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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
==============================================================

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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 
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