UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITES EXCHANGE ACT OF 1934
Date of Report (Date of earliest events reported) November 16, 2000
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November 9, 2000
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PUBLIC SERVICE COMPANY OF NEW MEXICO
(Exact name of registrant as specified in its charter)
New Mexico 85-0019030
--------------------------- Commission ----------------------
(State or Other Jurisdiction File Number 1-6986 (I.R.S. Employer
of Incorporation) ------ Identification) Number)
Alvarado Square, Albuquerque, New Mexico 87158
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(Address of principal executive offices) (Zip Code)
(505) 241-2700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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Item 9. Regulation D Disclosure
The following is the transcript of the Company's press conference to discuss the
Company's purchase of the electric utility operations of Western Resources that
was broadcast via telephone conference and the Company's web site on November 9,
2000 and is being filed herewith as a Regulation FD disclosure.
PNM/WESTERN RESOURCES
Moderator: Jeff Sterba
November 9, 2000
7:00 a.m. MT
Operator: Good morning everyone and welcome to the PNM/Western Resources
teleconference. With us today, we have Jeff Sterba, chairman,
president, and chief executive officer of PNM and Barbara
Barsky, senior vice president, planning and investor services
of PNM. After the opening remarks there will be a question and
answer period. At that time, if you have a question, you will
need to press the one, followed by the four, on your
telephone. This call is being recorded and your participation
implies consent to our recording this call. If you do not
agree to these terms, simply drop off the line.
Now I would like to turn the call over to Ms. Barsky. Please
go ahead, ma'm.
Barbara Barsky: Good morning. Thank you for joining us this morning to talk
about PNM's purchase of the electric utility operations of
Western Resources. Today's conference call can also be heard
live on the Internet by accessing the link on our website,
www.pnm.com. I'm Barbara Barsky, senior vice president at PNM.
Joining me today are Jeff Sterba, our chairman, president, and
CEO, Max Maerki our CFO, Pat Ortiz, general counsel, and John
Loyak [sp], our controller.
This morning we issued a press release announcing this
agreement. If you have not received this release, please call
505-241-2868 and we will fax you a copy immediately. A copy
can also be found on our website, again at www.pnm.com.
This presentation contains forward-looking statements within
the meaning of the safe harbor provisions of the United States
Private Securities Litigation Reform Act of 1995. Investors
are cautioned that such forward-looking statements with
respect to revenues, earnings, performance, strategies,
prospects, and other aspects of the businesses of PNM and
Western Resources, and with respect to the benefits of the
transaction are based on current expectations that are subject
to risks and uncertainties. Such statements are based upon the
current beliefs and expectations of the management of PNM and
Western Resources. A number of factors could cause actual
results or outcomes to differ materially from those indicated
by such forward-looking statements. For more information about
these factors, please refer to our press release.
I'd like to now introduce you to Jeff Sterba, who will take
about 15 minutes to discuss this announcement. Immediately
following his remarks, he will open the conference to
questions. Jeff.
Jeff Sterba: Good morning and thanks for joining us this morning.
Today I'm very pleased to announce that we have reached an
agreement with Western Resources of Topeka Kansas to acquire
that company's electric utility businesses in a stock for
stock transaction valued at $1.5 billion, based on our trading
price over the last ten days. As part of the agreement, we
will also be assuming about $2.9 billion worth of Western
Resources' debt, bringing the total purchase price to about
$4.4 billion.
The words Kansas Power and Light and Kansas Gas and Electric
Systems, Western Resources serves more than 600,000 retail
electric customers in north, central, and eastern Kansas.
Since PNM now serves about 427,000 electric and gas customers
here in New Mexico, this combination will create a core
utility business with over 1 million retail customers in two
states. Both Western Resources and PNM are also very active in
the wholesale power market, an area where we see significant
potential for value creation in this combination.
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Our new company will own more than 7,000 megawatts of cost
efficient generation in Kansas, New Mexico, and Arizona,
comprising of fuel mix of nuclear coal and natural gas and
oil. The strategic location of these assets gives us access to
wholesale customers from California to Ohio, and from Canada
to Mexico. With this combination, we are creating a
multi-regional energy provider with the scale and scope needed
to succeed in the new energy marketplace. This will be an
energy business with over $3 billion in annual revenues, $6
1/2 billion in utility plan, over 5,000 employees, and
exciting prospects for continued growth.
Before I talk more about these new opportunities though, let
me first give you some more detail about the merger itself.
This will be a stock for stock transaction, tax-free for
shareholders in both companies. Prior to the closing this
transaction, Western Resources will reorganize all of its
non-electric utility assets into a separate, publicly traded
company named Westar Industries. Stock in that new company
will be distributed to Western Resource shareholders so that
they will own shares in both Westar Industries and Western
Resources.
Simultaneously, PNM and Western Resources will become wholly
owned subsidiaries of a new holding company yet to be named.
The new company will issue 55 million shares, subject to
adjustment, to Western Resources shareholders and Westar
Industries. PNM shareholders will exchange their shares for
shares in the new holding company on a one-for-one basis. The
exchange ratio for the Western Resources shares will be
finalized at closing, depending on any additional equity
contributions to reduce the net level of debt.
When these share exchanges are complete, the new corporation
will have approximately 95 million shares of common stock
outstanding, of which approximately 42 percent will be owned
by PNM's former shareholders and about 58 percent owned by
Western Resources former shareholders. In addition, as I
mentioned, PNM will assume approximately $2.94 billion dollars
in Western Resources debt.
Based on PNM's average closing stock price over the last ten
days, which was $27.325 per share, the transaction is valued
at approximately 1.5 billion. The new company will have a
total market cap of about $2.6 billion based on that price.
All shareholders will be entitled to PNM's dividend. PNM's
current dividend rate is $0.80 per share annually.
Now we believe the combination of Western Resources and PNM
will provide tangible benefits to shareholders, customers, and
employees in both companies, beyond what either company could
offer on a stand-alone basis. For shareholders, the new
company will offer an attractive combination of predictable
cash flow and steady revenue growth from our expanded
regulated utility business, together will strong growth in the
competitive wholesale market. We expect that the combination
will be immediately accretive. That is, earnings per share
from the combined company will be larger than what PNM would
have earned by itself.
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We also continue to maintain our goal of achieving average
annual earnings growth of 10 percent over the next five years.
Let me emphasize that this transaction is not about cost
cutting. It is about creating a platform for expansion. Now we
do expect that by sharing best practices across the two
organizations, we will find new ways to control costs, improve
service, and enhance system reliability. But the strategic
rationale underlying this combination lies in the vastly
expanded opportunities it opens up for us in the wholesale
market. This transaction realizes Pan Am's strategic vision of
doubling our generation capacity and tripling our wholesale
power sales.
With the addition of Western's generation assets, we will have
an excellent mix of baseload, intermediate, and peaking
capacity. Combining PNM's existing electric business with the
KPL and KGE systems will give us a total of 7,125 megawatts of
net generating capacity, together with ownership of 6,500
miles of transmission lines, and 36,000 miles of distribution.
In 15 years experience in the wholesale market, PNM has built
on our favorable position by implementing an asset-based niche
strategy, focused on offering products and services tailored
to each of our wholesale customer needs.
That strategy has paid off with solid returns for PNM
stockholders in recent years. Our revenues from both power
sales have tripled from 1996 through 1999, and are up another
95% in the first nine months of this year.
Now with the addition of Western Resources strategically
positioned and cost effective generation portfolio, and its
experienced power marketing staff, we believe we can
successfully penetrate the mid-continent market, using the
same asset-back niche strategy that has served us so well in
the west. At the same time, adding the KPL and KGE service
territories to PNM's existing retail base will give our
combined company a broader, more predictable cash flow from
its regulated utility operations.
PNM, like KPL and KG&E, has earned a national reputation for
reliable customer focused retail service. Strong local
economies and steady growth in both territories enhance the
predictability of future revenue at earnings growth, while the
geographic diversification we achieve by operating both in
Kansas and New Mexico reduces reliance on local economic
condition and mitigates the impact of weather on revenues and
earnings. We also expect a merger will deliver some advantages
from the increase in scale achieved in the combination. Our
larger market cap should provide us with improved access to
capital markets, and an increase in shares outstanding will
boost our market flow. The increase capitalization will also
be of value as we continue to pursue new investments in energy
related technology.
We expect that this transaction can be completed within 12 to
15 months and we will begin immediately to prepare the
necessary filings to obtain regulatory and shareholder
approvals. Regulatory agencies that we will be presenting some
or all of this transaction to include the New Mexico Public
Regulation Commission, the Kansas State Corporation
Commission, the Federal Energy Regulatory Commission, the SEC,
and the Nuclear Regulatory Commission. Also, of course, the
transaction must be approved by the shareholders of both
companies and the appropriate HSR filings.
We already have a request pending before New Mexico regulators
to allow us to establish a holding company and place our
regulated utility operations and our competitive power
generation and marketing businesses into two separate
subsidiaries. We hope that the substantial advantages of this
proposed merger should dispose regulators to act favorably on
that request. Let me also emphasize that this transaction does
not, in any way, alter our commitment to proceed with
restructuring within the state of New Mexico.
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While the combined company will be headquartered in PNM's own
home state of New Mexico, we intend to maintain a significant
corporate presence in Kansas, and Kansas directors will be
represented on the board of the new holding company. We really
don't see any issues likely to arise at FERC, because of the
different markets in which we serve or the NRC, or with other
federal agencies that can potentially delay regulatory
approvals beyond the end of next year.
We are in the initial stages of establishing a transition
team, comprised of Western and PNM personnel, to guide us in
integrating the two companies once the transaction is
complete. PNM executive vice president, Bill Real, a 20-year
PNM veteran, who also happens to be a Kansas native and
started in Topeka with the gas services company, will head up
that team. Although it is too soon to say what the makeup of
the new management team will be, I will become the chairman
and CEO for the new holding company. The new board will
consist of PNM-- of six of PNM's current directors, plus three
members from Kansas.
Now PNM is taking on a significant amount of debt in
completing this combination. We have been successful in moving
our own operation back to investment grade and will continue
our strong commitment to conservative financial management. We
have made provisions for Western Resources to make additional
equity contributions through transactions not involving its
ongoing utility operations, which would significantly reduce
the leverage. The combined companies strong cash flow will
also be used to quickly achieve investment grade for all units
of the new company. We will use the combined companies strong
cash flow to de-lever the company in a rapid manner.
In summary, let me say that we see substantial strategic,
operational, and financial benefits flowing from this
combination; benefits that will work to the advantage of our
shareholders, customers, and employees alike. This combination
will create a mid-sized, multi-regional energy company that
combines both scope and agility, a company large enough to
compete in the marketplace but compact enough to respond
quickly to new opportunities. This transaction both expands
our par marketing and generation capability and substantially
increases our regulated utility base. It gives us the
opportunity to repeat in the Midwest, the same success we have
had it in the western bulk power market, at the same time that
it substantially adds to our existing retail base. We believe
this merger will create substantial value for our shareholders
of both companies, while providing tangible opportunities for
employees and stable rates and continued access to affordable
reliable service for retail customers in both states.
I want to thank you for your time this morning and I would be
pleased to have myself and the others with me today try to
answer any questions you may have.
Operator: Ladies and gentlemen, we will now begin the question and
answer session. If you have a question, please press the one,
followed by the four, on your telephone. You will hear a
three-tone prompt acknowledging your request. If your question
has been answered and you wish to withdraw your polling
request, you may do so by pressing the one, followed by the
three. If you're on a speakerphone, please pick up your
handset before entering your request. One moment please, for
the first question.
Once again, if you do have a question, please press the one,
followed by the four, at this time.
Paul Fremont from Jefferies & Company, please go with your
question.
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Paul Fremont: Thank you very much and congratulations on the transaction. A
number of us, I guess myself included, are not really familiar
with the Western Resources side and particularly breaking out
the utility piece from the entire company. Is there any way
that you can help us, either on a historical basis or on a
perspective basis, in providing us with some numbers on the
earnings power of the Western Resources regulated operations,
some sense of the book value? Should we assume sort of no good
will in this transaction and whether any of the debt that's
being picked up in this transaction is debt that's currently
not booked at the regulated company, but would actually be
booked at some of the non-regulated operations within the
Western Resources family?
J. Sterba: Paul, the Western Resources, I believe, announced in the
Spring their intention originally to break the company into
two pieces; the Westar Industries and the Western Resources
and have two pieces of paper that traded in the market. They
subsequently decided that they would search to sell, seek to
sell the utility operations. So with the Westar Industries is
already in their books and records, reasonably well broken
out, I believe, and has been kept separate. The debt that we
are assuming is all Western Resources debt that sits at the
utility level. It is-- does not sit at the-- at any of the
unregulated subsidiaries level. One of your questions related
to what about book value and the relationship to good will.
There will be no good will associated with this transaction
and no acquisition adjustment that will be sought in the
regulatory process.
Regarding the numbers, my suggestion is-- certainly I know
you, being the good analyst you are, will do the work in
looking at Western, but let me give you a bit of information
based on 1999 data. Their total utility plant is about $3.8
billion. Their-- I'm looking for the rest of the information
that I though I had with me, Paul. I don't. My suggestion
would be that separately you can call Barbara Barsky to obtain
specific data. There is some data contained within the press
release relative to their revenues, which lest, I think in
1999, where about $2.3 billion and there is disclosure, which
I apologize, Paul, I don't have with me right now, relative to
what their earnings per share for the utility operation is.
P. Fremont: Great. We'll try and follow up with Barbara separately. Thank
you.
J. Sterba: OK.
Operator: George Davies from ADBCO, please go with your question.
George Davies: Yes, two quick questions. One of my-- I've been a long-term
holder and my customers have a public service in New Mexico.
One of the reasons we were attracted to the company was its
not have a great deal of gas and oil exposure. I'd like to
know what the mix of business is going to be of the new
combined entities in terms of coal, gas, nuclear, and oil in
terms of production of capacity that you all will be
officially holding.
J. Sterba: Yes, George, the fuel mix of the combined company will be very
similar to the fuel mix that PNM has today. Western Resources
has a 47 percent interest in Wolf Creek, which is--
G. Davies: I don't know Wolf Creek so you'll have to help me with that.
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J. Sterba: Wolf Creek is a single unit nuclear facility that has an
excellent operating track record and has been well reviewed in
both the NRC and the INPO [sp] ratings. So they have a piece
of nuclear power. They also have coal resources, primarily in
a facility called the Jeffrey Energy Station. And then they
have gas and oil. The specific percentages we will provide
you, but in general it is very close to the same percentage
mix, fuel mix, that exists in our system today. They have just
a little bit more gas and oil than we do on a percentage basis
and a slightly smaller amount of coal. They are in the process
of bringing online some new gas generation. Two combustion
turbines have gone online this year and a combined cycle
facility that is coming online this next year, but they have a
good solid coal base, as well as a good operating nuclear
facility that will keep our fuel mix about the same place
where it is today.
G. Davies: So then it's safe to say before we see any hard numbers that
you're going to be much less than 25 percent will be gas or
oil.
J. Sterba: I believe we're just around 21 percent subject to check,
George.
G. Davies: OK, yes, well I-- that's slightly more than where you are
today, but not much.
J. Sterba: OK.
G. Davies: Second question and the last one. I'll get out of the way for
others. Were others bidding on this company on a Western-- has
been putting itself up for sale, where others bidding on this?
Was this a competitive bid? Was it we're good friends and
we're going to do this deal regardless? How was this arranged?
J. Sterba: No, George, this was a competitive situation and I certainly
can't comment on how many players may have been involved. I
know there were multiple and I know that they conducted a
competitive process that led down to a final negotiation
between the companies.
G. Davies: OK.
J. Sterba: We had very little contact with Western prior to this,
although we have had some amount of wholesale power
interchange with them. It's fairly small. They operate in a
different grid than we do and so it's not a company that I
would say we have had a lot of interaction with in the past.
G. Davies: Can you tell me if you were indeed a high bidder or was it a
mix, a fit business that allowed you to win versus other
competitors?
J. Sterba: George, I guess if you find out the answer to that question I
would hope you would call me and tell me.
G. Davies: I see.
J. Sterba: I certainly don't know. I have a sense, but it is only a
sense. I think that what I have been told is that they saw the
value in our strategy and in our ability to commit and execute
that strategy in the West. And their shareholders will be
taking that risk along with our current shareholders. And on
the basis of that, they chose us in a competitive situation.
G. Davies: Right now, you sell more wholesale power than you do retail
power, if I recall the numbers correctly, in terms of just
sheer power, though they're very close, where is Western, and
I'll get off the phone after this one, where is Western with
wholesale versus retail?
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J. Sterba: Yes, George, our wholesale business is today significantly in
excess of our retail business. It's about 60 percent of our
total sales. It is a much smaller percentage on Western's
side. They have been involved in the wholesale market, but
most of their wholesale sales have been in the, what I will
call the more traditional kind of marketplace where you're
selling to co-ops and municipalities on regulated rate
tariffs. They have developed a wholesale marketing operation.
We think that they have some good folks and have developed
some expertise in that marketplace. This is the arena that we
see the lion's share of the strategic rationale for the
transaction, though.
G. Davies: Thank you very much.
J. Sterba: Thank you, George.
Operator: Bill Mastoris from Bank of New York Capital Markets, please go
with your question.
Bill Mastoris: I have three questions. The first question is, Jeff, where the
rating agencies consulted before hand and what are your
expectations for the ultimate rating, once you have the
combined entity on public service New Mexico's debt and if
it's any different on any of the assumed debt that you'll be
taking on from the utility? And then also you mentioned in the
press release that you're going to maintain balance sheet
integrity and de-leverage, and if you could provide any more
color that would be greatly appreciated.
J. Sterba: Sure. Irrelative to the rating agencies, yes we did visit with
them prior to the announcement of this transaction. However,
we have certainly not completed the discussions that need to
take place for them to fully understand and evaluate this
transaction. I think we would expect the rating agencies to
take an action similar to what they have taken in other
mergers of this kind, in which they may likely place us on
credit watch until such time as they have an opportunity to
fully evaluate it. And because of the leveraging implications,
it wouldn't surprise me if it was a credit watch potentially
with negative implication. We will be visiting with them again
in the very near future to provide them the information
necessary for them to fully evaluate the transaction.
As you know, this company has some great experience with the
de-leveraging of a balance sheet. Over the 1990's we were able
to take our balance sheet from about 72 percent debt, down to
about 55 percent debt, and at the same time, provide rate
reductions to customers amounting to over 18 percent. So this
is something that I won't say that we relish the opportunity
to de-leverage another balance sheet, but we certainly are
not-- we believe in our capability to do it. And there are a
number of mechanisms by which it will be done. We mentioned
that there are opportunities for both Western Resources and
Westar industries to either sell assets or raise capital
outside of the fundamental utility and use that capital to
reduce the amount of leverage of the utility prior to the
closing of the transaction. And they will do that in return
for a mixture of common and convertible preferred stock.
This company will also, the combined company, will also have
an exceptionally strong cash flow engine in it. And
consequently, we feel very good about our ability to manage
the debt load. We are committed to insuring that the utility
subsidiaries of the holding company will maintain investment
grade rating. It is possible that the holding company, which
will take on some debt for a period of time, may or may not be
at investment grade, but it is certainly our intention to,
over a fairly short period of time, have the holding company
also be an investment grade paper.
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B. Mastoris: Jeff, just a quick follow up. Would you expect that Western
Resources, or I should say Westar, will commit any additional
or will provide any additional equity infusions into the
utility prior to consummation of the transaction?
J. Sterba: I do expect that they will likely either sell assets or raise
capital in a manner that will allow them to reduce the amount
of leverage in the utility. And consequently, it will increase
the amount of equity at the time of the consummation of the
transaction. The magnitude of that, obviously, is not known by
ourselves or Western.
B. Mastoris: OK and you know, kind of the last follow up and then I'll let
somebody else-- What-- could you pinpoint, if you are at
liberty to do so, some of the assets that may be sold?
J. Sterba: You know I really think that that's a question for Western
Resources and Westar Industries.
B. Mastoris: OK, thank you.
Operator: Doug Ficher from AG Edwards, please go with your question.
Doug Ficher: Yes, good morning. A couple of questions, number one, what is
the status of the preferreds that Western has? Will you be
assuming those or will those go with Westar Industries or will
they be taken out as a result of the merger? And are they
included in the 3.-- in the 2.-- whatever the debt is you said
that you're assuming here, the 2.939?
J. Sterba: I'm going to ask Max to answer that question for you.
D. Ficher: Then I have a follow on after that.
J. Sterba: OK.
Max Maerki: Good morning, Doug. It is our intention to assume the
preferred that are included in Western and they're included
into $2.9 billion worth of debt.
D. Ficher: OK thank you, Max. And then secondly, what's your thoughts as
to the rate disparity between Kansas Gas and Electric and the
Topeka operations that do business as Kansas Power and Light,
which has been a very contentious political issue in this
state? And I believe there's some kind of rate filing to at
least look at equalizing those over time.
J. Sterba: Doug, it's an issue of keen interest to us. Western Resources
has agreed to file a rate case, which I believe they will be
doing by- on or before November 25th. And in that rate case,
it's my understanding they will be asking for a rate increase
within their territory. And also, we'll probably propose some
approach to closing the rate disparity that exists between
those two areas. Obviously, between now and the closing, we
are going to watch that with great interest. Western has the
responsibility for proceeding with that rate case, but the
issue of the rate disparity is one of significant concern in
Kansas. When I visited with the Kansas governor, it was on the
top of his mind. And so we're very interested in being able to
help participate in shaping something that will allow that
issue to be addressed over time. At the same time, we can't do
a whole heck of a lot until we see what happens in the rate
case.
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D. Ficher: Is the deal contingent upon a favorable outcome to the rate
case?
J. Sterba: Well, like any transaction, this agreement has certain
provisions for material adverse change that would allow our
board to reevaluate the transaction in light of things that
may happen on the regulatory or other fronts relative to
Western. And so that's obviously the reason why that issue is
of keen interest to us.
D. Ficher: OK, thank you.
Operator: Sharina Chowdhury from Merrill Lynch, please go with your
question.
Steve Fleischmann:Yes, this is Steve Fleischmann [sp]. Jeff, can you hear me?
J. Sterba: Yes, Steve. How are you?
S. Fleischmann: Good, thank you. Could you please-- could you be willing to be
more specific on what level of earnings increase you expect
from the transaction?
J. Sterba: I can tell you this, Steve. We have looked at a whole series
of cases regarding this transaction, and as you know, you
don't base this kind of a transaction on just one set of
assumptions. In all cases, it is accretive in the first year.
It is accretive immediately. The range obviously varies, but
the notion of five to ten percent is certainly within the
range of what I would hope to see in the first year of the
deal.
S. Fleischmann: OK and that's off of the base that you've been pretty publicly
outlined for the company--
J. Sterba: Yes.
S. Fleischmann: --for at least 2001 and 10 percent growth in 2002. OK.
J. Sterba: Yes.
S. Fleischmann: My second question is in the numb-- have you assumed that any
additional equity is put into the utility from Westar in these
enterprise value numbers that you've provided? That is--
J. Sterba: W--
S. Fleischmann: Yes.
J. Sterba: Yes, Steve, we have made, again, a set, a different set of
assumptions. Everything from looking at it if no additional
equity is provided to looking at it if the maximum amounts
that are allowed under the merger agreement are provided. And
obviously, there is a balancing between the amount of
accretion that you get on the earnings side and the rapidity
with which one de-leverages the balance sheet. But again, as I
say, in all instances it is accretive to earnings immediately.
S. Fleischmann: OK. I guess my question is in the enterprise value numbers you
provided in the release, do you assume that any additional
equity is provided from Westar to you.
J. Sterba: No. I'm sorry Steve. I missed that. No.
S. Fleischmann: OK.
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J. Sterba: That enterprise value is based on the basics of the
transaction that include the assumption of debt. Now that will
include some amount of equity for a $234 million note that
exists between Western Resources and Westar Industries that
will be paid for, if you will, in stock. But that is included
in that 1.5 billion.
S. Fleischmann: OK, but they are encouraged to put more equity in.
J. Sterba: They certainly are. And our logic stream for that, Steve, was
we're going to--we-- if they don't we're going to do it. We're
going to find ways, whether it's through a convertible
preferred stock offering or something of that nature. And so
this is a way for it to be done without transaction fees and
to be done before closing of the transaction occurs.
S. Fleischmann: OK. Just quickly, what are the break up fees on each side?
J. Sterba: The break up fees vary, but the fundamental break up fee is
$35 million. And in the instance that there is a lack-- in the
instance that there is a third party offer if you will, on the
table, that causes the shareholder approval not to be
obtained, there are certain conditions under which a $25
million fee would be paid. And then there are other conditions
including material affect changes in which there would be no
break up fee paid.
S. Fleischmann: OK and one last question. In terms of Western generation
position, could you just give us some sense, how much power
they have available to sell wholesale, I guess both on-peak
and off-peak?
J. Sterba: Well, they have today about 5400 megawatts and it will be
increasing to about 57, I believe, by the time we close this
transaction with the addition of a combined cycle unit. The--
it is not so much that Western has excess capacity, it is that
there is a fundamental amount of energy available within their
system, just as it has been in our system. That is both
on-peak and off-peak. The magnitudes of that obviously vary,
but we see the opportunity to develop the same kind of trading
profiles, Steve, in that part of the territory, the
mid-continent area that we've developed in Western using the
same strategy, where we will sell, make sales that are backed
by assets, will then re-back those sales with purchases made
throughout the system, and then be able to resell the power
again. And that's particularly true with the ability to hedge
off the gas and oil units that exist in their system. So it's
hard to put a megawatt number on it, because they're not
necessarily excess in capacity, but there is a large amount of
energy that we believe is available to be marketed.
S. Fleischmann: OK, thank you.
Operator: Robert Mullin with ZLP, please go ahead with your question.
Robert Mullin: Well, congratulations, just a couple quick questions. I was
looking at the Western Resource information that they put out
in March when they talked about the separation of the company.
I was looking at a net income pro forma '99 net income number
of about 84.5 million. I wanted to see if that was-- if that
job was sort of what you guys were looking at.
J. Sterba: I believe that rings a bell, yes.
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R. Mullin: And then should we assume some increased level of earnings
with the new plant coming on line, that maybe would get you
somewhere in the ballpark of like 100 million for Western
Resources?
J. Sterba: Well, in fact, for the year ended 1999, the net income for the
utility, I believe, was 96 million and for the last 12 months
ended May of 2000 it was 98.8. So certainly we just believe
with their fundamental retail growth they will be over $100
million.
R. Mullin: OK and then some incremental level of earnings based on this
new combined cycle plant coming on.
J. Sterba: Yes.
R. Mullin: OK.
J. Sterba: And then where we really see the value over time will be the
change in a more aggressive trading strategy in the wholesale
marketplace.
R. Mullin: In terms of-- so that the-- in terms of like revenue
enhancements like that would be created via the trading
strategy. Is there some sort of number that we're targeting or
we should be targeting as we analyze this?
J. Sterba: Well, rather than provide a number on that, because as you
know, these markets are-- this is a new market for us. We're
going to utilize Western's experience in that market, but also
bring our experience to bear. I don't have-- there isn't a
number that I would say you should yet target, but I do expect
to see the kind of growth that we have seen and demonstrated
we can achieve in our business in the west.
R. Mullin: What-- on a pro forma basis, what the-- upon closing the deal,
what is the debt ratio look like as a percent of total cap?
J. Sterba: Max?
M. Maerki: Our debt ratio is approximately 69 to 70 percent before
additional equity contributions are being made.
R. Mullin: And do you have a number for the consolidated free cash flow
on a pro forma basis?
M. Maerki: I don't have it right in front, but it's a neighborhood of
$400 million.
R. Mullin: OK. Thank you very much.
Operator: Karen Roth from UBS Warburg, please go ahead with your
question.
Ray Wea: Actually it's Ray Wea [sp] with UBS [unintelligible]. Just
wanted to get-- go back to the debt leverage issue in terms
of, you know, you indicated the free cash flow
[unintelligible]. Can you provide us the sense of what type of
a debt leveraged target that you want to achieve? Do you want
to get back to the 55 percent level?
J. Sterba: Yes. We would target to get down into the 55 percent level
within a three-year time frame.
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R. Wea: OK and a question about with respect to the spin-off. What is
the regulatory process or approval process for that spin-off?
Is it just an SEC filing and shareholder approval?
J. Sterba: You know, I think that's a better question to ask of the
Western Resources folks. Certainly, the whole trend set of
transaction will require approval, but I'm not particularly
familiar with what may be required on the spin-off.
R. Wea: OK. And just maybe one last question you're here to clarify.
The debt associated with the Protection One would be the only
debt that goes with Westar Industries. Is that correct? Would
you expect any other debts to move along with that infancy?
J. Sterba: No, I think it's the debt that already exists on the books of
Westar, what's now Westar Capital, which is where the holding
of Protection One is. The debt that we are assuming is on the
books of the utility.
R. Wea: OK. Thank you.
J. Sterba: Thank you.
Operator: Jim Ferguson of Alliance Capital, please go ahead with your
question.
Jim Ferguson: At the time the Westar or Western Resources split up was
announced, there were some non-utility assets, which became a
subject for the Cangess [sp] Commission. I think the CCGT that
you're apparently is going with it and the conthrussion [sp]
turbines were--Are you going to be buying those? Are those now
in the utility?
J. Sterba: Yes, they are. They are in individual entities, but it will
include those properties.
J.Ferguson: All right and the follow-up on the previous question. There
was, I guess implied debt that was incurred at the utility
because it was only one company. Western Resources was the
utility to fund the other ventures that Western Resources was
involved in, PO1 [sp] and so forth. Has there been any
allocation of that debt to the non-regulated, or is it
regardless of what the purpose was? If it was issued in the
name of Western Resources is it going to be taken in as part
of the merger?
J. Sterba: Yes it is, subject to the raising of capital within Westar
Industries for the reduction of that level of debt and return
for stock.
J. Ferguson: OK. Now will KGE be-- continue to exist as a separate entity?
J. Sterba: At this time, we anticipate that it will. There may be a time
in the future where we would eliminate the separation or the
legal separation between KPL and KG&E. As you probably know,
that is tied both to some indenture issues, but also and more
importantly, to the rate difference issue that exists between
the two companies.
J. Ferguson: All right. And, let's see. Oh, what role, if any, will the
Western Resources management play in the new utility entity?
J. Sterba: Of the senior management at Western Resources, at this time, I
don't really expect that much involvement. There are a couple
of folks that are in the senior executive pool of Western that
we will take a look at as to whether we want them to be part
of this team. I would mention that it really is our intention
to create a new company, bringing the best of both companies.
And they do have some very good executives. But of-- their CEO
and chairman for example, and his close advisors, they will
not be involved in the management of the new company.
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J. Ferguson: Well, they were board directors?
J. Sterba: Board directors.
J. Ferguson: Thank you.
Operator: Jill Sakol with Credit Suisse First Boston, please go ahead
with your question.
Terryn Miller: Actually it's Terryn Miller [sp]. Two questions, you said you
were assume the on balance sheet obligations of Western
Resources, but I would also assume that you are going to take
over the payments under the Lesine [sp] lease, and that debt
would go with the utilities?
J. Sterba: Yes, that's correct.
T. Miller: And second, Jeff, in your prepared remarks you stated that you
hoped to achieve investment grade ratings in the future. And
then you said you had a commitment. I just-- not sure if I
misheard it or are you implying that you think you're going to
drop below investment grade and then need to build back up to
it, or you think you're going to keep investment grade
throughout the short term?
J. Sterba: Our intention is to do everything within our power to ensure
that the utility businesses are investment grade. It is
possible, because the holding company will take on debt that
it may, for a period of time, not be rated at the investment
grade level. And so that's where the-- where we're-- we'll
just have to see how the holding comp-- how the rating
agencies react to the information that we provide them.
T. Miller: So your statement about achieving was really intended and
worded to focus on the new holding company.
J. Sterba: Yes.
T. Miller: OK. Thank you.
Operator: Roselynn Perry with SAC Capital, please go ahead with your
question.
Roselynn Perry: Yes. Hi Jeff. I have several questions. First of all, I just
want to clarify. You indicated that the transaction is
immediately accretive to earnings under all cases. Are the
assumptions behind that statement, the 2.9 billion of debt,
the 55 million of new shares, and you know somewhat over 100
million of Western Resources' net income, is it-- does that
statement hold under those assumptions?
J. Sterba: It holds under those assumptions, yes.
R. Perry: OK. And--
J. Sterba: And it also holds under assumptions in which the amount of
equity that goes to Western and to Westar Industries is higher
than the 55 million shares.
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R. Perry: OK. And the equity would only be higher in a situation where
the debt were lower. Is that fair?
J. Sterba: That's correct. That's correct. And that's where the trade
off, obviously, between earnings impact and accretion and
leveraging.
R. Perry: OK. And you are not identifying, at this point, any revenue
enhancements or cost savings?
J. Sterba: We have some revenue enhancements in there, but they're not
significant early on. And as I said, on the cost savings side
I expect we will get cost savings, but I think it will take
some time to achieve them, because they'll largely come
through shared services, where we're really talking about over
time, computer systems and the like. So I don't think we'll
see significant cost savings in the near term. I would say
that this transaction is accretive, we believe, even in the
event there are no cost savings from the consolidation of
operations.
R. Perry: OK. And given that--
J. Sterba: Now let me just make one clarification statement. Are there
circumstances under which this transaction, if it were to go
forward, could become non-accretive? Both certainly. But in
the cases that we have looked at, in which we've made
reasonable assumptions, we believe that it is accretive, but
you know, if the creek doesn't rise, I mean there are always
things that can happen to blow a transaction apart.
R. Perry: What are the scenarios in which the transaction could be
non-accretive.
J. Sterba: Oh, you know if they lost a significant source of revenue in
the millions within a short period of time, if they had a
nuclear disaster at their nuclear power plant, I mean there
are always those kinds of material adverse affects that could
happen between now and closing that would make this
transaction something that our board would have to reevaluate.
But as I said, under what I will call reasonable scenarios, we
believe that this will be an accretive transaction, regardless
of the amount of de-leveraging that is done by the sale of
non-utility assets or the raising of capital through other
means by Westar Industries to de-leverage the utility.
R. Perry: OK. And given that they exchange ratio essentially floats
depending on the ultimate debt pay down and equity
transaction, what is the ultimate collar? You know, what's the
minimum amount of stock you'll give them, what's the maximum?
J. Sterba: Well, the minimum is really about, for Westar Industries, and
this is included in the 55 million shares, is about 7 percent
of the outstanding shares, because that's what they get on the
basis of the inter-company note that exists today of $234
million. They are restricted from owning it more than 19.9
percent in either common or convertible preferreds, so that's
a diluted 19.9 percent.
R. Perry: OK. I was referring to the 55 million new shares that you
indicated you would issue.
J. Sterba: Yes. Oh, of the 55 million shares, I don't have the exact
number with me, but it's about 7 percent of the 58 percent
that Western Resources shareholders will own, will be held by
Westar Industries.
R. Perry: So 7 percent of the 58 percent will be held by Westar
Industries.
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J. Sterba: Yes, 7. Yes, and just for clarity it's 7 percentage points of
the 58 percentage points--
R. Perry: OK.
J. Sterba: --of the total number of outstanding shares. So of the-- I
would ask if Max has of the 55 million shares, how many?
M. Maerki: I don't have the number of shares, but I think your question
was related more to what's the total that Western and Westar
stock owners, which basically are all Western stockholders,
could own of the total company if they went to the maximum of
their availability to infuse that-- infuse equity into the
corporations.
R. Perry: Yes.
J. Sterba: OK.
M. Maerki: That would amount to about 65 percent.
R. Perry: And what's the minimum?
M. Maerki: The minimum is the 58.
R. Perry: OK. OK, thank you.
J. Sterba: Sorry for misunderstanding your question.
R. Perry: That's all right.
Operator: Roger Sachs from Cathay Financial, please go ahead with your
question.
Roger Sachs: Yes, thank you, just a couple quick questions for
clarification. The proceeds of 1.5 billion, is that fixed no
matter what happens? I mean it's based on the last ten days of
their company's stock price. If your price fluctuates
indicatively, does that-- do those proceeds change? And could
you just also repeat the amount of shares that the Westar
Industries will hold as based on that if injured company note
of 234 million. Is it basically just going to be that 234
million divided by whatever price the new co comes to? Or is
it actually fixed at the 7 percent of the total New York
standing shares?
J. Sterba: I'm sorry. Could you mention your first question again?
R. Sachs: I'm just wondering if the 1.5 billion in total proceeds--
J. Sterba: You're right.
R. Sachs: --is that fixed or can there be an adjustment to that
depending on the price of your company?
J. Sterba: What we have fixed is the number of shares that will go to
Western shareholders at 55 million shares. It is not dependent
on our stock price. So if it moves up or down, it will still
be 55 million shares for the base amount of the transaction.
R. Sachs: OK. And would you--
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J. Sterba: With your second question, Max?
M. Maerki: And the question was, if I understood it correctly, how many
shares will Westar own of the corporation?
R. Sachs: Yes. You mentioned it just prior to this question. I just got
a little confused as to how that calculation will be done.
M. Maerki: Of the 58 million shares immediately after the close and
without any addition infusion of capital, Westar will own
approximately 6.6 million shares.
R. Sachs: 6.6 million shares of the 55 million being issued or of the
total amount that will be outstanding.
M. Maerki: Of the 55 million that's issued. I misspoke 58. It's 55
million.
R. Sachs: OK. They'll own 6.6 million shares of the 55 million. OK. That
clarifies that. And do you know, off hand, the spin-off that
Western is going to do? Is that going to be tax free to their
shareholders? Do you know that?
J. Sterba: Max?
M. Maerki: We believe it's not going to be a tax-free transaction to
their shareholders.
R. Sachs: It will not be a tax-free transaction.
M. Maerki: But that's a question you need to ask of Western. It's our
understanding it will not be.
R. Sachs: OK and just the last thing. The hundred or so million of
earnings that you're going to be getting from Western; that
does include the 2.9 billion of debt. So that's net of that
interest on the 2.9 billion.
J. Sterba: That's correct.
R. Sachs: OK. Great. Thank you very much and congratulations.
J. Sterba: Thank you very much.
Operator: Faith Klaus from Bank of America, please go ahead with your
question.
Faith Klaus: All of my questions have been answered. Thank you.
J. Sterba: OK. And if I could note, we have time for just a few more
questions, as we need to proceed with a press release for the
community, press conference.
Operator: Peter Hark from Vallentine Capital, please go ahead with your
question.
Peter Hark: Jeff, I just want to follow up some more on this accretion.
You make a statement in your release that this deal is
consistent with the targeted 10 percent annual average
earnings growth of the company. You laid out just recently,
revised earnings guidance for next year of around 250 to 260.
This deal probably doesn't close, let's say '02. Are you
suggesting then an '02 earnings are going to be 10 percent, at
least 10 percent better than '01 or are you saying it's
incremental to your 10 percent? I know you answered a question
previously to Steve Fleischmann saying that this deal was
anywhere from 5 to 10 percent accretive. Could you kind of
clarify what the earnings outlook is in '02?
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<PAGE>
J. Sterba: The specifics for-- my comment about the 10 percent is really
looking over the next 10 years. And any single year it may be
less than 10 percent and another year it may be more. So
that's really more of a trend over the five-year period. As we
look at in '02 going from what we have stated as our earnings
projections for '01, I expect to see earnings growth that will
be caused partially by the accretion and partially by earnings
growth inherent within PNM. The total of which could be in the
10 percent range.
P. Hark: Great. Thank you. And then for on a detaily [sp] side, what is
the incentive for WR to infuse additional equity to pay down
debt of the utility and why is there a maximum of 407 million?
J. Sterba: Well, I think the incentive is whether-- they obviously
believe that our strategy going forward makes sense for their
shareholders, because they have taken this transaction on a
stock basis. And I believe that they-- that it's fundamentally
based on their belief that this strategy, the strategy we are
deploying, makes sense. I think they also feel an obligation
to pursue means to de-lever the utility before this
transaction is consummated. So I think they're both financial
reasons to hold our common stock and as well as reasons that
are inherent within the Kansas system.
P. Hark: And the limit, the $407 million limit?
J. Sterba: Well, one, we felt that it was appropriate to place some
limitations on the amount of diluted holdings that any one
party could have. Then we felt that 19.9 percent was a
manageable number. There are certain restrictions relative to
their voting and the like. But the-- it also represented about
the amount of additional equity we felt we would need to
infuse early on in the process if they did not de-lever the
company. So it kind of matched it up in terms of what we felt
was needed to be done to help reestablish a sound balance
sheet, as well as providing the opportunity to Western to
participate in our stock performance in the future.
P. Hark: Well, near term stock performance, I guess indications here
look pretty open as the stock's down about 4 bucks.
J. Sterba: I'm sorry?
P. Hark: Our question is when are you coming into town to discuss the
benefits of this transaction and why it's good for
shareholders?
J. Sterba: We will be in New York next week. I think I will be there as
of Monday night. We plan on being available on Tuesday, and
Wednesday, and Thursday to be in New York and Boston to visit
with our shareholders as well as other shareholders in the
marketplace.
P. Hark: Great. Thank you.
J. Sterba: OK. Thank you all very much. I appreciate the time that you've
spent with us this morning. I know that this is obviously a
very significant transaction for us, and one that probably was
not anticipated by many people. So we will be pleased to be
able to see you in New York. We know you will have lots more
questions by then. And we look forward to seeing you then.
Thank you.
Operator: Ladies and gentlemen, that does conclude your conference for
today. You may all disconnect and thank you for participating.
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Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This press release contains forward looking statements within the meaning of the
"safe harbor" provisions of the United States Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such forward-looking statements
with respect to revenues, earnings, performance, strategies, prospects and other
aspects of the businesses of PNM and Western Resources and with respect to the
benefits of the transaction are based on current expectations that are subject
to risk and uncertainties. Such statements are based upon the current beliefs
and expectations of the management of PNM and Western Resources. A number of
factors could cause actual results or outcomes to differ materially from those
indicated by such forward looking statements. These factors include, but are not
limited to, risks and uncertainties relating to: the possibility that
shareholders of PNM and/or Western Resources will not approve the transaction,
the risks that the businesses will not be integrated successfully, the risk that
the benefits of the transaction may not be fully realized or may take longer to
realize than expected, disruption from the transaction making it more difficult
to maintain relationships with clients, employees, suppliers or other third
parties, conditions in the financial markets relevant to the proposed
transaction, the receipt of regulatory and other approvals of the transaction,
that future circumstances could cause business decisions or accounting treatment
to be decided differently than now intended, changes in laws or regulations,
changing governmental policies and regulatory actions with respect to allowed
rates of return on equity and equity ratio limits, industry and rate structure,
stranded cost recovery, operation of nuclear power facilities, acquisition,
disposal, depreciation and amortization of assets and facilities, operation and
construction of plant facilities, recovery of fuel and purchased power costs,
decommissioning costs, present or prospective wholesale and retail competition
(including retail wheeling and transmission costs), political and economic
risks, changes in and compliance with environmental and safety laws and
policies, weather conditions (including natural disasters such as tornadoes),
population growth rates and demographic patterns, competition for retail and
wholesale customers, availability, pricing and transportation of fuel and other
energy commodities, market demand for energy from plants or facilities, changes
in tax rates or policies or in rates of inflation or in accounting standards,
unanticipated delays or changes in costs for capital projects, unanticipated
changes in operating expenses and capital expenditures, capital market
conditions, competition for new energy development opportunities and legal and
administrative proceedings (whether civil, such as environmental, or criminal)
and settlements, the outcome of Protection One accounting issues reviewed by the
SEC staff as disclosed in previous Western Resources SEC filings, the impact of
Protection One's financial condition on Western Resources' consolidated results,
and other factors. PNM and Western Resources disclaim any obligation to update
any forward-looking statements as a result of developments occurring after the
date of this news release. Readers are referred to PNM's and Western Resources'
most recent reports filed with the Securities and Exchange Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PUBLIC SERVICE COMPANY OF NEW MEXICO
(Registrant)
Date: November 16, 2000 /s/ John R. Loyack
------------------------------------
John R. Loyack
Vice President, Corporate Controller
and Chief Accounting Officer
(Officer duly authorized
to sign this report)
19
