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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) August 6,1998
WESTERN RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
KANSAS 1-3523 48-0290150
(State or Other Jurisdiction of (Commission (Employer
Incorporation or Organization) File Number) Identification No.)
818 KANSAS AVENUE, TOPEKA, KANSAS 66612
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number Including Area Code (785) 575-6300
WESTERN RESOURCES, INC.
Item 5. Other Events
Western Resources herein files the following:
Exhibit 99.1 - Kansas City Power & Light Company 6/30/98 Form 10-Q
Western Resources was not involved in the preparation of Exhibit 99.1
and therefore is not in a position to verify any such information or
statements.
AVAILABLE INFORMATION
The reader's attention is directed to additional filings of Western
Resources, Inc. (Western Resources) and Kansas City Power & Light Company
(KCPL).
Western Resources and KCPL are subject to the informational
requirements of the Exchange Act, and in accordance therewith file
reports, proxy statements and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy statements and
other information filed by Western Resources and KCPL with the Commission
may be inspected and copied at the public reference facilities maintained by
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at the public reference facilities in the
Commission's Regional Offices at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of information may be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Because Western Resources and
KCPL each file certain documents electronically with the Commission, reports,
proxy and information statements and other information regarding Western
Resources and KCPL may also be obtained at prescribed rates from the
Commission at the Commission's Web site, http//:www.sec.gov. The Western
Resources Common Stock and the KCPL Common Stock are listed and traded on the
NYSE. The KCPL Common Stock is also listed on the Chicago Stock Exchange.
Reports, proxy statements and other information filed by Western Resources and
KCPL with the Commission may be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005 and, concerning KCPL only, at the
offices of the CSE, 440 South LaSalle Street, Chicago, Illinois 60605.
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.
Western Resources, Inc.
Date August 6, 1998 By /s/ Jerry D. Courington
Jerry D. Courington,
Controller
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, 1998
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 4, 1998, was 61,878,777 shares.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
June 30 December 31
1998 1997
(thousands)
ASSETS
UTILITY PLANT, at original cost
Electric $3,527,065 $3,502,796
Less-accumulated depreciation 1,362,293 1,314,154
Net utility plant in service 2,164,772 2,188,642
Construction work in progress 110,685 93,264
Nuclear fuel, net of amortization of
$96,014 and $86,516 33,124 41,649
Total 2,308,581 2,323,555
REGULATORY ASSET - RECOVERABLE TAXES 123,000 123,000
INVESTMENTS AND NONUTILITY PROPERTY 380,458 345,126
CURRENT ASSETS
Cash and cash equivalents 29,958 74,098
Electric customer accounts receivable, net of
allowance for doubtful accounts
of $1,459 and $1,941 50,983 28,741
Other receivables 29,874 33,492
Fuel inventories, at average cost 17,747 13,824
Materials and supplies, at average cost 45,742 46,579
Deferred income taxes 2,669 648
Other 9,036 7,155
Total 186,009 204,537
DEFERRED CHARGES
Regulatory assets 27,517 30,017
Other deferred charges 31,361 31,798
Total 58,878 61,815
Total $3,056,926 $3,058,033
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see statements) $2,027,376 $2,051,489
CURRENT LIABILITIES
Notes payable to banks 3,450 1,243
Current maturities of long-term debt 46,292 74,180
Accounts payable 44,565 57,568
Accrued taxes 37,492 1,672
Accrued interest 19,040 22,360
Accrued payroll and vacations 26,644 23,409
Accrued refueling outage costs 6,854 1,664
Other 26,630 15,068
Total 210,967 197,164
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 647,620 638,679
Deferred investment tax credits 60,976 63,257
Other 109,987 107,444
Total 818,583 809,380
COMMITMENTS AND CONTINGENCIES
Total $3,056,926 $3,058,033
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
1
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
June 30 December 31
1998 1997
(thousands)
COMMON STOCK EQUITY
Common stock-150,000,000 shares authorized
without par value-61,908,726 shares issued,
stated value $449,697 $449,697
Retained earnings (see statements) 429,216 428,452
Unrealized gain on securities available for sale 2,990 1,935
Capital stock premium and expense (1,664)
(1,664)
Total 880,239 878,420
CUMULATIVE PREFERRED STOCK
$100 Par Value
3.80% - 100,000 shares issued 10,000 10,000
4.50% - 100,000 shares issued 10,000 10,000
4.20% - 70,000 shares issued 7,000 7,000
4.35% - 120,000 shares issued 12,000 12,000
No Par Value
4.55%* - 500,000 shares issued 50,000 50,000
$100 Par Value - Redeemable
4.00% 62 62
Total 89,062 89,062
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY KCPL
SUBORDINATED DEBENTURES 150,000 150,000
LONG-TERM DEBT (excluding current maturities)
General Mortgage Bonds
Medium-Term Notes due 1998-2008, 6.90% and
6.92% weighted-average rate 386,000 407,500
3.98%* Environmental Improvement Revenue
Refunding Bonds due 2012-23 158,768 158,768
Guaranty of Pollution Control Bonds
4.10%* due 2015-17 196,500 196,500
Subsidiary Obligations
Affordable Housing Notes due 2000-06, 8.34%
and 8.48% weighted-average rate 54,775 61,207
Bank Credit Agreement due 1999, 6.50% and
6.67% weighted-average rate 109,500 107,500
Other Long-Term Notes 2,532 2,532
Total 908,075 934,007
Total $2,027,376 $2,051,489
* Variable rate securities, weighted-average rate as of June 30, 1998
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
2
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30 1998 1997
(thousands)
ELECTRIC OPERATING REVENUES $239,502 $215,420
OPERATING EXPENSES
Operation
Fuel 35,888 29,291
Purchased power 14,813 17,676
Other 46,686 47,538
Maintenance 16,507 19,764
Depreciation 28,750 27,731
Income taxes 23,559 13,836
General taxes 22,033 22,026
Deferred Wolf Creek costs amortization 0 684
Total 188,236 178,546
OPERATING INCOME 51,266 36,874
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds
used during construction 890 733
Miscellaneous income 12,953 8,568
Miscellaneous deductions (19,109) (13,503)
Income taxes 10,617 9,862
Total 5,351 5,660
INCOME BEFORE INTEREST CHARGES 56,617 42,534
INTEREST CHARGES
Long-term debt 14,431 17,628
Short-term debt 76 331
Miscellaneous 4,142 1,035
Allowance for borrowed funds
used during construction (588) (589)
Total 18,061 18,405
Net Income 38,556 24,129
Preferred Stock
Dividend Requirements 967 959
Earnings Available for
Common Stock $37,589 $23,170
Average Number of Common
Shares Outstanding 61,873 61,897
Basic and Diluted earnings
per Common Share $0.60 $0.37
Cash Dividends per
Common Share $0.405 $0.405
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Year to Date June 30 1998 1997
(thousands)
ELECTRIC OPERATING REVENUES $ 435,137 $ 410,164
OPERATING EXPENSES
Operation
Fuel 71,585 64,213
Purchased power 23,044 28,922
Other 93,689 91,461
Maintenance 32,245 36,580
Depreciation 57,381 55,573
Income taxes 31,796 22,366
General taxes 44,201 44,718
Deferred Wolf Creek costs amortization 0 1,368
Total 353,941 345,201
OPERATING INCOME 81,196 64,963
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds
used during construction 1,823 993
Miscellaneous income 26,176 12,461
Miscellaneous deductions (40,009) (75,664)
Income taxes 20,364 40,095
Total 8,354 (22,115)
INCOME BEFORE INTEREST CHARGES 89,550 42,848
INTEREST CHARGES
Long-term debt 29,370 32,144
Short-term debt 167 1,170
Miscellaneous 8,332 1,910
Allowance for borrowed funds
used during construction (1,241) (1,373)
Total 36,628 33,851
Net Income 52,922 8,997
Preferred Stock
Dividend Requirements 1,957 1,914
Earnings Available for
Common Stock $50,965 $7,083
Average Number of Common
Shares Outstanding 61,873 61,896
Basic and Diluted earnings
per Common Share $0.82 $0.11
Cash Dividends per
Common Share $0.81 $0.81
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
4
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Twelve Months Ended June 30 1998 1997
(thousands)
ELECTRIC OPERATING REVENUES $920,916 $881,254
OPERATING EXPENSES
Operation
Fuel 141,881 137,849
Purchased power 53,369 54,852
Other 194,125 183,162
Maintenance 66,557 70,637
Depreciation 112,706 109,908
Income taxes 80,543 58,181
General taxes 92,780 94,154
Deferred Wolf Creek costs amortization 0 7,177
Total 741,961 715,920
OPERATING INCOME 178,955 165,334
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds
used during construction 3,237 2,244
Miscellaneous income 52,736 14,615
Miscellaneous deductions (82,787) (116,123)
Income taxes 43,303 62,031
Total 16,489 (37,233)
INCOME BEFORE INTEREST CHARGES 195,444 128,101
INTEREST CHARGES
Long-term debt 57,524 59,454
Short-term debt 379 1,807
Miscellaneous 19,265 4,258
Allowance for borrowed funds
used during construction (2,209) (2,389)
Total 74,959 63,130
Net Income 120,485 64,971
Preferred Stock
Dividend Requirements 3,832 3,812
Earnings Available for
Common Stock $116,653 $61,159
Average Number of Common
Shares Outstanding 61,884 61,899
Basic and Diluted earnings
per Common Share $1.89 $0.99
Cash Dividends per
Common Share $1.62 $1.62
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
5
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year to Date June 30 1998 1997
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 52,922 $ 8,997
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 57,381 55,573
Amortization of:
Nuclear fuel 9,499 10,000
Deferred Wolf Creek costs 0 1,368
Other 4,541 4,032
Deferred income taxes (net) 6,325 (2,451)
Investment tax credit amortization (2,281) (2,113)
Deferred merger costs 0 (5,597)
Kansas rate refund accrual 6,640 0
Allowance for equity funds used
during construction (1,823) (993)
Other operating activities (Note 2) 7,421 4,226
Net cash from operating activities 140,625 73,042
CASH FLOWS FROM INVESTING ACTIVITIES
Utility capital expenditures (48,409) (67,055)
Allowance for borrowed funds used
during construction (1,241) (1,373)
Purchases of investments (31,251) (89,702)
Purchases of nonutility property (6,867) (5,841)
Other investing activities 8,890 (8,751)
Net cash from investing activities (78,878) (172,722)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of mandatorily redeemable
Preferred Securities 0 150,000
Issuance of long-term debt 9,405 54,360
Repayment of long-term debt (63,225) (26,807)
Net change in short-term borrowings 2,207 1,400
Dividends paid (52,158) (52,041)
Other financing activities (2,116) (7,785)
Net cash from financing activities (105,887) 119,127
NET CHANGE IN CASH AND CASH
EQUIVALENTS (44,140) 19,447
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 74,098 23,571
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $29,958 $43,018
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $40,153 $36,780
Income taxes $0 $0
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
6
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended June 30 1998 1997
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 120,485 $ 64,971
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 112,706 109,908
Amortization of:
Nuclear fuel 16,335 20,405
Deferred Wolf Creek costs 0 7,177
Other 8,732 6,777
Deferred income taxes (net) 13,556 (18,482)
Investment tax credit amortization (4,018) (4,227)
Deferred storm costs 0 (8,885)
Deferred merger costs 5,597 6,121
Kansas rate refund accrual 6,640 0
Allowance for equity funds used
during construction (3,237) (2,244)
Other operating activities (Note 2) (729) 13,181
Net cash from operating activities 276,067 194,702
CASH FLOWS FROM INVESTING ACTIVITIES
Utility capital expenditures (106,088) (115,268)
Allowance for borrowed funds used
during construction (2,209) (2,389)
Purchases of investments (49,152) (113,898)
Purchases of nonutility property (16,759) (16,678)
Sale of streetlights 21,500 0
Other investing activities 8,739 (6,193)
Net cash from investing activities (143,969) (254,426)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of mandatorily redeemable
Preferred Securities 0 150,000
Issuance of long-term debt 21,337 169,360
Repayment of long-term debt (65,250) (56,807)
Net change in short-term borrowings 2,050 (67,600)
Dividends paid (104,159) (104,061)
Other financing activities 864 (9,576)
Net cash from financing activities (145,158) 81,316
NET CHANGE IN CASH AND CASH
EQUIVALENTS (13,060) 21,592
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 43,018 21,426
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $29,958 $43,018
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $74,645 $60,931
Income taxes $22,385 $30,756
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
7
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Year to Date Twelve Months Ended
June 30 June 30 June 30
1998 1997 1998 1997 1998 1997
(thousands)
Net income
$ 38,556 $ 24,129 $ 52,922 $ 8,997 $120,485 $ 64,971
Other comprehensive income (loss),
net of tax:
Net unrealized gain (loss) on
securities available for sale
(1,132) 3,404 1,055 (1,399) (2,095) (1,853)
Comprehensive Income
$ 37,424 $ 27,533 $ 53,977 $ 7,598 $118,390 $ 63,118
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Year to Date Twelve Months Ended
June 30 June 30 June 30
1998 1997 1998 1997 1998 1997
(thousands)
Beginning Balance
$416,678 $414,774 $428,452 $455,934 $412,890 $451,980
Net Income
38,556 24,129 52,922 8,997 120,485 64,971
455,234 438,903 481,374 464,931 533,375 516,951
Dividends Declared
Preferred stock - at required rates
960 946 2,041 1,906 3,908 3,788
Common stock
25,058 25,067 50,117 50,135 100,251 100,273
Ending Balance
$ 429,216 $ 412,890 $ 429,216 $ 412,890 $ 429,216 $ 412,890
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
8
KANSAS CITY POWER & LIGHT COMPANY
Certain Forward-looking Information
Statements made in this report which are not based on historical
facts are forward-looking and, accordingly, involve risks and
uncertainties that could cause actual results to differ materially
from those discussed. Any forward-looking statements are intended to
be as of the date on which such a statement is made. In connection
with the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, we are providing the following important factors
that could cause actual results to differ materially from provided
forward-looking information. These important factors include: (a) the
Western Resources Inc. (Western Resources) merger (see Note 1 to the
Consolidated Financial Statements); (b) future economic conditions in
the regional, national and international markets; (c) state, federal
and foreign regulation and possible additional reductions in regulated
electric rates; (d) weather conditions; (e) financial market
conditions, including, but not limited to changes in interest rates;
(f) inflation rates; (g) increased competition, including, but not
limited to, the deregulation of the United States electric utility
industry, and the entry of new competitors; (h) ability to carry out
marketing and sales plans; (i ) ability to achieve generation planning
goals and the occurrence of unplanned generation outages; (j) nuclear
operations; (k) ability to enter new markets successfully and
capitalize on growth opportunities in nonregulated businesses; (l)
unforeseen events that would prevent correction of internal or
external information systems for Year 2000 problems, and (m) adverse
changes in applicable laws, regulations or rules governing
environmental, tax or accounting matters. This list of factors may
not be all inclusive since it is not possible for us to predict all
possible factors.
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 1997 annual report on Form 10-K.
1. AMENDED AND RESTATED PLAN OF MERGER WITH WESTERN RESOURCES
Western Resources, Inc. (Western Resources) delivered an
unsolicited exchange offer and an amended offer to KCPL's Board of
Directors during the second quarter of 1996. After careful
consideration, KCPL's Board of Directors rejected both offers. 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 a February 7, 1997 agreement.
In December 1997 KCPL canceled its previously scheduled special
meeting of shareholders to vote on the transaction because Western
Resources advised KCPL that its investment bankers, Salomon Smith
Barney, had indicated that it was unlikely that Salomon would be in a
position to issue a fairness opinion for the merger transaction on the
basis of the February 7, 1997 agreement. During 1997 KCPL incurred and
deferred $7 million of merger-related costs which were expensed in
December 1997.
On March 18, 1998, KCPL and Western Resources entered into an
Amended and Restated Agreement and Plan of Merger (Amended Agreement).
This Amended Agreement provides for the combination of the regulated
electric utilities of KCPL and Western Resources into Westar Energy, a
new company, using purchase accounting. Westar Energy will be owned
approximately 80.1% by Western Resources and approximately 19.9% by
KCPL shareholders. At closing, KCPL shareholders will receive for
every share of KCPL Common Stock one share of Westar Energy
9
Common Stock and a fraction of a share of Western Resources Common Stock
worth not less than $21.50 and not more than $26.50 pursuant to a
collar adjustment mechanism. The estimated trading value per share of
Westar Energy Common Stock to be issued to KCPL shareholders in
connection with the Amended Agreement is estimated to be in the range
of $10 to $11 per share based on current market conditions. Since
Westar Energy will be a newly formed entity with no trading history,
there can be no assurance that Westar Energy will trade at such
levels.
On July 30, 1998, KCPL's and Western Resources' shareholders
approved the Amended Agreement at special meetings of shareholders.
The transaction is subject to several closing conditions, including
approval by a number of regulatory and governmental agencies and
verification that no sales or use tax is payable in connection with
the proposed transactions. If the merger has not been closed by
December 31, 1999, either party may terminate the Amended Agreement as
long as they did not contribute to the delay. If Western Resources
Index Price is less than or equal to $29.78 five trading days prior to
closing, either party can terminate this Amended Agreement.
As part of the foregoing conditions, the obligation of Western
Resources to effect the merger is subject to the following:
(A) That the final orders are obtained from the various federal
and state regulators on terms and conditions which would not have a
material adverse effect on the benefits anticipated by Western
Resources in the merger. In many utility mergers state regulators
require a portion of savings from merger synergies to be allocated to
customers as a condition for their approval of a transaction. Western
Resources believes, and has discussed its position with KCPL, that in
light of the rate reductions associated with the merger and already
allocated to customers, any efforts by the relevant state regulators
to seek further rate reductions would give Western Resources the right
to trigger such condition. Western Resources and KCPL have each
already implemented rate reductions in Kansas and Missouri. KCPL has
(i) already implemented rate reductions to share anticipated merger
synergies with customers in Missouri from its previously planned
merger with UtiliCorp and (ii) entered into a stipulation in Kansas
which states that the Kansas Commission staff and the Citizen's
Utility Ratepayers Board will not request rate reductions or rate
refunds from Western Resources, KCPL or their affiliates sooner than
one year after consummation of the merger. Moreover, Western
Resources believes that the rate reductions it has begun to implement
in Kansas take into account synergies that are related to the merger.
However, there is no assurance that the state regulators will not
require Westar Energy to share additional merger-related synergies
with customers or require rate reductions for other reasons in
Missouri or Kansas as a condition to their approval of the merger or
that Western Resources will waive this condition and consummate the
merger if state regulators require additional rate reductions.
(B) That Western Resources will be reasonably satisfied that it
will be exempt from all of the provisions of the Public Utility
Holding Company Act of 1935 (1935 Act) other than Section 9(a)(2)
thereof. Western Resources seeks an exemption under section 3(a)(1)
of the 1935 Act pursuant to Rule 2. To qualify for an exemption under
Section 3(a)(1) of the 1935 Act, Westar Energy must be predominantly
intrastate in character and carry on its utility business
substantially in the state in which both Westar Energy and Western
Resources are incorporated, Kansas. As a result of the merger, Westar
Energy will derive utility revenues from outside of the state of
Kansas in an amount at the high-end of the range of out-of-state
utility revenues of utility subsidiaries of holding companies that
currently are exempt from the 1935 Act pursuant to Section 3(a)(1) and
Rule 2. In the event that Western Resources determines prior to the
consummation of the merger that an exemption under Section 3(a)(1) of
the 1935 Act is not available, Western Resources must either (i) waive
this condition and become a registered holding company under the 1935
Act or (ii) determine to assert that this condition has not been
satisfied and choose not to consummate the merger. Although Western
Resources anticipates that after the merger it will qualify for an
exemption under Section 3(a)(1) of the 1935 Act pursuant to Rule 2,
there is no assurance that the SEC will not
10
challenge Western Resources' stated intention to file for an exemption
pursuant to Rule 2 or that this condition will be satisfied.
The Amended Agreement allows the KCPL Board discretion to make
changes (including increases) in the KCPL Common Stock dividend
consistent with past practice exercising good business judgment. On
August 4, 1998, KCPL's Board approved an increase to the common stock
dividend raising it to an annualized dividend of $1.66 per share up
from $1.62 per share. The Amended Agreement also requires KCPL to
redeem all outstanding shares of cumulative preferred stock prior to
consummation of the proposed transactions. If the Amended Agreement
is terminated under certain other circumstances and KCPL, within two
and one-half years following termination, agrees to consummate a
business combination with a third party that made a proposal to
combine prior to termination, a payment of $50 million will be due
Western Resources. Under certain circumstances, if KCPL determines
not to consummate its merger into Westar Energy due to its inability
to receive a favorable tax opinion from its legal counsel, it must pay
Western Resources $5 million. Western Resources will pay KCPL $5
million to $35 million if the Amended Agreement is terminated and all
closing conditions are satisfied other than conditions relating to
Western Resources receiving a favorable tax opinion from its legal
counsel, favorable statutory approvals or an exemption from the Public
Utility Holding Company Act of 1935.
2. CONSOLIDATED STATEMENTS OF CASH FLOWS - OTHER OPERATING
ACTIVITIES
Year to Date Twelve Months
Ended
1998 1997 1998 1997
Cash flows affected by changes (thousands)
in:
Receivables $(18,624) $2,309 $(19,960) $12,929
Fuel inventories (3,923) 235 1,095 (895)
Materials and supplies 837 202 1,390 (1,032)
Accounts payable (13,003) 3,082 (14,135) 6,100
Accrued taxes 35,820 (6,862) 25,911 (24,698)
Accrued interest (3,320) (2,434) 420 1,984
Wolf Creek refueling outage
accrual 5,190 4,476 (4,803) 9,384
Pension and postretirement
benefit obligations (687) 868 (3,800) (145)
Other 5,131 2,350 13,153 9,554
Total $7,421 $4,226 $(729) $13,181
3. ACCOUNTING CHANGES
Change in Accounting Estimate
In 1998 KCPL adopted the American Institute of Certified
Public Accountants Statement of Position (SOP) 98-1 -- Accounting
for the Costs of Computer Software Developed or Obtained For
Internal Use. KCPL was generally in conformance with this SOP
prior to adoption in regards to external direct costs and
interest costs incurred in the development of computer software
for internal use. This SOP also provides that once the
capitalization criteria of the SOP have been met, payroll and
payroll-related costs for employees who are directly associated
with and who devote time to the internal-use computer software
project should be capitalized.
Costs capitalized in accordance with SOP 98-1 will be
amortized on a straight-line basis over estimated service lives
of 5 to 10 years. The effect of adopting SOP 98-1 for the six-
months ended June 30, 1998, is an increase of net income of
approximately $1,500,000 ($0.02 per share).
11
Comprehensive Income
In 1998 KCPL adopted Financial Accounting Standards Board
Statement No. 130 -- Reporting Comprehensive Income which
establishes standards for reporting of comprehensive income and
its components.
4. 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 comprehensive income and
common stock equity.
KLT Inc. (KLT), a wholly-owned subsidiary of KCPL, invested
$5.1 million in CellNet Data Systems, Inc (CellNet). This
investment is held as securities available for sale. During the
second quarter of 1998, KLT sold 80,000 shares of CellNet
resulting in a realized gain of $729,000. Unrealized gains
applicable to the remaining investment of $4.8 million were $3.0
million, net of $1.7 million deferred income taxes, at June 30,
1998, increasing from $1.9 million, net of $1.1 million deferred
income taxes, at December 31, 1997.
5. CAPITALIZATION
KCPL Financing I (Trust), a wholly-owned subsidiary of Kansas
City Power & Light Company, has previously 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.
6. INTANGIBLE ASSETS
The application of purchase accounting for certain
investments has resulted in about $23 million in goodwill
recognition. These amounts are included in Other deferred
charges and Investments and Nonutility Property on the
consolidated balance sheets and are being amortized over 10 to 40
years.
7. SUBSEQUENT EVENTS
On July 6, 1998, KCPL's wholly-owned unregulated subsidiary,
KLT Inc., reached an agreement to sell 100 percent of the common
stock of KLT Power Inc. The transaction was completed on July
31, 1998, and generated a minimal after-tax gain. KLT Inc.
continues to hold property in China and will retain the right to
develop Iatan 2.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STATUS OF MERGER
See Note 1 to the Consolidated Financial Statements as to the
current status of the merger agreement with Western Resources Inc.
(Western Resources) including the Amended and Restated Agreement and
Plan of Merger (Amended Merger Agreement) dated March 18, 1998. 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.
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 core
utility operations, lowering prices and offering new services. In
particular, value-added services for large energy users can include
contracts for natural gas commodities.
Competition in the electric utility industry was accelerated with
the National Energy Policy Act of 1992. This Act gives 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. In Kansas, the retail wheeling task
force proposed a restructuring bill that would implement retail
competition on July 1, 2001. Some of the key points included in the
proposed bill are: 1) the Kansas Corporation Commission (KCC) will
determine the amount of under-utilized assets (stranded costs) each
utility is allowed to recover and 2) a unit charge per kwh will be
assessed to all customers for recovery of competitive transition costs
(these costs include stranded costs, other regulatory assets, nuclear
decommissioning, etc.). In Missouri, a legislative committee has been
formed to study the issue. The retail wheeling task force formed by
the Missouri Public Service Commission (MPSC) issued its report in May
1998. The report identifies issues and various options for the
legislature to address. No retail wheeling bill was passed in either
the Kansas or Missouri legislatures in 1998.
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 stranded costs
and place an unfair burden on the remaining customer base or
shareholders. Testimony filed in the merger case in Kansas for KCPL
indicated that stranded costs are approximately $1 billion. An
independent study prepared at the request of the KCC concluded that
there are no stranded costs. We cannot predict the extent that
stranded costs
13
will be recoverable in future rates. 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
21% of KCPL's retail mwh sales are to industrial customers which is
below the utility industry average. KCPL has a flexible rate
structure with industrial rates that are competitively priced with
other companies in the region. In addition, long-term contracts are
in place or under negotiation for a large portion of KCPL's industrial
sales. Although there currently is no direct competition for retail
electric service within KCPL's service territory, it does exist within
the bulk power market, between alternative fuel suppliers and among
third-party energy management companies. Third-party energy
management companies are seeking to initiate relationships with large
users in an attempt to enhance their chances to directly supply
electricity if retail wheeling is authorized.
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 $151 million at June
30, 1998, 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. On July 31, 1998, KLT sold 100% of the common
stock of KLT Power Inc., a wholly-owned subsidiary of KLT (See Note 8
to the Consolidated Financial Statements). Remaining ventures include
investments in domestic and China power production, energy services,
oil and gas development and production, telecommunications, telemetry
technology and affordable housing limited partnerships.
KCPL had a total equity investment in KLT of $119 million as of
June 30, 1998, and KLT's net income for the six-months ended June 30,
1998, totaled $6.9 million compared to $4.6 million for the six months
ended June 30, 1997. KLT's consolidated assets at June 30, 1998,
totaled $345 million.
On May 29, 1998, Home Service Solutions Inc., a wholly-owned
subsidiary of KCPL, entered into a stock purchase agreement to obtain
a 50% interest in R.S. Andrews Enterprises, Inc. (RSA), a consumer
services company in Atlanta, Georgia. RSA expects, through future
acquisitions, to offer these services in key U.S. markets.
The growth of KLT and the investment in RSA by Home Service
Solutions Inc. account for most of the increase in KCPL's consolidated
investments and nonutility property.
14
RESULTS OF OPERATIONS
Three-month period: three months ended June 30, 1998, compared
with three months ended June 30, 1997
Six-month period: six months ended June 30, 1998, compared with
six months ended June 30, 1997
Twelve-month period: twelve months ended June 30, 1998, compared
with twelve months ended June 30, 1997
EARNINGS OVERVIEW
Earnings Per Share (EPS)
For the Periods Ended June 30
Increase
Merger excluding
1998 1997 Increase Expenses Merger Expenses
Three months ended $0.60 $0.37 $0.23 $(0.01) $0.24
Six months ended $0.82 $0.11 $0.71 $ 0.42 $0.29
Twelve months ended $1.89 $0.99 $0.90 $ 0.61 $0.29
EPS for all periods excluding merger expenses increased primarily
due to increases in retail sales because of warmer than normal weather
and continued load growth. Additionally, EPS for the three- and six-
month periods increased due to increased bulk power sales.
EPS for the three-month period was reduced by $0.04 because of
the implementation of rate reductions approved by the KCC effective
January 1, 1998. Growth in subsidiary income increased EPS for the
six-month period by $0.04 and the twelve-month period by $0.10.
Partially offsetting these increases in EPS for the six- and twelve-
month periods are the effect of rate reductions approved by the KCC
which reduced EPS by $0.07, increased interest expense related to the
mandatorily redeemable preferred securities and increased depreciation
expense. EPS for the twelve-month period was also reduced by $0.04
because of rate reductions previously approved by the MPSC.
Merger expenses for the six-months ended June 30, 1998, were $6.2
million ($0.10 per share). During the six-months ended June 30, 1997,
KCPL paid $53 million ($0.52 per share) to UtiliCorp United Inc.
(UtiliCorp) for terminating the merger agreement with UtiliCorp and
announcing an agreement to combine with Western Resources. Merger
expenses for the twelve-months ended June 30, 1998, reduced EPS by
$0.17. For the twelve-months ended June 30, 1997, merger expenses
reduced EPS by $0.78 which includes $0.52 for the UtiliCorp payment
and $0.26 for other merger expenses.
15
MEGAWATT-HOUR (MWH) SALES AND OPERATING REVENUES
Sales and revenue data:
(revenue change in millions)
Periods ended June 30, 1998 versus June 30, 1997
Three Months Six Months Twelve Months
Mwh Revenues Mwh Revenues Mwh Revenues
Increase (decrease)
Retail Sales:
Residential 20 % $ 12 9 % $ 13 10 % $ 29
Commercial 10 % 8 7 % 10 7 % 19
Industrial 13 % 2 7 % 2 3 % 2
Other 23 % (1) 10 % (4) 6 % (6)
KS rate refund
accrual (4) (7) (7)
Total Retail 13 % 17 8 % 14 7 % 37
Sales for Resale:
Bulk Power Sales 32 % 7 21 % 10 (12 %) -
Other 20 % - 14 % - 14 % 1
Total 24 24 38
Other revenues - 1 2
Total Operating
Revenues $ 24 $ 25 $ 40
The KCC approved a settlement agreement, effective January, 1,
1998, authorizing a $14.2 million revenue reduction and an increase in
depreciation expense of $2.8 million. When the KCC approves a new
rate design, which is anticipated near year-end 1998, KCPL will refund
the portion of the $14.2 million that has accrued between January 1,
1998, and the implementation date of the new rate design. Recorded
revenues for the three-month period are reduced by about $4 million
and the six- and twelve-month periods are reduced by about $7 million
as a result of an accrual (recorded in Other in Current Liabilities on
the Consolidated Balance Sheet) for this rate refund.
During 1996 the MPSC approved a 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. The decrease in revenues for the twelve-month period as a
result of this stipulation and agreement was about $4 million.
Higher summer rates, which take effect in June, and seasonally
higher mwh sales in June 1998 versus December 1997 resulted in a
higher customer accounts receivable balance at June 30, 1998, compared
with December 31, 1997.
Warmer than normal weather and continued load growth resulted in
an increase in retail mwh sales for all periods. Load growth consists
of higher usage-per-customer as well as the addition of new customers.
In addition, retail mwh sales for all periods in the prior year
reflected reduced sales to a major industrial customer because of a
strike by its employees.
For all periods, Other retail revenues decreased while Other
retail mwh sales increased. These differences are due to the sale of
the public streetlight system to the City of Kansas City, Missouri in
August 1997. The rate per mwh paid by the city was reduced as a
result of the sale agreement, as the new rate is for electricity only.
The city has entered into a separate maintenance agreement with KCPL.
16
On July 20, 1998, KCPL set a record peak demand for the
consumption of energy of 3,136 megawatts which replaced the previous
record of 3,044 megawatts set in July 1997. This continues the higher
than normal megawatt demand on the system being experienced by KCPL
during the summer of 1998.
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 or under negotiation for a large portion of
KCPL's industrial sales.
Bulk power sales vary with system requirements, generating unit
and purchased power availability, fuel costs and the requirements of
other electric systems. For all periods, the price per mwh of bulk
power sales increased. Outages at the LaCygne 1 and 2 generating
units in the second quarter of 1997 contributed to lower bulk power
sales in the three- and six-months ended June 30, 1997.
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 only included in 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, co-generation, 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 increased 8% while total mwh sales (total of retail and sales
for resale) increased 17%. Also combined fuel and purchased power
expenses for the six-month period increased 2% while total mwh sales
increased 11%. The differences are due mainly to additional
replacement power expense incurred during the three- and six-months
ended June 30, 1997, due to LaCygne 1 and 2 generating units outages.
Additionally, the per unit cost of generation decreased during all
periods as a result of lower costs of coal and nuclear fuel. For
these same reasons, combined fuel and purchased power expenses for the
twelve-month period increased 1% while total mwh sales increased 3%.
Partially offsetting these factors, the twelve-month period includes
the additional replacement power costs incurred for Wolf Creek's fall
1997 refueling outage.
Nuclear fuel costs per MMBTU remain substantially less than the
MMBTU price of coal. Nuclear fuel costs per MMBTU decreased 4% for
the twelve-month period. Nuclear fuel costs per MMBTU averaged 61% of
the MMBTU price of coal for the current twelve-month period compared
with 60% during the prior twelve-month period. We expect this
relationship and the price of nuclear fuel to remain fairly constant
through the year 2001. During the current twelve-month period fossil
plants represented about 76% of generation and the nuclear plant about
24%. For the twelve-months ended June 30, 1997, fossil plants
represented about 70% of generation and the nuclear plant about 30%.
The twelve-months ended June 30, 1997, reflected a higher percentage
of total generation by the nuclear plant due mainly to outages during
the first six months of 1997 at LaCygne I and II, coal-fired
generating units. Additionally, the current twelve-month period
reflects the fall 1997 refueling and maintenance outage at Wolf Creek
which lasted for 58 days.
17
The MMBTU price of coal decreased 6% 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 three-
and six-month periods decreased due to decreased maintenance expenses.
Outages at the LaCygne 1 and 2 generating units resulted in additional
maintenance expenses in the second quarter of 1997. Combined other
operation and maintenance expenses for the twelve-month period
increased due largely to increases in other power supply expenses,
Wolf Creek non-fuel operations, customer accounts expenses and sales
expenses, partially offset by decreased maintenance 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
The increase in depreciation expense for all periods reflects the
implementation of the KCC settlement agreement and normal increases in
depreciation from capital additions. The KCC settlement agreement
authorized an annual increase in depreciation expense of $2.8 million.
TAXES
The increase in operating income taxes for all periods reflects
higher taxable operating income. Additionally, for the twelve-months
ended June 30, 1997, income taxes had been reduced to reflect
adjustments for 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.
Components of general taxes:
Three Months Year to Date Twelve Months
Ended Ended
June 30 June 30 June 30
1998 1997 1998 1997 1998 1997
(thousands)
Property $ 9,658 $10,710 $21,017 $22,469 $42,077 $44,590
Gross
receipts 9,837 8,980 18,450 17,939 41,359 40,913
Other 2,538 2,336 4,734 4,310 9,344 8,651
Total $ 22,033 $22,026 $44,201 $44,718 $92,780 $94,154
Property taxes decreased for all periods reflecting changes in
Kansas tax law which reduced the mill levy rates and because of
reductions in Missouri and Kansas property tax assessed valuations.
Gross receipts taxes increased for all periods reflecting higher
billed Missouri revenues.
OTHER INCOME AND (DEDUCTIONS)
Miscellaneous Income
Miscellaneous income for all periods includes increased revenues
from non-utility and subsidiary operations. Dividends on the
investment in a fossil-fuel generator in Argentina, revenues from
an energy services subsidiary in which KLT obtained a controlling
interest
18
during 1997 and increased oil and gas production
contributed to the increase in miscellaneous income from
subsidiary operations.
Miscellaneous Deductions
Miscellaneous deductions for all periods included increased non-
utility expenses and subsidiary operating costs. Increased gas
operations and the inclusion of three small companies in which
KLT obtained controlling interests during 1997 are the primary
activities that contributed to the increase in subsidiary
operating costs.
Miscellaneous deductions for the six- and twelve-month periods
decreased primarily due to the $53 million payment to UtiliCorp
in the prior periods. During the six-months ended June 30, 1998,
$6 million of merger expenses were incurred related to the
Amended Merger Agreement with Western Resources. The twelve-
months ended June 30, 1998, includes an additional $7 million of
merger expenses related to the original merger agreement with
Western Resources. In addition to the $53 million payment to
UtiliCorp, the twelve-months ended June 30, 1997, included $26
million in other merger costs. These costs consist of $13
million in previously deferred merger costs expensed as a result
of terminating the merger agreement with UtiliCorp and $13
million in costs to defend against Western Resources' unsolicited
exchange offer.
Income Taxes
Income taxes for all periods reflect the tax impact of the excess
of miscellaneous deductions over miscellaneous income.
Additionally, during the first six months of 1998 and 1997 we
accrued tax credits of $13 million and $12 million, respectively,
or one-half of the total expected annual credits, related to
affordable housing partnership investments and oil and gas
investments. Non-taxable increases in the cash surrender value
of corporate-owned life insurance contracts and certain non-
deductible expenses also affected the relationship between net
miscellaneous income and deductions and income taxes.
INTEREST CHARGES
The increase in interest charges for the six- and twelve-month
periods is primarily due to interest charges incurred on the $150
million of 8.3% preferred securities issued in April 1997.
We use interest rate swap and cap agreements to limit the
volatility in interest expense on a portion of KLT's variable-rate
long-term bank credit agreement and 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 16% of its accredited generating capacity. The
plant's operating performance has remained strong, contributing about
26% of the 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.
The incremental operating, maintenance and replacement power
costs for planned outages 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.
19
Wolf Creek's ninth refueling and maintenance outage, budgeted for
35 days, began in early October 1997 and was completed in December
1997 (58 days). The extended length of the ninth outage was caused by
several equipment problems. The extended length of the outage was the
primary reason for a $7 million increase in Wolf Creek related
replacement power and operating and maintenance expenses for the
twelve-month period. Wolf Creek's tenth refueling and maintenance
outage is scheduled for the spring of 1999 and is estimated to be a 40
day outage.
Currently, no major equipment replacements are expected. 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.
ENVIRONMENTAL MATTERS
KCPL's policy is to act in an environmentally responsible manner
and use the latest technology available to avoid and treat
contamination. We continually conduct environmental audits designed
to ensure compliance with governmental regulations and detect
contamination. However, these regulations are constantly evolving;
governmental bodies may impose additional or more rigid environmental
regulations that could require substantial changes to operations or
facilities.
The Clean Air Act Amendments of 1990 contain two programs
significantly affecting the utility industry. KCPL has spent about $5
million for the installation of continuous emission monitoring
equipment to satisfy the requirements under the acid rain provision.
The other utility-related program calls for a study of certain air
toxic substances which has now been completed. Based on the
interpretation of this study, regulation of these substances,
including mercury, could be required. We cannot predict the
likelihood of any such regulations or compliance costs.
In July 1997 the United States Environmental Protection Agency
(EPA) published new air quality standards for ozone and particulate
matter. Additional regulations implementing these new standards are
expected to be finalized in 1998. Without the implementation
regulations, the real impact of the standards on KCPL cannot be
determined. However, the impact on KCPL and other utilities who use
fossil fuels could be substantial. Under the new fine particulate
regulations the EPA is in the process of implementing a three-year
study of fine particulate emissions. Until this testing and review
period has been completed, KCPL cannot determine additional compliance
costs, if any, associated with the new particulate regulations.
In 1997 the EPA also issued new proposed regulations on reducing
Nitrogen Oxide (NOx) emissions. Under the new regulations 22 states,
including Missouri but not Kansas, would be required to develop plans
to reduce NOx emissions. The new limits would go into effect in
either 2002 or 2004. The cost of equipment to reduce NOx emissions
could be substantial, however, until regulations are finalized the
associated costs to KCPL cannot be determined.
20
At a December 1997 meeting in Kyoto, Japan, the Clinton
Administration supported changes to the International Global Climate
Change treaty which would require a seven percent reduction in United
States Carbon Dioxide (CO2) emissions below 1990 levels. President
Clinton has stated that this change in the treaty will not be
submitted to the U.S. Senate at this time where ratification is
uncertain. If future national restrictions on electric utility CO2
emissions are eventually required, the financial impact upon KCPL
could be substantial.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs using two
digits instead of four digits to define the applicable year. Computer
programs with date-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations.
Through ongoing assessment of the Year 2000 Issue, we have
determined that it is necessary to modify or replace some of KCPL's
internal software so that its computer systems will properly utilize
dates beyond December 31, 1999. We believe that with the planned
modifications and conversions of KCPL's software, Year 2000 problems
will be minimized. We are utilizing both internal and external
resources, as necessary, to address the Year 2000 Issue. We plan to
complete the Year 2000 project prior to the end of 1999. Testing
processes have begun and will continue through 1999.
For the past several years, we have made considerable capital
investments to replace major information systems with new and
innovative technologies that place us in a stronger competitive
position for the future. As a result, the cost of the Year 2000
project has been lessened. The costs of modifications and
replacements to incidental systems identified in the Year 2000 project
are being expensed as incurred and are not expected to be material to
KCPL's results of operations. However, there is no guarantee that
current cost estimates of the Year 2000 project will not be exceeded.
Specific factors that might cause costs to exceed estimates include,
but are not limited to, the availability and cost of appropriately
trained personnel, the ability to locate and correct all relevant
computer codes, the ability to locate and replace non-Year 2000
compliant embedded microprocessors and similar uncertainties.
We have initiated formal communications with all of KCPL's large
suppliers and customers to evaluate KCPL's vulnerability to those
third parties' failure to remediate their own Year 2000 Issue.
However, there is no guarantee that third party systems on which
KCPL's systems rely will be timely converted, or that a failure to
convert, or a conversion that is incompatible with KCPL's systems,
would not have a material adverse effect on KCPL.
CAPITAL REQUIREMENTS AND LIQUIDITY
As of June 30, 1998, the liquid resources of KCPL included cash
flows from operations; $300 million of registered but unissued,
unsecured medium-term notes; $150 million of registered but unissued,
preferred securities and $312 million of unused bank lines of credit.
The unused lines consisted of KCPL's short-term bank lines of credit
of $271 million and KLT's long-term revolving line of credit of $41
million. Cash and cash equivalents decreased by $44 million from
December 31, 1997 to June 30, 1998, primarily due to redeeming $51
million of maturing medium-term notes, subsidiary repayment of long-
term debt and dividend payments. As a result of the shareholders
approving the Amended Merger Agreement with Western Resources, KCPL,
pursuant to an engagement letter with its financial advisors, will pay
its financial advisors $5 million. This payment will be expensed and
will reduce third quarter earnings per share by $0.08.
21
KCPL continues to generate positive cash flows from operating
activities although individual components of working capital items
will vary with normal business cycles and operations including the
timing of receipts and payments. Cash from operating activities
increased for the six- and twelve-month periods primarily due to
increased net income during the current periods. Additionally, the
timing of the Wolf Creek outage affects the refueling outage accrual,
deferred income taxes and amortization of nuclear fuel.
The increase in accrued taxes from December 31, 1997, to June 30,
1998, mainly reflects the increase in taxable income during the first
six months of 1998 and the timing of income tax and property tax
payments.
Coal inventory levels at the end of July 1998 are at
approximately 100% of targeted levels compared to 75% of targeted
levels at December 31, 1997.
Cash used for investing activities varies with the timing of
utility capital expenditures and purchases of investments and
nonutility properties. KLT closed several large investments during
the first three months of 1997. Additionally, the current twelve-
month period reflects $21.5 million of proceeds from the sale of
streetlights to the City of Kansas City, Missouri at a minimal gain.
The majority of cash from financing activities for the twelve-
months ended June 30, 1997, was used to repay short-term debt, pay
merger expenses and finance additional purchases of investments and
nonutility properties by KLT. Financings consisted of KCPL Financing
1, a wholly-owned subsidiary of KCPL, issuance of $150 million of
preferred securities and borrowings by KLT on its long-term bank
credit agreement.
KCPL's common dividend payout ratio was 86% for the current
twelve-month period and 164% for the twelve-months ended June 30,
1997. These payout ratios are higher compared to 75% for the twelve-
months ended June 30, 1996, due mainly to the reduction in earnings in
the two later periods because of merger-related expenses.
We expect to meet day-to-day operations, utility construction
requirements and dividends with internally-generated funds.
Uncertainties affecting KCPL's 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
$404 million of maturing debt through the year 2002 will be provided
from operations, refinancings or short-term debt. KCPL might issue
additional debt and/or additional equity to finance growth or take
advantage of new opportunities.
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PART II - OTHER INFORMATION
Item 5. Other Information
On June 12, 1998, Norman Ross, an employee of Kansas
City Power & Light Company (KCPL), filed a suit against the
Company in the United States District Court for the Western
District of Missouri, Western Division (District Court),
alleging race discrimination and seeking to certify a class
action on behalf of all existing employees and those
applying for employment from June 10, 1993 to the present.
KCPL believes that it can successfully defend the
certification of any class action, and thus believes that
this action will not be material to its financial condition
or results of operations.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
Exhibit 27 Financial Data Schedule (for the six months
ended June 30, 1998).
Reports on Form 8-K
No reports on Form 8-K were filed with the Securities
and Exchange Commission for the quarter ended June 30, 1998.
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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 4, 1998 By: /s/Drue Jennings
(Drue Jennings)
(Chief Executive Officer)
Dated: August 4, 1998 By: /s/Neil Roadman
(Neil Roadman)
(Principal Accounting Officer)
24