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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-707
KANSAS CITY POWER & LIGHT COMPANY
(Exact name of registrant as specified in its charter)
Missouri 44-0308720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Walnut, Kansas City, Missouri 64106-2124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 556-
2200
Indicate by check mark whether the registrant (1) has filed
all
reports required to be filed by Section 13 or 15(d) of the
Securities
Exchange Act of 1934 during the preceding 12 months (or for
such
shorter period that the registrant was required to file such
reports),
and (2) has been subject to such filing requirements for the
past 90
days.
Yes (X) No ( )
The number of shares outstanding of the registrant's Common
stock at
May 7, 1997, was 61,895,819 shares.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
March 31 December 31
1997 1996
ASSETS
UTILITY PLANT, at original cost
Electric $3,479,539 $3,472,607
Less-accumulated depreciation 1,261,837 1,238,187
Net utility plant in service 2,217,702 2,234,420
Construction work in progress 84,863 69,577
Nuclear fuel, net of amortization of
$89,655 and $84,540 36,797 39,497
Total 2,339,362 2,343,494
REGULATORY ASSET - RECOVERABLE TAXES 126,000 126,000
INVESTMENTS AND NONUTILITY PROPERTY 306,419 231,874
CURRENT ASSETS
Cash and cash equivalents 25,112 23,571
Customer accounts receivable, net of allowance
for doubtful accounts of $1,360 and $1,644 15,679 27,093
Other receivables 21,632 36,113
Fuel inventories, at average cost 17,717 19,077
Materials and supplies, at average cost 47,297 47,334
Deferred income taxes 3,672 2,737
Other 6,778 5,055
Total 137,887 160,980
DEFERRED CHARGES
Regulatory assets
Settlement of fuel contracts 9,358 9,764
KCC Wolf Creek carrying costs 684 1,368
Other 25,114 26,615
Other deferred charges 28,762 14,417
Total 63,918 52,164
Total $2,973,586 $2,914,512
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock-authorized 150,000,000 shares
without par value-61,908,726 shares issued-
stated value $449,697 $449,697
Retained earnings 414,774 455,934
Unrealized gain on securities available for sale 1,681 6,484
Capital stock premium and expense (1,666) (1,666)
Common stock equity 864,486 910,449
Cumulative preferred stock 89,000 89,000
Cumulative redeemable preferred stock 62 62
Refinanced short-term borrowings 93,000 0
Long-term debt 925,136 944,136
Total $1,971,684 $1,943,647
CURRENT LIABILITIES
Notes payable to banks 1,361 0
Commercial paper 8,000 0
Current maturities of long-term debt 71,091 26,591
Accounts payable 36,745 55,618
Accrued taxes 11,087 18,443
Accrued interest 19,863 21,054
Accrued payroll and vacations 21,395 25,558
Accrued refueling outage costs 9,280 7,181
Other 12,031 11,980
Total 190,853 166,425
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 638,508 643,189
Deferred investment tax credits 66,051 67,107
Other 106,490 94,144
Total 811,049 804,440
COMMITMENTS AND CONTINGENCIES (note 4)
Total $2,973,586 $2,914,512
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands of dollars)
Year to Date Twelve Months Ended
March 31 March 31
1997 1996 1997 1996
ELECTRIC OPERATING REVENUES $ 194,744 $ 206,624 $ 892,039 $ 893,673
OPERATING EXPENSES
Operation
Fuel 34,922 30,773 144,654 135,425
Purchased power 11,246 13,985 49,716 46,036
Other 43,923 43,499 181,143 177,653
Maintenance 16,816 18,029 70,282 75,790
Depreciation 27,842 24,716 107,038 97,802
Taxes
Income 8,530 13,413 63,272 78,858
General 22,692 24,361 95,579 97,325
Deferred Wolf Creek costs
amortization 684 2,904 9,397 12,235
Total 166,655 171,680 721,081 721,124
OPERATING INCOME 28,089 34,944 170,958 172,549
OTHER INCOME
Allowance for equity funds
used during construction 260 660 1,968 2,704
Miscellaneous income 3,893 741 7,995 1,123
Miscellaneous deductions (62,161) (3,785) (113,548) (13,213)
Income taxes 30,233 6,221 60,414 16,816
Total (27,775) 3,837 (43,171) 7,430
INCOME BEFORE INTEREST CHARGES 314 38,781 127,787 179,979
INTEREST CHARGES
Long-term debt 14,516 13,424 55,031 53,275
Short-term debt 839 118 1,972 687
Miscellaneous 875 1,106 4,609 3,600
Allowance for borrowed funds
used during construction (784) (390) (2,341) (1,805)
Total 15,446 14,258 59,271 55,757
PERIOD RESULTS
Net income (loss) (15,132) 24,523 68,516 124,222
Preferred stock
dividend requirements 955 957 3,788 3,942
Earnings (Loss) applicable to
common stock (16,087) 23,566 64,728 120,280
Average number of common
shares outstanding 61,896 61,902 61,900 61,902
Earnings (Loss) per common share ($0.26) $0.38 $1.05 $1.94
Cash dividends per
common share $0.405 $0.390 $1.605 $1.550
<F1>
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
Year to Date Twelve Months Ended
March 31 March 31
1997 1996 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(15,132) $ 24,523 $ 68,516 $124,222
Adjustments to reconcile net income
(loss)to net cash from operating
activities:
Depreciation 27,842 24,716 107,038 97,802
Amortization of:
Nuclear fuel 5,115 1,197 20,012 12,464
Deferred Wolf Creek costs 684 2,904 9,397 12,235
Other 1,362 1,409 5,460 7,533
Deferred income taxes (net) (2,885) 5,731 (17,278) 7,278
Deferred investment tax credit
amortization and reversals (1,056) (1,024) (4,195) (4,242)
Deferred storm costs 0 0 (8,885) 0
Deferred merger costs (4,787) (5,383) 596 (5,383)
Allowance for equity funds used
during construction (260) (660) (1,968) (2,704)
Cash flows affected by changes in:
Receivables 25,895 17,810 9,547 (9,863)
Fuel inventories 1,360 5,083 (697) 4,047
Materials and supplies 37 1,503 (1,625) (805)
Accounts payable (18,873) (465) (15,296) 10,211
Accrued taxes (7,356) 1,543 (30,182) (17,084)
Accrued interest (1,191) 4,885 (1,928) 11,765
Wolf Creek refueling outage
accrual 2,099 (13,006) 8,723 (4,743)
Pension and postretirement benefit
obligations (532) (519) (97) (2,290)
Other operating activities (2,238) 1,878 7,730 12,864
Net cash from operating
activites 10,084 72,125 154,868 253,307
CASH FLOWS FROM INVESTING ACTIVITIES
Utility capital expenditures (27,402) (29,549) (98,800) (136,962)
Allowance for borrowed funds used
during construction (784) (390) (2,341) (1,805)
Purchases of investments (77,241) (17,589) (95,014) (67,893)
Purchases of nonutility property (1,611) 0 (22,006) 0
Other investing activities (4,397) (1,804) (3,524) 3,936
Net cash from investing
activities (111,435) (49,332) (221,685) (202,724)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 32,000 11,827 155,614 118,719
Repayment of long-term debt (6,500) 0 (80,730) (33,428)
Net change in short-term borrowings 102,361 (9,000) 92,361 (31,500)
Dividends paid (26,028) (25,112) (103,119) (99,925)
Other financing activities 1,059 (149) (946) 2,834
Net cash from financing
activities 102,892 (22,434) 63,180 (43,300)
NET CHANGE IN CASH AND CASH
EQUIVALENTS 1,541 359 (3,637) 7,283
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 23,571 28,390 28,749 21,466
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $25,112 $28,749 $25,112 $28,749
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $17,019 $8,962 $60,514 $42,354
Income taxes $0 $5,072 $53,272 $68,150
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(thousands of dollars)
Year to Date Twelve Months Ended
March 31 March 31
1997 1996 1997 1996
Beginning balance $455,934 $449,966 $449,377 $425,080
Net income (loss) (15,132) 24,523 68,516 124,222
440,802 474,489 517,893 549,302
Dividends declared
Preferred stock - at required rates 960 970 3,772 3,977
Common stock 25,068 24,142 99,347 95,948
Ending balance $414,774 $449,377 $414,774 $449,377
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
KANSAS CITY POWER & LIGHT COMPANY
Notes to Consolidated Financial Statements
In management's opinion, the consolidated interim financial
statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the results of
operations for the interim periods presented. These statements and
notes should be read in connection with the financial statements and
related notes included in our 1996 annual report on Form 10-K.
1. AGREEMENT AND PLAN OF MERGER WITH WESTERN RESOURCES
On February 7, 1997, Kansas City Power & Light Company (KCPL) and
Western Resources, Inc. (Western Resources) entered into an Agreement
and Plan of Merger (the Merger Agreement) to form a strategic business
combination. The effective time of the merger is dependent upon all
conditions of the Merger Agreement being met or waived. At the
effective time, KCPL will merge with and into Western Resources, with
Western Resources being the surviving corporation.
Western Resources first delivered an unsolicited exchange offer
to KCPL's Board of Directors during the second quarter of 1996. This
initial offer, subject to numerous conditions, proposed the exchange
of $28 (later increased to $31) worth of Western Resources stock for
each share of KCPL stock. After careful consideration, both offers
were rejected by KCPL's Board of Directors. In July 1996 Western
Resources commenced an exchange offer for KCPL common stock. In late
1996 KCPL began discussing a possible merger with Western Resources
leading to the Merger Agreement.
Under the terms of the Merger Agreement, KCPL common stock will
be exchanged for Western Resources common stock valued at $32.00,
subject to a conversion ratio limiting the amount of Western Resources
common stock that holders of KCPL common stock would receive per share
of KCPL common stock to no more than 1.1 shares (if Western Resources'
stock is priced at or below $29.09 per share), and no less than 0.917
shares (if Western Resources' stock is priced at or above $34.90 per
share). However, there is a provision in the Merger Agreement that
allows KCPL to terminate the merger if Western Resources' stock price
drops below $27.64 and either the Standard and Poor's Electric
Companies Index increases or the decline in Western Resources stock
exceeds by approximately 5% any decline in this index. Western
Resources could avoid this termination by improving the conversion
ratio.
The transaction is subject to several closing conditions
including approval by each company's shareholders, approval by a
number of regulatory authorities (statutory approvals) and dissenting
shares equaling less than 5.5% of KCPL's outstanding shares. If the
effective time has not occurred by June 30, 1998 (the termination
date), either party may terminate the agreement as long as they did
not contribute to the delay. This termination date will be
automatically extended to June 30, 1999, if all of the Merger
Agreement closing conditions have been met except for certain
conditions relating to statutory approvals.
The Merger Agreement does not allow KCPL to increase its common
stock dividend prior to the effective time or termination. It also
requires KCPL to redeem all outstanding shares of preferred stock
prior to completion of the merger.
If the Merger Agreement is terminated under certain
circumstances, a payment of $50 million will be due Western Resources
if, within two and one-half years following termination, KCPL agrees
to consummate a business combination with a third party that made a
proposal to combine prior to termination. Western Resources will pay
KCPL $5 to $35 million if the Merger Agreement is terminated and all
closing conditions are satisfied other than conditions relating to
Western Resources receiving a favorable tax opinion, a favorable
letter from its accountants regarding pooling accounting, favorable
statutory approvals, or an exemption from the Public Utility Holding
Company Act of 1935.
In February 1997 KCPL paid UtiliCorp United Inc. (UtiliCorp) $53
million for agreeing to combine with Western Resources within two and
one-half years from the termination of KCPL's agreement to merge with
UtiliCorp. This agreement was terminated due to failure of KCPL
shareholders to approve the transaction with UtiliCorp.
During the first quarter of 1997, $4.8 million of merger-related
costs were deferred by KCPL and are included in Other deferred
charges. These costs will be expensed in the first reporting period
subsequent to closing of the merger.
2. SECURITIES AVAILABLE FOR SALE
Certain investments in equity securities are accounted for as
securities available for sale and adjusted to market value with
unrealized gains (or losses), net of deferred income taxes, reported
as a separate component of shareholders' equity.
The cost of securities available for sale held by KLT Inc. (KLT),
a wholly-owned subsidiary of KCPL, was $5 million as of March 31, 1997
and December 31, 1996. Unrealized gains, net of deferred income
taxes, decreased to $1.7 million at March 31, 1997, from $6.5 million
at December 31, 1996.
3. CAPITALIZATION
From January 1 to March 31, 1997, KCPL repaid $6.5 million of
medium-term notes. KCPL is authorized to issue up to $300 million in
unsecured medium-term notes under an indenture dated December 1, 1996.
As of March 31, 1997, no unsecured medium-term notes had been issued.
In April 1997 KCPL Financing I (Trust), a wholly-owned subsidiary
of Kansas City Power & Light Company, issued $150,000,000 of 8.3%
preferred securities. The sole asset of the Trust is subordinated
debentures, due 2037, issued by KCPL. The terms and interest payments
on these debentures correspond to the terms and dividend payments on
the preferred securities. KCPL guarantees the payment of
distributions on the preferred securities to the extent that KCPL has
made payments of interest or principal on the debentures. These
payments will be reflected as Miscellaneous Interest Charges in the
Consolidated Statement of Income and will be tax deductible by KCPL.
KCPL may elect to defer interest payments on the debentures for a
period up to 20 consecutive quarters, causing dividend payments on the
preferred securities to be deferred as well. In case of a deferral,
interest and dividends will continue to accrue, along with quarterly
compounding interest on the deferred amounts. KCPL may redeem all or
a portion of the debentures after March 31, 2002, requiring an equal
amount of preferred securities to be redeemed at face value plus
accrued and unpaid distributions. KCPL used $93,000,000 of the
proceeds from this issuance to repay short-term obligations. This
amount is reflected in the consolidated balance sheet at March 31,
1997, as "Refinanced short-term borrowings".
From April 1 through May 7, 1997, KLT's long-term debt, including
current maturities, increased $6.6 million.
4. LEGAL PROCEEDINGS
Jack R. Manson (Manson), as a representative of KCPL's
shareholders, alleged in a District Court proceeding, that KCPL and
its directors breached their fiduciary duties in adopting the Amended
Merger Agreement with UtiliCorp (Agreement). Manson also alleged
their actions 1) were illegal, 2) illegally deprived KCPL
shareholders of voting and appraisal rights under Missouri law, and 3)
were a disproportionate response to Western Resources' acquisition
offer. Also, on June 7, 1996, Western Resources and Robert L. Rives
each alleged against KCPL in the same court proceeding, that the
Agreement was illegal under Missouri law and the directors had
breached their fiduciary duties by adopting the Agreement.
By order dated November 25, 1996, the District Court allowed
Manson to amend his allegation to allege that the directors breached
their fiduciary duties by refusing to negotiate a merger with Western
Resources and committed reckless, grossly negligent, or negligent
waste of corporate assets by pursuing the merger with UtiliCorp.
Manson seeks monetary damages in an unspecified amount for the waste
of corporate assets. KCPL filed a motion on December 9, 1996, to
dismiss Manson's amendment; it is currently pending before the
District Court. The Company cannot predict the outcome of these
proceedings at this time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
REGULATION AND COMPETITION
As competition develops throughout the electric utility industry,
we are positioning Kansas City Power & Light Company (KCPL) to excel
in an open market. We are improving the efficiency of KCPL's core
utility operations, lowering prices and offering new services. KCPL
now offers customized energy packages to larger customers, including
options offering natural gas contracts. We are also creating growth
through our unregulated subsidiary (see Nonregulated Opportunities
below). As competition presents new opportunities, we will consider
various strategies including partnerships, acquisitions, combinations,
additions to or dispositions of service territory, and restructuring
wholesale and retail businesses. We have entered an Agreement and
Plan of Merger with Western Resources, Inc. (Western Resources). This
agreement was reached after nine months of defending against an
unsolicited exchange offer (see Note 1 to the Consolidated Financial
Statements).
In December 1996 the Federal Energy Regulatory Commission (FERC)
issued a statement concerning electric utility mergers. Under the
statement, companies must demonstrate that their merger does not
adversely affect competition or wholesale rates. As remedies, FERC
may consider a range of conditions including transmission upgrades or
divestitures of generating assets.
Competition in the electric utility industry was accelerated with
the National Energy Policy Act of 1992. This gave FERC the authority
to require electric utilities to provide transmission line access to
independent power producers (IPPs) and other utilities (wholesale
wheeling). KCPL, already active in the wholesale wheeling market, was
one of the first utilities to receive FERC's approval of an open-
access tariff for wholesale wheeling transactions. In April 1996 FERC
issued an order requiring all owners of transmission facilities to
adopt open-access tariffs and participate in wholesale wheeling. KCPL
has made the necessary filings to comply with that order.
FERC's April 1996 order is likely to encourage more movement
toward retail competition at the state level. An increasing number of
states have already adopted open access requirements for utilities'
retail electric service, allowing competing suppliers access to their
retail customers (retail wheeling). Many other states are actively
considering retail wheeling. Kansas has created a retail wheeling
task force to study and report on related issues. In Missouri,
legislative committees are being formed to study the issue while the
Missouri Public Service Commission (MPSC) has established a task force
to plan for implementation of retail wheeling if authorized by law.
Competition through retail wheeling could result in market-based
rates below current cost-based rates. This would provide growth
opportunities for low-cost producers and risks for higher-cost
producers, especially those with large industrial customers. Lower
rates and the loss of major customers could result in under-utilized
assets (stranded investment) and place an unfair burden on the
remaining customer base or shareholders. If an adequate and fair
provision for recovery of these lost revenues is not provided, certain
generating assets may have to be evaluated for impairment and
appropriate charges recorded against earnings. In addition to lower
profit margins, market-based rates could also require generating
assets to be depreciated over shorter useful lives, increasing
operating expenses.
Although Missouri and Kansas have not yet authorized retail
wheeling, we believe KCPL is positioned well to compete in an open
market with its diverse customer mix and pricing strategies. About
22% of KCPL's retail mwh sales are to industrial customers compared to
the utility industry average of about 35%. KCPL has a flexible rate
structure with industrial rates that are competitively priced within
our region. In addition, long-term contracts are in place or under
negotiation for a large portion of KCPL's industrial sales. There has
not been direct competition for retail electric service in our service
territory although there has been competition in the bulk power market
and between alternative fuels.
Increased competition could also force utilities to change
accounting methods. Financial Accounting Standards Board (FASB)
Statement No. 71 _ Accounting for Certain Types of Regulation, applies
to regulated entities whose rates are designed to recover the costs of
providing service. An entity's operations could stop meeting the
requirements of FASB 71 for various reasons, including a change in
regulation or a change in the competitive environment for a company's
regulated services. For those operations no longer meeting the
requirements of regulatory accounting, regulatory assets would be
written off. KCPL's regulatory assets, totaling $161 million at March
31, 1997, will be maintained as long as FASB 71 requirements are met.
It is possible that competition could eventually have a
materially adverse affect on KCPL's results of operations and
financial position. Should competition eventually result in a
significant charge to equity, capital costs and requirements could
increase significantly.
NONREGULATED OPPORTUNITIES
KLT Inc. (KLT) is a wholly-owned subsidiary pursuing
nonregulated, mainly energy-related business ventures. KLT's strategy
capitalizes on new market opportunities by combining our expertise in
energy-related fields with the knowledge of our joint venture
partners. Existing ventures include investments in domestic and
international nonregulated power production, energy services, oil and
gas reserves, telecommunications, and affordable housing limited
partnerships.
We had a total equity investment in KLT of $99 million as of
March 31, 1997, and expect that investment to grow to about $210
million within the next five years. KLT's consolidated assets at
March 31, 1997, totaled $293 million. Within the next five years we
expect KLT consolidated assets of about $800 million, generated
through the $210 million of equity investment, subsidiary retained
earnings and borrowings. The growth of KLT accounts for the majority
of the increase in KCPL's consolidated investments and nonutility
property.
RESULTS OF OPERATIONS
Three-month three months ended March 31, 1997, compared
period: with three months ended March 31, 1996
Twelve-month twelve months ended March 31, 1997, compared
period: with twelve months ended March 31, 1996
EARNINGS OVERVIEW
Earnings Per Share (EPS)
For the Periods Ended March
31
1997 1996 Decrease
Three months ended $(0.26) $0.38 $(0.64)
Twelve months ended $1.05 $1.94 $(0.89)
KCPL's pursuit of its strategic options resulted in the September
1996 termination of a merger agreement with UtiliCorp United Inc.
(UtiliCorp) and the February 1997 announcement of our agreement to
combine with Western Resources. These actions triggered KCPL's
payment of $53 million to UtiliCorp under provisions of that
agreement, lowering EPS for the three-month period by $0.52.
Continued implementation of rate reductions approved by the MPSC in
July 1996 also lowered EPS for the three-month period by an estimated
$0.11.
The decrease in EPS for the twelve-month period reflects the
payment to UtiliCorp ($0.52), the estimated twelve-month impact of the
Missouri rate reduction ($0.14), and merger costs expensed in the
second and third quarters of 1996 ($0.31). Mild summer temperatures
and an increase in depreciation expense also had a negative impact on
EPS for the twelve-month period. Factors contributing positively to
EPS for the twelve-month period included continued load growth and an
increase in bulk power sales.
MEGAWATT-HOUR (MWH) SALES AND OPERATING REVENUES
Sales and revenue data:
Increase (Decrease) from Prior Year
Three-Month Twelve-Month
Period Period
Mwh Revenues Mwh Revenues
(millions) (millions)
Retail sales:
Residential 0% $ (3) (2%) $ (9)
Commercial 1% (8) 3% (3)
Industrial (1%) (3) 5% -
Other (1%) - (3%) -
Total retail 0% (14) 2% (12)
Sales for resale:
Bulk power sales 19% 2 14% 13
Other 32% - 35% -
Total (12) 1
Other revenues - (3)
Total electric operating revenues $ (12) $ (2)
During 1996 the MPSC approved a new stipulation and agreement
authorizing a $20 million revenue reduction in two phases, and an
increase in depreciation and amortization expense by $9 million per
year. In July 1996 we implemented phase one of the revenue reduction
designed to reduce revenues from commercial and industrial customers
by an estimated $9 million per year. This decrease is achieved with
an increase in summer revenues offset by a larger decrease in winter
revenues. This design more closely follows our increased costs of
generating electricity in the summer. The second phase of this
stipulation, implemented January 1, 1997, further reduces Missouri
residential, commercial and industrial revenues by an estimated $11
million per year. The effect of the stipulation lowered revenues for
the three-month period by about $11 million, and the twelve-month
period by about $14 million.
These rate reductions, combined with seasonally lower sales in
March 1997 versus December 1996, resulted in a lower accounts
receivable balance at March 31, 1997, compared with December 31, 1996.
These rate reductions are the main reason retail revenues
decreased 7% for the three-month period on relatively flat mwh sales,
and decreased 1% for the twelve-month period despite a 2% increase in
mwh sales. Milder weather also decreased retail sales revenue for the
three- and twelve-month periods, but this decrease was largely offset
by continued load growth.
KCPL has long-term sales contracts with certain major industrial
customers. These contracts are tailored to meet customers' needs in
exchange for their long-term commitment to purchase energy. Long-term
contracts are in place for a large portion of KCPL's industrial sales
and more contracts are under negotiation. For the current twelve-
month period additional contracts reduced the average mwh price of
industrial sales.
Bulk power sales vary with system requirements, generating unit
and purchased power availability, fuel costs and the requirements of
other electric systems. Wolf Creek's spring 1996 refueling outage
(see Wolf Creek section) contributed to lower bulk power sales in the
prior three- and twelve-month periods.
Total revenue per mwh sold varies with changes in rate tariffs,
the mix of mwh sales among customer classifications and the effect of
declining price per mwh as usage increases. An automatic fuel
adjustment provision is included in only sales for resale tariffs,
which apply to less than 1% of revenues.
Future mwh sales and revenues per mwh will also be affected by
national and local economies, weather and customer conservation
efforts. Competition, including alternative sources of energy such as
natural gas, cogeneration, IPPs and other electric utilities, may also
affect future sales and revenue.
FUEL AND PURCHASED POWER
Combined fuel and purchased power expenses for the three-month
period increased only 3% while total mwh sales (total of retail and
sales for resale) increased 5%. The difference is due mainly to
additional replacement power expense incurred in the prior three-month
period during Wolf Creek's spring 1996 refueling outage. That outage
began one month early and lasted 19 days longer than planned (see Wolf
Creek section).
Combined fuel and purchased power expenses for the twelve-month
period increased 7% while total mwh sales increased only 5%. The
additional increase in expense is due mainly to a $6 million increase
in capacity purchases. Capacity purchases provide a cost effective
alternative to constructing new capacity. This increase is partially
offset by a $2 million decrease in expense from coal inventory
adjustments. In addition, the prior twelve-month period includes the
additional costs incurred for Wolf Creek's 1996 refueling outage
(discussed above) and a 1995 forced generating station outage. During
July 1995 a fire forced an outage at LaCygne I, a low-cost, coal-fired
generating unit. We replaced the power by increasing the usage of
higher-cost, coal-fired units and purchasing power on the wholesale
market. Damage to the unit was covered by insurance, but uninsured,
incremental fuel and purchased power costs were about $4 million.
The MMBTU price of nuclear fuel remains substantially less than
the MMBTU price of coal, despite increasing 27% for the twelve-month
period. Nuclear fuel costs averaged 61% of the price of coal during
the current twelve months compared with 46% during the prior twelve-
month period. We expect this relationship and the price of nuclear
fuel to remain fairly constant through the year 2001. During both
twelve-month periods, coal represented about 75% of generation and
nuclear fuel about 25%.
The MMBTU price of coal decreased 4% for the twelve month period.
Our coal procurement strategies continue to provide coal costs well
below the regional average. We expect coal costs to remain fairly
consistent with current levels through 2001.
OTHER OPERATION AND MAINTENANCE EXPENSES
Combined other operation and maintenance expenses for the three-
and twelve-month periods varied slightly, due largely to the timing of
scheduled maintenance programs.
We continue to emphasize new technologies, improved methods and
cost control. We are changing processes to provide increased
efficiencies and improved operations. Through the use of cellular
technology, a majority of customer meters are read automatically.
DEPRECIATION AND AMORTIZATION
The increase in depreciation expense for the three- and twelve-
month periods reflects the implementation of the Missouri stipulation
and agreement discussed in the revenue section as well as normal
increases in depreciation from capital additions. The Missouri
stipulation and agreement, effective July 1, 1996, authorized a $9
million annual increase in depreciation expense at about the same time
the Missouri portion of Deferred Wolf Creek costs became fully
amortized in December 1996. This amortization totaled about $9
million per year.
The Kansas portion of Deferred Wolf Creek costs will be fully
amortized in the second quarter of 1997, removing all regulatory
assets created from the completion of Wolf Creek construction in 1985.
Amortization of the Kansas portion of this asset totaled about $3
million per year.
INCOME TAXES
The decrease in operating income taxes for the three-month period
reflects lower taxable operating income. The decrease for the twelve-
month period reflects lower taxable operating income, adjustments
necessary to reflect the filing of the 1995 tax returns and the
settlement with the Internal Revenue Service regarding tax issues
included in the 1985 through 1990 tax returns.
OTHER INCOME
Miscellaneous Income
Miscellaneous income for the prior twelve-month period included
an adjustment to reduce a 1995 gain from the sale of steel
railcars by $3 million. The adjustment was based on a re-
calculation of the cars' net cost. Miscellaneous income for the
current three- and twelve-month periods includes increased
revenues from subsidiary operations.
Miscellaneous Deductions
Miscellaneous deductions for the three- and twelve-month periods
increased due to a $53 million payment to UtiliCorp in February
1997. The September 1996 termination of the UtiliCorp merger
agreement and the February 1997 announcement of our agreement to
combine with Western Resources, triggered the payment to
UtiliCorp under provisions of the UtiliCorp merger agreement.
The twelve-month period also reflects $31 million in merger
related costs incurred in the second and third quarters of 1996;
these costs consist of $13 million in previously deferred merger
costs expensed as a result of terminating the merger agreement
with UtiliCorp, a $5 million termination fee paid upon
termination, and $13 million in costs to defend against Western
Resources' unsolicited exchange offer.
Both periods reflect increased subsidiary operating and investing
activities. Total subsidiary expenses, including interest
charges discussed below, are substantially offset by related tax
benefits.
Income Taxes
Income tax reductions for the three- and twelve-month periods
increased primarily due to the increases in miscellaneous
deductions discussed above. Additionally, during the first
quarter of 1997 we accrued tax credits of $6 million, or one-
fourth of the total expected 1997 credits, related to affordable
housing partnership investments and oil and gas investments.
This is an increase of $3 million compared with the tax credits
accrued during the first quarter of 1996. Tax credits from the
investments in affordable housing more than offset the increase
in interest expense incurred from these investments. Non-taxable
increases in the cash surrender value of corporate-owned life
insurance contracts also affected the relationship between
miscellaneous deductions and income taxes.
INTEREST CHARGES
The increase in long-term interest expense for the three- and
twelve-month periods reflect higher average levels of long-term debt
outstanding. The higher levels of debt resulted mainly from
additional financing by KLT to support expanding subsidiary operations
and new investments in unregulated ventures.
We use interest rate swap and cap agreements to limit the
interest expense on a portion of our variable-rate long-term debt. We
do not use derivative financial instruments for trading or other
speculative purposes. Although these agreements are an integral part
of our interest rate management, their incremental effect on interest
expense and cash flows is not significant.
WOLF CREEK
Wolf Creek is one of KCPL's principal generating units
representing about 18% of accredited generating capacity. The plant's
operating performance has remained strong, contributing about 25% of
annual mwh generation while operating at an average capacity of 88%
over the last three years. It has the lowest fuel cost per MMBTU of
any of KCPL's generating units.
Wolf Creek's eighth scheduled refueling and maintenance outage
began in early February 1996 and was completed in April 1996 (64
days). The incremental operating, maintenance and replacement power
costs are accrued evenly over the unit's operating cycle, normally 18
months. As actual outage expenses are incurred, the refueling
liability and related deferred tax asset are reduced. The eighth
outage started one month early when the plant was shut down after
water flow from the cooling lake was restricted by ice buildup on an
intake screen. This extended the length of the outage and was the
primary reason for the increase in Wolf Creek related replacement
power and maintenance expenses in 1996. Wolf Creek's ninth refueling
and maintenance outage is scheduled for the fall of 1997.
Currently, no major equipment replacements are expected, but an
extended shut-down of Wolf Creek could have a substantial adverse
effect on KCPL's business, financial condition and results of
operations. Higher replacement power and other costs would be
incurred as a result. Although not expected, an unscheduled plant
shut-down could be caused by actions of the Nuclear Regulatory
Commission reacting to safety concerns at the plant or other similar
nuclear units. If a long-term shut-down occurred, the state
regulatory commissions could consider reducing rates by excluding the
Wolf Creek investment from rate base.
Ownership and operation of a nuclear generating unit exposes KCPL
to risks regarding the cost of decommissioning the unit at the end of
its life and to potential retrospective assessments and property
losses in excess of insurance coverage.
CAPITAL REQUIREMENTS AND LIQUIDITY
See Note 3 to the Consolidated Financial Statements regarding
$150 million in financing obtained by KCPL in April 1997. Other
liquid resources of KCPL at March 31, 1997, included cash flows from
operations; $300 million of registered but unissued, unsecured medium-
term notes and $359 million of unused bank lines of credit. The
unused lines consisted of KCPL's short-term bank lines of credit of
$296 million and KLT's long-term revolving line of credit of $63
million.
KCPL continued to generate positive cash flows from operating
activities despite the significant decreases in net income for the
three- and twelve-month periods. Cash flow variances from changes in
working capital items vary with normal business cycles and operations
including the timing of receipts and payments. The timing of the Wolf
Creek outage affects the refueling outage accrual, deferred income
taxes and amortization of nuclear fuel.
The decrease in accrued taxes from December 31, 1996, to March
31, 1997, mainly reflects the decrease in taxable income during the
first three months of 1997. This decrease is partially offset by the
loss of accelerated depreciation on significant plant assets.
Accelerated depreciation lowers tax payments in the earlier years of
an asset's life while increasing deferred tax liabilities; this
relationship reverses in the later years of an asset's life. Our last
significant generating plant addition was the completion of Wolf Creek
in 1985. We expect property tax requirements to decrease about $3
million in 1997 based on changes in Kansas laws.
The $8.9 million incurred to repair damages from an October 1996
snow storm lowered cash flows from operating activities for the twelve-
month period. Amortization of these costs over five years began in
1997.
Cash used in investing activities varies with the timing of
utility capital expenditures and KLT's purchases of investments and
nonutility properties. KLT closed several investments during the
first three months of 1997, increasing Investments and Nonutility
Property on the Consolidated Balance Sheet by approximately $76
million. These include a 12% ownership interest in the largest fossil-
fuel generator in Argentina and an ownership interest in Digital
Teleport, Inc. (DTI). DTI is constructing a state of the art, fiber
optic network throughout the region in anticipation of increased local
and long distance telephone competition. As part of the DTI
transaction, KLT converted a $9 million note receivable to the
investment in DTI, lowering Other Receivables on the Consolidated
Balance Sheet. The increase in nonutility properties in the twelve-
month period resulted mainly from KLT's purchase of certain oil and
gas projects during 1996.
As discussed in Note 2 to the Consolidated Financial Statements,
the market value of KLT's investment in securities available for sale
decreased during the first three months of 1997. This decrease is
reflected in the Unrealized Gain on Securities Available for Sale in
the Consolidated Balance Sheet.
The $53 million payment to UtiliCorp and KLT's purchases of
investments and nonutility properties were financed mostly through
additional long-term and short-term borrowings. As discussed in Note
3 to the Consolidated Financial Statements, a majority of the short-
term borrowings during the first three months of 1997 were refinanced
with long-term obligations during April 1997.
KCPL's common dividend payout ratio was 153% for the current
twelve-month period and 80% for the prior twelve-month period. The
increase in the payout ratio is due mainly to the significant merger
related expenses in the current twelve-month period.
Day-to-day operations, utility construction requirements and
dividends are expected to be met with internally-generated funds.
Uncertainties affecting our ability to meet these requirements with
internally-generated funds include the effect of inflation on
operating expenses, the level of mwh sales, regulatory actions,
compliance with future environmental regulations, the availability of
generating units, and the outcome of pending legal proceedings (see
Note 4 to the Consolidated Financial Statements). The funds needed
for the retirement of $386 million of maturing debt through the year
2001 will be provided from operations, refinancings or short-term
debt. We might incur additional debt and/or issue additional equity
to finance growth or take advantage of new opportunities.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4-a Amended and Restated Declaration of Trust of KCPL
Financing I dated
April 15, 1997
4-b Indenture dated as of April 1, 1997 between the Company
and The First
National Bank of Chicago, Trustee
4-c First Supplemental Indenture dated as of April 1, 1997
to the Indenture
dated as of April 1, 1997 between the Company and The
First National
Bank of Chicago, Trustee
4-d Preferred Securities Guarantee Agreement dated April
15, 1997
27 Financial Data Schedule (for the three months ended
March 31, 1997)
(b) Reports on Form 8-K
A report on Form 8-K was filed with the Securities and
Exchange Commission
on February 11, 1997, with attached copy of the Agreement
and Plan of Merger dated
as of February 7, 1997, between the Company and Western
Resources, Inc.
A report on Form 8-K was filed with the Securities and
Exchange Commission
on April 3, 1997, with attached copies of the following: 1)
Statement re Computation
of Ratios of Earnings to Fixed Charges and Ratios of
Earnings to Fixed Changes
and Preferred Dividend Requirements; 2) Western Resources
Annual Report on
Form 10-K for the year ended December 31, 1996; 3) Western
Resources Current
Report on Form 8-K dated April 1, 1997; 4) Western Resources
Proxy Statement
dated March 27, 1996 for the 1996 Annual Meeting of
Shareholders held on
May 7, 1996.
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 9, 1997 /s/ Drue Jennings
(Drue Jennings)
(Chief Executive Officer)
Dated: May 9, 1997 /s/ Neil Roadman
(Neil Roadman)
(Principal Accounting Officer)