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Western Reorganizes, Plans Electric Utility Separation

Western Reorganizes, Plans Electric Utility Separation

Although the creation of Westar Energy did not follow the path originally intended, plans for the utility holding company were set in motion last week when Western Resources announced it will split the company into two separate entities, one covering electric utility businesses and another for its non-electric operations. Both companies will be public entities. The separation is expected occur through a voluntary exchange offer expected to be completed prior to year-end.

"Many of our shareholders have wanted greater definition to the business, specifically a desire to have the company return to its core business as strictly an electric utility," said David Wittig, Western Resources CEO. "This strategy gives our shareholders a choice of which business they wish to own, and gives the financial community a clearer understanding of where the company's value lies."

The new Westar Energy will consist of two electric utilities, KPL and KGE, that provide electric service to 628,000 customers in Kansas.

"We believe that Westar Energy, as a pure-play electric company, will unlock the value associated with our electric assets by providing shareholders an investment opportunity exclusively in our electric utility operations," Wittig said.

Ironically, Westar Energy was to be the name of a company formed through the now-defunct merger between Western Resources and KCPL. The deal fell through last January (see NGI, Jan. 10), when KCPL canceled it because of questions it had about the financial performances of Western Resources stock price and of the value of certain Western Resources subsidiaries. Had the merger been executed, the combined Westar would have had more than one million electric customers in Kansas and Missouri, $8.2 billion in assets and more than 8,000 MW of electric generation resources.

The non-electric company, Westar Capital, will consist of the company's 85% ownership interest in Protection One, a monitored security company; its 45% ownership interest in Tulsa-based Oneok Inc.; its 100% ownership interest in Protection One Europe; its 40% ownership in Paradigm Direct LLC, a direct marketing company; and other investments.

Through the exchange offer, Western Resources shareholders will be able to trade some or all of their Western Resources common stock for shares in Westar Capital. The terms of the offer, including the exchange rate, will be determined and announced on commencement of the offer, expected to be in the third quarter of 2000. The offer of shares in Westar Capital will be made only by means of a prospectus. The exchange is expected to be a one-for-one exchange with between 29 and 37 million shares exchanged for Westar Capital, the company said.

Upon completion of the transaction, Westar Energy intends to raise $300 million of equity. Proceeds will be used to repay debt. Wittig will serve as the chairman, president and CEO of Westar Capital and will be the chairman of Westar Energy. The balance of the management teams will be announced at a later date. Each company will remain headquartered in Topeka, KS.

KCPL's worries now appear to be well justified. Along with the restructuring, Western announced its 1999 earnings last week. The company's net income was $11.3 million, or $0.17/share, versus $44.2 million or $0.67/share for 1998. While its investment in Oneok and its two utilities were able to post gains from 1998's results, Western Resources could not overcome its merger-related costs or its 71 cent/share loss incurred by Protection One. In addition, Western's stock price is trading at about $16, which is near its 52-week low of $15.31/share.

John Norris

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