LG&E Energy Corporation - Company Profile, Information, Business Description, History, Background Information on LG&E Energy Corporation

220 West Main Street
P.O. Box 32030
Louisville, Kentucky 40232

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Our mission is to provide exceptional value to our customers and shareholders as we move toward the era of competition in the energy industry.

History of LG&E Energy Corporation

LG&E Energy Corporation is a diversified energy services company formed in 1990 as a holding company for the Louisville Gas and Electric Company. Its operations include two regulated businesses in Kentucky, including Louisville Gas and Electric and Kentucky Utilities Company. Together, these companies provide service to 840,000 electricity and 290,000 natural gas customers. Both firms are considered to be among the lowest-cost energy providers in the United States. LG&E's unregulated business operations include 50 percent stakes in facilities in Texas and Georgia, interests in three Argentina-based gas distribution companies, and a wind turbine in Spain. LG&E holdings also include Western Kentucky Energy, LG&E Operating Services, Enertech, and CRC-Evans, an equipment and service provider catering to the gas and oil pipeline industry on an international level. LG&E became a subsidiary of UK-based Powergen plc in 2000. Two years later, German utilities giant E.ON Energie AG acquired Powergen, creating the world's second-largest utility.

Early History: 1800s

Louisville Gas and Electric Company traces its roots to the formation of the Louisville Gas and Water Company in 1838. City fathers needed a solution to a growing crime problem in the young and bustling town that was fast becoming a jumping-off point for westward expansion. Recognizing the deterring effects of city lighting on crime, they called for a company to provide a gas-manufacturing plant and lighting system. A group of investors responded, and Louisville Gas and Water was formed with Leven Shreve as its first president.

The fledgling company sold gas manufactured from coal at a plant on Jackson Street; it made Louisville the fifth city in the United States to have gaslights in streets and homes. In 1842, the company's charter was amended to repeal a provision calling for it to establish a city waterworks, and the firm's name was shortened to the Louisville Gas Company. The company kept pace with the city's rapid expansion and growing importance as a commerce center and the "Gateway to the South." By 1859, the company boasted 35 miles of gas mains and 925 street lamps.

The next year, the United States found its attention diverted from growth to Civil War. The war itself left Louisville relatively unscathed, but economic shifts after the war, notably the rise of rail travel, sent much of the region's commerce to Cincinnati. The postwar years also brought changes to Louisville Gas--some of them unwelcome. A competitor, the Citizens Gas Light Company, built a gas plant in the city in 1871. Louisville Gas claimed that this violated its rights as the sole provider of gas in the city, but the courts ruled against Louisville Gas. The decision brought a swarm of competitors into the gas business in the city.

Another competitor, the Kentucky Heating and Lighting Gas Company, founded in 1891, was able to offer lower rates because it supplied natural gas from a well in Meade County. However, this company failed to exploit its advantage and survived only by a succession of mergers with companies that sold the more reliable manufactured gas, which was produced by roasting coal at very high temperatures.

In the 1880s, a new competitor came on the scene: electricity. Its greatest asset was the bright, concentrated light it generated that literally outshone gaslight. Louisville residents gaped at the first commercial electric lights in the city in 1881, which were installed by the Brush Electric Light Company of Louisville. Another company, the Louisville Electric Light Company, began service in 1882. But early electric systems were awkward and accident-prone, and it was not until the Great Southern Exposition of Art, Industry, and Agriculture in 1883 that the city found a new electric system, the one perfected by Thomas Edison. The inventor had designed not only the light bulb but also an entire system of wires, switches, fuses, generators, and other apparatus that were needed to make the thin glass bulbs glow.

Private power plants sprang up in the city during the 1880s. Officials at Louisville Gas watched the progress of the wires, saw the illuminated writing on the wall, and prepared to enter the new business. The key move came in 1890, when the company obtained an amendment to its new charter that allowed it to manufacture, distribute, and sell electricity and to buy stock in electric companies. Louisville Gas quickly acquired a controlling interest in the Louisville Electric Light Company and began replacing gas street lamps with electric arc lights.

The Birth of Louisville Gas and Electric: 1913

The Louisville Lighting Company was formed in 1903, and the city council authorized only underground wiring in the city's central business district. Colonel Henry M. Byllesby, an electrical expert whose company, H.M. Byllesby & Company Inc., managed utilities in a number of states, had been watching the developments in Louisville. Byllesby succeeded in streamlining the city's utility operations into a single company in 1913. This was the birth of Louisville Gas and Electric, which consolidated the old Louisville Gas Company, the Louisville Lighting Company, and the Kentucky Heating Company. Three other companies were later added, and the new giant was soon serving 37,000 gas customers and 19,000 electric customers.

Most of the city's larger businesses soon switched from individual steam (electricity) plants to LG&E's service. The city used its stock in the Louisville Gas Company as leverage to require Byllesby to agree to construct a gas pipeline from West Virginia that would shore up the city's dwindling gas supply. The line was completed in March, 1914, at a cost of about $3 million, remaining in service until 1962. The new gas burned brighter, allowed customers to use less, and became cheaper as usage soared.

The low cost of gas in the growing city brought steady increases in demand: from 1914 to 1924, Louisville's appetite for gas doubled every four years. From 1920 to 1923, for example, 192 new industries came to the city. LG&E expanded to meet these growing needs but at times was forced to urge conservation because of the skyrocketing demand. In late 1920, the company bought 51 percent of the stock in the Ivyton Oil & Gas Company, which had 18 gas wells in Magoffin County, Kentucky. In 1923, the company began work on a new manufactured-gas plant that would provide a long-term solution to the gas shortage. The company also turned to hydroelectric power in the 1920s, and received permission from the Federal Power Commission to build a generating station on the Ohio River as part of a power and navigational dam project on the river. Ohio Falls station, completed in 1927 at a cost of about $8 million, met much of the city's power needs through the 1930s.

Louisville's swelling demand for gas was reined in sharply by the Great Depression. LG&E made it through the hard times better than many firms, with only one pay cut for employees that lasted just three months. The tobacco and distillery industries, areas that tend to prosper during hard times, helped keep Louisville's industrial base afloat. But changes were in store: Franklin D. Roosevelt's New Deal brought a host of new regulations and legislation designed to affect the way public utility companies did business. In 1934, the Kentucky legislature created the Public Service Commission to oversee rate regulation and approve public-construction projects.

Key Decisions Lead to Postwar Growth

In 1939, LG&E made a key decision that would influence Louisville's emergence as a post-World War II industrial center. The company ordered two 25,000-kilowatt, steam-powered electrical generating units just a few months before the government's growing mobilization for war halted utility-expansion projects. Beating that deadline left the city in much better shape than many others when the fighting was over. The new electrical capacity also enabled the utility to be a supplier of energy for government and defense needs. That brought new industry to Louisville during the war and attracted peacetime industries to the city even into the 1960s, including LG&E's biggest customer, General Electric's Appliance Park. The company also developed new underground natural gas storage facilities to meet the postwar boom in gas heating and cooking appliances, and the construction of interstate gas pipelines brought in new supplies of gas to fill those storage facilities.

A challenge to the company's future came in 1944 and 1945, when Mayor Wilson Wyatt, with the support of the city's Board of Aldermen, sought to have the city acquire all LG&E's physical properties. LG&E employees fought the takeover attempt and worked to turn public opinion against it. Democratic alderman candidates in the November 1945 election supported the move, but the Republicans won the election, and their victory effectively quashed the attempt.

The 1950s and 1960s saw LG&E's diversification into new opportunities. In 1952, the company was one of 15 investor-owned utilities that formed the Ohio Valley Electric Corporation to meet most of the power requirements of an Atomic Energy Commission plant in Ohio. In 1967, LG&E became a charter member of the East Central Area Reliability Coordination group, a network of utilities whose interconnections have been used to supplement local power output during emergencies and peak demand periods.

A different sort of company milestone came in 1957: the first general increase in electric rates in LG&E history. In 1972, the company applied to the Public Service Commission of Kentucky for a second general rate increase following reductions in 1964 and 1965. The 1972 increase marked the beginning of a tough decade for utilities and energy providers nationwide. LG&E was forced in 1973 to seek a moratorium on new and additional gas loads by its customers.

The problem of declining natural gas supplies was compounded by the extremely cold winters of 1976-77 and 1977-78 and the oil shortage that occurred at the same time, forcing the company to curtail its industrial and commercial gas customers. Fortunately, the supply picked up again in 1979, when the company began hooking up new residential and small commercial and industrial customers who could be served from existing mains.

LG&E began construction of a massive new project, the Trimble County electric generating station, in 1979. The 495-megawatt, coal-fired power plant began commercial operation in December 1990. Early in 1991, the company sold about 12 percent ownership interest in the Trimble County plant to the Illinois Municipal Electric Agency. LG&E also entered a long-term agreement with the Indiana Municipal Power Agency for the remaining 12.88 percent of Trimble County's capacity. The two sales were important because they ensured a market for the portion of the plant's capacity that was not covered by customer rates.

Litigation over the plant had been troublesome, however. In February 1991, the Franklin Circuit Court overturned a 1989 settlement agreement approved by the Public Service Commission of Kentucky. The agreement had excluded one-fourth of the plant's capacity from the rate base, but some intervenors argued that even 75 percent left the utility with an overcapacity. LG&E vigorously contested this challenge, arguing before the courts that no further rate action was justified. The issue was resolved the following year.

LG&E Energy Corp. Is Formed: 1990

In 1990, the company began aggressively expanding into the increasingly competitive field of energy services, forming LG&E Energy Corp. as a holding company. In 1991, the company reorganized into three distinct operating units: retail electric, wholesale electric, and retail gas.

Crucial to success in the energy field were the increasing concerns over protecting the environment. The company appeared in a good position to meet that challenge: LG&E was one of the first utilities in the nation to equip its coal-fired boilers with "scrubbers." Scrubbers were designed to enable plants to reduce sulfur-dioxide emissions to levels required by the year 2000 under the Clean Air Act.

However, there were some problems. Costs of reducing sulfur dioxide emissions at LG&E's Mill Creek and Cane Run plants, cited in 1991 by the Air Pollution Control District of Jefferson County, were expected to run about $52 million to $70 million. Also, residents near the Mill Creek plant reported damage to unprotected metal surfaces and spotting of paint on automobiles caused by plant emissions. The company worked with regulatory officials to solve the problems and surveyed residents to identify potential property damage claims. The utility has traditionally sought to recover the costs of complying with environmental regulations and settling property damage claims through future rate-making proceedings.

Anticipating that by the year 2000 half of all the new electricity generating capacity in the country would be provided by unregulated, independent suppliers, the company formed LG&E Energy Systems Inc. in 1991 to spearhead the expansion into the unregulated marketplace. In December 1991, this subsidiary acquired Hadson Power Systems, Incorporated, of Irvine, California, for about $50 million. The move was considered crucial to the company's goals of expanding into unregulated power supply. Hadson, which employed about 1,000 people, was renamed LG&E Power Systems Inc. The company designed, built, and operated electric generation plants that sold energy to local utilities. LG&E Power Systems has developed numerous power plants across the United States.

In 1992, LG&E Energy Systems, through a subsidiary, acquired a one-third general partnership interest in Natural Gas Clearinghouse (NGC). An indirect, wholly owned subsidiary of British Gas plc also acquired a one-third interest in NGC. LG&E Energy Systems' subsidiary paid approximately $52 million plus fees and expenses for its one-third partnership interests in NGC. Based in Houston, NGC was the largest independent natural gas marketer in the United States. This move, like the acquisition of Hadson, seemed designed to strengthen the company's ability to continue to meet new challenges and offer new opportunities for energy providers outside the field of regulated utilities. This interest was sold in 1994 however, for $170 million.

In 1993, the firm realigned its business, creating retail gas, retail electric, and wholesale generation divisions. The following year it restructured further, segmenting its operations into utility and non-utility business units. LG&E Power Marketing was then established in 1994 as a trading subsidiary. It received the go-ahead from the Federal Energy Regulatory Commission to market and trade power, making it the first U.S. company with ties to a regulated utility allowed to do so. In 1995, the company acquired Hadson Corp., a natural gas concern based in Dallas, Texas. It was renamed LG&E Natural Inc. the following year. The firm also made strides in international expansion when it completed development of a natural gas-fired plant in Argentina. In 1997, it increased its stake in Argentina's gas market by purchasing interests in two Argentine gas distribution companies. This was followed by the 1999 acquisition of a 19.6 percent share of Argentine gas distribution firm Gas Natural BAN.

Strategic Changes: Late 1990s and Beyond

LG&E made several key moves in 1998. It purchased KU Energy Corp. in a deal that added Kentucky Utilities Company to its regulated business arsenal. The firm also signed a 25-year lease agreement with Big Rivers Electric Corp., which gave LG&E access to the company's generation assets. As a result of both transactions, LG&E's assets grew from $3.6 billion to $4.7 billion. The company opted to exit the merchant trading and sales arena that year. Turbulent prices in the highly competitive U.S. wholesale electricity market had forced LG&E to rethink its strategy in that sector. Chairman and CEO Roger W. Hale commented on the firm's rationale behind the decision in a 1998 Electric Light & Power article, claiming that the firm "lacked the size and scale necessary to manage the existing portfolio of contracts, and simultaneously grow our energy marketing business in other areas." The company's focus on its physical assets also became apparent when it began construction of a merchant plant in Georgia in 1999 and acquired CRC Holdings Corp., the parent company of CRC-Evans Pipeline International Inc., a company that provided equipment and services related to gas and oil pipelines.

LG&E entered the new century on solid ground. Both net income and revenues had increased during 1999, and the company had been ranked number one among electric service providers in customer satisfaction by J.D. Power and Associates. The year 2000, however, brought significant change to the company. In February, LG&E announced that it would be acquired by London, England-based Powergen plc in a $3.2 billion cash deal, which also included the assumption of $2 billion in debt. The purchase, which gave Powergen a foothold in the U.S. market, was completed in December and strengthened LG&E's position in the energy services industry. In 2002, Powergen was acquired by German utility E.ON Energie AG in a union that created the world's second-largest utility concern. E.ON planned to utilize LG&E for future growth in the U.S. utilities market. While LG&E's ownership had changed hands, its reputation remained constant. In 2002, it was ranked number one in customer satisfaction in a J.D. Power & Associates survey for the second time in four years. The Edison Electric Institute also found that Kentucky Utilities' average electricity rates were the lowest in the nation in July 2001. With a utilities powerhouse as a parent, LG&E appeared to be well positioned for future growth in both its regulated and unregulated businesses.

Principal Subsidiaries: Louisville Gas and Electric Company; Kentucky Utilities Company; LG&E Operating Services; CRC Holdings Corp.

Principal Competitors: American Electric Power Company Inc.; Cinergy Corp.; NiSource Inc.


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