-----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, AHQR9xNoyeFXq4zUo9Rnqk1s+nooErqYkNgUc1VAcwm3/QCrgWJ/JxJjFMgLdlPg JH7jWnO8+Yjlkbq3Zq7vFw== 0000899652-04-000194.txt : 20040930 0000899652-04-000194.hdr.sgml : 20040930 20040930161253 ACCESSION NUMBER: 0000899652-04-000194 CONFORMED SUBMISSION TYPE: U-1 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20040930 DATE AS OF CHANGE: 20040930 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINERGY CORP CENTRAL INDEX KEY: 0000899652 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 311385023 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1 SEC ACT: 1935 Act SEC FILE NUMBER: 070-10254 FILM NUMBER: 041055434 BUSINESS ADDRESS: STREET 1: 139 E FOURTH ST CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5132872644 MAIL ADDRESS: STREET 1: 139 E FOURTH STREET STREET 2: P.O BOX 960 CITY: CINCINATI STATE: OH ZIP: 45202 U-1 1 calebu1.txt As filed with the Securities and Exchange Commission on September 30, 2004. File No. 070-______ SECURITIES AND EXCHANGE COMMISSION 450 FIFTH STREET WASHINGTON, D.C. 20549 ------------------------------------------ FORM U-1 DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 -------------------------------------------- CINERGY CORP. THE CINCINNATI GAS & ELECTRIC COMPANY 139 East Fourth Street Cincinnati, Ohio 45202 (Name of companies filing this statement and addresses of principal executive offices) --------------------------------------------- CINERGY CORP. (Name of top registered holding company) --------------------------------------------- Wendy L. Aumiller Treasurer Cinergy Corp. 139 East Fourth Street Cincinnati, Ohio 45202 (Name and address of agent for service) Please direct communications to: George Dwight II William C. Weeden Associate General Counsel Skadden Arps Slate Meagher & Flom Cinergy Corp. 1400 New York Avenue, N.W. 139 East Fourth Street, 25 AT2 Washington, D.C. 20005 Cincinnati, Ohio 45202 202-371-7877 (ph) 513-287-2643 (ph) 202-371-7012 (f) 513-287-3810 (f) wweeden@skadden.com gdwight@cinergy.com Item 1. Description of Proposed Transactions A. Requested Authorization Cinergy Corp.("Cinergy"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended (the "Act"), and its subsidiary, The Cincinnati Gas & Electric Company ("CG&E"; and together with Cinergy, "Applicants"), request Commission authorization pursuant to Section 12(d) of the Act and Rule 44 for CG&E to transfer, at net book value as of closing, its ownership interest in three electric generating facilities, including certain realty and other improvements, equipment, assets, properties, facilities and rights associated therewith or ancillary thereto (collectively, the "Plants") having a total nameplate capacity of 1105 megawatts ("MW") (the "Transfer") to its subsidiary, The Union Light, Heat and Power Company ("ULH&P").1 At June 30, 2004, the Plants had a net book value of approximately $374 million. The Transfer meets the goal of the Kentucky Public Service Commission ("KPSC") that ULH&P acquire physical generating assets to serve its retail electric customers. Historically, those customers have been served entirely through long-term supply contracts between CG&E and ULH&P, in part from power generated from these Plants. The KPSC approved the transaction in December 2003, finding it in the best interests of ULH&P's customers and urging this Commission to give consideration to its findings.2 B. Parties 1. Cinergy Cinergy was created in connection with the October 1994 merger between CG&E and the then-parent company of PSI Energy, Inc. ("PSI").3 Through CG&E, ULH&P and PSI,4 Cinergy provides retail electric and/or natural gas service to customers in southwestern Ohio, northern Kentucky and most of Indiana. In addition to its Midwestern-based utility business, Cinergy has numerous non-utility subsidiaries engaged in a variety of energy-related businesses. As of and for the six months ended June 30, 2004, Cinergy reported consolidated total assets of approximately $14.0 billion and consolidated total operating revenues of approximately $2.3 billion. For further information regarding Cinergy, reference is made to Cinergy's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31 and June 30, 2004 and Cinergy's Annual Report on Form 10-K for 2003. 2. CG&E CG&E is a combination electric and gas public utility holding company formed under Ohio law and engaged in the production, transmission, distribution and sale of electric energy and the sale and transportation of natural gas in the southwestern portion of Ohio and, through ULH&P, northern Kentucky. The area served with electricity, gas, or both covers approximately 3,200 square miles, has an estimated population of 2.0 million people, and includes the cities of Cincinnati and Middletown in Ohio and Covington and Newport in Kentucky.5 Cinergy directly holds all the outstanding common stock of CG&E. The Public Utilities Commission of Ohio ("PUCO") regulates CG&E's retail sales of electricity and natural gas.6 CG&E's wholesale power sales and transmission services are regulated by the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act ("FPA"). CG&E currently provides ULH&P full requirements electric service under a long-term power sales agreement, FERC Rate Schedule No. 56 (the "Full Requirements PPA"). As of and for the six months ended June 30, 2004, CG&E reported consolidated total operating revenues of approximately $1.3 billion and consolidated total assets of approximately $5.9 billion. For further information regarding CG&E, reference is made to CG&E's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31 and June 30, 2004 and CG&E's Annual Report on Form 10-K for 2003. 3. ULH&P A direct wholly-owned subsidiary of CG&E formed under Kentucky law, ULH&P is engaged in the transmission, distribution, and sale of electric energy and the sale and transportation of natural gas in northern Kentucky. The area served with electricity, gas, or both covers approximately 500 square miles, has an estimated population of 330,000 people, and includes the cities of Covington and Newport in northern Kentucky. ULH&P owns no electric generating facilities, but rather historically has relied on CG&E for its full requirements of electric supply to serve its retail customers. ULH&P's retail sales of electricity and natural gas are regulated by the KPSC. ULH&P has no wholesale customers. As of and for the six months ended June 30, 2004, ULH&P reported total operating revenues of approximately $187 million and total assets of approximately $444 million. For further information regarding ULH&P, reference is made to ULH&P's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31 and June 30, 2004 and ULH&P's Annual Report on Form 10-K for 2003. C. Terms of Transfer CG&E proposes to transfer, and ULH&P intends to acquire, the Plants, which comprise CG&E's right, title and interest in and to the following three electric generating stations, together in each case with certain realty and other improvements, equipment, assets, properties, facilities (e.g., inventories of fuel, supplies, materials and spare parts) associated with or ancillary to each Plant. CG&E will retain all transmission facilities and generation step-up transformers ("GSUs") or other FERC-jurisdictional facilities physically connected to the Plants. East Bend. ULH&P will acquire CG&E's entire ownership share (447 MW nameplate rating) in the East Bend Generating Station ("East Bend"), a 648 MW (nameplate rating) coal-fired baseload station located in Rabbit Hash, Kentucky. East Bend is jointly owned by CG&E (69 percent) and The Dayton Power & Light Company ("DP&L") (31 percent). At June 30, 2004, the net book value of CG&E's ownership interest in East Bend was approximately $200 million (including construction work in progress ("CWIP") of approximately $4.6 million). Miami Fort 6. ULH&P also proposes to acquire Miami Fort Unit 6 ("Miami Fort 6"), a 168 MW (nameplate rating) coal-fired intermediate load generating unit located in North Bend, Ohio. Miami Fort 6 is wholly-owned by CG&E, but is part of the larger Miami Fort Generating Station, which is jointly owned by CG&E and DP&L. At June 30, 2004, Miami Fort 6 had a net book value of approximately $21 million (including CWIP of approximately $4.6 million). Woodsdale. Finally, ULH&P proposes to acquire the Woodsdale Generating Station ("Woodsdale"), a 490 MW (nameplate rating) dual-fuel combustion-turbine peaking station that operates on either natural gas or propane and is located in Trenton, Ohio. Woodsdale is wholly-owned by CG&E. At June 30, 2004, Woodsdale had a net book value of approximately $153 million (including CWIP of approximately $11 million). The Plants will be transferred at net book value at the closing of the Transfer, pursuant to the terms of separate, but substantially identical Asset Transfer Agreements.7 The Plants are in good operating condition and are directly interconnected to the Cinergy joint transmission system. Following the acquisition, ULH&P will also operate the Plants, with assistance, provided at cost, (i) from Cinergy Services, Inc., Cinergy's service company subsidiary, in accordance with its Commission-approved utility service agreement and (ii) from CG&E, on an as-needed basis, pursuant to the exemption under Rule 87(a)(3). ULH&P will fund its acquisition of the Plants with debt and equity, in reliance on existing Commission authorization and/or the exemption for state commission-authorized financings under Rule 52(a).8 In connection with the Transfer, CG&E and ULH&P will enter into and terminate certain FERC-jurisdictional agreements pursuant to Section 205 of the FPA (collectively, "FERC 205 Agreements"). The Purchase, Sale and Operation Agreement between CG&E and ULH&P ("PSOA") provides the terms and conditions pursuant to which the Plants will continue to be jointly dispatched with the generation resources of CG&E and PSI. Importantly, by virtue of the PSOA, following the Transfer, the Plants will continue to be dispatched in exactly the same manner as they are today, i.e., jointly with CG&E's remaining generating facilities and PSI's generation. Second, pursuant to the Back-up Power Sale Agreement between CG&E and ULH&P, CG&E will sell back-up power to ULH&P in the event of a scheduled or forced outage at East Bend or Miami Fort 6.9 The Facilities Operation Agreement between CG&E and ULH&P provides the terms and conditions under which CG&E will provide ULH&P with the use of the various GSUs owned by CG&E and interconnected with the Plants. Finally, CG&E and ULH&P will file a notice of cancellation of the Full Requirements PPA upon closing of the transaction, as ULH&P no longer will require power under that agreement once it owns the Plants. D. Rationale for Transfer Although separately incorporated, ULH&P and CG&E have always been operated and planned effectively as a single company. For a number of reasons, all of the generating facilities for the combined companies have been placed in CG&E. CG&E's generation portfolio thus has been planned and operated to meet the power needs of retail customers in the Greater Cincinnati/Northern Kentucky area, the combined CG&E/ULH&P service territories, not just for CG&E load. ULH&P has paid for power from the Plants and CG&E's other generation assets under a number of long-term agreements, including currently under the Full Requirements PPA. However, the KPSC has stated on a number of occasions, dating back to 2001, that it believes an alternative structure should be adopted to serve load in Kentucky, i.e., that ULH&P should own physical generation assets. The KPSC is concerned that reliance on purchased power to serve ULH&P's entire load unduly exposes ULH&P's retail customers to the volatility of market prices for power.10 In light of these concerns, CG&E and ULH&P determined to enter into the proposed transactions. Preliminary to that determination, ULH&P examined various alternatives for meeting the KPSC's goals. ULH&P concluded that a request for proposals ("RFP") would not benefit its retail customers, and thus chose not to initiate such a process. Among other things, the financial problems that had resulted in significant downgrades in the credit ratings of numerous electric industry participants increased credit risk associated with purchases from many potential third parties. In its December 2003 order authorizing the Transfer, the KPSC agreed with ULH&P's determination that an RFP would not benefit ULH&P's customers.11 ULH&P also concluded that constructing new generation was not a viable alternative for a number of reasons, including the cost of construction and difficulties in siting new plants. Finally, entering into new purchase agreements to serve ULH&P's load would do nothing to further the KPSC's goal of ending ULH&P's total reliance on purchases. ULH&P and CG&E also analyzed a number of possible transfers of plants from CG&E to ULH&P. The Transfer is the result of that analysis. ULH&P determined that the Plants, taken together, will adequately meet ULH&P's retail load requirements. As the KPSC has found, this mix of generating assets (base load, intermediate and peaking) reasonably matches ULH&P's expected load shape over the long-run.12 Further, each of the Plants is directly interconnected to the Cinergy joint transmission system, reducing ULH&P's exposure to electric supply interruptions caused by the implementation of transmission loading relief procedures on other systems. ULH&P also determined that acquiring the Plants at their net book value would be the least cost alternative for meeting its long-term retail load requirements. Finally, ULH&P determined, in consultation with ICF Consulting, a recognized expert in the field, that the market value of the Plants exceeds their net book value. Item 2. Fees, Commissions and Expenses Total fees and expenses in connection with the preparation and filing of this application, and receipt of the Commission's order with respect thereto, are estimated not to exceed $5,000, consisting chiefly of outside counsel fees and expenses. Item 3. Applicable Statutory Provisions A. Provisions Applicable to Transfer Sections 9(b)(1) and 12(d) of the Act and Rules 44 and 54 thereunder are or may be applicable to the proposed transactions. The KPSC Order exempts ULH&P's acquisition of the Plants from Commission jurisdiction under Sections 9(a) and 10 pursuant to Section 9(b)(1). With respect to the transfer by CG&E, Section 12(d) and Rule 44, taken together, provide, as relevant here, that no registered holding company shall, directly or indirectly (emphasis added), sell to any person any utility assets -- "in contravention of such rules and regulations or orders regarding the consideration to be received for such sale, maintenance of competitive conditions, fees and commissions, accounts, disclosure of interest, and similar matters as the Commission deems necessary or appropriate in the public interest or for the protection of investors or consumers or to prevent the circumvention of the provisions of this title or the rules, regulations, or orders thereunder." The Transfer clearly satisfies these criteria. The Transfer will be effected at "cost" (i.e., net book value of the Plants at closing), which is fair and reasonable consideration from the perspective of both parties. As discussed above (see Item 1.D, "Rationale for Transfer"), in reviewing the transaction, the KPSC agreed with ULH&P's determination that an RFP would not have benefited ULH&P's customers. The KPSC found the Transfer in the best interests of ULH&P and its ratepayers, and urged this Commission to give weight to its findings. B. Rule 54 Statement Rule 54 provides that in determining whether to approve the issue or sale of a security by a registered holding company for purposes other than the acquisition of an exempt wholesale generator ("EWG") or a foreign utility company ("FUCO"), or (as in the present case) other transactions by such registered holding company or its subsidiaries other than with respect to EWGs or FUCOs, the Commission shall not consider the effect of the capitalization or earnings of any subsidiary which is an EWG or a FUCO upon the registered holding company if paragraphs (a), (b) and (c) of Rule 53 are satisfied. Cinergy's aggregate investment in EWGs and FUCOs currently exceeds the "safe harbor" afforded by Rule 53(a). At June 30, 2004, Cinergy's "aggregate investment" (as defined in Rule 53(a)(1)) was approximately $841 million and Cinergy's "consolidated retained earnings" (also as defined in Rule 53(a)(1)) were approximately $1,548 million. Accordingly, at June 30, 2004, Cinergy's aggregate investment exceeded 50% of its consolidated earnings, the "safe harbor" limitation contained in Rule 53(a). However, the Commission issued an order in May 2001 (HCAR No. 27400, May 18, 2001 (the "May 2001 Order")) authorizing Cinergy to increase its aggregate investment to an amount equal to the sum of (1) 100% of consolidated retained earnings plus (2) $2,000,000,000, excluding certain restructuring investments as provided therein.13 Accordingly, at June 30, 2004, Cinergy had all requisite authority under the Act for an aggregate investment totaling $3,548 million. Therefore, although Cinergy's aggregate investment at such date exceeded the 50% "safe harbor" limitation of Rule 53, it is well within the higher investment level of the May 2001 Order. With respect to capitalization, there has been no material adverse impact on Cinergy's consolidated capitalization resulting from Cinergy's investments in EWGs and FUCOs. At December 31, 2000, the most recent period for which financial statement information was evaluated in the May 2001 Order, Cinergy's consolidated capitalization consisted of 41.3% equity and 58.7% debt. At June 30, 2004, Cinergy's consolidated capitalization consisted of 42.5% equity and 57.5% debt. Further, at June 30, 2004, Cinergy's senior unsecured debt was rated "investment grade" by all the major rating agencies. Cinergy has committed to maintain a 30% consolidated common equity ratio (subject to certain qualifications), and the proposed transactions will have no adverse impact on Cinergy's ability to meet that commitment.14 At June 30, 2004, Cinergy's consolidated common equity ratio was 41.8%. Cinergy satisfies all of the other conditions of paragraphs (a) and (b) of rule 53. With reference to rule 53(a)(2), Cinergy maintains books and records in conformity with, and otherwise adheres to, the requirements thereof. With reference to rule 53(a)(3), no more than 2% of the employees of Cinergy's domestic public utility companies render services, at any one time, directly or indirectly, to EWGs or FUCOs in which Cinergy directly or indirectly holds an interest. With reference to rule 53(a)(4), Cinergy will concurrently provide a copy of this application to each regulator referred to therein, and will otherwise comply with the requirements thereof concerning the furnishing of information. With reference to rule 53(b), none of the circumstances enumerated in subparagraphs (1), (2) and (3) thereunder have occurred. Finally, rule 53(c) by its terms is inapplicable since the proposed transactions do not involve the issue or sale of a security to finance the acquisition of an EWG or FUCO. Item 4. Regulatory Approval With the exception of the KPSC which has issued its approval, no state or federal commission (other than this Commission), has jurisdiction over the Transfer.15 Item 5. Procedure Applicants request that the Commission issue a notice of and order authorizing the proposed transactions as soon as practicable. Applicants waive a recommended decision by a hearing officer or other responsible officer of the Commission; consent that the Division of Investment Management may assist in the preparation of the Commission's order, unless the Division opposes the matters proposed herein; and request that there be no waiting period between the issuance of the Commission's order and its effectiveness. Item 6. Exhibits and Financial Statements (a) Exhibits A Not applicable B Form of Asset Transfer Agreement C Not applicable D-1 Application, dated July 21, 2003, filed by ULH&P with KPSC in Case No. 2003-00252 (excluding exhibits thereto) D-2 Amended Application, dated October 29, 2003, in Case No. 2003-00252 (excluding exhibits thereto) D-3 Order of KPSC, dated December 5, 2003, in Case No. 2003-00252 E Not applicable F Preliminary opinion of counsel G Form of Federal Register notice (b) Financial Statements FS-1 Consolidated balance sheet of Cinergy as of June 30, 2004 (filed as a part of and hereby incorporated by reference from Cinergy's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004) FS-2 Consolidated statement of income of Cinergy for the six months ended June 30, 2004 (filed as a part of and hereby incorporated by reference from Cinergy's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004) FS-3 Consolidated balance sheet of CG&E as of June 30, 2004 (filed as a part of and hereby incorporated by reference from CG&E's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004) FS-4 Consolidated statement of income of CG&E for the six months ended June 30, 2004 (filed as a part of and hereby incorporated by reference from CG&E's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004) Item 7. Information as to Environmental Effects (a) The Commission's action in this matter will not constitute any major federal action significantly affecting the quality of the human environment. (b) No other federal agency has prepared or is preparing an environmental impact statement with regard to the proposed transactions. SIGNATURE Pursuant to the requirements of the Act, each of the undersigned companies has duly caused this Declaration on Form U-1 to be signed on its behalf by the officer indicated below. Dated: September 30, 2004 CINERGY CORP. By: /s/Wendy L. Aumiller Wendy L. Aumiller Treasurer THE CINCINNATI GAS & ELECTRIC COMPANY By: /s/Wendy L. Aumiller Wendy L. Aumiller Treasurer 1 By virtue of the KPSC Order (defined below), ULH&P's acquisition of the Plants is exempt from Commission jurisdiction under Sections 9(a)(1) and 10 of the Act See Section 9(b)(1) of the Act, 15 U.S.C. ss. 79i(b)(1). 2 See In the Matter of the Application of The Union Light Heat and Power Company for a Certificate of Public Convenience to Acquire Certain Generation Resources and Related Property; for Approval of Certain Purchase Power Agreements; for Approval of Certain Accounting Treatment; and for Approval of Deviation from Requirements of KRS 278.2207 and 278.2213(6), Case No. 2003-00252, at n. 1 (Dec. 5, 2003) ("KPSC Order"). 3 See Cinergy Corp., HCAR No. 26146, Oct. 21, 1994. 4 PSI is engaged in the production, transmission, distribution, and sale of electric energy in north central, central, and southern Indiana, serving an estimated population of 2.1 million people located in 69 of the state's 92 counties, including the cities of Bloomington, Columbus, Kokomo, Lafayette, New Albany, and Terre Haute. Cinergy directly holds all the outstanding common stock of PSI. PSI's retail electric services are regulated by the Indiana Utility Regulatory Commission, and its wholesale electric sales and transmission services are regulated by the Federal Energy Regulatory Commission. PSI will not acquire or divest any assets as a result of, nor will it otherwise participate in or be affected by, the Transfer. 5 In August 2004, CG&E consummated the sale to a nonaffiliate of its gas utility subsidiary, Lawrenceburg Gas Company, which provides local distribution service in and around Lawrenceburg, Indiana. See Cinergy Corp., et al., HCAR No. 27880, July 29, 2004. In addition to ULH&P, CG&E has one other utility subsidiary, Miami Power Corporation, whose business is limited to ownership of a 138 kilovolt transmission line extending from the Miami Fort Generating Station along the Ohio River in southwestern Ohio to a point near Madison, Indiana. CG&E has several immaterial nonutility subsidiaries. 6 Pursuant to Ohio's electric customer choice legislation which went into effect in January 2001, the PUCO has no approval authority over the Transfer. 7 At closing, ULH&P shall also (i) compensate CG&E at cost for inventories, as of the closing date, of fuels, supplies, materials and spare parts of CG&E located at or in transit to the Plants and (ii) reimburse CG&E for all transaction costs incurred by CG&E or any of its affiliates in connection with the Transfer. 8 ULH&P has Commission authority to issue debt with a maturity of two years or less in an aggregate principal amount not to exceed $65 million at any time outstanding, subject to certain terms and conditions, through June 30, 2006. See Cinergy Corp., et al., HCAR No. 27429, Aug. 2, 2001. 9 Woodsdale is not covered by the Back-up Agreement because, as a peaking facility it will not operate for most hours of the year, and thus will not be relied on to meet ULH&P's base load requirements. ULH&P has determined to bid out its back-up requirements for East Bend and Miami Fort 6, and thus CG&E will only file for FERC approval of the Back-up Agreement in the event that it is the winning bidder. 10 See, e.g., KPSC Order, supra, at 3-4 ("Background"). 11 The KPSC noted that the cost of the units is no greater than the market price; that "[a]ttempting to acquire an entire generation fleet through a single transaction is unprecedented in the electric utility industry"; and that uncertainty in the market supported the approach adopted by ULH&P. Id. at 10-11. 12 Id. at 12 (finding "ULH&P's analysis of supply-side resource options to be reasonable."). 13 The May 2001 Order reserved jurisdiction over, and excluded from the aggregate investment limitation described in the text, Cinergy's proposal regarding the potential transfer of CG&E's and PSI's generating assets to one or more EWG affiliates and Cinergy's proposed aggregate investment therein, which would not exceed the net book value of such generating assets at the time of transfer. 14 See Cinergy Corp., et al., HCAR No. 27190, June 23, 2000. 15 The FERC has jurisdiction over the FERC 205 Agreements but not the Transfer. EX-99 2 exhibitg.txt Exhibit G Form of Notice Securities and Exchange Commission (Release No. 35-_________) Cinergy Corp., a Delaware corporation and registered holding company ("Cinergy"), and its subsidiary The Cincinnati Gas & Electric Company, an Ohio corporation ("CG&E"; and together with Cinergy, "Applicants"), each with offices located at 139 East Fourth Street, Cincinnati, Ohio 45202, have jointly filed a Declaration on Form U-1 (the "Application") requesting Commission authorization pursuant to Section 12(d) of the Act and Rules 44 and 54 for CG&E to transfer, at net book value at closing, its ownership interest in three electric generating facilities, including certain realty and other improvements, equipment, assets, properties, facilities and rights associated therewith or ancillary thereto (collectively, the "Plants") having a total nameplate capacity of 1105 megawatts ("MW") (the "Transfer") to its subsidiary, The Union Light, Heat and Power Company ("ULH&P").1 At June 30, 2004, the Plants had a net book value of approximately $374 million. Cinergy was created in connection with the October 1994 merger between CG&E and the then-parent company of PSI Energy, Inc. ("PSI").2 Through CG&E, ULH&P and PSI,3 Cinergy provides retail electric and/or natural gas service to customers in southwestern Ohio, northern Kentucky and most of Indiana. In addition to its Midwestern-based utility business, Cinergy has numerous non-utility subsidiaries engaged in a variety of energy-related businesses. As of and for the six months ended June 30, 2004, Cinergy reported consolidated total assets of approximately $14.0 billion and consolidated total operating revenues of approximately $2.3 billion. CG&E is a combination electric and gas public utility holding company formed under Ohio law and engaged in the production, transmission, distribution and sale of electric energy and the sale and transportation of natural gas in the southwestern portion of Ohio and, through ULH&P, northern Kentucky. The area served with electricity, gas, or both covers approximately 3,200 square miles, has an estimated population of two million people, and includes the cities of Cincinnati and Middletown in Ohio and Covington and Newport in Kentucky.4 Cinergy directly holds all the outstanding common stock of CG&E. The Public Utilities Commission of Ohio ("PUCO") regulates CG&E's retail sales of electricity and natural gas.5 CG&E's wholesale power sales and transmission services are regulated by the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act ("FPA"). CG&E currently provides ULH&P full requirements electric service under a long-term power sales agreement, FERC Rate Schedule No. 56 (the "Full Requirements PPA"). As of and for the six months ended June 30, 2004, CG&E reported consolidated total operating revenues of approximately $1.3 billion and consolidated total assets of approximately $5.9 billion. A direct wholly-owned subsidiary of CG&E formed under Kentucky law, ULH&P is engaged in the transmission, distribution, and sale of electric energy and the sale and transportation of natural gas in northern Kentucky. The area served with electricity, gas, or both covers approximately 500 square miles, has an estimated population of 330,000 people, and includes the cities of Covington and Newport in northern Kentucky. ULH&P owns no electric generating facilities, but rather historically has relied on CG&E for its full requirements of electric supply to serve its retail customers. ULH&P's retail sales of electricity and natural gas are regulated by the Kentucky Public Service Commission ("KPSC"). ULH&P has no wholesale customers. As of and for the six months ended June 30, 2004, ULH&P reported total operating revenues of approximately $187 million and total assets of approximately $444 million. CG&E proposes to transfer, and ULH&P intends to acquire, the Plants, which comprise CG&E's right, title and interest in and to the following three electric generating stations, together in each case with certain realty and other improvements, equipment, assets, properties, facilities (e.g., inventories of fuel, supplies, materials and spare parts) associated with or ancillary to each Plant. CG&E will retain all transmission facilities and generation step-up transformers ("GSUs") or other FERC-jurisdictional facilities physically connected to the Plants. East Bend. ULH&P will acquire CG&E's entire ownership share (447 MW nameplate rating) in the East Bend Generating Station ("East Bend"), a 648 MW (nameplate rating) coal-fired baseload station located in Rabbit Hash, Kentucky. East Bend is jointly owned by CG&E (69 percent) and The Dayton Power & Light Company ("DP&L") (31 percent). At June 30, 2004, the net book value of CG&E's ownership interest in East Bend was approximately $200 million (including construction work in progress ("CWIP") of approximately $4.6 million). Miami Fort 6. ULH&P also proposes to acquire Miami Fort Unit 6 ("Miami Fort 6"), a 168 MW (nameplate rating) coal-fired intermediate load generating unit located in North Bend, Ohio. Miami Fort 6 is wholly-owned by CG&E, but is part of the larger Miami Fort Generating Station, which is jointly owned by CG&E and DP&L. At June 30, 2004, Miami Fort 6 had a net book value of approximately $21 million (including CWIP of approximately $4.6 million). Woodsdale. Finally, ULH&P proposes to acquire the Woodsdale Generating Station ("Woodsdale"), a 490 MW (nameplate rating) dual-fuel combustion-turbine peaking station that operates on either natural gas or propane and is located in Trenton, Ohio. Woodsdale is wholly-owned by CG&E. At June 30, 2004, Woodsdale had a net book value of approximately $153 million (including CWIP of approximately $11 million). The Plants will be transferred at net book value at the closing of the Transfer, pursuant to the terms of separate, but substantially identical Asset Transfer Agreements.6 Applicants state that the Plants are in good operating condition and are directly interconnected to the Cinergy joint transmission system. Following the acquisition, ULH&P will also operate the Plants, with assistance, provided at cost, (i) from Cinergy Services, Inc., Cinergy's service company subsidiary, in accordance with its Commission-approved utility service agreement and (ii) from CG&E, on an as-needed basis, pursuant to the exemption under Rule 87(a)(3). ULH&P will fund its acquisition of the Plants with debt and equity, in reliance on existing Commission authorization and/or the exemption for state commission-authorized financings under Rule 52(a).7 In connection with the Transfer, CG&E and ULH&P will enter into and terminate certain FERC-jurisdictional agreements pursuant to Section 205 of the FPA (collectively, "FERC 205 Agreements"). The Purchase, Sale and Operation Agreement between CG&E and ULH&P ("PSOA") provides the terms and conditions pursuant to which the Plants will continue to be jointly dispatched with the generation resources of CG&E and PSI. By virtue of the PSOA, following the Transfer, the Plants will continue to be dispatched in exactly the same manner as they are today, i.e., jointly with CG&E's remaining generating facilities and PSI's generation. Second, pursuant to the Back-up Power Sale Agreement between CG&E and ULH&P, CG&E will sell back-up power to ULH&P in the event of a scheduled or forced outage at East Bend or Miami Fort 6.8 The Facilities Operation Agreement between CG&E and ULH&P provides the terms and conditions under which CG&E will provide ULH&P with the use of the various GSUs owned by CG&E and interconnected with the Plants. Finally, CG&E and ULH&P will file a notice of cancellation of the Full Requirements PPA upon closing of the transaction, as ULH&P no longer will require power under that agreement once it owns the Plants. Total fees and expenses in connection with the preparation and filing of the Application, and receipt of the Commission's order with respect thereto, are estimated not to exceed $5,000, consisting chiefly of outside counsel fees and expenses. With the exception of the KPSC which has issued its approval,9 no state or federal commission (other than the Commission), has jurisdiction over the Transfer.10 For the Commission, by the Division of Investment Management, pursuant to delegated authority. 1 Applicant's state that by virtue of the Kentucky Public Service Commission's December 2003 order in Case No. 2003-00252, ULH&P's acquisition of the Plants is exempt from Commission jurisdiction under Sections 9(a)(1) and 10 of the Act pursuant to Section 9(b)(1). 2 See Cinergy Corp., HCAR No. 26146, Oct. 21, 1994. 3 PSI is engaged in the production, transmission, distribution, and sale of electric energy in north central, central, and southern Indiana, serving an estimated population of 2.1 million people located in 69 of the state's 92 counties, including the cities of Bloomington, Columbus, Kokomo, Lafayette, New Albany, and Terre Haute. Cinergy directly holds all the outstanding common stock of PSI. PSI's retail electric services are regulated by the Indiana Utility Regulatory Commission, and its wholesale electric sales and transmission services are regulated by the Federal Energy Regulatory Commission. PSI will not acquire or divest any assets as a result of, nor will it otherwise participate in or be affected by, the Transfer. 4 In August 2004, CG&E consummated the sale to a nonaffiliate of its gas utility subsidiary, Lawrenceburg Gas Company, which provides local distribution service in and around Lawrenceburg, Indiana. See Cinergy Corp., et al., HCAR No. 27880, July 29, 2004. In addition to ULH&P, CG&E has one other utility subsidiary, Miami Power Corporation, whose business is limited to ownership of a 138 kilovolt transmission line extending from the Miami Fort Generating Station along the Ohio River in southwestern Ohio to a point near Madison, Indiana. CG&E has several immaterial nonutility subsidiaries. 5 Pursuant to Ohio's electric customer choice legislation which went into effect in January 2001, the PUCO has no approval authority over the sale by CG&E of the Plants or otherwise with respect to the Transfer. 6 At closing, ULH&P shall also (i) compensate CG&E at cost for inventories, as of the closing date, of fuels, supplies, materials and spare parts of CG&E located at or in transit to the Plants and (ii) reimburse CG&E for all transaction costs incurred by CG&E or any of its affiliates in connection with the Transfer. 7 ULH&P has Commission authority to issue debt with a maturity of two years or less in an aggregate principal amount not to exceed $65 million at any time outstanding, subject to certain terms and conditions, through June 30, 2006. See Cinergy Corp., et al., HCAR No. 27429, Aug. 2, 2001. 8 Woodsdale is not covered by the Back-up Agreement because, as a peaking facility it will not operate for most hours of the year, and thus will not be relied on to meet ULH&P's base load requirements. ULH&P has determined to bid out its back-up requirements for East Bend and Miami Fort 6, and thus CG&E will only file for FERC approval of the Back-up Agreement in the event that it is the winning bidder. 9 In the Matter of the Application of The Union Light Heat and Power Company for a Certificate of Public Convenience to Acquire Certain Generation Resources and Related Property; for Approval of Certain Purchase Power Agreements; for Approval of Certain Accounting Treatment; and for Approval of Deviation from Requirements of KRS 278.2207 and 278.2213(6), Case No. 2003-00252 (Dec. 5, 2003). 10 Applicants state that the FERC has jurisdiction over the FERC 205 Agreements but not the Transfer. EX-99 3 caleb200300252.txt Exhibit D-3 COMMONWEALTH OF KENTUCKY BEFORE THE PUBLIC SERVICE COMMISSION In the Matter of: THE APPLICATION OF THE UNION LIGHT, HEAT AND ) POWER COMPANY FOR A CERTIFICATE OF PUBLIC ) CONVENIENCE TO ACQUIRE CERTAIN GENERATION ) RESOURCES AND RELATED PROPERTY; FOR ) APPROVAL OF CERTAIN PURCHASE POWER ) CASE NO AGREEMENTS; FOR APPROVAL OF CERTAIN ) 2003-00252 ACCOUNTING TREATMENT; AND FOR APPROVAL OF ) DEVIATION FROM REQUIREMENTS OF KRS 278.2207 ) AND 278.2213(6) ) I N D E X INTRODUCTION............................................................1 SUMMARY OF DECISION.....................................................2 BACKGROUND .............................................................3 ULH&P'S PROPOSAL........................................................4 THE AG'S POSITION.......................................................7 Need For an RFP.....................................................7 Transaction Costs..................................................12 ADITC and Deferred Income Taxes....................................14 Profits From Off-System Sales......................................18 FAC Treatment of Energy Transfers Under the PSOA...................20 OTHER ISSUES...........................................................21 New Agreements and Contracts.......................................21 Request for Deviation Regarding Affiliate Transactions.............25 Other Accounting and Rate-Making Treatment Proposals...............27 Requirement to File a Stand-Alone IRP..............................28 ULH&P'S Next General Rate Case.....................................28 Acceptance of Decision.............................................29 FINDINGS AND ORDERS....................................................30 APPENDIX A APPENDIX B COMMONWEALTH OF KENTUCKY BEFORE THE PUBLIC SERVICE COMMISSION In the Matter of: THE APPLICATION OF THE UNION LIGHT, HEAT AND ) POWER COMPANY FOR A CERTIFICATE OF PUBLIC ) CONVENIENCE TO ACQUIRE CERTAIN GENERATION ) RESOURCES AND RELATED PROPERTY; FOR ) CASE NO. APPROVAL OF CERTAIN PURCHASE POWER ) 2003-00252 AGREEMENTS; FOR APPROVAL OF CERTAIN ) ACCOUNTING TREATMENT; AND FOR APPROVAL OF ) DEVIATION FROM REQUIREMENTS OF KRS 278.2207 ) AND 278.2213(6) ) INTERIM ORDER On July 21, 2003, The Union Light, Heat and Power Company ("ULH&P") applied for a certificate of public convenience to acquire 1,105 megawatts ("MW") of generating capacity from its parent company, The Cincinnati Gas and Electric Company ("CG&E"), and approval of: (1) certain purchase power agreements with CG&E; (2) certain accounting and rate-making treatments related to the proposed acquisition, and (3) a request to deviate from certain statutory requirements related to affiliate transactions. The Attorney General of the Commonwealth of Kentucky, by and through his Office of Rate Intervention ("AG"), is the only intervenor in this proceeding. ULH&P responded to two rounds of interrogatories by the AG and Commission Staff. The AG filed testimony of his expert witnesses on September 26, 2003 and responded to one round of interrogatories by ULH&P and Commission Staff. Informal conferences were held at the Commission's offices on October 15, 21, and 24, 2003. On October 29, ULH&P filed an amendment to its application that changed several of the accounting and rate-making treatments proposed in its original application. A public hearing was held on October 29 and 30, 2003. ULH&P and the AG filed responses to hearing data requests on November 7, 2003. Post-hearing briefs were received on November 19, 2003, and the case now stands submitted for decision. SUMMARY OF DECISION Having considered and thoroughly analyzed the evidence, we find that the proposed transfer is in the best interests of ULH&P and its ratepayers and should be approved, with some clarification and modification, subject to the Commission's review and approval of all transaction documents in their final form.1 While this Commission cannot, in this transfer proceeding, render a decision on certain requests that will be binding on a future Commission in a ULH&P general rate case, we find that the related accounting and rate-making treatments proposed by ULH&P appear, at this time, to be reasonable.2 We also find that ULH&P's requests to deviate from the Commission's statutory requirements regarding affiliate transactions and from our requirement that it analyze bids for purchased power in conjunction with its next Integrated Resource Plan ("IRP") filing are reasonable and should be granted. BACKGROUND In Case No. 2001-00058, the Commission approved a wholesale power contract under which ULH&P purchases power from CG&E as a full requirements customer.3 That contract, scheduled to run through 2006, provides for ULH&P to purchase power from CG&E at a fixed price containing a market price component.4 In its approval Order in that proceeding, the Commission expressed its interest in ULH&P acquiring generation in order to insulate itself from the impacts of market prices for wholesale power on a going-forward basis. The Commission also required ULH&P to file a stand-alone IRP no later than June 30, 2004 as a means of evaluating its future resource supply needs.5 In its December 21, 2001 Order in Administrative Case No. 387, the Commission reiterated its concern regarding ULH&P's potential exposure to market prices in the future and also expressed concern that ULH&P had no announced plans for meeting its customers' power needs after the termination date of the current wholesale power contract.6 ULH&P states that this application is its response to the concerns expressed by the Commission in those prior proceedings. Its proposal includes the acquisition of CG&E's 69 percent share of East Bend No. 2,7 a 648 MW base load, coal-fired generating unit located in Rabbit Hash, Kentucky; Miami Fort No. 6, a 168 MW intermediate load, coal-fired generating unit located in North Bend, Ohio; and the 490 MW Woodsdale Generating Station, consisting of six peak load, gas or propane-fired generating units located in Trenton, Ohio.8 Along with its application, ULH&P filed an independent due diligence assessment of the subject facilities, which was performed by Burns & McDonnell Engineering Company ("B&McD").9 ULH&P'S PROPOSAL Under the amended application, the specific generating units will be transferred from CG&E to ULH&P at what is commonly referred to as net book value which, from a utility regulatory perspective, is defined as original cost less accumulated depreciation, with the original cost and the accumulated depreciation being carried forward to the accounting records of the acquiring entity. Because FERC and the SEC must rule upon the proposed transaction before it can be consummated, ULH&P and CG&E anticipate that the proposed transaction will not be completed until mid 2004. Although ULH&P will acquire ownership of these units, Cinergy's generation fleet, including these units, will continue to be operated and dispatched on a system-wide, centralized basis. ULH&P requests approval of a back-up power sale agreement ("PSA") under which CG&E will provide power to ULH&P when ULH&P's generation is not available to meet its system demand. It also requests approval of a purchase, sale and operation agreement ("PSOA") which will govern the terms of energy transfers between ULH&P and CG&E that occur for economic rather than reliability reasons. In addition to these agreements, ULH&P requests approval of assignment from CG&E of existing contracts governing the natural gas supply, propane fuel supply and propane storage at the Woodsdale site. The parties to these contracts are Cinergy Marketing and Trading, LP ("CMT"), Ohio River Valley Propane LLC ("ORVP"), affiliates within Cinergy, and TE Products Pipeline Company ("TEPPCO"), a non-affiliate company.10 In conjunction with the proposed acquisition of these generating units, ULH&P proposes specific accounting and rate-making treatments for certain revenues and costs, treatments it claims are necessary to make the transaction acceptable to CG&E and to maintain benefits that CG&E and Cinergy presently realize under the units' deregulated status. These accounting and rate-making treatments, as set forth in the amendment to ULH&P's application, are: (1) Fixing, for rate-making purposes, the value of the facilities being transferred at original cost less accumulated depreciation; (2) Deferring until ULH&P's next rate case a maximum of $2.45 million in transaction costs incurred by ULH&P and CG&E related to the transfer of the specific units, with such costs amortized over 5 years without carrying charges; (3) Including in ULH&P's future base rates the capacity charges set out in the back-up PSA; (4) Including in ULH&P's future Fuel Adjustment Clause ("FAC") the costs of energy charges assessed under the back-up PSA and the costs of energy transfers from CG&E assessed under the PSOA; (5) Authorizing ULH&P to record accumulated deferred investment tax credits ("ADITC") and accumulated deferred income taxes ("deferred income taxes") transferred from CG&E "below the line" and to exclude the ADITC and deferred income taxes from retail rate-making in its next general rate case; and (6) In its next general rate case, permitting ratepayers to retain the first $1 million in profits from off-system sales and 50 percent of profits above $1 million, with ULH&P retaining the other 50 percent of any off-system sales profits in excess of $1 million.11 ULH&P also requests approval to modify the IRP that it is required to file by June 30, 2004 to eliminate the requirement that the IRP include an evaluation of purchased power alternatives. In its amendment to its application, ULH&P commits to submit to the Commission for review and approval all final transaction documents prior to closing. ULH&P requests approval to deviate from the affiliate transaction requirements of KRS 278.2207 through 278.2213 in order to effect the acquisition of the specific units and establish the proposed agreements with CG&E, CMT and OVRP. ULH&P also proposes to continue the rate freeze ordered in Case No. 2001-00058. It will honor its commitment to continue its rate freeze through 2006, and its commitment will apply to base rates, FAC charges, and environmental surcharges. THE AG'S POSITION The AG takes issue with certain aspects of ULH&P's proposal. Those are as follows: (1) The fact that ULH&P did not issue a Request for Proposals ("RFP") seeking offers of generating assets, purchase power agreements, or combinations thereof, to meet its future needs; (2) The request to fix the value of the facilities being Transferred for future rate-making purposes; (3) The proposed deferral and recovery of transaction costs; (4) The proposal to record ADITC and deferred income taxes "below the line" and exclude them for retail rate-making in ULH&P's next general rate case; (5) ULH&P's proposed sharing of off-system sales profits; and (6) The FAC Treatment of energy transfers made under the proposed PSOA. The aspects of the proposal which the AG contests, or with which the AG disagrees, are discussed individually in the following paragraphs. Need for an RFP The AG commends ULH&P and CG&E for working to provide a means by which ULH&P's rates can remain stable and ratepayers can be sheltered from the impact of market price fluctuations. However, he argues that without an RFP, ULH&P and the Commission cannot be assured that the offer from CG&E represents the least cost alternative for meeting ULH&P's future power supply needs. Among other things, the AG cites KRS 278.2207(2), arguing that ULH&P has not demonstrated that the pricing for the transfer and related agreements is at CG&E's or its other affiliates' fully distributed costs, but in no event greater than market. The AG also contends that ULH&P has not demonstrated that the requested pricing is reasonable. The AG cites the recent experiences of East Kentucky Power Cooperative, Inc. ("East Kentucky") and Louisville Gas and Electric Company and Kentucky Utilities Company ("LG&E/KU") in support of his argument. He refers to East Kentucky's recent application for approval to construct two combustion turbines ("CTs") based on the low bid it received in response to an RFP for peaking power. He also cites LG&E/KU's use of an RFP to demonstrate that purchasing CTs from a non-regulated affiliate was the least cost alternative for meeting their need for additional peaking capacity. The AG argues that an RFP is especially warranted when the transaction involves affiliates. He states that the acquisition price of the Woodsdale units exceeds the prices of the CTs acquired recently by East Kentucky and LG&E/KU; therefore, he concludes the price ULH&P is paying exceeds market. ULH&P states that it did not issue an RFP for several reasons. First, it cites the recent and ongoing financial problems that have resulted in significant downgrades in the credit ratings of numerous electric industry participants, both regulated and non-regulated. Such downgrades have greatly increased credit risk concerns within the industry. Second, ULH&P indicates that the electricity market today focuses primarily on short-term contractual arrangements and that such a focus likely means that it would need to be back in the market for power within three to five years if it entered into a purchase power agreement at this time. Third, while acknowledging that a market exists for peaking generation such as CTs, ULH&P notes that there is not a comparable market for base load capacity.12 It also notes that there are no recent transactions similar to the proposed transaction, wherein a distribution utility attempted to acquire generation to supply its entire system or where facilities originally regulated, which were later deregulated, would go back under regulation.13 Although an active market for base load capacity similar to the market for peaking capacity does not exist, ULH&P engaged ICF Consulting ("ICF")14 to prepare an analysis of the market value of the generating capacity that is the subject of the proposed transaction.15 ICF's analysis includes a base case scenario that shows the market value of the assets being transferred to be more than twice their book value. It also includes 11 sensitivities to reflect changes in assumptions such as demand levels, fuel prices, environmental regulations, and/or combinations of changes in various assumptions. Under each of the 11 sensitivities, the market value of the generating assets exceeds their book value.16 ULH&P points to the advantages of acquiring existing facilities with documented service histories and avoiding the risks inherent with siting and permitting new facilities. It also cites the advantages of acquiring generation facilities that are already integrated into the Cinergy transmission system and that will continue to be dispatched on a centralized basis along with the rest of the generation in the Cinergy system. Finally, ULH&P states that the offer from CG&E may not remain available after it goes through the 6- to 9-month RFP process described by the AG. This is due to the potential for other parties to make purchase offers for some or all of the capacity or for wholesale power prices to increase to the point where CG&E decides that selling the output of the units in the market is in its best business interests. The AG's arguments regarding the affiliate nature of the transaction and whether ULH&P has met its burden under KRS 278.2207(2) are not compelling. It is clear that the cost of the generating units to be transferred reflects CG&E's fully distributed costs. The record evidence is also very clear that the cost of the units is no greater than market. While the AG claims that the absence of an RFP leaves the Commission no alternative but to speculate as to the market price of alternatives to the proposed transaction, he ignores other measures of "market" prices. ICF's market analysis of the facilities being transferred, which the AG neither refuted or contested, is one such measure. The AG's reliance on the recent CT proposals by East Kentucky and LG&E/KU does not consider any differences between those units and the Woodsdale units that could affect their relative costs. Some of those differences include: (1) Woodsdale's cost includes the cost of the land at that location; (2) Woodsdale's cost includes the cost of the pipelines that will be acquired with the generating units; and (3) the design of the Woodsdale units allows them to operate on either natural gas or propane. Furthermore, the AG has not demonstrated, in arguing as to whether prices are "no greater than market," that the Commission is required to review the components of the proposed transaction separately. Therefore, while the per cost kilowatt ("kw") of capacity of the Woodsdale units may exceed the cost of the East Kentucky and LG&E/KU CTs, the cost of the total package of generating facilities that ULH&P proposes to acquire is substantially below market value as reflected in ICF's market analysis. The Commission recognizes the AG's concerns and acknowledges that utilities under its jurisdiction typically conduct an RFP as part of the process of selecting new supply resources. We believe that such a process has benefited Kentucky's utilities and its ratepayers and that it will continue to benefit them in the future. However, in this instance, given the uniqueness of the proposed transaction, we are not persuaded that undertaking an RFP process would benefit ULH&P or its ratepayers. Attempting to acquire an entire generation fleet through a single transaction is unprecedented in the electric utility industry. Given the level of uncertainty that exists in the electric industry today, there are several arguments in favor of relying on factors other than the market or the financial strength of the firms that make up that market. Furthermore, based on ICF's market analysis, the facilities included in the transaction are being offered at an attractive price. As noted in the record, the average depreciated cost of the generating units included in the offer to ULH&P is $332 per kw of capacity.17 This compares to typical installed costs in today's electric industry of roughly $350 to $400 per kw for CTs and $1,000, or more, per kw for base load coal-fired capacity.18 As evident both in Case No. 2001-00058 and Administrative Case No. 387, the Commission is on record as favoring ULH&P owning generation to serve the needs of its customers and to reduce its reliance on wholesale power purchases. Under the unique circumstances of this case, and given that the evidence demonstrates that a market for baseload capacity comparable to the market for peaking capacity does not exist, we find ULH&P's analysis of supply-side resource options to be reasonable. While CG&E's generation offer may not reflect the mix of facilities that ULH&P would seek under ideal circumstances, this "imperfection" does not persuade the Commission that the proposed transaction should be put on hold while ULH&P undertakes the process of issuing an RFP and evaluating the responses it receives thereto.19 Considering all relevant factors, we find that requiring ULH&P to conduct an RFP process is not necessary to determine the reasonableness of the proposed transfer of generating facilities. Based on a thorough review and analysis of the evidence of record, the Commission finds that it has other means of determining whether the proposed transfer is reasonable. We also find that ULH&P's acquisition of the facilities being offered by CG&E is in its best interests and the interests of its ratepayers. Having determined that an RFP is not necessary in this instance, we must still make a determination of whether the various conditions proposed by ULH&P are reasonable before ruling on whether to approve the transfer as proposed. Transaction Costs In its amended application, ULH&P requests that it be permitted to defer no more than $2.45 million of transaction costs incurred in conjunction with the proposed acquisition. ULH&P also proposes that the deferred costs be amortized over 5 years without carrying charges, beginning on the effective date of the Commission's Order in its next general rate case.20 ULH&P has estimated that the total transaction costs would be $4.9 million, and would include transaction costs associated with filing preparation, financing, and taxes.21 The AG recommends that the transaction costs be deferred and recovered, but does not recommend that amortization begin with the next rate case. The AG suggests that, during the period between the transfer of the units and the next rate case, any profits generated by the units in excess of a reasonable rate of return be applied against the recovery of the deferred transaction costs. The AG believes this approach would reduce or possibly eliminate the deferred balance by the time of the next rate case.22 The Commission finds that ULH&P's proposal is reasonable and should be approved. Limiting the deferral provides for a sharing of the transaction costs between ULH&P's shareholders and ratepayers. The 5-year amortization period also represents a reasonable balance between the interests of these two groups. The exclusion of carrying charges on the deferred balance is consistent with the Commission's previous decisions concerning situations in which the unamortized balance of a deferred cost is excluded from the rate base calculations during a general rate case. ADITC and Deferred Income Taxes As a result of Ohio's retail unbundling effective January 1, 2001, ADITC and deferred income tax balances associated with the generating units proposed to be transferred to ULH&P were reclassified as "below the line" and have been amortized "below the line" over the remaining lives of the plants. ULH&P proposes that ADITC and deferred income tax balances associated with the generating units be transferred from CG&E's books to ULH&P's books concurrent with the transfer of the units. ULH&P proposes that the transferred ADITC and deferred income tax balances remain "below the line" items on its books, amortized over the remaining lives of the units, and excluded from retail rate-making in ULH&P's future general rate proceedings. Any deferred income taxes generated after ULH&P owns the units would be "above the line" and included for rate-making purposes.23 ULH&P acknowledges that the amortization expense associated with the "below the line" ADITC and deferred income tax balances would be recorded "below the line" as well.24 As of March 31, 2003, the ADITC balance was $7,404,258,25 and the deferred income tax balance was $83,388,148.26 ULH&P argues that the proposed treatment for the ADITC and deferred income tax balances is reasonable. It states that the units included in the proposal were not subject to retail rate-making in Kentucky during the period when they were owned by CG&E, and concludes that ULH&P's ratepayers should not receive the benefit of the rate base reduction generally made by the Commission for ADITC and deferred income taxes.27 ULH&P notes that the treatment proposed in this case is identical to that proposed and accepted in a recent plant transfer involving Cinergy affiliates in Indiana.28 ULH&P also contends that the proposed treatment is consistent with Internal Revenue Service ("IRS") tax normalization requirements, and cites several IRS rulings in support of this conclusion.29 The AG opposes ULH&P's proposed treatment of the ADITC and deferred income tax balances. The AG argues that ULH&P's proposal will result in an overstated rate base, a distorted capital structure that will produce an overstated cost of equity, and an overstated income tax expense on a going-forward basis. The AG contends that the proposed treatment is at odds with conventional rate-making and that it does not recognize that the ADITC and deferred income tax balances represent customer-supplied capital that was provided while the plants were under regulation. The AG estimates that the revenue requirement impact of ULH&P's proposed treatment would be approximately $341.9 million over the next 25 years.30 The AG recommends that the ADITC balance be either subtracted from ULH&P's rate base or treated as zero-cost capital, with the ADITC balance amortized over the remaining lives of the plant "above the line" in order to recognize the source of the ADITC. The AG further recommends that the deferred income tax balance be accounted for "above the line" in accordance with the FERC Uniform System of Accounts ("FERC USoA"). ULH&P's proposed acquisition of generating facilities from CG&E represents an unprecedented transaction to be considered by the Commission. Not only must the Commission consider that the proposed transaction is between affiliated companies, it must also recognize that the generating assets being sold to the regulated entity have been deregulated. Consequently, the Commission must carefully consider the accounting and rate-making treatments authorized in conjunction with the proposed transaction, including the tax normalization impacts. After reviewing the arguments and evidence, the Commission finds that the treatment of ADITC and deferred income taxes proposed by ULH&P is reasonable and should be approved. The generating units proposed to be transferred to ULH&P have been deregulated since January 1, 2001. When CG&E's regulated generating fleet became deregulated, the ADITC and deferred income tax balances were moved "below the line" for rate-making purposes. The possibility that some units of the deregulated generating fleet may be returning to regulation does not, in and of itself, support an assumption that the associated ADITC and deferred income tax balances will automatically move "above the line" for rate-making purposes. No evidence has been presented in this case that supports such an assumption. ULH&P has provided the results of its research concerning the treatment of the ADITC and deferred income tax balances from a tax perspective. That research indicates that, upon the sale of public utility assets between two public utilities, ADITC cannot be added to the regulated books of the purchasing utility and that it cannot be flowed-through to the customers of either the buyer or seller. ULH&P's research also indicates that, as the result of an asset sale and purchase transaction, any reduction of the purchaser's cost of service for pre-transfer ADITC or deferred income tax balances would result in a tax normalization violation. In addition, ULH&P's proposal concerning the transfer of the deferred income taxes is consistent with the FERC USoA. In three separate account descriptions, the FERC USoA provides, "When plant is disposed of by transfer to a wholly owned subsidiary the related balance in this account shall also be transferred."31 However, the Commission notes that the FERC USoA addresses only the accounting treatment, and does not state for rate-making purposes whether the deferred income taxes are to be recorded "above the line" or "below the line." Concerning the AG's estimated revenue requirement impact of ULH&P's proposed treatment for ADITC and deferred income taxes, the Commission finds the estimate to be of little persuasive value. The AG has not consistently stated the amount of the estimated impact.32 The Commission has examined the calculation of the $341.9 million estimate and notes that the calculation assumes the rate of return on rate base and federal and state income tax rates to be constant over the approximate 25-year time frame covered by the estimate. The calculations include the determination of an annual return resulting from the AG's contention that there will be an excessive equity ratio. This annual return is also assumed to be constant, and is multiplied by 24.75 years to reflect its impact on the AG's revenue requirement. We note that ULH&P expressed similar concerns about the calculations in its brief.33 The Commission does not believe that these assumptions produce a reasonable estimate of the revenue requirement impact of ULH&P's proposed rate-making treatment for ADITC and deferred income taxes. The Commission must consider all impacts of the proposal submitted rather than focus solely on the revenue requirement impact, as it appears the AG has done. Given the potential tax normalization issues, the lack of documentation supporting the AG's arguments, and the unrealistic assumptions contained in the AG's estimate of the revenue requirements impact, the Commission cannot consider the AG's position to be a reasonable alternative. Profits from Off-System Sales The AG argues that ratepayers should receive 90 percent of the profits from off-system sales and that ULH&P should be allowed to retain 10 percent as an incentive to make such sales. The AG states that ratepayers receive 100 percent of the profits from off-system sales under standard rate-making treatment, but recognizes that ULH&P should be given an incentive, albeit a small one, to make these sales. The AG also argues against ULH&P's proposed treatment of off-system sales profits on the basis that the proposal is not limited to sales made exclusively from the facilities being transferred. He claims the proposal would also apply to off-system sales derived from other assets that ULH&P could acquire while its proposed treatment of off-system sales profits was in place, which would produce an absurd result. ULH&P acknowledges that the proposal to share off-system sales profits between customers and shareholders departs from typical rate-making treatment. However, it points out that, since Ohio's electric restructuring went into effect, CG&E has retained 100 percent of the profits from off-system sales from the units. ULH&P argues that this aspect of the proposal is critical to making the transaction acceptable to CG&E from an economic perspective. The Commission finds ULH&P's proposal that ratepayers retain the first $1 million in profits from off-system sales and 50 percent of profits above $1 million to be acceptable. While it represents a departure from standard rate-making treatment, it represents an improvement for ratepayers compared to the current purchased power contract. As the contract is not cost-based, its pricing is not based on ratepayer retention of any off-system sales profits; hence, under ULH&P's proposal, ratepayers will be receiving a benefit from off-system sales that they had not received previously. In addition, ULH&P forecasts annual off-system sales profits of $4.5 million in the early years after the transfer, with the amount declining to $1.6 million by 2012. Given the uncertainty attendant to forecasting off-system sales, the guarantee of retaining up to the first $1 million in profits from such sales is a significant benefit to ratepayers. We recognize that this treatment does not comport with conventional rate-making; however, as stated elsewhere in this Order, this is not a conventional proceeding before this Commission. While ULH&P has referred to the sharing of off-system sales profits that has been approved for American Electric Power ("AEP") in the past, this is largely an issue of first impression.34 It is also, contrary to the AG's brief, an issue applicable only to sales from the facilities that are the subject of the proposed transfer.35 For these reasons, and considering all provisions in the transaction as a whole, we find that the treatment of off-system sales profits proposed in the amendment to ULH&P's application is reasonable. We further find no reason, at this time, that such treatment should not be approved in ULH&P's next general rate proceeding. FAC Treatment of Energy Transfers Under the PSOA The AG does not disagree with ULH&P's proposal to include the cost of energy transfers from CG&E to ULH&P for recovery through its future FAC. However, he argues that such treatment is appropriate only if credits that occur when ULH&P makes transfers to CG&E are also passed through the FAC. The amendment to ULH&P's application revised its original proposal, under which it would have retained 100 percent of the profits from off-system sales, such that ratepayers will receive the bulk of the profits from such sales. The proposal in ULH&P's original application would have precluded the AG's proposed treatment of the costs of energy transfers from ULH&P to CG&E. However, recognizing the change to both ULH&P's proposed treatment of off-system sales and its proposed treatment of energy transfers, as set out later in this Order in the section "Other Accounting and Rate-making Treatment Proposals," we conclude that passing through the FAC the credits that occur when ULH&P makes energy transfers to CG&E is entirely consistent with the FAC treatment prescribed in 807 KAR 5:056 and should, therefore, be approved, as proposed by the AG. OTHER ISSUES New Agreements and Contracts ULH&P seeks approval of a form of asset transfer agreement for each of the three generating facilities included in the proposed transfer. A draft of the asset transfer agreement for East Bend was filed with the application.36 Based on the amendment to ULH&P's application, the final agreements are expected to mirror the draft agreement, except for the deletion of provisions governing a "Regulatory Non-Satisfaction Event" and the "Purchase Option" both of which addressed circumstances that could lead to ULH&P transferring the facilities back to CG&E in the future. In conjunction with the proposed transfer, ULH&P and CG&E will enter into the back-up PSA and PSOA described earlier in this Order.37 The back-up PSA provides a firm supply of power for ULH&P's native load customers to replace capacity from either East Bend or Miami Fort when outages or deratings of those units occur.38 Pricing terms under the back-up PSA call for energy to be priced at the average variable cost per MWh during the prior calendar month at the plant for which back-up power is required. The capacity charges ULH&P will pay under the back-up PSA are based on a value of power calculated using forward market prices quoted from Megawatt Daily and the North American Power 10x Report.39 There are separate capacity charges for East Bend and Miami Fort which, on a combined basis, equal $421,595 per month. The overall price for back-up power included in the PSA is less than the price embedded in ULH&P's existing wholesale purchase power contract with CG&E. ULH&P and CG&E will also enter into the PSOA, which will allow the units being transferred to be jointly dispatched along with other Cinergy generating units. Energy transferred between ULH&P and CG&E under the PSOA will be priced at the market price for the hour in which the energy transfer takes place but will be capped at the receiving entity's incremental cost of available generation. The PSOA also establishes the terms under which off-system purchases and sales will be made and how the costs and revenues associated with such transactions will be treated by ULH&P and CG&E. For its operation of the Woodsdale station, CG&E presently has a contract with CMT to obtain its natural gas supply and contracts with ORVP to obtain propane and to store propane in a cavern partially owned by ORVP. CG&E also has a contract with TEPPCO to store propane in TEPPCO's pipeline system.40 CG&E owns the pipelines used to transport propane to Woodsdale from both the ORVP cavern and the TEPPCO pipeline. ULH&P will acquire CG&E's pipelines as part of the proposed transaction. Other than stating his concerns about the price of the facilities and the affiliate aspects of the proposed transaction, the AG did not oppose the form or content of the amended draft asset transfer agreement or ULH&P's proposal to enter into the back-up PSA and PSOA with CG&E. Likewise, the AG did not oppose CG&E's assignment of the "Woodsdale contracts" or its coal supply contracts to ULH&P. The Commission finds that the subject agreements and contracts are required in conjunction with the proposed transfer and, based on information in this record, appear to be reasonable and should therefore be approved, subject to our review and approval of the final documents.41 Several of the transaction documents have been and will be drafted to accomplish the proposed transaction. ULH&P commits to submit to the Commission for review and approval the final documents prior to closing. ULH&P refers to 12 transaction documents that will be executed as part of the proposed transaction.42 The Commission recognizes that the timing of the closing of the proposed transaction will be of significant concern to ULH&P and CG&E. However, the Commission must have adequate time to review the numerous documents related thereto. Therefore, the Commission finds that a process should be established to address the review and approval of the transaction documents in their final form. ULH&P should submit all the transaction documents in their final form to the Commission no later than 30 days prior to the expected closing date of the transaction. The submitted documents should include all attachments, exhibits, appendices, and schedules that are referenced as part of the particular transaction document. For those documents it has already included in this record, ULH&P should include a detailed explanation for any changes made to the document from the version already existing in the record. For those documents not already included in this record, ULH&P should include a narrative describing the purpose of the document and explaining how the terms and conditions contained in the document are consistent with this Order. ULH&P should file an original and 5 copies of this information with the Commission and a copy with the AG.43 Upon ULH&P's filing of these documents and explanations, the Commission will complete its review as expeditiously as possible. Request for Deviation Regarding Affiliate Transactions In 2000, the Kentucky General Assembly enacted guidelines on cost allocations and affiliate transactions, as well as a code of conduct for utilities with nonregulated activities or affiliates. These standards and guidelines are codified in Chapter 278 of the Kentucky Revised Statutes, specifically as KRS 278.2201 through KRS 278.2219. Provided within these statutes is the opportunity for regulated utilities to request from the Commission a waiver or deviation from the requirements thereof. ULH&P requests permission to deviate from the requirements of KRS 278.2207(1)(b) and requests a waiver from the requirements of KRS 278.2213(6) for its plant acquisition transaction and certain affiliate agreements.44 These statutes require, respectively, that the services and products provided to the utility by an affiliate be priced at the affiliate's fully distributed cost but in no event greater than market, and that all dealings between a utility and a nonregulated affiliate be conducted at arm's length. The Commission may grant a deviation from KRS 278.2207(1)(b) if it determines that the deviation is in the public interest. It shall grant a waiver or deviation from KRS 278.2207(1)(b) and/or KRS 278.2213 if it finds that compliance with the provisions thereof are impracticable or unreasonable. The AG argues that ULH&P has failed to demonstrate to the Commission that a waiver or deviation from the provisions of KRS 278.2207 and KRS 278.2213 is appropriate and asserts that ULH&P's request should be denied. The Commission does not agree. In reviewing ULH&P's arguments justifying the lack of an RFP for the acquisition of the generating facilities and ICF's market analysis of those facilities, the Commission was able to determine that the generating units being transferred from CG&E are priced at CG&E's fully distributed cost and that the cost is below market. Therefore, the Commission finds that no deviation from KRS 278.2207(1)(b) is required for the acquisition of the generating units. The Commission is also satisfied from the evidence presented by ULH&P that the pricing of the products and services provided in the Gas Supply and Management Agreement, Commodity Storage Agreement, and the Propane Supply and Management Agreement is reasonable and that ULH&P's request to deviate from the pricing requirements of KRS 278.2207(1)(b) with regard to these agreements should be granted. As stated previously, KRS 278.2213(6) requires that all dealings between a utility and its nonregulated affiliate be conducted at arm's length. Thus, a deviation from KRS 278.2213(6) is required for all of the agreements proposed by ULH&P in this proceeding, including the agreements for the generating units that the Commission has determined do not require a deviation from KRS 278.2207(1)(b). Having reviewed ULH&P's reasons for not issuing an RFP and our previous findings herein that an RFP was not necessary to determine the reasonableness of the transfer of generating units, that the transfer is reasonable and in the public interest, and that the agreements associated with the transfer are in the public interest, the Commission finds that ULH&P has met its burden under KRS 278.2219. Consequently, ULH&P's request to deviate from KRS 278.2213(6) should be granted. The Commission finds, however, that the deviations approved herein should apply only to this transaction and the agreements discussed herein. Future transactions or successor agreements will require separate deviation or waiver requests if and when they are proposed by ULH&P. Other Accounting and Rate-Making Treatment Proposals In addition to its proposals regarding the value of the facilities being transferred, deferral and recovery of transaction costs, treatment of ADITC and deferred income taxes, and sharing the profits from off-system sales, ULH&P also requested approval of the following provisions related to the back-up PSA and the PSOA, to be effective with its next general rate case: (1) Inclusion in its future base rates of all monthly capacity charges specified in the back-up PSA; and a commitment to consult with the Commission and the AG prior to filing a successor agreement at FERC; (2) Inclusion in its future FAC of all energy charges assessed under the back-up PSA in accordance with 807 KAR 5:056 and Commission precedent; (3) Inclusion in its future FAC of the costs of energy transfers from CG&E under the PSOA in accordance with 807 KAR 5:056 and Commission precedent; and (4) Inclusion in its future FAC of the cost of the fuel consumed in the facilities in accordance with 807 KAR 5:056 and Commission precedent. The Commission finds that this request is generally reasonable and should be approved. However, ULH&P did not specify what is meant by "Commission precedent" regarding its requested FAC treatment. Given that application and review of an electric utility's FAC is addressed in its entirety in 807 KAR 5:056, the Commission will limit its decision herein to approving treatment in accordance with that administrative regulation. Requirement to File a Stand-Alone IRP In Case No. 2001-00058, the Commission required ULH&P to file a stand-alone IRP by June 30, 2004. Our Order stated that the IRP should include analyses of bids to purchase power from non-affiliated suppliers as well as construction of generation to lock in prices for the long term. In the amendment to its application, ULH&P requests that it be permitted to deviate from the requirement to analyze bids for purchased power. ULH&P states that, should the Commission approve the proposed transfer, such a requirement, which would impose significant costs on ULH&P, would no longer be necessary. Given that ULH&P's load forecast and supply-side analysis show that it will not need additional resources until the 2011-2012 time frame, and that this need is expected to be met with summer season purchases, the Commission finds that the requested deviation is reasonable and should be granted. ULH&P's Next General Rate Case Based on the current freeze on ULH&P's retail electric rates, effective through December 31, 2006, many of the accounting or rate-making provisions included in the amendment to its application refer to its next general rate proceeding or contain the phrasing "on or after January 1, 2007." These same references and phrasing were in ULH&P's original application and in numerous of its responses to data requests. The Commission takes notice of the fact that ULH&P has not filed to increase its retail electric rates since 1991. By the end of the current rate freeze, its customers will have gone 15 years without a base rate increase. The Commission commends ULH&P for its efficiency and its stewardship of ratepayers' monies, which have contributed to its not requiring a general rate increase for this length of time. In some of its testimony and exhibits, ULH&P projected the future rate impact of acquiring the facilities that are the subject of the proposed transfer. Its projections show a possible future rate increase going into effect January 1, 2007, concurrent with the end of its current rate freeze. The Commission believes that a general rate proceeding will be necessary for ULH&P within that time frame. Given the numerous changes that have occurred in the electric industry since 1991, we believe that shareholders and ratepayers will both be better served in the long run by ULH&P filing a general rate application to effect a change in rates on January 1, 2007. Such an effective date, of course, would be at the conclusion of the suspension period provided by the statutes and regulations governing changes in rates. Therefore, we find that ULH&P should file a general rate application in 2006 to adjust its retail electric rates, so that, based on the suspension period applicable to ULH&P's choice of test period, the effective date of any eventual rate adjustment ordered by the Commission will be January 1, 2007. Acceptance of Decision The decision enunciated herein approves ULH&P's proposal, subject to certain conditions and modifications. Since the proposal was a response to concerns previously expressed by the Commission regarding ULH&P's long-term power supply needs, if any modifications are found to be unacceptable by ULH&P or its affiliates, the Commission wishes to be informed of that finding as soon as is practicable. Therefore, ULH&P should notify the Commission in writing, no later than 30 days from the date of this Order, whether or not it and its affiliates accept this decision, including all modifications. FINDINGS AND ORDERS Based on the evidence of record and being otherwise sufficiently advised, the Commission finds that: 1. ULH&P's amendment to its application, which establishes the terms and conditions under which it will acquire CG&E's interests in East Bend Unit No. 2, Miami Fort Unit No. 6, Woodsdale Unit Nos. 1 through 6, and the related property, appurtenances, contracts and agreements, should be approved, subject to Commission review and approval of final drafts of the transaction documents. 2. The termination of ULH&P's current PSA with CG&E, effective on the closing date of the transfer of facilities, is reasonable and should be approved. 3. ULH&P should be granted a waiver, in accordance with KRS 278.2219, from the requirements of KRS 278.2213(6) that its acquisition of the facilities, subject to this transfer, from its affiliate, CG&E, be at arm's length; and ULH&P should be granted a deviation, pursuant to KRS 278.2207, of certain affiliate agreements related to the operation of the facilities being transferred. 4. ULH&P's draft transfer agreements for the three facilities being acquired, with the provisions governing a "Regulatory Non-Satisfaction Event" and the "Purchase Option" deleted, should be approved, subject to Commission review and approval of the agreements in their final form. 5. ULH&P's back-up PSA and its PSOA, which will govern its power transactions with CG&E on a going forward basis subsequent to the consummation of the proposed transfer of facilities, should be approved, subject to Commission review and approval of the agreements in their final form. 6. The assignment to ULH&P by CG&E of CG&E's interests in the contracts for the supply, delivery, and storage of coal, oil, natural gas and propane used as fuel for electricity generation at East Bend Unit No. 2, Miami Fort Unit No. 6, and Woodsdale Unit Nos. 1 through 6 should be approved, subject to Commission review and approval of the contracts in their final form. 7. The facilities being acquired by ULH&P should be recorded by ULH&P at their original cost less accumulated depreciation. At this time, the Commission knows of no reason why such value should not be used in the future for rate-making purposes. 8. ULH&P should defer no more than $2.45 million of the transaction costs incurred in relation to its acquisition of the subject generating facilities, with the costs to be deferred and amortized over 5 years, without carrying charges, beginning with the effective date of the Commission's Order in ULH&P's next general rate proceeding. At this time, the Commission knows of no reason why the resulting amortization expense should not be recovered through rates beginning with the effective date of the Commission's Order in ULH&P's next general rate proceeding. 9. ULH&P's proposal to record the ADITC and deferred income tax balances associated with the generating facilities being transferred "below the line" is reasonable and should be approved. At this time, the Commission knows of no reason why such treatment should not be reasonable for future rate-making purposes. 10. Based on its approval of the back-up PSA, the monthly capacity charges set out therein are reasonable. The Commission knows of no reason, at this time, why such charges should not be recovered through rates beginning with the effective date of the our final Order in ULH&P's next general rate proceeding. ULH&P should consult with the Commission and the AG prior to filing any successor agreement with FERC. 11. ULH&P's recovery of energy charges assessed under the Back-Up PSA, from the date that its next FAC goes into effect, on or after January 1, 2007, should be in accordance with 807 KAR 5:056. 12. Treatment of the costs of energy transfers between ULH&P and CG&E under the PSOA, from the date that its next FAC goes into effect, on or after January 1, 2007, should be in accordance with 807 KAR 5:056. 13. ULH&P's proposal to share off-system sales profits with its customers, beginning with the effective date of the Commission's Order in its next general rate proceeding so that customers receive up to $1 million from off-system sales profits annually and 50 percent of such profits above $1 million annually, if any, while ULH&P retains 50 percent of the profits from off-system sales above $1 million annually, if any, is reasonable. The costs attributable to off-system sales should include the incremental costs listed in the PSOA, Paragraph 1.10. ULH&P should implement the necessary processes to allocate appropriately said incremental costs to its off-system sales. The Commission knows of no reason, at this time, why such treatment of off-system sales profits should not be approved in ULH&P's next general rate proceeding. 14. ULH&P should be granted a waiver from the Commission's requirement, imposed in Case No. 2001-00058, that it analyze purchase power alternatives in its stand-alone IRP, which is to be filed by June 30, 2004. 15. ULH&P should file its next general rate application to adjust retail electric rates so that, based on the suspension period applicable to ULH&P's choice of test period, the effective date of any eventual rate adjustment ordered by the Commission will be January 1, 2007. 16. ULH&P should notify the Commission in writing, not later than 30 days from the date of this Order, if this decision, including all conditions and modifications, is acceptable to it and its affiliates. 17. ULH&P should submit the final draft versions of the various transaction documents and accompanying narrative explanations for final Commission review and approval in the manner described herein. 18. Within 10 days of their receipt, ULH&P should file one copy of each of the approval documents issued by the FERC and the SEC. IT IS THEREFORE ORDERED that: 1. The proposed acquisition of generating facilities by ULH&P, as described in its amended application of October 29, 2003, is approved, subject to the conditions and modifications described in this Order. 2. Findings 2 through 15 shall be implemented as if the same were individually so ordered. 3. ULH&P shall notify the Commission in writing, not later than 30 days from the date of this Order, if this decision, including all conditions and modifications, is acceptable to it and its affiliates. 4. ULH&P shall submit the final draft versions of the various transaction documents and accompanying narrative explanations for final Commission review and approval in the manner described herein. 5. Within 10 days of their receipt, ULH&P shall file with the Commission one copy of each of the approval documents issued by the FERC and the SEC. Done at Frankfort, Kentucky, this 5th day of December, 2003. By the Commission ATTEST: APPENDIX A APPENDIX TO AN ORDER OF THE KENTUCKY PUBLIC SERVICE COMMISSION IN CASE NO. 2003-00252 DATED December 5, 2003 DESCRIPTION OF FACILITIES PROPOSED TO BE TRANSFERRED East Bend No. 2 A 648 MW (nameplate rating ) coal-fired base load plant in Boone County, Kentucky. Commissioned in 1981, it is jointly owned by CG&E and Dayton Power and Light, with CG&E owning a 69% interest. The unit's net rating is 600 MW, after allowing for power used to operate the plant machinery. The net rating of CG&E's 69% share is 414 MW. East Bend is designed to burn low- to high-sulfur eastern bituminous coal. Its recent achieved heat rates have ranged between 10,400 and 10,900 Btu/kWh. It is equipped with a lime-based flue gas desulfurization system (scrubber) along with a selective catalytic reduction (SCR) control system, which is designed to reduce NOx emissions by 85%. East Bend No. 2 has a 1.2 lbs./MMBTU SO2 emission limit. The unit's output is directly connected to Cinergy's 345 kV transmission system. Burns & McDonnell (B&McD) completed its due diligence review of East Bend in June 2003. Its personnel had visited the East Bend Generating Station on May 23, 2003. Its report concludes that the plant is fully capable of providing long-term, reliable service as a base load power facility if it continues to be properly operated and maintained in accordance with good utility practice. B&McD estimates that the unit's remaining useful operating life is at least 38 years. Miami Fort No. 6 A 168 MW (nameplate rating) coal-fired base or intermediate load plant in Hamilton County, Ohio. Commissioned in 1960, it is one of four coal-fired units at the Miami Fort Generating Station. CG&E owns 100% of the unit, which has a net rating of 163 MW. Miami Fort 6 is designed to burn low- to medium- sulfur eastern bituminous coal. Its recent heat rates have ranged between 9,900 and 10,200 Btu/kWh. It is equipped with a high efficiency electrostatic precipitator and with a temporary selective non-catalytic reduction (SNCR) system for NOx reductions. Miami Fort 6 has a 5.0 lbs./MMBTU SO2 emission limit. The SNCR has not performed as well as expected and will be replaced with second generation low NOx burners in the future. It is directly connected to Cinergy's 138 kV transmission system. B&McD visited the Miami Fort Generating Station on May 26, 2003. It shares a 600-foot tall exhaust stack and continuous emissions monitoring system with its sister unit, Miami Fort No. 5 as well as crushed coal conveyors. Miami Fort 6 also shares coal handling and fuel oil storage facilities with the three other units at the site. B&McD's report concludes that the plant is fully capable of providing long-term, reliable service as a base load/intermediate power facility if it continues to be properly operated and maintained in accordance with good utility practice. B&McD estimates that the unit's remaining useful operating life is at least 17 years. Woodsdale A 490 MW (nameplate rating) six-unit combustion turbine station located in Butler County, Ohio. Its net summer capacity, including inlet cooling, is 500 MW. It is owned 100% by CG&E. The Woodsdale Generating Station was originally planned for twelve units, but only six units were constructed. It has dual fuel capability (natural gas and propane) and black start capability. Five units were commissioned in 1992 with the sixth unit commissioned in 1993. Woodsdale is connected to two interstate natural gas transmission pipelines, Texas Eastern Transmission Company and Texas Gas Transmission Company. Its contracts with Ohio River Valley Propane LLC, an affiliate, provide for its propane supply and its propane storage. NOx emissions are controlled by water injection. Woodsdale's output is directly connected to Cinergy's 345 kV transmission system. B&McD visited the Woodsdale Station on May 28, 2003. Its report noted that Units 5 and 6 had undergone major overhauls in 2001 and that Units 1-4 will have major overhauls in 2004-2005. B&McD's report concludes that the plant is fully capable of providing long-term, reliable service as a peaking power facility if it continues to be properly operated and maintained in accordance with good utility practice. B&McD indicated that the units' remaining useful operating lives will be dependent on the number of times the units are started and that, based on the number of starts that have occurred since the units were commissioned, they should be able to operate for several more years. APPENDIX B APPENDIX TO AN ORDER OF THE KENTUCKY PUBLIC SERVICE COMMISSION IN CASE NO. 2003-00252 DATED December 5, 2003 TRANSACTION DOCUMENTS Documents Filed with the Commission as of July 21, 2003: Asset Transfer Agreement for Unit 2 of the East Bend Generating Station (See Turner Direct Testimony, Attachment JLT-1) Back-up Power Sale Agreement (See McCarthy Direct Testimony, Attachment RCM-1) Purchase, Sales and Operation Agreement (See McCarthy Direct Testimony, Attachment RCM-2) Documents Referenced But Not Flied with the Commission: Schedules referenced in Section 7.09 of the Asset Transfer Agreement for Unit 2 of the East Bend Generating Station Asset Transfer Agreement for Miami Fort 6 Asset Transfer Agreement for Woodsdale Assignment Document for the Gas Supply and Management Agreement (See Roebel Direct Testimony, Attachment JJR-1 for copy of the current Gas Supply and Management Agreement) Assignment of the Commodity Storage Agreement (See Roebel Direct Testimony, Attachment JJR-2 for copy of the current Commodity Storage Agreement) Assignment of the Storage and Service Agreement (See Roebel Direct Testimony, Attachment JJR-3 for copy of the current Storage and Service Agreement) Assignment of the Propane Supply and Management Agreement (See Roebel Direct Testimony, Attachment JJR-4 for copy of the current Propane Supply and Management Agreement) Amendment/Assignment of current Coal Contracts Ownership transfer and lease back of shared stack at Miami Fort 5 and 6 Use of shared coal handling and fuel oil storage facilities associated with Miami Fort 6 1 Based on the evidence in this record, it appears that the proposed transaction is in the best interests of ULH&P's customers. The Commission urges that the federal agencies that must approve this transfer, the Federal Energy Regulatory Commission ("FERC") and the Securities and Exchange Commission ("SEC"), will give consideration to our findings in this proceeding when rendering their decisions. 2 We recognize, however, that a change in law or compelling evidence to the contrary may require Commission consideration in ULH&P's next general rate case. 3 Case No. 2001-00058, The Application of The Union Light, Heat and Power Company for Certain Findings Under 15 U.S.C. ss. 79Z, final Order dated May 11, 2001, at 17. 4 ULH&P and CG&E are both part of the Cinergy Corp. ("Cinergy") system. CG&E's rates to ULH&P include a market component due to its generating facilities being deregulated under Ohio's electric industry restructuring and FERC's mandate that wholesale rates be market-based rather than cost-based. 5 In Case No. 2001-00058 ULH&P also agreed to freeze retail rate components that recover wholesale generation and transmission costs through December 31, 2006. 6 Administrative Case No. 387, A Review of the Adequacy of Kentucky's Generation Capacity and Transmission System, final Order dated December 21, 2001, at 39-40. 7 The Dayton Power and Light Company owns the remaining 31 percent. 8 Under Ohio's electric industry restructuring plan, all the units proposed to be transferred were deregulated effective January 1, 2001. See Transcript of Evidence ("T.E."), Vol. I, October 29, 2003, at 221-222. 9 Information on the facilities subject to the proposed transfer and B&McD's due diligence study of the facilities are included in Appendix A to this Order. 10 ULH&P also requests approval of assignment from CG&E of the existing coal supply contracts for East Bend and Miami Fort No. 6. 11 Off-system sales profits will be calculated by subtracting the incremental costs of such sales, as listed in paragraph 1.10 of the proposed PSOA, from the revenues generated through off-system sales. 12 T.E., Vol. I, October 29, 2003, at 181-182. 13 Id. at 182. 14 ICF Consulting is an international consulting firm whose clients include the United States Environmental Protection Agency, Royal Bank of Canada, JP Morgan Securities, Inc., Moody's Investors Service, other government entities and investment firms, along with utilities and regulatory commissions. 15 Rose Direct Testimony, Attachments JLR-26 and JLR-26a. 16 Id. 17 Id. at 183. 18 Response to the Commission Staff's Hearing Data Request of October 29, 2003, Item 1. 19 The Commission notes that it has no statutory authority to require that CG&E sell any generation to ULH&P or to require CG&E to hold open its current offer until ULH&P has completed an RFP process. 20 Amendment to Application at 2-3. 21 Steffen Direct Testimony, Attachment JPS-7. ULH&P explained that as a result of becoming "more comfortable" with certain aspects of Kentucky statutes and regulations, it decided to amend the application. The proposal to defer roughly half of the estimated transaction costs was one of the areas in which ULH&P felt comfortable in shifting the "balance more in customers' favor." See T.E., Volume I, October 29, 2003, at 16. 22 King Direct Testimony at 10-11. The AG's testimony on this issue related to the original application and request to defer all the transaction costs and amortize those costs over 3 years. The AG did not address the treatment of the transaction costs as included in the amended application in testimony or in his brief. 23 Application at 9-10 and Steffen Direct Testimony at 12-13. 24 T.E., Volume I, October 29, 2003, at 216-217. 25 Response to the Commission Staff's First Data Request dated August 21, 2003, Item 51(a). 26 Id., Item 52(a). 27 Id., Items 51(d)(1) and 52(c)(1). 28 T.E., Volume I, October 29, 2003, at 222. 29 Response to the Commission Staff's Hearing Data Request of October 29, 2003, Item 4. ULH&P cites a 1987 IRS General Counsel Memorandum and references several IRS Private Letter Rulings issued between 1987 and 1996. 30 AG's Response to Hearing Data Request filed November 7, 2003. 31See FERC USoA, Account No. 281, Accumulated Deferred Income Taxes - Accelerated Amortization Property; Account No. 282, Accumulated Deferred Income Taxes - Other Property; and Account No. 283, Accumulated Deferred Income Taxes - Other. 32 The AG did not include an estimate of the revenue requirement impact in his prefiled testimony. At the public hearing, the AG's witness stated the estimated impact was approximately $200.0 million. See T.E., Volume II, October 30, 2003 at 43-44. In the AG's response to the hearing data request, the estimated revenue requirement was determined to be $341.9 million. However, the AG's brief states that the impact on ULH&P's revenue requirement is $317.7 million. See AG's Post Hearing Brief at 10. 33 ULH&P Brief at 43-44. 34 AEP's sharing of profits from off-system sales has no revenue requirement impact, as does ULH&P's proposal. It involves a monthly comparison of such profits to the level (100%) of profits included in the revenue requirements determination in its prior general rate case. 35 ULH&P's application and testimony refer to off-system sales from the facilities being transferred and its amended application refers only to its next general rate case. To extend its proposal to include facilities that it might acquire in the future, ULH&P would have to file for and receive Commission approval. 36 Turner Direct Testimony, Attachment JLT-1. 37 Although the Commission can "approve" the back-up PSA and the PSOA as requested by ULH&P, because they both relate to wholesale transactions between ULH&P and CG&E, those agreements are subject to FERC's jurisdiction. Therefore, any approval thereof by the Commission would constitute an official endorsement of the agreements but would not constitute the final approval necessary. 38 Woodsdale is not covered by the back-up PSA because it is peaking capacity, which will not operate for most hours of the year and will not be relied upon to meet ULH&P's base load requirements. 39 McCarthy Direct Testimony, as adopted by M. Stephen Harkness, at 4. 40 CG&E also has non-affiliate contracts for the coal supply for East Bend and Miami Fort 6, which are to be assigned to ULH&P. 41 It should be noted, due to their impact on ULH&P's base rates and/or future FAC charges, that both the back-up PSA and the PSOA are subject to periodic audit or review by the Commission. 42 The transaction documents identified in the record are listed in Appendix B of this Order. 43 This docket will remain open to receive the final documents. The AG, as is his right as an intervenor, will have an opportunity to offer his opinion on those documents. 44 The affiliate agreements for which ULH&P requests deviation and waiver are the contract with CM&T that provides for CG&E to obtain natural gas for Woodsdale (Gas Supply and Management Agreement), the contract with ORVP for propane storage in the Todhunter propane cavern (Commodity Storage Agreement), and the contract CG&E has with ORVP to obtain propane for Woodsdale (Propane Supply and Management Agreement). EX-99 4 exhibitb.txt Exhibit B Draft 9/30/04 (East Bend Generating Station) ASSET TRANSFER AGREEMENT BY AND BETWEEN THE CINCINNATI GAS & ELECTRIC COMPANY AND THE UNION LIGHT, HEAT AND POWER COMPANY Dated as of _______________ ARTICLE I.................................................................2 DEFINITIONS...............................................................2 SECTION 1.01. Definitions..........................................2 ARTICLE II................................................................9 TRANSFER OF ASSETS........................................................9 Section 2.01. Transfer of Assets...................................9 Section 2.02. Excluded Assets......................................10 Section 2.03. Assumed Liabilities..................................12 Section 2.04. Excluded Liabilities.................................13 ARTICLE III...............................................................14 ASSET TRANSFER; CLOSING...................................................14 Section 3.01. Asset Transfer.......................................14 Section 3.02. Inventory; Transaction Costs.........................15 Section 3.03. Proration........... ................................15 Section 3.04. Closing..............................................15 Section 3.05. Closing Deliveries...................................16 ARTICLE IV................................................................17 REPRESENTATIONS AND WARRANTIES............................................17 Section 4.01. Representations and Warranties of Transferor.........17 Section 4.02. Representations and Warranties of Transferee.........22 ARTICLE V.................................................................23 COVENANTS.................................................................23 Section 5.01. Books and Records....................................23 Section 5.02. Finder's Fees........................................24 Section 5.03. Tax Matters..........................................24 Section 5.04. Further Assurances......... .........................24 Section 5.05. Site Access..........................................25 ARTICLE VI................................................................26 INDEMNIFICATION...........................................................26 Section 6.01. Survival............................................26 Section 6.02. Indemnification.....................................26 Section 6.03. Procedure for Indemnification........................28 ARTICLE VII...............................................................30 MISCELLANEOUS PROVISIONS..................................................30 Section 7.01 Notices..............................................30 Section 7.02. Waiver...............................................30 Section 7.03. Entire Agreement; Amendment etc......................31 Section 7.04. Assignment...........................................31 Section 7.05. Severability.........................................31 Section 7.06. Bulk Sales Laws......................................32 Section 7.07. Governing Law........................................32 Section 7.08. Counterparts; Facsimile Execution....................32 Section 7.09. Schedules............................................32 Section 7.10 U.S. Dollars.........................................32 Section 7.11. Dispute Resolution...................................32 EXHIBITS Exhibit A Form of Deed Exhibit B Form of Bill of Sale Exhibit C Form of Assignment and Assumption Agreement Exhibit D Form of Facilities Operation Agreement Exhibit E Form of PSOA SCHEDULES Schedule 2.01(a) Improvements Schedule 2.01(b) Tangible Personal Property Schedule 2.01(d) Transferred Contracts Schedule 2.01(e) Transferred Permits Schedule 2.02(a) Transmission Assets Schedule 4.01(c)(ii) Transferor's Required Governmental and Third Party Consents Schedule 4.01(e)(i) Real Property Schedule 4.01(m) Environmental Permits (see Section I of Schedule 4.01(m)) Schedule 4.01(k) Transferor Contracts Schedule 4.01(m) Permits (see Section II of Schedule 4.01(m)) Schedule 4.02(c)(ii) Transferee's Required Governmental and Third Party Consents ASSET TRANSFER AGREEMENT ASSET TRANSFER AGREEMENT (this "Agreement"), dated as of ___________, by and between The Cincinnati Gas & Electric Company, an Ohio corporation ("Transferor"), and The Union Light, Heat and Power Company, a Kentucky corporation ("Transferee" and, together with Transferor, the "Parties" and, individually, a "Party"). W I T N E S S E T H WHEREAS, Transferor owns an undivided 69% interest, as tenant in common with the Dayton Power & Light Company, in Unit 2 of the East Bend Generating Station ("East Bend Station"), a coal-fired electric generating station with a nameplate rating of 648 megawatts located in Boone Count, Kentucky near the Village of Rabbit Hash, such generating station being comprised of a boiler and steam turbine generator, together with certain other improvements, equipment, assets, properties (both tangible, including real property, and intangible), facilities and rights associated therewith or ancillary thereto; WHEREAS, Transferor desires to transfer and assign to Transferee, and Transferee desires to acquire and assume from Transferor, the Transferred Assets (as hereinafter defined) and certain associated liabilities, upon the terms and conditions hereinafter set forth; WHEREAS, concurrently with, and as a condition to, the execution and delivery of this Agreement, Transferor and Transferee are executing and delivering two additional asset transfer agreements (the "Related Asset Transfer Agreements"), pursuant to which, and subject to the terms and conditions thereof, Transferor has agreed to transfer and Transferee to acquire, concurrently with the closing of the transactions contemplated herein, the Woodsdale Generating Station, located in Trenton, Ohio, and Unit 6 of the Miami Fort Generating Station, located near North Bend, Ohio, together in each case with certain other assets, properties, facilities and rights associated therewith or ancillary thereto (collectively, together with East Bend Station, the "Plants"); WHEREAS, Transferor and Transferee intend that the transfer of the Transferred Assets contemplated herein qualify under Section 351 of the Internal Revenue Code of 1986, as amended; and WHEREAS, Cinergy Corp., a Delaware corporation, owns directly or indirectly all of the outstanding common stock of Transferor and Transferee. NOW, THEREFORE, in consideration of the premises and the mutual covenants, agreements, representations and warranties hereinafter set forth, the Parties, intending to be legally bound, hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. (a) As used in this Agreement, the following terms have the following meanings: "Affiliate" means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. The term "control" (including the terms "controlling," "controlled by" and "under common control with") means the possession, direct or indirect, 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. "Ancillary Agreements" means the Assignment and Assumption Agreement, the Bill of Sale, the Deed, the Facilities Operation Agreement, the PSOA and any other agreements or instruments entered into between the Parties with respect to the transactions contemplated by this Agreement. "Assignment and Assumption Agreement" means that certain Assignment and Assumption Agreement to be entered into by and between Transferor and Transferee at Closing, in substantially the form attached hereto as Exhibit C. "Assumed Liabilities" has the meaning set forth in Section 2.03. "Bill of Sale" means that certain Bill of Sale to be executed and delivered at Closing by Transferor to Transferee, in substantially the form attached hereto as Exhibit B. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended from time to time. "Closing" has the meaning set forth in Section 3.04. "Closing Date" has the meaning set forth in Section 3.04. "Closing Inventory" means an amount in dollars equal to Transferor's ownership interest in all Inventories on the Closing Date. "Deed" means that certain [Warranty Deed and Assignment of Adjoining Easement and License Interests] to be executed and delivered at Closing by Transferor to Transferee, in substantially the form attached hereto as Exhibit A. "Direct Claim" has the meaning set forth in Section 6.03(c). "East Bend Station" has the meaning set forth in the recitals to this Agreement. "Encumbrance" means any security interest, pledge, mortgage, lien, charge, option to purchase, lease, claim, restriction, covenant, title defect, hypothecation, assignment, deposit arrangement or other encumbrance of any kind or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or title retention agreement). "Environmental Condition" means the presence or Release to the environment, whether at the Real Property or otherwise, of Hazardous Substances, including any migration of Hazardous Substances through air, soil or groundwater at, to or from the Real Property or at, to or from any Off-Site Location, regardless of when such presence or Release occurred or is discovered. "Environmental Laws" means all (a) Laws relating to pollution or protection of the environment, natural resources or human health and safety, including Laws relating to Releases or threatened Releases of Hazardous Substances or otherwise relating to the manufacture, formulation, generation, processing, distribution, use, treatment, storage, Release, transport, Remediation, abatement, cleanup or handling of Hazardous Substances, (b) Laws with regard to recordkeeping, notification, disclosure and reporting requirements respecting Hazardous Substances and (c) Laws relating to the management or use of natural resources. "Environmental Liabilities" has the meaning set forth in Section 2.03(b). "Environmental Permit" has the meaning set forth in Section 4.01(i). "Excluded Assets" has the meaning set forth in Section 2.02. "Excluded Liabilities" has the meaning set forth in Section 2.04. "Facilities Operation Agreement" means that certain Facilities Operation Agreement to be effective at Closing by and between Transferor and Transferee, in substantially the form attached as Exhibit D. "GAAP" means United States generally accepted accounting principles as in effect from time to time, applied on a consistent basis. "Good Utility Practice" means any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods or acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. "Governmental Authority" means any: (a) nation, state, county, city, town, village, district, or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign, or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); (d) multi-national organization or body; or (e) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature. "Hazardous Substances" means (a) any petrochemical or petroleum products, oil or coal ash, radioactive materials, radon gas, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid which may contain levels of polychlorinated biphenyls; (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "hazardous constituents," "restricted hazardous materials," "extremely hazardous substances," "toxic substances," "contaminants," "pollutants," "toxic pollutants," or words of similar meaning and regulatory effect under any applicable Environmental Law; and (c) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any applicable Environmental Law. "Improvements" means all buildings, structures, machinery and equipment (including all fuel handling and storage facilities), fixtures, construction in progress, and other improvements, including all piping, cables and similar equipment forming part of the mechanical, electrical, plumbing or HVAC infrastructure of any building, structure or equipment, located on and affixed to the Real Property. "Indemnifiable Loss" has the meaning set forth in Section 6.02(a). "Indemnifying Party" has the meaning set forth in Section 6.02(d). "Indemnitee" has the meaning set forth in Section 6.02(c). "Inventories" means all inventories of fuels, supplies, materials and spare parts of Transferor located on or in transit to the Real Property. "Knowledge" means the actual knowledge of the corporate officer or officers of the specified Person charged with responsibility for the particular function as of the date of this Agreement, or, with respect to any certificate delivered pursuant to this Agreement, the date of delivery of the certificate, after reasonable inquiry by each such officer of selected employees of the specified Person whom such officer believes, in good faith, to be the persons generally responsible for the subject matters to which the knowledge is pertinent. "Laws" means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law of the United States, any foreign country and any domestic or foreign state, county, city or other political subdivision or of any Governmental Authority. "Liability" means any liability or obligation, whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, whether incurred or consequential, and whether due or to become due. "Material Adverse Effect" means (i) any event, circumstance or condition materially impairing the ability of Transferor to perform its obligations under this Agreement or any Ancillary Agreement, or (ii) any change in or effect on Transferor or the Transferred Assets that is materially adverse to the Transferred Assets, other than (a) any change resulting from changes in the international, national, regional or local wholesale or retail markets for electricity, (b) any change resulting from changes in the international, national, regional or local markets for fuel used at East Bend Station, (c) any change resulting from changes in the North American, national, regional or local electric transmission system, and (d) any change in Law generally applicable to similarly situated Persons. "Net Book Value" means an amount in dollars, as reflected in the corresponding line item or items of the balance sheet of Transferor as of the applicable date, equal to (i) total fixed assets net of accumulated depreciation in respect of Transferor's ownership interest in East Bend Station plus (ii) construction work in progress. "Off-Site Location" means any real property other than the Real Property. "Organizational Documents" means (a) the articles or certificate of incorporation and the bylaws of a corporation; (b) the limited liability company or operating agreement and certificate of formation of a limited liability company; (c) the partnership agreement and any statement of partnership of a general partnership; (d) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (e) any charter or similar document adopted or filed in connection with the creation, formation, or organization of a Person; and (f) any amendment to any of the foregoing. "PSOA" means that certain Purchase, Sales and Operation Agreement to be effective at Closing by and between Transferor and Transferee, in substantially the form attached hereto as Exhibit E. "Parent" has the meaning set forth in the first paragraph of this Agreement. "Party" has the meaning set forth in the first paragraph of this Agreement. "Permits" has the meaning set forth in Section 4.01(m). "Permitted Encumbrances" means (i) the respective rights and obligations of the Parties under this Agreement and the Ancillary Agreements; (ii) all matters that would be disclosed in a current title commitment or title policy or survey for the Real Property; (iii) Encumbrances for Taxes not yet due or which are being contested in good faith by appropriate proceedings and that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; (iv) carriers', warehousemen's, materialmen's, mechanics', repairman's or other like Encumbrances arising in the ordinary course of business that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; (v) zoning, planning, conservation restriction and other land use and environmental regulations by Governmental Authorities; (vi) Encumbrances resulting from legal proceedings being contested in good faith by appropriate proceedings that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and (vii) other Encumbrances that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. "Person" means any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or Governmental Authority. "Prime Rate" means as of any date, the prime rate as published in The Wall Street Journal on such date or, if not published on such date, on the most recent date of publication. "Real Property" has the meaning set forth in Section 4.01(e)(i). "Real Property Lease" has the meaning set forth in Section 4.01(e)(ii). "Release" means any release, spill, leak, discharge, disposal of, pumping, pouring, emitting, emptying, injecting, leaching, dumping or allowing to escape into or through the environment. "Remediation" means an action of any kind to address an Environmental Condition or a Release of Hazardous Substances or the presence of Hazardous Substances at the Real Property or an Off-Site Location, including the following activities to the extent they relate to, result from or arise out of the presence of a Hazardous Substance at the Real Property or an Off-Site Location: (a) monitoring, investigation, assessment, treatment, cleanup, containment, removal, mitigation, response or restoration work; (b) obtaining any permits, consents, approvals or authorizations of any Governmental Authority necessary to conduct any such activity; (c) preparing and implementing any plans or studies for any such activity; (d) obtaining a written notice from a Governmental Authority with jurisdiction over the Real Property or an Off-Site Location under Environmental Laws that no material additional work is required by such Governmental Authority; (e) the use, implementation, application, installation, operation or maintenance of removal actions on the Real Property or an Off-Site Location, remedial technologies applied to the surface or subsurface soils, excavation and treatment or disposal of soils at an Off-Site Location, systems for long-term treatment of surface water or groundwater, engineering controls or institutional controls; and (f) any other activities reasonably determined by a Party to be necessary or appropriate or required under Environmental Laws to address an Environmental Condition or a Release of Hazardous Substances or the presence of Hazardous Substances at the Real Property or an Off-Site Location. "Representatives" means, with respect to a Party, such respective directors (or parties performing similar functions), officers, employees, representatives, agents and advisors (including accountants, legal counsel, environmental consultants and financial advisors). "Tax" means any tax, charge, fee, levy, penalty or other assessment imposed by any federal, state, local or foreign taxing authority, including, but not limited to, any income, gross receipts, excise, property, sales, transfer, use, franchise, payroll, withholding, social security or other tax, including any interest, penalty or addition attributable thereto. "Third Party Claim" has the meaning set forth in Section 6.03(a). "Transfer Consideration" has the meaning set forth in Section 3.01. "Transferee" has the meaning set in the first paragraph of this Agreement. "Transferee Indemnitee" has the meaning set forth in Section 6.02(b). "Transferee's Required Consents" means Transferee's Required Governmental Consents and Transferee's Required Third-Party Consents. "Transferee's Required Governmental Consents" means the consents, approvals, filings and/or notices of, with, from or to Governmental Authorities listed in Section I of Schedule 4.02(c)(ii). "Transferee's Required Third-Party Consents" means the consents, approvals, filings and/or notices of, with, from or to Third Parties (other than Governmental Authorities) listed in Section II of Schedule 4.02(c)(ii). "Transferred Assets" has the meaning set forth in Section 2.01. "Transferor" has the meaning set forth in the first paragraph of this Agreement. "Transferor Indemnitee" has the meaning set forth in Section 6.02(a). "Transferor's Required Consents" means Transferor's Required Governmental Consents and Transferor's Required Third-Party Consents. "Transferor's Required Governmental Consents" means the consents, approvals, filings and/or notices of, with, from or to Governmental Authorities listed in Section I of Schedule 4.01(c)(ii). "Transferor's Required Third-Party Consents" means the consents, approvals, filings and/or notices of, with, from or to Third Parties (other than Governmental Authorities) listed in Section II of Schedule 4.01(c)(ii). "Transferred Contracts" has the meaning set forth in Section 2.01(d). "Transferred Intellectual Property" has the meaning set forth in Section 2.01(h). "Transferred Permits" has the meaning set forth in Section 2.01(e). "Transmission Assets" has the meaning set forth in Section 2.02(a). (b) Interpretation. In this Agreement, unless otherwise specified or where the context otherwise requires: (i) a reference, without more, to a recital is to the relevant recital to this Agreement, to an Article or Section is to the relevant Article or Section of this Agreement, and to a Schedule or Exhibit is to the relevant Schedule or Exhibit to this Agreement; (ii) words importing any gender shall include other genders; (iii) words importing the singular only shall include the plural and vice versa; (iv) the words "include," "includes" or "including" shall be deemed to be followed by the words "without limitation;" (v) reference to any agreement, document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof; (vi) reference to any applicable Law means, if applicable, such Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder, (vii) "or" is used in the inclusive sense of "and/or"; (viii) references to documents, instruments or agreements shall be deemed to refer as well to all addenda, exhibits, schedules or amendments thereto; (ix) the words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement; and (x) references to any party hereto or any other agreement or document shall include such party's successors and permitted assigns, but, if applicable, only if such successors and assigns are not prohibited by this Agreement. ARTICLE II TRANSFER OF ASSETS Section 2.01. Transfer of Assets. Upon the terms and conditions set forth in this Agreement, at the Closing, Transferor shall transfer, convey, assign and deliver to Transferee, and Transferee shall acquire and assume from Transferor, free and clear of all Encumbrances, other than Permitted Encumbrances, all of Transferor's right, title and interest in, to and under the real and personal property, tangible and intangible, constituting, or used in connection with or ancillary to the ownership or operation of, the East Bend Station, except as otherwise provided in Section 2.02, each as of the Closing Date, including all of Transferor's right, title and interest in, to and under the following assets (collectively, the "Transferred Assets"): (a) the portion of the Real Property that on the date hereof is or has been included in Transferor's rate base (including all buildings and other structures and Improvements located thereon and all appurtenances thereto, including without limitation those certain reserve auxiliary transformers and Improvements identified on Schedule 2.01(a)), which Real Property is more specifically described in Part II of Schedule 4.01(e)(i); (b) the machinery, equipment (including communications equipment), vehicles, furniture and other personal property located on the Real Property, including the items of tangible personal property listed on Schedule 2.01(b), but excluding property used or primarily usable as part of the Transmission Assets or otherwise constituting part of the Excluded Assets; (c) all Inventories; (d) subject to the receipt of any necessary consents and approvals, the contracts or agreements (including any licenses or real or personal property leases, other than any thereof constituting Transferred Permits or Transferred Intellectual Property) listed on Schedule 2.01(d) (the "Transferred Contracts"); (e) subject to the receipt of any necessary consents and approvals, the permits, licenses, certificates, certifications, orders and other governmental authorizations listed on Schedule 2.01(e) (the "Transferred Permits"); (f) all unexpired, transferable warranties and guarantees from manufacturers, vendors and other third parties with respect to any Improvement or item of real or tangible personal property constituting part of the Transferred Assets; (g) all books, expired purchase orders, operating records, operating, safety and maintenance manuals, engineering design plans, blueprints and as-built plans, specifications, procedures, studies, reports, equipment repair, safety, maintenance or service records, and similar items (subject to the right of Transferor to retain copies of same for its use), other than such items that are proprietary to third parties and accounting records (to the extent that any of the foregoing is contained in an electronic format, Transferor shall cooperate with Transferee to transfer such items to Transferee in a format that is reasonably acceptable to Transferee); and (h) subject to the receipt of any necessary consents and approvals, any Intellectual Property (the "Transferred Intellectual Property"). Notwithstanding the foregoing, the transfer of the Transferred Assets pursuant to this Agreement shall not include the assumption of any Liability related to the Transferred Assets unless Transferee expressly assumes that Liability pursuant to Section 2.03. Section 2.02. Excluded Assets. Notwithstanding anything to the contrary contained in Section 2.01 or elsewhere in this Agreement, nothing in this Agreement shall constitute or be construed as conferring on Transferee, and Transferee is not acquiring, any right, title or interest in and to (x) any properties, assets, business, operation, or division of Transferor or any of its Affiliates (other than Transferee) not expressly set forth in Section 2.01, or (y) the following specific assets of Transferor (or as to which Transferor has an undivided ownership interest therein, as tenant in common) that are associated with the Transferred Assets, but which are specifically excluded from the tranfer contemplated hereunder, are excluded from the Transferred Assets and shall remain the property of Transferor after the Closing (collectively, the "Excluded Assets"): (a) the electrical transmission or distribution facilities (as distinguished from generation facilities) located at or forming part of East Bend Station (whether or not regarded as a "transmission" or "generation" asset for regulatory or accounting purposes), including all switchyard facilities, substation facilities and support equipment, as well as all permits, contracts and warranties related thereto (other than any distribution assets expressly identified on Schedule 2.01(a) or (b)), including those certain assets facilities and agreements specifically identified on Schedule 2.02(a) (the "Transmission Assets"); provided, further, that without limitation of the foregoing, Transferor is not transferring to Transferee any of Transferor's right, title and interest in and to any generation step-up transformers or any other equipment or facilities connected or appurtenant to East Bend Station classified as "Station Equipment" under Account No. 353 of the Federal Energy Regulatory Commission's Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to Provisions of the Federal Power Act, 18 C.F.R. ss. 101; (b) all real property associated with East Bend Station, other than the interests therein to be conveyed by the Deed; (c) all cash, cash equivalents, bank deposits, accounts and notes receivables (trade or otherwise), prepaid expenses relating to the Transferred Assets and any income, sales, payroll or other Tax receivables; (d) all minute books, stock transfer books, corporate seals and other corporate records; (e) any refund, credit, penalty, payment, adjustment or reconciliation (i) related to Taxes paid prior to the Closing Date in respect of the Transferred Assets, whether such refund, credit, penalty, payment, adjustment or reconciliation is received as a payment or, subject to Section 3.03, as a credit against future Taxes payable, or (ii) arising under any Transferred Contract and relating to a period before the Closing Date (including any payment received after the Closing Date for electricity sold and delivered from East Bend Station prior to the Closing Date); (f) the rights of Transferor in, to and under all contracts, agreements, arrangements, permits or licenses of any nature, of which the obligations of Transferor thereunder are not expressly assumed by Transferee pursuant to Section 2.03; (g) any insurance policies; (h) certificates of deposit, shares of stock, securities, bonds, debentures, evidences of indebtedness, and interests in joint ventures, partnerships, limited liability companies and other entities; (i) all tariffs, agreements and arrangements to which Transferor is a party for the purchase or sale of electric capacity and/or energy or for the purchase or sale of transmission or ancillary services involving the Transferred Assets or otherwise; (j) all personnel records together with all deferred compensation, profit-sharing, retirement and pension plans and all bonus, fringe benefit and other employee benefit plans maintained or with respect to which contributions are made by Transferor or any of its Affiliates (other than Transferee) in respect of the current employees of Transferor or any of its Affiliates (other than Transferee) providing services for or otherwise associated with the Transferred Assets; (k) except in respect of Assumed Liabilities, the rights of Transferor in and to any causes of action against third parties relating to the Transferred Assets or any part thereof, including any claim for refunds (other than those Tax refunds that are covered by Section 2.02(d) above), prepayments, offsets, recoupment, insurance proceeds, condemnation awards, judgments and the like, whether received as a payment or credit against future liabilities, relating specifically to East Bend Station and relating to any period ending on or prior to the Closing Date; (l) all other assets and properties owned by Transferor or any of its Affiliates (other than Transferee) that are not used in the operation of East Bend Station; and (m) the rights of Transferor under this Agreement and the Ancillary Agreements. Section 2.03. Assumed Liabilities. On the Closing Date, Transferor and Transferee shall execute and deliver the Assignment and Assumption Agreement, pursuant to which, among other things, Transferee shall assume and agree to perform and discharge, without recourse to Transferor, the following Liabilities of Transferor, solely to the extent such Liabilities accrue or arise from and after the Closing and would otherwise constitute Liabilities (in whole or in part) of Transferor (as opposed to any other joint owner of East Bend Station), other than Excluded Liabilities (as defined below), in accordance with the respective terms and subject to the respective conditions thereof (collectively, the "Assumed Liabilities"): (a) All Liabilities of Transferor under the Transferred Contracts, Transferred Permits and Transferred Intellectual Property, in each case in accordance with the terms thereof, except to the extent that such Liabilities, but for a breach or default by Transferor, would have been paid, performed or otherwise discharged on or prior to the Closing Date or to the extent the same arise out of any such breach or default or out of any event which after the giving of notice would constitute a default by Transferor; (b) all Liabilities with respect to East Bend Station arising under or relating to Environmental Laws or relating to any claim in respect of Environmental Conditions or Hazardous Substances, including settlements, judgments, costs and expenses, including reasonable attorneys fees, whether based on common law or Environmental Laws (collectively, "Environmental Liabilities"), but in each case solely to the extent accruing or arising from and after the Closing Date, with respect to (i) any violation or alleged violation of Environmental Laws with respect to the ownership, lease, maintenance or operation of any of the Transferred Assets, including any fines or penalties that arise in connection with the ownership, lease, maintenance or operation of the Transferred Assets, and the costs associated with correcting any such violations; (ii) loss of life, injury to persons or property or damage to natural resources caused (or allegedly caused) by any Environmental Condition or the presence or Release of Hazardous Substances at, on, in, under, adjacent to or migrating from the Transferred Assets, including any Environmental Condition or Hazardous Substances contained in building materials at or adjacent to the Transferred Assets or in the soil, surface water, sediments, groundwater, landfill cells, or in other environmental media at or near the Transferred Assets; (iii) any Remediation of any Environmental Condition or Hazardous Substances that are present or have been Released at, on, in, under, adjacent to or migrating from, the Transferred Assets or in the soil, surface water, sediments, groundwater, landfill cells or in other environmental media at or adjacent to the Transferred Assets; (iv) any bodily injury, loss of life, property damage, or natural resource damage arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, of Hazardous Substances generated in connection with the ownership, lease, maintenance or operation of the Transferred Assets; (v) any Remediation of any Environmental Condition or Release of Hazardous Substances arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, of Hazardous Substances generated in connection with the ownership, lease, maintenance or operation of the Transferred Assets; and (vi) any obligation to repower, replace, decommission, deactivate, dismantle, demolish or close the Transferred Assets or any portion thereof, or any surface impoundments or other waste or effluent handling or storage units on owned or leased adjacent properties used in connection with the operation of the Transferred Assets; (c) all liabilities or obligations to third parties for personal injury or tort, or similar causes of action arising solely out of the ownership, lease, maintenance or operation of the Transferred Assets (collectively, "Tort Liabilities"), but in each case solely to the extent accruing or arising from and after the Closing Date; and (d) any Tax that may be imposed by any federal, state or local government on the ownership, sale, operation or use of the Transferred Assets on or after the Closing Date, except for any income Taxes attributable to income received by Transferor. Section 2.04. Excluded Liabilities. Except for the Assumed Liabilities, Transferee shall not assume by virtue of this Agreement, the Assignment and Assumption Agreement or any other Ancillary Agreement, or the transactions contemplated hereby or thereby, or otherwise, and shall have no liability for, any Liabilities of Transferor (the "Excluded Liabilities"), including any of the following Liabilities: (a) any Liabilities of Transferor in respect of any Excluded Assets or other assets of Transferor that are not Transferred Assets, except to the extent caused by the acts or omissions of Transferee or Transferee's ownership, lease, maintenance or operation of the Transferred Assets; (b) any Liabilities in respect of Taxes attributable to the Transferred Assets for taxable periods ending before the Closing Date; (c) any Liabilities of Transferor (i) arising from the breach or default by Transferor, prior to the Closing Date, of any Transferred Contract, Transferred Permit or Transferred Intellectual Property or (ii) in respect of any other contract, agreement, personal property lease, permit, license or other arrangement or instrument entered into by Transferor; (d) subject to Section 3.03, any payment obligations of Transferor or its Affiliates (other than Transferee) for goods delivered or services rendered prior to the Closing Date; (e) any fines and penalties imposed by any Governmental Authority resulting from any act or omission by Transferor that occurred prior to the Closing Date; (f) any income Taxes attributable to income received by Transferor; (g) any Liability of Transferor arising as a result of its execution and delivery of this Agreement or any Ancillary Agreement, the performance of its obligations hereunder or thereunder, or the consummation by Transferor of the transactions contemplated hereby or thereby; (h) any Liability of Transferor based on Transferor's acts or omissions after the Closing; and (i) any and all Environmental Liabilities and Tort Liabilities accruing, arising, existing or occurring prior to the Closing Date. ARTICLE III ASSET TRANSFER; CLOSING Section 3.01. Asset Transfer. Transferor shall transfer the Transferred Assets to Transferee at Net Book Value on the Closing Date ("Transfer Consideration"). The Parties agree and acknowledge that in consideration therefor Transferee will issue a combination of debt and equity of Transferee to Transferor, in such relative proportions as Transferor and Transferee shall mutually agree. Section 3.02. Inventory; Transaction Costs. At Closing, Transferee shall also compensate Transferor for the Closing Inventory, at cost. Further, Transferee shall reimburse Transferor for all transaction costs incurred by Transferor or any of its affiliates in connection with the transactions contemplated by this Agreement. Section 3.03. Proration. (a) Transferee and Transferor agree that all of the items normally prorated, including those listed below, relating to the business and operation of the Transferred Assets shall be prorated as of the Closing Date, with Transferor liable to the extent such items relate to any time period through the Closing Date, and Transferee liable to the extent such items relate to periods subsequent to the Closing Date: (i) personal property, real estate, occupancy and any other Taxes, assessments and other charges, if any, on or with respect to the business and operation of the Transferred Assets; (ii) rent, Taxes and other items payable by or to Transferor under any of the Transferor Agreements to be assigned to and assumed by the Transferee hereunder; (iii) any permit, license or registration fees with respect to any Environmental Permit or other Permit; and (iv) sewer rents and charges for water, telephone, electricity and other utilities. (b) In connection with such proration, in the event that actual figures are not available at the Closing Date, the proration shall be based upon the actual amount of such Taxes or fees for the preceding year (or appropriate period) for which actual Taxes or fees are available and such Taxes or fees shall be reprorated upon request of either the Transferor or the Transferee made within 60 days of the date that the actual amounts become available. Transferor and Transferee agree to furnish each other with such documents and other records as may be reasonably requested in order to confirm all adjustment and proration calculations made pursuant to this Section 3.03. Section 3.04. Closing. The transfer, assignment, conveyance and delivery of the Transferred Assets, and the consummation of the other transactions contemplated by this Agreement shall take place at a closing (the "Closing"), to be held at the offices of Cinergy Corp., 139 East Fourth Street, Cincinnati Ohio 45201 at 10:00 a.m. eastern standard time (or another mutually acceptable time and location), on the date of execution and delivery of this Agreement by each of the Parties (or on such other date as may be mutually agreed upon by the Parties) (the "Closing Date"). The Closing shall be effective for all purposes as of the close of business on the Closing Date. Section 3.05. Closing Deliveries. (a) At the Closing, Transferor will deliver, or cause to be delivered, to Transferee: (i) the Deed, duly executed and acknowledged by Transferor and in recordable form; (ii) the Bill of Sale, duly executed by Transferor; (iii) the Assignment and Assumption Agreement, duly executed by Transferor; (iv) the Facilities Operation Agreement, duly executed by Transferor; (v) the PSOA, duly executed by Transferor; (vi) copies of all Transferor's Required Consents obtained by Transferor; and (vii) such other documents as are contemplated by this Agreement or as the Transferee may reasonably request to carry out the purposes of this Agreement. (b) At the Closing, Transferee will provide the Transfer Consideration as well as reimbursement or compensation for the Closing Inventory and transaction costs. In addition, Transferee will deliver, or cause to be delivered, to Transferor: (i) the Assignment and Assumption Agreement, duly executed by Transferee; (ii) the Facilities Operation Agreement, duly executed by Transferee; (iii) the PSOA, duly executed by Transferee; (iv) copies of all Transferee's Required Consents obtained by Transferee; and (v) such other documents as are contemplated by this Agreement or as the Transferor may reasonably request to carry out the purposes of this Agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties of Transferor. Transferor represents and warrants to Transferee as follows: (a) Organization and Good Standing; Qualification. Transferor is a corporation duly formed, validly existing and in good standing under the laws of the State of Ohio. Transferor has all requisite power and authority to own, lease or operate the Transferred Assets and to carry on its business as it is now being conducted. Transferor is duly qualified or licensed to do business as a foreign corporation and is in good standing as a foreign corporation in each jurisdiction in which the character or location of the properties owned or used by it or the nature of the business conducted by it makes such qualification or license necessary, except for jurisdictions in which the failure to be so qualified, licensed or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (b) Authority and Enforceability. Transferor has full corporate power and authority to execute and deliver, and carry out its obligations under, this Agreement and each Ancillary Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Transferor of this Agreement and each Ancillary Agreement to which it is a party, and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action on the part of Transferor. Assuming the due authorization, execution and delivery of this Agreement and each Ancillary Agreement to which it is a party by Transferee, and subject to the receipt of Transferor's Required Consents, each of this Agreement and each such Ancillary Agreement constitutes a legal, valid and binding obligation of Transferor, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency and other similar laws affecting the rights and remedies of creditors generally and by general principles of equity. (c) No Violation; Consents and Approvals. (i) Subject to obtaining Transferor's Required Consents, neither the execution, delivery and performance by Transferor of this Agreement and each Ancillary Agreement to which it is a party, nor the consummation by Transferor of the transactions contemplated hereby and thereby, will (A) conflict with or result in any breach of any provision of the Organizational Documents of Transferor; (B) result in a default (or give rise to any right of termination, cancellation or acceleration), or require a consent, under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Transferor is a party or by which it or any of the Transferred Assets may be bound, except for any such defaults or consents (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; or (C) constitute a violation of any law, regulation, order, judgment or decree applicable to Transferor, except for any such violations as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (ii) Except as set forth in Section I of Schedule 4.01(c)(ii) (listing each of Transferor's Required Governmental Consents) or Section II thereof (listing each of Transferor's Required Third-Party Consents), no consent or approval of, filing with, or notice to, any Governmental Authority or other Person is necessary for the execution, delivery and performance of this Agreement by Transferor or of any Ancillary Agreement to which Transferor is a party, or the consummation by Transferor of the transactions contemplated hereby and thereby, other than such consents, approvals, filings or notices which, if not obtained or made, would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (d) Insurance. All material policies of fire, liability, workers' compensation and other forms of insurance owned or held by, or on behalf of, Transferor and insuring the Transferred Assets are in full force and effect, all premiums with respect thereto covering all periods up to and including the date hereof have been paid (other than retroactive premiums which may be payable with respect to comprehensive general liability and workers' compensation insurance policies), and no notice of cancellation or termination has been received with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation. (e) Real Property. (i) Schedule 4.01(e)(i) sets forth in Part I thereof all real property owned (whether on a tenancy in common basis or otherwise), used or occupied by Transferor and constituting part of or otherwise associated with East Bend Station (the "Real Property"), including a description of all land, and all encumbrances, easements or rights of way of record (or, if not of record, of which Transferor has Knowledge) granted on or appurtenant to or otherwise affecting such Real Property. (ii) There are [no material Real Property leases (the "Real Property Leases")] relating to the Transferred Assets under which the Transferor is a lessee, lessor or under which Transferor has any interest. (f) Conveyance of Real Property. No state, municipal, or other governmental approval regarding the division, platting, or mapping of real estate is required as a prerequisite to the conveyance by Transferor to Transferee (or as a prerequisite to the recording of any conveyance document) of any Real Property pursuant to the terms hereof. (g) Improvements. Neither Transferor nor any Affiliate thereof has received any written notices from any Governmental Authority stating or alleging that any Improvements constituting part of the Transferred Assets have not been constructed in compliance with applicable Laws. (h) Title; Condition of Assets. (i) Subject to Permitted Encumbrances, Transferor is the holder of record title to the Real Property and has good and valid title to the other Transferred Assets that it purports to own, free and clear of all Encumbrances. (ii) The tangible assets (real and personal) at, related to, or used in connection with East Bend Station, taken as a whole, (A) are in good operating and usable condition and repair, free from any defects (except for ordinary wear and tear, in light of their respective ages and historical usages, and except for such defects as do not materially interfere with the use thereof in the conduct of the normal operation and maintenance of the Transferred Assets taken as a whole) and (B) have been maintained consistent with Good Utility Practice. (i) Environmental Matters. (i) Transferor or its Affiliate, Cinergy Power Generation Services, LLC, a Delaware limited liability company ("GGPS"), holds, and is in compliance with, all permits, certificates, certifications, licenses and other authorizations issued by Governmental Authorities under Environmental Laws (collectively, "Environmental Permits") that are required for Transferor to conduct the business and operations of the Transferred Assets, and Transferor is otherwise in compliance with all applicable Environmental Laws with respect to the business and operations of the Transferred Assets, except for any such failures to hold or comply with required Environmental Permits, or such failures to be in compliance with applicable Environmental Laws, as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; (ii) Transferor has not received any written request for information, or been notified of any violation, or that it is a potentially responsible party, under CERCLA or any other Environmental Law for contamination or air emissions at East Bend Station or the Real Property, except for any such requests or notices that would result in liabilities under such laws as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, and there are no claims, actions, proceedings or investigations pending or, to the Knowledge of Transferor, threatened against Transferor before any Governmental Authority or body acting in an adjudicative capacity relating in any way to any Environmental Laws or against Transferor or Parent concerning contamination or air emissions at East Bend Station or the Real Property; and (iii) there are no outstanding judgments, decrees or judicial orders relating to the Transferred Assets regarding compliance with any Environmental Law or to the investigation or cleanup of Hazardous Substances under any Environmental Law relating to the Purchase Assets, except for such outstanding judgments, decrees or judicial orders as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (iv) Section I of Schedule 4.01(m) lists all Environmental Permits. The representations and warranties made in this Section 4.01(i) are the exclusive representations and warranties of Transferor relating to environmental matters. (j) Condemnation. There are no pending or, to the Knowledge of Transferor, threatened proceedings or governmental actions to condemn or take by power of eminent domain all or any part of the Transferred Assets. (k) Contracts and Leases. (i) Schedule 4.01(k) lists all written contracts, agreements, licenses (other than Environmental Permits, Permits or Intellectual Property) or personal property leases of Transferor that are material to the business or operations of the Transferred Assets, other than any such agreements, licenses, or personal property leases that are expected to expire or terminate on or prior to the Closing Date. (ii) Except as disclosed in Schedule 4.01(k), each Transferred Contract (A) constitutes a legal, valid and binding obligation of Transferor and, to Transferor's Knowledge, constitutes a valid and binding obligation of the other parties thereto, (B) is in full force and effect and Transferor has not delivered or received any written notice of termination thereunder, and (C) may be transferred to Transferee pursuant to this Agreement without the consent of the other parties thereto and will continue in full force and effect thereafter, in each case without breaching the terms thereof or resulting in the forfeiture or impairment of any rights thereunder. (iii) Except as set forth in Schedule 4.01(k), there is not under any Transferred Contract any default or event which, with notice or lapse of time or both, (A) would constitute a default by Transferor or, to Transferor's Knowledge, any other party thereto, (B) would constitute a default by Transferor or, to Transferor's Knowledge, any other party thereto which would give rise to an automatic termination, or the right of discretionary termination, thereof, or (C) would cause the acceleration of any of Transferor's obligations thereunder or result in the creation of any Encumbrance (other than any Permitted Encumbrance) on any of the Transferred Assets. There are no claims, actions, proceedings or investigations pending or, to the Knowledge of Transferor, threatened against Transferor or any other party to any Transferred Contract before any Governmental Authority or body acting in an adjudicative capacity relating in any way to any Transferred Contract or the subject matter thereof. Transferor has no Knowledge of any defense, offset or counterclaim arising under any Transferred Contract. (l) Legal Proceedings. There are no actions or proceedings pending or, to the Knowledge of Transferor, threatened against Transferor before any court, arbitrator or Governmental Authority, which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. Transferor is not subject to any outstanding judgments, rules, orders, writs, injunctions or decrees of any court, arbitrator or Governmental Authority that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. (m) Permits. (i) Transferor has all permits, licenses, franchises and other governmental authorizations, consents and approvals (other than Environmental Permits, which are addressed in Section 4.01(i)) (collectively, "Permits") necessary to own and operate the Transferred Assets, except where any failures to have such Permits would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Transferor has not received any written notification that Transferor is in violation, nor does Transferor have Knowledge of any violations, of any such Permits, or any Law or judgment of any Government Authority applicable to Transferor with respect to the Transferred Assets, except for violations that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (ii) Section II of Schedule 4.01(m) lists all material Permits (other than Environmental Permits). (n) Taxes. Transferor has filed all Tax Returns that are required to be filed by it with respect to any Tax relating to the Transferred Assets, and Transferor has paid all Taxes that have become due as indicated thereon, except where such Tax is being contested in good faith by appropriate proceedings, or where any failures to so file or pay would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. There are no Encumbrances for Taxes on the Transferred Assets that are not Permitted Encumbrances. (o) Intellectual Property. Transferor has such ownership of or such rights by license or other agreement to use all Intellectual Property necessary to permit Transferor to conduct its business with respect to the Transferred Assets as currently conducted, except where any failures to have such ownership, license or right to use would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Transferor is not, nor has Transferor received any notice that Transferor is, in default (or with the giving of notice or lapse of time or both, would be in default) under any contract to use such Intellectual Property, and there are no material restrictions on the transfer of any material contract, or any interest therein, held by Transferor in respect of such Intellectual Property. Transferor has not received notice that it is infringing any Intellectual Property of any other Person in connection with the operation or business of the Transferred Assets. (p) Compliance with Laws. Transferor is in compliance with all applicable Laws with respect to the ownership or operation of the Transferred Assets, except where any such failures to be in compliance would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (q) Limitation of Representations and Warranties. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS AGREEMENT AND IN ANY ANCILLARY AGREEMENT, TRANSFEROR IS NOT MAKING, AND HEREBY DISCLAIMS, ANY OTHER REPRESENTATIONS AND WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, CONCERNING TRANSFEROR, EAST BEND STATION OR THE TRANSFERRED ASSETS OR ANY PART THEREOF. Section 4.02. Representations and Warranties of Transferee. Transferee represents and warrants to Transferor as follows: (a) Organization and Good Standing. Transferee is a corporation duly formed, validly existing and in good standing under the laws of the State of Kentucky and has all requisite power and authority to own, lease or operate its properties and to carry on its business as it is now being conducted. (b) Authority and Enforceability. Transferee has full corporate power and authority to execute and deliver and carry out its obligations under this Agreement and each Ancillary Agreement to which it is a party, and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Transferee of this Agreement and each such Ancillary Agreement, and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action by Transferee. Assuming the due authorization, execution and delivery of this Agreement and each such Ancillary Agreement by the other party or parties thereto, and subject to the receipt of Transferee's Required Consents, each of this Agreement and each such Ancillary Agreement constitutes a legal, valid and binding obligation of Transferee, enforceable against Transferee in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency and other similar laws affecting the rights and remedies of creditors generally and by general principles of equity. (c) No Violation; Consents and Approvals. (i) Subject to obtaining Transferee's Required Consents, neither the execution, delivery and performance by Transferee of this Agreement and each Ancillary Agreement to which Transferee is a party, nor the consummation by Transferee of the transactions contemplated hereby and thereby, will (A) conflict with or result in any breach of any provision of the Organizational Documents of Transferee; (B) result in a default (or give rise to any right of termination, cancellation or acceleration), or require a consent, under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Transferee is a party or by which any of their respective material properties or assets may be bound, except for any such defaults or consents (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of Transferee to perform its obligations under this Agreement and the Ancillary Agreements; or (C) constitute a violation of any law, regulation, order, judgment or decree applicable to Transferee, except for any such violations as would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of Transferee to perform its obligations under this Agreement and the Ancillary Agreements. (ii) Except as set forth in Section I of Schedule 4.02(c)(ii) (listing each of Transferee's Required Governmental Consents) or Section II thereof (listing each of Transferee's Required Third-Party Consents), no consent or approval of, filing with, or notice to, any Governmental Authority or other Person is necessary for the execution and delivery of this Agreement or any Ancillary Agreement by Transferee, or the consummation by Transferee or Company of the transactions contemplated hereby and thereby, except for any such consents, approvals, filings or notices which, if not obtained or made, would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of Transferee to perform its obligations under this Agreement and the Ancillary Agreements. (d) Legal Proceedings. There are no actions or proceedings pending or, to the Knowledge of Transferee, threatened against Transferee before any court, arbitrator or Governmental Authority, which, individually or in the aggregate, would reasonably be expected to have a material adverse effect on the ability of Transferee to perform its obligations under this Agreement and the Ancillary Agreements. Transferee is not subject to any outstanding judgments, rules, orders, writs, injunctions or decrees of any court, arbitrator or Governmental Authority which, individually or in the aggregate, would reasonably be expected to have a material adverse effect on the ability of Transferee to perform its obligations under this Agreement and the Ancillary Agreements. ARTICLE V COVENANTS Section 5.01. Books and Records. For a period of 7 years after the Closing Date (or such other date as the Parties may mutually determine), each Party and its Representatives shall have reasonable access to all books and records of the Transferred Assets, to the extent that such access may reasonably be required by such Party in connection with the Assumed Liabilities or the Excluded Liabilities, or other matters affected by the operation of the Transferred Assets. Such access shall be afforded by the Party in possession of any such books and records upon receipt of reasonable advance notice and during normal business hours. The Party exercising this right of access shall be solely responsible for any costs or expenses incurred by it or the other Party with respect to such access pursuant to this Section 5.01. If the Party in possession of such books and records desires to dispose of any such books and records upon or prior to the expiration of such seven-year period, such Party shall, prior to such disposition, give the other Party a reasonable opportunity, at such other Party's expense, to segregate and remove such books and records as such other Party may select. Section 5.02. Finder's Fees. Transferor, on the one hand, and Transferee, on the other hand, represent and warrant to the other that no broker, finder or other Person is entitled to any brokerage fees, commissions or finder's fees in connection with the transactions contemplated hereby by reason of any action taken by the Party making such representation. Transferor, on the one hand, and Transferee, on the other hand, will pay to the other or otherwise discharge, and will indemnify and hold the other harmless from and against, any and all claims or liabilities for all brokerage fees, commissions and finder's fees incurred by reason of any action taken by the indemnifying party. Section 5.03. Tax Matters. All transfer, use, stamp, sales and similar Taxes incurred in connection with this Agreement and the transactions contemplated hereby shall be the sole responsibility of Transferor and, to the extent paid by Transferee, Transferor shall promptly reimburse Transferee upon request. Section 5.04. Further Assurances. (a) Subject to the terms and conditions of this Agreement, each of Transferor, on the one hand, and Transferee, on the other hand, shall use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws to consummate and make effective the transfer of the Transferred Assets pursuant to this Agreement and the assumption of the Assumed Liabilities, including using commercially reasonable efforts with a view to obtaining all necessary consents, approvals and authorizations of, and making all required notices or filings with, third parties required to be obtained or made in order to consummate the transactions hereunder, including the transfer of the Transferred Permits to Transferee. Neither Transferor, on the one hand, nor Transferee, on the other hand, shall, without prior written consent of the other, take or fail to take any action which might reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by this Agreement. (b) In the event that any portion of the Transferred Assets shall not have been conveyed to Transferee at the Closing, Transferor shall, subject to paragraphs (c) and (d) immediately below, convey such asset to Transferee as promptly as practicable after the Closing. (c) To the extent, if any, that Transferor's rights under any Transferred Contract may not be assigned without the consent of any other party thereto, which consent has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign the same if an attempted assignment would constitute a breach thereof or be unlawful. Transferor and Transferee agree that if any consent to an assignment of any Transferred Contract has not been obtained at the Closing Date, or if any attempted assignment would be ineffective or would impair Transferee's rights and obligations under the Transferred Contract in question, so that Transferee would not in effect acquire the benefit of all such rights and obligations, Transferor, at its option and to the maximum extent permitted by law and such Transferred Contract, shall, after the Closing Date, (i) appoint Transferee to be Transferor's agent with respect to such Transferred Contract or (ii) to the maximum extent permitted by law and such Transferred Contract, enter into such reasonable arrangements with Transferee or take such other commercially reasonable actions to provide Transferee with the same or substantially similar rights and obligations of such Transferred Contract. From and after the Closing Date, Transferor and Transferee shall cooperate and use commercially reasonable efforts to obtain an assignment to Transferee of any such Transferred Contract. (d) To the extent that Transferor's rights under any warranty or guaranty described in Section 2.01(f) may not be assigned without the consent of another Person, which consent has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign the same, if an attempted assignment would constitute a breach thereof or be unlawful. The Parties agree that if any consent to an assignment of any such warranty or guaranty has not been obtained or if any attempted assignment would be ineffective or would impair Transferee's rights and obligations under the warranty or guaranty in question, so that Transferee would not in effect acquire the benefit of all such rights and obligations, Transferor shall use commercially reasonable efforts to the extent permitted by law and such warranty or guaranty, to enforce such warranty or guaranty for the benefit of Transferee to the maximum extent possible so as to provide Transferee with the benefits and obligations of such warranty or guaranty. Notwithstanding the foregoing, Transferor shall not be obligated to bring or file suit against any third party, provided that if Transferor determines not to bring or file suit after being requested by Transferee to do so, Transferor shall assign, to the extent permitted by law or any applicable agreement, its rights in respect of the claims so that Transferee may bring or file such suit. Section 5.05. Site Access. The Parties acknowledge and agree that pursuant to the transactions contemplated hereby, and in light of the ongoing business operations and imperatives of Transferor, Transferor is not conveying to Transferee all of Transferor's ownership interest in the Real Property (and further that such portion of the Real Property being conveyed by Transferor pursuant to the Deed is subject to the terms and conditions set forth therein, including any reservations or restrictions in favor of Transferor), but rather solely that portion of the Real Property anticipated to be necessary or appropriate for Transferee's full enjoyment of its ownership interest in East Bend Station as presently configured for the expected useful life thereof. The foregoing notwithstanding, and in addition to the rights granted with respect thereto under the Deed, the Parties confirm that each may have legitimate needs for rights of access and use, from time to time after the Closing, on reasonable terms and conditions, with respect to real estate owned by the other constituting part of or otherwise associated with East Bend Station, and the Parties agree to cooperate with each other in good faith to accommodate such legitimate needs (taking into account rights of any other owners of East Bend Station), including, without limitation, developing written protocols and if necessary or appropriate legal instruments embodying the terms and conditions of such mutual accommodation in respect of access and use. ARTICLE VI INDEMNIFICATION Section 6.01. Survival. (a) The representations and warranties of the Parties contained herein shall survive the Closing for a period of one year and thereafter shall be of no further force and effect, except that (i) the representations and warranties set forth in Section 4.01(i) shall survive the Closing for a period of three years, (ii) the representations and warranties set forth in Section 4.01(n) shall survive the Closing for the period of the applicable statute of limitations, (iii) the representations and warranties set forth in Section 4.01(a), (b) and (c) and Section 4.02(a), (b) and (c) shall survive indefinitely, and (iv) any representation or warranty as to which a claim has been asserted during the survival period shall continue in effect with respect to such claim until such claim has been finally resolved or settled. (b) The covenants and agreements of the Parties contained in this Agreement shall survive the Closing in accordance with their respective terms. Section 6.02. Indemnification. (a) From and after the Closing, Transferee shall indemnify, defend and hold harmless Transferor and its Representatives (each, a "Transferor Indemnitee") from and against any and all claims, demands, suits, losses, liabilities, penalties, damages, obligations, payments, costs and expenses (including, without limitation, the costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements and compromises relating thereto and reasonable attorneys' fees and reasonable disbursements in connection therewith) (each, an "Indemnifiable Loss") asserted against or suffered by any Transferor Indemnitee relating to, resulting from or arising out of (i) any breach by Transferee of any representation, warranty, covenant or agreement of Transferee contained in this Agreement or the Ancillary Agreements, or (ii) the Assumed Liabilities. (b) From and after the Closing, Transferor shall indemnify, defend and hold harmless Transferee and its Representatives (each, a "Transferee Indemnitee") from and against any and all Indemnifiable Losses asserted against or suffered by any Transferee Indemnitee relating to, resulting from or arising out of (i) any breach by Parent or Transferor of any of their representations, warranties, covenants or agreements contained in this Agreement or the Ancillary Agreements, (ii) the Excluded Liabilities, or (iii) noncompliance with any bulk sales or transfer laws as provided in Section 7.06. (c) The amount of any Indemnifiable Loss shall be reduced (i) to the extent that any Person entitled to receive indemnification under this Agreement (an "Idemnitee") receives any insurance proceeds with respect to such Indemnifiable Loss, and (ii) to take into account any net Tax benefit realized by the Indemnitee arising from the recognition of such Indemnifiable Loss (but only to the extent that the Parties, following good faith negotiations for a period of 30 days, jointly agree that such Tax benefit would be realized by the Indemnitee). (d) The expiration or termination of any covenant, agreement, representation or warranty shall not affect the Parties' obligations under this Section 6.02 if the Indemnitee provided the Person required to provide indemnification under this Agreement (the "Indemnifying Party") with proper notice of the claim or event for which indemnification is sought prior to such expiration, termination or extinguishment. (e) Subject to Section 7.10 and subparagraph (f) immediately below, the rights and remedies of the Parties under this Article VI are exclusive and in lieu of any and all other rights and remedies which the Parties may have under this Agreement or otherwise in respect of any breach of or failure to perform any representation, warranty, covenant or agreement set forth in this Agreement, after the occurrence of the Closing. (f) Each Party waives any provision of law to the extent that it would limit or restrict the agreements contained in this Section 6.02. Notwithstanding any provisions in this Agreement to the contrary, each Party retains its remedies at law or in equity with respect to willful, knowing or intentional misrepresentations or breaches of this Agreement. (g) Notwithstanding anything to the contrary herein, no Party (including an Indemnitee) shall be entitled to recover from any other Party (including an Indemnifying Party) for any liabilities, damages, obligations, payments, losses, costs, or expenses under this Agreement or any amount in excess of the actual compensatory damages, court costs and reasonable attorney's fees suffered by such party. The Parties waive any right to recover punitive, special, exemplary and consequential damages arising in connection with or with respect to this Agreement. The provisions of this Section 6.02(g) shall not apply to indemnification for a Third Party Claim. (h) An Indemnitee shall use commercially reasonable efforts to mitigate all Indemnifiable Losses, including availing itself of any defenses, limitations, rights of contribution, claims against third parties and other rights at law or equity. Commercially reasonable efforts shall include the reasonable expenditure of money to mitigate or otherwise reduce or eliminate any losses or expenses for which indemnification would otherwise be due hereunder, and, in addition to its other obligations hereunder, the Indemnifying Party shall reimburse the Indemnitee for the Indemnitee's reasonable expenditures in undertaking such mitigation. (i) The rights and obligations of indemnification under this Section 6.02 shall not be limited or subject to set-off based on any violation or alleged violation of any obligation under this Agreement or otherwise, including but not limited to breach or alleged breach by the Indemnitee of any representation, warranty, covenant or agreement contained in this Agreement. Section 6.03. Procedure for Indemnification. (a) If any Indemnitee receives notice of the assertion of any claim or of the commencement of any claim, action, or proceeding made or brought by any Person who is not a party to this Agreement or any Affiliate of a Party to this Agreement (a "Third Party Claim") with respect to which indemnification is to be sought from an Indemnifying Party, the Indemnitee shall give such Indemnifying Party reasonably prompt written notice thereof, but in any event such notice shall not be given later than 20 days after the Indemnitee's receipt of notice of such Third Party Claim. Such notice shall describe the nature of the Third Party Claim in reasonable detail and shall indicate the estimated amount, if practicable, of the Indemnifiable Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party will have the right to participate in or, by giving written notice to the Indemnitee, to elect to assume the defense of any Third Party Claim at such Indemnifying Party's expense and by such Indemnifying Party's own counsel, provided that the counsel for the Indemnifying Party who shall conduct the defense of such Third Party Claim shall be reasonably satisfactory to the Indemnitee. The Indemnitee shall cooperate in good faith in such defense at such Indemnitee's own expense. If an Indemnifying Party elects not to assume the defense of any Third Party Claim, the Indemnitee may compromise or settle such Third Party Claim over the objection of the Indemnifying Party, which settlement or compromise shall conclusively establish the Indemnifying Party's liability pursuant to this Agreement. (b) If, within 20 days after an Indemnitee provides written notice to the Indemnifying Party of any Third Party Claims, the Indemnitee receives written notice from the Indemnifying Party that such Indemnifying Party has elected to assume the defense of such Third Party Claim as provided in Section 6.03(a), the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnitee in connection with the defense thereof; provided, however, that if the Indemnifying Party shall fail to take reasonable steps necessary to defend diligently such Third Party Claim within 20 days after receiving notice from the Indemnitee that the Indemnitee believes the Indemnifying Party has failed to take such steps, the Indemnitee may assume its own defense and the Indemnifying Party shall be liable for all reasonable expenses thereof. Without the prior written consent of the Indemnitee, the Indemnifying Party shall not enter into any settlement of any Third Party Claim which would lead to liability or create any financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder. If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to the Indemnitee to that effect. If the Indemnitee fails to consent to such firm offer within 10 days after its receipt of such notice, the Indemnifying Party shall be relieved of its obligations to defend such Third Party Claim and the Indemnitee may contest or defend such Third Party Claim. In such event, the maximum liability of the Indemnifying Party as to such Third Party Claim will be the amount of such settlement offer plus reasonable costs or expenses paid or incurred by Indemnitee up to the date of said notice. (c) Any claim by an Indemnitee on account of an Indemnifiable Loss which does not result from a Third Party Claim (a "Direct Claim") shall be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, but in any event such notice shall not be given later than 30 days after the Indemnitee becomes aware of such Direct Claim, and the Indemnifying Party shall have a period of 30 days within which to respond to such Direct Claim. If the Indemnifying Party does not respond within such thirty 30 day period, the Indemnifying Party shall be deemed to have accepted such claim. If the Indemnifying Party rejects such claim, the Indemnitee will be free to seek enforcement of its right to indemnification under this Agreement. (d) If the amount of any Indemnifiable Loss, at any time subsequent to the making of an indemnity payment in respect thereof, is reduced by recovery, settlement or otherwise under or pursuant to any insurance coverage, or pursuant to any claim, recovery, settlement or payment by, from or against any other entity, the amount of such reduction, less any costs, expenses or premiums incurred in connection therewith (together with interest thereon from the date of payment thereof at the Prime Rate) shall promptly be repaid by the Indemnitee to the Indemnifying Party. Upon making any indemnity payment, the Indemnifying Party, to the extent of such indemnity payment, shall be subrogated to all rights of the Indemnitee against any third party in respect of the Indemnifiable Loss to which the indemnity payment relates; provided, however, that (i) the Indemnifying Party shall then be in compliance with its obligations under this Agreement in respect of such Indemnifiable Loss and (ii) until the Indemnitee recovers full payment of its Indemnifiable Loss, any and all claims of the Indemnifying Party against such third party on account of said indemnity payment are hereby made subordinate in right of payment to the Indemnitee's rights against such third party. Without limiting the generality or effect of any other provision hereof, each such Indemnitee and Indemnifying Party shall duly execute upon request all instruments reasonably necessary to evidence and perfect the above-described subrogation and subordination rights, and otherwise cooperate in the prosecution of such claims at the direction of the Indemnifying Party. Nothing in this Section 6.03(d) shall require any Party hereto to obtain or maintain any insurance coverage. (e) A failure to give timely notice as provided in this Section 6.03 shall not affect the rights or obligations of any Party hereunder except if, and only to the extent that, as a result of such failure, the Party which was entitled to receive such notice was actually and materially prejudiced as a result of such failure. ARTICLE VII MISCELLANEOUS PROVISIONS Section 7.01 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given (i) on the day when delivered personally or by e-mail (with confirmation) or facsimile transmission (with confirmation), (ii) on the next business day when delivered to a nationally recognized overnight delivery service, or (iii) 5 business days after deposited as registered or certified mail (return receipt requested), in each case, postage prepaid, addressed to the recipient Party at its address set forth below (or to such other addresses and e-mail and facsimile numbers for a Party as shall be specified by like notice; provided, however, that any notice of a change of address or e-mail or facsimile number shall be effective only upon receipt thereof): If to Transferor, to: The Cincinnati Gas & Electric Company 139 East Fourth Street Cincinnati, OH 45202 Attn: President Facsimile No.: 513-287-1592 If to Transferee, to: The Union Light, Heat and Power Company 139 East Fourth Street Cincinnati, OH 45202 Attn: President Facsimile No: 513-287-4370 Section 7.02. Waiver. The rights and remedies of the Parties are cumulative and not alternative. Neither the failure nor any delay by any Party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable Law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one Party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by each other Party; (b) no waiver that may be given by a Party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one Party will be deemed to be a waiver of any obligation of such Party or of the right of the Party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. Section 7.03. Entire Agreement; Amendment etc. (a) This Agreement and the Ancillary Agreements, including the Schedules, Exhibits, documents, certificates and instruments referred to herein or therein, embody the entire agreement and understanding of the Parties hereto in respect of the transactions contemplated by this Agreement. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein or therein. This Agreement supersedes all prior agreements and understandings between the Parties, whether written or oral, with respect to the transactions contemplated hereby. (b) This Agreement may not be amended, supplemented, terminated or otherwise modified except by a written agreement executed by Transferor, Parent and Transferee. (c) This Agreement shall be binding upon and inure solely to the benefit of each Party hereto and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. Section 7.04. Assignment. This Agreement and all the of the provisions hereof shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by, on the one hand, Transferor, and on the other hand, Transferee, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other Party, and any attempt to make any such assignment without such consent will be null and void. Notwithstanding the foregoing, Transferor or Transferee may assign or otherwise transfer its rights hereunder and under any Ancillary Agreement to any bank, financial institution or other lender providing financing to Transferor or Transferee, as applicable, as collateral security for such financing; provided, however, that no such assignment shall (x) impair or materially delay the consummation of the transactions contemplated hereby or (y) relieve or discharge Transferor or Transferee, as the case may be, from any of its obligations hereunder and thereunder. Section 7.05. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any law or public policy, all other terms and provisions of this Agreement will nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party hereto. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties will negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. Section 7.06. Bulk Sales Laws. Transferee hereby acknowledges that, notwithstanding anything in this Agreement to the contrary, Transferor will not comply with the provisions of the bulk sales laws of any jurisdiction in connection with the transactions contemplated by this Agreement; and Transferee hereby irrevocably waives compliance by Transferor with the provisions of the bulk sales laws of all applicable jurisdictions. Section 7.07. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to choice of law principles thereof. Section 7.08. Counterparts; Facsimile Execution. This Agreement may be executed in one or more counterparts, all of which will be considered one and the same agreement and will become effective when one or more counterparts have been signed by each of the Parties and delivered to each other Party, it being understood that the Parties need not sign the same counterpart. This Agreement may be executed by facsimile signature(s). Section 7.09. Schedules. The Schedules to this Agreement are intended to be and hereby are specifically made a part of this Agreement. Section 7.10 Specific Performance. The Parties hereto agree that irreparable damage would occur in the event any of the provisions of this Agreement were not to be performed in accordance with the terms hereof and that the Parties will be entitled to specific performance of the terms hereof in addition to any other remedies at law or in equity. Section 7.11. Dispute Resolution. (a) If a dispute arises between the Parties relating to this Agreement, the Parties agree to use the following alternative dispute resolution ("ADR") procedures prior to any Party pursuing other available remedies: (i) A meeting shall be held promptly between the Parties, attended by individuals with decision-making authority regarding the dispute, to attempt in good faith to negotiate a resolution of the dispute. (ii) If, within 30 days after such meeting, the Parties have not succeeded in negotiating a resolution of the dispute, they will jointly appoint a mutually acceptable neutral person not affiliated with either Party (the "Neutral") to act as a mediator. If the Parties are unable to agree on the Neutral within 20 days, they shall seek assistance in such regard from the CPR Institute for Dispute Resolution, Inc. ("CPR"). The Parties shall share the fees of the Neutral and all other common fees and expenses equally. (iii) The mediation may proceed in accordance with CPR's Model Procedure for Mediation of Business Disputes, or the Parties may establish their own procedure. (iv) The Parties shall pursue mediation in good faith and in a timely manner. In the event the mediation does not result in resolution of the dispute within 60 days, then, upon 7 days" written notice to the other Party, either Party may propose another form of ADR (e.g., arbitration, a mini-trial, or a summary jury trial) or may pursue other available remedies. (b) All ADR proceedings shall be strictly confidential and used solely for the purposes of settlement. Any materials prepared by one Party for the ADR proceedings shall not be used as evidence by the other Party in any subsequent litigation; provided, however, that the underlying facts supporting such materials may be subject to discovery. (c) Each Party fully understands its specific obligations under the ADR provisions of this Agreement. Neither Party considers such obligations to be vague or in any way unenforceable, and neither Party will contend to the contrary at any future time or in any future proceeding. IN WITNESS WHEREOF, each of the Parties has caused this Asset Tranfer Agreement to be executed on its behalf by its respective officer thereunto duly authorized, all as of the day and year first above written. THE CINCINNATI GAS & ELECTRIC COMPANY By: ________________________________________ THE UNION LIGHT HEAT AND POWER COMPANY By: __________________________________________ EX-99 5 exhibitd-1.txt Exhibit D-1 COMMONWEALTH OF KENTUCKY BEFORE THE PUBLIC SERVICE COMMISSION In the Matter of the Application of The Union Light, Heat ) and Power Company for a Certificate of Public Convenience ) and Necessity to Acquire Certain Generation Resources and ) Related Property; for Approval of Certain Purchase Power ) Agreements; for Approval of Certain Accounting Treatment; ) and for Approval of Deviation from Requirements of KRS ) 278.2207 and 278.2213(6) ) ) ) Case No. 2003-00252 APPLICATION The Union Light, Heat and Power Company (ULH&P) respectfully petitions the Kentucky Public Service Commission (Commission) for an Order pursuant to KRS 278.020, and 807 KAR 5:001 Sections 8 and 9 granting ULH&P a Certificate of Public Convenience and Necessity (CPCN) to acquire, at net book value plus transaction costs, ownership of three electric generating station facilities totaling 1,105 megawatts (MW) nameplate rating (the Plants) and related property from The Cincinnati Gas & Electric Company (CG&E), ULH&P's parent company. Additionally, ULH&P requests approval of certain purchase power agreements with CG&E, authority to establish accounting deferrals for the recovery of transaction costs related to the acquisition by ULH&P of the Plants, and retention of profits related to off-system sales from the Plants. In accordance with KRS 278.2219, ULH&P also requests a deviation from the requirements of KRS 278.2207 and 278.2213(6) to allow ULH&P to become the assignee of certain affiliate contracts related to the operation of the Plants. Finally, ULH&P requests approval to terminate the current Power Sale Agreement with CG&E concurrent with its acquisition of the Plants and other authorizations detailed herein. In support of this Application, ULH&P respectfully states: 1. Address: ULH&P is a Kentucky corporation with its principal office and principal place of business at 107 Brent Spence Square, Covington, Kentucky 41042-0032. Its mailing address it P. O. Box 960, Cincinnati, Ohio 45201. 2. Articles of Incorporation: Pursuant to 807 KAR 5:001, Section 8(3), ULH&P states that a certified copy of its Articles of Incorporation, as amended, is on file with the Commission in Case No. 6566. 3. Statement of Business: ULH&P is a utility as defined in KRS 278.010(3)(a) and (b), engaged in providing retail gas and electric services to its customers in Northern Kentucky. ULH&P is thus subject to the jurisdiction of the Public Service Commission. 4. Acquisition of Generating Stations: ULH&P proposes to acquire three electric generating stations whose combined generating capacity totals 1,105 MW (nameplate rating). The East Bend Generating Station (East Bend) is a 648 MW (nameplate rating) coal-fired station in Rabbit Hash, Kentucky. East Bend is jointly owned by CG&E (69%) and The Dayton Power & Light Company (DP&L) (31%). CG&E currently operates East Bend on its own behalf and on behalf of DP&L through a joint ownership agreement. ULH&P proposes to acquire CG&E's entire ownership share in East Bend (447 MW nameplate rating). The Woodsdale Generating Station (Woodsdale) is a 490 MW (nameplate rating) dual-fuel combustion-turbine peaking station that operates on either natural gas or propane. Miami Fort Unit 6 (Miami Fort 6) is a 168 MW (nameplate rating) coal-fired unit located in North Bend, Ohio. This unit is wholly-owned by CG&E, and is part of the larger Miami Fort Generating Station, jointly owned by CG&E and DP&L. ULH&P proposes to acquire the Plants from CG&E at net book value. ULH&P has thoroughly analyzed the cost-effectiveness of acquiring, owning and operating the Plants. ULH&P's analysis conclusively demonstrates that acquiring the Plants is the least cost alternative for meeting its long-term electric power requirements, when compared to both market purchases of power and construction of new generation. 5. Statement of Need: ULH&P currently possesses no electric generating capability, purchasing its entire requirements of electricity from its parent company, CG&E, pursuant to a Power Sales Agreement approved by this Commission in Case No. 2001-00058.1 ULH&P's peak demand for the summer of 2003 is projected to be 848 MW under normal weather conditions. The projected rate of growth in ULH&P's service territory load for the period 2003 to 2013 is 1.6% per year. In its May 11, 2001 Order Case No. 2001-00058, the Commission stated: "the most reasonable and least costly way for a utility like ULH&P to secure a long-term power supply at prices not subject to market volatility is to construct and directly own sufficient generating capacity to meet its load." 2 Further, in its December 21, 2001 Order in Administrative Case No. 387, which investigated the adequacy of Kentucky's generation and transmission, the Commission stated that it was concerned that ULH&P had no announced plans for meeting its demand when the full-requirements wholesale purchase power contract expires at the end of 2006, and that ULH&P's resource plans do not adequately address the need to provide reliable service at reasonable costs beyond the contract's 2006 expiration.3 ULH&P's proposal to acquire the Plants is a direct response to the Commission's stated concerns. The facts that ULH&P relies upon to demonstrate that the public convenience and necessity calls for acquiring the Plants, and that such acquisition meets Kentucky's least-cost standard, are contained in the testimony and attachments supporting this Application. 6. Permits From Public Authorities. a. Statement of Environmental Compatibility: At the time that the generation assets in question for this acquisition were constructed, all of the appropriate permits were obtained from the respective regulatory agencies. Since the Plants were commissioned and in operation since 1960, 1981, and 1992 for East Bend, Miami Fort 6, and Woodsdale, respectively, the original siting, statements of environmental compatibility, and certificates of public need have been in force. ULH&P has attached as an Appendix to this Application separate volumes (Application Appendix I, II and III) containing the current permits for water quality; air quality (permits to operate an air containment source - acid rain permit); permits to operate; and other permits. The necessary steps will be taken at the time of closing the proposed transaction to transfer the required permits to ULH&P. 7. Location: East Bend is located at Route 338, Rabbit Hash, Kentucky 41091-0142. Woodsdale is located at 2100 Woodsdale Road, Trenton, Ohio, 43067. Miami Fort 6 is located at Brower Road, North Bend, Ohio, along the Ohio River. 8. Area Maps: Attached to this application in the Application Appendix are the site maps. The maps provided show the generating facilities and the transmission facilities connecting CG&E to ULH&P in the grid to serve ULH&P customers. Additional explanation of the grid is provided in the testimony of Mr. Ronald C. Snead. Aerial photographs and additional maps of the facilities for the Plants are in the applicable appendix sections of the Burns & McDonnell Due Diligence Evaluation Report for the Plants. See the Burns & McDonnell Appendix 1 for the Vicinity Map, Infrastructure Map, USGS Quadrangle, and the Aerial Site Photograph and see the Burns & McDonnell Appendix 2 for the Site Plan for each of the Plants. 9. Cost of Operation: ULH&P estimates annual operations and maintenance costs for the Plants of $46,711,816 for 2006. These Plants have been proven to be a reliable and cost-effective means of contributing to the supply of electric generation in Northern Kentucky and southwest Ohio for many years, and are expected to continue to provide a reliable and cost-effective supply of electricity to ULH&P's customers after ULH&P's acquisition of the Plants, as supported by the accompanying testimony. 10. Request for Waivers: ULH&P requests waivers of the following filing requirements: a. Financing Plan: ULH&P requests a waiver of the requirements of 807 KAR 5:001, Section 9(2)(e). ULH&P will finance the acquisition of the Plants, subject to receiving a CPCN, through a combination of internally and or externally generated funds. However, ULH&P's financing plans will depend in part on financial market conditions at the time of acquisition; therefore, ULH&P will seek Commission approval for the financing arrangements as the date of acquisition draws closer. b. Franchises or Permits: ULH&P requests a waiver of the requirements of 807 KAR Section 9(2)(b). Since ULH&P's acquisition of the Plants will require neither new construction nor extension of facilities, ULH&P believes this requirement is inapplicable to its Application. c. Location of Routes: ULH&P requests a waiver of the requirements of 807 KAR Section 9(2)(c) to the extent that these requirements call for a full description of the route or routes of new construction or extension of facilities. ULH&P believes that these requirements are inapplicable to this Application because no new construction or extension of facilities will occur. d. Engineering Information: ULH&P requests a waiver of the requirements of KRS 322.340. ULH&P's proposal to acquire the Plants will require no engineering or construction effort, but is simply a transfer of ownership interests. ULH&P therefore believes that these requirements are inapplicable to this Application. e. Other Waivers: ULH&P requests a waiver of any other requirement determined by the Commission to be necessary for approval of this Application. 11. Testimony and Attachments: Additional facts supporting this Application are set out in detail in ULH&P's direct testimony and attachments. The following witnesses submit direct testimony and supporting attachments as part of this Application, and their testimony and attachments are incorporated by reference into this Application: o Gregory C. Ficke, President of ULH&P, President of CG&E o James L. Turner, Executive Vice President, Cinergy Corp. o Richard G. Stevie, General Manager, Market Analysis, Cinergy Services, Inc. o Judah Rose, ICF Consulting Group, Inc. o Robert C. McCarthy, Senior Vice President, Portfolio Analysis & Systems, Cinergy Services, Inc. o John J. Roebel, Vice President, Generation Resource Group, Cinergy Power Generation Services, LLC. o H. Davis Ege, Principal Mechanical Technical Specialist/Consultant, Burns & McDonnell Engineering Co., Inc. o Diane L. Jenner, Manager, Asset Planning and Analysis, Cinergy Services, Inc. o Ronald C. Snead, Manager, Bulk Transmission Planning, Cinergy Services, Inc. o J. Thomas Mason, Vice President, Fuels Origination, Cinergy Services, Inc. o John P. Steffen, Vice President, Rates, Cinergy Services, Inc. 12. Acquisition of the Generation Assets: The current cost analysis demonstrates that the acquisition of these Plants to meet the needs of a secure, long-term supply of generation for ULH&P's retail electric customers is the least-cost option. 13. Ownership of the Generation Assets: If the Commission grants the requested CPCN for the acquisition of the Plants at net book value, ULH&P will acquire ownership interests in the Plants and related property as described in this Application and the supporting testimony. 14. Deviation from KRS 278.2207, 278.2213(6): ULH&P requests that the Commission grant a deviation from the affiliate transaction pricing requirements of KRS 278.2207 and 278.2213(6) to allow ULH&P to receive an assignment of the following affiliate contracts: (1) a natural gas fuel supply and management agreement currently in place for Woodsdale between CG&E and its affiliate, Cinergy Marketing and Trading, LP (CM&T); (2) a propane fuel supply and management agreement currently in place for Woodsdale between CG&E and its affiliate, Ohio River Valley Propane LLC (ORVP); and (3) a propane storage agreement currently in place for Woodsdale between CG&E and its affiliate, Ohio River Valley Propane LLC (ORVP). This request for deviation is fully supported by the Direct Testimony of John J. Roebel, filed herewith. 15. Approval of Certain Wholesale Power Agreements: It will be necessary to purchase back-up power and energy should East Bend and/or Miami Fort 6 experience either a planned or unplanned outage, thus ULH&P proposes to enter into a Back-up Power Sale Agreement (Back-up PSA) with CG&E. In addition, ULH&P proposes to continue to operate the Plants jointly with the generating assets of its affiliates, CG&E and PSI Energy, Inc. Such an arrangement will require that ULH&P enter into a Purchase, Sale and Operation Agreement (PSOA) with CG&E. ULH&P is requesting approval of these wholesale power agreements. These agreements are fully supported by the Direct Testimony of Robert C. McCarthy, filed herewith. 16. Approval to Transfer Generation Assets: CG&E conditions its agreement to transfer the Plants to ULH&P on the Commission's commitment to allow ULH&P certain rate treatment associated with the Plants and the wholesale power agreements, as follows: 1. Inclusion in rate base of full net book value associated with the acquisition of the Plants and related property, as described in the testimony filed in this proceeding, in ULH&P's future general rate proceedings; 2. Authorization to defer for future recovery in ULH&P's future general rate proceedings transaction costs incurred by ULH&P and by CG&E on ULH&P's behalf related to ULH&P's acquisition of the Plants; 3. Inclusion in rate base of the monthly capacity charges specified in the Back-up PSA, and reasonable capacity charges specified in successor back-up power supply agreements, in ULH&P's future general rate proceedings; 4. Inclusion in ULH&P's fuel adjustment charge of all energy charges assessed under the Back-up PSA and successor back-up power supply agreements on a going-forward basis from the date that ULH&P's next fuel adjustment charge after January 1, 2007 goes into effect; 5. Inclusion in ULH&P's fuel adjustment charge of all costs of energy transfers from CG&E assessed under the PSOA on a going forward basis from the date that ULH&P's next fuel adjustment charge after January 1, 2007 goes into effect; 6. Authority to amortize transferred accumulated deferred investment tax credit (ADITC) balance on ULH&P's books below the line over the remaining lives of the Plants, and exclusion of ADITC from retail ratemaking in ULH&P's future general rate proceedings; 7. Exclusion of accumulated deferred federal and state income taxes transferred from CG&E to ULH&P as part of this transaction from retail ratemaking in ULH&P's future general rate proceedings; 8. ULH&P's retention of all profits from off-system sales in ULH&P's future general rate proceedings. ULH&P therefore requests present Commission approval, pursuant to KRS 278.218, to transfer the Plants back to CG&E if these conditions of the transfer are not met. 17. WHEREFORE, ULH&P requests that the Commission find that the proposed acquisition by ULH&P of the Plants, joint economic dispatch of the Plants with CG&E's generation under the PSOA, and ULH&P's purchase of backup power supply from CG&E under the Back-up PSA, together form an integrated package that is in the public interest and will benefit ULH&P's customers because: 1. ULH&P will acquire its own resources, which will provide a reliable low-cost source of power that is preferable to the risks associated with wholesale market purchases; 2. Joint economic dispatch of the Plants under the PSOA will provide ULH&P and its customers with cost savings and the advantages of being part of a larger, more diverse system of generating resources; 3. The Back-up PSA will provide ULH&P with a reliable source of back-up power to hedge against the risk of failure of its own baseload units at a just and reasonable market rate; 4. Without prejudice to future ULH&P rate cases, the overall cost to ULH&P and its customers for the integrated package, taken as a whole, is just and reasonable; and 5. Alternative scenarios for ULH&P to meet its load requirements are unlikely to present benefits equal to the integrated package offered by CG&E. Accordingly, ULH&P requests the Public Service Commission to: 1. Issue an order granting ULH&P a Certificate of Public Convenience and Necessity, pursuant to KRS 278.020, and otherwise grant all necessary approvals, for the acquisition, at net book value plus transaction costs, of the Plants, as described herein and as further supported by the testimony filed herewith; 2. Approve ULH&P's request for authorization to defer for future recovery transaction costs related to its acquisition of the Plants; 3. Approve the heretofore-described wholesale power agreements; 4. Grant the request for deviation, pursuant to KRS 278.2207, of certain affiliate agreements, as supported by the testimony filed herewith; 5. Grant ULH&P authorization to terminate its current Power Sale Agreement with CG&E; 6. Recognize the conditions subsequent CG&E has placed on the transfer of the Plants to ULH&P, find that such conditions are for a proper purpose, are otherwise consistent with the public interest, and grant ULH&P the present authority to transfer the Plants back to CG&E pursuant to KRS 278.218 if ULH&P does not receive the rate-treatment described herein and in the attached testimony; 7. Order that ULH&P shall file its next integrated resource plan (IRP) pursuant to 807 KAR 5:058 within three years after the date of the Commission's final Order in this proceeding. Dated at Cincinnati, Ohio, this 21st day of July, 2003. THE UNION LIGHT, HEAT AND POWER COMPANY /s/Michael J. Pahutski James B. Gainer, Vice President and General Counsel Regulated Businesses Michael J. Pahutski, Trial Attorney John J. Finnigan, Senior Counsel The Union Light, Heat and Power Company 139 East Fourth Street Cincinnati, OH 45201 (513) 287-3075 Fax: (513) 287-3810 CERTIFICATE OF SERVICE I hereby give notice that on this 21st day of July, 2003, I have filed an original and 10 true copies of the foregoing Application and accompanying testimony and attachments with the Kentucky Public Service Commission at 211 Sower Boulevard, Frankfort, Kentucky, 40601, and I further certify that this same day I have served the parties by mailing a true copy of the same via overnight mail, postage prepaid, to those listed below. /s/Michael J. Pahutski Michael J. Pahutski Elizabeth E. Blackford Assistant Attorney General 1024 Capital Center Drive Frankfort, Kentucky 40601 David F. Boehm Boehm, Kurtz & Lowry 35 East Seventh Street Cincinnati, OH 45202 Michael Kurtz, Esq. Boehm, Kurtz & Lowry 35 East Seventh Street Cincinnati, OH 45202 1 Order in Case No. 2001-00058, In the Matter of The Application of The Union Light, Heat and Power Company for Certain Findings Under 15 U.S.C.ss.79Z (May 11, 2001). 2 Id. at 6. 3 Order in Administrative Case No.387, In the Matter of A Review of the Adequacy of Kentucky's Generation Capacity and Transmission System (December 20, 2001) at 6. EX-99 6 exhibitf.txt 2 EXHIBIT F September 30, 2004 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Cinergy Corp., et al./Declaration on Form U-1 File No. 70-_______ Ladies and Gentlemen: I am Associate General Counsel for Cinergy Corp., a Delaware corporation ("Cinergy"), and its subsidiaries including The Cincinnati Gas & Electric Company, an Ohio corporation ("CG&E"; and together with Cinergy, "Applicants"). This opinion letter relates specifically to the transactions proposed in that certain Declaration on Form U-1 (the "Application") filed jointly by the Applicants today under the Public Utility Holding Company Act of 1935, as amended (the "Act"). In connection with this opinion letter, I have reviewed the Application and such other documents and made such other investigation as I consider appropriate. Based on the foregoing and subject to the other paragraphs hereof, I express the following opinions: 1. All state laws applicable to the Applicants' involvement in the proposed transactions will be complied with. 2. The consummation of the proposed transactions will not violate the legal rights of the holders of any securities issued by any Applicant or any associate company thereof. The foregoing opinions presume that the proposed transactions will be consummated in accordance with the Application (including as the same may be amended prior to the issuance of the Commission's order requested therein) and all legal requirements and authorizations applicable thereto, including, without limitation, the Commission's order requested therein and any internal corporate authorizations. I am admitted to the Bars of the States of New York and Ohio. The foregoing opinions are limited to the laws of such states. I hereby consent to the Commission's use of this opinion letter in connection with the Application. This opinion letter may not be used for any other purpose or relied on by or furnished to any other party without my prior written consent. Very truly yours, /s/George Dwight II EX-99 7 exhibitd-2.txt Exhibit D-2 COMMONWEALTH OF KENTUCKY BEFORE THE PUBLIC SERVICE COMMISSION In the Matter of the Application of The Union Light, Heat ) and Power Company for a Certificate of Public Convenience ) and Necessity to Acquire Certain Generation Resources and ) Related Property; for Approval of Certain Purchase Power ) Agreements; for Approval of Certain Accounting Treatment; ) and for Approval of Deviation from Requirements of KRS ) 278.2207 and 278.2213(6) Case No. 2003-00252 AMENDMENT TO APPLICATION The Union Light, Heat and Power Company (ULH&P) hereby amends its previously filed Application in the above-captioned proceeding (Amendment). On July 21, 2003, ULH&P filed an Application for an Order pursuant to KRS 278.020 and 807 KAR 5:001 Sections 8 and 9 granting ULH&P a Certificate of Public Convenience and Necessity (CPCN) to acquire, at net book value plus transaction costs, ownership of three electric generating station facilities (the Plants) and related property from The Cincinnati Gas & Electric Company (CG&E), ULH&P's parent company (Application). Additionally, ULH&P requested approval of certain purchase power agreements with CG&E, authority to establish accounting deferrals for the recovery of transaction costs related to the acquisition by ULH&P of the Plants, and retention of profits related to off-system sales from the Plants. In accordance with KRS 278.2219, ULH&P also requested a deviation from the requirements of KRS 278.2207 and 278.2213(6) to allow ULH&P to become the assignee of certain affiliate contracts related to the operation of the Plants. Finally, ULH&P requested approval to terminate the current Power Sale Agreement with CG&E concurrent with its acquisition of the Plants and to continue to freeze its generation, fuel and wholesale transmission rates through 2006. ULH&P hereby amends its Application as described herein. In support of its Amendment, ULH&P respectfully states: 1. Address: ULH&P is a Kentucky corporation with its principal office and principal place of business at 107 Brent Spence Square, Covington, Kentucky 41042-0032. Its mailing address is P. O. Box 960, Cincinnati, Ohio 45201. 2. Articles of Incorporation: Pursuant to 807 KAR 5:001, Section 8(3), ULH&P states that a certified copy of its Articles of Incorporation, as amended, is on file with the Commission in Case No. 6566. 3. Amendments to Application: ULH&P amends its Application as follows: a. ULH&P had originally requested present Commission approval to transfer the Plants back to CG&E if ULH&P was not afforded the rate treatment it had originally requested. ULH&P hereby withdraws its request for present Commission approval to transfer the Plants back to CG&E. ULH&P states instead that CG&E conditions its agreement to transfer the Plants to ULH&P on the Commission granting the rate treatment requested in ULH&P's Application as amended herein. b. ULH&P had originally requested Commission authorization to defer all transaction costs, estimated to be $4.9 million, incurred by ULH&P and by CG&E on ULH&P's behalf related to ULH&P's acquisition of the Plants. ULH&P hereby amends its Application to request, instead, authorization to defer no more than $2.45 million of transaction costs incurred, without carrying charges, with such recovery to be amortized over five years beginning on the effective date of the Commission's Order in ULH&P's next general rate proceeding; c. ULH&P had originally requested Commission authorization to include in its base rates all monthly capacity charges specified in the Back-up Power Sale Agreement (Back-up PSA), and reasonable capacity charges specified in successor back-up power supply agreements as approved by the Federal Energy Regulatory Commission (FERC). ULH&P hereby amends its Application to commit, prior to filing any such successor agreements at FERC, to consult with the Commission and the Attorney General's Office of Rate Intervention on such matter. d. ULH&P had originally requested Commission authorization to include in its fuel adjustment charge (FAC) all energy charges assessed under the Back-up PSA on a going-forward basis from the date that ULH&P's next FAC on or after January 1, 2007 goes into effect. ULH&P hereby amends its Application to request instead that the recovery and inclusion in ULH&P's FAC of such energy charges simply be in accordance with 807 KAR 5:056 and applicable Commission precedent. e. ULH&P had originally requested Commission authorization to include in its FAC all costs of energy transfers from CG&E assessed under ULH&P's proposed Purchase, Sale and Operation Agreement (PSOA) on a going-forward basis from the date that ULH&P's next FAC on or after January 1, 2007 goes into effect. ULH&P hereby amends its Application to request instead that the inclusion in ULH&P's FAC of such energy transfers simply be in accordance with 807 KAR 5:056 and applicable Commission precedent. f. ULH&P hereby requests that the inclusion of the costs of all fuel consumed in the Plants in ULH&P's FAC from the date that ULH&P's next FAC on or after January 1, 2007 goes into effect shall be in accordance with 807 KAR 5:056 and applicable Commission precedent; g. ULH&P originally requested Commission authorization to retain all profits from off-system sales from the Plants in ULH&P's future general rate proceedings. ULH&P hereby amends its Application to request, instead, Commission authorization, effective in ULH&P's next general rate proceeding, to share profits from off-system sales with its customers as follows: i. Customers shall receive up to one million dollars in profits from off-system sales annually, and 50% of such profits above one million dollars annually, if any; ii. ULH&P shall retain 50% of the profits from off-system sales above one million dollars annually, if any; iii.The costs attributable to such off-system sales shall include only the Incremental Costs listed in the Purchase, Sale and Operation Agreement (PSOA), paragraph 1.10, Attachment RCM-2 to the Direct Testimony of Robert C. McCarthy previously filed in this proceeding; iv. ULH&P commits to implement the processes necessary to appropriately allocate such Incremental Costs to off-system sales. h. ULH&P withdraws its request for Commission waiver of its requirement, as set forth in Case No. 2001-00058, for ULH&P to file a stand-alone integrated resource plan (IRP) by June 30, 2004; ULH&P hereby amends its Application to request, instead, a waiver of the Commission's requirement, as set forth in Case No. 2001-00058, for ULH&P to analyze bids for purchased power, in that given ULH&P's acquisition of the Plants, such a requirement would no longer be necessary and would impose unreasonable costs on ULH&P. i. ULH&P requests the Commission, in this proceeding, to fix the value of the Plants for ratemaking purposes at the original cost less accumulated depreciation, at the time of transfer to ULH&P, under the authority granted to the Commission by KRS 278.290; j. ULH&P hereby commits to submit to the Commission for review and approval the final transaction documents prior to closing the transaction. k. ULH&P seeks a waiver, in accordance with KRS 278.2219, from the requirements of KRS 278.2213(6) that its acquisition of the Plants from its affiliate, CG&E, be an arm's length arrangement; i. ULH&P requests the Commission to find that compliance with such a requirement, considering the benefits accruing to ULH&P's customers from the proposed transaction, as fully supported by the testimony previously filed in this proceeding, is unreasonable, and thereupon grant a waiver of such requirement in accordance with KRS 278.2219. 4. Remainder of Application: ULH&P requests that the remainder of its Application be considered as originally filed. 5. WHEREFORE, ULH&P requests the Public Service Commission to: a. Issue an order granting ULH&P a Certificate of Public Convenience and Necessity, pursuant to KRS 278.020, and otherwise grant all necessary approvals for the acquisition of the Plants as described in ULH&P's previously-filed Application as amended herein and as further supported by the testimony previously filed in this proceeding; b. Fix the value of the Plants for ratemaking purposes at the original cost less accumulated depreciation, in accordance with the Commission authority granted by KRS 278.290; c. Approve ULH&P's request for authorization to defer no more than $2.45 million of transaction costs incurred, without carrying charges, with such recovery to be amortized over five years beginning on the effective date of the Commission's Order in ULH&P's next general rate proceeding; d. Approve the heretofore-described wholesale power agreements; e. Grant ULH&P a waiver, in accordance with KRS 278.2219, from the requirements of KRS 278.2213(6) that its acquisition of the Plants from its affiliate, CG&E, be an arm's length arrangement; further, grant the request for deviation, pursuant to KRS 278.2207, of certain affiliate agreements, as supported by ULH&P's previously-filed testimony in this proceeding; f. Grant ULH&P authorization to terminate its current Power Sale Agreement with CG&E effective on the closing date of the transfer of the Plants to ULH&P; g. Find that the inclusion in base rates of the monthly capacity charges specified in the Back-up PSA, and reasonable capacity charges specified in successor back-up power supply agreements as approved by the Federal Energy Regulatory Commission (FERC) is just and reasonable; and approve such treatment of said capacity charges; h. Find that the recovery and inclusion in ULH&P's FAC of the energy charges assessed under the Back-up PSA, on a going forward basis from the date that ULH&P's next FAC on or after January 1, 2007 goes into effect, in accordance with 807 KAR 5:056 and applicable Commission precedent is just and reasonable; and approve such treatment of said energy charges; i. Find that the recovery and inclusion in ULH&P's FAC of all costs of energy transfers from CG&E assessed under the PSOA, on a going forward basis from the date that ULH&P's next FAC on or after January 1, 2007 goes into effect, in accordance with 807 KAR 5:056 and applicable Commission precedent, is just and reasonable; and approve such treatment of said costs of energy transfers; j. Find that the inclusion of the costs of all fuel consumed in the Plants in ULH&P's FAC from the date that ULH&P's next FAC on or after January 1, 2007 goes into effect, in accordance with 807 KAR 5:056 and applicable Commission precedent, is just and reasonable; and approve such treatment of said fuel costs; k. Find in the present proceeding that ULH&P's request to share the profits from off-system sales, as described herein, is just and reasonable; and render a finding that the Commission sees no reason why such treatment should not be approved in ULH&P's next general rate proceeding; l. Find that ULH&P's request for a waiver of the Commission's requirement, as set forth in Case No. 2001-00058, for ULH&P to analyze bids for purchased power in its stand-alone integrated resource plan (IRP) filed by June 30, 2004, is just and reasonable, and approve such request. Dated at Cincinnati, Ohio, this 28th day of October, 2003. THE UNION LIGHT, HEAT AND POWER COMPANY /s/Michael J. Pahutski James B. Gainer, Vice President and General Counsel Regulated Businesses Michael J. Pahutski, Trial Attorney John J. Finnigan, Senior Counsel The Union Light, Heat and Power Company 139 East Fourth Street Cincinnati, OH 45201 (513) 287-3075 Fax: (513) 287-3810 CERTIFICATE OF SERVICE I hereby give notice that on this 29th day of October, 2003, I have filed an original and ten true copies of the foregoing Amendment to Application with the Kentucky Public Service Commission at 211 Sower Boulevard, Frankfort, Kentucky, 40601, and I further certify that this same day I have served the parties listed below by hand delivery. /s/Michael J. Pahutski Michael J. Pahutski Elizabeth E. Blackford Assistant Attorney General 1024 Capital Center Drive Frankfort, Kentucky 40601 Email: betsy.blackford@law.state.ky.us -----END PRIVACY-ENHANCED MESSAGE-----