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Despite staff opposition, analysts optimistic about Westar/Great Plains merger

The staff of the Kansas Corporation Commission has recommended that the proposed merger between Westar Energy Inc. and Great Plains Energy Inc. be rejected for not being in the public interest. However, certain analysts are still optimistic that the state commission will approve the proposed combination.

Kansas City, Mo.-headquartered Great Plains announced May 31 that it planned to acquire Topeka, Kan.-headquartered Westar Energy in an $8.6 billion cash-and-stock deal. Great Plains will also assume approximately $3.6 billion in Westar debt.

The companies said in June that the merger will benefit customers and "result in significant savings, economies of scale, and efficiencies from the elimination of duplicate corporate and administrative services, all of which will ultimately result in a lower cost of operations." The transaction is also projected to create savings that will result in lower rates than if Westar and Great Plains continued to operate separately, the companies said.

However, KCC staff on Dec. 16 said the proposed merger raises several concerns, including regarding the ability of the two companies to maintain and improve the quality of service currently provided to Kansas customers while "dramatically reducing the operating costs of the combined company."

Staffers also pointed to problems associated with the joint applicants' projected savings calculation and "difficulties in the financial path GPE must navigate in order to be successful."

The testimony also stressed that the KCC's merger standards "clearly ask whether the transaction will be beneficial to the affected customers and communities served." Staff therefore said the merged company must offer a higher quality of customer service, and it proposed quality of service performance metrics.

Additionally, the testimony noted that the companies are each other's "most formidable competitor." Staff said adjacent rivals always seek to outperform each other, and warned that eliminating benchmarks and rivalry weakens the pressure to perform. "This transaction does exactly that," staff maintained.

Thus, staff did not recommend that the deal be approved even with extra conditions. Staff said the financial risks for current and future customers and shareholders are simply too high given the purchase price and the lack of transaction benefits supported by the evidence.

Analysts for Wells Fargo Securities acknowledged that the tone of the staff recommendation was "harsh," but said the testimony could be a jumping-off point for future negotiations and noted that the KCC is not required to adopt the same position as its staff on the merger. Moreover, the analysts stressed that several "key stakeholders," including Kansas Gov. Sam Brownback, are supporting the deal. But the analysts also acknowledged staff's argument that the companies must make the case that the best offer for shareholders is also the best option for customers.

Evercore ISI analysts were also optimistic. Given that all three KCC commissioners were appointed by Brownback, the analysts said that despite the KCC staff’s position, the deal still has a 90% probability of closing.

The KCC has said it will rule on the proposed merger by April 24, 2017.