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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-707
KANSAS CITY POWER & LIGHT COMPANY
(Exact name of registrant as specified in its charter)
Missouri 44-0308720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Walnut, Kansas City, Missouri 64106-2124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 556-2200
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes (X) No ( )
The number of shares outstanding of the registrant's Common stock at
May 12 1999, was 61,898,020 shares.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
March 31 December 31
1999 1998
(thousands)
ASSETS
UTILITY PLANT, at original cost
Electric $3,565,416 $3,576,490
Less-accumulated depreciation 1,403,574 1,410,773
Net utility plant in service 2,161,842 2,165,717
Construction work in progress 112,222 110,528
Nuclear fuel, net of amortization of
110,335 and $105,661 36,128 40,203
Total 2,310,192 2,316,448
REGULATORY ASSET - RECOVERABLE TAXES 109,000 109,000
INVESTMENTS AND NONUTILITY PROPERTY 362,949 343,247
CURRENT ASSETS
Cash and cash equivalents 13,682 43,213
Electric customer accounts receivable, net of
allowance for doubtful accounts
of $1,286 and $1,886 8,693 31,150
Other receivables 28,407 38,981
Fuel inventories, at average cost 21,368 18,749
Materials and supplies, at average cost 44,438 45,363
Deferred income taxes 4,960 4,799
Other 4,893 5,926
Total 126,441 188,181
DEFERRED CHARGES
Regulatory assets 24,977 26,229
Other deferred charges 35,403 29,259
Total 60,380 55,488
Total $2,968,962 $3,012,364
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see statements) $1,829,004 $1,880,147
CURRENT LIABILITIES
Notes payable to banks 14,058 10,000
Current maturities of long-term debt 205,878 163,630
Accounts payable 43,232 61,764
Accrued taxes 22,254 15,625
Accrued interest 22,147 23,380
Accrued payroll and vacations 20,398 21,684
Accrued refueling outage costs 12,727 12,315
Other 15,247 28,874
Total 355,941 337,272
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 622,581 625,426
Deferred investment tax credits 57,669 58,786
Other 103,767 110,733
Total 784,017 794,945
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
Total $2,968,962 $3,012,364
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
1
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
March 31 December 31
1999 1998
(thousands)
COMMON STOCK EQUITY
Common stock-150,000,000 shares authorized
without par value-61,908,726 shares issued,
stated value $ 449,697 $ 449,697
Retained earnings (see statements) 428,948 443,699
Accumulated other comprehensive income
Unrealized gain on securities available for sale 542 74
Capital stock premium and expense (1,668) (1,668)
Total 877,519 891,802
CUMULATIVE PREFERRED STOCK
$100 Par Value
3.80% - 100,000 shares issued 10,000 10,000
4.50% - 100,000 shares issued 10,000 10,000
4.20% - 70,000 shares issued 7,000 7,000
4.35% - 120,000 shares issued 12,000 12,000
No Par Value
4.30%* - 500,000 shares issued 50,000 50,000
$100 Par Value - Redeemable
4.00% 62 62
Total 89,062 89,062
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY KCPL
SUBORDINATED DEBENTURES 150,000 150,000
LONG-TERM DEBT (excluding current maturities)
General Mortgage Bonds
Medium-Term Notes due 2000-2008, 6.96% and
6.95% weighted-average rate 296,500 338,500
3.50%* Environmental Improvement Revenue
Refunding Bonds due 2012-23 158,768 158,768
Environmental Improvement Revenue Refunding Bonds
3.28%* Series A & B due 2015 106,500 106,500
4.50% Series C due 2017 50,000 50,000
4.35% Series D due 2017 40,000 40,000
Subsidiary Obligations
Affordable Housing Notes due 2000-06, 8.35%
and 8.42% weighted-average rate 59,915 54,775
Other Long-Term Notes 740 740
Total 712,423 749,283
Total $1,829,004 $1,880,147
* Variable rate securities, weighted-average rate as of March 31, 1999
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
2
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31 1999 1998
(thousands)
ELECTRIC OPERATING REVENUES $190,734 $195,635
OPERATING EXPENSES
Operation
Fuel 31,038 35,697
Purchased power 10,658 8,231
Other 45,082 47,003
Maintenance 17,341 15,738
Depreciation 29,659 28,631
Income taxes 9,210 8,237
General taxes 21,811 22,168
Total 164,799 165,705
OPERATING INCOME 25,935 29,930
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds
used during construction 1,063 933
Miscellaneous income and
(deductions) - net (10,540) (7,677)
Income taxes 12,243 9,747
Total 2,766 3,003
INCOME BEFORE INTEREST CHARGES 28,701 32,933
INTEREST CHARGES
Long-term debt 13,331 14,939
Short-term debt 69 91
Mandatorily redeemable Preferred
Securities 3,113 3,113
Miscellaneous 1,037 1,077
Allowance for borrowed funds
used during construction (732) (653)
Total 16,818 18,567
Net Income 11,883 14,366
Preferred Stock
Dividend Requirements 947 990
Earnings Available for
Common Stock $10,936 $13,376
Average Number of Common
Shares Outstanding 61,898 61,873
Basic and Diluted earnings
per Common Share $0.18 $0.22
Cash Dividends per
Common Share $0.415 $0.405
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Twelve Months Ended March 31 1999 1998
(thousands)
ELECTRIC OPERATING REVENUES $934,040 $896,834
OPERATING EXPENSES
Operation
Fuel 138,690 135,284
Purchased power 66,045 56,232
Other 187,070 194,977
Maintenance 72,601 69,814
Depreciation 116,480 111,687
Income taxes 79,755 70,820
General taxes 93,229 92,773
Deferred Wolf Creek costs amortization 0 684
Total 753,870 732,271
OPERATING INCOME 180,170 164,563
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds
used during construction 3,946 3,080
Miscellaneous income and
(deductions) - net (44,364) (28,830)
Income taxes 48,478 42,548
Total 8,060 16,798
INCOME BEFORE INTEREST CHARGES 188,230 181,361
INTEREST CHARGES
Long-term debt 55,404 60,721
Short-term debt 273 634
Mandatorily redeemable Preferred
Securities 12,450 11,966
Miscellaneous 4,417 4,192
Allowance for borrowed funds
used during construction (2,553) (2,210)
Total 69,991 75,303
Net Income 118,239 106,058
Preferred Stock
Dividend Requirements 3,841 3,824
Earnings Available for
Common Stock $114,398 $102,234
Average Number of Common
Shares Outstanding 61,890 61,889
Basic and Diluted earnings
per Common Share $1.85 $1.65
Cash Dividends per
Common Share $1.65 $1.62
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
4
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year to Date March 31 1999 1998
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,883 $ 14,366
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 29,659 28,631
Amortization of:
Nuclear fuel 4,674 4,724
Other 2,481 2,272
Deferred income taxes (net) (3,271) (258)
Investment tax credit amortization (1,117) (1,129)
Losses from equity investments 4,917 773
Kansas rate refund accrual (14,200) 3,165
Missouri rate refund accrual 1,100 0
Allowance for equity funds used
during construction (1,063) (933)
Other operating activities (Note 2) 14,293 4,554
Net cash from operating activities 49,356 56,165
CASH FLOWS FROM INVESTING ACTIVITIES
Utility capital expenditures (26,105) (22,487)
Allowance for borrowed funds used
during construction (732) (653)
Purchases of investments (11,794) (19,230)
Purchases of nonutility property (14,078) (2,794)
Other investing activities (8,976) 2,884
Net cash from investing activities (61,685) (42,280)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 5,388 7,404
Repayment of long-term debt 0 (51,011)
Net change in short-term borrowings 4,058 2,252
Dividends paid (26,634) (26,140)
Other financing activities (14) (922)
Net cash from financing activities (17,202) (68,417)
NET CHANGE IN CASH AND CASH
EQUIVALENTS (29,531) (54,532)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 43,213 74,098
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 13,682 $ 19,566
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $ 18,383 $ 20,380
Income taxes $ 5,722 $ 0
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
5
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended March 31 1999 1998
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 118,239 $ 106,058
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 116,480 111,687
Amortization of:
Nuclear fuel 19,096 16,445
Deferred Wolf Creek costs 0 684
Other 9,280 9,133
Deferred income taxes (net) (5,481) 7,407
Investment tax credit amortization (4,459) (3,923)
Losses from equity investments 15,827 3,664
Deferred merger costs 0 4,787
Kansas rate refund accrual (3,165) 3,165
Missouri rate refund accrual 1,100 0
Allowance for equity funds used
during construction (3,946) (3,080)
Other operating activities (Note 2) 32,883 (1,462)
Net cash from operating activities 295,854 254,565
CASH FLOWS FROM INVESTING ACTIVITIES
Utility capital expenditures (123,158) (119,819)
Allowance for borrowed funds used
during construction (2,553) (2,210)
Purchases of investments (47,718) (49,592)
Purchases of nonutility property (33,895) (16,916)
Sale of KLT Power 53,033 0
Sale of streetlights 0 21,500
Other investing activities (3,852) (1,621)
Net cash from investing activities (158,143) (168,658)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of mandatorily redeemable
Preferred Securities 0 150,000
Issuance of long-term debt 5,390 41,696
Repayment of long-term debt (51,669) (73,343)
Net change in short-term borrowings 10,563 (98,866)
Dividends paid (105,969) (104,154)
Other financing activities (1,910) (6,786)
Net cash from financing activities (143,595) (91,453)
NET CHANGE IN CASH AND CASH
EQUIVALENTS (5,884) (5,546)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 19,566 25,112
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 13,682 $ 19,566
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $ 69,699 $ 74,633
Income taxes $ 30,510 $ 22,385
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
6
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Twelve Months Ended
March 31 March 31
1999 1998 1999 1998
(thousands)
Net income $ 11,883 $ 14,366 $ 118,239 $ 106,058
Other comprehensive income (loss):
Unrealized gain (loss) on
securities available for sale 733 3,428 (5,610) 3,824
Income tax benefit (expense) (265) (1,241) 2,030 (1,383)
Net unrealized gain (loss) on
securities available for sale 468 2,187 (3,580) 2,441
Comprehensive Income $ 12,351 $ 16,553 $ 114,659 $ 108,499
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Twelve Months Ended
March 31 March 31
1999 1998 1999 1998
(thousands)
Beginning Balance $ 443,699 $ 428,452 $ 416,678 $ 414,774
Net Income 11,883 14,366 118,239 106,058
455,582 442,818 534,917 520,832
Dividends Declared
Preferred stock - at required rates 947 1,081 3,846 3,894
Common stock 25,687 25,059 102,123 100,260
Ending Balance $428,948 $416,678 $428,948 $416,678
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
7
KANSAS CITY POWER & LIGHT COMPANY
CERTAIN FORWARD-LOOKING INFORMATION
Statements made in this report which are not based on historical facts
are forward-looking and, accordingly, involve risks and uncertainties
that could cause actual results to differ materially from those
discussed. Any forward-looking statements are intended to be as of
the date on which such statement is made. In connection with the safe
harbor provisions of the Private Securities Litigation Reform Act of
1995, we are providing a number of important factors that could cause
actual results to differ materially from provided forward-looking
information. These important factors include:
- - the proposed Western Resources Inc. (Western Resources) merger
- - future economic conditions in the regional, national and
international markets
- - state, federal and foreign regulation and possible additional
reductions in regulated electric rates
- - weather conditions
- - financial market conditions, including, but not limited to
changes in interest rates
- - inflation rates
- - increased competition, including, but not limited to, the
deregulation of the United States electric utility industry, and the
entry of new competitors
- - ability to carry out marketing and sales plans
- - ability to achieve generation planning goals and the occurrence
of unplanned generation outages
- - nuclear operations
- - ability to enter new markets successfully and capitalize on
growth opportunities in nonregulated businesses
- - unforeseen events that would prevent correcting internal or
external information systems for Year 2000 problems
- - adverse changes in applicable laws, regulations or rules
governing environmental (including air quality regulations), tax or
accounting matters
This list of factors may not be all-inclusive since it is not possible
for us to predict all possible factors.
Notes to Consolidated Financial Statements
In management's opinion, the consolidated interim financial statements
reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations for
the interim periods presented. These statements and notes should be
read in connection with the financial statements and related notes
included in our 1998 annual report on Form 10-K.
1. AMENDED AND RESTATED PLAN OF MERGER WITH WESTERN RESOURCES
A merger agreement was entered into with Western Resources on February
7, 1997. In December 1997 KCPL canceled its previously scheduled
special meeting of shareholders to vote on the transaction because
Western Resources advised KCPL that its investment bankers, Salomon
Smith Barney, had indicated that it was unlikely that Salomon would be
in a position to issue a fairness opinion. During 1997 KCPL incurred
and deferred $7 million of merger-related costs that were expensed in
December 1997.
On March 18, 1998, KCPL and Western Resources entered into an Amended
and Restated Agreement and Plan of Merger (Amended Agreement). This
Amended Agreement provides for the combination of the regulated
electric utilities of KCPL and Western Resources into Westar Energy, a
new company, using purchase accounting. Westar Energy would be owned
approximately 80.1%
8
by Western Resources and approximately 19.9% by
KCPL shareholders. KCPL shareholders would receive for each share of
KCPL's stock one share of Westar Energy common stock and a fraction of
a share of Western Resources common stock. The value of any
transaction to KCPL shareholders cannot be determined until closing.
If Western Resources' average stock price for a twenty day period just
prior to closing is less than or equal to $29.78, either party can
terminate this Amended Agreement. The Amended Agreement also requires
KCPL to redeem all outstanding shares of cumulative preferred stock
before consummation of the proposed transactions.
If the Amended Agreement is terminated under certain circumstances and
KCPL, within two and one-half years following termination, agrees to
consummate a business combination with a third party that made a
proposal to combine before termination, a payment of $50 million will
be due Western Resources. Under certain circumstances, if KCPL
determines not to consummate its merger into Westar Energy due to its
inability to receive a favorable tax opinion from its legal counsel,
it must pay Western Resources $5 million. Western Resources will pay
KCPL $5 million to $35 million if the Amended Agreement is terminated
and all closing conditions are satisfied other than conditions
relating to Western Resources receiving a favorable tax opinion from
its legal counsel, favorable statutory approvals or an exemption from
the Public Utility Holding Company Act of 1935.
On July 30, 1998, KCPL's and Western Resources' shareholders approved
the Amended Agreement at special meetings of shareholders. However,
the transaction is still subject to several other closing conditions,
including:
- - approval by a number of regulatory and governmental agencies
(applications for approval were filed during 1998),
- - receipt of the final orders from the various federal and state
regulators on terms and conditions which would not have a material
adverse effect on the benefits anticipated by Western Resources in the
merger,
- - reasonable satisfaction by Western Resources that it will be
exempt from all of the provisions of the Public Utility Holding
Company Act of 1935 other than Section 9(a)(2) thereof.
We cannot predict when or if the closing conditions will be met. If
the merger has not closed by December 31, 1999, either party may
terminate the Amended Agreement. See Part II - Other Information,
Item 1. Legal Proceedings, Merger Regulatory Proceedings of this
report on Form 10Q for additional information on the current status of
the proposed merger.
2. CONSOLIDATED STATEMENTS OF CASH FLOWS - OTHER OPERATING ACTIVITIES
Three Months Twelve Months
Ended Ended
1999 1998 1999 1998
Cash flows affected by changes (thousands)
in:
Receivables $ 33,031 $ 9,838 $ 15,295 $(15,084)
Fuel inventories (2,619) (2,177) (5,367) 1,716
Materials and supplies 925 723 1,418 1,441
Accounts payable (18,532)(17,263) 2,927 3,560
Accrued taxes 6,629 11,954 8,628 2,539
Accrued interest (1,233) (1,697) 1,484 800
Wolf Creek refueling outage 412 2,595 8,468 (5,021)
accrual
Other (4,320) 581 30 8,587
Total $ 14,293 $ 4,554 $ 32,883 $ (1,462)
9
3. SECURITIES AVAILABLE FOR SALE
Certain investments in equity securities are accounted for as
securities available for sale and adjusted to market value with
unrealized gains (or losses) reported as a separate component of
comprehensive income.
The cost of securities available for sale held by KLT Inc. (KLT) as of
March 31, 1999 and December 31, 1998 was $4.8 million. Net unrealized
gains were $0.5 million at March 31, 1999, and $0.1 million at
December 31, 1998.
4. EQUITY METHOD INVESTMENTS
We use the equity method to account for equity investments when
management can exert influence over the operations of the investee.
We had equity method investments of approximately $70 million at March
31, 1999. The companies accounted for using the equity method had
total assets of $565 million at March 31, 1999 and a combined net loss
of $11 million for the three months ended March 31, 1999. Equity
method investments and ownership percentages at March 31, 1999,
consisted of the following:
KLT
- - Kansas City Downtown Hotel Group, L.L.C., 25%
- - DTI Holdings, Inc., 47%
- - Nationwide Electric, Inc., 57%
- - Lyco Energy Corporation, 30%
- - Custom Energy, L.L.C., 47%
- - Custom Lighting Services L.L.C., 50%
Home Service Solutions Inc. (HSS)
- - R.S. Andrews Enterprises, Inc., 44%
5. CAPITALIZATION
KCPL Financing I (Trust), a wholly-owned subsidiary of KCPL, has
previously issued $150,000,000 of 8.3% preferred securities. The sole
asset of the Trust is the $154,640,000 principal amount of 8.3% Junior
Subordinated Deferrable Interest Debentures, due 2037, issued by KCPL.
From April 1 through May 13, 1999, KLT's borrowings under its bank
credit agreement increased $5.5 million.
6. SEGMENT AND RELATED INFORMATION
In 1998 we adopted SFAS No. 131 - Disclosures About Segments of an
Enterprise and Related Information. KCPL's reportable segments are
strategic business units. Electric Operations includes the regulated
electric utility, unallocated corporate charges and wholly-owned
subsidiaries on an equity basis. KLT is a holding company for various
nonregulated business ventures. The Other column represents the
operations of HSS and KLT Iatan Inc. (Iatan).
We evaluate performance based on profit or loss from operations and
return on capital investment. We eliminate all intersegment sales and
transfers. We include KLT, HSS and Iatan revenues and expenses in
Other Income and (Deductions) and Interest Charges in the Consolidated
Statements of Income.
10
The tables below reflect summarized financial information concerning
KCPL's reportable segments.
Electric Intersegment Consolidated
Operations KLT Inc. Other Eliminations Totals
Three Months Ended (thousands)
March 31, 1999
Electric Operating
Income (a) $ 25,935 $ 25,935
Miscellaneous
income (b) 4,875 $(1,084) $ 496 $ 745 5,032
Miscellaneous
deductions (c) (6,388) (7,025) (2,159) - (15,572)
Income taxes on
Other Income and
(Deductions) 184 11,429 630 - 12,243
Interest Charges (13,786) (3,032) - - (16,818)
Net income(loss) 11,883 288 (1,033) 745 11,883
Three Months Ended
March 31, 1998
Electric Operating
Income (a) $ 29,930 $ 29,930
Miscellaneous
income (b) 6,235 $10,298 $(4,148) 12,385
Miscellaneous
deductions (c) (8,750) (11,312) - (20,062)
Income taxes on
Other Income and
(Deductions) 1,020 8,727 - 9,747
Interest Charges (15,002) (3,565) - (18,567)
Net income 14,366 4,148 (4,148) 14,366
Twelve Months Ended
March 31, 1999
Electric Operating
Income (a) $180,170 $180,170
Miscellaneous
income (b) 20,448 $13,864 $ 1,229 $ 407 35,948
Miscellaneous
deductions (c) (34,134) (43,086) (3,092) - (80,312)
Income taxes on
Other Income and
(Deductions) 4,858 42,912 708 - 48,478
Interest Charges (57,049) (12,942) - - (69,991)
Net income(loss) 118,239 748 (1,155) 407 118,239
Twelve Months Ended
March 31, 1998
Electric Operating
Income (a) $164,563 $164,563
Miscellaneous
income (b) 21,709 $32,065 $(8,230) 45,544
Miscellaneous
deductions (c) (28,670) (45,704) - (74,374)
Income taxes on
Other Income and
(Deductions) 6,489 36,059 - 42,548
Interest Charges (61,113) (14,190) - (75,303)
Net income 106,058 8,230 (8,230) 106,058
(a) Refer to the Consolidated Statements of Income for detail of
Electric Operations revenues and expenses.
(b) Includes nonregulated revenues, interest and dividend income, and
losses from equity investments.
(c) Includes nonregulated expenses and merger-related expenses.
11
Identifiable Assets
March 31, 1999 December 31, 1998
(thousands)
Electric Operations $ 2,797,227 $ 2,831,052
KLT Inc. 300,002 310,750
Other 27,370 24,239
Intersegment
Eliminations (155,637) (153,677)
Consolidated
Totals $ 2,968,962 $ 3,012,364
7. ENVIRONMENTAL MATTERS
KCPL's policy is to act in an environmentally responsible manner and
use the latest technology available to avoid and treat contamination.
We continually conduct environmental audits designed to ensure
compliance with governmental regulations and detect contamination.
However, governmental bodies may impose additional or more rigid
environmental regulations that could require substantial changes to
operations or facilities.
Monitoring Equipment and Certain Air Toxic Substances
The Clean Air Act Amendments of 1990 required KCPL to spend about
$5 million in prior years for the installation of continuous
emission monitoring equipment to satisfy the requirements under
the acid rain provision. Also a study under the Act could
require regulation of certain air toxic substances, including
mercury. We cannot predict the likelihood of any such
regulations or compliance costs.
Air Particulate Matter
In July 1997 the United States Environmental Protection Agency
(EPA) published new air quality standards for particulate matter.
Additional regulations implementing these new particulate
standards have not been finalized. Without the implementation
regulations, the real impact of the standards on KCPL cannot be
determined. However, the impact on KCPL and other utilities that
use fossil fuels could be substantial. Under the new fine
particulate regulations the EPA is in the process of implementing
a three-year study of fine particulate emissions. Until this
testing and review period has been completed, KCPL cannot
determine additional compliance costs, if any, associated with
the new particulate regulations.
Nitrogen Oxide
In 1997 the EPA also issued new proposed regulations on reducing
nitrogen oxide (NOx) emissions. The EPA announced in 1998 final
regulations implementing reductions in NOx emissions. These
regulations require 22 states, including Missouri, to submit
plans for controlling NOx emissions by September 1999. The
regulations require a significant reduction in NOx emissions from
1990 levels at KCPL's Missouri coal-fired plants by the year
2003.
To achieve these reductions, KCPL would need to incur
significantly higher capital costs or purchase power or NOx
emissions allowances. It is possible that purchased power or
emissions allowances may be too costly or unavailable.
12
Preliminary analysis of the regulations indicate that selective
catalytic reduction technology will be required for some of the
KCPL units, as well as other changes. Currently, we estimate
that additional capital expenditures to comply with these
regulations could range from $90 to $120 million over the period
from 1999 to 2002. Operations and maintenance expenses could
also increase by more than $6 million per year, beginning in
2003.
We continue to refine our preliminary estimates and explore
alternatives to comply with these new regulations to minimize, to
the extent possible, KCPL's capital costs and operating expenses.
The ultimate cost of these regulations could be significantly
different than the amounts estimated above.
KCPL and several other western Missouri utilities filed suit
against the EPA over the inclusion of western Missouri in the NOx
reduction program. This matter is in the early stage of
litigation and the outcome cannot be predicted at this time.
Carbon Dioxide
At a December 1997 meeting in Kyoto, Japan, the Clinton
Administration supported changes to the International Global
Climate Change treaty which would require a seven percent
reduction in United States carbon dioxide (CO2) emissions below
1990 levels. The Administration has not submitted this change to
the U.S. Senate where ratification is uncertain. If future
reductions of electric utility CO2 emissions are eventually
required, the financial impact upon KCPL could be substantial.
8. LOW-LEVEL WASTE
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated
that the various states, individually or through interstate compacts,
develop alternative low-level radioactive waste disposal facilities.
The states of Kansas, Nebraska, Arkansas, Louisiana and Oklahoma
formed the Central Interstate Low-Level Radioactive Waste Compact and
selected a site in northern Nebraska to locate a disposal facility.
Wolf Creek Nuclear Operating Corporation (WCNOC) and the owners of the
other five nuclear units in the compact provide most of the pre-
construction financing for this project. KCPL's net investment on its
books was approximately $7.5 million at March 31, 1999 and December
31, 1998.
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. On January 15, 1999, a request for a contested
case hearing on the denial of the license was filed. On April 16,
1999, a U.S. District Court judge in Nebraska issued an injunction
staying indefinitely any further activity on the contested case
hearing. A greater possibility of reversing the license denial will
exist when the contested case hearing ultimately is conducted.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STATUS OF MERGER
See Note 1 to the Consolidated Financial Statements for the current
status of the proposed Western Resources Inc. (Western Resources)
merger. In December 1996 the Federal Energy Regulatory Commission
(FERC) issued a statement concerning electric utility mergers. Under
the statement, companies must demonstrate that their merger does not
adversely affect competition or wholesale rates. As a result, FERC
may consider a number of remedies including transmission upgrades,
divestitures of generating assets or formation of independent system
operators.
REGULATION AND COMPETITION
As competition develops throughout the electric utility industry, we
are positioning Kansas City Power & Light Company (KCPL) to excel in
an open market. We are continuing to improve the efficiency of KCPL's
electric utility operations, lowering prices and offering new
services. In particular, KCPL's value-added services for large energy
users now include contracts for natural gas commodities.
Competition in the electric utility industry accelerated with the
passage of the National Energy Policy Act of 1992. This Act gave FERC
the authority to require electric utilities to provide transmission
line access to independent power producers (IPPs) and other utilities
(wholesale wheeling). In April 1996 FERC issued an order requiring
all owners of transmission facilities to adopt open-access tariffs and
participate in wholesale wheeling. We made the necessary filings to
comply with that order.
FERC's April 1996 order encouraged more movement toward retail
competition at the state level. An increasing number of states have
already adopted open access requirements for utilities' retail
electric service, allowing competing suppliers access to their retail
customers (retail wheeling). Many other states are actively
considering retail wheeling, including Kansas and Missouri. While
retail wheeling legislation was introduced in Kansas and Missouri in
1999, no comprehensive legislation was passed.
Retail access could result in market-based rates below current cost-
based rates, providing growth opportunities for low-cost producers and
risks for higher-cost producers, especially those with large
industrial customers. Lower rates and the loss of major customers
could result in stranded costs and place an unfair burden on the
remaining customer base or shareholders. Testimony filed in the
merger case in Kansas indicated stranded costs of approximately $1
billion for KCPL. An independent study prepared at the request of the
Kansas Corporation Commission (KCC) concluded there are no stranded
costs. We cannot predict whether any stranded costs would be
recoverable in future rates. If an adequate and fair provision for
recovery of lost revenues is not provided, certain generating assets
may have to be evaluated for impairment and appropriate charges
recorded against earnings. In addition to lower profit margins,
market-based rates could require generating assets to be depreciated
over shorter useful lives, increasing operating expenses.
KCPL is positioned to compete in an open market with its diverse
customer mix and pricing strategies. Industrial customers make up
about 20% of KCPL's retail mwh sales, well below the utility industry
average. KCPL's flexible industrial rate structure is competitive
with other companies' rate structures in the region. In addition, we
have entered into or are negotiating long-term
14
contracts for a large
portion of KCPL's industrial sales. Although no direct competition
for retail electric service currently exists within KCPL's service
territory, it exists in the bulk power market and between alternative
fuel suppliers and KCPL. We also are currently encountering third-
party energy management companies seeking to initiate relationships
with large users in KCPL's service territory in an attempt to enhance
their chances to supply electricity directly when retail wheeling is
authorized.
Increased competition could also force utilities to change accounting
methods. Financial Accounting Standards Board (FASB) Statement No. 71
- - Accounting for Certain Types of Regulation applies to regulated
entities whose rates are designed to recover the costs of providing
service. A utility's operations could stop meeting the requirements
of FASB 71 for various reasons, including a change in regulation or a
change in the competitive environment for a company's regulated
services. For those operations no longer meeting the requirements of
regulatory accounting, regulatory assets would be written off. KCPL
can maintain its $134 million of regulatory assets at March 31, 1999,
as long as FASB 71 requirements are met.
Competition could eventually have a materially adverse effect on
KCPL's results of operations and financial position. Should
competition eventually result in a significant charge to equity,
capital requirements and related costs could increase significantly.
NONREGULATED OPPORTUNITIES
KLT Inc. (KLT), a wholly-owned subsidiary of KCPL, pursues
nonregulated business ventures. Existing ventures include investments
in energy services, oil and gas development and production,
telecommunications and affordable housing limited partnerships.
KCPL's equity investment in KLT was $119 million as of March 31, 1999
and 1998. KLT's net income for the three months ended March 31, 1999,
totaled $0.3 million compared to $4.1 million for the three months
ended March 31, 1998. KLT's consolidated assets at March 31, 1999,
totaled $300 million.
Home Service Solutions Inc. (HSS), a wholly-owned subsidiary of KCPL,
pursues nonregulated business ventures, primarily in residential
services. HSS has an investment in R.S. Andrews Enterprises, Inc.
(RSAE), a consumer services company in Atlanta, Georgia. RSAE expects
to continue making acquisitions in key U.S. markets. Additionally,
Worry Free Service, Inc., a wholly-owned subsidiary of HSS, provides
residential services, including preventative maintenance and warranty
services of heating and air conditioning equipment.
KCPL's equity investment in HSS was $24 million as of March 31, 1999.
HSS's consolidated assets at March 31, 1999, totaled $27 million.
RESULTS OF OPERATIONS
Three-month Three months ended March 31, 1999, compared
period: with three months ended March 31, 1998
Twelve-month Twelve months ended March 31, 1999, compared
period: with twelve months ended March 31, 1998
15
WOLF CREEK'S CURRENT REFUELING AND MAINTENANCE OUTAGE
Wolf Creek completed its tenth refueling and maintenance outage in 36
days, the shortest in Wolf Creek's history. See Wolf Creek section,
page 21.
EARNINGS OVERVIEW
Earnings Per Share
For the Periods Ended
March 31
(Decreased) Increase(Decrease)
Increase Merger Excluding
1999 1998 (Decrease) Expenses Merger Expenses
Three months $0.18 $0.22 $(0.04) $(0.09) $(0.13)
ended
Twelve months $1.85 $1.65 $ 0.20 $(0.05) $ 0.15
ended
Excluding merger expenses, earnings per share (EPS) for the three-
month period decreased primarily due to decreased income from
subsidiaries $(0.08 per share). Additionally, EPS decreased because
of decreased bulk power sales and increased purchased power because,
as a result of the February 17, 1999 boiler explosion, the 476-
megawatt Hawthorn Generating Station's Unit No. 5 (Hawthorn 5) was
unavailable. Missouri rate reduction accruals decreased EPS by $0.01.
Partially offsetting these decreases were the positive effects on EPS
of decreased administrative and general operating expenses and
continued load growth.
Excluding merger expenses, EPS for the twelve-month period increased
primarily due to increased revenues resulting from more favorable
weather during the twelve-month period and continued load growth. EPS
also increased for the twelve-month period as a result of decreased
administrative and general operating expenses ($0.05 per share) and
interest expense on long-term debt ($0.05 per share). Partially
offsetting these increases in EPS were the effects on EPS of decreased
subsidiary income ($0.14), rate reductions approved by the KCC
($0.11), the rate reduction approved by the MPSC ($0.01) and increased
depreciation expense ($0.05).
Merger expenses for the three months ended March 31, 1999, were $0.3
million compared to $5.3 million ($0.09 per share) for the three
months ended March 31, 1998. Merger expenses for the twelve months
ended March 31, 1999, reduced EPS by ($0.11) compared to ($0.16) for
the twelve months ended March 31, 1998.
16
MEGAWATT-HOUR (MWH) SALES AND OPERATING REVENUES
Sales and revenue data:
(revenue change in millions)
For the Periods Ended
March 31, 1999 versus March 31, 1998
Three Months Twelve Months
Mwh Revenues Mwh Revenues
Increase (decrease)
Retail Sales:
Residential 3 % $ 1 9 % $ 21
Commercial 4 % 2 5 % 13
Industrial 2 % - 5 % 4
Other 2 % - 8 % (2)
Total Retail 3 % 3 6 % 36
Sales for Resale:
Bulk Power Sales (44)% (8) (13)% 1
Other 4 % - 3 % -
Total (5) 37
Other revenues - -
Total Operating
Revenues $ (5) $ 37
On April 13, 1999, a stipulation and agreement among KCPL, the MPSC
staff and public counsel was approved by the MPSC. The essential
components of the stipulation are as follows:
- - Commencing with electric service provided on or after March 1,
1999, KCPL will reduce its annual Missouri electric revenues by 3.2%,
or about $15 million.
- - The parties will not file a request for an increase or decrease
in KCPL's rates, or for a refund of those rates, before the earlier of
September 1, 2001, or the closing of the KCPL/Western Resources
merger; such rates would not be effective before the earlier of March
1, 2002, or one year after closing of the merger.
- - In the merger case, staff and public counsel reserve the right to
recommend a rate reduction upon closing of the merger as a condition
of Commission approval of an alternative regulatory plan. They also
reserve the right to recommend rate reductions that would be effective
no sooner than one year after closing of the merger.
Effective March 1, 1999, we began accruing the 3.2% rate reduction for
refund to Missouri retail customers. We will refund to Missouri
retail customers the amounts accrued from March 1, 1999, through
August 1, 1999, the implementation date. Revenues for the three- and
twelve-month periods were reduced by about $1 million as a result of
the Missouri rate reduction.
The KCC approved a rate settlement agreement, effective January 1,
1998, authorizing a $14.2 million annual revenue reduction and an
annual increase in depreciation expense of $2.8 million. Pending the
approval of a new Kansas rate design, we accrued $14.2 million during
1998 for refund to customers. The new rate design was approved in
December 1998 and directed KCPL to refund, starting March 1, 1999, the
$14.2 million we accrued during 1998 plus the amount that we accrued
for January and February 1999. The KCC rate settlement agreement
reduced revenues by $14 million for the twelve months ended March 31,
1999, and $3 million for the twelve months ended March 31, 1998.
17
The Kansas rate refund accruals applied to customers' accounts in 1999
and seasonally lower retail sales in March 1999 versus December 1998,
resulted in a lower accounts receivable balance for electric customers
at March 31, 1999, compared with December 31, 1998.
Even though weather was milder for the three-month period, retail mwh
sales increased 3% primarily due to continued load growth. Load
growth consists of higher usage-per-customer as well as the addition
of new customers.
Retail mwh sales for the twelve-month period increased 6% while retail
revenues increased 4%. The MPSC and KCC rate reductions decreased
revenues for the twelve-month period, partially offsetting increased
revenues from increased retail mwh sales driven by warmer than normal
summer weather in 1998 and continued load growth.
Bulk power sales vary with system requirements, generating unit and
purchased power availability, fuel costs and the requirements of other
electric systems. The explosion at Hawthorn 5 on February 17, 1999,
resulted in reduced bulk power mwh sales for the three-month period.
The 1999 explosion and the 1998 outage due to a ruptured steam pipe at
Hawthorn 5 resulted in decreased bulk power mwh sales for the twelve-
month period. Outages at the LaCygne 1 and 2 generating units in the
second quarter of 1997 and the extended 1997 Wolf Creek outage
contributed to reduced bulk power mwh sales for the twelve-months
ended March 31, 1998.
Future mwh sales and revenues per mwh could be affected by national
and local economies, weather, customer conservation efforts and
availability of generating units. Competition, including alternative
sources of energy, such as natural gas, co-generation, IPPs and other
electric utilities, may also affect future sales and revenue.
FUEL AND PURCHASED POWER
Combined fuel and purchased power expenses for the three-month period
decreased 5% while total mwh sales (total of retail and sales for
resale) decreased by 10%. The unavailability of Hawthorn 5
contributed to increased purchased power expenses partially offset by
decreased fuel expenses at Hawthorn 5. The cost per mwh for purchased
power was significantly higher than the fuel cost per mwh of
generation.
Combined fuel and purchased power expenses for the twelve-month period
increased 7% while total mwh sales increased 2%. This difference is
largely due to increased purchased power expenses during the twelve-
month period.
Nuclear fuel costs per MMBTU remained substantially less than the
MMBTU price of coal. Nuclear fuel costs per MMBTU decreased 4% for
the twelve-month period. Nuclear fuel costs per MMBTU averaged about
60% of the MMBTU price of coal for the twelve months ended March 31,
1999, and March 31, 1998. We expect the price of nuclear fuel to
remain fairly constant through the year 2001. During the twelve
months ended March 31, 1999, fossil plants represented about 69% of
total generation and the nuclear plant about 31%. For the twelve
months ended March 31, 1998, fossil plants represented about 75% of
total generation and the nuclear plant about 25%.
The cost of coal burned declined 3% for the twelve-month period.
KCPL's coal procurement strategies continue to provide coal costs
below the regional average. We expect coal costs to remain fairly
consistent with current levels through 2001.
18
OTHER OPERATION AND MAINTENANCE EXPENSES
Combined other operation and maintenance expenses for the three- and
twelve-month periods declined slightly due largely to decreased
administrative and general expenses and, as a result of the February
17, 1999, boiler explosion, decreased maintenance expenses at Hawthorn
5. Partially offsetting these decreased expenses for the three-month
period, maintenance expenses increased at LaCygne 2 due to a Spring
1999 scheduled outage. The decreased administrative and general
expenses for the twelve-month period were partially offset by
increased maintenance expenses incurred during outages at Hawthorn 5,
as well as LaCygne 1 in 1998 and LaCygne 2 in 1999. The twelve-month
period also reflected decreased write-offs of uncollectible customer
accounts and decreased Wolf Creek non-fuel operations expenses.
We continue to emphasize new technologies, improved work methodology
and cost control. We continuously improve our work processes to
provide increased efficiencies and improved operations. Through the
use of cellular technology, more than 90% of KCPL's customer meters
are read automatically.
DEPRECIATION
The increase in depreciation expense for the three- and twelve-month
periods reflected normal increases in depreciation from capital
additions. Additionally, the twelve-month period reflected the
implementation of the KCC settlement agreement, effective January 1,
1998, which authorized a $2.8 million annual increase in depreciation
expense.
TAXES
Operating income taxes increased $9 million for the twelve-month
period reflecting higher taxable operating income.
Components of general taxes:
Three months ended Twelve months ended
March 31 March 31
1999 1998 1999 1998
(thousands)
Property $ 10,741 $ 11,358 $ 40,781 $ 43,128
Gross receipts 8,912 8,613 42,439 40,502
Other 2,158 2,197 10,009 9,143
Total $ 21,811 $ 22,168 $ 93,229 $ 92,773
Property taxes decreased in the three-month period, primarily
reflecting changes in Kansas tax law which reduced the mill levy
rates. Property taxes decreased in the twelve-month period,
reflecting changes in Kansas tax law which reduced the mill levy rates
and lower Missouri and Kansas property tax assessed valuations in
1998. Gross receipts taxes increased in the three- and twelve-month
periods reflecting higher billed Missouri revenues.
19
OTHER INCOME AND (DEDUCTIONS)
KLT summarized operations:
Three months ended Twelve months ended
March 31 March 31
1999 1998 1999 1998
(millions)
Miscellaneous income
and (deductions)-net* $(8.1) $(1.0) $(29.2) $(13.6)
Income taxes 11.4 8.7 42.9 36.0
Interest charges (3.0) (3.6) (13.0) (14.2)
Net income $ 0.3 $ 4.1 $ 0.7 $ 8.2
KLT's operations for the three-month period were affected by the
following significant factors:
- - Net income of approximately $2 million for the three months ended
March 31, 1998, related to KLT Power Inc. (sold in July 1998).
- - A $3 million equity loss recorded for the three months ended
March 31, 1999, on an investment in Digital Teleport, Inc. (DTI), a
company developing a midwest regional fiber optic network.
- - A $2 million loss from an equity investment in an oil and gas
company.
KLT's operations for the twelve-month period were affected by the
following significant factors:
- - The $2 million loss from an equity investment in an oil and gas
company.
- - A $12 million equity loss recorded on an investment in DTI.
- - The $4 million gain on the sale of the common stock of KLT Power
Inc.
- - A $6 million write down of its investment in a power station in
China.
Miscellaneous income and (deductions) - net includes the following
significant items:
Three months ended Twelve months ended
March 31 March 31
1999 1998 1999 1998
(millions)
Merger-related expenses $ (0.3) $(5.3) $ (9.6) $(11.6)
*From table above (8.1) (1.0) (29.2) (13.6)
Other (2.1) (1.4) (5.6) (3.6)
Total Miscellaneous
income and
(deductions) - net $(10.5) $(7.7) $(44.4) $(28.8)
Other Miscellaneous income and (deductions) - net for the three- and
twelve-month periods was affected by a $2 million write-off to comply
with an AICPA Statement of Position (SOP) regarding start-up
activities.
Other Income and (Deductions) - Income taxes for the three- and twelve-
month periods reflect the tax impact on total miscellaneous income and
(deductions) - net. Additionally, we accrued tax credits of $7
million for the three months ended March 31, 1999, and $6 million for
the three months ended March 31, 1998, or one-fourth of the total
expected annual credits related to KLT's
20
investments in affordable
housing limited partnerships as well as in oil and gas. We accrued
tax credits of $26 million for the twelve months ended March 31, 1999,
and $23 million for the twelve months ended March 31, 1998.
INTEREST CHARGES
Long-term debt interest expense decreased for the three- and twelve-
month periods, reflecting lower average levels of outstanding long-
term debt. The lower average levels of debt reflect scheduled debt
repayments made by KCPL and lower average levels of debt by KLT on its
bank credit agreement.
Interest expense of mandatorily redeemable Preferred Securities
reflects interest charges incurred on the $150 million of 8.3%
preferred securities issued in April 1997.
We use interest rate swap and cap agreements to limit the volatility
in interest expense on a portion of KLT's variable-rate, bank credit
agreement and KCPL's variable-rate, long-term debt. Although these
agreements are an integral part of interest rate management, the
incremental effect on interest expense and cash flows is not
significant. We do not use derivative financial instruments for
speculative purposes.
WOLF CREEK
Wolf Creek is one of KCPL's principal generating units, representing
about 19% of its accredited generating capacity, excluding the
Hawthorn 5 generating unit from KCPL's accredited generating capacity.
The plant's operating performance has remained strong, contributing
about 28% of the annual mwh generation while operating at an average
capacity of 94% over the last three years. Wolf Creek has the lowest
fuel cost per MMBTU of any of KCPL's generating units.
We accrue the incremental operating, maintenance and replacement power
costs for planned outages evenly over the unit's operating cycle,
normally 18 months. As actual outage expenses are incurred, the
refueling liability and related deferred tax asset are reduced.
Wolf Creek's tenth refueling and maintenance outage, estimated to be a
40-day outage, began April 3, 1999, and was completed May 9, 1999.
The 36-day outage was the shortest refueling and maintenance outage in
Wolf Creek's history.
Wolf Creek's ninth refueling and maintenance outage, budgeted for 35
days, began in early October 1997 and was completed in December 1997
(58 days). The extended length of the ninth outage was caused by
several equipment problems. Actual costs of the 1997 outage were $6
million in excess of the estimated and accrued costs for the outage.
No major equipment replacements are currently projected. An extended
shut-down of Wolf Creek could have a substantial adverse effect on
KCPL's business, financial condition and results of operations because
of higher replacement power and other costs. Although not expected,
an unscheduled plant shut-down could be caused by actions of the
Nuclear Regulatory Commission reacting to safety concerns at the plant
or other similar nuclear units. If a long-term shut-down occurred,
the state regulatory commissions could reduce rates by excluding the
Wolf Creek investment from rate base.
21
Ownership and operation of a nuclear generating unit exposes KCPL to
risks regarding decommissioning costs at the end of the unit's life
and to potential retrospective assessments and property losses in
excess of insurance coverage.
ENVIRONMENTAL MATTERS
KCPL's operations must comply with federal, state and local
environmental laws and regulations. The generation and transmission
of electricity produces and requires disposal of certain products and
by-products, including polychlorinated biphenyl (PCBs), asbestos and
other potentially hazardous materials. The Federal Comprehensive
Environmental Response, Compensation and Liability Act (the Superfund
law) imposes strict joint and several liability for those who
generate, transport or deposit hazardous waste. This liability
extends to the current property owner, as well as prior owners since
the time of contamination.
We continually conduct environmental audits to detect contamination
and ensure compliance with governmental regulations. However,
compliance programs needed to meet new and future environmental laws
and 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, could require substantial changes to operations or facilities
(see Note 7 to the Consolidated Financial Statements).
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue resulted from computer systems and applications
using two digits instead of four to define the year. Computer
programs with date-sensitive software could recognize the date of "00"
as the Year 1900 rather than the Year 2000. Unless corrected, some
computer systems and applications could incorrectly process
information resulting in miscalculations or system disruptions.
We have assessed the potential of the Year 2000 Issue on KCPL's
Information Technology (IT) and non-IT processes and operations.
Beginning in 1997, we established a Year 2000 team responsible for
evaluating, identifying and correcting problems in all critical
computer software, hardware and embedded systems. We utilized both
internal and external resources in this process. Because we have
invested approximately $62 million in new Year 2000 ready technologies
over the past several years, we identified fewer issues than some
companies.
The assessment of all of KCPL's major systems impacted by the Year
2000 Issue has been completed and remediation efforts are well
underway. The Control System at one power plant is currently running
with the date set beyond January 1, 2000, and we expect Control
Systems at KCPL's other plants to be advanced by mid-1999. We have
substantially completed readiness efforts for KCPL's major processes
with the exception of the new customer information system. We expect
the implementation and testing of the new customer information system
to be completed by mid-1999.
On an ongoing basis, we are sharing information with other electric
industry organizations, such as the Electric Power Research Institute,
in order to adequately anticipate and plan for potential problems. We
participated in an industry-wide drill April 9, 1999, coordinated by
the North American Electric Reliability Council (NERC). The drill
simulated partial loss of telecommunications and found that our
contingency procedures and backup systems worked well. We will
participate in another industry-wide drill, to be coordinated by NERC,
scheduled for September 9, 1999, which will be a "dress rehearsal" for
the transition to Year 2000. The monitoring phase of KCPL's Year 2000
project will continue through at least the first quarter of 2000. We
believe the total costs of the
22
assessment, remediation, testing and
monitoring efforts will be approximately $7 million. These costs are
expensed as incurred.
Regarding the Wolf Creek Nuclear Generating Station, we believe we are
in compliance with the Nuclear Regulatory Commission's Year 2000
regulations and will file the required status response with the
Commission before July 1, 1999. The Commission performed an on-site
audit of Wolf Creek's Year 2000 project plans in November 1998, and no
areas of concern were identified. Control systems at Wolf Creek
utilize analog components that are not date-sensitive which mitigates
Year 2000 concerns about critical operations of the plant. We expect
all assessments of affected systems will be completed by the end of
the second quarter in 1999, with remediation being completed by the
end of the third quarter. The Commission guidelines are being
followed in the development of contingency plans.
We initiated communications with all large suppliers and customers to
evaluate KCPL's vulnerability to the failure of others to remediate
their Year 2000 Issues. While no major issues have been discovered,
we cannot be certain their systems will not impact KCPL's operations.
Thus, we have developed a number of contingency plans to mitigate
potential problems with third party failures.
The most reasonable likely worse case scenario would be the loss or
partial interruption of KCPL's electrical system which is connected to
other utilities throughout the United States and Canada, east of the
Rocky Mountains. This interconnection is essential to the
reliability, stability and operational integrity of each connected
electric utility. KCPL could encounter difficulties supplying
electric service if other interconnected utilities fail to achieve
Year 2000 compliance and create an unstable condition on the grid.
We are addressing this and other potential Year 2000 risks by
implementing a number of action plans, including:
- Participating in operating contingency plans and drills developed
by the Southwest Power Pool and the North American Electric
Reliability Council.
- Implementing and testing radio communication for personnel
manning critical operation points.
- Testing functional emergency radio systems, and ensuring they are
operational for generating stations.
- Working with local authorities and testing systems to establish a
means of communicating if telephones are not available.
- Ensuring readiness to execute the generation and systems black
start procedures.
CAPITAL REQUIREMENTS AND LIQUIDITY
KCPL's liquid resources at March 31, 1999 included cash flows from
operations and $251 million of unused bank lines of credit. The
unused lines consisted of KCPL's short-term bank lines of credit of
$180 million and KLT's bank credit agreement of $71 million. Cash and
cash equivalents decreased by $30 million from December 31, 1998 to
March 31, 1999, primarily due to dividend payments.
By applying the Kansas rate refund accrual to the balances of Kansas
customers' electric accounts receivable during the three months ended
March 31, 1999, we reduced electric customer accounts receivable and
other current liabilities at March 31, 1999, compared to the December
31, 1998 balances. This resulted in minimal impact on cash flows from
operating activities in the three- and twelve-month periods.
23
KCPL continues to generate positive cash flows from operating
activities. Individual components of working capital will vary with
normal business cycles and operations, such as the refunds to Kansas
customers that will mainly reduce April 1999 cash receipts below
normal levels. Cash from operating activities decreased for the three-
month period primarily due to decreased net income, other receivables
and non-cash expenses. The majority of the decrease in non-cash
expenses for the three-month period was due to decreases in deferred
income taxes. Partially offsetting these decreases were increases in
non-cash expenses due to the Missouri rate refunds, accrued but not
refundable until August 1999, and increases in losses from equity
investments.
Cash from operating activities increased for the twelve-month period
reflecting increased net income and non-cash expenses. The increased
non-cash expenses were primarily due to increased depreciation and
amortization expenses, increased losses incurred on equity investments
and an increased refueling outage accrual. Partially offsetting these
increases were decreases in deferred income taxes. The timing of the
Wolf Creek outage affects the refueling outage accrual, deferred
income taxes and amortization of nuclear fuel.
Accrued taxes increased from December 31, 1998, to March 31, 1999,
mainly due to the timing of income tax and property tax payments.
Cash used in investing activities varies with the timing of utility
capital expenditures and purchases of investments and nonutility
properties. Cash used for investing activities decreased for the
twelve months ended March 31, 1999, reflecting the proceeds from the
sale of the common stock of KLT Power Inc. Cash used for investing
activities during the twelve months ended March 31, 1998 reflected the
proceeds received in 1997 from the sale of streetlights to the City of
Kansas City, Missouri.
Cash used for financing activities decreased for the three-month
period primarily because no debt repayments were scheduled during the
three months ended March 31, 1999, whereas $51 million in repayments
were made in the three months ended March 31, 1998. Cash used for
financing activities increased for the twelve-month period due to the
effect of KCPL Financing I, a wholly-owned subsidiary of KCPL, issuing
$150 million of preferred securities in April 1997, which decreased
cash used for financing activities for the twelve months ended March
31, 1998.
KCPL's common dividend payout ratio was 89% for the twelve months
ended March 31, 1999, and 98% for the twelve months ended March 31,
1998.
We expect to meet day-to-day operations, utility construction
requirements and dividends with internally-generated funds. KCPL
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
environment regulations and the availability of generating units (see
discussion below). The funds needed to retire $394 million of
maturing debt through the year 2003 will be provided from operations,
refinancings or short-term debt. KCPL might issue additional debt
and/or additional equity to finance growth or take advantage of new
opportunities.
On February 17, 1999, an explosion occurred at Hawthorn 5. The boiler
was not operating at the time, and there were no injuries. Though the
cause of the explosion is still under investigation, preliminary
results indicate that the damage was caused by an explosion of
accumulated gas in the boiler's firebox. KCPL has insurance coverage
for this type of event, with limits of $300 million. Work has begun
to dismantle the damaged boiler.
24
As a result of the explosion, we estimate a net increase in expense of
between $6.5 million and $11.5 million (before tax) for the year 1999.
These expenses assume normal weather and operating conditions and
include the effect of increased net replacement power costs, reduced
bulk power sales and reduction of certain operating and maintenance
expenses. We will continue to evaluate any impact on future years.
We do not anticipate rate increases as a result of the explosion.
We are evaluating several alternatives for replacing the power
generated by Hawthorn 5 and are confident that we can secure
sufficient power to meet the energy needs of KCPL's customers during
this summer and beyond. Even prior to the explosion, we were
finalizing contracts to bring on line an additional 294 megawatts of
capacity by the summer of 2000 in addition to Hawthorn No. 6, a 141-
megawatt, gas-fired combustion turbine, projected to be placed into
commercial operation during the spring of 1999. We also plan to
permanently replace the lost capacity at Hawthorn and are exploring
size, fuel source and technology alternatives.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Kansas City Power & Light Co. v. Western Resources, Inc., et al.
In Kansas City Power & Light Co. v. Western Resources, Inc.,
et al . (previously discussed in the Company's Form 10-K for
the year ended December 31, 1998), the United States Court
of Appeals for the Eighth Circuit upheld on March 17, 1999
the District Court's award of approximately $500,000 in
attorneys' fees. The Company does not intend to pursue this
matter further.
Merger Regulatory Proceedings
The Amended Merger Agreement with Western Resources continues
to be subject to regulatory and governmental approvals
including the Missouri Public Service Commission (MPSC), the
Kansas Corporation Commission (KCC) and the Federal Energy
Regulatory Commission (FERC). Merger hearings before the KCC
began May 3, 1999, and the hearings before the MPSC are
scheduled to begin on July 26, 1999. The orders in those two
proceedings are expected this fall. The FERC hearing is
scheduled to begin October 25, 1999. Unless a settlement is
reached with the FERC, an order is not expected until the
first quarter of 2000. (For more information on merger, see
Note 1 to the Notes to Consolidated Financial Statements on
page 8 of this Form 10-Q).
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
Exhibit 27 Financial Data Schedule (for the three months
ended Mach 31, 1999).
Reports on Form 8-K
A report on Form 8-K was filed with the Securities and
Exchange Commission on January 27, 1999, with attached
Stipulation and Agreement entered into January 26, 1999, by
and among Kansas City Power & Light Company, Staff of the
Missouri Public Service Commission and Office of Public
Counsel.
A report on Form 8-K was filed with the Securities and
Exchange Commission on February 19, 1999, with attached press
release reporting on an explosion that occurred at the
Company's Hawthorn Generating Station.
A report on Form 8-K was filed with the Securities and
Exchange Commission on March 2, 1999, with attached press
release concerning the Company's insurance coverage at its
Hawthorn Generating Station.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
KANSAS CITY POWER & LIGHT COMPANY
Dated: May 13, 1999 By: /s/Drue Jennings
(Drue Jennings)
(Chief Executive Officer)
Dated: May 13, 1999 By: /s/Neil Roadman
(Neil Roadman)
(Principal Accounting Officer)
UT 1,000 3-MOS Dec-31-1999 Mar-31-1999 PER-BOOK 2,310,192 362,949 126,441 169,380 0 2,968,962 449,697 (1,668) 428,948 877,519 62 89,000 712,423 14,058 0 0 205,878 0 0 0 1,070,564 2,968,962 190,734 9,210 155,589 164,799 25,935 2,766 28,701 16,818 11,883 947 10,936 25,687 13,331 49,356 0.18 0.18