Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-707
KANSAS CITY POWER & LIGHT COMPANY
(Exact name of registrant as specified in its charter)
Missouri 44-0308720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Walnut, Kansas City, Missouri 64106-2124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 556-2200
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes (X) No ( )
The number of shares outstanding of the registrant's Common stock at
May 8, 2001, was 61,856,069 shares.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Balance Sheets
(Unaudited)
March 31 December 31
2001 2000
(thousands)
ASSETS
Current Assets
Cash and cash equivalents $ 11,404 $ 34,877
Receivables 113,948 115,356
Equity securities 8,544 18,597
Fuel inventories, at average cost 19,393 20,802
Materials and supplies, at average cost 46,943 46,402
Deferred income taxes 1,842 737
Other 42,893 14,455
Total 244,967 251,226
Nonutility Property and Investments
Telecommunications property 375,663 -
Affordable housing limited partnerships 96,951 98,129
Gas property and investments 46,971 47,654
Nuclear decommissioning trust fund 59,131 56,800
Other 79,566 81,624
Total 658,282 284,207
Utility Plant, at Original Cost
Electric 3,847,233 3,832,655
Less-accumulated depreciation 1,689,498 1,645,450
Net utility plant in service 2,157,735 2,187,205
Construction work in progress 371,679 309,629
Nuclear fuel, net of amortization
of $114,173 and $110,014 26,995 30,956
Total 2,556,409 2,527,790
Deferred Charges
Regulatory assets 137,541 139,456
Prepaid pension costs 72,692 68,342
Goodwill 106,621 11,470
Other deferred charges 15,432 11,400
Total 332,286 230,668
Total $ 3,791,944 $ 3,293,891
LIABILITIES AND CAPITALIZATION
Current Liabilities
Notes payable $ 20,345 $ -
Commercial paper 198,771 55,600
Current maturities of long-term debt 253,645 93,645
Accounts payable 137,149 158,242
Accrued taxes 14,169 14,402
Accrued interest 14,081 12,553
Accrued payroll and vacations 23,473 28,257
Accrued refueling outage costs 4,725 1,890
Other 32,205 14,877
Total 698,563 379,466
Deferred Credits and Other Liabilities
Deferred income taxes 614,948 590,220
Deferred investment tax credits 48,965 50,037
Deferred telecommunications revenue 42,053 -
Other 127,749 121,907
Total 833,715 762,164
Capitalization (see statements) 2,259,666 2,152,261
Commitments and Contingencies (Note 4)
Total $ 3,791,944 $ 3,293,891
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
1
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Capitalization
(Unaudited)
March 31 December 31
2001 2000
(thousands)
Long-term Debt (excluding current maturities)
General Mortgage Bonds
Medium-Term Notes due 2002-08,
7.18% weighted-average rate $ 206,000 $ 206,000
4.49%* Environmental Improvement Revenue
Refunding Bonds due 2012-23 158,768 158,768
Senior Notes
7.125% due 2005 250,000 250,000
Unamortized discount (522) (550)
Medium-Term Notes
6.69%** due 2002 - 200,000
Environmental Improvement Revenue Refunding Bonds
5.18%* Series A & B due 2015 106,500 106,500
4.50% Series C due 2017 50,000 50,000
4.35% Series D due 2017 40,000 40,000
Subsidiary Obligations
Senior Discount Notes
12.5% due 2008 196,699 -
Unamortized discount (2,347) -
R.S. Andrews Enterprises, Inc. long-term debt
8.25% weighted-average rate due 2002-07 2,768 -
Affordable Housing Notes
8.29% weighted-average rate due 2002-08 31,129 31,129
KLT Inc. Bank Credit Agreement
5.78% due 2003 111,500 -
Total 1,150,495 1,041,847
Company-obligated Mandatorily Redeemable
Preferred Securities of a trust holding solely
KCPL Subordinated Debentures 150,000 150,000
Cumulative Preferred Stock
$100 Par Value
3.80% - 100,000 shares issued 10,000 10,000
4.50% - 100,000 shares issued 10,000 10,000
4.20% - 70,000 shares issued 7,000 7,000
4.35% - 120,000 shares issued 12,000 12,000
$100 Par Value - Redeemable
4.00% 62 62
Total 39,062 39,062
Common Stock Equity
Common stock-150,000,000 shares authorized
without par value 61,908,729 shares issued,
stated value 449,697 449,697
Retained earnings (see statements) 460,139 473,321
Accumulated other comprehensive income
Income on derivative hedging instruments 11,926 -
Capital stock premium and expense (1,653) (1,666)
Total 920,109 921,352
Total $ 2,259,666 $ 2,152,261
* Variable rate securities, weighted-average rate as of March 31, 2001
** Variable rate securities, weighted-average rate as of December 31, 2000
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
2
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31 2001 2000
(thousands)
Operating Revenues
Electric sales revenues $250,804 $190,333
Gas sales revenues 11,975 8,038
Telecommunications revenues 2,267 -
Other revenues 16,811 962
Total 281,857 199,333
Operating Expenses
Fuel 32,714 29,853
Purchased power 70,366 14,798
Gas purchased and production expenses 12,155 3,246
Other 79,800 55,520
Maintenance 21,309 20,061
Depreciation and depletion 36,631 31,594
(Gain) Loss on property (1,308) 1,025
General taxes 22,852 21,217
Total 274,519 177,314
Operating income 7,338 22,019
Loss from equity investments (536) (5,758)
Other income and expenses (1,180) (7,843)
Interest charges 24,221 17,352
Income before income taxes, extraordinary
item and cumulative effect of changes
in accounting principles (18,599) (8,934)
Income taxes (15,627) (9,509)
Income before extraordinary item and
cumulative effect of changes in
accounting principles (2,972) 575
Early extinguishment of debt,
net of income taxes 15,872 -
Cumulative effect to January 1, 2000,
of changes in accounting principles,
net of income taxes - 30,073
Net income 12,900 30,648
Preferred stock dividend requirements 412 412
Earnings available for common stock $ 12,488 $ 30,236
Average number of common shares outstanding 61,853 61,898
Basic and diluted earnings per common share
before extraordinary item and cumulative
effect of changes in accounting principles $ (0.06) $ -
Early extinguishment of debt 0.26 -
Cumulative effect to January 1, 2000, of
changes in accounting principles - 0.49
Basic and diluted earnings per common share $ 0.20 $ 0.49
Cash dividends per common share $ 0.415 $ 0.415
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31 2001 2000
(thousands)
Cash Flows from Operating Activities
Net income $ 12,900 $ 30,648
Adjustments to reconcile income to net cash
from operating activities:
Early extinguishment of debt, net of income taxes (15,872) -
Cumulative effect of changes in
accounting principles, net of income taxes - (30,073)
Depreciation and depletion 36,631 31,594
Amortization of:
Nuclear fuel 4,159 4,319
Other 3,930 2,957
Deferred income taxes (net) (1,585) (173)
Investment tax credit amortization (1,072) (1,118)
Accretion of Senior Discount Notes 3,892 -
Loss from equity investments 536 5,758
Asset impairments - 1,429
Allowance for equity funds
used during construction (2,308) (36)
Other operating activities (Note 1) (55,419) 26,182
Net cash from operating activities (14,208) 71,487
Cash Flows from Investing Activities
Utility capital expenditures (73,838) (78,978)
Allowance for borrowed funds
used during construction (4,118) (2,499)
Purchases of investments (36,284) (26,233)
Purchases of nonutility property (17,921) (6,162)
Sale of securities 9,478 -
Hawthorn No. 5 partial insurance recovery 15,000 -
Loan to DTI prior to majority ownership (94,000) -
Other investing activities (888) (6,048)
Net cash from investing activities (202,571) (119,920)
Cash Flows from Financing Activities
Issuance of long-term debt 111,500 268,000
Repayment of long-term debt (40,127) (44,000)
Net change in short-term borrowings 148,159 (147,799)
Dividends paid (26,082) (26,100)
Other financing activities (144) (634)
Net cash from financing activities 193,306 49,467
Net Change in Cash and Cash Equivalents (23,473) 1,034
Cash and Cash Equivalents at Beginning of Year 34,877 13,073
Cash and Cash Equivalents at End of Period $ 11,404 $ 14,107
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
4
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31
2001 2000
(thousands)
Net income $ 12,900 $ 30,648
Other comprehensive income (loss):
Loss on derivative hedging instruments (2,590) -
Income tax benefit 1,080 -
Net loss on
derivative hedging instruments (1,510) -
Reclassification adjustment, net of tax (4,007) 2,337
Comprehensive income before cumulative
effect of a change in accounting
principles, net of income taxes 7,383 32,985
Cumulative effect to January 1, 2001,
of a change in accounting principles,
net of income taxes 17,443 -
Comprehensive Income $ 24,826 $ 32,985
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Consolidated Statements of Retained Earnings
(Unaudited)
Three Months Ended
March 31
2001 2000
(thousands)
Beginning balance $ 473,321 $ 418,952
Net income 12,900 30,648
486,221 449,600
Dividends declared
Preferred stock - at required rates 412 413
Common stock 25,670 25,687
Ending balance $ 460,139 $ 423,500
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
5
KANSAS CITY POWER & LIGHT COMPANY
CERTAIN FORWARD-LOOKING INFORMATION
Statements made in this report which are not based on historical facts
are forward-looking and, accordingly, involve risks and uncertainties
that could cause actual results to differ materially from those
discussed. Any forward-looking statements are intended to be as of
the date on which such statement is made. In connection with the safe
harbor provisions of the Private Securities Litigation Reform Act of
1995, we are providing a number of important factors that could cause
actual results to differ materially from provided forward-looking
information. These important factors include:
- - future economic conditions in the regional, national and
international markets
- - state, federal and foreign regulation
- - weather conditions
- - financial market conditions, including, but not limited to changes
in interest rates
- - inflation rates
- - increased competition, including, but not limited to, the
deregulation of the United States electric utility industry, and the
entry of new competitors
- - ability to carry out marketing and sales plans
- - ability to achieve generation planning goals and the occurrence of
unplanned generation outages
- - nuclear operations
- - ability to enter new markets successfully and capitalize on growth
opportunities in nonregulated businesses
- - adverse changes in applicable laws, regulations or rules governing
environmental (including air quality regulations), tax or accounting
matters
- - delays in the anticipated in service dates of new generating
capacity
This list of factors may not be all-inclusive since it is not possible
to predict all possible factors.
THE COMPANY
The consolidated company (referred to throughout as consolidated or
the Company) consists of Kansas City Power & Light Company (KCPL), KLT
Inc., DTI Holdings, Inc. (DTI), Strategic Energy LLC (SEL), Home
Service Solutions Inc. (HSS), R.S. Andrews Enterprises, Inc. (RSAE)
and Great Plains Power Incorporated.
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Notes to Consolidated Financial Statements
In management's opinion, the consolidated interim financial statements
reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations for
the interim periods presented. These statements and notes should be
read in connection with the financial statements and related notes
included in our 2000 annual report on Form 10-K. The consolidated
financial statements include the accounts of KCPL, KLT Inc., HSS and
Great Plains Power Incorporated.
1. SUPPLEMENTAL CASH FLOW INFORMATION (a)
Three Months Ended
March 31
2001 2000
(thousands)
Cash flows affected by changes in:
Receivables $ 6,498 $ 19,153
Fuel inventories 1,409 (1,439)
Materials and supplies (541) (937)
Accounts payable (58,611) 9,848
Accrued taxes (257) 2,470
Accrued interest 1,486 (3,548)
Wolf Creek refueling outage accrual 2,835 2,646
Pension and postretirement benefit
obligations (2,800) (4,552)
Other (5,438) 2,541
Total other operating activities $ (55,419) $ 26,182
Cash paid during the period for:
Interest $ 22,181 $ 20,444
Income taxes $ 145 $ 62
7
During the first quarter of 2001, KLT Telecom increased its equity
ownership in DTI to a majority ownership and HSS increased its equity
ownership in RSAE to a majority ownership. The effect of these
transactions is summarized in the table below (c).
DTI RSAE Total
(thousands)
Cash paid to obtain
majority ownership $ (39,855) $ (560) $ (40,415)
Subsidiary cash 4,557 1,053 5,610
Purchases of subsidiaries,
net of cash received $ (35,298) $ 493 (34,805)
Purchases of other investments (1,479)
Total purchases of investments $ (36,284)
DTI at RSAE at
February 8 January 1
2001 2001
Initial consolidation of (thousands)
subsidiaries:
Assets
Cash $ 4,557 $ 1,053
Receivables 1,012 4,078
Other nonutility property
and investments 363,825 6,267
Goodwill 67,774 24,496
Other assets 5,143 3,919
Eliminate equity investment (64,870) (7,200)
Total assets $377,441 $ 32,613
Liabilities
Notes payable $ 5,300 $ 10,057
Accounts payable 31,299 6,219
Deferred income taxes 7,437 -
Deferred telecommunications
revenue 41,522 -
Other liabilities and
deferred credits 7,423 13,442
Loan from KLT Telecom (b) 94,000 -
Long-term debt 190,460 2,895
Total liabilities $377,441 $ 32,613
(a) The initial consolidations of DTI and RSAE are not reflected
in the Consolidated Statement of Cash Flows for the three months
ended March 31, 2001.
(b) KLT Telecom provided a $94 million loan to DTI for the
completion of the tender offer of 50.4 percent of DTI's Senior
Discount Notes prior to increasing its DTI investment to a
majority ownership. This loan is eliminated in consolidation.
(c) Additional adjustments to purchase accounting may be made.
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2. CAPITALIZATION
KCPL Financing I (Trust) has previously issued $150,000,000 of 8.3%
preferred securities. The sole asset of the Trust is the $154,640,000
principal amount of 8.3% Junior Subordinated Deferrable Interest
Debentures, due 2037, issued by KCPL.
KCPL is authorized to issue an additional $150 million of debt
securities under its shelf registration statement dated November 21,
2000.
3. SEGMENT AND RELATED INFORMATION
The Company's reportable segments include KCPL, KLT Inc. and HSS.
KCPL includes the regulated electric utility and unallocated corporate
charges. KLT Inc. and HSS are holding companies for various
unregulated business ventures.
The summary of significant accounting policies applies to all of the
segments. The Company evaluates performance based on several factors
including net income. The Company eliminates all intersegment sales
and transfers. The tables below reflect summarized financial
information concerning the Company's reportable segments.
For the three months ended March 31 2001 2000
KCPL (millions)
Operating revenues $ 198.8 $ 190.3
Fuel expense (32.7) (29.8)
Purchased power expense (24.2) (14.8)
Other (93.0) (91.9)
Depreciation and depletion (32.7) (29.3)
Other income and expenses (3.2) (3.9)
Interest charges (19.4) (13.9)
Income taxes 4.3 (3.2)
Cumulative effect of changes
in pension accounting - 30.1
Net income (loss) $ (2.1) $ 33.6
KLT Inc.
Operating revenues $ 66.4 $ 8.0
Purchased power expense (46.2) -
Other (22.3) (6.6)
Depreciation and depletion (3.3) (1.8)
Gain (loss) on property 1.3 (1.0)
Loss from equity investments (0.4) (4.6)
Other income and expenses (0.4) (4.4)
Interest charges (4.4) (3.4)
Income taxes 10.3 11.9
Early extinguishment of debt 15.9 -
Net income (loss) $ 16.9 $ (1.9)
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For the three months ended March 31 2001 2000
HSS (millions)
Operating revenues $ 16.7 $ 1.0
Other (20.8) (1.6)
Depreciation and depletion (0.6) (0.5)
Loss from equity investments (0.1) (1.2)
Other income and expenses 2.3 0.5
Interest charges (0.4) -
Income taxes 1.0 0.7
Net loss $ (1.9) $ (1.1)
Consolidated
Operating revenues $ 281.9 $ 199.3
Fuel expense (32.7) (29.8)
Purchased power expense (70.4) (14.8)
Other (a) (136.1) (100.1)
Depreciation and depletion (36.6) (31.6)
Gain (loss) on property 1.3 (1.0)
Loss from equity investments (0.5) (5.8)
Other income and expenses (1.3) (7.8)
Interest charges (24.2) (17.3)
Income taxes 15.6 9.4
Early extinguishment of debt and cumulative
effect of changes in pension accounting 15.9 30.1
Net income $ 12.9 $ 30.6
(a) Other includes gas purchased and production expenses,
telecommunications expenses, other operating, maintenance
and general tax expenses.
For the three months ended
March 31 KCPL KLT Inc. HSS Consolidated
2001 (millions)
Assets $2,997.5 $ 737.4 $ 57.0 $3,791.9
Net equity method investments - 24.1 - 24.1
Capital and investments
expenditures 74.7 53.8 (0.5) 128.0
2000
Assets $2,754.5 $ 299.5 $ 49.3 $3,103.3
Net equity method investments - 37.5 24.4 61.9
Capital and investments
expenditures 79.8 31.6 - 111.4
4. COMMITMENTS AND CONTINGENCIES
Environmental Matters
The Company operates in an environmentally responsible manner and uses
the latest technology available to avoid and treat contamination. The
Company continually conducts environmental audits designed to ensure
compliance with governmental regulations and to detect contamination.
However, governmental bodies may impose additional or more rigid
environmental regulations that could require substantial changes to
operations or facilities.
10
Mercury Emissions
In December 2000, The United States Environmental Protection
Agency (EPA) announced it would propose regulations to reduce
mercury emissions by 2003 and issue final rules by 2004. KCPL
cannot predict the likelihood or compliance costs of such
regulations.
Air Particulate Matter
In July 1997, the EPA published new air quality standards for
particulate matter. Additional regulations implementing these
new particulate standards have not been finalized. Without the
implementation regulations, the impact of the standards on KCPL
cannot be determined. However, the impact on KCPL and other
utilities that use fossil fuels could be substantial. Under the
new fine particulate regulations, the EPA is conducting a three-
year study of fine particulate emissions. Until this testing and
review period has been completed, KCPL cannot determine
additional compliance costs, if any, associated with the new
particulate regulations.
Nitrogen Oxide
In 1997, the EPA also issued new proposed regulations on reducing
nitrogen oxide (NOx) emissions. The EPA announced in 1998 final
regulations implementing reductions in NOx emissions. These
regulations initially called for 22 states, including Missouri,
to submit plans for controlling NOx emissions. The regulations
require a significant reduction in NOx emissions from 1990 levels
at KCPL's Missouri coal-fired plants by the year 2003.
To achieve the reductions proposed in the 1997 NOx reduction
program, KCPL would need to incur significant capital costs,
purchase power or purchase NOx emissions allowances. It is
possible that purchased power or emissions allowances may be too
costly or unavailable.
Preliminary analysis of the regulations indicates that selective
catalytic reduction technology, as well as other changes, may be
required for some of the KCPL units. Currently, KCPL estimates
that additional capital expenditures to comply with these
regulations could range from $40 million to $60 million.
Operations and maintenance expenses could also increase by more
than $2.5 million per year. These capital expenditure estimates
do not include the costs of the new air quality control equipment
being installed at Hawthorn No. 5, a unit currently being
rebuilt. The air control equipment being installed at Hawthorn
No. 5 will comply with the proposed requirements discussed above.
KCPL continues to refine its preliminary estimates and explore
alternatives to comply with these new regulations in order to
minimize, to the extent possible, KCPL's capital costs and
operating expenses. The ultimate cost of these regulations could
be significantly different from the amounts estimated above.
In December 1998, KCPL and several other western Missouri
utilities filed suit against the EPA over the inclusion of
western Missouri in the 1997 NOx reduction program. On March 3,
2000, a three-judge panel of the District of Columbia Circuit of
the U.S. Court of Appeals sent the NOx rules related to Missouri
back to the EPA stating the EPA failed to prove that fossil plants
in the western part of Missouri contribute to ozone formation in
downwind states. On March 5, 2001, the United States Supreme Court,
acting without comment, denied the petitions for a writ of
certiorari filed to review the March 3, 2000, U.S. Court of
Appeals for the District of Columbia Circuit Court of Appeals'
decision in the NOx State Implementation Plan (SIP) Call litigation.
The March 3, 2000, U.S. Court of Appeals' decision largely upheld the
NOx SIP call but remanded a few minor issues to EPA and is therefore
final. The impact of this court decision will not be known until
the EPA issues the
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implementing regulations, however, it is likely to delay the
implementation of new NOx regulations by EPA in the western portion
of Missouri for some time.
In May 1999, a three-judge panel of the District of Columbia Circuit
of the U.S. Court of Appeals found certain portions of the NOx control
program unconstitutional in a related case. The U.S. Supreme
Court heard oral arguments on the EPA's appeal of this decision
on November 7, 2000 and issued its decision on February 27, 2001.
In the February 27, 2001, decision, the U.S. Supreme Court
essentially upheld the basis for the NOx SIP Call and remanded to
the U.S. Court of Appeals for the District of Columbia Circuit
further proceedings on implementation issues for the 8 hour ozone
and particulate matter ambient air standards issued in mid-1997
in a manner consistent with the Supreme Court opinion. After the
Court of Appeals' final decision of this case, EPA will have to
develop a reasonable interpretation of the non-attainment
implementation provisions insofar as they apply to revised ozone
National Ambient Air Quality Standards. The effect of the U.S.
Court of Appeals for the District of Columbia Circuit may
decrease the severity of the standards with which KCPL ultimately
may need to comply.
In May 2000, the Missouri Air Conservation Commission approved
statewide rate-based NOx regulations requiring compliance with a
rate of 0.35 lbs. NOx / mmBtu of heat input for western Missouri
and 0.25 lbs. NOx / mmBtu of heat input for eastern Missouri and
EPA approved the statewide NOx regulation on December 28, 2000.
The State of Missouri has developed a State Implementation Plan
(SIP) for NOx reduction that was effective January 29, 2001. We
do not anticipate that KCPL will incur significant additional
costs to comply with these new regulations.
Global Warming
At a December 1997 meeting in Kyoto, Japan, the Clinton
Administration supported changes to the International Global
Climate Change treaty that would require a seven percent
reduction in United States carbon dioxide (CO2) emissions below
1990 levels. This treaty has not been submitted to the U.S.
Senate. The Bush administration said it has no intention of
sending the Kyoto Pact to the U.S. Senate for ratification.
Instead, President Bush "has directed his Cabinet secretaries to
begin a review so we can, as a nation, address a serious problem,
which is global warming." The Cabinet-legal review "is under
way," but staff did not indicate how much time it will take
before a proposal is presented to the president.
If national restrictions on electric utility CO2 emissions are
eventually required, the financial impact on KCPL could be
substantial.
Low-Level Waste
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated
that the various states, individually or through interstate compacts,
develop alternative low-level radioactive waste disposal facilities.
The states of Kansas, Nebraska, Arkansas, Louisiana and Oklahoma
formed the Central Interstate Low-Level Radioactive Waste Compact and
selected a site in northern Nebraska to locate a disposal facility.
Wolf Creek Nuclear Operating Corporation (WCNOC) and the owners of the
other five nuclear units in the compact provided most of the pre-
construction financing for this project. As of March 31, 2001, KCPL's
net investment on its books was $7.4 million.
Significant opposition to the project has been raised by Nebraska
officials and residents in the area of the proposed facility, and
attempts have been made through litigation and proposed legislation in
Nebraska to slow down or stop development of the facility. On
December 18, 1998, the application for a license to construct this
project was denied. This issue is being addressed in the courts. The
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passage of time, along with the appointment of a new state
administration in Nebraska, has increased the chances for reversal of
the license denial.
In May 1999, the Nebraska legislature passed a bill withdrawing
Nebraska from the Compact. In August 1999, the Nebraska governor gave
official notice of the withdrawal to the other member states.
Withdrawal will not be effective for five years and will not, of
itself, nullify the site license proceeding.
Coal Contracts
KCPL's remaining share of coal purchase commitments under existing
contracts total $93.5 million. Obligations for the remainder of 2001
through 2003, based on estimated prices for those years, total $32.4
million, $41.6 million, and $19.5 million, respectively. These
amounts are net of purchases made during the first quarter of 2001.
5. RECEIVABLES
March 31 December 31
2001 2000
(thousands)
KCPL Receivable Corporation $ 28,858 $ 48,208
Other Receivables 85,090 67,148
Receivables $113,948 $115,356
Accounts receivable sold under the revolving agreement between KCPL
Receivable Corporation and KCPL totaled $88.9 million at March 31,
2001 and $108.2 million at December 31, 2000. In consideration of the
sale, KCPL received $60 million in cash and the remaining balance in
the form of a subordinated note from KCPL Receivable Corporation.
Other receivables consist primarily of receivables from partners in
jointly-owned electric utility plants, bulk power sales receivables
and accounts receivable held by subsidiaries including receivables
from the increase to a majority ownership of DTI and RSAE (see Note 1 -
Supplemental Cash Flow Information).
6. DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, the Company adopted FASB Statement No. 133 -
Accounting for Derivative Instruments and Hedging Activities, as
amended. FASB 133 requires that every derivative instrument be
recorded on the balance sheet as an asset or liability measured at its
fair value and that changes in the fair value be recognized currently
in earnings unless specific hedge accounting criteria are met.
FASB 133 requires that as of the date of initial adoption, the
difference between the fair market value of derivative instruments
recorded on the balance sheet and the previous carrying amount of
those derivatives be reported in net income or other comprehensive
income, as appropriate, as a cumulative effect of a change in
accounting principle. The adoption of FASB 133 on January 1, 2001
required the Company to record a $0.2 million expense, net of income
tax. The Company did not reflect this immaterial amount as a
cumulative effect. This entry increased interest expense by $0.6
million and reduced purchased power by $0.3 million. The Company also
recorded $17.4 million, net of tax as a cumulative effect of a change
in accounting principle applicable to comprehensive income for its
cash flow hedges.
13
Derivative Instruments and Hedging Activities
The Company's activities expose it to a variety of market risks
including interest rates and commodity prices. Management has
established risk management policies and strategies to reduce the
potentially adverse effects that the volatility of the markets may
have on its operating results.
The Company's interest rate risk management strategy uses derivative
instruments to minimize significant, unanticipated earnings
fluctuations caused by interest-rate volatility on a portion of its
variable rate debt. The Company maintains commodity-price risk
management strategies that use derivative instruments to minimize
significant, unanticipated earnings fluctuations caused by commodity
price volatility.
The Company's risk management activities including the use of
derivatives are subject to the management, direction and control of
Risk Management Committees.
Interest Rate Risk Management
KCPL utilizes interest rate management derivatives to reduce a portion
of KCPL's interest rate risk by converting a portion of its variable
interest rate payments into fixed interest rate payments.
In 2000, KCPL issued $200 million of unsecured, floating rate medium-
term notes. Simultaneously, KCPL entered into interest rate cap
agreements to hedge the interest rate risk on the notes. The cap
agreements are designated as cash flow hedges. The difference between
the fair market value of the cap agreements recorded on the balance
sheet at initial adoption and the unamortized premium was reported in
interest expense.
KCPL entered into interest rate swap agreements to limit the interest
rate on $30 million of long-term debt. These swaps and the options
for renewal do not qualify for hedge accounting. The swap agreements
mature in 2001 and effectively fix the interest to a weighted-average
rate of 3.88%. The fair market values of these agreements and the
option for renewal were recorded as current assets and liabilities and
adjustments to interest expense on the income statement. Changes in
the fair market value of these instruments are recorded in the income
statement.
Commodity Risk Management
SEL utilizes an option and power swap agreements to hedge commodity
prices in various markets. The option and some of the swap agreements
are designated as cash flow hedges.
The remaining swap agreements do not qualify for hedge accounting.
The fair market value of these swaps at January 1, 2001 was recorded
as an asset or liability on the balance sheet and an adjustment to the
cost of purchased power. The change in the fair market value and
future changes in the fair market values of these swaps, will also be
recorded in purchased power.
The option allows SEL to purchase 270 MW of power at a fixed rate of
$21 per MW. The swap agreements protect SEL from price volatility by
fixing the price per MW. The fair market value of this option and the
swap agreements designated as cash flow hedges at January 1, 2001 was
recorded as a current asset and a cumulative effect of a change in
accounting principle in comprehensive income. When the power is
purchased and to the extent the hedge is effective at mitigating the
cost of purchased power, the amounts accumulated in other
comprehensive income are reclassified. However, most of the power
purchased under the option has been sold to customers through
contracts at prices below the fair market value used to value the
option. Therefore, SEL will not receive income to the extent
represented in comprehensive income in the
14
current or future periods. To the extent that the hedges are not
effective, the ineffective portion of the changes in fair market
value will be recorded directly to purchased power.
KLT Gas' risk management policy is to use firm sales agreements or
financial hedge instruments to mitigate its exposure to market price
fluctuations on up to 100% of its daily natural gas production. These
hedging instruments are designated as cash flow hedges. The fair
market value of these instruments at January 1, 2001 was recorded as
current assets, current liabilities, and the cumulative of effect of a
change in an accounting principle in comprehensive income. When the
gas is sold and to the extent the hedge is effective at mitigating the
sales price of gas, the amounts in other comprehensive income are
reclassified. To the extent that the hedges are not effective, the
ineffective portion of the changes in fair market value will be
recorded directly in gas revenues.
KCPL has eight capacity contracts, which it did not consider to be
derivatives. An interpretation from the FASB Derivatives
Implementation Group, if formally cleared by FASB, could define these
capacity contracts as derivatives, which could increase the volatility
of KCPL's future earnings. All implementation guidelines are applied
prospectively with the cumulative effect recorded in the quarter
subsequent to the effective date of the guidelines.
The amounts recorded related to the cash flow hedges are summarized
below.
Cumulative Increase Three Months
Effect to (Decrease) in Ended
Balance Sheet January 1, Comprehensive March 31,
Classfication 2001 Income Reclassified 2001
(millions)
Assets
Other current
assets $ 44.5 $(3.5) $(10.9) $ 30.1
Liabilities
Other current
liabilities (6.8) 0.3 2.1 (4.4)
Other comprehensive
income (17.4) 1.5 4.0 (11.9)
Deferred income
taxes (12.7) 1.1 2.9 (8.7)
Other deferred
credits (7.6) 0.6 1.9 (5.1)
7. HSS PURCHASE OF AN ADDITIONAL OWNERSHIP INTEREST IN RSAE
On March 12, 2001, HSS acquired control of RSAE by acquiring an
additional 22.1% of the shares of RSAE for $0.6 million.
This acquisition has been accounted for by the purchase method of
accounting and the operating results of RSAE have been included in the
Company's consolidated financial statements from January 1, 2001, with
the appropriate adjustments to minority interest from January 1, 2001,
through the date of the acquisition. RSAE's March 31, 2001 assets
included $24.3 million of goodwill which is being amortized over 40
years. On a pro forma basis, as if the business had been acquired at
the beginning of fiscal 2000, revenue, net income and earnings per
share would not differ materially from the amounts reported in the
Company's year ended December 31, 2000, consolidated financial
statements.
15
8. KLT TELECOM INC. PURCHASE OF AN ADDITIONAL OWNERSHIP INTEREST IN DTI
On February 8, 2001, KLT Telecom acquired control of DTI by acquiring
an additional 31.2% of the fully diluted shares of DTI from Richard D.
Weinstein, DTI's Chairman, President and CEO, for $33.6 million in
cash. An additional 5.0% of the fully diluted shares were purchased
through a tender offer for DTI's outstanding warrants and the purchase
of a separate warrant for 1.0% of DTI's common stock that results in
KLT Telecom owning 83.6% of DTI's fully diluted shares. Under the
purchase agreement, Weinstein, who resigned as Chairman, President and
CEO, retained just over 15% of the fully diluted ownership and a seat
on the DTI board. Also, the parties granted put and call options that
gave Weinstein the right to sell and KLT Telecom the right to buy
Weinstein's remaining ownership in DTI.
This acquisition has been accounted for by the purchase method of
accounting. Operating results were included in the Company's
consolidated financial statements from the date of the acquisition.
Goodwill of $67.8 was recorded as a result of this acquisition and is
being amortized over 25 years. At March 31, 2001, unamortized
goodwill totaled $67.4 million.
Extraordinary Item Early Extinguishment of Debt
The KLT Telecom gain on early extinguishment of debt in the three
months ended March 31, 2001, resulted from DTI's completion of a
successful tender offer for 50.4 percent of its outstanding Senior
Discount Notes prior to KLT Telecom acquiring a majority ownership in
DTI. The $15.9 million early extinguishment of debt has been reduced
by the losses previously recorded by DTI, but not reflected by KLT
Telecom and is net of $9.1 million of income taxes.
Telecommunications Property
Telecommunications property at March 31, 2001, of $375.7 million, is
net of accumulated depreciation of $34.9 million and consists mainly
of fiber optic plant and usage rights. At March 31, 2001,
telecommunications property includes $68 million of construction in
progress.
Operating Leases and Indefeasible Rights to Use (IRU) Commitments
DTI is a lessee under operating leases and IRUs for fiber, equipment
space, maintenance, power costs and office space. Minimum rental
commitments under these agreements for the years 2001 through 2005 are
$8 million, $9 million, $9 million, $9 million and $9 million,
respectively. Minimum rental commitments under these agreements after
2005 total $136 million.
DTI Risk Factors
For a description of certain risk factors that may adversely affect
DTI's business and results of operations see DTI's Form 10K for the
six-month period ended December 31, 2000 to be filed on or before May
15, 2001.
16
Pro forma Information
The following unaudited pro forma consolidated results of operations
are presented as if the acquisition of an additional ownership
interest in DTI had been made at the beginning of the periods
presented.
Three Months Ended March 31
2001 2000
(thousands)
Revenues $283,335 $201,703
EPS EPS
Income before extraordinary
item and cumulative effect
of changes in accounting
principles $ (2,972) $ 575
Eliminate DTI recorded operating loss 4,403 4,157
Add DTI operating loss on a 100% basis (9,403) (8,734)
Other adjustments 294 (603)
Pro forma loss before
extraordinary item and
cumulative effect of changes
in accounting principles (7,678) $(0.12) (4,605) $(0.07)
Cumulative effect to January 1,
2000 of changes in accounting
principles, net of income taxes 30,073 0.49
DTI's early extinguishment of debt,
net of income taxes and minority
interests 50,695 0.82
Pro forma net income $ 43,017 $0.70 $ 25,468 $0.42
The unaudited pro forma consolidated results of operations are not
necessarily indicative of the combined results that would have
occurred had the acquisition occurred on those dates, nor is it
indicative of the results that may occur in the future.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis by management focuses on those
factors that had a material effect on the consolidated financial
condition and results of operations during the periods presented. The
three months ended March 31, 2001, compared with the three months
ended March 31, 2000, is referred to as the three-month period. The
discussion should be read in conjunction with the accompanying
Consolidated Financial Statements, Notes and especially Note 3 -
Segment and Related Information which summarizes the income statement
by segment.
Consolidated Earnings Overview
Three months ended March 31 2001 2000
Earnings per share (EPS) summary
KCPL
Excluding cumulative effect $(0.04) $ 0.05
Cumulative effect of changes in
pension accounting - 0.49
KCPL EPS (0.04) 0.54
KLT Inc.
Excluding extraordinary item 0.01 (0.03)
Extraordinary item: Early 0.26 -
extinguishment of debt
KLT Inc. EPS 0.27 (0.03)
HSS EPS (0.03) (0.02)
Reported Consolidated EPS $ 0.20 $ 0.49
On February 1, 2001, DTI completed a tender offer for 50.4% of its
outstanding senior discount notes. This transaction resulted in KLT
Inc. reporting on an equity basis a $15.9 million ($0.26 per share)
extraordinary item for the gain on the early extinguishment of debt in
the three months ended March 31, 2001.
Effective January 1, 2000, KCPL changed its methods of amortizing
unrecognized net gains and losses and determination of expected return
related to its accounting for pension expense. Accounting principles
required the Company to record the cumulative effect of these changes
increasing common stock earnings in the three months ended March 31,
2000, by $30.1 million ($0.49 per share). Adoption of the new methods
of accounting for pensions will lead to greater fluctuations in
pension expense in the future. The portions of the cumulative effect
of pension accounting changes attributable to KLT Inc. and HSS are
immaterial and therefore were not allocated to these subsidiaries.
For further discussion regarding each segment's contribution to
consolidated EPS, see its respective Earnings Overview section below.
KCPL Operations
KCPL Business Overview
KCPL, a regulated utility, consists of two business units - generation
and delivery. Dividing into two business units has provided KCPL the
opportunity to reexamine the businesses' internal processes in order
to operate more efficiently and create additional value for
shareholders.
18
After completion of the rebuild of Hawthorn No. 5 (projected to be on-
line in June 2001), KCPL's generating capacity will be over 3,700
megawatts. The delivery business consists of transmission and
distribution that serves over 472,000 customers at March 31, 2001, and
experiences annual load growth of approximately 2% to 3% through
increased customer usage and additional customers. Rates charged for
electricity are currently below the national average. Additionally,
there is a moratorium on changes to Missouri retail rates until 2002.
KCPL has a regulatory obligation to join a Federal Energy Regulatory
Commission (FERC) approved Regional Transmission Organization (RTO) by
December 2001. RTOs combine regional transmission operations of
utility businesses into an organization that schedules transmission
services and monitors the energy market to ensure regional
transmission reliability and non-discriminatory access.
KCPL Earnings Overview
KCPL's EPS contribution was a loss of $0.04 for the three months ended
March 31, 2001, compared to earnings of $0.05, excluding the
cumulative effect of changes in pension accounting, for the three
months ended March 31, 2000. The following table and discussion
highlight significant factors affecting the changes in KCPL's EPS
contribution between the three months ended March 31, 2001, and the
three months ended March 31, 2000, excluding the cumulative effect of
changes in pension accounting.
Change in KCPL's EPS
For the three-month period ended March 31:
2001 compared to 2000
Increased cost of purchased
power energy $ (0.08)
Increased price of fossil fuels (0.02)
Other (see discussion below) 0.01
Total $ (0.09)
Contributing to the other factors impacting the change in KCPL's EPS
are the following:
- Increased retail sales primarily due to colder winter weather in
2001 compared to 2000 and continued load growth.
- Increased expenses because of the write-off of $2.0 million of
billings incurred after January 1, 2001, to one of KCPL's larger
customers because of their Chapter 11 bankruptcy filing on February 7,
2001. Billings subsequent to the bankruptcy are being paid daily.
Any recoveries from this bankruptcy proceeding will be recorded in
income when received.
- Increased depreciation expense due mostly to normal increases in
depreciation from capital additions.
- Increased interest expense due to higher average levels of
borrowing and higher interest charges on the variable rate environmental
improvement revenue refunding bonds.
19
KCPL Megawatt-hour (Mwh) Sales and Electric Sales Revenues
For the three-month period ended March 31:
2001 compared to 2000
Mwh Revenues
Retail Sales: (revenue change in millions)
Residential 16 % $ 6
Commercial 2 % 1
Industrial (15) % -
Other (1) % -
Total Retail 3 % 7
Sales for Resale:
Bulk Power Sales (18) % -
Other 2 % -
Total - % 7
Other revenues 1
KCPL electric sales revenue $ 8
Residential mwh sales increased in the three-month period primarily
due to colder winter weather for the period and continued load growth.
Load growth consists of higher usage-per-customer and the addition of
new customers. However, industrial mwh sales decreased in the three-
month period mostly offsetting the increase in residential mwh sales.
The decrease in industrial mwh sales is primarily due to one of KCPL's
larger customers filing for bankruptcy on February 7, 2001, and
deciding to close its Kansas City, Missouri facilities. The decrease
in revenues due to this closure was offset by an increase in revenues
primarily due to a few large industrial customers choosing higher
tariff rates over special contracts.
Bulk power sales vary with system requirements, generating unit and
purchased power availability, fuel costs and requirements of other
electric systems. The unavailability of Hawthorn No. 5 contributed to
lower bulk power mwh sales in both the three months ended March 31,
2001 and 2000. In addition, colder winter weather and continued load
growth contributed to decreased bulk power mwh sales for the three-
month period. However, the average price per mwh of bulk power sales
during the three-month period increased 22%, offsetting the effect of
lower bulk power mwh sales on revenues.
KCPL Fuel and Purchased Power
Fuel costs increased by $2.9 million for the three-month period
primarily due to additional oil-fired generation and higher costs per
mmBtu of fossil fuels. Natural gas and oil have a significantly
higher cost per mmBtu of generation than coal or nuclear fuel.
During the three months ended March 31, 2001, and March 31, 2000,
fossil plants represented about 65% and the nuclear plant about 35% of
total generation. Nuclear fuel costs per mmBtu remain substantially
less than the mmBtu price of coal. KCPL expects the price of nuclear
fuel to remain fairly constant through the year 2003. KCPL's
procurement strategies continue to provide coal costs below the
regional average.
Purchased power expenses increased $9.4 million for the three-month
period primarily because of a 71% increase in the cost per mwh of
purchased power in the three-month period. The cost per mwh for
purchased power is significantly higher than the fuel cost per mwh of
generation.
KCPL Other Income and Expenses
KCPL's other income and expenses decreased to $3.2 million of expense
for the three months ended March 31, 2001, from $3.9 million of
expense for the three months ended March 31, 2000. This
20
decrease was caused primarily by a $2.3 million increase in the
allowance for equity funds used during construction. This represents
mainly the cost of capital used to finance expenditures during
construction of Hawthorn 5 that arises from other than short- and long-
term debt. This cost, along with the interest on borrowed funds used
during construction, is capitalized as a component of the construction
cost. This reduction in other expenses was partially offset by a $2.0
million increase due to the write-off of billings to one of KCPL's
larger customers as a result of its bankruptcy filing.
KCPL Interest Charges
KCPL's interest charges increased $5.5 million for the three-month
period primarily because long-term debt interest expense increased
offset by an increase in interest charged to construction. The
increase in interest expense reflected higher average levels of
outstanding long-term debt and higher interest charges on the variable-
rate environmental improvement revenue refunding bonds. The higher
average levels of debt primarily reflect $200 million of unsecured,
floating rate medium-term notes issued by KCPL on March 20, 2000, and
$250 million of unsecured fixed-rate senior notes issued in December
2000, partially offset by $50.5 million of scheduled debt repayments
by KCPL.
KCPL uses interest rate swap and cap agreements to limit the
volatility in interest expense on a portion of its variable-rate, long-
term debt. Although these agreements are an integral part of interest
rate management, the incremental effect on interest expense and cash
flows is not significant.
Allowance for borrowed funds used during construction increased $1.6
million during the three-month period because of increased
expenditures for construction projects at the Hawthorn generating
station. FERC guidelines for calculating the allowance used during
construction require consideration of the level of outstanding short-
term debt before equity funds.
Wolf Creek
Wolf Creek is one of KCPL's principal generating units, representing
about 15% of KCPL's generating capacity, including the rebuilt
Hawthorn No. 5 generating unit. The plant's operating performance has
remained strong over the last three years, contributing about 30% of
KCPL's annual mwh generation while operating at an average capacity of
93%. Furthermore, Wolf Creek has the lowest fuel cost per mmBtu of
any of KCPL's generating units.
KCPL accrues the incremental operating, maintenance and replacement
power costs for planned outages evenly over the unit's operating
cycle, normally 18 months. As actual outage expenses are incurred,
the refueling liability and related deferred tax asset are reduced.
Wolf Creek's next refueling and maintenance outage is scheduled for
the spring of 2002 and is estimated to be a 30-day outage.
Ownership and operation of a nuclear generating unit exposes KCPL to
risks regarding decommissioning costs at the end of the unit's life
and to potential retrospective assessments and property losses in
excess of insurance coverage.
Hawthorn No. 5
On February 17, 1999, an explosion occurred at the 476-megawatt, coal-
fired Hawthorn No. 5 unit. The boiler, which was not operating at the
time, was destroyed, but there were no injuries. KCPL's investigation
indicates that an explosion of accumulated gas in the boiler's firebox
caused the damage. KCPL has property insurance coverage with limits
of $300 million. KCPL received an additional $15 million in insurance
recoveries during the three months ended March 31, 2001, increasing
the total insurance recoveries received to date to $145 million under
this coverage. The recoveries have been recorded in Utility Plant -
accumulated depreciation on the consolidated balance sheet.
KCPL is in the final stages of constructing a new coal-fired boiler to
permanently replace the lost capacity of Hawthorn No. 5. Hawthorn No.
5 is expected to be on-line in June 2001. Expenditures,
21
excluding capitalized interest, for rebuilding Hawthorn No. 5, were
$207.6 million in 2000, $35.6 million in 1999 and are projected to be
about $73 million in 2001 of which $23.6 million were incurred in the
three months ended March 31, 2001. These amounts have not been reduced
by the insurance proceeds received to date or future proceeds to be
received. The new unit is expected to have a capacity of 550
megawatts.
KLT Inc. Operations
KLT Inc. Business Overview
KLT Inc., an unregulated subsidiary, pursues business ventures in
higher growth businesses. Existing ventures include investments in
telecommunications, natural gas development and production, energy
services and affordable housing limited partnerships. The Company's
investment in KLT Inc. was $150 million at March 31, 2001, and $119
million at December 31, 2000.
Telecommunications
At December 31, 2000, KLT Telecom owned 47% of DTI (acquired in 1997),
a facilities-based telecommunications company. Through utilization of
a $94 million loan (10% interest rate) from KLT Telecom, DTI
successfully completed a tender offer to repurchase a portion of its
long-term debt on February 1, 2001, reducing interest costs. On
February 8, 2001, KLT Telecom increased its ownership from 47 percent
to 84 percent of DTI. See Note 8 to the Consolidated Financial
Statements for further information.
The strategic design of the DTI network allows DTI to offer reliable,
high-capacity voice and data transmission services, on a region-by-
region basis, to primary carriers and end-user customers who seek a
competitive alternative to existing providers. DTI's network
infrastructure is designed to provide reliable customer service
through back-up power systems, automatic traffic re-routing and
computerized automatic network monitoring. If the network experiences
a failure of one of its links, the routing intelligence of the
equipment transfers traffic to the next choice route, thereby ensuring
delivery without affecting customers. DTI currently provides services
to other communication companies including Tier 1 and Tier 2 carriers.
DTI also provides private line services to targeted business and
governmental end-user customers. All of DTI's operations are subject
to federal and state regulations. DTI's sales activities were
primarily focused in the states of Missouri, Arkansas and Oklahoma.
KLT Telecom has committed to provide or arrange (through guaranty or
otherwise) a revolving credit facility to DTI, to be made in 2001, in
the amount of $75 million. The proceeds would be used for operations
and capital expenditures as set forth in a reasonable capital budget
to be established by DTI's Board of Directors. Under that commitment,
KLT Telecom has loaned DTI at March 31, 2001, $21 million at a 9.5%
interest rate. KLT Telecom is working with DTI to arrange third-party
financing to DTI in the form of a $100 million senior credit facility.
DTI will use these combined resources of financing to complete the
construction of the planned DTI network and meet other operating
requirements. DTI estimates additional total capital expenditures of
approximately $150 million to complete construction of the network.
Natural Gas Development and Production
KLT Gas' business strategy is to acquire and develop early stage
coalbed methane properties and then divest properties in order to
create shareholder value. KLT Gas believes that coalbed methane
production provides an economically attractive alternative source of
supply to meet the growing demand for natural gas in North America and
has built a knowledge base in coalbed methane production and reserves
evaluation. Therefore, KLT Gas focuses on coalbed methane; a niche in
the natural gas industry where it believes its expertise gives it a
competitive advantage. Coalbed methane, with a longer, predictable
reserve life, is inherently lower risk than conventional gas exploration.
While gas
22
prices have been volatile recently and are unlikely to
continue to increase at levels experienced over the past year, KLT Gas
continues to believe the long-term future price scenarios for natural
gas appear strong. Environmental concerns and the increased demand
for natural gas for new electric generating capacity are contributing
to this projected growth in demand.
KLT Gas' properties are located in Colorado, Texas, Wyoming, Oklahoma,
Kansas, Montana and North Dakota. These leased properties cover
approximately 173,000 undeveloped acres. The development of this
acreage is in accordance with KLT Gas' exploration plan and capital
budget. The timing of the development may vary from the plans based
upon obtaining the required environmental and regulatory approvals and
permits.
Energy Services
SEL is an energy services provider that operates in the newly
deregulated electricity markets of Pennsylvania, Southern California,
Ohio and New York. SEL began operations in 1987 as an energy
consulting firm. In 2001, in exchange for approximately $4.7 million
preferred stock ownership in an energy services company, KLT Energy
Services received additional ownership in SEL increasing its voting
interests to approximately 83%.
As a result of dramatic changes in the electricity and natural gas
markets, and on the strength of SEL's value to its customers, revenues
have grown from $7 million in 1998 to $130 million in 2000. For the
three months ended March 31, 2001, SEL's revenues increased to $63
million compared to $21 million for the three months ended March 31,
2000. The investment in SEL was recorded on an equity basis during
the first quarter of 2000. Thus, KLT Inc.'s revenues, purchased power
expense and other expenses did not include SEL for the three months
ended March 31, 2000.
SEL acts as an energy manager in deregulated markets on behalf of over
8,000 commercial and small manufacturing customers. SEL enters into
one to five year contracts with customers to supply energy and manage
their energy needs. For this service they receive an ongoing
management fee plus the contracted price for the electricity and
natural gas. SEL purchases energy in the wholesale markets to meet
its customers energy needs. On occasion, SEL must purchase small
blocks of power prior to the sales contract in order to quote stable
pricing to new potential customers. SEL has deployed risk management
practices and strategies to manage this market risk.
SEL's suppliers and customer base are very diverse. Suppliers include
small and large energy generators across the country. Customers
include numerous Fortune 500 companies, school districts, and
governmental entities. Its customer base is currently concentrated in
the four previously mentioned deregulated states, with the largest
concentration being in Pennsylvania with approximately 370 megawatts
of its total 650 megawatt load.
Investments in Affordable Housing Limited Partnerships
At March 31, 2001, KLT Investments had $97.0 million in affordable
housing limited partnerships. About 70% of these investments were
recorded at cost; the equity method was used for the remainder. We
reduce tax expense in the year tax credits are generated. The
investments generate future cash flows from tax credits and tax losses
of the partnerships. The investments also generate cash flows from
the sales of the properties (estimated residual value). For most
investments, tax credits are received over ten years. A change in
accounting principle relating to investments made after May 19, 1995,
requires the use of the equity method when a company owns more than 5%
in a limited partnership investment. Of the investments recorded at
cost, $66.0 million exceed this 5% level but were made before May 19,
1995.
On a quarterly basis, KLT Investments completes a valuation study of
its cost method investments in affordable housing by comparing the
cost of those properties to the total of projected residual value of
23
the properties and remaining tax credits to be received. Estimated
residual values are based on studies performed by an independent firm.
Projected annual reductions of the book cost based on the latest
valuation study for the years 2001 through 2005 total $13 million, $9
million, $12 million, $8 million and $7 million, respectively.
Primarily all of the estimated reductions for the year ended December
31, 2001, are expected to be incurred in the third and fourth
quarters. Even after these reductions, earnings from affordable
housing are expected to be positive for the next five years.
These projections are based on the latest information available but
the ultimate amount and timing of actual reductions made could be
significantly different from the above estimates. Also, based on
preliminary external information, management believes the assets could
be sold at a loss significantly lower than the accumulated reductions
discussed above.
KLT Inc. Earnings Overview
The following table and discussion highlight significant factors
affecting KLT Inc.'s contribution to consolidated EPS for the three
months ended March 31, 2001, and March 31, 2000.
Factors impacting KLT Inc.'s EPS contribution
for the three months ended March 31 2001 2000
SEL $ 0.02 $ 0.01
DTI prior to majority ownership 0.26 (0.07)
DTI subsequent to majority ownership (0.07) -
Gas operations 0.02 0.03
Realized loss on CellNet stock - (0.05)
Other 0.04 0.05
KLT Inc. EPS contribution $ 0.27 $(0.03)
In February 2001, KLT Telecom increased its investment in DTI from 47%
to 84%, which required a change in the method of accounting from
equity to consolidation. DTI's $0.26 EPS contribution prior to the
change in ownership resulted from the net impact of the gain on the
early extinguishment of $193 million of senior discount notes by DTI
reduced by the losses previously recorded by DTI but not reflected by
KLT Telecom. This gain is reflected in the consolidated financial
statements as an extraordinary item.
KLT Inc. Other Income and Expenses
KLT Inc.'s other income and expenses decreased to $0.4 million of
expense for the three months ended March 31, 2001, compared to $4.4
million of expense for the three months ended March 31, 2000. This
decrease is due to $4.8 million of realized losses on an investment in
CellNet during the three months ended March 31, 2000.
KLT Inc. Taxes
KLT Inc. accrued tax credits of $6.6 million for the three months
ended March 31, 2001 and $6.9 million for the three months ended March
31, 2000.
HSS Operations
HSS, an unregulated subsidiary, pursues business ventures primarily in
residential services. In March 2001, HSS increased its ownership to
71% from 49% in RSAE, a consumer services company in Atlanta, Georgia
which required a change in the method of accounting for RSAE from
equity to consolidation. Additionally, Worry Free Service, Inc., a
wholly owned subsidiary of HSS, assists residential customers in
obtaining financing primarily for heating and air conditioning equipment.
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The Company's investment in HSS was $46.9 million at March 31, 2001,
and $46.3 million at December 31, 2000. HSS' loss for the three
months ended March 31, 2001, totaled $1.9 million ($0.03 per share)
compared to a loss of $1.1 million ($0.02 per share) for the three
months ended March 31, 2000. HSS' increased loss for the three months
ended March 31, 2001, was primarily due to increased losses associated
with its ownership in RSAE. HSS' consolidated assets increased to
$57.0 million at March 31, 2001, compared to $25.3 million at December
31, 2000, reflecting the consolidation of RSAE in 2001.
Great Plains Power Incorporated
Great Plains Power Incorporated will focus on fossil fuel-fired
electric generation in the central part of the U.S. Five combustion
turbines have already been ordered to add 385 megawatts of peaking
capacity in 2003. In April 2001, the company entered into a $200
million five-year renewable operating lease agreement for the five
combustion turbines. A significant portion of the output from these
units may be sold to KCPL.
Other Consolidated Discussion
Significant Consolidated Balance Sheet Changes (March 31, 2001
compared to December 31, 2000)
- Cash and cash equivalents decreased $23.5 million due primarily
to KLT Telecom's payment of $39.9 million to increase its investment
in DTI.
- Equity securities decreased $10.1 million primarily due to the
sale by KLT Gas of $8.2 million of stock in Evergreen Resources, Inc.
and a $1.8 million reduction in the value of an investment held by KLT
Energy Services.
- Other current assets increased $28.4 million due mainly to the
adoption of FASB 133 - Accounting for Derivative Instruments and
Hedging Activities, as amended. (See Note 6 to the Consolidated
Financial Statements)
- Telecommunications property of $375.7 million at March 31, 2001,
resulted from KLT Telecom's purchase of an additional ownership
interest in DTI, which required a change in the method of accounting
for DTI from equity to consolidation.
- Utility plant - construction work in process increased $62.1
million primarily due to increases of about $29 million at Hawthorn
No. 5 for rebuilding the boiler, $15 million for a deposit on five new
combustion turbines, and $18 million for normal construction
expenditures.
- Goodwill increased $95.2 million due to increased goodwill at KLT
Inc. at March 31, 2001, of $67.4 million resulting from the
consolidation of DTI and an additional $3.7 million in goodwill
recorded because of increased ownership in SEL. An additional $24.3
million of goodwill at March 31, 2001, relates to the consolidation of
R.S. Andrews Enterprises, resulting from an increased ownership by
HSS.
- Notes payable to banks of $20.3 million includes $15.3 million of
short-term notes at March 31, 2001, relating to the consolidation of
R.S. Andrews Enterprises and $4.0 million relates to short-term notes
held by DTI.
- Current maturities of long-term debt increased $160.0 million
reflecting a $200.0 million increase in the current portion of KCPL's
medium-term notes offset by $40.0 million of maturing medium-term
notes.
- Accounts payable decreased $21.1 million primarily due to a
decrease in KCPL's accounts payable of $38.9 million due to the timing
of cash receipts and cash payments partially offset by $17.3 million
in accounts payable at March 31, 2001, due to the consolidation of
DTI.
- Other current liabilities increased $17.3 million primarily due
to $8.4 million at March 31, 2001, due to the consolidation of R.S.
Andrews Enterprises, $4.8 million because of the adoption of
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FASB 133 and $4.8 million in other current liabilities at March 31, 2001,
due to the consolidation of DTI.
- Deferred telecommunications revenue of $42.1 million at March 31,
2001, is due to the consolidation of DTI. This deferred revenue
results from advances under contracts being deferred and then
recognized on a straight-line basis as revenue over the terms of the
contract. In many cases, recognition does not start until completion
of specified route segments.
Capital Requirements and Liquidity
The Company's liquid resources at March 31, 2001, included cash flows
from operations, $150 million of registered but unissued debt
securities; and $70 million of unused bank lines of credit. The
unused lines consisted of KCPL's short-term bank lines of credit of
$56 million and KLT Inc.'s bank credit agreement of $14 million.
The Company normally generates positive cash flows from operating
activities except for the three months ended March 31, 2001.
Individual components of working capital will vary with normal
business cycles and operations such as the reduction of accounts
payable by $58.6 million during the three months ended March 31, 2001,
excluding amounts recorded in the consolidations of DTI and RSAE.
Also, the timing of the Wolf Creek outage affects the refueling outage
accrual, deferred income taxes and amortization of nuclear fuel.
Cash used for investing activities varies with the timing of utility
capital expenditures and purchases of investments and nonutility
property. Cash used for purchases of investments for the three-month
period primarily reflects increased investments by KLT Telecom in DTI.
The note receivable from DTI prior to majority ownership is reflected
as an investing activity. DTI will obtain long-term financing to
repay KLT Telecom.
Cash from financing activities increased for the three-month period
primarily due short-term borrowings increasing $148.2 million during
the three months ended March 31, 2001, compared to a $147.8 million
decrease during the three months ended March 31, 2000. However, this
change in short-term borrowings was partially offset by a decrease in
long-term debt issuances during the three months ended March 31, 2001,
compared to the three months ended March 31, 2000.
The Company expects to meet day-to-day operations, construction
requirements (excluding new generating capacity and telecommunications
construction) and dividends with internally-generated funds. However,
the Company might not be able to meet these requirements with
internally-generated funds because of the effect of inflation on
operating expenses, the level of mwh sales, regulatory actions,
compliance with future environmental regulations and the availability
of generating units. The funds needed to retire $788 million of
maturing debt through the year 2005 will be provided from operations,
refinancings and/or short-term debt. The Company may issue additional
debt and/or additional equity to finance growth or take advantage of
new opportunities.
Environmental Matters
The Company's operations must comply with federal, state and local
environmental laws and regulations. The generation and transmission
of electricity produces and requires disposal of certain products and
by-products, including polychlorinated biphenyl (PCBs), asbestos and
other hazardous materials. The Federal Comprehensive Environmental
Response, Compensation and Liability Act (the Superfund law) imposes
strict joint and several liability for those who generate, transport
or deposit hazardous waste. In addition, the current owner of
contaminated property, as well as prior owners since the time of
contamination, may be liable for cleanup costs.
The Company continually conducts environmental audits to detect
contamination and ensure compliance with governmental regulations.
However, compliance programs need to meet new and
26
future environmental laws, as well as regulations governing water and
air quality, including carbon dioxide emissions, nitrogen oxide emissions,
hazardous waste handling and disposal, toxic substances and the
effects of electromagnetic fields. Therefore, compliance programs
could require substantial changes to operations or facilities (see
Note 4 to the Consolidated Financial Statements).
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This disclosure is for the interim periods presented and should be
read in connection with the quantitative and qualitative disclosures
about market risk included in our 2000 annual report on Form 10-K.
The consolidated company is exposed to market risks associated with
commodity price and supply, interest rates and equity prices. Market
risks are handled in accordance with established policies, which may
include entering into various derivative transactions. In the normal
course of business, the Company also faces risks that are either non-
financial or non-quantifiable. Such risks principally include
business, legal, operational and credit risks and are not represented
in the following analysis.
Commodity Risk
KCPL has approximately 95% of its forecasted coal requirements under
contract for the year 2001. A portion of these coal requirements are
subject to the market price of coal. Because of the increased price
of coal, KCPL's coal commitments for 2001 have increased 11% to $40.2
million since the 2000 annual report on Form 10-K was filed. A
hypothetical 10% increase in the price of coal would result in a $1.1
million decrease in the year 2001 pretax earnings.
Equity Price Risk
KLT Energy Services and KLT Gas own common stock of certain companies
with a cost basis of $8.2 million. These equity securities are
considered trading securities and as such have been recorded at their
fair value of $8.5 million at March 31, 2001. During April 2001,
shares with a cost basis of $3.4 million and a fair value of $4.0
million were sold. The remaining equity securities are exposed to
price fluctuations in equity markets. A hypothetical 10% decrease in
equity prices would have resulted in an immaterial reduction in the
fair value of the remaining equity securities after the April 2001
sale.
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PART II - OTHER INFORMATION
Item 5. Other Information.
PATRICIA S. LANG, ET AL. ON BEHALF OF HERSELF AND ALL
OTHERS SIMILARLY SITUATED V. KANSAS CITY POWER & LIGHT
COMPANY (previously disclosed in the Company's report on Form
10-K for the period ending December 31, 2000). On March 1,
2001, the United States District Court for the Western
District of Missouri denied plaintiff's motion to certify a
class action of African-American employees in this race
discrimination case, while allowing plaintiffs to appeal this
decision. The 8th Circuit Court of Appeals then denied the
plaintiff's interlocutory appeal on April 10, 2001. The
Company will continue to vigorously contest the claims of
individual plaintiffs. In the opinion of the General
Counsel, the relief sought by such individual plaintiffs will
not be material to the Company's financial condition or
result of operations. This will conclude the reporting on
this matter unless there are further appeals on the class
action status.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
Exhibit 10-a Annual Incentive Compensation Plan for KCPL
executives
Exhibit 10-b Amendment No. 3 dated March 9, 2001, to
Credit Agreement among KLT Inc., Bank One, NA, as
Agent, Second Amended and Restated Credit
Agreement among KLT Inc., Bank One, NA, as Agent,
Commerzbank Aktiengesellschaft, New York and
Grand Cayman Branches, as Syndication Agent,
Westdeutsche Landesbank Girozentrale, New York
Branch, as Documentation Agent, and Various
Lenders
REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and
Exchange Commission during the first quarter 2001.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
KANSAS CITY POWER & LIGHT COMPANY
Dated: May 10, 2001 By: /s/Bernard J. Beaudoin
(Bernard J. Beaudoin)
(Chief Executive Officer)
Dated: May 10, 2001 By: /s/Neil Roadman
(Neil Roadman)
(Principal Accounting Officer)