**EXHIBIT4.26**

 

**LOAN AND SECURITYAGREEMENT**

 

**Dated as of August15, 2003**

 

**between**

 

**KENTUCKY UTILITIESCOMPANY**

 

**and**

 

**FIDELIACORPORATION**

** **

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**TABLE OFCONTENTS**

 
| 1.     | DEFINITIONS                                       |                                                               |
|--------|---------------------------------------------------|--------------------------------------------------------------------|
|   | 1.1                                               | General  Terms                                                     |   |
|   | 1.2                                               | Accounting  Terms                                                  |   |
|   | 1.3                                               | Others Terms Defined in the Code                                   |   |
|   | 1.4                                               | Computation of Time Periods                                        |   |
|   | 1.5                                               | Headings and References                                            |   |
|   |                                              |                                                               |   |
| 2.     | TERM  LOANS                                       |                                                               |
|   |                                              |                                                               |   |
|   | 2.1                                               | Loans                                                              |   |
|   | 2.2                                               | Request for Purchase                                               |   |
|   | 2.3                                               | Interest                                                           |   |
|   | 2.4                                               | Notes                                                              |   |
|   | 2.5                                               | Closings                                                           |   |
|   | 2.6                                               | Payments                                                           |   |
|   | 2.7                                               | Term of This Agreement                                             |   |
|   |                                              |                                                               |   |
| 3.     | CONDITIONS OF ADVANCES                            |                                                               |
|   |                                              |                                                               |   |
|   | 3.1                                               | Documents                                                          |   |
|   | 3.2                                               | No  Default                                                        |   |
|   | 3.3                                               | Reaffirmation of Representations and  Warranties                   |   |
|   |                                              |                                                               |   |
| 4.     | COLLATERAL                                        |                                                               |
|   |                                              |                                                               |   |
|   | 4.1                                               | Security  Interest                                                 |   |
|   | 4.2                                               | Appointment of the Lender as the Borrower’s  Attorney-in-Fact |   |
|   | 4.3                                               | Preservation of Collateral and Perfection  of Security Interests   |   |
|   | 4.4                                               | Reasonable  Care                                                   |   |
|   | 4.5                                               | Termination of Security Interest and Liens                         |   |
|   |                                              |                                                               |   |
| 5.     | REPRESENTATIONS AND WARRANTIES                    |                                                               |
|   |                                              |                                                               |   |
|   | 5.1                                               | Existence                                                          |   |
|   | 5.2                                               | Authority                                                          |   |
|   | 5.3                                               | Binding  Effect                                                    |   |
|   | 5.4                                               | Financial Statements                                               |   |
|   | 5.5                                               | Collateral                                                         |   |
|   | 5.6                                               | Chief Executive Office Jurisdiction of  Incorporation              |   |
|   | 5.7                                               | Other Corporate Names                                              |   |
|   | 5.8                                               | Margin  Security                                                   |   |
|   | 5.9                                               | Survival of Warranties                                             |   |
|   | 5.10                                              | Compliance with Laws and Regulations                               |   |
|   |                                              |                                                               |   |
| 6.     | COVENANTS                                         |                                                               |
|   |                                              |                                                               |   |
|   | 6.1                                               | Financial Statements; Notices; Reports                             |   |
|   | 6.2                                               | Books, Records and Inspections                                     |   |
|   | 6.3                                               | Conduct of Business                                                |   |
|   |                                              |                                                               |   |
| 7.     | EVENTS  OF DEFAULT, RIGHTS AND REMEDIES OF LENDER |                                                               |
|   |                                              |                                                               |   |
|   | 7.1                                               | Events  of Default                                                 |   |

 

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|      | 7.2           | Rights and Remedies Generally                  |   |
|-----------|---------------|------------------------------------------------|--------|
|      | 7.3           | Waiver  of Demand                              |   |
|      | 7.4           | Marshalling; Payments Set Aside                |   |
|      |          |                                           |   |
| 8.        | SUBORDINATION |                                           |
|      |          |                                           |   |
|      | 8.1           | Agreement to Subordinate                       |   |
|      | 8.2           | Administration of Collateral                   |   |
|      | 8.3           | Delivery of Proceeds of Collateral             |   |
|      | 8.4           | Agreement Not to Contest                       |   |
|      | 8.5           | Release of Collateral                          |   |
|      | 8.6           | Release of Security Interest                   |   |
|      | 8.7           | Obligations under this Agreement Not  Affected |   |
|      | 8.8           | Bankruptcy                                     |   |
|      | 8.9           | Third Party Beneficiary                        |   |
|      |          |                                           |   |
| 9.        | MISCELLANEOUS |                                           |
|      |          |                                           |   |
|      | 9.1           | Amendments and Waivers                         |   |
|      | 9.2           | Severability                                   |   |
|      | 9.3           | Notices                                        |   |
|      | 9.4           | Counterparts                                   |   |
|      | 9.5           | Prior  Agreements                              |   |
|      | 9.6           | Successors and Assigns                         |   |
|      | 9.7           | CHOICE  OF LAW                                 |   |
|      |          |                                           |   |
|      |          | **EXHIBITS**                                   |   |
| EXHIBIT A | —        | Form of Note                                   |   |
|           |               |                                                |        |  |  |

 

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**LOANAND SECURITY AGREEMENT**

 

This LOAN AND SECURITY AGREEMENT, dated as of August 15, 2003 (this “Agreement”),is made between KENTUCKY UTILITIES COMPANY, a Kentucky and Virginiacorporation, as borrower (the “Borrower”), and FIDELIA CORPORATION, aDelaware corporation, as lender (the “Lender”).

 

**W I T N E S S E T H:**

 

WHEREAS, the Borrower has requested that the Lenderprovide the Borrower with term loans;

 

WHEREAS, to induce the Lender to make such term loansavailable to the Borrower, the Borrower has agreed to secure its obligations tothe Lender by granting the Lender a security interest in, and lien upon, theCollateral (as defined herein); and

 

WHEREAS, the Lender is willing to make such term loansavailable to the Borrower  upon theterms and conditions set forth in this Agreement;

 

NOW, THEREFORE, in consideration of the foregoing andthe mutual agreements contained in this Agreement, the Borrower and the Lenderagree as follows:

 

# **1.****                                      DEFINITIONS**.

#  

## **1.1          General Terms.** When used in this Agreement, the following terms have the followingmeanings (such meanings to be equally applicable to both the singular andplural forms of the terms defined):

##  

“Affiliate”, with respect to any Person, meansanother Person (i) that directly or indirectly, through one or moreintermediaries, controls or is controlled by or is under common control withsuch Person, (ii) that directly or beneficially owns or holds 5% or moreof any class of the voting stock of such Person or (iii) 5% or more of thevoting stock (or in the case of a Person that is not a corporation, 5% or moreof the equity interest) of which is owned directly or beneficially or held bysuch Person.

 

“Agreement” has the meaning set forth in the preamble.

 

“Authorized Officer” means at any time anindividual whose signature has been certified to the Lender on behalfof the Borrower by a certificate now or hereafter executed on behalf ofthe Borrower and delivered to the Lender and whose authority has not beenrevoked prior to such time.

 

“Bond Trustee” means U.S. Bank NationalAssociation, as successor trustee under the First Mortgage Bond Indenture, orany successor trustee thereunder.

 

“Borrower” has the meaning set forth in the preamble.

 

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“Business Day” means a day (other than a Saturdayor Sunday) on which banks are open for business in Louisville, Kentucky andWilmington, Delaware.

 

“Code” means the Uniform Commercial Code of theCommonwealth of Kentucky as in effect on the Closing Date.

 

“Collateral” has the meaning set forth in Section4.1.

 

“Default” means any event that, with lapse oftime or notice or lapse of time and notice, will constitute an Event of Defaultif it continues uncured.

 

“Dollars” and the “$” each means lawfulmoney of the United States of America.

 

“Equipment” has the meaning set forth in theCode and includes, without limitation, any and all of the Borrower’s now ownedor hereafter acquired machinery, equipment, furniture, furnishings and alltangible personal property similar to any of the foregoing (other thanInventory), together with all improvements, accessions and appurtenancesthereto and any proceeds of any of the foregoing, including insurance proceedsand condemnation awards, excluding, however, any Equipment which is not subjectto a Lien now or at any time hereafter pursuant to the First Mortgage BondIndenture.

 

“Event of Default” means the occurrence orexistence of any one of more of the events described in Section 7.1.

 

“First Mortgage Bond Indenture” means theIndenture of Trust dated as of May 1, 1947 from the Borrower to the BondTrustee, and any and all supplemental indentures thereof, as further amendedand supplemented from time to time.

 

“GAAP” means generally accepted accountingprinciples, as in effect in the United States from time to time.

 

“Governmental Authority” means any nation orgovernment, any federal, state, local or other political subdivision thereofand any entity exercising executive, legislative, judicial, regulatory oradministrative functions of or pertaining to government.

 

“Lender” has the meaning set forth in the preamble.

 

“Liabilities” means all of the Borrower’sliabilities, obligations, and indebtedness to the Lender for monetary amounts,whether now or hereafter owing, arising, due or payable under this Agreementand the Notes howsoever evidenced, created, incurred, acquired, or owing.

 

“Lien” means any mortgage, deed of trust,pledge, hypothecation, assignment, collateral deposit arrangement, securityinterest, encumbrance for the payment of money, lien (statutory or other),preference, right of setoff, priority or other security agreement orpreferential arrangement of any kind or nature whatsoever, including, withoutlimitation, any conditional sale or other title retention agreement, or theinterest of a lessor under a capital lease.

 

“Loan” has the meaning set forth in Section2.1.

 

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 “MaterialAdverse Effect” means a material adverse effect upon (i) the business,assets,  properties or condition(financial or otherwise), or results of operations of the Borrower, or(ii) upon the ability of the Borrower to perform or cause to be performedany of its obligations under this Agreement or the rights or remedies of theLender under this Agreement.

 

“Note” has the meaning set forth in Section2.4.

 

“Permitted Lien” means Liens created under orin connection with the First Mortgage Bond Indenture and Liens permitted by theFirst Mortgage Bond Indenture.

 

“Person” means any natural person, firm,enterprise, institution, corporation, association, partnership, trust,unincorporated organization, sole proprietorship, joint venture, limitedliability company or Governmental Authority.

 

## **1.2          AccountingTerms.**  Any accounting terms used in this Agreementwhich are not specifically defined in this Agreement have the meaningscustomarily given them in accordance with GAAP.

##  

## **1.3          OthersTerms Defined in the Code.**  All other terms contained in this Agreement (and which are nototherwise specifically defined in the Agreement) have the meanings provided bythe Code to the extent the same are used or defined in the Code.

##  

## **1.4          Computationof Time Periods.**  In this Agreement in the computation ofperiods of time from a specified date to a later specified date, the words“from” or “commencing on” means “from and including” and the words “to,”“through,” “ending on” and “until” each mean “to but excluding.”

##  

## **1.5          Headingsand References.**  Section and other headings are for referenceonly, and shall not affect the interpretation or meaning of any provision ofthis Agreement.  Any Section or clausereferences are to this Agreement, unless otherwise specified.  References in this Agreement or any otheragreement include this Agreement and other agreements as the same may beamended, restated, supplemented or otherwise modified from time to timepursuant to the provisions hereof or thereof. A reference to any law, statute or regulation shall mean that law,statute or regulation as it may be amended, supplemented or otherwise modifiedfrom time to time, and any successor law, statute or regulation.

##  

# **2.****                                      TERM LOANS**.

#  

## **2.1          Loans**. The Lender, at its discretion, may make available to the Borrower termloans (the “Loans”) from time to time pursuant to this Agreement, upontelephonic or written communication of a borrowing request from the Borrower asprovided in Section 2.2.

##  

## **2.2          Request forLoans**.  The Borrower may from time to time makerequests for Loans (each such request being a “Borrowing Notice”)hereunder.  Each Borrowing Notice shall(i) specify the principal amount of the Loan requested, (ii) specify the finalmaturity not to be less than one year from the Borrowing Date, (iii) specifythe proposed date for the borrowing of the Loan (the “Borrowing Date”),(iv) specify whether the Loan shall bear interest at a fixed rate or a floatingrate, (v) specify the dates on which interest is to be paid, and (vi) specifythe

 

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## number of theaccount and the name and address of the depository institution to which theproceeds of the Loan are to be transferred on the Borrowing Date.  Each Borrowing Notice may be giventelephonically or in writing.  Each suchrequest for a Loan is subject to acceptance by the Lender, in its solediscretion.

##  

## **2.3          Interest**.

##  

### **(A)          Interest Rate**. The interest rate payable by the Borrower on any Loan shall be set atsuch interest rate as the Borrower and the Lender shall agree, but in no eventgreater than the lowest of (i) the effective cost of capital of E.ON AG, (ii)the effective cost of capital of the Lender and (iii) the Borrower’s effectivecost of capital determined by reference to the effective cost of a directborrowing by the Borrower from a nonassociate for a comparable term loan thatcould be entered into at such time. Such interest rate may be determined as a fixed interest rate or afloating rate, as specified by the Borrower in the Borrowing Notice.

###  

### **(B)          Interest Payments**.  Accrued but unpaid interest on each Loan ispayable in arrears on dates agreed to by the Borrower and the Lender asspecified in the Borrowing Notice and upon payment in full of such Loan.  Interest on the Loans is computed on thebasis of a 360-day year consisting of twelve 30-day months.

###  

### **(C)          Highest Lawful Rate**.  In no contingency or event whatsoever will interestcharged on the Loans, however, such interest may be characterized or computed,exceed the highest rate permissible under any law which a court of competentjurisdiction, in a final determination, deems applicable to the Loans. In theevent that such a court determines that the Lender has received interest underthe Loans in excess of the highest rate applicable to the Loans, any suchexcess interest collected by the Lender is deemed to have been a repayment ofprincipal and will be so applied.

###  

## **2.4          Notes**.  Oneach Borrowing Date, the Borrower shall issue to the Lender a promissory note(the “Notes”) in a principal amount equal to the principal amount of theLoan to be made on such Borrowing Date; to bear interest on the unpaid balancethereof from the date thereof at the rate per annum as determined in accordancewith Section 2.3(A); and to be substantially in the form of Exhibit Aattached hereto.  The term “Notes” asused herein shall include each Note delivered pursuant to this Agreement andeach Note delivered in substitution or exchange for any such Note.

##  

## **2.5          Closings**.  Not later than 11:30 A.M. (New York City local time) on theBorrowing Date for any Loan, the Borrower will deliver to the Lender at theoffices of the Lender, a Note dated the Borrowing Date, evidencing the Loan tobe made on such Borrowing Date, against payment of the Loan proceeds bytransfer of immediately available funds for credit to the Borrower’s accountspecified in the Borrowing Notice.

##  

## **2.6          Payments**.

##  

### **(A)          Place of Payments.**  The Borrower will make each payment underthis Agreement and under the Notes not later than 2:00 p.m. (New Yorktime) on the day when due to the Lender at its address set forth in Section 9.3in immediately available funds.  TheBorrower’s

 

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### obligations to theLender with respect to such payments will be discharged by making such paymentsto the Lender under this Section 2.6.

###  

### **(B)          Timing of Payments.**  If any payment of any interest or fees owingunder this Agreement falls due on a day that is not a Business Day, then suchdue date is extended to the next following Business Day.

###  

### **(C)          Optional Prepayments.**  On any interest payment date, and with atleast three business day’s prior written notice, the Borrower shall be entitledto prepay any amount of the loan outstanding, provided such payment is not lessthan $1,000,000 and, provided further, the Borrower shall pay a prepaymentcharge equal to the present value of the difference between (i) the interest payableprovided in this loan agreement and (ii) the interest payable at the prevailinginterest rate at the time of prepayment, for the period from the date ofprepayment through the final maturity date, which difference, if negative, shall be deemed to be zero. The presentvalue will be determined using the prevailing interest rate at the time of theprepayment as the discount rate.

###  

## **2.7          Term ofThis Agreement.**  This Agreement shall remain in full forceand effect until the second Business Day after the Borrower or the Lender givesnotice to the other party hereto stating that it elects to terminate thisAgreement.  Notwithstanding thetermination of this Agreement, until all of the Loans under this Agreement havebeen paid in full and all financing arrangements between the Borrower and theLender under this Agreement have been terminated, all of the Lender’s rightsand remedies under this Agreement survive and the Lender is entitled to retainits security interest in and to all existing and future Collateral.

##  

# **3.****                                      CONDITIONS OF ADVANCES**.

#  

Notwithstandingany other provisions contained in this Agreement to the contrary, the making ofeach Loan provided for in this Agreement is conditioned upon the following:

 

## **3.1          Documents.**  The Lender has received all of the following (or the delivery ofsuch has been waived), each duly executed, in form and substance satisfactoryto the Lender, and delivered on or prior to the applicable Borrowing Date:

##  

##### (i)                                     ThisAgreement, duly executed by the Borrower.

#####  

##### (ii)                                  TheNote, evidencing such Loan, duly executed by the Borrower.

#####  

##### (iii)                               UCC-1 financingstatements listing the Borrower as debtor, and the Lender, as secured party,covering the Collateral.

#####  

##### (iv)                              Certifiedcopies of all documents evidencing any necessary corporate action, consents andgovernmental approvals, if any, with respect to this Agreement and the Notes.

#####  

##### (v)                                 Asignature authorization certificate for the Borrower.

#####  

##### (vi)                              Suchother documents as the Lender may reasonably request.

 

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## **3.2          No Default**. No Default or Event of Default has occurred and is continuing.

##  

## **3.3          Reaffirmation of Representations andWarranties**..  The representations and warrantiescontained in Section 5 are true and correct in all material aspects onand as of the Borrowing Date.

##  

# **4.****                                      COLLATERAL**.

#  

## **4.1          SecurityInterest.**  Tosecure payment of the Liabilities and performance of its obligations under thisAgreement and the Notes, the Borrower grants, mortgages, hypothecates andpledges to the Lender a continuing lien upon and security interest in all ofthe Borrower’s right, title and interest in the Collateral, wherever located,whether now or hereafter existing, owned, licensed, leased (to the extent ofthe Borrower’s leasehold interest in such property), consigned (to the extentof the Borrower’s ownership interest in such property), arising or acquired,subject, however, in all respects to the provisions of Section 8.  The “Collateral” shall consist of:  (i) theEquipment;  (ii) all insurance proceeds of orrelating thereto, (iii) all of the Borrower’s books and records relatingto any of the foregoing; and (iv) all accessions and additions to,substitutions for, and replacements, products and proceeds of any of theforegoing.

##  

## **4.2          Appointment of the Lender as theBorrower’s Attorney-in-Fact**. The Borrower irrevocably designates, makes, constitutes and appoints theLender (and all persons designated by the Lender) as the Borrower’s true andlawful attorney-in-fact, and authorizes the Lender, in the Borrower’s or theLender’s name, upon the occurrence and during the continuation of an Event ofDefault, with respect to any item of Collateral or the proceeds of suchCollateral, to do all acts and things which are necessary, in the Lender’s solediscretion, to fulfill the Borrower’s obligations under this Agreement.

##  

## **4.3          Preservation of Collateral andPerfection of Security Interests**. The Borrower will execute and deliver, or cause to be executed anddelivered, to the Lender at any time or times after the date of this Agreementat the request of the Lender, all (i) financingstatements or (ii) other documents (and, ineach case, pay the cost of filing or recording the same in all public officesdeemed necessary by the Lender), as the Lender may request, in a formsatisfactory to the Lender, to perfect and keep perfected the securityinterest, and preserve the priority of such security interest, in theCollateral granted by the Borrower to the Lender or to otherwise protect andpreserve the Collateral and the Lender’s security interest in theCollateral.  Should the Borrower fail todo so, the Lender is authorized to sign any such financing statements as theBorrower’s agent.  The Borrower furtheragrees that a carbon, photographic or other reproduction of this Agreement orof a financing statement is sufficient as a financing statement.

##  

## **4.4          Reasonable Care.**  The Lender is deemed to have exercisedreasonable care in the custody and preservation of any of the Collateral in itspossession if it takes such action for that purpose as the Borrower requests inwriting, but the Lender’s failure to comply with any such request will not ofitself be deemed a failure to exercise reasonable care.

##  

## **4.5          Termination of Security Interest andLiens.** The Lender’s security interest andother liens in, on and to the Collateral terminates when all the Liabilitieshave been paid in full and this Agreement has been terminated, at which timethe Lender will reassign and redeliver (or

 

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## cause to bereassigned and redelivered) to the Borrower, or to such Person as the Borrowerdesignates, against receipt, such of the Collateral (if any) assigned by theBorrower to the Lender (or otherwise held by the Lender) as has not been soldor otherwise applied by the Lender under the terms of this Agreement and isstill held by it under this Agreement, together with appropriate instruments ofreassignment and release.  Any suchreassignment is without recourse upon or representation or warranty by the Lenderand will be at the Borrower’s cost and expense.

##  

# **5.****                                      REPRESENTATIONS AND WARRANTIES**.

#  

TheBorrower represents and warrants that as of the date of this Agreement and asof each Borrowing Date.

 

## **5.1          Existence.**  The Borrower is a corporation duly organized, validly existing andin good standing under the laws of the Commonwealth of Kentucky and theCommonwealth of Virginia and is duly qualified as a foreign entity and is ingood standing in all jurisdictions where the nature and extent of the businesstransacted by it or the ownership of its assets makes such qualificationnecessary, except for those jurisdictions in which the failure so to qualify orto be in good standing would not have a Material Adverse Effect.

##  

## **5.2          Authority.** The execution and delivery by the Borrower of this Agreement and theNotes and the performance of the Borrower’s obligations under this Agreementand the Notes:  (i) are within theBorrower’s corporate powers; (ii) are duly authorized by the Borrower’sboard of directors or other governing body; (iii) are not in contraventionof the terms of the Borrower’s certificate of incorporation or bylaws or of anymaterial indenture, agreement or undertaking to which the Borrower is a partyor by which the Borrower or any of its property is bound; (iv) does notrequire any consent, registration or approval of any Governmental Authority,which has not been obtained; (v) does not contravene any materialcontractual or governmental restriction binding upon the Borrower; and (vi) willnot, except as contemplated in this Agreement, result in the imposition of anyLien, claim or encumbrance upon any property of the Borrower under any existingmaterial indenture, mortgage, deed of trust, loan or credit agreement or othermaterial agreement or instrument to which the Borrower is a party or by whichit or its property may be bound or affected.

##  

## **5.3          BindingEffect.**  This Agreement and the Notes are thelegal, valid and binding obligations of the Borrower and are enforceableagainst the Borrower in accordance with their respective terms.

##  

## **5.4          FinancialStatements.**  The financial statements of the Borrowerfiled with the Securities and Exchange Commission since December 31, 2001 arein accordance with the books and records of the Borrower and fairly present thefinancial condition of the Borrower at the dates of such financial statementsand the results of operations for the periods indicated (subject, in the caseof unaudited financial statements, to normal year-end adjustments), and suchfinancial statements were prepared in conformity with GAAP (other than theabsence of notes to such financial statements).

 

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## **5.5          Collateral.**  Except for Permitted Liens and as otherwiseprovided in Section 8.5, all of the Collateral is and will continue tobe owned by the Borrower free and clear of all Liens, claims and encumbrances.

##  

## **5.6          Chief Executive Office Jurisdiction ofIncorporation.**  As of the date hereof, the principal placeof business and chief executive office of the Borrower is located at 1 QualityStreet, Lexington, Kentucky 40507 and the Borrower has been duly incorporatedin the Commonwealth of Kentucky and the Commonwealth of Virginia.

##  

## **5.7          OtherCorporate Names.** The Borrower has not used anyother corporate or fictitious names in the past five years.

##  

## **5.8          MarginSecurity.**  The Borrower owns no margin security and noneof the proceeds of the Loans advanced under this Agreement will be used for thepurpose of purchasing or carrying any margin securities or for the purpose ofreducing or retiring any Indebtedness which was originally incurred to purchaseany margin securities or for any other purpose not permitted by Regulations T,U or X of the Board of Governors of the Federal Reserve System.

##  

## **5.9          Survivalof Warranties.**  All representations contained in thisAgreement survive the execution and delivery of this Agreement.

##  

## **5.10        Compliance with Laws and Regulations**.  The execution and delivery by the Borrowerof this Agreement and the performance of the Borrower’s obligations under thisAgreement and the Notes are not in contravention of any laws.  The Borrower is in compliance with all laws,orders, regulations and ordinances of all federal, foreign, state and local governmentalauthorities relating to the business, operations and the assets of theBorrower, including, without limitation, Regulations T, U and X of theBoard of Governors of the Federal Reserve System, except for laws, orders,regulations and ordinances the violation of which are not likely to have aMaterial Adverse Effect.

##  

# **6.****                                      COVENANTS**.

#  

TheBorrower covenants and agrees that, so long as any of the Liabilities remainoutstanding:

 

## **6.1          Financial Statements; Notices;Reports.**  The Borrower will keep, in all materialrespects, proper books of record and account in which entries will be made ofall dealings or transactions of or in relation to the business and affairs ofthe Borrower, in accordance with GAAP consistently applied.  The Borrower will furnish to the Lender:

##  

### **(A)          SEC Reports**.  Copies of annual reports and quarterlyreports filed by the Borrower with the Securities and Exchange Commission onForms 10-K and 10-Q, within 20 Business Days of the date of filing of suchreport;

###  

### **(B)          Default Notices.**  As soon as practicable (but in any event notmore than two Business Days after any Authorized Officer of the Borrowerobtains knowledge of the occurrence of an event or the existence of acircumstance giving rise to a Default or an Event of Default), notice of anyand all Defaults or Events of Default;

 

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### **(C)          Notice of Change of Name.**  Notice in writing to the Lender, as soon aspracticable and in any event within five days after the occurrence of anychange in the name, address or jurisdiction of incorporation of the Borrower orthe location of the books and records of the Borrower; and

###  

### **(D)          Other Information.**  With reasonable promptness, such otherbusiness or financial data as the Lender may reasonably request.

###  

The Lender will take reasonable efforts to keep suchinformation, and all information acquired as a result of any inspectionconducted in accordance with Section 6.2 (and any other informationprovided to the Lender under this Agreement), confidential, provided that theLender may communicate such information (i) inaccordance with the Borrower’s written authorization, (ii) toany regulatory authority having jurisdiction over the Lender, (iii) to any other Person in connection with theexercise of the Lender’s rights under this Agreement, (iv) toany Person in any litigation in which the Lender is a party or (v) to any other Person if the Lender believes inits sole discretion that disclosure is necessary in connection with any legalprocess or informal investigative demand, whether issued by a court, judicialor administrative or legislative body or committee or other governmentalauthority.  Notwithstanding theforegoing, information will not be deemed to be confidential to the extent suchinformation (a) is available in the publicdomain, (b) becomes available in the publicdomain other than as a result of unauthorized disclosure by the Lender or (c) is acquired from a Person not known by theLender to be in breach of an obligation of secrecy to the Borrower.

 

## **6.2          Books, Records andInspections.**  TheLender, or any agent or employee designated by the Lender in writing, has theright, from time to time after the date of this Agreement, to call at theBorrower’s place or places of business (or any other place where the Collateralor any information relating to the Collateral is kept or located) duringreasonable business hours and, without unreasonable hindrance or delay,(i) to inspect, audit, check and make copies of and extracts from theBorrower’s books, records, journals, orders, receipts and any correspondenceand other data relating to the Borrower’s business or to any transactionsbetween the parties thereto, (ii) to make such verification concerning theCollateral as the Lender may consider reasonable under the circumstances and (iii) todiscuss the affairs, finances and business of the Borrower with any officers,employees or directors of the Borrower.

##  

## **6.3          Conduct ofBusiness.**  Exceptas contemplated in this Agreement, the Borrower will (i) maintain itsexistence, (ii) continue in, and limit its operations to, the same generallines of business as that presently conducted by it or other businessesreasonably related thereto and (iii) comply with all laws, orders,regulations and ordinances of any federal, foreign, state or local governmentalauthority, except for such laws, orders, regulations and ordinances theviolation of which has no reasonable likelihood of having a Material AdverseEffect.

##  

# **7.****                                      EVENTS OF DEFAULT, RIGHTS AND REMEDIES OF LENDER.**

#  

## **7.1          Events of Default.**  If any one or more of the following events(“Events of Default”) occurs:

 

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###### **(A)         **the Borrower failsto pay any of the principal of or interest on the Loans, or any Commitment Feesor other amounts due hereunder, within 10 Business Days after such amounts aredue (whether by scheduled maturity, acceleration or otherwise);

######  

###### **(B)         **the Borrower failsor neglects to perform, keep or observe any of its covenants, conditions oragreements contained in this Agreement;

######  

###### **(C)         **any warranty orrepresentation now or hereafter made by the Borrower under this Agreement isuntrue or incorrect in any material respect when made;

######  

###### **(D)         **a proceeding underany bankruptcy, reorganization, arrangement of debt, insolvency, readjustmentof debt or receivership law or statute is filed by or against the Borrower, theBorrower makes an assignment for the benefit of creditors or the Borrower takesany requisite action to authorize any of the foregoing and, in the case of aninvoluntary proceeding filed against the Borrower, such proceeding is notdischarged or dismissed within 30 days;

######  

###### **(E)          **the Borrowervoluntarily or involuntarily dissolves or is dissolved;

######  

###### **(F)          **the Borrowerbecomes insolvent or fails generally to pay its debts as they become due;

######  

###### **(G)         **the Lender shallcease to have a valid, perfected security interest in all or any materialportion of the Collateral; or

######  

###### **(H)         **E.ON AG shall ceaseto own, directly or indirectly, at least 80% of the voting capital stock of theBorrower;

######  

then the Lender, upon notice to the Borrower, maydeclare the Loans to be immediately due and payable, whereupon the Loans willbecome immediately due and payable; *provided,* that if an Event of Defaultdescribed in Section 7.1(D) exists or occurs, the Loans shallautomatically, without notice of any kind, become immediately due and payable.

 

## **7.2          Rightsand Remedies Generally.** Subject to the subordination provisions of Section 8, upon theoccurrence and continuance of an Event of Default, the Lender has, in additionto any other rights and remedies contained in this Agreement, all of the rightsand remedies of a secured party under the Code or other applicable laws, all ofwhich rights and remedies are cumulative, and none exclusive, to the extentpermitted by law.  Any single or partialexercise by the Lender of any right or remedy for a default or breach of anyterm, covenant, condition or agreement in this Agreement does not affect itsrights and does not waive, alter, affect, or prejudice any other right orremedy to which the Lender may be lawfully entitled for the same default orbreach.

##  

## **7.3          Waiver ofDemand.**  Demand, presentment, protest and notice ofnonpayment are waived by the Borrower. The Borrower also waives the benefit of all valuation, appraisaland exemption laws.

 

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## **7.4          Marshalling;Payments Set Aside.**  The Lender is under no obligation tomarshall any assets in favor of the Borrower or any other party or against orin payment of any or all of the Liabilities. To the extent that the Borrower makes a payment or payments to theLender or the Lender enforces its security interests or exercises its rights ofsetoff, and such payment or payments or the proceeds of such enforcement orsetoff or any part thereof are subsequently invalidated, declared to befraudulent or preferential, set aside and/or required to be repaid to atrustee, receiver or any other party under any bankruptcy law, state or federallaw, common law or equitable cause, then to the extent of such recovery, theobligation or part thereof originally intended to be satisfied will be revivedand continue in full force and effect as if such payment had not been made orsuch enforcement or setoff had not occurred.

##  

# **8.****                                      SUBORDINATION**.

#  

## **8.1          Agreementto Subordinate**.

##  

###### **(A)          Terms of Subordination**.  The Lender and the Borrower agree that thelien granted by the Borrower hereunder to secure the Liabilities issubordinate, to the extent and in the manner set forth in this Agreement, tothe lien of the First Mortgage Bond Indenture and any and all of the bondsoutstanding from time to time thereunder (the “Senior Obligations”).  Notwithstanding the order or time ofcreation, acquisition, attachment, or the order, time, or manner of perfection,or the order or time of filing or recordation of any document or instrument, orother method of perfecting a security interest or Lien on and against any ofthe Collateral or other assets of the Borrower, the Lender agrees that any Lienor security interest now or hereafter existing in and to the Collateral infavor of the Lender shall be and at all times remain subject and subordinate inall respects to any Lien or security interest which may now or hereafter at anytime or from time to time be granted pursuant to the First Mortgage BondIndenture on or in any or all of the Collateral as security for the SeniorObligations.

######  

###### **(B)          Further Assurances**.  The Lender and the Borrower will, at theBorrower’s expense and at any time and from time to time, promptly execute anddeliver all further instruments and documents, and take all further action,that may be necessary, or that the Bond Trustee may reasonably request, inorder to protect any right or interest granted or purported to be granted bythis Agreement or to enable the Bond Trustee to exercise and enforce its rightsand remedies under this Agreement.

######  

## **8.2          Administrationof Collateral. **TheBond Trustee shall have complete and sole discretion in, and shall not beliable to the Lender for, determining how, when and in what manner the BondTrustee administers the Senior Obligations or forecloses or otherwise realizesupon the Collateral or exercises any rights or remedies of a secured party orlien creditor or any other rights with respect to the Collateral or otherwisetakes any action with respect thereto. Without in any way limiting the foregoing, the Lender specificallyacknowledges and agrees that the Bond Trustee may take such action as it deemsappropriate to enforce the Senior Obligations and its Lien on and securityinterest in the Collateral, whether or not such action is beneficial ordetrimental to the Lender’s interest. The Lender agrees that it shall not take any action to foreclose orotherwise realize upon the Collateral or exercise any rights or remedies of asecured party with respect to the Collateral, unless and until the SeniorObligations have been paid in full. Also without in any way limiting the foregoing, the Lender herebyexpressly waives and

 

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## releases any andall rights to have the Collateral or any part thereof marshaled upon anyforeclosure, sale or other realization thereon.  There shall be no obligation on the part of the Bond Trustee, atany time, to resort for payment of the Senior Obligations to any obligorthereon or any guarantor thereof, or to any other person or corporation, theirproperties or estates, or to resort to any other collateral or any other rightsor remedies whatsoever, and the Bond Trustee shall have the right to forecloseor otherwise realize upon the Collateral upon which it has a security interestirrespective of whether or not other proceedings or steps are pending seekingresort to or realization upon or from any of the foregoing.

##  

## **8.3          Delivery of Proceeds of Collateral. **So long as the SeniorObligations are outstanding, the Lender will without demand or request beingmade upon it deliver any parts or proceeds of the Collateral which shall comeinto its possession, control or custody to the Bond Trustee for application asset forth in the First Mortgage Bond Indenture.

##  

## **8.4          AgreementNot to Contest. **TheLender hereby agrees that it shall not contest the validity, perfection,priority or enforceability of any security interest or Lien granted to the BondTrustee pursuant to the First Mortgage Bond Indenture.

##  

## **8.5          Release ofCollateral. **TheLender agrees that in the event the Bond Trustee shall come into thepossession, custody and control of any property or assets of the Borrower asthe result of any security interest granted to secure the Senior Obligations,the Bond Trustee may, to the extent the Bond Trustee does not apply the same tothe payment or partial payment of the Senior Obligations, release the same toor upon the order of the Borrower, without notice, or accounting for the same,to the Lender or any other person, firm or corporation whomsoever, it beingspecifically understood and agreed that any property so released shall remainsubject to all claims of the Lender and the Bond Trustee thereto in accordanceherewith.  Without limiting theforegoing, the Lender acknowledges and agrees that the Bond Trustee may fromtime to time in its discretion release proceeds of the Collateral in which theBond Trustee has a security interest to the Borrower or otherwise deal with theCollateral in which the Bond Trustee has a security interest, without anynotice or accounting to the Lender whatsoever.

##  

## **8.6          Releaseof Security Interest. **TheLender agrees that, whether or not a default has occurred in payment of theLoans, its Lien on the Collateral or any portion thereof shall automatically bereleased ipso facto as to all indebtedness secured thereby owing to the Lenderif, when and to the same extent that the Bond Trustee releases its Lien on suchCollateral or portion thereof.  The Lenderfurther hereby agrees to execute and deliver such further instruments and dosuch further acts as the Borrower or the Bond Trustee may deem necessary orproper to carry out more effectively the foregoing.

##  

## **8.7          Obligations under this Agreement NotAffected. **Exceptas specifically described in this Agreement, nothing contained in thisAgreement or in any Note is intended to or impairs, as between the Borrower,its creditors other than the Bond Trustee and the Lender, the obligations ofthe Borrower, which are absolute and unconditional, to pay to the Lender theLiabilities as and when they become due and payable in accordance with theterms of this Agreement, subject, however, to the terms of this Section 8.  Except as specifically described in thisAgreement, nothing contained in this Agreement or in any Note is intended to oraffects the relative rights of the Lender and creditors of the Borrower otherthan the Bond Trustee.

 

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## **8.8          Bankruptcy. **The Lender agrees that inthe event bankruptcy proceedings are instituted by or against the Borrower, theBond Trustee may consent to the use of cash collateral or provide postpetitionfinancing under section 364 of the United States Bankruptcy Code, 11 U.S.C. § 364,to the Borrower on such terms and conditions and in such amounts as the BondTrustee, in its sole discretion, may decide. The Lender waives any rights it may have under applicable law to objectto such use of such cash collateral or postpetition financing.

##  

## **8.9          ThirdParty Beneficiary**.  The Bond Trustee shall be a third partybeneficiary of this Section 8.

##  

# **9.****                                      MISCELLANEOUS**.

#  

## **9.1          Amendmentsand Waivers.**  Nomodification or waiver of, nor any consent to the departure by the Borrowerfrom, any provision of this Agreement will be effective unless it is in writingfrom the Lender and then such modification, waiver or consent will be effectiveonly on the specific instance and for the purpose for which it is given.

##  

## **9.2          Severability.** Wherever possible, each provision of this Agreement must be interpretedin such manner as to be effective and valid under applicable law, but if anyprovision of this Agreement is prohibited by or invalid under applicable law,such provision is ineffective only to the extent of such prohibition orinvalidity, without invalidating the remainder of such provisions or theremaining provisions of this Agreement.

##  

## **9.3          Notices.** Except as otherwise expressly provided in this Agreement, any noticerequired or desired to be served, given or delivered under this Agreement mustbe in writing and is deemed to have been validly served, given or delivered(i) three days after deposit in the United States mails, with properpostage prepaid, (ii) when sent after receipt of confirmation if sent bytelecopy or other similar facsimile transmission, (iii) one BusinessDay after deposit with a reputable overnight courier with all charges prepaidor (iv) when delivered, if hand delivered by messenger, all of which mustbe properly addressed to the party to be notified and sent to the address ornumber indicated on the signature page hereof or to such other address ornumber as each party designates to the other in the manner prescribed in this Section9.3.

##  

## **9.4          Counterparts.**  This Agreement and any amendment orsupplement to this Agreement or any waiver granted in connection with thisAgreement may be executed in any number of counterparts and by the differentparties on separate counterparts and each such counterpart is deemed to be anoriginal, but all such counterparts together constitute but one and the sameAgreement.

##  

## **9.5          PriorAgreements.**  The terms and conditions set forth in thisAgreement supersede all prior agreements, discussions, correspondence,memoranda and understandings (whether written or oral) of the Borrower and theLender concerning or relating to the subject matter of this Agreement.

##  

## **9.6          Successorsand Assigns.**  ThisAgreement is binding upon the Borrower and the Lender and their respectivesuccessors and assigns and inures to the benefit of the Borrower and theLender and their respective successors and permitted assigns.  The Borrower has no right to assign itsrights or delegate its duties under this Agreement, without the prior writtenconsent

 

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## of theLender.  The Lender has the right toassign to any Affiliate of the Lender all or a portion of its rights andobligations under this Agreement.  Uponany such assignment by the Lender, (i) the assignee becomes a party tothis Agreement and, to the extent of such assignment, has all rights andobligations of the Lender under this Agreement and (ii) the Lender will,to the extent of such assignment, relinquish its rights and be released fromits obligations under this Agreement. The Borrower and the Lender agree to execute and deliver such documents,and to take such other actions, as the other party may reasonably request toaccomplish the foregoing.

##  

## **9.7          CHOICE OF LAW.**  THIS AGREEMENT SHALL BE GOVERNED BY ANDCONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OFDELAWARE.

##  

*  * *  *  *

 

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IN WITNESSWHEREOF, the parties have executed this Agreement as of the day and year firstabove written.

 

 
|   | **KENTUCKY UTILITIES COMPANY** |
|--------|--------------------------------|
|   |                           |   |   |
|   | Address:                       | 1 Quality Street |   |
|   |                           | Lexington,  Kentucky 40507 |   |
|   |                           | Attn:   Treasurer |   |
|   | Facsimile:                     | 502-627-4742 |   |
|   |                           |   |   |
|   |                           |   |   |
|   | By:                            |   |   |
|   | Name:                          |   |   |
|   | Title:                         |   |   |
|   |                           |   |   |
|   |                           |   |   |
|   | **FIDELIA CORPORATION**        |
|   |                           |   |   |
|   | Address:                       | 300 Delaware  Avenue |   |
|   |                           | Wilmington,  Delaware 19801 |   |
|   |                           | Attn:   Executive  Vice President |   |
|   | Facsimile:                     | 302-417-5913 |   |
|   |                           |   |   |
|   |                           |   |   |
|   | By:                            |   |   |
|   | Name:                          |   |   |
|   | Title:                         |   |   |
|        |                                |  |  |  |  |  |

 

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**EXHIBIT A**

 

**FORM OF NOTE**

 
| $ | Date:                     |
|---|-------------------------------------------------------------------------------------------------------------------------------|

 

FOR VALUE RECEIVED, on _______________ “MaturityDate”) the undersigned, KENTUCKY UTILITIES COMPANY, a Kentucky and Virginiacorporation (the “Borrower”), unconditionally promises to pay to FIDELIACORPORATION (the “Lender”), at the Lender’s office at 300 DelawareAvenue, Wilmington, Delaware  19801, orat such other place as the holder of this Note may from time to time designatein writing, in lawful money of the United States of America and immediatelyavailable funds, the principal sum of $___________.  This Note is referred to in and was executed and delivered underthe Loan and Security Agreement dated as of August 15, 2003 (the “LoanAgreement”) between the Borrower and the Lender, to which reference is madefor a more complete statement of the terms and conditions under which the loanevidenced by this Note was made and is to be repaid.  Capitalized terms used in this Note and not otherwise definedhave the meanings assigned to such terms in the Loan Agreement.

 

Unless otherwise paid sooner under the provisions of Section2.6(c) or 7.1 of the Loan Agreement, the principal indebtednessrepresented by this Note is payable on the Maturity Date.  The Borrower further promises to payinterest on the outstanding principal amount of the indebtedness represented bythis Note from the date of this Note until payment in full at the applicable ratesdetermined in accordance with Section 2.3(A) of the Loan Agreement.  Except as otherwise provided in the LoanAgreement, interest is payable quarterly in arrears not later than the lastBusiness Day of each calendar quarter and is computed on the basis of a 360-dayyear consisting of twelve 30-day months.

 

If payment under this Note becomes due and payable ona Business Day, the due date of such payment is extended to the next succeedingBusiness Day.  In no contingency orevent whatsoever will interest charged under this Note, however such interestmay be characterized or computed, exceed the highest rate permissible under anylaw which a court of competent jurisdiction, in a final determination, deemsapplicable to this Note.  In the eventthat such a court determines that the Lender has received interest under thisNote in excess of the highest rate applicable to this Note, any such excessinterest collected by the Lender is deemed to have been a repayment ofprincipal and be so applied.

 

The obligations of the Borrower under this Note issecured by certain collateral as and to the extent set forth in the LoanAgreement.  This Note is subject toprepayment at the option of the Borrower as provided in the Loan Agreement.

 

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**DEMAND, PRESENTMENT, PROTEST AND NOTICE OF NONPAYMENT ANDPROTEST ARE WAIVED BY THE BORROWER.**

 

This Note has been delivered and is deemed to havebeen made, at Wilmington, Delaware and will be interpreted in accordance withthe internal law as (as opposed to conflicts of law provisions) and decisionsof the State of Delaware.  Wheneverpossible each provision of this Note will be interpreted in such manner as tobe effective and valid under applicable law, but if any provision of this Noteis prohibited by or invalid under applicable law, such provision will beineffective to the extent of such prohibition or invalidity, withoutinvalidating the remainder of such provision or the remaining provisions ofthis Note.  Whenever in this Notereference is made to the Lender or the Borrower, such reference is deemed toinclude, as applicable, a reference to their respective successors andassigns.  The provisions of this Noteare binding upon and inure to the benefit of said successors and assigns.  The Borrower’s successors and assignsinclude, without limitation, a receiver, trustee or debtor-in-possession of or for the Borrower.

 
|   | **KENTUCKY UTILITIES COMPANY** |   |
|--------|--------------------------------|--------|
|   |                           |   |
|   | By:                            |   |
|   |                           |   |   |
|   |                           | Title: |
|        |                                |        |  |  |

 

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**NOTE**

 
| $75,000,000.00 |   | Date:  August 15, 2003 |
|----------------|--------|-----------------------------|

 

FOR VALUE RECEIVED, on August 15, 2013 “MaturityDate”) the undersigned, KENTUCKY UTILITIES COMPANY, a Kentucky and Virginiacorporation (the “Borrower”), unconditionally promises to pay to FIDELIACORPORATION (the “Lender”), at the Lender’s office at 300 DelawareAvenue, Wilmington, Delaware  19801, orat such other place as the holder of this Note may from time to time designatein writing, in lawful money of the United States of America and immediately availablefunds, the principal sum of $75,000,000. This Note is referred to in and was executed and delivered under theLoan and Security Agreement dated as of August 15, 2003 (the “Loan Agreement”)between the Borrower and the Lender, to which reference is made for a morecomplete statement of the terms and conditions under which the loan evidencedby this Note was made and is to be repaid. Capitalized terms used in this Note and not otherwise defined have themeanings assigned to such terms in the Loan Agreement.

 

Unless otherwise paid sooner under the provisions of Section2.6(c) or 7.1 of the Loan Agreement, the principal indebtednessrepresented by this Note is payable on the Maturity Date.  The Borrower further promises to payinterest on the outstanding principal amount of the indebtedness represented bythis Note from the date of this Note until payment in full at the applicablerates determined in accordance with Section 2.3(A) of the LoanAgreement.  Except as otherwise providedin the Loan Agreement, interest is payable quarterly in arrears not later thanthe last Business Day of each calendar quarter and is computed on the basis ofa 360-day year consisting of twelve 30-day months.

 

If payment under this Note becomes due and payable ona Business Day, the due date of such payment is extended to the next succeedingBusiness Day.  In no contingency orevent whatsoever will interest charged under this Note, however such interestmay be characterized or computed, exceed the highest rate permissible under anylaw which a court of competent jurisdiction, in a final determination, deemsapplicable to this Note.  In the eventthat such a court determines that the Lender has received interest under thisNote in excess of the highest rate applicable to this Note, any such excessinterest collected by the Lender is deemed to have been a repayment ofprincipal and be so applied.

 

The obligations of the Borrower under this Note issecured by certain collateral as and to the extent set forth in the LoanAgreement.  This Note is subject toprepayment at the option of the Borrower as provided in the Loan Agreement.

 

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**DEMAND, PRESENTMENT, PROTEST AND NOTICE OF NONPAYMENT ANDPROTEST ARE WAIVED BY THE BORROWER.**

 

This Note has been delivered and is deemed to havebeen made, at Wilmington, Delaware and will be interpreted in accordance withthe internal law as (as opposed to conflicts of law provisions) and decisionsof the State of Delaware.  Wheneverpossible each provision of this Note will be interpreted in such manner as tobe effective and valid under applicable law, but if any provision of this Noteis prohibited by or invalid under applicable law, such provision will beineffective to the extent of such prohibition or invalidity, withoutinvalidating the remainder of such provision or the remaining provisions ofthis Note.  Whenever in this Notereference is made to the Lender or the Borrower, such reference is deemed toinclude, as applicable, a reference to their respective successors andassigns.  The provisions of this Noteare binding upon and inure to the benefit of said successors and assigns.  The Borrower’s successors and assignsinclude, without limitation, a receiver, trustee or debtor-in-possession of or for the Borrower.

 
|   | **KENTUCKY UTILITIES COMPANY** |
|--------|--------------------------------|
|   |                           |
|   | By:                            |   |   |

 

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