Westar Energy Inc. (1.8%) (NYSE:WR) (WR – $49.61 – NYSE) is an electric utility serving 700,000 customers in central and northeastern Kansas. WR is well positioned to grow its earnings, given a constructive regulatory environment that allows for annual rate adjustments outside of a general rate case to recognize environmental and transmission investment. The company targets long-term EPS growth of 4%-6% off of its 2015 normalized earnings of $2.21 per share. In late 2015, WR implemented a $78 million rate increase based on a 53.45% equity ratio and an undisclosed ROE level (~9.35% inferred off of a 10.926% allowed pre-tax return). WR’s five-year capital expenditure program totals $4.2 billion, including $1.1 billion in 2016, $794 million in 2017, $751 million in 2018, $706 million in 2019, and $810 million in 2020. Management prefers to own the new capacity and believes it can lead to lower customer rates as well as Clean Power Plan compliance. A significant portion of the capital investment (transmission and environmental) is eligible for annual riders, which minimizes regulatory lag. Over the next five years, WR plans to invest over $1.2 billion on transmission rate base, or roughly $250 million per year. WR’s attractive wind resource, constructive regulation and transmission geography, make it an attractive takeover candidate.
From Mario Gabelli (Trades, Portfolio)'s Gabelli Utilities Fund first quarter 2016 commentary.
