SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 1-3523
WESTERN RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
KANSAS 48-0290150
(State or Other Jurisdiction of (Employer
Incorporation or Organization) 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
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 6, 1998
Common Stock, $5.00 par value 65,859,786
WESTERN RESOURCES, INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4 - 6
Consolidated Statements of Comprehensive Income 7
Consolidated Statements of Cash Flows 8 - 9
Consolidated Statements of Cumulative Preferred
and Preference Stock 10
Consolidated Statements of Shareowners' Equity 11
Notes to Consolidated Financial Statements 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 32
Part II. Other Information
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 35
WESTERN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 15,688 $ 76,608
Accounts receivable (net) . . . . . . . . . . . . . . . . 316,208 325,043
Inventories and supplies (net). . . . . . . . . . . . . . 89,724 86,398
Marketable securities . . . . . . . . . . . . . . . . . . 306,139 75,258
Prepaid expenses and other. . . . . . . . . . . . . . . . 42,538 25,483
Total Current Assets. . . . . . . . . . . . . . . . . . 770,297 588,790
PROPERTY, PLANT AND EQUIPMENT, NET. . . . . . . . . . . . . 3,766,718 3,786,528
OTHER ASSETS:
Investment in ONEOK . . . . . . . . . . . . . . . . . . . 613,907 596,206
Subscriber accounts . . . . . . . . . . . . . . . . . . . 954,670 549,152
Goodwill (net). . . . . . . . . . . . . . . . . . . . . . 1,243,344 854,163
Regulatory assets . . . . . . . . . . . . . . . . . . . . 381,729 380,421
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 292,691 221,700
Total Other Assets. . . . . . . . . . . . . . . . . . . 3,486,341 2,601,642
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $8,023,356 $6,976,960
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt. . . . . . . . . . . $ 44,357 $ 21,217
Short-term debt . . . . . . . . . . . . . . . . . . . . . 575,382 236,500
Accounts payable. . . . . . . . . . . . . . . . . . . . . 175,079 151,166
Accrued liabilities . . . . . . . . . . . . . . . . . . . 245,746 249,447
Accrued income taxes. . . . . . . . . . . . . . . . . . . 58,144 27,360
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 164,173 89,106
Total Current Liabilities . . . . . . . . . . . . . . . 1,262,881 774,796
LONG-TERM LIABILITIES:
Long-term debt (net). . . . . . . . . . . . . . . . . . . 2,717,019 2,181,855
Western Resources obligated mandatorily redeemable
preferred securities of subsidiary trusts holding
solely company subordinated debentures. . . . . . . . . 220,000 220,000
Deferred income taxes and investment tax credits. . . . . 1,041,527 1,065,565
Minority interests. . . . . . . . . . . . . . . . . . . . 205,886 164,379
Deferred gain from sale-leaseback . . . . . . . . . . . . 212,908 221,779
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 292,072 259,521
Total Long-term Liabilities . . . . . . . . . . . . . . 4,689,412 4,113,099
COMMITMENTS AND CONTINGENCIES
SHAREOWNERS' EQUITY:
Cumulative preferred and preference stock . . . . . . . . 24,858 74,858
Common stock, par value $5 per share, authorized
85,000,000 shares, outstanding 65,832,661 and
65,409,603 shares, respectively. . . . . . . . . . . . . 328,666 327,048
Paid-in capital . . . . . . . . . . . . . . . . . . . . . 771,970 760,553
Retained earnings . . . . . . . . . . . . . . . . . . . . 943,997 914,487
Accumulated other comprehensive income (net) . . . . . . 1,572 12,119
Total Shareowners' Equity . . . . . . . . . . . . . . . 2,071,063 2,089,065
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY . . . . . . . . . $8,023,356 $6,976,960
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended
September 30,
1998 1997
SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . $ 598,141 $ 527,182
Security. . . . . . . . . . . . . . . . . . . . . . . . . 103,261 32,814
Total Sales . . . . . . . . . . . . . . . . . . . . . . 701,402 559,996
COST OF SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . 303,432 210,382
Security. . . . . . . . . . . . . . . . . . . . . . . . . 32,555 10,947
Total Cost of Sales . . . . . . . . . . . . . . . . . . 335,987 221,329
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . 365,415 338,667
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . . . 80,249 95,960
Depreciation and amortization . . . . . . . . . . . . . . 73,339 61,352
Selling, general and administrative expense . . . . . . . 52,656 70,964
Total Operating Expenses. . . . . . . . . . . . . . . . 206,244 228,276
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . . . 159,171 110,391
OTHER INCOME (EXPENSE):
Gain on sale of Tyco securities . . . . . . . . . . . . . - 864,253
Investment earnings . . . . . . . . . . . . . . . . . . . 7,302 -
Minority interest . . . . . . . . . . . . . . . . . . . . (426) (484)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 8,740 (5,307)
Total Other Income (Expense). . . . . . . . . . . . . 15,616 858,462
INCOME BEFORE INTEREST AND TAXES. . . . . . . . . . . . . . 174,787 968,853
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . . . 43,465 28,493
Interest expense on short-term debt and other . . . . . . 16,012 20,547
Total Interest Expense. . . . . . . . . . . . . . . . 59,477 49,040
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . 115,310 919,813
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . 42,545 411,441
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 72,765 508,372
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . 282 1,230
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . $ 72,483 $ 507,142
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . 65,706,665 65,243,406
BASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING . . . . $ 1.10 $ 7.77
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . $ .535 $ .525
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . $1,269,949 $1,543,880
Security. . . . . . . . . . . . . . . . . . . . . . . . . . 277,097 96,320
Total Sales . . . . . . . . . . . . . . . . . . . . . . . 1,547,046 1,640,200
COST OF SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . 550,224 686,548
Security. . . . . . . . . . . . . . . . . . . . . . . . . . 88,028 28,519
Total Cost of Sales . . . . . . . . . . . . . . . . . . . 638,252 715,067
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . . 908,794 925,133
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . . . . 234,783 287,379
Depreciation and amortization . . . . . . . . . . . . . . . 204,617 182,874
Selling, general and administrative expense . . . . . . . . 163,027 183,693
Total Operating Expenses. . . . . . . . . . . . . . . . . 602,427 653,946
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . 306,367 271,187
OTHER INCOME (EXPENSE):
Gain on sale of Tyco securities . . . . . . . . . . . . . . - 864,253
Investment earnings . . . . . . . . . . . . . . . . . . . . 30,767 20,685
Minority interest . . . . . . . . . . . . . . . . . . . . . (1,600) (1,055)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,482 12,490
Total Other Income (Expense). . . . . . . . . . . . . . 66,649 896,373
INCOME BEFORE INTEREST AND TAXES. . . . . . . . . . . . . . . 373,016 1,167,560
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . . . . 121,376 75,858
Interest expense on short-term debt and other . . . . . . . 43,072 74,405
Total Interest Expense. . . . . . . . . . . . . . . . . 164,448 150,263
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . 208,568 1,017,297
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 72,107 443,557
NET INCOME BEFORE EXTRAORDINARY GAIN . . . . . . . . . . . . 136,461 573,740
EXTRAORDINARY GAIN, NET OF TAX. . . . . . . . . . . . . . . . 1,591 -
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . 138,052 573,740
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . . 3,309 3,689
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . . $ 134,743 $ 570,051
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . 65,554,116 65,033,517
BASIC EARNINGS PER COMMON SHARE
EARNINGS AVAILABLE FOR COMMON STOCK BEFORE EXTRAORDINARY GAIN $ 2.03 $ 8.77
EXTRAORDINARY GAIN. . . . . . . . . . . . . . . . . . . . . . .02 -
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . . $ 2.05 $ 8.77
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . . $ 1.605 $ 1.575
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Twelve Months Ended
September 30,
1998 1997
SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . $1,725,487 $2,103,683
Security. . . . . . . . . . . . . . . . . . . . . . . . . . 333,124 101,423
Total Sales . . . . . . . . . . . . . . . . . . . . . . . 2,058,611 2,205,106
COST OF SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . 792,000 948,402
Security. . . . . . . . . . . . . . . . . . . . . . . . . . 98,309 30,844
Total Cost of Sales . . . . . . . . . . . . . . . . . . . 890,309 979,246
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . . 1,168,302 1,225,860
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . . . . 331,316 388,161
Depreciation and amortization . . . . . . . . . . . . . . . 278,468 235,265
Selling, general and administrative expense . . . . . . . . 292,261 240,868
Write-off of deferred merger costs. . . . . . . . . . . . . 48,008 -
Security asset impairment charge. . . . . . . . . . . . . . 40,144 -
Total Operating Expenses. . . . . . . . . . . . . . . . . 990,197 864,294
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . 178,105 361,566
OTHER INCOME (EXPENSE):
Gain on sale of Tyco securities . . . . . . . . . . . . . . - 864,253
Special charges from ADT. . . . . . . . . . . . . . . . . . - (18,181)
Investment earnings . . . . . . . . . . . . . . . . . . . . 35,728 26,370
Minority interest . . . . . . . . . . . . . . . . . . . . . 4,192 (824)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,395 17,955
Total Other Income (Expense). . . . . . . . . . . . . . 93,315 889,573
INCOME BEFORE INTEREST AND TAXES. . . . . . . . . . . . . . . 271,420 1,251,139
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . . . . 164,907 103,031
Interest expense on short-term debt and other . . . . . . . 42,503 88,877
Total Interest Expense. . . . . . . . . . . . . . . . . 207,410 191,908
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . 64,010 1,059,231
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 7,195 453,025
NET INCOME BEFORE EXTRAORDINARY GAIN . . . . . . . . . . . . 56,815 606,206
EXTRAORDINARY GAIN, NET OF TAX. . . . . . . . . . . . . . . . 1,591 -
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . 58,406 606,206
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . . 4,539 4,919
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . . $ 53,867 $ 601,287
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . 65,517,183 64,904,715
BASIC EARNINGS PER COMMON SHARE
EARNINGS AVAILABLE FOR COMMON STOCK BEFORE EXTRAORDINARY GAIN $ .80 $ 9.26
EXTRAORDINARY GAIN. . . . . . . . . . . . . . . . . . . . . . .02 -
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . . $ .82 $ 9.26
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . . $ 2.13 $ 2.09
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
September 30,
1998 1997
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 72,765 $508,372
Other comprehensive (loss) income, before tax:
Unrealized (loss) gain on equity securities . . . . . . . (38,541) 38,129
Income tax benefit (expense). . . . . . . . . . . . . . . . 15,337 (18,253)
Other comprehensive (loss) income, net of tax . . . . . . . (23,204) 19,876
Comprehensive income. . . . . . . . . . . . . . . . . . . . $ 49,561 $528,248
Nine Months Ended
September 30,
1998 1997
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $138,052 $573,740
Other comprehensive (loss) income, before tax:
Unrealized (loss) gain on equity securities . . . . . . . (17,523) 38,129
Income tax benefit (expense). . . . . . . . . . . . . . . . 6,976 (18,253)
Other comprehensive (loss) income, net of tax . . . . . . . (10,547) 19,876
Comprehensive income. . . . . . . . . . . . . . . . . . . . $127,505 $593,616
Twelve Months Ended
September 30,
1998 1997
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 58,406 $606,206
Other comprehensive (loss) income, before tax:
Unrealized (loss) gain on equity securities . . . . . . . (30,403) 38,129
Income tax benefit (expense). . . . . . . . . . . . . . . . 12,099 (18,253)
Other comprehensive (loss) income, net of tax . . . . . . . (18,304) 19,876
Comprehensive income. . . . . . . . . . . . . . . . . . . . $ 40,102 $626,082
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 138,052 $ 573,740
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain. . . . . . . . . . . . . . . . . . . . (1,591) -
Depreciation and amortization . . . . . . . . . . . . . . 204,617 182,874
Gain from sale of securities. . . . . . . . . . . . . . . - (864,253)
Equity in earnings from investments . . . . . . . . . . . (3,828) (25,791)
Changes in working capital items (net of effects
from acquisitions):
Accounts receivable (net) . . . . . . . . . . . . . . . 14,621 54,853
Inventories and supplies. . . . . . . . . . . . . . . . (1,967) (4,657)
Prepaid expenses and other. . . . . . . . . . . . . . . (16,628) 5,665
Accounts payable. . . . . . . . . . . . . . . . . . . . 18,764 (36,311)
Accrued liabilities . . . . . . . . . . . . . . . . . . (75,712) 12,574
Accrued income taxes. . . . . . . . . . . . . . . . . . 30,784 267,734
Other . . . . . . . . . . . . . . . . . . . . . . . . . 40,110 50,937
Changes in other assets and liabilities . . . . . . . . . 10,711 (38,321)
Net cash flows from operating activities. . . . . . . . . . 357,933 179,044
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (net). . . . . (112,125) (154,092)
Customer account acquisitions . . . . . . . . . . . . . . (228,352) (28,498)
Security alarm monitoring acquisitions,
net of cash acquired. . . . . . . . . . . . . . . . . . (554,230) (171,081)
Proceeds from issuance of stock by subsidiary (net) . . . 45,565 -
Purchases of marketable securities. . . . . . . . . . . . (241,752) (23,682)
Proceeds from sale of securities. . . . . . . . . . . . . - 1,495,825
Other investments (net) . . . . . . . . . . . . . . . . . (76,468) (34,499)
Net cash flows from (used in) investing activities. . (1,167,362) 1,083,973
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . 338,882 (875,018)
Proceeds of long-term debt. . . . . . . . . . . . . . . . 688,782 523,250
Retirements of long-term debt . . . . . . . . . . . . . . (135,037) (276,545)
Issuance of common stock (net). . . . . . . . . . . . . . 13,035 20,447
Redemption of preference stock. . . . . . . . . . . . . . (50,000) -
Cash dividends paid . . . . . . . . . . . . . . . . . . . (107,153) (105,168)
Net cash flows from (used in) financing activities. . 748,509 (713,034)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . (60,920) 549,983
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . 76,608 3,724
End of the period . . . . . . . . . . . . . . . . . . . . $ 15,688 $ 553,707
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized). . . . . . . . . . . . . . . . . . . . . . $ 180,058 $ 166,177
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 32,138 169,199
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 58,406 $ 606,206
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain. . . . . . . . . . . . . . . . . . . . (1,591) -
Depreciation and amortization . . . . . . . . . . . . . . 278,468 235,265
Gain on sale of securities. . . . . . . . . . . . . . . . - (864,253)
Equity in earnings from investments . . . . . . . . . . . (3,442) (15,805)
Write-off of deferred merger costs. . . . . . . . . . . . 48,008 -
Security asset impairment charge. . . . . . . . . . . . . 40,144 -
Changes in working capital items (net of effects
from acquisitions):
Accounts receivable (net) . . . . . . . . . . . . . . . (26,076) (17,231)
Inventories and supplies. . . . . . . . . . . . . . . . 5,939 19,139
Prepaid expenses and other. . . . . . . . . . . . . . . (13,063) 7,800
Accounts payable. . . . . . . . . . . . . . . . . . . . 6,777 16,358
Accrued liabilities . . . . . . . . . . . . . . . . . . (23,215) 3,193
Accrued income taxes. . . . . . . . . . . . . . . . . . (227,081) 276,894
Other . . . . . . . . . . . . . . . . . . . . . . . . . 1,695 48,507
Changes in other assets and liabilities . . . . . . . . . (20,321) (93,012)
Net cash flows from operating activities. . . . . . . 124,648 223,061
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (net). . . . . (168,771) (214,482)
Customer account acquisitions . . . . . . . . . . . . . . (245,017) (28,498)
Security alarm monitoring acquisitions
net of cash acquired. . . . . . . . . . . . . . . . . . (821,866) (528,831)
Purchase of ADT common stock. . . . . . . . . . . . . . . - (110,585)
Proceeds from issuance of stock by subsidiary (net) . . . 45,565 -
Purchases of marketable securities. . . . . . . . . . . . (249,637) (23,682)
Proceeds from sale of securities. . . . . . . . . . . . . 37,705 1,495,825
Other investments (net) . . . . . . . . . . . . . . . . . (87,287) (8,532)
Net cash flows from (used in) investing activities. . (1,489,308) 581,215
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . 469,660 (540,678)
Proceeds of long-term debt. . . . . . . . . . . . . . . . 685,532 673,050
Retirements of long-term debt . . . . . . . . . . . . . . (152,469) (276,545)
Issuance of common stock (net). . . . . . . . . . . . . . 17,630 32,105
Redemption of preference stock. . . . . . . . . . . . . . (50,000) -
Cash dividends paid . . . . . . . . . . . . . . . . . . . (143,712) (139,470)
Net cash flows (used in) from financing activities. . 826,641 (251,538)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . (538,019) 552,738
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . 553,707 969
End of the period . . . . . . . . . . . . . . . . . . . . $ 15,688 $ 553,707
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized). . . . . . . . . . . . . . . . . . . . . . $ 207,349 $ 199,404
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 267,487 168,558
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the fourth quarter of 1997 the company contributed the net
assets of its natural gas business totaling approximately $594 million
to ONEOK in exchange for a 45% ownership interest in ONEOK.
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CUMULATIVE PREFERRED AND PREFERENCE STOCK
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1998 1997
CUMULATIVE PREFERRED AND PREFERENCE STOCK:
Preferred stock not subject to mandatory redemption,
Par value $100 per share, authorized
600,000 shares, outstanding -
4 1/2% Series, 138,576 shares. . . . . . . . . . $ 13,858 $ 13,858
4 1/4% Series, 60,000 shares . . . . . . . . . . 6,000 6,000
5% Series, 50,000 shares . . . . . . . . . . . . 5,000 5,000
24,858 24,858
Preference stock subject to mandatory redemption,
Without par value, $100 stated value,
Authorized 4,000,000 shares, outstanding -
7.58% Series, 500,000 shares . . . . . . . . . . - 50,000
TOTAL CUMULATIVE PREFERRED AND PREFERENCE STOCK. . . . $ 24,858 $ 74,858
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
1998 1997 1998 1997 1998 1997
Cumulative Preferred and
Preference Stock:
Beginning balance. . . . . . . $ 24,858 $ 74,858 $ 74,858 $ 74,858 $ 74,858 $ 74,858
Redemption of preference stock - - (50,000) - (50,000) -
Ending balance . . . . . . . . 24,858 74,858 24,858 74,858 24,858 74,858
Common Stock:
Beginning balance. . . . . . . 327,865 325,408 327,048 323,126 326,382 321,184
Issuance of common stock . . . 801 974 1,618 3,256 2,284 5,198
Ending balance . . . . . . . . 328,666 326,382 328,666 326,382 328,666 326,382
Paid-in-Capital:
Beginning balance. . . . . . . 766,453 751,147 760,553 739,433 756,624 729,716
Expenses on common stock . . . - - - - (5) -
Issuance on common stock . . . 5,517 5,477 11,417 17,191 15,351 26,908
Ending balance . . . . . . . . 771,970 756,624 771,970 756,624 771,970 756,624
Retained Earnings:
Beginning balance. . . . . . . 906,676 556,826 914,487 562,121 1,029,704 564,160
Net income . . . . . . . . . . 72,765 508,372 138,052 573,740 58,406 606,206
Dividends on preferred and
preference stock . . . . . . (282) (1,230) (3,309) (3,689) (4,539) (4,919)
Dividends on common stock. . . (35,162) (34,264) (105,233) (102,468) (139,574) (135,743)
Ending balance . . . . . . . . 943,997 1,029,704 943,997 1,029,704 943,997 1,029,704
Accumulated Other Comprehensive
Income (net):
Beginning balance. . . . . . . 24,776 - 12,119 - 19,876 -
Unrealized gain (loss) on
equity securities. . . . . . (38,541) 38,129 (17,523) 38,129 (30,403) 38,129
Income tax benefit (expense) . 15,337 (18,253) 6,976 (18,253) 12,099 (18,253)
Ending balance . . . . . . . . 1,572 19,876 1,572 19,876 1,572 19,876
Total Shareowners' Equity $2,071,063 $2,207,444 $2,071,063 $2,207,444 $2,071,063 $2,207,444
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Western Resources, Inc. (the company) is a
publicly traded holding company. The company's primary business activities are
providing electric generation, transmission and distribution services to
approximately 615,000 customers in Kansas and providing security alarm
monitoring services to approximately 1.5 million customers located throughout
the United States. In addition, through the company's 45% ownership interest in
ONEOK, Inc. (ONEOK), natural gas transmission and distribution services are
provided to approximately 1.4 million customers in Oklahoma and Kansas. Rate
regulated electric service is provided by KPL, a division of the company and
KGE, a wholly-owned subsidiary. Security services are provided by Protection
One, Inc. (Protection One), a publicly-traded, approximately 85%-owned
subsidiary.
Principles of Consolidation: The company's unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and in accordance with
the instructions to Form 10-Q. Accordingly, certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted.
These consolidated financial statements and notes should be read in conjunction
with the financial statements and the notes included in the company's 1997
Annual Report on Form 10-K/A.
New Pronouncements: Effective January 1, 1998, the company adopted the
provisions of Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130). This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). This statement established accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
133 requires that all derivatives be recognized as either assets or liabilities
in the balance sheet and that these instruments be measured at fair value. The
company will adopt SFAS 133 no later than January 1, 2000. Management is
presently evaluating the impact that adoption of SFAS 133 will have on the
company's financial position and results of operations.
Reclassifications: Certain amounts in prior years have been reclassified
to conform with classifications used in the current year presentation.
2. MERGER AGREEMENT WITH KANSAS CITY POWER & LIGHT COMPANY
On February 7, 1997, the company signed a merger agreement with KCPL by
which KCPL would be merged with and into the company in exchange for company
stock. In December 1997, representatives of the company's financial advisor
indicated that they believed it was unlikely that they would be in a position to
issue a fairness opinion required for the merger on the basis of the previously
announced terms.
On March 18, 1998, the company and KCPL agreed to a restructuring of their
February 7, 1997, merger agreement which will result in the formation of Westar
Energy, a new regulated electric utility company. Under the terms of the merger
agreement, the electric utility operations of the company will be transferred to
KGE, and KCPL and KGE will be merged into NKC, Inc., a subsidiary of the
company. NKC, Inc. will be renamed Westar Energy. In addition, under the terms
of the merger agreement, KCPL shareowners will receive company common stock
which is subject to a collar mechanism of not less than .449 nor greater than
.722, provided the amount of company common stock received may not exceed
$30.00, and one share of Westar Energy common stock per KCPL share. The Western
Resources Index Price is the 20 day average of the high and low closing sale
prices for company common stock on the NYSE ending ten days prior to closing.
If the Western Resources Index Price is less than or equal to $29.78 on the
fifth day prior to the effective date of the combination, either party may
terminate the agreement. Upon consummation of the combination, the company
will own approximately 80.1% of the outstanding equity of Westar Energy and KCPL
shareowners will own approximately 19.9%. As part of the combination, Westar
Energy will assume all of the electric utility related assets and liabilities of
the company, KCPL and KGE.
Westar Energy will assume $2.7 billion in debt, consisting of $1.9 billion
of indebtedness for borrowed money of the company and KGE, and $800 million from
KCPL. Long-term debt of the company, excluding Protection One, was $2.5 billion
at September 30, 1998. Under the terms of the merger agreement, it is intended
that the company will be released from its obligations with respect to the
company's debt to be assumed by Westar Energy.
Pursuant to the merger agreement, the company has agreed, among other
things, to call for redemption all outstanding shares of its 4 1/2% Series
Preferred Stock, par value $100 per share, 4 1/4% Series Preferred Stock, par
value $100 per share, and 5% Series Preferred Stock, par value $100 per share.
Consummation of the merger is subject to customary conditions. On July 30,
1998 the company's shareowners and the shareowners of KCPL voted to approve the
amended merger agreement at special meetings of shareowners. The company
estimates the transaction to close in 1999, subject to receipt of all necessary
approvals from regulatory and government agencies.
On August 7, 1998 the company and KCPL filed an amended application with
the Federal Energy Regulatory Commission (FERC) to approve the Western
Resources/KCPL merger and the formation of Westar Energy.
KCPL is a public utility company engaged in the generation, transmission,
distribution, and sale of electricity to customers in western Missouri and
eastern Kansas. The company, KCPL and KGE have joint interests in certain
electric generating assets, including Wolf Creek.
At September 30, 1998, the company had deferred approximately $12 million
related to the KCPL transaction. These costs will be included in the
determination of total consideration upon consummation of the transaction.
For additional information on the Merger Agreement with Kansas City Power
& Light Company, see the company's Registration Statement on Form S-4 filed on
June 9, 1998.
3. INVESTMENT IN ONEOK, INC.
In November 1997, the company completed its strategic alliance with ONEOK.
The company contributed substantially all of its regulated and non-regulated
natural gas business to ONEOK in exchange for a 45% ownership interest in ONEOK.
The company accounts for its common ownership of ONEOK in accordance with the
equity method of accounting.
For additional information on the Strategic Alliance with ONEOK, see Note
4 of the company's 1997 Annual Report on Form 10-K/A.
4. INVESTMENT IN PROTECTION ONE, INC.
For additional information on the Investment in Protection One and the
Security Alarm Monitoring Business, see Note 3 of the company's 1997 Annual
Report on Form 10-K/A.
5. LEGAL PROCEEDINGS
On January 8, 1997, Innovative Business Systems, Ltd. (IBS) filed suit
against the company and Westinghouse Electric Corporation (WEC), Westinghouse
Security Systems, Inc. (WSS) and WestSec, Inc. (WestSec), a wholly-owned
subsidiary of the company established to acquire the assets of WSS, in Dallas
County, Texas district court (Cause No 97-00184) alleging, among other things,
breach of contract by WEC and interference with contract against the company in
connection with the sale by WEC of the assets of WSS to the company. IBS claims
that WEC improperly transferred software owned by IBS to the company and that
the company is not entitled to its use. WEC has agreed to defend and indemnify
the company. WEC and the company have denied IBS' allegations and are
vigorously defending against them. Management does not believe that the
ultimate disposition of this matter will have a material adverse effect upon the
company's overall financial condition or results of operations.
The Securities and Exchange Commission (SEC) has commenced a private
investigation relating, among other things, to the timeliness and adequacy of
disclosure filings with the SEC by the company with respect to securities of ADT
Ltd. The company is cooperating with the SEC staff in the production of records
relating to the investigation.
The company and its subsidiaries are involved in various other legal,
environmental, and regulatory proceedings. Management believes that adequate
provision has been made and accordingly believes that the ultimate dispositions
of these matters will not have a material adverse effect upon the company's
overall financial position or results of operations.
6. COMMITMENTS AND CONTINGENCIES
International Power Project Commitments: The company, through its
subsidiary The Wing Group, has acquired interests in power generation projects
in Colombia, the People's Republic of China (China) and the Republic of Turkey
(Turkey). The company has also expended efforts to develop other power
generation projects in South America, China, and Southeast Asia. The company
has recorded investments for the Colombia, China, and Turkey generation
facilities and deferred costs associated with other power projects actively
being developed. The company's book investment in international power
development activities approximates $80 million at September 30, 1998.
During 1998, changes in overall economic, political, regulatory and other
conditions adversely impacted certain of these investments, particularly in
Colombia and China. Additionally, the Colombia facility, in which the company
maintains a 37.5% ownership interest, experienced delays in achieving scheduled
commercial operation. Arbitration and litigation have commenced against the
Colombian plant contractor. Business risks and conditions specific to certain
of these investments may adversely impact the company's ability to fully recover
invested amounts.
Manufactured Gas Sites: The company has been associated with 15 former
manufactured gas sites located in Kansas which may contain coal tar and other
potentially harmful materials. The company and the Kansas Department of Health
and Environment (KDHE) entered into a consent agreement governing all future
work at the 15 sites. The terms of the consent agreement will allow the
company to investigate these sites and set remediation priorities based upon the
results of the investigations and risk analysis. At September 30, 1998, the
costs incurred for preliminary site investigation and risk assessment have been
minimal. In accordance with the terms of the strategic alliance with ONEOK,
ownership of twelve of these sites and the responsibility for clean-up of these
sites were transferred to ONEOK. The ONEOK agreement limits our future
liability to an amount immaterial to the company's financial condition or
results of operations. However, our share of ONEOK income could be adversely
affected by these costs.
Affordable Housing Tax Credit Program (AHTC): At September 30, 1998, the
company had invested approximately $57.0 million to purchase AHTC investments in
limited partnerships. The company is committed to investing approximately $32.6
million more in AHTC investments by April 1, 2001.
Split Dollar Life Insurance Program: The company has established a split
dollar life insurance program for the benefit of the company and certain of its
executives. Under the program, the company has purchased a life insurance
policy on the executive's life, and, upon the executive's death, the executive's
beneficiary is entitled to a death benefit in an amount equal to the face amount
of the policy reduced by the greater of (i) all premiums paid by the company and
(ii) the cash surrender value of the policy, which amount, at the death of the
executive, will be returned to the company. The company retains an equity
interest in the death benefit and cash value of the policy to secure this
repayment obligation.
Subject to the conditions described below, beginning on the earlier of (i)
three years from the date of the policy or (ii) the first day of the calendar
year next following the date of the executive's retirement, the executive is
allowed to transfer to the company from time to time, in whole or in part, his
interest in the death benefit under the policy at a discount equal to $1 for
each $1.50 of the portion of the death benefit for which the executive officer
may designate the beneficiary, subject to adjustment based on the total return
to shareowners from the date of the policy unless the participant retires from
the company within six months of the date of the participant's agreement. Any
adjustment would result in an exchange of no more than one dollar for each
dollar of death benefit nor less than one dollar for each two dollars of death
benefit. The program has been designed such that upon the executive's death the
company will recover its premium payments from the policy and any amounts paid
by the company to the executive for the transfer of his interest in the death
benefit. The cash surrender value of these policies has been recorded in other
assets. The insurance premium and the estimated value of the executives'
agreements have been expensed. The company has accrued approximately $53
million at September 30, 1998 for this program. Under current tax rules,
payments to certain participants in exchange for their interest in the death
benefits may not be fully deductible by the company for income tax purposes.
For additional information on Commitments and Contingencies, see Note 7 of
the company's 1997 Annual Report on Form 10-K/A.
7. INCOME TAXES
Total income tax expense included in the Consolidated Statements of Income
reflects the Federal statutory rate of 35%. The Federal statutory rate produces
effective income tax rates of 37.3%, 34.4% and 12.0% for the three, nine and
twelve month periods ended September 30, 1998 compared to 44.7%, 43.6% and 42.8%
for the three, nine and twelve month periods ended September 30, 1997. The
effective income tax rates vary from the Federal statutory rate due to permanent
differences, including dividend income, the amortization of investment tax
credits, amortization of goodwill, benefits from corporate-owned life
insurance, and accelerated amortization of certain deferred income taxes.
WESTERN RESOURCES, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
In Management's Discussion and Analysis we explain the general financial
condition and the operating results for Western Resources, Inc. and its
subsidiaries. We explain:
- What factors affect our business
- What our earnings and costs were for the three, nine and twelve month
periods ending September 30, 1998 and 1997
- Why these earnings and costs differed from period to period
- How our earnings and costs affect our overall financial condition
- Any other items that particularly affect our financial condition or
earnings
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations updates the information provided in the 1997 Annual
Report on Form 10-K/A and should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
company's 1997 Annual Report on Form 10-K/A.
FORWARD-LOOKING STATEMENTS: Certain matters discussed here and elsewhere
in this Form 10-Q are "forward-looking statements." The Private Securities
Litigation Reform Act of 1995 has established that these statements qualify for
safe harbors from liability. Forward-looking statements may include words like
we "believe," "anticipate," "expect" or words of similar meaning. Forward-
looking statements describe our future plans, objectives, expectations or
goals. Such statements address future events and conditions concerning capital
expenditures, earnings, litigation, rate and other regulatory matters, possible
corporate restructurings, mergers, acquisitions, dispositions, liquidity and
capital resources, interest and dividend rates, Year 2000 issues, environmental
matters, changing weather, nuclear operations, ability to enter new markets
successfully and capitalize on growth opportunities in nonregulated businesses,
events in foreign markets in which investments have been made, and accounting
matters. What happens in each case could vary materially from what we expect
because of such things as electric utility deregulation, including ongoing state
and federal activities; future economic conditions; legislative developments;
our regulatory and competitive markets; and other circumstances affecting
anticipated operations, sales and costs.
FINANCIAL CONDITION
GENERAL: Sales increased $141 million primarily due to increased electric
sales because of warmer than normal weather and growth through acquisition from
our monitored security business for the three months ended September 30, 1998.
Partially offsetting this increase was no gas sales for the quarter due to the
transfer of our natural gas assets to ONEOK in November 1997. Net income
decreased $436 million and basic earnings per share decreased $6.67 per share,
resulting in basic earnings per share of $1.10, for the three months ended
September 30, 1998 due primarily to the gain on the sale of Tyco stock during
the third quarter of 1997.
Sales decreased $93 million for the nine months ended September 30, 1998
due to the transfer of our natural gas business to ONEOK in November 1997. Net
income decreased $436 million and basic earnings per share decreased $6.72 per
share, resulting in basic earnings per share of $2.05, for the nine months ended
September 30, 1998 due primarily to the gain on the sale of Tyco stock during
the third quarter of 1997.
Sales decreased $146 million for the twelve months ended September 30, 1998
due primarily to the transfer of our natural gas business to ONEOK in November
1997. Net income decreased $548 million and basic earnings per share decreased
$8.44, resulting in basic earnings per share of $0.82, for the twelve months
ended September 30, 1998 due to the pre-tax gain on the sale of the Tyco common
stock of $864 million. We recorded special non-recurring charges in the fourth
quarter of 1997 which resulted in a loss per share of $1.23 and negatively
impacted our net income for the twelve months ended September 30, 1998 compared
to the same period of 1997. These charges included $48 million of deferred KCPL
merger costs, approximately $40 million recorded by Protection One to eliminate
duplicate facilities and to write-off inventory and other assets which had no
continuing value, and the accrual of certain benefits, including the initial
amount estimated for the split dollar life insurance program.
Our net income has been negatively impacted by the effect of reductions in
our electric rates. Since 1996, we reduced our electric rates in accordance
with orders from the Kansas Corporation Commission, which will also include an
additional $10 million rate reduction in June 1999. The total annual cumulative
effect of these rate reductions is approximately $75 million. We also had a
one-time rate rebate totaling $5 million in January 1998 and will have an
additional rate rebate of $5 million in January 1999. All rate reductions have
a continuing effect while rate rebates are one-time events and do not influence
future rates.
Our net income this year has been favorably impacted by certain events.
We are unable to predict the likelihood, however, of these events recurring in
the future. We experienced warmer than normal weather during the summer months
which contributed to higher electric and power marketing sales. During the
year, we recorded income of $13.7 million due to death benefits received from
our corporate owned life insurance policies. We recorded non-recurring, pre-tax
gains in 1998 of approximately $21.3 million due primarily to Protection One's
repurchase of certain contracts and the exchange of certain investment
securities. In addition, a portion of Protection One's discount notes were
redeemed in 1998, resulting in an extraordinary gain, net of tax, of
approximately $1.6 million.
A quarterly dividend of $0.535 per share was declared in the third quarter
of 1998, for an indicated annual rate of $2.14 per share. The book value per
share was $31.15 at September 30, 1998, up from $30.79 at December 31, 1997.
There were 65,706,665 and 65,243,406 average shares outstanding for the third
quarter of 1998 and 1997.
OPERATING RESULTS
The following explains significant changes from prior year results in
sales, cost of sales, operating expenses, other income (expense), interest
expense, income taxes and preferred and preference dividends.
Energy sales and cost of sales have increased for the three months ended
September 30, 1998 due to warmer summer weather compared to last year. These
increases were partially offset by the transfer of our natural gas business
assets to ONEOK, Inc. in November 1997.
Energy sales, cost of sales and operating expenses have decreased
significantly for the nine and twelve months ended September 30, 1998 due
primarily to the transfer of our natural gas business assets to ONEOK Inc. in
November 1997.
Security sales, cost of sales and operating expenses have increased
significantly for the three, nine and twelve months ended September 30, 1998 due
primarily to our acquisition of Protection One in November 1997 and to
Protection One's subsequent acquisitions during 1998.
SALES: Energy sales primarily include electric sales, power marketing sales
and, through November, 1997, natural gas sales. Certain state regulatory
commissions and the FERC authorize rates for our electric sales, excluding power
marketing sales. Our energy sales vary with levels of energy deliveries.
Changing weather affects the amount of energy our customers use. Very hot
summers and very cold winters prompt more demand, especially among our
residential customers. Mild weather reduces demand.
Many things will affect our future energy sales. They include:
- The weather
- Our electric rates
- Competitive forces
- Customer conservation efforts
- Wholesale demand
- The overall economy of our service area
We are involved in both the marketing of electricity and risk management
services to wholesale electric customers in the purchase of electricity for our
retail customers. Our margin from power marketing activities is significantly
less than our margins on other energy sales. Our power marketing activity has
resulted in energy purchases and sales made in areas outside of our historical
marketing territory. We expanded our power marketing activity in 1997. Through
September 30, 1998, this additional power marketing activity has had an
insignificant effect on operating income.
Power marketing sales are also impacted by the availability of generating
units and purchased power from other companies. In 1998, due to warmer than
normal weather throughout the Midwest and lack of power available for purchase
on the wholesale market, the wholesale power market has seen extreme volatility
in prices and availability. We believe future volatility, such as that recently
experienced in the market, could impact our cost of power purchases and impact
our ability to participate in power trades.
Total electric sales increased 52.3% for the three months ended September
30, 1998 due to increased residential, wholesale and interchange, commercial,
and industrial energy deliveries as a result of warmer summer temperatures.
Such increase is attributable to increased electric utility sales of 12.3% and
increased power marketing sales of 500.8%. This sales increase was partially
offset by our reduced electric rates implemented June 1, 1998.
Total electric sales increased 35.7% for the nine months ended September
30, 1998 due to increased residential, commercial, wholesale and interchange,
and industrial energy deliveries as a result of warmer summer temperatures.
Such increase is attributable to increased electric utility sales of 6.7% and
increased power marketing sales of 850.0%. This increase was partially offset
by our reduced electric rates implemented on June 1, 1998.
Total electric sales increased 28.8% for the twelve months ended September
30, 1998. Such increase is attributable to increased electric utility sales of
3.3% and increased power marketing sales of 967.6%. This increase was partially
offset by our reduced electric rates implemented on February 1, 1997 and on June
1, 1998.
The following table reflects the increases (decreases) in electric energy
deliveries, as measured by kilowatt hours, for retail customers for the three,
nine and twelve months ended September 30, 1998 from the comparable periods of
1997.
3 Months 9 Months 12 Months
ended ended ended
Residential. . . . . 16.1% 12.7% 9.4%
Commercial . . . . . 8.2% 7.4% 6.5%
Industrial . . . . . 1.3% 2.3% 3.4%
Other. . . . . . . . (8.3)% (2.4)% (4.2)%
Total retail . . . 8.9% 7.4% 6.3%
Security alarm monitoring business sales increased $70.4 million for the
three months ended, $180.8 million for the nine months ended, and $231.7 million
for the twelve months ended September 30, 1998. These increases are primarily
due to our acquisition of Protection One on November 24, 1997 and Protection
One's continued growth and acquisition activity during 1998.
COST OF SALES: Items included in energy cost of sales are fuel expense,
purchased power expense (electricity we purchase from others for resale), power
marketing expense and natural gas purchased. Items included in security alarm
monitoring cost of sales are the cost of direct monitoring and the cost of
installing security monitoring equipment that is not capitalized.
Energy business cost of sales were higher by 44% for the three months ended
September 30, 1998. The increase was primarily due to increased generation and
purchases of power to make increased power marketing sales. Partially
offsetting this increase was the reduction of expenses due to the transfer of
our natural gas business assets to ONEOK in November 1997.
Energy business cost of sales were lower by 20% for the nine months ended
and 16% for the twelve months ended September 30, 1998. These decreases were
primarily due to the transfer of our natural gas business assets to ONEOK in
November 1997. Partially offsetting these decreases was increased power
marketing expense of $270 million for the nine months ended and $308 million for
the twelve months ended September 30, 1998.
Security alarm monitoring cost of sales increased 197% for the three months
ended, 209% for the nine months ended and 219% for the twelve months ended
September 30, 1998. The increases are primarily a result of our acquisition of
Protection One on November 24, 1997 and Protection One's continued growth and
acquisition activity in 1998 and additional commercial installation activities
from these acquisitions.
OPERATING EXPENSES
OPERATING AND MAINTENANCE EXPENSE: Total operating and maintenance expense
decreased 16% for the three months, 18% for the nine months, and 15% for the
twelve months ended September 30, 1998 primarily due to the transfer of our
natural gas business assets to ONEOK in November 1997. Partially offsetting
these decreases, were increased operating and maintenance expense due primarily
from our expansion into the security alarm monitoring business through
acquisitions.
We expect our operating and maintenance expense to increase when we bring
an inactive generating plant back into active service in 1999 and when we put
new generators in service in 2000 and 2001. See LIQUIDITY AND CAPITAL RESOURCES
below for further discussion of these projects.
DEPRECIATION AND AMORTIZATION EXPENSE: Depreciation and amortization
expense increased 20% for the three months, 12% for the nine months, and 18% for
the twelve months ended September 30, 1998. These increases are primarily
attributable to the amortization of capitalized security alarm monitoring
accounts and goodwill from our security alarm monitoring business. Partially
offsetting these increases were reductions in amortization expense for certain
regulatory assets which were fully amortized in December 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and
administrative expense decreased 26% for the three months and 11% for the nine
months ended September 30, 1998 primarily due to decreased selling, general and
administrative expense due to the transfer of our natural gas business assets to
ONEOK in November 1997. Partially offsetting these decreases were increased
selling, general and administrative expense from our expansion into the security
alarm monitoring business through acquisitions.
Higher security alarm monitoring business selling, general and
administrative expense caused a 21% increase in total selling general and
administrative expense for the twelve months ended September 30, 1998. This
increase is due primarily to our expansion into the security alarm monitoring
business. This increase also included an accrual for certain benefits including
the initial amount estimated for the split dollar life insurance program.
Partially offsetting this increase was the reduction of expenses due to the
transfer of our natural gas business assets to ONEOK in November 1997.
OTHER: We recorded special non-recurring charges in the fourth quarter of
1997 which affected total operating expenses for the twelve months ended
September 30, 1998. These charges included $48 million of deferred KCPL merger
costs and approximately $40 million recorded by Protection One to eliminate
duplicate facilities and to write-off inventory and other assets which had no
continuing value. These one time charges resulted in basic earnings per share
being reduced to $0.82 for the twelve months ended September 30, 1998.
OTHER INCOME (EXPENSE)
Other income (expense) includes miscellaneous income and expenses not
directly related to our operations. Other income for the three, nine and twelve
months ended September 30, 1998 decreased primarily due to the gain of $864
million on the sale of Tyco common stock during the third quarter of 1997.
During 1998, other income has been favorably impacted by certain events,
the recurrence of which cannot be accurately predicted or reasonably
anticipated. Included in other income are death benefits received from our
corporate owned life insurance policies which resulted in the recognition of
$13.7 million of income during the nine months ended September 30, 1998. Other
income also includes non-recurring, pretax gains associated with Protection One
of approximately $7.9 million for the three months ended and $21.3 million for
the nine months ended September 30, 1998. These non-recurring gains from
Protection One were primarily due to the repurchase of certain contracts and the
exchange of investment securities.
Also included in other income was investment earnings from the receipt of
stock dividends of approximately $7.3 million for the three months ended and
approximately $31 million for the nine months ended September 30, 1998 from our
45% ownership in ONEOK.
INTEREST EXPENSE
Interest expense includes the interest we incurred on outstanding debt.
Interest expense increased 21% for the three months, 9% for the nine months and
8% for the twelve months ended September 30, 1998. Interest recorded on long-
term debt increased $61.9 million or 60% for the twelve months ended September
30, 1998 due to the issuance of $520 million in senior unsecured notes in
November 1997 and $400 million in senior unsecured notes in August 1998. A
decline in short-term debt interest expense in the second half of 1997 partially
offset the increase in long-term debt interest expense. We used the proceeds
from the sale of Tyco common stock and the $520 million in senior unsecured
notes to reduce our short-term debt balance.
INCOME TAXES
Income tax expense for the three, nine and twelve months ended September
30, 1998 decreased substantially due to the gain from the sale of Tyco common
stock during the third quarter of 1997.
For the twelve month period ended September 30, 1998, the effective tax
rate was 12.0%. This rate differs from the Federal Statutory rate due to
permanent differences including dividend income, amortization of investment tax
credits, amortization of goodwill, benefits from corporate-owned life insurance,
and accelerated amortization of certain deferred income taxes. The net impact
of these permanent differences was significant due to special charges recorded
in the fourth quarter of 1997 that reduced net income for the twelve months
ended September 30, 1998.
EXTRAORDINARY GAIN
In June 1998, Protection One redeemed a portion of its discount notes which
resulted in an extraordinary gain, net of tax, of approximately $1.6 million.
PREFERRED AND PREFERENCE DIVIDENDS
Preferred and preference dividends decreased 8% for the twelve months ended
September 30, 1998 due to the dividend paid associated with the redemption of
our 8.50% preference stock due 2016 on July 1, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, we had approximately $16 million in cash and cash
equivalents. We consider highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Our cash and cash
equivalents decreased $61 million from December 31, 1997, due to a decrease in
cash held by Protection One. Protection One used its cash for security alarm
monitoring business acquisitions. Other than operations, our primary source of
short-term cash is from short-term bank loans, unsecured lines of credit and the
sale of commercial paper. At September 30, 1998, we had approximately $575
million of short-term debt outstanding, of which $375 million was commercial
paper. An additional $444 million of short-term debt was available from
committed credit arrangements.
In July 1998, we issued $30 million of 6.8% Senior Notes due July 15,
2018. The notes are unsecured and unsubordinated obligations of the company.
In July 1998, we filed a shelf registration for $800 million in senior,
unsecured obligations of the company. In August 1998, we issued $400 million of
6.25% Putable/Callable Notes due on August 15, 2018, putable/callable on August
15, 2003 under this shelf agreement. Proceeds from these issuances were used to
reduce short-term debt incurred in connection with investments in unregulated
operations, the redemption of preferred securities and other general corporate
purposes.
In August 1998, Protection One, in a private placement offering, issued
$250 million of 7 3/8% senior notes due August 15, 2005. $233 million of the
proceeds from the offering were used to repay borrowings on an existing credit
facility with Westar Capital, a wholly-owned subsidiary of the company.
We announced plans to install three new combustion turbine generators for
use as peaking units. The installed capacity of the three new generators will
approximate 300 MW. The first two units are scheduled to be placed in operation
in 2000 and the third is scheduled to be placed in operation in 2001. We
estimate that the project will require $120 million in capital resources
through
the completion of the project in 2001. In addition, we are planning to return
our inactive generation plant in Neosho, Kansas to active service in 1999 at an
estimated cost of $0.7 million.
MERGERS AND ACQUISITIONS
MERGER AGREEMENT WITH KANSAS CITY POWER & LIGHT COMPANY: On February 7,
1997, the company signed a merger agreement with KCPL by which KCPL would be
merged with and into the company in exchange for company stock. In December
1997, representatives of the company's financial advisor indicated that they
believed it was unlikely that they would be in a position to issue a fairness
opinion required for the merger on the basis of the previously announced terms.
On March 18, 1998, the company and KCPL agreed to a restructuring of their
February 7, 1997, merger agreement which will result in the formation of Westar
Energy, a new regulated electric utility company. Under the terms of the merger
agreement, the electric utility operations of the company will be transferred to
KGE, and KCPL and KGE will be merged into NKC, Inc., a subsidiary of the
company. NKC, Inc. will be renamed Westar Energy. In addition, under the terms
of the merger agreement, KCPL shareowners will receive company common stock
which is subject to a collar mechanism of not less than .449 nor greater than
.722, provided the amount of company common stock received may not exceed
$30.00, and one share of Westar Energy common stock per KCPL share. The Western
Resources Index Price is the 20 day average of the high and low closing sale
prices for company common stock on the NYSE ending ten days prior to closing.
If the Western Resources Index Price is less than or equal to $29.78 on the
fifth day prior to the effective date of the combination, either party may
terminate the agreement. Upon consummation of the combination, the company will
own approximately 80.1% of the outstanding equity of Westar Energy and KCPL
shareowners will own approximately 19.9%. As part of the combination, Westar
Energy will assume all of the electric utility related assets and liabilities of
the company, KCPL and KGE.
Westar Energy will assume $2.7 billion in debt, consisting of $1.9 billion
of indebtedness for borrowed money of Western Resources and KGE, and $800
million from KCPL. Long-term debt of the company, excluding Protection One, was
$2.5 billion at September 30, 1998. Under the terms of the merger agreement,
it is intended that we will be released from our obligations with respect to our
debt to be assumed by Westar Energy.
Pursuant to the merger agreement, we have agreed, among other things, to
call for redemption all outstanding shares of our 4 1/2% Series Preferred Stock,
par value $100 per share, 4 1/4% Series Preferred Stock, par value $100 per
share, and 5% Series Preferred Stock, par value $100 per share.
Consummation of the merger is subject to customary conditions. On July 30,
1998 the company's shareowners and the shareowners of KCPL voted to approve the
amended merger agreement at special meetings of shareowners. The company
estimates the transaction to close in 1999, subject to receipt of all necessary
approvals from regulatory and government agencies.
On August 7, 1998 the company and KCPL filed an amended application with
the Federal Energy Regulatory Commission to approve the Western Resources/KCPL
merger and the formation of Westar Energy.
KCPL is a public utility company engaged in the generation, transmission,
distribution, and sale of electricity to customers in western Missouri and
eastern Kansas. We, KCPL and KGE have joint interests in certain electric
generating assets, including Wolf Creek. Following the closing of the
combination, Westar Energy is expected to have approximately one million
electric utility customers in Kansas and Missouri, approximately $8.2 billion in
assets and the ability to generate more than 8,000 megawatts of electricity.
SECURITY ALARM MONITORING BUSINESS PURCHASES: Protection One has completed
various acquisitions comprising over 680,000 subscribers for the nine months
ended September 30, 1998.
During the third quarter, Protection One acquired substantially all of the
outstanding shares of Compagnie Europeene de Telesecurite (CET) for
approximately $140 million. CET is a French security alarm monitoring company
with approximately 60,000 subscribers located primarily in France, Belgium,
Germany, Switzerland, and the Netherlands.
On October 19, 1998, Protection One entered into an agreement to acquire
Lifeline Systems, Inc. (Lifeline) for approximately $174 million in cash and
common stock. Lifeline provides personal emergency response services in North
America.
INVESTMENTS IN INTERNATIONAL PROJECTS
The company, through its subsidiary The Wing Group, has acquired interests
in power generation projects in Colombia, the People's Republic of China (China)
and the Republic of Turkey (Turkey). The company has also expended efforts to
develop other power generation projects in South America, China, and Southeast
Asia. The company has recorded investments for the Colombia, China, and Turkey
generation facilities and deferred costs associated with other power projects
actively being developed. The company's book investment in international power
development activities approximates $80 million at September 30, 1998.
During 1998, changes in overall economic, political, regulatory and other
conditions adversely impacted certain of these investments, particularly in
Colombia and China. Additionally, the Colombia facility, in which the company
maintains a 37.5% ownership interest, experienced delays in achieving scheduled
commercial operation. Arbitration and litigation have commenced against the
Colombian plant contractor. Business risks and conditions specific to certain
of these investments may adversely impact the company's ability to fully recover
invested amounts.
YEAR 2000 ISSUE
GENERAL: We are currently addressing the effect of the Year 2000 Issue on
information systems and operations. We face the Year 2000 Issue because many
computer systems and applications abbreviate dates by eliminating the first two
digits of the year, assuming that these two digits are always "19". On January
1, 2000, some computer programs may incorrectly recognize the date as January 1,
1900. Some computer systems and applications may incorrectly process critical
information or may stop processing altogether because of the date abbreviation.
Calculations using dates beyond December 31, 1999 may affect computer
applications before January 1, 2000.
ELECTRIC UTILITY OPERATIONS: We have recognized the potential adverse
effects the Year 2000 Issue could have on our utility operations. In 1996, we
established a formal Year 2000 readiness program to investigate and correct
these problems in the main computer systems of our company. In 1997, we
expanded the program to include all business units and departments of our
utility operations, using a common methodology. The Year 2000 issues concerning
the Wolf Creek nuclear operating plant are discussed under WCNOC below.
The goal of our Year 2000 readiness program is to identify and assess all
critical computer programs, computer hardware and embedded systems potentially
affected by the Year 2000 date change, to repair or replace those systems found
to be incompatible with Year 2000 dates, and to develop predetermined actions to
be used as contingencies in the event any critical business function fails
unexpectedly or is interrupted. The program is directed by a written policy
which provides the guidance and methodology to the departments and business
units to follow. Due to varying degrees of exposure of departments and business
units to the Year 2000 Issue, some departments and business units are further
along in their readiness efforts than others. All departments have completed
the awareness, inventory, and assessment phases, and have developed their
initial contingency plans. Several smaller departments and business units have
completed the assessment, remediation, and testing phases. The majority of our
current efforts are in the remediation and testing phases. Overall, based on
manhours as a measure of work effort, we believe we are approximately 70%
completed with our readiness efforts.
The estimated progress of our departments and business units, exclusive of
Protection One and WCNOC, at September 30, 1998, based on manhours, is as
follows:
Percentage
Department/Business Unit Completion
Electric Generation Services. . . . . . . 65%
Energy Distribution Services. . . . . . . 65%
Electric Transmission . . . . . . . . . . 75%
Information Technology. . . . . . . . . . 65%
Administrative. . . . . . . . . . . . . . 75%
Our Year 2000 readiness program addresses all Information Technology (IT)
and non-IT issues which may be impacted by the Year 2000 Issue. We have
included commercial computer software, including mainframe, client/server, and
desktop software; internally developed computer software, including mainframe,
client/server, and desktop software; computer hardware, including mainframe,
client/server, desktop, network, communications, and peripherals; devices using
embedded computer chips, including plant equipment, controls, sensors,
facilities equipment, heating, ventilating, and air conditioning (HVAC)
equipment; and relationships with third-party vendors, suppliers, and customers.
Our program requires testing as a method for verifying the Year 2000 readiness
of an item. For those items which are impossible to test, other methods are
being used to
identify the readiness status, provided adequate contingency plans are
established to provide a workaround or backup for the item. We plan to have our
Year 2000 readiness efforts for utility operations substantially completed by
the end of 1998.
We estimate that total costs to update all of our electric utility
operating systems for Year 2000 readiness, excluding costs associated with WCNOC
discussed below, to be approximately $7 million, of which $4 million represents
IT costs and $3 million represents non-IT costs. As of September 30, 1998 we
have expensed approximately $3.5 million of these costs, of which $3 million
represent IT costs and $0.5 million represent non-IT costs. Based on what we
know, we expect to incur the remaining $3.5 million, of which $1 million
represents IT costs and $2.5 million represents non-IT costs, by the end of
1999. These costs include labor costs for both company employees and contract
personnel used in our Year 2000 program, and non-labor costs for software tools
used in our remediation and testing efforts, replacement software, replacement
hardware, replacement embedded devices, and miscellaneous costs associated with
their testing and replacement.
We have identified the following major areas of risk relating to our Year
2000 Issue exposure: 1) vendors and suppliers, 2) internal plant controls and
systems, 3) telecommunications, including phone systems and cellular phones, 4)
large customers, and 5) rail transportation. We consider vendors and suppliers
a risk because of the lack of control we have over their operations. We are in
the process of contacting by letter each vendor or supplier critical to our
operations for information pertaining to their Year 2000 readiness. We consider
our plant controls and systems a risk due to the complexity, variety, and extent
of the embedded systems. We consider telecommunications a risk because it
performs a critical function in a large number of our business processes and
plant control functions. We consider large customers a risk because of the
influence their electrical usage patterns have on our electrical generation and
distribution systems. We consider rail transportation a risk because of our
dependence for delivery of coal used at our coal-fired generating plants.
The most reasonably likely worst case scenario we anticipate is the loss
or partial interruption of local and long-distance telephone service, the
interruption or significant delay to rail service effecting the coal deliveries
to our generating plants, the unscheduled shut-down of the Wolf Creek nuclear
operating plant, the potential loss of load from one or more large customers,
and the loss of minimal generating capacity in the region for brief periods of
time. Approximately 62% of our generating capacity utilizes coal as fuel.
We are addressing these risks in our contingency plans, and have or will
be implementing a number of action plans in advance to mitigate these and other
potential risks. Our contingency plans include pre-established actions to deal
with potential operational impacts. For example, we have installed a
company-wide trunked radio system which can be used in place of the commercial
telecommunications systems, in the event those systems are interrupted. We plan
to place in service, at reduced output, generating units which would normally
not be in service to help accommodate load shifts that would be caused by a
large customer suddenly dropping or significantly reducing their electricity
usage, or in the event of unexpected loss of some of our generation capacity or
generation capacity of others in the region. In addition, we generally maintain
more than a 30-day supply of coal at each of our coal-fired generating plants,
reducing the
effect of any temporary interruption of rail transportation and an unscheduled
temporary shut-down of the Wolf Creek nuclear operating plant discussed below.
While all business units and departments have developed contingency plans
to cover essential business functions and anticipated possible Year
2000-related failure or interruption, these plans are continually reviewed and
updated based on information learned as our Year 2000 readiness efforts
proceed.
WOLF CREEK NUCLEAR OPERATING CORPORATION (WCNOC): WCNOC has been evaluating
and adjusting all known date-sensitive systems and equipment for Year 2000
compliance. WCNOC is developing a plan to effect the readiness of the plant for
the coming of the Year 2000. This plan is designed to closely parallel the
guidance provided by the Nuclear Energy Institute and the Nuclear Regulatory
Commission (NRC). WCNOC is partnering with several industry groups to share
information regarding evaluating items that are Year 2000 sensitive. As
applications and devices are confirmed to be Year 2000 non-compliant, business
decisions are being made to repair or retire the item.
On May 11,1998 the NRC issued Generic Letter 98-01 entitled "Year 2000
Readiness of Computer Systems at Nuclear Power Plants." This letter expressed
the NRC's expectations with regard to Year 2000 readiness. The letter also
requires the licensee to file its Year 2000 plan and status report no later than
July 1, 1999.
In order to access the licensees progress in preparing for Year 2000, the
NRC has scheduled audits at various nuclear power plant facilities during 1998
and early 1999. One of these audits will be conducted at WCNOC during the month
of November, 1998. The objectives of this audit are as follows:
- To assess the effectiveness of licensee programs for achieving Year 2000
readiness and in addressing compliance with the terms and conditions of
their license and NRC regulations and continued safe operation.
- To evaluate program implementation activities to assure that licensees
are on schedule to achieve Year 2000 readiness in accordance with
General Letter 98-01 guidelines.
- To assess the licensee contingency planning for addressing risks
associated with events resulting from Year 2000 problems.
Any open items resulting from the audit will be discussed with the licensee
along with the avenue to achieve resolution.
Since Wolf Creek was designed during the 1970 and 1980s, most of the
originally installed electronic plant equipment did not contain
microprocessors. During this time frame, the NRC would not allow components
required for safe shutdown of the plant to contain microprocessors. For these
reasons, there is minimal Year 2000 risk associated with being able to safely
shutdown the plant and maintain it in a safe shutdown condition. During the
years since original construction, microprocessor based electronic components
have been added in non-safe shutdown applications. Some of these (only two
identified thus far and no others are anticipated) could shutdown the plant.
Special attention will be paid to these devices to ensure that there is minimal
Year 2000 risk associated with them.
In the original design and through plant modifications, microprocessor
based components were installed in plant monitoring applications such as the
radiation monitoring equipment and the plant information computer. Similarly,
in the area of non-plant operation computers and applications, WCNOC has several
items which will require remediation. There is a possibility that these devices
could cause a Year 2000 problem. Failure to adequately remediate any Year 2000
problems could require the plant's operations be limited or shutdown.
WCNOC is developing contingency plans to address risk associated with Year
2000 Issues. These plans generally follow the guidance contained in NUCLEAR
ENERGY INSTITUTE/NUCLEAR UTILITY SOFTWARE MANAGEMENT GROUP 98-07, NUCLEAR
UTILITY READINESS CONTINGENCY PLANNING. The steps to be taken involve the
determination of which items present a critical risk to the facility, review of
the identified risks, determining mitigation strategies, and ensuring that each
responsible organization develops appropriate contingency plans.
WCNOC estimates that the most reasonably likely worse case scenario would
be a temporary plant shutdown due to external electrical grid disturbances.
While these disturbances may result in a temporary shutdown, the safety of the
plant will not be compromised and the unit should restart shortly after the grid
disturbance has been corrected.
The table below sets forth estimates of the status of the components of
WCNOC's Year 2000 readiness program at September 30, 1998.
Estimated
Completion Percentage
Phase Date Completion
Identification and assessment of plant components Mar 99 75%
Identification and assessment of computers/software (Note 1) Jun 99 20%
Identification and Assessment of Other Areas (Note 2) Jun 99 10%
Identified remediations complete (Note 3) Sep 99 10%
Comprehensive testing guidelines 100%
Comprehensive testing Jun 99 0%
Contingency planning guidelines 100%
Contingency planning individual plans Mar 99 0%
Note 1 - Several computers are on three year lease and will not be obtained until 1999.
Note 2 - Includes items such as measuring/test and telecommunications equipment.
Note 3 - Two major modifications are currently scheduled to be completed after June 1999,
the remaining remediations are presently scheduled for completion prior to July 1999.
WCNOC has established a goal of completing all assessments of affected
systems by the end of the second quarter of 1999, with remediations being
completed by the end of the third quarter. Remediations are being planned and
initiated as the detailed assessment phase identifies the need, not at the end
of the assessment period. The areas where the greatest potential for necessary
remediations and/or more complex remediations could result were the first ones
targeted for assessment so remediation planning could be started earlier. Many
remediations will be completed before the end of the assessment period. In
addition, WCNOC is communicating with others with which its systems interface or
on which they rely with respect to those companies' Year 2000 compliance.
Letters have been sent to all pertinent vendors to acquire this information.
WCNOC has estimated the costs to complete the Year 2000 project at $4.6
million ($2.1 million, company's share). As of September 30, 1998, $0.6 million
($0.3 million, company's share) had been spent on the project. A summary of the
projected costs and actual costs through September 30, 1998 is as follows:
Projected Actual
Costs Costs
(Dollars in Thousands)
Wolf Creek Labor and Expenses $ 494 $191
Contractor Costs 646 262
Remediation Costs 3,493 160
Total $4,633 $613
Approximately $3.5 million ($1.6 million, company's share) of WCNOC's
total Year 2000 cost is associated with remediation. Of these remediation
costs, $2.4 million ($1.1 million, company's share) are associated with 7 major
jobs which are in the initial stages. All of these costs are being expensed as
they are incurred and are being funded on a daily basis along with our normal
costs of operations. In order to minimize the effects of delaying other
information technology projects, WCNOC has and will continue to augment staffing
during the identification and remediation phases of the project. This staffing,
which will include both programmers and technical support personnel, will also
be available during the testing and initial operating phases of the various
systems.
SECURITY OPERATIONS: Protection One has established a formal Year 2000
readiness program to investigate and correct Year 2000 problems in its primary
information systems. All business components are participating in this formal
program, using a standardized methodology.
The goal of Protection One's Year 2000 readiness program is to identify and
assess all computer programs, computer hardware and embedded systems critical to
its business and operational needs that could be potentially affected by the
Year 2000 date change, to repair or replace such systems found to be
incompatible with Year 2000 dates, and develop and implement predetermined
actions to be used as contingencies in the event any critical business function
fails unexpectedly or is interrupted. The program is directed by a written
policy which provides guidance and methodology for the business components to
follow. Due to varying degrees of exposure of business components to the Year
2000 Issue, some are further along in the readiness process than others. All
departments have completed the awareness, inventory and assessment phases
(Identification and Assessment Phase). The majority of Protection One's current
efforts are in the remediation and testing phase. Development of contingency
plans are scheduled to commence in January 1999 and conclude in June 1999.
Overall, based on manhhours as a measure of work effort, Protection One's
management believes the readiness effort is approximately 20% complete.
Protection One's Year 2000 readiness program addresses commercial computer
software, including mainframe, client/server and desktop software, internally
developed computer software, including mainframe, client/server and desk-top
software; computer hardware, including mainframe, client/server and desktop,
network, communications, and peripherals; devices using embedded computer chips,
including controls, sensors, facilities equipment, heating, ventilating and air
conditioning (HVAC) equipment; and relationships with third-party vendors,
suppliers, and customers. Protection One's Year 2000 policy requires testing as
a method for verifying the Year 2000 readiness of an item. For those items
which
are impossible to test, other methods will be used to identify the readiness
status, provided adequate contingency plans are established to provide a
workaround or backup for the item.
The table below summarizes the estimated status of the business components
of Protection One's Year 2000 readiness program at September 30, 1998.
Estimated
Completion Percentage
Phase Date Completion
Identification and assessment Oct 1998 100%
Remediation and unit testing
Business critical process Feb 1999 33%
Less critical process Apr 1999 2%
Comprehensive testing
Guidelines and tools Dec 1998 5%
Testing Jun 1999 0%
Contingency planning
Guidelines and tools Dec 1998 80%
Planning Jun 1999 0%
Contingency plan testing and resourcing
Guidelines and tools Nov 1998 2%
Testing and resourcing Aug 1999 0%
Mobilization and alert Dec 1999 0%
Protection One estimates the total costs to update all critical operating
systems for Year 2000 readiness will be approximately $3 million. As of
September 30, 1998, approximately $0.5 million of these costs had been incurred.
These costs include labor for both company employees and contract personnel used
in the Year 2000 program, and non-labor costs for software tools used in the
remediation and testing efforts, replacement software, replacement hardware,
replacement embedded devices and other such costs associated with testing and
replacement. The costs of the Year 2000 readiness program are substantially all
information technology-related. Non-IT systems are highly critical to
Protection One's business, but are largely beyond the company's ability to
control. This includes telephone, electricity, transportation, and governmental
infrastructure.
Following the Identification and Assessment Phase, Protection One believes
that most of its business-critical systems are Year 2000 ready at this time with
the remainder to be remediated prior to the end of the first quarter of 1999.
Effective contingency plans will be developed and tested prior to January 1,
2000 in an effort to cover all Protection One business-critical systems and
processes. However, contingency plans are being formulated should the non-IT
problems arise.
The most reasonably likely worst case scenario is to be found in the area
of external services, specifically firms providing electrical power, heating,
ventilating and air conditioning, and telecommunications (local and long
distance). While Protection One believes the total collapse of service
providers is unlikely, one or more of the following scenarios could occur: (1)
temporary disruption or unpredictable provision of nationwide long-distance
service; (2) temporary or unpredictable provision of local telephone service;
and (3) temporary interruption or unpredictable provision of electrical power.
A period of disruption to the operations and the implementation of contingency
plans could increase operating expenses and have a material averse effect on
Protection One's revenues.
Protection One is developing contingency plans for each of the three most
reasonably likely worst case scenarios. Such plans would include (1) backup
arrangements with alternative long distance service providers, including
wireless services; (2) backup arrangements with alternative local telephone
service providers in areas of the country where they exist and also including
wireless services; and (3) relocation or transfer of some essential business
functions to other Protection One sites which are unaffected. Widespread or
long-term instances of any of the three identified most reasonably likely
scenarios will nonetheless, result in interruptions to Protection One's business
processes. Contingency plans will ameliorate, but not eliminate, problems of
such magnitude.
OTHER: For information on the Year 2000 readiness status of ONEOK, Inc.
and KCPL, see Form 10-Q for these respective companies.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
WESTERN RESOURCES, INC.
Part II Other Information
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The company held a Special Meeting of Shareowners on July 30, 1998. At the
meeting the shareowners, representing 52,231,780 shares either in person or by
proxy, voted to:
Approve and adopt the Amended and Restated Agreement and Plan of Merger,
dated March 18, 1998 by and among Western Resources, Kansas Gas and Electric
Company, NKC, Inc., and Kansas City Power and Light Company and the transactions
contemplated thereby providing, among other things, for the issuance of a number
of shares of Western Resources Common Stock sufficient to satisfy the terms of
the merger agreement and the transfer by Western Resources of substantially all
of its assets, as provided for in the Joint Proxy Statement/Prospectus.
Votes
For Against Abstain
50,765,561 864,981 601,238
Amend the Restated Articles of Incorporation of Western Resources to
increase, immediately prior to the share issuance, the number of authorized
shares of Western Resources Common Stock from 85,000,000 shares to 300,000,000
shares.
Votes
For Against Abstain
47,312,657 4,146,324 772,799
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 12 - Computation of Ratio of Consolidated Earnings
to Fixed Charges for 12 Months Ended
September 30, 1998 (filed electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
Form 8-K filed July 13, 1998 - Kansas City Power and Light
Company's December 31, 1997 Form 10-K and March 31, 1998
Form 10-Q.
Form 8-K filed August 3, 1998 - Press release reporting second
quarter earnings issued July 30, 1998, press release
announcing approval by shareholders of Kansas City Power and
Light Company merger agreement issued on July 30, 1998
Form 8-K filed August 6, 1998 - Kansas City Power and Light
Company's June 30, 1998 Form 10-Q.
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 November 6, 1998 By /s/ WILLIAM B. MOORE
William B. Moore, Acting Executive
Vice President, Chief Financial
Officer and Treasurer
Date November 6, 1998 By /s/ JERRY D. COURINGTON
Jerry D. Courington,
Controller
Exhibit 12
WESTERN RESOURCES, INC.
Computations of Ratio of Earnings to Fixed Charges and
Computations of Ratio of Earnings to Combined Fixed Charges
and Preferred and Preference Dividend Requirements
(Dollars in Thousands)
Unaudited
Twelve
Months
Ended
September 30, Year Ended December 31,
1998 1997 1996 1995 1994 1993
Net Income . . . . . . . . . . . $ 58,406 $ 494,094 $168,950 $181,676 $187,447 $177,370
Taxes on Income. . . . . . . . . 7,195 378,645 86,102 83,392 99,951 78,755
Net Income Plus Taxes. . . . 65,601 872,739 255,052 265,068 287,398 256,125
Fixed Charges:
Interest on Long-Term Debt . . 164,907 119,389 105,741 95,962 98,483 123,551
Interest on Other Indebtedness 24,428 55,761 34,685 27,487 20,139 19,255
Interest on Other Mandatorily
Redeemable Securities. . . . 18,075 18,075 12,125 372 - -
Interest on Corporate-owned
Life Insurance Borrowings. . 39,097 36,167 35,151 32,325 26,932 16,252
Interest Applicable to
Rentals. . . . . . . . . . . 34,154 34,514 32,965 31,650 29,003 28,827
Total Fixed Charges. . . . 280,661 263,906 220,667 187,796 174,557 187,885
Preferred and Preference Dividend
Requirements:
Preferred and Preference
Dividends. . . . . . . . . . 4,539 4,919 14,839 13,419 13,418 13,506
Income Tax Required. . . . . . 559 3,770 7,562 6,160 7,155 5,997
Total Preferred and
Preference Dividend
Requirements . . . . . . 5,098 8,689 22,401 19,579 20,573 19,503
Total Fixed Charges and Preferred
and Preference Dividend
Requirements. . . . . . . . . 285,759 272,595 243,068 207,375 195,130 207,388
Earnings (1) . . . . . . . . . . $ 346,262 $1,136,645 $475,719 $452,864 $461,955 $444,010
Ratio of Earnings to Fixed
Charges . . . . . . . . . . . . 1.23 4.31 2.16 2.41 2.65 2.36
Ratio of Earnings to Combined Fixed
Charges and Preferred and Preference
Dividend Requirements. . . . . 1.21 4.17 1.96 2.18 2.37 2.14
(1) Earnings are deemed to consist of net income to which has been added income taxes (including net
deferred investment tax credit) and fixed charges. Fixed charges consist of all interest on
indebtedness, amortization of debt discount and expense, and the portion of rental expense which
represents an interest factor. Preferred and preference dividend requirements consist of an
amount equal to the pre-tax earnings which would be required to meet dividend requirements on
preferred and preference stock.
5
1000
9-MOS
DEC-31-1998
SEP-30-1998
15688
306139
345530
29322
89724
42538
5768528
2001810
8023356
1262881
2717019
220000
24858
328666
1717539
8023356
1547046
1547046
638252
1240679
0
0
164448
208568
72107
136461
0
1591
0
138052
2.05
2.05
