Exhibit 99.1
THE STATE CORPORATION COMMISSION
OF THE STATE OF KANSAS
Before Commissioners: John Wine, Chair
Cynthia L. Claus
Brian J. Moline
In the Matter of the Investigation of Actions of )
Western Resources, Inc. to Separate its ) Docket No. 01-WSRE-949-GIE
Jurisdictional Electric Public Utility Business )
from its Unregulated Businesses. )
SUPPLEMENTAL ORDER
For the reasons stated below, the State Corporation Commission of the State of
Kansas ("Commission") supplements the May 8, 2001 Order Initiating Investigation
and declares that the Asset Allocation and Separation Agreement ("Asset
Allocation Agreement") between Western Resources, Inc. ("WRI") and its
affiliate, Westar Industries, Inc. ("Westar"), and amendments thereto, as
contained in the S-1 Registration Statement No. 333-47424 ("Registration
Statement") pending before the Securities and Exchange Commission ("SEC"), is of
no force and legal effect because WRI has not obtained Commission approval as
required by Kansas law. Further, the Commission orders WRI and each subsidiary
of WRI to take no action, directly or indirectly, that would increase the share
of debt in the capital structure in the electric business of WRI ("Western
Resources Electric Business" or "WREB"), including the sale of rights to
purchase Westar common stock in the rights offering described in the
Registration Statement. Finally, the Commission will hold a hearing on June 14,
2001 at 9:00 a.m. on various matters relating to this order.
Introduction and Overview
1. On May 8, 2001, the Commission entered its Order Initiating Investigation
("OII") into whether the participation by WRI and its affiliates in the
transactions and relationships described in said order, and any other
transactions or relationships which may emerge from the investigation, is
consistent with Kansas law, including the statutory obligations of WREB (WRI's
electric division, KPL, and its wholly-owned subsidiary KG&E) to provide
efficient and reliable service to Kansas customers at just and reasonable rates.
In the OII, the Commission described the public information concerning actions
and plans of WRI to restructure the relationship between WRI's electric
businesses and its unregulated businesses, including an allocation of debt and
equity between WRI and Westar, and including a rights offering under which WRI's
shareholders could purchase shares of Westar, that provided the factual basis to
warrant such investigation. The Commission required WRI and Westar to file a
verified statement explaining these transactions within 60 days from May 8,
2001.
2. On May 18, 2001, Westar filed Amendment No. 3 to the Registration Statement
on Form S-1 with the SEC. On the same date, WRI filed these documents with the
Commission in accordance with the Commission's May 8, 2001 Order Initiating
Investigation. These documents contained a letter signed by Mr. Paul Geist,
President of Westar, to the SEC. The Geist letter, written on behalf of Westar,
requested the SEC to accelerate the effective date of its Registration Statement
to May 21, 2001, so as to allow Westar to proceed immediately with its proposed
rights offering. No reason or justification for the accelerated treatment was
provided in the letter despite the pending Commission investigation.
3. The rights offering incorporates an Asset Allocation and Separation
Agreement ("Asset Allocation Agreement") between Westar and WRI, as more fully
described in paragraph 4 of the OII. If WRI implements its Asset Allocation
Agreement, WRI's capital structure would reflect substantially all of WRI's pre-
restructuring debt, including debt incurred for private business ventures of WRI
and not for purposes of acquisition of "used and useful" electric utility
assets. The resulting capital structure for WREB may impair WRI's ability to
provide sufficient and efficient electric service at just and reasonable rates
and fulfill its public service duties and obligations to ratepayers.
4. The Geist letter to the SEC evidences Westar's and WRI's intent to proceed
with the proposed rights offering without regard to the outcome of the
Commission's investigation and review process established in this docket, and
without regard to the possible practical difficulties of restoring WRI's
financial condition, particularly its capital structure, to its pre-
restructuring state should the Commission ultimately determine that WRI's
actions in the restructuring transactions are inconsistent with its public
service duties and obligations to ratepayers.
5. The concerns set forth in the OII, along with continuing problems in WRI's
unregulated investment in Protection One as noted in said order, as well as the
publicly stated intent to carry out structural changes regardless of the
existing Commission order, require immediate action set forth herein to prevent
irreparable harm to the public interest and safety.
6. For the reasons discussed below, the Commission (a) declares that the Asset
Allocation Agreement, and any amendments thereto, are of no legal effect unless
and until approved by the Commission; and (b) prohibits WRI from causing Westar
to complete the rights offering. The Commission will hold a hearing on June 12,
2001 at 9:00 a.m. to (a) afford WRI the opportunity to explain why the
requirements of this supplemental order should not be continued in effect,
(b) consider whether the requirements of this supplemental order should be
extended for an additional period of time or made permanent, and (c) receive
from other interested persons recommendations on how the Commission should
proceed with the investigation required in this docket.
The Asset Allocation Agreement Is of No Force and Legal Effect Because WRI Has
not Obtained the Commission Approval Required by Kansas Statutes.
7. On November 8, 2000, Westar and WRI entered into an Asset Allocation
Agreement. On May 2, 2001, Westar and WRI entered into Amendment 1 to Asset
Allocation and Separation Agreement. The Asset Allocation Agreement is the
mechanism which initiates WRI's plan to separate the unregulated investments of
Westar from WREB, the traditional electric business, and to allocate debt and
equity between the two companies according to a schedule attached to Asset
Allocation Agreement.
8. Under two separate statutory provisions, WRI had an obligation to obtain
Commission approval before entering into the Asset Allocation Agreement. First,
any transaction that constitutes a "contract or agreement with reference to or
affecting" the certificate of convenience and necessity is not valid until it is
approved by the Commission pursuant to K.S.A. 2000 Supp. 66-136. A reasonable
capital structure is necessary to carry out a utility's obligation under its
certificate of convenience and necessity. By substantially affecting WREB's
capital structure, the Asset Allocation Agreement, and the rights offering, will
affect WRI's ability to carry out the public utility responsibilities required
by and associated with WREB's certificates of convenience.
9. Second, because WRI holds more than 10 percent of Westar's stock, the
relationship between the two companies is subject to the Commission's
jurisdiction under K.S.A. 66-1401, et seq., for the purposes of that act. Any
"management . . . contract" or similar agreement entered into between the
affiliate and the public utility cannot be "effective" unless it is first filed
with the Commission. Such
contracts or agreements, after being filed, can be disapproved, upon
investigation and hearing, if found by the Commission not to be in the public
interest. K.S.A. 66-1402. The Asset Allocation Agreement involves "affiliate
interests" as defined by K.S.A. 66-1401(2), and is a transaction "other than
ownership of stock and receipt of dividends thereon." Id. The Asset Allocation
Agreement constitutes a "management" contract requiring advance approval under
K.S.A. 66-1402.
10. Neither of the parties to the Asset Allocation Agreement has filed it with
the Commission as required by K.S.A. 66-1402. Accordingly, under K.S.A. 66-136
and 66-1402, the Commission declares that the Asset Allocation Agreement is of
no force and legal effect. This declaration is without prejudice to the WRI's
ability to seek approval from the Commission of an unexecuted agreement, or of
an agreement which states explicitly that its effectiveness depends on
Commission approval.
WRI May Take No Action, Directly or Through Any Subsidiary, That Would Increase
the Share of Debt in WREB's Capital Structure.
11. WREB's balance sheet represents a capital structure weighted heavily, if
not exclusively, toward debt. See CURB Exhibit #7, admitted in Docket No. 01-
WSRE-436-RTS. It is far more common for the debt-equity ratio of a utility to
be in the range of 50 percent to 60 percent.
12. WREB's capital structure reached its present state of imbalance rapidly.
As recently as of December 31, 1997, its debt-equity ratio was approximately 50
percent equity, 50 percent debt. See WRI Joint Proxy Statement received by the
Commission on June 22, 1999 at F-3. By September 30, 2000, WREB's debt-equity
ratio was greater than 100 percent debt. See WRI's Response to Staff Data
Request 168, Docket No. 01-WSRE-436-RTS. The reduction in equity in WREB's
capital
structure coincides with the injection of equity into WRI's subsidiary, Westar's
predecessor, which was created on October 8, 1990.
13. Excessive debt in a utility's capital structure endangers the utility's
ability to serve customers effectively and economically. The contractual
obligation to pay interest to bondholders can put pressure on the utility's
ability to fund its operations. Indeed, the financial difficulties associated
with a debt-heavy capital structure are recognized by WRI itself, by WRI's
witness in the current rate case, Dr. Charles Cicchetti who has proposed that
for purposes of establishing WREB's revenue requirement the Commission ignore
the company's actual capital structure and instead substitute a hypothetical
capital structure of 50 percent equity, 50 percent debt. See Prefiled Direct
Testimony of Dr. Cicchetti, Docket No. 01-WSRE-436-RTS at 27.
14. K.S.A. 66-101 empowers the Commission to "supervise and control" the
electric utilities doing business in Kansas, and to "do all things necessary and
convenient for the exercise of such power, authority and jurisdiction." K.S.A.
66-101 (1992). K.S.A. 66-101h mandates close Commission oversight of "the
condition of each electric public utility" and the "manner of its conduct and
its management with reference to the public safety and convenience." K.S.A. 66-
101h (1992). Under K.S.A. 66-101d, the Commission may determine, after
investigation and hearing, that a utility's act or practice adversely affects
its ability to provide efficient and sufficient service at just and reasonable
rates, and then substitute such act or practice after investigation and hearing.
K.S.A. 2000 Supp. 66-101d. The Commission thus is empowered and obligated to
act to prevent a utility from placing itself into a precarious financial
condition so as to adversely affect its ability to carry out its public utility
duties.
15. Under K.S.A. 77-536 (1977), the Commission is empowered to take immediate
action to protect the public interest. In this instance immediate, protective
action is necessary because if the Registration Statement is declared effective
by the SEC and the rights offering is completed by Westar before the Commission
can complete its investigation and assure a reasonable capital structure for
WREB, WRI will implement the Asset Allocation Agreement and WRI's shareholders
will be able to exercise their rights to buy stock in Westar Industries. Such
actions would leave WREB with an unusually debt-heavy capital structure, and
consequently make restoration of an appropriate capital structure for WREB
extremely difficult, for the reasons described in the next paragraph.
16. Pursuant to these provisions, the Commission hereby finds that there is a
distinct possibility that WREB's present capital structure is inconsistent with
the public's safety and convenience, and adversely affects its ability to
provide efficient and sufficient service at just and reasonable rates. The
Commission further finds that if WRI's subsidiary, Westar, takes the actions
described in the Registration Statement, there will be irreparable harm to WREB
because it will be very difficult for WREB to re-establish the reasonable
capital structure that existed before the recent conversion of a $350 million
intercompany receivable into 14.4 million shares of WRI's common stock. This
transaction resulted in Westar owning approximately 17 percent of WRI's
outstanding common stock. If the rights offering proceeds as contemplated in
the Registration Statement, it will create a class of minority public
shareholders owning up to almost 15 percent of Westar's outstanding common
stock. The existence of these public shareholders may restrict the Commission's
ability to cause WRI to alter or reverse WRI's share issuance to Westar and
restore a sound capital structure for WREB. Thus, the Commission must act
immediately to prohibit the rights offering.
17. Accordingly, WRI shall, until the Commission orders or authorizes
otherwise,
i. refrain, and cause its subsidiary Westar and each other subsidiary of
WRI to refrain, from entering into any agreement which will, directly
or indirectly, increase the share of debt in WREB's capital structure,
including, without limitation, the rights offering; and
ii. take no action, and cause its subsidiary Westar and each other
subsidiary of WRI to take no action, including but not limited to,
actions pursuant to any interaffiliate contract to which it is now a
party, that would, directly or indirectly, increase the share of debt
in WREB's capital structure, including, without limitation, the
completion of the rights offering.
18. The Commission will conduct a hearing on the above requirements on June 14,
2001, commencing at 9:00 a.m. The purposes of this hearing are to (a) afford
WRI the opportunity to explain why the requirements of this supplemental order
should not be continued in effect, (b) consider whether the requirements of this
supplemental order should be extended for an additional period of time or made
permanent, and (c) receive from other interested persons recommendations on how
the Commission should proceed with the investigation required in this docket.
To facilitate the June 14, 2001 hearing, the Commission will accept prefiled
testimony on or before June 5, 2001. The Commission urges all parties to
cooperate in presenting their positions.
19. WRI may file the Asset Allocation Agreement and any associated agreements,
or any other restructuring proposal, for Commission approval. Any such filing
shall be supported by prefiled
testimony, and shall include a description of the ultimate capital structure
which WREB will achieve, the specific steps it will take to achieve that
structure, and a proposed schedule for taking those steps. While the Commission
does not specify in this order required weightings for the elements of WREB's
capital structure, the Commission expects that the ultimate capital structure
for WREB will resemble, absent a showing of unusual circumstances, the capital
structure that WREB had as of December 31, 1997.
IT IS, THEREFORE, BY THE COMMISSION CONSIDERED AND ORDERED THAT:
(A) The May 8, 2001 Order Initiating Investigation is supplemented, as stated
above.
(B) WRI is directed to comply with the requirements, as set forth above. The
failure to comply with the requirements of this order may result in the
Commission entering default judgment against WRI pursuant to K.S.A. 77-520
or taking other appropriate actions necessary to enforce the Commission's
orders, as permitted by law.
(C) Notice is hereby given that a hearing shall be held at 9:00 a.m. on June
14, 2001, in the First Floor Hearing Room at the Commission's Offices, 1500
S.W. Arrowhead Road, Topeka, Kansas, for the purposes discussed above. The
Commissioners will preside.
(D) This order is effective upon service. Any party may file a petition for
reconsideration of this order within fifteen days of the date this order is
served. If service is by mail, service is complete upon mailing and three
days may be added to the above time.
(E) This order shall be served upon counsel for WRI and Westar. The Commission
records indicate that the general counsel of WRI and Westar is Richard D.
Terrill, Western Resources, Inc., 818 Kansas Avenue, Topeka, Kansas 66612.
(F) The Commission retains jurisdiction over the subject matter and the parties
for the purpose of entering such further order or orders as it may deem
necessary.
BY THE COMMISSION IT IS SO ORDERED.
Wine, Chr.; Claus, Comm.; Moline, Comm.
Dated: May 22, 2001
/s/ Jeffrey S. Wagaman
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Jeffrey S. Wagaman
Executive Director