Western Breaks Off Talks with PNM Over Utility Deal

The merger of electric operations of Public Service Co. of New Mexico (PNM) and Kansas-based Western Resources Inc. appears to have foundered on conditions imposed by the Kansas Corporation Commission (KCC). PNM last Monday said Western had discontinued talks about possible modifications to their proposed transaction, and that the parties are in disagreement about the future of the deal.

Western has advised PNM that it believes the parties should pursue completion of the transaction as currently structured, notwithstanding the two recent orders from the KCC. PNM, in response, told Western it is disappointed that the talks have been discontinued since it continues to believe that the existing transaction cannot be consummated if the KCC orders remain in effect.

One of the orders prohibits the split-off of Western's unregulated businesses in the manner proposed by Western. As the transaction with PNM is currently structured, the split-off is required prior to closing the deal. The other order reduces Western's rates by almost $23 million annually. Western has filed for reconsideration of the two orders.

PNM has told Western that the order reducing Western's rates would have a material adverse effect on the financial condition of the proposed combined companies, and could result in the failure of a significant condition to the transaction. Western has advised PNM that it disagrees. PNM believes that Western has the responsibility for resolving issues raised by the KCC orders.

"PNM remains committed to the strategic benefits of bringing the two companies' electric operations together," said Jeff Sterba, PNM CEO. "We continue to believe that the merger agreement with Western, as currently structured, cannot be consummated if the KCC orders stand and the KCC's expressed concerns are not addressed by Western."

In response, Western said that it was surprised by PNM's announcement and noted that it "strongly disagrees" with PNM's characterization that Western has discontinued talks concerning the transaction.

Western indicated it remains committed to the transaction. "We have continually expressed our willingness to work with PNM and believe the current transaction can be completed without significant modification of the economic terms of the transaction," said David C. Wittig, Western's CEO. "We are extremely disappointed that PNM has refused to meet with us to discuss the transaction on that basis."

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