incorporated that
conclusion within the conditions listed on Appendix A.
Included in Appendix A of this Order is the commitment of the Applicants to
adequately fund and maintain LG&E's and KU's transmission and distribution
systems. This issue is further discussed in conjunction with the section on
obligation to serve and customer service issues. As LG&E Energy, as well as LG&E
and KU, will become part of a larger international operation, the concern exists
that the capital needs of LG&E and KU will not receive the proper precedence in
the capital budgeting process and capital investment allocation at PowerGen. In
order to monitor the Applicants' commitment in this area, the Commission will
require LG&E and KU to annually file their current 3-year capital budgets. This
filing will be due on March 31 of each year, and will
-------------------
17 Response to the Commission's March 24, 2000 Order, Item 37, and Response
to the Commission's April 5, 2000 Order, Item 23(c). SEC Staff Accounting
Bulletin No. 54, Topic 5J, indicates that if an acquired company had publicly
held debt or preferred stock at the time of acquisition, the SEC staff generally
does not insist on the application of "push down" accounting.
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<PAGE>
include an explanation for any reductions in the capital budget items greater
than 10 percent.
TRANSACTION COSTS
-----------------
The Applicants have committed to not seek recovery of, or otherwise include
in the cost of service and rates of LG&E and KU, any of the costs associated
with the acquisition of LG&E Energy by PowerGen. The Commission has included a
similar requirement in Appendix A to this Order. Even with this commitment, the
Commission finds it reasonable for LG&E and KU to file information sufficient to
allow adequate monitoring of the costs associated with this acquisition.
The Applicants testified at the hearing to a total estimated acquisition
cost of $111.0 million.18 The Applicants' Form U-1 Application -- Declaration
Under PUHCA ("SEC Application") contained an estimated cost of $50.4 million.19
The Applicants indicated that the difference between the two estimates reflects
SEC requirements and more current estimates.20 In addition, the Applicants have
provided a listing of the types of costs expected to be incurred to accomplish
the acquisition.21
To adequately monitor the actual acquisition costs, the Commission will
require PowerGen to file a schedule of its actual acquisition costs to date, at
the level of detail
-------------------
18 TE Vol. II, April 20, 2000, at 226-227.
19 SEC Form U-1 Application, filed with the SEC on April 26, 2000, Item 2,
at 25.
20 Response to Information Requested at Hearings held April 19, 2000
through April 21, 2000, Item 6.
21 Id.
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<PAGE>
shown in its Post-Hearing Data Responses, Item 6. PowerGen should also identify
any incurred costs that have been allocated to LG&E Energy. LG&E Energy will be
required to file a schedule of its actual acquisition costs to date, including
any costs allocated to it by PowerGen, at the level of detail shown in its
Post-Hearing Data Responses, Item 6. LG&E Energy should also identify any costs
allocated to a subsidiary or affiliate, provide the name of the subsidiary or
affiliate and the accounting entries made on its books, and identify the basis
for the allocation. PowerGen and LG&E Energy should file this information every
six months, as of June 30 and December 31. The first report will be due on
August 15, 2000, and all subsequent reports will be due 45 days after the end of
the reporting period. These reports should be filed until all transaction costs
have been incurred.
DIVIDEND POLICY
---------------
A concern expressed in the Commission's Orders in Case Nos. 10296, 89-374,
and 97-300 was the adoption of a dividend policy for LG&E and KU that could
adversely affect their financing requirements and capabilities. The Applicants
have acknowledged those concerns and have offered additional commitments
relating to the dividend policy. An affirmation of the conditions contained in
the Commission's Orders in Case Nos. 10296, 89-374, and 97-300 is contained in
Appendix A to this Order.
LG&E and KU stated that under current law, they are prohibited from paying
dividends from capital or unearned surplus, except as authorized by the SEC or
Federal Energy Regulatory Commission ("FERC"). Their current dividend authority
does not allow dividends to be paid out of capital or unearned surplus, and no
requests have
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been made to the SEC or FERC to allow such payments. 22 However, PowerGen is now
requesting SEC authority to pay dividends out of additional paid-in capital up
to the amount of LG&E Energy's consolidated retained earnings just prior to the
merger and out of earnings before the amortization of goodwill thereafter. These
dividends will not be paid by LG&E Energy out of paid-in capital if its common
stock equity as a percentage of total capitalization is below 30 percent on a
consolidated basis.23 LG&E Energy is also requesting SEC authority for its
non-utility subsidiaries to pay dividends out of capital and unearned surplus
capital, to the extent permitted under applicable corporate law.24
The current restrictions on the payment by LG&E and KU of dividends from
capital or additional paid-in capital, coupled with the commitments contained in
this Order, provide reasonable assurances that the dividend policy will not
adversely affect LG&E's or KU's financing requirements and capabilities. In
addition, the current restrictions appear to minimize any risk to LG&E and KU if
the SEC dividend authority sought by PowerGen and LG&E Energy is granted.
However, should LG&E or KU request the SEC or FERC for an exemption to the
dividend requirements, the Commission must be notified of such a request 30 days
before it is filed with the SEC or FERC.
-------------------
22 Joint Applicants' Post-Hearing Brief at 9-10.
23 SEC Form U-1 Application, filed with the SEC on April 26, 2000, Item 3,
Part D, at 98.
24 Id.
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<PAGE>
BEST PRACTICES
--------------
PowerGen states that there will be an ongoing review of LG&E's and KU's
operations utilizing "a business improvement process based on a benchmarking
technique."25 This improvement process is referred to as "world-class best
practices." By applying best practices, PowerGen seeks out other companies who
perform similar types of functions or processes to ascertain how the process
operates and whether or not there are techniques that can be adopted or modified
and applied to its own processes. For example, PowerGen stated that in 1992 it
identified KU as a low cost producer of electricity and had visited KU's Ghent
power station to study its generation processes.26 PowerGen's best practices
amounts to a continual worldwide search for ever more efficient operational
processes, which could lead to cost savings, more competitive customer prices,
and improved customer service and customer satisfaction. During the Applicants'
merger and subsequent operational review process, identified best practices may
either flow from LG&E and KU to PowerGen or in the opposite direction.27
LG&E is already familiar with business improvement processes and has been
applying those techniques since 1995. The Commission's 1995 Management Audit
Report of LG&E notes that management had initiated a comprehensive Continuous
Improvement Process ("CIP") "to identify, develop, and implement incremental
-------------------
25 Application Exhibit K, Sheers Testimony at 7. See also Wallis Testimony
--------
at 8, Hewett Testimony at 2, and T.E., Vol. 1, April 19, 2000, at 27-30.
26 T.E., Vol. 1, April 19, 2000, at 28.
27 Response to the Commission's March 24, 2000 Order, Item 54.
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<PAGE>
performance, customer service and safety improvements."28 At LG&E, the CIP
involved the use of teams of employees and facilitators to study areas of
opportunity that could lead to more efficient and effective operations.
The Commission encourages the Applicants' efforts to apply best practices
to their operations. Given LG&E's experience with successfully implementing ClP,
documenting and tracking team initiatives, and reporting results through the
management audit process, it should be easy for a similar procedure to be
applied to the best practices implementation process. To enable the Commission
to track the use of best practices, the Applicants should file semi-annual
progress reports. For each area reviewed for application of best practices, the
progress report should document the investigating team, its mission and area of
investigation, current status, estimated costs, expected results including
savings, and all results actually achieved.
OBLIGATION TO SERVE AND CUSTOMER SERVICE ISSUES
-----------------------------------------------
Native Load/Reserve Margin
---------------------------
NAS expressed concern that the Applicants may set a higher priority on
selling electricity outside of Kentucky at prices that exceed those paid by
LG&E's and KU's native load customers. Objecting to such a practice, NAS
asserted that serving existing and new Kentucky loads must be LG&E Energy's top
priority. NAS urged the Commission to require PowerGen to offer to Kentucky
consumers prices, terms and conditions of service that are at least as favorable
as any proposals extended for off-
-------------------
28 See the Comprehensive Management Audit of Louisville Gas and Electric
---
Company, dated July 28, 1995, Finding lll-F20, at 65.
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<PAGE>
system sales of any kind. The AG expressed concern that this proposed "most
favored nation" clause could result in revenue reductions that could negatively
impact other ratepayers through the ESM. If such a clause is adopted, the AG
requests native load customers be insulated from any adverse effects.
The Commission concurs that serving existing and new Kentucky load must be
a high priority for LG&E Energy. The existing LG&E and KU generating plants were
built to serve retail customers within their respective service territories.
While power that is temporarily excess is properly sold off-system in wholesale
markets, LG&E and KU must first serve their native load customers. NAS's concern
is adequately addressed by the Applicants' commitment to dedicate LG&E's and
KU's low cost generation first to the requirements of their native load
customers. This commitment is reflected in Appendix A under Other Commitments
-----------------
and Assurances. While the AG is correct that NAS's proposal could unfairly
--------------
impact other native load customers, insulating LG&E's and KU's other customers
would necessarily require stockholders to absorb any resulting revenue
shortfall. We find such action to be unnecessary in view of the other safeguards
currently in place to protect native load customers from being adversely
impacted by off-system sales.
An additional concern related to the protection of native load customers
was expressed by OMU regarding the generally reduced reserve margins within the
LG&E and KU system, coupled with steadily increasing reliance on peaking
generation units and wholesale power purchases. According to the latest
Integrated Resource Plan filed
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<PAGE>
by LG&E and KU, current capacity and reserve is close to peaking load.29
Investments in new generation are urgently needed throughout the region,
thereby further exacerbating the risk to customers by LG&E and KU relying upon
ever-increasing quantities of short-term wholesale power purchases. In addition,
the Commission is concerned that while the merger process is underway, upper
management's attention to this situation may be diverted by merger-related
issues.
In response to these concerns, PowerGen has committed to allowing LG&E and
KU to acquire the necessary resources, whether through new generating capacity
or firm contracts, in an effort to give priority to new and existing native
load.30 PowerGen has further committed that it will provide the necessary
capital to enable LG&E and KU to provide reasonable service at fair, just, and
reasonable rates and that it will not refuse to provide such capital if such
refusal would impair either utility's ability to provide reasonable service. The
Commission will monitor the fulfillment of this commitment by the Applicants,
including, if appropriate, the consideration of new base-load or
intermediate-load generation.
Transmission capacity and reliability are also concerns to be addressed
herein. Historically, LG&E and KU have actively participated in organizations
such as the East Central Area Reliability Council and the Midwest Independent
System Operator ("Midwest ISO") which help to ensure the reliability of the bulk
power system and which, in turn, have a significant impact on retail electric
service. The Commission encourages
-------------------
29 Case No. 99-430, The Joint Integrated Resource Plan of Louisville Gas
and Electric Company and Kentucky Utilities Company, filed November 22, 1999.
30 Joint Applicants' Post-Hearing Brief at Appendix A at 3.
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<PAGE>
LG&E and KU to continue active participation in these organizations,
particularly with respect to maintaining the reliability of the electricity
supplied to their customers.
Service Quality
---------------
The Commission is concerned that adequate distribution services be
maintained by the utilities. LG&E and KU provide excellent customer service and
the Commission expects that adequate resources will continue to be allocated to
customer service and safety. Therefore, to properly monitor service quality,
LG&E and KU must file annually by March 31 outage reports summarizing System
Average Interruption Duration Index ("SAIDI") and System Average Interruption
Frequency Index ("SAIFI") at the substation level for the previous year and a
comparison to the previous 5-year average. Any deterioration in excess of 10
percent for any one substation, or 5 percent for the system total, should be
explained and a description of corrective measures to be taken should be
included. If none are needed, an explanation should be provided. If weather is
the largest contributing factor for the differences, the effects of severe
storms should be removed and then the data re-compared.
Customer Service Issues
-----------------------
Several intervenors claimed that recent changes in LG&E's and KU's customer
service policies and practices will negatively affect low-income customers and
questioned whether those changes were in some way related to the merger
announcement. Concern was also expressed that under PowerGen's ownership,
additional changes might be made that would have further negative impacts on
<PAGE>
low-income customers and that service might suffer due to workforce reductions
or other cost-cutting measures implemented to improve economic efficiencies.
CAC and MHNA/POWER objected to the recent closing of customer service
centers by both LG&E and KU and to recent changes in LG&E's policies regarding
payments on arrearages and implementation and termination of partial payment
plans./31/ CAC and MHNA/POWER argue that these actions will negatively affect
low-income customers and that they need to be reversed if the merger is to be
consistent with the public interest./32/ CAC also raised concerns about LG&E's
recent applications to increase its rates for gas service/33/ and certain
non-recurring charges and urged that those cases be withdrawn./34/
LG&E stated that the recent filings to increase its gas rates and
non-recurring charges are unrelated to the PowerGen acquisition. LG&E and KU
stated that the recent closings of their respective customer service centers
resulted from planned consolidations that were an outgrowth of their 1998
merger. LG&E explained that the changes in its policies regarding payments on
arrearages and implementation and termination of partial payment plans were also
made as a result of that merger. In an effort to develop uniform policies and
practices in several areas, management reviewed
-------------------
/31/ Brown Kinloch Testimony at 28-34.
/32/ Id. at 35, Post-Hearing Brief of MHNA/POWER at 7.
--
/33/ Case No. 2000-080, An Adjustment of the Gas Rates of Louisville Gas
and Electric Company, flied March 30, 2000.
/34/ Case No. 2000-137, Changes to Louisville Gas and Electric Charge for
Disconnecting and Reconnection Service and Charge for Returned Checks, filed
April 21, 2000.
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<PAGE>
those in place at LG&E and KU and determined that KU's were superior. This led
to modifications of LG&E's existing policies on arrearage payments and partial
payment plans consistent with those of KU.
LG&E and KU have for many years been providing a high quality level of
customer service./35/ Their commitment to service quality was recognized in 1999
with an award by J.D. Power & Associates for outstanding residential customer
service. PowerGen has made the following commitments regarding issues affecting
low-income customers specifically. First, it will review with LG&E management
the current policies and practices with respect to low-income customers to
determine whether more "customer-sympathetic" policies and practices would be
appropriate. This review will specifically include those points raised in the
testimony sponsored by the low-income customer representatives. Secondly, with
respect to statewide legislation for a low-income universal service fund,
PowerGen stated LG&E and KU would take a neutral stance on the portion of such
legislation designed to create a line item charge on utility customers' bills
for the purpose of assisting low-income customers so long as such legislation
has no impact on shareholders./36/
On customer service issues, PowerGen has committed to take into
consideration the impact on customer service and customer satisfaction of
implementing best practices, and to minimize, to the extent possible, any
negative impacts. PowerGen, LG&E, and KU commit to advising the Commission at
least annually on the adoption and implementation of best practices at both LG&E
and KU following consummation of
-------------------
/35/ Application Exhibit K, Hewitt Testimony at 4.
/36/ T.E., Vol. 1, April 19, 2000, at 170.
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<PAGE>
the merger. PowerGen also states that it has the same level of commitment to
high quality service that LG&E Energy has and will fully support maintaining
the LG&E and KU "track record" for service.
It is clear that the rate filings, service center closings, and changes in
payment policies are unrelated to the PowerGen merger. The rate filings are
related solely to LG&E's existing costs and revenue levels. The service centers
were closed after an analysis based on the level of low-income transactions,
fewest customers affected, close proximity to another office, the level of O & M
reduction, and building ownership status./37/ The changes in LG&E's policies
regarding arrearage payments and partial payment plans result from actions taken
as a result of the LG&E/KU merger. The arguments that any or all of these
actions or changes should be reversed as a condition of approving the PowerGen
merger are not persuasive. Since these actions were undertaken independent of
the proposed merger, there is no justification to conditioning the merger on
their reversal.
We are encouraged by LG&E's and KU's efforts to increase the availability
of customer contacts through their agreements with independent parties to
establish customer bill payment facilities and with banks to establish
full-function payment centers, as well as by PowerGen's commitments concerning
customer service and customer satisfaction. However, we remain concerned about
the potential negative impacts of the service center closings and the policies
on arrearages and partial payment plans. Of particular concern is LG&E's
reduction in service centers from four to only one. PowerGen agreed to review
these and various other issues with LG&E's
-------------------
/37/ Response to CAC's March 23, 2000 Data Request, item 15.
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<PAGE>
and KU's management. The Commission expects to be kept apprised of the status of
these reviews and any changes, modifications, or other impacts resulting
therefrom, as well as any future actions that are taken affecting these areas.
We also expect LG&E and KU to monitor customer service under this new
environment and report on these matters to the Commission in conjunction with
their reports on the implementation of best practices.
Customer Service Performance Standards
--------------------------------------
LG&E and KU have been providing a high level of service quality for many
years though neither has adopted specific service quality standards. However,
both utilities maintain statistics on the duration and frequency of electric
interruptions, the SAIDI and SAIFI statistics previously identified, and other
measurements of customer satisfaction.38 While the Applicants agreed to provide
this data on customer satisfaction, they declined to adopt any minimum service
quality standards on the basis that existing Commission regulations govern
service reliability.39
PowerGen's electric distribution subsidiary, East Midlands, has adopted
service quality standards to improve its below-average performance. Those
standards include a guaranteed level of service with penalty payments to
customers when minimum service levels are not achieved.40 MHNA/POWER cite these
standards in recommending that the merger be conditioned upon LG&E's and KU's
commitment to
-------------------
38 Response to the Commission's April 5, 2000 Order, Item 34.
39 Response to the Commission's March 24, 2000 Order, Item 66.
40 Id., Item 65.
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<PAGE>
adopt customer service standards with penalty provisions./41/ Although the
Commission does not find such a condition necessary at this time, we share the
concerns that after the merger there might be a decline in the quality of
customer service.
Included under the umbrella of customer service are customer service
centers, and the recent closing of many of these offices is discussed herein.
The Applicants have testified extensively on adopting a best practices process
and the potential value of such a process. While the Commission recognizes that
potential value, we must emphasize that quality of service is of equal
importance to cost of service. The Applicants are on notice that cost reductions
must not be pursued if a direct or indirect result will be a decline in service
quality. As the Applicants analyze their operations for purposes of implementing
best practices, consideration of adopting customer service standards should be
made a top priority. To properly monitor this issue, the Applicants should
include a discussion of their consideration of such standards in their report to
the Commission on identifying and implementing best practices.
PRESERVATION OF ASSETS
----------------------
LG&E and KU have statutory obligations to provide adequate, efficient, and
reasonable utility service to native load customers within their respective
service territories. In addition, LG&E Energy is contractually obligated to
ensure that certain subsidiaries not regulated by this Commission fulfill their
long-term obligations to supply wholesale power to Big Rivers and Kenergy. These
LG&E Energy subsidiaries provide all the electrical needs of Big Rivers for
ultimate sale to approximately 96,000 Kentucky ratepayers, as well as the needs
of Kenergy for resale to Alcan and another aluminum
-------------------
/41/ MHNA/POWER Post-Hearing Brief at 4 and 8.
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<PAGE>
smelter. These wholesale supply contracts were approved by the Commission as
part of the financial reorganization of Big Rivers.
Big Rivers, Kenergy, and Alcan have objected to the merger on the basis
that PowerGen's ability to transfer or sell LG&E Energy assets, including the
LG&E and KU stock, may materially impair the value of LG&E Energy as security
for the wholesale power sales. The proposed remedy for this concern is to
require LG&E Energy to maintain a minimum level of net worth. The Applicants
rejected this remedy, arguing that the merger will not impair LG&E Energy's
value.
The Commission finds that Big Rivers, Kenergy, and Alcan have raised a
valid concern regarding security for these wholesale power contracts. The merger
also creates a similar concern with respect to maintaining the assets of LG&E
and KU for the benefit of retail customers. While we find it inappropriate at
this time to require LG&E Energy to maintain a minimum level of net worth,
certain less restrictive customer protections are appropriate. Thus, LG&E Energy
must commit to not transfer the LG&E or KU stock without prior Commission
approval, regardless of whether the transfer would be exempt under KRS
278.020(6)(b). In addition, the Applicants must commit to not transfer any asset
of LG&E or KU with an original book value in excess of $10 million without prior
Commission approval.
ECONOMIC/COMMUNITY DEVELOPMENT
------------------------------
One area of particular concern is the Applicants' commitment to continuing
LG&E's and KU's historic policies and level of effort in support of economic
development in the Commonwealth and maintaining a strong presence as positive
corporate citizens in the communities they serve. NAS, which takes the strongest
stand
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<PAGE>
on the issue of economic development, argued that the merger should be
conditioned on a 5-year requirement that any dividends or other payments by
LG&E Energy to PowerGen be solely from current earnings unless the Commission
finds that LG&E Energy: (1) is providing adequate levels of service; (2) is
making the capital investment required to reliably serve existing, expanding,
and expected new Kentucky electric loads; and (3) is continuing to make
satisfactory efforts to promote economic development in Kentucky. NAS also
recommends that PowerGen be required to file an annual report on its economic
development efforts in Kentucky, including efforts to promote the expansion of
existing electric loads.
NAS and MHNA/POWER raised concerns that after the merger, LG&E and KU may
increase their efforts to sell power in wholesale markets to the detriment of
serving existing or expanding native loads within the Commonwealth. Big Rivers
points to the lack of commitments on the part of PowerGen to being proactive in
economic development in Kentucky in the event of electric deregulation or to
maintaining LG&E's and KU's economic development budgets at least at their
current levels. MHNA/POWER and CAC expressed concerns that LG&E's and KU's
recent closing of customer service centers indicates a deterioration in the
level of commitment to the communities they serve and questioned whether, under
PowerGen's management, that commitment might be further weakened.
The Applicants made several commitments in the areas of economic and
community development, some of which address the specific concerns voiced by the
intervenors. The Applicants commit to: (1) maintaining and supporting for 10
years
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<PAGE>
LG&E's and KU's relationships with the communities they serve;/42/ (2)
maintaining LG&E's and KU's proactive stance on developing economic
opportunities in Kentucky; (3) allowing LG&E Energy, LG&E, KU, and the LG&E
Energy Foundation to continue making annual civic and charitable contributions
at levels comparable to or greater then those made prior to the merger; and (4)
extending to Lexington, Kentucky on an equal basis all commitments made with
respect to supporting economic development activities and civic and charitable
activities.
The Commission finds some comfort in these commitments, but we share the
belief of some of the intervenors that the commitments should apply with equal
force to rural areas. Economic development and investment in the communities
served by LG&E and KU are of paramount importance to the public interest and
these communities extend far beyond the urban centers of Louisville and
Lexington. The Commonwealth includes many small, rural communities. While great
strides have been made in economic development in recent years, many of these
rural areas have not experienced the same level of prosperity as our urban
centers. Thus, the Applicants' commitments to economic development and civic and
charitable activities must apply equally to all rural areas served, not solely
to the Louisville and Lexington areas.
The Commission is encouraged by the Applicants' commitments to economic
development, but we find that a minimal level of monitoring is appropriate.
Therefore, three reports will be required. The first, which should be filed
within 30 days, must disclose the total annual expenditures for economic
development and total annual expenditures for charitable contributions for the
past three calendar years for LG&E
-------------------
/42/ T.E., Vol. 1, April 19, 2000, at 185.
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<PAGE>
Energy Foundation, LG&E, and KU. This report should also include the budgeted
amounts for 2000 through 2002 for each corporation. Another report should be
filed annually by each corporation, in conjunction with the LG&E and KU annual
financial reports, disclosing total prior year expenditures for economic
development activities and charitable contributions. The remaining report, to be
filed annually by LG&E and KU, should detail economic development efforts within
their respective service areas.
RESEARCH AND DEVELOPMENT
------------------------
The Applicants state that they will continue funding research and
development ("R&D") programs as long as the programs produce benefits./43/ The
Commission concurs with this position because such programs produce a myriad of
benefits, including advances in fuel and generation technology, environmental
technology, and transmission grid technologies. However, many new technologies
take several years to develop and successfully implement. Thus, the Commission
is concerned that as electricity prices become more competitive, utilities will
intensify cost cutting efforts and reduce spending on R&D. Reducing R&D spending
would be short-sighted and not in the customers' long-term interest.
The Commission strongly supports research and development and commends the
Applicants for their commitments to such programs. Benefits can be realized
whether research is sponsored solely by one utility or through a larger
organization funded by multiple utilities or stakeholders. The benefits of R&D
may well help the
-------------------
/43/ Id. at 43.
-32-
<PAGE>
Applicants in fulfilling their commitments to preserve LG&E's and KU's low rates
and high quality service./44/
To assist the Commission in its efforts to monitor this commitment, the
Applicants should provide written notice of any material changes in their level
of participation or funding for R&D 30 days prior to the proposed change. This
includes any change in R&D funding equal to or greater than 5 percent of the
previous year's budget. The written notice should include an explanation and
justification for the change in policy.
REGULATORY CONCERNS
-------------------
Previous Orders approving the creation of holding companies for KU and
LG&E, as well as the merger of those holding companies, included extensive
discussions of the Commission's concerns and objectives with regard to the
protection of ratepayer interests. The Commission's concerns related to three
areas:
1. The protection of utility resources;
2. The ability to adequately monitor the corporate activities of the
utility, the holding company, and any other subsidiaries established by the
holding company; and
3. The establishment of reporting requirements to assist the Commission in
its monitoring activities.
Those Orders also contained a detailed list of the conditions and requirements
necessary to protect ratepayers' interests.
LG&E Energy, LG&E, and KU stated that they would continue to adhere to the
applicable conditions described in those Orders after the merger. This
commitment included, but was not limited to, the reporting requirements
prescribed in those Orders
-------------------
/44/ Application Exhibit K, Wallis Testimony at 11.
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<PAGE>
and the access to the books and records of other affiliates and subsidiaries
engaged in transactions with LG&E and KU./45/ However, LG&E and KU indicated
there were some areas where SEC restrictions could impact the Commission's
oversight./46/
The Commission is aware of and familiar with the SEC restrictions
associated with registered holding companies such as Cinergy and American
Electric Power. LG&E and KU will not be subject to these SEC provisions until
they become part of the PowerGen registered holding company system, which will
not occur until the merger is completed. However, the Commission believes it is
important to acknowledge other developments that will have an impact on the
conditions and requirements prescribed in the earlier holding companies and
merger Orders.
During the 2000 Regular Session, the Kentucky General Assembly passed House
Bill 897, which implements guidelines on cost allocations and affiliate
transactions, as well as a code of conduct for utilities with nonregulated
activities or affiliates. This legislation will become effective on July 14,
2000.
The SEC Application has also identified a situation which further affects
the conditions and requirements prescribed in the Commission's Orders in Case
Nos. 10296, 89-374, and 97-300. It is acknowledged in the SEC Application that
there are
-------------------
/45/ Application at 18-19.
/46/ Application Exhibit K, Robinson Testimony, at 3-4.
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<PAGE>
differences between the SEC and the FERC regarding intra-affiliate
transactions./47/ PowerGen, LG&E Energy, LG&E, and KU have told the SEC that
PowerGen will be able to comply with the requirements of both the FERC and SEC
for all services, sales, and construction contracts between associated and
holding companies unless otherwise permitted by the SEC./48/
Regardless of these developments, the Commission's concerns for the
protection of ratepayers remains the same as those expressed some 12 years ago.
Therefore, the Commission will require as a condition to the merger that
PowerGen, LG&E Energy, LG&E, and KU will comply with the conditions and
requirements previously expressed in the Orders in Case Nos. 10296, 89-374, and
97-300. These concerns, conditions, and requirements have been repeated and
restated as Appendix B to this Order. Until July 14, 2000, PowerGen, LG&E
Energy, LG&E, and KU will comply with the conditions and requirements expressed
in Appendix B. From July 14, 2000 until such time as these parties become
subject to the SEC's requirements as part of the PowerGen registered holding
company system, the conditions and requirements listed in
-------------------
/47/ The FERC intra-corporate transactions policy, with respect to non-power
goods and services, generally requires that affiliates or associates of a public
utility not sell non-power goods and services to the public utility at a price
above market. The sales of non-power goods and services by a public utility to
its affiliates or associates are to be at the public utility's cost for such
goods and services or market value for such goods and services, whichever is
higher. The SEC policy generally requires that affiliate transactions involving
system utilities be at cost, fairly or equitably allocated among such companies.
See SEC Form U-I Application, filed with the SEC on April 26, 2000, Item 3, Part
---
F, Section 13 -- Intra-System Provision of Services, at 101.
/48/ Id. at 101. Under circumstances of divergent cost and market prices
such that both the FERC and SEC pricing standards could not be reconciled if the
transaction was performed, PowerGen would comply by refraining from performing
the affected service, sales, or construction contract.
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Appendix B will be modified subject to the provisions of House Bill 897. Upon
the establishment of the PowerGen registered holding company system, the rules
of the SEC will take precedence. Further, the Commission expects that PowerGen,
LG&E Energy, LG&E, and KU will abide by the representations they have made in
the SEC Application concerning the conflict between FERC and SEC affiliate
transaction pricing. However, in any instance in which the conditions and
requirements expressed in Appendix B are not superseded by the provisions of
House Bill 897 or the rules of the SEC, the conditions and requirements in
Appendix B will control.
REPORTING ISSUES
----------------
To ensure adequate regulatory oversight, the Commission has imposed
numerous reporting requirements upon the Applicants. LG&E and KU have also
raised two specific reporting issues. First, they have suggested that the
quarterly supplemental financial information required in Case No. 97-300 is no
longer necessary because of the ESM, and have asked that this information be
filed on an annual basis only./49/ They also state that these reports can be
provided no earlier than 60 days after the end of the reporting month due to the
time necessary to separate and verify the financial statements./50/ Second, they
suggested convening a future conference to discuss how the SEC reports for
registered holding companies may satisfy the reporting requirements imposed in
this case./51/
-------------------
/49/ Response to the Commission's March 24, 2000 Order, Item 8.
/50/ Response to the Commission's April 5, 2000 Order, Item 24(a).
/51/ Response to the Commission's March 24, 2000 Order, Item 40(d).
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In Case No. 97-300, the Commission found that changes occurring in the gas
and electric industries necessitated the filing of supplemental information
which better identified the nature of LG&E's and KU's operations. LG&E and KU
were directed to file this supplemental information quarterly./52/ The
Applicants have provided no basis to support their claim that the ESM obviates
the Commission's need for this information on a quarterly basis. LG&E and KU
acknowledged that procedures are already in place to accomplish the allocations
needed to produce these quarterly reports./53/ The Commission finds that the
need for the quarterly financial information is not obviated by the ESM. The
request to file these reports on an annual basis is, accordingly, denied. As to
the filing date, LG&E and KU have failed to justify the need for 60 days to
prepare these reports, especially in light of testimony that procedures are in
place to perform the necessary allocations. Therefore, the quarterly
supplemental financial information should be filed with the Commission within 45
days of the end of the reporting quarter. These decisions will be subject to
future reconsideration in the event that good cause can be shown.
The Commission has previously recognized in cases involving registered
holding companies that SEC reports may satisfy many of our filing
requirements./54/ In such
-------------------
/52/ Case No. 97-300, September 12, 1997 Order at 29.
/53/ T.E., Vol. II, April 20, 2000, at 224-225.
/54/ See Case No. 94-104, Application of The Cincinnati Gas & Electric
---
Company and Cinergy Corp. for Approval of the Acquisition of Control of The
Union Light, Heat & Power Company by Cinergy Corp., final Order dated May 13,
1994, at 22; and Case No. 99-149, Joint Application of Kentucky Power Company,
American Electric Power Company, Inc. and Central and South West Corporation
Regarding a Proposed Merger, final Order dated June 14,1999, at 12.
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<PAGE>
cases, the SEC reports are acceptable substitutes. The Applicants should file an
analysis of the reporting requirements contained in this Order and the
information contained in their SEC reports, indicating areas that may be
duplicative. The Commission will then determine whether the identified SEC
reports adequately satisfy the Commission's information requirement. The
Applicants' analysis should be filed within 90 days of completing the
acquisition.
SUMMARY OF FINDINGS
-------------------
The Commission, after consideration of the evidence of record and being
advised, finds that:
1. PowerGen, LG&E Energy, LG&E, and KU will, after the consummation of the
merger, have the financial, technical, and managerial abilities to provide
reasonable utility services.
2. PowerGen and any intermediate company between PowerGen and LG&E Energy
will not, by reason of PowerGen's ownership of all outstanding shares of
common stock of LG&E Energy, be a utility as defined in KRS 278.010(3).
3. LG&E Energy will not, by reason of its ownership of all outstanding
shares of common stock of LG&E and KU, be a utility as defined in KRS 278.0
10(3).
4. The proposed acquisition of LG&E Energy by PowerGen, the merger of LG&E
Energy and the Merger Sub, and the transfer of control of LG&E and KU to a newly
constituted LG&E Energy is in accordance with law, for a proper purpose, and
will be consistent with the public interest only if the Applicants accept and
agree to the
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commitments and conditions set forth in Appendices A and B, attached hereto and
incorporated herein by reference.
5. The Commission will certify to the SEC pursuant to Section 33(a)(2) of
PUHCA that, with the Applicants' acceptance of the commitments in Appendices A
and B, the Commission has the authority and resources to protect LG&E's and KU's
ratepayers subject to its jurisdiction and that it intends to exercise this
authority.
6. The merger should be approved upon the condition that the CEOs of each
Applicant file within 7 days of the date of this Order a written acknowledgement
accepting, and agreeing to be bound by, the commitments set forth in Appendices
A and B to this Order.
7. LG&E and KU should provide copies of the applications, notices, final
approval orders, or other regulatory notifications received from FERC, SEC, the
Federal Communications Commission, the Department of Justice, the Virginia State
Corporation Commission, and the Tennessee Regulatory Authority, to the extent
these documents have not already been provided in this case.
8. The request by LG&E and KU to discontinue the filing of the quarterly
supplemental financial reports and to file those reports on an annual basis
should be denied. In addition, the supplemental financial reports should be
filed with the Commission within 45 days of the close of the reporting period.
9. LG&E and KU should file within 90 days of closing the merger an analysis
of the reporting requirements contained in this Order and the requirements of
the SEC, identifying those SEC reports that may satisfy the Commission's
requirements.
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<PAGE>
10. The Applicants should notify the Commission in writing of any material
change in LG&E's and KU's participation in, or funding for, research and
development 30 days prior to any proposed change.
11. LG&E and KU should file annually their service outage reports as
described in this Order.
12. The Applicants should file semi-annually a report detailing the
adoption and implementation of best practices at LG&E and KU. The report should
be filed 45 days after the close of the reporting period.
13. Within 30 days of the date of this Order, LG&E Energy, the LG&E Energy
Foundation, LG&E, and KU should file a report detailing their actual expenditure
levels for economic development activities and civic and charitable activities
for the past three calendar years. The report should also include the current
budgets for the same activities for the years 2000 through 2002.
14. LG&E Energy, the LG&E Energy Foundation, LG&E, and KU should report
annually their actual expenditures for economic development activities and civic
and charitable activities. In addition, LG&E and KU should annually file a
written update report concerning economic development efforts within their
respective service areas.
15. LG&E and KU should annually file their current 3-year capital budgets,
including an explanation for any reductions in the capital budget items greater
than 10 percent.
16. PowerGen and LG&E Energy should, every 6 months, provide reports on the
actual costs of the LG&E Energy acquisition, as described in this Order. The
reports should be as of June 30 and December 31, with the first report due on
August
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15, 2000 and all subsequent reports due 45 days after the end of the reporting
period. PowerGen and LG&E Energy should continue to provide these reports until
all transaction costs have been incurred.
17. In the event LG&E or KU requests the SEC or FERC for an exemption or
change to the current dividend requirements, a copy of such request should be
filed with the Commission 30 days prior to its submission to the SEC or FERC.
IT IS THEREFORE ORDERED that:
1. The transfer of ownership of LG&E and KU through the acquisition of
ownership and control of LG&E Energy by PowerGen is approved, subject to the
filing within 7 days of the date of this Order of the written acknowledgements
described in Finding No. 6 above.
2. PowerGen and LG&E Energy shall not impair the capacity of LG&E and KU to
meet their obligations to provide adequate, efficient, and reasonable utility
service.
3. LG&E and KU are prohibited from guaranteeing the debt of PowerGen, LG&E
Energy, and related affiliates and subsidiaries of PowerGen and LG&E Energy,
without the prior approval of the Commission.
4. The Applicants shall comply with all reporting and filing requirements
described herein. Unless otherwise noted, all quarterly reports shall be filed
within 45 days of the close of the reporting quarter, while all annual reports
shall be filed by March 31 of the year following the reporting period.
5. Access to the books and records of PowerGen and LG&E Energy and its
related affiliates and subsidiaries shall be provided as described in Appendix
B.
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<PAGE>
6. LG&E and KU shall file copies of the applications, notices, final
approval orders, or other regulatory notifications received from FERC, SEC, the
Federal Communications Commission, the Department of Justice, the Virginia State
Corporation Commission, and the Tennessee Regulatory Authority, to the extent
these documents have not already been provided in this case, within 10 days of
their filing or receipt.
7. Within five days of the consummation of the merger, LG&E and KU shall
file a written notice setting forth the date of merger.
8. The request by LG&E and KU to discontinue the filing of the quarterly
supplemental financial reports and all those reports to be filed on an annual
basis is denied.
9. The motion to intervene of Gallatin Steel Company is denied as untimely
and its tendered brief is rejected.
Done at Frankfort, Kentucky, this 15th day of May, 2000.
By the Commission
ATTEST:
[SIGNATURE ILLEGIBLE]
-----------------------------
Executive Director
<PAGE>
APPENDIX A
APPENDIX TO AN ORDER OF THE KENTUCKY PUBLIC SERVICE
COMMISSION IN CASE NO. 2000-095 DATED May 15, 2000.
The approval of the merger of PowerGen and LG&E Energy is subject to the
written acceptance by PowerGen, LG&E Energy, LG&E, and KU of the following
commitments and assurances:
OPERATIONS AND FINANCIAL
------------------------
1. PowerGen, LG&E Energy, LG&E, and KU shall adhere to the conditions
described in the Commission's Orders in Case Nos. 10296, 89-374, and 97-300, to
the extent those conditions are not superseded by the provisions of House Bill
897 or the jurisdiction of SEC or FERC. These conditions, restated in Appendix B
to this Order, concern protection of utility resources, monitoring the holding
company and the subsidiaries, and reporting requirements.
2. PowerGen commits that the books and records of LG&E Energy, LG&E, and KU
will be kept in Kentucky.
3. PowerGen, LG&E Energy, LG&E, and KU commit not to assert that the SEC's
jurisdiction legally preempts the Commission from disallowing recovery in retail
rates for the cost of goods and services that LG&E or KU obtain from or transfer
to an associate, affiliate, or subsidiary in the same holding-company system.
This assertion shall also apply to any claim under the Ohio Power vs. FERC
-------------------
decision. However, LG&E and KU shall retain the right to assert that the charges
are reasonable and appropriate.
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<PAGE>
4. PowerGen, LG&E Energy, LG&E, and KU shall commit not to assert in any
proceeding before the Commission preemption by a United Kingdom or other foreign
regulator of the review of the reasonableness of a cost. However, LG&E and KU
shall retain the right to assert that the charges are reasonable and
appropriate.
5. PowerGen, LG&E Energy, LG&E, and KU commit to provide the Commission
with notice 30 days prior to any SEC filing that proposes new allocation
factors. The notice need not be in precise form of the final filing but will
include, to the extent information is available, a description of the proposed
factors and the reasons supporting such factors. PowerGen, LG&E Energy, LG&E,
and KU commit to make a good faith attempt to resolve differences, if any, with
the Commission in advance of filing with the SEC.
6. PowerGen, LG&E Energy, LG&E, and KU commit that the merger will not
detract from the benefits customers currently receive as a result of the merger
approved in Case No. 97-300. This commitment includes LG&E's and KU's merger
surcredits, the merger dispatch savings, and lower fuel costs distributed
through LG&E's and KU's fuel adjustment clauses.
7. PowerGen, LG&E Energy, LG&E and KU commit that PowerGen's acquisition
will have no impact on the base rates or the operation of the fuel adjustment
clauses, environmental surcharges, gas supply clause, demand side management
clause, or ESM schedules of LG&E or KU.
8. PowerGen, LG&E Energy, LG&E, and KU commit to obtaining Commission
approval prior to the transfer of any LG&E or KU asset with an original book
value in excess of $10 million.
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<PAGE>
9. PowerGen, LG&E Energy, LG&E, and KU commit that any proposed
amendment to the Power Supply System Agreement and the Transmission Coordination
Agreement between KU and LG&E shall be submitted to the Commission for its
review 30 days in advance of filing the amendment with the FERC.
10. PowerGen, LG&E Energy, LG&E, and KU commit that LG&E Energy, its
subsidiaries, LG&E and KU, and their ratepayers, directly or indirectly, shall
not incur any additional costs, liabilities, or obligations in conjunction with
the acquisition of LG&E Energy by PowerGen including, but not limited to, the
following:
a. LG&E Energy, LG&E, and KU shall not incur any additional
indebtedness, issue any additional securities, or pledge any assets to finance
any part of the purchase price paid by PowerGen for the LG&E Energy stock.
b. The payment for the LG&E Energy stock shall be recorded on
PowerGen's books, not the books of LG&E Energy or its subsidiaries.
c. The premium paid by PowerGen for the LG&E Energy stock, as well as
any other associated costs, shall not be "pushed down" to LG&E or KU.
d. All transaction-related costs, including the cost of purchase and
the premium paid for the LG&E Energy transaction, shall be excluded for
rate-making purposes and from the rates of LG&E and KU.
e. LG&E and KU shall not seek a higher rate of return on equity in
future rate cases than would have been sought if no merger had occurred.
f. The current outstanding preferred stock of LG&E and KU shall not be
changed, converted, or otherwise exchanged in conjunction with the merger.
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<PAGE>
g. The accounting and rate-making treatments of LG&E's and KU's
excess deferred income taxes shall not be affected by the merger of PowerGen and
LG&E Energy.
h. No costs of the Advisory Board shall be borne by LG&E or KU.
i. No change in control payments will be allocated to the ratepayers
of LG&E and KU.
j. If early termination costs are incurred for Mr. Hale, Mr.
Staffieri, Mr. McCall, Mr. Duncan, or Mr. Newton, none of these costs will be
allocated to LG&E or KU.
k. Any additional administrative costs incurred in order to comply
with the financial and accounting standards of the United States and the United
Kingdom will not be borne by LG&E and KU.
1. No generation assets located within Kentucky will be sold to finance
this or any subsequent merger without prior Commission authorization.
11. The Applicants commit that the corporate officers of LG&E Energy, LG&E,
and KU shall maintain their current titles and responsibilities as officers
unless and until otherwise determined by either of their respective Boards of
Directors. The Applicants will maintain the highest level of management
experience within LG&E Energy, LG&E, and KU, and will provide an opportunity to
broaden that experience by exchanging positions with other managers in
PowerGen's organization.
12. PowerGen commits to taking an active and ongoing role in managing and
operating LG&E and KU in the interests of customers, employees, and the
Commonwealth of Kentucky, and to take the lead in enhancing LG&E's and KU's
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relationship with the Commission, with state and local government, and with
other community interests, including, but not limited to, meetings between
PowerGen's chief executive and the Commission at least twice a year.
13. PowerGen commits to maintaining a sound and constructive relationship
with those labor organizations that may represent certain employees of LG&E
Energy; to remain neutral respecting an individual's right to choose whether or
not to be a member of a trade union; to continue to recognize the unions that
currently have collective bargaining agreements with LG&E, and to honor those
agreements.
14. PowerGen, LG&E Energy, LG&E, and KU commit to advising the Commission
at least annually on the adoption and implementation of best practices at both
LG&E and KU following the consummation of the merger.
REPORTING
---------
1. If new debt or equity in excess of $100 million is issued, PowerGen
commits to notify the Commission as soon as practicable prior to the issuance,
and LG&E Energy commits to notify the Commission 30 days prior to the issuance.
2. PowerGen commits to notifying the Commission subsequent to its board
approval and as soon as practicable following any public announcement of any
acquisition of a regulated or non-regulated business representing 5 percent or
more of PowerGen's market capitalization.
3. PowerGen commits to providing an annual report to the Commission
detailing LG&E Energy's proportionate share of PowerGen's total assets, total
operating revenues, operating and maintenance expenses, and number of employees.
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<PAGE>
4. PowerGen commits to notifying the Commission 30 days prior to paying any
dividend or transferring more than 5 percent of the retained earnings of LG&E or
KU to PowerGen.
5. PowerGen commits to filing with the Commission a copy of its annual
report to its shareholders.
6. PowerGen commits to filing with the Commission such additional financial
reports as the Commission, from time to time, reasonably determines to be
necessary for it to effectively regulate the operation of LG&E and KU.
SERVICE QUALITY AND RELIABILITY
-------------------------------
1. PowerGen, LG&E Energy, LG&E, and KU commit that customers will
experience no change in utility service due to the establishment of LG&E Energy
Services, Inc.
2. PowerGen, LG&E Energy, LG&E, and KU commit to: a) adequately funding and
maintaining LG&E's and KU's transmission and distribution systems; b) complying
with all Commission regulations and statutes; and c) supplying LG&E and KU
customers' service needs.
3. When implementing best practices, PowerGen, LG&E Energy, LG&E, and KU
commit to taking into full consideration the related impacts on the levels of
customer service and customer satisfaction, including any negative impacts
resulting from workforce reductions.
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<PAGE>
4. PowerGen commits that it will minimize, to the extent possible, any
negative impacts on levels of customer service and customer satisfaction
resulting from workforce reductions.
5. LG&E and KU commit to periodically filing the various reliability and
service quality measurements they currently maintain, to enable the Commission
to monitor their commitment that reliability and service quality will not suffer
as a result of the merger.
6. PowerGen, LG&E Energy, LG&E, and KU commit to notifying the Commission
in writing 30 days prior to any material changes in their participation in
funding for research and development. The possible changes include, but are not
limited to, any change in funding equal to or greater than 5 percent of the
previous year's budget for research and development. The written notification
shall include an explanation and the reasons for the change in policy.
7. PowerGen commits to maintaining LG&E Energy's level of commitment to
high quality utility service, and will fully support maintaining the LG&E and KU
track record for superior service quality.
8. PowerGen, LG&E Energy, LG&E, and KU commit that LG&E and KU shall
continue to operate through regional offices with local service personnel and
field crews.
OTHER COMMITMENTS AND ASSURANCES
--------------------------------
1. PowerGen, LG&E Energy, LG&E, and KU commit to maintaining their
respective headquarters in Kentucky for a period of 10 years following the
merger. KU's headquarters shall be maintained in Lexington, Kentucky; LG&E
Energy's and LG&E's
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headquarters shall be maintained in Louisville, Kentucky; and PowerGen's United
States headquarters shall be maintained in Louisville, Kentucky.
2. PowerGen, LG&E Energy, LG&E, and KU commit to dedicating LG&E's and KU's
existing and future generation to the requirements of LG&E's and KU's existing
and future native load customers.
3. PowerGen and LG&E Energy commit that LG&E and KU shall maintain a
substantial level of involvement in community activities, through annual
charitable and other contributions, on a level comparable to or greater than the
participation levels experienced prior to the date of the merger. PowerGen
commits to maintaining and supporting the relationship between LG&E and KU with
the communities that each serves for a period of 10 years.
4. PowerGen and LG&E Energy commit that the acquisition of LG&E Energy will
have no effect or impact on KU's contract with Owensboro Municipal Utilities and
KU's contractual relationships with either its municipal customers or Berea
College.
5. PowerGen and LG&E Energy commit that the acquisition of LG&E Energy
shall have no effect or impact on various agreements associated with the
resolution of Big Rivers Electric Corporation's bankruptcy proceeding. These
agreements include, but are not limited to, the lease agreement and associated
obligations between LG&E Energy's affiliates and Big Rivers Electric Corporation
and the power purchase agreements between LG&E Energy Marketing, Kenergy Corp.,
Alcan Aluminum Corp., and Southwire Co. Any revisions to these agreements must
be submitted for Commission approval prior to the effective date of the
revision.
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<PAGE>
6. PowerGen and LG&E Energy commit that the acquisition of LG&E Energy
shall have no effect upon the performance of LG&E Energy and its affiliates of
their obligations under the Big Rivers Agreements. LG&E Energy and its
affiliates shall continue to be bound by the terms of those agreements,
including any guaranty agreements.
7. In the event of a subsequent merger over which the Commission would not
have jurisdiction, PowerGen commits to discuss with the Commission the issue of
whether there would be any synergies resulting from that merger that could be
appropriately shared with Kentucky ratepayers.
8. PowerGen commits to maintaining LG&E's and KU's pro-active stance on
developing economic opportunities in Kentucky and supporting economic
development, and social and charitable activities, throughout LG&E's and KU's
service territories.
9. As soon as practicable, PowerGen shall meet with the senior management
and the board of directors of Big Rivers.
10. PowerGen commits that the current members of the LG&E Energy Board are
eligible to serve as initial members of the Advisory Board and will be invited
to do so.
11. PowerGen commits that for as long as it owns, controls, or manages LG&E
or KU, there shall be a seat on the PowerGen Board occupied by a United States
citizen who resides in the service territories of LG&E or KU. PowerGen also
commits that the first occupant of that seat shall be the CEO of LG&E Energy.
12. PowerGen commits that LG&E Energy's Board of Directors shall consist of
three members, one of whom shall be the current Chairman of LG&E Energy.
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<PAGE>
13. PowerGen commits to review with LG&E management its current policies
and practices with respect to low income customers to determine whether policies
and practices more sympathetic to the needs of such customers would be
appropriate.
14. PowerGen commits that, with respect to any state-wide legislation for a
low-income universal fund, it shall adopt a neutral position regarding that
portion of such legislation designed to create a line item charge on utility
customers' bills for the purpose of assisting low-income customers so long as
such legislation has no impact on shareholders.
15. PowerGen commits that its present expectation is for LG&E and KU to
remain members of the Midwest ISO.
16. The Applicants commit that, in conjunction with the Commission review
of the PBR method presently in effect for LG&E's purchased gas adjustment
clause, LG&E shall propose an ESM or other alternative form of regulation that
will provide LG&E with incentives to make improvements while providing a
mechanism for sharing with customers the benefits realized from those
improvements.
17. Upon the expiration of the LG&E and KU ESM provided for in the
Commission's January 7, 2000 Orders, the Applicants commit to propose extension
of the ESM or some other method of regulation that will continue to provide LG&E
and KU with incentives to make improvements while providing a mechanism to share
with customers the benefits realized from those improvements.
18. PowerGen, LG&E Energy, LG&E, and KU commit that LG&E Energy shall hold
100 percent of the common stock of LG&E and KU and that LG&E Energy shall not
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transfer any of that stock without prior Commission approval even if the
transfer is pursuant to a corporate reorganization as defined in KRS
278.020(6)(b).
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<PAGE>
APPENDIX B
APPENDIX TO AN ORDER OF THE KENTUCKY PUBLIC SERVICE
COMMISSION IN CASE NO. 2000-095 DATED May 15, 2000.
In the Orders approving the creation of holding companies for KU and LG&E,
as well as those approving the merger of those holding companies, the Commission
expressed numerous regulatory concerns and required certain information of KU,
LG&E, and the respective holding companies. As these subjects are applicable to
the proposed merger of LG&E Energy with PowerGen, those regulatory concerns and
information requirements are restated below.
PROTECTION OF UTILITY RESOURCES
-------------------------------
Accounting Procedures and Controls
----------------------------------
A primary concern related to the issue of diversification is the potential
for subsidization of non-regulated activities by the regulated company. Three
major areas that can be readily identified for potential cross-subsidization are
accounting, cost allocation methodologies, and pricing of intercompany
transactions. The accounting and reporting system used by KU and LG&E should be
adequate to provide assurance that directly assignable utility and non-utility
costs are accounted for properly and that reports on the utility and non-utility
operations are accurately presented. KU and LG&E should implement and maintain
cost allocation procedures that will accomplish the objective of preventing
cross-subsidization, and be prepared to fully disclose all allocated costs, the
portion allocated to each subsidiary of LG&E Energy, complete details of the
allocation methods, and justification for the amount and the method. KU and LG&E
should continue to comply with their Corporate Policies and Guidelines for
-------------------------------------
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<PAGE>
Intercompany Transactions, as well as employing other procedures and controls
-------------------------
related to sales, transfers, and cost allocation to ensure and facilitate full
review by the Commission and protect against cross-subsidization.
Diversion of Management Talent
------------------------------
While it is in the best interest of LG&E Energy, PowerGen, and its
shareholders to secure the most skilled management available, there is a concern
that the diversion of management talent away from KU and LG&E to LG&E Energy,
PowerGen, and its affiliates could present a threat to the continued efficient
operation of the utilities and would not be in the best interests of ratepayers.
Utility operations should not be neglected and should be assigned the same
priority and level of expertise as in the past.
Financial Resources
-------------------
A concern exists that LG&E Energy or PowerGen may divert KU's and LG&E's
financial resources to benefit the activities of non-regulated affiliates at the
expense of utility ratepayers. There are four main areas of concern:
1. Attempts by LG&E Energy or PowerGen to adjust KU's or LG&E's capital
structure could adversely affect the utilities' cost of capital and financial
integrity. The Commission believes that LG&E Energy and PowerGen should assist
the utilities in maintaining a balanced capital structure.
2. The dividend policy of KU and LG&E could adversely affect the utilities'
financing requirements and capabilities. The dividend policy must not adversely
affect
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<PAGE>
the utilities' ratepayers, and the utilities, through their boards of directors,
have the responsibility to use their dividend policy consistent with preserving
the financial strength of the utility.
3. Unwillingness on the part of LG&E Energy or PowerGen to provide
necessary capital to KU and LG&E could severely impair the utilities' ability to
provide utility services, as is their statutory obligation. Any action or
decision by the board of directors of LG&E Energy or PowerGen, including the
unwillingness to provide adequate capital to KU and LG&E, that, in any way,
impairs KU's and LG&E's ability to provide adequate, efficient, and reasonable
utility service, will be in direct violation of KRS 278.030(2).
4. A guarantee of the debt of non-utility affiliates LG&E Energy or
PowerGen by KU and LG&E could unnecessarily place in jeopardy the financial
position and resources of the utilities. Pursuant to KRS 278.300, KU and LG&E
are prohibited from guaranteeing debt without prior Commission approval.
For rate-making purposes, the Commission has jurisdiction over KU's and
LG&E's capital structure, financing, and cost of capital. The Commission will
continue to exercise this jurisdiction.
Employer/Purchaser of Last Resort
---------------------------------
There is a risk that KU and LG&E could be used as the "dumping ground" for
employees, assets, and products associated with failed or troubled affiliate
ventures. The Commission will monitor KU's and LG&E's activities to assure the
ratepayers that "dumping" has not occurred.
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Divestiture
-----------
Consideration must be given to the worst case situation of a failed or
failing unregulated affiliate and its effect on the operations of KU and LG&E.
If circumstances dictate that the only reasonable course of action is
divestiture, including that of KU or LG&E, it will be the responsibility of
PowerGen's and LG&E Energy's management to ensure that divestiture takes place.
MONITORING THE HOLDING COMPANY AND THE SUBSIDIARIES
---------------------------------------------------
Among the regulatory safeguards necessary in cases of utility
reorganization, the most basic and indispensable requirement is open access to
all books, records, and personnel of the holding company and each subsidiary.
The Commission must have the ability to pursue any problems perceived in the
operations of the utility through access to the books and records of the holding
company and affiliates. During formal proceedings, it may also be necessary to
cross-examine personnel of the unregulated entities to effectively monitor the
relationship among KU, LG&E, its parent, and affiliates. The Commission will
have access, as necessary in the exercise of its statutory duties, to the books
and records of LG&E Energy and PowerGen and its other affiliates and
subsidiaries as the books and records may be related to transactions with KU and
LG&E. If the subsidiaries or affiliates of LG&E Energy or PowerGen do not
transact business with KU or LG&E, the utilities will verify, if necessary, the
lack of such transactions through independent sources. At the time of
completion, the Commission will also monitor significant transfers of utility
assets, business ventures of LG&E Energy and PowerGen, and other major
transactions.
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REPORTING REQUIREMENTS
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In order for the Commission to effectively monitor the activities of KU,
LG&E, LG&E Energy, PowerGen, and its related subsidiaries, and to ensure
ratepayer protection, certain additional reports shall be required of KU and
LG&E.
To Be Filed Annually:
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1. The annual financial statements of LG&E Energy and PowerGen, including
consolidating adjustments of LG&E Energy, PowerGen, and its subsidiaries, with a
brief explanation of each adjustment and all periodic reports filed with the
SEC.
2. The annual balance sheets and income statements of any non-consolidated
subsidiary of LG&E Energy or PowerGen.
3. A general description of the nature of intercompany transactions, with
specific identification of major transactions, and a detailed description of the
basis upon which cost allocations and transfer pricing have been established.
Included will be the cost allocation factors in use including a discussion of
the methods used to update or revise any cost allocation factors that have been
updated or revised.
4. A report that identifies professional personnel transferred from KU or
LG&E to LG&E Energy, PowerGen, or any of the non-utility subsidiaries. Included
should be a brief description of the duties performed while employed by KU or
LG&E and those to be performed subsequent to transfer. This report will also
include the years of service at KU or LG&E and the salaries of professional
employees transferred from KU or LG&E to LG&E Energy, PowerGen, or its
subsidiaries.
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5. A report containing the same information as contained in the SEC's Form
U-3A-2 for LG&E Energy.
6. A detailed organization chart as of the end of the calendar year showing
all subsidiaries referenced in the SEC U-3A-2 filing.
To Be Filed Quarterly:
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1. A report detailing the proportionate shares of KU and LG&E in LG&E
Energy's total operating revenues, operating and maintenance expenses, and
number of employees.
2. The number of employees of LG&E Energy and each subsidiary on the basis
of payroll assignment.
3. Twelve-month income statements and balance sheets. LG&E will separately
report gas and electric operations, and KU will separately report Kentucky
jurisdictional operations and other jurisdictional operations.
Other Filings:
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1. KU and LG&E will file any contracts or other agreements concerning the
transfer of utility assets or the pricing of intercompany transactions with the
Commission at the time the transfer occurs and in accordance with the Corporate
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Policies and Guidelines for Intercompany Transactions.
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2. As the studies are performed and completed, KU and LG&E will file
summaries of any cost allocation studies conducted and the basis for the methods
used to determine the cost allocation in effect.
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3. As such situations occur, KU and LG&E will file copies of the Articles
of Incorporation and bylaws of affiliated companies that will be in businesses
related to the electric or gas industry or that will be doing business with KU
or LG&E.
4. As such situations occur, KU and LG&E will file copies of the Articles
of Incorporation of affiliated companies involved in non-related business.
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