Shares of Westar Energy Inc. jumped more than 5% on Thursday after the company filed a comprehensive plan with the Kansas Corporation Commission (KCC) outlining how the company intends to reduce debt and become exclusively an electric utility.
Under the plan, Westar will sell its non-utility and non-core assets, reduce its common dividend and refocus the company solely on its electric utility operations.
Westar said that when it is fully implemented, the plan will reduce the company’s debt to the level appropriate for Westar’s utility operations in accordance with previous KCC orders. Westar is filing the plan to comply with an order issued by the KCC in late 2002.
The KCC issued an order in November requiring Westar to execute financial and corporate restructuring. The following month, the KCC said that Westar would have to transfer certain of its utility operations to a utility-only subsidiary by the start of August 2003. The decision also required that the consolidated debt of all of the company’s utility businesses not exceed $1.67 billion (see Power Market Today, Dec. 31, 2002).
The target date for completing Westar’s plan is year-end 2004. The plan was filed publicly. Only commercially sensitive information related to pricing and negotiating strategy for divesting non-utility investments was filed confidentially.
“When the plan is fully implemented, Westar Energy will be a pure electric utility company with a sound capital structure and investment-grade credit quality, providing safe, adequate, reliable and affordable electric service to our Kansas customers,” said James Haines, Westar CEO.
Westar noted in its filing that since November 2002, it has identified and has begun eliminating 12 organizational entities to simplify the company’s structure. Also, it has terminated or reversed agreements that might prevent or impede returning to being solely an electric utility.
Westar also told the KCC that it has raised $300 million for debt reduction through a sale of ONEOK stock to ONEOK on Feb. 5. In addition, the board of directors has established a dividend policy that will lower the common dividend by 37% to an indicated annual rate of $0.76 per share from the current indicated rate of $1.20 per share. Savings will be used to reduce debt.
Westar’s move to lower its dividend follows on the heels of this week’s announcement by El Paso Corp. that it is slashing its dividend 82% as it struggles to right its financial ship. El Paso also plans to sell off $2.9 billion in assets, the company disclosed on Wednesday.
Other power companies that have reduced or suspended their dividend payouts over the past year include: CMS Energy, Allegheny Energy, Alliant Energy, Aquila, TXU, Xcel Energy, Dynegy, Williams, Puget Energy and Centerpoint.
Westar said that the planned dividend reduction and the sale of ONEOK stock that closed Wednesday accomplish almost one-fifth of the targeted debt reduction. It plans to sell all of its remaining shares of ONEOK stock in late 2003 and 2004.
Meanwhile, the company is in the process of selling Protection One Europe and is exploring strategic options for divesting its investment in Protection One North America. Westar and Protection One have retained financial advisers to develop strategic alternatives for Protection One, including the possible sale of the company (see Power Market Today, Feb. 6).
More broadly, Westar said that “orderly and deliberate implementation” of the plan will allow the company to maximize proceeds from non-utility asset dispositions to reduce debt. If necessary to reach debt reduction targets, Westar will issue new equity following the sale of its non-utility assets.
Westar will make periodic reports to the KCC to demonstrate progress and “show that electric utility customers are being protected from risks associated with non-utility investments until these investments are divested.” The company expects that a first quarter dividend of $0.19 per share will be declared later this month.
Shares of Westar rallied in the wake of Thursday’s news. The stock finished up more than 5% to $11.42, bucking losses seen in the broader markets. It was an indication Wall Street may be seeing this week’s filing at the KCC as a turning point away from what has otherwise been a string of depressing headlines related to Westar over the past several months.
In response to the filing, Standard & Poor’s Ratings Services (S&P) affirmed its ratings on Westar (BB+) and subsidiary Kansas Gas & Electric Co. (BB+) and removed all ratings from CreditWatch with negative implications where they were placed Nov. 5, 2002.
S&P said that Westar’s outlook is developing, indicating that ratings may be raised, lowered or affirmed. Upward ratings potential is solely related to KCC approval of the plan and successful implementation of Westar’s proposed transactions. Downside ratings momentum recognizes the company’s currently “frail financial condition” coupled with execution risk of the plan, including possible KCC rejection of the plan, the ratings agency said.
KCC approval of the plan and its successful implementation “would likely result in a stronger business profile. This is important because less stringent financial parameters would be required to achieve investment-grade credit quality,” S&P said.
Execution of Westar Energy’s proposed transactions will lead to “dramatic improvement” of the company’s liberally leveraged capital structure, weak earnings protection and marginal cash flow measures. It appears that over time, the proceeds from the sale of Westar’s ONEOK stock will be “forthcoming and substantial,” S&P added.
“Depending on the actual proceeds received for the Protection One assets and, if necessary to achieve certain debt guideposts established by the KCC, the size of the future common stock offering, Westar Energy’s overall financial condition may support investment grade credit quality.”
While uncertainties still exist with regard to re-audits of historical financials, investigations and subpoenas, the recent receipt of $300 million through the partial sale of ONEOK stock and prospects for additional proceeds to further pare debt levels “tempers these concerns,” the ratings agency went on to say.
The Securities and Exchange Commission (SEC) recently launched an investigation of Westar after the company said that it was restating first and second quarter financial results. The restatement reflects an additional impairment (a charge of $93 million) at Protection One (see Power Market Today, Nov. 15, 2002).
Westar in September disclosed that it had been served with a federal grand jury subpoena by the U.S. Attorney’s Office in Topeka, seeking documents and testimony related to the use of aircraft leased by subsidiaries of the company and about its annual shareholder meetings (see Power Market Today, Sept. 30, 2002). A few months later, David Wittig resigned his position as chairman, president and CEO after being indicted by a federal grand jury on charges of money laundering, conspiracy and four counts of submitting false books to a federally insured bank (see Power Market Today, Nov. 8, 2002).
In December, Westar said that Douglas Lake had resigned, effective immediately, as a director of Westar and as chairman of the board of Protection One (see Power Market Today, Dec. 9, 2002). In January, Paul Geist resigned from his positions as senior vice president and CFO, but Geist continues to serve as treasurer. Mark A. Ruelle has been appointed as executive vice president and CFO (see Power Market Today, Jan. 15 ).
And Westar in December disclosed that FERC subpoenaed information related to its role in potentially questionable energy trades with affiliates of Cleco Corp., and power trades in which Westar or other trading companies acted as intermediaries (see Power Market Today, Dec. 27, 2002).
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