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File No. 70-9671
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
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 sarl P.O. Box 32030
Powergen Luxembourg Holdings Louisville, Kentucky 40232
sarl
Powergen Luxembourg Louisville Gas and Electric Company
Investments sarl 220 West Main Street
Powergen US Partnership P.O. Box 32010
Powergen US Investments Louisville, Kentucky 40232
Corp.
53 New Broad Street Kentucky Utilities Company
London EC2M 1SL One Quality Street
United Kingdom Lexington, KY 40507
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(Name of company filing this statement and
address of principal executive offices)
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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 General Counsel Sullivan & Cromwell
Powergen plc 125 Broad Street
53 New Broad Street New York, NY 10004
London EC2M 1JJ Telephone: 212-558-4000
United Kingdom Facsimile: 212-558-3588
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
John R. McCall Facsimile: 202-424-7643
Executive Vice President,
General Counsel and
Secretary Peter D. Clarke
LG&E Energy Corp. Debra J. Schnebel
220 West Main Street Gardner, Carton & Douglas
Louisville, Kentucky 40232 321 North Clark Street
Telephone: 502-627-3665 Suite 3400
Facsimile: 502-627-4622 Chicago, Illinois 60610
Telephone: 312-245-8685
Facsimile: 312-644-3381
(Names and addresses of agents for service)
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Certain Defined Terms
1. "Applicants" means Powergen, the Intermediate Companies, LG&E Energy,
Louisville Gas and Electric Company, Kentucky Utilities Company, LG&E
Capital Corp., LG&E Energy Marketing Inc., and LG&E Power Inc.
2. "Powergen" means Powergen plc.
3. "Powergen System" means Powergen and all of its direct and indirect
subsidiary companies.
4. "US Holdings" means Powergen US Holdings Limited.
5. "Intermediate Companies" means Powergen US Holdings Limited, Powergen US
Investments Limited, Ergon US Investments Limited, Powergen Luxembourg
sarl, Powergen Luxembourg Holdings, sarl, Powergen Luxembourg Investments,
sarl, Powergen US Partnership, and Powergen US Investments Corp.
6. "U.S. Subsidiary Companies" means the Intermediate Companies, LG&E Energy,
and the LG&E Energy Subsidiary Companies.
7. "LG&E Energy Group" means LG&E Energy and the LG&E Energy Subsidiary
Companies.
8. "LG&E Energy" means LG&E Energy Corp.
9. "LG&E Energy Subsidiary Companies" means the subsidiary companies of LG&E
Energy.
10. "U.S. Utility Subsidiaries" means Louisville Gas and Electric Company,
Kentucky Utilities Company, and Electric Energy, Inc.
11. "U.S. Non-Utility Subsidiaries" means the subsidiaries of LG&E Energy,
other than the U.S. Utility Subsidiaries.
12. "LG&E Services" means LG&E Energy Services, Inc., a company to be approved
as a service provider under Section 13 of the Act.
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TABLE OF CONTENTS
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Item 1. Description of the Proposed Merger and Financing Request....................................................... 8
A. Introduction.............................................................................................. 8
1. General Request...................................................................................... 8
2. Overview of the Merger............................................................................... 9
B. Description of the Parties to the Merger.................................................................. 11
1. Powergen............................................................................................. 11
2. LG&E Energy.......................................................................................... 15
C. Description of the Merger................................................................................. 20
1. Background........................................................................................... 20
2. Merger Agreement..................................................................................... 22
3. Corporate Structure for the Merger................................................................... 22
4. Financing the Merger................................................................................. 23
D. Operations and Management of Powergen and LG&E Energy Following the Merger................................ 24
1. Powergen............................................................................................. 24
2. LG&E Energy.......................................................................................... 25
E. Industry Restructuring Initiatives Affecting U.S. Operations.............................................. 25
F. Request for Authorization of Proposed Financings.......................................................... 27
Item 2. Fees, Commissions and Expenses................................................................................. 27
Item 3. Applicable Statutory Provisions................................................................................ 28
A. Legal Analysis of the Merger.............................................................................. 29
1. Section 10(b)........................................................................................ 31
a. Section 10(b)(1)................................................................................ 31
i. Interlocking Relationships................................................................. 31
ii. Concentration of Control................................................................... 32
b. Section 10(b)(2)................................................................................ 34
i. Fairness of Consideration.................................................................. 34
ii. Reasonableness of Fees..................................................................... 36
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c. Section 10(b)(3)................................................................................ 37
i. The presence of debt at more than one level of the Powergen System does not
"unduly complicate" the capital structure of the Powergen System for purposes of
Section 10(b)(3) .......................................................................... 41
ii. The Merger will not be detrimental to the public interest or the interest of
investors or consumers or the proper functioning of the registered holding
company system ............................................................................ 45
2. Section 10(c)........................................................................................ 45
a. Section 10(c)(1)................................................................................ 46
i. Section 8 Analysis......................................................................... 46
ii. Section 11 Analysis - Integration.......................................................... 46
iii. Section 11 Analysis - Retention of Gas Utility System...................................... 53
iv. Retention of "Other Businesses"............................................................ 59
v. The Merger will satisfy the requirements of Section 11(b)(2), as incorporated by
Section 10(c)(1)........................................................................... 60
b. Section 10(c)(2)................................................................................ 66
i. Benefits to customers, employees and shareholders.......................................... 66
ii. Strategic benefits......................................................................... 67
3. Section 10(f)........................................................................................ 70
B. Proposed Financings....................................................................................... 70
1. Introduction and General Request..................................................................... 70
2. Specifics of Proposed Financing Arrangements......................................................... 76
a. Powergen and US Holdings
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External Financing.............................................................................. 76
b. Intermediate Company Financings................................................................. 82
i. General Request............................................................................ 82
ii. Loans from Powergen UK (or Powergen Group Holdings, if applicable) to US Holdings.......... 83
c. Powergen Capital and Luxembourg Securities...................................................... 83
d. LG&E Energy Group Financings.................................................................... 85
i. External Financings........................................................................ 85
(A) LG&E Energy........................................................................... 85
(B) U.S. Utility Subsidiary Financing..................................................... 86
(C) U.S. Non-Utility Subsidiary Financings................................................ 87
ii. Intra-System Financings.................................................................... 88
(A) Inter-Company Loans................................................................... 88
(B) Money Pools........................................................................... 89
(C) Other Financings...................................................................... 94
e. Guarantees...................................................................................... 94
i. Guarantees by Powergen and US Holdings..................................................... 94
ii. Existing Guarantees of the LG&E Energy Group............................................... 95
iii. Additional Guarantees of
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the LG&E Energy Group during the Authorization Period........................................... 95
f. Interest Rate and Currency Risk Management...................................................... 96
g. Acquisition, Redemption, or Retirement of Securities............................................ 96
h. Financing Entities.............................................................................. 97
i. Receivables Factoring Program................................................................... 98
j. LG&E Energy Intermediate Subsidiaries........................................................... 101
k. Reorganization Authority........................................................................ 103
l. EWG/FUCO-Related Financings..................................................................... 104
C. Reporting............................................................................................ 110
1. Requests for Exemption.......................................................................... 110
2. Form U5S........................................................................................ 111
3. Rule 24 Certificates of Notification............................................................ 112
D. Payment of Dividends Out of Capital and Unearned Surplus............................................. 113
1. Powergen and U.S. Subsidiary Companies.......................................................... 113
2. U.S. Non-Utility Subsidiaries................................................................... 114
E. Approval of New Tax Allocation Agreement............................................................. 116
F. Section 13 - Intra-System Provision of Goods and Services............................................ 117
1. Interaction with FERC Policy.................................................................... 118
2. Scope of Service................................................................................ 119
3. Allocation of Service Costs Among Members of the LG&E Energy Group.............................. 122
4. Calculation of Service Costs.................................................................... 123
5. Billing......................................................................................... 125
6. Restriction on Amendments....................................................................... 125
7. Approval of LG&E Services....................................................................... 126
G. Other Statutory Provisions........................................................................... 127
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1. Sections 14 and 15 -- Jurisdiction................................................................... 127
2. Section 33 -- Foreign Utility Companies.............................................................. 127
3. Sections 3(a)(1) and 3(a)(2) - Exemption from Registration........................................... 129
Item 4. Regulatory Approvals........................................................................................... 134
I. Merger Approvals............................................................................................... 134
A. Antitrust................................................................................................. 134
B. Federal Power Act......................................................................................... 134
C. Exon-Florio............................................................................................... 135
D. State Regulatory Approval................................................................................. 136
E. U.K. Notice Requirements.................................................................................. 136
II. Financing Approvals............................................................................................ 137
Item 5. Procedure...................................................................................................... 137
Item 6. Exhibits and Financial Statements.............................................................................. 138
A. Exhibits.................................................................................................. 138
B. Financial Statements...................................................................................... 142
Item 7. Information as to Environmental Effects........................................................................ 143
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This Pre-effective Amendment No. 2 amends and restates in its entirety the
Application/Declaration on Form U-1 in this proceeding, originally filed with
the Securities and Exchange Commission on April 26, 2000 (File No. 70-9671),
with the exception that it does not replace exhibits previously filed, except
for Exhibits B-2, C-4, F-3.1 and F-3.2 which are replaced hereby.
Item 1. DESCRIPTION OF THE PROPOSED MERGER AND FINANCING REQUEST
A. Introduction
This Application-Declaration (the "Application") seeks approvals relating
to the proposed acquisition of LG&E Energy by Powergen pursuant to which all of
the companies comprising the LG&E Energy Group will become indirect subsidiaries
of Powergen ("the Merger"). Following consummation of the Merger, Powergen and
each of the Intermediate Companies propose to register with the Securities and
Exchange Commission (the "Commission") as holding companies under Section 5 of
the Public Utility Holding Company Act of 1935, as amended (the "Act" or the
"1935 Act")/1/ The LG&E Energy Group will become part of Powergen's registered
system. LG&E Energy and one of LG&E Energy's utility subsidiaries, Kentucky
Utilities Company ("KU"), are currently exempt holding companies under Sections
3(a)(1) and 3(a)(2), respectively, of the Act and intend to retain that status
following the Merger. However, as subsidiaries of a registered holding company,
LG&E Energy and the LG&E Energy Subsidiary Companies will be subject to full
regulation under the Act.
1. General Request
Pursuant to Sections 9(a)(2) and 10 of the Act, the Applicants hereby
request authorization and approval of the Merger, whereby Powergen will become
the indirect
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/1/ The Intermediate Companies either have been or will be formed prior to the
consummation of the Merger. They have been added to this Application to enable
the Commission to issue a notice. The Intermediate Companies will require the
approval of their respective Boards of Directors to engage in the activities
contemplated by this filing.
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owner of 100% of the common stock of Louisville Gas and Electric Company
("LG&E") and KU, 20% of the common stock of Electric Energy, Inc. ("EEI") and
7.4% of the common stock of Ohio Valley Electric Company ("OVEC"), each of which
is a public-utility company under the Act. The Applicants also request that the
Commission approve (i) using a corporate structure similar to that approved for
The National Grid Group plc ("National Grid"), the acquisition and retention by
Powergen of LG&E Energy's non-utility activities, businesses, and investments
and the retention of Powergen's existing non-utility activities, businesses, and
investments; (ii) certain Merger-related financing matters, including exempt
wholesale generator ("EWG")/foreign utility company ("FUCO") treatment similar
to that allowed for National Grid; (iii) certain existing financing arrangements
of the LG&E Energy Group; (iv) certain financing matters relating to the
Powergen System and the LG&E Energy Group after the Merger; (v) if necessary,
permitting Powergen and the U.S. Subsidiary Companies to pay dividends out of
paid-in capital; (vi) permitting the U.S. Non-Utility Subsidiaries to pay
dividends out of paid-in capital as described below; (vii) permitting Powergen
to provide to the Commission financial and other information on the bases and in
the form provided for herein; (viii) a tax allocation agreement; (ix) the
establishment of a service company subsidiary; and (x) adoption of service
company agreements.
The Applicants note that this Application is based on substantially the
same pertinent facts under the Act and seeks substantially the same
authorizations under the Act recently granted by the Commission in The National
Grid Group plc, Holding Co. Act Release No. 27154 (March 15, 2000) (the
"National Grid Order").
2. Overview of the Merger
Pursuant to an Agreement and Plan of Merger, dated as of February 27, 2000
(the "Merger Agreement"), among LG&E Energy, Powergen, a Delaware corporation to
be formed as an indirect wholly-owned subsidiary of Powergen ("Powergen US
Investments Corp."), and a Kentucky corporation to be formed as a direct wholly-
owned subsidiary of Powergen US Investments Corp., LG&E Energy will become an
indirect, wholly-owned subsidiary of Powergen. The proposed corporate
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structure of Powergen after the Merger is discussed in more detail in Item 1,
Section C.3 and Item 3, Section A.2.a.v below.
As consideration for each common share, without par value, of LG&E Energy
outstanding at the time of the Merger, the LG&E Energy shareholders will receive
$24.85 per share in cash. The LG&E Energy shareholders will not receive any
stock consideration in the Merger and they will not retain any equity interest
in LG&E Energy.
In addition to providing substantial value to LG&E Energy shareholders, the
Merger will produce benefits to the public interest and to customers in Kentucky
and Virginia, as well as to the employees of LG&E Energy Group, by combining a
company with demonstrated expertise in operating coal-fired generation
facilities and in operating in an increasingly deregulating environment with a
company that has among the lowest retail electric rates in the nation and owns
substantial coal-fired generation facilities.
For LG&E Energy Group employees, the Merger provides significant
opportunities as LG&E Energy will become the U.S. base of operations for a large
international entity. Powergen wants to expand its operations in the United
States, which should bring additional opportunities for employees. The Merger
gives LG&E Energy Group and its employees the opportunity to remain at the
forefront of an increasingly competitive U.S. electric industry. For the
Commonwealth of Kentucky, the Merger also provides significant benefits, as the
Commonwealth of Kentucky retains its good corporate citizen, LG&E Energy, at its
Kentucky headquarters with numerous jobs in the Commonwealth of Kentucky.
After the Merger, LG&E Energy will have the financial, technical, and
managerial capabilities needed to provide efficient customer service to its
utility customers. LG&E and KU customers should benefit from the Merger through
improved service quality and operating efficiencies resulting from reciprocal
adoption of best practices by Powergen and LG&E Energy throughout their
respective operations. For example, customers should benefit from Powergen's
significant expertise in electric power generation, which is necessary for an
efficient power supply market. Customers also should benefit from Powergen's
size and the size of the
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Powergen System following the Merger. Powergen's significantly larger scale,
in financial and operational terms, should enhance the ability of LG&E and
KU to use new developments in generation, transmission and distribution
technology, information systems, and capital markets, where these can be seen to
bring economic benefit. Customers also should benefit from the enhanced ability
of the larger enterprise to attract and retain excellent managers by offering
opportunities to participate in a leading international energy business.
The Merger is subject to approval by the shareholders of LG&E Energy and
Powergen, which has been received. The Applicants have received approval from
the Federal Energy Regulatory Commission (the "FERC")/2/, the Kentucky Public
Service Commission (the "Kentucky Commission"), and the Virginia State
Corporation Commission (the "Virginia Commission"). The Federal Trade Commission
has also granted LG&E Energy and Powergen early termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"). On June 5, 2000, Applicants notified the Tennessee
Regulatory Authority ("Tennessee Commission") of the Merger. The Commission has
advised Powergen that the Commission is seeking letters from each of the
affected state commissions certifying that the state commission has the
authority and resources to protect ratepayers. In addition, Applicants are
seeking clearance for the Merger by the Committee on Foreign Investments in the
United States under the Exon-Florio provisions of the Omnibus Trade and
Competitiveness Act of 1988. Finally, the proposed acquisition constitutes a
merger that could be investigated by the U.K. Competition Commission under the
United Kingdom's Fair Trading Act of 1973, although Powergen does not believe
that the Merger will have any impact on competition in the United Kingdom and
therefore does not anticipate that any issues will be raised.
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/2/ Powergen plc, 91 FERC (June 29, 2000) (the "FERC Order").
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B. Description of the Parties to the Merger
1. Powergen
Powergen, through its subsidiaries, is a leading integrated gas and
electricity company in the United Kingdom with significant investments in
utility operations outside the United Kingdom and United States. Powergen is the
parent holding company that was formed in 1998 following a corporate
reorganization, whereby Powergen UK plc ("Powergen UK") became a first-tier,
wholly-owned subsidiary of Powergen. Powergen's only business is as a holding
company and it conducts its business through two direct subsidiaries: Powergen
UK and US Holdings./3/ A chart showing Powergen and its subsidiaries is attached
hereto as Exhibit F-1.1.
Powergen UK is a public limited company formed under the laws of England
and Wales. It is the principal operating company of Powergen and was created as
a result of the privatization and restructuring of the British electricity
industry in 1990. Powergen UK's primary businesses are generation and
distribution of electricity. It also is involved, either directly or through its
subsidiaries or investment interests, in the transportation, marketing and
delivery of natural gas, and the development and operation of combined heat and
power plants (i.e., cogeneration) and renewable energy facilities (e.g., wind
farms)./4/ The business of Powergen UK is described in further detail below.
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/3/ Powergen presently intends to establish a new unlimited liability holding
company between Powergen plc and Powergen UK, to be called Powergen Group
Holdings ("Powergen Group Holdings"). This is to permit Powergen International
Limited (the holding company for all of Powergen's current overseas investments)
to become a sister company, rather than a subsidiary, of Powergen UK (which
conducts Powergen's U.K. businesses) while at the same time creating a single
FUCO company with ownership of all FUCO businesses, except for those in the LG&E
Energy Group.
/4/ Prior to consummation of the Merger, Powergen UK (or Powergen Group
Holdings, if applicable) will file notification of FUCO status to qualify as a
FUCO within the
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US Holdings is a corporation formed under the laws of England and Wales and
will enter into financing arrangements as described herein.
Powergen has one other direct subsidiary, Powergen Share Scheme Trustee
Limited ("Share Trustee"). Share Trustee is a trust company and a wholly owned
subsidiary of Powergen that operates a Qualifying Employee Share Trust
("QUEST"). The purpose of the QUEST is to provide a tax efficient method of
issuing ordinary shares under the Powergen ShareSave Scheme (the "ShareSave
Scheme"), a stock-based savings plan for all U.K. employees. Use of the
sharesave scheme and the QUEST permits Powergen to secure a corporate tax
deduction for the difference between the market value of the issued ordinary
shares and the amount required to be paid by the employees./5/ This arrangement
is similar to that approved by the Commission in the National Grid Order.
Powergen intends to establish two additional subsidiaries in connection
with the financing arrangements for the Merger. One company will be a direct
subsidiary of Powergen (referred to herein as "Powergen Capital"); the other
company (referred to herein as "Luxembourg Securities") will be a subsidiary of
Ergon Investments Limited. The business purposes of each of Powergen Capital and
Luxembourg Securities are described below in Item 3, Section B.2.c.
Powergen UK owns and operates nine power stations located in England and
Wales, which together are capable of generating approximately 10,000 Megawatts
("MW"). It is one of the largest of over 30 generators competing in the
________________
meaning of Section 33 of the Act. The Applicants expect that Powergen UK
(or Powergen Group Holdings) will retain this status following the Merger.
/5/ This tax benefit is not available in the case of U.S. employees and,
accordingly, U.S. employees will not participate in this arrangement, although
Powergen anticipates that it will establish separate employee benefit programs
for its U.S. employees, which will offer benefits generally similar to that
offered to U.K. employees under the ShareSave Scheme program.
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United Kingdom's "electricity pool" through which wholesale electric power is
traded.
Powergen UK conducts most of Powergen's retail business in the United
Kingdom. Powergen UK has been a significant participant in the United Kingdom's
competitive industrial and commercial gas and electricity markets for most of
the past decade. Powergen UK has been the leading supplier in the United Kingdom
of electricity and gas to industrial and commercial customers since 1992, and
now supplies over 25,000 electricity sites and 25,000 gas sites. The acquisition
of East Midlands Electricity plc (which has now been renamed Powergen Energy,
plc) provided access to the mass market (domestic) electricity customers and
(via Powergen Retail Gas Limited) to the mass market (domestic) gas customers.
In total, including Powergen Energy, plc, described further below, Powergen UK's
retail business now supplies electricity and gas to some 2.6 million customer
accounts and has the objective of supplying 5 million customers by 2002. In
addition, Powergen UK has secured the right to sell electricity in the newly
opened electricity market in Northern Ireland.
The significant subsidiaries of Powergen UK are described below:
(a) Powergen Energy, plc, a direct, wholly-owned subsidiary of Powergen
UK, is an electricity distribution company which supplies some 2.3 million
residential and business customers. Powergen Energy is the third largest
regional electricity company in England and Wales with a service territory
covering a 16,000 square kilometer area. It operates a distribution network of
over 67,000 kilometers of overhead lines and underground cables together with
utility connections and metering services.
(b) Through its wholly-owned subsidiaries Powergen CHP Limited and
Powergen CoGeneration Limited, Powergen UK is the United Kingdom's leading
developer and operator of combined heat and power plants, known as cogeneration
in the United States. Powergen CHP Limited and Powergen CoGeneration Limited
construct and operate power plants that provide electricity and heat or steam to
industrial and commercial customers. Plant investments currently represent a
capacity of 896 MW electric and 1,300 MW thermal.
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(c) Powergen Energy Trading Limited, a direct, wholly-owned subsidiary of
Powergen UK, undertakes trading of electricity, gas and oil in seven energy
trading markets in the United Kingdom and Europe.
(d) Powergen Energy Solutions Limited, a direct, wholly-owned subsidiary
of Powergen UK, provides tailored energy service products and advice to
customers.
(e) Powergen UK indirectly owns a 50% interest in Powergen Renewables
Holdings Limited, a renewable energy business developing onshore and offshore
wind farms. Powergen Renewables has 11 operational sites and is continuing to
expand activities in the United Kingdom and Ireland. This interest is owned by
Powergen Investments Ltd., a direct subsidiary of Powergen UK.
(f) Powergen Gas Limited, a direct, wholly-owned subsidiary of Powergen
UK, operates Powergen UK's natural gas pipelines in the United Kingdom.
(g) Through its wholly-owned subsidiary, Powergen International Limited,
Powergen UK is a leading independent power project developer. Powergen
International Limited is involved in 11 power projects, either operational or
under development, in Europe, India, and Asia Pacific, totaling more than 8,000
MW in generating capacity of which Powergen's equity interest represents over
3,000 MW.
(h) Powergen UK also directly owns 100% of a captive insurance company
(Ergon Insurance Limited) and a 50% interest in a company (Cottam Development
Centre Limited) engaged in the construction and operation of a gas fired power
station and the operation of a generator turbine testing facility, both of which
are located in Cottam, Nottinghamshire, England.
Powergen's ordinary shares are listed on the London Stock Exchange ("LSE")
and Powergen's American Depositary Shares ("ADSs") are listed on the New York
Stock Exchange, Inc. ("NYSE"). Powergen, including its predecessor company, has
been since 1995 a reporting company under the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and has filed reports with the
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Commission in accordance with the requirements of the 1934 Act applicable to
foreign private issuers.
More detailed information concerning Powergen and its subsidiaries is
contained in Powergen's Annual Report on Form 20-F for the year ended January 2,
2000, which is incorporated by reference as Exhibit I-1.
2. LG&E Energy
LG&E Energy was incorporated under the laws of the Commonwealth of Kentucky
in 1989. It is a holding company exempt from regulation by the Commission under
the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the
Act and by order of the Commission in LG&E Energy Corp., Holding Co. Act Release
No. 26866, 67 S.E.C. 107 (April 30, 1998). LG&E Energy has five direct
subsidiaries: LG&E, KU, LG&E Energy Foundation, Inc., LG&E Energy Marketing
Inc., and LG&E Capital Corp. LG&E and KU are public utility companies under the
Act. Each of these subsidiaries is described below.
(i) LG&E is engaged primarily in the generation, transmission and
distribution of electricity to approximately 366,000 customers in Louisville and
adjacent areas in Kentucky. LG&E's service area covers approximately 700 square
miles in 17 counties in Kentucky and has an estimated population of one million.
LG&E also purchases, distributes and sells natural gas to approximately 295,000
customers within this service area and in limited additional areas. Included
within LG&E's service area is the Fort Knox Military Reservation, to which LG&E
transports gas and provides electric service, but which maintains its own
distribution systems. Maps of the electric and gas service areas of LG&E are
filed as Exhibits E-1 and E-2, respectively.
Retail sales rates, services and other aspects of LG&E's electric and gas
retail operations are subject to the jurisdiction of the Kentucky Commission.
The Kentucky Commission also possesses regulatory authority over aspects of
LG&E's financial activities including security issuances, property transfers
when the asset value is in excess of $100,000, and mergers with other utilities.
The FERC has jurisdiction under the FPA over certain of the electric
utility facilities and operations, transmission
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in interstate commerce, wholesale sale of power and related transactions and
accounting practices of LG&E, and in certain other respects.
LG&E owns 4.9% of the common stock of 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 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. All of the
electricity sold by OVEC and IKEC is sold either to the U.S. Department of
Energy or to the owners of the stock of OVEC (or their subsidiaries, all of
which are utility companies). OVEC and IKEC do not sell electricity to private
consumers and do not have any securities outstanding in the hands of the public.
For each of the three years in the period ended December 31, 1999, LG&E derived
less than 0.2% of its net income from its share of the earnings of OVEC. See, In
the Matter of Ohio Valley Electric Corporation, Holding Co. Act Release No.
11578, 34 S.E.C. 323 (Nov. 7, 1952).
(a) KU is engaged in producing, transmitting, and selling electric energy
to approximately 458,000 customers in over 600 communities and adjacent suburban
and rural areas in 77 counties in central, southeastern and western Kentucky,
and to about 29,000 customers in 5 counties in southwestern Virginia. In
Virginia, KU operates under the name Old Dominion Power Company. KU also sells
electric energy at wholesale for resale to 12 municipalities in Kentucky and one
municipality in Pennsylvania. A map of the electric service area of KU is filed
as Exhibit E-1.
The territory served by KU has an aggregate population estimated at
approximately one million. The largest city served is Lexington, Kentucky. The
population of the metropolitan Lexington area is estimated at about 225,000.
The populations of the next 10 largest cities served at retail range from about
21,000 to 9,000. The territory served includes most of the Bluegrass Region of
central Kentucky and parts of the coal mining areas in southeastern and western
Kentucky and southwestern Virginia.
KU is subject to the jurisdiction of the Kentucky Commission and the
Virginia Commission as to retail rates and service, accounts, issuance of
securities, and in other
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respects. The FERC has jurisdiction under the FPA over certain of the electric
utility facilities and operations, wholesale sale of power and related
transactions and accounting practices of KU, and in certain other respects. By
reason of owning and operating a small amount of electric utility property in
one county in Tennessee (having a book value of about $251,000) which serves
five customers, KU may also be subject to the jurisdiction of the Tennessee
Commission as to retail rates, accounts, issuance of securities and in other
respects.
KU owns 2.5% of the common stock of OVEC, which company is described above.
KU also owns 20% of EEI. EEI provides electric energy to a uranium enrichment
plant located near Paducah, Kentucky by the United States Enrichment
Corporation. EEI owns the Joppa Plant, a 1,015 MW coal-fired electric
generating plant located near Joppa, Illinois, and six 161 kilovolt ("Kv")
transmission lines which transmit power from the Joppa Plant to the Paducah
enrichment plant. EEI's common stock is held by KU and three other utility
companies. EEI sells its excess electricity to its sponsoring utilities for
resale. The uranium enrichment facility is EEI's only end-user customer. For
each year in the three-year period ending December 31, 1999, KU derived less
than 3% of its net income from its share of the earnings of EEI and OVEC.
(a) LG&E Energy Foundation, Inc. ("LG&E Energy Foundation"), a charitable
foundation exempt from Federal income tax under Section 501(c)(3) of the
Internal Revenue Code, makes charitable contributions to qualified entities. It
is wholly-owned by LG&E Energy. As of December 31, 1999, the market value of the
assets of LG&E Energy Foundation were $19.9 million.
(b) LG&E Energy Marketing Inc. ("LEM") is wholly-owned by LG&E Energy and
engages in energy marketing and trading on behalf of LG&E Energy's utility and
non-utility operations. Effective June 30, 1998, LEM discontinued its merchant
trading and sales business. LEM, however, maintains the technical systems and
personnel necessary to engage in power marketing sales from assets owned or
controlled by its affiliates, including LG&E, KU, and Western Kentucky Energy
Corp./6/
___________________
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(c) LG&E Capital Corp. ("LG&E Capital"), through various subsidiaries and
joint ventures, is involved in numerous non-utility, energy-related businesses.
The activities of these subsidiaries are more fully described in Appendix A
hereto.
For the year-ended December 31, 1999, approximately 29.6% of LG&E Energy's
consolidated operating revenues and 20.3% of its consolidated operating income
were derived from the non-utility businesses. As of December 31, 1999,
approximately 22.9% of LG&E Energy's consolidated assets were invested in non-
utility businesses, including LG&E Energy, LG&E Capital and LEM.
For the twelve months ended June 30, 2000, approximately 29.9% of LG&E
Energy's consolidated operating revenues and 4.0% of its consolidated operating
income were derived from the non-utility businesses. As of June 30, 2000,
approximately 22.5% of LG&E Energy's consolidated assets were invested in non-
utility businesses, including LG&E Energy, LG&E Capital and LEM.
LG&E Energy's common stock is listed on the NYSE and the Chicago Stock
Exchange. As of February 29, 2000 there were 129,677,030 shares of LG&E Energy
common stock outstanding. LG&E Energy has no preferred stock outstanding. As of
February 29, 2000, there were three series, aggregating 1,610,287 shares, of
LG&E preferred stock outstanding, and two series, aggregating 400,000 shares, of
KU preferred stock outstanding. Copies of the Articles of Incorporation of LG&E
Energy, LG&E and KU are incorporated by reference as Exhibit A-2.1, Exhibit
A-2.2, and Exhibit A-2.3 respectively.
On a consolidated basis, LG&E Energy's operating revenues and operating
income for the twelve months ended December 31, 1999, were $2.7 billion and
$494.6 million, respectively, consisting of the following (before inter-company
eliminations):
________________
/6/ The business of Western Kentucky Energy Corp. is described in Appendix A
attached hereto.
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($ in millions)
Operating Operating
Revenues Income
LG&E Electric $790.7 $189.9
Gas 177.6 7.9
KU 937.3 196.4
LG&E Capital 810.3 120.8
LG&E Energy Marketing 34.0 (0.3)
LG&E Energy Corp -- (20.1)
Consolidated assets of LG&E Energy and its subsidiaries as of December 31, 1999
were approximately $5.1 billion, consisting of $3.0 billion in net electric
utility property, plant and equipment; $263.9 million in net gas utility
property, plant and equipment; and $1.8 billion in other corporate assets.
On a consolidated basis, LG&E Energy's operating revenues and operating
income for the twelve months ended June 30, 2000, were $2.7 billion and $393.9
million, respectively, consisting of the following (before inter-company
eliminations):
($ in millions)
Operating Operating
Revenues Income
LG&E Electric $790.5 $198.0
Gas 196.4 8.4
KU 917.3 171.6
LG&E Capital 627.7 58.3
LG&E Energy Marketing 231.9 (4.6)
LG&E Energy Corp -- (37.8)
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Consolidated assets of LG&E Energy and its subsidiaries as of June 30,
2000, were approximately $5.0 billion, consisting of $3.0 billion in net
electric utility property, plant and equipment; $269.2 million in net gas
utility property, plant and equipment; and $1.7 billion in other assets.
More detailed information concerning LG&E Energy and its subsidiaries is
contained in: (i) LG&E Energy's Annual Report on Form 10-K for the year ended
December 31, 1999, which is incorporated by reference as Exhibit I-2.1, (ii)
LG&E's Annual Report on Form 10-K for the year ended December 31, 1999, which is
incorporated by reference as Exhibit I-2.2, and (iii) KU's Annual Report on Form
10-K for the year ended December 31, 1999, which is incorporated by reference as
Exhibit I-2.3.
C. Description of the Merger
1. Background
In recent years Powergen has been seeking opportunities to gain a major
platform for growth in the United States, the world's largest energy market.
Powergen's vision is to transfer its skills as a leading international
integrated electricity and gas company to the U.S. electricity and gas markets.
The Merger is a major step toward realizing those goals. From Powergen's
perspective, the Merger:
. represents a significant investment in an efficient, focused
generation, transmission, and distribution business with a strong
operational track record as a low cost energy provider with high
standards of reliability and customer service, and a strong commitment
to the environment, which will benefit further from Powergen's
core skills;
. enhances Powergen's earnings per share, before the amortization
of goodwill, and enhances Powergen's cash flow per share immediately
following the acquisition;
. provides the right point of entry into the United States for
Powergen, given
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Kentucky's favorable economic climate and its well balanced regulatory
environment;
. brings Powergen a high-quality management team with proven
generation, distribution, and supply expertise and a shared view of
the industry's future development in the United States; and
. provides an excellent regional platform for growth in generation,
transmission, and distribution, as the Midwest region of the United
States represents around 25% of the U.S. electricity market and
further consolidation in the region is expected.
The Applicants believe that Powergen and LG&E Energy have skills that can
be used to benefit the public interest, as well as the interest of investors and
consumers, the "protected interests" under the Act. In the past decade, the
United Kingdom's electricity and gas markets have been restructured as the
industry has evolved from a state-owned monopoly to private ownership and
competition. Powergen's experience and expertise as one of the successful
leaders of this transition will help inform any discussion of such a
restructuring of the Midwest energy market and will help ensure, if and when
such restructuring occurs, that consumer benefits will be realized.
Powergen believes that this experience in competitive markets and as a
leading international integrated electric and gas company complements LG&E
Energy's proven expertise in operating efficient generation, transmission and
distribution businesses in an evolving regulatory environment. The Merger will
make LG&E Energy part of a much larger enterprise, well-positioned to meet and
benefit from the accelerating changes in the energy industry across the world,
while maintaining the historic connections between LG&E and KU and the
communities they serve. Applicants believe the Merger is important for ensuring
that both LG&E and KU remain able to continue to meet their commitments of
providing reliable and efficient service and enhancing overall performance
standards for the benefit of customers and shareholders over the long term.
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2. Merger Agreement
Under the terms of the Merger Agreement, each outstanding LG&E Energy
common share will be converted into the right to receive $24.85 in cash, without
interest./7/ LG&E Energy Group's debt ($2.2 billion as of December 31, 1999) at
the time of closing the Merger is expected to remain outstanding. The Merger is
subject to customary closing conditions, such as receipt of all necessary
regulatory approvals, including the approval of the Commission.
3. Corporate Structure for the Merger
As stated above, the Merger is structured as the indirect acquisition of
LG&E Energy by Powergen. The Intermediate Companies in the corporate structure
between Powergen and LG&E Energy create a structure that is not unusual for U.K.
cross-border transactions and is not dissimilar to structures used by U.S.
registered holding companies in making FUCO investments. These entities exist
primarily for the purpose of creating an economically efficient and viable
structure for the transaction and the ongoing operations of Powergen and the
U.S. Subsidiary Companies. The proposed structure as currently planned and the
specific function of each of the Intermediate Companies is set forth in Exhibit
F-3.2 hereto. The Applicants note that certain adjustments in the structure may
be necessary to reflect tax and accounting changes prior to consummation of the
Merger. Any material changes between the date of this Application and the
consummation of the Merger will be reflected in a pre-effective amendment
hereto. Powergen's direct and indirect interest in each of the Intermediate
Companies will flow through loans and equity interests similar to those
indicated in Exhibit F-3.2. This structure is essentially the same as that
approved by the Commission in the National Grid Order. As in National Grid, the
Intermediate Companies will not engage in any business activities except for the
acquisition and ongoing funding of LG&E Energy and its subsidiaries as
______________
/7/ Under Kentucky corporate law, dissenting shareholders are entitled to seek
the judicially determined value of their common stock in lieu of the $24.85
provided in the Merger Agreement.
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described herein. Except for financings by US Holdings as described herein, none
of the Intermediate Companies will have any third-party equity or debt holders.
4. Financing the Merger
The acquisition price for the LG&E Energy common stock, based on the number
of shares outstanding on February 27, 2000, will be approximately $3.23 billion.
Powergen intends to finance the acquisition from borrowings under a fully
committed bank facility that Powergen and US Holdings established on February
27, 2000, underwritten by five internationally recognized banks (the "Bank
Loans" or "Credit Facility")./8/ The Credit Facility has now been syndicated
among a wider group of internationally recognized banks. The Credit Facility
provides for up to $4.0 billion in borrowings by Powergen, US Holdings and other
wholly-owned subsidiaries of US Holdings as approved in writing by the banks,
and guaranteed by Powergen or US Holdings./9/ The Credit Facility, which is
filed as Exhibit B-3 hereto, has a final maturity of 5 years from the date of
signing. Each of the banks is a sophisticated commercial lender and the Credit
Facility was negotiated at arm's length. The Credit Facility was established
both to fund the acquisition and, if necessary, to provide funding and
accommodate working capital needs of the Intermediate Companies and the LG&E
Energy Group.
The Credit Facility contains provisions customary for a credit facility of
this type, including, among others, representations and warranties as to the
business and
________________
/8/ Borrowings under the Credit Facility could be reduced by, among other
things, application of available cash or the proceeds of assets sales by
Powergen UK and its subsidiaries, or by the issuance of debt securities or other
instruments by Powergen or its subsidiaries prior to, at or after the Merger.
See Note 31. Applicants will file an amendment or post-effective amendment to
this filing to reflect any material change in the plan of financing of the
Merger.
/9/ Although the Credit Facility permits other borrowers, Applicants intend for
US Holdings to be the only borrower under the Credit Facility, with a guarantee
from Powergen.
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operations of the U.S. and non-U.S. companies in the Powergen System (see Clause
15), covenants limiting consolidated borrowings by such companies (see Clause
16.8) and requiring prepayment of loans in the event of certain asset disposals
or capital market issues by such companies (see Clause 7.5), and events of
default providing for the acceleration of loans under the Credit Facility for
specified occurrences (including defaults and bankruptcies) involving such
companies (see Clause 17). These provisions are similar to those contained in
the credit facility of National Grid.
D. Operations and Management of Powergen and LG&E Energy Following the
Merger
1. Powergen
Upon consummation of the Merger, Powergen will become the indirect parent
company of LG&E Energy. All of Powergen's other operations will remain unchanged
in the Merger. The Merger Agreement provides that, at the effective time of the
Merger, Powergen will appoint Roger Hale, Chairman and Chief Executive Officer
of LG&E Energy, to the Powergen Board of Directors, increasing its size from 9
members to 10 members. As Powergen's Board of Directors is small in number, the
addition of one member is significant. Roger Hale is a U.S. citizen and resident
of Kentucky.
Powergen's inclusion of Mr. Hale on its Board demonstrates its commitment
to maintaining a local presence in the United States that is sensitive to local
concerns. Powergen also is committed to maintaining LG&E Energy's strong civic
and charitable presence in the service territories of LG&E and KU as
demonstrated by Powergen's obligation under Section 6.19(c) of the Merger
Agreement to continue to "make annual charitable and community contributions to
the communities served by . . . [LG&E Energy] and otherwise maintain a
substantial level of involvement in community activities in the State of
Kentucky that is comparable to, or greater than, the normal annual aggregate
level of charitable contributions, community development and related activities
carried on by . . . [LG&E Energy] prior to the date" of the Merger Agreement.
Upon consummation of the Merger, Powergen and the Intermediate Companies
will register as holding
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companies under Section 5 of the Act. Powergen expects that Powergen UK (or, if
Powergen Group Holdings is established before consummation of the Merger,
Powergen Group Holdings) will be qualified as a FUCO within the meaning of
Section 33 of the Act, and that all operations thereunder will claim the benefit
of the FUCO exemption.
2. LG&E Energy
Following consummation of the Merger, LG&E Energy will become an indirect
wholly-owned subsidiary of Powergen and its common shares will be deregistered
under the 1934 Act, and delisted from the NYSE and the Chicago Stock Exchange.
The Merger Agreement provides that the headquarters of LG&E Energy as the
surviving entity will remain in Louisville, Kentucky, with offices for utility
operations of LG&E remaining in Louisville and of KU remaining in Lexington. The
post-Merger LG&E Energy Board of Directors will be comprised of three directors,
one of whom will be a current director or officer of LG&E Energy. These
directors will hold office until their successors are duly elected or appointed
and qualified. Also, those individuals serving on the Board of Directors of LG&E
Energy at the time the Merger becomes effective will serve on a U.S. advisory
board to provide advice to Powergen 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.
E. Industry Restructuring Initiatives Affecting U.S. Operations.
LG&E Energy's public utility subsidiaries, through their recent case before
the Kentucky Commission, have agreed to the implementation of an earnings
sharing mechanism ("ESM") for electric rates, which will transition the
utilities to a more competitive structure. The ESM authorizes a threshold return
on equity of 11.5% with a "deadband" of 100 basis points above and below. If
earnings fall within the deadband range, customers are not charged an additional
rate and do not receive any rate credits. Over and under earnings outside the
band would be shared between shareholders and ratepayers of the affected company
on a 60/40 basis. The ESM provides LG&E and KU with incentives to improve
performance while, at the same time,
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maintaining regulatory authority and a fair regulatory environment.
Restructuring legislation has not been passed in Kentucky. The Kentucky
legislature created a special task force on electricity restructuring in March
1998, whose mission is to assess the desirability of deregulating and
restructuring electricity service. The task force submitted a report to the
Governor and a legislative agency in December 1999 recommending that no action
be taken during the 2000 legislative session to restructure Kentucky's electric
utility industry. It is expected that the Kentucky legislature will continue to
study restructuring through the next legislative session.
The Virginia legislature enacted an electric restructuring implementation
law in March 1999. The Virginia Commission and a legislative task force have
begun to implement the restructured framework and to resolve issues not
addressed by the law. Electric retail access under the new law is to commence
January 2002; the law provides the Virginia Commission with the option to
accelerate or delay implementation so long as it is in place by 2005. The law
caps retail electric rates from 2001 through 2007, but does not require rate
reductions. The law allows utilities to recover just and reasonable stranded
costs, if any, through the capped rates or, in the case of customers who choose
alternative generation suppliers, through a usage-based surcharge. There will
be no explicit determination of stranded costs by the Virginia Commission. The
law further provides for all incumbent utilities to join a regional transmission
entity ("RTE") and to transfer operational control of their transmission assets
to the RTE. The RTE may be an independent system operator (e.g., the Midwest
Independent System Operator, of which LG&E and KU are members). The Virginia
Commission has established a proceeding for the investigation of issues relating
to the establishment of an RTE. The restructuring law does not require
divestiture of generation assets, but utilities must functionally separate
generation from transmission and distribution by 2002. The effect of this
restructuring law on KU should be minimal, as its operations in Virginia are
relatively small in nature./10/
________________
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Powergen has experience in both regulated and competitive markets, which
experience will be helpful to the U.S. Utility Subsidiaries. Powergen has
participated in the transition to a competitive electric market in England and
Wales and has more than 10 years successful experience in a competitive
generation marketplace. Powergen also has experienced the introduction of retail
and wholesale competition in Australia in the state of Victoria. Following
the Merger, Powergen's expertise will help KU make the transition from a
regulated to a competitive electric market in Virginia. In the event Kentucky
deregulates or restructures its electric utility industry, Powergen also will
help LG&E and KU with the transition from a regulated to a competitive
marketplace in Kentucky. The benefits of Powergen's experience are discussed
further in Item 3, Section A.2.b below.
F. Request for Authorization of Proposed Financings
In addition to authorization of the proposed acquisition of LG&E Energy by
Powergen under Section 10, Applicants seek authority to conduct until February
28, 2004 (the "Authorization Period"), the financial and related transactions
described under Item 3, Section B.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
$ Millions
Accountants' fees 3.48
Legal fees and expenses 11.04
Shareholder communication and
proxy solicitation expenses and filing fees 2.62
Investment bankers' fees and expenses 31.67
Consulting fees 1.59
Total 50.40
The total fees, commissions, and expenses expected to be incurred in
connection with the Merger are estimated to
_________________
/10/ As noted above, KU also serves five customers in Tennessee. No definitive
action has been taken to date by the Tennessee legislature on deregulation or
restructuring.
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be approximately $50.4 million. Fees for investment bankers, lawyers, brokers,
accountants, consultants and other service providers are included within the
Merger-related fees disclosed above.
Powergen and US Holdings have incurred or will incur estimated fees and
expenses of approximately $33 million in connection with the Credit Facility
described in this Application. This amount includes arrangement fees,
underwriting costs and syndication fees. As explained below, Powergen proposes
that fees, commissions or other similar remuneration paid in connection with the
non-competitive issue, sale or distribution of a security pursuant to the
Application will not exceed 5% of the principal or total amount of the security
issued.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
The following sections of the Act and the Commission's rules thereunder are
or may be directly or indirectly applicable to the proposed transaction:
Sections of Transactions to which section or rule is or may be
the Act applicable:
Request for declaration that the Intermediate
Companies, LG&E Energy and KU are not holding
2(a)(7), 2(a)(8) companies or subsidiary companies, solely for
purposes of Section 11(b)(2).
Exemption of LG&E Energy from registration as a
holding company under the Act.
3(a)(1)
3(a)(2) Exemption of KU from registration as a holding
company under the Act.
4, 5 Registration of Powergen and the Intermediate
Companies as holding companies following the
consummation of the Merger.
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6(a), 7 Issuances and sales of securities.
9(a)(2), 10 Acquisition by Powergen of common stock of U.S.
Utility Subsidiaries and OVEC.
11(b)(2) Request for declaration that the Intermediate
Companies and KU are not subsidiary companies or
holding companies, solely with respect to the
"great-grandfather" provisions of Section 11(b)(2).
12 Extensions of credit and guarantees; payment of
dividends out of paid-in capital and unearned
surplus.
13 Approval of formation of a service company, LG&E
Services, to provide goods and services to
associate companies.
13 Approval of the Service Contract and services
provided to affiliates thereunder by LG&E Services.
13 Request for exemption of foreign providers of goods
and services from the provisions of Section 13 and
rules thereunder, except for transactions with the
U.S. Utility Subsidiaries.
14, 15 Reporting, books and records.
33 Operations of Powergen and its subsidiary
companies.
Rules
42, 45(a), 52 Financing transactions, generally.
43 Sales to Affiliates.
46 Payment of Dividends.
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53 Investments in FUCOs and EWGs.
80-91 Affiliate transactions, generally.
93, 94 Accounts, records and annual reports by subsidiary
service company.
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed applicable to the Merger and other authorizations
requested herein, such sections and rules should be considered to be set forth
in this Item 3.
A. Legal Analysis of the Merger
Section 9(a)(2) makes it unlawful, without approval of the Commission under
Section 10, "for any person . . . to acquire, directly or indirectly, any
security of any public utility company, if such person is an affiliate . . . of
such company and of any other public utility or holding company, or will by
virtue of such acquisition become such an affiliate." Under the definition set
forth in Section 2(a)(11)(A), an "affiliate" of a specified company means "any
person that directly or indirectly owns, controls, or holds with power to vote,
5 per centum or more of the outstanding voting securities of such specified
company."
Because Powergen will indirectly acquire in the Merger more than five
percent of the voting securities of LG&E, KU, EEI and OVEC it will become an
"affiliate" as defined in Section 2(a)(11)(A) of the Act of each of these
companies and must obtain the approval of the Commission for the Merger under
Sections 9(a)(2) and 10 of the Act. The statutory standards to be considered by
the Commission in evaluating the proposed transaction are set forth in Sections
10(b), 10(c) and 10(f) of the Act.
As set forth more fully below, the Merger complies with all of the
applicable provisions of Section 10 of the Act and should be approved by the
Commission because:
-the consideration to be paid in the Merger is fair and reasonable;
-the Merger will not create detrimental interlocking relations or
concentration of control;
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-the Merger will not result in an unduly complicated capital structure for
the Powergen system;
-the Merger is in the public interest and the interests of investors and
consumers;
-the Merger is consistent with Sections 8 and 11 of the Act;
-the Merger will tend towards the economical and efficient development of
an integrated public utility system; and
-the Merger will comply with all applicable state laws.
1. Section 10(b)
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to an extent
detrimental to the public interest or the interests of investors or consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other remuneration, to
whomsoever paid, to be given, directly or indirectly, in connection with such
acquisition is not reasonable or does not bear a fair relation to the sums
invested in or the earning capacity of the utility assets to be acquired or the
utility assets underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of the
holding company system of the applicant or will be detrimental to the public
interest or the interests of investors or consumers or the proper functioning of
such holding company system.
a. Section 10(b)(1)
i. Interlocking Relationships
By its nature, any merger results in new links between heretofore unrelated
companies. Northeast Utilities, Holding Co. Act Release No. 25221
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(Dec. 21, 1990), as modified, Holding Co. Act Release No. 25273 (March 15,
1991), aff'd sub nom., City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992)
("interlocking relationships are necessary to integrate [the two merging
entities]"). The links that will be established as a result of the Merger are
not the types of interlocking relationships targeted by Section 10(b)(1), which
was primarily aimed at preventing business combinations unrelated to improved
operations. Indeed, the links to be established as a result of the Merger are
intended to enhance the operations of the LG&E Energy Group. The Merger
Agreement provides that the Board of Directors of Powergen will be enlarged to
add Roger Hale, current Chief Executive Officer of LG&E Energy. This is useful
to integrate LG&E Energy fully into the Powergen System and will therefore be in
the public interest and the interests of investors and consumers. Forging such
relations is beneficial to the protected interests under the Act and thus is not
prohibited by Section 10(b)(1).
ii. Concentration of Control
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system. American Electric
Power Co., Holding Co. Act Release No. 20633, 46 S.E.C. 1299, 1309 (July 21,
1978). In applying Section 10(b)(1) to utility acquisitions, the Commission must
further determine whether the acquisition will create "the type of structures
and combinations at which the Act was specifically directed." Vermont Yankee
Nuclear Corp., Holding Co. Act Release No. 15958, 43 S.E.C. 693, 700 (1968). As
discussed below, the Merger will not create a "huge, complex, and irrational
system," but rather will result in a new holding company over a previously-
approved integrated public utility system and the increased scale of the
combined enterprise will actually create opportunities for economies of scale
and access to resources that would not be available without a combination with
another energy company. See WPL Holdings, Inc., Holding Co. Act Release No.
24590 (Feb. 26, 1988), aff'd in part and rev'd in part
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sub nom., Wisconsin's Environmental Decade, Inc. v. SEC, 882 F.2d 523 (D.C. Cir.
1989), reaffirmed, Holding Co. Act Release No. 25377 (Sept. 18, 1991).
Finally, Section 10(b)(1) also requires the Commission to consider possible
anticompetitive effects of a proposed acquisition. As noted by the Commission in
Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990):
"antitrust ramifications of an acquisition must be considered in light of the
fact that public utilities are regulated monopolies and that federal and state
administrative agencies regulate the rates charged consumers." Powergen and LG&E
Energy have filed Notification and Report Forms with the Department of Justice
("DOJ") and FTC pursuant to the HSR Act describing the effects of the Merger on
competition, and early termination of the waiting period under the HSR Act was
granted by the FTC on July 27, 2000.
LG&E Energy and its subsidiary companies, on the one hand, and Powergen and
its related companies, on the other, do not have facilities or sell products in
any common geographic markets. With the exception of interests in three
Argentinean gas distribution companies - Centro, Cuyana and Gas Natural BAN,
S.A. and wind turbines in Tarifa, Spain, the LG&E Energy Subsidiary Companies
operate almost exclusively in the United States, selling electricity, natural
gas and related energy services and providing transmission and distribution
services. Powergen and its subsidiary companies operate almost exclusively
outside the United States./11/
____________________
/11/ Powergen's only activity in the United States is through Power Technology,
a division of Powergen UK. Power
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In addition, the competitive impact of the Merger has been fully considered
by the FERC pursuant to Section 203 of the Federal Power Act. In its order
approving the Merger, the FERC stated:
"Applicants claim that the proposed merger raises no horizontal
or vertical competitive concerns. They state that Powergen
neither owns, operates, engages in, nor supplies inputs used for,
generation, transmission or distribution of electricity in North
America. Applicants therefore conclude that a competitive screen
analysis is unnecessary because none of the Applicants own
facilities or sell upstream input or downstream electricity
products in any common geographic markets. The Commission agrees,
and therefore, we find that the proposed merger does not raise
competitive concerns."
FERC Order at page 4.
The Commission has found, and the courts have agreed, that it may
appropriately rely upon the FERC with respect to such findings. See City of
Holyoke v. SEC, supra at 363-364, quoting Wisconsin's Environmental Decade v.
SEC, supra at 527.
For these reasons, the Merger will not "tend toward interlocking relations
or the concentration of [control] of public-utility companies, of a kind or to
an extent detrimental to the public interest or the interests of investors or
[consumers]" within the meaning of Section 10(b)(1).
b. Section 10(b)(2)
i. Fairness of Consideration
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given by Powergen to the holders of LG&E Energy common stock
in connection with the Merger is reasonable and whether it bears a fair relation
to investment in and earning capacity of the
__________________
Technology is engaged in engineering consulting operations worldwide and in 1999
received approximately $1,000,000 from rendering consulting services in the
United States.
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<PAGE>
utility assets underlying the securities being acquired. Market prices at which
securities are traded always have been strong indicators as to values. As shown
in the table below, the quarterly price data, high and low, and dividends paid,
for LG&E Energy common stock, particularly in the period immediately prior to
announcement of the Merger, provide support for the consideration of $24.85 for
each share of LG&E Energy common stock.
<TABLE>
<CAPTION>
LG&E Energy
High Low Dividends
<S> <C> <C> <C>
1998
First Quarter 26-7/16 23 0.2975
Second Quarter 27-3/4 24-11/16 0.2975
Third Quarter 27-7/8 22-1/2 0.2975
Fourth Quarter 29-5/16 26-1/16 0.3075
1999
First Quarter 28-3/4 20-3/4 0.3075
Second Quarter 23 20-11/16 0.3075
Third Quarter 23-11/16 20-11/16 0.3075
Fourth Quarter 23-5/16 17-3/8 0.3175
2000 First Quarter 18-1/4 15-1/4 0.3175
(through Feb. 25)
</TABLE>
On February 25, 2000, the last full trading day before the public
announcement of the execution of the Merger Agreement, the closing price per
share as reported on the NYSE-Composite Transaction of LG&E Energy common stock
was $15.75. The $24.85 per share cash consideration represents a 58% premium to
this pre-announcement closing price.
In addition, the consideration is the product of extensive and vigorous
arm's length negotiations between Powergen and LG&E Energy. As recognized by the
Commission in Ohio Power Co., Holding Co. Act Release No. 16753 (June 8, 1970),
prices arrived through arm's length negotiations are particularly persuasive
evidence that Section 10(b)(2) is satisfied. See also Southern Company, Holding
Co. Act
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Release No. 24579 (Feb. 12, 1988). These negotiations were preceded by months of
due diligence, analysis and evaluation of the assets, liabilities and business
prospects of the LG&E Energy Group. See Powergen Circular (Exhibit C-2 hereto);
LG&E Energy Proxy Statement (Exhibit C-1 hereto).
Finally, internationally-recognized investment bankers for both Powergen
and LG&E Energy have reviewed extensive information concerning the companies and
analyzed a variety of valuation methodologies. LG&E Energy's financial adviser,
the Blackstone Group L.P., has provided its written opinion to LG&E Energy's
Board of Directors that the consideration is fair, from a financial point of
view, to the holders of LG&E Energy common stock. The investment banker's
analysis is described in detail in the LG&E Energy Proxy Statement (Exhibit C-1
hereto). The assistance of independent consultants in setting consideration has
been recognized by the Commission as evidence that the requirements of Section
10(b)(2) have been met. Southern Co., supra, and SV Ventures, Inc., Holding Co.
Act Release No. 24579A (Feb. 26, 1988). See Powergen Circular (Exhibit C-2).
In light of these opinions and an analysis of all relevant factors,
including the benefits that may be realized as a result of the Merger,
Applicants believe that the consideration for the Merger bears a fair relation
to the sums invested in, and the earning capacity of, the utility assets of LG&E
Energy.
ii. Reasonableness of Fees
A further consideration under Section 10(b)(2) is the overall level of
fees, commissions and expenses incurred and to be incurred in connection with
the Merger. Applicants believe that these items are reasonable and fair in light
of the size and complexity of the Merger relative to other transactions and the
anticipated benefits of the Merger to the public, investors and consumers.
Applicants also believe that the fees are consistent with recent precedent and
that they meet the standards of Section 10(b)(2).
Powergen and LG&E Energy together expect to incur a combined total of
approximately $50.4 million in fees, commissions and expenses in
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<PAGE>
connection with the Merger. American Electric Power Company and Central and
South West Corporation have represented that they expect to incur total
transaction fees and regulatory processing fees of approximately $53 million in
connection with their proposed merger, while National Grid and NEES estimated
their total fees at $54.2 million.
The Applicants believe that the estimated fees and expenses in this matter
bear a fair relation to the value of LG&E Energy and the strategic benefits to
be achieved by the Merger, and further that the fees and expenses are fair and
reasonable in light of the complexity of the Merger. See Northeast Utilities,
Holding Co. Act Release No. 25548 (June 3, 1992), modified on other grounds,
Holding Co. Act Release No. 25550 (June 4, 1992) (noting that fees and expenses
must bear a fair relation to the value of the company to be acquired and the
benefits to be achieved in connection with the acquisition). Based on the price
of LG&E Energy common stock on February 25, 2000, the Merger would be valued at
approximately $3.23 billion in equity value. The total estimated fees and
expenses of $50.4 million represent approximately 1.6% of the equity value, and
are consistent with percentages previously approved by the Commission. See,
e.g., Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993) (fees and
expenses represented approximately 1.7% of the value of the consideration paid
to the shareholders of Gulf States Utilities); Northeast Utilities, Holding Co.
Act Release No. 25548 (June 3, 1992) (approximately 2% of the value of the
assets to be acquired); National Grid Order (approximately 1.69% of the value of
the assets to be acquired).
c. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether a proposed
acquisition will unduly complicate the acquiror's capital structure or will be
detrimental to the public interest or the interest of investors or consumers or
the proper functioning of the resulting system. For the reasons that follow, the
capital structure of Powergen will not be unduly complicated nor will it be
detrimental to the public interest, the interest of investors or consumers or
the proper functioning of the combined system.
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<PAGE>
Applicants are proposing a structure that will meet all of the requirements
of the 1935 Act, and will be virtually identical to that approved by the
Commission in the National Grid Order.
In the Merger, common shareholders of LG&E Energy will receive cash (in the
aggregate, the "Cash Consideration") in exchange for their LG&E Energy shares.
Powergen proposes to obtain the Cash Consideration through the Bank Loans./12/
The Bank Loans will be straightforward commercial loans from sophisticated
commercial lenders. US Holdings will be the borrower under the Credit Facility,
guaranteed by Powergen. Such obligations will neither be guaranteed by, nor
secured by any assets of, any other subsidiary of Powergen. In no event will
Powergen issue any equity or debt securities to LG&E Energy shareholders as
consideration for the Merger and the acquisition of LG&E Energy. The Merger
Agreement, however, does permit holders of LG&E Energy employee stock options to
convert their options into options for Powergen ADSs instead of
receiving cash. See the Merger Agreement, Section 6.11
Upon consummation of the Merger, LG&E Energy will become a wholly-owned,
indirect subsidiary of Powergen. Powergen proposes to hold its interest in LG&E
Energy through the Intermediate Companies. Each of the Intermediate Companies
will be organized under the laws of either a member state of the European Union
with which the United States has a comprehensive Double Taxation Treaty or a
state of the United States. Other than US Holdings, which may issue non-voting
preferred stock, all of the Intermediate Companies will be directly or
indirectly wholly-owned by Powergen and will have no public or private
institutional equity holders. The Intermediate Companies will be capitalized
with equity and/or debt all of which, other than any US Holdings borrowings or
preferred stock, will be held by either Powergen or an Intermediate Company. The
ultimate U.S. parent of LG&E Energy will be capitalized with both equity and
debt, to be
_________________
/12/ As noted above, a portion of the Cash Consideration may be paid from
available cash, proceeds of asset sales by Powergen UK and its subsidiaries and
issuances of debt securities and other instruments by Powergen or its
subsidiaries. See supra footnote 8.
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<PAGE>
held by one or more of the Intermediate Companies. Absent such additional
approval as may be required, none of the Intermediate Companies will be engaged
in any business or trade other than the business of owning, directly or
indirectly, equity securities of LG&E Energy and the financing transactions
described herein, and none of the Intermediate Companies will be regulated by
United Kingdom or other third country regulatory authorities having jurisdiction
over electricity rates and service.
As a wholly-owned indirect subsidiary of Powergen LG&E Energy
will continue to be a public utility holding company, and it will retain its
current capital structure. Neither LG&E Energy nor any of the LG&E Energy
Subsidiary Companies will incur any additional indebtedness or issue any
securities to finance any part of the Cash Consideration. The acquisition of
LG&E Energy by Powergen and the corporate and financing mechanics summarized
above are not designed or intended to alter or otherwise affect the current
corporate structure and financing obligations of the LG&E Energy Group companies
as members of a holding company system.
It is contemplated that the companies in the LG&E Energy Group will each
continue to pay dividends (and, in the case of the LG&E Energy Subsidiary
Companies, dividends on preferred stock and interest on and principal of their
debt). Dividends paid by LG&E Energy may ultimately be used by Powergen or US
Holdings to service debt.
Pursuant to the order of the Kentucky Commission authorizing the transfer
of ownership of LG&E and KU through the acquisition of ownership and control of
LG&E energy by powergen (the "Kentucky Order"), the dividend policies of LG&E
and KU remain under the jurisdiction of the Kentucky Commission. Specifically,
the Kentucky Commission reiterated its position that "the dividend policy [of KU
and LG&E] must not adversely affect the utilities' ratepayers, and the
utilities, through their boards of directors, have the responsibility to use
their dividend policy consistent with preserving the financial strength of the
utility." As part of the proceeding before the Kentucky Commission, and as a
condition to the effectiveness of the Kentucky Order, Powergen has committed to
notify the Kentucky Commission 30 days prior to paying any dividend or
transferring more than 5 percent of the retained earnings of LG&E or KU to
Powergen. In 1999, LG&E and KU have declared dividends equal to approximately
36.4% (34.7% in respect of common
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stock and 1.7% in respect of preferred stock) and 23.2% (22.5% in respect of
common stock and 0.7% in respect of preferred stock), respectively, of retained
earnings. During the twelve months ended June 30, 2000, LG&E and KU declared
dividends equal to approximately 31.1% (29.3% in respect of common stock and
1.8% in respect of preferred stock) and 28.2% (27.5% in respect of common stock
and 0.7% in respect of preferred stock), of their respective retained earnings
balances as of June 30, 2000.
The Kentucky Commission confirmed its jurisdiction over KU and LG&E, as
follows: "For rate-making purposes, the [Kentucky] Commission has jurisdiction
over KU's and LG&E's capital structure, financing and cost of capital. The
[Kentucky] Commission will continue to exercise this jurisdiction." To further
assure that a failed or failing unregulated affiliate not affect the operations
of KU and LG&E, the Kentucky Commission also observed: "If circumstances dictate
that the only reasonable course of action is divestiture, including that of KU
or LG&E, it will be the responsibility of Powergen's and LG&E Energy's
management to ensure that divestiture takes place."
The following table shows the capitalization of Powergen as of January 2,
2000, the capitalization of LG&E Energy as of December 31, 1999, and the pro
forma capitalization of Powergen after giving effect to the Merger:/13/
-------------------------
/13/ See footnote 31.
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<PAGE>
<TABLE>
<CAPTION>
Powergen LG&E Energy Acquisition Combined
(U.S. $ mm) (U.S. $ mm) adjustments System
<S> <C> <C> <C> <C>
Short-term
Debt 158 - 608
450
Current Portion
Long-Term
Debt - 412 - 412
Long-term
Debt 4,145 1,299 3,278 8,722
Preferred
Stock - 135 - 135
Common Stock
Equity 3,833 1,251 (1,141) 3,943
Total 8,136 3,547 2,137 13,820
</TABLE>
The following table shows the capitalization of Powergen as of July 2,
2000, the capitalization of L&GE Energy as of June 30, 2000, and the pro forma
capitalization of Powergen after giving effect to the Merger:
<TABLE>
<CAPTION>
Powergen LG&E Energy Acquisition Combined
(U.S. $ mm) (U.S. $ mm) Adjustments System
<S> <C> <C> <C> <C>
Short-term
Debt 98 414 - 512
Current Portion
Long-term
Debt - 376 - 376
Long-term
Debt 3,432 1,404 3,275 8,111
Preferred
Stock - 143 - 143
Common Stock Equity 3,656 1,052 (945) 3,763
Total 7,186 3,389 2,330 12,905
</TABLE>
This proposed capital structure is consistent with the requirements of the
Act. As explained in Item 3, Section B.1,/14/ Powergen expects that at the time
of the Merger, its consolidated ratio of common equity to total capitalization
will be near or above the "traditionally acceptable 30% level." Northeast
Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990) and in any event
Powergen will meet the 30% level by December 31, 2001. After the
--------------------
/14/ Id.
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<PAGE>
Merger, Powergen also is expected to maintain investment grade credit ratings.
See infra Item 3, Section B.1. Powergen has filed as a confidential exhibit to
this Application a detailed financial projection showing Powergen's ability to
service all acquisition indebtedness without imposing any undue demands on the
projected cash flows of the LG&E Energy Group.
i. The presence of debt at more than one level of the
Powergen System does not "unduly complicate" the capital
structure of the Powergen System for purposes of Section
10(b)(3).
A number of steps must be taken in a specified sequence in order to achieve
the economic benefits of the transaction structure. Completion of some of the
steps necessary to implement the transaction structure will occur shortly
following consummation of the Merger and thus will be subject to Commission
jurisdiction. Applicants request that the Commission view all of the steps
necessary to implement the transaction structure in their entirety as they are,
in fact, constituent elements comprising a single transaction.
In addition, Applicants recognize that, in prior matters involving the
formation of a registered holding company, the Commission has considered
preliminary financing transactions (i.e., transactions occurring prior to the
formation of a registered holding company) in view of their effects on the
capital structure of the resulting holding company. For example, in connection
with the merger of Atlantic Energy, Inc. and Delmarva Power & Light Co., the
Commission considered that the resulting registered holding company would have
two classes of common stock--notwithstanding that, at the time the letter or
"tracking stock" was issued, the issuer was not a registered holding company.
The Commission did not address the specific question of whether it had
jurisdiction to pass on the securities issuance but instead noted that, under
Section 7(c)(2)(A) of the 1935 Act, a registered holding company can issue other
than "plain vanilla" securities "solely . . . for the purpose of effecting a
merger, consolidation, or other reorganization." Conectiv, Inc., Holding Company
Act Release No. 26832 (Feb. 25, 1998). See also the National Grid Order.
Accordingly, to the extent that the Commission might choose to treat any element
of the implementation of the transaction structure, such as the
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<PAGE>
borrowing of the Bank Loans, as a jurisdictional event, there is express
statutory provision for such transactions under Section 7(c)(2)(A) of the 1935
Act.
Nor does the presence of holding company level debt at US Holdings to be
used for acquisition financing and general working capital represent an undue
complication of the capital structure of the Powergen System for purposes of
Section 10(b)(1). In the first instance, to the extent that the debt is
associated with facilities that have been entered into before Powergen becomes a
registered holding company or as replacements for such facilities, they should
be grandfathered for purposes of the Act. Second, and more importantly, Section
7(c)(2)(D) expressly provides for the issuance of nontraditional securities if
"such security is to be issued or sold solely for necessary or urgent corporate
purposes of the declarant where the requirements of the provisions of paragraph
(1) would impose an unreasonable financial burden upon the declarant and are
not necessary or appropriate in the public interest or for the protection of
investors or consumers." Registered gas systems have relied on this provision
for years in connection with their routine financing transactions. See, e.g.,
The Columbia Gas System, Inc., Holding Co. Act Release No. 26634 (Dec. 23, 1996)
(authorizing Columbia to issue external, long-term debt which, in the aggregate
with equity financing issued by Columbia, would not exceed $5 billion at any one
time outstanding through December 31, 2001). Based on the same rationale, the
Commission recently permitted a registered electric system to have long-term
debt at the parent company level. Southern Co., Holding Co. Act Release No.
27134 (Feb. 9, 2000). Following the Southern Co. decision, the Commission
similarly allowed investment grade long-term debt at the parent company level in
the National Grid Order.
Credit rating agencies have examined Powergen's and LG&E Energy's credit
ratings in light of the proposed Merger and indicated that they expect the
combined system will maintain investment grade ratings. On the day the Merger
was announced, both Moody's and Standard & Poor's placed Powergen and LG&E
Energy, LG&E, KU and LG&E Capital on credit watch/review for potential
downgrade, which will last until the Merger is completed. Standard & Poor's has
indicated that Powergen's Corporate
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<PAGE>
credit rating (essentially that of Powergen UK) would probably be BBB+ after the
Merger, in light of the acquisition as well as certain anticipated disposals by
Powergen UK. On the same basis Moody's indicated a likely rating of A3 (the
equivalent of A- for Standard & Poor's) for Powergen UK after the Merger.
The agencies indicated that the future rating for Powergen is likely to be
one notch below that of Powergen UK but is expected to remain investment grade.
Moody's has stated that "the operations of LG&E Energy are in many ways
complementary to Powergen's assets." Furthermore, Moody's found LG&E Energy's
strengths to "lie in its traditional well-managed low-cost electricity
production as well as its distribution system--which is held in high regard for
its customer satisfaction oriented focus." In addition, Moody's has reviewed
Powergen's announced corporate strategy of selling certain of its non-core
assets to generate cash to repay debt and cover interest payments. This
strategy, according to Moody's, "will enhance the business risk and cashflow
stability of the Powergen Group . . . ." Moody's concludes that "the effect of
any potential downgrade of Powergen's ratings [i.e., from assuming debt to pay
for the acquisition of LG&E Energy] should be no more than one notch."
Therefore, Powergen's securities are expected to maintain investment grade
status after the Merger.
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<PAGE>
Moody's current ratings for Powergen UK and LG&E Energy securities are shown
below.
Company and Security Moody's Rating
Powergen UK
Senior unsecured long-term debt A2
Powergen East Midlands Investments
Senior unsecured long-term debt A2
Powergen Energy plc
Senior unsecured long-term debt A1
LG&E Energy Corp.
Issuer rating A3
LG&E
Senior secured First Mortgage Bonds A1
Issuer rating and senior unsecured debt A2
Preferred Stock a2
KU
Senior secured First Mortgage Bonds A1
Issuer rating A2
Preferred Stock a2
Standard & Poor's also reviewed its ratings of the two groups and also
found that the combined systems are expected to maintain investment grade
ratings. Although Standard & Poor's, like Moody's, acknowledges that Powergen's
acquisition debt will be relatively high, Standard & Poor's observes that the
risks from the debt "will be partially offset by the improved business profile
of the enlarged group and Powergen's expected U.K. and international
divestments." Furthermore, Standard & Poor's notes that "Powergen's" acquisition
of 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." Therefore, Standard & Poor's finds that the Merger is not
expected to have a substantial adverse effect on Powergen's credit ratings,
which will remain investment grade.
Standard & Poor's current ratings of Powergen and LG&E Energy Group
securities are shown below.
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<PAGE>
Company and Security Standard & Poor's Rating
Powergen plc
Corporate credit rating A/A-1
Powergen US Holdings Ltd.
Corporate credit rating A/A-1
Powergen UK plc
Corporate credit rating A/A-1
Senior unsecured debt A
Powergen (East Midlands)
Corporate credit rating A/--
Senior unsecured debt A
Powergen Energy plc
Corporate credit rating A/A-1
Senior unsecured debt A
LG&E Energy Corp.
Corporate credit rating A-/--
LG&E
Long-term corporate credit rating A-
Senior secured debt A
Preferred Stock BBB
KU
Long-term corporate credit rating A-
Senior secured debt A
Preferred Stock BBB
The financial strength of Powergen is further confirmed by the
competitive terms under which it has been able to secure financing for the
proposed transaction. For these reasons and in light of the National Grid
Order, Applicants believe that the presence of more than one level of debt will
not unduly complicate Powergen's capital structure.
ii. The Merger will not be detrimental to the public
interest or the interest of investors or consumers or
the proper functioning of the registered holding
company system.
For the reasons previously set forth, and discussed below in the context of
Section 10(c)(2), Applicants believe that the proposed Merger will, in fact,
benefit the protected interests and enhance the functioning of the resulting
holding company systems. LG&E Energy and Powergen are requesting an
affirmation from each of
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<PAGE>
the affected state regulators that it has the authority and resources to protect
consumers subject to its jurisdiction and that it intends to exercise that
authority. These regulatory approvals will assure that the interests of retail
customers and wholesale customers are adequately protected. In addition,
Powergen commits that it will not seek recovery in higher rates to the U.S.
Utility Subsidiaries' ratepayers for any losses or inadequate returns that may
be associated with its non-LG&E Energy investments. Finally, the Merger is
expected to have no adverse effect on the rights of holders of the outstanding
preferred stock and debt securities of the LG&E Energy Subsidiary Companies./15/
Based on similar facts and the same assurances, the Commission in the National
Grid Order found that the proposed merger in that case would not be detrimental
to the public interest or the interest of investors or consumers or the proper
functioning of the registered holding company system. Applicants respectfully
submit that the Commission should make the same finding with respect to the
Merger.
2. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions of
Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of Section 11; or
(2) the acquisition of securities or utility assets of a public utility or
holding company unless the Commission finds that such acquisition will
serve the public interest by tending towards the economical and efficient
development of an integrated public utility system.
_________________________
/15/ Aside from holders of options for common stock and common stockholders,
LG&E Energy currently has no public security holders. LG&E and KU do have, and
following the Merger will continue to have, public security holders.
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<PAGE>
a. Section 10(c)(1)
Section 10(c)(1) prohibits the Commission from approving an acquisition for
which Commission approval is required under Section 9(a) if such acquisition is
unlawful under the provisions of Section 8 or is detrimental to the carrying out
of the provisions of Section 11
i. Section 8 Analysis
Section 8 prohibits a registered holding company from acquiring interests
in an electric utility company and a gas utility company serving substantially
the same territory in contravention of state law. The purpose of Section 8 is
to prevent holding companies, by use of separate subsidiaries, from
circumventing state restrictions on common ownership of gas and electric
operations. The Merger will not result in any new situations of common
ownership of so-called "combination" systems within any state. LG&E is
presently a combination gas and electric public utility serving substantially
the same territory in Kentucky. After the Merger, LG&E will continue to serve
both gas and electric customers in Kentucky. No state law prohibits LG&E's
combined gas and electric operations, and no state law prohibits Powergen from
indirectly acquiring LG&E. Further, the Merger will occur only after the
authorizations of the Kentucky Commission and the Virginia Commission have been
granted. Accordingly, the Merger will not be unlawful under Section 8, and
thus that portion of Section 10(c)(1) relating to Section 8 of the
Act is satisfied.
ii. Section 11 Analysis - Integration
Section 10(c)(1) also requires that an acquisition not be detrimental to
carrying out the provisions of Section 11 of the Act./16/ Section 11(b)(1), in
pertinent part, directs the Commission:
______________________
/16/ The FUCO holdings of Powergen and LG&E Energy need not be included in this
analysis as Section 33(c)(3) of the Act explicitly provides that FUCOs shall be
considered to be consistent with the operation of a single integrated public
utility system.
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<PAGE>
to require . . . that each registered holding company, and each subsidiary
company, thereof, take such action as the Commission shall find necessary
to limit the operations of the holding-company system of which such company
is a part to a single integrated public utility system, and to such other
businesses as are reasonably incidental, or economically necessary or
appropriate to the operations of such integrated public utility system. . .
. The Commission may permit as reasonably incidental, or economically
necessary or appropriate to the operations of one or more integrated public
utility systems the retention of an interest in any business (other than
the business of a public utility company as such) which the Commission
shall find necessary or appropriate in the public interest or for the
protection of investors or consumers and not detrimental to the proper
functioning of such system or systems.
o Integrated Public Utility System
Because Section 2(a)(29) specifies separate definitions for gas and
electric systems, the Commission has historically taken the position that gas
and electric properties together cannot constitute a single integrated public-
utility system./17/ However, Commission authority is equally clear that Section
10(c)(2) does not limit Commission approval to acquisitions resulting in only
one integrated system. "[W]e have indicated in the past that acquisitions may
be approved even if the combined system will not be a single integrated system.
Section 10(c)(2) requires only that the acquisition tend 'towards the
economical and the
______________________________
/17/ See New Century Energies, Inc., Holding Co. Act Release No. 26748, citing
SEC v. New England Electric System, 384 U.S. 176,178 n.7; In the Matter of
Columbia Gas & Electric Corporation, Holding Co. Act Release No. 2477, 8 S.E.C.
443, 462-463 (Jan. 10, 1941) (rejecting an earlier interpretation to the
contrary in American Water Works and Electric Company, Inc., 2 S.E.C. 972, 983
(Dec. 30, 1937)).
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<PAGE>
efficient development of an integrated public-utility system.'"/18/
In this case, the Merger will tend toward the economical and efficient
development of two integrated systems: the combined electric utility system of
LG&E and KU and the stand-alone gas utility system of LG&E.
o Electric System
As applied to electric utility companies, the term "integrated public
utility system" is defined in Section 2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility assets,
whether owned by one or more electric utility companies, are physically
interconnected or capable of physical interconnection and which under
normal conditions may be economically operated as a single interconnected
and coordinated system confined in its operations to a single area or
region, in one or more States, not so large as to impair (considering the
state of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation.
On the basis of this statutory definition, the Commission has established four
standards that must be met before the Commission will find that an integrated
electric system will result from a proposed acquisition of securities:
(1) the utility assets of the system are physically interconnected or
capable of physical interconnection;
_________________________
/18/ Gaz Metropolitan, Inc., quoting In the Matter of Union Electric Company,
Holding Co. Act Release No. 18368, 45 S.E.C. 489, 505 (April 10, 1974), aff'd
without op. sub nom. City of Cape Girardeau, Missouri v. S.E.C., 521 F.2d 324
(D.C. Cir. 1975). See also, New Century Energies, File No. 70-8787.
Environmental Action, Inc. v. S.E.C., 895 F.2d 1255, 1263 (9th Cir. 1990)
(citing In re Electric Energy, Inc., Holding Co. Act Release No. 35-13781, 38
S.E.C. 658, 668 (Nov. 28, 1958)).
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(2) the utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) the system must be confined in its operations to a single area or
region; and
(4) the system must not be so large as to impair (considering the state
of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation.
The Merger satisfies all four of these requirements.
First, LG&E and KU are already physically interconnected. LG&E and KU are
directly connected through transmission lines that they own, including two 138
Kv transmission lines and two 69 kv transmission lines. See Exhibit E-1.
Even if LG&E and KU were not actually interconnected, they would be deemed
capable of interconnection by virtue of their membership in the Midwest
Independent System Operator ("Midwest ISO"). In the past, the Commission has
determined that membership in a "tight" power pool satisfied the interconnection
standard for purposes of Sections 11(b)(1) and 2(a)(29)(A). UNITIL Corporation,
Holding Co. Act Release No. 25554 (April 24, 1992). This determination of
interconnection also has been interpreted to include independent system
operators. Conectiv, Inc., Holding Co. Act Release No. 26832 (Feb. 25,
1998).
LG&E and KU were among the original signatories to the Midwest ISO
Agreement. The Midwest ISO was developed in accordance with the FERC's Order No.
888, which order encouraged the formation of independent system operators. The
major reasons for establishing the Midwest ISO are: to provide access to a large
regional transmission system; to solve transmission pricing problems, including
pancaking of rates and loop flow issues; to maintain or improve system
reliability and security; and to coordinate planning of the transmission system.
On behalf of the Midwest ISO, ten transmission-owning public utilities
(including LG&E and KU) submitted an application to the FERC on January 15,
1998, for approval to transfer operational control over their transmission
facilities to the Midwest
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ISO. Concurrent with their application, the utilities submitted the Midwest ISO
Tariff, the Midwest ISO Agreement and related documents for approval to
establish an independent transmission system operator. FERC issued an order on
September 16,1998,/19/ authorizing the establishment of the Midwest ISO,
conditioned upon the resolution of certain issues. It is anticipated that the
Midwest ISO will be fully operational by mid-2001. Therefore, LG&E and KU are
also interconnected through the Midwest ISO.
Second, LG&E and KU will continue to be economically operated as a single
interconnected and coordinated system. The two companies are interconnected by
a transmission system which allows the transfer of power between LG&E and KU.
LG&E and KU will continue operating as a single system, economically dispatched.
Third, this single integrated system will operate in a single area or
region, the area delineated on Exhibit E-1, covering portions of Kentucky,
Virginia, and Tennessee. In considering size, the Commission has consistently
found that utility systems spanning multiple states satisfy the single area or
region requirement of the 1935 Act. For example, the Entergy system covers
portions of four states (Entergy, Holding Co. Act Release No. 25952 (Dec. 17,
1993)); the Southern system provides electric service to customers in portions
of four states (Southern Co., Holding Co. Act Release No. 24579 (Feb. 12,
1998)); and New Century Energies serves customers in six states (New Century
Energies, Holding Co. Act Release No. 26748 (Aug. 1, 1997)).
Fourth, the system is not so large as to impair the advantages of localized
management, efficient operations, and the effectiveness of regulation. The
Commission's past decisions on "localized management" show that the Merger fully
preserves the advantages of localized management. In these cases, the Commission
has evaluated localized management in terms of: (i) responsiveness to local
needs, see American Electric Power Co., Holding Co. Act
______________________
/19/ Midwest Independent Tranmission System Operator, Inc., 84 FERC (P) 61,231
(1998).
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Release No. 20633, 46 S.E.C. 1299, 1312 (July 21, 1978)(advantages of localized
management evaluated in terms of whether an enlarged system could be "responsive
to local needs"), General Public Utilities Corp., Holding Co. Act Release No.
13116, 37 S.E.C. 28, 36 (Mar. 2, 1956) (localized management evaluated in terms
of "local problems and matters involving relations with consumers"); (ii)
whether management and directors were drawn from local utilities, see Centerior
Energy Corp., Holding Co. Act Release No. 24073, 35 S.E.C. Docket 769, 775 (Apr.
29, 1986) (advantages of localized management would not be compromised by the
affiliation of two electric utilities under a new holding company because the
new holding company's "management [would be] drawn from the present management"
of the two utilities); Northeast Utilities, Holding Co. Act Release No. 25221,
47 S.E.C. Docket 1270, 1285 (Dec. 21, 1990)(advantages of localized management
would be preserved in part because the board of New Hampshire Utility, which was
to be acquired by an out-of-state holding company, included "four New Hampshire
residents"); (iii) the preservation of corporate identities, see Id. (utilities
"will be maintained as separate New Hampshire corporations. . .[t]herefore the
advantages of localized management will be preserved"); Columbia Gas & Electric
Corporation, Holding Co. Act Release No. 2477, 8 S.E.C. 443 (Jan. 10,
1941)(benefits of local management maintained where the utility to be added
would be a separate subsidiary); and (iv) the ease of communications, see
American Electric Power Co., supra, at 1312 (distance of corporate headquarters
from local management was a "less important factor in determining what is in the
public interest" given the "present-day ease of communication and
transportation.")
The Merger satisfies all of the factors regarding "localized management"
noted above. LG&E and KU will continue to operate through regional offices with
local service personnel and line crews available to respond to customers' needs.
The Merger Agreement does not change the existing management of LG&E or KU.
After the Merger, LG&E and KU will maintain their current offices as subsidiary
headquarters and as local operating headquarters for the areas they presently
serve, while LG&E Energy will maintain the LG&E Energy Group headquarters. KU
will maintain its Lexington headquarters and a substantial presence throughout
its service territory in order to conduct the state-wide
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operations of KU. Although the location of the corporate headquarters of
Powergen is distant from customers served by LG&E and KU, this distance is, as
noted by the Commission in the American Electric Power case supra, a relatively
unimportant factor given the present ease of transportation and communications
and the retention of the LG&E and KU headquarters at their present location. In
addition, the Commission in the National Grid Order approved a substantially
similar management arrangement. Thus, the Merger will preserve all the benefits
of localized management of LG&E and KU.
The Merger will result in the following changes to the Boards of Directors
of LG&E Energy, LG&E, and KU. The current Board of Directors of each of LG&E
Energy, LG&E and KU will be replaced by a new three-member Board of Directors.
The Merger Agreement provides that, for three years after the Merger, one member
of the LG&E Energy Board of Directors will be an individual who immediately
prior to the Merger is an officer or director of LG&E Energy. Powergen also
expects that this individual will serve on the KU and LG&E Boards of Directors.
In addition to LG&E Energy's Board of Directors, an advisory board comprised of
members of LG&E Energy's current Board will be established to advise Powergen on
local regulatory and management issues. Thus, the Merger Agreement will
preserve the advantages of local representation.
Finally, the Merger will not impair the effectiveness of state regulation.
LG&E and KU will continue their separate existence as before and their utility
operations will remain subject to the same regulatory authorities by which they
are presently regulated, namely the Kentucky Commission, the Virginia
Commission, the Tennessee Commission, and the FERC. This Merger will not be
consummated unless all required regulatory approvals are obtained.
. Gas Utility System
Section 2(a)(29)(B)defines an "integrated public utility system" as applied
to gas utility companies as:
a system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by being
operated as a single coordinated system confined in its
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operations to a single area or region, in one or more States, not so large
as to impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation, and
the effectiveness of regulation: Provided, that gas utility companies
deriving natural gas from a common source of supply may be deemed to be
included in a single area or region.
The LG&E gas utility system will meet the standard set forth in Section
2(a)(29)(B) and, therefore, will satisfy the requirements of Sections
10(c)(1)and (2) and should be approved by the Commission.
LG&E's gas utility system will operate as a coordinated system confined in
its operation to a single area or region covering portions of Kentucky. See
Exhibit E-1. As shown by the maps in Exhibit E-1, there is substantial overlap
between the gas service territory of LG&E and the electric service territories
of LG&E and KU. The system also will not be so large as to impair the advantages
of localized management or the effectiveness of regulation. As set forth in Item
3, Section A.2.a.ii above, localized management will be preserved. The
centralized functions of LG&E's gas utility business will continue to be managed
from Louisville, Kentucky, and the local functions will continue to be handled
from several regional offices. Management will, accordingly, remain close to the
gas operations, thereby preserving the advantages of local management. As also
set forth in Item 3, Section A.2.a.ii, from a regulatory standpoint there will
be no impairment of regulatory effectiveness. The same regulators currently
overseeing the LG&E gas operations (i.e., the Kentucky Commission) will
continue to have jurisdiction after the Merger.
For all of these reasons, the post-transaction gas operations satisfy the
integration requirements of Section 2(A)(29)(B).
iii. Section 11 Analysis - Retention of
Gas Utility System
As noted above, both the electric utility operations and gas utility
operations of LG&E Energy will continue to be separately integrated. For the
reasons set forth below, Applicants respectfully submit that LG&E's gas utility
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business is retainable under the standards of Section 11 of the Act.
Historically, the Commission had considered the question of whether a
registered electric system could retain a separate gas system under a strict
standard that required a quantification of the loss of substantial economies
before retention would be permitted. New England Electric System, 41 S.E.C. 888
(1964). In its affirmation of that decision, the U.S. Supreme Court declared
that a loss of substantial economies could be demonstrated by the inability of
the separate gas system to survive on a stand-alone basis. SEC v. New England
Electric System, 384 U.S. 176, 181 (1966). This rigid interpretation of the
requirements of Section 11(b)(1) has been explicitly eased by the Commission in
its most recent decisions under Sections 9(a) and 10 of the Act, both with
respect to exempt holding companies (TUC Holding Company, Holding Co. Act
Release No. 26749 (Aug. 1, 1997) and Houston Industries Incorporated, Holding
Co. Act Release No. 26744 (July 24, 1997)) and newly formed registered
companies (e.g., New Century Energies, Inc., Holding Co. Act Release No. 26748
(Aug. 1, 1997) and SCANA Corp., Holding Co. Act Release No. 27133 (Feb. 9,
2000)).
In these recent decisions, the Commission acknowledged the transformation
of utilities' status as franchised monopolies with captive ratepayers to
competitors and the convergence of the electric and gas industries that was then
underway (and which continues today). As a result, the historical standards of
review have become outdated as separated electric and gas companies would be
weaker competitors than they would be as combined companies in the same market.
See SCANA Corp., Holding Co. Act Release No. 27133 (Feb. 9, 2000); New Century
Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997); Houston
Industries Incorporated, Holding Co. Act Release No. 26744 (July 24, 1997).
Thus, newer transactions, such as Powergen's proposed acquisition of LG&E Energy
and subsequent registration of the merged systems, should be evaluated on the
basis of new Commission precedent and policy in light of changing industry
standards.
Applicants believe that the Commission should approve the Merger and allow
the retention of LG&E's gas system as a
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matter of policy and as a matter of fairness, and can approve the Merger as a
matter of law. First, as noted above, the Commission has already acknowledged
that the electric and gas industries are converging and that combination
companies may be more effective competitors in a given market. The Commission
has recognized and accepted the changing nature of the energy industry and, in
particular, the fact that the combination of multiple electric and gas
operations in a single company offers that company a means to compete more
effectively in the emerging energy services business in which a few cents of
cost per unit can make the difference between economic success and economic
failure. WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998),
aff'd sub nom., Madison Gas and Electric Company v. SEC, supra. Indeed, the
Commission has noted that "the utility industry is evolving towards a broadly
based energy-related business"/20/ marked by "the interchangeability of
different forms of energy, particularly gas and electricity."/21/ In the instant
situation, the lost economies that would follow from denying the retention of
LG&E's gas utility system are substantial, both quantitatively and
qualitatively.
Section 10(c)(1) does not require that the Commission apply Section
11(b)(1) without consideration of the lost economies that would result from
divestiture of additional systems in considering acquisitions under Section
9(a). As the Court of Appeals stated in Madison Gas and Electric Company v.
SEC:
By its terms . . ., Section 10(c)(1) does not require that new acquisitions
comply to the letter with Section 11. In contrast to its strict
incorporation of Section 8 . . ., with respect to Section 11 Section
10(c)(1) prohibits approval of an acquisition only if it "is detrimental to
the carrying out of Section 11's provisions." The Commission has
consistently read this provision to import into Section 10's regime not
only
_________________________
/20/ Consolidated Natural Gas Company, Holding Co. Act Release No. 26512 (April
30, 1996).
/21/ Id.
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the integration requirement of 11(b)(1)'s main clause but also the
exceptions to the requirement in the (A)(B)(C) clauses./22/
The economies and benefits of a combined gas and electric system would be
lost if Powergen were forced to divest LG&E's gas system. The electric
operations and gas operations of LG&E currently realize efficiencies from
numerous joint, or shared, services - e.g., joint billing, joint customer
service, joint meter reading, shared installation and inspection of service
lines and shared construction equipment. The stand alone gas company would have
greater operating costs per unit sold and would, therefore, realize a lesser
amount of any increased revenue on its bottom line./23/ Furthermore, Powergen
_______________________
/22/ Section 11(b)(1) states that
the Commission shall permit a registered holding company to continue to
control one or more additional integrated public utility systems, if,
after notice and opportunity for hearing, it finds that -
(A) Each of such additional systems cannot be operated as an
independent system without the loss of substantial economies
which can be secured by the retention of control by such holding
company of such system;
(B) All of such additional systems are located in one state, or
in adjoining states, or in a contiguous foreign country; and
(C) The continued combination of such systems under the control
of such holding company is not so large (considering the state of
the art and the area or region affected) as to impair the
advantages of localized management, efficient operation, or the
effectiveness of regulation.
/23/ The Commission has recently approved a similar lost economies analysis in a
situation where a registered holding company acquired a pure gas utility company
and the application examined the lost revenue enhancement opportunities that
would occur if the acquiror were forced to divest any of its newly acquired gas
utility operations.
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anticipates that many new electric generating units will be gas fired, which
will require expertise in gas transportation and purchasing.
Divestiture of LG&E's gas operations would cause a significant amount of
damage to LG&E Energy's ability to compete in the marketplace. Further,
divestiture would result in higher costs for LG&E Energy's customers and
regulators. As noted above, the gas and electric industries are converging
nationwide, and separation of electric and gas businesses would likely cause the
separated entities to be weaker competitors than they would be together. As
competition has developed in the utility industry, those companies in the retail
energy delivery business have found it a competitive advantage to be able to
offer customers a range of options to meet their energy needs. Potential non-
quantifiable costs to customers which would result from divestiture of LG&E's
gas operations involve the additional expenses of doing business with two public
utility companies instead of one and the costs associated with having multiple
companies supply information to shareholders and publish reports required by the
Exchange Act. Similarly, regulatory costs would involve additional duties for
the staff of the Kentucky Commission as a result of dealing with an additional
public utility company. These additional duties would largely be the result of
duplicating existing functions such as separate requests for approvals of
financing.
LG&E has prepared a study of its gas utility operations that analyzes the
lost economies that its gas utility operations would suffer upon divestiture
when compared to its retention pursuant to the Merger. This study, entitled
"Analysis of the Economic Impact of a Divestiture of the Gas Operations of
Louisville Gas and Electric Company," is attached to this Application as Exhibit
O-1 (the "Gas Study"). As set forth in the Gas Study, if the gas operations of
LG&E were operated on a stand-alone basis, lost economies from the need to
replicate services, the loss of economies of scale, the costs of reorganization,
and other factors would be immediate and substantial. In the absence of rate
relief, those lost
____________________________
See Northeast Utilities, Holding Co. Act Release No. 27127
(Feb. 1, 2000).
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economies would substantially injure the shareholders of LG&E upon the
divestiture of the gas operations. As the study further shows, if rate relief
were granted with respect to the lost economies, consumers would bear those
substantial costs over what they would have to pay if the properties were
retained as contemplated by the Merger.
As set forth in the Gas Study, divestiture of the gas operations of LG&E
into a stand-alone company would result in lost economies in LG&E's electric and
gas businesses of a total of $43,886,140. The table below shows the 1999
operating revenues, operating revenue deductions, gross income and net income of
LG&E.
<TABLE>
<CAPTION>
Operating Operating Revenue Gross Net
Revenues Deductions Income Income
<S> <C> <C> <C> <C>
Gas $204,675,655 $169,405,436 $ 35,270,219 $ 24,165,566
Electric $768,400,832 $601,137,059 $167,263,773 $114,601,606
</TABLE>
================================================================================
On a percentage basis, the lost economies in the gas business amount to
69.04% of net income of LG&E's gas business in 1999 -- far in excess of the loss
of net income in UNITIL, where the Commission allowed the retention of gas
utility operations, and the 30% loss in New England Electric System that the
Commission has described as the highest loss of net income in any past
divestiture order./24/ As a percentage of LG&E's 1999 gas operating revenues,
the lost economies in the gas business described in the Gas Study amount to
8.15% -- higher than the losses in any past divestiture order./25/ As a
percentage of expenses or
___________________________
/24/ See UNITIL Corp., Holding Company Act Release No. 25524 (April 24, 1992)
--- ------------
("The Commission has required divestment where the anticipated loss of income of
the stand-alone company was approximately 30%..." or "29.9% of net income before
taxes"), citing SEC v. New England Electric System, 390 U.S. 207, 214 n.11
--- ---------------------------
(1968).
/25/ The highest loss of operating revenues in any case ordering divestiture is
commonly said to be 6.58%. See, e.g., UNITIL Corp., supra ("[o]f cases in which
--- ---- ------------ -----
the Commission has required divestment, the highest estimated loss of operating
revenues of a stand-alone company was 6.58%...").
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operating revenue deductions for LG&E's gas business in 1999, the
lost economies described in the Gas Study would amount to 9.85%, higher than the
losses in any past divestiture order and, in Entergy Corporation, Holding Co.
Act Release No. 25952 (Dec. 17, 1993), another case in which the Commission
authorized the retention of gas operations. As a percentage of LG&E's 1999
gross gas income, the lost economies described in the Gas Study amount to
47.30%, far in excess of the highest loss of gross income in any divestiture
order.
In order to recover the estimated lost economies resulting from the
operation of the gas business on a stand-alone basis, LG&E's gas business would
need to increase rate revenue by $31,116,687, or 15.2%. This increase in rate
revenues would have a direct and immediate negative impact on the rates charged
to customers for electric and gas services.
In addition to the foregoing impact to the gas business, LG&E's electric
business would also suffer lost economies, primarily due to the expenses of
additional employees required to perform many functions accomplished by
employees who perform work for both the electric and gas businesses. Assuming
that such additional costs are recovered through rate increases, LG&E's electric
business would need to increase rate revenue by $12,769,453 or 1.7%.
Finally, the customers of LG&E who are customers of both its gas business
and its electric utility business will experience a doubling of their postage
costs to pay separate bills. The total estimated increase in such postage costs
is $3.96 per customer per year or $1,054,900 in the aggregate.
For all of the foregoing reasons, the Commission should hold that the
combination of electric and gas operations under Powergen's newly registered
holding company is lawful under the provisions of Section 8 and is not
detrimental to the carrying out of the provisions of Section 11.
iv. Retention of "Other Businesses"
The final question under Section 11(b)(1) is whether the "other businesses"
of Powergen and LG&E Energy are retainable under the standards of Section 11 and
the statutory
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amendments thereto. As previously noted, Powergen UK (or Powergen Group Holdings
from the time of its formation), Powergen's direct subsidiary, will claim an
exemption as a FUCO under the Act. Section 33, unlike Section 32, which
requires EWGs to be exclusively engaged in owning and operating exempt
facilities, does not require FUCOs to be engaged exclusively in the business of
owning and operating foreign utilities. Thus, Powergen UK and its subsidiaries
will be exempt from regulation and are retainable under the Act in accordance
with the provisions of Section 33(a)(1) of the Act. Attached as Exhibit F-1.2 is
a description of these subsidiaries and their present business activities.
LG&E Energy's non-utility subsidiaries are retainable under the
Commission's prior precedent, and under the Commission's Rule 58. The business
of each of these subsidiaries and its basis for retention is set forth in
Exhibit F-2.2 hereto.
In Xcel Energy Inc., Holding Company Act Release No. 27212 (August 16,
2000), New Century Energies, Inc., Holding Company Act Release No. 26748 (August
1, 1997) And WPL Holdings, Inc., Holding Company Act Release No. 26856 (April
14, 1998), the Commission excluded the non-utility businesses such applicants
sought to retain from the limitation upon investment in energy-related companies
under Rule 58, noting that the restrictions of Section 11(b)(1) are aplicable to
registered holding companies and not to exempt holding companies. LG&E Energy
and KU are both exempt holding companies. Rule 58 provides in section
(1)(1)(ii) that investments in non-utility activities that are exempt under Rule
58 cannot exceed 15% of the consolidated capitalization of the registered
holding company. In its statement supporting the adoption of the Rule, the
Commission stated:
The Commission believes that all amounts that have actually been
invested in energy-related companies pursuant to Commission order
prior to the date of effectiveness of the Rule should be excluded from
the calculation of aggregate investment under Rule 58. The Commission
also believes it is appropriate to exclude from the calculation
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all investments made prior to that date pursuant to available
exemptions./26/
Because the non-utility investments of LG&E Energy, as an exempt holding
company, were exempt under the Act, investments made prior to the effective date
of Rule 58 which will continue as part of the Powergen System after consummation
of the Merger, should not count in the calculation of the 15% maximum.
v. The Merger will satisfy the requirements of Section
11(b)(2), as incorporated by Section 10(c)(1).
Section 11(b)(2) further directs the Commission:
To require . . . that each registered holding company, and each subsidiary
company thereof, shall take such steps as the Commission shall find
necessary to ensure that the corporate structure or continued existence of
any company in the holding-company system does not unduly or unnecessarily
complicate the structure, or unfairly or inequitably distribute voting
power among security holders, of such holding-company system. In carrying
out the provisions of this paragraph the Commission shall require each
registered holding company (and any such company in the same holding
company system with such holding company) to take such action as the
Commission shall find necessary in order that such holding company shall
cease to be a holding company with respect to each of its subsidiary
companies which itself has a subsidiary company which is a holding company.
Except for the purpose of fairly and equitably distributing voting power
among the security holders of such company, nothing in this paragraph shall
authorize the Commission to require any change in the corporate structure
or existence or any company which is not a holding company, or of any
company whose principal business is that of a public-utility company.
Section 11(b)(2) raises two issues: first, will the corporate structure or
continued existence of any company unduly or unnecessarily complicate the
structure of the Powergen holding company system post-Merger
____________________
/26/ Holding Co. Act Release No. 26667 at 75.
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and, second, will the Merger result in an unfair or inequitable distribution of
voting power among the security holders of Powergen. As explained more fully
below and as found by the Commission in the National Grid Order, any apparent
complexity in the resulting holding company system does not create any
inequitable distribution of voting power and is necessary in order to achieve
economic efficiencies.
The principal economic effect of the transaction structure will be to
permit Powergen to maximize economic returns, given that the consideration for
the Merger will be funded by external borrowings in the United Kingdom. The only
external parties to the contemplated transactions will be the sophisticated
commercial lenders that will be advancing moneys to US Holdings under fully
negotiated lending agreements, none of which will involve any guarantees by, or
pledges of assets from, any member of the LG&E Energy Group. Powergen believes
that engaging in financing activities at US Holdings is preferable in order to
increase the separation between Powergen's US utility activities and the FUCO
activities of powergen UK. Further, the fact that US Holdings engages in bank
borrowings and investment grade financings does not change the essential
character of US Holdings as a holding company and conduit for financing - US
Holdings will engage in no business activities except raising capital and acting
as a conduit for funds within the Powergen System. Thus Powergen believes
approval of financing activity at US Holdings is consistent with the
Commission's findings in the National Grid Order in which it determined to "look
through" the intermediate holding companies in that application. Finally,
permitting financing activity at US Holdings is consistent with the Commission's
recent decision in The Southern Company, Holding Co. Act Release No. 27134
(February 9, 2000), allowing long-term debt and preferred stock in a top holding
company.
It is common practice for U.K.-based multinational corporations to hold
their non-U.K. subsidiaries through one or more intermediary companies
incorporated under laws of European Union member states. These types of
transaction structures are implemented to minimize the impact of tax on the
repatriation of dividends and interest to the United Kingdom and are understood
by the U.K. tax authorities. These structures are not unusual. Powergen has used
this type of structure in connection with its other
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foreign investments. U.S. registered holding companies also employ similar
structures in connection with their, albeit out-bound, cross-border transactions
into the United Kingdom. See, e.g., Exhibit H from the Form U5S filed by The
Southern Company for the year ended December 31, 1998, detailing the ownership
structure for the system's EWGs and FUCOs. Moreover, the Commission recently
approved a similar structure for National Grid.
. Powergen's Corporate Structure Will Not Be "Unduly or
Unnecessarily" Complicated.
As noted above, Powergen's proposed transaction structure is more
complicated than the traditional corporate structure commonly used by U.S.
registered holding companies with respect to their U.S. subsidiaries and
operations in that there will be more corporate layers between Powergen and LG&E
Energy than there are, for example, between LG&E Energy and its operating
subsidiaries. There also will be financing activity, in the form of bank
borrowings, and the issuance of debt securities and preferred stock at US
Holdings. The Applicants believe that the structure is nonetheless appropriate
and not unusual for cross-border transactions. Powergen proposes to continue the
current LG&E Energy corporate and holding company system structure. Accordingly,
the Applicants seek a declaratory order requesting that the proposed transaction
and financing structure is in compliance with Section 11 of the Act, solely for
purposes of complying with the "great grandfather" provisions of Section
11(b)(2).
Further, the Intermediate Companies will not be a means by which Powergen
seeks to diffuse control of LG&E Energy and the LG&E Energy Subsidiary
Companies. Rather, the Intermediate Companies (other than US Holdings) will be
created as special-purpose entities for the sole purpose of helping the parties
capture economic efficiencies that might otherwise be lost in a cross-border
transaction. Except with respect to US Holdings in connection with the financing
transactions described herein, there will be no third-party lenders or investors
in any of the Intermediate Companies. Each of the Intermediate Companies will be
wholly-owned, directly or indirectly, by Powergen and the creation and existence
of the Intermediate Companies will not affect the operation of the LG&E Energy
Group. Indeed,
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the corporate structure "downstream" from LG&E Energy will remain unaffected as
a result of the proposed Merger. Accordingly, this is not the type of situation
that concerned the drafters of the Act, and, in the Applicants' view, the
Commission should thus exercise its discretion to find that any apparent
complexity of the proposed transaction structure is neither undue nor
unnecessary./27/
It is again worth emphasizing that none of the economic planning reflected
in the proposed transaction structure will result in any change in the corporate
organization of the LG&E Energy Group or in the financing transactions
undertaken by LG&E Energy and its subsidiaries. Neither LG&E Energy nor any of
LG&E Energy's subsidiaries will borrow or issue any security or pledge any
assets to finance any part of the Cash Consideration. Thus, there is no
possibility that implementation and continuance of the proposed transaction
structure could result in an undue or unnecessarily complex capital structure to
the detriment of the public interest or the interest of consumers.
The foregoing structure and related facts are virtually identical to the
corporate structure and facts presented to the Commission in National Grid,
where the Commission decided "to 'look through' the Intermediate Companies (or
treat the Intermediate Companies as a single company) for purposes of the
analysis under Section 11(b)(2) of the Act," and found that corporate structure
in that case did "not unduly or unnecessarily complicate the structure" of
National Grid. Applicants respectfully submit that the same result should follow
in the present case.
______________________
/27/ KU's role in the corporate structure of LG&E Energy also violates
technically the "great-grandfather" provision of Section 11(b)(2); consequently,
Applicants also request that the Commission find that KU is not a holding
company for purposes of the "great grandfather" provision for the following
reasons. First, although the Commission applies a relaxed standard of Section 11
to exempt holding company systems, the present corporate structure of LG&E
Energy has been reviewed and approved by the Commission when LG&E and KU merged.
See Holding Co. Act Release No. 26866 (Apr. 30, 1998). Second, the Commission
authorized a similar structure for NEES in the National Grid Order by allowing
New England Power Company to serve as a holding company within the NEES
corporate structure.
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. Voting Power Will Be Fairly and Equitably
Distributed.
As stated previously, Powergen is a public limited company organized under
the laws of England and Wales and domiciled in the United Kingdom. Its ordinary
shares are listed and traded on the LSE and its ADSs are listed and traded on
the NYSE. The substantial majority of Powergen's 741,094 public shareholders are
not U.S. residents. The government of the United Kingdom also owns what is
commonly referred to as a "golden share" in Powergen. The golden share is a
governmental change-in-control regulation effected through governmental
ownership of a single, "golden" share. In the case of Powergen. Her Majesty's
Government's golden share confers only the right to prevent certain actions,
such as a person or group of persons from acquiring more than 15% of Powergen's
shares. This golden share does not entitle Her Majesty's Government to vote at
meetings of Powergen shareholders or exert any positive control over Powergen or
its business. Also, it does not restrict shareholder voting rights or affect the
economics of the financial structure of Powergen. The golden share is similar in
its effect to the laws of some states in the United States, which prohibit the
acquisition of more than a specified percentage (often 5% or 10%) of a holding
company's voting power without prior governmental approval. Thus, although a
golden share takes on a different form than normally seen in the United States,
its effect is not materially different from the effect of existing statutes in
the United States.
Powergen has ADSs in the United States which trade as American Depositary
Receipts ("ADRs") and are principally held by U.S. institutions. Powergen's
shareholders and ADR holders will approve the Merger transaction under
applicable requirements of the LSE. The moneys necessary to pay the Cash
Consideration will be borrowed by US Holdings from sophisticated commercial
lenders and the financing has been documented in the Credit Facility./28/ None
of the Intermediate Companies, other than US Holdings, will have any third-party
equity or debt
_______________________
/28/ As discussed above, a portion of the Cash Consideration may be available
from other sources at the time of Merger.
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holders. LG&E Energy will not have any third-party equity holders other than its
immediate parent, although it may have third-party short-term debt holders. LG&E
and KU currently have, and will continue to have, publicly issued preferred
stock and long-term debt, but the terms of these securities will not be altered
or modified or otherwise affected by the Merger or the proposed transaction
structure. As a result, the Merger will secure for Powergen voting power and
control over LG&E Energy and its direct and indirect subsidiaries.
The Applicants note that, as was the case in National Grid, maintaining an
efficient post-acquisition structure will require them to respond quickly to
changes in matters such as tax and accounting rules, including making
appropriate revisions after consummation of the Merger to the Intermediate
Companies that will not have any material impact on the financial condition or
operations of LG&E Energy and its subsidiaries or of US Holdings. For the
reasons noted above, and especially considering the lack of any investors
holding voting equity securities in the Intermediate Companies, the Applicants
request authorization to make these non-material corporate structure changes
without having to seek specific authority from the Commission for each change,
subject to the conditions that no change (i) will result in the introduction of
any investors holding voting equity securities in the Intermediate Companies,
(ii) will introduce a non-European Union or non-U.S. incorporated entity into
the upper structure, or (iii) will have any material impact on the financial
condition or operations of LG&E Energy and its subsidiaries or of Powergen.
Applicants note that the Commission granted National Grid the authority to make
such immaterial changes subject to comparable conditions.
b. Section 10(c)(2)
The standards of Section 10(c)(2) are satisfied because the Merger will
tend toward the economical and efficient development of an integrated public
utility system, thereby serving the public interest, as required by that section
of the Act. Integration is not an issue as the Merger simply will impose a new
holding company structure over an existing integrated public utility system. The
analysis under Section 10(c)(2) focuses then on the associated benefits, the so-
called "economies and efficiencies" as a result of the proposed transaction.
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Such benefits can be found in two forms: (i) the benefits to customers,
employees and shareholders, arising from the transaction, and (ii) the strategic
benefits which the transaction will bring to Kentucky and Virginia.
i. Benefits to customers, employees and shareholders
LG&E Energy shareholders will benefit from the consideration received for
their shares on closure of the transaction. The Cash Consideration of $24.85
per share is a 58% premium over the trading price for their shares as of the
last trading day before the announcement of the Merger. Shareholders will be
paid in cash. The LG&E Energy Board has received an opinion from The Blackstone
Group L.P., an investment banking firm with extensive experience in mergers,
that the consideration for the Merger is fair to LG&E Energy shareholders from a
financial point of view.
For LG&E Energy Group employees, the Merger represents an opportunity for
growth as the company becomes the U.S. base of operations for a large
international entity. 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 Group
employees remain at the forefront of an increasingly competitive U.S. electric
industry, while Powergen's expanding foreign operations will provide
opportunities for LG&E Energy Group employees abroad. For Kentucky, the Merger
ensures that utility operations in Kentucky will remain headquartered in
Kentucky.
After the Merger, LG&E Energy 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 are expected to benefit from improved service quality and
operating efficiency resulting from reciprocal adoption of best practices. The
adoption of best practices should benefit LG&E Energy's customers in two ways.
First, customers should benefit from Powergen's significant expertise in
electric power generation, which is necessary for an efficient power supply
market. Power supply is the major cost element of electricity and is crucially
influenced by the efficient development of the market for the product.
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Second, customers should benefit from Powergen's size. Powergen's
significantly larger scale, both in financial and operational terms, will
enhance the ability of LG&E Energy to utilize new developments in transmission
and distribution technology, information systems, and capital markets, where
these can be seen to bring economic benefit.
The Merger will enable LG&E Energy to become part of a merged entity with
the size, resources, scale, and the experience to succeed in the rapidly
evolving energy industry. The Merger thus serves the interests of LG&E Energy
Group customers, LG&E's and KU's communities, LG&E Energy Group employees and
shareholders.
ii. Strategic benefits
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 Kentucky and
Virginia.
Applicants recognize that the energy industry across the world has entered
a period of accelerating evolution, continuing deregulation and regulatory
change to encourage 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 between Powergen and LG&E Energy 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 generation, transmission and
distribution technology, information systems, and capital markets. The ESM that
has been established by the Kentucky Commission for LG&E and KU provides
customers with a share of benefits or cost reductions that may result from the
sharing of best practices and economies of scope and scale.
Powergen's experience in the United Kingdom and elsewhere should
also benefit Kentucky and Virginia consumers. Powergen's experience
is derived from operating and managing one of the United Kingdom's leading
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integrated electricity and gas companies, from trading gas, electricity, and oil
in seven different energy markets in the United Kingdom and Europe, and from
developing and operating combined heat and power plants in the United Kingdom as
well as power projects in Germany, Portugal, Hungary, Indonesia, India, South
Korea, and Australia, totaling more than 8,000 MW of output. In addition to its
operational experience and expertise, Powergen has gained considerable
experience from the privatization of the United Kingdom's electric industry in
1990. During the past decade, the United Kingdom's electricity and gas markets
have been restructured as the industry has evolved from a state-owned monopoly
to private ownership and competition. While the solutions reached in industry
restructuring in the United Kingdom are themselves still evolving and cannot be
transplanted simplistically into the U.S. market, Powergen's experience and
expertise will be available to LG&E and KU both as they participate in the
increasing competitive wholesale energy markets and as they prepare to compete
and serve their customers if and when retail restructuring occurs.
Over the past 10 years, Powergen has developed unique skills both in the
United Kingdom and overseas and gained considerable experience in competitive
energy markets. In particular, Powergen has developed expertise in strategic
management, marketing, research and development, and information and technology
management. Following consummation of the Merger, Powergen will bring these
skills to Kentucky and Virginia.
As Applicants have noted, the Merger comes at a time of substantial change
in the U.S. electricity industry, with reform and restructuring proceeding
nationwide. The intentions of Powergen and LG&E Energy to pursue consolidation
and rationalization of transmission and distribution in the Midwest are seen as
being fully consistent with the views of the FERC on the development of strong
regional transmission organizations.
The Midwest ISO, of which LG&E and KU are members, is grappling with many
complex issues on transmission pricing, congestion management and market price
determination as it attempts to advance the development of the electric market
in the Midwest. Powergen's experience in addressing and finding
appropriate solutions to similar problems, both in the United Kingdom and in
other countries, will be important in preparing LG&E and KU for the
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development of electricity markets in the United States and in the timely
achievement of the benefits which such markets can bring.
Although some of the anticipated economies and efficiencies of the Merger
will be fully realizable only in the longer term, they are properly considered
in determining whether the standards of Section 10(c)(2) have been met. See
American Electric Power Co., 46 S.E.C. 1299, 1320-1321 (1978). Further, the
Commission has recognized that while some potential benefits cannot be precisely
estimated, nevertheless they too are entitled to be considered: "[S]pecific
dollar forecasts of future savings are not necessarily required; a demonstrated
potential for economies will suffice even when these are not precisely
quantifiable." Centerior Energy Corp., Holding Co. Act Release No. 24073 (April
29, 1986) (citation omitted). See Energy East Corporation, Holding Co. Act
Release No. 26976 (Feb. 12, 1999) (authorizing acquisition based on strategic
benefits and potential, but presently unquantifiable, savings).
3. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an application
is made under this section unless it appears to the satisfaction of the
Commission that such State laws as may apply in respect to such acquisition
have been complied with, except where the Commission finds that compliance
with such State laws would be detrimental to the carrying out of the
provisions of section 11.
As described in Item 4 of this Application, and as evidenced by the applications
and the requested certification from each of the affected state regulators,
Applicants intend to comply with all applicable state laws related to the
proposed transaction.
B. Proposed Financings
1. Introduction and General Request
As discussed earlier, upon consummation of the Merger, Powergen and each of
the Intermediate Companies will register as holding companies under Section 5
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of the Act. Although LG&E Energy will remain an exempt holding company under
Section 3(a)(1) of the Act, LG&E Energy and its subsidiary companies will be
regulated as members of the Powergen registered holding company system.
Therefore, in addition to authorization of the proposed acquisition of LG&E
Energy by Powergen under Section 10 of the Act, Applicants seek authorization to
conduct a number of financial transactions during the Authorization Period.
The proposed financing authority is intended primarily to fund Powergen's
U.S. operations. The Commission's approval of the proposed financings will give
the Applicants flexibility that will allow them to respond quickly and
efficiently to their financing needs and to changes in market conditions
permitting them to efficiently and effectively carry on competitive business
activities designed to provide benefits to customers and shareholders. Approval
of this Application is consistent with the National Grid Order and with existing
Commission precedent, both for newly registered holding company systems (See,
e.g., Conectiv, Inc., HCAR No. 26833 (Feb. 26, 1998); and for holding company
systems that have been registered for a longer period of time (See, e.g., The
Columbia Gas System, Inc., HCAR No. 26634 (Dec. 23, 1996); Gulf States Utilities
Co., HCAR No. 26451 (Jan. 16, 1996)); New Century Energies, Inc., HCAR No. 27000
(April 7, 1999)).
Applicants request authority to engage in the following transactions, which
are all described in greater detail later in this Section:
(i) financings by Powergen through the issuance of ordinary shares, ADSs,
and short-term debt (or the alteration of the terms of any then existing
authorized securities), and guarantees of the securities and obligations of, and
other forms of credit support for, the Powergen System;
(ii) financings by US Holdings, including issuance of preferred stock or
debt (or the alteration of the terms of any then existing authorized
securities), and guarantees of the securities and obligations of, and other
forms of credit support for, the U.S. Subsidiary Companies;
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(iii) financings by the Intermediate Companies, Powergen Capital and
Luxembourg Securities, through issuance of ordinary shares, common stock,
preferred stock and debt to, or other borrowings from, other Intermediate
Companies, Powergen, Powergen Capital or Luxembourg Securities, as the case may
be (or the alteration of the terms of any then existing authorized
security);
(iv) financings by LG&E Energy, through issuance of short-term debt (or
the alteration of the terms of any then existing authorized security), and
guarantees of the securities and obligations of, and other forms of credit
support for, the LG&E Energy Subsidiary Companies;
(v) financings by the LG&E Energy Subsidiary Companies, including: (a)
intra-system transactions, including but not limited to, (1) authorization of
borrowings and extensions of credit made under the LG&E Energy Group's existing
money pool and the repayment of these borrowings and elimination of these
extensions of credit during a two year transition period, (2) the formation and
implementation of two new money pools -- a Utility Money Pool and a Non-Utility
Money Pool, and (3) other intra-system financings among LG&E Energy and the U.S.
Non-Utility Subsidiaries; and (b) the issuance of short and long-term debt, and
other securities (or the alteration of the terms of any then existing authorized
security);
(vi) entering into currency and interest rate hedging instruments;
(vii) acquisitions, redemptions and retirements by Powergen and each of
the U.S. Subsidiary Companies of their respective subsidiaries' securities;
(viii) forming financing entities and issuances by such entities of
securities otherwise authorized herein or pursuant to applicable exemptions
under the Act, including intra-system guarantees of such securities;
(ix) acquiring intermediate subsidiaries for the purpose of investing in
EWGs or FUCOs, Rule 58 Subsidiaries, exempt telecommunications companies
("ETCs") or other non-exempt Non-Utility Subsidiaries;
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(x) reorganization of the Intermediate Companies and the U.S. Non-
Utility Subsidiaries; and
(xi) using the proceeds of financing transactions in an amount equal to
100% of the Powergen System's consolidated retained earnings for additional
investment in EWGs and FUCOs.
As explained more fully herein, the specific terms and conditions of the
requested authorities are not known at this time. Accordingly, the Applicants
represent that the proposed transactions will be subject to the following
general terms and conditions of issuance:
1. Each of Powergen and US Holdings will maintain its senior unsecured
long-term debt rating at an investment grade level as established by a
nationally recognized statistical rating organization, as that term is used in
paragraphs (c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 of the 1934 Act;
2. The common stock equity/29/ of each of LG&E and KU, individually, as
reflected in their most recent annual, quarterly or other periodic earnings
report, will not fall below 35% of total capitalization;/30/
3. Powergen will, from and after December 31, 2001, maintain its common
stock equity as a percentage of total capitalization, measured on a book value
U.S. GAAP basis, as reflected in its most recent annual, semi-annual or other
periodic earnings report, at 30%;
4. The underwriting fees, commissions or other similar remuneration paid
in connection with the non-competitive issue, sale or distribution of a security
pursuant to this Application will not exceed 5% of the principal or total amount
of the security being issued;
___________________________
/29/ Common stock equity includes common stock (i.e., amounts received equal to
the par or stated value of the common stock), additional paid-in capital,
retained earnings, and minority interests.
/30/ Applicants calculated the common stock equity to total capitalization ratio
as follows: common stock equity/(gross debt + preferred stock + common stock
equity).
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5. The aggregate amount of external debt and equity issued by Powergen
and US Holdings pursuant to the authority requested will not exceed $6.0 billion
at any one time outstanding, which amount will include any borrowings under the
$4.0 billion Credit Facility;
6. Powergen will not issue or guarantee any securities for purposes of
financing EWGs or FUCOs unless, at the time of each issuance or guarantee,
Powergen's additional "aggregate investment" post-Merger in EWGs and FUCOs, as
defined in Rule 53 under the Act, will not exceed 100 percent of the
consolidated retained earnings of Powergen; and
7. The proceeds from the sale of securities in external financing
transactions by US Holdings and the LG&E Energy Group will be used for the
general corporate purposes of the U.S. Subsidiary Companies. The proceeds from
the sale of capital stock and short-term debt by Powergen will be used by the
Powergen System subject to any applicable limits on such uses.
The Applicants represent that no proceeds of financing by Powergen will be
used to acquire a new subsidiary, other than a special purpose financing entity
as described below, unless such acquisition is consummated in accordance with an
order of the Commission or an available exemption under the Act.
The table below shows the revenues, net income and total assets of Powergen
for the fiscal year ended January 2, 2000, and LG&E Energy for the year ended
December 31, 1999, according to U.S. GAAP (except as otherwise noted)./31/
_________________________
/31/ The figures for revenues and net income for the fiscal year ended January
2, 2000 were translated into dollars using a rate of U.S. $1.6172 equals one
pound and for total assets using a rate of U.S. $1.6117 equals one pound.
Consistent with U.S. GAAP, Powergen's share of joint ventures and associate's
businesses is included in net income and assets but is omitted from revenues.
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Powergen LG&E ENERGY
($ mm) ($ mm)
Revenues 6,058/32/ 2,707
Net Income 1,819 62
Total Assets 10,740 5,134
The table below shows the revenues, net income and total assets of Powergen
for the twelve months ended July 2, 2000, and LG&E Energy for the twelve months
ended June 30, 2000, according to U.S. GAAP (except as otherwise noted)./33/
Powergen LG&E ENERGY
($ mm) ($ mm)
Revenues 6,100 2,716
Net Income 1,643 (159)
Total Assets 9,586 5,037
The table below shows the capitalization of Powergen, LG&E Energy, and the
combined group on a pro forma basis, for the last day of the 1999 fiscal year,
according to U.S. GAAP./34/
_________________________
/32/ Powergen revenues calculated in accordance with U.K. GAAP.
/33/ The figures for revenues and net income for the twelve months ended July 2,
2000 were translated into dollars using a rate of U.S. $1.5674 equals one pound
and for total asets using a rate of U.S. $1.5139 equals one pound. Consistent
with U.S. GAAP, Powergen's share of joint ventures and associate's businesses is
included in net income and assets but is omitted from revenues.
/34/ Pro forma capitalization does not include the planned application of
current Powergen cash balances ($1.03 billion at January 2, 2000 and $0.62
billion at July 2, 2000) to reduce existing debt and borrowings that otherwise
would be required to pay the Cash Consideration, reductions in debt otherwise
projected to occur in the course of 2000, or expected issuances of debt
securities by the LG&E Energy
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Powergen LG&E Energy Acquisition Combined
(U.S.$ mm) (U.S.$ mm) adjustments System
Short-term 158 450 - 608
Debt
Current Portion - 412 - 412
Long-Term
Debt
Long-term 4,145 1,299 3,278 8,722
Debt
Preferred - 135 - 135
Stock
Common Stock 3,833 1,251 (1,141) 3,943
Equity
Total 8,136 3,547 2,137 13,820
The table below shows the capitalization of Powergen as of July 2, 2000,
the capitalization of LG&E Energy as of June 30, 2000, and the proforma
capitalization of Powergen after giving effect to the Merger, according to U.S.
GAAP.
______________________
Group. The net effect of these developments will be to significantly reduce the
total debt and total capitalization of the combined system during the course of
2000 so that, at the closing of the Merger, the common stock equity as a
percentage of total capitalization will be near or above 30%. In addition,
Powergen has announced an intention to explore the sale of certain of its UK
generating assets and other assets located outside the UK and US. The net
proceeds from the sales of these assets will be available to repay acquisition
indebtedness. The Credit Facility (Clause 7.5) generally requires that at least
50% of these proceeds in excess of $100,000,000 be applied to repay amounts
owing under the Credit Facility.
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Powergen LG&E Energy Acquisition Combined
(U.S.$ MM) (U.S.$ MM) Adjustments System
Short-term
Debt 98 414 -- 512
Current Portion
Long-term
Debt -- 376 -- 376
Long-term
Debt 3,432 1,404 3,275 8,111
Preferred
Stock -- 143 If any 143
Common Stock
Equity 3,656 1,052 (945) 3,763
Total 7,186 3,389 2,330 12,905
2. Specifics of Proposed Financing Arrangements
a. Powergen and US Holdings
External Financing
Powergen and US Holdings request authority to issue equity and debt
securities aggregating not more than $6.0 billion at any one time outstanding
during the Authorization Period. This overall limit will include any borrowings
of US Holdings under the $4.0 billion Credit Facility (which borrowings will be
guaranteed by Powergen). The securities that Powergen and/or US Holdings
anticipate issuing could include, but are not limited to, ordinary shares,
preferred shares, options, warrants, long- and short-term debt (including
commercial paper), convertible securities, subordinated debt, bank borrowings
and securities with call or put options.
Powergen and US Holdings propose that the various securities to be issued
would fall within the following limits, but would not in the aggregate exceed
the $6.0 billion limit stated above:
Security $ billions
Ordinary Shares, including options and warrants 4.0
Preferred stock 1.0
Short-term debt financing 4.0
Long-term debt financing 6.0
(i) Ordinary Shares Issued by Powergen. Powergen's common stock equity
consists of ordinary shares, with a par value of 50 pence each, that
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are listed on the LSE. Powergen currently has ADSs in the United States that
trade as ADRs. As of April 17, 2000, there were 9,054,617 ADRs
outstanding. Powergen has established a sponsored ADR program in the United
States and its ADRs are listed on the NYSE and registered under the Securities
Act of 1933, as amended (the "1933 Act"). As a result, Powergen has registered
securities under Section 12 of the 1934 Act, and currently files with the
Commission the periodic disclosure reports required of a foreign private issuer,
including annual reports on Form 20-F. The request contained herein with respect
to ordinary shares refers to the issuance of ordinary shares directly or through
the ADR program and, for purposes of this request, the ADSs and ADRs are not
considered separate securities from the underlying ordinary shares.
Ordinary share financings by Powegen covered by this Application may occur
in any one or a combination of more than one of the following ways: (i) through
a pro rata rights offering directly to existing shareholders; (ii) through
underwriters or dealers pursuant to underwriting agreements of a type standard
in the United Kingdom, the United States, or other places of sale; (iii) through
agents; (iv) directly in private placements or other non-public offerings to a
number of purchasers or a single purchaser; (v) directly to employees (or to
trusts established for their benefit) and other shareholders through Powergen's
employee benefit schemes ; or dividend reinvestment plans; (vi) through the
issuance of bonus shares (i.e., a stock split or a stock dividend) to existing
shareholders; or (vii) through the issuance of options or warrants to acquire
ordinary shares; or (viii) subject to compliance with applicable requirements of
the 1933 Act, through direct sales to former shareholders of LG&E Energy or
others. If underwriters are used in the sale of the securities, such securities
may be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices determined at the time of
sale. The securities may be offered to the public either through underwriting
syndicates (which may be represented by a managing underwriter or underwriters
designated by Powergen) or directly by one or more underwriters acting alone.
The securities may be sold directly by Powergen or through agents
designated
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by Powergen from time to time. If dealers are utilized in the sale of any of the
securities, Powergen may sell such securities to the dealers as principals. Any
dealer may then resell such securities to the public at varying prices to be
determined by such dealer at the time of resale. If ordinary shares are being
sold in an underwritten offering, Powergen may grant the underwriters thereof a
"green shoe" option permitting the purchase from Powergen at the same price
additional shares then being offered solely for the purpose of covering over-
allotments.
Powergen seeks authority to use its ordinary shares (or associated ADSs or
ADRs) as consideration for acquisitions that are otherwise authorized under the
Act. Among other things, transactions may involve the exchange of Powergen
equity securities for securities of the company being acquired in order to
provide the seller with certain tax advantages. These transactions will be
individually negotiated. The ability to offer stock as consideration provides
both Powergen and the seller of the business with flexibility. The Powergen
ordinary shares to be exchanged may, among other things, be purchased on the
open market pursuant to Rule 42 or may be original issue. From the perspective
of the Commission, the use of stock as consideration valued at market value is
no different than a sale of common stock on the open market and use of the
proceeds to acquire securities, the acquisition of which is otherwise
authorized. For purposes of the $6.0 billion external financing limit, Powergen
ordinary shares used as consideration in an acquisition would be valued at
market value based upon the last closing price of the ordinary shares on the LSE
prior to the execution of the transaction agreement.
In addition to other general corporate purposes, the ordinary shares will
be used to fund employee benefit plans. Powergen currently maintains three
employee benefit plans pursuant to which its employees may acquire ordinary
shares of Powergen as part of their compensation: (i) the Powergen ShareSave
Scheme, (ii) the Powergen Executive Share Option Scheme, and (iii) the Powergen
Restricted Share Plan. The Powergen ShareSave Scheme is available to all
eligible employees of Powergen. It provides for the issuance of share options
that are normally exercisable
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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 grant. The Powergen Executive Share Option Scheme is
available to executive directors and other senior executives and managers
selected by the Remuneration Committee of the Board of Directors. Options are
generally exercisable between the third and tenth anniversaries of the date of
grant, and are granted at the market price of Powergen's shares at the time of
the grant or higher where options have previously been exercised at a higher
rate. The Powergen Restricted Share Plan involves two types of awards: (1)
Medium Term Bonus Awards and (2) Annual Bonus Enhancement Awards. The Medium
Term Bonus Awards are available to executive directors and senior managers
selected by the Remuneration Committee. Shares of equivalent value to the annual
bonus received by the participant are placed into trust. Subject to certain
performance conditions being met, shares vest into the ownership of the
participant after three and four years, and may be called for a year after that.
The annual bonus Enhancement Awards are available to executive directors and
managers, who may elect to forgo some or all of their cash Annual Bonus. Shares
of equivalent value to the bonus forgone are placed into trust, and if held in
trust for a period of three years, are enhanced by Powergen on the basis of one
extra share for every four shares so held.
In addition, Powergen may adopt one or more other plans which will provide
for the issuance and/or sale of Powergen ordinary shares, share options and
share awards to a group which has not yet been determined but may include
directors, officers and employees of the companies in the Powergen System.
Powergen also has agreed to give holders of LG&E Energy stock options the right
to convert those options into options for Powergen ADSs./35/ Powergen may issue
its ordinary shares under the authorization, and within the limitations, set
forth herein in order to satisfy its obligations under such plans.
Ordinary shares for use under share plans may be newly issued shares or
shares purchased in the open market.
__________________________
/35/ Merger Agreement, Section 6.11.
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Powergen or the Share Trustee may make open-market purchases of ordinary shares
in accordance with the terms of or in connection with the operation of the
plans.
To the extent that any issuance, sale, or reacquisition of securities
pursuant to the equity based employee benefit plans are jurisdictional under the
Act, Applicants request authorization thereof. Securities issued by Powergen
under all of the plans will be included within the $6.0 billion external
financing limit and will be valued, if ordinary shares, at market value based on
the closing price on the LSE on the day before the issuance of the shares.
Options issued by Powergen pursuant to the plans will be valued at zero until
exercised.
Any ordinary shares issued by US Holdings will be issued solely to Powergen
absent additional authority from the Commission.
(ii) Preferred Stock Issued by US Holdings. US Holdings proposes to
issue non-voting preferred stock from time to time during the Authorization
Period. Any such preferred stock would have dividend rates or methods of
determining the same, redemption provisions, conversion or put terms and other
terms and conditions as US Holdings may determine at the time of issuance. All
issuances of preferred stock will be at rates or prices, and under conditions
negotiated pursuant to, based upon, or otherwise determined by competitive
market conditions.
(iii) Short-Term Financing of Powergen and US Holdings. Each of Powergen
and US Holdings may engage in such short-term financing as each may deem
appropriate in light of its needs and market conditions at the time of issuance.
Such financing could include, without limitation, commercial paper sold in
established U.S. or European commercial paper markets, lines of credit with
banks or other financial institutions, and debt securities issued under an
indenture or a note program. All transactions will be at rates or prices, and
under conditions, negotiated pursuant to, based upon or otherwise determined by
competitive market conditions.
(iv) Long-Term Debt Issued by US Holdings. US Holdings proposes to issue
long-term debt from time to time during the Authorization Period. Any long-term
debt would have the designation, aggregate principal amount, interest rate(s) or
method of determining the same, terms of payment
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of interest, redemption provisions, non-refunding provisions, sinking fund
terms, put terms and other terms and conditions as are deemed appropriate at the
time of issuance. In addition, the long-term debt may be convertible into
preferred shares of US Holdings or Powergen exchangeable for ordinary shares of
Powergen authorized to be issued hereunder. The maturity of any long-term debt
will not exceed 50 years.
The long-term debt may be issued and sold pursuant to standard underwriting
agreements or under negotiated bank facilities. In the case of public debt
offerings, distribution may be effected through private negotiations with
underwriters, dealers or agents, or through competitive bidding among
underwriters. In addition, the long-term debt may be issued and sold through
private placements or other non-public offerings to one or more persons. All
transactions will be at rates or prices, and under conditions negotiated
pursuant to, based upon, or otherwise determined by competitive market
conditions.
Pursuant to Section 7(c)(2)(D), the Commission permits the issuance of such
non-traditional securities where denial of such issuance would impose an
unreasonable financial burden on the applicant, and consumers and investors
would not be harmed. The Commission recently permitted a registered electric
system to have long-term debt at the holding company level in Southern Co.,
Holding Co. Act Release No. 27134 (Feb. 9, 2000). Following the Southern Co.
decision, the Commission allowed long-term debt at the holding company level in
the National Grid Order, where the debt would be investment grade. As Powergen
has represented in Item 3, Section B.1 above, it will remain a financially
strong system on a consolidated basis following consummation of the transaction
and both its and US Holdings' senior, unsecured long-term debt rating will be
investment grade.
(i) Other Securities Issued by Powergen and US Holdings. In addition to
the specific securities for which authorization is sought in this Application,
Powergen and US Holdings may issue other types of securities during the
Authorization Period that are not exempt from prior Commission approval.
Powergen and US Holdings request that the Commission reserve jurisdiction over
the issuance of such additional types of securities except to the extent these
securities are exempt pursuant to
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Rules 45 or 52. Powergen and US Holdings also undertake to have a post-effective
amendment filed in this proceeding that will describe the general terms of each
such security and request a supplemental order of the Commission authorizing the
issuance thereof. Powergen and US Holdings further request that each
supplemental order be issued by the Commission without further public notice.
b. Intermediate Company Financings
Applicants seek Commission approval of financings by the Intermediate
Companies as described below./36/
i. General Request
The portion of an individual Intermediate Company's aggregate financing to
be effected through the sale of equity securities to its immediate parent
company during the Authorization Period cannot be determined at this time. It
may happen that the proposed sale of capital securities may in some cases exceed
the capital stock of a given Intermediate Company authorized at the date of the
Merger, in which case such limit will be increased. In addition, an Intermediate
Company may choose to use other forms of capital securities. Capital stock
includes common stock, ordinary shares, preferred stock, other preferred
securities, options and/or warrants convertible into common or preferred stock,
rights, and similar securities. As needed to accommodate the sale of additional
equity, Applicants request the authority to increase the amount or change the
terms of any Intermediate Company's authorized capital securities, without
additional Commission approval, except as provided below. The terms that may be
changed include dividend rates, conversion rates and dates, and expiration
dates. These changes may be made either in connection with a reorganization
described in Item 3, Section B.2.i or otherwise. Applicants note that except for
the financings of US Holdings described above in Section Item 3, B.2.a, each of
the Intermediate Companies will be wholly-owned,
__________________________
/36/ US Holdings and its direct subsidiary, Powergen US Investments Limited,
will enter into parallel loans in order to effect a currency hedging
transaction. The Applicants believe that, although the transaction will be
booked as loans, they do not constitute loans or extensions of credit within the
meaning of Section 12(a) of the Act and request approval of such transactions.
See The Southern Company, Holding Co. Act Release No. 27134 (Feb. 9, 2000).
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directly or indirectly, by Powergen and will not have third-party investors. The
changes to capital stock proposed above affect only the manner in which internal
financing is conducted by the Intermediate Companies and will not alter the
terms or limits proposed in this Application.
Each Intermediate Company and LG&E Energy also requests authorization to
borrow from its parent company. Such inter-company loans would be on terms and
conditions not materially less favorable than those obtainable by US Holdings
from third parties.
ii. Loans from Powergen UK (or Powergen Group Holdings, if
applicable) to US Holdings
Powergen UK (or Powergen Group Holdings, if applicable) proposes to make
available to US Holdings the net sales proceeds of asset disposals and other
excess capital at Powergen UK (or Powergen Group Holdings, if applicable)
through intercompany loans to US Holdings. US Holdings will use the loan
proceeds to repay amounts owing under the Credit Facility, or (to the extent
permitted by the Credit Facility) for other corporate purposes. The use of loans
from Powergen UK (or Powergen Group Holdings, if applicable) to US Holdings is
the most efficient, and fastest, way to move excess funds from Powergen UK (or
Powergen Group Holdings, if applicable) to US Holdings. For example, U.K.
Companies may pay dividends only out of "distributable reserves" (roughly
comparable to retained earnings of a U.S. company) and the payment of dividends
from Powergen UK to Powergen in the amounts likely to be generated by the
announced plan of asset disposals likely would deplete all or substantially all
of Powergen UK's distributable reserves, making it difficult for it to pay
dividends to PowerGen in the future. Dividend payments in excess of
distributable reserves violate U.K. law.
Loans from Powergen UK (or Powergen Group Holdings, if applicable) to US
Holdings will be interest free, long-term, and will have no amortization
obligations. As a consequence, the financial position of US Holdings will be
improved due to the reduced level of external borrowings and interest
obligations. The capital structure and financial strength of the LG&E Energy
Group companies will not be adversely affected in any way.
The only change to the accounts of US Holdings as a result of the proposed
loans will be the recording on the books of US Holdings of an "Interest Free
Loan from Powergen UK (interco)" in the amount of any loans from Powergen UK (or
Powergen Group Holdings, if applicable) and the corresponding reduction in both
the external debt of US Holdings and in ongoing interest payments. The
intercompany loans will be cancelled in consolidation of the accounts of
Powergen, and the net effect in the financial statements of Powergen will be a
reduction in indebtedness at Powergen equal to the amounts repaid to third
parties. There would be no accounting effect from these entries on the accounts
of any other company in the Powergen registered holding company system. Since
these loans do not involve external sources, the amount of this loan will not
count towards US Holdings' aggregate borrowing authorization.
c. Powergen Capital and Luxembourg Securities
Powergen proposes to create two subsidiaries of Powergen which will serve
as conduits through which dividend payments from LG&E Energy are repatriated to
Powergen in the most economically efficient manner. These dividends normally
would be payable upwards from one Intermediate Company to another until the
funds reach Powergen.
Powergen Capital will be a U.K. unlimited company wholly owned by Powergen.
Powergen Capital will be a sister company to US Holdings, and will not be in the
chain of ownership between Powergen and LG&E Energy. See the corporate chart of
the Powergen System attached hereto as Exhibit F-1.1. It is proposed that
Powergen Capital will issue non-voting ordinary shares to Powergen Luxembourg
SA, one of the Intermediate Companies, which entity will subscribe to such
shares. It is further proposed that the monies from these sales of the non-
voting ordinary shares will be used to fund a loan from Powergen Capital to US
Holdings. In short, Powergen Capital will serve as a conduit through which
dividend payments from LG&E Energy are repatriated to Powergen in the most
economically efficient manner. /37/ The funds that Powergen Luxembourg sarl will
be using to subscribe for Powergen Capital non-voting shares
_________________________________
/37/ Since the proposed structure does not raise the potential for abuse, there
is no regulatory purpose to be served by recharacterizing the proposed
structure. Powergen respectfully requests that the Staff look at the substance
of the transactions to find that the proposed transaction involving Powergen
Capital does not constitute an "upstream loan" for purposes of Section 12(a).
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will originate as lawfully payable dividends from LG&E Energy.
Luxembourg Securities will be a Luxembourg company wholly owned by an
Intermediate Company, ultimately by Ergon Investments Ltd. At the time of the
Merger, Luxembourg Securities will own preference share capital of Powergen
Luxembourg Holdings sarl. The ordinary shares of Powergen Luxembourg Holdings
sarl will be owned by Powergen Luxembourg sarl, an Intermediate Company. See
the corporate chart of the Powergen System attached hereto as Exhibit F-1.1.
The only assets of Luxembourg Securities will be the preference shares of
Powergen Luxembourg Holdings sarl and a participating loan note/38/ to be issued
by Powergen Luxembourg Holdings sarl. Since Luxembourg Securities will own less
than 1% of the voting securities of Powergen Luxembourg Holdings sarl, an
Intermediate Company in the chain of ownership of LG&E Energy, Luxembourg
Securities will not be a holding company within the meaning of the Act/39/. The
funds that Powergen Luxembourg Holdings sarl will be using to make payments on
the participating loan note will originate as lawfully payable dividends from
LG&E Energy.
The introduction of Powergen Capital and Luxembourg Securities re-channels
dividend payments from LG&E Energy to Powergen through Powergen Capital and
Luxembourg Securities, respectively, for the purpose of economic efficiency.
Neither Powergen Capital nor Luxembourg Securities will issue securities to
third parties, nor will it be engaged in any substantive business activity other
than to effect the dividend repatriation.
The Applicants request Commission authorization for the retention of
Powergen Capital and Luxembourg Securities. Applicants further seek authority
for Powergen Capital to issue non-voting ordinary shares to one or more
Intermediate
_______________
/38/ The terms of the participating loan note provide for the payment in any
year, from dividend payments received in such year, an amount that causes the
rate of tax credit for UK double tax relief purposes to be equivalent to the
current rate of UK corporation tax.
/39/ Section 2(a)(7) of the Act defines a "holding company" as, in part, "any
company which directly or indirectly owns, controls or holds with power to vote
10 per centum or more of the outstanding voting securities of a public utility
company".
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Companies and to loan the proceeds from any such issuance to US Holdings on
commercially reasonable terms and for Luxembourg Securities to hold the
preference share capital and the participating loan note of Powergen Luxembourg
Holdings Sarl.
d. LG&E Energy Group Financings
Following consummation of the Merger, LG&E Energy will remain an exempt
holding company under Section 3(a)(1) of the Act. In light of its exempt status,
LG&E Energy previously has not been required to seek Commission approval of its
financing. As LG&E Energy will be a member of a registered holding company
system following the Merger, certain of its financing arrangements may be
jurisdictional. As a consequence, Applicants request approval of the existing
LG&E Energy Group financing arrangements that do not qualify for an exemption
from the Act and also request authorization for the financing transactions set
forth herein during the Authorization Period.
For purposes of the sections below entitled "U.S. Non-Utility
Subsidiaries," "Intra-System Financings" and "Guarantees", the terms "U.S. Non-
Utility Subsidiary" and "U.S. Non-Utility Subsidiaries" shall also include
direct or indirect subsidiaries, that are not public utility companies, that
LG&E Energy may form after the Merger with the approval of the Commission,
pursuant to the Rule 58 exemption or pursuant to Section 34 of the Act.
i. External Financings
(A) LG&E Energy
LG&E Energy requests authorization to obtain funds externally through sales
of short-term debt securities. The Applicants request authorization for LG&E
Energy to have outstanding at any time during the Authorization Period short-
term debt in an aggregate principal amount of up to $400 million.
LG&E Energy may engage in such short-term financing as it may deem
appropriate in light of its needs and market conditions at the time of issuance.
Such financing could include, without limitation, commercial paper sold in
established U.S. or European commercial paper markets, lines
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of credit with banks or other financial institutions, and debt securities issued
under an indenture or a note program. All transactions will be at rates or
prices, and under conditions, negotiated pursuant to, based upon or otherwise
determined by competitive market conditions.
Other Securities. In addition to the specific securities for which
authorization is sought herein, LG&E Energy may also find it necessary or
desirable in order to minimize financing costs or to obtain new capital under
then existing market conditions to issue and sell other types of securities from
time to time during the Authorization Period. The Applicants request that the
Commission reserve jurisdiction over the issuance by LG&E Energy of additional
types of securities and the amount thereof. LG&E Energy also undertakes to file
a post-effective amendment in this proceeding which will describe the general
terms of each such security and the amount thereof to be issued and request a
supplemental order of the Commission authorizing the issuance thereof by LG&E
Energy.
(B) U.S. Utility Subsidiary Financing
LG&E and KU have financing arrangements in place, which arrangements will
remain in place following the Merger. These financing arrangements are described
in more detail in Appendix B, Part I hereto.
Rule 52 provides an exemption from the prior authorization requirements of
the Act for most of the issuances and sales of securities by LG&E and KU because
they must be approved by the relevant state public utility commission. However,
certain external financings by LG&E and KU for which authorization is requested
below are outside the scope of the Rule 52 exemption. The Applicants request
authority for LG&E and KU to undertake the following external financings:
Short-Term Financing. All securities of LG&E and KU, except for securities
with maturities of two years or less, are approved by the Kentucky Commission.
Accordingly, authority is requested for LG&E and KU to maintain outstanding any
such existing debt with maturities of two years or less and to issue debt with
maturities of two years or less to one or more associate or non-associate
lenders, provided that the aggregate principal amount of such debt to be
outstanding at any one time during the Authorization
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Period shall not exceed $400 million in the case of LG&E and $400 million in the
case of KU.
Each of LG&E and KU may engage in such short-term financing as each may
deem appropriate in light of its needs and market conditions at the time of
issuance. Such financing could include, without limitation, commercial paper
sold in established U.S. or European commercial paper markets, lines of credit
with banks or other financial institutions, and debt securities issued under an
indenture or a note program. All transactions will be at rates or prices, and
under conditions negotiated pursuant to, based upon or otherwise determined by
competitive market conditions.
Other Securities. In addition, LG&E and KU may find it necessary or
desirable to issue other types of securities during the Authorization Period
that are not exempt from prior Commission approval. LG&E and KU request that the
Commission reserve jurisdiction over the issuance of such additional types of
securities and the amount thereof except to the extent the same are exempt
pursuant to Rule 52. Each of LG&E and KU also undertakes to have a post-
effective amendment filed in this proceeding that will describe the general
terms of each such security and the amount thereof of such U.S. Utility
Subsidiary and request a supplemental order of the Commission authorizing the
issuance thereof.
(C) U.S. Non-Utility Subsidiary Financings
The U.S. Non-Utility Subsidiaries have financing arrangements in place,
which arrangements will remain in place following the Merger. The financing
arrangements of the U.S. Non-Utility Subsidiaries of LG&E Energy are described
in more detail in Appendix B, Part II hereto. To the extent such financing
arrangements are not exempt under Rule 52, Applicants request authorization for
such arrangements.
The U.S. Non-Utility Subsidiaries are engaged in and expect to continue to
be active in the development and expansion of their existing energy-related or
otherwise functionally-related, non-utility businesses. They will be competing
in different sectors of the energy and other industries. In order to finance
investments in such competitive arenas, it will be necessary for the U.S. Non-
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Utility Subsidiaries to have the ability to engage in financing transactions
which are commonly accepted for such types of investments. It is believed that,
in almost all cases, such financings will be exempt from prior Commission
authorization pursuant to Rule 52(b). The U.S. Non-Utility Subsidiaries request
that the Commission reserve jurisdiction over the issuance of any other
securities during the Authorization Period with respect to which the exemption
under Rule 52(b) would not apply. They also undertake to cause a post-effective
amendment to be filed in this proceeding which will describe the general terms
of each such non-exempt security and the amounts thereof and request a
supplemental order of the Commission authorizing the issuance thereof by the
subject U.S. Non-Utility Subsidiary.
ii. Intra-System Financings
(A) Inter-Company Loans
The activities of LG&E Energy and the U.S. Non-Utility Subsidiaries are
financed, in part, through inter-company loans. The sources of funds for the
operations of LG&E Energy and the U.S. Non-Utility Subsidiaries include
internally generated funds and proceeds of external financings. Outside of the
LG&E Money Pool borrowings (as described below), there were outstanding as of
December 31, 1999, inter-company loans among LG&E Energy and the U.S. Non-
Utility Subsidiaries in a net principal amount of approximately $757 million,
including loans from LG&E Capital to LG&E Energy in the aggregate
amount of approximately $230 million.
The Applicants request authorization to maintain in place the existing
inter-company loans./40/ In addition, the
______________________
/40/ If LG&E Energy is denied its request for continuing exemption under Section
3(a)(1) of the Act, upstream loans to LG&E Energy would violate Section 12(a) of
the Act as of the moment LG&E Energy registers as a holding company. In such
event, LG&E Energy requests that these borrowings and extensions of credit not
be deemed illegal under the Act, pending their repayment over a reasonable
period of time. Because of the amount of the borrowings, LG&E Energy requests
that it be granted two years from the date of the order authorizing the
proposals in this Application to repay these borrowings and eliminate the
extensions of credit.
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Applicants request authorization for additional inter-company loans among
LG&E Energy and the U.S. Non-Utility Subsidiaries in a net principal amount at
any one time outstanding during the Authorization Period not to exceed $1.0
billion. The authorization for intra-system financing requested in this
paragraph excludes (a) financing that is exempt pursuant to Rules 45(b) and 52,
as applicable, and (b) amounts outstanding from time to time under the LG&E
Money Pool and/or the Utility Money Pool and Non-Utility Money Pool.
Such financings would generally be in the form of cash capital
contributions, open account advances, inter-company loans, and/or capital stock
purchases. The terms and conditions of inter-company loans available to any
borrowing company will be materially no less favorable than the terms and
conditions of loans available to such borrowing company from third-party
lenders.
(B) Money Pools
LG&E Money Pool. LG&E Energy, LG&E and KU currently participate in a money
pool (the "LG&E Money Pool"). Through the LG&E Money Pool, LG&E and KU make
unsecured short-term borrowings from the money pool and contribute surplus funds
to the money pool. LG&E Energy contributes surplus funds to the LG&E Money Pool,
but does not borrow from the LG&E Money Pool. At March 31, 2000, LG&E
Energy and LG&E were contributors to the LG&E Money Pool and KU had borrowings
from the LG&E Money Pool of approximately $17.2 million.
The cost of money for all borrowings from the LG&E Money Pool and the
investment rate for all moneys deposited in the LG&E Money Pool are set at the
Money Pool Rate. The "Money Pool Rate" is determined monthly and is equal to the
greater of (i) the weighted average rate of return on short-term investments of
the participating companies outstanding on the last day of the prior month or,
if no short-term investments are outstanding, the previous month's rate of
return earned by the Financial Square Fund managed by Goldman, Sachs & Co., or
(ii) the weighted average rate of any commercial paper issued by participating
companies outstanding on the last day of the prior month or, if no commercial
paper is outstanding, the commercial paper
_______________________
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rates of similarly rated companies for the prior week as published in the
Federal Reserve Statistical Release H.15.
LG&E Energy requests that the Commission authorize the continuation of the
LG&E Money Pool for an interim period of not to exceed two years (the
"Transition Period") to permit LG&E Energy to make a transition from the LG&E
Money Pool to the Utility Money Pool and the Non-Utility Money Pool as discussed
below.
Authorization and Operation of the Money Pools. LG&E Energy, LG&E, KU and
the U.S. Non-Utility Subsidiaries propose to replace the LG&E Money Pool with
the Utility Money Pool and Non-Utility Money Pool and request authority to do
so. Further, LG&E and KU, to the extent not exempted by Rule 52, also request
authorization to make unsecured short-term borrowings from the Utility Money
Pool and to contribute surplus funds to the Utility Money Pool and to lend and
extend credit to (and acquire promissory notes from) one another through the
Utility Money Pool.
LG&E Energy requests authorization to contribute surplus funds and to lend
and extend credit to (a) LG&E and KU through the Utility Money Pool and (b) the
U.S. Non-Utility Subsidiaries through the Non-Utility Money Pool. No loans
through the Utility Money Pool would be made to, and no borrowings through the
Utility Money Pool would be made by, LG&E Energy.
The Applicants believe that the cost of the proposed borrowings through the
two Money Pools will generally be more favorable to the borrowing participants
than the comparable cost of external short-term borrowings, and the yield to the
participants contributing available funds to the two Money Pools will generally
be higher than the typical yield on short-term investments.
For purposes of this section, the term "U.S. Non-Utility Subsidiary" shall
only include the companies that are associates of the LG&E Energy Group as of
the date of the filing of this Application. The Commission is asked to reserve
jurisdiction over the participation in the relevant money pool of future
companies formed by LG&E Energy until a specific post-effective amendment is
filed, naming the subsidiary to be added as a participant in the relevant money
pool.
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Utility Money Pool. Under the proposed terms of the Utility Money Pool,
short-term funds would be available from the following sources for short-term
loans to each of LG&E and KU from time to time: (1) surplus funds in the
treasuries of Utility Money Pool participants, (2) surplus funds in the treasury
of LG&E Energy, and (3) proceeds from bank borrowings by Utility Money Pool
participants or the sale of commercial paper by the Utility Money Pool
participants for loan to the Utility Money Pool ("External Funds"). Funds would
be made available from such sources in such order as LG&E Services, as
administrator of the Utility Money Pool, may determine would result in a lower
cost of borrowing, consistent with the individual borrowing needs and financial
standing of the companies providing funds to the pool. The determination of
whether a Utility Money Pool participant at any time has surplus funds to lend
to the Utility Money Pool or shall borrow funds from the Utility Money Pool
would be made by such participant's chief financial officer or treasurer, or by
a designee thereof, on the basis of cash flow projections and other relevant
factors, in such participant's sole discretion. See Exhibit N-1.1 for a copy of
the Form of Utility Money Pool Agreement.
Utility Money Pool participants that borrow would borrow pro rata from each
company that lends, in the proportion that the total amount loaned by each such
lending company bears to the total amount then loaned through the Utility Money
Pool. On any day when more than one fund source (e.g., surplus treasury funds
of LG&E Energy and other Utility Money Pool participants ("Internal Funds") and
External Funds), with different rates of interest, is used to fund loans through
the Utility Money Pool, each borrower would borrow pro rata from each such fund
source in the Utility Money Pool in the same proportion that the amount of funds
provided by that fund source bears to the total amount of short-term funds
available to the Utility Money Pool.
Borrowings from the Utility Money Pool would require authorization by the
borrower's chief financial officer or treasurer, or by a designee thereof. No
party would be required to effect a borrowing through the Utility Money Pool if
it is determined that it could (and had authority to) effect a borrowing at
lower cost directly from banks or through the sale of its own commercial paper.
The cost of compensating balances, if any, and fees paid to banks to
maintain credit lines and accounts by
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Utility Money Pool participants lending External Funds to the Utility Money Pool
would initially be paid by the participant maintaining such line. A portion of
such costs -- or all of such costs in the event a Utility Money Pool participant
establishes a line of credit solely for purposes of lending any External Funds
obtained thereby into the Utility Money Pool -- would be retroactively allocated
every month to the companies borrowing such External Funds through the Utility
Money Pool in proportion to their respective daily outstanding borrowings of
such External Funds.
If only Internal Funds make up the funds available in the Utility Money
Pool, the interest rate applicable and payable to or by the Utility Money Pool
participants for all loans of such Internal Funds outstanding on any day will be
the rates for high-grade unsecured 30-day commercial paper sold through dealers
by major corporations as quoted in The Wall Street Journal on the preceding
business day.
If only External Funds comprise the funds available in the Utility Money
Pool, the interest rate applicable to loans of such External Funds would be
equal to the lending company's cost for such External Funds (or, if more than
one Utility Money Pool participant had made available External Funds on such
day, the applicable interest rate would be a composite rate equal to the
weighted average of the cost incurred by the respective Utility Money Pool
participants for such External Funds).
In cases where both Internal Funds and External Funds are concurrently
borrowed through the Utility Money Pool, the rate applicable to all loans
comprised of such "blended" funds would be a composite rate equal to the
weighted average of (a) the cost of all Internal Funds contributed by Utility
Money Pool participants (as determined pursuant to the second-preceding
paragraph above) and (b) the cost of all such External Funds (as determined
pursuant to the immediately preceding paragraph above). In circumstances where
Internal Funds and External Funds are available for loans through the Utility
Money Pool, loans may be made exclusively from Internal Funds or External Funds,
rather than from a "blend" of such funds, to the extent it is expected that such
loans would result in a lower cost of borrowing.
Funds not required by the Utility Money Pool to make loans (with the
exception of funds required to satisfy the Utility Money Pool's liquidity
requirements) would
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ordinarily be invested in one or more short-term investments, including: (i)
interest-bearing accounts with banks; (ii) obligations issued or guaranteed by
the U.S. government and/or its agencies and instrumentalities, including
obligations under repurchase agreements; (iii) obligations issued or guaranteed
by any state or political subdivision thereof, provided that such obligations
are rated not less than "A" by a nationally recognized rating agency; (iv)
commercial paper rated not less than "A-1" or "P-1" or their equivalent by a
nationally recognized rating agency; (v) money market funds; (vi) bank
certificates of deposit; (vii) Eurodollar funds; and (viii) such other
investments as are permitted by Section 9(c) of the Act and Rule 40
thereunder.
The interest income and investment income earned on loans and investments
of surplus funds would be allocated among the participants in the Utility Money
Pool in accordance with the proportion each participant's contribution of funds
bears to the total amount of funds in the Utility Money Pool.
Each Applicant receiving a loan through the Utility Money Pool would be
required to repay the principal amount of such loan, together with all interest
accrued thereon, on demand. All loans made through the Utility Money Pool may
be prepaid by the borrower without premium or penalty.
Non-Utility Money Pool. The Non-Utility Money Pool will be operated
substantially on the same terms and conditions as the Utility Money Pool. See
Exhibit N-1.2 for copy of the form of Non-Utility Money Pool Agreement. All
contributions to, and borrowings from, the Non-Utility Money Pool are exempt
pursuant to the terms of Rule 52 under the Act, except contributions and
extensions of credit by LG&E Energy, authorization for which is hereby
requested.
Operation of the Money Pools and Administrative Matters. Operation of the
Utility and Non-Utility Money Pools, including record keeping and coordination
of loans, will be handled by LG&E Services under the authority of the
appropriate officers of the participating companies. LG&E Services will
administer the Utility and Non-Utility Money Pools on an "at cost" basis and
will maintain separate records for each money pool. Surplus funds of the
Utility Money Pool and the Non-Utility Money Pool may be combined in
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common short-term investments, but separate records of such funds shall be
maintained by LG&E Services as administrator of the pools, and interest thereon
shall be separately allocated, on a daily basis, to each money pool in
accordance with the proportion that the amount of each money pool's surplus
funds bears to the total amount of surplus funds invested from both money pools.
Use of Proceeds. Proceeds from the money pools may be used by each such
Applicant (i) for the interim financing of its construction and capital
expenditure programs, (ii) for its working capital needs, (iii) for the
repayment, redemption or refinancing of its debt and preferred stock, (iv) to
meet unexpected contingencies, payment and timing differences and cash
requirements, and (v) to otherwise finance its own business and for other lawful
general corporate purposes. LG&E requests authority to borrow up to $200 million
at any one time outstanding from the Utility Money Pool and KU requests
authority to borrow up to $200 million at any one time outstanding from the
Utility Money Pool, which amounts are in addition to LG&E's and KU's request to
issue short-term debt as set forth herein.
(C) Other Financings
LG&E Energy and the LG&E Energy Subsidiary Companies may issue and LG&E
Energy or other LG&E Energy Subsidiary Companies may acquire other types of
securities which do not qualify for use of Rule 52 but which are considered
appropriate during the Authorization Period. LG&E Energy and the LG&E Energy
Subsidiary Companies request that the Commission reserve jurisdiction over the
issuance of such additional types of securities and the amounts thereof. They
also undertake to cause a post-effective amendment to be filed in this
proceeding which will describe the general terms of each such security and the
amounts thereof and request a supplemental order of the Commission authorizing
the issuance thereof by the subject company.
e. Guarantees
i. Guarantees by Powergen and US Holdings
Powergen and US Holdings request authorization to enter into
guarantees, obtain letters of credit, extend credit, enter into guarantee-type
expense agreements or
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otherwise provide credit support with respect to the obligations of the U.S.
Subsidiary Companies as may be appropriate to enable such system companies to
carry on their respective authorized or permitted businesses./41/ Guarantees
entered into pursuant to this authorization by Powergen and US Holdings will be
subject to a $2.5 billion limit, based upon the amount at risk outstanding at
any one time, which amount is in addition to guarantees by Powergen of
securities issued by US Holdings pursuant to the $6.0 billion financing
authorization in Item 3, Section B.2.a above.
ii. Existing Guarantees of the LG&E Energy Group
The LG&E Energy Group has in place certain guarantees and other credit support
arrangements, which arrangements will remain in place following the Merger.
These guarantees and other credit support arrangements are described in more
detail in Appendix B. The Applicants request authorization to retain outstanding
the guarantees and other credit support arrangements identified in Part III of
Appendix B hereto.
iii. Additional Guarantees of the LG&E Energy Group during
the Authorization Period
LG&E Energy requests authorization for LG&E Energy to enter into
guarantees, extend credit, obtain letters of credit, enter into guaranty-type
expense agreements and otherwise to provide credit support for the obligations
from time to time of the LG&E Energy Subsidiary Companies during the
Authorization Period in an aggregate principal amount not to exceed $1.5
billion, based on the amount at risk, outstanding at any one time, exclusive of
any such guarantees or credit support arrangements existing on the date of the
Merger and identified in Appendix B hereto. This request for $1.5 billion of
guarantee authorization is separate from, and not included in, Powergen's and US
Holdings' request for $2.5 billion of guarantee authorization, requested in Item
3, Section B.2.e.i. above. Any securities issued by the LG&E Energy Subsidiary
Companies which LG&E Energy guarantees or for which LG&E Energy otherwise
provides credit support arrangements, will either be issued pursuant to a
Commission order or pursuant to an applicable exemption under the Act.
______________
/41/ Powergen also requests the authority to enter into guarantees and other
guarantee-type commitments for its FUCO financings, as discussed under Item 3,
Section B.2.k below.
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In addition, the Applicants request authorization for the U.S. Non-Utility
Subsidiary Companies to enter into guarantees, extend credit, obtain letters of
credit, enter into guaranty-type expense agreements or otherwise provide credit
support (collectively, "LG&E Guarantees") with respect to the obligations of any
of the U.S. Non-Utility Subsidiary Companies as may be appropriate to enable
such U.S. Non-Utility Subsidiary Companies to carry on its business, in an
aggregate principal amount not to exceed $1.5 billion outstanding at any one
time, exclusive of (a) any such guarantees existing on the date of the Merger
and identified in Appendix B hereto and (b) any such guarantees that may be
exempt pursuant to Rule 45(b).
Any guarantees or other credit support arrangements outstanding at the end
of the Authorization Period shall continue until expiration or termination in
accordance with their terms. The amount of LG&E Guarantees outstanding at any
one time shall not be counted against the aggregate respective limits applicable
to external financings or the limits on intra-system financing requested
elsewhere herein.
f. Interest Rate and Currency Risk Management.
The Applicants request authority to enter into, perform, purchase and sell
financial instruments intended to manage the volatility of interest rates and
currency exchange rates, including but not limited to interest rate and currency
swaps, caps, floors, collars and forward agreements or any other similar
agreements ("Instruments") and to maintain in place any existing Instruments.
The Applicants would employ Instruments as a means of prudently managing the
interest rate and currency risks associated with any of its outstanding debt
issued pursuant to this Application or an applicable exemption by, in effect,
synthetically (i) converting variable rate debt to fixed rate debt, (ii)
converting fixed rate debt to variable rate debt, (iii) limiting the impact of
changes in interest rates resulting from variable rate debt and (iv) hedging
currency exposures of foreign currency denominated debt. In addition, the
Applicants may utilize Instruments to manage interest rate and currency risks in
future periods for planned issuances of debt securities. In no case will the
notional amount of any Instruments exceed that of the underlying debt
instrument. Thus, the Applicants will not
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engage in "speculative" transactions. Applicants agree to only enter into
Instruments with counterparties which have, or whose obligations are guaranteed
by a party with, senior debt ratings, as published by Standard & Poor's, that
are greater than or equal to "BBB+", or an equivalent rating from Moody's
Investors Service, Inc., Fitch IBCA, Inc. or Duff & Phelps Credit Rating Co.
Applicants further agree that any such Instruments will be on terms or
conditions that would qualify under either U.S. or U.K. Gaap as in effect at
December 31, 1999, for hedge accounting treatment.
g. Acquisition, Redemption, or Retirement of Securities
Each of Powergen and the U.S. Subsidiary Companies proposes from time to
time during the Authorization Period to acquire, redeem, or retire its
securities or those of its direct and indirect subsidiaries, which securities
may be either outstanding presently or issued and sold in the future (i.e., from
the date of this Application until the end of the Authorization Period).
However, not all of the possible transactions are known at this time. Therefore,
to the extent any proposed acquisition, redemption, or retirement of securities
is not exempt from Commission approval pursuant to Rule 42, Powergen and its
direct and indirect subsidiaries request the authority to engage in these
transactions from time-to-time throughout the Authorization Period without
obtaining further Commission approval.
h. Financing Entities
Authority is sought for US Holdings and the LG&E Energy Subsidiary
Companies to organize new corporations, trusts, partnerships or other entities
created for the purpose of facilitating financings through their issuance to
third parties of trust preferred securities or other securities authorized
hereby or issued pursuant to an applicable exemption. Request is also made for
authorization for these financing entities to issue such securities to third
parties in the event such issuances are not exempt pursuant to Rule 52.
Additionally, request is made for authorization with respect to (i) the issuance
of debentures or other evidences of indebtedness by any of US Holdings and the
LG&E Energy Subsidiary Companies to a financing entity in return for the
proceeds of the financing, (ii) the acquisition by any of PowerGen or the U.S.
Subsidiary Companies of voting interests or equity securities issued by the
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financing entity to establish ownership of the financing entity, and (iii) the
guarantee by Powergen, US Holdings or LG&E Energy Subsidiary Companies of such
financing entity's obligations in connection therewith.
Powergen, US Holdings and the LG&E Energy Subsidiary Companies also may
enter into expense agreements with its respective financing entity, pursuant to
which it would agree to pay all expenses of such entity. All expense
reimbursements would be at cost. Powergen, US Holdings and the LG&E Energy
Subsidiary Companies seek authorization for such expense reimbursement
arrangements under Section 7(d)(4) the Act, regarding the reasonableness of fees
paid in connection with the issuance of a security, and/or under Section 13 of
the Act and the rules thereunder to the extent the financing entity is deemed to
provide services to an associate company.
Any amounts issued by such financing entities to third parties pursuant to
these authorizations will count against the external financing limit authorized
herein for US Holdings or the LG&E Subsidiary Companies, as applicable. However,
the underlying intra-system mirror debt and guarantee will not count against any
applicable inter-company financing limit or the separate Powergen, US Holdings
or the LG&E Energy Subsidiary Companies guarantee limits. The authorizations
sought herein with respect to financing entities is substantially the same as
that given to The Southern Company in Holding Co. Act Release No. 27134 (Feb. 9,
2000), New Century Energies, Inc. in Holding Co. Act Release No. 26750 (Aug. 1,
1997) and in Holding Co. Act Release No. 27000 (April 7, 1999) and Conectiv,
Inc. in Holding Co. Act Release No. 26833 (Feb. 26, 1998).
i. Receivables Factoring Program
Each of LG&E and KU propose, prior to the closing of the Merger, to
implement a receivables factoring program, providing for the factoring of
accounts receivable ("Receivables"), including outstanding consumer billings,
through an existing, or newly-formed, subsidiary of LG&E and KU, respectively
(hereinafter referred to as a "Receivables
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Sub") to one or more unaffiliated third parties (the "Purchasers")./42/
Each Receivable Sub will initially be capitalized by its associate company
with a nominal contribution of receivables and/or cash. The Receivables Sub
will not seek any outside financing in order to finance the purchase of the
Receivables. Each Receivables Sub will purchase Receivables from the related
associate company as such Receivables are generated, at a discount based on,
among other things, the collection history of the associate company.
Each Receivables Sub will enter into purchase and sale agreements with one
or more Purchasers under which Receivables Sub may sell (from time to time in
its discretion and subject to the satisfaction of certain conditions precedent)
fractional, undivided ownership interests expressed as a percentage ("Receivable
Interests") in (i) Receivables of its related associate company and (ii) certain
related assets, including any security or guaranty for such Receivables, all
collections thereon, and related records (the "Related Assets"). The
Purchaser(s) of the Receivable Interests are expected to be special purpose
corporations, which acquire receivables and other assets and issue commercial
paper to finance these acquisitions, and/or financial institutions, and their
respective successors or assigns.
Each Receivables Sub will sell Receivable Interests to the Purchasers from
time to time. Such Receivable Interests may be funded and repaid on a revolving
basis. The ownership interest in Receivables constituting the Receivable
Interests will be calculated from time to time according to a formula, which
will include reserves based on a multiple of historical losses, customer
concentrations that exceed specified levels and other costs associated with the
programs. Such formula will also take into account the
______________________
/42/ See, e.g., Central and South West Corporation, Holding Co. Act Release No.
25995 (March 2, 1994); Allegheny Power System, Inc., Holding Co. Act Release No.
26401 (Oct. 27, 1995); New Century Energies, Inc., Holding Co. Act Release No.
26748 (August 1, 1997); Connecticut Light & Power Company, Holding Co. Act
Release No. 26761 (Sept. 29, 1997); Columbia Energy Group, Holding Co. Act
Release No. 27604 (August 23, 1999).
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cost of servicing. The collection fee component will be paid to the servicer
of the Receivables.
Primarily because of the reserves that are included in the calculation of
the Receivable Interests sold to the Purchasers, the purchase price paid by the
Purchasers for the Receivable Interests will be lower than the purchase price
paid by the Receivables Sub to the associate company for the Receivables and
Related Assets. It is expected that each Receivables Sub will have available
sufficient assets to pay the associate company the full purchase price for the
Receivables purchased, from the collections on the portion of the Receivables
which is not allocated to the Receivables Interest sold to the Purchasers and to
the extent that the portion of the Receivable Interests of the Purchases which
represents loss reserves exceeds actual loss experience.
However, the funds available at the Receivables Sub at any time may not
match the cost of the Receivables and Related Assets available for purchase from
the associate company. In the event that the Receivables and Related Assets
originated by an associate company exceeds the amount of cash that the
applicable Receivables Sub has available, either the Receivables Sub will pay
the purchase price of the Receivables in part in cash and in part evidenced by
an inter-company note or the associate company will make an additional capital
contribution to the Receivables Sub in the form of such excess Receivables and
Related Assets. Any excess funds at the Receivables Sub will be used to pay down
the inter-company note and/or will be paid to the associate company as a
dividend.
While Purchasers will have the right to appoint collection agents after an
event of default, initially current collection procedures, which are managed by
the associate companies, will be maintained. Following consummation of the
Merger, the billing and collection function of the associate companies will be
subcontracted to LG&E Services.
The receivables programs will be structured so as to meet the specific
requirements of Statement of Financial Accounting Standards No. 125, Accounting
for Transfers and Servicing of Financial Assets and
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Extinguishments of Liabilities, issued in June 1996 by the Financial Accounting
Standards Board ("FAS 125"). Thus, for financial reporting purposes, the
transfers of Receivable Interests from associate companies to the Receivables
Subs will be treated as sales under generally accepted accounting principles.
FAS 125 mandates that any Receivable Interests sold to Purchasers be isolated
from the associate companies and their respective creditors, even in bankruptcy
or receivership of the associate companies; that the associate companies not
maintain effective control over the transferred assets through repurchase and
similar arrangements; and that the Receivables Subs and any subsequent
Purchasers have the right to pledge or exchange the Receivable Interests.
As transferees, the Receivables Subs and Purchasers will bear the risk of
the uncollectibility of Receivables, but will retain limited recourse against
the transferors of these assets. Such recourse claims would include liability
for (i) failure to transfer first priority ownership interests in the underlying
assets, (ii) transferor's breach of its representations, warranties and
covenants, and (iii) certain indemnity obligations. To secure any remedies
stemming from such claims, the transferees would be granted security interests
in the bank accounts into which payments on the Receivables are to be deposited.
The Applicants believe that the receivables factoring will permit the
associate companies in effect to accelerate the receipt of cash collections from
accounts receivable and thereby meet short term cash needs. The receivables
factoring program will provide the associate companies with additional financial
flexibility. Further, the effective cost of the factoring program is expected to
be comparable to the associate companies' cost of debt.
The Applicants request Commission authorization for the retention of the
Receivables Subs and the payment of dividends or other distributions by the
Receivables Subs to the associate companies, to the extent such dividends or
other distributions may be considered to be paid out of capital or unearned
surplus. The Applicants also request that the Commission authorize the
inter-company note between the Receivables Subs and their related associate
company. Such inter-company notes will not be counted against the intra-system
financing limit requested under Item 3.B.ii.n of this Application.
All other aspects of the transactions described herein are not subject to
the Commission's jurisdiction. The sales of Receivables to the Receivables Subs
are not sales of a "security" as defined in Section 2(a)(16) of the Act or
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"utility assets" as defined Section 2(a)(18). Furthermore, any capital
contributions to the Receivables Subs in the form of Receivables and Related
Assets subsequent to its initial capitalization will be exempt from regulation
under Rule 45(b)(4), and the Receivables Subs' sales of Receivable Interests, to
the extent such may be considered the issuance of a debt security, are exempt
from regulation under Rule 52(b).
j. LG&E Energy Intermediate Subsidiaries
LG&E Energy and its U.S. Non-Utility Subsidiaries seek a general grant of
authority to acquire the securities of one or more subsidiaries, which would be
organized exclusively for the purpose of acquiring, holding and/or financing the
acquisition of the securities of or other interests in one or more EWGs or
FUCOs, Rule 58 Subsidiaries, or other non-exempt U.S. Non-Utility Subsidiaries
("LG&E Energy Intermediate Subsidiaries"), provided that LG&E Energy
Intermediate Subsidiaries may also engage in development activities and
administrative activities relating to such subsidiaries. There are several legal
and business reasons for the use of special-purpose subsidiaries such as the
LG&E Energy Intermediate Subsidiaries in connection with making investments in
EWGs and FUCOs, Rule 58 Subsidiaries, and other non-exempt U.S. Non-Utility
Subsidiaries. The formation and acquisition of special-purpose subsidiaries is
often necessary or desirable to facilitate financing the acquisition and
ownership of a FUCO, an EWG or another non-utility enterprise. An LG&E Energy
Intermediate Subsidiary may be organized, among other things, (1) in order to
facilitate the making of bids or proposals to develop or acquire an interest in
any EWG or FUCO, Rule 58 Subsidiary or other non-exempt Non-Utility
Subsidiary; (2) after the award of such a bid proposal, in order to facilitate
closing on the purchase or financing of such acquired company; (3) at any time
subsequent to the consummation of an acquisition of an interest in any such
company in order, among other things, to effect an adjustment in the respective
ownership interests in such business held by LG&E Energy, either directly or
indirectly, and by non-affiliated investors; (4) to facilitate the sale of
ownership interests in one or more acquired non-utility companies; (5) to comply
with applicable laws of foreign jurisdictions limiting or otherwise relating to
the ownership of domestic companies by foreign nationals;
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(6) as a part of tax planning in order to limit PowerGen's exposure
to U.S. and foreign taxes; (7) to further insulate LG&E Energy and the Utility
Subsidiaries from operational or other business risks that may be associated
with investments in non-utility companies; or (8) for other lawful business
purposes.
Investments in LG&E Energy Intermediate Subsidiaries may take the form of
any combination of the following: (1) purchases of capital shares, partnership
interests, member interests in limited liability companies, trust certificates
or other forms of equity interests; (2) capital contributions; (3) open account
advances with or without interest; (4) loans; and (5) guarantees issued,
provided or arranged in respect of the securities or other obligations of any
LG&E Energy Intermediate Subsidiaries. Funds for any direct or indirect
investment by LG&E Energy in any LG&E Energy Intermediate Subsidiary will be
derived from (1) financings authorized in this proceeding; (2) any appropriate
future debt or equity securities issuance authorization obtained by LG&E Energy
or the U.S. Non-Utility Subsidiaries from the Commission; and (3) other
available cash resources, including proceeds of securities sales by a U.S. Non-
Utility Subsidiary pursuant to Rule 52.
k. Reorganization Authority
The Intermediate Companies seek a general grant of authority to restructure
the capital structure of the Intermediate Companies from time to time, in order
to reflect tax and accounting changes after the Merger, without the need to
apply for or receive prior Commission approval, on the condition that the
reorganization will not result in (i) any Intermediate Company being
organized under any jurisdiction other than a member state of the European Union
with which the United States has a Double Taxation Treaty, or a state of the
United States, (ii) any Intermediate Companies ceasing to be wholly-owned,
directly or indirectly, by Powergen or, other than in respect of the
debt and preferred stock of US Holdings, having third party investors,
(iii) the Intermediate Companies being engaged in any business or trade
other than the business of owning, directly or indirectly, equity securities of
LG&E Energy and the financing transactions described herein, or (iv) any of
the Intermediate Companies being regulated by United Kingdom or other third
country regulatory authorities having jurisdiction over electricity rates and
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service. Such restructurings may involve the creation of new, or the elimination
of existing, Intermediate Companies or subsidiaries thereof, or the
consolidation of Intermediate Companies and/or the re-incorporation of an
Intermediate Company in a different jurisdiction. Powergen also seeks a general
grant of authority to establish and retain Powergen Capital and Luxembourg
Securities, as discussed above at Item 3.B.2.c. to serve as conduits to
facilitate the efficient repatriation of funds from the non-U.K. organized
Intermediate Companies or their subsidiaries to the U.K. organized Intermediate
Companies.
LG&E Energy also seeks a general grant of authority to restructure its
non-utility interests from time to time, without the need to apply for or
receive prior Commission approval, on the condition that the reorganization will
not result in the entry by the U.S. Non-Utility Subsidiaries into new lines of
business that have not previously been authorized by the Commission or that are
not permissible on an exempt basis under the Act or Commission rule. Such
restructurings may involve the creation of new, or the elimination of existing,
LG&E Energy Intermediate Subsidiaries, the consolidation of U.S. Non-Utility
Subsidiaries, the spin-off of a portion of an existing business of a U.S.
Non-Utility Subsidiary to another U.S. Non-Utility Subsidiary, the
re-incorporation of an existing U.S. Non-Utility Subsidiary in a different
state, the transfer of authority from one U.S. Non-Utility Subsidiary to
another, the transfer or sale of one U.S. Non-Utility Subsidiary, or its assets,
to LG&E Energy or another U.S. Non-Utility Subsidiary, or other similar type
arrangements. The requested authorization would provide LG&E Energy with the
flexibility to permit any necessary or appropriate restructuring in connection
with the Merger or post-Merger to reflect actual operating experience.
Applicants also believe that such authority will relieve a burden on the
Commission, since without such authority Applicants may have to obtain
Commission authorization for routine reorganizations. The requested
authorization is consistent with the authorization granted to other applicants
in recent Commission orders. See Columbia Energy Group, Holding Company Act
Release No. 27099 (November 5, 1999).
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l. EWG/FUCO-Related Financings
Powergen has adopted a corporate structure that separates its existing
foreign operations from its U.S. utility operations. The organization of foreign
activities under Powergen UK (or Powergen Group Holdings, if applicable), and
U.S. utility activities under LG&E Energy, reflects Powergen's intent to develop
these two business areas in a financially independent manner. As a general
matter, Powergen intends to fund its FUCO activities at the Powergen UK level
(or at the Powergen Group Holdings level, if applicable), although under certain
circumstances it may be desirable from time to time for Powergen to provide some
investment capital or credit support for FUCO acquisitions or operations./43/ To
that end, Powergen is seeking authority to finance after the Merger additional
EWG and FUCO investments and operations in an aggregate amount of up to 100% of
its consolidated retained earnings at any one time outstanding during the
Authorization Period./44/ As of January 2, 2000, 100% of Powergen's consolidated
retained earnings on an U.S. GAAP basis was $1.649 billion. Such financings may
include the issue or sale of a security for purposes of financing the
acquisition or operations of an EWG or FUCO, or the guarantee of a security of
an EWG or FUCO.
As explained more fully below, the proposed financings will not have an
adverse effect on the financial integrity of the Powergen System, nor will they
have an adverse impact on any U.S. Utility Subsidiary, any customers of any U.S.
Utility Subsidiary, or the ability of the affected state commissions to protect
the U.S. Utility Subsidiaries and their customers.
________________
/43/ For example, it may be desirable for reasons of economic efficiency to hold
certain FUCO interests outside Powergen UK (or Powergen Group Holdings, if
applicable) and its subsidiary companies.
/44/ As noted above, all of Powergen's current operating company subsidiaries
are held through a FUCO. The Powergen System, excluding the LG&E Energy Group,
will not own any EWGs at the closing of the Merger.
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Powergen differs from most (The National Grid and Scottish Power are
exceptions) of the registered holding companies with FUCO investments because it
developed first as a FUCO involved primarily in the generation, distribution and
supply of electricity in England and Wales, and only secondarily has become
involved, through the Merger, in the U.S. energy industry. Powergen, therefore,
joins the family of registered holding companies with significant foreign
investments and operating experience in foreign markets. At the end of fiscal
year 1999 (as adjusted for investments subsequently sold), the combined LG&E
Group and Powergen "aggregate investment" in EWGs and FUCOs was approximately
$1.270 billion./45/ This investment represents 77% of Powergen consolidated
retained earnings at the end of fiscal year 1999, calculated in accordance with
U.S. GAAP.
Powergen's background makes it difficult for the company to comply fully
with certain of the technical requirements of Rule 53. In particular, because
Powergen has preexisting foreign utility operations, it cannot commit to
maintain the books and records of its FUCOs in conformity with U.S. GAAP.
Nonetheless, Powergen satisfies the ultimate standards, as set forth in Section
32 and reflected in Rule 53(c), namely, the proposed investment will not have a
substantial adverse impact on the financial integrity of the Powergen System, or
an adverse impact on any of the U.S. Utility Subsidiaries, or their customers,
or on the ability of state commissions to protect such subsidiary or customers.
Powergen makes this assertion based on an assessment of its business activities,
its capital structure, the earnings and cash flows anticipated from its assets,
and the risks that could affect the financial stability of the Powergen
________________
/45/ Powergen's "aggregate investment" in FUCOs is based on Powergen's equity
investment in Powergen UK and the amount of indebtedness of Powergen UK and its
subsidiaries that is recourse to Powergen. LG&E Energy's "aggregate investment"
in EWGs and FUCOs is based on LG&E Energy's equity investment in EWGs and FUCOs
and the amount of indebtedness of such EWGs and FUCOs that is recourse to LG&E
Energy. Further, this calculation was made in accordance with the formula
provided in the National Grid Order, footnote 45.
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System. See Powergen's financial statements as included in its Annual Report
(Exhibit I-1 attached hereto).
The final aspect of the Commission's inquiry into the proposed FUCO
financing should focus on whether risks associated with the foreign utility
businesses could adversely affect the financial stability of the system. In this
regard, Powergen's successful operation of a national generation, distribution,
and supply business and its international power projects should indicate that
Powergen has sound management skills and expertise in the utility industry,
particularly as it relates to foreign utility operations.
Powergen utilizes a stringent review process - known as its investment
decision procedure - in order to assess the risks associated with new (including
FUCO) investments, to provide a framework for managing investment decisions and
to establish minimum requirements for the investment process, so that decisions
are made in a consistent, informed and controlled environment.
By way of background, each year the Powergen Board of Directors approves a
one-year detailed budget and a five-year business plan. Within the framework of
the annual budget and the five year business plan, investments in new projects
proceed according to the following steps. First, generally, and unless a
proposed investment is specifically contemplated by the five-year business plan,
a "concept paper" is developed, which sets forth the general parameters of the
proposal. The concept paper stage is intended to expose potential risks before
significant resources have been applied to a project. Second, management
develops a proposal which requests authority to fund a project through its
development stage. Following development of the project, a proposal is created
that describes the specific investment opportunity. At this stage, the proposal
will request an amount of funds for the project, estimate the effect of the
project on the financial results of the Powergen System, and evaluate the
proposal against a variety of other financial benchmarks (e.g., net present
value of the project, internal rate of return, etc.). The proposal requires
approval by the Board or senior management according to Board approved
delegations of authority.
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The Commission has found the standards of the Act satisfied in connection
with requests by a number of U.S. registered holding companies to exceed the so-
called "50 percent limit" under Rule 53. Southern Co., Holding Co. Act Release
No. 26501 (April 1, 1996); Central and South West Corporation, Holding Co. Act
Release No. 26653 (Jan. 24, 1997). See also GPU, Inc., Holding Co. Act Release
No. 26779 (Nov. 17, 1997); Cinergy Corp., Holding Co. Act Release No. 26848
(March 23, 1998); American Electric Power Company, Holding Co. Act Release No.
26864 (April 27, 1998); New Century Energies, Holding Co. Act Release No. 26982
(Feb. 26, 1999). In each of those matters, the applicant sought relief from the
safe-harbor requirements of Rule 53(a)(1) to allow investments in an amount
equal to the applicant's consolidated retained earnings. The Commission found
that the applicants in each matter had demonstrated successfully, through the
use of certain financial indicators, that investing in EWGs and FUCOs in an
amount not to exceed their consolidated retained earnings would not have a
substantial adverse impact on the financial integrity of the holding company
system.
In addition, in the National Grid Order, the Commission concluded that
National Grid, an applicant with a significant existing FUCO investment, made
the requisite showing under Rule 53(a), and authorized additional EWG and FUCO
investments in an aggregate amount of up to 50% of its consolidated retained
earnings, thus allowing aggregate investments of approximately 252%.
Applicants assert that the comparison of the financial measures and
indicators discussed above, and Powergen's stringent project review procedures,
demonstrate that the financial integrity of the Powergen System is substantially
similar to the financial integrity of the applicants in matters in which the
Commission has previously granted exceptions to the safe harbor requirements of
Rule 53.
It is noteworthy that none of the conditions described in Rule 53(b) is
applicable. First, there has been no bankruptcy of any Powergen associate
company in which a plan of reorganization has not been confirmed. Second, the
average consolidated retained earnings for the two most recent semiannual
periods has not decreased by 10 percent from the average for the previous
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two semiannual periods./46/ Third, in the past fiscal year, Powergen has not
reported, on a consolidated basis, operating losses attributable to its direct
or indirect investments in FUCOs.
The soundness of Powergen's financial structure and the lack of risk to
U.S. utility consumers is further demonstrated by Powergen's commitment, as set
forth above, to maintain:
. The common stock equity ratios of each of LG&E and KU, on an
individual basis, at a minimum of 35%;
. Its and US Holdings' senior unsecured long-term debt rating at an
investment grade level; and
. Its common stock equity as a percentage of total capitalization,
measured on a book value U.S. GAAP basis, at 30% or above on and after
December 31, 2001.
Under Rule 53(c)(2) Powergen must demonstrate that the proposed use of
financing proceeds to invest in FUCOs will not have an "adverse impact" on any
of the U.S. Utility Subsidiaries, their respective customers, or on the ability
of the state commissions having jurisdiction over one or more such utility
subsidiaries to protect such public utility companies or such customers. The
conclusion that no such "adverse impact" will occur is supported by the
following:
(a) All of the investments by the Powergen System in EWGs and FUCOs will
be segregated from the U.S. Utility Subsidiaries. None of the U.S. Utility
Subsidiaries will provide financing for, extend credit to, or sell or pledge its
assets directly or indirectly to any EWG or FUCO in which Powergen owns any
interest. Powergen further commits not to seek recovery in
________________
/46/ Although Rule 53 specifies quarterly periods, Powergen does not prepare
accounts with this frequency.
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retail rates of the U.S. Utility Subsidiaries for any failed investment in, or
inadequate returns from, an EWG or FUCO investment.
(b) Investments in EWGs and FUCOs will not have any negative impact on
the ability of the U.S. Utility Subsidiaries to fund operations and growth. The
U.S. Utility Subsidiaries currently have financial facilities in place that are
adequate to support their operations. These facilities will continue after the
Merger. The expectation of continued strong credit ratings by the U.S. Utility
Subsidiaries should allow them to continue to access the capital markets to
finance their operations and growth.
(c) Powergen will comply with the requirements of Rule 53(a)(3) regarding
limiting the use of the U.S. Utility Subsidiaries' employees to provide services
to EWGs and FUCOs. It is contemplated that project development, management and
home office support functions for the FUCOs currently held by Powergen will be
largely performed by Powergen UK (or Powergen Group Holdings, if applicable) and
its subsidiary companies, and by outside consultants (e.g., engineers,
investment advisors, accountants and attorneys) engaged by Powergen or Powergen
UK (or Powergen Group Holdings, if applicable). On a going-forward basis,
Powergen also will comply with Rule 53(a)(4) regarding the provision of EWG and
FUCO related information to every federal, state and local regulator having
jurisdiction over the retail rates, as applicable, of the U.S. Utility
Subsidiaries.
(d) Powergen believes that the state commissions are able to protect
utility customers within their respective states. In connection with the Merger,
Powergen will request that each of the affected state commissions provide the
Commission with letters certifying that the state commission has jurisdiction
over the respective LG&E Energy system public utility companies and that the
state commission will exercise this authority to protect ratepayers.
(e) In addition, Powergen will continue to provide the financial
information required by Form 20-F to permit the Commission to monitor the effect
of Powergen's EWG and FUCO investments on Powergen's financial
condition.
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C. Reporting
Applicants will file Form U5S annually with the Commission within 120 days
of the close of Powergen's fiscal year. In addition, Powergen will continue to
file a Form 20-F annually with the Commission, a semiannual report containing
earnings information, and reports on Form 6-K containing material announcements
as made.
It is proposed that, with respect to Powergen which, as noted above, has
registered under the 1934 Act, the reporting systems of the 1934 Act and the
1933 Act be integrated with reports under the 1935 Act. This would eliminate
duplication of filings with the Commission that cover essentially the same
subject matters, and reduce burdens on both the Commission and Powergen. To
effect such integration, the Applicants propose to incorporate by reference into
the Rule 24 certificates of notification the portion of the 1933 Act and 1934
Act reports containing or reflecting disclosures of transactions occurring
pursuant to the authorization granted in this proceeding.
Applicants further propose to provide Rule 24 certificates semi-annually,
which is consistent with the financial reporting requirements in the United
Kingdom. Under U.K. rules, Powergen must prepare and publish consolidated
financial information semi-annually. In addition, semiannual financial reporting
is consistent with Powergen's ADR listing on the NYSE. Due to Powergen's
extensive foreign holdings, it would entail significant additional work and
expense for Powergen to prepare consolidated financial statements on a quarterly
basis. Powergen will provide the Commission access to the books, records and
financial statements, or copies thereof, of any of its subsidiary companies, in
English, as the Commission may request.
1. Requests for Exemption
Applicants request an exemption from Rule 26(a)(1) under the Act, regarding
the maintenance of financial statements in conformance with Regulation S-X, for
any existing subsidiary of Powergen UK (or Powergen Group Holdings as of its
formation) organized outside the United States. Any FUCO acquired directly or
indirectly by Powergen subsequent to
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the issuance of an order in this Application will maintain its financial
statements in accordance with U.S. GAAP or reconcile such statements to U.S.
GAAP in the same manner as required by Form 20-F. The same relief was sought by
National Grid and was granted by the Commission in the National Grid Order.
2. Form U5S
Applicants propose that their Form U5S filings will include Powergen's
consolidated financial statements in the format required by Form 20-F, i.e.,
U.K. GAAP format with reconciliations to U.S. GAAP. In addition, Applicants
propose to include in their Form U5S filings: (1) financial statements in the
format required by Form 20-F for US Holdings, on a consolidated basis, (2) U.S.
GAAP financial statements for all the companies in the LG&E Energy Group, on a
consolidated basis, and (3) consolidating financial schedules of LG&E Energy
showing the fair value adjustments resulting from a purchase price allocation
process as consolidation adjustments in a consolidation column to those
schedules. Amounts included in Form U5S filings will be stated in U.S. dollars.
Powergen will also provide the following supplemental information in its
annual Form U5S filing:
(a) The amount of any income tax credit and/or income tax liability
incurred during the previous fiscal year by Powergen US Partnership (one of
the Intermediate Companies): (i) as a result of any acquisition-related
debt, and (ii) as a result of any other income source or expense;
(b) A description of how the income tax credit and/or income tax
liability was calculated and allocated to all companies included in the
consolidated tax return, showing all of Powergen US Partnership's interest
costs and any assumptions used in the calculation;
(c) A description of how any acquisition-related funding is effected
through all Intermediate Companies;
(d) A description of the amount and character of any payments made by
each Intermediate Company to any other
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Powergen System company during the reporting period; and
(e) A statement that the allocation of tax credits and liabilities
was conducted in accordance with the Tax Allocation Agreement in effect and
filed as an exhibit to the Form U5S.
3. Rule 24 Certificates of Notification
The Rule 24 certificates will be provided to the Commission within 90 days
after the end of Powergen's fiscal year and within 60 days of the end of its
first semiannual reporting period and will contain the following information:
(a) The principal amount, interest rate, term, number of shares,
market price per share, sales price per share (if other than market price) and
aggregate proceeds, as applicable, of any securities issued by Powergen during
the reporting period, including securities issued to dividend reinvestment plans
and employee benefit plans;
(b) The amount of guarantees issued during the reporting period by
Powergen, the name of the beneficiary of the guarantee and the terms and purpose
of the guarantee;
(c) Powergen's aggregate investment, as defined under Rule 53, in
EWGs and FUCOs, excluding investments made prior to the date of the Merger, as
of the end of the reporting period in dollars and as a percentage of Powergen's
consolidated retained earnings, and a description of EWG and FUCO investments
during the reporting period;
(d) The aggregate amount of securities and the aggregate amount of
guarantees issued and outstanding by Powergen since the date of the order in
this Application, including any LG&E Energy acquisition debt;
(e) A list of the securities issued by the Intermediate Companies
during the reporting period, including principal amount, interest rate, term,
number of shares and aggregate proceeds, as applicable, with the acquiring
company identified;
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(f) The amount and terms of any short-term debt issued by LG&E and
KU, and a list of the deposits and withdrawals by such companies from the system
money pool during the reporting period;
(g) The amount and terms of any nonexempt financings consummated
during the period by LG&E or KU during the reporting period;
(h) The amount and terms of any nonexempt financings consummated by
any U.S. Non-Utility Subsidiary during the reporting period;
(i) A table showing, as of the end of the reporting period, the
dollar and percentage components of the capital structures of Powergen, LG&E
Energy and each first-tier subsidiary of LG&E Energy;
(j) Paper copies of Powergen's filings of Form 20-F and semiannual
reports to shareholders; and
(k) As applicable, all amounts shall be expressed in U.K. Pounds and
converted to U.S. dollars and shall be presented in accordance with the U.S.
GAAP reconciliation requirements of Form 20-F. In particular, the semiannual
reports provided to the Commission in Rule 24 filings under this Application
shall be organized so that all columns showing amounts in Pounds in financial
statements or tables are accompanied by parallel columns showing dollar amounts.
D. Payment of Dividends Out of Capital and Unearned Surplus
Section 12 of the 1935 Act, and Rule 46 thereunder, generally prohibit the
payment of dividends out of "capital or unearned surplus" except pursuant to an
order of the Commission. The legislative history explains that this provision
was intended to "prevent the milking of operating companies in the interest of
the controlling holding company groups." S. Rep. No. 621, 74th Cong., 1st Sess.
34 (1935). In determining whether to permit a registered holding company to pay
dividends out of capital surplus, the Commission considers various factors,
including: (i) the asset value of the company in relation to its capitalization,
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(ii) the company's prior earnings, (iii) the company's current earnings in
relation to the proposed dividend, and (iv) the company's projected cash
position after payment of a dividend. See Eastern Utilities Associates, Holding
Co. Act Release No. 25330 (June 13, 1991), and cases cited therein. Further, the
payment of the dividend must be "appropriate in the public interest." Id.,
citing Commonwealth & Southern Corporation, 13 S.E.C. 489, 492 (1943).
1. Powergen and U.S. Subsidiary Companies
Applicants will use the purchase method of accounting for the Merger. Under
this method of accounting, the premium to be paid to acquire LG&E Energy will
result in the accrual by the Powergen System of a substantial amount of goodwill
that will have to be amortized, reducing future consolidated net income. Such
amortization, however, will have no effect on the cash flow of Powergen and its
subsidiaries.
Further, Staff Accounting Bulletin No. 54 generally requires that the
premium paid in an acquisition utilizing the purchase method of accounting be
"pushed down" to the books of the acquired company, which in this case would be
the LG&E Energy Group. The effect of such a "pushdown" is to eliminate the
retained earnings of the acquired company and to increase its additional paid-in
capital. However, the Applicants have been advised that, under applicable
exceptions to the general rule, the premium paid in the acquisition will not be
"pushed down" to the LG&E Energy Group. However, changes in circumstances or
changes in accounting principles or the application thereof may result in such a
pushdown or a similar non-cash charge to retained earnings. Again, such charge
would have no effect on the cash flow of Powergen and its subsidiaries. In
addition, as described above under Item 3.C, Reporting, Powergen has agreed to
file consolidating schedules of LG&E Energy reflecting the fair value
adjustments resulting from such a pushdown.
In light of the above, Powergen and the U.S. Subsidiary Companies
request authority to pay dividends out of additional paid-in-capital up to the
amount of LG&E Energy's consolidated retained earnings just prior to
the Merger and out of earnings before the amortization of
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goodwill thereafter. In no case would such dividends be paid by LG&E Energy out
of paid-in capital if the common stock equity of LG&E Energy as a percentage of
total capitalization was below 30% on a consolidated basis. This restriction is
intended to protect both investors and consumers. The relief requested will
ensure the ability of US Holdings to service the acquisition debt incurred in
connection with the Merger without impairing the financial condition of the LG&E
Energy Group. It is similar to that granted by the Commission in the National
Grid Order.
2. U.S. Non-Utility Subsidiaries
LG&E Energy requests authorization, on behalf of the direct and indirect
U.S. Non-Utility Subsidiaries, that such U.S. Non-Utility Subsidiaries be
permitted to pay dividends with respect to the securities of such companies,
from time to time through the Authorization Period, out of capital and unearned
surplus (including revaluation reserve), to the extent permitted under
applicable corporate law.
LG&E Energy anticipates that there will be situations in which one or more
of its direct or indirect U.S. Non-Utility Subsidiaries will have unrestricted
cash available for distribution in excess of any such company's current and
retained earnings. In such situations, the declaration and payment of a dividend
would have to be charged, in whole or in part, to capital or unearned surplus.
As an example, if an LG&E Energy Intermediate Subsidiary purchases all of the
stock of an EWG or FUCO, and following such acquisition, the EWG or FUCO incurs
non-recourse borrowings some or all of the proceeds of which are distributed to
such LG&E Energy Intermediate Subsidiary as a reduction in the amount invested
in the EWG or FUCO (i.e., return of capital), the LG&E Energy Intermediate
Subsidiary (assuming it has no earnings) could not, without the Commission's
approval, in turn distribute such cash to its parent for possible distribution
to LG&E Energy.
Similarly, using the same example, if an LG&E Energy Intermediate
Subsidiary, following its acquisition of all of the stock of an EWG or FUCO,
were to sell part of that stock to a third party for cash, the LG&E Energy
Intermediate Subsidiary would again have substantial unrestricted cash available
for distribution, but (assuming no profit on the sale of the stock) would not
have current earnings and therefore could not, without the Commission's
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approval, declare and pay a dividend to its parent out of such cash proceeds.
Further, there may be periods during which unrestricted cash available for
distribution by a first-tier U.S. Non-Utility Subsidiary or a direct or indirect
subsidiary thereof exceeds current and retained earnings due to the difference
between accelerated depreciation allowed for tax purposes, which may generate
significant amounts of distributable cash, and depreciation methods required to
be used in determining book income.
Finally, even under circumstances in which a U.S. Non-Utility Subsidiary or
other downstream subsidiary has sufficient earnings, and therefore may declare
and pay a dividend to its immediate parent, such immediate parent may have
negative retained earnings, even after receipt of the dividend, due to losses
from other operations. In this instance, cash would be trapped at a subsidiary
level where there is no current need for it.
LG&E Energy, on behalf of each of its current and future direct and
indirect U.S. Non-Utility Subsidiaries, represents that it will not declare or
pay any dividend out of capital or unearned surplus in contravention of any law
restricting the payment of dividends. In this regard, it should be noted that
all U.S. jurisdictions limit to one extent or another the authority of
corporations to make dividend distributions to shareholders. Most state
corporations statutes contain either or both an equity insolvency test or some
type of balance sheet test. LG&E Energy also states that its U.S. Non-Utility
Subsidiaries will comply with the terms of any credit agreements and indentures
that restrict the amount and timing of distributions to shareholders.
E. Approval of New Tax Allocation Agreement
Applicants ask the Commission to approve an agreement for the allocation of
consolidated tax among Powergen US Partnership, Powergen US Investments Corp.
and the LG&E Energy Group post-Merger (the "Tax Allocation Agreement"). Approval
is necessary because the Tax Allocation Agreement will provide for the retention
by the Powergen entities within the consolidated group of certain payments for
tax losses, rather than the allocation of such losses to subsidiary companies
without payment as would otherwise be required by
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Rule 45(c)(5). The proposed Tax Allocation Agreement is filed as Exhibit C-3.1
hereto. The proposed Tax Allocation Agreement is based on the LG&E Energy Group
existing tax allocation agreement and is in a customary form in that no party to
the Tax Allocation Agreement is required to pay more taxes than it would have
paid as a stand-alone entity. There are two elements to the Tax Allocation
Agreement that are different from the comparable U.S. agreements. These
differences are intended to help realize the tax benefits arising out of the
cross-border nature of the Merger. These differences are that (1) no payments
will be made to US Partnership in respect of tax benefits received from it and
(2) no entity (other than the Utility Subsidiaries) will be required to make a
payment under the Tax Allocation Agreement to the extent such payment would
cause the entity to have a loss in respect of such period.
F. Section 13 - Intra-System Provision of Goods and Services
The LG&E Energy Group companies will engage in a variety of affiliate
transactions for the provision of goods, services, and construction. Following
the Merger, the provision of goods, services and construction by the LG&E
Energy Group companies to other LG&E Energy Group companies will be carried out
in accordance with the requirements and provisions of Rules 87, 90, and 91,
unless otherwise authorized by the Commission by order or by rule.
Applicants propose to form a service company subsidiary of LG&E Energy,
LG&E Services, to provide goods and services to members of the LG&E Energy Group
primarily and, to a
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lesser extent, members of the Powergen System. LG&E Services will be a direct
and wholly-owned subsidiary of LG&E Energy on the same level of the corporate
flow chart as LG&E and KU. It is anticipated that LG&E Services will be staffed
primarily by the transfer of personnel from LG&E Energy, LG&E and KU, and their
subsidiaries. Applicants request that LG&E Services be authorized pursuant to
Section 13(b) and Rule 88 to provide goods and services to affiliates.
Applicants also propose that members of the Powergen System may provide goods
and services to members of the LG&E Energy Group. In particular, it is
anticipated that most of the Trans-Atlantic goods and services will be provided
by Powergen UK (or by Powergen Group Holdings, if applicable). Applicants,
however, do not seek authorization for Powergen UK (or by Powergen Group
Holdings, if applicable) to be qualified as a service provider under Section
13(b) and Rule 88, subject to the terms and conditions outlined below, including
the commitment that all goods and services and billings flow through LG&E
Services. This corporate structure for the provision of goods and services is
consistent with the arrangement authorized in the National Grid Order.
The Applicants expect LG&E Services to be operational on the date the
Merger is effective or within 30 days thereafter. However, the Applicants seek
authority to delay, for a period not longer than one year following the
effective date of the Merger, the full implementation of all expected services
to be provided by LG&E Services and/or full implementation of required
accounting systems and cost allocation methodologies. Such delay would
accommodate the need to develop systems to fully implement the desired
accounting requirements or for other reasons making full implementation more
costly or complex than if a short delay were allowed./47/
In addition, certain LG&E Energy Group companies have in place transactions
for the provision of goods, services and construction to other LG&E Energy Group
companies, which
_____________________
/47/ The Commission has allowed limited phase-in of the affiliate requirements
for companies who are becoming subject to the Act for the first time as a result
of a merger. See Dominion Resources, Inc., Holding Company Act Release No.
27113.
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contracts are described in Exhibit K. The Applications seek the necessary
approval for the continued performance of such contracts pursuant to their
respective terms, including any pricing terms, until December 31, 2001, which
will allow an orderly transaction of these contracts.
1. Interaction with FERC Policy
Unless exempt, all services provided by Powergen System companies to other
companies within the system will be in accordance with the requirements of
Section 13 of the Act and the rules promulgated thereunder. Powergen is aware
that questions concerning the FERC's policy in this area are likely to arise
with respect to affiliate transactions involving LG&E and KU, companies that are
public utilities under the Federal Power Act. In connection with the application
to the FERC to approve the Merger, the Applicants represented that, with respect
to any transaction between any member company of the LG&E Energy system and
Powergen and any of its subsidiary or affiliated companies, the LG&E Energy
Companies will abide by FERC policy regarding intra-affiliate transactions. The
FERC intra-corporate transactions policy, with respect to non-power goods and
services, generally requires that affiliates or associates of a public utility
not sell non-power goods and services to the public utility at a price above
market; and sales of non-power goods and services by a public utility to its
affiliates or associates be at the public utility's cost for such goods and
services or market value for such goods and services, whichever is higher.
Applicants recognize that affiliate transactions among the member companies
of Powergen will be subject to the jurisdiction of the Commission under Section
13(b) of the Act and the rules and regulations thereunder. That section
generally requires that affiliate transactions involving system utilities be "at
cost, fairly or equitably allocated among such companies." See also Rule 90.
Nonetheless, Powergen believes that, as a practical matter, there should not be
any irreconcilable inconsistency between the application of the Commission's "at
cost" standard and the FERC's policies with respect to intra-system transactions
as applied to Powergen.
On this basis, Applicants believe that Powergen will be able to
comply with the requirements of
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both the FERC and the "at cost" and fair and equitable allocation of cost
requirements of Section 13, including Rules 87, 90, and 91 thereunder, for all
services, sale and construction contracts between associate companies and with
the holding company parent unless otherwise permitted by the Commission by rule
or order.
2. Scope of Service
After consummation of the Merger, LG&E Services will provide a variety of
administrative, management and support services to LG&E and KU pursuant to the
Utility Service Contract, and to the U.S. Non-Utility Subsidiaries pursuant to
the Non-Utility Service Contract. Although the full scope of services is not
known at this time, the services may include:
1. Information Systems Services - Provides electronic data processing
services.
2. Customer Services - Provides billing, mailing, remittance processing,
call center and customer communication services for customers.
3. Marketing and Sales - Establishes strategies, provides oversight for
marketing, sales and branding of utility and related services, conducts
marketing and sales programs, and economic development.
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.
5. Corporate Compliance - Oversees compliance with all laws, regulations
and policies applicable to all of LG&E Energy's businesses and directs
compliance training.
______________________
/48/ Under circumstances of divergent cost and market prices such that both the
FERC and SEC pricing standards could not be reconciled if the transaction was
performed, Powergen will comply by refraining from performing the affected
service, sales or construction contract.
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6. Purchasing - Provides procurement services.
7. Financial Services - Provides treasury, accounting, tax, financial
planning, regulatory and auditing services.
8. Risk Management - Provides insurance, claims, security and safety
services.
9. Public Affairs - Maintains relationship with government policy makers,
conducts lobbying activities and provides community relations functions.
10. Legal Services - Provides various legal services and general legal
oversight; handles claims.
11. Investor Relations - Maintains relationship with the financial
community and provides shareholder services.
12. Telecommunications - Provides telecommunications services, primarily
the use of telephone equipment.
13. Gas Supply and Capacity Management - Provides gas supply and capacity
management services.
14. Transmission, Substation Construction, Maintenance & Operations -
Provides management services for transmission and substation construction,
maintenance and operations areas.
15. Meter Reading, Repair and Maintenance - Provides services related to
meter reading and the repair and maintenance of meters.
16. Design Engineering - Designs and monitors construction of electric
transmission and distribution lines and substations.
17. Substation Engineering and Support - Provides management support
services to the Substation Engineering and Support organizations of the
operating companies.
18. 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 completes analyses as required on all fuel
used for generation.
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19. Purchased Power and Electric Trading - Purchases power and provides
electric trading services to the operating companies electric generation systems
and all other trading functions.
20. Strategic Planning - Develops corporate strategies and business plans.
21. Executive - Provides executive and general administrative services.
22. Environmental Affairs - Performs analyses and advocacy of regulatory
and legislative issues in the areas of environment. Communicates final
regulatory requirements to operating groups. Provides assistance, support and
compliance review in meeting those requirements. Oversees hazardous substance
site investigations and remediation activities.
23. Energy Supply - Coordinates the use of the generating, transmission
and interconnection facilities to provide economical and reliable energy.
24. Transportation - Operates transportation fleet for the operating
companies and affiliates. Provides engineering, support, mechanical servicing
of vehicles, and procurement of vehicles.
25. Media Relations - Performs all media relations with local and national
media organizations according to established policies and procedures.
Members of the Powergen System may provide services to the LG&E Energy
Group and, to a lesser extent, LG&E Energy Group companies may provide services
to Powergen System companies. The full range of services to be provided by
members of the Powergen System to LG&E Energy Group companies is not presently
known. Although some Trans-Atlantic services may be performed by LG&E Energy
Group companies for Powergen System companies, Applicants contemplate that the
majority of Trans-Atlantic services will flow from the Powergen System companies
to the LG&E Energy Group.
It is anticipated presently that Powergen UK (or Powergen Group Holdings,
if applicable) will be the principal entity providing services from the Powergen
System, and LG&E Services will be the principal
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recipient of services for the LG&E Energy Group. It is also anticipated
presently that the charges to the LG&E Energy Group will be primarily from
Powergen UK (or Powergen Group Holdings, if applicable) to LG&E Services, and
LG&E Services will reallocate the charges as appropriate to members of the LG&E
Energy Group.
Some services are solely concerned with events outside of the normal
operations of the LG&E Energy Group. The LG&E Energy Group will not be charged
with any costs relating to these departments, unless their services are
specifically requested. In addition, charges for costs associated with future
mergers and acquisitions may be allocated to LG&E Energy and/or to Powergen
System companies, but not to the LG&E Energy Subsidiary Companies.
The attached Form of Service Contract ("Service Contract"), Exhibit B-2,
will govern the charges between LG&E Services and the U.S. Utility Subsidiaries.
The Non-Utility Service Contract will be substantially similar to the Service
Contract, except as described herein. It is contemplated that the Service
Contract will be amended to provide for services to entities that will become
associate companies of LG&E Energy as a result of future mergers and
acquisitions.
3. Allocation of Service Costs Among Members of the LG&E Energy
Group
The costs of services provided by LG&E Services and members of the Powergen
System will be directly assigned, distributed or allocated by activity, project,
program, work order or other appropriate basis. Applicants expect that the
majority of costs billed by members of the Powergen System to the LG&E Energy
Group will be paid initially by LG&E Services which will then charge the
appropriate service recipient. Applicants envision two types of charges.
First, for services rendered specifically for the LG&E Energy Group or
individual members, costs will be directly attributed to specific subsidiaries
when it is possible to do so accurately.
Second, members of the LG&E Energy Group will pay a share of services that
benefit them as members of the Powergen System. Their share will be determined
by a two-step process. The LG&E Energy Group's portion of
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these costs will be determined using measures that reflect the relevant
contribution and size of the individual businesses. Allocation of group costs
will follow the methodology adopted by the U.K. regulator, the Office of Gas and
Electricity Markets ("OFGEM"). The OFGEM approach uses four measures (revenues,
operating profit, employee numbers and net assets) and allocates the group costs
equally across the four. Revenues are adjusted to exclude the income resulting
from sales of purchased power within LG&E Energy. Each Powergen service provider
will use figures from the latest published accounts to calculate the percentage
of revenues, operating profit, employee numbers and net assets on an annualized
basis, and these four percentages will be averaged to calculate the group
allocation.
LG&E Services will allocate the costs of service among the LG&E Energy
Group using one of several methods. LG&E Services will choose the method that
most accurately distributes the costs. The method of cost allocation varies
based on the department rendering the service. Exhibit B-2 provides an
illustration of allocation of group costs among the LG&E Energy Group.
4. Calculation of Service Costs
LG&E Services' accounting and cost allocation methods and procedures will
be structured so as to comply with the Commission's standards for service
companies in registered holding-company systems. LG&E Services' billing system
will use the "Uniform System of Accounts for Mutual Service Companies and
Subsidiary Service Companies" established by the Commission for service
companies of registered holding-company systems, as may be adjusted to use the
FERC uniform system of accounts. Further, since costs will be equitably
allocated, charges for all services provided by LG&E Services to public utility
affiliates under the Utility Service Contract will be on an "at cost" basis as
determined under Rules 90 and 91 of the Act.
The Non-Utility Service Contract contains provisions similar to those of
the Service Contract, except that the Non-Utility Service Contract permits
charges for certain services to be at fair market value to the extent authorized
by the Commission. To this end, Applicants request that LG&E Services and any
other non-utility subsidiary be authorized to provide goods and services at
other than cost to any associate company that is not a public-utility
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company as defined under the Act. Specifically, Applicants request that the
Commission grant an exemption from the provisions of Rules 90 and 91 and the at-
cost requirement for any non-utility subsidiary of Powergen (including LG&E
Services) for the following transactions, among others: services provided to
associate FUCOs and EWGs that derive no part of their income, directly or
indirectly, from the generation, transmission or distribution of electric energy
for sale or the distribution of natural gas at retail in the United States; and
services provided to an associated EWG, qualifying facility ("QF"), or
independent power project ("IPP"), provided that the purchaser of the
electricity sold by such entity is not an associate company of LG&E Energy. No
services will be provided at market-based rates to a QF, IPP, or EWG selling
electricity to the U.S. Utility Subsidiaries unless authorized by the Act or the
Commission. The Commission has granted comparable relief in numerous prior
orders. See, e.g., New Century Energies, Inc., Holding Co. Act Release No. 27000
(April 7, 1999). Applicants also request that the Commission grant an exemption
from the provisions of Rules 90 and 91 and the at costs requirements for any
non-utility subsidiary of Powergen (including LG&E Services) for services to any
subsidiary meeting the requirements of Rule 58, any exempt telecommunications
company under Section 34 of the Act and any other non-utility subsidiaries that
do not derive any part of their income from the sales of goods, services or
other property to a public-utility company that is an associate of Powergen.
With regard to services provided by any U.K. company in the Powergen System
to the LG&E Energy Group, the Powergen service provider will use appropriate
policies and procedures to assure that all costs are identified and attributed
to particular projects, programs or work orders for purposes of direct cost
allocation. Records related to services provided by any Powergen service
provider to LG&E Energy companies will be made available to the Commission staff
for review.
As required by Rule 91 under the 1935 Act, the costs allocated across the
businesses served by any Powergen service provider will as far as possible
represent the total true cost of providing the corporate service. The costs
considered in the allocation will include: (1) total payroll and associated
costs; (2) materials
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and consumable costs; (3) building and facilities costs; (4) IS infrastructure
costs; and (5) other departmental costs.
Rates for the charges from any Powergen service provider to LG&E Services
will be calculated by taking total cost over total time worked. This method of
calculation will ensure total recovery of departmental costs on a monthly basis,
with minimal fluctuation of hourly rates. Budgeted rates will be available for
forecasting purposes.
5. Billing
Each Powergen service provider will bill LG&E Services monthly in arrears.
The billing format will list charges by corporate department, detailing total
time applicable to LG&E Energy companies, multiplied by the current rate, to
give the total charge for the month.
If a Powergen service provider provides services for the benefit of a
specific LG&E Energy company, the charge applicable to that company will be
specifically identified in the invoice. Otherwise, the Powergen service
provider's charges will be allocated to individual LG&E Energy companies through
LG&E Services' allocation cycle.
6. Restriction on Amendments
No change in the organization of LG&E Services, the type and character of
the companies to be serviced (other than the amendment discussed above to
include services for the Powergen associate companies), the methods of
allocating costs to associate companies, or in the scope or character of the
services to be rendered subject to Section 13 of the Act, or any rule,
regulation or order thereunder, shall be made unless and until LG&E Services
shall first have given the Commission written notice of the proposed change not
less than 60 days prior to the proposed effectiveness of any such change. If,
upon the receipt of any such notice, the Commission shall notify LG&E Services
within the 60-day period that a question exists as to whether the proposed
change is consistent with the provisions of Section 13 of the Act, or of any
rule, regulation or order thereunder, then the proposed change shall not become
effective unless and until the LG&E Services shall have filed with the
Commission an appropriate
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declaration regarding such proposed change and the Commission shall have
permitted such declaration to become effective.
7. Approval of LG&E Services
Applicants believe that the Service Contract and the Non-Utility Service
Contract are structured so as to comply with Section 13 of the Act and the
Commission's rules and regulations thereunder.
Rule 88: Rule 88 provides that "[a] finding by the Commission that a
subsidiary company of a registered holding company . . . is so organized and
conducted, or to be conducted, as to meet the requirements of Section 13(b) of
the Act with respect to reasonable assurance of efficient and economical
performance of services or construction or sale of goods for the benefit of
associate companies, at cost fairly and equitably allocated among them (or as
permitted by Rule 90), will be made only pursuant to a declaration filed with
the Commission on Form U-13-1, as specified" in the instructions for that form,
by such company or the persons proposing to organize it. Notwithstanding the
foregoing language, the Commission has on at least three recent occasions made
findings under Section 13(b) based on information set forth in an Application-
Declaration on Form U-1, without requiring the formal filing of Form U-13-1. See
SCANA Corp., Holding Co. Act Release No. 27133 (Feb. 9, 2000); New Century
Energies, Holding Co. Act Release No. 26748 (Aug. 1, 1997); CINergy Corp.,
Holding Co. Act Release No. 26146 (Oct. 21, 1994); UNITIL Corp., Holding Co.
Act Release No. 25524 (April 24, 1992). In this Application, Applicants have
submitted substantially the same applicable information for the LG&E Services as
would have been submitted in a Form U-13-1.
Accordingly, it is submitted that it is appropriate to find that LG&E
Services is so organized and its business will be so conducted as to meet the
requirements of Section 13(b), and that the filing of a Form U-13-1 is
unnecessary, or, alternatively, that this Application should be deemed to
constitute a filing on Form U-13-1 for purposes of Rule 88.
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G. Other Statutory Provisions
1. Sections 14 and 15 -- Jurisdiction
Pursuant to these sections, the Commission has broad authority over, and
access to, the books and records and reporting of companies in a registered
holding company system. As noted previously, Powergen ADSs are listed on the
NYSE. In connection with the ADS listing, Powergen has provided financial
statements for the fiscal year ended January 2, 2000, and will provide financial
statements semiannually thereafter that include a reconciliation of net income
and shareholders' equity in accordance with U.S. GAAP.
It should be further noted that the utility assets of Powergen are
accounted for on the basis required by the U.K. regulator, rather than that used
for purposes of U.S. ratemaking proceedings, and rates for U.K. regulated
utilities are also determined in a different manner than those for U.S.
regulated companies.
In addition, Powergen undertakes and agrees to file, and will cause each of
its present and future directors and officers, who is not a resident of the
United States, to file with the Commission irrevocable designation of the
party's custodian as an agent in the United States to accept service of process
in any suit, action or proceeding before the Commission or any appropriate court
to enforce the provisions of the acts administered by the Commission./49/
2. Section 33 -- Foreign Utility Companies
Applicants make numerous commitments to ensure that the proposed financing
of the Powergen System, including financing for purposes of acquiring interests
in EWGs and FUCOs, is consistent with the protected interests. These commitments
are described above in Item 3, Section B.2.j.
Prior to the closing of the proposed transactions, Powergen UK (or Powergen
Group Holdings, if applicable) will file a Form U-57 to perfect its
_______________________
/49/ See Exhibit L-1, Appointment of Agent for Service of Process
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exemption as a FUCO. Thereafter, Applicants believe that Powergen UK (or
Powergen Group Holdings, if applicable) will be exempt from all provisions of
the Act -- except with respect to transactions with Powergen and its non-FUCO
subsidiary companies. This latter set of transactions will continue to be fully
regulated under the Act./50/ See Section 33(a)(1) of the Act ("A foreign utility
company shall be exempt from all provisions of the Act, except as otherwise
provided under this section").
As explained more fully in Exhibit F - 1.2 and Item 3, Section A.2.a.iv to
this Application, while FUCO interests will form the largest part of Powergen
UK's interests, Powergen UK will have certain non-FUCO subsidiaries.
Accordingly, Applicants seek to rely on the fact that Section 33 (unlike
Sections 32 and 34) does not require that the exempt entity be engaged
"exclusively" in the subject activity. Although there is no discussion of this
point in the legislative history, it does not seem unreasonable that Congress
was attempting to accommodate the nature of the entities exempt under Section 33
. Unlike EWGs and ETCs, which are likely to be special purpose entities, FUCOs
may comprise vertically-integrated utility systems and businesses that are
reasonably incidental or economically necessary or appropriate thereto. Indeed,
a review of the Forms U-57 suggests that U.S. holding companies have indirectly
acquired certain nonexempt interests in connection with their FUCO
holdings.
The Commission should not find these "other businesses" to be inconsistent
with the policies and provisions of the Act, so long as: (i) all direct or
indirect investments in these businesses for which there is recourse, directly
or indirectly, to the registered holding company will be counted toward
"aggregate investment" for purposes of Rule 53; and (ii) there are appropriate
safeguards, such as those described above, to protect the interests of
_____________________
/50/ The Commission's residual jurisdiction is generally limited to parent-level
financings, affiliate transactions and "the creation or maintenance of any other
relationship between a foreign utility company and a registered holding
company." See Section 33(c)(2).
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U.S. ratepayers from the adverse effects, if any, that may be associated with
the foreign operations.
3. Sections 3(a)(1) and 3(a)(2) - Exemption from Registration
LG&E Energy and KU currently enjoy exemption from registration under the
Act pursuant to Sections 3(a)(1) and 3(a)(2) of the Act, respectively. The
Commission initially authorized KU's exemption by order in KU Energy
Corporation, HCAR No. 25409 (Nov. 13 1991). The Commission reaffirmed KU's
exemption under Section 3(a)(2) and granted LG&E Energy's exemption under
Section 3(a)(1) in its order authorizing the merger of LG&E Energy and KU Energy
Corporation. See LG&E Energy Corp., HCAR No. 26866, 67 S.E.C. 107 (April 30,
1998).
Section 3(a)(1) exempts from registration under the act holding companies
which derive a material part of their income from public utility companies that
are predominantly intrastate in character, where such holding companies and
public utility companies conduct their businesses substantially in a single
state. LG&E energy and each of its material public utility subsidiaries, LG&E
and KU,/51/ are Kentucky corporations operating primarily in Kentucky. in
addition, the public utility operations of the LG&E energy group are
predominantly intrastate in character. in determining whether a company's
operations are "predominantly intrastate in character", the commission has
____________________
/51/ KU owns 20% of EEI. However, EEI, which is not a Kentucky corporation, is
not a material public utility subsidiary of LG&E Energy. In each of 1998 and
1999, income derived from EEI was less than 1.5% of LG&E Energy's income from
continuing operations. Neither OVEC nor IKEC are "subsidiaries", within the
meaning of the Act, of LG&E Energy.
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primarily examined the amount of utility revenues derived from out-of-state
activities,/52/ but has also considered out-of-state service areas, customers,
property, generation and sales./53/ For the fiscal year ended December 31, 1999,
less than 3.0% of the LG&E energy group's consolidated utility revenues, none of
its retail natural gas sales and less than 3.2% of its sales of electricity by
revenues were from utility operations outside of Kentucky./54/ 97% of the LG&E
energy group's net utility plant (based on book value) and over 96% of its
utility customers (based on number of customers) were located in Kentucky. These
amounts are well within the existing range of orders issued by the Commission
under Section 3(a)(1)./55/
Section 3(a)(2) of the Act exempts those entities which are predominantly
public utility companies whose operations do not extend beyond the state in
which they are organized and states contiguous, unless and except insofar as it
finds the exemption detrimental to the public interest or the interest of
investors or consumers. All of KU's electric utility assets are located in
Kentucky, Virginia and Tennessee. KU furnishes electricity to approximately
458,000 customers in central, southeastern and western Kentucky, to about 29,000
customers in southwestern
________________________
/52/ See In the Matter of Commonwealth Edison Co., Holding Co. Act Release No.
8331, 28 S.E.C. 172 (June 30, 1948); Yankee Atomic Electric Co., Holding Co. Act
Release No. 13048, 36 S.E.C. 552 (Nov. 25, 1955).
/53/ See In the Matter of Wisconsin Electric Power Co., Holding Co. Act Release
No. 8741, 28 S.E.C. 906 (Dec. 20, 1948).
/54/ For this purpose, electric utility revenues do not include electric sales
by exempt wholesale generators, revenues from other operations that are not
"utility" operations within the meaning of Section 2(a)(5) of the Act or
revenues from sale for resale and brokered sales.
/55/ The Commission has issued orders granting exemption under Section 3(a)(1)
of the Act to holding companies with out-of-state revenues of up to 9.9%. See
Sierra Pacific Resources Holding Co. Act Release No. 24566, 40 S.E.C. Docket 103
(Jan. 28, 1988).
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Virginia,/56/ and to five customers in one county in Tennessee. Also, KU sells
electric energy at wholesale for resale to 12 municipalities in Kentucky and one
municipality in Pennsylvania.
Since the operations of KU are confined to the state of its organization
and contiguous states, a determination whether KU qualifies for an exemption as
a holding company under the Act rests on whether or not it is "predominantly a
public utility company". In determining whether a holding company is
predominantly a utility, the principal consideration is the relative size of the
subsidiaries and their business as compared with that of the parent./57/ In
determining whether a holding company is "predominantly a public utility", the
Commission has applied what is referred to as a "gross to gross" test, comparing
the gross utility revenues of the holding company to the gross utility revenues
of the utility subsidiaries./58/
KU is a holding company solely as a result of its ownership of 20% of EEI.
EEI, an Illinois corporation, owns property and operates in the State of
Illinois an electric generating station with capacity of approximately 1,000 MW,
and related transmission facilities, and supplies power to a gaseous diffusion
project of the department of energy ("DOE") located in Paducah, Kentucky. The
delivery commitment of EEI under its power contract with DOE is 75% of the
station's annual output through December 31, 2005, subject to reduction in
certain circumstances. Under a power supply agreement between EEI and the four
sponsoring companies which own its common stock (including KU), KU is entitled
to 20% of the station's available capacity. KU's obligation to provide a portion
of EEI's operating expenses,
_________________________
/56/ KU does business under the name of Old Dominion Power Company in Virginia.
/57/ See Wisconsin Electric Power Co., 28 S.E.C. 906, (1948); Union Electric
Co., Holding Co. Act Release No. 1621 (July 7, 1939).
/58/ See Northern States Power Co., Holding Co. Act Release No. 22334 (Dec. 23,
1981); Ohio Edison Co., Holding Co. Act Release No. 21019 (Apr. 26, 1979);
Delmarva Power & Light Co., 46 S.E.C. 710 (1976); and Union Electric Co., 40
S.E.C. 1072 (1962).
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taxes and certain debt service is based upon KU's annual percentage of the EEI
station capacity. The DOE facility is EEI's only end-user customer.
The Commission has previously taken the position that the operations of EEI
devoted to satisfying the DOE requirements represent a virtually riskless power
supply service to a single instrumentality of the U.S. Government and thus EEI's
activities attributable to meeting its DOE requirements should not be considered
in evaluating whether KU's own utility operations predominates in influence and
importance within the meaning of Section 3(a)(2)./59/ For each of the three
years in the period ended December 31, 1999, operating revenue of the non-DOE
operations of EEI was less than 2% of KU's operating revenue (net of rate
refund) and KU derived less than 3% of its net income from its share of EEI
earnings. Thus, KU is predominantly a public utility company within the meaning
of Section 3(a)(2) of the Act. On the basis of the foregoing, KU is entitled to
exemption a holding company pursuant to Section 3(a)(2) of the Act.
Section 3(a) provides that the Commission "shall exempt any holding company"
meeting the standards of parts (1) through (5), "unless and except insofar as it
finds the exemption detrimental to the public interest or the interest of
investors or consumers ...." In the past, the Commission has granted each of
LG&E Energy and KU an exemption under Section 3(a)(1) and Section 3(a)(2),
respectively, finding in part that these exemptions did not present any
detriment that gave rise to denying the exemptions pursuant to the "unless and
except" clause. See LG&E Energy Corp. Holding Co. Act Release No. 26866 (Apr.
30, 1998). Since those exemptions were granted, the structure of LG&E Energy and
KU and the conduct of their business activities have not changed in any way
pertinent to the Commission's analysis. Furthermore, as a result of the Merger,
LG&E Energy and KU will become subsidiary companies of a registered holding
company, subject to full regulation under the Act. This increase in regulatory
accountability lowers the risk of detriment. The exemptions should be granted
because the Merger does not pose any detriment that should give rise to invoking
the "unless and except" clause.
____________________
/59/ Union Electric Company, 40 S.E.C. 1072 (1962); Ohio Edison Company, Holding
Co. Act Release No. 21019 (1979).
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The Merger poses no detriment to investors. Upon completion of the Merger,
which was approved by LG&E Energy shareholders on June 7, 2000, there will be no
publicly traded shares of LG&E Energy capital stock. Although the shareholders
will be bought out, these shareholders will receive a substantial premium for
their shares./60/ LG&E Energy has no debt outstanding to third party investors.
the investors of KU will not be directly affected by the merger. KU's
outstanding debt and preferred stock will not be changed, converted, or
otherwise exchanged as a result of the merger. Finally, following consummation
of the Merger, as members of a registered holding company system, the securities
transactions of LG&E Energy and KU will be regulated under the act. Therefore,
granting the exemptions will not pose a detriment to investors.
The Merger poses no detriment to the public interest or the interest of
consumers. None of the FERC, the Virginia Commission, and the Kentucky
Commission have found any detriment associated with the Merger. The FERC Order
found that the Merger did not raise competitive concerns, would not have an
adverse impact on rates and, based on various commitments by the Applicants,
would not have an adverse impact on regulation. The Virginia Commission found
that, subject to certain commitments by the Applicants, "adequate service to the
public at just and reasonable rates will not be impaired or jeopardized."
Virginia Order at pp. 9-10. The Kentucky Commission determined, based on various
commitments by the Applicants: (i) that "Powergen, LG&E Energy, LG&E and KU
will, after the consummation of the merger, have the financial, technical, and
managerial abilities to provide reasonable utility services;" (ii) that it would
"certify to the SEC" that it had "the authority and resources to protect LG&E's
and KU's ratepayers subject to its jurisdiction and that it intends to exercise
this authority;" and (iii) that the Merger "is in accordance with law, for a
proper purpose, and will be consistent with the public interest ...." Kentucky
Commission Order at pp. 38-39. Therefore, the FERC, the Virginia Commission, and
the Kentucky Commission found that the Merger would not be detrimental to the
public interest or the interest of consumers.
__________________
/60/ See the discussion above at Item 3.A.1.b.i. of this Application
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As shown above, neither the Merger nor granting the exemptions will pose
any detriment to the public interest or the interest of investors or consumers.
Therefore, Applicants respectfully submit that the Commission has no basis under
the "unless and except" clause to deny the requested exemptions.
Applicants seek a declaration from the Commission that LG&E Energy and KU
may remain exempt holding companies under Sections 3(a)(1) and 3(a)(2),
respectively, although following consummation of the Merger, the Intermediate
Companies and Powergen plan to register under Section 5 of the Act. However,
as a subsidiary of a registered holding company, LG&E Energy and the LG&E Energy
Subsidiary Companies will be subject to full regulation under the Act. Other
registered holding companies have exempt holding companies within their
registered systems, e.g., American Electric Power Company. See also Northeast
Utilities, Holding Co. Act Release No. 27127 (January 31, 2000). Applicants seek
the same relief. In the event the Commission does not grant the relief
requested, LG&E Energy or KU, as applicable, would register under Section 5 of
the Act.
ITEM 4. REGULATORY APPROVALS
I. Merger Approvals
Set forth below is a summary of the regulatory approvals that Powergen
and LG&E Energy expect to obtain in connection with the Merger.
A. Antitrust
The Merger is subject to the requirements of the HSR Act and the rules and
regulations thereunder, which provide that certain acquisition transactions may
not be consummated until certain information has been furnished to the DOJ and
the FTC and until certain waiting periods have been terminated or have expired.
LG&E Energy and Powergen filed their respective premerger notifications in
July 2000, and early termination of the waiting period was granted by the FTC on
July 27, 2000. If the Merger is not consummated within 12 months after the
expiration or earlier termination of the initial HSR Act waiting period, LG&E
Energy and Powergen would be required to submit new
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information to the DOJ and the FTC, and a new HSR Act waiting period would have
to expire or be earlier terminated before the Merger could be consummated.
B. Federal Power Act
Section 203 of the Federal Power Act provides that no public utility may
sell or otherwise dispose of its facilities subject to the jurisdiction of the
FERC or, directly or indirectly, merge or consolidate such facilities with those
of any other person or acquire any security of any other public utility without
first having obtained authorization from the FERC. Because this transaction
involves an indirect change in ownership and control of LG&E Energy's public
utility subsidiaries, Applicants have sought the prior approval of the FERC
under FPA Section 203 prior to consummation of the Merger.
Under Section 203 of the FPA, the FERC shall approve a Merger if it finds
such Merger "consistent with the public interest." In reviewing a Merger, the
FERC generally evaluates: (1) whether the Merger will adversely affect
competition; (2) whether the Merger will adversely affect rates; and (3)
whether the Merger will impair the effectiveness of regulation. LG&E Energy and
Powergen believe the proposed Merger satisfies these standards.
Applicants filed their Section 203 application with the FERC on March 24,
2000 and the FERC Order approving the merger was issued on June 29, 2000. In
its order, the FERC found that the Merger did not raise competitive concerns,
would not have an adverse impact on rates, and based on various commitments by
the Applicants, would not have an adverse impact on regulation.
C. Exon-Florio
The Committee on Foreign Investment in the United States ("CFIUS") may
review and investigate the Merger under Exon-Florio, and the President of the
United States or his designee is empowered to take certain actions in relation
to mergers, acquisitions, and takeovers by foreign persons which could result in
foreign control of persons engaged in interstate commerce in the United States
pursuant to Exon-Florio. In particular, Exon-Florio enables the President to
suspend or prohibit any acquisition, merger, or takeover by a foreign person if
that acquisition, merger, or takeover
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threatens to impair the national security of the United States. Before the
Merger may be consummated, any CFIUS review and investigation of the Merger
under Exon-Florio must have terminated, and the President must not have taken
any of his authorized actions under Exon-Florio. Applicants filed the Exon-
Florio application in connection with the Merger on August 2, 2000 and received
notification by letter dated September 1, 2000 that CFIUS has determined that
there are no issues of national security sufficient to warrant an investigation
and that action under Exon-Florio is concluded with respect to the Merger.
D. State Regulatory Approval
The Merger requires the approval of the Kentucky Commission and the
Virginia Commission.
The Kentucky Commission has jurisdiction over the transaction due to LG&E's
and KU's status as public utility companies in Kentucky. LG&E Energy and
Powergen filed a merger application with the Kentucky Commission on March 15,
2000, which application was approved by the Kentucky Commission on May 15,
2000.
The Virginia Commission has jurisdiction over the transaction because of
KU's operations in Virginia under the name Old Dominion Power Company. LG&E
Energy and Powergen filed a merger application with the Virginia Commission on
March 24, 2000, which application was approved by the Virginia Commission on
July 24, 2000.
While the Tennessee Commission does not have jurisdiction over the Merger,
KU and Powergen made an informational filing with the Tennessee Commission on
June 5, 2000 describing the Merger and the benefits of the Merger to ratepayers.
As part of the filing, the companies have advised the Tennessee Commission that
the SEC would be seeking a certification from the Tennessee Commission that it
has the authority and resources to protect ratepayers in matters such as rates,
financings, affiliate transactions, and the financial integrity of the operating
utility within its state, and, additionally, that the commission intends to
continue to exercise its authority.
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E. U.K. Notice Requirements
The Merger constitutes a merger qualifying for investigation under the
United Kingdom's Fair Trading Act of 1973 ("FTA"). The FTA provides that the
Secretary of State may refer a qualifying merger to the Competition Commission.
It is the responsibility of the Director General of Fair Trading ("DGFT") to
advise the Secretary of State whether to refer a merger to the Competition
Commission. In reviewing the acquisition, the Office of Fair Trading ("OFF") may
also consult with the Director General of the Office of Gas and Electricity
Markets ("OFGEM") in accordance with a concordat between the OFT and OFGEM on
regulatory issues. The U.K. merger regime is a voluntary regime. The OFT has
made a standard request of Powergen to provide it with information concerning
the acquisition. Powergen has provided this information and will respond to any
further requests from the OFT. Powergen does not believe that the Merger will
have any impact on competition in the United Kingdom and therefore does not
anticipate any issues will be raised by the OFT.
II. Financing Approvals
The Kentucky Commission has jurisdiction over the issuance of equity and
long-term debt securities of LG&E and KU. In addition, the Virginia Commission
has jurisdiction over the issuance of short-term debt of KU. Applicants are
seeking authorization of such transactions through February 28, 2004. Applicants
have requested that the Commission authorize various financing arrangements by
the LG&E Energy Group during the Authorization Period. To the extent that LG&E
or KU requires further authorization from the Kentucky Commission or the
Virginia Commission subsequent to February 28, 2004, the Applicants will seek
such authorization. Except as discussed above, no state or federal regulatory
agency other than the Commission under the Act has jurisdiction over the
proposed transactions.
* * * * *
Finally, pursuant to Rule 24 under the Act, the Applicants represent that
the transactions proposed in this filing shall be carried out in accordance with
the terms and conditions of, and for the purposes stated in, the
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Application no later than February 28, 2004.
ITEM 5. PROCEDURE
The Commission is respectfully requested to issue and publish not later
than September 8, 2000, the requisite notice under Rule 23 with respect to the
filing of this Application, such notice to specify a date not later than
September 25, 2000, by which comments may be entered, and a date not later than
October 31, 2000, as the date after which an order of the Commission granting
and permitting this Application to become effective may be entered by the
Commission.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
Merger and related financing. The Division of Investment Management may assist
in the preparation of the Commission's decision. There should be no waiting
period between the issuance of the Commission's order and the date on which it
is to become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
A-1 Memorandum and Articles of Association of Powergen plc.
A-2.1 Amended and Restated Articles of Incorporation of LG&E Energy,
filed as Exhibit 4.1 to Form 8-K of LG&E Energy dated May 4,
1998, File No. 1-10568, and incorporated herein by
reference.
A-2.2 Restated Articles of Incorporation of LG&E, filed as Exhibit
3.06 to Form 10-Q of LG&E for the quarter ended September 30,
1996, File No. 2-26720, and incorporated herein by
reference.
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A-2.3 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 No. 1-3463, and incorporated
herein by reference.
B-1 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, included as Appendix A to
Exhibit C-1 hereto.
B-2 Standard Form of Service Contract for U.S. Utility
Subsidiaries.
B-3 Term and Revolving Credit Facility for Powergen US Holdings
Limited and Powergen plc, dated February 27, 2000.
C-1 Proxy Statement of LG&E Energy for the shareholders meeting to
be held in connection with the Merger, filed with the
Commission on March 13, 2000, File No. 1-10568, and
incorporated by reference herein.
C-2 Circular of Powergen Group for the extraordinary general
meeting of shareholders to be held in connection with the
Merger (to be filed by amendment).
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C-3.1 Tax Allocation Agreement (to be filed by amendment).
C-3.2 Legal Analysis of Rule 45(c) and the
Proposed Tax Allocation Agreement (to be filed by
amendment).
C-4 Intercompany Debt and Funds Flow.
D-1.1 Joint Application of Louisville Gas and
Electric Company, Kentucky Utilities
Company, and Merger Sub before the FERC (filed in paper
format on Form SE).
D-1.2 Order of the FERC Approving the Merger.
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 (filed in paper format on Form SE).
D-2.2 Order of the Kentucky Public Service Commission Approving the
Merger.
D-3.1 Joint Application of Powergen plc, LG&E
Energy Corp., and Kentucky Utilities
Company before the Virginia Corporation
Commission (filed in paper format on Form SE).
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D-3.2 Order of the Virginia Corporation Commission Approving the
Merger.
D-4.1 Submission to the Tennessee Regulatory
Authority.
D-4.2 Response of Tennessee Regulatory Authority
E-1 Map of electric service territories and transmission lines of
Louisville Gas and Electric Company and Kentucky Utilities
Company (filed in paper format on Form SE).
E-2 Map of gas service territory of Louisville Gas and Electric
Company (filed in paper format on Form SE).
F-1.1 Powergen plc Corporate Chart (filed in paper format on
Form SE).
F-1.2 Description of the Companies in the Powergen System.
F-2.1 LG&E Energy Corp. Corporate Chart (filed in paper format on
Form SE).
F-2.2 Description of LG&E Energy Corp. non-utility subsidiaries and
basis for retention of each.
F-3.1 Combined Powergen/LG&E Energy Corporate Chart (filed in paper
format on Form SE).
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F-3.2 Merger Structure and Description of Intermediate Companies.
G-1.1 Opinion of Counsel - Powergen Group
(to be filed by amendment).
G-1.2 Opinion of Counsel - LG&E Energy (to be filed by amendment).
G-1.3 Past tense opinion of counsel (to be filed by amendment).
H-1 Credit Facility Fee Letters. (Confidential treatment requested
pursuant to Rule 104(b), 17 CFR 250.104(b).) (Filed in paper
format on Form SE.)
I-1 Annual Report of Powergen Group dated March 28, 2000 (filed in
paper format on Form SE).
I-2.1 Annual Report on Form 10-K of LG&E Energy for the year ended
December 31, 1999, File No. 1-10568, and incorporated by
reference herein.
I-2.2 Louisville Gas and Electric Company's Annual Report on
Form 10-K for the year
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ended December 31, 1999, File No. 2-26720 and incorporated by
reference herein.
I-2.3 Kentucky Utilities Annual Report on Form 10-K for the year
ended December 31, 1999, File No. 1-3464, and incorporated by
reference herein.
I-3.1 Quarterly Report on Form 10-Q of LG&E Energy Corp. for the
quarter ended March 31, 2000, File No. 1-10568, and
incorporated by reference herein.
I-3.2 Louisville Gas and Electric Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000, File No. 2-26720 and
incorporated by reference herein.
I-3.3 Kentucky Utilities' Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000, File No. 1-3464, and incorporated
by reference herein.
I-4 Semiannual Report of Powergen plc dated September 5, 2000
-----------
(filed in paper format on Form SE).
I-5.1 Quarterly Report on Form 10-Q of LG&E Energy Corp. for the
quarter ended June 30, 2000, File No. 1-10568, and incorporated
by reference herein.
I-5.2 Louisville Gas and Electric Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000, File No. 2-26720 and
incorporated by reference herein.
I-5.3 Kentucky Utilities' Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, File No. 1-3464, and incorporated
by
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reference herein.
J-1 Proposed Form of Notice.
K Description of LG&E Energy Group Affiliate Transactions.
L-1 Appointment of Agent for Service of Process (to be filed by
amendment).
M-1 [Intentionally left available.]
N-1.1 Form of Utility Money Pool Agreement.
N-1.2 Form of Non-Utility Money Pool Agreement.
O-1 Analysis of the Economic Impact of a Divestiture of the Gas
Operations of Louisville Gas and Electric Company.
B. Financial Statements
FS-1 Powergen System Consolidated Balance Sheet as of January 2,
2000 (included in Exhibit I-1).
FS-2 Powergen Consolidated Profit and Loss Account as of January 2,
2000 (included in Exhibit I-1).
FS-3 Notes to Powergen System Consolidated Financial Statements
(included in Exhibit I-1).
FS-4 LG&E Energy Corp. Consolidated Balance Sheet as of
December 31, 1999 (included Exhibit I-2.1).
FS-5 LG&E Energy Corp. Consolidated Statement
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of Income for the twelve months ended December 31, 1999
(included in Exhibit I-2.1).
FS-6 Notes to LG&E Energy Corp. Consolidated Financial Statements
(included in Exhibit I-2.1).
FS-7 Balance Sheets and Cash Flow Statements of US Holdings Showing
Effect of Loan from Powergen UK (or Powergen Group Holdings, if
applicable). (Confidential treatment requested pursuant to Rule
104(b), 17 CFR 250.104(b).) (Filed in paper format on Form SE.)
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The Merger neither involves a "major federal action" nor "significantly
affects the quality of the human environment" as those terms are used in Section
102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321 et seq.
Consummation of the Merger will not result in changes in the operations of LG&E
Energy and its subsidiaries that would have any impact on the environment. No
federal agency is preparing an environmental impact statement with respect to
this matter.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the Applicants have duly caused this Amendment to the Application, File
No. ---70-9671, 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: September __, 2000
__________________________________
__________________________________
/s/ David Jackson
Secretary and General Counsel
Powergen plc
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the Applicants have duly caused this Amendment to the Application, File
No. ---70-9671, 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: September __, 2000
__________________________________
__________________________________
/s/ John R. McCall
Executive Vice President,
General Counsel and Secretary
LG&E Energy Corp.
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APPENDIX A
Operations of LG&E Capital Corp.
o LG&E Credit Corp. is wholly-owned by LG&E Capital and offers consumer
lending programs and services in the Louisville metropolitan area.
o LG&E International, Inc. ("LG&E International") is wholly-owned by
LG&E Capital, and is a management and holding company for
international energy project investments and operations. LG&E
International's wholly-owned subsidiaries hold interests in overseas
projects and conduct other related businesses.
Through its subsidiaries, LG&E International holds interests in three
Argentine natural gas distribution companies, all of which have
obtained FUCO status under Section 33 of the Act. LG&E International
has a controlling interest in Distribuidora de Gas del Centro
("Centro"), and minority interests in Distribuidora de Gas Cuyana
("Cuyana"), and Gas Natural BAN, S.A. ("Gas BAN"). Together, Centro,
Cuyana, and Gas BAN serve approximately 1.8 million customers in
seven provinces in Argentina.
Through its subsidiaries, LG&E International also owns an interest in
a windpower generating facility in Tarifa, Spain, which has obtained
FUCO status under Section 33 of the Act.
o LG&E Power Inc. ("LG&E Power") is wholly-owned by LG&E Capital and is
a management and holding company for non-regulated subsidiaries. LG&E
Power develops, operates, maintains, and owns domestic power
generation facilities. LG&E Power currently has interests in 8
projects capable of generating approximately 500 MW of power in North
Carolina, Virginia, California, Texas, and Minnesota, and small
interests in three additional facilities in Texas and Washington. Each
of these domestic facilities is either a qualifying cogeneration
facility ("QF") under the Public Utility Regulatory Policies Act of
1978, or an
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exempt wholesale generator ("EWG") under Section 32 of the Act.
In 1998, LG&E Power, through a subsidiary, entered into a partnership
with Columbia Energy Corporation for the development of a natural gas-
fired cogeneration project in Gregory, Texas, which will be capable of
generating 550 MW equivalent of power and steam. Construction on the
project has commenced and completion is projected for the summer of
2000.
In 1999, a subsidiary of LG&E Power entered into a lease wherein it
agreed to lease a facility under construction in Georgia, which will
be capable of generating 450 MW of power. The facility is scheduled to
be completed in June 2001. LG&E Power's wholly-owned subsidiaries also
engage in natural gas storage, transmission, and processing.
In 1999, a subsidiary of LG&E Power entered into a contract to
purchase eight turbines, capable of generating 1,600 MW of power. The
facility is scheduled to be completed in June 2003.
o WKE Corp., a holding company, and its subsidiaries are wholly-owned by
LG&E Capital. 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. WKE Corp.'s wholly-owned
subsidiary, Western Kentucky Energy Corp. ("WKEC"), currently enjoys
EWG status under Section 32 of the Act, and leases and operates the
generating facilities owned by Big Rivers Electric Corporation/61/
(three coal-fired plants and one combustion turbine), and sells the
output of those facilities to LG&E Energy Marketing and, potentially,
other affiliates and third-parties.
____________________________
/61/ It was determined by the Commission that none of WKE Corp.'s subsidiaries
were public utility companies under the Act by virtue of their operation and
maintenance of the Big Rivers Electric Corporation's generating facilities. See
SEC No-Action Letter (July 13, 1998).
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LG&E Energy is considering reorganization of WKEC, which could change
WKEC's current status as an EWG. The FERC has authorized the
consolidation of WKEC with its subsidiaries and related companies./62/
o CRC -- Evans International, Inc. ("CRC -- Evans") is wholly-owned by
LG&E Capital. CRC - Evans and its related companies provide
specialized equipment and services used in the construction and
rehabilitation of gas and oil transmission pipelines.
______________________
/62/ Western Kentucky Energy Corp., et al., 87 FERC (P) 62,016 (1999).
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APPENDIX B
PART I - EXISTING FINANCING ARRANGEMENTS OF U.S. UTILITY SUBSIDIARIES
LG&E
----
Bond Financing:
<TABLE>
<CAPTION>
At 12/31/99
-----------
<S> <C>
First Mortgage Bonds (x 000's)
Series due July 1, 2000, 7.5%*.................................... 20,000
Series due August 15, 2003, 6%.................................... 42,600
Pollution control series
P due June 15, 2015, 7.45%........................................ 25,000
Q due November 1, 2020, 7.625%.................................... 83,335
R due November 1, 2020, 6.55%..................................... 41,665
S due September 1, 2017, variable................................. 31,000
T due September 1, 2017, variable................................. 60,000
U due August 15, 2013, variable................................... 35,200
V due August 15, 2019, 5.625%..................................... 102,000
W due October 15, 2020, 5.45%..................................... 26,000
X due April 15, 2023, 5.90%....................................... 40,000
-------
Total first mortgage bonds.............................................. 506,800
=======
Pollution control bonds (unsecured):
Jefferson County Series due September 1, 2026,
variable.......................................................... 22,500
Trimble County Series due September 1, 2026,
variable.......................................................... 27,500
Jefferson County Series due November 1, 2027,
variable.......................................................... 35,000
Trimble County Series due November 1, 2027,
variable.......................................................... 35,000
Total unsecured pollution control bonds................................. 120,000
Total LG&E bonds outstanding............................................ 626,800
</TABLE>
* Redeemed
Capital Stock:
Common Stock, without par value - Authorized: 75,000,000 shares
Outstanding:21,294,233 shares
Cumulative Preferred Stock:
Current
Shares Redemption
Outstanding Price
----------- -----
-------------------------------------------------------------------------
$25 par value, 1,720,000 shares
authorized,
5% series 860,287 $ 28.00
-------------------------------------------------------------------------
Without par value, 6,750,000 shares
authorized
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Auction rate 500,000 100.00
-------------------------------------------------------------------------
5.875% series 250,000 104.70
Short-Term Financing:
$200 million revolving credit line, expiring November 2001.
Commercial paper program, up to $200 million authorized
KU
--
Bond Financing:
<TABLE>
<CAPTION>
At 12/31/99
-----------
<S> <C>
First Mortgage Bonds (x 000's)
Series Q, due June 15, 2000, 5.95%................... 61,500
Series Q, due June 15, 2003, 6.32%................... 62,000
Series S, due January 15, 2006, 5.99%................ 36,000
Series P, due May 15, 2007, 7.92%.................... 53,000
Series R, due June 1, 2025, 7.55%.................... 50,000
Series P, due May 15, 2027, 8.55%.................... 33,000
Pollution Control Series:
Series 7, due May 1, 2010, 7.375%.................... 4,000
Series 8, due September 15, 2016, 7.45%.............. 96,000
Series 1B, due February 1, 2018, 6.25%............... 20,930
Series 2B, due February 1, 2018, 6.25%............... 2,400
Series 3B, due February 1, 2018, 6.25%............... 7,200
Series 4B, due February 1, 2018, 6.25%............... 7,400
Series 7, due May 1, 2020, 7.60%..................... 8,900
Series 9, due December 1, 2023, 5.75%................ 50,000
Series 10, due November 1, 2024, variable............ 54,000
Total KU bonds outstanding...................... 546,330
</TABLE>
Capital Stock:
Common Stock, without par value - Authorized: 80,000,000 shares
Outstanding: 37,817,878 shares
Cumulative Preferred Stock:
---------------------------------------------------------------------------
Current
Shares Redemption
Outstanding Price
----------- -----
---------------------------------------------------------------------------
Without par value, 5,300,000 shares
authorized
---------------------------------------------------------------------------
4.75% series, $100 stated value 200,000 101.00
---------------------------------------------------------------------------
6.53% series, $100 stated value 200,000 Not redeemable
---------------------------------------------------------------------------
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Short-Term Financing:
Commercial paper program, inactive.
Uncommitted credit line with Centric Corporation ("Centric"), up to $60
million.
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PART II - EXISTING FINANCING ARRANGEMENTS OF U.S.
NON-UTILITY SUBSIDIARIES
LG&E Capital Corp.
------------------
Long-Term Debt:
At 12/31/99
-----------
(x 000's)
Medium term notes, due September 7, 2000, variable.. 50,000
Medium term notes, due May 1, 2004, 6.205%.................. 150,000
Medium term notes, due January 15, 2008, 6.46%.............. 150,000
Medium term notes, due November 1, 2011, 5.75%.............. 150,000
Total Capital Corp. bonds outstanding....................... 500,000
Credit Facilities:
$200 million revolving lines of credit, expiring September 2000
$500 million revolving line of credit, expiring September 2002.
$20 million uncommitted letter of credit facility
Commercial paper program, up to $600 million authorized.
CRC-Evans Pipeline International Inc.
-------------------------------------
At 12/31/99
-----------
(x 000's)
Note payable, due May 2003, 6.75%........................... $ 281
Distribuidora de Gas del Centro
-------------------------------
At 12/31/99
-----------
(x 000's)
Argentine negotiable obligations, due August 2001,
10.5%....................................................... $37,782
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Part III - GUARANTEES
Obligations of LG&E Capital Supported by LG&E Energy under the Support
----------------------------------------------------------------------
Agreement:
---------
1. Obligations of LG&E Capital on each of its credit facilities, in an
aggregate principal amount of $720 million.
2. Obligations of LG&E Capital in respect of its commercial paper program, in
an authorized principal amount of $600 million.
3. Obligations of LG&E Capital in respect of its medium-term notes
outstanding, in an aggregate principal amount as of March 31, 2000 of $500
million.
4. Obligations of LG&E Capital in respect of a guarantee of lease obligations
of LG&E Power Monroe, LLC. See "Guarantees issued by LG&E Energy and the U.S.
Non-Utility Subsidiaries" below.
5. Obligations of LG&E Capital under interest rate swap transactions in an
aggregate notional amount of $50 million, entered into in connection with the
hedging of interest rate risk on outstanding indebtedness of LG&E Capital
Corp.
6. Obligations of LG&E Capital under a guarantee of certain obligations of
LG&E Energy Marketing Inc. under several Purchased Power Agreements relating to
the purchase of 560 MW of power. No limit is stated.
Guarantees issued by LG&E Energy and the U.S. Non-Utility Subsidiaries:
----------------------------------------------------------------------
1. LG&E Power and LG&E Capital guarantee certain obligations of LG&E Energy
Marketing. These guarantees are provided in lieu of letters of credit or other
credit enhancements required by counterparties and are provided in order to
minimize the cost of providing the commodity required under the contract. The
guarantees typically have a stated maximum amount, but the actual exposure is
typically only a small percentage of the aggregate maximum stated amount of the
guarantee. The maximum stated amount on such guarantees as of March 31, 2000 was
$461 million. In other cases, no maximum amount is stated. The aggregate
exposure of LG&E Power and LG&E Capital under such guarantees as of March 31,
2000 was approximately $63 million.
2. Guarantee by LG&E Capital of the lease obligations of LG&E Power Monroe,
LLC under an operating lease relating to three combustion turbines and related
facilities to be installed and constructed in Monroe, Georgia. The value of the
assets under lease is expected to be approximately $175 million.
3. Guarantee by LG&E Capital of the obligations of LG&E Power Inc. under a
lease of office space in Irvine, CA in an aggregate amount of less than $5
million.
4. Guarantees by LG&E Capital to provide equity contributions in respect of
the Gregory Project. Each guarantee is unlimited on its face,
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but the underlying agreements effectively limit the guaranteed obligations to
$42.5 million.
5. Guarantees by LG&E Capital of the obligations of HD/WS Corporation under a
standby ash disposal agreement relating to certain power projects in Franklin,
VA, Altavista, VA and Hopewell, VA. There is no stated cap on the potential
liability under these guarantees.
6. Guarantee by LG&E Energy of all obligations of certain of the U.S. Non-
Utility Subsidiaries relating to the lease of the generating assets of Big
Rivers Electric Corporation ("Big Rivers"). The transaction provides the U.S.
Non-Utility Subsidiaries with access to approximately 1,700 megawatts of
capacity and requires that power be supplied to Big Rivers at contractual
prices. The leased assets are expected to be capable of meeting the
requirements of Big Rivers throughout the term of the lease. In addition, the
U.S. Non-Utility Subsidiaries are required to make annual lease payments of
$31.5 million to Big Rivers through July 2023.
7. LG&E Energy has guaranteed all obligations of LG&E Energy Marketing in its
contract with Oglethorpe Power Corporation ("OPC"). Under this contract LG&E
Energy Marketing is required to supply approximately one-half of the system-wide
power needs of OPC at fixed prices and has access to one-half of OPC's
generation capacity. LG&E Energy Marketing has assumed the risk of price
increases for any power it is required to purchase off system and any load
growth under this contract. LG&E Energy has discontinued its merchant energy
trading operation which includes servicing of this contract and has booked
reserves to cover expected future losses from these activities. In July 1998,
LG&E Energy recorded an after-tax loss on disposal of discontinued operations of
$225 million. In December 1999, LG&E Energy increased the size of this reserve
by $175 million based on what it believes to be appropriate estimates of future
energy prices and load growth. There is no guarantee that higher-than-
anticipated future commodity prices or load demands or other factors could not
result in additional losses.
8. Guarantee by LG&E Capital of certain obligations, up to a maximum amount of
$96 million, payable by LG&E Power Development Inc. with respect to a purchase
contract for eight turbines.
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