Document:

Exhibit 4.2

 

COUNTY
OF CARROLL, KENTUCKY

 

AND

 

KENTUCKY
UTILITIES COMPANY

 

A
Kentucky and Virginia Corporation

 

*   * 
*  *  *

 

LOAN
AGREEMENT IN CONNECTION 

WITH ENVIRONMENTAL FACILITIES

 

*   *  
*   *   *

 

Dated
as October 1, 2005

 

*   *  
*   *   *

 

NOTICE:        The interest of the County of Carroll,
Kentucky, in and to this Loan Agreement has been assigned to Deutsche Bank
Trust Company Americas, as Trustee, under the Indenture of Trust dated as of October 1,
2005

 

 

TABLE
OF CONTENTS

 

	
  ARTICLE I
  DEFINITIONS

  	
   

  
	
   

  	
   

  
	
   

  	
  SECTION 1.1.

  	
  USE OF
  DEFINED TERMS

  	
   

  
	
   

  	
  SECTION 1.2.

  	
  INCORPORATION
  OF CERTAIN TERMS BY REFERENCE

  	
   

  
	
   

  	
  SECTION 1.3.

  	
  ADDITIONAL
  DEFINITIONS

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 2.1.

  	
  REPRESENTATIONS,
  WARRANTIES AND COVENANTS BY ISSUER

  	
   

  
	
   

  	
  SECTION 2.2.

  	
  REPRESENTATIONS,
  WARRANTIES AND COVENANTS BY COMPANY

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III COMPLETION AND OWNERSHIP OF PROJECT

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 3.1.

  	
  COMPLETION
  AND EQUIPPING OF PROJECT

  	
   

  
	
   

  	
  SECTION 3.2.

  	
  ESTABLISHMENT
  OF COMPLETION DATE

  	
   

  
	
   

  	
  SECTION 3.3.

  	
  AGREEMENT
  AS TO OWNERSHIP OF PROJECT

  	
   

  
	
   

  	
  SECTION 3.4.

  	
  USE OF
  PROJECT

  	
   

  
	
   

  	
  SECTION 3.5.

  	
  FINANCING
  OF ADDITIONAL SOLID WASTE DISPOSAL FACILITIES

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IV ISSUANCE OF 2005 SERIES B BONDS; APPLICATION OF
  PROCEEDS; COMPANY TO ISSUE FIRST MORTGAGE BONDS

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 4.1.

  	
  AGREEMENT
  TO ISSUE 2005 SERIES B BONDS; APPLICATION OF 2005 SERIES B BOND PROCEEDS

  	
   

  
	
   

  	
  SECTION 4.2.

  	
  DISBURSEMENTS
  FROM CONSTRUCTION FUND

  	
   

  
	
   

  	
  SECTION 4.3.

  	
  FURNISHING
  DOCUMENTS TO THE TRUSTEE

  	
   

  
	
   

  	
  SECTION 4.4.

  	
  COMPANY
  REQUIRED TO PAY IN EVENT CONSTRUCTION FUND INSUFFICIENT

  	
   

  
	
   

  	
  SECTION 4.5.

  	
  INVESTMENT
  OF CONSTRUCTION FUND, BOND FUND AND REBATE FUND MONEYS

  	
   

  
	
   

  	
  SECTION 4.6.

  	
  SPECIAL
  ARBITRAGE CERTIFICATIONS

  	
   

  
	
   

  	
  SECTION 4.7.

  	
  OPINION OF
  BOND COUNSEL

  	
   

  
	
   

  	
  SECTION 4.8.

  	
  FIRST
  MORTGAGE BONDS

  	
   

  
	
   

  	
  SECTION 4.9.

  	
  CONSTRUCTION
  FUND PLEDGED AS FURTHER SECURITY

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE V PROVISIONS FOR PAYMENT

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 5.1.

  	
  LOAN
  PAYMENTS AND OTHER AMOUNTS PAYABLE

  	
   

  
	
   

  	
  SECTION 5.2.

  	
  PAYMENTS
  ASSIGNED

  	
   

  
	
   

  	
  SECTION 5.3.

  	
  TAXES AND
  OTHER GOVERNMENTAL CHARGES

  	
   

  
	
   

  	
  SECTION 5.4.

  	
  OBLIGATIONS
  OF COMPANY UNCONDITIONAL

  	
   

  
	
   

  	
  SECTION 5.5.

  	
  REBATE
  FUND

  	
   

  
	
   

  	
  SECTION 5.6.

  	
  REDEMPTION
  OF THE 2005 SERIES B BONDS IN ADVANCE OF SCHEDULED MATURITY

  	
   

  
	
   

  	
  SECTION 5.7.

  	
  CANCELLATION
  OF 2005 SERIES B BONDS

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VI MAINTENANCE; DAMAGE, DESTRUCTION AND CONDEMNATION;
  USE OF NET PROCEEDS; INSURANCE

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 6.1.

  	
  MAINTENANCE

  	
   

  
	
   

  	
  SECTION 6.2.

  	
  INSURANCE

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VII SPECIAL COVENANTS

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 7.1.

  	
  NO
  WARRANTY OF CONDITION OR SUITABILITY BY ISSUER

  	
   

  
	
   

  	
  SECTION 7.2.

  	
  COMPANY TO
  MAINTAIN ITS CORPORATE EXISTENCE; CONDITIONS UNDER WHICH EXCEPTIONS PERMITTED

  	
   

  
	
   

  	
  SECTION 7.3.

  	
  FINANCIAL
  STATEMENTS

  	
   

  
	
   

  	
  SECTION 7.4.

  	
  FURTHER
  ASSURANCES AND CORRECTIVE INSTRUMENTS

  	
   

  
	
   

  	
  SECTION 7.5.

  	
  ISSUER
  REPRESENTATIVE

  	
   

  
	
   

  	
  SECTION 7.6.

  	
  COMPANY
  REPRESENTATIVE

  	
   

  
	
   

  	
  SECTION 7.7.

  	
  FINANCING
  STATEMENTS

  	
   

  
	
   

  	
  SECTION 7.8.

  	
  COMPANY’S
  PERFORMANCE UNDER INDENTURE

  	
   

  
	
   

  	
  SECTION 7.9.

  	
  NEGATIVE
  PLEDGE

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VIII ASSIGNMENT; INDEMNIFICATION; REDEMPTION

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 8.1.

  	
  ASSIGNMENT

  	
   

  

 

i

 

	
   

  	
  SECTION 8.2.

  	
  RELEASE
  AND INDEMNIFICATION COVENANTS

  	
   

  
	
   

  	
  SECTION 8.3.

  	
  ASSIGNMENT OF INTEREST IN AGREEMENT BY ISSUER

  	
   

  
	
   

  	
  SECTION 8.4.

  	
  REDEMPTION OF 2005 SERIES B BONDS

  	
   

  
	
   

  	
  SECTION 8.5.

  	
  REFERENCE TO 2005 SERIES B BONDS INEFFECTIVE AFTER 2005 SERIES B
  BONDS PAID

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IX EVENTS OF DEFAULT AND
  REMEDIES

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 9.1.

  	
  EVENTS OF DEFAULT DEFINED

  	
   

  
	
   

  	
  SECTION 9.2.

  	
  REMEDIES ON DEFAULT

  	
   

  
	
   

  	
  SECTION 9.3.

  	
  NO REMEDY EXCLUSIVE

  	
   

  
	
   

  	
  SECTION 9.4.

  	
  AGREEMENT TO PAY REASONABLE ATTORNEYS’ FEES
  AND EXPENSES

  	
   

  
	
   

  	
  SECTION 9.5.

  	
  WAIVER OF EVENTS OF DEFAULT

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE X PREPAYMENT OF LOAN

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 10.1.

  	
  OPTIONS TO PREPAY LOAN

  	
   

  
	
   

  	
  SECTION 10.2.

  	
  ADDITIONAL OPTION TO PREPAY LOAN

  	
   

  
	
   

  	
  SECTION 10.3.

  	
  OBLIGATIONS TO PREPAY LOAN

  	
   

  
	
   

  	
  SECTION 10.4.

  	
  NOTICE OF PREPAYMENT; REDEMPTION PROCEDURES

  	
   

  
	
   

  	
  SECTION 10.5.

  	
  RELATIVE POSITION OF THIS ARTICLE AND
  INDENTURE

  	
   

  
	
   

  	
  SECTION 10.6.

  	
  CONCURRENT DISCHARGE OF FIRST MORTGAGE
  BONDS

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE XI MISCELLANEOUS

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 11.1.

  	
  TERM OF AGREEMENT

  	
   

  
	
   

  	
  SECTION 11.2.

  	
  NOTICES

  	
   

  
	
   

  	
  SECTION 11.3.

  	
  BINDING EFFECT; BOND COUNSEL OPINIONS

  	
   

  
	
   

  	
  SECTION 11.4.

  	
  SEVERABILITY

  	
   

  
	
   

  	
  SECTION 11.5.

  	
  AMOUNTS REMAINING IN CONSTRUCTION FUND,
  BOND FUND AND REBATE FUND

  	
   

  
	
   

  	
  SECTION 11.6.

  	
  AMENDMENTS, CHANGES AND MODIFICATIONS

  	
   

  
	
   

  	
  SECTION 11.7.

  	
  EXECUTION IN COUNTERPARTS

  	
   

  
	
   

  	
  SECTION 11.8.

  	
  APPLICABLE LAW

  	
   

  
	
   

  	
  SECTION 11.9.

  	
  CAPTIONS

  	
   

  
	
   

  	
  SECTION 11.10.

  	
  NO PECUNIARY LIABILITY OF ISSUER

  	
   

  
	
   

  	
  SECTION 11.11.

  	
  PAYMENTS DUE ON OTHER THAN BUSINESS DAYS

  	
   

  

 

 

	
   

  	
  EXHIBIT A - DESCRIPTION OF PROJECT

  

 

ii

 

LOAN AGREEMENT IN CONNECTION 

WITH ENVIRONMENTAL FACILITIES

 

 This
LOAN AGREEMENT, dated as of October 1, 2005, by and between the COUNTY
OF CARROLL, KENTUCKY, a public body corporate and politic duly created and
existing as a County and political subdivision under the Constitution and laws
of the Commonwealth of Kentucky, and KENTUCKY UTILITIES COMPANY, a
corporation organized and existing under the laws of Kentucky and Virginia;

 

W I  T  N  E  S
S  E  T  H:

 

WHEREAS, the
County of Carroll, Kentucky is a public body corporate and politic duly created
and existing as a county and political subdivision under the Constitution and
laws of the Commonwealth of Kentucky (“Issuer”), and pursuant to the provisions
of Sections 103.200 to 103.285, inclusive, of the Kentucky Revised Statutes (“Act”),
Issuer has the power to enter into the transactions contemplated by this Loan
Agreement and to carry out its obligations hereunder; and

 

WHEREAS, Issuer
is authorized pursuant to the Act to issue negotiable bonds and lend the
proceeds from the sale of such bonds to a utility company to finance and
refinance the acquisition of solid waste disposal facilities, one of the
categories of “pollution control facilities,” as defined by the Act for the
collection, storage, treatment, processing and final disposal of solid wastes;
and

 

WHEREAS,
Issuer is further authorized pursuant to the Act to enter into a loan
agreement, which may include such provisions as Issuer shall deem appropriate
to effect the securing of a financing or refinancing undertaken in respect of
solid waste disposal facilities, including the pledge of direct securities of a
utility company; and

 

WHEREAS, the
Act further provides that title to solid waste disposal facilities shall not be
acquired by Issuer in the case of a loan transaction; and

 

WHEREAS,
Kentucky Utilities Company, a Kentucky and Virginia corporation (“Company”), is
desirous of financing the qualified costs of acquisition, construction,
installation and equipping of certain solid waste disposal facilities to serve
the Ghent Generating Station of Company, which facilities constitute the
Project, as defined in the Indenture and as described in Exhibit A
hereto (the “Project”), which Project is located within the corporate
boundaries of Issuer and consists of certain solid waste disposal facilities
and which Project qualifies for financing within the meaning of the Act; and

 

WHEREAS, the
Project is described and has been previously approved for tax-exempt bond
financing in a preliminary resolution adopted by the Fiscal Court of Issuer on February 22,
2005; and

 

WHEREAS,
pursuant to and in accordance with the provisions of the Act, a Memorandum of
Agreement between the Issuer and Company dated February 22, 2005 and an 

 

1

 

Ordinance duly adopted by the Fiscal Court of Issuer on October 11,
2005, and in furtherance of the purposes of the Act, Issuer proposes to issue,
sell and deliver a series of its bonds in fully registered form which will be
designated “County of Carroll, Kentucky, Environmental Facilities Revenue
Bonds, 2005 Series B (Kentucky Utilities Company Project)” (the “2005 Series B
Bonds”), the proceeds of which will be lent to Company to finance the
acquisition, construction, installation and equipping of the Project; and

 

WHEREAS, the Project
will provide for the collection, storage, treatment, processing and final disposal
of solid wastes in the Commonwealth of Kentucky; and

 

WHEREAS, the 2005
Series B Bonds are to be issued under and pursuant to and are secured by
an Indenture of Trust by and between Issuer and Deutsche Bank Trust Company
Americas, as trustee thereunder, dated as of October 1, 2005 (the “Indenture”);
and

 

WHEREAS, Issuer
proposes to lend to Company and Company desires to borrow from Issuer the
proceeds from the sale of the 2005 Series B Bonds to finance the
acquisition, construction, installation and equipping of the Project;

 

NOW, THEREFORE FOR AND IN CONSIDERATION OF THE PREMISES AND THE MUTUAL
COVENANTS AND AGREEMENTS HEREINAFTER CONTAINED, THE PARTIES HERETO AGREE EACH
WITH THE OTHER, AS FOLLOWS:

 

ARTICLE I

DEFINITIONS

 

Section 1.1.            Use of Defined Terms.  In
addition to the words and terms defined elsewhere in this Agreement or in the
Indenture or by reference to another document, the words and terms set forth in
Section 1.2  and Section 1.3 shall have the meanings
set forth therein unless the context or use clearly indicates another meaning
or intent.  Such definitions shall be
equally applicable to both the singular and plural forms of any of the words
and terms defined therein.

 

Section 1.2.            Incorporation
of Certain Terms by Reference.  When
and if used in this Agreement, the following terms shall have the meaning set
forth in ARTICLE I of the Indenture:

 

“Act”

“Agreement”

“Authorized Denomination”

“Bond Counsel”

“Bond Insurer”

“Bond Fund”

“Bond Year”

“Business Day”

“Code”

“Company”

“Company Bonds”

“Company Representative”

“Construction Fund”

 

2

 

“Cost of Construction”

“Cumulative Excess Earnings”

“Excess Earnings”

“First Mortgage Bonds”

“First Mortgage Indenture”

“First Mortgage Trustee”

“Governmental Obligations”

“Indenture”

“Interest Payment Date”

“Issuer”

“Issuer Representative”

“Loan”

“Net Proceeds”

“No Auction Rate”

“Paying Agent”

“Permitted Investments”

“Plans and Specifications”

“Pollution Control Facilities”

“Prevailing Rating”

“Project”

“Project Site”

“Purchase Date”

“Purchase Fund”

“Rating Service”

“Rebate Fund”

“Redemption Date”

“Redemption Demand”

“Release Date”

“2005 Series B Bonds”

“Solid Waste Disposal Facilities”

“Supplemental Indenture”

“Tender Agent”

“Thirty-Day ‘AA’ Composite Commercial Paper Rate”

“Trustee”

 

Section 1.3.            Additional Definitions.  In
addition to the terms whose definitions are incorporated by reference herein
pursuant to Section 1.2, the following terms shall have the
meanings set forth in this Section unless the use or context clearly
indicates otherwise:

 

“Capitalization”
means the total of all the following items appearing on, or included in, the
balance sheet of the Company:

 

(1)           liabilities for
indebtedness, including short-term debt, long-term debt and current maturities
of long-term debt; and

 

3

 

(2)           common stock, preferred
stock, capital surplus, premium on capital stock, capital in excess of par
value and retained earnings (however the foregoing may be designated), less to
the extent not otherwise deducted, the cost of shares of capital stock of the
Company held in its treasury.

 

Capitalization
shall be determined in accordance with generally accepted accounting principles
and practices applicable to the type of business in which the Company is
engaged and that are approved by the independent accountants regularly retained
by the Company, and shall be determined as of the date that is the end of the
most recent fiscal quarter prior to the happening of an event for which such
determination is being made.

 

“Completion
Date” means the date of completion of the construction of the Project, as
that date shall be certified as provided in Section 3.2 of this
Agreement.

 

“Debt”
shall mean any outstanding debt for money borrowed.

 

“Determination
of Taxability” shall have the meaning ascribed to such term in Section 10.3
of this Agreement.

 

“Net
Tangible Assets” means the amount shown as total assets on the balance
sheet of the Company, less the following:

 

(1)           intangible assets
including, but without limitation, such items as goodwill, trademarks, trade
names, patents and unamortized debt discount and expense carried as an asset on
said balance sheet; and

 

(2)           appropriate adjustments,
if any, on account of minority interests.

 

Net
Tangible Assets shall be determined in accordance with generally accepted
accounting principles and practices applicable to the type of business in which
the Company is engaged and that are approved by the independent accountants
regularly retained by the Company, and shall be determined as of the date that
is the end of the most recent fiscal quarter prior to the happening of an event
for which such determination is being made.

 

“Operating
Property” means (i) any interest in real property owned by the Company
and (ii) any asset owned by the Company that is depreciable in accordance
with generally accepted accounting principles.

 

In
addition to the definitions herein, terms used in this agreement and not
defined herein shall have the meanings ascribed to such terms in the Indenture.

 

The
words “hereof”, “herein”, “hereto”, “hereby” and “hereunder” refer to this
entire Agreement.  Unless otherwise
noted, all Section and Article references are to sections and
articles in this Agreement.

 

4

 

ARTICLE II

REPRESENTATIONS, WARRANTIES AND COVENANTS

 

Section 2.1.            Representations, Warranties and Covenants by
Issuer.  Issuer represents, warrants and covenants
that:

 

(a)           Issuer is a public body corporate and politic
duly created and existing as a county and de jure political subdivision under
the Constitution and laws of the Commonwealth of Kentucky and, pursuant to the
Act, Issuer has the power and duty to issue the 2005 Series B Bonds, to
enter into this Agreement and the Indenture and the transactions contemplated
hereby and to carry out its obligations hereunder and thereunder.  Issuer is not in default under or in
violation of the Constitution or any of the laws of the Commonwealth of
Kentucky relevant to the issuance of the 2005 Series B Bonds or the
consummation of the transactions contemplated hereby or in connection with such
issuance, and has been duly authorized to issue the 2005 Series B Bonds
and to execute and deliver this Agreement and the Indenture.  Issuer agrees that it will do or cause to be
done in timely manner all things necessary to preserve and keep in full force
and effect its existence, and to carry out the terms of this Agreement.

 

(b)           Issuer agrees to loan funds derived from the
sale of the 2005 Series B Bonds to Company to provide for the financing of
the construction, acquisition, installation and equipping of the Project, which
Project shall provide for solid wastes to be collected, stored, treated,
processed and disposed of at the Project Site.

 

(c)           To accomplish the foregoing, Issuer agrees to
issue $13,266,950 aggregate principal amount of its 2005 Series B Bonds
following the execution of this Agreement on such terms and conditions as are
set forth in the Indenture.  The proceeds
from the sale of the 2005 Series B Bonds shall be applied to finance the
Cost of Construction of the Project.

 

(d)           Issuer will cooperate with Company and take
all actions necessary for Company to comply with Section 2.2(n), (z)
and (aa) hereof and take other actions reasonably requested by Company in
furtherance of this Agreement.

 

(e)           Issuer has received its allocation from the
Commonwealth for the issuance of the 2005 Series B Bonds, as prescribed by
Section 146 of the Code.

 

(f)            The Project Site is located within the
boundaries of Issuer.

 

(g)           Each of Resolution No. 2005-0222 of the
Fiscal Court of the Issuer adopted February 22, 2005 in respect of
approval of the Project and its financing, the Memorandum of Agreement between
Issuer and Company, dated February 22, 2005, and Ordinance No. 2005-0913
of the Fiscal Court of the Issuer adopted on second reading on October 11,
2005 has been in continuous effect since the respective dates of adoption
thereof.

 

5

 

Section 2.2.            Representations, Warranties and Covenants by
Company.  Company represents, warrants and covenants
that:

 

(a)           Company (i) is a corporation duly
incorporated, validly existing and in good standing under the laws of the
Commonwealths of Kentucky and Virginia, (ii) is duly qualified, authorized
and licensed to transact business in each jurisdiction wherein failure to
qualify would have a material adverse effect on the conduct of its business and
(iii) is not in violation of any provision of its Articles of
Incorporation, its By-Laws or any laws of the Commonwealths of Kentucky and
Virginia relevant to the transactions contemplated hereby or in connection with
the issuance of the 2005 Series B Bonds.

 

(b)           Company has full and complete legal power and
authority to execute and deliver this Agreement, the Supplemental Indenture and
the First Mortgage Bonds to be issued pursuant thereto, and has by proper
corporate action duly authorized the execution and delivery of this Agreement,
the Supplemental Indenture and the First Mortgage Bonds.

 

(c)           The Project financed by application of the
proceeds of the 2005 Series B Bonds has been designed and will be constructed
to collect, store, treat, process and dispose of solid wastes at the Project
Site.  The Project was and is necessary
for the public health and welfare, and has been designed and will be
constructed solely for the purposes of solid waste collection, storage, treatment,
processing and final disposal of solid wastes, consisting of contaminated
gypsum sludge solid wastes created by operation of desulphurization facilities at
the Project Site.  The Project
constitutes solid waste disposal facilities and facilities functionally related
and subordinate to such facilities under Section 142(a)(6) of the
Code and the Act.

 

(d)           Not less than substantially all of the net proceeds
of the 2005 Series B Bonds (i.e., at least 95% of the net proceeds
thereof, including investment earnings thereon) will be applied and used to
finance the Cost of Construction of the Project, and all of such Solid Waste Disposal
Facilities consist either of land or of property of a character subject to the
allowance for depreciation provided in Section 167 of the Code.

 

(e)           The Company will not use or cause to be used
any of the funds provided by the Issuer hereunder (including the earnings on
any of such funds) in such a manner as to, or take or omit to take any action
with respect to the use of such funds which would, impair the exclusion of the
interest on any of the 2005 Series B Bonds from gross income for federal
income tax purposes.  Except for certain
environmental or building permits which will be required from time to time in
connection with the construction, occupation and use of the Project (which the
Company has no reason to believe will not be received in the ordinary course as
and when required), no consent, approval, authorization or other order of any
federal, state or local governmental authority (other than the Issuer), not
previously obtained or given is required in connection with the acquisition,
construction, installation or equipping of the Project or the consummation of
the transactions contemplated thereby.

 

(f)            The Project is of the type authorized and
permitted by the Act, and the Cost of Construction of the Project is not less
than $13,226,950.

 

6

 

(g)           No event of default, and no event of the type
described in clauses (a) through (e) of Section 9.1 hereof,  has occurred and is continuing and no
condition exists which, with the giving of notice or the lapse of time, or
both, would constitute an event of default or a default under any agreement or
instrument to which the Company is a party or by which the Company is or may be
bound or to which any of the property or assets of the Company is or may be
subject which would impair in any material respect its ability to carry out its
obligations under this Agreement, the Supplemental Indenture, the First
Mortgage Bonds or the transactions contemplated hereby or thereby.  Neither the execution and delivery of this
Agreement, the Supplemental Indenture, the First Mortgage Bonds, the
consummation of the transactions contemplated hereby or by the Indenture, nor
the fulfillment of or compliance with the terms and conditions hereof or
thereof conflicts with or results in a breach of the terms, conditions or
provisions of any corporate restriction or any agreement or instrument to which
Company is now a party or by which it is bound, or constitutes a default under
any of the foregoing, or results in the creation or imposition of any
prohibited lien, charge or encumbrance whatsoever upon any of the property or
assets of Company under the terms of any instrument or agreement.

 

(h)           Company intends to operate or cause the Project
to be operated as Solid Waste Disposal Facilities until all of the 2005 Series B
Bonds are paid and discharged.

 

(i)            No portion of the proceeds of 2005 Series B
Bonds will be invested at a yield in excess of the yield on the 2005 Series B
Bonds except (i) during any permitted temporary period provided by the
Code, (ii) proceeds of a reasonably required reserve or replacement fund
and (iii) as part of a minor portion of the proceeds of the 2005 Series B
Bonds, not in excess of the lesser of 5% of the proceeds of the 2005 Series B
Bonds or $100,000.  As used herein, “yield”
shall have the meaning assigned to it for purposes of Section 148 of the
Code and applicable tax regulations.

 

(j)            No part or component of the Project to be
financed with proceeds of the 2005 Series B Bonds was acquired,
constructed or installed by Company prior to February 22, 2005; and no
part of the proceeds of the 2005 Series B Bonds will be used by Company,
directly or indirectly, as working capital or to finance inventory.

 

(k)           At least 95% of the net proceeds of the 2005 Series B
Bonds (including investment earnings thereon) will be used to pay costs of the
Project incurred after the date which is 60 days prior to February 22,
2005; and the facilities constituting the Project constitute and will
constitute (i) land or property of a character subject to the allowance for
depreciation under Section 167 of the Code and (ii) Solid Waste
Disposal Facilities.

 

(l)            Company will cause no investment of 2005 Series B
Bond proceeds to be made and will make no other use of or omit to take any
action with respect to the proceeds of the 2005 Series B Bonds or any
funds reasonably expected to be used to pay the 2005 Series B Bonds which
will cause the 2005 Series B Bonds or any of them to be arbitrage bonds
within the meaning of Section 148 of the Code or would otherwise result in
the loss or impairment of the exclusion of the interest on such 2005 Series B
Bonds from gross income for federal income tax purposes.

 

7

 

(m)          The average maturity of the 2005 Series B
Bonds does not exceed one hundred twenty percent (120%) of the average
reasonably expected remaining economic life (as of the date of issuance of the 2005
Series B Bonds) of the Solid Waste Disposal Facilities.

 

(n)           Company will provide all information
requested by the Issuer necessary to evidence compliance with the requirements
of the Code, including the information in United States Internal Revenue
Service Form 8038 filed by Issuer with respect to the 2005 Series B
Bonds and the Solid Waste Disposal Facilities constituting the Project, and
such information will be true and correct in all material respects.

 

(o)           Within the meaning of Section 149 of the
Code, no portion of the payment of the principal or interest on the 2005 Series B
Bonds shall be guaranteed directly or indirectly by the United States or any
agency or instrumentality thereof.

 

(p)           The Project financed by the proceeds of the 2005
Series B Bonds will not have been placed in operation at substantially its
design level, pursuant to and within the meaning of Section 1.150-2(c)(2) of
the Treasury Regulations, more than 18 months prior to the date of the issuance
of the 2005 Series B Bonds.

 

(q)           For purposes of Section 147(c) of
the Code, the allocable cost of the land portion of the Project, if any, to be
financed with the proceeds of the 2005 Series B Bonds shall be less than
25% of the proceeds of the 2005 Series B Bonds, and none of the 2005 Series B
Bond proceeds shall be used to finance land to be used for farming.

 

(r)            Within the meaning of Section 147(e) of
the Code, no portion of the proceeds of the 2005 Series B Bonds shall be
used to provide any airplane, skybox or other private luxury box, any health
club facility, any facilities used primarily for gambling, or any store the
principal business of which is the sale of alcoholic beverages for consumption
off the premises.

 

(s)           The costs of the issuance of the 2005 Series B
Bonds paid from the proceeds of the 2005 Series B Bonds, if any, shall not
exceed 2% of the proceeds of the 2005 Series B Bonds to the public (less
accrued interest).

 

(t)            None of the proceeds of the 2005 Series B
Bonds will be used to acquire, construct or install any property or interest
therein unless the first use of such property shall be pursuant to such
acquisition, construction or installation.

 

(u)           No portion of the proceeds of the 2005 Series B
Bonds will be deposited to the account of any reserve or replacement fund.

 

(v)           Company shall not cause an amount less than
95% of the net proceeds, as defined in the Code and Treasury Regulations, of
the 2005 Series B Bonds (including all investment income therefrom) to be
expended for the Solid Waste Disposal Facilities constituting the Project to be
financed by the 2005 Series B Bonds and will direct the Trustee to make
payments and transfers of 2005 Series B Bond proceeds to the extent
necessary to satisfy such covenant.  In
furtherance of such covenant, moneys may not be withdrawn from the Construction
Fund until there has been filed with the Trustee prior to each drawing a written
requisition as required by Section 4.2 hereof.  For purposes of foregoing provisions of this
subsection (v) the portion of the 

 

8

 

proceeds used to finance the
costs of issuing the 2005 Series B Bonds, including underwriter’s discount
or underwriting compensation, is not considered used to provide Solid Waste
Disposal Facilities.

 

(w)          Except for Company or any “related person” or
group of “related persons”, no person has (i) guaranteed, arranged,
participated in, assisted with or paid any portion of the cost of the issuance
of, the 2005 Series B Bonds, or (ii) provided any property or any
franchise, trademark or trade name (within the meaning of Section 1253 of
the Code) which is to be used in connection with the solid waste disposal
facilities constituting the Project financed with the 2005 Series B Bonds.

 

(x)            Company reasonably expects that (i) all
of the spendable proceeds of the 2005 Series B Bonds will be used for the
governmental purpose of the issue within three years from date of issuance of
such 2005 Series B Bonds and (ii) none of the proceeds of such 2005 Series B
Bonds will be invested in nonpurpose obligations having a substantially
guaranteed yield for three years or more.

 

(y)           All of the depreciable properties which were
taken into account in determining the qualifying costs of the Project
constitute properties either (i) used for the collection, storage,
treatment, processing and final disposal of solid waste or (ii) facilities
which are functionally related and subordinate to the solid waste disposal facilities
constituting the Project.  All of such
functionally related and subordinate facilities are of a size and character
commensurate with the character and size of the solid waste disposal facilities
constituting the Project.

 

(z)            The Company will cause the Issuer to comply
in all respects with the requirements of Section 148 of the Code in
respect of the rebate of Excess Earnings with respect to the 2005 Series B
Bonds to the United States of America.

 

(aa)         Upon the date of issuance of the 2005 Series B
Bonds, the Company will have caused the Issuer to comply with the public
approval requirements of Section 147 of the Code and at or following the
issuance of the 2005 Series B Bonds the Company will cause the Issuer to
comply with the information reporting requirements of Section 149 of the
Code by the filing of Internal Revenue Service Form 8038 with the United
States Internal Revenue Service.

 

(bb)         All of the documents, instruments and written
information furnished by Company on behalf of Company to Issuer or Trustee in
connection with the issuance of the Bonds are true and correct in all material
respects as of the date of delivery thereof and did not, as of the date of
delivery thereof, omit or fail to state any material facts necessary to be
stated therein to make the information provided not misleading.

 

(cc)         The solid waste which is to be collected, stored,
treated, processed and disposed of by the Project is and will be useless,
unused and unwanted and constitute discarded solid waste materials which have
no market or other value at the place where it is located.  To the best knowledge of the Company, no
person is or would be willing to purchase such solid waste material in its
condition when disposed of in waste pits at any price.  Such solid waste, being sludge created by
sulphur dioxide removal facilities at the Ghent Generating Station of the 

 

9

 

Company will be disposed of
by placing such SO2 scrubber sludge into solid waste landfills, as required by
law.

 

(dd)         It is not anticipated, as of the date hereof,
that there will be created any “replacement proceeds”, within the meaning of Section 1.148-1(c) of
the Treasury Regulations, with respect to the 2005 Series B Bonds;
however, in the event that any such replacement proceeds are deemed to have
been created, such amounts will be invested in compliance with Section 148
of the Code.

 

(ee)         Company covenants to perform and observe all
provisions of the Indenture required to be performed or observed by it.

 

Company
need not comply with the covenants or representations in this Section if
and to the extent that Issuer and Company receive a written opinion of Bond
Counsel that such failure to comply will not affect adversely the exclusion of
interest on any of the 2005  Series A
Bonds from gross income for federal income tax purposes under Section 103(a) of
the Code.

 

ARTICLE III

COMPLETION AND OWNERSHIP OF PROJECT

 

Section 3.1.            Completion and Equipping of Project.  Company
represents that:

 

(a)           it will cause or has caused the Project to be
constructed as herein provided on the Project Site in accordance with the Plans
and Specifications as the same may be amended from time to time.

 

(b)           it will make, execute, acknowledge and
deliver any contracts, orders, receipts, writings and instructions with any
other persons, firms or corporations and in general do all things which may be
requisite or proper, all for acquiring, constructing, installing and equipping
the Project.

 

(c)           It will ask, demand, sue for, levy and use
its best efforts to recover and receive such sums of money, debts or other
demands whatsoever in connection with the Project, to which it may be entitled
under any contract, order, guaranty, warranty, writing or instruction in
connection with any of the foregoing, and it will enforce the provisions of any
contract, agreement, obligation, bond or other security in connection with the
Project.  Any amounts received in connection
with the foregoing, after deduction of expenses incurred in such recovery,
prior to the Completion Date and full disposition of the Construction Fund in
accordance with this Agreement and the Indenture, shall be paid into the
Construction Fund.

 

(d)           It will promptly commence and thereafter
diligently pursue and continue the acquisition, construction, installation and
equipping of the Project to completion and placement in service.

 

Section 3.2.            Establishment of Completion Date.  The
Completion Date of the Project shall be evidenced to the Trustee by a
certificate signed by Company Representative stating that, except for amounts
retained by the Trustee at the Company’s direction for any amount of the 

 

10

 

Cost
of Construction not then due and payable or the liability for payment of which
is being contested or disputed by Company, (i) construction of the Project
has been completed in accordance with the Plans and Specifications and all
labor, services, materials and supplies used in such construction, installation
and equipping have been paid for, (ii) all other facilities necessary in
connection with the Project have been acquired, constructed, installed and
equipped in accordance with the Plans and Specifications and all costs and
expenses incurred in connection therewith have been paid, and (iii) to the
best of Company’s knowledge and belief and based upon reasonable inquiry, the
Project is suitable and sufficient for its intended purposes.  Notwithstanding the foregoing, such
certificate shall state that it is given without prejudice to any rights
against third parties which exist at the date of such certificate or which may
subsequently come into being.  Upon
receipt of such certificate, the Trustee shall retain in the Construction Fund
a sum (specified in writing to it by Company) equal to the amounts necessary
for payment of any portion of the Cost of Construction of the Project not then
due and payable or the liability for payment of which is being contested or
disputed by Company.  The remaining
amounts in the Construction Fund shall be applied by the Trustee as provided in
Section 6.06 of the Indenture.

 

Section 3.3.            Agreement as to Ownership of Project. Issuer and Company agree that title to and
ownership of the Project shall remain in and be the sole property of Company in
which Issuer shall have no interest.  The
Project is acknowledged to be subject to the lien of the First Mortgage
Indenture.  Notwithstanding any other
provision hereof, the Company shall be permitted to sell or otherwise dispose
of all or any portion of the Project, provided that the Company first receives
the opinion of Bond Counsel that such sale or disposition shall not adversely
affect the exclusion of the interest on the 2005 Series B Bonds from gross
income for federal income tax purposes and provided further that in the event
of any assignment, in whole or in part, of this Agreement, such assignment
shall be in accordance with Section 8.1 hereof.

 

Section 3.4.            Use of Project. 
Issuer does hereby covenant and agree that it will not take any action
during the term of this Agreement, other than pursuant to ARTICLE IX
of this Agreement or ARTICLE IX of the Indenture, to interfere with
Company’s ownership of the Project or to prevent Company from having
possession, custody, use and enjoyment of the Project.

 

Section 3.5.            Financing of Additional Solid Waste Disposal
Facilities.  Company and Issuer hereby recognize that
additional Solid Waste Disposal Facilities at the Project Site (other than
those Solid Waste Disposal Facilities which constitute the Project) have in the
past been and may in the future be acquired, constructed, installed and
equipped at the Project Site, and that same may be financed with proceeds of
one or more series of Issuer’s solid waste disposal facility revenue bonds
issued in addition to the 2005 Series B Bonds issued pursuant to the
Indenture, to the extent permitted by law.

 

11

 

ARTICLE IV

ISSUANCE OF 2005 SERIES B BONDS; APPLICATION OF PROCEEDS; 

COMPANY TO ISSUE FIRST MORTGAGE BONDS

 

Section 4.1.            Agreement to Issue 2005 Series B Bonds;
Application of 2005 Series B Bond Proceeds.  In
order to provide funds to make the Loan, Issuer will issue, sell and deliver
the 2005 Series B Bonds to the initial purchasers thereof and deposit the
proceeds thereof with Trustee, as follows:

 

(a)           Into the Bond Fund, a sum equal to the
accrued interest, if any, to be paid by the initial purchasers of the 2005 Series B
Bonds.

 

(b)           Into the Construction Fund, the balance of
the proceeds of the 2005 Series B Bonds for application as provided in the
Indenture.

 

Section 4.2.            Disbursements from Construction Fund.  The
Issuer has, in the Indenture, authorized and directed Trustee to make payments
from the Construction Fund to pay the Cost of Construction or to reimburse
Company for any amount of the Cost of Construction paid or incurred by it.  Except for requisitions for costs of issuance
of the 2005 Series B Bonds (which costs shall not be considered to be
qualifying), requisitions made in the form and manner described below shall be
made initially exclusively for expenditures which qualify as solid waste
disposal facilities and none, except for the requisitions for such costs of
issuance, shall be made for expenditures which do not so qualify until such
time as the ratio of qualifying expenditures to nonqualifying expenditures can
be maintained at not less than 95% qualifying to 5% nonqualifying.  Notwithstanding the foregoing exception for
costs of issuance of the 2005 Series B Bonds, amounts requisitioned for
such purposes shall not exceed two percent (2%) of the proceeds of the 2005 Series B
Bonds and shall be considered part of the 5% nonqualifying portion.  Payments for Cost of Construction shall be
made upon receipt in the case of every disbursement of a requisition signed by
the Company Representative stating with respect to each payment to be made: (i) the
requisition number, (ii) the name and address of the person, firm or
corporation to whom payment has been made or is due, (iii) the amount paid
or to be paid, (iv) that each obligation mentioned therein has been
properly incurred, is a proper charge against the Construction Fund, is unpaid
or unreimbursed, and has not been the basis of any previous withdrawal, and (v) that
either (a) the expenditures qualify exclusively as Solid Waste Disposal
Facilities or (b) the 95%-5% ratio as required above has been satisfied
and the payment of the amount shown in such requisition will not result in less
than 95% of the proceeds of the 2005 Series B Bonds expended at such time
being used for the acquisition, construction or installation of Solid Waste
Disposal Facilities.

 

Section 4.3.            Furnishing Documents to the Trustee. 
Company agrees to cause such requisitions to be directed to the Trustee
as may be necessary to effect payments out of the Construction Fund in
accordance with Section 4.2 hereof.

 

Section 4.4.            Company Required to Pay in Event Construction
Fund Insufficient.  In the event the moneys in the Construction
Fund available for payment of the Cost of Construction should not be sufficient
to pay such Cost of Construction in full, Company agrees to pay such 

 

12

 

portion
of the Cost of Construction in excess of the moneys available therefor in the
Construction Fund.  Issuer does not make
any warranty, either express or implied, that the moneys paid into the
Construction Fund and available for payment of the Cost of Construction will be
sufficient to pay all of such Cost of Construction.  Company agrees that if, after exhaustion of
such moneys in the Construction Fund, Company should directly pay any portion
of the Cost of Construction pursuant to the provisions of this Section, it
shall not be entitled to any diminution or abatement of the amounts payable
under Section 5.1 hereof.

 

Section 4.5.            Investment of Construction Fund, Bond Fund
and Rebate Fund Moneys.  Subject to the provisions of Section 148
of the Code, any moneys held as a part of the Construction Fund, Bond Fund or
the Rebate Fund, shall be invested or reinvested by Trustee, at the written
request of and as specifically directed by Company, in one or more of the
Permitted Investments.  The Trustee may
make any and all such investments through its own investment department.

 

Any
such investments shall be held by or under the control of Trustee.  All moneys invested shall be deemed at all
times a part of the fund for which such investments were made.  The interest accruing thereon and any profit
realized from such investments shall be credited pro rata to such fund, and any
loss resulting from such investments shall be charged pro rata to such
fund.  Trustee shall sell and reduce to
cash a sufficient amount of applicable investments whenever the cash balance in
the Construction Fund or Bond Fund is insufficient to pay the principal of,
premium, if any, and interest on the 2005 Series B Bonds or any other
amount payable from the Bond Fund when due or upon any required disbursement
from the Rebate Fund, respectively.  The
Trustee will not be liable for any investment loss (including any loss upon a
sale of any investment) or any fee, tax or other charge in respect of any
investments, reinvestments or any liquidation of investments made pursuant to
this Agreement or the Indenture.  The
Rebate Fund shall never be commingled with any other fund or account.

 

Section 4.6.            Special Arbitrage Certifications.

 

(a)           Company covenants and agrees that it will not
take or authorize or permit any action to be taken and has not taken or
authorized or permitted any action to be taken which results or would result in
interest paid on any of the 2005 Series B Bonds being included in gross
income of any owner thereof for purposes of federal income taxation (other than
an owner who is a “substantial user” of the Project or a “related person”
within the meaning of Section 147(a) of the Code) or adversely
affects the validity of the 2005 Series B Bonds.

 

(b)           Company warrants, represents and certifies to
Issuer that the proceeds of the 2005 Series B Bonds will not be used in
any manner that would cause the 2005 Series B Bonds to be “arbitrage bonds”
under Sections 103(b)(2) and 148 and other applicable sections of the
Code.  To the best knowledge and belief
of Company, there are no facts, estimates or circumstances that would
materially change the foregoing conclusion.

 

(c)           Company hereby covenants that it will at all
times comply and cause Issuer to comply with the provisions of Section 148
and other applicable sections of the Code and will restrict the use of the
proceeds of the 2005 Series B Bonds, in such manner and to such extent, if
any, as may be necessary, and remit Excess Earnings with respect to all of the 2005
Series B 

 

13

 

Bonds, if any, to the United
States of America pursuant to Section 148(f)(2) of the Code and carry
out such actions so that the 2005 Series B Bonds will not constitute “arbitrage
bonds” under Sections 103(b)(2) and 148 of the Code.  An officer or officers of Issuer having
responsibility with respect to the issuance of the 2005 Series B Bonds is
or are hereby authorized and directed to give an appropriate certificate of
Issuer, for inclusion in the transcript of proceedings for the 2005 Series B
Bonds, setting forth the reasonable expectations of Issuer regarding the amount
and use of the proceeds of the 2005 Series B Bonds and the facts,
estimates and circumstances on which they are based and related matters, all as
of the date of delivery of and payment for the 2005 Series B Bonds pursuant
to said Section 148 of the Code. 
Company shall provide the Issuer, and Issuer’s certificate may be
expressly based on, a certificate of Company setting forth the facts, estimates
and circumstances and reasonable expectations of Company on the date of
delivery of and payment for the 2005 Series B Bonds regarding the amount
and use of the proceeds of the 2005 Series B Bonds and related
matters.  In the event any such
representation of Company relied upon by the Issuer is untrue or inaccurate and
Issuer thereby suffers costs or damages, Company shall indemnify Issuer for any
such costs or damages.

 

(d)           Consistent with the foregoing, Company
covenants and certifies to the Issuer and to and for the benefit of the
purchasers of the 2005 Series B Bonds, that no use will be made of the
proceeds of the sale of the 2005 Series B Bonds which would cause the 2005
Series B Bonds to be classified as “arbitrage bonds” within the meaning of
Sections 103(b)(2) and 148 of the Code and that Company and Issuer will,
after issuance of the 2005 Series B Bonds, comply with the provisions of
the Code at all times, including after the 2005 Series B Bonds are
discharged, to the extent Excess Earnings with respect to the 2005 Series B
Bonds are required to be rebated to the United States of America pursuant to Section 148(f)(2) of
the Code.  Pursuant to such covenant,
Issuer and Company obligate themselves throughout the term of this Agreement
and thereafter not to violate the requirements of Section 148 of the Code.

 

(e)           Company warrants, represents and certifies to
Issuer that the proceeds of the 2005 Series B Bonds will be applied and
invested in compliance with the current requirements of Section 149(g) of
the Code and that consequently the 2005 Series B Bonds will not be “hedge
bonds” under such Section 149(g) of the Code.

 

(f)            Company hereby covenants and agrees that it
will at all times comply with the provisions of Section 148, including Section 148(f) of
the Code and with Section 6.07 of the Indenture.  Specifically, Company shall carry out, do and
perform all acts stipulated to be performed by Company pursuant to such Section 6.07
of the Indenture.  Company shall further
undertake to assure and cause rebate payments to be calculated and made to the
United States of America in accordance with Section 148(f)(2) of the
Code from moneys on deposit in the Rebate Fund from time to time after the end
of each Computation Period, as defined in the Indenture, and following
discharge of the 2005 Series B Bonds. 
Company also covenants to take all necessary acts and steps as required
to cause Issuer to comply with the provisions of Sections 7.02 and 7.03
of the Indenture.

 

Section 4.7.            Opinion of Bond Counsel. 
Company need not comply with the covenants or representations in Section 4.6
if and to the extent that Issuer and Company (with a copy to Trustee) receive a
written opinion of Bond Counsel that such failure to comply will not affect 

 

14

 

adversely
the exclusion of interest on any of the 2005 Series B Bonds from gross
income for federal income tax purposes under Section 103(a) of the
Code.

 

Section 4.8.            First Mortgage Bonds. 
Company covenants and agrees with Issuer that it will, for the purpose
of providing security for the 2005 Series B Bonds, execute and deliver on
the date of issuance of the 2005 Series B Bonds, the First Mortgage Bonds
to Trustee in aggregate principal amount not less than the aggregate principal
amount of the 2005 Series B Bonds. 
The First Mortgage Bonds shall mature as to principal identically as in
the case of the 2005 Series B Bonds and, upon the giving of a Redemption
Demand to the First Mortgage Trustee and completion of other conditions
precedent set forth in the Supplemental Indenture, shall bear interest
identically as in the case of the 2005 Series B Bonds.

 

Prior
to the Release Date, in the event of a default under ARTICLE IX of
this Agreement or in the event of a default in payment of the principal of,
premium, if any, or interest on the 2005 Series B Bonds as and when the
same come due, whether at maturity, by purchase, redemption, acceleration or
otherwise, and upon receipt by First Mortgage Trustee of a Redemption Demand
from Trustee, the First Mortgage Bonds shall bear interest, and principal and interest
thereon will be payable in accordance with the provisions specified in the
Supplemental Indenture at the rate of interest of the 2005 Series B Bonds
and principal and interest thereon will be payable at the same time and in the
same manner in which such amounts are payable with respect to the 2005 Series B
Bonds, whether on schedule, at maturity, by redemption, by acceleration or
otherwise.

 

Upon
payment of the principal of, premium, if any, and interest on any of the 2005 Series B
Bonds, whether at maturity or prior to maturity by redemption or otherwise, and
the surrender thereof to, and cancellation thereof by, Trustee, or upon
provision for the payment thereof having been made in accordance with the
provisions of ARTICLE VIII of the Indenture, First Mortgage Bonds
in an amount equal to the aggregate principal amount of the 2005 Series B
Bonds so surrendered and cancelled or for the payment of which provision has
been made shall be deemed fully paid and the obligations of Company thereunder
terminated and such First Mortgage Bonds shall be surrendered by Trustee to the
First Mortgage Trustee, and shall be cancelled by the First Mortgage
Trustee.  All of the First Mortgage Bonds
shall be registered in the name of Trustee and shall be non-transferable,
except to effect transfers to any successor trustee under the Indenture.

 

Notwithstanding
anything in this Agreement to the contrary, from and after the Release Date,
the obligation of the Company to make payment with respect to the principal of
and premium, if any, and interest on the First Mortgage Bonds shall be deemed
satisfied and discharged as provided in the Supplemental Indenture and the
First Mortgage Bonds shall cease to secure in any manner the 2005 Series B
Bonds.  As a result, on the Release Date,
the obligations under this Agreement shall become unsecured general obligations
of the Company, subject, however to Section 7.9.

 

The
Company shall notify the Issuer and the Trustee in writing promptly upon the
occurrence of the Release Date.  Upon receiving
written notice of the Release Date from the Company, the Trustee shall deliver
for cancellation to the First Mortgage Trustee all of the First Mortgage Bonds.

 

15

 

Section 4.9.            Construction Fund Pledged as Further Security. 
Pending complete disbursement of all moneys in the Construction Fund
pursuant to the provisions of this Agreement, pursuant to the Indenture all of
such moneys or investments of such moneys are pledged to the Trustee and the
holders of the 2005 Series B Bonds for the further security of the 2005 Series B
Bonds.

 

ARTICLE V

PROVISIONS FOR PAYMENT

 

Section 5.1.            Loan Payments and Other Amounts Payable.

 

(a)           Company hereby covenants and agrees to repay
the Loan, as follows:  on or before any
Interest Payment Date for the 2005 Series B Bonds or any other date that
any payment of interest, premium, if any, purchase price or principal is
required to be made in respect of the 2005 Series B Bonds at the times
specified in accordance with the more specific provisions and requirements of
the Indenture, until the principal of, premium, if any, and interest on the 2005
Series B Bonds shall have been fully paid or provision for the payment
thereof shall have been made in accordance with the Indenture, it will pay to
the Trustee, for disbursement by the Trustee, as Paying Agent, or for
disbursement by any Paying Agent such sums which will enable the Paying Agent
to pay the amounts payable on such date, in immediately available funds, as
principal of (whether at purchase, maturity or upon redemption or acceleration
or otherwise), premium, if any, and interest on the 2005 Series B Bonds as
provided in the Indenture; provided that such payments by Company to enable the
Tender Agent to pay the purchase price of Bonds shall be made within the times
required by Section 3.05 of the Indenture.

 

It
is understood and agreed that all payments payable by Company under this subsection (a) of
Section 5.1 are assigned by the Issuer to the Trustee, the Paying
Agent and the Tender Agent, as applicable, for the benefit of the
Bondholders.  Company assents to such
assignment.  Issuer hereby directs
Company and Company hereby agrees to pay to Trustee and/or Paying Agent or
Tender Agent, as appropriate, at the Principal Office of the Trustee and/or
Paying Agent or Tender Agent, as appropriate, all payments payable by Company
pursuant to this subsection.

 

(b)           Company will also pay the reasonable expenses
of the Issuer related to the issuance of the 2005 Series B Bonds and incurred
upon the request of Company.

 

(c)           Company will also pay the agreed upon fees
and expenses of Trustee (including those referred to in Section 10.02
of the Indenture), the Bond Registrar, the Tender Agent and the Paying Agent
under the Indenture and all other amounts which may be payable to the Trustee,
the Bond Registrar, the Paying Agent, the Market Agent, the Auction Agent and
the Tender Agent, as applicable from time to time, under the Indenture, such
amounts to be paid directly to Trustee, the Bond Registrar, the Paying Agent, the
Tender Agent, the Market Agent and the Auction Agent for their respective own
accounts as and when such amounts become due and payable.

 

16

 

(d)           The Company further agrees to hold harmless
the Trustee, Bond Registrar and Paying Agent against any loss, liability or
expense, including reasonable attorneys’ fees and expenses, incurred by it
without negligence or bad faith on its part in connection with the issuance of
the 2005 Series B Bonds or the acceptance or administration of the trusts
under the Indenture, including the costs of defending itself against any claim
or liability in connection therewith.

 

(e)           The Company covenants, for the benefit of the
Bondholders, to pay or cause to be paid, to the Tender Agent for deposit in the
Purchase Fund, such amounts as shall be necessary to enable the Tender Agent to
pay the purchase price of 2005 Series B Bonds delivered to it for
purchase, all as more particularly described in Sections 3.03 and 3.05
of the Indenture, and, in that regard, it will maintain an account with the
Tender Agent and will pay in immediately available funds, a sum which will
enable the Tender Agent to pay the purchase price of 2005 Series B Bonds
delivered to it for purchase, as provided in the Indenture.

 

(f)            In the event Company should fail to make any
of the payments required in this Section 5.1, the item or
installment so in default shall continue as an obligation of Company until the
amount in default shall have been fully paid, and Company agrees to pay the
same with interest thereon, to the extent permitted by law, from the date when
such payment was due to the date of payment.

 

Section 5.2.            Payments Assigned.  As
set forth in Section 5.1 hereof, it is understood and agreed that
this Agreement and all payments made by Company pursuant to this Agreement
(except payments pursuant to Section 5.1(b) and (c) or
pursuant to Section 8.2 hereof) are assigned by Issuer to
Trustee.  Company assents to such
assignment and hereby agrees that, as to Trustee, Paying Agent, Market
Agent,  Auction Agent and Tender Agent,
as applicable from time to time, its obligation to make such payments shall be
absolute, irrevocable and unconditional and shall not be subject to cancellation,
termination or abatement or to any defense or any right of set-off,
counterclaim or recoupment arising out of any breach by any party, whether
hereunder or otherwise, or out of any indebtedness or liability at any time
owing by any party.  Except as provided
above, Issuer hereby directs Company and Company hereby agrees to pay directly to
Trustee, Paying Agent, Market Agent, Auction Agent, Bond Registrar, Tender
Agent and Issuer, as appropriate, all said payments payable by Company pursuant
to Section 5.1 of this Agreement.

 

Section 5.3.            Taxes and Other Governmental Charges. 
Company agrees to pay during the term of this Agreement, as the same
respectively become due, all taxes, assessments and other governmental charges
of any kind whatsoever that may at any time be lawfully assessed, levied or
charged against or with respect to the Project; provided, that with respect to
special assessments or other governmental charges that may lawfully be paid in
installments over a period of years, Company shall be obligated to pay only
such installments as may have become due and provided further that nothing
herein shall be construed as obligating Company to pay taxes on any interest or
principal on the 2005 Series B Bonds disbursed to Bondholders.

 

Company
may, at its expense and in its own name, in good faith contest any such taxes,
assessments and other governmental charges and, in the event of any such
contest, may permit the taxes, assessments or other governmental charges so
contested to remain unpaid during the 

 

17

 

period of such contest and any appeal therefrom unless, in the opinion
of its counsel, by nonpayment of any such items the security provided pursuant
to the provisions of the Indenture will be materially endangered, in which
event such taxes, charges for payments in lieu of taxes, assessments or charges
shall be paid forthwith.  Issuer will
cooperate fully with Company in any such contest.  In the event Company shall fail to pay any of
the foregoing items required by this Section to be paid by Company, Issuer
or Trustee may (but shall be under no obligation to) pay the same and any
amounts so advanced therefor by Issuer or Trustee shall become an additional
obligation of Company to the one making the advancement, which amounts,
together with interest thereon Company agrees to pay at a rate which shall be
one percent above the lowest minimum lending rate publicly quoted at such time
as being charged by any commercial bank which is a member of the New York
Clearing House on ninety-day commercial loans to its prime commercial borrowers
or the maximum rate permitted by law, whichever is lesser, until paid; provided,
however, that no such advancement shall operate to relieve the Company
from any default hereunder.  Company may
at its expense and in its own name and behalf apply for any tax exemption or
exemption from payments in lieu of taxes allowed by the Commonwealth of
Kentucky, or any political or taxing subdivision thereof under any existing or
future provision of law which grants or may grant any such tax exemption or
exemption from payments in lieu of taxes.

 

Section 5.4.            Obligations of Company Unconditional.  The
obligation of Company to make the payments pursuant to this Agreement and to
make any payments required in respect of the Rebate Fund as provided in Section 6.07
of the Indenture shall be absolute and unconditional.  Until such time as the principal of, premium,
if any, and interest on the 2005 Series B Bonds shall have been fully paid
or provision for the payment thereof shall have been made in accordance with
the Indenture, Company (i) will not suspend or discontinue any payments
pursuant to this Agreement and (ii) except as provided in ARTICLE X
hereof, will not terminate this Agreement for any cause including, without
limiting the generality of the foregoing, failure of title to the Project or
any part thereof, any acts or circumstances that may constitute failure of
consideration, destruction of or damage to the Project, commercial frustration
of purpose, any change in the tax or other laws of the United States of America
or of the Commonwealth of Kentucky or any political subdivision thereof or any
failure of Issuer or Trustee to perform and observe any agreement, whether
express or implied or any duty, liability or obligation arising out of or
connected with this Agreement.  Nothing
contained in this Section shall be construed to release Issuer from the
performance of any of the agreements on its part herein contained; and in the
event Issuer should fail to perform any such agreement on its part, Company may
institute such action against Issuer as Company may deem necessary to compel
performance so long as such action shall be in accordance with the agreements
on the part of Company contained in the preceding sentence.  Company may, however, at its own cost and
expense and in its own name or in the name of Issuer, prosecute or defend any
action or proceeding or take any other action involving third persons which
Company deems reasonably necessary in order to secure or protect its right of
ownership, possession, occupancy and use of the Project, and in such event
Issuer hereby agrees to cooperate fully with Company.

 

Section 5.5.            Rebate Fund.  Company agrees to make all
payments to the Trustee and rebate all amounts to the United States of America
as are required of it under Section 6.07 of the Indenture.  The obligation of Company to make such
payments shall remain in effect and be binding upon Company notwithstanding the
release and discharge of the Indenture.

 

18

 

Section 5.6.            Redemption of the 2005 Series B Bonds in
Advance of Scheduled Maturity.  Under the terms of the Indenture, the 2005 Series B
Bonds are and will be subject to redemption prior to their scheduled
maturity.  The Issuer agrees that it
shall direct the Trustee to redeem and call 2005 Series B Bonds at the
written direction of the Company.

 

Section 5.7.            Cancellation of 2005 Series B Bonds.  The
cancellation by the Bond Registrar of any 2005 Series B Bond or Bonds
purchased by the Company and delivered to the Bond Registrar for cancellation
or of any 2005 Series B Bond or Bonds redeemed or purchased by the Issuer
through funds other than funds received as Loan payments hereunder shall
constitute a Loan repayment equal to the principal amount of the 2005 Series B
Bond or Bonds so cancelled.

 

ARTICLE VI

MAINTENANCE; DAMAGE, DESTRUCTION AND 

CONDEMNATION; USE OF NET PROCEEDS; INSURANCE

 

Section 6.1.            Maintenance.  So long as any 2005 Series B
Bonds are Outstanding, as that term is defined in the Indenture, Company will
maintain, preserve and keep the Project, or cause the Project to be maintained,
preserved and kept, in good repair, working order and condition and will from
time to time make or cause to be made all proper repairs, replacements and
renewals necessary to continue to constitute the Project as Solid Waste Disposal
Facilities; provided, however, that Company will have no obligation to
maintain, preserve, keep, repair, replace or renew any element or portion of
the Project (a) the maintenance, preservation, keeping, repair,
replacement or renewal of which becomes uneconomical to Company because of
damage or destruction by a cause not within the control of Company, or
condemnation of all or substantially all of the Project or the generating
facilities to which the element or unit of the Project is an adjunct, or
obsolescence (including economic obsolescence) or change in government
standards and regulations, or the termination by Company of the operation of
the generating facilities to which the element or unit of the Project is an
adjunct, and (b) with respect to which Company has furnished to Issuer and
Trustee a certificate executed by Company Representative certifying that the maintenance,
preservation, keeping, repair, replacement or renewal of such element or unit
of the Project is being discontinued for one of the foregoing reasons, which
shall be stated therein, and that the discontinuance of such element or unit
will not adversely affect the exclusion of interest on any of the 2005 Series B
Bonds from gross income for federal income tax purposes under Section 103(a) of
the Code.

 

Company
shall have the privilege at its own expense of remodeling the Project or making
substitutions, modifications and improvements to the Project from time to time
as it, in its discretion, may deem to be desirable for its uses and purposes,
which remodeling, substitutions, modifications and improvements shall be
included under the terms of this Agreement as part of the Project; provided,
however, that Company shall take no actions which will change or alter the basic
nature of the Project as Solid Waste Disposal Facilities.

 

If,
prior to full payment of all 2005 Series B Bonds outstanding (or provision
for payment thereof having been made in accordance with the provisions of the
Indenture), the Project or any portion thereof is destroyed or damaged in whole
or in part by fire or other casualty, or title to, or 

 

19

 

the temporary use of, the Project or any portion thereof shall have
been taken by the exercise of the power of eminent domain, and the Issuer, the
Company or the First Mortgage Trustee receives Net Proceeds from insurance or
any condemnation award in connection therewith, Company (unless it shall have
exercised its option to prepay the Loan pursuant to provisions of Section 10.1(b) or
(c) hereof) shall either (i) cause such Net Proceeds to be used
to repair, reconstruct, restore or improve the Project, or (ii) take any
other action, including the redemption of 2005 Series B Bonds, in whole or
in part, on any date which is a Business Day, which, in the opinion of Bond
Counsel, will not adversely affect the exclusion of interest on any of the 2005
Series B Bonds from gross income for federal income tax purposes under Section 103(a) of
the Code; provided that if the 2005 Series B Bonds bear interest at the
Flexible Rate or Semi-Annual Rate, such redemption must occur on a date on
which the 2005 Series B Bonds are otherwise subject to optional
redemption.

 

Section 6.2.            Insurance.  Prior to the Release Date,
Company agrees to insure the Project at all times in accordance with the
provisions of First Mortgage Indenture. 
From and after the Release Date, the Company agrees to insure, or
self-insure, the Project at all times reasonably in accordance with
investor-owned public utility industry general practices and standards.

 

ARTICLE VII

SPECIAL COVENANTS

 

Section 7.1.            No Warranty of Condition or Suitability by
Issuer.  Issuer makes no warranty, either express or
implied, as to the Project or that it will be suitable for Company’s purposes
or needs.

 

Section 7.2.            Company to Maintain its Corporate Existence;
Conditions under Which Exceptions Permitted.  Company agrees that during the
term of this Agreement it will maintain its corporate existence and good
standing, will continue to be a corporation organized under the laws of the
Commonwealths of Kentucky and Virginia or qualified and admitted to do business
in the Commonwealths of Kentucky and Virginia, and will neither dispose of all
or substantially all of its assets nor consolidate with nor merge into another
corporation unless the acquirer of its assets or the corporation with which it
shall consolidate or into which it shall merge, (i) shall be a corporation
or other business organization organized and existing under the laws of the
United States or one of the States of the United States of America or the
District of Columbia, (ii) shall be qualified and admitted to do business
in the Commonwealth of Kentucky, (iii) shall assume in writing all of the
obligations and covenants of Company herein and (iv) shall deliver a copy
of such assumption to the Issuer and Trustee.

 

Section 7.3.            Financial Statements.  Company agrees to furnish Trustee (within 120
days after the close of each fiscal year) with an audited balance sheet and
statements of income, retained earnings and changes in cash flows showing the
financial condition of Company and its consolidated subsidiary or subsidiaries,
if any, at the close of such fiscal year and the results of operations of
Company and its consolidated subsidiary or subsidiaries, if any, for such
fiscal year, accompanied by an opinion of its regular independent certified
public accountants that such statements fairly represent the financial
condition of Company in accordance with generally 

 

20

 

accepted
accounting principles.  The requirements
of this Section shall be satisfied by the submission to Trustee of Company’s
annual report on Form 10-K.  The
information so provided to Trustee shall be kept in its files and is not
required to be distributed to any Registered Holder or other person.  Delivery of such reports, information and
documents to the Trustee is for informational purposes only and the Trustee’s
receipt of such shall not constitute constructive notice of any information
contained therein or determinable from information contained therein, including
the Company’s compliance with any of its covenants hereunder (as to which the
Trustee is entitled to rely exclusively on Officers’ Certificates).

 

Section 7.4.            Further Assurances and Corrective Instruments. Issuer and Company agree that they will,
from time to time, execute, acknowledge and deliver, or cause to be executed,
acknowledged and delivered, such supplements hereto and such further
instruments as may reasonably be required for carrying out the intention of or
facilitating the performance of this Agreement.

 

Section 7.5.            Issuer Representative. 
Whenever under the provisions of this Agreement the approval of Issuer
is required or Issuer is required to take some action at the request of
Company, such approval shall be made or such action shall be taken by Issuer
Representative and Company or Trustee shall be authorized to act on any such
approval or action, and Issuer shall have no redress against Company or Trustee
as a result of any such action taken.

 

Section 7.6.            Company Representative. 
Whenever under the provisions of this Agreement the approval of Company
is required or Company is required to take some action at the request of
Issuer, such approval shall be made or such action shall be taken by Company
Representative and Issuer or Trustee shall be authorized to act on any such
approval or action and Company shall have no redress against Issuer or Trustee
as a result of any such action taken.

 

Section 7.7.            Financing Statements. 
Company shall, to the extent required by law, file and record, refile
and rerecord, or cause to be filed and recorded, refiled and rerecorded, all
documents or notices, including financing statements and continuation
statements, required by law in order to perfect, or maintain the perfection of,
the lien of the Indenture and the Supplemental Indenture.  Issuer shall cooperate fully with Company in
taking any such action.  Concurrently
with the execution and delivery of the 2005 Series B Bonds, Company shall
cause to be delivered to the Trustee an opinion of counsel (a) stating
that in the opinion of such counsel, either (i) such action has been
taken, as set forth therein, with respect to the recording and filing of such
documents, notices and financing statements as is necessary to perfect the lien
of the Indenture under the Uniform Commercial Code of the Commonwealth of
Kentucky, or (ii) no such action is necessary to so perfect such lien, and
(b) stating the requirements for the filing of continuation statements or
other documentation or notices in order to maintain the perfection of the lien
of the Indenture, which filings the Company agrees to undertake.

 

Section 7.8.            Company’s Performance Under Indenture.  The
Company agrees, for the benefit of Bondholders to do and perform all acts and
things contemplated in the Indenture to be done and performed by it.

 

21

 

Section 7.9.            Negative Pledge.

 

(a)           The Company agrees that, subsequent to the
Release Date (as defined in the Indenture) and so long as any 2005 Series B
Bonds remain outstanding, the Company will not issue, assume or guarantee any
Debt secured by any mortgage, security interest, pledge or lien (herein
referred to as a “mortgage”) of or upon any Operating Property of the Company,
whether owned at the date of the Indenture or thereafter acquired, and will not
permit to exist any Debt secured by a mortgage on any Operating Property
created on or prior to the Release Date, without in any such case effectively
securing, on the later to occur of the issuance, assumption or guaranty of any
such Debt or the Release Date, the 2005 Series B Bonds equally and ratably
with such Debt; provided, however, that the foregoing restriction shall not
apply to Debt secured by any of the following:

 

(i)            mortgages on any property existing at the
time of acquisition thereof;

 

(ii)           mortgages on property of a corporation
existing at the time such corporation is merged into or consolidated with the
Company, or at the time of a sale, lease or other disposition of the properties
of such corporation or a division thereof as an entirety or substantially as an
entirety to the Company, provided that such mortgage as a result of such
merger, consolidation, sale, lease or other disposition is not extended to
property owned by the Company immediately prior thereto;

 

(iii)          mortgages on property to secure all or part
of the cost of acquiring, substantially repairing or altering, constructing,
developing or substantially improving such property, or to secure indebtedness
incurred to provide funds for any such purpose or for reimbursement of funds
previously expended for any such purpose, provided such mortgages are created
or assumed contemporaneously with, or within 18 months after, such acquisition
or completion of substantial repair or alteration, construction, development or
substantial improvement or within six months thereafter pursuant to a
commitment for financing arranged with a lender or investor within such 18
month period;

 

(iv)          mortgages in favor of the United States of
America or any State thereof, or any department, agency or instrumentality or
political subdivision of the United States of America or any state thereof, or
for the benefit of holders of securities issued by any such entity, to secure
any Debt incurred for the purpose of financing all or any part of the purchase
price or the cost of substantially repairing or altering, constructing,
developing or substantially improving the property subject to such mortgages;
or

 

(v)           any extension, renewal or replacement (or
successive extensions, renewals or replacements), in whole or in part, of any
mortgage referred to in the foregoing clauses (1) to (4), inclusive;
provided, however, that the principal amount of indebtedness secured thereby
and not otherwise authorized by said clauses (1) to (4), inclusive, shall
not exceed the principal amount of indebtedness, plus any premium or fee
payable in connection with any such extension, renewal or replacement, so
secured at the time of such extension, renewal or replacement.

 

22

 

(b)           Notwithstanding the provisions of Section 7.9(a) from
and after the Release Date and so long as any 2005 Series B Bonds remain
outstanding, the Company may issue, assume or guarantee Debt, or permit to
exist Debt, secured by mortgages which would otherwise be subject to the
restrictions of this Section up to an aggregate principal amount that,
together with the principal amount of all other Debt of the Company secured by
mortgages (other than mortgages permitted by Section 7.9(a) that
would otherwise be subject to the foregoing restrictions) does not at the time
exceed the greater of 10% of Net Tangible Assets or 10% of Capitalization.

 

(c)           Notwithstanding the provisions of Section 7.9(a) and
Section 7.9(b), the Company will not, from and after the Release Date,
issue, assume, guarantee or permit to exist any debt of the Company secured by
a mortgage, the creditor of which controls, is controlled by, or is under
common control with, the Company.

 

(d)           If at any time the Company shall issue,
assume or guarantee any Debt secured by any mortgage and if Section 7.9(a) requires
that the 2005 Series B Bonds be secured equally and ratably with such
Debt, the Company will promptly execute, at its expense, any instruments
necessary to so equally and ratably secure such 2005 Series B Bonds.

 

ARTICLE VIII

ASSIGNMENT; INDEMNIFICATION; REDEMPTION

 

Section 8.1.            Assignment.  This Agreement may be assigned
by Company without the necessity of obtaining the consent of either Issuer or
Trustee, subject, however, to each of the following conditions:

 

(a)           No assignment (other than pursuant to Section 7.2
hereof) shall relieve Company from primary liability for any of its obligations
hereunder, and in the event of any such assignment Company shall remain
primarily liable for payments of the amounts specified in Section 5.1
hereof and for performance and observance of the other covenants or agreements
on its part herein provided to be performed and observed to the same extent as
though no assignment had been made;

 

(b)           The assignee shall assume the obligations of
Company hereunder to the extent of the interest assigned;

 

(c)           Company shall, within thirty days after the
delivery thereof, furnish or cause to be furnished to Issuer and to Trustee a
true and complete copy of each such assignment and assumption of obligation;
and

 

(d)           prior to such assignment, the Company shall
have obtained an opinion of Bond Counsel to the effect that such assignment
will not adversely affect the exclusion of interest on the 2005 Series B
Bonds from gross income for Federal income tax purposes under Section 103(a) of
the Code.

 

Section 8.2.            Release and Indemnification Covenants. 
Company releases Issuer from and covenants and agrees that Issuer shall
not be liable for, and agrees to indemnify and hold Issuer harmless against,
any expense or liability incurred by Issuer, including attorneys’ fees, 

 

23

 

resulting from any loss or
damage to property or any injury to or death of any person occurring on or
about or resulting from any defect in the Project or from any action commenced
in connection with the financing thereof. 
If any such claim is asserted, Issuer agrees to give prompt notice to
the Company and Company will assume the defense thereof, with full power to
litigate, compromise or to settle the same in its sole discretion, it being
understood that Issuer will not settle or consent to the settlement of the same
without the consent of Company.

 

Section 8.3.            Assignment
of Interest in Agreement by Issuer. 
Any assignment by Issuer to Trustee pursuant to the Indenture or this
Agreement of any moneys receivable under this Agreement shall be subject and subordinate
to this Agreement.

 

Section 8.4.            Redemption
of 2005 Series B Bonds.  Upon
the agreement of Company to deposit moneys in the Bond Fund in an amount
sufficient to redeem 2005 Series B Bonds subject to redemption, Issuer, at
the request of Company, shall forthwith take all steps (other than the payment
of the money required for such redemption) necessary under the applicable
redemption provisions of the Indenture to effect redemption of all or part of
the 2005 Series B Bonds outstanding, as may be specified by Company, on
the redemption date specified by the Company.

 

Section 8.5.            Reference
to 2005 Series B Bonds Ineffective after 2005 Series B Bonds Paid.  Upon payment in full of the 2005 Series B
Bonds (or provision for payment thereof having been made in accordance with the
provisions of the Indenture) and payment of all amounts required to be paid to
the United States of America pursuant to Section 4.6 hereof and
payment of all fees and charges of the Trustee (including reasonable attorney’s
fees and expenses), the Bond Registrar, the Authenticating Agent and any Paying
Agent, all references in this Agreement to the 2005 Series B Bonds, the
First Mortgage Bonds and the Trustee shall be ineffective and neither the
Trustee nor the holders of any of the 2005 Series B Bonds shall thereafter
have any rights hereunder except as set forth in Section 11.1.

 

ARTICLE IX

EVENTS OF DEFAULT AND REMEDIES

 

Section 9.1.            Events
of Default Defined.  The following
shall be “events of default” under this Agreement and the term “events of
default” shall mean, whenever they are used in this Agreement, any one or more
of the following events:

 

(a)           Failure by the Company
to pay any amount required to be paid under subsections (a) and (e) of
Section 5.1 hereof which results in failure to pay principal of,
premium or interest on or the purchase price of the 2005 Series B Bonds,
and such failure shall cause an event of default under the Indenture.

 

(b)           Failure by Company to
observe and perform any covenant, condition or agreement on its part to be
observed or performed, other than as referred to in subsection (a) of
this Section, for a period of thirty days after written notice, specifying such
failure and requesting that it be remedied, is given to Company by Issuer or
Trustee, unless Issuer and Trustee shall agree in writing to an extension of
such time prior to its expiration; provided,

 

24

 

however, if the failure stated in the notice
cannot be corrected within the applicable period, Issuer and Trustee will not
unreasonably withhold their consent to an extension of such time if such
failure is capable of being cured and corrective action is instituted by
Company within the applicable period and is being diligently pursued.

 

(c)           All bonds outstanding
under the First Mortgage Indenture shall, if not already due, have become
immediately due and payable whether by declaration of the First Mortgage
Trustee or otherwise, and such acceleration shall not have been rescinded or
annulled by the First Mortgage Trustee.

 

(d)           An involuntary
proceeding shall be commenced or an involuntary petition shall be filed in a
court of competent jurisdiction seeking (i) relief in respect of Company,
or of a substantial part of the property or assets of Company, under Title 11
of the United States Code, as now constituted or hereafter amended, or any
other federal or state bankruptcy, insolvency, receivership or similar law, (ii) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for Company or for a substantial part of the property or
assets of Company or (iii) the winding-up or liquidation of Company; and
such proceeding or petition shall continue undismissed or unstayed for 90 days
or an order or decree approving or ordering any of the foregoing shall be
entered.

 

(e)           Company shall (i) voluntarily
commence any proceeding or file any petition seeking relief under Title 11 of
the United States Code, as now constituted or hereafter amended, or any other
federal or state bankruptcy, insolvency, receivership or similar law, (ii) consent
to the institution of, or fail to contest in a timely and appropriate manner,
any proceeding or the filing of any petition described in (d) above, (iii) apply
for or consent to the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for Company or for a substantial
part of the property or assets of Company, (iv) file an answer admitting
the material allegations of a petition filed against it in any such proceeding,
(v) make a general assignment for the benefit of creditors, (vi) become
unable, admit in writing its inability or fail generally to pay its debts as
they become due or (vii) take any action for the purpose of effecting any
of the foregoing.

 

(f)            The occurrence of an
Event of Default under the Indenture.

 

The provisions of Section 9.1(b) are subject to the
following limitations:  If by reason of
force majeure Company is unable in whole or in part to carry out its agreements
on its part herein contained, other than the obligations on the part of Company
contained in Section 2.2(k) and (l), Section 4.6, Section 4.8
or Section 7.2 or ARTICLE V hereof and the general
covenant and obligation of Company to take all necessary actions for the
continued exclusion of interest on the 2005 Series B Bonds from gross
income for federal and Kentucky income taxes, Company shall not be deemed in
default during the continuance of such inability.  The term “force majeure” as used herein shall
mean any cause or event not reasonably within the control of Company, including
without limitation the following:  acts
of God; strikes; wars or national police actions, lockouts or other industrial
disturbances; acts of public enemies, including terrorists; orders of any kind
of the government of the United States or of the Commonwealth of Kentucky or
any of their departments, agencies or officials, or any civil or military
authority; evacuations and quarantines; insurrections; riots; epidemics;
plague; famine; landslides; lightning; earthquakes;

 

25

 

fire; hurricanes; tornadoes; storms; typhoons; cyclones; volcanic
eruptions; floods; washouts; droughts; arrests; restraints of government and
people; civil disturbances; explosions; breakage or accident to machinery and
transmission lines or pipes; or partial or entire failure of utility
services.  Company agrees, however, to
remedy with all reasonable dispatch the cause or causes preventing the Company
from carrying out its agreements; provided, that the settlement of strikes,
lockouts and other industrial disturbances shall be entirely within the
discretion of Company, and Company shall not be required to make settlement of
strikes, lockouts and other industrial disturbances by acceding to the demands
of the opposing party or parties when such course is in the judgment of Company
unfavorable to Company.

 

Section 9.2.            Remedies
on Default.  Whenever any event of
default referred to in Section 9.1 hereof shall have happened and
be continuing, the Trustee, on behalf of the Issuer at the direction of the
Bond Insurer, may take any one or more of the following remedial steps:

 

(a)           By written notice to
Company, the Trustee, on behalf of the Issuer at the direction of the Bond Insurer,
may declare an amount equal to the principal and accrued interest on the 2005 Series B
Bonds then Outstanding, as defined in the Indenture, to be immediately due and
payable under this Agreement, whereupon the same shall become immediately due
and payable.

 

(b)           The Trustee, on behalf
of the Issuer at the direction of the Bond Insurer, may have access to and
inspect, examine and make copies of the books and records and any and all
accounts, data and income tax and other tax returns of Company.

 

(c)           The Trustee, on behalf
of the Issuer at the direction of the Bond Insurer, may take whatever action at
law or in equity may appear necessary or desirable to collect the amounts then
due and thereafter to become due, or to enforce performance and observance of
any obligation, agreement or covenant of Company under this Agreement,
including, until the Release Date, any remedies available in respect of the
First Mortgage Bonds.

 

In case there shall be pending a proceeding of the nature described in Section 9.1(d) or
(e) above, Trustee, upon direction by the Bond Insurer or the Bond
Insurer itself, shall be entitled and empowered, by intervention in such
proceeding or otherwise, to file and prove a claim or claims for the whole
amount owing and unpaid pursuant to this Agreement and, in case of any judicial
proceedings, to file such proofs of claim and other papers or documents as may
be necessary or advisable in order to have the claims of Trustee allowed in
such judicial proceedings relative to Company, its creditors or its property,
and to collect and receive any moneys or other property payable or deliverable
on any such claims, and to distribute the same after the deduction of its
charges and expenses; and any custodian (including, without limitation a
receiver, trustee or liquidator) of Company appointed in connection with such
proceedings is hereby authorized to make such payments to Trustee, and to pay
to Trustee any amount due it for compensation and expenses, including
reasonable counsel fees and expenses incurred by it up to the date of such
distribution.

 

Any amounts collected pursuant to action taken under this Section (other
than the compensation and expenses referred to in the immediately prior
sentence) shall be paid into the Bond Fund and applied in accordance with the
provisions of the Indenture or, if the 2005 Series B Bonds have been fully
paid (or provision for payment thereof has been made in accordance

 

26

 

with the
provisions of the Indenture) and all reasonable and necessary fees and expenses
of Trustee and any paying agents accrued and to accrue through final payment of
the 2005 Series B Bonds, and all other liabilities of Company accrued and
to accrue hereunder or under the Indenture through final payment of the 2005 Series B
Bonds have been paid, such amounts so collected shall be paid to Company.

 

Section 9.3.            No
Remedy Exclusive.  No remedy herein
conferred upon or reserved to Issuer is intended to be exclusive of any other
available remedy or remedies, but each and every such remedy shall be
cumulative and shall be in addition to every other remedy given under this
Agreement or now or hereafter existing at law or in equity or by statute.  No delay or omission to exercise any right or
power accruing upon default shall impair any such right or power or shall be
construed to be a waiver thereof, but any such right or power may be exercised
from time to time and as often as may be deemed expedient.  In order to entitle Issuer to exercise any
remedy reserved to it in this Article, it shall not be necessary to give any
notice other than such notice as may be herein expressly required.  Such rights and remedies as are given Issuer
hereunder shall also extend to Trustee, and Trustee and the holders of the 2005
Series B Bonds, subject to the provisions of the Indenture, shall be
entitled to the benefit of all covenants and agreements herein contained.

 

Section 9.4.            Agreement
to Pay Reasonable Attorneys’ Fees and Expenses.  In the event Company should default under any
of the provisions of this Agreement and Issuer and/or Trustee should employ
attorneys or incur other expenses for the collection of amounts payable
hereunder or the enforcement of performance or observance of any obligation or
agreement on the part of Company herein contained, Company agrees that it will
on demand therefor pay to Issuer and/or Trustee the reasonable fees and
expenses of such attorneys and such other reasonable expenses so incurred by
Issuer and/or Trustee.

 

Section 9.5.            Waiver
of Events of Default.  If, after the
acceleration of the maturity of the outstanding 2005 Series B Bonds by
Trustee pursuant to the Indenture, and before any judgment or decree for the
appointment of a receiver or for the payment of the moneys due shall have been
obtained or entered, Company shall cause to be deposited with Trustee a sum
sufficient to pay all matured installments of interest upon all 2005 Series B
Bonds and the principal of, and premium, if any, on any and all 2005 Series B
Bonds which shall have become due otherwise than by reason of such declaration
(with interest upon such principal and premium, if any, and overdue
installments of interest, at the rate per annum which is one percent above the
highest rate borne by any 2005 Series B Bond, until paid), and such
amounts as shall be sufficient to cover all expenses of Trustee in connection
with such default, and all defaults under the Indenture and this Agreement,
other than nonpayment of principal of 2005 Series B Bonds which shall have
become due by said declaration, shall have been remedied, and such event of
default under the Indenture shall be deemed waived by Trustee in accordance
with Section 9.12 of the Indenture with the consequence that under
the Indenture such acceleration is rescinded, then Company’s default hereunder
shall be deemed to have been waived by Issuer and no further action or consent
by Trustee or Issuer shall be required. 
In the event any agreement or covenant contained in this Agreement
should be breached by either party and thereafter waived by the other party,
such waiver shall be limited to the particular breach so waived and shall not
be deemed to waive any other breach hereunder. 

 

27

 

ARTICLE X

PREPAYMENT OF LOAN

 

Section 10.1.          Options
to Prepay Loan.  Company shall have,
and is hereby granted, options to prepay the Loan in whole and to cancel or
terminate this Agreement on any Business Day at any time Company so elects, if
certain events shall have occurred within the 180 days preceding the giving of
written notice by Company to Trustee of such election, as follows:

 

(a)           If in the judgment of
Company, unreasonable burdens or excessive liabilities shall have been imposed
after the issuance of the 2005 Series B Bonds upon Company with respect to
the Project or the operation thereof, including without limitation federal,
state or other ad valorem, property, income or other taxes not imposed on the
date of this Agreement other than ad valorem taxes presently levied upon privately
owned property used for the same general purpose as the Project;

 

(b)           If the Project or a
portion thereof or other property of Company in connection with which the Project
is used shall have been damaged or destroyed to such an extent so as, in the
judgment of the Company, to render the Project or other property of Company in
connection with which the Project is used unsatisfactory to Company for its
intended use and such condition shall continue for a period of six months;

 

(c)           There shall have occurred
condemnation of all or substantially all of the Project or the taking by
eminent domain of such use or control of the Project or other property of
Company in connection with which the Project is used so as, in the judgment of
the Company, to render the Project or other property of Company in connection
with which the Project is used unsatisfactory to Company for its intended use;

 

(d)           In the event changes,
which the Company cannot reasonably control, in the economic availability of
materials, supplies, labor, equipment, or other properties or things necessary
for the efficient operation of the Ghent Generating Station of the Company
shall have occurred which, in the judgment of the Company, render the continued
operation of the Ghent Generating Station or any generating unit at such
station uneconomical; or changes in circumstances, after the issuance of the 2005
Series B Bonds including but not limited to changes in solid waste abatement,
control and disposal requirements, shall have occurred such that the Company
shall determine that use of the Project is no longer required or desirable;

 

(e)           In the event this
Agreement shall become void or unenforceable or impossible of performance by
reason of any changes in the Constitution of the Commonwealth of Kentucky or
the Constitution of the United States of America or by reason of legislative or
administrative action, whether state or federal, or any final decree, judgment
or order of any court or administrative body, whether state or federal; or

 

(f)            A final order or
decree of any court or administrative body after the issuance of the 2005 Series B
Bonds shall require the Company to cease a substantial part of its operations
at the Ghent Generating Station to such extent that the Company will be
prevented from carrying on its normal operations at such location for a period
of six months.

 

28

 

In the case of prepayment pursuant to this Section (or if any 2005
Series B Bonds be redeemed in whole or in part pursuant to Section 6.1
hereof), the Loan prepayment price shall be a sum sufficient, together with
other funds deposited with Trustee and available for such purpose, to redeem
all 2005 Series B Bonds then outstanding (or, in the case any 2005 Series B
Bonds are redeemed in part pursuant to Section 6.1 hereof, such
portion of the 2005 Series B Bonds then outstanding) under the Indenture
at a price equal to 100% of the principal amount thereof plus interest accrued
and to accrue to the date of redemption of the 2005 Series B Bonds and to
pay all reasonable and necessary fees and expenses of Trustee and any Paying
Agents and all other liabilities of Company accrued and to accrue hereunder to
the date of redemption of the 2005 Series B Bonds.  In order to exercise any option to prepay the
Loan and to cancel or terminate this Agreement by reason of the occurrence of
any of the events mentioned in (a) through (f) above, Company is
required to give written notice to Trustee of its election to prepay the Loan
within 180 days of the occurrence of any of the events mentioned in (a) through
(f) above.

 

Section 10.2.          Additional
Option to Prepay Loan.  Company shall
have, and is hereby granted, further options, to the extent that the 2005 Series B
Bonds are, from time to time, subject to optional redemption, during any period
of optional redemption, to prepay all, or any portion, of the relevant and
applicable Loan payments due or to become due hereunder by depositing with
Trustee moneys sufficient to pay, together with other funds deposited with
Trustee and available for such purpose, the principal of and applicable
premium, if any, and accrued interest, through the date of redemption (which
must be a Business Day), on all or any portion of the 2005 Series B Bonds
then outstanding under the Indenture and, upon depositing with Trustee moneys
sufficient to pay the principal, applicable premium, if any, and accrued
interest, through the date of redemption, on all 2005 Series B Bonds then
outstanding under the Indenture, as well as all reasonable and necessary
expenses of Trustee and any Paying Agents and all other liabilities of Company
accrued and to accrue hereunder, to cancel or terminate the term of this
Agreement.

 

Section 10.3.          Obligations
to Prepay Loan.  Company shall be
obligated to prepay the entire Loan or any part thereof, as provided below,
prior to the required full payment of the 2005 Series B Bonds (or prior to
making provision for payment thereof in accordance with the Indenture) on the
180th day (or such earlier date as may be designated by Company), which, in
every case, must be a Business Day, upon the occurrence of a Determination of
Taxability.  The Issuer and Company shall
take all actions required to mandatorily redeem the 2005 Series B Bonds at
the cost of the Company upon the terms specified in this Agreement and in ARTICLE IV
of the Indenture following the occurrence of a Determination of Taxability,
including, but not limited to, prepaying appropriate amounts due on the 2005 Series B
Bonds in order to effect such redemption. 
The 2005 Series B Bonds shall be redeemed by the Issuer, in whole,
or in such part as described below, at a redemption price equal to 100% of the
principal amount thereof, without redemption premium, plus accrued interest, if
any, to the redemption date, within 180 days following a Determination of
Taxability.  For purposes of this Section,
a “Determination of Taxability” shall mean the receipt by the Trustee of
written notice from a current or former registered owner of a 2005 Series B
Bond or from the Company or the Issuer of (i) the issuance of a published
or private ruling or a technical advice memorandum by the Internal Revenue
Service in which the Company participated or has been given the opportunity to
participate, and which ruling or memorandum the Company, in its discretion,
does not contest or from which no

 

29

 

further right of administrative
or judicial review or appeal exists, or (ii) a final determination from
which no further right of appeal exists of any court of competent jurisdiction
in the United States in a proceeding in which the Company has participated or
has been a party, or has been given the opportunity to participate or be a
party, in each case, to the effect that as a result of a failure by the Company
to perform or observe any covenant or agreement or the inaccuracy of any
representation contained in this Agreement or any other agreement or
certificate delivered in connection with the 2005 Series B Bonds, the
interest on the 2005 Series B Bonds is included in the gross income of the
owners thereof for federal income tax purposes, other than with respect to a
person who is a “substantial user” or a “related person” of a substantial user
within the meaning of the Section 147 of Internal Revenue Code of 1986, as
amended (the “Code”); provided, however, that no such Determination of
Taxability shall be considered to exist as a result of the Trustee receiving
notice from a current or former registered owner of a 2005 Series B Bond
or from the Issuer unless (i) the Issuer or the registered owner or
former registered owner of the 2005 Series B Bond involved in such
proceeding or action (A) gives the Company and the Trustee prompt notice
of the commencement thereof, and (B) (if the Company agrees to pay all
expenses in connection therewith) offers the Company the opportunity to control
unconditionally the defense thereof, and (ii) either (A) the Company
does not agree within 30 days of receipt of such offer to pay such expenses and
liabilities and to control such defense, or (B) the Company shall exhaust
or choose not to exhaust all available proceedings for the contest, review,
appeal or rehearing of such decree, judgment or action which the Company
determines to be appropriate.  No
Determination of Taxability described above will result from the inclusion of
interest on any 2005 Series B Bond in the computation of minimum or
indirect taxes.  All of the 2005 Series B
Bonds shall be redeemed upon a Determination of Taxability as described above
unless, in the opinion of Bond Counsel, redemption of a portion of the 2005 Series B
Bonds of one or more series or one or more maturities would have the result
that interest payable on the remaining 2005 Series B Bonds outstanding
after the redemption would not be so included in any such gross income.

 

In the event any of the Issuer, the Company or the Trustee has been put
on notice or becomes aware of the existence or pendency of any inquiry, audit
or other proceedings relating to the 2005 Series B Bonds being conducted
by the Internal Revenue Service, the party so put on notice shall give
immediate written notice to the other parties of such matters.

 

Promptly upon learning of the occurrence of a Determination of
Taxability (whether or not the same is being contested), or any of the events
described in this Section, the Company shall give notice thereof to the Trustee
and the Issuer.

 

In the case of the mandatory obligation of Company to prepay the Loan
or any part thereof after the occurrence of a Determination of Taxability,
Company shall be obligated to prepay such Loan or such part thereof not later
than 180 days after any such final determination as specified in this Section hereof
and to provide to Trustee for deposit in the Bond Fund an amount sufficient,
together with other funds deposited with the Trustee and available for such
purpose, to redeem such 2005 Series B Bonds at the price of 100% of the
principal amount thereof in accordance with Section 5.1 hereof plus
interest accrued and to accrue to the date of redemption of the 2005 Series B
Bonds and to pay all reasonable and necessary fees and expenses of Trustee and
any paying agents and all other liabilities of Company accrued and to accrue
hereunder to the date of redemption of the 2005 Series B Bonds.

 

30

 

Section 10.4.          Notice
of Prepayment; Redemption Procedures. 
It is understood and agreed by the parties hereto that in order to
exercise an option granted in, or to consummate a mandatory prepayment required
by, this Article, Company shall give written notice to Issuer and Trustee which
notice shall (i) contain the agreement of Company to deposit moneys in the
Bond Fund on or before the redemption date in an amount sufficient to redeem a
principal amount of the 2005 Series B Bonds equal to the amount of the
prepayment, including, in the case of a prepayment under Section 10.2
hereof, any applicable redemption premium in respect of such 2005 Series B
Bonds, and any other amounts required under this Agreement and (ii) specify
the prepayment date (which must be a Business Day and which shall also be the
redemption date), which date shall not be less than 30 days (45 days if the 2005
Series B Bonds are bearing interest at the Semi-annual, Annual or Long
Term Rate or in all cases such shorter period as may be acceptable to the
Trustee) nor more than 90 days from the date the notice is mailed by Company to
Issuer and Trustee.

 

Section 10.5.          Relative
Position of this Article and Indenture.  The rights and options granted to Company in
this Article, except the option granted to Company pursuant to Section 10.2
to prepay less than all of the Loan payments, shall be and remain prior and
superior to the Indenture and may be exercised whether or not Company is
otherwise in default hereunder; provided that such default will not result in
nonfulfillment of any condition to the exercise of any such right or option.

 

Section 10.6.          Concurrent
Discharge of First Mortgage Bonds. 
Prior to the Release Date, in the event any of the 2005 Series B
Bonds shall be paid and discharged pursuant to any provisions of this
Agreement, so that same are not thereafter Outstanding, as the term “Outstanding”
is defined in the Indenture, a like principal amount of First Mortgage Bonds
shall be deemed fully paid and the obligations of Company thereunder
terminated.  Thereupon, Trustee shall
deliver to First Mortgage Trustee such like principal amount of First Mortgage
Bonds for cancellation pursuant to Section 2.13 of the Indenture.

 

ARTICLE XI

MISCELLANEOUS

 

Section 11.1.          Term
of Agreement.  This Agreement shall
remain in full force and effect from the date hereof to and including the later
of June 1, 2035, or until such earlier or later time as all of the 2005 Series B
Bonds shall have been fully paid (or provision made for such payment pursuant
to the Indenture), whichever shall be later; provided, however, that this
Agreement may be cancelled and terminated prior to said date if Company shall
prepay all of the Loan pursuant to ARTICLE X hereof; and provided
further, however, that all obligations of Company under ARTICLE V and
Section 8.1 hereof (a) to pay the agreed fees and expenses of
Trustee, the Bond Insurer, the Tender Agent, the Bond Registrar and any Paying
Agent and (b) to pay any amount required by Section 5.5 hereof
shall continue in effect even though 2005 Series B Bonds may no longer be
outstanding and this Agreement may otherwise be terminated.  All representations and certifications by
Company as to all matters affecting the tax-exempt status of interest on the 2005
Series B Bonds shall be for the equal and ratable benefit, protection and
security of the holders of any and all of the 2005 Series B Bonds and
shall survive the termination of this Agreement and all obligations of Company
contained herein relating to indemnification of Issuer, Trustee, Bond

 

31

 

Registrar, Authenticating
Agent, Tender Agent and any Paying Agent shall survive the termination of this
Agreement.

 

Section 11.2.          Notices.
All notices, certificates or other communications hereunder shall be
sufficiently given and shall be deemed given when delivered or mailed by
registered or certified mail, postage prepaid, addressed as follows:

 

If to Issuer, at 440 Main Street, Carrollton, Kentucky 41008,
Attention: County Judge/ Executive;

 

If to Company, at its corporate headquarters, One Quality Street,
Lexington, Kentucky 40507, Attention: 
Treasurer, with a copy to LG&E Energy LLC, 220 West Main Street, Louisville,
Kentucky 40202, Attention: Treasurer, and 

 

If to Trustee, at 60 Wall Street, 27th Floor, Mailstop
NYC60-2715, New York, New York 10005, Attn: Trust & Securities Services
(Municipal Group).

 

If to Bond Insurer, at One State Street Plaza, New York, New York 10004,
Attn: Surveillance Department, Global Utilities.

 

If to Paying Agent, Remarketing Agent, Auction Agent, Market Agent or
Tender Agent, at such addresses for notices as are set forth in the Indenture.

 

A duplicate copy of each notice, certificate or other communication
given hereunder by either Issuer or Company to the other shall also be given to
Trustee.  Issuer, Company and Trustee may
by notice given hereunder designate any further or different addresses to which
subsequent notices, certificates or other communications shall be sent.

 

Section 11.3.          Binding
Effect; Bond Counsel Opinions.  This
Agreement shall inure to the benefit of and shall be binding upon Issuer,
Company and their respective successors and assigns, subject, however, to the
limitations contained in Section 7.2, Section 8.1 and Section 8.3
hereof. 

 

Section 11.4.          Severability.  In the event any provision of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof.

 

Section 11.5.          Amounts
Remaining in Construction Fund, Bond Fund and Rebate Fund.  It is agreed by the parties hereto that any
amounts remaining in the Construction Fund and in the Bond Fund upon expiration
or sooner termination of the term of this Agreement, as provided in this
Agreement, after payment in full of the 2005 Series B Bonds (or provision
for payment thereof having been made in accordance with the provisions of the
Indenture) and the reasonable and necessary fees and expenses of Trustee
(including reasonable attorneys fees and expenses) and any Paying Agent in
accordance with the Indenture and the payment in full of all other amounts
required to be paid under this Agreement or the Indenture, shall belong to and
be paid to Company by Trustee.  Any
amounts remaining in the Rebate Fund at such time shall be held, applied and
disbursed strictly and only in accordance with the provisions of Section 6.07
of the Indenture.

 

32

 

Section 11.6.          Amendments,
Changes and Modifications. 
Subsequent to the issuance of the 2005 Series B Bonds and prior to
payment in full of all 2005 Series B Bonds (or provision for the payment
thereof having been made in accordance with the provisions of the Indenture),
except as otherwise provided in this Agreement or in the Indenture, this
Agreement may not be effectively amended, changed, modified, altered or
terminated, and no provision hereof waived, without the written consent of
Trustee, given in accordance with the Indenture.

 

Section 11.7.          Execution
in Counterparts.  This Agreement may
be simultaneously executed in several counterparts, each of which shall be an
original and all of which shall constitute but one and the same instrument.

 

Section 11.8.          Applicable
Law.  This Agreement shall be
governed by and construed in accordance with the laws of the Commonwealth of
Kentucky.

 

Section 11.9.          Captions.  The captions or headings in this Agreement
are for convenience only and in no way define, limit, or describe the scope or
intent of any provisions or sections of this Agreement.

 

Section 11.10.        No
Pecuniary Liability of Issuer.  No
provision, covenant or agreement contained in this Agreement or breach thereof
shall constitute or give rise to a pecuniary liability of Issuer or a charge
upon its general credit or taxing powers. 
In making such covenants, agreements or provisions, Issuer has not
obligated itself, except with respect to the Project and the application of the
revenues of this Agreement, as hereinabove provided.

 

Section 11.11.        Payments
Due on Other Than Business Days.  If
the date for making any payment or the last date for performance of any act or
the exercise of any right, as provided in this Agreement, shall not be on a
Business Day, such payment may be made or act performed or right exercised on
the next succeeding Business Day with the same force and effect as if done on
the date provided in this Agreement, and if done on such succeeding Business
Day no interest with respect to such payment shall accrue for the period after
such nominal date.

 

Section 11.12.        The
Bond Insurer shall be a third party beneficiary of the provisions of this
Agreement.

 

 

(remainder of page left
blank intentionally)

 

33

 

IN WITNESS WHEREOF,
Issuer and Company have caused this Agreement to be executed in their
respective corporate names and their respective corporate seals to be hereunto
affixed and attested by their duly authorized officers, all as of the date
first written.

 

	
   

  	
  COUNTY OF
  CARROLL, KENTUCKY

  
	
   

  	
   

  
	
   

  	
   

  
	
  (SEAL)

  	
   

  
	
   

  	
   

  
	
   

  	
  By 

  	
    /s/
  Harold “Shorty” Tomlinson

  	
   

  
	
   

  	
   

  	
  HAROLD TOMLINSON

  	
   

  
	
   

  	
   

  	
  County Judge/Executive

  	
   

  
	
   

  	
   

  
	
  ATTEST:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
    /s/ Traci Courtney

  	
   

  	
   

  
	
  Fiscal Court
  Clerk

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  KENTUCKY
  UTILITIES COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
  (SEAL)

  	
   

  
	
   

  	
   

  
	
   

  	
  By 

  	
    /s/
  Daniel K. Arbough

  	
   

  
	
   

  	
   

  	
  DANIEL K. ARBOUGH

  	
   

  
	
   

  	
   

  	
  Treasurer

  	
   

  
	
   

  	
   

  
	
  ATTEST:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
    /s/ John R. McCall

  	
   

  	
   

  
	
  JOHN R.
  McCALL

  	
   

  	
   

  
	
  Secretary

  	
   

  	
   

  

 

 

	
  COMMONWEALTH
  OF KENTUCKY

  	
  )

  
	
   

  	
  )  SS

  
	
  COUNTY
  OF CARROLL

  	
  )

  

 

I,
the undersigned Notary Public in and for the State and County aforesaid, do
hereby certify that on the 11th day of November, 2005, the foregoing instrument
was produced to me in said County by Harold Tomlinson and Traci Courtney,
personally known to me and personally known by me to be the County
Judge/Executive and Fiscal Court Clerk, respectively, of the COUNTY OF CARROLL,
KENTUCKY, and acknowledged before me by them and each of them to be their free
act and deed as County Judge/Executive and Fiscal Court Clerk of such County,
and the act and deed of said County as authorized by an Ordinance of the Fiscal
Court of such County.

 

Witness
my hand and seal this 11th day of November, 2005.  My commission expires June 28, 2009.

 

(SEAL)

 

	
   

  	
  /s/ Debra L.
  Ewen

  
	
   

  	
  Notary
  Public

  
	
   

  	
  State at Large, Kentucky

  

 

	
  COMMONWEALTH
  OF KENTUCKY

  	
  )

  
	
   

  	
  )  SS

  
	
  COUNTY
  OF JEFFERSON

  	
  )

  

 

I,
the undersigned Notary Public in and for the State and County aforesaid, do
hereby certify that on the 4th day of November, 2005, the foregoing instrument
was produced to me in said County by Daniel K. Arbough and John R. McCall,  personally known to me and personally known
by me to be the Treasurer and the Secretary, respectively, of KENTUCKY
UTILITIES COMPANY, a corporation incorporated under the laws of the Commonwealth
of Kentucky, who being by me duly sworn, did say that the seal affixed to said
instrument is the corporate seal of said corporation, and that said instrument
was signed and sealed in behalf of said corporation by authority of its Board
of Directors, and said respective persons acknowledged before me said
instrument to be the free act and deed of said corporation and to be their free
act and deed as such officers of such corporation.

 

Witness
my hand and seal this 4th day of November, 2005.  My commission expires 6/21/06.

 

(SEAL)

 

	
   

  	
    /s/ Betty Brinly

  
	
   

  	
  Notary
  Public

  
	
   

  	
  State at Large, Kentucky

  

 

This
Instrument Prepared by the

Undersigned, Attorney at Law of

Harper, Ferguson & Davis

(Division of Ogden Newell & Welch PLLC)

1700 PNC Plaza

500 West Jefferson Street

Louisville, Kentucky 40202

 

	
   

  	
   

  	
  /s/ Spencer E. Harper, Jr.

  	
   

  	
   

  
	
   

  	
   

  	
  SPENCER E. HARPER, JR.

  	
   

  	
   

  

 

 

EXHIBIT A

 

 

DESCRIPTION OF ENVIRONMENTAL FACILITIES

 

FOR

 

COLLECTION, STORAGE, TREATMENT, PROCESSING 

AND FINAL DISPOSAL OF SOLID WASTES

 

AT

 

GHENT GENERATING STATION

UNIT 3

 

KENTUCKY UTILITIES COMPANY

 

NOVEMBER 17, 2005

 

 

Prepared by

 

R. S. Straight, P.E. , Director-Project Engineering, LG&E Energy,
LLC

Joe F. Strickland, P.E., Senior Mechanical Engineer, Project Engineering,
LG&E Energy, LLC

 

 

Introduction

 

This report discusses the scope and costs (“qualifying
costs”) of certain solid waste disposal facilities consisting of flue gas
desulfurization (“FGD”) systems for the collection, storage, treatment,
processing and final disposal of solid wastes (the “Project”) to be constructed
as part of and to serve, Unit 3 of the Company’s Ghent Generating Station in
Carrollton, Kentucky (the “Station”). The Station is owned by Kentucky
Utilities Company (the “Company”).   This
report was prepared on the basis of estimated cost data and other information
furnished by the Company.  For the
purpose of this report, all costs shown as qualifying, in whole or in part, are
assumed, on the basis of information provided by or on behalf of the Company,
to be properly chargeable to the capital account of the facilities described
herein for federal income tax purposes.

 

1.0          General Description

 

The Station is a coal fired steam electric generating station located
in Carroll County, Kentucky.  Air
emission control regulations require removal of particulates and sulfur dioxide
(SO2) from the flue gas exhaust and solid waste disposal regulations
require the disposal of combustion by-products including FGD waste reagent
slurry (calcium sulfite, a.k.a. lime mud sludge).

 

FGD systems are required for removal of SO2 from the flue
gas exhaust of the generating units at the Station.  This is accomplished using FGDs, which mix
limestone with flue gas to remove sulfur dioxide (SO2).  Operation of the FGD using calcium carbonate
(a limestone reagent), for desulfurization, produces a solid waste in the form
of calcium sulfite.

 

The large quantity of FGD-produced solid sludge wastes requires large
scale solid waste sludge handling and disposal facilities.  The disposal costs for collection, storage,
treatment, processing and final disposal of such solid wastes are very
significant and the Company has an indefinite responsibility to maintain the
solid waste storage facilities.

 

Exhibit 1 is an
arrangement of the Unit 3 FGD general area.

 

2.0          Classification as
Solid Wastes

 

FGD sludge wastes are solid wastes at the Station.  These wastes have no use and no value in
their original form and are required to be disposed of in a solid waste
disposal facility.  This is necessary to
comply with solid waste disposal regulations. 
Exhibit 2 illustrates the sources and disposition of the
solid wastes.

 

3.0          FGD and the Solid
Waste Facilities

 

3.1          The General FGD
Project

 

On December 20, 2004, Kentucky Utilities Company (KU) filed with
the Public Service Commission of Kentucky a petition for approval of a
certificate of public convenience and necessity for construction of FGD systems
to be constructed and installed to serve the Ghent

 

1

 

Generating
Station Units 2, 3 & 4.  Ghent
is a 4-unit, 2,100 MW plant.  An FGD was
installed on Ghent Unit 1 in 1994 and has been in continuous operation since
its completion.  Estimated completion
years for the three FGD additions will be: Ghent Unit 3, May 1, 2007;
Ghent Unit 2, 2008; and Ghent Unit 4, 2009. 
The FGDs include all necessary equipment for FGD solid waste reagent
sludge collection, storage, treatment, processing and final disposal in
off-site waste dumps.

 

The Unit 3, 2007 Project is the subject of this report, together with
certain common elements of the other FGD systems to be constructed.  A complete new FGD will be installed to serve
Unit 3 and will be connected to the stack that was constructed for the
1994 FGD (located between Ghent Unit 2 and Unit 3) since it was designed and
has the capacity to serve two FGD units. 
Solid waste sludge from Unit 3 will be conveyed to the existing sludge
waste gypsum settling pond.  The pumps
and piping connecting with the settling pond will be added to and upgraded, as
will the decant pumps and piping that return carrier water to the FGD.

 

3.2          Solid Waste
Processing

 

In the FGD process, SO2 is removed from the flue gas by
reacting it with calcium carbonate (limestone). 
The calcium carbonate is mixed with water (a carrier) to create a slurry
that can be sprayed into the flue gas within the FGD absorber vessel.  The initial step of the process chemically
substitutes SO2 for the carbonate in limestone to create a solid
sludge waste, primarily calcium sulfite, a sludge which must be removed from
the reagent solution circulating through the FGD.  Calcium sulfite is useless, unused, unwanted,
or discarded solid waste material and has no market or other value at the place
where it is located.

 

SO2    +   CaCO3    +   1⁄2
H2O   à   CaSO3  *   1⁄2 H2O   + CO2

 

(gas)        (limestone)   (water)      
(calcium sulfite with water) 
(gas)

 

Further treatment and processing of the solid waste with the
introduction of oxygen (“forced oxidation”) promotes the dewatering and
handling characteristics of the solid waste by reacting oxygen with the solid
waste calcium sulfite and creating calcium sulfate. 

 

     2 (CaSO3  *   1⁄2 H2O)   +   O2   +   3
H2O   à   2 CaSO4   +   4
H2O

 

     2 (calcium sulfite with
water)                             2 (calcium
sulfate)

 

This further treatment and processing of the solid waste enables the
waste by-product to be dewatered more readily and to be disposed of more
efficiently.  

 

Exhibit 3 shows
the process flow schematic.

 

The calcium sulfate solids (impure gypsum) that are produced after
forced oxidation are suspended in water and will settle out if left
undisturbed.  However, for efficient
operation, water is required as a means of transport to solid waste disposal
facilities constituting landfills and solid waste dumps.  This is the current practice for Ghent Unit
1, where water, as a carrier, transports the waste gypsum to an on-site
settling pond.  This same method of
operation is

 

2

 

planned and is
being implemented for the 2007, Unit 3 Project. 
Impure gypsum transfer pumps and piping currently transport the solid
waste gypsum to on-site settling sludge disposal ponds.  Additions and upgrades will be required to
increase the solid waste handling capabilities of the pumps and piping to
handle and process the additional solid wastes to be created.  A mixture of approximately 20% solids is
maintained for efficient transport of the impure gypsum to the settling and
disposal ponds.  Decant pumps currently
are used to reclaim carrier water from the settling ponds and send it back to
the Unit 1 FGD.  Additions and upgrades
will be required to increase the handling capabilities of the decant pumps and
return piping.

 

4.0          FGD
Process Equipment

 

The FGD includes equipment to clean flue gas of sulfur dioxide
generated by the combustion of coal.  The
cleaning process in turn produces the calcium sulfite, which itself is
contaminated by inert particulates and unreacted limestone.  Additional solid waste treatment and processing
of the calcium sulfite produces an impure gypsum material, which although more
easily transported to waste disposal dumps, is useless, unwanted and discarded
solid waste having no market or value at the place where it is located.  Further cleaning, dewatering, processing and
purification would be required to convert the impure gypsum into a form which
has any commercial value or uses.

 

The sludge processing equipment includes the recycle tanks, forced
oxidation blowers, mechanical equipment, electrical components, pumps, controls
and instrumentation.

 

The sludge processing equipment also includes a recirculation loop with
sludge recirculation pumps, associated piping, valves, and auxiliary equipment.
In a conventional FGD process, which does not recirculate the solid waste, the
recirculation loop would require smaller capacity pumps, piping and
auxiliaries.  This loop is smaller when
calcium sulfite is the primary constituent in the sludge as is typical of FGDs
without forced oxidation.  This
requirement was determined to be 25% for the 1994 FGD, which is quite similar
in size, design and function to the 2007 project.  Accordingly, 75% of the recirculation loop
scope and cost and 100% of the FGD reaction tanks scope and cost can be
attributable to the solid waste disposal process.

 

The components of the FGD process located in the sludge processing area
include:

 

•      FGD
absorber reaction tank

 

•      FGD
absorber recirculation pumps

 

•      FGD
absorber recirculation piping

 

•      Oxidation
air blowers

 

•      Mechanical
and electrical auxiliaries

 

•      Instrumentation
and controls

 

•      Foundation
and structure

 

3

 

•      Site
development

 

5.0          Dewatering and
Purification Area

 

The existing dewatering and storage area to serve Unit 3 consists of
sludge settling ponds together with associated pumps, piping, sumps, controls
and mechanical equipment.  These
components remove excess water from the oxidized waste sludge.  The solid waste sludge (impure gypsum) is
dewatered and stored in a holding facility for transport offsite and water
removed from the gypsum is returned to the FGD for reuse.

 

The components of the FGD process already located in the dewatering and
storage area include:

 

•      Settling
pond

 

•      Decant
pumps

 

•      Sludge
transfer piping

 

•      Piping
supports and foundations (additions, as necessary)

 

•      Instrumentation
and controls

 

•      Mechanical
and electrical auxiliaries

 

•      Site
redevelopment, as necessary.

 

6.0          Allocation of
Environmental Facilities

 

Exhibit No. 4 is a block diagram of
the FGD and dewatering facilities.  The
Ghent FGD process equipment consists of systems and subsystems that, for
purposes of this report, are divided into four categories:  

 

•      Dedicated
Solid Waste Management – systems for the treatment, storage, handling or
disposal of qualifying solid waste or functionally related and subordinate
systems

 

•      Dual
Function – the portion of the cost of property allocable to solid waste is
determined by allocating the cost of such property between the property’s solid
waste disposal function and any other functions by a method which reasonably
reflects a separation of costs for each function of the property.

 

•      Non-Qualifying
Systems – systems that perform a function other than solid waste management

 

4

 

•      Balance
of Plant or Common Facilities – functionally related and subordinate
systems, services and equipment that support solid waste disposal and
non-qualifying functions on an allocable basis, including mechanical,
electrical and control facilities dedicated to the Project and other like
environmental facilities and engineering, design and similar support
facilities.

 

In this report, 100% of the capital expenditures for dedicated solid
waste management systems are included as qualifying costs; an allocable
percentage of dual function expenditures are included as qualifying costs; and
0% of non-qualifying facilities.  The
balance of plant expenditures are weighted based upon the overall percent of qualified
costs that exist for the three previous categories.  Common facilities are expected to be
allocated among three planned FGD systems on a one-third basis for each system.

 

Exhibit No. 5
provides an analysis of certain estimated qualified costs for the Unit 3, 2007
FGD project.

 

Construction of the Ghent Unit 3 FGD project has commenced and is
proceeding with due diligence to completion. 
A portion of the costs of the project has been previously provided by
the issuance on July 7, 2005 of $13,266,950 principal amount of County of
Carroll, Kentucky, Environmental Facilities Revenue Bonds, 2005 Series A
(Kentucky Utilities Company Project). As of the date hereof, November 17,
2005, not less than $1,666,666.67 of such 2005 Series A Bond proceeds has
been allocated to the construction costs of the Unit 3 FGD project.  All of such funds have been applied to the
capital costs of the Absorber Reaction Tank, 100% of the costs of which
represent qualified costs.  The entire
costs of the Unit 3 FGD project is not less than $44,000,000.  On the date hereof, the additional sum of
$13,266,950 has been funded for payment of Unit 3 FGD project costs by the
issuance of $13,266,950 of County of Carroll, Kentucky, Environmental
Facilities Revenue Bonds, 2005 Series B (Kentucky Utilities Company
Project), the proceeds of which will be applied to pay construction costs of
the project as construction of the project proceeds with due diligence to
completion.

 

7.0          Average Remaining
Economic Life

 

The class life asset guideline range of the Unit 3, 2007 Project, as provided
by Section 167(m) of the Code, is 49.13 (electric steam production plant)
with a mid-range asset guideline range of at least 28 years.  The Company has elected to use the safe
harbor of at least 28 years for the current funding.  The Ghent Unit 3 generating unit has a
remaining useful life of at least 30 years and the Company intends to continue
to operate and fully maintain each Unit of the Station for at least the period
extending to the scheduled maturity of any Bonds issued to finance FGD facilities
for such Units.

 

5

 

 

EXHIBIT 1. GHENT UNIT 3 FGD GENERAL AREA

 

 

 

EXHIBIT 2

 

 

 

PROCESS FLOW SCHEMATIC

 

EXHIBIT 3

 

 

	
   

  

 

EXHIBIT 4

 

 

EXHIBIT NO. 5

 

Kentucky Utilities Company

Ghent Generating Station
(Carroll County, Kentucky)

Solid Waste Environmental
Facilities; Unit 3*

 

	
   

  	
   

  	
  Equipment

  	
   

  	
  Material

  	
   

  	
  Labor

  	
   

  	
  Total

  	
   

  	
  Percent

  	
   

  	
  Qualified

  	
   

  
	
   

  	
   

  	
  Cost

  	
   

  	
  Cost

  	
   

  	
  Cost

  	
   

  	
  Cost

  	
   

  	
  Qualified

  	
   

  	
  Cost

  	
   

  
	
  Major
  Components

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Absorber
  Vessel

  	
   

  	
  $

  	
  10,000,000

  	
   

  	
  $

  	
  2,000,000

  	
   

  	
  $

  	
  3,000,000

  	
   

  	
  $

  	
  15,000,000

  	
   

  	
  75

  	
  %

  	
  $

  	
  11,250,000

  	
   

  
	
  Absorber
  Reaction Tank

  	
   

  	
  $

  	
  10,000,000

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  3,000,000

  	
   

  	
  $

  	
  13,000,000

  	
   

  	
  100

  	
  %

  	
  $

  	
  13,000,000

  	
   

  
	
  Absorber
  Recirulation Loop

  	
   

  	
  $

  	
  10,000,000

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
  $

  	
  11,000,000

  	
   

  	
  75

  	
  %

  	
  $

  	
  8,250,000

  	
   

  
	
  Oxidation
  Air Blowers

  	
   

  	
  $

  	
  5,000,000

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
  $

  	
  6,000,000

  	
   

  	
  100

  	
  %

  	
  $

  	
  6,000,000

  	
   

  
	
  Sludge
  Transfer Piping/Pumps

  	
   

  	
  $

  	
  2,000,000

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  500,000

  	
   

  	
  $

  	
  2,500,000

  	
   

  	
  100

  	
  %

  	
  $

  	
  2,500,000

  	
   

  
	
  Decant
  Pumps & Return Piping

  	
   

  	
  $

  	
  2,000,000

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
  $

  	
  3,000,000

  	
   

  	
  100

  	
  %

  	
  $

  	
  3,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Common
  Facilities

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Engineering &
  Design

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  0

  	
   

  	
  Estimates Not

  	
   

  
	
  Site
  Preparation/Development

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  0

  	
   

  	
  Available; 33.3%

  	
   

  
	
  Foundations &
  Structures

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  0

  	
   

  	
  Will Be Allocated

  	
   

  
	
  Mechanical,
  Electrical & Controls

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  0

  	
   

  	
  To Project

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  TOTAL
  QUALIFIED

  	
   

  	
  $

  	
  44,000,000

  	
  **

  

 

*Costs Estimated

 

**Construction
of the Ghent Unit 3 FGD project has commenced and is proceeding with due
diligence to completion.  A portion of
the costs of the project has been previously provided by the issuance on July 7,
2005 of $13,266,950 principal amount of County of Carroll, Kentucky,
Environmental Facilities Revenue Bonds, 2005 Series A (Kentucky Utilities
Company Project). As of the date hereof, November 17, 2005, not less than
$1,666,666.67 of such 2005 Series A Bond proceeds has been allocated to
the construction costs of the Unit 3 FGD project.  All of such funds have been applied to the
capital costs of the Absorber Reaction Tank, 100% of the costs of which
represent qualified costs.  The entire
costs of the Unit 3 FGD project is not less than $44,000,000.  On the date hereof, the additional sum of
$13,266,950 has been funded for payment of Unit 3 FGD project costs by the
issuance of $13,266,950 of County of Carroll, Kentucky, Environmental
Facilities Revenue Bonds, 2005 Series B (Kentucky Utilities Company
Project), the proceeds of which will be applied to pay construction costs of
the project as construction of the project proceeds with due diligence to
completion.Exhibit
10.1

 

 

 

November 21,
2005

 

Luther J. Nussbaum

5818 Bay Shore Walk

Long Beach, CA  90803

 

Dear
Lu,

 

This letter sets forth the substance of the
agreement (the “Agreement”) between you and First Consulting Group, Inc. (“FCG”)
regarding your separation of employment.

 

1.  Separation.  Your
separation as an employee of FCG and all of its subsidiaries or affiliates
(individually, an “FCG Company” or collectively, the “FCG Companies”) shall be effective
November 21, 2005 (the “Separation Date”). 
The foregoing shall not be deemed to modify the date of your previous
resignation on November 3, 2005 as FCG’s Chairman and Chief Executive
Officer, and as an officer and/or director of any FCG Company.

 

2.  Accrued Salary and Paid Time Off.  On
or after the Separation Date, in conformance with applicable state laws, FCG
will pay you all accrued and unpaid salary, and all accrued and unused paid
time off earned through the Separation Date, subject to standard payroll
deductions and withholdings.  You are
entitled to these payments regardless of whether or not you sign this
Agreement.  Unused personal choice
holidays are paid out.

 

3.  Severance Payments.  FCG will pay to you a lump sum amount of $820,250 as full consideration
for your obligations and covenants under this Agreement and in full
satisfaction of any amount that may be owed to you upon your separation from
FCG under any agreement or arrangement between you and FCG or any other FCG
Company.   The foregoing lump sum
severance amount represents: (a) eighteen (18) months base salary; (b) eighteen
(18) months of target DSO bonus at a 10% bonus rate; (c) lump sum amount equivalent
to purchase of retiree benefits; and (d) membership dues for the Center Club and WPO for the 2006 calendar year.
Payment of the lump sum severance described above will be made within ten (10) days
after the date this signed agreement is received by FCG.  All amounts paid under this paragraph will be
less federal, state and other applicable taxes and other authorized
withholdings, and shall be made by manual check.

 

4.  Health Insurance.  According
to company policy, your FCG group health insurance benefits will be cancelled
effective with the Separation Date. After the Separation Date, you will be
eligible to continue your group health insurance benefits at your sole cost and
expense to the extent provided by federal law, state insurance laws and by FCG’s
current group health insurance policies (including retiree medical benefits). You
may do this by making the retiree medical election and submitting your premiums
directly to our benefits administrator in the Long Beach office.

 

 

A package of information will be sent to you
via mail within 21 days of the Separation Date detailing the process and
premium amounts for your retiree medical benefits coverage, including the
deadline by which you must elect coverage. Coverage will be effective
retroactive to the Separation Date.

 

5. Flexible Spending Accounts. Coverage under Flexible Spending Accounts
ceases on the Separation Date, subject to your ability to continue your Health
Care Flexible Spending Account through the balance of the year on an after-tax
basis. Additional details are provided in the standard COBRA notification.

 

6. Life Insurance. Your FCG group life insurance coverage will
end effective on the Separation Date.  If
you would like to convert your coverage, please contact the Benefits Service
Center within 30 days of the Separation Date at 800-471-8853, ext. 2363.

 

7. Disability/Long Term Care
Coverage. Coverage
under the disability and Long Term Care programs will terminate effective on
the Separation Date.  If you would like
to convert your coverage(s), please contact the Benefits Service Center within
30 days of the Separation Date at the number above.

 

8. Associate Stock Purchase Plan
(ASPP).   Participation in the ASPP will terminate
effective with the Separation Date. 
Year-to-date deductions that have not already been used to purchase
stock will be refunded within two pay periods after the Separation Date.  Stock already purchased will remain in your
personal E*TRADE account. You should contact E*TRADE directly with any
questions regarding your account.

 

9. Stock Options.  Any
options to purchase FCG stock that you hold will cease to vest on the
Separation Date and all of your unvested stock options will be cancelled.  The expiration date on your vested options
will be modified so that you will have until December 31, 2006 to exercise
any vested options you received under FCG’s option plans. A closing statement
containing information on your vested options will be mailed to your home from
the FCG Corporate Affairs department. 
Also, status of your stock options is available online through E*TRADE
at www.optionslink.com.

 

10. Other Benefits.  You
and FCG hereby agree and acknowledge the following:

 

(a) SERP and 401(k).  As of
the Separation Date, you no longer may contribute funds to FCG’s 401(k) plan or
the Supplemental Executive Retirement Plan (“SERP”), nor will FCG contribute
any matching or other funds to such plans on your behalf.  No payroll deductions for pre-tax
contributions will be taken from your severance pay.   Nothing in this Agreement terminates or
otherwise affects any right or interest you may have in vested funds and assets
under FCG’s 401(k), ASOP and SERP plans.

 

You will receive detailed information from
New York Life regarding the distribution of your contributions and any vested
funds from the 401(k) and ASOP account. 
As you will read in that material, you should wait until the middle of
the month after the month in which your last 401(k) deduction is made
before applying for a distribution. 
Contact New York Life directly at 

(800) 294-3575 regarding any questions, including account rollover
transactions.  You may also visit their
website at www.bcomplete.com.  If you
currently have an outstanding loan, you may 

 

2

 

maximize the tax deferral of
this benefit by electing to repay the loan prior to taking a distribution from
the Plan.  If you choose not to, the
outstanding loan balance will be defaulted and treated as a taxable
distribution to you.  You may coordinate
the prepayment of the outstanding loan balance with New York Life.

 

You will receive detailed information from
Human Resources regarding the distribution of your contributions and any vested
funds from the SERP.  You may contact Carol
Cogan if you have any questions.

 

(b) Other Amounts.  You
acknowledge that, except as expressly provided in this Agreement, you will not
receive any additional compensation, bonus, severance or benefits after the
Separation Date.

 

(c) Acknowledgment.  You
acknowledge that the consideration provided in this Agreement is good and
valuable consideration in exchange for this Agreement, and includes payments
and benefits to which you are not otherwise entitled.

 

11. Unemployment Benefits. Because of the nature of your separation
with FCG, you are not eligible for unemployment insurance benefits.

 

12. Expense Reimbursement. Any outstanding unreimbursed expenses will
be paid based on the submission of your final Time and Expense Report and the
appropriate documentation. It is acknowledged that you may receive cellular
phone, long distance and other business related charges after the Separation
Date; please submit those expenses for reimbursement as they occur to FCG c/o
Jan Blue in the Long Beach, California office.

 

13. Return of FCG Property.  Except
as noted below, on or before the Separation Date, you agree to return to FCG
all FCG Company documents (and all copies thereof) and other FCG Company
property that you have had in your possession at any time, including (i) any
materials of any kind that contain or embody any proprietary or confidential
information of an FCG Company (and all reproductions thereof), and (ii) computers
and other electronic devices, credit cards, phone cards, entry cards,
identification badges and keys. Please return items to Jan Blue in Long Beach
as soon as practicable, at least within 7 days.

 

You will be permitted to keep your laptop
computer at no cost to you, except that the fair market value of the computer
will be added to your taxable wages and appropriate state and federal taxes
will be deducted.  The applications
software on your laptop is licensed for FCG use only and it is your
responsibility to delete any applications software from the computer with the
exception of the operating system.

 

In addition, FCG will make reasonable efforts
to provide to you any personal emails sent to your former FCG email address for
a period of sixty (60) days from the Separation Date.  Additionally, during that period of time, FCG
will place an auto reply message on your former FCG email indicating your new
email address for any personal messages. Meanwhile, any pertinent FCG
communications, other than inquiries described in Section 17 below, shall
be forwarded to Steve Heck or a successor CEO.

 

3

 

14. Vice President Agreement; Indemnity Agreement.
You hereby acknowledge and agree to your continuing obligations, both during
and after your employment with FCG, to abide by the terms of that certain Vice
President Agreement between you and FCG dated December 15, 2000; provided,
however, that you agree that Sections 7(a) and (b) of your Vice
President Agreement shall be superseded and replaced in their entirety by the
terms set forth in Section 15 of this Agreement.  The terms of that certain Indemnity Agreement
between you and FCG dated February 9, 1998 shall remain in full force and
effect and you are entitled to indemnification by FCG in accordance with and
subject to the terms of FCG’s charter documents and the Indemnity Agreement.

 

15. Non-Solicitation.  You hereby
agree to the following restrictions for a period of eighteen (18) months from
the Separation Date:

 

(a)         No Solicitation of Known FCG Company
Clients.  You
hereby agree that, without the prior written consent of FCG, you (i) shall
not provide any services, directly or indirectly, and whether as an employee,
consultant, independent contractor or otherwise, to or on behalf of any Known
FCG Client, and (ii) shall not, directly or indirectly, solicit, divert or
take away any Known FCG Client.  For
purposes of these restrictions, a “Known FCG
Client” shall be any past, present or prospective client of any FCG
Company that you provided services for, participated in preparation or delivery
of any oral or written proposal for, or otherwise had contact with during the
last 18 months while at FCG.

 

(b)         No Solicitation of Employees.  You agree to
not, directly or indirectly, solicit, divert, take away, hire or engage, on
behalf of yourself or any other person or entity any employee of any FCG
Company.

 

16. Confidentiality.  The provisions of this Agreement will be held
in strictest confidence by you and FCG and will not be publicized or disclosed
in any manner whatsoever; provided, however,
that:  (a) you may disclose this
Agreement to members of your immediate family upon their agreement to maintain
this Agreement in strict confidence as set forth in this section; (b) the parties
may disclose this Agreement in confidence to their respective attorneys,
accountants, auditors, tax preparers, and financial advisors; (c) FCG may
disclose this Agreement as necessary to fulfill standard or legally required
corporate reporting or disclosure requirements; and (d) the parties may disclose this
Agreement insofar as such disclosure may be necessary to enforce its terms or
as otherwise required by law.  In
particular, and without limitation, you agree not to disclose the terms of this
Agreement to any current or former FCG employee.

 

17. Nondisparagement; Inquiries.  Both you and FCG agree not to
disparage the other party, and the other party’s officers, directors,
employees, shareholders and agents, in any manner likely to be harmful to them
or their business, business reputation or personal reputation; provided that
both you and FCG will respond accurately and fully to any question, inquiry or
request for information when required by legal process.  You agree that you shall refer any inquiries
from the media, financial analysts or the stockholder community concerning the
reasons for your departure from FCG to Tom Reep and shall not provide any such
persons with any information concerning the reasons for your departure beyond
that described in FCG’s public announcement of your departure.

 

4

 

18. Release of Claims.  In
consideration for FCG entering into this Agreement and for other good and
valuable consideration, you hereby release, acquit and forever discharge each
of the FCG Companies and their respective parents and subsidiaries, and each of
their respective officers, directors, agents, servants, employees, attorneys,
shareholders, successors, assigns and affiliates, of and from any and all claims,
liabilities, demands, causes of action, costs, expenses, attorneys’ fees,
damages, indemnities and obligations of every kind and nature, in law, equity,
or otherwise, known and unknown, suspected and unsuspected, disclosed or
undisclosed, fixed or contingent, liquidated or unliquidated, arising out of or
in any way related to agreements, events, acts or conduct at any time prior to
and including the Effective Date of this Agreement, including but not limited
to: all such claims and demands directly or indirectly arising out of or in any
way connected with your employment with any FCG Company or the termination of
that employment; claims or demands related to salary, bonuses, commissions,
stock, stock options or any other ownership interests in any FCG Company,
vacation pay, fringe benefits, expense reimbursements, severance pay or any
other form of compensation; claims arising from any employment agreement or
arrangement between you and any FCG Company; claims pursuant to any federal,
state or local law, statute or cause of action including, but not limited to,
the federal Civil Rights Act of 1964, as amended; the federal Americans with
Disabilities Act of 1990; the federal Age Discrimination in Employment Act of
1967, as amended (“ADEA”); the California Fair Employment and Housing Act, as
amended; tort law; contract law; wrongful discharge; discrimination;
harassment; fraud; defamation; emotional distress; and breach of the implied
covenant of good faith and fair dealing. 
You further agree not to initiate or continue any proceeding based upon
the claims released herein. 
Notwithstanding the foregoing, your release of the FCG Companies in
accordance with this Section shall not be deemed to release (i) any
of the FCG Companies’ duties or obligations under this Agreement, including,
but not limited to, FCG’s indemnification obligations to you described in Section 14
of this Agreement; or (ii) any of your rights as a stockholder and/or
option holder of FCG.

 

19. ADEA Waiver.  You acknowledge that you are knowingly
and voluntarily waiving and releasing any rights you may have under the ADEA,
as amended.  You also acknowledge that
the consideration given for the waiver and release in the preceding paragraph
hereof is in addition to anything of value to which you were already
entitled.  You further acknowledge that
you have been advised by this writing, as required by the ADEA, that:  (a) your waiver and release do not apply
to any rights or claims that may arise after the execution date of this
Agreement; (b) you have been advised hereby that you have the right to
consult with an attorney prior to executing this Agreement; (c) you have
twenty-one (21) days to consider this Agreement (although you may choose to
voluntarily execute this Agreement earlier); (d) you have seven (7) days
following the execution of this Agreement by the parties to revoke the
Agreement; and (e) this Agreement will not be effective until the date
upon which the revocation period has expired, which will be the eighth day
after this Agreement is executed by you, provided that FCG has also executed
this Agreement by that date (“Effective Date”).

 

20. Section 1542
Waiver.  In giving the above
releases, which include claims which may be unknown to you at present, you acknowledge
that you have read and understand Section 1542 of the California Civil
Code which reads as follows:  “A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor.”  You hereby expressly
waive and relinquish all rights and benefits under that section and any
law of any jurisdiction of similar effect with respect to your release of any
unknown or unsuspected claims that you may have against the FCG Companies.

 

5

 

21. Indemnification and Attorneys’
Fees.  You understand and agree that if you
hereafter commence, join in, or in any manner seek relief through any lawsuit,
charge or complaint with any court, administrative agency, governmental
authority or otherwise in any matter arising out of, based upon, or relating to
the claims released in this Agreement, then you will pay FCG in addition to any
other expenses, costs or damages caused to FCG thereby, all FCG’s attorneys’
fees incurred in defending or otherwise responding to such lawsuit, charge, or
complaint.    This section will not apply to any claim
brought by you under the ADEA or to challenge the validity of the waiver in
this Agreement of any such claim or any claim to enforce FCG’s obligations
hereunder or any rights you may have as an FCG stockholder and/or option holder.

 

22. Consultation.  You
agree to make yourself reasonably available to FCG to respond to reasonable
requests by FCG for information concerning litigation, regulatory inquiry or
investigation, involving facts or events relating to FCG that may be within your
knowledge.  You will provide a reasonable
degree of cooperation with FCG in connection with any or all future litigation
or regulatory proceedings brought by or against FCG to the extent FCG
reasonably deems your cooperation necessary.

 

23. Miscellaneous.  This
Agreement constitutes the entire agreement between you and FCG with regard to
this subject matter.  It is entered into
without reliance on any promise or representation, written or oral, other than
those expressly contained herein, and it supersedes any other such promises,
warranties or representations, except and only to the extent expressly provided
in Section 14 hereof.  This
Agreement may not be modified or amended except in a writing signed by both you
and FCG.  This Agreement will bind and
inure to the benefit of the heirs, personal representatives, successors and
assigns of both you and FCG.  If any
provision of this Agreement is determined to be invalid or unenforceable, in
whole or in part, this determination will not affect any other provision of
this Agreement and the provision in question will be modified by the court so
as to be rendered enforceable.  This
Agreement will be deemed to have been entered into and will be construed and
enforced in accordance with the laws of the State of California as applied to
contracts made and to be performed entirely within California.

 

Lu, we deeply appreciate your many years of service
to FCG, including as CEO and Chairman. We wish you all the best in wherever
your future endeavors may take you.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

6

 

If this Agreement is acceptable to you,
please sign below and return the original to Jan Blue at First Consulting Group, Inc.,
111 West Ocean Boulevard, 4th Floor, Long Beach, California 90802.

 

Sincerely,

 

FIRST CONSULTING GROUP, INC.

 

 

	
  By:

  	
   
   /s/ Douglas G. Bergeron

  	
   

  
	
   

  	
   
  Douglas G. Bergeron

  
	
   

  	
    Chairman

  

 

 

AGREED:

 

	
   

  	
     /s/ Luther J. Nussbaum

  	
   

  
	
   

  	
   
  Luther J. Nussbaum

  

 

cc:        Jan
Blue, Vice President

 

7

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