Western Resources company analysis.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 Hostile TakeoverA takeover attempt that is strongly resisted by the target firm. Notes: Hostile takeovers are usually bad news, as the employee moral of the target firm can quickly turn to animosity against the acquiring firm. bid by WR of Kansas City Kansas City, two adjacent cities of the same name, one (1990 pop. 149,767), seat of Wyandotte co., NE Kansas (inc. 1859), the other (1990 pop. 435,146), Clay, Jackson, and Platte counties, NW Mo. (inc. 1850). 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 FERC Federal Energy Regulatory Commission FERC FEMA Emergency Response Capability 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 Wolf Creek may refer to several places in the United States: Cities
A business that engages in transactions with outsiders. for Wolf Creek Generation Station. WR's Corporate headquarters is located at 818 Kansas Avenue, Topeka, Kansas This article is about the state capital of Kansas. For other uses, see Topeka (disambiguation). Topeka is the capital of the U.S. state of Kansas and the county seat of Shawnee County, which is named after the Shawnee Indians. 66612. John E. Hayes, Jr. assumed control of KP&L in 1989, following a stint as chief executive officer of Southwestern Bell
Southwestern Bell Telephone, L.P. 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 Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. 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 The Southwest Power Pool (SPP) is the oldest North American reliability organization still in operation, having originally formed in 1941 when eleven power companies cooperated to ensure that an aluminum factory would receive reliable power as it worked to assist the US war effort (SPP (1) (Scalable Parallel Processor) A multiprocessing computer that can be upgraded by adding more CPUs. (2) (Standard Parallel Port) The Centronics parallel port that was used on the first PCs. ). 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 New Mexico, state in the SW United States. At its northwestern corner are the so-called Four Corners, where Colorado, New Mexico, Arizona, and Utah meet at right angles; New Mexico is also bordered by Oklahoma (NE), Texas (E, S), and Mexico (S). , 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 Capital requirements Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. * 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 $41.6 million, down from $66.1 million in the first quarter of 1994. However, the 1994 earnings included the gain from the sale of the Missouri natural gas operations. Operating revenues for the 1995 period were $417.5 million, compared with $538.4 million for the 1994 period. Expenses were $349 million in the first quarter of 1995, down from $464.6 million in the first quarter of 1994. Fitch Research reports that relative to its peers, WR's overall financial condition is average, representing a significant improvement since immediately after the merger. Long-term, continued strong cash flow, cost controls, good nuclear performance, and moderate capital requirements will maintain WR's financial condition. At September 30, 1994 internal generation stood at about 92% of net capital expenditures and is expected to be more than 100% over the next five years. TABLE 1 CORPORATE PERFORMANCE PERFORMANCE 1994 1993 1992 1991 1990 Revenues ($Mil) 1617.9 1909.4 1556.2 1162.2 1149.8 Net Profit ($Mil) 174 163.9 115.1 83.3 77.9 Earnings Per Share 2.82 2.76 2.2 2.41 2.25 Net Profit Margin (%) 10.8 8.6 7.4 7.2 6.8 Competitive Comparison Several electric cooperatives are bounded by both WR subsidiary electric utilities and have cooperative territory intermingled with KG&L and KP&L. Table 2 shows a comparison of the major rate classes. WR's has filed a package of regulatory proposals with the Kansas Corporation Commission The Kansas Corporation Commission is a Kansas government agency that regulates public utilities, common carriers, oil and gas production, telecommunications companies, and motor carriers. that would reduce costs and increase revenues. The package includes a request of a $36 million natural gas rate increase; an $11 million reduction in annual depreciation of certain electric plant assets (Wolf Creek Nuclear Generation Station); and an electricity rate reduction.
TABLE 2
COMPETITIVE COMPARISON
Avg. KG&E % KP&L %
RATE Coop
Residential 10.7 9.18 14.2% 6.43 39.9%
Commercial 9.7 8.18 15.7% 5.04 48.0%
Industrial 4.7 5.39 -14.7% 4.18 11.1%
Average 10.4 7.32 29.6% 5.30 49.0%
Strategic Planning Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and people. In their most recent annual report, CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. John E. Hayes, Jr. was quoted to say, "Our vision is this: Western Resources will be the leading energy business in America. We will be driven by customer satisfaction, financial strength, growth and marketing. We are working from the beliefs that long-term customer loyalty is essential to our business success, that the company must maintain strong credit and provide a competitive return to shareholders, that growth is critical to our future, and that the key to financial strength and growth is in expanding existing markets and creating new integrated businesses. "We will increase income by aggressively pursing new business opportunities, maximizing use of our resources and capitalizing on our competitive strengths. Our strategic focus: * Create and market new services. * Build partnerships with customers through customized service and pricing options. * Increase productivity through reduced expenses and streamlined operations. * Develop new business opportunities enhancing our core business."(2) WR makes no secret of the fact that they want to buy other utilities. The recent bold move of hiring David Wittig David Wittig (b. July 29, 1955) is the former chief executive officer of Topeka, Kansas-based Westar Energy, a utility company. Born in Prairie Village, Kansas, Wittig went on to enjoy success on Wall Street as an investment banker. , one of Wall Street's top merger and acquisition specialists, shows their determination to achieve their strategic goals. During nearly 20 years on Wall Street, Mr. Wittig was involved in many of the biggest utility mergers, with the exception of the Kansas Power and Light acquisition of Kansas Gas and Electric Co. Wittig left Wall Street's Salomon Brothers
Salomon Brothers was a Wall Street investment bank. Inc. in May 1995, where he'd been managing director, and co-head of mergers and acquisitions, to take his new position as executive vice president of corporate strategy at WR. By the time he left New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. , he had worked on more than 150 mergers and was considered one of the top merger and acquisition specialists in the country. Industry experts are expecting WR to be on the acquisition war path. The company has started to realign re·a·lign tr.v. re·a·ligned, re·a·lign·ing, re·a·ligns 1. To put back into proper order or alignment. 2. To make new groupings of or working arrangements between. its business in preparation for a competitive environment. At its last meeting, management outlined plans to realign its electric business into generation, transmission and retail segments. This realignment re·a·lign tr.v. re·a·ligned, re·a·lign·ing, re·a·ligns 1. To put back into proper order or alignment. 2. To make new groupings of or working arrangements between. goes along with the changes experts see coming. WR has made it clear that it hopes to become a national player in the market for brokering natural gas and electricity. "People write about all the mergers that are going on in banking and everything that is going on in the media area. I mean, they haven't seen anything yet until they see what's going to happen in this industry. It's really going to be extremely exciting," said Wittig.(3) Since Mr. Wittig's arrival at WR they have expanded their focus through the acquisition of non-energy businesses, such as home and commercial security firms, mobile phone firms, and appliance warranties. While the move to bring Wittig on board is an unusual one for this industry, it clearly indicates the company's desire to become a major player. "In an industry with more than 100 companies, he is only one of two or three people who has experience in mergers, acquisitions and deal making in this business," said Barry Abramson, and analyst with Prudential Securities in New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of . "I don't think it will become the norm, but I do think more people like that will join the management teams."(4) Wittig has made it clear he wants to grow WR's cash flow by 15% annually. (The industry is currently growing an average of 2% per year.) And he wants to triple the company's revenues within five years. Summation summation n. the final argument of an attorney at the close of a trial in which he/she attempts to convince the judge and/or jury of the virtues of the client's case. (See: closing argument) It seems obvious that WR plans to expand its customer base in both regulated and non-regulated ventures. Diversification into other service and recurring revenue producing companies will provide WR the opportunity to spread its name to customers that are not currently served by one of their regulated utilities. They feel this relationship will help them under the new rules of deregulation Deregulation The reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry. Notes: Traditional areas that have been deregulated are the telephone and airline industries. . They also seem poised for acquisition of other regulated utilities because of their strong and aggressive management and financial position. Questions remain as to the return that can be realized from the less densely populated pop·u·late tr.v. pop·u·lat·ed, pop·u·lat·ing, pop·u·lates 1. To supply with inhabitants, as by colonization; people. 2. utility service territories. WR itself does not seem to have a good handle on the cost of service for some of these more rural areas. Dependent on the outcome of WR's analysis of this sector of their business, there should be either an opportunity or a threat for the electric cooperatives. If the study shows that WR would be better off to sell power wholesale to these areas and turn the operation and maintenance to another company, this could be an opportunity. However, if the study shows that in their long range plan these and other rural properties would be financially and strategically beneficial then the cooperative could be threatened by takeover. It also seems that the entry of WR into the security business might give them opportunity to get into our member's households. From that position they would be poised to take these customers from us in the case of retail wheeling. It may be that we should look at the possibility of providing similar services to help protect our base and to give us opportunity to expand into their service territory. It is obvious that WR plans will be put into place at a rapid pace and it will be necessary for electric cooperatives to keep a close watch on their activities. References 1 Edward King Edward King refers to more than one person;
2 CEO John E. Hayes, Jr., 1994 Western Resources Annual Report. 3 Sandy West Sandy West (July 10, 1959–October 21, 2006) was an American musician, singer, songwriter, and drummer. She was hailed by fans and critics alike to be one of the most groundbreaking drummers in rock and roll history. , Wichita Business Journal, Volume 10, Number 49, December 1995, page 1. 4 Sandy West, Wichita Business Journal, Volume 10, Number 49, December 1995, page 12. Epilogue ep·i·logue also ep·i·log n. 1. a. A short poem or speech spoken directly to the audience following the conclusion of a play. b. The performer who delivers such a short poem or speech. 2. Since the original writing of this article, WR announced a bold step to increase its critical mass. On April 15, 1996, it was reported that Western Resources made a $1.7 billion hostile takeover bid for Kansas City Power and Light (KCP&L). KCP&L, which serves 425,000 electric customers in the Kansas City area, recently agreed to a friendly merger with UtiliCorp United. The WR offer would be in the form of a stock swap A stock swap also known as a share swap or equity swap is a business takeover in which the acquiring company uses its own stock to pay for the acquired company. , offering KCP&L shareholders $28.00 a share, or a premium of 17% above the stock's April 12, 1996, closing price of $23.875. The WR proposal expires on April 22, 1996. In addition to the stock swap, the WR proposal includes: 1. A rate decrease of $210 million over 10 years to KCP&L customers. 2. Combined cost savings of $1 billion over 10 years. 3. No layoffs in the combined workforce of 6,300 employees. 4. Five hundred jobs would be eliminated due to duplication, but no employees would lose their jobs because they would be given an opportunity to take newly created positions. In a recent news release, WR said it would freeze electric rates for KCPL KCPL Kansas City Public Library KCPL Kansas City Power & Light KCPL Knox County Public Library , KPL KPL Khaosan Pathet Lao (News Agency, Laos) KPL Korporaal (Dutch) KPL Korporal (German) KPL Kansas Power & Light KPL Kerry Properties Limited KPL Kit Parts List and KGE KGE Keller Ground Engineering KGE Knights of the Golden Eagles (formerly known as KG&E) customers for five years following the merger. The company also promised to lower KGE's rates by $10 million a year. That's instead of a proposed $8.7 million rate reduction pending before Kansas regulators. WR believes this reduction would push KGE's average rates below the current national average of 8.8 cents per kilowatt hour Kil´o`watt` hour 1. (Elec.) A unit of work or energy equal to that done by one kilowatt acting for one hour; - approximately equal to 1.34 horse-power hour. Noun 1. . If this takeover becomes a reality, WR becomes a 94 percent owner of the Wolf Creek nuclear power plant instead of 47 percent owner. Our G&T, Kansas Electric Power Cooperative, owns the remaining 6 percent. WR would then be able to write down the cost of building the plant more quickly than it currently can. "This, and other efficiencies," says WR CEO Joihn Hayes, "will create a $1 billion windfall, some of which could be passed on to our consumers." APPENDIX 1 CORPORATE PERFORMANCE Currently Western Resources' two operating electric utility divisions have a substantial rate disparity. It is possible this could change in the future, but the current statistics are: KG&E Rate Rev/kWh Sales Percent Residential 9.18[cents] 2,385,811 31% Commercial 8.18[cents] 1,990,616 26% Industrial 5.39[cents] 3,323,450 43% Total 7.32[cents] 7,744,969 Customers 268,209 Sales 9,749,076 Sales for Revenue 2,004,107 Revenue $612,988,832 Distribution Costs 1.55 cents per kWh Power Supply Costs 4.76 cents per kWh Assets $3,668,884,882 Equity $1,245,677,616 Equity as a percent of Assets 34% Cash Flow $170,043,582 Generation Capacity 2,693,000 kW 1993 Peak (Aug. 1993) 1,811,000 kW KP&L Rate Rev/kWh Sales Percent Residential 6.43[cents] 2,574,770 33% Commercial 5.04[cents] 3,109,539 40% Industrial 4.18[cents] 1,977,175 26% Total 5.30[cents] 7,719,555 Customers 316,923 Sales 10,240,226 Sales for Revenue 2,520,671 Revenue $481,616,545 Distribution Costs 1.21 cents per kWh Power Supply Costs 3.54 cents per kWh Assets $3,825,208,737 Equity $1,597,032,712 Equity as a percent of Assets 42% Cash Flow $96,876,661 Generation Capacity 2,956,000 kW 1993 Peak (Aug. 1993) 2,053,000 kW RELATED ARTICLE: WR Board of Directors Frank J. Becker Frank John Becker (August 27, 1899 - September 4, 1981) was a Republican member of the United States House of Representatives from New York. Becker was born in Brooklyn. , President, Becker Instruments, Inc. Gene A. Budig, President, American League American League (AL) One of the two associations of professional baseball teams in the U.S. and Canada designated as major leagues; the other is the National League (NL). Baseball Clubs C. G. Chandler, Chairman, INTRUST Financial Corp. Thomas R. Clevenger, Private Investor, Former Pres. Fourth Financial John C. Dicus, Chairman & Pres., Capital Federal Savings & Loan John E. Hayes, Jr., Chairman, President and CEO of WR David H. Hughes, Former Vice Chairman, Hallmark Cards Hallmark Cards, a privately owned American company based in Kansas City, Missouri, is the largest manufacturer of greeting cards in the United States. Approximately 50% of greeting cards sent in the United States every year are manufactured by Hallmark. Inc. Russell W. Meyer, Jr., Chairman and CEO, Cessna Aircraft Co. John H. Robinson, Chairman Emeritus, Black & Veatch Marjorie I. Setter, Consultant, Armstrong Shank shank (shangk) 1. leg (1). 2. crus ( 2). shank n. The part of the human leg between the knee and ankle. Marketing Louis W. Smith, President, Allied Signal Aerospace Co., Kansas City Div. Susan M. Stanton, President and COO, Payless Cashways Kenneth J. Wagnon, President, Capital Enterprises, Inc. Robert "Dale" Short is assistant manager at Butler Rural Electric Cooperative Association, Inc., in El Dorado, Kansas El Dorado is a city situated along the Walnut River in the central part of Butler County, located in south-central Kansas, in the central United States. The population was estimated to be 12,659 in the year 2005. , where he has held that position since 1994. Previous to that he held the position of manager of marketing at Butler from 1989 until his promotion in 1994. Dale is a recent graduate of the Management Internship internship /in·tern·ship/ (in´tern-ship) the position or term of service of an intern in a hospital. internship, n the course work or practicum conducted in a professional dental clinic. Program (MIP MIP See: Monthly income preferred security ) sponsored by NRECA NRECA National Rural Electric Cooperative Association . He holds a bachelor's degree in business administration and has more than 15 years of experience in the management of competitive retail business outside the utility industry. The competitive analysis of Western Resources was prepared as part of the curriculum requirements of the MIP program and is currently being used as a component in Butler's Strategic Planning efforts. |
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