Westar Energy, Inc. Business Information, Profile, and History

Company Perspectives:

Westar Energy will operate the best utility in the Midwest. We will provide our customers quality service at below average prices.

History of Westar Energy, Inc.

Westar Energy, Inc.--formerly Western Resources, Inc.--was formed in 1992 as the result of a merger between the Kansas Power and Light Company (KPL) and the Kansas Gas and Electric Company (KG&E). One of the largest combination utilities in the midwestern United States, Westar Energy provides electric utility and natural gas service primarily to some 640,000 customers in Kansas via 35,000 miles of electric distribution and transmission lines.

Late 19th-Century Origins of the Utilities Industry

The history of Western Resources is a story of nearly 370 mergers and acquisitions of various utility companies. Electric lighting was first introduced in the United States in Cleveland, Ohio, on April 29, 1879. Natural gas, which was also used for lighting, had already been introduced in Fredonia, New York, in 1821. The prospect of providing lighting for businesses and homes inspired a wave of entrepreneurs to establish small companies across the country. However, many of the small companies were unable to overcome the technological and financial difficulties that accompanied the growing demand for electrical and natural gas services. Thus the smaller companies were taken over by larger firms with professional management, more capital, and the resources to develop innovative technologies.

Founding of Kansas Power and Light Company: 1924

The Kansas Power and Light Company was incorporated on March 6, 1924, for the purpose of acquiring, financing, constructing, and equipping an electrical generator plant located in Tecumseh, Kansas. The firm was also responsible for building electrical transmission lines from Tecumseh to Topeka and Atchison in order to provide service for new customers. KPL was financed by its ultimate parent company, North American Light and Power Company. North American, which controlled a large number of utility companies throughout Kansas, Illinois, Iowa, and Missouri, was a holding company. At that time, a holding company such as North American did not directly operate utilities, but owned and directed them through outstanding voting securities. The most important function for a utility holding company was to provide the financing necessary for its subsidiaries to expand and develop technological improvements.

During the time the power plant at Tecumseh was under construction, KPL completed the Neosho facility, with 15,000 kilowatts--later 40,000 kilowatts--generated by coal. KPL also moved quickly to reach new customers by acquiring the Union Power Company, which included numerous smaller utilities in Kansas, and the entire generating facility, electrical transmission lines, and distribution system in Douglas, Wyoming. When the Tecumseh plant was finished, it started operations with a 6,000 kilowatt generator. Soon power for electricity was generated for the utilities serving Topeka and Atchison. In 1927 KPL acquired the Kansas Public Service Company, which encompassed all the utilities in Topeka and Atchison, Kansas.

Major Acquisitions for KPL: 1930s-40s

KPL's major acquisition during the 1930s was the United Power and Light Corporation. Established in 1898 by Jacob Brown in a grist mill in Abilene, United Power and Light initially used the mill machinery to produce electrical power for the city. Brown's son, C.L. Brown (who founded United Life Insurance Company and was instrumental in laying the groundwork for United Telecom and U.S. Sprint), expanded the operation to include 12 other Kansas utilities. This single acquisition brought most of central Kansas under the service of KPL.

During the 1940s, KPL made another extremely important acquisition with its purchase of the Kansas Electric Power Company. Founded in 1922, the Kansas Electric Power Company provided natural gas and electric service to a large area of Eastern Kansas. KPL extended its customer base due to Kansas Electric's involvement in Franklin D. Roosevelt's rural electrification program, and the construction of natural gas pipelines and gas-generated power plants that served the burgeoning demand for electricity. In 1949 the North American Light and Power Company, the holding company for KPL, was liquidated; KPL stock was first listed on the New York Stock Exchange that same year.

Until the 1950s, much of the area serviced by KPL was farmland. However, as the population increased the area became more urban and attractive to manufacturing companies. By 1959, KPL was providing electricity and natural gas to flour mills, chemical companies, oil refineries, iron and steel manufacturers, cement firms, and clothing stores. In 1959 the sale of electricity generated nearly two-thirds of company revenues, while the sale of natural gas generated about one-third. The number of industrial customers increased by more than 125 percent, and individual domestic customers doubled in number. Total gas revenues during the period between 1950 and 1959 increased 112 percent.

Technological Advances and Rapid Growth for KPL: 1960s-80s

During the 1960s, KPL continued to upgrade its technology and expand its customer base. In 1962 the Tecumseh plant installed a 142,000 kilowatt unit. In 1965 the company began work on the first 345 kilovolt electrical transmission line in the state of Kansas. KPL completed construction of the line, which operated from Kansas City all the way to the Oklahoma state line, one year later. Around the same time, KPL joined 16 other electrical utility companies to build the Southwest Experimental Fast Oxide Reactor (SEFOR). In 1968 one of the larger generators at the company's Lawrence Generating Station was fitted with a limestone wet scrubber system, designed to reduce the amount of sulfur emissions into the atmosphere. This system was the first of its kind in the world.

Over the next two decades, KPL grew rapidly. The company opened a number of new utility power plants with state-of-the-art technology. Coal-fired power units, combustion turbines, and nuclear reactors formed the core of KPL's utility plants. During this period the Wolf Creek Generating Station, a nuclear reactor providing electrical service to a huge number of customers in the state of Kansas, began commercial operations with a capacity of 1.15 million kilowatts. The Jeffrey Energy Center, with one of KPL's largest coal-fired units, began commercial operations at approximately the same time. When KPL merged with Kansas Gas and Electric Company in 1992, the firm was one of the largest and most successful utilities in the United States.

History of the Kansas Gas and Electric Company: 1909-92

The Kansas Gas and Electric Company was established in 1909 by the holding company American Power and Light to operate utility services in Wichita, Pittsburg, and Frontenac, Kansas. The company built a coal-burning generating station in Wichita with an 8,750 kilowatt capacity in 1912. In 1925 the company sold KG&E's natural gas service to Hutchinson, Newton, Pittsburg, and Wichita in order to concentrate exclusively on electrical power. In 1910 KG&E served only three small communities and 5,525 customers; however, by 1925 the company had extended its services to over 50 communities and a much larger number of customers.

Continuing to expand during the 1930s and 1940s, KG&E added numerous coal-fired power plants to provide a growing customer base with electricity. In 1948 American Power and Light, the holding company for KG&E, sold 150,000 shares of company stock to the public. One year later, KG&E's remaining 450,000 shares of company stock were offered to the public. In 1954 the Murray Gill Station began operations with a 124,000 kilowatt capacity; it was the company's first use of natural gas as the primary fuel for a utility plant. In 1955 KG&E was listed on the New York Stock Exchange; at the same time, the company was adding more generating power to its Murray Gill Station and other utility operations. By 1959, the Murray Gill Station alone had a capacity of 609,000 kilowatts. During the late 1960s and early 1970s, KG&E entered the field of nuclear energy and began to plan a nuclear power plant in Coffey County. In the 1980s, like most other utility companies, KG&E continued to upgrade its technology and expand its services to customers. When KG&E combined with the Kansas Power & Light Company to form Western Resources, the company was financially stable and well managed, but in need of the resources of a larger utility firm to help it weather rising costs and increasing competition.

History of Gas Service Company: 1925-83

Western Resources' third operating group, Gas Service, was established in August 1925 by Henry L. Doherty. From the turn of the century, Henry L. Doherty & Company worked as the financial agent for various utility companies operating in Kansas, Missouri, and Oklahoma. Doherty's firm also represented Cities Service Company, one of the large holding companies for both utility and non-utility businesses. Doherty was contracted by Cities Service to organize the Gas Service Company in order to develop new markets for the natural gas resources that Cities Service owned, produced, and transmitted, and also to take control of and operate Cities Service's extensive distribution systems. The Gas Service Company grew slowly but steadily. Its stock was initially traded in 1971 on the New York Stock Exchange. By the time Gas Service was acquired by KPL in 1983, the company served over one million customers in Kansas, Missouri, Oklahoma, and Nebraska. (The company's Nebraska interests were later sold.)

1990: The Birth of Western Resources, Inc.

In July 1990, Kansas City Power & Light Company (KCP&L) attempted a hostile takeover of KG&E at $27 per share. Management and the board of directors at KG&E rejected the proposal and filed a lawsuit challenging the takeover attempt. Within one month, KG&E began to search for an alternative transaction that management regarded as more beneficial for both the company and the stockholders. In October, management at KG&E announced that the company would merge with KPL at a mutually agreed upon $32 per share in stock and cash. At first, KCP&L refused to withdraw its offer; however, by December KCP&L recognized the futility of its takeover attempt and announced a halt to any further negotiations.

When the merger of KPL and KG&E became public, there was an immediate opposition to the proposal. Public hearings in Independence, Wichita, Overland Park, and various other locations served by the two utilities focused on the possibility of a rate increase to fund the costs of the merger. The Kansas House of Representatives even introduced legislation to "protect customers in a merger." With significant revisions after much debate, the Kansas House passed a bill prohibiting any rate increase that would result from the costs incurred during the merger of utility companies. On February 5, 1992, the Securities and Exchange Commission (SEC) approved the merger application. By March, KG&E had merged with KPL as a wholly owned subsidiary of the latter, and in May the shareholders approved the new name of Western Resources, Inc., for the company.

By 1993, management had fully integrated the merger between KG&E and KPL, and located its corporate office in Topeka, Kansas. Western Resources' total net generating capability amounted to 4.98 million kilowatts in 1993. Total operating revenues were reported at $1.9 billion. During that year, Western Resources produced nearly 80 percent of its electricity from low sulfur coal, 17 percent from nuclear generators, and the rest from natural gas. The company sold almost all of its natural gas properties located in Missouri to the Southern Union Company, operating out of Austin, Texas. This sale led to a decrease in the number of natural gas customers to 637,000 from a high of over one million. Nonetheless, Western Resources owned and operated an extensive natural gas transmission pipeline system throughout Kansas, and owned underground storage facilities for natural gas in south central Kansas.

Shortly after its inception, Western Resources made two significant additions to its operations. The company created a subsidiary, Astra Resources, to conduct its non-regulated business interests, searching for investment opportunities in the areas of pipeline compression services, natural gas gathering and processing, and natural gas marketing. Western Resources also established a Power Technology Center in Wichita to address the growing number of customers requiring technical assistance. Engineers from Western Resources' Power Technology Center resolved problems for customers that arose in providing electrical power for sensitive electronic equipment. The Power Technology Center also tested experimental vehicles that used electricity or natural gas; in 1993 as part of the National Consortium for Emission Reduction in Lawn Care, the company distributed 100 battery-powered lawnmowers.

Anticipating Deregulation in the Late 1990s

With utilities deregulation on the horizon, Western Resources began to take measures to shore itself up for a dramatic increase in competition. A key strategy was to expand the size of its regional platform. To this end, in 1996 Western Resources became engaged in what would be a bitter two-year contest with Utilicorp United to acquire Kansas City Power and Light (KCPL). Initially, a merger was planned between KCPL and Utilicorp, but this deal fell through when shareholders, influenced in part by the prospect of a simultaneous hostile takeover bid by Western, withheld their support.

In March 1998, in what appeared to be the final chapter of this saga, Western Resources and Kansas City Power and Light (KCPL) reached their own merger agreement. By the terms of the 1998 deal, Western and KCP&L would contribute a combined $8.2 billion in electric assets to create Westar, a new Kansas City-based utility serving Kansas City, Wichita, and Topeka. Western Resources would control 80.1 percent of the new company's stock, which would be traded on the New York Stock Exchange. Typically, finalization of the merger was contingent upon shareholder and regulatory approval, respectively.

Though regulators seemed willing to grant their approval under certain conditions, KCPL terminated the merger agreement late in 1999. Western Resources' stock price had fallen more than 46 percent by the end of the year. On the heels of this failure, Western Chairman and CEO David Wittig spearheaded a new plan to restructure his company and revive its stock.

In March 2000, Wittig announced that Western Resources (WR) would be split into two separate, publicly traded companies: Westar Energy would own WR's utility assets, primarily KG&E of Wichita and KPL of Topeka, worth about $4.6 billion; Westar Industries would own WR's non-utility assets worth about $1.35 billion, including an 85 percent stake in Protection One Inc., a home-security company, and a 45 percent stake in Oneok Inc., the parent company of Oklahoma Natural Gas, both of which Wittig had acquired in 1997. While the Oneok investment had proved solid, Protection One had performed poorly, dragging the whole of WR down in the process. Wittig's strategy was to liberate the utility assets from this burden, while coupling the relatively attractive Oneok with Protection One. To consolidate the shift, Western was renamed Westar Energy, Inc. in 2001.

Despite the restructuring, however, the company's financial performance did not improve: by September 2002, Westar Energy's stock was trading at less than $10 a share, the lowest level since Western Resources was formed in 1992. Though the company's regulated utilities had remained strong, the company's overall financial condition was suffering from the failure of its non-regulated enterprises. Further, the company had come under intense scrutiny for continuing to pay its top executives exorbitant salaries throughout these poorly performing years. Criticism was sharply focused on David Wittig, under whose leadership, which began in 1996, the company had declined steadily.

2002: Kansas Regulators Order Restructuring

In November 2002, Wittig stepped down in the face of federal indictments charging him with bank fraud, money laundering, and conspiracy, not directly related to his leadership of Western Resources. At the same time, the Kansas Corporation Commission ordered a thorough reorganization of Westar Energy. After finding that Westar had accumulated a huge corporate debt over the course of its continued investments in Protection One, the commission directed the company to segregate its utilities from the parent company as well as the unregulated ventures, so that accountability for income and debts could be enforced. Including other sweeping measures, the thrust of the commission's order was to favor the health and solvency of the utilities business over that of the non-utilities business, thereby protecting regional utilities customers. This was a reversal of the order of priorities that Westar had followed in recent years.

Principal Subsidiaries: ONEOK, Inc.; Protection One, Inc.

Principal Competitors: Great Plains Energy Inc.; The Pittston Company; Xcel Energy Inc.

Chronology

• Key Dates:
• 1909: Kansas Gas and Electric Company is established in 1909 by the holding company American Power and Light.
• 1924: The Kansas Power and Light Company (KPL) is incorporated, with financing from its ultimate parent company, North American Light and Power Company.
• 1925: Western Resources' third operating group, Gas Service Company, is established by Henry L. Doherty.
• 1927: KPL acquires the Kansas Public Service Company, which encompassed all the utilities in Topeka and Atchison, Kansas.
• 1930s:KPL acquires the United Power and Light Corporation.
• 1940s:KPL makes another acquisition with its purchase of the Kansas Electric Power Company.
• 1949: The North American Light and Power Company, the holding company for KPL, is liquidated; KPL stock is first listed on the New York Stock Exchange.
• 1965: The company begins work on the first 345 kilovolt electrical transmission line in the state of Kansas.
• 1971: Gas Service Company stock is initially traded on the New York Stock Exchange.
• 1983: Gas Service is acquired by KPL.
• 1992: KPL merges with Kansas Gas and Electric Company to form Western Resources.
• 2001: Western Resources changes its name to Westar Energy, Inc.
• 2002: Kansas Corporation Commission orders a sweeping reorganization of Westar Energy.