PNM to purchase Western Resources' utility business

Six months after a failed merger with Kansas City Power & Light Co., Western Resources Inc. is selling its electric utilities to Public Service Co. of New Mexico (PNM). PNM Thursday said it will acquire the electric utility operations of Western Resources in a $1.55 billion stock deal, plus assumption of about $2.9 billion in debt. Prior to completing that transaction, Western Resources will wrap all its nonutility assets into Westar Industries which will be spun off to shareholders.


Six months after a failed merger with Kansas City Power & Light Co., Western Resources Inc. is selling its electric utilities to Public Service Co. of New Mexico (PNM).

In a complex transaction, PNM Thursday said it will acquire the electric utility operations of Western Resources in a $1.55 billion stock deal, plus assumption of about $2.9 billion in debt. Under the terms of the agreement, PNM and Western Resources , will then both become subsidiaries of a new holding company to be named at a future date.

Prior to completing that transaction, Western Resources will wrap all its nonutility assets, including its 85% stake in Protection One, a home security company; and its 45% investment in Oneok Inc., a Tulsa-based natural gas company; into Westar Industries which will be spun off to shareholders.

In mid-morning trading on the New York Stock Exchange, PNM was down 6 3/16 to 22 and Western Resources was up 1 5/8 to 23.

The as yet unnamed new holding company will serve more than 1 million retail electric customers, including those of Western utility subsidiaries Kansas Gas & Electric Co. and Kansas Power & Light Co., and will have generating capacity of more than 7,000 Mw. It will also serve 400,000 retail gas customers in New Mexico and Kansas.

The combination will allow PNM to surpass a goal of doubling generation capacity and tripling power sales more than 3 years ahead of schedule, said Jeffry E. Sterba, chairman, president and chief executive officer of PNM, who will hold the same title at the combined company.

"The addition of Western Resources' low-cost, high-capacity generation facilities will quadruple our current production capabilities, giving us a competitive edge in both power plant operations, and wholesale electric sales," he said.

Sterba said Western Resources' trading presence in six Midwestern power pools will allow PNM to capitalize on 15 years of power marketing experience and niche product development to new customers. PNM marketers, working together with the experienced power trading group at Western Resources, expect to realize an enhanced position in the wholesale power market, he said.

Debt reduction key
A key priority will be continuation of PNM's successful debt reduction effort, Sterba said.

"Over the past 7 years, we have reduced PNM's debt to capital ratio from 72% to less than 55%, and we will maintain our balance sheet integrity after the transaction is completed," Sterba said. "We are committed to deleveraging the combined company."

The creation of a separately traded Westar Industries allows the potential of Western Resources' unregulated ownership in Protection One, Protection One Europe, Oneok and other investments to be more directly realized by shareholders, said David C. Wittig, chairman, president, and chief executive officer of Western Resources, who will hold the same position with Westar, when the transaction is completed.

Sterba said the transaction is expected to add to PNM's earnings per share and cash flow immediately. The companies said expect the transaction to be completed within the next 12-15 months and is subject shareholder and various state and federal regulatory approvals. The new holding company will be headquartered in New Mexico.

The proposed new holding company will issue 55 million of its shares, subject to adjustment, to Western Resources' shareholders and Westar Industries. Before adjustments, the new company will have approximately 95 million shares outstanding, of which approximately 42.1% will be owned by former PNM shareholders and 57.9% will be owned by former Western Resources shareholders and Westar Industries.

Westar Industries will receive a portion of such shares in repayment of a $234 million obligation currently owed by Western Resources to Westar Industries.

Since Western Resources and Westar Industries remain committed to reducing Western Resources' net debt balance prior to consummation of the transaction, Western said it has agreed with PNM on a mechanism to adjust the transaction consideration based on additional equity contributions.

Under this mechanism, Western Resources could undertake certain activities not affecting the utility operations to reduce the net debt balance. The effect of such activities would be to increase the number of new holding company shares to be issued to all Western Resources shareholders, including Westar Industries, in the transaction.

In addition, Westar Industries has the option of making additional equity infusions into Western Resources that will be used to reduce its net debt balance prior to closing, the companies said. Up to $407 million of such equity infusions may be used to purchase additional new holding company common and convertible preferred stock.

The breakup of Western Resources appears to represent a defeat for Wittig who launched a hostile bid for Kansas City Power & Light Co. (KCPL) in 1996, breaking up a friendly merger deal between UtiliCorp United Inc. and KCPL. After Western and KCPL struck their own agreement, Western tried to recut it after its own stock rose.

Shortly after, its stock began falling hurt by its entry into the home security business. Earlier this year, KCPL's board voted to terminate the agreement.

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