FORM U-3A-2
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
Statement by Holding Company Claiming
Exemption Under Rule 2 from the
Provisions of the Public Utility Holding
Company Act of 1935
Western Resources, Inc.
Western Resources, Inc. ("WRI") hereby files with the Securities and
Exchange Commission, pursuant to Rule 2, its statement claiming exemption as a
holding company from the provisions of the Public Utility Holding Company Act
of 1935 (the "Act") and submits the following information:
1. WRI is a Kansas corporation whose principal executive offices are
located at 818 Kansas Ave., Topeka, Kansas, 66612. WRI's mailing address is
P.O. Box 889, Topeka, Kansas 66601.
WRI's principal business consists of the generation, transmission,
distribution and sale of electricity and the transportation and sale of
natural gas. Currently, WRI provides retail electric service to approximately
322,000 industrial, commercial, and residential customers in 323 Kansas
communities. WRI also provides wholesale electric generation and transmission
services to numerous municipal customers located in Kansas and, through
interchange agreements, to surrounding integrated systems. As a natural gas
utility, WRI distributes gas in Kansas and northeastern Oklahoma. WRI
provides natural gas service to approximately 641,000 retail customers.
WRI's subsidiaries are as follows:
Kansas Gas and Electric Company ("KGE") is a Kansas corporation with its
principal offices at 120 East First Street, Wichita, Kansas, 67201. KGE
provides electric services to customers in the southeastern portion of Kansas,
including the Wichita metropolitan area. At December 31, 1993, it rendered
electric services at retail to 269,446 residential, commercial and industrial
customers and provides wholesale electric generation and transmission services
to numerous municipal customers located in Kansas, and through interchange
agreements, to surrounding integrated systems. KG&E does not own or operate
any gas properties.
Astra Resources, Inc. ("Astra") is a Kansas corporation with principal
offices at 1021 Main, Houston, Texas, 77002. Astra is a holding company for
non-utility activities, concentrating in the areas of natural gas gathering,
processing, compression and marketing.
KPL Funding, Inc. is a Kansas corporation established in connection with
the acquisition of KG&E.
The Kansas Power and Light Company is a Kansas corporation established
for the purpose of preserving the former corporate name of WRI in the state of
Kansas.
2(a). The principal electric generating stations of WRI, all of which
are located in Kansas, are as follows:
Accredited
Capacity - MW
Name and Location (WRI's Share)
Coal
JEC Unit 1, near St. Marys................... 447
JEC Unit 2, near St. Marys................... 431
JEC Unit 3, near St. Marys................... 448
Lawrence Energy Center, near Lawrence........ 538
Tecumseh Energy Center, near Tecumseh........ 230
Subtotal........................... 2,094
Gas/Oil
Hutchinson Energy Center, near Hutchinson.... 513
Abilene Energy Center, near Abilene.......... 67
Tecumseh Energy Center, near Tecumseh........ 38
Subtotal........................... 618
Total Accredited Capacity 2,712 MW
WRI maintains 19 interconnections with other public utilities to permit
direct extra-high voltage interchange. It is a member of the MOKAN Power Pool
consisting of eleven utilities in Kansas and western Missouri. WRI is also a
member of the Southwest Power Pool, the regional coordinating council for
electric utilities throughout the south-central United States.
WRI owns a transmission and distribution system which enables it to
supply its service area. Transmission and distribution lines, in general, are
located by permit or easement on public roads and streets or the lands of
others. All such transmission and distribution systems are located within the
State of Kansas. In addition, WRI owns and operates transmission,
distribution and other facilities related to supplying natural gas service to
its customers in Kansas and Oklahoma.
2(b). The principal electric generating stations of KG&E, all of which
are located in Kansas, are as follows:
Accredited
Capacity - MW
Name and Location (KG&E's Share)
Nuclear
Wolf Creek, near Burlington ................. 533
Coal
LaCygne Unit 1, near LaCygne ................ 342
LaCygne Unit 2, near LaCygne ................ 335
JEC Unit 1, near St. Mary's ................. 140
JEC Unit 2, near St. Mary's ................. 135
JEC Unit 3, near St. Mary's ................. 140
Subtotal .......................... 1,092
Gas/Oil
Gordon Evans, Wichita ....................... 517
Murray Gill, Wichita ........................ 327
Subtotal .......................... 844
Diesel
Wichita, Wichita ............................ 3
Total Accredited Capacity 2,472 MW
KG&E maintains fifteen interconnections with other public utilities to
permit direct extra-high voltage interchange. It is a member of the MOKAN
Power Pool consisting of eleven utilities in Kansas and western Missouri.
KG&E is also a member of the Southwest Power Pool, the regional coordinating
council for electric utilities throughout the south-central United States.
KG&E owns a transmission and distribution system which enables it to
supply its service area. Transmission and distribution lines, in general, are
located by permit or easement on public roads and streets or the lands of
others. All such transmission and distribution systems are located within the
State of Kansas. In addition KG&E owns 47% interest in Wolf Creek Nuclear
Operating Corporation (WCNOC) a Delaware corporation. WCNOC operates the Wolf
Creek Generating Station on behalf of and as agent for its owners. KG&E has
reserved the right to assert that WCNOC is not a Public Utility for purposes
of the Act, and that KG&E is not, by virtue of its ownership interest in
WCNOC, required to seek or file an exemption under the Act as a public utility
holding company.
3(a). For the year ended December 31, 1993, WRI sold 7,719,555,000 Kwh
of electric energy at retail, 2,520,671,000 Kwh of electric energy at
wholesale, and 159,078,000 Mcf of natural gas at retail. In early 1994, WRI
sold its Missouri natural gas operations which accounted for 70,452,000 Mcf of
such retail sales. For the year ended December 31, 1993, KG&E sold
7,744,969,000 Kwh of electric energy at retail and 2,004,107,000 Kwh of
electric energy at wholesale. All of KG&E's sales were within the State of
Kansas.
(b). During 1993, neither WRI nor its subsidiaries distributed or
sold electric energy at retail outside the State of Kansas. During 1993, WRI
distributed or sold at retail 4,465,000 Mcf of natural gas in the state of
Oklahoma, representing 2.8% of the retail natural gas sales of WRI.
(c). During 1993, WRI sold, at wholesale, 249,665,600 Kwh of
electric energy to adjoining public utilities through interconnections at the
Kansas state line. During 1993, KG&E sold, at wholesale, 1,207,740,000 Kwh of
electric energy to adjoining public utilities through interconnections at the
Kansas state line. During 1993, neither WRI or KG&E sold natural or
manufactured gas at wholesale outside the state of Kansas or at the Kansas
state line.
(d). During 1993, WRI purchased 198,826,600 Kwh of electric
energy from outside the State of Kansas or at the Kansas state line. During
1993, WRI purchased 68,080,665 Mcf of natural gas outside the state of Kansas
or at the state line. During 1993, KG&E purchased 386,886,000 Kwh of electric
energy from outside the State of Kansas or at the Kansas State line.
4. Neither WRI nor its subsidiaries hold, directly or indirectly, any
interest in an EWG or a foreign company.
The above-named claimant has caused this statement to be duly executed
on its behalf by its authorized officer on this 19th day of December, 1994.
Western Resources, Inc.
By: Richard D. Terrill
Richard D. Terrill
Secretary and Associate
General Counsel
Corporate Seal
Name, title and address of officer to whom notices and correspondence
concerning this statement should be addressed:
Richard D. Terrill
Secretary and Associate General Counsel
Western Resources, Inc.
P.O. Box 889
818 Kansas Avenue
Topeka, Kansas 66601
EXHIBIT A
A consolidating statement of income and surplus of the claimant and its
subsidiary companies for the last calendar year, together with a consolidating
balance sheet of claimant and its subsidiary companies as of the close of such
calendar year:
Exhibit A
WESTERN RESOURCES, INC.
CONSOLIDATING BALANCE SHEET
December 31, 1993
(Dollars in Thousands)
Kansas Gas Consolid- Western
Western and KPL Astra ating Ad- Resources
Resources Electric Funding Resources justments Consolidated
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . . $1,770,785 $3,339,832 $ - $ - $ - $5,110,617
Natural gas plant in service. . . . . . . . 1,111,866 - - - - 1,111,866
2,882,651 3,339,832 - - - 6,222,483
Less - Accumulated depreciation . . . . . . 1,030,867 790,843 - - - 1,821,710
1,851,784 2,548,989 - - - 4,400,773
Construction work in progress . . . . . . . 51,756 28,436 - - - 80,192
Nuclear fuel (net). . . . . . . . . . . . . - 29,271 - - - 29,271
Net utility plant. . . . . . . . . . . . 1,903,540 2,606,696 - - - 4,510,236
OTHER PROPERTY AND INVESTMENTS:
Net non-utility investments . . . . . . . . 1,274,122 506 - 60,970 (1,274,101) 61,497
Decommissioning trust . . . . . . . . . . . - 13,204 - - - 13,204
Other . . . . . . . . . . . . . . . . . . . 223 10,435 - - 10,658
1,274,345 24,145 - 60,970 (1,274,101) 85,359
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . 191 63 - 963 - 1,217
Accounts receivable and
unbilled revenues (net) . . . . . . . . . 208,164 11,112 - 18,861 - 238,137
Advances to parent company. . . . . . . . . 47,756 192,792 1 - (240,549) -
Fossil fuel, at average cost. . . . . . . . 23,340 7,594 - - - 30,934
Gas stored underground (average cost) . . . 51,788 - - - - 51,788
Materials and supplies (average cost) . . . 25,223 29,933 - - - 55,156
Prepayments and other current assets. . . . 6,524 14,995 3,942 8,667 - 34,128
362,986 256,489 3,943 28,491 (240,549) 411,360
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes. . . . . . . . 22,512 113,479 - - - 135,991
Deferred coal contract
settlement costs. . . . . . . . . . . . . - 21,247 - - - 21,247
Phase-in revenues . . . . . . . . . . . . . - 78,950 - - - 78,950
Corporate-owned life insurance (net). . . . 4,698 45 - - - 4,743
Other deferred plant costs. . . . . . . . . - 32,008 - - - 32,008
Other . . . . . . . . . . . . . . . . . . . 77,238 54,420 - 496 - 132,154
104,448 300,149 - 496 - 405,093
TOTAL ASSETS . . . . . . . . . . . . . . $3,645,319 $3,187,479 $ 3,943 $ 89,957 ($1,514,650) $5,412,048
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see statement). . . . . . . . $2,467,478 $1,899,221 $ 2,411 $ 36,603 ($1,284,692) $3,121,021
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . 285,095 155,800 - - - 440,895
Long-term debt due within one year. . . . . 2,966 238 - - - 3,204
Accounts payable. . . . . . . . . . . . . . 106,491 51,095 - 14,752 - 172,338
Accounts payable - subsidiary . . . . . . . 192,793 - - 36,202 (228,995) -
Accrued taxes . . . . . . . . . . . . . . . 32,125 12,185 1,532 234 - 46,076
Accrued interest and dividends. . . . . . . 58,444 7,381 - - - 65,825
Other . . . . . . . . . . . . . . . . . . . 54,862 9,427 - 2,166 (963) 65,492
732,776 236,126 1,532 53,354 (229,958) 793,830
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . . 322,478 646,159 - - - 968,637
Deferred investment tax credits . . . . . . 72,241 78,048 - - - 150,289
Deferred gain from sale-leaseback . . . . . - 261,981 - - - 261,981
Other . . . . . . . . . . . . . . . . . . . 50,346 65,944 - - - 116,290
445,065 1,052,132 - - - 1,497,197
COMMITMENTS AND CONTINGENCIES
TOTAL CAPITALIZATION AND LIABILITIES. . . $3,645,319 $3,187,479 $ 3,943 $ 89,957 ($1,514,650) $5,412,048
/TABLE
Exhibit A
WESTERN RESOURCES, INC.
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 1993
(Dollars in Thousands,
except Per Share Amounts)
Kansas Gas Consolid- Western
Western and KPL Astra ating Ad- Resources
Resources Electric Funding Resources justments Consolidated
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . $ 487,540 $ 616,997 $ - $ - $ - $1,104,537
Natural gas . . . . . . . . . . . . . . . . 804,822 - - - - 804,822
Total operating revenues. . . . . . . . . 1,292,362 616,997 - - - 1,909,359
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . 143,665 93,388 - - - 237,053
Nuclear fuel. . . . . . . . . . . . . . . - 13,275 - - - 13,275
Power purchased . . . . . . . . . . . . . . 6,532 9,864 - - - 16,396
Natural gas purchases . . . . . . . . . . . 500,189 - - - - 500,189
Other operations. . . . . . . . . . . . . . 230,212 118,948 - - - 349,160
Maintenance . . . . . . . . . . . . . . . . 71,103 46,740 - - - 117,843
Depreciation and amortization . . . . . . . 88,834 75,530 - - - 164,364
Amortization of phase-in revenues . . . . . - 17,545 - - - 17,545
Taxes (see statement):
Federal income. . . . . . . . . . . . . . 22,867 39,553 - - - 62,420
State income. . . . . . . . . . . . . . . 5,988 9,570 - - - 15,558
General . . . . . . . . . . . . . . . . . 78,290 45,203 - - - 123,493
Total operating expenses. . . . . . . . 1,147,680 469,616 - - - 1,617,296
OPERATING INCOME. . . . . . . . . . . . . . . 144,682 147,381 - - - 292,063
OTHER INCOME AND DEDUCTIONS (net of taxes). . 114,246 19,339 194 1,161 (109,458) 25,482
INCOME BEFORE INTEREST CHARGES. . . . . . . . 258,928 166,720 194 1,161 (109,458) 317,545
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . 69,643 53,908 - - - 123,551
Other . . . . . . . . . . . . . . . . . . . 13,180 6,075 - - - 19,255
Allowance for borrowed funds used during
construction (credit) . . . . . . . . . . (1,265) (1,366) - - - (2,631)
Total interest charges. . . . . . . . . 81,558 58,617 - - - 140,175
NET INCOME. . . . . . . . . . . . . . . . . . 177,370 108,103 194 1,161 (109,458) 177,370
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . 13,506 - - - - 13,506
EARNINGS APPLICABLE TO COMMON STOCK . . . . . $ 163,864 $ 108,103 $ 194 $ 1,161 $ (109,458) $ 163,864
AVERAGE COMMON SHARES OUTSTANDING . . . . . . 59,294,091 59,294,091
EARNINGS PER AVERAGE COMMON
SHARE OUTSTANDING . . . . . . . . . . . . . $ 2.76 $ 2.76
For information related to the sale of the Missouri natural gas distribution properties, see Notes 2
and 13 of the Notes to Consolidated Financial Statements.
/TABLE
Exhibit A
WESTERN RESOURCES, INC.
CONSOLIDATING STATEMENT OF RETAINED EARNINGS
December 31, 1993
(Dollars in Thousands)
Kansas Gas Consolid- Western
Western and KPL Astra ating Ad- Resources
Resources Electric Funding Resources justments Consolidated
BALANCE AT BEGINNING OF PERIOD. . . . . . . . $ 398,503 $ 71,941 $ 2,216 $ (700) $ (73,457) $ 398,503
ADD:
Net income. . . . . . . . . . . . . . . . . 177,370 108,103 194 1,161 (109,458) 177,370
Total . . . . . . . . . . . . . . . . . . 575,873 180,044 2,410 461 (182,915) 575,873
DEDUCT:
Cash dividends:
Preferred and preference stock. . . . . . . 13,506 - - - - 13,506
Common stock, $1.94 per share . . . . . . . 116,019 - - - - 116,019
Total . . . . . . . . . . . . . . . . . . 129,525 - - - - 129,525
BALANCE AT END OF PERIOD. . . . . . . . . . . $ 446,348 $ 180,044 $ 2,410 $ 461 $(182,915) $ 446,348
/TABLE
WESTERN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General: The consolidated financial statements of Western Resources, Inc.
(the Company, Western Resources), include the accounts of its wholly-owned
subsidiaries, Astra Resources, Inc., Kansas Gas and Electric Company (KG&E)
since March 31, 1992 (see Note 3), and KPL Funding Corporation (KFC). KG&E
owns 47 percent of Wolf Creek Nuclear Operating Corporation (WCNOC), the
operating company for Wolf Creek Generating Station (Wolf Creek). The Company
records its proportionate share of all transactions of WCNOC as it does other
jointly-owned facilities. All significant intercompany transactions have been
eliminated. The operations of Astra Resources, Inc., and KFC are not material
to the Company's results of operations. The accounting policies of the
Company are in accordance with generally accepted accounting principles as
applied to regulated public utilities. The accounting and rates of the
Company are subject to requirements of certain state regulatory commissions
and the Federal Energy Regulatory Commission (FERC). The Company is doing
business as KPL, Gas Service, and, through its wholly-owned subsidiary, KG&E.
Utility Plant: Utility plant is stated at cost. For constructed plant,
cost includes contracted services, direct labor and materials, indirect
charges for engineering, supervision, general and administrative costs, and an
allowance for funds used during construction (AFUDC). The AFUDC rate was
4.10% in 1993, 5.99% in 1992, and 6.25% in 1991. The cost of additions to
utility plant and replacement units of property is capitalized. Maintenance
costs and replacement of minor items of property are charged to expense as
incurred. When units of depreciable property are retired, they are removed
from the plant accounts and the original cost plus removal charges less
salvage are charged to accumulated depreciation.
Depreciation: Depreciation is provided on the straight-line method based
on estimated useful lives of property. Composite provisions for book
depreciation approximated 3.02% during 1993, 3.03% during 1992, and 3.34%
during 1991 of the average original cost of depreciable property.
Cash and Cash Equivalents: For purposes of the Consolidated Statements of
Cash Flows, cash and cash equivalents include cash on hand and highly liquid
collateralized debt instruments purchased with maturities of three months or
less.
Income Taxes: Income tax expense includes provisions for income taxes
currently payable and deferred income taxes calculated in conformance with
income tax laws, regulatory orders, and Statement of Financial Accounting
Standards No. 109 (SFAS 109) (see Note 12).
Investment tax credits are deferred as realized and amortized to income
over the life of the property which gave rise to the credits.
Revenues: Effective January 1, 1991, the Company changed its method of
accounting for recognizing electric and natural gas revenues to provide for
the accrual of estimated unbilled revenues. The accounting change provides a
better matching of revenues with costs of services provided to customers and
also serves to conform the Company's accounting treatment of unbilled revenues
with the tax treatment of such revenues. Unbilled revenues represent the
estimated amount customers will be billed for service provided from the time
meters were last read to the end of the accounting period. Meters are read
and services are billed on a cycle basis and, prior to the accounting change,
revenues were recognized in the accounting period during which services were
billed.
The after-tax effect of the change in accounting method for the year ended
December 31, 1991, was an increase in net income of $15.9 million or $0.46 per
share. This increase was a combination of an increase of $17.3 million or
$0.50 per share, attributable to the cumulative effect of the accounting
change prior to January 1, 1991, and a decrease of $1.4 million or $0.04 per
share in the 1991 income before cumulative effect of a change in accounting
principle. Unbilled revenues of $99 and $86 million are recorded as a
component of accounts receivable on the consolidated balance sheets as of
December 31, 1993 and 1992, respectively. Certain amounts of unbilled
revenues have been sold (see Note 8).
The Company had reserves for doubtful accounts receivable of $4.3 and $3.3
million at December 31, 1993 and 1992, respectively.
Fuel Costs: The cost of nuclear fuel in process of refinement,conversion,
enrichment, and fabrication is recorded as an asset at original cost and is
amortized to expense based upon the quantity of heat produced for the
generation of electricity. The accumulated amortization of nuclear fuel in
the reactor at December 31, 1993 and 1992, was $17.4 million and $26.0
million, respectively.
Cash Surrender Value of Life Insurance Contracts: The following amounts
related to corporate-owned life insurance contracts (COLI), primarily with one
highly rated major insurance company, are recorded on the consolidated balance
sheets (millions of dollars):
1993 1992
Cash surrender value of contracts. . . $ 326.3 $ 256.3
Prepaid COLI . . . . . . . . . . . . . 11.9 7.0
Borrowings against contracts . . . . . (321.5) (109.6)
COLI (net). . . . . . . . . . $ 16.7 $ 153.7
The decrease in COLI (net) is a result of increased borrowings against the
accumulated cash surrender value of the COLI policies. The COLI borrowings
will be repaid with proceeds from death benefits. Management expects to
realize increases in the cash surrender value of contracts resulting from
premiums and investment earnings on a tax free basis upon receipt of proceeds
from death benefits under the contracts. Interest expense included in other
income and deductions, net of taxes, related to KG&E's COLI for 1993 and the
nine months ended December 31, 1992, was $11.9 and $5.3 million, respectively.
As approved by the Kansas Corporation Commission (KCC) and Missouri Public
Service Commission (MPSC), the Company is using a portion of the net income
stream generated by COLI policies purchased in 1993 and 1992 by the Company
(see Note 6) to offset Statement of Financial Accounting Standards No. 106
(SFAS 106) expenses.
Reclassifications: Certain amounts in prior years have been reclassified
to conform with classifications used in the current year presentation.
2. SALE OF MISSOURI NATURAL GAS DISTRIBUTION PROPERTIES
On January 31, 1994, the Company sold substantially all of its Missouri
natural gas distribution properties and operations to Southern Union Company
(Southern Union). The Company sold the remaining Missouri properties to
United Cities Gas Company (United Cities) on February 28, 1994. The
properties sold to Southern Union and United Cities are referred to herein as
the "Missouri Properties." With the sales the Company is no longer operating
as a utility in the State of Missouri.
The portion of the Missouri Properties purchased by Southern Union was
sold for an estimated sale price of $400 million, in cash, based on a
calculation as of December 31, 1993. The final sale price will be calculated
as of January 31, 1994, within 120 days of closing. Any difference between the
estimated and final sale price will be adjusted through a payment to or from
the Company.
United Cities purchased the Company's natural gas distribution system in
and around the City of Palmyra, Missouri, for $665,000 in cash.
The operating revenues and operating income (unaudited) related to the
Missouri Properties approximated $350 million and $21 million representing
approximately 18 percent and seven percent, respectively, of the Company's
total for 1993, and $299 million and$11 million representing approximately 19
percent and five percent, respectively, of the Company's total for 1992. Net
utility plant (unaudited) for the Missouri Properties, at December 31, 1993,
approximated $296 million and $272 million at December 31, 1992. This
represents approximately seven percent at December 31, 1993, and six percent
at December 31, 1992, of the total Company net utility plant. Separate
audited financial information was not kept by the Company for the Missouri
Properties. This unaudited financial information is based on assumptions and
allocations of expenses of the Company as a whole.
3. ACQUISITION AND MERGER
On March 31, 1992, the Company, through its wholly-owned subsidiary KCA
Corporation (KCA), acquired all of the outstanding common and preferred stock
of Kansas Gas and Electric Company for $454 million in cash and 23,479,380
shares of common stock (the Merger). The Company also paid $20 million in
costs to complete the Merger. Simultaneously, KCA and Kansas Gas and Electric
Company merged and adopted the name of Kansas Gas and Electric Company (KG&E).
The Merger was accounted for as a purchase. For income tax purposes the tax
basis of the KG&E assets was not changed by the Merger.
As the Company acquired 100 percent of the common and preferred stock of
KG&E, the Company recorded an acquisition premium of $490 million on the
consolidated balance sheet for the difference in purchase price and book
value. This acquisition premium and related income tax requirement of $294
million under SFAS 109 have been classified as plant acquisition adjustment in
electric plant in service on the consolidated balance sheets. The total cost
of the acquisition was $1.066 billion. Under the provisions of orders of the
KCC and the MPSC the acquisition premium is recorded as an acquisition
adjustment and not allocated to the other assets and liabilities of KG&E.
In the November 1991 KCC order approving the Merger, a mechanism was
approved to share equally between the shareholders and ratepayers the cost
savings generated by the Merger in excess of the revenue requirement needed to
allow recovery of the amortization of a portion of the acquisition adjustment,
including income tax, calculated on the basis of a purchase price of KG&E's
common stock at $29.50 per share. The order provides an amortization period
for the acquisition adjustment of 40 years commencing in August 1995, at which
time the full amount of cost savings is expected to have been implemented.
Merger savings will be measured by application of an inflation index to
certain pre-merger operating and maintenance costs at the time of the next
Kansas rate case. While the Company has achieved savings from the Merger,
there is no assurance that the savings achieved will be sufficient to, or the
cost savings sharing mechanism will operate as to fully offset the
amortization of the acquisition adjustment. The order further provides a
moratorium on increases, with certain exceptions, in the Company's Kansas
electric and natural gas rates until August 1995. The KCC ordered refunds
totalling $32 million to the combined companies' customers to share with
customers the Merger-related cost savings achieved during the moratorium
period. The first refund was made in April 1992 and amounted to $8.5 million.
A refund of the same amount was made in December 1993 and an additional refund
of $15 million will be made in September 1994.
The KCC order approving the Merger requires the legal reorganization of
KG&E so that it is no longer held as a separate subsidiary after January 1,
1995, unless good cause is shown why such separate existence should be
maintained. The Securities and Exchange Commission order relating to the
Merger granted the Company an exemption under the Public Utilities Holding
Company Act until January 1, 1995. In connection with a requested ruling that
a merger of KG&E into Western Resources would not adversely affect the tax
structure of the merger, KG&E received a response from the Internal Revenue
Service that the IRS would not issue the requested ruling. In light of the
IRS response, KG&E withdrew its request for a ruling. The Company will
consider alternative forms of combination or seek regulatory approvals to
waive the requirements for a combination. There is no certainty as to whether
a combination will occur or as to the form or timing thereof.
As the Merger did not occur until March 31, 1992, the twelve months ended
December 31, 1992, results of operations for the Company reported in its
statements of income, cash flows, and common stock equity reflect KG&E's
results of operations for only the nine months ended December 31, 1992. The
pro forma combined revenues, operating income, net income, and earnings per
common share of the Company presented below give effect to the Merger as if it
had occurred at January 1, 1991. This pro forma information is not
necessarily indicative of the results of operations that would have occurred
had the Merger been consummated for the period for which it is being given
effect nor is it necessarily indicative of future operating results.
Year Ended December 31, 1992 1991
(Dollars in Thousands, except per share amounts)
Revenues. . . . . . . . . . . . $1,684,885 $1,748,844
Operating Income. . . . . . . . 268,772 279,458
Net Income. . . . . . . . . . . 131,524 110,290(1)
Earnings Per Common . . . . . . $ 2.03 $ 1.72(1)
(1) Reflects information before the cumulative effect of the January 1,
1991 change in accounting method of recognizing revenues.
4. COMMITMENTS AND CONTINGENCIES
As part of its ongoing operations and construction program, the Company
has commitments under purchase orders and contracts which have an unexpended
balance of approximately $86 million at December 31, 1993. Approximately $36
million is attributable to modifications to upgrade the turbines at Jeffrey
Energy Center to be completed by December 31, 1998. Plans for future
construction of utility plant are discussed in the "Management's Discussion
and Analysis" section.
Environmental: The Company has been associated with 28 (20 in Kansas and
8 in Missouri) former manufactured gas sites which may contain coal tar and
other potentially harmful materials. These sites were operated decades ago by
other companies, and were acquired by the Company after they had ceased
operation. The Environmental Protection Agency (EPA) has performed
preliminary assessments of eleven of these sites (EPA sites), six of which are
under site investigation. The Company has not received any indication from
the EPA that further action will be taken at the EPA sites, nor does the
Company have reason to believe there will be any fines or penalties assessed
related to these sites. The Company and the Kansas Department of Health and
Environment (KDHE) entered into a consent agreement to conduct separate
preliminary assessments of the 20 former manufactured gas sites located in
Kansas. The preliminary assessments of these 20 sites have been completed at
a total cost of approximately $500,000. The Company plans to initiate site
investigation and risk assessments at the two highest priority sites in 1994
at a total cost of approximately $500,000. Until such time that risk
assessments are completed at these or the remaining sites, it will be
impossible to predict the cost of remediation. However, the Company is aware
of other utilities in Region VII of the EPA (Kansas, Missouri, Nebraska, and
Iowa) which have incurred remediation costs for such sites ranging between
$500,000 and $10 million, depending on the site. The Company is also aware
that the KCC has permitted another Kansas utility to recover a portion of the
remediation costs through rates. To the extent that such remediation costs
are not recovered through rates, the costs could be material to the Company's
financial position or results of operations depending on the degree of
remediation and number of years over which the remediation must be completed.
The Company has been identified as one of numerous potentially responsible
parties in four hazardous waste sites listed by the EPA as Superfund sites.
One site is a groundwater contamination site in Wichita, Kansas, and one is an
oil soil contamination site in Springfield, Missouri. The other two sites are
solid waste land fills located in Edwardsville and Hutchinson, Kansas. The
Company's obligation at these sites appears to be limited, and it is the
opinion of the Company's management that the resolution of these matters will
not have a material impact on the Company's financial position or results of
operations.
As part of the sale of the Company's Missouri Properties to Southern
Union, Southern Union assumed responsibility under an agreement for any
environmental matters now pending or that may arise after closing. For any
environmental matters now pending or discovered within two years of the date
of the agreement, and after pursuing several other potential recovery options,
the Company may be liable for up to a maximum of $7.5 million under a sharing
arrangement with Southern Union provided for in the agreement.
Spent Nuclear Fuel Disposal: Under the Nuclear Waste Policy Act of 1982,
the U.S. Department of Energy (DOE) is responsible for the ultimate storage
and disposal of spent nuclear fuel removed from nuclear reactors. Under a
contract with the DOE for disposal of spent nuclear fuel, the Company pays a
quarterly fee to DOE of one mill per kilowatthour on net nuclear generation.
These fees are included as part of nuclear fuel expense and amounted to $3.5
million for 1993 and $1.6 million for 1992.
Decommissioning: The Company's share of Wolf Creek decommissioning costs,
currently authorized in rates, was estimated to be approximately $97 million
in 1988 dollars. Decommissioning costs are being charged to operating
expenses. Amounts so expensed are deposited in an external trust fund and will
be used solely for the physical decommissioning of the plant. Electric rates
charged to customers provide for recovery of these decommissioning costs over
the estimated life of Wolf Creek. At December 31, 1993, and December 31,
1992, $13.2 and $9.3 million, respectively, were on deposit in the
decommissioning fund. On September 1, 1993, WCNOC filed an application with
the KCC for an order approving a 1993 Wolf Creek Decommissioning Cost Study
which estimates the Company's share of Wolf Creek decommissioning costs at
approximately $174 million in 1993 dollars. If approved by the KCC,
management expects substantially all such cost increases to be recovered
through the ratemaking process.
The Company carries $164 million in premature decommissioning insurance in
the event of a shortfall in the trust fund. The insurance coverage has
several restrictions. One of these is that it can only be used if Wolf Creek
incurs an accident exceeding $500 million in expenses to safely stabilize the
reactor, to decontaminate the reactor and reactor station site in accordance
with a plan approved by the Nuclear Regulatory Commission (NRC), and to pay
for on-site property damages. If the amount designated as decommissioning
insurance is needed to implement the NRC-approved plan for stabilization and
decontamination, it would not be available for decommissioning purposes.
Nuclear Insurance: The Price-Anderson Act limits the combined public
liability of the owners of nuclear power plants to $9.4 billion for a single
nuclear incident. The Wolf Creek owners (Owners) have purchased the maximum
available private insurance of $200 million and the balance is provided by an
assessment plan mandated by the NRC. Under this plan, the Owners are jointly
and severally subject to a retrospective assessment of up to $79.3 million
($37.3 million, Company's share) in the event there is a nuclear incident
involving any of the nation's licensed reactors. This assessment is subject
to an inflation adjustment based on the Consumer Price Index. There is a
limitation of $10 million ($4.7 million, Company's share) in retrospective
assessments per incident per year.
The Owners carry decontamination liability, premature decommissioning
liability, and property damage insurance for Wolf Creek totalling
approximately $2.8 billion ($1.3 billion, Company's share). This insurance is
provided by a combination of "nuclear insurance pools" ($1.3 billion) and
Nuclear Electric Insurance Limited (NEIL) ($1.5 billion). In the event of an
accident, insurance proceeds must first be used for reactor stabilization and
site decontamination. The remaining proceeds from the $2.8 billion insurance
coverage ($1.3 billion, Company's share), if any, can be used for property
damage up to $1.1 billion (Company's share) and premature decommissioning
costs up to $117.5 million (Company's share) in excess of funds previously
collected for decommissioning (as discussed under "Decommissioning"), with the
remaining $47 million (Company's share) available for either property damage
or premature decommissioning costs.
The Owners also carry additional insurance with NEIL to cover costs of
replacement power and other extra expenses incurred during a prolonged outage
resulting from accidental property damage at Wolf Creek. If losses incurred
at any of the nuclear plants insured under the NEIL policies exceed premiums,
reserves, and other NEIL resources, the Company may be subject to
retrospective assessments of approximately $9 million per year.
There can be no assurance that all potential losses or liabilities will be
insurable or that the amount of insurance will be sufficient to cover them.
Any substantial losses not covered by insurance, to the extent not recoverable
through rates, could have a material adverse effect on the Company's financial
condition and results of operations.
Clean Air Act: The Clean Air Act Amendments of 1990 (the Act) require a
two-phase reduction in sulfur dioxide and nitrous oxide emissions effective in
1995 and 2000 and a probable reduction in toxic emissions. To meet the
monitoring and reporting requirements under the acid rain program, the Company
is installing continuous monitoring and reporting equipment at a total cost of
approximately $10 million. At December 31, 1993, the Company had completed
approximately $4 million of these capital expenditures with the remaining
$6 million of capital expenditures to be completed in 1994 and 1995. The
Company does not expect additional equipment to reduce sulfur emissions to be
necessary under Phase II. The Company currently has no Phase I affected
units.
The nitrous oxide and toxic limits, which were not set in the law, will be
specified in future EPA regulations. The EPA has issued for public comment
preliminary nitrous oxide regulations for Phase I group 1 units. Nitrous
oxide regulations for Phase II units and Phase I group 2 units are mandated in
the Act to be promulgated by January 1, 1997. Although the Company has no
Phase I units, the final nitrous oxide regulations for Phase I group 1 may
allow for early compliance for Phase II group 1 units. Until such time as the
Phase I group 1 nitrous oxide regulations are final, the Company will be
unable to determine its compliance options or related compliance costs.
Federal Income Taxes: During 1991, the Internal Revenue Service (IRS)
completed an examination of KG&E's federal income tax returns for the years
1984 through 1988. In April 1992, KG&E received the examination report and
upon review filed a written protest in August 1992. In October 1993, KG&E
received another examination report for the years 1989 and 1990 covering the
same issues identified in the previous examination report. Upon review of
this report, KG&E filed a written protest in November 1993. The most
significant proposed adjustments reduce the depreciable basis of certain
assets and investment tax credits generated. Management believes there are
significant questions regarding the theory, computations, and sampling
techniques used by the IRS to arrive at its proposed adjustments, and also
believes any additional tax expense incurred or loss of investment tax credits
will not be material to the Company's financial position and results of
operations. Additional income tax payments, if any, are expected to be offset
by investment tax credit carryforwards, alternative minimum tax credit
carryforwards, or deferred tax provisions.
Fuel Commitments: To supply a portion of the fuel requirements for its
generating plants, the Company has entered into various commitments to obtain
nuclear fuel, coal, and natural gas. Some of these contracts contain
provisions for price escalation and minimum purchase commitments. At December
31, 1993, WCNOC's nuclear fuel commitments (Company's share) were
approximately $18.0 million for uranium concentrates expiring at various times
through 1997, $123.6 million for enrichment expiring at various times through
2014, and $45.5 million for fabrication through 2012. At December 31, 1993,
the Company's coal and natural gas contract commitments in 1993 dollars under
the remaining term of the contracts were $2.8 billion and $20.4 million,
respectively. The largest coal contract was renegotiated early in 1993 and
expires in 2020, with the remaining coal contracts expiring at various times
through 2013. The majority of natural gas contracts continue through 1995
with automatic one-year extension provisions. In the normal course of
business, additional commitments and spot market purchases will be made to
obtain adequate fuel supplies.
Energy Act: As part of the 1992 Energy Policy Act, a special assessment
is being collected from utilities for a uranium enrichment, decontamination,
and decommissioning fund. The Company's portion of the assessment for Wolf
Creek is approximately $7 million, payable over 15 years. Management expects
such costs to be recovered through the ratemaking process.
5. RATE MATTERS AND REGULATION
The Company, under rate orders from certain state regulatory commissions
and the FERC, recovers increases in fuel and natural gas costs through fuel
adjustment clauses for wholesale and certain retail electric customers and
various purchased gas adjustment clauses (PGA) for natural gas customers.
Certain state regulatory commissions require the annual difference between
actual gas cost incurred and cost recovered through the application of the PGA
be deferred and amortized through rates in subsequent periods.
Elimination of the Energy Cost Adjustment Clause (ECA): On March 26,
1992, in connection with the Merger, the KCC approved the elimination of the
ECA for most Kansas retail electric customers of both the Company and KG&E
effective April 1, 1992. The provisions for fuel costs included in base rates
were established at a level intended by the KCC to equal the projected average
cost of fuel through August 1995, and to include recovery of costs provided by
previously issued orders relating to coal contract settlements. Any increase
or decrease in fuel costs from the projected average will be absorbed by the
Company.
MPSC Rate Proceedings: On October 5, 1993, the MPSC approved an agreement
among the Company, the MPSC staff, and intervenors to increase natural gas
rates $9.75 million annually, effective October 15, 1993. Also on October 15,
1993, the Company discontinued the deferral of service line replacement
program costs deferred since July 1, 1991, and began amortizing the balance to
expense over twenty years. At December 31, 1993, approximately $8.3 million
of these deferrals have been included in other deferred charges on the
consolidated balance sheet.
On January 22, 1992, the MPSC issued an order authorizing the Company to
increase natural gas rates $7.3 million annually.
KCC Rate Proceedings: On January 24, 1992, the KCC issued an order
allowing the Company to continue the deferral of service line replacement
program costs incurred since January 1, 1992, including depreciation, property
taxes, and carrying costs for recovery in the next general rate case. At
December 31, 1993, approximately $2.9 million of these deferrals have been
included in other deferred charges on the consolidated balance sheet.
On December 30, 1991, the KCC approved a permanent natural gas rate
increase of $39 million annually and the Company discontinued the deferral of
accelerated line survey costs on January 1, 1992. Approximately $8.3 million
of deferred costs remain in other deferred charges on the consolidated balance
sheet at December 31, 1993, with the balance being included in rates and
amortized to expense during a 43-month period, commencing January 1, 1992.
Gas Transportation Charges: On September 12, 1991, the KCC authorized the
Company to begin recovering, through the PGA, deferred supplier gas
transportation costs of $9.9 million incurred through December 31, 1990, based
on a three-year amortization schedule. On December 30, 1991, the KCC
authorized the Company to recover deferred transportation costs of
approximately $2.8 million incurred subsequent to December 31, 1990, through
the PGA over a 32-month period. At December 31, 1993, approximately $4.8
million of these deferrals remain in other deferred charges on the
consolidated balance sheet.
Tight Sands: In December 1991, the KCC, MPSC, and Oklahoma Corporation
Commission (OCC) approved agreements authorizing the Company to refund to
customers approximately $40 million of the proceeds of the Tight Sands
antitrust litigation settlement to be collected on behalf of Western
Resources' natural gas customers. To secure the refund of settlement
proceeds, the Commissions authorized the establishment of an independently
administered trust to collect and maintain cash receipts received under Tight
Sands settlement agreements and provide for the refunds made. The trust has a
term of ten years.
Rate Stabilization Plan: In 1988, the KCC issued an order requiring that
the accrual of phase-in revenues be discontinued by KG&E effective December
31, 1988. Effective January 1, 1989, KG&E began amortizing the phase-in
revenue asset on a straight-line basis over 9 1/2 years.
Coal Contract Settlements: In March 1990, the KCC issued an order
allowing KG&E to defer its share of a 1989 coal contract settlement with the
Pittsburgh and Midway Coal Mining Company amounting to $22.5 million. This
amount was recorded as a deferred charge on the consolidated balance sheets.
The settlement resulted in the termination of a long-term coal contract. The
KCC permitted KG&E to recover this settlement as follows: 76 percent of the
settlement plus a return over the remaining term of the terminated contract
(through 2002) and 24 percent to be amortized to expense with a deferred
return equivalent to the carrying cost of the asset.
In February 1991, KG&E paid $8.5 million to settle a coal contract lawsuit
with AMAX Coal Company and recorded the payment as a deferred charge on the
consolidated balance sheet. The KCC approved the recovery of the settlement
plus a return, equivalent to the carrying cost of the asset, over the
remaining term of the terminated contract (through 1996).
FERC Order No. 528: In 1990, the FERC issued Order No. 528 which
authorized new methods for the allocation and recovery of take-or-pay
settlement costs by natural gas pipelines from their customers. Settlements
have been reached between the Company's two largest gas pipelines and their
customers in FERC proceedings related to take-or-pay issues. The settlements
address the allocation of take-or-pay settlement costs between the pipelines
and their customers. However, the amount which one of the pipelines will be
allowed to recover is yet to be determined. Litigation continues between the
Company and a former upstream pipeline supplier to one of the Company's
pipeline suppliers concerning the amount of such costs which may ultimately be
allocated to the Company's pipeline supplier. A portion of any costs
allocated to the Company's pipeline supplier will be charged to the Company.
Due to the uncertainty concerning the amount to be recovered by the Company's
current suppliers and of the outcome of the litigation between the Company and
its current pipeline's upstream supplier, the Company is unable to estimate
its future liability for take-or-pay settlement costs. However, the KCC and
MPSC have approved mechanisms which are expected to allow the Company to
recover these take-or-pay costs from its customers.
6. EMPLOYEE BENEFIT PLANS
Pension: The Company maintains noncontributory defined benefit pension
plans covering substantially all employees. Pension benefits are based on
years of service and the employee's compensation during the five highest paid
consecutive years out of ten before retirement. The Company's policy is to
fund pension costs accrued, subject to limitations set by the Employee
Retirement Income Security Act of 1974 and the Internal Revenue Code.
The following tables provide information on the components of pension
cost, funded status, and actuarial assumptions for the Company's pension
plans:
Year Ended December 31, 1993 1992 1991
(Dollars in Thousands)
Pension Cost:
Service cost................... $ 9,778 $ 9,847 $ 6,589
Interest cost on projected
benefit obligation........... 35,688 29,457 20,985
Return on plan assets.......... (64,113) (38,967) (59,161)
Deferred gain on plan assets... 29,190 7,705 38,015
Net amortization............... (669) (948) (131)
Net pension cost........... $ 9,874 $ 7,094 $ 6,297
December 31, 1993 1992 1991
(Dollars in Thousands)
Funded Status:
Actuarial present value of
benefit obligations:
Vested . . . . . . . . . . . $353,023 $316,100 $200,435
Non-vested . . . . . . . . . 26,983 19,331 13,935
Total. . . . . . . . . . . $380,006 $335,431 $214,370
Plan assets (principally debt
and equity securities) at
fair value . . . . . . . . . . . $490,339 $452,372 $324,780
Projected benefit obligation . . . 468,996 424,232 282,062
Plan assets in excess of
projected benefit obligation . . 21,343 28,140 42,718
Unrecognized transition asset. . . (2,756) (3,092) (1,253)
Unrecognized prior service costs . 64,217 55,886 27,216
Unrecognized net gain. . . . . . . (108,783) (106,486) (69,494)
Accrued pension costs. . . . . . . $(25,979) $(25,552) $ (813)
Year Ended December 31, 1993 1992 1991
Actuarial Assumptions:
Discount rate. . . . . . . . . . 7.0-7.75% 8.0-8.5% 8.0%
Annual salary increase rate. . . 5.0 % 6.0% 6.0%
Long-term rate of return . . . . 8.0-8.5 % 8.0-8.5% 8.0%
Retirement and Voluntary Separation Plans: In January 1992, the Board of
Directors approved early retirement plans and voluntary separation programs.
The voluntary early retirement plans were offered to all vested participants
in the Company's defined pension plan who reached the age of 55 with 10 or
more years of service on or before May 1, 1992. Certain pension plan
improvements were made, including a waiver of the actuarial reduction factors
for early retirement and a cash incentive payable as a monthly supplement up
to 60 months or as a lump sum payment. Of the 738 employees eligible for the
early retirement option, 531, representing ten percent of the combined
Company's work force, elected to retire on or before the May 1, 1992,
deadline. Seventy-one of those electing to retire were employees of KG&E
acquired March 31, 1992 (see Note 3). Another 67 employees, with 10 or more
years of service, elected to participate in the voluntary separation program.
Of those, 29 were employees of KG&E. In addition, 68 employees received
Merger-related severance benefits, including 61 employees of KG&E. The
actuarial cost, based on plan provisions for early retirement and voluntary
separation programs, and Merger-related severance benefits for the KG&E
employees, were considered in purchase accounting for the Merger. The
actuarial cost of the former Kansas Power and Light Company employees, of
approximately $11 million, was expensed in 1992.
Postretirement: The Company adopted the provisions of Statement of
Financial Accounting Standards No. 106 (SFAS 106) in the first quarter of
1993. This statement requires the accrual of postretirement benefits other
than pensions, primarily medical benefit costs, during the years an employee
provides service.
Based on actuarial projections and adoption of the transition method of
implementation which allows a 20-year amortization of the accumulated benefit
obligation, the annual expense under SFAS 106 was approximately $26.5 million
in 1993 (as compared to approximately $9.6 million on a cash basis) and the
Company's total obligation was approximately $166.5 million at December 31,
1993. To mitigate the impact of SFAS 106 expense, the Company has implemented
programs to reduce health care costs. In addition, the Company has received
orders from the KCC and MPSC permitting the initial deferral of SFAS 106
expense. To mitigate the impact SFAS 106 expense will have on rate increases,
the Company will include in the future computation of cost of service the
actual SFAS 106 expense and an income stream generated from corporate-owned
life insurance (COLI). To the extent SFAS 106 expense exceeds income from the
COLI program, this excess will be deferred (as allowed by the FASB Emerging
Issues Task Force Issue No. 92-12) and offset by income generated through the
deferral period by the COLI program. The OCC is reviewing the Company's
application for similar treatment in Oklahoma. Should the OCC require
recognition of postretirement benefit costs for regulatory purposes under a
different method than that proposed
under the Company's application, the impact on earnings would not be material.
Should the income stream generated by the COLI program not be sufficient to
offset the deferred SFAS 106 expense, the KCC and MPSC orders allow recovery
of such deficit through the ratemaking process.
Prior to the adoption of SFAS 106 the Company's policy was to recognize
the cost of retiree health care and life insurance benefits as expense when
claims and premiums for life insurance policies were paid. The cost of
providing health care and life insurance benefits to 2,928 retirees was $8.1
million in 1992.
The following table summarizes the status of the Company's postretirement
plans for financial statement purposes and the related amount included in the
consolidated balance sheet:
December 31, 1993
(Dollars in Thousands)
Actuarial present value of postretirement
benefit obligations:
Retirees. . . . . . . . . . . . . . . . . . . . $ 111,499
Active employees fully eligible . . . . . . . . 11,848
Active employees not fully eligible . . . . . . 43,109
Unrecognized prior service cost . . . . . . . . 18,195
Unrecognized transition obligation. . . . . . . (160,731)
Unrecognized net loss . . . . . . . . . . . . . (7,100)
Balance sheet liability . . . . . . . . . . . . . . $ 16,820
For measurement purposes, an annual health care cost growth rate of 13%
was assumed for 1994, decreasing to 6% by 2002 and thereafter. The
accumulated post retirement benefit obligation was calculated using a
weighted-average discount rate of 7.75%, a weighted-average compensation
increase rate of 5.0%, and a weighted-average expected rate of return of 8.5%.
The health care cost trend rate has a significant effect on the projected
benefit obligation. Increasing the trend rate by 1% each year would increase
the present value of the accumulated projected benefit obligation by $11.1
million and the aggregate of the service and interest cost components by $1.5
million.
Postemployment: The FASB has issued Statement of Financial Accounting
Standards No. 112 (SFAS 112), which establishes accounting and reporting
standards for postemployment benefits. The new statement will require the
Company to recognize the liability to provide postemployment benefits when the
liability has been incurred. The Company adopted SFAS 112 effective January
1, 1994. To mitigate the impact adopting SFAS 112 will have on rate
increases, the Company will file applications with the KCC and OCC for orders
permitting the initial deferral of SFAS 112 transition costs and expenses and
its inclusion in the future computation of cost of service net of an income
stream generated from COLI. However, if the state regulatory commissions were
to recognize postemployment benefit costs under a different method, 1994
earnings could be impacted negatively. At December 31, 1993, the Company
estimates SFAS 112 liability to total approximately $11 million.
Savings: The Company maintains savings plans in which substantially all
employees participate. The Company matches employees' contributions up to
specified maximum limits. The funds of the plans are deposited with a trustee
and invested at each employee's option in one or more investment funds,
including a Company stock fund. The Company's contributions were $5.4, $5.4,
and $3.3 million for 1993, 1992, and 1991, respectively.
Missouri Property Sale: Effective January 31, 1994, the Company
transferred a portion of the assets and liabilities of the Company's pension
plan to a pension plan established by Southern Union. The amount of assets
transferred equal the projected benefit obligation for employees and retirees
associated with Southern Union's portion of the Missouri Properties plus an
additional $9 million.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value as set forth in Statement of Financial Accounting Standards No.
107:
Cash and Cash Equivalents-
The carrying amount approximates the fair value because of the short-term
maturity of these investments.
Decommissioning Trust-
The fair value of the decommissioning trust is based on quoted market
prices at December 31, 1993 and 1992.
Variable-rate Debt-
The carrying amount approximates the fair value because of the short-term
variable rates of these debt instruments.
Fixed-rate Debt-
The fair value of the fixed-rate debt is based on the sum of the
estimated value of each issue taking into consideration the interest
rate, maturity, and redemption provisions of each issue.
Redeemable Preference Stock-
The fair value of the redeemable preference stock is based on the sum of
the estimated value of each issue taking into consideration the dividend
rate, maturity, and redemption provisions of each issue.
The estimated fair values of the Company's financial instruments are as
follows:
Carrying Value Fair Value
December 31, 1993 1992 1993 1992
(Dollars in Thousands)
Cash and cash
equivalents. . . . . . . $ 1,217 $ 875 $ 1,217 $ 875
Decommissioning trust. . . 13,204 9,272 13,929 9,500
Variable-rate debt . . . . 931,352 758,449 931,352 758,449
Fixed-rate debt. . . . . . 1,364,886 1,508,077 1,473,569 1,563,375
Redeemable preference
stock. . . . . . . . . . 150,000 152,733 160,780 161,733
8. LONG-TERM DEBT
The amount of first mortgage bonds authorized by the Western Resources
Mortgage and Deed of Trust, dated July 1, 1939, as supplemented, is unlimited.
The amount of first mortgage bonds authorized by the KG&E Mortgage and Deed of
Trust, dated April 1, 1940, as supplemented, is limited to a maximum of $2
billion. Amounts of additional bonds which may be issued are subject to
property, earnings, and certain restrictive provisions of each Mortgage.
On January 20, 1994, KG&E issued $100 million of First Mortgage Bonds,
6.20% Series due January 15, 2006.
On January 31, 1994, the Company redeemed the remaining $2,466,000
principal amount of Gas Service Company (GSC) 8 1/2% Series First Mortgage
Bonds due 1997. In addition, the Company took measures to have the GSC
Mortgage and Deed of Trust discharged.
Debt discount and expenses are being amortized over the remaining lives of
each issue. The Western Resources and KG&E improvement and maintenance fund
requirements for certain first mortgage bond series can be met by bonding
additional property. The sinking fund requirements for certain Western
Resources and KG&E pollution control series bonds can be met only through the
acquisition and retirement of outstanding bonds. Bonds maturing and
acquisition and retirement of bonds for sinking fund requirements for the five
years subsequent to December 31, 1993, are as follows:
Maturing Retiring
Year Bonds Bonds
(Dollars in Thousands)
1994. . . . . $ 2,466 $ 738
1995. . . . . - 753
1996. . . . . 16,000 770
1997. . . . . - 1,333
1998. . . . . - 1,550
Long-term debt outstanding at December 31, 1993 and 1992, was as follows:
1993 1992
(Dollars in Thousands)
Western Resources
First mortgage bond series:
9.35 % due 1998. . . . . . . . . . . . . $ - $ 75,000
7 1/4% due 1999. . . . . . . . . . . . . 125,000 125,000
7 5/8% due 1999. . . . . . . . . . . . . 19,000 19,000
8 3/4% due 2000. . . . . . . . . . . . . - 20,000
8 7/8% due 2000. . . . . . . . . . . . . 75,000 75,000
7 1/4% due 2002. . . . . . . . . . . . . 100,000 100,000
8 5/8% due 2005. . . . . . . . . . . . . - 35,000
8 1/8% due 2007. . . . . . . . . . . . . 30,000 30,000
8 3/4% due 2008. . . . . . . . . . . . . - 35,000
8 5/8% due 2017. . . . . . . . . . . . . 50,000 50,000
8 1/2% due 2022. . . . . . . . . . . . . 125,000 125,000
7.65% due 2023. . . . . . . . . . . . . 100,000 -
624,000 689,000
Pollution control bond series:
5.90 % due 2007. . . . . . . . . . . . . 31,000 31,500
6 3/4% due 2009. . . . . . . . . . . . . 45,000 45,000
9 5/8% due 2013. . . . . . . . . . . . . - 58,500
6% due 2033. . . . . . . . . . . . . 58,500 -
134,500 135,000
KG&E
First mortgage bond series:
5 5/8% due 1996. . . . . . . . . . . . . 16,000 16,000
8 1/8% due 2001. . . . . . . . . . . . . - 35,000
7 3/8% due 2002. . . . . . . . . . . . . - 25,000
7.60% due 2003. . . . . . . . . . . . . 135,000 135,000
6 1/2% due 2005. . . . . . . . . . . . . 65,000 -
8 3/8% due 2006. . . . . . . . . . . . . - 25,000
8 1/2% due 2007. . . . . . . . . . . . . - 25,000
8 7/8% due 2008. . . . . . . . . . . . . - 30,000
216,000 291,000
Pollution control bond series:
6.80% due 2004. . . . . . . . . . . . . 14,500 14,500
5 7/8% due 2007. . . . . . . . . . . . . 21,940 21,940
6% due 2007. . . . . . . . . . . . . 10,000 10,000
7.0% due 2031. . . . . . . . . . . . . 327,500 327,500
373,940 373,940
GSC
First mortgage bond series:
8 1/2% due 1997. . . . . . . . . . . . . 2,466 4,932
2,466 4,932
Bank term loan . . . . . . . . . . . . . . - 230,000
Other pollution control obligations. . . . 13,980 14,205
Revolving credit agreement . . . . . . . . 115,000 150,000
Other long term agreement. . . . . . . . . 53,913 46,640
Less:
Unamortized debt discount. . . . . . . . 6,607 6,730
Long-term debt due within one year . . . 3,204 1,961
$1,523,988 $1,926,026
In January 1993, the Company renegotiated its $600 million bank term loan
and revolving credit facility used to finance the Merger into a $350 million
revolving credit facility, secured by KG&E common stock. The revolver has an
initial term of three years with options to renew for an additional two years
with the consent of the banks. The unused portion of the revolving credit
facility may be used to provide support for outstanding short-term debt. At
December 31, 1993, $115 million was outstanding under the facility.
On September 20, 1993, KG&E terminated a long-term revolving credit
agreement which provided for borrowings of up to $150 million. The loan
agreement, which was effective through October 1994, was repaid without
penalty.
KG&E has a long-term agreement, expiring in 1995, which contains
provisions for the sale of accounts receivable and unbilled revenues
(receivables) and phase-in revenues up to a total of $180 million. Amounts
related to receivables are accounted for as sales while those related to
phase-in revenues are accounted for as collateralized borrowings. Additional
receivables are continually sold to replace those collected. At December 31,
1993 and 1992, outstanding receivables amounting to $56.8 and $47.7 million,
respectively, were considered sold under the agreement. The credit risk
associated with the sale of customer accounts receivable is considered
minimal. The weighted average interest rate, including fees, was 3.7% for the
year ended December 31, 1993, and 6.6% for the nine months ended December 31,
1992. At December 31, 1993, an additional $16.4 million was available under
the agreement.
9. SHORT-TERM DEBT
The Company's short-term financing requirements are satisfied, as needed,
through the sale of commercial paper, short-term bank loans and borrowings
under other unsecured lines of credit maintained with banks. Information
concerning these arrangements for the years ended December 31, 1993, 1992, and
1991, is set forth below:
Year Ended December 31, 1993 1992 1991
(Dollars in Thousands)
Lines of credit at year end. . . . $145,000 $250,000(1) $185,000(2)
Short-term debt out-
standing at year end . . . . . . 440,895 222,225 135,800
Weighted average interest rate
on debt outstanding at year
end (including fees) . . . . . . 3.67% 4.70% 5.07%
Maximum amount of short-
term debt outstanding during
the period. . . .. . . . . . . . $443,895 $263,900 $175,000
Monthly average short-term debt. . 347,278 179,577 125,968
Weighted daily average interest
rates during the year
(including fees) . . . . . . . . 3.44% 4.90% 6.69%
(1) Decreased to $155 million in January 1993.
(2) Increased to $200 million in January 1992.
In connection with the commitments, the Company has agreed to pay certain
fees to the banks. Available lines of credit and the unused portion of the
revolving credit facility are utilized to support the Company's outstanding
short-term debt.
10. LEASES
At December 31, 1993, the Company had leases covering various property and
equipment. Certain lease agreements meet the criteria, as set forth in
Statement of Financial Accounting Standards No. 13, for classification as
capital leases.
Rental payments for capital and operating leases and estimated rental
commitments are as follows:
Capital Operating
Year Ending December 31, Leases Leases
(Dollars in Thousands)
1991 $ 1,217 $21,501
1992 2,426 52,701
1993 3,272 55,011
Future Commitments:
1994 $ 4,002 $47,729
1995 3,752 45,825
1996 3,627 44,176
1997 1,209 41,644
1998 - 41,019
Thereafter - 771,157
Total $12,590 $ 991,550
Less Interest 1,466
Net obligation $11,124
In 1987, KG&E sold and leased back its 50 percent undivided interest in La
Cygne 2. The lease has an initial term of 29 years, with various options to
renew the lease or repurchase the 50 percent undivided interest. KG&E remains
responsible for its share of operation and maintenance costs and other related
operating costs of La Cygne 2. The lease is an operating lease for financial
reporting purposes.
As permitted under the lease agreement, the Company in 1992 requested the
Trustee Lessor to refinance $341.1 million of secured facility bonds of the
Trustee and owner of La Cygne 2. The transaction was requested to reduce
recurring future net lease expense. In connection with the refinancing on
September 29, 1992, a one-time payment of approximately $27 million was made
by the Company which has been deferred and is being amortized over the
remaining life of the lease and included in operating expense as part of the
future
lease expense.
Future minimum annual lease payments, included in the table above,
required under the lease agreement are approximately $34.6 million for each
year through 1998 and $715 million over the remainder of the lease.
The gain of approximately $322 million realized at the date of the sale
has been deferred for financial reporting purposes, and is being amortized
over the initial lease term in proportion to the related lease expense.
KG&E's lease expense, net of amortization of the deferred gain and a one-time
payment, was approximately $22.5 million for the year ended December 31, 1993,
and $20.6 million for the nine months ended December 31, 1992.
11. JOINT OWNERSHIP OF UTILITY PLANTS
Company's Ownership at December 31, 1993
In-Service Invest- Accumulated Net Per-
Dates ment Depreciation (MW) cent
(Dollars in Thousands)
La Cygne 1 (a) Jun 1973 $ 150,265 $ 91,175 342 50
Jeffrey 1 (b) Jul 1978 277,087 116,526 587 84
Jeffrey 2 (b) May 1980 274,018 106,301 566 84
Jeffrey 3 (b) May 1983 386,925 124,158 588 84
Wolf Creek (c) Sep 1985 1,366,387 281,819 533 47
(a) Jointly owned with Kansas City Power & Light Company (KCPL)
(b) Jointly owned with UtiliCorp United Inc. and a third party
(c) Jointly owned with KCPL and Kansas Electric Power Cooperative, Inc.
Amounts and capacity represent the Company's share. The Company's share
of operating expenses of the plants in service above, as well as such expenses
for a 50 percent undivided interest in La Cygne 2 (representing 335 MW
capacity) sold and leased back to the Company in 1987, are included in
operating expenses in the statements of income. The Company's share of other
transactions associated with the plants is included in the appropriate
classification in the Company's consolidated financial statements.
12. INCOME TAXES
The Company adopted the provisions of SFAS 109 in the first quarter of
1992. KG&E adopted the provisions of SFAS 96 in 1987 and SFAS 109 in 1992.
These statements require the Company to establish deferred tax assets and
liabilities, as appropriate, for all temporary differences, and to adjust
deferred tax balances to reflect changes in tax rates expected to be in effect
during the periods the temporary differences reverse.
In accordance with various rate orders received from the KCC, the MPSC,
and the OCC, the Company has not yet collected through rates the amounts
necessary to pay a significant portion of the net deferred income tax
liabilities. As management believes it is probable that the net future
increases in income taxes payable will be recovered from customers through
future rates, it has recorded a deferred asset for these amounts. These
assets are also a temporary difference for which deferred income tax
liabilities have been provided. Accordingly, the adoption of SFAS 109 did not
have a material impact on the Company's results of operations.
At December 31, 1993, KG&E has unused investment tax credits of
approximately $7.1 million available for carryforward which, if not utilized,
will expire in the years 2000 through 2002. In addition, the Company has
alternative minimum tax credits generated prior to April 1, 1992, which
carryforward without expiration, of $57.2 million which may be used to offset
future regular tax to the extent the regular tax exceeds the alternative
minimum tax. These credits have been applied in determining the Company's net
deferred income tax liability and corresponding deferred future income taxes
at December 31, 1993.
Deferred income taxes result from temporary differences
between the financial statement and tax basis of the Company's assets and
liabilities. The sources of these differences and their cumulative tax
effects are as follows:
December 31, 1993
Debits Credits Total
(Dollars in Thousands)
Sources of Deferred Income Taxes:
Accelerated depreciation and
other property items . . . . . . $ - $ (647,202) $ (647,202)
Energy and purchased gas
adjustment clauses . . . . . . . 2,452 - 2,452
Phase-in revenues. . . . . . . . . - (35,573) (35,573)
Natural gas line survey and
replacement program. . . . . . . - (7,721) (7,721)
Deferred gain on sale-leaseback. . 116,186 - 116,186
Alternative minimum tax credits. . 39,882 - 39,882
Deferred coal contract
settlements. . . . . . . . . . . - (14,980) (14,980)
Deferred compensation/pension
liability. . . . . . . . . . . . 11,301 - 11,301
Acquisition premium. . . . . . . . - (301,394) (301,394)
Deferred future income taxes . . . - (117,549) (117,549)
Other. . . . . . . . . . . . . . . - (14,039) (14,039)
Total Deferred Income Taxes. . . . . $ 169,821 $(1,138,458) $ (968,637)
December 31, 1992
Debits Credits Total
(Dollars in Thousands)
Sources of Deferred Income Taxes:
Accelerated depreciation and
other property items . . . . . . $ - $ (607,303) $ (607,303)
Energy and purchased gas
adjustment clauses . . . . . . . - (7,717) (7,717)
Phase-in revenues. . . . . . . . . - (37,564) (37,564)
Natural gas line survey and
replacement program. . . . . . . - (7,473) (7,473)
Deferred gain on sale-leaseback. . 104,573 - 104,573
Alternative minimum tax credits. . 39,882 - 39,882
Deferred coal contract
settlements. . . . . . . . . . . - (9,318) (9,318)
Deferred compensation/pension
liability. . . . . . . . . . . . 8,488 - 8,488
Acquisition premium. . . . . . . . - (314,241) (314,241)
Deferred future income taxes . . . - (158,102) (158,102)
Other. . . . . . . . . . . . . . . - (1,380) (1,380)
Total Deferred Income Taxes. . . . . $ 152,943 $(1,143,098) $ (990,155)
13. SEGMENTS OF BUSINESS
The Company is a public utility engaged in the generation, transmission,
distribution, and sale of electricity in Kansas and the transportation,
distribution, and sale of natural gas in Kansas, Missouri, and Oklahoma.
Year Ended December 31, 1993 1992(1) 1991
(Dollars in Thousands)
Operating revenues:
Electric. . . . . . . . . . . $1,104,537 $ 882,885 $ 471,839
Natural gas . . . . . . . . . 804,822 673,363 690,339
1,909,359 1,556,248 1,162,178
Operating expenses excluding
income taxes:
Electric. . . . . . . . . . . 791,563 632,169 337,150
Natural gas . . . . . . . . . 747,755 642,910 664,825
1,539,318 1,275,079 1,001,975
Income taxes:
Electric. . . . . . . . . . . 73,425 41,184 32,239
Natural gas . . . . . . . . . 4,553 816 (1,657)
77,978 42,000 30,582
Operating income:
Electric. . . . . . . . . . . 239,549 209,532 102,450
Natural gas . . . . . . . . . 52,514 29,637 27,171
$ 292,063 $ 239,169 $ 129,621
Identifiable assets at
December 31:
Electric. . . . . . . . . . . $4,231,277 $4,390,117 $1,196,023
Natural gas . . . . . . . . . 1,040,513 918,729 840,692
Other corporate assets(2) . . 140,258 130,060 75,798
$5,412,048 $5,438,906 $2,112,513
Other Information--
Depreciation and amortization:
Electric. . . . . . . . . . . $ 126,034 $ 105,842 $ 53,632
Natural gas . . . . . . . . . 38,330 38,171 32,103
$ 164,364 $ 144,013 $ 85,735
Maintenance:
Electric. . . . . . . . . . . $ 87,696 $ 73,104 $ 34,240
Natural gas . . . . . . . . . 30,147 28,507 26,275
$ 117,843 $ 101,611 $ 60,515
Capital expenditures:
Electric. . . . . . . . . . . $ 137,874 $ 95,465 $ 43,714
Nuclear fuel. . . . . . . . . 5,702 15,839 -
Natural gas . . . . . . . . . 94,055 91,189 81,961
$ 237,631 $ 202,493 $ 125,675
(1)Information reflects the merger with KG&E on March 31, 1992.
(2)Principally cash, temporary cash investments, non-utility assets, and
deferred charges.
The portion of the table above related to the Missouri Properties is as
follows (unaudited):
1993
(Dollars in Thousands)
Natural gas revenues. . . . . . . . . . $ 349,749
Operating expenses excluding
income taxes. . . . . . . . . 326,329
Income taxes. . . . . . . . . . . . . . 2,672
Operating income. . . . . . . . . . . . 20,748
Identifiable assets . . . . . . . . . . 398,464
Depreciation and amortization . . . . . 12,668
Maintenance . . . . . . . . . . . . . . 10,504
Capital expenditures. . . . . . . . . . 38,821
14. COMMON STOCK AND CUMULATIVE PREFERRED AND PREFERENCE STOCK
The Company's Restated Articles of Incorporation, as amended, provides for
85,000,000 authorized shares of common stock. During 1993, the Company issued
3,572,323 shares of common stock and at December 31, 1993, 61,617,873 shares
were outstanding.
Not subject to mandatory redemption: The cumulative preferred stock is
redeemable in whole or in part on 30 to 60 days notice at the option of the
Company.
Subject to mandatory redemption: On October 1, 1993, the Company redeemed
the remaining 22,000 shares of the 8.70% Series preference stock.
The mandatory sinking fund provisions of the 8.50% Series preference stock
require the Company to redeem 50,000 shares annually beginning on July 1,
1997, at $100 per share. The Company may, at its option, redeem up to an
additional 50,000 shares on each July 1, at $100 per share. The 8.50% Series
also is redeemable in whole or in part, at the option of the Company, subject
to certain restrictions on refunding, at a redemption price of $107.37,
$106.80, and $106.23 per share beginning July 1, 1993, 1994, and 1995,
respectively.
The mandatory sinking fund provisions of the 7.58% Series preference stock
require the Company to redeem 25,000 shares annually beginning on April 1,
2002, and each April 1 through 2006 and the remaining shares on April 1, 2007,
all at $100 per share. The Company may, at its option, redeem up to an
additional 25,000 shares on each April 1 at $100 per share. The 7.58% Series
also is redeemable in whole or in part, at the option of the Company, subject
to certain restrictions on refunding, at a redemption price of $106.82,
$106.06, and $105.31 per share beginning April 1, 1993, 1994, and 1995,
respectively.
15. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal and
environmental proceedings. Management believes that adequate provision has
been made within the consolidated financial statements for these matters and
accordingly believes their ultimate dispositions will not have a material
adverse effect upon the business, financial position, or results of operations
of the Company.
16. QUARTERLY RESULTS (UNAUDITED)
The amounts in the table are unaudited but, in the opinion of management,
contain all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of such periods. The
business of the Company is seasonal in nature and, in the opinion of
management, comparisons between the quarters of a year do not give a true
indication of overall trends and changes in operations.
First Second Third Fourth
(Dollars in Thousands, except Per Share Amounts)
1993
Operating revenues. . . . . . . $579,581 $400,411 $419,018 $510,349
Operating income. . . . . . . . 85,950 60,282 81,225 64,606
Net income. . . . . . . . . . . 54,814 30,723 56,807 35,026
Earnings applicable to
common stock. . . . . . . . . 51,468 27,320 53,405 31,671
Earnings per share. . . . . . . $ 0.89 $ 0.47 $ 0.90 $ 0.51
Dividends per share . . . . . . $ 0.485 $ 0.485 $ 0.485 $ 0.485
Average common shares
outstanding . . . . . . . . . 58,046 58,046 59,441 61,603
Common stock price:
High. . . . . . . . . . . . . $ 35 3/4 $ 36 1/8 $ 37 1/4 $ 37
Low . . . . . . . . . . . . . $ 30 3/8 $ 32 3/4 $ 35 $ 32 3/4
1992(1)
Operating revenues. . . . . . . $373,620 $341,715 $380,745 $460,168
Operating income. . . . . . . . 42,684 45,830 77,010 73,645
Net income. . . . . . . . . . . 27,984 18,434 42,185 39,281
Earnings applicable to
common stock. . . . . . . . . 25,472 15,113 38,726 35,822
Earnings per share. . . . . . . $ 0.74 $ 0.26 $ 0.67 $ 0.62
Dividends per share . . . . . . $ 0.475 $ 0.475 $ 0.475 $ 0.475
Average common shares
outstanding . . . . . . . . . 34,566 58,046 58,046 58,046
Common stock price:
High. . . . . . . . . . . . . $ 29 1/2 $ 26 7/8 $ 30 1/2 $ 32 5/8
Low . . . . . . . . . . . . . $ 25 3/8 $ 25 1/4 $ 26 3/4 $ 28 1/2
(1) Information reflects the merger with KG&E on March 31, 1992.
Exhibit B
Financial Data Schedule
[ARTICLE] OPUR3
[MULTIPLIER] 1,000
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1993
[PERIOD-END] DEC-31-1993
[BOOK-VALUE] PER-BOOK
[TOTAL-ASSETS] 5,412,048
[TOTAL-OPERATING-REVENUES] 1,909,359
[NET-INCOME] 177,370
