KU Energy Corporation

views updated

KU Energy Corporation

One Quality Street
Lexington, Kentucky 40507
(606) 288-1155
Fax:(606) 288-1125

Public Company
Employees: 2,241
Sales: $.61 billion
Stock Exchanges: New York Pacific
SICs: 8340 Electric, Water, and Gas Utilities

KU Energy Corporation provides electric service to about 440,000 people in 77 Kentucky and 5 Virginia counties. Through its primary subsidiary, Kentucky Utilities Company, it operates seven power generating stations. A leading institution in the state, Kentucky Utilities Company has grown steadily during its 80-plus years of service to the region.

When Kentucky Utilities Company was formed in the early 1900s, the electric industry was still in its infancy. The first commercial power station, Thomas Edisons Pearl Street Station, had been installed in New York in 1883. Even 30 years later, however, most regions in the United States were without centralized electric service, and some rural communities had no electricity at all. Most towns in Kentucky got their electricity from small, local generators. The power was often costly and the service poor. The generators only ran from dusk to midnight, and, in a confusing arrangement, different generators often competed for customers within the same town.

It was this setting that lured Harry Reid from his New York home to the tiny town of Versailles, Kentucky. Having witnessed the success of central power stations in his home state, Reid saw an opportunity to bring the same type of service to Kentucky. So, with $200 in savings and the promise of credit from an east coast friend, the bespectacled Reid traveled by rail to Versailles. He arrived in 1905 with the intent of purchasing its small, run-down power plant.

Reids plan was to eventually acquire a network of power generators that would serve the entire region, but his vision was dashed shortly after his arrival to the Blue Grass State. Although Reid was able to purchase the Versailles power station, his east coast friend died, leaving him strapped for cash. Unable to afford the expensive repairs needed to refurbish his dilapidated station, the local city council prepared to terminate his street lighting contract. The final blow came when Reid contracted typhoid fever and nearly expired.

Reid recovered and was able to rekindle his fading vision in 1912. He sold his power plant and led a group of like-minded entrepreneurs to form the Kentucky Utilities Company (KU), which began operations December 2, 1912. Reid was named general manager of the Lexington-based enterprise, which started out operating local electric systems and a few ice and water companies. With a hefty $2.7 million in capital, the company quickly purchased stations in eight surrounding areas (including Versailles), bringing its customer base to 4,277 and its first-year receipts to nearly $290,000.

KU continued to expand its operations aggressively throughout the decade and into the 1920s. By 1916, in fact, KU was serving 51 communities in the central and western regions of the state, many of which had never enjoyed access to electricity. By the early 1920s, KU was providing service to customers in eastern Virginia. Furthermore, KU benefited greatly from the burgeoning coal mining industry of that era. Besides consuming almost two-thirds of KUs electricity output by 1920, the local coal mines supplied a cheap source of fuel for KUs power plants. KU augmented its income from electricity operations by selling electrical appliances and charging people to wire their homes.

KU snapped up small power generators and even entire competing generation companies to build its network during the 1920s, and it erected poles and power lines throughout its service regions. The work was hard. Line crews traveled in wagons or trucks and lived out of tents for weeks on end. After falling the timber that was used for the poles, they used mules to drag the lumber from the forest. Even after the power lines were built and the generators were working, numerous problems plagued the systems. Aside from technical breakdowns, which occurred with frustrating regularity, high winds and ice often inflicted long-lasting damage to the companys fragile networks.

KUs early years were filled with telling examples of the type of ingenuity and perseverance that originally settled the region. One day, for example, the smokestack at KUs power plant in Richmond melted and folded in the middle, closing the draft necessary to keep the boilers operating. The manager of the plant grabbed his shotgun and a box of shells and started blasting holes in the stack. By the time he had emptied his gun the stack was again functioning properly. In another episode described in company annals, lightning struck and knocked out power at a KU plant two times during a storm, once even striking the plant operator. After a third bolt hit nearby, the operator turned the power off himself, exclaiming If a Higher Power is going to run His light plant, I m going to shut down mine.

KU persevered through the 1920s and was able to expand its reach significantly. Early in the decade, however, management realized that its disjointed network of plants and lines would soon be insufficient to handle the electricity demands that would arise in the near future. So, it began tying its operations together with the intent of creating one or two major power producing facilities that would distribute electricity to its broad customer base. To this end, the company constructed a 30,000-kilowatt power plant in Pineville, Kentucky in 1924. It served most of its central and southeastern markets. In the late 1920s, moreover, KU tapped into power provided by the massive Dix Dam. At 105 feet higher than Niagara Falls, the Dix hydroelectric dam was the tallest dam east of the Rocky Mountains at the time it was built.

By the end of the roaring twenties, KU was providing electricity to over 250 communities, most of which had been added to the KU network since 1925. It had made large strides toward its goal of consolidating its systems, virtually redesigning and rebuilding the infrastructure in several service regions. KU had also initiated programs to take its service to small rural areas. In addition, its appliances division had grown into a surprisingly healthy sideline. Although the companys expansion was stumped in the five years following the Great Depression, growth resumed in the latter half of the 1930s. Importantly, KU absorbed competitors Lexington Utilities Company and Kentucky Power and Light Company in the early 1940s, making KU the dominant supplier in the state.

World War II delayed KUs construction of its gigantic Tyrone Plant until 1946. Completion of that facility in 1948 marked the beginning of a huge period of growth that would change the face of the fledgling power producer. Indeed, a vast supply of electricity would be needed to fuel the postwar U.S. economic boom. Recognizing the emerging need, KU decided to liquidate its varied operationsby the 1940s KU was operating water works, selling ice and appliances, and operating buses systems and trolleysand focusing solely on developing an electrical supply network. In addition to the Tyrone plant, KU added its Green River Operating Station during that period.

During the 1950s KU became a truly statewide supplier of electricity, thus realizing its founders original dreamReid had stepped aside as president of the company in 1927. Demand for electricity soared during the 1950s and 1960s. Hundreds of manufacturing companies commenced operations in the state and the residential population boomed. Furthermore, the use of electrical appliances, such as water heaters and air conditioners, vastly broadened applications for electricity. Between 1960 and 1970, annual power consumption in Kentucky more than doubled. Despite government-supported utilities (i.e. the Tennessee Valley Authority (TVA) and rural electric cooperatives), which captured a significant share of the power generation market during the 1940s and throughout the mid-1900s, KU managed to sustain a healthy pattern of growth.

By the early 1970s, KUs generating capacity had soared to more than 1.2 million kilowatts (kw). Much of this increased capacity was the result of the first of a new generation of massive power generators that KU built in 1970 and 1971. Rated at 427,000 kw, the new Unit Three generator at KUs Brown Plant was capable of producing close to the total amount of KU electricity consumed annually just 15 years earlier. In 1974, KU added an even larger unit to its new station at Ghent on the Ohio River in northern Kentucky.

The Organization of Petroleum Exporting Countries (OPEC) in the Middle East slashed production in the mid-1970s, causing oil and gas prices to soar and resulting in what was referred to as an energy crisis. In response, KU and other utilities shifted their marketing strategies to emphasize conservation rather than increased consumption. Also during that period, dozens of tornadoes inflicted heavy damage on many of KUs facilities. The company was further strained by the winter of 1977-1978, during which extreme cold diminished local coal inventories. These problems, combined with general economic sluggishness in the region, nearly crippled KU by the late 1970s.

KU, under the direction of then-President William A. Duncan, Jr., withstood the crises of the 1970s and even managed to position itself for expansion during the coming decade. William B. Bechanan assumed Duncans position in 1978, shortly before the company moved into its new nine-story corporate headquarters building in downtown Lexington. Early in the 1980s, KU completed construction of major new generation facilities. In addition, it opened a $6.6 million high-tech addition to its aging System Control Center, which served as a sort of central nervous system for KUs operations. The updated center greatly increased power generation efficiency and service.

Although several factors, such as the increasing popularity of natural gas heating in homes, detracted from the overall performance of the electric utilities industry during the late 1970s and early 1980s, KU managed to remain profitable and even to steadily enlarge its operations. To overcome lagging demand growth, KU initiated several programs during the early 1980s to increase consumption. Its economic development thrust, for example, helped state officials to attract major electricity-consuming manufacturers to Kentucky. Its Wise Choice Home program offered financial incentives to customers whose homes met energy efficiency guidelines, thus helping KU reclaim some of the residential energy market that it had lost to natural gas.

KUs growth during the 1970s and early 1980s represented a decline from the rate of expansion the company enjoyed during the boom years of the 1950s and 1960s. Nevertheless, it posted solid gains throughout much of that period. 1977 sales of $261 million, for example, swelled to $373 million in 1980 and to a whopping $512 million by 1983. Likewise, net income jumped from about $22 million to $27 million to $76 million in the same years. These figures reflected particularly strong growth in consumption by commercial and industrial sectors. KUs financial performance also reflected regulation of most of its rates by the Kentucky Public Service Commission, which served to protect consumers and restrict KUs profitability.

The power generation industry began to change in the 1980s. Alternative fuels, new energy technologies, slowing growth in demand, and a range of environmental issues diminished the industrys strength. KU, like many other traditional power generation companies, changed its focus during the decade away from expanding its generation capacity. Instead, it started to concentrate its efforts on increasing efficiency, boosting marketing efforts aimed at its most profitable niches, and improving customer service.

KUs increased emphasis on efficiency during the late 1980s merely augmented an already strong reputation for low-cost performance. Partly because of its reliance on coal, the company was already a low-cost leader in the U.S. power-producing industry. In 1987, in fact, the average residential electric bill in the United States for 500 kilowatt hours of energy was $40.21. KU customers, in contrast, paid only $27.02 for the same amount of power. KU was also a leader in its own statecompeting TVA utilities charged $29.13. Furthermore, KUs emphasis on cost containment contributed to vastly improved performance by the 1990s. Indeed, as the national average increased to $48.25 by 1993, KUs price for 500 kilowatt hours actually fell to $25.33, a real victory for the company.

Thanks in part to cost control efforts and improved customer service, KU managed to stabilize its earnings and revenues during the middle and late 1980s, despite overall industry malaise. Consumption of KUs electricity increased only 22 percent between 1983 and 1987, and its actual sales almost stagnated, growing from $530 million in 1984 to only $531 million by 1987. Although profits dipped to $54 million in 1986, they bounced back to $65 million one year later.

KU, like many other large U.S. energy producers, continued to struggle during the late 1980s and early 1990s. Weak demand growth and an explosion of new environmental restrictions capped industry earnings and pummeled many competitors. KU was especially battered by the 1990 Clean Air Act Amendments, which instituted new restrictions on the amount of pollution that could be emitted by coal-burning power plants. Because over 99 percent of KUs energy was produced by coal-fired facilities, it faced major expenditures during the 1990s to bring its plants into compliance. The Kentucky Public Service Commission granted KU permission in 1994 to implement an environmental surcharge to help recover the costs of complying with the Clean Air Act amendments and any applicable federal, state, and local requirements that apply to coal combustion.

To bolster slacking profits, KU revised its growth strategy to take advantage of The National Energy Policy Act of 1992, industry deregulation enacted by Congress. The organization was restructured in 1991 as KU Energy Corporation with Kentucky Utilities Company as a wholly owned subsidiary. KU Energys second wholly owned subsidiary, KU Capital Corporation, was created as a minor division to manage the organizations nonutility, energy-related investments. Specifically, the company was focusing on investments in independent power projects encouraged by the new legislation.

Meanwhile, KU continued to strive toward greater productivity. The company implemented an array of high-tech information systems during the early and mid-1990s designed to increase efficiency and customer service. It also worked to ensure that its new and existing plants utilized state-of-the-art generation technology. Evidencing KUs success in the efficiency arena was a 1993 study conducted by a major investment banking firm. It ranked KU production costs second lowest of 80 investor-owned utilities. Despite these efforts, however, weak markets allowed KU to realize only tepid gains. Sales increased a measly ten percent between 1990 and 1993, to $607 million, as net income fluctuated between $75 million and $80 million annually.

Going into the mid-1990s KU faced ongoing obstacles to growth. Increased competition, lackluster demographic forecasts, and environmental difficulties would likely linger at least through the turn of the century. On the other hand, John T. Newton, KU Energy president since 1987, hoped that his company would benefit from industry deregulation and the companys subsequent activities related to independent power projects. Regardless of its performance in the future, KU Energys customer base of 440,000 and its forceful presence in Kentucky almost ensured it a prominent role in the states electric-generating community through the end of the century.

Principal Subsidiaries

Kentucky Utilities Company; KU Capital Corporation.

Further Reading

Kentucky Utilities Company: A Pictorial History, Lexington, KY: KU Energy Corp., 1987.

Greene, Marvin, KU Affiliates with Power Plant Partnership, Courier-Journal (Lexington, Kentucky), April 5, 1994, p. BIO.

Hershbert, Ben Z, Area Utilities Prepare for Greater Competition, Courier-Journal (Lexington, Kentucky), February 7, 1993, p. K9.

Dave Mote