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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "IssueAlert" <IssueAlert@scientech.com< X-To: X-cc: X-bcc: X-Folder: \Drew_Fossum_Dec2000_June2001_1\Notes Folders\Discussion threads X-Origin: FOSSUM-D X-FileName: dfossum.nsf http://www.consultrci.com ********************************************************************* Learn more about SCIENTECH's Mergers, Acquisitions, and Convergence in the US Electric Industry InfoGrid at: http://www.consultrci.com ********************************************************************* =============================================================== SCIENTECH IssueAlert, November 10, 2000 Public Service Company of New Mexico to Acquire the Electric Utility Operations of Western Resources By: Jon T. Brock, Director, Strategic and Competitive Intelligence =============================================================== Public Service Company of New Mexico (PNM) announced yesterday that it intends to acquire the electric utility operations of Topeka, Kansas based Western Resources (WR) in a tax-free stock-for-stock transaction. The deal will require that WR separate its non-utility assets from its regulated utility business and spin it off to WR shareholders. ANALYSIS: In this day and age of a consolidating electric industry, strategic combinations are becoming more commonplace. This announcement took me by surprise even though the signs were clearly marked for this type of merger. WR has had a tough time financially in recent years and has been seeking a utility operations buyer for some time now. WR busted up a planned merger between Kansas City based KCPL and UtiliCorp United by attempting to acquire KCPL in 1996. At the time WR share price was above $30. In 1997 WR share price soared to record highs of more than $40. WR attempted to acquire security company ADT but their bid failed. They sold their interest in ADT for a $800 million profit. This profit "masked" a rate review by the Kansas Corporation Commission that at the time was cutting WR rates by $75 million, reducing earnings by 75 cents per share. WR, who obviously had a strategic focus on security, used the profits from the ADT sale to purchase 85 percent of Protection One, one of the fastest growing companies in the monitored security business. Protection One hit some hard times soon after the purchase by WR and as a result, their stock tumbled. WR investors became nervous when state and federal regulators began discussing terms of the KCPL merger that might not necessarily be favorable to them. As a result, some moved their money out of WR and by 1999, WR share price had tumbled to $16 to $17. In January of this year, KCPL determined that the share price of WR and the financial considerations of the merger were not advantageous to KCPL shareholders and called off the merger. WR immediately split itself into two organizations (regulated utility operations and non-regulated business) with the intent of finding a buyer for the regulated utility operations. WR claimed in June of this year that 50 companies were being courted, including international companies, for the utility operations assets of Kansas Power & Light (KPL) and Kansas Gas and Electric (KGE). Putting PNM on that list had not occurred to me. But it does fit. SCIENTECH interviewed Jeff Sterba, CEO of PNM, just weeks ago and asked if the development of alliances, mergers, and acquisitions were a part of the positive approach to PNM's strategy. Jeff answered, "Very definitely. Alliances focused on the things that are core to your business, and that can bring a sustainable, competitive advantage are essential for us in this industry. The criticality of market channels can't be over-emphasized. Once you have a good market channel, that doesn't mean that everything you put through that market channel you have to do yourself, or you have to own. You can expand that reach to customers by forming alliances. There are times when acquisitions can also be an important investment if it involves something that is core to your business. So, both alliances and acquisitions will be a part of PNM's future." Just weeks later PNM is buying WR. Utilizing my rear view mirror now I see the existing similarities between the assets of WR and PNM. They both operate regulated utilities with a generation fuel mix (including nuclear). They both have multi-commodity in electric and gas. They both have wholesale operations. PNM actually has had a great year financially due in part to a strong wholesale operation. PNM net earnings for the nine months ended Sept. 30, 2000 totaled $86.9 million, or $2.17 per share (diluted) on total operating revenues of $1.15 billion, compared to earnings of $66.2 million, or $1.60 per share in the first three quarters of 1999. PNM has adopted a "niche" strategy in the wholesale power market by developing tailored wholesale power products for its customers. While some of the mega-traders in the wholesale market thrive on volume and a standard commodity, PNM differentiates itself by creating a tailored power product according to the needs of the buyer. PNM has found success in this niche segment of a large wholesale market. The merger deal is expected to take between 12 and 15 months to complete. PNM will inherit approximately $2.9 billion in debt making the total value of the deal worth $4.4 billion. Fitch has placed its securities ratings of PNM on Rating Watch Negative and WR on Rating Watch Evolving. Fitch plans to meet with PNM management soon in order to assess the full impact of the merger. Apparently some regulatory concern exists in Kansas where deregulation has not occurred and where some rate inconsistencies exist between Wichita and Topeka. This may result in a rate case. It should also be noted that Wichita, Kansas currently has an ongoing effort to takeover (municipalize) the electric system from Western Resources within its city limits because of the rate disparity between Wichita and Topeka. Wichita has about 170,000 power customers -- roughly a fourth of all the customers served by Western Resources. They represent more than $370 million of KGE's $580 million in revenues. PNM will increase its debt but is committed to reducing that debt and has demonstrated its ability to do so. PNM has decreased its debt-to-capital ratio from 72 percent to less than 55 percent in the last seven years. The headquarters will be based in Albuquerque, NM and the chairman, president, and chief executive officer will be Jeff Sterba. =============================================================== Search SCIENTECH's PowerHitter archive to read about our interview with Jeff Sterba, Chairman, President, and CEO of The Public Service Company of New Mexico at: http://www.consultrci.com/web/infostore.nsf/Products/PowerHitter ============================================================== SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Jon T. Brock Director, Strategic and Competitive Intelligence jbrock@scientech.com =============================================================== Feedback regarding SCIENTECH's IssueAlert should be sent to jbrock@scientech.com =============================================================== SCIENTECH's IssueAlerts are compiled based on independent analysis by SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, please reply to this message and in the body of the email type "remove."
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