The parent company of Kansas City Power & Light has agreed to buy Topeka-based Westar Energy to create a regional energy giant with 1.5 million customers.
The $8.6 billion bid by Kansas City-based Great Plains Energy for the largest power company in Kansas also offers hope for holding down electric bills of customers in both states by sharing costs across the border.
Utility companies across the nation are facing financial pressures from energy conservation, which is limiting demand for their power. Increased costs from environmental efforts to cut pollution also are cutting into profits.
Mergers have been a common answer.
“It puts more pressure on your ability to provide service at the same cost, which ultimately means you end up filing a rate case to increase rates,” Great Plains chief executive Terry Bassham said Tuesday. “We want to reduce our need to make those (rate increase) filings, and scale helps.”
In other words, bigger utilities may be able to control costs more easily.
How customers might benefit from a merger will be part of the review at the Kansas Corporation Commission, whose approval the companies require to merge.
David Nickel of the Citizens Utility Ratepayer Board said the board, which represents consumers at commission proceedings, would have a role in the merger hearings.
Missouri regulatory officials won’t rule on the deal but will keep an eye on potential benefits of sharing costs across a large customer base in the two states.
“The economies of scale are going to probably be more in favor of Missouri,” said James Owen, acting director of the Missouri Office of Public Counsel, which represents consumers before the Missouri Public Service Commission. “We always want to see Missouri ratepayers pay less. This is another opportunity for doing that.”
Terms of the deal, approved by each company’s board of directors, value Westar at $60 a share in a combination of cash and shares of Great Plains Energy. In the deal, Great Plains would take on $3.6 billion of debt that Westar owes, making the overall value of the deal $12.2 billion.
Westar shares closed Tuesday at $56.33, up $3.41, or 6.4 percent. Great Plains shares ended the day at $29.18, down $1.82, or 5.9 percent.
Analyst Sarah Akers called the price “rich” but rated the deal “a logical strategic fit” in a note to her investment clients at Wells Fargo Securities. She sees the potential for significant cost savings, given that the companies serve customers in contiguous territories and jointly own some power plants.
Those savings, Akers wrote, would help Great Plains improve its “chronic underearning position” and allow reasonable profits in both states’ markets “without the need for frequent rate cases.”
The companies expect the deal to be completed by spring 2017.
Great Plains’ Bassham, speaking to many of Westar’s 2,330 employees during a morning session in Topeka, summed up the idea this way: “Our companies are better together.”
Bassham held a similar afternoon session in Kansas City with Great Plains’ 2,900 employees at the headquarters and other sites through remote hookups.
The announcement comes after Westar sought potential buyers amid a wave of industry mergers. There were more than $52 billion worth of utility deals pending or completed across the U.S. last year, the most since 2011, data compiled by Bloomberg show.
In Missouri, for example, Joplin-based Empire District Electric agreed to a $2.4 billion buyout from Canada-based Algonquin Power & Utilities Corp.
“Once Westar determined that they wanted to do this, as Mark Ruelle, their CEO, calls it, you’re either a seller or a buyer, and he made clear they were a seller,” Bassham said of his counterpart at Westar.
Bloomberg reported that Westar had drawn interest from St. Louis-based Ameren Corp., which is Missouri’s largest utility, and an investor group that includes Borealis Infrastructure Management Inc. and the Canada Pension Plan Investment Board.
As with most mergers, the companies will look for jobs that overlap and can be consolidated into one position to save money.
Bassham said that he expects redundancies among “support” jobs to lead to an employee count reduction and that he hopes much of that would be taken care of through a normal attrition of employees that reaches 4 to 5 percent of the workforce each year. Layoffs, if necessary, would take place, but Great Plains has not ruled out offering buyouts or an early retirement option.
Union jobs are less likely to disappear. For example, Bassham said, the union head count “remained relatively the same” when Great Plains acquired Aquila.
“Those employees serve customers day to day, and so we wouldn’t expect a lot of change there,” Bassham said.
Each company has about 1,000 non-union employees. Their union employees are represented by various locals of the International Brotherhood of Electrical Workers.
The merger follows years of cooperation between the companies as co-owners of the Wolf Creek Nuclear Generating Station and their La Cygne and Jeffrey power plants, which are all in Kansas.
Bassham said buying Westar “uncomplicates” the partnership relationship, putting the power plants under one company’s control.
Great Plains said the merger also will help it deal with the impact of future carbon regulations on consumers.
In addition to seeking approval from the Kansas Corporation Commission, Great Plains said it will present the merger to the Federal Energy Regulatory Commission and the Nuclear Regulatory Commission in June and July.
Shareholders of each company also will vote on the merger.
Great Plains Energy
Source: Corporate reports