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PNM Grabs Western Resources' Utilities for $4.4B

PNM Grabs Western Resources' Utilities for $4.4B

Public Service Co. of New Mexico is gaining a strong presence in the Midwest/Midcontinent power market with the $4.4 billion purchase, including debt assumption, of Western Resources' utilities. The proposed merger would create a new Albuquerque-based holding company serving more than one million retail electric customers and 400,000 retail gas customers in New Mexico and Kansas, with a generating capacity of more than 7,000 MW.

The tax-free, stock-for-stock transaction, which will take 12 to 15 months to complete, will make the new company a leading energy supplier in Midwest and western U.S. wholesale markets. Western's trading presence in six Midwestern power pools is expected to provide opportunities for PNM to bring its 15 years of power marketing experience and niche product development to new customers. In 1998, PNM exited the gas marketing business, after having a less than stellar start trying to enter the California market (see NGI, Aug. 31, 1998).

"We evaluated potential partners across a broad range of criteria, including financial flexibility, proven management skills, superior operating and technological capabilities, excellent customer service and a track record for fair dealing on regulatory issues," said Western's CEO David C. Wittig. He said the company was confident about the merger with PNM.

The merger comes nearly 10 months after Western announced it would seek a buyer of its electric utilities following its failed merger with Kansas City Power & Light Co. (see NGI, Jan. 10). Faced with a falling stock price and financial problems associated with its subsidiary Protection One, a monitored security company, Western decided to split up the company.

The new company, which will have combined assets of nearly $6.5 billion, won't occur until Western separates its utility assets from its unregulated subsidiaries. These include an 85% ownership in Protection One, and its 45% investment in ONEOK Inc., the Tulsa-based parent of Kansas Gas Service Co. Western plans to transfer its unregulated assets to its spinoff company, Westar Industries (see NGI, April 4). In October, it filed an application with the Securities and Exchange Commission to sell stock in Westar. Wittig will become CEO of Westar.

What PNM found attractive, among other things, was the $3 billion Wolf Creek nuclear power plant near Burlington, KS, the Kansas Power & Light division and the KG&E subsidiary. PNM recently announced plans to increase its generating capacity to meet the Southwest's power demands.

PNM said it plans to accelerate its growth plan, which includes 10% annual average earnings growth. It also wants to reduce its debt load, said PNM CEO Jeffry E. Sterba. The company has reduced its debt-to-capitalization ratio to 55% from 72% over the past seven years.

"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," said Sterba, who will lead the new company.

Once the merger is completed, the new holding company would issue approximately 95 million shares of stock, of which 42.1% would be owned by former PNM shareholders and 57.9% by former Western shareholders and Westar Industries.

The board of directors of the new company would consist of six current PNM members and three additional directors, two of whom will be selected by PNM from a pool of candidates nominated by Western, and one nominated by Westar. The headquarters for the Kansas utilities will remain in Topeka.

Carolyn Davis, Houston

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