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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-707
KANSAS CITY POWER & LIGHT COMPANY
(Exact name of registrant as specified in its charter)
Missouri 44-0308720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Walnut, Kansas City, Missouri 64106-2124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 556-2200
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes (X) No ( )
The number of shares outstanding of the registrant's Common stock at
August 8, 1997, was 61,900,693 shares.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
June 30 December 31
1997 1996
ASSETS
UTILITY PLANT, at original cost
Electric $3,486,400 $3,472,607
Less-accumulated depreciation 1,283,825 1,238,187
Net utility plant in service 2,202,575 2,234,420
Construction work in progress 100,245 69,577
Nuclear fuel, net of amortization of
$94,540 and $84,540 45,006 39,497
Total 2,347,826 2,343,494
REGULATORY ASSET - RECOVERABLE TAXES 126,000 126,000
INVESTMENTS AND NONUTILITY PROPERTY 327,330 231,874
CURRENT ASSETS
Cash and cash equivalents 43,018 23,571
Customer accounts receivable, net of allowance
for doubtful accounts of $1,333 and $1,644 36,403 27,093
Other receivables 24,494 36,113
Fuel inventories, at average cost 18,842 19,077
Materials and supplies, at average cost 47,132 47,334
Deferred income taxes 4,606 2,737
Other 9,284 5,055
Total 183,779 160,980
DEFERRED CHARGES
Regulatory assets
Settlement of fuel contracts 8,951 9,764
KCC Wolf Creek carrying costs 0 1,368
Other 23,710 26,615
Other deferred charges 41,092 14,417
Total 73,753 52,164
Total $3,058,688 $2,914,512
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock-authorized 150,000,000 shares
without par value-61,908,726 shares issued-
stated value $449,697 $449,697
Retained earnings 412,890 455,934
Unrealized gain on securities available for sale 5,085 6,484
Capital stock premium and expense (1,665) (1,666)
Common stock equity 866,007 910,449
Cumulative preferred stock 89,062 89,062
Company-obligated mandatorily redeemable Preferred
Securities of subsidiary trust holding solely
KCPL Subordinated Debentures * 150,000 0
Long-term debt 934,767 944,136
Total $2,039,836 $1,943,647
CURRENT LIABILITIES
Notes payable to banks 1,400 0
Current maturities of long-term debt 63,513 26,591
Accounts payable 58,700 55,618
Accrued taxes 11,581 18,443
Accrued interest 18,620 21,054
Accrued payroll and vacations 23,533 25,558
Accrued refueling outage costs 11,657 7,181
Other 13,311 11,980
Total 202,315 166,425
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 641,812 643,189
Deferred investment tax credits 64,994 67,107
Other 109,731 94,144
Total 816,537 804,440
COMMITMENTS AND CONTINGENCIES
Total $3,058,688 $2,914,512
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
* The sole asset of the KCPL Financing I Trust is the $154,640,000 principal
amount of 8.3% Junior Subordinated Deferrable Interest Debentures due 2037
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Year to Date Twelve Months Ended
June 30 June 30 June 30
1997 1996 1997 1996 1997 1996
(thousands of dollars)
ELECTRIC OPERATING REVENUES $ 215,420 $ 226,205 $ 410,164 $ 432,829 $ 881,254 $ 914,573
OPERATING EXPENSES
Operation
Fuel 29,291 36,096 64,213 66,869 137,849 138,476
Purchased power 17,676 12,540 28,922 26,525 54,852 50,990
Other 47,538 45,519 91,461 89,018 183,162 174,133
Maintenance 19,764 19,409 36,580 37,438 70,637 72,699
Depreciation 27,731 24,861 55,573 49,577 109,908 98,448
Taxes
Income 13,836 18,927 22,366 32,340 58,181 85,862
General 22,026 23,451 44,718 47,812 94,154 98,095
Deferred Wolf Creek costs
amortization 684 2,904 1,368 5,808 7,177 11,864
Total 178,546 183,707 345,201 355,387 715,920 730,567
OPERATING INCOME 36,874 42,498 64,963 77,442 165,334 184,006
OTHER INCOME
Allowance for equity funds
used during construction 733 457 993 1,117 2,244 2,656
Miscellaneous income 8,568 1,948 12,461 2,689 14,615 2,257
Miscellaneous deductions (13,503) (10,928) (75,664) (14,713) (116,123) (19,870)
Income taxes 9,862 8,245 40,095 14,466 62,031 20,951
Total 5,660 (278) (22,115) 3,559 (37,233) 5,994
INCOME BEFORE INTEREST CHARGES 42,534 42,220 42,848 81,001 128,101 190,000
INTEREST CHARGES
Long-term debt 17,628 13,205 32,144 26,629 59,454 53,590
Short-term debt 331 496 1,170 614 1,807 712
Miscellaneous 1,035 1,386 1,910 2,492 4,258 4,347
Allowance for borrowed funds
used during construction (589) (541) (1,373) (931) (2,389) (1,849)
Total 18,405 14,546 33,851 28,804 63,130 56,800
PERIOD RESULTS
Net income 24,129 27,674 8,997 52,197 64,971 133,200
Preferred stock
dividend requirements 959 935 1,914 1,892 3,812 3,855
Earnings applicable to
common stock 23,170 26,739 7,083 50,305 61,159 129,345
Average number of common
shares outstanding 61,897 61,902 61,896 61,902 61,899 61,902
Earnings per common share $0.37 $0.43 $0.11 $0.81 $0.99 $2.09
Cash dividends per
common share $0.405 $0.39 $0.81 $0.78 $1.62 $1.56
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
Year to Date Twelve Months Ended
June 30 June 30
1997 1996 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,997 $ 52,197 $ 64,971 $133,200
Adjustments to reconcile net income
to net cash from operating
activities:
Depreciation 55,573 49,577 109,908 98,448
Amortization of:
Nuclear fuel 10,000 5,689 20,405 13,226
Deferred Wolf Creek costs 1,368 5,808 7,177 11,864
Other 4,032 2,762 6,777 6,849
Deferred income taxes (net) (2,451) 7,369 (18,482) 9,883
Deferred investment tax credit
amortization and reversals (2,113) (2,049) (4,227) (4,181)
Deferred storm costs 0 0 (8,885) 0
Deferred merger costs (5,597) (11,718) 6,121 (11,718)
Allowance for equity funds used
during construction (993) (1,117) (2,244) (2,656)
Cash flows affected by changes in:
Receivables 2,309 (9,158) 12,929 (30,301)
Fuel inventories 235 4,156 (895) 1,367
Materials and supplies 202 1,075 (1,032) (480)
Accounts payable 3,082 94 6,100 14,278
Accrued taxes (6,862) (3,447) (24,698) (18,740)
Accrued interest (2,434) (270) 1,984 3,589
Wolf Creek refueling outage
accrual 4,476 (11,290) 9,384 (5,874)
Pension and postretirement benefit
obligations 868 929 (145) (3,898)
Other operating activities 2,350 4,642 9,554 12,236
Net cash from operating
activites 73,042 95,249 194,702 227,092
CASH FLOWS FROM INVESTING ACTIVITIES
Utility capital expenditures (67,055) (52,734) (115,268) (134,758)
Allowance for borrowed funds used
during construction (1,373) (931) (2,389) (1,849)
Purchases of investments (89,702) (11,166) (113,898) (44,827)
Purchases of nonutility property (5,841) (9,558) (16,678) (9,558)
Other investing activities (8,751) (3,489) (6,193) 1,921
Net cash from investing
activities (172,722) (77,878) (254,426) (189,071)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of mandatorily redeemable
Preferred Securities of
subsidiary trust 150,000 0 150,000 0
Issuance of long-term debt 54,360 20,441 169,360 49,114
Repayment of long-term debt (26,807) (44,230) (56,807) (44,239)
Net change in short-term borrowings 1,400 50,000 (67,600) 55,000
Dividends paid (52,041) (50,183) (104,061) (100,440)
Other financing activities (7,785) (363) (9,576) 2,669
Net cash from financing
activities 119,127 (24,335) 81,316 (37,896)
NET CHANGE IN CASH AND CASH
EQUIVALENTS 19,447 (6,964) 21,592 125
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 23,571 28,390 21,426 21,301
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $43,018 $21,426 $43,018 $21,426
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $36,780 $28,306 $60,931 $51,621
Income taxes $0 $27,588 $30,756 $80,992
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(thousands of dollars)
Year to Date Twelve Months Ended
June 30 June 30
1997 1996 1997 1996
Beginning balance $455,934 $449,966 $451,980 $419,220
Net income 8,997 52,197 64,971 133,200
464,931 502,163 516,951 552,420
Dividends declared
Preferred stock - at required rates 1,906 1,900 3,788 3,874
Common stock 50,135 48,283 100,273 96,566
Ending balance $412,890 $451,980 $412,890 $451,980
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
KANSAS CITY POWER & LIGHT COMPANY
Notes to Consolidated Financial Statements
In management's opinion, the consolidated interim financial
statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the results of
operations for the interim periods presented. These statements and
notes should be read in connection with the financial statements and
related notes included in our 1996 annual report on Form 10-K.
1. AGREEMENT AND PLAN OF MERGER WITH WESTERN RESOURCES
On February 7, 1997, Kansas City Power & Light Company (KCPL) and
Western Resources, Inc. (Western Resources) entered into an Agreement
and Plan of Merger (the Merger Agreement) to form a strategic business
combination. The effective time of the merger is dependent upon all
conditions of the Merger Agreement being met or waived. At the
effective time, KCPL will merge with and into Western Resources, with
Western Resources being the surviving corporation.
Western Resources first delivered an unsolicited exchange offer
to KCPL's Board of Directors during the second quarter of 1996. This
initial offer, subject to numerous conditions, proposed the exchange
of $28 (later increased to $31) worth of Western Resources stock for
each share of KCPL stock. After careful consideration, both offers
were rejected by KCPL's Board of Directors. In July 1996 Western
Resources commenced an exchange offer for KCPL common stock. In late
1996 KCPL began discussing a possible merger with Western Resources
leading to the Merger Agreement.
Under the terms of the Merger Agreement, KCPL common stock will
be exchanged for Western Resources common stock valued at $32.00,
subject to a conversion ratio limiting the amount of Western Resources
common stock that holders of KCPL common stock would receive per share
of KCPL common stock to no more than 1.1 shares (if Western Resources'
stock is priced at or below $29.09 per share), and no less than 0.917
shares (if Western Resources' stock is priced at or above $34.90 per
share). However, there is a provision in the Merger Agreement that
allows KCPL to terminate the merger if Western Resources' stock price
drops below $27.64 and either the Standard and Poor's Electric
Companies Index increases or the decline in Western Resources stock
price exceeds by approximately 5% any decline in this index. Western
Resources could avoid this termination by improving the conversion
ratio.
The transaction is subject to several closing conditions
including approval by each company's shareholders, approval by a
number of regulatory authorities (statutory approvals) and dissenting
shares equaling less than 5.5% of KCPL's outstanding shares. If the
effective time has not occurred by June 30, 1998 (the termination
date), either party may terminate the agreement as long as they did
not contribute to the delay. This termination date will be
automatically extended to June 30, 1999, if all of the Merger
Agreement closing conditions have been met except for certain
conditions relating to statutory approvals.
The Merger Agreement does not allow KCPL to increase its common
stock dividend prior to the effective time or termination. It also
requires KCPL to redeem all outstanding shares of preferred stock
prior to completion of the merger.
If the Merger Agreement is terminated under certain
circumstances, a payment of $50 million will be due Western Resources
if, within two and one-half years following termination, KCPL agrees
to consummate a business combination with a third party that made a
proposal to combine prior to termination. Western Resources will pay
KCPL $5 to $35 million if the Merger Agreement is terminated and all
closing conditions are satisfied other than conditions relating to
Western Resources receiving a favorable tax opinion, a favorable
letter from its accountants regarding pooling accounting, favorable
statutory approvals, or an exemption from the Public Utility Holding
Company Act of 1935.
In February 1997 KCPL paid UtiliCorp United Inc. (UtiliCorp) $53
million for agreeing to combine with Western Resources within two and
one-half years from the termination of KCPL's agreement to merge with
UtiliCorp. This agreement was terminated due to failure of KCPL
shareholders to approve the transaction with UtiliCorp.
During the first six months of 1997, $5.6 million of merger-
related costs were deferred by KCPL and are included in Other deferred
charges. These costs will be expensed in the first reporting period
subsequent to closing of the merger.
2. SECURITIES AVAILABLE FOR SALE
Certain investments in equity securities are accounted for as
securities available for sale and adjusted to market value with
unrealized gains (or losses), net of deferred income taxes, reported
as a separate component of shareholders' equity.
The cost of securities available for sale held by KLT Inc. (KLT),
a wholly-owned subsidiary of KCPL, was $5 million as of June 30, 1997
and December 31, 1996. Unrealized gains, net of deferred income
taxes, decreased to $5.1 million at June 30, 1997, from $6.5 million
at December 31, 1996.
3. CAPITALIZATION
From January 1, 1997 to June 30, 1997, KCPL repaid $16.5 million
of medium-term notes. KCPL is authorized to issue up to $300 million
in unsecured medium-term notes under an indenture dated December 1,
1996. As of June 30, 1997, no unsecured medium-term notes had been
issued.
In April 1997 KCPL Financing I (Trust), a wholly-owned subsidiary
of Kansas City Power & Light Company, issued $150,000,000 of 8.3%
preferred securities. The sole asset of the Trust is the $154,640,000
principal amount of 8.3% Junior Subordinated Deferrable Interest
Debentures, due 2037, issued by KCPL. The terms and interest payments
on these debentures correspond to the terms and dividend payments on
the preferred securities. These payments are reflected as
Miscellaneous Interest Charges in the Consolidated Statement of Income
and are tax deductible by KCPL. We may elect to defer interest
payments on the debentures for a period up to 20 consecutive quarters,
causing dividend payments on the preferred securities to be deferred
as well. In case of a deferral, interest and dividends will continue
to accrue, along with quarterly compounding interest on the deferred
amounts. We may redeem all or a portion of the debentures after March
31, 2002, requiring an equal amount of preferred securities to be
redeemed at face value plus accrued and unpaid distributions. The
back-up undertakings in the aggregate provide a full and unconditional
guarantee of amounts due on the preferred securities.
From July 1 through August 8, 1997, KLT's long-term debt,
including current maturities, increased $5.0 million.
4. LEGAL PROCEEDINGS
See Part II - Other Information, Item 1. Legal Proceedings
5. COSTANERA INVESTMENT
In 1997 KLT invested $46 million for a 12 percent ownership
position in the largest fossil-fueled generator in Argentina. While
the cost method is used to account for this investment, Financial
Accounting Standards Board (FASB) Statement No. 115 -- Accounting for
Certain Investments in Debt and Equity Securities is not applicable
because the fair value of Class A stock is not readily determinable.
Because of a legally binding Consortium and Stockholders Contract
requiring the Class A shareholders to authorize the maximum dividend
distribution, KLT accrues estimated dividends before actual
declaration.
6. INTANGIBLE ASSETS
The application of purchase accounting for certain KLT
investments during 1997 resulted in $12 million of goodwill
recognition. These amounts are included in Other deferred charges on
the balance sheet and are being amortized over 10 to 15 years.
7. KANSAS RETAIL REVENUE REQUIREMENT
On June 19, 1997, the Kansas Corporation Commission formally
opened a case for the purpose of reviewing KCPL's Kansas retail
revenue requirement. We expect to file direct testimony and exhibits
in the case in August 1997. About 39 percent of KCPL's retail sales
revenue, net of gross receipts tax, currently comes from Kansas.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
REGULATION AND COMPETITION
As competition develops throughout the electric utility industry,
we are positioning Kansas City Power & Light Company (KCPL) to excel
in an open market. We are improving the efficiency of KCPL's electric
utility operations, lowering prices and offering new services. We now
offer customized energy packages to larger customers, including
options offering natural gas contracts. We are also creating growth
through our nonregulated subsidiary (see Nonregulated Opportunities
below). As competition presents new opportunities, we will consider
various strategies including partnerships, acquisitions, combinations,
additions to or dispositions of service territory, and restructuring
wholesale and retail businesses. We have entered an Agreement and
Plan of Merger with Western Resources, Inc. (Western Resources). This
agreement was reached after nine months of defending against an
unsolicited exchange offer (see Note 1 to the Consolidated Financial
Statements).
In December 1996 the Federal Energy Regulatory Commission (FERC)
issued a statement concerning electric utility mergers. Under the
statement, companies must demonstrate that their merger does not
adversely affect competition or wholesale rates. As remedies, FERC
may consider a range of conditions including transmission upgrades,
divestitures of generating assets or formation of independent system
operators.
Competition in the electric utility industry was accelerated with
the National Energy Policy Act of 1992. This gave FERC the authority
to require electric utilities to provide transmission line access to
independent power producers (IPPs) and other utilities (wholesale
wheeling). KCPL, already active in the wholesale wheeling market, was
one of the first utilities to receive FERC's approval of an open-
access tariff for wholesale wheeling transactions. In April 1996 FERC
issued an order requiring all owners of transmission facilities to
adopt open-access tariffs and participate in wholesale wheeling. We
have made the necessary filings to comply with that order.
FERC's April 1996 order has encouraged more movement toward
retail competition at the state level. An increasing number of states
have already adopted open access requirements for utilities' retail
electric service, allowing competing suppliers access to their retail
customers (retail wheeling). Many other states are actively
considering retail wheeling. Kansas has created a retail wheeling
task force to study and report on related issues. In Missouri, a
legislative committee has been formed to study the issue while the
Missouri Public Service Commission (MPSC) has established a task force
to plan for implementation of retail wheeling if authorized by law.
Competition through retail wheeling could result in market-based
rates below current cost-based rates. This would provide growth
opportunities for low-cost producers and risks for higher-cost
producers, especially those with large industrial customers. Lower
rates and the loss of major customers could result in under-utilized
assets (stranded investment) and place an unfair burden on the
remaining customer base or shareholders. If an adequate and fair
provision for recovery of these lost revenues is not provided, certain
generating assets may have to be evaluated for impairment and
appropriate charges recorded against earnings. In addition to lower
profit margins, market-based rates could also require generating
assets to be depreciated over shorter useful lives, increasing
operating expenses.
Although Missouri and Kansas have not yet authorized retail
wheeling, we believe KCPL is positioned well to compete in an open
market with its diverse customer mix and pricing strategies. About
22% of KCPL's retail mwh sales are to industrial customers compared to
the utility industry average of about 35%. KCPL has a flexible rate
structure with industrial rates that are competitively priced within
our region. In addition, long-term contracts are in place or under
negotiation for a large portion of KCPL's industrial sales. There has
not been direct competition for retail electric service in our service
territory although there has been competition in the bulk power market
and between alternative fuels.
Increased competition could also force utilities to change
accounting methods. Financial Accounting Standards Board (FASB)
Statement No. 71 _ Accounting for Certain Types of Regulation, applies
to regulated entities whose rates are designed to recover the costs of
providing service. An entity's operations could stop meeting the
requirements of FASB 71 for various reasons, including a change in
regulation or a change in the competitive environment for a company's
regulated services. For those operations no longer meeting the
requirements of regulatory accounting, regulatory assets would be
written off. KCPL's regulatory assets, totaling $159 million at June
30, 1997, will be maintained as long as FASB 71 requirements are met.
It is possible that competition could eventually have a
materially adverse affect on KCPL's results of operations and
financial position. Should competition eventually result in a
significant charge to equity, capital costs and requirements could
increase significantly.
NONREGULATED OPPORTUNITIES
KLT Inc. (KLT) is a wholly-owned subsidiary pursuing nonregulated
business ventures. KLT's strategy capitalizes on new market
opportunities by combining our strengths with the knowledge of our
joint venture partners. Existing ventures include investments in
domestic and international nonregulated power production, energy
services, oil and gas reserves, telecommunications, telemetry
technology, and affordable housing limited partnerships.
KCPL had a total equity investment in KLT of $109 million as of
June 30, 1997. KLT's consolidated assets at June 30, 1997, totaled
$331 million. The growth of KLT accounts for most of the increase in
KCPL's consolidated investments and nonutility property (see Capital
Requirements and Liquidity section). The Agreement and Plan of Merger
with Western Resources includes a provision that requires Western
Resources approval if annual Investments exceed a certain limit. Such
Investments do not include the cost of routine regulated utility
capital expenditures. If planned annual investments are anticipated
to be restricted because of this limit, KLT will review the allocation
of funds among its investment plans.
RESULTS OF OPERATIONS
Three-month three months ended June 30, 1997, compared
period: with three months ended June 30, 1996
Six-month six months ended June 30, 1997, compared with
period: six months ended June 30, 1996
Twelve-month twelve months ended June 30, 1997, compared
period: with twelve months ended June 30, 1996
EARNINGS OVERVIEW
Earnings Per Share (EPS)
For the Periods Ended June
30
1997 1996 Decrease
Three months ended $0.37 $0.43 $(0.06)
Six months ended $0.11 $0.81 $(0.70)
Twelve months ended $0.99 $2.09 $(1.10)
EPS for the three-month period decreased mainly due to cool
weather, plant outages and Missouri rate reductions during the
quarter. The estimated impact of the Missouri rate reduction was
$0.03 per share. A decline in bulk power sales and increases in
purchased power and depreciation expense also negatively affected EPS
for the period. Partially offsetting these decreases is an increase
in subsidiary income for the three-month period. In addition, EPS for
the three-months ended 1996 was reduced by $0.05 for merger costs.
KCPL's pursuit of its strategic options resulted in the September
1996 termination of a merger agreement with UtiliCorp United Inc.
(UtiliCorp) and the February 1997 announcement of our agreement to
combine with Western Resources. These actions triggered KCPL's
payment of $53 million to UtiliCorp under provisions of that
agreement, lowering EPS for the six-month period by $0.52. Continued
implementation of rate reductions approved by the MPSC in July 1996
also lowered EPS for the six-month period by an estimated $0.14.
The decrease in EPS for the twelve-month period reflects the
payment to UtiliCorp ($0.52), the estimated twelve-month impact of the
Missouri rate reduction ($0.17), and merger costs expensed in the
third quarter of 1996 ($0.26). Mild summer temperatures and an
increase in depreciation expense also had a negative effect on EPS for
the twelve-month period. Factors contributing positively to EPS for
the twelve-month period included continued load growth and an increase
in bulk power sales.
MEGAWATT-HOUR (MWH) SALES AND OPERATING REVENUES
Sales and revenue data:
(revenue change in millions)
Periods ended June 30, 1997 versus June 30, 1996
Three Months Six Months Twelve Months
Mwh Revenues Mwh Revenues Mwh Revenues
Increase (decrease)
Retail Sales:
Residential (6)% $(4) (3)% $(7) (6)% $(21)
Commercial 1 % (2) 1 % (10) 1 % (13)
Industrial (13)% (1) (7)% (4) - % (3)
Other (1)% - (1)% - (2)% -
Total Retail (4)% (7) (2)% (21) (1)% (37)
Sales for Resale:
Bulk Power Sales (21)% (4) (2)% (2) 8 % 6
Other 21 % - 26 % - 35 % 1
Total (11) (23) (30)
Other revenues - - (3)
Total Operating Revenues $(11) $(23) $(33)
During 1996 the MPSC approved a new stipulation and agreement
authorizing a $20 million revenue reduction in two phases, and an
increase in depreciation and amortization expense by $9 million per
year. In July 1996 we implemented phase one of the revenue reduction
designed to reduce revenues from commercial and industrial customers
by an estimated $9 million per year. This decrease is achieved with
an increase in summer revenues offset by a larger decrease in winter
revenues. This design more closely follows our increased costs of
generating electricity in the summer. The second phase of this
stipulation, implemented January 1, 1997, further reduces Missouri
residential, commercial and industrial revenues by an estimated $11
million per year. The effect of the stipulation lowered revenues for
the three-month period by about $3 million, the six-month period by
about $14 million and the twelve-month period by about $17 million.
In June 1997 the Kansas Corporation Commission formally opened a
case for the purpose of reviewing KCPL's Kansas retail revenue
requirement. We expect to file direct testimony and exhibits in the
case in August 1997.
The summer rate increases discussed above, combined with
seasonally higher mwh sales in June 1997 versus December 1996,
resulted in a higher customer accounts receivable balance at June 30,
1997, compared with December 31, 1996.
Milder weather, the effect of the rate reductions and reduced
sales to a major industrial customer because of a strike by its
employees resulted in a decline in retail revenues for all periods.
Continued load growth partially offset decreases in mwh sales.
KCPL has long-term sales contracts with certain major industrial
customers. These contracts are tailored to meet customers' needs in
exchange for their long-term commitment to purchase energy. Long-term
contracts are in place for a large portion of KCPL's industrial sales
and more contracts are under negotiation.
Bulk power sales vary with system requirements, generating unit
and purchased power availability, fuel costs and the requirements of
other electric systems. Outages at the LaCygne I and II generating
units in the second quarter of 1997 contributed to lower bulk power
sales in the current three- and six-month periods (see Fuel and
Purchased Power section). Both units at LaCygne were in service by
early July 1997. Wolf Creek's spring 1996 refueling outage (see Wolf
Creek section) contributed to lower bulk power sales in the prior
twelve-month period. Lower bulk power sales in June 1997 compared to
December 1996, combined with the conversion of a Note receivable to an
investment (see Capital Requirements and Liquidity section),
contributed to the lower Other receivables balance at June 30, 1997,
compared with December 31, 1996.
Total revenue per mwh sold varies with changes in rate tariffs,
the mix of mwh sales among customer classifications and the effect of
declining price per mwh as usage increases. An automatic fuel
adjustment provision is included in only sales for resale tariffs,
which apply to less than 1% of revenues.
Future mwh sales and revenues per mwh will also be affected by
national and local economies, weather and customer conservation
efforts. Competition, including alternative sources of energy such as
natural gas, cogeneration, IPPs and other electric utilities, may also
affect future sales and revenue.
FUEL AND PURCHASED POWER
Combined fuel and purchased power expenses for the three-month
period decreased only 3% while total mwh sales (total of retail and
sales for resale) decreased 8%. Also combined fuel and purchased
power expenses for the six-month periods were approximately equal
while total mwh sales decreased 2%. The differences are due mainly to
additional replacement power expense incurred during the two periods
due to LaCygne generating units outages.
Combined fuel and purchased power expenses for the twelve-month
period increased 2% while total mwh sales increased only 1%. The
additional increase in expense is due mainly to a $4 million increase
in capacity purchases and the replacement power expense incurred
during the LaCygne generating units outages. Partially offsetting
this, the prior twelve-month period includes the additional costs
incurred for Wolf Creek's 1996 refueling outage and a July 1995 forced
generating station outage. During July 1995 a fire forced an outage
at LaCygne I, a low-cost, coal-fired generating unit. We replaced the
power by increasing the usage of higher-cost, coal-fired units and
purchasing power on the wholesale market. Damage to the unit was
covered by insurance, but uninsured, incremental fuel and purchased
power costs were about $4 million.
The MMBTU price of nuclear fuel remains substantially less than
the MMBTU price of coal, despite increasing 18% for the twelve-month
period. Nuclear fuel costs averaged 60% of the price of coal during
the current twelve months compared with 50% during the prior twelve-
month period. We expect this relationship and the price of nuclear
fuel to remain fairly constant through the year 2001. For the current
twelve-month period, coal represented about 70% of generation and
nuclear fuel about 30%. In the prior twelve-month period, coal
represented about 75% of generation and nuclear fuel about 25%. The
increase in nuclear fuel as a percentage of total generation is due
mainly to outages during 1997 at LaCygne I and II, coal-fired
generating units, and the refueling outage at Wolf Creek in the prior
period.
The MMBTU price of coal decreased 2% for the twelve month period.
Our coal procurement strategies continue to provide coal costs well
below the regional average. We expect coal costs to remain fairly
consistent with current levels through 2001.
OTHER OPERATION AND MAINTENANCE EXPENSES
Combined other operation and maintenance expenses for the twelve-
month period increased due largely to increases in transmission,
distribution and customer accounts expenses.
We continue to emphasize new technologies, improved work
methodologies and cost control. We are continuously improving our
work processes to provide increased efficiencies and improved
operations. Through the use of cellular technology, a majority of
customer meters are read automatically.
DEPRECIATION AND AMORTIZATION
The increase in depreciation expense for all periods reflects the
implementation of the Missouri stipulation and agreement discussed in
the revenue section as well as normal increases in depreciation from
capital additions. The Missouri stipulation and agreement, effective
July 1, 1996, authorized a $9 million annual increase in depreciation
expense at about the same time the Missouri portion of Deferred Wolf
Creek costs became fully amortized in December 1996. This
amortization totaled about $9 million per year.
The Kansas portion of Deferred Wolf Creek costs became fully
amortized in the second quarter of 1997. Amortization of the Kansas
portion of this asset totaled about $3 million per year.
INCOME TAXES
The decrease in operating income taxes for the three-and six-
month periods reflects lower taxable operating income. The decrease
for the twelve-month period reflects lower taxable operating income,
adjustments necessary to reflect the filing of the 1995 tax returns
and the settlement with the Internal Revenue Service regarding tax
issues included in the 1985 through 1990 tax returns.
General taxes decreased for all periods reflecting changes in
Kansas tax law which reduced the mill levy rates.
OTHER INCOME
Miscellaneous Income
Miscellaneous income for the prior twelve-month period included
an adjustment to reduce a 1995 gain from the sale of steel
railcars by $3 million. The adjustment was based on a re-
calculation of the cars' net cost. Miscellaneous income for all
current periods includes increased revenues from non-utility and
subsidiary operations. Dividends on the investment in a fossil-
fuel generator in Argentina (see Capital Requirements and
Liquidity section) and revenues from a subsidiary in which KLT
obtained a controlling interest during 1997 contributed to the
increase in miscellaneous income from subsidiary operations.
Miscellaneous Deductions
Miscellaneous deductions for the six- and twelve-month periods
increased due to a $53 million payment to UtiliCorp in February
1997. The September 1996 termination of the UtiliCorp merger
agreement and the February 1997 announcement of our agreement to
combine with Western Resources, triggered the payment to
UtiliCorp under provisions of the UtiliCorp merger agreement.
The twelve-month period also reflects $26 million in merger
related costs incurred in the third quarter of 1996; these costs
consist of $13 million in previously deferred merger costs
expensed as a result of terminating the merger agreement with
UtiliCorp, a $5 million termination fee paid upon termination,
and $8 million in costs to defend against Western Resources'
unsolicited exchange offer. Miscellaneous deductions for all
prior periods reflect $5 million incurred to defend against
Western Resources' unsolicited exchange offer.
All periods reflect increased non-utility expenses and subsidiary
operating and investing activities. Subsidiary expenses included
in Miscellaneous deductions increased by $9 million for the six-
month period and $14 million for the twelve-month period. The
primary subsidiary expenses that increased are general office
expense, administrative and general labor and benefits and
outside consulting services. Development of independent power
producers, increased gas operations and inclusion of three small
companies in which KLT obtained controlling interests during 1997
are the primary activities that contributed to the increased
expenses.
Income Taxes
Income tax reductions for all periods increased primarily due to
the increases in miscellaneous deductions discussed above.
Additionally, during the first six months of 1997 we accrued tax
credits of $12 million, or one-half of the total expected 1997
credits, related to affordable housing partnership investments
and oil and gas investments. This is an increase of $6 million
compared with the tax credits accrued during the first half of
1996. Tax credits from the investments in affordable housing
more than offset the increase in interest expense incurred from
these investments. Non-taxable cash surrender value of corporate-
owned life insurance contracts also affected the relationship
between miscellaneous deductions and income taxes.
INTEREST CHARGES
The increase in long-term interest expense for all periods
reflects higher average levels of long-term debt outstanding. The
higher levels of debt resulted mainly from additional financing for
new investments in unregulated ventures, funding of other corporate
capital requirements and financing by KLT to support expanding
subsidiary operations.
We use interest rate swap and cap agreements to limit the
interest expense on a portion of KCPL's variable-rate long-term debt.
We do not use derivative financial instruments for trading or other
speculative purposes. Although these agreements are an integral part
of our interest rate management, their incremental effect on interest
expense and cash flows is not significant.
WOLF CREEK
Wolf Creek is one of KCPL's principal generating units
representing about 17% of accredited generating capacity. The plant's
operating performance has remained strong, contributing about 27% of
annual mwh generation while operating at an average capacity of 88%
over the last three years. It has the lowest fuel cost per MMBTU of
any of KCPL's generating units.
Wolf Creek's eighth scheduled refueling and maintenance outage
began in early February 1996 and was completed in April 1996 (64
days). The incremental operating, maintenance and replacement power
costs are accrued evenly over the unit's operating cycle, normally 18
months. As actual outage expenses are incurred, the refueling
liability and related deferred tax asset are reduced. The eighth
outage started one month early when the plant was shut down after
water flow from the cooling lake was restricted by ice buildup on an
intake screen. This extended the length of the outage and was the
primary reason for the increase in Wolf Creek related replacement
power and maintenance expenses in 1996. Wolf Creek's ninth refueling
and maintenance outage is scheduled for the fall of 1997.
Currently, no major equipment replacements are expected, but an
extended shut-down of Wolf Creek could have a substantial adverse
effect on KCPL's business, financial condition and results of
operations. Higher replacement power and other costs would be
incurred as a result. Although not expected, an unscheduled plant
shut-down could be caused by actions of the Nuclear Regulatory
Commission reacting to safety concerns at the plant or other similar
nuclear units. If a long-term shut-down occurred, the state
regulatory commissions could consider reducing rates by excluding the
Wolf Creek investment from rate base.
Ownership and operation of a nuclear generating unit exposes KCPL
to risks regarding the cost of decommissioning the unit at the end of
its life and to potential retrospective assessments and property
losses in excess of insurance coverage.
CAPITAL REQUIREMENTS AND LIQUIDITY
See Note 3 to the Consolidated Financial Statements regarding
$150 million in financing obtained by KCPL in April 1997. Other
liquid resources of KCPL at June 30, 1997, included cash flows from
operations, $300 million of registered but unissued unsecured medium-
term notes and $355 million of unused bank lines of credit. The
unused lines consisted of KCPL's short-term bank lines of credit of
$300 million and KLT's long-term revolving line of credit of $55
million. Cash and cash equivalents increased by $19 million from
December 1996 to June 1997 primarily due to the unused portion of the
$150 million in financing currently held in temporary investments.
KCPL continued to generate positive cash flows from operating
activities despite the significant decreases in net income for all
periods. Cash flow variances from changes in working capital items
vary with normal business cycles and operations including the timing
of receipts and payments. The timing of the Wolf Creek outage affects
the refueling outage accrual, deferred income taxes and amortization
of nuclear fuel.
The decrease in accrued taxes from December 31, 1996, to June 30,
1997, mainly reflects the decrease in taxable income during the first
six months of 1997. Accelerated depreciation lowers tax payments in
the earlier years of an asset's life while increasing deferred tax
liabilities; this relationship reverses in the later years of an
asset's life. Our last significant generating plant addition was the
completion of Wolf Creek in 1985. Accelerated depreciation on Wolf
Creek ended in 1995.
The $8.9 million incurred to repair damages from an October 1996
snow storm lowered cash flows from operating activities for the twelve-
month period. Amortization of these costs over five years began in
1997.
Subsidiary goodwill resulting from KLT investments, deferred
merger costs and unamortized debt expense all contributed to the
increase in Other deferred charges on the Consolidated Balance Sheet
from December 31, 1996, to June 30, 1997. Other deferred credits
increased due to increases in long-term pension and Wolf Creek
decommissioning liabilities. Also, subsidiary minority interests
included in Other deferred credits increased as KLT obtained
controlling interests in new companies in 1997.
Cash used in investing activities varies with the timing of
utility capital expenditures and KLT's purchases of investments and
nonutility properties. KLT closed several investments during the
first six months of 1997, increasing Investments and Nonutility
Property on the Consolidated Balance Sheet by approximately $88
million. These include a 12% ownership interest in the largest fossil-
fuel generator in Argentina and an ownership interest in Digital
Teleport, Inc. (DTI). DTI is constructing a state of the art, fiber
optic network throughout the region in anticipation of increased local
and long distance telephone competition. As part of the DTI
transaction, KLT converted a $9 million note receivable to the
investment in DTI.
Construction work in progress increased by $31 million from
December 1996 to June 1997 due to normal seasonal fluctuations in the
construction schedule, continued construction on major production
projects, and system software upgrades. Nuclear fuel, net of
amortization, increased from December 1996 to June 1997 primarily due
to incurring costs for fabrication and enrichment of fuel assemblies
for the fall 1997 reload.
Cash provided by financing activities increased for the six- and
twelve-month periods due to additional long-term borrowings. Long-
term debt, including current maturities, increased by $28 million from
December 1996 to June 1997 primarily due to additional borrowings by
KLT on its long-term revolving line of credit. As discussed in Note 3
to the Consolidated Financial Statements, KCPL Financing I, a wholly-
owned subsidiary of KCPL, issued $150,000,000 of preferred securities
in April 1997. The $53 million payment to UtiliCorp and KLT's
purchases of investments and nonutility properties were financed
mostly by this financing and additional long-term borrowings. Cash
used in Other financing activities increased for the six- and twelve-
month periods due primarily to an increase in unamortized debt expense
related to the $150,000,000 financing.
KCPL's common dividend payout ratio was 164% for the current
twelve-month period and 75% for the prior twelve-month period. The
increase in the payout ratio is due mainly to the significant merger
related expenses in the current twelve-month period.
Day-to-day operations, utility construction requirements and
dividends are expected to be met with internally-generated funds.
Uncertainties affecting our ability to meet these requirements with
internally-generated funds include the effect of inflation on
operating expenses, the level of mwh sales, regulatory actions,
compliance with future environmental regulations and the availability
of generating units. The funds needed for the retirement of
$413 million of maturing debt through the year 2001 will be provided
from operations, refinancings or short-term debt. We might incur
additional debt and/or issue additional equity to finance growth or
take advantage of new opportunities.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On July 18, 1997 in Kansas City Power & Light Company
vs. Western Resources, Inc. (previously discussed in the
Company's Form 10-K for the year ended December 31, 1996),
the United States District Court for the Western District of
Missouri issued an Order dismissing Intervenor Jack R.
Manson's derivative amended counterclaims alleging breach of
directors' fiduciary duties in connection with the proposed
merger with Utilicorp United Inc. In early August 1997,
Manson filed a motion to amend the Order requesting the
Court award his attorney's fees in this matter.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
Exhibit 27. Financial Data Schedule (for the six months
ended June 30, 1997).
Reports on Form 8-K
The Company filed on July 30, 1997, its second quarter
financial statements on a Report on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
KANSAS CITY POWER & LIGHT COMPANY
Dated: August 12, 1997 By: /s/Drue Jennings
(Drue Jennings)
(Chief Executive Officer)
Dated: August 12, 1997 By: /s/Neil Roadman
(Neil Roadman)
(Principal Accounting Officer)