Exhibit D
TAX ALLOCATION AGREEMENT
Agreement dated March 1, 2003, by and among E.ON US Investments Corp. ("US
Parent") and its undersigned subsidiaries.
WITNESSETH
WHEREAS, the parties hereto are members of an affiliated group ("Affiliated
Group") as defined in Section 1504(a) of the Internal Revenue Code of 1986, as
amended ("Code"), of which the US Parent is the common parent; and
WHEREAS, such Affiliated Group intends to file a U.S. consolidated income
tax return for its tax period 2003 and for subsequent years; and
WHEREAS, Louisville Gas & Electric Company ("LG&E") was ordered in the
Commonwealth of Kentucky Public Service Commission Case No. 89-374 to allocate
income tax liabilities using the "stand alone" method; and
WHEREAS, Kentucky Utilities Company ("KU") was ordered in the Commonwealth
of Kentucky Public Service Commission Case No. 10296 to develop, implement, and
maintain cost allocation procedures that will prevent cross-subsidization; and
WHEREAS, it is the intent and desire of the parties hereto that a method be
established for allocating the consolidated tax liability of the Affiliated
Group among its members, for reimbursing US Parent for payment of such tax
liability, for compensating any party for use of its losses or tax credits, and
to provide for the allocation and payment of any refund or credit arising from a
carryback, or carryforward of losses or tax credits from other tax years.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1. Definitions:
"Consolidated tax" shall mean the aggregate tax liability for a taxable
year, being the tax shown on the consolidated return of the Affiliated Group and
any adjustments thereto thereafter determined. The consolidated tax shall mean
the amount of the refund if the consolidated tax return shows a negative tax
liability.
"Corporate tax credit" shall mean the negative separate return tax of a
member for a taxable year, equal to the amount by which the consolidated tax is
reduced by including a loss, credit, carryover or other tax benefit of such
member in the consolidated return.
"Corporate taxable income" shall mean the income or loss of a member,
computed as though the member had filed a separate return on the same basis as
used in the consolidated return, except that dividends or distributions from
members shall be disregarded, and other
Exhibit D
intercompany transactions eliminated in the consolidated return shall be given
appropriate effect. Carryovers and carrybacks shall be taken into account unless
the member has been paid a corporate tax credit therefor under paragraph 4 of
this Agreement.
"Holding Company" means LG&E Energy and each member of the Affiliate Group
which directly or indirectly owns LG&E Energy.
"LG&E Energy" means LG&E Energy Corp., a Kentucky corporation.
"Member" shall mean each of the undersigned corporations and limited
liability companies.
"E.ON Holding Company" means each Holding Company other than LG&E Energy.
"Separate return tax" shall mean the tax on the corporate taxable income of
a member computed as though the member were taxable as a corporation filing a
separate tax return and were not a member of a consolidated group. For purposes
of computing the separate return tax of a member which is a limited liability
company, such member shall be considered to possess and be entitled to use
losses, carryovers, tax credits and other tax attributes (1) attributable to a
predecessor of such member taxable as a corporation or (2) arising while such
member is a limited liability company.
2. A U.S. consolidated income tax return shall be filed by US Parent for the
tax period ended December 31, 2003 and for each subsequent taxable period in
respect of which this Agreement is in effect and for which the Affiliated Group
is required or permitted to file a consolidated tax return. US Parent shall be
solely responsible for the preparation of such returns, and shall be entitled to
make all such elections under the Code (in its sole discretion) as it shall deem
appropriate or advisable in connection with those returns; provided that US
Parent shall have no liability to the subsidiaries for any errors or omissions
in the preparation or filing of those returns, or in connection with those
elections. Each of the undersigned members shall, and shall cause their
respective subsidiaries to execute and file such consents, elections, and other
documents that US Parent may in its sole discretion determine are required or
appropriate, in US Parent's discretion and at its request, for the proper filing
of, or in connection with, such returns, and take all such other actions as
shall be required to give effect to the provisions of this Agreement. The
undersigned members and their respective subsidiaries are hereinafter
collectively referred to as the "subsidiaries" or "members", and individually
referred to as a "subsidiary" or a "member".
3. US Parent will make all Federal corporate income tax payments to the
Internal Revenue Service on behalf of the Affiliated Group.
4. Each member (including each Holding Company) shall pay the amount of its
separate return tax to US Parent (or other non-utility designee) if such amount
is positive. US Parent (or other non-utility designee) shall pay any member with
a positive corporate tax credit the amount of such credit; provided, however,
that no such payment shall be made to any Holding Company. Any corporate tax
credit of a Holding Company, other than a corporate tax credit related to the
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Exhibit D
debt incurred by US Parent (or any other E.ON Holding Company) from time to time
to finance the acquisition of its U.S. utility and energy-related businesses,
including LG&E Energy and its direct and indirect subsidiaries, and any debt
incurred to refinance or refund the foregoing ("Acquisition Debt"), shall be
reallocated to the other members of the Affiliated Group having a positive
separate return tax liability in proportion to their separate return tax. The
corporate tax benefits related to the Acquisition Debt shall be retained by US
Parent. For purposes of this Agreement, any liability for alternative minimum
tax shall be treated as part of the member's separate tax liability provided
that the entire Affiliated Group incurs an alternative minimum tax liability.
Intercompany eliminations recorded by consolidation entries that affect the
consolidated tax will be assigned to the appropriate member necessitating the
intercompany elimination for the purpose of computing separate return tax. In
the event that less than all of the losses, credits, carryovers or other tax
benefits of the members having negative separate return tax are absorbed, the
aggregate corporate tax credit applicable to such members shall be allocated to
such members in proportion to their negative separate return tax; provided,
however, that to the extent that the consolidated tax and separate return tax
for any year include material items taxed at different rates or involve other
special benefits or limitations, the associated tax benefits shall be first
allocated, to the extent possible, to the individual members of the group
applicable to them. Under no circumstances shall the amount of tax liability
allocated to a member of the Affiliated Group under this Agreement exceed its
separate tax liability.
5. Payment of the consolidated U.S. tax liability for a taxable period shall
include the payment of estimated tax installments due for such taxable period.
Each member shall pay to US Parent an amount equal to its positive separate
return tax liability, if any, for that taxable period, and US Parent shall pay
to each member an amount equal to its corporate tax credit attributable to that
taxable period, in each case by the due date for payment of the consolidated
U.S. taxes. Any amounts paid by a member on account of a separate return or
separate estimated tax payment that are credited against the consolidated tax
liability of the Affiliated Group shall be included in determining the payments
due from such member. Any overpayment of estimated tax shall be promptly
refunded to such member. Payment shall be made within ten days after each
quarterly payment date for estimated taxes and the date of filing of the
consolidated return for such taxable period.
6. If part or all of a loss, credit, carryover or other tax benefit is carried
back or forward to a year in which such member filed a separate return or a
consolidated return with another affiliated group, any refund or reduction in
tax liability arising from the carryback or carryover shall be retained by such
member. Notwithstanding the above, US Parent shall determine whether an election
shall be made not to carry back part or all of a consolidated net operating loss
for any tax year in accordance with Section 172(b)(3) of the Code.
7. If the consolidated tax liability is adjusted for any taxable period,
whether by means of an amended return, claim for refund, or after a tax audit by
the Internal Revenue Service, the liability of each member shall be recomputed
to give effect to such adjustments, and in the case of a refund, US Parent shall
make payment to each member for its share of the refund, determined in the same
manner as in paragraph 4 above, within ten days after the refund is received by
US Parent, and in the case of an increase in tax liability, each member shall
pay to US Parent its allocable share of such increased tax liability, penalties
and interest within ten days
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after receiving notice of such liability from US Parent.
8. The allocation of state and local income tax liabilities will be determined
based on the application of one of the following filing methods:
(1) Separate entity
(2) Unitary group
(3) Nexus Combined
(4) Consolidated (mirrors the federal group);
provided, however, that no member's state or local tax income tax liability
under the Agreement shall exceed its state or local tax liability had it filed a
separate return.
All tax cost or benefit determined under a separate entity filing will be
allocated to the subsidiary that filed the separate return.
Tax cost or benefit determined for a unitary filing will be allocated to
the applicable business unit, similar to a separate entity filing allocation.
For example, if the power generation group files a state unitary return
including the power generation parent and all its subsidiaries, the entire state
tax cost or benefit is allocated to the power generation group. Further
allocation within the group is optional at the discretion of the group.
Tax cost or benefit determined for a nexus combined filing will be
allocated as if each entity or business unit (e.g., KU, LG&E, Power Generation)
filed a "stand alone" or separate entity return. Both apportionment factors and
taxable income are to be considered in the allocation. No benefit will be
allocated to US Parent. Any remaining cost or benefit will be allocated to LG&E
Energy on at least an annual basis.
Tax cost or benefit determined for a consolidated filing will be allocated
based on each subsidiary's or business unit's nexus (as defined below) with the
individual state or locality. For example, state tax determined in a
consolidated return will be allocated as if the entity (or business unit) filed
a "stand alone" or separate tax return using both: (a) the entity's (or business
unit's) property, payroll, and receipts apportioned to the state and (b) their
taxable income or loss. No tax cost or benefit will be allocated to any entity
or business unit having no nexus in the state or locality, and no benefit will
be allocated to US Parent. The remaining cost or benefit will be allocated to
LG&E Energy on at least an annual basis.
For purposes of state and local allocations, the following definitions are
provided:
"Nexus"-- The connection an entity has with a taxing jurisdiction generally
represented by property and payroll. The applicable jurisdiction's nexus
standards will determine whether tax cost or benefit is allocated to an entity.
(E.g., state sales or receipts of an entity may require inclusion in a
consolidated return even though the entity itself does not have nexus and is
protected by PL 86-272.)
"Unitary"--The relationship between related/affiliated members generally
within a
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Exhibit D
consolidated group. The applicable jurisdiction will determine whether the
entities are unitary. This often requires a presence of unity of ownership
(e.g., over 50% owned by common parent), unity of operation (back-office or
central support functions) and unity of use (centralized policies, common
management forces, intercompany products flow or services provided by one entity
to another).
"Nexus-combined"-- A return that includes only those entities having nexus
in the applicable jurisdiction.
9. The payment or refund of any tax liability discussed in paragraphs 2-8
above may be satisfied through the debiting or crediting of the member's (s')
intercompany payable or receivable account on the same day as payment or refunds
would have otherwise been required. If during a consolidated return period US
Parent or any subsidiary acquires or organizes another corporation that is
required to be included in the consolidated return, then such corporation shall
join in and be bound by this Agreement.
10. This Agreement shall apply to the tax period ending after March 1, 2003,
and all subsequent taxable periods unless and until (a) this Agreement is
terminated by the mutual consent of the signatories hereto, (b) this Agreement
is terminated by US Parent (in its sole discretion) or (c) as to any one or more
subsidiaries at any time that those subsidiaries are no longer members of an
affiliated group with US Parent under Section 1504(a) of the Code.
Notwithstanding such termination, this Agreement shall continue in effect with
respect to any payment or refunds due for all taxable periods ending on or prior
to termination.
11. This Agreement shall be binding upon and inure to the benefit of any
successor of the parties and their subsidiaries, whether by operation of law or
otherwise, to the same extent as if the successor had been an original party to
the Agreement.
12. This Agreement is subject to revision as a result of changes in income tax
law and changes in relevant facts and circumstances, subject to approval of such
revision by the Securities and Exchange Commission as and to the extent required
by the Public Utility Holding Company Act of 1935.
13. Notwithstanding any provision in this Agreement to the contrary, income tax
shall be allocated among the parties in a manner consistent with Rule
45(c)(2)(ii) of the Public Utility Holding Company Act of 1935.
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Exhibit D
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their duly authorized representatives on March 1, 2003.
E.ON US Investments Corp. (formerly Powergen
US Investment Corp.- Name change effective
March 3, 2003)
By /s/ S. Xxxxxxxx Xxxxx
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LG&E Energy Corp.
By /s/ S. Xxxxxxxx Xxxxx
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Louisville Gas and Electric Company
By /s/ S. Xxxxxxxx Xxxxx
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Kentucky Utilities Company
By /s/ S. Xxxxxxxx Xxxxx
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LG&E Capital Corp.
By /s/ S. Xxxxxxxx Xxxxx
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LG&E Energy Marketing Inc.
By /s/ S. Xxxxxxxx Xxxxx
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LG&E Energy Services Inc.
By /s/ S. Xxxxxxxx Xxxxx
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E.ON North America, Inc.
By /s/ Xxxxxx X. Supp
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