SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission File Number 1-3523
WESTERN RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
KANSAS 48-0290150
(State or Other Jurisdiction of (Employer
Incorporation or Organization) Identification No.)
818 KANSAS AVENUE, TOPEKA, KANSAS 66612
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number Including Area Code (913) 575-6300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 14. 1996
Common Stock, $5.00 par value 64,187,150
<page1>
WESTERN RESOURCES, INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4 - 6
Consolidated Statements of Cash Flows 7 - 8
Consolidated Statements of Capitalization 9
Consolidated Statements of Common Stock Equity 10
Notes to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Part II. Other Information
Item 4. Submission of Matters to a Vote to Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
<page2>
WESTERN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
1996 1995
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . . . . . . . . $5,410,452 $5,341,074
Natural gas plant in service. . . . . . . . . . . . . . 809,613 787,453
6,220,065 6,128,527
Less - Accumulated depreciation . . . . . . . . . . . . 1,992,633 1,926,520
4,227,432 4,202,007
Construction work in progress . . . . . . . . . . . . . 71,458 100,401
Nuclear fuel (net). . . . . . . . . . . . . . . . . . . 49,415 53,942
Net utility plant. . . . . . . . . . . . . . . . . . 4,348,305 4,356,350
OTHER PROPERTY AND INVESTMENTS:
Net non-utility investments . . . . . . . . . . . . . . 557,476 90,044
Decommissioning trust . . . . . . . . . . . . . . . . . 28,551 25,070
Other . . . . . . . . . . . . . . . . . . . . . . . . . 15,127 9,225
601,154 124,339
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . 1,504 2,414
Accounts receivable and unbilled revenues (net) . . . . 232,000 257,292
Fossil fuel, at average cost. . . . . . . . . . . . . . 46,369 54,742
Gas stored underground, at average cost . . . . . . . . 27,806 28,106
Materials and supplies, at average cost . . . . . . . . 55,845 57,996
Prepayments and other current assets. . . . . . . . . . 53,104 20,973
416,628 421,523
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes. . . . . . . . . . . . . . 282,476 282,476
Deferred coal contract settlement costs . . . . . . . . 24,159 27,274
Phase-in revenues . . . . . . . . . . . . . . . . . . . 35,089 43,861
Corporate-owned life insurance (net). . . . . . . . . . 86,482 44,143
Other deferred plant costs. . . . . . . . . . . . . . . 31,406 31,539
Unamortized debt expense. . . . . . . . . . . . . . . . 54,446 56,681
Other . . . . . . . . . . . . . . . . . . . . . . . . . 107,131 102,491
621,189 588,465
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . $5,987,276 $5,490,677
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see statement):
Common stock equity . . . . . . . . . . . . . . . . . . $1,582,257 $1,553,110
Cumulative preferred and preference stock . . . . . . . 74,858 174,858
Western Resources obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures. . . . . . . . . . . . 100,000 100,000
Long-term debt (net). . . . . . . . . . . . . . . . . . 1,341,279 1,391,263
3,098,394 3,219,231
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . 739,755 203,450
Long-term debt due within one year. . . . . . . . . . . - 16,000
Preference stock redeemable within one year . . . . . . 100,000 -
Accounts payable. . . . . . . . . . . . . . . . . . . . 132,010 149,194
Accrued taxes . . . . . . . . . . . . . . . . . . . . . 57,571 68,569
Accrued interest and dividends. . . . . . . . . . . . . 65,778 62,157
Other . . . . . . . . . . . . . . . . . . . . . . . . . 36,753 40,266
1,131,867 539,636
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . . . . . . . . 1,161,056 1,167,470
Deferred investment tax credits . . . . . . . . . . . . 128,881 132,286
Deferred gain from sale-leaseback . . . . . . . . . . . 237,880 242,700
Other . . . . . . . . . . . . . . . . . . . . . . . . . 229,198 189,354
1,757,015 1,731,810
COMMITMENTS AND CONTINGENCIES (Notes 3 and 5)
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . $5,987,276 $5,490,677
The Notes to Consolidated Financial Statements are an integral part of these statements.
<page3>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
June 30,
1996 1995
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . . . . . . . . $ 294,231 $ 262,510
Natural gas . . . . . . . . . . . . . . . . . . . . . . . 141,890 109,785
Total operating revenues. . . . . . . . . . . . . . . . 436,121 372,295
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 60,598 47,160
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 5,618 5,076
Power purchased . . . . . . . . . . . . . . . . . . . . . 6,852 2,095
Natural gas purchases . . . . . . . . . . . . . . . . . . 49,561 40,598
Other operations. . . . . . . . . . . . . . . . . . . . . 136,487 122,424
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 30,152 27,622
Depreciation and amortization . . . . . . . . . . . . . . 43,102 38,914
Amortization of phase-in revenues . . . . . . . . . . . . 4,386 4,386
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 11,014 7,112
State income. . . . . . . . . . . . . . . . . . . . . . 3,952 2,426
General . . . . . . . . . . . . . . . . . . . . . . . . 25,379 24,591
Total operating expenses. . . . . . . . . . . . . . . 377,101 322,404
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 59,020 49,891
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (1,565) (1,821)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 5,332 2,324
Income taxes (net). . . . . . . . . . . . . . . . . . . . 2,296 1,124
Total other income and deductions . . . . . . . . . . 6,063 1,627
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 65,083 51,518
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 26,605 24,003
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 10,415 6,714
Allowance for borrowed funds used during
construction (credit) . . . . . . . . . . . . . . . . . (683) (915)
Total interest charges. . . . . . . . . . . . . . . . 36,337 29,802
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 28,746 21,716
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . 3,354 3,354
EARNINGS APPLICABLE TO COMMON STOCK . . . . . . . . . . . . $ 25,392 $ 18,362
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . 63,465,666 61,885,556
EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING . . . . . . . $ .40 $ .30
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . $ .515 $ .505
The Notes to Consolidated Financial Statements are an integral part of these statements.
<page4>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
1996 1995
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . . . . . . . . $ 563,216 $ 515,768
Natural gas . . . . . . . . . . . . . . . . . . . . . . . 428,527 299,902
Total operating revenues. . . . . . . . . . . . . . . . 991,743 815,670
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 121,588 94,091
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 7,375 9,764
Power purchased . . . . . . . . . . . . . . . . . . . . . 14,897 5,644
Natural gas purchases . . . . . . . . . . . . . . . . . . 200,084 142,336
Other operations. . . . . . . . . . . . . . . . . . . . . 279,246 223,175
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 54,991 54,464
Depreciation and amortization . . . . . . . . . . . . . . 85,415 77,285
Amortization of phase-in revenues . . . . . . . . . . . . 8,772 8,772
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 26,808 24,606
State income. . . . . . . . . . . . . . . . . . . . . . 7,763 7,083
General . . . . . . . . . . . . . . . . . . . . . . . . 50,511 49,118
Total operating expenses. . . . . . . . . . . . . . . 857,450 696,338
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 134,293 119,332
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (3,749) (3,537)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 11,069 5,062
Income taxes (net). . . . . . . . . . . . . . . . . . . . 985 2,306
Total other income and deductions . . . . . . . . . . 8,305 3,831
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 142,598 123,163
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 53,104 47,849
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 17,575 13,801
Allowance for borrowed funds used during
construction (credit) . . . . . . . . . . . . . . . . . (1,616) (1,778)
Total interest charges. . . . . . . . . . . . . . . . 69,063 59,872
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 73,535 63,291
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . 6,709 6,709
EARNINGS APPLICABLE TO COMMON STOCK . . . . . . . . . . . . $ 66,826 $ 56,582
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . 63,314,691 61,816,659
EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING . . . . . . . $ 1.06 $ 0.92
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . $ 1.03 $ 1.01
The Notes to Consolidated Financial Statements are an integral part of these statements.
<page5>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
June 30,
1996 1995
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . . . . . . . . $1,193,343 $1,107,547
Natural gas . . . . . . . . . . . . . . . . . . . . . . . 726,005 532,641
Total operating revenues. . . . . . . . . . . . . . . . 1,919,348 1,640,188
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 239,491 208,664
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 17,036 15,231
Power purchased . . . . . . . . . . . . . . . . . . . . . 24,992 14,186
Natural gas purchases . . . . . . . . . . . . . . . . . . 321,538 221,781
Other operations. . . . . . . . . . . . . . . . . . . . . 538,523 453,075
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 109,168 111,761
Depreciation and amortization . . . . . . . . . . . . . . 164,941 151,385
Amortization of phase-in revenues . . . . . . . . . . . . 17,545 17,544
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 74,516 66,346
State income. . . . . . . . . . . . . . . . . . . . . . 19,562 17,617
General . . . . . . . . . . . . . . . . . . . . . . . . 98,232 96,207
Total operating expenses. . . . . . . . . . . . . . . 1,625,544 1,373,797
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 293,804 266,391
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (2,880) (6,898)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 25,685 7,151
Income taxes (net). . . . . . . . . . . . . . . . . . . . 6,484 5,626
Total other income and deductions . . . . . . . . . . 29,289 5,879
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 323,093 272,270
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 101,218 95,510
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 34,020 25,269
Allowance for borrowed funds used during
construction (credit) . . . . . . . . . . . . . . . . . (4,065) (2,867)
Total interest charges. . . . . . . . . . . . . . . . 131,173 117,912
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 191,920 154,358
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . 13,419 13,418
EARNINGS APPLICABLE TO COMMON STOCK . . . . . . . . . . . . $ 178,501 $ 140,940
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . 62,903,857 61,716,449
EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING . . . . . . . $ 2.84 $ 2.28
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . $ 2.04 $ 2.00
The Notes to Consolidated Financial Statements are an integral part of these statements.
<page6>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 73,535 $ 63,291
Depreciation and amortization . . . . . . . . . . . . . . 77,774 77,337
Other amortization (including nuclear fuel) . . . . . . . 5,668 7,388
Gain on sales of utility plant (net of tax) . . . . . . . - (951)
Deferred taxes and investment tax credits (net) . . . . . (6,052) (7,264)
Amortization of phase-in revenues . . . . . . . . . . . . 8,772 8,772
Corporate-owned life insurance. . . . . . . . . . . . . . (12,565) (23,806)
Amortization of gain from sale-leaseback. . . . . . . . . (4,820) (4,821)
Amortization of acquisition adjustment. . . . . . . . . . 12,781 -
Noncash earnings in equity of investees . . . . . . . . . (11,788) -
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . 25,292 40,917
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 8,373 (11,489)
Gas stored underground. . . . . . . . . . . . . . . . . 300 12,866
Accounts payable . . . . . . . . . . . . . . . . . . . (17,184) (12,845)
Accrued taxes . . . . . . . . . . . . . . . . . . . . . (10,998) (11,015)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (2,333) (3,750)
Changes in other assets and liabilities . . . . . . . . . (21,256) 13,942
Net cash flows from operating activities. . . . . . . 125,499 148,572
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . 86,906 107,191
Sales of utility plant. . . . . . . . . . . . . . . . . . - (1,723)
Non-utility investments (net) . . . . . . . . . . . . . . 448,281 9,455
Corporate-owned life insurance policies . . . . . . . . . 50,828 54,041
Death proceeds of corporate-owned life insurance policies - (287)
Net cash flows used in investing activities . . . . . 586,015 168,677
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . 536,305 (25,400)
Bonds retired . . . . . . . . . . . . . . . . . . . . . . (16,135) (105)
Revolving credit agreements (net) . . . . . . . . . . . . (50,000) 57,500
Other long-term debt issued . . . . . . . . . . . . . . . 20 -
Borrowings against life insurance policies. . . . . . . . 44,321 47,811
Repayment of borrowings against life insurance policies . - (115)
Common stock issued (net) . . . . . . . . . . . . . . . . 16,103 8,576
Dividends on preferred, preference and common stock . . . (71,008) (68,399)
Net cash flows from financing activities. . . . . . . 459,606 19,868
INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . (910) (237)
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . 2,414 2,715
End of the period . . . . . . . . . . . . . . . . . . . . $ 1,504 $ 2,478
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized). . . . . . . . . . . . . . . . . . . . . . $ 94,557 $ 84,852
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 49,104 48,810
The Notes to Consolidated Financial Statements are an integral part of these statements.
<page7>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
June 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 191,920 $ 154,358
Depreciation and amortization . . . . . . . . . . . . . . . 150,623 151,490
Other amortization (including nuclear fuel) . . . . . . . . 13,473 12,426
Gain on sales of utility plant (net of tax) . . . . . . . . - (951)
Deferred taxes and investment tax credits (net) . . . . . . 16,184 32,457
Amortization of phase-in revenues . . . . . . . . . . . . . 17,545 17,544
Corporate-owned life insurance. . . . . . . . . . . . . . . (17,307) (48,885)
Amortization of gain from sale-leaseback. . . . . . . . . . (9,639) (9,641)
Amortization of acquisition adjustment. . . . . . . . . . . 19,510 -
Noncash earnings in equity of investees . . . . . . . . . . (11,788) -
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . (53,157) 4,074
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . 3,882 (10,026)
Gas stored underground. . . . . . . . . . . . . . . . . . 4,550 (3,391)
Accounts payable. . . . . . . . . . . . . . . . . . . . . 14,239 (5,618)
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . (19,007) (37,075)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 9,596 18,018
Changes in other assets and liabilities . . . . . . . . . . (46,753) (11,066)
Net cash flows from operating activities . . . . . . . 283,871 263,714
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 216,542 237,091
Sales of utility plant. . . . . . . . . . . . . . . . . . . - (1,723)
Non-utility investments (net) . . . . . . . . . . . . . . . 454,234 15,334
Corporate-owned life insurance policies . . . . . . . . . . 51,962 56,451
Death proceeds of corporate-owned life insurance policies . (10,900) (287)
Net cash flows used in (from) investing activities. . . 711,838 306,866
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . 456,955 65,000
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (16,135) (105)
Revolving credit agreement (net). . . . . . . . . . . . . . (57,500) 57,500
Other long-term debt issued . . . . . . . . . . . . . . . . 20 -
Other mandatorily redeemable securities . . . . . . . . . . 100,000 -
Borrowings against life insurance policies (net). . . . . . 45,789 49,218
Repayment of borrowings against life insurance policies . . (5,269) (138)
Common stock issued (net) . . . . . . . . . . . . . . . . . 43,688 8,576
Dividends on preferred, preference and common stock . . . . (140,555) (136,110)
Net cash flows from (used in) financing activities. . . 426,993 43,941
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . (974) 789
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . . 2,478 1,689
End of the period . . . . . . . . . . . . . . . . . . . . . $ 1,504 $ 2,478
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized). . . . . . . . . . . . . . . . . . . . . . . $ 146,253 $ 140,731
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . 85,105 76,585
The Notes to Consolidated Financial Statements are an integral part of these statements.
<page8>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
1996 1995
COMMON STOCK EQUITY (see statement):
Common stock, par value $5 per share,
authorized 85,000,000 shares, outstanding
63,847,133 and 62,855,961 shares, respectively . $ 319,235 $ 314,280
Paid-in capital. . . . . . . . . . . . . . . . . . 721,838 697,962
Retained earnings. . . . . . . . . . . . . . . . . 541,184 540,868
1,582,257 52% 1,553,110 48%
CUMULATIVE PREFERRED AND PREFERENCE STOCK:
Preferred stock not subject to mandatory redemption,
Par value $100 per share, authorized
600,000 shares, outstanding -
4 1/2% Series, 138,576 shares. . . . . . . . . 13,858 13,858
4 1/4% Series, 60,000 shares . . . . . . . . . 6,000 6,000
5% Series, 50,000 shares . . . . . . . . . . . 5,000 5,000
24,858 24,858
Preference stock subject to mandatory redemption,
Without par value, $100 stated value,
Authorized 4,000,000 shares, outstanding -
7.58% Series, 500,000 shares . . . . . . . . . 50,000 50,000
8.50% Series, 1,000,000 shares . . . . . . . . 100,000 100,000
Less:
Preference stock redeemable within one year 100,000 -
50,000 150,000
74,858 2% 174,858 6%
WESTERN RESOURCES OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST
HOLDING SOLELY COMPANY
SUBORDINATED DEBENTURES. . . . . . . . . . . . . 100,000 3% 100,000 3%
LONG-TERM DEBT:
First mortgage bonds . . . . . . . . . . . . . . . 825,000 841,000
Pollution control bonds. . . . . . . . . . . . . . 521,682 521,817
Revolving credit agreement . . . . . . . . . . . . - 50,000
Other long-term debt . . . . . . . . . . . . . . . 20 -
Less:
Unamortized premium and discount (net) . . . . . 5,423 5,554
Long-term debt due within one year . . . . . . . - 16,000
1,341,279 43% 1,391,263 43%
$3,098,394 100% $3,219,231 100%
The Notes to Consolidated Financial Statements are an integral part of these statements.
<page9>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY
(Dollars in Thousands)
(Unaudited)
Common Paid-in Retained
Stock Capital Earnings
BALANCE DECEMBER 31, 1994, 61,617,873 shares. . . . . $308,089 $667,992 $498,374
Net income. . . . . . . . . . . . . . . . . . . . . . 63,291
Cash dividends:
Preferred and preference stock. . . . . . . . . . . (6,709)
Common stock, $1.01 per share . . . . . . . . . . . (62,450)
Issuance of 283,324 shares of common stock. . . . . . 1,417 7,159
BALANCE JUNE 30, 1995, 61,901,197 shares. . . . . . . 309,506 675,151 492,506
Net income. . . . . . . . . . . . . . . . . . . . . . 118,385
Cash dividends:
Preferred and preference stock. . . . . . . . . . . ( 6,709)
Common stock, $1.01 per share . . . . . . . . . . . (63,313)
Expenses on common stock. . . . . . . . . . . . . . . (772)
Issuance of 954,764 shares of common stock. . . . . . 4,774 23,583
BALANCE DECEMBER 31, 1995, 62,855,961 shares. . . . . 314,280 697,962 540,868
Net income. . . . . . . . . . . . . . . . . . . . . . 73,535
Cash dividends:
Preferred and preference stock. . . . . . . . . . . (6,709)
Common stock, $1.03 per share . . . . . . . . . . . (65,263)
Issuance of 991,172 shares of common stock. . . . . . 4,955 23,876 (1.247)
BALANCE JUNE 30, 1996, 63,847,133 shares. . . . . . . $319,235 $721,838 $541,184
The Notes to Consolidated Financial Statements are an integral part of these statements.
<page10>
WESTERN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES AND OTHER INFORMATION
General: The Consolidated Financial Statements of Western Resources,
Inc. (the Company) and its wholly-owned subsidiaries, include KPL, a
rate-regulated electric and gas division of the Company, Kansas Gas and
Electric Company (KGE), a rate-regulated electric utility and wholly-owned
subsidiary of the Company, the Westar companies and the Wing Group, non-utility
subsidiaries, and Mid Continent Market Center, Inc., a regulated gas
transmission service provider. KGE owns 47% of Wolf Creek Nuclear Operating
Corporation (WCNOC), the operating Company for Wolf Creek Generating Station
(Wolf Creek). The Company records its proportionate share of all transactions
of WCNOC as it does other jointly-owned facilities. All significant
intercompany transactions have been eliminated.
The Company prepares its financial statements in conformity with
generally accepted accounting principles as applied to regulated public
utilities. The accounting and rates of the Company are subject to
requirements of the Kansas Corporation Commission (KCC), the Oklahoma
Corporation Commission (OCC), and the Federal Energy Regulatory Commission
(FERC). The financial statements require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, to
disclose contingent assets and liabilities at the balance sheet date, and to
report amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. These consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's 1995 Annual Report on Form 10-K and
the KGE Annual Report on Form 10-K incorporated by reference in the Company's
1995 Annual Report on Form 10-K.
On April 24, 1996, FERC issued its final rule on Order No. 888,
Promoting Wholesale Competition Through Open Access Non-discriminatory
Transmission Services by Public Utilities; Recovery of Stranded Costs by Public
Utilities and Transmitting Utilities. The Company has analyzed the effect of
this order on its operations and does not expect it to have a material adverse
effect.
Consolidated Statements of Cash Flows: For purposes of the Consolidated
Statements of Cash Flows, the Company considers highly liquid collateralized
debt instruments purchased with a maturity of three months or less to be cash
equivalents.
Cash Surrender Value of Life Insurance Contracts: The following amounts
related to corporate-owned life insurance contracts (COLI) are recorded in
Corporate-owned Life Insurance (net) on the Consolidated Balance Sheets:
June 30, December 31,
1996 1995
(Dollars in Millions)
Cash surrender value of contracts. . . $566.5 $479.9
Borrowings against contracts . . . . . (480.0) (435.8)
COLI (net). . . . . . . . . . $ 86.5 $ 44.1
<page11>
Income is recorded for increases in cash surrender value and net death
proceeds. Interest expense is recognized for COLI borrowings except for
certain contracts entered into in 1993 and 1992. The net income generated
from COLI contracts purchased prior to 1992 including the tax benefit of the
interest deduction and premium expenses are recorded as Corporate-owned Life
Insurance (net) on the Consolidated Statements of Income. The income from
increases in cash surrender value and net death proceeds was $5.4 million,
$10.2 million, and $24.7 million for the three, six, and twelve months ended
June 30, 1996, respectively, compared to $4.2 million, $8.1 million, and $16.0
million for the three, six, and twelve months ended June 30, 1995,
respectively. The interest expense deduction taken was $7.0 million, $13.9
million, and $27.6 million for the three, six, and twelve months ended June
30, 1996, respectively, compared to $6.0 million, $11.7 million, and $22.9
million for the three, six, and twelve months ended June 30, 1995,
respectively.
The COLI contracts entered into in 1993 and 1992 were established to
mitigate the cost of postretirement and postemployment benefits. As approved
by the KCC, the Company is using the net income stream generated by these COLI
policies to offset the costs of postretirement and postemployment benefits. A
significant portion of this income stream relates to the tax deduction
currently taken for interest incurred on contract borrowings under these COLI
policies. The amount of the interest deduction used to offset these benefits
costs was $1.8 million, $3.9 million, and $7.9 million for the three, six,
and twelve months ended June 30, 1996, respectively, compared to $1.5 million,
$2.9 million, and $5.5 million for the three, six, and twelve months ended
June 30, 1995, respectively.
On August 2, 1996, Congress passed the Health Insurance Portability and
Accountability Act of 1996 which President Clinton has indicated that he
intends to sign. This act may substantially reduce or eliminate tax benefits
associated with the 1993 and 1992 COLI contracts. If this legislation is
enacted or should the income stream generated by the 1993 and 1992 COLI
contracts not be sufficient to offset postretirement and postemployment
benefit costs on an accrual basis, the KCC order allows the Company to seek
recovery of a deficiency through the ratemaking process. Regulatory
precedents established by the KCC generally permit the accrual costs of
postretirement and postemployment benefits to be recovered in rates. The act
is expected to have minimal impact on the Company's COLI contracts entered
into prior to 1992. See Note 5 to the Consolidated Financial Statements of
the Company's 1995 Form 10-K for additional disclosure.
Reclassifications: Certain amounts in prior years have been
reclassified to conform with classifications used in the current year
presentation.
2. PROPOSED MERGER WITH KANSAS CITY POWER & LIGHT COMPANY
On April 14, 1996, in a letter to Mr. A. Drue Jennings, Chairman of the
Board, President and Chief Executive Officer of Kansas City Power & Light
Company (KCPL), the Company proposed an offer to merge with KCPL.
On April 22, 1996, KCPL's Board of Directors rejected the Company's
proposal and announced its intention to proceed with a merger agreement
entered into on January 19, 1996 with UtiliCorp United Inc. (UCU). Following
the rejection of the April 14 offer, the Company filed proxy materials with
the Securities and Exchange Commission (SEC) for use in soliciting proxies
from KCPL shareholders
<page12>
against the approval of the UCU/KCPL merger. The Company believes its offer
is financially superior for KCPL shareholders and is actively seeking to have
KCPL shareholders vote against the proposed UCU/KCPL merger. On April 22,
1996, the Company announced its intention to commence an offer to exchange
shares of Company common stock for each KCPL share (the Offer) and filed with
the SEC a registration statement on Form S-4 relating to such exchange offer.
On July 3, the registration statement became effective and on July 8, exchange
offer materials were mailed to KCPL shareholders.
The number of shares of Company common stock to be delivered per KCPL
share pursuant to the initial Offer would have been equal to the quotient
(rounded to the nearest 1/100,000) determined by dividing $28 by the average
of the high and low sales prices of Company common stock on the New York Stock
Exchange for each of the twenty consecutive trading days ending with the
second trading day immediately preceding the expiration of the Offer (the
Exchange Ratio), provided that the Exchange Ratio would not have been less
than 0.833 nor greater than 0.985. On May 6, 1996, the Company announced a
change in the terms of the Offer so that the Exchange Ratio would not be less
than 0.91 nor greater than 0.985, and presented the new offer to the KCPL
Board.
On June 17, 1996, the Company raised its Offer to $31 from $28 with an
exchange ratio of 0.933 to 1.1 shares of Company common stock for each KCPL
common share. The increased Offer, which remains a stock-for-stock
transaction, is valued at $1.9 billion. On June 24, 1996 KCPL's Board of
Directors also rejected this offer.
KCPL shareholders were scheduled to vote on the UCU/KCPL merger at their
annual shareholders' meeting on May 22, 1996. On May 20, 1996, KCPL announced
that it had reached a restructured merger agreement with UCU and canceled the
May 22, 1996 vote. The vote on the new transaction was scheduled for an
August 7, 1996, special shareholder meeting. On May 20 1996, KCPL also filed
suit against the Company and a KCPL shareholder in the Federal District Court
for the Western District of Missouri (the Court) for a declaratory order,
among other things, determining that the restructured transaction was legal
pursuant to Missouri law, that its adoption was not a breach of fiduciary
duty, and that a simple majority of shares voted would be required to approve
the transaction rather than the vote of two-thirds of all outstanding shares
required for approval of the original proposal.
On August 2, 1996, the Court denied KCPL's request with respect to the
requisite vote, holding a two-thirds vote of outstanding shares would be
required to approve the restructured transaction. As a result, KCPL postponed
the special shareholder meeting until August 16, 1996.
According to KCPL's quarterly report on Form 10-Q for the quarter ended
June 30, 1996, there were issued and outstanding 61,902,083 shares of KCPL
common stock.
The Company intends to acquire, after consummation of the Offer the
remaining KCPL shares pursuant to a merger of the Company and KCPL (the
Merger).
The Company has filed applications with the KCC and Missouri Public
Service Commission (MPSC) seeking approval of the Merger. The Company will
also need approval from the FERC and the Nuclear Regulatory Commission (NRC).
See Note 4 for discussion of rate proceedings.
<page13>
The Company's proposal is designed to qualify as a pooling of interests
for financial reporting purposes. Under this method, the recorded assets and
liabilities of the Company and KCPL would be carried forward at historical
amounts to a combined balance sheet. Prior period operating results and
statements of financial position, cash flows and capitalization would be
restated to effect the combination for all periods presented.
KCPL is a public utility company engaged in the generation,
transmission, distribution, and sale of electricity to approximately 430,000
customers in western Missouri and eastern Kansas. KCPL and the Company have
joint interests in certain electric generating assets, including Wolf Creek.
Completion of the Offer and the Merger are subject to various
conditions, including approvals from shareholders, regulatory and other
governmental agencies.
As of June 30, 1996, the Company estimates it has incurred approximately
$12 million of transaction costs associated with the Merger. The Company
anticipates expensing all of these costs upon the closing of the Merger.
The merger proposal contains certain analyses and statements with
respect to the financial condition, results of operations and business of the
Company following the consummation of the Offer and the Merger, including
statements relating to the cost savings that will be realized from the Merger.
Such analyses and statements include forward looking statements with respect
to, among other things: (1) expected cost savings from the Merger; (2) normal
weather conditions; (3) future national and regional economic and competitive
conditions; (4) inflation rates; (5) regulatory treatment; (6) future
financial market conditions; (7) interest rates; (8) future business
decisions; and (9) other uncertainties, which though considered reasonable by
the Company, are beyond the Company's control and difficult to predict.
3. LEGAL PROCEEDINGS
On May 30, 1996, the Company and Southern Union Company settled the
ligation which had been pending between them since June 1, 1994, as reported
in the Company's Annual Report on Form 10-K. The case was dismissed with
prejudice by the District Court.
The resolution of this litigation will not have a material adverse
effect on the Company's financial condition and is within amounts previously
reserved by the Company.
The Company and its subsidiaries are involved in various other legal,
environmental, and regulatory proceedings. Management believes that adequate
provision has been made within the Consolidated Financial Statements for these
other matters and accordingly believes their ultimate dispositions will not
have a material adverse effect upon the Company's overall financial position
or results of operations.
<page14>
4. RATE MATTERS AND REGULATION
The Company, under rate orders from the KCC, OCC, and FERC, recovers
increases in fuel and natural gas costs through fuel adjustment clauses for
wholesale and certain retail electric customers and various purchased gas
adjustment clauses (PGA) for natural gas customers. The KCC and the OCC
require the annual difference between actual gas cost incurred and cost
recovered through the application of the PGA be deferred and amortized through
rates in subsequent periods.
KCC Rate Proceedings: On August 17, 1995, the Company and KGE filed
three proceedings with the KCC. The first sought a $36 million increase in
revenues from the Company's natural gas distribution business. In separate
dockets, the Company and KGE filed with the KCC a request to more rapidly
recover KGE's investment in its assets of Wolf Creek over the next seven years
by increasing depreciation by $50 million each year and a request to reduce
annual depreciation expense by approximately $11 million for electric
transmission, distribution and certain generating plant assets to reflect the
useful lives of these properties more accurately. The Company sought to
reduce electric rates for KGE customers by approximately $8.7 million annually
in each of the seven years of accelerated Wolf Creek depreciation.
On April 15, 1996, the KCC issued an order allowing a revenue increase
of $33.8 million in the Company's natural gas distribution business. On May 3,
1996, the Company filed a Petition for Reconsideration and on July 11, 1996,
the KCC issued its Order On Reconsideration allowing the revenue to be
increased to $34.4 million.
On May 23, 1996, the Company implemented an $8.7 million reduction to
KGE customers on an interim basis. On July 25, 1996, the KCC Staff, the
Company, and KGE entered into an agreement whereby KGE rates would be reduced
an additional $37.3 million and the current interim $8.7 million rate reduction
would become permanent upon final order in the proceeding. Other provisions
of the agreement include an $8.7 million annual KPL electric rate reduction
upon final order, a $10 million KGE annual rate reduction at January 1, 1998,
and a five year incentive rate mechanism requiring all regulated earnings in
excess of a 12% regulatory return on equity to be shared 50/50 between
customers and shareholders. The agreement specifies that the plan and
electric rates will remain in place five years subject to changes necessary to
reflect the effect of laws and/or edicts, or other material changes in
circumstances which have a substantial net impact upon the Company's utility
operations or revenues. On August 9, 1996, the Company, KGE, and the KCC
Staff were joined by the Citizens Utility Ratepayers Board and the City of
Wichita, Kansas in filing a motion to the KCC to approve the agreement.
On April 15, 1996, the Company filed an application with the KCC
requesting an order approving its proposal to merge with KCPL and for other
related relief. On July 29, 1996, the Company filed its First Amended
Application with the KCC in its proceeding for approval to merge with KCPL.
The amended application reflected the increase in the Company's offer for KCPL
from $28 to $31 per share and proposed an incentive rate mechanism requiring
all regulated earnings in excess of the merged Company's 12.61% return on
equity to be split among customers, shareholders, and additional depreciation
on Wolf Creek.
<page15>
MPSC Proceedings: On May 3, 1996, the Company filed an application with
the MPSC requesting an order approving its proposal to merge with KCPL. The
application includes the same regulatory plan as proposed before the KCC and
includes an annual rate reduction of $21 million for KCPL retail electric
customers.
5. COMMITMENTS AND CONTINGENCIES
Manufactured Gas Sites: The Company has been associated with 15 former
manufactured gas sites located in Kansas which may contain coal tar and other
potentially harmful materials. The Company and the Kansas Department of
Health and Environment (KDHE) entered into a consent agreement governing all
future work at the 15 sites. The terms of the consent agreement will allow
the Company to investigate these sites and set remediation priorities based
upon the results of the investigations and risk analysis. The prioritized
sites will be investigated over a 10 year period. The agreement will allow
the Company to set mutual objectives with the KDHE in order to expedite
effective response activities and to control costs and environmental impact.
The costs incurred for site investigation and risk assessment in 1995 were
minimal. The Company is aware of other Midwestern utilities which have
incurred remediation costs ranging between $500,000 and $10 million per site.
The KCC has permitted another Kansas utility to recover its remediation costs
through rates. To the extent that such remediation costs are not recovered
through rates, the costs could be material to the Company's financial position
or results of operations depending on the degree of remediation required and
number of years over which the remediation must be completed.
Superfund Sites: The Company is one of numerous potentially responsible
parties at a groundwater contamination site in Wichita, Kansas (Wichita site)
which is listed by the EPA as a Superfund site. The Company has previously
been associated with other Superfund sites of which the Company's liability
has been classified as de minimis and any potential obligations have been
settled at minimal cost. In 1994, the Company settled Superfund obligations
at three sites for a total of $57,500. No Superfund obligations have been
settled since 1994. The Company's obligation at the Wichita site appears to be
limited based on this experience. In the opinion of the Company's management,
the resolution of these matters is not expected to have a material impact on
the Company's financial position or results of operations.
Clean Air Act: The Clean Air Act Amendments of 1990 (the Act) require a
two-phase reduction in certain emissions. To meet the monitoring and
reporting requirements under the acid rain program, the Company installed
continuous monitoring and reporting equipment at a total cost of approximately
$10 million by the December 31, 1995 deadline. The Company expects some
additional equipment acquisitions and other expenditures to be needed to meet
Phase II sulfur dioxide requirements. Current estimated costs for Phase II
are approximately $5 million.
The nitrogen oxides and toxic limits, which were not set in the law,
were proposed by the EPA in January 1996. The Company is currently evaluating
the steps it will need to take in order to comply with the proposed new rules,
but is unable to determine its compliance options or related compliance costs
until the evaluation is finished later this year. The Company will have three
years to comply with the new rules.
Decommissioning: The Company accrues decommissioning costs over the
expected life of the Wolf Creek generating facility. The accrual is based on
estimated unrecovered decommissioning costs which consider inflation over the
<page16>
remaining estimated life of the generating facility and are net of expected
earnings on amounts recovered from customers and deposited in an external
trust fund.
On June 9, 1994, the KCC issued an order approving the estimated
decommissioning costs of the 1993 Wolf Creek Decommissioning Cost Study which
estimates the Company's share of Wolf Creek decommissioning costs, under the
immediate dismantlement method, to be approximately $595 million during the
period 2025 through 2033, or approximately $174 million in 1993 dollars.
These costs were calculated using an assumed inflation rate of 3.45% over the
remaining service life, in 1993, of 32 years.
Decommissioning costs are being charged to operating expenses in
accordance with the KCC order. Electric rates charged to customers provide
for recovery of these decommissioning costs over the life of Wolf Creek.
Amounts expensed approximated $3.6 million in 1995 and will increase annually
to $5.5 million in 2024. These expenses are deposited in an external trust
fund. The average after tax expected return on trust assets is 5.9%
The Company's investment in the decommissioning fund, including
reinvested earnings approximated $28.6 million and $25.1 million at June 30,
1996 and December 31, 1995, respectively. Trust fund earnings accumulate in
the fund balance and increase the recorded decommissioning liability. These
amounts are reflected in Decommissioning Trust, and the related liability is
included in Deferred Credits and Other Liabilities, Other, on the Consolidated
Balance Sheets.
The staff of the SEC has questioned certain current accounting practices
used by nuclear electric generating station owners regarding the recognition,
measurement, and classification of decommissioning costs for nuclear electric
generating stations. In response to these questions, the FASB is expected to
issue new accounting standards for removal costs, including decommissioning,
in 1997. If current electric utility industry accounting practices for such
decommissioning costs are changed: (1) annual decommissioning expenses could
increase, (2) the estimated present value of decommissioning costs could be
recorded as a liability rather than as accumulated depreciation, and (3) trust
fund income from the external decommissioning trusts could be reported as
investment income rather than as a reduction to decommissioning expense.
When revised accounting guidance is issued, the Company will also have to
evaluate its effect on accounting for removal costs of other long-lived
assets. The Company is not able to predict what effect such changes would
have on results of operations, financial position, or related regulatory
practices until the final issuance of revised accounting guidance, but such
effect could be material.
The Company carries premature decommissioning insurance which has
several restrictions. One of these is that it can only be used if Wolf Creek
incurs an accident exceeding $500 million in expenses to safely stabilize the
reactor, to decontaminate the reactor and reactor station site in accordance
with a plan approved by the NRC, and to pay for on-site property damages.
This decommissioning insurance will only be available if the insurance funds
are not needed to implement the NRC-approved plan for stabilization and
decontamination.
Nuclear Insurance: The Price-Anderson Act limits the combined public
liability of the owners of nuclear power plants to $8.9 billion for a single
nuclear incident. If this liability limitation is insufficient, the U.S.
<page17>
Congress will consider taking whatever action is necessary to compensate the
public for valid claims. The Wolf Creek owners (Owners) have purchased the
maximum available private insurance of $200 million and the balance is
provided by an assessment plan mandated by the NRC. Under this plan, the
Owners are jointly and severally subject to a retrospective assessment of up
to $79.3 million ($37.3 million, Company's share) in the event there is a
major nuclear incident involving any of the nation's licensed reactors. This
assessment is subject to an inflation adjustment based on the Consumer Price
Index and applicable premium taxes. There is a limitation of $10 million
($4.7 million, Company's share) in retrospective assessments per incident, per
year.
The Owners carry decontamination liability, premature decommissioning
liability, and property damage insurance for Wolf Creek totaling approximately
$2.8 billion ($1.3 billion, Company's share). This insurance is provided by a
combination of "nuclear insurance pools" ($500 million) and Nuclear Electric
Insurance Limited (NEIL) ($2.3 billion). In the event of an accident,
insurance proceeds must first be used for reactor stabilization and site
decontamination. The Company's share of any remaining proceeds can be used
for property damage or premature decommissioning costs up to $1.3 billion
(Company's share). Premature decommissioning insurance cost recovery is
excess of funds previously collected for decommissioning (as discussed under
"Decommissioning").
The Owners also carry additional insurance with NEIL to cover costs of
replacement power and other extra expenses incurred during a prolonged outage
resulting from accidental property damage at Wolf Creek. If losses incurred
at any of the nuclear plants insured under the NEIL policies exceed premiums,
reserves, and other NEIL resources, the Company may be subject to
retrospective assessments under the current policies of approximately $11
million per year.
Although the Company maintains various insurance policies to provide
coverage for potential losses and liabilities resulting from an accident or an
extended outage, the Company's insurance coverage may not be adequate to cover
the costs that could result from a catastrophic accident or extended outage at
Wolf Creek. Any substantial losses not covered by insurance, to the extent
not recoverable through rates, would have a material adverse effect on the
Company's financial condition and results of operations.
Fuel Commitments: To supply a portion of the fuel requirements for its
generating plants, the Company has entered into various commitments to obtain
nuclear fuel, coal, and natural gas. Some of these contracts contain
provisions for price escalation and minimum purchase commitments. At December
31, 1995, WCNOC's nuclear fuel commitments (Company's share) were
approximately $15.3 million for uranium concentrates expiring at various times
through 2001, $120.8 million for enrichment expiring at various times through
2014, and $72.7 million for fabrication through 2025. At December 31, 1995,
the Company's coal contract commitments in 1995 dollars under the remaining
terms of the contracts were approximately $2.5 billion. The largest coal
contract expires in 2020, with the remaining coal contracts expiring at
various times through 2013.
Energy Act: As part of the 1992 Energy Policy Act, a special assessment
is being collected from utilities for a uranium enrichment, decontamination,
and decommissioning fund. The Company's portion of the assessment for Wolf
Creek is approximately $7 million, payable over 15 years. Management expects
such costs to be recovered through the ratemaking process.
<page18>
6. INCOME TAXES
Total income tax expense included in the Consolidated Statements of
Income reflects the Federal statutory rate of 35%. The Federal statutory rate
produces effective income tax rates of 31.6%, 32.5%, and 31.9% for the three,
six, and twelve month periods ended June 30, 1996 compared to 29.2%, 32.3%,
and 34.3% for the three, six, and twelve month periods ended June 30, 1995.
The effective income tax rates vary from the Federal statutory rate due to
permanent differences, including the amortization of investment tax credits,
and accelerated amortization of certain deferred income taxes.
7. INVESTMENTS
During the first quarter of 1996, the Company purchased 30.8 million
common shares of ADT Limited (ADT) for approximately $444 million (average
price of $14.40 per share). In July of 1996, in order to obtain what the
Company considered to be favorable market prices for ADT shares, the Company
purchased an additional 1.3 million shares of ADT for approximately $25
million (average price of $18.91 per share). The shares purchased represent
approximately 24% of ADT's common equity. Goodwill of $282 million is
associated with this investment and is being amortized over 40 years. The
Company accounts for this investment using the equity method and includes the
investment in net non-utility investments on the accompanying Consolidated
Balance Sheets.
On July 1, 1996, ADT and Republic Industries, Inc. (Republic) announced
plans to combine, in which ADT would become a wholly-owned subsidiary of
Republic. Republic would exchange all 133.3 million shares of ADT stock for
its stock at the .92857 exchange ratio and anticipates issuing an additional
130 million shares of Republic stock at the close of the agreement. Under the
terms of the agreement, the Company would receive 29.8 million shares of
Republic common stock in exchange for its ADT stock.
The Company is considering its options with respect to ADT's proposed
amalgamation with Republic and has not yet made a final determination on this
matter. The Company may determine to oppose the Republic transaction and may
choose to exercise its appraisal rights under Bermuda law, although no final
decision by the Company has yet been taken. Should ADT consummate the
transaction with Republic, and the Company received Republic shares, in
connection therewith, the Company may decide to sell some or all of such
Republic shares.
<page19>
WESTERN RESOURCES, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's 1995 Annual Report on Form 10-K. The following
updates the information provided in the 1995 Annual Report on Form 10-K and
analyzes certain changes in the results of operations between the three, six,
and twelve month periods ended June 30, 1996 and comparable periods of 1995.
FINANCIAL CONDITION
General: Net income for the second quarter of 1996 was $28.7 million,
up from net income of $21.7 million for the same period of 1995. The Company
earned $0.40 per share of common stock for the second quarter of 1996, an
increase of $0.10 per share from the second quarter of 1995. Operating
revenues were $436 million and $372 million for the three months ended June
30, 1996 and 1995, respectively.
Net income for the six and twelve months ended June 30, 1996, was $73.5
million and $191.9 million, respectively, compared to $63.3 million and $154.4
million for the same periods of 1995. The Company earned $1.06 and $2.84 per
share of common stock, respectively, for the six and twelve months ended June
30, 1996 compared to $0.92 and $2.28 for the comparable periods of 1995.
Operating revenues were $1.0 billion and $1.9 billion for the six and twelve
months ended June 30, 1996, respectively. These revenues compare to $0.8
billion and $1.6 billion for the same periods of 1995.
The increases in net income, earnings per share, and operating revenues
are primarily due to the reasons discussed below in Results of Operations.
A quarterly dividend of $0.515 per share was declared in the second
quarter of 1996, for an indicated annual rate of $2.06 per share. The book
value per share was $24.78 at June 30, 1996, up from $24.71 at December 31,
1995. There were 63,465,666 and 61,885,556 average shares outstanding for
the second quarter of 1996 and 1995, respectively.
Liquidity and Capital Resources: The Company's short-term financing
requirements are satisfied, as needed, through the sale of commercial paper,
short-term bank loans and borrowings under unsecured lines of credit
maintained with banks. At June 30, 1996, short-term borrowings amounted to
$740 million, of which $303 million was commercial paper. Short-term debt
increased from December 31, 1995 primarily as a result of the Company's
purchase of an approximate 24% common equity interest in ADT. (See Note 7 for
further discussion of the Company's investment in ADT.)
At June 30, 1996, the Company had bank credit arrangements available of
$322 million. On August 1, 1996, the available bank arrangements increased
to $423 million, of which $200 million was outstanding.
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At the Company's' 1996 Annual Meeting of Shareholders, shareholders
voted to remove the 15% unsecured debt limitation from the Company's Articles of
Incorporation.
On July 1, 1996, four million shares of the Company's $25 par value
8.50% Preference Stock due 2016 were redeemed.
On July 31, 1996, Western Resources Capital II, a wholly owned trust, of
which the sole asset is subordinated debentures of the Company, sold in a
public offering 4.8 million preferred securities of 8-1/2% Cumulative
Quarterly Income Preferred Securities, Series B, for $120 million. The trust
interests represented by the preferred securities are redeemable at the option
of Western Resources Capital II, on or after July 31, 2001, at $25 per
preferred security plus accrued interest and unpaid dividends. Holders of the
securities are entitled to receive distributions at an annual rate of 8-1/2%
of the liquidation preference value of $25. Distributions are payable
quarterly, and in substance are tax deductible by the Company. The sole asset
of the trust is $124 million principal amount of 8-1/2% Deferrable Interest
Subordinated Debentures, Series B due July 31, 2036.
The securities will be shown as Western Resources Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust holding solely
Subordinated Debentures (Other Mandatorily Redeemable Securities) on the
Consolidated Balance Sheets and Consolidated Statements of Capitalization.
See Note 7 of the Company's 1995 Annual Report on Form 10-K for additional
information.
RESULTS OF OPERATIONS
Revenues: The Company's revenues vary with levels of usage as a result
of changing weather conditions during comparable periods and are sensitive to
seasonal fluctuations between consecutive periods. Future electric and
natural gas sales will continue to be affected by weather conditions,
competing fuel sources, wholesale demand, and the overall economy of the
Company's service area.
The following table reflects changes in electric sales for the three,
six, and twelve months ended June 30, 1996 from the comparable periods of
1995.
Increase in electric sales volumes:
3 Months 6 Months 12 Months
ended ended ended
Residential 20.0% 14.0% 12.7%
Commercial 8.9% 8.1% 5.7%
Industrial 3.4% 3.3% 4.0%
Total retail sales 9.9% 8.0% 7.2%
Wholesale and interchange 56.0% 38.4% 28.8%
Total electric sales 19.2% 14.1% 11.3%
Electric revenues increased over twelve percent for the three months
ended June 30, 1996 compared to 1995. The increase is largely due to
increased residential and wholesale and interchange (sales to other utilities)
sales as warm spring temperatures increased the demand for air conditioning
load, compared to last year. The Company's service territory experienced a
102% increase in the number of cooling degree days during the second quarter
of 1996, as compared to
the second quarter of 1995 and a 29% higher than normal number of cooling
degree days.
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Electric revenues were higher nine percent and eight percent,
respectively for the six and twelve months ended June 30, 1996 compared to the
same periods of 1995. The increase was due to higher sales in all retail
customer classes and wholesale and interchange as a result of warmer spring
and colder winter temperatures experienced during the first six months of 1996
compared to 1995.
The following table reflects changes in natural gas sales for the three,
six, and twelve months ended June 30, 1996 from the comparable periods of
1995.
Increase (Decrease) in natural gas sales volumes:
3 Months 6 Months 12 Months
ended ended ended
Residential (7.8)% 13.3% 11.7%
Commercial (5.0)% 11.1% 8.2%
Industrial (27.9)% (10.2)% (8.6)%
Transportation (10.7)% (3.2)% (3.9)%
Total Deliveries (8.1)% 4.4% 9.8%
Natural gas revenues increased 14% for the three months end June 30,
1996 compared to June 30, 1995 as a result of as available gas sales (See the
Company's 1995 Annual Report on Form 10-K for additional explanation of as
available gas sales). Natural gas revenues increased 28% and 29% for the six
and twelve months ended June 30, 1996, respectively compared to the same
periods of 1995 as a result of colder winter temperatures.
Operating Expenses: Total operating expenses increased 17%, 23%, and
18% for the three, six, and twelve months ended June 30, 1996 compared to the
same periods of 1995. These increases are primarily attributable to the
amortization of the acquisition adjustment and increased fuel expense,
purchased power, and natural gas purchases due to Wolf Creek having been taken
off-line for its eighth refueling and maintenance outage during the first
quarter of 1996. Also contributing to the increases in fuel and purchased
power expenses was the increase in net generation due to the increase in
customer demand for air conditioning load during the second quarter of 1996.
The amortization of the acquisition adjustment associated with the
Company's 1992 acquisition of KGE, which began in August 1995, amounted to
$5.0 million, $10.0 million, and $16.7 million for the three, six, twelve
months ended June 30, 1996, respectively.
Partially offsetting the increase for the twelve months ended June 30,
1996 was cost savings from the July 1, 1995 early retirement programs which
recorded an expense of $7.6 million in the second quarter of 1995.
Other Income and Deductions: Other income and deductions, net of taxes,
increased $4.4 million and $4.5 million for the three and six months ended
June 30, 1996 compared to same periods of 1995. These increases are primarily
attributable to earnings from subsidiary investments.
Other income and deductions, net of taxes, increased $23.4 million for
the twelve months ended June 30, 1996 compared to 1995 as a result of earnings
from subsidiary investments and the receipt of death benefit proceeds under
COLI contracts during the fourth quarter of 1995. See Note 1 for additional
disclosure relating to COLI.
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Interest Charges and Preferred and Preference Dividend Requirements:
Total interest charges increased 22 percent, 15 percent, and 11 percent for
the three, six, and twelve months ended June 30, 1996 from the comparable
periods in 1995, respectively. The increases for the three and six months
ended interest charges reflects interest paid on higher short-term debt
balances and balances under the Company's revolving credit agreement. The
increase in the twelve months interest charges was a result of interest paid
on higher short-term debt balances and distributions on mandatorily redeemable
preferred securities. See discussion above in Liquidity and Capital Resources
regarding higher short-term debt balances.
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WESTERN RESOURCES, INC.
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on May 7, 1996.
At the meeting the shareholders, representing 52,037,563 shares either in person
or by proxy, voted to:
Elect the following directors to serve a term of three years:
Votes
For Against
Frank J. Becker 50,959,646 1,077,824
Gene A. Budig 50,810,020 1,228,831
C. Q. Chandler 50,883,155 1,154,315
Thomas R. Clevenger 50,918,248 1,119,222
David C. Wittig 50,919,401 1,117,154
The following directors will continue to serve their unexpired terms:
John C. Dicus, John E. Hayes, Jr., David H. Hughes, Russell W. Meyer, Jr.,
John H. Robinson, Louis W. Smith, Susan M. Stanton, and Kenneth J. Wagnon.
Adopt the 1996 Long Term Incentive and Share Award Plan as follows:
Votes
For Against Abstain
41,041,308 8,926,574 2,069,681
Amend the Articles of Incorporation by deleting certain provisions of
the Preferred Stock relating to unsecured indebtedness as follows:
Votes
For Against Abstain
Common and Preferred Stock 40,586,741 1,791,450 1,541,650
Preferred Stock 182,065 16,388 7,078
Item 5. Other Information
Proposed Merger with Kansas City Power & Light Company: See Note 2 of
the Notes to Consolidated Financial Statements.
Rate Plans: See Note 4 of the Consolidated Financial Statements.
Investments: See Note 7 of the Consolidated Financial Statements.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3(a) - Amendment to the Restated Articles of
Incorporation, as amended May 7, 1996
(filed electronically)
Exhibit 10(a) - Long-term Incentive and Share Award Plan
(filed electronically)
Exhibit 10(b) - Form of Employment Agreement with officers of
the Company (filed electronically)
Exhibit 12 - Computation of Ratio of Consolidated Earnings to Fixed
Charges for 12 Months Ended June 30, 1996 (filed
electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
Exhibit 99 - Kansas Gas and Electric Company's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1996 (filed electronically)
(b) Reports on Form 8-K:
Form 8-K dated April 14, 1996 - Press release regarding the Company's
offer to merge with KCPL.
Form 8-K dated April 22, 1996 - Press release regarding the Company's
offer to merge with KCPL.
Forms 8-K dated April 25, 1996 - Press release regarding the Company's
offer to merge with KCPL.
Forms 8-K dated April 26, 1996 - Press release regarding the Company's
offer to merge with KCPL.
Form 8-K dated April 29, 1996 - Press release regarding the Company's
offer to merge with KCPL.
Form 8-K dated May 3, 1996 - Press release regarding the Company's
offer to merge with KCPL.
Forms 8-K dated May 6, 1996 - Press release regarding the Company's
offer to merge with KCPL.
Form 8-K dated May 6, 1996 - Press release regarding the Company's
offer to merge with KCPL.
Form 8-K dated May 10, 1996 - Press release regarding the Company's
offer to merge with KCPL.
Form 8-K dated May 24, 1996 - Press release about the Company filing
testimony to the electric rate case at the KCC.
Form 8-K dated June 17, 1996 -Press release regarding the Company's
offer to merge with KCPL.
Form 8-K dated July 23, 1996 - 6/30/96 earnings release.
Form 8-K dated July 26, 1996 - Press release about KCC Staff and the
Company reaching agreement in rate case.
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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.
Western Resources, Inc.
Date August 14, 1996 By /s/ S. L. KITCHEN
S. L. Kitchen, Executive Vice President
and Chief Financial Officer
Date August 14, 1996 By /s/ JERRY D. COURINGTON
Jerry D. Courington,
Controller
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