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SCHEDULE 14A INFORMATION
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SECURITIES EXCHANGE ACT OF 1934
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KANSAS CITY POWER & LIGHT COMPANY
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The "Apples to Apples" Comparison
In conjunction with our independent consultant, and employees
from both companies, KCPL/UCU worked very hard to analyze and
fully document cost savings related to the friendly merger of our
two companies. KCPL/UCU synergies are credible and achievable.
Nonetheless, we feel compelled to put our study on an "apples to
apples" basis with the WR study to allow for an appropriate
comparison. The following paragraphs detail the impact of
applying apparent WR synergy assumptions to the KCPL/UCU study.
This outline follows the format of the attached graphic. Finally,
it is significant to note that this analysis does not address the
impact of the additional 293 FTE reductions identified in WR's
synergy study.
- - TIMING
- WR assumes immediate recognition of all FTE reductions.
KCPL/UCU assumes FTE reductions over 10 years. If KCPL/UCU
assumed the immediate recognition of all FTE reductions, KCPL/UCU
synergies would increase by $24 million.
- WR assumes a 1998-2007 time period for the calculation of
synergies. KCPL/UCU assumes a 1997-2006 time period. If
KCPL/UCU assumed a 1998-2007 time period, KCPL/UCU synergies
would increase by $36 million.
- WR assumes a five-year depreciable life for the information
systems that would be avoided. KCPL/UCU assumes a 10-year life
for avoided information systems. If KCPL/UCU assumed a
five-year depreciable life, KCPL/UCU synergies would increase by
$39 million.
- WR assumes the immediate recognition of facilities savings.
KCPL/UCU assumes facilities savings phased in over a three-year
period to allow for the leasing of facilities. If KCPL/UCU
assumed the immediate recognition of all facilities benefits,
synergies would increase by $2 million.
- WR assumes the immediate recognition of all procurement
leverage benefits. KCPL/UCU assumes a phase-in of benefits to
reflect contractual commitments, etc. If KCPL/UCU assumed the
immediate recognition of all procurement leverage benefits,
KCPL/UCU synergies would increase $4 million.
- - COMPENSATION
- WR assumes labor is inflated at an average annual rate of
4.3%. KCPL/UCU assumes a labor inflation rate of 3.5%. If
KCPL/UCU assumed a 4.3% inflation rate, synergies for KCPL/UCU
would increase by $12 million.
- WR assumes a benefits ratio of 34%. KCPL/UCU assumes a
benefits ratio of 29.4%. If KCPL/UCU assumed a 34% benefits
ratio, synergies would increase by $7 million.
- WR calculates the labor severance deduction assuming nine
months average severance. KCPL/UCU found the average severance
for the actual FTEs to be 10.85 months. If KCPL/UCU assumed a
nine-month severance average, KCPL/UCU synergies would increase
by $2 million.
- - PROCUREMENT
- WR assumes immediate recognition of a 5% discount on all
material purchases of the combined entity. KCPL/UCU vendor
surveys found a discount of 2.85% more likely. Further, KCPL/UCU
found that a significant portion of materials purchased by the
parties would not be leverageable. If KCPL/UCU applied a 5%
discount to the WR-envisioned KCPL material purchases, as well as
an implied UCU purchase volume, total KCPL/UCU procurement
synergies would be $119 million.
- WR assumes immediate recognition of a 5% discount on all
purchased services (excluding fuel and purchased power) for the
combined companies. KCPL/UCU research found that a significant
portion of the purchased services are not leverageable. If
KCPL/UCU applied a 5% discount to both WR's universe of
purchased services for KCPL, and an implied UCU volume, KCPL/UCU
procurement synergies would be $45 million.
In this case, using WR assumptions creates an entirely new
procurement synergy for KCPL/UCU. To make the studies comparable
requires netting out the KCPL/UCU synergy study savings and
procurement timing issues discussed earlier. The resulting total
increase to KCPL/UCU synergy would be $125 million.
- - BENEFITS & A&G
- WR assumes a reduction of Benefits Administration costs.
KCPL/UCU found that both UCU and KCPL had already significantly
leveraged Benefits Administration suppliers and that the merger
would not result in additional synergies. To make the studies
comparable would require adding back the KCPL portion of
synergies identified by Western to the KCPL/UCU synergy number.
This results in an additional synergy of $7 million.
- WR assumes the reduction of general and administrative
expenses of over $7,500 per FTE reduction. KCPL/UCU, based on a
line item review of KCPL/UCU budget documents, found that
avoided A&G expense per FTE reduction to be about $3,700. To
make the studies comparable would require applying the difference
to each KCPL/UCU FTE reduction, which would increase KCPL/UCU
synergies by $3 million.
- - OTHER
- WR does not include a deduction for transaction costs of $30
million in its synergy number. The KCPL/UCU $606 million synergy
number does include a $30 million deduction for transaction
costs. To make the studies comparable would require increasing
the KCPL/UCU synergies by this $30 million.
- WR does not include a deduction for the $58 million break up
fees. To make the studies comparable would require adding back
the $58 million to the KCPL/UCU synergies. Assuming
capitalization, this would increase KCPL/UCU synergies by $99
million.
- WR assumes that the gross receipts tax avoided by WR
customers constitutes a synergy. KCPL/UCU does not include a
gross receipts tax synergy. Using a conservative 5% gross
receipts tax, applied to the 50% of synergies passed through to
the ratepayers, results in additional KCPL/UCU synergies of $19
million.
In an attempt to achieve an "apples to apples" comparison, this
study quantifies the impact of applying some of the apparent
assumptions employed by Western Resources in their Project Royal
Synergies quantification dated April 1996 to the KCPL/UCU
synergies report entitled Analysis of Synergies Related to the
Merger of UtiliCorp United and Kansas City Power & Light. This
analysis is based solely upon the interpretation of the Western
report, as a review of the supporting documentation and work
papers has not been performed.
[graph follows]
THE "APPLES TO APPLES" COMPARISON
[right arrow] THIS CHART QUANTIFIES THE IMPACT OF APPLYING
APPARENT WR ASSUMPTIONS TO THE UCU / KCPL SYNERGY
STUDY.
UCU/KCPL
Merger Study
$606 Million
[down arrow]
WESTERN RESOURCES/KCPL MERGER STUDY -- $1.04 BILLION
Reconciling Adjustments ($ in millions):
Timing Compensation Procurement A&G and Benefits Other
[1st right [2nd right [3rd right [4th right [5th right
arrow] arrow] arrow] arrow] arrow]
$105 $21 $125 $10 $148
[under first right arrow]
- FTE timing
- 1998 -- 2007 time frame
- IT systems life
- Procurement timing
- Facilities timing
[under second right arrow]
- Labor inflated at 4.3% vs. 3.5%
- Benefits at 34% vs. 29.4%
- Severance at 9 months vs. 10.86 months
[under third right arrow]
- All services at 5%
- All materials at 5%
[under fourth right arrow]
- Benefits administered by KCPL
- Administrative and overhead
[under fifth right arrow]
- Transaction costs
- Break-up fee
- Gross receipts tax
$1.02 Billion w/o Add'l FTEs