<PAGE>
CONFIRMING COPY
File No. 070-09671
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------------------------
CONFIRMING COPY
OF
FORM U-1
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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PowerGen plc LG&E Energy Corp.
PowerGen US Holdings Limited LG&E Capital Corp.
PowerGen US Investments LG&E Energy Marketing Inc.
Limited LG&E Power Inc.
Ergon US Investments Limited 220 West Main Street
PowerGen Luxembourg SA P.O. Box 32030
PowerGen Luxembourg Holdings Louisville, Kentucky 40232
SA
PowerGen Luxembourg Louisville Gas and Electric
Investments SA Company
PowerGen US Partnership 220 West Main Street
PowerGen US Investments P.O. Box 32010
Corp. Louisville, Kentucky 40232
53 New Broad Street
London EC2M 1SL Kentucky Utilities Company
United Kingdom One Quality Street
Lexington, KY 40507
(Name of company filing this statement and
address of principal executive offices)
-----------------------------------------------------------
PowerGen plc
(Name of top registered holding company
parent of each applicant or declarant)
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David Jackson Joseph B. Frumkin
Company Secretary and Sullivan & Cromwell
General Counsel 125 Broad Street
PowerGen plc New York, NY 10004
53 New Broad Street Telephone: 212-558-4000
London EC2M 1JJ Facsimile: 212-558-3588
United Kingdom
Telephone: 011-44-171-826-2742
Facsimile: 011-44-171-826-2716
Steven J. Agresta
Richard T. Miller
Sara C. Weinberg
Swidler Berlin Shereff
Friedman, LLP
3000 K Street, NW, Suite 300
Washington, DC 20007-5116
Telephone: 202-424-7500
Facsimile: 202-424-7643
John R. McCall Peter D. Clarke
Executive Vice President, Debra J. Schnebel
General Counsel and Gardner, Carton & Douglas
Secretary 321 North Clark Street
LG&E Energy Corp. Suite 3400
220 West Main Street Chicago, Illinois 60610
Louisville, Kentucky 40232 Telephone: 312-245-868
Telephone: 502-627-3665 Facsimile: 312-644-3381
Facsimile: 502-627-4622
(Names and addresses of agents for service)
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<PAGE>
This submission is a confirming copy of Form U-1. It is being submitted to
provide electronic copies of certain exhibits associated with the Form U-1 filed
electronically on April 26, 2000, under file numbered 070-09671. The exhibits
submitted herewith in electronic form were originally filed in paper on April
26, 2000 pursuant to a temporary hardship exemption.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
D-1.1 Joint Application of Louisville Gas and Electric
Company, Kentucky Utilities Company, and Merger Sub
before the FERC.
D-2.1 Joint Application of PowerGen plc, LG&E Energy
Corp., Louisville Gas and Electric Company, and
Kentucky Utilities Company, before the Kentucky
Public Service Commission.
D-3.1 Joint Application of PowerGen plc, LG&E Energy
Corp., and Kentucky Utilities Company before the
Virginia Corporation Commission.
I-1 Annual Report of PowerGen Group dated March 28,
2000.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the Applicants have duly caused this Application, File No. 070-09671, to
be signed on their behalf by the undersigned thereunto duly authorized.
The signature of the Applicants and of the persons on their behalf are
restricted to the information contained in this Application which is pertinent
to the Application of the respective companies.
Date: May 4, 2000
/s/ David Jackson
Secretary and General Counsel
PowerGen plc
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the Applicants have duly caused this Application, File No. 070-09671, to
be signed on their behalf by the undersigned thereunto duly authorized.
The signature of the Applicants and of the persons on their behalf are
restricted to the information contained in this Application which is pertinent
to the Application of the respective companies.
Date: May 4, 2000
/s/ John R. McCall
Executive Vice President,
General Counsel and Secretary
LG&E Energy Corp.
<PAGE>
EXHIBIT 99.D-1.1
March 24, 2000
VIA MESSENGER
- -------------
The Honorable David P. Boergers
Secretary
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, D.C. 20426
Re: Joint Application of Louisville Gas and Electric Company,
Kentucky Utilities Company and Merger Sub For Approval of Merger
and Related Authorizations
Docket No. EC00-_____-000
Dear Secretary Boergers:
Enclosed for filing, pursuant to Section 203 of the Federal Power Act and
Part 33 of the Commission's regulations (18 C.F.R. Part 33 (1998)), please find
an original and five (5) copies, plus one copy for each State affected, of the
above referenced Application. The filing consists of three volumes as follows:
Volume I: Application, Attachments, Verifications, and Exhibits A, H and
I.
Volume II: Exhibit G - Kentucky
Volume III: Exhibit G - Virginia
Also submitted for filing, in accordance with the Commission's regulations,
is a diskette containing a Notice of Filing suitable for publication in the
Federal Register.
Applicants have served copies of the filing on the state commissions of
Kentucky, Virginia and Tennessee. In addition, Applicants have served courtesy
copies of the filing on each party in the Louisville Gas and Electric
Company/Kentucky Utilities Company merger proceeding before this Commission
(Docket No. EC98-2-000).
Applicants seek approval of the indirect change of control over
jurisdictional assets of Louisville Gas and Electric Company ("LG&E") and
Kentucky Utilities Company ("KU") and their affiliates holding jurisdictional
assets (collectively, the "LG&E Companies") that will occur as a result of the
merger of an indirect, wholly-
<PAGE>
The Honorable David P. Boergers
March 24, 2000
Page 2
owned subsidiary of PowerGen plc ("Merger Sub") with and into LG&E Energy Corp.
("LEC"), the parent holding company of the LG&E Companies, pursuant to the terms
of merger agreement dated February 27, 2000 ("Merger Agreement")/1/. Through
the merger, LEC and the LG&E Companies will become indirect, wholly-owned
subsidiaries of PowerGen plc ("PowerGen"). The Application includes all the
information and exhibits required by Part 33 of the Commission's regulations
(except those for which waiver is sought) and the Commission's Merger Policy
Statement. As demonstrated in the Application itself, the proposed transaction
easily satisfies the criteria established by the Commission. Accordingly, the
Applicants respectfully request the Commission expeditiously approve this
Application without condition, modification or evidentiary, trial-type hearing
by the end of July, 2000.
I. Description of the Parties to be Merged
LEC is a utility holding company incorporated under the laws of the
Commonwealth of Kentucky and is headquartered in Louisville, Kentucky. LEC's
principal utility holdings are LG&E and KU. LG&E is a combination gas and
electric public utility primarily engaged in the generation, transmission, and
distribution of electricity in Louisville and adjacent areas of Kentucky. LG&E
also purchases, distributes and sells natural gas within the Louisville and
other limited areas. KU is engaged in producing, transmitting and selling
electric energy to customers in Kentucky, Virginia and Tennessee. In Virginia,
KU operates under the name Old Dominion Power Company.
PowerGen is a leading integrated gas and electricity company in the United
Kingdom holding interests in electricity generation, distribution and supply.
PowerGen is the overall holding company of the PowerGen system of companies and
was formed in 1998 as a holding company for PowerGen UK plc ("PowerGen UK"), the
principal operating company. PowerGen UK is a public utility company formed
under the laws of England and Wales. PowerGen UK owns and operates 10,000 MW of
generation capacity across England and Wales and, through subsidiaries and
investments, is a leading developer and operator of large scale combined heat
and power plants (cogeneration), provides retail natural gas and electricity
service to over 2.6 million customer accounts, trades natural gas, oil and
electricity in seven different energy trading markets in the United Kingdom and
Europe and owns approximately 2,100 MW of generating capacity in Europe, India
and Asia Pacific.
II. Overview of Section 203 Filing
The attached Section 203 Application demonstrates that the proposed
indirect change in control through merger is in the public interest, satisfying
the three requirements for approval established by the Commission. These
requirements, set out
_____________________
/1/ A copy of the Merger Agreement is provided as Exhibit H to the Application.
<PAGE>
The Honorable David P. Boergers
March 24, 2000
Page 3
in the Commission's Merger Policy Statement, require that the merger not
adversely affect competition, rates, or effective regulation.
First, the Merger will not adversely affect competition. The LG&E
Companies and PowerGen and its related companies do not have facilities or sell
products in any common geographic markets. Since the Applicants do not conduct
business in the same geographic markets, there can be no adverse impact on
competition.
Second, the proposed transaction will not increase customers' rates. As is
set forth in their Section 203 Application, the Applicants affirm their
commitments and agreements regarding rates made as part of the LG&E/KU merger
and commit that transaction costs and any merger premium will not be included in
rates without specific Commission authorization.
Finally, the proposed transaction will not adversely affect either federal
or state regulation. With respect to federal regulation, there will be no
change in the relationship among the LG&E system of companies as a result of the
merger, and hence there will be no impact on federal regulation for transactions
among those companies. With respect to the new affiliate relationships created
by the transaction, as explained fully in the Application, the Applicants commit
to abide by Commission policy with respect to sales of non-power goods and
services. With respect to state regulation, the structure of the LG&E Companies
will not be changed. Each state commission that currently has authority over
the LEC operating companies will continue to have authority over the rates and
operations of those companies.
III. Communications and Service
Communications regarding the Application submitted with this letter should
be addressed to the following individuals, whose names should be entered on the
official service list maintained by the Secretary (with the persons designated
to receive service in accordance with the Commission's Rule of Procedure
203(b)(3), 18 C.F.R. (S) 385.203(b)(3) (1998),
marked by the "*"):
For the Merger Sub:
Steven J. Agresta, Esq. David J. Jackson
*Stephen C. Palmer, Esq. General Counsel and
Swidler Berlin Shereff Friedman, LLP Company Secretary
3000 K Street, N.W., Suite 300 PowerGen plc
Washington, D.C. 20007-5116 53 New Broad Street
Telephone: (204) 424-7500 London EC2M 1SL
Facsimile: (204) 424-7647 United Kingdom
For the LG&E Companies:
<PAGE>
The Honorable David P. Boergers
March 24, 2000
Page 4
*Earle H. O'Donnell, Esq. *John R. McCall
Laurel W. Glassman, Esq. Executive Vice President,
Dewey Ballantine, LLP General Counsel and
1775 Pennsylvania Ave., N.W. Secretary
Washington, D.C. 20006 LG&E Energy Corp.
Telephone (202) 862-1000 220 West Main Street
Facsimile (202) 862-1093 Louisville, Kentucky 40232
Telephone (502) 627-2000
Facsimile (502) 627-4622
Four additional copies of this filing is enclosed to be date-stamped and
returned to our messenger. If there are any questions, please call Stephen C.
Palmer at (202) 424-7576 or Earle H. O'Donnell at (202) 429-2327. Thank you for
your assistance in this matter.
Respectfully submitted,
/s/ Stephen C. Palmer /s/ Earle H. O'Donnell
Swidler Berlin Shereff Friedman, LLP Dewey Ballantine, LLP
On Behalf of Merger Sub On Behalf of Louisville Gas and
Electric Company, Kentucky
Utilities Company, and Affiliated
Applicants
Enclosures
cc: Michael C. McLaughlin (w/enclosure)
Diana L. Moss (w/enclosure)
Daniel T. Hedberg (w/enclosure)
<PAGE>
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
LOUISVILLE GAS AND ELECTRIC COMPANY )
KENTUCKY UTILITIES COMPANY ) Docket No. EC00-___-000
MERGER SUB )
JOINT APPLICATION OF
LOUISVILLE GAS AND ELECTRIC COMPANY,
KENTUCKY UTILITIES COMPANY AND MERGER SUB FOR
APPROVAL OF MERGER AND RELATED WAIVERS AND AUTHORIZATIONS
VOLUME I
APPLICATION, ATTACHMENTS, VERIFICATIONS
---------------------------------------
AND EXHIBITS A, H AND I
-----------------------
Steven J. Agresta, Esq. John R. McCall
Stephen C. Palmer, Esq. Executive Vice President, General
Swidler Berlin Shereff Freidman, LLP Counsel and Secretary
Suite 300 LG&E Energy Corp.
3000 K Street, N.W. 220 West Main Street
Washington, D.C. 20007-5116 Louisville, Kentucky 40232
(202) 424-7500 (502) 627-2000
Attorneys for Merger Sub Earle H. O'Donnell, Esq.
Laurel W. Glassman, Esq.
Dewey Ballantine, LLP
1775 Pennsylvania Ave., N.W.
Washington, D.C. 20006
(202) 862-1000
Attorneys for Louisville Gas and
Electric Company, Kentucky Utilities
Company and Affiliated Applicants
March 24, 2000
<PAGE>
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
LOUISVILLE GAS AND ELECTRIC COMPANY, et al. ) Docket No. EC00-___-000
JOINT APPLICATION OF
LOUISVILLE GAS AND ELECTRIC COMPANY,
KENTUCKY UTILITIES COMPANY AND MERGER SUB FOR
APPROVAL OF MERGER AND RELATED WAIVERS AND AUTHORIZATIONS
I. INTRODUCTION
Pursuant to Section 203 of the Federal Power Act ("FPA"),/1/ and Part 33 of
the Commission's Regulations,/2/ Louisville Gas and Electric Company ("LG&E")
and Kentucky Utilities Company ("KU"), on behalf of themselves and their
affiliates holding jurisdictional assets (collectively, the "LG&E Companies")/3/
and Merger Sub, as defined below, hereby respectfully request that the
Commission approve, and grant related waivers and authorizations with respect
to, the indirect change in control over jurisdictional assets of the LG&E
Companies that will occur as a result of the merger of an indirect, wholly-owned
subsidiary of PowerGen plc ("Merger Sub") with and into LG&E Energy Corp.
("LEC"), the parent holding company of the LG&E Companies. Through the merger,
LEC, which will be the surviving entity, and the LG&E
______________________________
/1/ 16 U.S.C. (S) 824b (1994).
/2/ 18 C.F.R. (S) 33.1 et seq. (1999).
/3/ All the applicants together are referred to jointly as "Applicants."
-2-
<PAGE>
Companies will become indirect, wholly-owned subsidiaries of PowerGen plc
("PowerGen"), a public limited company organized under the laws of England and
Wales./4/
This Application includes all the information and exhibits required by Part
33 of the Commission's regulations and the Commission's Merger Policy Statement
/5/ except where waiver of certain requirements of Part 33 has been requested.
As demonstrated below, the Merger satisfies the criteria established by the
Commission for approval of transactions of the kind proposed here. Accordingly,
the Applicants respectfully request the Commission approve this Application
without condition, modification or evidentiary, trial-type hearing. The
Applicants seek to close the merger expeditiously and, therefore, respectfully
request Commission approval by the end of July, 2000.
II. EXECUTIVE SUMMARY
The Applicants request that the Commission approve the Merger pursuant to
Section 203 of the FPA. The Merger will combine the skills and experience of
the LG&E Companies with the complementary talents and resources of PowerGen.
LEC, through its wholly-owned public utility subsidiaries, owns and operates
electric generation, transmission and distribution facilities located in
Kentucky and five counties in Southwest Virginia, and provides service to
approximately five customers in one county in Tennessee. LEC, through its
wholly-owned public utility subsidiaries also owns and operates natural gas
distribution and storage facilities in
_________________________
/4/ While not applicants, LEC and PowerGen join this Application for purposes
of supporting the approvals sought by the Applicants.
/5/ Inquiry Concerning the Commission's Merger Policy Under the Federal Power
Act: Policy Statement, III FERC Stats. & Regs., Regulations Preambles (P) 31,044
("Merger Policy Statement").
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<PAGE>
Kentucky. In addition, through wholly-owned subsidiaries that are not
franchised public utilities, LEC invests in domestic and international power and
energy-related projects and businesses.
PowerGen is a foreign integrated utility company whose business consists
primarily of the generation and distribution of electricity and the
transportation and supply of natural gas in the United Kingdom, and also
includes extensive marketing and trading operations outside the United States.
In addition, PowerGen invests in combined heat and power schemes (known in the
U.S. as cogeneration) and international power and energy-related projects
outside the United Kingdom primarily in India, Asia Pacific and Europe.
PowerGen has no U.S. operations.
The Merger will allow the LG&E Companies' customers to benefit from
PowerGen's expertise in operating electric generation facilities and electric
and natural gas distribution systems in a competitive environment. Further,
through their combined resources and capabilities, the merged company will be
better positioned to take advantage of other business opportunities in the
United States and abroad.
Included with the Application are the required exhibits, except where
waiver has been requested, as well as an affidavit of Dr. Mark W. Frankena,
Principal, Economists, Inc. (included as Attachment 1), demonstrating that the
Merger will not have any adverse impact on competition. The Application shows
that the Merger is consistent with the public interest, satisfying each of the
three tests established in the Merger Policy Statement, namely: (1) it does not
adversely affect competition in any market; (2) it does not increase customers'
rates; and (3) it does not impair the effectiveness of regulation.
-4-
<PAGE>
A. The Merger Will Not Adversely Affect Competition.
The Merger will not have an adverse effect on competition. As Dr. Frankena
demonstrates, the LG&E Companies and the PowerGen family of companies do not
have facilities or sell products in any common geographic market. Because the
Applicants do not conduct business in the same geographic market, there can be
no adverse impact on competition. Moreover, the Merger will permit PowerGen to
make its extensive experience operating in a competitive environment available
to the electric generation and natural gas and electricity distribution
businesses of the LG&E Companies helping, over time, to bring the benefits of
more efficient and effective operations to consumers.
B. The Merger Will Not Subject Customers to Increased Rates.
At the time of LG&E's merger with KU, LG&E and KU implemented a number of
safeguards to ensure that rates paid by their firm wholesale and transmission
customers would not be affected. In general, these safeguards included: (i) a
cap on base rates for all LG&E and KU firm wholesale requirements and firm
transmission customers for a specified term; (ii) certain base rate reductions
for KU's wholesale requirements customers; (iii) certain reductions in fuel
costs for all wholesale requirements customers; and (iv) waiver by KU for a
specified period of its right to file for changes in base rates under Section
205 of the FPA. Applicants reaffirm these commitments./6/ Accordingly, all of
the safeguards detailed in the ratepayer protection provisions of the LG&E/KU
merger remain in force and will not be affected by this transaction.
_________________________
/6/ Louisville Gas and Electric Company, et al., 82 FERC (P) 61,308 (1998).
-5-
<PAGE>
The Merger will generate certain costs including transaction costs and an
acquisition premium. Applicants commit to exclude these costs from wholesale
power and transmission service rates, unless and until permitted to include them
by specific order of the appropriate regulatory authority and subject,
furthermore, to any ratepayer commitments adopted in the LG&E/KU merger
proceeding. Thus, rates will not be increased as a result of these merger-
related costs. Finally, Applicants note that their rates for wholesale power
and transmission service will remain subject to the Commission's jurisdiction.
Consequently, the Merger will not have any adverse effect on the rates paid by
the domestic wholesale power or transmission service customers of Applicants.
C. The Merger Will Not Impair the Effectiveness of Federal or State
Regulation.
The Merger will not adversely affect either federal or state regulation.
With respect to federal regulation, there will be no change in the relationship
among the LEC system of companies as a result of the Merger, and hence there
will be no impact on federal regulation for transactions among those companies.
LEC currently is an exempt utility holding company under the Public Utility
Holding Company Act of 1935, as amended ("PUHCA")/7/ and will seek to maintain
that status./8/ Further, PowerGen and the intermediate companies between
PowerGen and LEC intend to register under PUHCA and become subject to regulation
by the SEC. To avoid any impact on regulation resulting from the SEC
registrations that are ultimately required,
____________________________
/7/ 15 U.S.C. (S) 79 et seq. (1994).
/8/ LEC intends to form LG&E Energy Services, Inc. as a service company
subsidiary to LEC to provide centralized administrative and corporate services
so that the utility operating companies can be individually managed and
operated. Filings pursuant to Section 205 of the FPA will be made with this
Commission as necessary for LG&E Services Company to undertake these activities.
-6-
<PAGE>
the Applicants commit to be subject to the Commission's policy regarding intra-
corporate transactions for those transactions involving the sale of non-power
goods and services between PowerGen, any of its subsidiaries or affiliates, and
the LG&E Companies. Accordingly, the Merger will not impair federal regulation.
With respect to state regulation, the structure of the LG&E Companies will
not be changed by the Merger. Each state commission that currently has
authority over the LEC operating companies will continue to have authority over
the rates, services and operations of those companies. In addition, in each of
the states in which the LEC operating companies provide retail service, the
appropriate state regulatory commission will be requested to state to the SEC
that the state commission has adequate authority and resources to protect
customers and will continue to exercise that authority after the Merger. To the
extent required by state law, approvals will also be sought from the responsible
state agency. These applications will provide state regulators with the
opportunity to deal directly with any concerns they may have regarding the
Merger. The Merger, accordingly, will not impair state regulation.
Because the Merger satisfies all of the requirements of Section 203 of the
FPA, the Commission's regulations and the Merger Policy Statement, the
Commission should find that the Merger is consistent with the public interest,
and approve the Application by the end of July, 2000 without modification or
condition and without holding a trial-type hearing.
-7-
<PAGE>
III. DESCRIPTION OF THE PARTIES TO THE MERGER
A. The LEC System of Companies
1. LEC
LEC is a utility holding company incorporated under the laws of the
Commonwealth of Kentucky and is headquartered in Louisville, Kentucky. LEC's
principal utility holdings are LG&E and KU. LEC and its subsidiaries currently
are exempt from all provisions, except Section 9(a)(2), of PUHCA on the basis
that LEC, LG&E and KU are incorporated in the same state and their business is
predominately intrastate in character and carried on substantially in the state
of incorporation. The LEC energy system supplies 840,000 customers in Kentucky,
and 29,000 in Virginia with 47 TWh of electricity per annum and its gas
distribution business has 289,000 customers in the Louisville area.
a. LG&E
LG&E, a Kentucky corporation, is a combination gas and electricity public
utility. LEC owns all of the outstanding common stock of LG&E. LG&E is
primarily engaged in the generation, transmission and distribution of
electricity to approximately 360,000 customers in Louisville and adjacent areas
in Kentucky. LG&E's service territory covers approximately 700 square miles in
17 counties and has an estimated population of one million. LG&E also
purchases, distributes and sells natural gas to approximately 289,000 customers
within this service area and in limited additional areas. LG&E owns 4.9% of the
voting securities of Ohio Valley Electric Corporation ("OVEC"), which has one
wholly-owned subsidiary, Indiana Kentucky Electric Corp. ("IKEC"). OVEC and
IKEC were organized in 1952 by LG&E and other public utilities to supply the
entire power requirements of the U.S. Department of Energy's
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<PAGE>
gaseous diffusion plant in Pike County, Ohio. OVEC owns a 1,075 MW generating
station near Cheshire, Ohio, and IKEC owns a 1,290 MW generating station at
Madison, Indiana.
i. Generation
LG&E's power generating system consists primarily of coal-fired units with
a total capability rating of approximately 2500 MW, plus various gas and oil-
fired units. LG&E also owns and operates the FERC-licensed Ohio Falls
hydroelectric facility, FERC Project No. 289, an 80 MW facility located in
Louisville, Kentucky. A list and fuller description of these generation
facilities is set forth in Attachment 3.
ii. Electric Transmission
LG&E's electric transmission system, as of December 31, 1998, included 102
pole miles of 345 KV line, 66 pole miles of 154 KV line, 250 pole miles of 138
KV line and 233 pole miles of transmission line of 69 KV or less. As of
December 31, 1998, LG&E's 21 transmission substations had a combined capacity of
approximately 11,026,897 thousand kilovolt amps ("KVa") and the 83 distribution
substations totaled approximately 3,383,530 thousand KVa.
iii. Gas Facilities
LG&E provides natural gas service at retail in the Louisville metropolitan
area and in 16 neighboring counties. LG&E is directly connected to two
interstate pipelines and has a portfolio of supply arrangements in order to meet
the needs of its customers. The gas properties of LG&E include 3,528 miles of
natural gas distribution mains and 178 miles of transmission mains. LG&E
operates underground gas storage fields with a current working gas capacity of
14.6 Bcf.
-9-
<PAGE>
b. KU
KU, a wholly owned subsidiary of LEC, is an exempt (pursuant to Section
3(a)(2) of PUHCA) utility holding company engaged in producing, transmitting and
selling electric energy to about 449,000 customers in over 600 communities and
adjacent suburban and rural areas in 77 counties in Kentucky, to about 29,000
customers in five counties in Virginia, and to approximately five customers in
one county in Tennessee. In Virginia, KU operates under the name Old Dominion
Power Company. KU also sells wholesale electric energy to 12 municipalities in
Kentucky. KU also owns 2.5% of the voting securities of OVEC and 20% of the
outstanding shares of capital stock of Electric Energy, Inc. ("EEI"), an
Illinois company that owns and operates a 1,015 MW generating station at Joppa,
Illinois and six 161 KV transmission lines that transmit power from the Joppa
plant to the nearby Paducah uranium enrichment plant.
i. Generation
KU's power generation system consists of coal-fired units with a total
capability rating of approximately 4000 MW, plus various gas and oil-fired
units. KU also owns and operates the FERC licensed Lock and Dam No. 7
hydroelectric facility, FERC Project No. 539, a 2.2 MW facility located in
Burgin, Kentucky. A list and fuller description of these generation facilities
is set forth in Attachment 3.
ii. Electric Transmission
KU's electric transmission system, as of December 31, 1998, included 57
pole miles of 500 KV lines, 356 pole miles of 345 KV lines, 1,381 pole miles of
138-161 KV lines and 2,472 pole miles of lines 69 KV or less. As of December
31, 1998, KU's transmission substations had a combined capacity of 14,235,000
KVa and the distribution substations had a combined capacity of 4,172,000 KVa.
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<PAGE>
c. LG&E Energy Marketing, Inc. ("LEM")
LEM is wholly-owned by LEC. LEM holds no physical facilities for the
generation or transmission of electricity but does hold a power marketing
certificate/9/ and is authorized to sell power at market-based rates/10/ and to
sell ancillary services at cost-based rates./11/
d. WKE Corp.
WKE Corp., a holding company, is an indirect, wholly-owned subsidiary of
LEC. WKE Corp.'s wholly-owned subsidiary, WKE Station Two, Inc. ("Station
Two"), operates and maintains the Station Two generating facility of the City of
Henderson, Kentucky. WKE Corp.'s wholly-owned subsidiary, Western Kentucky
Energy Corporation ("WKEC")/12/, which currently enjoys exempt wholesale
generator status, leases and operates the generating facilities owned by Big
Rivers Electric Corporation and sells the output of these facilities to LEM and,
potentially, other affiliates and third-parties./13/
e. Other Activities
_______________________
/9/ LG&E Energy Marketing, 68 FERC (P) 61,247 (1994).
/10/ LG&E Energy Marketing, 83 FERC (P) 61,130 (1998).
/11/ LG&E Energy Marketing, 83 FERC (P) 61,136 (1998).
/12/ WKEC is a power marketer authorized to sell power at market-based rates.
WKE Station Two Inc., 82 FERC (P) 61,178 (1998).
/13/ WKE Corp., WKEC, Station Two, and LEM have received Commission
authorization to reorganize whereby WKE Corp., WKE, and Station Two will merge
with WKEC as the surviving entity. Certain contracts for the sale of energy,
capacity and ancillary services will be transferred from LEM to WKEC as part of
that transaction. Western Kentucky Energy Corp. et al., 87 FERC (P) 62,016
(1999).
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<PAGE>
Through subsidiaries, LEC has ownership interests in projects which are
either (or both) qualifying facilities ("QFs") and exempt wholesale generators
("EWGs")./14/ Other subsidiaries hold interests in certain international energy
projects that have obtained foreign utility company status under Section 33 of
PUHCA and conduct other related business outside of the United States. In
addition, other LEC subsidiaries engage in a wide variety of activities
including engineering and project management, power project development, natural
gas storage, transmission and processing, and the provision of equipment and
services used in the construction and rehabilitation of gas and oil pipelines.
B. The PowerGen System of Companies
PowerGen is a leading integrated gas and electricity company in the United
Kingdom holding interests in electricity generation, distribution and supply.
PowerGen is the overall holding company of the PowerGen system of companies and
was formed in 1998 as a holding company for PowerGen UK plc ("PowerGen UK"), the
principal operating company. Except for PowerGen US Holdings Ltd., which has
been formed to effectuate the proposed transaction, PowerGen has one direct
subsidiary, PowerGen UK.
1. PowerGen UK
PowerGen UK, a wholly-owned subsidiary of PowerGen, is a public utility
company formed under the laws of England and Wales. PowerGen UK is PowerGen's
principal operating
___________________________
/14/ The QF/EWG projects are: (1) Westmoreland-LG&E Partners (ROVA II)(45 MW,
located in Roanoke Rapids, NC); (2) LG&E-Westmoreland Hopewell (62.7 MW, located
in Hopewell, VA); (3) LG&E-Westmoreland Altavista (62.7 MW, located in
Altavista, VA); (4) LG&E-Westmoreland Southampton, L.P. (62.6 MW, located in
Franklin, VA); (5) Windpower Partners 1993, L.P. (25 MW, located in Tyler, MN
and 34.5 MW located in North Palm Springs, CA); and (6) Windpower Partners 1994,
L.P. (35 MW, located in Salt Flat, TX). In addition, LEC has an ownership
interest in Westmoreland-LG&E Partners (ROVA I)( 167 MW, located in Roanoke
Rapids, NC), an exempt wholesale generator.
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subsidiary and serves as a subholding company for the balance of the PowerGen
system of companies. PowerGen UK owns and operates nine coal, gas, oil and
renewable fuel power stations across England and Wales capable of generating
10,000 MW. In addition, through various subsidiaries and investments identified
below, PowerGen UK is a leading developer and operator of large scale combined
heat and power plants; provides retail natural gas and electricity services to
over 2.6 million customer accounts; distributes electricity across 67,000 km of
electric lines; trades natural gas, oil and electricity in seven different
energy trading markets in the United Kingdom and Europe; and owns approximately
2,100 MW of generating capacity outside of the United Kingdom (and the U.S.).
a. PowerGen Energy plc
PowerGen Energy plc (formerly East Midlands Electricity plc), incorporated
in England and Wales, is a wholly-owned subsidiary of PowerGen UK engaged in the
distribution and supply of electricity in the East Midlands across 67,000 km of
electric overhead and underground lines over an area of 16,000 square
kilometers.
b. PowerGen CHP Limited
PowerGen CHP Limited, incorporated in England and Wales, is a wholly-owned
subsidiary of PowerGen UK and with its subsidiary PowerGen Cogeneration Limited,
also incorporated in England and Wales, is engaged in the sale of energy
services involving the construction of combined heat and power (CHP) plant.
c. PowerGen Gas Limited
PowerGen Gas Limited, incorporated in England and Wales, is a wholly-owned
subsidiary of PowerGen UK engaged in the transportation and marketing of natural
gas in the United Kingdom.
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d. PowerGen Energy Trading Limited
PowerGen Energy Trading Limited, incorporated in England and Wales, is a
wholly-owned subsidiary of PowerGen UK engaged in the trading of electricity,
gas and oil in seven energy trading markets in the United Kingdom and Europe.
e. PowerGen Energy Solutions Limited
PowerGen Energy Solutions Limited, incorporated in England and Wales, is a
wholly-owned subsidiary of PowerGen UK engaged in providing tailored energy
service products and advice to customers.
f. PowerGen Renewables Holdings Limited
PowerGen Renewables Holdings Limited, incorporated in England and Wales, is
a 50% owned joint venture of PowerGen UK engaged in developing onshore and off-
shore wind farms in the United Kingdom and Ireland.
g. PowerGen International Limited
PowerGen International Limited ("PowerGen International"), incorporated in
England and Wales, is a wholly owned subsidiary of PowerGen UK that holds
PowerGen's interests indirectly in various energy-related projects in Europe,
India, and the Asia Pacific region (including Australia).
h. Other Activities
PowerGen UK also owns a captive insurance company and a 50% interest in a
company engaged in the construction and operation of a gas-fired power station
and the operation of a generator turbine testing facility.
2. US Holdco/ Merger Sub
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Several holding companies, some incorporated in the U.S. and some in member
states of the European Union, each wholly-owned, directly or indirectly by
PowerGen, will be created to effectuate the Merger. The Agreement and Plan of
Merger (attached as Exhibit H) provides for the creation of US Subholdco 2, a
Delaware corporation, and its direct, wholly-owned subsidiary, Merger Sub, a
Kentucky corporation, which is to be formed for the express purpose of merging
into LEC and effectuating the transaction.
IV. DESCRIPTION OF THE TRANSACTION
A. Goals and Benefits of the Merger
As is explained in more detail in the filings with the relevant state
commissions,/15/ the Merger will produce benefits by bringing together the core
skills of PowerGen of asset management and customer service with the generation,
transmission and distribution businesses and skills of LEC. PowerGen has proven
expertise in the operation of fossil fuel-fired generation, particularly coal,
in a fully competitive power market, as well as expertise in managing electric
and natural gas distribution systems in such an environment. The skills
developed and lessons learned in these competitive generation and distribution
markets, whether or not directly applicable to the Midwest markets in which the
LEC operating companies do business, will be of benefit to the LEC system of
companies in approaching and resolving the same types of issues that PowerGen
has already faced in these other markets.
Applicants recognize that the energy industry in the U.S. generally has
entered a period of accelerating evolution, rapid deregulation and regulatory
change, and increased competition. In this environment, size and scale have
become critical and necessary prerequisites to success.
_____________________
/15/ See Exhibit G.
<PAGE>
The Merger will better position the Applicants to meet and benefit from the
accelerating changes in the energy industry in the U.S. and worldwide, while
maintaining their respective historic connections with the communities they
serve. The merger will ensure that LEC and its affiliates will remain at the
forefront of an increasingly competitive marketplace for energy goods and
services. The combined resources and experience of the Applicants will produce
a stronger, company that will be better able to pursue opportunities
domestically and abroad, thereby benefiting customers, employees and
shareholders.
B. Procedural Status of the Merger
The Agreement and Plan of Merger establishes that LEC will merge with
Merger Sub, with LEC continuing as the surviving corporation. LEC's outstanding
shares will be canceled upon completion of the Merger, and its shareholders will
receive in return a cash payment of $24.85 per share. The total purchase price
is approximately $3.2 billion in cash (plus the assumption of approximately $2.2
billion of debt held by LEC). Each share of common stock of Merger Sub will be
converted into a share of common stock of the surviving company. The end result
of the Merger will be to establish a series of new holding companies above LEC,
with LEC becoming an indirect wholly-owned subsidiary of PowerGen.
As is virtually always done in United Kingdom cross-border transactions,
there will be one or more intermediate entities, themselves wholly-owned,
directly or indirectly, by PowerGen, between PowerGen and LEC. This type of
structure is utilized by United Kingdom companies with foreign subsidiaries to
avoid losing United Kingdom tax relief for foreign taxes paid on profits
repatriated to the United Kingdom, and to minimize taxes on the repatriation of
foreign subsidiary profits. The structure will have no impact on the financial
integrity of LEC or its relationship with PowerGen. LEC will be wholly-owned by
PowerGen, which itself will
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register as a public utility holding company under PUHCA. PowerGen's other
utility subsidiaries operating in the United Kingdom and elsewhere outside the
United States will seek FUCO status under PUHCA. Applicants will inform the
Commission of the final structure of the transaction upon closing.
The LEC headquarters will remain in Kentucky, and LEC and its operating
subsidiaries will retain their separate corporate status and names following the
merger. The chairman and chief executive officer of LEC, Roger W. Hale, will
continue in those positions and he will join the board of PowerGen on completion
of the transaction.
The Boards of Directors of both LEC and PowerGen have approved the Merger,
as is shown in Exhibit A. The completion of the Merger is subject to certain
conditions, including, among others, those involving regulatory and shareholder
approval, which are now being sought.
V. THE MERGER IS CONSISTENT WITH THE PUBLIC INTEREST
Section 203(a) of the FPA provides, in pertinent part, that
No public utility shall sell, lease, or otherwise dispose of . . . its
facilities subject to the jurisdiction of the Commission . . . or by
any means whatsoever, directly or indirectly, merge or consolidate
such facilities or any part thereof with those of any other person, or
purchase, acquire, or take any security of any other public utility,
without first having secured an order of the Commission authorizing it
to do so . . . . After notice and opportunity for hearing, if the
Commission finds that the proposed disposition, consolidation,
acquisition, or control will be consistent with the public interest,
------------------------------------
it shall approve the same./16/
-------------------------
The statute thus requires the Commission to approve a merger if it finds
the merger is consistent with the public interest. In the Merger Policy
Statement, the Commission established that the following issues need to be
examined to determine if a merger is consistent with the
_____________________________
/16/ 16 U.S.C. (S) 824b(a) (1994) (emphasis added).
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public interest: (1) the effect of the merger on competition; (2) the effect of
the merger on rates; and (3) the effect of the merger on regulation. As is
demonstrated in this Application and supporting materials, the Merger will not
have an adverse effect in any of the three areas. Consequently, the Merger is
consistent with the public interest and the Commission should promptly approve
it.
A. The Merger Will Have No Adverse Effect on Competition.
The affidavit of Dr. Frankena establishes that the Merger raises no
competitive issues. Dr. Frankena explains that LEC and PowerGen do not compete
in any relevant geographic markets, with the LG&E Companies' generation,
transmission and distribution activities taking place in the United States and
PowerGen's comparable activities in the United Kingdom or other foreign
markets./17/ PowerGen does not engage in (or own or control facilities used for)
generation, transmission, or distribution of electricity in North America, and
does not supply any inputs used in generation, transmission or distribution of
electricity in North America. The LG&E Companies, therefore, do not provide
electric generation, transmission or distribution service in any overlapping
geographic area with PowerGen within the United States./18/ LG&E and KU each
have Commission-approved open access transmission tariffs in place. Moreover,
the LG&E Companies have been in the forefront of the industry efforts to form
and implement a regional transmission entity through their role as founding
members of the Midwest Independent System Operator ("MISO"). Therefore,
transmission over LG&E Companies facilities will be governed by open access
tariffs, further assuring there can be no concerns regarding transmission
____________________________
/17/ Attachment 1 at (P)(P) 6-7, 14 and 18. See Section III, above.
/18/ Attachment 1 at (P) 14.
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market power./19/ Because there are no common facilities or sales of relevant
products in common geographic markets, the Merger will not change the current
structure of the market or reduce the number of competitors. The Merger,
therefore, presents no competitive concerns at all.
In the Merger Policy Statement the Commission stated that where there are
no competitive concerns presented
it will not be necessary for the merger applicants to perform the
screen analysis or file the data needed for the screen analysis . . .
[since] [i]n these cases, the proposed merger will not have an adverse
competitive impact (i.e., there can be no increase in the applicants'
----
market power unless they are selling relevant products in the same
geographic markets) so there is no need for a detailed data
analysis./20/
The Commission's proposed revision to its merger rules indicates that it
intends to adhere to this policy./21/ In the NOPR, the Commission stated that if
an applicant affirmatively demonstrates that the "merging entities do not
operate in the same geographic market," the applicants "need not provide the
full competitive screen analysis."/22/ The affidavit of Dr. Frankena
affirmatively demonstrates that there is no competitive overlap./23/ This
application is a
_____________________________
/19/ Id. at (P) 17.
/20/ Merger Policy Statement at 68,597. Dr. Frankena's affidavit explains that
this conclusion of the Commission is fully consistent with the procedures used
in the Horizontal Merger Guidelines, jointly issued by the Department of Justice
and Federal Trade Commission. See Attachment 1 at (P) 16.
/21/ Notice of Proposed Rulemaking, Revised Filing Requirements Under Part 33
of the Commission's Regulations, Docket No. RM98-4-000, 63 Fed. Reg. 20,340
(April 24, 1998), III FERC Stats. and Regs., Regulations Preambles (P) 32,528
("NOPR").
/22/ Id. at 20,348-49. The Commission's decision in New England Power Co. et
al, 87 FERC (P) 61,287, 62,146 (1999)(hereinafter "New England Power") confirms
that no such screen is required in a merger of this type with no competitive
overlap.
/23/ Attachment 1 at (P) 12. The affidavit also demonstrates that there are no
vertical or potential competition issues involved in the Merger. See Attachment
1 at (P)(P) 14-16.
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text-book example of a case in which no competitive screen analysis or further
information under Appendix A to the Commission's merger guidelines is required.
The Merger thus satisfies the first prong of the Commission's Merger Policy
Statement test.
B. The Merger Will Have No Adverse Effect on Rates.
The Merger Policy Statement makes clear that the Commission's concern
regarding the effect on rates is with wholesale and transmission ratepayer
protection./24/ There will be no change in the LG&E Companies that would have an
adverse effect on wholesale or transmission rates. As noted above, at the time
of LG&E's merger with KU, LG&E and KU implemented a number of safeguards to
ensure that rates paid by their firm wholesale and transmission customers would
not be adversely affected. The Applicants in that case committed to cap base
rates at then-present levels for all wholesale requirements and firm
transmission customers for at least five years, absent "extraordinary
circumstances" - - defined to mean a change in law or occurrence of
circumstances or events that materially impair or damage LG&E/KU's credit or
operations. In addition, KU's wholesale requirements customers were offered an
aggregate base rate reduction totaling approximately $4.5 million over five
years reflecting approximately 50% of non-fuel merger-related savings./25/ All
wholesale requirements customers also received a reduction in fuel costs through
operation of the fuel adjustment clause contained in their rate schedules, then
estimated to total an aggregate of approximately $4.5 million over ten years. In
addition, KU waived its right to file for changes in base rates charged the KU
Requirements
__________________
/24/ Merger Policy Statement at 68,599.
/25/ LG&E had no wholesale requirements customers at the time of the merger,
and has none now.
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Customers and the rates charged its firm transmission customers under Section
205 of the FPA during the five-year period the base rate cap is in effect,
absent extraordinary circumstances.
As noted, certain or all of these commitments were explicitly conditioned
on the absence of extraordinary circumstances. Applicants hereby affirm that
the Merger of PowerGen with the LG&E Companies does not constitute an
"extraordinary circumstance" as defined in the LG&E/KU merger application, and
thus does not trigger the LG&E Companies' right to file for a rate increase
---
under Section 205. Applicants reaffirm their commitment to each of the
ratepayer mechanisms set forth in the LG&E/KU merger application without change
or modification./26/ Accordingly, all of the safeguards detailed in the
ratepayer protection provision remain in force and will not be affected by the
Merger. Attachment 2 hereto lists each of the entities that was the subject of
a ratepayer protection provision in the LG&E/KU merger proceeding and the nature
of that protection./27/
While there will be an acquisition premium and transaction costs associated
with the Merger, Applicants do not request recovery of the acquisition premium
or transaction costs in rates subject to the Commission's jurisdiction as part
of this Application. Further, Applicants commit that they will not attempt to
recover these merger-related costs through rates without first receiving
specific regulatory approval to do so.
__________________________
/26/ LG&E and KU also entered into various settlements with parties as part of
the merger proceeding. They will, of course, continue to honor these
settlements according to their terms.
/27/ Since the LG&E/KU merger, KU has added one new wholesale requirements
customer -- the Borough of Pitcairn ("Pitcairn"), a Pennsylvania municipality.
Pitcairn now purchases all of its capacity and energy requirements from KU.
Pitcairn will not be adversely affected by the merger. KU was chosen by
Pitcairn as the supplier by competitive bid. Pitcairn is served at a fixed rate
specified in its contract under KU's market-based rate tariff. The merger will
have no impact on the rates charged Pitcairn.
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Based on the foregoing and Applicants' commitment to hold their wholesale
power and transmission customers harmless from the costs associated with the
proposed transaction, there is no need for the imposition of any incremental
layer of protection for ratepayers./28/
The fact that no additional ratepayer protection is needed is confirmed by
looking at the only structural change effectuated by the Merger -- imposing new
holding companies over LEC. In similar cases, the Commission has found that no
ratepayer protection is needed other than requiring the utility to hold
ratepayers harmless from the costs associated with the transaction./29/
C. The Merger Will Have No Adverse Effect on Regulation.
In the Merger Policy Statement, the Commission stated that its analysis
would address two aspects to determine whether a merger would impair effective
regulation. The first is whether the merger would transfer authority from the
Commission to the SEC. If no such transfer would occur, or if the applicants
were to commit to abide by the Commission's policies with respect to intra-
system transactions within the holding company structure, the first element
would be satisfied. Otherwise, a hearing on the effect of the proposed
transaction on effective regulation by the Commission would be required. The
second part of the test is whether the affected states would have authority to
act on the merger or request Commission review./30/ If the
____________________________
/28/ See, e.g., New England Power, 87 FERC at 62,146 (no ratepayer protection
needed in context of almost identical merger); New York State Electric & Gas
Corp., et al., 86 FERC (P) 61,020, 61,053 (1999) (no additional protection
needed for transmission customers where no change in ownership of transmission
facilities). MidAmerican Energy Co. and MidAmerican Energy Holdings Co., 85
FERC (P) 61,354, 63,369 (1998) (no additional protection needed for transmission
customers if held harmless from costs).
/29/ See, e.g., New England Power, 87 FERC at 62,146; Central Maine Power Co.,
84 FERC (P) 61,030, 61,134 (1998). See also Atlantic City Electric Co., 80 FERC
(P) 61,126 (1997).
/30/ Merger Policy Statement at 68,603-04; see American Electric Power Co. and
Central and Southwest Corp., 85 FERC (P) 61,201, 61,819 (1998).
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states have authority to act on the merger or do not otherwise request
Commission review, the Commission will find that there would be no adverse
effect on state regulation, and will not set the issue for hearing. The Merger
of LEC and PowerGen satisfies both elements of this test.
1. Federal Regulation
Although the Merger places new holding companies over LEC, the relationship
of LEC to its subsidiaries remains unchanged. Accordingly, the current federal
regulatory controls over LEC and its subsidiaries are unaffected.
PowerGen, which will become a registered utility holding company under
PUHCA, will be subject to SEC regulation. To avoid any change in the pre-
existing scope of federal regulation, Applicants hereby make the following
commitment: with respect to any transaction involving the sale of non-power
goods and services between any of the LG&E Companies and PowerGen or any of its
subsidiary or affiliated companies, the LG&E Companies agree to be subject to
the Commission's policy on intra-corporate transactions. Because this
commitment assures that the Commission will have appropriate oversight over such
sales of non-power goods and services involving the new layer of affiliate
transactions resulting from the Merger, there will be no adverse effect on
federal regulation from the Merger./31/
_____________________________
/31/ In addition, consistent with the requirement the Commission has imposed on
other mergers involving foreign owners, PowerGen will make available upon
request of the Commission all publicly available financial information and
related books and records (including shareholder information, interim and annual
reports, and annual results). E.g. New England Power, 87 FERC at 62,147. To
the extent that PowerGen files additional financial information with the Office
of Electricity Regulation in the United Kingdom, it will also make that
information available to the extent such information is subject to release to
the public under the applicable rules and regulations of the Office of
Electricity Regulation. Moreover, PowerGen will make available upon request
information necessary to support the pricing for the sales of goods and services
between the PowerGen system of companies and the LG&E Companies.
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2. State Regulation
With respect to state regulation, there will not be any change as a result
of the Merger. The Merger does not change the corporate existence, financing,
operations or service of the LG&E Companies, but only imposes new holding
companies above the existing holding company. Each of the LEC operating
companies regulated by a state before the Merger will continue to be subject to
plenary state regulatory jurisdiction after the Merger.
In addition to the fact that the Merger will not affect state regulatory
control, it is contemplated that filings will be made with those state
commissions that require them. These filings will provide full information
regarding the transaction and provide the affected states with an opportunity to
evaluate any impact on state regulation associated with the transaction. State
concerns, if any, will be addressed directly in the state proceedings. There
will, therefore, be no adverse effect on state regulation as a result of the
Merger.
Accordingly, the third and final prong of the Merger Policy Statement test
is satisfied.
VI. ACCOUNTING TREATMENT
In accordance with the Merger Policy Statement,/32/ proper accounting
principles will be applied to the Merger. The proposed merger transaction will
be accounted for using the purchase method of accounting. The purchase method
of accounting has been approved by the Commission in similar transactions./33/
As discussed above in Section V.B., Applicants commit that they will not attempt
to recover these merger-related costs through rates without first receiving
specific regulatory approval to do so. Finally, consistent with Commission
policy,
________________________
/32/ Merger Policy Statement at 68,604.
/33/ See, e.g., New England Power, 87 FERC at 62,147.
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Applicants will submit their proposed accounting entries to the Commission for
approval within six months after the Merger is consummated./34/ This submission
will provide all accounting entries necessary to reflect the Merger, along with
appropriate narrative explanations describing the bases for the entries.
VII. INFORMATION REQUIRED OF APPLICANTS BY SECTION 33.2 OF THE COMMISSION'S
REGULATIONS
A. The exact name and address of the principal business office.
The address of the principal business office to be used for the LG&E
Companies is:
Louisville Gas and Electric Company
220 West Main Street
Louisville, Kentucky 40232
The address of Merger Sub's principal business office is:
Merger Sub
c/o PowerGen plc
53 New Broad Street
London EC 2M 1SL
United Kingdom
B. Name and address of the person authorized to receive notices and
communications in respect to application.
For the LG&E Companies:
John R. McCall Earle H. O'Donnell
Executive Vice President, General Laurel W. Glassman
Counsel and Secretary Dewey Ballantine, LLP
LG&E Energy Corp. 1775 Pennsylvania Avenue,
220 West Main Street N.W.
Louisville, Kentucky 40232 Washington, DC 20006
_________________________
/34/ MidAmerican Energy Co., 85 FERC at 62,370; 18 C.F.R. Pt. 101, Electric
Plant Instruction No. 5 and Account 102, (P) B (1998).
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For Merger Sub:
David J. Jackson Steven J. Agresta
General Counsel and Company Stephen C. Palmer
Secretary Swidler Berlin Shereff
PowerGen Friedman LLP
53 New Broad Street 3000 K Street, N.W.,
London EC2M 1SL Suite 300
United Kingdom Washington, D.C. 20007
C. Designation of the territories served by counties and states.
LG&E provides service in the following counties of Kentucky: Bullitt,
Green, Hardin, Hart, Henry, Jefferson, Larue, Marion, Meade, Metcalfe, Nelson,
Oldham, Shelby, Spencer, Trimble and Washington.
KU provides service in the following counties of Kentucky: Adair, Anderson,
Ballard, Barren, Bath, Bell, Bourbon, Boyle, Bracken, Bullitt, Caldwell,
Campbell, Carlisle, Carroll, Casey, Christian, Clark, Clay, Crittenden, Daviess,
Edmonson, Estill, Fayette, Fleming, Franklin, Fulton, Gallatin, Garrard, Grant,
Grayson, Green, Hardin, Harlan, Harrison, Hart, Henderson, Henry, Hickman,
Hopkins, Jessamine, Knox, LaRue, Laurel, Lee, Lincoln, Livingston, Lyon,
Madison, Marion, Mason, Mercer, Montgomery, Muhlenberg, McCracken, McCreary,
McLean, Nelson, Nicholas, Ohio, Oldham, Owen, Pendleton, Pulaski, Robertson,
Rockcastle, Rowan, Russell, Scott, Shelby, Spencer, Taylor, Trimble, Union,
Washington, Webster, Whitley, and Woodford.
KU also provides service in the following counties of Virginia: Dickenson,
Lee, Russell, Scott and Wise.
Certain other subsidiaries and joint venture provide wholesale electric
service in various locations in the United States.
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None of the other affiliates of the Applicants provides electric sales or
transmission service at retail or wholesale in the United States.
D. A general statement briefly describing the facilities owned or
operated for transmission of electric energy in interstate commerce or
the sale of electric energy at wholesale in interstate commerce.
See Section III, above.
E. Whether the application is for disposition of facilities by sale,
lease, or otherwise, a merger or consolidation of facilities, or for
purchase or acquisition of securities of a public utility, also a
description of the consideration, if any, and the method of arriving
at the amount thereof.
The Merger involves the acquisition by PowerGen of LEC as described in
Section IV of the Application, above. A copy of the Merger Agreement is included
as Exhibit H to this Application.
F. A statement of facilities to be disposed of, consolidated, or merged,
giving a description of their present use and of their proposed use
after disposition, consolidation, or merger. State whether the
proposed disposition of facilities or plan for consolidation or merger
includes all the operating facilities of the parties to the
transaction.
The Merger includes all of the operating facilities of Applicants,
including all franchises, permits and operating rights owned by them and their
subsidiaries. Following the Merger, all jurisdictional facilities will be
operated in substantially the same manner as they are currently operated.
G. A statement (in the form prescribed by the Commission's Uniform System
of Accounts for Public Utilities and Licensees) of the cost of the
facilities involved in the sale, lease, or other disposition or merger
or consolidation. If original cost is not known, an estimate of
original cost based, insofar as possible, upon records or data of the
applicant or its predecessors must be furnished, together with a full
explanation of the manner in which such estimate has been made, and a
description and statement of the present custody of all existing
pertinent data and records.
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No jurisdictional facilities are being transferred by sale or disposition
as a result of the merger. The book costs of the facilities involved in the
merger are contained in the FERC Form 1 filings of LG&E and KU.
H. A statement as to the effect of the proposed transaction upon any
contract for the purchase, sale, or interchange of electric energy.
The Merger will not have any known effect on the rights, interests or
obligations of the parties to contracts for the purchase, sale, transmission or
interchange of electric energy involving LEC, the LG&E Companies or PowerGen.
I. A statement as to whether or not any application with respect to the
transaction or any part thereof is required to be filed with any other
Federal or State regulatory body.
The following are the other regulatory approvals or filings that are
contemplated being made and copies are included with this Application as Exhibit
G or will be provided upon filing:
1. LEC and PowerGen will file an application with the SEC for approval of
the Merger pursuant to PUHCA.
2. LEC and PowerGen will submit to the Federal Trade Commission and the
Department of Justice the information required by the Hart-Scott-
Rodino Antitrust Improvements Act of 1976. In addition, LEC and
PowerGen will make a filing as required by the Exon-Florio
Amendment./35/
3. LEC and PowerGen will file requests for approval of the Merger with
the Kentucky Public Service Commission and the Virginia State
Corporation Commission. LEC and PowerGen also will formally notify the
Tennessee Regulatory Authority of their intention to consummate the
Merger.
J. The facts relied upon by applicants to show that the proposed
disposition, merger, or consolidation of facilities or acquisition of
securities will be consistent with the public interest.
See Section V, above.
_____________________________
/35/ 50 U.S.C. App. (S) 2170
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K. A brief statement of franchises held, showing date of expiration if
not perpetual.
Only the retail distribution affiliates of LEC have franchises. The
franchises of those companies that are set forth in Attachment 4.
L. A form of notice suitable for publication in the Federal Register,
which will briefly summarize the facts contained in the application in
such way as to acquaint the public with its scope and purpose.
A form of notice suitable for publication in the Federal Register is
attached to this Application, both in hard copy form and on diskette.
VII. REQUEST FOR WAIVER OF CERTAIN EXHIBITS REQUIRED PURSUANT TO SECTION 33.3 OF
THE COMMISSION'S REGULATIONS
Applicants request waiver of the requirement to file certain of the
exhibits specified in Section 33.3 of the Commission's regulations.
Specifically, Applicants request waiver of Exhibit B (statement of measure of
control); Exhibit C (balance sheets and supporting plant schedules); Exhibit D
(statement of contingent liabilities); Exhibit E (income statement); and Exhibit
F (analysis of retained earnings). Waiver of the requirement to file these
exhibits is appropriate because the information contained in these exhibits is
not relevant to the issues which the Commission will be examining with respect
to this merger, which are governed by the Merger Policy Statement. The Merger
Policy Statement abandoned the Commission's previous focus on estimated cost
savings, to which most of the referenced exhibits apply. Furthermore, the merger
will not affect the income, balance sheet, retained earnings or liabilities of
any public utility subsidiary of LEC. The merger will merely change the ultimate
shareholder of LEC. If any change in jurisdictional interlocks occurs, such
change will be covered in filings to be made under Section 305 of the FPA.
Applicants are filing the other exhibits required by Section 33.3. Specifically,
Applicants submit the following:
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Exhibit A. Copies of All Resolutions of Directors.
Exhibit G. Copies of All Applications Filed with Other Federal and State
Regulatory Bodies and Certified Copies of Each Order Relating
Thereto, Where Applicable.
Exhibit H. Copies of All Contracts with Respect to the Merger.
Exhibit I. Map.
VIII. PROCEDURAL MATTERS
The facts and analysis provided in this Application demonstrate that the
Merger will not have an adverse effect on competition, rates or regulation. The
transaction easily satisfies all requirements of Section 203 of the FPA and the
Merger Policy Statement. It is thus consistent with the public interest.
Consequently, Applicants, LEC and PowerGen respectfully request that the
Commission approve the Merger expeditiously on the basis of the facts and
analysis set forth in this Application and without hearing by the end of July,
2000.
-30-
<PAGE>
IX. CONCLUSION
For the foregoing reasons, Applicants, LEC and PowerGen respectfully
request that the Commission: (1) approve the Merger under Section 203 of the
FPA, (2) grant any other authorizations, approvals or waivers necessary or
appropriate to allow this Application to be accepted for filing and granted; and
(3) issue such approvals, authorizations and waivers expeditiously, without
condition, modification or trial-type hearing by the end of July, 2000.
Respectfully submitted,
<TABLE>
<S> <C>
/s/ Steven J. Agresta /s/ Earle H. O'Donnell
Stephen C. Palmer Laurel W. Glassman
Swidler Berlin Shereff Friedman, LLP Dewey Ballantine, LLP
3000 K Street, N.W., Suite 300 1775 Pennsylvania Avenue, N.W.
Washington, DC 20007 Washington, DC 20006
(202) 424-7500 (202) 862-1000
Attorneys for Merger Sub Attorneys for Louisville Gas and Electric
Company, Kentucky Utilities Company and
Affiliated Applicants
</TABLE>
-31-
<PAGE>
Exhibit A
- ---------
SECRETARY'S CERTIFICATE
-----------------------
I, John R. McCall, certify that I am Secretary of LG&E Energy Corp. a
corporation organized and existing under the laws of the State of Kentucky (the
"Company"); that I am one of the officers of the Company authorized to make
certified copies of the corporate records; and as Secretary, I have access to
all original records of the Company. I do hereby certify that attached hereto
are resolutions of the Boards of Directors of the Company duly adopted at a
meeting on February 25, 2000, and that the same are in full force and effect as
of the date hereof.
IN WITNESS HEREOF, I have signed this Certificate this 23/rd/ day of March,
2000.
/s/ John R. McCall
Secretary
<PAGE>
Approval of Merger Agreement, Amendment to Rights Plan and Related Matters
--------------------------------------------------------------------------
RESOLVED, that it is in the furtherance of long-term business strategies of
LG&E Energy Corp., a Kentucky corporation (the "Company"), and advisable
and in the best interests of the Company and its shareholders for the
Company to enter into the Agreement and Plan of Merger by and among the
Company, PowerGen plc, an English corporation ("PowerGen"), and Merger Sub,
a Kentucky corporation and a wholly-owned subsidiary of PowerGen ("Merger
Sub"), substantially in the form presented to the Board of Directors (the
"Merger Agreement"), pursuant to which, among other things, Merger Sub
would merge with and into the Company (the "Merger"), with the Company
surviving the Merger, and, in accordance with the terms and conditions of
the Merger Agreement, (i) each share of common stock, no par value, of the
Company (the "Company Common Stock") that is owned by the Company as
treasury stock, by subsidiaries of the Company, by PowerGen or by any
subsidiaries of PowerGen would be canceled and cease to exist; (ii) each
then issued and outstanding share of Company Common Stock, together with
the associated purchase rights (the "Company Rights") under the Rights
Agreement, as amended as of May 20, 1997, and as amended from time to time,
between the Company and Louisville Gas and Electric Company, as rights
agent (the "Company Rights Agreement"), other than shares canceled pursuant
to clause (i) above and Company Dissenting Shares (as defined in the Merger
Agreement), would be canceled and converted into the right to receive cash
in an amount equal to $24.85, without interest thereof, as more fully
described in the Merger Agreement; and (iii) the Company Dissenting Shares
would be canceled and converted into such consideration as may be due with
respect to such shares pursuant to the applicable provisions of the
Kentucky Business Corporation Act (the "BCA"), as more fully described in
the Merger Agreement; and
FURTHER RESOLVED, that the Merger Agreement, the Rights Amendment and,
where applicable, the consummation of the transactions contemplated
thereby, are approved in the forms presented to this meeting, and the
Chairman, the President, the Chief Executive Officer, the Chief Financial
Officer, the Chief Operating Officer and the Executive Vice President,
General Counsel and Corporate Secretary of the Company (collectively, the
"Authorized Officers") be, and each of them hereby is, authorized, on
behalf of and in the name of the Company, to execute and deliver such
agreements in the forms presented to the Board of Directors, with such
changes thereto as the officer or officers executing the same shall
approve, which approval shall be conclusively evidenced by such execution
and delivery, subject to final approval by the Chief Executive Officer,
including such changes as he may deem necessary, appropriate or advisable
within the terms of these resolutions; and
FURTHER RESOLVED, that the Authorized Officers be, and each of them hereby
is, authorized and directed to obtain or enter into, in the name and on
<PAGE>
behalf of the Company, such consents, waivers, modifications or amendments
of, under or with respect to, any loan or credit agreement, note, mortgage,
indenture, lease or other agreement, obligation or instrument which are, in
the opinion of such officers, necessary or desirable in order to execute
and deliver the Merger Agreement or to consummate the transactions
contemplated therein; and that such Authorized Officers be, and each of
them hereby is, authorized to execute and deliver any agreements,
certificates, documents, letters or other instruments as they or counsel
for the company may deem necessary or advisable to effectuate the
foregoing, and such certificates, documents, letters and other instruments
shall be in such forms as the officer or officers executing the same shall
approve, as conclusively evidenced by his or their execution thereof,
subject to final approval by the Chief Executive Officer, including such
changes as he may deem necessary, appropriate or advisable within the terms
of these resolutions; and
FURTHER RESOLVED, that in the judgment of the Board of Directors, the
aggregate consideration to be received by the shareholders of the Company
for each share of Common Stock which is to be converted into the right to
receive cash in connection with the Merger, as provided in the foregoing
resolutions and as more fully described in the Merger Agreement, is fair;
and
FURTHER RESOLVED, that the Board of Directors hereby approves, for purposes
of Section 271B.12-210 of the BCA and Section 3(a) of Paragraph C of
Article Seventh of the Articles of Incorporation of the Company, the entry
by PowerGen and the Company into the Merger Agreement and the consummation
by PowerGen and the Company of the transactions contemplated thereby; and
<PAGE>
Special Meeting and Recommendation to Shareholders
- --------------------------------------------------
FURTHER RESOLVED, that a special meeting of the shareholders of the Company
shall be called (the "Special Meeting") in accordance with the applicable
provisions of the BCA for the purpose of approving the plan of Merger, and
that the Merger Agreement shall be submitted to the shareholders of the
Company for approval at the Special Meeting, and the authority of the Board
of directors to fix the date, time and place of the Meeting, to fix the
record date for the determination of the shareholders of the Company
entitled to notice of, and to vote at, the Meeting, and to take other
relevant action in the foregoing respects is delegated, to the fullest
extent permitted under BCA, to a special committee consisting of the
Chairman of the Board and J. David Grissom (the "Special Committee"); and
FURTHER RESOLVED, that the Board of Directors recommends that the
shareholders of the Company vote to approve the Merger Agreement; and
Governmental And Regulatory Approvals And Filings
-------------------------------------------------
FURTHER RESOLVED, that, if the shareholders of the Company shall have voted
to approve the Merger and the Merger Agreement, and if the other conditions
to the Company's obligation to effect the Merger set forth in the Merger
Agreement shall have been fulfilled or duly waived, the Authorized Officers
be, and each of them hereby is, authorized to consummate the Merger in
accordance with the Merger Agreement and in connection therewith, to
execute and, whether before or after obtaining such shareholder approval,
file all applications, reports, statements, certificates, documents and
other instruments in the name of the Company and its subsidiaries and, if
so required, under its corporate seal or otherwise as such officer shall
deem necessary or desirable for the approval of the transactions
contemplated by the Merger Agreement, with the Securities and Exchange
Commission (the "SEC"), Federal Energy Regulatory Commission ("FERC"),
Department of Justice ("DOJ"), Federal Trade Commission ("FTC"), Federal
Communication Commission ("FCC"), New York Stock Exchange ("NYSE"),
Philadelphia Stock Exchange ("PSE"), Chicago Stock Exchange ("CSE"), London
Stock Exchange ("LSE"), Kentucky Public Service Commission ("KPSC"), the
Virginia State Corporations Commission ("VSCC"), the Tennessee Regulatory
Authority ("TRA") and any other appropriate Federal, state, foreign or
other governmental or regulatory authority necessary or appropriate for
approval of the transactions contemplated by the Merger Agreement, with
full power and authority by such officers and counsel to take any and all
such action as may be necessary or advisable in their judgment to obtain
such approvals, including, without limitation, appearing before the SEC,
FERC, DOJ, FTC, FCC, NYSE, PSE, CSE, LSE, KPSC, VSCC, TRA or any other
appropriate Federal, state or other governmental or regulatory authority;
and
<PAGE>
Rights Agreement Amendment
--------------------------
FURTHER RESOLVED, that the Board of Directors of the Company deems it
advisable and in the best interests of the Company and its shareholders
that, in connection with the execution and delivery of the Merger
Agreement, the Company enter into an amendment to the company Rights
Agreement, substantially in the form presented to the Board of Directors,
providing, among other things, that (i) neither PowerGen nor any of its
Affiliates (as defined in the Company Rights Agreement) will become and
"Acquiring Person" and (ii) that no "Distribution Date", "Stock Acquisition
Date" or "Triggering Event" (as each such term is defined in the company
Rights Agreement) shall occur as a result of the execution of the Merger
Agreement or the consummation of the transactions contemplated by the
Merger Agreement, which Rights Amendment is hereby approved, and the
authorized Officers be, and each of them hereby is authorized, on behalf of
and in the name of the Company, to execute and deliver the Rights
Amendment, with such changes therein or thereto as the Authorized Officer
or Officers executing the same shall approve, the execution and delivery of
any such agreement to conclusively evidence such approval, subject to final
approval by the Chief Executive Officer, including such changes as he may
deem necessary, appropriate or advisable within the terms of these
resolutions; and
Proxy Statement And Circular
----------------------------
FURTHER RESOLVED, that the Authorized Officers be, and each of them hereby
is, authorized, with the assistance of counsel, in the name and on behalf
of the Company, to prepare a proxy statement (the "Proxy Statement") to be
filed with the SEC under the Securities Act of 1934, as amended, and the
rules and regulations of the SEC thereunder, and to mail the Proxy
Statement to shareholders of the Company, together with a notice of
meeting, in connection with the solicitation by the Board of Directors of
proxies in connection with the Special Meeting and to take all action which
they deem necessary and proper in connection with such filing, mailing,
solicitation and meeting; and
FURTHER RESOLVED, that the Authorized Officers be, and each of them hereby
is, authorized, with the assistance of counsel, in the name and on behalf
of the Company, to assist PowerGen in preparing a circular (the "Circular")
to be submitted by PowerGen to the LSE for approval under the Companies
Act, the Financial Services Act of 1986, as amended, and the rules and
regulations made thereunder, and the rules and requirements of the LSE, and
to take all action which they deem necessary and proper, including
supplying all information deemed appropriate by any of the Authorized
Officers in connection with such filing; and
FURTHER RESOLVED, that the Authorized Officers of the company be, and each
of them hereby is, authorized in the name and on behalf of the Company to
prepare or cause to be prepared and to execute and cause to be filed with
the SEC
<PAGE>
and the LSE any and all amendments and/or supplements to the Proxy
Statement and the Circular, and any additional certificates, documents,
letters or other instruments, as they or counsel for the Company may deem
necessary or advisable, such amendments, supplements, certificates,
documents, letters and other instruments to be in such forms as the officer
or officers executing or directing the filing of the same shall approve, as
conclusively evidenced by his, her or their execution or filing thereof;
and
Confidentiality And Standstill Agreements
-----------------------------------------
FURTHER RESOLVED, that the form, terms and provisions of the letter
agreement, dated November 1, 1999, between the Company and PowerGen, copies
of which have been directed to be filed with the records of the Company,
be, and they hereby are, in all respects approved and adopted; and that the
actions of any officer of the Company in executing, in the name and on
behalf of the Company, such agreements be, and they hereby are, ratified,
confirmed and approved in all respects, subject to final approval by the
Chief Executive Officer, including such changes as he may deem necessary,
appropriate or advisable within the terms of these resolutions; and
Agreement With Investment Bankers
---------------------------------
FURTHER RESOLVED, that the form, terms and provisions of the engagement
letter, dated as of January 21, 2000 between the Company and The Blackstone
Group L.P., a copy of which has been directed to be filed with the records
of the Company be, and they hereby are, in all respects approved and
adopted; and that the actions of any officer of the Company in executing,
in the name and on behalf of the Company, such engagement letter be, and
they hereby are, ratified, confirmed and approved in all respects; and
General Enabling Resolutions
----------------------------
FURTHER RESOLVED, that until further action of the Board of Directors, the
Board of Directors hereby (i) delegates plenary power and authority to the
Special Committee and (ii) authorizes each of the Authorized Officers to
approve the taking of any actions, they payment of any costs and expenses
and the forms and terms of any instruments, documents or agreements,
consistent with these resolutions, in connection with the Merger, the
transactions contemplated by the Merger Agreement and the other
transactions referred to in or contemplated by these resolutions,
including, without limitation, approval of any amendment to, waiver of, or
consent under, the Merger Agreement, the Rights Amendment, or any other
agreement or instrument authorized or contemplated by these resolutions, as
the Special Committee or such officer shall deem necessary or desirable in
connection with the Merger Agreement and the transactions contemplated
thereby, subject to final approval by the Chief Executive Officer,
<PAGE>
including such changes as he may deem necessary, appropriate or advisable
within the terms of these resolutions; and
FURTHER RESOLVED, that all actions heretofore taken by any director,
officer, employee or agent of the Company in connection with any matter
referred to in any of the foregoing resolutions are hereby ratified,
confirmed and approved in all respects; and
FURTHER RESOLVED, that each Authorized Officer is authorized and directed
to take, or cause to be taken, all actions, and to execute and deliver, or
cause to be executed and delivered, all agreements, undertakings,
documents, instruments and certificates, to retain such financial advisors,
legal counsel and such other advisors, consultants or experts necessary or
appropriate to carry out the actions contemplated in these resolutions, and
to secure any appropriate advice and opinions from such advisors,
consultants or experts, and to pay all charges, fees, taxes and other
expenses, from time to time, as such Authorized Officer deems necessary,
desirable or appropriate to provide for the consummation of the
transactions contemplated by the Merger Agreement and to accomplish the
purpose and intent of these resolutions, and the actions heretofore taken
and to be taken by any Authorized Officer in that connection are hereby
ratified, confirmed and approved in all respects; and
FURTHER RESOLVED, that, for purposes of carrying out the foregoing
resolutions, any person authorized to execute any document or take or cause
to be taken any action on behalf of the Company is authorized to grant,
execute and deliver a power of attorney, individually or in the name and on
behalf of the Company, to any other person, whether or not an employee of
the Company, as the person executing the power of attorney may deem
appropriate, and any action taken by any such duly authorized person
pursuant to and within the scope of any such power of attorney is hereby
ratified and confirmed as the act and deed of the Company.
<PAGE>
POWERGEN plc
Secretary's Certificate
The undersigned, the Company Secretary of PowerGen plc, DOES HEREBY
CERTIFY, on behalf of PowerGen plc, that:
Attached hereto as Exhibit A is a true and correct
copy of the resolutions duly adopted by The
Committee of the Board of PowerGen plc, which
Resolutions have not been revoked, modified,
amended, or rescinded and remain in full force and
effect on the date hereof, except as indicated
therein.
IN WITNESS WHEREOF, the undersigned has executed and delivered this
certificate this 22/nd/ day of March, 1999.
PowerGen plc
/s/ David J. Jackson
Company Secretary
<PAGE>
PowerGen plc
(Company No: 3586615)
(the Company)
EXTRACT
From the
Minutes of a Meeting of Committees
of the Board of Directors of the Company
held on Friday 25 February 2000
PRESENT:
Mr E A Wallis (In the Chair)
Mr P C F Hickson
Mr P Myners
being a quorum
IN ATTENDANCE:
Mr. D J Jackson
Project Libra
- -------------
Merger Agreement
----------------
2. There was produced to the meeting in draft form the Merger Agreement
between the Company and Libra (the Merger Agreement) for the purpose of
implementing the acquisition of Libra (the Merger).
3. The terms of the proposed Merger Agreement were considered in detail. After
due and careful consideration IT WAS RESOLVED THAT:
(a) the terms of the Merger Agreement in the form produced to the meeting
(or with such amendments, additions or deletions thereto as any
director or the Secretary of the Company may in his absolute
discretion think fit) be and they are hereby APPROVED;
(b) the execution and delivery by or on behalf of the Company of the
Merger Agreement be and they are hereby APPROVED; and
(c) any director or the Secretary of the Company be and he is hereby
AUTHORISED to execute the Merger Agreement on behalf of the Company
<PAGE>
in the form produced to the meeting (or with such amendments,
additions or deletions thereto as any director or the Secretary of the
Company may in his absolute discretion think fit), and to execute any
other documents ancillary thereto.
Employment Contracts
--------------------
4. It was reported that the Merger Agreement annexed proposed Contracts of
Employment to be entered into a completion between Libra and certain
Executives (the Employment Contracts). The Employment Contracts were
considered and APPROVED.
Page 2
9. After due and careful consideration, IT WAS RESOLVED THAT:
(a) the Facility be and it is hereby APPROVED and that Messrs P C F
Hickson and P O'Donnell Bourke be and they are each hereby AUTHORISED
to negotiate and settle the terms thereof and all other matters
incidental thereto;
(b) the guarantee given by the Company contained in the Facility Agreement
is in the best interests of the Company, and the giving of similar
guarantees by any subsidiary company is in the best interests of the
Group;
(c) the Facility Agreement, the Fee Letters and the Underwriting Letter be
and they are hereby APPROVED;
(d) any director, the Secretary of the Company and Mr P O'Donnell Bourke
each be and he is hereby AUTHORISED to sign the Facility Agreement,
the Fee Letters and the Underwriting Letter subject to such revisions
or amendments (if any) as may be approved by any director, the
Secretary of the company or Mr P
<PAGE>
O'Donnell Bourke as he shall in his absolute discretion deem necessary
or desirable;
(e) any two or more of the designated individuals set out below and any
other person who may, in addition, be designated by the Secretary of
the Company in writing (an Authorised Person) be and they are hereby
AUTHORISED to sign and/or despatch all other documents and notices
including Requests (as defined in the Facility Agreement) to be signed
and/or despatched by the Company under or in connection with the
Facility Agreement:
Authorised Persons
Group Finance Director: P C F Hickson
Group Treasurer: P O'D Bourke
Head of Corporate Treasury: G J Wood
Company Secretary: D J Jackson
Treasury Manager, Funding: M J Head
Treasury Manager, Funding: S Rodd
Treasury Manager, Operations: G Town
Group Project Finance Manager: J Corrigan
(f) any director or the Secretary of the Company be and he is hereby
AUTHORISED to:
(i) approve, agree and authorise the contents of or issue of any
other document which he may, in his absolute discretion, consider to
be necessary or appropriate for or incidental to the purposes of and
the Facility;
<PAGE>
Page 3
(ii) authorise the carrying into effect of any matters preparatory to or
contemplated or referred to in the Facility Agreement or otherwise in
connection with the Facility;
(iii) authorise the execution and delivery, issue or release by any person
of any documents approved by him, including any document to be executed as
a Deed;
(iv) give or authorise the giving by any person of any information,
notice, authorisation, consent or waiver on behalf of and in the name of
the Company in connection with the Facility;
(v) appoint, instruct and authorise any agent or adviser on behalf of
and in the name of the Company to do any act required for the purpose of or
incidental to the Facility; and
(vi) do all other matters, incidental to or connected with or required
for the purposes of the Facility and to delegate any of the powers hereby
delegated;
(g) the Secretary of the Company be INSTRUCTED to arrange forthwith for each
Authorised Person to sign an incumbency certificate; and
(h) the execution on behalf of the Company of the Shareholder's Resolution be
and it is hereby APPROVED subject to such revisions or amendments (if any)
as may be approved by any director or the Secretary of the Company as he
shall in his absolute discretion deem necessary or desirable, and any
director or the Secretary of the Company be and he is hereby AUTHORISED to
execute the Shareholder's Resolution in the form produced to the meeting
(or with such amendments, additions or deletions thereto as any director or
the Secretary of the Company may in his absolute discretion think fit).
<PAGE>
Exhibit H
See Agreement and Plan of Merger, dated as of February 27, 2000, among PowerGen
plc, LG&E Energy Corp., US Subholdco 2 and Merger Sub, filed as Exhibit B-1 to
PowerGen plc's Form U-1 filed April 26, 2000, File No. 70-9671, and incorporated
by reference herein.
<PAGE>
Exhibit I
See the Maps of the Louisville Gas and Electric Company and Kentucky Utilities
Company Electric Systems filed as Exhibit E-1 to PowerGen plc's Form U-1 filed
April 26, 2000, File No. 70-9671, and incorporated by reference herein.
See the Map of the Big Rivers Electric System (filed on paper format on Form SE
on April 26, 2000, File No. 70-9671).
<PAGE>
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
LOUISVILLE GAS AND ELECTRIC COMPANY )
KENTUCKY UTILITIES COMPANY ) Docket No. EC00-___-000
MERGER SUB )
VERIFICATION
------------
STATE OF KENTUCKY )
)
COUNTY OF JEFFERSON )
NOW, BEFORE ME, the undersigned authority, personally came and
appeared,
John R. McCall
who, after first being duly sworn by me, did depose and say:
That he is General Counsel for Louisville Gas and Electric Company and
Kentucky Utilities Company which are Applicants in the above proceeding; that he
has the authority to verify the foregoing Application on behalf of the LG&E
Companies (as defined in the Application); that he has read said Application and
knows the contents thereof; and that all of the statements contained in said
Application are true and correct to the best of his knowledge and belief.
/s/ John R. McCall
Subscribed and sworn to before me, this 23/rd/ day of March, 2000.
/s/ Notary Public
My Commission Expires: June 30, 2003
County of Residence: Notary Public, State at Large, KY
<PAGE>
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
LOUISVILLE GAS AND ELECTRIC COMPANY )
KENTUCKY UTILITIES COMPANY ) Docket No. EC00-___-000
MERGER SUB )
VERIFICATION
David J. Jackson, being duly sworn upon oath, states that he is
General Counsel and Company Secretary of PowerGen plc and has read the attached
JOINT APPLICATION OF LOUISVILLE GAS AND ELECTRIC COMPANY et al. FOR APPROVAL OF
MERGER AND RELATED AUTHORIZATIONS; that he knows the contents thereof; that the
statements made therein are true and correct to the best of his knowledge,
information and belief; and that he has full power and authority to sign this
document on behalf of PowerGen plc.
/s/ David J. Jackson
Subscribed and sworn to me this 22nd day of March, 2000.
/s/ Notary Public
My Commission Expires: December 14, 2000
<PAGE>
Attachment 1
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
LOUISVILLE GAS AND ELECTRIC COMPANY )
KENTUCKY UTILITIES COMPANY ) Docket No. EC00-___-000
MERGER SUB )
Affidavit of
Mark W. Frankena
I, Mark W. Frankena, declare:
1. My name is Mark W. Frankena. I am a Principal at Economists Incorporated,
an economics consulting firm located at 1200 New Hampshire Avenue, N.W.,
Washington, D.C. 20036.
2. I received a Ph.D. in economics from the Massachusetts Institute of
Technology in 1971. Between 1971 and 1982, I was an assistant professor and
then a tenured associate professor of economics at the University of
Western Ontario. Between 1982 and 1988, I held several senior positions in
the Bureau of Economics of the Federal Trade Commission, one of the two
federal agencies responsible for enforcing the antitrust laws. As Deputy
Director for Antitrust, I was responsible for supervising approximately
thirty-five economists who analyzed the competitive effects of mergers and
other matters involving market power. In 1988, I joined Economists
Incorporated, where I have worked on antitrust and regulatory matters
involving electric power and other industries. During 1997, LG&E Energy
Corp. (LEC) and KU Energy Corp. (KUC) submitted to the Commission testimony
that I prepared analyzing the competitive effects of their merger. My
curriculum vitae is attached as Exhibit ___ (MWF-1).
3. I have been asked by counsel for Louisville Gas and Electric Company
(LG&E), Kentucky Utilities Company (KU) and PowerGen plc (PowerGen) to
evaluate whether the proposed acquisition of LEC by PowerGen would be
likely to reduce
<PAGE>
competition in any market for electric power in the United States. I have
evaluated the potential for the proposed merger to increase horizontal
market power over electric energy, capacity, power marketing or
transmission service by eliminating a competitor; transmission market power
by combining ownership of one company's transmission assets with the other
company's generating facilities; and vertical market power over electric
power by combining ownership of natural gas or other upstream market
operations of one company with the downstream electric power operations of
the other company.
4. My affidavit is organized as follows: Paragraph 5 discusses the standard
for evaluating mergers. Paragraphs 6 and 7 summarize my analysis.
Paragraphs 8 through 13 describe the merging companies. Paragraphs 14
through 17 explain my competitive analysis. Paragraph 18 states my
conclusion.
5. The 1992 Department of Justice and Federal Trade Commission Merger
Guidelines state that "the ultimate inquiry in merger analysis" is "whether
the merger is likely to create or enhance market power or to facilitate its
exercise."/1/ That is, in evaluating a merger under the Merger Guidelines
and the Clayton Act, one focuses on the effects of the merger. Whether the
merging companies would have market power absent the proposed merger is not
relevant to the inquiry. The Commission's Merger Policy Statement has
adopted the Merger Guidelines as the appropriate method for analyzing the
competitive effects of mergers in the electric power industry./2/ A merger
between two companies that operate in totally separate geographic areas may
create or enhance market power only in highly unusual circumstances. These
circumstances are addressed in the 1984 Department of Justice Merger
Guidelines, which explain the Department of Justice's methodology for
evaluating potential competition theories./3/
______________
/1/ Horizontal Merger Guidelines (1992, rev'd 1997), reprinted in 4 Trade Reg.
Rep. (CCH) (P) 13,104, (S) 0.1.
/2/ Inquiry Concerning the Commission's Merger Policy Under the Federal Power
Act; Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (Dec. 30, 1996),
FERC Stats. & Regs. [Regs. Preambles 1991-1996] (P) 31,044 (1996)(codified
at 18 C.F.R. Part 2), recons. denied, 79 FERC (P) 61,321(1997).
/3/ Merger Guidelines (1984), reprinted in 4 Trade Reg. Rep. (CCH) (P) 13,103,
(S) 4.
2
<PAGE>
6. My analysis leads me to conclude that the proposed acquisition will not
cause any reduction in competition in any U.S. market for electric power.
This is clear because the markets in which PowerGen (including its
affiliates) is a seller or buyer are separated by oceans from the U.S.
markets in which the LEC companies are sellers or buyers./4/ The
transaction will not increase the ability or incentives of the LEC
companies to behave anticompetitively.
7. The transaction cannot increase horizontal market power in any U.S. market
for electric power because PowerGen is neither an actual competitor in nor
an important potential entrant into any market in which the LEC companies
are sellers. The transaction cannot increase transmission market power in
the U.S. because PowerGen has neither transmission nor generation assets in
North America. The transaction cannot increase vertical market power in the
U.S. because PowerGen does not supply inputs used in generation,
transmission, or distribution of electricity in North America and does not
own generating assets in North America. In short, the proposed transaction
is neither a horizontal nor a vertical merger. In addition, LG&E and KU
will continue to provide transmission service under open access tariffs,
and they will continue to fulfill the obligations imposed in connection
with the merger of LEC and KUC. As a result, I conclude that the
acquisition of LEC by PowerGen will not harm competition in U.S. markets
for electric power.
8. LEC is a holding company whose affiliate LG&E owns and operates electric
generation, transmission and distribution assets in Kentucky and whose
affiliate KU owns and operates electric generation, transmission and
distribution assets in Kentucky, Virginia and Tennessee. LG&E Energy
Marketing, Inc. (LEM) is a FERC-authorized power marketer that owns no
facilities for the generation, transmission or distribution of power. LG&E
also owns and operates natural gas distribution and storage facilities in
Kentucky. In addition, LEC owns several unregulated companies that market
energy and develop,
__________
/4/ I use the term "LEC companies" to refer to LEC and companies in which LEC
has an ownership interest that operate in U.S. electricity markets or that
supply inputs to companies that generate electric power in the U.S.
3
<PAGE>
own, operate and maintain domestic and international power generation
facilities that sell electric and steam energy to utility and industrial
customers. The majority of the revenues for the LEC companies are derived
from services provided in the United States, primarily in the Commonwealths
of Kentucky and Virginia.
9. The Agreement and Plan of Merger establishes that LEC will merge with an
indirect subsidiary of PowerGen, Merger Sub, with LEC continuing as the
surviving corporation. LEC's outstanding shares will be canceled upon
completion of the Merger, and its shareholders will receive in return a
cash payment per share. The end result of the Merger will be to establish a
series of holding companies above LEC, with LEC becoming an indirect
wholly-owned subsidiary of PowerGen.
10. PowerGen is a leading integrated gas and electricity company in the United
Kingdom holding interests in electricity generation, distribution and
supply. PowerGen is the overall holding company of the PowerGen system of
companies and was formed in 1998. Aside from PowerGen US Holdings, Ltd.,
which has been formed to effectuate the proposed transaction, PowerGen has
one direct subsidiary, PowerGen UK plc (PowerGen UK).
11. PowerGen UK, a wholly-owned subsidiary of PowerGen, is a public utility
company formed under the laws of England and Wales. PowerGen UK is
PowerGen's principal operating subsidiary and serves as a subholding
company for the balance of the PowerGen system of companies. PowerGen UK
owns and operates nine coal, gas, oil and renewable fuel-fired power
stations across England and Wales. PowerGen Energy plc (formerly East
Midlands Electricity plc), incorporated in England and Wales, is a wholly-
owned subsidiary of PowerGen UK that is engaged in the distribution and
supply of electricity in the East Midlands.
12. In addition, through various subsidiaries and investments, PowerGen is also
engaged in the development and operation of large scale combined heat and
power plants;
4
<PAGE>
the transportation and marketing of natural gas in the United Kingdom; the
trading of electricity, gas and oil in seven energy trading markets in the
United Kingdom and Europe; the provision of tailored energy service
products and advice to customers; and the development of onshore and off-
shore wind farms in the United Kingdom and Ireland. In addition, through
various other subsidiaries and investments, PowerGen is engaged in the
development of generation projects and other energy-related activities in
Europe, India, Asia Pacific and Australia.
13. Neither PowerGen nor any of its subsidiaries sells electricity, natural
gas, other generator inputs, or transmission or distribution services for
electricity or natural gas or other generator inputs in North America.
Moreover, while PowerGen has considered acquisition of established U.S.
companies such as LEC, absent PowerGen's proposed acquisition of LEC there
is not a substantial likelihood that PowerGen would set up a new company
that would compete in U.S. electric power markets in which the LEC
companies are sellers. In any event, PowerGen would have no significant
advantage over numerous other companies as a new entrant in U.S. electric
power markets in which the LEC companies are sellers.
14. The proposed merger cannot have an adverse effect on competition in any
market for electric power in the U.S. because PowerGen is not a seller in
any North American market for electric power or transmission or inputs
(e.g., fuel or fuel transportation services) used in the production or
delivery of electric power. There are oceans between the markets in the
United Kingdom and elsewhere in which PowerGen is a seller or a buyer, on
the one hand, and the U.S. markets in which the LEC companies are sellers
or buyers, on the other. Because PowerGen and the LEC companies are not
vertically related, the transaction will not reduce competition by
foreclosing access to electric transmission or generator inputs, raising
rivals' costs, or facilitating anticompetitive coordination or regulatory
evasion./5/
_____________
/5/ Revised Filing Requirements Under Part 33 of the Commission's Regulations,
63 Fed. Reg. at 20,349.
5
<PAGE>
15. In order for PowerGen's acquisition of LEC to raise even prima facie
concerns under a potential competition theory, several conditions would
have to be met. One necessary (not sufficient) condition is that absent
PowerGen's proposed acquisition of LEC there would be a substantial
likelihood that PowerGen would set up a new company that would compete in
U.S. electric power markets in which the LEC companies are sellers. A
second necessary condition is that PowerGen would have significant
advantages over other companies as a new entrant in these markets (or that
PowerGen and at most one or two other companies would have such
advantages). These necessary conditions for the potential competition
theory to be relevant to the proposed merger are not met, for reasons that
are stated in paragraph 13.
16. It follows from the preceding discussion that PowerGen and the LEC
companies are neither competitors nor vertically related. The proposed
transaction therefore is neither a horizontal nor a vertical merger. In
this situation, no purpose would be served by detailed delineation of
relevant markets or computation of market shares and concentration, or by
supplying to the Commission the data needed for such computations. The
Commission's Merger Policy Statement recognizes that mergers involving
firms that do not operate in common geographic markets typically do not
raise competitive concerns. According to the Merger Policy Statement:
[I]t will not be necessary for the merger applicants to perform the
screen analysis or file data needed for the screen analysis in cases
where the merging firms do not have facilities or sell relevant
products in common geographic markets. In these cases, the proposed
merger will not have an adverse competitive impact (i.e., there can be
no increase in the applicants' market power unless they are selling
relevant products in the same geographic markets) so there is no need
for a detailed analysis./6/
17. There is no reason to expect that the proposed acquisition would change
practices of the LEC companies in ways that would be likely to reduce
competition. The merger will do nothing to increase the ability of the LEC
companies to raise electric power prices
_________________________________
/6/ See footnote 2, supra.
6
<PAGE>
anticompetitively in the U.S. Also, the merger will do nothing to increase
the profitability to the merging companies of such an anticompetitive price
increase. LG&E and KU will continue to comply with the Commission's
requirements regarding provision of open, comparable access to transmission
service and will continue to honor the commitments made to customers in
connection with the merger of LEC and KUC.
18. Based on my competitive analysis, I conclude that the proposed acquisition
of LEC by PowerGen plc will not reduce competition in any U.S. market for
electric power.
I declare under penalty of perjury that the foregoing is true and correct.
/s/ Mark W. Frankena
Signed on this ____ day of March, 2000
7
<PAGE>
Exhibit No. ___ (MWF-1)
Page 1 of 12
CURRICULUM VITAE
Mark W. Frankena
Address Economists Incorporated
1200 New Hampshire Avenue, N.W., Suite 400
Washington, D.C. 20036
Voice: (202) 833-5231
Fax: (202) 296-7138
[email protected]
-----------------
http://www.ei.com
-----------------
Education Massachusetts Institute of Technology, Ph.D.,
Economics, 1971
National Science Foundation Scholarship
Woodrow Wilson Scholarship
Swarthmore College, B.A. with Highest Honors,
Economics, 1965
Employment Economists Incorporated (1988 - present)
Principal
U.S. Federal Trade Commission, Bureau of Economics
(1982) - 1988)
Deputy Director for Antitrust (1987 - 1988)
Deputy Director for Economic Policy Analysis
(1986 - 1987)
Economic Advisor to the Chairman (1986)
Assistant Director for Consumer Protection
(1985 - 1986)
Assistant to the Deputy Director, Antitrust (1985)
Deputy Assistant Director, Consumer Protection
(1985)
Staff Economist, Antitrust (1983 - 1984),
Consumer Protection (1982 - 1983)
Senior Executive Service (1986 - 1988)
Senior Executive Service Award (1987)
Award for Excellence in Economics (1985)
<PAGE>
Exhibit No. ___ (MWF-1)
Page 2 of 12
Employment University of Western Ontario, Department of
(cont.) Economics (1971 - 1982)
Associate Professor, tenured (1976 - 1982)
Director of Graduate Studies (1977 - 1978)
Associate Director of Graduate Studies (1976 - 1977)
Assistant Professor (1971 - 1976)
Testimony Prepared testimony and rebuttal testimony on behalf of UtiliCorp
United, St. Joseph Light & Power, and Empire District Electric
concerning competitive effects of their mergers, Federal Energy
Regulatory Commission, Docket Nos. EC00-27 and EC00-28, November
23, 1999, February 11, 2000.
Economic report and two depositions on behalf of plaintiff, a
district energy company, concerning violation of the Sherman Act
and damages, Cleveland Thermal Energy Corp. v. CEI, U.S. District
Court, Northern District of Ohio, Eastern Division, Case No. 1:97
CV 3023, July 29, 1999, Aug. 18, 1999, October 14, 1999.
Testimony and cross-examination on behalf of Carolina Utility
Consumers Association concerning competitive effects of merger of
SCANA Corp. and Public Service Co. of North Carolina, North
Carolina Utilities Commission, Docket Nos. G-5, Sub 400, G-43,
Sub O, Sept. 13, 1999, Sept. 29, 1999.
Affidavit on behalf of Virginia Municipal Electric Association
concerning competitive effects of merger of Dominion Resources
and Consolidated Natural Gas, Federal Energy Regulatory
Commission, Docket No. EC99-81, Aug. 6, 1999.
Testimony, surrebuttal testimony, and cross-examination on behalf
of Enron on Arizona Public Service electric industry
restructuring settlement agreement, Arizona Corporation
Commission, Docket No. E-01345A-98-0473, June 30, 1999, and July
15, 1999.
_______________
Curriculum Vitae
Mark W. Frankena
Pg. 2
<PAGE>
Exhibit No. ___ (MWF-1)
Page 3 of 12
Testimony Prepared testimony and affidavit on behalf of UtiliCorp
(cont.) United concerning competitive effects of the merger of Western
Resources and Kansas City Power & Light, Federal Energy
Regulatory Commission, Docket No. EC 97-56, Nov. 17, 1997, Feb.
1, 1999.
Economic report on behalf of defendant Quality King Distributors
concerning salon hair care products, Nexxus et al. v. CVS et al.,
U.S. District Court, Massachusetts, C.A. 97-40197 (PBS), Jan. 29,
1999.
Affidavit on behalf of Minnesota Power concerning transmission by
Northern States Power, Federal Energy Regulatory Commission,
Docket No. EL99-20, Dec. 21, 1998.
Prepared testimony on behalf of the Arizona Attorney General
concerning effects of electric industry restructuring settlement
agreements on market power, Arizona Corporation Commission,
Docket No. RE-00000C-94-0165, Nov. 30, 1998.
Affidavit and participation in technical conference on behalf of
Barrick and Newmont gold mines concerning remedies for Sierra
Pacific Power's market power, Public Service Commission of
Nevada, Docket No. 97-8001, May 15, 1998.
Prepare testimony on behalf of WPS Resources and Upper Peninsula
Energy concerning competitive effects of their merger, Federal
Energy Regulatory Commission, Docket EC98-27, Jan. 23, 1998. The
Commission approved the merger as proposed, 83 FERC (P)61, 196.
Affidavit on behalf of the Maine Attorney General on New England
Power Pool's proposal for detection and mitigation of market
power, Federal Energy Regulatory Commission, Docket Nos. OA97-237
and ER97-1079, Jan. 23, 1998.
__________________
Curriculum Vitae
Mark W. Frankena
Pg. 3
<PAGE>
Exhibit No. ___ (MWF-1)
Page 4 of 12
Testimony Affidavits on behalf of LG&E Energy affiliates providing
(cont.) hub-and-spoke analyses in support of applications for market-
based pricing, Federal Energy Regulatory Commission, Docket Nos:
ER98-__ and ER98-__, Dec. 31, 1997.
Prepared testimony on behalf of LG&E and Kentucky Utilities
providing an analysis of their merger using the methodology
specified by Appendix A of FERC's Merger Policy Statement,
Federal Energy Regulatory Commission, Docket No. EC98-2, Oct. 9,
1997. Cited in Commission order approving merger as proposed, 82
FERC (P)61,308.
Affidavit on behalf of the City of Austin concerning competitive
effects of the merger of PG&E Corporation and Valero Energy,
Federal Energy Regulatory Commission, Docket No. EC97-22, May 23,
1997.
Prepared testimony and on behalf of Commission Staff concerning
market power of Sierra Pacific Power and Nevada Power in a
restructured electric industry, Public Service Commission of
Nevada, Docket No. 95-9022, January 31, 1997.
Testimony, surrebuttal testimony and cross-examination on behalf
of Madison Gas & Electric, Citizens' Utility Board, the Wisconsin
Electric Cooperative Association, and the Wisconsin Industrial
Energy Group concerning competitive effects of the merger of
Northern States Power and Wisconsin Electric Power, Public
Service Commission of Wisconsin, Docket No. 6630-UM-100/4420-UM-
101, Oct. 8, Oct. 30, and Nov. 5, 1996.
Testimony and cross-examination on behalf of Madison Gas &
Electric and others concerning competitive effects of the merger
of Northern States Power and Wisconsin Electric Power, Federal
Energy Regulatory Commission, Docket EC95-16, May 10 and June 11,
1996. Cited in Commission order rejecting merger as proposed, 79
FERC (P)61,158.
___________________
Curriculum Vitae
Mark W. Frankena
Pg. 4
<PAGE>
Exhibit No. ___ (MWF-1)
Page 5 of 12
Testimony Affidavit on market definition, Caribbean Broadcasting System,
(cont.) LTD., et al., v. Cable and Wireless P.L.C., et al., U.S. District
Court, January 31, 1994.
Affidavit on behalf of Occidental Chemical Corp. concerning
competitive effects of the acquisition of Gulf States Utilities
by Entergy, Federal Energy Regulatory Commission, Docket EC92-21,
September 28, 1992.
Testimony and cross-examination on behalf of Public Service of
New Hampshire concerning competitive effects of the acquisition
of PSNH by Northeast Utilities, U.S. Bankruptcy Court, November
1989.
Add'l Competitive analysis of PECO Energy's proposed acquisition of
Electric Pennsylvania Power and Light on behalf of the latter.
and Gas
Experience
Competitive analysis of Southern California Edison's proposed
merger with San Diego Gas & Electric for Federal Energy
Regulatory Commission and California Public Utilities Commission
proceedings on behalf of the City of San Diego.
Evaluation of competition issues in electric restructuring and in
merger of American Electric Power and Central and South West on
behalf of latter.
Competitive analysis of mergers between Public Service of New
Mexico and Gas Company of New Mexico, Duke Power and PanEnergy,
Carolina Power and Light and North Carolina Natural Gas, and
other electric and gas companies.
Competitive analysis of gas pipeline mergers between MidCon and
United Energy Resources, and between InterNorth and Houston
Natural Gas.
__________________
Curriculum Vitae
Mark W. Frankena
Pg. 5
<PAGE>
Exhibit No. ___ (MWF-1)
Page 6 of 12
Add'l Electric Reports on market power in electric power markets in Spain on
and Gas behalf of the Spanish National Electric Regulatory Commission
Experience and in New York on behalf of an energy services company.
(cont.)
Competitive analysis of the proposed merger of four Dutch
electric generating companies on behalf of the Dutch
Competition Authority.
Review of study of competitive effects of synchronous
interconnection of ERCOT and the SPP on behalf of Public
Utility Commission of Texas staff.
Invited Pre- American Bar Association,
sentations on Annual Meeting, August 1997
Analysis of Electricity Conference, February 1998
Market Power Annual meeting, mock trial witness, August 1998
In the Electric Federal Energy Bar Association,
and Gas Meeting, November 1997
Industries U.S. Department of Justice and Federal Trade
Commission, Conference, April 1996
Federal Trade Commission, Bureau of Economics
Retreat, December 1997
Federal Energy Regulatory Commission,
Staff Seminar, September 1997
Edison Electric Institute, Economics Committee,
May 1996, October 1998
National Association of Regulatory Utility Commissioners,
NARUC/DOE Electricity Forum, December 1997
Conference, March 1998
Kansas, Missouri & Oklahoma Commissions & Universities,
Rate Symposium, April 1999
Spanish National Electric Regulatory Commission,
December 1996, February 1997
Electricity Consumers Resource Council (ELCON),
Annual Seminar, October 1996
Institute of Public Utilities,
Conference, November 1996
________________
Curriculum Vitae
Mark W. Frankena
Pg. 6
<PAGE>
Exhibit No. ___ (MWF-1)
Page 7 of 12
Experience Mass Media and Advertising
with Other --------------------------
Industries
Competitive analyses of cable network mergers:
CNBC/FNN financial news networks on behalf of NBC; HSN/QVC
home shopping networks on behalf of TCI.
Cable television antitrust suit by Viacom against TCI on
behalf of the latter.
Children's television programming antitrust suit by Buena
Vista against Fox on behalf of the latter.
Online database antitrust suit by Dialog against American
Chemical Society on behalf of former.
Federal Communications Commission rulemakings on station
ownership and financial interest and syndication rules on
behalf of ABC, CBS, and NBC.
Competition between cable television and direct-broadcast
satellites on behalf of National Cable Television
Association.
Telecommunications
------------------
Deceptive advertising litigation between MCI and AT&T on
behalf of former.
Federal Communications Commission rulemakings on mobile
telecommunications services on behalf of AT&T Wireless.
Market power analysis and damage estimate for satellite
communications monopolization suit by PanAmSat against
Comsat.
Competitive analysis of a merger of two regional Bell
operating companies on behalf of a ratepayer group.
________________
Curriculum Vitae
Mark W. Frankena
Pg. 7
<PAGE>
Exhibit No. ___ (MWF-1)
Page 8 of 12
Experience Other Industries
with Other ----------------
Industries
(cont.) Competitive analyses of mergers and joint ventures involving
power transformers and other heavy electric equipment, small
electric motors, petroleum refining, oilfield and refinery
chemicals, automobiles, specialty vehicles, sheets and
towels, soft drinks, salon hair care products and numerous
other manufacturing and service industries.
Publications Antitrust (1985 - Present)
--------------------------
Antitrust Policy for Declining Industries, with P. Pautler,
FTC Bureau of Economics, 1985, 108 pages.
"FERC's Acceptance of Market-Based Pricing: An Antitrust
Analysis," with Barry C. Harris, The Electricity Journal,
June 1992, pp. 38-51.
"Competitive Issues in Electric Utility Mergers," with
Bruce M. Owen, International Merger Law, October 1992.
"Antitrust Analysis of Electric Utility Mergers after the
Energy Policy Act," with Bruce M. Owen, International Merger
Law, February 1993.
"Flawed Reasoning," with Bruce M. Owen, Public Utilities
Fortnightly, July 15, 1993, pp. 25-27. (On FERC's decision
not to investigate competitive effects on the Entergy/GSU
merger.)
Electric Utility Mergers: Principles of Antitrust analysis,
with Bruce M. Owen, Praeger, Westport, CT, 1994.
"Odd Bedfellows," Energy, June 1996, pp. 9-14. (On
impediments to electric utility mergers.)
"FERC Must Fix Its Electric Utility Merger Policy," The
Electricity Journal, October 1996, pp. 32-43.
________________
Curriculum Vitae
Mark W. Frankena
Pg. 8
<PAGE>
Exhibit No. ___ (MWF-1)
Page 9 of 12
Publications "Electric Utility mergers: A U.S. Perspective on Market
(cont.) Power" ("Fusiones de Empresas de Servicios Electricos:
Perspectiva Esadounidense del Poder Sobre el Mercado"),
prepared for the Spanish National Electric Regulatory
Commission, January 1997.
"Market Power in the Spanish Electric Power Industry,"
Spanish National Electric Regulatory Commission, March 1997.
"Why Applicants Should Use Computer Simulation Models to
Comply with the FERC's New Merger Policy," with John R.
Morris, Public Utilities Fortnightly, Feb. 1, 1997, pp. 22-
26.
"Competitive Issues in Mergers between Electric and Gas
Companies," in Where Are We Now? Electric Power in
Transition, ABA Aug. 1997.
"Analyzing Market Power Using Appendix A of FERC's Merger
Policy Statement," CCH Power and Telecom Law,
January/February 1998.
"Competition Simulation Models Enter the World of Energy
Litigation," with John R. Morris, Power, ABA Section of
Antitrust Law, Winter 1998, pp. 8-12.
Addressing Market Power: The Next Step in Electric
Restructuring, with R. J. Binz, Competition Policy
Institute, June 1998, 81 pages. (Available free at
http://www.cpi.org)
------------------
"Geographic Market Delineation for Electric Utility
Mergers," accepted for publication in The Antitrust
Bulletin.
"Vertical Mergers: Analysis of Competitive Effects in
Markets for Electric Power," attached to comments of Edison
Electric Institute on FERC's merger policy in Docket No.
RM98-4, Aug. 24, 1998.
_________________
Curriculum Vitae
Mark W. Frankena
Pg. 9
<PAGE>
Exhibit No. ___ (MWF-1)
Page 10 of 12
Publications "An Economic Evaluation of the Federal Communications
(cont.) Commission's Commercial Mobil Radio Services Spectrum Cap,"
with B.M. Owen, attached to comments of AT&T Wireless
Services in FCC WT Docket No. 98-205, Jan. 25, 1999.
"Antitrust Pitfalls for Electric and Gas Utilities that
compete with District Energy," CCH Power and Telecom Law,
July/Aug. 1999, pp. 19-29.
Consumer Protection (1985)
--------------------------
Alcohol Advertising, Consumption and Abuse, with others, FTC
Bureau of Economics, 1985, 53 pages.
Urban Economics (1973 - 1987)
-----------------------------
"Income Distributional Effects of Urban Transit Subsidies,"
Journal of Transport Economics and Policy, September 1973,
pp. 215-230.
"Alternative Modes of Rent control," Urban Studies, October
1975, pp. 303-308.
"A Bias in Estimating Urban Population Density Functions,"
Journal of Urban Economics, January 1978, pp. 35-45.
"The Demand for Urban Bus Transit in Canada," Journal of
Transport Economics and Policy, September 1978, pp. 280-303.
Urban Transportation Economics, Butterworths, Toronto, 1979,
141 pages. (Japanese edition, 1983)
Economic Analysis of Provincial Land Use Policies in
Ontario, with D.T. Scheffman, University of Toronto Press,
1980, 171 pages.
________________
Curriculum Vitae
Mark W. Frankena
pg. 10
<PAGE>
Exhibit No. ___ (MWF-1)
Page 11 of 12
Publications "A Theory of Development Controls in a 'Small' City,"
(cont.) with D.T. Scheffman, Journal of Public Economics, April
1981, pp. 203-234.
"The Effects of Alternative Urban Transit Subsidy Formulas,"
Journal of Public Economics, June 1981, pp. 337-348.
"Intrametropolitan Location of Employment," Journal of Urban
Economics, September 1981, pp. 256-269.
Urban Transportation Financing: Theory and Policy,
University of Toronto Press, 1982, 232 pages.
"The Efficiency of Public Transport Objectives and Subsidy
Formulas," Journal of Transport Economics and Policy,
January 1983, pp. 67-76.
An Economic Analysis of Taxicab Regulation, with P. Pautler,
FTC Bureau of Economics, May 1984, 176 pages.
"Taxicab Regulation: An Economic analysis," with P. Pautler,
in R. Zerbe, ed., Research in Law and Economics, Vol. 9, JAI
Press, Greenwich, Conn., 1986, pp. 129-65.
"Capital-Biased Subsidies, Bureaucratic Monitoring and Bus
Scrapping," Journal of Urban Economics, 1987, pp. 180-93.
International Trade (1972 - 1975)
---------------------------------
"Restrictions on Exports by Foreign Investors: The Case of
India," Journal of World Trade Law, September -October 1972,
pp. 575-593.
"Marketing Characteristics and Prices of Exports of
Engineering Goods from India," Oxford Economic Papers, March
1973, pp. 127-132.
________________
Curriculum Vitae
Mark W. Frankena
Pg. 11
<PAGE>
Exhibit No. ___ (MWF-1)
Page 12 of 12
Publications "The Industrial and Trade Control Regime and Product
(cont.) Designs in India," Economic Development and Cultural Change,
January 1974, pp. 249-264.
"Devaluation, Recession and Non-Traditional Manufactured
Exports from India," Economic Development and Cultural
Change, October 1975, pp. 109-137.
"Revival and Expansion of Export Subsidies" (co-author),
Chapter 7 of J.N. Bhagwati and T.N. Srinivasan, Foreign
Trade Regimes and Economic Development: India, National
Bureau of Economic Research, New York, 1975, pp. 99-110.
Corporate Finance (1969 - 1971)
-------------------------------
"The Yield Spread Between New and Seasoned Corporate Bonds,"
with J.W. Conard, in J.M. Guttentag and P. Cagan, eds.,
Essays on Interest Rates, Vol. 1, National Bureau of
Economic Research, 1969, pp. 143-222.
"The Influence of Call Provisions and Coupon Rate on the
Yields of Corporate Bonds," in J.M. Guttentage, ed., Essays
on Interest Rates, Vol. 2, National Bureau of Economic
Research, New York, 1971, pp. 134-186.
________________
Curriculum Vitae
Mark W. Frankena
Pg. 12
<PAGE>
Attachment 2
RATEPAYER PROTECTION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Protection Affected
by PowerGen
Description of Merger?
Customer Ratepayer Protection (Yes/No)
- ------------------------------------------------------------------------------------------------------------------------------
Full-Service Wholesale Requirements Customers
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
City of Barbourville, KY . Base rate cap for 5 years No
City of Bardstown, KY . No changes to base rates under Section 205 for 5 years
City of Bardwell, KY absent extraordinary circumstances*
City of Benham, KY . Allocable share of total $4.5 million base rate
City of Corbin, KY reduction through monthly credits for non-fuel merger
City of Falmouth, KY savings over 5 years
City of Frankfort, KY . Allocable share of total estimated $4.5 million reduction
City of Madisonville, KY in fuel costs through fuel adjustment clause over 10 years
City of Nicholasville, KY . No costs of merger included in fuel adjustment clause
City of Providence, KY . Guaranteed minimum credit for entitlement to SEPA power
- ------------------------------------------------------------------------------------------------------------------------------
Berea College . Base rate cap for 5 years No
. No changes to base rates under Section 205 for 5 years absent
extraordinary circumstances*
. Allocable share of total $4.5 million base rate reduction
through monthly credits for non-fuel merger savings over 5
years
. Allocable share of total estimated $4.5 million reduction in
fuel costs through fuel adjustment clause over 10 years
. No costs of merger included in fuel adjustment clause
- ------------------------------------------------------------------------------------------------------------------------------
Partial-Requirements Wholesale Service Customer
- ------------------------------------------------------------------------------------------------------------------------------
City of Paris, KY . Base rate cap for 5 years No
. No changes to base rates under Section 205 for 5 years absent
extraordinary circumstances*
. Allocable share of total $4.5 million base rate reduction
through monthly credits for non-fuel merger savings over 5
years
. Allocable share of total estimated $4.5 million reduction in
fuel costs through fuel adjustment clause over 10 years
. No costs of merger included in fuel adjustment clause
. Guaranteed minimum credit for entitlement to SEPA power
- ------------------------------------------------------------------------------------------------------------------------------
_________________________________
* "Extraordinary circumstances" defined as a change in law or the occurrence of
circumstances or events that materially impair or damage LGE/KU's credit or operations.
Applicants commit not to deem the Merger or the incurrence of costs associated therewith as
"extraordinary circumstances."
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Protection Affected
by PowerGen
Description of Merger?
Customer Ratepayer Protection (Yes/No)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Other Sales Agreements
- ------------------------------------------------------------------------------------------------------------------------------
East Kentucky Power Corp. . Will not file for Section 205 change for five years in No
Indiana Municipal Power Agency rates absent extraordinary circumstances
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Wholesale Transmission
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
East Kentucky Power Corp. . Same fixed rate for base load No
(Interconnection Agreement with KU) . New lower single-system tariff rate for demand above base load
. Will not file for Section 205 change in rates for five years
absent extraordinary circumstances
- ------------------------------------------------------------------------------------------------------------------------------
East Kentucky Power Corp. . Will not file for Section 205 change in rates absent extraordinary No
(Interconnection Agreement with LG&E) circumstances
- ------------------------------------------------------------------------------------------------------------------------------
East Kentucky Power Corp. . New single-system tariff rate (base plus additional load) No
(KU-East Kentucky Gallatin Agreement) (rate decrease)
. Will not file for Section 205 change in rates for five years
absent extraordinary circumstances
- ------------------------------------------------------------------------------------------------------------------------------
Tennessee Valley Authority . Contract rate for monthly maximum reservation remains unchanged No
. New lower single-system rate for demand above monthly maximum
demand
. Will not file for Section 205 change in rates for five years
absent extraordinary circumstances
. LG&E commitment not to exercise right to terminate transmission
agreement for five years
- ------------------------------------------------------------------------------------------------------------------------------
Indiana Municipal Power Agency . Grandfathered existing transmission rate for 5 year period No
Illinois Municipal Electric Agency . Will not file for Section 205 change in rates for five years
absent extraordinary circumstances
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Attachment 3
See Existing Electric Generating Facilities (filed on paper on Form SE on April
26, 2000, File No. 70-9671).
<PAGE>
Attachment 4
LOUISVILLE GAS AND ELECTRIC COMPANY FRANCHISES
- ------------------------------------------------------------------------------
City Kind of Franchise Date of Expiration
- ------------------------------------------------------------------------------
Anchorage Gas and Electric January 27, 1995
- ------------------------------------------------------------------------------
Audubon Park Gas March 28, 2003
- ------------------------------------------------------------------------------
Bancroft Gas and Electric April 6, 1991
- ------------------------------------------------------------------------------
Barbourmeade Gas and Electric March 21, 2003
- ------------------------------------------------------------------------------
Bardstown Gas March 8, 2006
- ------------------------------------------------------------------------------
Bedford Gas December 5, 2006
- ------------------------------------------------------------------------------
Beechwood Village Gas and Electric April 1, 1995
- ------------------------------------------------------------------------------
Bellemeade Gas and Electric May 14, 1999
- ------------------------------------------------------------------------------
Bellewood Gas and Electric April 12, 1991
- ------------------------------------------------------------------------------
Blue Ridge Manor Gas and Electric November 15, 2004
- ------------------------------------------------------------------------------
Brandenburg Gas and Electric September 14, 2001
- ------------------------------------------------------------------------------
Briarwood Gas and Electric April 9, 1999
- ------------------------------------------------------------------------------
Broadfields Gas and Electric April 16, 1999
- ------------------------------------------------------------------------------
Brownsboro Farm Gas and Electric August 7, 1987
- ------------------------------------------------------------------------------
Brownsboro Village Gas and Electric June 10, 1995
- ------------------------------------------------------------------------------
Cambridge Gas and Electric November 14, 1994
- ------------------------------------------------------------------------------
Campbellsburg Gas September 25, 2007
- ------------------------------------------------------------------------------
Cold Stream Gas and Electric November 17, 2005
- ------------------------------------------------------------------------------
Creekside Gas and Electric April 10, 1998
- ------------------------------------------------------------------------------
Crestwood Gas and Electric December 13, 1991
- ------------------------------------------------------------------------------
Crossgate Gas and Electric February 17, 1989
- ------------------------------------------------------------------------------
Druid Hills Gas and Electric April 21, 1991
- ------------------------------------------------------------------------------
Eminence Gas August 3, 2002
- ------------------------------------------------------------------------------
Fairmeade Gas and Electric March 3, 1995
- ------------------------------------------------------------------------------
Forest Hills Gas and Electric March 2, 2001
- ------------------------------------------------------------------------------
Graymoor-Devondale Gas and Electric February 17, 2001
- ------------------------------------------------------------------------------
Hickory Hill Gas and Electric August 15, 1999
- ------------------------------------------------------------------------------
Hillview Gas and Electric November 18, 1994
- ------------------------------------------------------------------------------
Hodgenville Gas April 10, 1999
<PAGE>
- ------------------------------------------------------------------------------
Hollow Creek Gas and Electric August 3, 1991
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Hollyvilla Gas and Electric October 13, 2001
- ------------------------------------------------------------------------------
Houston Acres Gas and Electric February 12, 1999
- ------------------------------------------------------------------------------
Indian Hills Gas and Electric November 1, 2002
- ------------------------------------------------------------------------------
Jeffersontown Gas and Electric May 7, 1993
- ------------------------------------------------------------------------------
Keenland Gas and Electric April 21, 1999
- ------------------------------------------------------------------------------
Kingsley Gas and Electric September 3, 2001
- ------------------------------------------------------------------------------
LaGrange Gas July 6, 1990
- ------------------------------------------------------------------------------
Langdon Place Gas and Electric April 8, 1998
- ------------------------------------------------------------------------------
Lincolnshire Gas and Electric April 15, 1995
- ------------------------------------------------------------------------------
Loretto Gas May 18, 2007
- ------------------------------------------------------------------------------
Louisville Gas October 15, 1996
- ------------------------------------------------------------------------------
Louisville (Gooch) Electric Perpetual
- ------------------------------------------------------------------------------
Lyndon Gas and Electric December 9, 2005
- ------------------------------------------------------------------------------
Lynnview Gas and Electric May 5, 1995
- ------------------------------------------------------------------------------
Manor Creek Gas and Electric May 26, 1992
- ------------------------------------------------------------------------------
Maryhill Estates Gas and Electric May 18, 2007
- ------------------------------------------------------------------------------
Meadow Vale Gas and Electric March 8, 1988
- ------------------------------------------------------------------------------
Meadowbrook Farm Gas and Electric March 1, 1996
- ------------------------------------------------------------------------------
Meadowview Estates Gas and Electric April 23, 1995
- ------------------------------------------------------------------------------
Middletown Gas and Electric November 15, 1999
- ------------------------------------------------------------------------------
Minor Lane Heights Gas and Electric February 9, 2001
- ------------------------------------------------------------------------------
Moorland Gas and Electric February 10, 2001
- ------------------------------------------------------------------------------
Mt. Washington Gas and Electric June 9, 1995
- ------------------------------------------------------------------------------
Muldraugh Gas and Electric March 3, 1995
- ------------------------------------------------------------------------------
New Castle Gas August 3, 2002
- ------------------------------------------------------------------------------
Norbourne Estates Gas and Electric May 6, 1995
- ------------------------------------------------------------------------------
Northfield Gas and Electric August 27, 1999
- ------------------------------------------------------------------------------
Norwood Gas and Electric December 16, 1996
- ------------------------------------------------------------------------------
Old Brownsboro Place Gas and Electric July 5, 1998
- ------------------------------------------------------------------------------
Orchard Grass Hills Gas and Electric June 8, 2002
<PAGE>
- ------------------------------------------------------------------------------
Peewee Valley Gas and Electric June 2, 1995
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Pioneer Village Gas and Electric September 17, 1995
- ------------------------------------------------------------------------------
Plantation Gas and Electric February 16, 2001
- ------------------------------------------------------------------------------
Pleasureville-(Henry County) Gas May 10, 2003
- ------------------------------------------------------------------------------
Pleasureville-(Shelby County) Gas May 10, 2003
- ------------------------------------------------------------------------------
Plymouth Village Gas and Electric January 25, 1998
- ------------------------------------------------------------------------------
Radcliff Gas April 18, 1998
- ------------------------------------------------------------------------------
Richlawn Gas and Electric June 8, 1990
- ------------------------------------------------------------------------------
River Bluff Gas and Electric August 8, 2008
- ------------------------------------------------------------------------------
Rolling Hills Gas and Electric July 12, 2006
- ------------------------------------------------------------------------------
Seneca Gardens Gas and Electric December 20, 2002
- ------------------------------------------------------------------------------
Shepherdsville Gas and Electric August 13, 2001
- ------------------------------------------------------------------------------
Shively Gas and Electric May 24, 2002
- ------------------------------------------------------------------------------
Simpsonville Gas May 14, 1999
- ------------------------------------------------------------------------------
Smithfield Gas August 7, 2002
- ------------------------------------------------------------------------------
South Park View Gas and Electric October 14, 2001
- ------------------------------------------------------------------------------
Spring Valley Gas and Electric November 20, 2005
- ------------------------------------------------------------------------------
St. Matthews Gas and Electric March 11, 1995
- ------------------------------------------------------------------------------
St. Regis Park Gas and Electric October 17, 1994
- ------------------------------------------------------------------------------
Strathmoor Gardens Gas and Electric November 10, 2006
- ------------------------------------------------------------------------------
Strathmoor Manor Gas and Electric March 12, 1999
- ------------------------------------------------------------------------------
Strathmoor Village Gas and Electric February 6, 1999
- ------------------------------------------------------------------------------
Sycamore Electric October 6, 2000
- ------------------------------------------------------------------------------
Ten Broeck Gas and Electric April 15, 2000
- ------------------------------------------------------------------------------
Thornhill Gas and Electric May 7, 1998
- ------------------------------------------------------------------------------
Vine Grove Gas April 3, 1998
- ------------------------------------------------------------------------------
Wellington Gas and Electric August 16, 2006
- ------------------------------------------------------------------------------
West Buechel Gas and Electric August 12, 1994
- ------------------------------------------------------------------------------
West Point Gas and Electric April 5, 2002
- ------------------------------------------------------------------------------
Westwood Gas and Electric December 5, 1987
- ------------------------------------------------------------------------------
Whipps Millgate Gas and Electric September 15, 1989
<PAGE>
- ------------------------------------------------------------------------------
Wildwood Gas and Electric November 21, 2005
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Winding Falls Gas and Electric July 17, 1998
- ------------------------------------------------------------------------------
Windy Hills Gas and Electric December 9, 1994
- ------------------------------------------------------------------------------
Woodland Hills Gas and Electric October 27, 2001
- ------------------------------------------------------------------------------
Woodlawn Park Gas and Electric May 19, 1995
- ------------------------------------------------------------------------------
Worthington Hills Gas and Electric October 19, 2002
- ------------------------------------------------------------------------------
<PAGE>
MUNICIPALITIES WITHOUT LG&E FRANCHISES
- ------------------------------------------------------------------------------
City Date of Expiration
- ------------------------------------------------------------------------------
Broeck Pointe
- ------------------------------------------------------------------------------
Cherrywood Village
- ------------------------------------------------------------------------------
Devondale
- ------------------------------------------------------------------------------
Douglass Hills
- ------------------------------------------------------------------------------
Fincastle
- ------------------------------------------------------------------------------
Fox Chase
- ------------------------------------------------------------------------------
Glenview
- ------------------------------------------------------------------------------
Glenview Hills
- ------------------------------------------------------------------------------
Glenview Manor
- ------------------------------------------------------------------------------
Goose Creek
- ------------------------------------------------------------------------------
Green Spring
- ------------------------------------------------------------------------------
Hebron Estates
- ------------------------------------------------------------------------------
Hills and Dales
- ------------------------------------------------------------------------------
Hunters Hollow
- ------------------------------------------------------------------------------
Hurstbourne
- ------------------------------------------------------------------------------
Hurstbourne Acres
- ------------------------------------------------------------------------------
Indian Hills - (Cherokee Section)
- ------------------------------------------------------------------------------
Mockingbird Valley
- ------------------------------------------------------------------------------
Murray Hill
- ------------------------------------------------------------------------------
Park Lake
- ------------------------------------------------------------------------------
Parkway Village
- ------------------------------------------------------------------------------
Poplar Hills
- ------------------------------------------------------------------------------
Prospect
- ------------------------------------------------------------------------------
Riverwood
- ------------------------------------------------------------------------------
Robinswood
- ------------------------------------------------------------------------------
Rolling Fields
- ------------------------------------------------------------------------------
Springlee
- ------------------------------------------------------------------------------
Spring Mill
- ------------------------------------------------------------------------------
Watterson Park
- ------------------------------------------------------------------------------
Goshen
- ------------------------------------------------------------------------------
<PAGE>
List of KU Franchises and Their Date of Expiration
<TABLE>
<CAPTION>
DATE OF DATE OF DATE OF
CITY EXPIRATION CITY EXPIRATION CITY EXPIRATION
- ---- ---------- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C>
Columbia 06/30/00 Clay 05/11/13 Smithfield 02/21/15
Lexington 06/30/00 Russel Spring 05/13/13 Sharpsburg 03/06/15
Manchester 06/30/00 Jamestown 05/17/13 Livingston 03/25/15
Richmond 06/30/00 Springfield 07/13/13 Butler 04/13/15
Wallings 06/30/00 Lawrenceburg 10/04/13 Dover 04/03/15
Winchester 06/30/00 Slaughters 11/02/13 Perryville 04/06/15
Glenco 11/05/01 Irvine 11/22/13 Germantown 04/10/15
London 11/23/01 Eminence 02/14/14 Warsaw 05/08/15
Eubank 12/07/01 Central City 03/09/14 Worthville 05/15/15
Washington 04/19/02 Cave City 04/04/14 Harrodsburg 07/11/15
Hodgenville 06/28/02 Centertown 04/04/14 Hustonville 08/01/15
Crofton 02/17/03 LaGrange 04/04/14 Lakeview Heights 09/04/15
Lynch 03/08/03 Lancaster 04/04/14 Bedford 09/18/15
Beaver Dam 04/11/03 Lebanon Junction 04/04/14 Wilmore 09/19/15
Mortons Gap 05/02/03 Corydon 04/12/14 Rockport 10/10/15
White Plains 06/06/03 Clarkson 04/13/14 Campbellsburg 12/28/15
Ferguson 03/05/04 Sonora 04/14/14 Fredonia 03/11/16
Bradfordsville 05/10/04 Caneyville 04/19/14 Eddyville 04/01/16
Cumberland 03/08/05 Flemingsburg 05/02/14 Mt. Olivet 04/01/16
Clinton 02/03/06 Simpsonville 05/03/14 Mentor 04/09/16
LaCenter 02/11/06 Beattyville 05/09/14 California 04/17/16
Harlan 03/10/06 Lebanon 05/09/14 Bonnieville 05/02/16
Williamsburg 03/10/06 Uniontown 05/09/14 Ravenna 05/06/16
Owenton 04/01/06 Island 06/06/14 Ghent 05/14/16
Kuttawa 04/07/06 Kevil 06/06/14 Danville 05/25/16
</TABLE>
<PAGE>
List of KU Franchises and Their Date of Expiration (continued)
<TABLE>
<CAPTION>
DATE OF DATE OF DATE OF
CITY EXPIRATION CITY EXPIRATION CITY EXPIRATION
- ---- ---------- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C>
Science Hill 06/03/06 Mt. Vernon 06/06/14 Corinth 07/01/16
Somerset 09/22/06 Munfordville 06/06/14 Nortonville 07/01/16
Loretto 02/02/07 Calhoun 06/07/14 Owingsville 07/08/16
Salem 02/03/07 New Haven 06/11/14 Nicholasville 08/08/16
Mackville 05/22/07 Powderly 06/21/14 Nebo 12/05/16
Fairfield 09/12/07 Sacramento 06/21/14 Carlisle 04/14/17
Sturgis 11/09/07 Gratz 07/14/14 Loyall 05/12/17
Hiselville 04/18/08 Upton 08/16/14 Wheatcroft 05/12/17
Middlesboro 04/19/08 Versailles 09/06/14 Salt Lick 07/01/17
Horse Cave 11/07/08 Pineville 09/13/14 Sanders 07/07/17
Stanford 01/05/09 Stamping Ground 10/02/14 Milton 07/10/17
Elizabethtown 07/17/09 Brooksville 10/17/14 Camargo 08/08/17
Dawson Springs 05/07/10 Midway 10/17/14 Georgetown 09/17/17
Marion 01/21/11 Waverly 11/01/14 Shelbyville 10/22/17
Barlow 02/12/11 Hanson 11/21/14 Hartford 10/23/17
Jeffersonville 03/12/11 Burgin 12/05/14 Liberty 11/03/17
Morganfield 04/25/11 Greensburg 12/05/14 Campbellsville 12/01/17
Drakesboro 05/15/11 Wicklifee 12/06/14 St. Charles 12/01/17
Cynthiana 03/10/12 Greenville 12/08/14 Evarts 12/16/17
Junction City 11/12/12 Broadhead 12/12/14 Burnside 01/05/18
Columbus 02/01/13 Crab Orchard 01/05/15 Livermore 02/17/18
Pleasureville 02/01/13 Sebree 02/06/15 North Middletown 02/17/18
Earlington 02/23/13 Carrollton 02/07/15 Millersburg 06/01/18
Radcliffe 03/16/13 Taylorsville 02/07/15 Dixon 06/08/18
Leitchfield 04/05/13 Bloomfield 02/13/15 Sadieville 09/01/18
Vine Grove 04/05/13 Morehead 02/13/15 Sparta 01/04/19
McHenry 05/03/13 Prestonville 02/13/15 Mt. Sterling 06/15/19
New Castle 05/03/13 Berry 02/14/15 Augusta 06/16/19
Paris Will Not Sign**
</TABLE>
<PAGE>
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
LOUISVILLE GAS AND ELECTRIC COMPANY )
KENTUCKY UTILITIES COMPANY ) Docket No. EC00-___-000
MERGER SUB )
NOTICE OF FILING
Take notice that on March 24, 2000, Louisville Gas and Electric Company
("LG&E") and Kentucky Utilities Company ("KU") on behalf of themselves and their
affiliates holding jurisdictional assets (collectively, the "LG&E Companies")
and Merger Sub, submitted for filing an application under Section 203 of the
Federal Power Act (16 U.S.C.ss.824b) and Part 33 of the Commission's Regulations
(18 C.F.R.ss.33.1 eq. seq. (1998)) seeking the Commission's approval and related
authorizations to effectuate the indirect change in control over jurisdictional
assets of the LG&E companies that will occur as a result of the merger of an
indirect, wholly-owned subsidiary of PowerGen plc ("Merger Sub") with and into
LG&E Energy Corp. ("LEC"), the parent holding company of the LG&E Companies.
Through the merger, LEC, which will be the surviving entity, and the LG&E
Companies will become indirect, wholly-owned subsidiaries of PowerGen plc
("PowerGen"), a public limited company organized under the laws of England and
Wales.
The Application requests waiver of the requirements to file exhibits B, C,
D, E, and F as specified in Section 33.3 of the Commission's regulations. The
Application states that it includes all other information and exhibits required
by Part 33 of the Commission's regulations and the Commission's Merger Policy
Statement, and that the Merger Application easily satisfies the criteria set
forth in the Commission's Merger Policy Statement. The Application requests that
the Commission grant approval without condition, modification or an evidentiary,
trial-type hearing. The Application states that the parties are seeking to close
the transaction expeditiously and thus the Applicants have requested Commission
approval by the end of July, 2000.
The Applicants have served copies of the filing on the state commissions of
Kentucky, Virginia, and Tennessee and the parties of Docket No. EC98-2-000.
Any person desiring to be heard or to protest said application should file
a motion to intervene or protest with the Federal Energy Regulatory Commission,
888 First Street, N.E., Washington, D.C. 20426 in accordance with Rules 211 and
214 of the commission's Rules of Practice and Procedure (18 C.F.R. 385.211 and
18 C.F.R. 385.214). All such motions or protests should be filed on or before
_________________________. Protests will be considered by the Commission in
determining the appropriate action to be taken, but will not serve to make the
protestants parties to the proceeding. Any person wishing to become a party must
file a motion to intervene. Copies of this filing are on file with the
Commission and are available for public inspection.
<PAGE>
CERTIFICATE OF SERVICE
I, Stephen C. Palmer, certify that I have this day served the foregoing
Joint Application of Louisville Gas and Electric Company, Kentucky Utilities
Company and Merger Sub for Approval of Merger and Related Waivers and
Authorizations by first-class mail, postage pre-paid on the entities set forth
on the attached service list.
Dated at Washington, D.C. this 24th day of March, 2000.
/s/ Stephen C. Palmer, Esq.
Swidler Berlin Shereff Friedman, LLP
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
(202) 424-7576
<PAGE>
SERVICE LIST FOR
EC00-_ _ _-000
MR. MARTIN J. HUELSMANN, JR. MR. JOEL PECK, CLERK
EXECUTIVE DIRECTOR VIRGINIA STATE CORPORATION
PUBLIC SERVICE COMMISSION COMMISSION
211 SOWER BLVD. DOCUMENT CONTROL CENTER
FRANKFORT, KY 40601 TYLER BUILDING - SECOND FLOOR
1300 EAST MAIN STREET
BRENDA J. HELTON RICHMOND, VA 23219
KENTUCKY PUBLIC SERVICE
COMMISSION TENNESSEE REGULATORY
730 SCHENKEL LANE AUTHORITY
P.O. BOX 615 460 JAMES ROBERTSON PARKWAY
FRANKFORT, KY 40602 NASHVILLE, TENNESSEE
37243-0505
JAMES M. MILLER
SULLIVAN, MOUNT JOY, JOSEPH R. HARTSOE
STAINBACK & MILLER ENRON CORP.
100 ST. ANN BUILDING 1775 EYE STREET, N.W.
P.O. BOX 727 SUITE 800
OWENSBORO, KY 42302-0727 WASHINGTON, DC 20006
FREDERIC G. BERNER, JR., ESQ. DANIEL A. KING
SIDLEY & AUSTIN DIRECTOR & REGULATORY
1722 EYE STREET, N.W. COUNSEL
WASHINGTON, DC 20006 DYNEGY POWER MARKETING, INC.
805 15/TH/ STREET, N.W.
CHARLES W. RITZ, III SUITE 510-A
PARR, RICHEY, OBREMSKEY & WASHINGTON, DC
MORTON
1600 MARKET TOWER PAUL ATCHISON
TEN WEST MARKET STREET V. PRESIDENT
INDIANAPOLIS, IN 46204-2970 EAST KENTUCKY POWER
COOPERATIVE, INC.
4775 LEXINGTON ROAD
P.O. BOX 707
WINCHESTER, KY 40392-0707
<PAGE>
DAVID F. BOEHM RONALD D. EARL
BOEHM, KURTZ & LOWRY GENERAL MANAGER & CEO
2110 SOCIETY BANK CENTER ILLINOIS MUNICIPAL ELECTRIC
36 EAST 7/TH/ STREET AGENCY
CINCINNATI, OH 45202 919 SOUTH SPRING STREET
SPRINGFIELD, IL 62704
THOMAS C. TRAUGER
SPIEGEL & MCDIARMID RAJESHWAR G. RAO
1350 NEW YORK AVENUE, N.W. INDIANA MUNICIPAL POWER
WASHINGTON, DC 20005-4798 AGENCY
11610 NORTH COLLEGE AVENUE
LAWRENCE A. GOLLOMP CARMEL, IN 46032
US DEPT. OF ENERGY
OFFICE OF GENERAL COUNSEL GEORGE A. PORCH, ESQ.
1000 INDEPENDENCE AVENUE, S.W. BAMBERGER, FOREMAN, OSWALD
WASHINGTON, DC 20585 & HAHN
7/TH/ FLOOR HULMAN BUILDING
DONALD N. FURMAN, PRESIDENT P.O. BOX 657
PACIFICORP POWER MARKETING, EVANSVILLE, IN 47704-0657
INC.
700 NE MULNOMAH STEVEN M. SHERMAN, ESQ.
PORTLAND, OR 97232 PROLIANCE ENERGY LLC
11 MONUMENT CIRCLE
LEON JOUROLMON ASST. ADMIN. SUITE 2200
SOUTHEASTERN POWER INDIANAPOLIS, IN 46204-5178
ADMINISTRATION
U.S. DEPARTMENT OF ENERGY DENVER L. RAMPEY, JR. ASST. ADMIN.
2 SOUTH PUBLIC SQUARE SOUTHEASTERN POWER
ELBERTON, GA 30635 ADMINISTRATION
U.S. DEPARTMENT OF ENERGY
2 SOUTH PUBLIC SQUARE
ELBERTON, GA 30635
<PAGE>
VOLUME II
Exhibit G - Kentucky
See the Joint Application of PowerGen plc, LG&E Energy Corp., Louisville Gas and
Electric Company, and Kentucky Utilities Company, before the Kentucky Public
Service Commission, filed as Exhibit D-2.1 to PowerGen plc's Form U-1 filed
April 26, 2000, File No. 70-9671, and incorporated by reference herein.
<PAGE>
VOLUME III
Exhibit G - Virginia
See the Joint Application of PowerGen plc, LG&E Energy Corp., and Kentucky
Utilities Company before the Virginia Corporation Commission, filed as Exhibit
D-3.1 to PowerGen plc's Form U-1 filed April 26, 2000, File No. 70-9671, and
incorporated by reference herein.
<PAGE>
EXHIBIT D-2.1
March 15, 2000
VIA HAND DELIVERY
- -----------------
Mr. Martin J. Huelsmann, Jr.
Executive Director
Public Service Commission
211 Sower Blvd.
Frankfort, KY 40601
RE: In the Matter of: JOINT APPLICATION OF POWERGEN plc and LG&E ENERGY CORP.,
LOUISVILLE GAS AND ELECTRIC COMPANY AND KENTUCKY UTILITIES COMPANY FOR
APPROVAL OF MERGER
Case No. 200-095
Our File No.: 1/230
Dear Mr. Huelsmann:
Please find enclosed and accept for filing the original and fifteen copies
of the Joint Application of PowerGen plc, LG&E Energy Corp., and Louisville Gas
and Electric Company and Kentucky Utilities Company for approval of the merger.
Thank you for your assistance.
Yours very truly,
/s/ Kendrick R. Riggs
KRR/md
Enclosures
Cc: Persons shown on PSC Service List dated March 10, 2000
<PAGE>
COMMONWEALTH OF KENTUCKY
BEFORE THE PUBLIC SERVICE COMMISSION
In the Matter of:
JOINT APPLICATION OF )
POWERGEN plc, LG&E ENERGY CORP., )
LOUISVILLE GAS AND ELECTRIC COMPANY, ) CASE NO. 2000-095
AND KENTUCKY UTILITIES COMPANY )
FOR APPROVAL OF A MERGER )
JOINT APPLICATION
-----------------
PowerGen plc ("PowerGen"), LG&E Energy Corp. ("LG&E Energy"), Louisville
Gas and Electric Company ("LG&E"), and Kentucky Utilities Company ("KU")
(collectively referred to as "Applicants"), by counsel, hereby petition the
Commission for approval, pursuant to KRS 278.020(4) and (5), of the transfer of
ownership and control of LG&E and KU, all in accordance with the terms of the
Agreement and Plan of Merger dated as of February 27, 2000, between PowerGen and
LG&E Energy ("the Agreement").
I. Introduction
1. Between February 25 and 27, 2000, the Boards of Directors of PowerGen
(acting through a subcommittee on authority granted earlier by the full board)
and LG&E Energy held meetings and approved a merger between LG&E Energy and
Merger Sub (a corporation to be formed and indirectly owned by PowerGen for the
purpose of facilitating the merger) and related transactions. A true copy of
the Agreement is attached as Appendix A to this Application. Under the
Agreement, LG&E Energy will merge with Merger Sub; LG&E Energy will survive the
merger; Merger Sub will cease to exist; LG&E Energy will become an indirect
subsidiary of PowerGen; and LG&E and KU will remain subsidiaries of LG&E Energy.
LG&E Energy will
<PAGE>
consequently have four (4) first tier subsidiaries -- LG&E, KU, LG&E Capital
Corp. and LG&E Energy Marketing, Inc. In addition, to comply with the Public
Utility Holding Company Act of 1935 ("PUHCA"), LG&E Energy Services, Inc. will
become a first tier subsidiary of LG&E Energy, as more fully discussed below.
There will be additional companies between LG&E Energy and PowerGen, each of
which will be organized under the laws of either a member state of the European
Union or a state of the United States. All of the intermediate companies will
be, directly or indirectly, wholly owned by PowerGen and will have no public or
private institutional equity or debt holders. Such structures are typical for
U.K.-U.S. cross-border transactions and will exist primarily for the purpose of
creating an economically efficient and viable structure for completing the
transaction and owning LG&E Energy.
II. Applicants
2. PowerGen is a public limited company formed under the laws of England
and Wales. PowerGen's ordinary shares are traded on the London Stock Exchange,
and its American Depository Receipts are listed on the New York Stock Exchange.
PowerGen is a holding company that was formed in 1998 following a corporate
reorganization that made PowerGen UK plc ("PowerGen UK"), a subsidiary of
PowerGen, the main operating subsidiary of the group. PowerGen is one of the
world's major independent power businesses and, through PowerGen UK, has become
one of the United Kingdom's leading integrated electricity and gas companies.
PowerGen UK was created as a result of the privatization and restructuring of
the electricity industry in England and Wales in 1990. PowerGen, through its
subsidiaries (PowerGen and its subsidiaries sometimes collectively referred to
herein as "PowerGen"), owns and operates nine power stations across England and
Wales with a generating capacity of approximately 10,000 MW, and competes in the
UK's "electricity pool" through which wholesale electric power is
2
<PAGE>
traded. In 1998, PowerGen acquired East Midlands Electricity ("EME"), the third
largest regional electric distribution company in England and Wales, which at
that time supplied some 2.3 million residential and business customers.
PowerGen's retail business now supplies electricity and gas to some 2.6 million
customer accounts and is on target to meet its objective of 5 million by 2002.
PowerGen also conducts trading, shipping and pipeline operations. PowerGen
is the UK's leading developer and operator of combined heat and power plants
(known as cogeneration in the U.S.), is involved in renewable energy ventures,
and is a leading independent power project developer with projects in Europe,
India and the Asian Pacific area.
The mailing address of PowerGen is 53 New Broad Street, London EC2M 1SL,
England. PowerGen is not a public utility in Kentucky as that term is defined
by KRS 278.010(3). Charts showing PowerGen's corporate structure before and
after the merger are attached, respectively, as Appendices B and C to this
Application. PowerGen's Articles of Association and Memorandum of Association
are attached as Appendix D to this Application.
3. LG&E Energy is a corporation organized pursuant to Kentucky law. Its
post office address is 220 West Main Street, Louisville, Kentucky 40202. By
Order dated May 25, 1990, in Case No. 89-374, the Commission approved the
reorganization of LG&E as a regulated subsidiary of LG&E Energy, and determined
that LG&E Energy is not a public utility as defined by KRS 278.010(3). The
record in that case is on file with the Commission and is incorporated by
reference in this Application. In Case No. 97-300, the Commission approved the
merger of KU's then-parent company with and into LG&E Energy with LG&E Energy
being the surviving company. In Case No. 97-300, the Commission again
determined that LG&E Energy is not a public utility as defined by KRS 278.010.
The record in Case No. 97-300 is on file with the
3
<PAGE>
Commission and is incorporated by reference in this Application. Pursuant to 807
KAR 5:001 (S)8(3), a certified copy of LG&E Energy's Articles of Incorporation
is attached as Appendix E to this Application. A chart depicting LG&E Energy's
corporate structure is attached as Appendix F to this Application.
4. LG&E is a Kentucky corporation with the same post office address as
LG&E Energy. LG&E is a utility as defined by KRS 278.010(3)(a) and (b),
provides retail electric service to approximately 360,000 customers and retail
gas service to approximately 290,000 customers in 17 counties in Kentucky, and
is subject to this Commission's jurisdiction as to its retail rates and service.
A certified copy of LG&E's Articles of Incorporation is attached as Appendix G
to this Application.
5. KU is a corporation organized pursuant to Kentucky and Virginia law.
KU's post office address is One Quality Street, Lexington, Kentucky 40507. KU
is a utility as defined by KRS 278.010(3)(a), provides retail electric service
to approximately 478,000 customers in 77 counties in Kentucky and five counties
in southwestern Virginia, and is subject to this Commission's jurisdiction as to
its retail rates and service in Kentucky. A certified copy of KU's Articles of
Incorporation is attached as Appendix H to this Application. In Case No. 97-
300, by Order dated September 12, 1997, the Commission approved the merger of
KU's parent company with and into LG&E Energy, with LG&E Energy being the
surviving parent company. As a result of that merger, KU joined LG&E as a
subsidiary of LG&E Energy.
III. The Merger Will Be Made in Accordance with Law
6. The merger will be consummated in accordance with law. LG&E Energy
was incorporated under Kentucky law on November 14, 1989, to become a holding
company for LG&E following the reorganization of LG&E and LG&E Energy.
Following merger with KU's
4
<PAGE>
then-holding company pursuant to the Commission's Order in Case No. 97-300, LG&E
Energy also became KU's holding company. Upon LG&E Energy's merger with Merger
Sub, it is expected that PowerGen and the intermediate companies between
PowerGen and LG&E Energy will become registered public utility holding companies
under the Public Utility Holding Company Act of 1935 ("PUHCA"), and that LG&E
Energy, LG&E and KU will become part of PowerGen's registered holding company
system. KU, by virtue of its ownership of an interest in Electric Energy, Inc.,
will remain a holding company, though exempt from registration under PUHCA.
After the merger, the Commission will have the same ratemaking and regulatory
authority to regulate the rates and services of LG&E and KU as it did before the
Merger. The merger will have no effect on LG&E's or KU's contractual
relationship with or ownership interest in the Ohio Valley Electric Corporation,
and no effect on KU's contractual relationship with or ownership interest in
Electric Energy, Inc. LG&E will continue in existence as a corporation organized
under Kentucky law. KU will continue in existence as a corporation organized
under Kentucky and Virginia law.
7. Both PowerGen and LG&E Energy shareholders must approve the merger.
PowerGen has scheduled its shareholder meeting for June 5, 2000, and LG&E Energy
expects to schedule a shareholder meeting in early June 2000.
8. Performance of the Agreement is subject to a number of other
conditions as well.
It is subject to approval by the Virginia State Corporation Commission, and
such regulatory approval as may be required by the Tennessee Regulatory
Authority.
Applicants must receive approval of the merger from the Federal Energy
Regulatory Commission ("FERC").
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Applicants must receive approval by the Securities and Exchange Commission
("SEC"), after which PowerGen and all the intermediate companies expect to
register with the SEC as holding companies under PUHCA. As a result of
provisions in PUCHA, Applicants plan to utilize a service company ("LG&E Energy
Services, Inc.") to provide LG&E and KU with administrative, management and
support services pursuant to a Service Agreement. The Kentucky regulatory
implications of PUHCA registration are discussed below.
A filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
will be made, but Applicants do not believe the merger implicates any provision
of the federal antitrust laws.
A filing under the Exon-Florio provisions of the Omnibus Trade and
Competitiveness Act of 1988 will be made, although Applicants do not believe
that the merger will affect national security interests or that any action will
be taken under that statute.
Copies of the final Service Agreement, as well as the other filings noted
herein, will be filed with this Commission when or shortly after they are filed
with the other commissions or agencies.
In addition, PowerGen may be required to make filings or give notice under
the United Kingdom's Electricity Act of 1989, the Fair Trading Act of 1973 and
regulations of the European Community.
Because the Applicants will undergo the aforementioned approvals, the
merger will be in accordance with the law.
IV. Corporate Structure and Regulation Following the Merger
9. After receipt of all necessary regulatory approvals and satisfaction
or waiver of other conditions to the consummation of the transaction, Merger Sub
will merge with LG&E Energy and LG&E Energy will be the surviving Kentucky
corporation. The merger structure is
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shown in Appendix I to this Application. After the merger, PowerGen will then
indirectly own 100% of the issued and outstanding stock of LG&E Energy, and LG&E
Energy will own 100% of the common stock of LG&E and KU. The holders of LG&E
Energy common stock will not become holders of PowerGen's ordinary shares, but
each share of LG&E Energy's common stock will be converted into the right to
receive $24.85 cash. The shares held by owners of PowerGen's ordinary shares
will not be converted or exchanged. The preferred stock and debt obligations of
LG&E and KU will not be changed, converted, or otherwise exchanged in the merger
and will continue to be the respective obligations of LG&E and KU following the
merger.
10. Following the merger, LG&E Energy will continue as a separate Kentucky
corporation with two direct operating utility subsidiaries: LG&E and KU. LG&E
will continue its separate corporate existence, operating under the name
"Louisville Gas and Electric Company." KU will continue its separate corporate
existence, operating under the name of "Kentucky Utilities Company."
11. At the time the merger becomes effective, PowerGen will promptly
increase the size of its Board of Directors to allow LG&E Energy's Chief
Executive Officer to be appointed to PowerGen's Board of Directors. LG&E
Energy's Chief Executive Officer shall also continue to serve as Chairman and
Chief Executive Officer of LG&E Energy. Some of the Directors of LG&E Energy at
the effective time of the merger will be invited to serve as members of a U.S.
Advisory Board to provide advice with respect to the operations of LG&E Energy
and its subsidiaries, business and regulatory developments in the United States,
and such other matters as the Advisory Board members, PowerGen, and LG&E Energy
shall mutually agree. Following the merger, LG&E Energy's Board of Directors
shall consist of three members, one of whom
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shall be the current Chairman of LG&E Energy prior to the merger. Similar
compositions for the boards of LG&E and KU are expected after the merger. The
respective corporate officers of LG&E and KU shall be entitled to maintain their
current titles and responsibilities as officers of LG&E and KU, respectively,
unless and until otherwise determined by LG&E's Board of Directors and KU's
Board of Directors, respectively.
12. LG&E and KU will continue to function as public utilities subject to
the regulatory jurisdiction of this Commission and, as to KU, the Virginia State
Corporation Commission, and, to the extent required by applicable law, the
Tennessee Regulatory Authority. The FERC will continue to regulate LG&E's and
KU's transmission services and wholesale rates as before the merger. LG&E will
continue to own and operate various non-jurisdictional subsidiaries consistent
with this Commission's approvals in Case No. 89-374, including those
subsidiaries engaged in the lease and operation of the facilities of Big Rivers
Electric Corporation as approved by this Commission in Case Nos. 97-204 and 97-
267.
Holding Company Registration Under PUHCA
----------------------------------------
13. PowerGen and the intermediate companies are expected, subject to SEC
approval of the merger, to register as holding companies under PUHCA. As
registered holding companies, they will be subject to various statutory and
administrative requirements under PUHCA. The SEC has jurisdiction over
registered holding companies and, among other things, places certain
restrictions on affiliate transactions including the holding companies' ability
to provide services to the utility operating subsidiaries, and the allocation of
costs to and from utility operating companies within the holding company
structure. As part of the merger approval under PUHCA, the SEC will review the
Applicants' non-utility operations, LG&E's continued operation as a combined gas
and electric company and the corporate structure
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proposed for the merged company. Further, the SEC will request certification
from state regulatory commissions confirming that they have the authority and
resources to protect ratepayers within their jurisdiction and intend to exercise
their authority.
14. The Applicants will request that the SEC approve the continued
operation of LG&E as a combination electric and gas utility. In the SEC filing,
the Applicants will demonstrate that continued operation by LG&E as a
combination electric and gas utility is in the public interest. The loss of the
ability to operate as a combination utility would result in higher costs for
both electric and natural gas service because the economies of shared services
and resources would be lost. Applicants will submit to the Commission a copy of
the SEC filing on this issue once it is available. The SEC will consider the
preference of this Commission when considering whether to allow continued,
combined operations. Applicants request that the Commission include in its
Order approving the merger a finding that it is in the public interest for LG&E
to remain a combination electric and gas utility.
15. Registration under PUHCA will also impose a number of restrictions on
the operations of PowerGen and its subsidiary companies that are not Foreign
Utility Companies ("FUCOs") as defined by Section 33 of PUHCA. These
restrictions include a requirement that the SEC approve in advance securities
issuances, sales and acquisitions of utility assets, and acquisitions of other
businesses. In addition, PUHCA limits the ability of registered holding
companies and their subsidiaries to engage in various businesses. Generally
stated, PUHCA limits a holding company's activities to utility operations,
activities needed to support utility operations, energy related businesses, and
telecommunications.
16. PUHCA prohibits registered holding companies from providing services
to operating utility subsidiaries for a fee, and further greatly restricts
operating companies from
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providing services directly to each other. Consequently, LG&E Energy Services,
Inc. will be formed as a service company subsidiary to LG&E Energy to provide
centralized administrative and corporate services. The SEC will then regulate
the provision of services and allocation of costs from LG&E Energy Services,
Inc. to LG&E and to KU to ensure that appropriate measures are used. Customers
will experience no change in utility service due to the establishment of LG&E
Energy Services, Inc. Services will be provided pursuant to the provisions of a
Service Agreement between LG&E, KU and LG&E Energy Services, Inc. A draft copy
of the Service Agreement is attached as Appendix J. The Service Agreement is not
yet finalized, and will be subject to SEC approval when filed. However, a copy
of the proposed Service Agreement will be provided to the Commission when filed
with the SEC, and an additional copy will be provided to the Commission when
approved by the SEC.
17. The SEC will have regulatory authority regarding the governance of
LG&E Energy Services, Inc. and the allocation of costs to the operating
utilities. The SEC regulations are designed to ensure that the activities
performed by the service company are "necessary or appropriate in the public
utility interest or for the protection of investors or consumers and to insure
that such [services] are performed economically and efficiently for the benefit
of such associated companies at cost, fairly and equitably allocated among such
companies." 15 U.S.C. (S)79m(b). Applicants believe that the proposed
corporate structure and PUHCA registration would not have a negative effect upon
the ability of the Commission to regulate LG&E and KU. Accounting for service
company costs will comply with the SEC's Uniform System of Accounts for Mutual
Service Companies and Subsidiary Service Companies under PUHCA, which for all
practical purposes is identical to the FERC Uniform System of Accounts. Costs
will either be directly assigned to the benefiting subsidiary or allocated using
allocation methods approved by
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the SEC. Applicants believe that the Commission can be assured that costs are
allocated between regulated and unregulated subsidiaries, and between utility
operating companies, in an appropriate manner with no adverse consequences to
utility customers. In addition, the SEC will have audit authority over all
transactions between LG&E Energy Services, Inc. and the operating companies
(LG&E and KU) and has historically invited both FERC and state regulatory
commissions to participate in this process. Consequently, this Commission can
participate in future SEC proceedings. Applicants also agree to permit the
Commission reasonable access to the books and records of not only LG&E Energy
and its subsidiaries, but to PowerGen and the intermediate companies, consistent
with the exercise of the Commission's jurisdiction and authority.
18. The merger will not alter the authority of the Commission to regulate
LG&E's and KU's utility operations. LG&E and KU will continue to be public
utilities under and subject to the Commission's jurisdiction. The merger and
subsequent holding company registrations will not prevent the Commission or FERC
from reviewing the books and records of either LG&E and KU or of their non-
utility affiliates or parents and the companies will provide access to their
personnel as well. After the merger, the Commission shall have the same
ratemaking and regulatory authority to regulate the rates and services of LG&E
and KU as it did before the merger. Furthermore, Applicants commit that they
will not assert that the SEC's jurisdiction legally preempts the Commission from
disallowing recovery in retail rates of the cost of goods and services that LG&E
or KU obtain from LG&E Energy Services, Inc., provided that LG&E and KU
otherwise retain the right to assert that the charges are reasonable and
appropriate.
19. Section 33(a)(2) of PUHCA (15 U.S.C. (S) 79z-5b) provides, inter alia,
that certain exemptions from its provisions afforded PowerGen UK and EME,
foreign utility companies, are
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not applicable unless every State commission having jurisdiction over the retail
electric rates of a public utility company that is an affiliate of PowerGen UK
and EME has certified to the SEC that it has the authority and resources to
protect ratepayers subject to its jurisdiction and that it intends to exercise
its authority.
20. Upon approval of the proposed merger, Applicants request that this
Commission certify to the SEC pursuant to Section 33(a)(2) of PUHCA that this
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 its authority.
V. The Merger Is for a Proper Purpose
21. The purpose of the merger is to make LG&E Energy part of a much larger
enterprise, well-positioned to serve customers given accelerating changes in the
energy industry across the world, while maintaining the historic connections
between both LG&E and KU and the communities they serve. The merger is critical
for ensuring that both LG&E and KU remain able to continue to meet their
commitments to their customers, to their communities and to the Commonwealth as
a whole.
22. Applicants recognize that the energy industry across the world has
entered a period of accelerating evolution, continuing deregulation and
regulatory change, and increased competition. In this environment, size and
scale have become critical and necessary prerequisites to success. The merger
will result in sharing the best practices to provide the best possible service
to customers at the lowest cost. By becoming part of a larger entity with
greater resources, LG&E and KU will be better able to utilize new, economically
beneficial developments in transmission and distribution technology, information
systems, and capital markets. The Earnings Sharing Mechanism that has been
established by the Commission for
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LG&E and KU provides the ideal means of providing customers with a share of any
benefits or cost reductions that may result from these efficiencies. Moreover,
because PowerGen's existing utility operations are outside the U.S., there will
be no increase in market concentration at either the wholesale or retail levels.
23. PowerGen's experience in the UK and elsewhere will also benefit
Kentucky consumers as the energy market evolves. In the past decade, the UK's
electricity and gas markets have been restructured as the industry has evolved
from a state owned monopoly to private ownership and competition. The solutions
reached in industry restructuring in the UK are themselves still evolving and
cannot be simplistically transplanted into the U.S. market. However, PowerGen's
experience and expertise will be important in advancing LG&E's and KU's efforts
in the competitive wholesale market, as well as in preparing LG&E and KU for
restructuring and in helping to ensure they are prepared to compete and serve
their customers well when retail restructuring occurs.
24. The merger brings benefits to customers, employees of LG&E Energy and
its subsidiaries, the Commonwealth as a whole and LG&E Energy's shareholders (a
majority of whom are residents of Kentucky).
After the merger, LG&E and KU will have the financial, technical, and
managerial capabilities that are needed to provide efficient customer service to
their utility customers. Customers will be better off as a result of this
transaction and may benefit from improved service quality and operating
efficiency resulting from reciprocal adoption of best practices. For employees,
the merger represents an opportunity for growth as Kentucky becomes the U.S.
base of operations for a large international entity. The transaction ensures
that LG&E Energy and its employees remain at the forefront of an increasingly
competitive U.S. electric industry, while
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foreign operations provide opportunities for LG&E Energy employees abroad. For
Kentucky, the merger ensures that utility operations in Kentucky will remain
headquartered in Kentucky, and that Kentucky will be the base for PowerGen's
other anticipated U.S. operations. LG&E Energy's shareholders will receive a 58%
premium over the trading price for their shares as of the last trading day
before announcement of the merger.
25. PowerGen is firmly committed to maintaining and supporting the
relationships between LG&E and KU and the communities they serve. Following the
merger, KU will continue to maintain its headquarters in Lexington, Kentucky,
and LG&E will continue to maintain its headquarters in Louisville, Kentucky.
26. The merger will enable LG&E and KU to become part of a merged entity
with the size, resources, scale, and the experience to succeed in the rapidly
evolving energy industry. Though part of a larger entity, LG&E and KU will
continue to be regulated utilities subject to this Commission's jurisdiction
with a continuing focus on serving their customers. The merger thus serves the
interests of LG&E's and KU's customers, their communities and of the
Commonwealth as a whole, and is therefore for a proper purpose.
VI. Following the Merger, LG&E and KU Will Have Abilities to Provide Reasonable
Service
27. Following the merger, the customers of LG&E and KU will continue to
receive the same high-quality energy services and do business with their
respective utilities as before the merger. PowerGen has the same level of
commitment to high quality services that LG&E Energy has, and will fully support
maintaining the LG&E and KU track record for service. As a result, LG&E and KU
will continue to be highly responsive to customer needs. LG&E will remain in
Louisville, Kentucky, and will maintain a substantial presence in Louisville and
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LG&E's service territory. KU's headquarters will remain in Lexington, Kentucky,
and KU will maintain a substantial presence throughout its service territory in
order to conduct its statewide operations. LG&E and KU will continue to operate
through regional offices with local service personnel and line crews available
to respond to customers' needs.
28. LG&E and KU will continue as direct subsidiaries of LG&E Energy and
will continue to have the financial, technical, and managerial abilities
required to provide high-quality, reliable service consistent with their
statutory obligation to provide reasonable service.
(a) Financial Abilities
29. Following the merger, LG&E and KU intend to continue to maintain their
balanced capital structure. PowerGen has in place bank facilities to finance
the acquisition of LG&E Energy's common stock. PowerGen may also dispose of
certain of its existing assets or some of LG&E Energy's (other than Kentucky
jurisdictional) assets as part of its overall plan to refocus its strategic
direction. Neither LG&E Energy nor any of LG&E Energy's subsidiaries, including
LG&E and KU, will incur any additional indebtedness or issue any securities to
finance any part of the purchase price paid by PowerGen for the LG&E Energy
stock.
PowerGen's Board of Directors does not intend to allow dividend policy to
affect adversely the financial integrity or rates of either LG&E and KU after
the merger. Both utilities will also benefit from PowerGen's enhanced ability
to attract capital at reasonable rates and PowerGen's sustained ability to
maintain already-strong mortgage bonds and investment grade credit ratings. If
for any reason PowerGen is unable to provide needed capital, both LG&E and KU
will have the ability in the future to seek alternative funding, subject to
necessary regulatory approval. PowerGen assures the Commission that no cross
guarantees of debt will be in place between the utilities and PowerGen or non-
utility affiliates of PowerGen. LG&E and KU will
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provide financing for PowerGen's investments only through payment of dividends
from shareholder-owned funds and will not guarantee the credit of any affiliates
without Commission approval. Neither LG&E Energy nor any of LG&E's subsidiaries,
including LG&E and KU, will borrow or issue any security, incur any debt or
pledge any assets to finance any part of the purchase price for LG&E Energy's
shares. PowerGen represents and agrees that the costs of the purchase of LG&E
Energy's shares shall be excluded from the cost of service and rates of LG&E and
KU.
(b) Technical and Managerial Abilities
30. LG&E and KU will continue to operate through regional offices with
local service personnel and field crews available to respond to customers' needs
and personnel necessary to operate and dispatch their existing systems. The
post-merger management of LG&E Energy is expected to include the existing
management of LG&E Energy, LG&E and KU.
LG&E and KU will continue to be able to draw on the larger and more diverse
managerial and employee pool that resulted from the merger approved by this
Commission in Case No. 97-300. In addition, because both utilities will be part
of a much larger entity with a more prominent international position, both
should be better able to attract and retain the most qualified job applicants
and employees. As part of the larger global entity, employees should also
benefit from new and wider career opportunities. PowerGen is one of the UK's
largest generating companies, and owns the UK's third largest regional electric
distribution company. Moreover, PowerGen has, over the last decade,
transitioned from a government owned monopoly to a participant in a competitive
marketplace. This experience and expertise will be available to LG&E and KU as
the U.S. market restructures and evolves. Neither LG&E nor KU will serve as an
employer of last resort for employees, assets, or products associated with
failed
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or troubled non-utility affiliate ventures of either PowerGen or LG&E Energy. As
a result of the merger, the management of LG&E and KU stand to be strengthened
and will not suffer a diversion of valuable management resources.
31. Following the consummation of the merger, LG&E Energy's Board of
Directors will consist of three persons, one of whom will be the current
Chairman. Some of the existing Directors of LG&E Energy will be invited to
serve as members of a U. S. Advisory Board to provide advice with respect to
operations of LG&E Energy and its subsidiaries' businesses, regulatory
developments in the United States generally, and such other matters upon which
the members of the Advisory Board, PowerGen, and LG&E Energy shall mutually
agree. The current Chairman and CEO of LG&E Energy will become a member of
PowerGen's Board of Directors and will continue as Chairman and Chief Executive
Officer of LG&E Energy.
32. The merger preserves the heritage of the relationship that LG&E, KU
and the Commonwealth have built, and continues the charitable/civic/education
process that is of critical importance to the Commonwealth. After the effective
date of the merger, PowerGen has agreed to make, or to cause LG&E and KU
(through the LG&E Energy Foundation or otherwise) to continue to make, annual
charitable and community contributions to the communities they serve, and
otherwise maintain a substantial level of involvement in community activities in
the Commonwealth comparable to or greater than normal annual aggregate levels of
charitable contributions, community development, and related activities carried
on by LG&E and KU prior to the date of the merger. PowerGen acknowledges that
the primary purpose of the LG&E Energy Foundation is to support charitable
causes in LG&E's and KU's service territories, and shall cause and ensure that,
following the merger, it continues to support charitable causes in such service
territories. The Foundation will remain under the control of the Board of
Directors
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of LG&E Energy, and the Foundation's Board of Directors will consist, in
majority, of employees knowledgeable of community interests within the service
territories of LG&E and KU.
33. LG&E and KU will continue to support economic development within the
communities they serve and throughout the Commonwealth. Each currently works
closely with state and local economic development agencies to attract and retain
businesses and jobs in the Commonwealth. After the merger, LG&E and KU will not
only continue these activities, but, because they will be part of a larger
global operation, will have broader contacts worldwide and be better able to
both attract economic development to the Commonwealth and strengthen existing
relationships. For example, Toyota is not only one of KU's largest customers,
but one of PowerGen's customers as well. This increased worldwide presence and
increased connection will enhance their economic development efforts, as well as
those of the Commonwealth.
(c) Utility Accounts and Affiliate Transactions
34. Following consummation of the merger, LG&E and KU will continue to
operate as public utilities, will keep their respective books and records, will
make accounting entries according to the Uniform System of Accounts (LG&E Energy
Services, Inc.'s costs will comply with the SEC's essentially identical
system), and will render appropriate reports in the same manner as they do now.
Payment for the LG&E Energy shares will be recorded in PowerGen's books, not
those of LG&E Energy or its subsidiaries, which will neither incur debt nor
issue equity to fund the purchase of shares. After the merger, LG&E Energy,
LG&E, and KU also will continue to adhere to the applicable conditions described
in the Commission's orders in Case Nos. 89-374, 10296, and 97-300, including but
not limited to, reporting requirements, and
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access to the books and records of other affiliates and subsidiaries engaged in
transactions with LG&E and KU.
VII. The Merger Is Consistent with the Public Interest
35. The merger is consistent with the public interest. As indirect
subsidiaries of PowerGen, LG&E and KU will be part of a larger, stronger entity
with an international presence. They will be better able to withstand the
impact of increased competition and industry change, and better able to ensure
that their customers continue to receive the benefits flowing from their
combined operation. The operation of LG&E Energy as a wholly owned, indirect
subsidiary of PowerGen is essential to preserve the strength and stability of
LG&E Energy and its utility subsidiaries at a time of increasing change and
competition. The merger will preserve the benefits currently provided to
customers and is consistent with the public interest. The merger will not
detract from the benefits customers currently receive as a result of the merger
approved in Case No. 97-300, including LG&E's and KU's merger surcredits, and
the merger dispatch savings and lower fuel costs distributed through LG&E's and
KU's fuel adjustment clauses. The merger will have no impact on LG&E's and
KU's commitment to operate under the Earnings Sharing Mechanism tariffs.
Indeed, the framework created by the Earning Sharings Mechanism provides a
balanced approach to regulation within the Commonwealth.
VIII. Testimony and Exhibits
36. The Application is supported by appendices to this application. E.A.
Wallis, Chairman and Chief Executive of PowerGen, and Roger W. Hale, Chairman
and Chief Executive Officer of LG&E Energy have filed testimony regarding the
purpose of the merger and the managerial abilities of PowerGen, LG&E Energy,
LG&E and KU after the merger. Testimony by Caroline A. Sheers, Director of
Mergers and Acquisitions of PowerGen, describes
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PowerGen's financial ability to consummate the transaction, the financial
strength of the merged company after the transaction and the potential for
achieving efficiencies. Testimony by Michael D. Robinson, Vice President and
Controller of LG&E Energy, addresses the accounting issues following the merger.
Testimony by Dr. Karl McDermott, Vice President of National Economic Research
Associates, Inc., addresses criteria assessing whether a merger or acquisition
is in the public interest, and applies those criteria to the acquisition of LG&E
Energy by PowerGen. Dr. Donald J. Mullineaux, Director of the School of
Management at the Gatton College of Business and Economics at the University of
Kentucky addresses whether the acquisition is in the interest of the
Commonwealth and its citizens and discusses the benefits flowing from the
acquisition. Testimony by Robert M. Hewett, Group Executive of Regulatory
Affairs of LG&E and KU, addresses regulatory issues and the technical and
managerial capability LG&E and KU will have following the merger. The verified
testimony of the above listed witnesses is attached as Appendix K to this
Application.
WHEREFORE, Applicants request that the Commission, after hearing, enter a
final order as follows:
1. Finding that, after the acquisition of ownership and control of LG&E
Energy Corp. by PowerGen pursuant to the merger, Louisville Gas and Electric
Company and Kentucky Utilities Company will continue to have the financial,
technical, and managerial abilities necessary to provide reasonable service to
their respective customers, and that the transfer of ownership and acquisition
of control of Louisville Gas and Electric Company and Kentucky Utilities Company
is in accordance with law, for a proper purpose, and consistent with the public
interest pursuant to KRS 278.020;
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2. Approving the transfer of ownership of Louisville Gas and Electric
Company and Kentucky Utilities Company through the acquisition of ownership and
control of LG&E Energy Corp. by PowerGen upon the merger of Merger Sub into LG&E
Energy Corp. pursuant to KRS 278.020(4) and (5);
3. Determining that neither LG&E Energy Corp. nor PowerGen or any
intermediate company between LG&E Energy Corp. and PowerGen will, by reason of
ownership of all outstanding shares of common stock of LG&E Energy Corp., which
in turn owns all outstanding common shares of Louisville Gas and Electric
Company and Kentucky Utilities Company, be a utility in Kentucky as defined in
KRS 278.010(3) as they will not own, operate, or manage any facilities used in
connection with the generation, production, transmission, and distribution of
electricity to or for the public for compensation or own, operate, or manage any
facility used in connection with the production, manufacture, storage,
distribution, sale, or furnishing of natural or manufactured gas to or for the
public, for compensation for light, heat, power or other uses; and
4. Finding that it is in the public interest for LG&E to remain a
combination gas and electric utility following consummation of the merger.
5. Applicants further request that the Commission certify to the SEC
under Section 33(a)(2) of PUHCA that this Commission has the authority and
resources to protect the ratepayers of LG&E and KU subject to its jurisdiction
and it intends to exercise its authority.
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March 15, 2000 Respectfully submitted,
/s/ David Jackson
General Counsel
PowerGen plc
53 New Broad Street
London, EC2
/s/ John R. McCall,
Executive Vice President
General Counsel and Corporate Secretary
Michael S. Beer
Senior Corporate Attorney
LG&E Energy Corp.
220 West Main Street
Louisville, Kentucky 40202
/s/ Richard F. Newell
Kendrick R. Riggs
J. Wade Hendricks
Ann E. Eberle
Maureen M. Carr
OGDEN NEWELL & WELCH
1700 Citizens Plaza
500 West Jefferson Street
Louisville, Kentucky 40202
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CERTIFICATE OF SERVICE
----------------------
This is to certify that, on March 15, 2000, a copy of the foregoing was
filed with the Public Service Commission of Kentucky by hand delivery and sent
by overnight courier or mail, postage-prepaid to:
Hon. Elizabeth E. Blackford Hon. Don Meade
Hon. Dennis G. Howard, II Counsel for IBEW, Local 2100
Assistant Attorneys General Miller & Meade, P.S.C.
Office for Rate Intervention 802 Republic Bldg.
1024 Capital Center Drive 429 W. Muhammad Ali Blvd.
Frankfort, KY 40602 Louisville, KY 40202
Hon. David F. Boehm Hon. Edward W. Gardner
Hon. Michael L. Kurtz Hon. Michael Keith Horn
Boehm, Kurtz & Lowry Department of Law
2110 CBLD Center 200 East Main Street
36 East Seventh Street Lexington, KY 40507
Cincinnati, OH 45202
Mr. Jack E. Burch
Hon. Carol Raskin Executive Director
Legal Aid Society, Inc. Community Action Council
425 West Muhammad Ali Boulevard 892 Georgetown Street
Louisville, KY 40202 P. O. Box 11610
Lexington, KY 40576
Hon. David A. McCormick
General Attorney Hon. Anthony G. Martin
Office of The Judge Advocate General Attorney at Law
Department of the Army 325 Henry Clay Blvd.
(DAJA-RL 3970) Lexington, KY 40502
901 N. Stuart Street, Rm 713
Arlington, VA 22203-1837 Hon. Joe F. Childers
Kentucky Association for
Hon. Richard G. Raff Community Action
Staff Counsel 201 West Short Street, Suite 310
Public Service Commission Lexington, KY 40507
211 Sower Blvd.
Frankfort, KY 40601 Hon. W. Henry Graddy, IV
W. H. Graddy & Associates
Kentucky Resources Council
103 Railroad Street
P. O. Box 4307
Midway, KY 40347
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Hon. Mark W. Dobbins Mr. Robert L. Madison
Tilford, Dobbins, Alexander 5407 Baywood Drive
Buckaway & Black Louisville, KY 40241-1318
1400 One Riverfront Plaza
Louisville, KY 40202 Mr. Tom FitzGerald
Kentucky Resources Council, Inc.
Hon. Walker C. Cunningham, Jr. P.O. Box 1070
Jefferson County Attorney Frankfort, KY 40602
Suite 688, Starks Building
Louisville, KY 40202 Hon. John D. Myles
Attorney for KAPHCC
Hon. Iris Skidmore 413 Sixth Street
Hon. Ronald P. Mills Shelbyville, KY 40065
Counsel for NREPC
Office of Legal Services Mr. Robert M. Hewett
Capital Plaza Tower, 5/th/ Floor Group Executive - Regulatory Affairs
Frankfort, KY 40601 Kentucky Utilities Company
One Quality Street
Mr. John M. Stapleton Lexington, KY 40507
Director Division of Energy
663 Teton Trail Hon. James M. Miller
Frankfort, KY 40601 Sullivan, Mountjoy, Stainback
and Miller, P.S.C.
Michael S. Beer 100 St. Ann Building
Senior Corporate Attorney P.O. Box 727
LG&E Energy Corp. Owensboro, KY 42302-0727
220 West Main Street
Louisville, KY 40202 Hon. Douglas L. Beresford
Hon. George F. Hobday, Jr.
Mr. Kip Bowmar LONG ALDRIDGE & NORMAN, LLP
Executive Director 701 Pennsylvania Avenue, N.W.
Kentucky Association for Suite 600
Community Action Washington, DC 20004
900 Wilkinson Blvd.
Frankfort, KY 40601 /s/ Counsel for PowerGen, LG&E Energy,
Louisville Gas and Electric Company and
Kentucky Utilities Company
24
<PAGE>
Exhibit A: See Exhibit H to Section 203 Application
See Exhibit H to Joint Application of Louisville Gas and Electric Company,
Kentucky Utilities Company, and Merger Sub before the FERC, filed as Exhibit D-
1.1 to PowerGen plc's Form U-1 filed April 26, 2000, File No. 70-9671, and
incorporated by reference herein.
<PAGE>
Exhibit B
See PowerGen plc Corporate Chart filed as Exhibit F-1.1 to PowerGen plc's Form
U-1 filed April 26, 2000, File No. 70-9671, and incorporated by reference
herein.
See Description of the Companies in the PowerGen System, filed as Exhibit F-1.2
to PowerGen plc's Form U-1 filed April 26, 2000, File No. 70-9671, and
incorporated by reference herein.
<PAGE>
Exhibit C
See Combined PowerGen/LG&E Energy Corporate Chart filed as Exhibit F-3.1 to
PowerGen plc's Form U-1 filed April 26, 2000, File No. 70-9671, and incorporated
by reference herein.
<PAGE>
Exhibit D
THE COMPANIES ACT 1985
Company No. 3586615
The Registrar of Companies for England and Wales hereby certifies that
POWERGEN PLC (originally called POWERGEN 1998 PLC which name was changed by
special resolution on 9/th/ December 1998 to POWERGEN PLC) was incorporated
under the Companies Act 1985 as a public company on 19/th/ June 1998. **********
Given at Companies House, Cardiff the 8/th/ March 2000
<PAGE>
Company No: 3586615
MEMORANDUM
AND
ARTICLES OF ASSOCIATION
OF
PowerGen plc
9 December 1998
<PAGE>
CERTIFICATE OF INCORPORATION
ON CHANGE OF NAME
Company No. 3586615
The Registrar of Companies for England and Wales hereby certifies that
POWERGEN 1998 PLC
having by special resolution changed its name, is now incorporated under the
name of
POWERGEN PLC
Given at Companies House, London, the 9/th/ December 1998
MR. N. RICHARDS
For The Registrar Of Companies
<PAGE>
CERTIFICATE OF INCORPORATION
OF A PUBLIC LIMITED COMPANY
Company No. 3586615
The Registrar of Companies for England and Wales hereby certifies that
POWERGEN 1998 PLC
is this day incorporated under the Companies Act 1985 as a public company and
that the company is limited.
Given at Companies House, London, the 19/th/ June 1998
MISS S. BASHAR
For The Registrar of Companies
<PAGE>
See Memorandum of Association of PowerGen 1998 plc (filed on paper format on
Form SE on April 26, 2000, File No. 70-9671).
See Articles of Association of PowerGen 1998 plc (filed on paper format on Form
SE on April 26, 2000, File No. 70-9671).
See Memorandum and Articles of Association of PowerGen plc, filed as Exhibit A-1
to PowerGen plc's Form U-1 filed April 26, 2000, File No. 70-9671, and
incorporated by reference herein.
<PAGE>
Exhibit E
JOHN Y. BROWN III
SECRETARY OF STATE
CERTIFICATE OF EXISTENCE
I, JOHN Y. BROWN III, Secretary of State of the Commonwealth of Kentucky,
do hereby certify that according to the records in the Office of the Secretary
of State, LG&E ENERGY CORP. is a corporation duly organized and existing under
KRS Chapter 271.B whose date of incorporation is NOVEMBER 14, 1989 and whose
period of duration is PERPETUAL.
I further certify that all fees and penalties owed to the Secretary of
State have been paid; that articles of dissolution have not been filed; and that
the most recent annual report required by KRS 271B.16-220 has been delivered to
the Secretary of State.
I further certify that the following documents have been filed as follows
ARTICLES OF INCORPORATION OF LG&E ENERGY, CORP FILED NOVEMBER 14, 1989.
ARTICLES OF CORRECTION OF ARTICLES OF INCORPORATION OF LG&E ENERGY CORP.
CHANGING NAME TO LG&E ENERGY CORP FILED MARCH 2, 1990.
AMENDED AND RESTATED ARTICLES FILED AUGUST 9, 1990.
ARTICLES OF SHARE EXCHANGE OF LG&E ENERGY CORP. AND LOUISVILLE GAS AND
ELECTRIC COMPANY FILED AUGUST 15, 1990, EFFECTIVE AUGUST 17, 1990.
ARTICLES AMENDMENT FILED DECEMBER 10, 1990.
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
JULY 1, 1991;
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
NOVEMBER 22, 1991;
PAGE 2
<PAGE>
CONTINUED
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
MARCH 18, 1992;
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
JANUARY 25, 1994;
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
JULY 27, 1994;
ARTICLE OF AMENDMENT FILED MAY 10, 1996;
AMENDED AND RESTATED ARTICLES FILED NOVEMBER 4, 1996;
AMENDED AND RESTATED ARTICLES OF INCORPORATION FILED MAY 1, 1998;
ARTICLES OF MERGER OF KU ENERGY CORPORATION INTO LG&E ENERGY CORP. FILED
MAY 1, 1998;
CERTIFICATE OF ASSUMED NAME OF KU CREDIT CORP HAS BEEN ADOPTED BY LG&E
ENERGY CORP. FILED MAY 24, 1990.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my Official
Seal at Frankfort, Kentucky, this 28/TH/ day of FEBRUARY, 2000.
/s/ JOHN Y BROWN III
Secretary of State
Commonwealth of Kentucky
RL
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
LG&E ENERGY CORP.
Pursuant to the provisions of Sections 271B.10-030, 271B.10-060 and
271B.10-070 of the Kentucky Business Corporation Act, as amended, LG&E Energy
Corp., a Kentucky corporation (the "Company"), hereby adopts the following
Articles of Amendment and Restatement to its Amended and Restated Articles of
Incorporation, and certifies the following in connection with this amendment and
restatement.
FIRST: The name of the Company is LG&E Energy Corp.
SECOND: The Amended and Restated Articles of Incorporation filed herewith
as Exhibit A (the "Restatement"), contain amendments to Article
Fourth and Article Fourteenth thereof.
THIRD: The amendments to Article Fourth of the Restatement were
recommended by the Company's Board of Directors on May 20, 1997
and adopted by the Company's shareholders at a Special Meeting on
October 14, 1997 in the manner prescribed by the Kentucky
Business Corporation Act. The only voting group entitled to vote
on the foregoing was owners of record on August 8, 1997 of the
Corporation's Common Stock (without par value). The designation,
number of outstanding shares, number of votes entitled to be case
by the voting group entitled to vote on such amendment, and the
number of votes of the voting group indisputably represented at
the meeting were as follows:
<TABLE>
<CAPTION>
Number of Number of Number of votes
Outstanding votes entitled indisputably represented
Designation shares to be case at the meeting
------ ---------- --------------
<S> <C> <C> <C>
Common Stock 66,486,875 66,486,875 52,499,555.39
</TABLE>
FOURTH: The total number of votes cast for the amendments to Article
Fourth of the Restatement, against such amendment, and abstaining
regarding the amendment by the voting group entitled to vote on
such amendment was as follows: 49,738,586.696 votes for,
1,678,589.993 votes against and 1,082,378.707 votes abstaining.
The number of votes cast for such amendment by the voting group
was sufficient for approval by such voting group.
<PAGE>
FIFTH: The amendments to Article Fourteenth of the Restatement do not
require shareholder approval and were adopted by the Company's
Board of Directors on April 22, 1998.
SIXTH: The amendments contained in the Restatement do not provide for an
exchange, reclassification or cancellation of issued shares of
stock of the Company.
SEVENTH: As amended above, Articles First through Fourteenth of the
Company's Articles of Incorporation are restated in their
entirety as set forth in the Restatement. The Restatement,
together with the amendments contained therein, supersede the
original Amended and Restated Articles of Incorporation, as
amended, and all amendments thereto.
EIGHTH: The Restatement, containing the amendments adopted, shall be
effective at 7:00 a.m. E.D.T. on May 4, 1998 and shall read in
its entirety as set forth on Exhibit A attached hereto.
Dated: April 30, 1998
LG&E ENERGY CORP.
/s/ John R. McCall
Executive Vice President General Counsel
and Corporate Secretary
<PAGE>
See the Amended and Restated Articles of Incorporation of LG&E Energy, filed as
Exhibit 4.1 to Form 8-K of LG&E Energy dated May 4, 1998, File No. 1-10568, and
incorporated by reference herein.
<PAGE>
ARTICLES OF MERGER
OF
KU ENERGY CORPORATION INTO
LG&E ENERGY CORP.
Pursuant to the provisions of Section 271B.11-050 of the Kentucky Business
Corporation Act and the Agreement and Plan of Merger, dated as of May 20, 1997
(the "Plan of Merger") by and between KU Energy Corporation, a Kentucky
corporation ("KU Energy"), and LG&E Energy Corp., a Kentucky corporation ("LG&E
Energy"), LG&E Energy hereby submits the following Articles of Merger:
1. The Plan of Merger, as approved and adopted by separate resolution of
the respective Board of Directors of KU Energy and LG&E Energy at
their respective meetings on May 20, 1997, is attached hereto and made
a part hereof as Annex A. pursuant to the Plan of Merger upon
effectiveness of the merger, KU Energy will be merged with and into
LG&E Energy, with LG&E Energy as the surviving entity and, each issued
and outstanding share of common stock of KU Energy (except shares held
by KU Energy shareholders who perfect dissenters' rights with respect
thereto), together with associated stock purchase rights, will be
cancelled and converted into 1.67 shares (the "Exchange Ratio") of
common stock of LG&E Energy, together with associated stock purchase
rights.
2. The holders of LG&E Energy common stock approved the Plan of Merger at
a special meeting of LG&E Energy shareholders on October 14, 1997 (the
"LG&E Energy Meeting") The designation, number of outstanding shares,
and number of votes entitled to be cast by each voting group entitled
to vote separately on the Plan of Merger at the LG&E Energy Meeting
was as follows:
Number of Number of votes
Designation Outstanding shares entitled to be cast
----------- ------------------ -------------------
Common Stock 66,486,875 66,486,875
3. The total number of undisputed votes cast for approval of the Plan of
Merger by the above mentioned voting group at the LG&E Energy Meeting
was 51,148,571.327, and that number was sufficient for approval of the
Plan of Merger by that voting group.
4. The holders of KU Energy common stock approved the Plan of Merger at a
special meeting of KU Energy shareholders on October 14, 1997 (the "KU
Energy Meeting"). The designation, number of outstanding shares, and
number of votes
<PAGE>
entitled to be cast by each voting group entitled to vote separately
on the Plan of Merger at the KU Energy Meeting was as follows:
Number of Number of votes
Designation Outstanding shares entitled to be cast
----------- ------------------ -------------------
Common Stock 37,817,517 37,817,517
5. The total number of votes cast for approval of the Plan of Merger by
the above mentioned voting group at the KU Energy Meeting was
29,113,099, and that number was sufficient for approval of the Plan of
Merger by that voting group.
6. The effective time and date of these Articles of merger and the merger
effectuated hereby in the Commonwealth of Kentucky shall be 7:30 a.m.
E.D.T. on May 4, 1998.
Date: _____, 1998.
LG&E ENERGY CORP.
By: ______________________________
Name:
Title:
<PAGE>
See Agreement and Plan of Merger By and Between LG&E Energy Corp. and KU Energy
Corporation, filed as Annex A to LG&E Energy Corp.'s Registration Statement No.
333-34219 on Form S-4 filed August 22, 1997, and incorporated by reference
herein.
See Certificate of Assumed Name for KU Credit Corp. (filed on paper on Form SE
on April 26, 2000, File No. 70-9671).
<PAGE>
Exhibit F
See LG&E Energy Corporate Charts (filed on paper format on Form SE on April 26,
2000, File No. 70-9671).
<PAGE>
Exhibit G
CONTINUED
ARTICLES OF AMENDMENT FILED MAY 29, 1941;
ARTICLES OF AMENDMENT FILED SEPTEMBER 22, 1947;
ARTICLES OF AMENDMENT FILED SEPTEMBER 14, 1948;
ARTICLES OF AMENDMENT FILED NOVEMBER 5, 1956;
CORPORATION PROCESS AGENT CERTIFICATE FILED AUGUST 8, 1957;
CORPORATION PROCESS AGENT CERTIFICATE FILED JUNE 13, 1958;
ARTICLES OF AMENDMENT FILED MAY 9, 1962;
CORPORATION PROCESS AGENT CERTIFICATE FILED JUNE 18, 1964;
CORPORATION PROCESS AGENT CERTIFICATE FILED MAY 29, 1967;
ARTICLES OF AMENDMENT FILED MAY 15, 1969;
ARTICLES OF AMENDMENT FILED APRIL 3, 1973;
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT FILED APRIL
26, 1974;
ARTICLES OF AMENDMENT FILED MAY 21, 1974;
ARTICLES OF AMENDMENT FILED MAY 12, 1976;
ARTICLES OF AMENDMENT FILED JUNE 25, 1976;
ARTICLES OF AMENDMENT FILED JUNE 30, 1978;
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
JULY 10, 1978;
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
DECEMBER 18, 1978;
PAGE 3
CONTINUED
<PAGE>
JOHN Y. BROWN III
SECRETARY OF STATE
CERTIFICATE OF EXISTENCE
I, JOHN Y. BROWN III, Secretary of State of the Commonwealth of Kentucky,
do hereby certify that according to the records in the Office of the Secretary
of State, LOUISVILLE GAS AND ELECTRIC COMPANY is a corporation duly organized
and existing under KRS Chapter 271.B whose date of incorporation is July 2, 1913
and whose period of duration is Perpetual.
I further certify that all fees and penalties owed to the Secretary of
State have been paid; that articles of dissolution have not been filed; and that
the most recent annual report required by KRS 271B.16-220 has been delivered to
the Secretary of State
I further certify that the following documents have been filed as follows
ARTICLES OF AGREEMENT AND CONSOLIDATION BETWEEN LOUISVILLE LIGHTING COMPANY
LOUISVILLE GAS COMPANY AND KENTUCKY HEATING COMPANY FORMED BY CONSOLIDATION
LOUISVILLE GAS AND ELECTRIC COMPANY FILED JULY 2, 1913.
ARTICLES OF AMENDMENT FILED NOVEMBER 7, 1919.
ARTICLES OF AMENDMENT FILED NOVEMBER 25, 1922.
STATEMENT OF CORPORATION FILED FEBRUARY 19, 1925.
ARTICLES OF AMENDMENT FILED JULY 2, 1925;
ARTICLES OF AMENDMENT FILED OCTOBER 25, 1928;
ARTICLES OF AMENDMENT FILED OCTOBER 4, 1929;
STATEMENT OF CORPORATION FILED JANUARY 30, 1932;
ARTICLES OF AMENDMENT FILED SEPTEMBER 29, 1937;
PAGE 2
<PAGE>
ARTICLES OF AMENDMENT FILED SEPTEMBER 27, 1979;
ARTICLES OF AMENDMENT FILED MAY 14, 1981; STATEMENT OF CHANGE OF REGISTERED
OFFICE OR REGISTERED AGENT OR BOTH FILED JULY 12, 1982;
ARTICLES OF AMENDMENT FILED MAY 21, 1987;
RESTATED ARTICLES OF INCORPORATION FILED OCTOBER 8, 1987;
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
OCTOBER 5, 1988;
ARTICLES OF AMENDMENT FILED MAY 25, 1989;
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
JUNE 27, 1989;
ARTICLES OF SHARE EXCHANGE OF LG&E ENERGY CORP. AND LOUISVILLE GAS AND
ELECTRIC COMPANY FILED AUGUST 15, 1990, EFFECTIVE DATE AUGUST 17, 1990.
ARTICLES OF MERGER OF OHIO VALLEY TRANSMISSION CORPORATION (NON-QUALIFIED)
INTO LOUISVILLE GAS AND ELECTRIC COMPANY FILED AUGUST 15, 1990. EFFECTIVE
DATE AUGUST 17, 1990.
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
SEPTEMBER 18, 1990.
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
NOVEMBER 22, 1991.
ARTICLES OF AMENDMENT FILED FEBRUARY 6, 1992.
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
MARCH 18, 1992.
ARTICLES OF AMENDMENT FILED APRIL 8, 1993.
ARTICLES OF AMENDMENT FILED MAY 19, 1993.
PAGE 4
CONTINUED
<PAGE>
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
JANUARY 25, 1994.
STATEMENT OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH FILED
JULY 27, 1994.
AMENDED AND RESTATED ARTICLES FILED NOVEMBER 6, 1996.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my Official
Seal at Frankfort, Kentucky, this 28/th/ day of FEBRUARY 2000.
/s/ JOHN Y. BROWN III
Secretary of State
Commonwealth of Kentucky
RL
<PAGE>
CERTIFICATE
Pursuant to the provisions of KRS 271B.10-070, Louisville Gas and Electric
Company, a Kentucky corporation (the "Company"), files herewith Articles of
Amendment and Restated Articles of Incorporation and hereby certifies that:
FIRST: The name of the Company is Louisville Gas and Electric Company.
SECOND: The Articles of Amendment and Restated Articles of Incorporation
(the "Restatement") filed herewith contains no amendments to the
Company's Articles of Incorporation which require shareholder
approval.
THIRD: Articles First through Fourteenth of the Company's Articles of
Incorporation are restated in their entirety as set forth in the
Restatement filed herewith, a copy of which is attached hereto.
FOURTH: The Restatement of the Company's Articles of Incorporation was
adopted by the Company's Board of Directors as of September 4,
1996.
Dated September 4, 1996
LOUISVILLE GAS AND ELECTRIC COMPANY
By /s/ John R. McCall
Title Executive Vice President, General Counsel
And Corporate Secretary
<PAGE>
See Restated Articles of Incorporation of LG&E, filed as Exhibit 3.06 to Form
10-Q of LG&E for the quarter ended September 30, 1996, File No. 2-26720, and
incorporated by reference herein.
<PAGE>
Exhibit H
JOHN Y. BROWN III
SECRETARY OF STATE
CERTIFICATE
I, JOHN Y. BROWN III, Secretary of State for the Commonwealth of Kentucky, do
certify that the foregoing writing has been carefully compared by me with the
original record thereof, now in my official custody as Secretary of State and
remaining on file in my office, and found to be a true and correct copy of
AMENDED AND RESTATED ARTICLES OF INCORPORATION OF KENTUCKY UTILITIES COMPANY
FILED OCTOBER 28, 1992, STATEMENT OF CHANGE OF REGISTERED AGENT FILED OCTOBER
28, 1992, ARTICLES OF AMENDMENT FILED DECEMBER 11, 1993.
IN WITNESS WHEREOF, I have hereunto set my
hand and affixed my official seal. Done at
Frankfort this 28th day of February, 2000
/s/ Secretary of State Commonwealth of Kentucky
<PAGE>
See Amended and Restated Articles of Incorporation of KU, filed as Exhibit 4.03
and 4.04 to form 8-K of Kentucky Utilities, dated December 10, 1993, File
1-3463, and incorporated by reference herein.
<PAGE>
Exhibit I
See Combined PowerGen/LG&E Energy Corporate Chart Showing the Merger (filed on
paper format on Form SE on April 26, 2000, File No. 70-9671).
<PAGE>
Exhibit J
See Standard Form of Service Contract for U.S. Utility Subsidiaries as amended,
filed as Exhibit B-2 to PowerGen plc's Form U-1 filed April 26, 2000, File No.
70-9671, and incorporated by reference herein.
<PAGE>
Exhibit K
COMMONWEALTH OF KENTUCKY
BEFORE THE PUBLIC SERVICE COMMISSION
In the Matter of:
JOINT APPLICATION OF )
POWERGEN plc, LG&E ENERGY CORP., )
LOUISVILLE GAS AND ELECTRIC COMPANY, ) CASE NO. 2000-095
AND KENTUCKY UTILITIES COMPANY )
FOR APPROVAL OF A MERGER )
TESTIMONY
OF
E. A. WALLIS
CHAIRMAN AND CHIEF EXECUTIVE
POWERGEN plc
<PAGE>
INTRODUCTION
------------
Q. Please state your name and business address.
A. My name is Edmund A. Wallis. My business address is 53 New Broad Street,
London, EC2M 1SL, England.
Q. What is your position?
A. I am Chairman and Chief Executive of PowerGen plc ("PowerGen").
Q. Please describe your work experience and educational background.
A. I have spent my whole career in the electric utility business. I have
experience in generation, transmission and distribution, as well as in the
government-owned, regulated, and unregulated parts of the business. I
joined the United Kingdom's state-run electric system in 1955 as a trainee
at the Drakelow Power Station. After holding a number of engineering
appointments in coal, oil, and nuclear generating stations, I became
Station Manager at the Oldbury Nuclear Power Station in 1978. I went on to
become Head of Power System Operations in 1981 and Divisional Director of
Operations in 1986. In 1988, I was appointed Chief Executive of PowerGen,
following the government's announcement that the electricity industry was
to be privatized. I was appointed Chairman and Chief Executive of PowerGen
in July 1996, and have held that position since then. As Chairman and
Chief Executive, I run the United Kingdom's second-largest generator, one
of its largest regulated distribution companies, and a major international
independent power developer.
I qualified in Electrical Engineering at the University of Aston in
1962, and in General Management Studies at Henley Management College in
1978. In 1996, I
<PAGE>
received an Honorary Degree of Doctorate of Technology from Brunel
University and an Honorary Degree of Doctorate of Science from Aston
University. In 1997, I was invited to become a Fellow of the Royal Academy
of Engineering. Details regarding my career and education are described in
Appendix A to my testimony.
Q. Would you please describe PowerGen?
A. PowerGen is the United Kingdom's leading integrated electricity and gas
company and has a growing presence in the international energy business.
PowerGen is an overall holding company. Its principal subsidiary, PowerGen
UK plc ("PowerGen UK"), was created as a result of the privatization and
restructuring of the United Kingdom's electric system. PowerGen is the
leading supplier of electricity to British industry and commerce, and also
a major supplier of natural gas. Currently, we serve approximately 14% of
the total electric generation market in England and Wales with
approximately 10,000 MW of coal, gas, oil, and renewable power plants.
PowerGen has over 67,000 km of overhead and underground electric lines
distributing electricity to 2.3 million residential and commercial
customers. Within the United Kingdom, our retail operation has a total of
over 2.6 million electric and gas accounts, and we supply gas to an
additional 500,000 customers for two other regional distribution companies.
PowerGen trades gas, electricity, and oil in seven different energy markets
in the United Kingdom and Europe, and is the United Kingdom's leading
developer and operator of combined heat and power cogeneration plants.
Internationally, PowerGen is involved in power projects, operations, or
holdings totaling approximately 8,400 MW in Germany, Portugal, Hungary,
India, Indonesia, Thailand, South Korea, and Australia. PowerGen's equity
2
<PAGE>
share in operational and construction projects is equivalent to 3,100 MW.
Upon completion of this merger, PowerGen will have business operations on
five continents.
THE JOINT APPLICATION
---------------------
Q. What is the purpose of the Joint Application?
A. The purpose of the Joint Application is to respectfully request approval
from the Kentucky Public Service Commission ("Commission") for the transfer
of ownership and control over Louisville Gas and Electric Company ("LG&E")
and Kentucky Utilities Company ("KU") through the merger of their present
parent, LG&E Energy Corporation ("LG&E Energy"), with Merger Sub so that
LG&E Energy becomes an indirect, wholly-owned subsidiary of PowerGen. The
request is supported by this Joint Application and the testimony attached
to it.
Q. Please provide a general overview of the testimony supporting the filing.
A. My testimony presents a general overview of the proposed merger; outlines
the approvals necessary for its consummation; explains how the merger will
be financed; describes the financial, technical, and managerial abilities
LG&E and KU will have after the merger; identifies benefits that will flow
from the merger; discusses operations after the merger; and acknowledges
the authority the Commission will continue to have after the merger.
Roger W. Hale, Chairman and Chief Executive Officer of LG&E Energy,
explains why PowerGen and LG&E Energy are merging and addresses the purpose
of the merger. He also describes changes that will or will not occur after
the merger.
Caroline Sheers, Director of Mergers and Acquisitions of PowerGen,
further explains why the merger is occurring and discusses the financial
aspects of the merger, including efficiencies the combined company will
strive to achieve after the merger.
3
<PAGE>
Dr. Karl McDermott, Vice President of National Economic Research
Associates, Inc., addresses criteria assessing whether a merger or
acquisition is in the public interest, and applies those criteria to the
acquisition of LG&E Energy by PowerGen.
Dr. Donald J. Mullineaux, Director of the School of Management at the
Gatton College of Business and Economics at the University of Kentucky
addresses whether the acquisition is in the interest of the Commonwealth
and its citizens and discusses the benefits flowing from the acquisition.
Michael D. Robinson, Controller of LG&E Energy, addresses accounting
and reporting issues involved with the merger, including affiliate
transaction issues.
Robert M. Hewett, Group Executive of Regulatory Affairs of LG&E and
KU, addresses the impact the merger will have and discusses the purpose of
the merger and important regulatory issues, including the ability the
Commission will have to regulate LG&E and KU after the merger.
THE PROPOSED MERGER
-------------------
Q. Please explain the growing interest of British energy companies in United
States utilities.
A. The United Kingdom electricity industry was privatized in 1990. As part of
that privatization, the generation market was deregulated and competition
was introduced for large retail electricity customers such that they were
able to choose their electricity supplier. By 1998, competition had been
extended in phases to all retail electricity customers, including domestic
households. Consequently, over the past ten years, British energy
companies like PowerGen have developed unique skills both in the United
4
<PAGE>
Kingdom and overseas (e.g., in Australia), and have gained experience in
competitive markets. They want to put what they have learned to use.
The ability of United Kingdom utilities to utilize their competitive
advantages fully is hampered, though, by the limited size of the U.K.
energy market. In the U.K. energy market, companies can only grow so large
domestically before giving rise to market power concerns. Therefore,
British companies look to foreign markets. Nowhere are the opportunities
as great as in the United States, which has the world's largest energy
market and has just begun to deregulate. Moreover, there is a common bond
of language that facilitates good working relationships between United
States and British concerns.
Q. What is PowerGen's strategic vision?
A. PowerGen is one of the United Kingdom's best-known energy companies and
currently is involved in projects in Europe, India, Asia Pacific, and
Australia. In recent years, it has been seeking opportunities to gain a
major platform for growth in the United States. PowerGen's vision is to
transfer to the United States its skills as a leading international
integrated electricity and gas company that has developed expertise and
experience in operating regulated and unregulated energy companies in
competitive markets. The United States represents a key world energy market
and PowerGen believes that to become and remain one of the world's top
energy companies it must expand into this market. The energy business is
rapidly becoming globalized, which means that, to remain competitive,
energy companies must have a presence in multiple national markets and use
that presence to bring all parts of the business up to the best global
standards. We believe that, with the right partner in the United States, we
can build a strong
5
<PAGE>
presence here that will let us use the skills we have developed in the
United Kingdom and elsewhere overseas to bring real value to both
shareholders and customers.
Q. How does the acquisition as a result of this merger fit into PowerGen's
strategic vision?
A. This is a major step toward realizing our vision. LG&E Energy is the right
partner for PowerGen. It represents a significant investment in an
efficient and focused generation, transmission, and distribution business
with a strong operational track record as a low-cost energy provider that
will benefit further from PowerGen's core skills of excellent asset
management and strong customer service. LG&E Energy also brings with it a
high-quality management team with proven generation, transmission, and
distribution expertise and a shared view of the industry's future
development in the United States. The merger provides PowerGen with the
right point of entry into the United States, given Kentucky's strong and
growing economy and its fair and balanced regulatory environment. It
further provides us with an excellent regional platform for growth as the
Midwestern region of the United States accounts for approximately 25% of
the country's electricity market, which alone equates to total electric
consumption greater than the whole of France and Germany combined. After
more than two years of investigation, we believe that with LG&E Energy we
have made the right acquisition in the right market of the right company
with the right management and in the right regulatory environment.
Q. Please provide a general description of the merger.
A. On February 27, 2000, PowerGen and LG&E Energy signed an agreement under
which PowerGen will acquire all outstanding shares of LG&E Energy. Each
issued and outstanding share of LG&E Energy common stock, without par
value, will be canceled
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and converted into the right to receive $24.85 in cash, valuing the equity
at a total of $3.2 billion. PowerGen will assume $2.2 billion in debt from
LG&E Energy, bringing the total value of the acquisition to $5.4 billion.
Under the terms of the agreement, LG&E Energy will become a wholly-
owned indirect subsidiary of PowerGen, but will keep its name and
Louisville headquarters. To comply with the requirements of the Public
Utility Holding Company Act of 1935 ("PUHCA"), PowerGen will become a
registered holding company with the United States Securities and Exchange
Commission ("SEC"). A service company named LG&E Energy Services, Inc.
will be created as a first-tier subsidiary of LG&E Energy. That company
will provide services to both LG&E and KU, which will remain first-tier
subsidiaries of LG&E Energy. PowerGen will not be the direct parent
company of LG&E Energy. Instead, under the new corporate structure,
various wholly owned subsidiaries of PowerGen will be interposed as
intermediate companies between PowerGen and LG&E Energy. All of the
intermediate companies will be directly or indirectly wholly-owned by
PowerGen and will have no public or private institutional equity or debt
holders. Such structures are typical for U.K.-U.S. cross-border
transactions and will exist primarily for the purpose of creating an
economically efficient and viable structure for completing the transaction
and owning LG&E Energy.
Details of our corporate structure before and after the transaction,
as well as the corporate method of consummating the merger, are set forth
in our application along with an explanation of the requirements and impact
of PUHCA on the transaction.
7
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BENEFITS EXPECTED TO FLOW FROM THE MERGER
-----------------------------------------
Q. Please describe some of the advantages the merger provides.
A. The proposed merger combines two financially-sound, well-managed companies.
It will result in significant benefits to customers, employees, the
Commonwealth of Kentucky and shareholders. LG&E Energy, LG&E, and KU will
keep their well-respected names, efficient corporate structure and Kentucky
headquarters. As a result, Kentucky will continue to enjoy the nation's
highest quality of utility service, and some of the nation's lowest rates
will be preserved. Of similar importance, LG&E Energy's strong presence as
a major corporation in the state will be preserved. The company will
continue its longstanding commitments to economic development, charitable
giving, and community involvement throughout the state.
PowerGen's experience with benchmarking the best practices of the
world will provide LG&E and KU with the opportunity to continue to improve
and operate more efficiently in the future, with any savings being passed
on to ratepayers through the Earnings Sharing Mechanism recently
established by the Commission for LG&E and KU.
The merger will not adversely affect the low rates and high-quality
service LG&E's and KU's customers have come to expect. One contributing
factor toward PowerGen's decision to acquire LG&E Energy is the rating LG&E
and KU received from JD Power & Associates as Number One in customer
satisfaction. PowerGen is committed to providing customers with the same
level of service they have come to expect, and believe this will make the
combined company even more responsive as
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consumers demand even higher quality service in an increasingly-competitive
environment.
PowerGen has significant expertise in existing competitive markets in
the United Kingdom and Australia. This will provide LG&E Energy with the
expertise to remain competitive in the face of increasing competition. It
allows PowerGen to apply its extensive international experience in a
competitive electricity generation market and retail distribution to the
electricity industry in the United States at a time of strategic
significance in the reform and restructuring of that industry. PowerGen's
expertise will help LG&E and KU keep their rates among the lowest in the
United States, which will benefit customers and Kentucky as a whole.
LG&E Energy's, LG&E's, and KU's employees will enjoy an opportunity to
continue their rewarding careers, but now with a major global energy
corporation. For LG&E Energy employees, the transaction represents an
opportunity for growth as the company becomes the United States
headquarters for a large international group. PowerGen has expressed
intentions to expand and consolidate its operations in this country, which
will bring expanded opportunities for employees. The transaction will
ensure that LG&E Energy and its employees remain at the forefront of an
increasingly-competitive electric industry in the United States, while
PowerGen's expanding foreign operations will provide opportunities for LG&E
Energy employees abroad.
The merger with PowerGen also offers unique opportunities to Kentucky.
PowerGen's vision is to become one of the world's top independent electric
and gas businesses. To achieve this vision, PowerGen is looking to expand
its presence in the United States market. The merger with LG&E Energy is
only its first step into this
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market. However, PowerGen has committed to keep its United States
headquarters for future expansions in Louisville, which offers significant
opportunities for new jobs, investments, and other economic development in
Kentucky.
LG&E Energy shareholders, a substantial number of whom are Kentucky
residents, will benefit from the $24.85 per share received on closure of
the transaction, an amount 58% greater than the market value of the shares
on the last trading day before the merger was announced.
One reason we believe LG&E Energy is the right company for us is its
strength in such areas as low-cost production, high standards of
reliability and customer service, and commitment to the environment. We
are interested in being in Kentucky, not only because it is strategically
located in the Midwestern United States, but also because of Kentucky's
strong and growing economy - which is due in no small part not only to the
low-cost and reliable service of LG&E and KU, but also to their strong
commitment to their communities and to economic development. Since we
regard LG&E Energy and Kentucky as our entry into the United States market,
Kentucky will become the center of our United States presence, with the
possibility of expanded employment in Kentucky for our United States
operations extending far beyond Kentucky.
Q. Please describe PowerGen's commitments to charitable and community projects
after the merger.
A. The Agreement and Plan of Merger expressly commits PowerGen to continuing
charitable and community contributions to the communities served by LG&E
and KU at levels comparable to, or greater than, those before the merger.
PowerGen is also committed to continuing the LG&E Energy Foundation, Inc.'s
support for charitable
10
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causes in LG&E's and KU's service territories. Following the merger, the
Foundation will remain under the control of LG&E Energy's Board of
Directors, and the majority of the Foundation's Board of Directors will
consist of individuals knowledgeable regarding community interests within
LG&E's and KU's service territories.
Q. Please describe PowerGen's commitment to economic development in Kentucky
following the merger.
A. PowerGen is committed to continuing community development and related
activities at comparable or greater levels. We believe the health and
growth of our investment depends upon the health and growth of the economy
in the areas we serve.
Q. Please describe PowerGen's commitment to protect LG&E's and KU's utility
resources and preserve their low rates and high-quality service.
A. LG&E and KU represent some of the best in operations, low rates, and
reliable, high-quality service by any United States measure. PowerGen is
committed to protecting these resources following the merger so customers
continue to enjoy rates among the lowest in the country and service among
the best in the country. PowerGen commits to excluding all transaction-
related costs from LG&E's or KU's rates, including the premium paid in this
transaction.
REQUIRED APPROVALS
------------------
Q. Have PowerGen's directors approved the merger?
A. Yes. On February 17, 2000, PowerGen's board approved the merger in
principle and delegated final approval authority to a subcommittee. The
subcommittee, consisting of two executive directors and one non-executive
director, met on February 25, 2000, and approved the merger between LG&E
Energy and Merger Sub, and related transactions.
11
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Q. Will PowerGen's shareholders vote on the merger?
A. Yes. We plan to put the merger proposal before the holders of PowerGen's
ordinary shares (the equivalent to United States common stock) on June 5,
2000.
Q. Please describe any other approvals necessary to consummate the merger.
A. PowerGen and LG&E Energy will obtain the following approvals for the merger
so that it will be lawful:
. Approval of this Commission in accordance with the statutory
provisions governing the proposed transaction.
. Approval of the Virginia State Corporation Commission based on
KU's operations in five Virginia counties under the name "Old
Dominion Power Company."
. Such regulatory action as may be required by the Tennessee
Regulatory Authority.
. Approval of the United States Securities and Exchange Commission
("SEC"). A copy of all filings made with the SEC will be filed
with the Commission at or shortly after the time of filing with
the SEC.
. Approval of the Federal Energy Regulatory Commission ("FERC"). A
copy of the FERC application, as well as any other notices or
filings that may be required, will be filed with the Commission
at or shortly after the time they are filed with the FERC.
. A filing must be made under the Hart-Scott-Rodino Act, although
the Joint Applicants do not believe the merger will implicate any
provision of the federal antitrust laws. A copy of the Hart-Scott
Rodino Act filing will be provided to the Commission at or
shortly after the time it is filed.
. A filing must be made under the Exon-Florio provisions of the
Omnibus Trade and Competitiveness Act of 1988, although the Joint
Applicants do not believe the merger will affect national
security interests. A copy of the Exon-Florio filing will be
provided to the Commission at or shortly after the time it is
filed.
. PowerGen may be required to make filings or give notice under the
United Kingdom's Electricity Act of 1989, the United Kingdom's
Fair Trading Act of 1973, and regulations of the European Union.
Copies of
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PowerGen's United Kingdom and European filings will be provided
to the Commission at or shortly after they are filed.
The Joint Applicants expect to complete the proposed transaction within
nine to twelve months from the date it was announced (i.e., February 28,
2000).
FINANCING THE MERGER
--------------------
Q. How will PowerGen finance the merger?
A. Before the merger was announced, PowerGen arranged a $4 billion loan
facility, more than sufficient to cover the cost of acquiring LG&E Energy
of $3.2 billion. This facility has been underwritten by five leading
international banks. While we are also exploring the option of disposing of
some of PowerGen's existing assets, we are doing so not to pay for this
acquisition, but to give ourselves more flexibility to go forward with our
strategy of making another move here in the United States. The plan to
divest certain assets is part of an overall plan to refocus PowerGen's
strategic direction. Any divestiture would represent prudent financial
planning in accordance with that strategy as it would allow PowerGen the
flexibility to consider further United States acquisitions. PowerGen is
committed to a strategy that builds on the Kentucky platform.
The downgrade of PowerGen's debt as a result of the acquisition is
normal and will last until the merger is complete. Both Standard & Poor's
and Moody's expect PowerGen to retain strong investment grade ratings, and
therefore, remain financially stable.
Success in the global marketplace requires taking prudent, well-
calculated risks. We have done that with LG&E Energy, and have every
expectation it will prove to be the
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right move. The testimony of PowerGen's financial witness, Caroline Sheers,
discusses our plans in more detail.
FINANCIAL, TECHNICAL, AND MANAGERIAL ABILITIES
----------------------------------------------
Q. Following the merger with PowerGen, will LG&E and KU have the financial
ability to provide reasonable service?
A. Yes. LG&E Energy, LG&E, and KU will be insulated from the cost of the
acquisition. They will neither issue securities nor incur debt to fund the
transaction. PowerGen will provide all of the funds to acquire the LG&E
Energy common stock. LG&E and KU will continue their balanced capital
structures; their outstanding preferred stock and long-term debt will
remain; and they will continue to have the ability to incur debt and issue
equity if the necessary funding for their operations cannot be generated
internally or provided by PowerGen.
Q. Following the merger with PowerGen, will LG&E and KU have the technical and
managerial abilities required to provide reasonable service?
A. Yes. One of the primary reasons PowerGen has been interested in merging
with LG&E Energy is the high caliber of the existing technical and
managerial staff. We intend not only to preserve such staff following the
merger, but also have included Mr. Hale on PowerGen's board. The respective
corporate officers of LG&E Energy, LG&E and KU shall be entitled to
maintain their current titles and responsibilities unless and until
otherwise determined by the respective Boards of Directors of each company.
In addition to LG&E Energy's and its subsidiaries' existing technical
and managerial abilities, PowerGen has much technical and managerial
expertise of its own. PowerGen owns 10,000 MW of generation capacity in the
United Kingdom. Since 1998,
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PowerGen has owned East Midlands Electricity, the third largest regional
electric distribution company in the United Kingdom, and is also involved
in natural gas sales, transmission and distribution. Moreover, because the
electric industry in the United Kingdom has been restructuring
progressively throughout the 1990s, we have over ten years' successful
experience in a marketplace that has made the transition gradually to
competition. Furthermore, our investment in the Australian State of
Victoria, which also is deregulating, gives us additional experience in
this area. This experience, although not directly transferable into the
United States marketplace, gives us critical expertise and background in
managing the changes that restructuring will involve.
OPERATIONS AFTER THE MERGER
---------------------------
Q. What will be the composition of the PowerGen board following the merger?
A. The pre-merger PowerGen directors will continue following the merger. In
addition, the board will be expanded to include Roger W. Hale, LG&E
Energy's current Chairman and Chief Executive Officer. PowerGen's inclusion
of Mr. Hale on its board demonstrates our continued commitment to
maintaining a local presence in the United States that is sensitive to
local concerns.
Q. How will PowerGen apply its operating experience from other parts of the
world to the operations of LG&E and KU?
A. As part of an ongoing review over the next few years PowerGen and LG&E will
utilize a business improvement process based on a benchmarking technique to
review the operating practices of LG&E and KU to determine whether their
current practices can be improved when compared with the best practices in
the world. PowerGen believes that through this process LG&E and KU may be
able to achieve greater efficiencies and
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<PAGE>
improvements in their operations. Benchmarking is a widely used management
tool for achieving continued business improvement. Potential efficiencies,
if available, will be of the incremental sort that good managers, such as
those at LG&E and KU, are always striving to achieve. They are precisely
the sort of savings that the Earnings Sharing Mechanism was designed to
share between customers and shareholders. The only difference will be the
fact that LG&E will have an increased ability to achieve such savings by
obtaining efficiency savings ideas from PowerGen as a result of PowerGen's
international experience.
Q. The Commission has adopted - and both LG&E and KU have in place - an
Earnings Sharing Mechanism. Does PowerGen support this mechanism?
A. Yes. We fully support the Earnings Sharing Mechanism. We believe it
represents progressive regulatory policy, and regard it as the blueprint at
this stage of deregulation for sharing benefits with customers going
forward. The Earnings Sharing Mechanism provides LG&E and KU with
incentives to improve performance while, at the same time, creating
regulatory certainty and a balanced and fair regulatory environment while
the industry is in transition. The Commission's decision to approve the
Earnings Sharing Mechanism as an alternative form of regulation contributed
to PowerGen's decision to complete the agreement with LG&E Energy.
THE COMMISSION'S REGULATORY AUTHORITY
-------------------------------------
Q. Will the Commission have access to PowerGen's books and records?
A. Yes. PowerGen recognizes access to its books and records may be necessary
for the Commission to exercise adequate regulatory authority over LG&E and
KU.
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<PAGE>
Accordingly, PowerGen will provide the Commission access to its books,
records, and personnel as required to achieve this.
Q. Will the merger affect the Commission's regulatory authority over LG&E and
KU?
A. On the critical issues of rates, service, certificates of convenience and
necessity, safety, oversight, monitoring, and securities issuances, the
Commission's authority will remain the same. In the area of affiliate
transactions, the SEC will extensively regulate the registered holding
company system, of which LG&E and KU will be a part. To address the
potential for federal preemption, Applicants commit that they will not
assert that SEC jurisdiction legally preempts the Commission from
disallowing recovery in retail rates of the cost of goods and services that
LG&E or KU obtain from LG&E Energy Services, Inc., provided that LG&E and
KU otherwise retain the right to assert that the charges are reasonable and
appropriate. Mr. Robinson's testimony describes the additional regulatory
oversight and restrictions as a result of PUHCA, discusses the terms of the
services agreement contemplated after the merger, and makes the identical
commitment for LG&E and KU. These commitments ensure that the Commission's
regulatory authority will not be impeded after the merger.
CONCLUSION
----------
Q. Please summarize your testimony.
A. I would like to emphasize that we believe this merger provides key benefits
for customers, employees, shareholders, and indeed Kentucky as a whole. The
head office will be maintained in Kentucky. LG&E will become a platform for
growth in the United States, thereby protecting current jobs and providing
new ones as the company expands. There will be no adverse change for
customers, and, as operational efficiencies are
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<PAGE>
achieved, the Earnings Sharing Mechanism will provide the blueprint for
sharing benefits between customers and shareholders. This is good for all
stakeholders. The protections imposed by the Commission on utility
resources and the Earnings Sharing Mechanism provide a balanced and
innovative regulatory system. We believe Kentucky has it right.
Q. What action are you requesting the Commission take in this proceeding?
A. The Joint Applicants are asking that the Commission approve the transfer of
ownership and control of LG&E and KU. PowerGen intends to preserve the
separate existence of both companies and the historic ties they have to the
communities they serve. The merger ensures these companies will have the
strength, resources, and experience to thrive in a changing marketplace and
to continue to provide reliable, low-cost service to their customers.
Q. Does this conclude your testimony?
A. Yes, it does.
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VERIFICATION
COMMONWEALTH OF KENTUCKY )
) SS:
COUNTY OF JEFFERSON )
E.A. WALLIS, being first duly sworn, deposes and states:
That he has read the foregoing testimony and appendix and knows the matters
contained therein; that said matters are true and correct to the best of his
knowledge and belief, except as to those matters stated on information and
belief, and as to those matters, he believes them to be true.
/s/ E.A. WALLIS
Subscribed and Sworn to before me, a Notary Public in and before said
County and State, this ____ day of March, 2000.
/s/ Notary Public
My Commission Expires:
___________________________
<PAGE>
APPENDIX A
E.A. WALLIS
Chairman and Chief Executive
PowerGen plc
53 New Broad Street
London EC2M
1SL, England
Employment History
Central Electric Generating Board
Trainee at the Drakelow Power Station
1955 - 1978 Various engineering appointments in coal, oil and nuclear
generating stations
1978 - 1981 Station Manager, Oldbury Nuclear Power Station
1981 - 1986 Head of Power System Operation
1986 - 1988 Divisional Director Director of Operations
PowerGen plc
1988 - 07/96 Chief Executive
07/96 to present Chairman and Chief Executive
Education
Qualification in Electrical Engineering, 1962 - University of Aston
General Management Studies, 1978 - Henley Management College
Honorary Doctorate of Technology, 1996 - Brunel University
Honorary Doctorate of Science, 1996 - Aston University
Business and Professional Affiliations
Fellow of the Royal Academy of Engineering, 1997
Companion of the British Institute of Management, 1994
Civic Activities
Chairman of the Birmingham Royal Ballet (fundraising) Trust, member of the
Board and significant supporter since 1990
Trustee of the Development Trust since 1993 (supports the development of
facilities for the mentally handicapped and support of MENCAP)
Industrial Sponsor of the William Walton Trust since 1994 (promotion and
appreciation of Walton's work in schools and wider audiences, and
development of Master Class Training Programmes for young singers)
<PAGE>
COMMONWEALTH OF KENTUCKY
BEFORE THE PUBLIC SERVICE COMMISSION
In the Matter of:
JOINT APPLICATION OF )
POWERGEN plc, LG&E ENERGY CORP., )
LOUISVILLE GAS AND ELECTRIC COMPANY, ) CASE NO. 2000-095
AND KENTUCKY UTILITIES COMPANY )
FOR APPROVAL OF A MERGER )
TESTIMONY
OF
ROGER W. HALE
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
LG&E ENERGY CORP.
LOUISVILLE GAS AND ELECTRIC COMPANY
KENTUCKY UTILITIES COMPANY
<PAGE>
Q. Please state your name and business address.
A. My name is Roger W. Hale. My business address is 220 West Main Street,
Louisville, Kentucky 40502.
Q. What is your position?
A. I am a Director, Chairman of the Board and Chief Executive Officer of LG&E
Energy Corp. ("LG&E Energy"), Louisville Gas and Electric Company ("LG&E"),
and Kentucky Utilities Co. ("KU").
Q. Please describe your work experience.
A. Prior to joining LG&E, I served as Executive Vice President of BellSouth
Corporation and BellSouth Enterprises, Inc. from 1986 to 1989. I had
previously been employed by AT&T from 1966 to 1986. The details regarding
my career and education are described in Appendix A to my testimony.
Q. What is the purpose of your testimony?
A. The purpose of my testimony is to support the Joint Application requesting
the Commission's approval of the transfer of ownership and control over
LG&E and KU through the merger of LG&E Energy with PowerGen. The request is
supported by our application and the testimony attached to it.
Q. Has the Board of Directors of LG&E Energy approved the transaction with
PowerGen?
A. LG&E Energy's board approved the merger on February 25, 2000, determining
the terms of the merger to be fair to, and in the best interests of, the
LG&E Energy shareholders. It
<PAGE>
is expected that the LG&E Energy shareholders will approve the transaction
at the annual meeting, tentatively scheduled for early June 2000.
Q. Please describe LG&E Energy, LG&E and KU.
A. LG&E Energy is a diversified energy services company with businesses in
power generation and project development; retail gas and electric utility
services; and asset-based energy marketing. It operates in both the United
States and international markets from its headquarters in Louisville,
Kentucky. LG&E Energy owns and operates two regulated utility businesses,
LG&E and KU. LG&E is an electric and gas utility based in Louisville,
Kentucky. It serves customers in Louisville and 16 surrounding counties. KU
is an electric utility based in Lexington, Kentucky. LG&E Energy acquired
KU in the 1998 merger of LG&E Energy and KU Energy. KU is a wholly-owned
subsidiary of LG&E Energy. It serves 77 Kentucky counties and five Virginia
counties. In total, these businesses have a generation capacity of 7,300 MW
and 840,000 electricity customers and 290,000 gas customers over a
transmission and distribution network that covers approximately 27,000
square miles.
LG&E Energy also has significant non-utility businesses. It owns
interests in and operates non-utility power plants in six U.S. states as
well as in Spain. It owns interests in three natural gas distribution
companies in Argentina and owns CRC-Evans Pipeline International, Inc., the
world's leading provider of specialty equipment and services to the natural
gas and oil pipeline construction industry.
Q. Please briefly review the recent history of LG&E Energy.
A. Over the past ten years, LG&E Energy has been an industry innovator in many
areas. LG&E Energy was created in 1990 as a holding company for one of the
nation's oldest
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public utilities, Louisville Gas and Electric Company. The reorganization
gave the corporation the ability to enter into the unregulated as well as
the regulated energy services businesses. In 1998, KU Energy Corporation
merged into LG&E Energy and LG&E Energy survived with two wholly owned
utility subsidiaries, LG&E and KU. The merger of LG&E Energy and KU Energy
was designed to create a combined Kentucky enterprise well- positioned to
serve the energy needs of its customers in an increasingly competitive
market. It did so and provides significant benefits to Kentucky's
consumers.
Q. Why did LG&E Energy enter into the merger with PowerGen?
A. LG&E Energy entered into this transaction to optimize the value of one of
the country's most efficient energy services companies at a time when our
industry is struggling to take command of an increasingly complex
marketplace. As you know, the evolving competitive nature of our industry
has clearly demanded from us creative and unique growth strategies. Over
the past 10 years, LG&E Energy has been an industry innovator and has
delivered returns to its shareholders well above industry averages. In the
previous nine years since LG&E Energy was formed, it has consistently out-
performed the utility market as a whole, generating returns that averaged
14.6 percent each year.
However, today, the nature of the industry has changed. Size and scale
have become a significant prerequisite for developing and executing any
viable growth strategy. Most of the major utility players today started
with a large size and have gotten even larger and far more aggressive. Even
though LG&E Energy is now nearly five times its size of a decade ago, we
are limited in our ability to continually make a significant impact on the
current market, and then deliver the year-after-year increasing growth
rates now demanded by investors.
3
<PAGE>
The merger with PowerGen is an immediate opportunity to provide
significant value to shareholders now. In addition, we will be able to
maintain our innovative status in the industry as the platform to help
PowerGen grow throughout the U.S.
As an integral part of this transaction, we will maintain our
respected name, operations, and efficient corporate structure. Kentucky
will continue to enjoy the nation's highest quality of service and some of
its lowest rates. We will enhance our corporate presence as one of
Kentucky's major sponsors of educational, civic and cultural initiatives.
We will provide our employees with an opportunity to continue their
rewarding careers with a major global energy corporation, which is rooted
for all time in the traditions and respected history of both Louisville Gas
and Electric Company and Kentucky Utilities Company.
Q. Does the merger serve a proper purpose with respect to shareholders?
A. LG&E Energy common shareholders, a substantial number of whom are Kentucky
residents, will obtain through the merger the right to receive $24.85 in
cash for each share of LG&E Energy common stock that they hold. Based upon
market closing prices immediately prior to the announcement of the proposed
merger, this constitutes a 58% premium.
During 1999, the price of LG&E Energy's stock declined, along with
that of most other utilities. This decline was due, in large part, to
investor rotation out of utility stocks in general and into the technology
sector, and a series of interest rate hikes, as indicated by a 27 percent
increase in the 30-year Treasury bond yield in 1999. As a result, the S&P
Electric Index was down 23 percent in 1999, its sharpest decline in 25
years. Not since 1974 have utilities suffered more.
4
<PAGE>
Since our announced merger with PowerGen, the stock price has
increased to approximately $22 per share, a 40 percent increase.
Q. Mr. Wallis has testified that the merger provides significant benefits to
LG&E Energy's customers, employees and shareholders as well as to the
Commonwealth of Kentucky. Do you agree with his testimony?
A. I agree completely with Mr. Wallis' testimony.
Q. Please describe the changes that will occur to LG&E and KU after the
merger.
A. After the merger the only practical change will be the identity of the
shareholder, i.e., LG&E Energy will no longer be a publicly traded company.
Instead, it will be owned by PowerGen. LG&E will continue in existence as a
corporation organized under Kentucky law. KU will continue in existence as
a corporation organized under the laws of Kentucky and Virginia. The Merger
Agreement provides that both LG&E's and KU's headquarters will remain in
Kentucky. The testimony of Mr. Hewett and Mr. Robinson discuss the impact
of the merger on regulatory and accounting issues.
Q. What will be the composition of the Boards of LG&E Energy, LG&E, and KU
following the merger?
A. Following the merger, the Board of Directors for LG&E Energy will consist
of three members, one of whom will be a Director or Officer currently
serving in that capacity from LG&E Energy. Initially, I will serve as
Chairman of that Board. I expect similar board compositions for both LG&E
and KU. Some of the Directors of LG&E Energy at the effective time of the
merger will be asked to serve as members of an U.S. Advisory Board to
provide advice with respect to the operations of LG&E Energy and its
subsidiaries; business and regulatory developments; and other matters.
5
<PAGE>
Q. How will the corporation be organized at the senior level after the merger?
A. LG&E Energy's current senior management is shown on Exhibit 1 to my
testimony. Because PowerGen and LG&E Energy are both public corporations,
there will be some redundancies in corporate functions. However, we
anticipate that the majority of LG&E Energy's senior management team will
remain in place after the merger. I will continue as Chairman and Chief
Executive of LG&E Energy and will serve on the Board of PowerGen in the
U.K.
Q. What about the senior officers of LG&E and KU?
A. The respective corporate officers of LG&E and KU will retain their current
titles and responsibilities unless and until otherwise determined by LG&E's
Board of Directors and KU's Board of Directors, respectively. The merger,
in and of itself, is not expected to change employee duties at either of
the utilities. LG&E and KU will, therefore, continue to have the same
managerial and technical capabilities following the merger to provide high-
quality customer service.
Q. Will the merger affect the commitment of the Companies to charitable and
community projects?
A. No. Both LG&E Energy and PowerGen take their role as responsible corporate
citizens seriously and that will not change. Both companies have been major
sponsors of state educational, civic and cultural initiatives. In 1994,
LG&E Energy created the LG&E Energy Foundation, Inc., an endowed charitable
corporation to support activities and agencies in the communities where
LG&E Energy has operations and facilities. LG&E Energy's commitment to
charitable and civic activities will remain comparable to, or
6
<PAGE>
greater than, the normal annual aggregate level of charitable
contributions, community development and related activities carried on by
the LG&E Energy prior to the merger.
Q. Will the merger affect the commitment of LG&E Energy, LG&E and KU to
economic development?
A. No. The utility Companies understand the importance of recruiting strong
companies to support this state. Their commitment to economic development
in the communities they serve will continue. Kentucky's continued economic
health has been an important consideration to LG&E Energy throughout its
existence. LG&E Energy believes the merger with PowerGen is perhaps the
only viable strategic transaction that will allow the company's
headquarters to remain in Kentucky. In addition, PowerGen is looking to
expand further into the U.S. market and has made Louisville its base for
doing so, thereby creating further opportunities for LG&E Energy to grow
within the United States.
Q. What action are you requesting that the Commission take in this proceeding?
A. The Companies are asking the Commission to approve the transfer of
ownership and control of LG&E and KU to PowerGen.
Q. Does this conclude your testimony?
A. Yes, it does.
7
<PAGE>
VERIFICATION
COMMONWEALTH OF KENTUCKY )
) SS:
COUNTY OF JEFFERSON )
ROGER W. HALE, being first duly sworn, deposes and states:
That he has read the foregoing testimony, appendix and exhibit and knows
the matters contained therein; that said matters are true and correct to the
best of his knowledge and belief, except as to those matters stated on
information and belief, and as to those matters, he believes them to be true.
/s/ ROGER W. HALE
Subscribed and Sworn to before me, a Notary Public in and before said
County and State, this ____ day of March, 2000.
/s/ Notary Public
My Commission Expires:
___________________________
<PAGE>
APPENDIX A
ROGER W. HALE
Chairman of the Board and Chief Executive Officer
LG&E Energy Corp.
220 West Main Street
Louisville, KY 40202
(502) 627-2210
LG&E Energy Corp., headquartered in Louisville, Kentucky, is a Fortune 500
diversified energy services company with more than $5 billion in assets,
including businesses in retail gas and electric utility services, energy
marketing, power generation and project development and pipeline equipment
and services.
LG&E Energy Corp. operates domestically and internationally through four
major divisions:
. Power Generation, which controls more than 9,000 MW of power plants for
Louisville Gas and Electric Company, Kentucky Utilities Company and
Western Kentucky Energy Corp., as well as LG&E's independent power
plants throughout the U.S. and in Spain. This division also manages LG&E
Energy's project development initiatives domestically and
internationally. The division's operations and projects range from fully
scrubbed coal units to natural gas-fired plants and wind turbines.
. Distribution Services, which offers retail electric and natural gas
distribution and other energy management services in the United States
and Argentina. The division includes the company's interests in two
Argentine gas distribution companies serving more than 600,000 customers
in six northwestern provinces. It also includes the company's two
largest subsidiaries, Louisville Gas and Electric Company and Kentucky
Utilities Company, which offer among the nation's lowest cost energy
services to more than 1.1 million residential, commercial and industrial
customers.
. Energy Marketing, which focuses on the marketing of power from
generating assets that LG&E Energy owns or controls, such as Louisville
Gas and Electric Company, Kentucky Utilities Company and Western
Kentucky Energy Corp. This asset-based strategy enables the company to
optimize its growing portfolio of physical assets and low-cost
generation supply.
. Pipeline Equipment and Services, through its subsidiary, CRC-EVANS
International, Inc., it is the world's leading provider of specialized
equipment and services used in the construction and rehabilitation of
gas and oil transmission pipelines.
<PAGE>
Public Company Affiliations
Global TeleSystems Group, Inc., McLean, VA -- Board of Directors
H&R Block, Inc., Kansas, MO -- Board of Directors
Industry Affiliations
Electric Power Research Institute, Palo Alto, CA -- Board of Directors
The Conference Board Inc., NY -- Regular Member
Civic Activities
Junior Achievement Inc., New York, NY -- National Board of Directors
Centre College, Danville, KY -- Board of Trustees
Kentucky Economic Development Corporation -- Board of Directors
Education
M.S. in Management, 1979 -- Massachusetts Institute of Technology,
Sloan School of Management, Cambridge, MA
B.A., 1965 -- University of Maryland, College Park, MD
Previous Positions
BellSouth Corporation, Atlanta, GA
1986 - 1989 -- Executive Vice President
AT&T Co., 1966 - 1986
1983 - 1986 -- Vice President of Marketing, Southern Region, Atlanta,
GA
<PAGE>
See Hale Exhibit 1 to Roger Hale's Testimony (filed on paper format on Form SE
on April 26, 2000, File No. 70-9671).
<PAGE>
COMMONWEALTH OF KENTUCKY
BEFORE THE PUBLIC SERVICE COMMISSION
In the Matter of:
JOINT APPLICATION OF )
POWERGEN plc, LG&E ENERGY CORP., )
LOUISVILLE GAS AND ELECTRIC COMPANY, ) CASE NO. 2000-095
AND KENTUCKY UTILITIES COMPANY )
FOR APPROVAL OF A MERGER )
TESTIMONY
OF
CAROLINE SHEERS
DIRECTOR OF MERGERS AND ACQUISITIONS
POWERGEN plc
<PAGE>
INTRODUCTION
------------
Q. Please state your name and business address.
A. My name is Caroline Sheers. My business address is 53 New Broad Street,
London, England EC2M 1SL.
Q. By whom are you employed and what is your position?
A. I am the Director of Mergers and Acquisitions with PowerGen plc
("PowerGen").
Q. Please describe your employment history, as well as your education and
civic involvement.
A. Descriptions of my employment history, educational background, and civic
involvement are attached to this testimony as Appendix A.
Q. Have you testified before regulatory authorities on other occasions?
A. I have prepared testimony several times in the United Kingdom before the
Monopolies and Mergers Commission, a regulatory body similar to the Public
Service Commission. I have also prepared testimony for Parliament regarding
utility competition and regulation issues.
Q. What is the purpose of your testimony in this proceeding?
A. The purpose of my testimony is to describe PowerGen's financial ability to
consummate the transaction, and the financial ability of Louisville Gas and
Electric Company ("LG&E") and Kentucky Utilities Company ("KU") to provide
reasonable service after the merger. I also discuss the steps PowerGen
intends to take to evaluate potential cost savings that may be achievable
as a result of the merger.
<PAGE>
THE PROPOSED MERGER
-------------------
Q. Please describe the proposed merger.
A. On February 27, 2000, PowerGen and LG&E Energy agreed to a plan of merger
pursuant to which PowerGen will acquire all outstanding shares and share
options of LG&E Energy in an all-cash transaction valued at $3.2 billion.
Under the terms of the merger agreement, PowerGen will acquire 100% of
LG&E Energy's stock, and LG&E Energy will continue to own 100% of the
issued and outstanding common stock of LG&E and KU. The shares held by
owners of PowerGen's ordinary shares will not be converted or exchanged,
and PowerGen's American Depositary Receipts will continue to be listed on
the New York Stock Exchange, with each representing four ordinary shares.
The holders of LG&E Energy common stock will not become holders of
PowerGen's ordinary shares, rather PowerGen will pay LG&E Energy
shareholders $24.85 cash per share. This represents a premium of 58 percent
above the closing price of LG&E Energy shares on February 25, 2000, and
places the value of equity at a total of $3.2 billion on a fully-diluted
basis. Upon completion of the merger between PowerGen and LG&E Energy,
there will be no publicly-traded shares of LG&E Energy stock. 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.
As a result of the merger, LG&E Energy will become the United States
headquarters for PowerGen, and will serve as PowerGen's growth vehicle to
expand its operations in the United States in the future. PowerGen has no
intention of consolidating any of LG&E Energy's existing regulated business
operations with any of its own; does
2
<PAGE>
not anticipate sales of any of the Kentucky jurisdictional physical assets
that currently support LG&E's or KU's regulated utility business; and
recognizes that any future sales of jurisdictional generation,
transmission, or distribution assets of LG&E or KU first must be authorized
by this Commission.
FINANCING
---------
Q. How did the investment community react to the merger announcement?
A. LG&E Energy stock rose on the day of the announcement, closing at $21.875,
a gain of $6.125 or 39 percent. PowerGen's ADR's closed down $0.938 at
$27.563.
In general, equity analyst opinion has been favorable. For example,
Warburg Dillon Read have said that LG&E represents a suitable target given
its location, cost characteristics and regulatory environment. Donaldson
Lufkin and Jenrette believe that LG&E represents a strategic platform for
PowerGen. I believe that these analysts reflect my view that well-run,
experienced business units, in both traditional and nontraditional areas,
will give the merged company an advantage in the competitive energy market
of the future.
Q. Is there any concern in the investment community over the premium being
paid for LG&E Energy?
A. Investor reaction has generally been favorable and there are no material
concerns. Over the past few weeks, I've met with numerous investors and
generally they seem content with the price. They recognize that LG&E Energy
is a good business with strong growth opportunities. In this context the
concept of a "premium" is somewhat misleading because of the overall
decline in the utility market in the last year or so, both in the United
States and indeed worldwide. This has led to an undervaluation of the
entire
3
<PAGE>
sector. Instead, investors have focused on the acquisition multiples, such
as the forward looking price-to-earnings ratio. In this case, the first
year price-to-earnings ratio of 14.2 times based on analyst's forecasts is
lower than the average for comparable transaction of 18.3 times.
Q. Is there any reason for concern about the amount of debt PowerGen will
assume as a result of this merger? Please describe the companies' bond and
preferred stock ratings.
A. There is no reason for concern. Before the merger was announced, PowerGen
arranged a $4 billion loan facility, more than sufficient to cover the cost
of acquiring LG&E Energy of $3.2 billion. This facility has been
underwritten by five leading international banks.
Standard & Poor's and Moody's currently assign credit ratings to the
debt of PowerGen UK plc - the principal operating company - and also to the
debt of certain subsidiaries. The current ratings of PowerGen UK plc are A
and A2 from Standard & Poor's and Moody's respectively. The rating agencies
do not rate the ultimate holding company, PowerGen plc, because at present
it has no borrowings. LG&E Energy and several of its subsidiaries are rated
by Standard & Poor's, Moody's and a third rating agency, Duff & Phelps.
Exhibit A shows the ratings assigned to LG&E Energy borrowings by these
agencies.
On the day the merger was announced Standard & Poor's and Moody's
placed PowerGen on credit watch / review for potential downgrade. This is
normal and will last until the merger is completed. In their press release
Standard & Poor's indicated that PowerGen's corporate credit rating
(essentially that of PowerGen UK plc) would probably fall to BBB+; this was
after taking into account the effect of the acquisition as
4
<PAGE>
well as certain disposals by PowerGen. On the same basis Moody's indicated
a likely downgrade to A3 (the equivalent of A- for Standard & Poor's). Both
agencies stated that the future rating for PowerGen plc - the ultimate
holding company - was likely to be one notch below that of PowerGen UK plc.
A Copy of the Standard & Poor's press releases is shown in Exhibit B.
The outcome of the rating agencies' pronouncements is that both
Standard & Poor's and Moody's expect PowerGen to retain strong investment
grade credit ratings, and therefore, remain financially stable.
Q. Please describe PowerGen's and LG&E Energy's capital structures, including
long term debt.
A. PowerGen's and LG&E Energy's current overall capital structures and the
capital structure of the combined company following the merger are depicted
in Exhibit C to my testimony. The combined company will have a total
capitalization of $11.9 billion. The capital structure of the combined
company at the end of the first full year of operation is expected to
comprise long-term debt 66%, preferred stock 1%, and common equity 33% of
total capitalization. LG&E's and KU's current outstanding preferred stock
will not be changed, converted, or otherwise exchanged in the merger.
An analysis of PowerGen's, LG&E Energy's, LG&E's, and KU's long-term
debt is contained in Exhibit D to my testimony.
Q. What effect will the merger have on LG&E's and KU's financial abilities to
provide reasonable service?
A. At present, the obligations of LG&E Energy - the utility holding company -
are not guaranteed by LG&E and KU. PowerGen has raised its $4 billion
acquisition facility in a
5
<PAGE>
new subsidiary, PowerGen US Holdings Limited, which will own LG&E Energy
via a number of intermediary companies. The obligations of PowerGen US
Holdings Limited will equally not be guaranteed by LG&E and KU.
PowerGen expects that LG&E and KU will continue to pay dividends to
LG&E Energy. Once the acquisition is complete these dividends will be
payable by LG&E Energy to PowerGen rather than to external shareholders. In
setting an appropriate level of dividend PowerGen will be mindful of the
financial impact on LG&E and KU and their ability to provide service.
Accordingly PowerGen does not expect the merger to affect LG&E's and
KU's financial abilities to provide reasonable service.
Q. Does PowerGen need to sell any of its international holdings or holdings in
England to pay for the acquisition of the LG&E Energy Corp?
A. PowerGen has in place the necessary funds to finance the acquisition. The
intention behind divesting certain assets is part of an overall plan to
refocus PowerGen's strategic direction. The divestiture will reduce the
overall level of debt and represents prudent financial planning in
accordance with that strategy. PowerGen and its investors see the certainty
of earnings as a key issue for the financial strength of the group going
forward. It allows PowerGen flexibility to consider further investments in
the United States or elsewhere as part of its day to day business. Returns
in other jurisdictions are less certain. PowerGen is committed to a
strategy that builds on the Kentucky platform.
6
<PAGE>
Q. Will there be savings from the PowerGen merger comparable to the savings
from the LG&E/KU merger?
A. In the merger of KU and LG&E, there were synergistic benefits resulting in
savings that were reasonably certain as to kind, amount, and the timing of
their achievement. These would not have been available absent the merger
and were the result of the elimination of duplicative functions and
positions, the combination of similar activities, the aggregation of
external purchases of commodities and services, the avoidance of capital
expenditures, and the centralization of functions. These merger savings are
being passed through to customers from LG&E's and KU's merger surcredits.
Such synergistic savings simply do not exist where the two businesses are
separated by thousands of miles. Although there may be some small savings,
for example from elimination of shareholder services of LG&E Energy, we
anticipate that these savings will be largely offset by the extra cost of
complying with PUHCA. To the extent these minimal savings are not offset,
they will be shared with customers through the Earnings Sharing Mechanism.
As part of an ongoing review over the next few years PowerGen and LG&E
will utilize a business improvement process based on a benchmarking
technique to review the operating practices of LG&E and KU to determine
whether their current practices can be improved when compared with the best
practices in the world. PowerGen believes that through this process LG&E
and KU may be able to achieve greater efficiencies and improvements in
their operations. Benchmarking is a widely used management tool for
achieving continued business improvement. Potential efficiencies, if
available, will be of the incremental sort that good managers, such as
those at LG&E and KU, are always striving to achieve. They are precisely
the sort of savings that the Earnings Sharing
7
<PAGE>
Mechanism was designed to share between customers and shareholders. The
only difference will be the fact that LG&E will have an increased ability
to achieve such savings by obtaining efficiency savings ideas from PowerGen
as a result of PowerGen's international experience.
CONCLUSION
----------
Q. What is your recommendation to the Commission?
A. Following the merger of PowerGen and LG&E Energy, LG&E and KU will have the
financial ability to provide reasonable utility service. The Commission
therefore should approve the transfer of ownership and control of LG&E and
KU to PowerGen.
Q. Does this conclude your testimony?
A. Yes, it does.
8
<PAGE>
VERIFICATION
COMMONWEALTH OF KENTUCKY )
) SS:
COUNTY OF __________________ )
CAROLINE SHEERS, being first duly sworn, deposes and states:
That she has read the foregoing testimony, appendix and exhibits and knows the
matters contained therein; that said matters are true and correct to the best of
her knowledge and belief, except as to those matters stated on information and
belief, and as to those matters, she believes them to be true.
/s/ CAROLINE SHEERS
Subscribed and Sworn to before me, a Notary Public in and before said
County and State, this ____ day of March, 2000.
/s/ Notary Public
My Commission expires:
_________________________
9
<PAGE>
APPENDIX A
CAROLINE E. SHEERS
------------------
Director of Mergers and Acquisitions
PowerGen plc
53 New Broad Street
London EC2M 1SL
England
Employment History
- ------------------
PowerGen plc
- ------------
1998 - to present Director of Mergers and Acquisitions
1995 - 1998 Regulatory Strategy Adviser
1994 - 1995 Corporate Strategy Manager
1992 - 1994 Financial Strategy Manager
Ernst and Young
- ---------------
1991 - 1992 Management Consultant (Utilities Group)
Government Economic Service, Department of Energy
- -------------------------------------------------
1988 - 1991 Economic Adviser
. Electricity Privatisation
. Coal
1985 - 1988 Senior / Economic Assistant
(Gas, Nuclear, Environmental and Energy Demand
Forecasting)
Education
- ----------
1985 MSc Economics University of York
1984 BA (Honours) Economics University of Nottingham
<PAGE>
EXHIBIT A
LG&E Borrowing Ratings
----------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Standard and Poors Moody's Duff & Phelps
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
LG&E Energy Corp
- ------------------------------------------------------------------------------------------------------------------
Corporate Credit Rating / Issuer rating A-/Watch Neg/-- A3* -
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Louisville Gas & Electric Co
- ------------------------------------------------------------------------------------------------------------------
Long term corp credit rating / issuer rating A-/Watch Neg A2* -
- ------------------------------------------------------------------------------------------------------------------
Short term corporate & commercial paper A-2 P-1* D-1*
- ------------------------------------------------------------------------------------------------------------------
Senior secured debt A/Watch Neg A1* AA-*
- ------------------------------------------------------------------------------------------------------------------
Senior unsecured debt BBB+/Watch Neg A2* A+*
- ------------------------------------------------------------------------------------------------------------------
Preferred stock BBB/Watch Neg "a2"* A*
- ------------------------------------------------------------------------------------------------------------------
Bank Loan rating BBB+/Watch Neg - -
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Kentucky Utilities Co
- ------------------------------------------------------------------------------------------------------------------
Long term corp credit rating / issuer rating A-/Watch Neg A2* -
- ------------------------------------------------------------------------------------------------------------------
Short term corporate & commercial paper A-2 P-1* D-1*
- ------------------------------------------------------------------------------------------------------------------
Senior secured debt A/Watch Neg A1* AA-*
- ------------------------------------------------------------------------------------------------------------------
Preferred stock BBB/Watch Neg "a2"* A*
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
LG&E Capital Corp
- ------------------------------------------------------------------------------------------------------------------
Long Term corporate credit rating A-/Watch Neg - -
- ------------------------------------------------------------------------------------------------------------------
Commercial paper and other short term A-2 P-2* D-1-
- ------------------------------------------------------------------------------------------------------------------
Senior unsecured debt BBB+/Watch Neg A3* A-
- ------------------------------------------------------------------------------------------------------------------
Bank loan rating BBB+/Watch Neg - -
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* all ratings on review for possible downgrade
<PAGE>
EXHIBIT B
STANDARD & POOR'S PRESS RELEASE
PowerGen Ratings Placed on CreditWatch Negative; LG&E Lowered,
L/T Ratings Still on Watch
LONDON (Standard & Poor's CreditWire) Feb. 28, 2000 - Following today's
announcement by PowerGen U.K. PLC (PowerGen) of its agreed bid to acquire LG&E
Energy Corp., Standard & Poor's today reviewed its ratings on the two groups.
PowerGen will assume LG&E's existing debt of about US$2 billion. Standard &
Poor's also assigned new corporate credit ratings to the ultimate group holding
company, PowerGen PLC, and the new holding company that will own the assets of
LG&E, PowerGen U.S. Holdings Ltd. Any future senior unsecured debt issued by
these two entities will be rated single-'A'-minus, one notch below the corporate
credit rating. PowerGen is an integrated U.K. electricity and gas supply
company, which also owns a regulated, monopoly electricity distribution
business. LG&E is a vertically integrated, regulated electricity and gas company
based in Kentucky, U.S.
The one notch downgrade of LG&E group's long-term ratings reflects the
group's continued financial weakness on a stand-alone basis. The CreditWatch
placements of both groups' ratings, reflect the likelihood of the ratings being
lowered further to triple-'B'-plus following completion of the acquisition and
planned disposals.
The US$3.2 billion ((Pounds)2.0 billion) cost of acquiring the equity in
LG&E will be financed by a new bank loan facility at PowerGen U.S. Holdings Ltd.
This debt will be guaranteed by PowerGen PLC. The borrowings at the holding
companies are expected to be rated one notch below their corporate credit
ratings to indicate structural subordination.
The credit profile of PowerGen group will be adversely affected by its
acquisition of the weaker entity, LG&E. Further negative factors are the
significant reduction in PowerGen's debt service ability, as a result of the
additional debt that will be raised to finance the acquisition, and lower price
forecasts for generating output in the U.K. These risks will be partially offset
by the improved business profile of the enlarged group and PowerGen's expected
U.K. and international divestments. Funds from operations interest coverage for
the enlarged group will be in excess of 3 times (x), with total debt to total
capital of about 60%, including the new acquisition debt, net of disposals.
Proceeds generated by the divestments will provide PowerGen with some
headroom at this rating level, allowing financial flexibility in the group's
financing options. Once PowerGen obtains regulatory and shareholder approval for
the acquisition, the CreditWatch placement will be resolved. The ratings on both
group's are expected to be equalized at this time.
PowerGen's acquisition of the LG&E group is consistent with its previously
stated strategy to diversify its income streams geographically, by acquiring a
vertically integrated utility in a highly rated country. Standard & Poor's
expects that PowerGen will use the acquisition of LG&E as a stepping stone to
further growth in the U.S. -CreditWire
<PAGE>
EXHIBIT C
POWERGEN AND LG&E ENERGY'S CURRENT OVERALL CAPITAL STRUCTURES AND THE CAPITAL
STRUCTURE OF THE COMBINED COMPANY FOLLOWING THE MERGER
The following is an unaudited pro forma statement of combined net assets of the
enlarged group, prepared to show the effects on the PowerGen group of the
proposed acquisition of LG&E as if it had taken place on 2 January 2000. It has
been prepared on the basis set out in the notes below for illustrative purposes
only. Because of its nature, the pro forma statement of combined net assets may
not give a true picture of the financial position of the Enlarged Group after
the acquisition has taken place.
<TABLE>
<CAPTION>
PowerGen LG&E Adjustments Enlarged
Group
Group Group
(Note 1) (Note 2,3,4) (Note 5)
At At At
2 January 31 December 2 January
2000 1999 2000
Unaudited Unaudited Unaudited
(Pounds)m (Pounds)m (Pounds)m (Pounds)m
<S> <C> <C> <C> <C>
Goodwill 1,309 46 1,308 2,663
Other fixed assets 3,702 2,603 6,305
Other net liabilities (1,003) (495) (1,498)
--------- ------------- --------- ---------
Total assets 4,008 2,154 1,308 7,470
========= ============= ========= =========
Shareholders funds 1,919 798 (798) 1,919
Net debt 2,024 1,288 2,021 5,333
Minority Interest 65 68 85 218
--------- ------------- --------- ---------
Total finance 4,008 2,154 1,308 7,470
========= ============= ========= ========
</TABLE>
Notes
Extracted from the unaudited preliminary announcement of PowerGen for the year
ended 2 January 2000
Extracted from the unaudited consolidated balance sheet of LG&E, as supplied by
LG&E management.
No account has been taken of differences between US GAAP and UK GAAP
The net assets of LG&E have been translated at a rate of US$1.60 = (Pounds)1
The adjustments reflect:
(i) The acquisition of the share capital of LG&E for (Pounds)2,021
million, financed by additional borrowings of (Pounds)2,021m
(ii) The recognition of an intangible asset of goodwill of (Pounds)1,308
million arising on the acquisition of LG&E
(iii) The reclassification of LG&E preferred stock to minority interest.
6. No account has been taken of:
(i) The trading results of PowerGen subsequent to 2 January 2000 or the
trading results of LG&E subsequent to 31 December
(ii) The fair value adjustments that may be made to the net assets of LG&E
acquisition
(iii) The estimated expenses of the acquisition
<PAGE>
EXHIBIT D
ANALYSIS OF LONG TERM DEBT
PowerGen
- --------
Debt within the PowerGen group at 2/nd/ January 2000 was as follows:
<TABLE>
<CAPTION>
Amount (fair Amount (face
value) value)
Company Debt ((Pounds)m) ((Pounds)m)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PowerGen UK Plc 8.5% Sterling bonds 2006 250 250
8.875% Sterling bonds 2003 250 250
6.25% Sterling Eurobond 2024 244 250
5% Euro Eurobond 2009 326 326
PowerGen (East Midlands) 8.125% Sterling Eurobond 2007 105 100
Investments 7.45% US Dollar Yankee Bond 2007 262 250
7.1% US Dollar Yankee Bond 2002 253 250
[PowerGen (East
Midlands) Holding] Loan notes 2007 4 4
Ergon Finance Ltd (Pounds)2.4 billion syndicated bank 299 300
facility expiring 2003/(1)/
(now reduced to (Pounds)1.3 billion)
PowerGen Energy Plc 12% Eurobond 2016 224 150
8.375% Sterling Eurobond 2006 106 100
Other Bank loans in overseas investments 249 249
Short-term loans and overdrafts 98 98
Cash and short-term deposits (646) (646)
=======================================================================================================
TOTAL 2,024 1,931
=======================================================================================================
</TABLE>
NOTE:
1 Guaranteed by PowerGen UK plc and PowerGen (East Midlands) Investments
<PAGE>
LG&E
Debt in the LG&E Energy group as at 31/st/ December 1999 was as follows:
<TABLE>
<CAPTION>
LG&E
LG&E KU Capital Total
Type (US$m) (US$m) (US$m) (US$m)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CP Programmes 120.9 329.5 450.4
1/st/ Mortgage Bonds 62.6 295.5 - 358.1
1/st/ Mortgage Pollution Bonds 444.2 250.8 - 695.0
Unsecured Pollution Bonds 120.0 - - 120.0
MTNs - - 538.1 538.1
Total 747.7 546.3 867.6 2,161.0
- ---------------------------------------------------------------------------------------------------
</TABLE>
The following table shows the debt maturity profile for the LG&E Group as a
whole as at 31 December 1999.
Amount
Year of Maturity (US$m)
- ---------------------------------------------
2000 861/(1)/
2001 38
2002 20
2003 105
2004 150
2005 0
2005* 987
Total 2,161
Cash and marketable securities 102
Net debt 2,059
- ---------------------------------------------
NOTE:
1 Includes all CP and short-term MTNs and variable rate pollution control
bonds
<PAGE>
COMMONWEALTH OF KENTUCKY
BEFORE THE PUBLIC SERVICE COMMISSION
In the Matter of:
JOINT APPLICATION OF )
POWERGEN plc, LG&E ENERGY CORP., )
LOUISVILLE GAS AND ELECTRIC COMPANY, ) CASE NO. 2000-095
AND KENTUCKY UTILITIES COMPANY )
FOR APPROVAL OF A MERGER )
TESTIMONY
OF
MICHAEL D. ROBINSON
VICE PRESIDENT AND CONTROLLER
LG&E ENERGY CORP.
<PAGE>
INTRODUCTION
------------
Q. Please state your name and business address.
A. My name is Michael D. Robinson. My business address is 220 West Main
Street, Louisville, Kentucky 40502.
Q. By whom are you employed and what is your position?
A. I am Vice President and Controller of LG&E Energy Corp. ("LG&E Energy") and
its subsidiaries, Louisville Gas and Electric Company ("LG&E") and Kentucky
Utilities Company ("KU").
Q. Please describe your employment history, as well as your education and
civic involvement.
A. Descriptions of my employment history, educational background, and civic
involvement are attached to this testimony as appendix A.
Q. Have you testified before this Commission on other occasions?
A. Yes. I have testified in hearings before this Commission on several
occasions in rate proceedings, fuel adjustment clause proceedings, and
environmental surcharge proceedings.
PURPOSE OF TESTIMONY
--------------------
Q. What is the purpose of your testimony?
A. The purpose of my testimony is to address the issue of affiliate
transactions and to demonstrate that the creation of a new corporate
structure, including a registered holding company and a service company,
will not affect the Commission's regulatory oversight or authority. I
further explain that there will be no accounting consequences to LG&E or KU
stemming from the acquisition of LG&E Energy stock.
<PAGE>
AFFILIATE TRANSACTIONS
----------------------
Q. Will the PowerGen merger result in a new corporate structure for LG&E
Energy?
A. Yes. The merger of LG&E Energy into a subsidiary of PowerGen will result in
a new corporate structure for LG&E Energy. Generally speaking, this change
will mean that LG&E Energy's existing shareholders will be replaced by one
new shareholder, namely PowerGen. Specifically, LG&E Energy will become an
indirect, wholly-owned subsidiary of PowerGen. LG&E Energy's existing
subsidiaries (i.e., LG&E, KU and LG&E Energy's non-utility subsidiaries)
will remain unchanged as subsidiaries of LG&E Energy. However, as a result
of the merger, PowerGen will become a registered holding company under the
Public Utility Holding Company Act of 1935, as amended ("PUHCA").
Q. Does PUHCA impose any restrictions on the operation of PowerGen as a
registered holding company?
A. Yes. PUHCA will impose a number of restrictions on the operations of
PowerGen as a registered holding company and of its subsidiaries, including
LG&E Energy, LG&E and KU. The restrictions include a requirement that the
United States Securities and Exchange Commission ("SEC") approve in advance
certain securities issuances, sales and acquisitions of utility assets, and
acquisitions of other businesses. In addition, PUHCA limits the ability of
registered holding companies and their subsidiaries to engage in various
businesses. Generally stated, PUHCA limits a holding company's activities
to utility operations, activities needed to support utility operations,
energy-related businesses, exempt wholesale generators, foreign utility
companies, and
2
<PAGE>
telecommunications. PUHCA will regulate LG&E Energy Services, Inc., a
service company that will provide corporate and administrative services to
utility and non-utility subsidiaries and affiliates in the PowerGen system.
Q. Does the merger affect the authority of the Kentucky Commission to regulate
the utility operations of LG&E or KU?
A. No. LG&E Energy's becoming a subsidiary of PowerGen as a result of the
merger will not alter the authority of the Kentucky Commission to regulate
LG&E's or KU's utility operations. LG&E and KU will remain subject to all
applicable laws and rules that apply under the current LG&E Energy
structure. Further, the merger will not prevent the Commission from
reviewing LG&E's or KU's costs and operations. Access to company books,
records, and management will not change as a result of the merger.
Q. Is there any area where regulatory oversight of the Kentucky Commission
could be affected by the merger?
A. Yes. The establishment of LG&E Energy Services, Inc. could affect the
regulatory oversight of the Kentucky Commission. PUHCA prohibits
registered holding companies from providing services at a fee to operating
utility subsidiaries, and greatly restricts operating companies from
providing services directly to each other. However, PUHCA permits the
provision of centralized administrative and corporate services within a
holding company system by a services subsidiary of a holding company if the
services subsidiary meets the requirements of PUHCA and is approved by the
SEC. The SEC then regulates the provision of services and allocation of
costs from the services subsidiary to the operating utilities to ensure
that appropriate measures are used. PowerGen and LG&E Energy opted to
establish a services subsidiary, LG&E Energy Services, Inc., to
3
<PAGE>
provide centralized administrative and corporate services to various
companies in the U.S. PowerGen system, including LG&E and KU. LG&E Energy
Services, Inc. will be a new, direct, and wholly owned subsidiary of LG&E
Energy. Some employees of LG&E Energy, LG&E and KU will provide staffing
for LG&E Energy Services, Inc.
After the merger, the Commission shall have the same ratemaking and
regulatory authority to regulate the rates and services of LG&E and KU as
it did before the merger. Furthermore, Applicants commit that they will not
assert that the SEC's jurisdiction legally preempts the Commission from
disallowing recovery in retail rates of the cost of goods and services that
LG&E or KU obtain from LG&E Energy Services, Inc., provided that LG&E and
KU otherwise retain the right to assert that the charges are reasonable and
appropriate.
Q. What types of services will be provided by LG&E Energy Services, Inc.?
A. LG&E Energy Services, Inc. may perform the following services:
. Information System Services
. Customer Services
. Marketing and Sales
. Employee Services
. Corporate Compliance
. Purchasing
. Financial Services
. Risk Management
. Public Affairs
. Legal Services
4
<PAGE>
. Investor Relations
. Telecommunications
. Gas Supply and Capacity Management
. Transmission, Substation Construction, Maintenance & Operations
. Design Engineering
. Substation Engineering and Support
. Resource Acquisition and Analysis
. Strategic Planning
. Executive
The details of these services are set forth in Exhibit A to my testimony.
Exhibit B to my testimony contains a Form of Service Agreement presently
contemplated by PowerGen and LG&E Energy. The content of the Agreement is
still preliminary and subject to change. LG&E and KU will file a copy of
the final Service Agreement with the Commission concurrent with the filing
at the SEC and subsequently will file the orders of the SEC approving the
Service Agreement.
Q. Will LG&E Energy Services, Inc. have any material change on the day-to-day
operations of LG&E and KU?
A. No. In general, LG&E Energy Services, Inc. will not change the day-to-day
operations of the utilities. In the past, these services were provided
directly by KU and LG&E or were provided in large part by LG&E Energy, and
the costs of the services were allocated and charged to LG&E and KU
consistent with past guidelines approved in orders issued by the
Commission. Customers will experience no change in their utility services
due to the establishment of LG&E Energy Services, Inc.
5
<PAGE>
Q. What role will the SEC have in the governance of LG&E Energy Services, Inc.
in the allocation of costs to the operating utilities?
A. The SEC has regulatory authority over the governance of LG&E Energy
Services, Inc. and the allocation of costs to the operating utilities. The
SEC's regulations are designed to ensure that the activities performed by
utility service companies are:
[n]ecessary or appropriate in the public interest or for the
protection of investors or consumers and to ensure that such
[services] are performed economically and efficiently for the benefit
of such associated companies, at cost, fairly and equitably allocated
among such companies.
15 U.S.C. (S)79m(b).
As a result, the SEC standards are very similar to those of the Commission.
Q. Why then do the Applicants believe that the proposed corporate structure
does not negatively affect the ability of the Kentucky Commission to
regulate the provision of the utility services effectively?
A. There are several reasons. First, accounting for LG&E Energy Services,
Inc.'s costs will comply with the SEC Uniform System of Accounts for Mutual
Service Companies and Subsidiary Service Companies under PUHCA. The SEC
Uniform System of Accounts is, for all practical purposes, identical to the
FERC Uniform System of Accounts. Consequently, the Commission will be
familiar with LG&E Energy Services, Inc.'s accounting methods. Moreover,
the Commission has experience in overseeing the operation of a services
company in the context of a registered holding company from its regulation
of subsidiaries of AEP and CINergy. Second, a significant majority of LG&E
Energy Services, Inc.'s costs will be directly assigned to the benefiting
subsidiary. Costs that cannot be directly assigned will be allocated using
allocation methods approved by
6
<PAGE>
the SEC. The Applicants anticipate using allocation methods similar to
those described in Exhibit A, which are similar to methods currently used
to allocate costs to LG&E and KU subsidiaries as they are based on fully
allocated costing principles. Consequently, the Commission can be assured
that costs are appropriately allocated between regulated and unregulated
subsidiaries, and between utility operating companies. Third, the SEC will
have audit authority over all transactions between LG&E Energy Services,
Inc. and the affiliate operating companies. The SEC has historically
invited FERC and state regulatory commissions to participate in this
process. Consequently, the Kentucky Commission can participate in future
SEC proceedings, should it choose.
Q. Have PowerGen and LG&E Energy made a commitment with respect to the
Kentucky Commission's jurisdiction?
A. Yes. Because the SEC regulation under PUHCA is intended to be consistent
with state regulation, the parties to this merger believe that the merger
will not reduce the authority of the Kentucky Commission. Nonetheless, the
Applicants offer an additional commitment to the Commission. The Applicants
commit that they will not assert that the SEC jurisdiction legally preempts
the Commission from disallowing recovery in retail rates of the costs of
goods and services that LG&E and KU obtain from LG&E Energy Services, Inc.,
provided that LG&E and KU otherwise retain the right to assert that the
charges are reasonable and appropriate. This is comparable to the
commitment made by CINergy when Union Light, Heat & Power became part of a
registered system.
7
<PAGE>
ACCOUNTING CONSEQUENCES
-----------------------
Q. Will the acquisition of LG&E Energy stock have any accounting consequences
on LG&E's and KU's books?
A. No. The cost of the acquisition will not be recorded on the books of LG&E
or KU.
ACCOUNTING RECORDS
------------------
Q. Will the merger affect LG&E's or KU's accounting records?
A. No. The merger will not affect LG&E's or KU's accounting records. LG&E and
KU will continue to operate as public utilities, will continue to maintain
separate accounting records, and will continue to file reports and
financial information with the Commission as separate and distinct
companies in accordance with Generally Accepted Accounting Principles and
the Uniform System of Accounts, as required by the FERC and adopted by this
Commission. The applicable reporting and record-keeping requirements
imposed by the Commission in the reorganizations of LG&E & KU in case
numbers 89-374 and 10296 and the LG&E/KU merger in case number 97-300 will
continue to be followed by LG&E and KU after the merger with PowerGen.
CONCLUSION
----------
Q. What is your recommendation to the Commission?
A. The Commission should approve the proposed merger between PowerGen and LG&E
Energy.
Q. Does this conclude your testimony?
A. Yes, it does.
8
<PAGE>
VERIFICATION
COMMONWEALTH OF KENTUCKY )
) SS:
COUNTY OF __________________ )
MICHAEL D. ROBINSON, being first duly sworn, deposes and states:
That he has read the foregoing testimony, appendix and exhibits and knows
the matters contained therein; that said matters are true and correct to the
best of his knowledge and belief, except as to those matters stated on
information and belief, and as to those matters, he believes them to be true.
/s/ MICHAEL D. ROBINSON
Subscribed and Sworn to before me, a Notary Public in and before said
County and State, this ____ day of March, 2000.
/s/ Notary Public
My Commission Expires:
___________________________
<PAGE>
APPENDIX A
MICHAEL D. ROBINSON
Vice President and Controller
LG&E Energy Corp.
220 West Main Street
Louisville, Kentucky 40202
Telephone: (502) 627-2874
CIVIC AND PROFESSIONAL ACTIVITIES
Lexington Children's Theatre - Board Member
Louisville Chapter of Financial Executives Institute
American Institute of Certified Public Accountants
Lexington Community College - Accounting Advisory Board
Transylvania University - Accounting Advisory Board
EDUCATION
University of Iowa - Business Administration and Accounting - 1978
Certified Public Accountant - Commonwealth of Kentucky
PREVIOUS POSITIONS
Kentucky Utilities Company
1990 - 1998 Controller
1983 - 1990 Assistant Controller
Arthur Andersen & Co.
1978 - 1983 Staff Auditor - Audit Manager
<PAGE>
Exhibit A
Description of LG&E Energy Services, Inc. and Allocation Factors
----------------------------------------------------------------
I. Overview
Because the Merger Agreement will result in a registered holding company
structure, a service company LG&E Energy Services, Inc., (herein, "LG&E
Services") will be formed as a wholly-owned, first-tier subsidiary of LG&E
Energy to provide administrative and other services to the various affiliated
companies. This Exhibit describes the anticipated services and cost-allocation
methods of LG&E Services. As part of the merger process, PowerGen, LG&E Energy,
LG&E and KU will review the appropriateness of the allocation methods and charge
structure. Accordingly, it is possible the information provided below may
change; however, the objective is to provide as much detail as possible based on
current expectations.
LG&E Services will enter into separate Utility and Non-Utility Service
Agreements with the companies receiving its services ("Client Entities").
Generally, the Utility Service Agreement implements a fully allocated cost
approach similar to that used by the Kentucky Commission when reviewing
affiliate transactions. The Agreement will provide that costs will be directly
assigned, distributed or allocated as described below. The Non-Utility Service
Agreement will contain similar provisions, but will also permit charges for
services to be at fair market value in specific instances, if the Securities and
Exchange Commission permits.
LG&E Services will maintain an accounting system for accumulating all costs
on an activity, project, program, work order, or other appropriate basis. To the
extent practical:
(i) time records of hours worked by all LG&E Services employees will be
maintained by activity, project, program or work order;
(ii) charges to the benefiting parties will be determined from such
records and will include the cost of pension and benefits as well as
payroll taxes;
(iii) employee-related expenses and other costs will be maintained for
each service group (described below) within LG&E Services and will
be directly assigned where identifiable to the appropriate activity,
project, program or work order;
(iv) where not identifiable to a particular activity, project, program or
work order, indirect costs will be distributed within a service
group based on the directly assigned costs of such group.
II. Cost Assignment
LG&E Services' costs accumulated for each activity, project, program, or
work order will be directly assigned, distributed or allocated as follows:
A-1
<PAGE>
(i) Costs accumulated in an activity, project, program or work order for
services specifically performed for a single Client Entity will be directly
assigned and charged to such entity.
(ii) Costs accumulated in an activity, project, program or work order for
services specifically performed for two or more Client Entities will be
distributed among and charged to such Client Entities using methods
determined on a case-by-case basis consistent with the nature of the work
performed and based on one of the allocation methods described below.
(iii) Costs accumulated in an activity, project, program or work order for
services of a general nature which are applicable to all Client Entities or
to a class or classes of Client Entities will be allocated among and
charged to such Client Entities by application of one or more of the
allocation methods described below.
III. Allocation Methods
The following methods will be applied, as indicated in the Description of
Services section that follows, to allocate costs for services of a general
nature.
1. Information Systems Chargeback Rates - Rates for services, including
------------------------------------
but not limited to software, consulting, mainframe and personal computer
services, are based on the costs of labor, materials and information services
overheads related to the provision of each service. Such rates are applied based
on the specific equipment employed and the measured usage of services by Client
Entities. These rates will be determined annually based on actual experience and
may be adjusted for any known and reasonably quantifiable events, or at such
time as may be required due to significant changes.
2. Number of Customers Ratio - A ratio based on the number of retail
-------------------------
electric and/or gas customers. This ratio will be determined annually based on
the actual number of customers at the end of the previous calendar year and may
be adjusted for any known and reasonably quantifiable events, or at such time as
may be required due to significant changes.
3. Number of Employees Ratio - A ratio based on the number of employees
-------------------------
benefiting from the performance of a service. This ratio will be determined
annually based on actual counts of applicable employees at the end of the
previous calendar year and may be adjusted for any known and reasonably
quantifiable events, or at such time as may be required due to significant
changes.
4. Three-Factor Formula - This formula will be determined annually based
--------------------
on the average of gross property (original cost of plant in services, excluding
depreciation), payroll charges (salaries and wages, including overtime, shift
premium and holiday pay, but not including pension, benefit and company-paid
payroll taxes) and gross revenues during the previous calendar year and may be
adjusted for any known and reasonably quantifiable events, or at such time as
may be required due to significant changes.
A-2
<PAGE>
5. Telecommunications Chargeback Rates - Rates for use of
-----------------------------------
telecommunications services other than those encompassed by Information Systems
Chargeback Rates are based on the costs of labor, materials, outside services
and telecommunications overheads. Such rates are applied based on the specific
equipment employment and the measured usage of services by Client Entities.
These rates will be determined annually based on actual experience and may be
adjusted for any known and reasonably quantifiable events, or at such time as
may be required due to significant changes.
6. Gas Sales Ratio - A ratio based on the actual number of dekatherms of
---------------
natural gas sold by the applicable gas distribution or marketing operations.
This ratio will be determined annually based on actual results of operations for
the previous calendar year and may be adjusted for any known and reasonably
quantifiable events, or at such time, based on results of operations for a
subsequent twelve-month period, as may be required due to significant changes.
7. Transmission Construction Expenditures Ratio - A ratio based on
--------------------------------------------
transmission construction or capital expenditures, net of reimbursements, for
the immediately preceding twelve consecutive calendar months. The numerator is
equal to such expenditures for a specific Client Entity and the denominator is
equal to such expenditures for all applicable Client Entities. This ratio will
be determined annually, or at such time as may be required due to a significant
change.
8. Distribution Construction Expenditures Ratio - A ratio based on
--------------------------------------------
distribution construction or capital expenditures, net of reimbursements, for
the immediately preceding twelve consecutive calendar months. The numerator is
equal to such expenditures for a specific Client Entity and the denominator is
equal to such expenditures for all applicable Client Entities. This ratio will
be determined annually, or at such time as may be required due to a significant
change.
9. Substation Construction Expenditures Ratio - A ratio based on
------------------------------------------
substation construction or capital expenditures, net of reimbursements, for the
immediately preceding twelve consecutive calendar months. The numerator is
equal to such expenditures for a specific Client Entity and the denominator is
equal to such expenditures for all applicable Client Entities. This ratio will
be determined annually, or at such time as may be required due to a significant
change.
10. Electric MWh Generation - A ratio based on the sum of electric MWh
-----------------------
generated during each month for the immediately preceding twelve consecutive
calendar months. The numerator is equal to the electric MWh generated by a
specific Client Entity and the denominator is equal to all electric MWh
generated by all applicable Client Entities. This ratio will be determined
annually, or at such time as may be required due to significant changes.
A-3
<PAGE>
IV. Description of Services
A description of each of the services performed by LG&E Energy Services,
Inc., which may be modified from time to time, is presented below. As discussed
above, where identifiable, costs will be directly assigned or distributed to
Client Entities. For costs accumulated in an activity, project, program or work
order which are for services of a general nature that cannot be directly
assigned or distributed, the method or methods of allocation are also set forth.
Substitution or changes may be made in the methods of allocation hereinafter
specified, as may be appropriate, and will be provided to state regulatory
agencies and to each affected Client Entity.
1. Information Systems Services - Provides electronic data processing
----------------------------
services. Costs of a general nature are allocated using the Information Systems
Chargeback Rates.
2. Customer Services - Provides billing, mailing, remittance processing,
-----------------
call center and customer communication services for electric and gas customers.
Costs of a general nature are allocated using the Number of Customers Ratio.
3. Marketing and Sales - Establishes strategies, provides oversight for
-------------------
marketing, sales and branding of utility and related services and conducts
marketing and sales programs. Costs of a general nature are allocated using the
Number of Customers Ratio.
4. Employee Services - Includes Human Resources, which establishes and
-----------------
administers policies and oversees compliance with regulations in the areas of
employment, compensation and benefits, processes payroll and administers
corporate training. Also includes employee communications, facilities management
and mail services. Costs of a general nature are allocated using the Number of
Employees Ratio.
5. Corporate Compliance - Oversees compliance with all laws, regulations
--------------------
and policies applicable to all of LG&E Energy Corp.'s businesses and directs
compliance training. Costs of general nature are allocated using the Number of
Employees Ratio.
6. Purchasing - Provides procurement services. Costs of a general nature
----------
are allocated using the Three-Factor Formula.
7. Financial Services - Provide treasury, accounting, tax, financial
------------------
planning, regulatory and auditing services. Costs of a general nature are
allocated using the Three-Factor Formula.
8. Risk Management - Provides insurance, claims, security, environmental
---------------
and safety services. Costs of a general nature allocated using the Three-Factor
Formula.
9. Public Affairs - Maintains relationships with government policy
--------------
makers, conducts lobbying activities and provides community relations functions.
Costs of a general nature are allocated using the Three-Factor Formula.
A-4
<PAGE>
10. Legal Services - Provides various legal services and general legal
--------------
oversight; handles claims. Costs of a general nature are allocated using the
Three-Factor Formula.
11. Investor Relations - Maintains relationships with the financial
------------------
community and provides shareholder services. Costs of a general nature are
allocated using the Three-Factor Formula.
12. Telecommunications - Provides telecommunications services, primarily
------------------
the use of telephone equipment. Costs are allocated using the Telecommunications
Chargeback Rates.
13. Gas Supply and Capacity Management - Provides gas supply and capacity
----------------------------------
management services. Costs of a general nature are allocated using the Gas Sales
Ratio.
14. Transmission, Substation Construction, Maintenance & Operations -
---------------------------------------------------------------
Provides management services for transmission and substation construction,
maintenance and operations areas. Costs of a general nature are allocated using
the Transmission Construction Expenditures Ratio.
15. Design Engineering - Designs and monitors construction of electric
------------------
transmission and distribution lines and substations. Costs of a general nature
are allocated using the Transmission Construction Expenditures Ratio or the
Distribution Construction Expenditures Ratio, whichever is appropriate.
16. Substation Engineering and Support - Provides management support
----------------------------------
services to the Substation Engineering and Support organizations of the
Operating Companies. Costs of a general nature are allocated using the
Substation Construction Expenditures Ratio.
17. Resource Acquisition and Analysis - Procures coal, natural gas and oil
---------------------------------
for the generation facilities of Client Entities. Also ensures compliance with
price and quality provisions of fuel contracts and arranges for transportation
of fuel to the desired location and purchases power and performs electric and
gas trading services. Costs of a general nature are allocated using the Electric
MWh Generation Ratio.
18. Strategic Planning - Develops corporate strategies and business plans.
------------------
Costs of a general nature are allocated using the Three-Factor Formula.
19. Executive - Provides executive and general administrative services.
---------
Costs of a general nature are allocated using the Three-Factor Formula.
A-5
<PAGE>
FORM OF INITIAL SERVICE REQUEST
The undersigned request all of the services listed in Exhibit B from LG&E
Energy Services, Inc., except for ____________________________________________.
The services requested hereunder shall commence on _________________________ and
be provided through ______________________.
[Subsidiary]
By:______________________________________
Name:
Title:
A-6
<PAGE>
EXHIBIT B
Form of Service Agreement
-------------------------
This Service Agreement (this "Agreement") is entered into as of the ___ day
of _______, by and between [insert name of subsidiary], a __________________
Corporation (the "Company") and LG&E Energy Services, Inc., a Kentucky
corporation ("LG&E Services").
WHEREAS, LG&E Services is a direct or indirect wholly owned subsidiary
of LG&E Energy Corp.;
WHEREAS, LG&E Services has been formed for the purpose of providing
administrative, management and other services to subsidiaries and affiliates of
LG&E Energy Corp.; and
WHEREAS, the Company believes that it is in the interest of the Company to
provide for an arrangement whereby the Company may, from time to time and at the
option of the Company, agree to purchase such administrative, management and
other services from LG&E Services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, hereby
agree as follows:
I. SERVICES. LG&E Services supplies, or will supply, certain
administrative, management or other services to Company similar to those
supplied to other subsidiaries or affiliates of LG&E Energy Corp. Such services
are and will be provided to the Company only at the request of the Company.
Exhibit A hereto lists and describes all of the services that are available from
LG&E Services.
II. PERSONNEL. LG&E Services provides and will provide such services by
utilizing the services of their executives, accountants, financial advisers,
technical advisers, attorneys and other persons with the necessary
qualifications.
If necessary, LG&E Services, after consultation with the Company, may also
arrange for the services of nonaffiliated experts, consultants and attorneys in
connection with the performance of any of the services supplied under this
Agreement.
III. COMPENSATION AND ALLOCATION. As and to the extent required by law,
LG&E Services provides and will provide such services at fully allocated cost.
Exhibit A hereof contains rules for determining and allocating such costs.
IV. COMPLIANCE. All contracts, agreements, or arrangements of any kind,
hereafter required to be filed with and/or approved by the Securities and
Exchange Commission
B-1
<PAGE>
("SEC") pursuant to the Public Utility Holding Company Act of 1935, as
subsequently amended, between Louisville Gas and Electric Company or Kentucky
Utilities Company, and any affiliate, associate, holding, mutual service or
subsidiary company, within the same holding company system, as these terms are
defined in 15 U.S.C. (S)79b as it presently exists or as subsequently amended,
shall contain and be conditioned upon the following without modification or
alteration:
Louisville Gas and Electric Company ("LG&E") and Kentucky Utilities Company
("KU") will not seek to overturn, reverse, set aside, change or enjoin,
whether through appeal or the initiation or maintenance of any action in
any forum, a decision or order of the Kentucky Public Service Commission,
or the Virginia State Corporation Commission which pertain to recovery,
disallowance, allowance, deferral or ratemaking treatment of any expense,
charge, cost or allocation incurred or accrued by LG&E or KU in or as a
result of a contract, agreement, arrangement, or transaction with any
affiliate, associate, holding, mutual service or subsidiary company on the
basis that such expense, charge, cost or allocation: (1) has itself been
filed with or approved by the SEC or (2) was incurred pursuant to a
contract, agreement, or allocation method which was filed with or approved
by the SEC.
V. TERMINATION AND MODIFICATION. The Company may terminate this
Agreement by providing 60 days written notice of such termination to LG&E
Services. LG&E Services may terminate this Agreement by providing 60 days
written notice of such termination to the Company.
This Agreement is subject to termination or modification at any time to the
extent its performance may conflict with the provisions of the Public Utility
Holding Company Act of 1935, as amended, or with any rule, regulation or order
of the Securities and Exchange Commission adopted before or after the making of
this Agreement. This Agreement shall be subject to the approval of any state
commission or other state regulatory body whose approval is, by the laws of said
state, a legal prerequisite to the execution and delivery or the performance of
this Agreement.
VI. SERVICE REQUESTS. The Company and LG&E Services will prepare a
Service Request on or before ________________ of each year listing services to
be provided to the Company by LG&E Services and any special arrangements related
to the provision of such services for the coming year, based on services
provided during the past year. The Company and LG&E Services may supplement the
Service Request during the year to reflect any additional or special services
that the Company wishes to obtain from LG&E Services, and the arrangements
relating thereto.
VII. BILLING AND PAYMENT. Unless otherwise set forth in a Service Request,
payment for services provided by LG&E Services shall be by making remittance of
the amount billed or by making appropriate accounting entries on the books of
the Company and LG&E Services. Billing will be made on a monthly basis, with
the bill to be rendered by the 25/th/ of the month, and remittance or accounting
entries completed within 30 days of billing.
B-2
<PAGE>
VIII. NOTICE. Where written notice is required by this Agreement, all
notices, consents, certificates, or other communications hereunder shall be in
writing and shall be deemed given when mailed by United States registered or
certified mail, postage prepaid, return receipt requested, addressed as follows:
1. To the Company:
______________________________
______________________________
2. To LG&E Energy Services, Inc.:
______________________________
______________________________
IX. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Kentucky, without regard to their
conflict of laws provisions.
X. MODIFICATION. No amendment, change or modification of this Agreement
shall be valid, unless made in writing and signed by all parties hereto.
XI. ENTIRE AGREEMENT. This Agreement, together with its exhibits,
constitutes the entire understanding and agreement of the parties with respect
to its subject matter, and effective upon the execution of this Agreement by the
respective parties hereof and thereto, any and all prior agreements,
understandings or representations with respect to this subject matter are hereby
terminated and canceled in their entirety and are of no further force and
effect.
XII. WAIVER. No waiver by any party hereto of a breach of any provision of
this Agreement shall constitute a waiver of any preceding or succeeding breach
of the same of the same or any other provision hereof.
XIII. ASSIGNMENT. This Agreement shall inure to the benefit and shall be
binding upon the parties and their respective successors and assigns. No
assignment of this Agreement or any party's rights, interests or obligations
hereunder may be made without the other party's consent, which shall not be
unreasonably withheld, delayed or conditioned.
XIV. SEVERABILITY. If any provision or provisions of this Agreement shall
be held by a court of competent jurisdiction to be invalid, illegal, or
unenforceable, the validity, legality, and enforceability of the remaining
provisions shall in no way be affected or impaired thereby.
B-3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of this _____ day of _____.
LG&E Energy Services, Inc.
By:________________________________
Name:
Title:
[Subsidiary]
By:_________________________________
Name:
Title:
B-4
<PAGE>
COMMONWEALTH OF KENTUCKY
BEFORE THE PUBLIC SERVICE COMMISSION
In the Matter of:
JOINT APPLICATION OF )
POWERGEN plc, LG&E ENERGY CORP., )
LOUISVILLE GAS AND ELECTRIC COMPANY, ) CASE NO. 2000-095
AND KENTUCKY UTILITIES COMPANY )
FOR APPROVAL OF A MERGER )
TESTIMONY
OF
DR. KARL A. MCDERMOTT
LOUISVILLE GAS AND ELECTRIC COMPANY
AND
KENTUCKY UTILITIES COMPANY
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I. QUALIFICATIONS, PURPOSE AND SCOPE OF TESTIMONY
Q1. PLEASE STATE YOUR NAME.
A. My name is Dr. Karl McDermott. I am a Vice President of National
Economic Research Associates, Inc. ("NERA"). My business address is
875 North Michigan Avenue, Suite 3650, Chicago, Illinois 60611.
Q2. PLEASE STATE YOUR QUALIFICATIONS.
A. I am a Vice President of National Economic Research Associates. Inc.
("NERA"). I received a B.A. in Economics from Indiana University of
Pennsylvania, an M.A. in Public Utility Economics at the University of
Wyoming, and a Ph.D. in Economics at the University of Illinois.
From April of 1992 until May of 1998, I served as a Commissioner at
the Illinois Commerce Commission ("ICC"). Prior to that, I was founder
and served as the President of the Center for Regulatory Studies
("CRS"), a not-for-profit company that is located on the campus of the
Illinois State University. Before founding the CRS, I worked in
numerous capacities in the regulatory industry including positions on
the staff of the Illinois Commerce Commission, the National Regulatory
Research Institute ("NRRI") and Argonne National Laboratory. Since
leaving the ICC, I have testified as an expert witness on behalf of
electric, gas, and telecommunications firms. A copy of my Curriculum
Vitae is attached as Exhibit KM-1.
Q3. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is to discuss the criteria assessing
whether a merger or acquisition is in the public interest. I will then
apply these criteria to the acquisition of LGE Energy Corporation
("LGE Energy"), the parent company of Louisville Gas and Electric
Company ("LG&E") and Kentucky Utilities Company ("KU"), by PowerGen
plc ("PowerGen"). The criteria that I employ are based on my training
as an economist and experience in the analysis of public policy and
regulatory issues, particularly as a Commissioner at the
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Illinois Commerce Commission where I had the responsibility for
evaluating a number of electric and natural gas mergers and
acquisitions.
Based on my past experience and my review of this proposed
acquisition, it is my firm belief that LGE Energy's proposed
transaction with PowerGen will provide a significant opportunity to
benefit both the customers of the company and the state of Kentucky
for the reasons that are outlined below.
Q4. COULD YOU PLEASE OUTLINE THE SCOPE OF YOUR TESTIMONY?
A Yes. After discussing the public interest standard, I will begin my
analysis by describing how the energy market has been evolving and the
role that globalization has played in the choices of merger partners.
I will then briefly describe the types of acquisitions that have been
occurring and the different impacts that these acquisitions have on
the timing of customer benefits. Next, I will describe the focus that
both LGE Energy and PowerGen have had on implementing a best-practice
management philosophy.
With these basic issues covered I then turn to a discussion of the
timing of this acquisition and the advantages this brings to both the
consumer and the Public Service Commission of Kentucky ("Commission").
The fact that the Commission has just approved a new set of just and
reasonable rates for LG&E and KU creates an "optimal" starting point
for the Earnings Sharing Mechanism to pass on to customers the future
benefits that should be derived from the application of LG&E and
PowerGen's best practice techniques. To support this view, I reviewed
information on PowerGen's applications of best practices in its
generation operations as well as the application of this management
approach at East Midland, which it acquired in 1998. I will also
discuss PowerGen's many years of experience with utility regulation.
Finally, I will address the additional financial resources that the
acquisition will bring and how this can better position LG&E and KU to
provide efficient, safe, adequate and reliable service to their
utility customers.
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Consulting Economists
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Q5. PLEASE SUMMARIZE YOUR CONCLUSIONS.
A. PowerGen's acquisition of LGE Energy will enhance the already
considerable financial, technical, and managerial resources of LGE
Energy. The financial benefits that this acquisition brings can
provide an additional assurance that needed infrastructure
requirements in Kentucky will be met in an economical fashion. By
creating a financially strong and highly efficient company, this
acquisition will help to ensure that a Kentucky-based utility will be
in a position to serve Kentucky customers in the long run.
I conclude that it would be unnecessary and unwarranted to impose
additional conditions on the transaction. I will show that this
acquisition will not reduce the regulators' ability to regulate LG&E
or KU and I will explain that this acquisition does not raise
anticompetitive concerns. On the contrary, the acquisition of LGE
Energy by PowerGen can strengthen LG&E's and KU's ability to meet
future challenges (including competition) on behalf of utility
customers in Kentucky.
As a result of the acquisition with PowerGen, LGE Energy would become
a more viable and efficient provider of energy products and services
in Kentucky, the benefits of which would be shared with LGE Energy's
utility consumers through the Earnings Sharing Mechanism.
As a result of this transaction, consumers in Kentucky could
potentially benefit from improved service quality and operating
efficiency resulting from reciprocal adoption of best practices. In
addition, there might be other benefits, such as greater capital
resources to invest in the region. In addition, PowerGen's many years
of experience with improving business performance in the U.K. could
help it to improve the efficiency of LGE Energy's utility operations.
I believe that the acquisition of LGE Energy by PowerGen is likely to
provide benefits to the public and, at a minimum, is not likely to
harm consumers. I therefore recommend that this transaction be
approved by the Commission.
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Consulting Economists
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II. REGULATORY POLICIES SHOULD ACCOMMODATE CORPORATE REORGANIZATIONS THAT
PROVIDE BENEFITS TO CONSUMERS
A. This Transaction Meets the Applicable Statutory Requirements
Q6. AS AN ECONOMIST AND FORMER REGULATOR, PLEASE DISCUSS YOUR GENERAL
UNDERSTANDING OF THE PUBLIC INTEREST STANDARD.
A. In the field of public utilities regulation, the public interest can
be defined broadly as the potential ability of a decision to produce a
set of outcomes that will enhance the efficiency, reliability and
safety of a public utility's operations. The public is benefited
through the improved efficiency, reliability and safety. Some measures
of the public interest relating to utility mergers and acquisitions
include the degree of customer satisfaction, the level of rates, the
ability to share the gains from improved efficiency with customers,
and the level of system reliability.
The public interest can be enhanced through regulatory mechanisms that
motivate performance improvements by utilities and share these
benefits with customers. The Commission has had the foresight to
establish a performance-based regulatory framework that will share
with consumers the efficiency and financial stability that this
acquisition will bring to LGE Energy and its operating utility
subsidiaries--LG&E and KU. Thus, the Commission's past decisions help
to assure that the customers of LGE and KU and the citizens of
Kentucky in general will benefit from this transaction. Not all states
have had the benefit of a performance-based form of regulation to
protect the customers during periods of change.
Q7. IS THIS ACQUISITION IN THE PUBLIC INTEREST?
A. Yes. This acquisition is in the public interest. PowerGen (and its LGE
Energy subsidiary) will have the financial, technical, and managerial
capabilities that are needed to provide highly efficient service to
LG&E and KU utility customers in
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Consulting Economists
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the future. Indeed, consumers are likely to be better off as a result
of this acquisition (and certainly are not likely to be harmed in any
way). Further, there is no reason to believe that consumers might
suffer competitive harm as a result of this acquisition. Nor will the
acquisition adversely affect this Commission's jurisdiction over LG&E
and KU. Upon completion of this transaction, the Commission will
continue to be able to regulate LG&E and KU effectively, including
necessary oversight of the level and design of their rates.
Q8. WHAT IS THE REGULATORY FRAMEWORK THAT ENSURES THAT CONSUMERS WILL
SHARE IN THE BENEFITS OF THIS TRANSACTION?
A. In January 2000, the Commission approved a three-year alternative
method of regulation plan ("ARP") for LG&E and KU. More recently, in
early March 2000, the LG&E's and KU's rates were lowered, which
provides a fair starting point for the Commission's ARP. The ARP's
Earnings Sharing Mechanism ("ESM") can ensure that utility customers
share in benefits of the acquisition. Given the Commission's foresight
in developing and approving this mechanism, there is no need for
additional regulatory requirements regarding the sharing of the
benefits of this acquisition.
Q9. WILL THE COMMISSION'S OVERSIGHT OF LG&E AND KU BE AFFECTED BY THIS
TRANSACTION?
A. No, not to any appreciable degree as a practical matter. The
Commission will retain its regulatory authority over LG&E and KU and,
most importantly, will continue to have the ability to set LG&E/KU
rates.
Q10. DO YOU SEE ANY ADVANTAGES THAT ARE ASSOCIATED WITH THE TIMING OF THIS
TRANSACTION?
A. Yes. While there may be an element of serendipity at work here, the
fact remains that the Kentucky Commission has just completed a
thorough review of LG&E's and KU's costs and rates in the order filed
January 7, 2000. This means that the current rates are "fresh" and,
therefore, fair, just and reasonable. The
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rate reduction that was implemented and the continuing merger credit
further imply that the benefits of the "contiguous" merger between
LG&E and KU have been captured for the customers and that there is no
reason to focus on any additional immediate rate reductions.
Furthermore, the Commission fortuitously has implemented an Earnings
Sharing Mechanism ("ESM") that can capture the future efficiencies
that could be expected to arise from the merger. I view this situation
as representing what could be characterized as an "optimal" initial
condition upon which we have added an "optimal" adjustment mechanism
designed to reap the benefits of efficiency improvements over time for
customers. I have put the quotations around the word optimal merely to
reflect the fact that it would be difficult to prove the exact "truth"
of whether the current situation is the optimum.
B. This Transaction Serves the Interest of Kentucky Utility Customers
While Responding to Global Trends
Q11. ARE THERE RATIONAL ECONOMIC REASONS FOR INTERNATIONAL MERGERS AND
ACQUISITIONS?
A. Yes, there are. The utility industry is facing the same economic
forces that other industries face. Kentucky, for example, enjoys the
benefits of having a major global auto manufacturer, Toyota, locate
operations in the state. While regulation has been effective in
providing Kentucky utility customers with efficient and reliable
service, LGE Energy is not immune from the forces of global
competition.
The acquisition of LGE Energy by PowerGen will provide a strong
assurance that consumers in Kentucky will retain the benefits of LGE
Energy's efficient utility operations in the future. There are other
benefits to the citizens of Kentucky in general as well including
retaining a corporate headquarters in the state, which would not be
likely if LGE Energy had merged with a contiguous utility. Given the
benefits of the LGE Energy/PowerGen transaction for utility consumers
and citizens in Kentucky as a whole, I believe that this merger should
be approved.
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Consulting Economists
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Q12. PLEASE DESCRIBE THE CHANGES THAT ARE TAKING PLACE IN THE ELECTRIC AND
GAS UTILITY INDUSTRIES.
A. In the U.S., the introduction of wholesale competition at the federal
level (and retail competition in some states) and the emphasis on
unbundling services have forced a large number of utilities to
reassess where their core competencies lay. As a result, some
utilities have spun-off or divested generation and distribution assets
while others have sought to strengthen their core areas of competency
through acquisitions. Thus, mergers and acquisitions have undeniably
been one of the strategies that utilities and other market players
have chosen in order to transform and position themselves to thrive in
changing energy markets in the U.S. Experience in other industries
suggests that the corporate restructuring that is taking place in the
electric and gas industries will benefit consumers over time./1/
The acquisition of LGE Energy by PowerGen is consistent with industry
trends. Asset realignment and consolidation in the electric utility
industry, both in the U.S. and abroad, is rapidly occurring. According
to a Report on Mergers and Acquisitions (which is available at
energyinfosource.com), for example, 87 electric utility mergers and
acquisitions have been announced since 1997. These include
transactions by U.K.-based companies such as National Grid (NEES) and
Scottish Power (PacifiCorp)./2/ The proposed acquisition of LGE Energy
by PowerGen should be viewed as part of this trend. The proposed
transaction has the potential to create a combined, diversified
company with geographic reach that could allow it to achieve economic
efficiency, more stable revenues, and other benefits that would be
shared with utility customers through the ESM.
______________________
/1/ See Clifford Winston, "U.S. Industry Adjustment to Economic Deregulation,"
12 Journal of Economic Perspectives, Summer 1998, pages 89-110.
/2/ In the United Kingdom, on the other hand, a number of U.S. electric
utilities own regional electric distribution companies.
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Q13. IN YOUR VIEW AS A FORMER REGULATOR, WHY WOULD POWERGEN SEEK TO MERGE
WITH LGE ENERGY?
A. The first point that should be noted is that PowerGen has probably
reached the limit of its capability to expand in the UK energy market.
Given the limited size of that market and the acquisition of East
Midlands in 1998, there is little opportunity for PowerGen to grow in
its home market. Given depressed utility stock prices, stable markets,
and a growing economy in the U.S. it is a very logical decision for
PowerGen to allocate a significant fraction of its financial resources
to acquire U.S. companies. In this respect PowerGen is not alone--both
Scottish Power and National Grid have made U.S. acquisitions in the
last year. The Scottish Power/PacifiCorp transaction was found to be
in the public interest and approved by the relevant states and the
Federal Energy Regulatory commission. The National Grid/NEES
transaction has been approved by the FERC, the Nuclear Regulatory
Commission, and the applicable state regulatory agencies but has not
yet received approval from the Securities and Exchange Commission.
LG&E and KU are relatively small electric utilities by national
standards. Compared to similar companies in terms of 12-month
revenues,/3/ for example, LGE Energy was the 43rd largest electric
utility operator. PowerGen is a leading integrated gas and electric
company in the United Kingdom, with activities in generation and
distribution as well as retail electricity marketing and trading.
_________________
/3/ This information was developed using the Value Line for Windows data base.
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Q14. COULD YOU PLEASE DESCRIBE THE VARIOUS TYPES OF MERGERS AND
ACQUISITIONS THAT ARE OCCURRING IN THE ENERGY INDUSTRY TODAY?
A. Yes, there are two basic types of transactions that are occurring in
the energy market today. The first is the "contiguous" merger, which
takes the form of two utilities that are neighbors or in close
proximity to one another so that the merger can have a direct effect
on the operations and organizational structure of the two companies.
The merger between LG&E and KU is a perfect example of this form of
merger. In these cases the benefits of the merger can be linked to
"synergies" from combined front and back office operations, more
effective dispatch of power plants and other costs savings that result
from the integration of the operations.
Second, there are so-called "consolidation" mergers and acquisitions,
which are a loosely-defined group of transactions that raise little or
no market power issues but that generally do not provide substantial
efficiency benefits up-front. While a merger of a gas utility and an
electric utility in the same geographical area could be considered a
"consolidation" merger, for my purposes here I assume that the merging
parties do not operate in contiguous areas. Consolidation transactions
include: (1) mergers of natural gas with electric companies (e.g.,
NiSource's acquisition of Bay State Gas Company); (2) acquisitions of
electric utilities by non-traditional gas or electric firms (e.g.,
Dynegy's acquisition of Illinois Power and AES' acquisition of
CILCORP); and (3) mergers of foreign utilities with an U.S.-based
electric utility (e.g., National Grid/NEES, Scottish
Power/PacifiCorp).
In these cases, the benefits of the transaction take on a different
set of characteristics. The benefits could arise from the
diversification of demands (or risk), where weather related
consumption would not be correlated across the country, or the
economic characteristics of the industry served vary considerably.
These factors can lead to a greater stability in earnings and revenue
with the concomitant effect that financial risks and the costs of
capital
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are reduced. The benefits of such a merger or acquisition are not as
"instantaneous" as a transaction between contiguous utilities, but
rather tend to occur over time in a more gradual fashion.
Because of the absence of market power issues, and the potential for
eventual net benefits to consumers from these mergers, consolidation
mergers have generally been approved more quickly than have mergers of
contiguous utilities. The PowerGen/LGE Energy transaction can be
viewed as an example of a consolidation merger.
Q15. DOES THIS MERGER RAISE MARKET POWER CONCERNS?
No. This transaction does not raise competitive concerns. PowerGen and
LGE Energy are not actual or potential competitors in any relevant
market.
Q16. HAVE LG&E AND POWERGEN FOLLOWED PARALLEL PATHS IN DEVELOPING
STRATEGIES TO IMPROVE OPERATIONS?
A. Yes. An examination of the strategies of LG&E and KU indicate that
they have been and will continue to be very cognizant of the need to
reengineer and adopt total quality management strategies in order to
stay ahead of the industry in terms of efficiency and reliability.
This is borne out by the conclusions of the management audits ordered
by the Commission. While it might not have been referred to as "best
practices" analysis, the managerial approach of LG&E and KU certainly
amounts to that with respect to the U.S. energy industry. I think this
is also borne out by the recent recognition by the J.D. Power
Associates award that LG&E and KU received for customer satisfaction.
As discussed below, PowerGen has also been very cognizant of the need
to adapt and improve its operations.
Q17. PLEASE DESCRIBE THE BEST PRACTICES APPROACH EMPLOYED BY POWERGEN.
A. PowerGen is one of the world's leading independent power businesses
and a leading participant in UK's electricity and gas markets.
PowerGen is an integrated company whose principal activities are the
generation and distribution
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of electricity. It is also a participant in the marketing and trading
of electricity and gas. PowerGen has nine power stations in England
and Wales with an installed capacity of over 10,000 megawatts of
electricity/4/ and is building and operating power plants across the
world and is involved in 11 power projects in Europe, India and Asia
Pacific.
An important feature that PowerGen brings to the market is its
commitment to use best practices to improve business operations and
performance and to lead to better growth prospects. It applies best
practice standards to its generation and distribution businesses.
According to PowerGen's 1997 Annual Report, the company's major coal-
fired plant operated at close to world's best practices during the
year. The report stated:
"This followed a major benchmarking exercise in which its
performance was compared against a group of power stations in the
US whose operation was identified as being the best of its kind
in the world...A similar benchmarking exercise has now been
completed on PowerGen's gas-fired plant and has confirmed that
these stations continue to set world's best practice."
Q18. WHAT EVIDENCE LEADS YOU TO BELIEVE THAT POWERGEN CAN HELP LG&E IMPROVE
THEIR OPERATIONS?
A. The evidence exists in the response that the financial community in
the UK has made to the innovations being implemented in the recent
acquisition of East Midlands Electricity. In 1998, PowerGen acquired
East Midlands Electricity, the third largest Regional Electricity
Company in England and Wales, supplying 2.3 million residential and
business customers. One financial analyst, for example, observed that
East Midlands Electricity had experienced an "unbelievable" turnaround
since being acquired by PowerGen. While LGE/KU plants are well run,
efficient plants--one of which was included in the list of
___________________________
/4/ 1998 Annual Report
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best-run plants that PowerGen used to benchmark its performance--
potential further improvements could be possible.
Q19. HAS POWERGEN USED ITS BEST-PRACTICE APPROACH WITH EAST MIDLANDS
ELECTRICITY?
A. Yes. PowerGen is using its best practice approach on East Midlands
Electricity. According to the company's 1998 Annual Report:
"PowerGen has embarked on a drive to attain 'world's best
practice' in the [East Midlands Electricity] EME distribution
business. This follows a benchmarking exercise comparing the
business with other electricity distribution and utility
organizations throughout the world. The exercise provided a
better understanding of what the 'world's best' are doing to
deliver outstanding results to their customers and shareholders."
Q20. HAS THIS SHOWN ANY SUCCESS?
A. While evidence is preliminary in nature, there is evidence that East
Midlands has benefited from the expertise and best-practice philosophy
used by PowerGen. For example, according to a report by the Office of
Gas Electricity Markets,/5/ East Midlands experienced a significant
decrease in supply interruptions per 100 customers during the 1998/99
time period. East Midland's performance--based on a number of
indicators--was generally somewhat better during the 1998/99 time
period relative to the 10-year average. At a minimum, it seems safe to
say that East Midland's customer service performance has not been
reduced since 1998, when it was acquired by PowerGen.
Q21. PLEASE DISCUSS POWERGEN'S FINANCIAL INTEGRITY AND RESOURCES.
A. While LG&E and KU could continue to finance their debt capital on a
"stand-alone" basis at the operating utility level, it is appropriate
to consider
_________________________
/5/ Ofgem, January 2000, Report on Distribution and Transmission System
Performance 1998/99.
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Consulting Economists
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PowerGen's financial integrity and resources. PowerGen will become the
sole equity holder of the utilities' parent, LGE Energy. I have
reviewed reports from credit rating agencies with respect to both
PowerGen and LGE Energy. Both PowerGen and LGE Energy have investment
grade bond ratings.
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Consulting Economists
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Q22. WHAT CONCLUSIONS CAN YOU DRAW ON POWERGEN'S FINANCIAL, TECHNICAL AND
MANAGERIAL CAPABILITIES?
A. PowerGen has solid financial, technical and managerial capabilities.
As a result of the acquisition, the utilities will retain the cost
efficiencies that have benefited Kentucky utility consumers for many
years and will also benefit, over time, from expertise and resources
that PowerGen will bring to bear in.
Mechanisms are in Place to Assure that Kentucky Utility Customers
Benefit from the Acquisition
Q23. ARE THERE ADEQUATE MEANS TO PROTECT THE RATEPAYERS OF KENTUCKY AND
ENSURE THAT THE PUBLIC INTEREST IS SERVED?
A. Yes. The Commission retains all of its traditional authority to review
the costs and rates of LG&E. This includes its power to conduct
management audits, review accounting and financial data and all of the
traditional regulatory tools. In addition, as discussed below, the
creation of the holding company brings the Security and Exchange
Commission into the process of analyzing the company. This means that
there are now two sets of regulatory eyes that are observing the
company and the additional resources that the SEC can bring to bear
should it be necessary.
Q24. ARE MECHANISMS IN PLACE TO ENSURE THAT EFFICIENCY GAINS WILL BE PASSED
ON TO CONSUMERS?
A. Yes. As we have noted above, the Commission's recent rate order
provides a fair starting point for the Commission's ARP.
The ESM provides for 60/40 sharing between shareholders and ratepayers
outside a 100 basis point bandwidth (the midpoint of the bandwidth is
11.50 percent). This earnings-sharing mechanism provides a very
effective way to
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ensure that LG&E/KU utility customers share in the efficiency benefits
of this transaction. Given the Commission's foresight in developing
and approving this mechanism, there is a no need for additional
regulatory requirements regarding the sharing of the benefits of this
transaction.
Q25. POWERGEN'S U.S. SUBSIDIARY AND LGE ENERGY WILL BECOME REGISTERED
HOLDING COMPANIES UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT. WILL
THIS LIMIT THE COMMISSION'S ABILITY TO REGULATE THE OPERATING
UTILITIES?
A. No. The Commission will retain the ability to review costs, set the
operating utilities' rates, and regulate service. The Securities and
Exchange Commission ("SEC") will provide accounting and financial
oversight over the holding companies and their affiliates; for
example, SEC-required cost allocation methods will be used. The
merging companies have, however, agreed that the Commission has
ultimate ratemaking authority. As a result, the Commission will fully
retain its regulatory jurisdiction and will benefit from having
"another set of eyes" scrutinizing the accounting and financial
practices of the utilities. Most importantly, the Kentucky utilities
will continue to be insulated from the non-utility activities of the
parent corporations.
Q26. PLEASE DISCUSS THE POTENTIAL BENEFITS OF LGE ENERGY'S ADOPTION OF
POWERGEN'S BEST PRACTICES.
A. As noted above, PowerGen has a best-practices management style where
it seeks out the best practices used by competing firms worldwide and
seeks to adopt those best-practices in order to improve the efficiency
of its own operations. In fact, PowerGen identified LGE Energy as an
acquisition partner, in part, as a result of the efficiency of its
generating units and the overall high level of efficiency of LGE
Energy's utility operations.
PowerGen would expect to transfer its best-practices management style
to LGE Energy. The combined companies can compare the cost,
effectiveness, and
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quality of each other's processes. If PowerGen has a better practice
for some process than LGE Energy does, then LGE Energy can deploy it,
and vice versa. This reciprocal adoption of best practices is far more
effective within a company than between two independent companies.
Within a company, cooperation is greater, concerns about proprietary
or competitively-sensitive information are eliminated, and the
information about each other's processes is more reliable and less
costly to obtain. The result of this reciprocal adoption of best
practices may be lower costs and accelerated improvements in service
quality to customers for both companies. Given LGE Energy's already
high level of operating efficiency, the search for best practices
would not likely result in immediate efficiency gains, but could, over
time, result in additional benefits to customers.
Q27. PLEASE DESCRIBE THE OTHER POTENTIAL EFFICIENCY BENEFITS OF THE LGE
ENERGY/POWERGEN TRANSACTION.
A. The LGE Energy transaction with PowerGen would not be expected to
provide immediate cost savings to consumers. However, over time, given
the complementaries that these companies have, additional benefits to
consumers could be realized. Potential benefits to consumers could
include reductions in managerial costs and overhead, improved risk
management capabilities, and potential reductions in the cost of
capital resulting from the combined companies' increased financial
strength.
Q28. IN ADDITION TO EFFICIENCY CONSIDERATIONS, ARE THERE OTHER POTENTIAL
BENEFITS OF THIS TRANSACTION?
A. Yes, I believe that there are additional benefits of this transaction
that should be considered. As a former regulator, my primary focus has
always been on the interests of utility customers, but there are also
broader notions of benefits that are relevant when considering a
merger or acquisition--and these considerations can be viewed as
providing an additional assurance that a transaction is in the public
interest. For example, from the standpoint of the citizens of the
Commonwealth of Kentucky, benefits include retaining a corporate
headquarters
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in the state, which would be likely if LGE Energy had merged with a
contiguous utility.
Q29. WILL THIS TRANSACTION PROVIDE BENEFITS TO CONSUMERS?
A. Yes. While it is not possible to quantify any merger savings that
would result from this transaction in advance, I believe that this
transaction is likely to provide net benefits over time. Given the
benefits of the LGE Energy/PowerGen transaction for utility consumers
and citizens in Kentucky as a whole, I believe that this transaction
should be approved.
Q30. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes, it does.
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VERIFICATION
STATE OF ________ )
) SS:
COUNTY OF ________ )
KARL A. MCDERMOTT, being first duly sworn, deposes and states:
That he has read the foregoing testimony, appendix and exhibit and knows the
matters contained therein; that said matters are true and correct to the best of
his knowledge and belief, except as to those matters stated on information and
belief, and as to those matters, he believes them to be true.
/s/ KARL A. MCDERMOTT
Subscribed and Sworn to before me, a Notary Public in and before said
County and State, this ___ day of March, 2000.
/s/ Notary Public
My Commission Expires:
______________________
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Exhibit KM-1
KARL A. MCDERMOTT
BUSINESS ADDRESS
National Economic Research Associates, Inc.
875 North Michigan Avenue, Suite 3650
Chicago, Illinois 60611
312-573-2822
e-mail: [email protected]
Dr. Karl McDermott is a Vice President with National Economic Research
Associates, specializing in public utility regulation. He served as Commissioner
(1992 - 1998) on the Illinois Commerce Commission during the negotiation of the
Illinois restructuring law. He has also assisted the country of Poland since
1994 with their efforts to privatize and restructure their electric supply
industry. As a Commissioner, Dr. McDermott also lectured extensively in Eastern
Europe and South America on regulatory reform and restructuring.
During the six years that he served as Commissioner he has had an opportunity to
evaluate alternative regulation proposals and the economic and social impacts of
a number of new policies presented to the Commission. As a Commissioner, Dr.
McDermott initiated the Commission's investigation into the alternative
restructuring options and has made a number of presentations on restructuring
issues.
Since leaving the Commission, Dr. McDermott has advised the members of the
Southern Companies, Wisconsin Electric Power Company and Bell Atlantic on issues
regarding restructuring. He is the author of "Is There a Rational Path to
Implementing Competition?" which appeared in the January/February 1996 issue of
The Electricity Journal.
Dr. McDermott received a B.A. in Economics from Indiana University of
Pennsylvania, his M.A. in Public Utility Economics at the University of Wyoming,
and his Ph.D. in Economics at the University of Illinois.
n/e/r/a
Consulting Economics
<PAGE>
EDUCATION
Ph.D. 1990, Economics, University of Illinois
M.A. 1978, Public Utility Economics, University of Wyoming
B.A. 1976, Economics, Indiana University of Pennsylvania
Dissertation Topic: The Monetary Theory of Production of
John Maynard Keynes
Additional Education
Michigan State Public Utility Course; Michigan State University
Seminar on Austrian Economics at Marquette University, Milwaukee,
Wisconsin, conducted by the Institute of Humane Studies, Menlo
Park, California
State of Illinois; Certificates in SPSS and advanced SPSS
Computer Software Classes and TSO Operations
Illinois Bell Telephone Seminars on Separations and Settlements,
Embedded Direct Analysis (EDA), Costs and Demand Analysis, and
Engineering Characteristics of Telecommunication System
EMPLOYMENT
1999- NATIONAL ECONOMIC RESEARCH ASSOCIATES, INC.
Vice President.
--------------
1998-1999 MCDERMOTT ASSOCIATES
President. Worked for various clients in the electric, and
telephone industry including the Edison Electric Institute,
Georgia Power Co., Bell Atlantic, and L. E. Burgess Consultants.
1992-1998 ILLINOIS COMMERCE COMMISSION
Commissioner.
------------
Domestic:
Served as Chairman of both the Telecommunications Policy
Committee and Electricity and Resource Planning Policy Committee
of the Illinois Commission.
n/e/r/a
Consulting Economics
<PAGE>
Served on the National Association of Regulatory Utility
Commissioners (NARUC) Energy Resources and Environment Committee
as the Chairman of its environmental subcommittee. Made over one-
hundred presentations and speeches on telecommunications,
electricity, and natural gas industry topics. Served on the
President's Global Climate Change Task Force, the Federal Energy
Regulatory Commission's Pipeline Competition Task Force, and as a
member of the Harvard Electric Policy Group.
International:
In addition to regular Commission duties, served as part of the
United States Energy Association and USAID educational effort in
Eastern Europe. Lectured in Argentina, the Czech Republic,
Latvia, Poland, Romania, Russia, and Slovakia. Participated in
two joint USEA/USAID and World Bank seminars in Vienna providing
advanced regulatory training. In addition, the Illinois
Commission has hosted visits with the above-listed countries as
well as Bulgaria, Lithuania, and Estonia.
PROFESSIONAL ACTIVITIES
1985-1998 Chairman of the Board, Center for Regulatory Studies, Inc.
1985-1992 President, Center for Regulatory Studies, Inc.
One of three cofounders of the Center. Involved in fundraising,
organization, and program development. Focused on the development
of statewide energy planning options for the State of Illinois,
the introduction of competition into the natural gas market,
environmental issues in Illinois, and competition in the Illinois
telecommunications market. Conducted research on the use of
competitive bidding and avoided-cost pricing mechanisms to
acquire electricity supplies, the role of demand-side management
in electricity supply planning, and the use of incentive
mechanisms and the role of incentive regulation in our current
regulatory environment.
1988-1992 Research Scientist, Argonne National Laboratory
Served as an economic advisor to the office of Fossil Energy at
DOE. Investigated possible ways to promote development of
innovative emission control technologies in the electric utility
industry as part of the Presidential Task Force on Regulatory
Relief directed by Vice President Bush. Involved in writing a
chapter in the State of Science and Technology Report No. 25 of
the National Acid Precipitation Assessment Program (NAPAP)
concerning the use of tradable emission permits to control acid
rain. Performed work on incentive
n/e/r/a
Consulting Economics
<PAGE>
mechanisms to promote clean coal technology and the trading of
greenhouse gas emissions.
Performed research on the nature of individual's risk perception
regarding nuclear waste deposits on behalf of the office of
Radioactive Civilian Waste Management at the Department of
Energy.
1988-1990 President Elect and President, Illinois Economic Association
Organized the 1989 Illinois Economic Association annual meeting
and presided over the meetings.
1989- Instructor, NARUC Introductory Regulatory Training Program
Instructed new public utility commission employees from various
state commissions on the basic economic issues confronting
regulators.
1986-1992 Lecturer in Economics, Department of Economics, Illinois State
University
Taught both graduate and undergraduate public utility courses,
Money and Banking, as well as introductory courses.
1984-1991 Instructor in Economics, Parkland Community College, Champaign,
Illinois
Taught both Principles of Economics I and II, with a typical
course load of two sections of 35-40 students per class.
1984-1986 Teaching Assistant, University of Illinois, Champaign, Illinois
Taught both Principles of Economics and Introduction to
Econometrics. In the spring semester of 1985, was the supervisory
assistant in charge of coordinating the Economics 101 assistance
for Professor Fred Gotthiel.
1982-1988 Graduate School, University of Illinois, Champaign, Illinois
Completed all coursework towards Ph.D. and defended dissertation
on 6/12/88. Fields of specialization were: Monetary Theory and
Policy, Macroeconomic Theory, and the History of Economic
Thought.
1983-1985 Consultant, Select Joint Subcommittee on Regulatory Reform,
Illinois Legislature
Investigated the effects of the AT&T divestiture and FCC
decisions upon Illinois telephone utilities and assisted in
identifying issues that require legislative action. Presentation
of issue reports to the telecommunications subcommittee and
served on the local exchange subgroup in developing
recommendations for a new Illinois Public Utilities Act.
1980-1982 Consultant, Governor's Sunset Task Force on Utility Regulatory
Reform, Department of Energy and Natural Resources
Delivered both written and oral reports on the issues of power
plant certification, monitoring of construction costs, and
allocation of power plant cancellation costs.
1980-1983 Economic Analyst III, Policy Analysis and Research Division,
n/e/r/a
Consulting Economics
<PAGE>
Illinois Commerce Commission
Conducted research investigating the development and use of
incentive mechanisms in utility regulation. Prepared and
presented testimony on the use of incentive mechanisms in power
plant construction.
Conducted research and assisted in developing testimony on the
cost of service for electric generation to meet PURPA
requirements.
Assisted in the development of proposals for PURPA innovative
rates projects on productivity and time-of-use pricing; cost-
benefit analysis. Assisted in the managing of consultants
conducting the TOD cost-benefit study. Prepared and presented
testimony on the time-of-day pricing standards to meet the PURPA
requirements.
Prepared and presented testimony regarding the use of q-ratios in
determining rates-of-return for Illinois Bell Telephone Company
and testimony regarding appropriate cost and pricing methodology
and philosophy for Illinois Bell Telephone Company.
Assisted in the investigation of capacity expansion, lifeline
rates, efficiency measurement, and impact of deregulation in
electric generation, water rate design; and investigated the
impact of investment tax credit changes on utilities.
1978-1979 Senior Research Associate, National Regulatory Research Institute
Ohio State University
Conducted research in the areas of telecommunication licensee
contract fees and cost of service, the effects of budget billing
plans on utilities and consumers, and methods of monitoring fuel
adjustment clauses.
Assisted in research regarding marginal and average cost pricing,
time-of-use pricing, power plant productivity, and the
examination of cost and price differences of Ohio municipal gas
rates.
Assisted in the management of consultant subcontractors as well
as supervising the presentation of cost and load research
seminars.
9/79-12/79 Lecturer in Economics, Department of Economics, Ohio State
University
Taught Macro Economic Principles to a class of approximately 100
students.
1977-1978 Cost Analyst, Action Computing, Laramie, Wyoming
Developed cost data for competitive pricing of bids for the
provision of computer services provided by Action Computing.
n/e/r/a
Consulting Economics
<PAGE>
1976-1977 Graduate Research Assistant, University of Wyoming, Laramie,
Wyoming
Assisted professors in conducting research and teaching of
Principles of Economics, while completing a Masters degree in
Economics with specialization in Public Utility Economics and
Industrial Organization Theory.
AWARDS
1986 Alpha Lambda Delta Outstanding Teacher of Freshman Award at the
University of Illinois
1983 Thrift Prize at the University of Illinois for the paper entitled
"The Allocation of Savings: An Investigation of Portfolio
Composition of Chicago Households"
PROFESSIONAL SOCIETY ACTIVITIES
Alpha Lambda Delta Honorary Society
American Economic Association
Association for Social Economics
Canadian Economics Association
Econometric Society
Transportation Public Utilities Group of American Economic
Association
Illinois Economic Association
History of Economics Society
Royal Economic Society
PUBLICATIONS
"Is There a Rational Path to Implementing Competition?" The
Electricity Journal. Vol. 9:1 Jan-Feb 1996.
"Changing Regulatory Incentives" with G. Enholm and J. Robert Malko
Eds., Reinventing Electric Utility Regulation. Public Utility Reports,
Inc. Vienna, VA 1995.
"The Evolution of the "Investment Systems:" Keynes' Theory of
Employment and Money Revisited." Review of Social Economy. Volume
51:1, Spring 1993.
Discussant. "The Urban Ozone Abatement Problem." Cost Effective
Control of Urban Smog. R. Kosobud, W. Testa, and D. Hansan Eds.
Federal Reserve Bank of Chicago. November 1993.
n/e/r/a
Consulting Economics
<PAGE>
"Strategic Use of Incentive Mechanisms as a Regulatory Policy Tool."
The Electricity Journal. Vol. 5, No. 10, December 1992.
"Electric Utilities: Control Cost Reducing Methods," Chapter 7 in
David South ed. "Technologies and Other Measures for Controlling
Emissions: Performance, Costs and Applicability." National Acid
Precipitation Assessment Program, State-of-Science/Technology Report
25, January 1990.
"The Quantity Theory of Money of J. M. Keynes: From the Indian
Currency to the General Theory" with Christopher Marme D., Walker Ed.,
Perspectives on the History of Economics Thought. Edward Edgar
Publishing Co., Brookfield, VT (1989).
Computer Assisted Regulatory Analysis and Its Potential Application to
the Colorado Public Utilities Commission with M. S. Gerber. The
National Regulatory Research Institute (1979).
Towards an Analysis of Telephone License Contracts and Measured Rates
with A. G. Buckalew, and D. Z. Czamanski. The National Regulatory
Research Institute (1979).
Budget Billing Plans for Electric and Gas Utilities: An Analysis and
Some Recommendations for Change with J-M Guldman, and C. Odle. The
National Regulatory Institute (1979).
PUBLICATIONS: CONFERENCE PAPERS
The Use of Nontraditional Universal Service Programs in a Competitive
Local Exchange Market with Cindi Schieber. Presented at the National
Association of Regulatory Commissioners Biennial Conference (1996).
Incentive Mechanisms as a Strategic Option for Acid Rain Compliance
with D. W. South, and K.A. Bailey. Presented to the Future of
Incentive Regulation in the Electric Utility Industry (November 1991).
Role of Emission Allowances in Utility Compliance Decisions with D. W.
South, and K. A. Bailey. Presented at the Eighth Annual International
Pittsburgh Coal Conference (October 1991).
Clean Coal Technology and Emissions Trading: Is There a Future for
High Sulfur Coal Under the Clean Air Act Amendments of 1990? With K.
A. Bailey, and D.W. South. P. R. Dugan, D. R. Quigley, Y. A. Attia
(eds.), Processing and Utilization of High Sulfur Coals IV,
proceedings of the Fourth International Conference on Processing and
Utilization of High Sulfur Coals, Idaho Falls, ID., sponsored by the
U.S. Department of Energy, et al., Elseveir Science Publishing Co.
Inc., New York, NY.
n/e/r/a
Consulting Economics
<PAGE>
Incentive Mechanisms as a Strategic Option in the Design of Regulatory
Policies with D. W. South. Presented at National Association of
Regulatory Utility Commissioners, Committee on Electricity,
Subcommittee on Strategic Issues, San Francisco (July 1991).
Achieving Efficiency Through Emissions Trading: Paradoxes,
Misconceptions and Market Performance with D. W. South. Presented at
National Association of Regulatory Utility Commissioners, Committee on
Electricity, Subcommittee on Environment and Efficiency, San Francisco
(July 1991).
To Mitigate or Not To Mitigate: Regulatory Treatment of Emissions
Trading Decisions and Its Effect on Marketplace Incentives with D. W.
South. Presented at 84th Annual Meeting and Exhibition, Air and Waste
Management Association, Vancouver, British Columbia (June 1991).
Regulatory Incentives: A Means to Accelerate Clean Coal Technology
Adoption for Acid Rain Compliance with D. W. South. Presented at
Compliance and Emissions Trading Strategies: Facing Acid Rain
Tradeoffs, Center for Regulatory Studies, Chicago, IL (June 1991).
Implementing Emissions Trading: Regulatory and Compliance Planning
Issues with D. W. South. Presented at the Workshop on Implementing the
Electric Utility Provisions of the Clean Air Act Amendments of 1990:
Midwestern State Public Utility Commission Issues, National Regulatory
Research Institute, Chicago, IL (May 1991).
Clean Coal Technology and Acid Rain Compliance: An Examination of
Alternative Incentive Proposals with D. W. South. Presented at the
American Power Conference, Chicago, IL. (April 1991).
Emissions Trading: Implications for Regulatory Policy with D. W.
South. Presented at the 20th Annual Meeting of the Illinois Economic
Association, Chicago, IL (October 1990).
The Future of Clean Coal Technology: An Evaluation of the Proposed CCT
Incentives in S. 1630 with D. W. South. Presented at the 20th Annual
Meeting of the Illinois Economic Association, Chicago, IL (October
1990).
The Future of Clean Coal Technology: An Evaluation of the Proposed
Incentives in S. 1630 with D. W. South. Presented at the Seventh
Annual International Pittsburgh Coal Conference, Pittsburgh, PA
(September 1990).
The Future of Clean Coal Technology: An Evaluation of the Proposed
Incentives in S. 1630 with D. W. South. Presented at the Seventh NARUC
Biennial Regulatory Information Conference, Columbus, OH (September
1990).
n/e/r/a
Consulting Economics
<PAGE>
Emissions Trading: Implications for Regulatory Policy with D. W.
South. Presented at the Seventh NARUC Biennial Regulatory Information
Conference, Columbus, OH (September 1990).
Alternatives to Rate of Return Regulation in the Telephone Industry: A
Survey of the New Incentive Mechanism Proposals. Illinois Economic
Association (October 1988).
Market Structures in the Local Communication Market: Fact and Fiction.
Presented at the Intra-MSA Telecommunication Conference (September
1988).
The Quantity Theory of Money of J. M. Keynes: From the Tract to the
General Theory with Christopher Marme. Proceedings of the 14th Annual
Meeting of the History of Economics Society (June 1987).
Competitive Pricing and the Local Telephone Service Market: Some
Problems of Balancing Equity and Efficiency. Illinois Economic
Association (October 1986).
The Impact of Self-Selective Tariffs in Telecommunications Markets:
The Design of an Experiment with M. J. Morey, and K. Costello.
Proceedings of the Fifth NARUC Biennial Regulatory Conference
(September 1986).
An Incentive Plan to Control Power Plant Construction Costs, Third
NARUC Biennial Information Conference (September 1981).
The Measurement of Efficiency and the Application of Incentives to
Regulated Industries with K. Costello. Proceedings of the Second NARUC
Biennial Regulatory Information Conference (September 1980).
PUBLICATIONS: REPORTS
Avoided Cost Pricing: Theoretical Issues and Problems in Estimation.
Prepared for the Illinois Department of Energy and Natural Resources
(June 1990).
Least-Cost Planning in the Natural Gas Industry: An Overview of the
Issues. Prepared for the Illinois Department of Energy and Natural
Resources (December 1989).
Equity Issues in a Least-Cost Planning Environment. Prepared for the
Illinois Department of Energy and Natural Resources (October 1989).
An Analysis of Prudency Evaluation Within a Least-Cost Planning
Framework: The Case of Natural Gas Planning. Prepared for the Illinois
Department of Energy and Natural Resources (October 1989).
n/e/r/a
Consulting Economics
<PAGE>
Consumer Choice Under Risk and Uncertainty: The Role of Risk
Perceptions as a Causal Factor in Consumer Decisionmaking. Prepared
for the Energy and Environmental Systems Division, Argonne National
Laboratory for U.S. DOE Office of Civilian Radioactive Waste
Management (April 1989).
The Effects of Alternative Definitions of the Obligation to Serve on
the Least-Cost Plans of Local Gas Distribution Companies. A Report for
the Northern Illinois Alliance to Support Least-Cost Utility Planning
(February 1989).
A Complete and Economic Study on Proposed IPCB Regulation R89-9: with
J. L. Carlson, M. J. Morey, R. C. Hemphill, and W. Mikucki Waste
Prohibitions. Prepared for the Illinois Department of Energy and
Natural Resources.
The Role of Prices and the Pricing System Within the Regulatory
Process. Prepared for the Illinois Department of Energy and Natural
Resources (October 1986).
An Evaluation of the Minimization of Total Regional Requirements as an
Objective in State-Wide Utility Planning Process. For the Illinois
Department of Energy and Natural Resources (November 1986).
The Economic Incentives Provided by Section 9-215 (Excess Capacity
Rule) of Proposed Illinois Public Utility Act. A Memorandum to the
Joint Committee (June 1985).
An Analysis of the Issue of Cross-Subsidization in the Local Telephone
Market. Prepared for the Joint Committee on Public Utility Regulation
(May 1985).
A Survey of State Regulatory Actions and Legislative Developments
Resulting from the Divestiture of AT&T. Prepared for the Joint
Committee on Public Utility Regulations, Illinois State Legislature
(March 1985).
A Memorandum to the Telecommunications Policy Working Group on the
Concepts of Competing, Competition and Market Structure (September
1984).
The Evolution of Competition in the Telephone Industry and the
Critical Issues Facing the Illinois Legislature on the Deregulation of
Telephone Service. Prepared for the Select Joint Subcommittee on
Regulatory Reform (July 1984).
The Review of Existing Power Plant Certificates, Monitoring of Power
Plant Costs and the Allocation of Power Plant Cancellation Costs.
Presented to the Sunset Task Force on Utility Regulatory Reform
(January 1984).
Utility Efficiency Report Subtask IX - Final Report in Incentive
Mechanisms. Prepared for the Illinois Commerce Commission (May 1981).
n/e/r/a
Consulting Economics
<PAGE>
Utility Efficiency Report Subtask IV - Evaluation and Choice of
Incentive Mechanisms. Illinois Commerce Commission for the U.S.
Department of Energy (July 1980).
Utility Efficiency Report Subtask II - Review of Existing Incentive
Mechanisms. Illinois Commerce Commission for the U.S. Department of
Energy (March 1980).
Estimating Fuel Prices, a Memorandum to the Virginia State Corporation
Commission with K. Kelly, National Regulatory Research Institute
(1979).
Summary of Regulatory Commission Activities on Power Plant
Productivity. The National Regulatory Research Institute draft report
for the U.S. Department of Energy (1979).
UNPUBLISHED PAPERS
The Reichbanks' Reaction Function During the Hyperinflation: An
Alternative Test of the Causes of the Hyperinflation. (December 1987)
How Real Was The German Hyperinflation: A Reexamination of the Demand
for Money Employing a Fully Specified Demand Function. (October 1987)
Bubbles During the Hyperinflation: An Empirical Test of the
Interaction of the Double Bubble in Exchange Markets and Prices in
Germany. (September 1987)
Evaluating the Causes of the Hyperinflation: A Reexamination of
Monetary Policy and Theoretical Debates Concerning the Factors
Affecting the German Money Supply from 1919 to 1923. (August 1987)
Decentralization vs. Coordination: An Examination of the Options for
Deregulating the Electric Supply Industry. (June 1985)
Applied Fairness Theory: The Case of Allocating Canceled Power Plant
Costs. (October 1983)
Is the Rational Expectations Equilibrium Business Cycle Theory a Neo-
Austrian Theory? (October 1983)
An Examination of the Policy Alternatives for a Small Open Economy
Experiencing a Trade Boom: The Case of Sterilization, Credit Rationing
and Profit Taxation. (August 1983)
The Transmission of Monetary Shocks to Real Variables in the Business
Cycle. (July 1983)
The Economics of Revolutions: A Club Theoretic Approach and a Case
Study of England, 1642-1649. (Summer 1983)
n/e/r/a
Consulting Economics
<PAGE>
Interest Rates, Market Efficiency and Expectations: The Effectiveness
of Monetary Policy. (April 1983)
Towards Developing a Framework for Evaluating Incentive Mechanisms,
Performance Measures and Institutional Choice in Deregulation. (August
1981)
A Critique of the Averch-Johnson Bias and a Test of Some Alternative
Hypotheses. Master Thesis submitted to the Graduate School of the
University of Wyoming. (July 1978)
An Overview of the Theories of Regulation and Pricing Policies for
Regulated Industries. The National Regulatory Institute. (1979)
PRESENTATIONS
A Conflict of Paradigms; The Future Role of State Regulation of the
Natural Gas Industry. Presented to the Midwest Gas Association
(November 6, 1991).
Exit and Entry: Who Will Bear the Risk in a Competitive Natural Gas
Industry. Presented at the conference "At the Crossroads:
Restructuring the Natural Gas Industry," held by the Center for
Regulatory Studies (October 1991).
"To Serve Man" - The Golden Rule or a Visit to the Twilight Zone: How
to Reconcile the Obligation to Serve with Competitive Market Forces.
Presented to the Gas Policy Committee of the Illinois Commerce
Commission (April 16, 1991).
Regulatory Treatment of Emissions Trading Decisions and Their Effect
on Marketplace Incentives with D. W. South Presented at the Notice of
Inquiry Public Hearing, Illinois Commerce Commission (March 1991).
The National Energy Strategy: Impacts on the Farm Sector. Presented to
the Illinois Farm Bureau Leadership Conference (February 1991).
Emissions Trading in the CAAA of 1990: Regulatory, Compliance Planning
and Implementation Issues with D. W. South. Presented to the Illinois
Commerce Commission (January 1991).
Obligations to Serve and Competition in the Natural Gas Industry.
Luncheon presentation at the conference "Assessing the Competitiveness
of the Natural Gas Industry," held by the Center for Regulatory
Studies (October 1990).
Pricing in an Age of Opportunism: The Cost of Being a Provider of Last
Resort. Presented at the conference "Natural Gas Supply Planning: The
Implications for Planning Pricing and Competition," held by the Center
for Regulatory Studies (March 1990).
n/e/r/a
Consulting Economics
<PAGE>
Public Utility Issues: Long and Short-Term Impacts. Presented to the
Illinois Farm Bureau Leadership Conference (February 1990).
Uncertainty in the Least-Cost Planning Process: The Case of Natural
Gas. Presented at the conference "Issues in Least Cost Planning in the
Natural Gas Industry," held by the Center for Regulatory Studies
(December 21, 1989).
How Real was the German Hyperinflation: An Examination of the Factors
Determining the German Money Supply, Demand and Prices Between 1920
and 1923 with M. J. Morey. Presented to the Economic History Workshop
at the University of Illinois (December 1986).
Since joining the Commission, Commissioner McDermott has given over
one-hundred presentations on a variety of topics in the
telecommunications, electricity and natural gas industries.
TESTIMONY
Testimony to Illinois General Assembly joint committee on electricity
deregulation. Summer 1997.
Illinois Public Utilities Committee Telecommunications Subcommittee,
Alternative Methods of Telecommunications Regulation, March 27, 1991.
Illinois Commerce Commission Docket No. 80-0167 on the use of
incentive mechanisms at Clinton Power Plant construction site.
Illinois Commerce Commission Docket No. 80-0544 on the use of the
variable return to CWIP incentive model in the Illinois Power rate
case.
Illinois Commerce Commission Docket No. 80-0167 rebuttal testimony to
Dr. Pappas on the use of incentive mechanisms at the Clinton Power
Plant site.
Illinois Commerce Commission Docket No. 80-0367 on the treatment of
the time of use pricing standards of the Public Utility Regulatory
Policy Act (PURPA) for Iowa-Illinois Gas and Electric Company.
Illinois Commerce Commission Docket No. 81-0478 on the use of q-ratios
determining the appropriate rate of return for Illinois Bell Telephone
Company.
Illinois Commerce Commission Docket No. 81-0478 on the appropriate
cost of service method for pricing telecommunication service under the
transition to competition.
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Consulting Economics
<PAGE>
COMMONWEALTH OF KENTUCKY
BEFORE THE PUBLIC SERVICE COMMISSION
In the Matter of:
JOINT APPLICATION OF )
POWERGEN plc, LG&E ENERGY CORP., )
LOUISVILLE GAS AND ELECTRIC COMPANY, ) CASE NO. 2000-095
AND KENTUCKY UTILITIES COMPANY )
FOR APPROVAL OF A MERGER )
TESTIMONY
OF
DR. DONALD J. MULLINEAUX
LOUISVILLE GAS AND ELECTRIC COMPANY
AND
KENTUCKY UTILITIES COMPANY
<PAGE>
Q. Please state your name and business address.
A. My name is Donald J. Mullineaux. My business address is Gatton College of
Business and Economics, University of Kentucky, Lexington, Kentucky 40506.
Q. By whom are you employed and what is your position?
A. I presently serve as the Director of the School of Management at the Gatton
College of Business and Economics at the University of Kentucky. I also
hold the DuPont Endowed Chair in Banking and Financial Services. Details
regarding my career and education are described in Appendix A to my
testimony.
Q. Please briefly summarize your education and professional experience.
A. I accepted the Chair in Banking and Financial Services with the University
when I joined the faculty in 1984. I teach undergraduate and graduate
courses in banking, finance, and money and capital markets. I worked
previously for the Federal Reserve Bank of Philadelphia, where I served as
Senior Vice President and Director of Research. I received my Ph.D. degree
in Economics from Boston College in 1971. I have also taught various
courses in economics at the Wharton School at the University of
Pennsylvania and at Temple University.
Q. Have the Joint Applicants asked you to provide the Commission with your
opinion discussing the potential benefits to the Commonwealth of the
proposed merger between PowerGen plc and LG&E Energy?
A. Yes. In my opinion, the transaction at issue will result in benefits to the
Commonwealth of Kentucky to the extent that it benefits consumers and
businesses within the state and to the extent that it improves overall
economic conditions and/or economic performance by
<PAGE>
private or public firms within the Commonwealth. The primary ways in which
the Kentucky economy could benefit from this merger would be:
a. An increase in productivity growth for workers or businesses in the
Commonwealth's economy;
b. Increased entry by new business into Kentucky based on an improved
operating environment;
c. Improved overall business efficiency based on an improved allocation
of energy resources; and
d. Reduced prospects of business disruption in response to unanticipated
changes in the energy market, given the high potential for additional
deregulation and the uncertainty associated with private sector
initiatives in the energy market.
Favorable changes in any of these areas would prompt an increase in
the rate of growth in the Commonwealth's state domestic product and more
rapid creation of jobs within the state.
In this rapidly changing and highly unpredictable environment, the
Commonwealth will be advantaged if the major energy supplier within the
state has proven experience in managing through a period of significant
deregulation and technology-driven change. PowerGen has gained such
experience in the United Kingdom, where retail customers and small
businesses already have free choice with respect to energy suppliers and
where substantial consolidations of energy market resources have already
taken place. PowerGen can bring the kind of expertise in strategic
management, marketing, research and development, and information and
technology
2
<PAGE>
management to Kentucky that will ease the transition to a yet-to-be
determined set of market characteristics in the energy sector.
In sum, the potential advantages to the Commonwealth from the proposed
transaction are partly related to the size of the combined entity, since
size typically reflects the potential to exploit economies of scale and/or
scope and it improves access to global sources of finance. The combined
managerial competencies of the two firms are equally relevant, however.
Capacities to strategize, plan, organize, and respond quickly and
efficiently to rapidly changing and potentially chaotic energy market
conditions, while continuing to support philanthropic causes and social
issues such as education and economic development, should also prove to be
substantial sources of benefit to the Commonwealth.
Q. Does this conclude your testimony?
A. Yes, it does.
3
<PAGE>
VERIFICATION
COMMONWEALTH OF KENTUCKY )
) SS:
COUNTY OF FAYETTE )
DONALD J. MULLINEAUX, being first duly sworn, deposes and states:
That he has read the foregoing testimony, appendix and exhibit and knows
the matters contained therein; that said matters are true and correct to the
best of his knowledge and belief, except as to those matters stated on
information and belief, and as to those matters, he believes them to be true.
/s/ DONALD J. MULLINEAUX
Subscribed and Sworn to before me, a Notary Public in and before said
County and State, this ____ day of March, 2000.
/s/ Notary Public
My Commission Expires:
___________________________
<PAGE>
APPENDIX A
PERSONAL RESUME
NAME: Mullineaux, Donald J.
ADDRESS: Gatton College of Business and Economics
University of Kentucky
Lexington, Kentucky 40506-0034
TELEPHONE: (606) 269-7178 (Home)
(606) 257-2890 (University)
(606) 257-9688 (Fax)
E-MAIL: [email protected]
--------------------
CIVIL STATUS: Born July 11, 1945; U.S. citizen
EDUCATION: Graduated in 1971 from Boston College with a Ph.D. in
Economics. Recipient of a National Science Foundation
Traineeship. Received a Bachelor of Arts degree in Economics
from St. Vincent College in 1967.
PROFESSIONAL EXPERIENCE:
University of Kentucky, Lexington, Kentucky
1999 - Present As Director of the School of Management, responsible for the
administration of four areas: Finance, Marketing, Management
and Decision Sciences and Information Systems. Specific duties
include: planning, budget administration, assessment, faculty
recruiting and evaluation, promotion and tenure, class
scheduling, program and course changes, and administration of
the MBA and Ph.D. programs in Business Administration.
University of Kentucky, Lexington, Kentucky
1984-Present As Chairholder of the duPont Endowed Chair in Banking and
Financial Services, responsible for teaching graduate and
undergraduate courses in bank management and financial markets,
for conducting research on issues in banking and finance, and
for providing service to the community of financial-service
firms.
<PAGE>
University of Kentucky, Lexington, Kentucky
1990-93 As Associate Dean for Academic Affairs, responsible for
administration of all graduate and undergraduate programs in
the College of Business and Economics. Specific administrative
responsibilities include: supervision of annual merit review,
promotion and tenure, teaching evaluations, self studies,
department reviews and program or course changes. Responsible
for assessing equipment and housing needs, coordinating
information networks, and for all College-related reporting.
Responsible for College planning, budgeting and control
functions.
Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania
1971-84 As Senior Vice President and Director of Research, was
responsible for advising the bank's President on the economic
outlook and on monetary policy and discount rate decisions.
Presented regular briefings on the economy and financial
markets to the Board of Directors and senior bank management.
Attended Federal Open Market Committee Meetings in Washington.
Served as the bank'' chief spokesman on economic and policy
issues, addressing some 30-40 outside audiences per year.
Managed a professional staff of some 50 people, including 15
economists, with a budget of over $2 million.
Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania
1976-80 Taught courses in the MBA program on Financial Structure and
Public Policy and Macroeconomics.
Temple University, Philadelphia, Pennsylvania
1975-76 Taught MBA course of Financial Markets.
Graduate School of Banking, Madison, Wisconsin
1981-Present Presentations to senior bank managers on the relevance of
changing economic and financial trends for strategic planning
decisions.
Graduate School of Banking at LSU, Baton Rouge, Louisiana
1988-1998 Course Coordinator and Lecturer in Money and Capital Markets.
Stonier Graduate School of Banking, Newark, Delaware
1990-Present Lecture on Bank Investments and Asset-Liability Management.
Kentucky School of Banking, Louisville, Kentucky
1984-Present Program Director and Lecturer on Asset-Liability Management
Kentucky School of Banking, Louisville, Kentucky
1987-Present Dean of the Faculty
2
<PAGE>
National Bank Director Training School
1995-1999 Presentations to directors on principles of bank management and
director duties and responsibilities
UNIVERSITY SERVICE:
1999- Gatton College Operating Committee
1998-2000 UK Futures Committee
1997-98 University Strategic Planning Committee
1997-98 University Task Force on Research and Graduate Studies (Reedy
Committee)
1996-97 MBA Policy Committee
1996-97 Chair, Merit Review Appeals Committee
1995-96 College of Business and Economics Strategic Planning Committee
1995-96 Honorary Degree Committee
1995 Chair, Search Committee for Economics Department Chair
1994-96 Academic Area Committee for Promotion and Tenure (Social
Sciences)
1995-99 Finance Area Coordinator
1994-96 University Senate
1994-95 Finance Department Chair
1990-93 Associate Dean for Academic Affairs
1991-92 Lexington Campus Research Advisory Committee
1991-94 Intellectual Property Committee
1991-92 Kentucky Educational Reform Act Committee
1990-91 Merit Review Appeals Committee (Chair)
1990-91 MBA Program Review Committee
3
<PAGE>
1990-91 University Self-Study Committee (University Finances)
1989-90 Chairman, Academic Area Committee for Promotion and Tenure
(Social Sciences)
1988-89 Academic Area Committee for Promotion and Tenure (Social
Sciences)
1988-89 Research Professorship Selection Committee
1987-91 Department Chairman
1987-88 Faculty Grant Awards Committee
1986-87 DBA Policy Committee
1985-87 Academic Area Committee for Promotion and Tenure (Social
Sciences)
1985-87 DBA Program Coordinator
1985-86 Chairman, Committee for MS Degree in Banking
1984-85 Chairman, MBA Policy Committee
1984-85 Chairman, Department of Economics Review Committee
GRANTS:
Prochnow Education Foundation Grant, 1988.
Financial Services Roundtable, 1999.
AWARDS:
1995: Distinguished Alumnus Award, St. Vincent College, Latrobe,
Pennsylvania, July 1995
1990: Outstanding Teacher in the College, Beta Gamma Sigma
1984: Unique Achievement Award, Federal Reserve Bank of
Philadelphia, 1983.
4
<PAGE>
DOCTORAL DISSERTATIONS CHAIRED:
Rosemary Carlson, "Shareholder Wealth Effects and Changes in Interstate Banking
Regulations," 1988 (Morehead State University).
Yeong J. Park, "Tests of Real Estate Investments Trusts as Inflation Hedges,"
1989 (Yeungnam University, Korea).
Dianna Preece, "Monitoring, Contractual Flexibility, and the Capital Market
Response to Loan-Agreement Announcements," 1990. (University of Louisville).
Gregory Filbeck, "Regulatory Monitoring and the Impact of Bank Holding Company
Dividend Changes on Equity Returns," 1990. (University of Toledo).
John Thompson, "A Multiple-Metric Study of the Returns to Shareholders: The
Case of Bank Holding Company Mergers," 1990. (Eastern Kentucky University).
Patricia Webster, "The Capital Market Response to Bank Holding Company
Spinoffs," 1991. (Bradley University).
Youguo Liang, "Stock Prices, Volume, and Market Overreaction," 1991.
(Prudential).
Shelly Webb, "Ownership Structure and Firm Value for Financially Distressed
Firms," 1993. (Xavier University).
Steve Dennis, "Agency Costs in Loan Sales: Theory and Evidence," 1993.
(California State University, Fullerton).
Chia Pin Chen, "The Lending Behavior of Global Banks: A Relative Comparison of
U.S. vs.
Non-U.S. Banks," 1994. (National Chung Hsing University, Taiwan).
Michael Schinski, "The Impact of the Federal Reserve's Source of Strength
Doctrine on Bank Equity Returns," 1994. (SUNY at Geneseo).
Marwan Asri, "The Impact of Financial Liberalization on Savings and Investment
in Indonesia," 1997 (Gadjah Mada University, Indonesia).
Aloysius Ro, "The Private Placement Debt Decision: An Empirical Analysis,"
1998. (Merrill Lynch).
John Paglia, "An Empirical Examination of the Role of Covenants in Large Bank
Lonas" (in process).
Sang Wih Lee, "The Size and Composition of Bank Lending Syndicates." (in
process).
5
<PAGE>
Chien Chih Peng, "Loan Commitments vs. Spot Loans: An Empirical Analysis" (in
process.)
MONOGRAPHS:
Balance-Sheet Decisions at Relatively Unregulated Banks: New York Free
------------------------------------------------------- -------------
Banking, 1843-62. Herbert v. Prochnow Education Foundation, 1990.
------- -------
General Banking II. The American Bankers Association, 1990.
------------------
REFEREED PAPERS:
"Agency Costs and Dividend Payments: the Case of Bank Holding Companies,"
Quarterly Review of Economics and Finance 39 (1999): 408-19 (with Greg Filbeck).
"Monitoring, Loan Renegotiability, and Firm Value: The Role of Lending
Syndicates," Journal of Banking and Finance 20 (1996): 577-93 (with Dianna
Preece).
"Insider Trading and Regulation: A Look at Bank Holding Companies,"
Journal of Economics and Finance 19 (1995): 71-84 (with Greg Filbeck).
"The Impact of the Federal Reserve's Source of Strength Policy on Banking
Holding Companies," Quarterly Review of Economics and Finance 35 (1995): 483-96
(joint with Michael Stinks).
"A Multiple-Metric Study of the Returns to Shareholders: The Case of Bank
Holding Company Mergers," Journal of Financial and Strategic Decisions 8 (1995):
43-51 (joint with John Thompson).
"Monitoring by Financial Institutions: Banks vs. Nonbanks," Journal of
Financial Services Research 8 (1994): 191-200 (joint with Dianna Preece).
"Overreaction and Reverse Anticipation: Two Related Puzzles," Journal of
Financial Research 17 (1994): 31-43 (joint with Youguo Liang).
"Regulatory Monitoring and the Impact of Bank Holding Company Dividend
Changes on Equity Returns", Financial Review (1993): 403-15 (joint with Greg
Filbeck).
"Are REITs Inflation Hedges?", Journal of Real Estate Finance and
Economics (1990): 91-101 (Joint with Y. J. Park and 1. K. Chew).
"The Joint Production of Confidence: Endogenous Regulation and 19th
Century Commercial Bank Clearinghouses," Journal of Money, Credit, and Banking
(November 1987): 457-68 (Joint with Gary Gorton).
6
<PAGE>
"Competitive Monies and the Suffolk Bank System: A Contractual
Perspective," Southern Economic Journal 53 (1987): 884-98.
"Inflation Expectations and Money Growth in the United States," American
Economic Review (1980): 149-6 1.
"Unemployment, Industrial Production, and Inflation Uncertainty: Some
Empirical Results," Review of Economics and Statistics (1980): 163-69.
"On Testing for Rationality: Another Look at the Livingston Price
Expectations Data," Journal of Political Economy 86 (1978).
"Economies of Scale and Organizational Efficiency in Banking: A Profit-
Function Approach," Journal of Finance 33 (1978): 259-80.
"Branching Restrictions and Commercial-Bank Costs," Journal of Business 49
(1976): 402-07.
"Economies of Scale at Financial Institutions," Journal of Monetary
Economics 1 (1975): 233-40.
"Deposit-Rate Ceilings and Noncompetitive Bidding for U.S. Treasury
Bills," Journal .of Money, Credit, and Banking 5 (1973): 201-12.
OTHER PAPERS:
"Is There a Safety Net Subsidy? Some Evidence Based on Non-bank Entry into
Banking," Refuting the Federal Safety Net "Subsidy Argument, The Financial
Services Roundtable, 1999.
"Commercial Banking," The New Palgrave Dictionary of Money and Finance.
Stockton Press, 1992.
"Expectations, Surprises, and Treasury Bill Rates: 1960-82: Discussion,"
Journal of Finance (Papers and Proceedings, 1984): 696-98.
"Monetary Rules and Contracts: Why Theory Loses to Practice," Business
Review of the Federal Reserve Bank of Philadelphia, November/December, 1984.
"Revealing Real Interest Rates: Let the Market Do It," Business Review of
the Federal Reserve Bank of Philadelphia, March/April 1984 (with Axis
Protopapadakis).
"Efficient Markets, Interest Rates, and Monetary Policy," Business Review
of Federal Reserve Bank of Philadelphia, May/June 198 1.
7
<PAGE>
"On Active and Passive Monetary Policies: What Have We Learned from the
Rational Expectations Debate?" Business Review of the Federal Reserve Bank of
Philadelphia, November/December 1979.
"Regulation: Whence It Came and Whether It's Here to Stay," Business
Review of the Federal Reserve Bank of Philadelphia, September/October, 1978.
"Inflation Expectations in the U.S.: A Brief Anatomy," Business Review of
the Federal Reserve Bank of Philadelphia, July/August 1977.
"Money Growth, Jobs, and Expectations: Does a Little Lean-ting Ruin
Everything?" Business Review of the Federal Reserve Bank of Philadelphia,
January /February 1976.
"An Economic Approach to Family Size: A New Perspective on Population
Growth," Business Review of the Federal Reserve Bank of Philadelphia, January
/February 1976.
"The Taxman Rebuffed: Income Taxes at Commercial Banks," Business Review
of the Fed Reserve Bank of Philadelphia, May 1974.
"Unit vs. Branch Banking: An Analysis of Relative Costs," in Changing
Pennsylvania's Branching Laws: An Economic Analysis, Federal Reserve Bank of
Philadelphia, 1973.
"The Economic Folklore of Party Politics: Myths or Realities?" Business
Review of Federal Reserve Bank of Philadelphia, November 1973.
"Interest-Rate Ceilings and the Treasury-Bill Market: Disintermediation
and the Small Saver," New England Economic Review, July/August 1973.
"Paying for Social Security: Is It Time to Retire the Payroll Tax?"
Business Review of Federal Reserve Bank of Philadelphia, April 1973.
"Inflation Insurance: An Escalator Clause for Securities," Business Review
of the Federal Reserve Bank of Philadelphia, October 1972.
"Stock-Market Commission Fees: Competition or Bust--or Be Busted?"
Business Review of the Federal Reserve Bank of Philadelphia, April 1972.
WORKING PAPERS:
"Syndicated Loans" (under second review at the Journal of Financial
Intermediation, with Steven Dennis).
"Private Placements vs. Public Debt: An Analysis of Finn Funding Source
Decisions" (with Aloysius Ro)
8
<PAGE>
"Financial Covenants in Bank Loan Contracts" (with John Paglia).
"CEO and Board of Director Compensation at Commercial and Investment Banks"
(with Agus Harjoto)
"Debt Underwriting by Commercial Bank-Affiliated Finns and Investment
Banks: More Evidence" (under review at the Journal of Banking and Finance, with
Ivan Roten )
"Equity Underwriting by Bank Holding Companies and Investment Banks: An
Analysis of Relative Performance" (with Ivan Roten).
"Medium Term Notes" (with John Paglia and Ivan Roten)
PROFESSIONAL ASSOCIATIONS:
American Economic Association
American Finance Association
Financial Management Association
European Finance Association
Southern Finance Association
Eastern Finance Association
Kentucky Economics Association
PROFESSIONAL ACTIVITIES:
Board of Directors, Eastern Finance Association, 1996-98.
Financial Institutions Track Chair, Financial Management Association
Meetings, 1991.
Frequent presenter and discussant at professional meetings; have reviewed
papers for:
American Economic Review
Journal of Political Economy
Review of Economics and Statistics
Journal of Finance
Journal of Monetary Economics
Journal of Money, Credit, and Banking
Journal of the American Statistical Association
Review of Economic Studies
Journal of Financial Research
Financial Review
Economic Journal
Southern Economic Journal
Journal of Banking and Finance
9
<PAGE>
Financial Services Review
PROGRAMS FOR BANKERS (DOMESTIC)
"Bank Tax Management" "
Prospects for Financial Reform"
"Asset/Liability Management Techniques"
"The International Debt Problem" "Regulation/Deregulation: Where To From
Here?"
"What's Wrong with Economic Policymaking in the United States?"
"Federal Deficits: How Big A Problem?"
"Strategic Planning and Economic Policy"
"Trust Activities at Commercial Banks: An Overview"
"Financial Market Outlook for the 1990s"
"The European Monetary System"
"Managing the Investment Portfolio"
"Risk Management in Theory and Practice"
"The Future of Banking"
"Determinants of Bank Shareholder Value"
"The Transformation of the Financial System"
"Risk Management: Fad or Fundamental?"
PROGRAMS FOR BANKERS (INTERNATIONAL
Lectures on Bank Management Techniques, Vienna, Austria, Summer 1988,1989,1990,
and 1993.
Lectures on Bank Management, Zagreb, Croatia, April, 1992 December, 1992,
September, 1993, and July, 1994.
Seminar Leader for Bank Simulation Program, Nemetria Institute, Foligno, Italy,
October, 1992.
Seminar on Asset-Liability Management, Instituto Mexicano de Administracion
Bancaria, Mexico City, January, 1993.
Seminar on Financial Markets, Mexico City, June, 1993.
Lectures to Academy of Management, Almaty, Kazakhstan, September, 1993.
Seminar Leader for Bank Simulation Analysis, Vladivostock, Russia, November,
1994 and Hbarask, Russia in February, 1995
Seminar Leader for Stanford Bank Management Simulation Program, Vilnius,
Lithuania, 1995.
Seminar Leader for Bank Simulation Analysis, Panama City, Panama, 1996.
10
<PAGE>
Seminar in Principles of Bank Management, Nemetria Institute, Foligno, Italy,
1997, 1998, 1999.
PUBLIC AND OTHER SERVICE:
Vice Chairman, Committee on Business, Labor and the Economy, Kentucky
--------
Tomorrow Commission, 1985-86.
---------------------
Board Member, Lexington Philharmonic Orchestra, 1986-87.
Board Member, First National Bank, Louisa, Kentucky, 1988-95.
Board of Directors, The Education Network, 1987-1991.
Investments Seminar Leader, Kentucky Telebanking Network. (Satellite TV
Distribution of Programming), 1989 - 1991.
TEAM Lexington, Mayor's Committee to Improve Efficiency in Local
Government, 1994.
Donor Choice Committee, United Way of Lexington, 1994.
Mayor's Commission on Competitiveness, 1996.
National Science Foundation Proposal Reviewer, 1990, 1994, 1998, 1999.
Frequent speaker at meetings of professional associations and business
groups (10-20 annually).
11
<PAGE>
COMMONWEALTH OF KENTUCKY
BEFORE THE PUBLIC SERVICE COMMISSION
In the Matter of:
JOINT APPLICATION OF )
POWERGEN plc, LG&E ENERGY CORP., )
LOUISVILLE GAS AND ELECTRIC COMPANY, ) CASE NO. 2000-095
AND KENTUCKY UTILITIES COMPANY )
FOR APPROVAL OF A MERGER )
TESTIMONY
OF
ROBERT M. HEWETT
GROUP EXECUTIVE - REGULATORY AFFAIRS
LOUISVILLE GAS AND ELECTRIC COMPANY
AND
KENTUCKY UTILITIES COMPANY
<PAGE>
Q. Please state your name and business address.
A. My name is Robert M. Hewett. My business address is One Quality Street,
Lexington, Kentucky 40507.
Q. By whom are you employed and what is your position?
A. I am Group Executive - Regulatory Affairs for Louisville Gas and Electric
Company ("LG&E") and Kentucky Utilities Company ("KU"). Please refer to
Appendix A to this testimony.
Q. Have you previously testified before this Commission?
A. Yes. I have testified in numerous proceedings before this Commission on
behalf of LG&E or KU since 1982.
Q. What is the purpose of your testimony?
A. The purpose of my testimony is to address the issues concerning the impact
of the acquisition by PowerGen on LG&E and KU, the proper purpose of the
merger and the regulatory issues involved.
IMPACT OF THE ACQUISTION
------------------------
Q. How will customers benefit from the proposed merger?
A. After the merger, LG&E and KU will have the financial, technical, and
managerial capabilities that are needed to provide efficient customer
service to their utility customers. Customers will be better off as a
result of this transaction and will benefit from improved service quality
and operating efficiency resulting from reciprocal adoption of best
practices.
Q. Will the merger have any effect upon LG&E's or KU's contractual
obligations?
<PAGE>
A. The merger will not affect the contractual obligations of either LG&E or
KU. This includes LG&E's and KU's contractual relationship with and
ownership interest in the Ohio Valley Electric Corporation and KU's
contractual relationship with and ownership interest in Electric Energy,
Inc.
Q. Will LG&E's or KU's union contracts be affected by the transaction?
A. No.
Q. Will the proposed merger have any impact on the generation, transmission or
retail operations of LG&E and KU?
A. After the merger, LG&E and KU will continue to own, operate and control
their generation, transmission and retail operations and otherwise own and
operate their electric systems. PowerGen's acquisition initially will not
have any impact on LG&E's and KU's financial, technical and managerial
capabilities that are needed to provide efficient and reasonable service to
their customers.
As addressed in Ms. Sheers' testimony, PowerGen, LG&E and KU are
conducting an ongoing joint review of LG&E's and KU's operations over the
next few years for the purpose of establishing truly world class practices
in all phases of the business. This benchmarking process of determining and
applying best practices to the utility operations may lead to improvements
in LG&E's and KU's operations that create efficiencies and greater
performance. Over time, the operation of LG&E's and KU's electrical systems
could evolve through the implementation of best practices. The improvements
and efficiencies actually realized will be developed over time by the
application of this best practices review, although the effect of this
process will likely not result in immediate changes.
2
<PAGE>
Q. Will the proposed merger have any impact on the rates of LG&E and KU?
A. PowerGen's acquisition will not have any impact on the base rates, or the
operation of the fuel clause, environmental surcharge, gas supply clause,
demand side management clause or Earning Sharing Mechanism schedules of
LG&E or KU. PowerGen Chief Executive, Mr. Wallis, in his testimony has
endorsed the Earnings Sharing Mechanism as a progressive method of
regulation. LG&E and KU commit that all transaction-related costs,
including the premium paid by PowerGen for LG&E Energy's stock, shall be
excluded for ratemaking purposes for LG&E and KU.
As I previously discussed, the purpose of the ongoing joint review of
LG&E's and KU's operations is to establish truly world class practices over
the next few years, and to improve operations and create efficiencies. At
this time, we cannot foresee what changes might be made as a result of the
review or to what extent savings might actually be achieved. It is always
important to try to make improvements or you lose ground, while at the same
time focusing on the absolute necessity to maintain the same quality that
LG&E's and KU's customers have experienced. We believe that implementation
of best practices may lead to gradual and incremental improvements in
service quality, efficiencies and cost savings. To the extent that changes
occur and the changes produce improvements in efficiencies and savings,
then such benefits can and will be shared with LG&E's and KU's customers
through the Earnings Sharing Mechanism. This method of regulation gives the
companies strong incentives to improve, while ensuring that customers will
benefit from any improvements and cost savings actually realized.
3
<PAGE>
Q. Will the proposed merger affect LG&E's and KU's quality of utility service?
A. LG&E and KU have always been committed to high quality, reliable utility
service and will continue to maintain this service in the future. Their
commitment was recognized by the award in 1999 by J.D. Power & Associates
for having outstanding customer service. The acquisition of LG&E and KU by
PowerGen does not affect their continuing commitment to high quality,
reliable service. We further believe that the adoption of world class best
practices may over time improve the quality of LG&E's and KU's service.
Q. In the Merger of LG&E Energy and KU Energy merger, the utilities expected
to achieve substantial cost savings that otherwise would not have been
possible on a stand-alone basis through the consolidation of LG&E's and
KU's operations. Do PowerGen, LG&E and KU anticipate achieving similar
types and amounts of cost savings as a result of this transaction?
A. No. While the acquisition by PowerGen will facilitate LG&E's and KU's
review of world class best practices, the improvements LG&E and KU expect
to achieve through the benchmarking review are efficiencies, or "developed
savings" that could be achieved without PowerGen's acquisition and could be
accomplished by LG&E or KU on a stand-alone basis. The "synergies" or
"created savings" identified by LG&E and KU in their 1997-98 merger were
created because of the integration of their then two independent electrical
systems. The ability to physically integrate LG&E's and KU's electrical
system with PowerGen's generation facilities around the world and system in
the U.K. obviously is extremely limited by the respective locations of the
systems, the physical nature of electricity and gas, and fundamental
principles of electric engineering.
4
<PAGE>
However, access to differing knowledge bases and processes presents new
perspectives from which to draw ideas and improve, and any savings that do
occur as a result of the PowerGen acquisition will be shared with customers
through the operation of LG&E's and KU's Earnings Sharing Mechanisms. There
may be some small savings, for example, from the elimination of shareholder
services of LG&E Energy. To the extent that these savings are not off-set
by increased costs associated with being a registered holding company, the
savings will also be shared with customers through the Earnings Sharing
Mechanism.
Q. Why should benefits from the best practices review be shared 60/40 under
the Earnings Sharing Mechanism and not split 50/50 in the same manner as
the LG&E/KU merger surcredit?
A. As the Commission observed in its January 7, 2000, Orders:
ESMs provide incentives to increase efficiency and
cut costs by allowing utilities to retain a portion
of any increase in earnings.
The Commission then established the Earnings Sharing Mechanism for LG&E and
KU on the "firm belief" that a "more balanced ESM plan would be extremely
beneficial" to both LG&E's and KU's customers and shareholders. The
Commission approved the 60/40 sharing so that the Earnings Sharing
Mechanism would provide LG&E and KU "with sufficient incentives to improve
their performance while reducing the business risks inherent in over- or
under- earnings." The best practices process now being undertaken requires
PowerGen and the utility companies to go out and be creative and find ways
to do things differently and better. The improvements achieved and any
savings realized as a result of that ongoing process will be directly
responsive to the strong incentives the Commission created in the Earnings
Sharing Mechanism.
5
<PAGE>
The 50/50 sharing of savings ordered in the LG&E Energy/KU Energy
merger was a response to the consolidation of the LG&E and KU systems and
the elimination of duplication. The 50/50 ratio was not designed to create
incentives to achieve savings that could be accomplished without the
merger.
Q. Are the current integration of LG&E's and KU's distribution systems and re-
engineering of management systems related to the acquisition by PowerGen?
A. No. These activities are part of LG&E's and KU's continuous effort to
achieve more efficient operations, provide greater customer service and
achieve the savings created by the LG&E Energy/KU Energy merger. The merger
surcredit has been guaranteed until the year 2003. The amount of synergies
increases from $41.8 million in year one to $78.0 million in year five of
the surcredit. The significance of this increase is that the actual
synergies must be achieved through cost reductions to meet the increasing
surcredit. I should emphasize that, in the reorganization of the
distribution systems, no positions for service technicians or line
technicians were targeted for reduction.
Q. Will the proposed PowerGen merger have any impact on the benefits provided
to customers in the LG&E Energy/KU Energy merger?
A. No. Customers will continue to receive the merger surcredit benefits and
fuel savings and merger dispatch benefits through the operation of the fuel
adjustment clause.
THE MERGER IS FOR A PROPER PURPOSE
----------------------------------
Q. Is the PowerGen acquisition of LG&E and KU for a proper purpose?
A. Yes. The merger is beneficial to LG&E's customers, its employees, its
subsidiaries, the Commonwealth as a whole, and its shareholders (a
substantial number of whom are residents of Kentucky). After the merger,
LG&E and KU will have the financial,
6
<PAGE>
technical, and managerial capabilities that are needed to provide efficient
customer service to their utility customers. Customers will be better off
as a result of this transaction and will benefit from a new informed look
at improved service quality and operating efficiency resulting from
reciprocal adoption of best practices. For employees, the merger represents
an opportunity for growth as Kentucky becomes the U.S. base of operations
for a large international entity. The transaction ensures that LG&E and KU
and their employees remain at the forefront of an increasingly competitive
U.S. electric industry, while foreign operations provide opportunities for
their employees abroad. For Kentucky, the merger ensures that utility
operations in Kentucky will remain headquartered in Kentucky, and that
Kentucky will be the base for PowerGen's other anticipated U.S. operations.
Moreover, because PowerGen's existing utility operations are outside the
U.S., there will be no increase in market concentration at the wholesale or
retail levels. PowerGen, LG&E and KU have expressed their commitment to
sound customer relations and their dedication to the communities in their
service areas. Moreover, the merger facilitates the review of and possible
improvements in LG&E's and KU's operations based on world class best
practices. Finally, LG&E Energy's shareholders will receive a 58% premium
over the trading price for their shares as of the last trading day before
announcement of the merger, equal to $24.85 per share.
REGULATORY ISSUES
-----------------
Q. In the LG&E Energy/KU Energy merger, the then existing level of earnings
was an issue. Are the current level of earnings of LG&E and KU a concern?
A. No. After a lengthy review, the Commission established fair, just and
reasonable rates for LG&E and KU through its Orders on January 7, 2000, in
Case Nos. 98-426 and 98-
7
<PAGE>
474. The approximately $62 million rate reduction ordered in those cases
took effect March 1, 2000. The merger will not affect the rate reduction,
and the current rates will remain in place until changed by Commission
order. The level of earnings from the current gas base rates and LG&E's
need to increase those rates will be reviewed in a separate gas base rate
case to be filed at the end of March 2000. LG&E's and KU's current level of
earnings therefore is not a concern in this case.
Q. Will LG&E's and KU's electric base rates be fair, just and reasonable after
the acquisition by PowerGen?
A. Yes. In the Orders of January 7, 2000, the Commission also determined that
LG&E's and KU's electric rates would be fair, just and reasonable in the
future through the operation of the Commission's Earnings Sharing
Mechanism. LG&E and KU have adopted the Earnings Sharing Mechanism
established by the Commission in its Orders of January 7, 2000. To the
extent that the world class best practices benchmark process with PowerGen
produces any further improvements and such improvements cause savings in
2001 and 2002 or some other savings are achieved, the Earnings Sharing
Mechanism will share the savings with customers.
Q. Will the merger affect the Commission's ability to protect utility
resources?
A No. The applicable conditions imposed by the Commission in the
reorganization orders of LG&E and KU in Case Nos. 10296 and 89-374, and
again in the LG&E Energy/KU Energy merger, will not be affected by the
merger and will provide very adequate and sound protection of the resources
of LG&E and KU.
8
<PAGE>
Q. Will the merger affect the Commission's authority to monitor the corporate
activities of LG&E Energy, LG&E and KU?
A. No. The applicable monitoring procedures established by the Commission in
Case Nos. 10296, 89-374 and 97-300 provide adequate supervision for the
Commission to monitor the corporate activities of LG&E Energy, LG&E and KU.
The testimony of Mr. Robinson discusses the affiliate interest issues and
shows how the registration of a holding company under the Public Utility
Holding Company Act of 1935 provides further oversight and scrutiny of
affiliate transactions, accounting, and the books and records of LG&E, KU
and LG&E Energy. It is important to note that the Joint Applicants in this
case have made an important commitment. After the merger, the Commission
shall have the same ratemaking and regulatory authority to regulate the
rates and services of LG&E and KU as it did before the merger. Furthermore,
the Joint Applicants commit that they will not assert that the SEC's
jurisdiction legally preempts the Commission from disallowing recovery in
retail rates of the cost of goods and services that LG&E or KU obtain from
LG&E Energy Services, Inc., provided that LG&E and KU otherwise retain the
right to assert that the charges are reasonable and appropriate.
Q. Does this conclude your testimony?
A. Yes, it does.
9
<PAGE>
VERIFICATION
COMMONWEALTH OF KENTUCKY )
) SS:
COUNTY OF __________________ )
ROBERT M. HEWETT, being first duly sworn, deposes and states:
That he has read the foregoing testimony and appendix and knows the matters
contained therein; that said matters are true and correct to the best of his
knowledge and belief, except as to those matters stated on information and
belief, and as to those matters, he believes them to be true.
/s/ ROBERT M. HEWETT
Subscribed and Sworn to before me, a Notary Public in and before said
County and State, this ____ day of March, 2000.
/s/ Notary Public
My Commission Expires:
___________________________
<PAGE>
APPENDIX A
ROBERT M. HEWETT
In 1969, I received a B.S. Degree in Electric Engineering from the
University of Kentucky. Subsequent to that date I participated in both
undergraduate and graduate level courses in accounting and finance leading to a
Master in Business Administration Degree from the University of Kentucky in
1979.
My business background began with Kentucky Utilities Company in 1966 as a
student engineer in the Relay and Communications Department. Upon completion of
my undergraduate degree I was employed as an engineer in that Department until
1974. I then became a member of the Rates and Contract Department, involved in
rate matters, in particular, the application of rates and fuel clause
calculations, cost of service studies, and kWh sales forecasts. In September
1981, I was named Assistant Director of Rates and in January 1982 I assumed the
duties of Vice President of Rates and Service Contracts. Budget and Financial
Forecasts became my additional responsibilities as of March 1, 1987. In October,
1992, I became Vice President, Regulation and Economic Planning. In that
capacity, I was responsible for state and federal regulatory affairs and
economic planning for Kentucky Utilities Company. In May, 1997, I assumed the
duties of Senior Vice President Customer Service and Marketing until May, 1998
when I became President of Kentucky Utilities Co. Effective January 1, 2000, my
responsibilities became Group Executive-Regulatory Affairs for Louisville Gas &
Electric and Kentucky Utilities.
<PAGE>
EXHIBIT 99.D-3.1
March 24, 2000
VIA HAND DELIVERY
- -----------------
Mr. Joel Peck, Clerk
Virginia State Corporation Commission
Document Control Center
Tyler Building -- Second Floor
1300 East Main Street
Richmond, Virginia 23219
RE: Joint Petition of PowerGen plc, LG&E Energy Corp. and Kentucky
--------------------------------------------------------------
Utilities Company d/b/a/ Old Dominion Power Company for Approval of a
---------------------------------------------------------------------
Merger
------
Dear Mr. Peck:
Enclosed please find and accept for filing the original and four (4) copies
of the Joint Petition of Kentucky Utilities Company d/b/a Old Dominion Power
Company for approval of a merger by PowerGen plc. Please file-stamp the extra
copy for our records and return the same to me in the enclosed, self-addressed
stamped envelope.
Yours very truly,
/s/ Kendrick R. Riggs
KRR/ec
Enclosures
cc: Richard J. Williams (w/encl.)
Ronald A. Gibson (w/encl.)
William F. Stephens (w/encl.)
William H. Chambliss (w/encl.)
Michael S. Beer (w/encl.)
Robert M. Hewett (w/encl.)
Richard D. Gary (w/encl.)
<PAGE>
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
JOINT PETITION OF )
POWERGEN plc, LG&E ENERGY CORP., )
AND KENTUCKY UTILITIES COMPANY, ) CASE NO. PUA00 ______
FOR APPROVAL OF A MERGER )
JOINT PETITION
--------------
PowerGen plc ("PowerGen"), LG&E Energy Corp. ("LG&E Energy") and Kentucky
Utilities Company ("KU/ODP") (collectively referred to as "Petitioners"), by
counsel, hereby jointly petition the State Corporation Commission of Virginia
("Commission") for approval, pursuant Chapter 5, Title 56, of the Virginia Code
((S)56-88 et seq.), as amended, of the transfer of ownership and control of
-- ----
KU/ODP, all in accordance with the terms of the Agreement and Plan of Merger
dated as of February 27, 2000, between PowerGen and LG&E Energy ("the Merger
Agreement") (Appendix A to this Petition).
In support of this Joint Petition, Petitioners state as follows:
I. Petitioners and Affiliates
1. PowerGen is a public limited company formed under the laws of England
and Wales. PowerGen's ordinary shares are traded on the London Stock Exchange,
and its American Depository Receipts are listed on the New York Stock Exchange.
PowerGen is a holding company formed in 1998 following a corporate
reorganization which made PowerGen UK plc ("PowerGen UK"), a subsidiary of
PowerGen, the main operating subsidiary of the group. PowerGen is one of the
world's major independent power businesses and, through PowerGen UK, has become
one of the United Kingdom's leading integrated electricity and gas companies.
<PAGE>
PowerGen UK was created as a result of the privatization and restructuring of
the electricity industry in England and Wales in 1990. PowerGen, through its
subsidiaries, owns and operates nine power stations across England and Wales
with a generating capacity of approximately 10,000 MW, and competes in the
United Kingdom's "electricity pool" through which wholesale electric power is
traded. In 1998, PowerGen acquired East Midlands Electricity ("EME"), the third
largest regional electric distribution company in England and Wales, which at
that time supplied some 2.3 million residential and business customers.
PowerGen's retail business now supplies electricity and gas to some 2.6 million
customer accounts and is on target to meet its objective of 5 million customer
accounts by 2002.
PowerGen also conducts energy trading, shipping and gas pipeline
operations. PowerGen is the U.K.'s leading developer and operator of combined
heat and power plants (known as cogeneration in the U.S.), is involved in
renewable energy ventures, and is a leading independent power project developer
with projects in Europe, India and the Asia Pacific area.
The mailing address of PowerGen is 53 New Broad Street, London EC2M 1SL,
England. PowerGen is not a public service company in Virginia as this term is
defined by (S)(S)56-1, 56-76 and 56-88 of the Code of Virginia. Charts showing
PowerGen's corporate structure before and after the merger are attached as
Appendices B and C, respectively. PowerGen's Articles of Association and
Memorandum of Association are attached as Appendix D to this Petition.
2. LG&E Energy is a corporation organized and existing under the laws of
the Commonwealth of Kentucky. The address of LG&E Energy's principal business
office is 220 West Main Street, Louisville, Kentucky 40202. By Order dated
January 20, 1998, in Case No. PUA970041, the Commission approved the merger of
KU/ODP's then-parent company with and
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<PAGE>
into LG&E Energy with LG&E Energy being the surviving company. A chart depicting
LG&E Energy's corporate structure is attached as Appendix E to this Petition.
3. KU/ODP is a public service corporation organized and existing under the
laws of the Commonwealth of Kentucky and of the Commonwealth of Virginia. The
address of KU/ODP's principal business office is One Quality Street, Lexington,
Kentucky 40507. KU/ODP provides retail electric service to approximately
478,000 customers in 77 counties in Kentucky and five counties in southwestern
Virginia. KU/ODP conducts business in Virginia under the name "Old Dominion
Power Company" ("ODP"). In Virginia, ODP provides retail electric service to
approximately 29,000 customers in the Counties of Lee, Wise, Dickenson, Scott
and Russell and the City of Norton, Virginia, pursuant to Certificates of Public
Convenience and Necessity issued by the Commission. ODP does not have any
wholesale customers in Virginia. In 1999, ODP's revenue was approximately $39.6
million or 4.23% of KU/ODP's total utility revenues. A map showing the areas in
Virginia served by ODP and the electric system used to provide service in these
areas is attached as Appendix F. By Order dated January 20, 1998, in Case No.
PUA970041, the Commission approved the merger of KU/ODP's then-parent company
with and into LG&E Energy, with LG&E Energy being the surviving parent company.
As a result of that merger, KU/ODP joined Louisville Gas and Electric Company
("LG&E") as a wholly-owned subsidiary of LG&E Energy. LG&E is a Kentucky public
service company and is a wholly-owned subsidiary of LG&E Energy. LG&E provides
retail electric service to approximately 360,000 customers and retail gas
service to approximately 290,000 customers in 17 counties in Kentucky.
3
<PAGE>
II. The Proposed Merger Transaction
4. Between February 25 and 27, 2000, the Boards of Directors of PowerGen
(acting through a subcommittee on authority granted earlier by the full board),
and LG&E Energy held meetings and approved a merger between LG&E Energy and
Merger Sub (a corporation to be formed and indirectly owned by PowerGen for the
purpose of facilitating the merger) and related transactions. A copy of the
Merger Agreement is attached as Appendix A to this Petition. Under the Merger
Agreement, LG&E Energy will merge with Merger Sub; LG&E Energy will survive the
merger; Merger Sub will cease to exist; LG&E Energy will become an indirect
subsidiary of PowerGen; and LG&E and KU/ODP will remain subsidiaries of LG&E
Energy. LG&E Energy will consequently have four (4) first tier operating
subsidiaries -- LG&E, KU/ODP, LG&E Capital Corp. and LG&E Energy Marketing, Inc.
In addition, to comply with the Public Utility Holding Company Act of 1935
("PUHCA"), LG&E Energy Services, Inc. will become a first tier subsidiary of
LG&E Energy, as more fully discussed below. There will be additional companies
between LG&E Energy and PowerGen, each of which will be organized under the laws
of either a member state of the European Union or a state of the United States.
All of the intermediate companies will be directly or indirectly wholly owned by
PowerGen and will have no public or private institutional equity or debt
holders. Such structures are typical for U.K.-U.S. cross-border transactions
and will exist primarily for the purpose of creating an economically efficient
and viable structure for completing the transaction and owning LG&E Energy. In
accordance with the Commission's guidelines for filing applications involving
the transfer of asset, securities, and control, a Transaction Summary is
attached as Appendix L.
4
<PAGE>
III. The Merger Will Be Made in Accordance With Law
5. LG&E Energy was incorporated under Kentucky law on November 14, 1989,
to become a holding company for LG&E. Following merger with KU/ODP's then-
holding company pursuant to, among other orders, the Commission's Order in Case
No. PUA970041, LG&E Energy also became KU/ODP's holding company. Upon LG&E
Energy's merger with Merger Sub, it is expected that PowerGen and all
intermediate companies between PowerGen and LG&E Energy will become registered
public utility holding companies under PUHCA and KU/ODP will become part of
PowerGen's registered system. KU/ODP, by virtue of its ownership of interests
in other utilities, will itself remain a holding company, though exempt from
registration under PUHCA. KU/ODP will continue in existence as a corporation
organized under Kentucky and Virginia law.
6. Both PowerGen and LG&E Energy shareholders must approve the merger.
PowerGen has scheduled its shareholder meeting for June 5, 2000, and LG&E Energy
expects to schedule a shareholder meeting in early June, 2000.
7. Performance of the Agreement also is subject to other conditions,
including approval by the Kentucky Public Service Commission, and such
regulatory approval as may be required by the Tennessee Regulatory Authority.
8. Several federal approvals must be obtained and foreign notices must be
provided:
(a) Petitioners must receive approval of the merger from the Federal
Energy Regulatory Commission ("FERC").
(b) A filing under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 must be made, but Petitioners do not believe the merger implicates any
provision of the federal antitrust laws.
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<PAGE>
(c) A filing under the Exon-Florio provisions of the Omnibus Trade and
Competitiveness Act of 1988 will be made, although Petitioners do not believe
the merger will affect national security interests or that any action will be
taken under that statute.
(d) Petitioners must receive approval by the Securities and Exchange
Commission ("SEC"), after which PowerGen and all the intermediate companies
expect to register with the SEC as holding companies under PUCHA. As a result
of provisions in PUCHA, Petitioners plan to utilize a service company, LG&E
Energy Services, Inc., to provide LG&E and KU/ODP with administrative,
management and support services pursuant to a Service Agreement. The Virginia
regulatory implications of PUHCA registration are discussed below. Copies of
the final Service Agreement as well as the other filings noted herein will be
filed with this Commission when they are filed with the other federal and state
commissions or agencies.
(e) In addition, PowerGen may be required to make filings or give
notice under the United Kingdom's Electricity Act of 1989, the Fair Trading Act
of 1973 and regulations of the European Community.
IV. Corporate Structure and Regulation Following the Merger
9. After receipt of all necessary regulatory approvals and satisfaction or
waiver of other conditions to the consummation of the transaction, Merger Sub
will merge with LG&E Energy and LG&E Energy will be the surviving corporation.
The merger structure is shown in Appendix G to this Petition. PowerGen will
then indirectly own 100% of the issued and outstanding stock of LG&E Energy, and
LG&E Energy will continue to own 100% of the common stock of KU/ODP. The
holders of LG&E Energy common stock will not become holders of PowerGen's
ordinary shares, but each share of LG&E Energy's common stock will be
6
<PAGE>
converted into the right to receive $24.85 cash. The shares held by owners of
PowerGen's ordinary shares will not be converted or exchanged. The preferred
stock and debt obligations of KU/ODP will not be changed, converted, or
otherwise exchanged in the merger and will continue to be the obligations of
KU/ODP following the merger.
10. Following the merger, LG&E Energy will continue as a separate Kentucky
corporation with two direct operating utility subsidiaries: LG&E and KU/ODP.
KU/ODP will continue its separate corporate existence, operating under the name
of "Old Dominion Power Company" in Virginia and "Kentucky Utilities Company" in
Kentucky.
11. At the time the merger becomes effective, PowerGen will promptly
increase the size of its Board of Directors to allow LG&E Energy's Chief
Executive Officer to be appointed to PowerGen's Board of Directors. LG&E
Energy's Chief Executive Officer shall also continue to serve as Chairman and
Chief Executive Officer of LG&E Energy. Some of the Directors of LG&E Energy at
the effective time of the merger will be invited to serve as members of a U.S.
Advisory Board to provide advice with respect to the operations of LG&E Energy
and its subsidiaries, business and regulatory developments in the United States,
and such other matters as the Advisory Board members, PowerGen, and LG&E Energy
shall mutually agree. Following the merger, LG&E Energy's and KU/ODP's Board of
Directors will consist of three members, one of whom will have been an officer
or director of LG&E Energy prior to the merger. The corporate officers of
KU/ODP will maintain their current titles and responsibilities as officers of
KU/ODP unless and until otherwise determined by KU/ODP's Board of Directors.
12. KU/ODP will continue to function as a public utility subject to the
regulatory jurisdiction of this Commission, the Kentucky Public Service
Commission and, to the extent
7
<PAGE>
required by applicable law, the Tennessee Regulatory Authority. The FERC will
continue to regulate KU/ODP's transmission services and wholesale rates.
V. Holding Company Registration Under PUHCA
13. PowerGen and the intermediate companies are expected, subject to SEC
approval of the merger, to register as holding companies under PUHCA. As
registered holding companies, they will be subject to various statutory and
administrative requirements under PUHCA. The SEC has jurisdiction over
registered holding companies and, among other things, places certain
restrictions on affiliate transactions, including the holding companies' ability
to provide services to the utility operating subsidiaries, and the allocation of
costs to and from utility operating companies within the holding company
structure. As part of the merger approval under PUHCA, the SEC will review the
Petitioners' non-utility operations and the corporate structure proposed for the
merged company. Further, the SEC will request certification from state
regulatory commissions that they have the authority and resources to protect
ratepayers subject to their jurisdiction and intend to exercise that authority.
14. Registration under PUHCA will also impose a number of restrictions on
the operations of PowerGen and its subsidiary companies that are not Foreign
Utility Companies ("FUCOs") as defined in Section 33 of PUHCA. These
restrictions include a requirement that the SEC approve in advance securities
issuances, sales and acquisitions of utility assets, and acquisitions of other
businesses. In addition, PUHCA limits the ability of registered holding
companies and their subsidiaries to engage in various businesses. Generally
stated, PUHCA limits a holding company's activities to utility operations,
activities needed to support utility operations, energy-related businesses, and
telecommunications.
8
<PAGE>
15. PUHCA prohibits registered holding companies from providing services
to operating utility subsidiaries for a fee, and further greatly restricts
operating companies from providing services directly to each other.
Consequently, LG&E Energy Services, Inc. will be formed as a service company
subsidiary to LG&E Energy to provide centralized administrative and corporate
services. The SEC will then regulate the provision of services and allocation
of costs from LG&E Energy Services, Inc. to KU/ODP to ensure that appropriate
measures are used. Customers will experience no change in utility service due
to the establishment of LG&E Energy Services, Inc. Upon approval by this
Commission and the SEC, services will be provided pursuant to the provisions of
the Service Agreement between LG&E, KU/ODP and LG&E Energy Services, Inc.
16. The SEC will have regulatory authority regarding the governance of
LG&E Energy Services, Inc. and the allocation of costs to KU/ODP. The SEC
regulations are designed to ensure that the activities performed by the service
company are "necessary or appropriate in the public interest or for the
protection of investors or consumers and to insure that such [services] are
performed economically and efficiently for the benefit of such associate
companies at cost, fairly and equitably allocated among such companies." 15
U.S.C. (S)79m(b). KU/ODP believes that the proposed corporate structure and
PUHCA registration will not negatively impact the ability of the Commission to
regulate KU/ODP. Accounting for service company costs will comply with the
SEC's Uniform System of Accounts for Mutual Service Companies and Subsidiary
Service Companies under PUHCA, which for all practical purposes is identical to
the FERC Uniform System of Accounts. Costs either will be directly assigned to
the benefiting subsidiary or allocated using allocation methods approved by the
SEC. The Commission can be assured that costs will be allocated between
regulated and unregulated subsidiaries, and between
9
<PAGE>
utility operating companies, in an appropriate manner with no adverse
consequences to utility customers in Virginia. In addition, the SEC will have
audit authority over all transactions between LG&E Energy Services, Inc. and
KU/ODP and has historically invited both the FERC and state regulatory
commissions to participate in this process. Consequently, this Commission can
participate in future SEC proceedings. Petitioners also agree to the
Commission's reasonable access to the books and records of not only LG&E Energy
and its subsidiaries, but to PowerGen and the intermediate companies, consistent
with the exercise of the Commission's jurisdiction and authority.
17. The merger will not alter the authority of the Commission to regulate
KU/ODP's utility operations, or impair or jeopardize adequate service to the
public at just and reasonable rates. KU/ODP will continue to be a public
utility under and subject to the Commission's jurisdiction. The merger and
subsequent holding company registrations will not prevent the Commission or the
FERC from reviewing the books and records of either KU/ODP or its utility and
non-utility affiliates and parents and the companies will provide access to
their personnel as well. After the merger, the Commission will have the same
ratemaking and regulatory authority to regulate the rates and services of KU/ODP
as it did before the merger. Furthermore, KU/ODP commits that it will not
assert that the SEC's jurisdiction legally preempts the Commission from
disallowing recovery in retail rates of the cost of goods and services that
KU/ODP obtains from LG&E Energy Services, Inc. KU/ODP otherwise retains the
right to assert that the charges are reasonable and appropriate.
18. Petitioners expect to file their application under Chapter 4
Regulation of Relations With Affiliated Interests no later than the end of May,
2000 requesting the Commission
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<PAGE>
to exempt KU/ODP from all of the requirements in (S)56-77(a) or in the
alternative approve a services agreement.
VI. The Merger is in the Public Interest
19. The purpose of the merger is to make LG&E Energy part of a much larger
enterprise, well-positioned to serve customers given accelerating changes in the
energy industry across the world, while maintaining the historic connections
between KU/ODP and the communities it serves. Petitioners believe that the
merger is critical for ensuring that KU/ODP remains able to continue meeting its
commitments to its customers, to its communities and to the Commonwealth as a
whole.
20. Petitioners recognize that the energy industry has entered a period of
accelerating evolution, rapid deregulation and regulatory change, and increased
competition. In this environment, size and scale have become critical and
necessary prerequisites to success. The merger will result in sharing the best
practices to provide the best possible service to customers at the lowest cost.
By becoming part of a larger entity with greater resources, KU/ODP will be
better able to utilize new economically beneficial developments in transmission
and distribution technology, information systems, and capital markets.
Moreover, because PowerGen's existing utility operations are outside the U.S.,
there will be no increase in market concentration at either the wholesale or
retail levels.
21. PowerGen's experience in the U.K. and elsewhere will also benefit
Virginia consumers as the energy market evolves. In the past decade, the U.K.'s
electricity and gas markets have been restructured as the industry has evolved
from a state-owned monopoly to private ownership and competition. The solutions
reached in industry restructuring in the U.K. are themselves still evolving and
cannot be simplistically transplanted into the U.S. market.
11
<PAGE>
However, PowerGen's experience and expertise will be important in advancing
KU/ODP's efforts in the wholesale market, as well as in preparing KU/ODP for
restructuring and in helping to ensure that KU/ODP is prepared to compete and
serve its customers as restructuring occurs.
22. The merger brings material benefits to customers, employees of KU/ODP
and its parent and affiliates, LG&E Energy's shareholders (a number of whom are
residents of Virginia), and the Commonwealth of Virginia as a whole. After the
merger, KU/ODP will have the financial, technical and managerial capabilities
that are needed to provide efficient customer service to its utility customers.
Customers will be better off as a result of this transaction and may benefit
from improved service quality and energy efficiency resulting from the
reciprocal adoption of best practices. For employees, the merger represents an
opportunity for growth as the existing KU/ODP affiliated group becomes the U.S.
base of operations for a large international entity. The transaction ensures
that KU/ODP's parents and affiliates and their employees remain at the forefront
of an increasingly competitive U.S. electric industry, while foreign operations
provide opportunities for LG&E Energy employees abroad. LG&E Energy's
shareholders will receive a 58% premium over the trading price for their shares
as of the last trading day before announcement of the merger.
23. PowerGen retains the same commitment to KU/ODP that was exhibited by
LG&E Energy and KU Energy Corp. and is firmly committed to maintaining and
supporting the relationships between KU/ODP and the communities it serves.
Following the merger, KU/ODP will maintain its separate existence and its
connections and commitments to southwestern Virginia.
24. The merger will enable KU/ODP to become part of a merged entity with
the size, resources, scale, and the experience to succeed in the rapidly
evolving energy industry. Though
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part of a larger entity, KU/ODP will continue to be a regulated utility subject
to this Commission's jurisdiction with a continuing focus on serving its
customers. The merger thus serves the interests of KU/ODP's customers, its
communities and of the Commonwealth of Virginia as a whole, and is, therefore,
in the public interest.
VII. Following the Merger, KU/ODP Will Provide Adequate Service at Just and
Reasonable Rates
25. Following the merger, the customers of KU/ODP will continue to receive
the same high-quality energy services and will have the same business
arrangements with KU/ODP as before the merger. PowerGen has the same commitment
to high quality service as does LG&E Energy, and will fully support maintaining
the KU/ODP excellent service record. KU/ODP will continue to be highly
responsive to customer needs. KU/ODP's headquarters will remain in Lexington,
Kentucky, and KU/ODP will maintain a substantial presence throughout its service
territory in order to conduct its multistate operations. KU/ODP will continue to
operate through regional offices with local service personnel and line crews
available to respond to customers' needs.
26. KU/ODP will continue as a direct subsidiary of LG&E Energy and will
continue to have the financial, technical, and managerial abilities required to
provide high-quality, reliable service consistent with its statutory obligation
to provide adequate service to the public at just and reasonable rates.
VIII. Financial Abilities
27. Following the merger, KU/ODP intends to continue to maintain its
balanced capital structure. PowerGen has in place bank facilities to finance the
acquisition of LG&E Energy's common stock. Neither LG&E Energy nor any of LG&E
Energy's subsidiaries,
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<PAGE>
including KU/ODP, will incur any additional indebtedness or issue any securities
to finance any part of the purchase price paid by PowerGen for the LG&E Energy
stock.
PowerGen's Board of Directors does not intend to allow dividend policy to
affect adversely the financial integrity or rates of KU/ODP after the merger.
The utility will also benefit from PowerGen's sustained ability to maintain
already-strong mortgage bonds and credit ratings. If, for any reason, PowerGen
is unable to provide needed capital, KU/ODP will have the ability in the future
to seek alternative funding, subject to necessary regulatory approval. PowerGen
assures the Commission that no cross guarantees of debt will be in place between
KU/ODP and PowerGen or non-utility affiliates of PowerGen. KU/ODP will not
guarantee the credit of PowerGen or any affiliates without Commission approval.
Neither LG&E Energy nor any of LG&E's subsidiaries, including KU/ODP, will
borrow or issue any security, incur any debt or pledge any assets to finance any
part of the purchase of LG&E Energy's shares. PowerGen represents and agrees
that the costs of the purchase of LG&E Energy's shares will be excluded from the
cost of service and rates of KU/ODP.
IX. Technical and Managerial Abilities
28. KU/ODP will continue to operate through regional offices with local
service personnel and field crews available to respond to customers' needs and
personnel necessary to operate and dispatch its existing system. The post-
merger management of LG&E Energy is expected to include most of the existing
management of LG&E Energy, LG&E and KU/ODP.
KU/ODP will continue to be able to draw on the larger and more diverse
managerial and employee pool that resulted from the merger approved by this
Commission in Case No. PUA970041. In addition, because KU/ODP will be part of a
much larger entity with a more prominent international position, it should be
better able to attract and retain the most qualified
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job applicants and employees. As part of the larger global entity, employees
should also benefit from new and wider career opportunities. PowerGen is one of
the U.K.'s largest generating companies, and owns the U.K.'s third largest
regional electric distribution company. Moreover, PowerGen has, over the last
decade, experienced the transition from a government owned monopoly to a player
in a competitive marketplace. This experience and expertise will be available
to KU/ODP as the U.S. market restructures and evolves. As a result of the
merger, the management of KU/ODP stands to be strengthened and will not suffer
a diversion of valuable management resources.
X. Utility Accounts
29. Following consummation of the merger, KU/ODP will continue to operate
as a public utility, will keep its books and records, will make accounting
entries according to the Uniform System of Accounts (LG&E Energy Services, Inc.
costs will comply with the SEC's essentially identical system), and will render
appropriate reports in the same manner as it does now. Payment for the LG&E
Energy shares will be recorded in PowerGen's accounting books; neither LG&E
Energy nor KU/ODP will incur debt or issue equity to fund the purchase of
shares. After the merger, LG&E Energy and KU/ODP also will continue to adhere
to the applicable conditions described in the Commission's Orders in Case Nos.
PUA970041, PUF990010, and PUF990027, reporting requirements, and access to the
books and records of other affiliates and subsidiaries engaged in transactions
with KU/ODP.
XI. The Merger is Consistent With the Public Interest and Will Not Impair or
Jeopardize the Provision of Adequate Service at Just and Reasonable Rates
30. The merger is consistent with the public interest and will not impair
or jeopardize the provision of adequate service at just and reasonable rates.
As an indirect subsidiary of
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PowerGen, KU/ODP will be part of a larger, stronger entity with an international
presence whereby the ability exists to benefit from the utilization of the
process of adoption of best practices. It will be better able to withstand the
impact of increased competition and industry change, and better able to ensure
that its customers continue to receive the benefits flowing from its combined
operation with LG&E Energy. The operation of LG&E Energy as a wholly-owned
indirect subsidiary of PowerGen is essential to preserve the strength and
stability of LG&E Energy and KU/ODP at a time of increasing change and
competition. The merger will preserve the benefits customers receive and is
consistent with the public interest. The merger will not detract from the
benefits customers currently receive as the result of the merger approved in
Case No. PUA970041, including KU/ODP's merger surcredit associated with the
KU/ODP- LG&E merger synergies and the five year commitment to cap base rates
through June 30, 2003.
XII. Commission PUHCA Certification of PowerGen
31. Section 33(a)(2) of PUHCA (15 U.S.C. (S)79z-5b) provides, inter alia,
that certain exemptions from its provisions afforded PowerGen UK and EME, as
foreign utility companies, are not applicable unless every State commission
having jurisdiction over the retail electric rates of a public utility company
that is an affiliate of PowerGen UK and EME has certified to the SEC that it has
the authority and resources to protect ratepayers subject to its jurisdiction
and that it intends to exercise that authority.
32. Upon approval of the proposed merger, Petitioners request that this
Commission certify to the SEC pursuant to Section 33(a)(2) of PUHCA that this
Commission has the authority and resources to protect KU/ODP's ratepayers
subject to its jurisdiction and that it intends to exercise that authority.
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<PAGE>
XIII. The Proposed Services Agreement Does Not Negatively Affect the Ability of
This Commission to Effectively Regulate the Provision of Utility Services
or Rates
33. After the merger the Commission will have the same ratemaking and
regulatory authority to regulate the rates and services of KU/ODP as it did
before the merger.
34. To that end, KU/ODP commits that it will not assert that SEC
jurisdiction legally preempts the Commission from disallowing recovery in retail
rates of the costs of goods and services that KU/ODP obtains from LG&E Energy
Services, Inc. provided that KU/ODP otherwise retains the right to assert that
the charges are reasonable and appropriate.
OTHER POSSIBLE ISSUES UNDER TITLE 56,
--------------------------------------
CHAPTER 3 AND CHAPTER 4, DO NOT PRECLUDE THE
--------------------------------------------
APPROVAL OF THE SERVICES AGREEMENT
----------------------------------
35. In its petition filed with the Commission in Case No. PUA970041,
KU/ODP warranted that it would not guarantee the debt of LG&E Energy or LG&E
Energy's non-utility affiliates. The Commission's Order of January 20, 1998, in
Case No. PUA970041, approved the merger on certain conditions, including
prohibiting KU/ODP from guaranteeing the debt of LG&E Energy and its affiliates
without prior Commission approval. KU/ODP will comply with this condition at
all times.
36. LG&E Energy will seek Commission approval before issuing capital to
KU/ODP under Va.Code, Title 56, Chapters 3 and 4.
37. KU/ODP currently has no outstanding authority under Va. Code, Title
56, Chapter 3 related to the issuance of long-term debt, preferred stock, or
common equity. Authority to borrow up to $250 million in short-term debt and to
participate in a Money Pool and borrow up to this short-term debt limit from the
Money Pool was granted by the Commission in Case No. PUF990010 and will expire
on December 31, 2000. As a result, KU/ODP is limited to
17
<PAGE>
borrowing short-term funds up to $250 million. The 2000 Proposed Financing Plan
filed with the Commission by letter dated January 31, 2000, shows that KU/ODP
does not anticipate needing funds from external sources during 2000 other than
short-term debt; and that the maximum outstanding short-term debt expected in
2000 is $187 million.
WHEREFORE, Petitioners request that the Commission enter a final order as
follows:
1. Finding that, after the acquisition of ownership and control of LG&E
Energy Corp. by PowerGen pursuant to the Merger Agreement, Kentucky Utilities
Company/Old Dominion Power Company will continue to have financial, technical,
and managerial abilities to provide adequate service to its Virginia customers
at just and reasonable rates, and that the transfer of ownership and acquisition
of control of Kentucky Utilities Company is in accordance with the law and
consistent with the public interest;
2. Approving the transfer of ownership of Kentucky Utilities Company
through the acquisition of ownership and control of LG&E Energy Corp. by
PowerGen upon the merger of Merger Sub into LG&E Energy Corp. pursuant to
Sections 56-88.1 and 56-90 of the Virginia Code;
3. Determining that neither LG&E Energy Corp. nor PowerGen or any
intermediate company between LG&E Energy Corp. and PowerGen will, by reason of
ownership of all outstanding shares of common stock of LG&E Energy Corp., which
in turn owns all outstanding common shares of Kentucky Utilities Company/Old
Dominion Power Company, be a public service company in Virginia as defined in
Section 56-1 of the Virginia Code as they will not own, operate, or manage any
facilities used in connection with the generation, production, transmission, and
distribution of electricity for the public, for compensation for light, heat,
power or other uses;
18
<PAGE>
4. Granting all other necessary or appropriate authorizations; and
5. Petitioners further request that the Commission certify to the SEC
under Section 33(a)(2) of PUHCA that this Commission has the authority and
resources to protect the ratepayers of KU/ODP subject to its jurisdiction and it
intends to exercise that authority.
19
<PAGE>
March 24, 2000 Respectfully submitted,
/s/ David Jackson /s/ John R. McCall,
General Counsel and Executive Vice President
Corporate Secretary General Counsel and
PowerGen plc Corporate Secretary
53 New Broad Street Michael S. Beer
London, EC2 Senior Corporate Attorney
LG&E Energy Corp.
220 West Main Street
Louisville, Kentucky 40202
/s/ Kendrick R. Riggs /s/ Richard D. Gary
Timothy J. Eifler HUNTON & WILLIAMS
OGDEN NEWELL & WELCH Riverfront Plaza, East Tower
1700 Citizens Plaza 951 East Byrd Street
500 West Jefferson Street Richmond, Virginia 23219-4074
Louisville, Kentucky 40202
20
<PAGE>
Exhibit A
See Agreement and Plan of Merger, dated as of February 27, 2000, among PowerGen
plc, LG&E Energy Corp., US Subholdco 2 (PowerGen US Investments Corp.) and
Merger Sub, filed as Exhibit B-1 to PowerGen plc's Form U-1 filed April 26,
2000, File No. 70-9671, and incorporated by reference herein.
<PAGE>
Exhibit B
See PowerGen plc Corporate Chart filed as Exhibit F-1.1 to PowerGen plc's Form
U-1 filed April 26, 2000, File No. 70-9671, and incorporated by reference
herein.
See Description of the Companies in the PowerGen System, filed as Exhibit F-1.2
to PowerGen plc's Form U-1 filed April 26, 2000, File No. 70-9671, and
incorporated by reference herein.
<PAGE>
Exhibit C
See Combined PowerGen/LG&E Energy Corporate Chart, filed as Exhibit F-3.1 to
PowerGen plc's Form U-1 filed April 26, 2000, File No. 70-9671, and incorporated
by reference herein.
<PAGE>
Exhibit D
See Change of Name of PowerGen plc, filed as part of Exhibit D to Exhibit D-2.1
of PowerGen plc's Form U-1 filed on April 26, 2000, File No. 70-9671, and
incorporated by reference herein.
See Certificate of Incorporation of PowerGen plc, filed as part of Exhibit D to
Exhibit D-2.1 of PowerGen plc's Form U-1 filed on April 26, 2000, File No. 70-
9671, and incorporated by reference herein.
See Certificate of Incorporation of PowerGen 1998 plc, filed as part of Exhibit
D to Exhibit D-2.1 of PowerGen plc's Form U-1 filed on April 26, 2000, File No.
70-9671, and incorporated by reference herein.
See Memorandum of Association of PowerGen 1998 plc (filed on paper format on
Form SE on April 26, 2000, File No. 70-9671).
See Articles of Association of PowerGen 1998 plc (filed on paper format on Form
SE on April 26, 2000, File No. 70-9671).
See Memorandum and Articles of Association of PowerGen plc, filed as Exhibit A-1
to PowerGen plc's Form U-1 filed April 26, 2000, File No. 70-9671, and
incorporated by reference herein.
<PAGE>
Exhibit E
See LG&E Energy Corporate Charts (filed on paper format on Form SE on April 26,
2000, File No. 70-9671).
<PAGE>
Exhibit F
See Map of Old Dominion Power Company System, filed as part of Exhibit E-1 to
PowerGen plc's Form U-1 filed April 26, 2000, File No. 70-9671, and incorporated
by reference herein.
<PAGE>
Exhibit G
See Combined PowerGen/LG&E Energy Corporate Chart Showing the Merger (filed on
paper format on Form SE on April 26, 2000, File No. 70-9671).
<PAGE>
Exhibit H
See Annual Report on Form 10-K of LG&E Energy for the year ended December 31,
1998, File No. 1-10568, and incorporated by reference herein.
<PAGE>
Exhibit I
See the Annual Report of PowerGen Group dated March 28, 2000, filed as Exhibit
I-1 to PowerGen plc's Form U-1 filed April 26, 2000, File No. 70-9671, and
incorporated by reference herein.
<PAGE>
Exhibit J
See Annual Report on Form 10-K of LG&E Energy for the year ended December 31,
1995, File No. 1-10568, and incorporated by reference herein.
See Annual Report on Form 10-K of LG&E Energy for the year ended December 31,
1996, File No. 1-10568, and incorporated by reference herein.
See Annual Report on Form 10-K of LG&E Energy for the year ended December 31,
1997, File No. 1-10568, and incorporated by reference herein.
<PAGE>
Exhibit K
See Annual Report on Form 10-K of KU Energy Corporation for the year ended
December 31, 1995, File No. 1-10944, and incorporated by reference herein.
See Annual Report on Form 10-K of KU Energy Corporation for the year ended
December 31, 1996, File No. 1-10944, and incorporated by reference herein.
See Annual Report on Form 10-K of KU Energy Corporation for the year ended
December 31, 1997, File No. 1-10944, and incorporated by reference herein.
<PAGE>
Exhibit L
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
JOINT PETITION OF )
POWERGEN plc, LG&E ENERGY CORP., )
AND KENTUCKY UTILITIES COMPANY, ) CASE NO. PUA00 _____
FOR APPROVAL OF A MERGER )
TRANSACTION SUMMARY FOR
-----------------------
UTILITY TRANSFERS ACT PETITION
------------------------------
Petitioners file this Transaction Summary in support of their petition
for approval, pursuant Chapter 5, Title 56, of the Virginia Code ((S)56-88 et
--
seq.), as amended, of the transfer of ownership and control of KU/ODP (the
- ----
"Petition"), all in accordance with the terms of the Agreement and Plan of
Merger dated as of February 27, 2000, between PowerGen and LG&E Energy.
1. Provide a copy of the agreement signed by the president or any vice
president and the secretary or any assistant secretary of the company.
A copy of the Agreement and Plan of Merger dated as of February 27, 2000,
between PowerGen and LG&E Energy (the "Merger Agreement") is attached as
Appendix A to the Petition.
2. Provide a clear summarization of the asset(s) in question.
Under the Merger Agreement, LG&E Energy will merge with Merger Sub; LG&E
Energy will survive the merger; Merger Sub will cease to exist; LG&E Energy will
become an indirect subsidiary of PowerGen; and KU/ODP will remain a subsidiary
of LG&E Energy. The transaction involves the indirect transfer of all operating
assets of KU/ODP.
<PAGE>
3. Describe the proposed procedure and the terms and conditions of the
transaction to include:
a) Historical and current use of property;
KU/ODP is a public service corporation organized and existing under the
laws of the Commonwealth of Kentucky and the Commonwealth of Virginia. KU/ODP
provides retail electric service to approximately 478,000 customers in 77
counties in Kentucky and five counties in southwestern Virginia. KU/ODP
conducts business in Virginia under the name "Old Dominion Power Company"
("ODP"). In Virginia, ODP provides retail electric service to approximately
29,000 customers in the Counties of Lee, Wise, Dickenson, Scott and Russell and
the City of Norton, Virginia, pursuant to Certificates of Public Convenience and
Necessity issued by the Commission. ODP does not have any wholesale customers
in Virginia. A map showing the areas in Virginia served by ODP and the electric
system used to provide service in these areas is attached as Appendix F to the
Petition. By Order dated January 20, 1998, in Case No. PUA970041, the
Commission approved the merger of KU/ODP's then-parent company with and into
LG&E Energy, with LG&E Energy being the surviving parent company. As a result
of that merger, KU/ODP joined LG&E as a wholly-owned subsidiary of LG&E Energy.
LG&E is a Kentucky public service company and is a wholly-owned subsidiary of
LG&E Energy. LG&E provides retail electric service to approximately 360,000
customers and retail gas service to approximately 290,000 customers in 17
counties in Kentucky.
b) Proposed use of property;
Following the merger, LG&E Energy will continue as a separate Kentucky
corporation with two direct operating utility subsidiaries: LG&E and KU/ODP.
KU/ODP will continue its separate corporate existence, operating under the name
of "Old
2
<PAGE>
Dominion Power Company" in Virginia and "Kentucky Utilities Company" in
Kentucky. KU/ODP will continue to function as a public utility subject to the
regulatory jurisdiction of this Commission, the Kentucky Public Service
Commission and, to the extent required by applicable law, the Tennessee
Regulatory Authority. The FERC will continue to regulate KU/ODP's transmission
services and wholesale rates.
c) Original cost of property;
A copy of LG&E Energy's 1998 Annual Report reflecting the historical cost of
and accrued depreciation related to KU/ODP's assets is attached as Appendix H.
d) Proposed sales price of property and method of determining the price;
After receipt of all necessary regulatory approvals and satisfaction or
waiver of other conditions to the consummation of the transaction, Merger Sub
will merge with LG&E Energy and LG&E Energy will be the surviving corporation.
PowerGen will then indirectly own 100% of the issued and outstanding stock of
LG&E Energy, and LG&E Energy will continue to own 100% of the common stock of
KU/ODP. The holders of LG&E Energy common stock will not become holders of
PowerGen's ordinary shares, but each share of LG&E Energy's common stock will be
converted into the right to receive $24.85. The shares held by owners of
PowerGen's ordinary shares will not be converted or exchanged. The preferred
stock and debt obligations of KU/ODP will not be changed, converted, or
otherwise exchanged in the merger and will continue to be the obligations of
KU/ODP following the merger. The price at which PowerGen will be acquiring
ownership of LG&E Energy and its subsidiaries was determined by arms-length
negotiation between LG&E Energy and PowerGen based upon the value of LG&E
3
<PAGE>
Energy's assets, including necessarily those of KU/ODP, and the income derived
therefrom.
e) Proposed accounting treatment of the transaction as well as current
recording on company's books of record.
Following consummation of the merger, KU/ODP will continue to operate as a
public utility, will keep its books and records, will make accounting entries
according to the Uniform System of Accounts (LG&E Energy Services, Inc. costs
will comply with the SEC's essentially identical system), and will render
appropriate reports in the same manner as it does now. Payment for the LG&E
Energy shares will be recorded in PowerGen's accounting books; neither LG&E
Energy nor KU/ODP will incur debt or issue equity to fund the purchase of
shares. After the merger, LG&E Energy and KU/ODP also will continue to adhere
to the applicable conditions described in the Commission's Orders in Case Nos.
PUA970041, PUF990010, and PUF990027, reporting requirements, and access to the
books and records of other affiliates and subsidiaries engaged in transactions
with KU/ODP.
4) Provide assurances that adequate service to the public at just and
reasonable rates will not be impaired or jeopardized by the proposed
transfer.
The merger will not impair or jeopardize the provision of adequate service
to the public at just and reasonable rates. As an indirect subsidiary of
PowerGen, KU/ODP will be part of a larger, stronger entity with an international
presence with the ability to benefit from the utilization of the process of
adoption of best practices. It will be better able to withstand the impact of
increased competition and industry change, and better able to ensure that its
customers continue to receive the benefits flowing from its combined operation
with LG&E Energy. The operation of LG&E Energy as a wholly-
4
<PAGE>
owned indirect subsidiary of PowerGen is essential to preserve the strength and
stability of LG&E Energy and KU/ODP at a time of increasing change and
competition. The merger will preserve the benefits customers receive as the
result of the merger approved in Case No. PUA970041, including KU/ODP's merger
surcredit associated with the KU/ODP- LG&E merger synergies and the five year
commitment to cap base rates through June 30, 2003.
5) Show that the sales price was arms-length and that the purchase will result
in a direct benefit to customers.
The price at which PowerGen will be acquiring ownership of LG&E Energy and
its subsidiaries was determined by arms-length negotiation between LG&E Energy
and PowerGen based upon the value of LG&E Energy's assets and the income derived
therefrom. This is evidenced by the fact that LG&E Energy's shareholders will
receive a 58% premium over the trading price for their shares as of the last
trading day before announcement of the merger.
The purpose of the merger is to make LG&E Energy part of a much larger
enterprise, well-positioned to serve customers given accelerating changes in the
energy industry across the world, while maintaining the historic connections
between KU/ODP and the communities it serves. Petitioners believe that the
merger is critical for ensuring that KU/ODP remains able to continue meeting its
commitments to its customers, to its communities and to the Commonwealth as a
whole.
Petitioners recognize that the energy industry has entered a period of
accelerating evolution, rapid deregulation and regulatory change, and increased
competition. In this environment, size and scale have become critical and
necessary prerequisites to success. The merger will result in sharing the best
practices to provide the best possible service to
5
<PAGE>
customers at the lowest cost. By becoming part of a larger entity with greater
resources, KU/ODP will be better able to utilize new economically beneficial
developments in transmission and distribution technology, information systems,
and capital markets. Moreover, because PowerGen's existing utility operations
are outside the U.S., there will be no increase in market concentration at
either the wholesale or retail levels.
PowerGen's experience in the U.K. and elsewhere will also directly benefit
Virginia customers as the energy market evolves. In the past decade, the U.K.'s
electricity and gas markets have been restructured as the industry has evolved
from a state owned monopoly to private ownership and competition. The solutions
reached in industry restructuring in the U.K. are themselves still evolving and
cannot be simplistically transplanted into the U.S. market. However, PowerGen's
experience and expertise will be important in advancing KU/ODP's efforts in the
wholesale market, as well as in preparing KU/ODP for restructuring and in
helping to ensure that KU/ODP is prepared to compete and serve its customers as
restructuring occurs.
The merger brings material benefits to customers, employees of KU/ODP and
its parent and affiliates, LG&E Energy's shareholders (a number of whom are
residents of Virginia), and the Commonwealth of Virginia as a whole. After the
merger, KU/ODP will have the financial, technical and managerial capabilities
that are needed to provide efficient customer service to its utility customers.
Customers will be better off as a result of this transaction and may benefit
from improved service quality and energy efficiency resulting from the
reciprocal adoption of best practices. For employees, the merger represents an
opportunity for growth as the existing KU/ODP affiliated group becomes the U.S.
base of operations for a large international entity. The transaction ensures
that
6
<PAGE>
KU/ODP's parents and affiliates and their employees remain at the forefront of
an increasingly competitive U.S. electric industry, while foreign operations
provide opportunities for LG&E Energy employees abroad
PowerGen retains the same commitment to KU/ODP that was exhibited by LG&E
Energy and KU Energy Corp. and is firmly committed to maintaining and supporting
the relationships between KU/ODP and the communities it serves. Following the
merger, KU/ODP will maintain its separate existence and its connections and
commitments to southwestern Virginia.
The merger will enable KU/ODP to become part of a merged entity with the
size, resources, scale, and the experience to succeed in the rapidly evolving
energy industry. Though part of a larger entity, KU/ODP will continue to be a
regulated utility subject to this Commission's jurisdiction with a continuing
focus on serving its customers. Accordingly, the merger will result in a direct
benefit to customers.
6. Provide schedule of plant, book depreciation, and contributed property
related to assets to be acquired up to current date (or date of purchase, if
acquisition has taken place).
The 1998 Annual Report of LG&E Energy and the 1999 Annual Report of PowerGen
are attached hereto as Appendices H and I respectively.
7. Provide complete financial statements, to include Balance Sheet, Income
Statement, and Cash Flow Statement, for the latest twelve-month period and
for the last five years.
The 1998 Annual Report of LG&E Energy and the 1999 Annual Report of
PowerGen are attached hereto as Appendices H and I respectively. The Annual
Reports of LG&E Energy and KU Energy Corp. for 1995 through 1997 are attached as
Appendices J and K.
7
<PAGE>
8. Are invoices available to verify plant figures? If not, why not?
Petitioners agree to the Commission's reasonable access to the books and
records of not only LG&E Energy and its subsidiaries, but to PowerGen and the
intermediate companies, consistent with the exercise of the Commission's
jurisdiction and authority.
9. In addition to the items listed above, for applications requesting approval
of the acquisition/disposition of control, address the anticipated impact of
such action on the regulated company's rates and service, capital structure,
and access to capital and financial markets. Discuss favorable and
unfavorable economic impact on the State of Virginia to include employee
levels, facilities, and services provided. Will an additional investment be
required to improve service quality? Provide specific details on
improvements needed. Provide the anticipated impact on rates of such
improvements currently and for the next ten years.
The merger will not adversely affect KU/ODP's rates. The merger will not
detract from the benefits customers currently receive as the result of the
merger approved in Case No. PUA970041, including KU/ODP's merger surcredit
associated with the KU/ODP- LG&E merger synergies and the five year commitment
to cap base rates through June 30, 2003.
The merger will not effect KU/ODP' quality of service and no additional
investment will be required to improve service quality. Following the merger,
the customers of KU/ODP will continue to receive the same high-quality energy
services and will have the same business arrangements with KU/ODP as before the
merger. PowerGen has the same commitment to high quality service as does LG&E
Energy, and will fully support maintaining the KU/ODP excellent service record.
KU/ODP will continue to be highly responsive to customer needs. KU/ODP's
headquarters will remain in Lexington, Kentucky, and KU/ODP will maintain a
substantial presence throughout its service territory in order to conduct its
multistate operations. KU/ODP will continue to
8
<PAGE>
operate through regional offices with local service personnel and line crews
available to respond to customers' needs. KU/ODP will continue as a direct
subsidiary of LG&E Energy and will continue to have the financial, technical,
and managerial abilities required to provide high-quality, reliable service
consistent with its statutory obligation to provide adequate service to the
public at just and reasonable rates.
The merger will provide KU/ODP broader access to capital and financial
markets. Following the merger, KU/ODP intends to continue to maintain its
balanced capital structure. PowerGen has in place bank facilities to finance the
acquisition of LG&E Energy's common stock. Neither LG&E Energy nor any of LG&E
Energy's subsidiaries, including KU/ODP, will incur any additional indebtedness
or issue any securities to finance any part of the purchase price paid by
PowerGen for the LG&E Energy stock.
PowerGen's Board of Directors does not intend to allow dividend policy to
affect adversely the financial integrity or rates of KU/ODP after the merger.
The utility will also benefit from PowerGen's enhanced ability to attract
capital at reasonable rates and PowerGen's sustained ability to maintain
already-strong mortgage bonds and credit ratings. If, for any reason, PowerGen
is unable to provide needed capital, KU/ODP will have the ability in the future
to seek alternative funding, subject to necessary regulatory approval. PowerGen
assures the Commission that no cross guarantees of debt will be in place between
the utilities and PowerGen or non-utility affiliates of PowerGen. KU/ODP will
not guarantee the credit of PowerGen or any affiliates without Commission
approval. Neither LG&E Energy nor any of LG&E's subsidiaries, including KU/ODP,
will borrow or issue any security, incur any debt or pledge any assets to
finance any part of the purchase of LG&E Energy's shares. PowerGen represents
and agrees that the costs of
9
<PAGE>
the purchase of LG&E Energy's shares will be excluded from the cost of service
and rates of KU/ODP.
10
<PAGE>
EXHIBIT 99.I-1
PowerGen plc
Report
ANNUAL REPORT 1999
[GRAPHIC OMITTED]
[LOGO]
POWERGEN
<PAGE>
PowerGen's vision is to create one of the world's leading independent
electricity and gas businesses. We seek to grow by generating, distributing and
supplying power both in the UK and throughout the world.
As a low cost, innovative and environmentally responsible operator, PowerGen
delivers value and quality to its customers, shareholders, employees, partners
and communities in which it operates throughout the world.
Our values
Working Together, Working Better
We work together
o for mutual benefit
o with integrity, honesty and trust
o showing respect and consideration for others
We work better by
o not compromising on safety
o constantly seeking innovation and improvement
o taking account of the future in what we do today
o delivering what we promise
<PAGE>
Financial highlights
Nine months
ended December 1998
96/6 96/7 97/8 1998 99
Turnover 2,933 2,898 2,932 2,344 3,746
((pound)millions)
Pre-exceptional profit 538 566 579 292 512
before tax ((pound)millions)
Pre-exceptional earnings 54.1 63.0 68.1 38.8 73.4
per ordinary share (pence)(1)
Dividends per ordinary 21.0 25.2 29.0 24.1 34.8
share (pence)
(1) Earnings per ordinary share are based on profits before exceptional items
and goodwill amortisation.
o Profits up 11%, earnings per share up 17% and dividends up 8%(4)
o UK business successfully re-focused, with significant cost savings
o Strong organic customer growth
o Overseas operating profits doubled(4)
<TABLE>
<CAPTION>
Year ended Year ended Year ended Nine months ended Year ended
March 1996 March 1997 March 1998 3 January 1999 2 January 2000
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Group turnover (pound)m 2,933 2,898 2,932 2,344 3,746
- ----------------------------------------------------------------------------------------------------------------------------
Pre-exceptional profit before tax(3) (pound)m 538 566 579 292 512
- ----------------------------------------------------------------------------------------------------------------------------
Profit/(Loss) before tax(1),(3) (pound)m 659 568 210 (245) 762
- ----------------------------------------------------------------------------------------------------------------------------
Earnings per ordinary share(2),(3) pence 54.1 63.0 68,1 38.8 73.4
- ----------------------------------------------------------------------------------------------------------------------------
Dividends per ordinary share pence 21.0 25.2 29.0 24.1 34.8
- ----------------------------------------------------------------------------------------------------------------------------
Dividend cover per share(2),(3) times 2.6 2.5 2.3 1.6 2.1
- ----------------------------------------------------------------------------------------------------------------------------
Net assets(3) (pound)m 2,358 2,022 1,656 1,345 1,984
- ----------------------------------------------------------------------------------------------------------------------------
Net debt (pound)m 334 655 481 2,408 2,024
- ----------------------------------------------------------------------------------------------------------------------------
Shares in issue (year-end) millions 728.3 637.4 644.5 649.1 649.7
- ----------------------------------------------------------------------------------------------------------------------------
Staff numbers (year-end) 3,413 3,551 3,453 8,118 7,678
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes
1 In the year to 2 January 2000, profit before tax includes exceptional
credits (net) of (pound)250 million. In the nine months to 3 January 1999,
profit before tax includes exceptional costs of (pound)537 million. In the
years to March 1998, March 1997 and March 1996, profit before tax includes
exceptional costs of (pound)369 million, exceptional credits of (pound)2
million and exceptional credits of (pound)121 million respectively.
2 Earnings per share (eps) and dividend cover figures quoted above are based
on profits before exceptional items and goodwill amortisation. After
charging or crediting exceptional items and goodwill amortisation, the
figures are: year to 2 January 2000 eps 109.Op, nine months to 3 January
1999, eps (24.1)p, year ended March 1998, eps (19.5)p, year ended March
1997, eps 63.3p and year ended March 1996, eps 68.8p.
3 Profit before tax, earnings per share and net assets for the three years
ended March 1998 were restated following the adoption of Financial
Reporting Standard 12 from 30 March 1998.
4 On an annualised basis.
<PAGE>
2 POWERGEN PLC ANNUAL REPORT 1999
The Group
- --------------------------------------------------------------------------------
UK Operations
- --------------------------------------------------------------------------------
o Production
We produce enough electricity to supply the homes of over eight million
people from our coal, gas, oil and renewable power stations
o Energy Trading
We are active traders of electricity and gas, both in the UK and in
European markets
o Retail
We sell electricity and gas to domestic, industrial and commercial
customers and are developing other related products. We currently supply
2.6 million customer accounts
o PowerGen CHP
We are a market leader in providing energy-intensive customers with highly
efficient combined heat and power plant to meet their electricity and
steam needs
o Distribution
Through over 67,000km of overhead lines and underground cables, we
distribute electricity to 2.3 million homes and businesses across the East
Midlands.
- --------------------------------------------------------------------------------
PowerGen International
- --------------------------------------------------------------------------------
We are a growing international power business, with substantial interests in
nine projects in operation or under construction across Europe, India and Asia
Pacific.
o Europe
In Germany, we have stakes in power generation and mining assets. In
Portugal, we operate the country's first gas-fired power station. We are
the largest British investor in Hungary, where we are building a new
gas-fired plant and operate a co-generation plant
o India
We are one of the largest foreign investors in the Indian private power
market through the gas and naphtha-fired plant that we operate in the
state of Gujarat
o Asia Pacific
PowerGen has major stakes in new plants under construction in Indonesia
and South Korea. We also operate a power station and mining operation near
Melbourne, Australia.
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 3
Chairman's statement
PowerGen has delivered strong operational and financial performance in 1999. As
the energy market evolves, PowerGen has proved its ability to be quick to adapt
to new challenges and new working environments. During the year the UK business,
in particular, outperformed expectations. The re-organisation of the divisions
refocused the business to make the whole greater than the sum of parts. We have
a strong and growing retail division, a flexible plant portfolio and the trading
and risk management skills to optimise value and limit risk in a declining price
environment. These, together with a solid performance in distribution, provide
earnings diversity in the UK market.
Group turnover for 1999 was (pound)3,746 million, up (pound)511 million on
last year, largely due to the inclusion of only five months' sales from the East
Midlands Electricity (EME) business in the prior year. Profit before tax,
exceptional items and goodwill amortisation increased 11 per cent to (pound)580
million compared with the same period in 1998. Earnings per share, on a similar
basis, improved 17 per cent to 73.4p. After (pound)68 million of goodwill
amortisation, profit before tax and exceptional items was (pound)512 million.
Three exceptional items result in a net credit of (pound)250 million.
These are a profit on the 4,000 megawatt (MW) plant sale of (pound)543 million
set off by (pound)197 million for gas contract re-negotiations and (pound)96
million for restructuring costs.
There was a net tax charge of (pound)50 million, after a tax credit of
(pound)49 million arising on the exceptional items. Excluding this amount, the
effective tax rate on pre-exceptional profits before goodwill amortisation was
17.1 per cent.
The Board has announced a second interim dividend for the year of 24.0p,
making the total dividend 34.8p per share which represents a year-on-year
increase of 8.1 per cent. This dividend will be paid on or before 10 May 2000 to
shareholders on the record on 17 March 2000.
competition is continuing to increase in the UK production business with
wholesale prices starting to move lower as anticipated. During the year the sale
of our 2,000MW power stations at Fiddler's Ferry and Ferrybridge C was
completed. Excluding this plant, good availability from our portfolio ensured
our overall market share was flat with last year at 14.3 per cent.
PowerGen CHP has continued to grow, with the successful integration of
Yorkshire CoGen which was acquired at the end of 1998. Development agreements
for 25OMWe plant at ICI and 50MWe plant at Cargill have been signed, as was a 15
year contract with Michelin for a 56MWe project in January 2000. By 2003, our
CHP assets will be generating the equivalent of 2.3 per cent of the England and
Wales generation market.
In February PowerGen, along with four other generators, declined to accept
the proposed Licence Condition from the Office of Gas and Electricity Markets
(Ofgem) to counter market abuse. A reference to the Competition Commission is
anticipated. PowerGen believes that such a reference will clarify the need for
and the operation of such a Condition. Although this reference could take six
months or more, it will not impact on our strategy going forward.
In our distribution business, the distribution price review was published
in December and was in line with our expectations. It will reduce our operating
profit by some (pound)50 million per annum prior to cost savings. This business
has undergone extensive rationalisation and restructuring, resulting in
immediate cost savings of around (pound)30 million per annum (including
(pound)10 million EME Group overhead costs). These savings rise to (pound)75
million per annum over the following two years. Our plans will see this business
exceed existing efficiency frontiers early next year enabling us to generate
returns at least 4 per cent above those currently allowed by Ofgem.
In retail, domestic sales have exceeded our targets for new customers for
1999. With 2.6 million customer accounts we are well on track to achieve our
target of five million by the end of 2002. Our recent internet-based retail
telecommunications joint venture with Affinity Internet Holdings plc will allow
us to market telecommunications and energy packages to both our own and our
partner's customers. In the industrial and commercial sector of the market we
remain a market leader and plan to increase our market share in sales of both
electricity and gas.
Our international business has also made progress despite some problems in
Australia and Indonesia. During the year we achieved commercial operation of
Tapada in Portugal, and purchased a 49.9 per cent stake in LG Energy in Korea.
In India we have increased our stake in the recently renamed GPEC (Gujarat
PowerGen Energy Corporation) project by 46.3 per cent to 74.1 per cent. By 2001
the business will have investments in over 6,000MW of operating international
projects.
On 28 February 2000 we announced our acquisition of LG&E Energy Corp.
(LG&E) for $3.2 billion. Our strategic rationale for acquiring LG&E is based on
what we have always said about potential expansion into the US: that we want to
buy the right company, in the right market, with the right management, and with
the right deal. LG&E gives us the integrated characteristics of our UK business
with a sound management team in the expanding and strategically important mid
western market in the US. We anticipate completing the deal in about a year's
time once regulatory consents have been received.
This transaction is expected to increase shareholder value, as returns are
forecast to be above PowerGens cost of capital. Earnings are forecast to be
significantly enhanced in the first year on a pre-amortisation basis and to be
at least neutral on a post-amortisation basis. The real importance of this
transaction is that it provides an excellent platform for future growth both
organically and through follow-on mergers or acquisitions.
PowerGen's strategy recognises the need to replace declining earnings in
the core UK generation business as competition increases. We are now seeing the
benefits of a vertically integrated UK business with the best known national
electricity brand name and are confident that PowerGen will remain a key player
in the UK market. With our acquisition of LG&E we will secure better quality
earnings from the Group to underpin future shareholder value, and to help us to
achieve our vision of becoming one of the world's leading independent
electricity and gas companies.
PowerGen has come a long way from our origins as a power generating
company. The tremendous change we have brought about is in large part down to
the energy, commitment and ideas of our people around the world. I would like to
take this opportunity to thank them for another year of excellent work.
/s/ E A Wallis
E A Wallis
Chairman
<PAGE>
4 POWERGEN PLC ANNUAL REPORT 1999
Operating review
PowerGens aim is to create one of the world's leading independent electricity
and gas businesses.
In the UK, it is an integrated electricity and gas business built on:
o electricity production, including combined heat and power and renewables
o energy trading
o electricity distribution and gas transportation
o retailing electricity and gas to domestic, industrial and commercial
customers.
Internationally, it is a growing developer and operator of power plants in
Europe, India and Asia Pacific. After the year-end, it also announced an
agreement under which it proposes to enter the US energy market through the
acquisition of LG&E Energy Corp., a vertically-integrated energy group based in
Louisville, Kentucky.
UK Operations
Production The total electricity demand in the England and Wales market
increased slightly to 295TWh (292.6TWh 1998) over the year. PowerGen's
generation output fell by 7.1TWh to 47.0TWh, with market share falling from 18.5
per cent to 15.9 per cent. This reduction resulted from the divestment of two
2,000MW coal-fired power stations -- Fiddler's Ferry and Ferrybridge C -- to
Edison Mission Energy in July. If these two plants are excluded, PowerGens
market share remained unchanged at 14.3 per cent in both 1998 and 1999.
PowerGen's gas and coal-fired plant performed well and with good
availability, remaining within the band that the Group has identified as
representing world's best practice. This helped the Group to compete in the
market in terms of both volume and value and achieve its targets for the year.
Its high plant availability also meant that it benefited from the high levels of
capacity payments that were available in the summer as a result of competitors'
low availability and plant overhaul programmes.
PowerGens total plant capacity fell by 3,100MW during the year to
10,160MW. This was a result of the divestment of Fiddler's Ferry and Ferrybridge
C and the commissioning of Cottam Development Centre, PowerGen's joint venture
with Siemens to develop, test and commercially operate the next generation of
gas-fired power plant technology. Commissioning of the 390MW combined cycle unit
was completed in September, and it is now generating in accordance with its full
commercial operating plan.
After the period end, PowerGen and four other generators opted to go to
the Competition Commission rather than agree to the Regulator's wording for the
proposed 'market abuse' licence condition. This decision was a response to the
lack of clarity in the wording and the lack of a formal and binding appeal
mechanism. The reference to the Competition Commission could take between six
months and a year, but will not affect PowerGen's forward strategy.
Looking ahead, PowerGen will continue to compete vigorously as competition
in the England and Wales coal-fired market increases following the sale of plant
by PowerGen and National Power to Edison Mission Energy and AES respectively.
The forthcoming sale by National Power of Eggborough to British Energy will
increase the number of competitors in this market to six, and potentially seven
if its sale of Blyth to NRG Energy goes ahead.
Combined Heat and Power (CHP) PowerGen's CHP activities contributed another
solid performance, with Yorkshire CoGen, which was acquired in December 1998,
now fully integrated into the existing business.
The operational CHP schemes continued to perform well, and the
construction and commissioning of a 56MWe plant for Hays was successfully
completed.
Construction of its largest CHP project, a 130DMWe scheme for Brunner
Mond, is making good progress, with the plant on track for commercial operation
in summer 2000. Construction of a 56MWe project for Hickson and Welch at
Castleford also began during the year, and is scheduled for completion in summer
2001.
Two other substantial projects were secured during the period: an
exclusive development agreement with ICI for a 25OMWe plant at Runcom, Cheshire,
and a 5DMWe plant for Cargill PLC at the port of Liverpool, Both plants are
expected to come on stream in 2002.
After the year-end, PowerGen also signed a contract with Michelin for a
56MWe plant at its Stoke-on-Trent site. The plant will be operational by the end
of 2001.
These developments increase PowerGen's committed investment in CHP to
(pound)600 million in 896MWe and 1,300MWth of plant, confirming PowerGen's
position as one of the market leaders in CHP in the UK. By 2003, its assets will
be generating the equivalent of 2.3 per cent of the England and Wales generation
market.
Renewables PowerGen Renewables Ltd, a joint venture with Abbot Group, has 11
operational wind farms with a total capacity of 55MW. Two further wind farms
with a total capacity of 20MW are under construction and the business is
continuing to look to expand its activities in the UK and Ireland both on and
offshore. After the year-end, it announced its participation in the UK's first
offshore wind farm at Blyth, off the Northumberland coast.
Distribution In 1999, PowerGen, under the brand name East Midlands Electricity
(EME), distributed 26.7TWh of electricity over 67,00O km of overhead lines and
underground cables.
In 1998/99 -- the period monitored by Ofgem -- it delivered a strong
operational performance. Network reliability increased to 99.9 per cent and the
number of interruptions experienced by customers reduced by 17 per cent. A
customer satisfaction survey carried out in May 1999 found that domestic
satisfaction levels remained high and unchanged at 93 per cent. Satisfaction
among business customers fell slightly to 82 per cent, although those who were
extremely satisfied rose from 15 per cent to 28 per cent.
PowerGen made good progress during the year in its drive to achieve
world's best practice in distribution. To assist the necessary change in
business practices, the distribution activities operated as two distinct
business streams for the majority of the period, Networks and Distribution
Services comprised the regulated core asset management activity responsible for
the operation of the network. Distribution Services consisted of the service
activities of construction, metering and contracting.
This exercise helped to identify metering and contracting as non-core
activities that could be run more cost-effectively and flexibly by service
providers outside the Group. After the year-end, PowerGen announced the sale of
EME Contracting to ABB, including a three-year agreement under which it will
provide service support to EME. The sale of the metering activities has a target
completion date of fourth quarter 2000, following the outcome of the regulatory
consultation on metering separation due to take place in the first half of 2000.
The remaining businesses of Networks and Construction
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 5
integrated into a single business group at the end of 1999. This is adopting a
centralised structure through which it will reduce costs and improve its ability
to meet customer needs. A new central facility near East Midlands Airport is
nearing completion and will be supported by four field operating centres.
A proportion of the employees who are leaving the core distribution
operation as part of the rationalisation process, 260 are moving to external
service providers who will provide support for the network.
In December, PowerGen accepted Ofgem's final proposals for price controls
on its distribution activities from 2000 to 2005. Under the proposals, PowerGen
is required to deliver a real reduction in distribution charges in 2000 of 23
per cent followed by four years with charges capped at RPI-3. While these
targets are challenging, the planned restructuring of the business will enable
PowerGen to meet them within its current business plan.
Retail -- industrial and commercial The industrial and commercial operation
continued to build upon its market leading position in electricity sales and
established PowerGen as one of the leading suppliers in the gas market. On an
annualised basis, at the end of 1999, it supplied 19TWh of electricity to 28,000
sites and 19TWh of gas to 23,000 sites.
PowerGen also entered the Northern Ireland industrial and commercial
market during the year, It secured 13 per cent of the auctioned capacity
available for supply and now serves a number of customers in the non-franchise
market. There are plans to increase customer numbers and volumes as the market
de-regulates further.
Product innovation has been a key criterion for success in 1999. The
former energy services activities of EME and Kinetica were brought together to
create PowerGen Energy Solutions. This new service links energy supply with
tailored energy services products to provide a complete 'solution' to each
customer's energy needs.
There is also a growing potential to sell a variety of additional products
to the industrial and commercial customer base. Despite the relatively recent
introduction of multi-fuel deals, PowerGen already sells electricity and gas to
13 per cent of its industrial and commercial customer portfolio and plans to
increase this to 25 per cent by 2003. A cross-functional product development
group is now actively exploring opportunities for the sale of further products,
and is seeking to exploit the recent technological advances in electronic
communication, particularly the internet.
Government legislation and customer sensitivity towards environmental
issues are likely to reinforce the demand for green' products. PowerGen is well
positioned to respond both by providing energy efficiency advice through
PowerGen Energy Solutions and through its purchase of a significant proportion
of the available electricity generated from renewable sources for re-sale under
a green tariff.
PowerGen continued to place a high emphasis on enhancing its customer
service standards, which consistently gain a top quartile ranking within the
industry.
PowerGen has challenging five-year expansion targets in the industrial and
commercial retail market and aims to increase electricity volumes by 20 per cent
and to double the volume of gas sales.
Retail-mass markets The retail business of EME was rebranded under the
PowerGen name in July. The competitive advantage of a strong national brand,
together with a commitment to excellence in marketing, sales, service and
innovative product development, enabled PowerGen to achieve its year-end target
of 2.6 million customer accounts.
Growth in the domestic customer base was particularly rapid in the last
quarter of the year. PowerGen gained 100,000 new gas customers -- approximately
30 per cent of all those switching over the period. It also achieved a net
growth of 40,000 electricity accounts.
The business focused on offering highly competitive prices. Ofgem's final
proposals on supply price controls in December required real term reductions in
the standard domestic and Economy 7 tariffs in the East Midlands area of 6.9 per
cent and 2.8 per cent respectively. PowerGen responded immediately with an
announcement of price reductions that were both greater than required by Ofgem
and implemented earlier than required. Gas prices were also significantly
reduced.
A range of new products was launched during the year, in particular
targeted at maximising the potential of the internet. PowerGen became the first
UK energy supplier to allow domestic customers to sign up for electricity and
gas via the internet in July. PowerGen became an Internet Service Provider in
October 1999.
A range of affinity relationships and marketing initiatives were launched
during the period. These include a partnership with Age Concern on an energy
package tailored to the needs of the over 60s, and a marketing campaign
demonstrating the competitiveness of PowerGen's dual fuel deals.
The industry has received an increase in electricity customer complaints,
due particularly to increased sales activity and ensuing registration issues.
PowerGen's performance is believed to be better than that of comparable
suppliers achieving similar levels of new customers and the business is placing
considerable efforts on constantly improving the service it offers.
Looking ahead, PowerGen has set itself the target of exploiting the strong
PowerGen brand to achieve five million customers by the end of 2002 through
organic growth. Customer numbers are continuing to grow in line with this
target, with the losses of electricity customers within the East Midlands area
exceeded by the substantial growth of the domestic gas business and electricity
gains outside the area. Significantly, former customers who left for another
supplier are now beginning to return.
Energy Trading PowerGen brought together its skills in trading electricity and
gas into a new business activity, Energy Trading, during 1999. The role of the
new team is to manage PowerGen's routes to market in the UK to achieve a robust
contract portfolio 'hedge' against its generation output, and to prepare the
Group for a more dynamic business environment in the run-up to the New
Electricity Trading Arrangements (NETA). The Energy Trading group is active in
seven different energy markets for electricity, gas and oil in the UK and
Europe, gaining valuable experience and developing best practice systems and
procedures to enable it to stay ahead of developments in the market.
Within Energy Trading, a team has been working to build the trading and
operating systems that NETA requires. This will both ensure that PowerGen's
operations continue to run successfully in this new environment and give it a
competitive edge through industry-leading standards of decision support,
reporting systems and information. The project is on schedule, enabling
PowerGen's energy traders to be fully prepared for the opening of the new
market.
<PAGE>
6 POWERGEN PLC ANNUAL REPORT 1999
Operating review continued
Gas PowerGen continued to manage its gas portfolio to maintain flexible and
cost-effective supplies.
It successfully completed another phase of renegotiations on its Liverpool
Bay contract, paying (pound)197 million in return for contract modifications
that deliver price reductions and increased flexibility in the gas offtake.
PowerGen International
PowerGen International aims to establish integrated businesses in a small number
of target countries in the three zones of Europe, India and Asia Pacific. Its
focus is on growth through acquisitions.
The business currently has stakes in 8,400MW of contracted generation
projects in eight countries. Of this, 4,200MW is operational, 2,100MW is under
construction or commissioning, and the remainder is under development.
PowerGen's equity share in operational and construction projects is equivalent
to 3,100MW.
The business was established as a wholly-owned subsidiary, PowerGen
International Ltd, in 1999, in order to provide the business focus and
flexibility to implement its growth strategy.
Europe Full commercial operation was achieved for all three units at the 990MW
gas-fired plant at Tapada do Outeiro in Portugal in August 1999. PowerGen has a
49.9 per cent stake in the project, as well as the operations and maintenance
contract. The plant now supplies up to 20 per cent of Portugal's electricity
needs.
In Germany, the 900MW coal-fired Schkopau plant performed well during the
year. At the MIBRAG power generation and mining complex, the new Schleenhain
mine was successfully opened. PowerGen has a 22 per cent stake in Schkopau, and
a 33 per cent stake in MIBRAG.
Construction of PowerGen's 389MW gas-fired Csepel II plant in Hungary
continued on schedule, with commercial operation expected by the end of 2000.
India PowerGen increased its stake in the renamed GPEC (Gujarat PowerGen Energy
Corporation) project from 28 per cent to 74 per cent. The plant, a 655MW gas and
naphtha-fired plant at Paguthan, has now completed its first full year of
commercial operation.
Asia Pacific In February, PowerGen acquired a 49.9 per cent stake in the 528MW
LG Energy gas-fired plant in South Korea. Construction of the plant is going
well, with the plant on target to commission in open cycle mode in the third
quarter of 2000, followed by combined cycle operation by mid-2001.
In Indonesia, PowerGen has a 35 per cent stake in the 1,220MW coal-fired
Paiton II project. The first unit is due to complete commissioning in the first
quarter of 2000, followed by the second in the middle of the year PowerGen is
confident that economic recovery and rising electricity demand in Indonesia will
prove the commercial rationale for the Paiton plant in the medium-term.
Meanwhile preparations are in hand to begin commercial discussions with the
state electricity company PLN to address their short-term difficulties in
meeting their contractual obligations as a result of the financial crisis in
Indonesia.
The 1,450MW power station and mining operation at Yallourn, Australia,
delivered a good technical performance, with high levels of availability, safety
and environmental performance. However, continuing low pool prices, together
with some restructuring costs, resulted in a loss to PowerGen in 1999.
Negotiations for changes to working agreements aimed at enabling Yallourn to
operate more competitively in the market resulted in industrial action which
began in January 2000. PowerGen is working with all parties to achieve a
satisfactory resolution of the dispute and enable it to enhance Yallourn's
future.
Development activity PowerGen has continued to secure its positions in
development projects such as those at Bina in India and Map Ta Phut in Thailand
which has been delayed until 2003. Further projects are being pursued in core
countries where there is potential to add shareholder value.
Property
PowerGen Property continued to focus on the estate management of the Group's
property portfolio and the disposal of surplus assets. Following the sale of the
majority of PowerGen's remaining surplus UK sites, it shifted emphasis to the
property aspects of the re-organisation of the electricity distribution
activity. Sites were acquired for the new headquarters office and four field
operating centres in the East Midlands region.
Research and development
PowerGen's research and development activities, conducted at its Power
Technology Centre (PTC), focus on improving the performance of its generation
and non-generation assets to give technical advantage in a competitive market
place.
During the period, PowerGen invested (pound)5 million in research and
development activities. In the UK, this included research into improving the
combustion processes in coal-fired plant to increase efficiency and reduce
emissions, and the development of monitoring techniques for providing early
warning of faults on gas turbines. A system for advising our industrial and
commercial customers of the quality of their power supplies was also
established.
PowerGen's international activities benefited from the development of
models of overseas transmission grids and an improved understanding of the
impact of burning a broad range of coals from India, China and South East Asia.
Power Technology also makes its expertise available to external clients.
During the year, it carried out consultancy work in the UK, USA, Malaysia, South
Africa, India and the rest of Europe.
Environmental regulation and performance
The environment remains a major business issue for PowerGen.
The Group continues to work proactively with regulators, governments and
international organisations and to maintain an effective environmental research
programme.
In the light of the acquisition of EME, the environmental policy
statements of both PowerGen and EME have been reviewed and a new combined
statement implemented. This, together with the Group's environmental objectives
and targets, is published separately in the 1999 Environmental Performance
Report. The majority of the Group's targets have been achieved or are in
progress, and a small number are no longer appropriate following the integration
of EME.
PowerGen was awarded corporate certification under the international
standard for environmental management, ISO 14001, for its electricity
production, gas operations, and associated services in January 1999. All power
stations and connected facilities in the UK and the majority of the Group's
international
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 7
sites are now individually certified. The distribution business is on a
programme aimed at securing full certification by 2001.
The Group's emissions of sulphur dioxide and oxides of nitrogen from its
UK power stations in 1999 remained well below the targets set by the Environment
Agency. Emissions of carbon dioxide also remained well below internal targets.
PowerGen was not subject to any environmental prosecutions from the Environment
Agency during the period, and so retaining its record of zero prosecutions for
an environmental offence.
The Environment Agency issued new authorisations for PowerGen's power
plant after the end of the period. While challenging and more prescriptive than
previous authorisations, these are in line with the levels discussed during the
consultation process and give PowerGen some certainty for the next few years.
The new authorisations take into account both the UK's commitments under
the UNECE Convention on Long Range Transboundary Air Pollution and local air
quality objectives set by the UK's revised National Air Quality Strategy.
Means for achieving UK greenhouse gas targets are under discussion,
particularly in relation to the international trading of emissions. PowerGen has
assisted UNCTAD and the UK Government's own task force in this area. Extending
this work PowerGen gave strong support to a joint ACBE/CBI Emissions Trading
Group on developing a pilot emissions trading scheme for the UK during 1999. The
Group's report was welcomed by the Government and PowerGen will continue to work
constructively in this area.
Companies are increasingly being benchmarked for environmental management
and performance. PowerGen has improved its position in the Business in the
Environment (BiE) Environmental Index from 86 per cent to 94 per cent.
Health and safety
To ensure the health and well-being of all those at work at PowerGen sites,
PowerGen is committed to continually improving its health and safety management
systems, reducing both the number of accidents and the extent of occupational
health risks. World-class standards are consistently set and achieved across the
Group, with employees and contractors all made aware of their personal role in
delivering these targets. Particular care is taken in new areas of activity as
the business develops, and new safety and occupational health standards were
established in retail and distribution during 1999.
PowerGen continues to be concerned for the welfare of all employees.
Should individuals need support during difficult circumstances, help is
available through line managers or professional occupational health advisers. In
addition, a new employee assistance programme was launched during 1999,
providing employees with a consistent source of support independent of the work
environment.
Employees
During the period employee numbers decreased from 8,118 to 7,678. This reflects
the divestment of Fiddler's Ferry and Ferrybridge C power stations, the
restructuring of the EME distribution business, the growth of the CHP business,
and an increase in the retail business to resource the planned growth of the
customer base. A comprehensive programme including extensive training for
managers was introduced to support employees through the integration of EME.
An employee opinion survey had a response rate of 67 per cent, which is
good for an organisation in the middle of significant change. The results were
encouraging, but have highlighted a number of priorities for action.
The Group continues to build up the levels of competence and knowledge in
the organisation. A new purpose-built training centre was opened in December
1999, offering first-class facilities for the provision of technical and
managerial training. Regular career development centres both provide a detailed
analysis of individuals' strengths and areas for development and feed into the
Group's planning process for succession to key senior positions.
The Group's graduate development programme attracts highly talented young
people from diverse backgrounds, who are recruited into disciplines including
commercial fields, engineering, research and development, and information
technology. A review of the programme was undertaken in 1999 to ensure that the
Group continues to attract the best individuals and make the most of new
potential through a fully comprehensive development framework.
Community
PowerGen's programme of community involvement is focused on support for
education, projects to meet the needs of its local communities, and
environmental action projects.
During 1999, the Group focused particularly on measures to help tackle the
problem of fuel poverty. Working with the charity National Energy Action, it
supported the Warm Homes project under which in-depth energy efficiency advice
was made available to individual householders in fuel poverty in Leicester.
An electric blanket testing campaign was run jointly with Age Concern in
areas surrounding PowerGen sites, under which 4,000 blankets were given a safety
check.
By the end of 1999, 250 public lighting schemes had been funded through
Lighting 2000, the Group's millennium project. The (pound)500,000 three-year
project has helped to improve safety and security across the East Midlands by
providing lighting in public areas such as walkways and alleyways.
PowerGen launched the third year of its Weather Reports project to support
numeracy, science and technology and other key aspects of the national
curriculum. Over 150 schools around the Group's UK sites are now involved in the
project.
1999 saw the launch of the PowerGen Environment Fund, run on the Group's
behalf by the Royal Society for Nature Conservation (RSNC). This supports local
environmental projects that also benefit individual communities.
In addition, PowerGen's operating sites in the UK and overseas were
involved in many locally-driven initiatives providing support for their local
communities.
<PAGE>
8 POWERGEN PLC ANNUAL REPORT 1999
Financial review
Group financial results
This is the first set of annual accounts following the Group's change of
year-end to December last year. The previous accounts were for a nine month
period. In order to aid comparison of the current year's performance with that
of the previous period, the figures and commentary set out below include a
comparison of the 12 months to 2 January 2000 with the 12 months to 3 January
1999. The figures for that period are extracted from the Group's unaudited
management accounts.
In summary, profit before tax, exceptional items and goodwill amortisation
was (pound)580 million, which compares to (pound)523 million for the same
calendar year in 1998. Earnings per share on the same basis was 73.4p, compared
with 62.5p for the 12 months to 3 January 1999. After charging goodwill
amortisation of (pound)68 million, profit before tax and exceptional items was
(pound)512 million, compared with(pound)495 million for the previous year.
Turnover
Turnover from operations has increased when compared with the same 12 months to
3 January 1999, however this is largely due to the impact of two acquisitions.
Within UK Operations, prior year figures include only five months sales from
PowerGen Energy (formerly East Midlands Electricity), which was acquired in July
1998, whereas this year's figures include a full year's trading from that
company. This is evident in the increase in the sales of distribution and retail
set out in the table below. Within International Operations, the acquisition of
GPEC in July 1999 has led to the inclusion of (pound)74 million of turnover
since that date.
Elsewhere within UK Operations, electricity wholesales (which represent
sales through the Pool) were lower as PowerGen's market share fell from 18.5 per
cent to 15.9 per cent in the year to 2 January 2000, compared with the year to 3
January 1999 and its output fell from 55.1TWh to 47.0TWh over the same period.
PowerGen's fall in both output and market share primarily reflects the impact of
the sale of Fiddler's Ferry and Ferrybridge C power stations to Edison Mission
Energy in July 1999. Excluding these two stations, PowerGen's market share in
both the year ended 2 January 2000 and the year ended 3 January 1999 would have
been similar, at 14.3 per cent.
Overall market demand in England and Wales was up slightly from 292.6TWh
to 295.OTWh on an annual basis. Average prices were generally similar to the
previous year, as demand weighted pool purchase price fell slightly from
(pound)26.66/MWh to (pound)26.49/MWh.
Turnover is analysed at Figure 1 below:
Figure 1
Turnover
------------------------------------------------
Year Year Nine Months Year
ended ended ended ended
2 January 3 January 3 January 29 March
2000 1999 1999 1998
(pound)m (pound)m (pound)m (pound)m
- ---------------------------- --------- --------- --------- --------
UK Operations
Electricity and gas --
wholesale and trading 1,685 1,756 1,155 1,979
Electricity -- distribution 376 157 157 --
Electricity and gas -- retail 1,751 1,248 1,001 797
Cogeneration and renewables 95 73 54 68
Other energy and hydrocarbon
sales -- 110 89 76
Internal charges from
distribution to retail (245) (119) (119) --
- ---------------------------- --------- --------- --------- --------
3,682 3,225 2,337 2,920
International Operations 84 10 7 12
- --------------------------------------------------------------------------------
3,746 3,235 2,344 2,932
- -------------------------------------------------------------------------------
Other energy and hydrocarbon sales represent turnover from the Group's upstream
oil and gas business that was sold in November 1998.
Operating Costs
Details of Group operating costs are set out in note 2 to the accounts. In order
to aid analysis, figures for the year ended 3 January 1999 are highlighted at
Figure 2 below:
Figure 2
Pre-exceptional operating costs
------------------------------------------------
Year Year Nine Months Year
ended ended ended ended
2 January 3 January 3 January 29 March
2000 1999 1999* 1998
(pound)m (pound)m (pound)m (pound)m
- ---------------------------- --------- --------- --------- --------
Fuel costs 643 782 567 888
Pool purchases and other
costs of sales 1,722 1,243 940 965
Staff costs 235 173 139 128
Depreciation 263 206 157 214
Goodwill amortisation 68 28 28 --
Other operating charges --
excluding operating
exceptionals 366 347 231 276
- ---------------------------- --------- --------- --------- --------
3,297 2,779 2,062 2,471
- ---------------------------- --------- --------- --------- --------
* Includes five months costs from PowerGen Energy, acquired in July 1998.
Figures for the year ended 2 January 2000 include 12 months costs.
Following the disposal of the two coal-fired stations at Fiddler's Ferry and
Ferrybridge C, output is now split evenly between coal-fired and gas-fired
generation. Overall, fuel costs have fallen during the year, however this
reflects both a reduction in output and a fall in the price of gas. As a result
of the re-negotiation of the Group's gas purchase contract with the Liverpool
Bay Owners both in 1998 and 1999, gas costs were reduced by around (pound)60
million compared with the previous year. As a result, average fuel costs per
unit of generation in the core business fell to 1.21p/kWh compared with
1.34p/kWh in the year to 3 January 1999.
Pool purchases and other costs of sales continue to include the cost of
electricity purchased to meet customer sales obligations ('pool purchases'),
charges from the National Grid
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 9
Group and Regional Electricity Companies for the use of their transmission and
distribution systems, and costs of the gas trading and retail businesses. These
costs increased due to the inclusion of a full year's costs from PowerGen
Energy.
Staff costs rose to (pound)235 million for the year to 2 January 2000,
compared to (pound)173 million for the year to 3 January 1999, reflecting the
inclusion for a full year of around 4,500 staff acquired with the PowerGen
Energy business in July 1998. Staff numbers at 2 January 2000 totalled 7,678 of
whom 6,829 were in UK Operations and 849 in International Operations.
The Group's depreciation charge for the year has increased compared with
the previous 12 months. This reflects additional depreciation charged on the
write-down of two generating units, one at Kingsnorth and one at Grain,
totalling (pound)45 million, following an impairment review of the asset value
of the UK Operations generation portfolio.
Goodwill arising on the acquisition of PowerGen Energy is being amortised
over its useful economic life of 20 years. The charge against profits for the
year was (pound)67 million, compared to (pound)28 million in 1998, which
represented a charge for the five months following the acquisition in July.
Goodwill figures this year also include (pound)1 million in respect of GPEC,
which became a subsidiary company during July 1999, giving a total charge for
the year of (pound)68 million.
Other operating charges include the costs of running both the UK and
international businesses, together with the supporting corporate infrastructure.
Major UK business costs include maintenance and overhaul costs at power
stations, business rates and insurance. There has been a small increase in these
costs year-on-year overall, as the full impact of the inclusion of costs from
the PowerGen Energy acquisition has been offset by cost savings elsewhere in UK
Operations and the disposal of Fiddler's Ferry and Ferrybridge C power stations.
Within the international business, development costs are significant, including
support of a regional office network.
Operating income
Other operating income totals (pound)191 million this year compared with
(pound)137 million in the year to 3 January 1999. The 1999 figure includes
(pound)60 million of deferred income relating to services under warranty
arrangements entered into with Edison Mission Energy as part of the disposal of
Fiddler's Ferry and Ferrybridge C power stations in July 1999. These warranty
arrangements are further discussed in the `Exceptional Items' note to the
accounts.
Other operating income also includes (pound)84 million of income from the
asset disposal arrangement entered into with Eastern Group plc during 1996. In
the year to 3 January 1999 this operating lease income totalled (pound)96
million. The income is linked to total generation by Eastern, and the
arrangement will end in March 2000.
Exceptional items
The Group's results include three exceptional items; an exceptional profit of
(pound)543 million on the disposal of Fiddler's Ferry and Ferrybridge C power
stations, an exceptional operating charge of (pound)197 million relating to gas
contracts and an exceptional operating cost of (pound)96 million relating to the
restructuring of the UK business. This leads to a net exceptional credit of
(pound)250 million in these accounts.
The profit arising on the power station disposals, together with other
arrangements entered into with the purchaser, Edison Mission Energy, are
described in note 3 to the accounts 'Exceptional Items'.
The exceptional operating cost relating to gas contracts of (pound)197
million represents a follow-on arrangement to that signed during 1998 with the
Liverpool Bay owners, BHP Petroleum, LASMO and Monument Oil and Gas, to
re-negotiate existing long-term gas contract supply arrangements to Connah's
Quay power station. This will reduce fuel costs by over (pound)40 million per
annum in future years.
Following the acquisition of PowerGen Energy in July 1998, UK Operations
has undertaken a significant programme of restructuring and rationalisation,
and, in particular embarked on a fundamental re-shaping of its distribution
business. This has led to an exceptional operating cost of (pound)96 million in
these accounts, of which (pound)37 million has been spent during the year and
(pound)59 million relates to payments accrued under PowerGen's voluntary
severance scheme where staff, primarily within distribution, have agreed to
leave the Group during 2000.
Operating profits
Operating profits excluding exceptional items and goodwill amortisation totalled
(pound)791 million for the year compared with (pound)673 million in the same
period to 3 January 1999. The majority of profits continue to arise within UK
Operations, including a significant increase in distribution as a result of the
inclusion of a full year's results from PowerGen Energy. Results from
International Operations totalled (pound)79 million, compared with (pound)31
million in the year to 3 January 1999. This year's figure reflects improved
performance from our German assets together with a significant contribution from
GPEC in India which commissioned towards the end of 1998.
A more detailed analysis of operating profits is set out below, at Figure
3:
Figure 3
Operating profits
------------------------------------------------
Year Year Nine Months Year
ended ended ended ended
2 January 3 January 3 January 29 March
2000 1999 1999 1998
(pound)m (pound)m (pound)m (pound)m
- ---------------------------- --------- --------- --------- --------
UK Operations
Electricty and gas --
wholesale and trading 448 450 264 513
Electricty -- distribution 154 70 70 --
Electricity and gas -- retail 3 17 17 --
Cogeneration and renewables 14 9 6 7
Other energy and hyorocarbon
sales -- 17 9 22
Lease and other income 146 138 100 115
- ---------------------------- --------- --------- --------- --------
765 701 466 657
International Operations 79 31 27 27
Corporate costs (53) (59) (39) (50)
--------- --------- --------- --------
Operating profit before
exceptional items and
goodwill amortisation 791 673 454 634
- ---------------------------- --------- --------- --------- --------
Interest costs
Interest costs total (pound)211 million for the year, an increase of (pound)61
million over the previous 12 months' figure of (pound)150 million. This reflects
a full year's interest costs of funding higher levels of Group debt following
the purchase of PowerGen Energy during July 1998, including funding the
long-term debt obligations acquired at that time.
<PAGE>
10 POWERGEN PLC ANNUAL REPORT 1999
Financial review continued
Inflation
In the view of the Company, inflation has had only a minimal impact on the
Group's results from operations and financial position during the period under
review.
Treasury Management
As the PowerGen Group has developed in recent years, treasury management has
become more complex and diversified. In particular, the increase in size and
spread of PowerGen's overseas investments, including some in emerging markets,
and the significant amount of debt in the Group's balance sheet has increased
the importance of treasury management.
PowerGen has a centralised treasury department that is responsible for all
funding requirements, cash management, and the management of financial risks
including interest rate and currency exposure. PowerGen's treasury activities
are carried out in accordance with Board approved treasury policies, and all
treasury operations comply with detailed treasury procedures which are approved
at Board level. All treasury interfaces with banks and other third parties are
governed by dealing mandates, facility letters and other agreements. Within
treasury there is a segregation of front, middle and back office activities.
PowerGen does not enter into speculative treasury arrangements in that all
transactions in financial instruments are matched to an underlying business
requirement, such as planned purchases or forecast debt requirement. All
treasury operations and planned activities are reported and discussed at a
monthly treasury committee that is chaired by the Group Finance Director
Treasury activities are audited several times each year.
Treasury works in close liaison with the various businesses within the
Group, when considering hedging requirements on behalf of their activities. A
group-wide cash forecasting and currency exposure reporting process exists which
ensures regular reporting into treasury of future positions, both short and
medium term.
PowerGen takes steps to limit its credit exposure to banks and other
counter-parties. Exposure limits are set following credit analysis, and
aggregate exposures are monitored on a group-wide basis.
As part of its operating activities PowerGen actively trades in the gas
market to manage the price and volume risks associated with its gas business.
The Group's portfolio is strictly monitored and controlled through delegated
authorities and procedures, including transaction limits and credit risk
management.
There has been no change since the year-end to the major financial risks
faced by PowerGen, or to its approach to the management of these risks, other
than the proposed acquisition of LG&E Energy Corp. as described in note 34 to
the accounts, for which a new US$4 billion loan facility has been put in place.
The year-end position as described above is representative of the Group's
current position in terms of its objectives, policies and strategies.
Foreign exchange risk management
The majority of PowerGen's income and expenditure is settled in pounds sterling.
However, the Group has significant exposures to foreign currencies including US
dollars, Euros and Australian dollars.
PowerGen has Board approved policies dealing with transaction exposures
(typically trading cash flows which impact the profit and loss account) and
translation exposures (the value of liabilities and assets in the balance
sheet). PowerGen's policy is to hedge all contractually committed transaction
exposures, as soon as the commitment arises. PowerGen also covers a proportion
of forecast foreign currency cash flows, and will also hedge more uncertain cash
flows if this is appropriate, using flexible financial instruments that do not
commit the Group.
PowerGen's policy towards translation exposures is to hedge these
exposures where practicable, with the intention of protecting the sterling net
asset value. These hedges are normally achieved through a combination of
borrowing in local currency, forward currency contracts or foreign currency
swaps.
Where the foreign currency exposure is hedged, the value of the exposure
is translated to pounds sterling at the exchange rate achieved in the associated
hedging contracts. Details of the Group's foreign exchange contracts and swaps
are set out in note 32 to the accounts.
Interest rate risk management
The PowerGen Group has a significant portfolio of debt, and is exposed to
movement in interest rates. This exposure is principally to sterling interest
rates, although a limited exposure to interest rates of other currencies exists
including US dollars and Euros.
PowerGen will manage these interest rate movements primarily through the
use of a combination of fixed and floating rate borrowings and interest rate
swaps.
PowerGen's Board approved policy towards interest rate risk is to maintain
a target of 50 per cent fixed rate debt and 50 per cent floating rate debt,
excluding overseas debt. This can be varied within a band of 66:34 either way to
allow for fluctuations in working capital and changing interest rate
expectations. Application of this target band allows the Group's exposure to
interest rates to be managed whilst maintaining operational flexibility.
Group funding
PowerGen's Board approved policy towards funding is to ensure that the Group is
not constrained by lack of funds at anytime, and not unreasonably or imprudently
bound by restrictive covenants, or liquidity risks. Within this objective, the
Group seeks to manage its cost of borrowing to minimise interest charges, while
maintaining a stable, long-term funding base.
To achieve this, the Group has a combination of committed bank term
facilities, long-term capital market funding, and short-term uncommitted capital
market and bank facilities.
In June 1998, PowerGen negotiated a (pound)2.4 billion committed bank term
loan and a revolving credit facility. Following the sale of Fiddler's Ferry and
Ferrybridge C power stations in July 1999 the cash proceeds were used to repay a
significant part of this debt, with the result that PowerGen now has a
(pound)300 million term loan, and a (pound)1,000 million revolving credit
facility. At 2 January 2000, PowerGen had other short-term committed bank
facilities totalling (pound)88 million.
At the beginning of the year, PowerGen had (pound)2,413 million of
long-term debt funding. During the year, two further long-term bonds were
issued. In April 1999, PowerGen issued a 6.25 per cent Sterling bond that
matures in 2024. This bond had a face value of (pound)250 million. Then, in July
1999, PowerGen issued a 5 per cent Euro Eurobond with a maturity of 2009. This
bond had a face value of (Euro)50O million, which was swapped to sterling
proceeds of (pound)326 million. At 2 January 2000, the PowerGen Group had total
borrowings of (pound)2,670 million (3 January 1999 (pound)2,501 million)
including (pound)2,572 million of long-term loans and
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 11
(pound)98 million of short-term loans and overdrafts.
The bank term loan referred to above, and the 2016 sterling bond issued by
PowerGen Energy plc contain financial covenants. In addition, the bank loans and
all the bonds contain other conditions with which PowerGen must comply. None of
these covenants or conditions is considered onerous, but to ensure compliance, a
group-wide covenant monitoring and forecasting process exists. This is
co-ordinated by treasury.
PowerGen's short-term funding is normally provided by a combination of
Euro commercial paper issues, and borrowing under uncommitted bank lines. At 2
January 2000, no amounts were outstanding under the commercial paper programme
or the uncommitted bank lines.
At 2 January 2000 the Group had (pound)646 million of cash and short-term
investments (3 January 1999 (pound)93 million). PowerGen's policy is to place
any surplus funds on short-term deposit with approved banks and financial
institutions. Strict limits governing the maximum exposure to these banks and
financial institutions are applied. The majority of this cash was invested with
AAA rated money funds.
The Group's net borrowing position at 2 January 2000 therefore was
(pound)2,024 million, compared to (pound)2,408 million at 3 January 1999. The
overall interest rate for the year, when compared to average net borrowings, was
6.9 per cent, compared with 7.5 per cent in the previous year. Gearing (net debt
as a percentage of net assets plus net debt) was 50.5 per cent at the end of the
year, compared with 64.2 per cent at 3 January 1999.
Cash flow from operations
The consolidated cash flow statement on page 26 is prepared in accordance with
FRS1 (revised). Net cash flow can be summarised below, at Figure 4:
Figure 4
Year Year Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ---------------------------------------- --------- --------- --------
From operations 692 856 583
Gas contract re-negotiation
payments (719) -- --
- ---------------------------------------- --------- --------- --------
Operating cash flow (27) 856 583
Interest (154) (101) (32)
Tax 26 (19) (30)
Windfall tax -- (152) (101)
Dividends (162) (224) (151)
- ---------------------------------------- --------- --------- --------
Free cash flow (317) 360 269
Capital expenditure and investment (387) (307) (224)
Acquisition expenditure (434) (2,035) --
Sale of investments 203 235 89
Station disposal proceeds 1,282 -- --
Other 33 75 31
- ---------------------------------------- --------- --------- --------
Trading cash flow 380 (1,672) 165
Issue of shares 4 7 9
- ---------------------------------------- --------- --------- --------
Net cash flow 384 (1,665) 174
- ---------------------------------------- --------- --------- --------
Cash flow from operations of (pound)692 million was (pound)164 million lower
than in the previous year. This reflects movements in working capital, together
with payments for exceptional restructuring costs in 1999.
Interest payments have increased, primarily as a result of a full year's
costs in respect of the five long-term bonds acquired on the purchase of
PowerGen Energy. During the year ended 2 January 2000, PowerGen has received
several refunds of tax paid in previous years, following the agreement of prior
year tax liabilities with the Inland Revenue.
The pattern of dividend payments during the year ended 2 January 2000 is
similar to that in the year ended 29 March 1998. Figures for the year ended 3
January 1999 are distorted by the inclusion of two interim dividend payments
during the period, as a consequence of the Groups change of year-end to December
during that year.
Capital expenditure and investment during the year includes (pound)285
million within the UK business and (pound)102 million on overseas projects. A
full analysis of expenditure is set out at Figure 5. Acquisition expenditure in
the year ended 2 January 2000 represents the purchase of a further 46.3 per cent
stake in GPEC in India (described in note 14 to the accounts) for (pound)166
million, together with the assumption of (pound)173 million of debt in respect
of this project. It also includes the payment of (pound)95 million for the
Cogeneration business of Yorkshire Electricity, acquired at the end of 1998.
Acquisition expenditure in the year ended 3 January 1999 refers to the purchase
of PowerGen Energy.
Sale of investments includes the realisation of (pound)150 million of
investments in the Group's captive insurance company. In the previous year, the
figure reflects the sale of the Group's oil and gas subsidiary, PowerGen North
Sea.
Figure 5
Year Year Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ---------------------------------------- --------- --------- --------
UK
Generation 82 77 85
Cottam Development Centre 45 4 --
Distribution 72 34 --
PowerGen CHP and Renewables 53 49 16
PowerGen Property 6 20 25
PowerGen North Sea -- 10 5
Others 39 35 51
Loan repayments (12) -- --
- ---------------------------------------- --------- --------- --------
285 229 182
International
Tapada do Outeiro 10 5 9
GPEC -- 7 22
Paiton II 8 34 21
Csepel II 82 31 5
LG Korea 28 -- --
Bina -- 6 --
Loan repayments (26) (5) (15)
- ---------------------------------------- --------- --------- --------
102 78 42
- ---------------------------------------- --------- --------- --------
387 307 224
- ---------------------------------------- --------- --------- --------
In addition to the amounts shown above, at 2 January 2000 the Group had
commitments of (pound)198 million for capital expenditure and investment, of
which (pound)18 million relates to expenditure to be incurred after one year.
(pound)103 million of these total commitments relate to international projects.
<PAGE>
12 POWERGEN PLC ANNUAL REPORT 1999
Financial review continued
Taxation
The tax charge, excluding exceptional items, amounts to (pound)99 million for
the year compared with (pound)119 million for the same 12 months to 3 January
1999. The effective rate, before exceptional items and goodwill, is 17.1 per
cent compared with 22.8 per cent in the year to 3 January 1999.
An exceptional tax credit of (pound)89 million arises on the exceptional
operating charge relating to the gas re-negotiation contracts and restructuring
costs described above. This is partly offset by a tax charge of (pound)40
million on the profit on power station disposals, leading to a net exceptional
tax credit for the year of (pound)49 million.
Dividends
The second interim dividend to be paid on 10 May 2000 for the year is 24.0p,
giving a total dividend payment of 34.8p for the 12 months. This represents an
eight per cent increase on the annualised figure in respect of 1998.
US GAAP Information
A reconcilliation between the Group's results in accordance with UK GAAP and
those results in accordance with US GAAP are set out on pages 43 and 44 of the
accounts.
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 13
Board of Directors
as at 2 January 2000
Chairman and Chief Executive
Edmund Wallis (6O) He was appointed on 22 October 1998, having been chief
executive of PowerGen UK plc since March 1990 and Chairman since July 1996. He
is a non-executive director of Mercury European Privatisation Trust plc and a
non-executive director of London Transport. He was formerly non-executive
chairman of LucasVarity plc.
Directors
Paul Myners* (51) Deputy chairman (non-executive). He is the senior independent
director, and was appointed on 31 May 1999. He has been an executive director of
National Westminster Bank plc since August 1997 having previously been chairman
of Gartmore Investment Management plc since 1985. He has also been a
non-executive director of Orange plc since February 1996 and is a member of the
Financial Reporting Council. He was formerly a non-executive director of
PowerGen UK plc between 1990 and 1996. He chairs the Remuneration and Nomination
Committees and is a member of the Audit Committee.
Nick Baldwin (47) Executive director, UK Operations. He was appointed on 22
October 1998, having been a director of PowerGen UK plc since February 1998 and
managing director, UK Electricity Production since 1996. He joined the CEGB, the
predecessor of PowerGen, in 1980 and his previous appointments with PowerGen
include director of Generation, director of Strategy and Head of Strategic
Planning. He is a non-executive director of Electricity Association Limited and
a director and Trustee of Midlands Excellence.
Sir Frederick Crawford* (68) (non-executive). He was appointed on 22 October
1998, having been a non-executive director of PowerGen UK plc since June 1990.
He is chairman of the Criminal Cases Review Commission and a Fellow of the Royal
Academy of Engineering. He has held appointments as Professor of Electrical
Engineering at Stanford University and Vice-Chancellor of Aston University for
16 years. He was formerly a non-executive director of Legal and General Group
plc and Rexam plc.
Sydney Gillibrand* (65) (non-executive). He was appointed on 31 May 1999. He is
chairman of AMEC plc and a non-executive director of ICL, Messier-Dowty and TAG
Aviation (UK). He was previously vice-chairman of British Aerospace plc. He is
chairman of the Audit Committee and member of the Nomination and Remuneration
Committees.
Anthony Habgood* (53) (non-executive). He was appointed on 22 October 1998,
having been a non-executive director of PowerGen UK plc since November 1993. He
is Chairman of Bunzl Plc., having joined that company in 1991. He was previously
chief executive of Tootal Group plc. He is a non-executive director of Schroder
Ventures International Investment Trust plc and of National Westminster Bank
Plc.
Peter Hickson (54) Group finance director (executive). He was appointed a
director on 19 June 1998, having been Group finance director of PowerGen UK plc
since July 1996. Prior to that, he had been Group finance director at MAI plc
since 1991 and had previously held various senior positions at Tarmac Building
Products Ltd and United Scientific Holdings PLC. He is a non-executive director
of Lex Service plc.
Dr David K-P Li* (60) (non-executive). He was appointed a director on 22 October
1998, having been a non-executive director of PowerGen UK plc since January
1998. He is chairman and chief executive of The Bank of East Asia Limited,
having been a director since 1997, deputy chairman of Hong Kong
Telecommunications Limited and holds directorships of numerous companies in the
Far East and elsewhere including The Hong Kong and China Gas Company Limited.
Roberto Quarta* (50) (non-executive). He was appointed a director on 22 October
1998, having been a non-executive director of PowerGen UK plc since July 1996.
He is chief executive of BBA Group plc, having joined the board in 1993, and has
also been a director of BTR plc.
Company Secretary
David Jackson (46) company secretary.
*Independent non-executive director.
All non-executive directors are members of the Audit, Nominations and
Remuneration Committees.
As part of a Group reorganisation effective from 9 December 1998, a new holding
company, PowerGen plc, was put in place. The previous quoted company named
PowerGen plc changed its name to PowerGen UK plc.
<PAGE>
14 POWERGEN PLC ANNUAL REPORT 1999
Directors' Report
The directors present their report and the audited accounts of PowerGen plc for
the year ended 2 January 2000.
Activities
The Company is the holding company of a Group whose principal activities are the
generation, supply and distribution of electricity and the marketing and trading
of electricity and gas. The Chairman's Statement and the Operating and Financial
Review, which form part of this report, describe the development of the business
during the year and the outlook for the future. They also contain information
about the Group's research and development activities and events which have
taken place since 2 January 2000.
The Company recognises that there is an increasing requirement to report
on broader social and ethical issues. In coming years, a formal report on these
matters will be prepared. The Company is already reporting to shareholders on a
number of the issues which comprise this agenda.
In particular, the Company is committed to ensuring that the environmental
implications of its business in all of the countries in which it operates are
properly identified, assessed and managed. The Company publishes Environmental
Performance Reports on its activities. Copies of the 1999 Report will be
available from the Company Secretary.
A Health and Safety Report is also published regularly, and the Company
reports on community and other matters in the Annual Report and the Annual
Review which is sent to all shareholders.
Profit and Dividends
Profit before taxation for the year ended 2 January 2000 was (pound)512 million
before exceptional items (an increase of (pound)220 million on the figure for
the nine month reporting period to 3 January 1999). Including exceptional items,
there was a profit before tax on the same basis of (pound)762 million (nine
months to 3 January 1999: loss of (pound)245 million).
The directors have announced a second interim dividend of 24p net per
ordinary share, payable on or before 10 May 2000 to shareholders on the register
at 17 March 2000. Added to the interim dividend paid on 29 October 1999, this
makes a total dividend for the year of 34.8p net per ordinary share, compared
with a total dividend paid for the nine month period to 3 January 1999 of 24.1p
net per ordinary share.The directors are not recommending a final dividend.
After providing for taxation ((pound)50 million) and a minority interest
((pound)4 million), and after payment of the dividend ((pound)226 million), the
retained profit for the period amounted to (pound)482 million.
Substantial Shareholdings
As at 1 March 2000, the Company had been notified of the following interests in
three per cent or more of the issued ordinary share capital of the Company:
o The Bank of New York (6.249 per cent) underlying the ADRs
o Franklin Resources, Inc (5.0653 per cent)
o Brandes Investment Partners L.P. (4.7 per cent); and
o the Prudential Corporation Group of companies and the segregated funds
which they manage for clients (3.99 per cent).
The Company is not aware of any other interest in the issued ordinary
share capital of the Company of three per cent or more.
Fixed Assets
DTZ Debenham Tie Leung, property consultants, have updated the valuation of the
Group's properties, other than those owned by PowerGen Energy plc, formerly East
Midlands Electricity plc, on the basis of site values for the operational power
station land and open market values for other, non-specialist, properties.
Bruton Knowles, property consultants, have prepared a valuation of the
properties owned by PowerGen Energy plc and its wholly-owned subsidiaries, other
than the operational sub station sites which are included in the value of
Distribution assets. Both valuations are as at 31 December 1999. Based on those
valuations, the current value of properties held at 2 January 2000 is (pound)118
million, approximately (pound)4 million less than their net book value at the
date of these accounts. The directors consider that there has been no
significant reduction in value since the date of the valuations.
The Group's properties are subject to property clawback arrangements
entered into at the time of the first public offers of shares in the generation
and Regional Electricity Companies which entitle HM Government to a proportion
of any gains (above certain thresholds) accruing to the Group on certain
property disposals made up to 31 March 2000.
Directors
For clarity of presentation, information required in accordance with the
provisions of the Companies Act regarding the remuneration, share options and
beneficial interests of the directors and the interests of the directors and
their families in the share capital of the Company is included in full in the
Report on Directors' Remuneration and Related Matters starting on page 18, as
are details of the service contracts, if any, of all the directors.
Employees
The Company provides an environment in which communication is open and
constructive. There are well-established arrangements for communication and
consultation with employees and their representatives at local and Group level
covering a wide range of business and employment issues. The views of staff are
both sought and taken into account, an Employee Opinion Survey being one way in
which they are regularly measured.
PowerGen is committed to offering equal opportunities to both current and
prospective employees. The Company continues to review, develop and communicate
best practices and procedures to ensure that all staff are treated fairly in all
aspects of employment. It also strives for a diverse environment that is
supportive of all staff. Individual differences which do not relate to job
performance such as gender, marital status, sexual orientation, race, colour,
ethnic origin, nationality, religion, age or disability are respected.
Training and development of staff remains a key priority in achieving
PowerGen's growth strategy and ensuring that all staff perform at the highest
level. During 1999 a new company training centre near Nottingham was opened.
PowerGen seeks to ensure also that staff meet their individual aspirations and
are developed to meet the future business requirements of the Group.
PowerGen believes in ensuring that disabled people can compete fairly for
job opportunities, training and development, through the promotion and
development of best practices. Links and contacts with external disability
networks and organisations are actively promoted to identify best practices and
to provide work experience placements for disabled people. In the event of
existing employees becoming disabled, PowerGen will seek to maintain their
employment through training, redeployment and adjustments to the job role and
workplace, where it is reasonable and practicable to do so.
The Company encourages employee share ownership and operates a number of
arrangements to encourage ongoing commitment to PowerGen. These include three
Inland Revenue-approved employee share schemes: the PowerGen Share Save Scheme
(1998), a share option scheme for employees; the PowerGen Executive Share Option
Scheme (1998), which is available for PowerGen executives and senior management;
and the PowerGen Profit Sharing Scheme.
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 15
Contributions for Political and Charitable Purposes
Donations to charitable organisations during the financial year amounted
to (pound)205,049.
No political donations were made.
Policy on Payment of Creditors
Where appropriate in relation to specific contracts, the Company's practice is
to:
a) settle the terms of payment with the supplier when agreeing the terms of each
transaction;
b) ensure that those suppliers are made aware of the terms of payment by
inclusion of relevant terms in the contracts; and
c) pay in accordance with its contractual and other legal obligations.
For all other cases, the Company supports the Better Payments Practice
Code (copies of the Code are obtainable from the Company Secretary) and has in
place well-developed arrangements with a view to ensuring that this is observed.
The average number of days taken to pay the Company's trade suppliers
calculated in accordance with the requirements of the Companies Act is 32 days
(period ended 3 January 1999: 26 days).
Overseas subsidiaries are encouraged to adopt equivalent arrangements by
applying local best practices.
Authority to Purchase Own Shares
General authority was given on 11 May 1999 for the purchase by the Company of up
to 10 per cent of the Company's existing issued share capital. This authority
was still valid at the end of the year ended 2 January 2000, being due to expire
at the end of the 2000 Annual General Meeting. The directors intended that this
power would be exercised only under certain circumstances and it is proposed
that the authority be renewed at the forthcoming Annual General Meeting.
During the year a Qualifying Employee Share Trust was set up to acquire
shares in the Company in the market. Further details are given in Note 28 to the
Accounts.
Summary Financial Statement
The Company is permitted under the Companies Act to send its shareholders a
summary financial statement in place of its full Report and Accounts. Full
financial statements are available to shareholders on request and will be
provided on receipt of a written request to the Company Secretary to that
effect.
Auditors
A resolution to reappoint the auditors, PricewaterhouseCoopers, and to authorise
the directors to fix their remuneration will be proposed at the forthcoming
Annual General Meeting.
Annual General Meeting
The second Annual General Meeting of the Company will be held on Monday 5 June
2000 at 11.00am at The ICC, Birmingham. The company has announced the
acquisition of LG & E Energy Corp., conditional on shareholder approval, which
will be sought at that meeting. A separate notice will be sent to shareholders.
Euro
The PowerGen Group recognises the wide implications of the Euro for businesses,
including impacts on commercial arrangements and financial systems. Appropriate
preparation is being made in those of its entities resident in Euro-land
countries, based on the EU timetable for transition towards the introduction of
hard currency in January 2002. Within the UK, the Group's preparations recognise
the uncertain position regarding possible UK entry to the single currency, and
the situation is monitored closely.
Y2K Report
PowerGen conducted a risk-based review of its computer systems and computer
controlled processes to identify those which could be affected by the Year 2000
date change and established a dedicated project team accordingly. A plan and
work programme was then developed to test those systems and processes identified
and to take appropriate action, such as replacing or repairing the affected
systems or processes in collaboration with the respective suppliers. The
programme covered business systems, process control and issues relating to the
energy supply/demand chain as a whole, including key suppliers and customers.
Given the key position of PowerGen in the national infrastructure, the Group
also developed and tested Year 2000 business continuity plans.
Over the millennium period there was no impact on customers or critical
systems from Year 2000 issues. No high priority issues arose and the small
number of low level issues were quickly resolved.
The PowerGen Year 2000 programme was subject to independent assessment on
behalf of the industry regulators. PowerGen also reported directly to the
Government on `lights on' issues up to and over the millennium period itself,
and worked closely with other electricity supply and gas industry parties
throughout the period, Arrangements have been made within the PowerGen Group to
continue vigilance over other potentially sensitive date changes during 2000.
The total cost of the Y2K project to the PowerGen Group to 2 January 2000
was (pound)55.9 million, (pound)24.7 million of which was incurred during the
year ended 2 January 2000. Expenditure in 2000 is expected to be less than
(pound)0.3 million as individual projects and the central programme formally
end.
Directors' Responsibilities
Company law requires the directors to prepare accounts for each financial period
which give a true and fair view of the state of affairs of the Company and of
the Group and of the profit or loss of the Group for that period. The accounts
have been prepared on a going concern basis and a statement confirming this is
included in the Report on Corporate Governance beginning on page 16.
In preparing the accounts, the directors confirm that they have:
o selected suitable accounting policies and applied them consistently
o made judgements and estimates that are reasonable and prudent; and
o followed applicable accounting standards.
The directors are responsible for ensuring that proper accounting records
are kept which disclose with reasonable accuracy at any time the financial
position of the Company and the Group and enable them to ensure that the
accounts comply with the Companies Act 1985. They are responsible for
safeguarding the assets of the Group and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
By order of the Board
D J Jackson
Company Secretary
1 March 2000
<PAGE>
16 POWERGEN PLC ANNUAL REPORT 1999
Report on Corporate Governance
The Board of PowerGen is pleased to have the opportunity to report to
shareholders on the manner in which it has applied the principles of good
governance as set out in the Combined Code. As the standards of corporate
governance have continued to be refined over time through the reports of the
Cadbury. Greenbury and Hampel committees and the Turnbull Working Party, the
PowerGen Board has been active in ensuring that the Company's practice has
remained in line with best practice.
In preparing this report the Board has considered the manner in which it
has applied the Principles of Good Governance ('Principles') and the extent to
which it has complied with the Code of Best Practice ('Combined Code'). Any
areas where the Company has not complied with the Combined Code are set out in
this report.
The Board of Directors
The PowerGen Board has always had a balance of executive and non-executive
directors with. in the latter years, a preponderance of non-executive directors.
During the year under report, three executive and eight non-executive directors
have served on the Board. Mr Cohn Short stood down as deputy chairman and
director from the end of the 1999 Annual General Meeting and Sir Alan Thomas
resigned as a director on 31 May 1999. Mr Paul Myners was appointed a director
on 31 May 1999. Mr Sydney Gillibrand was appointed a director on 31 May 1999.
Brief personal details of each of the directors serving at the end of the period
are given on page 13. All of the non-executive directors are independent, all
regularly attend meetings of the Board and its committees and play a full part
in the deliberations of matters reserved to the Board.
All directors are required to submit themselves for re-election at regular
intervals, at least every three years.
Sir Frederick Crawford retires by rotation at the forthcoming annual
General Meeting and will offer himself for re-appointment. Whilst Sir Frederick
will be entering a fourth three-year term as a director, given his active
contribution to Board deliberations, particularly those relating to IT, the
Board considers he remains an independent director.
In 1996 the Board appointed Mr Ed Wallis to act as Chairman and Chief
Executive of the Company. Mr Paul Myners, a non-executive director, holds the
position of deputy chairman and is the senior independent director on the Board.
The Board acknowledges that the principles of good governance indicate that
there should be a clear division of responsibilities between the running of the
Board and executive responsibility for the running of the Company's business.
The Board however continues to take the view that in the light of Mr
Wallis substantial knowledge of the industries in which the Company operates,
his experience of those industries and the regard with which he is generally
held within those industries, it is in the interests of the Company that, at the
present time, these roles are combined. The balance of the Board is such that
there is strong countervailing pressure, a weight from a substantial body of
non-executive directors such that the appropriate `checks and balances are in
place.
The Board does, however keep this position under regular review and has
indicated that proposals for the separation of the roles will be brought forward
at the appropriate time.
The Board has reserved to itself powers in respect of areas significant to
the Groups business including the approval of the corporate plans and annual
budgets: acquisitions and disposals of segments of the business: major
investment and financial decisions; appointments to the Board and to the Boards
of subsidiary companies, and changes to the management and control structure
within the PowerGen Group, including key policies and procedures and delegated
authority limits
The Board meets routinely at regular intervals with additional meetings
taking place as necessary. The Board considers annually the strategy and
direction of the Group at an extended meeting over a two-day period. In total
the Board met 14 times in the last year To facilitate the smooth transaction of
business within the Company the Board has established a number of standing and
ad hoc committees. The terms of reference of each committee have been approved
by the Board and where applicable comply with the recommendations of the
Combined Code.
The Board has three standing committees, the Remuneration Committee, the
Audit Committee and the Nomination Committee. The Remuneration and Audit
Committees were both established in 1990.
Procedures are in place to facilitate access to independent outside advice
for directors.
Remuneration Committee
Membership of the Remuneration Committee comprises all the non-executive
directors, under the chairmanship of Mr Paul Myners. The Committee met three
times during the year The Chairman attends meetings of the Committee other than
when matters concerning himself are under discussion. The Committee is
responsible for developing remuneration policy, determining the remuneration
packages of the executive directors, administering the Company's incentive
schemes for employees (including the grant of share options) and ensuring that
the Company has a developed succession policy and that it is kept under review
Audit Committee
The Audit Committee comprises all the non-executive directors with all executive
directors having a right to attend its meetings. The Committee met twice during
the year Both meetings were attended by senior members of the Company's external
auditors and the head of the Company's internal audit department. The Audit
Committee reviews issues of accounting policy and presentation for external
financial reporting, monitors the work of the internal audit function and
ensures an objective and professional relationship is maintained with the
external auditors. The committee has full access to the auditors both internally
and externally who in turn have access at all times to the chairman of the
committee, Mr Sydney Gillibrand.
Nomination Committee
The Nomination Committee was set up in 1992. All non-executive directors are
members under the chairmanship again of Mr Paul Myners. The Committee meets as
and when required. The Nomination Committee provides a formal and transparent
procedure for appointments of new directors to the Board.
Directors Remuneration
The Board has since 1996 set out its policy on directors' remuneration in detail
in the Annual Report. The Board's present policies, together with the detailed
description of the packages of individual directors, can be found on page 18.
The Remuneration Committee keeps under regular review the development of good
practice in the structuring and terms of
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 17
executive directors' remuneration packages. The policy of the Committee remains
one of ensuring that the high quality management that is required by the
Company's developing businesses both in the UK and abroad is recruited and
retained. Sustained financial growth, the achievement of business goals and
individual personal development are key areas upon which the Committee focuses
its attention. The Committee ensures that a strong link is maintained between
the level of remuneration and individual performance against agreed targets. The
Company's arrangements are such that no director is involved in deciding his or
her own remuneration.
The Committee have considered the compensation commitments of executive
directors' service contracts should they be terminated early and have taken a
robust line by reducing compensation to reflect departing directors' obligations
to mitigate loss. The Committee acknowledges that it is considered by some that
there are advantages in providing explicitly in the initial contract for
compensation commitments to be fixed; however practice in this area is varied
and the issues are not sufficiently well defined in the view of the Committee to
allow for a formal stance to be taken. The position will continue to be
monitored.
Relations with Shareholders
Since its creation, the Company has, through its Investor Relations and Company
Secretary's Departments, maintained an active dialogue with its shareholders
both small and large presently totalling almost 750000 individual accounts. The
very fact of being a 'privatisation stock' with an initial register exceeding
1.5 million has meant that shareholder communication has always been high on the
Company's agenda. The Investor Relations Department, reporting to the Finance
Director has an active programme of contact with institutions and brokers which
involves not only presentations at the time of the announcement of the Company's
preliminary and interim results but also visits to the Group's facilities and
briefings on particular parts of the Group's business. The Company publishes
documentation used at the time of these briefings through the internet.
The Company has for some years now been using the Annual General Meeting
as a means of communicating with private investors by treating the event as more
than just a business meeting. This is particularly so now that the Company has
some 2.5 million customers, a significant proportion of whom are also
shareholders. The meeting includes a presentation on the Company's activities
following which shareholders are invited to ask questions. Private investors
have shown considerable interest in the Company through attendance at the Annual
General Meeting and also at Extraordinary General Meetings.
The Company has at its meetings indicated the level of proxies lodged on
each resolution. Differing methods have been tried (for example disclosure on
absolute number of shares or a percentage). It is clear that companies are
adopting a number of methods and no one method has yet emerged as best practice.
Financial Reporting and Internal Financial Control
The Board has established procedures necessary to implement the requirements of
the Combined Code relating to internal control as reflected in the September
1999 guidance `Internal Control: Guidance for Directors on the Combined Code'
(the Turnbull guidance), and has adopted transitional arrangements as allowed by
the London Stock Exchange. The Board and the Audit Committee continue to keep
under review the manner in which they report the Company's position and
prospects. Changes in accounting practice, taken with ever more detailed
reporting requirements, present a challenge to any company to try and explain
the position of its business from an operational and financial perspective in a
clear and concise fashion.
The directors recognise their responsibility for the maintenance of a
system of internal financial control. A system of internal financial control is
designed to ensure that the risks facing the business in pursuit of its
objectives are identified and managed at known acceptable levels. It is the
case, however, that, as with any such system, controls can only provide
reasonable and not absolute assurance against material misstatement or loss.
The Board has continued its ongoing review of the key commercial and
financial risks facing the business together with more general risks such as
those relating to compliance with laws and regulations. The procedures necessary
to implement the `Turnbull' Guidance on the Combined Code issued by the
Institute of Chartered Accountants in England and Wales have been established.
The evaluation of risks has led to the development of specific management
strategies to address issues involved in the achievement of its business and
objectives whilst complying with the regulatory regimes in the countries within
which the Group operates.
The Board has established clear lines of accountability and documented
delegations of authority that set out the proposed actions which need to be
referred to the Board for its prior approval. These delegations are subject to
periodic review throughout the year as to their implementation and for their
continuing suitability within the evolving business.
Group Policies are in place for key issues including the management of
Health and Safety, Environmental, Engineering, and IT risks, as well as defining
the Board's requirements for personal conduct and probity. Corporate values,
which emphasise team working and ethical behaviour have been fully communicated
to staff.
Each business unit has clear accountabilities for ensuring appropriate
control procedures are in place.
Action has continued during the year to develop appropriate local
procedures applicable to the parts of the business acquired with EME, to meet
the Group Policy requirements.
The Board and its committees receive specific regular reports from
management on key risk areas and senior managers confirm annually that they have
complied with a number of the Group Policies.
The Board's evaluation includes a specific assessment of long and
short-term risks and opportunities identified by each of the business units as
part of the Group's annual planning process. This ensures that local objectives
are set in the context of the Group's overall corporate vision, strategies and
objectives.
This plan underpins the approved budgets. The Board has reviewed the
Group's budget and cash flow forecast for the year ended 2 January 2000 and the
outline projections for the four subsequent years. The directors confirm they
have a reasonable expectation that the Company and the Group have adequate
resources to continue in operational existence for the foreseeable future. The
directors continue to adopt the going concern basis in preparing the Company's
consolidated statements.
Performance of the Group is reviewed monthly by executive directors and by
the Board. The reports include variance analysis
<PAGE>
18 POWERGEN PLC ANNUAL REPORT 1999
Reports on Corporate Goverance continued
and projected forecasts for the year' cash management, covenant compliance
compared to the approved budgets, and non-financial performance indicators.
The Board has continued its practice of undertaking a specific review of
the effectiveness of the Group's system of internal financial controls as
operated throughout the prior financial year. This has included a review of the
process adopted throughout the Group whereby business units and responsible
directors have assessed local arrangements.
The Group's Internal Audit Department conduct reviews which include the
control of financial systems and their associated computer environments,
business unit operations, compliance with policies, particularly relating to
health and safety, regulation and the environment. Reports, including where
relevant action plans agreed with local management, are circulated to
responsible senior managers and directors and are reviewed by the Audit
Committee.
The monitoring arrangements in place give reasonable assurance that the
structure of controls and operation is appropriate to the Company's and Group's
situation and that there is an acceptable level of risk throughout the business.
Good corporate governance is of prime importance for the Company in
demonstrating to all of those who have an interest in the Company's affairs that
it is acting in accordance with, and even exceeding, best practice. The
Company's reputation both at home and abroad is of significant value and
adherence to the principles of corporate governance is one of the prime methods
by which that reputation is supported.
Report of the Board on Directors' Remuneration and Related Matters
The Board of PowerGen is pleased to report on the remuneration of directors and
other matters relating to the benefits and interests of directors.
Responsibility for the determination of the remuneration packages of executive
directors lies with the Remuneration Committee. The remuneration of
non-executive directors is a matter for the Board as a whole.
Remuneration Committee and Remuneration Policy
The composition and remit of the Remuneration Committee (`the Committee') is
described on page 16. In establishing a package of remuneration and other
benefits applicable to the executive directors and other senior employees and in
reviewing the level of payments involved, the Committee has given full
consideration to the Combined Code.
The members of the Committee receive fees as set out on page 19 and no
other benefits.
The Committee has established a strong link between the level of
remuneration and performance against agreed targets. By so doing, it is the aim
of the Board that sustained financial growth can be achieved and business goals
met. In addition, individuals can be developed to attain their full potential.
In constructing the remuneration package ('package') for directors the
goal of the Committee is to provide for salary at the median level but upper
quartile reward through the payment of bonuses where exceptional performance so
warrants.
The package comprises a number of separate elements which include base
salary, bonus arrangements (both annual and medium term), retirement and certain
non-cash benefits. The package aims specifically to align the interests of
executives with those of the Company's shareholders.
In reviewing the individual elements of the package, the Committee has
taken advice from independent consultants and considered external surveys and
packages within comparable companies. Increases in salaries and benefits will
reflect the performance of the Company and of the individual executives against
comparable companies.
The bonus arrangements and share option scheme are performance based.
Performance is measured against profit and other targets set from the Company's
annual budget and plans and from the returns provided to shareholders. The
financial targets agreed annually by the Board as part of the planning and
budgeting review process are reviewed by the Committee to ensure that they are
appropriate yardsticks for judging the performance of the Company and of
individuals. Executive directors and senior employees are encouraged to take
incentive payments in the form of shares and to retain the holding of those
shares.
The Committee keeps the package under review, and took independent advice
on its comparability. As a result of that review all the component parts of the
package were confirmed. Salaries have been reviewed annually as has been
customary. The Committee determined early in the year that, given the need to
respond to particular pressures on the business, the maximum bonus achievable
for executive directors should be increased for this year only from 40 per cent
to 60 per cent of base salary.
The Committee recognises that the Utilities Bill makes reference to
putting in place performance criteria related to service standards for directors
who are responsible for regulated businesses, and intends to reflect the
eventual requirements of the Act.
Details of the compensation package and information on each individual
director are given below. Copies of directors' employment contracts and
agreements, together with documentation supporting the various schemes
described, are available for inspection by shareholders at the Company's
registered office.
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 19
Summary of Directors' Emoluments
<TABLE>
<CAPTION>
Nine months
Year ended 2 January 2000 ended 3 January 1999
------------------------------------------------------------- -----------------------
Performance
Salaries/ related Other Salaries/
fees Benefits bonuses payments Total fees Total
(pound)000 (pound)000 (pound)000 (pound)000 (pound)000 (pound)000 (pound)000
- --------------------- ----------- ---------- ----------- ---------- ---------- ----------- ----------
Chairman
<S> <C> <C> <C> <C> <C> <C> <C>
Edmund Wallis 470 25 4O2** -- 897 317 489
Executive directors
Nick Baldwin 245 12 156 -- 413 143 203
Peter Hickson 283 16 156 -- 455 197 267
Non-executive directors
Sir Frederick Crawford 23 -- -- -- 23 15 15
Sydney Gillibrand* 18 -- -- -- 18 -- --
Anthony Habgood 23 -- -- -- 23 15 15
Dr David Li 28 -- -- -- 28 15 15
Paul Myners* 32 -- -- -- 32 -- --
Roberto Quarta 23 -- -- -- 23 15 15
Cohn Short* 18 -- -- -- 18 38 38
Sir Alan Thomas* 8 -- -- -- 8 15 15
- --------------------- ----------- ---------- ----------- ---------- ---------- ----------- ----------
<CAPTION>
Total Pension Transfer
accrued p.a. value of
pension accruing in Increases,
p.a. at 2 year ended at 2
January 2 January January
2000 2000 2000
(pound)000 (pound)000 (pound)000
- --------------------- ---------- ----------- -----------
Chairman
<S> <C> <C> <C>
Edmund Wallis 312 35 633
Executive directors
Nick Baldwin 107 31 427
Peter Hickson 32 11 192
Non-executive directors
Sir Frederick Crawford
Sydney Gillibrand*
Anthony Habgood
Dr David Li
Paul Myners*
Roberto Quarta
Cohn Short*
Sir Alan Thomas*
- --------------------- ---------- ----------- -----------
</TABLE>
* The figures for Sydney Gillibrand relate to the period from 31 May 1999,
the date of his appointment.
The figures for Paul Myners relate to the period from 31 May 1999, the
date of his appointment. The figures for Colin Short relate to the period
to 11 May 1999 when he left the Company.
The figures for Sir Alan Thomas relate to the period to 31 May 1999 when
he left the Company.
** This figure includes an amount representing the vesting of shares under
the Medium Term Bonus Scheme, and an ex-gratia award of bonus of 10 per
cent of salary in respect of performance in the nine months ended 3
January 1999.
Note:
The pension information shown above are accrued benefit entitlements and
transfer values of relevant increases in accrued benefits calculated on the
basis of actuarial advice in accordance with Actuarial Guidance Note GN11. The
amounts represent the total accrued pensions payable at normal retirement date
of age 60, the increase or decrease in that amount during the year and the
transfer value of relevant increases in accrued benefit during the year
Performance-related bonsues have been calculated as the aggregate value of:
(i) payments earned during the year, except where payment is deferred and the
amount of the payment remains dependent on future performance and/or subject to
forfeiture; plus
(ii) payments earned in previous years which have ceased to be dependent on
future performance and/or forfeiture during the year.
Where payment arises in the form of shares, the value attributed to the shares
has been calculated based on the market price of the shares either at the time
the shares were awarded or, if later, the time the award ceased to be dependent
on future performance and/or subject to forfeiture. Increases in value of share
awards resulting from the addition of the share equivalent of dividends during
deferral periods are included in executive directors' emoluments only up to the
time the award ceased to be dependent on future performance and/or subject to
forfeiture.
<PAGE>
20 POWERGEN PLC ANNUAL REPORT 1999
Report on Corporate Governance continued
Options over ordinary shares granted to, and exercised by, the executive
directors
<TABLE>
<CAPTION>
Held
Options held at 3 First Expiry
at 2 January January date of date
1999 Options granted during year 2000 exercise
- ------------------ ------------------------------- -------------------------------- ------- -------- --------
Date
Name Granted Price Number Date Price Number
- ------------------ -------- ------------ ------- --------- ------------ ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Edmund Wallis 01.12.92 (pound) 2.78 25,500 25,500 01.12.95 01.12.02
01.07.93 (pound) 3.87 27,500 27,500 01.07.96 01.07.03
22.11.94 (pound) 5.57 53,500 53,500 22.11.99 22.11.04
29.11.95 (pound) 5.32 56,000 56,000 29.11.00 29.11.05
26.06.96 (pound) 5.32 63,500 63,500 26.06.01 26.06.06
02.07.97 (pound) 7.35 20,000 20,000 02.07.02 02.07.07
25.09.98 (pound) 8.88 50,500 50,500 25.09.03 25.09.08
12.03.99 (pound) 8.70 10,500 10,500 12.03.04 12.03.09
------- -------
296,500 307,000
(ShareSave) 24.07.96 (pound) 3.77 2,586 --
-------
- ------------------ -------- ------------ ------- --------- ------------ ------- ------- -------- --------
Nick Baldwin 22.11.94 (pound) 5.57 11,000 11,000 22.11.97 22.11.04
29.11.95 (pound) 5.32 13,000 13,000 29.11.98 29.11.05
26.06.96 (pound)4.705 15,500 15,500 26.06.99 26.06.06
02.07.97 (pound) 7.35 14,000 14,000 02.07.00 02.07.07
25.09.98 (pound) 8.88 20,500 20,500 25.09.03 25.09.08
12.03.99 (pound)6,875 32,500 32,500 12.03.04 12.03.09
------- -------
74,000 106,500
(ShareSave) 24.07.96 (pound) 3.77 4,575 4,575 01.08.01 31.01.02
-------
4,575
- ------------------ -------- ------------ ------- --------- ------------ ------- ------- -------- --------
Peter Hickson 11.12.96 (pound) 5.72 78,500 78,500 11.12.01 11.12.06
02,07.97 (pound) 7.35 32,000 32,000 02.07.02 02.07.07
25.09.98 (pound) 8.88 30,500 30,500 25.09.03 25.09.08
12.03.99 (pound)6.875 21,000 21,000 12.03.04 12.03.09
------- -------
141,000 162,000
(ShareSave) 25.07.97(pound)5.81 1,678 1,678 01.08.00 31.01.01
-------
1,678
- ------------------ -------- ------------ ------- --------- ------------ ------- ------- -------- --------
Options granted on or after 22 November 1994 are subject to performance
criteria.
Options were exercised by the following executive director during the year:
<CAPTION>
Number Date Grant Market Gain
exercised Price Price
Name (pound) (pound) (pound)
- ----------------------------------------------------------------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Edmund Wallis 2,586 09.09.99 3.77 6.59 7,292
- ----------------------------------------------------------------- ---------- -------- -------- -------- --------
</TABLE>
No other options were exercised by executive directors during the year. No
options lapsed during the year. The mid-market price for ordinary shares in
PowerGen plc on 2 January 2000 was 445p. The price range during the period 3
January 1999 to 2 January 2000 was 439p (low) to 917p (high).
This information is presented as at a date more than one month prior to the date
of the Notice of Annual General Meeting by agreement with the London Stock
Exchange.
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 21
Notice Period of Employment Contracts
Mr E A Wallis has a service contract with the Company with entitlement to a
rolling two-year period of notice. Mr P C F Hickson has a service contract
which, following an initial period of three years ending on 21 July 1999, can be
terminated on a rolling one-year period of notice. Mr N P Baldwin has a service
contract with the Company which can be terminated on a rolling one year period
of notice. It is the policy of the Committee that the Company should not enter
into contracts with rolling notice periods exceeding one year for any executive
director to be appointed in future.
If an executive director's contract is terminated by the Company other
than in the circumstances described below, the benefits for which the Company is
liable will be not more than a termination payment of up to full salary and
benefits for the outstanding period of the contract and benefits and enhanced
early retirement under the Company's pension schemes, subject to mitigation by
the individual concerned.
In October 1998 Mr E A Wallis, Mr P C F Hickson and Mr N P Baldwin each
entered into a Deed of Amendment of their service contract to provide for a
termination payment of twice gross annual salary plus target annual bonuses and
compensation for pension benefits to be made in certain circumstances following
the termination of their employment by the Company following a change of control
of the Board or a merger (which payments are not subject to mitigation by the
individual concerned).
Annual Bonus Scheme
Payments under the scheme are dependent, in all cases except the Chairman, on
the achievement of corporate and personal performance targets. The Chairman's
annual bonus is determined solely according to corporate performance.
Corporate performance is measured by the annual increase in the Company's
earnings per share excluding any exceptional items. The payment of a bonus is
conditional upon achievement of a defined level of Profit Before Tax. The level
of bonus, set in 1998 at 25 per cent of base salary in respect of target
performance increasing to a maximum of 40 per cent of base salary for
exceptional achievement, is determined by the Committee. The position for 1999
is set out on page 18.
Annual bonus payments may be made in either cash or shares. To encourage
executive directors to take bonuses in shares, shares issued in lieu of bonus
payments may be put into trust. Subject to certain conditions, additional
matching shares will be issued by the Company to the individual director in
respect of such shares after three years.
Medium Term Bonus Scheme
This scheme is based on the performance of the Company over a five-year period
and was first introduced in the 1994/95 financial year. Membership of the scheme
is limited to executive directors selected at the discretion of the Committee.
All the executive directors are currently members. The numbers of shares placed
in trust under the scheme are:
at Grants during year at
3 January -------------------------------- 2 January
1999 Date Number 2000
Edmund Wallis 98,710 12.03.99 26,181 124,891
Peter Hickson 41,809 12.03.99 16,000 57,809
Nicholas Baldwin 9,542 12.03.99 13,090 22,632
Note
David Dance, a former director, retains an entitlement to 25,114 shares under
the scheme. The performance criteria relating to their exercise were waived when
he left the Company.
Performance targets relate to Total Shareholder Return (determined with
reference to the Company's share price and dividends), the performance of the
Company being measured against that of a comparator group of FTSE 100 companies.
Awards under the scheme are in the form of restricted shares which are held by
Trustees (the PowerGen Employee Share Trust), shares equivalent to the value of
the annual bonus of a participating executive director for the previous year
(currently up to 40 per cent of salary) being placed in Trust. For the shares to
vest, and the director to be able to call for the transfer of shares to him, the
Company must meet the target criteria. The actual number of shares available for
transfer to the director depends on the Company's performance against the
comparator group, no shares being released if the Company is in the lower half
of the group and a maximum of 100 per cent being released if the Company is in
the top quartile. Additional shares may be released if, an entitlement having
been established, shares are not called for immediately after they have vested
and the performance of the Company then continues to improve. If neither target
performance is achieved, the award is lost.
Certain shares placed in trust under the scheme have vested during the
year. An appropriate amount is included in the performance related bonus for
Edmund Wallis set out in the Summary of Directors' Emoluments on page 19. No
shares awarded under the scheme have been lost during the year. Executive
directors (and former directors) first became eligible to call for the transfer
of the vested shares under the scheme on 7 June 1998.
Share Options
The PowerGen Executive Share Option Scheme was originally established in 1991
and was approved by shareholders and the Inland Revenue. The Rules of the Scheme
were amended by the Board in May 1996 under powers granted to them by the
Scheme, to give effect to implications for the operation of the Scheme of the
provisions of the Finance Act 1996. Membership of the Scheme is at the
discretion of the Committee. Following the implementation of the Scheme of
Arrangement in December 1998 the Scheme was replicated in respect of shares in
the Company as the new holding Company of the Group. All executive directors are
members of the Scheme together with certain other senior executives and
managers. Details of grants of options are given on page 20; at all times these
have made in accordance with best practice as it has developed.
<PAGE>
22 POWERGEN PLC ANNUAL REPORT 1999
Report on Corporate Governance continued
Grants of options are conditional upon specific performance criteria
similar to those applicable to the Medium Term Bonus Scheme having been met at
the time of exercise. Options are exercisable between three and ten years after
the date of grant (between five and ten years in the case of executive directors
who are members of the Medium-Term Bonus Scheme). At the time when an option
holder wishes to exercise his options, the performance of the Company in terms
of Total Shareholder Return is compared with that of the relevant comparator
companies.
Options are granted at the market price of the Company's shares at the
time of grant. In normal circumstances, the maximum levels of grant for any one
year for executive directors will be equivalent to their emoluments for that
year; the maximum levels for other participants will be a proportion of their
base emoluments. Total grants of options outstanding at any time will not exceed
four times emoluments.
Retirement Benefits
The executive directors are all members of the Electricity Supply Pension Scheme
(ESPS) and of the PowerGen Senior Executive Pension Scheme. Members are entitled
on normal retirement to a pension of two thirds of final year's base salary
after 20 years' service, together with dependants' pensions in the event of
death, a lump sum on death in service and a pension in the event of early
retirement on the grounds of ill health. Contributions to the ESPS paid by the
Company are determined by the actuary and are expressed as a percentage of total
pensionable salaries. Members are required to contribute six per cent of their
pensionable salary. In a similar way, the Company meets all the costs of the
PowerGen Senior Executive Pension Scheme which is also determined by an actuary
and expressed as a percentage of pensionable salaries for all members. Further
details of the ESPS are set out in note 25 on page 36.
PowerGen ShareSave Scheme
The PowerGen ShareSave Scheme is an Inland Revenue approved Scheme available to
all eligible employees. Non-executive directors are not eligible for membership.
Following the implementation of the Scheme of Arrangement in December 1998
existing options held under the ShareSave Scheme were transferred to apply to
shares in the Company, as the new holding Company of the Group.
Options granted to executive directors under the PowerGen ShareSave Scheme
are included in the table on page 20.
Other Benefits
Each Executive director and certain other senior employees receive a car
provided by the Company together with petrol for private mileage. Certain
executive directors also have the use of a pool car and chauffeur. Telephone
rental charges are reimbursed and a mobile telephone is provided. The Company
operates a private health insurance scheme through PPP.
Non-executive directors' remuneration
The remuneration of the non-executive directors is determined by the Board. The
fees of non-executive directors consist of a basic sum plus an additional
payment for specific duties in respect of chairmanship of committees.
Non-executive directors do not receive pension contributions and do not have
service contracts with the Company or any of its subsidiaries. Each appointment
of a non-executive director is subject to review on the third anniversary of the
appointment.
Appointment of directors
In accordance with the Company's Articles of Association, Mr P Myners and Mr S
Gillibrand will retire at the forthcoming Annual General Meeting and will offer
themselves for re-appointment.
Mr E A Wallis and Sir Frederick Crawford will retire by rotation at the
forthcoming Annual General Meeting and will offer themselves for re-appointment.
As at the date of the Annual General Meeting, there will be an unexpired
term of two years on Mr E A Wallis' service contract as his contract is subject
to termination on two years' notice on a rolling basis. Mr P Myners, Mr S
Gillibrand and Sir Frederick Crawford are members of the Remuneration Committee
and they do not have service contracts with the Company or any of its
subsidiaries.
Beneficial Interests
The beneficial interests of the directors in the ordinary share capital of
PowerGen plc are as follows:
As at As at
2 January 3 January
2000 1999
- ------------------------------------------------------- --------- ---------
Nicholas Baldwin 4,379 4,263
Sir Frederick Crawford 7,398 7,398
Sydney Gillibrand 6,858 6,858*
Anthony Habgood 3,000 3,000
Peter Hickson 17,057 10,000
Dr David Li 20,000 10,000
Paul Myners 9,867 9,867
Roberto Quarta 3,000 3,000
Cohn Short ** 10,000
Sir Alan Thomas ** 4,984
Edmund Wallis 41,686 38,037
- ------------------------------------------------------- --------- ---------
Notes
* The holdings shown for Sydney Gillibrand and Paul Myers are as at the dates of
their appointments as directors both 31 May 1999
** No longer a director as at 2 January 2000
There have been no changes in the beneficial interests of the directors in
the ordinary share capital of PowerGen plc between 2 January 2000 and the date
of this Report.
In addition, certain Executive directors have interests in shares held in
the PowerGen Employee Share Trust as shown on page 21.
There were no non-beneficial interests of the directors in the ordinary
share capital of the Company.
No director had at any time during the period under report any interest
(other than as a nominee on behalf of the Company) in the shares of any
subsidiary company.
No director during the period under report had a material interest in any
contract significant to the Group's business.
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 23
Report of the Auditors
to the members of PowerGen plc
We have audited the financial statements on pages 24 to 42.
Respective responsibilities of directors and auditors
The Company's directors are responsible for preparing the Annual Report. As
described on page 15, this includes responsibility for preparing the financial
statements in accordance with applicable United Kingdom accounting standards.
Our responsibilities, as independent auditors, are established in the United
Kingdom by statute, the Auditing Practices Board, the Listing Rules of the
London Stock Exchange and our profession's ethical guidance.
We report to you our opinion as to whether the financial statements give a
true and fair view and are properly prepared in accordance with the United
Kingdom Companies Act. We also report to you if, in our opinion, the directors'
report is not consistent with the financial statements, if the Company has not
kept proper accounting records, if we have not received all the information and
explanations we require for our audit, or if information specified by law or the
Listing Rules regarding directors' remuneration and transactions is not
disclosed.
We read the other information contained in the Annual Report and consider
the implications for our report if we become aware of any apparent misstatements
or material inconsistencies with the financial statements.
We review whether the statement on page 16 reflects the Company's
compliance with the seven provisions of the Combined Code specified for our
review by the London Stock Exchange, and we report if it does not. We are not
required to consider whether the Board's statements on internal control cover
all risks and controls, or to form an opinion on the effectiveness of the
Company's or the Group's corporate governance procedures or its risk and
internal control procedures.
Basis of audit opinion
We conducted our audit in accordance with Auditing Standards generally accepted
in the United Kingdom and in the United States. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the
financial statements. It also includes an assessment of the significant
estimates and judgements made by the directors in the preparation of the
financial statements, and of whether the accounting policies are appropriate to
the Company's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion, we also evaluated the overall
adequacy of the presentation of information in the financial statements.
UK Opinion
In our opinion the financial statements give a true and fair view of the state
of affairs of the Company and the Group at 2 January 2000 and of the results and
cash flows of the Group for the year then ended and have been properly prepared
in accordance with the Companies Act 1985.
US Opinion
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Group as at 2 January 2000 and 3 January 1999 and the results of their
operations and their cash flows for the year ended 2 January 2000, the nine
month period ended 3 January 1999, and the year ended 29 March 1998, in
conformity with accounting principles generally accepted in the United Kingdom.
These principles differ in certain respects from accounting principles generally
accepted in the United States. The effect of the differences in the
determination of net income, shareholders' equity and cash flows is shown on
pages 43 and 44 to the financial statements.
PricewaterhouseCoopers
Chartered Accountants and Registered Auditors
London
1 March 2000
<PAGE>
24 POWERGEN PLC ANNUAL REPORT 1999
Consolidated Profit and Loss Account
for the year ended 2 January 2000
<TABLE>
<CAPTION>
Year ended
2 January
2000
- -------------------------------------------------------------- ------------- ------------- --------- -------------
Note Before Exceptional Total Before
exceptional Items exceptional
items (note 3) items
(pound)m (pound)m (pound)m (pound)m
- ---------------------------------------------------- -------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Turnover 3,989 -- 3,989 2,489
Group's share of associates' turnover (243) -- (243) (145)
- ---------------------------------------------------- -------- ------------- ------------- --------- -------------
Group turnover 1 3,746 -- 3,746 2,344
- -----------------------------------------------------------------------------------------------------------------------
continuing activities 3,672 -- 3,672 2,344
acquisitions 74 -- 74 --
- -------------------------------------------------------------------------------------------------------------------------
Operating costs 2,3 (3,297) (293) (3,590) (2,062)
Other operating income 2 191 -- 191 100
- ---------------------------------------------------- -------- ------------- ------------- --------- -------------
Group operating profit/(loss) 2 640 (293) 347 382
- -----------------------------------------------------------------------------------------------------------------------
continuing activities 618 (293) 325 382
acquisitions 22 -- 22 --
- -----------------------------------------------------------------------------------------------------------------------
Group's share of associates' operating profit 83 -- 83 44
Disposal of fixed assets and investments 3 -- 543 543 --
Net interest payable
Group 6 (156) -- (156) (104)
associates (55) -- (55) (30)
- ---------------------------------------------------- -------- ------------- ------------- --------- -------------
Profit/(Loss) on ordinary activities before taxation 7 512 250 762 292
Tax on profit on ordinary activities 8 (99) 49 (50) (69)
Windfall tax 9 -- -- -- --
- ---------------------------------------------------- -------- ------------- ------------- --------- -------------
Profit/(Loss) on ordinary activities after taxation 413 299 712 223
Minority interest (4) -- (4) --
- ---------------------------------------------------- -------- ------------- ------------- --------- -------------
Profit/(Loss) attributable to shareholders 409 299 708 223
Dividends 10 (226)
- ---------------------------------------------------- -------- ------------- ------------- --------- -------------
Retained Proflt/(Loss) for the year 482
---------
Earnings/(Loss) per ordinary share 12 109.Op
Earnings per ordinary share
(excluding goodwill amortisation,
windfall tax and exceptional Items) 12 73.4p
Diluted Earnings/(Loss) per ordinary share 12 108.5p
Dividends per ordinary share 10 34.8p
<CAPTION>
Nine months ended Year ended
3 January 29 March
1999 1998
------------ ------------------ ------------
Exceptional Total Total
items
(note 3)
(pound)m (pound)m (pound)m
- ---------------------------------------------------- ----------- ------------------ ------------
<S> <C> <C> <C>
Turnover -- 2,489 3,122
Group's share of associates' turnover -- (145) (190)
- ---------------------------------------------------- ----------- ------------------ ------------
Group turnover -- 2,344 2,932
- ---------------------------------------------------------------------------------------------------
continuing activities -- 2,344 2,932
acquisitions -- -- --
- ---------------------------------------------------------------------------------------------------
Operating costs (535) (2,597) (2,840)
Other operating income -- 100 128
- ---------------------------------------------------- ----------- ------------------ ------------
Group operating profit/(Loss) (535) (153) 220
- ---------------------------------------------------------------------------------------------------
continuing activities (535) (153) 220
acquisitions -- -- --
- ---------------------------------------------------------------------------------------------------
Group's share of associates' operating profit -- 44 45
Disposal of fixed assets and investments (2) (2) --
Net interest payable
Group -- (104) (15)
associates -- (30) (40)
- ---------------------------------------------------- ----------- ------------------ ------------
Profit/(Loss) on ordinary activities before taxation (537) (245) 210
Tax on profit on ordinary activities 158 89 (133)
Windfall tax -- -- (202)
- ---------------------------------------------------- ----------- ------------------ ------------
Profit/(Loss) on ordinary activities after taxation (379) (156) (125)
Minority interest -- -- --
- ---------------------------------------------------- ----------- ------------------ ------------
Profit/(Loss) attributable to shareholders (379) (156) (125)
Dividends (157) (189)
- ---------------------------------------------------- ----------- ------------------ ------------
Retained Profit/(Loss) for the year (313) (314)
------- ------------
Earnings/(Loss) per ordinary share (24.1)p (19.5)p
Earnings per ordinary share
(excluding goodwill amortisation,
windfall tax and exceptional Items) 38.8p 68.1p
Diluted Earnings/(Loss) per ordinary share (24.1)p (19.5)p
Dividends per ordinary share 24.1p 29.Op
</TABLE>
Statement of Total Recognised Gains and Losses
for the year ended 2 January 2000
<TABLE>
<CAPTION>
Year Nine Months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- --------------------------------------------------------------------- ------- --------- --------- --------
<S> <C> <C> <C>
Profit/(Loss) attributable to shareholders 708 (156) (125)
Revaluation of fixed assets on acquisition 25 -- --
Currency translation differences on foreign currency net investments 63 (28) (79)
- --------------------------------------------------------------------- ------- --------- --------- --------
Total recognised gains/(losses) for the year 796 (184) (204)
- --------------------------------------------------------------------- ------- --------- --------- --------
Prior year adjustment -- 96 --
Total recognised gains/(losses) 796 (88) (204)
- --------------------------------------------------------------------- ------- --------- --------- --------
</TABLE>
The notes on pages 29 to 42 form part of these financial statements
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 25
Balance Sheets
as at 2 January 2000
<TABLE>
<CAPTION>
The Group The Company
---------------------- ---------------------
2 January 3 January 2 January 3 January
2000 1999 2000 1999
Note (pound)m (pound)m (pound)m (pound)m
- -------------------------------------------------------------- ------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Fixed assets
Goodwill 15 1,309 1,301 -- --
Tangible fixed assets 16 3,232 3,024 -- --
Investments 17 470 612 325 325
- -------------------------------------------------------------- ------- --------- --------- --------- ---------
5,011 4,937 325 325
- -------------------------------------------------------------- ------- --------- --------- --------- ---------
Current assets
Stocks 18 127 173 -- --
Debtors: amounts falling due after more than one year 19 11 30 -- --
Debtors: amounts falling due within one year 20 722 730 161 95
Cash and short-term deposits 646 93 -- --
- -------------------------------------------------------------- ------- --------- --------- --------- ---------
1,506 1,026 161 95
- -------------------------------------------------------------- ------- --------- --------- --------- ---------
Creditors: amounts falling due within one year
Loans and overdrafts 21 (98) (88) -- --
Trade and other creditors 22 (1,106) (1,677) (156) (92)
- -------------------------------------------------------------- ------- --------- --------- --------- ---------
Net current assets/(liabilities) 302 (739) 5 3
- -------------------------------------------------------------- ------- --------- --------- --------- ---------
Total assets less current liabilities 5,313 4,198 330 328
Creditors: amounts falling due after more than one year
Long-term loans 23 (2,572) (2,413) -- --
Other creditors 24 (415) (731) -- --
Provisions for liabilities and charges 26 (295) (322) -- --
Deferred tax 27 (47) (45) -- --
- -------------------------------------------------------------- ------- --------- --------- --------- ---------
Net assets 1,984 1,345 330 328
- -------------------------------------------------------------- ------- --------- --------- --------- ---------
Capital and reserves
Called-up share capital 28 325 325 325 325
Share premium account 29 4 -- 4
Other reserves 29 656 656 -- --
Revaluation reserve 29 25
Profit and loss account 29 909 364 1 3
- -------------------------------------------------------------- ------- --------- --------- --------- ---------
Shareholders' funds (including non-equity shareholders' funds) 1,919 1,345 330 328
- -------------------------------------------------------------- ------- --------- --------- --------- ---------
Equity minority interests 65 -- -- --
- -------------------------------------------------------------- ------- --------- --------- --------- ---------
1,984 1,345 330 328
--------- --------- --------- ---------
</TABLE>
Approved by the Board on 1 March 2000
E A Wallis P C F Hickson
The notes on pages 29 to 42 form part of these financial statements
<PAGE>
26 POWERGEN PLC ANNUAL REPORT 1999
Consolidated Cash Flow Statement
for the year ended 2 January 2000
<TABLE>
<CAPTION>
Year Nine Months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
Note (pound)m (pound)m (pound)m
- --------------------------------------------------------------------- ------- --------- --------- --------
<S> <C> <C> <C> <C>
Cash flow from operating activities 31a (27) 456 583
- --------------------------------------------------------------------- ------- --------- --------- --------
Dividends from associated undertakings 1 -- 1
- --------------------------------------------------------------------- ------- --------- --------- --------
Returns on investments and servicing of finance
Interest received 56 7 34
Interest paid (210) (83) (66)
- --------------------------------------------------------------------- ------- --------- --------- --------
(154) (76) (32)
- --------------------------------------------------------------------- ------- --------- --------- --------
Taxation 26 (176) (131)
- --------------------------------------------------------------------- ------- --------- --------- --------
Capital expenditure and financial investment
Purchase of tangible fixed assets (329) (175) (147)
Purchase of fixed asset investments (53) (39) (83)
(New)/Repayment of loans to associated undertakings (5) (4) 6
Sale of fixed asset investments 203 11 89
Sale of tangible fixed assets 18 53 30
Net receipts from disposal of power stations 1,282 -- --
- --------------------------------------------------------------------- ------- --------- --------- --------
1,116 (154) (105)
- --------------------------------------------------------------------- ------- --------- --------- --------
Acquisitions and disposals
Purchase of subsidiary undertakings (261) (866) --
Net cash acquired with subsidiary undertakings -- 1 --
Receipts from sale of subsidiary undertakings 5 253 --
Net cash disposed with subsidiary undertakings -- (29) --
- --------------------------------------------------------------------- ------- --------- --------- --------
(256) (641) --
- --------------------------------------------------------------------- ------- --------- --------- --------
Equity dividends paid (162) (172) (151)
- --------------------------------------------------------------------- ------- --------- --------- --------
Net cash inflow/(outflow) before use of liquid resources 544 (763) 165
- --------------------------------------------------------------------- ------- --------- --------- --------
Management of liquid resources
Cash (paid for)/withdrawn from short-term deposits (493) 31 (61)
- --------------------------------------------------------------------- ------- --------- --------- --------
Financing
Issue of ordinary share capital 4 6 9
Debt due within one year:
Repayment of commercial paper -- -- (127)
Movement in short-term loans (76) 76 --
Debt due beyond one year:
Repayment of term loans -- (200) --
Movement in sterling term facility (600) 895 --
Issue of 6.25% Sterling Eurobond 2024 244 -- --
Issue of 5% Euro Eurobond 2009 326 -- --
Movement in sterling equivalent long-term loans 41 (38) 1
- --------------------------------------------------------------------- ------- --------- --------- --------
(61) 739 (117)
- --------------------------------------------------------------------- ------- --------- --------- --------
(Decrease)/lncrease in cash in the year 31b (10) 7 (13)
- --------------------------------------------------------------------- ------- --------- --------- --------
</TABLE>
The notes on pages 29 to 42 form part of these financial statements
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 27
Principal Accounting Policies
Nature of operations
The PowerGen Group has two main businesses; UK Operations and International
Operations. PowerGen's principal business in the UK is the generation,
distribution and sale of electricity and the sale of gas. PowerGen's principal
business overseas is the generation of electricity and associated energy-related
businesses.
Basis of preparation of accounts
The financial statements are prepared under the historical cost convention and
in accordance with applicable UK accounting standards. There is no difference
between the profit on ordinary activities before taxation and the retained
profit for the year stated on the face of the consolidated profit and loss
account and their historical cost equivalents. Values of assets and liabilities
vested in the Company on 31 March 1990 under the Transfer Scheme made pursuant
to the Electricity Act 1989 (the Transfer Scheme) are based on their historical
cost to the Central Electricity Generating Board (CEGB).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions which affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting year. Actual results can differ from those estimates.
In the accounts for the year ended 3 January 1999, figures for the three
years ended 29 March 1998 were restated, following the adoption of Financial
Reporting Standard 12, from 30 March 1998. This necessitated adjustment to
provisions made in prior periods principally relating to major overhaul and
decommissioning of generation plant.
On 9 December 1998 under a Scheme of Arrangement between the Company and
its Shareholders a new holding company was created for the PowerGen Group,
PowerGen 1998 PLC (then renamed PowerGen plc). A simultaneous capital
reorganisation of PowerGen UK plc (formerly PowerGen plc) was accounted for as a
Group reconstruction and merger accounting principles were applied.
Basis of consolidation
The consolidated accounts include the financial statements of the Company and
its subsidiary undertakings. The results of subsidiaries sold or acquired are
included in the consolidated profit and loss account up to, or from, the date on
which control passes. Intra-group sales and profits are eliminated on
consolidation. Goodwill arising on consolidation represents the excess or
shortfall of the fair value of the consideration given compared to the fair
value of the identifiable net assets acquired. Purchased goodwill is capitalised
in the balance sheet and amortised on a straight-line basis over its estimated
minimum useful economic life of 20 years. Prior to the adoption of Financial
Reporting Standard 10 'Goodwill and Intangible Assets' from 30 March 1998,
goodwill arising was written off on acquisition against retained earnings.
Associated undertakings
The Group's share of profits less losses of associated undertakings is included
in the consolidated profit and loss account. These amounts are taken from the
latest audited financial statements of the undertakings, except where the
accounting reference date of the undertaking is not coterminous with the parent
company, where management accounts are used. The accounting reference dates of
associated undertakings are set out in note 17. Where the accounting policies of
associated undertakings do not conform to those of the Group, adjustments are
made on consolidation where the amounts involved are material to the Group.
Turnover
Turnover comprises sales of electricity, including fees under contracts for
differences stated net of difference payments ('Cfds'), revenue from the sale of
electricity and gas to industrial, commercial and domestic customers, and the
sale of electricity and steam under combined heat and power schemes. The cost or
the income attributable to Cfds is recorded when settlement is made. Where
physical delivery under the Cfd has taken place prior to the year end,
adjustment is made to account for the known variances between the contract
strike price and the Pool price on the date of delivery. Income from the sale of
electricity and gas to industrial, commercial and domestic customers is
recognised when earned and reflects the value of units supplied, including a
value of units supplied to customers between the date of their last meter
reading and the year end.
Restructuring costs
Amounts are set aside for the Group's restructuring programme that involves the
reorganisation or future closure of power station and other sites and specific
reductions in staff numbers, where the Group is demonstrably committed to such
actions.
Depreciation
Provision for depreciation of generating and other assets is made so as to write
off, on a straight-line basis, the book value of tangible fixed assets. Assets
are depreciated over their estimated useful lives or, in the case of leased
assets, over the lease term if shorter. No depreciation is provided on freehold
land or assets in the course of construction.
The estimated useful lives for the other principal categories of fixed
assets are:
Asset Life in years
- ------------------------------------------------------------------ -------------
Generating assets 20-40
Distribution network 40
Other buildings 40
Other operating and short-term assets 3-15
- ------------------------------------------------------------------ -------------
Overhaul of generation plant
Overhaul costs are capitalised as part of generating assets and depreciated on a
straight-line basis over their estimated useful life, typically the period until
the next major overhaul. That period is usually between four and six years.
Foreign exchange
Assets and liabilities expressed in foreign currencies, including those of
subsidiary and associated undertakings, are translated to sterling at rates of
exchange ruling at the end of the financial year The results of foreign
subsidiary and associated undertakings are translated to sterling using average
exchange rates.
Transactions denominated in foreign currencies are translated to sterling
at the exchange rate ruling on the date payment takes place unless related or
matching forward foreign exchange contracts have been entered into when the rate
specified in the contract is used. Differences on exchanoe arising from the
re-translation of the opening net investment in and results of
<PAGE>
28 POWERGEN PLC ANNUAL REPORT 1999
Principal Accounting Policies continued
subsidiary and associated undertakings are taken to reserves and, where the net
investments are hedged, are matched with differences arising on the translation
of related foreign currency borrowings. Any differences arising are reported in
the statement of total recognised gains and losses. All other foreign exchange
differences are taken to the profit and loss account in the year in which they
arise.
Deferred income
Amounts received in advance in respect of the provision of services under
warranty arrangements are taken to deferred income and recognised in operating
income over the period to which the warranty cover relates. Costs associated
with the provision of services under the warranty arrangements are included
within operating costs when incurred.
Financial instruments
The Group uses a range of derivative instruments, including interest rate swaps,
energy based futures contracts and foreign exchange contracts and swaps.
Derivative instruments are used for hedging purposes, apart from energy based
futures contracts, which are used for trading purposes. Interest differentials
on derivative instruments are charged to the profit and loss account as interest
costs in the period to which they relate. Accounting for foreign currency
transactions is described in the foreign exchange policy set out above. Changes
in the market value of futures trading contracts are reflected in the profit and
loss account in the period in which the change occurs.
Debt instruments Following the issue of Financial Reporting Standard 4 'Capital
Instruments' all borrowings are initially stated at the fair value of
consideration received after deduction of issue costs. The issue costs and
interest payable on bonds are charged to the profit and loss account at a
constant rate over the life of the bond.
Interest rate swaps Interest rate swap agreements are used to manage interest
rate exposures and are accounted for using hedge accounting. Amounts payable or
receivable in respect of these agreements are recognised as adjustments to
interest expense over the period of the contracts. The cash flows from interest
rate swaps and gains and losses arising on terminations of interest rate swaps
are recognised as returns on investments and servicing of finance.
Forward currency contracts The Group enters into forward currency contracts for
the purchase and/or sale of foreign currencies in order to hedge its exposure to
fluctuations in currency rates. Unrealised gains and losses on currency
contracts are not accounted for until the maturity of the contract. The cash
flows from forward purchase currency contracts are classified in a manner
consistent with the underlying nature of the hedged transaction.
Currency swaps Currency swap agreements are used to manage foreign currency
exposures and are accounted for using hedge accounting. In order to qualify for
hedge accounting the instrument must be identified to a specific foreign
currency asset or liability and must be an effective hedge. Foreign currency
loans, where the repayment of principal is hedged by currency swaps, are
included in the balance sheet at the sterling eguivalent of the hedged rate.
Tangible fixed assets
Tangible fixed assets, including plant spares, are stated at original cost less
accumulated depreciation and provisions for impairment. In the case of assets
constructed by the Company and its subsidiaries, directly related overheads and
commissioning costs are included in cost.
Major assets in the course of construction are included in tangible fixed
assets on the basis of expenditure incurred at the balance sheet date. Where
borrowings are specifically financing the construction of a major capital
project with a long period of development, interest payable, not exceeding the
actual amount incurred during the relevant period of construction, is
capitalised as part of the cost of the asset and written off over the
operational life of the asset.
Leases
Rents payable under operating leases are charged to the profit and loss account
evenly over the term of the lease. Income from operating leases is included
within other operating income in the profit and loss account. Income is
recognised on a straight-line basis except where income receipts vary with
output or other factors. Any variable element is recognised as earned.
Fixed asset investments
The Group's share of the net assets of associated undertakings is included in
the consolidated balance sheet. Other investments are stated at cost. Provision
is made for any impairment in the value of investments.
Fuel stocks and stores
Fuel stocks and general and engineering stores are stated at the lower of cost
and net realisable value. In general, stocks are recognised in the profit and
loss account on a weighted average cost basis. The Companies Act 1985 requires
stocks to be categorised between raw materials, work in progress and finished
goods. Fuel stocks and stores are raw materials under this definition.
Cash and short-term deposits
Short-term deposits include cash at bank and in hand, and certificates of tax
deposit.
Deferred taxation
Deferred taxation arises in respect of items where there is a timing difference
between their treatment for accounting purposes and their treatment for taxation
purposes. Provision for deferred taxation, using the liability method, is made
to the extent that it is probable that a liability or asset will crystallise in
the foreseeable future.
Pensions
Pension costs are charged to the profit and loss account so as to spread the
cost of pensions over employees' remaining working lives. The regular cost is
attributed to individual years using either the projected unit credit method or
the attained age method, see note 25. Variations in pension costs, which are
identified as a result of actuarial valuations, are amortised over the average
expected remaining service lives of members. Differences between the amounts
funded and the amounts charged to the profit and loss account are treated as
either creditors or debtors in the balance sheet.
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 29
Notes to the Accounts
for the year ended 2 January 2000
1 Turnover
Turnover, which arises mainly in the UK, is analysed as follows:
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ------------------------------------------- ---------- ---------- ----------
UK Operations
Electricity and gas -- wholesale and
trading 1,685 1,155 1,979
Electricity -- distribution 376 157 --
Electricity and gas -- retail 1,751 1,001 797
Cogeneration and renewables 95 54 68
Other energy and hydrocarbon sales -- 89 76
Internal charges from distribution
to retail (245) (119) --
- ------------------------------------------- --------- ---------- ---------
3,662 2,337 2,920
International Operations 84 7 12
- ------------------------------------------- --------- ---------- ---------
3,746 2,344 2,932
- ------------------------------------------- --------- ---------- ---------
Wholesale electricity trades in England and Wales are conducted according to a
multilateral agreement between the electricity generators and the wholesale
electricity purchasers. This multilateral agreement specifies the charges on
each purchaser and the payments to each generator and ensures that the total
charges equal the total payments. All such payments and charges are settled
through a daily clearing account (the Pool) without passing through the
ownership of a third party. Therefore although the customers of a specific
generator are identified collectively as the purchasers who have signed the
multilateral agreement, it is not possible to quantify the actual sales from one
specific generator to one specific purchaser.
2 Operating profit
Operating costs were as follows:
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ---------------------------------------- ----------- ----------- ----------
Fuel costs 840 1,102 888
- --------------------------------------------------------------------------------
burnt in power stations 643 567 888
gas buy-outs 197 535 --
- --------------------------------------------------------------------------------
Pool purchases and other costs of sales 1,722 940 965
Staff costs (note 4) 235 139 128
Depreciation, including exceptional
charge 263 157 553
Goodwill amortisation 68 28 --
Other operating charges, including
restructuring costs 462 231 306
- ---------------------------------------- ----- ----- -----
Operating costs, after exceptional items 3,590 2,597 2,840
----- ----- -----
- --------------------------------------------------------------------------------
Operating costs, before exceptional items 3,297 2,062 2,471
Exceptional operating charges (note 3) 293 535 369
- --------------------------------------------------------------------------------
The directors believe that the nature of the Group's business is such that the
analysis of operating costs set out in the Companies Act 1985 is not
appropriate. As required by the Act, the directors have therefore adopted the
presented format so that operating costs are disclosed in a manner appropriate
to the Group's principal activities.
The depreciation charge for the year ended 2 January 2000 includes
(pound)45 million as the result of an impairment review of the Group's UK power
station portfolio. The cash flows used in this impairment review were discounted
at PowerGen's cost of capital for UK Operations.
Operating costs include (pound)52 million relating to the post-acquisition
results of GPEC (see note 14).
Operating costs also include:
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ---------------------------------------- ----------- ----------- ----------
Repairs and maintenance costs 99 72 79
Research and development costs 5 5 6
Operating leases 6 17 8
Loss/(Profit) on disposal of fixed assets 1 (33) (22)
Auditors' remuneration for audit
(Company (pound)nil, in all periods) 0.5 0.4 0.3
Auditors' remuneration for non-audit
services (of which (pound)0.8 million
paid to Coopers & Lybrand
in the nine months ended 3 January 1999
and the year ended 29 March 1998) 4.7 4.9 0.8
- ---------------------------------------- ----------- ----------- ----------
Other operating income includes (pound)84 million (nine months ended 3 January
1999 (pound)68 million, year ended 29 March 1998 (pound)99 million) of income
from operating leases. It also includes the recognition of (pound)60 million of
deferred income in respect of the provision of services under warranty
arrangements associated with the disposal of Fiddler's Ferry and Ferrybridge C
power stations to Edison Mission Energy during 1999 (see note 3).
Fees for non-audit services comprise due diligence, accounting advisory,
tax advisory services and other general consultancy.
3 Exceptional items
Exceptional items comprise:
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ---------------------------------------- ------------- ------------ -----------
Re-negotiation of gas contract portfolio (197) 535 --
Reorganisation and restructuring costs (96) -- --
Plant portfolio rationalisation and
restructuring -- -- (369)
- ---------------------------------------- ------------- ------------ -----------
Charged against operating profit (293) 535 (369)
Disposal of fixed assets and investments 543 (2) --
- ---------------------------------------- ------------- ------------ -----------
250 (537) (369)
- ---------------------------------------- ------------- ------------ -----------
Charged against operating profit
On 19 October 1999, the Group agreed to pay (pound)197 million to Liverpool Bay
owners BHP Petroleum. LASMO and Monument Oil and Gas in exchange for
modifications to their existing long-term gas supply contracts to Connah's Quay
power station. This amount was paid in November 1999. During the nine months
ended 3 January 1999, the Group agreed to pay (pound)535 million to the same
parties for amendments to their existing long-term gas supply contracts, which
was settled during 1999.
Reorganisation and restructuring costs represent the costs of
restructuring and integrating the UK business consequent upon the acquisition of
PowerGen Energy in July 1998. The amount includes committed severance payments
and reorganisation costs.
Following a review of the Group's UK plant portfolio in the light of
increased competition and market changes, the value of the Group's coal and
oil-fired plant was reduced by (pound)339 million in the year ended 29 March
1998. (pound)30 million of associated business restructuring costs were also
charged against profits at that time.
<PAGE>
30 POWERGEN PLC ANNUAL REPORT 1999
Notes to the Accounts continued
In the year ended 2 January 2000, tax credits on these exceptional items
totalled (pound)89 million (nine months ended 3 January 1999 (pound)158 million,
year ended 29 March 1998 (pound)9 million).
Disposal of fixed assets and investments
On 19 July 1999, PowerGen completed the sale of Fiddler's Ferry and Ferrybridge
C power stations to Edison Mission Energy, and entered into arrangements to
supply coal to the stations for a four year period on terms consistent with
PowerGen's overall coal commitments.
PowerGen is also providing services associated with a major parts warranty
in respect of the future operations, capability and availability of each
station. Under the terms of the warranty, PowerGen will have to repay up to
(pound)100 million per annum (pound)50 million per station) during each of the
five years following the disposal should the plant be unavailable during the
specified periods. In addition PowerGen and Edison Mission also entered into a
six month Contract for Differences in respect of part of the capacity of the
plant, a Technical Support Agreement, a Transitional Services Agreement and an
agreement to provide access to PowerGen's coal import terminal at Liverpool.
The total consideration received from Edison Mission amounted to
(pound)1,296 million. (pound)500 million of this amount was received in advance
in respect of the provision of services under warranty arrangements and taken to
deferred income. This deferred income will be recognised over the five year
period subsequent to the disposal on the following basis; (pound)60 million in
1999, (pound)100 million in each year from 2000 to 2003 and (pound)40 million in
2004. During the year ended 2 January 2000, (pound)60 million of deferred income
has been recognised and has been included within other operating income (note
2). Costs associated with services under the warranty arrangements will be
recognised as incurred and included in operating costs.
Net assets disposed of together with disposal costs, totalled(pound)253
million, giving rise to an exceptional profit on disposal of (pound)543 million,
net of deferred income in respect of services under the warranty arrangements.
Proceeds arising from the disposal, all of which were received during 1999, are
subject to a retrospective adjustment for sulphur dioxide limits issued to the
divested stations by the Environment Agency of England and Wales. An exceptional
tax charge of (pound)40 million arises on this disposal.
On 26 November 1998, PowerGen North Sea Limited (PGNS) was sold to
Centrica plc for consideration of (pound)248 million in cash on a debt-free
basis. Excluding inter-company debt, the net assets of PGNS on disposal were
(pound)252 million. On 31 December 1998, the Group sold a fifty per cent share
in PowerGen Renewables Limited (PGR) to Abbott plc for consideration of (pound)5
million. The net assets of PGR disposed of totalled (pound)3 million. The
disposal of these two investments gave rise to a net (pound)2 million loss.
4 Employee information
The average number of persons employed by the Group, including directors,
analysed by activity was:
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
- ------------------------------------- --------- ----------- --------
UK Operations 7,130 5,560 2,865
International Operations 746 656 591
- ------------------------------------- ------- ------ -----
7,876 6,216 3,456
- ------------------------------------- ------- ------ -----
The salaries and related costs of employees, including directors, were:
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ------------------------------------- ---------- ----------- ----------
Wages and salaries 224 131 110
Social security costs 19 10 8
Other pension costs (note 25) 16 11 10
- ------------------------------------- --------- ----------- --------
259 152 128
Capitalised in fixed assets (24) (13) --
- ------------------------------------- --------- ----------- --------
Charged in profit and loss account 235 139 128
- ------------------------------------- --------- ----------- --------
5 Summary of directors' emoluments
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pounds) (pounds) (pounds)
- ------------------------------------- --------- ----------- --------
Total emoluments:
As directors 173,385 113,486 153,552
For management services:
Salaries 1,051,727 869,166 1,010,932
Performance related bonuses 714,330 274,008 241,832
Compensation for loss of office -- 913,224 444,918
Gain on the exercise of
share options 7,292 348,300 460,867
- ------------------------------------- --------- --------- ---------
1,946,734 2,518,184 2,312,101
- ------------------------------------- --------- --------- ---------
Full details of the remuneration, pension arrangements and share options of the
directors are set out in the Report on Directors' Remuneration and Related
Matters on pages 18 to 22.
For the purpose of comparability, the figures stated above include the
emoluments of the directors of the Company and of PowerGen UK plc, the former
parent company of the Group. The emoluments earned as directors of PowerGen UK
plc (prior to the Group reconstruction on 9 December 1998) totalled
(pound)2,420,748 in the nine months ended 3 January 1 999 (year ended 29 March
1998 (pound)231 2,101).
6 Net interest payable -- Group
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- -------------------------------------- ----------- ----------- -----------
Investment income 7 8 30
Interest receivable from associated
undertakings 9 6 8
Interest receivable and similar income 40 9 7
- -------------------------------------- --------- ----------- --------
56 23 45
Interest payable on loans:
Bank loans and overdrafts (55) (48) (12)
Other loans (153) (75) (44)
- -------------------------------------- --------- ----------- --------
(152) (100) (11)
Unwinding of discount in provisions (4) (4) (4)
- -------------------------------------- --------- ----------- --------
(156) (104) (15)
- -------------------------------------- --------- ----------- --------
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 31
7 Profit/(Loss) on ordinary activities before taxation
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- -------------------------------------- ----------- ----------- -----------
UK Operations
Electricity and gas -- wholesale and
trading 448 264 513
Electricity -- distribution 154 70 --
Electricity and gas -- retail 3 17 --
Cogeneration and renewables 14 6 7
Other energy and hydrocarbon sales -- 9 22
Lease and other income 146 100 115
- -------------------------------------- --------- ----------- --------
765 466 657
International Operations 79 27 27
Corporate costs (53) (39) (50)
- -------------------------------------- --------- ----------- --------
791 454 634
Net interest payable
Group (156) (104) (15)
associates (55) (30) (40)
Goodwill amortisation (68) (28) --
Exceptional items (note 3) 250 (537) (369)
- -------------------------------------- --------- ----------- --------
762 (245) 210
- -------------------------------------- --------- ----------- --------
Other energy and hydrocarbon sales represent the results of PowerGen North Sea
Limited, a subsidiary company which was disposed of in November 1998.
Net assets of (pound)1,984 million (3 January 1999 (pound)1,345 million)
include (pound)483 million (3 January 1999 (pound)288 million) relating to
assets employed in International Operations.
8 Tax on profit on ordinary activities
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- -------------------------------------- ----------- ----------- -----------
United Kingdom corporation tax at 30.25%
(nine months ended 3 January 1999
and year ended 29 March 1998 31%)
Current 113 (97) 137
Prior year (52) (12) (3)
Deferred (note 27)
Accelerated capital allowances 19 -- --
Other timing differences (17) 14 (9)
- -------------------------------------- --------- ----------- --------
63 (95) 125
Associated undertakings (13) 6 8
- -------------------------------------- --------- ----------- --------
50 (89) 133
- -------------------------------------- --------- ----------- --------
The actual rate of tax reconciles with the applicable United Kingdom corporation
tax rate as follows:
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
% % %
- -------------------------------------- --------- ----------- --------
United Kingdom corporation tax rate 30 31 31
Accelerated capital allowances 11 (1) 1
Other timing differences (6) 2 (4)
Plant divestment (6) (6) (5)
Prior year items (9) (4) --
Other (3) -- 1
- -------------------------------------- --------- ----------- --------
Effective tax rate on profit before
exceptional items and goodwill
amortisation 17 22 24
Exceptional items (10) 14 39
- -------------------------------------- --------- ----------- --------
Effective tax rate 7 36 63
- -------------------------------------- --------- ----------- --------
The tax impact of exceptional items is given in note 3.
9 Windfall tax
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- -------------------------------------- ----------- ----------- -----------
Windfall tax -- -- 202
- -------------------------------------- --------- ----------- --------
10 Dividends
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- -------------------------------------- ---------- ----------- -----------
Net dividend per ordinary share:
Interim paid 10.8p
(nine months ended 3 January 1999
1O.Op, year ended 29 March 1998 9.Op) 70 65 59
Second interim to be paid 24.Op
(nine months ended 3 January 1999 nil,
year ended 29 March 1998 nil) 156 -- --
Final proposed nil
(nine months ended 3 January 1999
14.lp, year ended 29 March 1999 20.Op) -- 92 130
- -------------------------------------- --------- ----------- --------
226 157 189
- -------------------------------------- --------- ----------- --------
11 Profit of the Company
The profit for the financial year of the Group includes (pound)224 million
attributable to the Company (nine months ended 3 January 1999 (pound)95 million
profit). The Company is not publishing a separate profit and loss account, as
permitted by Section 230 of the Companies Act 1985.
12 Earnings per ordinary share
Earnings per ordinary share has been calculated by dividing the profit
attributable to shareholders for the financial year of (pound)708 million (nine
months ended 3 January 1999 (pound)156 million loss, year ended 29 March 1998
(pound)125 million loss) by 649,552,248 ordinary shares (nine months ended 3
January 1999 by 646,681,662 ordinary shares, year ended 29 March 1998 by
642,002,743 ordinary shares), being the weighted average number of ordinary
shares in issue during the year.
Earnings per ordinary share before goodwill amortisation, windfall tax and
exceptional items based on the same numbers of weighted average ordinary shares
is calculated as follows:
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- -------------------------------------- ----------- ----------- -----------
Profit/(Loss) attributable to
shareholders 708 (156) (125)
Goodwill amortisation 68 28 --
Windfall tax -- -- 202
Exceptional items (net of tax) (299) 379 360
- -------------------------------------- --------- ----------- --------
Adjusted earnings 477 251 437
- -------------------------------------- --------- ----------- --------
Earnings per share (before goodwill
amortisation, windfall tax and
exceptional items) 73.4p 38.8p 68.1p
- -------------------------------------- --------- ----------- --------
Adjusted earnings per share has been presented in addition to earnings per share
calculated in accordance with Financial Reporting Standard 14 'Earnings per
share' in order that more meaningful comparisons of financial performance can be
made.
<PAGE>
32 POWERGEN PLC ANNUAL REPORT 1999
Notes to the Accounts continued
Diluted earnings per share is calculated as follows. The proceeds of the
assumed exercise of dilutive Executive and ShareSave options is calculated as if
the shares had been issued at fair value. The difference between the number of
shares issued and the number of shares that would have been issued at fair value
is treated as an issue of ordinary shares for no consideration. The number of
shares used in the calculation of diluted earnings per share is shown on page
43.
13 Fair value adjustments
On 27 July 1998. the Group acquired the whole of the issued share capital of
PowerGen (East Midlands) Investments (PEMI), formerly DR Investments, for
(pound)851 million cash incurring acquisition costs of (pound)15 million. PEMI
owns 100% of the issued share capital of PowerGen Energy plc (formerly East
Midlands Electricity plc).
The provisional fair value adjustments recorded in the accounts to 3
January 1999 in respect of this acquisition have been finalised during the year
ended 2 January 2000, following the crystallisation of a number of
uncertainties. As a result, further adjustments totalling (pound)18 million have
been made. Details of these adjustments are set out below:
<TABLE>
<CAPTION>
Fair value Accounting Revaluation Other Fair value
as stated in policy fair value as now
accounts at adjustments adjustments(3) restated
3 January
1999
(pound)m (pound)m (pound)m (pound)m (pound)m
- ------------------------- ------------ ----------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Net assets acquired:
Fixed assets
Tangible 1,082 -- (55)(2) -- 1,027
Investments 24 -- -- -- 24
Stocks 9 -- -- -- 9
Taxation payable (46) -- -- -- (46)
Other working capital (99) 29(1) -- 3 (67)
Long-term borrowings (1,170) -- -- -- (1,170)
Provisions (263) -- -- 5 (258)
- ------------------------- ------------ ----------- ----------- -------------- ----------
(463) 29 (55) 8 (481)
Goodwill 1,329 1,347
- ------------------------- ------------ ----------
Consideration, including
costs of acquisition 866 866
- ------------------------- ------------ ----------
</TABLE>
1 Conforming policies in accounting for revenue and cost recognition.
2 Revaluation of metering fixed assets
3 Re-assessment of provisions, principally contract related
provisions
14 Acquisitions
On 27 July 1999, the Group acquired an additional 46.3% stake in Gujarat Torrent
Energy Corporation (GTEC) for (pound)166 million. GTEC, formerly an associated
undertaking, owns a 655MW dual-fired power station in Gujarat, North India. This
purchase, which has been acquisition accounted, brought the Group's total stake
in GTEC to 74.1%. Subsequent to the purchase of this additional stake, GTEC has
been treated as a subsidiary undertaking by the Group. On 18 January 2000, GTEC
was renamed Gujarat PowerGen Energy Corporation (GPEC).
Fair Value Table
Book Revaluation Fair value to
value the PowerGen
Group
(pound)m (pound)m (pound)m
- ----------------------------------- ----------- ----------- -----------
Net assets of GPEC:
Tangible fixed assets 311 91 402
Stocks 6 -- 6
Debtors 8 -- 8
Deposts 45 -- 45
Creditors and loans (227) -- (227)
- ----------------------------------- ----------- ----------- -----------
143 91 234
- ----------------------------------- ----------- ----------- -----------
Share of net assets acquired (46.3%) 108
Goodwill 58
- ----------------------------------- -----------
Cash consideration, including
costs of acquisition 166
- ----------------------------------- -----------
Amortisation of goodwill for the five months to 2 January 2000 in respect of
GPEC totalled (pound)1 million.
The profit after tax of GPEC for the twelve months to 31 March 1999 was
(pound)22 million. The profit after tax for the period from 1 April 1999 to 27
July 1999 was (pound)18 million.
Prior to becoming a subsidiary undertaking, GPEC was accounted for as an
associated undertaking. In accordance with Financial Reporting Standard 2
'Accounting for Subsidiary Undertakings', and in order to give a true and fair
view, purchased goodwill has been calculated as the sum of the goodwill arising
on each separate purchase of shares in GPEC. Goodwill arising represents the
difference at the date of each purchase between the fair value of the
consideration given and the fair value of the identifiable assets and
liabilities attributable to the interest purchased. This represents a departure
from the statutory method, under which goodwill is calculated as the difference
between cost and fair value on the date that GPEC became a subsidiary
undertaking. The statutory method would not give a true and fair view because it
would result in the Group's share of GPEC's retained reserves, during the period
that it was an associated undertaking, being re-characterised as goodwill. The
effect of this departure is to increase retained profits by (pound)5 million,
create a revaluation reserve of (pound)25 million and to increase purchased
goodwill by (pound)30 million.
15 Goodwill
The Group (pound)m
- ---------------------------------------------------------------- ----------
Cost
At 3 January 1999 1,329
Fair value adjustment (note 13) 18
Additions (note 14) 58
- ---------------------------------------------------------------- ----------
At 2 January 2000 1,405
- ---------------------------------------------------------------- ----------
Amortisation
At 3 January 1999 28
Charge for the year 68
- ---------------------------------------------------------------- ----------
At 2 January 2000 96
- ---------------------------------------------------------------- ----------
Net book value at 2 January 2000 1,309
- ---------------------------------------------------------------- ----------
Net book value at 3 January 1999 1,301
- ---------------------------------------------------------------- ----------
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 33
16 Tangible fixed assets
<TABLE>
<CAPTION>
Generating Distribution Customers' Assets in Other Total
assets network contributions course of assets
construction
The Group (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
- --------------------------------------------- ---------- -------------- ---------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cost
At 3 January 1999 3,705 1,790 (353) 127 532 5,801
Foreign exchange adjustment (8) -- -- -- (1) (9)
Acquired during the year 399 -- -- 12 3 414
Additions 93 100 (26) 181 5 353
Transfers 14 -- -- (22) 8 --
Disposals (537) (1) -- (7) (69) (614)
Fair value adjustment -- (11) -- -- -- (11)
- --------------------------------------------- ---------- -------------- ---------------- -------------- ------------- -------------
At 2 January 2000 3,666 1,878 (379) 291 478 5,934
- --------------------------------------------- ---------- -------------- ---------------- -------------- ------------- -------------
Depreciation
At 3 January 1999 2,124 516 (82) -- 219 2,777
Foreign exchange adjustments (1) -- -- -- -- (1)
Acquired during the year 10 -- -- -- 2 12
Charge for the year 176 56 (9) -- 40 263
Disposals (324) (1) -- -- (68) (393)
Fair value adjustment -- 44 -- -- -- 44
- --------------------------------------------- ---------- -------------- ---------------- -------------- ------------- -------------
At 2 January 2000 1,985 615 (91) -- 193 2,702
- --------------------------------------------- ---------- -------------- ---------------- -------------- ------------- -------------
Net book value at 2 January 2000 1,681 1,263 (288) 291 285 3,232
- --------------------------------------------- ---------- -------------- ---------------- -------------- ------------- -------------
Net book value at 3 January 1999 1,581 1,274 (271) 127 313 3,024
- --------------------------------------------- ---------- -------------- ---------------- -------------- ------------- -------------
</TABLE>
Group assets include freehold land and buildings with a net book value of
(pound)203 million (3 January 1999 (pound)221 million). Group assets also
include assets held for use under operating leases with a cost of (pound)132
million and accumulated depreciation of (pound)132 million at both 2 January
2000 and 3 January 1999.
(pound)4 million of interest was capitalised during the year (nine months
ended 3 January 1999 and year ended 29 March 1998 (pound)nil). Accumulated
interest capitalised, gross of tax relief, included in the total cost for the
Group amounts to (pound)65 million (3 January 1999 (pound)61 million, 29 March
1998 (pound)61 million).
17 Investments
Associated undertakings
-----------------------
Share of Loans Other Total
net assets investments
The Group (pound)m (pound)m (pound)m (pound)m
- -------------------------------- ---------- ------------ ------------ ---------
At 3 January 1999 296 64 252 612
Additions 45 32 8 85
Disposals (17) (27) (190) (234)
Transfer to subsidiary (note 14) (40) -- -- (40)
Share of retained profits 41 -- -- 41
Currency translation differences 11 (5) -- 6
- -------------------------------- ---------- ------------ ------------ ---------
At 2 January 2000 336 64 70 470
- -------------------------------- ---------- ------------ ------------ ---------
Additions to associated undertakings represent equity investments in, and loans
to, associates.
Other investments include investments listed on a recognised stock
exchange of (pound)70 million (nine months ended 3 January 1999 (pound)234
million) set aside by subsidiary companies for certain medium and long-term
insurance liabilities. At 2 January 2000, the market value of these investments
was (pound)1 million in excess of cost (3 January 1999 (pound)9 million).
Other Sterling investments can be analysed under US GAAP as follows:
At 2 January 2000
---------------------
Carrying Fair
value value
(pound)m (pound)m
- ------------------------------------------------------ -------- ------------
Equity Investments 20 22
Debt Investments 50 49
- ------------------------------------------------------ -------- ------------
Total 70 71
- ------------------------------------------------------ -------- ------------
Proceeds from the sale of investments classified as 'available for sale' under
US GAAP amounted to (pound)491 million for the year ended 2 January 2000. On
these sales, gross realised profits and losses amounted to (pound)12 million and
(pound)10 million respectively. These gains and losses were computed by
reference to the actual cost of the specific securities being sold.
The contracted maturity of the Group's debt investments at 2 January 2000
was as follows:
(pound)m
- ---------------------------------------------------------------------- --------
Within one year 11
1-5 years 12
5-10 years 15
After 10 years 12
- ---------------------------------------------------------------------- --------
Total 50
- ---------------------------------------------------------------------- --------
The Company
The cost of investment of (pound)325 million in the Company balance sheet at 2
January 2000 and 3 January 1999 represents the subsidiary undertaking, PowerGen
UK plc.
<PAGE>
34 POWERGEN PLC ANNUAL REPORT 1999
Notes to the Accounts continued
Interests in Group subsidiary undertakings
Details of the Group's principal investments in subsidiary undertakings are set
out below. Principal subsidiaries are those which in the opinion of the
directors significantly affect the amount of profit and assets and liabilities
shown in the Group accounts. The directors consider that those companies not
listed are not significant in relation to PowerGen as a whole.
<TABLE>
<CAPTION>
Proportion of Country of Principal business activities
nominal value incorporation
of issued equity of registration
shares held by the
Group and Company
%
- ------------------------------ ---------------------- --------------------- -----------------------------
<S> <C> <C> <C>
PowerGen UK plc* 100 England Generation and sale
and Wales of electricity
PowerGen 100 England Distribution and supply
Energy plc (formerly and Wales of electricity
East Midlands
Electricity plc)+
PowerGen 100 England Holding company for
International Limited+ and Wales international activities
Ergon Insurance 100 Isle of Man Captive insurance
Limited+ company
PowerGen CHP 100 England Sale of energy services
Limited+ and Wales involving the construction
of combined heat and
power (CHP) plant
PowerGen 100 England Sale of energy services
Cogeneration and Wales involving the construction
Limited+ of combined heat and
power (CHP) plant
PowerGen Gas 100 England Transportation and
Limited+ and Wales marketing of natural
gas in the UK
PowerGen Retail 100 England Supply, trading and
Gas Limited+ and Wales shipping of natural
gas in the UK
Csepeli 100 Hungary Construction and
Aramtermelo Rt+ operation of gas-fired
power station plant
Csepel Power 100 Hungary Generation and sale
Company+ of electricity
Gujarat PowerGen 74.1 India Operation of gas-fired
Energy Corporation power station plant
Limited (GPEC)+
- ------------------------------ ---------------------- --------------------- -----------------------------
</TABLE>
* direct interest
+ indirect interest
All the above subsidiaries have a December year end apart from GPEC, which, for
commercial reasons, has an accounting reference date of 31 March.
Associated undertakings
Details of the Group's principal investments in associated undertakings are as
follows:
<TABLE>
<CAPTION>
Accounting Country of Shares held Percentage
reference date incorporation of capital
or registration held directly
by the Group
- ------------------- ---------------- ----------------- --------------------- -------------
<S> <C> <C> <C> <C>
Yallourn Energy 30 June Australia Australian dollar 49.95%
Pty Limited ordinary shares
Saale Energie 31 December Germany Deutschmark 50%
GmbH ordinary capital
MIBRAG BV 31 December Holland Dutch guilders 33.33%
ordinary capital
MIBRAG GmbH 31 December Germany Deutschmark 33.33%
ordinary capital
Turbogas 31 December Portugal Escudos 49.99%
Produtora ordinary shares
Energetica SA
PT Jawa 31 December Indonesia Indonesian rupees 35%
Power ordinary shares
L G Energy 31 December Republic Korean won 49.9%
Co Limited of Korea ordinary shares
Cottam 31 December England Ordinary shares 50%
Development and Wales
Centre Limited
- ------------------- ---------------- ----------------- --------------------- -------------
</TABLE>
The principal activities of these associated undertakings are:
Yallourn Energy -- Mining of brown coal and production
Pty Limited and sale of electricity from coal-fired
power station
Saale Energie GmbH -- Holding and management company
for the Group's interest in Schkopau
power station
MIBRAG BV -- Holding company for the Group's interest
in MIBRAG GmbH
MIBRAG GmbH -- Mining, refinement and sale of brown
coal and generation and sale of electricity
Turbogas Produtora -- Generation and sale of electricity from
Energetica SA gas-fired power station
PT Jawa Power -- Construction of coal-fired power
station plant
L G Energy -- Development, construction and operation
Co Limited of power generation plant
Cottam Development -- Construction and operation of gas-fired
Centre Limited power station plant and operation
of a generator turbine testing facility
Group share of aggregate associates' balance sheets
At At
2 January 3 January
2000 1999
(pound)m (pound)m
- ------------------------------------------------------ --------- --------------
Share of assets:
Share of fixed assets 1,579 1,441
Share of current assets 166 160
- ------------------------------------------------------ --------- --------------
1,745 1,601
--------- --------------
Share of liabilities:
Amounts falling due within one year (134) (152)
Amounts falling due after more than one year (1,275) (1,153)
- ------------------------------------------------------ --------- --------------
(1,409) (1,305)
- ------------------------------------------------------ --------- --------------
Share of net assets 336 296
- ------------------------------------------------------ --------- --------------
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 35
18 Stocks
The Group
---------------------
At At
2 January 3 January
2000 1999
(pound)m (pound)m
- ---------------------------------------------------------- --------- -----------
Fuel stocks 70 112
Stores 57 61
- ---------------------------------------------------------- --------- -----------
127 173
- ---------------------------------------------------------- --------- -----------
19 Debtors: amounts falling due after more than one year
The Group
---------------------
At At
2 January 3 January
2000 1999
(pound)m (pound)m
- ---------------------------------------------------------- --------- -----------
Other debtors 11 30
- ---------------------------------------------------------- --------- -----------
11 30
- ---------------------------------------------------------- --------- -----------
Other debtors include (pound)5 million in respect of pensions (3 January 1999
(pound)24 million).
20 Debtors: amounts falling due within one year
The Group
---------------------
At At
2 January 3 January
2000 1999
(pound)m (pound)m
- ---------------------------------------------------------- --------- -----------
Trade debtors 484 442
Other debtors 204 255
Prepayments and accrued income 34 33
- ---------------------------------------------------------- --------- -----------
722 730
- ---------------------------------------------------------- --------- -----------
Other debtors include (pound)70 million (3 January 1999 (pound)73 million) in
respect of income under operating leases. The Company has no debtors apart from
(pound)161 million (3 January 1999 (pound)95 million) of inter-group balances
due from PowerGen UK plc, a subsidiary company.
21 Loans and overdrafts
The Group
---------------------
At At
2 January 3 January
2000 1999
(pound)m (pound)m
- ---------------------------------------------------------- --------- -----------
Bank overdrafts 37 12
Other short-term loans 61 76
- ---------------------------------------------------------- --------- -----------
98 88
- ---------------------------------------------------------- --------- -----------
The Group has a Euro Commercial Paper programme which allows it to issue paper
for maturities of seven to 364 days up to a maximum of US $500 million or
equivalent at LIBOR rates. There was no commercial paper outstanding at 2
January 2000 and 3 January 1999. The weighted average interest rate on all
short-term loans during the year was 7.3% (nine months ended 3 January 1999
7.6%).
At 2 January 2000, (pound)34 million of bank overdrafts were denominated
in Indian Rupees bearing interest at 13%. This overdraft facility is repayable
in July 2000. The remainder of bank overdrafts ((pound)3 million) at 2 January
2000 primarily comprised unpresented payments and was non-interest bearing. At 3
January 1999 no portion of bank overdrafts, which primarily comprised
unpresented payments, was interest bearing.
22 Trade and other creditors falling due within one year
The Group
---------------------
At At
2 January 3 January
2000 1999
(pound)m (pound)m
- ---------------------------------------------------------- --------- -----------
Trade creditors 393 395
Payments on account 11 48
Corporation tax 86 39
Other taxation and social security 9 24
Accruals and other creditors 351 1,079
Deferred income 100 --
Proposed dividend 156 92
- ---------------------------------------------------------- --------- -----------
1,106 1,677
- ---------------------------------------------------------- --------- -----------
Accruals and other creditors include accruals for capital work performed but not
yet paid for and rationalisation and restructuring costs of the Group. Prior
year figures include (pound)535 million in respect of gas contract
re-negotiation payments settled in 1999. The Company has no trade and other
creditors apart from the proposed dividend of (pound)156 million (3 January 1999
(pound)92 million).
The Group is not committed to significant payments under operating or
finance leases during the next financial year.
23 Long-term loans
The Group
---------------------
At At
2 January 3 January
2000 1999
(pound)m (pound)m
- ---------------------------------------------------------- --------- -----------
Foreign Currency loans 2000 -- 31
7.1% US Dollar Yankee Bond 2002 253 254
Sterling term facility expiring 2003 299 895
8.875% Sterling Bonds 2003 250 250
8.5% Sterling Bonds 2006 250 250
8.375% Sterling Eurobond 2006 106 107
8.125% Sterling Eurobond 2007 105 106
7.45% US Dollar Yankee Bond 2007 262 263
Loan notes 2007 4 6
5% Euro Eurobond 2009 326 --
12% Eurobond 2016 224 229
6.25% Sterling Eurobond 2024 244 --
Bank loans in overseas subsidiaries 249 22
- ---------------------------------------------------------- --------- -----------
2,572 2,413
- ---------------------------------------------------------- --------- -----------
The Sterling term facility expiring in 2003 bears interest at variable rates,
fixed in advance for periods up to six months, by reference to Sterling LIBOR.
During the year the Group issued two further long-term bonds. In April
1999, a 6.25% (pound)250 million Sterling Eurobond was issued which matures in
2024. In July 1999, a 5% 500 million Euro Eurobond was issued which matures in
2009. This bond was swapped into Sterling, raising (pound)326 million.
None of the bonds described above has any financial covenants apart from
the 12% 2016 Sterling Eurobond, which has interest cover and dividend payment
restrictions.
<PAGE>
36 POWERGEN PLC ANNUAL REPORT 1999
Notes to the Accounts continued
The maturity profile of the Group's financial liabilities, including overdrafts
and long-term loans, is as follows:
At
2 January
2000
(pound)m
- ---------------------------------------------------------------------- ---------
In one year or less, or on demand 98
In more than one year but not more than two years 25
In more than two years but not more than five years 877
In more than five years 1,670
- ---------------------------------------------------------------------- ---------
2,670
- ---------------------------------------------------------------------- ---------
The undrawn committed borrowing facilities available to the Group are as
follows:
At
2 January
2000
(pound)m
- ---------------------------------------------------------------------- ---------
Expiring in one year or less 88
Expiring in more than two years but not more than five years 1,000
- ---------------------------------------------------------------------- ---------
1,088
- ---------------------------------------------------------------------- ---------
These facilities comprise a syndicated loan facility of two tranches; a five
year term loan and a five year revolving credit facility, both expiring on 26
June 2003. The annual commitment fee is 20 basis points for each tranche and the
facility carries financial covenants that vary over time. The covenants relating
to the syndicated loan facility, at 2 January 2000, comprise a cap on total
borrowings of (pound)4 billion, a maximum net debt to earnings before interest,
tax, depreciation and amortisation ratio of 4 times, and a minimum interest to
earnings before interest, tax and amortisation ratio of 2.5 times. There are
also two 364 day committed bi-lateral facilities totalling (pound)50 million,
and undrawn committed facilities in overseas subsidiaries of (pound)38 million.
24 Other creditors falling due after more than one year
The Group
---------------------
At At
2 January 3 January
2000 1999
(pound)m (pound)m
- ---------------------------------------------------------- --------- -----------
Accruals and other creditors 75 73
Deferred income 340 --
- ---------------------------------------------------------- --------- -----------
415 73
- ---------------------------------------------------------- --------- -----------
Accruals and other creditors shown above include (pound)57 million in respect of
pensions (3 January 1999 (pound)48 million).
25 Pension scheme arrangements
UK GAAP
The Group participates in the industry-wide scheme, the Electricity Supply
Pension Scheme (ESPS), for the majority of its employees. This is a funded
scheme of the defined benefit type, with assets invested in separate trustee
administered funds. The Group has two separate funds with the ESPS, the PowerGen
fund and the East Midlands Electricity fund (the plan).
An actuarial valuation of the ESPS is normally carried out every three
years by the Scheme's independent professionally qualified actuary, who
recommends the rates of contribution payable by each group participating in the
scheme. In intervening years the actuary reviews the continuing appropriateness
of the rates.
The latest published actuarial valuation of the ESPS was at 31 March 1998.
The 1998 valuation revealed a surplus of (pound)89 million in respect of the
PowerGen fund and (pound)32 million in respect of the East Midlands Electricity
fund.
<TABLE>
<CAPTION>
At 31 March 1998
----------------------------
PowerGen East Midlands
fund Electricity fund
- ------------------------------------------------------ ---------------- ----------------
<S> <C> <C>
Market value of assets (pound)1,631m (pound)881m
Extent to which actuarial value covered benefits
accruing to members 108% 105%
Rate of return on investments
compared with annual increase in salaries 2.5% 2.5%
higher higher
compared with annual increase in pensions 4.0% 4.0%
higher higher
Method of valuation used Projected Attained
unit age
- ------------------------------------------------------ ---------------- ----------------
</TABLE>
In the financial year ended 2 January 2000, the normal pension cost for the
Group amounted to (pound)21 million (nine months ended 3 January 1999 (pound)13
million, year ended 29 March 1998 (pound)12 million) and was determined in
accordance with the advice of an independent, professionally qualified actuary.
A net credit of (pound)5 million is required to the pension charge in the
accounts in respect of the experience surplus which is being recognised over 13
years, the average remaining service lives of members (nine months ended 3
January 1999 net credit of (pound)2 million, year ended 29 March 1998 net credit
of (pound)2 million). The accounts include a prepayment of (pound)18 million (3
January 1999 (pound)13 million) representing the excess of the amounts funded
over the pension cost for the year.
Amounts set aside in other creditors for the Group's rationalisation and
restructuring programme include costs associated with the early retirement of
employees. An element of these costs is likely to be payable to the ESPS to meet
early retirement costs.
US GAAP
The effect of adopting US Statements of Financial Accounting Standards (SFAS 87
and SFAS 88) is shown on page 44.
The pension cost determined under SFAS 87 requirements for the three
periods ended 2 January 2000 and the projected benefit obligation as at 2
January 2000 were calculated using the following assumptions:
<TABLE>
<CAPTION>
Projected Pension cost
benefit
obligation
---------- ------------------------------------------------------
Year Nine months Five months Year
At ended ended ended ended
2 January 2 January 3 January 3 January 29 March
2000 2000 1999 1999 1998
% % % % %
- ---------------------------------- --------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Discount rate 5.0 4.5 6.75 6.0 8.5
Rate of future salary
increases 4.0 4.0 5.5 5.0 6.5
Rate of expected return on
plan assets 6.5 6.5 8.0 7.5 9.0
- ---------------------------------- --------- ------------ ------------- -------------- ------------
</TABLE>
The figures for the five months ended 3 January 1999 were used to reflect the
inclusion of PowerGen Energy plc in the Group's pension disclosures from the
date of acquisition.
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 37
The components of the Scheme's pension cost under SFAS 87 are as follows:
Change in benefit obligations
<TABLE>
<CAPTION>
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ------------------------------------------------- --------- -------------- --------------
<S> <C> <C> <C>
Benefit obligation at start of year 2,304 1,285 1,133
PowerGen Energy on acquisition -- 781 --
Service cost 31 13 10
Interest cost 105 85 96
Plan participants' contributions 11 5 5
SFAS 88 events 9 10 4
Actuarial (gain)/loss (179) 196 108
Benefits paid (119) (71) (71)
- ------------------------------------------------- --------- -------------- --------------
Benefit obligation at end of year 2,162 2,304 1,285
- ------------------------------------------------- --------- -------------- --------------
</TABLE>
Change in plan assets
<TABLE>
<CAPTION>
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ------------------------------------------------- --------- -------------- --------------
<S> <C> <C> <C>
Fair value of plan assets at start of year 2,522 1,631 1,288
PowerGen Energy on acquisition -- 843 --
Actual return on plan assets 455 93 349
Employer contributions 7 21 60
Plan participants' contributions 11 5 5
Total payments (119) (71) (71)
- ------------------------------------------------- --------- -------------- --------------
Fair value of plan assets at end of year 2,876 2,522 1,631
- ------------------------------------------------- --------- -------------- --------------
</TABLE>
Components of net periodic pension cost
<TABLE>
<CAPTION>
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ------------------------------------------------- --------- -------------- --------------
<S> <C> <C> <C>
Cost of benefits earned during the year 31 13 10
Interest cost on projected benefit obligation 105 85 96
Expected return on assets (165) (124) (116)
Net amortisation 2 (10) (6)
- ------------------------------------------------- --------- -------------- --------------
Pension credit for the year under US GAAP (27) (36) (16)
- ------------------------------------------------- --------- -------------- --------------
</TABLE>
Additional costs in relation to severances under SFAS 88 are as follows:
<TABLE>
<CAPTION>
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ------------------------------------------------- --------- -------------- --------------
<S> <C> <C> <C>
Cost of termination benefits 9 10 4
- ------------------------------------------------- --------- -------------- --------------
</TABLE>
The information required to be disclosed in accordance with SFAS 87 concerning
the funded status of the PowerGen and East Midlands Electricity funds of the
ESPS at 2 January 2000 and 3 January 1999 were as follows:
At At
2 January 3 January
2000 1999
(pound)m (pound)m
- ------------------------------------------------------- --------- -------------
Actuarial present values of accumulated benefit
obligations (all benefits vested) 2,043 2,180
- ------------------------------------------------------- --------- -------------
Projected benefit obligations 2,162 2,304
Plan assets at fair value 2,876 2,522
- ------------------------------------------------------- --------- -------------
Projected benefit obligation less than scheme assets (714) (218)
Reconciliation of plan's status:
Unrecognised net obligation at date of initial
application of SFAS 87 (a) (2) (4)
Unrecognised net gain 583 114
- ------------------------------------------------------- --------- -------------
Accrued pension credit under US GAAP (133) (108)
- ------------------------------------------------------- --------- -------------
(a) The unrecognised net obligation at the date of initial application is being
amortised over 15 years.
The scheme's assets are invested in UK and overseas equities, index-linked
bonds and property.
26 Provisions for liabilities and charges
Movements on provisions comprise:
<TABLE>
<CAPTION>
3 January Disposals Transferred Fair value Charged Amortisation Provisions
1999 during to creditors adjustment to profit of discount utilised
the year during and loss
the year account
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
- ----------------------------------- --------- ----------- -------------- ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rationalisation and restructuring 3 -- (3) -- -- -- --
Liability and damage claims 75 -- -- (5) 7 -- (6)
Contract provisions 150 -- -- -- -- -- --
Decommissioning 94 (22) -- -- -- 4 (2)
- ----------------------------------- --------- ----------- -------------- ------------ ----------- -------------- ------------
322 (22) (3) (5) 7 4 (8)
- ----------------------------------- --------- ----------- -------------- ------------ ----------- -------------- ------------
<CAPTION>
2 January
2000
(pound)m
- ----------------------------------- -----------
<S> <C>
Rationalisation and restructuring --
Liability and damage claims 71
Contract provisions 150
Decommissioning 74
- ----------------------------------- -----------
295
- ----------------------------------- -----------
</TABLE>
The liability and damage claims provision includes reserves in respect of
potential claims for industrial related diseases and gradual pollution. Given
the inherent uncertainty surrounding the timing of any potential claims, it is
not possible to estimate when these amounts will crystallise. Contract
provisions, which relate to out of money electricity purchase contracts, were
acquired on the purchase of PowerGen Energy plc and will be utilised over the
period to 2008, when the contracts terminate. Decommissioning provisions, which
comprise amounts set aside for the estimated costs of terminating power station
grid connections, decommissioning power stations and subsequent site restoration
costs, based on engineering estimates will be utilised as each power station
closes.
<PAGE>
38 POWERGEN PLC ANNUAL REPORT 1999
Notes to the Accounts continued
27 Deferred tax
An analysis of the full potential liability (which represents the US GAAP
deferred tax liability) and the net deferred tax liability recognised at 2
January 2000 under UK GAAP is as follows:
<TABLE>
<CAPTION>
2 January 2000 3 January 1999
-------------------------------------- ----------------------------------------
Full Amounts Liability/ Full Amounts Liability/
potential unprovided (Asset) potential unprovided (Asset)
liability recognised liability recognised
The Group (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
- --------------------- --------- ------------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Accelerated capital
allowances 525 (476) 49 565 (535) 30
Other timing
differences (134) 132 (2) (105) 120 15
- --------------------- --------- ------------- -------------- ------------ ------------- -------------
391 (344) 47 460 (415) 45
- --------------------- --------- ------------- -------------- ------------ ------------- -------------
</TABLE>
Where there is an intention that profits retained by overseas subsidiaries will
be remitted, provision is made for any taxation liability that would arise on
the distribution. No provision is made where there is no intention that such
profits will be remitted in the foreseeable future. Assets and liabilities have
been recognised for those timing differences that are expected to crystallise in
the foreseeable future. The liability in respect of accelerated capital
allowances and other timing differences is calculated at 30% in both periods.
28 Share capital
The share capital of the Company comprises:
2 January 3 January
Authorised 2000 1999
(pound)m (pound)m
- ---------------------------------------------------------- --------- -----------
1,050,000,000 ordinary shares of 50p each 525 525
49,998 redeemable preference shares of (pound)1 -- --
Special rights redeemable preference share of (pound)1 -- --
- ---------------------------------------------------------- --------- -----------
525 525
- ---------------------------------------------------------- --------- -----------
Allotted, called up and fully paid
- ---------------------------------------------------------- --------- -----------
649,726,502 ordinary shares of 50p each 325 325
49,998 redeemable preference shares of (pound)1 -- --
Special rights redeemable preference share of (pound)1 -- --
- ---------------------------------------------------------- --------- -----------
325 325
- ---------------------------------------------------------- --------- -----------
During the year 163,804 ordinary shares of 50p each were issued under the
PowerGen ShareSave Scheme realising (pound)671,206. An amount of (pound)589,304
has been credited to share premium account.
52,600 ordinary shares of 50p each were issued under the Executive Share
Option Scheme realising (pound)246,508. An amount of (pound)220,208 has been
credited to share premium account.
386,571 ordinary shares of 50p each were issued under the Profit Sharing
Share Scheme realising (pound)2,906,829. An amount of (pound)2,713,543 has been
credited to share premium account.
The special share is redeemable at par at any time at the option of the
Secretary of State, after consulting the Company. This share, which may only be
held by the Secretary of State or another person acting on behalf of HM
Government, does not carry any rights to vote at general meetings but entitles
the holder to attend and speak at such meetings. The special share confers no
right to participate in the capital or profits of the Company except that, on a
distribution of capital in a winding up, the special shareholder is entitled to
repayment of (pound)1 in priority to other shareholders. Certain matters, in
particular the alteration of specific sections of the Articles of Association of
the Company (including the Article relating to limitations that prevent a person
from owning or having an interest in 15% or more of the ordinary shares in the
Company), require the prior written consent of the holder of the special share.
The redeemable preference shares are held by PowerGen UK plc and are
redeemable at par at the option of PowerGen plc. The holders of the limited
voting redeemable preference shares are not entitled to receive or participate
in any of the profits of the Company available for distribution by way of
dividend or otherwise.
Share Option Schemes
The Company has two share option schemes under which options to acquire shares
have been granted to employees: the PowerGen ShareSave Scheme, which is
available to all eligible employees of the Company, and the PowerGen Executive
Share Option Scheme which is available to executive directors and other senior
executives and managers selected by the Remuneration Committee.
The PowerGen ShareSave Scheme is savings related and the share options are
normally exercisable on completion of a three or five year Save-As-You-Earn
contract. The exercise price of options granted may be at a discount of no more
than 20% of the market price at the date of the grant.
Under the PowerGen Executive Share Option Scheme, which the Company
regards as an important incentive in attracting and retaining key employees, the
share options are generally exercisable between the third and tenth
anniversaries of the date of grant. Options are granted at the market price of
the Company's shares at the time of the grant or higher where options have
previously been exercised at a higher rate. Options granted after 1994 are
subject to specific performance criteria having been met at the time of
exercise, as established by the Remuneration Committee. For this purpose the
performance of the Company is assessed in terms of Total Shareholder Return as
compared against other companies which constitute the FTSE 100 at the date of
each grant.
The number of ordinary shares issued or issuable pursuant to options
granted under the ShareSave Scheme and the Executive Share Option Scheme shall
not exceed 117,188,722 (representing 15% of the issued ordinary share capital of
the Company immediately following the date on which the Company's shares were
first admitted to the Official List of The Stock Exchange) for either scheme.
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 39
Options granted, exercised and lapsed under these share option schemes during
the three financial periods ended 2 January 2000, were as follows:
PowerGen ShareSave Scheme PowerGen Executive Share
Option Scheme
--------------------------- ------------------------------
Number of Weighted Number of Weighted
shares average shares average
exercise price exercise price
- ------------------ ---------- ----------------- ------------- ----------------
Outstanding at
30 March 1997 9,330,273 (pound)2.87 2,213,000 (pound)4.48
Granted 1,686,291 (pound)5.81 521,000 (pound)7.35
Exercised (3,969,402) (pound)1.86 (533,000) (pound)3.23
Lapsed (375,013) (pound)4.19 -- --
- ------------------ ---------- ----------------- ------------- ----------------
Outstanding at
29 March 1998 6,672,149 (pound)4.14 2,201,000 (pound)5.46
Granted -- -- 403,000 (pound)8.88
Exercised (1,291,323) (pound)3 11 (343,500) (pound)4.93
Lapsed (157,573) (pound)4.66 -- --
- ------------------ ---------- ----------------- ------------- ----------------
Outstanding at
3 January 1999 5,223,253 (pound)4.38 2,260,500 (pound)6.15
Granted 3,162,793 (pound)6.02 471,500 (pound)7.10
Exercised (778,072) (pound)3.84 (52,600) (pound)4.69
Lapsed (470,937) (pound)5.25 (16,500) (pound)7.35
- ------------------ ---------- ----------------- ------------- ----------------
Outstanding at
2 January 2000 7,137,037 (pound)5.11 2,662,900 (pound)6.34
- ------------------ ---------- ----------------- ------------- ----------------
Options outstanding at 2 January 2000, together with their exercise prices and
dates of exercise, are as follows:
Date of grant Price per Normal dates Number of ordinary shares
share of exercise ---------------------------------
(pound) 2 January 2000 3 January 1999
- --------------------- --------- -------------- ---------------- ----------------
PowerGen ShareSave Scheme
12 July 1993 3.06 1998 -- 11,430
24 July 1996 3.77 1999 & 2001 2,758,796 3,646,169
25 July 1997 5.81 2000 & 2002 1,433,554 1,565,654
1 June 1999 6.02 2002 2,944,687 --
PowerGen Executive Share Option Scheme
6 December 1991 2.21 1994-2001 40,000 43,500
1 December 1992 2.78 1995-2002 107,000 109,000
1 July 1993 3.87 1996-2003 82,000 83,500
22 November 1994 5.57 1997-2004 261,500 273,500
5 July 1995 4.86 1998-2005 28,000 44,000
5 July and
29 November 1995 5.32 1998-2005 292,500 292,500
29 November 1995 5.59 1998-2005 15,500 15,500
26 June 1996 4.705 1999-2006 111,900 129,500
26 June 1996 5.32 1999-2006 286,500 286,500
26 June 1996 5.34 1999-2006 11,000 11,000
26 June 1996 5.59 1999-2006 16,500 16,500
11 December 1996 5.72 2001-2006 78,500 78,500
2 July 1997 7.35 2000-2007 457,500 474,000
25 September 1998 8.88 2001-2008 403,000 403,000
12 March 1999 7.10 2002-2009 471,500 --
- --------------------- --------- -------------- ---------------- ----------------
The Company had options exercisable totalling 1,261,656, 872,930 and 603,000 and
shares available for the grant of options totalling 224,577,507, 226,893,591 and
225,504,295 at 2 January 2000, 3 January 1999, and 29 March 1998 respectively.
No options expired during the three financial periods ended 2 January 2000.
During the year, a tranche of ShareSave options (taken out on 24 July 1996,
at a price of (pound)3.77) matured. A Qualifying Employee Share Trust (QUEST)
was set up to acquire in the market the required number of shares to satisfy the
options and to simultaneously transfer them to employees. 623,782 shares with a
nominal value of (pound)311,891 were acquired for consideration of
(pound)4,139,540 by the QUEST. A profit and loss account charge of (pound)2
million arose in the year ended 2 January 2000, being the difference between the
market and exercise prices. Of the 778,072 shares exercised during the year
under the PowerGen ShareSave Scheme 614,268 shares related to the QUEST. The
number of shares held by the QUEST at 2 January 2000 was 9,514, on which
dividends had not been waived.
US GAAP
Fair value of options
The weighted average fair value of options granted under the Executive Share
Option Scheme during the year to 2 January 2000 was (pound)0.85 premium (nine
months to 3 January 1999 (pound)1.29 discount). The weighted average fair value
of options granted under the ShareSave Scheme during the year to 2 January 2000
was (pound)1.45 discount. The weighted average remaining contractual life of
options outstanding at 2 January 2000 was 7.5 years. The fair value of options
granted under each scheme is estimated using the Black Scholes options pricing
model with the following weighted average assumptions for grants in the year to
2 January 2000: expected volatility -- 25%; interest rates -- 5% (based upon UK
Gilts on the date of grant with a maturity equal to the expected term); expected
dividend yield -- 6% and expected term -- 3 years for the ShareSave Scheme and 4
years for the Executive Share Option Scheme.
The Company has adopted the disclosure only option under SFAS 123
'Accounting for Stock Based Compensation'. If the accounting provisions of the
new standard had been adopted, PowerGen's net income and earnings per share
under US GAAP would be as the pro-forma amounts indicated below.
2 January 3 January
2000 1999
- -------------------------------------------------- ------------- ---------------
Net income/(loss)
as reported (pound)1,125m (pound)(184)m
pro-forma (pound)1,122m (pound)(186)m
Earnings/(loss) per share
as reported 173.2p (28.5)p
pro-forma 172.7p (28.8)p
- -------------------------------------------------- ------------- ---------------
29 Reserves
<TABLE>
<CAPTION>
Share Other Revaluation Profit
premium reserves reserve and loss
account account
The Group (pound)m (pound)m (pound)m (pound)m
- ------------------------------------- -------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
At 3 January 1999 -- 656 -- 364
Premium on shares issued 4 -- -- --
Currency translation differences on
foreign currency net investments -- -- -- 63
Arising on acquisition (note 14) -- -- 25 --
Retained profit for the year -- -- -- 482
- ------------------------------------- -------- ---------- ------------- ----------
At 2 January 2000 4 656 25 909
- ------------------------------------- -------- ---------- ------------- ----------
</TABLE>
The element of 'other reserves' relating to the previous capital reserve of
(pound)474 million, is not available for distribution as long as any liabilities
of PowerGen as at 9 December 1998 remain undischarged, unless the persons to
whom such liabilities are owed shall otherwise agree, or an appropriate bank
guarantee of such liabilities is put in place.
<PAGE>
40 POWERGEN PLC ANNUAL REPORT 1999
Notes to the Accounts continued
Aggregate goodwill written off directly to the Group profit and loss reserve
totals (pound)16 million (3 January 1999 (pound)16 million).
Profit and
loss account
The Company (pound)m
- ------------------------------------------------------------------ ------------
At 3 January 1999 3
Profit attributable to shareholders 224
Dividends (226)
- ------------------------------------------------------------------ ------------
At 2 January 2000 1
- ------------------------------------------------------------------ ------------
30 Reconciliation of movements in shareholders' funds
<TABLE>
<CAPTION>
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ----------------------------------------------- --------- -------------- -----------
<S> <C> <C> <C>
Profit/(Loss) for the financial year 708 (156) (125)
Shares issued 4 30 27
Dividends (226) (157) (189)
Currency translation differences on foreign
currency net investments 63 (28) (79)
Arising on acquisition 25 -- --
- ----------------------------------------------- --------- -------------- -----------
Net increase/(decrease) in shareholders
funds for the year 574 (311) (366)
Opening shareholders' funds as --------- -------------- -----------
previously stated 1,345 1,656 1,925
Prior year adjustment -- -- 97
--------- -------------- -----------
Opening shareholders' funds as restated
for prior year adjustment 1,345 1,656 2,022
- ----------------------------------------------- --------- -------------- -----------
Closing shareholders funds 1,919 1,345 1,656
- ----------------------------------------------- --------- -------------- -----------
</TABLE>
Closing shareholders' funds include 49,998 limited-voting redeemable preference
shares of (pound)1 fully paid up.
31 Cash flow
a) Reconciliation of operating results to cash flow from operating activities:
<TABLE>
<CAPTION>
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ----------------------------------------------- --------- ------------- ----------
<S> <C> <C> <C>
Operating profit/(loss) 347 (153) 220
Depreciation 263 157 214
Exceptional depreciation -- -- 339
Loss/(Profit) on sale of tangible fixed assets 1 (33) (22)
Loss/(Profit) on sale of investments 4 -- (2)
Goodwill amortisation 68 28 --
(Increase)/Decrease in stocks (6) 13 (8)
Decrease/(Increase) in debtors 34 (124) (79)
(Decrease)/Increase in creditors (725) 528 (91)
(Decrease)/Increase in provisions (13) 40 12
- ----------------------------------------------- --------- ------------- ----------
(27) 456 583
- ----------------------------------------------- --------- ------------- ----------
</TABLE>
The movement in creditors and provisions for the year ended 2 January 2000
includes cash outflows of (pound)553 million (3 January 1999 (pound)12 million,
29 March 1998 (pound)4 million) relating to exceptional charges arising in
previous years.
b) Analysis of changes in net debt in the year:
<TABLE>
<CAPTION>
2 January Non-cash Cash flow Acquisitions Exchange 3 January
2000 changes change (including adjustments 1999
cash and
overdrafts)
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
- --------------------- --------- ----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash at bank
and in hand 28 -- 15 -- -- 13
Overdrafts (37) -- (25) -- -- (12)
- --------------------- --------- ----------- ----------- -------------- ------------- -----------
(9) -- (10) -- -- 1
Debt due after
one year (2,572) 43 (11) (195) 4 (2,413)
Debt due within
one year:
Short-term loans (61) (38) 76 (23) -- (76)
Short-term deposits 618 -- 493 45 -- 80
- --------------------- --------- ----------- ----------- -------------- ------------- -----------
(2,024) 5 548 (173) 4 (2,408)
- --------------------- --------- ----------- ----------- -------------- ------------- -----------
</TABLE>
32 Financial instruments
Financial instruments and risk management
As part of the financing of its normal operating activities, the Group uses a
variety of financial instruments, these may be assets, liabilities or related
commitments, depending on requirements. These instruments are denominated in
sterling or foreign currencies and have various maturities and interest rates.
The Group is exposed to movements in market interest rates and foreign currency
exchange rates. Active steps are taken to manage these risks, both by management
of the portfolio of financial instruments themselves, and by the use of
derivative financial instruments, which are primarily used where there is an
underlying exposure.
The objectives, policies and strategies connected with the use of
financial instruments are discussed in the 'Treasury Management' section of the
Financial Review.
The Group may be exposed to credit related loss in the event of
non-performance by counter-parties under these instruments. However, the Group
does not anticipate any non-performance given the high credit rating of the
established banks and financial institutions that form these counter-parties.
The Group controls this credit risk through credit approvals, strict exposure
limits, monitoring procedures and specific controls depending on the size of
individual transactions. There are no significant concentrations of credit risk.
The Group does not usually require collateral or other security to support
financial instruments with credit risks.
Foreign exchange contracts and options
PowerGen enters into foreign exchange contracts and options in accordance with
its hedging policies. These policies are discussed under 'Foreign exchange risk
management' in the Financial Review. The net Sterling amounts of each foreign
currency PowerGen has contracted to purchase (or sell), and has options to
purchase are as follows:
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 41
Foreign exchange contracts Foreign exchange options
--------------------------- -----------------------------
2 January 3 January 2 January 3 January
2000 1999 2000 1999
Notional Notional Notional Notional
amount amount amount amount
(pound)m (pound)m (pound)m (pound)m
- ---------------------- ------------- ------------- --------------- -------------
US dollars (31) 117 -- --
Portuguese escudos (11) (46) -- --
Deutschmarks 14 10 -- --
Euros (51) -- -- --
French francs -- 3 -- --
Australian dollars (62) -- (12) --
Danish krone -- 2 -- --
- ---------------------- ------------- ------------- --------------- -------------
(141) 86 (12) --
- ---------------------- ------------- ------------- --------------- -------------
At 2 January 2000 PowerGen has contracted to sell Korean won to a value of US
dollars 29 million (3 January 1999 US dollars nil).
The weighted average time to maturity of foreign exchange contracts is
four months.
Foreign currency swaps are entered into with the objective of stabilising
the effect of exchange rate movements and effective Sterling interest rates
applicable to debt. The notional amounts swapped to Sterling are as follows:
2 January 3 January
2000 1999
Notional Notional
amount amount
(pound)m (pound)m
- ---------------------------------------------------------- --------- -----------
Foreign currency swaps 864 582
- ---------------------------------------------------------- --------- -----------
The additional swaps taken out in 1999 principally refer to PowerGen's 500
million Euro Eurobond, issued in July 1999, which was swapped in full to pounds
Sterling.
There are no material monetary assets or liabilities of the Group that are
not denominated in the functional currency of the entity concerned, other than
certain non-sterling borrowings treated as hedges of net investments in overseas
operations.
Interest rate risk management
PowerGen has a portfolio of fixed and floating interest rate debt and, in order
to mitigate interest rate risk, arranges interest rate hedges to achieve a
desired mix of fixed and floating interest rates, with a range of different
maturities, as described in the Financial Review. The instruments used can be
summarised as follows:
2 January 3 January
2000 1999
Notional Notional
amount amount
(pound)m (pound)m
- ---------------------------------------------------------- --------- -----------
Interest rate swap contracts 760 193
- ---------------------------------------------------------- --------- -----------
The weighted average time to maturity of interest rate swap contracts is 3.1
years.
Interest rate risk profile of financial assets and liabilities
<TABLE>
<CAPTION>
Total Floating rate Fixed rate financial activities
financial
liabilities
----------------------------------------
Weighted Weighted
average average
interest period for
rate which rate
is fixed
At 2 January 2000 (pound)m (pound)m (pound)m % Years
- ------------------- -------- --------------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Sterling 2,364 1,110 1,254 7.9 11.0
US dollar 41 17 24 5.1 0.8
Deutschmark 199 167 32 3.6 0.8
Indian rupee 66 -- 66 16.4 1.6
- ------------------- -------- --------------- ----------- ------------- --------------
2,670 1,294 1,376 8.2 10.2
- ------------------- -------- --------------- ----------- ------------- --------------
</TABLE>
The figures in the above table are stated after taking account of relevant
derivative instruments.
The floating rate financial liabilities bear interest at variable rates,
in some cases fixed in advance for periods up to one year.
The floating rates are determined with reference to the following rates:
Currency Rate
- -------------------------------- -----------------------------------------------
Sterling LIBOR
US dollar LIBOR, FIBOR
Deutschmark LIBOR, FIBOR
Indian rupee Banks' Prime Lending Rates
- -------------------------------- -----------------------------------------------
In addition to the above, the Group's provisions include (pound)150 million (3
January 1999 (pound)150 million) for contract provisions (see note 26) which
meet the definition of financial liabilities. These financial liabilities are
considered to be floating rate liabilities as, in establishing the provisions,
the cash flows have been discounted. The discount rate is re-appraised at each
half yearly reporting date to ensure that it reflects current market assessments
of the time value of money and the risks specific to the liability.
At 2 January 2000 the Group held (pound)646 million of financial assets in
the form of Sterling bank deposits (3 January 1999 (pound)93 million). These
deposits earn interest at floating rates, fixed in advance for periods up to
three months, by reference to Sterling LIBID.
Fair Value
The fair value of all these financial instruments, which reflects the estimated
amounts PowerGen would receive or pay to terminate the contracts at the year end
based on market values is shown below. The fair values therefore reflect current
unrealised gains or (losses) on all open contracts.
2 January 3 January
2000 1999
Fair Value Fair Value
(pound)m (pound)m
- ------------------------------------------------------- ---------- ------------
Foreign currency contracts 3 (9)
Foreign currency swaps (49) (5)
Interest rate swaps (22) 10
- ------------------------------------------------------- ---------- ------------
The estimated fair values of the Group's financial assets and liabilities are as
follows:
2 January 2000 3 January 1999
- ------------------------------- ---------------------- ------------------------
Carrying Fair Value Carrying Fair Value
amount amount
Note (pound)m (pound)m (pound)m (pound)m
- ------------------------------- -------- ------------- ---------- -------------
Assets:
Cash and short-term
deposits 1 646 646 93 93
Investments 2 70 71 252 261
Liabilities:
Short-term debt 3 (98) (98) (88) (88)
Long-term debt 4 (2,572) (2,551) (2,413) (2,527)
- ------------------------------- -------- ------------- ---------- -------------
1 The fair value of short-term deposits approximates to carrying value due
to the short maturity of instruments held.
2 The fair value of investments listed on a recognised stock exchange is
estimated at quoted market price. Others are valued at cost.
3 The fair value of short-term debt approximates to the carrying value as
the balance represents short-term loans and bank overdrafts.
4 The fair value of the long-term debt at the reporting date has been
estimated at quoted market rates.
Short term debtors and creditors are not included in these disclosures.
<PAGE>
42 POWERGEN PLC ANNUAL REPORT 1999
Notes to the Accounts continued
The movement in unrecognised gains and losses on instruments used for hedging is
as follows:
Gains Losses Total net
losses
(pound)m (pound)m (pound)m
- --------------------------------------------- -------- ----------- ------------
Unrecognised gains and (losses) on hedges
at 3 January 1999 13 (56) (43)
Gains and (losses) on hedges arising before
previous periods that were recognised
during the year (3) 20 17
- --------------------------------------------- -------- ----------- ------------
Gains and (losses) on hedges arising before
3 January 1999 that were not recognised
during the year 10 (36) (26)
Gains and (losses) on hedges arising during
1999 that were not recognised during the year -- (42) (42)
- --------------------------------------------- -------- ----------- ------------
Unrecognised gains and (losses) on hedges
at 2 January 2000 10 (78) (68)
- --------------------------------------------- -------- ----------- ------------
Of which:
Gains and (losses) expected to be recognised
in 2000 6 (8) (2)
Gains and (losses) expected to be recognised
in 2001 or later 4 (70) (66)
- --------------------------------------------- -------- ----------- ------------
The hedging of translation exposures associated with foreign currency net
investments is however recognised in the balance sheet.
Contracts for differences
Given the variability of pool prices, PowerGen's policy is to enter into Cfds
and direct sales contracts, which effectively fix the price of its expected
output sold through the Pool. PowerGen seeks to achieve a broad match between
the cover provided by these contracts and its expected sales through the Pool,
thereby removing the majority of exposure to movements in pool prices.
PowerGen's direct sales portfolio spans the entire electricity market and
includes industrial, commercial and domestic customers.
PowerGen has a variety of wholesale contract types of varying lengths
(although generally of one year's duration), with a number of Regional
Electricity Companies (RECs), under which PowerGen believes the RECs hedge their
purchases from the Pool to meet their customer electricity demand. These Cfd
sales totalled 32.7TWh for the year to 2 January 2000.
The majority of PowerGen's Cfd contract cover for any particular year is
secured between January and March. Consequently the cover in place, including
direct sales contracts, at the balance sheet date, for the twelve months to
December 2000 equates to around 78% of the Group's expected electricity output.
The gross value of net Cfd sales cover outstanding as at 2 January 2000 was
(pound)307 million.
PowerGen now serves a large number of domestic customers and industrial
and commercial customers in the under 100kW market, acquired through its
purchase of East Midlands Electricity plc, now PowerGen Energy plc, during 1998.
Regulatory constraints require that all of the purchases to back these sales are
made through the wholesale market.
Any estimate of the fair value of the Cfds outstanding at the balance
sheet date must necessarily be based on assumptions of a number of complex
factors, including the level of UK power prices, availability, bidding behaviour
of others within the market place and the appropriate market discount rates.
PowerGen believes that any adjustment to fair-value its Cfd portfolio would not
be material to the Group's financial statements.
These Cfds involve a degree of credit risk, being the risk that the
counterparty to the Cfd defaults on settlement. The Group controls credit risk
arising from holding the Cfds through credit approvals, limits and monitoring
procedures.
Energy based futures
On a limited basis, the Company also purchases and sells energy based futures
contracts for trading purposes. Changes in the market values of these trading
contracts are reflected in income in the period in which the change occurs.
33 Commitments and contingent liabilities
a) At 2 January 2000, the Group had commitments of (pound)198 million (3 January
1999 (pound)372 million) for capital expenditure, of which (pound)18 million (3
January 1999 (pound)147 million) related to expenditure to be incurred after one
year.
b) (i) The Group is aware of claims in respect of current and former employees,
including former employees of the CEGB, and contractors in respect of industrial
illness and injury and other potential claims which involve or may involve legal
proceedings against the Group.
(ii) On the acquisition of East Midlands Electricity plc (now PowerGen
Energy plc) in 1998, PowerGen inherited certain contractual arrangements for the
supply of electricity from third parties. The interpretation of these
contractual arrangements may result in certain future costs to the Group. At 2
January 2000 estimated contingent liabilities in respect of these contractual
arrangements amounted to (pound)100 million.
The directors are of the opinion, having regard to legal advice received,
the Group's insurance arrangements and provisions held, as appropriate, that it
is unlikely that the matters referred to in (i) and (ii) above will, in
aggregate, have a material effect on the Group's financial position, results of
operations or liquidity.
c) The Group has in place a portfolio of fuel contracts of varying volume,
duration and price, reflecting market conditions at the time of commitment.
These contracts are with UK and international suppliers of coal and are backed
by transport contracts for rail, road, canal and sea movements. At 2 January
2000 the Group's future commitments for the supply of coal under all its
contractual arrangements totalled approximately (pound)0.8 billion.
The Group is also committed to purchase gas under various long-term gas
supply contracts including the supply of gas to the Group's three UK CCGT power
stations. At 2 January 2000 the estimated minimum commitment for the supply of
gas under all these contracts totalled approximately (pound)3.6 billion.
d) In the normal course of business the Group gives certain other indemnities
and guarantees which are not considered to be material in the context of these
financial statements and on which no losses are anticipated to arise.
34 Post balance sheet event
On 28 February 2000, PowerGen announced the acquisition of 100% of LG&E Energy
Corp. (LG&E), a vertically integrated electricity and gas utility based in
Louisville, Kentucky in the United States. PowerGen will pay US$24.85 in cash
per ordinary share valuing the equity at US$3,233 million ((pound)2,021 million)
on a fully diluted basis. At 31 December 1999, LG&E had net debt amounting to
US$2,061 million ((pound)1,288 million), and preference shares totalling US$135
million ((pound)85 million). The acquisition will be financed wholly from
available resources. The acquisition is conditional upon the approval of both
companies' shareholders and certain regulatory and other consents in the United
States.
35 Related party transactions
As part of its international activities the Group has contracted on an arms
length basis to provide power station construction management and operation and
maintenance services to certain associated companies. Total revenues during the
year ended 2 January 2000 amounted to (pound)13 million (nine months to 3
January 1999 (pound)7 million). There were no outstanding balances at either
period end.
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 43
Summary of differences between UK and US generally accepted accounting
principles
PowerGen's consolidated financial statements have been prepared in accordance
with UK GAAP which differs in certain significant respects from US GAAP. These
differences relate principally to the following items, and the effect of the
adjustments to net income and equity shareholders' funds which would be required
under US GAAP are set out in the tables below.
a) Pension costs and other post employment benefits
Under UK GAAP, pension costs represent the expected cost of providing pension
benefits to be charged to the profit and loss account so as to spread the cost
over the expected average remaining service lives of employees. Under US GAAP,
the annual pension cost comprises the estimated cost of benefits accruing in the
period adjusted for any deficit or surplus arising at the time Statement Number
87 of the United States Financial Accounting Standards Board (SFAS 87)
Employers' Accounting for Pensions was adopted. The charge is further adjusted
to reflect the cost of benefit improvements and any surpluses/deficits which
emerge as a result of the actuarial assumptions made not being borne out in
practice. For US purposes, only those surpluses/deficits falling outside a 10%
fluctuation 'corridor' are being recognised.
b) Deferred taxation UK GAAP requires provision for deferred taxation only when
it is expected that a liability will become payable or an asset will crystallise
in the foreseeable future and then at the known future rates of tax. US GAAP
requires full provision for deferred taxes to be made using enacted future tax
rates.
c) Severance costs Under UK GAAP, voluntary severance costs for employees
leaving as part of PowerGen's ongoing restructuring programme are accrued and
recognised in the consolidated profit and loss account once the Group is
demonstrably committed to such a programme and implementation has commenced.
Voluntary severance costs include severance payments, payments in lieu of notice
and the costs of providing incremental pension benefits in respect of staff
reductions. Under US GAAP, voluntary termination benefits are generally charged
in the year in which the employees accept the terms under which they will leave
PowerGen's employment. In addition, where the number of employees leaving
results in a significant reduction in the accrual of pension benefits for
employees' future service (a 'curtailment' under SFAS 88), the effects are
reflected as part of the cost of such termination benefits.
d) Capitalisation of interest Under UK GAAP, PowerGen capitalises interest
payable where borrowings are specifically financing the construction of a major
capital project with a long period of development. US GAAP requires that
interest incurred on borrowings, which could have been theoretically avoided
during construction of major capital projects, be included in tangible fixed
assets and depreciated over the lives of the related assets. The amount of
interest capitalised is determined by reference to average interest rates on
outstanding long-term borrowings.
e) Goodwill Under UK GAAP, and US GAAP, goodwill is held as an intangible asset
in the balance sheet and amortised over its useful life. Prior to the adoption
of Financial Reporting Standard 10 'Goodwill and Intangible Assets', from 30
March 1998, under UK GAAP, goodwill arising was written off on acquisition
against retained earnings.
f) Investments Under UK GAAP, investments in securities are accounted for at
purchase cost with provision made for any impairment in value. Under US GAAP,
SFAS 115, Accounting for Certain Investments in Debt and Equity Securities,
requires that certain investments in debt securities and equity securities are
accounted for at fair value.
g) Ordinary dividends Under UK GAAP, ordinary dividends are provided for in the
financial year in respect of which they are recommended by the Board of
Directors for approval by shareholders. Under US GAAP, such dividends and tax
are not provided for until the dividends are formally declared by the Board of
Directors.
h) Employee share option schemes Under US GAAP, a compensation cost is
recognised for the amount by which the quoted market value of the share at the
date of grant exceeds the option price for compensatory plans as defined in APB
25. The cost is accrued over the approximate periods in which employees provide
service to PowerGen in consideration of the grant of options. Under UK GAAP,
SAYE employee share option schemes are specifically exempt from the requirement
to recognise any such compensation cost. There is no compensation cost
associated with other employee share option schemes.
i) Fixed asset impairment US GAAP does not allow the reinstatement of previous
fixed asset impairments. Under UK GAAP, if, after an impairment loss has been
recognised, the recoverable amount of the asset increases, the impairment loss
is reversed.
j) Deferred income As described in note 3 to the financial statements, on 19
July 1999 PowerGen completed the sale of Fiddler's Ferry and Ferrybridge C power
stations to Edison Mission. As part of this transaction, PowerGen is providing
services under a major parts warranty in respect of each station, whereby,
PowerGen will have to pay certain amounts during each of the five years
following the sale should the plant be unavailable during specified periods.
Under UK GAAP, amounts received in advance in respect of the provision of
services under warranty arrangements are taken to deferred income and recognised
in operating income over the period to which the warranty cover relates. Costs
associated with the provision of services under warranty arrangements are
included within operating costs when incurred. Under US GAAP, the Company is
required to reserve for a reasonable estimate of the anticipated warranty
expense. The Company deferred (pound)132 million of the sales proceeds to
reserve for this liability. Direct costs incurred by the Company under the
warranty arrangements will be used to reduce the reserve. The reserve will be
examined and adjusted each year with movements being reflected in the Company's
profit and loss account.
k) Decommissioning costs Under UK GAAP, a fixed asset and related provision is
recognised in respect of the estimated total discounted cost of decommissioning
generating assets. The resulting fixed asset is depreciated on a straight-line
basis, and the discount on the provision is amortised, over the useful life of
the associated power stations. US GAAP requires that a charge is made annually
against profits to accrue for the estimated cost of decommissioning major power
plant.
l) Cash flow statement Under US GAAP, various items would be reclassified within
the consolidated cash flow statement. In particular, interest received, interest
paid (net of interest capitalised), interest on finance leases and taxation
would form part of net cash flows from operating activities. Dividends paid
would be included within net cash flows from financing. Net cash used in
investing activities includes interest capitalised. Under US GAAP, all
short-term debt (including commercial paper and bank overdrafts) would be
included in financing activities.
m) Earnings per share Earnings per share computed in accordance with US GAAP has
been based upon the following number of shares:
<TABLE>
<CAPTION>
2 January 2000 3 January 1999 29 March 1998
- ------------------------------------------------------------------------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Weighted average shares in issue for UK and US GAAP basic earnings 649,552,248 646,651,662 642,002,743
Scrip dividends -- 1,474,315 1,272,449
Share options 3,281,183 3,732,182 4,343,726
- ------------------------------------------------------------------------------------- -------------- --------------- --------------
Weighted average shares in issue for UK and US GAAP diluted earnings 652,833,431 651,888,159 647,618,918
- ------------------------------------------------------------------------------------- -------------- --------------- --------------
</TABLE>
<PAGE>
44 POWERGEN PLC ANNUAL REPORT 1999
Summary of differences between UK and US generally accepted accounting
principles continued
Effect on net income of differences between UK GAAP and US GAAP:
<TABLE>
<CAPTION>
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ---------------------------------------------------- --------- ------------- -----------
<S> <C> <C> <C>
Net income/(loss) under UK GAAP 708 (156) (125)
US GAAP adjustments:
Pension costs 48 49 28
Severance costs (3) (28) 13
Capitalised interest, net of related depreciation 7 1 3
Goodwill amortisation (5) (3) (1)
Share option scheme (1) (1) (1)
Fixed asset impairment 30 (30) --
Deferred income 308 -- --
Decommissioning costs (2) -- --
Taxation effects on the foregoing adjustments (36) (7) (12)
Deferred taxation 71 (9) 139
- ---------------------------------------------------- --------- ------------- -----------
Net income/(loss) under US GAAP 1,125 (184) 44
- ---------------------------------------------------- --------- ------------- -----------
<CAPTION>
pence pence pence
- ---------------------------------------------------- --------- ------------- -----------
<S> <C> <C> <C>
Basic earnings/(loss) per share under US GAAP 173.2 (28.5) 6.9
- ---------------------------------------------------- --------- ------------- -----------
Diluted earnings/(loss) per share under US GAAP 172.3 (28.5) 6.8
- ---------------------------------------------------- --------- ------------- -----------
</TABLE>
Effect on equity shareholders' funds of differences between UK GAAP and US GAAP:
2 January 3 January
2000 1999
(pound)m (pound)m
- --------------------------------------------------------- --------- -----------
Equity shareholders' funds under UK GAAP 1,919 1,345
US GAAP adjustments:
Pension costs 176 128
Severance costs 8 11
Capitalised interest, net of related depreciation 82 75
Goodwill 93 98
Investment(1) 2 10
Dividends 156 92
Fixed asset impairment -- (30)
Deferred income 308 --
Decommissioning costs (2) --
Taxation effects on the foregoing adjustments (85) (49)
Deferred taxation (344) (415)
- --------------------------------------------------------- --------- -----------
Equity shareholders' funds under US GAAP 2,313 1,265
- --------------------------------------------------------- --------- -----------
1 The movement on these adjustments is posted to retained earnings.
Consolidated statement of cash flows
The table below summarises the consolidated cash flow statements as if presented
in accordance with US GAAP, and includes the adjustment to reconcile cash and
cash equivalents under US GAAP to cash under UK GAAP.
<TABLE>
<CAPTION>
Year Nine months Year
ended ended ended
2 January 3 January 29 March
2000 1999 1998
(pound)m (pound)m (pound)m
- ---------------------------------------------------------------------------------------------- --------- -------------- -----------
<S> <C> <C> <C>
Net cash (used in)/provided by operating activities (150) 204 421
Net cash provided by/(used in) investing activities 901 (795) (105)
Net cash (used in)/provided by financing activities (186) 569 (263)
- ---------------------------------------------------------------------------------------------- --------- -------------- -----------
Net increase/(decrease) in cash and cash equivalents 565 (22) 53
Cash and cash equivalents under US GAAP at the beginning of the period 74 96 43
- ---------------------------------------------------------------------------------------------- --------- -------------- -----------
Cash and cash equivalents under US GAAP at the end of the period 639 74 96
Non-cash equivalent components of net debt under UK GAAP at the end of the period 7 19 19
Short-term debt at the end of the period (98) (88) (10)
Long-term debt at the end of the period (2,572) (2,413) (586)
- ---------------------------------------------------------------------------------------------- --------- -------------- -----------
Net debt under UK GAAP at the end of the period (2,024) (2,408) (481)
- ---------------------------------------------------------------------------------------------- --------- -------------- -----------
</TABLE>
There are no significant non-cash investing or financing activities during the
year.
Cash and cash equivalents
US GAAP defines cash and cash equivalents as deposits with banks and financial
institutions that are unrestricted as to withdrawal or use, and which have
original maturities of three months or less.
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 45
Five Year Summary
<TABLE>
<CAPTION>
Year Nine months Year ended March
ended ended --------------------------------------
2 January 2000 3 January 1999 1998 1997 1996
Summarised Profit and Loss Accounts (pound)m (pound)m (pound)m (pound)m (pound)m
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Group turnover 3,746 2,344 2,932 2,898 2,933
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
Group operating profit before exceptionals 640 382 589 592 573
Net income/(loss) from interests in associated undertakings 28 14 5 (19) (26)
Exceptional items 250 (537) (369) 2 121
Net interest payable -- Group (156) (104) (15) (7) (9)
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
Profit/(Loss) before taxation 762 (245) 210 568 659
Taxation, including windfall tax (50) 89 (335) (148) (159)
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
Profit/(Loss) after taxation 712 (156) (125) 420 500
Minority interest (4) -- -- 5 --
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
Profit attributable to shareholders 708 (156) (125) 425 500
Dividends (226) (157) (189) (160) (153)
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
Retained profit/(loss) for the year (6) 482 (313) (314) 265 347
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
Earnings per ordinary share (pence) (1)(2)(3)(4)(5)(6) 73.4 38.8 68.1 63.0 54.1
Dividends per ordinary share (pence) 34.8 24.1 29.0 25.2 21.0
Dividend per ADS ((pound)) 1.39 0.96 1.16 1.01 0.84
Amounts in accordance with US GAAP:
Net income/(loss) for the year 1,125 (184) 44 481 418
Basic earnings/(loss) per ADS (pound) 6.93 (1.14) 0.27 2.86 2.30
</TABLE>
<TABLE>
<CAPTION>
29 March 30 March 31 March
2 January 2000 3 January 1999 1998 1997 1996
Summarised Consolidated Balance Sheets (pound)m (pound)m (pound)m (pound)m (pound)m
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Fixed assets 5,011 4,937 2,676 3,142 3,447
Stocks 127 173 178 170 108
Debtors 733 760 515 486 428
Creditors and provisions (1,863) (2,117) (1,232) (1,121) (1,291)
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
4,008 3,753 2,137 2,677 2,692
Short-term borrowings (98) (88) (10) (132) (280)
Long-term loans (2,572) (2,413) (586) (585) (350)
Short-term deposits 646 93 115 62 296
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
Net borrowings (2,024) (2,408) (481) (655) (334)
Equity minority interests (65) -- -- -- (3)
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
Equity shareholders' funds(6) 1,919 1,345 1,656 2,022 2,355
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
Amounts in accordance with US GAAP:
Shareholders' funds 2,313 1,265 1,632 1,813 2,107
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
Total assets 6,664 6,101 3,493 3,886 4,338
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
Total long-term liabilities 3,493 3,275 1,112 1,313 1,156
- ------------------------------------------------------------- -------------- --------------- ------------ ------------ ------------
</TABLE>
Notes
1 In the year ended 2 January 2000, earnings per ordinary share is based on
profit before goodwill amortisation and exceptional items and after
taxation and minority interests for the financial year of (pound)477
million. Including exceptional items and after goodwill amortisation,
earnings per ordinary share was 109.0 pence.
2 In the nine months ended 3 January 1999, earnings per ordinary share is
based on profit before goodwill amortisation and exceptional items and
after taxation for the financial year of (pound)251 million. Including
exceptional items and after goodwill amortisation, loss per ordinary
share was 24.1 pence.
3 In 1998, earnings per ordinary share is based on profit before exceptional
items and after taxation for the financial year of (pound)437 million.
Including exceptional items, loss per ordinary share for 1998 was 19.5
pence.
4 In 1997, earnings per ordinary share is based on profit before exceptional
items and after taxation and minority interests for the financial year of
(pound)423 million. Including exceptional items, earnings per ordinary
share for 1997 was 63.3 pence.
5 In 1996, earnings per ordinary share is based on profit before exceptional
credits and after taxation for the financial year of (pound)393 million.
Including exceptional credits, earnings per ordinary share for 1996 was
68.8 pence.
6 Retained profit/(loss) for the year, earnings per share and equity
shareholders' funds for the three years ended March 1998 were restated
following the adoptions of Financial Reporting Standard 12 from 30 March
1998.
<PAGE>
46 POWERGEN PLC ANNUAL REPORT 1999
Shareholder Information
Shareholder Profile
as at 24 February 2000
No. of % of total No. of ordinary % of issued
shareholders shareholders shares capital
- ---------------------- ------------ ------------- ----------------- ------------
1-- 250 592,636 79.99 78,609,006 12.09
251-- 750 126,125 17.02 49,699,588 7.64
751-- 1,000 8,546 1.15 7,563,331 1.16
1,001-- 10,000 12,371 1.67 28,611,150 4.40
10,001-- 30,000 528 0.07 8,897,229 1.37
30,001-- 100,000 290 0.04 16,499,754 2.54
100,001-- 500,000 272 0.04 60,630,303 9.33
500,001--1,000,000 54 0.01 38,273,898 5.89
1,000,001--and above 81 0.01 361,307,772 55.58
- ---------------------- ------------ ------------- ----------------- ------------
740,903 100 650,092,031 100
- ---------------------- ------------ ------------- ----------------- ------------
Financial Calendar
- --------------------------- ----------------------------------------------------
13 March 2000 Shares go ex dividend
5.00 pm 17 March 2000 Record date for dividend
10 May 2000 1999 Second Interim Dividend paid
11.00 am 5 June 2000 AGM at The ICC, Birmingham
6 September 2000 2000 interim results announcement and announcement
of 2000 Interim Dividend
18 September 2000 Shares go ex dividend
5.00 pm 22 September 2000 Record date for dividend
3 November 2000 2000 Interim Dividend paid
- --------------------------- ----------------------------------------------------
Dividend Re-Investment Plan (DRIP)
PowerGen is offering a Dividend Re-Investment Plan (DRIP) to shareholders,
operated by our Registrars, Computershare Services PLC. Full details of the
Plan, which uses shareholders' dividends to purchase extra shares to be added to
their holdings, are set out in the Chairman's letter to all shareholders, which
accompanies this report. A small commission will be charged for the service.
To participate in the DRIP, please follow the instructions set out in the
letter. The Mandate Form should be returned before 5 April 2000 in order to
participate in the DRIP for the forthcoming dividend. Please note that mandates
for the former Scrip dividend scheme will NOT be carried over automatically.
Alternatively, details may be obtained from the Registrars at the address shown
below under 'Shareholder Enquiries'.
Company Nominee Service
PowerGen offers a Company Nominee Service, which is likely to be of most
interest to private investors who deal frequently in the Company's shares -- say
more than twice a year.
The key features of the Company Nominee Service are:
o shares are held in a nominee account, and regular statements of account
are provided, rather than share certificates;
o it provides a facility to allow shareholders to deal in PowerGen shares
rapidly and cost effectively through the CREST electronic settlement
system;
o the benefits of direct shareholding are retained, such as prompt payment
of dividends, a copy of the Annual Review, and attendance and voting at
the Annual General Meeting;
o the Nominee Service is provided at no cost to the shareholder. However, if
the facility to deal in PowerGen shares is used, charges are payable.
Basic commission is 1 per cent with a (pound)10 minimum charge.
Full details of the Company Nominee Service may be obtained from the Registrar
at the address shown below under 'Shareholder Enquiries'.
<PAGE>
POWERGEN PLC ANNUAL REPORT 1999 47
Low Cost Share Dealing Service
A simple and economic way of buying or selling certificated shareholdings is
still available through Hoare Govett. This is a postal dealing service, with a
basic 1 per cent commission subject to a minimum charge of (pound)10. Full
details may be obtained from Pershing Securities on 020 7661 6616 (Purchases) or
020 7661 6617 (Sales).
Dividend History
To assist shareholders with the completion of their tax returns, a dividend
history is set out below:
Payment Date Net amount per share Scrip: Price of New Share
- --------- ---------------- ----------------------- -----------------------------
1 21 October 1991 5.55p --
2 27 March 1992 3.05p --
3 19 October 1992 6.20p 261.0p
4 26 March 1993 3.35p 294.2p
5 31 March 1993 7.15p --
6 12 November 1993 3.95p 417.0p
7 29 July 1994 8.70p 465.6p
8 20 December 1994 5.00p 550.6p
9 28 July 1995 10.00p 498.0p
10 20 December 1995 6.50p 531.8p
11 31 July 1996 14.50p 485.0p
12 20 December 1996 7.80p 579.1p
13 31 July 1997 17.40p 658.5p
14 31 December 1997 9.00p 781.6p
15 31 July 1998 20.00p 776.8p
16 8 December 1998 10.00p --
17 13 May 1999 14.10p --
18 29 October 1999 10.80p --
- --------- ---------------- ----------------------- -----------------------------
Capital Gains Tax: The price paid for the Company's Ordinary share at certain
key events is listed below:
Event Date Price paid per share
- -------------------------------- -------------------------- --------------------
Flotation: First Instalment 12 March 1991 100p
Flotation: Second Instalment* 4 February 1992 75p
40% Sale: First Instalment 6 March 1995 185p
40% Sale: Second Instalment* 6 February 1996 185p
40% Sale: Third Instalment* 17 September 1996 142p
- -------------------------------- -------------------------- --------------------
* An instalment discount incentive was available under both offers, which
offered a reduction on the instalments shown to shareholders who elected
for that incentive.
The market price of the Company's ordinary share on the issue of the bonus
shares was:
Event Date Market price paid per share
- ----------------------------- ---------------------- ---------------------------
Flotation: Bonus Shares 31 March 1994 538.5p
40% Sale: Bonus Shares 31 March 1998 835.5p
- ----------------------------- ---------------------- ---------------------------
<PAGE>
48 POWERGEN PLC ANNUAL REPORT 1999
Shareholder Information continued
Shareholder Enquiries
Enquiries on your shareholding should be made to the Registrar at the following
address:
Computershare Services PLC, P0 Box 96, The Pavilions,
Bridgwater Road, Bristol BS99 7ZG
Telephone: 0870 702 0103 (Calls charged at National Rate)
Fax: 0870 703 6119
General enquiries on the Company should be made to the Company Secretary at:
PowerGen plc, 53 New Broad Street, London EC2M 1SL
Telephone: 020 7826 2826
Fax: 020 7826 2890
Enquiries on ADR holdings should be made to the Depositary for American
Depositary Receipts:
Bank of New York, Attention ADR Department,
101 Barclay Street, New York, NY 10286, USA
Telephone: (800) 524 4458 toll free.
Unsolicited Mail
The Share Register is a public document under the law, and some shareholders may
have received unsolicited mail from other organisations taking advantage of this
situation. If you wish to limit the amount of such mail, please write to the
Mailing Preference Service, FREEPOST 22, London W1E 7EZ. You may still however
receive mail from organisations which do not subscribe to this service.
Telephone information service
For a short commentary on PowerGen's business together with the latest share
price, telephone 0839 505900 (calls charged at 50p/min at all times, including
VAT).
PowerGen plc
53 New Broad Street, London EC2M 1SL
Registered in England and Wales
No. 3586615
Internet Website address:
www.powergen.co.uk
<PAGE>
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