EXHIBIT A-1
TAX ALLOCATION AGREEMENT
Agreement dated __________, 200_, by and among Powergen 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 2002 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 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.
"Powergen 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, 2002 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 if such amount is positive. US Parent
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
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Company, other than a corporate tax credit related to the debt incurred by
US Parent (or any other Powergen 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
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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 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 gas facilities group files a state unitary
return including the gas facilities parent and all its subsidiaries, the
entire state tax cost or benefit is allocated to the gas facilities 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, Facilities) 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
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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 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 January 1, 2002,
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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IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their duly authorized representatives on _____________, 2002.
Powergen US Investments Corp.
By___________________________________
LG&E Energy Corp.
By___________________________________
Louisville Gas and Electric Company
By___________________________________
Kentucky Utilities Company
By___________________________________
LG&E Capital Corp.
By___________________________________
LG&E Energy Marketing Inc.
By___________________________________
LG&E Energy Services Inc.
By___________________________________
