SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27711; 70-9985)

E.ON AG, et al.

Order Authorizing Intercompany Secured Loans

August 15, 2003

E.ON AG ("E.ON"), Dusseldorf, Germany, a registered holding company under the Act; Fidelia Corporation ("Fidelia"), Wilmington, Delaware, an indirect, financing subsidiary of E.ON; Louisville Gas and Electric Company ("LG&E"), Louisville, Kentucky, a public utility company under the Act and an indirect subsidiary of E.ON; and Kentucky Utilities Company ("KU"), Lexington, Kentucky, a public utility company under the Act and an indirect subsidiary of E.ON, (collectively, "Applicants"), have filed a post-effective amendment ("Application") to a previously filed application-declaration under sections 6(a), 7, 9, 12(b), 12(d), 32 and 33 of the Act and rules 53 and 54 under the Act. The Commission issued a notice of the filing of the post-effective amendment on July 18, 2003 (Holding Company Act Release Number 27697).

Applicants request authority through May 31, 2005 ("Authorization Period") for Fidelia to provide intercompany loans to LG&E and KU and for LG&E and KU to grant security for these loans to Fidelia.

By order dated June 14, 2002 (Holding Company Act Release No. 27539)¹ ("June Order"), the Commission authorized the acquisition of Powergen plc by E.ON and authorized terms of the financing of the E.ON holding company system as well as certain related transactions. E.ON owns LG&E Energy Corp. ("LG&E Energy"), a public utility holding company exempt by order under section 3(a)(1) of the Act, which in turn owns LG&E and KU. E.ON's interest in LG&E Energy is held indirectly through several intermediate holding companies. E.ON US Investments Corp., the direct parent of LG&E Energy, also owns E.ON North America Inc. ("E.ON NA"), which in turn currently owns 74.6% of Fidelia. The remaining 25.4% of Fidelia is owned by E.ON US Holding GmbH, a direct, wholly-owned subsidiary of E.ON.

In the June Order, the Commission authorized, among other things, E.ON and its subsidiaries to engage in certain financing transactions. Specifically, E.ON and E.ON NA, through Fidelia or another special purpose financing subsidiary of E.ON NA, were authorized to finance all or a portion of the capital needs of LG&E Energy and its subsidiaries, directly or through other companies in the E.ON holding company system ("E.ON Group"). The financing authority in the June Order provided that borrowings would be unsecured and would only occur if the interest rate on the loan would result in an equal or lower cost of borrowing than the LG&E Energy Group company could obtain in a loan from E.ON or in the capital markets on its own.

E.ON is currently funding, and proposes to continue to fund, the cash requirements of LG&E and KU through intercompany loans. E.ON states that its financing strategy is to raise capital at the top holding company, E.ON, and to provide those funds to subsidiary companies through intercompany loans and/or as equity contributions. E.ON states that it is able to provide funds to LG&E and KU at a cost that is at or below the external borrowing costs of LG&E and KU.

LG&E and KU, however, have provisions in their respective articles of incorporation that restrict the amount of unsecured debt that can be outstanding. When LG&E and KU approach this limit on unsecured debt, any additional debt incurred by them would have to be secured. Therefore, under the financing authority granted in the June Order, LG&E and KU will not be able to take advantage of the economic efficiencies of the intercompany loans when they have reached their unsecured debt limits. E.ON states that it is in the best interest of LG&E and KU, as well as that of the E.ON group, that the financing needs of LG&E and KU be provided through intercompany loans. Therefore, the Applicants request authority for Fidelia to provide intercompany loans to LG&E and KU on a secured basis.

The Applicants request authorization for Fidelia to provide intercompany loans to LG&E and KU upon the terms and subject to the conditions set forth in the June Order,² except that Applicants request that LG&E and KU may grant security for the intercompany loans.³ LG&E and KU request authorization to secure intercompany loans with a subordinated lien on certain of the personal property of each company, including "utility assets" within the meaning of the Act. The subordination provisions will provide that the E.ON group companies cannot exercise any rights or remedies against the property of LG&E and KU unless all bonds under the borrowing company's first mortgage bond indenture have been paid in full. The aggregate outstanding principal amount of intercompany loans made to LG&E and KU on a secured basis will not exceed $275 million and $215 million, respectively. LG&E and KU commit that the aggregate principal amount of secured intercompany loans, together with the aggregate principal amount of bonds issued under their respective first mortgage bond indenture, will not exceed the limit on bonds set forth in their first mortgage bond indenture.⁴ The Applicants further commit that neither LG&E nor KU will borrow any funds as secured intercompany loans under the authority granted, unless at the time of the incurrence of any secured intercompany loan, the following conditions are met:

1. E.ON and the borrowing company (LG&E or KU, as the case may be) maintain common equity⁵ as a percentage of total capitalization⁶ of at least 30%, as reflected in their most recent annual or semiannual report. Applicants request that the Commission reserve jurisdiction over the making of secured intercompany loans at any time that this condition is not satisfied.

2. All outstanding securities of the borrowing company that are rated are rated investment grade, and all outstanding securities of E.ON that are rated are rated investment grade. For purposes of this provision, a security will be deemed to be rated investment grade if it is rated investment grade by at least one nationally recognized statistical rating organization, as defined in rule 15c3-1(c)(2)(vi)(F) under the Securities Exchange Act of 1934. Applicants request that the Commission reserve jurisdiction over the making of secured intercompany loans at any time that this condition is not satisfied.

The secured intercompany loans would be in compliance with the Best Rate Method.

Therefore, LG&E and KU would not pay more than they would pay in the capital markets for a similar loan had the borrower sought to finance its capital requirements with independent third parties. LG&E and KU would save the issuance expenses associated with the issuance of first mortgage bonds. These expenses would typically include legal fees, printing costs, trustees fees, rating agency fees and filing fees. In recent transactions, these expenses have aggregated approximately $300,000 per issuance.

E.ON's Financing Policy

E.ON's states its financing policy is to centralize, wherever possible, all external funding at the E.ON level. This strategy, it says, allows E.ON to ensure that all funds are raised at the lowest cost due to the greater financial strength of the holding company. E.ON (currently AA-, stable outlook, from Standard & Poor's, and A1, stable outlook, from Moody's) is the strongest credit in the E.ON holding company system (the "E.ON Group"). E.ON states that lenders and bond investors see E.ON (and its finance companies under its guarantee) as the most creditworthy company in the E.ON Group. E.ON receives the best margins and other terms and conditions. Therefore, E.ON (or its finance companies under guarantee of E.ON) is the preferred entity of the E.ON Group to approach the capital markets, according to the company. E.ON will then lend the proceeds in the form of intercompany loans to those subsidiaries with demand.

Restriction in Articles of Incorporation

The articles of incorporation for LG&E and KU contain provisions for the benefit of the holders of their preferred shares that limits the amount of unsecured indebtedness which may be outstanding at any time that the company has any preferred shares outstanding. The unsecured debt limit at LG&E is 20% of the sum of (a) secured debt, plus (b) total of capital and surplus. The limit at KU is 25% of the same sum. In order to exceed these limits, LG&E and KU would need to obtain the consent of the holders of a majority of the preferred shares outstanding.

The outstanding series of preferred stock of LG&E and KU as of July 31, 2003 are shown below:

LG&E

Series	Shares Outstanding	Par Value	Current Redemption Price	Amount Outstanding ($000's)
5% Series	860,287	$25.00	$28.00	$21,507
Auction Rate	500,000	$100.00	$100.00	$50,000
$5.875 Series	250,000	$100.00	$100.00	$23,750

KU

Series	Shares Outstanding	Par Value	Current Redemption Price	Amount Outstanding ($000's)
4.75% Series	200,000	$100.00	$101.00	$20,000
6.53% Series	200,000	$100.00 not allowed now($103.27on 12/1/03)	$20,000

Certain of the series of preferred stock of KU are not callable at this time, or are callable only at a premium. Therefore, LG&E and KU could not be assured that they could effect a redemption of all series of preferred stock on an economic basis at this time. LG&E and KU undertake to review the redemption provisions of the preferred stock on a periodic basis to determine the economics of effecting the redemption of the preferred stock and evaluate the feasibility and appropriateness of redeeming the preferred stock. At such time that LG&E and KU have redeemed all series of preferred stock and are no longer subject to the limits set forth in their respective Articles of Incorporation on the amount of unsecured debt which may be outstanding, any intercompany loans made to LG&E and KU will be made on an unsecured basis.

The Intercompany Secured Loans

To satisfy the requirements of the Articles of Incorporation of LG&E and KU, Applicants request authorization for Fidelia to make intercompany loans to LG&E and KU on a secured basis. Absent the restrictions imposed by the respective Articles of Incorporation, the Applicants state that they would not be requesting this authority.

The company states that the secured intercompany loans, as long-term debt, will provide a cost-efficient means for LG&E and KU to finance their capital needs, including payment of maturing indebtedness and financing of capital expenditures.⁷ Use of secured intercompany loans to fund the capital needs of LG&E and KU will allow LG&E and KU to use unsecured short-term debt, including loans through the money pool, to finance their respective working capital, according to the Applicants

The intercompany loans to be made by Fidelia to LG&E and KU will be made according to separate loan and security agreements between Fidelia and the borrower. The loan and security agreement documents the intercompany loan, specifying the Best Rate Method for determining the interest rate for the loans and providing for the grant of a security interest in the specified collateral. The interest rate on the notes will be set at the time of issuance, based upon the maturity of the notes. At the time of the proposed intercompany loan, the borrowing company will obtain quotes from investment banks for a first mortgage bond issued by the company and E.ON will obtain quotes from investment banks for an unsecured bond issued by E.ON. The investment banks will be selected based upon their knowledge of the issuer and its credit profile. The interest rate applicable to the intercompany loan would be the lower of (a) the average of three quotes obtained by E.ON from investment banks for an unsecured bond issued by E.ON with the applicable term of the loan,⁸ and (b) the lowest of three quotes obtained by the borrowing company from investment banks for a first mortgage bond issued by the company with the applicable term of the loan.⁹ According to the Applicants, this ensures that the rate on the intercompany loans will be determined using the lowest of the average of actual quotes obtained based on the credit of E.ON or the credit of the borrowing company.¹⁰ This method is in compliance with the Best Rate Method, Applicants state.

The collateral consists of all of the borrower's current or acquired "equipment," as that term is defined in Kentucky's Uniform Commercial Code (KRS Chapter 355), excluding, however, any equipment that is not subject to the lien pursuant to the borrower's first mortgage bond indenture. Only property subject to the lien of the first mortgage bond indenture will be subject to the subordinated security interest. As set out in the definition section of the loan and security agreement, "equipment" has the meaning set out in the Uniform Commercial Code ("goods other than inventory, farm products, or consumer goods") and includes all of the borrower's currently owned and later acquired machinery, equipment, furniture, furnishings and all tangible personal property similar to any of the foregoing (other than inventory), together with all improvements, accessories and appurtenances and any proceeds of any of the foregoing, including insurance proceeds and condemnation awards and all books and records relating to the preceding. Motor vehicles and other property subject to a certificate of title law are not included as collateral. Also, assets such as cash and accounts receivable are not "equipment" and would not be subject to the lien.

The security interest granted in the loan and security agreement is expressly subordinated to the lien of the borrower's first mortgage bond indenture. The subordination provisions provide that Fidelia cannot exercise any rights or remedies against the property of LG&E or KU unless all bonds under the company's first mortgage bond indenture have been paid in full.

So long as LG&E and KU are not in default under their respective loan agreements, Fidelia will have no rights against LG&E and KU, except to receive payment of principal and interest on the loans when due. Even if a default existed under a loan agreement, Fidelia would have no right to pursue any remedies against the property of LG&E or KU until all of the borrower's first mortgage bonds have been paid in full, according to the Applicants.

Under the existing financing agreements of E.ON, the creditors of E.ON would have no rights against LG&E or KU as a result of the proposed transactions, the Applicants state. In any event, the creditors of E.ON could have no greater rights against LG&E and KU than those of Fidelia through the loan agreement, according to the Applicants. Therefore, so long as LG&E or KU, as the case may be, is not in default of its obligations under the proposed loan agreement, neither Fidelia nor any creditor of E.ON would have any rights against LG&E or KU, as applicable, or their respective property, the Applicants state.

Use of Proceeds

Both LG&E and KU have significant projected capital and financing needs, including those related to the pending maturity of first mortgage bonds, the anticipated need to finance the installation of pollution control equipment and the planned acquisition of additional electric generation capacity in 2003. LG&E has $42.6 million principal amount of bonds maturing on August 15, 2003. KU redeemed $62 million principal amount of bonds in June 2003 with proceeds of short-term debt. KU proposes to refinance the short-term debt with secured intercompany loans. The projected capital expenditure budgets for LG&E and KU for 2003 and 2004 are approximately $340 million and $550 million, respectively.

In addition, the existing accounts receivable securitization programs of LG&E and KU are scheduled to be refinanced in 2004. The outstanding balances of the accounts receivables securitization programs ranged from a high of $75 million to a low of $20 million in the case of LG&E and from a high of $50 million to a low of $20 million for KU.¹¹ As of July 31, 2003, the outstanding balances under the accounts receivables securitization programs were $58.9 million for LG&E and $49.3 million for KU. The fluctuations in the balances are caused by two factors. First, the seasonal nature of the sales of LG&E and KU result in a fluctuation in the amount of receivables generated during the year. Sales and receivables are highest during the hot summer months and cold winter months when electric and gas use are highest. They are lowest in the shoulder months of the spring and fall. The level of receivables generated by LG&E and KU dictate the maximum amount available under the respective programs. Also, the outstanding balances at any time will reflect the funding needs of LG&E and KU, respectively. Within the limits of the respective programs, LG&E and KU will reduce or increase their respective participations in the programs to meet their respective funding requirements.

The following chart summarizes the projected capital requirements of LG&E and KU for 2003-2004:

	LG&E (000's omitted)	KU (000's omitted)
Bond Maturities	$ 42,600	$ 62,000
Capital Expenditures for 2003 and 2004	$340,000	$550,000
Accounts Receivable Securitization Programs, as of July 31, 2003	$ 58,900	$ 49,300
TOTAL	$441,500	$661,300

The limit on unsecured indebtedness in the Articles of Incorporation of LG&E and KU constrains the financing options available to LG&E and KU to finance these needs. LG&E and KU propose to finance these requirements using cash from operations and proceeds of secured intercompany loans.¹² In that regard, Applicants request authorization for LG&E and KU to obtain intercompany loans on a secured basis in an aggregate principal amount of up to $275 million and $215 million, respectively.

Benefits to LG&E and KU

Applicants state that the proposed transactions would ensure that LG&E and KU would not pay more for the secured intercompany loans than it would pay in the capital markets for a similar loan obtained from independent third parties. In addition, by obtaining funds through intercompany loans, LG&E and KU would save the issuance expenses incurred in connection with the issuance of first mortgage bonds, according to the Applicants In recent transactions, such issuance expenses have aggregated approximately $300,000 per issuance. Therefore, by utilizing secured intercompany loans, LG&E and KU can realize an overall lower cost of financing, as compared to the issuance of first mortgage bonds, the Applicants state.

Priority of Securityholders

Upon implementation of the proposed transactions, LG&E and KU will each have five general classes of securityholders, which are (in order of priority):

Class 1. First Mortgage Bonds

Class 2. Secured Intercompany Loans

Class 3. Unsecured Creditors

Class 4. Preferred Stockholders

Class 5. Common Stockholders

Class 1 consists of the holders of the first mortgage bonds and the pollution control bonds, which are secured by first mortgage bonds. Through the first mortgage bond indenture, these holders have a first priority lien on substantially all of the utility and related assets of the respective utility. This class is not harmed or disadvantaged by the proposed transaction but would benefit from the proposed transactions, according to the Applicants. To the extent that capital needs are funded by secured intercompany loans, instead of the issuance of additional first mortgage bonds, the amount of debt which will be ranked pari passu with the outstanding first mortgage bonds will not be increased.

Class 2 will consist of Fidelia, as lender of the secured intercompany loans. Fidelia will have a subordinated lien on the utility and related assets of LG&E and KU, subject in all respects to the prior lien of the respective first mortgage bond indenture.

Class 3 consists of the unsecured creditors of LG&E and KU. This class includes the holders of unsecured, short-term debt of LG&E and KU, which at this time is primarily through the money pool. The unsecured creditors are in the same position whether the capital needs are financed through the issuance of first mortgage bonds or through secured intercompany loans, according to the Applicants. In either event, this indebtedness has a prior claim to the utility and related assets of LG&E and KU. However, to the extent that the cost of the secured intercompany loans is less than the cost of the issuance of first mortgage bonds, LG&E and KU, and their respective creditors, benefit from the cost savings, the Applicants state.

Class 4 consists of the holders of the outstanding preferred stock of LG&E or KU, respectively. The preferred shareholders are not harmed by the proposed transaction, the Applicants state. All debt, secured or unsecured, is prior to the claims of preferred shareholders. The preferred shareholders will continue to have the benefit of the restrictions in the articles of incorporation on the amount of unsecured debt and in the first mortgage bond indenture on issuance of bonds. Further, LG&E and KU commit that they would not incur any secured intercompany loan, unless at the time they could have incurred the debt through the issuance of first mortgage bonds under the first mortgage bond indenture.

Class 5 consists of LG&E Energy, as holder of the common stock outstanding of LG&E and KU.

Discussion

Under the Act, the Commission must consider the impact of the proposed transaction on investors and consumers. The proposed transaction is not detrimental to the investors or consumers.

A. Consumers of LG&E and KU

The June Order provides that the interest rate on intercompany loans cannot exceed E.ON's cost of borrowing and must result in an equal or lower cost of borrowing than LG&E or KU could obtain in the capital markets on their own. Typically, E.ON's cost of borrowing is at or below that which is available to LG&E and/or KU in the capital markets. In no event, however, will the cost of the proposed transactions to LG&E and KU exceed the cost of borrowing that LG&E or KU could obtain in the capital markets on their own. In addition, by obtaining funds through intercompany loans, LG&E and KU would save the issuance expenses incurred in connection with the issuance of first mortgage bonds, which in recent transactions have aggregated approximately $300,000 per issuance. As a result, the cost of borrowing is advantageous to LG&E and KU and their consumers.

B. Investors in LG&E and KU

The unaffiliated investors of LG&E and KU fall within two categories -- bondholders and preferred shareholders.¹³

As noted above, the proposed transaction will not disadvantage in any way the existing bondholders. The outstanding indebtedness for borrowed money of LG&E and KU owing to unaffiliated third party investors is in all cases secured under their respective first mortgage bond indenture.¹⁴ The first mortgage bond indentures of LG&E and KU permit subordinated liens to be placed upon the property of LG&E and KU. The subordination provisions of the intercompany debt instruments will provide that the E.ON group companies cannot exercise any rights or remedies against the property of LG&E or KU unless all bonds under such company's first mortgage bond indenture have been paid in full. Furthermore, with the use of intercompany debt to finance the needs of LG&E and KU, the aggregate amount of first mortgage bonds will be less than if LG&E and KU issued first mortgage bonds to fund these needs. Therefore, the bondholders will be in a more secure position. Neither LG&E nor KU has outstanding any debt owing to unaffiliated third parties that is unsecured at this time.¹⁵

The preferred shareholders are not put in any worse a position than if LG&E and KU had financed their funding needs with the issuance of bonds in the capital markets, rather than through intercompany loans. As discussed above, the articles of incorporation of LG&E and KU contain a provision for the benefit of their respective preferred shareholders that limits the amount of unsecured indebtedness which may be outstanding at any time that the company has any preferred shares outstanding. The combination of the covenants in the articles of incorporation and the restrictions on issuances of bonds contained in the first mortgage bond indentures of LG&E and KU effectively protect the preferred shareholders from being too deeply subordinated. Each of LG&E and KU commits that the aggregate principal amount of the bonds issued under their respective first mortgage bond indenture and their respective secured intercompany loans will not exceed the limit on bonds set forth in such first mortgage bond indenture.

LG&E's first mortgage bond indenture does not fix an overall dollar limitation on the principal amount of first mortgage bonds that may be issued or outstanding. Additional first mortgage bonds secured by the first mortgage bond indenture may be issued by LG&E on the basis of (i) 60% of the cost or fair value, whichever is less, of permanent additions, after making the required deductions on account of retired property, (ii) retired first mortgage bonds, the retirement of which has not been otherwise used under the first mortgage bond indenture, and (iii) deposit of an equal amount of cash with the trustee under the first mortgage bond indenture, which cash may be withdrawn by applying amounts of established permanent additions equal to 166 2/3% of such cash to be withdrawn or by retirements of first mortgage bonds. No additional first mortgage bonds may be issued on basis (i), basis (ii) under specified conditions, or basis (iii), unless the earnings applicable to bond interest for a specified twelve month period are equal to at least twice the annual interest requirement on the first mortgage bonds including those about to be issued. At December 31, 2002, the amount of permanent additions which could be used for the issuance of additional first mortgage bonds exceeded $1.7 billion. Therefore, LG&E could issue in excess of $1 billion of additional first mortgage bonds under its first mortgage bond indenture.

KU's first mortgage bond indenture does not fix an overall dollar limitation on the principal amount of first mortgage bonds that may be issued or outstanding. Additional first mortgage bonds may be issued by KU from time to time under its first mortgage bond indenture in a principal amount equal to (i) 60% of eligible net expenditures made by KU for bondable property constructed or acquired by it and on which the first mortgage bond indenture is a mortgage lien, subject only to permitted encumbrances and liens and prepaid liens, (ii) the principal amount of previously authenticated first mortgage bonds of KU which have been retired or for the retirement of which the trustee under the first mortgage bond indenture holds the necessary funds, other than certain first mortgage bonds not usable for the purpose under the terms of the first mortgage bond indenture, and (iii) the amount of money deposited with the trustee, which money may be applied to the retirement of KU's first mortgage bonds or may be withdrawn in lieu of the authentication of an equivalent principal amount of first mortgage bonds under the first mortgage bond indenture provisions referred to in clauses (i) and (ii). Net expenditures for bondable property are determined as provided in the first mortgage bond indenture. In general, bondable property means any utility plant, property or equipment owned by KU and used or useful in its utility business.

No additional first mortgage bonds may be authenticated under KU's first mortgage bond indenture as provided in clauses (i) and (iii) in the preceding paragraph, or authenticated as provided in clause (ii) of the preceding paragraph bearing a higher rate of interest than the first mortgage bonds to be retired (unless such first mortgage bonds to be retired would mature within 5 years), unless the net earnings (as determined according to the provisions of the first mortgage bond indenture) of KU for a 12-month period ending within 90 days next preceding the authentication were at least equal to twice the interest for one year on (i) all first mortgage bonds to be outstanding under the first mortgage bond indenture immediately after the authentication (other than first mortgage bonds for the retirement of which the trustee holds the necessary funds), and (ii) all other indebtedness then secured by a lien equal or prior to the lien of the first mortgage bond indenture on property of KU, with certain exceptions.

At December 31, 2002, KU had outstanding $484.8 million of first mortgage bonds issued under the first mortgage bond indenture. The principal amount of retired first mortgage bonds available as a basis for authenticating additional first mortgage bonds aggregated $172 million at December 31, 2002 and available net expenditures of bondable property aggregated not less than $999.5 million at December 31, 2002. Therefore, KU could issue approximately $772 million, in the aggregate, of additional first mortgage bonds under its first mortgage bond indenture.

Other

Rule 54 provides that in determining whether to approve certain transactions other than those involving exempt wholesale generators, as defined in section 32(a) of the Act ("EWGs"), or foreign utility companies, as defined in section 33(a) of the Act ("FUCOs"), the Commission will not consider the effect of the capitalization or earnings of any subsidiary which is an EWG or FUCO if rule 53(a), (b) and (c) are satisfied. E.ON satisfies all of the conditions of rule 53, except rule 53(a)(1).

As of December 31, 2002, E.ON's "aggregate investment," as defined in rule 53(a)(l), in EWGs and FUCOs was $18.369 billion. This amount is within the authorization granted to E.ON by Commission order dated June 14, 2002 (Holding Co. Act Release No. 27539) ("SEC Order"). In the SEC Order, the Commission authorized E.ON to invest up to $25 billion, plus an additional $35 billion from proceeds of divestments, in EWGs and FUCOs and found that such an investment would not have either of the adverse effects set forth in rule 53(c). There has been no material change in the facts or circumstances surrounding E.ON's capitalization since the SEC Order was issued.¹⁶

LG&E and KU and their respective customers will not be adversely impacted by the requested relief. In this application, the Applicants are not seeking authorization to increase the aggregate amount of indebtedness to be incurred by LG&E and KU, but rather seek authorization for an alternative source of financing to fund the respective capital needs of LG&E and KU. The application of the Best Rate Method will ensure that the cost of the proposed financings will not exceed the rate that the borrowing company could obtain in the capital markets on its own.

E.ON currently complies with, and will comply with, the record-keeping requirements of rule 53(a)(2), the limitation under rule 53(a)(3) on the use of the E.ON's system's domestic public-utility company personnel to render services to EWGs and FUCOs, and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail regulatory commissions. Further, none of the circumstances described in Rule 53(b) has occurred or is continuing.

The fees and commissions to be incurred in connection with the proposed transactions are expected to be $25,000 or less, not including fees, commissions and expenses incurred in connection with the issuance and sale of the securities.

LG&E is subject to regulation by the Kentucky Public Service Commission (the "Kentucky Commission"). KU is subject to regulation by the Kentucky Commission, the Virginia State Corporation Commission (the "Virginia Commission") and the Tennessee Regulatory Authority (the "Tennessee Commission" and, together with the Kentucky Commission and the Virginia Commission, the "State Commissions"). All three State Commissions must approve the issuance of long-term debt. The Virginia Commission must approve affiliate transactions involving utilities. By an order issued on April 14, 2003, as clarified in an order dated April 30, 2003, the Kentucky Commission authorized LG&E to obtain up to $300 million in secured intercompany loans from Fidelia. By an order issued on April 14, 2003, as clarified in an order dated April 30, 2003, the Kentucky Commission authorized KU to obtain up to $250 million in secured intercompany loans from Fidelia. The Virginia Commission authorized the issuance by KU of up to $250 million of secured long-term debt to its affiliate, Fidelia, in an order dated April 10, 2003. Similarly, on April 7, 2003, the Tennessee Commission authorized KU to borrow from Fidelia up to $250 million on a secured basis. No other commission has jurisdiction over the transactions proposed.

Due notice of the filing of the Application has been given in the manner prescribed by rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act are satisfied and that no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and the rules under the Act, that the Application, as amended, be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

¹ The June Order granted authority requested in S.E.C. Filing 70-9961 ("Acquisition Filing") and 70-9985 ("Original Financing Filing"). The financing portions of the June Order were amended by order dated February 21, 2003 (Holding Company Act Release No. 27654), which approved the transfer of Powergen US Investment Corp. from the Powergen chain of companies to E.ON US Holding GmbH.

² The financing authority granted in the June Order requires that all borrowings by LG&E Energy and its subsidiary companies (the "LG&E Energy Group") from an associate company be at the lowest of: (i) E.ON's effective cost of capital; (ii) the lending associate's effective cost of capital (if lower than E.ON's effective cost of capital); and (iii) the borrowing LG&E Energy Group company's effective cost of capital determined by reference to the effective cost of a direct borrowing by the company from a nonassociate for a comparable term loan that could be entered into at that time (the "Best Rate Method"). E.ON states that the Best Rate Method assures that an LG&E Energy Group company that elects to obtain debt financing from an associate company would not pay more for that financing than it would pay in the capital markets for a similar loan had the borrower sought to finance its capital requirements with independent third parties.

³ LG&E and KU are currently participants in a utility money pool, through which each company may borrow funds on an unsecured basis. The operation of the utility money pool would not be affected by this proposal, and money pool transactions would remain unsecured.

⁴ Currently, LG&E and KU have sufficient capacity under their respective first mortgage bond indenture to issue first mortgage bonds, or alternatively to incur secured intercompany loans, in the amount of the authorization requested.

⁵ Common stock equity includes common stock (i.e., amounts received equal to par or stated value of the common stock), additional paid in capital, retained earnings and minority interests.

⁶ Common stock to total capitalization ratio is calculated as follows: common stock equity/(common stock equity + preferred stock +gross debt). Gross debt is the sum of long-term debt, short-term debt and current maturities.

⁷ The secured intercompany loans may also be used to finance the payments due upon termination of the accounts receivable securitization programs of LG&E and KU. The accounts receivable securitization programs, which were scheduled to terminate at the end of July 2003, are being extended.

⁸ Typically, bond transactions are marketed within a range quoted by the dealers when a transaction is launched and the deal is priced only after determining the market demand within the price range, the Applicants state. E.ON, however, will not necessarily be raising funds in the market to fund the intercompany loans. It is E.ON's belief that use of the lowest quote may not provide a realistic estimate of the true market clearing price. The average of three quotes should provide a good proxy for the market rate, E.ON states.

⁹ At this time, the debt of Fidelia is not rated. Therefore, the interest cost of any debt that would be issued by Fidelia to unaffiliated third parties would not be competitive with the rates available to E.ON, LG&E or KU. If in the future Fidelia is able to obtain funds in the capital markets on competitive terms, quotes will also be obtained in a similar manner for debt to be issued by Fidelia.

¹⁰ If Fidelia is unwilling to provide funds at this rate, LG&E or KU will not access funds through secured intercompany loans.

¹¹ The outstanding balance of the accounts receivable program of LG&E reached a high of $75 million in February - March, 2001 and in January - March, 2003 and dropped to a low of $20 million in April - June, 2002. The outstanding balance of the accounts receivable program of KU reached a high of $50 million in March, 2001 and dropped to a low of $20 million in March - June, 2002.

¹² A portion of these capital requirements may be funded with unsecured, short-term debt on an interim basis, until permanent funding is obtained.

¹³ All the issued and outstanding common stock of LG&E and KU is held legally and beneficially by LG&E Energy.

¹⁴ LG&E and KU have outstanding accounts receivable securitization programs under which they have sold interests in their accounts receivable to unaffiliated third parties. The outstanding program balances are not reflected as indebtedness on the balance sheets of LG&E and KU.

¹⁵ LG&E has undrawn lines of credit, with commitments aggregating $160 million, with several banks. In addition, LG&E or KU may in the future obtain unsecured revolving lines of credit from banks or other financial institutions.

¹⁶ As of December 31, 2001, the most recent period for which financial statement information was evaluated for a rule 53(c) order, E.ON's consolidated capitalization consisted of 51.32% debt, 48.68% equity (on a pro forma basis taking into account acquisition of Powergen plc). As of March 31, 2003, E.ON's consolidated capitalization consisted of 47.7% short- and long-term debt (including current maturities) and 52.3% common equity.

http://www.sec.gov/divisions/investment/opur/filing/35-27711.htm