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, 2002 or [ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification Number 0-33207 GREAT PLAINS ENERGY INCORPORATED 43-1916803 (A Missouri Corporation) 1201 Walnut Street Kansas City, Missouri 64106 (816) 556-2200 1-707 KANSAS CITY POWER & LIGHT COMPANY 44-0308720 (A Missouri Corporation) 1201 Walnut Street Kansas City, Missouri 64106 (816) 556-2200 Each of the following classes or series of securities registered pursuant to Section 12(b) of the Act is registered on the New York Stock Exchange: Registrant Title of each class Great Plains Energy Incorporated Cumulative Preferred Stock par value $100 per share 3.80% Cumulative Preferred Stock par value $100 per share 4.50% Cumulative Preferred Stock par value $100 per share 4.35% Common Stock without par value Securities registered pursuant to Section 12(g) of the Act: None. 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 12, 2002, was 62,296,170 shares. 2 Great Plains Energy and KCP&L separately file this combined Quarterly Report on Form 10-Q. Information contained herein relating to an individual registrant and its subsidiaries is filed by such registrant on its own behalf. Each registrant makes representations only as to information relating to itself and its subsidiaries. This report should be read in its entirety. No one section of the report deals with all aspects of the subject matter. GLOSSARY OF TERMS The following is a glossary of frequently used abbreviations or acronyms that are found throughout this report: Abbreviation or Acronym Definition Clean Air Act Clean Air Act Amendments of 1990 CO2 Carbon Dioxide Consolidated KCP&L KCP&L and its subsidiary HSS COLI Corporate Owned Life Insurance DIP Debtor-in-Possession DTI DTI Holdings, Inc. and its subsidiaries Digital Teleport, Inc. and Digital Teleport of Virginia, Inc. EIRR Environmental Improvement Revenue Refunding EPA Environmental Protection Agency EPS Earnings per share ERISA Employee Retirement Income Security Act FASB Financial Accounting Standards Board FERC Federal Energy Regulatory Commission GPP Great Plains Power Incorporated, a subsidiary of Great Plains Energy HSS Home Service Solutions Inc., a subsidiary of KCP&L KCC The State Corporation Commission of the State of Kansas KCP&L Kansas City Power & Light Company, a regulated, integrated electric utility subsidiary of Great Plains Energy MACT Maximum Achievable Control Technology MISO Midwest Independent System Operator MPSC Missouri Public Service Commission NEIL Nuclear Electric Insurance Limited NRC Nuclear Regulatory Commission NOx Nitrogen Oxide PCBs Polychlorinated biphenyls RSAE R.S. Andrews Enterprises, Inc. a consumer services company in which HSS owns a 72% equity interest Receivables Company Kansas City Power & Light Receivables Company RTO Regional Transmission Organization SPP Southwest Power Pool SFAS Statement of Financial Accounting Standards WCNOC Wolf Creek Nuclear Operating Corporation CAUTIONARY STATEMENTS REGARDING CERTAIN FORWARD-LOOKING INFORMATION Statements made in this report that are not based on historical facts are forward-looking, may involve risks and uncertainties, and are intended to be as of the date when made. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the registrants are providing a number of important factors that could cause actual results to differ materially from provided forward-looking information. These important factors include: o future economic conditions in the regional, national and international markets o state, federal and foreign regulation o weather conditions including weather-related damage o cost of fuel o financial market conditions including, but not limited to, changes in interest rates o inflation rates o increased competition including, but not limited to, the deregulation of the electric utility industry and the entry of new competitors o ability to carry out marketing and sales plans o ability to achieve generation planning goals and the occurrence of unplanned generation outages o nuclear operations o ability to enter new markets successfully and capitalize on growth opportunities in nonregulated businesses o adverse changes in applicable laws, regulations or rules governing environmental regulations including air quality, tax or accounting matters o delays in the anticipated in-service dates of additional generating capacity o performance of projects undertaken by our non-regulated businesses and the success of efforts to invest in and develop new opportunities o non-performance of counterparties o impact of terrorist acts o availability and cost of capital and o other risks and uncertainties. This list of factors is not all-inclusive because it is not possible to predict all possible factors. 3 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements GREAT PLAINS ENERGY Consolidated Balance Sheets (Unaudited) September 30 December 31 2002 2001 (thousands) ASSETS Current Assets Cash and cash equivalents $ 24,866 $ 29,034 Receivables 234,004 152,114 Fuel inventories, at average cost 19,534 22,246 Materials and supplies, at average cost 51,449 50,696 Current income taxes - 31,031 Deferred income taxes 2,021 5,061 Other 13,020 19,167 Total 344,894 309,349 Nonutility Property and Investments Affordable housing limited partnerships 69,613 81,136 Gas property and investments 47,636 43,385 Nuclear decommissioning trust fund 60,628 61,766 Other 66,124 63,616 Total 244,001 249,903 Utility Plant, at Original Cost Electric 4,407,461 4,332,464 Less-accumulated depreciation 1,859,725 1,793,786 Net utility plant in service 2,547,736 2,538,678 Construction work in progress 38,578 51,265 Nuclear fuel, net of amortization of $118,343 and $127,101 25,076 33,771 Total 2,611,390 2,623,714 Deferred Charges Regulatory assets 139,725 124,406 Prepaid pension costs 86,543 88,337 Goodwill 34,066 37,066 Other deferred charges 38,466 30,724 Total 298,800 280,533 Total $ 3,499,085 $ 3,463,499 LIABILITIES AND CAPITALIZATION Current Liabilities Notes payable $ 165,561 $ 144,404 Commercial paper 29,580 62,000 Current maturities of long-term debt 29,393 238,767 EIRR bonds classified as current 31,000 177,500 Accounts payable 170,936 173,956 Accrued taxes 41,122 14,324 Accrued interest 13,877 13,262 Accrued payroll and vacations 28,856 26,422 Accrued refueling outage costs 5,183 12,979 Other 29,371 35,810 Total 544,879 899,424 Deferred Credits and Other Liabilities Deferred income taxes 609,086 594,704 Deferred investment tax credits 42,611 45,748 Accrued nuclear decommissioning costs 61,921 63,040 Other 118,588 114,085 Total 832,206 817,577 Capitalization (see statements) 2,122,000 1,746,498 Commitments and Contingencies (Note 7) Total $ 3,499,085 $ 3,463,499 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 GREAT PLAINS ENERGY Consolidated Statements of Capitalization (Unaudited) September 30 December 31 2002 2001 (thousands) Long-term Debt (excluding current maturities) General Mortgage Bonds Medium-Term Notes due 2004-08, 7.37%* and 7.28%** weighted-average rate $ 159,000 $ 179,000 3.07%* and 2.71%** EIRR bonds due 2012-23 158,768 158,768 EIRR bonds classified as current liabilities (31,000) (31,000) Senior Notes 7.125% due 2005 250,000 250,000 6.500% due 2011 150,000 150,000 6.000% due 2007 225,000 - Unamortized discount (971) (660) EIRR bonds 2.81%* and 3.25%** Series A & B due 2015 109,157 106,500 2.81%* and 3.25%** Series D due 2017 41,037 40,000 EIRR bonds classified as current liabilities - (146,500) 4.50%*** Series C due 2017 50,000 50,000 Subsidiary Obligations R.S. Andrews Enterprises, Inc. long-term debt 8.02%* and 8.14%** weighted-average rate due 2003-07 2,866 2,832 Affordable Housing Notes 7.83%* and 8.16%** weighted-average rate due 2003-08 11,197 19,746 Total 1,125,054 778,686 Company-obligated Mandatorily Redeemable Preferred Securities of a trust holding solely KCP&L Subordinated Debentures 150,000 150,000 Cumulative Preferred Stock $100 Par Value 3.80% - 100,000 shares issued 10,000 10,000 4.50% - 100,000 shares issued 10,000 10,000 4.20% - 70,000 shares issued 7,000 7,000 4.35% - 120,000 shares issued 12,000 12,000 Total 39,000 39,000 Common Stock Equity Common stock-150,000,000 shares authorized without par value 61,908,726 shares issued, stated value 449,697 449,697 Capital stock premium and expense (1,632) (1,656) Retained earnings (see statements) 365,427 344,815 Treasury stock (4) (903) Accumulated other comprehensive loss Loss on derivative hedging instruments (4,511) (12,110) Minimum pension liability (1,031) (1,031) Total 807,946 778,812 Total $ 2,122,000 $ 1,746,498 * Weighted-average rate as of September 30, 2002 ** Weighted-average rate as of December 31, 2001 *** Weighted-average rate as of September 30, 2002 and December 31, 2001 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 GREAT PLAINS ENERGY Consolidated Statements of Income (Unaudited) Three Months Ended Year to Date September 30 September 30 2002 2001 2002 2001 (thousands) Operating Revenues Electric revenues - KCP&L $ 334,516 $ 323,233 $ 780,654 $ 759,619 Electric revenues - Strategic Energy 232,839 136,902 579,826 267,485 Other revenues 17,632 20,780 48,677 80,571 Total 584,987 480,915 1,409,157 1,107,675 Operating Expenses Fuel 48,732 52,533 118,089 124,836 Purchased power - KCP&L 15,618 21,016 38,850 59,061 Purchased power - Strategic Energy 205,455 109,359 506,328 218,532 Gas purchased and production expenses 966 339 2,555 17,454 Other 90,417 78,304 249,035 243,163 Maintenance 19,914 18,835 75,622 60,588 Depreciation and depletion 37,670 40,424 112,402 117,046 General taxes 29,768 28,839 76,169 74,253 Total 448,540 349,649 1,179,050 914,933 (Gain) Loss on property 610 (463) 543 (22,169) Total 449,150 349,186 1,179,593 892,764 Operating income 135,837 131,729 229,564 214,911 Loss from equity investments (248) (389) (880) (501) Minority interest in subsidiaries (2,890) (3,133) (8,245) (1,954) Non-operating income 1,417 3,453 4,997 10,912 Non-operating expenses (5,077) (21,152) (17,752) (30,321) Interest charges 22,867 28,645 67,205 78,481 Income before income taxes, extraordinary item and cumulative effect of a change in accounting principle 106,172 81,863 140,479 114,566 Income taxes 37,334 26,331 38,571 25,774 Income before extraordinary item and cumulative effect of a change in accounting principle 68,838 55,532 101,908 88,792 Early extinguishment of debt, net of income taxes - - - 15,872 Cumulative effect to January 1, 2002, of a change in accounting principle - - (3,000) - Net income 68,838 55,532 98,908 104,664 Preferred stock dividend requirements 411 412 1,234 1,236 Earnings available for common stock $ 68,427 $ 55,120 $ 97,674 $ 103,428 Average number of common shares outstanding 61,909 61,870 61,901 61,860 Basic and diluted earnings per common share before extraordinary item and cumulative effect of a change in accounting principle $ 1.11 $ 0.89 $ 1.63 $ 1.41 Early extinguishment of debt - - - 0.26 Cumulative effect to January 1, 2002, of a change in accounting principle - - (0.05) - Basic and diluted earnings per common share $ 1.11 $ 0.89 $ 1.58 $ 1.67 Cash dividends per common share $ 0.415 $ 0.415 $ 1.245 $ 1.245 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 6 GREAT PLAINS ENERGY Consolidated Statements of Cash Flows (Unaudited) Year to Date September 30 2002 2001 (thousands) Cash Flows from Operating Activities Net income $ 98,908 $ 104,664 Adjustments to reconcile income to net cash from operating activities: Early extinguishment of debt, net of income taxes - (15,872) Cumulative effect of a change in accounting principle 3,000 - Depreciation and depletion 112,402 117,046 Amortization of: Nuclear fuel 9,501 12,757 Other 8,167 12,892 Deferred income taxes (net) 12,507 3,634 Investment tax credit amortization (3,137) (3,217) Loss from equity investments 880 501 (Gain) Loss on property 543 (22,169) Allowance for equity funds used during construction (30) (3,551) Deferred storm costs (20,124) - Minority Interest 8,245 1,954 Other operating activities (Note 3) (9,842) (70,027) Net cash from operating activities 221,020 138,612 Cash Flows from Investing Activities Utility capital expenditures (98,767) (154,743) Allowance for borrowed funds used during construction (659) (8,404) Purchases of investments (6,276) (40,693) Purchases of nonutility property (8,567) (49,202) Proceeds from sale of assets 3,121 64,072 Hawthorn No. 5 partial insurance recovery - 30,000 Loan to DTI prior to majority ownership - (94,000) Other investing activities (5,067) 8,382 Net cash from investing activities (116,215) (244,588) Cash Flows from Financing Activities Issuance of long-term debt 224,573 99,500 Repayment of long-term debt (237,923) (63,366) Net change in short-term borrowings (11,263) 144,731 Dividends paid (78,296) (78,246) Other financing activities (6,064) (3,583) Net cash from financing activities (108,973) 99,036 Net Change in Cash and Cash Equivalents (4,168) (6,940) Cash and Cash Equivalents at Beginning of Year 29,034 34,877 Cash and Cash Equivalents at End of Period $ 24,866 $ 27,937 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 7 GREAT PLAINS ENERGY Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended Year to Date September 30 September 30 2002 2001 2002 2001 (thousands) Net income $ 68,838 $ 55,532 $ 98,908 $104,664 Other comprehensive income: Gain (loss) on derivative hedging instruments 2,088 (5,537) 7,888 (39,705) Income taxes (507) 2,287 (2,885) 16,494 Net gain (loss) on derivative hedging instruments 1,581 (3,250) 5,003 (23,211) Reclassification to revenues and expenses, net of tax (211) 653 2,596 (7,687) Comprehensive income before cumulative effect of a change in accounting principles, net of income taxes 70,208 52,935 106,507 73,766 Cumulative effect to January 1, 2001, of a change in accounting principles, net of income taxes - - - 17,443 Comprehensive income $ 70,208 $ 52,935 $106,507 $ 91,209 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. GREAT PLAINS ENERGY Consolidated Statements of Retained Earnings (Unaudited) Three Months Ended Year to Date September 30 September 30 2002 2001 2002 2001 (thousands) Beginning balance (Note 9) $322,693 $470,289 $344,815 $473,321 Net income 68,838 55,532 98,908 104,664 391,531 525,821 443,723 577,985 Dividends declared Preferred stock - at required rates 411 411 1,234 1,235 Common stock 25,693 25,671 77,062 77,011 Ending balance $365,427 $499,739 $365,427 $499,739 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 8 KANSAS CITY POWER & LIGHT COMPANY Consolidated Balance Sheets (Unaudited) September 30 December 31 2002 2001 (thousands) ASSETS Current Assets Cash and cash equivalents $ 2,013 $ 962 Receivables 92,625 62,511 Fuel inventories, at average cost 19,534 22,246 Materials and supplies, at average cost 51,449 50,696 Deferred income taxes 2,021 5,061 Other 9,114 11,484 Total 176,756 152,960 Nonutility Property and Investments Nuclear decommissioning trust fund 60,628 61,766 Other 43,116 40,797 Total 103,744 102,563 Utility Plant, at Original Cost Electric 4,407,461 4,332,464 Less-accumulated depreciation 1,859,725 1,793,786 Net utility plant in service 2,547,736 2,538,678 Construction work in progress 38,578 51,265 Nuclear fuel, net of amortization of $118,343 and $127,101 25,076 33,771 Total 2,611,390 2,623,714 Deferred Charges Regulatory assets 139,725 124,406 Prepaid pension costs 86,543 88,337 Goodwill 19,952 22,952 Other deferred charges 32,479 30,724 Total 278,699 266,419 Total $ 3,170,589 $ 3,145,656 LIABILITIES AND CAPITALIZATION Current Liabilities Notes payable $ 23,561 $ 20,404 Commercial paper 29,580 62,000 Current maturities of long-term debt 20,257 227,383 EIRR bonds classified as current 31,000 177,500 Accounts payable 68,584 113,029 Accrued taxes 78,693 15,895 Accrued interest 12,928 11,327 Accrued payroll and vacations 26,264 22,581 Accrued refueling outage costs 5,183 12,979 Other 12,793 14,562 Total 308,843 677,660 Deferred Credits and Other Liabilities Deferred income taxes 644,140 630,699 Deferred investment tax credits 42,611 45,748 Accrued nuclear decommissioning costs 61,921 63,040 Other 82,834 75,186 Total 831,506 814,673 Capitalization (see statements) 2,030,240 1,653,323 Commitments and Contingencies (Note 7) Total $ 3,170,589 $ 3,145,656 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 9 KANSAS CITY POWER & LIGHT COMPANY Consolidated Statements of Capitalization (Unaudited) September 30 December 31 2002 2001 (thousands) Long-term Debt (excluding current maturities) General Mortgage Bonds Medium-Term Notes due 2004-08, 7.37%* and 7.28%** weighted-average rate $ 159,000 $ 179,000 3.07%* and 2.71%** EIRR bonds due 2012-23 158,768 158,768 EIRR bonds classified as current liabilities (31,000) (31,000) Senior Notes 7.125% due 2005 250,000 250,000 6.500% due 2011 150,000 150,000 6.000% due 2007 225,000 - Unamortized discount (971) (660) EIRR bonds 2.81%* and 3.25%** Series A & B due 2015 109,157 106,500 2.81%* and 3.25%** Series D due 2017 41,037 40,000 EIRR bonds classified as current liabilities - (146,500) 4.50%*** Series C due 2017 50,000 50,000 Subsidiary Obligations R.S. Andrews Enterprises, Inc. long-term debt 8.02%* and 8.14%** weighted-average rate due 2003-07 2,866 2,832 Total 1,113,857 758,940 Company-obligated Mandatorily Redeemable Preferred Securities of a trust holding solely KCP&L Subordinated Debentures 150,000 150,000 Common Stock Equity Common stock-1,000 shares authorized without par value 1 share issued, stated value 562,041 526,041 Retained earnings (see statements) 205,373 219,524 Accumulated other comprehensive income (loss) Income (loss) on derivative hedging instruments - (151) Minimum pension liability (1,031) (1,031) Total 766,383 744,383 Total $ 2,030,240 $ 1,653,323 * Weighted-average rate as of September 30, 2002 ** Weighted-average rate as of December 31, 2001 *** Weighted-average rate as of September 30, 2002 and December 31, 2001 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 10 KANSAS CITY POWER & LIGHT COMPANY Consolidated Statements of Income (Unaudited) Three Months Ended Year to Date September 30 September 30 2002 2001 2002 2001 (thousands) Operating Revenues Electric revenues $ 334,516 $ 460,135 $ 780,654 $ 1,027,104 Other revenues 16,927 20,780 47,221 80,571 Total 351,443 480,915 827,875 1,107,675 Operating Expenses Fuel 48,732 52,533 118,089 124,836 Purchased power 15,618 130,375 38,850 277,593 Gas purchased and production expenses - 339 - 17,454 Other 75,891 78,304 211,236 243,163 Maintenance 19,903 18,835 75,541 60,588 Depreciation and depletion 37,034 40,424 110,853 117,046 General taxes 29,063 28,839 74,813 74,253 Total 226,241 349,649 629,382 914,933 (Gain) Loss on property 609 (463) 304 (22,169) Total 226,850 349,186 629,686 892,764 Operating income 124,593 131,729 198,189 214,911 Loss from equity investments - (389) - (501) Minority interest in subsidiaries - (3,133) - (1,954) Non-operating income 1,084 3,453 3,834 10,912 Non-operating expenses (2,922) (21,152) (7,925) (30,321) Interest charges 20,587 28,645 61,542 78,481 Income before income taxes, extraordinary item and cumulative effect of a change in accounting principle 102,168 81,863 132,556 114,566 Income taxes 39,817 26,331 51,155 25,774 Income before extraordinary item and cumulative effect of a change in accounting principle 62,351 55,532 81,401 88,792 Early extinguishment of debt, net of income taxes - - - 15,872 Cumulative effect to January 1, 2002, of a change in accounting principle - - (3,000) - Net income 62,351 55,532 78,401 104,664 Preferred stock dividend requirements - 412 - 1,236 Earnings available for common stock $ 62,351 $ 55,120 $ 78,401 $ 103,428 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 11 KANSAS CITY POWER & LIGHT COMPANY Consolidated Statements of Cash Flows (Unaudited) Year to date September 30 2002 2001 (thousands) Cash Flows from Operating Activities Net income $ 78,401 $104,664 Adjustments to reconcile income to net cash from operating activities: Early extinguishment of debt, net of income taxes - (15,872) Cumulative effect of a change in accounting principle 3,000 - Depreciation and depletion 110,853 117,046 Amortization of: Nuclear fuel 9,501 12,757 Other 5,980 12,892 Deferred income taxes (net) 16,385 3,634 Investment tax credit amortization (3,137) (3,217) Loss from equity investments - 501 (Gain) Loss on property 304 (22,169) Allowance for equity funds used during construction (30) (3,551) Deferred storm costs (20,124) - Other operating activities (Note 3) 366 (68,073) Net cash from operating activities 201,499 138,612 Cash Flows from Investing Activities Utility capital expenditures (99,667) (154,743) Allowance for borrowed funds used during construction (659) (8,404) Purchases of investments (2,566) (40,693) Purchases of nonutility property (1,148) (49,202) Proceeds from sale of assets - 64,072 Hawthorn No. 5 partial insurance recovery - 30,000 Loan to DTI prior to majority ownership - (94,000) Other investing activities (5,393) 8,382 Net cash from investing activities (109,433) (244,588) Cash Flows from Financing Activities Issuance of long-term debt 224,573 99,500 Repayment of long-term debt (227,126) (63,366) Net change in short-term borrowings (29,263) 144,731 Dividends paid - (78,246) Dividends paid to Great Plains Energy (92,552) - Equity contribution from Great Plains Energy 36,000 - Other financing activities (2,647) (3,583) Net cash from financing activities (91,015) 99,036 Net Change in Cash and Cash Equivalents 1,051 (6,940) Cash and Cash Equivalents at Beginning of Year 962 34,877 Cash and Cash Equivalents at End of Period $ 2,013 $ 27,937 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 12 KANSAS CITY POWER & LIGHT COMPANY Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended Year to Date September 30 September 30 2002 2001 2002 2001 (thousands) Net income $ 62,351 $ 55,532 $ 78,401 $104,664 Other comprehensive income: Gain (loss) on derivative hedging instruments - (5,537) 422 (39,705) Income taxes - 2,287 (165) 16,494 Net gain (loss) on derivative hedging instruments - (3,250) 257 (23,211) Reclassification to revenues and expenses, net of tax (39) 653 (106) (7,687) Comprehensive income before cumulative effect of a change in accounting principles, net of income taxes 62,312 52,935 78,552 73,766 Cumulative effect to January 1, 2001, of a change in accounting principles, net of income taxes - - - 17,443 Comprehensive income $ 62,312 $ 52,935 $ 78,552 $ 91,209 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. KANSAS CITY POWER & LIGHT COMPANY Consolidated Statements of Retained Earnings (Unaudited) Three Months Ended Year to Date September 30 September 30 2002 2001 2002 2001 (thousands) Beginning balance (Note 9) $199,897 $470,289 $219,524 $473,321 Net income 62,351 55,532 78,401 104,664 262,248 525,821 297,925 577,985 Dividends declared Preferred stock - at required rates - 411 - 1,235 Common stock - 25,671 - 77,011 Common stock held by Great Plains Energy 56,875 - 92,552 - Ending balance $205,373 $499,739 $205,373 $499,739 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 13 GREAT PLAINS ENERGY INCORPORATED KANSAS CITY POWER & LIGHT COMPANY Notes to Consolidated Financial Statements In management's opinion, the consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations for the interim periods presented. These statements and notes should be read in connection with the financial statements and related notes included in our combined 2001 annual report on Form 10-K. The notes to consolidated financial statements that follow are a combined presentation for Great Plains Energy and consolidated KCP&L, both registrants under this filing. 1. ORGANIZATION Great Plains Energy (The Company) Great Plains Energy's consolidated financial statements include consolidated KCP&L, KLT Inc. and GPP. KLT Inc.'s major holdings consist of Strategic Energy, KLT Gas, and investments in affordable housing limited partnerships. GPP's assets and results of operations are insignificant to Great Plains Energy's financial position and results of operations for all periods presented. During the second quarter of 2002, the Company's management revised its corporate business strategy. As a result of this revision, management has decided to limit the operations of GPP until market conditions improve, or the Company makes changes in its business strategy. Effective October 1, 2001, KCP&L distributed, as a dividend, its 100% ownership of KLT Inc. and GPP to Great Plains Energy. As a result, those companies are subsidiaries of Great Plains Energy and are not included in consolidated KCP&L's results of operations and financial position since that date. The presentation of the prior year results of operations for Great Plains Energy is provided for comparative purposes and is identical to the results of operations for consolidated KCP&L, prior to formation of the holding company, presented for that year. Intercompany balances and transactions have been eliminated in consolidation. Consolidated KCP&L KCP&L's consolidated financial statements include its wholly owned subsidiary HSS. HSS has two subsidiaries: Worry Free Service, Inc. and RSAE. In addition, KCP&L's consolidated results of operations include KLT Inc. and GPP for all periods prior to the October 1, 2001, formation of the holding company. 14 Strategic Energy Revenues and Purchased Power Reclassified Great Plains Energy retail electric revenues and purchased power have been reduced by $5.8 million for the three months ended March 31, 2002 to reflect Strategic Energy's policy of reflecting customer credits as a reduction of electricity energy sales when such credits are determined to be payable. The table below details the originally reported amounts and the reclassification. Three Months Ended March 30 2002 (millions) Operating revenues- Strategic Energy, as reported (a) $ 152.2 Reclassification (5.8) Operating revenues - Strategic Energy $ 146.4 Purchased power - Strategic Energy, as reported (a) $ 130.8 Reclassification (5.8) Purchased power - Strategic Energy $ 125.0 (a) As reported in Form 10-Q for the period ended March 31, 2002 and on Form 8-K dated April 24, 2002. 2. RESTRICTED CASH Strategic Energy has entered into performance assurance agreements with selected electricity power suppliers. As part of the agreements, Strategic Energy has directed selected retail customers to remit payment to lockboxes that are held in trust and managed by a Trustee, agreed upon by both the supplier and Strategic Energy. As part of the trust administration, the Trustee remits payment to the supplier for electricity purchased by Strategic Energy during the month according to the supplier payment terms. Any excess remittances into the lockboxes are remitted back to Strategic Energy after the disbursement to the supplier has been made. The assets of the Trust are included in cash and cash equivalents in the Great Plains Energy consolidated balance sheets and totaled $13.8 million at September 30, 2002 and $2.2 million at December 31, 2001. 15 3. SUPPLEMENTAL CASH FLOW INFORMATION Great Plains Energy Other Operating Activities Year to Date September 30 2002 2001 Cash flows affected by changes in: (thousands) Receivables $ (81,890) $(101,179) Fuel inventories 3,116 752 Materials and supplies (753) (2,425) Accounts payable (3,020) (61,674) Accrued taxes and current income taxes 57,829 60,157 Accrued interest 615 2,873 Wolf Creek refueling outage accrual (7,796) 8,636 Pension and postretirement benefit obligations 883 (17,997) Other 21,174 40,830 Total other operating activities $ (9,842) $(70,027) Cash paid during the period: Interest $ 65,003 $ 61,984 Income taxes $ 7,318 $ 7,822 Consolidated KCP&L Other Operating Activities Year to Date September 30 2002 2001 Cash flows affected by changes in: (thousands) Receivables $ (30,114) $(101,179) Fuel inventories 3,116 752 Materials and supplies (753) (2,425) Accounts payable (44,445) (61,674) Accrued taxes 62,798 60,157 Accrued interest 1,601 2,873 Wolf Creek refueling outage accrual (7,796) 8,636 Pension and postretirement benefit obligations 883 (17,997) Other 15,076 42,784 Total other operating activities $ 366 $ (68,073) Cash paid during the period: Interest $ 58,354 $ 61,984 Income taxes $ 1,800 $ 7,822 During the first quarter of 2001, KLT Telecom, a wholly owned subsidiary of KLT Inc., increased its equity ownership in DTI to a majority ownership and HSS increased its equity ownership in RSAE to a majority ownership. The effect of these transactions is summarized in the tables that follow. The initial consolidation of DTI (February 8, 2001) and RSAE (January 1, 2001) are excluded from both Great 16 Plains Energy and KCP&L's consolidated statement of cash flows year to date September 30, 2001. See Note 7 for discussion of DTI's bankruptcy. DTI RSAE (thousands) Cash paid to obtain majority ownership $ (39,855) $ (560) Subsidiary cash 4,557 1,053 Purchase of DTI and RSAE, net of cash received $ (35,298) $ 493 Initial consolidation of subsidiaries: Assets Cash $ 4,557 $ 1,053 Receivables 1,012 4,078 Other nonutility property and investments 363,825 6,267 Goodwill 62,974 24,496 Other assets 5,143 3,919 Eliminate equity investment (67,660) (7,200) Total assets $ 369,851 $ 32,613 Liabilities Notes payable $ 5,300 $ 10,057 Accounts payable 31,299 6,219 Accrued taxes 2,414 24 Deferred income taxes 7,437 - Other liabilities and deferred credits 46,531 13,418 Loan from KLT Telecom (a) 94,000 - Long-term debt 182,870 2,895 Total liabilities $ 369,851 $ 32,613 (a) KLT Telecom provided a $94 million loan to DTI for the completion of the tender offer of 50.4 percent of DTI's Senior Discount Notes prior to increasing its DTI investment to a majority ownership. 4. CAPITALIZATION KCP&L Financing I (Trust) has previously issued $150.0 million of 8.3% preferred securities. The sole asset of the Trust is the $154.6 million principal amount of 8.3% Junior Subordinated Deferrable Interest Debentures, due 2037, issued by KCP&L. In March 2002, KCP&L issued $225 million of 6.0% unsecured senior notes, maturing in 2007, through a private placement. The proceeds from the issuance were primarily used to refinance maturing unsecured medium-term notes. KCP&L, pursuant to its obligations under a registration rights agreement entered into in connection with the private placement, filed an S-4 registration statement offering to exchange up to $225 million of 6.0% unsecured senior notes, maturing in 2007, registered under the Securities Act for the $225 million privately placed notes which became effective during the third quarter of 2002. All of the privately placed notes were exchanged. During the first quarter of 2002, Great Plains Energy terminated its $129 million bridge revolving credit facility. Great Plains Energy replaced the bridge facility with a $205 million syndicated 364-day, revolving credit facility with a group of banks. During June 2002, Great Plains Energy entered into a separate $20 million 364-day revolving credit facility with a bank. At September 30, 2002, Great Plains Energy had $142 million of borrowings, at an average interest rate of 2.72%, outstanding under the facilities. 17 In the third quarter of 2002, KCP&L remarketed its 1998 Series A, B, and D EIRR bonds totaling $146.5 million to a 5-year fixed interest rate of 4.75% ending October 1, 2007. The final maturity for Series A and B bonds is 2015 and the final maturity for Series D is 2017. At the end of the fixed interest rate period, the bonds will be subject to mandatory redemption or purchase and KCP&L anticipates remarketing the bonds at which time a new interest rate period and mode will be determined. KCP&L has classified the EIRR bonds as long-term debt consistent with the 5-year term of the remarketing. Under the previous, one-year remarketing term, the EIRR bonds were classified as current liabilities. Simultaneously with the remarketing, KCP&L entered into an interest rate swap for the $146.5 million based on LIBOR to effectively create a floating interest rate obligation. The transaction is a fair value hedge with the assumption of no ineffectiveness under SFAS No. 133. The fair value of the swap is recorded on KCP&L's balance sheet as an asset with an offset to the respective debt balances and has no impact on earnings. Future changes in the fair market value of the swap will be similarly recorded on the balance sheet with no impact on earnings. At September 30, 2002, the fair value of the swap was $3.7 million. In March 2002, Great Plains Energy made a $36 million capital contribution to KCP&L increasing capital stock premium and expense to $75 million, which is reflected in Common Stock in the KCP&L consolidated statement of capitalization. Great Plains Energy filed an S-3 registration statement, for the issuance of an aggregate amount up to $300 million of any combination of senior debt securities, subordinated debt securities, trust preferred securities, convertible securities, or common stock. The registration statement became effective in November 2002. Great Plains Energy expects to issue additional common equity. However, the timing and amount of this transaction are dependent on a number of factors, including overall and sector-specific equity market conditions. 5. SEGMENT AND RELATED INFORMATION Great Plains Energy Great Plains Energy has three reportable segments based on its method of internal reporting, which generally segregates the reportable segments based on products and services, management responsibility and regulation. During the second quarter of 2002, the Company's management revised its corporate business strategy focusing on the following three primary business segments: (1) KCP&L, an integrated electric utility, generates, transmits and distributes electricity; (2) Strategic Energy earns a management fee on the direct delivery to retail customers under long-term contracts of wholesale power purchased under long-term contracts, operating in several deregulated electricity markets; and (3) KLT Gas acquires and develops early stage coalbed methane properties. "Other" includes the operations of HSS and GPP, all KLT Inc. operations other than Strategic Energy and KLT Gas, unallocated corporate charges and intercompany eliminations. The summary of significant accounting policies applies to all of the reportable segments. Segment performance is evaluated based on net income. 18 The tables below reflect summarized financial information concerning Great Plains Energy's reportable segments. Prior year information has been restated to conform to the current presentation. For the three months ended Strategic Great Plains September 30, 2002 KCP&L Energy KLT Gas Other Energy (millions) Operating revenues $ 334.6 $ 233.1 $ 0.5 $ 16.8 $ 585.0 Depreciation and depletion (36.2) (0.2) (0.3) (1.0) (37.7) Interest charges (20.2) (0.1) (0.1) (2.5) (22.9) Loss from equity investments - - - (0.3) (0.3) Income taxes (40.1) (7.2) 2.6 7.3 (37.4) Net income (loss) 63.7 6.7 0.3 (1.9) 68.8 For the three months ended Strategic Great Plains September 30, 2001 KCP&L Energy KLT Gas Other Energy (millions) Operating revenues $ 323.2 $ 137.0 $ (0.5) $ 21.2 $ 480.9 Depreciation and depletion (34.4) (0.1) (0.4) (5.5) (40.4) Interest charges (21.6) - - (7.1) (28.7) Loss from equity investments - - - (0.4) (0.4) Income taxes (37.0) (7.1) 2.7 15.1 (26.3) Net income (loss) 59.7 10.0 0.3 (14.4) 55.6 Strategic Great Plains Year to date September 30, 2002 KCP&L Energy KLT Gas Other Energy (millions) Operating revenues $ 780.7 $ 580.7 $ 0.6 $ 47.2 $1,409.2 Depreciation and depletion (108.1) (0.6) (0.7) (3.0) (112.4) Interest charges (60.3) (0.3) (0.1) (6.5) (67.2) Loss from equity investments - - - (0.9) (0.9) Income taxes (51.4) (17.8) 7.4 23.2 (38.6) Cumulative effect of a change in accounting principle - - - (3.0) (3.0) Net income (loss) 84.1 21.8 (0.1) (6.9) 98.9 Strategic Great Plains Year to date September 30, 2001 KCP&L Energy KLT Gas Other Energy (millions) Operating revenues $ 759.6 $ 283.0 $ 1.4 $ 63.6 $1,107.6 Depreciation and depletion (100.9) (0.2) (1.4) (14.5) (117.0) Interest charges (59.3) (0.1) - (19.1) (78.5) Income (loss) from equity investments - - 1.0 (1.5) (0.5) Income taxes (47.1) (12.2) (0.8) 34.3 (25.8) Early extinguishment of debt - - - 15.9 15.9 Net income (loss) 81.0 17.3 13.6 (7.2) 104.7 19 Strategic KLT Great Plains KCP&L Energy Gas Other Energy September 30, 2002 (millions) Assets $ 3,116.5 $ 191.1 $ 52.6 $ 138.9 $ 3,499.1 Capital and investment expenditures (a) 102.3 0.8 6.1 4.4 113.6 December 31, 2001 Assets(b) $ 3,089.4 $ 129.1 $ 57.6 $ 187.4 $ 3,463.5 Capital and investment expenditures (a) 265.8 1.5 25.0 82.0 374.3 (a) Capital and investment expenditures reflect year to date amounts for the periods presented. (b) KCP&L assets do not match the KCP&L assets in the consolidated KCP&L segment table due to the reclassification of accrued taxes to current income taxes during consolidation with Great Plains Energy. Consolidated KCP&L On October 1, 2001, consolidated KCP&L distributed, as a dividend, its ownership interest in KLT Inc. and GPP to Great Plains Energy. As a result, those companies are direct subsidiaries of Great Plains Energy and have not been included in consolidated KCP&L's results of operations and financial position since October 1, 2001. The table below reflects summarized financial information for the three months ended and year to date September 30, 2002, concerning consolidated KCP&L's reportable segment. For the three months ended and year to date September 30, 2001, consolidated KCP&L's segment information is identical to the Great Plains Energy segment information presented above. Other includes the operations of HSS and immaterial intercompany eliminations. For the three months ended Consolidated September 30, 2002 KCP&L Other KCP&L (millions) Operating revenues $ 334.6 $ 16.9 $ 351.5 Depreciation and depletion (36.2) (0.9) (37.1) Interest charges (20.2) (0.3) (20.5) Income taxes (40.1) 0.2 (39.9) Net income (loss) 63.7 (1.4) 62.3 Consolidated Year to date September 30, 2002 KCP&L Other KCP&L (millions) Operating revenues $ 780.7 $ 47.2 $ 827.9 Depreciation and depletion (108.1) (2.8) (110.9) Interest charges (60.3) (1.2) (61.5) Income taxes (51.4) 0.2 (51.2) Cumulative effect of a change in accounting principle - (3.0) (3.0) Net income (loss) 84.1 (5.7) 78.4 Consolidated KCP&L Other KCP&L September 30, 2002 (millions) Assets $ 3,116.5 $ 54.1 $ 3,170.6 Capital and investment expenditures (a) 102.3 1.1 103.4 December 31, 2001 Assets $ 3,092.5 $ 53.1 $ 3,145.6 Capital and investment expenditures (a) 265.8 87.0 352.8 (a) Capital and investment expenditures reflect year to date amounts for the periods presented. 20 6. RELATED PARTY TRANSACTIONS AND RELATIONSHIPS In January of 1997, KLT Energy Services, a wholly-owned subsidiary of KLT Inc., acquired approximately 71% of Custom Energy from Environmental Lighting Concepts. In February of 1999, Custom Energy acquired 100% of the outstanding ownership interest in Strategic Energy from SE Holdings, L.L.C. (SE Holdings) in exchange for 25% of the ownership interest in Custom Energy. In a December 1999 reorganization, Custom Energy changed its name to Custom Energy Holdings and transferred all of its operations to a new wholly owned subsidiary called Custom Energy. After the reorganization, Custom Energy Holdings' assets consisted of its ownership interests in Strategic Energy and Custom Energy. Through a series of transactions, KLT Energy Services has increased its indirect ownership position in Strategic Energy to approximately 83% as of December 31, 2001. In a July 2002 transaction, Custom Energy was distributed to KLT Energy Services and a third-party investor, resulting in Strategic Energy being the sole subsidiary of Custom Energy Holdings. Environmental Lighting Concepts continued to own a 5.8% indirect ownership interest in Strategic Energy. Gregory Orman, Executive Vice President of Corporate Development and Strategic Planning of Great Plains Energy and President and CEO of KLT Inc., held a 67% interest in Environmental Lighting Concepts. The other 33% interest in Environmental Lighting Concepts was held by an employee of a Great Plains Energy subsidiary. Both persons were officers and shareholders of Environmental Lighting Concepts before they became officers or employees of the Company. On November 5, 2002, the Board of Directors of the Company approved the merger of Environmental Lighting Concepts into Innovative Energy Consultants, Inc., a recently created wholly-owned subsidiary of the Company. The merger was consummated on November 7, 2002, with Innovative Energy Consultants being the surviving company after the merger. In exchange for their entire ownership interest in Environmental Lighting Concepts, the two shareholders received $15.1 million in Great Plains Energy common stock and notes issued by Great Plains Energy and Innovative Energy Consultants. Great Plains Energy issued 387,596 common shares of Great Plains Energy common stock, valued at $8 million, which was distributed to the Environmental Lighting Concepts shareholders in proportion to their interests in that company. Great Plains Energy also issued a promissory note to Mr. Orman in the principal amount of approximately $4.7 million, and Innovative Energy Consultants issued a promissory note to the other shareholder of Environmental Lighting Concepts in the principal amount of approximately $2.4 million. Both notes mature on January 1, 2003, and bear interest at 2.48% per annum. As a result of the merger, Great Plains Energy now indirectly holds an approximate 89% indirect ownership interest in Strategic Energy through KLT Energy Services and Innovative Energy Consultants. Certain employees of Strategic Energy and other investors indirectly hold, through SE Holdings, the remaining ownership interest in Strategic Energy. Custom Energy Holdings' business and affairs are controlled and managed by a three member Management Committee composed of one representative designated by KLT Energy Services, one representative designated by Innovative Energy Consultants and one representative designated by SE Holdings. Certain actions (including amendment of Custom Energy Holdings' operating agreement, approval of actions in contravention of the operating agreement, approval of a dissolution of Custom Energy Holdings, additional capital contributions and assumption of recourse indebtedness) require the unanimous consent of all the members of Custom Energy Holdings. Certain other actions (including mergers with Custom Energy Holdings, acquisitions by Custom Energy Holdings, assumption of non-recourse indebtedness, sales of substantial assets, approval of distributions, filing of registration statements, partition of assets, admission of new members and transfers of interests in Custom Energy Holdings) can be approved by the Management Committee, but to the extent they affect the rights, 21 obligations, assets or business of Strategic Energy, the approval of the Strategic Energy Management Committee is also required. Strategic Energy's business and affairs are controlled and managed exclusively by a four member Management Committee composed of two representatives designated by KLT Energy Services, one representative designated by Innovative Energy Consultants and one representative designated by SE Holdings. Certain actions (including amendment of Strategic Energy's operating agreement, approval of actions in contravention of the operating agreement, approval of transactions between Strategic Energy and affiliates of its members, approval of a dissolution of Strategic Energy, and assumption of recourse indebtedness) require the unanimous consent of all the Management Committee representatives of Strategic Energy. 7. COMMITMENTS AND CONTINGENCIES Nuclear Liability and Insurance Liability Insurance The Price-Anderson Act currently limits the combined public liability of nuclear reactor owners to $9.5 billion for claims that could arise from a single nuclear incident. The owners of Wolf Creek, a nuclear generating station, (the Owners) carry the maximum available commercial insurance of $0.2 billion. Secondary Financial Protection, an assessment plan mandated by the NRC, provides insurance for the $9.3 billion balance. Under Secondary Financial Protection, if there were a catastrophic nuclear incident involving any of the nation's licensed reactors, the Owners would be subject to a maximum retrospective assessment per incident of up to $88 million ($41 million, KCP&L's 47% share). The Owners are jointly and severally liable for these charges, payable at a rate not to exceed $10 million ($5 million, KCP&L's 47% share) per incident per year, excluding applicable premium taxes. The assessment, most recently revised in 1998, is subject to an inflation adjustment every five years based on the Consumer Price Index. Property, Decontamination, Premature Decommissioning and Extra Expense Insurance The Owners also carry $2.8 billion ($1.3 billion, KCP&L's 47% share) of property damage, decontamination and premature decommissioning insurance for loss resulting from damage to the Wolf Creek facilities. NEIL provides this insurance. In the event of an accident, insurance proceeds must first be used for reactor stabilization and NRC mandated site decontamination. KCP&L's share of any remaining proceeds can be used for further decontamination, property damage restoration and premature decommissioning costs. Premature decommissioning coverage applies only if an accident at Wolf Creek exceeds $500 million in property damage and decontamination expenses, and only after trust funds have been exhausted. The Owners also carry additional insurance from NEIL to cover costs of replacement power and other extra expenses incurred in the event of a prolonged outage resulting from accidental property damage at Wolf Creek. Under all NEIL policies, KCP&L is subject to retrospective assessments if NEIL losses, for each policy year, exceed the accumulated funds available to the insurer under that policy. The estimated maximum amount of retrospective assessments to KCP&L under the current policies could total about $10.7 million. In the event of a catastrophic loss at Wolf Creek, the insurance coverage may not be adequate to cover property damage and extra expenses incurred. Uninsured losses, to the extent not recovered through 22 rates, would be assumed by KCP&L and could have a material, adverse effect on its financial condition, results of operations and cash flows. Low-Level Waste The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated that the various states, individually or through interstate compacts, develop alternative low-level radioactive waste disposal facilities. The states of Kansas, Nebraska, Arkansas, Louisiana and Oklahoma formed the Central Interstate Low-Level Radioactive Waste Compact and selected a site in northern Nebraska to locate a disposal facility. WCNOC and the owners of the other five nuclear units in the compact provided most of the pre-construction financing for this project. KCP&L's net investment in the Central Interstate Low-Level Radioactive Waste Compact was $7.4 million at September 30, 2002 and December 31, 2001. Significant opposition to the project has been raised by Nebraska officials and residents in the area of the proposed facility and attempts have been made through litigation and proposed legislation in Nebraska to slow down or stop development of the facility. On December 18, 1998, the application for a license to construct this project was denied. After the license denial, WCNOC and others filed a lawsuit in federal court contending Nebraska officials acted in bad faith while handling the license application. In September 2002, the U.S. District Court Judge presiding over the Central Interstate Compact Commission's federal "bad faith" lawsuit against the State of Nebraska issued his decision in the case finding clear evidence that the State of Nebraska acted in bad faith in processing the license application for a low-level radioactive waste disposal site in Nebraska. He rendered a judgment in the amount of $151.4 million against the state. The state has appealed this decision. Based on the favorable outcome of this trial, in KCP&L's opinion, there is a greater possibility of reversing the state's license denial once the decision in this case is final. In May 1999, the Nebraska legislature passed a bill withdrawing Nebraska from the Compact. In August 1999, the Nebraska Governor gave official notice of the withdrawal to the other member states. Withdrawal will not be effective for five years and will not, of itself, nullify the site license proceeding. Environmental Matters KCP&L's operations are subject to regulation by federal, state and local authorities with regard to air and other environmental matters. The generation and transmission of electricity produces and requires disposal of certain hazardous products which are subject to these laws and regulations. In addition to imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. Failure to comply with these laws and regulations could have a material adverse effect on KCP&L. KCP&L operates in an environmentally responsible manner and seeks to use current technology to avoid and treat contamination. KCP&L regularly conducts environmental audits designed to ensure compliance with governmental regulations and to detect contamination. Governmental bodies, however, may impose additional or more rigid environmental regulations that could require substantial changes to operations or facilities at a significant cost. At September 30, 2002, and December 31, 2001, KCP&L had $1.9 million accrued for environmental remediation expenses covering water monitoring at one site and unasserted claims for remediation at a second site. The amounts accrued were established on an undiscounted basis and KCP&L does not currently have an estimated time frame over which the accrued amounts may be paid out. Expenditures to comply with environmental laws and regulations have not been material in amount during the periods presented and are not expected to be material in the upcoming years with the exception of the issues discussed below. Certain Air Toxic Substances In July 2000, the National Research Council published its findings of a study under the Clean Air Act which stated that power plants that burn fossil fuels, particularly coal, generate the greatest amount of 23 mercury emissions. As a result, in December 2000, the EPA announced it would propose Maximum Achievable Control Technology (MACT) requirements by December 2003 to reduce mercury emissions and issue final rules by December 2004. Until the rules are proposed, KCP&L cannot predict the likelihood or compliance costs of such regulations. Air Particulate Matter In July 1997, the EPA revised ozone and particulate matter air quality standards creating a new eight-hour ozone standard and establishing a new standard for particulate matter less than 2.5 microns (PM-2.5) in diameter. These standards were challenged in the U. S. Court of Appeals for the District of Columbia (Appeals Court) that decided against the EPA. Upon further appeal, the U. S. Supreme Court reviewed the standards and remanded the case back to the Appeals Court for further review, including a review of whether the standards were arbitrary and capricious. On March 26, 2002, the Appeals Court issued its 3 to 0 decision on challenges to the 8-hour ozone and PM-2.5 national ambient air quality standards (NAAQS). This ruling denies all state, industry and environmental groups petitions for review and thus upheld as valid the EPA's new 8-hour ozone and PM-2.5 NAAQS. In so doing, the court held that the EPA acted consistently with the Clean Air Act in setting the standards at the levels it chose and the EPA's actions were reasonable and not arbitrary and capricious, and cited the deference given the Agency's decision-making authority. The court stated that the extensive records established for each rule supported the EPA's actions in both rulemakings. This ruling by the Appeals Court removed the last major hurdle to the EPA's implementation of stricter ambient air quality standards for ozone and fine particles. The EPA has not yet issued regulations incorporating the new standards. Until new regulations are issued, KCP&L is unable to estimate the impact of the new standards. However, the impact on KCP&L and all other utilities that use fossil fuels could be substantial. In addition, the EPA is conducting a three-year study of fine particulate ambient air levels. Until this testing and review period has been completed, KCP&L cannot determine additional compliance costs, if any, associated with the new particulate regulations. Nitrogen Oxide The EPA announced in 1998 regulations implementing reductions in NOx emissions. These regulations initially called for 22 states, including Missouri, to submit plans for controlling NOx emissions. The regulations require a significant reduction in NOx emissions from 1990 levels at KCP&L's Missouri coal-fired plants by the year 2003. In December 1998, KCP&L and several other western Missouri utilities filed suit against the EPA over the inclusion of western Missouri in the NOx reduction program based on the 1-hour NOx standard. On March 3, 2000, a three-judge panel of the District of Columbia Circuit of the U.S. Court of Appeals sent the NOx rules related to Missouri back to the EPA, stating the EPA failed to prove that fossil plants in the western part of Missouri significantly contribute to ozone formation in downwind states. On March 5, 2001, the U.S. Supreme Court denied certiorari, making the decision of the Court of Appeals final. In the February 22, 2002, Federal Register, the EPA issued proposed Phase II NOx SIP Call regulation which specifically excludes the fossil plants in the western part of Missouri from the NOx SIP Call. To date, the EPA has not issued its final Phase II NOx SIP Call regulation. If required to be implemented, KCP&L would need to incur significant capital costs, purchase power or purchase NOx emission allowances. Preliminary analysis of the regulations indicates that selective catalytic reduction technology, as well as other changes, may be required for some of the KCP&L units. Currently, KCP&L estimates that additional capital expenditures to comply with these regulations could range from $40 million to $60 million. Operations and maintenance expenses could also increase by more than $2.5 million per year. KCP&L continues to refine these preliminary estimates and explore 24 alternatives. The ultimate cost of these regulations, if any, could be significantly different from the amounts estimated above. Carbon Dioxide At a December 1997 meeting in Kyoto, Japan, delegates from 167 nations, including the United States, agreed to a treaty (Kyoto Protocol) that would require a seven percent reduction in United States carbon dioxide (CO2) emissions below 1990 levels. Although the United States agreed to the Kyoto Protocol, the treaty has not been sent to Congress for ratification. The financial impact on KCP&L of future requirements in the reduction of CO2 emissions cannot be determined until specific regulations are adopted. Proposed Water Use Regulations In February 2002, the EPA issued proposed rules related to certain existing power producing facilities that employ cooling water intake structures that withdraw 50 million gallons or more per day and use 25% or more of that water for cooling purposes. The proposed rules establish national minimum performance requirements designed to minimize adverse environmental impact. The EPA must take final action by August 2003. KCP&L will continue to monitor the progress of this rulemaking. The impact of these proposed rules has not yet been quantified, however, KCP&L's generating stations would be affected. KCP&L Leases In 2001, KCP&L entered into a synthetic lease arrangement with a Trust (Lessor) to finance the purchase, installation, assembly and construction of five combustion turbines and related property and equipment that will add 385 megawatts of peaking capacity (the "Project). The Trust is a special-purpose entity and has an aggregate financing commitment from third-party equity and debt participants (Investors) of $176 million, amended during the third quarter 2002 to adjust the amount financed from the previously estimated $200 million to reflect a reduction in the estimated cost for the purchase, installation, assembly and construction of the five combustion turbines. In accordance with SFAS No. 13 "Accounting for Leases," and related EITF issues (including EITF Issue No. 90-15, "Impact of Non-substantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions" and EITF Issue No. 97-10, "The Effect of Lessee Involvement in Asset Construction"), the Project and related lease obligations are not included in KCP&L's consolidated balance sheet. The Lessor has appointed KCP&L as supervisory agent responsible for completing construction of the Project by no later than June 2004. The initial lease term is approximately three and one quarter years, beginning at the date of construction completion, which is expected to be June 2003. At the end of the lease term (October 2006), KCP&L may choose to sell the Project for the Lessor, guaranteeing to the Lessor a residual value for the Project in an amount which may be up to 83.21% of the project cost. If KCP&L does not elect the sale option, KCP&L must either extend the lease, if it can obtain the consent of the Lessor, or purchase the Project for the then outstanding project cost. KCP&L also has contingent obligations to the Lessor upon an event of a default during both the construction period and lease period. Upon a default in the construction period, KCP&L's maximum obligation to the Lessor equals (i) in the circumstances of bankruptcy, fraud, illegal acts, misapplication of funds and willful misconduct, 100% of then-incurred project costs, and (ii) in all other circumstances, an amount which may be up to 89.9% of then-incurred project costs that are capitalizable in accordance with GAAP. At September 30, 2002, cumulative project costs were approximately $107.2 million. Upon a default during the lease period, KCP&L's maximum obligation to the Lessor equals 100% of project costs. KCP&L's rental obligation, which reflects interest payments only, is expected to be approximately $25.8 million in the aggregate. During the second quarter of 2002, the FASB issued an exposure draft related to identifying and accounting for special-purpose entities. The proposed interpretation would require consolidation of special-purpose entities by a business that has a controlling financial interest. The proposed 25 interpretation explains how to determine if a business has a controlling financial interest through a variable interest such as financial instruments, service contracts, nonvoting ownership interest, or other arrangements. The provisions of the proposed interpretation would apply immediately to special-purpose entities created after the date of the final interpretation and would apply to special-purpose entities already in existence as of the beginning of the first fiscal year or interim period beginning after March 15, 2003. The final interpretation is expected to be issued in the fourth quarter of 2002 and would require KCP&L to apply the guidance on April 1, 2003. If the interpretation is issued as currently proposed, the Company believes the synthetic lease discussed above would be consolidated beginning April 1, 2003. Strategic Energy Purchased Power Energy Commitments Strategic Energy has entered into agreements to purchase electricity at various fixed prices to meet estimated supply requirements. Commitments at September 30, 2002, under these agreements total $1,057.2 million through 2010. Commitments for the remainder of 2002 total $123.1 million and for the years 2003 through 2006 total $390.5 million, $267.6 million, $205.7 million, and $50.1 million, respectively. See Note 11 for further discussion. Put Option Held by Minority Interests in Strategic Energy As of November 7, 2002, Great Plains Energy indirectly owns approximately 89% of Strategic Energy. SE Holdings has a put option to sell all or part of its interest in Strategic Energy (approximately 11%) to Custom Energy Holdings at any time within the 90 days following January 31, 2004, under certain circumstances, at fair market value. Fair market value would be determined by the mutual agreement of the parties, or if an agreement cannot be reached, by third party appraisal. DTI Holdings, Inc. and Subsidiaries On December 31, 2001, DTI, a subsidiary of KLT Telecom, filed voluntary petitions for bankruptcy. DTI's reorganization under Chapter 11 of the U.S. Bankruptcy Code continues in process. Timing of completion of the bankruptcy process has yet to be determined. During the first quarter of 2002, the bankruptcy court approved $5 million in DIP financing to be provided by KLT Telecom. As of September 30, 2002, none of the DIP financing has been borrowed by DTI. As a result of DTI's filing for bankruptcy protection and KLT Telecom's ensuing loss of control, KLT Telecom has not included the ongoing earnings or loss incurred by DTI in its results for the three months ended and year to date September 30, 2002. Consistent with the fiduciary obligation of the creditors' committee to investigate potential sources of recovery for the DTI bankruptcy estate, the creditors' committee served a request for the production of documents by the Company and its affiliates relating to the issue of whether DTI should have been compensated for the use by the Company of its tax losses. The Company believes that it would have meritorious defenses to any such claim that ultimately might be asserted by the creditors' committee. Since the legal and factual basis for any such unasserted claim have not yet been established, the Company is currently unable to estimate the amount of liability or loss, if any, that might arise if a claim is asserted. The Company has performed an evaluation of the recoverability of deferred tax assets relating to the write-off of its investment in DTI. In December 2001, the Company established a $15.8 million income tax valuation allowance reflecting the uncertainty of when the Company will recognize future tax deductions while DTI is in the bankruptcy process. The Company is unable to project the outcome of the bankruptcy proceedings. Since the uncertainty of recognizing future tax deductions still exists, the Company has not adjusted the valuation allowance. 26 Internal Revenue Service Settlement - Corporate-Owned Life Insurance During 2000, KCP&L recorded a $12.7 million charge for the Federal and states income tax impact of the proposed disallowance of interest deductions on COLI loans and assessed interest on the disallowance for tax years 1994 to 1998. In the fourth quarter of 2002, KCP&L will accept a settlement offer related to COLI from the IRS. The offer allows 20% of the interest originally deducted and taxes only 20% of the gain on surrender of the COLI policies. Acceptance of the offer will require a cash payment to the IRS of approximately $11.2 million to satisfy the liability, but will have an immaterial impact on earnings. KCP&L paid $1.5 million to the IRS in 2001 related to the disallowance of the COLI deduction. 8. GUARANTEES As part of normal business, Great Plains Energy and certain of its subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. Such agreements include, for example, guarantees, stand-by letters of credit and surety bonds. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries' intended business purposes. FASB issued an exposure draft of a proposed interpretation, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, during the second quarter of 2002. The final interpretation is expected to be issued in the fourth quarter of 2002 and take effect beginning January 1, 2003. For guarantees issued after December 31, 2002, the interpretation would require the Company to record a liability for the fair value of the obligation it has undertaken in issuing the guarantees. Additionally, specific disclosures about obligations under guarantees would be required. Until the final interpretation is issued, the Company cannot complete the quantification of the effects of the interpretation on the Company's financial condition and results of operation. 9. GOODWILL SFAS No. 142, "Goodwill and Other Intangible Assets" The Company adopted SFAS No. 142 on January 1, 2002. Under the new standard, goodwill is no longer amortized, but rather is tested for impairment upon adoption and at least annually thereafter. The annual test may be performed anytime during the year, but must be performed at the same time each year. Strategic Energy's initial valuation and annual impairment test have been completed and there was no impairment of the $14.0 million of goodwill. 27 In accordance with SFAS No. 142, the Company completed its initial impairment test of RSAE during the second quarter of 2002 and recorded a $3.0 million write-down of goodwill. The goodwill write-down is reflected as a cumulative effect to January 1, 2002, of a change in accounting principle. RSAE completed its first annual impairment test in September and no additional write-down was necessary. At September 30, 2002, RSAE had $20.0 million of goodwill. First quarter 2002 income statement information as reported in the March 31, 2002, report on Form 10-Q has been restated below to reflect the cumulative effect to January 1, 2002, of a change in accounting principle as follows: For the three months ended March 31, 2002 Great Plains (in thousands, except per share amounts) Energy KCP&L Net loss, as originally reported $ (2,897) $ (7,981) Cumulative effect to January 1, 2002, of a change in accounting principle (3,000) (3,000) Net loss, as restated (5,897) (10,981) Preferred stock dividend requirements 412 - Loss available for common stock, as restated $ (6,309) $ (10,981) Basic and diluted loss per common share, as originally reported $ (0.05) Cumulative effect to January 1, 2002, of a change in accounting principle (0.05) Basic and diluted loss per common share, as restated $ (0.10) Retained earnings at March 31, 2002, as originally reported $ 315,829 $ 185,866 Cumulative effect to January 1, 2002, of a change in accounting principle (3,000) (3,000) Retained earnings at March 31, 2002, as restated $ 312,829 $ 182,866 28 The following table adjusts the reported 2001 Great Plains Energy and Consolidated KCP&L income statement information to add back goodwill amortization as if the provisions of SFAS No. 142 had been applied during all periods presented. Three Months Ended Year to Date September 30 September 30 (in thousands, except per share amounts) 2001 2001 Income before extraordinary item, as reported $ 55,532 $ 88,792 Add back: Goodwill amortization 987 2,729 Income before extraordinary item 56,519 91,521 Early extinguishment of debt, net of income taxes - 15,872 Income, as adjusted 56,519 107,393 Preferred stock dividend requirements 412 1,236 Earnings available for common stock, as adjusted $ 56,107 $ 106,157 Basic and diluted earnings per common share before extraordinary item, as reported $ 0.89 $ 1.41 Add back: Goodwill amortization 0.02 0.04 Basic and diluted earnings per common share before extraordinary item, as adjusted 0.91 1.45 Early extinguishment of debt - 0.26 Basic and diluted earnings per common share, as adjusted $ 0.91 $ 1.71 10. RECEIVABLES The Company's accounts receivables are comprised of the following: September 30 December 31 2002 2001 (thousands) Kansas City Power & Light Receivables Company $ 51,269 $ 25,723 KCP&L other receivables 41,356 36,788 Consolidated KCP&L receivables 92,625 62,511 Great Plains Energy other receivables 141,379 89,603 Great Plains Energy receivables $ 234,004 $ 152,114 In 1999, KCP&L entered into a revolving agreement to sell all of its right, title and interest in the majority of its customer accounts receivable to Receivables Company, a special purpose entity established to purchase customer accounts receivable from KCP&L expiring in October 2003. KCP&L expects the agreement to be renewed annually. Receivables Company has sold receivable interests to outside investors. Accounts receivable sold under the revolving agreement between Receivables Company and KCP&L totaled $121.3 million at September 30, 2002 and $95.7 million at December 31, 2001. These sales included unbilled receivables of $37.5 million at September 30, 2002, and $28.9 million at December 31, 2001. In consideration of the sale, KCP&L received $70 million in cash and the remaining balance in the form of a subordinated note from Receivables Company. The agreement is structured as a true sale under which the creditors of Receivables Company are entitled to be satisfied out of the assets of Receivables Company prior to any value being returned to KCP&L or its creditors. KCP&L sells its receivables at a fixed price based upon the expected cost of funds and charge-offs. These costs comprise KCP&L's loss on the sale of accounts receivable and are included in non- 29 operating expenses. KCP&L services the receivables and receives an annual servicing fee of 0.25% of the outstanding principal amount of the receivables sold and retains any late fees charged to customers. As currently proposed, the FASB exposure draft related to identifying and accounting for special-purpose entities would not require consolidation of the Receivables Company. Information regarding KCP&L's sale of accounts receivable is reflected in the following table. Three Months Ended Year to Date September 30 September 30 2002 2001 2002 2001 (thousands) Gross proceeds on sale of accounts receivable $330,458 $321,025 $763,407 $755,507 Collections 326,344 296,893 745,370 721,470 Loss on sale of accounts receivable 1,104 1,943 3,457 7,602 Late fees 887 976 2,002 2,356 KCP&L other receivables at September 30, 2002, and December 31, 2001, consist primarily of receivables from partners in jointly-owned electric utility plants, bulk power sales receivables and accounts receivable held by RSAE and Worry Free. Great Plains Energy other receivables at September 30, 2002, and December 31, 2001, are primarily the accounts receivable held by Strategic Energy which include unbilled receivables of $61.8 million at September 30, 2002, and $48.5 million at December 31, 2001. 11. DERIVATIVE FINANCIAL INSTRUMENTS On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS No. 133 requires that every derivative instrument be recorded on the balance sheet as an asset or liability measured at its fair value and that changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 requires that as of the date of initial adoption, the difference between the fair market value of derivative instruments recorded on the balance sheet and the previous carrying amount of those derivatives be reported in net income or other comprehensive income, as appropriate, as a cumulative effect of a change in accounting principle. The adoption of SFAS No. 133 on January 1, 2001, required the Company to record a $0.2 million expense, net of $0.1 million of income tax. The Company did not reflect this immaterial amount as a cumulative effect. This entry increased interest expense by $0.6 million and reduced purchased power expense by $0.3 million. The Company also recorded $17.4 million, net of $12.6 million of income tax, as a cumulative effect of a change in accounting principle applicable to comprehensive income for its cash flow hedges. Cash flow hedges are derivative instruments used to mitigate the exposure to variability in expected future cash flows attributable to a particular risk. Derivative Instruments and Hedging Activities The Company's activities expose it to a variety of market risks including interest rates and commodity prices. Management has established risk management policies and strategies to reduce the potentially adverse effects that the volatility of the markets may have on its operating results. The Company's interest rate risk management strategy uses derivative instruments to adjust the Company's liability portfolio to optimize the mix of fixed and floating rate debt within an established range. The Company maintains commodity-price risk management strategies that use derivative 30 instruments to minimize significant, unanticipated earnings fluctuations caused by commodity price volatility. The Company's risk management activities, including the use of derivatives, are subject to the management, direction and control of internal Risk Management Committees. Interest Rate Risk Management KCP&L utilizes interest rate management derivatives to adjust the Company's liability portfolio to optimize the mix of fixed and floating rate debt within an established range. In the third quarter, KCP&L remarketed its 1998 Series A, B, and D EIRR bonds totaling $146.5 million to a 5-year fixed interest rate of 4.75% ending October 1, 2007. Simultaneously with the remarketing, KCP&L entered into an interest rate swap for the $146.5 million based on LIBOR to effectively create a floating interest rate obligation. The transaction is a fair value hedge with the assumption of no ineffectiveness under SFAS No. 133. The fair value of the swap is recorded on KCP&L's balance sheet as an asset with an offset to the respective debt balances and has no impact on earnings. Future changes in the fair market value of the swap will be similarly recorded on the balance sheet with no impact on earnings. At September 30, 2002, the fair value of the swap was $3.7 million. KCP&L has two interest rate swap agreements in place to fix the interest rate on $30 million of floating-rate long-term debt. These swaps do not meet the criteria to qualify for hedge accounting. The swap agreements terminate in 2003 and effectively fix the interest at a weighted-average rate of 3.88%. The fair market values of these agreements are recorded as current assets or liabilities and adjustments to interest expense. Changes in the fair market value of these instruments are recorded in the income statement. Commodity Risk Management KCP&L's risk management policy is to use derivative hedge instruments to mitigate its exposure to market price fluctuations on its projected gas generation requirements for retail and firm wholesale sales. These hedging instruments are designated as cash flow hedges. The fair market value of these instruments is recorded as current assets or current liabilities. When the gas is purchased and to the extent the hedge is effective at mitigating the impact of a change in the purchase price of gas, the amounts in other comprehensive income are reclassified to the consolidated income statement. To the extent that the hedges are not effective, the ineffective portion of the changes in fair market value are recorded directly in fuel expense. As of September 30, 2002, all of KCP&L's gas hedging instruments have expired. Strategic Energy maintains a commodity-price risk management strategy that uses forward physical energy purchases and derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity-price volatility. An option that was designated as a cash flow hedge expired on December 31, 2001. The option allowed Strategic Energy to purchase up to 270 megawatts of power at a fixed rate of $21 per mwh. The fair market value of this option and swap agreements designated as cash flow hedges at January 1, 2001, was recorded as a current asset and a cumulative effect of a change in accounting principle in comprehensive income. As a result of supplying electricity to retail customers under fixed rate contracts, Strategic Energy's policy is to match customers' demand with fixed price purchases. In certain markets where Strategic Energy operates, entering into forward fixed price contracts is cost prohibitive. By entering into swap contracts for a portion of its forecasted purchases in these markets, the future purchase price of electricity is effectively fixed under these swap contracts protecting Strategic Energy from price volatility. The swap contracts limit the unfavorable effect that price increases will have on electricity purchases. Under SFAS No. 133, the majority of the swap agreements are designated as cash flow 31 hedges resulting in the difference between the market value of energy and the hedge value being recorded as comprehensive income (loss). To the extent that the hedges are not effective, the ineffective portion of the changes in fair market value will be recorded directly in purchased power. At September 30, 2002, the accumulated comprehensive loss, net of income taxes and minority interest, reflected in Great Plains Energy's consolidated statement of capitalization reflected a $4.5 million loss related to such cash flow hedges. However, substantially all of the energy hedged with the swaps has been sold to customers through contracts at prices different than the fair market value used to value the swaps. Therefore, Strategic Energy does not anticipate incurring any of the losses represented in comprehensive income. At January 1, 2001, Strategic Energy also had a few swap agreements that did not qualify for hedge accounting. The fair market value of these swaps at January 1, 2001, was recorded as an asset or liability on the consolidated balance sheet and an adjustment to the cost of purchased power. The change in the fair market value was recorded in purchased power. As of September 30, 2002, all of these swaps have expired. KLT Gas' risk management policy is to use firm sales agreements or financial hedge instruments to mitigate its exposure to market price fluctuations on up to 85% of its daily natural gas production. These hedging instruments are designated as cash flow hedges. The fair market value of these instruments at January 1, 2001, was recorded as current assets or current liabilities, as applicable, and the cumulative effect of a change in accounting principle in comprehensive income. When the gas is sold and to the extent the hedge is effective at mitigating the impact of a change in the sales price of gas, the amounts in other comprehensive income are reclassified to the consolidated income statement. To the extent that the hedges are not effective, the ineffective portion of the changes in fair market value are recorded directly in gas revenues. KLT Gas is currently developing gas properties; therefore, no production is hedged at September 30, 2002. The amounts recorded related to the cash flow hedges in other comprehensive income (OCI) are summarized below. Consolidated KCP&L activity for the three months ended September 30, 2002, was insignificant. Great Plains Energy activity for the three months ended September 30, 2002 Increase June 30 (Decrease) in September 30 2002 OCI Reclassified 2002 (millions) Assets Other current assets $ 0.1 $ (0.3) $ 0.4 $ 0.2 Other deferred debits 0.5 (0.5) - - Liabilities and capitalization Other current liabilities (7.9) 2.7 (0.5) (5.7) Accumulated OCI 5.9 (1.6) 0.2 4.5 Deferred income taxes 4.1 (0.5) - 3.6 Other deferred credits (2.7) 0.2 (0.1) (2.6) 32 Great Plains Energy and Consolidated KCP&L activity for the three months ended September 30, 2001 Increase June 30 (Decrease) in September 30 2001 OCI Reclassified 2001 (millions) Assets Other current assets $ 6.0 $ (3.1) $ (2.9) $ - Liabilities and capitalization Other current liabilities (28.0) 8.8 4.2 (15.0) Accumulated OCI 10.8 3.3 (0.7) 13.4 Deferred income taxes 7.5 2.3 (0.4) 9.4 Other deferred credits 3.7 (11.3) (0.2) (7.8) Great Plains Energy activity year to date September 30, 2002 Increase December 31 (Decrease) in September 30 2001 OCI Reclassified 2002 (millions) Assets Other current assets $ (0.2) $ 0.1 $ 0.3 $ 0.2 Liabilities and capitalization Other current liabilities (12.7) 1.7 5.3 (5.7) Accumulated OCI 12.1 (5.0) (2.6) 4.5 Deferred income taxes 8.5 (2.9) (2.0) 3.6 Other deferred credits (7.7) 6.1 (1.0) (2.6) Consolidated KCP&L activity year to date September 30, 2002 Increase December 31 (Decrease) in September 30 2001 OCI Reclassified 2002 (millions) Assets Other current assets $ (0.2) $ 0.3 $ (0.1) $ - Liabilities and capitalization Other current liabilities (0.1) 0.1 - - Accumulated OCI 0.2 (0.2) - - Deferred income taxes 0.1 (0.2) 0.1 - Great Plains Energy and Consolidated KCP&L activity year to date September 30, 2001 Cumulative Effect to Increase January 1, (Decrease) in September 30 2001 OCI Reclassified 2001 (millions) Assets Other current assets $ 44.5 $(20.4) $(24.1) $ - Liabilities and capitalization Other current liabilities (6.8) (15.6) 7.4 (15.0) Accumulated OCI (17.4) 23.2 7.6 13.4 Deferred income taxes (12.7) 16.5 5.6 9.4 Other deferred credits (7.6) (3.7) 3.5 (7.8) 33 Reclassified to earnings for the three months ended September 30, Great Plains Energy Consolidated KCP&L 2002 2001 2002 2001 (millions) Gas revenues $ - $ (0.6) $ - $ (0.6) Purchased power expense 0.1 (0.7) - (0.7) Minority interest 0.1 0.2 - 0.2 Income taxes - 0.4 - 0.4 OCI $ 0.2 $ (0.7) $ - $ (0.7) Reclassified to earnings year to date September 30, Great Plains Energy Consolidated KCP&L 2002 2001 2002 2001 (millions) Gas revenues $ (0.2) $ (3.7) $ - $ (3.7) Fuel expense 0.1 - 0.1 - Purchased power expense (5.5) 20.4 - 20.4 Minority interest 1.0 (3.5) - (3.5) Income taxes 2.0 (5.6) (0.1) (5.6) OCI $ (2.6) $ 7.6 $ - $ 7.6 12. KCP&L JANUARY ICE STORM At the end of January 2002, the most damaging ice storm in Kansas City history caused roughly 285,000 customer outages throughout the KCP&L territory. Incremental costs incurred through September 30, 2002, related to the January ice storm were approximately $51.3 million of which $14.7 million were capital expenditures and therefore recorded to utility plant. KCP&L expensed $16.5 million ($0.16 per share) for the Kansas jurisdictional portion of the storm costs and deferred as a regulatory asset $20.1 million of the storm costs applicable to Missouri. In the second quarter of 2002, the KCC approved the stipulation and agreement that KCP&L had reached with the Commission staff and the Citizens Utility Ratepayers Board with regard to treatment of the Kansas portion of the ice storm costs. Under this stipulation and agreement, KCP&L received a rate moratorium until 2006 in exchange for KCP&L's agreement to not seek recovery of the $16.5 million expense for the Kansas jurisdictional portion of the storm costs and reduce rates by $12 - $13 million in 2003. Additionally, KCP&L agreed to determine depreciation expense of the Wolf Creek nuclear generating station using a 60 year life instead of a 40 year life effective January 2003, which results in a reduction of expense by approximately $7 - $8 million in 2003. KCP&L also agreed to file a rate case by May 15, 2006. Effective August 2002, the MPSC approved KCP&L's application for an accounting authority order related to the Missouri jurisdictional portion of the storm costs. The order allows KCP&L to defer and amortize $20.1 million, representing the Missouri impact of the storm, through January 2007. The amortization began in September 2002 and is expected to be approximately $1.5 million in 2002 and approximately $4.6 million annually for the remainder of the amortization period. 13. ASSET RETIREMENT OBLIGATIONS In 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Under the new pronouncement, an entity must recognize as a liability the fair value of legal obligations associated with the retirement of long- 34 lived assets. The Company has substantially completed the identification of its retirement obligations and is currently evaluating the effects on the Company's financial condition. Management believes that nuclear decommissioning cost is its most significant legal retirement obligation. After adoption of SFAS No. 143 in 2003, the additional obligation for nuclear decommissioning will increase liabilities, currently estimated to be less than $100 million, with offsets to net utility plant and a regulatory asset. The amount recorded to the electric plant accounts will be depreciated over the remaining life of Wolf Creek. The associated liability will be increased for the passage of time (accretion) to operating expense. Trust fund income and losses from the external decommissioning trusts would be reported as investment income or loss. KCP&L does not anticipate results of operations to be significantly affected by the adoption of SFAS No. 143 as long as KCP&L is regulated. Regulatory assets or liabilities will be recorded when SFAS No. 143 is first adopted and then yearly for the difference between decommissioning expense determined by regulation and amounts required by SFAS No. 143. 14. Subsequent Event On November 7, 2002, Great Plains Energy entered into an Agreement and Plan of Merger (Agreement) with Environmental Lighting Concepts, Inc. (ELC), Gregory J. Orman and Mark R. Schroeder (ELC Shareholders), and Innovative Energy Consultants Inc., a recently created, wholly-owned subsidiary of Great Plains Energy. Mr. Orman is Executive Vice President of Corporate Development and Strategic Planning of Great Plains Energy, and Mr. Schroeder is an employee of a Great Plains Energy subsidiary. ELC indirectly owned 5.8% of Strategic Energy, a Great Plains Energy majority-owned subsidiary that is an energy management company. As provided for in the Agreement, ELC was acquired and merged with and into Innovative Energy Consultants, whereupon the existence of ELC ceased and Innovative Energy Consultants continued as the surviving corporation and a wholly-owned subsidiary of Great Plains Energy. The merger increased Great Plains Energy's indirect ownership interest in Strategic Energy from 82.75% to 88.55%. Certain employees of Strategic Energy and other investors indirectly hold the remaining ownership interest in Strategic Energy. In exchange for their entire ownership interest in ELC, the ELC Shareholders received an aggregate amount of $15.1 million in Great Plains Energy common stock and notes issued by Great Plains Energy and Innovative Energy Consultants. Great Plains Energy issued 387,596 common shares, valued at $8 million, which were distributed to the ELC Shareholders in proportion to their ownership interests in that company. Great Plains Energy also issued a promissory note to Mr. Orman in the principal amount of approximately $4.7 million and Innovative Energy Consultants issued a promissory note to Mr. Schroeder in the principal amount of approximately $2.4 million. Both notes mature on January 1, 2003, and bear interest at 2.48% per annum. See Note 6. Related Party Transactions and Relationships, which has been updated for this subsequent event, for further discussion of this transaction. 35 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis of Financial Condition and Results of Operations that follow are a combined presentation for Great Plains Energy and KCP&L, both registrants under this filing. The discussion and analysis by management focuses on those factors that had a material effect on the financial condition and results of operations of the registrants during the periods presented. It should be read in conjunction with the accompanying Financial Statements and Notes and with the management's discussion and analysis included in the Company's 2001 annual report on Form 10-K. Great Plains Energy Incorporated Effective October 1, 2001, Great Plains Energy became the holding company of KCP&L, GPP and KLT Inc. and subsidiaries. As a diversified energy company, its primary segments of business include: o KCP&L, an integrated electric utility in the states of Missouri and Kansas, provides reliable, affordable electricity to retail customers; o Strategic Energy provides power supply coordination services in several deregulated electricity markets, including Pennsylvania, southern California, Ohio, New York, Massachusetts and Texas; and o KLT Gas acquires and develops early stage coalbed methane natural gas properties. Effective October 1, 2001, all outstanding KCP&L shares were exchanged one for one for shares of Great Plains Energy. The Great Plains Energy trading symbol "GXP" replaced the KCP&L trading symbol "KLT" on the New York Stock Exchange. During the second quarter of 2002, the Company's management revised its corporate business strategy. The goal is to become a premier diversified energy company that achieves annual growth in earnings per share in a financially disciplined manner. To achieve this goal, Great Plains Energy intends to focus on its three primary segments of business and identify synergistic energy investments by: o Developing KCP&L into an operationally excellent electric utility, o Continuing to grow Strategic Energy's business model into new markets, o Developing KLT Gas into a premier brand in the unconventional natural gas exploration market, and o Identifying synergistic energy investments that drive earnings growth while supporting the Company's core strategies. 36 Great Plains Energy Results of Operations Three Months Ended Year to Date September 30 September 30 2002 2001 2002 2001 (millions) Operating revenues $ 585.0 $ 480.9 $ 1,409.2 $ 1,107.6 Fuel (48.7) (52.5) (118.1) (124.8) Purchased power (221.1) (130.5) (545.2) (277.6) Revenues, net of fuel and purchased power 315.2 297.9 745.9 705.2 Other operating expenses (141.0) (126.3) (403.4) (395.5) Depreciation and depletion (37.7) (40.4) (112.4) (117.0) Gain on property (0.6) 0.5 (0.5) 22.2 Operating income 135.9 131.7 229.6 214.9 Loss from equity investments (0.3) (0.4) (0.9) (0.5) Non-operating income (expenses) (6.5) (20.7) (21.0) (21.3) Interest charges (22.9) (28.7) (67.2) (78.5) Income taxes (37.4) (26.3) (38.6) (25.8) Early extinguishment of debt - - - 15.9 Cumulative effect of a change in accounting principle - - (3.0) - Net income 68.8 55.6 98.9 104.7 Preferred dividends (0.3) (0.5) (1.2) (1.3) Earnings applicable to common $ 68.5 $ 55.1 $ 97.7 $ 103.4 Three months ended September 30, 2002, compared to September 30, 2001 Great Plains Energy's earnings for the three months ended, as detailed in the table below, increased $13.4 million, or $0.22 per share, compared to the same period of 2001. Three Months Ended September 30 2002 2001 2002 2001 Earnings Earnings EPS EPS (millions) KCP&L $ 63.7 $ 59.3 $ 1.03 $ 0.96 Subsidiary operations (1.4) (0.3) (0.02) (0.01) Consolidated KCP&L 62.3 59.0 1.01 0.95 Strategic Energy 6.7 10.0 0.11 0.16 KLT Gas 0.3 0.3 - - Other non-regulated operations (0.8) (14.2) (0.01) (0.22) Total $ 68.5 $ 55.1 $ 1.11 $ 0.89 KCP&L's increase in earnings for the three months ended September 30, 2002, compared to the same period of 2001, is primarily the result of warmer summer 2002 weather compared to 2001, continued load growth, lower average fuel cost per mmbtu and a significantly lower purchased power price per mwh. These factors combined to more than offset increased administrative and general expenses including pension costs and other benefit costs. Strategic Energy's earnings increased $6.0 million, excluding earnings during the three months ended September 30, 2001, of $9.3 million from the sale of power purchased from one supplier under very favorable wholesale contracts that expired at the end of 2001. The increase is due to continued growth in retail electric sales resulting from increases in customer accounts and mwh's served. This was partially offset by increased salaries and benefits and 37 an effective state income tax rate true-up for the first six months of 2002 and higher state income tax rates due to higher sales in states with higher income tax rates for the quarter. Other non-regulated operations includes, among other things, earnings from affordable housing of $3.2 million for the three months ended September 30, 2002, compared to a loss of $2.1 million for the same period of 2001. Additionally, the three months ended September 30, 2001, reflects DTI losses of $10.1 million. Year to date September 30, 2002, compared to September 30, 2001 Great Plains Energy's earnings year to date September 30, 2002, compared to 2001 increased $13.2 million, or $0.22 per share, excluding the cumulative effect of a change in accounting principle in 2002 and the early extinguishment of debt in 2001. Year to Date September 30 2002 2001 2002 2001 Earnings Earnings EPS EPS (millions) KCP&L $ 84.1 $ 79.8 $ 1.36 $ 1.28 Subsidiary operations (2.7) (3.7) (0.04) (0.06) Cumulative effect to January 1, 2002 of a change in accounting principle (3.0) - (0.05) - Consolidated KCP&L 78.4 76.1 1.27 1.22 Strategic Energy 21.8 17.3 0.35 0.28 KLT Gas (0.1) 13.6 - 0.22 Other non-regulated operations (2.4) (19.5) (0.04) (0.31) Earnings excluding extraordinary item 97.7 87.5 1.58 1.41 Early extinguishment of debt - 15.9 - 0.26 Total $ 97.7 $ 103.4 $ 1.58 $ 1.67 KCP&L earnings increased $4.3 million year to date September 30, 2002, compared to the same period of 2001. Warmer summer 2002 weather combined with the positive impact of the return to service of Hawthorn No. 5 in June 2001 and significantly lower cost per mwh of purchased power were partially offset by the impact of expensing the Kansas jurisdictional portion of the January 2002 ice storm costs and increased administrative and general expenses including pension costs and other benefit costs. Strategic Energy's earnings increased $19.0 million, excluding earnings during year to date September 30, 2001, of $14.5 million from the sale of power purchased from one supplier under very favorable wholesale contracts that expired at the end of 2001. The increase is due to continued growth in the retail markets including increases in customer accounts and mwh's served partially offset by increased salaries and benefits and higher state income tax rates. KLT Gas is currently developing gas properties following its most recent sale of property during the second quarter of 2001 which resulted in an after tax gain of $12.0 million. Other non-regulated operations includes earnings from affordable housing of $6.4 million and $5.8 million year to date September 30, 2002 and 2001, respectively. Additionally, year to date September 30, 2001, reflects DTI losses of $24.0 million, excluding the early extinguishment of debt. On December 31, 2001, DTI filed voluntary petitions for bankruptcy. As a result of DTI's filing for bankruptcy protection, and KLT Telecom's ensuing loss of control, KLT Telecom has not included in its results for the three months ended and year to date September 30, 2002, the ongoing earnings or loss incurred by DTI. The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002. In accordance with SFAS No. 142, the Company completed its initial impairment test of RSAE during the second quarter of 2002 and determined that a $3.0 million write-down of goodwill was 38 required. As a result, year to date September 30, 2002, Great Plains Energy net income reflects the $3.0 million cumulative effect to January 1, 2002, of a change in accounting principle. Ongoing annual impairment tests are required by SFAS No. 142. RSAE completed its first annual impairment test in September and no additional write-down was necessary. On February 1, 2001, DTI, an equity investment of KLT Telecom on that date, completed a tender offer for 50.4% of its outstanding senior discount notes. This transaction resulted in a $15.9 million ($0.26 per share) extraordinary gain on the early extinguishment of debt. For further discussion regarding each segment's results of operations, see its respective section below. Consolidated KCP&L The following discussion of consolidated KCP&L results of operations includes KCP&L, an integrated electric utility and HSS, an unregulated subsidiary of KCP&L. References to KCP&L, in the discussion that follows, reflect only the operations of the integrated electric utility. The discussion excludes the results of operations for GPP and KLT Inc. and subsidiaries, which were transferred to Great Plains Energy on October 1, 2001. Consolidated KCP&L Business Overview KCP&L consists of two business units - power and delivery. The power business unit has over 3,700 megawatts of generating capacity. During 2001, KCP&L entered into a $200 million, five-year construction and synthetic operating lease transaction for five combustion turbines that will add 385 megawatts of peaking capacity. During the third quarter of 2002, the lease was amended to reduce the amount financed from the previously estimated $200 million to $176 million to reflect changes in the estimated cost for the purchase, installation, assembly and construction of the five combustion turbines. Construction began in the third quarter of 2002 with the expected commercial operation of the five combustion turbines in the spring and summer 2003. The delivery business unit consists of transmission and distribution facilities that serve over 480,000 customers as of September 30, 2002. KCP&L continues to experience load growth approximating the historical average of 2.0% to 2.5% annually through increased customer usage and additional customers. Rates charged for electricity are below the national average. Under FERC Order 2000, KCP&L, as an investor-owned utility, is strongly encouraged to join a FERC approved RTO. RTOs combine regional transmission operations of utility businesses into a regional organization that schedules transmission services and monitors the energy market to ensure regional transmission reliability and non-discriminatory access. KCP&L is a member of the SPP. During the first quarter of 2002, the SPP and the MISO voted to consolidate the two organizations to create a larger Midwestern RTO, a non-profit organization that will operate in twenty states and one Canadian province. The consolidation is expected to be completed during the first quarter of 2003 and has received FERC approval. FERC has already approved an RTO proposal submitted by the MISO. During the third quarter of 2002, FERC issued a Notice of Proposed Rulemaking to Remedy Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design. The proposed rulemaking is designed to establish a single non-discriminatory open access transmission tariff with a single transmission service that is applicable to all users of the interstate transmission grid. All public utilities that own, control or operate interstate transmission facilities would be required to become an independent transmission provider, turn over the operation of their transmission facilities to an RTO that meets the definition of an independent transmission provider or contract with an entity that meets the definition of an independent transmission provider. KCP&L is in the process of evaluating the impact of the proposed rulemaking on its operations and providing 39 comments on the proposed rulemaking to FERC. Additionally, regulatory approvals would have to be received from the MPSC and the KCC prior to KCP&L's participation in an independent transmission provider. KCP&L also has a wholly-owned unregulated subsidiary, HSS, that holds investments in businesses primarily in residential services. HSS is comprised of two subsidiaries, RSAE and Worry Free Services, Inc. Consolidated KCP&L Results of Operations The following table summarizes consolidated KCP&L's comparative results of operations. For comparative purposes only, the 2001 periods presented below have been restated to exclude the results of operations for KLT Inc. and subsidiaries and GPP, which were transferred to Great Plains Energy on October 1, 2001. Therefore, the 2001 periods presented below do not agree with the 2001 periods presented in KCP&L's consolidated statements of income and should only be used in the context of the discussion and analysis that follows. Three Months Ended Year to Date September 30 September 30 2002 2001 2002 2001 (millions) Operating revenues $ 351.5 $ 339.8 $ 827.9 $ 811.6 Fuel (48.7) (52.5) (118.1) (124.8) Purchased power (15.7) (21.1) (38.9) (59.1) Revenues, net of fuel and purchased power 287.1 266.2 670.9 627.7 Other operating expenses (124.8) (108.6) (361.5) (334.8) Depreciation and depletion (37.1) (34.9) (110.9) (102.7) Gain on property (0.6) (0.1) (0.3) (1.5) Operating income 124.6 122.6 198.2 188.7 Loss from equity investments - - - (0.1) Non-operating income (expenses) (1.9) (3.6) (4.1) (4.1) Interest charges (20.5) (22.0) (61.5) (60.4) Income taxes (39.9) (37.5) (51.2) (46.7) Cumulative effect of a change in accounting principle - - (3.0) - Net income 62.3 59.5 78.4 77.4 Preferred dividends - (0.5) - (1.3) Earnings applicable to common $ 62.3 $ 59.0 $ 78.4 $ 76.1 Consolidated KCP&L's earnings increased $3.3 million for the three months ended September 30, 2002, and $2.3 million year to date September 30, 2002, compared to the same periods of 2001. For the three months ended September 30, 2002, KCP&L earnings increased $4.4 million, compared to the same period of 2001. Warmer summer 2002 weather, continued load growth, lower average fuel cost per mmbtu and a significantly lower purchased power cost per mwh combined to more than offset increased administrative and general expenses including pension costs of $4.3 million and other employee-related costs of $5.6 million. KCP&L's increased earnings were also offset by continued operating losses of HSS. Year to date September 30, 2002, KCP&L earnings increased $4.3 million, compared to the same period of 2001. The positive impact of the return to service of Hawthorn No. 5 in June 2001 and significantly lower cost per mwh of purchased power were offset by the impact of expensing the Kansas 40 jurisdictional portion of the January 2002 ice storm costs and increased administrative and general expenses including pension costs of $12.3 million and other employee-related costs of $2.5 million. The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002. In accordance with SFAS No. 142, the Company completed its initial impairment test of RSAE during the second quarter of 2002 and determined that a $3.0 million write-down of goodwill was required. As a result, year to date September 30, 2002, Great Plains Energy net income reflects the $3.0 million cumulative effect to January 1, 2002, of a change in accounting principle. Ongoing annual impairment tests are required by SFAS No. 142. RSAE completed its first annual impairment test in September and no additional write-down was necessary. Consolidated KCP&L Sales Revenues and Megawatt-hour (mwh) Sales Three Months Ended Year to Date September 30 % September 30 % 2002 2001 Change 2002 2001 Change (millions) (millions) Retail revenues Residential $ 146.1 $ 137.0 7 % $ 300.1 $ 286.1 5 % Commercial 131.9 130.2 1 % 328.6 322.1 2 % Industrial 26.0 27.4 (5)% 72.2 80.4 (10)% Other retail revenues 2.3 2.2 3 % 6.6 6.3 3 % Total retail 306.3 296.8 3 % 707.5 694.9 2 % Sales for resale revenues Bulk power sales 23.3 20.9 11 % 60.2 49.8 21 % Other sales for resale revenues 1.3 1.3 (3)% 3.0 3.3 (10)% Other revenues 3.7 4.2 (15)% 10.0 11.6 (14)% KCP&L electric revenues 334.6 323.2 3 % 780.7 759.6 3 % Subsidiary revenues 16.9 16.6 2 % 47.2 52.0 (9)% Consolidated KCP&L revenues $ 351.5 $ 339.8 3 % $ 827.9 $ 811.6 2 % Three Months Ended Year to Date September 30 % September 30 % 2002 2001 Change 2002 2001 Change (thousands) (thousands) Retail mwh sales Residential 1,821 1,686 8 % 3,970 3,812 4 % Commercial 1,991 1,920 4 % 5,273 5,185 2 % Industrial 548 532 3 % 1,496 1,614 (7)% Other retail mwh sales 20 19 6 % 61 58 7 % Total retail 4,380 4,157 5 % 10,800 10,669 1 % Sales for resale mwh Bulk power sales 1,110 924 20 % 2,903 2,051 41 % Other sales for resale 38 37 7 % 98 97 2 % KCP&L electric mwh sales 5,528 5,118 8 % 13,801 12,817 8 % Total revenues increased $11.7 million for the three months ended and $16.3 million year to date September 30, 2002, compared to the same periods of 2001. Warmer summer 2002 weather and continued load growth increased retail revenues $9.5 million for the three months ended September 30, 2002. For the year to date comparison, the increased retail revenues due to the warmer summer 2002 weather and continued load growth were partially offset by the mild weather in the first quarter of 2002 and the bankruptcy of one major industrial customer in early 2001 ($4.4 million of revenues year to date 41 September 30, 2001). Load growth consists of higher usage-per-customer and the addition of new customers. Less than 1% of revenues include an automatic fuel adjustment provision. Bulk power sales vary with system requirements, generating unit and purchased power availability, fuel costs and requirements of other electric systems. The significant increases in bulk power mwh sales were partially offset by a decline of approximately 4% in prices per bulk power mwh sold for the three months ended and 13% year to date September 30, 2002, compared to the same periods in 2001. In October 2002, the Staff of the MPSC concluded its review of the Missouri jurisdictional earnings for KCP&L and determined that the current rate levels do not warrant action at this time. In the second quarter 2002, the KCC approved the stipulation and agreement that KCP&L had reached with the Commission staff and the Citizens Utility Ratepayers Board with regard to treatment of the Kansas portion of the ice storm costs. Under this stipulation and agreement, KCP&L received a rate moratorium until 2006 in exchange for KCP&L's agreement to not seek recovery of the $16.5 million expense for the Kansas jurisdictional portion of the storm costs and reduce rates by $12 - $13 million in 2003. Additionally, KCP&L agreed to determine depreciation expense of the Wolf Creek nuclear generating station using a 60 year life instead of a 40 year life effective January 2003, which results in a reduction of expense by approximately $7 - $8 million in 2003. KCP&L also agreed to file a rate case by May 15, 2006. KCP&L Fuel and Purchased Power KCP&L fuel costs decreased $3.8 million for the three months ended and $6.7 million year to date September 30, 2002, compared to the same periods of 2001, even though generation increased 7% and 10%, respectively. Lower fuel cost per mmBtu due to additional coal and less natural gas and oil in the generation fuel mix was the primary reason for the decline in fuel costs. The return to service of Hawthorn No. 5, a low cost coal-fired unit, in June 2001 contributed to the change in generation fuel mix. Significantly lower natural gas prices and lower cost of uranium in the 2002 periods also contributed to the lower fuel cost. Purchased power expenses decreased $5.4 million for the three months ended and $20.2 million year to date September 30, 2002, compared to the same periods of 2001. Cost per mwh purchased decreased approximately 40% in 2002 compared to 2001 due to regional energy availability and a less volatile energy market. The significantly lower cost per mwh purchased more than offset the effect on purchased power expense of a 5% increase in the quantity of power purchased during the three months ended. Also contributing to the year to date decrease was a 9% decrease in the quantity of power purchased due to the availability of KCP&L generating units. The fuel cost per mmBtu and the purchased power cost per mwh have a significant impact on the results of operations for KCP&L. Generation fuel mix can change the fuel cost per mmBtu substantially. Nuclear fuel costs per mmBtu remain substantially less than the mmBtu price of coal. Replacement power costs for planned Wolf Creek outages are accrued evenly over the unit's operating cycle, as discussed below. KCP&L expects its cost of nuclear fuel to remain fairly constant through the year 2003. Coal has a significantly lower cost per mmBtu than natural gas and oil. KCP&L's procurement strategies continue to provide delivered coal costs below the regional average. The cost per mwh for purchased power is still significantly higher than the fuel cost per mwh of coal and nuclear generation. KCP&L continually evaluates its system requirements, the availability of generating units, availability and cost of fuel supply, availability and cost of purchased power and the requirements of other electric systems to provide reliable power economically. Montrose Unit No. 3, a 176-mw unit, returned to service at the end of the third quarter 2002 following a forced outage due to damage to the turbine blades in the combined high and intermediate pressure 42 section of the turbine. Additional maintenance including replacing blades in the low pressure section of the turbine to mitigate a long outage in the next few years and maintenance originally scheduled for October was also completed during the three-month outage. The unanticipated outage costs were approximately $4.3 million of capital expenditures, $0.9 million in additional operations and maintenance expense and $4.0 million in net fuel and purchased power expense in 2002. These amounts do not reflect the $1.0 million expected to be recovered from insurance. Consolidated KCP&L Other Operating Expenses KCP&L's other operating expenses increased $15.8 million for the three months ended September 30, 2002, compared to the same period of 2001 primarily due to increased administrative and general expenses including a $4.3 million increase in pension expense, a $5.6 million increase in other employee-related costs, and increased legal and injuries and damages expenses. KCP&L's other operating expenses increased $36.2 million year to date September 30, 2002, compared to the same period of 2001 primarily due to expensing $16.5 million for the Kansas jurisdictional portion of the January ice storm and increased administrative and general expenses including a $12.3 million increase in pension expense, a $2.5 million increase in other employee-related costs, and increased legal and injuries and damages expenses. The increased pension expense for both periods is mostly due to a significant decline in the market value of plan assets at the end of the plan's year, September 30, 2001. HSS's other expenses decreased $9.5 million year to date September 30, 2002, compared to the same periods of 2001 due to the closure of some locations and the implementation of cost saving strategies at RSAE. Consolidated KCP&L Depreciation Consolidated KCP&L's depreciation expense increased $2.2 million for the three months ended and $8.2 million year to date September 30, 2002, compared to the same periods of 2001, primarily due to increased capital additions relating to Hawthorn No. 5, which was returned to service in 2001, and the purchase of the previously leased Hawthorn No. 6 turbine at the end of the third quarter of 2001. Consolidated KCP&L Interest Charges Consolidated KCP&L's interest charges decreased $1.5 million for the three months ended and increased $1.1 million year to date September 30, 2002, compared to the same periods of 2001. A portion of the proceeds from long-term debt issuances have been used to pay down short-term debt. Long-term debt interest expense KCP&L's long-term debt interest expense increased $1.7 million for the three months ended and $1.0 million year to date September 30, 2002, compared to 2001, primarily due to higher average levels of long-term debt outstanding. Year to date, lower average rates on variable rate debt partially offset the higher average levels of long-term debt. The higher average levels of long-term debt primarily reflect the issuances of $375.0 million of unsecured, fixed-rate senior notes partially offset by $257.0 million of scheduled debt repayments since September 30, 2001. Short-term debt interest expense KCP&L's short-term debt interest expense decreased $2.1 million for the three months ended and $6.6 million year to date September 30, 2002, compared to the same periods of 2001. Average interest rates are down more than 50% and average levels of outstanding commercial paper are down more than 70% for the 2002 periods compared to the same periods of 2001. KCP&L had $29.6 million of commercial paper outstanding at September 30, 2002, and $193.2 million of commercial paper outstanding at September 30, 2001. 43 Capitalized interest Allowance for borrowed funds used during construction decreased $7.7 million year to date September 30, 2002, compared to the same periods of 2001 because of decreased construction work in progress primarily due to the return to service of Hawthorn No. 5 in 2001. Wolf Creek Wolf Creek, a nuclear generating station, represents about 15% of KCP&L's generating capacity. The plant's operating performance has remained strong over the last three years, contributing an average of 27% of KCP&L's annual mwh generation while operating at an average capacity of 92%. Wolf Creek has the lowest fuel cost per mmBtu of any of KCP&L's generating units. KCP&L accrues the incremental operating, maintenance and replacement power costs for planned outages evenly over the unit's operating cycle, normally 18 months. As actual outage expenses are incurred, the refueling liability and related deferred tax asset are reduced. Wolf Creek returned to service on April 27, 2002, following a 35-day refueling and maintenance outage that began on March 23, 2002. During the outage, a complete inspection of the reactor vessel head indicated no corrosion or other problems of the type experienced at the Davis-Besse nuclear plant in Ohio. The next outage is scheduled for the fall of 2003. Ownership and operation of a nuclear generating unit exposes KCP&L to risks regarding decommissioning costs at the end of the unit's life and to potential retrospective assessments and property losses in excess of insurance coverage. Strategic Energy Strategic Energy Business Overview Strategic Energy provides power supply coordination services for a management fee by purchasing electricity and reselling it to retail customers in several deregulated electricity markets, including Pennsylvania, California, Ohio, New York, Massachusetts and Texas. As part of its process of managing electricity portfolios for retail customers, Strategic Energy occasionally sells unsold power back into the wholesale market. Strategic Energy also provides strategic planning and consulting services in the natural gas and electricity markets. During the first three quarters of 2002, power supply coordination services provided to retail customers accounted for substantially all of Strategic Energy's operating income. In the first quarter of 2001, KLT Energy Services exchanged its ownership of $4.7 million of preferred stock in another energy service company for additional ownership in Strategic Energy. This transaction increased KLT Energy Services' ownership of Strategic Energy from 72% to 83%. As of September 30, 2002, KLT Energy Services has invested $17.0 million in cash and securities to acquire its 83% ownership position. In 2000, Strategic Energy also provided retail gas services to commercial, institutional and small manufacturing customers. Strategic Energy elected to exit this business in the first quarter of 2001 to focus on power supply coordination services and had phased out of retail gas services at the end of 2001. Strategic Energy made this decision after evaluating the organizational demands, growth prospects and relative levels of profitability of both businesses. As the marketplace and Strategic Energy's business evolves, Strategic Energy may elect to re-enter the market for retail gas services. Strategic Energy currently provides power supply coordination services on behalf of approximately 29,100 commercial, institutional and small manufacturing accounts. Strategic Energy's customer base is very diverse. Customers include numerous Fortune 500 companies, school districts, and governmental entities. Based on current signed contracts and expected usage, Strategic Energy 44 forecasts a peak load of 2,560 megawatts in 2002. The largest concentration of the forecasted load, 959 megawatts, is in California. The largest customer of the forecasted peak load, 199 megawatts, is a retail grocery chain. Strategic Energy enters into full-requirements contracts (usually one to five years in duration) with customers to supply electricity and manage their energy needs. In return, Strategic Energy receives an ongoing management fee which is included in the contracted price for the electricity. Based on current signed contracts and expected usage, Strategic Energy anticipates future mwh sales of 3.3 million for the remainder of 2002 and 10.4 million, 6.9 million, 4.5 million and 1.2 million for the years 2003 through 2006, respectively. To supply its retail contracts, Strategic Energy purchases blocks of electricity under forward contracts to purchase fixed quantities at fixed prices from power suppliers based on projected peak demand under one to five year contracts. When Strategic Energy has excess supply in the on-peak period, the excess is sold in the wholesale market. The savings generated by the sale of excess supply of on-peak electricity is used to reduce the cost of providing energy to Strategic Energy's retail customers and is recorded as a reduction of purchased power. At September 30, 2002, Strategic Energy had entered into forward contracts with multiple suppliers. Should the supplier default and not deliver, Strategic Energy would be exposed to market fluctuations, and possible losses to the extent that the then current market price was higher than the fixed forward contract price. Strategic Energy monitors this risk by evaluating the credit quality and performance of its suppliers on a routine basis as part of its risk management policy and practices. At September 30, 2002, Strategic Energy's five largest suppliers under forward supply contracts represented 77% of the total future committed purchases. Based on current wholesale electricity market prices, management believes that replacement power could be obtained without a significant impact on Strategic Energy's results of operations in the event of a default by a major supplier. Strategic Energy maintains a commodity-price risk management strategy that uses forward physical energy purchases and derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity-price volatility. As a result of supplying electricity to retail customers under fixed rate contracts, Strategic Energy's policy is to match customers' demand with fixed price purchases. In certain markets where Strategic Energy operates, entering into forward fixed price contracts is cost prohibitive. By entering into swap contracts for a portion of its forecasted purchases in these markets, the future purchase price of electricity is effectively fixed under these swap contracts. The swap contracts limit the unfavorable effect that price increases will have on electricity purchases. Under SFAS No. 133, the majority of the swap agreements are designated as cash flow hedges resulting in the difference between the market value of energy and the hedge value being recorded as comprehensive income (loss). At September 30, 2002, the accumulated comprehensive loss, net of income taxes and minority interest, reflected in Great Plains Energy's consolidated statement of capitalization included a $4.5 million loss related to such cash flow hedges. However, substantially all of the energy hedged with the swaps has been sold to customers through contracts at prices different than the fair market value used to value the swaps. Therefore, Strategic Energy does not anticipate incurring the losses represented in comprehensive income. During the third quarter of 2002, FERC issued a Notice of Proposed Rulemaking to Remedy Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design. The proposed rulemaking is designed to establish a single non-discriminatory open access transmission tariff with a single transmission service that is applicable to all users of the interstate transmission grid. All public utilities that own, control or operate interstate transmission facilities would be required to become an independent transmission provider, turn over the operation of their transmission facilities to an RTO that meets the definition of an independent transmission provider or contract with an entity that meets the definition of an independent transmission provider. Strategic 45 Energy is in the process of evaluating the impact of the proposed rulemaking on its operations and providing comments on the proposed rulemaking to FERC. Strategic Energy Results of Operations The following table summarizes Strategic Energy's comparative results of operations. Three Months Ended Year to Date September 30 September 30 2002 2001 2002 2001 (millions) Operating revenues $ 233.1 $ 137.0 $ 580.7 $ 283.0 Purchased power (205.4) (109.4) (506.3) (218.5) Revenues, net of purchased power 27.7 27.6 74.4 64.5 Other operating expenses (10.8) (6.7) (26.0) (29.8) Depreciation (0.2) (0.1) (0.6) (0.2) Operating income 16.7 20.8 47.8 34.5 Non-operating income (expenses) (2.7) (3.7) (7.9) (4.9) Interest charges (0.1) - (0.3) (0.1) Income taxes (7.2) (7.1) (17.8) (12.2) Net income $ 6.7 $ 10.0 $ 21.8 $ 17.3 Strategic Energy's net income increased $6.0 million for the three months ended and $19.0 million year to date September 30, 2002, compared to the same periods of 2001, excluding earnings during the three months ended and year to date September 30, 2001, of $9.3 million and $14.5 million, respectively, resulting from the sale of power purchased from one supplier under wholesale contracts that expired at the end of 2001. The increased net income for the three months ended and year to date is primarily due to continued growth in retail electric sales from the expansion into new markets and continued sales efforts, partially offset by increased labor and benefits as well as other general and administrative expenses. Strategic Energy Operating Revenues Operating revenues from Strategic Energy increased $96.1 million for the three months ended and $297.7 million year to date September 30, 2002, compared to the same periods of 2001. The following table reflects the operating revenues of Strategic Energy for the three months ended and year to date September 30, 2002 and 2001. Three Months Ended Year to Date September 30 % September 30 % 2002 2001 Change 2002 2001 Change (millions) (millions) Electric - Retail $ 225.1 $ 101.6 122 % $ 558.2 $ 194.8 187 % Electric - Wholesale 7.7 35.3 (78)% 21.6 72.6 (70)% Gas and other 0.3 0.1 200 % 0.9 15.6 (94)% Total Operating Revenues $ 233.1 $ 137.0 70 % $ 580.7 $ 283.0 105 % Strategic Energy currently serves approximately 29,100 commercial and small manufacturing accounts, compared to about 15,000 accounts at September 30, 2001. Strategic Energy added approximately 1,600 accounts during the third quarter of 2002 for a total of approximately 9,600 accounts added since the beginning of 2002. 46 Retail electric revenues increased $123.5 million for the three months ended September 30, 2002, compared to the same period of 2001, primarily due to an increase in retail mwh sales, partially offset by a decrease in average retail revenues per mwh. Retail mwh's sold increased 155% to 3,386,750 for the three months ended September 30, 2002, compared to the same period in 2001. Several factors contributed to the decrease in the average retail revenues per mwh, including, the mix in the underlying price of the commodity, the nature and type of products offered and the markets participated in. Retail electric revenues increased $363.4 million year to date September 30, 2002, compared to the same period of 2001, primarily due to a 194% increase in retail mwh sales to 8,566,975. Wholesale electric revenues decreased $27.6 million for the three months ended and $51.0 million year to date September 30, 2002, compared to the same periods of 2001. The decline in wholesale electric revenues was primarily due to large block sales of power during 2001 purchased from one supplier under very favorable wholesale contracts that expired at the end of 2001. Strategic Energy provides periodic billing credits to its customers resulting from favorable experience in its power supply coordination efforts. The amounts credited back to the customer are treated as a reduction of electricity energy sales when determined to be payable. During the third quarter of 2001, Strategic Energy began to phase out its natural gas retail supply service, which was completely phased out during the fourth quarter of 2001. This is the primary reason for the decrease in gas and other sales revenues for year to date September 30, 2002, compared to the same period of 2001. Strategic Energy Purchased Power Purchased power increased $96.0 million for the three months ended and $287.8 million year to date September 30, 2002, compared to the same periods of 2001, primarily due to the increase in electric sales as discussed above, partially offset by a decrease in the average cost per mwh purchased for retail sales. Purchased power expense as a percentage of electric sales revenue increased for both the three months ended and year to date September 30, 2002, compared to the same periods of 2001, primarily due to purchases of power from one supplier during 2001 under very favorable wholesale contracts that expired at the end of 2001. Strategic Energy Other Operating Expenses Strategic Energy has experienced increased labor and benefits as well as other general and administrative expenses during 2002, following the growth in retail electric sales, expansion into new markets and increased fuel management and consulting activities. As a result, other operating expenses increased $4.1 million for the three months ended September 30, 2002, compared to the same period of 2001. Other operating expenses year to date September 30, 2001, include the cost of commercial gas sales of about $14.9 million, from Strategic Energy's natural gas retail supply service which was phased out by the end of 2001. As a result, year to date September 30, 2002, other operating expenses decreased $3.8 million, compared to the same period of 2001. Other operating expenses (excluding the cost of commercial gas sales) increased $11.1 million year to date September 30, 2002, compared to the same period of 2001, primarily due to increased labor and benefits as well as other general and administrative expenses during 2002, as discussed above. Strategic Energy Non-operating Income (Expenses) Non-operating income (expenses) includes non-operating income less minority interest expense and non-operating expenses. For the three months ended September 30, 2002, compared to the same period of 2001, non-operating income (expenses) decreased $1.0 million primarily due to a decrease in minority interest expense, which represents the share of Strategic Energy's net income not attributable to KLT Energy Services' indirect ownership interest in Strategic Energy. Non-operating income (expenses) increased $3.0 million year to date September 30, 2002, compared to the same period of 47 2001, primarily due to a gain of $1.4 million recognized on the sale of gas contracts during the second quarter of 2001 and an increase year to date September 30, 2002, of $1.9 million in minority interest expense. KLT Gas KLT Gas Business Overview KLT Gas' business strategy is to acquire and develop early stage coalbed methane properties. KLT Gas believes that coalbed methane production provides an economically attractive alternative source of supply to meet the growing demand for natural gas in North America. KLT Gas has built a knowledge base in coalbed methane production and reserves evaluation. Therefore, KLT Gas focuses on coalbed methane - a niche in the natural gas industry where it believes its expertise provides a competitive advantage. Because it has a longer, predictable reserve life and lower development cost, management believes coalbed methane is inherently lower risk than conventional gas exploration. Although gas prices have been volatile recently, KLT Gas continues to believe that the long-term future price scenarios for natural gas appear strong. Environmental concerns and the increased demand for natural gas for new electric generating capacity are contributing to this projected growth in demand. KLT Gas' properties are located in Colorado, Texas, Wyoming, Kansas, and Nebraska. These leased properties cover approximately 254,000 undeveloped acres. The development of this acreage is in accordance with KLT Gas' exploration plan and capital budget. KLT Gas has revised its capital expenditure estimates, based on changes in market conditions to approximately $4 million for the remainder of 2002 and $30 million, $40 million and $34 million for the years 2003 through 2005, respectively. The timing of the development may vary from current plans based upon obtaining the required environmental and regulatory approvals and permits and future changes in market conditions. During the third quarter of 2002, KLT Gas began the pilot phase of a new prospect in Colorado and continued pilot development at a Powder River Basin project and two additional projects in the Rocky Mountain region. KLT Gas continued production at its South Texas property. KLT Gas Results of Operations The following table summarizes KLT Gas' comparative results of operations. Three Months Ended Year to Date September 30 September 30 2002 2001 2002 2001 (millions) Operating revenues $ 0.5 $ (0.5) $ 0.6 $ 1.4 Other operating expenses (2.4) (2.3) (7.4) (8.3) Depreciation and depletion (0.3) (0.4) (0.7) (1.4) Gain (loss) on property - 0.6 (0.2) 21.5 Operating income (loss) (2.2) (2.6) (7.7) 13.2 Income from equity investments - - - 1.0 Non-operating income - 0.2 0.3 0.2 Interest charges (0.1) - (0.1) - Income taxes 2.6 2.7 7.4 (0.8) Net income (loss) $ 0.3 $ 0.3 $ (0.1) $ 13.6 KLT Gas is currently developing gas properties following its most recent sale of property during the second quarter of 2001. Year to date September 30, 2001, net income included KLT Gas' second 48 quarter 2001 Patrick KLT Gas, LLC, sale which resulted in a $20.1 million before tax gain ($12.0 million after tax). KLT Gas Operating Revenues Operating revenues increased $1.0 million for the three months ended September 30, 2002, compared to the same period of 2001, primarily due to the effect of gas hedging activities during the third quarter of 2001. Operating revenues decreased $0.8 million year to date September 30, 2002, compared to the same period of 2001, primarily due to declining production at KLT Gas' South Texas property during 2002, partially offset by the effect of gas hedging activities during 2001. KLT Gas Income Taxes KLT Gas recorded tax credits related to its investment in natural gas properties of $1.3 million and $4.1 million for the three months ended and year to date September 30, 2002, respectively, compared to $1.7 million and $5.1 million for the three months ended and year to date September 30, 2001, respectively. The law that allows these credits will expire at the end of 2002 unless extended by legislation. Other Non Regulated Activities Investments in Affordable Housing Limited Partnerships - KLT Investments At September 30, 2002, KLT Investments had $69.6 million in affordable housing limited partnerships. About 66% of these investments were recorded at cost; the equity method was used for the remainder. Tax expense is reduced in the year tax credits are generated. The investments generate future cash flows from tax credits and tax losses of the partnerships. The investments also generate cash flows from the sales of the properties. For most investments, tax credits are received over ten years. KLT Investments projects tax credits to run through 2008. A change in accounting principle relating to investments made after May 19, 1995, requires the use of the equity method when a company owns more than 5% in a limited partnership investment. Of the investments recorded at cost, $44.2 million exceed this 5% level but were made before May 19, 1995. KLT Investments' management does not anticipate making additional investments in affordable housing limited partnerships at this time. On a quarterly basis, KLT Investments compares the cost of those properties accounted for by the cost method to the total of projected residual value of the properties and remaining tax credits to be received. Estimated residual values are based on studies performed by an independent firm. Based on the latest comparison, KLT Investments reduced its investments in affordable housing limited partnerships by $1.8 million in the three months ended September 30, 2002, bringing the year to date reductions to $8.9 million. KLT Investments estimates that additional reductions in affordable housing investments, primarily as a result of ongoing utilization of tax credits, will be minimal for the remainder of 2002. Projected annual reductions of the carrying value for the years 2003 through 2006 total $14 million, $6 million, $7 million and $6 million, respectively. Even after these reductions, earnings from affordable housing are expected to be positive for the next five years. These projections are based on the latest information available but the ultimate amount and timing of actual reductions made could be significantly different from the above estimates. KLT Investments accrued tax credits related to its investments in affordable housing limited partnerships of $4.7 million and $14.3 million for the three months ended and year to date September 30, 2002, respectively, compared to $4.8 million and $14.4 million for the three months ended and year to date September 30, 2001, respectively. 49 DTI Bankruptcy Update On December 31, 2001, a subsidiary of KLT Telecom, DTI filed voluntary petitions for bankruptcy. DTI's reorganization under Chapter 11 of the U.S. Bankruptcy Code continues in process. Timing of completion of the bankruptcy process has yet to be determined. During the first quarter of 2002, the bankruptcy court approved $5 million DIP financing to be provided by KLT Telecom. As of September 30, 2002, none of the DIP financing has been borrowed by DTI. As a result of DTI's filing for bankruptcy protection and KLT Telecom's ensuing loss of control, KLT Telecom has not included in its results for the three months ended and year to date September 30, 2002, the ongoing earnings or loss incurred by DTI. KLT Telecom's results for the three months ended September 30, 2001, reflected DTI losses of $10.1 million and its results year to date September 30, 2001, reflected DTI losses of $24.0 million, excluding the early extinguishment of debt. Other Consolidated Discussion Significant Balance Sheet Changes (September 30, 2002 compared to December 31, 2001) o Great Plains Energy's receivables increased $81.9 million primarily due to a $62.2 million increase in Strategic Energy's receivables as a result of the strong growth in its power supply coordination services and a $30.1 million increase in consolidated KCP&L's receivables. Consolidated KCP&L's receivables increased primarily due to a $25.5 million increase in KCP&L's receivables resulting from the seasonal nature of the utility business. o Great Plains Energy's affordable housing limited partnerships decreased $11.5 million primarily due to a reduction in the valuation of the properties held by KLT Investments, Inc. o Great Plains Energy's and consolidated KCP&L's regulatory assets increased $15.3 million primarily due to deferral of $20.1 million of the January ice storm costs applicable to KCP&L's Missouri customers partially offset by scheduled amortization of the assets. o Great Plains Energy's notes payable increased $21.2 million due to increased borrowings by Great Plains Energy of $18.0 million on its short-term credit facility for the KCP&L equity infusion and general corporate purposes and a $3.2 million increase in consolidated KCP&L's notes payable. Consolidated KCP&L's notes payable increased due to additional borrowing by RSAE on its short-term credit facility for general corporate purposes. o Great Plains Energy's and consolidated KCP&L's commercial paper decreased $32.4 million primarily due to KCP&L paying down commercial paper with cash flow from operations. o Great Plains Energy's current maturities of long-term debt decreased $209.4 million primarily due to a $207.1 million decrease in consolidated KCP&L's current maturities of long-term debt. Consolidated KCP&L's decrease is primarily due to refinancing $200.0 million of maturing KCP&L medium-term notes with the issuance of KCP&L unsecured senior notes and a $27.0 million decrease due to KCP&L retiring medium-term notes partially offset by a $20.0 million increase in the current portion of KCP&L's medium-term notes. o Great Plains Energy's and consolidated KCP&L's EIRR bonds classified as current decreased $146.5 million due to the remarketing of the series 1998 A, B and D bonds for a five-year period ending October 1, 2007. o Great Plains Energy's accounts payable decreased $3.0 million primarily due to a $47.5 million increase in Strategic Energy's accounts payable as a result of the strong growth in its power supply coordination services, mostly offset by a $44.4 million decrease in consolidated KCP&L's accounts payable and a $5.8 million decrease in KLT Gas' accounts payable. Consolidated KCP&L's accounts payable decreased primarily due to the timing of KCP&L's cash payments. o Great Plains Energy's combined accrued taxes and current income tax increased $57.8 million to a liability of $41.1 million primarily due to a $62.8 million increase in consolidated KCP&L's accrued income tax. Consolidated KCP&L's accrued income tax increase primarily due to a 50 $41.8 million increase in accrued income tax and a $22.5 million increase in property taxes due to the timing of tax payments. Capital Requirements and Liquidity Great Plains Energy operates through its subsidiaries and has no material assets other than the stock of its subsidiaries. Great Plains Energy's ability to make payments on its debt securities and its ability to pay dividends is dependent on its receipt of dividends from its subsidiaries or proceeds from the sale of its securities. Great Plains Energy's liquid resources at September 30, 2002, included cash flows from operations of subsidiaries and $209.4 million of unused bank lines of credit. The unused lines consisted of $96.4 million from KCP&L's short-term bank lines of credit, $30.0 million from Strategic Energy's bank line of credit, and $83.0 million from Great Plains Energy's revolving credit facilities. During the first quarter of 2002, Great Plains Energy terminated its $129 million bridge revolving credit facility and replaced it with a $205 million 364-day revolving credit facility syndicated with a group of banks. The revolving credit facility contains a Material Adverse Change (MAC) clause that requires Great Plains Energy to represent, prior to receiving any funding, that no MAC has occurred. Great Plains Energy's available liquidity under this facility is not impacted by a decline in credit ratings unless the downgrade occurs in the context of a merger, consolidation or sale. During the second quarter of 2002, Great Plains Energy entered into a $20 million 364-day revolving credit facility with a bank. The revolving credit facility does not contain a MAC clause. Great Plains Energy's available liquidity under this facility is not impacted by a decline in credit ratings unless the downgrade occurs in the context of a merger, consolidation or sale. During the third quarter of 2002, Strategic Energy increased its bank line of credit to $30 million from $10 million. The line of credit contains a MAC clause. This agreement requires Strategic Energy to represent, prior to receiving any funding, that no MAC has occurred. KCP&L's primary sources of liquidity are cash flows from operations and bilateral credit lines totaling $126.0 million with six banks (as of September 30, 2002). KCP&L uses these lines to provide support for its issuance of commercial paper, $29.6 million of which was outstanding at September 30, 2002. During October 2002, KCP&L repaid the $29.6 million. These bank facilities are each for a 364-day term and mature at various times throughout the year. KCP&L has MAC clauses in two agreements covering $50.0 million of available bilateral credit lines. These two agreements require KCP&L to represent, prior to receiving any funding, that no MAC has occurred. KCP&L's available liquidity under these facilities is not impacted by a decline in credit ratings unless the downgrade occurs in the context of a merger, consolidation or sale. Great Plains Energy has agreements with KLT Investments Inc., a wholly owned subsidiary of KLT Inc., associated with notes KLT Investments Inc. issued to acquire its affordable housing investments. Prior to forming Great Plains Energy, KCP&L had these agreements. Great Plains Energy agreed not to take certain actions including, but not limited to, merging, dissolving or causing the dissolution of KLT Investments Inc., or withdrawing amounts from KLT Investments Inc. if the withdrawals would result in KLT Investments Inc. to not be in compliance with minimum net worth and cash balance requirements. The amendment also gives KLT Investments Inc.'s lenders the right to have KLT Investments Inc. repurchase the notes if Great Plains Energy's senior debt rating falls below investment grade, or if Great Plains Energy ceases to own at least 80% of KCP&L's stock. At September 30, 2002, KLT Investments Inc. had $20.3 million in outstanding notes, including current maturities. Pursuant to agreements with the MPSC and the KCC, KCP&L maintains its common equity at not less 51 than 35 percent of total capitalization. Additionally, Great Plains Energy maintains its consolidated common equity at no less than 30 percent of total consolidated capitalization. Great Plains Energy's consolidated statements of cash flows include consolidated KCP&L, KLT Inc. and GPP. KCP&L's consolidated statements of cash flows include its wholly owned subsidiary HSS. In addition, KCP&L's consolidated statements of cash flows include KLT Inc. and GPP for all the periods prior to the October 1, 2001 formation of the holding company. The presentation of the prior year statement of cash flows for Great Plains Energy is provided for comparative purposes and is identical to the statement of cash flows for consolidated KCP&L, prior to the formation of the holding company. Great Plains Energy and consolidated KCP&L generated positive cash flows from operating activities year to date September 30, 2002. The increase for Great Plains Energy and consolidated KCP&L over the same period of 2001 is attributable to changes in working capital detailed in Note 3 to the consolidated financial statements. The individual components of working capital vary with normal business cycles and operations. Also, the timing of the Wolf Creek outage affects the refueling outage accrual, deferred income taxes and amortization of nuclear fuel. Cash used for investing activities varies with the timing of utility capital expenditures and purchases of investments and nonutility property. Investing activities are offset by the proceeds from the sale of properties and insurance recoveries. Year to date September 30, 2002, utility capital expenditures decreased $55.0 million and allowance for borrowed funds used during construction decreased $7.7 million, compared to 2001, primarily due to the 2001 completion of the rebuild of Hawthorn No. 5. The decrease was partially offset by $14.7 million of capital expenditures as a result of the January 2002 ice storm. Cash used for purchases of investments and nonutility property year to date September 30, 2002, compared to the same period of 2001, decreased primarily reflecting KLT Telecom's 2001 investments in DTI and DTI's 2001 purchases of telecommunications property. Cash from Great Plains Energy and consolidated KCP&L financing activities decreased year to date September 30, 2002, compared to the same period of 2001, primarily because of the net changes in short-term borrowings. Additionally, long-term debt issuances, net of repayments decreased $49.5 million for Great Plains Energy and $38.7 million for consolidated KCP&L. These decreases reflect decreased investing activities in utility capital expenditures, nonutility property and investments discussed above. KCP&L expects to meet day-to-day operating requirements including interest payments, construction requirements (excluding new generating capacity) and dividends with internally-generated funds. However, it might not be able to meet these requirements with internally-generated funds because of the effect of inflation on operating expenses, the level of mwh sales, regulatory actions, compliance with future environmental regulations and the availability of generating units. The funds needed to retire the $394.8 million of Great Plains Energy's maturing long-term debt through the year 2006, which includes $375.5 million of consolidated KCP&L's maturing long-term debt, are expected to be provided from operations, the issuance of long and short-term debt and/or the issuance of equity or equity-linked instruments. In addition, the Company may issue debt, equity and/or equity-linked instruments to finance growth or take advantage of new opportunities. In March 2002, KCP&L issued $225 million of 6.0% unsecured senior notes, maturing in 2007, through a private placement. The proceeds from the issuance were primarily used to refinance maturing unsecured medium-term notes. KCP&L, pursuant to its obligations under a registration rights agreement entered into in connection with the private placement, filed an S-4 registration statement offering to exchange up to $225 million of 6.0% unsecured senior notes, maturing in 2007, registered under the Securities Act for the $225 million privately placed notes. The registration statement became effective during the third quarter. All of the privately place notes were exchanged. 52 Great Plains Energy filed an S-3 registration statement for the issuance of an aggregate amount up to $300 million of any combination of senior debt securities, subordinated debt securities, trust preferred securities, convertible securities, or common stock. The registration statement became effective in November 2002. Great Plains Energy expects to issue additional common equity. However, the timing and amount of this transaction are dependent on a number of factors, including overall and sector-specific equity market conditions. KCP&L maintains defined benefit pension plans. Under the terms of its pension plans, KCP&L reserves the right to amend or terminate the plans and, from time to time benefits have changed. Our policy is to fund amounts on an actuarial basis to provide assets sufficient to meet benefits to be paid to plan participants consistent with the funding requirements of ERISA. No contributions to the plans were necessary in 2002 or 2001. Due to sharp declines in the debt and equity markets since the third quarter of 2000, the value of assets held in the trusts to satisfy the obligations of pension plans has decreased significantly. As a result, under minimum funding requirements of ERISA, we may be required to fund additional amounts to the plan trusts in future years. KCP&L will be required to fund approximately $7 million in 2003 based on funding requirements for the 2001-2002 plan year. Participants in the plan may request a lump-sum cash payment upon the termination of their employment, which may result in increased cash requirements from pension plan assets. KCP&L may be required to accelerate future funding to the pension plans as a result of these increased cash requirements. Supplemental Capital Requirements and Liquidity Information Update Great Plains Energy's other long-term contractual cash obligations, net, have increased approximately 35% since December 31, 2001. The increase is primarily for new Strategic Energy purchased power contracts in the years 2003 through 2006 supporting the growth in their power supply coordination services. As part of normal business, Great Plains Energy and certain of its subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. Such agreements include, for example, guarantees, stand-by letters of credit and surety bonds. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries' intended business purposes. FASB issued an exposure draft of a proposed interpretation, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, during the second quarter of 2002. The final interpretation is expected to be issued in the fourth quarter of 2002 and take effect beginning January 1, 2003. For guarantees issued after December 31, 2002, the interpretation would require the Company to record a liability for the fair value of the obligation it has undertaken in issuing the guarantees. Additionally, specific disclosures about obligations under guarantees would be required. Until the final interpretation is issued, the Company cannot complete the quantification of the effects of the interpretation on the Company's financial condition and results of operation. The Company's guarantees in total are $257.7 million at September 30, 2002, relatively unchanged from December 31, 2001. However, year to date 2002, approximately $142.4 million of KLT Inc.'s guarantees related to Strategic Energy have been replaced by Great Plains Energy guarantees. There was also an increase to $25 million from $22 million at December 31, 2001, in RSAE's line of credit with 53 a commercial bank, which Great Plains Energy supports through an agreement that ensures adequate capital to operate. Environmental Matters The Company's operations comply with federal, state and local environmental laws and regulations. The generation and transmission of electricity produces and requires disposal of certain products and by-products, including PCBs, asbestos and other hazardous materials. The Superfund law imposes strict joint and several liability for those who generate, transport or deposit hazardous waste. In addition, the current owner of contaminated property, as well as prior owners since the time of contamination, may be liable for cleanup costs. Environmental audits are conducted to detect contamination and ensure compliance with governmental regulations. However, compliance programs need to meet new and future environmental laws, as well as regulations governing water and air quality, including carbon dioxide emissions, nitrogen oxide emissions, hazardous waste handling and disposal, toxic substances and the effects of electromagnetic fields. Therefore, compliance programs could require substantial changes to operations or facilities (see Note 7 to the consolidated financial statements). Critical Accounting Policies Update KCP&L is regulated and follows SFAS No. 71, "Accounting for Certain Types of Regulation", which applies to regulated entities with rates that are designed to recover the costs of providing service. Accordingly, KCP&L defers on the balance sheet items when allowed by a commission's rate order or when it is probable, based on regulatory past practices, that future rates will recover the amortization of the deferred costs. If SFAS No. 71 were not applicable, regulatory assets would be written off. At September 30, 2002, KCP&L had $139.7 million of unamortized regulatory assets including storm costs discussed below. Effective August 2002, the MPSC approved KCP&L's application for an accounting authority order related to the Missouri jurisdictional portion of the storm costs. The order allows KCP&L to defer and amortize $20.1 million, representing the Missouri impact of the storm, through January 2007. The amortization began in September 2002 and is expected to be approximately $1.5 million in 2002 and approximately $4.6 million annually for the remainder of the amortization period. The Company adopted SFAS No. 142 on January 1, 2002. Under the new standard, goodwill is no longer amortized, but rather is tested for impairment upon adoption and at least annually thereafter. The annual test may be performed anytime during the year, but must be performed at the same time each year. Any future impairment of goodwill would be reflected in continuing operations. Strategic Energy's initial valuation has been completed and there was no impairment of the $14 million of goodwill. In accordance with SFAS No. 142, the Company completed its initial impairment test of RSAE during the second quarter of 2002 and recorded a $3.0 million write-down of goodwill. The goodwill write-down is reflected as a cumulative effect to January 1, 2002, of a change in accounting principle. As a result, year to date September 30, 2002, Great Plains Energy net income reflects the $3.0 million cumulative effect to January 1, 2002, of a change in accounting principle. Ongoing annual impairment tests are required by SFAS No. 142. RSAE and Strategic Energy completed this test in September and no additional write-down was necessary. At September 30, 2002, RSAE had $20 million of unamortized goodwill. In the third quarter, the U.S. District Court Judge presiding over the Central Interstate Compact Commission's federal "bad faith" lawsuit against the State of Nebraska issued his decision in the case finding clear evidence that the State of Nebraska acted in bad faith in processing the license application for a low-level radioactive waste disposal site in Nebraska. He rendered a judgment in the amount of 54 $151.4 million against the state. The state has appealed this decision. Based on the favorable outcome of this trial, in KCP&L's opinion, there is a greater possibility of reversing the state's license denial once the decision in this case is final. KCP&L's investment in the Central States Compact at September 30, 2002, was $7.4 million. KCP&L's reported costs of providing non-contributory defined pension benefits are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. Pension costs, are impacted by actual employee demographics (including age, compensation levels, and employment periods), the level of contributions made to the plan, earnings on plan assets and plan amendments. In addition, pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and pensions costs. In the 2002 actuarial valuation currently in process, the Company expects to decrease its discount rate from 7.25% in 2001 to 6.75% in 2002, and anticipates the assumed long term return on plan assets will remain unchanged at 9.0%. In accordance with SFAS No. 87, Employers' Accounting for Pensions, changes in pension obligations associated with these factors may not be immediately recognized as pension costs on the income statement, but generally gains and losses are recognized by KCP&L by amortizing over a five-year period the rolling five-year average of unamortized gains and losses. Year to date September 30, 2002, KCP&L recorded non-cash expense of approximately $3.9 million and recorded non-cash income of $8.4 million year to date September 30, 2001. The recorded non-cash annual expense for 2003 is expected to be approximately $19 million. KCP&L's pension plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased or decreased pension costs in future periods. The market value of the Company's plan assets has been affected by sharp declines in equity markets since the third quarter of 2000. During 2001, plan assets lost value of approximately $112 million. The plan continued to experience losses in 2002, with losses through September 30, 2002, totaling approximately $32 million. As a result of our plan asset return experience, at December 31, 2002, the Company could be required to increase the additional minimum liability as prescribed by SFAS No. 87. The liability would be recorded as a reduction to common equity through a charge to OCI, and would not affect net income for 2002. Excluding the WCNOC pension plan (plan year ends November 30), the Company anticipates a charge to OCI in the fourth quarter of 2002 of approximately $26 million. The OCI would be restored through common equity in future periods to the extent the fair value of trust assets exceeds the accumulated benefit obligation adjusted for the prepaid (accrued) benefit costs. 55 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Great Plains Energy and consolidated KCP&L are exposed to market risks associated with commodity price and supply, interest rates and equity prices. Market risks are handled in accordance with established policies, which may include entering into various derivative transactions. In the normal course of business, Great Plains Energy and consolidated KCP&L also face risks that are either non-financial or non-quantifiable. Such risks principally include business, legal, operational and credit risks and are not represented in the following analysis. Great Plains Energy and consolidated KCP&L interim period disclosures about market risk included in quarterly reports on Form 10-Q address material changes, if any from the most recently filed annual report on Form 10-K. Therefore, interim period disclosures should be read in connection with the quantitative and qualitative disclosures about market risk included in our 2001 combined annual report on Form 10-K. There have been no material changes in Great Plains Energy's or consolidated KCP&L's market risk since December 31, 2001. ITEM 4. CONTROLS AND PROCEDURES The chief executive officer and the chief financial officer of Great Plains Energy and KCP&L have evaluated those companies' disclosure controls and procedures within 90 days of the filing of this quarterly report. Based on this evaluation, the chief executive officer and chief financial officer have concluded that the disclosure controls and procedures of those companies are functioning effectively to provide reasonable assurance that the information required to be disclosed by those companies in the reports that they file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes to Great Plains Energy's or KCP&L's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation. 56 PART II - OTHER INFORMATION ITEM 3. OTHER LEGAL PROCEEDINGS DTI Chapter 11 Reorganization Proceedings. Pending in the United States Bankruptcy Court for the Eastern District of Missouri (Bankruptcy Court) is the bankruptcy reorganization proceedings filed on December 31, 2001, by DTI and its Virginia subsidiary in Case Nos. 01-54369-399, 01-54370-399 and 01-54371-399. These proceedings have been consolidated for joint procedural administration. DTI is continuing to conduct its business operations while it restructures its financial obligations. KLT Telecom Inc. is a creditor in the proceedings. Timing of completion of the bankruptcy process has yet to be determined. During the first quarter of 2002, the bankruptcy court approved $5 million in DIP financing to be provided by KLT Telecom. As of September 30, 2002, none of the DIP financing has been borrowed by DTI. Consistent with the fiduciary obligation of the creditors' committee to investigate potential sources of recovery for the DTI bankruptcy estate, the creditors' committee served a request for the production of documents by the Company and its affiliates relating to the issue of whether DTI should have been compensated for the use by the Company of its tax losses. The Company believes that it would have meritorious defenses to any such claim that ultimately might be asserted by the creditors' committee. Since the legal and factual basis for any such unasserted claim have not yet been established, the Company is currently unable to estimate the amount of liability or loss, if any, that might arise if a claim is asserted. ITEM 5. OTHER INFORMATION Rick Muench, vice president technical services of WCNOC, has been appointed President and Chief Executive Officer of WCNOC effective January 3, 2003. His predecessor, Otto Maynard, announced his retirement after 20 years of working at the Wolf Creek Nuclear Generating Station. Lori Wright, Assistant Controller of Great Plains Energy and KCP&L, has been appointed Controller of those companies effective November 15, 2003. Her predecessor, Neil Roadman, will become a consultant to the companies and retire in 2003. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS Great Plains Energy Incorporated Exhibit No. 10.1.a. Guaranty issued by Great Plains Energy Incorporated in favor of PG&E Trading-Power, L.P., dated July 26, 2002. 12 Computation of Ratios of Earnings to Fixed Charges. 57 99.1.a. Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Kansas City Power & Light Company Exhibit No. 4.2.a.* Company Order and Officers' Certificate dated September 5, 2002, regarding the issuance of up to $225 million principal amount of 6.00% Senior Notes due 2007, Series B, registered under the Securities Act of 1933 for a like aggregate principal amount of 6.00% Senior Notes due 2007, Series A. (Exhibit 4(a) to Form 8-K dated September 5, 2002) 99.2.a. Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Incorporated by reference and made a part hereof. REPORTS ON FORM 8-K Great Plains Energy Incorporated Great Plains Energy Incorporated filed a report on Form 8-K dated August 12, 2002, including the Statements under Oath of its Principal Executive Officer and Principal Financial Officer, submitted to the Securities and Exchange Commission pursuant to Order No. 4-460. Great Plains Energy Incorporated filed a report on Form 8-K dated August 26, 2002, including Great Plains Energy Incorporated's and Kansas City Power & Light Company's financial statements for the years ended December 31, 2001, 2000 and 1999 with a revised Note 9, "Segment and Related Information", containing reformatted segment information reflecting a revision in corporate business strategy. 58 Kansas City Power & Light Company Kansas City Power & Light Company filed a report on Form 8-K dated August 26, 2002, including Great Plains Energy Incorporated's and Kansas City Power & Light Company's financial statements for the years ended December 31, 2001, 2000 and 1999 with a revised Note 9, "Segment and Related Information", containing reformatted segment information reflecting a revision in corporate business strategy. Kansas City Power & Light Company filed a report on Form 8-K dated September 5, 2002, regarding the commencement of an offer to exchange up to $225 million principal amount of 6.00% Senior Notes due 2007, Series B registered under the Securities Act of 1933 for a like aggregate principal amount of 6.00% Senior Notes due 2007, Series A, and including a Company Order and Officers' Certificate respecting the Series B notes to be exchanged upon consummation of the exchange offer. 59 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Great Plains Energy Incorporated and Kansas City Power & Light Company have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GREAT PLAINS ENERGY INCORPORATED Dated: November 13, 2002 By: /s/Bernard J. Beaudoin (Bernard J. Beaudoin) (Chief Executive Officer) Dated: November 13, 2002 By: /s/Neil Roadman (Neil Roadman) (Principal Accounting Officer) KANSAS CITY POWER & LIGHT COMPANY Dated: November 13, 2002 By: /s/Bernard J. Beaudoin (Bernard J. Beaudoin) (Chief Executive Officer) Dated: November 13, 2002 By: /s/Neil Roadman (Neil Roadman) (Principal Accounting Officer) 60 CERTIFICATION I, Bernard J. Beaudoin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Great Plains Energy Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/Bernard J. Beaudoin Bernard J. Beaudoin Chairman of the Board, President and Chief Executive Officer 61 CERTIFICATION I, Andrea F. Bielsker, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Great Plains Energy Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/Andrea F. Bielsker Andrea F. Bielsker Senior Vice President - Finance, Chief Financial Officer and Treasurer 62 CERTIFICATION I, Bernard J. Beaudoin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Kansas City Power & Light Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/Bernard J. Beaudoin Bernard J. Beaudoin Chairman of the Board, President and Chief Executive Officer 63 CERTIFICATION I, Andrea F. Bielsker, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Kansas City Power & Light Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/Andrea F. Bielsker Andrea F. Bielsker Senior Vice President - Finance, Chief Financial Officer and Treasurer 64