Westar Energy, Inc. (NYSE:WR)

jmweese (83.70) Submitted: 4/30/2007 9:23:04 PM : Start Price: $20.93 WR Score: +41.32

I really like Western Resources but I liked it much more about 4 years ago when it was only about $10 a share. After quickly browsing its annual report, I believe Western Resources will outperform the market in the near term. However, I see a major weakness in their alternative energy sector. Western Resources is well positioned to use wind energy (come on, where better for wind than Kansas or Western Kansas) but it is slow to expand into that area. Additionally, I wonder the effects the continued push for “greener” sources of power will have on the company. Review its assets and you see plants built in the 1960s and 70s and probably are not the most efficient. A Democratic president and congress that pass a number of global warming bills will hurt small operators like Western Resources.

Pros:
-   Good dividend, decent return on investment.
-   Located in Kansas which is good for wind (and not just from the Statehouse).
-   Faces increased demand for electricity.
-   Owns rights to some energy produced by Wolf Creek Nuclear Power Plant.
-   Provides limited electrical capacity to the larger rural communities in Western Kansas.
-   Building a couple of “cleaner” gas fired power plants.

Cons:
-   Generates 54.5% (as of 2006) of its power from coal. On one hand, that is good for business but if the environmentalists start complaining and passing laws…WR could have substantial costs associated with cleaning up.
-   Raising costs of input (natural gas and oil).
-   Faces ongoing legal trouble with the former thieves who ran the company. Although immaterial, one wonders if current management will ever let such “wonderful” professional managers return. Additionally, look at insider trading…the current managers have been dumping their stock. To me, a sign of overvaluation.
-   Located in Kansas which faces a shrinking population

Personally, I like the stock but would only hold it as long as the dividend remains strong and the company considers more alternative energy sources (not because I am necessarily an environmentalist but because the next few years might see a push for more “green” power and such a small utility could carve a niche market). However, if environmental regulations increase and cause the operating environment for Western Resources to worsen (i.e. raising costs of fuel combined with raising costs of plant rework), I would sell.