As filed with the Securities and Exchange Commission on
March 12, 2001
File No. 70-____
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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APPLICATION ON FORM U-1
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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WESTERN RESOURCES, INC.
818 South Kansas Avenue
Topeka, Kansas 66612
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(Name of companies filing this statement and
address of principal executive offices)
WESTERN RESOURCES, INC.
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(Name of top registered holding company
parent of each applicant or declarant)
Richard D. Terrill
Executive Vice President and General Counsel
Western Resources, Inc.
818 South Kansas Avenue
Topeka, Kansas 66612
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(Name and address of agent for service)
The Commission is requested to mail copies of
all orders, notices and communications to:
William S. Lamb
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019-4513
TABLE OF CONTENTS
Page
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS.............................1
A. Description of the Parties and Facilities........................1
1. Western Resources, Inc. ....................................1
2. Westar Generating, Inc.......................................2
3. The Empire District Electric Company.........................2
B. State Line Generation Station....................................2
C. Description of Applicant's Requests..............................3
ITEM 2. FEES, COMMISSIONS AND EXPENSES...................................4
ITEM 3. APPLICABLE STATUTORY PROVISIONS..................................4
A. Approval of the Proposed Transactions............................4
1. Section 10(b)(1).............................................4
a. Interlocking Relationships...............................4
b. Concentration of Control.................................4
2. Section 10(b)(2).............................................5
3. Section 10(b)(3).............................................6
4. Section 10(c)(1).............................................6
5. Section 10(c)(2).............................................6
6. Section 10(f)................................................8
B. Exemption Under Section 3(a)(1)..................................8
ITEM 4. REGULATORY APPROVALS.............................................8
ITEM 5. PROCEDURE........................................................8
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS................................9
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.........................10
Western Resources, Inc. submits this application (the "Application") under
Sections 9(a)(2) and 10 of the Public Utility Holding Company Act of 1935, as
amended (the "Act"), to acquire an interest in a public utility company as
described in the Application.
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS
A. Description of the Parties and Facilities
1. Western Resources, Inc.
Western Resources, Inc. ("WRI" or "Applicant") is a public utility holding
company exempt from all provisions of the Act except Section 9(a)(2) under
Section 3(a)(1) pursuant to Rule 2 of the Act. WRI, through its KPL/1 division,
is engaged in the production, purchase, transmission, distribution and sale of
electric energy in the State of Kansas. WRI's assets include security company
holdings through its ownership of Protection One, Inc. ("Protection One"), which
has more than 1.3 million security customers in North America. Its utility
operations, conducted through KPL and WRI's subsidiary, Kansas Gas and Electric
Company ("KGE"), provide electric service to approximately 636,000 customers in
432 communities in the State of Kansas. KGE owns a 47% interest in Wolf Creek
Nuclear Operating Corporation which operates the Wolf Creek Generating Station
on behalf of its owners. Through its ownership interest in ONEOK Inc., an
Oklahoma corporation, WRI has an approximately 45% economic interest/2 in the
eighth largest natural gas distribution company in the nation, serving more than
1.4 million customers. For the year ended December 31, 1999, WRI reported
consolidated revenues of approximately $2,036,158,000. WRI's net income reported
for the same period was $14,296,000. Consolidated assets of WRI at December 31,
1999 were $7,989,892,000.
WRI's other subsidiaries include: Westar Generating, Inc., which is
described in greater detail below; The Wing Group, Limited Co., a Delaware
corporation and wholly owned subsidiary of Westar Industries, Inc. ("Westar
Industries"), which holds an interest in Wing Turkey, Inc.; Western Resources
(Bermuda) Limited, a Bermuda limited liability company, indirectly holding
interests in four power plants in China; Wing Turkey, Inc., a Delaware holding
company, owning a power project in Turkey; and Westar Industries, a Kansas
corporation and wholly owned subsidiary of WRI, a holding company for certain
non-regulated business subsidiaries of WRI including, among others, Protection
One, a Delaware holding company for monitored security alarm businesses, of
which approximately 85% is held by Westar Industries, Protection One
International, Inc. and Protection One (UK) plc, wholly owned subsidiaries which
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1 "KPL" is the trade name for WRI's electric business.
2 Comprised solely of up to 9.9% of the voting stock and shares of nonvoting
convertible preferred stock of ONEOK. WRI has relied on a no-action letter
issued by the Commission's Staff in 1997 for the proposition that ONEOK is
not a subsidiary of WRI and that WRI does not control ONEOK. See Western
Resources, Inc., SEC No-Action Letter (Nov. 24, 1997).
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offer home security services in the United Kingdom and continental Europe,
respectively and Westar Communications, Inc., a Kansas corporation and wholly
owned subsidiary of Westar Industries, providing paging services.
2. Westar Generating, Inc.
Westar Generating, Inc. ("Westar Generating"), a wholly owned subsidiary of
WRI, is a Kansas corporation that holds an undivided 40% ownership interest in a
2X1 F class combined cycle generation facility that is under construction at The
Empire District Electric Company State Line station near Joplin, Missouri - the
facility is the subject of this Application. The Empire District Electric
Company holds the remaining interest and operates the facility pursuant to the
Agreement for the Construction, Ownership and Operation of State Line Combined
Cycle Generating Facility ("Operating Agreement"). See Exhibit A-1. Westar
Generating and Empire (collectively the "Owners") hold their interests as
tenants in common.
3. The Empire District Electric Company
The Empire District Electric Company's ("Empire") Form 10-K for the year
ended December 31, 1999 states that Empire, a Kansas corporation organized in
1909, is an operating public utility engaged in the generation, purchase,
transmission, distribution and sale of electricity in parts of Missouri, Kansas,
Oklahoma and Arkansas. The territory served by the Company's electric operations
embraces an area of about 10,000 square miles with a population of over 330,000.
The service territory is located principally in Southwestern Missouri and also
includes smaller areas in Southeastern Kansas, Northeastern Oklahoma and
Northwestern Arkansas.
B. State Line Generation Station
Pursuant to the Operating Agreement, Empire is constructing a 2X1 F class
combined cycle generating facility on the Missouri side of the Kansas-Missouri
state line just west of Joplin, MO ("State Line"). This site also houses another
generating facility, Unit 1, in which WRI and its subsidiaries do not have an
interest. State Line is not currently operative, and is being upgraded from its
original configuration of a single Westinghouse 501-F.C. turbine installed in
1997 to a Westinghouse 501-F.D1. Empire is adding another 501-F.D2, two heat
recovery steam generators, a steam turbine, a cooling tower, and associated
equipment to create the 2X1 F facility. The new combined cycle facility will
have a nominal rating of 500 MW. State Line began operations in June 1997 and
was removed from service on September 11, 2000 to facilitate the conversion.
Westar Generating currently has a 40% interest in the portion of State Line
under construction. Pursuant to the Operating Agreement, Westar Generating will
acquire a 40% interest in the portion that existed prior to the start of
construction after receipt of the EDE Regulatory Approvals and the Certificate
of Convenience, but "not before the date that exhaust from the Existing CT is
utilized in its associated heat recovery steam generators."/3 Utilization of the
exhaust in this manner will occur when State Line's construction is complete and
the station
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3 EDE Regulatory Approvals, Certificate of Convenience and Existing CT have
the same meaning as in the Operating Agreement.
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resumes operation. See Exhibit B-1. The Owners anticipate beginning testing of
the new configuration on or about March 19, 2000 and depending upon the success
of the trials, resuming commercial operation as early as May 15, 2000. Westar
Generating also owns a 34% share in non-utility facilities such as offices,
maintenance buildings and fire protection equipment.
Westar Generating's cost associated with acquiring its interest in State
Line will be equal to its share of the costs of constructing State Line. These
costs will be approximately $104,292,841.
WRI entered into the Operating Agreement on July 26, 1999 as a means of
acquiring a generation source to meet the generation needs of KPL, the division
of WRI operating as a public utility. State Line will provide reliable,
inexpensive power to WRI. WRI and Westar Generating have entered into a power
purchase agreement under which Westar Generating will sell its entire 40%
entitlement to the output of State Line to WRI under a cost-based tariff ("Power
Purchase Agreement") which will be approved by the Federal Energy Regulatory
Commission ("FERC"). WRI will also purchase power generated during testing of
State Line. See Exhibit D-1. WRI will receive State Line's output at the high
voltage side of State Line's step-up transformer and, via a thirty-mile 200 MW
point-to-point firm ten-year contract path with the Southwest Power Pool,
transmit it to WRI's electric grid.
C. Description of Applicant's Requests
WRI is seeking authority to retain its 40% indirect interest in State Line
when the plant resumes commercial operation. Because State Line is not presently
operating commercially, Westar Generating is not an "electric utility" as
defined by Section 2(a)(3) of the Act./4 However, upon State Line's resumption
of commercial operations, Westar Generating will become an electric utility. WRI
will qualify as an affiliate of Westar Generating under the Act, and WRI is
already an affiliate, as that term is defined in the Act/5, of KGE and ONEOK.
Retaining the securities of Westar Generating is equivalent to acquiring the
security of a public utility company and requires prior Commission authorization
under Sections 9(a)(2) and 10.
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4 Several Commission no-action letters describe circumstances in which the
Commission has effectively concluded that generation facilities under
construction or conducting tests prior to commercial operation were not
electric utilities. See e.g. ISO & PX Restructuring Trusts, SEC No-Action
Letter, July 25, 1997 (facilities under construction); Midland Cogeneration
Venture Limited, SEC No-Action Letter, December 19, 1989 (facilities
generating power for sale during testing).
5 Section 2(a)(11)(B) of the Act states that affiliates include "any company
five per centum or more of whose outstanding voting securities are owned,
controlled, or held with power to vote, directly or indirectly, by such
specified company."
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ITEM 2. FEES, COMMISSIONS AND EXPENSES
WRI estimates that, in connection with the proposed transactions, they will
pay fees, commissions and expenses of:
Legal Fees...............................................................$25,000
Miscellaneous............................................................$10,000
Total.............................................................$35,000
ITEM 3. APPLICABLE STATUTORY PROVISIONS
Sections 9(a)(2) and 10 of the Act are directly or indirectly applicable to
the authority requested in this Application.
A. Approval of the Proposed Transactions
Section 9(a)(2) makes it unlawful, without approval of the Commission under
Section 10, "for any person . . . to acquire, directly or indirectly, any
security of any public utility company, if such person is an affiliate . . . of
such company and of any other public utility or holding company, or will by
virtue of such acquisition become such an affiliate." The proposed transactions
comply with all of the applicable provisions of Section 10.
1. Section 10(b)(1)
Section 10(b)(1) directs the Commission to approve an acquisition that
meets the requirements of subsection (f) unless it finds that the acquisition
will "tend towards interlocking relations or the concentration of control of
public utility companies, of a kind or to an extent detrimental to the public
interest or the interest of investors or consumers."
a. Interlocking Relationships
State Line is essentially a new facility owned by Empire and Westar
Generating. Retention of Westar Generating's interest after State Line resumes
commercial operations will not create any interlocking relations between
previously unaffiliated utilities. Rather Western Generating and Empire hold
their respective interests as tenants in common and are dividing State Line's
output and construction costs. This type of arrangement is not harmful to the
Act's protected interests.
b. Concentration of Control
Section 10(b)(1) requires the Commission, before blocking an acquisition,
to find that control is "of a kind or to an extent detrimental to the public
interest or the interest of investors or consumers." The framers of the Act
sought through Section 10(b)(1) to avoid "an excess of
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concentration and bigness" while preserving the "opportunities for economies of
scale, the elimination of duplicative facilities and activities, the sharing of
production capacity and reserves and generally more efficient operations"
afforded by certain combinations. American Electric Power Co., Inc., Holding Co.
Act Release No. 20633 (July 21, 1978). In applying Section 10(b)(1) to utility
acquisitions, the Commission must determine whether the acquisition will create
"the type of structures and combinations at which the Act was specifically
directed." Vermont Yankee Nuclear Corp., Holding Co. Act Release No. 15958 (Feb.
6, 1968). State Line will provide a reliable source of power for KPL's utility
businesses and does not involve a combination of previous separate utilities.
Thus, rather than create prohibited corporate structures, State Line will serve
KPL's utility customers by providing reliable inexpensive power.
In addition, other regulatory agencies will review the concentration of
control and any potential anticompetitive effects. In Northeast Utilities,
Holding Co. Act Release No. 25221 (Dec. 21, 1990), the Commission stated that
"antitrust ramifications of an acquisition must be considered in light of the
fact that public utilities are regulated monopolies and that federal and state
administrative agencies regulate the rates charged consumers." The staff of the
Missouri Public Service Commission ("Missouri Commission") has determined that
the State Line project is necessary or convenient for the public service, and
the Missouri Commission granted Westar Generating a certificate of convenience
and necessity to "construct, install, own, operate, control, manage and
maintain" State Line. See Exhibits D-3 and D-4. The State Corporation Commission
of the State of Kansas ("Kansas Commission") also has jurisdiction over the
operation of WRI and its utility businesses but did not have jurisdiction over
construction of State Line or Westar Generating's acquisition of a 40% interest.
However, the Kansas Commission will review the costs of State Line proposed to
be charged to KPL's retail electric customers. Thus, the proposed transactions
do not create the kind of structures that the Act's framers were attempting to
avoid.
Finally, the rates under which State Line provides its output to KPL will
be fully reviewed by FERC pursuant to Section 205 of the Federal Power Act. See
Exhibit D-1.
Accordingly, because State Line is located just across the Missouri border
and because other regulatory agencies have evaluated and approved the proposed
transactions, the Commission should find that the proposed transactions do not
create the type of concentration of control prohibited by Section 10(b)(1).
2. Section 10(b)(2)
Section 10(b)(2) requires the Commission to determine whether the
consideration to be paid in connection with the proposed transactions, including
all fees, commissions and other remuneration, is reasonable and whether it bears
a fair relation to, investment in and earning capacity of the underlying utility
assets.
Westar Generating's share of State Line's construction costs will be
approximately $104,292,841. These costs are the product of arm's-length
negotiations between Empire and/or Westar Generating and service providers.
These negotiations were preceded by due diligence,
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analysis and evaluation of the assets, liabilities and business prospects of
State Line. As recognized by the Commission in Northeast Utilities, Holding Co.
Act Release No. 25221 (Dec. 21, 1990) citing Ohio Power Co., 44 SEC 340, 346
(1970), prices arrived at through arm's-length negotiations are particularly
persuasive evidence that Section 10(b)(2) is satisfied.
As set forth in Item 2 of this Application, WRI expects to incur a combined
total of approximately $35,000 in fees, commissions and expenses. WRI believes
that the estimated fees and expenses in this matter bear a fair relation to the
value of the transactions and the strategic benefits to be achieved, and further
that the fees and expenses are fair and reasonable in light of the complexity of
the transactions. See Northeast Utilities, Holding Co. Act Release No. 25548
(June 3, 1992), modified on other grounds, Holding Co. Act Release No. 25550
(June 4, 1992) (noting that fees and expenses must bear a fair relation to the
value of the company to be acquired and the benefits to be achieved in
connection with the acquisition). Based on construction costs of $104,292,841,
the total estimated fees and expenses represent approximately .03% of the value
of the consideration. This percentage of fees and expenses is less than that of
other transactions approved by the Commission. See Entergy Corp., Holding Co.
Act Release No. 25952 (Dec. 17, 1993) (fees and expenses represented
approximately 1.7% of the value of the consideration paid to the shareholders of
Gulf States Utilities); Northeast Utilities, Holding Co. Act Release No. 25548
(June 3, 1992) (approximately 2% of the value of the assets to be acquired).
3. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the proposed
transactions will unduly complicate the capital structure of WRI or will be
detrimental to the public interest, the interest of investors or consumers or
the proper functioning of the WRI system. The construction of State Line was
financed through existing financing sources and did not involve issuance of new
securities. In addition, the acquisition of State Line will not be detrimental
to the interest of consumers or the functioning of the WRI system because state
and federal regulators have jurisdiction over many aspects of the sale of State
Line's output. The rate WRI pays for State Line's output is fixed by the Power
Purchase Agreement, which is reviewed by FERC, and the rates KPL's retail
consumers pay are governed by the Kansas Commission.
4. Section 10(c)(1)
Section 10(c)(1) provides that the Commission may not approve a transaction
that is "unlawful under the provisions of section 8 or is detrimental to the
carrying out of the provisions of section 11." Together these sections relate to
the corporate simplification standards of Section 11(b)(2), which require that
each registered holding company take the necessary steps to ensure that the
corporate or continued existence of any company in the holding-company system
does not unduly or unnecessarily complicate the structure of such
holding-company system. Sections 8 and 11, by their terms, only apply to
registered holding companies, and WRI will be exempt from registration under
Section 3(a)(1).
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5. Section 10(c)(2)
Section 10(c)(2) requires that any acquisition not be approved unless the
Commission finds that "such acquisition will serve the public interest by
tending towards the economical and efficient development of an integrated
public-utility system."
Section 2(a)(29)(A) defines an "integrated public utility system" as
applied to electric utility companies as a:
system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as a single
area or region in one or more States, not so large as to impair
(considering the state of the art and the area or region affected) the
advantages of localized management, efficient operation, and the
effectiveness of regulation.
As discussed in Item 1, WRI and Westar Generating have entered into a power
purchase agreement under which Westar Generating will sell its entire 40%
entitlement to the output of State Line under a cost-based tariff which will be
approved by the FERC. WRI will receive State Line's output at the high voltage
side of State Line's step-up transformer and, via a thirty-mile 200 MW
point-to-point firm ten-year contract path with the Southwest Power Pool,
transmit it to WRI's electric grid. In prior applications, the Commission has
found a contract path sufficient to interconnect utilities. See Unitil Corp.,
Holding Co. Act Release No. 25524 (April 24, 1992). WRI will dispatch State Line
using the same mechanisms and same system operator as it does to operate its
existing generation and thereby meets the Commission's requirements for
economical operation. See Conectiv, Inc., Holding Co. Act Release No. 26832
(Feb. 25, 1998). WRI's utility businesses are located in Kansas, and State Line
is being built in neighboring Missouri. Accordingly, the proposed acquisitions
comply with the single area or region requirement of 10(c)(2).
As previously described in Item 3A, the Missouri Commission approved Westar
Generating's acquisition of its 40% interest in State Line and granted Westar
Generating a certificate of convenience and necessity for State Line. See
Exhibits D-3 and D-4. After consummation of the proposed transactions, WRI will
continue to be subject to regulation by the Kansas Commission and Westar
Generating will also be regulated by the Missouri Commission. The Commission has
previously found that state regulation is not impaired when a holding company's
utility subsidiaries remain subject to the same state regulators as prior to a
transaction. See Conectiv, Inc., Holding Co. Act Release No. 26832 (Feb. 25,
1998). Accordingly, the proposed transactions do not impair effective state
regulation. Finally, since State Line is located just across the Missouri
border, the proposed transactions will not impair the effectiveness of local
management.
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6. Section 10(f)
Section 10(f) prohibits the Commission from approving the proposed
transactions unless the Commission is satisfied that the they will be undertaken
in compliance with applicable state laws. All the required state regulatory
approvals have been obtained as described in Item 4, and WRI shall undertake to
complete the transaction in a manner consistent with the laws of the States of
Kansas and Missouri.
B. Exemption Under Section 3(a)(1)
WRI claims exemption, under Section 3(a)(1), from all provisions of the Act
except Section 9(a)(2). WRI will continue to be entitled to this exemption after
State Line commences commercial operation because it and each of its public
utility subsidiaries from which it derives a material part of its income will be
predominantly intrastate in character and will carry on their businesses
substantially within Kansas. WRI will not derive a material part of its income
from State Line.
ITEM 4. REGULATORY APPROVALS
The Missouri Commission has previously approved Empire's transfer, and
Westar Generating's acquisition of, a 40% interest in State Line and also
granted Westar Generating a certificate of convenience and necessity to
"construct, install, own, operate, control, manage and maintain" the State Line
facility. See Exhibits D-3 and D-4. The Kansas Commission does not have
jurisdiction over the transactions proposed in this Application but does have
jurisdiction over the retail rates of KPL. The FERC, pursuant to Section 205 of
the Federal Power Act has jurisdiction over the rates of the sales between
Westar Generating and WRI, and Westar Generating's application to the FERC is
attached as Exhibit D-1.
ITEM 5. PROCEDURE
WRI requests that the Commission issue and publish no later than March 23,
2001, the requisite notice under Rule 23 with respect to the filing of this
Application, such notice to specify a date not later than April 17, 2001 as the
date after which an order granting and permitting this Application to become
effective may be entered by the Commission and that the Commission enter not
later than May 8, 2001 an appropriate order granting and permitting this
Application to become effective.
No recommended decision by a hearing officer or other responsible officer
of the Commission is necessary or required in this matter. The Division of
Investment Management of the Commission may assist in the preparation of the
Commission's decision in this matter. There should be no thirty-day waiting
period between the issuance and effective date of any order issued by the
Commission in this matter, and WRI respectfully requests that any such order be
made effective immediately upon the entry thereof.
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ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
A-1 Articles of Incorporation of Westar Generating, Inc., as
amended
B-1 Agreement for the Construction, Ownership and Operation of
State Line Combined Cycle Generating Facility by and among
The Empire District Electric Company, as an Owner, Westar
Generating, Inc., as an Owner, and The Empire District
Electric Company, as Agent dated July 26, 1999, as amended
(Filed on Form SE).
D-1 Application before the Federal Energy Regulatory Commission
(To be Filed by Amendment)
D-2 Order of the Federal Energy Regulatory Commission (to be
filed by Amendment)
D-3 Application to the Missouri Public Service Commission
D-4 Order of the Missouri Public Service Commission
F-1 Opinion of Counsel (To be filed by amendment)
F-2 "Past Tense" Opinion of Counsel (To be filed by amendment)
H-1 Form of Notice
H-2 WRI's 1999 Annual Report (filed on March 29, 2000 and
amended by WRI's 10-K/A-2 filed on February 2, 2001 (File
No. 1-3523) and incorporated by reference herein).
B. Financial Statements
FS-1 Consolidated Balance Statement and Statement of Income of
WRI for the year ended December 31, 1999 (filed on March 29,
2000 and amended by WRI's 10-K/A-2 filed on February 2, 2001
(File No. 1-3523) and incorporated by reference herein).
FS-2 WRI's Consolidated Statement of Income for the Preceding
Three years (filed on March 29, 2000 and amended by WRI's
10-K/A-2 filed on February 2, 1001 (File No. 1-3523) and
incorporated by reference herein).
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ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
None of the matters that are the subject of this Application involve a
"major federal action" nor do they "significantly affect the quality of the
human environment" as those terms are used in Section 102(2)(C) of the National
Environmental Policy Act. None of the proposed transactions that are the subject
of this Application will result in changes in the operation of WRI that will
have an impact on the environment. WRI is not aware of any federal agency which
has prepared or is preparing an environmental impact statement with respect to
the transactions proposed herein.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned has duly caused this application and declaration to be
signed on their behalf by the undersigned thereunto duly authorized.
WESTERN RESOURCES, INC.
By: /s/ Richard D. Terrill
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Name: Richard D. Terrill
Title: Executive Vice President and
General Counsel
March 8, 2001
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