Western Resources Company Analysis (1996)

As part of Management Quarterly's continuing effort to provide its readers with an analysis of investor-owned utilities, Dale Short provides us with a description of Western Resources. His article includes a description of the utility, its operational results, competitive comparisons, and strategic initiatives. He also includes a brief summary of the recently announced hostile takeover bid by WR of Kansas City Power and Light. GENERAL DESCRIPTION Western Resources, Inc. (WR) is a diversified public utility primarily providing electric service to 585,000 customers in Kansas and natural gas service to 637,000 customers in Kansas and northeastern Oklahoma. The two electric subsidiaries operated by WR are Kansas Power and Light Company (KP&L) and Kansas Gas and Electric (KG&E). WR was formed in 1992 with the merger of KP&L and KG&E. KG&E was acquired for $454 million in cash and 23,479,380 shares of common stock. WR also paid approximately $20 million in costs to complete the merger. Since then WR has established an Astra Resources, Inc. subsidiary to handle natural gas marketing, compression services, and technology development and an Astra Services, Inc. subsidiary to handle diversification ventures such as cellular phones, security systems and appliance warranties. WR's FERC form 1 lists the following as companies controlled by the parent: * Kansas Gas and Electric Co., Utility Company, 100% * Astra Resources, Inc., Holding Co., 100% * Mid Continent Market Center, Inc., Natural Gas Trans & Storage, 100% * Gas Service Energy Corp., Energy Services, 100% * KP&L Funding Corporation, Funding, 100% Kansas Gas and Electric Co. owns 47% of Wolf Creek Nuclear Operating Corporation, the Operating company for Wolf Creek Generation Station. WR's Corporate headquarters is located at 818 Kansas Avenue, Topeka, Kansas 66612. John E. Hayes, Jr. assumed control of KP&L in 1989, following a stint as chief executive officer of Southwestern Bell Telephone Co. Since then, the company has successfully merged with KG&E in 1992 and sold the under-performing Missouri gas operations in early 1994 for a reported $400,665,000. As a result of the sales of Missouri Properties the Company recognized a gain of approximately $19.3 million. Fitch Research gives WR management team a favorable report based on these two events and improved operating and financial performance. Fitch's analysts believe that WR management appears capable of addressing the key challenges, which will include lowering production costs to preserve margins, maintaining nuclear performance, marketing excess power, improving customer service, and providing alternative price and service options.(1) For the year 1994, Western Resources reported selling nearly 19.8 billion kWhs and electric revenues of $1.122 billion. Operating expenses were $1.348 billion and net Income was $187.5 million. Profits rose 6% and electric retail sales were up 3%. WR has a combined asset base of $5.2 billion, 4,330 employees and 44,037 common stock holders. WR is one of 47 members of the Southwest Power Pool (SPP). SPP's responsibility is to maintain system reliability on a regional basis. The region encompasses areas within the eight states of Kansas, Missouri, Oklahoma, New Mexico, Texas, Louisiana, Arkansas and Mississippi. WR's 1994 peak system net load occurred August 25, 1994 and amounted to 3,720 MW. WR's net generated capacity together with power available from firm interchange and purchase contracts, provides a capacity margin of approximately 25% above system peak. WR does not contemplate any significant expenditure in connection with construction of any major generating facilities through the turn of the century. Strengths * Modest capital requirements * Strong cash flow * Ample generation capacity * Improving balance sheet and interest coverage * Merger savings exceeded the acquisition premium * Aggressive management Weaknesses * Sustaining good nuclear plant performance * High production costs for the area * Rate disparity between the KG&E and KP&L areas Financial WR reported first quarter 1995 earnings of $41. …