CEO: Westar recovery not a ‘fool’s errand’

Reducing debt. Improving employee morale. Rebuilding relationships. Erasing the past.

They’re all priorities for James Haines Jr., new president and chief executive of Westar Inc.

“There are several ‘job ones’ we have to tackle,” Haines said in an interview last week. “The company has some significant problems.”

One week ago, Haines was named by the Topeka-based utility company to replace David Wittig, who resigned Nov. 22 under federal indictment for fraud and money laundering charges involving his personal finances.

Haines is no stranger to the Topeka utility.

The former chief operating officer of Westar left the company about the time Wittig joined. And he intimated that part of his new job would be erasing Wittig’s marks on the company.

“I have no reason to think that any of Westar’s problems are not fixable,” Haines said. “I wouldn’t be taking the job if I thought it was a fool’s errand.

“Fundamentally, I still think it is a great company. It has excellent facilities, excellent infrastructure. And I know many of the people who work there. They are great people who want to do a great job.

“I think the past just has to be cleared away so they can do that.”

The utility focus

Walker Hendrix, consumer counsel for the Citizen’s Utility Ratepayer Board, said he thought Haines would accomplish that by changing the focus of the company.

Under Wittig’s leadership, Hendrix said, the company spent too much time dealing with its nonutility businesses, mainly the security monitoring firm Protection One.

“Haines is more of your classical type of utility executive who, I believe, will really be much more focused on the utility operations,” Hendrix said. “I may not always agree with him, but I have an appreciation for him because I think that is absolutely the focus this company needs.”

And the utility business is where the incoming Westar chief built his career.

In the mid-1980s, Haines was in the legal department at Kansas Gas & Electric. He later became KG&E’s group vice president.

In 1992, when KG&E merged with Kansas Power and Light Co. to form Western Resources Inc., Haines was named the big utility’s chief administrative officer.

In 1996, he resigned his post as chief operating officer at Western Resources …quot; which later was renamed Westar under Wittig. Haines became president and CEO of El Paso Electric Co., a Texas-based utility with about half as many customers as Westar.

Wittig’s focus

Wittig, on the other hand, came to the company in 1995 after a career in investment banking and the mergers and acquisitions industry.

And it was an acquisition that led to Westar’s downfall, Hendrix said.

In the consumer watchdog’s view, many of the company’s problems – including a stock price that has plummeted from the $40 range a few years ago to a closing price of $11.53 per share Friday on the New York Stock Exchange – can be traced to the 88 percent ownership stake Westar took in Protection One.

“They got themselves involved with Protection One, and it just drug them down,” Hendrix said. “It never made them any money, and then one day they woke up and realized they had more than $2 billion into a company that wasn’t returning anything to the bottom line.

“And I think while David Wittig was there, the management was unwilling to say this was a bad investment and that it needs to be written off.”

For his part, Haines won’t rule out the possibility of removing Protection One from Westar’s future.

“That is something I need to figure out,” he said. “I can say I don’t think it is fundamentally a problem for a utility company to have nonregulated operations, but I also believe the nonregulated operations have to support themselves. They should not be allowed to be a drag on the regulated operations.

“If Protection One can make money for the shareholders and do that without jeopardizing the utility operations, then it could be a good thing. If not, we’ll have to figure out how to resolve that.”

Plenty of problems

It is just one of many issues Haines must figure out.

“It appears to me the company has lost the confidence of its customers, its shareholders, its employees and its regulators,” Haines said. “Obviously, we have to regain that confidence.”

Confidence has been sinking as Westar’s debt has been increasing. The company has an estimated $3 billion in debt. The high debt level has raised eyebrows on Wall Street. Standard & Poor’s consistently labels the company’s financial condition as “frail.”

Haines said he also was concerned about Westar debt.

“There’s clearly well over $1 billion worth of debt that we need to figure out how to pay,” Haines said.

The debt has done more than upset investors. It also has created a problematic relationship with the Kansas Corporation Commission, the state agency responsible for overseeing utility rates.

“You can tell from the language of the recent KCC orders that it is a strained relationship,” Haines said. “It is pretty clear there is a significant level of frustration on the part of the commissioners that the company has incurred all of this debt largely to support the unregulated business and in doing so have created some jeopardy for the regulated businesses. We have to work on building that relationship back up.”

Flagging morale

The same could be said of the relationship the company has with its approximately 5,000 employees. Haines said he was still assessing employee morale, but indications are that it is bad.

“I can’t say for sure where the level of morale is at, but it does appear to me that it is low and that is a problem,” Haines said. “People need to be happy at work.

“I want to do my part to get everybody back to the point of where they are really proud to work for Westar and proud to be providing electric service to Kansas.

“You do that by paying attention to a lot of little things. You do that by telling people what you are going to do and then doing it. You do it by making yourself accessible to people.”

Despite the company’s problems, Hendrix said it still has a sound base in its utility operations. The industry generally regards favorably the company’s power plants, infrastructure and ability to cheaply produce electricity.

“From an operational standpoint, it is still regarded as a good company,” Hendrix said. “But whether it can continue to operate that way given their financial condition is a real ongoing question.”

Rate increases?

Westar’s weakened financial condition has Hendrix worried about what price the company’s approximately 647,000 customers, including Lawrence residents, will have to pay for electricity in the future.

“When a company has liquidity problems like Westar, and then they have an outage and have to buy additional power or build a new plant … they just don’t have a way to get that money other than a big, massive rate increase,” Hendrix said. “The problems of their unregulated companies have created real pressure on their utility business.

“I’m sure we’re going to be faced with the new management considering rate increases as a way to get out of debt faster.”

Haines didn’t discuss the issue of increasing rates but made it clear he would be bottom line-oriented.

“I think the utility operations are still in a good place right now,” Haines said. “What I want to do is just get it focused on providing great service for customers, making it a tremendous and safe place to work, and making lots of money for shareholders. I think you can do all three of those things at the same time.”