The Kansas Corporation Commission has rejected a $12.2 billion merger of Westar Energy and Kansas City Power & Light, calling it “simply too risky.”
“The proposed transaction is not in the public interest,” the commission order said, adding that it “fails not only to meet the majority of the (state’s) merger standards, but it fails to meet the most important of the factors.”
The order expressed deep concern over the price that KCP&L’s parent company, Great Plains Energy, agreed to pay for Westar.
It also questioned whether the combined utility company would be financially weaker, forcing it to cut jobs or reduce service to unacceptable levels.
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“Both KCP&L and Westar have a long history of providing sufficient and efficient service in Kansas and the Commission agrees that based on their geographies a merger makes sense,” the order said. “But not this merger.”
The order was approved unanimously by the three-member commission.
The decision is “a good result for the ratepayer,” said David Nickel, consumer counsel for the Citizens’ Utility Ratepayer Board, the small state agency representing residential and small-business utility customers.
“Ultimately, it means that we’re going to continue the status quo,” Nickel said. “KCP&L and Westar are financially sound companies. They’re not going to have to issue any additional debt. There’s not going to be any risk of the failure of this merger to fall upon the ratepayer.”
Westar and KCP&L expressed disappointment but offered only brief comments, saying they need to study the order.
“We felt like we had put together a good transaction that would benefit customers, would create a strong regional utility to serve Kansans,” said Westar spokeswoman Gina Penzig.
“KCP&L and Westar have served customers in Kansas and Missouri for more than 100 years as neighboring utilities and as a combined company would create significant operational efficiencies and cost savings that would benefit our customers and communities,” Great Plains vice president Chuck Caisley said in a written statement. “We will review the order and consider next steps.”
Among the possible next steps, Great Plains and Westar can ask the commission to reconsider the decision. If the decision stands, they can appeal to the state Court of Appeals.
They could also try again with a new merger proposal taking into account the commission’s concerns. Or Westar could seek a different buyer.
Price a sticking point
Had the merger been approved, it would have been one of the largest business deals in state history, creating a mammoth power company with 1.5 million customers and $14 billion in rate base in Kansas and Missouri
Gov. Sam Brownback and Wichita Mayor Jeff Longwell supported the merger at a public hearing in December, as did about two dozen charities that receive funding from Westar. They were concerned that local giving might decline if Westar is sold to a larger out-of-state utility conglomerate.
But 29 other utility and consumer interests, including the KCC staff and the Kansas Industrial Consumers group, opposed it.
The biggest sticking point for the commission appears to be the price Great Plains offered to buy Westar.
Great Plains would have paid Westar shareholders $8.6 billion in cash and stock in the combined company and assumed $3.6 billion of Westar debt.
That $12.2 billion total is $4.9 billion more than the book value of Westar’s assets.
“GPE’s offer (of $60 per share for Westar stock) exceeded the next highest offer by $570 million,” the commission said.
The company planned to borrow $4.3 billion to pay for half of the $8.6 billion cash payout and pay it back from merger savings.
“Even if all of the joint applicants’ projections are accurate, its ability to maintain an investment-grade credit rating is tenuous,” the order said.
And if the projections are low, the ability to service the debt “could be in jeopardy,” it continued.
The commission also expressed concern that the merger would lead to job losses in Kansas, even though Great Plains promised to keep Westar’s downtown Topeka headquarters open.
“That pledge falls short of a commitment to preserve jobs in Kansas,” the order said. “Retaining a Topeka headquarters is not the same as a commitment to fully staffing the headquarters or maintaining certain employment levels.”
Eliminating duplicated departments was a big part of Great Plains’ plan to reduce costs and pay off its debt for acquiring Westar.
In anticipation of the merger, both companies had been paring down their workforces for about the past year by not replacing workers who retired or resigned.
A number of workers were scheduled to receive buyouts when the merger closed and now may remain on the job, Penzig said.