We are the largest electric utility in Kansas. We provide electric generation, transmission and distribution services to approximately 685,000 customers in Kansas. Westar Energy provides these services in central and northeastern Kansas, including the cities of Topeka, Lawrence, Manhattan, Salina and Hutchinson. Kansas Gas and Electric Company (KGE), Westar Energy’s wholly-owned subsidiary, provides these services in south-central and southeastern Kansas, including the city of Wichita. KGE owns a 47% interest in Wolf Creek, a nuclear power plant located near Burlington, Kansas. Both Westar Energy and KGE conduct business using the name Westar Energy. Our corporate headquarters is located at 818 South Kansas Avenue, Topeka, Kansas 66612.
Our strategy is to remain a vertically integrated electric utility meeting the energy needs of our customers reliably at reasonable prices. We strive to optimize flexibility in our planning and operations to be able to respond quickly to the uncertain and changing energy and environmental policies, economic conditions, regulations and technologies currently affecting or related to our business. Working constructively with our regulators and public officials is an important part of our strategy.
Significant elements of our strategy include environmental upgrades to our coal-fired power plants, the ability to use more natural gas-fired generation, the development of wind generation and the building and upgrading of transmission facilities. We also plan to invest significant resources to enhance our distribution system and to develop energy efficiency programs. Following is a summary of some of the progress we have made on these significant elements.
During 2009, we made capital expenditures of $85.2 million at our power plants for air emission controls.
We completed construction of the Emporia Energy Center, a natural gas-fired peaking power plant comprising approximately 660 megawatts (MW) of capacity, in early 2009 for a total investment of $304.5 million.
Along with third parties, we developed approximately 300 MW of wind generation facilities at three different sites in Kansas, approximately half of which we own and half of which we purchase under long-term supply contracts. These wind generation facilities began producing energy in late 2008 and early 2009.
We continued constructing a 345 kilovolt (kV) transmission line in central Kansas.
We are actively engaged in numerous programs to enable and educate customers to use energy more efficiently.
Our plans and expectations for 2010 and beyond include:
The potential to invest an additional $946.0 million of capital expenditures at our power plants for air emissions projects over the next three years.
In January 2010, we reached an agreement with a third party to acquire the development rights for a site we believe is capable of supporting up to 500 MW of wind generation. We expect to develop the site in phases with the initial phase potentially completed by the end of 2012, subject to regulatory approvals and the pace of development of new transmission facilities in western Kansas.
We expect to complete in 2010 the 345 kV transmission line we are constructing in central Kansas.
In 2010, we expect to begin planning and engineering a 345 kV transmission line that will run from a location near Wichita, Kansas, south to the Kansas-Oklahoma border.
Upon approval from the Southwest Power Pool (SPP) Board of Directors and appropriate regional cost allocation, Prairie Wind Transmission, LLC, a joint venture company of which we own 50%, intends to construct a new substation near Wichita, Kansas, and one near Medicine Lodge, Kansas, as well as a transmission line connecting the two substations. Prairie Wind also plans to construct a transmission line south to the Kansas-Oklahoma border from one of the two substations.
We expect to continue improving our distribution system through enhanced vegetation management as well as equipment and process improvements.
We expect to continue developing programs to better educate our customers about the efficient use of energy. One project we expect to undertake beginning in 2010 is SmartStar Lawrence, a smart grid project based in Lawrence, Kansas. Under this project, we will install Advanced Metering Infrastructure meters and other equipment to give customers the ability to better monitor their energy use. We applied for and have been selected by the Department of Energy (DOE) to negotiate a matching grant of approximately $19.0 million. We expect the total project cost to be approximately $39.3 million.
SIGNIFICANT BUSINESS DEVELOPMENTS
Our electricity sales and revenues are significantly impacted by the weather, mostly in the summer, and particularly during the third quarter. Warmer summer weather results in more demand for electricity while cooler summer weather reduces demand, especially among our residential customers. The opposite is true for the winter season, although to a lesser extent. The weather in our service territory during the third quarter of 2009 was the coolest in over 40 years. As measured by cooling degree days, the weather during this period was 14% cooler than the same period in 2008 and 27% cooler than the 20-year average.
Despite improvements in the capital markets and increases in asset valuations, many aspects of the downturn in the global and U.S. economy continued to impact our business throughout 2009. Most notably, many of our industrial customers continued to experience reduced production. This resulted in decreased demand for electricity from these customers as evidenced by the 10.8% decrease in industrial sales from 2008 to 2009. Additionally, the Kansas unemployment rate increased from 5.0% in December 2008 to 7.5% in July 2009 before declining to 6.6% in December 2009. We cannot predict when these economic conditions may improve or to what extent they may continue to affect electricity sales, including effects that may spill over into residential and commercial sales, and the affect this might have on our consolidated financial results.
Changes in Prices
On January 27, 2010, the Kansas Corporation Commission (KCC) issued an order allowing us to adjust our prices to include costs associated with our investments in natural gas and wind generation facilities that were not included in the price increase approved by the KCC in its January 21, 2009, order. The new prices were effective February 2010 and are expected to increase our annual retail revenues by $17.1 million.
On January 21, 2009, the KCC issued an order expected to increase our annual retail prices by $130.0 million to reflect investments in natural gas generation facilities, wind generation facilities and other capital projects, costs to repair damage to our electrical system, which were previously deferred as a regulatory asset, higher operating costs in general and an updated capital structure. The new prices became effective on February 3, 2009.
The KCC and Federal Energy Regulatory Commission (FERC) also adjust our prices through the use of price methods that are designed to track certain portions of the costs of providing utility service. For additional information, see Note 3 of the Notes to Consolidated Financial Statements, “Rate Matters and Regulation.”
In January 2009, we reached a settlement with the Internal Revenue Service (IRS) for years 2003 and 2004 associated with the re-characterization of a portion of the loss we incurred on the sale of Protection One, Inc. (Protection One) from a capital loss to an ordinary loss. This settlement resulted in a 2009 net earnings benefit from discontinued operations of $33.7 million, or $0.30 per share, net of $22.8 million we paid Protection One.
Westar Energy supplies electric energy at retail to approximately 368,000 customers in central and northeast Kansas and KGE supplies electric energy at retail to approximately 317,000 customers in south-central and southeastern Kansas. We also supply electric energy at wholesale to the electric distribution systems of 31 cities in Kansas and four electric cooperatives in Kansas. We also have contracts for the sale, purchase or exchange of wholesale electricity with other utilities. In addition, we engage in energy marketing and purchase and sell electricity in areas outside our retail service territory.
We have a retail energy cost adjustment (RECA) under which we are permitted to recover in our prices the cost of fuel consumed in generating electricity and purchased power needed to serve our retail customers. Through the RECA, we bill our customers for fuel and purchased power costs based on a quarter-ahead estimate. The RECA provides for an annual review by the KCC to reconcile estimated and actual fuel and purchased power costs. The KCC uses this same method as the means by which we refund to customers the margins we realize from market-based wholesale sales.
We have 6,807 MW of accredited generating capacity in service, of which 2,586 MW is owned or leased by KGE. See “Item 2. Properties” for additional information on our generating units. While we also own 149 MW of wind generation facilities, the intermittent nature of this type of production does not create any appreciable amount of accredited capacity.
Our aggregate 2009 peak system net load of 4,545 MW occurred on June 23, 2009. This included 132 MW of potentially interruptible load. Our net generating capacity, combined with firm capacity purchases and sales and the ability to interrupt 132 MW of load, provided a capacity margin of 26.0% above system peak responsibility at the time of our 2009 peak system net load.
The effectiveness of a fuel to produce heat is measured in British thermal units (Btu). The higher the Btu content of a fuel, the less fuel it takes to produce electricity. We measure the quantity of heat consumed during the generation of electricity in millions of Btu (MMBtu).
Based on MMBtu, our 2009 fuel mix was 78% coal, 14% nuclear and 7% natural gas, with diesel and oil making up less than 1%. In 2010 we expect to use a higher percentage of nuclear fuel because Wolf Creek will not have a scheduled refueling and maintenance outage. Wolf Creek had such an outage in the fall of 2009. Our generation mix fluctuates with the operation of Wolf Creek, fluctuations in fuel costs, plant availability, customer demand and the cost and availability of power in the wholesale market.
Fossil Fuel Generation
Jeffrey Energy Center: The three coal-fired units at Jeffrey Energy Center have an aggregate capacity of 2,164 MW, of which we own and lease a combined 92% share, or 1,991 MW. We have a long-term coal supply contract with Foundation Coal West to supply coal to Jeffrey Energy Center from surface mines located in the Powder River Basin (PRB) in Wyoming. The contract contains a schedule of minimum annual MMBtu delivery quantities. All of the coal used at Jeffrey Energy Center is purchased under this contract. The contract expires December 31, 2020. The contract provides for price escalation based on certain costs of production. The price for quantities purchased in excess of the scheduled annual minimum is subject to renegotiation every five years to provide an adjusted price for the ensuing five years that reflects then current market prices. The next re-pricing for those quantities over the scheduled annual minimum will occur in 2013.