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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------------------------- For the fiscal year ended December 31, 2000 ----------------- [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------------------------- Commission file number 1-3523 ------ WESTERN RESOURCES, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) KANSAS 48-0290150 - -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 818 KANSAS AVENUE, TOPEKA, KANSAS 66612 - -------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code 785/575-6300 ------------ Securities registered pursuant to Section 12(b) of the Act: Common Stock, $5.00 par value New York Stock Exchange - ----------------------------- ----------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Preferred Stock, 4 1/2% Series, $100 par value ---------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] State the aggregate market value of the voting stock held by nonaffiliates of the registrant. Approximately $1,682,196,624 of Common Stock and $10,181,490 of Preferred Stock (excluding the 4 1/4% Series of Preferred Stock for which there is no readily ascertainable market value) at March 19, 2001. Indicate the number of shares outstanding of each of the registrant's classes of common stock. Common Stock, $5.00 par value 84,460,817 - ----------------------------- ------------------------------- (Class) (Outstanding at March 19, 2001)
Documents Incorporated by Reference: Document -------- None 2
WESTERN RESOURCES, INC. TABLE OF CONTENTS Page ---- PART I Item 1. Business 5 Item 2. Properties 23 Item 3. Legal Proceedings 25 Item 4. Submission of Matters to a Vote of Security Holders 26 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 26 Item 6. Selected Financial Data 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 28 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 51 Item 8. Financial Statements and Supplementary Data 52 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 96 PART III Item 10. Directors and Executive Officers of the Registrant 97 Item 11. Executive Compensation 99 Item 12. Security Ownership of Certain Beneficial Owners and Management 107 Item 13. Certain Relationships and Related Transactions 109 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 112 Signatures 117 3
FORWARD-LOOKING STATEMENTS Certain matters discussed here and elsewhere in this Annual Report are "forward-looking statements." The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like we "believe," "anticipate," "expect" or words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals. Such statements address future events and conditions concerning capital expenditures, earnings, liquidity and capital resources, litigation, rate and other regulatory matters, possible corporate restructurings, mergers, acquisitions, dispositions, including the proposed separation of Westar Industries, Inc. from our electric utility businesses and the consummation of the acquisition of our electric operations by Public Service Company of New Mexico, compliance with debt covenants, changes in accounting requirements and other accounting matters, interest and dividends, Protection One's financial condition and its impact on our consolidated results, environmental matters, changing weather, nuclear operations, ability to enter new markets successfully and capitalize on growth opportunities in non-regulated businesses, events in foreign markets in which investments have been made, and the overall economy of our service area. What happens in each case could vary materially from what we expect because of such things as electric utility deregulation, ongoing municipal, state and federal activities, such as the Wichita municipalization efforts; future economic conditions; legislative and regulatory developments; competitive markets; and other circumstances affecting anticipated operations, sales and costs. See Risk Factors in Item 1. Business for additional information on these and other matters. 4
PART I ITEM 1. BUSINESS - ----------------- GENERAL Western Resources, Inc. is a publicly traded consumer services company incorporated in 1924. Unless the context otherwise indicates, all references in this report on Form 10-K to the "company," "Western Resources," "we," "us" "our" or similar words are to Western Resources, Inc. and its consolidated subsidiaries. Our primary business activities are providing electric generation, transmission and distribution services to approximately 636,000 customers in Kansas and providing monitored security services to over 1.5 million customers in North America, the United Kingdom and continental Europe. Rate regulated electric service is provided by KPL, a division of the company, and Kansas Gas and Electric Company (KGE), a wholly owned subsidiary. Monitored security services are provided by Protection One, Inc., a publicly traded, approximately 85%-owned subsidiary, and other wholly owned subsidiaries collectively referred to as Protection One Europe. KGE owns 47% of Wolf Creek Nuclear Operating Corporation (WCNOC), the operating company for Wolf Creek Generating Station (Wolf Creek). In addition, through our 45% ownership interest in ONEOK, Inc., natural gas transmission and distribution services are provided to approximately 1.4 million customers in Oklahoma and Kansas. Westar Industries, Inc., our wholly owned subsidiary, owns our interests in Protection One, Protection One Europe, ONEOK, and other non-utility businesses. Our corporate headquarters are located at 818 South Kansas Avenue, Topeka, Kansas 66612. On November 8, 2000, we entered into an agreement under which Public Service Company of New Mexico (PNM) will acquire our electric utility businesses in a stock-for-stock transaction. Under the terms of the agreement, both we and PNM will become subsidiaries of a new holding company. Immediately prior to the consummation of this combination, we will split-off our remaining interest in Westar Industries to our shareholders. Westar Industries has filed a registration statement with the Securities and Exchange Commission (SEC) which covers the proposed sale of a portion of its common stock through the exercise of non-transferable rights proposed to be distributed by Westar Industries to our shareholders. We can give no assurance as to whether or when the rights offering will be consummated or whether or when the separation of our electric and non-electric utility businesses, or the consummation of the acquisition of the company by PNM may occur. ELECTRIC UTILITY OPERATIONS General We supply electric energy at retail to approximately 636,000 customers in Kansas including the communities of Wichita, Topeka, Lawrence, Manhattan, Salina and Hutchinson. We also supply electric energy at wholesale to the electric distribution systems of 65 communities and 4 rural electric cooperatives. We have contracts for the sale, purchase or exchange of wholesale electricity with other utilities. In addition, we have power marketing 5
operations in which electric purchases and sales are made in areas outside of our historical marketing territory. Our electric sales for the last three years ended December 31 are as follows: 2000 1999 1998 ---------- ---------- ---------- (In Thousands) Residential................... $ 452,674 $ 407,371 $ 428,680 Commercial.................... 367,367 356,314 356,610 Industrial.................... 252,243 251,391 257,186 Wholesale and Interchange.................. 214,721 174,895 145,320 Power Marketing............... 457,178 190,101 382,601 System Hedging................ 35,321 3,320 - Other......................... 49,628 46,306 41,288 ---------- ---------- ---------- Total........................ $1,829,132 $1,429,698 $1,611,685 Our electric sales volumes for the last three years ended December 31 are as follows: 2000 1999 1998 ---------- ---------- ---------- (Thousands of MWH) Residential................... 6,222 5,551 5,815 Commercial.................... 6,485 6,202 6,199 Industrial.................... 5,820 5,743 5,808 Wholesale and Interchange.................. 6,892 5,617 4,826 Other......................... 108 108 108 ------ ------ ------ Total........................ 25,527 23,221 22,756 Power marketing and system hedging sales do not have any physical sales volumes associated with them. Fossil Fuel Generation Capacity: The aggregate net generating capacity of our system is presently 5,604 megawatts (MW). The system has interests in 21 fossil-fuel steam generating units, one nuclear generating unit (47% interest), nine combustion peaking turbines, two diesel generators, and two wind generators. A fossil fueled unit at Lawrence Energy Center (31 MW of capacity) was retired in 2000. Our aggregate 2000 peak system net load, which was also our all time peak system net load, occurred on September 11, 2000 and amounted to 4,531 MW. Our net generating capacity combined with firm capacity purchases and sales provided a capacity margin of approximately 11.7% above system peak responsibility at the time of the peak. We are a member of the Western Systems Power Pool (WSPP). Under this arrangement, electric utilities and marketers throughout the western United States have agreed to market energy. Services available include short-term and long-term energy transactions, unit commitment service, firm capacity, energy sales and energy exchanges. We are also a member of the Southwest Power Pool as discussed under Power Delivery. 6
We have agreed to provide generating capacity to other utilities for certain periods as set forth below: Utility Capacity (MW) Period Ending ------- ------------- ------------- Oklahoma Municipal Power Authority (OMPA) 60 December 2013 Midwest Energy, Inc. 60 May 2008 125 May 2010 Empire District Electric Company (Empire) 80 May 2001 162 May 2010 McPherson Board of Public Utilities (McPherson) (a) May 2027 (a) We provide base capacity to McPherson and McPherson provides peaking capacity to us. During 2000, we provided approximately 73 MW to and received approximately 185 MW from McPherson. The amount of base capacity provided to McPherson is based on a fixed percentage of McPherson's annual peak system load. Future Capacity: We are installing a new combustion turbine generator with a capacity of approximately 154 MW. The unit is scheduled to be placed in operation in mid-2001. We estimate that completion of the project will require approximately $20 million in capital resources during 2001. We forecast that we will need additional capacity of approximately 150 MW by 2005 to serve our customers' expected electricity needs. The methods for supplying this estimated additional energy will be determined at a future date. In July 1999, we and Empire agreed to jointly construct a 500-MW combined cycle generating plant, which Empire will operate. We will own a 40% interest in the plant through a subsidiary, Westar Generating, Inc. We estimate that our share of the cost of completing the project will require approximately $31 million in capital resources during 2001. Commercial operation is expected to begin in mid-2001. For further discussion regarding future capacity and cash requirements, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Fuel Mix: Coal-fired units comprise 3,366 MW of our total 5,604 MW of generating capacity and the nuclear unit provides 550 MW of capacity. Of the remaining 1,688 MW of generating capacity, units that can burn either natural gas or oil account for 1,603 MW, units that burn only diesel fuel account for 84 MW, and units which are powered by wind account for 1 MW (See Item 2. Properties). During 2000, coal was used to produce 78% of our electricity. Nuclear fuel produced 16% and the remainder was produced from natural gas, oil, or diesel fuel. Our fuel mix fluctuates with the operation of nuclear powered Wolf Creek as discussed below under Nuclear Generation, fuel costs, plant availability and power available on the wholesale market. 7
Coal: The three coal-fired units at Jeffrey Energy Center (JEC) have an aggregate capacity of 1,870 MW (our 84% share). We have a long-term coal supply contract with Amax Coal West, Inc., a subsidiary of RAG America Coal Company (RAG), to supply coal to JEC from mines located in the Powder River Basin in Wyoming. The contract expires December 31, 2020. The contract contains a schedule of minimum annual MMBtu delivery quantities. The coal to be supplied is surface mined and has an average Btu content of approximately 8,397 Btu per pound and an average sulfur content of .43 lbs/MMBtu (See Environmental Matters). The average cost of coal burned at JEC during 2000 was approximately $1.14 per MMBtu, or $19.09 per ton. Coal is transported from Wyoming under a long-term rail transportation contract with Burlington Northern Santa Fe (BNSF) and Union Pacific (UP) railroads with a term continuing through December 31, 2013. This contract is currently the subject of litigation. The two coal-fired units at La Cygne Station have an aggregate generating capacity of 681 MW (KGE's 50% share). La Cygne 1 uses a blended fuel mix containing approximately 85% Powder River Basin coal and 15% Kansas/Missouri coal. La Cygne 2 uses Powder River Basin coal. The operator of La Cygne Station, Kansas City Power & Light Company (KCPL), administers the coal and coal transportation contracts. A portion of the La Cygne 1 and La Cygne 2 Powder River Basin coal is supplied through several fixed price and spot market contracts which expire at various times through 2003 and is transported under KCPL's Omnibus Rail Transportation Agreement with BNSF and Kansas City Southern Railroad through December 31, 2010. Additional coal may be acquired on the spot market. The La Cygne 1 Kansas/Missouri coal is purchased from time to time from local Kansas and Missouri producers. The Powder River Basin coal supplied during 2000 had an average Btu content of approximately 8,800 Btu per pound and an average sulfur content of .45 lbs/MMBtu. During 2000, the average cost of all coal burned at La Cygne 1 was approximately $0.81 per MMBtu, or $13.92 per ton. The average cost of coal burned at La Cygne 2 was approximately $0.72 per MMBtu, or $12.30 per ton. The coal-fired units located at the Tecumseh and Lawrence Energy Centers have an aggregate generating capacity of 815 MW. In 2000, we obtained coal from Montana and Colorado. The Montana coal supplied in 2000 had an average Btu content of approximately 9,750 Btu per pound and an average sulfur content of .80 lbs/MMBtu. The Colorado coal supplied in 2000 had an average Btu content of approximately 10,568 Btu per pound and an average sulfur content of .45 lbs/MMBtu. During 2000, the average cost of all coal burned in the Lawrence units was approximately $1.14 per MMBtu, or $22.50 per ton. The average cost of all coal burned in the Tecumseh units was approximately $1.08 per MMBtu, or $20.92 per ton. During the first quarter of 2001, the Lawrence and Tecumseh Energy Centers switched from Montana Coal to Wyoming Powder River Basin Coal transported by BNSF railroad. Fuel switching is done in an effort to find alternative economical supplies of coal that meet our generation needs. Colorado coal will supplement the Wyoming coal and will be transported by BNSF and UP railroads. We have enough Wyoming and Colorado coal under contract to support the anticipated operation of these units through the end of 2001. We have a portion of our Colorado coal needs under a contract that expires in 2004. We intend to negotiate contracts for Wyoming and Colorado coal for these facilities for future operations. We may also purchase coal on the spot market. 8
We have entered into all of our coal contracts in the ordinary course of business and do not believe we are substantially dependent upon these contracts. We believe there are other suppliers with plentiful sources of coal available at spot market prices to replace, if necessary, fuel to be supplied pursuant to these contracts. In the event that we were required to replace our coal agreements, we would not anticipate a substantial disruption of our business although the cost of purchasing coal could increase. We have entered into all of our coal transportation contracts in the ordinary course of business. Several rail carriers are capable of serving our origin coal mines, but several of our generating stations can be served by only one rail carrier. In the event the rail carrier to one of our generating stations fails to provide reliable service, we could experience a short-term disruption of our business. However, due to the obligation of the rail carriers to provide service under the Interstate Commerce Act, we do not anticipate any substantial long-term disruption of our business although the cost of transporting coal could increase. 9
Natural Gas: We use natural gas as a primary fuel in our Gordon Evans, Murray Gill, Neosho, Abilene, and Hutchinson Energy Centers and in the gas turbine units at our Tecumseh generating station. Natural gas is also used as a supplemental fuel in the coal-fired units at the Lawrence and Tecumseh generating stations. Natural gas for all facilities is purchased in the short- term spot market which supplies the system with a flexible natural gas supply necessary to meet operational needs. For Abilene and Hutchinson Energy Centers, we have maintained interruptible natural gas transportation with Kansas Gas Service under a contract which expires March 31, 2001. We are in the process of replacing the current contract. For Gordon Evans, Murray Gill, Neosho, Lawrence and Tecumseh Energy Centers, we meet a portion of our natural gas transportation requirements through firm natural gas transportation capacity agreements with Williams Gas Pipelines Central. The firm transportation agreements that serve Gordon Evans, Murray Gill, Lawrence and Tecumseh extend through April 1, 2010 and the agreement for the Neosho facility extends through June 1, 2016. Oil: We use oil as an alternate fuel when economical or when interruptions to natural gas make it necessary. Oil is also used as a start-up fuel at some of our generating stations and as a primary fuel in the Hutchinson Unit 4 combustion turbine and in the diesel generators. Oil is obtained by spot market purchases and year-long contracts. We maintain quantities in inventory to meet emergency requirements and protect against reduced availability of natural gas for limited periods or when the primary fuel becomes uneconomical to burn. Other Fuel Matters: Our contracts to supply fuel for our coal and natural gas-fired generating units, with the exception of JEC, do not provide full fuel requirements at the various stations. Supplemental fuel is procured on the spot market to provide operational flexibility and, when the price is favorable, to take advantage of economic opportunities. We use financial instruments to hedge a portion of our anticipated fossil fuel needs in an attempt to offset the volatility of the spot market. Due to the volatility of these markets, we are unable to determine what the value will be when the agreements are actually settled. See the Market Risk Disclosure for further information. Natural gas and oil prices increased significantly during 2000 throughout the nation. During 2000, our region experienced a price range of $2.09 per MMBtu to $11.53 per MMBtu for natural gas. We experienced a 45% increase in our average cost for natural gas purchased, or an increase of $1.07 per MMBtu. See the Market Risk Disclosure for further discussion. During the first quarter of 2001, spot market prices for western coal markets increased significantly. This increase will impact the fuel contracts currently in place for the portion of our 2001 anticipated coal which is indexed to or purchased on the spot market for our La Cygne Generating Station, increasing our coal commodity price market risk. We do not believe that 2001 spot market purchases will be at rates as favorable as those experienced during 2000. Set forth in the table below is information relating to the weighted average cost of fuel that we have used (which includes the commodity cost, transportation cost to our facilities and any other associated costs). 10
KPL Plants 2000 1999 1998 ---------- ---- ---- ---- Per Million Btu: Coal............... $1.13 $1.09 $1.15 Gas................ 3.84 2.66 2.29 Oil................ 3.45 4.17 4.40 Per MWH Generation.... 1.36 1.26 1.31 KGE Plants 2000 1999 1998 ---------- ---- ---- ---- Per Million Btu: Nuclear............ $0.44 $0.45 $0.48 Coal............... 0.91 0.87 0.86 Gas................ 3.34 2.31 2.28 Oil................ 3.12 2.11 4.05 Per MWH Generation.... 1.11 0.98 0.94 Nuclear Generation Fuel Supply: The owners of Wolf Creek have on hand or under contract 100% of their uranium needs for 2001 and 65% of the uranium required for operation of Wolf Creek through March 2005. The balance is expected to be obtained through spot market and contract purchases. Contractual arrangements are in place for 100% of Wolf Creek's uranium conversion needs for 2001 and 65% of the uranium conversion required for operation of Wolf Creek through March 2005. The owners have under contract 100% of Wolf Creek's uranium enrichment needs for 2001 and 77% of the uranium enrichment required to operate Wolf Creek through March 2005. The balance of Wolf Creek's conversion and enrichment needs are expected to be obtained through term contract and spot market purchases. All uranium, uranium hexaflouride and uranium enrichment arrangements have been entered into in the ordinary course of business and Wolf Creek is not substantially dependent upon these agreements. Wolf Creek's management believes there are other supplies available at reasonable prices to replace, if necessary, these contracts. In the event that these contracts were required to be replaced, Wolf Creek's management does not anticipate a substantial disruption of Wolf Creek's operations. Nuclear fuel is amortized to cost of sales based on the quantity of heat produced for the generation of electricity. Fuel Disposal: Under the Nuclear Waste Policy Act of 1982 (NWPA), the Department of Energy (DOE) is responsible for the permanent disposal of spent nuclear fuel. Wolf Creek pays the DOE a quarterly fee of one-tenth of a cent for each kilowatt-hour of net nuclear generation delivered for the future disposal of spent nuclear fuel. These disposal costs are charged to cost of sales. In 1996 and 1997, a U.S. Court of Appeals issued decisions that (1) the NWPA unconditionally obligated the DOE to begin accepting spent fuel for disposal in 1998, and (2) precluded the DOE from concluding that its delay in accepting spent fuel is "unavoidable" under its contracts with utilities due to lack of a repository or interim storage authority. 11
In May 1998, the Court issued an order in response to the utilities' petitions for remedies for DOE's failure to begin accepting spent fuel for disposal. The Court affirmed its conclusion that the sole remedy for DOE's breach of its statutory obligation under the NWPA is a contract remedy, and indicated that the court will not revisit the matter until the utilities have completed their pursuit of that remedy. Wolf Creek intends to pursue its claims against the DOE. A permanent disposal site may not be available for the nuclear industry until 2010 or later, although an interim facility may be available earlier. Under current DOE policy, once a permanent site is available, the DOE will accept spent nuclear fuel on a priority basis. The owners of the oldest spent fuel will be given the highest priority. As a result, disposal services for Wolf Creek may not be available prior to 2016. Wolf Creek has on-site temporary storage for spent nuclear fuel. In early 2000, Wolf Creek completed replacement of spent fuel storage racks to increase its on-site storage capacity for all spent fuel expected to be generated by Wolf Creek through the end of its licensed life in 2025. 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 Nebraska to locate a disposal facility. WCNOC and the owners of the other five nuclear units in the Compact have provided most of the pre-construction financing for this project. Our net investment in the Compact through December 31, 2000, was approximately $7.4 million. On December 18, 1998, the application for a license to construct this project was denied. The license applicant has sought a hearing on the license denial, but a U.S. District Court has delayed indefinitely proceedings related to the hearing. In December 1998, the utilities filed a federal court lawsuit contending Nebraska officials acted in bad faith while handling the license application and seeking damages related to the utilities' costs incurred because of the delay in processing the application. In May 1999, the Nebraska legislature passed a bill withdrawing Nebraska from the Compact. In August 1999, the Nebraska governor gave official notice of the withdrawal to the other member states. Withdrawal will not be effective for five years and will not, of itself, nullify the site license proceeding. Wolf Creek disposes of all classes of its low-level radioactive waste at existing third-party repositories. Should disposal capability become unavailable, Wolf Creek is able to store its low-level radioactive waste in an on-site facility for up to five years under current regulations. Wolf Creek believes that a temporary loss of low-level radioactive waste disposal capability will not affect continued operation of the power plant. Scheduled Outages: Wolf Creek has an 18-month refueling and maintenance schedule which permits uninterrupted operation every third calendar year. The next outage is scheduled in the spring of 2002. During the outage, electric demand is expected to be met primarily by our other fossil-fueled generating units and by purchased power. Insurance: Information with respect to insurance coverage applicable to the operations of our nuclear generating facility is set forth in Note 14 of the Notes to Consolidated Financial Statements. 12
Power Delivery Our Power Delivery segment transports electricity from the generating stations to approximately 636,000 customers in Kansas. It also transports electric energy to the electric distribution systems of 65 communities and 4 rural electric cooperatives. Power Delivery properties include substations, poles, wire, underground cable systems, and customer meters. Power Delivery's objective is to provide low-cost electricity transportation while maintaining a high level of system reliability and customer service. We are a member of the Southwest Power Pool (SPP). SPP's responsibility is to maintain transmission system reliability on a regional basis. SPP is working to become a regional transmission organization (RTO) for the region encompassing areas within the eight states of Kansas, Missouri, Oklahoma, New Mexico, Texas, Louisiana, Arkansas, and Mississippi. We are also a member of the SPP transmission tariff along with ten other transmission providers in the region. Revenues from this tariff are divided among the tariff members based upon calculated impacts to their respective system. The tariff allows for both non- firm and firm transmission access. The Power Delivery segment also includes the customer service portion of our electric utility business. Customer service includes, among other things, operating our phone center, handling credit and collections, billing, meter reading, and field service. Competition and Deregulation Electric utilities have historically operated in a rate regulated environment. Federal and state regulatory agencies having jurisdiction over our rates and services and other utilities have initiated steps that were expected to result in a more competitive environment for utility services. However, during 2000 and early 2001, extensive problems in the deregulated California market have caused many states to reconsider deregulation efforts. The Kansas Legislature took no action on deregulation in 2000. In a deregulated environment, utility companies that are not responsive to a competitive energy marketplace may suffer erosion in market share, revenues and profits as recently experienced in the California energy market. Increased competition for retail electricity sales may in the future reduce our earnings which could impact our ability to pay dividends and could have a material adverse impact on our operations and our financial condition. A material non- cash charge to earnings may be required should we discontinue accounting under Statement of Financial Accounting Standard No. 71, "Accounting for the Effects of Certain Types of Regulation." The 1992 Energy Policy Act began deregulating the electricity market for generation. The Energy Policy Act permitted the Federal Energy Regulatory Commission (FERC) to order electric utilities to allow third parties the use of their transmission systems to sell electric power to wholesale customers. In 1992, we agreed to open access of our transmission system for wholesale transactions. FERC also requires us to provide transmission services to others under terms comparable to those we provide ourselves. In December 1999, FERC issued an order (FERC Order 2000) encouraging formation of regional transmission organizations (RTOs), whose purpose is to facilitate greater competition at the wholesale level. We anticipate that FERC Order 2000 will not have a material effect on us or our operations. For further discussion regarding competition and its potential impact on us, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 13
Regulation and Rates As a Kansas electric utility, we are subject to the jurisdiction of the Kansas Corporation Commission (KCC) which has general regulatory authority over our rates, extensions and abandonments of service and facilities, valuation of property, the classification of accounts and various other matters. We are also subject to the jurisdiction of the KCC with respect to the issuance of certain securities. Additionally, we are subject to the jurisdiction of the FERC, which has authority over wholesale sales of electricity, the transmission of electric power and the issuance of certain securities. We are subject to the jurisdiction of the Nuclear Regulatory Commission for nuclear plant operations and safety. We are also exempt as a public utility holding company pursuant to Section 3(a)(1) of the Public Utility Holding Company Act of 1935 from all provisions of that Act, except Section 9(a)(2). On November 27, 2000, we and KGE filed applications with the KCC for a change in retail rates which included a cost allocation study and separate cost of service studies for our KPL division and KGE. We and KGE also provided revenue requirements on a combined company basis on December 28, 2000. If approved as proposed, the impact of these rate requests will be an annual increase of $93.0 million for our KPL division and $58.0 million for KGE for a total of $151.0 million. The proposal also contains a mechanism for adjusting these rate requests up or down if projected natural gas fuel prices are different from the prices utilized in the November 27, 2000 filings. We anticipate a ruling by the KCC in July 2001 but are unable to predict the outcome. We can give no assurance that these rate requests will be approved as proposed. Additional information with respect to Rate Matters and Regulation is set forth in Notes 1 and 3 of Notes to Consolidated Financial Statements and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Environmental Matters We currently hold all Federal and State environmental approvals required for the operation of our generating units. We believe we are presently in substantial compliance with all air quality regulations (including those pertaining to particulate matter, sulfur dioxide and nitrogen oxides (NOx)) promulgated by the State of Kansas and the Environmental Protection Agency, or EPA. The JEC and La Cygne 2 units have met: (1) the Federal sulfur dioxide standards through the use of low sulfur coal; (2) the Federal particulate matter standards through the use of electrostatic precipitators; and (3) the Federal NOx standards through boiler design and operating procedures. The JEC units are also equipped with flue gas scrubbers providing additional sulfur dioxide and particulate matter emission reduction capability when needed to meet permit limits. The Kansas Department of Health and Environment (KDHE) regulations applicable to our other generating facilities prohibit the emission of more than 3.0 pounds of sulfur dioxide per million Btu of heat input. We meet these standards through the use of low sulfur coal and by all facilities burning coal being equipped with flue gas scrubbers and/or electrostatic precipitators. 14
We must comply with the provisions of The Clean Air Act Amendments of 1990 that require a two-phase reduction in certain emissions. We have installed continuous monitoring and reporting equipment to meet the acid rain requirements. We have not had to make any material capital expenditures to meet Phase II sulfur dioxide and nitrogen oxide requirements. All of our generating facilities are in substantial compliance with the Best Practicable Technology and Best Available Technology regulations issued by the EPA pursuant to the Clean Water Act of 1977. Most EPA regulations are administered in Kansas by the KDHE. Additional information with respect to Environmental Matters is discussed in Note 14 of the Notes to Consolidated Financial Statements. MONITORED SERVICES General: We provide property monitoring services through Protection One and Protection One Europe to over 1.5 million customers. Security services are provided to residential (both single family and multifamily residences), commercial and wholesale customers. Revenues are generated primarily from recurring monthly payments for monitoring and maintaining the alarm systems installed in customer's homes and businesses. Protection One and Protection One Europe are owned by Westar Industries and will therefore cease to be part of Western Resources upon consummation of a separation of our electric utility and non-electric utility businesses. Operations: Operations consist principally of alarm monitoring, customer service functions and branch operations. Security alarm systems include many different types of devices installed at customers' premises designed to detect or react to various occurrences or conditions, such as intrusion or the presence of fire or smoke. Products range from basic intrusion and fire detection equipment to fully integrated systems with card access, closed circuit television and voice/video monitoring. Alarm monitoring customer contracts generally have initial terms ranging from two to ten years in duration, and provide for automatic renewals for a fixed period (typically one year) unless one of the parties elects to cancel the contract at the end of its term. Protection One maintains nine major service centers in North America to provide monitoring services to the majority of its customer base. In the United Kingdom, Protection One Europe's service centers are based in the metropolitan London area. The service centers in continental Europe are based in Paris and in metropolitan Marseilles, France. Protection One Europe has a significant number of customers in the United Kingdom whose security systems are not monitored. Systems for these customers are designed to detect unauthorized entry and emit an audible alarm. Protection One Europe provides maintenance service for these customers. 15
Branch Operations: Protection One maintains 69 service branches in North America from which Protection One provides field repair, customer care, alarm response and sales services and 11 satellite locations from which Protection One provides field repair services. Protection One's branch infrastructure plays an important role in enhancing customer satisfaction, reducing customer loss and building brand awareness. Protection One Europe maintains approximately 44 sales branch offices in the United Kingdom and continental Europe. Sales and Marketing: Protection One relies on a diverse customer acquisition strategy including a mix of internal sales efforts, "tuck-in" acquisitions and a dealer program. Protection One Europe relies on an internal sales force. In February 2000, Protection One initiated a commission only internal sales team, now operating in all Protection One markets, with a goal of producing accounts at a cost lower than its external sales efforts. This program utilizes Protection One's existing branch infrastructure in all its markets. Protection One is also pursuing alliances with strategic partners in an effort to further diversify its marketing distribution channels. Protection One's dealer marketing program provides support services to dealers as they grow their independent businesses. On behalf of dealer program participants, Protection One obtains purchase discounts on security systems, coordinates cooperative dealer advertising and provides assistance in marketing and employee training support services. Competition: The security alarm industry is highly competitive. In North America, there are only five alarm companies that offer services across the U.S. and Canada with the remainder being either large regional or small, privately held alarm companies. Based on number of residential customers, Protection One believes the top five alarm companies in North America are: - ADT Security Services, a subsidiary of Tyco International, Inc.; - SecurityLink from Cambridge Securities (previously from Ameritech Inc., a subsidiary of Ameritech Corporation); - Protection One; - Brinks Home Security Inc., a subsidiary of The Pittston Services Group of North America; and - Honeywell Inc. Competition in the security alarm industry is based primarily on reliability of equipment, market visibility, services offered, reputation for quality of service, price and the ability to identify and to solicit prospective customers as they move into homes. Protection One and Protection One Europe believe that they compete effectively with other national, regional and local security alarm companies due to their reputation for reliable equipment and services, their prominent presence in the areas surrounding their branch offices and dealers, and their ability to offer combined monitoring, repair and enhanced services. Intellectual Property: Protection One owns trademarks related to the name and logo for each of Protection One, Network Multifamily Security, and PowerCall as well as a variety of trade and service marks related to individual services Protection One provides. Protection One owns certain proprietary software applications, which it uses to provide services to its customers. While Protection One believes its trademarks, service marks and proprietary information are important to its business, other than the trademarks Protection One owns in its own name and logo, Protection One does not believe its inability to use any of its trademarks and service marks would have a material adverse effect on its business as a whole. 16
Regulatory Matters: A number of local governmental authorities have adopted or are considering various measures aimed at reducing the number of false alarms. Such measures include: - Permitting of individual alarm systems and the revocation of such permits following a specified number of false alarms; - Imposing fines on alarm customers for false alarms; - Imposing limitations on the number of times the police will respond to alarms at a particular location after a specified number of false alarms; - Requiring further verification of an alarm signal before the police will respond; and - Subjecting alarm monitoring companies to fines or penalties for transmitting false alarms. Protection One's and Protection One Europe's operations are subject to a variety of other laws, regulations and licensing requirements of both domestic and foreign federal, state, and local authorities. In certain jurisdictions, Protection One and Protection One Europe are required to obtain licenses or permits, to comply with standards governing employee selection and training, and to meet certain standards in the conduct of its business. Many jurisdictions also require certain employees to obtain licenses or permits. Those employees who serve as patrol officers are often subject to additional licensing requirements, including firearm licensing and training requirements in jurisdictions in which they carry firearms. The alarm industry is also subject to requirements imposed by various insurance, approval, listing, and standards organizations. Depending upon the type of customer served, the type of security service provided, and the requirements of the applicable local governmental jurisdiction, adherence to the requirements and standards of such organizations is mandatory in some instances and voluntary in others. Protection One's advertising and sales practices are regulated in the United States by both the Federal Trade Commission and state consumer protection laws. In addition, certain administrative requirements and laws of the jurisdictions in which Protection One and Protection One Europe operate also regulate such practices. Such laws and regulations include restrictions on the promotion of the sale of security alarm systems, the obligation to provide purchasers of its alarm systems with certain rescission rights and certain foreign jurisdictions' restrictions on a company's freedom to contract. Protection One's alarm monitoring business utilizes telephone lines and radio frequencies to transmit alarm signals. The cost of telephone lines, and the type of equipment, which may be used in telephone line transmission, are currently regulated by both federal and state governments. The Federal Communications Commission and state public utilities commissions regulate the operation and utilization of radio frequencies. In addition, the laws of certain foreign jurisdictions in which Protection One and Protection One Europe operate regulate the telephone communications with the local authorities. Risk Management: The nature of the services provided by Protection One and Protection One Europe potentially exposes them to greater risks of liability for employee acts or omissions, or system failure, than may be inherent in other businesses. Substantially all of Protection One's and Protection One Europe's alarm monitoring agreements, and other agreements, pursuant to which their products and services are sold, contain provisions limiting liability to customers in an attempt to reduce this risk. 17
Protection One and Protection One Europe carry insurance of various types, including general liability and errors and omissions insurance in amounts considered adequate and customary for the industry and business. Loss experience, and the loss experiences at other security service companies, may affect the availability and cost of such insurance. Certain insurance policies, and the laws of some states, may limit or prohibit insurance coverage for punitive or certain other types of damages, or liability arising from gross negligence. SEGMENT INFORMATION Financial information with respect to business segments is set forth in Note 22 of the Notes to Consolidated Financial Statements. GEOGRAPHIC INFORMATION Geographic information is set forth in Note 22 of the Notes to Consolidated Financial Statements. EMPLOYEES As of December 31, 2000, we had approximately 7,500 employees, of which approximately 5,000 were monitored service employees. We did not experience any strikes or work stoppages during 2000. Our current contract with the International Brotherhood of Electrical Workers extends through June 30, 2002. The contract covers approximately 1,400 employees. RISK FACTORS Cautionary Statements Regarding Future Results of Operations You should read the following risk factors in conjunction with discussions of factors discussed elsewhere in this and other of our filings with the SEC. These cautionary statements are intended to highlight certain factors that may affect our financial condition and results of operations and are not meant to be an exhaustive discussion of risks that apply to public companies with broad operations, such as us. Like other businesses, we are susceptible to macroeconomic downturns in the United States or abroad that may affect the general economic climate and our performance or that of our customers. Similarly, the price of our securities is subject to volatility due to fluctuations in general market conditions, differences in our results of operations from estimates and projections generated by the investment community and other factors beyond our control. Efforts by Wichita to Equalize Rates May Affect Operations and Results: In September 1999, the City of Wichita filed a complaint with FERC against KGE, alleging improper affiliate transactions between KGE and Western Resources' KPL division. The City of Wichita asked that FERC equalize the generation costs between KGE and KPL, in addition to other matters. On November 9, 2000, a FERC administrative law judge ruled in our favor that no change in rates was required. On December 13, 2000, the City of Wichita filed a brief with 18
FERC asking that the Commission overturn the judge's decision. We anticipate a decision by FERC in the second quarter of 2001. A decision requiring equalization of rates could have a material adverse effect on our business and financial condition. Municipalization Efforts by Wichita May Affect Operations and Results: In December 1999, the City Council of Wichita, Kansas, authorized the hiring of an outside consultant to determine the feasibility of creating a municipal electric utility to replace KGE as the supplier of electricity in Wichita. The feasibility study was released in February 2001 and estimates that the City of Wichita would be required to pay us $145 million for our stranded costs if it were to municipalize. However, we estimate the amount to be substantially greater. In order to municipalize KGE's Wichita electric facilities, the City of Wichita would be required to purchase KGE's facilities or build a separate independent system and arrange for its own power supply. These costs are in addition to the stranded costs for which the city would be required to reimburse us. On February 2, 2001, the City of Wichita announced its intention to proceed with its attempt to municipalize KGE's retail electric utility business in Wichita. KGE will oppose municipalization efforts by the City of Wichita. Should the city be successful in its municipalization efforts without providing us adequate compensation for our assets and lost revenues, the adverse effect on our business and financial condition could be material. KGE's franchise with the City of Wichita to provide retail electric service expires in March 2002. There can be no assurance that we can successfully renegotiate the franchise with terms similar, or as favorable, as those in the current franchise. Under Kansas law, KGE will continue to have the right to serve the customers in Wichita following the expiration of the franchise, assuming the system is not municipalized. Customers within the Wichita metropolitan area account for approximately 25% of our total energy sales. Electric Fuel Costs and Purchased Power are Included in Base Rates and are not Recovered Automatically: Electric fuel costs and purchased power are included in base rates. Therefore, if we wish to recover an increase in fuel and purchased power costs, we have to file a request for recovery in a rate filing with the KCC, which could be denied in whole or in part. Any increase in fuel and purchased power costs from the projected average which we did not recover through rates would reduce our earnings. Purchased Power and Fossil-Fuel Commodity Prices are Volatile: In 2000 and 1999, the wholesale power market experienced extreme volatility in prices and supply. This volatility impacts our costs of power purchased and our participation in power trades. If we were unable to generate an adequate supply of electricity for our customers, we would have to purchase power in the wholesale market, if available, or implement curtailment or interruption procedures. To the extent open positions exist in our power marketing portfolio, we are exposed to fluctuating market prices that may adversely impact our financial position and results of operations. The increased expenses or loss of revenues associated with this could be material and adverse to our consolidated results of operations and financial condition. Over the last few years, purchased power prices have increased above historical levels and are not expected to decrease. We use a mix of various fuel types, including coal and natural gas, to operate our system. Natural gas prices increased significantly during 2000 throughout the nation. This increase impacted the cost of gas we used for generation as well as our cost of purchased power. The higher natural gas prices increased our total cost of gas purchased during 2000 although we decreased the quantity burned. 19
During the first quarter of 2001, spot market prices for western coal markets increased significantly. This increase will impact the portion of our anticipated cost of coal which is indexed to or purchased on the spot market. In an effort to mitigate fuel commodity price market risk, we use hedging arrangements to minimize our exposure to increased coal, natural gas and oil prices. Our future exposure to changes in fossil fuel prices will be dependent upon the market prices and the extent and effectiveness of any hedging arrangements we may have. Increases in purchased power and fossil fuel prices could have a material adverse effect on our results of operation. Hedging and Trading Activities Involve Risks: We are involved in hedging and trading activities primarily to minimize risk from commodity market fluctuations, capitalize on market knowledge and enhance system reliability. In these activities, we utilize a variety of financial instruments, including forward contracts involving cash settlements or physical delivery of an energy commodity, options, swaps requiring payments (or receipt of payments) from counter-parties based on the differential between specified prices for the related commodity, and futures traded on electricity and natural gas. Our hedging and trading activities involve risks, including the risk that market prices will move against the prices reflected in our contracts, credit risks associated with the financial condition of our counter-parties, and the risk of increased earnings volatility from period to period. See Market Risk Disclosure in Item 7. Management's Discussion and Analysis for further discussion. Strategic Transactions May Not Be Completed and the Separation of Westar Industries Would Impact Results of Operation: Our strategic plans contemplate acquisition of our electric utility business by PNM and the split-off of Westar Industries to our shareholders. Prior to the completion of these transactions, Westar Industries intends to sell a portion of its common stock in a rights offering to our shareholders. The completion of these transactions is subject to the satisfaction of various conditions, including the receipt of shareholder and regulatory approvals in the case of the PNM transaction. We can give no assurance that the conditions to closing will be satisfied and that the transactions will be consummated as contemplated. Furthermore, if the Westar Industries rights offering is completed, we would record a non-cash charge against income equal to the difference between the book value of the portion of our investment in Westar Industries sold in the rights offering and the offering proceeds received by Westar Industries. Similarly, if the split-off of Westar Industries is completed, we would record a non-cash charge against income equal to the difference between the book value of our remaining investment in Westar Industries and the fair market value of the shares of Westar Industries common stock distributed to our shareholders. We are unable to determine the amount of the charges at this time because the subscription price in the rights offering has not been determined and the fair market value of the common stock of Westar Industries distributed in the split-off will be determined at the time of the split-off. However, the charges would be material and would have a material adverse effect on our operating results in the period recorded. Monitored Services Has Had a History of Losses Which are Likely to Continue: Monitored services incurred net losses of $77.8 million in 2000 (a net loss of $127.1 million excluding extraordinary gains of $49.3 million, net of tax), $80.7 million in 1999 (a net loss of $91.9 million excluding the effect of the Mobile Services Group gain, net of tax) and $17.8 million in 1998. These losses reflect, among other factors: - lower revenue and higher costs per customer due to a smaller customer base; - substantial charges incurred for amortization of purchased customer accounts; - interest incurred on indebtedness; - other charges required to manage operations; and - costs associated with the integration of acquisitions. Substantial charges for amortization of purchased customer accounts will continue on monitored services' existing customer base and customer accounts acquired in the future. We anticipate that Protection One will also continue to incur substantial interest expense because of its substantial debt. We do not expect monitored services to attain profitable operations in the forseeable future. The Impact of Recently Proposed Accounting Changes Requiring the Write Off of Goodwill Could Be Significant: The Financial Accounting Standards Board issued an exposure draft on February 14, 2001 which, if adopted as proposed, would establish a new accounting standard for the treatment of goodwill in a business combination. The new standard would continue to 20
require recognition of goodwill as an asset in a business combination but would not permit amortization as currently required by APB Opinion No. 17, "Intangible Assets." The new standard would require that goodwill be separately tested for impairment using a fair-value based approach as opposed to an undiscounted cash flow approach which is required under current accounting standards. If goodwill is found to be impaired, we would be required to record a non-cash charge against income. The impairment charge would be equal to the amount by which the carrying amount of the goodwill exceeds the fair value. Goodwill would no longer be amortized on a current basis as is required under current accounting standards. The exposure draft contemplates this standard to become effective on July 1, 2001, although this effective date is not certain. Furthermore, the proposed standard could be modified prior to its adoption. If the new standard is adopted as proposed, any subsequent impairment test on our customer accounts would be performed on the customer accounts alone rather than in conjunction with goodwill utilizing an undiscounted cash flow test pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." At December 31, 2000, we had $976 million in goodwill attributable to acquisitions of businesses and $1,006 million for monitored services' customer accounts. These intangible assets together represented 25.5% of the book value of our total assets. We recorded approximately $61.4 million in goodwill amortization expense in 2000. If the new standard becomes effective July 1, 2001 as proposed, we believe it is probable that we would be required to record a non-cash impairment charge. We cannot determine the amount at this time, but we believe the amount would be material and could be a substantial portion of our intangible assets. This impairment charge would have a material adverse effect on our operating results in the period recorded. The Impact of Protection One Class Action Litigation May Be Material: We, our subsidiary Westar Industries, Protection One, its subsidiary Protection One Alarm Monitoring, Inc., and certain present and former officers and directors of Protection One are defendants in a purported class action litigation pending in the United States District Court for the Central District of California brought on behalf of shareholders of Protection One. The plaintiffs are seeking unspecified compensatory damages based on allegations that various statements concerning Protection One's financial results and operations for 1997, 1998, 1999 and the first three quarters of 2000 were false and misleading. We and Protection One cannot predict the impact of this litigation which could be material. (See Item 3. Legal Proceedings and Note 15 of the Notes to Consolidated Financial Statements for more information.) For additional risk factors relating to Protection One, see its December 31, 2000 Annual Report on Form 10-K. 21
EXECUTIVE OFFICERS OF THE COMPANY Other Offices or Positions Name Age Present Office Held During Past Five Years - ---- --- -------------- --------------------------- David C. Wittig 45 Chairman of the Board (since January 1999) Chief Executive Officer (since July 1998) and President (since March 1996) Thomas L. Grennan 49 Executive Vice President, Senior Vice President, Electric Electric Operations Operations (September 1998 to (since November 1998) November 1998) Vice President, Generation Services (May 1995 to August 1998) Carl M. Koupal, Jr. 47 Executive Vice President and Chief Administrative Officer Douglas T. Lake 50 Director Bear Stearns & Co., Inc. - (since October 2000) Senior Managing Director Executive Vice President, (1995 to August 1998) Chief Strategic Officer (since September 1998) James A. Martin 43 Senior Vice President, Vice President (July 1995 to and Treasurer August 2000) (since August 2000) Richard D. Terrill 46 Executive Vice President, Executive Vice President, General General Counsel Counsel, Corporate Secretary (since May 1999) (May 1999 to May 2000) Vice President, Law and Corporate Secretary (July 1998 to May 1999) Secretary and Associate General Counsel (April 1992 to June 1998) Rita A. Sharpe 42 Executive Vice President, Western Resources, Inc. - Shared Services (since Vice President, Shared Services May 2000) (October 1998 to May 2000) Westar Energy, Inc., - Chairman and President (February 1997 to October 1998) Vice President and Assistant Secretary (May 1995 to February 1997) Executive officers serve at the pleasure of the Board of Directors. There are no family relationships among any of the executive officers, nor any arrangements or understandings between any executive officer and other persons pursuant to which he or she was appointed as an executive officer. 22
ITEM 2. PROPERTIES - ------------------- ELECTRIC GENERATING FACILITIES Unit Year Principal Unit Capacity Name No. Installed Fuel (MW) ----------------------------- ---- --------- --------- ------------- Abilene Energy Center: Combustion Turbine 1 1973 Gas 66.0 Gordon Evans Energy Center: Steam Turbines 1 1961 Gas--Oil 151.0 2 1967 Gas--Oil 383.0 Combustion Turbines 1 2000 Gas--Oil 74.0 2 2000 Gas--Oil 74.0 Diesel Generator 1 1969 Diesel 3.0 Hutchinson Energy Center: Steam Turbines 1 1950 Gas 18.0 2 1950 Gas 18.0 3 1951 Gas 31.0 4 1965 Gas 191.0 Combustion Turbines 1 1974 Gas 52.0 2 1974 Gas 50.0 3 1974 Gas 52.0 4 1975 Oil--Diesel 78.0 Diesel Generator 1 1983 Diesel 3.0 Jeffrey Energy Center (84%)(a): Steam Turbines 1 1978 Coal 625.0 2 1980 Coal 622.0 3 1983 Coal 623.0 Wind Turbines 1 1999 - 0.6 2 1999 - 0.6 La Cygne Station (50%): Steam Turbines 1 (a) 1973 Coal 344.0 2 (b) 1977 Coal 337.0 Lawrence Energy Center: Steam Turbines 3 1954 Coal 59.0 4 1960 Coal 119.0 5 1971 Coal 394.0 Murray Gill Energy Center: Steam Turbines 1 1952 Gas--Oil 43.0 2 1954 Gas--Oil 74.0 3 1956 Gas--Oil 112.0 4 1959 Gas--Oil 106.0 Neosho Energy Center: Steam Turbine 3 1954 Gas--Oil 67.0 Tecumseh Energy Center: Steam Turbines 7 1957 Coal 85.0 8 1962 Coal 158.0 Combustion Turbines 1 1972 Gas 20.0 2 1972 Gas 21.0 Wolf Creek Generating Station (47%): Nuclear 1 (a) 1985 Uranium 550.0 ------- Total 5,604.2 ======= 23
(a) We jointly own Jeffrey Energy Center (84%), La Cygne 1 generating unit (50%), and Wolf Creek Generating Station (47%). (b) In 1987, KGE entered into a sale leaseback transaction involving its 50% interest in the La Cygne 2 generating unit. We own approximately 6,300 miles of transmission lines, approximately 21,000 miles of overhead distribution lines, and approximately 2,800 miles of underground distribution lines. Substantially all of our utility properties are encumbered by first priority mortgages pursuant to which bonds have been issued and are outstanding. MONITORED SERVICES FACILITIES Protection One: Size Location (Sq. ft.) Lease/Own Principal Purpose -------- --------- --------- ------------------------------------- United States: Addison, TX...................... 28,512 Lease Service Center/Multifamily Administrative Headquarters Beaverton, OR.................... 44,600 Lease Service Center Hagerstown, MD (1)............... 21,370 Lease Service Center Irving, TX....................... 53,750 Lease Service Center Irving, TX....................... 27,197 Lease Administrative Functions Orlando, FL...................... 11,020 Lease Wholesale Service Center Topeka, KS....................... 17,703 Lease Financial/Administrative Headquarters Wichita, KS...................... 50,000 Own Service Center/Administrative Functions Canada: Ottawa, ON....................... 7,937 Lease Service Center/Administrative Headquarters Vancouver, BC.................... 5,177 Lease Service Center (1) In March 2001, this facility was closed. Protection One Europe: Size Location (Sq. ft.) Lease/Own Principal Purpose -------- --------- --------- ------------------------------------ Europe: London, UK....................... 8,900 Lease Administrative/Service Center Basingstoke (London), UK......... 4,600 Lease Financial/Administrative Offices/Service Center Paris, FR........................ 3,498 Lease Financial/Administrative Offices/Service Center Vitrolles........................ (Marseilles), FR................. 13,003 Lease Administrative/Service Center 24
ITEM 3. LEGAL PROCEEDINGS - -------------------------- The Securities and Exchange Commission (SEC) commenced a private investigation in 1997 relating to, among other things, the timeliness and adequacy of disclosure filings with the SEC by us with respect to securities of ADT Ltd. We are cooperating with the SEC staff in this investigation. The company, its subsidiary Westar Industries, Protection One, its subsidiary Protection One Alarm Monitoring, Inc. (Monitoring), and certain present and former officers and directors of Protection One are defendants in a purported class action litigation pending in the United States District Court for the Central District of California, "Alec Garbini, et al v. Protection One, Inc., et al," No. CV 99-3755 DT (RCx). Pursuant to an Order dated August 2, 1999, four pending purported class actions were consolidated into a single action. On February 27, 2001, plaintiffs filed a Third Consolidated Amended Class Action Complaint ("Amended Complaint"). Plaintiffs purported to bring the action on behalf of a class consisting of all purchasers of publicly traded securities of Protection One, including common stock and notes, during the period of February 10, 1998 through February 2, 2001. The Amended Complaint asserts claims under Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 against Protection One, Monitoring, and certain present and former officers and directors of Protection One based on allegations that various statements concerning Protection One's financial results and operations for 1997, 1998, 1999 and the first three quarters of 2000 were false and misleading and not in compliance with generally accepted accounting principles. Plaintiffs allege, among other things, that former employees of Protection One have reported that Protection One lacked adequate internal accounting controls and that certain accounting information was unsupported or manipulated by management in order to avoid disclosure of accurate information. The Amended Complaint further asserts claims against the company and Westar Industries as controlling persons under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. A claim is also asserted under Section 11 of the Securities Act of 1933 against Protection One's auditor, Arthur Andersen LLP. The Amended Complaint seeks an unspecified amount of compensatory damages and an award of fees and expenses, including attorneys' fees. Defendants have until April 9, 2001 to respond to the Amended Complaint. The company and Protection One intend to vigorously defend against all the claims asserted in the Amended Complaint. The company and Protection One cannot predict the impact of this litigation which could be material. Additional information on legal proceedings involving the company is set forth in Notes 3 and 15 of Notes to Consolidated Financial Statements. See also Item 1. Business, Environmental Matters and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matter was submitted to a vote of our security holders through the solicitation of proxies or otherwise during the fourth quarter of 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ Stock Trading Our common stock is listed on the New York Stock Exchange and traded under the ticker symbol WR. As of March 19, 2001, there were 39,546 common shareholders of record. For information regarding quarterly common stock price ranges for 2000 and 1999, see Note 23 of Notes to Consolidated Financial Statements. Dividends Holders of our common stock are entitled to dividends when and as declared by the Board of Directors. However, prior to the payment of common dividends, dividends must be first paid to the holders of preferred stock based on the fixed dividend rate for each series and our obligations with respect to mandatorily redeemable preferred securities issued by subsidiary trusts must be met. Quarterly dividends on common stock normally are paid on or about the first of January, April, July, and October to shareholders of record as of or about the ninth day of the preceding month. The company's board of directors reviews its dividend policy from time to time. Among the factors the board of directors considers in determining its dividend policy are earnings, cash flows, capitalization ratios, competition and financial loan covenants. In March 2000, the company announced a quarterly dividend of $0.30 per share (an indicated dividend rate of $1.20 per share on an annual basis). In February 2001, the company's board of directors declared a first-quarter 2001 dividend of 30 cents per share. Our agreement with PNM prohibits an increase in the dividend paid on our common stock without the consent of PNM. Our Articles of Incorporation contain restrictions on the payment of dividends or the making of other distributions on our common stock while any preferred shares remain outstanding unless certain capitalization ratios and other conditions are met. At December 31, 2000, under these provisions, the company's paid-in capital and retained earnings were restricted by $857,600 against the payment of dividends on common stock. For information regarding quarterly dividend declarations for 2000 and 1999, see Note 23 of Notes to Consolidated Financial Statements included herein. See also Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 26
ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- For the Year Ended December 31, ------------------------------------------------------------------- 2000 1999(a) 1998(b) 1997(c) 1996 ---------- ----------- ----------- ----------- ---------- (In Thousands) Income Statement Data: Sales.............................. $2,368,476 $2,030,087 $2,034,054 $2,151,765 $2,046,827 Net income before extraordinary gain and accounting change........ 91,050 2,554 34,058 498,652 168,950 Earnings available for common stock............................. 135,352 13,167 32,058 493,733 154,111 For the Year Ended December 31, ------------------------------------------------------------------- 2000 1999(a) 1998(b) 1997(c) 1996 ---------- ----------- ----------- ----------- ---------- (In Thousands) Balance Sheet Data: Total assets....................... $7,767,208 $7,989,892 $7,929,776 $6,945,350 $6,647,781 Long-term debt (net) and other mandatorily redeemable securities............. 3,457,849 3,103,066 3,283,064 2,391,889 1,951,583 For the Year Ended December 31, ------------------------------------------------------------------- 2000 1999(a) 1998(b) 1997(c) 1996 ---------- ----------- ----------- ----------- ---------- Common Stock Data: Basic and diluted earnings per share available for common stock before extraordinary gain and accounting change........ $ 1.30 $ 0.02 $ 0.46 $ 7.58 $ 2.41 Basic and diluted earnings per share available for common stock............................. $ 1.96 $ 0.20 $ 0.48 $ 7.58 $ 2.41 Dividends per share (d)............ $ 1.44 $ 2.14 $ 2.14 $ 2.10 $ 2.06 Book value per share............... $ 27.20 $ 27.66 $ 29.21 $ 30.86 $ 25.15 Average shares outstanding(000's) 68,962 67,080 65,634 65,128 63,834 (a) Information reflects the impairment of marketable securities and the change to an accelerated amortization method for Monitored Services customer accounts. (b) Information reflects exit costs associated with international power development activities. (c) Information reflects the gain on the sale of Tyco common shares, our strategic alliance with ONEOK and the acquisition of Protection One. (d) In March 2000, the company announced a new dividend policy. See Item 5. Dividends. 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS --------------------- INTRODUCTION Unless the context otherwise indicates, all references in this report on Form 10-K to the "company," "Western Resources," "we," "us," "our" or similar words are to Western Resources, Inc. and its consolidated subsidiaries. In Management's Discussion and Analysis we explain the general financial condition, significant annual changes and the operating results for Western Resources and its subsidiaries. We explain: - What factors impact our business - What our earnings and costs were in 2000 and 1999 - Why these earnings and costs differ from year to year - How our earnings and costs affect our overall financial condition - What our capital expenditures were for 2000 - What we expect our capital expenditures to be for the years 2001 through 2003 - How we plan to pay for these future capital expenditures - Any other items that particularly affect our financial condition or earnings As you read Management's Discussion and Analysis, please refer to our Consolidated Financial Statements which show our operating results. SUMMARY OF SIGNIFICANT ITEMS PNM Merger and Split-off of Westar Industries On November 8, 2000, we entered into an agreement under which Public Service Company of New Mexico (PNM) will acquire our electric utility businesses in a stock-for-stock transaction. Under the terms of the agreement, both we and PNM will become subsidiaries of a new holding company. Immediately prior to the consummation of this combination, we will split-off our remaining interest in Westar Industries to our shareholders. Westar Industries, our wholly owned subsidiary, owns our interests in Protection One, Inc., Protection One Europe, ONEOK, Inc., and other non-utility businesses. In connection with this transaction, in February 2001 Westar Industries converted a portion of a receivable owed by us into approximately 14.4 million shares of our common stock. See Note 2 of the Notes to Consolidated Financial Statements. Westar Industries has filed a registration statement with the Securities and Exchange Commission (SEC) covering the proposed sale of a portion of its common stock through the exercise of non-transferable rights proposed to be distributed by Westar Industries to our shareholders. We anticipate that the rights offering will be completed in 2001. We can give no assurance as to whether or when the rights offering will be consummated or whether or when the separation of our electric and non-electric utility businesses, or the consummation of the acquisition of the company by PNM may occur. 28
Extraordinary Gain on Extinguishment of Debt During 2000, Westar Industries purchased $170.0 million face value of Protection One bonds on the open market. In exchange for cash and the settlement of certain intercompany payables and receivables, $103.9 million of these debt securities were transferred to Protection One. Protection One also purchased $30.5 million face value of its bonds on the open market during 2000. An extraordinary gain of $49.2 million, net of tax of $26.5 million, was recognized at December 31, 2000, on these retirements. Exposure Draft for Goodwill Accounting The Financial Accounting Standards Board (FASB) issued an exposure draft on February 14, 2001 which, if adopted as proposed, would establish a new accounting standard for the treatment of goodwill in a business combination. The new standard would continue to require recognition of goodwill as an asset in a business combination but would not permit amortization as currently required by APB Opinion No. 17, "Intangible Assets." The new standard would require that goodwill be separately tested for impairment using a fair-value based approach as opposed to an undiscounted cash flow approach which is required under current accounting standards. If goodwill is found to be impaired, we would be required to record a non-cash charge against income. The impairment charge would be equal to the amount by which the carrying amount of the goodwill exceeds the fair value. Goodwill would no longer be amortized on a current basis as is required under current accounting standards. The exposure draft contemplates this standard to become effective on July 1, 2001, although this effective date is not certain. Furthermore, the proposed standard could be modified prior to its adoption. If the new standard is adopted as proposed, any subsequent impairment test on our customer accounts would be performed on the customer accounts alone rather than in conjunction with goodwill utilizing an undiscounted cash flow test pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." At December 31, 2000, we had $976 million in goodwill attributable to acquisitions of businesses and $1,006 million for monitored services' customer accounts. These intangible assets together represented 25.5% of the book value of our total assets. We recorded approximately $61.4 million in goodwill amortization expense in 2000. If the new standard becomes effective July 1, 2001 as proposed, we believe it is probable that we would be required to record a non-cash impairment charge. We cannot determine the amount at this time, but we believe the amount would be material and could be a substantial portion of our intangible assets. This impairment charge would have a material adverse effect on our operating results in the period recorded. Strategic Transaction and the Separation of Westar Industries Our strategic plans contemplate the acquisition of our electric utility businesses by PNM and the split-off of Westar Industries to our shareholders. Prior to the completion of these transactions, Westar Industries intends to sell a portion of its common stock in a rights offering to our shareholders. The completion of these transactions is subject to the satisfaction of various conditions, including the receipt of shareholder and regulatory approvals in the case of the PNM transaction. We can give no assurance that the conditions to closing will be satisfied and that the transactions will be consummated as contemplated. Futhermore, if the Westar Industries rights offering is completed, we would record a non-cash charge against income equal to the difference between the book value of the portion of our investment in Westar Industries sold in the rights offering and the offering proceeds received by Westar Industries. Similarly, if the split-off of Westar Industries is completed, we would record a non-cash charge against income equal to the difference between the book value of our remaining investment in Westar Industries and the fair market value of the shares of Westar Industries common stock distributed to our shareholders. We are unable to determine the amount of the charges at this time because the subscription price in the rights offering has not been determined and the fair market value of the common stock of Westar Industries distributed in the split- off will be determined at the time of the split-off. However, the charges would be material and would have a material adverse effect on our operating results in the period recorded. Monitored Services Change in Estimate of Useful Life of Goodwill In January 2000, Protection One re-evaluated the original assumptions and rationale utilized in the establishment of the carrying value and estimated useful life of goodwill. Protection One concluded that due to continued losses, increased levels of attrition experienced in 1999 and other factors, the estimated useful life of goodwill should be reduced from 40 years to 20 years as of January 1, 2000. After that date, remaining 29
goodwill, net of accumulated amortization, is being amortized over its remaining useful life based on a 20-year life. Protection One Europe made a similar change. Based on Protection One's and Protection One Europe's existing account bases at January 1, 2000, this resulted in an increase in aggregate annual goodwill amortization of approximately $33.0 million in 2000. Marketable Securities During the fourth quarter of 1999, we decided to sell our remaining marketable security investments in paging industry companies. These securities were classified as available-for-sale; therefore, changes in market value were historically reported as a component of other comprehensive income. The market value for these securities declined during the last six to nine months of 1999. We determined that the decline in value of these securities was other than temporary and a charge to earnings for the decline in value was required at December 31, 1999. Therefore, a non-cash charge of $76.2 million was recorded in the fourth quarter of 1999 and is presented separately in the accompanying Consolidated Statements of Income. During the first quarter of 2000, we sold the remainder of our portfolio of paging company securities. We realized a gain of $24.9 million on these sales. This gain was largely attributable to a general increase in the market value of paging companies triggered by an announcement made by one paging company in February 2000 which had a favorable impact on the market value of public paging company securities. During 2000, we sold our equity investment in a gas compression company and realized a pre-tax gain of $91.1 million. OPERATING RESULTS Western Resources Consolidated 2000 Compared to 1999: Basic earnings per share was $1.96 compared to $0.20 in 1999. This increase is primarily attributable to increased investment earnings from the sale of certain investments and the extraordinary gain on the retirement of Protection One bonds. This increase was partially offset by a change in the estimated life of goodwill and operating losses from our monitored services segment. 1999 Compared to 1998: Basic earnings per share was $0.20 compared to $0.48 in 1998. Our 1999 results of operations benefited from the performance of the regulated electric utility operations. However, this performance was not sufficient to offset the impairment recorded on marketable securities in the fourth quarter of 1999 or the losses from our monitored services segment. The following discussion explains significant changes from prior year results in sales, costs of sales, operating expenses, other income (expense), interest expense, income taxes, and preferred dividends. 30
Electric Utility We supply electric energy at retail to approximately 636,000 customers in Kansas. We also supply electric energy at wholesale to the electric distribution systems of 65 communities and 4 rural electric cooperatives. We have contracts for the sale, purchase or exchange of electricity with other utilities. In addition, we have power marketing operations and we engage in system hedging transactions. Power marketing transactions are electric purchases and sales made in areas outside of our historical marketing territory. System hedging transactions are entered into at certain times to reduce exposure relative to the volatility of market prices for purchased power. The settlement of system hedging transactions affects both our sales and our cost of sales although the net effect in 2000 was insignificant. If the cost of settling the hedging transactions exceeds the premiums from the related sales, the net effect will be a loss just as there would be a net gain if the premiums from the sales exceed the corresponding cost of the sales. Many things will affect our future electric sales. They include: - The weather - Our electric rates - Competitive forces - Customer conservation efforts - Wholesale demand - The overall economy of our service area - The City of Wichita's attempt to create a municipal electric utility - The cost of fuel and purchased power included in base rates - The results of our power marketing and system hedging transactions Our electric sales for the last three years are as follows: 2000 1999 1998 ---------- ---------- ---------- (In Thousands) Residential....... $ 452,674 $ 407,371 $ 428,680 Commercial........ 367,367 356,314 356,610 Industrial........ 252,243 251,391 257,186 Wholesale and Interchange..... 214,721 174,895 145,320 Power Marketing... 457,178 190,101 382,601 System Hedging.... 35,321 3,320 - Other............. 49,628 46,306 41,288 ---------- ---------- ---------- Total........... $1,829,132 $1,429,698 $1,611,685 ========== ========== ========== The following tables reflect the changes in electric sales volumes, as measured by megawatt hours, for the years ended December 31, 2000, 1999 and 1998: 31
2000 1999 % Change ------ ------ -------- (Thousands of MWH) Residential................ 6,222 5,551 12.1% Commercial................. 6,485 6,202 4.6 Industrial................. 5,820 5,743 1.4 Other...................... 108 108 - ------ ------ ----- Total retail.............. 18,635 17,604 5.9 Wholesale.................. 6,892 5,617 22.7 ------ ------ ----- Total..................... 25,527 23,221 9.9% ====== ====== ===== 1999 1998 % Change ------ ------ -------- (Thousands of MWH) Residential................ 5,551 5,815 (4.5)% Commercial................. 6,202 6,199 0.1 Industrial................. 5,743 5,808 (1.1) Other...................... 108 108 - ------ ------ ----- Total retail.............. 17,604 17,930 (1.8) Wholesale.................. 5,617 4,826 16.4 ------ ------ ----- Total..................... 23,221 22,756 2.0% ====== ====== ===== Power marketing and system hedging sales do not have any physical sales volumes associated with them. 2000 compared to 1999: Electric operations gross profit increased $28.3 million, or 3%. The increase is due primarily to increased power marketing sales. Electric operations gross profit as a percentage of sales decreased to 54% from 67% primarily due to higher fuel and purchased power prices. (See Market Risk Disclosure for further discussion.) Additionally, we experienced a 12% increase in residential sales volumes and a 23% increase in wholesale sales volumes. The increase in residential sales is primarily due to increased demand caused by warm weather. Cooling- degree days increased by 27%. The increase in wholesale sales volumes was primarily due to increased wholesale market opportunities because of our larger trading operation. Items included in energy cost of sales are fuel expense, purchased power expense (electricity we purchase from others for resale) and power marketing expense. Partially offsetting the higher sales was an increase of $371.3 million in cost of sales primarily due to higher power marketing expense of $263.0 million and increased fuel and purchased power expenses of approximately $71.0 million. Fuel and purchased power expenses were higher primarily due to increased commodity prices, increased demand from retail customers because of warmer weather and higher wholesale sales volumes. 1999 compared to 1998: Electric utility gross profit increased 3%, or $30.5 million. Gross profit as a percentage of sales improved to 67% from 57%. These improvements were due primarily to increased power marketing profit and increased wholesale sales. In the summer of 1999, we had increased power plant availability during hot weather when demand was high which allowed increased wholesale sales. Power plant availability impacts both gross profit and gross profit percentage, as it is more profitable for us to generate electricity for resale than to purchase power for resale. Partially offsetting these increases were lower retail sales due to weather which was milder in 1999. 32
BUSINESS SEGMENTS Our business is segmented based on differences in products and services, production processes, and management responsibility. Based on this approach, we have identified four reportable segments: Fossil Generation, Nuclear Generation, Power Delivery and Monitored Services. We also have other non-utility operations and our ONEOK investment. Fossil Generation produces power for sale internally to the Power Delivery segment and externally to wholesale customers. Power marketing and system hedging are components of our Fossil Generation segment. Nuclear Generation represents our 47% ownership in the Wolf Creek nuclear generating facility. This segment has only internal sales because it provides all of its power to its co-owners. The Power Delivery segment consists of the transmission and distribution of power to our retail customers in Kansas and the customer service provided to these customers and the transmission of wholesale energy. Monitored Services represents our security alarm monitoring business in North America and Europe. We manage our business segments' performance based on their earnings before interest and taxes (EBIT). EBIT does not represent cash flow from operations as defined by generally accepted accounting principles, should not be construed as an alternative to operating income and is indicative neither of operating performance nor cash flows available to fund the cash needs of our company. Items excluded from EBIT are significant components in understanding and assessing the financial performance of our company. We believe presentation of EBIT enhances an understanding of financial condition, results of operations and cash flows because EBIT is used by our company to satisfy its debt service obligations, capital expenditures, dividends and other operational needs, as well as to provide funds for growth. Our computation of EBIT may not be comparable to other similarly titled measures of other companies. 33
The following tables reflect key information for our three electric utility business segments: For the years ended December 31, ------------------------------------ 2000 1999 1998 ---------- ---------- ---------- Fossil Generation: (In Thousands) External sales................. $ 705,536 $ 365,311 $ 525,974 Internal sales................. 572,533 546,683 517,363 Depreciation and amortization.. 60,331 55,320 53,132 EBIT........................... 202,744 219,087 144,357 Nuclear Generation (a): Internal sales................. $ 107,770 $ 108,445 $ 117,517 Depreciation and amortization.. 40,052 39,629 39,583 EBIT........................... (24,323) (25,214) (20,920) Power Delivery: External sales................. $1,123,590 $1,064,385 $1,085,711 Internal sales................. 291,927 293,522 66,492 Depreciation and amortization.. 75,419 71,717 68,297 EBIT........................... 171,872 145,603 196,398 (a) Our 47% share of Wolf Creek's operating results. Fossil Generation Fossil Generation's external sales include power produced for sale to external wholesale customers located outside our historical marketing territory and the amounts associated with the system hedging transactions discussed above. Internal sales include power produced for sale to Power Delivery which delivers the power to our retail and wholesale customers. The internal transfer price for these sales is set by us based upon what we believe would be competitive market prices for capacity and energy at the time of sale. 2000 compared to 1999: External sales increased $340.2 million primarily due to power marketing sales which increased by $267.1 million, wholesale sales which increased by $39.8 million and system hedging sales which increased by $32.0 million. Since 1997, we have gradually increased the size of our power trading operation in an effort to better utilize our market knowledge and to mitigate the risk associated with energy prices. While sales increased significantly, EBIT was $16.3 million lower because of higher cost of sales. Cost of sales was $371.3 million higher primarily due to higher power marketing expense of $263.0 million, increased fuel and purchased power expenses of approximately $71.0 million and system hedging transaction costs of approximately $33.1 million. Fuel and purchased power expenses were higher primarily due to increased commodity prices, increased demand from retail customers because of warmer weather and higher wholesale sales volumes. The cost of fuel was significantly affected by increased gas costs of $13.3 million (despite a 9% reduction in MMBtu of gas burned). Our average natural gas price increased 45% during the year compared to 1999. Additionally, coal costs increased by $35.1 million primarily due to increasing the quantities of coal burned in our efforts to minimize gas costs and cost of oil increased $7.2 million primarily due to increased price and increasing the quantities of oil burned. See the Market Risk Disclosure in Item 7. Management's Discussion and Analysis for further discussion. 1999 compared to 1998: External sales decreased $160.7 million, or 31%, primarily due to lower power marketing sales. Power marketing sales decreased $189.2 million, or 50%, due to milder weather compared to 1998. In 1999 and 1998, the wholesale power market experienced extreme volatility in prices and supply. This volatility impacts our cost of power purchased and our participation in power trades. 34
The decrease in power marketing sales was partially offset by higher wholesale sales of $29.6 million. Due to warmer than normal weather throughout the Midwest in July and increased availability of our coal-fired generation stations, we were able to sell more electricity to wholesale customers in 1999 than in 1998. During the summer of 1998, one of our coal-fired generation units was unavailable for an extended period of time, reducing our wholesale sales capacity. The internal transfer price Fossil Generation charged Power Delivery was higher due to a higher forecasted peak demand. Therefore, internal sales and EBIT of Fossil Generation were higher. EBIT was also higher due to improved net profit on power marketing transactions. Nuclear Generation Nuclear generation has only internal sales because it provides all of its power to its co-owners: KGE, Kansas City Power and Light Company, and Kansas Electric Power Cooperative, Inc. KGE owns 47% of Wolf Creek Nuclear Operating Corporation (WCNOC), the operating company for Wolf Creek Generating Station (Wolf Creek). Internal sales are priced at the internal transfer price that Nuclear Generation charges to Power Delivery. Wolf Creek has a scheduled refueling and maintenance outage approximately every 18 months. The next outage is scheduled in the spring of 2002. During an outage, Wolf Creek produces no power for its co-owners; therefore internal sales, EBIT and nuclear fuel expense decrease. 2000 compared to 1999: Wolf Creek shut down on September 29, 2000, for its eleventh scheduled refueling and maintenance outage. Internal sales and EBIT declined immaterially because both periods had scheduled refueling and maintenance outages. 1999 compared to 1998: Internal sales and EBIT decreased primarily due to the scheduled 36-day refueling and maintenance outage at Wolf Creek in 1999. In 1998, Wolf Creek operated the entire year without any refueling outages. Power Delivery The Power Delivery segment's external sales consist of the transmission and distribution of power to our electric retail and wholesale customers and the customer service provided to them. Internal sales consist of the intra-segment transfer price charged to Fossil Generation and Nuclear Generation for the use of the distribution lines and transformers. 2000 compared to 1999: External sales increased $59.2 million, or 6% and EBIT increased $26.3 million, or 18%. We experienced a 12% increase in residential sales volumes primarily due to a 27% increase in cooling degree days and a 15% increase in heating degree days which increased the demand for power on our system. 1999 compared to 1998: External sales decreased $21.3 million due primarily to 2% lower retail electric sales volumes. Retail sales volumes decreased primarily as a result of milder temperatures in 1999 than in 1998. Our service territories averaged 22% fewer cooling degree days in 1999. The cumulative effect of the electric rate decreases implemented on June 1, 1998, and June 1, 1999, reduced sales by approximately $10 million. 35
Internal sales were $227 million higher due to a change in the internal transfer price charged for the use of the distribution lines and transformers. EBIT decreased $50.8 million primarily due to $21.3 million lower external sales, a $16.1 million higher internal transfer price charged by Fossil Generation and $8.3 million in ancillary service fees charged by Fossil Generation. Ancillary services include such items as voltage stabilization and spinning reserve. No ancillary service fees were charged by Fossil Generation in 1998. The increased internal transfer price was due to higher peak demand to accommodate air conditioning load. Monitored Services Protection One and Protection One Europe comprise our monitored services business. The results discussed below reflect monitored services on a stand- alone basis. These results do not take into consideration Protection One's minority interest of approximately 15% at December 31, 2000, 1999 and 1998. 2000 1999 1998 -------- -------- -------- (In Thousands) External sales................... $537,859 $599,105 $421,095 Depreciation and amortization.... 248,414 235,465 125,103 EBIT............................. (91,370) (20,675) 34,438 2000 compared to 1999: Sales decreased $61.2 million primarily due to a decline in customer base and the effect of the adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101). Adoption of SAB 101 reduced revenue by $10.9 million. In North America, Protection One had a net decrease of 141,527 customers in 2000 as compared to a net increase of 8,595 customers in 1999. The decrease in customers is primarily attributable to the fact that Protection One's present customer acquisition strategies were not able to generate accounts in a sufficient volume at acceptable costs to replace accounts lost through attrition. Protection One expects this trend will continue until the efforts it is making to acquire new accounts and reduce attrition become more successful than they have been to date. Until Protection One is able to reverse this trend, net losses of customer accounts will materially and adversely affect its business, financial condition and results of operations. Protection One's focus remains on the completion of its current infrastructure projects, the development of cost effective marketing programs, the development of its commercial business and the generation of positive cash flow. Protection One Europe had a net increase of 9,115 customers. The increase is primarily due to internal marketing efforts. EBIT decreased $70.7 million due to lower sales, higher cost of sales and lower other income. Cost of sales increased $5.6 million due to increased compensation costs for additional personnel hired at Protection One's monitoring centers, an increase in the cost of parts and materials, and increased vehicle costs. Other income decreased because Protection One recorded a $17.2 million gain on the sale of the Mobile Services Group in the third quarter of 1999. Depreciation and amortization expense increased by $12.9 million primarily due to the change in the estimated life of goodwill which was reduced from 40 years to 20 years. 36
Operating and maintenance expense decreased $13.6 million primarily due to declines in third party monitoring costs, signs and decals, printing and compensation expenses. These decreases are a direct result of the significant decline in the number of new accounts acquired during 2000 primarily due to the restructuring of Protection One's dealer program. 1999 compared to 1998: Monitored services had a net increase of 63,611 customers in 1999 as compared to a net increase of 544,521 customers in 1998. Accordingly, results for 1999 include a full year of operations with the customers added throughout 1998. The increase in customers is the primary reason for the $178.0 million increase in external sales. EBIT decreased $53.6 million due to higher cost of sales as a result of increased customers, higher depreciation and amortization expense and higher selling general and administrative expenses. Depreciation and amortization expense increased $108.8 million. In 1999, Protection One and Protection One Europe changed their customer amortization method from a 10-year straight line method to a 10-year declining balance method for most of the North American and European customers. This change increased amortization expense by approximately $39.2 million. The balance of the increase is primarily attributed to a full year of amortization expense on customers acquired during 1998. See Note 1 of Notes to Consolidated Financial Statements for further discussion. Selling, general and administrative expenses increased $71.5 million primarily due to costs associated with the overall increase in the average number of customers billed, additional bad debt expense of approximately $10.5 million resulting from higher attrition, costs associated with Year 2000 compliance, professional fees and salary increases. Western Resources Consolidated Other Operating Expenses In 1999, we recorded a charge of $17.6 million for deferred KCPL merger costs related to the termination of the KCPL merger. In 1998, we recorded a $98.9 million charge to income associated with our decision to exit the international power project development business. See Note 17 of Notes to Consolidated Financial Statements for further discussion. Other Income (Expense) 2000 compared to 1999: Other income increased $214.4 million primarily due to a $91.1 million gain on the sale of our remaining investment in a gas compression company and a $24.5 million gain on the sale of marketable securities. Other income also improved in 2000 because of a special charge of $76.2 million we recorded in 1999 related to our paging securities portfolio. These increases were partially offset by a decrease in other income due to the $17.2 million gain on the sale of Protection One's Mobile Services Group recorded in the third quarter of 1999. 1999 compared to 1998: Other income for 1999 decreased $57.3 million primarily due to the impairment charge for an other than temporary decline in the value of marketable securities recorded in 1999 as discussed above. 37
Interest Expense 2000 compared to 1999: Interest expense represents the interest we paid on outstanding debt. We retired long-term debt during 1999 and 2000, causing long- term debt interest expense to decrease by $10.0 million for the year ended December 31, 2000. The retirements included $125 million of Western Resources' first mortgage bonds in 1999 and $75 million in 2000. We also retired Protection One bonds in the fourth quarter of 1999 and during 2000 with an aggregate face value of $290.4 million. For more information, see the Liquidity and Capital Resources section below. Short-term debt interest expense was $5.5 million higher due to increased short-term borrowings under our credit facilities. The majority of this short- term debt was repaid in the third quarter of 2000 with proceeds from the $600 million term loan. 1999 compared to 1998: Interest expense increased 30% primarily due to Protection One incurring additional long-term debt to fund purchases of customer accounts. We also had higher long-term debt interest expense because of the 6.25% and 6.8% unsecured senior notes due in 2018 that we issued in the third quarter of 1998. Short-term debt interest expense was $2.4 million higher due to higher average balances of short-term debt in 1999. Income Taxes 2000 compared to 1999: We had income tax expense of $46.1 million in 2000 compared to an income tax benefit of $32.2 million in 1999. Our effective income tax rates were 33.6% for December 31, 2000 and (108.6%) for December 31, 1999. This change is primarily due to earnings before income taxes in 2000 compared to a loss before income taxes in 1999. Earnings before income taxes increased primarily due to the $115.6 million gain on the sale of investments. In 1999, our loss before income taxes included an impairment charge for marketable securities and the charge related to the termination of the KCPL merger. In 2000, we also had tax expense of $26.5 million related to our extraordinary gain on the purchase of Protection One bonds. The difference between our effective tax rate and the statutory rate is primarily attributable to the tax benefit of excluding from taxable income, in accordance with IRS rules, 70% of the dividends received from ONEOK, the generation and utilization of tax credits from affordable housing investments, the amortization of prior years' investment tax credits, the amortization of non-deductible goodwill, the tax benefits from corporate-owned life insurance and the deduction for state income taxes. 1999 compared to 1998: We have recorded an income tax benefit in 1999 of $32.2 million and income tax expense in 1998 of $6.8 million. This change is primarily due to lower earnings before income taxes in 1999. Earnings before income taxes decreased primarily due to operating results at Protection One, the impairment of marketable securities discussed above and the charge related to the termination of the KCPL merger. 38
We also had tax expense of $7.2 million related to Westar Industries' extraordinary gain on the purchase of Protection One bonds, which is presented on the consolidated statement of income after income from continuing operations. LIQUIDITY AND CAPITAL RESOURCES The following discussion explains significant factors in liquidity and capital resources at December 31, 2000. Overview Most of our cash requirements consist of capital expenditures and maintenance costs associated with the electric utility business, cash needs of our monitored services business, debt service and cash payments of common stock dividends. Our ability to attract necessary financial capital on reasonable terms is critical to our overall business plan. Historically, we have paid for these items with cash on hand and the issuance of stock or long- or short-term debt. Our ability to provide the cash, stock or debt to fund our capital expenditures depends upon many things, including available resources, our financial condition and current market conditions. We had $8.8 million in cash and cash equivalents at December 31, 2000. We consider cash equivalents to be highly liquid debt instruments when purchased with a maturity of three months or less. We also had $22.2 million of restricted cash classified as a current asset. The current asset portion of our restricted cash consists primarily of cash held in escrow as required by certain letters of credit. In addition, we had $35.9 million of restricted cash classified as a long-term asset which consists primarily of cash held in escrow required by the terms of a pre-paid capacity and transmission agreement. At December 31, 2000, current maturities of long-term debt were $41.8 million and short-term debt outstanding was $35.0 million. At March 19, 2001, our short-term debt outstanding was $72.0 million. On June 28, 2000, we entered into a $600 million, multi-year term loan that replaced two revolving credit facilities which matured on June 30, 2000. The net proceeds of the term loan were used to retire short-term debt. The term loan is secured by first mortgage bonds of the company and KGE and has a final maturity date of March 17, 2003. Maturities of the term loan through March 17, 2003, are as follows: Principal Year Amount ---- --------- (In Thousands) 2001.................... $ 9,000 2002.................... 6,000 2003.................... 585,000 --------- $ 600,000 39
The terms of the loan contain requirements for maintaining certain consolidated leverage ratios, interest coverage ratios and consolidated debt to capital ratios. We are in compliance with all of these requirements. Interest on the term loan is payable on the expiration date of each borrowing under the facility or quarterly if the term of the borrowing is greater than three months. The weighted average interest rate, including amortization of fees, on the term loan for the year ending December 31, 2000 was 10.28%. We also have an arrangement with certain banks to provide a revolving credit facility on a committed basis totaling $500 million. The facility is secured by first mortgage bonds of the company and KGE and matures on March 17, 2003. Borrowings on this facility were $35.0 million at December 31, 2000 and $72.0 million at March 19, 2001. Under the terms of the agreement, we are required, among other restrictions, to maintain a total debt to total capitalization ratio of not greater than 65% at all times. We are in compliance with this restriction. We have registered securities for sale with the Securities and Exchange Commission (SEC). As of December 31, 2000, these included $400 million of unsecured senior notes, $500 million of our first mortgage bonds, $50 million of KGE first mortgage bonds and approximately 11.2 million of our common shares. Our ability to issue additional debt and equity securities is restricted under limitations imposed by the Articles of Incorporation and the Mortgage and Deed of Trusts of Western Resources and KGE. Our mortgage prohibits additional first mortgage bonds from being issued (except in connection with certain refundings) unless our unconsolidated net earnings available for interest, depreciation and property retirement (which as defined, does not include earnings or losses attributable to the ownership of securities of subsidiaries) for a period of 12 consecutive months within 15 months preceding the issuance are not less than the greater of twice the annual interest charges on, or 10% of the principal amount of, all first mortgage bonds outstanding after giving effect to the proposed issuance. In addition, the issuance of bonds is subject to limitations based upon the amount of bondable property additions. As of December 31, 2000, $39 million of first mortgage bonds (at an assumed interest rate of 9.5%) could be issued under the most restrictive provisions in the mortgage. KGE's mortgage prohibits additional first mortgage bonds from being issued (except in connection with certain refundings) unless KGE's net earnings before income taxes and before provision for retirement and depreciation of property for a period of 12 consecutive months within 15 months preceding the issuance are not less than either two and one-half times the annual interest charges on, or 10% of the principal amount of, all KGE first mortgage bonds outstanding after giving effect to the proposed issuance. In addition, the issuance of bonds is subject to limitations based upon the amount of bondable property additions. As of December 31, 2000, approximately $242 million principal amount of additional KGE first mortgage bonds could be issued under the most restrictive provisions in the mortgage. S&P, Fitch Investors Service (Fitch) and Moody's are independent credit- rating agencies that rate our debt securities. These ratings indicate the agencies' assessment of our ability to pay interest and principal on these securities. 40
As of March 15, 2001, ratings with these agencies are as follows: Western Protection Protection Resources' Western KGE's One's One's Mortgage Resources Mortgage Senior Senior Bond Unsecured Bond Unsecured Subordinated Rating Agency Rating Debt Rating Debt Unsecured Debt - ------------- --------- --------- --------- ---------- -------------- S&P BBB- BB- BB+ B+ B- Fitch BB+ BB BB+ B+ B- Moody's Ba1 Ba2 Ba1 B3 Caa2 Credit rating agencies are applying more stringent guidelines when rating utility companies due to increasing competition and utility investment in non- utility businesses. Following the announcement on November 9, 2000, of an agreement under which PNM will acquire our electric utility businesses, S&P revised its Credit Watch for us from developing to positive. Moody's has also upgraded its outlook from negative to positive. Fitch also revised our Rating Watch from negative to evolving after the November 2000 announcement. On March 24, 2000, Moody's downgraded its ratings on Protection One's outstanding securities and on March 9, 2001, Moody's further downgraded these ratings citing concerns regarding Protection One's operations, leverage and liquidity over the intermediate term, with outlook remaining negative. S&P and Fitch currently have Protection One's ratings on negative watch. Sale of Accounts Receivable On July 28, 2000, we and KGE entered into an agreement to sell, on an ongoing basis, all of our accounts receivable arising from the sale of electricity, to WR Receivables Corporation, a special purpose entity wholly owned by the company. The agreement expires on July 26, 2001, and is annually renewable upon agreement by both parties. The special purpose entity has sold and, subject to certain conditions, may from time to time sell, up to $125 million (and upon request, subject to certain conditions, up to $175 million) of an undivided fractional ownership interest in the pool of receivables to a third-party, multi-seller receivables funding entity affiliated with a lender. Our retained interests in the receivables sold are recorded at cost which approximates fair value. We have received net proceeds of $115.0 million as of December 31, 2000. Cash Flows from Operating Activities Cash from operations decreased to $286.1 million for the year ended December 31, 2000, from $368.4 million for the same period of 1999. The primary reasons for this decrease are income taxes paid on the sale of marketable securities in 2000 and cash required to be escrowed in 2000 for certain contractual agreements as discussed in Liquidity and Capital Resources. Changes in working capital also contributed to this decrease in cash flow from operations. Cash Flows (used in) Investing Activities Investing activities used net cash flow of $86.0 million in 2000. The proceeds from the sale of marketable securities of approximately $218.6 million were offset by $308.1 million of capital additions which included costs associated with two new combustion turbine generators which were placed in service in June 2000. 41
Investing activities used net cash flow of $467.1 million in 1999 primarily due to net additions to property, plant and equipment of approximately $275.7 million and Protection One's use of approximately $268.4 million for customer account and security alarm business acquisitions. Cash Flows (used in) from Financing Activities We had a net use of cash for financing activities totaling $202.4 million during 2000 due primarily to net payments on short-term and long-term debt and dividend payments. In June 2000, we received $600 million of proceeds on a multi-year term loan, which was used to replace two revolving credit facilities, which matured at the end of the second quarter. The proceeds from the sale of marketable securities and accounts receivable were also used to reduce short- term debt and to retire long-term debt. We had net cash provided from financing activities totaling $93.3 million during 1999 due primarily to proceeds of short-term and long-term debt of $408.9 million offset by payments on long-term debt totaling $198.0 million and dividend payments of $145.0 million. Debt and Equity Repurchase Plans We and Protection One may from time to time purchase our and Protection One's debt and equity securities in the open market or through negotiated transactions. The timing and terms of purchases, and the amount of debt or equity actually purchased, will be determined by the company and Protection One based on market conditions and other factors. Future Cash Requirements We believe that internally generated funds and access to capital markets will be sufficient to meet our operating and capital expenditure requirements, debt service and dividend payments through the year 2003. Uncertainties affecting our ability to meet these requirements include the factors affecting sales described above, the impact of inflation on operating expenses, regulatory actions, the proposed change in accounting for goodwill, the rights offering, compliance with future environmental regulations, municipalization efforts by the City of Wichita, the pending rate applications and the impact of our monitored services' operations and financial condition. Additionally, our ability to access capital markets will affect the new and existing credit agreements we have available to meet our operating and capital expenditure requirements, debt service and dividend payments. We have $747 million of long-term debt and a $500 million revolving credit facility that will mature in 2003. Additionally, we have $400 million of putable/callable bonds that may either mature in August 2003 or be remarketed and repriced at our current credit spread and mature in 2018. We believe we will be successful in refinancing these obligations but can make no assurance that these financings will be completed at similar costs to maturing debt or at all. We are constructing a new combustion turbine generator with an installed capacity of approximately 154 MW. The unit is scheduled to be placed in operation in mid-2001. We estimate that completion of the project will require approximately $20 million in capital resources during 2001. 42
We forecast that we will need additional capacity of approximately 150 MW by 2005 to serve our customer's expected electricity needs. The methods for supplying this additional energy will be determined at a future date. In July 1999, we and Empire District Electric Company (Empire) agreed to jointly construct a 500-MW combined cycle generating plant, which Empire will operate. We will own a 40% interest in the plant through a subsidiary, Westar Generating, Inc. which will be entitled to 40% of the plant's capacity. We estimate that our share of the cost of completing the project will require approximately $31 million in capital resources during 2001. Commercial operation is expected to begin in mid-2001. Our business requires significant capital investments. We currently expect that through the year 2003, we will need cash mostly for: - Ongoing utility construction and maintenance programs designed to maintain and improve facilities providing electric service. - Improving operations within the monitored services business and the acquisition of customer accounts. Capital expenditures for 2000 and anticipated capital expenditures for 2001 through 2003 are as follows: Fossil Nuclear Power Monitored Generation Generation Delivery Services Other Total ---------- ---------- -------- --------- ------- -------- (In Thousands) 2000. . . $162,600 $25,900 $97,000 $ 69,500 $ 2,900 $357,900 2001. . . 110,700 16,700 89,300 92,900 200 309,800 2002. . . 76,600 19,900 97,100 101,300 - 294,900 2003. . . 70,400 29,400 96,000 134,900 - 330,700 Monitored Services includes capital expenditures for Protection One and Protection One Europe, including purchases of customer accounts. Other represents our commitment to fund our affordable housing tax credit program. These estimates are prepared for planning purposes and will be revised from time to time. See Note 6 of Notes to Consolidated Financial Statements. Actual expenditures are likely to differ from our estimates. Maturities of long-term debt as of December 31, 2000 are as follows: Principal Year Amount ------------------------------- (In Thousands) 2001 . . . . . . . . $ 41,825 2002 . . . . . . . . 116,705 2003 . . . . . . . . 747,207 2004 . . . . . . . . 370,617 2005 . . . . . . . . 313,007 Thereafter . . . . . 1,683,819 ---------- $3,273,180 43
Capital Structure Our capital structure at December 31, 2000 and 1999 was as follows: 2000 1999 ---- ---- Shareholders' Equity........................ 35% 38% Preferred stock............................. 1 1 Western Resources obligated mandatorily redeemable preferred securities of subsidiary trust holding solely company subordinated debentures.... 4 4 Long-term debt.............................. 60 57 ---- ---- Total..................................... 100% 100% Dividend Policy Our board of directors reviews our dividend policy from time to time. Among the factors the board of directors considers in determining our dividend policy are earnings, cash flows, capitalization ratios, competition and financial loan covenants. Provisions in our Articles of Incorporation contain restrictions on the payment of dividends or the making of other distributions on our common stock while any preferred shares remain outstanding unless certain capitalization ratios and other conditions are met. Our agreement with PNM prohibits an increase in the dividend paid on our common stock without the consent of PNM. OTHER INFORMATION Electric Utility City of Wichita Municipalization Efforts: In December 1999, the City Council of Wichita, Kansas, authorized the hiring of an outside consultant to determine the feasibility of creating a municipal electric utility to replace KGE as the supplier of electricity in Wichita. The feasibility study was released in February 2001 and estimates that the City of Wichita would be required to pay us $145 million for our stranded costs if it were to municipalize. However, we estimate the amount to be substantially greater. In order to municipalize KGE's Wichita electric facilities, the City of Wichita would be required to purchase KGE's facilities or build a separate independent system and arrange for its own power supply. These costs are in addition to the stranded costs for which the city would be required to reimburse us. On February 2, 2001, the City of Wichita announced its intention to proceed with its attempt to municipalize KGE's retail electric utility business in Wichita. KGE will oppose municipalization efforts by the City of Wichita. Should the city be successful in its municipalization efforts without providing us adequate compensation for our assets and lost revenues, the adverse effect on our business and financial condition could be material. 44
KGE's franchise with the City of Wichita to provide retail electric service expires in March 2002. There can be no assurance that we can successfully renegotiate the franchise with terms similar, or as favorable, as those in the current franchise. Under Kansas law, KGE will continue to have the right to serve the customers in Wichita following the expiration of the franchise, assuming the system is not municipalized. Customers within the Wichita metropolitan area account for approximately 25% of our total energy sales. KCC Rate Proceedings: On November 27, 2000, we and KGE filed applications with the KCC for a change in retail rates which included a cost allocation study and separate cost of service studies for our KPL division and KGE. We and KGE also provided revenue requirements on a combined company basis on December 28, 2000. If approved as proposed, the impact of these rate requests will be an annual increase of $93.0 million for our KPL division and $58.0 million for KGE for a total of $151.0 million. The proposal also contains a mechanism for adjusting these rate requests up or down if projected natural gas fuel prices are different from the prices utilized in the November 27, 2000 filings. We anticipate a ruling by the KCC in July 2001 but are unable to predict its outcome. We can give no assurance that these rate requests will be approved as proposed. FERC Proceeding: In September 1999, the City of Wichita filed a complaint with FERC against us alleging improper affiliate transactions between our KPL division and KGE, our wholly owned subsidiary. The City of Wichita asked that FERC equalize the generation costs between KPL and KGE, in addition to other matters. A hearing on the case was held at FERC on October 11 and 12, 2000 and on November 9, 2000, a FERC administrative law judge ruled in our favor that no change in rates was required. On December 13, 2000, the City of Wichita filed a brief with FERC asking that the Commission overturn the judge's decision. On January 5, 2001, we filed a brief opposing the city's position. We anticipate a decision by FERC in the second quarter of 2001. A decision requiring equalization of rates could have a material adverse effect on our business and financial condition. Competition and Deregulation: The United States electric utility industry is evolving from a regulated monopolistic market to a competitive marketplace. During 2000 and early 2001, extensive problems in the deregulated California market have made many states reconsider deregulation efforts. Various states have taken steps to allow retail customers to purchase electric power from providers other than their local utility company. Several bills promoting deregulation were introduced to the Kansas Legislature in the 1999 legislative session, but none passed. No bills were considered in the legislature during the 2000 legislative session. Based on these events, we do not anticipate deregulation to occur in Kansas in the near term. The 1992 Energy Policy Act began deregulating the electricity market for generation. The Energy Policy Act permitted the FERC to order electric utilities to allow third parties the use of their transmission systems to sell electric power to wholesale customers. During 2000, traditional wholesale electric sales, excluding power marketing sales, represented approximately 12% of total electric sales. In 1992, we agreed to open access of our transmission system for wholesale transactions. FERC also requires us to provide transmission services to others under terms comparable to those we provide ourselves. In December 1999, FERC issued an order (FERC Order 2000) encouraging formation of regional transmission organizations (RTOs), whose purpose is to facilitate greater competition at the wholesale level. We are a member of the Southwest Power Pool (SPP) which filed a second request with FERC in October 2000 to seek RTO recognition which reflects FERC comments to the SPP's first request. We anticipate that FERC Order 2000 will not have a material effect on us or our operations. 45
If retail wheeling is implemented in Kansas, increased competition for retail electricity sales may reduce our future electric utility earnings compared to our historical electric utility earnings. Wholesale and industrial customers may pursue cogeneration, self-generation, retail wheeling, municipalization or relocation to other service territories in an attempt to cut their energy costs. Our rates range from approximately 5% to 24% below the national average for retail customers. Because of these rates, we expect to retain a substantial part of our current volume of sales volumes in a competitive environment. Stranded Costs: The definition of stranded costs for a utility business is the investment in and carrying costs on property, plant and equipment and other regulatory assets which exceed the amount that can be recovered in a competitive market. We currently apply accounting standards that recognize the economic effects of rate regulation and record regulatory assets and liabilities related to our fossil generation, nuclear generation and power delivery operations. If we determine that we no longer meet the criteria of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), we may have a material extraordinary non-cash charge to earnings. Reasons for discontinuing SFAS 71 accounting treatment include increasing competition that restricts our ability to charge prices needed to recover costs already incurred and a significant change by regulators from a cost-based rate regulation to another form of rate regulation and the impact should the City of Wichita municipalization efforts be successful. We periodically review SFAS 71 criteria and believe our net regulatory assets, including those related to generation, are probable of future recovery. If we discontinue SFAS 71 accounting treatment based upon competitive or other events, such as the successful municipalization efforts by areas we serve, we may significantly impact the value of our net regulatory assets and our utility plant investments, particularly Wolf Creek. Regulatory changes, including competition or successful municipalization efforts by the City of Wichita, could adversely impact our ability to recover our investment in these assets. As of December 31, 2000, we have recorded regulatory assets which are currently subject to recovery in future rates of approximately $327.4 million. Of this amount, $187.3 million is a receivable for income tax benefits previously passed on to customers. The remainder of the regulatory assets are items that may give rise to stranded costs, including debt issuance costs, deferred employee benefit costs, deferred plant costs, and coal contract settlement costs. In a competitive environment or because of such successful municipalization efforts, we may not be able to fully recover our entire investment in Wolf Creek. KGE presently owns 47% of Wolf Creek. We may also have stranded costs from an inability to recover our environmental remediation costs and long-term fuel contract costs in a competitive environment. If we determine that we have stranded costs and we cannot recover our investment in these assets, our future net utility income will be lower than our historical net utility income has been unless we compensate for the loss of such income with other measures. Nuclear Decommissioning: Decommissioning is a nuclear industry term for the permanent shut-down of a nuclear power plant. The Nuclear Regulatory Commission (NRC) will terminate a plant's license and release the property for unrestricted use when a company has reduced the residual radioactivity of a nuclear plant to a level mandated by the NRC. The NRC requires companies with nuclear plants to prepare formal financial plans to fund decommissioning. These plans are designed so that funds required for decommissioning will be accumulated during the estimated remaining life of the related nuclear power plant. 46
On September 1, 1999, Wolf Creek submitted the 1999 Decommissioning Cost Study to the KCC for approval. The KCC approved the 1999 Decommissioning Cost Study on April 26, 2000. Based on the study, our share of Wolf Creek's decommissioning costs, under the immediate dismantlement method, is estimated to be approximately $631 million during the period 2025 through 2034, or approximately $221 million in 1999 dollars. These costs include decontamination, dismantling and site restoration and were calculated using an assumed inflation rate of 3.6% over the remaining service life from 1999 of 26 years. The actual decommissioning costs may vary from the estimates because of changes in the assumed dates of decommissioning, changes in regulatory requirements, changes in technology and changes in costs of labor, materials and equipment. On May 26, 2000, we filed an application with the KCC requesting approval of the funding of our decommissioning trust on this basis. Approval was granted by the KCC on September 20, 2000. The FASB is reviewing the accounting for closure and removal costs, including decommissioning of nuclear power plants. The FASB has issued an Exposure Draft "Accounting for Obligations Associated with the Retirement of Long-Lived Assets." The FASB expects to issue a final statement of financial accounting standard in the second quarter of 2001. The proposed Exposure Draft contains an effective date of fiscal years beginning after June 15, 2001. However, the ultimate effective date has not been finalized. If current accounting practices for nuclear power plant decommissioning are changed, the following could occur: - Our annual decommissioning expense could be higher than in 2000 - The estimated cost for decommissioning could be recorded as a liability (rather than as accumulated depreciation) - The increased costs could be recorded as additional investment in the Wolf Creek plant We do not believe that such changes, if required, would adversely affect our operating results due to our current ability to recover decommissioning costs through rates. See Note 14 of the Notes to Consolidated Financial Statements. Monitored Services Attrition: Customer attrition has a direct impact on Protection One's and Protection One Europe's results of operations since it affects revenues, amortization expense and cash flow. Any significant change in the pattern of their historical attrition experience would have a material effect on the results of operations. Customer attrition for the years ended December 31, 2000 and 1999 is summarized below: Customer Account Attrition -------------------------------------------- December 31, 2000 December 31, 1999 --------------------- --------------------- Annualized Trailing Annualized Trailing Fourth Twelve Fourth Twelve Quarter Month Quarter Month ---------- -------- ---------- -------- Protection One 15.0% 14.0% 14.7% 14.3% Protection One Europe 11.4% 12.2% 10.7% 9.5% 47
Our monitored services segment had a net decrease of 119,415 customers from December 31, 1999 to December 31, 2000. The number of customers decreased primarily because monitored services' customer acquisition strategies were not able to generate accounts in a sufficient volume at acceptable costs to replace accounts lost through attrition. We expect that this trend will continue until the efforts being made to acquire new accounts at acceptable costs and reduce attrition become more successful than they have been to date. Until this trend has been reversed, net losses of customer accounts will materially and adversely affect monitored services' business, financial condition, results of operation and prospects. Related Party Transactions We and ONEOK have shared services agreements in which we provide and bill one another for facilities, utility field work, information technology, customer support, bill processing and human resources services. Payments for these services are based on various hourly charges, negotiated fees and out-of-pocket expenses. In 2000 and 1999, ONEOK paid us $5.0 million and $5.6 million, net of what we owed ONEOK, for services. At December 31, 2000, $44.0 million was outstanding under Protection One's senior credit facility with Westar Industries. In February 2001, the facility maturity date was extended to January 2, 2002 and in March 2001, Protection One requested a $40 million increase in the commitment under the facility pursuant to the terms of the facility. We have a tax sharing agreement with Protection One. This pro rata tax sharing agreement allows Protection One to be reimbursed for current tax benefits utilized in our consolidated tax return. Upon consummation of the PNM merger and the split-off, we will no longer consolidate Protection One's tax return with ours. During 2000, Westar Industries purchased $170.0 million face value of Protection One bonds on the open market. In exchange for cash and the settlement of certain intercompany payables and receivables, $103.9 million of these debt securities were transferred to Protection One. The balance of the bonds were sold to Protection One in March 2001. No gain or loss was recognized on these transactions. On February 29, 2000, Westar Industries purchased the European operations of Protection One, and certain investments held by a subsidiary of Protection One for an aggregate purchase price of $244 million. Westar Industries paid approximately $183 million in cash and transferred Protection One debt securities with a market value of approximately $61 million to Protection One. Westar Industries has agreed to pay Protection One a portion of the net gain, if any, on a subsequent sale of the European businesses on a declining basis over the four years following the closing. Cash proceeds from the transaction were used to reduce the outstanding balance owed to Westar Industries on Protection One's revolving credit facility. No gain or loss was recorded on this intercompany transaction and the net book value of the assets was unaffected. We may acquire additional Protection One debt securities. The timing and terms of purchases, and the amount of debt actually purchased, will be based on market conditions and other factors. Purchases are expected to be made in the open market or through negotiated transactions. Because Protection One's debt currently trades at less than its carrying value, we would expect to realize an extraordinary gain on extinguishment of debt on any future purchases. 48
On February 28, 2001, Westar Industries converted a portion of a receivable owed by us into approximately 14.4 million shares of our common stock. See Note 2 of the Notes to Consolidated Financial Statements. Market Risk Disclosure Market Price Risks: We are exposed to market risk, including market changes, changes in commodity prices, equity instrument investment prices and interest rates. Commodity Price Exposure: In 2000, we engaged in both trading and non- trading activities in our commodity price risk management activities. We traded electricity, gas and oil. We utilized a variety of financial instruments, including forward contracts involving cash settlements or physical delivery of an energy commodity, options, swaps requiring payments (or receipt of payments) from counter-parties based on the differential between specified prices for the related commodity and futures traded on electricity, natural gas and oil. We are involved in trading activities primarily to minimize risk from market fluctuations, capitalize on our market knowledge and enhance system reliability. We attempted to balance our physical and financial purchase and sale contracts in terms of quantities and contract terms. Net open positions existed or were established due to the origination of new transactions and our assessment of, and response to, changing market conditions. To the extent we had open positions, we were exposed to the risk that fluctuating market prices could adversely impact our financial position or results from operations. In 2001, we expect to trade coal, natural gas and oil fossil fuel types as well as electricity. We manage and measure the exposure of our trading portfolio using a variance/covariance value-at-risk (VAR) model, which simulates forward price curves in the energy markets to estimate the size of future potential losses. The quantification of market risk using VAR methodologies provides a consistent measure of risk across diverse energy markets and products. The use of the VAR method requires a number of key assumptions including the selection of a confidence level for losses and the estimated holding period. We express VAR as a potential dollar loss based on a 95% confidence level using a one-day holding period. Our Risk Oversight Committee sets the VAR limit. The high, low and average VAR amounts for the year ended December 31, 2000, were $725,403, $36,559 and $269,217. We employ additional risk control mechanisms such as stress testing, daily loss limits, and commodity position limits. We expect to use the same VAR model and VAR limits in 2001. We have considered a number of risks and costs associated with the future contractual commitments included in our energy portfolio. These risks include credit risks associated with the financial condition of counter-parties, product location (basis) differentials and other risks which management policy dictates. The counter-parties in our portfolio are primarily large energy marketers and major utility companies. The creditworthiness of our counter-parties could positively or negatively impact our overall exposure to credit risk. We maintain credit policies with regard to our counter-parties that, in management's view, minimize overall credit risk. 49
We are also exposed to commodity price changes outside of trading activities. We use derivatives for non-trading purposes primarily to reduce exposure relative to the volatility of market prices. From 1999 to 2000, we experienced a 13% increase in the average price per MW of electricity purchased for utility operations. Actual purchased power market volatility was significantly greater than the average price increase indicates. If we were to have a similar increase from 2000 to 2001, given the amount of power purchased for utility operations during 2000, we would have an exposure of approximately $5.4 million of operating income. Due to the volatility of the power market, past prices can not be used to predict future prices. We use a mix of various fuel types, including coal and natural gas, to operate our system which helps lessen our risk associated with any one fuel type. Natural gas prices increased significantly during 2000 throughout the nation. This increase impacted the cost of gas we used for generation as well as our cost of purchased power. From December 31, 1999 to December 31, 2000, we experienced a 45% increase in our average cost for natural gas purchased for utility operations, or an increase of $1.07 per MMBtu. The higher natural gas prices increased our total cost of gas purchased during 2000 by approximately $16.9 million although we decreased the quantity burned by 1.5 million MMBtu. If we were to have a similar increase from 2000 to 2001, we would have an exposure of approximately $24.4 million of operating income. Based on MMBtu's of natural gas and fuel oil burned during 2000, we had exposure of approximately $6.8 million of operating income for a 10% change in average price paid per MMBtu. Actual natural gas market volatility was significantly greater than that indicated by the average price increase. Due to the volatility of natural gas prices, past prices can not be used to predict future prices. During the first quarter of 2001, spot market prices for western coal markets increased significantly. This increase will impact the fuel contracts currently in place for a portion of our 2001 anticipated coal needs at our La Cygne Generating Station, increasing our coal commodity price market risk. We believe that 2001 spot market purchases will be at higher rates than those experienced during 2000. In an effort to mitigate fuel commodity price market risk, we use hedging arrangements to minimize our exposure to increased coal, natural gas and oil prices. Our future exposure to changes in fossil fuel prices will be dependent upon the market prices and the extent and effectiveness of any hedging arrangements we enter into. Additional factors that affect our commodity price exposure are the quantity and availability of fuel used for generation and the quantity of electricity customers will consume. Quantities of fossil fuel used for generation could vary dramatically year to year based on the individual fuel's availability, price, deliverability, unit outages and nuclear refueling. Our customer's electricity usage could also vary dramatically year to year based on the weather or other factors. Financial Hedging Exposure: We also use financial instruments to hedge a portion of our anticipated fossil fuel needs. At the time we enter into these transactions, we are unable to determine what the value will be when the agreements are actually settled. 50
Decline in Equity Price Risk: During 2000, our balance in marketable securities declined approximately $173.2 million from December 31, 1999, due to the sale of a significant portion of our marketable security portfolio. We do not expect to be materially impacted by changes in the market prices of our remaining investments. Interest Rate Exposure: We have approximately $156.9 million of variable rate debt and current maturities of fixed rate debt as of December 31, 2000. Our weighted average interest rate increased from 6.96% at December 31, 1999 to 8.11% at December 31, 2000. A 100 basis point change in each debt series' benchmark rate used to set the rate for such series would impact net income on an annual basis by approximately $1.6 million after tax. Foreign Currency Exchange Rates: We have foreign operations with functional currencies other than the United States dollar. As of December 31, 2000, the unrealized loss on currency translation, presented as a separate component of shareholders' equity and reported within other comprehensive income was approximately $9.4 million pretax. A 10% change in the currency exchange rates would have an immaterial effect on other comprehensive income. New Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended, is effective for fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. We adopted SFAS 133 on January 1, 2001. We have evaluated our commodity contracts, financial instruments and other contracts and have determined that we have derivative instruments which will be marked to market through earnings in accordance with SFAS 133. We will not designate any derivatives as hedges. We estimate that the effect on our financial statements of adopting SFAS 133 on January 1, 2001, will be to increase pre-tax earnings for the first quarter of 2001 by approximately $31 million. Accounting for derivatives under SFAS 133 may increase volatility in future earnings. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- Information relating to market risk disclosure is set forth in Other Information of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included herein. 51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- TABLE OF CONTENTS PAGE Report of Independent Public Accountants 53 Financial Statements: Consolidated Balance Sheets, December 31, 2000 and 1999 54 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 55 Consolidated Statements of Comprehensive Income for the years ended December 31, 2000, 1999 and 1998 56 Consolidated Statements of Cash Flows for the years ended 2000, 1999 and 1998 57 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 58 Notes to Consolidated Financial Statements 59 Financial Schedules: Schedule II - Valuation and Qualifying Accounts 103 SCHEDULES OMITTED The following schedules are omitted because of the absence of the conditions under which they are required or the information is included in the financial statements and schedules presented: I, III, IV, and V. 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Western Resources, Inc.: We have audited the accompanying consolidated balance sheets of Western Resources, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, cash flows, and shareholders' equity for each of the three years in the period ended December 31, 2000. These financial statements and the schedule referred to below are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and this schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Western Resources, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II - Valuation and Qualifying Accounts is presented for purposes of complying with the Securities and Exchange Commission rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Kansas City, Missouri, March 9, 2001 53
WESTERN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, ------------------------ 2000 1999 ---------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................ $ 8,762 $ 11,040 Restricted cash...................................... 22,205 15,962 Accounts receivable (net)............................ 152,165 229,200 Inventories and supplies (net)....................... 101,303 112,392 Marketable securities................................ 3,946 177,128 Energy trading contracts............................. 185,364 16,370 Prepaid expenses and other........................... 40,503 40,876 ---------- ---------- Total Current Assets................................ 514,248 602,968 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT (NET)................... 3,993,438 3,889,444 ---------- ---------- OTHER ASSETS: Restricted cash...................................... 35,878 - Investment in ONEOK.................................. 591,173 590,109 Customer accounts (net).............................. 1,005,505 1,122,585 Goodwill (net)....................................... 976,102 1,057,041 Regulatory assets.................................... 327,350 366,004 Other................................................ 323,514 361,741 ---------- ---------- Total Other Assets.................................. 3,259,522 3,497,480 ---------- ---------- TOTAL ASSETS.......................................... $7,767,208 $7,989,892 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt................. $ 41,825 $ 111,667 Short-term debt...................................... 35,000 705,421 Accounts payable..................................... 177,067 132,834 Accrued liabilities.................................. 207,329 226,786 Accrued income taxes................................. 53,834 40,328 Deferred security revenues........................... 73,585 61,148 Energy trading contracts............................. 191,673 15,182 Other................................................ 34,187 57,829 ---------- ---------- Total Current Liabilities........................... 814,500 1,351,195 ---------- ---------- LONG-TERM LIABILITIES: Long-term debt (net)................................. 3,237,849 2,883,066 Western Resources obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company subordinated debentures.............. 220,000 220,000 Deferred income taxes and investment tax credits..... 919,807 976,135 Minority interests................................... 184,591 192,734 Deferred gain from sale-leaseback.................... 186,294 198,123 Other................................................ 272,747 279,451 ---------- ---------- Total Long-term Liabilities......................... 5,021,288 4,749,509 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 14) SHAREHOLDERS' EQUITY: Cumulative preferred stock........................... 24,858 24,858 Common stock, par value $5 per share, authorized 150,000,000 shares, outstanding 70,082,314 and 67,401,657 shares, respectively..................... 350,412 341,508 Paid-in capital...................................... 850,100 820,945 Retained earnings.................................... 714,454 679,880 Accumulated other comprehensive income (loss) (net).. (8,404) 37,788 Treasury stock, at cost, 0 and 900,000 shares, respectively....................................... - (15,791) ---------- ---------- Total Shareholders' Equity.......................... 1,931,420 1,889,188 ---------- ---------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.............. $7,767,208 $7,989,892 ========== ========== The Notes to Consolidated Financial Statements are an integral part of these statements. 54
WESTERN RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Amounts) Year Ended December 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- SALES: Energy............................................................. $ 1,830,617 $1,430,982 $1,612,959 Monitored services................................................. 537,859 599,105 421,095 ----------- ---------- ---------- Total Sales....................................................... 2,368,476 2,030,087 2,034,054 ----------- ---------- ---------- COST OF SALES: Energy............................................................. 850,277 478,982 691,468 Monitored services................................................. 185,555 179,964 131,791 ----------- ---------- ---------- Total Cost of Sales............................................... 1,035,832 658,946 823,259 ----------- ---------- ---------- Gross profit........................................................ 1,332,644 1,371,141 1,210,795 ----------- ---------- ---------- OPERATING EXPENSES: Operating and maintenance expense.................................. 337,481 337,081 337,507 Depreciation and amortization...................................... 426,369 403,669 288,125 Selling, general and administrative expense........................ 343,163 340,609 263,310 International power development costs.............................. - (5,632) 98,916 Deferred merger costs.............................................. - 17,600 - ----------- ---------- ---------- Total Operating Expenses.......................................... 1,107,013 1,093,327 987,858 ----------- ---------- ---------- INCOME FROM OPERATIONS.............................................. 225,631 277,814 222,937 ----------- ---------- ---------- OTHER INCOME (EXPENSE): Investment earnings................................................ 192,423 35,979 49,797 Impairment of marketable securities................................ - (76,166) - Minority interests................................................. 8,625 12,600 2,762 Other.............................................................. - 14,234 (8,563) ----------- ---------- ---------- Total Other Income (Expense)...................................... 201,048 (13,353) 43,996 ----------- ---------- ---------- EARNINGS BEFORE INTEREST AND TAXES.................................. 426,679 264,461 266,933 ----------- ---------- ---------- INTEREST EXPENSE: Interest expense on long-term debt................................. 226,419 236,417 170,855 Interest expense on short-term debt and other...................... 63,149 57,687 55,265 ----------- ---------- ---------- Total Interest Expense.......................................... 289,568 294,104 226,120 ----------- ---------- ---------- EARNINGS (LOSS) BEFORE INCOME TAXES................................. 137,111 (29,643) 40,813 Income tax expense (benefit)........................................ 46,061 (32,197) 6,755 ----------- ---------- ---------- NET INCOME BEFORE EXTRAORDINARY GAIN AND ACCOUNTING CHANGE.......... 91,050 2,554 34,058 Extraordinary gain, net of tax of $26,514, $6,322 and $2,730........ 49,241 11,742 1,591 Cumulative effect of accounting change, net of tax of $1,097........ (3,810) - - ----------- ---------- ---------- NET INCOME.......................................................... 136,481 14,296 35,649 Preferred dividends................................................. 1,129 1,129 3,591 ----------- ---------- ---------- EARNINGS AVAILABLE FOR COMMON STOCK................................. $ 135,352 $ 13,167 $ 32,058 =========== ========== ========== Average common shares outstanding................................... 68,962,245 67,080,281 65,633,743 BASIC AND DILUTED EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING: Before extraordinary gain and accounting change.................... $ 1.30 $ 0.02 $0.46 Extraordinary gain................................................. 0.71 0.18 0.02 Accounting change.................................................. (0.05) - - ----------- ---------- ---------- After extraordinary gain and accounting change..................... $ 1.96 $ 0.20 $ 0.48 =========== ========== ========== DIVIDENDS DECLARED PER COMMON SHARE................................. $ 1.435 $ 2.14 $ 2.14 The Notes to Consolidated Financial Statements are an integral part of these statements. 55
WESTERN RESOURCES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) Year Ended December 31, -------------------------------------- 2000 1999 1998 ---------- ----------- ----------- NET INCOME........................................................... $ 136,481 $ 14,296 $ 35,649 ---------- ----------- ----------- OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Unrealized holding gains/(losses) on marketable securities arising during the year........................................... 43,174 (55,420) (17,244) Adjustment for (gains)/losses included in net income................ (114,948) 102,417 14,029 ---------- ----------- ----------- Net change in unrealized gain/(loss) on marketable securities....... (71,774) 46,997 (3,215) Foreign currency translation adjustment............................. (9,376) (115) (1,026) Income tax (expense)/benefit........................................ 34,958 (18,602) 1,630 ---------- ----------- ----------- Total other comprehensive income (loss), net of tax................ (46,192) 28,280 (2,611) ---------- ----------- ----------- COMPREHENSIVE INC0ME................................................. $ 90,289 $ 42,576 $ 33,038 ========== =========== =========== The Notes to Consolidated Financial Statements are an integral part of these statements. 56
WESTERN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Year Ended December 31, ------------------------------------------ 2000 1999 1998 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................... $ 136,481 $ 14,296 $ 35,649 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary gain................................................... (49,241) (11,742) (1,591) Cumulative effect of accounting change............................... 3,810 - - Depreciation and amortization........................................ 426,369 403,669 288,125 Amortization of gain on sale-leaseback............................... (11,828) (11,828) (11,828) Equity in earnings from investments.................................. (11,219) (8,199) (6,064) Minority interests................................................... (8,625) (12,600) (2,762) (Gain)/loss on sale of marketable securities......................... (114,948) 26,251 14,029 Impairment of marketable securities.................................. - 76,166 - Gain on sale of investments.......................................... (9,562) (17,249) - Accretion of debt premium............................................ (6,237) (6,799) 3,034 Write-off of international development activities.................... - (5,632) 98,916 Net deferred taxes................................................... (29,744) (15,825) (57,119) Deferred merger costs................................................ - 17,600 - Changes in working capital items (net of effects from acquisitions): Restricted cash..................................................... (15,234) (18,689) (11,987) Accounts receivable (net)........................................... (37,127) (3,824) 118,844 Inventories and supplies (net)...................................... 12,282 (15,024) (8,000) Accounts payable.................................................... 44,172 5,000 (33,613) Accrued liabilities................................................. (19,457) (20,152) (42,411) Accrued income taxes................................................ 13,506 7,386 5,582 Deferred security revenues.......................................... (2,065) 3,479 (2,237) Other............................................................... (10,314) (2,571) 43,518 Changes in other assets and liabilities.............................. (24,875) (35,272) (29,873) ---------- ---------- ---------- Net cash flows from operating activities............................ 286,144 368,441 400,212 ---------- ---------- ---------- CASH FLOWS USED IN INVESTING ACTIVITIES: Additions to property, plant and equipment (net)..................... (308,073) (275,744) (182,885) Customer account acquisitions........................................ (35,513) (241,000) (277,667) Security alarm monitoring acquisitions, net of cash acquired......... (11,748) (27,409) (549,196) Purchases of marketable securities................................... - (12,003) (261,036) Proceeds from sale of marketable securities.......................... 218,609 73,456 27,895 Other investments (net).............................................. 50,688 15,556 (91,451) ---------- ---------- ---------- Net cash flows used in investing activities......................... (86,037) (467,144) (1,334,340) ---------- ---------- ---------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Short-term debt (net)................................................ (670,421) 392,949 75,972 Proceeds of long-term debt........................................... 610,045 16,000 1,096,238 Retirements of long-term debt........................................ (208,952) (198,021) (167,068) Proceeds from accounts receivable sale (net)......................... 115,000 - - Proceeds from issuance of stock by subsidiary........................ - - 45,565 Issuance of common stock (net)....................................... 38,059 43,245 17,284 Redemption of preference stock....................................... - - (50,000) Cash dividends paid.................................................. (98,827) (145,033) (144,077) Acquisition of treasury stock........................................ (9,187) (15,791) - Reissuance of treasury stock......................................... 21,898 - - ---------- ---------- ---------- Net cash flows from (used in) financing activities.................. (202,385) 93,349 873,914 ---------- ---------- ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS............................. (2,278) (5,354) (60,214) CASH AND CASH EQUIVALENTS: Beginning of year.................................................... 11,040 16,394 76,608 ---------- ---------- ---------- End of year.......................................................... $ 8,762 $ 11,040 $ 16,394 ========== ========== ========== The Notes to Consolidated Financial Statements are an integral part of these statements. 57
WESTERN RESOURCES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in Thousands) Cumulative Accumulated Preferred and Other Preference Common Paid-in Retained Comprehensive Unearned Treasury Stock Stock Capital Earnings Income Compensation Stock Total ------------- -------- -------- ------------- ------------- ------------ ---------- ---------- BALANCE, December 31, 1997....... $ 74,858 $327,048 $760,553 $ 919,045 $ 12,119 $ - $ - $2,093,623 Net income....................... - - - 35,649 - - - 35,649 Redemption of preference stock... (50,000) - - - - - - (50,000) Dividends on preferred and preference stock................ - - - (3,591) - - - (3,591) Issuance of common stock......... - 2,500 12,711 - - - - 15,211 Dividends on common stock........ - - - (140,486) - - - (140,486) Unrealized loss on marketable securities...................... - - - - (3,215) - - (3,215) Currency translation adjustments..................... - - - - (1,026) - - (1,026) Tax benefit...................... - - - - 1,630 - - 1,630 Grant of restricted stock........ - - 4,137 - - (4,137) - - Amortization of restricted stock. - - - - - 2,073 - 2,073 -------------------------------------------------------------------------------------------------- BALANCE, December 31, 1998....... $ 24,858 $329,548 $777,401 $ 810,617 $ 9,508 $ (2,064) $ - $ 1,949,868 Net income....................... - - - 14,296 - - - 14,296 Dividends on preferred and preference stock................ - - - (1,129) - - - (1,129) Issuance of common stock......... - 11,960 44,906 - - - - 56,866 Dividends on common stock........ - - - (143,904) - - - (143,904) Unrealized gain on marketable securities...................... - - - - 46,997 - - 46,997 Currency translation adjustments..................... - - - - (115) - - (115) Tax benefit...................... - - - - (18,602) - - (18,602) Acquisition of treasury stock.... - - - - - - (15,791) (15,791) Grant of restricted stock........ - - 4,333 - - (4,333) - - Amortization of restricted stock. - - - - - 702 - 702 -------------------------------------------------------------------------------------------------- BALANCE, December 31, 1999....... $ 24,858 $341,508 $826,640 $679,880 $ 37,788 $ (5,695) $(15,791) $1,889,188 Net income....................... - - - 136,481 - - - 136,481 Dividends on preferred and preference stock............... - - - (1,129) - - - (1,129) Issuance of common stock......... - 8,904 18,537 - - - - 27,441 Dividends on common stock........ - - - (97,698) - - - (97,698) Unrealized loss on marketable securities..................... - - - - (71,774) - - (71,774) Currency translation adjustments. - - - - (9,376) - - (9,376) Tax benefit...................... - - - - 34,958 - - 34,958 Acquisition of treasury stock.... - - - - - - (9,187) (9,187) Issuance of treasury stock....... - - - (3,080) - - 24,978 21,898 Grant of restricted stock........ - - 22,989 - - (22,989) - - Amortization of restricted stock. - - - - - 10,618 - 10,618 -------------------------------------------------------------------------------------------------- BALANCE, December 31, 2000....... $24,858 $350,412 $868,166 $714,454 $ (8,404) $ (18,066) $ - $1,931,420 ================================================================================================== The Notes to Consolidated Financial Statements are an integral part of these statements. 58
WESTERN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business: Western Resources, Inc. (Western Resources, the company) is a publicly traded consumer services company. The company's primary business activities are providing electric generation, transmission and distribution services to approximately 636,000 customers in Kansas and providing monitored security services to approximately 1.5 million customers in North America and Europe. Rate regulated electric service is provided by KPL, a division of the company, and Kansas Gas and Electric Company (KGE), a wholly owned subsidiary. Monitored security services are provided by Protection One, Inc., a publicly traded, approximately 85%-owned subsidiary, and other wholly owned subsidiaries collectively referred to as Protection One Europe. In addition, through the company's 45% ownership interest in ONEOK, Inc., natural gas transmission and distribution services are provided to approximately 1.4 million customers in Oklahoma and Kansas. Westar Industries, Inc., the company's wholly owned subsidiary, owns the company's interests in Protection One, Protection One Europe, ONEOK and other non-utility businesses. Principles of Consolidation: The company prepares its financial statements in conformity with accounting principles generally accepted in the United States. The accompanying Consolidated Financial Statements include the accounts of Western Resources and its wholly owned and majority owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Common stock investments that are not majority owned are accounted for using the equity method when the company's investment allows it the ability to exert significant influence. Regulatory Accounting: The company currently applies accounting standards for its rate regulated electric business that recognize the economic effects of rate regulation in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," (SFAS 71) and, accordingly, has recorded regulatory assets and liabilities when required by a regulatory order or when it is probable, based on regulatory precedent, that future rates will allow for recovery of a regulatory asset. Use of Management's Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents: The company considers highly liquid collateralized debt instruments purchased with a maturity of three months or less to be cash equivalents. Restricted Cash: Restricted cash consists of cash used to collateralize letters of credit and cash held in escrow. Accounts Receivable: Receivables, which consist primarily of trade accounts receivable, were reduced by allowances for doubtful accounts of $45.8 million at December 31, 2000 and $35.8 million at December 31, 1999. 59
Available-for-sale Securities: The company classifies marketable equity and debt securities accounted for under the cost method as available-for-sale. These securities are reported at fair value based on quoted market prices. Cumulative, temporary unrealized gains and losses, net of the related tax effect, are reported as a separate component of shareholders' equity until realized. Current temporary changes in unrealized gains and losses are reported as a component of other comprehensive income. Realized gains and losses are included in earnings and are derived using the specific identification method. The following table summarizes the company's investments in marketable securities as of December 31: Gross Unrealized ---------------- Cost Gains Losses Fair Value -------- ------- --------- ---------- (In Thousands) 2000: Equity securities............ $ 6,690 $ - $ (2,744) $ 3,946 Debt securities.............. - - - - -------- ------- -------- -------- Total...................... $ 6,690 $ - $ (2,744) $ 3,946 ======== ======= ======== ======== 1999: Equity securities............ $ 43,124 $70,407 $ (1,628) $111,903 Debt securities.............. 65,225 - - 65,225 -------- ------- -------- -------- Total...................... $108,349 $70,407 $ (1,628) $177,128 ======== ======= ======== ======== Proceeds from the sales of equity and debt securities were $218.6 million in 2000 and $73.5 million in 1999. The gross realized gains from sales of equity and debt investments were $116.0 million in 2000 and $12.6 million in 1999. The gross realized losses from sales of equity and debt investments were $1.0 million in 2000 and $38.8 million in 1999. Energy Trading Contracts: The company is involved in system hedging and trading activities primarily to minimize risk from commodity market fluctuations, capitalize on its market knowledge and enhance system reliability. In these activities, the company utilizes a variety of financial instruments, including forward contracts involving cash settlements or physical delivery of an energy commodity, options, swaps requiring payments (or receipt of payments) from counter-parties based on the differential between specified prices for the related commodity, and futures traded on electricity and natural gas. The company accounts for transactions on either a settlement basis or using the mark-to-market method of accounting. On a settlement basis, the company recognizes the gains or losses on system hedging transactions as the power is delivered. Under the mark-to-market method of accounting, trading transactions are shown at fair value in the consolidated balance sheets as energy trading contracts assets - current and energy trading contracts liabilities-current. Long term energy trading contract assets and liabilities are included in other long term assets and other long term liabilities, respectively. The company reflects changes in fair value resulting in unrealized gains and losses from these transactions in energy sales. The company records the revenues and costs for all transactions in its consolidated statements of income when the contracts are settled. The company recognizes revenues in energy sales; costs are recorded in energy cost of sales. 60
The company values contracts in the trading portfolio using end-of-the- period market prices, utilizing the following factors (as applicable): - closing exchange prices (that is, closing prices for standardized electricity products traded on an organized exchange such as the New York Mercantile Exchange); - broker dealer and over-the-counter price quotations; Property, Plant and Equipment: Property, plant and equipment is stated at cost. For utility 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). AFUDC represents the cost of borrowed funds used to finance construction projects. The AFUDC rate was 7.39% in 2000, 6.00% in 1999 and 6.00% in 1998. The cost of additions to utility plant and replacement units of property are capitalized. Interest capitalized into construction in progress was $9.4 million in 2000, $4.4 million in 1999 and $1.9 million in 1998. Maintenance costs and replacement of minor items of property are charged to expense as incurred. Incremental costs incurred during scheduled Wolf Creek Generating Station refueling and maintenance outages are deferred and amortized monthly over the unit's operating cycle, normally about 18 months. When units of depreciable property are retired, the original cost and removal cost, less salvage value, are charged to accumulated depreciation. In accordance with regulatory decisions made by the Kansas Corporation Commission (KCC), the acquisition premium of approximately $801 million resulting from the acquisition of KGE in 1992 is being amortized over 40 years. The acquisition premium is classified as electric plant in service. Accumulated amortization totaled $108.2 million as of December 31, 2000 and $88.1 million as of December 31, 1999. Depreciation: Utility plant is depreciated on the straight-line method at rates approved by regulatory authorities. Utility plant is depreciated on an average annual composite basis using group rates that approximated 2.99% during 2000, 2.92% during 1999 and 2.88% during 1998. Nonutility property, plant and equipment is depreciated on a straight-line basis over the estimated useful lives of the related assets. The company periodically evaluates its depreciation rates considering the past and expected future experience in the operation of its facilities. Inventories and Supplies: Inventories and supplies for the company's utility business are stated at average cost. Monitored services' inventories, comprised of alarm systems and parts, are stated at the lower of average cost or market. Nuclear Fuel: 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 cost of sales based upon the quantity of heat produced for the generation of electricity. The accumulated amortization of nuclear fuel in the reactor was $18.6 million at December 31, 2000 and $29.3 million at December 31, 1999. Customer Accounts: Customer accounts are stated at cost. The cost includes amounts paid to dealers and the estimated fair value of accounts acquired in business acquisitions. Internal costs incurred in support of acquiring customer accounts are expensed as incurred. 61
Protection One and Protection One Europe historically amortized most customer accounts by using the straight-line method over a ten-year life. The choice of an amortization life was based on estimates and judgments about the amounts and timing of expected future revenues from these assets and average customer account life. Selected periods were determined because, in Protection One's and Protection One Europe's opinion, they would adequately match amortization cost with anticipated revenue. Protection One and Protection One Europe conducted a comprehensive review of their amortization policy during the third quarter of 1999. This review was performed specifically to evaluate the historic amortization policy in light of the inherent declining revenue curve over the life of a pool of customer accounts and Protection One's historical attrition experience. After completing the review, Protection One identified three distinct pools, each of which has distinct attributes that effect differing attrition characteristics. The pools corresponded to Protection One's North America, Multifamily and Europe business segments. For the North America and Europe pools, the analyzed data indicated that Protection One can expect attrition to be greatest in years one through five of asset life and that a change from a straight-line to a declining balance (accelerated) method would more closely match future amortization cost with the estimated revenue stream from these assets. Protection One elected to change to that method, except for accounts acquired in the Westinghouse acquisition which are utilizing an accelerated method. No change was made in the method used for the Multifamily pool. Protection One's and Protection One Europe's amortization rates consider the average estimated remaining life and historical and projected attrition rates. The amortization method for each customer pool is as follows: Pool Method ------------------------------------------------------------------------ North America Acquired Westinghouse customers Eight-year 120% declining balance Other customers Ten-year 130% declining balance Europe Ten-year 125% declining balance Multifamily Ten-year straight-line Adoption of the declining balance method effectively shortens the estimated expected average customer life for these customer pools, and does so in a way that does not make it possible to distinguish the effect of a change in method (straight-line to declining balance) from the change in estimated lives. In such cases, generally accepted accounting principles require that the effect of such a change be recognized in operations in the period of the change, rather than as a cumulative effect of a change in accounting principle. Protection One changed to the declining balance method in the third quarter of 1999 for Europe customers and the North America customers which had been amortized on a straight-line basis. Accordingly, the effect of the change in accounting principle increased Protection One's amortization expense reported in the third quarter of 1999 by approximately $40 million. Accumulated amortization would have been approximately $34 million higher through the end of the second quarter of 1999 if the declining balance method had historically been used. 62
In accordance with SFAS No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of," long-lived assets held and used by Protection One and Protection One Europe are evaluated for recoverability on a periodic basis or as circumstances warrant. An impairment would be recognized when the undiscounted expected future operating cash flows by customer pool derived from customer accounts is less than the carrying value of capitalized customer accounts and related goodwill. Goodwill has been recorded in business acquisitions where the principal asset acquired was the recurring revenues from the acquired customer base. For purposes of the impairment analysis, goodwill has been considered directly related to the acquired customers. Due to the high level of customer attrition experienced in 2000 and 1999, the decline in market value of Protection One's publicly traded equity and debt securities and because of recurring losses, Protection One and Protection One Europe performed an impairment test on their customer account assets and goodwill in both 2000 and 1999. These tests indicated that future estimated undiscounted cash flows exceeded the sum of the recorded balances for customer accounts and goodwill. Goodwill: Goodwill represents the excess of the purchase price over the fair value of net assets acquired by Protection One and Protection One Europe. Protection One and Protection One Europe changed their estimates of goodwill life from 40 years to 20 years as of January 1, 2000. After that date, remaining goodwill, net of accumulated amortization, is being amortized over its remaining useful life based on a 20-year life. As a result of this change in estimate, goodwill amortization expense for the year ended December 31, 2000 increased by approximately $33.0 million. The carrying value of goodwill was included in the evaluations of recoverability of customer accounts. No reduction in the carrying value was necessary at December 31, 2000. Amortization expense was $61.4 million, $31.6 million and $22.5 million for the years ended December 31, 2000, 1999 and 1998. Accumulated amortization was $118.6 million and $59.3 million at December 31, 2000 and 1999. The Financial Accounting Standards Board (FASB) issued an exposure draft on February 14, 2001 which, if adopted as proposed, would establish a new accounting standard for the treatment of goodwill in a business combination. The new standard would continue to require recognition of goodwill as an asset in a business combination but would not permit amortization as currently required by APB Opinion No. 17, "Intangible Assets." The new standard would require that goodwill be separately tested for impairment using a fair-value based approach as opposed to an undiscounted cash flow approach which is required under current accounting standards. If goodwill is found to be impaired, the company would be required to record a non-cash charge against income. The impairment charge would be equal to the amount by which the carrying amount of the goodwill exceeds the fair value. Goodwill would no longer be amortized on a current basis as is required under current accounting standards. The exposure draft contemplates this standard to become effective on July 1, 2001, although this effective date is not certain. Furthermore, the proposed standard could be modified prior to its adoption. 63
If the new standard is adopted, any subsequent impairment test on the company's customer accounts would be performed on the customer accounts alone rather than in conjunction with goodwill utilizing an undiscounted cash flow test pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." At December 31, 2000, the company had $976 million in goodwill attributable to acquisitions of businesses and $1,006 million for monitored services' customer accounts. These intangible assets together represented 25.5% of the book value of the company's total assets. The company recorded approximately $61.4 million in goodwill amortization expense in 2000. If the new standard becomes effective July 1, 2001 as proposed, the company believes it is probable that it would be required to record a non-cash impairment charge. The company cannot determine the amount at this time, but it believes the amount would be material and could be a substantial portion of its intangible assets. This impairment charge would have a material adverse effect on the company's operating results in the period recorded. Regulatory Assets and Liabilities: Regulatory assets represent probable future revenue associated with certain costs that will be recovered from customers through the rate-making process. The company has recorded these regulatory assets in accordance with SFAS 71. If the company were required to terminate application of that statement for all of its regulated operations, the company would have to record the amounts of all regulatory assets and liabilities in its Consolidated Statements of Income at that time. The company's earnings would be reduced by the total amount in the table below, net of applicable income taxes. Regulatory assets reflected in the Consolidated Financial Statements are as follows: As of December 31, ------------------ 2000 1999 -------- -------- (In Thousands) Recoverable income taxes............... $187,308 $218,239 Debt issuance costs.................... 63,263 68,239 Deferred employee benefit costs........ 36,251 36,251 Deferred plant costs................... 29,921 30,306 Other regulatory assets................ 10,607 12,969 -------- -------- Total regulatory assets.............. $327,350 $366,004 ======== ======== - Recoverable income taxes: Recoverable income taxes represent amounts due from customers for accelerated tax benefits which have been previously flowed through to customers and are expected to be recovered in the future as the accelerated tax benefits reverse. - Debt issuance costs: Debt reacquisition expenses are amortized over the remaining term of the reacquired debt or, if refinanced, the term of the new debt. Debt issuance costs are amortized over the term of the associated debt. - Deferred employee benefit costs: Deferred employee benefit costs represent costs to be recovered by income generated through the company's Affordable Housing Tax Credit (AHTC) investment program as authorized by the KCC. - Deferred plant costs: Costs related to the Wolf Creek nuclear generating facility. 64
The company expects to recover all of the above regulatory assets in rates charged to customers. A return is allowed on deferred plant costs and coal contract settlement costs and approximately $18.0 million of debt issuance costs. Minority Interests: Minority interests represent the minority shareholders' proportionate share of the shareholders' equity and net loss of Protection One. Revenue Recognition Energy Sales Recognition: Energy sales are recognized as services are rendered and include estimated amounts for energy delivered but unbilled at the end of each year. Unbilled sales are recorded as a component of accounts receivable (net) and amounted to $44 million at December 31, 1999. During 2000, the company sold its energy related accounts receivable, including amounts related to unbilled sales. Monitored Services Sales Recognition: Monitored services sales are recognized when security services are provided. Installation revenue, sales revenues on equipment upgrades and direct costs of installations and sales are deferred for residential customers with service contracts. For commercial customers and national account customers, revenue recognition is dependent upon each specific customer contract. In instances when the company sells the equipment outright, revenues and costs are recognized in the period incurred. In cases where there is no outright sale, revenues and direct costs are deferred and amortized. Deferred installation revenues and system sales revenues will be recognized over the expected useful life of the customer, utilizing a 130% declining balance. Deferred costs in excess of deferred revenues will be recognized over the contract life. To the extent deferred costs are less than deferred revenues, such costs are recognized over the customers' estimated useful life, utilizing a 130% declining balance. Deferred revenues also result from customers who are billed for monitoring, extended service protection and patrol and response services in advance of the period in which such services are provided, on a monthly, quarterly or annual basis. Income Taxes: Deferred tax assets and liabilities are recognized for temporary differences in amounts recorded for financial reporting purposes and their respective tax bases. Investment tax credits previously deferred are being amortized to income over the life of the property which gave rise to the credits. Foreign Currency Translation: The assets and liabilities of the company's foreign operations are generally translated into U.S. dollars at current exchange rates and revenues and expenses are translated at average exchange rates for the year. Cash Surrender Value of Life Insurance: The following amounts related to corporate-owned life insurance policies (COLI) are recorded in other long-term assets on the Consolidated Balance Sheets at December 31: 65
2000 1999 ------- ------- (In Millions) Cash surrender value of policies (a).... $ 705.4 $ 642.4 Borrowings against policies............. (665.9) (608.3) ------- ------- COLI (net).............................. $ 39.5 $ 34.1 ======= ======= (a) Cash surrender value of policies as presented represents the value of the policies as of the end of the respective policy years and not as of December 31, 2000 and 1999. Income is recorded for increases in cash surrender value and net death proceeds. Interest incurred on amounts borrowed is offset against policy income. Income recognized from death proceeds is highly variable from period to period. Death benefits recognized as other income approximated $0.9 million in 2000, $1.4 million in 1999 and $13.7 million in 1998. Cumulative Effect of Accounting Change: The company adopted Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101) in the fourth quarter of 2000 which had a retroactive effective date of January 1, 2000. The impact of this accounting change generally requires deferral of certain monitored services sales for installation revenues and direct sales-related expenses. Deferral of these revenues and costs is generally necessary when installation revenues have been received and a monitoring contract to provide future service is obtained. Historically, Protection One acquired a majority of its customers by acquisition or through an independent dealer program for its North American operations. Dealers billed and retained any installation revenues. In 2000, Protection One began an internal sales program. Because of these factors the impact of adopting SAB 101 for Protection One was not significant. Protection One Europe has a larger concentration of commercial customers where installation revenues and related costs had previously been recognized. The cumulative effect of the change in accounting principle was approximately $3.8 million, net of tax benefits of $1.1 million and is related to changes in revenue recognition at Protection One Europe. Prior to the adoption of SAB 101, Protection One Europe recognized installation revenues and related expenses upon completion of the installation. Pro forma amounts and amounts per share, assuming the change in accounting principle was applied retroactively are as follows: 2000 1999 1998 ---------------- ------------------ ----------------- Per Share Per Share Per Share Amount Amount Amount Amount Amount Amount ------ ------ ------ ------ -------- ------- (In Thousands, Except Per Share Amounts) Earnings available for common stock before extraordinary gain and accounting change: As reported.............................. $ 89,921 $1.30 $ 1,425 $ 0.02 $30,467 $ 0.46 Pro forma effect of accounting change....................... - - (2,800) (0.04) (1,010) (0.01) -------- ----- ------- ------ ------- ------ Pro forma................................ $ 89,921 $1.30 $(1,375) $(0.02) $29,457 $ 0.45 Earnings available for common stock: As reported.............................. $135,352 $1.96 $13,167 $ 0.20 $32,058 $ 0.48 Pro forma effect of accounting change....................... 3,810 0.05 (2,800) (0.04) (1,010) (0.01) -------- ----- ------- ------ ------- ------ Pro forma................................ $139,162 $2.01 $10,367 $ 0.16 $31,048 $ 0.47 66
New Accounting Pronouncements: In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended, is effective for fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The company adopted SFAS 133 on January 1, 2001. The company has evaluated its commodity contracts, financial instruments and other contracts and determined that certain commodity contracts are derivative instruments. Under current GAAP, these contracts qualify as hedges. However, under SFAS 133, these contracts will not qualify as hedges. Accordingly, the instruments will be marked to market through earnings. The company estimates that the effect on its financial statements of adopting SFAS 133 on January 1, 2001, will be to increase pre-tax earnings for the first quarter of 2001 by approximately $31 million. Accounting for derivatives under SFAS 133 may increase volatility in future earnings. Supplemental Cash Flow Information: Cash paid for interest and income taxes for each of the years ended December 31, are as follows: 2000 1999 1998 -------- -------- -------- (In Thousands) Interest on financing activities (net of amount capitalized)......... $310,345 $298,802 $220,848 Income taxes.......................... 28,751 784 47,196 Reclassifications: Certain amounts in prior years have been reclassified to conform with classifications used in the current year presentation. 67
2. PNM MERGER AND SPLIT-OFF OF WESTAR INDUSTRIES On November 8, 2000, the company entered into an agreement under which Public Service Company of New Mexico (PNM) will acquire the electric utility businesses of the company in a stock-for-stock transaction. Under the terms of the agreement, both the company and PNM will become subsidiaries of a new holding company. Immediately prior to the consummation of this combination, the company will split-off its remaining interest in Westar Industries to its shareholders. Westar Industries has filed a registration statement with the Securities and Exchange Commission (SEC) covering the proposed sale of a portion of its common stock through the exercise of non-transferable rights proposed to be distributed by Westar Industries to the company's shareholders. The company and Westar Industries entered into an Asset Allocation and Separation Agreement at the same time the company entered into the merger agreement with PNM. Among other things, this agreement permits a receivable owed by the company to Westar Industries to be converted into certain securities of the company. At the closing of the merger, any of these securities then owned by Westar Industries will be converted into securities of PNM or the holding company to be formed by PNM. On February 28, 2001, Westar Industries converted $350 million of the receivable into approximately 14.4 million shares of the company's common stock pursuant to the Asset Allocation and Separation Agreement. These shares represent approximately 16.9% of the company's outstanding common stock including these shares in outstanding shares. There are no voting rights with respect to these shares as long as Westar Industries is a majority owned subsidiary of the company. 3. RATE MATTERS AND REGULATION KCC Rate Proceedings: On November 27, 2000, the company and KGE filed applications with the KCC for a change in retail rates which included a cost allocation study and separate cost of service studies for the company's KPL division and KGE. The company requested an annual rate increase totaling approximately $151 million. The company and KGE also provided revenue requirements on a combined company basis on December 28, 2000. The company anticipates a ruling by the KCC in July 2001 but is unable to predict its outcome. FERC Proceeding: In September 1999, the City of Wichita filed a complaint with the Federal Energy Regulatory Commission (FERC) against the company alleging improper affiliate transactions between the company's KPL division and KGE, a wholly owned subsidiary of the company. The City of Wichita asked that FERC equalize the generation costs between KPL and KGE, in addition to other matters. A hearing on the case was held at FERC on October 11 and 12, 2000 and on November 9, 2000 a FERC administrative law judge ruled in favor of the company that no change in rates was required. On December 13, 2000, the City of Wichita filed a brief with FERC asking that the Commission overturn the judge's decision. On January 5, 2001, the company filed a brief opposing the City's position. The company anticipates a decision by FERC in the second quarter of 2001. 68
4. SALE OF ACCOUNTS RECEIVABLE On July 28, 2000, the company and KGE entered into an agreement to sell, on an ongoing basis, all of their accounts receivable arising from the sale of electricity, to WR Receivables Corporation, a special purpose entity wholly owned by the company. The agreement expires on July 26, 2001, and is annually renewable upon agreement by both parties. The special purpose entity has sold and, subject to certain conditions, may from time to time sell, up to $125 million (and upon request, subject to certain conditions, up to $175 million) of an undivided fractional ownership interest in the pool of receivables to a third-party, multi-seller receivables funding entity affiliated with a lender. The company's retained interests in the receivables sold are recorded at cost which approximates fair value. The company has received net proceeds of $115.0 million as of December 31, 2000. 5. SHORT-TERM DEBT The company has an arrangement with certain banks to provide a revolving credit facility on a committed basis totaling $500 million. The facility is secured by first mortgage bonds of the company and KGE and matures on March 17, 2003. The company also has arrangements with certain banks to provide unsecured short-term lines of credit on a committed basis totaling approximately $12.0 million. As of December 31, 2000, borrowings on these facilities were $35.0 million. The agreements provide the company with the ability to borrow at different market-based interest rates. The company pays commitment or facility fees in support of these lines of credit. Under the terms of the agreements, the company is required, among other restrictions, to maintain a total debt to total capitalization ratio of not greater than 65% at all times. The company is in compliance with all restrictions. Information regarding the company's short-term borrowings, comprised of borrowings under the credit agreements, bank loans and commercial paper, is as follows: As of December 31, ---------------------- 2000 1999 --------- ----------- (Dollars in Thousands) Borrowings outstanding at year end: Credit agreement.................... $ 35,000 $ 50,000 Bank loans.......................... - 120,000 Commercial paper notes.............. - 535,421 -------- ---------- Total.............................. $ 35,000 $ 705,421 ======== ========== Weighted average interest rate on debt outstanding at year end (including fees).................... 8.11% 6.96% Weighted average short-term debt outstanding during the year......... $402,845 $ 455,184 Weighted daily average interest rates during the year (including fees).................... 7.92% 5.76% Unused lines of credit supporting commercial paper notes.................. $ - $1,021,000 The company's interest expense on short-term debt and other was $63.1 million in 2000, $57.7 million in 1999 and $55.3 million in 1998. 69
6. LONG-TERM DEBT Long-term debt outstanding is as follows at December 31: 2000 1999 ---------- ---------- (In Thousands) Western Resources - ----------------- First mortgage bond series: 8 7/8% due 2000.................................. $ - $ 75,000 7 1/4% due 2002.................................. 100,000 100,000 8 1/2% due 2022.................................. 125,000 125,000 7.65% due 2023................................... 100,000 100,000 ---------- ---------- 325,000 400,000 ---------- ---------- Pollution control bond series: Variable due 2032, 4.70% at December 31, 2000.... 45,000 45,000 Variable due 2032, 4.62% at December 31, 2000.... 30,500 30,500 6% due 2033...................................... 58,410 58,420 ---------- ---------- 133,910 133,920 ---------- ---------- 6 7/8% unsecured senior notes due 2004........... 370,000 370,000 7 1/8% unsecured senior notes due 2009........... 150,000 150,000 6.80% unsecured senior notes due 2018............ 28,977 29,783 6.25% unsecured senior notes due 2018, putable/callable 2003.......................... 400,000 400,000 Senior secured term loan......................... 600,000 - Other long-term agreements....................... 16,889 21,895 ---------- ---------- 1,565,866 971,678 ---------- ---------- KGE - --- First mortgage bond series: 7.60% due 2003................................... 135,000 135,000 6 1/2% due 2005.................................. 65,000 65,000 6.20% due 2006................................... 100,000 100,000 ---------- ---------- 300,000 300,000 ---------- ---------- Pollution control bond series: 5.10% due 2023................................... 13,623 13,653 Variable due 2027, 4.60% at December 31, 2000.... 21,940 21,940 7.0% due 2031.................................... 327,500 327,500 Variable due 2032, 4.60% at December 31, 2000.... 14,500 14,500 Variable due 2032, 4.60% at December 31, 2000.... 10,000 10,000 ---------- ---------- 387,563 387,593 ---------- ---------- 70
Protection One - -------------- Convertible senior subordinated notes due 2003, fixed rate 6.75%..................... 23,785 53,950 Senior subordinated discount notes due 2005, effective rate of 11.8%........................ 42,887 87,038 Senior unsecured notes due 2005, fixed rate 7.375%.............................. 204,650 250,000 Senior subordinated notes due 2009, fixed rate 8.125% (1).......................... 255,740 341,415 Other............................................ 267 2,033 ---------- ---------- 527,329 734,436 ---------- ---------- Protection One Europe - --------------------- CET recourse financing agreements, average effective rate 15%............................. 33,512 60,838 Unamortized debt premium........................... 13,541 13,726 Less: Unamortized debt discount........................ (7,047) (7,458) Long-term debt due within one year............... (41,825) (111,667) ---------- ---------- Long-term debt (net)............................. $3,237,849 $2,883,066 ========== ========== (1) The rate is currently 8.625% and will continue at that rate until an exchange offer related to the offering is completed. Debt discount and expenses are being amortized over the remaining lives of each issue. The amount of the company's first mortgage bonds authorized by its Mortgage and Deed of Trust, dated July 1, 1939, as supplemented, is unlimited. The amount of KGE's first mortgage bonds authorized by the KGE Mortgage and Deed of Trust, dated April 1, 1940, as supplemented, is limited to a maximum of $2 billion. First mortgage bonds are secured by the utility assets of the company and KGE. Amounts of additional bonds which may be issued are subject to property, earnings and certain restrictive provisions of each mortgage. The company's unsecured debt represents general obligations that are not secured by any of the company's properties or assets. Any unsecured debt will be subordinated to all secured debt of the company, including the first mortgage bonds. The notes are structurally subordinated to all secured and unsecured debt of the company's subsidiaries. On June 28, 2000, the company entered into a $600 million, multi-year term loan that replaced two revolving credit facilities which matured on June 30, 2000. The net proceeds of the term loan were used to retire short-term debt. The term loan is secured by first mortgage bonds of the company and KGE and has a maturity date of March 17, 2003. 71
Maturities of the term loan through March 17, 2003, are as follows: Principal Amount Year (In Thousands) ------------------------------------- 2001...................... $ 9,000 2002...................... 6,000 2003...................... 585,000 -------- $600,000 The terms of the loan contain requirements for maintaining certain consolidated leverage ratios, interest coverage ratios and consolidated debt to capital ratios. The company is in compliance with all of these requirements. Interest on the term loan is payable on the expiration date of each borrowing under the facility or quarterly if the term of the borrowing is greater than three months. The weighted average interest rate, including amortization of fees, on the term loan for the year ending December 31, 2000, was 10.28%. In 1998, Protection One issued $350 million of Unsecured Senior Subordinated Notes. The notes are redeemable at Protection One's option, in whole or in part, at a predefined price. Protection One did not complete a required exchange offer during 1999. As a result, the interest rate on these notes has been 8.625% since June 1999. If the exchange offer is completed, the interest rate will revert back to 8.125%. Interest on these notes is payable semi-annually on January 15 and July 15. In 1998, Protection One issued $250 million of Senior Unsecured Notes. Interest is payable semi-annually on February 15 and August 15. The notes are redeemable at Protection One's option, in whole or in part, at a predefined price. In 1995, Protection One issued $166 million of Unsecured Senior Subordinated Discount Notes with a fixed interest rate of 13.625%. Interest payments began in 1999 and are payable semi-annually on June 30 and December 31. In connection with the acquisition of Protection One in 1997, these notes were restated to fair value reflecting a current market yield of approximately 6.4% through June 30, 2000, the first full call date of the notes. Since the notes were not called on that date the current market yield was adjusted to 11.8% as of July 1, 2000. The 1997 revaluation resulted in bond premium being recorded to reflect the increase in value of the notes as a result of the decline in interest rates since the note issuance. This revaluation had no impact on the expected cash flow to existing noteholders. As of June 30, 2000, the notes became redeemable at Protection One's option, at a specified redemption price. In 1998, Protection One redeemed unsecured senior subordinated discount notes with a book value of $69.4 million and recorded an extraordinary gain on the extinguishment of $1.6 million, net of tax. In 1996, Protection One issued $103.5 million of Convertible Senior Subordinated Notes. Interest is payable semi-annually on March 15 and September 15. The notes are convertible at any time at a conversion price of $11.19 per share. The notes are redeemable, at Protection One's option, at a specified redemption price, beginning September 19, 1999. 72
In 1999, Westar Industries purchased Protection One bonds on the open market at amounts less than the carrying amount of the debt. The company recognized an extraordinary gain of $13.4 million, net of tax, at December 31, 1999, related to the retirement of this debt. During 2000, Westar Industries purchased various issues of Protection One bonds on the open market at amounts less than the carrying amount of the debt. The company recognized an extraordinary gain of $49.2 million, net of tax, at December 31, 2000, related to the retirement of this debt. Protection One Europe has recognized as a financing transaction cash received through the sale of security equipment and future cash flows to be received under security equipment operating lease agreements with customers to a third-party financing company. Maturities of long-term debt through 2005 are as follows: Principal Amount Year (In Thousands) --------------------------------- 2001................ $ 41,825 2002................ 116,705 2003................ 747,207 2004................ 370,617 2005................ 313,007 Thereafter.......... 1,683,819 ---------- $3,273,180 The company's interest expense on long-term debt was $226.4 million in 2000, $236.4 million in 1999 and $170.9 million in 1998. Protection One's debt instruments contain financial and operating covenants which may restrict its ability to incur additional debt, pay dividends, make loans or advances and sell assets. At December 31, 2000, Protection One was in compliance with all financial covenants governing its debt securities. The indentures governing all of Protection One's debt securities require that Protection One offer to repurchase the securities in certain circumstances following a change of control. 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 "Disclosures about Fair Value of Financial Instruments." 73
Cash and cash equivalents, short-term borrowings and variable-rate debt are carried at cost which approximates fair value and are not included in the table below. The decommissioning trust is recorded at fair value and is based on the quoted market prices at December 31, 2000 and 1999. The fair value of fixed-rate debt and other mandatorily redeemable securities is estimated based on quoted market prices for the same or similar issues or on the current rates offered for instruments of the same remaining maturities and redemption provisions. The estimated fair values of contracts related to commodities have been determined using quoted market prices of the same or similar securities. The recorded amounts of accounts receivable and other current financial instruments approximate fair value. The fair value estimates presented herein are based on information available at December 31, 2000 and 1999. These fair value estimates have not been comprehensively revalued for the purpose of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein. The carrying values and estimated fair values of the company's financial instruments are as follows: Carrying Value Fair Value ---------------------- ---------------------- As of December 31, ---------------------------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In Thousands) Decommissioning trust.... $ 64,222 $ 58,286 $ 64,222 $ 58,286 Fixed-rate debt, net of current maturities...... 3,109,415 2,743,057 2,809,711 2,350,880 Other mandatorily redeemable securities... 220,000 220,000 182,232 187,950 The tables below present the estimated fair value of contracts not settled at December 31, 2000. The notional volumes and estimated fair values of the company's forward contracts and options for electricity positions are as follows at December 31: 74
2000 1999 ---------------------- ---------------------- Notional Notional Volumes Estimated Volumes Estimated (MWH's) Fair Value (MWH's) Fair Value --------- ---------- --------- ---------- (Dollars in Thousands) Forward contracts: Purchased................ 3,581,500 $264,488 1,137,600 $33,021 Sold..................... 3,713,248 269,731 1,088,800 32,395 Options: Purchased................ 647,600 $ 12,606 944,800 $ 5,524 Sold..................... 387,200 11,976 754,200 8,458 The notional volumes and estimated fair values of the company's forward contract and options for gas positions are as follows at December 31: 2000 1999 ----------------------- ----------------------- Notional Notional Volumes Estimated Volumes Estimated (MMBtu's) Fair Value (MMBtu's) Fair Value ---------- ---------- ---------- ---------- (Dollars in Thousands) Forward contracts: Purchased................ 73,859,179 $283,453 13,010,000 $31,002 Sold..................... 50,614,417 174,441 500,000 1,108 Options: Purchased................ 39,171,500 $ 21,887 6,000,000 $ 971 Sold..................... 30,140,000 21,196 4,000,000 615 Under mark-to-market accounting, energy trading contracts with third parties are reflected at fair market value, net of reserves, with resulting unrealized gains and losses recorded as energy trading contract assets and liabilities. These assets and liabilities are affected by the actual timing of settlements related to these contracts and current period changes resulting primarily from newly originated transactions and the impact of price movements. These changes are recognized as revenues in the consolidated statements of income in the period the changes occur. As of December 31, 2000, the company had gross mark-to-market gains (asset position) and losses (liability position) on these energy trading contracts as follows: 2000 1999 -------- ------- (In Thousands) Current Assets - energy trading contracts...... $185,364 $16,370 Other Assets - other........................... 15,883 - -------- ------- $201,247 $16,370 -------- ------- Current Liabilities - energy trading contracts. $191,673 $15,182 Long-term liabilities - other.................. 1,096 - -------- ------- $192,769 $15,182 -------- ------- Net mark-to-market gains..................... $ 8,478 $ 1,188 ======== ======= These net mark-to-market gains have been recognized in revenue. Included within these assets and liabilities is an unrealized gain of $31 million which will be recognized through revenue in 2001 as a cumulative effect of an accounting change upon adoption of SFAS 133. 75
8. MONITORED SERVICES BUSINESS In 1999, Protection One sold the assets which comprised its Mobile Services Group. Cash proceeds of this sale approximated $20 million and Protection One recorded a pre-tax gain of approximately $17 million. This gain is reflected in other income (expense) - other on the statement of income. Protection One acquired a significant number of security companies in 1998. All companies acquired have been accounted for using the purchase method. The principal assets acquired in the acquisitions are customer accounts. The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. The results of operations of each acquisition have been included in the consolidated results of operations of Protection One from the date of the acquisition. The following table presents the unaudited pro forma financial information considering Protection One's monitored services acquisitions in 1998. The table assumes acquisitions in 1998 occurred as of January 1, 1998. Year Ended December 31, 1998 ----------- (Unaudited) (In Thousands, Except Per Share Data) ---------------------- Sales......................................... $2,175,089 Earnings available for common stock........... $21,449 Earnings per share............................ $0.33 The unaudited pro forma financial information is not necessarily indicative of the results of operations had the entities been combined for the entire period nor do they purport to be indicative of results which will be obtained in the future. 9. MARKETABLE SECURITIES During the fourth quarter of 1999, the company decided to sell its remaining marketable security investments in paging industry companies. These securities were classified as available-for-sale; therefore, changes in market value were historically reported as a component of other comprehensive income. The market value for these securities declined during the last six to nine months of 1999. The company determined that the decline in value of these securities was other than temporary and a charge to earnings for the decline in value was required at December 31, 1999. Therefore, a non-cash charge of $76.2 million was recorded in the fourth quarter of 1999 and is presented separately in the accompanying Consolidated Statements of Income. In February 2000, a paging company whose securities were included in the securities discussed in the paragraph above at December 31, 1999, made an announcement that significantly increased the market value of paging company securities generally in the public markets. During the first quarter of 2000, the remainder of these paging securities were sold and a gain of $24.9 million was realized. 76
During 2000, the company sold its equity investment in a gas compression company and realized a pre-tax gain of $91.1 million. 1O. CUSTOMER ACCOUNTS The following is a rollforward of the investment in customer accounts (at cost) for the following years: December 31, ----------------------- 2000 1999 --------- --------- (In Thousands) Beginning customer accounts, net.............. $1,122,585 $1,009,084 Acquisition of customer accounts.............. 54,993 337,464 Amortization of customer accounts............. (163,297) (185,974) Non-cash charges against purchase holdbacks...................... (8,776) (37,989) ---------- ---------- Ending customer accounts, net................. $1,005,505 $1,122,585 ========== ========== Accumulated amortization of the investment in customer accounts at December 31, 2000 and 1999 was $493.4 million and $330.7 million. 11. INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD The company's investments which are accounted for by the equity method are as follows: Equity Earnings, Investment at Year Ended Ownership at December 31, December 31 December 31, --------------------- ------------------ 2000 2000 1999 2000 1999 ------------- -------- -------- -------- ------- (Dollars in Thousands) ONEOK (a).................. 45% $591,173 $590,109 $ 8,213 $6,945 Affordable Housing Tax Credit limited partnerships (b).......... 13% to 29% 69,364 79,460 10,066 5,615 Paradigm Direct (c)........ - - 35,385 3,006 1,254 International companies and joint ventures (d).... 9% to 50% 13,514 18,724 4,799 - (a) The company also received approximately $40 million and $41 million of preferred and common dividends in 2000 and 1999. (b) Investment is aggregated. Individual investments are not material. Based on an order received by the KCC, equity earnings from these investments are used to offset costs associated with post-retirement and post- employment benefits offered to the company's employees. (c) The company sold this investment on December 15, 2000. (d) Investment is aggregated. Individual investments are not material. The following summarized unaudited financial information for the company's investment in ONEOK is as follows: 77
As of December 31, ---------------------- 2000 1999 ---------- ---------- (In Thousands) Balance Sheet: Current assets.................... $3,324,959 $ 595,386 Non-current assets................ 4,044,177 2,645,854 Current liabilities............... 3,535,352 786,713 Non-current liabilities. 2,608,827 1,303,003 Equity............................ 1,224,957 1,151,524 For the Year Ended December 31, ------------------------------- 2000 1999 ---------- ---------- (In Thousands) Income Statement: Revenues.......................... $6,642,858 $2,064,726 Gross profit...................... 797,132 632,350 Net income........................ 145,607 106,873 At December 31, 2000, the company's ownership interest in ONEOK is comprised of approximately 2.2 million common shares and approximately 19.9 million convertible preferred shares. If all the preferred shares were converted, the company would then own approximately 45% of ONEOK's common shares outstanding. 12. EMPLOYEE BENEFIT PLANS Pension: The company maintains qualified noncontributory defined benefit pension plans covering substantially all utility 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 company also maintains a non-qualified Executive Salary Continuation Program for the benefit of certain management employees, including executive officers. Postretirement Benefits: The company accrues the cost of postretirement benefits, primarily medical benefit costs, during the years an employee provides service. The following tables summarize the status of the company's pension and other postretirement benefit plans: Pension Benefits Postretirement Benefits ----------------------- ------------------------- December 31, 2000 1999 2000 1999 - -------------------------------------------- ---------- --------- ---------- -------- (Dollars in Thousands) Change in Benefit Obligation: Benefit obligation, beginning of year...... $ 350,749 $ 392,057 $ 79,287 $ 87,519 Service cost............................... 7,964 8,949 1,344 1,609 Interest cost.............................. 26,901 26,487 7,158 5,854 Plan participants' contributions........... - - 1,130 784 Benefits paid.............................. (20,337) (21,961) (6,476) (6,990) Assumption changes......................... 19,350 (49,499) 5,038 (9,458) Actuarial losses (gains)................... (2,491) (4,608) 15,049 (31) Acquisitions............................... - (676) - - Curtailments, settlements and special term benefits............................. 1,267 - - - ---------- --------- ---------- -------- Benefit obligation, end of year............ $ 383,403 $ 350,749 $ 102,530 $ 79,287 ========== ========= ========== ======== 78
Change in Plan Assets: Fair value of plan assets, beginning of year......................... $ 506,995 $ 441,531 $ 261 $ 173 Actual return on plan assets............... 1,448 85,079 17 10 Acquisitions............................... - - - - Employer contribution...................... 1,927 2,882 5,177 6,284 Plan participants' contributions........... - - 1,109 784 Benefits paid.............................. (20,197) (22,497) (6,170) (6,990) ---------- --------- ---------- -------- Fair value of plan assets, end of year............................... $ 490,173 $ 506,995 $ 394 $ 261 ========== ========= ========== ======== Funded status.............................. $ 106,770 $ 156,246 $ (102,136) $(79,026) Unrecognized net (gain)/loss............... (141,443) (205,338) 11,904 (7,733) Unrecognized transition obligation, net........................... 174 209 48,183 52,171 Unrecognized prior service cost............ 29,538 32,854 (3,264) (3,730) ---------- --------- ---------- -------- Accrued postretirement benefit costs....... $ (4,961) $ (16,029) $ (45,313) $(38,318) ========== ========= ========== ======== Actuarial Assumptions: Discount rate.............................. 7.25-7.75% 7.75% 7.25-7.75% 7.75% Expected rate of return.................... 9.00-9.25% 9.00% 9.00-9.25% 9.00% Compensation increase rate................. 4.25-5.00% 4.50% 4.50-5.00% 4.50% Components of net periodic (benefit) cost: Service cost............................... $ 7,972 $ 8,949 $ 1,344 $ 1,610 Interest cost.............................. 26,977 26,487 7,157 5,854 Expected return on plan assets............. (39,143) (34,393) (24) (16) Amortization of unrecognized transition obligation, net................ 35 34 3,988 3,987 Amortization of unrecognized prior service costs............................. 3,316 3,455 (466) (466) Amortization of (gain)/loss, net........... (9,427) (3,477) 457 129 Other...................................... 9 - - - ---------- --------- ---------- -------- Net periodic (benefit) cost................ $ (10,261) $ 1,055 $ 12,456 $ 11,098 ========== ========= ========== ======== For measurement purposes, an annual health care cost growth rate of 6.0% was assumed for 2000 decreasing to 5% in 2001 and thereafter. 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 $2.5 million and the aggregate of the service and interest cost components by $0.2 million. A 1% decrease in the trend rate would decrease the present value of the accumulated projected benefit obligation by $2.3 million and the aggregate of the service and interest cost components by $0.2 million. Savings Plans: The company maintains savings plans in which substantially all employees participate, with the exception of Protection One and Protection One Europe employees. The company matches employees' contributions up to specified maximum limits. The company's contribution to the plans are deposited with a trustee and are invested in one or more funds, including the company stock fund. The company's contributions were $3.9 million for 2000, $3.7 million for 1999 and $3.8 million for 1998. In 1999, the company established a qualified employee stock purchase plan, the terms of which allow for full-time non-union employees to participate in the purchase of designated shares of the company's common stock at no more than a 15% discounted price. Western Resources' employees purchased 249,050 shares in 2000, pursuant to this plan, at an average price per share of $13.9984. In 1999, employees purchased 72,698 shares at an average price per share of 79
$14.4234. A total of 1,250,000 shares of common stock have been reserved for issuance under this program. Protection One also maintains a savings plan. Contributions, made at Protection One's election, are allocated among participants based upon the respective contributions made by the participants through salary reductions during the year. Protection One's matching contributions may be made in Protection One common stock, in cash or in a combination of both stock and cash. Protection One's matching cash contribution to the plan was approximately $0.7 million for 2000, $0.9 million for 1999 and $1.0 million for 1998. Protection One maintains a qualified employee stock purchase plan that allows eligible employees to acquire shares of Protection One common stock at periodic intervals through their accumulated payroll deductions. A total of 2,650,000 shares of common stock have been reserved for issuance in this program and a total of 422,133 shares have been issued including the issuance of 145,523 shares in January 2001. Stock Based Compensation Plans: The company, excluding Protection One and Protection One Europe, has a long-term incentive and share award plan (LTISA Plan), which is a stock-based compensation plan. The LTISA Plan was implemented as a means to attract, retain and motivate employees and board members (Plan Participants). Under the LTISA Plan, the company may grant awards in the form of stock options, dividend equivalents, share appreciation rights, restricted shares, restricted share units (RSUs), performance shares and performance share units to Plan Participants. Up to five million shares of common stock may be granted under the LTISA Plan. During 2000, 710,352 RSUs were granted to a broad-based group of over 900 non-union employees. Each RSU represents a right to receive one share of the company's common stock at the end of the restricted period. In addition, in 2000, current non-union employees were offered the opportunity to exchange their stock options for RSUs of approximately equal economic value. As a result, 2,246,865 stock options were canceled in 2000 in exchange for 614,741 RSUs. The grant of restricted stock is shown as a separate component of shareholders' equity. Unearned compensation is being amortized to expense over the vesting period. This compensation expense is shown as a separate component of shareholders' equity. The company granted a total of 152,000 restricted shares in 1999 and 136,500 in 1998. Another component of the LTISA Plan is the Executive Stock for Compensation program where eligible employees are entitled to receive RSUs in lieu of cash compensation at the end of a deferral period. In 2000, 95,000 RSUs were deferred, representing $1.3 million in cash compensation. In 1999, 35,000 RSUs were deferred, representing $0.7 million of cash compensation. Dividend equivalents accrue on the deferred RSUs. Dividend equivalents are the right to receive cash equal to the value of dividends paid on the company's common stock. Stock options and restricted shares under the LTISA plan are as follows: As of December 31, ------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Shares Exercise Shares Exercise Shares Exercise (Thousands) Price (Thousands) Price (Thousands) Price ---------- -------- ---------- ------------- ---------- --------- Outstanding, beginning of year............................. 2,418.6 $ 34.139 1,590.7 $36.106 665.4 $30.282 Granted........................................ 1,953.1 15.513 981.6 30.613 925.3 40.293 Exercised...................................... (0.5) 15.625 - - - - Forfeited...................................... (2,265.6) 28.827 (153.7) 31.985 - - ---------- ---------- ---------- Outstanding, end of year....................... 2,105.6 $ 22.583 2,418.6 $34.139 1,590.7 $36.106 ========== ========== ========== Weighted-average fair value of awards granted during the year...................................... $ 11.28 $ 8.22 $ 9.12 80
Stock options and restricted shares issued and outstanding at December 31, 2000 are as follows: Number Weighted- Weighted- Range of Issued Average Average Exercise and Contractual Exercie Price Outstanding Life in Years Price ------------------ ----------- ------------- ------- Options: 2000...................................................... $ 15.3125 17,690 10.0 $15.3125 1999...................................................... 27.8125-32.125 51,305 9.0 29.7357 1998...................................................... 38.625-43.125 222,720 8.0 40.986 1997...................................................... 30.750 137,740 7.0 30.750 1996...................................................... 29.250 68,870 5.7 29.250 --------- 498,325 --------- Restricted shares: 2000...................................................... 15.3125-19.875 1,319,083 6.3 15.6079 1999...................................................... 27.813-32.125 151,783 8.0 29.7587 1998...................................................... 38.625 136,500 7.0 38.625 --------- 1,607,366 --------- Total issued............................................ 2,105,691 ========= An equal amount of dividend equivalents is issued to recipients of stock options and RSUs. The weighted-average grant-date fair value of the dividend equivalent was $4.62 in 2000 and $3.28 in 1999. The value of each dividend equivalent is calculated by accumulating dividends that would have been paid or payable on a share of company common stock. The dividend equivalents, with respect to stock options, expire after nine years from date of grant. The fair value of stock options and dividend equivalents were estimated on the date of grant using the Black-Scholes option-pricing model. The model assumed the following at December 31: 2000 1999 ----- ----- Dividend yield..................... 6.32% 6.25% Expected stock price volatility.... 16.42% 16.56% Risk-free interest rate............ 5.79% 6.05% Protection One Stock Warrants and Options: Protection One has outstanding stock warrants and options which were considered reissued and exercisable upon the company's acquisition of Protection One on November 24, 1997. The 1997 Long-Term Incentive Plan (the LTIP), approved by the Protection One stockholders on November 24, 1997, provides for the award of incentive stock options to directors, officers and employees. Under the LTIP, 4.2 million shares are reserved for issuance. The LTIP provides for the granting of options that qualify as incentive stock options under the Internal Revenue Code and options that do not so qualify. Options issued since 1997 have a term of 10 years and vest ratably over 3 years. A summary of warrant and option activity for Protection One from December 31, 1998, through December 31, 2000, is as follows: 81
As of December 31, ----------------------------=--------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Shares Exercise Shares Exercise Shares Exercise (Thousands) Price (Thousands) Price (Thousands) Price ---------- -------- ---------- ------------ ---------- -------- Outstanding, beginning of year....................... 3,788.1 $ 7.232 3,422.7 $ 7.494 2,366.4 $ 5.805 Granted.............................................. 922.5 1.436 1,092.9 7.905 1,246.5 11.033 Exercised............................................ (5.4) 3.89 - - (109.6) 5.564 Forfeited............................................ (300.6) 6.698 (727.5) 10.125 (117.4) 10.770 Adjustment to May 1995 warrants...................... - - - - 36.8 - -------- ------- ------- Outstanding, end of year............................. 4,404.6 $ 6.058 3,788.1 $ 7.232 3,422.7 $ 7.494 ======== ======= ======= Exercisable, end of year............................. - - 2,313.3 $ 6.358 2,263.2 $ 5.681 ======== ======= ======= (1) There were no outstanding stock or options prior to November 24, 1997. Stock options and warrants of Protection One issued and outstanding at December 31, 2000, are as follows: Number Weighted- Weighted- Range of Issued Average Average Exercise and Contractual Exercise Price Outstanding Life in Years Price --------------- ----------- ------------- ---------- Exercisable: Fiscal 1995..................... $ 6.375-$ 6.500 100,800 4.0 $ 6.491 Fiscal 1996..................... 8.000- 10.313 248,400 5.0 8.022 Fiscal 1996..................... 13.750- 15.500 99,000 5.0 14.947 Fiscal 1997..................... 9.500 110,500 6.0 9.500 Fiscal 1997..................... 15.000 37,500 6.0 15.000 Fiscal 1997..................... 14.268 50,000 1.0 14.268 Fiscal 1998..................... 11.000 671,835 7.0 11.000 Fiscal 1998..................... 8.5625 23,833 7.0 8.5625 Fiscal 1999..................... 8.9275 248,297 8.0 8.9275 Fiscal 1999..................... 5.250- 6.125 56,222 8.0 6.028 Fiscal 2000..................... 1.438 5,000 9.0 1.438 1993 Warrants................... 0.167 428,400 3.0 0.167 1995 Note Warrants.............. 3.890 780,837 4.0 3.890 --------- 2,860,624 --------- Not Exercisable: 1998 options.................... $ 11.000 112,165 7.0 $ 11.000 1998 options.................... 8.5625 11,917 7.0 8.5625 1999 options.................... 8.9275 410,403 8.0 8.9275 1999 options.................... 5.250- 6.125 112,444 8.0 6.028 2000 options.................... 1.313- 1.438 896,980 9.0 1.436 --------- 1,543,909 --------- Total outstanding 4,404,533 ========= The weighted average fair value of options granted by Protection One during 2000, 1999 and 1998 estimated on the date of grant were $1.13, $5.41 and $6.87. The fair value was calculated using the following assumptions: 82
Year Ended December 31, ------------------------- 2000 1999 1998 ----- ----- ----- Dividend yield................... - % - % - % Expected stock price volatility.. 92.97% 64.06% 61.72% Risk free interest rate.......... 4.87% 6.76% 5.50% Expected option life............ 6 years 6 years 6 years Effect of Stock-Based Compensation on Earnings Per Share: The company accounts for both the company's and Protection One's plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and the related interpretations. Had compensation expense been determined pursuant to Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation," the company would have recognized additional compensation costs during 2000, 1999 and 1998 as shown in the table below. Year Ended December 31, 2000 1999 1998 -------------------------------------------------------------------------- (In Thousands, Except Per Share Amounts) Earnings available for common stock: As reported.................................. $135,352 $13,167 $32,058 Pro forma.................................... 134,274 10,699 42,640 Basic and diluted earnings per common share: As reported.................................. $ 1.96 $ 0.20 $ 0.48 Pro forma.................................... 1.95 0.16 0.65 Split Dollar Life Insurance Program: The company has established a split dollar life insurance program for the benefit of the company and certain of its executives. Under the program, the company has purchased life insurance policies on which the executive's beneficiary is entitled to a death benefit in an amount equal to the face amount of the policy reduced by the greater of (i) all premiums paid by the company or (ii) the cash surrender value of the policy, which amount, at the death of the executive, will be returned to the company. The company retains an equity interest in the death benefit and cash surrender value of the policy to secure this repayment obligation. Subject to certain conditions, each executive may transfer to the company their interest in the death benefit based on a predetermined formula, beginning no earlier than the first day of the calendar year following retirement or three years from the date of the policy. The liability associated with this program was $19.1 million as of December 31, 2000, and $31.9 million as of December 31, 1999. The obligations under this program can increase and decrease based on the company's total return to shareholders and payments to plan participants. This liability decreased approximately $12.8 million in 2000 due primarily to payments to plan participants and $10.5 million in 1999 based on the company's total return to shareholders. There was no change in the liability in 1998. Under current tax rules, payments to active employees in exchange for their interest in the death benefits may not be fully deductible by the company for income tax purposes. 13. COMMON STOCK, PREFERRED STOCK AND OTHER MANDATORILY REDEEMABLE SECURITIES The company's Restated Articles of Incorporation, as amended, provide for 150,000,000 authorized shares of common stock. At December 31, 2000, 70,082,314 shares were issued and outstanding. 83
The company has a Direct Stock Purchase Plan (DSPP). Shares issued under the DSPP may be either original issue shares or shares purchased on the open market. During 2000, a total of 3,220,657 shares were purchased from the company made up of 1,440,000 treasury and 1,780,657 original issue shares. These shares were for DSPP, ESPP, 401K match and other stock based plans operated under the 1996 Long-term Incentive and Share Award Plan. Of the total shares purchased from the company in 2000, 2,750,457 were for the DSPP made up of 1,021,443 treasury and 1,729,014 original issue shares. During 2000 an additional 6,000,000 shares were registered to the DSPP. At December 31, 2000, 6,020,734 shares were available under the DSPP registration statement. In 1999, the company purchased 900,000 shares of common stock at an average price of $17.55 per share. The purchased shares were purchased with short-term debt and available funds. These purchased shares are shown as $15.8 million in treasury stock on the accompanying Consolidated Balance Sheet. In 2000, the company purchased 540,000 shares of common stock at an average price of $17.01. All of these shares were reissued during the year. Preferred Stock 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. Total Principal Call Amount Rate Outstanding Price Premium to Redeem ---- ----------- -------- ----------- ----------- 4.500% $13,857,600 108.00% $1,108,608 $14,966,208 4.250% 6,000,000 101.50% 90,000 6,090,000 5.000% 5,000,000 102.00% 100,000 5,100,000 ----------- ---------- ----------- $24,857,600 $1,298,608 $26,156,208 The provisions in the company's Articles of Incorporation contain restrictions on the payment of dividends or the making of other distributions on the company's common stock while any preferred shares remain outstanding unless certain capitalization ratios and other conditions are met. Other Mandatorily Redeemable Securities: On December 14, 1995, Western Resources Capital I, a wholly owned trust, issued 4.0 million preferred securities of 7-7/8% Cumulative Quarterly Income Preferred Securities, Series A, for $100 million. The trust interests are redeemable at the option of Western Resources Capital I on or after December 11, 2000, at $25 per preferred security plus accrued interest and unpaid dividends. Holders of the securities are entitled to receive distributions at an annual rate of 7-7/8% of the liquidation preference value of $25. Distributions are payable quarterly and are tax deductible by the company. These distributions are recorded as interest expense. The sole asset of the trust is $103 million principal amount of 7-7/8% Deferrable Interest Subordinated Debentures, Series A due December 11, 2025. On July 31, 1996, Western Resources Capital II, a wholly owned trust, of which the sole asset is subordinated debentures of the company, sold in a public offering, 4.8 million shares of 8-1/2% Cumulative Quarterly Income Preferred Securities, Series B, for $120 million. The trust interests are redeemable at the option of Western Resources Capital II, on or after July 31, 2001, at $25 per preferred security plus accumulated and unpaid distributions. Holders of the securities are entitled to receive distributions at an annual 84
rate of 8-1/2% of the liquidation preference value of $25. Distributions are payable quarterly and are tax deductible by the company. These distributions are recorded as interest expense. The sole asset of the trust is $124 million principal amount of 8-1/2% Deferrable Interest Subordinated Debentures, Series B due July 31, 2036. In addition to the company's obligations under the Subordinated Debentures discussed above, the company has agreed to guarantee, on a subordinated basis, payment of distributions on the preferred securities. These undertakings constitute a full and unconditional guarantee by the company of the trust's obligations under the preferred securities. 14. COMMITMENTS AND CONTINGENCIES Efforts by Wichita to Equalize Electric Rates: In September 1999, the City of Wichita filed a complaint with FERC against KGE, alleging improper affiliate transactions between KGE and Western Resources' KPL division. The City of Wichita asked that FERC equalize the generation costs between KGE and KPL, in addition to other matters. On November 9, 2000, a FERC administrative law judge ruled in the company's favor that no change in rates was required. On December 13, 2000, the City of Wichita filed a brief with FERC asking that the Commission overturn the judge's decision. The company anticipates a decision by FERC in the second quarter of 2001. A decision requiring equalization of rates could have a material adverse effect on the company's operations and financial position. Municipalization Efforts by Wichita: In December 1999, the City Council of Wichita, Kansas, authorized the hiring of an outside consultant to determine the feasibility of creating a municipal electric utility to replace KGE as the supplier of electricity in Wichita. The feasibility study was released in February 2001 and estimates that the City of Wichita would be required to pay KGE $145 million for its stranded costs if the City were to municipalize. However, the company estimates the amount to be substantially greater. In order to municipalize KGE's Wichita electric facilities, the City of Wichita would be required to purchase KGE's facilities or build a separate independent system and arrange for its own power supply. These costs are in addition to the stranded costs for which the city would be required to reimburse the company. On February 2, 2001, the City of Wichita announced its intention to proceed with its attempt to municipalize KGE's retail electric utility business in Wichita. KGE will oppose municipalization efforts by the City of Wichita. Should the city be successful in its municipalization efforts without providing the company adequate compensation for its assets and lost revenues, the adverse effect on the operations and financial position of the company could be material. KGE's franchise with the City of Wichita to provide retail electric service expires in March 2002. There can be no assurance that this franchise can be successfully renegotiated with terms similar, or as favorable, as those in the current franchise. Under Kansas law, KGE will continue to have the right to serve the customers in Wichita following the expiration of the franchise, assuming the system is not municipalized. Customers within the Wichita metropolitan area account for approximately 25% of the company's total energy sales . Purchase Orders and Contracts: 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 $154.2 million at December 31, 2000. 85
Manufactured Gas Sites: The company has been associated with 15 former manufactured gas sites located in Kansas which may contain coal tar and other potentially harmful materials. The company and the Kansas Department of Health and Environment (KDHE) entered into a consent agreement governing all future work at the 15 sites. The terms of the consent agreement will allow the company to investigate these sites and set remediation priorities based on the results of the investigations and risk analysis. At December 31, 2000, the costs incurred for preliminary site investigation and risk assessment have been minimal. In accordance with the terms of the strategic alliance with ONEOK, ownership of twelve of these sites and the responsibility for clean-up of these sites were transferred to ONEOK. The ONEOK agreement limits the company's future liability associated with these sites to an immaterial amount. The company's investment earnings from ONEOK could be impacted by these costs. Superfund Sites: In December 1999, the company was identified as one of more than 1,000 potentially responsible parties at an EPA Superfund site in Kansas City, Kansas (Kansas City site). The company has previously been associated with other Superfund sites for which the company's liability has been classified as de minimis and any potential obligations have been settled at minimal cost. Since 1993, the company has settled Superfund obligations at three sites for a total of $141,300. No Superfund obligations have been settled since 1994. The company's obligation, if any, at the Kansas City site is expected to be limited based upon previous experience and the limited nature of the company's business transactions with the previous owners of the site. In the opinion of the company's management, the resolution of this matter is not expected to have a material impact on the company's financial position or results of operations. Clean Air Act: The company must comply with the provisions of The Clean Air Act Amendments of 1990 that require a two-phase reduction in certain emissions. The company has installed continuous monitoring and reporting equipment to meet the acid rain requirements. Material capital expenditures have not been required to meet Phase II sulfur dioxide and nitrogen oxide requirements. Decommissioning: The company accrues decommissioning costs over the expected life of the Wolf Creek generating facility. The accrual is based on estimated unrecovered decommissioning costs which consider inflation over the remaining estimated life of the generating facility and are net of expected earnings on amounts recovered from customers and deposited in an external trust fund. On September 1, 1999, Wolf Creek submitted the 1999 Decommissioning Cost Study to the KCC for approval. The KCC approved the 1999 Decommissioning Cost Study on April 26, 2000. Based on the study, the company's share of Wolf Creek's decommissioning costs, under the immediate dismantlement method, is estimated to be approximately $631 million during the period 2025 through 2034, or approximately $221 million in 1999 dollars. These costs include decontamination, dismantling and site restoration and were calculated using an assumed inflation rate of 3.6% over the remaining service life from 1999 of 26 years. The actual decommissioning costs may vary from the estimates because of changes in the assumed dates of decommissioning, changes in regulatory requirements, changes in technology and changes in costs of labor, materials and equipment. On May 26, 2000, the company filed an application with the KCC requesting approval of the funding of the company's decommissioning trust on this basis. Approval was granted by the KCC on September 20, 2000. 86
Decommissioning costs are currently being charged to operating expense in accordance with the prior KCC orders. Electric rates charged to customers provide for recovery of these decommissioning costs over the life of Wolf Creek. Amounts expensed approximated $4.0 million in 2000 and will increase annually to $5.5 million in 2024. These amounts are deposited in an external trust fund. The average after-tax expected return on trust assets is 5.8%. The company's investment in the decommissioning fund, including reinvested earnings approximated $64.2 million at December 31, 2000 and $58.3 million at December 31, 1999. Trust fund earnings accumulate in the fund balance and increase the recorded decommissioning liability. The FASB is reviewing the accounting for closure and removal costs, including decommissioning of nuclear power plants. The FASB has issued an Exposure Draft "Accounting for Obligations Associated with the Retirement of Long-Lived Assets." The FASB expects to issue a final statement of financial accounting standard in the second quarter of 2001. The proposed Exposure Draft contains an effective date of fiscal years beginning after June 15, 2001. However, the ultimate effective date has not been finalized. If current accounting practices for nuclear power plant decommissioning are changed, the following could occur: - The company's annual decommissioning expense could be higher than in 2000 - The estimated cost for decommissioning could be recorded as a liability (rather than as accumulated depreciation) - The increased costs could be recorded as additional investment in the Wolf Creek plant The company does not believe that such changes, if required, would adversely affect its operating results due to its current ability to recover decommissioning costs through rates. Nuclear Insurance: The Price-Anderson Act limits the combined public liability of the owners of nuclear power plants to $9.5 billion for a single nuclear incident. If this liability limitation is insufficient, the United States Congress will consider taking whatever action is necessary to compensate the public for valid claims. The Wolf Creek owners (Owners) have purchased the maximum available private insurance of $200 million. The remaining balance is provided by an assessment plan mandated by the Nuclear Regulatory Commission (NRC). Under this plan, the Owners are jointly and severally subject to a retrospective assessment of up to $88.1 million in the event there is a major nuclear incident involving any of the nation's licensed reactors. This assessment is subject to an inflation adjustment based on the Consumer Price Index and applicable premium taxes. There is a limitation of $10 million in retrospective assessments per incident, per year. The Owners carry decontamination liability, premature decommissioning liability and property damage insurance for Wolf Creek totaling approximately $2.8 billion ($1.3 billion, company's share). This insurance is provided by Nuclear Electric Insurance Limited (NEIL). In the event of an accident, insurance proceeds must first be used for reactor stabilization and site decontamination in accordance with a plan mandated by the NRC. The company's share 87
of any remaining proceeds can be used to pay for property damage or decontamination expenses or, if certain requirements are met including decommissioning the plant, toward a shortfall in the decommissioning trust fund. The Owners also carry additional insurance with NEIL to cover costs of replacement power and other extra expenses incurred during a prolonged outage resulting from accidental property damage at Wolf Creek. If losses incurred at any of the nuclear plants insured under the NEIL policies exceed premiums, reserves and other NEIL resources, the company may be subject to retrospective assessments under the current policies of approximately $5.3 million per year. Although the company maintains various insurance policies to provide coverage for potential losses and liabilities resulting from an accident or an extended outage, the company's insurance coverage may not be adequate to cover the costs that could result from a catastrophic accident or extended outage at Wolf Creek. Any substantial losses not covered by insurance, to the extent not recoverable through rates, would have a material adverse effect on the company's financial condition and results of operations. Fuel Commitments: To supply a portion of the fuel requirements for its generating plants, the company has entered into various commitments to obtain nuclear fuel and coal. Some of these contracts contain provisions for price escalation and minimum purchase commitments. At December 31, 2000, WCNOC's nuclear fuel commitments (company's share) were approximately $7.3 million for uranium concentrates expiring in 2003, $1.1 million for conversion expiring in 2003, $16.1 million for enrichment expiring at various times through 2003 and $61.3 million for fabrication through 2025. At December 31, 2000, the company's coal and transportation contract commitments in 2000 dollars under the remaining terms of the contracts were approximately $1.52 billion. The largest contract expires in 2020, with the remaining contracts expiring at various times through 2013. At December 31, 2000, the company's natural gas transportation commitments in 2000 dollars under the remaining terms of the contracts were approximately $61.5 million. The natural gas transportation contracts provide firm service to several of the company's gas burning facilities and expire at various times through 2010, except for one contract which expires in 2016. Energy Act: As part of the 1992 Energy Policy Act, a special assessment is being collected from utilities for an uranium enrichment decontamination and decommissioning fund. The company's portion of the assessment for Wolf Creek is approximately $9.6 million, payable over 15 years. Such costs are recovered through the ratemaking process. 15. LEGAL PROCEEDINGS The SEC commenced a private investigation in 1997 relating to, among other things, the timeliness and adequacy of disclosure filings with the SEC by the company with respect to securities of ADT Ltd. The company is cooperating with the SEC staff in this investigation. The company, its subsidiary Westar Industries, Protection One, its subsidiary 88
Protection One Alarm Monitoring, Inc. (Monitoring), and certain present and former officers and directors of Protection One are defendants in a purported class action litigation pending in the United States District Court for the Central District of California, "Alec Garbini, et al v. Protection One, Inc., et al," No. CV 99-3755 DT (RCx). Pursuant to an Order dated August 2, 1999, four pending purported class actions were consolidated into a single action. On February 27, 2001, plaintiffs filed a Third Consolidated Amended Class Action Complaint ("Amended Complaint"). Plaintiffs purport to bring the action on behalf of a class consisting of all purchasers of publicly traded securities of Protection One, including common stock and notes, during the period of February 10, 1998 through February 2, 2001. The Amended Complaint asserts claims under Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 against Protection One, Monitoring, and certain present and former officers and directors of Protection One based on allegations that various statements concerning Protection One's financial results and operations for 1997, 1998, 1999 and the first three quarters of 2000 were false and misleading and not in compliance with generally accepted accounting principles. Plaintiffs allege, among other things, that former employees of Protection One have reported that Protection One lacked adequate internal accounting controls and that certain accounting information was unsupported or manipulated by management in order to avoid disclosure of accurate information. The Amended Complaint further asserts claims against the company and Westar Industries as controlling persons under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. A claim is also asserted under Section 11 of the Securities Act of 1933 against Protection One's auditor, Arthur Andersen LLP. The Amended Complaint seeks an unspecified amount of compensatory damages and an award of fees and expenses, including attorneys' fees. Defendants have until April 9, 2001 to respond to the Amended Complaint. The company and Protection One intend to vigorously defend against all the claims asserted in the Amended Complaint. The company and Protection One cannot predict the impact of this litigation which could be material. The company and its subsidiaries are involved in various other legal, environmental and regulatory proceedings. Management believes that adequate provision has been made and accordingly believes that the ultimate disposition of such matters will not have a material adverse effect upon the company's overall financial position or results of operations. See also Note 3 for discussion of regulatory proceedings and FERC proceedings including the City of Wichita and Note 14 for discussion of the City of Wichita municipalization efforts. 89
16. LEASES At December 31, 2000, the company had leases covering various property and equipment. Rental payments for operating leases and estimated rental commitments are as follows: Year Ended December 31, Leases ------------------------------------------- (In Thousands) Rental payments: 1998......................... $70,796 1999......................... 71,771 2000......................... 71,232 Future commitments: 2001......................... $71,280 2002......................... 67,033 2003......................... 62,270 2004......................... 54,647 2005......................... 55,931 Thereafter................... 558,754 -------- Total future commitments... $869,915 ======== In 1987, KGE sold and leased back its 50% undivided interest in the La Cygne 2 generating unit. The La Cygne 2 lease has an initial term of 29 years, with various options to renew the lease or repurchase the 50% undivided interest. KGE 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. The company recognized a gain on the sale which was deferred and is being amortized over the initial lease term. In 1992, the company deferred costs associated with the refinancing of the secured facility bonds of the Trustee and owner of La Cygne 2. These costs are being amortized over the life of the lease and are included in operating expense. Future minimum annual lease payments, included in the table above, required under the La Cygne 2 lease agreement are approximately $34.6 million for each year through 2002, $39.4 million in 2003, $34.6 million in 2004, $38.0 million in 2005, and $464.6 million over the remainder of the lease. KGE's lease expense, net of amortization of the deferred gain and refinancing costs, was approximately $28.9 million annually for 2000, 1999 and 1998. 90
17. INTERNATIONAL POWER DEVELOPMENT COSTS During the fourth quarter of 1998, management decided to exit the international power development business. This business had been conducted by the company's wholly owned subsidiary, The Wing Group. The company recorded a $98.9 million charge to income in the fourth quarter of 1998 as a result of exiting this business. During 1999, the company terminated the employment of all employees, closed offices, discontinued all development activities, and terminated all other matters related to the activity of The Wing Group in accordance with the terms of the exit plan. These activities were substantially completed by December 31, 1999. The actual costs incurred during 1999 to complete the exit plan approximated $16.9 million, which was $5.6 million less than the amount estimated at December 31, 1998. This was accounted for as a change in estimate in 1999. 18. INCOME TAXES Income tax expense (benefit) is composed of the following components at December 31: 2000 1999 1998 ------- -------- -------- (In Thousands) Currently payable: Federal................... $18,600 $ 13,907 $ 52,993 State..................... 10,131 9,622 10,881 Deferred: Federal................... 13,790 (43,090) (46,869) State..................... 9,585 (6,582) (4,185) Amortization of investment tax credits................ (6,045) (6,054) (6,065) ------- -------- -------- Total income tax expense (benefit).................. $46,061 $(32,197) $ 6,755 ====== ======== ======== Under SFAS No. 109, "Accounting for Income Taxes," temporary differences gave rise to deferred tax assets and deferred tax liabilities as follows at December 31: 2000 1999 ---------- ---------- (In Thousands) Deferred tax assets: Deferred gain on sale-leaseback....... $ 82,013 $ 87,220 Monitored services deferred tax assets 101,101 59,171 Other................................. 119,344 131,976 ---------- ---------- Total deferred tax assets............ $ 302,458 $ 278,367 ========== ========== Deferred tax liabilities: Accelerated depreciation and other.... $ 609,396 $ 614,309 Acquisition premium................... 275,159 283,157 Deferred future income taxes.......... 188,006 218,937 Other................................. 58,158 40,508 ---------- ---------- Total deferred tax liabilities....... $1,130,719 $1,156,911 ========== ========== Investment tax credits................. $ 91,546 $ 97,591 ========== ========== Accumulated deferred income taxes, net. $ 919,807 $ 976,135 ========== ========== 91
In accordance with various rate orders, the company has not yet collected through rates certain accelerated tax deductions which have been passed on to customers. As management believes it is probable that the net future increases in income taxes payable will be recovered from customers, it has recorded a regulatory asset for these amounts. These assets also are a temporary difference for which deferred income tax liabilities have been provided. This liability is classified above as deferred future income taxes. The effective income tax rates set forth below are computed by dividing total federal and state income taxes by the sum of such taxes and net income. The difference between the effective tax rates and the federal statutory income tax rates are as follows: For the Year Ended December 31, ------------------------------- 2000 1999 1998 ------ ------ ------ Effective income tax rate................... 33.6% (108.6%) 16.6% Effect of: State income taxes......................... (9.4) (7.1) (7.3) Amortization of investment tax credits..... 4.4 20.4 14.9 Corporate-owned life insurance policies.... 8.4 28.0 22.4 Affordable housing tax credits............. 7.8 31.3 3.1 Accelerated depreciation flow through and amortization, net..................... (4.9) (12.2) (4.4) Adjustment to tax provision................ - 4.3 (16.9) Dividends received deduction............... 7.1 34.3 23.9 Amortization of goodwill................... (13.0) (19.3) (17.0) Other...................................... 1.0 (6.1) (0.3) ----- ------ ----- Statutory federal income tax rate........... 35.0% (35.0%) 35.0% ===== ====== ===== 19. RELATED PARTY TRANSACTIONS The company and ONEOK have shared services agreements in which facilities, utility field work, information technology, customer support, bill processing, and human resources services are provided to and billed to one another. Payments for these services are based on various hourly charges, negotiated fees and out-of-pocket expenses. ONEOK paid the company $5.0 million in 2000 and $5.6 million in 1999, net of what the company owed ONEOK, for services. In 1999, the company sold 984,000 shares of ONEOK stock to ONEOK as a result of ONEOK's repurchase program. The company reduced its investment in ONEOK for proceeds received from this sale. All such shares were required to be sold to ONEOK in accordance with a shareholder agreement between the company and ONEOK. The company's ownership interest remains at approximately 45% as of December 31, 2000. 92
2O. PROPERTY, PLANT AND EQUIPMENT The following is a summary of property, plant and equipment at December 31: 2000 1999 ---------- ---------- (In Thousands) Electric plant in service........... $5,987,920 $5,769,401 Less - accumulated depreciation..... 2,274,940 2,141,037 ---------- ---------- 3,712,980 3,628,364 Construction work in progress....... 189,853 170,061 Nuclear fuel (net).................. 30,791 28,013 ---------- ---------- Net utility plant.................. 3,933,624 3,826,438 Non-utility plant in service........ 113,040 92,872 Less - accumulated depreciation..... 53,226 29,866 ---------- ---------- Net property, plant and equipment.. $3,993,438 $3,889,444 ========== ========== The company's depreciation expense on property, plant and equipment was $201.7 million in 2000, $186.1 million in 1999 and $168.9 million in 1998. 21. JOINT OWNERSHIP OF UTILITY PLANTS Company's Ownership at December 31, 2000 --------------------------------------------------- In-Service Invest- Accumulated Net Per- Dates ment Depreciation (MW) cent ---------- ---------- ------------ ----- ---- (Dollars in Thousands) La Cygne 1 (a) Jun 1973 $ 182,794 $ 115,903 344.0 50 Jeffrey 1 (b) Jul 1978 305,838 144,009 625.0 84 Jeffrey 2 (b) May 1980 297,979 133,701 622.0 84 Jeffrey 3 (b) May 1983 410,926 175,482 623.0 84 Jeffrey wind 1 (b) May 1999 828 58 0.6 84 Jeffrey wind 2 (b) May 1999 828 57 0.6 84 Wolf Creek (c) Sep 1985 1,381,656 491,978 550.0 47 (a) Jointly owned with Kansas City Power & Light Company (KCPL) (b) Jointly owned with UtiliCorp United Inc. (c) Jointly owned with KCPL and Kansas Electric Power Cooperative, Inc. Amounts and capacity presented above 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% undivided interest in La Cygne 2 (representing 337 MW capacity) sold and leased back to KGE in 1987, are included in operating expenses on the Consolidated 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. 22. SEGMENTS OF BUSINESS In 1998, the company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement requires the company to define and report the company's business segments based on how management currently evaluates its business. 93
Management has segmented its business based on differences in products and services, production processes, and management responsibility. Based on this approach, the company has identified four reportable segments: Fossil Generation, Nuclear Generation, Power Delivery and Monitored Services. The first three segments comprise the company's electric utility business. Fossil Generation produces power for sale internally to the Power Delivery segment and externally to wholesale customers. A component of the company's Fossil Generation segment is power marketing which attempts to minimize market fluctuation risk associated with fuel and purchased power requirements and enhance system reliability. Nuclear Generation represents the company's 47% ownership in the Wolf Creek nuclear generating facility. This segment has only internal sales because it provides all of its power to its co-owners. The Power Delivery segment consists of the transmission and distribution of power to the company's retail customers in Kansas and the customer service provided to these customers and the transportation of wholesale energy. Monitored Services represents the company's security alarm monitoring business in North America, the United Kingdom and continental Europe. Other represents the company's non- utility operations and natural gas investment. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies. The company evaluates segment performance based on earnings before interest and taxes (EBIT). Unusual items, such as charges to income, may be excluded from segment performance depending on the nature of the charge or income. The company's ONEOK investment, marketable securities investments and other equity method investments do not represent operating segments of the company. The company has no single external customer from which it receives ten percent or more of its revenues. Year Ended December 31, 2000: ----------------------------- Eliminating/ Fossil Nuclear Power Monitored Reconciling Generation Generation Delivery Services Other(a) Items (b) Total ---------- ---------- --------- ----------- ---------- ---------- ---------- (In Thousands) External sales.................. $ 705,536 $ - $1,123,590 $ 537,859 $ 1,484 $ 7 $2,368,476 Internal sales.................. 572,533 107,770 291,927 - - (972,230) - Depreciation and amortization... 60,331 40,052 75,419 248,414 2,116 37 426,369 Earnings before interest and taxes.......................... 202,744 (24,323) 171,872 (91,370) 189,289 (21,533) 426,679 Interest expense................ 289,568 Earnings before income taxes.... 137,111 Identifiable assets............. 1,664,300 1,068,228 1,899,951 2,139,748 994,983 (2) 7,767,208 Year Ended December 31, 1999: -------------------------------- Eliminating/ Fossil Nuclear Power Monitored Reconciling Generation Generation Delivery Services Other(a) Items (b) Total ---------- ---------- --------- ----------- ---------- ---------- ---------- (In Thousands) External sales.................. $ 365,311 $ - $1,064,385 $ 599,105 $ 1,284 $ 2 $2,030,087 Internal sales.................. 546,683 108,445 293,522 - - (948,650) - Depreciation and amortization... 55,320 39,629 71,717 235,465 1,448 90 403,669 Earnings before interest and taxes.......................... 219,087 (25,214) 145,603 (20,675) (28,088) (26,252) 264,461 Interest expense................ 294,104 Earnings/(loss) before income taxes.......................... (29,643) Identifiable assets............. 1,476,716 1,083,344 1,783,937 2,539,921 1,165,145 (59,171) 7,989,892 94
Year Ended December 31, 1998: - ---------------------------- Eliminating/ Fossil Nuclear Power Monitored Reconciling Generation Generation Delivery Services Other(a) Items (b) Total ---------- ---------- --------- ----------- ---------- ---------- ---------- (In Thousands) External sales.................. $ 525,974 $ - $1,085,711 $ 421,095 $ 1,342 $ (68) $2,034,054 Internal sales.................. 517,363 117,517 66,492 - - (701,372) - Depreciation and amortization... 53,132 39,583 68,297 125,103 2,010 - 288,125 Earnings before interest and taxes.......................... 144,357 (20,920) 196,398 34,438 (99,608) 12,268 266,933 Interest expense................ 226,120 Earnings before income taxes.......................... 40,813 Identifiable assets............. 1,360,102 1,121,509 1,788,943 2,489,667 1,269,013 (99,458) 7,929,776 (a) EBIT includes the gain on the sale of the company's investment in a gas compression company of $91.1 million and the gain on the sale of other marketable securities of $24.9 million. (b) Identifiable assets includes eliminating and reclassing balances to consolidate the monitored services business. (c) EBIT includes investment earnings of $36.0 million, an impairment of marketable securities of $76.2 million and the write-off of deferred costs of $17.6 million. (d) EBIT includes investment earnings of $21.7 million and the write-off of international power development costs of $98.9 million. Geographic Information: Prior to 1998, the company did not have international sales or international property, plant and equipment. The company's sales and property, plant and equipment are as follows: For the Year Ended December 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (In Thousands) External sales: North America operations........... $2,262,381 $1,867,081 $1,990,329 International operations........... 106,095 163,006 43,725 ---------- ---------- ---------- Total............................ $2,368,476 $2,030,087 $2,034,054 ========== ========== ========== As of December 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (In Thousands) Property, plant and equipment, net: North America operations........... $3,985,331 $3,881,294 $3,792,645 International operations........... 8,107 8,150 7,271 ---------- ---------- ---------- Total............................ $3,993,438 $3,889,444 $3,799,916 ========== ========== ========== 23. 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 electric 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. 95
First Second Third Fourth ------- -------- --------- ---------- (In Thousands, Except Per Share Amounts) 2000 ---- Sales............................. $481,699 $546,607 $759,562 $580,608 Gross profit...................... 306,760 331,889 395,534 298,461 Net income before extraordinary gain and accounting change.............. 39,801 23,565 53,991 (26,307) Net income........................ 54,483 40,912 60,707 (19,621) Earnings per share available for common stock before extraordinary gain and accounting change Basic....................... $ 0.58 $ 0.34 $ 0.78 $ (0.40) Diluted..................... $ 0.58 $ 0.34 $ 0.77 $ (0.39) Cash dividend per common share. $ 0.535 $ 0.30 $ 0.30 $ 0.30 Market price per common share: High............................ $ 18.313 $ 17.813 $ 21.953 $ 25.875 Low............................. $ 15.313 $ 14.688 $ 15.375 $ 20.438 1999 - ------------------------------------ Sales............................. $460,582 $476,142 $646,740 $446,623 Gross profit...................... 312,655 324,407 424,581 309,498 Net income before extraordinary gain and accounting change.............. 19,980 17,722 53,203 (88,351) Net income........................ 19,980 17,722 53,203 (76,609) Basic and fully diluted earnings per share available for common stock before extraordinary gain.............. $ 0.30 $ 0.26 $ 0.78 $ (1.32) Cash dividend per common share. $ 0.535 $ 0.535 $ 0.535 $ 0.535 Market price per common share: High............................ $ 33.875 $ 29.375 $ 27.125 $23.8125 Low............................. $26.6875 $ 23.75 $ 20.375 $16.8125 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE - -------------------- None. 96
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- Director (age), year first became a director: Description Directors (Class I) - Term Expiring in 2OO3 Charles Q. Chandler, IV (47), 1999: Mr. Chandler is Chairman of the Board, President, and Chief Executive Officer of INTRUST Bank, N.A. (since February 1996) and President of INTRUST Financial Corporation. Both companies are located in Wichita, Kansas. Mr. Chandler is a director of INTRUST Financial Corporation, the First National Bank of Pratt, Kansas, the Will Rogers Bank in Oklahoma City, Oklahoma, and the Wesley Medical Center in Wichita, Kansas, and a trustee for the Kansas State University Endowment Foundation. John C. Dicus (67), 199O: Mr. Dicus is Chairman of the Board and Chief Executive Officer of Capitol Federal Savings Bank. Mr. Dicus is also Chairman of the Board and Chief Executive Officer of Capitol Federal Financial and Capitol Federal Savings Bank MHC (since march 1999). These companies are located in Topeka, Kansas. Mr. Dicus is a director for Security Benefit Life Insurance Company and Columbian National Title Company, and a trustee of the Menniger Foundation, Stormont-Vail HealthCare, Inc. and the Kansas University Endowment Association. Douglas T. Lake (5O), 2OOO: Mr. Lake is Executive Vice President and Chief Strategic Officer of the company (since September 1998). Prior to that Mr. Lake was Senior Managing Director at Bear, Stearns & Co. Inc., an investment banking firm. Mr. Lake is also Chairman of the Board of Protection One, Inc., and a director of ONEOK, Inc. and Guardian International, Inc. Owen F. Leonard (6O), 2OOO: Mr. Leonard is President of KL Industries, Saddle Brook, New Jersey. KL Industries is privately held investment company which manufactures equipment for the electronics industry. Mr. Leonard is a director for QuVIS, Inc., Fox Run Holdings, Inc. and Waco Instruments, Inc. Directors (Class II) - Term Expiring in 2OO1 Gene A. Budig (61), 1999 (Dr. Budig also served as a director of the company from 1987 to 1998): Dr. Budig is Senior Advisor to the Commissioner of Baseball in New York, New York (since March 2000). Prior to that time, Dr. Budig was President of the American League of Professional Baseball Clubs. Dr. Budig is a director of the Harry S. Truman Library Institute, the Ewing Marion Kaufman Foundation, the Major League Baseball Hall of Fame and the Media Studies Center- Freedom Forum. John C. Nettels, Jr. (44), 2000: Mr. Nettels is a Partner with the law firm of Morrison & Hecker, L.L.P. in Overland Park, Kansas. David C. Wittig (45), 1996: Mr. Wittig is Chairman of the Board, President, and Chief Executive Officer of the Company (since January 1999, March 1996, and July 1998, respectively). Prior to that time, Mr. Wittig was Executive Vice President of Corporate Development. Mr. Wittig is a director of Waco Instruments, Inc. and Fox Run Holdings, Inc. Mr. Wittig is a trustee of the Kansas University Endowment Association and Boys Harbor, Inc. Directors (Class III) - Term Expiring in 2OO2 Frank J. Becker (65), 1992: Mr. Becker is President of Becker Investments, Inc. in Lawrence, Kansas. Mr. Becker is a director of the Douglas County Bank, Martin K. Eby Construction Company, and IMA Insurance, Inc., and a trustee of the Kansas University Endowment Association. 97
Louis W. Smith (58), 1991: Mr. Smith is President and Chief Executive Officer (since July 1997) of the Ewing Marion Kauffman Foundation in Kansas City, Missouri. Mr. Smith is a director of the Ewing Marion Kauffman Foundation, Sprint Corporation, H & R Block, Inc., and Midwest Research Institute. See "Executive Officers of the Company" in "Item 1. Business," for the information relating to the company's Executive Officers as required by Item 10 which is incorporated herein by reference. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely on our review of the copies of reports filed under Section 16(a) of the Exchange Act and written representations that no other reports were required, we believe that, during the fiscal year ended December 31, 2000, all required filings applicable to our executive officers, directors and owners of more than ten percent of our common stock were made and that such persons were in compliance with Exchange Act requirements. 98
ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- The following table sets forth the compensation of the named executive officers for the last three completed fiscal years: SUMMARY COMPENSATION TABLE Long Term Compensation Annual Compensation Awards ---------------------------------------- ---------------------- Other Restricted Securities All Annual Stock Underlying Other Salary Bonus Compensation Awards Options Compensation Name and Principal Position Year $ $ $(1) $(2) # $(3) - --------------------------- ---- -------- ---------- ------------ ---------- ---------- ------------ David C. Wittig 2000 303,400 1,171,170 134,794 2,155,781 58,500 486,969 Chairman of the Board, President 1999 408,683 -- 105,909 1,738,625 114,000 5,756,753 and Chief Executive Officer 1998 635,542 114,400 31,312 1,622,250 113,000 79,217 Douglas T. Lake 2000 224,476 642,706 57,417 1,317,813 9,000 700,999 Executive Vice President, 1999 266,849 -- 31,494 948,219 40,000 429,664 Chief Strategic Officer 1998 108,333 15,080 3,348 521,438 30,000 354,839 Carl M. Koupal, Jr. 2000 290,740 427,078 9,847 930,000 9,000 48,318 Executive Vice President, 1999 307,020 -- 13,045 612,313 28,000 42,327 Chief Administrative Officer 1998 250,125 36,720 4,258 502,125 28,000 31,610 Thomas L. Grennan 2000 175,750 299,702 56,375 496,875 6,000 69,953 Executive Vice President, 1999 187,708 -- 35,965 445,000 20,000 64,292 Electric Operations 1998 163,000 47,481 31,840 -- 12,000 17,761 Richard D. Terrill 2000 188,849 299,750 8,311 740,219 2,700 36,576 Executive Vice President, 1999 180,000 28,400 12,448 361,563 16,000 36,224 General Counsel 1998 130,667 17,160 3,919 -- 9,000 17,177 (1) Other Annual Compensation for 2000 includes the following items: (a) payments for federal and state taxes associated with personal benefits and financial and tax planning (Mr. Wittig, $19,038, Mr. Lake, $18,095, Mr. Koupal, $2,036, Mr. Grennan, $7,446, and Mr. Terrill, $904); (b) interest (in excess of the applicable federal long term interest rate) on deferred compensation (Mr. Wittig, $30,665, Mr. Koupal, $2,705, Mr. Grennan, $36,249, and Mr. Terrill, $1,566); and (c) value of discounts received on stock compensation (Mr. Wittig, $85,091, Mr. Lake, $39,322, Mr. Koupal, $5,106, Mr. Grennan, $12,680, and Mr. Terrill, $5,841). (2) The aggregate Restricted Share Units ("RSUs") held by each of the named executive officers as of December 31, 2000, were as follows: Mr. Wittig, 335,095; Mr. Lake, 149,548; Mr. Koupal, 118,282; Mr. Grennan, 60,515; and Mr. Terrill, 69,858. Based on the closing price of our common stock on December 29, 2000 ($24.8125 per share), the RSUs had an aggregate value on that date of: $8,314,545; $3,710,660; $2,934,872; $1,501,528; and $1,733,352, respectively. This value may not represent the ultimate value of such RSUs to the employee or the company. Dividend equivalents are paid on the RSUs from the date of grant. See the Human Resources Committee Report for a discussion of vesting of these RSUs. 99
(3) All Other Compensation for 2000 includes the following items: (a) company contributions under our 401(k) savings plan, a defined contribution plan (Mr. Wittig, $5,044, Mr. Lake, $3,380, Mr. Koupal, $4,505, Mr. Grennan, $3,515, and Mr. Terrill, $5,100); (b) premiums paid on term life insurance policies (Mr. Wittig, Mr. Lake and Mr. Koupal, $853 each, Mr. Grennan, $688, and Mr. Terrill, $575); (c) imputed income on split dollar life insurance policies (Mr. Wittig, $40,852 and Mr. Koupal, $15,460); (d) value of shares received under our Stock for Compensation Program in lieu of compensation (Mr. Wittig, $440,220, Mr. Lake, $203,424, Mr. Koupal, $27,500, Mr. Grennan, $65,750, and Mr. Terrill, $30,901); and (e) $493,342 paid to Mr. Lake under the terms of a letter agreement entered into when he joined us. OPTIONS GRANTED IN LAST FISCAL YEAR Number of Securities Underlying % of Total Options Exercise or Options Granted # Granted to Employees Base Price Grant Date Name (1) in Fiscal Year ($/share) Expiration Date (1) Present Value (2) - ---- ----------------- --------------------- -------------- -------------------- ------------------- David C. Wittig 58,500 9.31% $15.3125 January 26, 2010 $125,190 Douglas T. Lake 9,000 1.43% $15.3125 January 26, 2010 $ 19,260 Carl M. Koupal, Jr. 9,000 1.43% $15.3125 January 26, 2010 $ 19,260 Thomas L. Grennan 6,000 0.96% $15.3125 January 26, 2010 $ 12,840 Richard D. Terrill 2,700 0.43% $15.3125 January 26, 2010 $ 5,778 (1) In 2000, current employees were offered the opportunity to exchange their stock options for RSUs of approximately equal economic value as determined by an independent compensation consultant. On September 1, 2000, each of the named executive officers elected to exchange the above-listed stock options for RSUs. (2) The grant date valuation was calculated using the Black-Scholes option pricing model, and assumptions called for by paragraph 19 and Appendix B of Financial Accounting Standard 123. This calculation does not necessarily follow the same method and assumptions that we use in valuing long term incentives for other purposes. Please refer to the Human Resources Committee Report for a description of the 1996 Long Term Incentive and Share Award Plan. January 26, 2010 ---------------- Annualized stock volatility: 26.45% Time of exercise (option term): 10 years Risk free interest rate: 4.88% Stock price at grant date and exercise price: $13.3125 Average dividend yield: 6.87% Vesting restrictions: 3 years * * One third of options were to become exercisable at each anniversary date for three years. RETIREMENT PLANS We maintain a qualified non-contributory defined benefit pension plan and a non-qualified supplemental retirement plan for certain of our management employees, including executive officers, who are selected by our Human Resources Committee of the Board of Directors. Benefits payable from the qualified pension plan are limited by provisions of the Internal Revenue Code of 1986, as amended (the "Code"). The non-qualified supplemental retirement plan provides for the payment of retirement benefits in addition to those provided under the qualified pension plan. 100
The following table sets forth the estimated annual benefits payable to the named executive officers upon specified remuneration based on age 65 as of January 1, 2001. The amounts presented do not take into account any reduction for joint and survivorship payments. ANNUAL PENSION BENEFIT FROM QUALIFIED AND NON-QUALIFIED PLANS Average Applicable Average Applicable Compensation Pension Benefit Compensation Pension Benefit ------------ --------------- ------------ --------------- $150,000 $ 92,550 $1,150,000 $709,550 $200,000 $123,400 $1,200,000 $740,400 $250,000 $154,250 $1,250,000 $771,250 $300,000 $185,100 $1,300,000 $802,100 $350,000 $215,950 $1,350,000 $832,950 $400,000 $246,800 $1,400,000 $863,800 $450,000 $277,650 $1,450,000 $894,650 $500,000 $308,500 $1,500,000 $925,500 $550,000 $339,350 $1,550,000 $956,350 $600,000 $370,200 $1,600,000 $987,200 $650,000 $401,050 $1,650,000 $1,018,050 $700,000 $431,900 $1,700,000 $1,048,900 $750,000 $462,750 $1,750,000 $1,079,750 $800,000 $493,600 $1,800,000 $1,110,600 $850,000 $524,450 $1,850,000 $1,141,450 $900,000 $555,300 $1,900,000 $1,172,300 $950,000 $586,150 $1,950,000 $1,203,150 $1,000,000 $617,000 $2,000,000 $1,234,000 $1,050,000 $647,850 $2,050,000 $1,264,850 $1,100,000 $678,700 $2,100,000 $1,295,700 The supplemental retirement plan provides a retirement benefit at or after age 65, or upon disability prior to age 65, in an amount equal to 61.7% of final three-year average cash compensation (including share awards under the Stock for Compensation Program) and annual incentive bonuses, reduced by the benefits under the qualified pension plan (but not social security benefits), such amount to be paid to the employee or his designated beneficiaries for the employee's life with a 15-year term certain. The percentage of final three-year average compensation to be paid commencing at age 65, before reduction for qualified pension plan benefits, is 50% for a person retiring at age 50 increasing to 61.7% at age 65. An employee retiring at or after age 50, but before age 65, may receive a reduced benefit, payable in the same form commencing prior to age 65. The age 65 benefits are reduced by 5% per year if commenced prior to age 60, but no earlier than age 50. The supplemental plan vests 10% per year after five years of service until fully vested with 15 years of service or at age 65. Under the qualified plan, full vesting occurs after 5 years of service. The supplemental plan also pays a death benefit if death occurs before retirement, equal to 50% of the employee's previous three year average compensation (or the vested retirement benefit percentage, whichever is higher) to his or her beneficiary for fifteen years following his or her death. All of the individuals listed in the compensation table are covered by the qualified and supplemental retirement plans. In the event of a change in control of the company, participants may be deemed to be 65 years of age as of the date of such change in control for purposes of vesting and benefits. The years of service as of January 1, 2001 for the named executive officers are as follows: Mr. Wittig, six years; Mr. Lake, two years; Mr. Koupal, nine years; Mr. Grennan, twenty-seven years; and Mr. Terrill, twenty-one years. SPLIT DOLLAR LIFE INSURANCE PROGRAM We established a split dollar life insurance program for our benefit and for the benefit of certain of our officers, including executive officers. Under the split dollar life insurance program, we purchase a life insurance 101
policy on the insured's life and, upon termination of the policy or the insured's death, the insured's beneficiary is entitled to a death benefit in an amount equal to the face amount of the policy reduced by the greater of (i) all premiums paid by us and (ii) the cash surrender value of the policy, which amount, at the death of the insured or termination of the policy, as the case may be, will be returned to us. We retain an equity interest in the death benefit and cash value of the policy to secure this repayment obligation. Subject to certain conditions, beginning on the earlier of (i) three years from the date of the policy or (ii) the first day of the calendar year next following the date of the insured's retirement, the insured is allowed to transfer to us from time to time, in whole or in part, his interest in the death benefit under the policy at a discount equal to $1 for each $1.50 of the portion of the death benefit for which the insured may designate the beneficiary, subject to adjustment if the participant does not retire within six months of the date of agreement based on the total return to shareowners from the date of the policy. Any adjustment would result in an exchange of no more than $1 for each $1 of death benefit nor less than $1 for each $2 of death benefit. At March 31, 2001, our liability under this program was approximately $19 million. The program has been designed such that upon the insured's death we will recover our premium payments from the policy and any amounts paid by us to the insured for the transfer of his interest in the death benefit. COMPENSATION OF DIRECTORS Each director who is not also our employee receives an annual cash retainer fee of $25,000, paid quarterly, an annual stock award of $18,500, and an annual restricted share unit award of $19,000. The restricted share unit award vests ratably over three years from the date of grant. The fee paid for attendance at each meeting held by the Board of Directors is $1,200 and $600 for each meeting held by telephone conference. The fee paid for attendance at each committee meeting is $1,000 and $600 for each meeting held by telephone conference. Directors are also reimbursed for expenses incurred by them which are incidental to attending meetings of the Board of Directors and committees of the Board of Directors. Pursuant to our Outside Directors' Deferred Compensation Plan (the "Deferred Compensation Plan"), an outside director may elect to defer all or a portion of his or her retainer and/or meeting fees. The Deferred Compensation Plan is a voluntary participation plan. The Deferred Compensation Plan is administered by the Human Resources Committee of our Board of Directors. In addition, an outside director may elect to have all or a portion of any cash fees paid in stock pursuant to the 1996 Long Term Incentive and Share Award Plan. HUMAN RESOURCES COMMITTEE REPORT The executive compensation programs of Western Resources, Inc. (the "Company") are administered by the Human Resources Committee of the Board of Directors (the "Committee"), which is composed of three non-employee directors. The Committee reviews and approves all issues pertaining to executive compensation. The objective of the Company's three compensation programs (base salary, short term incentive, and long term incentive) is to provide compensation which enables the Company to attract, motivate and retain talented and dedicated executives, foster a team orientation toward the achievement of business objectives, and directly link the success of our executives with that of our shareholders. The Company extends participation in its long term and short term incentive programs to certain key employees in addition to executive officers based on their potential to contribute to increasing shareholder value. In structuring the Company's compensation plans, the Committee takes into consideration Section 162(m) (which disallows the deduction of compensation in excess of $1,000,000 except for certain payments based upon performance goals) of the Internal Revenue Code and other factors the Committee deems appropriate. As a result, some of the compensation under the Company's compensation plans may not be deductible under Section 162(m). 102
Base Salary Compensation - ------------------------ A base salary range is established for each executive position to reflect the potential contribution of each position to the achievement of the Company's business objectives and to be competitive with the base salaries paid for comparable positions in the national market by diversified consumer services companies, with emphasis on electric energy and monitored security services with annual total revenues comparable to ours. Some, but not all, of such companies are included in the Standard & Poor's Electric Companies Index. The Company utilized industry information for compensation purposes. Not all companies comprising such index participate in making available such industry information. In addition, the Company considers information about other companies with which the Committee believes the Company competes for executives, but which are not part of such industry information. The mid-point for each base salary range is intended to approximate the average base salary for the relevant position in the national market. Industry surveys by national industry associations are the primary source of this market information. The Committee also utilizes the services of an independent compensation consultant to provide national market data for executive positions and to evaluate the appropriateness of the Company's executive compensation and benefit programs. Within the established base salary ranges, actual base salary is determined by the Company's financial performance in relation to attainment of specific goals, such as earnings-per-share and total return to shareholders, and a subjective assessment of each executive's achievement of individual objectives and managerial effectiveness. The Committee annually reviews the performance of the chairman of the board, president and chief executive officer and other executive officers. The Committee, after consideration of the Company's financial performance, and such other subjective factors as the Committee deemed appropriate for the period being reviewed, established the base compensation of such officers. In reviewing the annual achievement of each executive and setting the new base annual salary levels for 2000, the Committee considered each individual's contribution toward meeting the board-approved budgeted financial plan for the previous year, total return to shareholders, earnings per share, customer satisfaction, compliance with the Company's capital financial plan, the Company's budgets, the individual's management effectiveness and the individual's base compensation compared to the national market. Annual Incentive Compensation - ----------------------------- All executive officers are eligible for annual incentive compensation. The primary form of short term incentive compensation is the Company's Short Term Incentive Plan for employees selected by the Committee, including the named executive officers, who have an opportunity to directly and substantially contribute to the Company's achievement of short term objectives. Short term incentives are structured so that potential compensation is comparable with short term compensation granted to comparable positions in the national market. Short term incentives are targeted to approximate the median in the national market. Some, but not all, of such companies are included in the Standard & Poor's Electric Companies Index. Mr. Wittig was eligible for an annual short term incentive target of 90% of base salary. Other participants are eligible for annual short term incentive targets ranging from 15% to 80% of base salary. For executive officers 20% of the annual incentive is tied to the attainment of individual goals and management skills. The balance is based upon the Company's achievement of financial goals established annually by the Committee. Awards in excess of the targets may be payable if the financial goals set by the Committee are exceeded. The Committee may grant performance based awards to the chief executive officer and the other four most highly compensated officers of the Company who are or may be subject to Section 162(m) of the Code without being subject to the $1 million limitation or deductibility for federal income tax purposes. Changes in annual incentive compensation to the named executive officers in 2000 compared to 1999 resulted from an individual's relative attainment of his or her goals and our substantially exceeding our earnings per share and shareholder value goals. 103
Long Term Incentives - -------------------- Long term incentive compensation is offered to employees who are in positions which can affect the Company's long term success through the formation and execution of its business strategies. The Long Term Incentive and Share Award Plan (the "Plan") is the principal method for long term incentive compensation, and compensation thereunder currently takes the form of dividend equivalents and restricted share unit grants. The purposes of long term incentive compensation are to: (1) focus key employees' efforts on performance which will increase value of the Company to its shareholders; (2) align the interests of management with those of the Company's shareholders; (3) provide a competitive long term incentive opportunity; and (4) provide a retention incentive for key employees. The Plan has been established to advance the Company's interests and its shareholders by providing a means to attract, retain, and motivate employees and directors upon whose judgment, initiative and effort the Company's continued success, growth, and development is dependent. All non-union employees are eligible for grants under the Plan. Under the Plan, stock based awards are provided to such participants and in such amounts as the Committee deems appropriate. The number and form of awards vary on the basis of position and pay grade. The level of total compensation for similar executive positions in companies considered comparable by the Committee was used as a reference in establishing the level of dividend equivalents and restricted share units for the Company's executives. The use of restricted share units and stock grants as a significant component of compensation creates a strong and direct linkage between the financial outcomes of the employees and the shareholders. Dividend equivalents are also granted. The value of a single dividend equivalent is equal to the dividends that would have been paid or payable on a share from the date of grant. Restricted share units require the continued employment of the executive for four years unless the executive's employment terminates due to retirement, death, disability, termination without cause by us, for good reason by the executive or a change in control of the Company. Dividends are paid on the restricted share units from the date of grant. In April 1999, the Committee adopted a Stock for Compensation Program which allows the Company's executive officers and other key employees to receive up to a specified percentage of base compensation in the form of restricted share units. The percentage of base compensation allowed to be paid in restricted share units ranges from approximately 5% to approximately 60% depending on the salary of the individual. Restricted share units are valued based upon 85% of the closing price for the Company's common stock on the date of grant. Dividend equivalents are paid on such restricted share units. In 2000, Mr. Wittig elected to receive approximately 60% of his base compensation in restricted share units under the program. In addition, during 2000 the Committee allowed all current employees to exchange outstanding stock options and dividend equivalents for restricted share units with approximately equal value as determined by an independent compensation consultant. The named executive officers exchanged 605,625 stock options with dividend equivalents for 161,398 restricted share units. Of these, Mr. Wittig exchanged 360,500 stock options for 96,895 restricted share units. These restricted share units vest ratably over a three year period. In the event of a change in control, stock options, dividend equivalents and restricted shares may accelerate and vest with performance criteria deemed satisfied. Chief Executive Officer - ----------------------- Mr. Wittig's base salary and his annual short term incentive compensation are established annually. In recommending the base salary to be effective July 1, 2000, while not utilizing any specific performance formula and without ranking the relative important of each factor, the Committee took into account relevant salary information in the national market and the Committee's subjective evaluation of Mr. Wittig's overall management effectiveness in his position as Chairman of the Board, President and Chief Executive Officer of the Company and his achievement of individual goals. Factors considered included his continuing leadership of the Company and his contribution to strategic direction, management of change in an increasingly competitive environment, management of operations, and the overall productivity of the Company. The Committee also took into account the recommendations made by 104
an independent compensation consultant. Mr. Wittig's base salary, including compensation received under the Stock for Compensation Program, was not changed in 2000. With respect to Mr. Wittig's 2000 short term incentive compensation, the Committee took into account the above performance factors and the Company substantially exceeding its earnings per share and shareholder value goals. The long term incentive compensation of Mr. Wittig included stock options, dividend equivalents and restricted share units granted based upon the factors described under Long Term Incentives above. Western Resources, Inc. Human Resources Committee Frank J. Becker, Gene A . Budig Chairman John C. Dicus EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS We have entered into employment agreements with the named executive officers and one other officer, each of which contains change in control provisions, and change in control agreements with other officers and key employees. The agreements have three year terms with an automatic extension of one year on each anniversary, unless prior notice is given by the officer or by us. The agreements are intended to insure the officers' continued service and dedication to us and to ensure their objectivity in considering on our behalf any transaction which would result in a change in control of the Company. Under the employment agreements, an officer is entitled to benefits, if his or her employment is terminated by us other than for Cause or upon death, disability, or retirement; or by the officer for Good Reason, each as defined in the agreements. Under the change in control agreements, benefits are provided for such termination only if it occurs within two years of a change in control. Under the employment agreements, benefits would also be provided if the officer were to terminate his or her employment, regardless of the reason, within 90 days of a change in control or if, in connection with a change in control, the officer were to leave our employ and become an employee of a former subsidiary which is then a separate, publicly-traded company. A termination that would result in payments becoming payable is referred to as "Qualifying Termination." For a discussion of the pending acquisition of us by PNM and a proposed separation of our electric utility and non-electric utility businesses, see Note 2 to Notes to Consolidated Financial Statements. The employment agreements provide for annual salaries at the executive's base salary on September 19, 2000, the date of the agreements, with annual reviews by the Board of Directors, and participation in all employee benefit and incentive plans, programs and perquisites offered to our senior executives and reimbursement of business expenses. In addition to performing their duties, the executives have also agreed to keep certain company information confidential, not to solicit certain employees to leave our employ, and not to disparage us or our representatives. Upon a Qualifying Termination, we, or our successor, must make a lump-sum cash payment to the officer, in addition to any other compensation to which the officer is entitled, of two (2.99 in the case of certain officers, including the named executive officers) times the higher of such officer's base salary and 90% of the position's job value ("Adjusted Salary"); two (2.99 in the case of certain officers, including the named executive officers) times the higher of the highest bonus paid to such officer for the last three fiscal years and the officer's target bonus ("Bonus Amount"); and for officers not participating in our executive salary continuation plan, the actuarial equivalent of the excess of the officer's accrued pension benefits, computed as if the officer had two additional years of benefit accrual service, over the officer's vested accrued pension benefits utilizing the officer's current salary without regard for any salary limits imposed for qualified pension plans. In addition, we must offer health, disability and life insurance coverage to the officer and his or her dependents on the same terms and conditions that existed immediately prior to the termination for two (three in the case of certain officers, including the named executive officers) years, or, if earlier, until such officer is covered by equivalent benefits, continuation of financial and legal counseling services, participation in our matching gift 105
program for two (three in the case of certain officers, including the named executives) additional years, and outplacement services. The employment agreements also provide for additional payments, if required, to make the individuals whole for any excise tax imposed under Section 4999 of the Internal Revenue Code, to pay certain relocation costs within eighteen months of the officer's termination of employment, and provision of retiree medical benefits. In the event of a Qualifying Termination, dividend equivalents, restricted share units and other stock based incentives or compensation accelerate and vest and restrictions or performance criteria lapse. Our Executive Salary Continuation Plan described under "Annual Pension Benefit from Qualified and Non-Qualified Plans" provides supplemental retirement benefits to designated participants, including the named executive officers. The plan provides in the event of a change in control, all active participants in the plan will be deemed to be 65 years of age for purposes of determining the maximum percentage of retirement benefits and 100% vesting of such benefits with benefits commencing not earlier than age 50. The employment agreements for six executive officers, including the named executive officers, provides that full benefits under the plan shall commence immediately upon a Qualifying Termination and shall be calculated using the officer's Adjusted Salary and Bonus Amount. Under the employment agreements, if the officer is entitled to benefits under any split dollar life insurance agreement, a Qualifying Termination will result in the vesting of the base amount benefit (as defined in the split dollar agreement) under the program. Upon a Qualifying Termination, benefits payable under the split dollar life insurance program are required to be deposited into a rabbi trust. In addition, any unvested deferred compensation will be fully vested and, with respect to Mr. Terrill's benefits under deferred compensation agreements with KGE, the present value of such benefits are payable upon a Qualifying Termination. "Cause" is defined as the willful and continued failure to perform substantially his or her duties or the willful engaging in illegal conduct demonstrably and materially injurious to us. "Good Reason" is defined as any material and adverse change in the executive's position or responsibilities; a reduction in base salary, annual target bonus opportunity or targeted long term incentive value; relocation; reduction in benefits; or termination of the agreement. Mr. Lake's agreement with us relating to his initial employment provides for a payment of $1 million on September 15, 2002 if he remains in our employ or is terminated by us without Cause or by Mr. Lake for Good Reason. Upon a Qualifying Termination, this payment will become due on the date of termination. 106
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following information is furnished with respect to the beneficial owners of more than 5% of our common stock as of April 26, 2001. Name and Address of Beneficial Owner Amount and Nature of Beneficial Ownership Percent of Class - ------------------------------------ ----------------------------------------- ---------------- Westar Industries, Inc. (1) 14,368,996 shares 20.4% (2) 818 S. Kansas Avenue Topeka, KS 66612 OZ Management, LLC (3) 7,678,000 shares 9.1% 9 West 57th Street, 39th Floor New York, NY 10019 Wallace R. Weitz and Company (4) 5,174,300 shares 7.4% 1125 S. 103rd Street, Suite 600 Omaha, NE 68124-6008 (1) Westar Industries, Inc. ("Westar") is our wholly-owned subsidiary. We have shared investment power with respect to, and are deemed under Rule 13d-3 of the Securities Exchange Act of 1934, as amended, to beneficially own these shares. Under Kansas law, the shares held by Westar are non-voting shares as long as Westar remains our subsidiary. (2) The percent is calculated pursuant to Section 13(d)(4) of the Securities Exchange Act which excludes shares held by the issuer or any subsidiary from outstanding shares. The percent is 16.9% if the shares held by Westar Industries, Inc. are included in outstanding shares. (3) As reported in a Schedule 13G filing with the Securities and Exchange Commission on April 25, 2001. (4) As reported in a Schedule 13G/A filing with the Securities and Exchange Commission on February 2, 2001. Change Of Control Pursuant to an agreement entered into on November 8, 2000, by Public Service Company of New Mexico ("PNM") and us, PNM will acquire our electric utility businesses in a stock for stock transaction. Under the terms of the agreement, both we and PNM will become subsidiaries of a new holding company. The agreement is subject to shareholder and regulatory approvals and other conditions to closing. For a discussion of this transaction see Note 2 to Notes to Consolidated Financial Statements. SECURITY OWNERSHIP OF MANAGEMENT The following information is furnished with respect to each of our current directors and named executive officers individually, and with respect to our current directors and executive officers as a group, as to ownership of shares of our common stock, and the common stock of Protection One, Inc. ("Protection One"), our indirect subsidiary, as of March 31, 2001. Amount and Nature of Amount and Nature of Beneficial Ownership of Percentage of Beneficial Ownership of Name of Beneficial Owner Western Resources Stock (1) Ownership Protection One Stock (2) - ------------------------ --------------------------- --------- ------------------------ Frank J. Becker 31,568 (3) (4) 26,500 (5) Gene A. Budig 8,630 (4) 0 Charles Q. Chandler, IV 2,661 (4) 2,222 (6) John C. Dicus 6,255 (7) (4) 0 Thomas L. Grennan 97,911 (8) (4) 0 Carl M. Koupal, Jr. 175,320 (8) (4) 0 Douglas T. Lake 274,423 (8) (4) 0 107
Owen F. Leonard 22,359 (4) 0 John C. Nettels, Jr. 4,017 (9) (4) 10,500 (6)(9) Louis W. Smith 14,944 (4) 0 Richard D. Terrill 109,891 (8)(10) (4) 0 David C. Wittig 757,299 (8)(11) 1.08% 0 All directors and executive officers as a group (14 individuals) 1,595,439 (12) 2.28% 39,222 (13) (1) No director or executive officer owns any of our equity securities other than our common stock. Includes beneficially owned shares held in employee savings plans and shares deferred under the Long Term Incentive and Share Award Plan, the Stock for Compensation Program, and the Outside Directors' Deferred Compensation Plan. (2) Each individual and the group owns less than one percent of the outstanding shares of Protection One's common stock. No director or executive officer owns any equity securities of Protection One other than Protection One's common stock. (3) Includes 3,400 shares held in trusts, of which Mr. Becker is a co-trustee with voting and investment power and excludes stock held in trust by Douglas County Bank, of which Mr. Becker is a director. (4) Owns less than one percent of the outstanding shares of our common stock. (5) Includes 5,000 shares held in a trust in which Mr. Becker has shared investment and voting power. (6) Includes stock options exercisable currently or within sixty days: Mr. Chandler, 2,222 shares; and Mr. Nettels, 7,500 shares. (7) Includes 500 shares held by Mr. Dicus' spouse, not subject to his voting or investment power. (8) Includes RSUs as follows: Mr. Grennan, 83,333; Mr. Koupal, 160,051; Mr. Lake, 207,625; Mr. Terrill, 101,604; Mr. Wittig, 444,320; and 80,192 RSUs granted to other executive officers in the group. (9) Includes 500 shares held in a trust in which Mr. Nettels has shared investment and voting power. (10) Includes 17 shares held by Mr. Terrill's son, not subject to his voting or investment power. (11) Includes 31,080 shares held by Mr. Wittig's spouse, not subject to his voting or investment power. (12) Includes shares referred to in items (1), (3) and (7) through (11) above. (13) Includes shares referred to in items (2), (5), (6) and (9) above. 108
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- TRANSACTIONS BETWEEN WESTAR INDUSTRIES, INC. ("WESTAR") AND THE COMPANY Westar has entered into an asset allocation and separation agreement (the "allocation agreement") with us that provides for the allocation of assets and liabilities between us and Westar. The allocation agreement divides non-tax assets and liabilities substantially on a corporate organizational basis such that the assets and liabilities of Westar and its subsidiaries (as reflected on its balance sheet) will remain assets and liabilities of Westar and its subsidiaries and our assets and liabilities and our subsidiaries (other than Westar and its subsidiaries) will remain assets and liabilities of ours. Tax assets and liabilities are not treated in the allocation agreement, but rather are addressed in a separate tax disaffiliation agreement (which is described below). Certain additional assets and liabilities relating to the unregulated business will be transferred from us to Westar, including certain smaller companies, certain legal claims, and certain interests in leased facilities. Westar will also assume liability for any discontinued non-utility operations from and after January 1, 1995. We will retain all liabilities associated with our former gas business and electric utility business, including any marketing and other related service businesses. The allocation agreement also provides the terms for repayment of a receivable in the amount of approximately $117.6 million at March 31, 2001 owed to Westar by us. The receivable will be increased by additional cash advances by Westar to us, including the advance of the net proceeds of the rights offering. Immediately prior to the closing of the PNM merger, Westar will elect to convert the then outstanding balance of the receivable into: (1) our convertible preference stock; (2) shares of Westar's common stock currently held by us at a price based on the average market prices for the 20 trading days preceding conversion, but not less than the subscription price for the rights offering or (3) shares of our common stock at a price based on the average market prices for the 20 trading days preceding conversion. On February 28, 2001, Westar converted $350 million of the then outstanding balance of the receivable into approximately 14.4 million shares of our common stock, representing approximately 17% of our outstanding common stock. Under the allocation agreement, immediately prior to the closing of the PNM merger, we will split-off our then interest in Westar to our shareholders. Prior to the split-off, Westar and we will enter into a tax disaffiliation agreement, which will set forth each party's rights and obligations with respect to payments and refunds, if any, of federal taxes for periods before and after the split-off and related matters such as the filing of federal tax returns and the conduct of audits or other proceedings involving claims made by the Internal Revenue Service. This agreement will remain in force for the full period of any statute of limitations. Under the tax disaffiliation agreement, Westar will assume sole responsibility of any (i) tax liability assessed to the extent attributable to Westar or any corporation that will be a member of the consolidated group of which Westar is the common parent immediately after the distribution (the "Westar Group") and (ii) tax liability resulting from the breach by Westar or any member of the Westar Group of certain representations and covenants that Westar has provided to us relating to the distribution. An indemnity arises under the tax disaffiliation agreement only to the extent that the tax liability results in a cash payment to a tax authority. We will provide management and administrative services to Westar under a shared services agreement which will be entered into immediately following the closing of the proposed rights offering. This agreement may be terminated by giving one year's notice, which following the closing of the PNM merger may not be given prior to the first anniversary of the closing of the PNM merger. The services to be provided by us, through our employees, will include financial reporting, accounting, legal, auditing, tax, office services, payroll and human resources, as well as management consulting services. Westar will pay us for these services at various hourly charges and negotiated fees and will reimburse us for out-of-pocket expenses. Westar will enter into a stock purchase option agreement with us that will grant Westar an option to purchase our interest in an electric power plant near Joplin, Missouri under joint development with the Empire District Electric Company. The plant is scheduled to commence operations in June 2001. Our interest in the power plant is held by Westar Generating, Inc. ("Westar Generating"), our subsidiary. The purchase option granted is for a period of three years from execution, subject to two optional one-year extension periods. 109
Westar may extend loans, or guarantee payment of loans being extended by a bank or other lender, in an aggregate amount not to exceed $20 million for the purchase of shares of its common stock upon the exercise of rights by its officers and directors and certain of our officers and directors. TRANSACTIONS BETWEEN WESTAR AND OUR SUBSIDIARIES Pursuant to a contribution agreement between Protection One, Inc. ("Protection One") and us, we have agreed to certain arrangements relating to the election of directors of Protection One. In addition, during the 10-year period following November 24, 1997, a merger or a sale of all or substantially all of the assets of Protection One involving us or any of our affiliates generally will require the prior approval of a majority of the "Independent Directors" (as defined in the contribution agreement), and we may not acquire more than 85% of the outstanding shares of common stock or other voting securities of Protection One except under specified circumstances and subject to specified limitations. On February 29, 2000, Protection One sold its European operations and certain investments to Westar. The consideration received was approximately $244 million, comprised of approximately $183 million in cash and certain outstanding debt securities of Protection One Alarm Monitoring, Inc. ("Monitoring"), a wholly owned subsidiary of Protection One, with a market value of approximately $61 million. Westar paid approximately $102 million for the aggregate of approximately $76 million of Monitoring's debt securities paid to Protection One. During 1998, Protection One paid an aggregate of approximately $228.5 million for the European operations and other investments subsequently sold to Westar. Westar agreed to pay Protection One a portion of the net gain, if any, on a subsequent sale of the business on a declining basis over the four years following the date of the Purchase Agreement. Based on the recommendation of a special committee of the Board of Directors, the sale of Protection One's European operations was approved by the Protection One Board of Directors, excluding Carl M. Koupal, Jr. and Douglas T. Lake. The special committee, comprised of Maria de Lourdes Duke, Ben M. Enis and James Q. Wilson, received a fairness opinion from an investment banker with regard to the sale of the European operations. Protection One had outstanding borrowings under its Senior Credit Facility with Westar of $44 million on December 31, 2000. Protection One used the $183 million in cash proceeds from the sale of its European operations to reduce outstanding borrowings under the facility. For the year ended December 31, 2000, interest expense of $7.6 million was accrued on borrowings from the facility and total interest payments of $8.1 million were made. In December 2000, the Senior Credit Facility was amended to extend the maturity date from January 2, 2001 to March 2, 2001 and to increase the interest rate to reflect current market conditions. On February 28, 2001, the Senior Credit Facility was further amended, among other things, to further extend the maturity date to January 2, 2002. In connection with the amendments, Protection One paid Westar a $1.15 million amendment fee. A tax sharing agreement between Protection One and us provides for our payment to Protection One for tax benefits utilized by us. Accordingly, a receivable balance of $3.2 million at December 31, 2000, from us reflects a portion of the tax benefit that will be utilized by us on our 2000 consolidated income tax return. During 2000, Protection One received $20.3 million and $28.6 million from us under the tax sharing agreement for the tax years 1998 and 1999, respectively. The $20.3 million payment, together with a payment for an intercompany receivable of $8.9 million, was comprised of certain of Monitoring's debt securities that Westar had acquired with a market value of approximately $15 million and a promissory note in the principal amount of approximately $14.2 million, payable in cash or the delivery of certain of Monitoring's debt securities. Protection One received from Westar certain of Monitoring's debt securities with a market value of approximately $13.8 million as payment against the promissory note and the balance of the note was repaid in cash in 2000. Protection One acquired 5,152,113 shares of its common stock from Westar in 2000 for a combined cost of $3.4 million, which maintained Westar' proportionate ownership interest of the Protection One's common stock after Protection One acquired 1,674,700 shares of its common stock in open market transactions. During the first quarter of 2001, Protection One purchased 11,532,104 shares of its common stock from Westar for $12.6 million after Protection One acquired 2,180,600 shares of its common stock for $2.4 million in open market transactions. Protection One purchased from Westar $37.6 million face value of Monitoring's debt securities for $25 million during 2000. The original cost of the debt securities to Westar was $21.5 million. During the first quarter of 2001, Protection One purchased from Westar $66.1 million face value of Monitoring's debt securities for $45.2 110
million. The original cost of the debt securities to Westar was $45.6 million. The prices paid by Protection One for the debt securities were established by the Board of Directors of Protection One so as not to exceed the ten day average of the market price for such securities as quoted by a reputable New York broker who makes a market in the debt securities. Protection One relied on these quotes in order to meet the guidelines set by the Protection One Board of Directors in establishing the purchase prices. Protection One is a party to a service agreement with us. Pursuant to this agreement, we provide administrative services including accounting, human resources, legal, facilities and technology services. Protection One incurred charges of approximately $7.3 million for the year ended December 31, 2000, which were based upon various hourly charges, negotiated fees and out-of-pocket expenses. At December 31, 2000, Protection One had a net intercompany balance due to us of $1.2 million for these services. From January 1, 2001 through March 31, 2001, Protection One purchased 13,712,704 million shares of its outstanding common stock pursuant to its share repurchase program. Concurrently with these open market purchases, Protection One purchased 11,532,104 million shares from Westar for $12.6 million, at the same prices as the market purchases. Protection One was a party to a marketing agreement with Paradigm Direct LLC ("Paradigm") which was terminated as of September 30, 2000. Westar had a 40% ownership interest in Paradigm. Protection One expensed $4.3 million for the year ended December 31, 2000, for marketing services provided by Paradigm pursuant to the marketing agreement. Protection One has entered into a lease agreement with us for the use of office space owned or leased by us. During 2000, we billed Protection One approximately $325,000 for office space under this agreement. Protection One compensates Westar Aviation, Inc. ("Westar Aviation"), a wholly owned subsidiary of Westar, for the use of corporate aircraft. During 2000, Westar Aviation billed Protection One approximately $110,000 for aircraft use. 111
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- The following financial statements are included herein. FINANCIAL STATEMENTS - -------------------- Report of Independent Public Accountants Consolidated Balance Sheets, December 31, 2000 and 1999 Consolidated Statements of Income, for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Comprehensive Income, for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows, for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Shareholders' Equity, for the years ended December 31, 2000, 1999, and 1998 Notes to Consolidated Financial Statements SCHEDULES - --------- Schedule II - Valuation and Qualifying Accounts Schedules omitted as not applicable or not required under the Rules of regulation S-X: I, III, IV, and V REPORTS ON FORM 8-K - ------------------- Form 8-K filed November 17, 2000 - Announcement of merger agreement between Public Service Company of New Mexico and Western Resources. Form 8-K filed November 27, 2000 - Press release announcing that Western Resources. and KGE filed separate requests with the KCC seeking recovery of investments in new power plants and higher operating and maintenance costs. 112
EXHIBIT INDEX All exhibits marked "I" are incorporated herein by reference. All exhibits marked by an asterisk are management contracts or compensatory plans or arrangements required to be identified by Item 14(a)(3) of Form 10-K. Description ----------- 2(a) -Agreement and Plan of Restructuring and Merger, dated as of November 8, I 2000 among the Company, Public Service Company of New Mexio, HVOLT Enterprises, Inc., HVK, Inc. and HVNM, Inc. (filed as Exhibit 99.1 to the November 17, 2000 Form 8-K) 3(a) -By-laws of the company, as amended March 16, 2000 (filed as Exhibit 3(a) to December 1999 Form 10-K) I 3(b) -Restated Articles of Incorporation of the company, as amended I through May 25, 1988 (filed as Exhibit 4 to Registration Statement, SEC File No. 33-23022) 3(c) -Certificate of Amendment to Restated Articles of Incorporation I of the company dated March 29, 1991. 3(d) -Certificate of Designations for Preference Stock, 8.5% Series, I without par value, dated March 31, 1991 (filed as exhibit 3(d) to December 1993 Form 10-K) 3(e) -Certificate of Correction to Restated Articles of Incorporation I of the company dated December 20, 1991 (filed as exhibit 3(b) to December 1991 Form 10-K) 3(f) -Certificate of Designations for Preference Stock, 7.58% Series, I without par value, dated April 8, 1992 (filed as exhibit 3(e) to December 1993 form 10-K) 3(g) -Certificate of Amendment to Restated Articles of Incorporation I of the company dated May 8, 1992 (filed as exhibit 3(c) to December 31, 1994 Form 10-K) 3(h) -Certificate of Amendment to Restated Articles of Incorporation I of the company dated May 26, 1994 (filed as exhibit 3 to June 1994 Form 10-Q) 3(i) -Certificate of Amendment to Restated Articles of Incorporation I of the company dated May 14, 1996 (filed as exhibit 3(a) to June 1996 Form 10-Q) 3(j) -Certificate of Amendment to Restated Articles of Incorporation I of the company dated May 12, 1998 (filed as exhibit 3 to March 1998 Form 10-Q) 3(k) -Form of Certificate of Designations for 7.5% Convertible Preference Stock I (filed as Exhibit 99.4 to November 17, 2000 Form 8-K). 4(a) -Deferrable Interest Subordinated Debentures dated November 29, I 1995, between the company and Wilmington Trust Delaware, Trustee. (filed as Exhibit 4(c) to Registration Statement No. 33-63505) 4(b) -Mortgage and Deed of Trust dated July 1, 1939 between the Company I and Harris Trust and Savings Bank, Trustee. (filed as Exhibit 4(a) to Registration Statement No. 33-21739) 4(c) -First through Fifteenth Supplemental Indentures dated July 1, I 1939, April 1, 1949, July 20, 1949, October 1, 1949, December 1, 1949, October 4, 1951, December 1, 1951, May 1, 1952, October 1, 1954, September 1, 1961, April 1, 1969, September 1, 1970, February 1, 1975, May 1, 1976 and April 1, 1977, respectively. (filed as Exhibit 4(b) to Registration Statement No. 33-21739) 4(d) -Sixteenth Supplemental Indenture dated June 1, 1977. (filed as I Exhibit 2-D to Registration Statement No. 2-60207) 4(e) -Seventeenth Supplemental Indenture dated February 1, 1978. I (filed as Exhibit 2-E to Registration Statement No. 2-61310) 113
4(f) -Eighteenth Supplemental Indenture dated January 1, 1979. (filed I as Exhibit (b) (1)-9 to Registration Statement No. 2-64231) 4(g) -Nineteenth Supplemental Indenture dated May 1, 1980. (filed as I Exhibit 4(f) to Registration Statement No. 33-21739) 4(h) -Twentieth Supplemental Indenture dated November 1, 1981. (filed I as Exhibit 4(g) to Registration Statement No. 33-21739) 4(i) -Twenty-First Supplemental Indenture dated April 1, 1982. (filed I as Exhibit 4(h) to Registration Statement No. 33-21739) 4(j) -Twenty-Second Supplemental Indenture dated February 1, 1983. I (filed as Exhibit 4(i) to Registration Statement No. 33-21739) 4(k) -Twenty-Third Supplemental Indenture dated July 2, 1986. I (filed as Exhibit 4(j) to Registration Statement No. 33-12054) 4(l) -Twenty-Fourth Supplemental Indenture dated March 1, 1987. I (filed as Exhibit 4(k) to Registration Statement No. 33-21739) 4(m) -Twenty-Fifth Supplemental Indenture dated October 15, 1988. I (filed as Exhibit 4 to the September 1988 Form 10-Q) 4(n) -Twenty-Sixth Supplemental Indenture dated February 15, 1990. I (filed as Exhibit 4(m) to the December 1989 Form 10-K) 4(o) -Twenty-Seventh Supplemental Indenture dated March 12, 1992. I (filed as exhibit 4(n) to the December 1991 Form 10-K) 4(p) -Twenty-Eighth Supplemental Indenture dated July 1, 1992. I (filed as exhibit 4(o) to the December 1992 Form 10-K) 4(q) -Twenty-Ninth Supplemental Indenture dated August 20, 1992. I (filed as exhibit 4(p) to the December 1992 Form 10-K) 4(r) -Thirtieth Supplemental Indenture dated February 1, 1993. I (filed as exhibit 4(q) to the December 1992 Form 10-K) 4(s) -Thirty-First Supplemental Indenture dated April 15, 1993. I (filed as exhibit 4(r) to Registration Statement No. 33-50069) 4(t) -Thirty-Second Supplemental Indenture dated April 15, 1994, I (filed as Exhibit 4(s) to the December 31, 1994 Form 10-K) 4(v) -Thirty-Fourth Supplemental Indenture dated June 28, 2000 4(w) -Debt Securities Indenture dated August 1, 1998. I (filed as Exhibit 4.1 to the June 30, 1998 Form 10-Q) 4(x) -Form of Note for $400 million 6.25% Putable/Callable Notes due I August 15, 2018, Putable/Callable August 15, 2003 (filed as Exhibit 4.2 to the June 30, 1998 Form 10-Q) Instruments defining the rights of holders of other long-term debt not required to be filed as exhibits will be furnished to the Commission upon request. 10(a) -Long-Term Incentive and Share Award Plan. (filed as Exhibit I 10(a) to the June 1996 Form 10-Q)* 10(b) -Form of Employment Agreements with Messers. Grennan, Koupal, Lake, Terrill, Wittig and Ms. Sharpe.* 10(c) -A Rail Transportation Agreement among Burlington Northern I Railroad Company, the Union Pacific Railroad Company and the 114
Company. (filed as Exhibit 10 to the June 1994 Form 10-Q) 10(d) -Agreement between the Company and AMAX Coal West Inc. I effective March 31, 1993. (filed as Exhibit 10(a) to the December 31, 1993 Form 10-K) 10(e) -Agreement between the Company and Williams Natural Gas Company I dated October 1, 1993. (filed as Exhibit 10(b) to the December 31, 1993 Form 10-K) 10(f) -Deferred Compensation Plan (filed as Exhibit 10(i) to the I December 31, 1993 Form 10-K)* 10(g) -Short-term Incentive Plan (filed as Exhibit 10(k) to the I December 31, 1993 Form 10-K)* 10(h) -Outside Directors' Deferred Compensation Plan (filed as Exhibit I 10(l) to the December 31, 1993 Form 10-K)* 10(i) -Executive Salary Continuation Plan of Western Resources, Inc., I as revised, effective September 22, 1995. (filed as Exhibit 10(j) to the December 31, 1995 Form 10-K)* 10(j) -Letter Agreement between the company and David C. Wittig, I dated April 27, 1995. (filed as Exhibit 10(m) to the December 31, 1995 Form 10-K)* 10(k) -Form of Shareholder Agreement between New ONEOK and the I company. (filed as Exhibit 99.3 to the December 12, 1997 Form 8-K) 10(l) -Form of Split Dollar Insurance Agreement (filed as Exhibit 10.3 I to the June 30, 1998 Form 10-Q)* 10(m) -Amendment to Letter Agreement between the company and David C. I Wittig, dated April 27, 1995 (filed as Exhibit 10 to the June 30, 1998 Form 10-Q/A)* 10(n) -Letter Agreement between the company and Douglas T. Lake, dated I August 17, 1998.* 10(o) -Form of Change of Control Agreement with officers of the company* 10(p) -Amendment to Outside Directors' Deferred Compensation Plan dated May 17, 2001.* 10(q) -Asset Allocation and Separation Agreement, dated as of November 8, 2000, I between the Company and Westar Industries, Inc. (filed as Exhibit 99.2 to the November 17, 2000 Form 8-K) 12 -Computation of Ratio of Consolidated Earnings to Fixed Charges. 21 -Subsidiaries of the Registrant. 23 -Consent of Independent Public Accountants, Arthur Andersen LLP 115
WESTERN RESOURCES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Dollars in Thousands) Balance at Charged to Charged to Balance Beginning Costs and Other at End Description of Period Expenses Accounts(a) Deductions of Period - ----------- --------- -------- ----------- ---------- --------- Year ended December 31, 1998 Allowances deducted from assets for doubtful accounts........ $ 8,391 $24,726 $2,289 $ (5,862) $29,544 Monitored services special charge (a).......................... 3,856 - - (2,831) 1,025 Accrued exit fees, change in estimate, shut-down and severance costs (b)........................... - 22,900 - - 22,900 Year ended December 31, 1999 Allowances deducted from assets for doubtful accounts........ 29,544 24,302 - (18,081) 35,765 Monitored services special charge (a).......................... 1,025 - - (1,025) - Accrued exit fees, shut-down and severance costs (b)............. 22,900 (5,632) - (16,888) 380 Year ended December 31, 2OOO Allowances deducted from assets for doubtful accounts........ 35,765 23,690 - (13,639) 45,816 Accrued exit fees, shut-down and severance costs................. 380 - - - 380 (a) Consists of costs to close duplicate facilities and severance and compensation benefits. (b) See Note 17 of Notes to the Consolidated Financial Statements for further information. 116
SIGNATURE --------- Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTERN RESOURCES, INC. Date April 30, 2001 By /s/ DAVID C. WITTIG - ------------------- --------------------------------------- David C. Wittig, Chairman of the Board, President and Chief Executive Officer 117
SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- DAVID C. WITTIG Chairman of the Board, April 30, 2001 - ---------------------------------- President and Chief (David C. Wittig) Executive Officer (Principal Executive Officer) JAMES A. MARTIN Senior Vice President April 30, 2001 - ---------------------------------- and Treasurer (James A. Martin) (Principal Financial and Accounting Officer) FRANK J. BECKER Director April 30, 2001 - ---------------------------------- (Frank J. Becker) GENE A. BUDIG Director April 30, 2001 - ---------------------------------- (Gene A. Budig) CHARLES Q. CHANDLER, IV Director April 30, 2001 - ---------------------------------- (Charles Q. Chandler, IV) JOHN C. DICUS Director April 30, 2001 - ---------------------------------- (John C. Dicus) DOUGLAS T. LAKE Director April 30, 2001 - ---------------------------------- (Douglas T. Lake) OWEN F. LEONARD Director April 30, 2001 - ---------------------------------- (Owen F. Leonard) JOHN C. NETTELS, JR. Director April 30, 2001 - ---------------------------------- (John C. Nettels, Jr.) LOUIS W. SMITH Director April 30, 2001 - ---------------------------------- (Louis W. Smith) 118
================================================================================ WESTERN RESOURCES, INC. TO HARRIS TRUST AND SAVINGS BANK as Trustee ------------------ THIRTY-FOURTH SUPPLEMENTAL INDENTURE Dated as of June 28, 2000 ================================================================================
TABLE OF CONTENTS/a/ ----------------- Page ---- Parties.......................................................................................................1 Recitals......................................................................................................1 Granting Clause...............................................................................................3 Habendum......................................................................................................5 Exceptions and Reservations...................................................................................5 Grant in Trust................................................................................................6 General Covenant..............................................................................................6 ARTICLE I DESCRIPTION OF BONDS OF THE 2003 SERIES SECTION 1. General Description of Bonds of the 2003 Series...........................................6 SECTION 2. Denominations of Bonds of the 2003 Series and privilege of exchange.......................7 SECTION 3. Form of Bonds of the 2003 Series..........................................................7 SECTION 4. Execution and Form of Temporary Bonds of the 2003 Series.................................11 ARTICLE II ISSUE OF BONDS OF THE 2003 SERIES SECTION 1. Limitations as to principal amount.......................................................12 SECTION 2. Execution and Delivery of Bonds of the 2003 Series.......................................12 a Note: The Table of Contents is not part of this Supplemental Indenture and should not be considered as such. It is included only for purposes of convenience. -i-
ARTICLE III REDEMPTION SECTION 1. Bonds of the 2003 Series are redeemable prior to maturity only upon a demand therefor by the Collateral Agent.............................................................................12 SECTION 2. Article VIII of Original Indenture Controlling..................................................12 SECTION 3. Article V of Original Indenture Controlling.....................................................13 SECTION 4. Bonds redeemed may be used to authenticate any deliver additional Bonds under Original Indenture...........................................................................13 ARTICLE IV ADDITIONAL COVENANTS SECTION 1. Title to mortgaged property.....................................................................13 SECTION 2. To retire certain portions of Bonds upon release of all or substantially all of the electric properties...................................................................................13 ARTICLE V AMENDMENTS TO RATIO OF BONDS ISSUABLE TO PROPERTY ADDITIONS AND OF CERTAIN OTHER RATIOS. AMENDMENT OF NET EARNINGS TEST. USE OF FACSIMILE SIGNATURES. AMENDMENT OF ARTICLE XV. RESERVATION OF RIGHT TO AMEND ARTICLE VII SECTION 1. So long as Bonds of the 2003 Series remain outstanding: Bonds issuable on basis only of 60% of net bondable value of property additions not subject to an unfunded prior lien..............................................14 Amendment of definition of net bondable value of property additions not subject to an unfunded prior lien........................................................14 Monies deposited with Trustee under Section 5(a) of Article III of the Original Indenture may not be withdrawn in an amount in excess of 60% of net bondable value of property additions not subject to an unfunded prior lien, notwithstanding provisions of Section 3(a) of Article VIII of the Original Indenture...............................................................14 Amendment of definition of net bondable value of property additions subject to an unfunded prior lien............................................................15 -ii-
Amendment of covenants in Sections 14 and 16 of Article IV and Section 1 of Article XII of the Original Indenture with respect to acquisition of property subject to an unfunded prior lien..........................................................................15 Definitions: minimum charge for depreciation; net earnings of property available for interest, depreciation and property retirement; net earnings of another corporation available for interest, depreciation and property retirement.................................16 Amendment of Articles III, IV and XII of the Original Indenture.................................16 SECTION 2. Facsimile Signatures............................................................................17 SECTION 3. Reservation of Right to Amend Article VII.......................................................17 SECTION 4. Reservation of Right to Delete certain requirements and conditions..............................20 ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 1. Acceptance of Trust.............................................................................20 SECTION 2. Responsibility and Duty of Trustee..............................................................20 SECTION 3. Parties to include successors and assigns.......................................................21 SECTION 4. Benefits restricted to parties and to holders of Bonds and coupons..............................21 SECTION 5. Execution in counterparts.......................................................................21 SECTION 6. Titles of Articles not part of the Thirty-Fourth Supplemental Indenture.........................21 TESTIMONIUM.................................................................................................S-1 SIGNATURES AND SEALS........................................................................................S-1 ACKNOWLEDGMENTS.............................................................................................S-2 APPENDIX A DESCRIPTION OF PROPERTIES -iii-
THIRTY-FOURTH SUPPLEMENTAL INDENTURE, dated as of the 28th day of June, Two Thousand, made by and between Western Resources, Inc., formerly The Kansas Power and Light Company, a corporation organized and existing under the laws of the State of Kansas (hereinafter called the "Company"), party of the first part, and Harris Trust and Savings Bank, a corporation organized and existing under the laws of the State of Illinois whose mailing address is 111 West Monroe Street, P.O. Box 755, Chicago, Illinois 60690 (hereinafter called the "Trustee"), as Trustee under the Mortgage and Deed of Trust dated July 1, 1939, hereinafter mentioned, party of the second part; WHEREAS, the Company has heretofore executed and delivered to the Trustee its Mortgage and Deed of Trust, dated July 1, 1939 (hereinafter referred to as the "Original Indenture"), to provide for and to secure an issue of First Mortgage Bonds of the Company, issuable in series, and to declare the terms and conditions upon which the Bonds (as defined in the Original Indenture) are to be issued thereunder; and WHEREAS, the Company has heretofore executed and delivered to the Trustee Thirty-Three Supplemental Indentures supplemental to said Original Indenture, of which Thirty-One provided for the issuance thereunder of series of the Company's First Mortgage Bonds, and there is set forth below information with respect to such Supplemental Indentures as have provided for the issuance of Bonds, and the principal amount of Bonds which remain outstanding as of March 31, 2000. Series of First Principal Principal Supplemental Indenture Mortgage Bonds Amount Amount Hereinafter Called Date Provided For Issued Outstanding - ------------------------------ ------------------- -------------------- ----------- ----------- Supplemental Indenture July 1, 1939 3-1/2% Series $26,500,000 None Due 1969 Second Supplemental Indenture April 1, 1949 2-7/8% Series 10,000,000 None Due 1979 Fourth Supplemental Indenture October 1, 1949 2-3/4% Series 6,500,000 None Due 1979 Fifth Supplemental Indenture December 1, 1949 2-3/4% Series 32,500,000 None Due 1984 Seventh Supplemental December 1, 1951 3-1/4% Series 5,250,000 None Indenture Due 1981 Eighth Supplemental Indenture May 1, 1952 3-1/4% Series 4,750,000 None Due 1982 Ninth Supplemental Indenture October 1, 1954 3-1/8% Series 8,000,000 None Due 1984 Tenth Supplemental Indenture September 1, 1961 4-3/4% Series 13,000,000 None Due 1991 Eleventh Supplemental April 1, 1969 7-5/8% Series 19,000,000 None Indenture Due 1999 Twelfth Supplemental September 1, 1970 8-3/4% Series 20,000,000 None Indenture Due 2000 Thirteenth Supplemental February 1, 1975 8-5/8% Series 35,000,000 None Indenture Due 2005
-2- Series of First Principal Principal Supplemental Indenture Mortgage Bonds Amount Amount Hereinafter Called Date Provided For Issued Outstanding - ------------------------------ ------------------- -------------------- ----------- ----------- Fourteenth Supplemental May 1, 1976 8-5/8% Series 45,000,000 None Indenture Due 2006 Fifteenth Supplemental April 1, 1977 5.90% Pollution 32,000,000 None Indenture Control Series Due 2007 Sixteenth Supplemental June 1, 1977 8-1/8% Series 30,000,000 None Indenture Due 2007 Seventeenth Supplemental February 1, 1978 8-3/4% Series 35,000,000 None Indenture Due 2008 Eighteenth Supplemental January 1, 1979 6-3/4% Pollution 45,000,000 None Indenture Control Series Due 2009 Nineteenth Supplemental May 1, 1980 8-1/4% Pollution 45,000,000 None Indenture Control Series Due 1983 Twentieth Supplemental November 1, 1981 16.95% Series 25,000,000 None Indenture Due 1988 Twenty-First Supplemental April 1, 1982 15% Series 60,000,000 None Indenture Due 1992 Twenty-Second Supplemental February 1, 1983 9-5/8% Pollution 58,500,000 None Indenture Control Series Due 2013 Twenty-Third Supplemental July 1, 1986 8-1/4% Series 60,000,000 None Indenture Due 1996 Twenty-Fourth Supplemental March 1, 1987 8-5/8% Series 50,000,000 None Indenture Due 2017 Twenty-Fifth Supplemental October 15, 1988 9.35% Series 75,000,000 None Indenture Due 1998 Twenty-Sixth Supplemental February 15, 1990 8-7/8% Series 75,000,000 None Indenture Due 2000 Twenty-Seventh Supplemental March 12, 1992 7.46% Demand 370,000,000 None Indenture Series Twenty-Eighth Supplemental July 1, 1992 7-1/4% Series 125,000,000 None Indenture Due 1999 8-1/2% Series 125,000,000 125,000,000 Due 2022 Twenty-Ninth Supplemental August 20, 1992 7-1/4% Series 100,000,000 100,000,000 Indenture Due 2002 Thirtieth Supplemental February 1, 1993 6% Pollution 58,500,000 58,410,000 Indenture Control Revenue Refunding Series Due 2033 Thirty-First Supplemental April 15, 1993 7.65% Series 100,000,000 100,000,000 Indenture Due 2023 Thirty-Second Supplemental April 15, 1994 7-1/2% Series 75,500,000 75,500,000 Indenture Due 2032 Thirty-Third Supplemental August 11, 1997 6-7/8% Convertible 370,000,000 None Indenture Series Due 2004 7-1/8% Convertible 150,000,000 None Series Due 2009
-3- ; and WHEREAS, the Company is entitled at this time to have authenticated and delivered additional bonds on the basis of net bondable value of property additions not subject to an unfunded prior lien and in substitution for refundable Bonds, upon compliance with the provisions of Article III of the Original Indenture, as amended; and WHEREAS, the Company desires by this Thirty-Fourth Supplemental Indenture (hereinafter referred to as this "Supplemental Indenture") to supplement the Original Indenture and to provide for the creation of a new series of bonds under the Original Indenture to be designated "First Mortgage Bonds, 9-1/2% Series Due 2003"; and the Original Indenture provides that certain terms and provisions, as determined by the Board of Directors of the Company, of the Bonds of any particular series may be expressed in and provided by the execution of an appropriate supplemental indenture; and WHEREAS, the Company in the exercise of the powers and authority conferred upon and reserved to it under the provisions of the Original Indenture and indentures supplemental thereto, and pursuant to appropriate resolutions of its Board of Directors, has duly resolved and determined to make, execute and deliver to the Trustee a supplemental indenture in the form hereof for the purposes herein provided; and WHEREAS, all conditions and requirements necessary to make this Supplemental Indenture a valid, binding and legal instrument have been done, performed and fulfilled, and the execution and delivery hereof have been in all respects duly authorized; NOW, THEREFORE, THIS INDENTURE WITNESSETH: That, in consideration of the premises and of the mutual covenants herein contained and of the sum of One Dollar duly paid by the Trustee to the Company at or before the time of the execution of these presents, and of other valuable considerations, the receipt whereof is hereby acknowledged, and in order further to secure the payment of the principal of and interest and premium, if any, on all Bonds at any time issued and outstanding under the Original Indenture as amended by all indentures supplemental thereto (hereinafter sometimes collectively called the "Indenture") according to their tenor, purport and effect, and to declare certain terms and conditions upon and subject to which Bonds are to be issued and secured, the Company has executed and delivered this Supplemental Indenture, and by these presents grants, bargains, sells, warrants, aliens, releases, conveys, assigns, transfers, mortgages, pledges, sets over and ratifies and confirms unto Harris Trust and Savings Bank, as Trustee, and to its successors in trust under the Indenture forever, all and singular the following described properties (in addition to all other properties heretofore specifically subjected to the lien of the Indenture and not heretofore released from the lien thereof), that is to say:
-4- FIRST. All and singular the rents, real estate, chattels real, easements, servitudes, and leaseholds of the Company, or which, subject to the provisions of Article XII of the Original Indenture, the Company may hereafter acquire, including, among other things, the property described in Appendix A hereto under the caption "First", which description is hereby incorporated herein by reference and made a part hereof as if fully set forth herein, together with all improvements of any type located thereon. Also all power houses, plants, buildings and other structures, dams, dam sites, substations, heating plants, gas works, holders and tanks, compressor stations, gasoline extraction plants, together with all and singular the electric heating, gas and mechanical appliances appurtenant thereto of every nature whatsoever, now owned by the Company or which it may hereafter acquire, including all and singular the machinery, engines, boilers, furnaces, generators, dynamos, turbines and motors, and all and every character of mechanical appliance for generating or producing electricity, steam, water, gas and other agencies for light, heat, cold or power or any other purpose whatsoever. SECOND. Also all transmission and distribution systems used for the transmission and distribution of electricity, steam, water, gas and other agencies for light, heat, cold or power, or any other purpose whatever, whether underground or overhead or on the surface or otherwise of the Company, or which, subject to the provisions of Article XII of the Original Indenture, the Company may hereafter acquire, including all poles, posts, wires, cables, conduits, mains, pipes, tubes, drains, furnaces, switchboards, transformers, insulators, meters, lamps, fuses, junction boxes, water pumping stations, regulator stations, town border metering stations and other electric, steam, water and gas fixtures and apparatus. THIRD. Also all franchises and all permits, ordinances, easements, privileges and immunities and licenses, all rights to construct, maintain and operate overhead, surface and underground systems for the distribution and transmission of electricity, gas, water or steam for the supply to itself or others of light, heat, cold or power or any other purpose whatsoever, all rights-of-way, all waters, water rights and flowage rights and all grants and consents, now owned by the Company or, subject to the provisions of Article XII of the Original Indenture, which it may hereafter acquire. Also all inventions, patent rights and licenses of every kind now owned by the Company or, subject to the provisions of Article XII of the Original Indenture, which it may hereafter acquire. FOURTH. Also, subject to the provisions of Article XII of the Original Indenture, all other property, real, personal and mixed (except as therein or herein expressly excepted) of every nature and kind and wheresoever situated now or hereafter possessed by or belonging to the Company, or to which it is now, or may at any time hereafter be, in any manner entitled at law or in equity.
-5- FIFTH. Also any and all property of any kind or description which may from time to time after the date of the Original Indenture by delivery or by writing of any kind be conveyed, mortgaged, pledged, assigned or transferred to the Trustee by the Company or by any person, copartnership or corporation, with the consent of the Company or otherwise, and accepted by the Trustee, to be held as part of the mortgaged property; and the Trustee is hereby authorized to accept and receive any such property and any such conveyance, mortgage, pledge, assignment and transfer, as and for additional security hereunder, and to hold and apply any and all such property subject to and in accordance with the terms and provisions upon which such conveyance, mortgage, pledge, assignment or transfer shall be made. SIXTH. Together with all and singular, the tenements, hereditaments and appurtenances belonging or in any wise appertaining to the aforesaid property or any part thereof, with the reversion and reversions, remainder and remainders, tolls, rents, revenues, issues, income, products and profits thereof, and all the estate, right, title, interest and claim whatsoever, at law and in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof. EXPRESSLY EXCEPTING AND EXCLUDING, HOWEVER, all properties of the character excepted from the lien of the Original Indenture. TO HAVE AND TO HOLD all said properties, real, personal and mixed, mortgaged, pledged and conveyed by the Company as aforesaid, or intended so to be, unto the Trustee and its successors and assigns forever; SUBJECT, HOWEVER, to the exceptions and reservations hereinabove referred to, to existing leases other than leases which by their terms are subordinate to the lien of the Indenture, to existing liens upon rights-of-way for transmission or distribution line purposes, as defined in Article I of the Original Indenture; and any extensions thereof, and subject to existing easements for streets, alleys, highways, rights-of-way and railroad purposes over, upon and across certain of the property herein before described and subject also to all the terms, conditions, agreements, covenants, exceptions and reservations expressed or provided in the deeds or other instruments respectively under and by virtue of which the Company acquired the properties hereinabove described and to undetermined liens and charges, if any, incidental to construction or other existing permitted liens as defined in Article I of the Original Indenture; IN TRUST, NEVERTHELESS, upon the terms and trusts in the Original Indenture, and the indentures supplemental thereto, including this Supplemental Indenture, set forth, for the equal and proportionate benefit and security of all present and future holders of the Bonds and coupons issued and to be issued thereunder, or any of them, without preference of any of said Bonds and coupons of any particular series over the Bonds and coupons of any other series by reason of priority in the time of issue, sale or negotiation thereof, or by reason of the purpose of issue or otherwise howsoever, except as otherwise provided in Section 2 of Article IV of the Original Indenture.
-6- AND IT IS HEREBY COVENANTED, DECLARED AND AGREED, by and between the parties hereto for the benefit of those who shall hold the Bonds and coupons, or any of them, to the be issued under the Indenture as follows: ARTICLE I Description of Bonds of the 2003 Series SECTION 1. The 2003 series of Bonds to be executed, authenticated and delivered under and secured by the Original Indenture shall be designated as "First Mortgage Bonds, 9-1/2% Series Due 2003" of the Company (herein called "Bonds of the 2003 Series"). The Bonds of the 2003 Series shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, all of the terms, conditions and covenants of the Original Indenture, as amended, and subject to all the terms, conditions and covenants of this Supplemental Indenture. Bonds of the 2003 Series shall mature March 17, 2003 and shall bear interest at the rate of nine and one-half percent (9-1/2%) per annum payable (subject to the fifth paragraph of this Section 1) on the interest payment dates for the Loans (as defined below). Every Bond of the 2003 Series shall be dated the date of authentication except that, notwithstanding the provisions of Section 6 of Article II of the Original Indenture, if at the time of authentication of any Bond of the 2003 Series interest shall be in default on any Bonds of the 2003 Series, such Bond shall be dated as of the day following the interest payment date to which interest has previously been paid in full or made available for payment in full on outstanding Bonds of the 2003 Series, as the case may be, or, if no interest has been paid or made available for payment, as of the date of initial authentication and delivery of such Bond. Every Bond of the 2003 Series shall bear interest from each interest payment date for the Loans next preceding the date thereof, unless no interest has been paid on this Bond, in which case from June 28, 2000. The person in whose name any Bond of the 2003 Series is registered on any interest payment date shall be entitled to receive the interest payable thereon on such interest payment date, unless the Company shall default in the payment of the interest due on such interest payment date, in which case such defaulted interest shall be paid to the person in whose name such Bond is registered on the date of payment of such defaulted interest. The Bonds of the 2003 Series shall be payable as to principal, premium, if any, and interest, in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts, at the agency of the Company in the City of Chicago, Illinois. All Bonds of the 2003 Series shall be issued and pledged by the Company to the Collateral Agent pursuant to a Collateral Agreement dated as of June 28, 2000 among the Company and The Chase Manhattan Bank (in such capacity, the "Collateral Agent") to secure the payment of the principal of, and up to 9-1/2% per annum of the interest on any of the loans issued pursuant to the $600,000,000 Credit Agreement, dated as of June 28, 2000 among the Company, The Chase Manhattan Bank, as administrative agent, and the lenders party thereto, and the Five-Year Competitive Advance and Revolving Credit Facility Agreement, dated as of March 17, 1998, among the Company, The Chase Manhattan Bank, as administrative agent, and the lenders party thereto (such agreements,
-7- in each case, as amended, supplemented or otherwise modified from time to time, are referred to collectively herein as the "Credit Agreements" and the loans thereunder are referred to collectively as the "Loans"). The obligation of the Company to make payments with respect to the principal of and interest on Bonds of the 2003 Series (including without limitation upon maturity thereof) shall be fully or partially, as the case may be, satisfied and discharged to the extent that, at the time that any such payment shall be due, the then due principal of and interest on the Loans shall have been fully or partially paid, or there shall be held by the Collateral Agent pursuant to the Collateral Agreement sufficient available funds to fully or partially pay the then due principal of and interest on the Loans. Notwithstanding any other provisions of the Indenture, interest on the Bonds of the 2003 Series shall be deemed fully or partially satisfied and discharged as provided herein even if the interest rate on Bonds of the 2003 Series may be higher or lower than the interest rate on any of the Loans at the time interest on any such Loans is paid. The Trustee may conclusively presume that the obligation of the Company to make payments with respect to the principal of and interest on Bonds of the 2003 Series shall have been fully satisfied and discharged unless and until the Trustee shall have received a written notice from the Collateral Agent, signed by an authorized officer, stating (i) that timely payment of the principal of or interest on the Loans required to be made by the Company has not been made, (ii) that there are not sufficient available funds held by the Collateral Agent pursuant to the Collateral Agreement to make such payment and (iii) the amount of funds, in addition to available funds held by the Collateral Agent pursuant to the Collateral Agreement, required to make such payment. SECTION 2. The Bonds of the 2003 Series shall be registered bonds without coupons of the denominations of $5,000 and of any multiples of $5,000, numbered consecutively from R 1 upwards. Bonds of the 2003 Series may each be exchanged for other bonds within the same Series in authorized denominations and in the same aggregate principal amounts, without charge, except for any tax or governmental charge imposed in connection with such interchange. SECTION 3. The Bonds of the 2003 Series, and the Trustee's Certificate with respect thereto, shall be substantially in the following forms, respectively: [FORM OF BOND OF THE 2003 SERIES] This bond is not transferable, except as permitted under the Collateral Agreement dated as of June 28, 2000 among Western Resources, Inc. and The Chase Manhattan Bank. WESTERN RESOURCES, INC. (Incorporated under the laws of the State of Kansas) FIRST MORTGAGE BOND, 9-1/2% SERIES DUE 2003 DUE March 17, 2003
-8- No. _____ $[ ] WESTERN RESOURCES, INC., a corporation organized and existing under the laws of the State of Kansas (hereinafter called the "Company", which term shall include any successor corporation as defined in the Indenture hereinafter referred to), for value received, hereby promises to pay to [ ] or registered assigns, on the 17th day of March, 2003, the sum of [ ] Dollars in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts, and to pay interest thereon in like coin or currency from the interest payment date with respect to the Loans (as defined below) next preceding the date of this Bond next preceding the date thereof, unless no interest has been paid on this Bond, in which case from June 28, 2000, at the rate of nine and one-half percent (9-1/2%) per annum, payable (subject to the fourth paragraph hereof) on each interest payment date with respect to the Loans, until maturity, or, if this Bond shall be duly called for redemption, until the redemption date, or, if the Company shall default in the payment of the principal hereof, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in the Indenture hereinafter mentioned. The interest payable on any interest payment date as aforesaid will be paid to the person in whose name this Bond is registered on any interest payment date, unless the Company shall default in the payment of the interest due on such interest payment date, in which case such defaulted interest shall be paid to the person in whose name this Bond is registered on the date of payment of such defaulted interest. Principal of and premium, if any, and interest on, this Bond are payable at the agency of the Company in the City of Chicago, Illinois in immediately available funds. This Bond is one of a duly authorized issue of Bonds of the Company (herein called the "Bonds"), in unlimited aggregate principal amount, of the series hereinafter specified, all issued and to be issued under and equally secured by a Mortgage and Deed of Trust, dated July 1, 1939, executed by the Company to Harris Trust and Savings Bank (herein called the "Trustee"), as Trustee, as amended by the indentures supplemental thereto including the thirty-fourth indenture supplemental thereto dated as of June 28, 2000 (herein called the "Supplemental Indenture"), between the Company and the Trustee (said Mortgage and Deed of Trust, as so amended, being herein called the "Indenture") to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the properties mortgaged and pledged, the nature and extent of the security, the rights of the bearers or registered owners of the Bonds and of the Trustee in respect thereto, and the terms and conditions upon which the Bonds are, and are to be, secured. The Bonds may be issued in series, for various principal sums, may mature at different times, may bear interest at different rates and may otherwise vary as in the Indenture provided. This Bond is one of a series designated as the "First Mortgage Bonds, 9-1/2% Series Due 2003" (herein called "Bonds of the 2003 Series") of the Company, issued under and secured by the Indenture executed by the Company to the Trustee. All Bonds of the 2003 Series shall be issued and pledged by the Company to the Collateral Agent pursuant to a Collateral Agreement dated as of June 28, 2000, among the Company and The Chase Manhattan Bank (in such capacity, the "Collateral Agent") to secure the payment of the principal of, and up to 9-1/2% per annum of the interest on any of the loans issued pursuant to the $600,000,000 Credit Agreement, dated as of June 28, 2000 among the Company, The Chase Manhattan Bank, as administrative agent, and the lenders party thereto, and the Five-Year Competitive Advance and Revolving Credit Facility Agreement, dated as of March 17, 1998, among the Company, The Chase Manhattan Bank, as administrative agent and the lenders party thereto, (such agreements,
-9- in each case, as amended, supplemented or otherwise modified from time to time, are referred to collectively herein as the "Credit Agreements" and the loans issued thereunder are referred to collectively as the "Loans"). The obligation of the Company to make payments with respect to the principal of and interest on Bonds of the 2003 Series (including without limitation upon maturity hereof) shall be fully or partially, as the case may be, satisfied and discharged to the extent that, at the time that any such payment shall be due, the then due principal of and interest on the Loans shall have been fully or partially paid, or there shall be held by the Collateral Agent pursuant to the Collateral Agreement sufficient available funds to fully or partially pay the then due principal of and interest on the Loans. The Trustee may conclusively presume that the obligation of the Company to make payments with respect to the principal of and interest on Bonds of the 2003 Series shall have been fully satisfied and discharged unless and until the Trustee shall have received a written notice from the Collateral Agent, signed by an authorized officer, stating (i) that timely payment of the principal of or interest on the Loans required to be made by the Company has not been made, (ii) that there are not sufficient available funds held by the Collateral Agent pursuant to the Collateral Agreement to make such payment and (iii) the amount of funds, in addition to available funds held by the Collateral Agent pursuant to the Collateral Agreement, required to make such payment. Notwithstanding any other provisions of this Bond or the Indenture, interest on the Bonds of the 2003 Series shall be deemed fully satisfied and discharged as provided herein and therein even if the interest rate on Bonds of the 2003 Series may be higher or lower than the interest rate on any of the Loans at the time interest on any of the Loans is paid. To the extent permitted by, and as provided in the Indenture, modifications or alterations of the Indenture or of any indenture supplemental thereto, and of the rights and obligations of the Company and of the holders of the Bonds and coupons, may be made with the consent of the Company by an affirmative vote of not less than 60% in principal amount of the Bonds entitled to vote then outstanding, at a meeting of Bondholders called and held as provided in the Indenture, and by an affirmative vote of not less than 60% in principal amount of the Bonds of any series entitled to vote then outstanding and affected by such modification or alteration, in case one or more but less than all of the series of Bonds then outstanding under the Indenture are so affected. No modification or alteration shall be made which will affect the terms of payment of the principal of or premium, if any, or interest on, this Bond, which are unconditional. The Company has reserved the right to make certain amendments to the Indenture, without any consent or other action by holders of the Bonds of this series (i) to the extent necessary from time to time to qualify the Indenture under the Trust Indenture Act of 1939, (ii) to delete the requirement that the Company meet a net earnings test as a condition to authenticating additional Bonds or merging into another company and (iii) to make certain other amendments which make the provisions for the release of mortgaged property less restrictive, all as more fully provided in the Indenture and in the Supplemental Indenture. In addition, once all Bonds issued prior to January 1, 1997 are no longer outstanding, the Company will be permitted to issue additional Bonds in an amount equal to 70% of the value of net bondable property additions not subject to an unfunded prior lien, as provided in the Original Indenture. The Bonds of the 2003 Series are redeemable prior to maturity only upon a demand therefor by the Collateral Agent as set forth in Article III of the Supplemental Indenture.
-10- In case an event of default, as defined in the Indenture, shall occur, the principal of all of the Bonds at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Bonds outstanding. This Bond is transferable by the registered owner hereof, in person or by duly authorized attorney, on the books of the Company to be kept for that purpose at the agency of the Company in the City of Chicago, Illinois, upon surrender and cancellation of this Bond and on presentation of a duly executed written instrument of transfer, and thereupon a new registered Bond or Bonds of the same series, of the same aggregate principal amount and in authorized denominations will be issued to the transferee or transferees in exchange herefor; and this Bond, with or without others of like form and series, may in like manner be exchanged for one or more new registered Bonds of the same series of other authorized denominations but of the same aggregate principal amount; all upon payment of the charges and subject to the terms and conditions set forth in the Indenture. No recourse shall be had for the payment of the principal of or premium, if any, or interest on this Bond, or for any claim based hereon or on the Indenture or any indenture supplemental thereto, against any incorporator, or against any stockholder, director or officer, past, present or future, of the Company, or of any predecessor or successor corporation, as such, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution, statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Bond and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture. This Bond shall not be entitled to any benefit under the Indenture or any indenture supplemental thereto, or become valid or obligatory for any purpose, until Harris Trust and Savings Bank, the Trustee under the Indenture, or a successor trustee thereto under the Indenture, shall have signed the form of certificate endorsed hereon. IN WITNESS WHEREOF, WESTERN RESOURCES, INC. has caused this Bond to be signed in its name by its Chairman of the Board, President and Chief Executive Officer or a Vice President, manually or by facsimile, and its corporate seal (or a facsimile thereof) to be hereto affixed and attested by its Secretary or an Assistant Secretary, manually or by facsimile. Dated: WESTERN RESOURCES, INC. By________________________ Attest:
-11- [FORM OF TRUSTEE'S CERTIFICATE] This Bond is one of the Bonds, of the series designated herein, described in the within-mentioned Mortgage and Deed of Trust of July 1, 1939 and Supplemental Indenture dated as of June 28, 2000. HARRIS TRUST AND SAVINGS BANK, Trustee, By ____________________________ SECTION 4. Until Bonds of the 2003 Series in definitive form are ready for delivery, the Company may execute, and upon its request in writing the Trustee shall authenticate and deliver, in lieu thereof, Bonds of the 2003 Series in temporary form, as provided in Section 9 of Article II of the Original Indenture. ARTICLE II Issue of Bonds of the 2003 Series SECTION 1. The total principal amount of Bonds of the 2003 Series which may be authenticated and delivered hereunder is not limited except as the Original Indenture and this Supplemental Indenture limit the principal amount of Bonds which may be issued thereunder. SECTION 2. Bonds of the 2003 Series for the aggregate principal amount of $397,800,000 may forthwith be executed by the Company and delivered to the Trustee and shall be authenticated by the Trustee and delivered (either before or after the filing or recording hereof) to or upon the order of the Company, upon receipt by the Trustee of the resolutions, certificates, instruments and opinions required by Article III and Article XVIII of the Original Indenture, as amended. ARTICLE III Redemption SECTION 1. Bonds of the 2003 Series are redeemable prior to maturity only upon a demand therefor by the Collateral Agent. To effect the redemption of Bonds of the 2003 Series, the Collateral Agent shall deliver to the Trustee (and deliver a copy thereof to the Company) a written demand (hereinafter referred to as a "Redemption Demand") for the redemption of Bonds of the 2003 Series, signed by an authorized officer and dated the date of its delivery to the Trustee, stating (i) that an Event of Default (as defined in the Collateral Agreement) has occurred and is continuing, (ii) that there are not sufficient available funds held by the Collateral Agent pursuant to the Collateral Agreement to make all payments required as a result of such Event of Default, (iii) the amount of funds, in addition to available funds held by the Collateral Agent pursuant to the Collateral Agreement, required to make such payments, and (iv) the principal amount of Bonds of the 2003 Series the Collateral
-12- Agent demands to have redeemed and the redemption date therefor which date shall be at least thirty-one (31) days after the date of such Redemption Demand (provided, such principal amount shall not exceed the amount of funds specified pursuant to the foregoing clause (iii)). The Trustee may conclusively presume the statements contained in the Redemption Demand to be correct. Redemption of Bonds of the 2003 Series shall in all cases be at a price equal to the principal amount of the Bonds to be redeemed together with accrued interest to the redemption date, and such amount shall become and be due and payable on the redemption date. The Company hereby covenants that if a Redemption Demand shall be delivered to the Trustee, the Company will deposit, on or before the redemption date, with the Trustee, in accordance with Article V of the Indenture, an amount in cash sufficient to redeem the principal amount of Bonds of the 2003 Series so called for redemption. SECTION 2. Article VIII of Original Indenture Controlling. The Bonds of the 2003 Series shall be redeemable pursuant to Section 8 of Article VIII of the Original Indenture, from time to time prior to maturity subject to the terms and conditions of Section 1 of this Article III. SECTION 3. Article V of Original Indenture Controlling. The provisions of Article V of the Original Indenture shall be applicable to redemptions of Bonds of the 2003 Series pursuant to the provisions of Section 1 of this Article III; provided, however, that with respect to any redemption of Bonds of the 2003 Series, notice of redemption shall be given as provided in such Section 1. The principal amount of Bonds of the 2003 Series to be redeemed on any partial redemption shall be an authorized denomination thereof. SECTION 4. Bonds redeemed may be used to authenticate and deliver additional Bonds under the Original Indenture. Any Bonds of the 2003 Series redeemed pursuant to Section 1 of this Article III are hereby expressly permitted to be used as refundable Bonds for the execution, authentication and delivery of additional Bonds pursuant to Section 6 of Article III of the Original Indenture. ARTICLE IV Additional Covenants The Company hereby covenants, warrants and agrees: SECTION 1. That the Company is lawfully seized and possessed of all of the mortgaged property described in the granting clauses of this Supplemental Indenture; that it has good, right and lawful authority to mortgage the same as provided in this Supplemental Indenture; and that such mortgaged property is, at the actual date of the initial issue of the Bonds of the 2003 Series, free and clear of any deed of trust, mortgage, lien, charge or encumbrance thereon or affecting the title thereto prior to the Indenture, except as set forth in the granting clauses of the Original Indenture, the Twenty-Eighth Supplemental Indenture, the Twenty-Ninth Supplemental Indenture, the Thirtieth Supplemental Indenture, the Thirty-First Supplemental Indenture, the Thirty-Second Supplemental Indenture or this Supplemental Indenture.
-13- SECTION 2. So long as any Bonds of any series originally issued prior to January 1, 1997 are outstanding, in the event all or substantially all of the electric properties shall have been released as an entirety from the lien of the Original Indenture, the Company will, at any time or from time to time within six months after the date of such release, retire Bonds outstanding under the Original Indenture in an aggregate principal amount equal to the fair value of the electric properties so released pursuant to Section 3 of Article VII of the Original Indenture, as stated in the engineer's certificate required by Section 3(b) of said Article VII, and the proceeds of the electric properties so released pursuant to Section 5 of said Article VII. Such retirement of Bonds shall be effected in either one or both of the following methods: (a) By the withdrawal pursuant to Section 2 of Article VIII of the Original Indenture of any moneys deposited with the Trustee pursuant to Sections 3(d), 4(d) and 5 of Article VII of the Original Indenture upon such release; or (b) By causing the Trustee to purchase or redeem bonds, pursuant to Section 8 of Article VIII of the Original Indenture, out of any moneys deposited with the Trustee pursuant to Sections 3(d), 4(d) and 5 of Article VII of the Original Indenture upon such release. The Bonds to be so retired pursuant to this Section 3 shall include a principal amount of Bonds of each Series then outstanding in the same ratio to the aggregate principal amount of all Bonds so retired as the aggregate principal amount of all Bonds of each Series outstanding immediately prior to such release bears to the total principal amount of all Bonds then outstanding. ARTICLE V AMENDMENTS TO RATIO OF BONDS ISSUABLE TO PROPERTY ADDITIONS AND OF CERTAIN OTHER RATIOS. AMENDMENT OF NET EARNINGS TEST. USE OF FACSIMILE SIGNATURES. AMENDMENT OF ARTICLE XV. RESERVATION OF RIGHT TO AMEND ARTICLE VII SECTION 1. So long as any of the Bonds of any series originally issued prior to January 1, 1997 shall remain outstanding: (a) Notwithstanding the provisions of Section 4 of Article III of the Original Indenture, no Bonds shall be authenticated and delivered pursuant to the provisions of Article III of the Original Indenture and issued upon the basis of net bondable value of property additions for an aggregate principal amount in excess of sixty percent (60%) of the net bondable value of property additions not subject to an unfunded prior lien. For the purposes of Subsections (e) and (f) of the definition of "net bondable value of property additions not subject to an unfunded prior lien", contained in Article I of the Original Indenture, and Subdivisions 8 and 9 of clause (a) of Section 4 of Article III of the Original Indenture, in all computations made with respect to a period subsequent to April 1, 1949, the deductions therein referred to shall in each case be ten-sixths (10/6ths) of the respective amounts mentioned, in lieu of ten-sevenths (10/7ths).
-14- (b) Notwithstanding the provisions of Section 3(a) of Article VIII of the Original Indenture, no moneys received by the Trustee pursuant to Section 5(a) of Article III of the Original Indenture shall be paid over by the Trustee in an amount in excess of sixty percent (60%) of the net bondable value of property additions not subject to an unfunded prior lien, and for the purposes of Section 3 of Article VII of the Original Indenture, the amount of cash required to be deposited by the Company pursuant to Subsection (d) of said Section 3 of Article VII shall not be reduced in an amount in excess of sixty percent (60%) of the net bondable value of property additions not subject to an unfunded prior lien. (c) For the purposes of clauses (c) and (d) of the definition of "net bondable value of property additions subject to an unfunded prior lien", contained in Article I of the Original Indenture, and Subsection 7 of clause (a) of Section 4 of Article III of the Original Indenture, in all computations made with respect to a period subsequent to April 1, 1949, the deductions therein referred to shall in each case be ten-sixths (10/6ths) of the respective amounts mentioned, in lieu of ten-sevenths (10/7ths). (d) Subsection (a) of Section 14, clauses (1) and (2) of Subsection (a) of Section 16 of Article IV and clause (1) of Subsection (b) of Section 1 of Article XII of the Original Indenture shall be deemed amended by substituting the words "sixty percent (60%)" for "seventy percent (70%)" where they appear in said provisions of the Original Indenture. (e) The definition of the term "net earnings available for interest, depreciation and property retirement", as contained in Article I of the Original Indenture, shall be deemed to mean the net earnings of the Company ascertained as follows: 1. The total operating revenues of the Company and the net non-operating revenues of the properties of the Company shall be ascertained. 2. From the total, determined as provided in Subsection (a), there shall be deducted all operating expenses, including all salaries, rentals, insurance, license and franchise fees, expenditures for repairs and maintenance, taxes (other than income, excess profits and other taxes measured by or dependent on net taxable income), depreciation as shown on the books of the Company or an amount equal to the minimum provision for depreciation as hereinafter defined, whichever is greater, but excluding all property retirement appropriations, all interest and sinking fund charges, amortization of stock and debt discount and expense or premium and further excluding any charges to income or otherwise for the amortization of plant or property accounts or of amounts transferred therefrom. 3. The balance remaining after the deduction of the total amount computed pursuant to Subsection (b) from the total amount computed pursuant to Subsection (a) shall constitute the "net earnings of the Company available for interest", provided that not more than fifteen percent (15%) of the net earnings of the Company available for interest may consist of the aggregate of (i) net non-operating income, (ii) net earnings from mortgaged property other than property of the character of
-15- property additions and (iii) net earnings from property not subject to the lien of this Indenture. 4. No income received or accrued by the Company from securities and no profits or losses of capital assets shall be included in making the computations aforesaid. 5. In case the Company shall have acquired any acquired plant or systems or shall have been consolidated or merged with any other corporation, within or after the particular period for which the calculation of net earnings of the Company available for interest, depreciation and property retirement is made, then, in computing the net earnings of the Company available for interest, depreciation and property retirement, there may be included, to the extent they may not have been otherwise included, the net earnings or net losses of such acquired plant or system or of such other corporation, as the case may be, for the whole of such period. The net earnings or net losses of such property additions, or of such other corporation for the period preceding such acquisition or such consolidation or merger, shall be ascertained and computed as provided in the foregoing subsections of this definition as if such acquired plant or system had been owned by the Company during the whole of such period, or as if such other corporation had been consolidated or merged with the Company prior to the first day of such period. 6. In case the Company shall have obtained the release of any property pursuant to Section 3 of Article VII of the Original Indenture, of a fair value in excess of Five Hundred Thousand Dollars ($500,000), as shown by the engineer's certificate required by said Section 3, or shall have obtained the release of any property pursuant to Section 5 of Article VII of the Original Indenture, the proceeds of which shall have exceeded Five Hundred Thousand Dollars ($500,000), within or after the particular period for which the calculation of net earnings of the Company available for interest, depreciation and property retirement is made, then, in computing the net earnings of the Company available for interest, depreciation and property retirement, the net earnings or net losses of such property for the whole of such period shall be excluded to the extent practicable on the basis of actual earnings and expenses of such property or on the basis of such estimates of the earnings and expenses of such property as the signers of an officers' certificate filed with the Trustee pursuant to Section 3(b) of Article III or Section 16 of Article IV of the Original Indenture shall deem proper. The term "minimum charge for depreciation" as used herein shall mean an amount equal to (a) fifteen percent (15%) of the total operating revenues of the Company after deducting therefrom an amount equal to the aggregate cost to the Company of electric energy, gas and water purchased for resale to others and rentals paid for, or other payments made for the use of, property owned by others and leased to or operated by the Company, the maintenance of which and depreciation on which are borne by the owners, less (b) an amount equal to the expenditures for maintenance and repairs to the plants and property of the Company and included or reflected in its operating expense accounts.
-16- The terms "net earnings of property available for interest, depreciation and property retirement" and "net earnings of another corporation available for interest, depreciation and property retirement" as contained in Article I of the Original Indenture, when used with respect to any property or with respect to another corporation, shall mean the net earnings of such property or the net earnings of such other corporation, as the case may be, computed in the manner provided in Subsections (a), (b), (c) and (d) hereof. (f) Notwithstanding the provisions of clauses (1) and (2) of subsection (b) of Article III, and Subsection (b) of Section 14 of Article IV, and Subsection (b) of Section 16 of Article IV and clause (2) of Subsection (b) of Section 1 of Article XII of the Original Indenture, the computation of net earnings required therein shall be made as provided in Subsection (5) of this Section 1, and the net earnings tests required in said mentioned provisions of Articles III, IV and XII of the Original Indenture shall be based on two times the annual interest charges described in such provisions, instead of two and one-half times such charges, but shall not otherwise affect such provisions or relieve from the requirements therein pertaining to ten percent (10%) of the principal amount of Bonds therein described. SECTION 2. All of the Bonds of the 2003 Series and of any series initially issued after the initial issuance of Bonds of the 2003 Series shall, from time to time, be executed on behalf of the Company by its Chairman of the Board, Chief Executive Officer, President or one of its Vice Presidents whose signature, notwithstanding the provisions of Section 12 of Article II of the Original Indenture, may be by facsimile, and its corporate seal (which may be in facsimile) shall be thereunto affixed and attested by its Secretary or one of its Assistant Secretaries whose signature, notwithstanding the provisions of the aforesaid Section 12, may be by facsimile. In case any of the officers who have signed or sealed any of the Bonds of the 2003 Series or of any series initially issued after the initial issuance of Bonds of the 2003 Series manually or by facsimile shall cease to be such officers of the Company before such Bonds so signed and sealed shall have been actually authenticated by the Trustee or delivered by the Company, such Bonds nevertheless may be authenticated, issued and delivered with the same force and effect as though the person or persons who so signed or sealed such Bonds had not ceased to be such officer or officers of the Company; and also any such Bonds may be signed or sealed by manual or facsimile signature on behalf of the Company by such persons as at the actual date of the execution of any of such Bonds shall be the proper officers of the Company, although at the nominal date of any such Bond any such person shall not have been such officer of the Company. SECTION 3. The Company reserves the right subject to appropriate corporate action, but without the consent or other action of holders of bonds of any series created after January 1, 1997, to make such amendments to the Original Indenture, as supplemented, as shall be necessary in order to amend Article VII thereof by adding thereto a Section 8 and a Section 9 to read as follows: "SECTION 8. Notwithstanding any other provision of this Indenture, unless an event of default shall have happened and be continuing, or shall happen as a result of the making or granting of an application to release mortgaged property permitted by this Section 8, the Trustee shall release from the lien of this Indenture any mortgaged property if the fair value to the Company of all of the property constituting the
-17- trust estate (excluding the mortgaged property to be released but including any mortgaged property to be acquired by the Company with the proceeds of, or otherwise in connection with, such release) equals or exceeds an amount equal to 10/7ths of the aggregate principal amount of outstanding Bonds and prior lien bonds outstanding at the time of such release, upon receipt by the Trustee of: "(a) an officers' certificate dated the date of such release, requesting such release, describing in reasonable detail the mortgaged property to be released and stating the reason for such release; "(b) an engineer's certificate, dated the date of such release, stating (i) that the signer of such engineer's certificate has examined such officers' certificate in connection with such release, (ii) the fair value to the Company, in the opinion of the signer of such engineer's certificate, of (A) all of the property constituting the trust estate, and (B) the mortgaged property to be released, in each case as of a date not more than 90 days prior to the date of such release, and (iii) that in the opinion of such signer, such release will not impair the security under this Indenture in contravention of the provisions hereof; "(c) in case any bondable property is being acquired by the Company with the proceeds of, or otherwise in connection with, such release, an engineer's certificate, dated the date of such release, as to the fair value to the Company, as of the date not more than 90 days prior to the date of such release, of the bondable property being so acquired (and if within six months prior to the date of acquisition by the Company of the bondable property being so acquired, such bondable property has been used or operated by a person or persons other than the Company in a business similar to that in which it has been or is to be used or operated by the Company, and the fair value to the Company of such bondable property, as set forth in such certificate, is not less than $25,000 and not less than 1% of the aggregate principal amount of Bonds at the time outstanding, such certificate shall be an independent appraiser's certificate); "(d) an officer's certificate, dated the date of such release, stating the aggregate principal amount of outstanding Bonds and prior lien bonds outstanding at the time of such release, and stating that the fair value to the Company of all of the property constituting the trust estate (excluding the mortgaged property to be released but including any bondable property to be acquired by the Company with the proceeds of, or otherwise in connection with, such release) stated on the independent appraiser's certificate filed pursuant to Section 8(c) equals or exceeds an amount equal to 10/7ths of such aggregate principal amount; "(e) an officers' certificate, dated the date of such release, stating that, the Company is not, and by the making or granting of the application
-18- will not be, in default in the performance of any of the terms and covenants of this Indenture; "(f) an opinion of counsel, dated the date of such release, as to compliance with conditions precedent. "SECTION 9. If the Company is unable to obtain, in accordance with any other Section of this Article VII, the release from the lien of this Indenture of any property constituting part of the trust estate, unless an event of default shall have happened and be continuing, or shall happen as a result of the making or granting of an application to release mortgaged property permitted by this Section 9, the Trustee shall release from the lien of this Indenture any mortgaged property if the fair value to the Company thereof, as shown by the engineer's certificate filed pursuant to Section 9(b), is less than 1/2 of 1% of the aggregate principal amount of outstanding Bonds and prior lien bonds outstanding at the time of such release, provided that the aggregate fair value to the Company of all mortgaged property released pursuant to this Section 9, as shown by all engineer's certificates filed pursuant to Section 9(b) in any period of 12 consecutive calendar months which includes the date of such engineer's certificate, shall not exceed 1% of the aggregate principal amount of the outstanding Bonds and prior lien bonds outstanding at the time of such release, upon receipt by the Trustee of: "(a) an officers' certificate, dated the date of such release, requesting such release, describing in reasonable detail the mortgaged property to be released and stating the reason for such release; "(b) an engineer's certificate, dated the date of such release, stating (A) that the signer of such engineer's certificate has examined such officers' certificate in connection with such release, (B) the fair value to the Company, in the opinion of the signer of such engineer's certificate, of such mortgaged property to be released as of a date not more than 90 days prior to the date of such release, and (C) that in the opinion of such signer such release will not impair the security under this Indenture in contravention of the provisions hereof; "(c) an officers' certificate, dated the date of such release, stating the aggregate principal amount of outstanding Bonds and prior lien bonds outstanding at the time of such release, that 1/2 of 1% of such aggregate principal amount does not exceed the fair value to the Company of the mortgaged property for which such release is applied for as shown by the engineer's certificate referred to in Section 9(b), and that 1% of such aggregate principal amount does not exceed the aggregate fair value to the Company of all mortgaged property released from the lien of this Indenture pursuant to this Section 9 as shown by all engineer's certificates filed pursuant to Section 9(b) in such period of 12 consecutive calendar months;
-19- "(d) an officers' certificate, dated the date of such release, stating that, the Company is not, and by the making or granting of the application will not be, in default in the performance of any of the terms and covenants of this Indenture; and "(e) an opinion of counsel, dated the date of such release, as to compliance with conditions precedent." The Company also reserves the right subject to appropriate corporate action, but without the consent or other action of holders of Bonds of any series created after January 1, 1997 to amend, modify or delete any other provision of the Original Indenture, as supplemented, as may be necessary in order to effectuate the intents and purposes contemplated by the foregoing Sections 8 and 9. SECTION 4. The Company reserves the right subject to appropriate corporate action, but without the consent or other action of holders of Bonds of any series created after January 1, 1997 to: (a) delete as a condition to the authentication of additional Bonds pursuant to Sections 4, 5 or 6 of Article III of the Original Indenture the requirement to file or deposit with the Trustee the officers' certificate described in Section 3(b) of Article III of the Original Indenture; (b) delete as a condition to the consolidation or merger of the Company into, or sale by the Company of its property as an entirety or substantially as an entirety to another corporation the requirement set forth in Section 1(b)(2) of Article XII of the Original Indenture; (c) delete as a condition to the release of property pursuant to Section 3 of Article VII of the Original Indenture, the requirement to obtain an independent engineer's certificate under the circumstances set forth in Section 3(c) of Article VII; and (d) amend, modify or delete any other provision of the Original Indenture, as supplemented, as may be necessary in order to effectuate the intents and purposes contemplated by this Section 6. ARTICLE VI Miscellaneous Provisions SECTION 1. The Trustee accepts the trusts herein declared, provided, created or supplemented and agrees to perform the same upon the terms and conditions herein and in the Original Indenture, as amended, set forth and upon the following terms and conditions. SECTION 2. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. In general each and every
-20- term and condition contained in Article XIII of the Original Indenture, as amended by the Second Supplemental Indenture, shall apply to and form part of this Supplemental Indenture with the same force and effect as if the same were herein set forth in full with such omissions, variations and insertions, if any, as may be appropriate to make the same conform to the provisions of this Supplemental Indenture. SECTION 3. Whenever in this Supplemental Indenture either of the parties hereto is named or referred to, such reference shall, subject to the provisions of Articles XII and XIII of the Original Indenture, be deemed to include the successors and assigns of such party, and all the covenants and agreements in this Supplemental Indenture contained by or on behalf of the Company, or by or on behalf of the Trustee, shall, subject as aforesaid, bind and inure to the respective benefits of the respective successors and assigns of such parties, whether so expressed or not. SECTION 4. Nothing in this Supplemental Indenture, expressed or implied, is intended or shall be construed, to confer upon, or to give to, any person, firm or corporation, other than the parties hereto and the holders of the Bonds and coupons outstanding under the Indenture, any right, remedy or claim under or by reason of this Supplemental Indenture or any covenant, condition, stipulation, promise or agreement hereof, and all the covenants, conditions, stipulations, promises and agreements in this Supplemental Indenture contained by and on behalf of the Company shall be for the sole and exclusive benefit of the parties hereto, and of the holders of the Bonds and of the coupons outstanding under the Indenture. SECTION 5. This Supplemental Indenture may be executed in several counterparts, and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. SECTION 6. The Titles of the several Articles of this Supplemental Indenture shall not be deemed to be any part thereof.
S-1 IN WITNESS HEREOF, WESTERN RESOURCES, INC., party hereto of the first part, has caused its corporate name to be hereunto affixed, and this instrument to be signed and sealed by its Chairman of the Board, President, Chief Executive Officer or a Vice President, and its corporate seal to be attested by its Secretary or an Assistant Secretary for and in its behalf, and HARRIS TRUST AND SAVINGS BANK, party hereto of the second part, has caused its corporate name to be hereunto affixed, and this instrument to be signed and sealed by its Chairman of the Board, Chief Executive Officer, President or a Vice President and its corporate seal to be attested by its Secretary or an Assistant Secretary, all as of the day and year first above written. (CORPORATE SEAL) WESTERN RESOURCES, INC. By: /s/ James A. Martin ----------------------- ATTEST: By: /s/ Larry D. Irick ---------------------------- Executed, sealed and delivered by WESTERN RESOURCES, INC. in the presence of: By: /s/ Cynthia S. Couch --------------------------- By: /s/ Patti Beasley --------------------------- HARRIS TRUST AND SAVINGS BANK, As Trustee By: /s/ Judith Bartolini ------------------------- ATTEST: By: /s/ D G Donovan --------------------------- Executed, sealed and delivered by HARRIS TRUST AND SAVINGS BANK in the presence of: By: /s/ --------------------------- By: /s/ ---------------------------
S-2 STATE OF KANSAS ) : ss.: COUNTY OF SHAWNEE ) BE IT REMEMBERED, that on this 28th day of June, before me, the undersigned, a Notary Public within and for the County and State aforesaid, personally came James A. Martin and Larry D. Irick, of Western Resources, Inc., a corporation duly organized, incorporated and existing under the laws of the State of Kansas, who are personally known to me to be such officers, and who are personally known to me to be the same persons who executed as such officers the within instrument of writing, and such persons duly acknowledged the execution of the same to be the act and deed of said corporation. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed my official seal on the day and year last above written. /s/ Patti Beasley ------------------------- Notary Public My Commission Expires November 18, 2000
S-3 STATE OF ILLINOIS ) : ss.: COUNTY OF COOK ) BE IT REMEMBERED, that on this 23rd day of June, before me, the undersigned, a Notary Public within and for the County and State aforesaid, personally came J. Bartolini and D.G. Donovan, of Harris Trust and Savings Bank, a corporation duly organized, incorporated and existing under the laws of the State of Illinois, who are personally known to me to be such officers, and who are personally known to me to be the same persons who executed as such officers the within instrument of writing, and such persons duly acknowledged the execution of the same to be the act and deed of said corporation. /s/ Linda Ellen Garcia -------------------------- Notary Public My Commission Expires
S-4 STATE OF KANSAS ) : ss.: COUNTY OF SHAWNEE ) BE IT REMEMBERED, that on this 28th day of June, before me, the undersigned, a Notary Public within and for the County and State aforesaid, personally came James A. Martin and Larry D. Irick, of Western Resources, Inc., a corporation duly organized, incorporated and existing under the laws of the State of Kansas, who are personally known to me to be such officers, being by me respectively duly sworn, did each say that the said James A. Martin is Vice President and that the said Larry D. Irick is Secretary of said corporation, that the consideration of and for the foregoing instrument was actual and adequate, that the same was made and given in good faith, for the uses and purposes therein set forth and without any intent to hinder, delay, or defraud creditors or purchasers. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed my official seal on the day and year last above written. /s/ Patti Beasley -------------------------- Notary Public My Commission Expires November 18, 2000
APPENDIX A to THIRTY-FOURTH SUPPLEMENTAL INDENTURE Dated as of June 28, 2000 Western Resources, Inc. to Harris Trust and Savings Bank ------------ DESCRIPTION OF PROPERTIES LOCATED IN THE STATE OF KANSAS FIRST PARCELS OF REAL ESTATE BROWN COUNTY A tract of land 400 feet by 430 feet located in the South Half of the Northwest Quarter (S/2 NW/4) of Section 5, Township 3 South, Range 17 East, Brown County, Kansas, more particularly described as follows: Beginning at the Southwest Corner of said South Half of the Northwest Quarter (S/2 NW/4); thence North on the West line of said Section a distance of 430 feet; thence East 90(degree) from the line last described a distance of 400 feet; thence South 90(degree) from the last line described a distance of 430 feet to the South line of said South Half of the Northwest Quarter (S/2 NW/4); thence West on said South line to the point of beginning, containing 4.0 acres more or less. DOUGLAS COUNTY The South 800 feet of the East 800 feet of the East Half of the Southeast Quarter (E/2 SE/4), Section Nineteen (19), Township Twelve South (12S), Range Nineteen (19), East of the 6th P.M., containing fifteen (15) acres, more or less. ELLSWORTH COUNTY
-2- Beginning at a point Sixty (60) feet North and Thirty (30) feet West of the Southeast corner of Section 33, Township 17 South, Range 10 West of the 6th P.M., in Ellsworth County, Kansas; thence North adjacent to the County Road Right of Way and parallel to the East line of said Section 33, a distance of One Hundred (100) feet; thence West parallel to the South line of said Section 33, a distance of Sixty (60) feet; thence South parallel to the East line of said Section 33, a distance of One Hundred (100) feet to a point on the North Right of Way line of Highway 4; thence East along the North Right of Way line of Highway 4 to the Point of Beginning. LABETTE COUNTY Lots 15, 16, 17, 19 and 21, in Block One (1), South Side Addition to the City of Parsons, Labette County, Kansas. NEMAHA COUNTY A tract of land 500 feet by 550 feet located in the Northeast Quarter (NE/4) of Section 2, Township 4 South, Range 13 East of 6th P.M., Nemaha County, Kansas, said tract more particularly described as follows: Beginning at the Northwest Corner of said Northeast Quarter (NE/4), thence East on the North line of said Northeast Quarter a distance of 500 feet, thence South parallel to the West line of said Northeast Quarter a distance of 550 feet, thence West parallel to said North line a distance of 500 feet to the West line of said Northeast Quarter, thence North on said West line to the point of beginning.
Exhibit 10(b) EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into as of the ___ day of ____, 2000 by and between Western Resources, Inc., a Kansas corporation (the "Company"), and ______________ ("Executive"). This Agreement amends and restates in its entirety the Letter Agreement between the Company and Executive, dated ____________ 199___. W I T N E S S E T H WHEREAS, the Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its stockholders; and WHEREAS, the Board (as defined in Section 1) has determined that it is in the best interests of the Company and its stockholders to secure Executive's continued services; and WHEREAS, the Company also recognizes that the possibility of a change in control could arise which may result in the distraction of management to the detriment of the Company and its shareholders. It is important that Executive be able to advise the Board whether a proposed change in control would be in the best interests of the Company and its shareholders and to take action regarding such proposal as the Board directs, without being influenced by the uncertainties of Executive's own situation. WHEREAS, the Board has authorized the Company to enter into this Agreement. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and agreements herein contained, the Company and Executive hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall ----------- have the respective meanings set forth below: (a) "Adjusted Base Salary" shall mean ninety percent (90%) of the annual salary job value for the pay grade of Executive and other remuneration for current services (but excluding all bonuses, stock based awards and other incentive compensation) paid to or for the benefit of Executive. (b) "Base Salary" shall mean all salary, cash compensation
and other remuneration for current services (but excluding all bonuses, stock based awards and other incentive compensation) paid to, for the benefit of or deferred by Executive, together (without duplication) with the compensation that would have been payable in cash to Executive if such compensation had not been converted into Restricted Share Units pursuant to the Western Resources, Inc. Executive Stock for Compensation Program. (c) "Board" means the Board of Directors of the Company. (d) "Bonus Amount" means the greater of (a) the highest annual incentive bonus (together with the bonus amount that would have been payable to Executive if such bonus amount had not been converted into a split dollar life insurance benefit pursuant to the Split Dollar Insurance Program) payable to or for the benefit of or deferred by Executive from the Company (or its affiliates) for the last three (3) completed fiscal years of the Company immediately preceding Executive's Date of Termination (annualized in the event Executive was not employed by the Company (or its affiliates) for the whole of any such fiscal year), or (b) the Executive's target bonus amount for the year of termination of employment. (e) "Cause" means (i) the willful and continued failure of Executive to perform substantially his duties with the Company (other than any such failure resulting from Executive's incapacity due to physical or mental illness or any such failure subsequent to Executive being delivered a Notice of Termination without Cause by the Company or delivering a Notice of Termination for Good Reason to the Company) after a written demand for substantial performance is delivered to Executive by the Chairman of the Board which specifically identifies the manner in which Executive has not substantially performed Executive's duties, or (ii) the willful engaging by Executive in illegal conduct which is demonstrably and materially injurious to the Company. For purposes of this paragraph (e), no act or failure to act by Executive shall be considered "willful" unless done or omitted to be done by Executive in bad faith and without reasonable belief that Executive's action or omission was in, or not opposed to, the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board, based upon the advice of counsel for the Company or upon the instructions of the Company's chief executive officer or another senior officer of the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. Executive's attention to matters not directly related 2
to the business of the Company shall not provide a basis for termination for Cause if the Company has not objected to such activity in writing. Cause shall not exist unless and until the Company has delivered to Executive a copy of a resolution duly adopted by three-quarters (3/4) of the entire Board (excluding Executive if Executive is a Board member) at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board an event set forth in clauses (i) or (ii) has occurred and specifying the particulars thereof in detail. (f) "Change in Control" means the occurrence of any one of the following events: (i) individuals who, on May 17, 2000, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to May 17, 2000, whose election or nomination for election was approved by a vote of at least three-fourths of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director; (ii) any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary, (B) by any employee benefit plan 3
(or related trust) sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii)), (E) pursuant to any acquisition by Executive or any group of persons including Executive (or any entity controlled by Executive or any group of persons including Executive); (iii) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries (a "Business Combination"), unless immediately following such Business Combination: (A) more than 60% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation) is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or (iv) the stockholders of the Company approve a plan of 4
complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets. (g) "Date of Termination" means (i) if Executive's employment is to be terminated for Disability, 30 days after Notice of Termination is given (provided that Executive shall not have returned to the performance of Executive's duties on a full-time basis during such 30 day period), (ii) if Executive's employment is to be terminated by the Company for Cause or by Executive for Good Reason, the date specified in the Notice of Termination, (iii) if Executive's employment is to be terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which shall be 90 days after the Notice of Termination is given, unless an earlier date has been expressly agreed to by Executive in writing, (iv) if Executive's employment terminates by reason of death, the date of death of Executive; or (v) if Executive's employment is terminated by Executive other than for Good Reason, the date specified in Executive's Notice of Termination, but not more than 30 days after the Notice of Termination is given, unless expressly agreed to by the Company in writing. (h) "Disability" means termination of Executive's employment by the Company due to Executive's absence from Executive's duties with the Company on a full-time basis for at least one hundred eighty (180) consecutive days as a result of Executive's incapacity due to physical or mental illness, unless within 30 days after Notice of Termination is given to Executive following such absence Executive shall have returned to the full-time performance of Executive's duties. (i) "Good Reason" shall mean termination based on any of the following events: (i) (A) any change in the duties or responsibilities (including reporting responsibilities) of Executive that is inconsistent in any material and adverse respect with Executive's position(s), duties, responsibilities or status with the Company (including any adverse diminution of such duties or responsibilities) or (B) the failure to reappoint or reelect Executive to any position held by Executive without Executive's consent; provided, however, that Good Reason shall not be deemed to occur upon a change in duties or responsibilities (other than reporting responsibilities) that is solely and directly a result of the Company no longer being a publicly traded entity and does not involve any other event set forth in this paragraph; 5
(ii) a reduction by the Company in Executive's Base Salary, annual target bonus opportunity or targeted long-term incentive value (including any material and adverse change in the formula for such annual bonus target or long-term incentive target) as in effect immediately prior to the date hereof or as the same may be increased from time to time thereafter; (iii) any requirement of the Company that Executive (A) be required to relocate more than 30 miles from Executive's present place of employment or (B) travel on Company business to an extent substantially greater than the travel obligations of Executive immediately prior to the date hereof; (iv) the failure of the Company to (A) continue in effect any employee benefit plan, welfare benefit plan or fringe benefit plan in which Executive is participating immediately prior to the date hereof or, if more favorable, which may be available from time to time hereafter to Executive or other executives of the Company, or the taking of any action by the Company which would materially and adversely affect Executive's participation in or reduce Executive's benefits under any such plan, unless Executive is permitted to participate in other plans providing Executive with substantially equivalent benefits (at no greater cost to Executive with respect to welfare benefit plans), or (B) provide Executive with paid vacation and sick leave in accordance with the most favorable policies of the Company as in effect for Executive immediately prior to the date hereof or, if more favorable, as may be available for Executive or other executives of the Company after the date hereof; provided however, that prior to a Change in Control, changes in any such plans which constitute in the aggregate less than 10% of Executive's aggregate benefits under such plans and which are applied to all employees of the Company shall not constitute "Good Reason"; (v) any refusal by the Company to permit Executive to engage in activities not directly related to the business of the Company which Executive was, or other executives of the Company are, permitted to engage in; (vi) any purported termination of Executive's employment which is not effectuated pursuant to Section 17(b) (and which will not constitute a termination 6
hereunder); (vii) the failure of the Company to obtain the assumption (and, if applicable, guarantee) agreement contemplated in Section 16(b); or (viii) the Company's termination of this Agreement or the failure of the Company to renew this Agreement as provided in Section 4 hereof. For purposes of this Agreement, any good faith determination of Good Reason by Executive shall be conclusive, provided however, that an isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company within ten (10) days after receipt of notice thereof given by Executive shall not constitute Good Reason. Executive's right to terminate employment for Good Reason shall not be affected by Executive's incapacities due to mental or physical illness and Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any event or condition constituting Good Reason; provided, however, that Executive must provide notice of termination of employment within one hundred eighty (180) days following Executive's knowledge of an event constituting Good Reason or such event shall not constitute Good Reason under this Agreement. (j) "Notice of Termination" means a written notice of termination of employment given by one party to the other party pursuant to Section 17(b). (k) "Qualifying Termination" means a termination of Executive's employment (i) by the Company other than for Cause; (ii) by Executive for Good Reason; or (iii) by Executive during the 90 day period after a Change in Control. Termination of Executive's employment on account of death, Disability or Retirement shall not be treated as a Qualifying Termination. In addition, in the event that Executive is offered employment with a subsidiary of the Company in connection with any event which would constitute a Change in Control and in which such subsidiary becomes a publicly traded Company and Executive accepts such offer, Executive shall be deemed to have terminated employment with the Company pursuant to a Qualifying Termination upon commencing such employment with the subsidiary and shall be entitled to the benefits described in this Agreement payable by reason of a Qualifying Termination. (l) "Rabbi Trust" means a trust established by the Company 7
with a trustee acceptable to Executive under a trust agreement pursuant to which (i) the trustee will be required to pay the amounts payable to Executive in connection with the split dollar insurance agreement in accordance with Section 6(a)(ix) and for the amounts payable to Executive for "relocation expenses" in accordance with Section 6(a)(x) of this Agreement to the extent not otherwise paid to Executive (to the extent the trust assets are sufficient), (ii) the Company will be required to make any additional contributions to the trust that may be necessary to assure the trust assets are sufficient to pay the amounts described in (i) above, (iii) except as provided in (iv) below, no amounts held in the trust may be returned to the Company or used for any purpose other than the payment of the amounts described in (i) above or the payment of the fees of the trustee and other expenses of the trust until there has been full payment of the amounts described in (i) above, (iv) the assets of the trust shall be subject to claims of creditors of the Company in the event of the Company's insolvency, (v) the Company will promptly pay all of the fees of the trustee and other expenses of the trust, and (vi) the trust assets shall be invested exclusively in public debt securities of the United States, time or demand deposits in a bank insured by an agency of the United States, cash and cash equivalents. (m) "Retirement" means Executive's termination on or after Executive's normal retirement date under the terms of the Western Resources, Inc. Retirement Plan, as in effect immediately prior to Executive's termination or a Change in Control, whichever is earlier, or in accordance with any retirement arrangement established with respect to Executive with Executive's written consent. (n) "Subsidiary" means any corporation or other entity in which the Company has a direct or indirect ownership interest of 50% or more of the total combined voting power of the then outstanding securities or interests of such corporation or other entity entitled to vote generally in the election of directors or in which the Company has the right to receive 50% or more of the distribution of profits or 50% of the assets upon liquidation or dissolution. 2. Employment and Duties. --------------------- (a) Term of Employment. The Company agrees to continue to employ ------------------ Executive, and Executive agrees to remain in employment of the Company, in accordance with the terms and provisions of this Agreement, for the Term of this Agreement, unless such employment is sooner terminated by the Company or 8
Executive. (b) Duties. During the term of Executive's employment under this ------ Agreement, Executive shall serve as of the Company. Executive shall devote Executive's full business time and attention to the affairs of the Company and his duties as its _________. Executive shall have such duties as are appropriate to Executive's position as ________, and shall have such authority as required to enable Executive to perform these duties. Consistent with the foregoing, Executive shall comply with all reasonable instructions of the [Chief Executive Officer of the Company] [Board of Directors of the Company]. Executive shall be based at the headquarters of the Company in Topeka, Kansas and Executive's services shall be rendered there except insofar as travel may be involved in connection with Executive's regular duties. Executive shall report directly to ________. 3. Obligation of Executive. In the event of a tender or exchange offer, ----------------------- proxy contest, or the execution of any agreement which, if consummated, would constitute a Change in Control, Executive agrees not to voluntarily leave the employ of the Company, other than as a result of Disability, Retirement or an event which would constitute Good Reason, until the Change in Control occurs or, if earlier, such tender or exchange offer, proxy contest, or agreement is terminated or abandoned. 4. Term of Agreement. This Agreement shall continue for a period of ----------------- three (3) years from the date hereof provided that on each anniversary of the Agreement, the term shall automatically be extended for one year, unless at least 90 days prior to such date, the Company or Executive shall have given notice to cancel this Agreement at the end of its then term. 5. Salary and Benefits. ------------------- (a) Salary. The Company shall pay Executive an annual salary ------ at an initial rate equal to Executive's current Base Salary which shall be reviewed annually by the Human Resources Committee of the Board for the purpose of considering increases thereof. Executive's salary shall be paid in accordance with the standard practices for other senior corporate executives of the Company. (b) Bonuses. Executive shall be eligible to receive annually ------- or otherwise any bonus awards, whether payable in cash, shares of common stock of the Company or otherwise, which the Company, the Human Resources Committee of the Board or such other 9
authorized committee of the Board determines to award or grant. (c) Benefit Programs. Executive shall receive such benefits ---------------- and awards, including without limitation stock options and restricted share unit awards, as the Human Resources Committee of the Board shall determine and shall be eligible to participate in all employee benefit plans and programs of the Company from time to time in effect for the benefit of senior executives of the Company, including, but not limited to, pension and other retirement plans, 401(k) plans, group life insurance, hospitalization and surgical and major medical coverages, sick leave, salary continuation arrangements, vacations and holidays, long-term disability, and such other benefits as are or may be made available from time to time to senior executives of the Company. (d) Business Expenses and Perquisites. Executive shall be --------------------------------- reimbursed for all reasonable expenses incurred by Executive in connection with the conduct of the business of the Company, provided Executive properly accounts therefor in accordance with the Company's policies. Executive shall also be entitled to such other perquisites as are customary for senior executives of the Company. (e) Office and Services Furnished. The Company shall furnish ----------------------------- Executive with office space, secretarial assistance and such other facilities and services as shall be suitable to Executive's position and adequate for the performance of Executive's duties hereunder. 6. Payments Upon Termination of Employment. --------------------------------------- (a) Qualifying Termination. If during the Term of this Agreement the ---------------------- employment of Executive shall terminate pursuant to a Qualifying Termination, then the Company shall provide to Executive: (i) within five days following the Date of Termination a lump-sum cash amount equal to the sum of (A) Executive's Base Salary through the Date of Termination and any bonus amounts which have become payable to the extent not theretofore paid or deferred, (B) a pro rata portion of Executive's annual bonus for the fiscal year in which Executive's Date of Termination occurs in an amount at least equal to (1) Executive's Bonus Amount, multiplied by (2) a fraction, the numerator of which 10
is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination and the denominator of which is three hundred sixty-five (365), and reduced by (3) any amounts paid from the Company's annual incentive plan for the fiscal year in which Executive's Date of Termination occurs, (C) any accrued vacation pay, and (D) the cash equivalent of any accumulated sick leave; in each case to the extent not theretofore paid; (ii) within five days following the Date of Termination, a lump-sum cash amount equal to the sum of (i) 2.99 times the higher of Executive's highest annual rate of Base Salary during the 12-month period immediately prior to Executive's Date of Termination and Executive's Adjusted Base Salary, plus (ii) 2.99 times Executive's Bonus Amount; (iii) the Company shall continue to provide, for a period of three (3) years following Executive's Date of Termination, Executive (and Executive's dependents, if applicable) with the same level of medical, dental, accident, disability and life insurance benefits and following such three year period retiree medical and dental benefits for the life of Executive and eligible dependents upon substantially the same terms and conditions (including contributions required by Executive for such benefits) as existed on the date hereof or, if more favorable to the Executive, as may exist immediately prior to Executive's Date of Termination; provided, that, if Executive cannot continue to participate in the Company plans providing such benefits or the Company shall modify or terminate any such plans, the Company shall otherwise provide such benefits on the same after-tax basis as if continued participation had been permitted. Notwithstanding the foregoing, in the event Executive becomes reemployed with another employer and becomes eligible to receive welfare benefits from such employer, the welfare benefits described herein shall be secondary to such benefits during the period of Executive's eligibility, but only to the extent that the Company reimburses Executive for any increased cost and provides any additional benefits necessary to give Executive the benefits provided hereunder; (iv) Executive shall be entitled to the provisions of the Executive Salary Continuation Plan and, notwithstanding anything to the contrary in such Plan, (i) shall be deemed to be sixty-five years of age as of the Date of Termination for purposes of determining the Retirement Benefit and commencement of payment thereof under Section 4.1 of the Plan (without regard to Executive's actual age or date of 11
commencement of retirement benefit payments under the Western Resources, Inc. Retirement Plan) and Vesting under Section 4.3 of the Plan and (ii) Compensation for purposes of calculating the Retirement Benefit thereunder shall be deemed to be the sum of (A) the higher of Executive's Adjusted Base Salary and Executive's Base Salary, plus (B) Executive's Bonus Amount; (v) the cost of outplacement services of a nationally recognized executive employment agency selected by Executive and reasonably acceptable to the Company, or in lieu of such outplacement services Executive may elect to receive a lump sum of $50,000; (vi) continuation of the Company's executive financial and legal counseling services program as in effect on the date hereof or if more favorable to Executive, as may be available to Executive or other comparable executives of the Company thereafter, for three (3) years following Executive's Date of Termination; (vii) continuation of participation in the Company's matching gift program as in effect on the date hereof or if more favorable to the Executive, as may be available to Executive or other comparable executives of the Company thereafter, as if Executive continued as a senior executive of the Company, for three (3) years following Executive's Date of Termination; (viii) if Executive has deferred compensation agreements or deferred retention payments with the Company, or any of its subsidiaries or affiliates that (i) have not fully vested or contain any restriction on the payment of benefits thereunder (other than the passage of time) [Certain Executives: other than the passage of time, except that payment under Executive's Deferred Compensation agreements with Kansas Gas and Electric Company shall commence upon a Qualifying Termination] such benefits shall upon a Qualifying Termination become fully vested and all such restrictions shall lapse, and/or (ii) provide for variable interest rates thereon (which interest rates are established by the Company, subsidiary or affiliate), such interest rates shall be fixed for the duration of such deferral at the higher of the contract rate and the prime rate established from time to time by Chase Manhattan Bank, New York, New York ("Prime Rate"); 12
(ix) if the Executive is entitled to benefits under any split dollar life insurance agreement, (A) the amount payable to Executive thereunder shall be in accordance with the terms of the agreement, but not less than the Base Amount (as defined in the split dollar insurance agreement) under any such agreement, (B) upon a Change in Control the maximum amount that could be payable to Executive under such split dollar life insurance agreement shall be deposited in a Rabbi Trust until paid to Executive and (C) following a Change in Control the total shareholder return calculation under the split dollar agreement shall include any consideration received in the Change in Control and any distribution to shareholders of assets and/or securities at or about the time of the Change in Control; (x) Relocation Expenses; "Relocation Expenses" shall mean the purchase of Executive's principal residence by the Company at the request of Executive on or before 18 months following Executive's Date of Termination. The price to be paid by Company shall equal the higher of the appraised tax value of the residence and the appraised value of such residence determined by an appraiser selected by the Executive and the Company (but not less than the purchase price of such residence plus all improvements thereto) plus, in each case, the cost of any brokerage fees or other costs and expenses incurred by Executive in connection with such sale. If Executive and the Company cannot agree on an appraiser each shall select an appraiser. Such appraisers shall select a third appraiser. Each appraiser shall determine the fair value of the residence which shall be averaged, provided that any appraisal that is more than 10% deviation from the other two appraisals shall be omitted. The cost of such appraisals shall be paid by the Company. Upon a Change in Control, relocation expenses under this Section 6(a)(x) shall be estimated at the higher of (i) the appraised value and (ii) the purchase price plus all improvements of the applicable residence at the date of the Change in Control, plus 17% of such amount and shall be deposited in a Rabbi Trust until paid to Executive; (xi) each stock option granted to Executive by the Company and outstanding immediately prior to the Qualifying Termination shall be fully exercisable and may be exercised by Executive (or Executive's legal representatives, legatees or distributees) at prior to the expiration date of the 13
applicable option (determined without regard to any earlier termination that would otherwise occur by reason of termination of employment) and each related dividend equivalent shall become fully vested upon such Qualifying Termination; (xii) each restricted share granted to Executive by the Company and still subject to restrictions immediately prior to the Qualifying Termination shall become fully vested and all restrictions shall lapse upon such Qualifying Termination; (xiii) each restricted share unit granted to Executive by the Company which has not vested prior to the Qualifying Termination shall become fully vested upon such Qualifying Termination; and (xiv) each other stock or stock equivalent grant granted to Executive by the Company which has not vested prior to the Qualifying Termination shall become fully vested and all restrictions shall lapse upon such Qualifying Termination. (b) If during the Term of this Agreement the employment of Executive shall terminate other than by reason of a Qualifying Termination, then the Company shall pay to Executive within ten (10) days following the Date of Termination, a lump-sum cash amount equal to the sum of (1) Executive's Base Salary through the Date of Termination and any Bonus Amounts which have become payable, to the extent not theretofore paid or deferred, and (2) any accrued vacation pay and accumulated sick leave, in each case to the extent not theretofore paid. The Company may make such additional payments, and provide such additional benefits, to Executive as the Company and Executive may agree in writing. 7. Gross-Up Provision. ------------------ (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates a change in ownership or control described in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") (or any of its affiliated entities) to or for the benefit of Executive (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 7) (the "Payments") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or 14
penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay to Executive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any Excise Tax) imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of any deductions disallowed because of the inclusion of the Gross-up Payment in Executive's adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made. For purposes of determining the amount of the Gross-up Payment, the Executive shall be deemed to (i) pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross-up Payment is to be made, (ii) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (iii) have otherwise allowable deductions for federal income tax purposes at least equal to those which could be disallowed because of the inclusion of the Gross-up Payment in the Executive's adjusted gross income. (b) Subject to the provisions of Section 7(a), all determinations required to be made under this Section 7, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment, and the assumptions to be utilized in arriving at such determinations, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the change in ownership or control (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from the Company or the Executive that there has been a Payment, or such earlier time as is requested by the Company (collectively, the "Determination"). In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the change in ownership or control, Executive may appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Company shall enter into any agreement requested by the Accounting Firm in connection with the 15
performance of the services hereunder. The Gross-up Payment under this Section 7 with respect to any Payments shall be made no later than thirty (30) days following such Payment. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion to such effect, and to the effect that failure to report the Excise Tax, if any, on Executive's applicable federal income tax return will not result in the imposition of a negligence or similar penalty. The Determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") or Gross-up Payments are made by the Company which should not have been made ("Overpayment"), consistent with the calculations required to be made hereunder. In the event that the Executive thereafter is required to make payment of any Excise Tax or additional Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code and any penalties payable by Executive) shall be promptly paid by the Company to or for the benefit of Executive. In the event the amount of the Gross-up Payment exceeds the amount necessary to reimburse the Executive for his Excise Tax, the Accounting Firm shall determine the amount of the Overpayment that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by Executive (to the extent he has received a refund if the applicable Excise Tax has been paid to the Internal Revenue Service) to or for the benefit of the Company. Executive shall cooperate, to the extent his expenses are reimbursed by the Company, with any reasonable requests by the Company in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax. 8. Confidential Information. Executive acknowledges that: (i) the ------------------------ business of the Company and its subsidiaries and affiliates is intensely competitive and that Executive's engagement by the Company requires that Executive have access to and knowledge of confidential information of the Company and its subsidiaries and affiliates, including, but not limited to, the identity of customers, the identity of the representatives of customers with whom the Company and its subsidiaries and affiliates have dealt, the kinds of services provided by the Company and its subsidiaries and affiliates to customers and offered to be performed for potential customers, the manner in 16
which such services are performed or offered to be performed, the service needs of actual or prospective customers, pricing information, information concerning the creation, acquisition or disposition of products and services, customer maintenance listings, computer software applications and other programs, personnel information and other trade secrets (the "Confidential Information"); (ii) the direct and indirect disclosure of such Confidential Information to existing or potential competitors of the Company and its subsidiaries and affiliates would place the Company and its subsidiaries and affiliates at a competitive disadvantage and would do damage, monetary or otherwise, to the business of the Company and its subsidiaries and affiliates; and (iii) the engaging by Executive in any of the activities prohibited by this Section 8 may constitute improper appropriation and/or use of such information and trade secrets. Notwithstanding the foregoing, Confidential Information shall not include information which (x) is or becomes part of the public domain through a source other than Executive, (y) is or becomes available to Executive from a source independent of the Company and its subsidiaries and affiliates, or (z) constitutes general industry knowledge possessed by Executive by virtue of Executive's employment with the Company. Executive expressly acknowledges the trade secret status of the Confidential Information and that the Confidential Information constitutes a protectable business interest of the Company and its subsidiaries and affiliates. Accordingly, the Company and Executive agree as follows: (a) During the Term of this Agreement and for three years following Executive's Date of Termination, Executive shall not, directly or indirectly, whether individually, as a director, stockholder, owner, partner, employee, principal or agent of any business, or in any other capacity, make known, disclose, furnish, make available or use any of the Confidential Information, other than in the proper performance of the duties contemplated herein or as required by law or by a court of competent jurisdiction or other administrative or legislative body; provided, however, that prior to disclosing any of the Confidential Information to a court or other administrative or legislative body, Executive shall promptly notify the Company so that the Company may seek a protective order or other appropriate remedy. (b) Executive agrees to return all Confidential Information, including all photocopies, extracts and summaries thereof, and any such information stored electronically on tapes, computer disks or in any other manner to the Company at upon 17
request of the Company and upon the termination of Executive's employment for any reason. 9. Nonsolicitation. During the Term of this Agreement and for a period --------------- of two years after the Date of Termination Executive shall not, directly or indirectly, solicit, interfere with, hire, offer to hire or induce any person who is an employee of the Company or any of its subsidiaries or affiliates and whose salary is in excess of $50,000 to discontinue his or her relationship with the Company or any of its subsidiaries or affiliates and accept employment by, or enter into a business relationship with, Executive or any other person or entity. 10. Antidisparagement. ----------------- (a) Unless otherwise required by a court of competent jurisdiction or pursuant to any recognized subpoena power, Executive agrees and promises that Executive shall not make any oral or written statements or reveal any information to any person, company or agency which (i) is negative, disparaging or damaging to the name, reputation or business of the Company or any of its subsidiaries or affiliates, or any of their shareholders, directors, officers or employees, or (ii) has or would have a negative financial impact, whether directly or indirectly, on the Company or any of its subsidiaries and affiliates, or any of their shareholders, directors, officers or employees. (b) Unless otherwise required by a court of competent jurisdiction or pursuant to any recognized subpoena power, the Company agrees and promises that neither it nor any of its subsidiaries and affiliates shall make any oral or written statements or reveal any information to any person, company or agency which (i) is negative, disparaging or damaging to the name, reputation or business of Executive or (ii) has or would have a negative financial impact, whether directly or indirectly, on Executive. 11. Injunctive Relief. ----------------- (a) Executive acknowledges that a breach of the undertakings in Sections 8, 9 or 10(a) of this Agreement would cause irreparable damage to the Company and its subsidiaries and affiliates, the exact amount of which shall be difficult to ascertain, and that remedies at law for any such breach would be inadequate. Executive agrees that, if Executive breaches or attempts or threatens to breach any of the undertakings in Sections 8, 9 or 10(a) of this Agreement, then the Company shall be entitled to injunctive relief without posting bond or other 18
security, in addition to any other remedy or remedies available to the Company at law or in equity. (b) The Company acknowledges that a breach of the undertakings in Section 10(b) of this Agreement would cause irreparable damage to Executive, the exact amount of which shall be difficult to ascertain, and that remedies at law for any such breach would be inadequate. The Company agrees that, if the Company or any of its subsidiaries or affiliates breaches or attempts or threatens to breach any of the undertakings in Section 10(b) of this Agreement, then Executive shall be entitled to injunctive relief, without posting bond or other security, in addition to any other remedy or remedies available to Executive at law or in equity. 12. Withholding Taxes. The Company may withhold from all payments due ----------------- to Executive (or his beneficiary or estate) hereunder all taxes which, by applicable federal, state, local or other law, the Company is required to withhold therefrom. 13. Indemnity. The Company shall hold harmless and indemnify Executive --------- against any and all expenses (including attorneys' fees), judgements, fines and amounts paid in settlement actually and reasonably incurred by Executive in connection with any threatened, pending, or completed action, suit, or proceeding whether civil, criminal, administrative, or investigative (including an action by or in the right of the corporation) to which Executive is, was, or at becomes a party, or is threatened to be made a party, by reason of the fact that Executive is, was, or at becomes a director, officer, employee, or agent of Company, or is, or was serving, or at serves at the request of Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise; or otherwise to the fullest extent as may be provided to Executive by Company under the nonexclusivity provisions of Article XVIII of The Articles of Incorporation of Company and Kansas law. 14. Reimbursement of Expenses; Mitigation. (a) If any contest or ------------------------------------- dispute shall arise under this Agreement involving termination of Executive's employment with the Company or involving the failure or refusal of the Company to perform fully in accordance with the terms hereof, the Company shall reimburse Executive, on a current basis, for all legal fees and expenses, if any, incurred by Executive in connection with such contest or dispute or incurred by Executive in seeking advice with respect to any such matters (regardless of the result thereof), together 19
with interest in an amount equal to the prime rate of Chase Manhattan Bank from time to time in effect, but in no event higher than the maximum legal rate permissible under applicable law, such interest to accrue from the date the Company receives Executive's statement for such fees and expenses through the date of payment thereof, regardless of whether or not Executive's claim is upheld by an arbitration panel or court. (b) Executive shall not be required to mitigate any payment the Company becomes obligated to make to Executive under this Agreement. 15. Scope of Agreement. Nothing in this Agreement shall be deemed to ------------------ entitle Executive to continued employment with the Company or its Subsidiaries; provided, however, that any termination of Executive's employment during the Term of this Agreement shall be subject to all of the provisions of this Agreement. 16. Successors; Binding Agreement. (a) This Agreement shall not be ----------------------------- terminated by any sale, merger or other business combination. In the event of any such sale, merger or other business combination, the provisions of this Agreement shall be binding upon the surviving corporation, and such surviving corporation shall be treated as the Company hereunder. (b) The Company agrees that in connection with the sale, merger or other business combination, it will cause any successor entity to the Company unconditionally to assume (and for any Parent Corporation in such business combination to guarantee), by written instrument delivered to Executive (or his beneficiary or estate), all of the obligations of the Company hereunder. (c) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive's estate. 17. Notice. (a) For purposes of this Agreement, all notices and other ------ communications required or permitted hereunder 20
shall be in writing and shall be deemed to have been duly given when delivered or five (5) days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed as follows: If to the Executive: If to the Company: Western Resources, Inc. 818 S. Kansas Avenue Topeka, KS 66612 Attention: General Counsel or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (b) A written notice of Executive's Date of Termination by the Company or Executive, as the case may be, to the other, shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, and (iii) specify the Date of Termination. The failure by Executive or the Company to set forth in such notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company hereunder or preclude Executive or the Company from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. 18. Full Settlement; Resolution of Disputes. The Company's obligation --------------------------------------- to make any payments provided for in this Agreement and otherwise to perform its obligations hereunder shall be in lieu and in full settlement of all other severance payments to Executive under any other severance or employment agreement between Executive and the Company, and any severance plan of the Company. The Company's obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and except as otherwise provided in Section 21
6(a)(iii), such amounts shall not be reduced whether or not Executive obtains other employment. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Topeka, Kansas by three arbitrators in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section. 19. Employment with Subsidiaries. Employment with the Company for ---------------------------- purposes of this Agreement shall include employment with any Subsidiary. 20. Survival. The respective obligations and benefits afforded to the -------- Company and Executive as provided in Sections 6 (to the extent that payments or benefits are owed as a result of a termination of employment that occurs during the term of this Agreement), 7, 8, 9, 10, 11, 12, 13, 14, 16, 18, and 21 shall survive the termination of this Agreement. 21. GOVERNING LAW; VALIDITY. THE INTERPRETATION, CONSTRUCTION AND ----------------------- PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF KANSAS WITHOUT REGARD TO THE PRINCIPLE OF CONFLICTS OF LAWS. THE INVALIDITY OR UNENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT, WHICH OTHER PROVISIONS SHALL REMAIN IN FULL FORCE AND EFFECT. 22. Counterparts. This Agreement may be executed in counterparts, each ------------ of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 23. Miscellaneous. No provision of this Agreement may be modified or ------------- waived unless such modification or waiver is agreed to in writing and signed by Executive and by a duly authorized officer of the Company. No waiver by either party hereto at of any breach by the other party hereto of; or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Failure by Executive or the Company to insist upon strict compliance with any provision of this Agreement or to assert any right Executive or the Company may have hereunder, including without limitation, the right of Executive to terminate 22
employment for Good Reason, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. Except as otherwise specifically provided herein, the rights of, and benefits payable to, Executive, his estate or his beneficiaries pursuant to this Agreement are in addition to any rights of, or benefits payable to, Executive, his estate or his beneficiaries under any other employee benefit plan or compensation program of the Company. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer of the Company and Executive has executed this Agreement as of the day and year first above written. WESTERN RESOURCES, INC. By: _____________________________ Title:___________________________ - ---------------------------- 23
Exhibit 10(o) CHANGE IN CONTROL AGREEMENT THIS AGREEMENT is entered into as of the _____ day of _______________, 2000 by and between Western Resources, Inc., a Kansas corporation (the "Company"), and _________________ ("Executive"). This Agreement amends and restates in its entirety the Letter Agreement between the Company and Executive, dated ____________, 199__. W I T N E S S E T H WHEREAS, the Board (as defined in Section 1) has determined that it is in the best interests of the Company and its stockholders to secure Executive's continued services; and WHEREAS, the Company recognizes that the possibility of a change in control could arise which may result in the distraction of management to the detriment of the Company and its shareholders. It is important that Executive be able to advise the Board whether a proposed change in control would be in the best interests of the Company and its shareholders and to take action regarding such proposal as the Board directs, without being influenced by the uncertainties of Executive's own situation. WHEREAS, the Board has authorized the Company to enter into this Agreement. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and agreements herein contained, the Company and Executive hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall ----------- have the respective meanings set forth below: (a) "Adjusted Base Salary" shall mean ninety percent (90%) of the annual salary job value for the pay grade of Executive. (b) "Base Salary" shall mean all salary paid to or deferred by Executive for current services (excluding all bonuses, stock-based awards and other incentive compensation), together (without duplication) with the salary that would have been payable in cash to Executive if such compensation had not been converted into Restricted Share Units pursuant to the Western Resources, Inc. Executive Stock for Compensation Program. (c) "Board" means the Board of Directors of the Company.
(d) "Bonus Amount" means the greater of (a) the highest annual incentive bonus payable to or deferred by Executive from the Company (or its affiliates) for the last three (3) completed fiscal years of the Company immediately preceding Executive's Date of Termination (annualized in the event Executive was not employed by the Company (or its affiliates) for the whole of any such fiscal year) or (b) the Executive's target bonus amount for the year of termination of employment. (e) "Cause" means (i) the willful and continued failure of Executive to perform substantially his duties with the Company (other than any such failure resulting from Executive's incapacity due to physical or mental illness or any such failure subsequent to Executive being delivered a Notice of Termination without Cause by the Company or delivering a Notice of Termination for Good Reason to the Company) after a written demand for substantial performance is delivered to Executive by the Chairman of the Board which specifically identifies the manner in which Executive has not substantially performed Executive's duties, or (ii) the willful engaging by Executive in illegal conduct which is demonstrably and materially injurious to the Company. For purposes of this paragraph (e), no act or failure to act by Executive shall be considered "willful" unless done or omitted to be done by Executive in bad faith and without reasonable belief that Executive's action or omission was in, or not opposed to, the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board, based upon the advice of counsel for the Company or upon the instructions of the Company's chief executive officer or another senior officer of the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. Executive's attention to matters not directly related to the business of the Company shall not provide a basis for termination for Cause if the Company has not objected to such activity in writing. Cause shall not exist unless and until the Company has delivered to Executive a copy of a resolution duly adopted by three-quarters (3/4) of the entire Board (excluding Executive if Executive is a Board member) at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board an event set forth in clauses (i) or (ii) has occurred and specifying the particulars thereof in detail. 2
(f) "Change in Control" means the occurrence of any one of the following events: (i) individuals who, on May 17, 2000, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to May 17, 2000, whose election or nomination for election was approved by a vote of at least three-fourths of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director; (ii) any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii)), (E) pursuant to any acquisition by Executive or any group of persons including Executive (or any entity controlled by Executive or any group of persons including Executive); (iii) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries (a "Business Combination"), unless immediately following 3
such Business Combination: (A) more than 60% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation) is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets. (g) "Date of Termination" means (i) if Executive's employment is to be terminated for Disability, 30 days after Notice of Termination is given (provided that Executive shall not have returned to the performance of Executive's duties on a full-time basis during such 30 day period), (ii) if Executive's employment is to be terminated by the Company for Cause or by Executive for Good Reason, the date specified in the Notice of Termination, (iii) if Executive's employment is to be terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which shall be 90 days 4
after the Notice of Termination is given, unless an earlier date has been expressly agreed to by Executive in writing; (iv) if Executive's employment terminates by reason of death, the date of death of Executive; or (v) if Executive's employment is terminated by Executive other than for Good Reason, the date specified in Executive's Notice of Termination but not more than 30 days after the Notice of Termination is given, unless expressly agreed to by the Company in writing. (h) "Disability" means termination of Executive's employment by the Company due to Executive's absence from Executive's duties with the Company on a full-time basis for at least one hundred eighty (180) consecutive days as a result of Executive's incapacity due to physical or mental illness, unless within 30 days after Notice of Termination is given to Executive following such absence Executive shall have returned to the full-time performance of Executive's duties. (i) "Good Reason" shall mean termination within two years following a Change in Control based on any of the following events: (i) (A) any change in the duties or responsibilities (including reporting responsibilities) of Executive that is inconsistent in any material and adverse respect with Executive's position(s), duties, responsibilities or status with the Company (including any adverse diminution of such duties or responsibilities) or (B) the failure to reappoint or reelect Executive to any position held by Executive without Executive's consent; provided, however, that Good Reason shall not be deemed to occur upon a change in duties or responsibilities (other than reporting responsibilities) that is solely and directly a result of the Company no longer being a publicly traded entity and does not involve any other event set forth in this paragraph; (ii) a reduction by the Company in Executive's Base Salary, annual target bonus opportunity or targeted long-term incentive value (including any material and adverse change in the formula for such annual bonus target or long-term incentive target) as in effect immediately prior to the Change in Control or as the same may be increased from time to time thereafter; (iii) any requirement of the Company that Executive (A) be required to relocate more than thirty (30) miles from Executive's place of employment immediately prior to a 5
Change in Control or (B) travel on Company business to an extent substantially greater than the travel obligations of Executive immediately prior to the Change in Control; (iv) the failure of the Company to (A) continue in effect any employee benefit plan, welfare benefit plan or fringe benefit plan in which Executive is participating immediately prior to the Change in Control or, if more favorable to Executive, which may be available from time to time thereafter to Executive or other comparable executives of the Company, or the taking of any action by the Company which would materially and adversely affect Executive's participation in or reduce Executive's benefits under any such plan, unless Executive is permitted to participate in other plans providing Executive with substantially equivalent benefits (at no greater cost to Executive with respect to welfare benefit plans), or (B) provide Executive with paid vacation and sick leave in accordance with the most favorable policies of the Company as in effect for Executive immediately prior to the Change in Control or, if more favorable to Executive, as may be available for Executive or other executives of the Company after the date thereof; provided however, changes in any such plans which constitute in the aggregate less than 10% of Executive's aggregate benefits under such plans and which are applied to all employees of the Company shall not constitute "Good Reason"; (v) any refusal by the Company to permit Executive to engage in activities not directly related to the business of the Company which Executive was, or other executives of the Company are, permitted to engage in; (vi) any purported termination of Executive's employment by the Company which is not effectuated pursuant to Section 15(b) (and which will not constitute a termination hereunder); or (vii) the failure of the Company to obtain the assumption (and, if applicable, guarantee) agreement contemplated in Section 14(b); For purposes of this Agreement, any good faith determination of Good Reason by Executive shall be conclusive, provided however, that an isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company within ten (10) days after receipt of notice thereof given by Executive 6
shall not constitute Good Reason. Executive's right to terminate employment for Good Reason shall not be affected by Executive's incapacities due to mental or physical illness and Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any event or condition constituting Good Reason; provided, however, that Executive must provide notice of termination of employment within one hundred eighty (180) days following Executive's knowledge of an event constituting Good Reason or such event shall not constitute Good Reason under this Agreement. (j) "Notice of Termination" means a written notice of termination of employment given by one party to the other party pursuant to Section 15(b). (k) "Qualifying Termination" means a termination of Executive's employment within two (2) years following a Change in Control (i) by the Company other than for Cause; or (ii) by Executive for Good Reason. Termination of Executive's employment on account of death, Disability or Retirement shall not be treated as a Qualifying Termination. (l) "Retirement" means Executive's termination on or after Executive's normal retirement date under the terms of the Western Resources, Inc. Retirement Plan, as in effect immediately prior to Executive's termination or a Change in Control, whichever is earlier, or in accordance with any retirement arrangement established with respect to Executive with Executive's written consent. (m) "Subsidiary" means any corporation or other entity in which the Company has a direct or indirect ownership interest of 50% or more of the total combined voting power of the then outstanding securities or interests of such corporation or other entity entitled to vote generally in the election of directors or in which the Company has the right to receive 50% or more of the distribution of profits or 50% of the assets upon liquidation or dissolution. 2. Obligation of Executive. In the event of a tender or exchange offer, ----------------------- proxy contest, or the execution of any agreement which, if consummated, would constitute a Change in Control, Executive agrees not to voluntarily leave the employ of the Company, other than as a result of Disability, Retirement or an event which would constitute Good Reason, until the Change in Control occurs or, if earlier, such tender or exchange offer, proxy contest, or agreement is terminated or abandoned. 7
3. Term of Agreement. This Agreement shall continue for a period of ----------------- three (3) years from the date hereof provided that on each anniversary of the Agreement, the term shall automatically be extended for one year, unless at least 90 days prior to such date, the Company or Executive shall have given notice to cancel this Agreement at the end of its then term. 4. Payments Upon Termination of Employment. --------------------------------------- (a) Qualifying Termination. If during the Term of this Agreement the ---------------------- employment of Executive shall terminate pursuant to a Qualifying Termination, then the Company shall provide to Executive: (i) within five days following the Date of Termination a lump-sum cash amount equal to the sum of (A) Executive's Base Salary through the Date of Termination and any bonus amounts which have become payable to the extent not theretofore paid or deferred, (B) a pro rata portion of Executive's annual bonus for the fiscal year in which Executive's Date of Termination occurs in an amount at least equal to (1) Executive's Bonus Amount, multiplied by (2) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination and the denominator of which is three hundred sixty-five (365), and reduced by (3) any amounts paid from the Company's annual incentive plan for the fiscal year in which Executive's Date of Termination occurs, (C) any accrued vacation pay, and (D) the cash equivalent of any accumulated sick leave; in each case to the extent not theretofore paid; (ii) within five days following the Date of Termination, a lump-sum cash amount equal to the sum of (i) two (2) times [three (3) times for certain executives] the higher of Executive's highest annual rate of Base Salary during the 12-month period immediately prior to Executive's Date of Termination and Executive's Adjusted Base Salary, plus (ii) two (2) times [three (3) times for certain executives] Executive's Bonus Amount; (iii) the Company shall continue to provide, for a period of two (2) years [three (3) years for certain executives] following Executive's Date of Termination, Executive (and Executive's dependents, if applicable) with the same level of medical, dental, accident, disability and life insurance benefits upon substantially the same terms 8
and conditions (including contributions required by Executive for such benefits) as existed on Executive's Date of Termination or, if more favorable to Executive, as may exist immediately prior to the Change of Control; provided, that, if Executive cannot continue to participate in the Company plans providing such benefits, the Company shall otherwise provide such benefits on the same after-tax basis as if continued participation had been permitted. Notwithstanding the foregoing, in the event Executive becomes reemployed with another employer and becomes eligible to receive welfare benefits from such employer, the welfare benefits described herein shall be secondary to such benefits during the period of Executive's eligibility, but only to the extent that the Company reimburses Executive for any increased cost and provides any additional benefits necessary to give Executive the benefits provided hereunder. [(iv) Non-SERP Executives Only: within five days following the Date of Termination, a lump sum cash amount equal to the actuarial equivalent of the amount by which Executive's total vested benefits under the Western Resources Inc. Retirement Plan, computed as if Executive had two (2) additional years of benefit accrual service, exceed Executive's actual pension benefits. For this computation, Executive's final average salary shall be deemed to be the higher of Executive's Base Salary and Executive's Base Salary in effect just prior to the time a Notice of Termination is given and the benefit and accrual formulas and actuarial assumptions shall be no less favorable to Executive than those in effect at the same time;] (v) the cost (not to exceed $20,000) of outplacement services of a nationally recognized executive employment agency selected by Executive and reasonably acceptable to the Company; (vi) continuation of the Company's executive financial and legal counseling services program as in effect on the Date of Termination or if more favorable to Executive, as may be available to Executive or other comparable executives of the Company immediately prior to the Change in Control, for two (2) years [three (3) years for certain executives] following Executive's Date of Termination; (vii) if Executive has deferred compensation agreements with the Company, or any of its subsidiaries or affiliates that (i) have not fully vested or contain any restriction on 9
the payment of benefits thereunder (other than the passage of time) such benefits shall upon a Qualifying Termination become fully vested and all such restrictions shall lapse, and/or (ii) provide for variable interest rates thereon (which interest rates are established by the Company, subsidiary or affiliate), such interest rates shall be fixed for the duration of such deferral at the higher of the contract rate and the prime rate established from time to time by Chase Manhattan Bank, New York, New York ("Prime Rate"); (viii) each stock option granted to Executive by the Company and outstanding immediately prior to the Qualifying Termination shall be fully exercisable and may be exercised by Executive (or Executive's legal representatives, legatees or distributees) at anytime prior to the expiration date of the applicable option (determined without regard to any earlier termination that would otherwise occur by reason of termination of employment) and each related dividend equivalent shall become fully vested upon such Qualifying Termination; (ix) each restricted share granted to Executive by the Company and still subject to restrictions immediately prior to the Qualifying Termination shall become fully vested and all restrictions shall lapse upon such Qualifying Termination; (x) each restricted share unit granted to Executive by the Company which has not vested prior to the Qualifying Termination shall become fully vested upon such Qualifying Termination; and (xi) each other stock or stock equivalent grant granted to Executive by the Company which has not vested prior to the Qualifying Termination shall become fully vested and all restrictions shall lapse upon such Qualifying Termination. (b) If during the Term of this Agreement the employment of Executive shall terminate other than by reason of a Qualifying Termination, then the Company shall pay to Executive within ten (10) days following the Date of Termination, a lump-sum cash amount equal to the sum of (1) Executive's Base Salary through the Date of Termination and any Bonus Amounts which have become payable, to the extent not theretofore paid or deferred, and (2) any accrued vacation pay and accumulated sick leave, in each case to the extent not theretofore paid. The Company may make such 10
additional payments, and provide such additional benefits, to Executive as the Company and Executive may agree in writing. 5. Gross-Up Provision. If the payments provided by Section 4(b) hereof ------------------ (the "Agreement Payments") become subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code as in effect on the date of this Agreement (or any similar tax), Executive will be responsible for the Excise Tax and the Company will not pay Executive an additional amount (the "Gross-up Payment"). If, however, the "Agreement Payments" become subject to the Excise Tax (or any similar tax) by virtue of changes in the Code which occur after the date of this Agreement, the Company shall pay to Executive at the time specified in Subsection (i) below a "Gross-up Payment" such that the net amount retained by Executive, after deduction of any Excise Tax on the Total Payments (as hereinafter defined), and any federal, state and local income tax and Excise Tax upon the Gross-up Payment provided for by this section shall be equal to what the Total Payments would have been had such changes in the Code not occurred. For purposes of determining whether any of the Agreement Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) any other payments or benefits received or to be received by Executive in connection with a change in control or Executive's termination of employment (under this Agreement or any other agreement with the Company or any person whose actions result in a change of control or any person affiliated with the Company) (which, together with the Agreement Payments, shall constitute the "Total Payments") shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors such other payments or benefits (in whole or in part) are not subject to the Excise Tax, (b) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the Total Payments or (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (a), above), and (c) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the Gross-up Payment, Executive shall be deemed to pay federal, state, and local income taxes at 11
the highest applicable marginal rate for the calendar year in which the Gross-up Payment is to be made net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Excise Tax is finally determined to be less than the amount taken into account at the time the Gross-up Payment is made, Executive shall repay the portion attributable to such reduction (plus the portion of the Gross-up Payment attributable to a reduction in Excise Tax and/or a federal and state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. If the Excise Tax is later determined to exceed the amount taken into account at the time the Gross-up Payment is made, the Company shall make an additional gross-up payment (plus any interest payable with respect to such excess at the rate provided in Section 1274(b)(2)(B) of the code) when such excess is finally determined. (i) The Gross-up Payment or portion thereof provided for above shall be paid not later than the thirtieth day following payment of any amounts under Section 4; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than the forty-fifth day after payment of any amounts under Section 4. If the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (ii) In the event it shall be determined by the Company's independent auditor that the Agreement Payments would subject Executive to the Excise Tax, it shall also be determined whether a certain reduction in the Agreement Payments would result in an after-tax amount with a greater net present value than would occur without such reduction. If so, the Agreement Payments shall be reduced by the minimum amount necessary to obtain such result. 6. Confidential Information. Executive acknowledges that: (i) the ------------------------ business of the Company and its subsidiaries and affiliates is intensely competitive and that Executive's engagement by the Company requires that Executive have access to and knowledge of confidential information of the Company and its subsidiaries and 12
affiliates, including, but not limited to, the identity of customers, the identity of the representatives of customers with whom the Company and its subsidiaries and affiliates have dealt, the kinds of services provided by the Company and its subsidiaries and affiliates to customers and offered to be performed for potential customers, the manner in which such services are performed or offered to be performed, the service needs of actual or prospective customers, pricing information, information concerning the creation, acquisition or disposition of products and services, customer maintenance listings, computer software applications and other programs, personnel information and other trade secrets (the "Confidential Information"); (ii) the direct and indirect disclosure of such Confidential Information to existing or potential competitors of the Company and its subsidiaries and affiliates would place the Company and its subsidiaries and affiliates at a competitive disadvantage and would do damage, monetary or otherwise, to the business of the Company and its subsidiaries and affiliates; and (iii) the engaging by Executive in any of the activities prohibited by this Section 6 may constitute improper appropriation and/or use of such information and trade secrets. Notwithstanding the foregoing, Confidential Information shall not include information which (x) is or becomes part of the public domain through a source other than Executive, (y) is or becomes available to Executive from a source independent of the Company and its subsidiaries and affiliates, or (z) constitutes general industry knowledge possessed by Executive by virtue of Executive's employment with the Company. Executive expressly acknowledges the trade secret status of the Confidential Information and that the Confidential Information constitutes a protectable business interest of the Company and its subsidiaries and affiliates. Accordingly, the Company and Executive agree as follows: (a) During the Term of this Agreement and for three years following Executive's Date of Termination, Executive shall not, directly or indirectly, whether individually, as a director, stockholder, owner, partner, employee, principal or agent of any business, or in any other capacity, make known, disclose, furnish, make available or use any of the 13
Confidential Information, other than in the proper performance of the duties contemplated herein or as required by law or by a court of competent jurisdiction or other administrative or legislative body; provided, however, that prior to disclosing any of the Confidential Information to a court or other administrative or legislative body, Executive shall promptly notify the Company so that the Company may seek a protective order or other appropriate remedy. (b) Executive agrees to return all Confidential Information, including all photocopies, extracts and summaries thereof, and any such information stored electronically on tapes, computer disks or in any other manner to the Company at anytime upon request of the Company and upon the termination of Executive's employment for any reason. 7. Nonsolicitation. During the Term of this Agreement and for a period --------------- of two years after the Date of Termination Executive shall not, directly or indirectly, solicit, interfere with, hire, offer to hire or induce any person who is an employee of the Company or any of its subsidiaries or affiliates and whose salary is in excess of $50,000 to discontinue his or her relationship with the Company or any of its subsidiaries or affiliates and accept employment by, or enter into a business relationship with, Executive or any other person or entity. 8. Antidisparagement. ----------------- (a) Unless otherwise required by a court of competent jurisdiction or pursuant to any recognized subpoena power, Executive agrees and promises that Executive shall not make any oral or written statements or reveal any information to any person, company or agency which (i) is negative, disparaging or damaging to the name, reputation or business of the Company or any of its subsidiaries or affiliates, or any of their shareholders, directors, officers or employees, or (ii) has or would have a negative financial impact, whether directly or indirectly, on the Company or any of its subsidiaries and affiliates, or any of their shareholders, directors, officers or employees. (b) Unless otherwise required by a court of competent jurisdiction or pursuant to any recognized subpoena power, the Company agrees and promises that neither it nor any of its subsidiaries and affiliates shall make any oral or written statements or reveal any information to any person, company or agency which (i) is negative, disparaging or damaging to the name, reputation or business of Executive or (ii) has or would have a negative financial impact, whether directly or indirectly, on Executive. 9. Injunctive Relief. ----------------- 14
(a) Executive acknowledges that a breach of the undertakings in Sections 6, 7 or 8(a) of this Agreement would cause irreparable damage to the Company and its subsidiaries and affiliates, the exact amount of which shall be difficult to ascertain, and that remedies at law for any such breach would be inadequate. Executive agrees that, if Executive breaches or attempts or threatens to breach any of the undertakings in Sections 6, 7 or 8(a) of this Agreement, then the Company shall be entitled to injunctive relief without posting bond or other security, in addition to any other remedy or remedies available to the Company at law or in equity. (b) The Company acknowledges that a breach of the undertakings in Section 8(b) of this Agreement would cause irreparable damage to Executive, the exact amount of which shall be difficult to ascertain, and that remedies at law for any such breach would be inadequate. The Company agrees that, if the Company or any of its subsidiaries or affiliates breaches or attempts or threatens to breach any of the undertakings in Section 8(b) of this Agreement, then Executive shall be entitled to injunctive relief, without posting bond or other security, in addition to any other remedy or remedies available to Executive at law or in equity. 10. Withholding Taxes. The Company may withhold from all payments due ----------------- to Executive (or his beneficiary or estate) hereunder all taxes which, by applicable federal, state, local or other law, the Company is required to withhold therefrom. 11. Indemnity. The Company shall hold harmless and indemnify Executive --------- against any and all expenses (including attorneys' fees), judgements, fines and amounts paid in settlement actually and reasonably incurred by Executive in connection with any threatened, pending, or completed action, suit, or proceeding whether civil, criminal, administrative, or investigative (including an action by or in the right of the corporation) to which Executive is, was, or at anytime becomes a party, or is threatened to be made a party, by reason of the fact that Executive is, was, or at anytime becomes a director, officer, employee, or agent of Company, or is, or was serving, or at anytime serves at the request of Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise; or otherwise to the fullest extent as may be provided to Executive by Company under the nonexclusivity provisions of Article XVIII of The Articles of Incorporation of Company and Kansas law. 15
12. Reimbursement of Expenses; Mitigation. (a) If any contest or ------------------------------------- dispute shall arise under this Agreement involving termination of Executive's employment with the Company or involving the failure or refusal of the Company to perform fully in accordance with the terms hereof, the Company shall reimburse Executive, on a current basis, for all legal fees and expenses, if any, incurred by Executive in connection with such contest or dispute or incurred by Executive in seeking advice with respect to any such matters (regardless of the result thereof), together with interest in an amount equal to the prime rate of Chase Manhattan Bank from time to time in effect, but in no event higher than the maximum legal rate permissible under applicable law, such interest to accrue from the date the Company receives Executive's statement for such fees and expenses through the date of payment thereof, regardless of whether or not Executive's claim is upheld by an arbitration panel or court. (b) Executive shall not be required to mitigate any payment the Company becomes obligated to make to Executive under this Agreement. 13. Scope of Agreement. Nothing in this Agreement shall be deemed to ------------------ entitle Executive to continued employment with the Company or its Subsidiaries; provided, however, that any termination of Executive's employment during the Term of this Agreement shall be subject to all of the provisions of this Agreement. 14. Successors; Binding Agreement. (a) This Agreement shall not be ----------------------------- terminated by any sale, merger or other business combination. In the event of any such sale, merger or other business combination, the provisions of this Agreement shall be binding upon the surviving corporation, and such surviving corporation shall be treated as the Company hereunder. (b) The Company agrees that in connection with the sale, merger or other business combination, it will cause any successor entity to the Company unconditionally to assume (and for any Parent Corporation in such business combination to guarantee), by written instrument delivered to Executive (or his beneficiary or estate), all of the obligations of the Company hereunder. (c) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts 16
would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive's estate. 15. Notice. (a) For purposes of this Agreement, all notices and other ------ communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered or five (5) days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed as follows: If to the Executive: If to the Company: Western Resources, Inc. 818 S. Kansas Avenue Topeka, Kansas 66612 Attention: General Counsel or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (b) A written notice of Executive's Date of Termination by the Company or Executive, as the case may be, to the other, shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, and (iii) specify the Date of Termination. The failure by Executive or the Company to set forth in such notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company hereunder or preclude Executive or the Company from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. 16. Full Settlement; Resolution of Disputes. The Company's obligation --------------------------------------- to make any payments provided for in this Agreement and otherwise to perform its obligations hereunder shall be in lieu and in full settlement of all other severance payments to Executive under any other severance or employment agreement between Executive and the Company, and any severance plan of the 17
Company. The Company's obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and, such amounts shall not be reduced whether or not Executive obtains other employment, except as otherwise provided in Section 4(a)(iii). Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Topeka, Kansas by three arbitrators in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section. 17. Employment with Subsidiaries. Employment with the Company for ---------------------------- purposes of this Agreement shall include employment with any Subsidiary. 18. Survival. The respective obligations and benefits afforded to the -------- Company and Executive as provided in Sections 4 (to the extent that payments or benefits are owed as a result of a termination of employment that occurs during the term of this Agreement), 5, 6, 7, 8, 9, 10, 11, 12, 14, 16, and 19 shall survive the termination of this Agreement. 19. GOVERNING LAW; VALIDITY. THE INTERPRETATION, CONSTRUCTION AND ----------------------- PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF KANSAS WITHOUT REGARD TO THE PRINCIPLE OF CONFLICTS OF LAWS. THE INVALIDITY OR UNENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT, WHICH OTHER PROVISIONS SHALL REMAIN IN FULL FORCE AND EFFECT. 20. Counterparts. This Agreement may be executed in counterparts, each ------------ of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 21. Miscellaneous. No provision of this Agreement may be modified or ------------- waived unless such modification or waiver is agreed to in writing and signed by Executive and by a duly authorized officer of the Company. No waiver by either party hereto at anytime of any breach by the other party hereto of; or compliance 18
with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Failure by Executive or the Company to insist upon strict compliance with any provision of this Agreement or to assert any right Executive or the Company may have hereunder, including without limitation, the right of Executive to terminate employment for Good Reason, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. Except as otherwise specifically provided herein, the rights of, and benefits payable to, Executive, his estate or his beneficiaries pursuant to this Agreement are in addition to any rights of, or benefits payable to, Executive, his estate or his beneficiaries under any other employee benefit plan or compensation program of the Company. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer of the Company and Executive has executed this Agreement as of the day and year first above written. WESTERN RESOURCES, INC. By: ______________________________ Carl M. Koupal, Jr. Executive Vice President, Chief Administrative Officer - ------------------------------ 19
Exhibit 10(p) FIRST AMENDMENT TO WESTERN RESOURCES, INC. OUTSIDE DIRECTORS' DEFERRED COMPENSATION PLAN The Western Resources, Inc. Outside Directors' Deferred Compensation Plan (Amended and Restated January 1, 1994) is hereby amended, effective as of May 17, 2000, in the following respects: 1. The second paragraph of Part VIII is amended to read in its entirety as follows: "To be eligible to defer amounts during his initial year, the Director must make the election to defer the amounts as soon as elected as a Director but no later than thirty (30) days after being elected as a Director. This election is effective until December 31 of the first year of the Director's term. 2. The third paragraph of Part VIII is amended by substituting "thirty (30) days" for "fourteen (14) days." 3. The following sentence is added immediately after the third sentence of Part X: "Anything herein to the contrary notwithstanding, the phantom stock option may not be elected after May 1, 2000." IN WITNESS WHEREOF, Western Resources, Inc. has adopted this amendment the 17th day of May, 2000. WESTERN RESOURCES, INC. By: /s/ Carl M. Koupal, Jr. ----------------------- Carl M. Koupal, Jr. Executive Vice President
Exhibit 12 WESTERN RESOURCES. INC. Computations of Ratio of Earnings to Fixed Charges and Computations of Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements (Dollars in Thousands) Year Ended December 31, -------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- ---------- ---------- ---------- ---------- Earnings (loss) from continuing operations (a).................... $ 120,273 $(48,798) $ 58,088 $ 872,739 $ 255,052 --------- ---------- ---------- ---------- ---------- Fixed Charge: Interest expense............................. 298,960 294,104 226,120 193,225 152,551 Interest on Corporate-owned Life Insurance Borrowings....................... 45,634 36,908 38,236 36,167 35,151 Interest Applicable to Rentals............... 28,898 34,252 32,796 34,514 32,965 --------- ---------- ---------- ---------- ---------- Total Fixed Charges...................... 373,492 365,264 297,152 263,906 220,667 --------- ---------- ---------- ---------- ---------- Distributed income of equity investees.................................... 2,686 3,728 3,812 Preferred and Preference Dividend Requirements: Preferred and Preference Dividends........... 1,129 1,129 3,591 4,919 14,839 Income Tax Required......................... 746 746 1,095 3,770 7,562 --------- ---------- ---------- ---------- ---------- Total Preferred and Preference Dividend Requirements....... 1,875 1,875 4,686 8,689 22,401 --------- ---------- ---------- ---------- ---------- Total Fixed Charges and Preferred and Preference Dividend Requirements......... 375,367 367,139 301,838 272,595 243,068 --------- ---------- ---------- ---------- ---------- Earnings (b).................................. $ 496,451 $ 320,194 $ 359,052 $1,136,645 $ 475,719 ========= ========== ========== ========== ========== Ratio of Earnings to Fixed Charges............ 1.33 (c) 1.21 4.31 2.16 Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements....................... 1.32 (d) 1.19 4.17 1.96 (a) Earnings from continuing operations consists of earnings or loss before extraordinary gain and income taxes adjusted for minority interest and undistributed earnings from equity investees. (b) Earnings are deemed to consist of net income to which has been added income taxes (including net deferred investment tax credit), fixed charges and distributed income of equity investees. Fixed charges consist of all interest on indebtedness, amortization of debt discount and expense, and the portion of rental expense which represents an interest factor. Preferred and preference dividend requirements consist of an amount equal to the pre-tax earnings which would be required to meet dividend requirements on preferred and preference stock. (c) At December 31, 1999, the company's earnings were deficient by $45.1 million to cover fixed charges. (d) At December 31, 1999, the company's earnings were deficient by $46.9 million to cover fixed charges and Preferred and Preference Dividend Requirements.
EXHIBIT 21 WESTERN RESOURCES, INC. Subsidiaries of the Registrant State of Date Subsidiary Incorporation Incorporated 1) Kansas Gas and Electric Company Kansas October 9, 1990 2) Westar Industries, Inc. Kansas October 8, 1990 3) Protection One, Inc. Delaware June 12, 1991
Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As Independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K/A, into the previously filed Registration Statements File Nos. 333-44256, 333-35872, 333-59673, 33-49467, 33- 49553, 333-02023, 33-50069, 333-26115, and 33-62375 of Western Resources, Inc. on Form S-3; Nos. 333-02711 and 333-56369 of Western Resources, Inc. on Form S- 4; Nos. 333-9335, 333-70891, 33-57435, 333-13229, 333-06887, 333-20393, 333- 20413 and 333-75395 of Western Resources, Inc. on Form S-8; and No. 33-50075 of Kansas Gas and Electric Company on Form S-3. ARTHUR ANDERSEN LLP Kansas City. Missouri, April 30, 2001