-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BD/VcfJFj8z0EDs4xoh5aPoswSukDOxh4HxmnxnPR1xEDtsw17VtldYdReJFbpTa OKc14dWllgQ0LxafQVmLew== 0000861388-04-000012.txt : 20040813 0000861388-04-000012.hdr.sgml : 20040813 20040813151518 ACCESSION NUMBER: 0000861388-04-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENTUCKY UTILITIES CO CENTRAL INDEX KEY: 0000055387 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 610247570 STATE OF INCORPORATION: KY FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03464 FILM NUMBER: 04973916 BUSINESS ADDRESS: STREET 1: ONE QUALITY ST CITY: LEXINGTON STATE: KY ZIP: 40507 BUSINESS PHONE: 6062552100 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOUISVILLE GAS & ELECTRIC CO /KY/ CENTRAL INDEX KEY: 0000060549 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 610264150 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-02893 FILM NUMBER: 04973915 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32030 CITY: LOUISVILLE STATE: KY ZIP: 40232 BUSINESS PHONE: 5026272000 MAIL ADDRESS: STREET 1: 220 WEST MAIN ST CITY: LUUISVILLE STATE: KY ZIP: 40232 10-Q 1 q10q0604.txt LG&E AND KU 2ND QTR 10-Q 45 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 Or [_] TRANSITION REPORT PURSUANT 1TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission Registrant, State of Incorporation IRS Employer File Number Address, and Telephone Number Identification No. 1-2893 Louisville Gas and Electric Company 61-0264150 (A Kentucky Corporation) 220 West Main Street P.O. Box 32010 Louisville, KY 40232 (502) 627-2000 1-3464 Kentucky Utilities Company 61-0247570 (A Kentucky and Virginia Corporation) One Quality Street Lexington, KY 40507-1428 (859) 255-2100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No _. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No X Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Louisville Gas and Electric Company 21,294,223 shares, without par value, as of July 31, 2004, all held by LG&E Energy LLC Kentucky Utilities Company 37,817,878 shares, without par value, as of July 31, 2004, all held by LG&E Energy LLC This combined Form 10-Q is separately filed by Louisville Gas and Electric Company and Kentucky Utilities Company. Information contained herein related to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information related to the other registrants. - - New Page - TABLE OF CONTENTS PART I Item 1 Consolidated Financial Statements Louisville Gas and Electric Company and Subsidiary Statements of Income 1 Statements of Retained Earnings 1 Balance Sheets 2 Statements of Cash Flow 4 Statements of Other Comprehensive Income 5 Kentucky Utilities Company and Subsidiary Statements of Income 6 Statements of Retained Earnings 6 Balance Sheets 7 Statements of Cash Flow 9 Statements of Other Comprehensive Income 10 Notes to Consolidated Financial Statements 11 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3 Quantitative and Qualitative Disclosures About Market Risk 36 Item 4 Controls and Procedures 37 PART II Item 1 Legal Proceedings 38 Item 6 Exhibits and Reports on Form 8-K 39 Signatures 40 Exhibits 41 - - New Page - Part I. Financial Information - Item 1. Financial Statements Louisville Gas and Electric Company and Subsidiary Consolidated Statements of Income (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 2004 2003 2004 2003 OPERATING REVENUES (Note 5): Electric $192,566 $173,917 $390,815 $360,936 Gas 43,646 41,456 207,360 181,280 Total operating revenues 236,212 215,373 598,175 542,216 OPERATING EXPENSES: Fuel for electric generation 47,615 46,277 100,139 95,754 Power purchased 17,345 17,313 46,233 41,440 Gas supply expenses 30,991 25,963 161,747 132,070 Other operation expenses 57,110 53,379 115,171 106,907 Maintenance 15,266 17,690 26,807 29,583 Depreciation and amortization 28,223 30,293 55,722 57,437 Federal and state income taxes 9,374 4,714 24,399 21,355 Property and other taxes 5,069 3,454 10,140 8,189 Total operating expenses 210,993 199,083 540,358 492,735 NET OPERATING INCOME 25,219 16,290 57,817 49,481 Other income (expense) - net 133 (1,395) (328) (335) Other income from affiliated company (Note 10) - 1 - 5 Interest expense (Note 3) 5,236 5,849 10,013 12,104 Interest expense to affiliated companies (Note 10) 2,976 1,292 6,117 2,027 NET INCOME $ 17,140 $ 7,755 $ 41,359 $ 35,020 Consolidated Statements of Retained Earnings (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 2004 2003 2004 2003 Balance at beginning of period $521,204 $435,647 $497,441 $409,319 Net income 17,140 7,755 41,359 35,020 Subtotal 538,344 443,402 538,800 444,339 Cash dividends declared on stock: 5% cumulative preferred 269 269 538 538 Auction rate cumulative preferred 219 268 406 569 $5.875 cumulative preferred (Note 8) - 367 - 734 Common 21,000 - 21,000 - Subtotal 21,488 904 21,944 1,841 Balance at end of period $516,856 $442,498 $516,856 $442,498 The accompanying notes are an integral part of these consolidated financial statements. - - New Page - Louisville Gas and Electric Company and Subsidiary Consolidated Balance Sheets (Unaudited) (Thousands of $) ASSETS June 30, December 31, 2004 2003 UTILITY PLANT: At original cost $3,857,231 $3,804,183 Less: reserve for depreciation 1,366,281 1,326,442 Net utility plant (Note 7) 2,490,950 2,477,741 OTHER PROPERTY AND INVESTMENTS - less reserve of $63 as of June 30, 2004 and December 31, 2003 507 611 CURRENT ASSETS: Cash and cash equivalents 13,984 1,706 Accounts receivable - less reserve of $3,515 as of June 30, 2004 and December 31, 2003 (Note 4) 114,072 84,585 Materials and supplies - at average cost: Fuel (predominantly coal) 32,843 25,260 Gas stored underground 21,795 69,884 Other 26,085 24,971 Prepayments and other 2,981 5,281 Total current assets 211,760 211,687 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 8,653 8,753 Regulatory assets (Note 6) 113,553 143,626 Long-term derivative asset (Note 3) 2,368 - Other 33,038 40,121 Total deferred debits and other assets 157,612 192,500 Total assets $2,860,829 $2,882,539 The accompanying notes are an integral part of these consolidated financial statements. - - New Page - Louisville Gas and Electric Company and Subsidiary Consolidated Balance Sheets (Unaudited) (Thousands of $) CAPITALIZATION AND LIABILITIES June 30, December 31, 2004 2003 CAPITALIZATION: Common stock, without par value - Outstanding 21,294,223 shares $ 425,170 $ 425,170 Common stock expense (836) (836) Additional paid-in capital 40,000 40,000 Accumulated other comprehensive loss (34,444) (38,111) Retained earnings 516,856 497,441 Total common equity 946,746 923,664 Cumulative preferred stock 70,425 70,425 Mandatorily redeemable preferred stock (Note 8) 22,500 22,500 Long-term debt (Note 9) 328,104 328,104 Long-term debt to affiliated company (Note 9) 225,000 200,000 575,604 550,604 Total capitalization 1,592,775 1,544,693 CURRENT LIABILITIES: Current portion of mandatorily redeemable preferred stock (Note 8) 1,250 1,250 Current portion of long-term debt 246,200 246,200 Current portion of long-term debt to affiliated company (Note 9) 50,000 - Notes payable to affiliated companies (Note 9) 25,950 80,332 Accounts payable 76,261 93,118 Accounts payable to affiliated companies (Note 10) 27,606 38,343 Accrued income taxes 2,605 11,472 Customer deposits 11,015 10,493 Accrued interest 2,146 1,999 Accrued interest to affiliated company (Note 10) 3,648 2,750 Other 14,893 11,784 Total current liabilities 461,574 497,741 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes - net 344,337 337,704 Investment tax credit, in process of amortization 47,535 50,329 Accumulated provision for pensions and related benefits 106,695 140,598 Customer advances for construction 10,344 9,890 Asset retirement obligation 10,064 9,747 Regulatory liabilities (Note 6): Accumulated cost of removal of utility plant 218,022 216,948 Other 49,511 51,822 Long-term derivative liability (Note 3) 12,198 15,966 Other 7,774 7,101 Total deferred credits and other liabilities 806,480 840,105 Total capital and liabilities $2,860,829 $2,882,539 The accompanying notes are an integral part of these consolidated financial statements. - - New Page - Louisville Gas and Electric Company and Subsidiary Consolidated Statement of Cash Flows (Unaudited) (Thousands of $) Six Months Ended June 30, 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 41,359 $ 35,020 Items not requiring cash currently: Depreciation and amortization 55,722 57,437 Deferred income taxes - net 4,909 12,876 Investment tax credit - net (2,794) (2,105) Value Delivery Team (VDT) amortization (Note 6) 15,067 15,332 Mark-to-market financial instruments (6,136) 1,551 Other 4,957 9,557 Changes in current assets and liabilities (19,580) 14,956 Changes in accounts receivable securitization-net (Note 4) - (14,000) Pension funding (Note 9 and 12) (34,492) (83,125) Provision for post-retirement benefits (8,047) (4,201) Gas supply clause 8,340 (19,834) Earnings sharing mechanism 2,357 1,772 Combustion turbine litigation settlement 7,107 - Other 9,769 3,401 Net cash flows from operating activities 78,538 28,637 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities 103 163 Construction expenditures (64,958) (119,412) Net cash flows from investing activities (64,855) (119,249) CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings from affiliated company (Note 9) 125,000 100,000 Short-term borrowings from affiliated company (Note 9) 260,550 349,400 Repayment of long-term borrowings from affiliated company (50,000) - Repayment of short-term borrowings from affiliated company (314,932) (370,737) Issuance costs of pollution control bonds (133) - Payment of common dividends (21,000) - Payment of preferred dividends (890) (1,993) Net cash flows from financing activities (1,405) 76,670 CHANGE IN CASH AND CASH EQUIVALENTS 12,278 (13,942) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,706 17,015 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,984 $ 3,073 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Income taxes $ 33,062 $ 15,947 Interest on borrowed money 8,539 10,705 Interest to affiliated companies on borrowed money 5,282 1,315 The accompanying notes are an integral part of these consolidated financial statements. - -New Page - Louisville Gas and Electric Company and Subsidiary Consolidated Statements of Other Comprehensive Income (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 2004 2003 2004 2003 Net income $17,140 $7,775 $41,359 $35,020 Gains/(losses) on derivative instruments and hedging activities - net of tax benefit/(expense) of $(4,866), $1,021, $(2,449) and $1,034, respectively (Note 3) 7,299 (1,531) 3,667 (1,551) Other comprehensive income (loss), net of tax 7,299 (1,531) 3,667 (1,551) Comprehensive income $24,439 $6,224 $45,026 $33,469 The accompanying notes are an integral part of these consolidated financial statements. - - New Page - Kentucky Utilities Company and Subsidiary Consolidated Statements of Income (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 2004 2003 2004 2003 OPERATING REVENUES $232,369 $197,174 $479,755 $422,157 OPERATING EXPENSES: Fuel for electric generation 67,631 59,641 137,515 125,964 Power purchased 30,662 33,648 71,969 74,848 Other operation expenses 36,536 38,130 74,990 77,019 Maintenance 17,024 7,403 28,908 36,369 Depreciation and amortization 25,950 27,762 51,199 51,912 Federal and state income taxes 17,461 7,467 38,562 14,067 Property and other taxes 4,284 3,968 8,537 8,163 Total operating expenses 199,548 178,019 411,680 388,342 NET OPERATING INCOME 32,821 19,155 68,075 33,815 Other income - net 1,958 2,697 3,420 4,803 Other income (expense) from affiliated company (Note 10) 4 (3) 14 - Interest expense (Note 3) 3,682 6,582 4,417 11,113 Interest expense to affiliated companies (Note 10) 3,536 1,108 7,083 1,485 NET INCOME $ 27,565 $ 14,159 $ 60,009 $ 26,020 Consolidated Statements of Retained Earnings (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 2004 2003 2004 2003 Balance at beginning of period $623,050 $513,321 $591,170 $502,024 Net income 27,565 14,159 60,009 26,020 Subtotal 650,615 527,480 651,179 528,044 Cash dividends declared on stock: 4.75% cumulative preferred 237 237 475 475 6.53% cumulative preferred 327 327 653 653 Common 21,000 - 21,000 - Subtotal 21,564 564 22,128 1,128 Balance at end of period $629,051 $526,916 $629,051 $526,916 The accompanying notes are an integral part of these consolidated financial statements. - - New Page - Kentucky Utilities Company and Subsidiary Consolidated Balance Sheets (Unaudited) (Thousands of $) ASSETS June 30, December 31, 2004 2003 UTILITY PLANT: At original cost $3,645,814 $3,596,657 Less: reserve for depreciation 1,377,302 1,355,055 Net utility plant (Note 7) 2,268,512 2,241,602 OTHER PROPERTY AND INVESTMENTS - less reserve of $131 as of June 30, 2004 and December 31, 2003 19,196 17,862 CURRENT ASSETS: Cash and cash equivalents 9,792 4,869 Accounts receivable - less reserve of $673 and $672 as of June 30, 2004 and December 31, 2003, respectively (Note 4) 94,804 49,289 Materials and supplies - at average cost: Fuel (predominantly coal) 35,552 45,538 Other 27,367 27,094 Prepayments and other 9,866 13,100 Total current assets 177,381 139,890 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 4,349 4,481 Regulatory assets (Note 6) 64,974 72,318 Long-term derivative asset (Note 3) 7,584 12,223 Other 11,102 21,916 Total deferred debits and other assets 88,009 110,938 Total assets $2,553,098 $2,510,292 The accompanying notes are an integral part of these consolidated financial statements. - - New Page - Kentucky Utilities Company and Subsidiary Consolidated Balance Sheets (cont.) (Unaudited) (Thousands of $) CAPITALIZATION AND LIABILITIES June 30, December 31, 2004 2003 CAPITALIZATION: Common stock, without par value - Outstanding 37,817,878 shares $ 308,140 $ 308,140 Common stock expense (322) (322) Additional paid-in capital 15,000 15,000 Accumulated other comprehensive loss (6,045) (6,031) Retained earnings 629,051 591,170 Total common equity 945,824 907,957 Cumulative preferred stock 39,727 39,727 Long-term debt (Note 9) 307,940 312,646 Long-term debt to affiliated company (Note 9) 333,000 283,000 640,940 595,646 Total capitalization 1,626,491 1,543,330 CURRENT LIABILITIES: Current portion of long-term debt 87,130 91,930 Notes payable to affiliated company (Note 9) 53,181 43,231 Accounts payable 48,356 69,947 Accounts payable to affiliated companies (Note 10) 15,727 26,426 Accrued income taxes 10,454 7,104 Customer deposits 13,867 13,453 Accrued interest 1,972 2,024 Accrued interest to affiliated company (Note 10) 3,493 2,454 Other 17,019 9,767 Total current liabilities 251,199 266,336 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes - net 275,860 261,258 Investment tax credit, in process of amortization 4,832 5,859 Accumulated provision for pensions and related benefits 63,140 103,101 Customer advances for construction 1,624 1,564 Asset retirement obligation 20,339 19,698 Regulatory liabilities (Note 6): Accumulated cost of removal of utility plant 266,218 261,942 Other 30,908 38,027 Other 12,487 9,177 Total deferred credits and other liabilities 675,408 700,626 Total capital and liabilities $2,553,098 $2,510,292 The accompanying notes are an integral part of these consolidated financial statements. - - New Page - Kentucky Utilities Company and Subsidiary Consolidated Statement of Cash Flows (Unaudited) (Thousands of $) Six Months Ended June 30, 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 60,009 $ 26,020 Items not requiring cash currently: Depreciation and amortization 51,199 51,912 Deferred income taxes - net 13,346 1,485 Investment tax credit - net (1,027) (1,321) Value Delivery Team (VDT) amortization (Note 6) 5,877 6,153 Mark-to-market financial instruments (67) 2,016 Other 1,632 14,548 Changes in current assets and liabilities (52,855) 4,628 Pension funding (Note 9 and 12) (43,409) (3,515) Provision for post-retirement benefits (3,372) (3,036) Earnings sharing mechanism 344 4,464 Combustion turbine litigation settlement 11,595 - Other 6,296 11,434 Net cash flows from operating activities 49,568 114,788 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of securities (1,334) (1,786) Construction expenditures (76,338) (175,507) Net cash flows from investing activities (77,672) (177,293) CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings from affiliated company (Note 9) 50,000 100,000 Short-term borrowings from affiliated company (Note 9) 255,000 360,640 Repayment of short-term borrowings from affiliated company (245,050) (333,700) Retirement of pollution control bonds (4,800) (62,000) Refund of issuance costs of pollution control bonds 5 - Payment of common dividends (21,000) - Payment of preferred dividends (1,128) (1,128) Net cash flows from financing activities 33,027 63,812 CHANGE IN CASH AND CASH EQUIVALENTS 4,923 1,307 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,869 5,391 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,792 $ 6,698 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Income taxes $ 21,264 $ 13,763 Interest on borrowed money 7,562 11,045 Interest to affiliated companies on borrowed money 6,070 724 The accompanying notes are an integral part of these consolidated financial statements. - - New Page - Kentucky Utilities Company and Subsidiary Consolidated Statements of Other Comprehensive Income (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 2004 2003 2004 2003 Net income $27,565 $14,159 $60,009 $26,020 Losses on derivative instruments and hedging activities - net of tax benefit/(expense) of $18 and $5 respectively (Note 3) (27) - (14) - Other comprehensive loss, net of tax (27) - (14) - Comprehensive income $27,538 $14,159 $59,995 $26,020 The accompanying notes are an integral part of these consolidated financial statements. - - New Page - Louisville Gas and Electric Company and Subsidiary Kentucky Utilities Company and Subsidiary Notes to Consolidated Financial Statements (Unaudited) 1. General The unaudited consolidated financial statements include the accounts of Louisville Gas and Electric Company and Subsidiary and Kentucky Utilities Company and Subsidiary (each "LG&E" and "KU", or the "Companies"). The common stock of each of LG&E and KU is wholly-owned by LG&E Energy LLC ("LG&E Energy"). In the opinion of management, the unaudited interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of consolidated financial position, results of operations, comprehensive income and cash flows for the periods indicated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations, although the Companies believe that the disclosures are adequate to make the information presented not misleading. See LG&E's and KU's Annual Reports on Form 10-K for the year ended December 31, 2003, for information relevant to the accompanying financial statements, including information as to the significant accounting policies of the Companies. The accompanying financial statements for the three months and six months ended June 30, 2003, have been revised to conform to certain reclassifications in the current three months and six months ended June 30, 2004. These reclassifications had no impact on the balance sheet net assets or net income, as previously reported. 2. Mergers and Acquisitions LG&E and KU are each subsidiaries of LG&E Energy. In July 2002, E.ON AG ("E.ON"), a German company, completed its acquisition of Powergen Limited ("Powergen"), the former parent company of LG&E Energy. As a result, LG&E and KU became indirect subsidiaries of E.ON. E.ON had announced its pre-conditional cash offer of 5.1 billion pounds sterling ($7.3 billion) for Powergen in April 2001. Following the purchase of Powergen by E.ON, E.ON became a registered holding company under the Public Utility Holding Company Act of 1935 ("PUHCA"). As a result, E.ON, its utility subsidiaries, including LG&E and KU, and certain of its non-utility subsidiaries are subject to extensive regulation by the SEC under PUHCA with respect to issuances and sales of securities, acquisitions and sales of certain utility properties, and intra-system sales of certain goods and services. In addition, PUHCA generally limits the ability of registered holding companies to acquire additional public utility systems and to acquire and retain businesses unrelated to the utility operations of the holding company. LG&E and KU believe that they have adequate authority (including financing authority) under existing SEC orders and regulations to conduct their business. LG&E and KU will seek additional authorization when necessary. As contemplated in their regulatory filings in connection with the E.ON acquisition, E.ON, Powergen and LG&E Energy completed an administrative reorganization to move the LG&E Energy group from an indirect Powergen subsidiary to an indirect E.ON subsidiary. This reorganization was effective in March 2003. In early 2004, LG&E Energy began direct reporting arrangements to E.ON. - - New Page - The utility operations (LG&E and KU) of LG&E Energy have continued their separate identities and continue to serve customers in Kentucky, Virginia and Tennessee under their existing names. The preferred stock and debt securities of LG&E and KU were not affected by these transactions and LG&E and KU continue to file SEC reports. Effective December 30, 2003, LG&E Energy LLC became the successor, by assignment and subsequent merger, to all the assets and liabilities of LG&E Energy Corp. Following the conversion, LG&E Energy became a registered holding company under PUHCA. 3. Financial Instruments The Companies use interest rate swaps to hedge exposure to market fluctuations in certain of their debt instruments. Pursuant to the Companies' policies, use of these financial instruments is intended to mitigate risk, earnings and cash flow volatility and is not speculative in nature. Management has designated all of the Companies' interest rate swaps as hedge instruments. Financial instruments designated as cash flow hedges have resulting gains and losses recorded within other comprehensive income and stockholders' equity. To the extent a financial instrument designated as a cash flow hedge or the underlying item being hedged is prematurely terminated or the hedge becomes ineffective, the resulting gains or losses are reclassified from other comprehensive income to net income. Financial instruments designated as fair value hedges and the underlying hedged items are periodically marked to market with the resulting net gains and losses recorded directly into net income. Upon termination of any fair value hedges, the resulting gain or loss is recorded into net income. As of June 30, 2004, LG&E was party to various interest rate swap agreements with aggregate notional amounts of $228.3 million. Under these swap agreements, LG&E paid fixed rates averaging 4.38% and received variable rates based on LIBOR or the Bond Market Association's municipal swap index averaging 1.01% at June 30, 2004. The swap agreements in effect at June 30, 2004 have been designated as cash flow hedges and mature on dates ranging from 2005 to 2033. The hedges have been deemed to be fully effective resulting in a pretax gain of $12.2 million and $6.1 million for the three months and six months ended June 30, 2004, respectively, recorded in other comprehensive income. Upon expiration of these hedges, the amount recorded in other comprehensive income will be reclassified into earnings. The amounts expected to be reclassified from other comprehensive income to earnings in the next twelve months are immaterial. As of June 30, 2004, KU was party to various interest rate swap agreements with aggregate notional amounts of $103.0 million. Under these swap agreements, KU paid variable rates based on either LIBOR or the Bond Market Association's municipal swap index averaging 2.23%, and received fixed rates averaging 7.74% at June 30, 2004. The swap agreements in effect at June 30, 2004 have been designated as fair value hedges and mature on dates ranging from 2007 to 2025. During the three months and six months ended June 30, 2004, the effect of marking these financial instruments and the underlying debt to market resulted in a net pretax gain/(loss) of $(0.5) million and $0.7 million (representing the hedges' ineffectiveness), respectively, recorded as a decrease/(increase) in interest expense. Interest rate swaps hedge interest rate risk on the underlying debt. Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, in addition to swaps being marked to market, the item being hedged using a fair value hedge must also be marked to market. Consequently at June 30, 2004, KU's debt reflects an increase by a $10.0 million mark-to-market adjustment. - - New Page - In February 2004, KU terminated the swap it had in place related to its Series 9 pollution control bonds. The notional amount of the terminated swap was $50 million and KU received a payment of $2.0 million as part of the termination, resulting in a gain of $0.8 million. 4. Accounts Receivable Securitization Programs In February 2001, LG&E and KU implemented accounts receivable securitization programs. The purpose of these programs was to enable LG&E and KU to accelerate the receipt of cash from the collection of retail accounts receivable, thereby reducing dependence upon more costly sources of working capital. In January 2004, LG&E and KU terminated their accounts receivable securitization programs and replaced them with intercompany loans from an E.ON affiliate. In May 2004, LG&E and KU dissolved their inactive accounts receivable securitization-related subsidiaries, LG&E Receivables LLC and KU Receivables LLC. The accounts receivable securitization-related subsidiaries were the only subsidiaries of LG&E and KU. 5. Segment of Business LG&E's revenues and net income by business segment for the three and six months ended June 30, 2004 and 2003, follow: Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2004 2003 2004 2003 LG&E Electric Revenues 192,566 173,917 390,815 360,936 Net income 20,441 9,457 36,384 27,489 LG&E Gas Revenues 43,646 41,456 207,360 181,280 Net income (3,301) (1,682) 4,975 7,531 Total Revenues 236,212 215,373 598,175 542,216 Net income 17,140 7,775 41,359 35,020 6. Regulatory Assets and Liabilities The following regulatory assets and liabilities were included in LG&E's balance sheets as of June 30, 2004 and December 31, 2003: Louisville Gas and Electric (Unaudited) June 30, December 31, (in thousands) 2004 2003 VDT costs $ 52,743 $ 67,810 Gas supply adjustments due from customers 11,930 22,077 Unamortized loss on bonds 20,802 21,333 Earnings sharing mechanism (ESM) provision 10,002 12,359 Merger surcredit 5,529 6,220 Asset retirement obligation (ARO) 6,480 6,015 Gas performance-based ratemaking (PBR) 3,378 5,480 Other (including fuel adjustment clause (FAC), demand side management (DSM), etc.) 2,689 2,332 Total regulatory assets $ 113,553 $ 143,626 Accumulated cost of removal of utility plant $(218,022) $(216,948) Deferred income taxes - net (39,457) (41,180) Gas supply adjustments due to customers (4,999) (6,805) DSM (2,904) (1,706) Other (including environmental cost recovery (ECR), ARO, FAC and ESM) (2,151) (2,131) Total regulatory liabilities $(267,533) $(268,770) - New Page - LG&E currently earns a return on all regulatory assets except for gas supply adjustments, ESM, gas performance-based ratemaking and FAC, all of which are separate rate mechanisms with recovery within twelve months. Additionally, no current return is earned on the ARO regulatory asset. This regulatory asset will be offset against the associated regulatory liability, ARO asset, and ARO liability at the time the underlying asset is retired. The following regulatory assets and liabilities were included in KU's balance sheets as of June 30, 2004 and December 31, 2003: Kentucky Utilities (Unaudited) June 30, December 31, (in thousands) 2004 2003 VDT costs $ 20,574 $ 26,451 Unamortized loss on bonds 10,127 10,511 ESM provision 12,038 12,382 Merger surcredit 4,280 4,815 ARO 12,095 11,322 FAC 2,865 4,298 Other 2,995 2,539 Total regulatory assets $ 64,974 $ 72,318 Accumulated cost of removal of utility plant $(266,218) $(261,942) Deferred income taxes - net (22,802) (24,058) ARO (1,288) (1,162) Spare parts (1,071) (1,055) ECR (3,671) (9,189) Other (including FAC and DSM) (2,076) (2,563) Total regulatory liabilities $(297,126) $(299,969) KU currently earns a return on all regulatory assets except for ESM and FAC, both of which are separate recovery mechanisms with recovery within twelve months. Additionally, no current return is earned on the ARO regulatory asset. This regulatory asset will be offset against the associated regulatory liability, ARO asset, and ARO liability at the time the underlying asset is retired. 7. Utility Plant KU retired two steam generating units, Green River Units 1 and 2, in the amount of $17.2 million, from its books as of March 31, 2004. Approximately $4 million in common assets, which are shared by Green River Units 3 and 4, remain on KU's books. The common assets will remain on KU's books until the final retirement of Green River Units 3 and 4. The gross book value of Green River Units 1 and 2 was charged to the accumulated reserve for depreciation in accordance with FERC regulations and no gain or loss was recorded. A partial redemption of pollution control Series 14 bonds totaling $4.8 million was required in the second quarter as a result of the retirement (see Note 9). - - New Page - The following data represent shares of jointly-owned additions to the Trimble County plant for four combustion turbines ("CT's") as of June 30, 2004. Trimble County CT Units 7 and 8 began commercial operation on June 1, 2004. The addition to LG&E plant in service was $37.0 million and for KU the addition was $63.2 million. Trimble County CT Units 9 and 10 began commercial operation on July 1, 2004. ($ in millions) LG&E KU Total Trimble CT 7 Ownership % 37% 63% 100% Mw capacity 59 101 160 Net book value $18.7 $32.1 $50.8 Trimble CT 8 Ownership % 37% 63% 100% Mw capacity 59 101 160 Net book value $18.6 $31.9 $50.5 Trimble CT 9 Ownership % 37% 63% 100% Mw capacity 59 101 160 Net book value (in construction work in progress) $18.7 $32.0 $50.7 Trimble CT 10 Ownership % 37% 63% 100% Mw capacity 59 101 160 Net book value (in construction work in progress) $18.6 $32.0 $50.6 8. New Accounting Pronouncements FIN 46 In January 2003, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46"). FIN 46 required certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for all new variable interest entities created or acquired after January 31, 2003. In December 2003, FIN 46 was revised, delaying the effective dates for certain entities created before February 1, 2003, and making other amendments to clarify application of the guidance. For potential variable interest entities other than special purpose entities, the revised FIN 46 ("FIN 46R") is now required to be applied no later than the end of the first fiscal year or interim reporting period ending after March 15, 2004. For all special purpose entities created prior to February 1, 2003, FIN 46R is now required to be applied at the end of the first interim or annual reporting period ending after December 15, 2003. FIN 46R may be applied prospectively with a cumulative- effect adjustment as of the date it is first applied, or by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46R also requires certain disclosures of an entity's relationship with variable interest entities. Both LG&E and KU hold investment interests in Ohio Valley Electric Corporation ("OVEC"), and KU holds an investment interest in Electric Energy, Inc. ("EEI"). Neither LG&E nor KU are the primary beneficiary of OVEC or EEI, and thus neither are consolidated into the financial statements of LG&E or KU. - New Page - LG&E, KU and ten other electric utilities are participating owners of OVEC, located in Piketon, Ohio. OVEC owns and operates two power plants that burn coal to generate electricity, Kyger Creek Station in Ohio and Clifty Creek Station in Indiana. LG&E's share is 7%, representing approximately 155 Mw of generation capacity and KU's share is 2.5%, approximately 55 Mw of generation capacity. LG&E's and KU's original investments in OVEC were made in 1952. LG&E's investment in OVEC is the equivalent of 4.9% of OVEC's common stock and KU's investment is the equivalent of 2.5% of OVEC's common stock. LG&E's and KU's investments in OVEC are accounted for under the cost method of accounting. As of June 30, 2004, LG&E's and KU's investments in OVEC totaled $0.5 million and $0.3 million, respectively. LG&E's and KU's maximum exposure to loss as a result of their involvement with OVEC is limited to the value of their investments. In the event of the inability of OVEC to fulfill its power provision requirements, LG&E and KU would substitute such power supply with either owned generation or market purchases and would generally recover associated incremental costs through regulatory rate mechanisms. See Note 11 and Part II, Item 1, for further discussion of developments regarding LG&E's and KU's ownership interests and power purchase rights. KU owns 20% of the common stock of EEI, which owns and operates a 1,000- Mw generating station in southern Illinois. KU is entitled to take 20% of the available capacity of the station. Purchases from EEI are made under a contractual formula which has resulted in costs which were and are expected to be comparable to the cost of other power purchased or generated by KU. Such power equated to approximately 9% of KU's net generation system output in 2003. KU's original investment in EEI was made in 1953. KU's investment in EEI is accounted for under the equity method of accounting and, as of June 30, 2004, totaled $11.9 million. KU's maximum exposure to loss as a result of its involvement with EEI is limited to the value of its investment. In the event of the inability of EEI to fulfill its power provision requirements, KU would substitute such power supply with either owned generation or market purchases and would generally recover associated incremental costs through regulatory rate mechanisms. SFAS No. 150 In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 was effective immediately for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for interim reporting periods beginning after June 15, 2003. As of June 30, 2004, LG&E had 237,500 shares of $5.875 series mandatorily redeemable preferred stock outstanding having a current redemption price of $100 per share. The preferred stock has a sinking fund requirement sufficient to retire a minimum of 12,500 shares on July 15 of each year commencing with July 15, 2003, and the remaining 187,500 shares on July 15, 2008 at $100 per share. Beginning with the three months ended September 30, 2003, LG&E reclassified its $5.875 series preferred stock as long-term debt with the minimum shares mandatorily redeemable within one year classified as current. Dividends accrued beginning July 1, 2003 are charged as interest expense. On July 15, 2004, LG&E redeemed 12,500 shares as required at a price of $100 per share. KU has no financial instruments that fall within the scope of SFAS No. 150. FSP 106-2 In May 2004, the FASB finalized FASB Staff Position ("FSP") 106-2, Accounting and Disclosure Requirements Related to the Medicare - - New Page - Prescription Drug, Improvement and Modernization Act of 2003 ("Medicare Act") with guidance on accounting for subsidies provided under the Medicare Act which became law in December 2003. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. KU will adopt FSP 106-2 in the third quarter of 2004. LG&E's medical plan does not provide a benefit that is actuarially equivalent to Medicare Part D; therefore, FSP 106-2 is not expected to have an impact on LG&E. On the basis of actuarial estimates, the Medicare Act will result in an overall reduction of the accumulated postretirement benefit obligation ("APBO") for postretirement health and life insurance benefits for KU amounting to approximately $5.0 million as of January 1, 2004. Accordingly, KU's net periodic postretirement benefit cost for 2004 will be reduced by approximately $0.7 million. The APBO and the net periodic postretirement benefit cost as of and for the periods ending June 30, 2004 and 2003 do not reflect amounts associated with the subsidies provided by the Medicare Act. 9. Short-Term and Long-Term Debt Under the provisions for LG&E's variable-rate pollution control bonds, Series S, T, U, BB, CC, DD and EE, and KU's variable-rate pollution control bonds Series 10, 12, 13, 14 and 15, the bonds are subject to tender for purchase at the option of the holder and to mandatory tender for purchase upon the occurrence of certain events, causing the bonds to be classified as current portion of long-term debt in the Consolidated Balance Sheets. The average annualized interest rate for these bonds during the three months ending June 30, 2004 was 1.11% for the LG&E bonds and 1.18% for the KU bonds. In January 2004, LG&E entered into two long-term notes from Fidelia Corporation ("Fidelia"), an E.ON financing subsidiary, one totaling $25 million with an interest rate of 4.33% that matures in January 2012, and a one-year note totaling $100 million with an interest rate of 1.53%. The loans are secured by a lien subordinated to the first mortgage bond lien. The proceeds were used to fund a pension contribution and to repay other debt obligations. In April 2004, LG&E prepaid $50 million of the $100 million 1.53% note payable to Fidelia. The prepayment was paid out of cash balances and there was no prepayment fee. In January 2004, KU entered into an unsecured long-term loan from Fidelia totaling $50 million with an interest rate of 4.39% that matures in January 2012. The proceeds were used to fund a pension contribution and to repay other debt obligations. In May 2004, KU redeemed $4.8 million of its Series 14 pollution control bonds which were initially issued in the amount of $7.2 million. LG&E maintains five bilateral lines of credit totaling $185 million that mature in 2005. There was no outstanding balance under these facilities at June 30, 2004. Management expects to renew these facilities as they expire. LG&E and KU participate in an intercompany money pool agreement wherein LG&E Energy and KU make funds available to LG&E at market-based rates (based on an index of highly rated commercial paper issues as of the prior month end) up to $400 million. Likewise, LG&E Energy and LG&E make funds available to KU at market-based rates up to $400 million. - - New Page - LG&E had $26.0 million in money pool loans from LG&E Energy (included in "Notes payable to affiliated companies") at an average rate of 1.04% at June 30, 2004, and $171.7 million at an average rate of 1.21% at June 30, 2003. The balance of the money pool loans from LG&E Energy to KU (included in "Notes payable to affiliated companies") was $53.2 million at an average rate of 1.04% and $146.4 million at an average rate of 1.21% at June 30, 2004 and 2003, respectively. The amount available to LG&E under the money pool agreement at June 30, 2004 was $374.0 million. The amount available to KU under the money pool agreement at June 30, 2004 was $346.8 million. LG&E Energy maintains a revolving credit facility totaling $150 million with an E.ON affiliate to ensure funding availability for the money pool. LG&E Energy had an outstanding balance of $69.7 million at an average rate of 1.79% under this facility as of June 30, 2004 and availability of $80.3 million remained. 10.Related Party Transactions LG&E, KU, certain subsidiaries of LG&E Energy and other subsidiaries of E.ON engage in related-party transactions. Transactions among LG&E, KU and LG&E Energy subsidiaries are eliminated upon consolidation of LG&E Energy subsidiaries. Transactions between LG&E or KU and E.ON subsidiaries are eliminated upon consolidation of E.ON subsidiaries. These transactions are generally performed at cost and are in accordance with the SEC regulations under the PUHCA and the applicable Kentucky Public Service Commission ("Kentucky Commission") regulations. Accounts payable to and receivable from related parties are netted and presented as accounts payable to affiliated companies on the balance sheets of LG&E and KU, as allowed due to the right of offset. Obligations related to intercompany debt arrangements with LG&E Energy and Fidelia are presented as separate line items on the balance sheet, as appropriate. The significant related-party transactions are disclosed below. Electric Purchases LG&E and KU intercompany electric revenues and purchased power expense (including LG&E Energy Marketing Inc. ("LEM")) for the three months and six months ended June 30, 2004 and 2003 were as follows: Three months ended Six months ended June 30, June 30, (in thousands) 2004 2003 2004 2003 LG&E Electric operating revenues from KU $8,426 $10,850 $30,504 $27,820 Electric operating revenues from LEM 622 1,077 1,350 8,226 Purchased power from KU 9,114 9,211 30,699 23,675 KU Electric operating revenues from LG&E $9,114 $9,211 $30,699 $23,675 Electric operating revenues from LEM 390 318 550 2,100 Purchased power from LG&E 8,426 10,850 30,504 27,820 Interest Charges LG&E intercompany interest income and expense for the three months and six months ended June 30, 2004 and 2003 were as follows: Three months ended Six months ended June 30, June 30, (in thousands) 2004 2003 2004 2003 Interest to affiliate (money pool) $ (13) $ 536 $ 35 $1,269 Interest to affilitate (Fidelia loans) 2,986 758 6,069 758 Interest to affiliate (KU) 4 (3) 14 - Interest from affiliate (KU) - 1 - 5 - New Page - KU intercompany interest income and expense for the three months and six months ended June 30, 2004 and 2003 were as follows: Three months ended Six months ended June 30, June 30, (in thousands) 2004 2003 2004 2003 Interest to affiliate (money pool) $ 75 $349 $ 219 $722 Interest to affiliate (Fidelia loans) 3,461 758 6,864 758 Interest to affiliate (LG&E) - 1 - 5 Interest from affiliate (LG&E) 4 (3) 14 - Other Intercompany Billings Other intercompany billings (including LG&E Energy Services Inc. ("LG&E Services")) related to LG&E and KU for the three months and six months ended June 30, 2004 and 2003 were as follows: Three months ended Six months ended June 30, June 30, (in thousands) 2004 2003 2004 2003 LG&E Services billings to LG&E $60,390 $61,404 $98,552 $88,034 LG&E Services billings to KU 44,613 64,915 75,188 86,409 LG&E billings to LG&E Services 1,490 1,281 4,525 6,143 LG&E billings to KU 33,796 39,111 94,509 91,760 KU billings to LG&E 31,683 22,203 83,516 55,795 KU billings to LG&E Services 1,097 770 3,915 7,864 11.Commitments and Contingencies Except as discussed in this Quarterly Report on Form 10-Q, material changes have not occurred in the current status of various commitments or contingent liabilities from that discussed in the Companies' Annual Report on Form 10-K for the year ended December 31, 2003 (including in Notes 3 and 11 to the financial statements of LG&E and KU contained therein and incorporated herein by reference) or Quarterly Report on Form 10-Q for the quarter ended March 31, 2004. Electric and Gas Rates Cases In December 2003, LG&E and KU filed applications with the Kentucky Commission requesting increases in LG&E's and KU's electric rates and LG&E's gas rates. The Companies requested general adjustments in electric rates and LG&E requested general adjustments in gas rates based on the twelve-month test year ended September 30, 2003. The revenue increases requested by LG&E were $63.8 million for electric and $19.1 million for gas. The revenue increase requested by KU was $58.3 million. On June 30, 2004, the Kentucky Commission issued an order approving increases in the base electric and gas rates of LG&E and the base electric rates of KU. The Kentucky Commission's order largely accepted proposed settlement agreements filed in May 2004 by LG&E, KU and a majority of the parties to the rate case proceedings. The rate increases took effect on July 1, 2004. In the Kentucky Commission's order, (a) LG&E was granted increases in annual base electric rates of approximately $43.4 million (7.7%) and in annual base gas rates of approximately $11.9 million (3.4%) and (b) KU was granted an increase in annual base electric rates of approximately $46.1 million (6.8%). Other provisions of the order include decisions on certain depreciation, gas supply clause, ECR and VDT amounts or mechanisms and a termination of the ESM with respect to all periods after 2003. The order also provided for a recovery before March 31, 2005 by the Companies of previously requested amounts relating to the ESM during 2003. - New Page - During July 2004, the Attorney General of Kentucky ("AG") served subpoenas on LG&E and KU, as well as on the Kentucky Commission and its staff, requesting information regarding allegedly improper communications between the Companies and the Kentucky Commission, particularly during the period covered by the rate cases. The Kentucky Commission has procedurally reopened the rate cases for the limited purpose of taking evidence, if any, as to the communication issues. Subsequently, the AG filed pleadings with the Kentucky Commission requesting rehearing of the rate cases on certain computational components of the increased rates, including income tax, cost of removal and depreciation amounts. In August 2004, the Kentucky Commission denied the AG's rehearing request on the cost of removal and depreciation issues, with the effect that the rate increase order is final as to these matters, subject to the parties' rights to judicial appeals. The Kentucky Commission further agreed to hold in abeyance until mid-October 2004 its further proceedings regarding the AG's concerns about alleged improper communications until the AG could file with the Kentucky Commission an investigative report regarding the latter issue. In addition, the Kentucky Commission granted a rehearing on the income tax component once the abeyance discussed above is lifted. LG&E and KU believe no improprieties have occurred in their communications with the Kentucky Commission and are cooperating with the proceedings before the AG and the Kentucky Commission. The Companies are currently unable to determine the ultimate impact, if any, of the AG's investigation on the recently concluded rate case or their operations generally. Earnings Sharing Mechanism The Companies filed their final 2003 ESM calculations with the Kentucky Commission on March 1, 2004, and applied for recovery of $13.0 million related to LG&E and $16.2 million related to KU. Based upon estimates, the Companies previously accrued $8.9 million at LG&E and $9.3 million at KU for the 2003 ESM as of December 31, 2003. On June 30, 2004, the Kentucky Commission issued an order largely accepting proposed settlement agreements by the Companies and all intervenors regarding the ESM mechanisms of LG&E and KU. Under the ESM settlements, LG&E and KU will continue to collect approximately $13.0 million and $16.2 million, respectively, of previously requested 2003 ESM revenue amounts through March 2005. As part of the settlement, the parties agreed to a termination of the ESM mechanism relating to all periods after 2003. As a result of the settlement, the Company accrued an additional $4.1 million at LG&E and $6.9 million at KU in June 2004 related to 2003 ESM revenue. OVEC Power Agreement and Share Purchase On April 30, 2004, OVEC and its shareholders, including LG&E and KU, entered into an Amended and Restated Inter-Company Power Agreement, to be effective beginning March 2006, upon the expiration of the current power contract among the parties. Under the new contract, which has a 20-year term from its effective date, LG&E and KU have purchase rights for 5.63% and 2.5%, respectively, of OVEC power at marginal cost-based rates. LG&E and KU are entitled to 7% and 2.5% of OVEC power, respectively, under the current contract. - New Page - LG&E's estimated future minimum annual demand payments under the Amended and Restated Inter-Company Power Agreement are as follows: (in thousands) 2006 $ 10,098 2007 9,726 2008 9,932 2009 10,144 2010 10,361 Thereafter 170,646 Total $220,907 In addition, LG&E will purchase from American Electric Power Company Inc. ("AEP") an additional 0.73% interest in OVEC for a purchase price of approximately $104,000, resulting in an increase in LG&E ownership in OVEC from 4.9% to 5.63%. The share purchase transaction is anticipated to be completed during the fourth quarter of 2004, subject to receipt of certain regulatory approvals. Owensboro Contract Litigation In May 2004, the City of Owensboro, Kentucky and Owensboro Municipal Utilities (collectively "OMU"), filed suit in Davies County, Kentucky District Court against KU concerning a long-term power supply contract (the "OMU Agreement") with KU. The dispute involves interpretational differences regarding certain issues under the OMU Agreement, including various payments or charges between KU and OMU and rights concerning excess power, termination and emissions allowances, respectively. The complaint seeks approximately $6 million in damages for historical periods, as well as injunctive and other relief, including a declaration that KU is in material breach. KU has removed this litigation to the U.S. District Court for the Western District of Kentucky and filed an answer in that court denying the OMU claims and presenting certain counterclaims. KU has also initiated a proceeding at the FERC to obtain the FERC's ruling on certain of the issues in dispute. Environmental Matters In September 1998, the EPA announced its final "NOx SIP Call" rule requiring states to impose significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport impacts on the Northeast region. The Commonwealth of Kentucky SIP, which was approved by EPA June 24, 2003, required reductions in NOx emissions from coal-fired generating units to the 0.15 lb./Mmbtu level on a system-wide basis. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule pursuant to Section 126 of the Clean Air Act directing similar NOx reductions from a number of specifically targeted generating units including all LG&E and KU units. As a result of appeals to both rules, the compliance date was extended to May 2004. LG&E and KU have complied with these NOx emissions reduction rules by adding significant additional NOx controls to their generating units. Installation of additional NOx controls have been performed on a phased basis, commencing in late 2000 and continuing through the final compliance date. As of June 30, 2004, LG&E has incurred total capital costs of approximately $182 million to reduce its NOx emissions to the 0.15 lb./Mmbtu level on a company-wide basis. As of June 30, 2004, KU has incurred total capital costs of approximately $193 million to reduce its NOx emissions to the 0.15 lb./Mmbtu level on a company-wide basis. In addition, LG&E and KU have begun incurring additional operation and maintenance costs in operating new NOx controls. LG&E and KU believe their costs in this regard to be comparable to those of similarly situated utilities with like generation assets. In April 2001, the Kentucky Commission granted recovery of these costs under the environmental surcharge mechanism for LG&E and KU. LG&E and KU are also monitoring several other air quality issues which may potentially impact coal-fired power plants, including EPA's revised air quality standards for ozone and particulate matter, measures to - - New Page - implement EPA's regional haze rule, EPA's December 2003 proposals to regulate mercury emissions from steam electric generating units and to further reduce emissions of sulfur dioxide and nitrogen oxides under the Clean Air Interstate Rule. In addition, LG&E is currently working with local regulatory authorities to review the effectiveness of remedial measures aimed at controlling particulate matter emissions from its Mill Creek Station. LG&E previously settled a number of property damage claims from adjacent residents and completed significant remedial measures as part of its ongoing capital construction program. LG&E has converted the Mill Creek Station to a wet stack operation in an effort to resolve all outstanding issues related to particulate matter emissions. 12. Pension and Other Post-retirement Benefit Plans The following table provides the components of net periodic benefit cost for pension and other benefit plans: Three Months Ended Year to Date June 30, 2004 June 30, 2004 (in thousands) LG&E KU LG&E KU Components of net periodic benefit cost: Service cost $ 934 $ 1,103 $ 3,022 $ 3,490 Interest cost 4,709 3,538 15,233 11,187 Expected return on plan assets (4,289) (3,195) (13,874) (10,104) Amortization of prior service cost (2) 148 (7) 467 Amortization of transition obligation 897 269 2,900 853 Recognized actuarial loss 494 388 1,599 1,227 $ 2,743 $ 2,251 $ 8,873 $ 7,120 In January 2004, LG&E and KU made discretionary contributions to their pension plans in the amounts of $34.5 million and $43.4 million, respectively. No contributions are required for 2004 for either LG&E or KU and no further discretionary contributions are planned. 13.Subsequent Events July Storms In July 2004 violent thunderstorms swept through Kentucky, causing significant damage and widespread power outages. At the height of the storms, 115,000 LG&E customers and 22,700 KU customers were without power. The cost to repair the damage incurred in the LG&E service territory as a result of these storms is estimated to be $8.4 million in operations and maintenance expense and $2.1 million in capital expenditures. The cost to repair the damage incurred in the KU service territory as a result of these storms is estimated to be $0.5 million in operations and maintenance expense and $0.1 million in capital expenditures. Rate Cases Update During July 2004, the AG requested a rehearing of the LG&E and KU rate cases. For a description of developments in these cases, see Note 11 of the Notes to Consolidated Financial Statements in Part 1, Item 1, of this Quarterly Report on Form 10-Q. Trimble County Combustion Turbines Units 9 & 10 Trimble County Combustion Turbines Units 9 and 10 began commercial operation on July 1, 2004. See Note 7 of the Notes to Consolidated Financial Statements on Part 1, Item 1 of this Quarterly Report on Form 10-Q. - - New Page - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. General The following discussion and analysis by management focuses on those factors that had a material effect on LG&E's and KU's financial results of operations and financial condition during the three and six month periods ended June 30, 2004, and should be read in connection with the financial statements and notes thereto. Some of the following discussion may contain forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words "anticipate," "expect," "estimate," "objective," "possible," "potential" and similar expressions. Actual results may vary materially. Factors that could cause actual results to differ materially include: general economic conditions; business and competitive conditions in the energy industry; changes in federal or state legislation; unusual weather; actions by state or federal regulatory agencies; and other factors described from time to time in LG&E's and KU's reports to the SEC, including the Annual Reports on Form 10-K for the year ended December 31, 2003. Executive Summary LG&E's net income for the three months ended June 30, 2004 was $17.1 million ($9.4 million higher than the three months ended June 30, 2003). The increase was primarily related to higher electric revenues. Retail sales volumes increased due to warmer weather, while gas volumes decreased. KU's net income for the three months ended June 30, 2004, was $27.6 million ($13.4 million higher than the three months ended June 30, 2003). The increase was primarily due to higher electric revenues due to higher retail sales volumes resulting from warmer weather, partially offset by higher maintenance expense. LG&E's net income for the six months ended June 30, 2004 was $41.4 million ($6.4 million higher than the six months ended June 30, 2003). The increase was primarily related to higher electric revenues due to warmer weather. KU's net income for the six months ended June 30, 2004, was $60.0 million ($34.0 million higher than the six months ended June 30, 2003). The increase was primarily due to higher electric revenues and lower maintenance expense. As regulated utilities, LG&E and KU's financial performance is greatly impacted by regulatory proceedings. On June 30, 2004, the Kentucky Commission issued an order approving increases in the base rates of LG&E and KU. The rate increase took effect on July 1, 2004. In July 2004, the AG commenced an investigation examining communications between the Kentucky Commission and the Companies and separately, filed for a rehearing of the rate cases on such issue and certain calculation components of the increased rates. The Kentucky Commission ordered a reopening of the rate cases to take evidence in the communications issue. For a description of developments in these cases, see Note 11 of the Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10- Q. Results of Operations The results of operations for LG&E and KU are affected by fluctuations in temperature and other weather-related factors. Because of these and other factors, the results of one period are not necessarily indicative of results or trends to be expected for another period. - - New Page - Three Months Ended June 30, 2004, Compared to Three Months Ended June 30, 2003 LG&E Results: LG&E's net income increased $9.4 million (121%) for the three months ended June 30, 2004, as compared to the three months ended June 30, 2003, primarily due to higher retail electric revenues, partially offset by higher other operation expenses. A comparison of LG&E's revenues for the three months ended June 30, 2004, with the three months ended June 30, 2003, reflects increases and (decreases) which have been segregated by the following principal causes: Cause Electric Gas (in thousands) Revenues Revenues Retail sales: Fuel and gas supply adjustments $ 1,159 $ 7,751 Environmental cost recovery surcharge 5,513 - Earnings sharing mechanism 518 - LG&E/KU merger surcredit (947) - Variation in sales volume and other 17,303 (5,777) Total retail sales 23,546 1,974 Wholesale sales (4,026) 279 Provision for rate collections 1,017 - Other (1,888) (63) Total $ 18,649 $ 2,190 Electric revenues increased $18.6 million primarily as the result of an increase in sales volumes to ultimate consumers of 9.2%. The retail sales volume increase was due to warmer weather than the prior year as cooling degree days increased 89%. However, overall volumes decreased due to lower wholesale sales. Gas revenues increased $2.2 million primarily as a result of higher natural gas prices billed to customers through the gas supply clause partially offset by lower sales volumes to ultimate consumers due to warmer weather. The provision for rate collections increased $1.0 million, including a $3.4 million higher provision for the earnings sharing mechanism, offset by a $2.4 million lower provision for the environmental cost recovery surcharge. Fuel for electric generation and gas supply expenses comprise a large component of LG&E's total operating expenses. LG&E's electric and gas rates contain a fuel adjustment clause and a gas supply clause, respectively, whereby increases or decreases in the cost of fuel and gas supply are reflected in retail rates, subject to the approval of the Kentucky Commission. Fuel for electric generation increased $1.3 million (3%) for the three months ended due to an increase in the cost of coal burned ($2.0 million), partially offset by a decrease in generation ($0.7 million). Gas supply expenses increased $5.0 million (19%) due to an increase in net gas supply cost ($6.7 million), offset by a decrease in the volume of retail gas sold ($1.7 million). Other operation expenses increased $3.7 million (7%), as compared to 2003. An estimated $7.4 million was recorded in the second quarter of 2004 for costs incurred related to May 2004 storms. Results for 2003 included $1.1 million in cost to achieve amortization related to the KU/LG&E merger and the One Utility initiative, which ended June 30, 2003, and September 30, 2003, respectively. In addition, pension expense was $1.3 million lower and bad debt expense was $0.5 million lower in 2004. Maintenance expenses decreased $2.4 million (14%). A write-off of obsolete inventory of $1.1 million was included in 2003 and steam power generation was $0.7 million lower in 2004. Depreciation and amortization decreased $2.1 million (7%) due to a depreciation adjustment in the second quarter of 2003 related to assets capitalized in that period. - - New Page - Property and other taxes increased $1.6 million (47%). In June 2003, property taxes reflected a $1.2 million coal incentive tax credit. Variations in income tax expense are largely attributable to changes in pre- tax income. Three Months Three Months Ended Ended June 30, 2004 June 30, 2003 Effective Rate Statutory federal income tax rate 35.0% 35.0% State income taxes net of federal benefit 5.8 6.5 Amortization of investment tax credit & R&D (6.6) (9.5) Other differences 0.6 (2.2) Effective income tax rate 34.8% 29.8% The amortization of investment tax credit and other differences were approximately the same in both periods, but lower pretax income for the three months ended June 30, 2003, caused the percentage changes to be greater in the 2003 period. Interest charges decreased $0.6 million (10%) primarily due to the $ 1.0 million savings on interest expense realized from the refinancing of fixed- rate Series V and Series W pollution control bonds to the variable-rate Series GG pollution control bonds in November 2003. Interest expense to affiliated companies increased $1.7 million (130%) primarily due to a $2.2 million increase in interest expense to Fidelia related to new notes issued in August 2003 and January 2004. Offsetting this increase is a $0.5 million decrease in interest expense on borrowings from the money pool due to lower borrowing levels. The weighted average interest rate on variable-rate bonds for the three months ended June 30, 2004, was 1.07% and the corresponding rate for the three months ended June 30, 2003, was 1.15%. KU Results: KU's net income increased $13.4 million (95%) for the three months ended June 30, 2004, as compared to the three months ended June 30, 2003. The increase was primarily due to higher revenues related to higher sales volumes, partially offset by higher maintenance expense. A comparison of KU's revenues for the three months ended June 30, 2004, with the three months ended June 30, 2003, reflects increases and (decreases) which have been segregated by the following principal causes: Cause (in thousands) Retail sales: Fuel supply adjustments $(2,503) Environmental cost recovery surcharge 1,615 Earnings sharing mechanism 1,395 LG&E/KU merger surcredit (1,071) Variation in sales volume and other 16,967 Total retail sales 16,403 Wholesale sales 5,362 Provision for rate collections 11,694 Other 1,736 Total $35,195 - - New Page - Electric revenues increased $35.2 million primarily as the result of an increase in sales volumes to ultimate consumers of 11.3%. The sales volume increase was due to warmer weather than last year as cooling degree days increased 73%. Also contributing to higher revenues for the quarter were increases in the provision for rate collections and wholesale sales. The provision for rate collections included a $3.8 million higher provision for the earnings sharing mechanism, a $5.4 million higher provision related to the environmental cost recovery surcharge, and a $2.4 million higher provision related to the fuel adjustment clause. Fuel for electric generation comprises a large component of KU's total operating expenses. KU's electric rates contain a fuel adjustment clause, whereby increases or decreases in the cost of fuel are reflected in retail rates, subject to the approval of the Kentucky Commission, the Virginia State Corporation Commission, and the Federal Energy Regulatory Commission. Fuel for electric generation increased $8.0 million (13%) for the quarter because of an increase in generation ($8.1 million), partially offset by a slight decrease in the cost of coal burned ($0.1 million). Power purchased decreased $3.0 million (8%) due to a decrease in the price of power purchased ($1.7 million) and a decrease in the volume purchased ($1.3 million). Other operation expenses decreased $1.6 million (4%) as compared to 2003. Cost to achieve amortization for the KU/LG&E merger, which ended in June 2003, was $1.0 million in 2003. Maintenance expenses increased $9.6 million (130%). Maintenance expenses in 2003 were reduced by an $8.9 million insurance reimbursement received in the second quarter of 2003 for costs incurred in a February 2003 ice storm. Depreciation and amortization decreased $1.8 million (7%) because of a depreciation adjustment in the second quarter of 2003 related to assets capitalized that quarter. Variations in income tax expense are largely attributable to changes in pretax income. Three Months Three Months Ended Ended June 30, 2004 June 30, 2003 Effective Rate Statutory federal income tax rate 35.0% 35.0% State income taxes net of federal benefit 6.0 6.5 Amortization of investment tax credit & R&D (1.2) (3.1) Other differences (1.8) (4.6) Effective income tax rate 38.0% 33.8% The amortization of the investment tax credit and other differences were approximately the same in both periods, but lower pretax income for the three months ended June 30, 2003, caused the percentage change to be greater in the 2003 period. Interest expense decreased $2.9 million (44%) primarily due to $1.6 million in interest expense savings from the redemption of pollution control bonds Series Q at 6.32% and Series P at 8.55% redeemed in June and November of 2003, respectively. Additionally, interest rate swaps yielded a $1.2 million decrease in related interest expenses resulting primarily from the termination of a swap in February 2004 and better performance of the remaining swaps. Interest expense to affiliated companies increased $2.4 million (219%) primarily due to a $2.7 million increase in interest expense to Fidelia related to new notes issued in August 2003 through January 2004. Offsetting this increase is a $0.3 decrease in interest expense on borrowings from the money pool due to lower borrowing levels. The weighted average interest rate on variable-rate bonds for the three months ended June 30, 2004, was 1.11% and the corresponding rate for the three months ended June 30, 2003, was 1.14%. - - New Page - Six Months Ended June 30, 2004, Compared to Six Months Ended June 30, 2003 LG&E Results: LG&E's net income increased $6.4 million (18%) for the six months ended June 30, 2004, as compared to the six months ended June 30, 2003, primarily due to higher electric and gas revenues, partially offset by higher other operations expenses and higher interest expense. A comparison of LG&E's revenues for the six months ended June 30, 2004, with the six months ended June 30, 2003, reflects increases and (decreases) which have been segregated by the following principal causes: Cause Electric Gas (in thousands) Revenues Revenues Retail sales: Fuel and gas supply adjustments $(1,646) 45,381 Environmental cost recovery surcharge 7,911 - Earnings sharing mechanism 3,774 - LG&E/KU merger surcredit (1,418) - Weather normalization - 2,419 Variation in sales volume and other 15,998 (22,275) Total retail sales 24,619 25,525 Wholesale sales 8,091 1,034 Provision for rate refunds (2,982) - Other 151 (479) Total $29,879 $ 26,080 Electric revenues increased $29.9 million primarily because of increased sales volumes to ultimate consumers of 4.4% due to warmer weather than prior year as cooling degrees days increased 94%. Increased wholesale revenues and environmental cost recovery also contributed to the increase in revenues. Gas revenues increased $26.1 million primarily as a result of higher natural gas prices billed to customers, partially offset by lower sales volumes to ultimate consumers due to warmer weather. The provision for rate refunds decreased $3.0 million, primarily due to a $3.9 million lower provision related to the environmental cost recovery surcharge. Fuel for electric generation increased $4.4 million (5%) for the six months due to an increase in the cost of coal burned ($4.4 million) while generation volume was flat. Gas supply expenses increased $29.7 million (22%) due to an increase in net gas supply cost ($40.8 million), offset by a decrease in the volume of retail gas delivered to the distribution system ($11.1 million). Power purchased increased $4.8 million (12%) due to an increase in the price of power purchased ($1.0 million) and an increase in the volume of the purchases ($3.8 million). Other operations expenses increased $8.3 million (8%) in 2004, as compared to 2003, due to higher transmission expense of $3.5 million, primarily due to higher MISO-related expense, and $7.5 million higher electric distribution expense, due to the May 2004 storms. These higher expenses were partially offset by $2.9 million lower cost to achieve amortization related to the KU/LG&E merger and One Utility initiative, and $1.5 million lower benefits expense. Maintenance expenses decreased $2.8 million (9%). In 2003, $2.1 million in obsolete inventory was written off. - - New Page - Depreciation and amortization decreased $1.7 million (3%) because of a depreciation adjustment in the second quarter of 2003, related to assets capitalized in that period. Variations in income tax expense are largely attributable to changes in pre- tax income. Six Months Ended Six Months Ended June 30, 2004 June 30, 2003 Effective Rate Statutory federal income tax rate 35.0% 35.0% State income taxes net of federal benefit 5.7 5.8 Amortization of investment tax credit & R&D (4.3) (3.8) Other differences 0.2 (0.8) Effective income tax rate 36.6% 36.2% Property and other taxes increased $2.0 million (24%). Property taxes in 2003 reflected a $1.2 million coal incentive tax credit. Interest charges decreased $2.1 million (17%) primarily due to the $2.9 million savings of interest expense realized from the refinancing of fixed- rate Series V and Series W pollution control bonds into the variable-rate Series GG. Also, the redemption of the first mortgage bond in August 2003 contributed to the decrease in interest expense by $1.3 million. Offsetting these decreases is an increase of $1.9 million from interest rate swaps. Interest expense to affiliated companies increased $4.1 million (202%) primarily due to a $5.3 million increase in interest expense to Fidelia related to new notes issued in August 2003 and January 2004. Offsetting this increase is a $1.2 million decrease in interest expense on borrowings from the money pool due to lower borrowing levels. The weighted average interest rate on variable-rate bonds for the six months ended June 30, 2004 was 1.06%, compared to 1.19% for the comparable period in 2003. KU Results: KU's net income increased $34.0 million (131%) for the six months ended June 30, 2004, as compared to the six months ended June 30, 2003. The increase was primarily due to higher electric revenues and lower maintenance expense. A comparison of KU's revenues for the six months ended June 30, 2004, with the six months ended June 30, 2003, reflects increases and (decreases) which have been segregated by the following principal causes: Cause (in thousands) Retail sales: Environmental cost recovery surcharge $ 2,067 Earnings sharing mechanism 5,304 LG&E/KU merger surcredit (1,829) Variation in sales volume and other 19,541 Total retail sales 25,083 Wholesale sales 11,918 Provision for rate collections 15,863 Other 4,734 Total $57,598 - - New Page - Electric revenues increased $57.6 million primarily due to increased sales volumes to ultimate consumers of 6.1% due to warmer weather than last year as cooling degree days increased 75%. Also contributing to the overall revenue increase were increases in the provision for rate collections, wholesale revenues, and earnings sharing mechanism recoveries. The provision for rate collections included higher provisions for the environmental cost recovery ($10.4 million), the earngins sharing mechanism ($3.5 million) and the fuel adjustment clause ($2.0 million). Fuel for electric generation increased $11.6 million (9%) for the six months due to an increase in the cost of coal burned ($3.5 million) and an increase in generation ($8.1 million). Power purchased decreased $2.9 million (4%) due to a decrease in the price of power purchased ($5.4 million), partially offset by an increase in volumes purchased ($2.5 million). Other operation expenses decreased $2.0 million (3%). Cost to achieve amortization of $3.2 million related to the KU/LG&E merger and One Utility initiative was recorded in 2003 and was fully amortized as of June 2003. In 2004, benefits expense decreased $1.5 million and distribution expense decreased $0.7 million due to the February 2003 ice storm. These decreases were offset by higher emission allowance expense of $2.3 million and higher transmission expense of $1.1 million. Maintenance expenses decreased $7.5 million (21%). Steam power maintenance expense decreased $5.5 million; Ghent Unit 3, Green River Unit 4 and Tyrone Unit 3 all had major overhauls in 2003. Distribution maintenance decreased $1.3 million and transmission overhead line maintenance decreased $0.6 million in 2004 due to the February 2003 ice storm. Variations in income tax expense are largely attributable to changes in pretax income. Six Months Ended Six Months Ended June 30, 2004 June 30, 2003 Effective Rate Statutory federal income tax rate 35.0% 35.0% State income taxes net of federal benefit 5.9 6.7 Amortization of investment tax credit & R&D (1.1) (3.4) Other differences (1.7) (4.4) Effective income tax rate 38.1% 33.9% The amortization of the investment tax credit and other differences were approximately the same in both periods, but lower pretax income for the six months ended June 30, 2003, caused the percentage changes to be greater in the 2003 period. Interest expense decreased $6.7 million (60%) due primarily to the redemption of pollution control bonds Series P at 8.55% and Series Q at 6.32% redeemed in November and June of 2003, respectively. Additionally, interest rate swaps yielded a $2.8 million decrease in related interest expenses resulting primarily from the February termination of a swap related to the Series 9 pollution control bonds and better performance of remaining swaps. - - New Page - Interest expense to affiliated companies increased $5.6 million (377%) primarily due to a $6.1 million increase in interest expense to Fidelia related to new notes issued in August 2003 through January 2004. Offsetting this increase is a $0.5 million decrease in interest expense on borrowings from the money pool due to lower borrowing levels. The weighted average interest rate on variable-rate bonds for the six months ended June 30, 2004, was 1.08% and the corresponding rate for the six months ended June 30, 2003, was 1.16%. Liquidity and Capital Resources LG&E and KU's needs for capital funds are largely related to the construction of plant and equipment necessary to meet the needs of electric and gas utility customers. Internal and external lines of credit are maintained to fund short-term capital requirements. LG&E and KU believe that such sources of funds will be sufficient to meet the needs of the business in the foreseeable future. As of June 30, 2004, LG&E and KU are in a negative working capital position. The Companies expect to cover any deficiencies with cash flow from operations, money pool borrowings, and borrowings from Fidelia, an E.ON financing subsidiary. Construction expenditures for the six months ended June 30, 2004 for LG&E and KU amounted to $64.9 million and $76.3 million, respectively. Such expenditures include construction to meet nitrogen oxide (NOx) emission standards and the acquisition of combustion turbines to meet peak power demands. Expenditures for the six months ended June 30, 2004, by LG&E and KU for NOx construction were $5.6 million and $21.9 million, respectively. Expenditures for the six months ended June 30, 2004, for Trimble County combustion turbines, Units 7 through 10, by LG&E and KU were $5.5 million and $9.5 million, respectively. In addition, LG&E construction expenditures include $8.4 million for distribution overhead line construction, $5.8 million for Mill Creek Unit 3 ductwork installation related to the flue gas desulfurization ("FGD") project, and $5.3 million for gas main replacements. At KU, construction expenditures include $6.4 million for E.W. Brown Unit 3 cooling tower and precipitator rebuild and $6.0 million for distribution construction in the Lexington area. The expenditures were financed with internally generated funds and intercompany loans from affiliates. LG&E's cash balance increased $12.3 million during the six months ended June 30, 2004, primarily due to higher net income and increased net borrowings from affiliated companies, partially offset by pension funding, construction expenditures, and payment of common dividends to its parent company. KU's cash balance increased $4.9 million during the six months ended June 30, 2004. The increase reflects higher net income and increased net borrowings from affiliated companies, partially offset by pension funding, construction expenditures and the payment of common dividends to its parent company. Variations in accounts receivable, accounts payable and materials and supplies are generally not significant indicators of LG&E's and KU's liquidity. In general, such variations are usually attributable to seasonal fluctuations in weather, which have a direct effect on sales of electricity and natural gas. However, the increase in accounts receivable at LG&E and KU, as of June 30, 2004, was primarily due to the termination of the accounts receivable securitization programs in January 2004. Discontinuing the accounts receivable securitizations programs resulted in an increase in accounts receivable of $58.0 million at LG&E and by $50.0 million at KU. (LG&E and KU maintained a fully funded reserve for uncollectible accounts related to receivables sold during the securitization program.) The increase in accounts receivable at LG&E as of June 30, 2004 was somewhat offset by the impact of decreased gas sales in June 2004 compared to December 2003. The decrease in LG&E's gas stored underground relates to seasonal uses of gas. Interest rate swaps are used to hedge LG&E's and KU's underlying variable- rate debt obligations. These swaps hedge specific debt issuances and, consistent with management's designation, are accorded hedge accounting treatment. As of June 30, 2004, LG&E had swaps with a combined notional value of $228.3 million and KU had swaps with a combined notional value of $103.0 million. LG&E's swaps exchange floating-rate interest payments for fixed-rate interest payments to reduce the impact of interest rate changes on LG&E's pollution control bonds. KU's swaps effectively convert fixed- rate obligations on KU's first mortgage bonds Series P and R to variable- rate obligations. In February 2004, KU terminated the swap it had in place at December 31, 2003 related to its Series 9 pollution control bonds. The notional amount of the terminated swap was $50 million and KU received a payment of $2.0 million as part of the termination, resulting in a gain of $0.8 million. - - New Page - At June 30, 2004, variable rate debt, including the impact of interest rate swaps, was 36.9% of LG&E's total debt at $331.9 million and 45.7% of KU's total debt at $352.2 million. At December 31, 2003, variable rate debt, including the impact of interest rate swaps, was 44.0% of LG&E's total debt at $386.3 million and 55.5% of KU's total debt at $397.1 million. Under the provisions of LG&E's variable-rate pollution control bonds, Series S, T, U, BB, CC, DD and EE, and KU's variable-rate pollution control bonds Series 10, 12, 13, 14 and 15, the bonds are subject to tender for purchase at the option of the holder and to mandatory tender for purchase upon the occurrence of certain events, causing the bonds to be classified as current portion of long-term debt in the Consolidated Balance Sheets. The average annualized interest rate for these bonds during the six months ending June 30, 2004, was 1.10% for the LG&E bonds and 1.13% for the KU bonds. In January 2004, LG&E entered into two long-term notes with Fidelia, one totaling $25 million with an interest rate of 4.33% that matures in January 2012, and a one-year note totaling $100 million with an interest rate of 1.53%. The loans are secured by a lien subordinated to the first mortgage bond lien. The proceeds were used to fund a pension contribution and to repay other debt obligations. In April 2004, LG&E prepaid $50 million of the $100 million 1.53% note payable to Fidelia. The prepayment was paid out of cash balances and there was no prepayment fee. In January 2004, KU entered into an unsecured long-term loan from Fidelia totaling $50 million with an interest rate of 4.39% that matures in January 2012. The proceeds were used to fund a pension contribution and to repay other debt obligations. LG&E maintains five bilateral lines of credit with banks totaling $185 million that mature in 2005. There was no outstanding balance under these facilities at June 30, 2004. Management expects to renew these facilities as they expire. LG&E and KU participate in an intercompany money pool agreement wherein LG&E Energy and KU make funds available to LG&E at market-based rates (based on an index of highly rated commercial paper issues as of the prior month end) up to $400 million. Likewise, LG&E Energy and LG&E make funds available to KU at market-based rates up to $400 million. LG&E had $26.0 million in money pool loans from LG&E Energy (included in "Notes payable to affiliated companies") at an average rate of 1.04% at June 30, 2004, and $171.7 million at an average rate of 1.21% at June 30, 2003. The balance of the money pool loans from LG&E Energy to KU (included in "Notes payable to affiliated companies") was $53.2 million at an average rate of 1.04% and $146.4 million at an average rate of 1.21% at June 30, 2004 and 2003, respectively. The amount available to LG&E under the money pool agreement at June 30, 2004 was $374.0 million. The amount available to KU under the money pool agreement at June 30, 2004 was $346.8 million. LG&E Energy maintains a revolving credit facility totaling $150 million with an affiliate to ensure funding availability for the money pool. LG&E Energy had an outstanding balance of $69.7 million at an average rate of 1.79% under this facility as of June 30, 2004 and availability of $80.3 million remained. In January 2004, LG&E and KU made discretionary contributions to their pension plans of $34.5 million and $43.4 million, respectively. No contributions are required for 2004 and no further discretionary contributions are planned. LG&E's security ratings as of June 30, 2004, were: Moody's S&P First mortgage bonds A1 A- Preferred stock Baa1 BBB- Commercial paper P-1 A-2 - - New Page - KU's security ratings as of June 30, 2004, were: Moody's S&P First mortgage bonds A1 A Preferred stock Baa1 BBB- Commercial paper P-1 A-2 These ratings reflect the views of Moody's and S&P. A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating agency. LG&E's capitalization ratios at June 30, 2004, and December 31, 2003, follow: June 30, December 31, 2004 2003 Long-term debt (including current portion) 31.2% 31.9% Long-term debt to affiliated company (including current portion) 14.3 10.7 Notes payable to affiliated companies 1.4 4.3 Preferred stock 3.7 3.8 Common equity 49.4 49.3 Total 100.0% 100.0% KU's capitalization ratios at June 30, 2004, and December 31, 2003, follow: June 30, December 31, 2004 2003 Long-term debt (including current portion) 22.4% 24.1% Long-term debt to affiliated company (including current portion) 18.8 16.8 Notes payable to affiliated companies 3.0 2.6 Preferred stock 2.3 2.4 Common equity 53.5 54.1 Total 100.0% 100.0% New Accounting Pronouncements FIN 46 In January 2003, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46"). FIN 46 required certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for all new variable interest entities created or acquired after January 31, 2003. In December 2003, FIN 46 was revised, delaying the effective dates for certain entities created before February 1, 2003, and making other amendments to clarify application of the guidance. For potential variable interest entities other than special purpose entities, the revised FIN 46 ("FIN 46R") is now required to be applied no later than the end of the first fiscal year or interim reporting period ending after March 15, 2004. For all special purpose entities created prior to February 1, 2003, FIN 46R is now required to be applied at the end of the first interim or annual reporting period ending after December 15, 2003. FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date it is first applied, or by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46R also requires certain disclosures of an entity's relationship with variable interest entities. - - New Page - Both LG&E and KU hold investment interests in OVEC and KU holds an investment interest in EEI. Neither LG&E nor KU are the primary beneficiary of OVEC or EEI, and thus neither are consolidated into the financial statements of LG&E or KU. LG&E, KU and ten other electric utilities are participating owners of OVEC, located in Piketon, Ohio. OVEC owns and operates two power plants that burn coal to generate electricity, Kyger Creek Station in Ohio and Clifty Creek Station in Indiana. LG&E's share is 7%, representing approximately 155 Mw of generation capacity and KU's share is 2.5%, approximately 55 Mw of generation capacity. LG&E's and KU's original investments in OVEC were made in 1952. LG&E's investment in OVEC is the equivalent of 4.9% of OVEC's common stock and KU's investment is the equivalent of 2.5% of OVEC's common stock. LG&E's and KU's investments in OVEC are accounted for on the cost method of accounting. As of June 30, 2004, LG&E's and KU's investments in OVEC totaled $0.5 million and $0.3 million, respectively. LG&E's and KU's maximum exposure to loss as a result of their involvement with OVEC is limited to the value of their investment. In the event of the inability of OVEC to fulfill its power provision requirements, LG&E and KU would substitute such power supply with either owned generation or market purchases and would generally recover associated incremental costs through regulatory rate mechanisms. See Part II, Item 1, for further discussion of developments regarding LG&E's and KU's ownership interests and power purchase rights. KU owns 20% of the common stock of EEI, which owns and operates a 1,000-Mw generating station in southern Illinois. KU is entitled to take 20% of the available capacity of the station. Purchases from EEI are made under a contractual formula which has resulted in costs which were and are expected to be comparable to the cost of other power purchased or generated by KU. Such power equated to approximately 9% of KU's net generation system output in 2003. KU's original investment in EEI was made in 1953. KU's investment in EEI is accounted for on the equity method of accounting. As of June 30, 2004, KU's investment in EEI totaled $11.9 million. KU's maximum exposure to loss as a result of its involvement with EEI is limited to the value of its investment. In the event of the inability of EEI to fulfill its power provision requirements, KU would substitute such power supply with either owned generation or market purchases and would generally recover associated incremental costs through regulatory rate mechanisms. SFAS No. 150 In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 was effective immediately for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for interim reporting periods beginning after June 15, 2003. As of June 30, 2004, LG&E had 237,500 shares of $5.875 series mandatorily redeemable preferred stock outstanding having a current redemption price of $100 per share. The preferred stock has a sinking fund requirement sufficient to retire a minimum of 12,500 shares on July 15 of each year commencing with July 15, 2003, and the remaining 187,500 shares on July 15, 2008 at $100 per share. Beginning with the three months ended September 30, 2003, LG&E reclassified its $5.875 series preferred stock as long-term debt with the minimum shares mandatorily redeemable within one year classified as current. Dividends accrued beginning July 1, 2003 are charged as interest expense. KU has no financial instruments that fall within the scope of SFAS No. 150. - - New Page - FSP 106-2 In May 2004, the FASB finalized FASB Staff Position ("FSP") 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("Medicare Act") with guidance on accounting for subsidies provided under the Medicare Act which became law in December 2003. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. KU will adopt FSP 106-2 in the third quarter of 2004. LG&E's medical plan does not provide a benefit that is actuarially equivalent to Medicare Part D; therefore, FSP 106-2 is not expected to have an impact on LG&E. On the basis of actuarial estimates, the Medicare Act will result in an overall reduction of the accumulated postretirement benefit obligation ("APBO") for postretirement health and life insurance benefits for KU amounting to approximately $5.0 million as of January 1, 2004. Accordingly, KU's net periodic postretirement benefit cost for 2004 will be reduced by approximately $0.7 million. The APBO and the net periodic postretirement benefit cost as of and for the periods ending June 30, 2004 and 2003 do not reflect amounts associated with the subsidies provided by the Medicare Act. Contingencies For a description of significant contingencies that may affect LG&E and KU, reference is made to Part I, Item 3, Legal Proceedings in LG&E's and KU's Annual Reports on Form 10-K for the year ended December 31, 2003; Quarterly Report on Form 10-Q for the quarter ended March 31, 2004; and to Part II - Item 1, Legal Proceedings herein. Electric and Gas Rates Cases On June 30, 2004, the Kentucky Commission issued an order approving increases in the base electric and gas rates of LG&E and the base electric rates of KU. In July 2004, the AG commenced an investigation examining communications between the Kentucky Commission and the Companies and separately filed for a rehearing of the rate cases on such issue and certain calculation components of the increased rates. The Kentucky Commission ordered a procedural reopening of the rate cases for the limited purpose of taking evidence, if any, as to the communication issue. For a description of developments in these cases, see Note 11 of the Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q. Earnings Sharing Mechanism The Companies filed their final 2003 ESM calculations with the Kentucky Commission on March 1, 2004, and applied for recovery of $13.0 million related to LG&E and $16.2 million related to KU. Based upon estimates, the Companies previously accrued $8.9 million at LG&E and $9.3 million at KU for the 2003 ESM as of December 31, 2003. On June 30, 2004, the Kentucky Commission issued an order largely accepting proposed settlement agreements by the Companies and all intervenors regarding the ESM mechanisms of LG&E and KU. Under the ESM settlements, LG&E and KU will continue to collect approximately $13.0 million and $16.2 million, respectively, of previously requested 2003 ESM revenue amounts through March 2005. As part of the settlement, the parties agreed to a termination of the ESM mechanism relating to all periods after 2003. As a result of the settlement, the Company accrued an additional $4.1 million at LG&E and $6.9 million at KU in June 2004 related to 2003 ESM revenue. - - New Page - OVEC Power Agreement and Share Purchase On April 30, 2004, OVEC and its shareholders, including LG&E and KU, entered into an Amended and Restated Inter-Company Power Agreement, to be effective beginning March 2006, upon the expiration of the current power contract among the parties. Under the new contract, which has a 20-year term from its effective date, LG&E and KU have purchase rights for 5.63% and 2.5%, respectively, of OVEC power at marginal cost-based rates. LG&E and KU are entitled to 7% and 2.5% of OVEC power, respectively, under the current contract. LG&E's estimated future minimum annual demand payments under the Amended and Restated Inter-Company Agreement are as follows: (in thousands) 2006 $ 10,098 2007 9,726 2008 9,932 2009 10,144 2010 10,361 Thereafter 170,646 Total $220,907 In addition, LG&E will purchase from American Electric Power Company Inc. ("AEP") an additional 0.73% interest in OVEC for a purchase price of approximately $104,000, resulting in an increase in LG&E ownership in OVEC from 4.9% to 5.63%. The share purchase transaction is anticipated to be completed during the fourth quarter of 2004, subject to receipt of certain regulatory approvals. Owensboro Contract Litigation In May 2004, the City of Owensboro, Kentucky and Owensboro Municipal Utilities (collectively "OMU"), filed suit in Davies County, Kentucky District Court against KU concerning a long-term power supply contract (the "OMU Agreement") with KU. The dispute involves interpretational differences regarding certain issues under the OMU Agreement, including various payments or charges between KU and OMU and rights concerning excess power, termination and emissions allowances, respectively. The complaint seeks approximately $6 million in damages for historical periods, as well as injunctive and other relief, including a declaration that KU is in material breach. KU has removed this litigation to the U.S. District Court for the Western District of Kentucky and filed an answer in that court denying the OMU claims and presenting certain counterclaims. KU has also initiated a proceeding at the FERC to obtain the FERC's ruling on certain of the issues in dispute. Environmental Matters In September 1998, the EPA announced its final "NOx SIP Call" rule requiring states to impose significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport impacts on the Northeast region. The Commonwealth of Kentucky SIP, which was approved by EPA June 24, 2003, required reductions in NOx emissions from coal-fired generating units to the 0.15 lb./Mmbtu level on a system-wide basis. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule pursuant to Section 126 of the Clean Air Act directing similar NOx reductions from a number of specifically targeted generating units including all LG&E and KU units. As a result of appeals to both rules, the compliance date was extended to May 2004. LG&E and KU have complied with these NOx emissions reduction rules. LG&E and KU have added significant additional NOx controls to their generating units. Installation of additional NOx controls have been performed on a phased basis, with installation of controls which commenced in late 2000 and continued through the final compliance date. As of June 30, 2004, LG&E has incurred total capital costs of approximately $191 million to reduce its NOx emissions to the 0.15 lb./Mmbtu level on a company-wide basis. As of June 30, 2004, KU has incurred total capital costs of approximately $252 million to reduce its NOx emissions to the 0.15 lb./Mmbtu level on a company-wide basis. In addition, LG&E and KU have begun incurring additional operation and maintenance costs in operating new NOx controls. LG&E and KU believe their costs in this regard to be comparable to those of similarly situated utilities with like generation assets. In April 2001, the Kentucky Commission granted recovery of these costs under the environmental surcharge mechanism for LG&E and KU. - - New Page - LG&E and KU are also monitoring several other air quality issues which may potentially impact coal-fired power plants, including EPA's revised air quality standards for ozone and particulate matter, measures to implement EPA's regional haze rule, EPA's December 2003 proposals to regulate mercury emissions from steam electric generating units and to further reduce emissions of sulfur dioxide and nitrogen oxides under the Clean Air Interstate Rule. In addition, LG&E is currently working with local regulatory authorities to review the effectiveness of remedial measures aimed at controlling particulate matter emissions from its Mill Creek Station. LG&E previously settled a number of property damage claims from adjacent residents and completed significant remedial measures as part of its ongoing capital construction program. LG&E has converted the Mill Creek Station to a wet stack operation in an effort to resolve all outstanding issues related to particulate matter emissions. Item 3. Quantitative and Qualitative Disclosures About Market Risk. LG&E and KU, and their respective ratepayers, are exposed to market risks. Market risk exposures include changes in interest rates and commodity prices. To mitigate changes in cash flows attributable to these exposures, the Companies have entered into various derivative instruments. Derivative positions are monitored using techniques that include market value and sensitivity analysis. The Companies use interest rate swaps to hedge exposure to market fluctuations in certain of their debt instruments. Pursuant to the Companies' policies, use of these financial instruments is intended to mitigate risk and earnings volatility and is not speculative in nature. Management has designated all of the Companies' interest rate swaps as hedge instruments. Financial instruments designated as cash flow hedges have resulting gains and losses recorded within other comprehensive income and stockholders' equity. To the extent a financial instrument or the underlying item being hedged is prematurely terminated or the hedge becomes ineffective, the resulting gains or losses are reclassified from other comprehensive income to net income. Financial instruments designated as fair value hedges are periodically marked to market with the resulting gains and losses recorded directly into net income to correspond with income or expense recognized from changes in market value of the items being hedged. The potential change in interest expense associated with a 1% change in base interest rates of LG&E's and KU's unswapped debt is estimated at $3.3 million and $3.5 million, respectively, at June 30, 2004. LG&E's exposure to floating interest rates decreased $1.1 million and KU's exposure to floating interest rates decreased $1.0 million during the first six months of 2004. The potential loss in fair value of LG&E's interest rate swaps resulting from a hypothetical 1% change in base interest rates is estimated at approximately $23.6 million as of June 30, 2004. The potential loss in fair value of KU's interest rate swaps resulting from a hypothetical 1% change in base interest rates is estimated at approximately $4.3 million as of June 30, 2004. These estimates are derived from third-party valuations. Changes in the market values of these swaps, if held to maturity, will have no effect on LG&E's or KU's net income or cash flow. Pension Risk LG&E's and KU's costs of providing defined-benefit pension retirement plans is dependent upon a number of factors, such as the rates of return on plan assets, discount rate, and contributions made to the plan. At June 30, 2004, LG&E and KU have a minimum pension liability as prescribed by SFAS No. 87, Employers' Accounting for Pensions, in the pre-tax amounts of $47.6 - - New Page - and $9.9 million, respectively. The liabilities are recorded as a reduction to other comprehensive income, and do not affect net income. The amount of the liabilities depends upon the asset returns experienced in 2003 and contributions made by LG&E and KU to the plan during 2003. If the fair value of the plan assets exceeds the accumulated benefit obligation, the recorded liability will be reduced and other comprehensive income will be restored in the Consolidated Balance Sheets. A 1% increase or decrease in the assumed discount rate could have an approximate $41 million positive or negative impact to the accumulated benefit obligation of LG&E. A 1% increase or decrease in the assumed discount rate could have an approximate $27 million positive or negative impact to the accumulated benefit obligation of KU. In January 2004, LG&E and KU made contributions to their pension plans of $34.5 million and $43.4 million, respectively. Energy Trading & Risk Management Activities The table below summarizes LG&E's and KU's energy trading and risk management activities for the three months and six months ended June 30, 2004, and 2003(in thousands of $). Trading volumes are evenly divided between LG&E and KU. Three Months Six Months Ended Ended June 30, June 30, 2004 2003 2004 2003 Fair value of contracts at beginning of period, net asset/(liability) $ 603 $ 403 $ 572 $(156) Fair value of contracts when entered into during the period (5) - (5) 2,620 Contracts realized or otherwise settled during the period (82) (226) (232) (283) Changes in fair value due to changes in assumptions 25 141 206 (1,863) Fair value of contracts at end of period, net asset $ 541 $ 318 $ 541 $ 318 No changes to valuation techniques for energy trading and risk management activities occurred during 2004 or 2003. Changes in market pricing, interest rate and volatility assumptions were made during all periods. All contracts outstanding at June 30, 2004, have a maturity of less than one year and are valued using prices actively quoted for proposed or executed transactions or quoted by brokers. LG&E and KU maintain policies intended to minimize credit risk and revalue credit exposures daily to monitor compliance with those policies. As of June 30, 2004, 98.9% of the trading and risk management commitments were with counterparties rated BBB-/Baa3 equivalent or better. Item 4. Controls and Procedures. LG&E and KU maintain a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Companies in reports they file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission rules and forms. LG&E and KU conducted an evaluation of such controls and procedures under the supervision and with the participation of the Companies' - - New Page - management, including the Chairman, President and Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"). Based upon that evaluation, the CEO and CFO have concluded that the Companies' disclosure controls and procedures are effective as of the end of the period covered by this report. There has been no change in the Companies' internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2004, that has materially affected, or is reasonably likely to materially affect, the Companies' internal control over financial reporting. Part II. Other Information Item 1. Legal Proceedings. For a description of the significant legal proceedings involving LG&E and KU, reference is made to the information under the following items and captions of (a) LG&E's and KU's respective combined Annual Report on Form 10-K for the year ended December 31, 2003: Item 1, Business; Item 3, Legal Proceedings; Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data and (b) LG&E's and KU's Quarterly Report on Form 10-Q for the period ended March 31, 2004: Item I, Legal Proceedings. Except as described herein, to date, the proceedings reported in LG&E's and KU's respective combined Annual Report on Form 10-K or Quarterly Reports on Form 10-Q have not changed materially. Electric and Gas Rates Cases On June 30, 2004, the Kentucky Commission issued an order approving increases in the base electric and gas rates of LG&E and the base electric rates of KU. In July 2004, the AG commenced an investigation examining communications between the Kentucky Commission and the Companies and separately filed for a rehearing of the rate cases on such issue and certain calculation components of the increased rates. The Kentucky Commission ordered a procedural reopening of the rate cases for the limited purpose of taking evidence, if any, as to the communication issue. For a description of developments in these cases, see Note 11 of the Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q. MISO During March and April 2004, the Kentucky Commission held hearings in the proceedings examining the cost and benefits of MISO membership. In July 2004, the Kentucky Commission reopened the matter for further testimony and hearings on recently-filed MISO energy market tariffs and analysis of potential membership in other Regional Transmission Organizations. Proceedings in this matter are anticipated to continue into 2005. OVEC Power Agreement and Share Purchase On April 30, 2004, OVEC and its shareholders, including LG&E and KU, entered into an Amended and Restated Inter-Company Power Agreement, to be effective beginning March 2006, upon the expiration of the current power contract among the parties. Under the new contract, which has a 20-year term from its effective date, LG&E and KU have purchase rights for 5.63% and 2.5%, respectively, of OVEC power at marginal cost-based rates. LG&E and KU are entitled to 7% and 2.5% of OVEC power, respectively, under the current contract. In addition, LG&E will purchase from American Electric Power Company Inc. ("AEP") an additional 0.73% interest in OVEC for a purchase price of approximately $104,000, resulting in an increase in LG&E ownership in OVEC from 4.9% to 5.63%. The share purchase transaction is anticipated to be completed during the fourth quarter of 2004, subject to receipt of certain regulatory approvals. - - New Page - Owensboro Contract Litigation In May 2004, the City of Owensboro, Kentucky and Owensboro Municipal Utilities (collectively "OMU"), filed suit in Davies County, Kentucky District Court against KU concerning a long-term power supply contract (the "OMU Agreement") with KU. The dispute involves interpretational differences regarding certain issues under the OMU Agreement, including various payments or charges between KU and OMU and rights concerning excess power, termination and emissions allowances, respectively. The complaint seeks approximately $6 million in damages for historical periods, as well as injunctive and other relief, including a declaration that KU is in material breach. KU has removed this litigation to the U.S. District Court for the Western District of Kentucky and filed an answer in that court denying the OMU claims and presenting certain counterclaims. KU has also initiated a proceeding at the FERC to obtain the FERC's ruling on certain of the issues in dispute. Item 6. Exhibits and Reports on Form 8-K. 6(a) Applicable to Form 10-Q of Exhibit No. LG&E KU Description 10.01 X X Copy of Amended and restated inter-company power agreement dated as of March 13, 2006, among Ohio Valley Electric Corporation and sponsoring companies, including LG&E and KU. 10.02 X X Copy of Fourth Amendment dated as of February 1, 2004 to Employment and Severance Agreement dated as of February 25, 2000 by and among E.ON AG, LG&E Energy, Powergen and Victor A. Staffieri. 10.03 X X Copy of Modification No. 15, dated as of April 30, 2004, to Inter-Company Power Agreement dated July 10, 1953 among Ohio Valley Electric Corporation and Sponsoring Companies. 31 X X Certification - Section 302 of Sarbanes-Oxley Act of 2002 31.1 X Certification of Chairman of the Board, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 X Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.3 X Certification of Chairman of the Board, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.4 X Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 X X Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certain instruments defining the rights of holders of certain long-term debt of LG&E and KU have not been filed with the SEC but will be furnished to the SEC upon request. 6(b). Reports on Form 8-K. On July 1, 2004, LG&E and KU filed a Current Report on Form 8-K describing the June 30, 2004, order of the Kentucky Commission regarding increases in their base rates. - - New Page - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Louisville Gas and Electric Company Registrant Date: August 13, 2004 /s/ S. Bradford Rives S. Bradford Rives Chief Financial Officer (On behalf of the registrant in his capacities as Principal Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Kentucky Utilities Company Registrant Date: August 13, 2004 /s/ S. Bradford Rives S. Bradford Rives Chief Financial Officer (On behalf of the registrant in his capacities as Principal Financial Officer and Principal Accounting Officer) - - New Page - Exhibit 31 - CERTIFICATIONS Exhibit 31.1 Louisville Gas and Electric Company I, Victor A. Staffieri, Chairman of the Board, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Louisville Gas and Electric Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2004 /s/ Victor A. Staffieri Victor A. Staffieri Chairman of the Board, President and Chief Executive Officer - - New Page - Exhibit 31.2 Louisville Gas and Electric Company I, S. Bradford Rives, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Louisville Gas and Electric Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2004 /s/ S. Bradford Rives S. Bradford Rives Chief Financial Officer - - New Page - Exhibit 31.3 Kentucky Utilities Company I, Victor A. Staffieri, Chairman of the Board, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Kentucky Utilities Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2004 /s/ Victor A. Staffieri Victor A. Staffieri Chairman of the Board, President and Chief Executive Officer - - New Page - Exhibit 31.4 Kentucky Utilities Company I, S. Bradford Rives, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Kentucky Utilities Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2004 /s/ S. Bradford Rives S. Bradford Rives, Chief Financial Officer - - New Page - Exhibit 32 Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Louisville Gas and Electric Company and Kentucky Utilities Company (the "Companies") on Form 10-Q for the period ended June 30, 2004, as filed with the Securities and Exchange Commission (the "Report"), each of the undersigned does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge, 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Companies as of the dates and for the period expressed in the Report. August 13, 2004 /s/ Victor A. Staffieri Chairman of the Board, President and Chief Executive Officer Louisville Gas and Electric Company Kentucky Utilities Company /s/ S. Bradford Rives Chief Financial Officer Louisville Gas and Electric Company Kentucky Utilities Company The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. EX-10 2 q10q0604ex1001.txt AMENDED AND RESTATE INTER-COMPANY POWER AGREEMENTS AMENDED AND RESTATED INTER-COMPANY POWER AGREEMENT DATED AS OF MARCH 13, 2006 AMONG OHIO VALLEY ELECTRIC CORPORATION, ALLEGHENY ENERGY SUPPLY COMPANY, LLC APPALACHIAN POWER COMPANY, THE CINCINNATI GAS & ELECTRIC COMPANY, COLUMBUS SOUTHERN POWER COMPANY, THE DAYTON POWER AND LIGHT COMPANY, FIRSTENERGY GENERATION CORP., INDIANA MICHIGAN POWER COMPANY, KENTUCKY UTILITIES COMPANY, LOUISVILLE GAS AND ELECTRIC COMPANY, MONONGAHELA POWER COMPANY, OHIO POWER COMPANY, and SOUTHERN INDIANA GAS AND ELECTRIC COMPANY AMENDED AND RESTATED INTER-COMPANY POWER AGREEMENT THIS AGREEMENT, dated as of March 13, 2006, by and among Ohio Valley Electric Corporation (herein called OVEC), Allegheny Energy Supply Company, LLC (herein called Allegheny), Appalachian Power Company (herein called Appalachian), The Cincinnati Gas & Electric Company (herein called Cincinnati), Columbus Southern Power Company (herein called Columbus), The Dayton Power and Light Company (herein called Dayton), FIRSTENERGY GENERATION CORP. (herein called FirstEnergy), Indiana Michigan Power Company (herein called Indiana), Kentucky Utilities Company (herein called Kentucky), Louisville Gas and Electric Company (herein called Louisville), Monongahela Power Company (herein called Monongahela), Ohio Power Company (herein called Ohio Power), and Southern Indiana Gas and Electric Company (herein called Southern Indiana, and all of the foregoing, other than OVEC, being herein sometimes collectively referred to as the Sponsoring Companies and individually as a Sponsoring Company) hereby amends and restates in its entirety, the Inter-Company Power Agreement dated as of July 10, 1953 as amended from time to time (herein called the Original Agreement), by and among OVEC, Appalachian, Cincinnati, Columbus, Dayton, Indiana, Kentucky, Louisville, Monongahela Ohio Edison Company, Ohio Power, Pennsylvania Power Company, The Potomac Edison Company, Southern Indiana, The Toledo Edison Company and West Penn Power Company. Witnesseth That: Whereas, the Original Agreement was amended by Modification No. 1, dated as of June 3, 1966; Modification No. 2, dated as of January 7, 1967; Modification No. 3, dated as of November 15, 1967; Modification No. 4, dated as of November 5, 1975; Modification No. 5, dated as of September 1, 1979; Modification No. 6, dated as of August 1, 1981; Modification No. 7, dated as of January 15, 1992; Modification No. 8, dated as of January 19, 1994; Modification No. 9, dated as of August 17, 1995; Modification No. 10, dated as of January 1, 1998; Modification No. 11, dated as of April 1, 1999; Modification No. 12, dated as of November 1, 1999; Modification No. 13, dated as of May 24, 2000; Modification No. 14, dated as of April 1, 2001; and Modification No. 15, dated as of April 30, 2004 (the Modifications); and Whereas, OVEC designed, purchased, and constructed, and continues to operate and maintain two steam-electric generating stations, one station (herein called Ohio Station) consisting of five turbo-generators and all other necessary equipment, at a location on the Ohio River near Cheshire, Ohio, and the other station (herein called Indiana Station) consisting of six turbogenerators and all other necessary equipment, at a location on the Ohio River near Madison, Indiana, (the Ohio Station and the Indiana Station being herein called the Project Generating Stations); and Whereas, OVEC also designed, purchased, and constructed, and continues to operate and maintain necessary transmission and general plant facilities (herein called the Project Transmission Facilities) and OVEC established or cause to be established interconnections between the Project Generating Stations and the systems of certain of the Sponsoring Companies; and Whereas, OVEC entered into an agreement, attached hereto as Exhibit A, with Indiana-Kentucky Electric Corporation (herein called IKEC), a corporation organized under the laws of the State of Indiana as a wholly owned subsidiary corporation of OVEC, which has been amended and restated as of the date of this Agreement and embodies the terms and conditions for the ownership and operation by IKEC of the Indiana Station and such portion of the Project Transmission Facilities which are to be owned and operated by it; and Whereas, transmission facilities were constructed by certain of the Sponsoring Companies to interconnect the systems of such Sponsoring Companies, directly or indirectly, with the Project Generating Stations and/or the Project Transmission Facilities, and the Sponsoring Companies have agreed to pay for Available Power, as hereinafter defined, as may be available at the Project Generating Stations; and Whereas, pursuant to East Central Area Reliability Group ("ECAR") Document No. 2, entitled DAILY OPERATING RESERVE, as revised August 8, 1996 ("ECAR Document No. 2"), Corporation is required to have available spinning reserve equal to a percentage of its internal load as well as supplemental reserve equal to a percentage of its internal load, which supplemental reserve is expected to be provided by the Sponsoring Companies in proportion to their respective Power Participation Ratios as defined in subsection 1.0120; and Whereas, the parties hereto desire to amend and restate in their entirety, the Original Agreement and all of the Modifications, to define the terms and conditions governing the rights of the Sponsoring Companies to receive Available Power from the Project Generating Stations and the obligations of the Sponsoring Companies to pay therefor. Now, Therefore, the parties hereto agree with each other as follows: ARTICLE 1 Definitions 1.01. For the purposes of this Agreement, the following terms, wherever used herein, shall have the following meanings: 1.011 "Affiliate" means, with respect to a specified person, any other person that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, such specified person; provided that "control" for these purposes means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. 1.012 "Arbitration Board" has the meaning set forth in Section 9.10. 1.013 "Available Energy" of the Project Generating Stations means the energy associated with Available Power. 1.014 "Available Power" of the Project Generating Stations at any particular time means the total net kilowatts at the 345-kV busses of the Project Generating Stations which Corporation in its sole discretion will determine that the Project Generating Stations will be capable of safely delivering under conditions then prevailing, including all conditions affecting capability. 1.015 "Corporation" means OVEC, IKEC, and all other subsidiary corporations of OVEC. 1.016 "Decommissioning and Demolition Obligation" has the meaning set forth in Section 5.03(f) hereof. 1.017 "ECAR Emergency Energy" means energy sold by Corporation from its Spinning Reserve during an ECAR Reserve Sharing Period. 1.018 "ECAR Reserve Sharing Period" means any period of time during which any control area within ECAR ("ECAR Member") is experiencing a system contingency which requires implementation of ECAR's reserve sharing procedures. 1.019 "Effective Date" means March 13, 2006, or to the extent necessary, such later date on which Corporation notifies the Sponsoring Companies that all conditions to effectiveness, including all required waiting periods and all required regulatory acceptances or approvals, of this Agreement have been satisfied in form and substance satisfactory to the Corporation. 1.0110 "Election Period" has the meaning set forth in Section 9.183(a) hereof. 1.0111 "Minimum Generating Unit Output" means 80 MW (net) for each of the Corporation's generation units; provided that such "Minimum Generating Unit Output" shall be confirmed from time to time by operating tests on the Corporation's generation units and shall be adjusted by the Operating Committee as appropriate following such tests. 1.0112 "Minimum Loading Event" means a period of time during which one or more of the Corporation's generation units are operating at below the Minimum Generating Output as a result of the Sponsoring Companies' failure to schedule and take delivery of sufficient Available Energy. 1.0113 "Minimum Loading Event Costs" means the sum of the following costs caused by one or more Minimum Loading Events: (i) the actual costs of any of the Corporation's generating units burning fuel oil; and (ii) the estimated actual additional costs to the Corporation resulting from Minimum Loading Events, including without limitation the incremental costs of additional emissions allowances, reflected in the schedule of charges prepared by the Operating Committee and in effect as of the commencement of any Minimum Loading Event, which schedule may be adjusted from time to time as necessary by the Operating Committee. 1.0114 "Month" means a calendar month. 1.0115 "Nominal Power Available" means an individual Sponsoring Company's Power Participation Ratio share of the Corporation's current estimate of the maximum amount of Available Power available for delivery at any given time. 1.0116 "Offer Notice" means the notice required to be given to the other Sponsoring Companies by a Transferring Sponsor offering to sell all or a portion of such Transferring Sponsor's rights, title and interests in, and obligations under this Agreement. At a minimum, the Offer Notice shall be in writing and shall contain (i) the rights, title and interests in, and obligations under this Agreement that the Transferring Sponsor proposes to Transfer; and (ii) the cash purchase price and any other material terms and conditions of such proposed transfer. An Offer Notice may not contain terms or conditions requiring the purchase of any non-OVEC interests. 1.0117 "OVEC Emergency Energy" means energy purchased by Corporation during an ECAR Reserve Sharing Period pursuant to the provisions of ECAR Document No. 2. 1.0118 "Permitted Assignee" means a person that is (a) a Sponsoring Company or its Affiliate whose long-term unsecured non- credit enhanced indebtedness, as of the date of such assignment, has a Standard & Poor's credit rating of at least BBB- and a Moody's Investors Service, Inc. credit rating of at least Baa3 (provided that, if the proposed assignee's long-term unsecured non-credit enhanced indebtedness is not currently rated by one of Standard & Poor's or Moody, such assignee's long-term unsecured non-credit enhanced indebtedness, as of the date of such assignment, must have either a Standard & Poor's credit rating of at least BBB- or a Moody's Investors Service, Inc. credit rating of at least Baa3); or (b) a Sponsoring Company or its Affiliate that does not meet the criteria in subsection (a) above, if the Sponsoring Company or its Affiliate that is assigning its rights, title and interests in, and obligations under, this Agreement agrees in writing (in form and substance satisfactory to Corporation) to remain obligated to satisfy all of the obligations related to the assigned rights, title and interests to the extent such obligations are not satisfied by the assignee of such rights, title and interests; provided that, in no event shall a person be deemed a "Permitted Assignee" if counsel for the Corporation reasonably determines that the assignment of the rights, title or interests in, or obligations under, this Agreement to such person could cause a termination, default, loss or payment obligation under any security issued, or agreement entered into, by the Corporation prior to such transfer. 1.0119 "Postretirement Benefit Obligation" has the meaning set forth in Section 5.03(e) hereof. 1.0120 "Power Participation Ratio" as applied to each of the Sponsoring Companies refers to the percentage set forth opposite its respective name in the tabulation below: Company Power Participation Ratio-Percent Allegheny 9.00 Appalachian 15.69 Cincinnati 9.00 Columbus 4.44 Dayton 4.90 FirstEnergy 20.50 Indiana 7.85 Kentucky 2.50 Louisville 5.63 Monongahela 3.50 Ohio Power 15.49 Southern Indiana 1.50 ----- Total 100.0 1.0121 "Spinning Reserve" means unloaded generation which is synchronized and ready to serve additional demand within ten minutes. 1.0122 "Supplemental Reserve" means a combination of spinning reserve, qualified interruptible load, qualified quick-start generating capacity or pre-scheduled assistance from another system which can be fully utilized within ten minutes. 1.0123 "Third Party" means any person other than a Sponsoring Company or its Affiliate. 1.0124 "Total Minimum Generating Output" means the product of the Minimum Generating Unit Output times the number of the Corporation's generation units available for service at that time. 1.0125 "Transferring Sponsor" has the meaning set forth in Section 9.183(a) hereof. 1.0126 "Uniform System of Accounts" means the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission as in effect on January 1, 2004. ARTICLE 2 Transmission Facilities 2.01. Limited Burdening of Corporation's Transmission Facilities. Transmission facilities owned by the Corporation, including the Project Transmission Facilities, shall not be burdened by power and energy flows of any Sponsoring Company to an extent which would impair or prevent the transmission of Available Power, ECAR Emergency Energy or OVEC Emergency Energy. ARTICLE 3 ECAR and OVEC Emergency Energy 3.01. In order to enable Corporation to fulfill its obligation under ECAR Document No. 2 to maintain Supplemental Reserve equal to a percentage of Corporation's internal load, each Sponsoring Company shall stand ready to supply its Power Participation Ratio of OVEC's Supplemental Reserve obligation to other members of ECAR during any ECAR Reserve Sharing Period. It is understood, however, that the amount which each Sponsoring Company may charge for its share of such Supplemental Reserve shall be such Sponsoring Company's FERC filed emergency energy charge. 3.02. In order to enable Corporation to fulfill its obligation under ECAR Document No. 2 to provide some or all of the energy available from OVEC's Spinning Reserve to an ECAR Member which is in need of ECAR Emergency Energy, the Sponsoring Companies shall stand ready to purchase from Corporation the energy available from its Spinning Reserve, or any portion thereof, for their own emergency use or for resale to or for another ECAR Member which is experiencing an emergency and shall also stand ready to transmit such energy to or for another ECAR Member which is experiencing an emergency. 3.03. In the event that Corporation is required to purchase, and pay other entities for, OVEC Emergency Energy, each Sponsoring Company shall pay its share, in accordance with its Power Participation Ratio, of the full amount paid by Corporation for OVEC Emergency Energy in accordance with the applicable FERC filed emergency energy charge; provided, however, that Corporation shall credit any payments which Corporation owes to any Sponsoring Company for ECAR Emergency Energy against the amounts otherwise payable by such Sponsoring Company for OVEC Emergency Energy. ARTICLE 4 Available Power Supply 4.01. Operation of Project Generating Stations. Corporation shall operate and maintain the Project Generating Stations in a manner consistent with safe, prudent, and efficient operating practice so that the Available Power available from said stations shall be at the highest practicable level attainable consistent with OVEC's obligations under ECAR Document No. 2 throughout the term of this Agreement. 4.02. Available Power Entitlement. The Sponsoring Companies collectively shall be entitled to take from Corporation and Corporation shall be obligated to supply to the Sponsoring Companies any and all Available Power and Available Energy pursuant to the provisions of this Agreement. Each Sponsoring Company's Available Power Entitlement hereunder shall be its Power Participation Ratio, as defined in subsection 1.0120, of Available Power. 4.03. Available Energy. Corporation shall make Available Energy available to each Sponsoring Company in proportion to said Sponsoring Company's Power Participation Ratio. No Sponsoring Company, however, shall be obligated to avail itself of any Available Energy. Available Energy shall be scheduled and taken by the Sponsoring Companies in accordance with the following procedures: 4.031 Each Sponsoring Company shall schedule the delivery of all or any portion (in whole MW increments) of its entitlement to Available Energy in accordance with scheduling procedures established by the Operating Committee from time to time. 4.032 In the event that any Sponsoring Company does not schedule the delivery of all of its Power Participation Ratio share of Available Energy, then each such other Sponsoring Company may schedule the delivery of all or any portion (in whole MW increments) of any such unscheduled share of Available Energy (through successive allotments if necessary) in proportion to their Power Participation Ratios. 4.033 Notwithstanding any Available Energy schedules made in accordance with this Section 4.03 and the applicable scheduling procedures, (i) the Corporation shall adjust all schedules to the extent that the Corporation's actual generation output is less than or more than the expected Nominal Power Available to all Sponsoring Companies; and (ii) immediately following a Minimum Loading Event, any Sponsoring Company causing (in whole or part) such Minimum Loading Event shall have its Available Energy schedules increased after the schedules of the Sponsoring Companies not causing such Minimum Load Event, in accordance with the estimated ramp rates associated with the shutdown and start- up of the Corporation's generation units as reflected in the schedules prepared by the Operating Committee and in effect as of the commencement of any Minimum Loading Event, which schedules may be adjusted from time to time as necessary by the Operating Committee. 4.034 Each Sponsoring Company availing itself of Available Energy shall be entitled to an amount of energy (herein called billing kilowatt-hours of Available Energy) equal to its portion, determined as provided in this Section 4.03, of the total Available Energy after deducting therefrom such Sponsoring Company's proportionate share, as defined in this Section 4.03, of all losses as determined by the Operating Committee which would be incurred in transmitting the total of such Available Energy from the 345-kV busses of the Project Generating Stations to the applicable delivery points, as scheduled pursuant to Section 9.01, of all Sponsoring Companies availing themselves of Available Energy. The proportionate share of all such losses that shall be so deducted from such Sponsoring Company's portion of Available Energy shall be equal to all such losses multiplied by the ratio of such portion of Available Energy to the total of such Available Energy. Each Sponsoring Company shall have the right, pursuant to this Section 4.03, to avail itself of Available Energy for the purpose of meeting the loads of its own system and/or of supplying energy to other systems in accordance with agreements, other than this Agreement, to which such Sponsoring Company is a party. 4.035 To the extent that, as a result of the failure by one or more Sponsoring Companies to take its respective Power Participation Ratio share of the applicable Total Minimum Generating Output during any hour, a Minimum Loading Event shall occur, then such one or more Sponsoring Companies shall be assessed charges for any Minimum Loading Event Costs in accordance with Section 5.05. ARTICLE 5 Charges for Available Power, ECAR and OVEC Emergency Energy, and Minimum Loading Event Costs 5.01. Total Monthly Charge. The amount to be paid to Corporation each month by the Sponsoring Companies for Available Power and Available Energy supplied under this Agreement shall consist of the sum of an energy charge, a demand charge and, if applicable, an emergency energy charge, all determined as set forth in this Article 5. 5.02. Energy Charge. The energy charge to be paid each month by the Sponsoring Companies for Available Energy shall be determined by Corporation as follows: 5.021 Determine the aggregate of all expenses for fuel incurred in the operation of the Project Generating Stations, in accordance with Account 501 (Fuel), Account 506.5 (Variable Reagent Costs Associated With Pollution Control Facilities) and 509 (Allowances) of the Uniform System of Accounts. 5.022 Determine for such month the difference between the total cost of fuel as described in subsection 5.021 above and the sum of (i) the total cost of fuel used to generate ECAR Emergency Energy, and (ii) the total cost of fuel included in any Minimum Loading Event Costs payable to the Corporation for such month pursuant to Section 8.04. For the purposes hereof the difference so determined shall be the fuel cost allocable for such month to the total kilowatt-hours of energy generated at the Project Generating Stations for the supply of Available Energy. For Available Energy availed of by the Sponsoring Companies, each Sponsoring Company shall pay Corporation for each such month an amount obtained by multiplying the ratio of the billing kilowatt- hours of such Available Energy availed of by such Sponsoring Company during such month to the aggregate of the billing kilowatt-hours of all Available Energy availed of by all Sponsoring Companies during such month times the total cost of fuel as described in this subsection 5.022 for such month. 5.03. Demand Charge. During the period commencing with the Effective Date and for the remainder of the term of this Agreement, demand charges payable by the Sponsoring Companies to Corporation shall be determined by the Corporation as provided below in this Section 5.03. Each Sponsoring Company's share of the aggregate demand charges shall be the percentage of such charges represented by its Power Participation Ratio. The aggregate demand charge payable each month by the Sponsoring Companies to Corporation shall be equal to the total costs incurred for such month by Corporation resulting from its ownership, operation, and maintenance of the Project Generating Stations and Project Transmission Facilities determined as follows: As soon as practicable after the close of each calendar month the following components of costs of Corporation (eliminating any duplication of costs which might otherwise be reflected among the corporate entities comprising Corporation) applicable for such month to the ownership, operation and maintenance of the Project Generating Stations and the Project Transmission Facilities, including additional facilities and/or spare parts (such as fuel processing plants, flue gas or waste product processing facilities, and facilities reasonably required to enable the Corporation to limit the emission of pollutants or the discharge of wastes in compliance with governmental requirements) and replacements necessary or desirable to keep the Project Generating Stations and the Project Transmission Facilities in a dependable and efficient operating condition, and any provision for any taxes that may be applicable to such charges, to be determined and recorded in the following manner: (a) Component (A) shall consist of fixed charges made up of (i) the amounts of interest properly chargeable to Accounts 427, 430 and 431, less the amount thereof credited to Account 432, of the Uniform System of Accounts, including the interest component of any purchase price, interest, rental or other payment under an installment sale, loan, lease or similar agreement relating to the purchase, lease or acquisition by Corporation of additional facilities and replacements (whether or not such interest or other amounts have come due or are actually payable during such Month), (ii) the amounts of amortization of debt discount or premium and expenses properly chargeable to Accounts 428 and 429, and (iii) an amount equal to the sum of (I) the applicable amount of the debt amortization component for such month required to retire the total amount of indebtedness of Corporation issued and outstanding, (II) the amortization requirement for such month in respect of indebtedness of Corporation incurred in respect of additional facilities and replacements, and (III) to the extent not provided for pursuant to clause (II) of this clause (iii), an appropriate allowance for depreciation of additional facilities and replacements. (b) Component (B) shall consist of the total operating expenses for labor, maintenance, materials, supplies, services, insurance, administrative and general expense, etc., properly chargeable to the Operation and Maintenance Expense Accounts of the Uniform System of Accounts (exclusive of Accounts 501, 509, 555, 911, 912, 913, 916, and 917 of the Uniform System of Accounts), minus the total of all non-fuel costs included in any Minimum Loading Event Costs payable to the Corporation for such month pursuant to Section 8.04, and plus any additional amounts which, after provision for all income taxes on such amounts (which shall be included in Component (C) below), shall equal any amounts paid or payable by Corporation as fines or penalties with respect to occasions where it is asserted that Corporation failed to comply with a law or regulation relating to the emission of pollutants or the discharge of wastes. (c) Component (C) shall consist of the total expenses for taxes, including all taxes on income but excluding any federal income taxes arising from payments to Corporation under Component (D) below, and all operating or other costs or expenses, net of income, not included or specifically excluded in Components (A) or (B) above, including tax adjustments, regulatory adjustments, net losses for the disposition of property and other net costs or expenses associated with the operation of a utility. (d) Component (D) shall consist of an amount equal to the product of $2.089 multiplied by the total number of shares of capital stock of the par value of $100 per share of Ohio Valley Electric Corporation which shall have been issued and which are outstanding on the last day of such month. (e) Component (E) shall consist of an amount to be sufficient to pay the costs and other expenses relating to the establishment, maintenance and administration of life insurance, medical insurance and other postretirement benefits other than pensions attributable to the employment and employee service of active employees, retirees, or other employees, including without limitation any premiums due or expected to become due, as well as administrative fees and costs, such amounts being sufficient to provide payment with respect to all periods for which Corporation has committed or is otherwise obligated to make such payments, including amounts attributable to current employee service and any unamortized prior service cost, gain or loss attributable to prior service years ("Postretirement Benefit Obligation"); provided that, the amount payable for Postretirement Benefit Obligations during any month shall be determined by the Corporation based on, among other factors, the Statement of Financial Accounting Standards No. 106 (Employers' Accounting For Postretirement Benefits Other Than Pensions) and any applicable accounting standards, policies or practices as adopted from time to time relating to accruals with respect to all or any portion of such Postretirement Benefit Obligation. (f) Component (F) shall consist of an amount that may be incurred in connection with the decommissioning, shutdown, demolition and closing of the Project Generating Stations when production of electric power and energy is discontinued at such Project Generating Stations, which amount shall include, without limitation the following costs (net of any salvage credits): the costs of demolishing the plants' building structures, disposal of non-salvageable materials, removal and disposal of insulating materials, removal and disposal of storage tanks and associated piping, disposal or removal of materials and supplies (including fuel oil and coal), grading, covering and reclaiming storage and disposal areas, disposing of ash in ash ponds to the extent required by regulatory authorities, undertaking corrective or remedial action required by regulatory authorities, and any other costs incurred in putting the facilities in a condition necessary to protect health or the environment or which are required by regulatory authorities, or which are incurred to fund continuing obligations to monitor or to correct environmental problems which result, or are later discovered to result, from the facilities' operation, closure or post-closure activities ("Decommissioning and Demolition Obligation") provided that, the amount payable for Decommissioning and Demolition Obligations during any month shall be calculated by Corporation based on, among other factors, the then-estimated useful life of the Project Generating Stations and any applicable accounting standards, policies or practices as adopted from time to time relating to accruals with respect to all or any portion of such Decommissioning and Demolition Obligation, and provided further that, the Corporation shall recalculate the amount payable under this Component (F) for future months from time to time, but in no event later than five (5) years after the most recent calculation. 5.04. ECAR and OVEC Emergency Energy. The amount to be paid to Corporation for ECAR Emergency Energy supply under this Agreement shall be 98.74 mills per kilowatt hour (plus transmission charges calculated in accordance with applicable law). The amount to be paid to Corporation for OVEC Emergency Energy purchased by Corporation under this Agreement shall be the applicable FERC filed emergency energy charge per kilowatt hour (plus any applicable transmission charges calculated in accordance with applicable law). 5.05. Minimum Loading Event Costs. To the extent that, as a result of the failure by one or more Sponsoring Companies to take its respective Power Participation Ratio share of the applicable Total Minimum Generating Output during any hour, a Minimum Loading Event shall occur, then the sum of all Minimum Loading Event Costs relating to such Minimum Loading Event shall be charged to such Sponsoring Company or group of Sponsoring Companies that failed take its respective Power Participation Ratio share of the applicable Total Minimum Generating Output during such period, with such Minimum Loading Event Costs allocated among such Sponsoring Companies on a pro-rata basis in accordance with such Sponsoring Company's MWh share of the MWh reduction in the delivery of Available Energy causing any Minimum Loading Event. The applicable charges for Minimum Loading Event Costs as determined by the corporation in accordance with Section 5.05 shall be paid each month by the applicable Sponsoring Companies. ARTICLE 6 Metering of Energy Supplied 6.01. Measuring Instruments. The parties hereto shall own and maintain such metering equipment as may be necessary to provide complete information regarding the delivery of power and energy to or for the account of any of the parties hereto; and the ownership and expense of such metering shall be in accordance with agreements among them. Each party will at its own expense make such periodic tests and inspections of its meters as may be necessary to maintain them at the highest practical commercial standard of accuracy and will advise all other interested parties hereto promptly of the results of any such test showing an inaccuracy of more than 1%. Each party will make additional tests of its meters at the request of any other interested party. Other interested parties shall be given notice of, and may have representatives present at, any test and inspection made by another party. ARTICLE 7 Costs of Replacements and Additional Facilities; Payments for Employee Benefits; Decommissioning, Shutdown, Demolition and Closing Charges 7.01. Replacement Costs. The Sponsoring Companies shall reimburse Corporation for the difference between (a) the total cost of replacements chargeable to property and plant made by Corporation during any month prior thereto (and not previously reimbursed) and (b) the amounts received by Corporation as proceeds of fire or other applicable insurance protection, or amounts recovered from third parties responsible for damages requiring replacement, plus provision for all taxes on income on such difference; provided that, to the extent that the Corporation arranges for the financing of any replacements, the payments due under this Section 7.01 shall equal the amount of all principal, interest, taxes and other costs and expenses related to such financing during any month. Each Sponsoring Company's share of such payment shall be the percentage of such costs represented by its Power Participation Ratio. The term cost of replacements, as used herein, shall include all components of cost, plus removal expense, less salvage. 7.02. Additional Facility Costs. The Sponsoring Companies shall reimburse Corporation for the total cost of additional facilities and/or spare parts purchased and/or installed by Corporation during any month prior thereto (and not previously reimbursed), plus provision for all taxes on income on such costs; provided that, to the extent that the Corporation arranges for the financing of any additional facilities and/or spare parts, the payments due under this Section 7.02 shall equal the amount of all principal, interest, taxes and other costs and expenses related to such financing during any month. Each Sponsoring Company's share of such payment shall be the percentage of such costs represented by its Power Participation Ratio. 7.03. Payments for Employee Benefits. Not later than the effective date of termination of this Agreement, each Sponsoring Company will pay to Corporation its Power Participation Ratio share of additional amounts, after provision for any taxes that may be applicable thereto, sufficient to cover any shortfall if the amount of the Postretirement Benefit Obligation collected by the Corporation prior to the effective date of termination of the Agreement is insufficient to permit Corporation to fulfill its commitments or obligations with respect to both postemployment benefit obligations under the Statement of Financial Accounting Standards No. 112 and postretirement benefits other than pensions, as determined by Corporation with the aid of an actuary or actuaries selected by the Corporation based on the terms of the Corporation's then-applicable plans. 7.04. Decommissioning, Shutdown, Demolition and Closing. The Sponsoring Companies recognize that a part of the cost of supplying power to it under this Agreement is the amount that may be incurred in connection with the decommissioning, shutdown, demolition and closing of the Project Generating Stations when production of electric power and energy is discontinued at such Project Generating Stations. Not later than the effective date of termination of this Agreement, each Sponsoring Company will pay to Corporation its Power Participation Ratio share of additional amounts, after provision for any taxes that may be applicable thereto, sufficient to cover any shortfall if the amount of the Decommissioning and Demolition Obligation collected by the Corporation prior to the effective date of termination of the Agreement is insufficient to permit Corporation to complete the decommissioning, shutdown, demolition and closing of the Project Generating Stations, based on the Corporation's recalculation of the Decommissioning and Demolition Obligation in accordance with Section 5.03(f) of this Agreement no earlier than twelve (12) months before the effective date of termination of this Agreement. ARTICLE 8 Billing and Payment 8.01. Available Power, and Replacement and Additional Facility Costs. As soon as practicable after the end of each month Corporation shall render to each Sponsoring Company a statement of all Available Power and Available Energy supplied to or for the account of such Sponsoring Company during such month, specifying the amount due to the Corporation therefor, including any amounts for reimbursement for the cost of replacements and additional facilities and/or spare parts incurred during such month, pursuant to Articles 5 and 7 above. Such Sponsoring Company shall make payment therefor promptly upon the receipt of such statement, but in no event later than fifteen (15) days after the date of receipt of such statement. In case any factor entering into the computation of the amount due for Available Power and Available Energy cannot be determined at the time, it shall be estimated subject to adjustment when the actual determination can be made. 8.02. Provisional Payments for Available Power. The Sponsoring Companies shall, from time to time, at the request of the Corporation, make provisional semi-monthly payments for Available Power in amounts approximately equal to the estimated amounts payable for Available Power delivered by Corporation to the Sponsoring Companies during each semi-monthly period. As soon as practicable after the end of each semi-monthly period with respect to which Corporation has requested the Sponsoring Companies to make provisional semi-monthly payments for Available Power, Corporation shall render to each Sponsoring Company a separate statement indicating the amount payable by such Sponsoring Company for such semi-monthly period. Such Sponsoring Company shall make payment therefor promptly upon receipt of such statement, but in no event later than fifteen (15) days after the date of receipt of such statement and the amounts so paid by such Sponsoring Company shall be credited to the account of such Sponsoring Company with respect to future payments to be made pursuant to Articles 5 and 7 above by such Sponsoring Company to Corporation for Available Power. 8.03. ECAR and OVEC Emergency Energy. As soon as practicable after the end of each month, Corporation shall render to each Sponsoring Company a statement indicating all ECAR Emergency Energy supplied to or for the account of such Sponsoring Company during such month and all OVEC Emergency Energy supplied to Corporation during such month, specifying the amount due to the Corporation therefor pursuant to Article 5 above; provided, however, that Corporation shall credit any payments which Corporation owes to any Sponsoring Company for ECAR Emergency Energy against the amounts otherwise payable by such Sponsoring Company for OVEC Emergency Energy. Such Sponsoring Company shall make payment therefor promptly upon the receipt of such statement, but in no event later than fifteen (15) days after the date of receipt of such statement. In case the computation of the amount due for ECAR Emergency Energy or OVEC Emergency Energy cannot be determined at the time, it shall be estimated subject to adjustment when the actual determination can be made, and all payments shall be subject to subsequent adjustment. 8.04. Minimum Loading Event Costs. As soon as practicable after the end of each month, Corporation shall render to each Sponsoring Company a statement indicating any applicable charges for Minimum Loading Event Costs pursuant to Section 5.05 during such month, specifying the amount due to the Corporation therefor pursuant to Article 5 above. Such Sponsoring Company shall make payment therefor promptly upon the receipt of such statement, but in no event later than fifteen (15) days after the date of receipt of such statement. In case the computation of the amount due for Minimum Loading Event Costs cannot be determined at the time, it shall be estimated subject to adjustment when the actual determination can be made, and all payments shall be subject to subsequent adjustment. 8.05. Unconditional Obligation to Pay Demand and Other Charges. The obligation of each Sponsoring Company to pay its specified portion of the Demand Charge under Section 5.03 and all charges under Article 7 for any Month shall not be reduced irrespective of: (a) whether or not any Available Power or Available Energy are supplied by the Corporation during such calendar month and whether or not any Available Power or Available Energy are accepted by any Sponsoring Company during such calendar month; (b) the existence of any claim, set-off, defense, reduction, abatement or other right (other than irrevocable payment, performance, satisfaction or discharge in full) that such Sponsoring Company may have, or which may at any time be available to or be asserted by such Sponsoring Company, against the Corporation , any other Sponsoring Company, any creditor of the Corporation or any other Person (including, without limitation, arising as a result of any breach or alleged breach by either the Corporation, any other Sponsoring Company, any creditor of the Corporation or any other Person under this Agreement or any other agreement (whether or not related to the transactions contemplated by this Agreement or any other agreement) to which such party is a party); or (c) the validity or enforceability against any other Sponsoring Company of this Agreement or any right or obligation hereunder (or any release or discharge thereof) at any time. ARTICLE 9 General Provisions 9.01. Characteristics of Supply and Points of Delivery. All power and energy delivered hereunder shall be 3-phase, 60-cycle, alternating current, at a nominal unregulated voltage designated for the point of delivery as described in this Article 9. Available Power and Available Energy to be delivered between Corporation and the Sponsoring Companies pursuant to this Agreement shall be delivered at the points, as scheduled by the Sponsoring Company in accordance with procedures established by the Operating Committee and in accordance with Section 9.02, where the transmission facilities of Corporation interconnect with the transmission facilities of any Sponsoring Company (or its successor or predecessor); provided that, to the extent that a joint and common market is established for the sale of power and energy by Sponsoring Companies within one or more of the regional transmission organizations or independent system operators approved by the Federal Energy Regulatory Commission in which the Sponsoring Companies are members or otherwise participate, then Corporation and the Sponsoring Companies shall take such action as reasonably necessary to permit the Sponsoring Companies to bid their entitlement to power and energy from Corporation into such market(s) in accordance with the procedures established for such market(s). 9.02. Modification of Delivery Schedules Based on Available Transmission Capability. To the extent that transmission capability available for the delivery of Available Power and Available Energy at any delivery point is less than the total amount of Available Power and Available Energy scheduled for delivery by the Sponsoring Companies at such delivery point in accordance with Section 9.01, then the following procedures shall apply and the Corporation and the applicable Sponsoring Companies shall modify their delivery schedules accordingly until the total amount of Available Power and Available Energy scheduled for delivery at such delivery point is equal to or less than the transmission capability available for the delivery of Available Power and Available Energy: (a) the transmission capability available for the delivery of Available Power and Available Energy at the following delivery points shall be allocated first on a pro rata basis (in whole MW increments) to the following Sponsoring Companies up to their Power Participation Ratio share of the total amount of Available Energy available to all Sponsoring Companies (and as applicable, further allocated among Sponsoring Companies entitled to allocation under this Section 9.02(a) in accordance with their Power Participation Ratios): (i) to Allegheny, Appalachian, Columbus, FirstEnergy, Indiana, Monongahela and Ohio Power (or their successors) for deliveries at the points of interconnection between the Corporation and Appalachian, Columbus, Indiana or Ohio Power, or their successors; (ii) to Cincinnati (or its successor) for deliveries at the points of interconnection between the Corporation and Cincinnati or its successor; (iii) to Dayton (or its successor) for deliveries at the points of interconnection between the Corporation and Dayton or its successor; and (iv) to Kentucky, Louisville and Southern Indiana (or their successors) for deliveries at the points of interconnection between the Corporation and Louisville or Kentucky, or their successors; and (b) any remaining transmission capability available for the delivery of Available Power and Available Energy shall be allocated on a pro rata basis (in whole MW increments) to the Sponsoring Companies in accordance with their Power Participation Ratios. 9.03. Operation and Maintenance of Systems Involved. Corporation and the Sponsoring Companies shall operate their systems in parallel, directly or indirectly, except during emergencies that temporarily preclude parallel operation. The parties hereto agree to coordinate their operations to assure maximum continuity of service from the Project Generating Stations, and with relation thereto shall cooperate with one another in the establishment of schedules for maintenance and operation of equipment and shall cooperate in the coordination of relay protection, frequency control, and communication and telemetering systems. The parties shall build, maintain and operate their respective systems in such a manner as to minimize so far as practicable rapid fluctuations in energy flow among the systems. The parties shall cooperate with one another in the operation of reactive capacity so as to assure mutually satisfactory power factor conditions among themselves. The parties hereto shall exercise due diligence and foresight in carrying out all matters related to the providing and operating of their respective power resources so as to minimize to the extent practicable deviations between actual and scheduled deliveries of power and energy among their systems. The parties hereto shall provide and/or install on their respective systems such communication, telemetering, frequency and/or tie-line control facilities essential to so minimizing such deviations; and shall fully cooperate with one another and with third parties (such third parties whose systems are either directly or indirectly interconnected with the systems of the Sponsoring Companies and who of necessity together with the parties hereto must unify their efforts cooperatively to achieve effective and efficient interconnected systems operation) in developing and executing operating procedures that will enable the parties hereto to avoid to the extent practicable deviations from scheduled deliveries. In order to foster coordination of the operation and maintenance of Corporation's transmission facilities with those facilities of Sponsoring Companies that are owned or functionally controlled by a regional transmission organization or independent system operator, Corporation shall use commercially reasonable efforts to enter into a coordination agreement with any regional transmission organization or independent system operator approved by the Federal Energy Regulatory Commission that operates transmission facilities that interconnect with Corporation's transmission facilities, and to enter into a mutually agreeable services agreement with a regional transmission organization or independent system operator to provide the Corporation with reliability and security coordination services and other related services. 9.04. Power Deliveries as Affected by Physical Characteristics of Systems. It is recognized that the physical and electrical characteristics of the transmission facilities of the interconnected network of which the transmission systems of the Sponsoring Companies, Corporation, and other systems of third parties not parties hereto are a part, may at times preclude the direct delivery at the points of interconnection between the transmission systems of one or more of the Sponsoring Companies and Corporation, of some portion of the energy supplied under this Agreement, and that in each such case, because of said characteristics, some of the energy will be delivered at points which interconnect the system of one or more of the Sponsoring Companies with systems of companies not parties to this Agreement. The parties hereto shall cooperate in the development of mutually satisfactory arrangements among themselves and with such companies not parties hereto whereby the supply of power and energy contemplated hereunder can be fulfilled. 9.05. Operating Committee. There shall be an "Operating Committee" consisting of one member appointed by the Corporation and one member appointed by each of the Sponsoring Companies electing so to do; provided that, if any two or more Sponsoring Companies are Affiliates, then such Affiliates shall together be entitled to appoint only one member to the Operating Committee. The "Operating Committee" shall establish (and modify as necessary) scheduling, operating, testing and maintenance procedures of the Corporation in support of this Agreement, including establishing: (i) procedures for scheduling delivery of Available Energy under Section 4.03, (ii) procedures for power and energy accounting, (iii) procedures for the determination and the accounting of transmission losses, (iv) the Minimum Generating Unit Output, and (v) the form of notifications relating to power and energy and the price thereof. In addition, the Operating Committee shall consider and make recommendations to Corporation's Board of Directors with respect to such other problems as may arise affecting the transactions under this Agreement. The decisions of the Operating Committee, including the adoption or modification of any procedure by the Operating Committee pursuant to this Section 9.04, must receive the affirmative vote of at least two-thirds of the members of the Operating Committee, regardless of the number of members of the Operating Committee present at any meeting. 9.06. Acknowledgment of Certain Rights. For the avoidance of doubt, all of the parties to this Agreement acknowledge and agree that (i) as of the Effective Date of this Agreement, certain rights and obligations of the Sponsoring Companies under the Original Agreement will be changed, modified or otherwise removed, (ii) to the extent that the rights of any Sponsoring Company will be changed, modified or otherwise removed as of the Effective Date of this Agreement, such Sponsoring Company may be entitled to rights under applicable law, regulation, rules or orders under the Federal Power Act or otherwise adopted by the Federal Energy Regulatory Commission ("FERC"), (iii) as a result of the elimination as of the Effective Date of this Agreement of the firm transmission service previously provided during the term of the Original Agreement to Sponsoring Companies whose transmission systems were only indirectly connected to the Corporation's facilities through intervening transmission systems by certain Sponsoring Companies whose transmission systems were directly connected to the Corporation's facilities, such Sponsoring Companies whose transmission systems were only indirectly connected to the Corporation's facilities through intervening transmission systems shall be entitled to such "roll over" firm transmission service for delivery of their entitlement to their Power Participation Ratio share of Surplus Power and Surplus Energy under this Agreement, to the border of such Sponsoring Company system and intervening Sponsoring Company system, as would be accorded a long-term firm point-to-point transmission service reservation under the then otherwise applicable FERC Open Access Transmission Tariff ("OATT"), (iv) the obligation of any Sponsoring Company to maintain or expand transmission capacity to accommodate another Sponsoring Company's "roll over" rights to transmission service for delivery of their entitlement to their Power Participation Ratio share of Surplus Power and Surplus Energy under this Agreement shall be consistent with the obligations it would have for long-term firm point-to- point transmission service provided pursuant to the then otherwise applicable OATT, and (v) the parties shall cooperate with any Sponsoring Company that seeks to obtain and/or exercise any such rights available under applicable law, regulation, rules or orders under the Federal Power Act or otherwise adopted by the FERC. 9.07. Term of Agreement. This Agreement shall become effective upon the Effective Date and shall terminate upon the earlier of: (1) March 13, 2026 or (2) the sale or other disposition of all of the facilities of the Project Generating Stations or the permanent cessation of operation of such facilities; provided that, the provisions of Articles 5, 7 and 8, this Section 9.07 and Sections 9.08, 9.09, 9.10, 9.11, 9.12, 9.14, 9.15, 9.16, 9.17 and 9.18 shall survive the termination of this Agreement, and no termination of this Agreement, for whatever reason, shall release any Sponsoring Company of any obligations or liabilities incurred prior to such termination. 9.08. Access to Records. Corporation shall, at all reasonable times, upon the request of any Sponsoring Company, grant to its representatives reasonable access to the books, records and accounts of the Corporation, and furnish such Sponsoring Company such information as it may reasonably request, to enable it to determine the accuracy and reasonableness of payments made for energy supplied under this Agreement. 9.09. Modification of Agreement. Absent the agreement of all parties to this Agreement, the standard for changes to provisions of this Agreement related to rates proposed by a party, a non- party or the Federal Energy Regulatory Commission (or a successor agency) acting sua sponte shall be the "public interest" standard of review set forth in United Gas Pipeline Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956) and Federal Power Comm'n v. Sierra Pacific Power Co., 350 U.S. 348 (1956). 9.10. Arbitration. Any controversy, dispute or claim arising out of this Agreement or the refusal by any party hereto to perform the whole or any part thereof, shall be determined by arbitration, in the City of Columbus, Franklin County, Ohio, in accordance with the Commercial Arbitration Rules of the American Arbitration Association or any successor organization, except as otherwise set forth in this Section 9.10. The party demanding arbitration shall serve notice in writing upon all other parties hereto, setting forth in detail the controversy, dispute or claim with respect to which arbitration is demanded, and the parties shall thereupon endeavor to agree upon an arbitration board, which shall consist of three members ("Arbitration Board"). If all the parties hereto fail so to agree within a period of thirty (30) days from the original notice, the party demanding arbitration may, by written notice to all other parties hereto, direct that any members of the Arbitration Board that have not been agreed to by the parties shall be selected by the American Arbitration Association, or any successor organization. No person shall be eligible for appointment to the Arbitration Board who is an officer, employee, shareholder of or otherwise interested in any of the parties hereto or in the matter sought to be arbitrated. The Arbitration Board shall afford adequate opportunity to all parties hereto to present information with respect to the controversy, dispute or claim submitted to arbitration and may request further information from any party hereto; provided, however, that the parties hereto may, by mutual agreement, specify the rules which are to govern any proceeding before the Arbitration Board and limit the matters to be considered by the Arbitration Board, in which event the Arbitration Board shall be governed by the terms and conditions of such agreement. The determination or award of the Arbitration Board shall be made upon a determination of a majority of the members thereof. The findings and award of the Arbitration Board shall be final and conclusive with respect to the controversy, dispute or claim submitted for arbitration and shall be binding upon the parties hereto, except as otherwise provided by law. The award of the Arbitration Board shall specify the manner and extent of the division of the costs of the arbitration proceeding among the parties hereto. 9.11. Liability. The rights and obligations of all the parties hereto shall be several and not joint or joint and several. 9.12. Force Majeure. No party hereto shall be held responsible or liable for any loss or damage on account of non- delivery of energy hereunder at any time caused by an event of Force Majeure. "Force Majeure" shall mean the occurrence or non- occurrence of any act or event that could not reasonably have been expected and avoided by exercise of due diligence and foresight and such act or event is beyond the reasonable control of such party, including to the extent caused by act of God, fire, flood, explosion, strike, civil or military authority, insurrection or riot, act of the elements, or failure of equipment. For the avoidance of doubt, "Force Majeure" shall in no event be based on any Sponsoring Company's financial or economic conditions, including without limitation (i) the loss of the Sponsoring Company's markets; or (ii) the Sponsoring Company's inability economically to use or resell the Available Power or Available Energy purchased hereunder. 9.13. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Ohio. 9.14. Regulatory Approvals. This Agreement is made subject to the jurisdiction of any governmental authority or authorities having jurisdiction in the premises and the performance thereof shall be subject to the following: (a) The receipt of all regulatory approvals, in form and substance satisfactory to Corporation, necessary to permit Corporation to perform all the duties and obligations to be performed by Corporation hereunder. (b) The receipt of all regulatory approvals, in form and substance satisfactory to the Sponsoring Companies, necessary to permit the Sponsoring Companies to carry out all transactions contemplated herein. 9.15. Notices. All notices, requests or other communications under this Agreement shall be in writing and shall be sufficient in all respects: (i) if delivered in person or by courier, upon receipt by the intended recipient or an employee that routinely accepts packages or letters from couriers or other persons for delivery to personnel at the address identified above (as confirmed by, if delivered by courier, the records of such courier), (ii) if sent by facsimile transmission, when the sender receives confirmation from the sending facsimile machine that such facsimile transmission was transmitted to the facsimile number of the addressee, or (iii) if mailed, upon the date of delivery as shown by the return receipt therefor. 9.16. Waiver. Performance by any party to this Agreement of any responsibility or obligation to be performed by such party or compliance by such party with any condition contained in this Agreement may by a written instrument signed by all other parties to this Agreement be waived in any one or more instances, but the failure of any party to insist in any one or more instances upon strict performance of any of the provisions of this Agreement or to take advantage of any of its rights hereunder shall not be construed as a waiver of any such provisions or the relinquishment of any such rights, but the same shall continue and remain in full force and effect. 9.17. Titles of Articles and Sections. The titles of the Articles and Sections in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement. 9.18. Successors and Assigns. This Agreement may be executed in any number of counterparts, all of which shall constitute but one and the same document. 9.181 This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns, but a party to this Agreement may not assign this Agreement or any of its rights, title or interests in or obligations (including without limitation the assumption of debt obligations) under this Agreement, except to a successor to all or substantially all the properties and assets of such party or as provided in Section 9.182 or 9.183, without the written consent of all the other parties hereto. 9.182 Notwithstanding the provisions of Section 9.181, any Sponsoring Company shall be permitted to, upon thirty (30) days notice to the Corporation and each other Sponsoring Company, without any further action by the Corporation or the other Sponsoring Companies, assign all or part of its rights, title and interests in, and obligations under this Agreement to a Permitted Assignee, provided that, the assignee and assignor of the rights, title and interests in, and obligations under, this Agreement have executed an assignment agreement in form and substance acceptable to the Corporation in its reasonable discretion (including, without limitation, the agreement by the Sponsoring Company assigning such rights, title and interests in, and obligations under, this Agreement to reimburse the Corporation and the other Sponsoring Companies for any fees or expenses required under any security issued, or agreement entered into, by the Corporation as a result of such assignment, including without limitation any consent fee or additional financing costs to the Corporation under the Corporation's then-existing securities or agreements resulting from such assignment). 9.183 Notwithstanding the provisions of Section 9.181, any Sponsoring Company shall be permitted to, subject to compliance with all of the requirements of this Section 9.183, assign all or part of its rights, title and interests in, and obligations under this Agreement to a Third Party without any further action by the Corporation or the other Sponsoring Companies. (a) A Sponsoring Company (the "Transferring Sponsor") that desires to assign all or part of its rights, title and interests in, and obligations under this Agreement to a Third Party shall deliver an Offer Notice to the Corporation and each other Sponsoring Company. The Offer Notice shall be deemed to be an irrevocable offer of the subject rights, title and interests in, and obligations under this Agreement to each of the other Sponsoring Companies that is not an Affiliate of the Transferring Sponsor, which offer must be held open for no less than thirty (30) days from the date of the Offer Notice (the "Election Period"). (b) The Sponsoring Companies (other than the Transferring Sponsor and its Affiliates) shall first have the right, but not the obligation, to purchase all of the rights, title and interests in, and obligations under this Agreement described in the Offer Notice at the price and on the terms specified therein by delivering written notice of such election to the Transferring Sponsor and the Corporation within the Election Period; provided that, irrespective of the terms and conditions of the Offer Notice, a Sponsoring Company may condition its election to purchase the interest described in the Offer Notice on the receipt of approval or consent from such Sponsoring Company's Board of Directors; provided further that, written notice of such conditional election must be delivered to the Transferring Sponsor and the Corporation within the Election Period and such conditional election shall be deemed withdrawn (as if it had never been provided) unless the Sponsoring Company that delivered such conditional election subsequently delivers written notice to the Transferring Sponsor and the Corporation on or before the tenth (10th) day after the expiration of the Election Period that all necessary approval or consent of such Sponsoring Company's Board of Directors have been obtained. To the extent that more than one Sponsoring Company exercises its right to purchase all of the rights, title and interests in, and obligations under this Agreement described in the Offer Notice in accordance with the previous sentence, such rights, title and interests in, and obligations under this Agreement shall be allotted (successively if necessary) among the Sponsoring Companies exercising such right in proportion to their respective Power Participation Ratios. (c) Each Sponsoring Company exercising its right to purchase any rights, title and interests in, and obligations under this Agreement pursuant to this Section 9.183 may choose to have an Affiliate purchase such rights, title and interests in, and obligations under this Agreement; provided that, notwithstanding anything in this Section 9.183 to the contrary, any assignment to a Sponsoring Company or its Affiliate hereunder must comply with the requirements of Section 9.182. (d) If one or more Sponsoring Companies have elected to purchase all of the rights, title and interests in, and obligations under this Agreement of the Transferring Sponsor pursuant to the Offer Notice, the assignment of such rights, title and interests in, and obligations under this Agreement shall be consummated as soon as practical after the delivery of the election notices, but in any event no later than fifteen (15) days after the filing and receipt, as applicable, of all necessary governmental filings, consents or other approvals and the expiration of all applicable waiting periods. At the closing of the purchase of such rights, title and interests in, and obligations under this Agreement from the Transferring Sponsor, the Transferring Sponsor shall provide representations and warranties customary for transactions of this type, including those as to its title to such securities and that there are no liens or other encumbrances on such securities (other than pursuant to this Agreement) and shall sign such documents as may reasonably be requested by the Corporation and the other Sponsoring Companies. The Sponsoring Companies or their Affiliates shall only be required to pay cash for the rights, title and interests in, and obligations under this Agreement being assigned by the Transferring Sponsor. (e) To the extent that the Sponsoring Companies have not elected to purchase all of the rights, title and interests in, and obligations under this Agreement described in the Offer Notice, the Transferring Sponsor may, within one-hundred and eighty (180) days after the later of the expiration of the Election Period or the deemed withdrawal of a conditional election by a Sponsoring Company under Section 9.183(b) hereof (if applicable), enter into a definitive agreement to, assign such rights, title and interests in, and obligations under this Agreement to a Third Party at a price no less than 92.5% of the purchase price specified in the Offer Notice and on other material terms and conditions no more favorable to the such Third Party than those specified in the Offer Notice; provided that such purchases shall be conditioned upon: (i) such Third Party having long-term unsecured non-credit enhanced indebtedness, as of the date of such assignment, with a Standard & Poor's credit rating of at least BBB- and a Moody's Investors Service, Inc. credit rating of at least Baa3 (provided that, if such Third Party's long-term unsecured non-credit enhanced indebtedness is not currently rated by one of Standard & Poor's or Moody, such Third Party's long- term unsecured non-credit enhanced indebtedness, as of the date of such assignment, must have either a Standard & Poor's credit rating of at least BBB- or a Moody's Investors Service, Inc. credit rating of at least Baa3); (ii) the filing or receipt, as applicable, of any necessary governmental filings, consents or other approvals; (iii) the determination by counsel for the Corporation that the assignment of the rights, title or interests in, or obligations under, this Agreement to such Third Party would not cause a termination, default, loss or payment obligation under any security issued, or agreement entered into, by the Corporation prior to such transfer; and (iv) such Third Party executing a counterpart of this Agreement, and both such Third Party and the Sponsoring Company which is assigning its rights, title and interests in, and obligations under, this Agreement executing such other documents as may be reasonably requested by the Corporation (including, without limitation, an assignment agreement in form and substance acceptable to the Corporation in its reasonable discretion and containing the agreement by such Sponsoring Company to reimburse the Corporation and the other Sponsoring Companies for any fees or expenses required under any security issued, or agreement entered into, by the Corporation as a result of such assignment, including without limitation any consent fee or additional financing costs to the Corporation under the Corporation's then-existing securities or agreements resulting from such assignment). In the event that the Sponsoring Company and a Third Party have not entered into a definitive agreement to assign the interests specified in the Offer Notice to such Third Party within the later of one-hundred and eighty (180) days after the expiration of the Election Period or the deemed withdrawal of a conditional election by a Sponsoring Company under Section 9.183(b) hereof (if applicable) for any reason or if either the price to be paid by such Third Party would be less than 92.5% of the purchase price specified in the Offer Notice or the other material terms of such assignment would be more favorable to such Third Party than the terms specified in the Offer Notice, then the restrictions provided for herein shall again be effective, and no assignment of any rights, title and interests in, and obligations under this Agreement may be made thereafter without again offering the same to Sponsoring Companies in accordance with this Section 9.183. ARTICLE 10 Representations and Warranties 10.01. Representations and Warranties. Each Sponsoring Company hereby represents and warrants for itself, on and as of the date of this Agreement, as follows: (a) it is duly organized, validly existing and in good standing under the laws of its state of organization, with full corporate power, authority and legal right to execute and deliver this Agreement and to perform its obligations hereunder; (b) it has duly authorized, executed and delivered this Agreement, and upon the execution and delivery by all of the parties hereto, this Agreement will be in full force and effect, and will constitute a legal, valid and binding obligation of such Sponsoring Company, enforceable in accordance with the terms hereof, except as enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally; (c) Except as set forth in Schedule 10.01(c) hereto, no consents or approvals of, or filings or registrations with, any governmental authority or public regulatory authority or agency, federal state or local, or any other entity or person are required in connection with the execution, delivery and performance by it of this Agreement, except for those which have been duly obtained or made and are in full force and effect, have not been revoked, and are not the subject of a pending appeal; and (d) the execution, delivery and performance by it of this Agreement will not conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute a default under its charter or by-laws or any indenture or other material agreement or instrument to which it is a party or by which it may be bound or result in the imposition of any liens, claims or encumbrances on any of its property. ARTICLE 11 Events of Default and Remedies 11.01. Payment Default. If any Sponsoring Company fails to make full payment to Corporation under this Agreement when due and such failure is not remedied within ten (10) days after receipt of notice of such failure from the Corporation, then such failure shall constitute a "Payment Default" on the part of such Sponsoring Company. Upon a Payment Default, the Corporation may suspend service to the Sponsoring Company that has caused such Payment Default for all or part of the period of continuing default (and such Sponsoring Company shall be deemed to have notified the Corporation and the other Sponsoring Companies that any Available Energy shall be available for scheduling by such other Sponsoring Companies in accordance with Section 4.032). The Corporation's right to suspend service shall not be exclusive, but shall be in addition to all remedies available to the Corporation at law or in equity. No suspension of service or termination of this Agreement shall relieve any Sponsoring Company of its obligations under this Agreement, which are absolute and unconditional. 11.02. Performance Default. If the Corporation or any Sponsoring Company fails to comply in any material respect with any of the material terms, conditions and covenants of this Agreement (and such failure does not constitute a Payment Default under Section 11.01), the Corporation (in the case of a default by any Sponsoring Company) and any Sponsoring Company (in the case of a default by the Corporation) shall give the defaulting party written notice of the default ("Performance Default"). To the extent that a Performance Default is not cured within thirty (30) days after receipt of notice thereof (or within such longer period of time, not to exceed sixty (60) additional days, as necessary for the defaulting party with the exercise of reasonable diligence to cure such default), then the Corporation (in the case of a default by any Sponsoring Company) and any Sponsoring Company (in the case of a default by the Corporation) shall have all of the rights and remedies provided at law and in equity, other than termination of this Agreement or any release of the obligation of the Sponsoring Companies to make payments pursuant to this Agreement, which obligation shall remain absolute and unconditional. 11.03. Waiver. No waiver by the Corporation or any Sponsoring Company of any one or more defaults in the performance of any provision of this Agreement shall be construed as a waiver of any other default or defaults, whether of a like kind or different nature. 11.04. Limitation of Liability and Damages. TO THE FULLEST EXTENT PERMITTED BY LAW, NEITHER THE CORPORATION, NOR ANY SPONSORING COMPANY SHALL BE LIABLE UNDER THIS AGREEMENT FOR ANY CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES, LOST REVENUES, LOST PROFITS OR OTHER BUSINESS INTERRUPTION DAMAGES, BY STATUTE, IN TORT OR CONTRACT, OR OTHERWISE. [Signature pages follow] IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Inter-Company Power Agreement to be duly executed and delivered by their proper and duly authorized officers to be effective as of March 13, 2006. OHIO VALLEY ELECTRIC ALLEGHENY ENERGY SUPPLY CORPORATION COMPANY, LLC By /s/ Michael Morris By /s/ David C. Benson Its President Its President APPALACHIAN POWER COMPANY THE CINCINNATI GAS & ELECTRIC COMPANY By /s/ Henry Fayne By /s/ Michael J. Cyrus Its President Its Executive Vice President COLUMBUS SOUTHERN POWER THE DAYTON POWER AND LIGHT COMPANY COMPANY By /s/ Henry Fayne By /s/ W. Steven Wolff Its President Its President, Power Production FIRSTENERGY GENERATION CORP. INDIANA MICHIGAN POWER COMPANY By /s/ Donald R. Schneider By /s/ Henry Fayne Its President Its President KENTUCKY UTILITIES COMPANY LOUISVILLE GAS AND ELECTRIC COMPANY By /s/ Paul W. Thompson By /s/ Paul W. Thompson Its Sr. Vice President - Its Sr. Vice President - Energy Services Energy Services MONONGAHELA POWER COMPANY OHIO POWER COMPANY By /s/ David C. Benson By /s/ Henry Fayne Its Vice President Its President SOUTHERN INDIANA GAS AND ELECTRIC COMPANY By /s/ William S. Doty Its President EX-10 3 q10q0604ex1002.txt AMENDENT TO EMPLOYMENT AND SEVERANCE AGREEMENT FOURTH AMENDMENT TO THE EMPLOYMENT AND SEVERANCE AGREEMENT OF VICTOR A. STAFFIERI This Fourth Amendment to the Employment and Severance Agreement of Victor A. Staffieri ("Fourth Amendment") is made and entered into as of the 1st day of February, 2004 by and among (i) LG&E Energy LLC, a Kentucky limited liability company ("Company" as successor to LG&E Energy Corp.), (ii) Powergen Limited, a United Kingdom limited company ("Parent" formerly known as Powergen, plc), (iii) E.ON AG, an anktiengesellschaft formed under the Federal Republic of Germany ("German Parent"), and (iv) Victor A. Staffieri ("Executive"), collectively referred to as the "Parties". WHEREAS, the Executive, the Company and the Parent entered into an Employment and Severance Agreement, dated February 25, 2000 ("Original Agreement"); WHEREAS, the Original Agreement was previously amended by the Executive, the Company and the Parent in documents dated December 8, 2000 ("First Amendment") and dated as of April 30, 2001 ("Second Amendment"); WHEREAS, the Executive, the Company, the Parent and German Parent previously amended the Original Agreement in a document dated July 1, 2002 ("Third Amendment"), the Original Agreement, the First Amendment, the Second Amendment and the Third Amendment (collectively referred to herein as "Agreement"); WHEREAS, the Company, the Parent and the German Parent have determined that a realignment of the board of directors of certain subsidiaries of the German Parent is appropriate; and WHEREAS, the Parties have determined that it is now desirable to amend the Agreement to reflect certain changes resulting from the German Parent's realignment of the composition of certain boards of directors. AGREEMENT: NOW THEREFORE, in consideration of the respective agreements of the Parties contained herein, it is agreed as follows: 1. Section 3.1 shall be deleted and replaced in its entirety to read as follows: "3.1 The Company agrees to employ Executive, and Executive agrees to serve during the term hereof as Chairman and Chief Executive Officer of the Company. Executive shall report to Dr. Wulf Bernotat, or his successor. In addition, German Parent shall (i) cause the Executive to be elected as Chairman of the Board of Directors of the Company (the "Board"), (ii) secure Executive's election as a member of the Board of Directors of E.ON US Investments Corp. (the "Primary U.S. Board"), and (iii) secure Executive's election as a member of the management board or board of directors (as applicable) of any entity the German Parent utilizes to establish its presence, through acquisition or other development activity, in the United States' energy industry ("Primary U.S. Acquisition Board"), and Executive agrees to serve in such capacities." 2. Section 3.2 shall be deleted and replaced in its entirety to read as follows: "3.2 Executive agrees to devote his full working time and efforts, to the best of his ability, experience and talent, to the performance of services, duties and responsibilities in connection with the position named above. Executive shall perform such duties and exercise such powers, commensurate with his position, as Chairman and Chief Executive Officer of the Company, as Dr. Wulf Bernotat or his successor shall from time to time delegate to him on such terms and conditions and subject to such restrictions as Dr. Wulf Bernotat or his successor may reasonably from time to time impose." 3. Section 4.1 shall be deleted and replaced in its entirety to read as follows: "4.1. SALARY. The Company shall pay Executive an annual base salary ("Base Salary") of not less than the amount the Executive is receiving at the time of this Fourth Amendment. The Base Salary shall be payable in accordance with the ordinary payroll practices of the Company. The Base Salary shall be reviewed by Dr. Wulf Bernotat or his successor in December of each year, or such other date as agreed to by the Executive, during the term of this Agreement and may be increased in the discretion of Dr. Wulf Bernotat or his successor at that or any other time and, as so increased, shall constitute "Base Salary" hereunder. At no time shall Dr. Wulf Bernotat or his successor be able to decrease the Base Salary 4. Subsection 6.5(a) shall be deleted and replaced in its entirety to read as follows: "(a) For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the events or conditions described in subsections (1) through (10) hereof: (1) a reduction by the Company in the Executive's Base Salary or annual target bonus opportunity as in effect prior to such reduction or any failure to pay the Executive any compensation or benefits to which the Executive is entitled within thirty days of the applicable due date, provided that the Company may correct such reduction or failure within thirty (30) days of its commission; (2) German Parent, Parent or the Company require the Executive to be relocated anywhere in excess of fifty (50) miles of his present office location, except for required travel on German Parent, Parent or Company business consistent with his business travel obligations as in effect prior to the Effective Time and as provided in Section 3.4 of this Agreement; (3) a failure by Parent or the Company to maintain plans providing benefits at least as beneficial in the aggregate as those provided by any benefit or compensation plan, retirement or pension plan, stock option plan, bonus plan, long-term incentive plan, life insurance plan, health and accident plan or disability plan in which the Executive is participating prior to the Effective Time, the Change in Control, or the effective date of this Fourth Amendment, as applicable, or if the Company or Parent has taken any action which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any of such plans or deprive him of any material fringe benefit enjoyed by him prior to the Effective Time, the Change in Control, or the effective date of this Fourth Amendment, as applicable, or if the Company or Parent has failed to provide him with the number of paid vacation days to which he would be entitled in accordance with the Company's normal vacation policy immediately prior to the Effective Time, the Change in Control, or the effective date of this Fourth Amendment as applicable; (4) Parent or the Company materially reduces, individually or in the aggregate, the Executive's title, job authorities or responsibilities as in effect prior to such reduction; (5) Parent or the Company fails to obtain the assumption of the obligations contained in this Agreement by any successor as contemplated in Section 11 hereof; (6) any purported termination of the Executive's employment by Parent or the Company which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 8, hereof; and, for purposes of this Agreement, no such purported termination shall be effective; (7) any material breach by Parent or the Company of any provision of this Agreement; (8) any purported termination of the Executive's employment for Cause by Parent or the Company which does not comply with the terms of Section 6.2 of this Agreement; (9) any removal of the Executive from the position of Chairman and Chief Executive Officer of the Company, except for Cause; or (10) any removal of Executive from, the Board, the Primary U.S. Board, or the Primary U.S. Acquisition Board, except for Cause." 5. The first full sentence of Section 16 shall be deleted and replaced in its entirety to read as follows: "16. MISCELLANEEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive, German Parent and the Company." IN WITNESS WHEREOF, the Company, the German Parent, and the Parent have caused this Fourth Amendment to be executed by its duly authorized representative and the Executive has executed this Fourth Amendment as of the date set forth above. Except as provided herein, nothing contained in this Fourth Amendment shall alter the terms and conditions of the Agreement. E. ON. AG By: ______________________________ Name _________________________ Title __________________________ LG&E ENERGY LLC By: ______________________________ Name _________________________ Title __________________________ POWERGEN LIMITED By: ______________________________ Name _________________________ Title __________________________ EXECUTIVE _____________________________ VICTOR A. STAFFIERI EX-10 4 q10q0604ex1003.txt MODIFICATION NO.15 TO INTER-COMPANY POWER AGREEMENTS Execution Copy MODIFICATION NO. 15 TO INTER-COMPANY POWER AGREEMENT DATED JULY 10, 1953 AMONG OHIO VALLEY ELECTRIC CORPORATION, ALLEGHENY ENERGY SUPPLY COMPANY, L.L.C. (successor to West Penn Power Company and The Potomac Edison Company) APPALACHIAN POWER COMPANY (formerly APPALACHIAN ELECTRIC POWER COMPANY), THE CINCINNATI GAS & ELECTRIC COMPANY, COLUMBUS SOUTHERN POWER COMPANY (formerly COLUMBUS AND SOUTHERN OHIO ELECTRIC COMPANY), THE DAYTON POWER AND LIGHT COMPANY, FIRSTENERGY GENERATION CORP. (successor to OHIO EDISON COMPANY, PENNSYLVANIA POWER COMPANY and THE TOLEDO EDISON COMPANY) INDIANA MICHIGAN POWER COMPANY (formerly INDIANA & MICHIGAN ELECTRIC COMPANY), KENTUCKY UTILITIES COMPANY, LOUISVILLE GAS AND ELECTRIC COMPANY MONONGAHELA POWER COMPANY, OHIO POWER COMPANY (formerly THE OHIO POWER COMPANY), and SOUTHERN INDIANA GAS AND ELECTRIC COMPANY. _____________ Dated as of April 30, 2004 MODIFICATION NO. 15 TO INTER-COMPANY POWER AGREEMENT THIS AGREEMENT dated as of the 30th day of April, 2004, by and among OHIO VALLEY ELECTRIC CORPORATION (herein called "OVEC" or "Corporation"), ALLEGHENY ENERGY SUPPLY COMPANY, L.L.C. (successor to WEST PENN POWER COMPANY and THE POTOMAC EDISON COMPANY), APPALACHIAN POWER COMPANY ("Appalachian"), THE CINCINNATI GAS & ELECTRIC COMPANY, COLUMBUS SOUTHERN POWER COMPANY (formerly COLUMBUS AND SOUTHERN OHIO ELECTRIC COMPANY) ("Columbus"), THE DAYTON POWER AND LIGHT COMPANY, FIRSTENERGY GENERATION CORP. (successor to OHIO EDISON COMPANY, PENNSYLVANIA POWER COMPANY and THE TOLEDO EDISON COMPANY), INDIANA MICHIGAN POWER COMPANY (formerly INDIANA & MICHIGAN ELECTRIC COMPANY) ("Indiana"), KENTUCKY UTILITIES COMPANY, LOUISVILLE GAS AND ELECTRIC COMPANY, MONONGAHELA POWER COMPANY, OHIO POWER COMPANY ("Ohio Power"), and SOUTHERN INDIANA GAS AND ELECTRIC COMPANY, all of the foregoing, other than OVEC, being herein sometimes collectively referred to as the Sponsoring Companies and individually as a Sponsoring Company. W I T N E S S E T H T H A T WHEREAS, the parties hereto have entered into a contract, herein called the "Inter-Company Power Agreement," dated July 10, 1953, governing, among other things, the rights of the Sponsoring Companies to receive Surplus Power and Surplus Energy as may be available at the OVEC's generating stations and the obligations of the Sponsoring Companies to pay therefor; and WHEREAS, the Inter-Company Power Agreement has heretofore been amended by Modification No. 1, dated as of June 3, 1966, Modification No. 2 dated as of January 7, 1967, Modification No. 3, dated as of November 15, 1967, Modification No. 4, dated as of November 5, 1975, Modification No. 5, dated as of September 1, 1979, Modification No. 6, dated as of August 1, 1981, Modification No. 7, dated as of January 15, 1992, Modification No. 8, dated as of January 19, 1994, Modification No. 9, dated as of August 17, 1995, Modification No. 10, dated as of January 1, 1998, Modification No. 11, dated as of April 1, 1999, Modification No. 12, dated as of November 1, 1999, Modification No. 13, dated as of May 24, 2000, and Modification No. 14, dated as of April 1, 2001 (said contract so amended and as modified and amended by this Modification No. 15 being herein and therein sometimes called the "Agreement"); and WHEREAS, OVEC and the Sponsoring Companies desire to amend the Agreement to permit the Sponsoring Companies, under specified circumstances, to assign their rights, title or interests in or obligations under this Agreement to other parties; and WHEREAS, OVEC and the Sponsoring Companies desire to enter into this Modification No. 15 as more particularly hereinafter provided; NOW, THEREFORE, the parties hereto agree with each other as follows: 1. Delete subsection 1.0126 and substitute therefor the following: 1.0126 "Effective Date" means April 30, 2004, or such later date as required by the Federal Energy Regulatory Commission (or any other regulatory agency or authority with jurisdiction) for the effectiveness of Modification No. 15, including the expiration of any required waiting periods and the satisfaction of any conditions under any required regulatory acceptance or approval. 2. Insert the following new subsections 1.0127 through 1.0132: 1.0127 "Affiliate" means, with respect to a specified person, any other person that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, such specified person; provided that "control" for these purposes means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. 1.0128 "Permitted Assignee" means a person that is (a) a Sponsoring Company or its Affiliate whose long-term unsecured non-credit enhanced indebtedness, as of the date of such assignment, has a Standard & Poor's credit rating of at least BBB- and a Moody's Investors Service, Inc. credit rating of at least Baa3 (provided that, if the proposed assignee's long-term unsecured non-credit enhanced indebtedness is not currently rated by one of Standard & Poor's or Moody, such assignee's long-term unsecured non- credit enhanced indebtedness, as of the date of such assignment, must have either a Standard & Poor's credit rating of at least BBB- or a Moody's Investors Service, Inc. credit rating of at least Baa3); or (b) a Sponsoring Company or its Affiliate that does not meet the criteria in subsection (a) above, if the Sponsoring Company or its Affiliate that is assigning its rights, title and interests in, and obligations under, this Agreement agrees in writing (in form and substance satisfactory to Corporation) to remain obligated to satisfy all of the obligations related to the assigned rights, title and interests to the extent such obligations are not satisfied by the assignee of such rights, title and interests; provided that, in no event shall a person be deemed a "Permitted Assignee" if counsel for the Corporation reasonably determines that the assignment of the rights, title or interests in, or obligations under, this Agreement to such person could cause a termination, default, loss or payment obligation under any security issued, or agreement entered into, by the Corporation prior to such transfer. 1.0129 "Election Period" has the meaning set forth in Section 12.193(a) hereof. 1.0130 "Offer Notice" means the notice required to be given to the other Sponsoring Companies by a Transferring Sponsor offering to sell all or a portion of such Transferring Sponsor's rights, title and interests in, and obligations under this Agreement. At a minimum, the Offer Notice shall be in writing and shall contain (i) the rights, title and interests in, and obligations under this Agreement that the Transferring Sponsor proposes to Transfer; and (ii) the cash purchase price and any other material terms and conditions of such proposed transfer. An Offer Notice may not contain terms or conditions requiring the purchase of any non-OVEC interests. 1.0131 "Third Party" means any person other than a Sponsoring Company or its Affiliate. 1.0132 "Transferring Sponsor" has the meaning set forth in Section 12.193(a) hereof. 3. Delete Section 12.19 and substitute therefor the following: 12.19. Successors and Assigns. This Agreement may be executed in any number of counterparts, all of which shall constitute but one and the same document. 12.191. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns, but a party to this Agreement may not assign this Agreement or any of its rights, title or interests in or obligations (including without limitation the assumption of debt obligations) under this Agreement, except to a successor to all or substantially all the properties and assets of such party or as provided in Section 12.192 or 12.193, without the written consent of all the other parties hereto. 12.192. Notwithstanding the provisions of Section 12.191, any Sponsoring Company shall be permitted to, upon thirty (30) days notice to the Corporation and each other Sponsoring Company, without any further action by the Corporation or the other Sponsoring Companies, assign all or part of its rights, title and interests in, and obligations under this Agreement to a Permitted Assignee, provided that, the assignee and assignor of the rights, title and interests in, and obligations under, this Agreement have executed an assignment agreement in form and substance acceptable to the Corporation in its reasonable discretion (including, without limitation, the agreement by the Sponsoring Company assigning such rights, title and interests in, and obligations under, this Agreement to reimburse the Corporation and the other Sponsoring Companies for any fees or expenses required under any security issued, or agreement entered into, by the Corporation as a result of such assignment, including without limitation any consent fee or additional financing costs to the Corporation under the Corporation's then-existing securities or agreements resulting from such assignment). 12.193. Notwithstanding the provisions of Section 12.191, any Sponsoring Company shall be permitted to, subject to compliance with all of the requirements of this Section 12.193, assign all or part of its rights, title and interests in, and obligations under this Agreement to a Third Party without any further action by the Corporation or the other Sponsoring Companies. (a) A Sponsoring Company (the "Transferring Sponsor") that desires to assign all or part of its rights, title and interests in, and obligations under this Agreement to a Third Party shall deliver an Offer Notice to the Corporation and each other Sponsoring Company. The Offer Notice shall be deemed to be an irrevocable offer of the subject rights, title and interests in, and obligations under this Agreement to each of the other Sponsoring Companies that is not an Affiliate of the Transferring Sponsor, which offer must be held open for no less than thirty (30) days from the date of the Offer Notice (the "Election Period"). (b) The Sponsoring Companies (other than the Transferring Sponsor and its Affiliates) shall first have the right, but not the obligation, to purchase all of the rights, title and interests in, and obligations under this Agreement described in the Offer Notice at the price and on the terms specified therein by delivering written notice of such election to the Transferring Sponsor and the Corporation within the Election Period; provided that, irrespective of the terms and conditions of the Offer Notice, a Sponsoring Company may condition its election to purchase the interests described in the Offer Notice on the receipt of approval or consent from such Sponsoring Company's Board of Directors; provided further that, written notice of such conditional election must be delivered to the Transferring Sponsor and the Corporation within the Election Period and such conditional election shall be deemed withdrawn (as if it had never been provided) unless the Sponsoring Company that delivered such conditional election subsequently delivers written notice to the Transferring Sponsor and the Corporation on or before the tenth (10th) day after the expiration of the Election Period that all necessary approval or consent of such Sponsoring Company's Board of Directors have been obtained. To the extent that more than one Sponsoring Company exercises its right to purchase all of the rights, title and interests in, and obligations under this Agreement described in the Offer Notice in accordance with the previous sentence, such rights, title and interests in, and obligations under this Agreement shall be allotted (successively if necessary) among the Sponsoring Companies exercising such right in proportion to their respective Power Participation Ratios. (c) Each Sponsoring Company exercising its right to purchase any rights, title and interests in, and obligations under this Agreement pursuant to this Section 12.193 may choose to have an Affiliate purchase such rights, title and interests in, and obligations under this Agreement; provided that, notwithstanding anything in this Section 12.193 to the contrary, any assignment to a Sponsoring Company or its Affiliate hereunder must comply with the requirements of Section 12.192. (d) If one or more Sponsoring Companies have elected to purchase all of the rights, title and interests in, and obligations under this Agreement of the Transferring Sponsor pursuant to the Offer Notice, the assignment of such rights, title and interests in, and obligations under this Agreement shall be consummated as soon as practical after the delivery of the election notices, but in any event no later than fifteen (15) days after the filing and receipt, as applicable, of all necessary governmental filings, consents or other approvals and the expiration of all applicable waiting periods. At the closing of the purchase of such rights, title and interests in, and obligations under this Agreement from the Transferring Sponsor, the Transferring Sponsor shall provide representations and warranties customary for transactions of this type, including those as to its title to such securities and that there are no liens or other encumbrances on such securities (other than pursuant to this Agreement) and shall sign such documents as may reasonably be requested by the Corporation and the other Sponsoring Companies. The Sponsoring Companies or their Affiliates shall only be required to pay cash for the rights, title and interests in, and obligations under this Agreement being assigned by the Transferring Sponsor. (e) To the extent that the Sponsoring Companies have not elected to purchase all of the rights, title and interests in, and obligations under this Agreement described in the Offer Notice, the Transferring Sponsor may, within one-hundred and eighty (180) days after the later of the expiration of the Election Period or the deemed withdrawal of a conditional election by a Sponsoring Company under Section 12.193(b) hereof (if applicable), enter into a definitive agreement to, assign such rights, title and interests in, and obligations under this Agreement to a Third Party at a price no less than 92.5% of the purchase price specified in the Offer Notice and on other material terms and conditions no more favorable to the such Third Party than those specified in the Offer Notice; provided that such purchases shall be conditioned upon: (i) such Third Party having long-term unsecured non-credit enhanced indebtedness, as of the date of such assignment, with a Standard & Poor's credit rating of at least BBB- and a Moody's Investors Service, Inc. credit rating of at least Baa3 (provided that, if such Third Party's long-term unsecured non-credit enhanced indebtedness is not currently rated by one of Standard & Poor's or Moody, such Third Party's long-term unsecured non-credit enhanced indebtedness, as of the date of such assignment, must have either a Standard & Poor's credit rating of at least BBB- or a Moody's Investors Service, Inc. credit rating of at least Baa3); (ii) the filing or receipt, as applicable, of any necessary governmental filings, consents or other approvals; (iii) the determination by counsel for the Corporation that the assignment of the rights, title or interests in, or obligations under, this Agreement to such Third Party would not cause a termination, default, loss or payment obligation under any security issued, or agreement entered into, by the Corporation prior to such transfer; and (iv) such Third Party executing a counterpart of this Agreement, and both such Third Party and the Sponsoring Company which is assigning its rights, title and interests in, and obligations under, this Agreement executing such other documents as may be reasonably requested by the Corporation (including, without limitation, an assignment agreement in form and substance acceptable to the Corporation in its reasonable discretion and containing the agreement by such Sponsoring Company to reimburse the Corporation and the other Sponsoring Companies for any fees or expenses required under any security issued, or agreement entered into, by the Corporation as a result of such assignment, including without limitation any consent fee or additional financing costs to the Corporation under the Corporation's then-existing securities or agreements resulting from such assignment). In the event that the Sponsoring Company and a Third Party have not entered into a definitive agreement to assign the interests specified in the Offer Notice to such Third Party within the later of one-hundred and eighty (180) days after the expiration of the Election Period or the deemed withdrawal of a conditional election by a Sponsoring Company under Section 12.193(b) hereof (if applicable) for any reason or if either the price to be paid by such Third Party would be less than 92.5% of the purchase price specified in the Offer Notice or the other material terms of such assignment would be more favorable to such Third Party than the terms specified in the Offer Notice, then the restrictions provided for herein shall again be effective, and no assignment of any rights, title and interests in, and obligations under this Agreement may be made thereafter without again offering the same to Sponsoring Companies in accordance with this Section 12.193. 12.194 Charges for Surplus Energy to Assignee. With respect to any assignment permitted under this Section 12.19 hereof after the Effective Date, charges for Surplus Energy availed of by any such assignee shall be based on the calculation applicable under Section 6.024 hereof subject to the following changes: (i) if the average cost per Btu of all fuel consumed by the assignor (or in the case of any successive assignments, the first assignor after the Effective Date) in such assignor's own generating stations for the next preceding month (calculated as if such assignor were still a Sponsoring Company) would be greater than the average cost per Btu of all fuel consumed by the Corporation in its own generating stations during the current billing month, then for purposes of the calculation in Section 6.024 hereof, the Corporation shall use the average cost per Btu of all fuel consumed by such assignor in its own generating stations for the next preceding month in calculating the charges for such assignee; or (ii) if the average cost per Btu of all fuel consumed by the assignor (or in the case of any successive assignments, the first assignor after the Effective Date) in such assignor's own generating stations for the next preceding month (calculated as if such assignor were still a Sponsoring Company) would be less than or equal to the average cost per Btu of all fuel consumed by the Corporation in its own generating stations during the current billing month, then (A) the charges for such assignee for Surplus Energy shall be equal to an amount obtained by multiplying the billing kilowatt-hours of Surplus Energy availed of by such assignee during the current billing month by the average station heat rate of the Project Generating Stations for the current billing month times the average cost per Btu of all fuel consumed by the Corporation in its own generating stations during the current billing month, and (B) the charges for all Sponsoring Companies (other than any assignee(s) with charges for Surplus Energy subject to the calculations in this Section 12.194(ii)) shall be calculated in accordance with Section 6.024 hereof as if any assignee(s) with charges for Surplus Energy subject to the calculations in this Section 12.194(ii) had not availed itself of any kilowatt-hours of Surplus Energy during the current billing month and without such assignee(s) participating in any Power Participation Ratio share of the charges or credits applicable to the other Sponsoring Companies under Sections 6.024(ii) and (iii) hereof. 12.195 Delivery Point for Third Party Assignee. Notwithstanding any other provision of this Agreement to the contrary, with respect to any assignment permitted under this Section 12.19 hereof to a Third Party, as of the date of such assignment, Surplus Power and Surplus Energy to be delivered between Corporation and such Third Party assignee pursuant to this Agreement shall be delivered at the points, as scheduled by such assignee, where the transmission facilities of Corporation interconnect with the transmission facilities of any Sponsoring Company (or its successor or predecessor). 4. This Modification No. 15 shall become effective at 12:00 o'clock Midnight on the Effective Date. 5. The Inter-Company Power Agreement, as modified by Modifications Nos. 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 and 14 and as hereinbefore provided, is hereby in all respects confirmed. 6. This Modification No. 15 may be executed in any number of copies and by the different parties hereto on separate counterparts, each of which shall be deemed an original but all of which together shall constitute a single agreement. IN WITNESS WHEREOF, the parties hereto have executed this Modification No. 15 as of the day and year first written above. OHIO VALLEY ELECTRIC CORPORATION By: /s/ Michael Morris ALLEGHENY ENERGY SUPPLY COMPANY, L.L.C. By: /s/ David C. Benson APPALACHIAN POWER COMPANY By: /s/ Henry W. Fayne THE CINCINNATI GAS & ELECTRIC COMPANY By: /s/ Michael J. Cyrus COLUMBUS SOUTHERN POWER COMPANY By: /s/ Henry W. Fayne THE DAYTON POWER AND LIGHT COMPANY By: /s/ W. Steven Wolff FIRSTENERGY GENERATION CORP. By: /s/ Donald R. Schneider INDIANA MICHIGAN POWER COMPANY By: /s/ Henry W. Fayne KENTUCKY UTILITIES COMPANY By: /s/ Paul W. Thompson LOUISVILLE GAS AND ELECTRIC COMPANY By: /s/ Paul W. Thompson MONONGAHELA POWER COMPANY By: /s/ David C. Benson OHIO POWER COMPANY By: /s/ Henry W. Fayne SOUTHERN INDIANA GAS AND ELECTRIC COMPANY By: /s/ William S. Doty -----END PRIVACY-ENHANCED MESSAGE-----