Kansas-based Western Resources is exploring “several strategic alternatives” for its electric utility operations, which include finding a merger partner as it attempts to separate its regulated and unregulated assets and strengthen its market position. If a merger partner can’t be found, Western plans to look at other options for its two electric utilities, KPL and KGE. It may form a strategic alliance with other companies, partner with another electric or gas utility or possibly even sell them outright.

“This is the next logical step in our strategy to separate the regulated and unregulated assets of Western Resources, which was announced in March,” said David C. Wittig, Western Resources chairman and CEO.

In late March, Western made a decision to separate its regulated assets under a different corporate umbrella from its unregulated assets (see NGI, April 3).The companies are becoming public entities with the separation, a change expected to occur through a voluntary exchange offer by the end of this year.

The new electric utility entity will be called Westar Energy, and will consist of KPL and KGE, which will provide electric service to about 628,000 customers in Kansas. The non-electric company will be called Westar Capital and will consist of the company’s 85% interest in Protection One, a monitored security company; 45% ownership interest in Tulsa-based Oneok Inc.; 100% ownership interest in Protection One Europe; 40% ownership in Paradigm Direct LLC, a direct marketing company; and various other investments.

This week the problem of separating the electric utility operations and finding a way to make them financially successful for the company took center stage.

“We understand that growth is essential to be successful in a deregulated electric environment,” Wittig said. “That has been our view for some time – and remains our view today. Our electric operations, while solid, are becoming comparatively smaller as the industry consolidates. We look forward to partnering with another energy company that offers compatibility, growth and opportunity for our shareholders, customers and employees.”

Wittig said that “ultimately, this decision is based upon our long-held view that the electric business must be significantly larger in order to prosper in a deregulated environment. We need to prepare for coming deregulation and the competition that will inevitably come to Kansas, and with it, rate equalization. While we have extremely valuable assets, particularly on the generation side, these assets needs to be a part of a larger business.”

Wittig said that Western also would enhance its options to serve its “employees, customers and the communities in which we operate” as it begins to initiate the process of separation. Through an exchange offer, Western shareholders will be able to trade some or all of their Western common stock for shares in Westar Capital. The exchange is expected to be a one-for-one exchange, with between 29 million and 37 million shares exchanged. Western announced earlier this month that it was decreasing the discount on shares sold through its direct stock purchase plan to 3% from 2% beginning June 1. When the exchange is completed, Westar Energy will raise $300 million in equity to retire debts.

Topeka-based Western also holds a 45% interest in ONEOK Inc., the ninth largest natural gas distribution company in the U.S., which serves more than 1.4 million customers.

Carolyn Davis, Houston

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