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 September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-707
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
November 9, 1998, was 61,898,020 shares.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
September 30 December 31
1998 1997
(thousands)
ASSETS
UTILITY PLANT, at original cost
Electric $3,552,745 $3,502,796
Less-accumulated depreciation 1,379,035 1,314,154
Net utility plant in service 2,173,710 2,188,642
Construction work in progress 102,814 93,264
Nuclear fuel, net of amortization of
$100,839 and $86,516 31,881 41,649
Total 2,308,405 2,323,555
REGULATORY ASSET - RECOVERABLE TAXES 123,000 123,000
INVESTMENTS AND NONUTILITY PROPERTY 331,623 345,126
CURRENT ASSETS
Cash and cash equivalents 82,481 74,098
Electric customer accounts receivable, net of
allowance for doubtful accounts
of $1,910 and $1,941 67,603 28,741
Other receivables 29,622 33,492
Fuel inventories, at average cost 17,333 13,824
Materials and supplies, at average cost 44,662 46,579
Deferred income taxes 3,831 648
Other 2,912 7,155
Total 248,444 204,537
DEFERRED CHARGES
Regulatory assets 27,416 30,017
Other deferred charges 30,518 31,798
Total 57,934 61,815
Total $3,069,406 $3,058,033
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see statements) $2,008,787 $2,051,489
CURRENT LIABILITIES
Notes payable to banks 6,741 1,243
Current maturities of long-term debt 36,287 74,180
Accounts payable 53,899 57,568
Accrued taxes 63,442 1,672
Accrued interest 18,531 22,360
Accrued payroll and vacations 22,608 23,409
Accrued refueling outage costs 9,832 1,664
Other 32,243 15,068
Total 243,583 197,164
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 642,174 638,679
Deferred investment tax credits 59,824 63,257
Other 115,038 107,444
Total 817,036 809,380
COMMITMENTS AND CONTINGENCIES
Total $3,069,406 $3,058,033
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
1
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
September 30 December 31
1998 1997
(thousands)
COMMON STOCK EQUITY
Common stock-150,000,000 shares authorized
without par value-61,908,726 shares issued,
stated value $ 449,697 $ 449,697
Retained earnings (see statements) 461,430 428,452
Unrealized gain on securities available for sale 697 1,935
Capital stock premium and expense (1,674) (1,664)
Total 910,150 878,420
CUMULATIVE PREFERRED STOCK
$100 Par Value
3.80% - 100,000 shares issued 10,000 10,000
4.50% - 100,000 shares issued 10,000 10,000
4.20% - 70,000 shares issued 7,000 7,000
4.35% - 120,000 shares issued 12,000 12,000
No Par Value
4.37%* - 500,000 shares issued 50,000 50,000
$100 Par Value - Redeemable
4.00% 62 62
Total 89,062 89,062
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY KCPL
SUBORDINATED DEBENTURES 150,000 150,000
LONG-TERM DEBT (excluding current maturities)
General Mortgage Bonds
Medium-Term Notes due 1998-2008, 6.90% and
6.92% weighted-average rate 386,000 407,500
4.07%* Environmental Improvement Revenue
Refunding Bonds due 2012-23 158,768 158,768
Guaranty of Pollution Control Bonds
4.31% as of December 31, 1997, due 2015-17 0 196,500
Environmental Improvement Revenue Refunding Bonds
4.28%* Series A & B due 2015 106,500 0
4.50% Series C due 2017 50,000 0
4.35% Series D due 2017 40,000 0
Subsidiary Obligations
Affordable Housing Notes due 2000-06, 8.34%
and 8.48% weighted-average rate 54,775 61,207
Bank Credit Agreement due October 31, 1999,
6.87% and 6.67% weighted-average rate 61,000 107,500
Other Long-Term Notes 2,532 2,532
Total 859,575 934,007
Total $2,008,787 $2,051,489
* Variable rate securities, weighted-average rate as of September 30, 1998
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
2
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30 1998 1997
(thousands)
ELECTRIC OPERATING REVENUES $313,462 $290,218
OPERATING EXPENSES
Operation
Fuel 41,039 39,832
Purchased power 31,273 17,219
Other 49,631 49,897
Maintenance 18,597 15,973
Depreciation 28,857 27,464
Income taxes 39,058 38,762
General taxes 27,934 27,648
Total 236,389 216,795
OPERATING INCOME 77,073 73,423
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds
used during construction 912 779
Miscellaneous income 10,471 11,263
Miscellaneous deductions (22,633) (16,896)
Income taxes 10,804 8,596
Total (446) 3,742
INCOME BEFORE INTEREST CHARGES 76,627 77,165
INTEREST CHARGES
Long-term debt 14,056 15,261
Short-term debt 72 103
Miscellaneous 4,189 4,172
Allowance for borrowed funds
used during construction (575) (518)
Total 17,742 19,018
Net Income 58,885 58,147
Preferred Stock
Dividend Requirements 973 952
Earnings Available for
Common Stock $57,912 $57,195
Average Number of Common
Shares Outstanding 61,888 61,896
Basic and Diluted earnings
per Common Share $0.94 $0.92
Cash Dividends per
Common Share $0.415 $0.405
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Year to Date September 30 1998 1997
(thousands)
ELECTRIC OPERATING REVENUES $ 748,599 $ 700,382
OPERATING EXPENSES
Operation
Fuel 112,624 104,045
Purchased power 54,317 46,141
Other 143,320 141,358
Maintenance 50,842 52,553
Depreciation 86,238 83,037
Income taxes 70,854 61,128
General taxes 72,135 72,366
Deferred Wolf Creek costs amortization 0 1,368
Total 590,330 561,996
OPERATING INCOME 158,269 138,386
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds
used during construction 2,735 1,772
Miscellaneous income 34,390 23,724
Miscellaneous deductions (60,385) (92,560)
Income taxes 31,168 48,691
Total 7,908 (18,373)
INCOME BEFORE INTEREST CHARGES 166,177 120,013
INTEREST CHARGES
Long-term debt 43,426 44,777
Short-term debt 239 1,273
Miscellaneous 12,521 8,710
Allowance for borrowed funds
used during construction (1,816) (1,891)
Total 54,370 52,869
Net Income 111,807 67,144
Preferred Stock
Dividend Requirements 2,930 2,866
Earnings Available for
Common Stock $108,877 $64,278
Average Number of Common
Shares Outstanding 61,878 61,896
Basic and Diluted earnings
per Common Share $1.76 $1.04
Cash Dividends per
Common Share $1.225 $1.215
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
4
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Twelve Months Ended September 30 1998 1997
(thousands)
ELECTRIC OPERATING REVENUES $944,160 $901,270
OPERATING EXPENSES
Operation
Fuel 143,088 140,415
Purchased power 67,423 57,810
Other 193,859 188,843
Maintenance 69,181 70,009
Depreciation 114,099 110,380
Income taxes 80,839 63,514
General taxes 93,066 94,345
Deferred Wolf Creek costs amortization 0 4,273
Total 761,555 729,589
OPERATING INCOME 182,605 171,681
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds
used during construction 3,370 2,605
Miscellaneous income 48,178 23,724
Miscellaneous deductions (84,758) (99,154)
Income taxes 45,511 55,949
Total 12,301 (16,876)
INCOME BEFORE INTEREST CHARGES 194,906 154,805
INTEREST CHARGES
Long-term debt 58,947 58,990
Short-term debt 348 1,383
Miscellaneous 16,654 9,930
Allowance for borrowed funds
used during construction (2,266) (2,407)
Total 73,683 67,896
Net Income 121,223 86,909
Preferred Stock
Dividend Requirements 3,853 3,816
Earnings Available for
Common Stock $117,370 $83,093
Average Number of Common
Shares Outstanding 61,893 61,897
Basic and Diluted earnings
per Common Share $1.90 $1.34
Cash Dividends per
Common Share $1.63 $1.62
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
5
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year to Date September 30 1998 1997
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 111,807 $ 67,144
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 86,238 83,037
Amortization of:
Nuclear fuel 14,323 15,211
Deferred Wolf Creek costs 0 1,368
Other 6,802 6,049
Deferred income taxes (net) 896 (10,168)
Investment tax credit amortization (3,433) (3,170)
Deferred merger costs 0 (5,712)
Kansas rate refund accrual 11,174 0
Allowance for equity funds used
during construction (2,735) (1,772)
Other operating activities (Note 2) 36,375 25,881
Net cash from operating activities 261,447 177,868
CASH FLOWS FROM INVESTING ACTIVITIES
Utility capital expenditures (71,941) (92,782)
Allowance for borrowed funds used
during construction (1,816) (1,891)
Purchases of investments (22,338) (98,500)
Purchases of nonutility property (13,686) (12,271)
Sale of KLT Power 53,033 0
Sale of streetlights 0 21,500
Other investing activities (7,924) (8,390)
Net cash from investing activities (64,672) (192,334)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of mandatorily reedemable
Preferred Securities 0 150,000
Issuance of long-term debt 10,405 66,292
Repayment of long-term debt (122,730) (26,787)
Net change in short-term borrowings 5,498 935
Dividends paid (78,829) (78,094)
Other financing activities (2,736) (9,413)
Net cash from financing activities (188,392) 102,933
NET CHANGE IN CASH AND CASH
EQUIVALENTS 8,383 88,467
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 74,098 23,571
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $82,481 $112,038
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $58,915 $56,562
Income taxes $468 $0
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
6
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended September 30 1998 1997
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 121,223 $ 86,909
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 114,099 110,380
Amortization of:
Nuclear fuel 15,948 20,421
Deferred Wolf Creek costs 0 4,273
Other 8,976 7,452
Deferred income taxes (net) 15,844 (19,438)
Investment tax credit amortization (4,113) (4,227)
Deferred storm costs 0 (8,885)
Deferred merger costs 5,712 (5,712)
Kansas rate refund accrual 11,174 0
Allowance for equity funds used
during construction (3,370) (2,605)
Other operating activities (Note 2) 6,570 8,580
Net cash from operating activities 292,063 197,148
CASH FLOWS FROM INVESTING ACTIVITIES
Utility capital expenditures (103,893) (117,105)
Allowance for borrowed funds used
during construction (2,266) (2,407)
Purchases of investments (31,441) (118,305)
Purchases of nonutility property (17,148) (17,286)
Sale of KLT Power 53,033 0
Sale of streetlights 0 21,500
Other investing activities (8,436) (4,876)
Net cash from investing activities (110,151) (238,479)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of mandatorily redeemable
Preferred Securities 0 150,000
Issuance of long-term debt 10,405 176,292
Repayment of long-term debt (124,775) (46,787)
Net change in short-term borrowings 5,806 (34,065)
Dividends paid (104,777) (104,096)
Other financing activities 1,872 (11,204)
Net cash from financing activities (211,469) 130,140
NET CHANGE IN CASH AND CASH
EQUIVALENTS (29,557) 88,809
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 112,038 23,229
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $82,481 $112,038
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $73,625 $63,459
Income taxes $22,853 $17,605
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
7
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Year to Date Twelve Months Ended
September 30 September 30 September 30
1998 1997 1998 1997 1998 1997
(thousands)
Net income $ 58,885 $ 58,147 $ 111,807 $ 67,144 $ 121,223 $ 86,909
Other comprehensive income (loss),
net of tax:
Net unrealized gain (loss) on
securities available for sale (2,293) 84 (1,238) (1,315) (4,472) (1,769)
Comprehensive Income $ 56,592 $ 58,231 $ 110,569 $ 65,829 $ 116,751 $ 85,140
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Year to Date Twelve Months Ended
September 30 September 30 September 30
1998 1997 1998 1997 1998 1997
(thousands)
Beginning Balance $ 429,216 $ 412,890 $ 428,452 $ 455,934 $ 444,984 $ 462,171
Net Income 58,885 58,147 111,807 67,144 121,223 86,909
488,101 471,037 540,259 523,078 566,207 549,080
Dividends Declared
Preferred stock - at required rates 981 986 3,022 2,892 3,903 3,827
Common stock 25,690 25,067 75,807 75,202 100,874 100,269
Ending Balance $ 461,430 $ 444,984 $ 461,430 $ 444,984 $ 461,430 $ 444,984
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
8
KANSAS CITY POWER & LIGHT COMPANY
Certain Forward-looking Information
Statements made in this report which are not based on historical
facts are forward-looking and, accordingly, involve risks and
uncertainties that could cause actual results to differ materially
from those discussed. Any forward-looking statements are intended to
be as of the date on which such a statement is made. In connection
with the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, we are providing the following important factors
that could cause actual results to differ materially from provided
forward-looking information. These important factors include: (a) the
proposed Western Resources Inc. (Western Resources) merger (see Note 1
to the Consolidated Financial Statements); (b) future economic
conditions in the regional, national and international markets; (c)
state, federal and foreign regulation and possible additional
reductions in regulated electric rates; (d) weather conditions; (e)
financial market conditions, including, but not limited to changes in
interest rates; (f) inflation rates; (g) increased competition,
including, but not limited to, the deregulation of the United States
electric utility industry, and the entry of new competitors; (h)
ability to carry out marketing and sales plans; (i ) ability to
achieve generation planning goals and the occurrence of unplanned
generation outages; (j) nuclear operations; (k) ability to enter new
markets successfully and capitalize on growth opportunities in
nonregulated businesses; (l) unforeseen events that would prevent
correction of internal or external information systems for Year 2000
problems, and (m) adverse changes in applicable laws, regulations or
rules governing environmental (including air quality regulations), tax
or accounting matters. This list of factors may not be all inclusive
since it is not possible for us to predict all possible factors.
Notes to Consolidated Financial Statements
In management's opinion, the consolidated interim financial
statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the results of
operations for the interim periods presented. These statements and
notes should be read in connection with the financial statements and
related notes included in our 1997 annual report on Form 10-K.
1. AMENDED AND RESTATED PLAN OF MERGER WITH WESTERN RESOURCES
Western Resources, Inc. (Western Resources) delivered an
unsolicited exchange offer and an amended offer to KCPL's Board of
Directors during the second quarter of 1996. After careful
consideration, KCPL's Board of Directors rejected both offers. In
July 1996 Western Resources commenced an exchange offer for KCPL
Common Stock. In late 1996 KCPL began discussing a possible merger
with Western Resources leading to a February 7, 1997 agreement.
In December 1997 KCPL canceled its previously scheduled special
meeting of shareholders to vote on the transaction because Western
Resources advised KCPL that its investment bankers, Salomon Smith
Barney, had indicated that it was unlikely that Salomon would be in a
position to issue a fairness opinion for the merger transaction on the
basis of the February 7, 1997 agreement. During 1997 KCPL incurred and
deferred $7 million of merger-related costs that were expensed in
December 1997.
On March 18, 1998, KCPL and Western Resources entered into an
Amended and Restated Agreement and Plan of Merger (Amended Agreement).
This Amended Agreement provides for the combination of the regulated
electric utilities of KCPL and Western Resources into Westar Energy, a
new company, using purchase accounting. Westar Energy would be owned
approximately 80.1% by Western Resources and approximately 19.9% by
KCPL shareholders. At closing, KCPL shareholders would receive for
every share of KCPL Common Stock one share of Westar Energy
9
Common Stock and a fraction of a share of Western Resources Common
Stock worth not less than $21.50 and not more than $26.50 pursuant to a
collar adjustment mechanism. The estimated trading value per share of
Westar Energy Common Stock to be issued to KCPL shareholders in
connection with the Amended Agreement was estimated to be in the range
of $10 to $11 per share (as stated in the Joint Proxy Statement dated
June 9, 1998). Since Westar Energy would be a newly formed entity
with no trading history, there can be no assurance that Westar Energy
would trade within the initial estimated range.
On July 30, 1998, KCPL's and Western Resources' shareholders
approved the Amended Agreement at special meetings of shareholders.
The transaction is subject to several closing conditions, including
approval by a number of regulatory and governmental agencies and
verification that no sales or use tax is payable in connection with
the proposed transactions. If the merger has not been closed by
December 31, 1999, either party may terminate the Amended Agreement as
long as they did not contribute to the delay. If Western Resources
Index Price is less than or equal to $29.78 five trading days prior to
closing, either party can terminate this Amended Agreement.
Applications for regulatory approvals of the Amended Agreement
have been filed with the Kansas Corporation Commission (KCC), the
Missouri Public Service Commission (MPSC) and the Federal Energy
Regulatory Commission (FERC). In the Kansas proceeding, the KCC set a
procedural schedule that requires the KCC Staff and intervenors to
file their testimony in the case by December 11, 1998. In the
Missouri proceeding, a number of parties to the case filed a joint
pleading on October 7, 1998, recommending a procedural schedule for
the case. In that pleading, the MPSC Staff indicated that, in
conjunction with the merger case, the MPSC Staff would review KCPL's
earnings. In the FERC proceeding, the FERC Staff, on August 24, 1998,
requested that the Companies amend their filing by providing
additional analyses using updated information. Such revised
information is in the process of being prepared. We cannot predict
the timing or outcome of the proceedings.
As part of the foregoing conditions, the obligation of Western
Resources to effect the merger is subject to the following:
(A) That the final orders are obtained from the various federal
and state regulators on terms and conditions which would not have a
material adverse effect on the benefits anticipated by Western
Resources in the merger. In many utility mergers state regulators
require a portion of savings from merger synergies to be allocated to
customers as a condition for their approval of a transaction. Western
Resources believes, and has discussed its position with KCPL, that in
light of the rate reductions associated with the merger and already
allocated to customers, any efforts by the relevant state regulators
to seek further rate reductions would give Western Resources the right
to trigger such condition. Western Resources and KCPL have each
already implemented rate reductions in Kansas and Missouri. KCPL has
(i) already implemented rate reductions to share anticipated merger
synergies with customers in Missouri from its previously planned
merger with UtiliCorp and (ii) entered into a stipulation in Kansas
which states that the Kansas Commission staff and the Citizen's
Utility Ratepayers Board will not request rate reductions or rate
refunds from Western Resources, KCPL or their affiliates sooner than
one year after consummation of the merger. Moreover, Western
Resources believes that the rate reductions it has begun to implement
in Kansas take into account synergies that are related to the merger.
However, there is no assurance that the state regulators will not
require Westar Energy to share additional merger-related synergies
with customers or require rate reductions for other reasons in
Missouri or Kansas as a condition to their approval of the merger or
that Western Resources will waive this condition and consummate the
merger if state regulators require additional rate reductions.
(B) That Western Resources will be reasonably satisfied that it
will be exempt from all of the provisions of the Public Utility
Holding Company Act of 1935 (1935 Act) other than Section 9(a)(2)
thereof. Western Resources seeks an exemption under section 3(a)(1)
of the 1935 Act pursuant to
10
Rule 2. To qualify for an exemption under Section 3(a)(1) of the 1935 Act,
Westar Energy must be predominantly intrastate in character and carry on its
utility business substantially in the state in which both Westar Energy and
Western Resources are incorporated, Kansas. As a result of the merger, Westar
Energy will derive utility revenues from outside of the state of
Kansas in an amount at the high-end of the range of out-of-state
utility revenues of utility subsidiaries of holding companies that
currently are exempt from the 1935 Act pursuant to Section 3(a)(1) and
Rule 2. In the event that Western Resources determines prior to the
consummation of the merger that an exemption under Section 3(a)(1) of
the 1935 Act is not available, Western Resources must either (i) waive
this condition and become a registered holding company under the 1935
Act or (ii) determine to assert that this condition has not been
satisfied and choose not to consummate the merger. Although Western
Resources anticipates that after the merger it will qualify for an
exemption under Section 3(a)(1) of the 1935 Act pursuant to Rule 2,
there is no assurance that the SEC will not challenge Western
Resources' stated intention to file for an exemption pursuant to Rule
2 or that this condition will be satisfied.
The Amended Agreement allows the KCPL Board discretion to make
changes (including increases) in the KCPL Common Stock dividend
consistent with past practice exercising good business judgment. On
August 4, 1998, KCPL's Board approved an increase to the common stock
dividend raising it to an annualized dividend of $1.66 per share from
$1.62 per share. The Amended Agreement also requires KCPL to redeem
all outstanding shares of cumulative preferred stock prior to
consummation of the proposed transactions. If the Amended Agreement
is terminated under certain other circumstances and KCPL, within two
and one-half years following termination, agrees to consummate a
business combination with a third party that made a proposal to
combine prior to termination, a payment of $50 million will be due
Western Resources. Under certain circumstances, if KCPL determines
not to consummate its merger into Westar Energy due to its inability
to receive a favorable tax opinion from its legal counsel, it must pay
Western Resources $5 million. Western Resources will pay KCPL $5
million to $35 million if the Amended Agreement is terminated and all
closing conditions are satisfied other than conditions relating to
Western Resources receiving a favorable tax opinion from its legal
counsel, favorable statutory approvals or an exemption from the Public
Utility Holding Company Act of 1935.
2. CONSOLIDATED STATEMENTS OF CASH FLOWS - OTHER OPERATING ACTIVITIES
Year to Date Twelve Months
Ended
1998 1997 1998 1997
Cash flows affected by changes (thousands)
in:
Receivables $(34,992) $(16,478) $(17,541) $ (9,528)
Fuel inventories (3,509) 3,121 (1,377) 3,584
Materials and supplies 1,917 340 2,332 (505)
Accounts payable (3,669) (9,811) 8,092 (175)
Accrued taxes 61,770 44,369 630 (4,250)
Accrued interest (3,829) (3,192) 669 4,579
Wolf Creek refueling outage
accrual 8,168 5,097 (2,446) 7,731
Pension and postretirement
benefit obligations (1,478) (4,335) 612 (2,020)
Other 11,997 6,770 15,599 9,164
Total $ 36,375 $ 25,881 $ 6,570 $ 8,580
3. ACCOUNTING CHANGES
Change in Accounting Estimate
In 1998 KCPL adopted the American Institute of Certified Public
Accountants Statement of Position (SOP) 98-1 -- Accounting for the
Costs of Computer Software Developed or Obtained For
11
Internal Use. KCPL was generally in conformance with this SOP prior to
adoption in regards to external direct costs and interest costs incurred in
the development of computer software for internal use. This SOP also
provides that once the capitalization criteria of the SOP have been
met, payroll and payroll-related costs for employees who are directly
associated with and who devote time to the internal-use computer
software project should be capitalized.
Costs capitalized in accordance with SOP 98-1 will be amortized
on a straight-line basis over estimated service lives of 5 to 10
years. The effect of adopting SOP 98-1 for the nine-months ended
September 30, 1998, is an increase of net income of approximately
$2,200,000 ($0.04 per share).
Comprehensive Income
In 1998 KCPL adopted Financial Accounting Standards Board
Statement No. 130 -- Reporting Comprehensive Income which establishes
standards for reporting of comprehensive income and its components.
4. SECURITIES AVAILABLE FOR SALE
Certain investments in equity securities are accounted for as
securities available for sale and adjusted to market value with
unrealized gains (or losses), net of deferred income taxes, reported
as a separate component of comprehensive income and common stock
equity.
The cost of securities available for sale held by KLT Inc. (KLT),
a wholly-owned subsidiary of KCPL, was $4.8 million as of September
30, 1998, and $5.1 million as of December 31, 1997. Unrealized
gains were $0.7 million net of $0.4 million deferred income taxes, at
September 30, 1998, decreasing from $1.9 million, net of $1.1 million
deferred income taxes, at December 31, 1997.
5. CAPITALIZATION
KCPL Financing I (Trust), a wholly-owned subsidiary of Kansas
City Power & Light Company, has previously issued $150,000,000 of 8.3%
preferred securities. The sole asset of the Trust is the $154,640,000
principal amount of 8.3% Junior Subordinated Deferrable Interest
Debentures, due 2037, issued by KCPL.
In August 1998 KCPL refinanced the full amount of its Guaranty of
Pollution Control Bonds with unsecured Environmental Improvement
Revenue Refunding Bonds. The maturity dates of the Bonds were not
extended.
From October 1 through November 9, 1998, KLT's borrowings under
its bank credit agreement increased $18 million.
6. INTANGIBLE ASSETS
The application of purchase accounting for certain investments
has resulted in about $19 million in goodwill recognition. These
amounts are included in Other deferred charges and Investments and
Nonutility Property on the consolidated balance sheets and are being
amortized over 10 to 40 years.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STATUS OF MERGER
See Note 1 to the Consolidated Financial Statements as to the
current status of the merger agreement with Western Resources Inc.
(Western Resources) including the Amended and Restated Agreement and
Plan of Merger (Amended Merger Agreement) dated March 18, 1998. In
December 1996 the Federal Energy Regulatory Commission (FERC) issued a
statement concerning electric utility mergers. Under the statement,
companies must demonstrate that their merger does not adversely affect
competition or wholesale rates. As remedies, FERC may consider a
range of conditions including transmission upgrades, divestitures of
generating assets or formation of independent system operators.
REGULATION AND COMPETITION
As competition develops throughout the electric utility industry,
we are positioning Kansas City Power & Light Company (KCPL) to excel
in an open market. We are improving the efficiency of KCPL's core
utility operations, lowering prices and offering new services. In
particular, value-added services for large energy users can include
contracts for natural gas commodities.
Competition in the electric utility industry was accelerated with
the National Energy Policy Act of 1992. This Act gives FERC the
authority to require electric utilities to provide transmission line
access to independent power producers (IPPs) and other utilities
(wholesale wheeling). KCPL, already active in the wholesale wheeling
market, was one of the first utilities to receive FERC's approval of
an open-access tariff for wholesale wheeling transactions. In April
1996 FERC issued an order requiring all owners of transmission
facilities to adopt open-access tariffs and participate in wholesale
wheeling. We have made the necessary filings to comply with that
order.
FERC's April 1996 order has encouraged more movement toward
retail competition at the state level. An increasing number of states
have already adopted open access requirements for utilities' retail
electric service, allowing competing suppliers access to their retail
customers (retail wheeling). Many other states are actively
considering retail wheeling. In Kansas, the retail wheeling task
force proposed a restructuring bill that would implement retail
competition on July 1, 2001. Some of the key points included in the
proposed bill are: 1) the Kansas Corporation Commission (KCC) will
determine the amount of under-utilized assets (stranded costs) each
utility is allowed to recover and 2) a unit charge per kwh will be
assessed to all customers for recovery of competitive transition costs
(these costs include stranded costs, other regulatory assets, nuclear
decommissioning, etc.). In Missouri, a legislative committee has been
formed to study the issue. The retail wheeling task force formed by
the Missouri Public Service Commission (MPSC) issued its report in May
1998. The report identifies issues and various options for the
legislature to address. No retail wheeling bill was passed in either
the Kansas or Missouri legislatures in 1998.
Competition through retail wheeling could result in market-based
rates below current cost-based rates. This would provide growth
opportunities for low-cost producers and risks for higher-cost
producers, especially those with large industrial customers. Lower
rates and the loss of major customers could result in stranded costs
and place an unfair burden on the remaining customer base or
shareholders. Testimony filed in the merger case in Kansas for KCPL
indicated that stranded costs are approximately $1 billion. An
independent study prepared at the request of the KCC concluded that
there are no stranded costs. We cannot predict the extent that
stranded costs
13
will be recoverable in future rates. If an adequate and fair provision for
recovery of these lost revenues is not provided, certain generating assets may
have to be evaluated for impairment and appropriate charges recorded against
earnings. In addition to lower profit margins, market-based rates could also
require generating assets to be depreciated over shorter useful lives,
increasing operating expenses.
Although Missouri and Kansas have not yet authorized retail
wheeling, we believe KCPL is positioned well to compete in an open
market with its diverse customer mix and pricing strategies. About
20% of KCPL's retail mwh sales are to industrial customers which is
below the utility industry average. KCPL has a flexible rate
structure with industrial rates that are competitively priced with
other companies in the region. In addition, long-term contracts are
in place or under negotiation for a large portion of KCPL's industrial
sales. Although there currently is no direct competition for retail
electric service within KCPL's service territory, it does exist within
the bulk power market, between alternative fuel suppliers and among
third-party energy management companies. Third-party energy
management companies are seeking to initiate relationships with large
users in an attempt to enhance their chances to directly supply
electricity if retail wheeling is authorized.
Increased competition could also force utilities to change
accounting methods. Financial Accounting Standards Board (FASB)
Statement No. 71 - Accounting for Certain Types of Regulation, applies
to regulated entities whose rates are designed to recover the costs of
providing service. An entity's operations could stop meeting the
requirements of FASB 71 for various reasons, including a change in
regulation or a change in the competitive environment for a company's
regulated services. For those operations no longer meeting the
requirements of regulatory accounting, regulatory assets would be
written off. KCPL's regulatory assets, totaling $150 million at
September 30, 1998, will be maintained as long as FASB 71 requirements
are met.
It is possible that competition could eventually have a
materially adverse affect on KCPL's results of operations and
financial position. Should competition eventually result in a
significant charge to equity, capital costs and requirements could
increase significantly.
NONREGULATED OPPORTUNITIES
KLT Inc. (KLT) is a wholly-owned subsidiary pursuing nonregulated
business ventures. On July 31, 1998, KLT sold 100% of the common
stock of KLT Power Inc., a wholly-owned subsidiary of KLT, resulting
in an after-tax gain of approximately $2.4 million. Remaining
ventures include investments in domestic and China power production,
energy services, oil and gas development and production,
telecommunications, telemetry technology and affordable housing
limited partnerships.
KCPL had a total equity investment in KLT of $119 million as of
September 30, 1998. KLT's net income for the nine-months ended
September 30, 1998, totaled $9.0 million compared to $2.7 million for
the nine-months ended September 30, 1997. KLT's consolidated assets
at September 30, 1998, totaled $302 million.
On May 29, 1998, Home Service Solutions Inc. (HSS), a wholly-
owned subsidiary of KCPL, entered into a stock purchase agreement to
obtain a 50% interest in R.S. Andrews Enterprises, Inc. (RSAE), a
consumer services company in Atlanta, Georgia. RSAE expects to make
future acquisitions in other key U.S. markets. On August 28, 1998,
HSS formed Worry Free, Inc. to acquire the Worry Free non-regulated
business from KCPL. As a residential service provider, Worry Free,
Inc. bundles financing, preventative maintenance and warranty services
for heating and
14
air conditioning equipment. KCPL had a total equity investment in Home
Service Solutions Inc. of $21 million as of September 30, 1998.
The growth of KLT and the investment in RSAE by HSS account for
most of the increase in KCPL's consolidated investments and nonutility
property.
RESULTS OF OPERATIONS
Three-month Three months ended September 30, 1998,
period: compared with three months ended September
30, 1997
Nine-month Nine months ended September 30, 1998,
period: compared with nine months ended September 30,
1997
Twelve-month Twelve months ended September 30, 1998,
period: compared with twelve months ended September
30, 1997
EARNINGS OVERVIEW
Earnings Per Share (EPS)
For the Periods Ended September 30
Increase
excluding
Merger Merger
1998 1997 Increase Expenses Expenses
Three months $0.94 $0.92 $0.02 $(0.09) $0.11
ended
Nine months $1.76 $1.04 $0.72 $ 0.33 $0.39
ended
Twelve months $1.90 $1.34 $0.56 $ 0.26 $0.30
ended
EPS for all periods excluding merger expenses increased primarily
due to increases in retail sales because of warmer than normal weather
and continued load growth. Additionally, EPS for all periods
increased due to increased bulk power revenues. Partially offsetting
these increases to EPS are the effects of increased fuel production
costs and purchased power expenses as a result of outages at the
Hawthorn 5 and LaCygne 1 generating units (see the Fuel and Purchased
Power section).
Growth in subsidiary income increased EPS for the three-month
period by $0.07, the nine-month period by $0.10 and the twelve-month
period by $0.18. EPS for the three-month period was reduced by $0.04
because of the implementation of rate reductions approved by the KCC
effective January 1, 1998. EPS for the nine- and twelve-month periods
was reduced by $0.11 because of the KCC rate reductions. EPS for the
nine- and twelve-month periods was also reduced by increased interest
expense related to the mandatorily redeemable preferred securities and
increased depreciation expense.
Merger expenses for the three-months ended September 30, 1998,
were $5.8 million ($0.09 per share). Merger expenses for the nine-
months ended September 30, 1998, were $12.0 million ($0.19 per share).
During the nine-months ended September 30, 1997, KCPL paid $53 million
($0.52 per share) to UtiliCorp United Inc. (UtiliCorp) for terminating
the merger agreement with UtiliCorp and announcing an agreement to
combine with Western Resources. Merger expenses for the twelve-months
ended September 30, 1998, reduced EPS by $0.26. For the twelve-months
ended September 30, 1997, EPS was reduced by $0.52 for the payment to
UtiliCorp. Costs to
15
implement the new merger structure with Western Resources announced March
18, 1998, are being expensed as incurred.
MEGAWATT-HOUR (MWH) SALES AND OPERATING REVENUES
Sales and revenue data:
(revenue change in millions)
Periods ended September 30, 1998 versus
September 30, 1997
Three Months Nine Months Twelve Months
Mwh Revenues Mwh Revenues Mwh Revenues
Increase (decrease)
Retail Sales:
Residential 13 % $ 14 11 % $ 27 11 % $ 31
Commercial 7 % 8 7 % 18 6 % 21
Industrial 2 % 2 5 % 4 3 % 4
Other 10 % - 10 % (4) 6 % (6)
KS rate refund
accrual (4) (11) (11)
Total Retail 8 % 20 8 % 34 7 % 39
Sales for Resale:
Bulk Power Sales (13)% 3 13 % 13 (11)% 2
Other 12 % - 13 % - 16 % -
Total 23 47 41
Other revenues - 1 2
Total Operating
Revenues $ 23 $ 48 $ 43
The KCC approved a settlement agreement, effective January 1,
1998, authorizing a $14.2 million revenue reduction and an increase in
depreciation expense of $2.8 million. When the KCC approves a new
rate design, which is expected to be implemented February 1, 1999,
KCPL will refund the amount that has accrued between January 1, 1998,
and the implementation date. Recorded revenues for the three-month
period are reduced by about $4 million and the nine- and twelve-month
periods are reduced by about $11 million as a result of an accrual
(recorded in Other in Current Liabilities on the Consolidated Balance
Sheet) for this rate refund.
Higher summer rates, which are in effect from June through
September, and seasonally higher mwh sales in September 1998 versus
December 1997 resulted in a higher customer accounts receivable
balance at September 30, 1998, compared with December 31, 1997.
Warmer than normal weather and continued load growth resulted in
an increase in retail mwh sales for all periods. Load growth consists
of higher usage-per-customer as well as the addition of new customers.
In addition, retail mwh sales during the nine- and twelve-months ended
September 30, 1997, reflected reduced sales to a major industrial
customer because of a strike by its employees.
For the three-month period, Other retail revenues remained
approximately the same and for the nine- and twelve-month periods
Other retail revenues decreased while Other retail mwh sales increased
for all periods. These differences are due to the sale of the public
streetlight system to the City of Kansas City, Missouri in August
1997. The rate per mwh paid by the city was reduced as a result of
the sale agreement, as the new rate is for electricity only. The city
has entered into a separate maintenance agreement with KCPL.
16
On August 19, 1998, KCPL set a record peak demand for the
consumption of energy of 3,175 megawatts. This reflects the higher
than normal megawatt demand on the system during the summer of 1998.
KCPL has long-term sales contracts with certain major industrial
customers. These contracts are tailored to meet customers' needs in
exchange for their long-term commitment to purchase energy.
Bulk power sales vary with system requirements, generating unit
and purchased power availability, fuel costs and the requirements of
other electric systems. For all periods, the price per mwh of bulk
power sales increased and even resulted in increased revenues for the
three- and twelve-month periods even though mwh sales decreased.
Outages at the LaCygne 1 and 2 generating units in the second quarter
of 1997 contributed to lower bulk power sales in the nine- and twelve-
months ended September 30, 1997.
Total revenue per mwh sold varies with changes in rate tariffs,
the mix of mwh sales among customer classifications and the effect of
declining price per mwh as usage increases. An automatic fuel
adjustment provision is included only in sales that apply to less than
1% of revenues.
Future mwh sales and revenues per mwh will also be affected by
national and local economies, weather and customer conservation
efforts. Competition, including alternative sources of energy such as
natural gas, co-generation, IPPs and other electric utilities, may
also affect future sales and revenue.
FUEL AND PURCHASED POWER
Combined fuel and purchased power expenses for the three-month
period increased 27% while total mwh sales (total of retail and sales
for resale) increased 5%. Combined fuel and purchased power expenses
for the nine-month period increased 11% while total mwh sales
increased 9%. Combined fuel and purchased power expenses for the
twelve-month period increased 6% while total mwh sales increased 3%.
The differences are due mainly to additional replacement power
expenses incurred during the three-, nine- and twelve-months ended
September 30, 1998, due to outages at the Hawthorn 5 and LaCygne 1
generating units. Additionally, the per unit cost of generation
increased during all periods as a result of more generation from oil
and gas which are substantially higher in cost per MMBTU than coal or
nuclear. The price per unit of purchased power also increased during
all periods due to less purchased power availability and the
widespread use of market-based rates in the competitive wholesale
market. Partially offsetting these factors, the nine- and twelve-
months ended September 30, 1997, included additional replacement power
costs incurred during outages at the LaCygne generating units.
Nuclear fuel costs per MMBTU decreased 6% for the twelve-month
period. Nuclear fuel costs per MMBTU remain substantially less than
the MMBTU price of coal averaging 60% of the MMBTU price of coal for
the twelve-months ended September 30, 1998 and 1997. We expect this
relationship and the price of nuclear fuel to remain fairly constant
through the year 2001. For the twelve-months ended September 30,
1998, fossil plants represented about 76% of generation and the
nuclear plant about 24%. For the twelve-months ended September 30,
1997, fossil plants represented about 70% of generation and the
nuclear plant about 30%. The twelve-months ended September 30, 1998,
reflected a higher percentage of total generation by the fossil plants
due mainly to the fall 1997 refueling and maintenance outage at Wolf
Creek that lasted for 58 days in the fourth quarter of 1997.
Additionally, the outages at the LaCygne coal-fired generating units
in 1997
17
reduced the percentage of total generation by the fossil plants for the
twelve-months ended September 30, 1997.
The MMBTU price of coal decreased 6% for the twelve-month period.
Our coal procurement strategies continue to provide coal costs well
below the regional average. We expect coal costs to remain fairly
consistent with current levels through 2001.
OTHER OPERATION AND MAINTENANCE EXPENSES
Combined other operation and maintenance expenses for all periods
increased. The three-month period increased due to increased
maintenance expenses resulting from outages at LaCygne 1 and Hawthorn
5 during the three-months ended September 30, 1998. Repairs to
Hawthorn 5 to fix the damage from a steam line rupture will be
reimbursed by insurance except for the deductible. Certain
maintenance projects originally scheduled for the 1999 spring outage
were rescheduled to be completed during this outage resulting in
higher maintenance expenses in 1998. Other operation expenses
increased for the nine-month period but were partially offset by
decreased maintenance expenses as outages at the LaCygne 1 and 2
generating units resulted in additional maintenance expenses in the
nine-months ended September 30, 1997. Combined other operation and
maintenance expenses for the twelve-month period increased due largely
to increases in other power supply expenses, Wolf Creek non-fuel
operations, customer service expenses and sales expenses.
We continue to emphasize new technologies, improved work
methodologies and cost control. We are continuously improving our
work processes to provide increased efficiencies and improved
operations. Through the use of cellular technology, a majority of
customer meters are read automatically.
DEPRECIATION
The increase in depreciation expense for all periods reflects the
implementation of the KCC settlement agreement and normal increases in
depreciation from capital additions.
TAXES
The increase in operating income taxes for all periods reflects
higher taxable operating income. Additionally, for the twelve-months
ended September 30, 1997, income taxes had been reduced to reflect
adjustments for the filing of the 1995 tax returns and the settlement
with the Internal Revenue Service regarding tax issues included in the
1985 through 1990 tax returns.
Components of general taxes:
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30 September 30 September 30
1998 1997 1998 1997 1998 1997
(thousands)
Property $10,508 $11,235 $31,525 $33,704 $41,350 $44,125
Gross receipts 14,472 13,824 32,922 31,764 42,006 41,227
Other 2,954 2,589 7,688 6,898 9,710 8,993
Total $27,934 $27,648 $72,135 $72,366 $93,066 $94,345
18
Property taxes decreased for all periods reflecting changes in
Kansas tax law which reduced the mill levy rates and because of
reductions in Missouri and Kansas property tax assessed valuations.
Gross receipts taxes increased for all periods reflecting higher
billed Missouri revenues.
OTHER INCOME AND (DEDUCTIONS)
Miscellaneous income for the nine- and twelve-month periods
increased because of increased revenues from non-utility and
subsidiary operations. The gain on the sale of 100% of the common
stock of KLT Power Inc., dividends on the investment in a fossil-fuel
generator in Argentina (prior to the sale of the investment), revenues
from an energy services subsidiary in which KLT obtained a controlling
interest during 1997 and increased oil and gas production contributed
to the increase in miscellaneous income from subsidiary operations for
the nine- and twelve-month periods.
Miscellaneous deductions for all periods included increased non-
utility expenses. Additionally, the nine- and twelve-month periods
increased because of increased subsidiary operating costs. Increased
gas operations and the inclusion of three small companies in which KLT
obtained controlling interests during 1997 are the primary activities
that contributed to the increase in subsidiary operating costs.
Miscellaneous deductions for the nine- and twelve-month periods
decreased primarily due to the $53 million payment to UtiliCorp in the
prior periods. During the nine-months ended September 30, 1998, $12
million of merger expenses were incurred related to the Amended Merger
Agreement with Western Resources. The twelve-months ended September
30, 1998, includes an additional $7 million of merger expenses related
to the original merger agreement with Western Resources.
Income taxes for all periods reflect the tax impact of the excess
of miscellaneous deductions over miscellaneous income. Additionally,
during the first nine months of 1998 and 1997 we accrued tax credits
of $19 million and $16 million, respectively, or three-fourths of the
total expected annual credits, related to affordable housing
partnership investments and oil and gas investments. Non-taxable
increases in the cash surrender value of corporate-owned life
insurance contracts and certain non-deductible expenses also affected
the relationship between net miscellaneous income and deductions and
income taxes.
INTEREST CHARGES
The increase in miscellaneous interest charges for the nine- and
twelve-month periods is primarily due to interest costs incurred on
the $150 million of 8.3% preferred securities issued in April 1997.
We use interest rate swap and cap agreements to limit the
volatility in interest expense on a portion of KLT's variable-rate,
bank credit agreement and KCPL's variable-rate, long-term debt.
Although these agreements are an integral part of our interest rate
management, their incremental effect on interest expense and cash
flows is not significant. We do not use derivative financial
instruments for speculative purposes.
WOLF CREEK
Wolf Creek is one of KCPL's principal generating units
representing about 16% of its accredited generating capacity. The
plant's operating performance has remained strong, contributing about
26% of the annual mwh generation while operating at an average
capacity of
19
88% over the last three years. It has the lowest fuel cost per MMBTU of
any of KCPL's generating units.
The incremental operating, maintenance and replacement power
costs for planned outages are accrued evenly over the unit's operating
cycle, normally 18 months. As actual outage expenses are incurred,
the refueling liability and related deferred tax asset are reduced.
Wolf Creek's ninth refueling and maintenance outage, budgeted for
35 days, began in early October 1997 and was completed in December
1997 (58 days). The extended length of the ninth outage was caused by
several equipment problems. The extended length of the outage was the
primary reason for a $7 million increase in Wolf Creek related
replacement power and operating and maintenance expenses for the
twelve-month period. Wolf Creek's tenth refueling and maintenance
outage is scheduled for the spring of 1999 and is estimated to be a 40-
day outage.
Currently, no major equipment replacements are expected. An
extended shut-down of Wolf Creek could have a substantial adverse
effect on KCPL's business, financial condition and results of
operations. Higher replacement power and other costs would be
incurred as a result. Although not expected, an unscheduled plant
shut-down could be caused by actions of the Nuclear Regulatory
Commission reacting to safety concerns at the plant or other similar
nuclear units. If a long-term shut-down occurred, the state
regulatory commissions could consider reducing rates by excluding the
Wolf Creek investment from rate base.
Ownership and operation of a nuclear generating unit exposes KCPL
to risks regarding the cost of decommissioning the unit at the end of
its life and to potential retrospective assessments and property
losses in excess of insurance coverage.
ENVIRONMENTAL MATTERS
KCPL's policy is to act in an environmentally responsible manner
and use the latest technology available to avoid and treat
contamination. We continually conduct environmental audits designed
to ensure compliance with governmental regulations and detect
contamination. However, these regulations are constantly evolving;
governmental bodies may impose additional or more rigid environmental
regulations that could require substantial changes to operations or
facilities.
The Clean Air Act Amendments of 1990 contain two programs
significantly affecting the utility industry. KCPL has spent about $5
million for the installation of continuous emission monitoring
equipment to satisfy the requirements under the acid rain provision.
The other utility-related program calls for a study of certain air
toxic substances which has now been completed. Based on the
interpretation of this study, regulation of these substances,
including mercury, could be required. We cannot predict the
likelihood of any such regulations or compliance costs.
In July 1997 the United States Environmental Protection Agency
(EPA) published new air quality standards for particulate matter.
Additional regulations implementing these new particulate standards
have not been finalized. Without the implementation regulations, the
real 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 in
the process of implementing a three-year study of fine particulate
emissions. Until this testing and review period has been completed,
KCPL cannot determine additional compliance costs, if any, associated
with the new particulate regulations.
20
In 1997 the EPA also issued new proposed regulations on reducing
nitrogen oxide (NOx) emissions. Final regulations implementing
reductions in NOx emissions were announced by the EPA on September 24,
1998. These regulations require 22 states, including Missouri, to
submit plans for controlling NOx emissions by September 1999. The
regulations will require a significant reduction in NOx emissions from
1990 levels from KCPL's Missouri coal-fired plants by the year 2003.
In order to achieve these reductions, KCPL will incur significantly
higher capital costs or will purchase power or NOx emissions
allowances. It is possible that purchased power or emissions
allowances may be too costly or unavailable. Preliminary analysis of
the regulations indicate that selective catalytic reduction technology
will be required for some of the KCPL units, as well as other changes.
Currently, KCPL estimates that additional capital expenditures to
comply with these regulations could range from $90 to $150 million
over the period from 1999 to 2002. Operations and maintenance
expenses could also increase by more than $10 million per year,
beginning in 2003. We will continue to refine these 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 than the amounts
estimated above. KCPL will continue to question whether such
significant reductions in NOx emissions are economically justified.
The final resolution of this matter may require federal legislative
action or litigation.
At a December 1997 meeting in Kyoto, Japan, the Clinton
Administration supported changes to the International Global Climate
Change treaty which would require a seven percent reduction in United
States carbon dioxide (CO2) emissions below 1990 levels. President
Clinton has stated that this change in the treaty will not be
submitted to the U.S. Senate at this time where ratification is
uncertain. If future national restrictions on electric utility CO2
emissions are eventually required, the financial impact upon KCPL
could be substantial.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs using two
digits instead of four digits to define the applicable year. Computer
programs with date-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations.
In our ongoing assessment of the Year 2000 Issue, we have been
examining KCPL's systems, processes and operations to ensure readiness
for the year 2000 and plan for the protection of the KCPL electric
system. We have determined that it is necessary to modify or replace
some of KCPL's hardware and internal software so that its systems will
properly utilize dates beyond December 31, 1999. We believe that with
the planned modifications and conversions of KCPL's hardware and
software, Year 2000 problems will be minimized. We are utilizing both
internal and external resources, as necessary, to address the Year
2000 Issue. We have substantially completed the inventory and
assessment phases of our Year 2000 project. The remediation and
testing phases of the project are in process and we expect to be
substantially complete with the remediation phase by July 1999 and
with the testing phase prior to the end of 1999. The monitoring phase
of our Year 2000 project will continue through at least the first
quarter of 2000.
For the past several years, KCPL has made approximately $39
million in capital investments for new and innovative technologies
that place it in a stronger competitive position for the future. We
believe all replacement systems will be Year 2000 ready. As a result,
the cost of the Year 2000 project has been lessened and is estimated
to be under $7 million of additional costs. These additional costs
are being expensed as incurred. However, there is no guarantee that
current cost
21
estimates of the Year 2000 project will not be exceeded. Specific factors
that might cause costs to exceed estimates include, but are not limited to,
the availability and cost of appropriately trained personnel, the ability to
locate and correct all relevant computer codes, the ability to locate and
replace non-Year 2000 ready embedded microprocessors and similar
uncertainties.
A Nuclear Regulatory Commission (NRC) audit of the Wolf Creek
nuclear generating unit's Year 2000 program is scheduled for the week
beginning November 19, 1998. To date, we believe we are in compliance
with the NRC's Year 2000 regulations including being on schedule to
meet the July 1, 1999, deadline for a written response confirming Year
2000 state of readiness.
We have initiated formal communications with all of KCPL's large
suppliers and customers to evaluate KCPL's vulnerability to those
third parties' failure to remediate their own Year 2000 Issue.
However, there is no guarantee that third party systems on which
KCPL's systems rely will be timely converted, or that a failure to
convert, or a conversion that is incompatible with KCPL's systems,
would not have a material adverse effect on KCPL. Contingency plans
are being developed for critical suppliers to minimize the affect of
third party failures.
KCPL's electrical system is included in the Eastern
Interconnection that connects utilities throughout the United States
and Canada, east of the Rocky Mountains. The interconnection is
essential to the reliability, stability and operational integrity of
each connected electric utility. Failure of electric facilities due
to the millennium change could affect the interconnection and, if
severe, could result in electric service disruptions. KCPL could
encounter difficulties supplying electric service if other utilities
in the interconnected grid fail to achieve Year 2000 compliance.
Recognizing this risk, we are preparing operating contingency plans to
protect KCPL's customers and equipment. KCPL's existing emergency
procedures for start up after system blackout and its load reduction
and restoration procedures will be reviewed and updated. We are
evaluating the possibility of forming one or more "islands" to protect
a portion of KCPL's system from disruptions and if needed, to provide
electricity to assist in the restoration of its system. Alternatives
developed during contingency planning will be tested, where feasible,
prior to their use. Additionally, we are working with other electric
industry organizations, such as the Electric Power Research Institute,
to share Year 2000 information. KCPL will also be participating in
the operating contingency plans and drills developed by the Southwest
Power Pool and the North American Electric Reliability Council.
PROJECTED CONSTRUCTION EXPENDITURES
On November 3, 1998, KCPL's Board of Directors approved a plan to
increase generation capacity to help ensure that KCPL will be able to
meet future load demands of its customers. This plan could result in
approximately $58 million of additional capital expenditures in 1999
with additional costs in later years, unless we enter into operating
leases to obtain the capacity.
CAPITAL REQUIREMENTS AND LIQUIDITY
As of November 9, 1998, the liquid resources of KCPL included
cash flows from operations; $300 million of registered but unissued,
unsecured medium-term notes; $150 million of registered but unissued,
preferred securities and $281 million of unused bank lines of credit.
The unused lines consisted of KCPL's short-term bank lines of credit
of $210 million and KLT's bank credit agreement of $71 million.
KCPL continues to generate positive cash flows from operating
activities although individual components of working capital items
will vary with normal business cycles and operations including the
timing of receipts and payments. Cash from operating activities
increased for the nine- and
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twelve-month periods primarily due to increased net income during the current
periods, additional income taxes deferred and Kansas rate refund accrued but
not refundable until 1999. Additionally, the timing of the Wolf Creek outage
affects the refueling outage accrual, deferred income taxes and amortization
of nuclear fuel.
The increase in accrued taxes from December 31, 1997, to
September 30, 1998, mainly reflects the increase in taxable income
during the first nine months of 1998, refunds of federal and state
income taxes after the 1997 tax returns were filed and the timing of
income tax and property tax payments.
Coal inventory levels at the end of September 1998 are at
approximately 100% of targeted levels compared to 75% of targeted
levels at December 31, 1997.
Cash used for investing activities varies with the timing of
utility capital expenditures and purchases of investments and
nonutility properties. Cash used for investing activities decreased
for the nine- and twelve-month periods, partially due to $53 million
of proceeds from the July 31, 1998, sale of 100% of the common stock
of KLT Power Inc. Additionally, KLT made several large investments
during the first three months of 1997. Partially offsetting these
activities, the nine- and twelve-months ended September 30, 1997,
reflect $21.5 million of proceeds from the sale of streetlights to the
City of Kansas City, Missouri at a minimal gain.
Cash used for financing activities for the nine- and twelve-
months ended September 30, 1998, was primarily for repayment of long-
term debt by KCPL and KLT and for dividend payments by KCPL. The
proceeds from the sale of 100% of the common stock of KLT Power Inc.
were primarily used by KLT for repayment of borrowings under its bank
credit agreement. The majority of cash from financing activities for
the nine- and twelve-months ended September 30, 1997, was used to
repay short-term debt, pay merger expenses and finance additional
purchases of investments and nonutility properties by KLT. Financings
consisted of KCPL Financing 1, a wholly-owned subsidiary of KCPL,
issuance of $150 million of preferred securities and borrowings by KLT
on its bank credit agreement.
KCPL's common dividend payout ratio was 86% for the twelve-months
ended September 30, 1998, and 121% for the twelve-months ended
September 30, 1997. The ratio for the twelve-months ended September
30, 1997, is higher due mainly to the reduction in earnings because of
significant merger-related expenses.
We expect to meet day-to-day operations, utility construction
requirements and dividends with internally-generated funds.
Uncertainties affecting KCPL's ability to meet these requirements with
internally-generated funds include the effect of inflation on
operating expenses, the level of mwh sales, regulatory actions,
compliance with future environmental regulations and the availability
of generating units. The funds needed for the retirement of
$346 million of maturing debt through the year 2002 will be provided
from operations, refinancings or short-term debt. KCPL might issue
additional debt and/or additional equity to finance growth or take
advantage of new opportunities.
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PART II - OTHER INFORMATION
Item 3. Legal Proceedings
In Kansas City Power & Light Co. v. Western Resources,
Inc., et al . (previously discussed in the Company's Form
10-K for the year ended December 31, 1997), the United
States Court of Appeals for the Eight Circuit, on July 6,
1998, awarded approximately $500,000 in attorneys' fees and
related expenses to Manson, an intervenor. The Company and
Manson have both appealed the award. Manson has withdrawn
his original appeal filed on September 23, 1997. The
appeals regarding attorneys' fees are all that remain of this
litigation.
State of Missouri ex rel. Inter-City Beverage Co., Inc.,
et al. vs. The Public Service Commission of the State of
Missouri, et al.; and Jewish Community Campus of Greater
Kansas City, Inc. vs. Kansas State Corporation Commission et
al . (previously discussed in the Company's Form 10-Q for
the quarter ended March 31, 1998) were dismissed by the
Missouri Court of Appeals, Western District (transfer to the
Missouri Supreme Court was denied) and the Kansas Court of
Appeals respectively. Complainants in these two cases have
exhausted all judicial remedies.
Item 4. Submission of Matters to A Vote of Security Holders.
The Company held a Special Meeting of Shareholders on
July 30, 1998, to vote on matters relating to the proposed
merger of the Company, Western Resources, Inc., Kansas Gas
and Electric Company, NKC, Inc. (to be renamed Westar
Energy), and the merger of KCPL with and into Westar Energy.
At that meeting, votes cast with respect to the approval and
adoption of the Amended and Restated Agreement and Plan of
Merger dated as of March 18, 1998, were as follows:
FOR AGAINST ABSTAIN
46,005,335 2,444,476 531,913
With respect to the approval of granting discretionary
power to adjourn or postpone the Special Meeting to solicit
additional votes for Item 1, the votes case were as follows:
FOR AGAINST ABSTAIN
38,087,360 9,948,578 945,786
Item 5. Other Information
Shareholder Proposals. Shareholder proposals intended
to be presented at the KCPL 1999 Annual Meeting of
Shareholders must be received at the Corporate Secretary's
Office at the Company's principal office, 1201 Walnut, Kansas
City, Missouri 64106-2124, on or before December 11, 1998,
for consideration for inclusion in the proxy statement and
form of proxy relating to that meeting.
If a shareholder intends to bring a matter before the
1999 Annual Meeting, other than by submitting a proposal for
inclusion in the Company's proxy statement for that meeting,
the
24
shareholder must give timely notice according to the
Company's By-laws. To be timely, a shareholder's notice must
be received by the Corporate Secretary's Office at the
Company's principal office, 1201 Walnut, Kansas City,
Missouri 64106, not less than sixty (60) days nor more than
ninety (90) days prior to the date of the Annual Meeting;
provided, however, that in the event that less than seventy
(70) days' notice or prior public disclosure of the date of
the meeting is given to shareholders, notice by the
shareholder to be timely must be so received not later than
the close of business on the tenth (10th) day following the
day on which such notice of the date of the annual meeting
was mailed or such public disclosure of the date of the
annual meeting was made, whichever first occurs.
To be in proper written form, a shareholder's notice
must set forth as to each matter the shareholder proposes to
bring before the annual meeting (i) a brief description of
the business desired to be brought before the annual meeting
and the reasons for conducting such business at the annual
meeting, (ii) the shareholder's name and record address,
(iii) the class and number of shares of Company stock the
shareholder owns beneficially or of record, (iv) a
description of all arrangements or understandings between the
shareholder and any other person or persons (including their
names) in connection with the proposal of such business by
the shareholder, and any material interest of the shareholder
in such business, and (v) the shareholder's representation
that they intend to appear in person or by proxy at the
annual meeting to bring such business before the meeting.
New President. The Board of Directors of the Company on
November 3, 1998, elected Bernard J. Beaudoin as President
and member of the Board effective January 1, 1999.
Mr. Beaudoin, who joined the Company in 1980, is currently
Executive Vice President and Chief Financial Officer.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
Exhibit 10(a) Credit Agreement dated as of August 11, 1998,
among Kansas City Power & Light Company, Certain
Lenders, The First National Bank of Chicago and
NationsBank, N.A.
Exhibit 10(b) Railcar Lease dated as of September 8, 1998,
with CCG Trust Corporation.
Exhibit 27 Financial Data Schedule (for the nine months
ended September 30, 1998).
Reports on Form 8-K
No reports on Form 8-K were filed with the Securities
and Exchange Commission for the quarter ended September 30,
1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
KANSAS CITY POWER & LIGHT COMPANY
Dated: November 9, 1998 By: /s/Drue Jennings
(Drue Jennings)
(Chief Executive Officer)
Dated: November 9, 1998 By: /s/Neil Roadman
(Neil Roadman)
(Principal Accounting Officer)