ML20141L951
| ML20141L951 | |
| Person / Time | |
|---|---|
| Site: | Wolf Creek  |
| Issue date: | 12/31/1996 |
| From: | External (Affiliation Not Assigned) |
| To: | |
| Shared Package | |
| ML20141L945 | List: |
| References | |
| NUDOCS 9706030217 | |
| Download: ML20141L951 (74) | |
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1 Woctern Roccurcos Products 9ge nr;. w f% . M@if% " Utility Operations utikry operations are divided into three business units: Generation Transmission, and Distnbution. Electric generating y capacity of more than 5,317 megawatts. More than 11.500
'g miles of electric transmission lines. Distribution of electncity and natural gas through more than 14,000 mi!cs of electnc
,' distnbution and about 11.000 miles of natural gas transmission
, and distnbution lines.
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Westar Security setis. instatis and eiectronically mcmtors eiectronic secunty
).J ' ' systems and services for homes and businesses Features range from basic burglary and fue detection to advanced monitoring apphcations.
The Wing Group Premier developer of large international power projects. Expertise a in structunng and financing projects in gas or coal-fired power generation and specialeed experience in all aspects of pro 3ect development and completion.
< -y r' ,i Westar Energy customeed solutions to meet customer needs with emphasis on energy efficiency and comprehensive, cost-effective solutions.
Special teams design, build. and maintain high-voltage electricity and/or natural gas systems to assure power quakty (. ( yn 4 f' O Westar Capital Westar Gas Marketing offers secunty of supply. tailored nsk management, and customeed rates Holds equity investments in technology and energy-related companies, including Hanover Compressor and ADT l' 1
, 1 2
i _ . . . ~ .
l l l I l Cu;t:mers Strategy CONTENTS More than 605.000 electnc customers in Kansas and more Contribute the natural gas assets to ONE0K Inc., of Tulsa. 4 than 650.000 natural gas customers in Kansas and Oklahoma, to create the eighth largest natural gas company Financial Oklahoma. KPL and KGE sold mcne than 22.567.000 in the nation and, in return. receive 45 percent ownership Performance megawatt-hours of electricity and 153.033 mdhon cubic feet position in the combined entity Concentrate on the of natural gas in 1996 Currently. Western Resources' utikty generation, transmission and distnbution of electncity. 5 operations serve about one percent of the natonal market. Grow market share and customer base through the Chairman's pragmatic acquisition of other energy companies, such letter as Kansas City Power & Light Company. 8 Acquisition of Westmghouse Secunty Systems, pius three Build on a natonal brand name and broad customer base A Look at additional secunty company acquisitions in 1996. position to take advantage of an industry with a double-digit annual Western the company as the third largest monitored secunty services growth rate. Estabbsh a natonal platform on which to Resources company in the U S serving about 430.000 customers in overlay electncity sales when industry is deregulated One 46 states with offices in 26 states opportunity to further this strategy is the offer we made 24 ; n Decernber 1996 to acquire ADT Limited, the largest Selected l secunty company in North America Financia! Data 25 Market scope is worldwide Signed agreements in 1996 to Focus on rapidly growing Asian and South American Management's partner in projects in People's Repubhc of China. Turkey. markets. develop relationships with central govemments. Discussion and Colombia, to budd or refurbish total electric generating find local partners and seek majority of capital from third- and Analysis ; capacity of more than 2.600 megawatts party financial partners. Receive carried interest for structunng expertise and obtain opportunity for equity 30 I investment as appropriate Position involvement with an I Statements eye toward eventual distnbution pnvatization and Notes 49 Markets for electrotechnology support facihties include Market the 70-plus years of expenence and expertise in Directors chemical processors, nnsing and painting applications in the design. construction and management of high-voltage the automobde, aircraft and semiconductof industnes and electnc and high pressure natural gas systems gained while
$Q assisting entities to comply w;th federal and state serung nearly one mdhon customers in the core utihty Ten-Year environmental water and wastewater treatment regulatons. business Serve emerging and niche markets by using the Comparative unique advantage of being able to meet practical!y any Westar Gas Marketing serves about 600 customers in 10 Data utihty services challenge states and is the largest suppher of natural gas to Kansas businesses Officers and Westar Capitalis a wholly-owned subs 6ary that holds Take advantage of investment opportunities and support, Corporate Western Resources, non-operatng interests in other through prudent investrrent, energy-re!ated technology Information companies ventures 1 53 Shareowner Information 3 ;
. . ,.-.-. ~ . , . . . . . , , -
'I- WESliRN RESOURCES, INC, j 1996 Financial Performance -
% increase !
(Dollars in Millions) 19e6 - 1995 Decrease FINANClAL DATA
' Operating revenues . $ 2,047 $ 1,743 17.4 %
l Operating expenses 1,743 1,465 19.0 % l-' . Net income 169 182 7.1% Gross plant in service 6,371 6.129 3.9% l . , . 4 Embedded cost of long-term debt , , 7.6% ' 7.7% interest coverage ratio , (before income taxes, including ARJDC) . , /. 2.67 3.14
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OPERATING DATA ! Electric:
. Sales (thousands of MWH) ;
Utility service 16,6H 16,268 2.4% l Wholesale ' 5,908 4,012 47.3 % Total 22,567 20,280 11.3 % Customers (average) , , , 605,971 - 600,791 0.9% ~ j Natural gas: l Sales (thousands of MCF) l Utility service . 107,006 94.681 13.1 % ! Transportation . 45,H7 48.292 -4.9% Total 153,033 142,973 7.0% Customers (average) . . 650,257 - 648,016 0.3% ; Monitored security customers 424,000 N/A - l Number of employees (at year end). 5,960 4,047 47.3 % t t COMMON STOCK DATA l Earnings per share $2.41 $2.71 11.1 % Dividends per share $2.06 $2.02 2.0% , Book value per share . . 325.14 $24.71 - 1.7% Market value per share (at 12/31). . $30.I75 $33.375 -7.5% 3 Average shares outstanding , 63,633,763 62,157,125 2.7% l Number of common shareowners . 63,470 65.946 -3.8% Retum on average common equity 9.7% 11.2 % l Annualized dividend yield 6.7% 6.1% l Average daily volume traded , 196,441 115,826 69.6 % j I Price / earnings ratio . 12.8 12.3 Common stock price range High . . . $34.875 $34.000 Low $28.000 $28.625 l 4
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WFsTERN RrsouRCis. INC f ! f
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Jear :e ow Saareowners: i Scores of adjectives could describe your company in 1996. In fact, the media, in its extensive coverage of our growth strategy this past year, reported a few that l set the tone for this year's annual report to shareowners: innovative, aggressivo, savvy, capable, strong, and imaginative. L We, however, simply have one word for last year: strategic. l As the energy business continues to change, so, too, must your company Seeds were planted in 1996 that will grow Western Resources into a premier investment value for the long term, an investment beyond energy. PERFORMANCE First, a few words about the company's 1996 j financial performance. Earnings from continuing operations of the company were $2.60 per share. Restructuring charges at ADT and a { cooler than normal summer reduced earnings to $2.41 per share. Revenues for both electric and natural gas operations were up this year - electric by five ! percent and gas by 42 percent. The company's wholesale electricity trade showed major growth in 1996, posting a 47 percent increase in sales as compared to 1995, While revenues increased in our uti!ity l business, so did expenses as we continued our business plans tu expand our subsidiary operations. sono g.sayaa,;,. Chairman of the Board INNOVATION and Chief Euc@w Ncer l Certainly, the pace of acquisition, alliance-development, and partnership building has been dynamic. Pioneering innovation for our company, as well as the whole energy industry, will be the remembrances of 1996. j We began in April, shattering convention in the energy industry by pro, nosing a merger with Kansas City l Power & Light Company (KCPL), a neighboring efectric company headquartered in Kansas City, Missouri During the year, KCPL shareowners rejected a proposed merger with UtihCorp United, and in early 1997, we , reached a definitive agreement to merge with KCPL I i 1 5 1
WESTERN HEscuricEs. INC. i i Much was written about our efforts constituting an historic, first successful " hostile" takeover in the utility industry. We believe our bid was not hostile. It was strategic. The acquisition of KCPL makes good sense for shareowners, customers, and employees of both companies.
)
It increases our national market share of the electricity distnbution business, is projected to achieve cost j savings of more than $1 billion during 10 years, lowers rates for Missouri and Kansas customers, strengthens our balance sheet, and boosts cash flow. STRATEGIC in December, the inventive approach to restructuring our business prevailed again when we announced our intent to forge a strategic alliance with ONE0K Inc. This strategic alliance is unique in the energy industry. We contribute our natural gas assets to a new company controlled by ONEOK Inc. of Tulsa, Oklahoma. In return, your company receives the l largest shareowner interest in ONEOK, equivalent to 45 percent. And, at the same time, our gas operations benefit by joining an entity whose focus is Seeds were planted solely the natural gas business. in 1996 that will grow This alliance creates the eighth largest r^.tural gas distribution company in the country. And, Western Resources gains access Western Resources to 735,000 additional customers in Oklahoma, customers to whom we will market electricity, sect'rity, and related into a premier investment products and services. value for the long term, 8 " 0 *" Throughout 1996, we acquired four security companies, an mvestment solidifying our position in the monitored security business. After the successful acquisition of Westinghouse Security Systems at year beyond energy. end. Westar Security. our security subsidiary, became the third largest l monitored security system business in the United States. Last year, we also embarked on perhaps the most ambitious - yet very attainable - phase of our growth strategy, a bid for complete control of a world leader in security, ADT Limited, of which we already own 27 percent. Our goal? To establish a branded presence throughout the United States and abroad. allowing us to market security and energy choices to customers. l Research shows that tesidential customers are comfortable receiving security from their energy provider. The security services business is a natural fit with out other businesses. Monitored security enjoys a revenue stream that doesn't fluctuate with the seasons. And, unlike the two percent average growth rate in the electric utility business, security has exhibited an industry-wide double-digit annual growth rate. l 6
WESTERN PEscuRCEs. INC FOCUS Are we losing sight of our main business-the generation, transmission and sale of electricity? No. The strategy of acquiring nationwide security services is simple. We are increasing our opportunities to market to customers outside our traditional service territory. When full competition comes to the electric industry, your company - and your investment - will have an established national presence. GLOBAllZATION We're also investing globally. On the international front, we made substantial progress to become the leading innovator in the international energy business, The Wing Group, which we acquired in early 1996, successfully closed three major international power production agreements in 1996 in the People's Republic of China, Turkey and Colombia. Most of the growth in generating facilities and energy consumption in the nest 20 years will take place outside the United States. Like the security business, foreign energy markets offer the potentia l for robust growth. We plan, through The Wing Group, to be a player in the development of electric generation in these growth markets. We believe that the builders of the infrastructure will be best positioned to eventually serve l end-use consumers when those markets are opened to competition. ; l LEADING l 1 Why move so aggressively to accomplish so much growth so quickly? Because we plan not only to survive the coming shakeout in the energy industry, but to be a leader in the energy industry of tomorrow. Deregulation, competition, mergers, takeovers and global expansion are a fact of life. We are positioning your company with the future in mind. Our objective is simple - greater value for shareowners. We thank you for investing in Western Resources and appreciate your support as we continue to build our company, h John E. Hayes. Jr. Chairman of the Board and Chief Executive Officer 7
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l WESTERN BEscuRcEs. !Nc. l l In 1988, on the eve of wholesale deregulation in the natural gas industry, we established Rangeline Corporation (now Westar Gas Marketing) to participate and market in the new competitive marketplace. Our experience with Rangeline, and with this relatively free marketplace, was an excellent way to cut our teeth. Valuable lessons were learned as we built this successful, regiona! full-service gas marketer, lessons we intend to take to the deregulated electric market. By the early 1990s, competition in the electric industry seemed a given. To begin preparations, we acquired the Kansas Gas and Electric Company, Wichita, Kansas in 1992. Through the combination, we added more than 250,000 electnc customers to our base, many to whom we already were selling nattral gas. Natural synergies provided cost savings to customers and cost containment to the company. l l l But energy mergers alone will not grow the company at the rate necessary for the new competitive marketplace. As a result, we launched a business strategy seeking new revenue streams, new customers and new lines of unregulated business. The logical step? Monitored security services for homes and goa ,sycguessn . businesses. as In 1995, we acquired two security companies. With those ao acquisitions, we began our joumey to become a major player in the I 25 i s security business. Through the acquisition of four more security companies in 1996, including Westinghouse Security Systems, we 20 are the third largest security company for homes and businesses 15 in the United States. Capitalizing on opportunities in energy also marked 1996. , Through a strategic alliance with ONE0K Inc., Tulsa, Oklahoma, we g g , 33 , are contributing our natural gas assets to a new enterprise in return ums u,,g., for 45 percent ownership in the eighth largest natural gas company
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in the nation. We also gain access to ONE0K's 735,000 natural The 1998 closing stock price w . gas customers, enlarging our marketing platform for security and 123% of book value. Other products. This innovative approach to retaining and redefining our energy profile has been lauded by the financial market as yet another way to grow strategically. 1996 also featured our entry into the intemational power market through our acquisition of The Wing Group, an international leader in power project development. Through The Wing Group, we now are affiliated with power plant projects in the People's Republic of China. Turkey and Colombia. 10
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WisT[RN REscuRC[s. INc Yes, the company profile today goes beyond the traditional utility comoany. By year end 1996, the face of Western Resources looked like this:
- More than 650,000 natural gas customers in Kansas and Ok;ahoma,
- Mnre than 600,000 electric customers in Kansas;
- Approximately 430.000 monitored security customers in 46 states;
- Almost 600 Westar Gas Marketing customers in the central U.S.; l
- Partnerships for six power generation projects in three foreign countries;
- More than $6 billion in total assets.
- A market value of almost $2 billion; and
- Earnings of $169 million on revenues of $2 billion.
There can be no doubt. We have grown by looking at our business in Earnings and Dividends a new way. The profile, which continues to strengthen and grow, Dollars Per Share 3 og must change to meet customer and marketplace demands. g But perhaps our proudest accomplishment for you is that we broadened our business interests nationally and abroad while A, 2 00 maintaining financial integrity. I
- Our market price at year end 1996 was $30 875, with a 52 week i gg high of $34 875 and low of $28.
- The annual dividend for 1996 was $2.06, a two percent increase 3o
- from the prior year.
92 9J 94 95 96
- Current yield on Western Resources stock is 6.7 percent.
M Earnings suas Dividends The last 12 months have been exciting, challenging and fast-paced. We believe the business transactions help us move ever closer to ; Dividends increased $.04 per our vision of being the leading provider of energy and energy-related common share in 1996. Earnings
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per share were lowered primarily services and support our driving force values of customer satisfac-by onetime charges recorded by the tion, financial strength, growth and marketing ) company's investee, ADT Limited. i Far from being just an inspirational mantra or advertising gimmick, Our vision and values are backed by a concrete plan and aggressive strategy. In 1996, we set in motion sonie major components of that strategy. But we do not rest on our lautels The ; nature of change in the energy supply business is unrelenting So, too, are we in our pursuit to add value and succeed. 11 1 I
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l l WESTERN REscuBCEs. INc i ' e i j Our Wing Group investment makes Westem Resources an important player in the developing international l marketplace. Westar Energy, an unregulated subsidiary, is spearheading efforts to develop energy and energy-related . products and services to add convenience to every lifestyle. i l Further, the initiatives enacted by Western Resources in the last year have garnered widespread support i among financial analysts who follow the utility and security industries. , We are extremely enthusiastic about where these moves take your company. Why? Because our entire industry is preparing for the changes occurring in the electric utility industry. As you read the newspapers and view broadcast media reports, you will see that many of our competitors are being , equally aggressive. News of mergers and acquisitions in the electric business appear almost daily. The utility business is growing at about two percent
- annually. No utility has more than six percent of the national market share. Western Resources today has I
apprcximately one percent of the national electricity ! market. Monitored security, on the otlier hrnd, is experiencing robust expansion, witn double-digit annual growth rates. Revenues are consistent, not adversely affected by
- g weather or regulatory limitations.
But again, there are few major suppliers and only 20
- percent of the potential market has been captured. In fact, ADT, the largest monitored security company, has With the addition the largest share of the U.S. market with only seven percent.
of Westinghouse security systems Through strategic energy and security mergers and acquisitions, our goal is to and the planned d versify and grow Our customer base to between five and 10 miiiion by 2000, giving acquisition of ADT us access to five to 10 percent of the national energy market. To accomplish that, it is absolutely essential that we act on our business plan to company's market-ing reach will extend dhdd#nMms and to grow. to 46 states and provide access to Adding value and differentiating ourselves from our competitors is how we will win more than 70% of loyalty from existing customers while gaining new customers the U.S. population. When full competition arrives and customers are able to choose their energy provider, based on quality service, competitive prices, ano coavenience-driven offenngs, we believe customers will choose Western Resources. 14
1 l WESTERN PEscuRcts, Ac l l To be a low-cost producer of energy, we enlist the knowledge of our employees With their help to rnaintain service excellence, we continue to streamline and refine processes through the creation, sharing, and implementation of best practices. l We have worked diligently to ensure our customer rates are competitive. Toward that end, in 1996 we reached agreement with the Kansas Corporation Commission, and all interested parties, to reduce rates for our KEE and KPL electric customers. The $55 million rate reductions effective in 1997, combined with $10 million reductions in 1998 and 1999 and $10 million of rebates in those years, will drive KGE rates to a competitive level below the national ave, age and make KPL rates even more competitive. And we also have worked aggressively to retain customer loyalty. Our Power Technology Center in 1996 received numerous honors from the Edison Electric Institute for partnering with large industrial customers to f find solutions to their energy problems. 1 We have done this in concert with setting record production levels at our coal-fired generating facilities, j focusing on customer satisfaction l l and reliability ratings and estab-lishing a strong branded identity within our regulated service territory and beyond.
- l l Where are we going?
l l We are redefining ourselves as a caretaker, making life a httle easier for our customers by providing com-fort in their lifestyles and choice in their business plans. Our goal is to provide energy, secunty and related products that customers need, vai e, and demand. In 1996, The Wing l Group signed We must be innovative in our approach, finding solutions to the daily challenges we all face.
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And we must expand our national marketing presence for security and energy services Through increased partner in power P' i'c'* in china, product offerings, such as Appliance Care. Payment Power. security systems, customized billing, power Turkey and quality and electrotechnology solutions, we will become a one-stop energy and security convenience shop. Colombia adding We must. .and we will. . leapfrog crenpetitors to take advantage of the similarities between energy and to its other security, establishing a new accord with consumers we understand and can serve with a variety c' worldwide projects. products and services into the next century. l 15
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- WEsif RN REscuRC[s. INc a presence in 46 states throughout the United States, serving approximately 430.000 customers We will continue to grow this segment of our company, most notably and dramatically through the completion of our proposed acquisition of ADT limited, the largest secunty company in North America. We see the security business as the key to our national marketing strategy for energy and other products and services.
We see opportunities in the international power market through The W;ng Group, which we acquired in early 1996. I Through The Wing Group, we have entered into international power production markets in China, Turkey, and Colombia. All are markets where an electricity infrastructure is needed, but the local Expertise may be lacking That expertise is provided by The Wing Group, and into the future, we will continue to identify projects with strong local government support, a freely convertible currency and whera a distinct competitive advantage can be realized. I I And we see Westar Capital continuing to build a healthy investment portfolio. In 1996, Westar Capital acquired 27 percent ownership of ADT Limited, seeing the value of a
$589 million investment grow significantly. Ana its acquisition, in Wholesale Electric Sales Volumes Thousands of KWH 1992, of ContraCl Compression for $20 million was sold in 1995 to Hanover for $55 milhon in stock.
Opening our Eyes to new possibilities. That is all it really takes to j 4.000,000 prosper and maintain stable footing.
- 3.000.000 Many parallels have been drawn between the electric industa and j ,, other industries experiencing deregulation, such as telecom- i j munications, natural gas, and airline transportation. l t000.000 We see that a utility company will not survive, let alone prosper, by just selling kilowatt-hours. The airline industry deregulation 92 93 94 2 96 experience demonstrated that it Was bad business to pursue a 4
Wholesale electricity sales Commodity business with high-cost assets Tne electric industry can showed substantial advances profit by heeding that lesson. I compared to 1995. Wholesale electric volumes were up more Electric utility companies must change or disappear. We believe it is than 47% from last year, not a question of "If" utility monopoly franchises will disappear, it is a question of "when."
- Electricity providers will have to offer value-added goods and services to retain current customers and attract new ones. These new products may be as simple as customized bilkng or as comphcated as multi year j hedging of energy prices.
j Perhaps they will be products yet uncreated But we envision that the electricity business will storm the marketplace with much the same technological innovations that made cellular phones, laptop computers and 4 ATMs common consumer terms. W l It is highly probable the electric utility industry will redefine the concept of deregulation. The stakes are higher, the players more numerous, and the issues more complex. The U.S. electric utility industry is a i
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WESTERN REscuRcts,INC J j $200-billion plus industry, bigger than either telecommunications or automobiles. And the industry is q experiencing the most drastic changes in its history. There will be consolidation of providers, price restructuring, choices beyond comprehension for customers, while technological advancements and capabilities will give new meaning to lifestyle convenience. Of the approximate 150 major investor-owned utilities at the beginning of the 1990s, only 94 remain. We f expect, that to be a survivor, we must be one of the top 25 energy companies by the year 2000. At the end of 1996, Western Resources ranked 43rd, And we also expect the legislative and regulatory arenas to set some deadlines for bringing competition to I the electric power market. What the end product will entail is anyone's guess. But the ultimate winner must j be the customer. And those energy companies who are aggressively seeking new ways to conduct business l will share in that success as well as making winners of their shareowners. Taking care of business these days means managing perpetual motion. The economy will reward only those ! of us who grasp the meaning of competition, who embrace it, and ) who run head first into the opportunities change brings. l
...we believe the 1 With competition, or without it, we believe the marketplace will l demand much more from its energy company. We will deliver without marketplace w.ll i breaking our stride or your dividends.
demand much more We already are headlong into a business world requiring speed and agility. The days of improving operations by small, steady, step-by-from its energy step improvements are fading fast. We are creating a high speed organintion, quick to respond, quick to change and quick to succeed. company. We will As a result, we are honing our powers of peripheral vision. That is, we are not merely looking at our business in the context of the deliver without electric industry. Rather, we are examining all options and strategies in relation to all other companies, not simply electric companies. breaking our stride While our vision is to be a leading energy and security provider in the nation, we also see that meeting and exceeding what it takes to or your d.ivi .dends. achieve that vision will make Western Resources a leader in long-term value accretion. Our vision will be attained by adding value. More customers is a means to an end for growth, but just having access to custorncrs is not enough. It will no longer be enough to meet customers' needs, we must anticipate and exceed customers' needs. As William Jennings Bryan said, " Destiny is not a matter of chance, it is a matter of choice; it is not a thing to be waited for, it is a thing to be achieved." i 19
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i WEs1[RN resources, iNc. i profile lias made it a sales leader in the growing bulk power merket. Joining with KCPL will add more than 430,(ird electric retail customers and $900 m2 ion in operating revenues. Changes in our industry will alter the utility financial picture. There will be less reliance on monopoly territories and regulated rates of retum from established lates. Market-based pricing, fewer restrictions on ! allowed rates of return, and freedom from geographical boundaries will be the result. To meet these new market realities, we also are finding new ways to offer more services and meet customer needs and demands.
; The monitored security business offers advantages to revenue streams unavailable in the traditional energy business. Monitored security has a non-seasonal revenue stream with an industryewide average annual double-digit growth rate. Annual growth rates in the electricity business average approximately two percent.
The ADT transaction is expected to significantly improve cash flow in the frrst full year. Similarly, the addition of Westinghouse Security Systems also should add to cash flows. Growth in the security business also means we will achieve a branded national presence. Today, elec'ric , utilities sell only in certified territories, except to other utilities and municipalities. But legislative and regulatory changes will soon likely allow utilities to compete for customers in the same manner as we have seen with AT&T, MCI, and Sprint, in the telecommunications iridustry. t in addition to gaining an expanded customer and geographic base plus an immediate national brand name, the strategic combination with security companies will bring us markoting expertise and a ready-made I nationalinfrastructure. The Westinghouse Security Systems acquisition, combined with other security acquisitions completed in [ 1996, gives the company customer offices in 26 states, serving almost 430,000 customers in 46 states in the U.S. The addition of ADT will add another 280 offices in North America and more than two million customers in 46 states in the U.S., Canada and the United Kingdom. As well as providing access to more than 70 percent ; of the U.S. population, this extensive marketing network will bring us valuable marketing and operating l experience in different regions well in advance of nationwide opportunities in the electric retail business. This 1 pragmatic purchase of existing branch office operations also will make it easier and faster to market other j' products and services as technology and market trends warrant. The monitored security business provides a platform on which to overlay other energy products and services. t The two lines of business are a good fit with each other. We have in common many operating aspects: 24-hour phone service, monitoring and dispatch centers, a monthly billing system, and a responsive workforce that is geared toward field service and a networked customer base. In the increasingly automated, interconnected marketplaces of modemized countries, there are four lines of access to homes and businesses: security, energy, telecommunications, and entertainment. We aim to focus in two of those areas, security and energy. l l The experience we have gained in the partially deregulated natural gas trade, as well as the expertise we have and are buying through our push into the security business, will toughen our ent' oetitive edge. Through our unregulated subsidiaries, we are gaining marketing savvy and learning how to penetrmnd repture new market niches. n \ l
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l WisT[RN REscuRC[s. INc i Our expanding intemational involvement means more opportunities for growth and positioning to eventually j expand retail energy markets. Through The Wing Group, our power project development subsidiary, the
- company is taking steps to become a leader in the international energy business.
a i Most of the growth in generating facilities and energy consumption during the next 20 years will take place outside the United States in developing nations in Asia, the Middle East and South America. As govemments l dismantle energy monopolies, there are major opportunities for expansion. Many govemments are privatizing the generation segment of these monopolies first. { in 1996, The Wing Group finalized an agreement with China Power Intemational Holdings involving more than l 2,000 megawatts of coal-fired generation in China. The Wing Group also closed on a 478 megawatt f combined-cycle plant in Turkey and formalized construction of a 160-megawatt, natural l gas fired power plant in Colorabia. f
...we have chosen In these international ventures, the company is taking advantage of opportunities to establish relationships with central governments.
8 Unique growth The structure of these projects is to find local partners and seek third-party financial partners. In retum, the company receives j etrategy that will bear fruit carried interests for structuring expertise and obtains equity i investments. Acquisition and participation opportunities we j i in the coming tide of pian to execute include acting as developers, modifying existing plants and constructing new plants. competition, challenge, We believe our growth program will afford the company a more favorable position when distribution is eventually privatized. and change. Builders of the infrastructure in these developing nations will be best positioned to serve end-users later as retail markets are opened and consumption grows. Also on the intemational front, our strategic combination with ADT gives a foothold in foreign markets in Canada and the United Kingdom. As in the United States, the organization in place provides a springboard for marketing energy and related products and services. Westem Resources, through the ADT outlets, may soon have the opportunity to market energy to those same United Kingdom customers. Increased financial strength is directly linked to growth. We are focusing on achieving growth without sacnficing productivity. Our growth strategy is characterized by increasing the customer base, market share, and diversifying to increase product offerings. We are operating under a mindset that is marked by innovation and nimble, agile adjustment to market trends. The company is focusing on growing revenues to boost the value of the shareowners' investment. We intend to make the most of the markets to come through our strategies and tha resourcefulness and drive of our empicyees, to assure Western Resources' continued position as the company of choice for customers and for investors. 23
WESTERN RESOURCES,INC, I Selected Financial Data ; l (Ddlars in Thousands) 1996 1995 1994.1) 1993 1992m + Year Ended December 31 INCOME STATEMENT DATA:
. Operating revenues:
Electric . $ 1,197,433 $ 1,145.895 $ 1.121.781 $ 1,104,537 $ 882,885 Natural gas - 849,386 597.405 642.988 923,874 756.537 Total operating revenues 2,046,819 1,743.300 1,764,769 2,028,411 1,639.422 Operating expenses 1,742,826 1,464.591 1,489,719 1,736,051 1.399,701 Allowance for funds used dunng construction , 3,225 4.227 2,667 2,631 2,002
- Net income 168,950 181,676 187,447 177,370 127,884 Earnings applicable to common stock . 154,111 168,257 174,029 163.864 115.133 Decemter 31. (Dollars in Thousands)
BALANCE SHEET DATA: Gross plant in service $ 6,370,586 $ 6.128,527 $ 5,963,366 $ 6.722,483 $ 6.033.023 j Construction work in progress 93,834 100,401 85,290 80,192 68.041 Tctal assets. 6,647,781 5.490,677 5.371,029 5.412,048 5.438,906 Long-term debt, preference stock and !
- other mandatority r0Jeemable securities . 1,951,583 1.641,263 1,507,028 1.673.988 2,077,459 I l
Year Ended December 31 COMMON STOCK DATA: Earnings per share. $2,41 $2.71 $2.82 $2.76 $2.20 Dividends per share. $2.06 $2.02 $1.98 $1.94 $1.90 Book value per share . $25.14 $24 71 $23 93 $23.08 $21.51 Average shares outstanding {000's) . 63,834 62,157 61.618 59.294' 52,272 Interest coverage ratio (before income taxes, including AFUDC) . 2.67 3.14 3.42 2.79 2.27 Opsrating Revenues Operating Costs Residential Operation & Maintenance Industnal Depreciation & Amortization 1 Other Taxes ,Q Capital Costs Commercial . g Rsysnues by customer class exhibited Reflecting our increasing focus on unregulated , e tiight shift from industrial to other businesses, operating and maintenance l bretuse of the substantialincrease expenses increased as a percentage of total I in wholesale sales volumes, costs, while capital expenditures accounted for less of total operating costs. l
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(1)Infonnate reflects the sales of the Missouri Propenies (Note 191 l (2)Iriformation reheets the mergne with KGE on Mrch 31,1932.
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wtSIERN HEs00RCES,INC, Management's Discussion and Analysis Financial Condition proposed alliance, the company will record its common equity interest in New
" "98 " " "9" " "" "0 ' " "9 * * " "
General: Eacnings were $2.41 por share of common stock based on 63,833,783 average cornman shares for 1996, a decrease from $2.71 in 1995 on 62,157,125
"" "' 9" '" * "W** "* I average common shares. Net income for 1996 decreased to $169.0 million com-en pa c e e ge e s a s are enec e pya n al
" 0 * " ^"9"8 pared to $181.7 milhon in 1995. The decrease in net income and eamings per ' '
reported operating revenues of $1.2 billion and net income of $52.8 million. share is primanly due to the impact of an $11.8 milhon or $0.19 per share charge, Het of tax, attributable to one-time rest'ucturing and other charges recorded by The structure of the oroposed alliance is not expected to have any immediate i ADT Limited (ADT), in which the company owns approximately 27% of the com- income tax consequences to either company or to either company's shareowners I man stock. Abnormally cool summer weather during the third quarter of 1996 See Note 6 for more information regarding this strategic alliance. compaied 101995 and the $8.7 million electric rate reduction to Kansas Gas ard Proposed Acquisition of ADT Limited,Inc.:During 1996,the company Electric Company (KGE) customers implemented on an interim basis on May 23, purchased approximately 38 million common shares of ADT Limited, Inc. (ADT) for 1996 and made permanent on January 15,1997 also adversely affected eamings. approximately $539 million. The shares purchased represent approximately 27% Dividends for 1996 increased four cents per common share to $2.06.per share. On of ADT's common equity making the company the largest shareowner of ADT. January 24,1997, the Board of Directors declued a dividend of 521/2 cents per On December 18,1996, the company capitalization Summary common share for the first quarter of 1997, an increase of one cent over the pre- announced its offer to exchange vious quarter. "
$22.50 in cash ($7.50) and shares of 100 %
The book value per share was $2514 at December 31,1996, compared to $24 71 the company's common stock l at December 31,1995. The 1996 closing stock price of $30.875 was 123% of book ($1500) for each remaining out- ) g value. There were 64,625,259 common shares outstanding at December 31,1996. standing common share of ADT not j already owned by the company (ADT 1 ed e vabe of & AM OHer, en I 1996 Highlights assuming the company's average Proposed Merger with fdansas City Power & Light Company: stock price prior to closing is above On April 14,1996, in a letter to Mr. A. Drue Jennings, Chairman of the Board. $29 75 per common share,is approx-President and Chief Executive Officer of Kansas City Power & Light Company imately $3.5 billion, including the I (KCPL), the company proposed an offer to merge with KCPL (KCPL Merger)- company's existing investment in 2n .On November 15,1996, the company and KCPL announced that representatives of ADT. Based upon the closing stock their respective boards and rnanagements rnet to discuss the proposed merger price of the company on December transaction. On February 7,1997, KCPL and the company entered into an agree. 17,1996, approximately 63.1 milhon ment to merge the two companies shares of company common stock 92 93 94 95 96 would be issuable pursuant to the tscotherMendatoruyned m ble The merger agreement provides for a tax free, stock-for-stock transaction vaned sommes ADT Offer. However, the actual num, at approximately $2 bil! ion. Under the terms of the agreement, KCPL shareowners "*"" *"**'# ber of shares of company common " " will receive $32 of company common stock por KCPL common share, subject to an stock that would be issuable in con- sem o g I m o exchange ratio collar of not less than 0.917 to no more than 1.100 common shares nection with the ADT Offer will Consummation of the KCPL Merger is subject to customary conditions including depend on the exchange ratio and The company's capital structure obtaining the approval of KCfTs and the company's shareowners and various the number of shares of ADT out- at December 31,1996, was 45% regulatory agencies. standing on the expiration date of common stock equity,2% pre-The KCPL Merger, will create a company with more than two million security and the exchange offer. ferred and preference stock,6% energy customers. $8.8 billion in assets, $2.7 bdlion in annual revenues and more other mandatorily redeemable ADT is engaged in the electronic than 8,000 megawatts of electnc generation resources. As a result of the merger securities and 47% long-term debt. security services business providing agreement, the company terminated its exchange offer that had been effective continuous monitoring of commercial since July 3,1996. See Note 2 of Notes to Consolidated Financial Statements and residential security systems for approximately 1.2 million customers in North (Notes) for more information regarding the proposed merger with KCPL. America and abroad. A registration statement covering the proposed ADT Offer is Proposed Strategic Alliance with Oneck Inc.: On Decerrter 12, pending beiare the Secunties and Exchange Commission (SEC). The ADT Offer will 1996, the company and ONEOK Inc. (ONE0K) announced an agreement to form a be subject to the approval of ADT and company shareowners and certain re0ula-strategic alliance combining the natural gas assets of both companies. Under the tory authorities. On January 23,1997, the waiting period for the Hart-Scott-flodino agreement for the proposed strategic alliance, the comoany will contribute its Antitrust Improvement Act expired. On February 7,1997, the company received natural gas business to a new company (New Oneok) in exchange for a 4b% regulatory approval from the KCC to issue company common stock and debt equity interest. The recorded net property value being contributed at December 31, necessary for the ADT Offer. See Note 3 for more information regarding this 1996 is estimated at $G00 milhon No gain or loss is anticipated as a result of the investment and the proposed ADT Offer, proposed transaction. The proposed transaction is subject to satisfaction of cus-Acquisition of Westinghouse Security Systems, Inc.: On tomary conditions, including approval by ONEOK shareownr s and regulatory December 31,1996, the company purchased the assets and assumed certain lia-authorities. The company is working towards consummation .;f the transaction bihties comprising Westinghoise Security Systems, Inc. (WSS), a monitored durin0 the summer of 1997. security service provider with over 300,000 accounts in the United States. The The equity interest would be comprised of approximately 3.0 million common company paid $358 milkon in cash, subject to adjuatment. As the acquisition was shares and 19.3 million convertible preferred shares. Upon consummation of the consummated on December 31,1996, the assets of WSS are included in the 25
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.wist[M MSOURCES, INCJ l
'l Management s Discussion and Analysis ]
I l Consolidated Balance Sheets, but the results of operations are not included in the The company expects to improve cash flow in 1997 and subsequent years wher. it l Consolidated Statements of income. For the year ended December 31,1996, WSS begins receiving annual dividends from New Oneck upon consummation of the l reported $110 million in revenues. See Note 4 for further infarmation. alliance with DNE0K. :
~ Aoguisition of The Wing Group Umited:In February of 1996 the Cash provided by operating activities has decreased compared to 1995, but l campsny purchased The Wing Group Limited (The Wing Group), an intemational continues to be the primary source for meeting cash requirements. The company pwer developer. believes that intemally generated funds and new and existing credit agreements will be sufficient to meet its debt service, dividend payment.and capital expenditure As a consequence of consummated acquisitions and investments, the cornpuny's j mquirements for its utility operations, j investments and other property increased by approximately $1.1 billion in 1996.
These investments represent approximately 18% of the company's consolidated The company, through its wholly-owned subsidiary The Wing Graup, has committed , assets at December 31,1996. The impact of the consummated acquisition and to investing at least $136 million throagh June 1998 for power generation projects )
. investment transactions on the company's 1997 financial results is expected to be in the People's Republic of China, Turkey and Colombia See Notes 4 and 8. i accretive to eamings.
The company will be required to issue a si0nificant number of its common shares 1994 Seles of Missouri Gas Properties: On January 31,1994, the to consummate the transactions discussed above. The company will also be i
> company sold substantially all of its Missouri natural gas distribution pmperties required to raise a significant amount of funds to consummate the proposed trans- l ard operations to Southem Union Company (Southem Union). The company sold actions and to repay short-term debt incurred in connection with compicted -l the remaining Missouri properties to United Cities Gas Company (United Cities) on transactions. The company expects to raise the required funds from intemally gen- ' February 28,1994. The propodies sold to Southem Union and United Cities are erated funds and from the issuance of debt and equity securities. See Notes 2 and referred to herein as the Missouri Properties." For additional information regarding 3 for additional discussion regarding the proposed transactions of KCPL and ADT. l the sales of the Missouri Properties see Nnte 19.
The company's capital needs through 2001 for bond maturities are approximately Forwerd Looking information: Certain matters discussed in this annual $200 million. This capital will be provided from intamal and extemal sources avail- , report are " forward-looking staternents" intended to qualify for the safe harbors able under then existing financial conditions. There are no cash sinking fund l from liabihty estab!ished by the Private Securities litigation Reform Act of 1995. requirements for bonds or preference stock through the year 2001. i Such statements address future plans, obja:tives, expectations and events or con-On July 1,1996, all shares of the company's 8 50% Preference Stock due 2016 ! ditions conteming various matters such as capital expenditures, eamings, I were redeemed. litipation, rate and other regulatory matters, .pending transactions, liquidity and , capital resources, and accounting matters. Actual results in each caso could differ On July 31,1996 Westem Resources Capitai ll, a wholly owned trust, of which the , materially from those currently anticipated in such statements, by reason of fac. sole asset is subordinated debentures of the company, sold in a public offering , tors such as electric utility restructuring, including ongoing state and federal 18 milhon shares of 8-1/2% Cumulative Quarterly Income Preferred Securities, activities; future economic conditions; legislation; regulation; competition; and Series B for $120 million. The trust interests represented by the preferred securi- , other circumstances offecting anticipated rates, revenues and costs. ties are redeemable at the option of Western Resources Capital li, on or after July ! 31,2001, at $25 per prefened security plus accumulated and unpaid distributions. r i.lquidity and Capital Resources:The company's liquidity is a function of Holders of the securities are entitled to receive distributions at an annual rate of , its ongoing construction and maintenance program designed to improve facilities g_1/2% of the liquidation preference value of $25. Distributions are payable quar-which provide electric and natural gas service and meet future customer service terly, and in substance are tax deductible by the company These distributions are i requirements. Acquisitions and subsidiary investments also significantly affect the recorded as interest charges on the Consolidated Statements of income. The sole ; company's liquidity. ' asset of the trust is $124 million principal amount of 8-1/2% Deferrable Interest During 1996, construction expenditures for the company's electric system were Subordinated Debentures, Series B due July 31,2036.These preferred securities l approx %ately $138 million and nuclear fuel expenditures were approximately are included under Westem Resources Obi; gated Mandatority Redeemable l
$3 millira. It is projected that adequate capacity margins will be maintained with. Preferred Securities of Subsidiary Trusts holding solely company Subordinated out the addition of any major generating facilities for the next five years. The Dehentures (Other Mandatorily Redeemable Securities) on the Consolidated i construction expenditures for improvements on the natural gas system, including Balance Sheets and Consolidated Statements of Capitalization (See Note 11).
the company's service line replacement program, were approximately $59 million The company's short-term financing requirements are satisfied, as needed, during 1996. through the sale of commercial paper, short-term bank loans and borrowings under Capital expenditures for current utility operations for 1997 through 1999 are antic- lines of credit maintained with banks. At December 31,1996, short-term burrow-ipated to be as follows: ings amounted to $981 million, of which $293 rnillion was commercial paper s an , , e company M conunM cd Electric Nuclear Fuel Natural Gas arrangements available of $973 million. (Dollars in Thousands) The company's short-term debt balance at December 31,1996, increased approx-1997 $122,900 $ 21,300 $ 50.600 imately $777 million from December 31,1995. The increase was prirnarily a result 1998 . 126,600 21,500 52,100 of the company's purchases of an approximate 27% common equity interest in 130,400 3,800- 53,700 ADT and its purchase of WSS. See Notes 3 and 4 for further discussion of these
] 99 purchases.
These expenditures are estimates prepared for planning purposes and are subject On February 12,1997, the company filed an application with the KCC to issue to revisions (See Note B). Electnc expenditures would be significantly more in
$550 million in first mortgage bonds or senior unsecured debt to refinance '
years after 1997 following consummation of the merger with KCPL (See Note 2). short-term and long-term debt and for other corporate purposes.
- It!atural gas expenditures wdl be significantly less m 1997 and subsequent years upn the consummation of the alliance with ONE0K (see Note 6). The embedded cost of long-term debt, excluding the revolving credit facility, was 7.6% at December 31,1996, a decrease from 7.7% at December 31,1995. Lower 26
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l wtsTtnN ntsouncts, INC. ;
^ Management's Discussion and Analysis {
L interest rates on the company's variable rate pollution control bonds resulted in Regulated natural gas revenues increased 29% for 1996 as compared to 1995 as -l l this decrease. a result of colder winter temperatures, higher gas costs passed on to customers f
' The company has a Dividend Reinvestment and Stock Purchase Plan (DRIP). through the ccst of gas rider (COGR), and inueased as-available gas sales.
l Shares issued under the DRIP may be either original issue shares or shares pur- Regulated natural gas revenues for the last six months of 1996 were also higher ; due to the gas revenue increase ordered by the KCC on July 11,1996. For addi-l' . chased on the open market. The company has been issuing original issue shares l since January 1,1995 with 935,461 shares issued in 1996 under the DRIP. tional information on the gas rate increase, see Note 9. t
- The company's capital structure at December 31,1996, was 45% common stock As-available gas is excess natural gas under contract that the company did not l equity,2% prefened and preference stock,6% other mandatorily redeemable require for custcmer sales or storage that is typically sold to gas marketers. -
securities, and 47% long-term debt. The capital structure at December 31,1996, According to the company's tariff, the nominal margin made on as;available gas including shon-term debt and current matunties of long-term debt, was 35% com_ sales, is retumed 75% to customers through the COGR and 25% is reflected in ! wholesale revenues of the company, i rnon stock equity,2% preferred and preference stock,5% other mandatorily redeemable securities, and 58% dobt. Natural gas revenues will be significantly less 'in 1997 and subsequent years fol-lowing consummation of the alliance with ONE0K (see Note 6). l As of December 31;1996, the company's bonds were rated "A3" by Moody's (Investors Service, "A? by Fitch investors Service, and "A " by Standard & Poor's Non-regulated gas revenues increased from approximately $170 million to approx-Ratings Group (S&P). In January of 1997, reflecting S&P's increased financial imately $250 million, or 47%, for 1996 as compared to 1995 as a result of a 12% , rating standards and as a result of the company's increased short-term debt increase in sales volumes of the companys wholly-owned subsidiary Westar Gas .. related to its acquisitions, S&P regraded the company's band rating to DBBt Marketing, Inc. (Westar Gas Marketing). When the alliance with ONE0K is com- ! Pending the resolution of the ADT Offer, the company remains on CreditWatch plete, Westar Gas Marketing will be transferred to New Oneok. with negative implications with S&P. 1955 Compared to 1994: Electric revenues increased two percent in 1995 f as a result of increased sales in all customer classes. The increase is primarily i Results of Operations attributable to a higher demand for air conditioning load during the summer ! The following is an explanation of significant variations from prior year results in months of 1995 campared to 1994. The company's service territory experienced
. revenues, operating expenses, other income and deductions, interest charges, and normal temperatures during the summer of 1995, but were more than 20% ;
preferred and preference dividend requirements The results of operations of the w rmer, based on cooling degree days, compared to the summer of 1994. { company exclude the activities related to the Missouri Properties following the Natural gas revenues decreased in 1995 primarily as a result of the sales of t sales of those properties in the first quarter of 1994. For additional information Missouri Properties in the first quarter of 1994. The Conschdated Statements of . regurding the sales of the Missouri Properties, see Note 19. Income include revenues of $77 million related to the Missouri Properties for ths first quarter of 1994. Revenues Excluding natural gas sales related to the Missouri Properties, natural gas revenues , The oprating revenues of the company are based on sales volumes and rates increased six percent due to an increase in non regulated gas revenues. Non- i authorized by certain state regulatory commissions and the Federal Energy regulated gas revenues increased from approximately $145 million to approximately i Rege!atory Commission (FERC). Future electric and natural gas sales will be $170 million, or 17% for 1995 as compared to 1994 as a result of a 44% increase l
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affected by weather conditions, the electric rate reduction which was implemented in sales volumes of Westar Gas Marketing. on Febniary 1,1997, changei in the industry, changes in the regulatory environ- ' ment, competition from other sources of energy, competing fuel sources, customer Operating Expenses conservation effotts, and the overall economy of the company's service area. 1996 Compared to 1995:A 19% increase in total operating expenses in Electric fuel costs are included in base rates Therefore, if the company wished to 199fi compared to 1995 is primarily due to a full year of amortization of the acqui- i recover an increase in fuel costs, it would have to file a request for recovery in a sition adjustment related to the acquisition of KGE in 1992 and increased fuel rate filing with the Kansas Corporation Commission (KCC) which could be denied expense, purchased power, and natural gas purchases for electric generating in whole or in part The company's fuel costs represented 17% of its total operat- stations due to ' Wolf Creek having been taken off-line for its eighth rafueling and ing expenses for the years ended December 31,1996 and 1995. Any increase in maintenarice outage during the first quarter of 1996. Also contributing to the j fuel costs from the projected average which the company did not recover through increases in fuel and purchased power expenses was the increased net genera-rates would reduce the company's camings, The degree of any such impact would tion due to the increase in customer demand for air conditioning load during the b affected by a variety of factors, however, and thus cannot be predicted. second quarter of 1996. The increase in operating expenses was partially offset 1996 Compared to 1995: Electric revenues were five percent higher in by decreased maintenance expense and income tax expense. j 1996 compared to 1995 duo to higher sales in the residential and commercial cus- 1995 Compared to 1994: Total operating expenses decreased two percent l tomer classes as a result of colder winter and warmer spring temp ^ratures in 1995 compared to 1994. The decrease is largely due to the sales of the Missouri experienced during the first six months of 1996 compared to 1995. The company's Properties, lower natural gas purchases resulting from lower sales, and lower fuel setvice territory experienced a 17% increase in heating degree days during the expense resulting from a lower unit cost of fuel used for generation. first quarter end cooling degree days more than doubled during the second Partially offsetting this decrease were expenses related to an early retirement quarter of 1996 compared to the same periods in 1995. Wholesale and inter' program. In the second quarter of 1995, $7.6 million related to early retirement change sales were also higher due to an inemased number of customers. Partially programs was recorded as an expense. offsetting this increase was abnormally cool summer weather during the third quarter of 1996 compared to 1995 and the $8.7 million electric fate reduction to Other income and Deductions: Other income and deductions, net of KGE customers implemented on an interim basis on May 23,1996 and made taxes, decreased for the year ended December 31,199C compared to 1995 permanent on January 15,1997, For more information related to electric rate primarily as a result of a decrease in certain miscellaneous regulated gas revenues decreases, see Note 9. which ceased during 1996 in accordance with a KCC order. 27
1 WEST 9N MSoVRCES,INC, l o Management's Discussion and Analysis
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l ' Other income and deductions, net of taxes, decreased for the twelve months the date the limits were proposed to comply with the new tules. See Note 8 for ertded December 31.1995 compared to 1994 as a result of the gain on the sales more information regarding environmental matters. I of the Missouri Properties recorded in the first quarter of 1994. Decommissioning: The staff of the SEC has questioned -certain current = - Interest Charges and Preferred and Preference Dividend Re. . accounting practices used by nuclear electric generating station owners regarding
- quirements: Total interest charges increased 22% for the twelve months the recognition, measurement, and classification of decommissionig costs for endad December 31,1996 as compared to 1995 due tc increased interest expense nuclear electric generating stations. In response to these questions, the Financial on higher balances of the mandatorily redeemable F9ferred securities and . Accounting Standards Board is expecteo to issue new accounting standards for ';
increases in short-term borrowings to finance the purchase of the investment in . closure and removal costs, including decommissioning, in 1997. TheI ADT. Total interest charges increased three percent for the twelve months ended not able to predict what effect such changes would have rA ila results of opera-December 31,1995 as compared to 1994, primarily due to higher debt balances f tions, financial position, or related regulatory practices until the final issuance of 1 and higher interest rates on short-term borrowings and variable long-term debt. revised accounting guidance, but such effect could be material. Refer to Note 8 for I KGE hrger implementation: In accordance with the KCC KGE merger additional information relating to new accounting standards for decommissioning. l order, amortization of the acquisition adjustment commenced August 1995. The On August 30,1996, Wolf Creek Nuclear Operating Corporation submitted the amortization will amount to approximately $20 reillion (pre-tax) per year for 40 - 1996 Decommissioning Cost Study to the KCC for approval. Approval of-lt years. The company is recovering the amortization of the acquisition adjustment is sti!) pending Based on the study, the company's share of these decommis- !' through cost savings under a sharing mechanism approved by the KCC sioning costs, under the immediate dismantlement method, is estimated to be Dased or the order issued by the KCC, with regard to the recovery of the acquisi, approximately $624 million during the period 2025 through 2033, or approxi-
. tion premium, the company must achieve a level of savings on an annual basis mately $192 million in 1996 dollars. These costs were calculated using an ,
(considering shanng provisions) of approximately $27 million in order to recover assumed inflation rate of 36% over the remaining service life from 1996 of 29 l the entire acquisition premium. years. Refer to Note 8 for additional information relating to the 1996 Decom-missioning Cast Study. ;
' On January 15,1997, the KCC fixed the annual merger savings level at $40 million ;
which provides complete recovery of the acquisition premium amortization Corporate-owned Life Insurance: A regulatory asset totahng $41 mik' ion ! expnse and a retum on the acquisition premium. See Note 9 for further informa- and $35 million is outstanding at December 31,' 1996 and 1995, respectively , tion relating to rate matters and regulation. related to deferred postretirement and postemployment costs. In order to offset these costs, the company purchased corporate-owned life insurance (COU) pole, As management presently expects to continue this level of savings, the amount is cies on its employees in 1992 and 1993. On August 2,1996, Congress passed I expcted to be sufficient to allow for the full recovery of the acquisition premium. ' legislation that will phase out tax benefits associated with the 1992 and 1993 COLI contracts. The loss of tax benefits will significantly reduce the C0U camings. I Other Information The company is evaluating other methods to replace the 1992 and 1993 C0U core inflation: Under the ratemaking procedures prescribed by the regulatory tracts. The company also has the ability to seek recovery of postretirement and commissions to which the company is subject, only the original cost of plant is postemployment costs through the ratemaking process. Regulatory precedents
' recoverablo in rates cha'ged to customers. Therefore, because of inflation, established by the KCC are expected to permit the accrued costs of postretirement j
present and future depreciation provisions are inadequate for purposes of main _ and postemployment benefits to be recovered in rates. If these costs cannot be ; recovered m rates, the company will be required to expense the regulatory asset. ' taining the purchasing power invested by common shareowners and the related cash thws are inadequate for replacing property. The impact of this ratemaking See Notes 1 and 12. ; prccess on common shareawners is mitigated to the extent depreciable property Competition and Enhanced Business Opportunities:The electric , is financed with debt that can be repaid with dollars of less purchasing power. and natural gas utility industry in the United States is rapidly evolving from a While the company has experienced relatively low inflation in the recent psst, the historically regulated monopolistic market to a dynamic and cornpetitive inte- ) cumulative effect of inflation on operating costs may require the company to seek grated marketplace. The 1992 Energy Policy Act (Act) began the process of regulatory rate relief to recover these higher costs, deregulation of the electricity industry by permitting the FERC to order electric Environmental: The company has taken a proactive position with respect to utilities to allow third parties in sell electric power to wholesale customers over
< the potential environmental liability associated with former manufactured gas their transmission systems. As part of the KGE merger, the company agreed to sites and has an agreement with the Kansas Department of Health and open access of its transmission system for wholesale transactions. During 1996, .
Environment to systematically evaluate these sites in Kansas. In accordance with wholesale electric revenues represen;ed approximately 12% of the company's
. the terms of the ONE0K agreement, ownmship of twelve of the fifteen aforemen- toWect@evenn . tioned sites will be transferred to New D. rok upon consummation of the ONEOK Since the Act, the wholesale electricity market has become increasingly competi-alliance. The DNE0K agreement limits 1N company's liabilities to an immaterial tive as companies begin to engage in nationwide power brokerage. In addition. - amount for future remediation of these sites. various states including Califamia and New York have taken active steps toward The company is one of numerous potentially responsible parties at a groundwater allowing retail customers to purchase electric power from third party providers. In contamination site in Wichita, Kansas which is listed by the Environmental Protection 1996, the KCC initiated a generic docket to study electric restructuting issues.
AgWEPN as a Supedund site. A retail wheeling task force has been created by the Kacsas Leg _slature i to study competitivu trends m retail eir'ctric services. During the 1997 session of the The nitrogen oxides and toxic limits, which were not set in the law, were proposed 1 Kansas legislature, bills have been introduced to increase competition in the l
. by the EPA in January 1996. The company is currently evaluating the steps it will electric industry. Among the matters under consideration is the recovery by utilities )
need to take in order to comply with the proposed new rules, but is unable to ' of costs in excess of competitive cost levels. There can be no assurance at this time determine its compliance options or related compliance costs, which could be that such costs will De recoverable rf open competition is initiated in the electric material, until the evaluation is finished. The company will have three years from utility market. 4 28
WESTERN RESOURCES, INC. Management's Discussion and Analysis The natural gas industry has been substantially deregulated, with FERC and many Center, which began operations on July 1,1993, provides natural gas transporta- I state regulators mquiring local natural gas distribution companies to allow tion, storage, and gathering services, as well as balancing, and title transfer wholesale and retah customers to pmchase pas from third party providers. capability. The company transferred certain natural gas transmission assets The successful providers of energy in a regulated market will not only provide having a net book value of approximately $50 million to the Market Center. The electric or natural gas service but also a variety of other services, including secu- Market Center provides no notice natural gas transportation and storage services rity. Tb company believes that in the coming deregulated environment, more to the company under a long-term contract. When the alliance with DNE0r is cophisticated consumers continue to demand new and innovative options and completed, the Market Center will be transfened to New Oneck. insist on the development of more efficient products and services to meet their Regulatory: On April 24,1996, FERC issued its final rule on Order No. 888, l energy 4 elated needs. The company believes that its strong core utility business " Promoting Wholesale Competition Through Open Access Non-discriminatory provides it with the platform to offer the more efficient product and energy Transmission SerAces by Public Utilses; flecovery of Stranded Costs by Public sersicos that customers will desire. Furtnermore, the company believe* it is Utilities and Transmitting Utikties". The company does not presently expect the l necessary to continuously seek new ways to add value to its customers' lives and order to have a material effect on its operations in large part because it is already businesses. Recognizing that its current customer base must expand beyond its operating in substantially the required manner due to its agreement with the KCC l existing service area, the company views every person, whether in the United during the merger with KGE (See discussion above in " Competition and Enhanced States or abroad, as a potential customer. The company also recognizes that its Business 0pponunities"). potential to emerge as a leading national energy and energy-related services On May 23,1996, the company implemented an $8.7 million electric rate redaction provider l,s enhanced by having a strong brand name. The company has been to KGE customers on an interim be On October 22,1996, the comparn, the KCC ! establishing its brand identity through the Westar Security name.The combination Staff, the City of Wichita, and the Cnw . Utility Ratepayer Board filed an agree- 1 of tb company and ADT would immediately pmvide an ideal brand name to I ment al the KCC whereby the company's retail electric rates would be reduced. capitali:e on the emerging security and energy marketplaces. subject to approval by the KCC. This agreemont was approved by the KCC on Altbugh the company has been planning for the deregu!ation of the energy January 15,1997. Under the agreement, on February 1,1997, KGE's rates were market, increased competition for retail electricity sales may in the future reduce reduced by $36 3 million and the May.1996 interim reductirn became permanent. the company's eamings from its formerly mgulated business. During 1995, how- KGE's rates will be reduced by another 510 million effective June 1,1938, and e"er, the company's average retail electric rates were over 9% below the national again on June 1,1999. KPCs rates were reduced by $10 milkon effective overage and continue to be competitive within the midwestem United States. In February 1,1997, Two one-time rebates of $5 million will be credited to the com-1997, the company further reduced its retail rates and expects to be able to retain pany's customers in January 1998 and 1999 The agreement also fixed annual a substantial portion of its current sales volume in a competitive environment. savings from the merger with KGE at $40 million. This level of merger savings pro- 1 Finally, the company belines that the deregulation of the. energy market may vidas for complete recovery af the acquisition. premium araortization expense and pro"e bneficial to the company, since any potontial competitive pressure in its a retum on the acquisition premium. See Note 9 for additional information regard-formerly regulated business is expected to be more than offset by the nationwide ing rate matters. markets which the company expects to enter by ofiering energy and security On August 22,1996, the company filed with the FERC an application for aaproval , services to customers. of its proposed merger with KCPL On December 18,1996, the FERC issued a ; Oparating in this competitive environment will place pressure on utikty profit Merger Policy Statement (Policy Statement) which articulates three principal fac- , margins and credit quality. Wholesale and mdustrial customers may threaten to tors the FERC will apply for analyzing mergers: (1) effect on competition (2) ! pursue cogeneration, self-generation, retail wheeling, municipalization or reloca- customer protection, and (3) effect on regulation. The FERC has requested the tion to other service territories in .an attempt to obtain reduced energy costs. company to and pursuant to the FERC request, the company will revise its filing to increasing r,ompetition has resulted in credit rating agencies applying more strin- comply with the specific requirements of the Policy Statement. gent guidelines when making utility credit rating determinations. See discussion The company currently applies accounting standards that recognize the economic of Statement of financial Accounting Standards No. 71 " Accounting for the Effects effects of rate regulation, SFAS 71, and, accordingly, has recorded regulatory of Certain Types of Regulation"(SFAS 71)in " Regulatory" below-assets and liabilities related to its generation, transmission and distribution oper-The company is providing competitive electric rates for industrial expansion ations. In the event the company determines that it no longer meets the criteria projects and economic development projects in an effort to maintain and increase set forth in SFAS 71, the accounting impact would be an extraordinary non-cash electric load. During 1996, the company lost a major industrial custorner to cogen- charg9 to operations of an amount th?t would be material. Critena that give rise cration resulting in a reduction to pre-tax eamings of $86 million annually This to the discontinuance of SFAS 71 include,(1) increasing competition that rastricts customer's decision to develop its own cogeneration project was based largely on the company's ability to establish prices to recover specific costs..and (2) a signif-factors unique to the customer, other thafi energy cost. icant change in the manner in which rates are set by regulators from a cost-based regulation to another form of regulation. The company periodically reviews these in light of these developments, the company is pursuing the following stratagic entena to ensure the continuing apphcation of SFA$ 71 is appropriate. Based on plan: Il maintain a strong core energy business; 2) build a national brarded current evaluation of the various factors and conditions that are expected to presence; and 3) become a leader in the international energy business h oroer to
- mpact future cost recovery, the company believes that its net regulatory assets be btter positioned for the competitive environment in the energy industry, the am pmbable of future recovery. Any regulatory changes that would require the company is pursuing a merger with KCPL (see Note 2), seeking to acquire ADT (see company to discontinue SFAS 71 based upon competitive or other events may sig-Note 3), planning a strategic alliance with ONEOK (see Note 6), and developing nificantly impact the valuation of the company's net regulatory E,ssets and its intemational power projects through its wholly owned subsidiary, The Wing Group (see Note 4).
utihty plant investments, particularly the Wolf Creek faciky At this time, the effect of competition and the amount of regulatory assets which could be recov-To capitalize on opportunities in the non-regulated natural gas industry, the ered in such an environment cannot be predicted. See discussion of
- Competition" i
company, thm'.igh its wholly-owned subsidiary Mid Continent Market Center, Inc. above for initiatives taken to restructure the electric industry in Kansas. (Market Center), established a natural gas market center in Kansas. The Market j J 29
. , - - . - - . .= .-
WESTElIN MSOURCES, INC.-- l .
' Consolidated Balance Sheets -
December 31, (Dollars in Thousands) 1996 1995 ASSETS : 3 UTILITY PLANT (Notes 1 and 17): i Electric plant in service . , 8 5.536,256 $ 5,341,074 l Natural gas plant in service . , 834,330 787,453-6,370,586 6.128,527 I Less- Accumulated depreciation , 2,146,363 1.926.520 { 4,224,223 4,202,007 ! Construction work in progress , , 93,834 100.401 1 Nuclear fuel (net) . , , 38,461 53.942 Net utility plant . , 4,356,518 4,356.350 ; INVESTMENTS AND OTHER PROPERTY: !' trwestment in ADT (net) . . 590,102 - Security business and other property , , 584,647 99,269 Decommissioning trust (Note 8) , 33,041 25.070 1,207,790 124,339 l
, CURRENT ASSETS: .
i Cash and cash equivalents (Note 1) 3,724 2.414 Accounts receivable and unbilled revenues (net)(Note 1) . 318,966 257,292 Fossil fuel, at average cost 39,061 54,742 l Cas stored underground, at average cost . 30.027 28,106 ' Materials and supplies, at average cost , 66,167 57,996 Prepayments and other current assets' 36.503 20.426 ; 494.448 420.976 ,
- DEFERRED CHABGES AND OTHER ASSETS: !
Defened future income taxes (Note 10) 217,257 282,476 ! Carparate owned life insurance (net)(Notes 1 and 12) . 86,179 44.143 [ Regulatory assets (Note 9) . 241.,039 262.393 ! Other . 44.550 3 589,025 589 012 ! TOTAL ASSETS $ 6,647,781 5 5.490.677 i CAPITAll2ATl0N AND LIABILITIES CAPITALIZATION (See statements): Common stock equity , 8 1,624,680 $ 1,553,110 Cumulative pre' erred and preference stock , 74,858 174,858 : Western Resources obligated mandatority redemable preferred securities j 1 of subsidiary tnJsts holding solely comparrt subordinated debentures 220,000 100.000- ! Long-term debt (net) . 1,681,583 1.391,263 4 3,601.121 3.219.231 l CURfGNT LIABILITIES:- Short-term debt (Note 15) 980,740
)
203.450 ; long-term debt dne within one year (Note 14) - - 16.000 ! Accounts payable , , 100,540 149,194 , Accrued taxes - . 83,813 60.569 i s Accrued interest and dividends , 70,193 62,157 Other , 36,806 40,266 1,352,092 539.636 ' DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes (Note 10) 1,110,372 1,167.470 Deferred investment tax credits (Note 10) . , 125,528 132,286 Defened gain from sale-leaseback (Note 16) . 233,060 242.700 l- Other , , 225,008 189.354 f 1,694,568 1.731.810 l COMMITMENTS AND CONTINGENCIES (Notes 7 and 8) l [ TOTAL CAPITAllZATION AND LIABILITIES . $ 'i,647,781 $ 5.490,677 l The Notes to Consolidated Fmancial Statements are an integral part of thm statement.
)
30 l
. WESTERN RESOURCES, IfdC.
- Consolidated Statements of locome Year Ended December 31, (Dollars in Thousands, Except Per Share Amounts) 1996 1995 1994m
" OPERATING REVENUES (Notes 1 and 9):
Electric u ,, 8 1,197,433- $ 1,145,895
$ 1,121,781 Natural gas . 849,386 597.405 642,988 Total operating revenues , 2,046,B19 1,743,300
, , 1,764,769 OPERATING EXPENSES:
Fe:tl used for generation: Fossil fuel . 245,990 211,994 220,766 Nuclear fuel (net) , , 19,962 19,425 13.562 Power purchased , 27,592 15,739 15.438 Natural gas purchases 354,755 263.790 ' 312,576 '
' Other operations 907,995 479,136 438,945 Maintenance ,
, , 99,122 - 108,641 113,186 Depieciation and amortization , 183,722 160,285 157,398 Amortization of phase-in revenues . 17,544 17,545 17,544 Taxes (See Statements):
Federalincome . , 70,057 72,314 76,477 State income 19,035 18,883 19.145 General 97,052 104,682
- 96.839 Total operating expenses . . 1,742,825 1,464.591 1,489.719 OPERATING INCOME ,,.
. 303.993 278,709 275,050 OTHER INCOME AND DEDUCTIONS:
; Corporate-owned life insurance (net) . (2,249) - (2,668) (5,354)
Gain on sales of Missouri Properties (Note 19) . - -- 30,701 Spcial charges from ADT(Note 3) (18,181) Equity in camings of investees and other (net) 31,723 . 19,925 10.296 ;
' income taxes inct)(See Statements) 2,900 7,805 (4,329) !
Total other income and deductions 14.283 25.062 31,314 l
- INCOME BEFORE INTEREST CHARGES 318,276 303,771 306.364 INTEREST CHARGES:
Long-term debt 105,741 95,962 98,483 Other 46,810 90.360 25.101 : Allowarte for borrowed funds used during construction (credit) . . (3,225) (4,227) (2,667) ! Tota' interest charges , 149,326 122.095 118,917 ! NET INCOME , , 168,950 181,676 187,447 , PREFERRED AND PREFERENCE DIVIDENDS . 14,839 13.419 13418_ j EARNINGS APPUCABLE TO COMMON STOCK , 8 154,111 ,S 168,257 j
$ 1 9 29 1
AVERAGE COMMON SHARES OUTSTANDING . 63,833,783 62,157,125 61,617,873 i- EARNINGS PER AVERAGE COMMON SHARE.0UTSTANDING $2.41 $2.71 $2.82 DIVIDENDS DECLARED PER COMMON SHARE $2.06 $2.0? $1.93 l l I' l l I l 1 1 j {1Hntarmenon refiacts the sales of the Misscarl P. ,,1ertics { Note 19L [ . The Notes to Consokdated knancial Statements are an mtogral pan of this utstement. I' 31 L !
! WEST (RN RESOURCES,INC. ; i I i 4 Consolidated Statements of Cash Flows , Year Ended Oncember 31, (Dollars in Thousands) 1996 1995 19941) -l l ! CASH FLOWS FROM OPERATING ACTMTIES: l l Net income . $ 188,950 $ 181,676 $ ,187,447 j Depreciation and amortization . . , 190,E28 160.285 157,398 ' Amortization of nuclear fuel . 15,885 14,703 10.437 f Gain on sale of utility plantinet of tax) ,, , (951) . (19,296) ' ! Amortization of phase-in revenues . 17,544 17,545 17,544 l Corporate-owned life insurance policies , , , , (29,713) (28,548). (17,246) l , Amortization of gain fram sale-leaseback . , (9,540) (9,640) (9.640) l Equity in eamings ofinvestees , (9.373) - - J Deterred acquisition costs , , (31,518) - l l Changes in nther working capital items l (net of effects from acquisitions): . l l Accounis receivable and unbilled revenues (net)(Note 1) (47,474) (37,532) (75,630) l '~ Fossil fuel . , , . , ,.. 15,881 (15,980) (7,B28) l Gas stored underground . (1,921 ) 17.116 (5,403) ! I Accounts payable , , , 15,353 18.578 (41,682) Accrued taxes . , ,, , , , 36,709 (19.024) 20,756 i Other . . . 1ft,325 8,179 41,309 l Changes in other assets and liabilities . , (63,950) 537 9.625 ' Net cash flows from operating activities . 275,286 306,944 267,791
)
t t CASH FLOWS USED IN INVESTING ACTIVITIES: Additions to utility plant . , 199,509 236.827 237,696 ,
- l. Sales of utility plant . - (1,723) (402.076) !
Purchase of ADT common stock . lis9,362 - - l ! Security business acquisitions , , 368,535 - - l Non-utility investments (net) . 6,563 15,408 9,041 ! Corporate-owned life insurance policies . , 54,007 55,175 54.914 D3ath proceeds of corporate-owned hfe insurance policies , (10.653) (11,187) (1,251) t Net cash flows used in (from) investing activities . . 1,207,323 294,500 (101.676) l, CASH FLOWS FROM FINANCING ACTMTIES: Short. term debt (net) 777,290 (104,750) (132,695) Bonds issued .
- - 235,923 Bonds retired , (16,135) (105) (223.906) l Pevolving credit agreements (net) 225,000 50,000 (115,000)' I Other long-term debt retired . , , , - - (67,893) !
I Other mandatorily redeemable securities . 120,000 100,000 - Borrowings against life ireurance policies 45,978 49,279 70.633 i , Repayment of borrowings a0ainst life insurance policies . (4,963) (5,384) (225) Cemmon stock issued (net) . . 33,212 36,161 - Proference stock redeemed . (100,000) - - Dividends on preferred, prefenmce, and common stock , (147,035) (137,946) (134,806) Net cash flows from (used in) financing activities . 933,347 (12,745) (367.969) l WET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS 1,310 (301) 1,498 l l CASH AND CASH EQUIVALENTS:
- l. Beginning of the period , 2,414 2,715 1,217
' End of the period . $
3,724 $ 2,414 $ 2,715 .) SUPPLEMENTAL DISCLOStWES OF CASH FLOW INFORMATION CASH PAID FOR: Interest on financing activities (net of amount capitalized) . $ 169,713 $ 136,548 $ 134,785 income taxes 66.692 84,811 90.229 I i, l
, i ,
tillnformation reflects the sales of the Nhssoun Properties (Note 191 Tk) Notes to Consohdated hnancial Statements are an imegral part r,f this statement 32
I
. Wf ST[RN RESOURCES, INC.
}
- Consoudated Statements of Taxes i
- i i Year Ec
- led December 31, (Dollarsin Thousands) 1996 1995 1994m i
!' '" i FEDERAL INCOME TAXES: I Payable currently . , , ,
. ,, 8 61,802 $ 51,218 $ 98,748 Defened taxes arising from: .
Attemative minimum tax credit . . .. .. . - ;. , . 18.491 23,925 - i Depreciation and other property related items (1,386) (1,813)
, , .. 29.506 ' i Energy and cost of gas riders . {2,095) '
5.239 9.764' Natural gas line survey and replacement program . (486) - 1,192 (313) .( Missouri property sales . , ,, . - - (36,343) ! Prepaid power sale . 376 (13,759) (23) l Other . , , . . (2,301) (7,046) : (800) Amortization of investment tax credits . . . (6,852) 16.789) (6.739) {' Total Federalincome taxes . ,, 57,569 65.903 80.064 Less: , i Federal income taxes applicable to r on operating items: j
' Missouri property sales , ,. ., . - -
S.485 ! Other . ,, ,, , (2.408) (6.411) ! 15.898) t Total Federal income taxes applicable to non-operating items . . (2.488) (6.411) 3.587 ; Total Federal income taxes charged to cperations 70,057 72.314 76.477 !
. STATE Il0COME TAXES:
Pa7able cunently . ,, .
-[
18,885 17,203 17,758 .t Deferred (net) ' (352) 286 2.129 : Total State income taxes . , , 18.533 17.489 19.887 [ Less: . State income taxes applicable to non-operating items . Total State income taxes charged to operations . (502) 19,035 (1,394) 18.883 742
./
19.145 g L GENERAL TAXES:
't . Prcperty and other taxes , 84,776 83,738 86.087 Franchise taxes , 32 26 5.116
. Payroll taxes , 12,244 13.075 12.879 Total general taxes charged to operations . 97.052 96.839 104.682 TOTAL TAXES CHARGED TO DPERATIONS . , 8 186,144 $ 188.036
$ 200.304
' 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 btween the effective rates and the Federal statutory income tax rates are as follows:
Yea, inded Decerr. bur 31, 1996 1995 1994m EFFECTIVE INCOME TAX RATE . 32.8 % 318% 35.3 % EFFECT OF; State incometaxes (5.1) (4 3) (4 6)
. Amortization of investment tax credits . 2.7 2.5 2.4 Corpsrate-owned hfe insurance policies . , 3.7 3.2 2.1
- Flow through and amortization, net (.2) (.2) (7)
Othar differences . . 1.1 20 .5 STATLITORY FEDERAL INCOME TAX RATE . , 35.0% 35 0 % 35.0 % hfintcamapon renects its soies of the ussoun hopemes (Note 19) The Notes to Conschd.ited fiimcial Statements are en miegral part of this statement. 33
WESitRN fif SOUitC(3,INC. f
+
Consolidated Statements of Capitalization December 31 (Dollars in Thousands) 1996 1995 , I COMMON STOCK EQUITY (See Statements). ; Common stock, par value $5 per share, j
. authorized 85.000.000 shares, ;
outstanding 64,625.259 and 62.855,961 shares, respectiw.ly , , i
$ . 323,126 $ 314,280 i Paid-in capital , 739,433 697,962 j
Retained earnings , , 562,121 E,40.868 ; 1,624.600 45 % 1,553.110 48 % I CUMULAihE PREFERRED AND PREFERENCE STOCK (Note 11): Prefened stock not subject to mandatory redemption. l Par value $100 per share, authorized ' 3 600.000 shares, outstanding i i 41/2% Series.138,576 shares . 13,858 13.858 f 41/4% Series,00,000 shares . E,0e0 6.000 ! 5% Series. 50.000 shares 5,000 5.000 l 24,858 24.858 ! i Pieference stock subject to mandatory redemption - l Without par value, $100 stated value, authorimd l 4,000.000 shares, outstanding - i 7 58% Series. 500,000 shares 50,000 50,000 l 8.50% Series 1,000,000 shares , - 100.000 l 50,000 150.000 f 74.858 2% 174.858 6% l WESTERN RESOURCES OBLIGATED MANDATORILY REDEEMABLE f PREFERRED SECURITIES OF SUBSIDIARY l TRUST HOLDING SOLELY COMPANY l SUBORDINATED DEBENTURES (Note 11): 220,000 - 6 % 100.000 3% l
~ LONG-TERM DEBT (Note 14): }
First mortgage bonds 825,000 841,000 l Pollution control bonds . 521,682 521,817 ; Revolving credit agreement . . 275,000 50,000 l Other long-term debt 65,190 - l
' Less: i Unumortized premium and discount (net) 5,289 5.554 Long-term debt due within one year - 16.000 1,681,583 47% - 1,391,263 43 %
. TOTAL CAPITAllZATION . , 8 3,601.121 100 % $ 3,219.231 100%
1 l i l l 1 ( l l ! i i I l The Notes to Consohdated hnantaat Statements sie an intagial pan of this statement 34 l
. ., . . . . . - ~ - - - . . .. - -
WESTERN RE5000CIS, INC. l 1 Consolidated Statements of Common Stock Equity i i Ccmmon Pasa m Hetamed I (Dollars in Thousands) Stock Capital Earnings ] BALANCE DECEMBER 31,1993 5 61,617,873 shares . .,, ,
$ 308.089 $ 667,738 - $ 446,348 l N3 income , 187,447 f
Cash dividends: . .; Preferred and preference stock :. , , + , (13,418) l Common stock, $1.98 per share , 1122,003) } l Expenses on common stock . . , , . (228) l Distribution of common stock under the { Dividend Reinvestment and Stock Purchase Plan , 482 i BALANCE DECEMBER 31,1994 61,617,873 shares , , , 308.089 667.992 ' 498.374 ! Net income , , ,,, , , ,,. 181.676-Cash dividends: ! l- Preferred and preference $tock . , (13.419) , '~ Commoa stock, $2 D2 per share ' , , (125.763) ! Ex53nses on common stock , (772) Issuance of 1,238,088 shares of common stock , 6,191 30,742 :
- I
! BALANCE DECEMBER 31,1995 ; 62,855,961 shares , , , , 314.280 697,962 540,868 i Net income . . , 100,910 J Cash dividends: l Preferred and preference stock . , (14,830) ; Common stock, $2.06 per share , (131,811) l l
- ' Issuance of 1,769,298 shares of common stock . ,
I,846 41,471 (1,247) j i i ! BALANCE DECEMBER 31,1996, i 64,625,259 shares 8 323,136 8 730,433 $ 582,121 j l , , , , { l ; l \ l t I l I 5
}
i !
- l. !
I i t ! I I 5 t i i
' The Notes to Consolidateo fmancial Statements are an integral part of ths statement.
35 ) i
E
~ t'!E8 TERN RESOUPcES, INC = Notes to Consolidated Financial Statements f
- 1. Summary of Significant Accounting Policies ery, the company believes that its net regulatory assets are probable of future l General: The Consolidated Financial Statements of Westem Resources, Inc. recovery. Any regulatory changes that would require the company to discontinue SFAS 71 based upon competitive or other events may significantly impact the val- l (tb company) and its wholly owned subsidiaries, include KPL, e rate-regulated ;
electric and gas division of the company, Kansas Gas and Electric Company (KGE), nation of the company's net regulatory assets and its utility plant investments. l a rate-regulated electric utility and wholly-caned subsidiary of the comoany, particularly the Wolf Creek facility. At this time, the effect of compatition and the l 1 Westar Security inc. (Westar Security) a wholly-owned subsidiary which provides amount of regulatory assets which could be recovered in such an environment j monitored electronic security services, Westar Energy, Inc. a wholly owned sub- cannot be predicted. See Note 9 for further discussion on regulatory assets. t sidiary which provides non-regulated energy services. Westar Capital, Inc. In January,1996, the company adopted Statement of Financial Accounting j (W; star Capital) a wholly-owned subsidiary which holds equity invectments in Standards No.121. " Accounting for the Impairment of Long-Lived Assets and for i technology and energy related companies, The Wing Group Limited (The Wing Long-Lived Assets to Be Disposed Of"(SFAS 121). This Statement imposes stricter Group), a wholly-owned developer of Lintemational power projects, and Mid criteria for regulatory assets by requiring that such assets be probable of future : Continent Market Center, Inc. (Market Center), a regulated gas transmission ser. recuvery at each balance sheet date. Based on the current regulatory structure in vice provider. KGE owns 47% of Wolf Creek Nuclear Operating Corporation which the company operates, the adoption of this standard did not have a mater- j (WCN00), the operating company for Wolf Creek Generating Station (Wolf Creek). ial impact on the financial position or results of operations of the company. This i The company records its proportionate share of all transactions of WCNOC as it conclusion may change in the future as competitive factors influence wholesale or ; does other jointly-owned facilities. All significant intercompany transactions have retail pricing in the electric industry. { been eliminated. Util6ty Plent: Utility plant is stated at cost. For constructed plant, cost includes l The company is an investor-owned holding company. The company is engaged contracted servicts, direct labor and materials, indirect charges for engineering, , principally in the production, purchase, transmission, distribution and sale of elec- supervision, general and administrative costs, and an allowance for funds used j tricity, the delivery and sale of natural gas, and electronic security services. The during construction (AFUDC). The AFUDC rate was 5.7% in 1996,6.31% in 1995, ! company serves approximately 606,000 electric customers in eastem and central and 4.08% in 1994. The cost of additions to utility plant and replacement units of j Kansas and approximately 650,000 natural gas customers in Kansas and north- property are capitalized. Maintenance costs and replacement of minor items of i castem Oklahoma. The company's non-utility subsidiaris provide electronic property are charged to expense as incuned. When units of depreciable property ! security services to approximately 400,000 customers throughout the Linited are retired, they are removed from the plant accounts and the original cost plus [ States, market natural gas primarily to large commercial and industrial customers, removal charges less salvage are charged to accumulated depreciation. l develop intemational power projects, and provide other energy-related products In accordant;e with regulatory decisions made by the KCC, amortization of the and services. acquisition premium of approximately $801 million resulting from the KGE purchase I The company prepares its financial statements in conformity with generally began in August of 1995. The premium is being amortized over 40 years and has a cceepted accounting principles as applied to regulated public utilities. The been classified as electric plant in service. Accumulated amortization through accounting and rates of the i,cmpany are subject to requirements of the Kansas December 31,1996 totaled $27.5 million. See Note 9 for further information r i Corporation Commission (KCC), ti e Oklahoma Corpnration Commission (OCC), and conceming the amortization of this premium. , the Federal Energy Regulatory 40mmission (FERC). The financial statements ' Depreciation: Depreciation is provided on the straight-line method based on require management to m6Le esti nates and assumptions that affect the reported estimated useful lives of property. Composite provisions for book depreciation amounts of assets and liabildiP;,, to disclose contingent assets and liabilities at approximated 2.97% during 1996,2.84% during 1995, and 2.87% during 1994 the balonce sheet dates. and to report amounts of revenues and expenses during of the average original cost of depreciable property. In the past, the methods the reporting period. ActwI result could differ from those estimates. and rates have been determined by depreciation studies and approved by the The company currently applies accounting standards that recognize the economic various regulatory bodies. The company periodically evaluates its depreciation effects of rate regulation Statement of Financial Accounting Standards No. 71, rates considering the past and expected future experience in the operation of l
- Accounting for the Effects of Certain Types at Regulation",(SFAS 71) and, accord- its facilities. !
ingly, has recorded regulatory assets and liabilities related to its generation, Environmental Remediction: Effective January 1,1997, the company transtnasion and distribution operations. In 1996, the KCC initiated a generic adopted the provisions of Statement of Position (SOP) 96-1, " Environmental docket to study electric restructuring issues. A retail wheeling task force has been Remediation Liabilities" This statement provides authoritative guidance for recog-created by the Kansar Legislature to study competitive trends in retail electric ser' nition, measurement, display, and disclosure of environmental remediation vices. During the 1997 session of the Kansas legislature, bills have been liabilities in financial statements. The company is currently evaluating and in the introduced to increase competition in the electric industry. Amung the matters process of estimating the potential liabihty associated with environmental reme-under consideration is the recovery by utilities of costs in excess of compctitive diation. Management does not expect the amount to be significant to the
. cost byels. There tan be no assurance at this time that such costs will be recov-company's results of operations as the company will seek recovery of these costs i erable if open competition is initiated in the electric utility market. In the event the through rates as has been permitted by the KCC in the case of another Kansas util- !
company determines that it no lon.ger meets the criteria set forth in SFAS 71, the ity. Additionally, the adoption of this statement is not expected to have a rasterial !
. accounting impact would be an extraordinary non cash charge to operations of an impact on the company's financial position. To the extant that such remediation l amount that would be material. Criteria that give rise to the discontinuance of costs are not recovered through rates. the costs may be material to the company's l SFAS 71 include,(1) increasing competition that restricts the company's abihty to i operating results, depending on the degree of remediation required and number of establish prices to recover specific costs, and (2) a significant change in the man- !
years over which the remediation must be completed. , ner in which rates are set by regu!ators from a cost-based regulation to another i form of regulation The company periodically reviews these critede to ensure the Cash and Cash Equivalents: For purposes of the Consnhdated Statementr. I continuing application of SFAS 71 is appropriate. Based on currert evaluation of of Cash Flows, the company considers highly liquid collateralized debt instruments ' the various factors and conditions that are expected to impact future cost recov, purchased with a maturity of three months or less to be cash equivalents. i 36
j WESHRN RESOURCES. INC. r Notes to Consolidated Financial Statements l- i l -i incosne Tesee:The company accounts for income taxes in accordance with the company is using the net income stream generated by these COLI policies to off- k provisions of Statement of Financial Accounting Standards No.109 " Accounting set the costs of postretirement and postemployment benefits. A regulatory asset , fcr Ir:: cme Taxes" (SFAS 109). Under SFAS 109, deferred tax assets and liabilities totaling $41 million and $35 million is outstanding at December 31,1996 and r ! are recognized based on temporary differences in amounts recorded for financial 1995, respectively, related to defened postretirement and postemployment costs. '
' reprting purposes and their respective tax bases. Investment tax credits previ-On August 2,1996, Congress passed logislation that will phase out tax benefits :
ously deferred are being amortized to income over the hfe of the property which I associated with the 1992 and 1993 COLI policios. The loss of tax benefits will sig-gee nse to the credits (See Note 10). ' nificantly reduce the COLI eamings. The company is evaluating other methods to i Revenues: Operating revenues for both electric and natural gas services include replace the 1992 and 1993 COLI pol;cies. The company also has the ability to seek P estimated amounts for services rendered but unbilled at the end of each year. recovery of postretirement and postemployment costs through the ratemaking ;
' Reeenues for security services are recognizcd in the period earned. Unbilled rev- - process. Regulatory precedents established by the KCC are expected to permit the ;
l l enues of $83 million and $66 rnillion are recorded as a component of accounts accrued costs of postretirement and postemployment benefits to be recovered in ! receivable and unbilled revenues (net) on the Consolidated Balance Sheets as of rates. If a suitable COLI replacement product cannot be found, or these costs can- [ l Ibember 31,1996 and 1995, respectively. not be recovered in rates, the company may be required to expense the regulatory + asset. The company currently expects to be able to find a suitable COLI replace- , ' The company's recorded reserves for doubtful accounts receivable totaled .l
' $6.3 million and $4.9 million at December 31,1996 and 1995, respectively. ment. The legislation had minimal impact on the company's COLI policies entered ';
into prior to 1992. (See Notes 9 and 12 ). .! Debt loosence and Reeceluisition Emponee: Debt premium, discount, and issuance expenses are amortized over the life of each issue. Under regula. Recleosifications: Certain amounts in prior years have been reclassified to ! tory prc:edures, debt reacquisition expenses are amortized over the remaining life conform with classifications used in the current year presentation. of the reacquired debt or, if refinanced, the life of the new debt. See Note 9 for more information regarding regulatory assets. 2. N M Merger with Risk Management:The company is exposed to fluctuations in price on the 888 W W#r & CanPany j portfolio of natural gas transactions resulting from marketing activities of a non. On April 14,1996, in a letter to Mr. A. Drue Jennings, Chairman of the Board, { regulated subsidiary. To minimize the risk from market fluctuations, the company President and Chief Executive Officer of Kansas City Power & Light Company : enters into natural gas futures, swaps and options in order to hedge existing phys- (KCPL), the company proposed an offer to merge with KCPL (KCPL Merger). ! ical natural gas purchase or sale commitments. These financial instruments are On November 15,1996, the company and KCPL announced that representatives of ! designated as hedges of the underlying physical commitments and as such, gains their respective boards and managements met to discuss the proposed merger i or losses resulting from changes in market value of the various derivative instru- transaction. On February 7,1997. KCPL and the company entered into an agree-ments are defened and recognized in income when the underlying physical ment to merge the two companies. trcosaction is closed. See Note 5 for further information. The merger agreement provides for a tax-free, stock-for-stock transaction valued l Fuel Costs: The cost of nuclear fuel in process of refinement, conversion- at approximately $2 billion. Under the terms of the agreement, KCPL shareowners ] enrichment, and fabrication is recorded as an asset at original cost and is amor' w ll receive $32 of company common stock per KCPL common share, subject to an . tued to espwe based upon the quantity of heat produced for the generation of exchange ratio collar of not less than 0.917 to no more than 1.100 common shares. .I electricity. The accumulated amortization of nuclear fuel in the reactor at Consummation of the KCPL Merger is subject to customary conditions including I December 31,1996 and 1995, was $25.3 million and $28.5 million, respectively. obtaining the approval of KCPL's and the company's shareowners and various reg-Cash Surrender Value of Life insuranee Policies: The foilowing ulatory agencies. The company expects to be able to close the KCPL Merger in the amounts related to corporate owned life insurance policies (COLI) are recorded first half of 1998. See Note 9 for discussion of rate proceedings. in Corporate-owned life insurance (net) on the Consolidated Balance Sheets: The KCPL Merger, will create a company with more than two million security and energy customers, $8.8 billion in total assets, $2.7 billion in annual revenues and l i Decembar 31, 199S 1995 more than 8.000 megawatts of electric generation resources. As a result of the l Mars in Mons) merger agreement, the company terminated its exchange offer that had been Cash sunender value of policies m $ 563.0 $ 479.9 effective since July 3,1996. Borrowings against policies (476.8) (435.8) . The KCPL Merger is designed to qualify as a pooling of interests for financial COLI(net) . 5 86.2 $ 44.1 reporting purposes. Under this method, the recorded assets and liabilities of the (1)cesh surrender value of policies as presented represents the value of the policies as of the end of the company and KCPL would be carried forward et historical amounts to a combined j capectwo pokcy years and not as of December 31.1996 and 1935. balance sheet. Prior period operating results and the consolidated statements of ) financial position, cash flows and capitalization would be restated to effect the ] Income is recorded for increases in cash surrender value and net death proceeds. combination for all periods presented. j Interest expense is recognized for COLI bonowings except for certain policies enterad into in 1992 and 1993. The net income generated from COLI contracts pur- KCPL is a public utility company engaged in the generation, transmission, distri- l chased prior to 1992 including the tax benefit of the interest deduction and bution, and sale of electricity to approximately 430.000 customers in westem j l premium expensec are recorded as Corporate owned life insurance (net) on the Missouri and eastem Kansas. KCPL and the company have joint interests in ; l Consolidated Statements of Income. The income from increases in cash sunender certain electric generating assets, including Wolf Creek. i
- value and net death proceeds was $25.4 million in 1996, $22.7 million in 1995, and As of December 31,1996, the company has incurred approximately $32 million of I' T $156 million in 1994. The interest expense deduction taken was $27.6 million for transaction costs associated with the KCP! Merger. The company anticipates i 1996 $254 million for 1995. and $210 million for 1994. expensing these costs in the first reporting period subsequent to closing the KCPL ;
i The COLI policies entered into in 1992 and 1993 were established to mitigate the Merger. As of December 31,1996, costs incurred have been included in Deferred ; cost of postretirement and postamployment benefits. As approved by the KCC,the Charges and Other Assets, Other on the Consolidated Balance Sheets. ! 37 l
i WEStEliN RESOURCES, INC. , Notes to Consolidated Financial Statements
- i i
3, ADT Limited, Inc. no operating results are reflected on the Consolidated Statements of Income. For l the yer ended December 31,1996, WSS reported $110 million in revenuos As of L , investment in ADT limited, Inc.:During 106,the company purchased l !. approximately 38 million common shares of ADi limited, Inc. (ADT) for approxi- December 31,1996 the company consolidated WSS' financial position in the mately $589 million. The shares purcl%.8 represent approximately 27% of ADT's accompanying Consolidated Balance Sheets. The company financed this acquisi- j common shares making the compsny the largest shareowner of ADT. These tion with short-term borrowings. ; purchases were financed entirely with short-term borrowings ADT is North During 1996, the company also acquired The Wing Group and three small security j America's largest monitored security services company with $1.8 billion in annual system companies. The Wing Gmup develops intemational power projects. In con- j revenucs. ADT has approximately 12 million customers in North America and nection with these acquisitions, the company gave consideration of approximately abroad and has approximately 18,000 employees. The company uses the equity $33 8 million in cash and 683.333 shares of common stock. In connection with the method ut accounting for this investment. Goodwill of approximately $369 million acquisitions, liabilities were assumed as follows: , is essociated with this investment and is being amortized over 40 years and is pre-
'I I sented net in Equity in eamings of investees and other on the Consolidated l Statements of Income. Accumulated amortization approximates $6.5 million at I. a ue as s acquired 38 Co December 31,1996. '
Liabilities assumed $ 5.0
' ADT recently announced that it would record a net charge to income of approx.i-mately $76 million during 1996. This charge is primarily related to one-time Each acquisition was accounted for as a purchase. Goodwill related to these restructuring charges resulting from its merger with another secunty company, '
acquisitions of approximately $32.9 million is presented in the Consolidated partially offset by a gain on the sale of assets. The company recognized its share of this charge equal to $11.8 million or approximately $0.19 per share, not of tax, Balance Sheets as Security Dusiness and other property and is being amortized ) over 20 years. Accumulated amortization of approximately $943,000 has been l as a component of Equity in camings of investees and other on the Consolidated recognized to date. Statements of income. Proposed Acquisition of ADT: On December 18.1996, the company "'" "O " * "O * ** * '* n, e mes e n p wm p a s in M h bns
- announced its offer to exchange $22.50 in cash and shares of the company's com-mon stock for each remaining outstanding common share of ADT not already
"* "O ** "9 " '
* 'N W U** * '**
owned by the company (ADT Offert The value of the ADT Offer, assuming the com-
* * " * * " "" * *"E '" '" *"
cent equity interest in a power project in Turkey. See Note 8 for .information ! i pany's average stock price prior to clos.ing is above $29.75 per common share, .is with respect to investment commitments made by the company on behalf of { approximately $3.5 billion, including the company's existing investment in ADT. The Wing Group. Based upon the closing stock price of the company on December 17,1996, approx-imately 63.1 million shares of company common stock would be issuable pursuant to the acquisition of ADT. However, the actual number of shares of company com- E bn-regulated Subsidiaries mon stock that would be issuable in connection with the ADT Offer will depend on Certain non-regulated subsidiaries use naturalCas futures, swaps and options the exchange ratio and the number of shares outstanding on the expiration date contracts to reduce the effects of natural gas commodity price volatility on oper-of theexchangeoffer. ating results which include price risk and basis risk. Price risk is the difference in The ADT Offer of $22.50 consists of $15.00 in company common stock up to a max. price between the physical commodity being hedged and the price of the futures imum of 0.50420 of a share of company common stock and $7.50 in cash for each contracts used foi hedging. Natural gas options held to hedge price risk provide ouutanding ADT share. Concurrent with the announcement of the ADT Offer on the right. but not the requirement, to buy or sell natural gas at a fixed price. Basis December 18,1996, the company filed a registration statement on Form S-4 with risk is the risk that an adverse change in the futures market will not be comp letely the Securities and Exchange Commission (SEC) related to the ADT Offer. Review offset by an equal and opposite change in the cash price of the commodity being of the prospectus and pmxy statements relating to the ADT Offer by the SEC is hedged Basis risk exists in natural gas primarily due to the geographical price pending. The ADT Offer will be subject to the approval of ADT and company share- differentials between cash market locations and futures contract delivery owners and certain regulatory authorities. On January 23,1997, the waiting period locations. In general, the company's risk management policy requires that post-for the Hart Scottaodino Antitrust Improvement Act expired. On February 7,1997, tions taken with derivatives be offset by positions in physical transactions or other the company received regulatory approval from the KCC to issue company com. derivatives. All of the company's financial instruments are held for purposes other mon stock and debt necessary for the ADT Offer See Note 5 for summary financial than trading. information conceming ADT. The derivative instruments used to hedge commodity transactions have histori-cally had a high correlation with commodity prices and are expected to continue G Acquisitions - to do so. The correlation of indices and prices is regularly evaluated by manage-
"" *** " 0" On December 31.1996, Westar Capital bought the assets of Westinghouse that the correlation falls below allowable levels, the gains or losses associated Secunty Systems, IncE/SS). This acquisition, which was accounted for as a pur-w th hedging instrumany are recognized in the current period to the extent that chase, significantly expands the scope of the company's security service correlation was lost. The maturity of tSe derivative instruments is timed to coin-operations. Westar Capital paid approximately $358.million in cash, subject t cide with the hedged transar% If the hedged transaction is terminated early or adjustment, to purchase the assets and assume certain liabilities of WSS. Based f an anticipated transaction fails to occur, the deferred gain or loss associated s
on a preliminary estimate of the purchase price allocation, the company recorded w th the derivative instrument is recognized in the period and the hedge is closed, approximately $270 million of goodwill to be amortized over 40 yead This bal-I ance is included in Security business and other property on the accompanying The company has historically used natural gas futures and options contracts Consolidated Balance Sheets. Since ths transaction closed on Docember 31,1996, traded on the New York Mercantile Exchange and natural gas financial swaps 38
.~ WESTERN RESOURCES, INC, l . Notes to Consolidated Financial Statements . f l
with various third parties to reduce exposure to price risk when gas is not bought Oneck's c?mings using the equity method of accounting' Eamings for the convert-i and sold simultaneously. At December 31,1996, the company had a deferred gain ible prefeired shares held will be recognized and recorded based upon preferred of $3A rnillion representing unrealized gains on forward commitments that will dividends paid. The convertible preferred shares are expected to pay an initial div-mature through the year 2000. idend rate of $1.80 per share. For its fiscal year ended August 31,1996. DNE0K ,
; The consolidated financial stataments include the company's investments in ADT reported operating revenue's of $1.2 billion and net incomo of $52.8 rnillion.
I l '
- and Harover Compressor Company (Hanover) each accounted for under the equity The structure of the proposed alliance is not expected to have any immediate
- ' methoc of accounting The company's investments (not including the amortization income tax consequences to either company or to either company's shareowners.
! of geodwill)in these entities are as follows: Ownership interest 1996 1995 @ IDonars m Thousands! The company has requested that the District Court for the Southem District of , ADT, . , - 27% $ 596,598 $ - Florida require that ADT hold a special shareowners mectin0 no later than March , I t Hanocer . 24 % 64,166 55,963 20,1997. In its filing, the company claims that the ADT board of directors has breached its fiduciary and statutory duties and that there is no reason to delay L The company's equity in eamings of these entities is as follows: the special meeting until July 8,1997 as established by ADT. See Note 3 for addi-tional information regarding the proposed acquisition of ADT. On December 26, 1996, an ADT shareowner filed a purported class action , (Donars in Thousands) ! ADT $7,236 complaint against ADT, ADT's board of directors, the company and the company's Hancher ' 2,137 wholly-owned subsidiary, Westar Capital in the Civil Division of the Circuit Court i 33 of the Fifteenth Judicial Circuit in Palm Beach County, Florida. (Charles Gachot ; l . Summarized combined financialinformation of ADT and Hanover is presented v. ADT. Ltd., Westem Resources, Inc., Westar Capital, Inc., Michael A. Ashcroft, , l below: et al., Case No. 96-10912-AN) The complaint alleges, among other things, that the l company and Westar Capital are breaching their fiduciary duties to ADT's share- ! As of and for the year ended December 31, 19 % 19 h owners by failing to offer "an appropriate premium for the controlling interest" in r (Dollars in Thousands) ADT and by holding "an effective blocking position" that prevents independent l L Balance Sheet: parties from bidding for ADT. The complaint seeks preliminary and permanent
- Current assets . $ 531,275 $ 43,603 relief enjoining the company from acquiring the outstanding shares of ADT and 3 j Blorzurrent assets . 2,295,824 207,316 unspecified damages. The company believes it has 900d end valid defenses to the ,
Current liabilities . 433,845 20.333 l -- Noncurrent liabilities . 1,493,900 64,390 claims asserted and does not anticipate any material adverse effect upon its '! overall financial condition or results of operations. + Equity 899,354 166,196 ! Subject to the approval of the KCC, the company entered into five new gas supply E Revenues 1,887,180 95,964 contracts with certain entities affiliated with The Bishop Group, Ltd. (Bishop enti-Oprating expenses . 2,559,707 00,350 ties) which are currently regulated by the KCC. A contested hearing was held for Net income (loss) (670,326k 5.614 the approval of those contracts. While the case was under consideration by the KCC, the FERC issued an order under which it extended jurisdiction over the Bishop + {1Hnformahon presented for ADT is based on ADD quenerty repon on form 10-Q. ADTs balance sheet entities. On November 3,1995, the KCC stayed its consideration of the contracts ! NNivNbIeIn t nEn omYn!s presen ed IN' n I between the company and the Bishop entities until the FERC takes final appeal-19E3, the most recent information available The company cannot give any assurance of the accuracy able action on its assertion of jurisdiction over the Bishop entities. of the informat on so obtained. (2) AoTs net income thiough September 30,19% as reponed m its Form 100 for the nine months ended n Me R R de E M h de@dsd b Wa@ a@h September 30.1996, includes a one-time charge related to tne adopt on of SFAS 121. This charge for appraial of the contracts and of recovery of the related costs from its customers. i~ for approximately $45 m%on was mcurred pnor to the company's mvestment in ADI The company The company appealed this ruling and on January 24,1997, the Kansas Court of cannot give any assurance of the accuracy at the informaban so obtamed Appeals reversed the KCC order and upheld the contracts and the company's , recovery of related costs from its customers were approved by operation of law. I l
- 6. Proposed Strategic Alliance As part of the acquisition of WSS on December 31,1996, WSS assigned to
- On December 12,1996, the company and ONE0K Inc. (ONE0K) announced an WestSec, a wholly-owned subsidiary of Westar Capital established to acquire the .
I agreement to form a strategic alliance combining the natural gas assets of both assets of WSS, a software license with innovative Business Systems (18S) which r companies. IJnder the agreement for the pmposed strategic alliance, the company is integral to the operation of its security business. On January 8,1997, IBS filed
- will contribute its natural Gas business to a new company (New Oneck) in litigetion in Dallas County, Texas in the 298th Judicial District Court concoming the 1 i exchange for a 45% equity interest. The recorded net property value being con- assignment of the license to WestSec,(Innovative Business Systems (Overseas) tributed at December 31,1996 is estimated at $600 milhon (unaudited). No gain Ltd., and Innovative Business Software, Inc. v. Westinghouse Electric Corporation, or loss is anticipated as a result of the proposed transaction. The proposed trans- Westinghouse Security Systems, Inc., WestSec, Inc., Westem Resources, Inc.,
- action is subject to satisfaction of customary condit6ns, including approval by et al., Cause No. 97-00184). The company and Westar Capital have demanded ;
ONE0K shareowners and regulatory authorities, The company is working towards WSS defend and indemnify them. While the loss (,f use of the license may have a i
- consummation of the transaction during the summer of 1997, material impact on the operations of WestSec, management of the company cur-
..The equity interest would be comprised of approximately 3.0 milhon common rently does not believe that the ultimate disposition of this matter will have a ,
shares and 19.3 million convertible preferred snares. Upon consummation of the material adverse effect upon the company's overall financial condition or results of operations. l proposed alliance, the company will record its common equity interest in New ; 39 i
WEST [flN RES0uRCES, INC.
- Notes to Consolidated Financial Statements Tha company and its subsidiaries are involved in various other legal, environmentaf, Decommissioning: The company accrues decommissioning costs over and regulatory proceedings Management believes that adequate provision has the expected life of the Wolf Creek generating facility. The accrual is based on been made and accordingly believes that the ultimate dispositions of these mat- estimated unrecovered decommissioning cost
- which consider inflation over ters will not have a material adverse effect upon the company's overall financial the remaining estimated life of the generating facility and are net of exwcted position or results of operations. eamings on amounts recovered from customers and deposited in an extemal trust fund.
- 8. Commitments and Contingencies On August 30,1996, WCNOC submitted the 1996 Decommissioning Cost Study to As part of its ongoing operations and construction program, the company has the KCC for approval. Approval of this study is still pending Based on the study, commitments under purchase orders and contracts which have an unexpended the company's share of these decommissioning costs, under the ,mmediate i hslance of approximately $69.9 million at December 31,1996. Approximately . dismantlemert method, is estimated to be approximately $624 million during the
$12.8 million is attributable to modifications to upgrade the three turoines at period 2025 through 2033, or approximately $192 million in 1996 dollars. These Jeffrey Energy Center to be completed by December 31,1998. costs were calculated psing an assumed inflation rate of 3.6% over the remaining service life from 1996 of 29 years.
In January 1994, the company entered into an agreement with Oklahoma Municipal Power Authority (OMPA). Under the agreement, the company received Decommissioning costs are currently being charged to operating expenses in a prepayment of approximately $41 million for which the company will provide accordance with the prior KCC orders. Electric rates charged to customers provide capacity and transmission services to DMPA through the year 2013. for recovery of these decommissioning costs over the life of Wolf Creek. Amounts expensed approximated $37 million in 1996 and will increase annually to Manufactwed Gas Sites:The company has been associated with 15 former
$5.6 million in 2024. These expenses are deposited in an extemal trust fund. The manufactured gas sites located in Kansas which may contain coal tar and other average after tax expected retum on trust assets is 5.7%.
potentially harmful materials. The company and the Kansas Department of Health artd Environment (KDHE) entered into a consent agreement goveming all future The company's investment in the decommissioning fund, including reinvested work at the 15 sites. The terms of the consent agre,Jment will allow the company eamings approximated $33.0 million and $25.1 million at December 31,19% and to investigate these sites and set remediation priorities based upon the results of December 31,1995, respectively. Trust fund eamings accumulate in the fund bal-the investigations and risk analyses. The prioritized sites wi!I be investigated over ance and increase the recorded decommissioning I; ability. These amounts are a ten year period. The agreement will allow the company to set mutual objectives reflected in investments and Other Property, Decommissioning trust, and the
' with the KDHE in order to expedite effective response activ ties and to control related liability is included in Deferred Credits and Other Liabilities, Other, on the costs and environmental impact. The costs incurred for site investigation and risk Consolidated Balance Sheets.
assessment in 1996 and 1995 were minimal. in accordance with the terms of the The staff of the SEC has questioned certain current accounting practices used by ONEOK agreement, ownership of twelve of the aforementioned sites will be trans-nuclear electric generating station owners regarding the recognition, measure-ferred to New Oneok upon closing. The ONE0K agreement limits the company's ment, and classification of decommissioning costs for nuclear electric generating liabikties to an immaterial amount for future remediation of these sites. stations. In response to these questions, the Financial Accounting Standards Superfund Sites: The company is one of numerous potentially responsible Board is expected to issue new accounting standards for removal costs, including parties at a groundwater contamination site in Wichita, Kansas (Wichita site) decommissioning, in 1997. If current electric utility industry accounting practices which is listed by the EPA as a Superfund site. The company has previously been for such decommissiomng costs are changed: (1) annual decommissioning asscriated with other Superfund sites of which the company's liability has been expenses could increase, (2) the estimated present value of decomm,ss_oning ii _ classified as de minimis and any potential obligations have been settled at mini, costs could be recorded as a liability rather than as accumulated depreciation, and mal cost. In 1994, the company settled Superfund obligations at three sites for a (3) trust fund income from the extemal decommissioning trusts could be reported total of $57,500. No Superfund obligations have been settled since 1994. The as investment income rather than as a reduction to decommissioning expense. company's obligation at the Wichita site appears to be limited based on this expe. When revised accounting guidance is issued, the company will also have to eval rience. In the opinion of the company's menagement, the resolution of this matter uate its effect on accounting for removal costs of other long-lived assets. The is not expected to have a rnaterial impact on the company % financial position or company is not able to predict what effect such changes would have on results of results of operations. operations, financial position, or related regulatory practices until the final issuance of revised accounting guidance, but such effect could be material. Clean Air Act: The Clean Air Act Amendments of 1990 (the Act) require a two phase reduction in certain emissions. To meet the monitoring and reporting The company carries premature decommissioning insurance dich has several requirements under the acid rain program, the company has installed continuous restrictions. One of these is that it can coly be used if Wolf Creek incurs an monitoring and reporting equipment at a total cost of approximately $10 million as accident exceeding $500 million in expenses to safely stabilize the reactor, to of December 31,1996 The company does not expect material expenditures to be decontaminate the reactor and reactor station site n accordance with a plan needed to meet Phc.e 11 sulfur dioxide requirements. approved by the NRC, and to pay for on-site property damages. This decommis-sioning insurance will only be available if the insurance funds are not needed to ' Ihe mirogen oxides and toxic limits, which were not set in the law, were proposed implement the NRC-approved plan for stabilization and decantaminatior by t.u EPA in January 1996. The company is currently evaluating the steps it would need to take in order to comply with the proposed new rules, but is unable Nuclear insurance: The Price-Anderson Act limits the combined public to determino its comphance options or related compliance costs, which could be liability of the owners of nuclear power plants to $8.9 billion for a single nuclear materia!, until the evaluation is finished. The company will have three years from incident. If this liability limitation is insufficient, the U.S. Congress will consider tha date the limits were proposed to comply with the new rules. taking wh3tever action is necessary to compensate the public for valid claims. The Wulf Creek owners (0wners) have purchased the maximum available private 40
WISTERN RESOURCES,INC. Notes to Consolidated Financial Statements insurance of $200 million and the balance is provided by aa assessment plan 9. Rate Matters and Regulation martdated by the NRC. Unoer this plan, the Owners are jointly and severally sub-L!tility expenses and credits recognized as regulatory assets and liabinties on Ject to a retrospective assessment of up to $79.3 million ($37.3 million, company's the Consolidated Balance Sheets ere recognized in income as the related amounts shire)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 are included in service rates and recovered from or refunded to customers in the Consumer Price Index and applicable premium taxes. There is a limitation of utility revenues. The company expects to recover tha following regulatory assets in rates: . $10 million ($4.7 million, company's share) in retrospective assessments per incident, per year. December 3L 1996 1995 The Owners carry decontamination liability, premature decommissioning liability, IDdl8'un Thoosanass and property damage insurance for Wolf Creek totaling approximately $2.8 billion Coal contract settlement costs $ 21,037 5 27,274 ($1.3 billion, company's sharol. This insurance is provided by a combination of Servicelinereplacement . 12,921 14,164
." nuclear insurance pools" ($500 million) and Nuclear Electric Insurance Limited Post employment / retirement benefits (see Note 12) 40,834 35,057 (NEll)($2.3 billion). In the event of an accident, insurance proceeds must first Defened plant costs 31,272 31,539 be used for reactor stabilization and site decontamination. The company's shere Phase-in revenues . 26,317 43.861 of any remaining proceeds can be used for property damage or premature Debtissuance costs (See Note 1) 78.532 80,354 decommissioning costs up to $1.3 billion (company's share). Premature decom- Deferred cost of gas purchased . 21,332 20,318 missioning insurance cost recovery is the excess of funds previously collected for Other regulatory assets 8,794 9,826 decommissioning (as discussed under " Decommissioning").
Total regulatory assets $ 241,039 $ 262,393 The Owners also carry additional insurance with NEll to cover costs of replacement pwer and other extra expenses incurred during a prolonged outage resulting from coal contract settlenients: in March 1990, the KCC issued an order-accidental property damage at Wolf Creek. lf losses incurred at any of the nuclear allowing KGE to defer its share of a 1989 coal contract settlement with the plants insured under the NEll policies exceed premiums, reserves, and other NEll Pittsburg and Midway Coal Mining Company amounting to $22.5 million. This resources, the company may be subject to retrospective assessments under the amount was recorded as a deferred charge and is included in Deferred Charges - current policies of approximately $8 million per year. and Other Assets, Regulatory assets, on the Consolidated Balance Sheets. The Although the company maintains various insurance policies to provide coverage settlement resulted in the termination of a long-term coal contract. The KCC for ptential losses and liabilities resulting from an accident or an extended out. permitted KGE to recover this settlement as follows: 76% of the settlement plus age, the company's insurance coverage may not be adequate to cover the costs a return over the remaining term of the terminated contiact (through 2002) and that could result from a catastrophic accident or extended outage at Wolf Creek. 24% to be amortized to expense with a deferred re'um equivalent to the carrying Any substantial losses not covered by insurance, to the extent not recoverable c st of the asset. through rates, would have a material adverse effect on the company's financial in Septembar 1994, the FERC issued an order allowing the company to defer conditica and results of operations. $24.5 million in costs associated with the buy-out of a long-tenn coal supply Fuel Conunitments: To supply a portion of the fuel requirements for its contract with American Metal Climax (AMAX) to supply the Lawrence and generating plants, the company has entered into various commitments to obtain Tecumseh Energy Centers. The deferred costs are included in the Deferred nuclear fuel and coal Some of these contracts contain provisions for price esca- Charges and Other Assets Rsgulatory assets, section of the Consolidated Balance latica and minimum purchase commitments. At December 31,1996, WLNOC's Sheets and are amortized monthly to expense over the life of the original AMAX nuclect fuel commitments (company's share) were approximately $15.4 million for c ntract(tnrough2013). uranium concentrates expiring at various times through 2001, $59.4 million for Service Line m nt: On January 24,1992, the KCC issued an order enrichment expiring at various times through 2003, and $70.3 million for fabrica- allowing the company to continue the deferral of service line replacement program tion through 2025. At December 31, 1996, the company's coal contract costs incurred since January 1,1992, including depreciation, property taxes, and commitments in 1996 dollars under the remaining terms of the contracts were carrying costs for recovery. As part of the natural gas distribution rate case approximately $2.6 billion. The largest coal contract expires in 2020, with the settlement on July 11,1996 (See discussion of natural gas distribution rate case . remainirg coal contracts expiring at various times through 2013. below), the company was permitted to begin amortizing these costs in July 1999. .! Energy Act: As part of the 1992 Energy Policy Act, a special assessment is Approximately $431,000 will be amortized each month through June 1999. being collected from utilities for a uranium enrichment, decontamination, and At December 31,1996, approximately $12.9 million of these deferrals have been decommissioning fund. The company's portion of the assessment for Wolf Creek included m Deferred Charges and Other Assets, Regulatory assets, on the is approximately $7 million, payable over 15 years. Management expects such Consolidated Balance Sheets. These deferrals will become a responsibility of costs to be recovered through the ratemaking process. New Oneck, when the alliance with ONE0K is consummated. Investment Conunitmente:During 1996. The Wing Group obtained owner- Deferred Mont Costo:in 1986, KGE recognized the effects of Wolf Creek ship interests in independent power generation projects under construction in related disallowances in accordance wi th Statement of Financial Accounting Turkey and Colombia. The Wing Group or other non-regulated Westem sub- Standards No. 90 " Regulated Enterprises - Accounting for Abandonments and sidiaries are committed to future funding of equity interests in these projects. In Dballowances of Plant Costs". 1997, commitments are not expected to exceed $31 million. Currently, equity com- Phase-in Revenues: In 1988, the KCC ordered the accrual of phase-in rev-mitments beyond 1997 are approximately $3 milhon. The company has also enues to be discontinued by KGE effective December 31, 1988. KGE began committed $105 million through June of 1998 to pcwer generation projects in the amortizing the phase-in revenue asset on a straight-line basis over 9 I/2 years People's Hepublic of China. beginning January 1,1989. At December 31,1996, approximately $26 million of deferred phase-in revenues remain to be recovered. 41
.- --. ._. . .- ~, .. - . . =, - WESTERN RES0uflCE1,INC. [
Notes to Consolidated Financial Statements ! i Deferred Coot of Gas Pdrchseed:The company, under rate orders from MPSC Proceedings:On May 3,1996, the compar'y filed an application with l the KCC, OCC, and FERC, recovers increases in fuel and natural gas costs through the MPSC requesting an order approving its proposal to merge with KCPL The fusi adjustment clauses for wholesale and certain 'etail electric customers and application includes the same regulatory plan as propor.ed before the KCC and r various cost of gas nders (COGR) for natural gas customers. The KCC and the OCC includes an annual rate reduction of $21 million for KCPL retail electric customers. ! require the annual difference between actual gas cost incurred and cost recovered ! FERC Proceedings:On August 22,1996, the company filed with the FERC an
. through the application of the COGR be deierred and amortized through rates in I
' application for approval of its proposed merger with KCPL. 0n December 18,1996
' subsequent periods.
the FERC issued a Merger Policy Statement (Policy Staten.ent) which articulates ! KC3 Rate Proceedings: On August 17,1995, the company and KGE filed three principal factors the FERC will apply for analyzing mergers: (1) effect on l three proceedings with the KCC, The first sought a $36 million increase in competition, (2) customer protection, and (3) effect on regulation. The FERC has l revenues from the company's natural gas distribution business. In separate dock- requested the company to and the company will wvise its filing to comply with the j ets, the company and KGE filed with the KCC a requert to more rapidly recover . specific requirements of the Policy Statement.
~ KGE's investment in its assets of Wolf Creek over the next seven years by increas- ; ~ ing depreciation by $50 mit! ion each year and a request to reduce annual 10. locomo Taxes I depreciation expense by approximately $11 million for electric transmission.
_ distribution and certain generating plant assets to reflect the useful lives of these Under SFAS 109, temporary differences gave rise to deferred tax assets and ) deferred tax liabikties at December 31,1996 and 1995, respectively, as follows: 4 properties more accurately. The company sought to reduce electric rates for KGE ] customers by approximately $8.7 million annually in each of the seven years of 1996 ' 9 95 $
- accelerated Wolf Creek depreciation.
toonars in nasands) On April 15,1996, the KCC issued an ordar allowing a ravenue increase of Deferred tax assets: f
' $33.8 million in the company's natural gas distribution business. On May 3,1996, Deferred gain on sale-leaseback $ 99,466 $ 105,007 !
t io company filed a Petition for Reconsideration and on July 11,1996, the KCC Attemative minimum tax carryferwards . 250 18,740 l issued its Order on Reconsideration allowing the revenue to be increased to Other . 29,945 30,789 i
$34.4 million, i Total deferred tax assets $ 129,661 $ 154,536 t On May 23,19% the company implemented an $8.7 million electric rate reduction
]
to KGE customers on en interim basis. On October 22,1996, the company, the KCC Deferred tax liabilities: ! Staff, the City of Wichita, and the Citizens Utility Ratepayer Board filed an agree. Accelerated depreciation & other . $ 654.102 $ 653,134 i Acquisition premium . 307,242 315,513 ment with the KCC whereby the company's retail electric rates would be reduced. l Deferred future income taxes . 217,257 282,476 subject to approval by the KCC, This agreement was approved on January 15. other . 61,432 70.883 1997, Under the agreement, on February 1,1997, KGE's rates were reciuced by
$36.3 million, and in addition, the May 1996 interim reduction became permanent. Total deferred tax liabilities $1,240,033 $1,322.006 KGE's rates will be reduced by another $10 million effective June 1,1998, and again on June 1,1999. KPCs rates were reduced by $10 million effective February Acumulated deferred income taxes, net . $1,110,372 $1,167,470 1,1997. Two one-time rebates of $5 milkon will be credited to the company's customers in January 1998 and 1999. The agreement also fixed annual savings from the merger with KGE at $40 million. This level of merger savings provides for In accordance with various rate orders received from the KCC and the OCC, the !
complete recovery of and a retum on the acquisition premium- company has not yet collected through rates the amounts necessary to pay a sig- I On April 15,1996, the company filed an application with the KCC requesting an nifwant portion of tne net accumulated deferred income tax liabikties. As i order approving its proposal to merge with KCPL and for other related relief. On management believes it is probable that the net future increases in income taxes
' July 29,1996, the company filed its First Amended Application with the KCC in its payable will be recovered from customers, it has recorded a deferred asset for proceeding for approval to merge with KCPL The amended app ication proposed these amounts. These assets are also a temporary difference for which deferred
'an incentive rate mechanism requiring all regulated eamings in excess of income tax liabikties have been provided. l the merged company's 12.61% retum on equity to be split among customers, shareowners, and adc'itional depreciation on Wolf Creek. 11. Common Stock, Preferred Stock, On November 27,1996, the KCC issued a Suspension Order and on December 3. Preference Stock, and Other Mandatority 1996, an order was issued which suspended, subject to refund, costs related to Hedeemable Secssrities purchases trom Kansas Pipeline Partnership included in the company's C0GR. On The company's Restated Articles of Incorporation, as amended, provide for December 12,1996, the company filed a Petition for Reconsideration or For More 85,000,000 authorized shares of common stock. At December 31, 1996.
Definite Statement by Staff of the issues to be addressed in this Docket. On 64,625,259 shares were outstanding. January 2,1997, the KCC issued an order directing Staff to file within sixty days, The company has a Dividend Reinvestment and Stock Purchase Plan (DRIP)- a Bill of Particulars, specifying which charges from Kansas Pipeline Partnership it Shares issued under the DRIP may be eithor original issue shares or t, hares pur-asserts are inappropriate for inclusion in the company's COGR. The company does chased on the open market. The company has been issuing original issue shares
' not expect this proceeding to have a material adverse effect on its results of since January 1,1995 with 935.461 shares issued in 1996 under the DRIP. At opwauons.
December 31,1996 2,082,166 shares were available under the DRIP registration statement. 42
WESTEriN RESOURCES. INC. k
' Notes'to Consolidated Financial Statements Not subject to Mendetary Redemption: The cumulative preferred 12. Employee Benefit Plans stock is redeemable in whole or in part on 30 to 60 days notice at the option of Pension: The company maintains qualified noncontributory defined benefit me company.
pension plans covering substantially all employees. Pension benefits are based on Subbot to Mandatory Redemption: On July 1,1996, a!! shares of the years of service and the employee's compensation during the five highest paid company's 8.50% Preference Stock due 201G were redeemed. consecutive years out of ten before retire nent. The company's policy is to fund The mandatory sinking fund provisions of the 7.58% Series preference stock pension costs accrued, subject to limitations set by the Employee Retirement require the company to redeem 25,000 shares annually beginning on April 1,2002, income Security Act of 1974 and the intemal Revenue Code. and each April 1 through 2006 and the remaining shares on April 1,2007, all at seiery continuation: The company maintains a non-qualified Execerke
$100 per share. The company may, at its option, redeem up to an adJitional 25,000 Salary Continuation Program for the benefit of certain management employees, shares on each April 1 at $100 per share. The 7.58% Series also is redeemable in including executive officers.
whole or in part, at the option of the company, subject to certain restrictions on The following tables pmvide information on the components of pension and salary refunding, at a mdemption price of $104.55, $103.79, and $103.03 per share continuation costs under Statement of Financial Accounting Standards No. 87 beginning April 1,1996,1997, and 1998, respectively.
" Employers' Accounting for Pension Plans-(SFAS 871, funded status and actuarial Other Mendeterily Redeemable Securities: On December 14,1995, assumptions for the company:
Westem Resources Capital I, a wholly owned trust, issued four million preferred securities of 7 7/8% Cumulative Quarterly Income Preferred Securities, Series A, lear ended December 31, 1996 1995 1994 fut $100 Niion. The trust interests represented by the preferred securities are (Douars ulhasands) redeemable et the option of Westem Resources Capital 1, on or after December SFAS 87 Expense: 11,2000, at $25 per preferred security plus accrued interest and unpaid dividends. Service cost . $ 11,644 $ 11.039 $ 10,197 Holders of the securities are entitled to receive distributions at an annual rate of interest cost on projected benefit obligation 34,003 32,416 29,734 7 7/8% of the liquidation preference value of $25. Distributions are payable quar-terly, and in substance are tax deductible by the corrpany. These distributions are GaMon on van assets (6E790 M,730 7,351 recorded as interest charges on the Consolidated Statements of income. The sole tamo at 2 5 asset of the trust is $103 million principal amount of 7-7/8% Deferrable Interest Subordinated Debenturas, Series A due December 11,2025 (the Subordinated Net expense . $ 12,107 $ 12,686 $ 9.070 Debntures). - On July 31,1996, Westem Resources Capital 11, a wholly-owned trust, of which DecemW 3L 1996 1995 1994 the soie asset is subordinated debentures of the company, sold in a public offer. marsin Thousands) ing, 4.8 million shares of 8-1/2% Cumulative Ourrterly income Preferred Reconciliation of Funded Status: Securities, Series B, for $120 million. The trust interests represented by the pre. Actuarial present value of ferred securities are redeemable at the option of Westem Resources Capital 11 on benefit obligations; Vested . $ 347,734 $ 331,027 $278,545 or after July 31,2001, at $25 per preferred security plus accumulated and unpaid Non-vested ,220 21,775 19.132 distributions. Holders of the sccurities are entitled to receive distributions at an annual rate of 8-1/2% of the liquidation preference value of $25. Distributions are Total . $ 370,954 $352,802 $2S7,677 payable quarterly, and in substance are tax deductible by the company. These dis- Plan assets (principally debt l
- tributions are recorded as interest charges on the Consolidated Statements of end equity securities)at income The sole asset of the trust is $124 mil! ion principal amount of B-1/2% fair value , $ 495.993 $ 444.608 $375,521 ,
Deferrable Interest Subordinated Debentures, Series 8 due July 31,2036. Projected benefit obligation . 483.862 456,707 378,146 i The preferred securities are included under Westein Resources obligated manda. Funded status . 12,131 (12.099) (2,625) torily redeemable preferred securities of subsidiary trusts holding solely company Umecognized transition asset . (448) (527) (2,205) subordinated debentures (Other Mandatorily Redeemable Securities) on the Unrecognized prior service costs . 62,434 57,087 47.796 Consolidated Balance Sheets and Consolidated Statunents of Capitalization. Umecognized net (gain) . 003,132) (71312) (56,079) in addition to the company's obligations under the Subordinated Debentures, the e aW $ M $ RE $03,4 j company has agreed, pursuant to guarantees issued to the trusts, the provisions ; of the trust agreements establishing the trusts and related expense agreements, Year emied December 31, 199S 1995 1994 ) to guarantee, on a subordinated basis, payment of distributions on the preferred Actuarial Assumptions. secunties (but not if the applicable trust does not have sufficient funds to pay such Discount rate . 7.5% 7.5% 8.0-85% distributions) and to pay all of the expenses of the trvMs (co!!ectively, the "Back- Annual salary increat e rate . 4.75 % 4.75 % 5.0% up Urdertakings"). Considered together, the Back-up Undertakings constitute a full Long-te m rate of return 8.5-9.0% 8.5-9 D% 80-8.5% and unconditional guarantee by the company of the trusts obligations under the preferred securities.. Poetretiremen':: The company follows the provisions of Statement of l Financial Accounting Standards No.106 " Employers' Accounting for Post-retirement Benefits Other Than Pensions"(SFAS 106). This statement requires the l j accrual of pometirement benefits other then pensions, primarily medical benefit costs, during the years an employee provides service. 43 4
wet!ERN RESOURCES,INC. Notes to Consolidated Financial Statanants-Based on actuarial projections and adoption of tb9 transition method of imple- Savings: The company maintains savings plans in which substantially all mentation which allows a 20-year amortization of the accumulated benefit employees participate. The company matches employees' contributions up to obligation, postretirement benefits expenses approximated $16.4 million, specified maximum limits. The funds of the plans are deposited with a trustee and
$15.0 million, and $12.4 million for 1996,19W, and 1994, resoectively. The invested at each employee's option in one or more investmont funds, including a company's total postretirement benefit obligation approximated $123.0 million compaay stak fund. The company's contributions were $4.6 million, $5.1million, and $123.2 million at December 31,19% and 1995, iespectively. In addition, the and $5.1 million for 1996,1995, and 1994, respectively.
company received an order from the KCC perraitting tho initial deferral of SFAS stock Based compensation Plans:The ccmpany has two stock-based 106 expense m excess of amounts previously recognized. Tha foilowing table sum' compensaDn plans, a long terrn incentive and share award plan (LTISA Plan) and rrtrizes the status of the company's postretirement benefit plans for financial a long temi incentive program !LTI Program). The company accounts for these statement purposes and the related amounts included in the Consolidated Balance Sheets; plans under Accounting Principles Board Opinion No. 25 and the related interpretations. Had compensation cost been determined pursuant to Statement Decemtar 31 15 2 1995 1994 of hrancial Accounting Standards No.123, " Accounting for Stock-Based Compensation" (SFAS 123), the company would have recognized compensation (Dowsin tnousaws) costs during 1996 and 1995. Powever, recognition of the compensation costs Au a p e nt a ue ostretirement would not have been material to the Consolidated Statements of incorra nor benefit obligations: would these costa ha9e affected camings per share. Fietirees . $ 76,588 $ 81.402 $ 68,570 The LTISA Plan was implemented to help ensure that managers and board mem-Active employees fully eligible . 10.060 7,645 13.549 bers (P;en Participants) were properly incented to increase shareouner volce. It Active employees rot fulh eligible . 36,345 34,144 32,484 was estaoiished to replace the company's LTI Program, discussed below. Under the Tota! $122,993 S123,191 $114,603 LTISA Plan, the compny may grant awards in the form of stock options, dividend Fair value of plan assets equivalents, shore eppreciation rights, restricted shares, restricted share units, 78 46 - performance shares, and performance share units to Plan Participants. Up to three Funded status . (122.915) (123,145) (114,603) million shares of common stock may be granted under the LTISA Plan. Unrecognized prior service cost (8.157) (8.900) (9.391) Unrecognized transition onligation 104.920 111.443 117,967 in 1996, the LTISA Plan granted 205,700 stock options and 205,700 dividend equiv-Unrecognized net (gain) . (8,137) (7.271 ) (14.489) alents to Plan Participants. The exercise price of the stock options granted was Accrued postretirement benefit costs . $ (34,289) $ (27,873) $ (20,516) $29.25. These options vest in nine years. Accelerated vesting allows stock options to vest within three years, dependent upon certain company perfonnant,c factors. Year ended December 31' 1996 1995 1994 The options expire in approximately ten years. The 'weighte$ average grant-date fair value of the dividend equivalent was $5.82. The va!ue of each dividend equiv-Actuarial Assumptions: alent is calculated as a percentage of the accumulated dividends that would have Discount rate 7.5% 7.5% 8045%, Annual salary increase rate . been paid or payable on a share of company common stock. This percentage 4.75 % 4.75 % 5.0% Expected rate of retum . 9.0% 9.0% ranges from zero to 100%, based upon certain company performance factors. The 8.5% g For measurement purposes, an annual health care cost growth rate of 10% was cptions and dividend eouivaients granted were outstanding at December 31,1996. assumed for 1996, decreasing one percent per year to five percent in 2001 and The fair value of stock options and dividend equivalents were estimated on the thoreafter. The health care cost trend rute has a significant effect on the projected date of grant using the Black Scholes opion-pricing model. The model assumed a benefit 09ligation. Increasing the trend rate by one percent each year would dividend yid of 6.33%, expected volatility of 14.12%; and an expected life of increase the present value of the acrumulated projected benefit obligation by 8.7 years. Addhionally, the stock option model assumed a dsk-free interest rate of
$5.5 million and the aggregate of the service and interest cost components 6.45%. The dividend equivalent model assumed a risk-free interest rate of 6.61%,
by $0.5 million. an award percentage of 100% and a dividend tecumulation period of five years. Postemployment: The compar;y adopted Statement of Financial Accounting The LTI Program is a performance-based stock plan which awards perfarmance Standards No.112 " Employers' Accounting for fostemployment Benefits" shares to executive officers (Program Participants) of the company equalin value (SFAS 112) in the first qucrtei of 1994, which established accounting and report- to 10% of the officer's annual base compensation. Each performance share is ing standards for postemployment banefits. The s4.atement requires the company equal in value to one share of the company's common stock. Each Program to recognize the liability to provide postemployment benefits when the liabili'y has Particicant may be entitleo to receive a common stock distribution based on the been incurred. The company received an order from the KCC permitting the initial value of perfor1ance shares awarded rnuftiplied by a distribution percentape not deferral of SFAS 112 expanse to exceed 110%. This distribution percentage is based upon the Program in accordance with the provision of an order from the KCC, the company has Participants' and the company's performance. Program Participants also receive deierred postretirement and postemployment expenses representing the excess cash equivalen' to dividends on common stock for performance shares awarded. expense incuned upon adoption of SFAS 106 and SFAS 112. In 1992 and 1993, the in 1995, the company gramed 14,756 performance shares, with a weighted-company purchased CDU policies whose associated income stream was intended average f air value of $28.81. The fair value of each performance share is based on to offset actual postretirement and postemployment costs incurred. See Note 1 market price at the date uf grant. No perforrrance shares were granted in 1996. regarding legislative action related to COU. As of December 31,1996 and 1995. As of December 31,1996, shares granted in 1995 have a remaining contractual life the company recognited a regulatory asset for postretirement expense of approx- of one year. imately $31.6 million and $253 million and for postamployment expense of approximately $9.3 million and $9.8 million, respectively. 44
WESTERN RES0uRCES, INC.: Notes to Consolidated Financial Statements
- 13. Fair Value of Financial instruments Debt discount and expenses are being amortized over the remaining lives of each
' The following methods and assumptions were used to estimate the fair value of issue, During the years 1997 through 2001, $125 million of bonds will mature in each class of financial instruments for which it is practicable to estir . ate that 1999 and $75 million of bonds will mature ,n i 2000. No other bonds will mature and value as set forth in Statement of Financial Accounting Standards No.107l there are no cash sinking fund requirements for preference stock or bonds during this time penod.
Disclosures about Fair Value of Financial Instruments":
Cash and cash equivalents, short-term irr owings and variable-rate debt are . The company maintains a $350 million revolving credit agreement that expires on carried at cost which approxirnates fair value. The decommissioning trust is October 5,1999. Under the terms of this agreoment, the company may, at its recorded at fair value and is based on tty quoted market prices ut December 31, option, borrow at different market-based interest rates and is required, among - 1996 and 1995. The fair value of fixed-rate Jcb', redeemable preferen ,e stock. and other restrictions, to maintain a total debt to total capitalization ratio of not other mandatorily redeemable securities is estimated based on quoted market ; greater than $5% at all times A facility be ,si paid on the $350 milkon commit-prices for the same or similar issues or on the current rates offered fer instrums.1ts ment. The unused portion of the revolving credit facility may be used to provide of the same remaining maturities and redemption provisions. The estimated fair ' support for commercial paper. At December 31,1996, the company had $275 million values of contracts re!ated to commodities have been determined using quoted borrowed under the facility and had available $75 million of 9nused capacity under market prices of the same or similar securities. the facility. The carrying values and estimated fair values of the company's financial instru- Long-term debt outstanding at December 31,1996 and 1995, was as follows: ments are as follows: 1996 1995 Carrying Value Fair Value (Dollarsin Thousands) Dccomber 31, 1996 $995 199o 19 0 Woesem Resowoes IDollars m Thousands) First mortgage bond series:
, $ 33,041 $ 25,070 $ 33,041. $ 25,070 71/4% due 1999, , . $ 125,000 $ 125,000 Decommissionin0 trust .
Fixed-rate debt . 1,224,743 1,240,077 1,260,722 1,294.30 ; 8 7/8% due 2000. ,
' 75.000 75,000 Redeemable preference 71/4% due 2002. 100,000 100,000 stock 50,000 150,000 52,500 160,405 81/2% due 2022 - 125,000 125,000 Other mandatorily 7.65% due 2023, 100,000 100,000 redeemable securities 220,000 100.000 214,100 102,000 525,000 . 525,000 Pollution control band series:
Dei, ember 31, 1996 1995 Variable due 2032 m , 45,000 45,000 Notienal tetenal Variable due 2032 e . 30,500 30,500 volumes Estimated Gain / Vo'umes Estimated Gain / 6% due 2033. . 58,420 58,420 (mmbtu's) Fair Value (loss) (mmbtu's) Fair Value (loss) g g (Dollars in Tr'ousands) Natural gas "' futures . 6,540,000 $16,032 $ 2,061 7.440,000 $16,380 $2,678 First mortgage bond series: Natural ges 55/8% due 1996. .
- 16,000 swapr 2.344.000 $ 5.500 $1,315 2.624,000 $ 3,406 $ 16 7.60% due 2003 135,000 135,000 61/2% due 2006, , 65,000 65,000 The recorded amount of accounts receivable and other cunent financial instru- 6.20% due 2006. 100,000 100,000 ments approximate fair value.
300,000 316,000 l The fair value estimates preser,ted herein are based on information available as I Pollution controlbond series: of December 31,1996 and 1995. These fair value estimates have not been com-5.10% due 2023 13,822 13,957
. prehensively revalued for the purpose of these financial statements since that Variable due 2027 m . 21,940 21,940 date, and current estimates of fair value may differ significantly from the amounts 7.0% due 2031 , 327,500 327,500 prcsonted herein. Because a substantial portion of the company's operations are Variable due 2032 , 14,500 14,500
. regulated, the company believes that any gains or losses related to the retirement Variable due 2032 sn 10,000 10,000 of debt or redemption of preferred securities would not have a material ef'act on th3 company's financial position or results of operations. 387,762 387,897 l 11 Long-term Debt Revolving credit agreement . 275,000 50,000 j Other long-term agreements 65,190 - The amount of the company's first mortgage bonds authorized by its Mortgage and tegi: Deed of Trust, dated July 1,1939, as supplemented, is unlimited. The amount of Unamortized debt discount . 5,289 5,554 KGE's first mortgage bonds authorized by the KGE Mortgage and Deed of Trust, Long. term debt due within one year - 15.000 dated April 1,1940, as supplemented, is limited to a maximum of $2 billion.. Amounts of ad6tional bonds which may be issued are subject to property. Long term debt (net) . $1,681,583 $1.391,263 eamings, and certain restrictive provisions of each Mortgage. Rates at Dec. ember 31,1998 m 3 68%. (2) 3.582%. (313 55%.m 3.60% and 1513.52% 45
l WESTERN RESOURCkS,INC. Notes to Consolidated Financial Statements
- 15. Short-term Debt in 1987, KGE sold and leased back its 50% undivided interest in the la Cygne 2 The company has arrangements with certain banks to provide unsecured 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 short-term lines of credit on a committed basis totaling $973 million. The agree-raents provide the company with the abihty to borrow at different market based responsible for its share of operation and maintenance costs and other related interest rates. The company pays commitment or facility fees in support of these operating costs of La Cygne 2. The lease is an operating lease for financial report-mg pwposes.
lines of credit. Under the terms of the agreements, the company is reauired, among other restrictions, to maintain a total debt to total capitalization ratio of not As permitted under the la Cygno 2 lease agreement, the company in 1992 greater than 65% at all times. The unused portion of these lines of credit are used requested the Trustee lessor to refinance $341.1 m? ion of secured facility bonds to provide support for commercial paper. of the Trustee and owner of La Cygne 2. The transaction was requested to reduce In addition, the company has agreements with several banks to borrow on an . recurring future net lease expense. In connection with the refinancing on uncommitted, as available, basis at money market rates quoted by the banks. September 29,1992, a one-time payment of approximately $27 million was made There are no costs, other than interest, for these agreements. The company also by the company which has been deferred and is being amortized over the remain-uses commercial paper to fund its short-torm borrowing requirements. ing life of the lease and included in operating expense as part of the future lease expense. At December 31, 1996, approximately $22.5 million of this deferral information regarding the company's short term borrowings, comprised of borrow-remained on the Consolidated Balance Sheets. ings i:nder the credit agreements, bank loans and commercial paper, is as follows.' Future minimum annual lease payments,mc . luded in the table above, required December 31, 1996 1995 1994 under the La Cygne 2 lease agreement are approximately $34.6 million for each (DoHars in Thousands) year through 2001 and $611 million over the remainder of the lease. Borrowings outstanding at year end: The gain realized at the date of the sale of La Cygne 2 has been deferred for Lines of credit . $ 525,000 $ - $ - financial reporting purposes, and is being amortized ($9.7 million per year) over Bank loans . 162,300 177,600 151,000 the initial lease term in proportion to the related lease expense. KGE's lease Commercial paper notes 293.440 25,850 157,200 expense, net of amortization of the deferred gain and a one-time payment, was p Total . , $ 980,740 $ 203,450 $ 308.200 approximately $22.5 million for 1996,1995, and 1994. Weighted average interest rate on debt outstanding at year end 17. Joint Ownership of Utility Plants (including fees) . 5.94 % 6.02 % 6.25 % Weighted average short-term debt and Ownm adecemM, M outstanding during the year . $ 491,136 $ 301,871 $ 214.180 in-Sennce Invest- Accumulated Net Per-Weighted daily average interest rates during the year (Dollars in Thousands) (including fees) , 5.72 % 6.15 % 4.63 % La Cygne 1(a) Jun 1973 $ 160.541 $ 105.043 343 50 Jeffrey 1 (b) . Jul 1978 290.617 121.307 616 84 Unused lines of credit supporting Jeffrey 2 (b) . May 1980 289,944 115.025 617 84 commercial paper notes . $ 447,850 $ 121.075 $ 145.000 Jeffrey 3 (b) . May 1983 389.350 152,579 591 84 Wolf Creek (c) Sep 1985 1,382.000 369.182 547 47 3
- 16. I. eases W Jointly owned with KCPL M Jointly owned with Utilicorp United inc.
At December 31,1996, the company had leases covering various property and Icl Jomtty owned with KCPL and Kansas Electric Power Cooperatwo. inc. equipment. The company currently has no capital leases. Am unts and capacity presented above represent the company's share. The com-Rental payments for operating leases and estimated rental commitments are as g' pany's share of operating expenses of the plants in service above, as well as such expenses for a 50% und;vided interest in La Cygne 2 (representing 335 MW capac-Operstmg ity) sold and leased back to the company in 1987, are included in operating
' Year ended 0ecember 31, Leases expenses on the Consolidated Statements of Income. The company's share of (Donars m thousands) other transactions associated with the plants is included in the appropriate clas-sification in the company's Consolidated Financial Statements.
', 18. Segments of Business 8
' The company is a pub!ic utility principally engaged in the generation, transmission, Future Commitments: distribution, and sale of electricity in Kansas and the transportation, distribution, 1997 . 60 N and sale of natural gas in Kansas and Oklahoma. 1998 SW 1999. 47,276 Substantially all of the results of tperations and financial position of the natural 2000 43,877 gas segment will be exchanged for an equity interest in New Oneok in the strate-2001 .,. 42.592 gic alliance which is expected to close in the third quartw of 1997. Upon Thereafter 688.231 contribution of the natural gas net assets to New Oneck, the company will record Total . $934.866 s WneWn New Oned 46
WESTERN RESDURCES, INC. Notes to Consolidated Financial Statements Yaarcaded December 31 1996 1995 1994m The portion of the table above related to the Missouri Properties is as follows: (Dollars in Thousands! 1994 Operating revenues: (Dollars m Thousands, unausted) - Electric $1,197,433 $1,145,895 $1,121,781 Naturalgas revenues $ 77,008 Naturat gas m . , 849,386 597,405 642,988 Operating expenses excluding 2,046,819 1,743,300 1,764.769 irr:ome taxes . , 69,114 Income taxes 2,897 0 prating expenses excludmg Operating income . , , 4,997 irsome taxes: Identifiable assets - Electric , 843,672 788.900 768.317 Depreciation and amortization .. 1,274 Natural gas 810,062 584.494 625,780 Maintenance 1.099 4 1.653.734 1,373.394 1,394,097 Capitalexpenditures , 3,682 Irzome taxes: Electric 84,108 96.719 100,078 19. Sales of Misscuri Natural Gas Matural gas 4,984 (5.522) . (4,456) Distribution Properties 89,092 91,197 95,622 On January 31,1994, the company said substantially all of its Missouri natural gas distribution properties and operations to Southem Union Company (Southem Operating income: Union) for $404 million. The company sold the remaining Misswri properties to Electric 269.653 260.245 253,386 United Cities Gas Company (United Cities) for $665,000 on February 28,1994. The Maturalgas 34.340 18,464 21,664 properties sold to Southem Union and United Cities are referred to herein as the
$ 303,993 $ 278.709 $ 275.050 " Missouri Properties."
During the first quarter of 1994, the company recognized a gain of opproximately Identifiable assets at December 31:
$19.3 million, net of tax, on the sales of the Missouri Properties. As of the respec-Electric $4,379.435 $4.470.359 $4,346.312 Neturalgas tive dates of the sales of the Missouri Properties, the company ceased recording 769.417 712,858 654.483 the results of operations, and terr.cved the assets and liabilities from the Other corporate assetsa . 1.498,929 307,460 370,234 Consolidated Balance Sheets related to the Missouri Properties. The gain is
$6.647,781 $5,490.677 $5,371.029 reflected in Other income and Deductions, on the Consolidated Statements of income.
Other Information-Depreciation and amortization: The following table reflects the approximate operating revenues and operating Electric income included in the company's consolidated results of operations for the year
$ 152,549 $ 133,452 $ 123,696 ended December 31,1994, related to the Missouri Properties:
Natural gas 31,173 26,833 33,702 Percent of Total
$ 183,722 $ 160.285 $ 157,398 Amount company Maintenance: Wars sands.unau6ted Electric $ 81,972 $ 87,942 $ 88.162 Natural gas 17,150 20.699 25,024 * "9 P'""'8 ' ' ' '
Operating mcome 4.997 1.9%
$ 99,122 $ 108.641 $ 113,186 Separate audited financial information was not kept by the company for the Capitz,1 expenditures: Missouri Properties. This unaudited financial information is based on assumptions Electric $ 138,361 $ 153.931 $ 152,384 and allocations of expenses of the company as a whole.
Nuclear f.iel . . 2.629 28.465 20.590 Natural gas 58,519 54.431 64,722
$ 199.509 $ 236.827 $ 237.696
. (1)Information reflects the sales of the Missouri Propertes (Note 19).
' (2) For the years ended December 31,1996 and 1995 operatmg revenues associated w!th the natural gas sagnent include immatenal amounts of revenues related to operations of non-regule'sd subsidianes m non gas related busmesses.
(3) As of December 31,1996. *his balance pnncipally tepresents the equity investmeat in ADT. security business and other property. non-utikty assets and deferred charges. As of December 31,1995 and Isa4. this balance represerits prmerily cash. non utility assets Ad de9 fred charges 47
E a ,
)
WESTERN RESOURCES,INC. Notes to Consolidated Financial Staternents
- 20. Quarterly Results (Uneudited)
Th3 amounts in the table are unaudited but, in the opinion of tranagsment, contain all adjustments { consisting only of nonnal recurring odjustraents) necessary for a fair presentation of the results of such periods. he business of the company is seasonal in nature and, in the opinion of managernent, comparisons between the quarters of a year do not giva a true indication of overall trends and changes in operations. First Second Third Fourth (Dollars in Thousands, Except Per Share Amountsf 1996 Operating revenues , . ,,. . . $ 555.622 $ 436,121 $ 490.172 $ 564,904 Operating income . , 75,273 59.020 93,587 76,113 Netincome , , 44,789 28,746 62,349 32,466 Eamings applicable to common stock , , ,, 41,434 25,392 56.049 31.236
' Earnings per share . . , $ 0.66 $ 0.40 $ 0.87 $ 0 48 Dividends per share ,
... $ 0.E15 $ 0.515 $ 0.515 $ 0.515 Average common shares outstanding . , 63.164 63,466 64,161 64,523 Common stock price:
High . $ 34.875 $ 30.75 $ 30.75 5 31.75 Low . , $ 29.25 $ 28.00 $ 28.25 3 28.625 1995
- Operating revenues . $ 443.375 $ 372.295 $ 470.289 $ 457,341 Op; rating income . . 69.441 43,891 99,481 59.896 Net income . . 41,575 21,716 71.905 46.480 Eamings applicable to common stock . 38.220 18.362 68,550 43,125 Eamings per share . , ,
$ 0.62 $ 0.30 $ 1.10 $ 0.69 Dividends per share $ 0.505 $ 0.505 $ 0.505 $ 0.505 Average common shares outstanciing . , 61,747 61,886 62.244 62712 Common stock orice:
High . , 8 33.375 5 32.50 $ 32.875 $ 34.00 Low , . $ 28.625 $ 30.25 $ 29.75 $ 31.00 Report of Independent Public Accountents
- T2 the Shareowners and Board of Directors of Western Resources,Inc.:
We have audited the accompanying consolidated balance sheets and statements In our opinion, the financial statem 9 referred to above present fairly, in all of capitalization of Westem Resources,Inc., and subsidiaries as of December 31, . material respects, the consolidated financial position of Westem Resources, Inc., 1996 and 1995, and the related consolidated statements of income, cash flows, . and subsidiaries as of December 31,1996 and 1995, and the consolidated results taxas and common stock equity for each of the three years in the period ended of their operations and their cash flows for each of the three years in the period December 31,1996. These financial statements are the responsibility of the com- ended December 31,1996, in conformity with generally accepted accounting pany's management. Our responsibility is to express an opinion on these financial pnnciples. statements based on our audits-As explained in Note 12 to the consolidated financial statements, eff6ctive We conducted our audits in accordance with generally accepted auditing ' January 1,1994, the company changed its method of accounting for postemploy. standards. Those standards require that we plan and perform the audits to obtain ment benefits. reasonable assurance about whether the financial statements are free of mater-ARTHUR ANDERSEN LLP ial misstatement. An audit includes e amining, on a test basis, evidence
. supporting the amounts and disclosures in the financial statements. An audit also Kansas City, Missouri, includes assessing the accounting principles used and significant estimates made January 24,1997 by management. as well as evaluating the overall financial statement presenta- Fe% W W mmt to Note 2 cf the Notes to Consolidated Fmancial Statements 1 tion. We believe that our audits provide a reasonable basis for our opinion.
48
WESTERN REFOURCES. INC. Directors Frank J. Becker(30) John C. Dicus (63) John H. RoWnson (69)
.. Elected 1992. Elected 1990. Elected 199t Prssident . Chairman of the Board Chairman Emmitus
~k. Becket investments. Inc.
Lawrance, Kansas . ,, g'; and President Capitol Federal Savings h^ Black & Veatet. Kansas City, Missouri
' Committees: Audit 'a and Loan Associ tion Comm;aees: Corporate and finance. Corporate , o Topeka, Kansas
-' PublicPolicy. Human Public Policy
^
. Committees: Corporate Resources Public Pdlicy Human -
'.f Resources Gene A.Rudig(57) -
John E. Hayes, Jr. (59) Louis W. Smith (53) Elected 1987. < ,o . ,. Elected 1989. .. Elected 1991. v- President '*4
. Chairman of the Board ,. President and Chief American League M.' ; '
and Chief Executive Officer Operating Officer of Professional -a
. Westem Resources. Inc. .. Fwing Marion Kauffman (p.
~
Baseball Clubs - 9' Topeka, Kansas ^ Foundation New York New York . Kansas City. Missouri s Committees: Audit Committees: Human and finance, Nominating . Resources. Nominating
*l~*
C. Q. Chandler (70) David H. Hughes (68) g Susan M.Stanton (48) e . Elected 1992. Elected 1988. Elected 1995.
.; Chairman of the Board ,
Aetired Vice Chairman cg President and Chief
. - INT 3UST Financial M'. Hallmark Cards, Inc. Operating Officer
.f Corporation , Kansas City Missouri ~. Payless Cashways. Inc.
- . Wichita. Kansas .
g, g ,,,.g, g , Kansas City, Missouri l , Committees: Audit PublicPolicy, Nominating - Committees: Corporate andFinance. Corporate .' Public Policy Human Public Policy -- Resources i T . 4 80 Thomas R. Clevenger (61) Russell W. Meyer, Jr. (64) Kenneth J.Wagnon (58)
. Elected 1975.
- Electod 1992. ~ .
Elec%d 1987. Investments and Financial Chairman and Chief -,1 '
' ka President l o -
Consu! tant Wichita, Kansas eg. Executive Officer Cessna Aircraft Company
'-( Capital Enterprises. Inc.
Wichita. Kansas l Wichita, Kansas Committees: Audit ?_ Commmees: Human
? h',L .
')
andFinance, Nominatng . Committees: Human . Resources, Nominating
.;y , xif Resources, Nominating ,
a David C.Wittig (41) Eiected 1996. President
. Western Resources. Inc.
Topexa. Kansas ti () Age as of December 3t.1996 49
- WESTERN RESOURCES,INC.
1 Ten-Year Comparative Data INCOME STATEMENT DATA ($1,000s): Operatine Expenses Depre-Total Fuel Power Natural ciation & Operstmg ' Used for Purchased Gas ' Other Main. Amorti- Operating Years Revenues Generation (Nm Purchases Coerations tenance ration Taxes income 1916 ' $2,046,819 $285,952 $27,582 $354,755 3607,995 899.122' $201,286 $106.144 $303,983 1995 1,743,300 231,419 15.739 263,790 479,136 108,641 177,830 188,036 278,709 1994m 1,764,769 234,328 15,438 312,b76 438,945 113.186 174,942 200,304 275,050 1993 2,028.411 250,328 16,396 500,189 467,915 117,843 181.909 201.471 292.360 1992m 1,639,422 - 200,779 ' 14,819 403,326 379,264 101,611 157,171 142,731 239,721 I 1,162,178 146,256 5,335 439,323 1991 103,319 60,515 85,735 102,074 ' 129,621 1990 1,149,755 148.681 2.658 456,868 178.448 57,817 76,815 96,478 131,990 1909 1,127,623 149,796 148 451,896 171,094 58.442 73,305 97,406 125,536 1988- 1,166.114 148,787 (2,356) ,486,347 165,234 55,128 70.406 112,146 130.422 1987 1,166.458 144,495 2,328 485,995 153,789 49,598 67,804 124,115 138,334 1986 1,198,884 144,693 2,065 511,344 151,076 45,842 SS,208 135.417 142,639 ELECTRIC STATISTICS: compear system supply MWH Seles (1,000s) et Peek Hour (Not MW) System System Peak Accredited Net Responsi- Generatmg System Years Residential Commercial industnal Other Total Load bility (3) Capacity Capacity (3)
'1996 5,265 5,667 5,622 6,013 22,567 3,997 - 4,077 5,312 4,978 1995 5,088 5,453 5.619 4,120 20,280 3,979 4,004 5,240 4,966 1994 5,003 5,368 5.410 4,005 19,786 3,720 3,730 . 5.230 4,900 1903 4.960 5,100 5,301 4,628 19,989 3,821 3,827 5,184 4,985 1992m 3,842 4,473 4.419 3,119 15,853 3,583 3.590 5.139 4,807 1991 2,556 3,051 1,947 1,984(si 5.538mi 1,973 1.959 2,622 2,367 1990 2,403 2,952 1,954 1,820 9.129 1,957 1,948 2.589 2.344 1989 2,248 2,814 1,925 2,077 9.064 1,838 1,823 2,589 2,345 1988 2.296 2,782 1,877 2,174 9.129 1,926 1,919 2,526 2,287 1037 2.153 2,633 1,816 2,001 8,o03 1,818 1,821 2,505 2,241 1986 2,075 2,521 1,821 2,125 8,542 1,737 1,740 2,531 2,262 NATURAL GAS STATISTICS:
MCF Seles (1,000s) Average Cost of Gas Purchased Years Residential Commercial industnal Other Transportation Total Per MCF 1996 62,728 22,841 450 21,067 45,M7 153,033 $3.20 1995 55,810 21,245 548 17.078 48,292 142.973 2.68 1994ai 64,804 26.526 605 43 51,059 143.037 3.06 1993 110,045 47,536 1,490 41 73,574 232,686 3.05 1992 93,779 40,556 2,214 94 68,425 205.068 2.74 1991 97,297 . 47.075 2,655 14,960mi 78,055 240,042isi 2.87 1990 95,247. 43,973 3.207 1,361 72,623 21J 411 2.90 1989 104,057 47,339 5,637 1.403 58,025 2' 6.461 2.75 1988 10' 471 ' 52,567 19,929 2.455 37.424 2 6,846 2.57 1987 94,842 50,946 29,9i7 2.101 24,584 2i t2,390 2.67 1986 97,368 54,132 48,181 2.523 5,752 20',956 2.50 f tlInformation reflects the sales of the Missouri Properties (Note 19L A Information refincts the merger with KGE on March 31,1992. (3) Net of off-system sales and purchases (4) Restated to reflect two-for one stock spht on May S.1987 50
U WESTERN RESOURCES. W4 Ten-Year Comparative Data Other laceme and Deductions laterest Cherpes income, Earnings, and Dividends
' Otte . .
Eammgs Eamings Dividends kome & . Preferred & Appleable per - . Declared per AFUDC Deductions Longlerm 1 AFUDC- Net Preference to Comsnon ' Common - Common Epity (Netl Debt Other Debt Ircome Dividends Stock Share 14) - Share (4) 8- $14,283 $105.741 $46,810 - $(3,225) $160,950 - $14.839 $154,111 $2.41 $2.06
- 25,062 95,962 30.360 V,227)- 181,676 13,419 168,257 2.71 2.02
- '31,314 - 90.483 23,101 (2,667) 187,447 13.418 174,029 . 2 82 . 1.98
-- 25,185 123,551 19,255 (2,631) 177,370 13,506 163.864 2 76 1.94
- 23,634 117,464 20,009 (2,002) 127,884 115,133 -
12.751 220 1.90
- 3,351 51,2671 10,490 (1,070) 89.645m . 6,377 83.268e 2.41 m 2.04 m
- ' 9,012 51,542 .11,022 (1,181) 1,744 79.619 77,875 ' 2.25 1.80 859 46,378 8,742 (1.503) 72,778 1,857 . 70.921 2.05 1.70
- (461) 44,362 ' 7.135 (1,327) 79.791 1,970 77.821 2.25 1.72 -
"375~ 1,188 ' . 48,185 3.517 (496) 88,691 3.700 - 84,991 -2.46 .1.65 366 750 50.213 2.902 - (742) 91,362 7.633 83.749 2 42 1.58 utihey Meat Electric Revenues ($1.esos) Cuesomers ($1.ests)
Other Avora0e Gross Resi6ntial Commercial . Industtial & Mac. Total Tota; Additions Total -l
$403,500 $351.806 $262,909 ' $179,050 $1,197,433 805,971- $138,474 $5,004,519 3S3.025 . 340,019 - 268,947 140.104 1.145.895 600,791 179,090 5.415,754 -
388,271 334.059 265,838 133.613 1,121,781 164,305 593.859 5,293,995 384,618 319,686 261,898 138,335 1,104,537 585,042 147,556 5,169.915 296,917 271,303 211,593 103,072 882,885 577,918 93.340 5,046,903 . 160,831-- 149.152 78,138 83.718 471,839 306,203 42.387 1,684,147 152,509 146,001 79225 85.972 303,535 46,697 463.707 1.649.367 142,3C3 139.567 78,267 92,201 452,343 300,028 54,207 . 1,613,095 j 149.155 138.318 77,201 96.486 461,160 295,072 62.010 1.563.444 ! 149,914 ' 143.084 82,972 93.755 409,725 295,371 52,792 11,510.067 - l 150,950 145,166 89,084 97,674 482,874 291,967 47,526 1.466,334 I utility Meat Natural Gas Revenues ($1,000s) Cassomers ($1,Ists) Other Average
. Gross j Residential ; Cornmercial ladustnal & Misc. Total Total Additions Total j
$352,905 $120,927 ' $ 2,005 $71,997 $540,714 850,257 8 52,040 $ 744,857
. 274,550 ' 94,349 3.051 54,226 426,176 648,016 53,162 700,255 332,348 . 3.472 34.772 68A,809
. 125.570 . 496.162 64.125 750,496 529,260 209,344 7,294 58.924 804.822 1,P'.s2,713 100,324 . 1.129,792
' 440,239 169.470 7,804 55,850 673,363 '. 082,467 89,520 1,040,373 433.871 182,486 10.546 63,436 690,339 1,067.840 80,630 865,448
- 439,956 176,279 12,994 56,819 686,048 1,059,140 84,553 l
789.428 1
'430250m 172,628 18.021 54,381 675,280 1,053,787 91,613 708,787 418,190 181.506 57,434 47,824 1,042,140 704.954 50.227- 620,P43 7 390,218 .178,402 87207 40.906 696.733 1,030,422 49,906 572,382
. 386,954 184,721 131,090 13,245 716,010 1,011,686 46,319 520,631 l
- 15) includes special, one-time dividend of $018 por share pad February 28.1991.
(6)Itchdes cumulative effect to January 1,1991, of change m revenue recogrution, a $17.360.000 or 50.50 par share increase. Tt:2 curmdative effect of tins change increased natural gas sales by 14.838 000 MCF and electre sales by 256.000 MWH. 51
WESTERN RESOURCES. INC. Officers and Corporate Information EXECUTIVE OFFICERS CORPORATE MANAGEMENT CORPORATE INFORMATION John E. Hayes, Jr. (59)1989 James T. Clark (56) Iris Corporate Address Chairman of the Board and Chief Vice President. Management Executive Off w information Systems and Western Resources I un tions Dnid C.Wittig (41)1995 818 South Kansas Avenue President Richard M. Haden (57)1966 Topeka, Kansas 666121217 Norman E. Jackson (59)1960 0 Sh d Ser ce Executive Vice President. Electric Operations ntemet: http://www.wstnres.com James A. Martin (39)1983 Mce President. Finance Stnen L Kitchen (51)1964 Executive Vice President Carl A. Ricketts (39)1982 Common Stock Listing and Chief Financial Officer Vice President. Labor Helations Ticker Symbol (NYSE): WR Carl M. Koupal, Jr. (43)1992 David E.Roth (41)1979 Daily stock table listing: WstnRes Executive Mce President %ce President. Human Resources andChief AdministrativeOfficer Edward H. Schaub (65)1989* Annual Meeting John K.Rosenberg (51)1979 Mce President. Govemment Affairs
" The annual meeting of shareowners will be at:
n Ge r o ns Jerry D.Courington (51)1977 ConnHer 1120 a.m., Tuesday, May 6,1997, at Thomas E. Shes (47)1972 Kansas Expocentre UTILITY OPERATIONS Treasurer Frsd M. Bryan (55) 1969'" Richard D.Terrill(42)Im One Expocentre Drive President. KPL Corporate Secretary and As ociate General Counsel Topeka, Kansas William G. Eliason (44)1988 Vice President. Gas Strategy Dividends Thomas L Grennan (44)1974 WESTAR SECURITY, INC. Vice President. Generation Services " " Steven A.Millstein(44)1995 Chairman of the Board and President for 1997 dividends on Western Resources William B. Moore (44)1978 Chairman of the Board. KGE common stock: Kenneth T.Wymore (44)1974 Record Data Payment Date President. Gas Service THE WING GROUP December 4,1996 January 2 John B. Wing (50)1996 March 4 April 1 Chairman of the Board and Chief Executive Officer June 4 JulY1 September 4 October 1 John L Davis (49)1996 President and Chief Operating Officer WESTAR ENERGY, INC.. Mark A.Ruelle(J5)1996 Chairman of the Board and President Rita A.Sharpe(38)1977 Vice President.Westar Energy Rodrick S. Donovan (38)1994
%ce President.Westar Gas Marketing
{ } Age as of December 31.1996 Date jomed Westem Resources or predecessor company ll) Mr Fred M. Bryan retired from the company effective November 1.1996. (2) Mr Edward H. Schaub retired from the company effectwe November 1.1996 52
--- _ _ ^
WistlRN HESoURC[S INC Shareowner Information and Assistance Direct Stock Purchase Plan The Shareholder Services Department provides information and assistance to shareowners, including inquines regarding lost, stolen, or destroyed dwidend Western Resources offers common shareowners a program to purchase checks or stock certificates, address changes and transfers of Western add tional shares of common stock Options of the Direct Stock Purchase Plan (Plan) include full or partial reinvestment of dividends, optional cash payments, Resources stock automatic electronic investment. and safekeeping of share certificates Dividend payments should reach shareowners on the dividend payment date. investors may become a Western Resources shareowner through the Plan with If a dividend check is not reccived within seven days after the payment date, a minimum initial investment of $250. please notify Shareholder Services in wnting so that we may stop payment on the Certificate Safekeeping is a convenient feature of the plan. Safekeeping is ongenal check and teissue your dividend payment. designed for investors who prefer tc hold their shares on account rather than Shareholder Services is the transfer agent for Western Resources' common and receive stock certificates. Shareowners enrolled in the Safekeeping program preferred stock. Always keep cert:ficates in a safe place and doreceive not endorse untd receipt in place of a certificate Reinvestment of divi-a Safekeeping you are ready to transfer the stock. dends is not required to take advantage of Safekeeping If a certificate is lost, stolen or destroyed, please contact Shareholder Services To recewe additional information about the Plan, please contact Shareholder immediately. This will assure that an unauthorimd person is prevented from trans-Services at the number hsted above. fernng shares An indemnity bond must be purchased by the shareowner to replace stock certificates The cost of the bond is two percent of the current Direct Deposit of Dividends market value of the stocks Western Resources offers, at no charge, the option of direct deposit of dividends. Quarterly dividend payments are deposited deectly to your bank Contacting Shareholder Services: account the same day the dividends are paid Participahng shareowners receive Telephone; a mwrd of the transaction. Apphtations for this service are available from Toll-free number: 800-527-2495 Sh reholder Services The form must be received at least 30 days prior to the In the Topeka area 913-575-6394 (FAX 913-5751796) dwidend payment date Westem Resources SharebNder Services Duplicate Mailings PO Box 750320 To ehminate duplcate mailings, possibiy because of stock registered in more than Topeka.KS 66675-0320 ne way. Nease wnm %amMW hes Msm %somes is mquaed
$ E-mail Address sharsvcs@wstnres com by law, to create a separate account for each name when stock is held in similar
/ but dttferent names (e g John A. Smith, John Smith. John A Smith & Mary Please include a daytime telephone number in pur correspondence Smith JT TEN. etc ) Help us reduce mailing and record keeping costs by conschdating your accounts Contacting Investor Relations: Telephone. 913-575-8226 (F AX 913-575-8160) tc an er Agents and Reghtrars Director of Investor Relations Western Resources. Inc. Westem Resources P.0 Box 750320 P O Box 889 Topeka. Kansas 66675-0320 Topeka Kansas 666010889 Continental Stock Transfer & Trust Company E-mail Address investre@wstnres com Copies of the Form 10-K Annual Report to the Secunties and Exchange New York. New York 10004 Commission and other pubbshed reports can be obtained without charge by contacting lovestor Relations at the above address. Trustee for Bonds Pnncipal Trustee. Paying Agent, and Registrar Harris Trust and Savings Bank 111 West Monroe Street Chicago. Ilknois 60603-4003 Call conect 312 461-6838 m - - _ - - ,s -s w_
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