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Rating Action:

MOODY'S CONFIRMS E.ON'S Aa2 RATING WITH STABLE OUTLOOK AND PLACES POWERGEN'S AND LG&E ENERGY'S RATINGS ON REVIEW FOR POSSIBLE UPGRADE

09 Apr 2001
MOODY'S CONFIRMS E.ON'S Aa2 RATING WITH STABLE OUTLOOK AND PLACES POWERGEN'S AND LG&E ENERGY'S RATINGS ON REVIEW FOR POSSIBLE UPGRADE

London, 09 April 2001 -- Moody's Investors Service has confirmed E.ON's Aa2 long-term debt rating and Prime-1 short-term rating. The outlook for the rating has been changed to stable from negative. The rating action follows today's announcement that E.ON intends to acquire the UK utility Powergen for €15.3 billion including assumed debt in an all cash funded transaction. The confirmation of the rating is based on the announcement that the group is to refocus as a utility company and will divest all of its non core-business activities including significant assets in oil and chemicals. Moody's has focused on the cash which E.ON should raise from these disposals which will be significantly more than they intend to spend in acquiring Powergen. In the absence of further significant acquisitions, E.ON will soon be in a net cash positive position even allowing for the acquisition cost of Powergen.

At the same time, Moody's has placed the Baa1/Prime-2 issuer rating of Powergen plc, the A3/Prime-2 ratings of Powergen UK PLC, the A2 rating of Powergen Energy PLC and the ratings of LG&E Energy Corp. and its legally supported financial conduit, LG&E Capital Corp. on review for possible upgrade reflecting the anticipated support these companies will receive from becoming a core part of an Aa2 group. At the same time, the ratings of Louisville Gas & Electric Company and the ratings of Kentucky Utilities Company are confirmed at their existing levels. These rating actions completes the ratings review initiated when the U.S. companies were acquired by Powergen.

E.ON has made two significant announcements. The first announcement is that they intend to become a pure utility company and will, over the short to medium term, divest of all their non-utility businesses including Veba Oel, VAW aluminium and Degussa, the fine chemicals business. With the €11.4 billion which has already been raised from the sale of the stake in VIAG Interkom, these disposals should generate in excess of €20 billion for E.ON. The company intends to reinvest this capital in global utility businesses with electricity and gas at the heart of the group and water and services as supplementary businesses.

The second announcement is the agreed acquisition of the Powergen group, subject to regulatory approvals. In addition to the €8.2 billion (GBP7.65 per share) which E.ON will offer to Powergen's shareholders they must also assume around €9 billion of net debt. E.ON will be registered under the US regulatory rules of the Public Utility Holding Company Act (PUHCA) and approvals will be needed from OFGEM in the UK, the EU and HSR who will consider anti-trust issues and from the Securities and Exchange Commission (SEC), Federal Energy Regulatory Commission (FERC) and the Public Service Commissions (PSC's) of Kentucky and Virginia in the US. The completion of these approvals cannot be expected before the end of 2001 so the acquisition will not close until the spring of 2002 at the earliest. There are no obvious problems in obtaining regulatory approvals.

Moody's recognises two clear attractions for E.ON in acquiring Powergen. Firstly, they become a major player in the UK with significant assets in generation (around 34 TWh with over 7,800 MW capacity) distribution (with around 67,000 km of lines) and a strong brand with over 3 million retail customers. Powergen has an experienced trading capability and is well placed for a post-NETA trading environment.

Secondly, LG&E becomes not only an attractive asset to allow E.ON to enter the US market in a significant way but also a platform for future growth. Powergen identified LG&E as a target for this purpose: it is at the crossroads of major energy flows, is in a heavily industrialised region and there are clear consolidation opportunities in a fragmented market. Powergen always intended to leverage off the LG&E acquisition by acquiring further US assets and the real synergy benefits come from combining entities as National Grid has shown with the acquisitions of NEES, EUA and Niagara Mohawk. The issue for Powergen was one of how it would fund another significant US acquisition and this transaction offers the solution.

The geographic position of LG&E Energy and the relatively favourable regulatory environment (incentive based rate plan, pass-through of fuel costs and recovery of environmental costs) means LG&E Energy does not face the types of problems which have caused crisis in California. Moody's anticipates that E.ON will support LG&E Energy both strategically and financially in its current activities and future expansion plans. The change of the rating review from possible downgrade to possible upgrade is based upon the support which Moody's anticipates LG&E Energy will receive from a Aa2 rated group.

Following the acquisition of Powergen, E.ON's sales of electricity will be more diverse with 56% from Germany (75% at present), 28% from Europe including the UK and 16% from the US. In addition to Powergen, E.ON has already acquired the Dutch generator, EZH and is seeking to acquire full control of the Swedish generator, Sydkraft. The combined E.ON/Powergen/LG&E Energy group will be the world's largest investor-owned electricity and gas company and second only to EDF in terms of electricity sales of all companies on whom Moody's has reliable information.

There are a number of uncertainties which still surround this transaction and E.ON's future strategy. The principal issues are:

· Obtaining regulatory clearance for the Powergen acquisition and the possibility of a higher bidder - given the support of the Powergen Board, neither of these issues look to be a major threat;

· Achieving the sale value of the non-utility businesses and the timeframe for this. It could take more than 3 years to fully divest these activities at an acceptable value;

· Realising the growth strategy in utilities. Moody's believes that this could be the most significant of the issues for E.ON. There are now a number of European companies - including EDF, Endesa, Vattenfall, RWE, ENEL and E.ON itself - who hope to become dominant players in the liberalising European power markets and who have the financial resources to fulfil this aim. The question may become one of a lack of opportunities which could push up asset values and tempt acquirers into over-paying for assets or companies which do become available.

However, Moody's assessment of the announcements that E.ON has made is that they will remain a Aa2 credit over the medium term and hence the change of rating outlook from negative to stable. Clearly, a rapid acquisition programme which significantly overspends the capital E.ON should receive from the asset disposals would change this rating outlook. To date, E.ON has shown itself to be a cautious and patient acquirer.

The following rating changes are made as a result of this announcement:

E.ON AG

Senior unsecured long term debt ratings: From Aa2 with negative outlook to Aa2 with stable outlook.

Powergen plc

Issuer ratings: From Baa1/Prime-2 with stable outlook to review for possible upgrade

Powergen UK plc

Senior unsecured long term debt ratings: From A3 with stable outlook to review for possible upgrade

Commercial paper and other short term: From Prime-2 with stable outlook to review for possible upgrade

Powergen Energy plc

Senior unsecured long term issuer ratings: From A2 with stable outlook to review for possible upgrade

Commercial paper and other short term: Prime-1 with stable outlook - no change

LG&E Energy Corp

Issuer rating: From A3 on review for possible downgrade to review for possible upgrade

LG&E Capital Corp

Senior unsecured debt: From A3 on review for possible downgrade to review for possible upgrade

Commercial paper and other short term: From Prime-2 on review for possible downgrade to review for possible upgrade

Louisville Gas & Electric Company

Senior secured First Mortgage Bonds: A1 ratings confirmed; stable outlook

Issuer rating and senior unsecured debt: A2 ratings confirmed; stable outlook

Preferred stock: "a2" ratings confirmed; stable outlook

Commercial paper and other short term: Prime-1 and VMIG-1 ratings confirmed

Kentucky Utilities Company

Senior secured First Mortgage Bonds: A1 ratings confirmed; stable outlook

Issuer rating: A2 rating confirmed; stable outlook

Preferred stock: "a2" ratings confirmed; stable outlook

Commercial paper and other short term: Prime-1and VMIG-1 ratings comfirmed

E.ON AG, headquartered in Duesseldorf, Germany, is a diversified concern with activities in energy, speciality chemicals, telecommunications and service areas. The company's consolidated sales as of December 2000 amounted to €93 billion in 2000.

Powergen plc is the UK holding company for an international power generation, distribution and retail businesses headquartered in London. The group reported turnover of over GBP4.2bn (€6.7 billion) in 2000. Its principal operating subsidiary is Powergen UK PLC.

LG&E Energy Corp. is the holding company for Louisville Gas & Electric Company, Kentucky Utilities Company and LG&E Capital Corp. LG&E Energy Corp., along with its subsidiaries, is headquartered in Louisville, KY.

London
Stuart Lawton
Managing Director
European Corporates
Moody's Investors Service Ltd.
44 20 7772 5454

London
Helen Francis
Vice President - Senior Analyst
European Corporates
Moody's Investors Service Ltd.
44 20 7772 5454

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