ML20195C001

Ks City Power & Light Co 1998 Annual Rept & Financial Statements as of 981231 & 1997 for Ks Electric Power Cooperative,Inc

ML20195C001
Person / Time
Site:	Wolf Creek
Issue date:	12/31/1998
From:	Jennings D KANSAS CITY POWER & LIGHT CO.
To:
Shared Package
ML20195B987	List: ML20195B981 ML20195B990 ML20195C001
References
NUDOCS 9906030336
Download: ML20195C001 (74)

Text

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r Kansas City Power Light Company 1998 anmurtRepait

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':ESTERM RES URCES.,E C.

1998 FIN ANCI AL MEASURES dbilan m Milkony 1998 Iw7

• Change

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FINANCIAL DATA

'{

Sales

$ 2,034 5 2,152

-5.5 Earnings before interest, taxes, depreciation and anmrtiution (1151TDA) 568 1,333

-57.4 I arnings as ailable for common stock 44 495

-91.1 Cash I' low (rarnings plus depreciation and amortiution).

316 751

-57.9 Adjusted Eat nings (earnings plus goodwill amortiution).

92 520

-82.3

~Ii>tal Assets 7,951 6,960 14.2 1 mbedded cost of long. term debt 7.4%

7. 5%

OPER ATING D ATA 1:lectrie:

Sales (thousands of MWil) litility service 17,930 16,934 5.9 Wholesale 4,826 5,334

-9.5

'Iotal 22,756 22,268 2.2 Customers (as erage) 620,183 613,7I5 1.1 Monitored sersires customers (at year end) 1,541,526 953,097 61.7 Number of employees (at year end).

6,960 5,548 25.5 COMMON STOCK D ATA 1.arnings per share

$0.67

$7.59

-91.2 Cash flost per share

$4.81

$11.54

-58.3 Adjusted earnings per share

$1.40

$ 7.99

-82.5 Dividends per share

$2.14

$ 2.10 1.9 liook salue per share

$29.40

$ 30.88

-4.8 Market value per share (et 12/ 31).

$33.250

$ 4 3.000

-22.7 Ascrage shares outstanding 65,633,743 65,127,803 0.8 Number of common shareholders 55.892 59,504 6.1 Annuali/cd dividend yield 6.4%

4.9"n s#

Ascrage daily volume traded 162,273 149,000 8.9 Price /carnings ratio 49.6 5.7 Multiple for cash flow per share 6.9 3.7 Multiple for adjusted earnings per share 23.8 5.4 Common stoi k price range lhph

$44.188

$4 3.4 38 low

$32.563

$ 29.750 C0NTENTS 2

Company Profile 4

Ch irman's lxtter to Shareholders 8

Inside the CEO Perspective 10 Protection One 16 Utility Operations 22 ONEOK 28 Strategic Direction 33 Selected Financial Data p

34 Management's Disemsion and Analysis

$f 48 Consolidated Financial Statements 53 Notes to the Consolidated Financial Statements '

V 72 Directors and Omcers

-h 72 Corporate Information 73 Information for our Shareholders j

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WEiTERN HE&oVRcCS, INC, Western Resources Connany Pm:ile WESTERN RESOURCES (NYSE: WR)

' LINE OF BUSINESS

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jf N ' MONITORE D SERVICLS Protection One (NYSE: P00

1. argent residential and wromt. largest oserall nionitored seniccu ompany IN Vf'S FMF N I S Network Multifamily in the worhi sening more than 1.5 nullmn customen in ihe umica siairs Lifeline Systems Canada, tlic LLK. and htern 1 urope. Protcetion One hea<lquartcrs are Protection One Europe in Cuber City, Cahfornia.

Protection One Mobile Protection One Monitoring Guardian international no. ales alarm monnoring nenicen as wcil as design, mstallation (0TC: GilS) and.crvia oficcurity and hre alarm aystems throughout f lornia an I in New Wrk. Guardun in hea<hguartered in 11011) w ood, I lornla. Ft I ( J RICll Y KPL Fully integrated clectric utihty generating and retaihng electricny Gener& KGE in gans,, and selbng wholesale tlectritity nationu nic. Gcncratnig t Transmission upacity of 5,H6 MW. Operates more than 6, kx) nules of transnnssion . and Distribution lines. Sold ahnout 2 3 milhon MWil of ilet tncity m IW8 and wrses more tian 6.?O,nx) custome.n. licaihjuartered in Topeka, Kansas. i' .1 N AlUR Al (, A 5 - ONEOK (NYSE: OKEl Saves 650,0(x) customers in Kansas under the operating name Dt 1 RIBill lON Kansas Gas Service and 750,000 customen in Oklabonu under the name Oklahom4 Natural Gas. ONI OK also has operations m natural gas storage, marketing and prmluction, llcathluartcred inluha, Oklahona. Hanover Compressor Through % tar Capital, a w holly ow ned,,ubsidury, we hohl im estments (NYSE: HC) in energy -related and paging companien, incluthng: llanos cr Comprewor, Paging Companies a leading pronder of a broad array of natu.ral gas tomprewion rental, operation and maintenantc menices m the thuted staics an,1 wh4i international markets Westar Communications, a grow ing paging (ompany, oliering nationwide pagmg sc nic es equity imestnu nts m urn.us pagmg companics across the linned staten. SALES

• CASH F L O W*

Fiscal year sales dollars by hne of business Incal yeaf cash h tw Ime of busmess is calculated as net income P.r, depreciation and anivt:tation Natural Gas Monitored Servg es Natur al Gas lowestment s 1,835,402 421.095 203.448 s 1.480 ~ / .N / %at . p -l,lh. l 5 y 9 -[ .. p ; f 4 t u 1 ..g..- Electnc Manifored Servnes t let tnc 1.611.685 115.1 E8 293 664 'An msnbers shown m ttmusands Lne of bus ness measures are snown at Imn. i e. mounxed :.ervo n a ie natea1 ps suimoen roei t i tia r,mnany riiantwu even inough 2 Western Resources owns only 8% and 45% respectively. of t%se combames AU natara( ps numtm are as of Ac t 31.1W Ah omer numtm are 6 of Dn ember M 1%

WESTERN RESOURCES, INC, L.. J Cost of gnm th w di be dn n ased through a spanuon and relini nu ni Western Resources owns about 8 5% of Protection One, of the I h aler Pri grarii anil ice reliaiu e on large ai sitiisiti. iis. Priinary 111.8 rnillion iihares worth approximatcly $957 imllion, goal is to make Pnacetion i)ne prolitable and si11 lunihng. New cmphasa , or 514.54 per Western Resources share. wdi be plas ed on irow marketmg momtored struirs pn.duiis through alhhatul compam cusionn r baset The i dehne aulmunon, due to dose in sn und quarter 1999 w ill add 4Wloo i ustomers, w ha h a dli rcate anoths r soun c for irow marks tmg opportumors. Contmur to support this imestmenti gnmth plans by lurmshmg fun.hng Company owns about 12% of Guardian international, and busmew strategy ionsulung as Guanhan npands into new markitt worth about s 3 milhon at year-end 1995. Complete the proposed merger with Kansas City Power A Iight Estimated salue of the electric utihty hohhngs of Western Resources Company to ircate Westar i nirgy Contmur to prepare for esentual . can be cah ulated by multiplying net electric carmngs by the industry niad competioon and unher fully the synrrgies asailable bi twirii price to carriiiign ratio of 14 and disidmg by Western Resouries regulated anil nonn gulaini busmew hnn Iorge pomt generanon awrage outstanihng mmmon shanw 5125 nuthon x 14.0 = 5175 bilhon, pnqn ts with neighbonng utihnes to i nhance piakmg t apaaty Conunue or about $26.56 per share of Western Resourers tummon sim k. to biok for strategic augmunonimorger oppor tmnun that sin ngthen our goal to herome a super rrponal inmprotor m the %dwest. support iomplet on ol ONI OK's merger with southwest Gas Company Company hohls common and comertible prrferrni stoi k equal to ha m largtst natural gas Imal drenbution uimpany m thr umicd to 45% ownership of ONEOK. Estimated market salue of UNI OK states. Dewlop neu sales opportumi es beiwein pas, ricctra.ty hokhngs is approximately $8 38.9 nulhon. and momtorni arruin buunewes. Contmue to hold n;mts in llanowr Compressor and inirrasr Company owns about 11% of llanowr Compressor. s ppori Wntar Westar Communicatium is a 100% ow ntd subudiary of Westerni imestments m attractne pagmg iompana v u Conununnatium ettorts to npand market share and reas h Resources. Year-end 1998 market salue of strairgic imntments totaled about $288 milhon. E BIT D A* CUSTOMERS *. E.rnmgs before interest, taxes. depreciation At year end 1998, Western Resources has and amortaation by hne of busmess access to more tilan 3 milhon customers Natural Gas investments Monitored Services Electric 305.108 ' 6.465 1.500 620 P ?tm N w f j* ' ? ,e:

: ' ; p'u

..v> Monitored services Electnc Natural Gas c 157.208 480 847 1,400

• An numtes srwun thousands in.e o tenns measses se vue at laes. i e m=tmed waes and nata gas numtes refiect total compary numtes, even though n

WPSTPm NPs(Ki8tPs DWh$ DH4 8*.1% and 4R FPskP(lively Of thDse CompaNPS M haTJial ga$ fWmtrer5 We 45 Of August 31.1998 Ail OthPf viumles arg 35 of Deceml)er $1,1998, 3

N ge stes3 assoun ce s; inc. 4: i' ,7 pg ^ y SHAREHOLDERS ] a / 2 3 + i.wi r l h L. u *. ,/: D AYl0 C. WITTIG Western Resources 'i Chantman of the Board, Pressdent and Cheet Esecutwe Ott6cer . j) y. t yr 5 r J T 1 ransition is the word i, ai best summarizes n 1998 activity for our company, from a both a personnel and financial perspective. Thniughout the year, we experienced sescral leadership (hanges, most notably the retirement of John E. Ilay es, Jr., w ho led this company for nine years. o.-, last summer, John retired as chief executise ollicer and in early 1999, he stepped dow n as c hairman of the hoard. Ikith of those responsibilities hase been passed to me.We believe it's been a smooth and seamless transition for our company. As a result, this is my first opportunity to address you in our annual report's letter from the chairman. w I believe annual reports reflect the style and direction of a.>mpany. As a result, weNe chosen a simple, direct style to f communicate our message: we're fotwed on gnm ing the company, growing our customer base and growing the value g of your imestment. It's a simple, direct premise with simple, chreet and measurable results. o

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e !N} C E $ 1 t a if Rft,~u cli$,i C. Q 19 9 8 FIN AN CI A L MEASURES

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(Ibilars m Mill >om> 1998 I997 % changi-FINANCIAL DATA Sales $ 2,034 5 2,152 5.5 Earnings before interest, taxes, depreciation arid amorti/ation (I lilTIM) 568 1,333 57.4 ..3W 1:arnings as allable for common stot k 44 495 91.1 Cash l~ low (rarnings plus depreciation and amortization). 316 751 57.9 Adjusted 1:arnings (rarnings plus goodwill amortization). 92 520 -82.3 'Ihtal Assets. 7,951 6,960 14.2 Embedded cost oflong term debt 7.4%

7. 5%

OPER ATING DATA )I 1:lectrie: [, Sales (thousands of MWil) litihty service 17,930 16,934 5.9 4 Wholesalc 4,826 5,334 9.5 lbtal 22.756 22,268 2.2 Customers (as trage) 620,183 613,715 1.I Monitored sersices customers (at year end) 1,541,526 953,097 61.7 Number of employees (at year end). 6,960 5,54 8 25.5

Up COMMON STOCK DATA 1:armngs per share

$0.67 $7.59 91.2 w Cash flow per share $4.81 $ 11.54 -58.3 Adjusted carnings per share $1.40 $ 7.99 -82.5 Disidends per 6 hare $2.14 $ 2.10 1.9 lionk salue per sharc $29.40 $ 10.88 -4.8 C Market value per share (at 12/ 31). $33.250 $ 4 3.0(M) -22.7 7, Ascrage shares outstanding 65.633,743 65,127,803 0,8 Number of conunon shareholders 55,892 59,504 -6.1 Annuali/cd dnidend yichl, 6.4% 4.9*o Ascrage daily solume traded 162,273 149,000 8.9 Price /rarnings ratio 49.6 5.7 Multiple for cash flow per sharc 6.9 3.7 Multiple for adjusted carnings per share 23.8 5.4 Conunon stock price range liigh. $44.188 $ 4 3.418 l.ow $32.563 $ 29.750 4 C0NTENTS 2 Company Profile 4 Chairman's lxtter to Shareholders 8 Inside the CEO Perspective 10 Protection One 16 litility operations 22 ONEOK s 28 Strategic Direction 33 Selected Financial Data 34 Management's Discussion 'and Analysis ' ( 48 Consolidated f inancial Statements

f 53 Notes to the Consolidated Financial Stateme'nts.

L 72 Directors and Omccrs 72 Corporate Information 73 Information for our Shareholders y 11 'Y i >Q e

WE kTE R M:RE $0UR C E s. IN C. Western Resources Company Profile WESTERN RESOURCES (NYSE: WR)

• W:

~ Protection One (NYSE: POI) largest residential and semnd largest userall nunutored scrum c ompany Network Multifamily in the worhi sening more than 1.5 milhon customen in the unned stati n. Lifeline Systems canada, the U.K. and western I urope. Protecta,n One hea.h uarters are i Protection One Europe in Culver City, Cahfornia. Protection One Mobile Protection One Monitoring Guardian International lhuvides alarm monitoring servim as well as design, m talianon (0TC: GlC and sersim of sivurity and fire alarm systems throughout Ilonda and in New brk Guantian is heashpi artered in llollywomi, Ilonda. KPL rully Aritegrated electric utihty generatmg and retadmg elettricity O'" h KGE in Kansas and selhng whoicule electncity nanonwide. cencraung Transmissson capadtv of 5,356 MW. Operates more than 6,Mm nules of transmimon and Destribution hnes. Sohl almost 2 3 $nilhon MWil of elettricily in 1998 and scncs more than620,000 rustomers. Ilea<hjuartered in TopcLa, Kansas. 1' ' ONEOK (NYSE: OKE) Serves 650,000 customers in Kansas under the operating name K:nsas Gas Service arut 750,000 cuatomers m Oklahoma under the name Oklahoma Natural Gas. ONEOK also has operauon* m natural gas storage, marketing and production. licadquartered in Tulsa, Oklahoma. 1r '...i Hanover Compressor Through% tar capital, a w holly 4m ned subsidiary, we hohl imestmeni, i (NYSE: HC) in energy-related ami paging companics, inclushng: llanmer Compresmr, Paging Companies a leading provider of a broad array of naiu,ral gas compremon rental, operation and maintenance services in the tinind staics and select international markets;htar Communications, a growing pagmg compam, offering nationwide paging senices; equity imcatments m sariom pagmg mmpanies across the Umted states. ? SALES

• C A S H F L OW*

Fiscal year sales dollars by line of business hscal year cash flow by Ime of business is calculated as not income plus depreciation and amorteation 0. . Natural Gas Monitored Services Natural Gas Irivestments 1,835,402 421.095 203.448 1.480 i Electnc M';nitored Services Electnc i 1.611.685 115.1 E8 293.884 l j[ -. hneers shown m uiousna u or tosiness n as,n n u n aum i e. monma sem es,,a r.ata u,,t p s namn m,eim imammnew nonws. een tw 2 Westeen Resources ovms on4 8% arid 4W. respectwety. of those comparues All na*,al gas tiornbers are as of Aug 31,1998 AH otbtn numters,e as of (mc er'itw' 31.19% 4

~ j 1. W (TERN RESOURCES, I N c '. s Western Resources Company Profile . ESTERN RESOURCES (NYSE: WR) W ,r v 7_. ..;,.;... ;, y,;. _ l NW E ON$0FH9LDINGS. 1 W 1; b Protection One (NYSE: POI) Largest residential and wcund largest overall musiitored scriites company Network Multifamily in the world sening rnore than 1.5 mala customen in the timted states, Lifeline Systems Canada, the ll.K. and Western I urope. Protection One headquar ters are Protection One Europe in Culver City, Cahfornia. Protection One Mobile Protection One Monitoring Guardian international Provides alarm monitoring wnicca as wcll as dcaign, instalianon (0TC: GilS) and wrvicr of security and fire alarm systems throughout f lorida and in New York. Guardian is headquartered in llolly wml, I'lorida. 4 KPL Fully integrated ricctric utihty generating and retading clectrisity Generaten. KGE in Kansas and alhng w holesale electritity nationaide. Generatmg capacity of 5,356 MW. Operates more than 6, No miles of transnnssion and Distribution hnes. S<dd almost 2 3 million MWil of clectricity in 1998 and wncs mote than 620,000 customers. lleadquartered inLpt La, Kansas t ONEOK (NYSE: OKE) Serves 650,000 customers in Kansas under the operatmg name Kansas Gas Service and 750,0(K) customers in Oklahoma under the name Oklahoma Natural Gas. ONI.OK also has operanons in natural gas storage, marketmg and pr<xtudion. licadquartered in Tulsa, Oklahoma. Hanover Compressor nrough Westar capital, a w holly. owned subsidiary, u r hoL1 imestments (f.YSE: HC) in energy.rclated and paging companics, includmg: llanmcr compressor, Paging Companies a leading proiider of a broad array of natural gas compression rental, operation and maintenance wrvices in the Linited States and select internanonal markets;Westar Commusiitations, a grow ing paging coinjuny, otTering nationnide pagmg menites; equity investments in sanous pagmg (umpanies acrms the Linited states. I t ,,s S A L E S* CASH F L O W* hscal year sales dollars by line of business fiscal year cash flow by kne of business is calculated .j' as net income plus depreciation and amortaation Natural Gas Monitored Services Natural Gas lwestments 1,835,402 421.095 203,448 1.480 7 Electnc Monitored Sereces Dettoc 1,611.685 115.188 293.884 ' 'M numbers shown in thousands. Une al business measures are shown at 100% ; e. monwea sem es am naut us a mte acet iorat onmany ruirnter s. c#r. itu,urt u 2.. Western Resources owns only 85% and 4SA respectively. of t?mse companies All natmai gas nunibers are as of Aapst 31. } W,8 All other num!*rs Ne as of l'exernher 31. IM !i t

] WESTERN RESOURCi$, lHC. I i i pro wsunk j 1 ~, Cosi of grou th a di be dron ased ihrough i spanuun and rehm ment Western Resourtru owns almut 85'o of Protection Onc, j I ,i the Ikaler Prograin and Ins ri hain e on large ai quisitior s. Pranary 111.8 million shares worth approximately 1957 milhon, goal a to make Protecnon ( Dnr profitable and % )! tun.hng. New emphash or 514.54 per Western Resources share, u di be pla rd on crusi marketmg momton d i.tr uin products through af hhaird iompany rusionn r baso 'l he t ih hne aupuunon, dur to t h.sc in arrond quarter im u di add 4nopio c ustomers, u hn h a dl irrate another soun r for i row markrong opportumiin. Continue to suppor ihn unntminti growth plam by f urmshmg tunihng Company owns about 12% of Guarilian international, ami busnu w *trairgy comulung as Guanhan npands mto uns markin worth about 5 3 mdlion at year.end 1998. Compirir thC proposed merger with Kamas City Power & 1ighi I stimated salue of the electric utihty hohhng* of Writern knourir. Company to irrair htar i nergs cononur to prepart for eu ntual am be calculated by multiplying net clertric rarmngs by the indmtry rotad i ompention and univt fully thi syni rgin asadahlt heturen prire to earnings ratio (14 and dnidmg by Wrntern Resourin iegulated and nonregulatid busnns hnem Iorpr jomt generanon average outstan&ng mnuimn shares: s125 milhon x 14.0 = s175 bdhon, pngerts with naphboring unknn to i nhanic pi almg c apauty Contmur or almut 126.56 per share of WCstern Resourcn Common atm L. to h.ok for r.irategn auluninon/ merger opportumtu s that surngthen our goal to ha ome a super n gional o mpentor m thC %du nt. s p;wirt wmplenon ut ( >NI OKi merger w ith %uthunt G.n Company i Company holds common and comertible preferred stin k equal u to form larpnt natural gas loial dninbunon 6ompany m the timted to 4 5% ownership of ONEOK. Futimated market salue of UNI OK s.tain. l>nclop new salm opportumors beturen gas, < lerinoty holdings is approximately 58 38.9 milhon. f and im dule 8Ted he'r s si C5 buMni ssC4 Conimur to h..Ll equity in llanoser Comprnwr and mi rraw Company owns about 11% of llanmer Comprnsor, s pport Wtar Westar Communitations is a 100% nwned subsiihary of Etern unntruents m attraitne pagmg c ompamn u Cornmunn anom of forts to espand marli t share and ri as h. Resources. Year.cnd 1998 market salue of atrategic imntments totaled about s288 milhon. e .'j i E BIT D A* C U S T O M E R S* Iarnings before interest. tanes. depreuation At yearend 1998, Western Resources has i and amortaation by hne of business access to more than 3 milhon customers j Natural Gas investments Monitored Services Electric 305.108 6,465 1.500 620 ' f% j'N j i ,j< i i w ~ 3 m l Monitored ServK es flectnc Natural Gas 157.208 480.847 1.400 u nunt,-s snown in tusane-tme o' bonns measmes are shown at 1(>0s., e. crunutores :,crvites and natti,at gas rimut>ers renect tota' company runtiers. even themgh Westem hewwtes owns ONy 8% ant 14% rem twi4 o' t'K:se companes 4 riatatal gas nautiers se as of Augu';t 31. lW8 M other twmtiers a'e as of Decerntier 31, IMB. -3

4 .. d W E S.t E 3t N R E S O U R C E s, I N C. Dear Felhnc SHAREHOLDERS i ).}' l;de. 1 h DAVID C. WITTIG Western Resources Cheneman of the Board Presodent and Cheet Esecurrve Offner 4 l. (.y ? i I l ransition is llle word lllat hest sumnlarizes

1998 activity for our company, from p

boll) a personnel and financial perspective. Throughout the year, ur experierucil sescral Icailerslup t hanges, nnist notalih the retirennent of John I. liases, Jr., 'F w ho Icil this t ompans h,r nine ycars. I.ast sulnint'r, jullin ITtiretl as t bicI circutise ol}}s er afi(I in cally l999, Inc sit ppcil ilou l) as t halfinan of tlic hoani. lh atll of those responsibihties base been passeil to me.We ht hese iti been a smooth anil seamless transition for our compam. As a result, this is my first opportunits to aihlrcss you in our annual repot ti letter Ironi the ihairman. I I bilicsc annual reports reflect the stsie antl threction of a cornpam. As a result, uc'se t hosen a simple,ihrect style to conunuincate our message: uc're focuseil on grou mp the e ompany, growing our customer base anil growing the ialue of your unestment. li s a simple,ihrect prernisc with sunple,ihrect aml measuralite results. 4-

'm. f? E t t t R N A E S' 0 0 R C f i, ~ I N C, c p.. ~ y Dear Fellow SHAREHOLDERS a i '1-j r

I

, (- i y i 1 ,-;(y;. l D P~ .q D AvtD C. Wt1TIG 1 Itestern Resources Chaorman of the Bosnt, Pressdent and Chnet Esecutsve Off<cer qt 4 ( /! a

-. t 1-i vi i

r I l ransition is the word that aest summarizes m y 1998 activity for our company, from both a personnel and financial perspective. a ? .f-Throughout the year, we experienced several leaden. hip changes, most notably the retirement of John i. Ilayes, Jr., who led this company for nine years. q d last summer, John retired as chief executiu oflicer and in early 1999, he stepped dow n as (hairman of the luard. Itoth of those responsibilities base been passed to me.We beliese it's been a smooth and scamicss transition for our company. m As a result, this is my first opportunity to address you in our annual report's letter from the chairman. I beliese annual reports reflut the style and direction of a company. As a result, we'se chosen a simple, direct style to communicate our message: we're focused on growing the compam, growing our customer base and gnm ing the salue of your imestment. It's a simple,ihrect premise with simple, direct and measurable results. '). S Ikl s, 4; g, b !!' . kj l

ESTER li $ O U 8t C 4 5,' l N C. liut an annual report also shouhl be a source of pride for and a celebration of employees.The Western Resources family of companies now has more than 10,000 employees.While the financial data dlustrate the saluable collection of businesses we'se become, the photographs feature our greatest assets - our people. Next to each person pictured, we base listed the number of shares and options ow ned in Western Resources or its alliliates. Since our employees are ou nors, their economic interests are aligned with yours: to create a leading consumer services company and increase sharehohler salue.We all benefit from healthy financial performance because we are all owners. In terms of financial performance during the past year, transition seems the appropriate adjectise to use again. While 1997 coukl best be described as euphoric - the company made an 5864 million profit on its ADT imestment and completed both the ONFOK and Protection One transactions - - these positise deselopments mershadowed a number of factors that had a negatise impact on the company. Namely, we are enduring the elTects of a 575 million rate reduction, whi< h will reduce carnings from utility operations by 50.69 per common share, not including the 542 million rate rchates to KPL and KGE customers since the time of the KPIJKGE merger.That's significant. Especially w hen KPL and KGE customers pay rates that are 28% and 10% below the national ase; age, respectisely. What are we doing to make up lbr the carnings drop off in the utility? We continue to h>ok for cost-sasings opportunitics, but w hen you measure our operating perfbrmance, we compare favorably with electric utilities in our peer group.That's sery good from a competitise standpoint, but further savings will be difficult to achiese. Also, we need to increase our lesel of operating expenses to fi>cus on continued reliability for our customers. sound gloomy ? Not necessarily so. Our utility operation is a good business, but I know of no other business w here a company has all of the dow nside and none of the upside.We must work constructively with our regulators to change this formula to enable our customers and sharehohlers to share in our success.We hope to share more of that risk through our approach to merger savings from our proposed merger with KCPL Completing a financially sound merger with KCPL is our number one goal in 1999 While our monitored sersices business has seen significant growth, Protection One's success has not been reflected in our stock price.The reason is that Protection One is a" cash flow" story. llecause Protection One is growing so rapidly, the company traditionally has been salued on a cash flow basis rather than carnings. Western Resources traditionally has been valued as an earnings per share story.While Protection One couhl hase been more profitahic, that wouhl have f meant loucring our growth goals substantially. Our management team beliesed that to maximire long-term salue on our imestment it was of paramount importance to get to 2 million customers. The second goal for 1999 is to focus on operating synergies and increased profitability that (ome f rom growing the customer base from 400,000 to 2 million customers. Our imestment in ONI OK continues to buihl value for sharehohlers with its recent mme to merge with Las Vegas based Southwest Gas.This transaction uill create the nation's largest stand-alone natural gas distribution company, of uhic h we will ou n 45 percent without Western Resources imesting any additional dollars. ONEOK's grow th strategy is consistent uith ours -- grow a relatisely static energy customer base through acciuisitions and mergers. In reality, Western Resources has a htmple story to tell. lluihl a base of customers u ho pas each month for a sersite. This service shouhl be essential to lifestyle, comfort and comenience, but not labor mtensive. In other words, we uant to delhcr a product without regularly sending someone to the home (i.e., we do not want to get into the naste remos al business). .g 3 ,y

.' W'i h T E R N RESOURCES, 'WC. I '.e l n ~r, ty .e o, ? Above. Ru h Tertill. vare president. law and secretary (WR - 2.125 '22.500 sh ares.' option s ). Dared Wittig. { Western Pesaurces-WR -219.369'301.000 shares /optionsl. Bell Moore. esecuttve vite president. thief fenancial offic er and treasurer. (WR - 4 870 '34 935 sharesc eptions). Cart koupal, esecutive vst.e president and chief admmestrative offu er. (WR - 29 974/81.500 shares / options) Arght. Carl Ric k etts. vue president. t orporate oevelopment, {WR - 435;13.250 shares ' options;. and Anita jo Hunt. were president. enformation technology. (WR - 423 9.675 shares / options) l "T l 9.

n.. WLSTERN RESOURCES. INC. F -e a _ y. '"O O?.b M I / _,,J ',U u.1 ',, W ' s+ e Above Fl.i a Terrist vu e prewaent 14. and seuetary tWR - 2,125 22 500 short s options! Dmd Witt g. Mestern Resou t es - WP - ?!9 369 301000 shares options! r 11ith Moore e met utrve at e president ( tnet fmancial o'in er and t<eanorer. lWR - 4 670 34 936 bh d r e g og,tiofYhl (#rl b dup ti. F# et Ut'VR WK e prel6 dent and chief administr :,t've o'N or. <WR - 29 974 81 500 shares options) Ifight, Carl ht b etts, .i< c .e sioe n, o.. ner a.e de..en,m.,, WR - n 13 2so,b.res ont,onsi.ed Anem Jo Huret vic e preudent ir:'or marain te(-hnolog y iWR - 423 9 875 theres options) I l 1 s

TESTER; EB0 a ES3 ( ly C, Our goalis to hase 10 million customers by 2003. At that rate, we would serse about 10 percent of the households in the lini;cd States. DECEMBER 1996 TODAY DECEMBER 1999 COAL Monitored Sersices 430,00() 1,500,000 2,300,000 Natural Gas 650,000 1,400,00() 2,600,000 .t Electric 600,000 620,00() 1,100,000 Total 1,680,000 3,520,000 6,000,000 Our third goal in 1999 is to develop more proactise w ay s to market to our captis e customer base. I beliese in our company and our business plan.7o that end, in 1998 I purchased almost 17,000 shares of Western llesources common stm k at an aserage price of $ 19.3 3. As part of our compensation in 1999, a significant portion of senior management's base compensation will be in Western Resources common sto(k as well. Iinancially, the company is in gmui shape. It's no surprise that we're all disappointed with our stock performance. We simply must do a better job of communicating our simple story. When we embarked on reshaping th( company, we had to c hoose between financial flexibility (separating the balance sheets of the s arious entities) or pooling accounting (not accounting for goodwill).We opted for financial ficxibility. 2 l'se heard from some sharehohlers w ho are confused about how Western Resources lits together financially. I beliese that a more informed investor is a better shareholder.lo that end, let me show you the numbers (a similar table for earnings is on page 30): UTILITY ELIMINATIONS / OPER ATION$ il PROTECTION ONE ONEOKd OTHER RECLASSES TOTAL t iMaons of Dres) Anets Other than Goulwill. 4,271 1,323 2,345 654 (1,8 30 ) 6,763 Gomlwill. 0 1,188 77 0 (77 ) 1,188 1.iabihties 1,483 239 712 877 (606) 2,705 Debt. 1,900

• 927 541 50t; (591) 3,283 Eciuity.

888 1,345 1,169 1,082 (2,521) 1,963 a m., noi e u w-e u. coo, rue..,o -,.,,, too c coo i e i,.nce.,a io msu, t,,e<,, i-(T Re:Newh 10L% of ONE OM's consanden kmxw Werrnst,an at August 31 1498 Weuer,i hesuines owns 45% All othe, Wo, mate o as of lecemtie,31.1996 d DVDl 10 i, l'#ttle,,ed 10 WeMs (r,ergy As we mme foruard to 1999 and beyond, we beliese the reshaping of Western Resources into a consumer sersices company is the best approach to remain competitise and successful. As we complete this transition to a growth company, we will do our best to communicate with you about the changes taking place. l'inally, we were saddened with the death of our friend and colleague, Ken Wymore,4 5, w ho sersed as our senior vice president, electric operations. Our thoughts continue to be with his wife, Juanita, and his family. Sincerely, thid C.Witng Chairman of the lioani, Preslent and chm i set utisc Ollicer P

• t S T E ft ti RESOURCES, INC.

Insic.e tae + CEO Perspective r ( Can you explain 1998 earnings? 1 tmer earnings resulteil from sescral business ilecisions ticsigneti to better liosition the coml>any to com[itte. As ur h>cus on gnming ( energy anti monitoreil sersit es, we took sescral one-time charges against our 1998 carnings,incluihng the ticrision to exit the international lumer tirseloinnent businc.ss.1:xiting that business line alhm s us to focus on our consumer sersices businesses. What is your interpretation of Western Resources

• stock performance?

Western was forretl to reclute carnings jier share by $0.69 as l> art of our tuost ret ent Iate retjut tions. At a 14 }) rice /rarnings tuultijile, W' the not ell.etI has been to l'etlut e our jirice by 510.00 per share. 6:.aduG.b In achhtion, for the last sescral years, we hacl numerous one-time positise carnings a(ljustments th11 can't be countetl ost r the long tertu. There ucre gains in the stot L juirtfolio of imestments tr.g., theTyco stot k salch aml ur recrisetl corporate-ow nctl life insurance procretls in ext ess of actuarial projections. Wall htreet hatt herome usetl to those one-time carnings anti hatl (onsitleteti them as part of carnings going forwani.When they resisett their future estiinatch to ext luvIe one-time iterns, our stot k prit e suflerett. I beliese the market has incrreacted to these tiesclopments. c. What steps will you take to improve the stock price performance in 1999 and beyond? om c wm#,,.. o., our primary business hnes of energy anti monitoreil sersices are expected to deliser sustained profitable gnm th in 1999 anil beyond.We c urrently ...on... oom u..... .om, t,,yo,niiv. 6,a ...i.on. cxpect this carnings grow th to be in the 5 to 10 ;>cr(ent range iluritig the next few ycars, using 1999 as a hase.We hase a good litisint ss ;>lan, but that is not enough. Potential sharehohlers nectl to hear the story in onlcr to create demand for the stot L.We're sharpening our focus on imestor n lations anti will take the juisitise Western itesources ston to imestors sia a set of nationwide meetings in 1999. It is our sicu that LE

E L Od T r. u s 'a s s o u n c e s,' i te c. ( :r // j v Insic.e t ae CEO Perspective m [ Can you explain 1998 earnings? "y - Lower carnings resulted from several business decisions designed =, to better position the company to compete. As we fiwus on growing ). energy and monitored services, we took several one-time charges against our 1998 carnings, including the decision to exit the international power desclopment business. Exiting that business 1 line allows us to licus on our consumer services businesses. IH What is your interpretation of k Western Resources' stock performance? hl Western was forced to reduce carnings per share by 50.69 as part p of our most recent rate reductions. At a 14 price /carnings multiple, ' ~ yt the net efTect has been to reduce our price by $10.00 per share. i AwJ In addition, for the last several years, we had numerous one-time positise earnings adjustmer'ts that can't be counted over the long term. i. There were gains in the stock portfolio ofimotments (e.g., theTyco stock sale), and w e receised corporate-ow ned life insurance proceeds in excess of actuarial projections. Wall Street had become ustd to those one-time carnings and had considered them as part of carnings going forward.When they resised l their future estimates to exclude one-timr items, our stot k price sutTered. I believe the market has merreacted to these deselopments, p What steps will you take to improve the stock price performance in 1999 and beyond? o.mo c. mei.a. n.. ch., our primary busiww hnes ohmtgy and monitm d senicn are expcM p, to deliser sustained profitable growth in 1999 and bevond. We currently em uw..na...n...,. expect this carnings growth to be in the 5 to 10 percent range during ..m. e.qu.nnna.e au..tiani. the next few years, using 1999 as a base. We have a good business plan, but that is not enough. Potential shareholders need to hear the story in order to create demand Ihr the stm k.We're sharpening our focus on imestor relations and will take the positive Western Resources story to imestors sia a set of nationwide meetings in 1999. It is our view that I s, l'%

ESTER REs C 4 INC. a better cducated investor in a better shareholder.We will provide more information to our ow ners so that they can understand u hat is happening uith their imestment. Chat is your focus going forward? One, to complete a financially sound merger with KCPLTwo, to lhcus on operating synergies at Protection One. And threr, to more proactisely market to our existing customer base. What is your non regulated strategy? 'Io seek out and pursue business knes that are compatible with our imestment criteria and growth strategies; i.e., customer growth and monthly recurring resenues. How do you get employees to think and perform more like owners of the company? The best way to elTect that is to reward employees with stock as part of compensation. We're mming to tie sasings plans and personal net worth desclopment for employees intoWestern itesources stock. lleginning this year, ollic crs and senior management uill recrise a portion of their base compensation in Western itesources stock, and the company's 401(k) match will be made in sto< k. What is Western Resources doing to prepare for the year 2000? Will the company be ready? We'gr been working on this project Ihr more than two years and have substantially completed work for becomingYear 2000-ready at the end of 1998.We will continue to test our systems throughout 1999 In addition to this internal process, w hich encompasses our operating companies KPL and KGli, we are working with our afliliated companics, vendors and suppliers for the uninterrupted continuation of all our casential business functions. Do you plan to change the company's dividend policy? The Western llesources dividend policy in place today is that of a profitahic regulated utility. Two things are happening in our businesses w hich could necessitate a mmhfication to this dividend policy. One is the potential deregulation of electricity, which will decrease the certainty of the electric retenue stream. Second, after the completion of the merger with KCPl., Western llesources will become a holding company with diierse imestments.Therefore,it may be appropriate to review the disidend policy in light of that structure. Our goal is to maintain our current dividend. liut, in order to do so, we need greater participation in the imidend lleimestment Plan. ' *.f f A What will Western Resources look like five years from now? Western licsources will be a comumer services company with substantialimestments in monitored scrsices and related products, electricity and natural gas. In most cases, Western itesources will hold a majority interest in these consumer services companics and will prornote cross-marketing strategics among them. . d 9

WE6 FERN RESoGRCES. INC, i Protection One Our goa s are to focus on operating synergies anc to profitably anc strategicaly grow this business. l .r .n:; .q. PROFITABILITY Excludes One Time Events 5200,000 [ 150,000 h ' [ g 5$ l 100.000 - l Y 50.000 - f E \\ 0 - 50.000 1998 1997 1996 j I EBITDA and Cash flow improved substantially for. Protection One in 1998 due to growth of the Dealer Program and acquisitions.' 10 i e .,.m

l WESTERN R E 8 0 0 H C ( $,. t N C ', ,E n s ' f )l b L lt's about growth. Sustained, profitable, strategic growth. www: i,. lp Q just three years ago, Western licsources acquired its first two monitorcil security companics.~Inday, through l'rotection One, our monitorcil scrsices husir. css has grou n to herome one of the leading prosiilers of residential monitoring and,,ccurity related 44 sersiccs in North America. t t $n t. Proicction One, approsimately 85 percent owned hy Western 4 i I ... i itesources, shouhl reach the tuo million customer lesel in 1999 These customers, w ho rely on us escry day, prosiile recurring ~ i A, monthly resenues.These customers gise us marketing act ess to all 4 t '

• I of the continental linited States, plus Canada, the linited Kingilom, and Continental furope.

Top, John Mat h, cheef executive officer. Protetten One-Nationwide, residential filonitored scrVices are growing in cAcess (POI - 111.115/311.600 shares / options), Bottom, Tom Rankm. president and chief operating officer, I"' I" U# Protect on One. (Pol - 117.951/311.600 shares / options) 3gl pgggg gggyg jag, ~lo maintain our profitahle and strategic grou th lincus, uc contentrated only on those acquisitions hest inceting our imestment criteria. Our tactical grow th has included properties w hit h: n _fiarnnh strong rescnue and carmngs grouth vpportunnics; a offcr unportant geograplacfoothoIJr. a Jcinomtratc c1pcriens cJ,.rua cyful managernent; n poucu saluahic, state of the art flu uhtner; a prouJe logn al wnwhJatwn s) nergues; ( a prnent signifuans. contunucJ grou th potentul. l 11'

& $ p u b'atsouncts,[tNC; e c i t A prime exampic is our October 1998 agreement with Lifeline Systems, ACC0UNT C0NCEN TI0N ci^ Inc. Lifeline is the leading provider of personal emergency response M MORE THAN 125,000

x

M 20,000 - 125,000 services in North America, ofTering 24-hour monitoring to customers Elmi LE SS THAN 20,000 in their homes. Lifeline ofTers ecluipment and medical monitoring services United States and Canada to more than 400,000 subscribers through its relationships with more than 2,200 community hospitals in all 50 states and Canada. s W 9 With more than 70 percent market share of an attractive demographic segment, Lifeline is nearly 10 times i q larger than its nearest competitor and enjoys 1 4 <,3 0 a solid reputation for ofTering high f quality, dependable services. y ,,i 1 Lifeline shares our common 4 strategy of offering innovatisc g.j: t ; products and services, growing rapidly, and developing long-term value for our share-holders. Lifeline is an excellent addition to our Protection One family. 9

• k$

Protection One Mobile Services has contracted with i Mercedes llent to be the provider of an innovatise new sers cc available with 1999 S-Class sedans, p Europe Mercedes* new TeleAid system includes an " SOS" button w hich w ill immediately establish voice contact with a Protection One representatise R w ho can dispatch local police, fire or other emergency services. i Our Network Multifamily disision of Protection One is another strong ~ev player in its industry segment. Protection One's Network Multifamily

1. J division is the leader in the apartment security market with more than 320,000 current subscribers and more market share than all other j

competitors combined. { k liv providing security services to the apartment dweller, Protection One's ( N A Multifamily division helps apartment ouners attain higher net operating .o 3 k? 5' j[39 yh g-

WESTERN RESOURCE $. l'N C.' 4 ,. j 1.> I i l i - 1 1 '.i .. : j ' i 'i e I i i .P j e, e. I

l

,1 d +, 3. j e.t >4 ,.j s. i a.. 41 g ,1 2 $i ? ,f.d 1 1 Above, at the Protection One Call Center in Chatsoorth, CA. Michael Hildebrand, Jr, collectsons 6 agency coordinator, Nicole Durand, sales and marketing representative, and Christine Charles, sales and marketing representative. Right. at Protection One in Topeka. KS. Kim Lesseski, e' customer account representative, (WR. 5 shares). .',. 6 / f a j ' ' Nh '. [ f ' ,.h's n

WESTERN Ef50VRCf3c INC. sas J g) ,, [.. ~ ) - p..a :;' ' Q', ' [ '.- '.. % A ' ~ i- ~ t .) ~ W 4 q.,, t,. ~,

• w

+ r ~ N J i 1 - ', 4 g S-Mt I e 1 I S j Above. at the Protection One Call Center m Cnatsoorth. CA, Michael Hddebrand. Jr, collections agency coordmator. Nicole Durand. sales and marketing representative, and Christine Charles, salet and marketmg representative Right. at Pretection One m Topeka. KS. Kim lesseski. customer account representative. (WR - 5 shares) ..^ l , f 1' 13

f

l - WE E TE RN ;R E C R C E L, lTC. l l l l l y l incomes through increased occupancy rates, reduced turnoser and higher rents, u hile providing tenants a valuable amenity and peace of mind. I ess than 2% of the H milkon multifamily units in North America currently h.nc monitored security, a fact that allow = for high growth for this division of Protection One. Protection one's grow th strategy in 1999 and beyond is to grow subscribers at inner cost. Our dealer program does just that.This successful program allows dealers to sell and install Protection One sersices in their markets. Protection One offers dealers centrali/cd monitoring, sales education, training and l'Io/cclion One inaterials, customer leads, consulting services and national advertising. Once a dealer installs a security system, Protection One purchases the account, receives is llle seronti-largest recurring monthly resenue from that subscriber and services the account. lHolllluft*tl st'rl'iCL's %.e view our Dealer Program as an important mgredient to growing monthly Conipully [N llle HUT [tl recurring resenues and strong financial performance.With Protection One, ne are working to desclop other low-cost ways to grow customer accounts, lHITllHIissilll0ielT fugtnenle<l llulusfrn HnaHy, we recognin that our best prospects are often our current customers. With this in mind, we continue to design and market enhanced services. Recent initiatises, often ollered as a bundled pac kage with monitoring services, include: COMPANY CUSTOMERS ASSETS ANNUALIZED RANK Im*ond (muond REVENUES E catcndcJ scri tcc Uref erflon; imdiens) ADT SECURITY SERVICES 27 $2,700.0 $1.800.0 1 N rarrol and alarin rcsponse; PROTECTION ONE 1.5 2.511.3 421.1 2 5 rno-nay micc commurncatwn; a SECURITYLINK (AMERITECH) 1.3 WA 422.4 3 5 surcrissed monitoring 3crisccs; DR'NK'S HOME SECURITY 06 252.0 207.2 4 5 cellular plwnc Imc back-up; HONEYWELL INC. 0.2 WA 220.8 5 5 molille scn kes. kanked by number oftvuomerg As Protection One continues to grow as the prosidct ld (hoice for I monitored sersices, we will strise to improse margins and achieve strong financial performant c. l l l a: \\ u:

q 1 WESTERN R E SOUR C E S; (NC. I I l 'I l l l 1 i i i; f

1

\\ f' \\ s ( / le ' / q e 4W l , f. f y 'l l l At the Chatsworth, CA, Call Center. Gail Carpenter, vice president customer operations. (Pol 10.000 options), and Thomme Ryan, vice president Chatsworth. (WR - 100 shares) Right. Cedrich Holmes, sales and marketmg representatwe. 7g =, c a m ay.:: u hq . m is

1 4 lJ b I 'NC, Wt&TERH RE$0URCE64 i '/ 1 g .g 1 st.65 3 .), p. . y '; 7 + Eti]ityOpy ations .e We1continus toh,,,%r obi 6tfunities to w. n.,' y' -k l: x '( 1, 9i expand' the:ene, r..y.;gy portions of'; tour company v:s ..~., a tuarougr rnergersh actnisitloils. ailc aalliances. ,i ' M@ ri '< J,, ( ,; g . s. i ad ;o: .,? ~ , W.eDare7k3eellna ourfootlolls ,u Q : - ,jp.1 = 7:Openiand (' __g'exible;l , 1 4 } s '>s g.., j(pi kNj[I. 3,,( f r .-,. q g g ) 'q.\\*'4- - y 7: 3q ,~ u a, y, s. NA s, l$ja

l,r' d:

I'y,a. ef_%i:J4 ^ T l ls f % p' y L 'y ~ g., j u,, y 4 +.m,.,,x.$% u/ n" Pit 0 FIT ABILIT Yi ~*'g y,- s. ~ y i e - .m 4-y m . Eaciudes One: Time Events; if* u 7; i ? ~., 5600,000 ,f' / 500,000 'h g / j- 400.000 y.g y** .l 300,000 - /o 2 zE : l 200,000 - 3 100.000 - i 0 - 1998 1997 1996 EBITDA and cash flow measures for the utility hne of business benefited from a warmer than normal summer season. is

WESTERN RESOURCES. INC. y A I ( I ' et \\ / e i =Mr n o e -V, s Ik At the Chatsworth, CA. Call Center. Gail Carpenter. vue pressdent, customer operations. [ POI - 10 000 options). and Thomas Ryan, vue president. Chatsworth. (WR - 100 shares) Right. Cedrn k Holmes. saies and marmeting representative g a ; a e

d, t k

i a i t 15 .a

WFSTIRN R E s o ll R C E S. fNC, -.j Ltility Operations Mye continue to loon:or o 3portun111es to ex,anc the energy 11ortions oiour conraany tarougrinei;gers, acc uisitions anc alliances. 'We areaeeping our opti'ons oaen and f exi;a.e. h-P R O FIT A BILIT Y Excludes One-Time Events 1 $600.000 - l 500.000 I O { 400.000 y j ~ 300.000 - 200,000 -- h 100.000 - 0 - 1998 1997 1996 i EBITDA and Cash flow measures for the utility line of busiriess benefited from a warmer than riormal Summer season. 16

l WESTERN RESOURCES, INC, .t' In today's utility business, 3 size is essential. n: Our long ter m goal, supportc<l in plans anil initiatises alrea<lv unclernav, is to become a super-regional energs competitor. We must base a strong marketing presence, a competitisc cost prolile anil substantial generation capacitt our merger with the Kansas City Power & l.ight Compam t KCPI), w ill mme the electric si<le ol' our business (loser to critis al inass. n 4, ; The merge <l compam, to be nameil htar I nergy, w ill 1.c i reated from the KGl. an<l KPl electric operatior.s of Western itesources anil the electric operations of KCPl. htern Resources will ow n i 80.1 per< cot of the common stot L of the nen (ompam. Ibrmer j KCPL sharehohk rs uill ow n the other 19.9 pcrt cm 1 htar [ \\ s. v' 7 ' \\ ql u l'ncrgy. htar i ncrgy will boast about 1.1 milhon, e o u s ustomers, / scrsed under the KCPI, KGl! anil KPI brand name. S u di trade I as a separate, pure plas electric compam, with 58.2 b::.,n in asst ts d!M! Inore tilan $ 2 liillH)H in annual resenuc%.These finain i d strengtlis, coupled with control of almost 8,800 mcpan atis of generaung capacits, Top Tom Grennan, emetutive vue president. u dl make Westar I Hergy a strong compctitor in tbc Miducst. Ocorar operstmns, mR - 4 096'29 625 sharen optional Bottom Wayne Kitt hen, The incrger prot ess is ucll undcru at We h.se recrised the approsal ,,,,,,,,,3,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,o of both htern Resourt es and KCPI sharehohlers. While there are a mu - 2 349 8.179sh.,ei optier s erntection One - $00 shares and Hanover Compressor-nutuber of regulators issues to be athlressetl, ne anti (ipate regulators 793,g, ,ny g, g, ,,,m, approsal in the state and federal jurivhctions in 1999

• • "'e"**'"r*ad">"*"*

(WR - 520 604 shares optmns) The htern Itcsr urt es/KCPI merger is a (lear example of our strategy to sci /c business opportunitics tonsistent with our grou th goals. It u di help espand our geographit footprint both through growing our customer 17

F WESTERN RESOURCES, INC. b t .,a ?. l. [, 9-I ' f';"' [] t J \\ 9 / l , A,_ i 6 Above. Ron Hott. senior director corporate and community affairs (WR - 1.359 3.200 nr.aresc options }

1. ,.., g Armette Bei k. vice president, customer servae. and chairman of the board and preudent, KGE, Oj(( {s((;j'[q

-l / j'. fl;!.. { {. [ [WR - 1467c"3.103 shares options). and Ra hard Good, director, customer operations. (WR - 900/3 750 shares 'optmns) Right. Les Morgari, was pres dent, generstmn seryt< es. (WR $ 000 optionsl. and Otto Maynarti preudent and chief esecutive officer Wolf Creek Nuclear j EN ~ k Oper0tmg (Orpuf stion, (WR - 200 shares) u '

W.. b" 7.. WE S TE RM' R E S OUNC E $i JNC, i c q ( In today's utility business, 4 size is essential. n os ,.mg' Our long. term goal, supported by plans and initiatives already . g W, r.. o undernay,is to become a super-regional energy competitor, We must base a strong marketing presenw, a competitise cost m' f prollle and substantial generation capacity. 4 i Our merger with the Kansas City Power & L.ight Company (KCPL), .S' uill more the elet tric side of our business (loser to critical mass. The merged company, to be named Westar Energy, uill be created p from the KGE and KPL clectric operations of Mstern llesources and the electric operations of KCPL. Western llesources uill on n <<)

80. I percent of the conunon stoc k of the new company. Nrmer g1 I.

,u g KCPL shareholders will own the other 19.9 percent of Westar

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p ~ s Energy. Westar Energy will boast about 1.1 million electric customers, sersed under the KCPL, KGE and KPL brand names. It uill trade b 1 + as a separate, pure-play electric company, with 58.2 billion in assets n' + and more than s2 billion in annual resenues.These financial strengths, coupled with control of abnost 8,800 megawatts of generating capacity, Top. Tom Grennan, executive vice president. will make Westar Energy a stronf 'petitor in the Midwest. electoc operations, (WR - 4.096/29 625 lel shares / options). Bottom. Wayne kitchen, The merger process is well unds _ . We have receised die api,roval ,,c,,,,,,,,,,,,,,,i,,,,,,,,,,,,,,,,,,,,,, , n;, i of imth Western llesources and KCPL shareholders. While there are a (*" - 2 348 's. 79 shares / options. Protect on One - 500 shares and Hanover Compressor-number of reguIJtory issuch to be addressed, we anticipate regulatory ,oo,,,,,,,,,,,,,,,,,,,,,,.,,,,, approval in the state and federal jurisdictions in 1999

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(WR - 520,-604 shares / options). The L'estern liesources/ KCPL merger is a clear example of our strategy to sein business opportunities consistent with our grow th goals. It will help expand oi.c geographic footprint - both through growing our customer C t.m

WESTERN RESOURCES,INC. e \\ / l:, ,. a Aoove. Ron Hort. sen.or director. t orporate and (ommunity affairs. ;WR -. 1.359 5 200 shares options) 33 y. Annette Bec k vn e president. customer serv <t e, and chairman of the troard and president, W GI '[g l / =d 'E..jj (_ WR - 140 7,3103 shares options). and An mard Good. director. t untomer operations a i (WR - 900 3 750 staves optionsi R.ght les Morgan vu e president generation servaes ..,[ ! A R - 5 OfKs opt <ons!. orid (mo Maynard president and chief esec utive oft cer Wolf Creek Naclear OpeP elitfig C ors.or atton !WR - 200 shaven) EE U ~ !1 14-

r C E S T E R I R E S O. '.C E S',- I N C ig A %4 base, and by adding to our generating capacity. And the merger will help us continue to be a low-cost energy provider - reducing our costs further through reorganization and economies of scale. Delisering reliable energy to our customers' homes and businesses is as important to them as it is to us. lHISineSSCS of Uk'SlerH Through our resitali7ed Service Guarantee for energy customers, we promise that if we miss a service appointment, sersice connection PSOUIffS DIN! blNSUS bil[ or security light installation and don't call to make other agreeable Potter & Light Co/npany arrangements, wc ll credit the customer's account.We support this initiative IcIll create a Strong, with the promise,"No Excuses. No liassles. No Kidding"It's a dynamic part of our strategy to provide the most eflicient energy in the business and the A'glonal c/ectnh conipelltor, best customer service as well. ja l,( pgggypj yj,Sjyy fQgpygy, Workplace safety also is a top priority for our energy business. Und trade US U Sldnd-U[one It protects our employees and our customers. It reinforces a positive colnpany on the hrelv )ork perception of our company. And reducing safety problems helps to promote profitable company growth and productivity, in 1998 we launched a Stock Exchange. comptny-wide safety awareness promotion i featuring a new slogan " Safety: A bright idea!" t l This exemplifies our commitment to encouraging

• E KCPL WESTAR ENERGY g

employees to think of safety as a w ay oflife. l ELECTRIC CUSTOMERS h 620,000 451,000 1,071,000 Our safety track record has been good during l ANNUAL REVENUES $1.61 tulhon $939 mdhon $2.55 bdhon the last few years. Since 1993, we have had l ASSETS 55.2 bdhon' $3 bdhon $8.2 tulhon l a nearly steady decrease in safety incidents. l TRANSMISSIONimdes of hne) I 6.300 1,700 8,000 GENERATING CAPACITY (MW) 5,356 3,361 8,717 Despite a slight upturn m. 1997, we base reduced total annual incidents more than 60 perce. > the '*" '*'* " '""""" * '" xca nwrge last six years. Our company goal for 1998 w., o reduce our safety incident rate to 4.0 or less.We came very close to that goal with a year-end rate of 4.42. In order to serve our customers, we are adding

• peaking" capacity. Planned expansions and retrolits will add to our generating capacity. In 1999, we will add 80 megawatts of peaking power available from the City of McPherson, q

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Above. Rita Sharpe. vice president. shared servues. iWR - 1.000/12.500 shares options). and John Fitzpatink, senior voice technician. (WR - 6.?$1/100 shares optsons) left. Lee Johnson. electric dist ibution supervisor. Doug Henry vic e president. poner delevery (WR - 1.445'5 800 shares options). and Connie Ostermann. mans;;er system deseloper (WR - 1.393.240 shares options! w$ Ob 4, o ./ .t i4 2 0,.' )

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jL Above Rna Sharpe. vne president, shared serynes, (WR - 1.000/12300 unares/optenst er,d John htipatrich. semor vosce ter.hmcian. (WR -6.751/100 shares /optenal left, Lee Johnson, electnc distribution supervisor, Doug Henry, vice president power dehvery, (WR - 1,445/5.800 Antes /optonst. and Conme Ostermann.

[' manager, system developer. (WR - 1.393/240 shares / options). -[ .ja rc (( 1 3 L, Ed

> b. h o t s T f R N. R t $QU R C E $g [m Ng pt Kansas. Reactivation of a steam turbine at Neosho Station near Parsons, C APlT AL Kansas, will add another 68 megawatts to our system. EXPENDITURES 97 The Gordon Esans Energy Center, northwest of Wichita, Kansas, will be 150,174 the site of three new combustion turbines.Two of the units will begin serving 135.457 1 customers in late spring 2000 and the third will be operational in 2001. All g w three will be natural gas-fucied, using the latest in environmental technology g with low nitrous oxide combustors.They will be quick-start units, offering E o our customers an additional 300 megawatts in available peaking capacity ]o for high load conditions or system emergencies. p And, in January 1999, we reached agreement with neighboring Empire District Electric Company fi>r joint ownership of a 500-megawatt combined cycle gener. 1998 1997 1996 ating unit. Construction of this unit is to begin in the fall of 1999, and the unit is Capital expenditures for expected to start generating electricity in 2001. All of these the electric business were generating additions will enhance the operation of our existing power plants and the merall reliability of our electric system. POWER We also are the first company in Kansas with plans to offer wind-generated MARKETING SALES power for sale to retail customers.The pilot project will include two 382.601 750-kilowatt class wind turbines, capable of producing approximately 5.2 million kilowatt hours of electricity per sear, based on wind patterns. 1 If the project proves technically successful, and customers support our elli>rts Sw s to provide" green" power, ue intend to expand the size of the wind farm to as j l large as 50 megawatts, which couhl serve more than 15,000 households. I m i o I o We will continue to kmk to expand through mergers, acquisitions and alliances. o i Since the grow th needed to become a super-regional energy provider will not E 69,827 w I result from organic growth in the next fiw years, we are keeping our options open and flexible. 1998 1997 Power marketing sales increased sharply in 1998, reflecting our emphasis on utilizing our generating assets and reducing risk associated with energy pnces. w aL:SA

WESTERN RfSoURCES, INC. OXEOK Aggressive pursuit

0. complementary acquisition

~ ~ opportunities, suca as Sout1 west Gas, will be an important part

o. ONEOK's ~uture orowth.

~ D i PROFITABILITY Cash flow is calculated as net income plus depreciation and amortization. Illl $350,000 300.000 h 250,000 S E ) U 5 200,000 - S 150.000 - 5 100.000 - 5 50.000 - 0 - - 1998 1997 1996 ONE0K's EBITDA and cash flow both increased substantially in fiscal year 1998 due, in large part, to completion of the alkance between Western Resources and ONEOK. Western Resources contributed its a natural gas business to ONE0K in exchange for common and convertible preferred stock equal to a 45% ownership in ONEOK. 22

WESTERN R E S O U R C E S.' JNC. j.. 'I -i .l AQlQ:f 4 i ., + ,'y Yet another example of our j forward-thinking, strategic j approach to structuring 1 our business units is our successful alliance with 1 a ONEOK, Inc. of Tulsa, Oklahoma. I) in late 1997, Western Resourt es contributed substantialh 3 I all of its natural gas operations and awets to ()Nll)K in return for corntuon and preferred stot k equal to a 4 3 percent ow nership position in ON1 OK.The resulting compam became the eighth

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largest local natural gas <hstribution (ompant <1 I)C) in the nation, sersing more than 1.4 million natural gas custorners in approximately a} h0 percent of Oklahoma and 67 percent of Kansas. More grow th shouhl he reali/cd in Iw9 to double the siec of ()NI OK again. Instead of seasonalh fluctuating carnings f rom operations, ty pical in the natural gas industrs, Western Resources nou ret cises steady quarter disidenik from ()NI.OK. A hne of l'usinew that presiously l required s20 million cash annualk realiecd a positise s40 million Top, Larry fIrummett, chmerman of the board cash l low alter restructuring, and chief cuecutive of4ter. ONE OK. Inc.. {0NEOK-OKE - 67.454 shares. WR - 250 shares) $s art (if the stratt git alliant c, Western Res(>Urt'es' liatural gas Middle, Gene Dubay president and chief operstmg off.c er, Kansas Gas Service Company. IOKE - 18 806 sharent and Ed Farrell. president O N j '(') K Kansas (jas hers it c. Willi a sinth ath transitiori, heath and chief operahng officer. Ohlahoma Natural Gas Company (OKE - 4.142 shares) Bottom. David K yle. president. ONEOM. Inc., (Ont - 53.812 shares). i

.:c J p,'.! c w t h T E R N) R E _S O U R C t S,j t N E] fl }; y } t. t v, ga %8 Yet another example of our

• dn forward-thinking, strategic approach to structuring

~j our business units IS our d, y. successful alliance with M1 ONE0K, Inc. of Tulsa, Oklahoma. di Q s 'g '}. In late 1997, Western Resources contributed substantially .,t. all ofits natural gas operations and a sets to ONEOK in return ' 09 for conunon and preferred stock equal to a 45 percent ownership N' I position in ONEOK.The resulting company became the eighth <d largest local natural gas distribution company (1 DC) in the nation, N.f ,y serving more than 1.4 million natural gas customers in approximately i $f(jQ) 80 percent of Oklahoma and 67 percent of Kansas. More growth Q) ' :S Ag Jih i W shouhl be reali/ed in 1999 to double the siec of ONEOK again. g Instead of seasonally lluctuating earnings from operations, typical in the natural gas industry, Western Resources now receises steady quarterly dividends from ONEOK. A line of business that previously j required $20 million cash annually realifed a positive 540 million Top, Larry Brs.mmett. chairman of the board cash jlow after TcStructuring, and chief executive off car. ONEOK, Inc., {0 NEON.OKE - 67.454 shares. WR - 250 shares)* A8 part of the strategic alliance, Western Resources' natural gas Middle, Gene Dubay, president and chief operstmg off cor, Kansas Gas Serv 6ce Company, toke - 1s. sos shares), and Ed rarresi president ONE()K - Kansas Gas Sersice.With a smooth transition, nearly and chief operahng omcer Oklahoma Natural 1,500 former Western Resources employees transf. erred to the o Gas Company,10KE - 4.142 shares), Bottom, David Kyle, president. ONEOK. Inc., 10KE - 53.812 shares). a

6 wasyt ontsquacts,Inc. p' i g' new company.% day, Kansas Gas Sersice continues to deliser natural NONREGULATED REVENUES gas service to more than 660,000 customers in 341 Kansas communities and 20 Oklahoma communities. 863,497 ONEOK also acquired these Western llesources natural gas assets: a 12,232 mdes ofJsstributwn percIme; l 686.176 1 ( n a naturalgas transmsssion and gathermg ss stem y nsth 1.650 miles ofppchne; o 563,537 m a Kansas gas processmg plant with 15 mmcfper Jay capacity; z n a 42 percent interest un a Ncn Me.uco plant with a 200 mmcf o per Jay capacity; a a the.1hd Contment.lfarket Center olJering no-notsce naturalgas transportatwn and nhecimg, parkmg. balancmg and storage serru cs 0 to TroJucers at market-bascJ rates; a a retail naturalgas marketing operation now Jomg busmess as Kansas Gas.11arkeimg; E a long-term transportation agreement; 1998 1997 1996 E - ss m // h nram p-n aJhtianalleased storagefacshtics that wsilenhance peak Jchrerabshty ofnaturalgas. OhEOK noHregulHted All this was added to ONEOK's pre existing assets, including: 1Pl't'llHPS grPIC b $C E naturalgas service to rnore than 735,000 customers i l11) Srtll yelir l'Efl0 IllHillly E "' a iS,520 insics of Justribution. transmsssion and gathermg pipcime; elSUfr8tlllif..litrretiSetl E a naturalgas nhdesa!c rnarketmg company scresng 23 states gHS lililllfflfly tirilllly. fromarsly in the mid-continent region of the UniscJ States: E on on nership mterest in I 5 Oklahoma gas processing plants nsth a nct Jady capacity of 335 b fofnaturalgas; E a productwn company with more than S5.2 bulbon cubicjeet of naturalgas reserses. l i l 1 l hh sq h +, W

W E S T & R f4 R C S O U R C C S.;. I N C 2 'd-mm.%.*.. N4as 1 p., 3. Ww { I 4 f { v - j slh ,,.l ~ Ef ,1 h' Y ,r fi s '* / i ',E ' ^ 7, i. s 4 rgagr M )M- .mx~L + , t ___ gfy 31 ~ t s. ~I % ~

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i6 .. qg'p na y s Above, witham Fa=* ell. vice presedent. gas marketmg. (OKE - 5.000 shares). Andrew _h D j' d. t

y Helm. futures and basis trader. IOKE - 10.000 shares. WR - 3 000 shares, and Protection One - 750 shares l. and Sandra Douglas. gas marketing assistant. (OKE - 2 000 shares).

{ R>ght. Jim Lecterby. operator. diggmg mathme, and Joe Andshkiewitz. workseig foreman. street. {0KE - 8 shares WR - 186 shares). .n

WESTERN RESOURCES, lNC. _h - " ~ 111111111111I'b<w= Il N ".. ~ N g ..g s.. q. / I.

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E$thi R E S U U Q C E S.. IN C.

1 m O This alliance nearly doubled ONEOK's asset base from 51.2 billion to V $2.1 billion, prmiding ONEOK with the assets and resources needed to be a contender in the future unregulated gas industry. l T0TAL RETURN m J y Corporation of 1.as Vegas, Nevada, anaounced that their d l j boards of directors had unanimously apprmed a merger P! $200 l agreement. ONEOK's acquisition of Southwest Gas would 175 combine the financial strength of ONEOK with the country's 150 fastest-growing gas distribution utility.The merger would f f 125 create the largest independent gas distribution company in O l R 'j

100 the United States, sersing 2.6 million customers in fisc states.

f' 75 - Southwest Gas will operate as a disision of ONEOK h and keep its name in the local markets it serves. ONI OK g_ f] will rank as the primary gas distributor in Ari/ona, 25 - ~e g Kansas, Nevada and Oklahoma and will hase a strong h 0 '~ presence in Califi>rnia. Western llesources will retain n 8/95 8/96 8/97 8/98 its current 45 percent equity interest, with no additional imestment in ONEOK, and will gain marketing access to Tbree-year tola/ return 1.2 million new customers (br its other product offerings, such as home security. On Ilk /$flk' CorninOll Stor/i Tlw quimion will be financed with a combination of ONEOK debt and CXct'('dA 50$f. [ bis e/ulrl preferred stock and is expected to add to ONI OK's carnings in the first full f NbOffN l[lc l U[nc ([G gf pg year of operations Subject to approsal by shareholden and state and local I regulators, the transaction is anticipated to (lose during the fall of 1999, inrestinent in (IN55(lh, to Duke Enngy Helcl knh sewral nonregulated natural colninon Alor/i, InU(/c 01 O a o so gas assets that were nonstrategic for ONEOK. ONEOK and Duke are partnering l

1ugust 31.199/>, at Ibe end 1

in plans to build a new natural gas processing plant and gathermg system m ([l/leIbree)Purs.//ine/u(/c3 Carter County, Oklahoma, to process gas. f j)T c(* UJujarreint on unt/ i i l At year-end, ONEOK announced the purchase of 5 50 million of convertible ussunit's reinres/nlent preferred stock of Magnum flunter itesources, Inc., one of the nation's D f o[(/iri(/etu/S. fastest-growing independent natural gas and oil exploration and deselopment bp d k -.m..a --2.m

CE&TE. RESOURCEE,INC. Companies.The agreement includes ONEOK's ability to market certain ONE0K's proposed merger with Southwest Gas will double the size of the company of. Magnum ilunter,s natural gas production in the state of. Oklahoma, again ht more than doubled with the Western Resources alkance) and would create While total natural gas deregulation may be a few ) cars away, ONE.Ok, the largest natural gas local distribution has taken important steps in that direction. Deregulation in the CIcctric industry company in the country, moving DNE0K already has prmided ONEOK with the opportunity to transport gas to li>ur mto fast-growing markets in the Southwest. natural gas fired electric generating plants on ned by Public Service Company COMB 1NED of Oklahoma. S E RVIC E AR E A S mens Okl AHOM A N ATUR AL GAS ONEOK also is imobed profitably in nonregulated muums K ANS AS G AS SE RVICE ensum SOUTHWEST GAS CORPOR ATION purt hase and marketing of natural gas primarily to Midwest u holesale customers Rather than compete for baseload M t.;g' business, howeser, the ONEOK Gas Marketing Company L focuses its elli>rts on the intra-day, -month, and gear swing N business,uhere margins and price volatility are higher.The n* 1 company's aserage gross margins per thousand cubic feet have increased significantly pursuing this strategy. N %, '* L Q 'Q As a business line whose only focus is natural gas, ONI:OK combines a regulated distribution and pipeline business uith the nonregulated operations of natural gas marketing, processing and production, to handle all phases of the natural gas business.This means all of ONEOK's financial, tet hnical, engineering, customer sersice and marketing resources are directed towanl AREAS SERVICED BY one goal: to become the premier natural gas prmider in the linited States. mmm SOUTHWE ST G AS CORPOR ATION Aggressise pursuit of complementary accluisition opportunities will be an important part of future grow th. ONEOK is well capitaliicd to fund growth p-with a balance sheet short on debt and long on cash. Esidence of ONEOK's

.e

• .twsaa cny sohd financial fhoting is apparent in its recent stock perfi>rmance. Cumulatise total return on ONEOK common stm k exceeds 50 percent, for the three-year period ending August 31,1998. Some beliese ONEOK stock is in the top La *se bt f

fh e performers among i DCs. g . mon,ae LDS Angeir5.. 2%, ,.w kga,, y 4

WESTERN RESOURCES,INC. Strategic Direction L n a. We wiledntinue our transition ras ?romYtraciti6nal utility company ~

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.4 s to a consumer (services' company +, n ~wlta su ]stantla. Investments in monitor $bserv^ ides,. s m = Le_ectricity anc naturaJgas. 1$ 6 7 h .I ) .n 1 INVESTMENT GROWTH $300.000 --- 250.000 - - - - - i i !-E 200.000 -- " = O' l ? l 150.000 g r- [ 100.000 - - ~ E, 50,000 - - - - - 0 ~- 1998 1997 The increase in investments reflects our continuing interest i in paging companies and the appreciation of our interest in Hanover Compressor. 28

I.p, f f4 WESTERN RESOURCE $

INC, i

e One of Western Resources' ~ greatest strengths is our proven t and extensive track record in growing the company. s-. - s Three short years ago, our rustomer base was ain>ut 1.2 million. W l (?J/ ni 'linlav, through our ou ncrshijn interests in l'rotection ()ne %a '. r '4. --y ant] ()Nl ()K, ur soon will hate atress to more than 4 million } 1 rustomers. (Ipon ronipletion of the Kansas City l'oucr & l.iglit Coml)ans ant l Southurst Gas transactions, ur uill hase access to more than 6 million customers. Wehe alemonstrateil our capahilits. htaying li>ruscal on grow th is the natt huoral at Western llesources. ( A(romplishment of our ongoing arquisition plans will require b imestment gra(le crc <ht ratings, u his h u ill allou the Company to grou without putting untlue strain on company carnings. Completion of our merger with KCPl. shouhl help strengthin our creclit rating.Taking 'n j athantage of tattical grouth opportunitics hy the pru(lent use of lescrage ypp. poy, t,n,,,,ecutive vice president iso will make the comparu attractise to the imestor serking long term t heirman of the board Protection One, in\\estment salue. and member of the ONEOK Board of Directors .e (WR - 45 89 7 /60.000 shares / options Another asset is the strong, Acasonctl manJpciDent train ur ha\\c in pId(c. ONEOn - S 972 sharesi Middle left. Jim Martm. We think antl make decisions like ou nors herause ne are ou ncrs..Io. vice presedent, mvestor relations and strategn h enrourage p% planmng (WR - 1 847/14 625 shares 'optionsi all our emplo\\ces to rXp! ore non (l'atlBlitma! meth(H!s (>I buihling %a!ue, Bottom. (mda lethL admemstraftve assrstant II uc re ollering non-traditmnal compensation metho<ls.These metho<ls m.(lu<le (WR - 100 opt.ons). and Knob 6.sm. associate. torporate strategy (WR - 100 options) an I mployer Sto(k Ou nership l'rogram, as nell as c ompensation and 401(k) matt hcs in Western llesources ronunon stoi k.We helicsc these initiatises u ill help imprme mcrall perfin mam e h) entouraging emphners to huihl their wealth as they huihl yours. rs -

.. a W E S T E R N R E S D U R h t s t it h ; [ m. t s g. % VVr n One of Western Resources' io l o u ~ greatest strengths is our proven and extensive track record in Mc growing the company. 3 .b .d Three short years ago, our customer base was about 1.2 million. [mj Today, through our on nership interests in Protection One and ONEOK, we soon will base access to more than 4 million .j 6 1 custorners. Upon completion of the Kansas City Power & Light

• Sg

.a Company and Southwest Gas transactions, we uill have access to 6 ,q , ir > vi t s s. more than 6 million customers. We've demonstrated our capability. { [ Staying Ibcused on growth is the watchword at Western Resources. h g Accomplishment of our ongoing acquisition plans uill require M h [ a imestment grade credit ratings, which will allow the company to grow Jg without putting undue strain on company carnings. Completion of 7; -a our merger with KCPL should help strengthen our credit iating.Taking adsantage of tactical growth opportunities by the prudent use ofleverage y,,,o,,,t,,,,,,,,,,,,,,,,,,,,,,,,,,, y also will make the company attractive to the imestor seeking long. term chief strategic officer, Western Resources. p chairman of the board. Protection One, imestment Value. and member of the ONEOK Bo rd of Directors (WR - 45.897/60.000 shares / options. Another asset is the strong, seasoned management team we have in place. onton - 5 972 sharest. unddie ieft. >>m uartin. We think and make decismns like owners because we are ow ners..Ib encourage vice president, investor relations and strategic i ?4 plannmg. (WR - 1.847/14.625 shares / options l. all our eniployees to explore non-traditional methods of building value, Bottom. Unda Luthi. admmestratsve assistant. we re offering non-traditional compensat. ion methods.These methods m.clude (WR - 100 options). and Fook Kim, associate. -j'; corporate strategy. (WR - 100 options). an Employee Stock Ownership Program, as well as compensation and 401(k) O matches in Western Resources common stock.We believe these initiatives will U help improve merall perfbrmance by encouraging employees to build their wcalth as they build yours. ,e I Je - - Rua

n$tra .R E s o u n c t e ; ( N C. Western llesources is drisen by good customer service and focus on sharehokler salue. In terms of understanding the financial aspects of our business, we heliese we're ahead of our competition. We base a long-term strategy that gmerns our ~" "~' " ~ " " ' ? "Y" "E "~ A tllun/>cr ofone-linle iternS te(/ftver/ repor/c(/ Our rnain chauenge has been a need to clarify our sision, strategies and operating outlook to the financial conununity to increase understanding and confidence earnitlgs per S/lfire in In our stock value.We need to educate imestors regarding the real salue of. he t / Nl. M(//flSle(/ c(f rtl[IlyS company, w hose stm k, we believe, remains undervalued in the market. (in([ edS[lj[off' f('Sil//S /le/p % address this issue, and to play a key role in continued grow th, DouglasT. io preSen/ a /rner picInre Lake joined us in a newly created post as executise sice president and chief strategic ollicer on September 1,1998. At Western itesources, Lake, former ofongoing operating senior managing director, Ilear Stearns & Co., Inc., u ill head all corporate rcSn/13for //ie colnpuny. desclopment, corporate strategy and investor relations for the company. 1.ake and his title may he new, but the function of strategic planning and its EARNINGS ADJ. E ARNINGS* CASH FLOW

• importance to our future is long standing.

UTILITY OPERATIONS $ 2.03 $ 2.34 $ 4 48 E "N ONE 0K $0.56 $ 0.57 $0.57 on inmtor reMons at PROTECTION ONE $(0.18) $ 0.07 $1.34 emp s INVESTMENT INCOME $ 019 $ 0.20 $ 0.20 a corporate lesel, James A. Martin INTEREST ON has become vice president, imestor UNALLOCATED DEBT (0.61) 10 61) (0.61) EARNINGS BEFORE relations and strairgic planning. Martin ONE TIME ITEMS $ 1.99 $2.57 $5.98 manages the company..s mcreased ONE. TIME GAINS / LOSSES WESTERN RESOURCES (1.4 7) (1.32) (1.32) cliort to proactisclv promote its stock PROTECTION ONE $ 0.15 $ 0.15 $ 0.15 to analysts and portfolio managers. TOTAL $ 0.67 $1.40 $4.81 To he better positioned for long term m tr=ngs + sood*m e r on 1 m towngs

• cepmanon ano amorturwn investment salue, Western llesources will continue its transition from a tradi-tional utility company to a consumer services company with substantialimest.

ments in monitored services and related prexlucts, electricity and natural gas. In most cases, Western itesources uill hold a majority interest in these companies 1 i and will promote crowsclling strategics and expansions for all hnes of business.

WESTERN RESOURCES, I N C '. i m .~. 7 v* r ' N' ( ,y ggq " l - ? i' __. l 'v' Y .A. e e r 'O 4 4' ~ f. e + c .9-t ]!l j..bi m. 4 'd kh,. -,,,.y.' t ',{ b' .. $~ 4 '. i O e * ^b p Above. ton Fmney. president. Westar Commumcations. (WR - 356,6.100 shares / options). i. '- Gary Gifford distnct manager. KPL Pagmg, (WR - 398 sharest and Jennifer Kopp, semor customer care consultant, KPL Pagmg. (WR - 3 shares) Right, a Hanover .,.I' Compressor employee 31

WESTERN RESOURCLS, INC.

" ~ '.

..:. 4N, ' a.. _, h. r 's ~ ~. r u .g' 5 '5 l '~~ .5. l[ .2."M. . _,_. T qs i [, f I .;~ s. b g..e i WWuq a = kt} ~ ' g&V. f W drlL .g- -] .~. ~ ? t... Nh ~ !s / 9 j L'g - Above L ori Finney president Westar Con.munn ahons WR - 356 6100 shares optionsi Gary G.ff ord disernt rnanager RPL Paging IWR - 398 shares) and Jennifee kopp sentOf C ultDnler ( Sf e C Oh5Ultaint KPL Pagmg ;WR - 3 shares 1 R.ght a Haerover 3 m-.s.o, er,.e ~ J M-%.._ 31

a t s t r ay ' t s o u n e s s, i c. n We also are taking a serious l<mk at other businesses u hich suit our strategic interests.The common denominator is recurring monthly resenue.We want to be in businesses that are high margin, but not personnel-intensise. Paging is an example. In fact, through Westar Communications, we already base a growing paging sersice with customers based in Kansas, with cmerage ihr Kansas, Oklahoma, Texas and Inuisiana.We also olTer nationwide paging services. In addition,Westar Conununications uill explore other opportunities in the telecommunications arena. Through its growth, Western ltesources has not changed its Ibcus on hasing a strong balance sheet.To that end, we intend to maintain our financial strength. Additionally, our subsidiaries uih be accessing the capital markets on their own, which means we don't expect to grow our business solely on the back of Western Resources' balance { 1 sheet. As we did when we acquired KGI! and pursued ADT, we may tem}mrarily borrow against our balance sheet. Ilut by the end of the day, we will, through issuance of equity and other means, de-leser the balance sheet and return to a stronger financial profile. Above all, we understand the stockhohler is our priority.We serve our stockholders by creating value - and we are dedicated to enhancing and creating value. l l l l l I I I j n

1 WESTERN RESOURCES. INC. SELECTED FIN ANCI AL DATA 199808 1997m 1996 1995 1994 Year Emicd December 31, (thillars 6nThomands) RISTATED INCCCE STATEMENT DATA: kles: Energy. $ 1,612.959 $ 1,999,418 $ 2,038,281 $ 1,743,930 $ 1,764,769 Security 421,095 152,347 8,546 344 Total sales 2.034,054 2,151,765 2,046,827 1,744,274 1,764,769 income from operations. 230,514 154,425 388,553 373,721 370.672 Net income.. 47,756 499,518 168,950 181,676 187,447 Earnings available for common stock 44.165 494,599 154,111 168,257 174,029 December 31, (thillars inThomamin) B ALANCE SHEET D ATA: lbtal assets $ 7,951,428 5 6,959,550 $ 6,647,781 $ 5,490,677 $ 5,371,029 Long-term debt, preference stock, and other mandatorily redeemable securities 3.283.064 2,458,034 1,951,583 1,641,263 1,507,028 Year Imled Detrmler 31 COCOCN STOCK DATA: ILisic carnings per share $0.67 $7.59 $ 2.41 32.71 32.82 Dividends per share. $2.14 $ 2.10 $2.06 $ 2.02 $1.98 tkmk value per share $29.40 $ 30.88 $25.14 $ 24.71 $23.93 Ascrage shares outstanding (000's). 65.634 65,128 63,834 62,157 61,618 Interest coverage ratio (before income taxes, including AFUDC) 1.27 5.55 2.67 3.14 3.42 W ntormaton reflects wntectf Ofinternatitelpower development actuties. i E litformatOn reflect 1 the gain On the sale Of TyCO Common shares and reflects the st'ateglC alhance with ONE0K. e 6 33

E EVESTERN RE8oURCES, INC, i / M AN AG E M E N T'S DIS C U S SIO N AN D AN ALY SIS INTRODUCTION 1998 HIGHLIGHTS l In Management's Discussion and Analysis we explain the general Continued Expansion of Monitored Services financial condition and the operating suits for Western Resource"' Pmwion One,Inc. (Protection One) had a vear of rapid expansion Inc. and its subsidiaries.We explain: and continued grow th. During the year, Protection One doubled the e What factors impact our business siec of its customer base from about 750,000 customers to about o What our carnings and em.ts were in 1998 and 1997 1.5 million customers.This growth w as achies ed through acquisitions a Why these cae nings and costs difTered from year to year and Protection One's Dealer Program. o flow our earnings and costs affect our overall financial condition During 1998, Protection One invested approximately 5549 million o What our capital expenditures were for 1998 in security company acquisitions. Highlights of this actisity include: o What we expect our capital expenditures to be for the years 1999 m Network Multi lamd.y - A leadm.g prouder of. monitored. through 2(01 i uf N delh9 % gisihd&d g4 o How we plan to pay for these future capital expenditures ly 200,000 custorners. o Any other items that particularly affect our financial condition s Multimedia h.ecurity Services - A purchase of assets, mcluding a or canunp brge secunty monitoring center in Wichita, Kansas, that added As you read Management's Discussion and Analysis, please refer to about 147,000 customers, our Consohdated Statements ofincome on page 49.These statements . Compagnie Europeenne de Telesecurite (CET) - An acquisition show our operating results for 1998, 1997 and 1996. In of a French monitored services provider which added 60,000 Management's Discussion and Analysis, we analyze and explain the customers and established a major presence inWestern Europe, significant annual changes of specific line items in the Consolidated Statements ofIncome. Protection Or: banced these acquisitions primarily with cash advances from Gern Resources and frr m the sale of common Ftrward-Looking Statements shares. In June, Protection One completed an equity offering Certain matters discussed here and elsew here in this Annual Report that raised approximately 5406 million in aggregate proceeds. We are " forward looking statements"The Private Securities Litigation purchased approximately 37.6 million Protection One common Reform Act of 1995 has established that these statements qualify for shares of the 42.8 million common shares sold.The shares, w hich sold safe harbors from liabihty. Furward.looking statements may include for 59.50 per common share, increased our investment in Protection words like we "believe," anticipate,"" expect or words of similar One by 5 357 million. Our approximate 85% imestment in Protection One totals about $1.1 billion at December 31, 1998. meaning. Forward.looking statements describe our future plans, objectives, expectations or goals. Such statements address future During the year, Protection one refinanced a large portion of its esents and conditions concerning capital expenditures, carnings, debt by issuing 5250 million of senior unsecured notes, issuing 5350 million of senior subordinated notes and obtaining a litigation, rate and other regulatory matters, possible corporate restructurings, mergers, acquisitions, dispositions, liquidity and 5500 million credit facility. Part of the proceeds from these olTerings capital renomces, interest and dividend rates, Year 2000 lasue, "cre used to repay a 5 395 milhon intercompany obligation to us. environmental matters, changing weather, nuclear operations, ability The Lifeline Transaction to enter new markets successfully and capitahic on growth opportu-nities in nonregulated businesses, ctents in foreign markets in w hich in October 1998, Protection One announced an agreement to investments have been made, and accounting matters.What happens acquire Lifeline Systems, Inc., (ljfeline) a leading prmider of in each case could sary materialh from what we expect because of 24-hour personal emergency response and support services in North

• such things as electric utihty der'egulation, including ongoing state America. Based on the average closing price for the three trading days and federal artisities; future economic conditions; legislative prior to April 8,1999, the value of the consideration to be paid under developments; our regulatory and competitive markets and other the merger agreement is approximatel) 5129.2 million or 522.05 per,

Lifeline share in cash and stock. Lifeline has adsised Protection One circumstances affecting anticipated operations, sales and costs. that it is evaluating the restatement of Protection One's financial statements.The consideration to be given in the Lifeline transaction is by design variable and is subject to thange within certain parameters until the closing date. Interested parties should obtain the most recent proxy / registration statement for further analysis of the transaction. 34

WESTERN RESOURCES, INC. M AN AGE M E NT'S DISCUSSION AN D AN ALYSIS Innstment in ONEOK, Inc. These electric rate decreases have negatively impacted our net We received approximately 540 million in cash dividends from our i""'*C U'" '"tal ammal cunmlative effect of these rate decreases in ONI OK, Inc. (ONI OK) imestment in 1998. Tax rules allow us to appnaimately 575 million. All rate decreases are mmulatise. Itebatn exclude 70% of these dividends from the determination of taxable are one-time m ents and do not innuence future rates. income.This 70% exdusion sases us about 511 million in income Llectric utility net income totaled approximately $133 million, taxes annually. culuding one-thne ments, for 1998. LleMc utility net income in December 1998, ONEOK announced its intention to purchase re0ccis a debt auotation of $ 1.9 billion. Wntar iLiergy, the new Southw est Gas Corporation (Southwest). ONEOK will pay company to k (n atal as a resuk of the Kansas City Power & Light Southwest sharehohlers 528.50 per comnmn shaic and assume debt Company (KCPL) merger, will assume 51.9 billion of debt from us for a total transaction value of approximately $1.8 billion. ONI OK aml KGL after closing the KCPL merger. We expect to own an

• will add 1.2 million customers in higher grow th markets in Arirona, 80.1% interest in Wntar Energy whith will combine our electric Nevada and California to its existing base of 1.4 million customers as operations with those of KCPL. For more information on the KCPL j

a result of this purchase.The merger is expected to create the largest incrger, see OTHLR INI ORMATION. stand-alone gas distribution company in the tinited States. Charge to income to Exit international in february 1999, ONLOK was achised by Southwest that it had Power Development Activity receised an unsolicited oller of 5 32 per share of conunon tm k from We decided to exit the international power dnelopment business Southern Union Company. Southwest is evaluating both olTers. during the fourth quarter of 1998 in order to focus more attention on l our consumer service businesses. As a result of this decision, we in November 1997, we completed our strategic alliance with i ONLOK and contributnl substantially all of our natural gas busines" recorded a charge to income approximating 599 million, or 50.98 sk to ONEOK in exchange for a 45% ounership interest in ONLOK. The darge accrued exit and shutdown costs, includmg i Our ownership internt is comprised of approximately 3.2 million severance to affected emplovces who were notified of the shutdown common shares and approximately 20.1 milhon convertible prderrni in December, recogniecd the w rite otrof deferred dn clopment costs fm sbares.1[ all the piclctred abares were comeTted, we woubl own rops we wiU cm dndoping and recogniicd the w rite-o!Iof modwiu created w hen we acquired The Wing Group in 1996. We approximately 45% of ONEOK's common shares presently outstanding. Ibtlow ing the strategic alliance, the conmlidated energy have also written down the value of certain equity imestments in sales, related cost of sales and operating expenses in 1997 for our foreign countries to their estimated fair salue.We beline negatise natural gas business ha$e been replaced by inintment earnings in htid enomic, operating and regulatory factors reduced the value of our ownership interests in thne investments and that this ONLOK' decrm is not temporary. See Note 11 for further information. ElIctric Utility Operations Other Charges to income We experienced warmer weather during the summer months in 1998 than we did in 1997 whic h improved net income by 519.8 milhon.The in dw fourth quarter, we sold our investment in an equity security h umdated to our core utilitv and monitored ser ices effect of our electric rate decrease lowered 1998 net income ~ businesses and realised a pre-tax loss of about 513 million, in 56.6 million. addition, we w rote down the value of another imntment due to in January 1997, the Kansas Corporation Comminion (KCC) declinn in value which we beline were not temporary.The pre. tax entered en order reducing electric rates for both our KPL diusion charge related to this imestment approximated 56 million.

• (KPI) and Kansas Gas and Electric Company (KGil Sigmficant Operating rnults for 1998 also included pre-tax snerance terms of the unter are as follows:

obhgations and employee lienents of approximately 520 million. o We made permanent the May 1996 interim 58.7 million decrease OPERATING RESULTS in K G L. rates on February 1,1997 o We reduced KGE's ratn by $ 36 million annuallt on Operating results for 1998 are difficult to compare to 1997 due Februar) 1,1997 primarily to 1998 charges as discussed abme in 1998 lilGilllGilTS ~ e We reduced KPL's rain by 510 million annualh on and the 1997 pre-tax gain on the sale olT)co International Ltd. (Ts co) February 1,1997 conunon stock of 5864 million. o We rebated 55 million to all of oar electric customers in addition to the gain on the sale ofTyco common stm k recorded in in January 1998 1997, we recorded charges uhich included 548 million of deferred o We reduced KGL's ratn by $ 10 million annually on June 1,1998 KCPI merger costs and approximately 524 million recorded by a We rchated 5 5 million to all of our electric customers Protection One to recogniec higher than expected customer attrition in January 1999 and to record costs related io the acquisition of Protection One. o We will reduce KGL's ratn bs s 10 million more annually on June 1,1999 35

westtRN af80URCr$.INC. M AN AG E M E NT'S DIS CU S SION AND AN ALYSIS in November 1997, we completed our strategic alliance with 1997 compared to 1996: Electric sales increased 3% because of our ONFOK and contributed substantially all of our natural gas business expansion of power marketing actisity in 1997. Iligher electric sales to ONEOK in cubange fi>r a 45% ownership interest in ONEOK, from power marketing were offset by our reduced electric rates Fullow ing the strategic alliance, the consolidated sales, related mst of implemented February 1,1997, which lowered revenues by an sales and operating expenses in 1997 for our natural gas business have estimated $46 million annually, been repbced in 1998 by irwestment earnings from ONEOK. Sales g3 and cost of sales from our natural gas business in 1997 wcre 5739 million and 5538 million. 1998 compared to 1997: Total electric cost of sales increased 83%

• in 1998 due mostly to higher power marketing cost of sales.

The following explains, significant changes from prior year results in sales, cost of sales, operating expenses, other income (expense), 1997 compared to 1996: Our pcmcr marketing activity in 1997 interest exgwnse,incume taxes and preferred and preference dividends. increased electric cost of sales by 570 million. Actual cost of fuel, to generate electricity (coal, nuclear fuel, natural gas or oil) and Energy sales primarily include electric sales, power marketing the amount of power purchased from other utilities were sales and, through Nm ember 1997, natural gas sales. Items included 514 million higher. For further explanations of cost of sales in energy cost of sales are fuel expense, purchased power increases, see the fi>ssil generation and nuclear generation business expense (including electricity we purchase from others for resale), segments discussion below. power marketing expense and, through November 1997, natural gas purchased. Depreciation and Amortization Expense 1998 compared to 1997: Depreciation and amortization expense Electric Utility decreased 522 million, or 12%, primarily because we had fully amor-Siles tired a regulatory asset during 1997.This decrease in amortization Electric sales include sales from fossil generation, power marketing expense increased 1998 carnings beliere interest and taxes from 1997. and power delisery operations.The KCC and the Federal Energy 1997 compared to 1996: Depreciation and amortization expense Regulatory Commission (FERC) authorire rates for our electric increased 513 million, or 8%, primarily due to fully amortizing a sales. Power marketing is only regulated by the FERC Our cledric regulatory asset associated with the %lf Creek nuclear generation sales vary with levels of energy deliseries. Changing weather alTect' facility (Wolf Creek). the amount of electricity our customers use.Very hot summers and scry cold winters prompt more demand, especially among our Stranded Costs residential customers. Mild weather reduces demand. The definition of stranded costs for a utility business is the investment Many things will alTect our future electric sales.They include: in and carrying costs on property, plant and ecguipment and other regulatory assets which exceed the amount that can be recovered in e The weather a competitise market. We currently apply accounting standards e Our electnc rates that recognize the cronomic effects of rate regulation and record i o Competitive forces regulatory assets and liabilities related to our fossil generation, a Customer conservation efTorts nuclear generation and power delivery operations. If we determine e Wholesale demand that we no longer meet the criteria of Statement of Financial e The overall economy of our service area Accounting Standards No. 71,* Accounting for the Effects of Certain Types of Regulation"(SFAS 71), we may have a material extraordi-1998 compared to 1997: Total electric sales increased 31% Electric n'ary non-cash charge to operations. ' Reasons for discontinuing

• utility sales increased 6% due to increased retail energy deliveries as a SF$s 71 accounting treatment include increasing competition that result of warmer summer temperatures and power marketing sales restricts our ability to charge prices needed to recover costs already increased 448% Our annual 510 million electric rate decrease incurred and a significant change bv regulators from a cost-based rate,

implemented on June 1,1998, partially ofTset this increase. regulation to another form of rate regulation.We periodically review The follmving table reflects the change in electric energy deliveries, SFAS 71 criteria and believe our net regulatory assets, including those as measured by kilowatt hours, for retail customers for 1998 related *.o generation, are probable of future recmcry. If we discon. compared to 1997. tinue Si AS 71 accounting treatment based upon competitive or other events, we may significantly impact the value of our net regulatory assets and our utility plant investments, particularly Wolf Crcok. See Residential 9.5% OTilER INFORMATION for initiatises taken to restructure the Commercial 6E% electric industry in Kansas. Industnal 14% 4 Other 10% Regulatory changes, including competition, couhl a(bersely impact Totairetail. 59% our ability to recmer our imestment in these assets. As of December 31,1998, we have recorded regulatory assets which are currently subject to recovery in future rates of approximately 36

WESTERN R E S OUR C E s, IN C. M AN AG E M E N T'S DIS C U S SIO N AN D AN ALY SIS s 364 million. Of this amount, 5205 million h a receivable for income sale electric customers and the purchase of electricity for our retail tax benelits presiously pasmi on to customers.The remainder of customers. Our margin from pmcr marketing actisitics is signifi-the regulatory assets are items that may gise rise to stranded costs cantly less than our margins on our traditional electric sales. Our including coal contract settlement costs, deferred employee benefit power marketing activity has resulted in electric purchases and sales costs, deferred plant costs and debt issuance costs, made in areas outside of our historical marketing territory.Through December 31, 1998, our power marketing artisity has had an in a competitive environment, we may not be able to fully reemer msigmh, cant effect on Ellfi.. our entire imestment m Wolf Creek. We presently own 47% of Wolf Creek. Our ou nership would increase to 94% w hen the KCPL 'Ihe availahdity of our generating units and purchased power from combination is completed.We also may base stranded costs from an other companies impacts power marketing sales. In 1998, due to inability to rermer our environmental remediation costs and long. warmer than normal weather throughout the Midwest and a lack term fuel contract costs in a competithe environment. If we of power asailable for purchase on the wholesale market, the determine that we have stranded costs and we cannot recmcr our wholesale power market experienced extreme volatility in prices im estment in these assets, our future net utihty income will be low er and asailability. We beliese future volatility, such as that recently than our historical net utility income has been unless we compensate experienced in the market.could impact our cost of power purchased for the loss of such income with other measures. and impact our ability to participate in power trades. ElIctric Utility Business Segments Ell!T for 1998 decreased from 1997 because we had higher purchased We define and report our business segments based on how manage-P""" "P'"*" "I 5 5 milhon due to a coal fired generation station ment currently evaluates our business. Management has segmented being unavailable f,or the summer. our business based on thfrerence,in products and sersicca, prmluc-IillT fier 1997 decreased from 1996 due to higher cost of fuel and tion processes and management responsibility. We manage our purchased power expense discussed below, a 56 million expense of electric utility business segments' performance based on their carn-obsolete inventory and other increased operating and maintenance ings before interen and taxes (ElllT). ElilT does not represent cash npenses. flow from operations as defined by generally accepted accounting principles, should not be construed as an aiternatise to operating in 1997, actual cost of fossil fuel to generate electricity and the income and is indicative neither of operating performance nor cash anmunt of pown purchased from other utilities were $14 million flow s available to fund the cash needs of our company, items excluded higher than in 1996. Our Wolf Creek nuclear generating station w as from ElilT are signi6 cant components in understanding and assessing on ne in the founh quann of 1997 for scheduled maintenance and the financial performance of our company. We belies e presentation of mr La Cygne coal generation station was off.line during 1997 fi>r an 1:ltlT enhances an understanding of financial condition, resuha of cuended maintenance outge. As a result, we burned more natural operations and cash flow s because ElllT is used by our company to gas to gennate ekctricity at our facihties. Natural gas is more costly satisfy its debt sersice obligations, capital expenditures, dividends to burn than coal and nudear fuel for generating electricity. and other operational needs, as uell as to provide funds fi>r growth. Itailroad transportation limitations prevented scheduled fuel our computation of EHIT may not be comparable to other similarly delis cries, reducing our coal im entories.To compensate fier a lack of titled measures of other companies. mal, w e purchased more pow er from other utilities and burned more Allocated sales are external sales collected from customers by our

• • P'""I'* ""'"I E^ " '" * ""' ""' """'E} '*9 "I'" *'"' #" "I'"

pow er delis erv segment that are allocated to our Ibssil generation and purchased more power from other utilities because our Wolf t reck and La C.ygne generating stations were not generating electricity f. .. or nuclear generation business segments based on demand and c!) erg'y cost. The following discuuion identifies key factors afTecting our P" "I I 9 7' electric business segments. Nuclear Generation Fassli Generation N"5 * **58"os) 1%8 Iw7 Iw6 (Donas m housinds) 1998 1997 1996 Mocated sales. $117,517 $102.330 $100.592 Depreciation and amorteation. 39.583 65.902 57.242 External sales. $525.974 $208.836 $144.056 EBIT. 120.920) 160.968) (SL585) Mocated sales. 517,363 517.167 518.199 Depreciation and amorteation. 53.132 53,831 52,303 EBIT. 144.357 149.825 188.173 Nm lear fuel generation has no nternal sales because it provides all of its p<mer to its co-owners KGE, KCPI and Kansas Ilectric Power External sales increased mer the last two scars mmth because Cooperatise, Inc. The amounts ahme are our 47% share of Wolf of increased power marketing sales of 5 31i million in 1998 and Creek's operaung resulto ~ 570 million in 1997. In 1997, we made a strat< gic decision to expand Allocated sales and IlilT wcre higher in 1998 because Wolf our power marketing business to better utili/c our generating assets Cred opdated the entire } car uithout any outages. In 1997, the and reduce risk awociated uith energy prices.We npanded into both Wolf Creek facility w as oft line for 58 days for a x heduled the marketing of electricity and risk management sersices to w hole-maintenance outage. 37

WESTERN RESOURCES. INC. f M AN AG E M E N T'S DISCUSSION AND AN ALY SIS Depreciation and amortiration expense for 1998 cornpared to 1997 Restatement of 1997 Financial Statements: As a result of a decision decreased $26 million because we had fully amortiied a regulatory by Protection One to restate its 1997 fmancial statements, we base asset during 1997.This decrease in amortintion expense increased chosen to restate our financial statements to conform to the (hanges i IllT for 1998. refleued by Protection One.We do not belies e the restated operating results and financial position are materially different from those D; commissioning: Decommissioning is a nuclear m. dustry term for whic h were reported in our liecen ber 31,1997, Annual lleport on the Iirrmanent shut 4hm n of.a nuclear Ixmcr Islant w hen the I ant,s d ibrm IOK/A. See Note 2 for f.urther discussion of the restatement. license expires.The Nudear Regulatory L,ommission (N RC) will ter. minate a planti lic ense and release the property for unrestricted use 1998 compared to 1997: In 1998, Protection One operated and

• when a company has reduced the residual radioactisity of a nuclear managed our monitored sersices.The results discussed below renect plant to a lesel mandated by the NitC.The NitC requires companies Protection One on a stand-alone basis and do not take into consider-with nudcar power plants to prepare formal financial plans.These ation the minority interest of about 15% at I)ecember 31, 1998.

plans ensure that funds required for decommissioning will be accu. licsults of operations for 1998 rc0cci adjustments made to restate mulated during the estimated remaining life of the related nuclear quarterly earnings as discussed in Note 22 to the consolidated [xmcr plant. financial statements. The I:inancial Accounting Standards lloard is resicuing the account-Monitored services sales increased 5269 million.The increase is due ing for closure aad remosal costs, including decommissioning to acquisitions and new customers purchased through Protection of nutlear pcmcr plants. If current accounting practices for One's Dealer Program.The Dealer Program consists ofindependent nuclear poucr plant decommissioning are (hanged, the following companies with residential and small conuncreial sales, marketing could occur: and installation skills that enter into exclusisc contracts with Protection One to prmide it with new monitoring customers for o our annual decommissioning expense couhl be higher than purchase on an ongoing basis. Monthly recurring resenue is all I" #8 of the monthh resenue Protection One is entitled to receise o The estimated cost for decommissioning couhl be recorded as under contracts uith customers. At December 31, 1998, monthlv a liability (rather than as accumulated depreciation) recurring revenue totaled about 5 38 million. Protection One a The increased costs couhl be recorded as additional investment added approximately 517 million of monthly recurring rnenue from in theWolf Creek plant acquisitions and approximately 55 million of monthly recurring We do not beline that such changen, if required, wouhl adversely resenue from its Dealer Program. Ilecause acquisitions and purt bases affect our operating results due to our current ability to recover from the Dealer Program occurred throughout the year, not all of the decommissioning costs through rates hee Note 10). 522 million of acquired monthly recurring resenue is reflected in 1998 results. Offsetting these rnenue increases was Protection i P=er Delivery One's net monthly recurring rn enue attrition of 9%, a decrease from (Doks m husands) 1998 1997 19 % j 3oo in 1997 her further discussion below). External sales. $1,085.711 $1.021,212 $1.053.359 Cost of sales increased 593 million. Monitormg and related sersites Mocated sales. 66.492 66.492 71.492 Depreciation and amortaation. 68,297 63.590 60.713 expenses increased by 571 million, or 217%, due to the acquisition of EBIT. 196.398 173.809 218.936 three major service centers and three smaller satellite monitoring facilitics in the United States, as well as tu o sersice centers in Canada IAternal sales and LilIT increased from 1997 to 1998. In athlition and tuoin Europe. to our normal customer growth, we experienced uarmer wcather Mmitoring and sen ice activit es at existing facilities increased as w ell during the summer months in 1998 than we did in 1997 which due to new customern generated by Protection one's Dealer Program. imprmed external sales approximately 542 million.The effect of. our electric rate decrease lowered 1998 external sales approximately Selling, general and administratise expenses rose $ 31 million.The 511 mdlion. increase in expensn resulted primarily from acquisitions, offwt by a decrease in sales and related expenses. Selling, general and adminis-External sales and i IllT decreased f. rom 1996 to 1997 due to reduced tratis e expenses as a percentage of total rnenues dedined from 56% electric rates implemented I rbruary 1,1997, w hich low ered rn enues in 1997 m 27% in 1998.The transition of Protection Onci priman by an estimated 546 million. diciktion (hannd from an internal sales for(c to the Dealer MInitored Services Program resulted in sales conunissions dnhning by approximately 19 milhon. Protection One also reduced a<bertising and telemarket-(Dolla's m Thoesands! 1998 1997 19 % N External saiet 5421,095 $152.347 $8.546 Depreciation and amorteation. 117.651 41.179 944 Amortization of intangibles and depreciation expense totaled EBIT. 56.727 (38,517) (3.555) 5118 million in 1998. Protection One recorded $582 milhon of 36

WESTERN RESDURCES. INC. M AN AGE ME NT'S DIS C U S SION AN D AN ALYSIS customer intangibles and $549 million in cost allc ated to goodwill 1998 compared to 1997: Other income (expense) decreased during 1998 from its purchases of monitored services companies, 5866 million due to the following factors: portfolios of customer accounts and indisidual new customers through its Dealer Program. Protection One amortires customer accounts over 10 years and goodwill over 40 years,in each case using Other Income (Expenselin 1997.. S922 a straight line method. 1887 Non recumng ga n on the sale of our TYC0 common stock., (864i Like most monitored sersices, Protection One invests significant investment earnings recorded on Hanover and ADT investments. i33) amounts to generate new customers and seeks ' o maintain relation-t998 t ships with its customers by providing excellent service. Protection increase in earnings from the investment in ONE0K 37 One measures the loss of customers and resenues to serify that Recordedinvestmentiosses.. (22) e g oc ans investments in new customers are generating a satisfactory rate of a o.. return and that the policy of amortizing the cost to acquire customer Other Mscehneous.. 0 61 accounts over 10 years is reasonable. Protection One calculates both Other Income (Expensehn 1998 $36 gross customer losses and net monthly recurring revenue loss as

=

meaningful statistics. If future losses were to increase substantially, Protection One could be required to shorten the 10-year pericxl used interest Expense to amortire the investment in new customers.The resulting increase 1998 compared to 1997: Interest expense represents the interest in amortization expense could be significant, in addition, the SEC we paid on outstanding debt. Interest expense increased 17% due to stalTis resiewing Protection One's amortization methculology used higher long term debt. Our long. term debt balance increased on customer accounts.The SEC staff has cluestioned the appropriate- $875 million due to our and Protection One's issuance of new long-ness of the current accounting method which Protection One term Jebt used to reduce existing short-term debt, to fund believes is consistent with industry practices. A significant change nonregulated operations and to finance a substantial portion of in the amortization methcxl would likely have a material etTect on Protection One's customer account growth. Lower short term debt the company's results of operations.The intangible amortization interest expense partially ofTset the higher long. term debt interest represents a non. cash charge to income.The net balance of customer expense. Our short term debt had a lower weighted aserage interest accounts ;.t December 31,1998, was approximately $ 1 billion. rate than the long. term debt w hich replaced it. ElllT increased 595 million in 1998, included in 1998 EBIT is a 1997 compared to 1996:We incurred 527 million more short term non-recurring gain approximating 516 million on the repurchase of debt interest in 1997. Average short term debt balances were higher customer contracts covered I y a financing arrangement. A charge of in 1997 because we used short term debt to finance our investment approximately $24 million adversely afTected 1997 ElllT.The charge in ADT Limited,(n hich later converted toTyco) and to purchase the was needed to recognize higher than expected customer attrition and assets of Westinghouse Security Systems, short-term debt interest to record costs related to the acquisition of Protection One. expense declined in the second half of 1997 after we used the 1997 compared to 1996: Monitored services sales increased proceeds from the sale of Tyco common stock and a long-term $ 144 million from a minimal amount recorded in 1996.This incicase debt financin to reduce our short term debt balance. From December 31,1996, to December 31, 1997, our short-term debt is because of our December 30,1996, purchase of the net assets of Westinghouse Security Systems, Inc., (Westmghouse Security balance decreased $744 mu.. lion. From 1996 to 1997, interest Systems) and the a uisition on November 24,1997, of 82.4% of recorded on long. term debt increased s 14 million, or 13%, due to the Protectm.n One. issuance of $ 520 million in senior unsecured notes. Oth:r Operating Expenses in 1998, we recorded a 199 million charge to income associated with 1998 compared to 1997: Income tax expense declined significantly e our decision to exit the international power project development due to the decline in taxable net income. In 1998, charges, primarily business as previously discussed in 1998 IIIGHLIGilTS. the char e to income to exit the mternational power development business, signilicantly lowered tax expense. Tax expense for 1997 in 1997, we recorded a charge totaling $48 million to write-off included taxes related to the gain on the sale of Tyco common stock. the original merger costs associated with the KCPL transaction. In Our effective tax rate also declined from 1997.This decline is largely addition, Protection One recorded a charge of $24 million in 1997 as attributable to non. taxable proceeds from our corporate owned hfc diseuued above in Monitored Services. insurance policies and the benefit of excluding 70% of ONEOK Oth:r income (Expense) dividends received from the determination of taxable income. Non. deductibk goodwill amortization, state income taxes, depreciation, Other income (expense) includes miscellaneous income and and other adjustments to our tax provision partially oft *ct the tax expenses not directly related to our operations. benefits described above. 39

WESTERN R E S O U ll C E S, INC. M A N AG E M E N T'S DIS C U S SIO N AN D AN ALY SIS l 1997 compared to 1996: Income taxes on the gain from the sale of tions, the Dealer Program and installations. Protection One ik>cs not Tyco common stock increased totalincome tax expense by approxi-anticipate its 1999 expansion activity to be as significant as in 1998. mately $ 345 million. Capital expenditures totaled 518 3 million in 1998, slightly less than Pr'ferred and Preference Dividends 1997 and 1996. We also purchased marketable securities and i i tional interests in affordable housing tax credit projects. a On April 1,1998, we redeemed the 7.58% preference stock due 2007. On July 1,1996, we redeemed all the 8.5% preference stock in October 1998, Protection One announced an agreement to duc 2016.These redemptions hase resulted in a significant decline in acquire Lifeline Systems, Inc., (Lifeline) a leading pro,ider of. i preferred and preference digidends since 1996. In accordance with 24-hour personal emergency response and support services in North i the terms of the KCPL merger agreement, we will be required to America. Based on the average closing price for the three trading days redeem all of the remaining prek rred stm k prior to the merger. prior to April 8,1999, the value of the consideration to be paid under the merger agreement is approxiniately 5129.2 million or 522.05 per LIQUIDITY AND CAPITAL RESOURCES Lifeline share in cash and stock. Lifeline has advised Protection One Ovsrview that it is evaluating the restatement of Protection One's financial statements.The consideration to be given in the I.ifeline transaction is Most of. our cash requirements consist of. capital expenditures and by dq nble md is subject to change within certain parameters maintenance costs associated with the electric utility business, until the closing date. Interested parties should obtain the continued gnm th m the monitored services business and payment of most recent proxy / registration statement for further analysis of common stock dividends. Our ability to attract newssary financial the transaction. ~ capital on reasonable terms is critical to our merall busincu plan. llistorically, we base paid for acquisitions with cash on hand, or the on January 25,1999 Protection One's Board of Directors autho-issuance of stock or short-term debt. Our ability to prm ide the cash, rized a private placement of common shares to Westar Capital,Inc., a stock or debt to fund our capital expenditures depends upon many w holly-<m ned subsidiary of our company, things, including asailable resources, our financial condition and The private placement will allow us to maintain ownership in excess current market conditions. of 80%. of Protection One,s. issued and outstanding common shares As of December 31,1998, we had 516 million in cash and cash following the issuance of Protection shares to Lifeline sharehohlers. equivalents. We consider highly liquid debt instruments purchased We may also acquire shares of Protection One common stm k in open u ith a maturity of three months or less to be cash equivalents. Other market or prisatelv negotiated transactions depending upon market than operations, our primary source of. hort-term cash is from short-conditions. Any open market or private purchases w d. i reduce or s term bank loans, unsecured lines of credit and the sale of commercial climinate our need to purchase shares in the prisate placement to paper. At December 31,199h,, we had approximately 5 313 milhon of maintain our ou nership of at least 80%.. short-term debt outstanding, of which 5148 milh.on was commercial paper and 5165 million was bank loans.We hase arrangements with Cash Flows from Financing Activities certain banks to prmide unsecured short term lines of credit on a in July 1998, w eissued 5 30 million of 6.8% N nior Notes duc July 15, committed basis totaling approximately 5821 million. 2018.The notes are unsecured and unsubordinated obligations of the We have also registered securities for sale with the Securities and company. In July 1998, we Gled a shelf registration for 5800 million in 1:xchangs Commission. As of December 31, 1998, these included senior, unsecured obligations of the company. In August 1998, we 5400 million of unsecured senior notes, 550 mdlion of KGE first issued 5400 million of 6.25% Putable/ Callable Notes due on August mortgage bonds and approximately 11 million Western Resources 15,2018, putable/ callable on August 15,2003 under this shelf regis-common shares. tration. Proceeds from these issuances uere used to reduce short-term debt incurred in connection with investments in unregu-Our embedded cost of long-term debt was 7.4% at December 31, led opaim 6 adqtion of p ferred securities and other i 1998, a drop of 0.1% from December 31,1997. general corporate purposes. Cash Flows from Operating Activities On April 1,1998, we redeemed our 7.58% Proference Stock due Cash from operations increased significantly from 1997 because of 2007 at a premium, including dividends, for 5 5 3 million. two factors. First, taxes paid of aI, proximately 5345 million on the linancing activities provided Protection One with 5744 million of gain on the sale oi.T)co common stock reduced 1997 operating cash cash. Protection one raised 5642 million through the ftdlowing new Dow. S.econdly,1998 m.cludes the first full year of. Protection One debt instruments: operations.This increased operating cash now from our monitored hersices busincu by about 590 million from 1997. Mrs m Wel Cash Flows from investing Activities August 17,1998: Senior unsecured 7 3/8% notes due in 2005. $250 Decernber 16,1998: Senior subordmated 81/8% notes due in 2009. 350 During 1998, most of.our cash used f.or imesting purposes was to Decernber,1998. Bonowmgs under a revolvmg credit facility. 42 continue the growth of our monitored services business.We used net Sg cash of about 5827 million to expand this business through acquisi-4o

WtSTERN RE50URCfs.INC, M A N AGE M E NT'S DIS C U S SION AN D AN ALYSIS in December 1998, Protection One obtained a revolsing credit iollowing the announcement of our restructured merger agreement facility. Protection One can borrow under this facility at a range of with KCPl., S&P placed its ratings of Western Resources and KGl! interest rates based on either (1) the Prime Rate or (2) a Eurodollar bonds on CreditWatch with positive implications. Moody's changed Rate. At December 31,1998 the sen or credit facility had a weighted the direction ofits ongoing review of Western Resources

• debt rating aserage interest rate of 6.8% and had an outstanding balance of from possible downgrade to possible upgrade.

542 million.The facility matures in December 2001. Future Cash Requirements Among other restrictions, Protection One is required under the We behese that internally generated funds and new and existm ' i revolving credit facility to maintain a ratm ofcarnings bel. ore mterest, taxes, depreciation and amortization (EllrI.DA) to mterest ex >ense of credit ag'reements will be suth,cient to meet our o ieratm and ca u.tal not less than 2.75 to one and total debt cannot be greater than 5 times expenditure requirements, debt service and dividend iayments annualv.ed most recent quarter ElllTDA for 1999 and 4.5 times through the year 2001. Uncertainties alTectm our ability to meet thercafter. In addition, in light of the restatement of its h,nancial these requirements with internally generated funds m.clude the effect statements, Protectm.n One has obtamed a bank waiver for >rior of competition and inflation on operating expenses, sales solume, representations concerning its h,nancial statements. regulatory actions, compliance with future emironmental regula-i tions, availability of carnings to pay dividends, the availability of. Protection One also raised 5406 million in eggtgate proceeds gen (rating units and weather.The amount of these requirements and through the sale of commt mck.We paid approximately 5357 niillion our ability to fund them will also be significantly impacted by the of the total amount raised; therefore, the proceeds net of applicable pending combination of our electric utility operations with KCPL. fees obtained from the sale ofcommon stock approximated 546 milhon. In order to meet the needs of our electric utility customers, we plan Protection One used proceeds from these financing transactions to install three new combustion turbine generators for use as peaking primarily to fund acquisitions and Dealer Program growth. units.The installed capacity of the three new generators will approxi. Protection One also repaid 5512 million of existing debt, including a mate 300 MW.The first two units are scheduled to be placed in $ 395 million intercompany obligation with us. operation in 2000 and the third is scheduled to be placed in operation ) in 2001.We estimate that the project will require 5120 million in C: pit:I Structure capital resources through the completion of the projects in 2001. in Our capital structures at December 31,1998, and 1997 were as fo!;ows: addition, we are planning to return our inactive generation plant in Neosho, Kansas to active service in 1999 at an estimated cost of n98 s 50.7 milhon. Common stock. 37% 45% Preferred and preference stock. 1% 2% On january 4,1999, we and the Empire District Electric Company Wcstern Resources ob ated mandatonly redeemable (Empire) signed a memorandum of understanding that prmides for s ted t ntu e 4% 5% the joint ownership of a 500-megawatt combined cycle generating Long-tcrm debt. 58% 48% unit, which Empire will operate.We estimate that the project will htM. 100% 100% require 590 million in capital resources and we will <m n 40% of the generating unit. Construction of the unit is expected to begin in the = 3.curity Ratings Standard & Poor,s Ratm s Grou > (S&P), Fitch Investors Service Our business requm,,ignilkant capital imestment.We currently expect that throt me war 2001, we will need cash mostly for: (Fitch) and Moody,n Investors S.ervice (Moody,s) are independent credit-rating agencies.These agencies rate our debt securities.These e ongoing utdg t onstruction and maintenance programs designed ratings indicate the agencies' assessment of our ability to pay interest to maintain and improve facilities prmiding electric service. and principal on these securities.These ratings afTect how much we o Growth within the monitored services, including acquisition of will have to pay as interest on securities we sell to obtain additional customer accounts. capital.The better the rating, the less interest we will have to pay on the new debt securities we sell. Capital expen htures for 1998 and anticipated capital expenditures for 1999 through 2001 are as follows: At December 31,1998, ratings w ith these agencies were as follows: Fossi Nuclear Power Morutored Westem Resources' Westem Resources' Westem Resources' Kansas Gas and Dectnc Generaton Generation Dehvery Semces Ott er Total M age Unsecured Short term Company's Mortgage Rt. tog Agency Bond atmg Debt Ratmg Debt Ratmg Bond Ratmg (DoHars m Thousands) S&P A. BBB A-2 BBB+ 1998. S 46.400 525.800 578.000 $859.500 547.700 S1.057.400 Fitch. A-BBB+ F-2 A. 1999. 117.900 19.700 90.800 434 400 20.700 683.500 P A3 2000. 149.900 32.200 79.700 355.100 2,300 619.200 g.s A3 Baal _-2__- 2001 109.100 21.200 78.600 373.700 200 582.800 -.. _ - _ _ _.~ _ _ _ 41

r WESTERN HESOURCES. INC. M AN AG E M E NT'S DISCUSSION AND AN ALY SIS Monitored sersites capital expenditures include anticipated acquisi. We believe successful prmiders of energy in a deregulated market tions.uul purchases of customer accounts. Other primarily represents will pnnide energy.related sersices. We belicse consumers uill our commitments to our Affordable llousing Tax Credit (AllTC) demand innmatise options and insist on ef ficient products and program. See diwussion in OTill R INI ORM ATION behnt. services to meet their energprelated needs. We believe that our strong core utility business provides a platform to olTer the eflicient These estimates are prepared for planning purposes and may bc energy products and sersices that customers w d. l desire.We continue resised (see Note 10). Actual expenditures may diff.er f. rom our to seek new w ays to add salue to the lives and businesses of our estimates. Ilectric exIienditures shown in the table above do not customers. %.c recogm/c that our current customer base must take into aauunt the pending combination of our electric utihty expand beyond our existing sersice area. operations with KCPL (see Note 2I). Increased competition for retail electricity sales may reduce future liond maturitics will require cash of. approximately 5415 million electric utih.ty carsungs compared to our historical electric utility

• i I,nrough the year 2003. Protection One is required to retire its carmngs. After all ordered electric rate decreases are implemented, j

5500 million resohina credit faciht} in the vcar 2001. At 1)ccen b. r our rates will range f. rom 73% to 90% of the national ascrage f. o or 31,199M,142 million u as outstanding under this facility. retail customers. Ilecause of. hese reduced rates, we expect to retain t Dividend policy a substant;al part of our current wiume of energy deliseries in a Our currently authorized quarterly dis idend Ihr 1999 of 5 3 h, cents per competitis e em ironment. tummon share or 52.14 on an annual basis is paid from our carnings While operating in this competitis e emiromnent may place pressure and remains unt hanged from 1998. Our boani of directorn review n our on our profit margins, common dnidends and credit ratings, ue disidend policy on an annual basis.We expect the next resicw to be expect it to create opportunities. Wholesale and industrial customers maile in January 2(xx). Anmng the factors typically considered in deter-may pursue tugeneration, self-generation, retail uhecling, munici-mining our disidend policy are carnings, cash flow s, capitalisation pali <ation or relocation to other service territories in an attempt ratios, competition and regulatory conditions. In athhtian, we expect to cut their energy costs. Crecht rating agencies are applying more the boani of directors in its next res icw to consider s arious factors such stringent guidelines nhen rating utility companies due to increasing as greater participation in our ihvidend reimestment program, our competition. . compensation plan that pays senior management part of new their annual compensation in stock and our business profile upon We offer comIsctitise electric rates f.or industrial imIirmement completion of the KCPL merger, projects and economic desclopment projects in an eft. ort to maintain and increase electnc load. OTHER INFORMATION To better position oursches for the competitis e energy environment, C:mpetition and Enhanced Business Opportunities we are pursuing a merger with KCPI, we base consummated a strategic allianct with ONI:OK <>ec Note 8) and we hold a controb The linited States electric utility industry is emh ing from a regulated 1 imerm in Pmtection One (see Note 4). monopolistic market to a competitise marketplace.The 1992 I:ncrgy Policy Act began deregulating the electricity in Justry.The Fncrgy in light of competitise deselopments, we are pursuing the fbilowing Policy Act permitted the FLRC to order elect'ric utdities to allow strategicplan: third parties the use of their transmission nystems to sell electric a Maintain a strong core energy business. power to u holesale customers. A wholesale sale is defined as a utilit) a Seek out and pursue business lines that are compatible nith our sclhng electricity to a "mi&lleman" usually a city or its utility com-imestment cnteria and growth strategics; i.e., customer growth, pany, to resell to the ultimate retad customer. As part of the 1992 and monthiv, recurring revenues. KGE merger, we agreed to open acccus of our transmission 53 stem a Pmmow cSw.muketing strategies among our consumer senices for wholesale transactions. I ERC also requires us to prmide businesses. transmission scrsiccs to others under terms comparable to those ue prmide to oursches.1)uring 1998, wholesale electric sales Year 2000 issue represented approximately 12% of total electric sales, excluding We ac currentiv addressing the effect of theYear 20(K)lssue on infor-power marketing sales. mation sy stems and operations. We fac c the Year 2(KK) Issue because ~ Various states base taken steps to allow retail customers to purchase many computer systems and applications abbreviate dates by climi-clectric pow er f rom pnn iders other than their local utility company. nating the first two digits of the year, assuming that these tuo digits The Kansas I egidature created a RetailWheelingTask f orce (thcTask are always "19." On January 1,20(X), some computer programs may lurce) in 1997 to study the clTects of a deregulated and competitise incorrectly recognire the date as January 1,1900. Some computer market for electric senices. I egislators, regulators, consumer sy stems and applications may incorrectly process critical information achocates and representatises from the electric industry made up the or may stop proccwing altogether because of the date abbrniation. last f orce. Several bilh w ere intnnluced to the Kamas l egislature in Calculations using dates beyond I)cccmber 31, 1999, may affect the 1998 legidatise session, but none passed, licatings on retail coniputer applications bi fore January 1,2000. u heehng bilh are being held in the 1999 legislature.The outcome of retad u herling legislation in K*nsas remains uncertain. 42

r WE5 FERN RESOURCLS, INC M AN AG E M E NT'S DISC U S SIO N AN D AN ALY SIS El:ctric Utility Operations:We bas e recognized the potential atherse We estimate that total costs to update all of our electric utility oper. effects the Year 2000 Issue couhl have on our utility operations. ating systems ihrYear 2000 readiness, exclutling costs associated w ith in 1996, we establishet' a formal Year 2000 readiness program m WCNOC discussed below, to be approximately $6.5 million, of imestigate and correct these pn>blems in the main computer systems uhi(h $4.2 million represents IT costs and $2.3 million represents of our company. In 1997, we expanded the program to include all non-IT costs. As of Decemba 31,1998, we have expended approxi. business units and departments of our utility operations, using a mately $4.1 million of these costs, of which 5 3.2 million represent common methodology.The Year 2000 issues concerning the Wolf IT costs and 50.9 million represent non IT costs. liased on w hat , Creek nuclear operating plant are discussed below, we know, we expect to incur the remaining 52.4 million, of which The goal of.ouri. car 2000 readiness program is to utentify and assess S 1.0 million represents IT costs and 51.4 million represents non-lT all critical computer programs, computer hardware anti embethled costs, by the end of 1999.These costs include labor costs li>r both n stems potentially atrected by thei. car 2000 date < hange, to repair or company employees and contract personnel used m. ouri. car 2000 program, and non-labor costs for software tools used in our remedia-replace those systems found to be incompatible w ithi. car 2000 dates,

t. ion and testing efl. orts, replacement soft w are, replacement and to deselop predetermined actions to be used as contingencies in the esent any critical business function fails unexpectedly or is inter-hardware, replacement embedded devices, and miscellaneous costs is.

associated with the.ir testing and replacement. rupted.The program. directed by a written pohey which provides the guidance and methodology to the departments and business units We have identilled the folhming major areas of risk relating to our to follow. Due to varying degrees of exposure of departments and Year 2000 issue exposure: 1) vendors and suppliers,2) internal plant business units to theYear 2000 issue, some departments and business controls and systems, 3) telecommunications, including phone units are further along in their readiness efforts than others. systems and cellular phones,4) large customers, and 5) rail trans. All departments base completed the awareness, imentory, and [mrtation.We consider vendors and suppliers a risk because of the assessment phases, and has e des cloped their initial contingency plans. lack ofcontrol we bas e over their operations. We are in the process of Most smaller departments and business units hase completed the contacting by letter each s endor or supplier critical to our operations assessment, remediation, and testing phases.The majority of our for information pertaining to theirYear 2000 readiness.We consider current efforts are in the remediation and testing phases. Oserall, our plant controls and sptems a risk due to the complexity, variety, based on manhours as a measure of work elTort, we beliese we are and extent of the embeckled spiems.We consider telecommunica-approximately 74% complete with our readiness efforts, tions a risk because it performs a critical function in a large number of I our business processes and plant control functions.We consider large 'I,be estimatsd trobiress of our departments and busm.ess umts, exclusisc of Protection One and Wolf Creek Nudear O >cratinE customers a risk because of the m. iluence their ekttrical usage I patterns base on our electrical generation and distribution systems. Corporation (WCNOC), at December 31, 1998, based on W.e consider rad. transportation a risk because of our dependence I.or manhours, is as f<dlows: &hm v of coal used at our coal-fired generating plants. Percentage Departmenthmess umt compicon The most reasonably likely worst case scenario we anticipate is fossilFuel. 81% the loss or partial interruption of local and long-distance telephone Power Delivery 73% service, the interruption or significant delay to rail service affecting information Technology 76% the coal deliseries to our generating plants, the unscheduled Administratwe 69% shut-down of the Wolf Creek nuclear operating plant, the potential loss ofload from one or more large customers, and the loss of mini-Our Year 2000 readiness program addresses all Information mal generating capacity in the region for brief periods of time. Technology (IT) and non-IT issues u hk h may be impacted by theYear Approximately 62% ofour generating capacity utilizes coal as fuel. 1 2000 issue.We bas e included commercial computer software, indud - ing mainframe, dient/serser, and desktop software; internally .e are addressing these n. ks in our contingency plans, and base or w. s desdoped computer software, including mainf.rame, dient/serser, n ill be implement.mg a number of action plam. ' dvance to mitigate ma 1 these and other potential ro. ks. Our contingency plans m. dude and desktop software; computer hardware, m. duding mainframe, dient/serser, desktop, network, communications, and peripherals; pre-established actions to deal with potential operational impacts. des ices using embedded computer du.ps, mduding plant equipment, I or example, w c has e installed a company.n ide trunked radio system which can be used m. place of. he commercial telecommunications t controls, sensors, facihties equipment, heatmg, ventilating, and air 1 condition.mg 0l\\,At,) equipment; and relan.onsh.ips uith third party sutems, m the esent those systenu are interrupted.We plan to place i sendors, suppliers, and customers. Our pn gram requires testing as a m scruce, at reduced output, generating units u hit h w ouhl normally method for senfu.nEi thei. car 2000 readiness of an item. l.ur those not be in service to help accommodate load shif.ts that would be items u hit h are impossible to test, other methods are being used to caused by a large customer suddenly dropping or signih,cantly reduc-t idenu.f) the readiness status, prmided adequate contingency plans are ing their elecincitv usage, or m the esent of unexpected loss of. some established to proside a workaround or backup l.or the item. Our our generation capacity or generation capacity of others in the T of. Year 2000 readiness clTorts for utility operations were substantially region. In addition, we generally maintain more than a 30-dy supph of. completed at the end of.1998 except for those items scheduled f,or cual at eat h of our coal-fired generating plants, reducing the effect nonnat maintenance or upgrade during 1999 - temporary mterruption of rail transportation and an of. any 43

WESTERN R E S O u R l; t s. I N C. M AN AG E M E NT'S DISC U S SION AND AN ALY SIS unscheduled temporary shut-down of the Wolf Creek nuclear aheduled for September 15,1999, and can be achiesed based on operating plant discussed below, the elTort underway. While all business units and departments base descloped contingency ' U""*i **"*8'*'"t ""PPort w as found to be aggressive at plans to cover essential business functions and anticipated pmsibl'c Wolf Creek. Management at if Creek has dedicated the al nwourns nee for sunessfu completion of the year 2000 Year 2000-related failure or interruption, these plans are continualh reviewed and updated based on information learned as ourYear 2000 "'achnm pmgram. readiness clTorts proceed. Since Wolf Creek u as designed during the 1970s and 1980s, most of Cif Creek Nuclear Operating Corporation: WCNOC has been " N "#"I ""' " *"I' P"' '4 " P*'"' "# ""I I evaluating and adjusting all know n date-sensitise systems and equip-rninoprocenon. Dunng this time frame, the NRC would not allow ment for Year 2000 compliance. WCNOC is dc[ eloping a plan to cmnponents required for safe shutdown of the plant to contain elTect the readiness of the plant for the coming of theYear 2000.This microprocessors. For these reasons, there is minimalYear 2000 risk. awiat w hh being able to safely shutd<m n the plant and maintain { plan is designed to closely parallel the guidance provided by the Nuclear Energy Institute and the NRC.WCNOC is partnering with n in a safe shutdown condition. During the years since original ~ sescral industry groups to share information regarding evaluating consnuction, minopmnw based eintmnw components base items that areYear 2000 sensitive. As applications and desices are con-en added in non4afe shutdown applications. Some of these (only firmed to be Year 2000 non-compliant, business decisions are being tw o identified thus far and no others are anticipated) could shutdown made to repair or retire the item. the plant Special attention will be paid to these devices to ensure that there is minimal Year 2000 risk associated with them. On May 11,1998 the NRC issued Generic letter 98 01 entitled In t original sign and through plant modifications, microproces-

• Year 2000 Readiness of Computer S$ stems at Nuclear Pow er Plants" This letter expressed the NRC's expectations with regard to Year sor based components were installed in plant monitoring applications 2000 readiness.The letter also requires the licensee to file itsYear such as the radiation monitoring equipment and the plant informa-2000 plan and status report no later than July 1,1999, tion computer. similarly, in the area of non plant operation computers and applications,WCNOC has sesera: items which will WCNOC is deseloping contingency plans to address risk associated require remediation.There is a possibility that these desices could with Year 2000 issues. These plans generally follow the guidance cause a Year 2000 problem. Failure to adequately remediate any contained in NUCLEAR ENERGY INSTITUTE / NUCLEAR Year 2000 prohk ms could require the plant's operations be limited UTILITY SOFTWA RE MANAGEMENT GROUP 98-07, or shutdown.

NUCLEAR UTILITY READINESS CONTINGENCY PLANNING. The steps to be taken inmlic the determination of which items WCNOC estimates that the most reasonably likely worst case present a critical ri k to the facility, review of the identitled risks, sanario would be a temporary plant shutdown due to external determining mitigation strategies, ahd ensuring that each responsible dwakal grid disturbances.While these disturbances may result organintion des elops appropriate contingency plans. in a tnnporary shutdown, the safety of the plant will not be compro-mised and the unit should mtart shortly after the grid disturbance In order to assess the licensees progress in preparing forYear 2000, has been corrected. the NRC scheduled audits at sarious nuclear power plant facilities ~ below sets forth estimates of the status of the components e ta during 1998 and carh 1999. One of these auoits was conducted at WCNOC during the month of Nmember 1998.The findings of this of WCNOC'sYear 2000 readiness program at December 31,1998. audit were as followo Estimatea Completion Percentage a o The NEl/NUSMG 97-07 guidance is being followed.The Wolf Phase Date ComNetion Creek licenser has not identified any systems needed for safe identification and assessment of plant components Mar 99 89% shutdown as havingYear 2000 problems. loentification and assessment of computers / software (Note 1). Jun 99 64% o Wolf Creek is making use of its existing quahts assurance and Identification and assessment of other areas (Note 2). Jun 99 47% mmhfication IroErams and imcedures to achieseYear 2000 readi. I identified remediations complete (Note 3). Sep 99 31% ness. Furthermore, Wolf Creek is engaged in extensis e inf,ormation Comprehenswe testmg gudeknes 100% sharing and interfaces w ith other entities onYear 20001ssues. Comprehenswe testmg (Note 4). Jun 99 13% o The need forYear 2000 contingency planning is understomi by the Contingency planning gmdehnes. 100% Wolf Creek licensee and in keeping uith the NEl/NUSMG 98-07 Cmt.ngency plann ng mdandial plans. Mar 99 15% recommendation, one indisidual has been designated as the single Note 1 - Several computers are on three year lease and will not be obtained untd 1999. point of contact for contingency planning. Note 2 - includes items such as measunngMest and telecommumcations eumpment. O Wolf Creek is at the detailed assessment phase except for the items Note 3 - Two major modihcations are currently scheduled to be completed after June 1999. of minimal si nificance desi nated as Limited use Databases ami the remaining remediations are presently scheduled for completion onor to E S July 1999, spreadsheets, which come under the category of 1.imited Note 4 - Several tests wm not be performed until remediations are complete. Use liardware/ Software. Year 2000 readiness for Wolf Creek is 44

WfSifRN HESoVRCES, INC. 1 M AN AGE MENT'S DISCUSSION AN D AN ALYSIS WCNOC has established a goal of completing all assessments of = Internally deschiped computer softw are, including mainframe, affected systems by the end of the second quarter of 1999, with dient / server and desktop softw are remediat:ons being completed by the end of the third quarter. = Computer hardw are, including mainframe, client / server and desk Remediations are being planned and initiated as the detailed assess-top, network, communications, and peripherals ment phase identifies the need, not at the end of the assessment . Devices using emlekled computer c hips, including antrols, sen-period.The areas w here the greatest potential for necessary remedia-sors, facilities equipment, heating, sentilating and air conditioning tions and/or more complex remediations couhl result were the first equipment ones targeted for asscoment so remediation planning could be a Relationship

• with third-partv sendors and suppliers started earlier. Many remediations uill be completed before the end of the assessment ; criod. In addition, WCNOC is communicating liased on the results of its on going res iew s, Protection One belieses with others nith which its systems interface or on uhich thev relv that theYear 2(KK) Issue does not pose material operational problems.

~ with respect to those companies' Year 2000 compliance. I citer's hate Iknvever, the most reasonably likely worst case scenario is to be been sent to all pertinent s endors to acquire this information. found in the area of external sersires, specifically firms providing electrical power, heating, ventilating and air conditioning, and local WCNOC has estimated the costs to complete theYear 2000 project at and long distance telecommunications. 54.6 million ($2.1 million, our share). As of December 31, 1998, s 1.4 million (50.6 million, our share) had been spent on the project. While Protection One beheses the total collapse of service provided A summary of the projected costs to complete and actual cost, is highly unhkely, one or more of the following scenarios could occur: incurred through December 31,1998,is as f<dlow s: m Timporary disruption or unpredictable prmision of nationwide Projected Actual long-distance sersice Costs Costs s li.mporary or unpredictable prin'ision oflocal telephone service, or (Donamn ihousands) e Temporary interruption or unpredictable prmision of electrical Wolf Cred Labor and Expenses S 494 $ 261 pmver. Contractor Costs 646 493 To the extent customers did not receise timely and adequate Remediation Costs 3,493 611 responses to alarms, Protection One would be required to rely on its Total {633 specille disdaimer,in most ofits customers agreements ofliability for the acts or omissions of third party agencies.The enforceability of such Approximately $ 3.5 million (51.6 million, our share) of WCNOC's disclaimers may be subject to judicial scrutiny in jurisdictions in totalYear 2000 cost is associated with remediation. Of these remedi-which Protection One operates. ation costs, $ 2.4 million ( 51.1 million, our share) are associated u ith sesen major jobs u hich are in the initial stages. All of these costs are Protection One estimates the total cost to plate all critical operating q being expensed as they are incurred and are being funded on a daih sptenu forWar 2(m readimm wiU be appmximatdy $ 5 rniUion. At basis along w ith our normal costs of operations. In order to minimi/c Dnember 31, N, approximately s 1.1 million of these costs had the cifects of delaying other information technology projects, been incurred.The costs of the Year 2000 project and the date on WCNOC has and will continue to augment staffing during the w hich Protection One plans to complete theYear 2000 modifications, identillcation and remediation phases of the project.This staffing, estimated to be during 1999, is based on the best estimates, w hich w ill include both programmers and technical support personnel, w hich wcre derised utihzing numerous assumptions of future will also be asailable luring the testing and initial operating phases of nents imluding the wntinued asailability of certain resources, the sarious systems. third party modillcation plans and other factors. Iloweser, there can be no guarantee that these estimates will be achiesed and Mnitored Services Operations: Protection One is resicwing its actual results couhl differ materially from those plans. Specille factors computer programs, computer harduare and embedded systems that might cause such material differences im lude, but are not limited crnical to its businesses and operational needs to identify and correct to, the asailability and cost of personnel trained in this area, the any components that could be affected by the t hange of the date to ability to locate and correct all relevant computer codes, and January 1, 2000. Protection One will continue its review s until similar uncertainties. january 1, 2000, particularly with respect to the acquisition of busineAses that include additional computer systems and equipment. Market Risk Disclosure in addition, changes in the date of compliance or preparedness w ithin Market Price Risks: We are cxposed to market risk, includmg companies that pnnide services or equipment to Protection One u ill changes in commochty prices, equity and debt instrument im estment require management to continue its esaluations. prices and interest rates. Protection One'sYear 2000 readiness program addresses: Commodity Price Exposure: In our commodity price risk manage-c Rnunercial computer softw are, including mainframe, client / service ment artisitics, we engage in both trading and non trading activities. and Oktop softw are in these artis ities, w e utili/c a s ariety of financial instruments,indud-ing f oru ard contracts imohing cash settlements or physical delisery 45

W L t, "f E R N PtSOURCE5. INC. M AN AG E M E N T'S DISCUSSION AND AN ALY SIS of an energy comm<xlity, options, swaps u hich rc<iuire payments (or Investment Portfolio:We have approx:mately s288 million of ecjuity receipt of payments) from counterparties based on the differential and debt securities as of December ll,1998.We do not hedge these between specified prices for the celated commodity, and futures imestments and are exposed to the risa of changing market prices. traded on clectricity and natural gas. We classify these securities as "asailable for sale" for accounting purposes and mark them to market on the balane sheet at the end of w.e are mvohed m. trading actisities primarily to minimite risk f.rom market fluctuations, to maintain a market presence and to enhance each period, lloweser, net income is not affected until the securities system nhabihtv. Althoub>h we attemIit to balance our fihssical and are sohl. Management estimates that its im estments w d. l generally be consistent with trends and mmements of the merall stock market imancial purt hase and sale contracts in terms of. (;uantities and harring any unusual situations. An irnmediate lO?o. change in the contract terms, net open positions can exist or are established due to market price of our egm.t) securities wouhl hase a $ 11 million elTect the origination of. new transactions and our assessment of.,and resjn,nse to, changing market conditmns. Io the extent we hase an on other comprehensn.e incoine. The salue of. he debt securitics m t Our portlidio changes im ersely with fluctuatiens in interest rates. open position, we are exposed to the risk that fluctuating market 1 prices may adversely impact our financial position or results from Interest Rate Exposure: We have approximately $602 million of operations. sariable rate debt, including current maturities ofIIxed rate debt, as of December 11,1998. A 100 basis pomt change in each debt series We manane and measure the exImsure of.our tradinE lsortfoh.o usmbi 6 a varianec/cmariance salue.at-risk (VAR) model, which simulates benclunark rate wouhl impact net income on an anned basis by forward price curses in the energy markets to estunate the site of approximately 55 million. future Imtential losses. The quantification of market risk using VAR Merger Agreement with Kansas City Power & Light Company methodologies prmides a consistent measure of risk across diserse energy markets ami products. T he use of tlas methoil requires a On February 7,1997, we signed a merger agreement uith KCPL by which KCPl. wouhl be merged with and into the company in number of key assumptions including the selection of a confidence ext hange for company sto< k. In December 1997, representatids of les el for losses and the estimated hohhng period. our financial achisor indicated that they beliesed it was unhkely that We expressVAR as a ymtential dollar loss based on a 95% conndence they would be in a position to issue a fairness opinion required for the lesel using a one-day hohling perioi As of December 31,1998, our merger on the basis of the previously announced terms. VAR (unaudited) for our trading activities was approximately On March 18, 1998, we and KCPL agreed to a r(strneturing of s100,000 Our Risk Oversight Conunittee sets the VAR hmit. We our February 7,1997, merger agreement which will resu! m. the employ additional risk control methanisms such as stress testing, f daily loss limits, and commmhty position limits. ion of Westar I:nergy, a new electric company. Under the terms of the merger agreement, our electric utihty operations uill be We base considered a number of risks and costs associated uith the transferred to KGl, and KCPl. and KGE w dl be merged into NKC, future contractual commitments in(luded in our energy portfolio, Inc., a subsidiary of the company. NKC, Inc. will be renamed Westar including credit risks associated with the financial condition of Energy. In addition, under the terms of the merger agreement, KCPL counterparties, product location (basis) difTerentials and other risks sharehohlers u ill receive company common stoc k w hic h is subject to u hich management policy dictates.The counterparties in our por trolio a collar mechanism of not less than A19 nor greater than.722, pro-consist primarily oflarge energs market-s and major utility compa. sided the amount of company common sto(k recrised may not nies. The creditworthiness of our counterparties (ould impact our exceed $ 30.00, and one share of Westar i ncrgy common stoc k per morall exposure to credit risk, either positisely or negatisely. KCPl. share.The htern Resouri cs index Pri< c is the 20 day as erage l h m ever, w e maintain crecht policies w ith regard to nur munterparties of the high and lou sale prices fi>r company common stot L on the that in our management's view minimi/c overall credit risk. New Erk Stock Exchange ending ten days prior to (losing. If the Western Resources index Price is less than or equal to 529.78 on the We are also exposed to commodity price changes outside of trading hfth da prior to the efTectise date of the combination, either party activities. We use derisatises for non-trathng purposes primarily to may terminate the at'reement. Upon consummation of the combina-reduce expmure relatise to the mlatility of cash market prices. Gisen tid will a n himximately 80.l*6 of the outstanding equits of the amount of p<mer purthased for utility operations during 1998, htar I nergy and KCPI sharehohlers will own approximately we nouhl base had exposure of approximately $5 million of operat- ~ 19.9"o. As part of the combination,htar i nergy will assume all of ing income for a 10% increase in price per MW of electricity Based the Flectric utihty related assets and liabilities of htern Resources, upon mmbtu's of natural gas and fuel oil burned during 1998, w e had KCPL and KGI. exposure of approximately $4 milhon of operating income for a 10% ( hange in ascrage price paid per mmbtu. Quantities of natural gas and htar I nergy wdl assume 52.7 bdlion in debt, consisting of 51.9 billion clectricity could sary dramatically year in ycar based on weather, unit of indebtedness for borrowed money of Eter n Resources and outages and nuclear refueling. KGE, and $800 million of debt of KCPL long-term debt of the company, culuding Protection One, was 52.5 billion at 46

1 w t sit e n nisouncts.inc I M AN AG E M E NT'S DISCUSSION AN D AN ALY SIS !)cccmber 31,1998. Linder the terms of the merger agreement, Affordable Housing Tax Credit Program it is intended that we will be released from our obligations with in 1997, we receised authorization from the KCC to imest up to respect to our debt to be assumed by Westar Lnergy. $ j j 4 million in AlITC imestments. An example of an AlITC pnin t Pursuant to the merger agreement, we base agreed, among other is housing for residents who are eldctly or meet certain income things, to call for redemption all outstanding shares of our 4 'Maries n quinsnents. At Dannba 31,1998, we had imested approxi. Preferred Stock, par salue $100 per share,4 '/,% Series Preferred mately $65 million to punhase limited partnership interests.We are Stml, par salue $100 per share, and 5% Series Preferred Simk, par conunitted to imesting approximately 525 million more in AllTC imestments by April 1,2001.These investments are accounted for = salue 5100 per share. using the equity metlul of accounting, llased upon an order received Consummation of the merger is subject to customary conditions, from the KCC, income generated from the AllTC in esiments, On July 30,1998, our sharehoklers anil the sharclu.hlers of KCPL voted primarily tax credits, will be used to of fset costs associated uith to appios e the amef uled merger agreement at special meetings of share. postretirement and lmstemployment benefits olli red to our employees. holders.We estimate the transaction to close in 1999, subject to receipt of all necessary appnnals from regulatory and genernment agencies. PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE in testimony filed in Februars 1999, the ); CC staff recommended the in June 1998, the Iinancial Accounting Standards lloard issued merger be apprmnl but with condaions which we beliese wouhl Statenient of financial Accounting Standards No.13 3," Accounting ~ make the merger uneconomical.The metger agreement allows us to for Derisative instruments and liedging Actisitics" (Si AS 13 3). terminate the agreement if regulatory appnnals are not acceptable. This statement establishes accounting and reporting standards The KCC is under no ohhgation to accept the KCC stair recommen- '"luiring that esery denvatne mstrument, mcluding certain daisatise instruments embnkled in other contracts, be reconled in dation. In addition, legislation has been proposed in Kansas that couhl impact the transaction.We do not anticipate the proposed legislation the balance sheet as either an asset or liabihty measured at its fair to pass in its current fi>rm.We are not ab!< ta predict u hether any of '31"' SIAS I 3 3 '"luires that changes in the derivatisc's fair salue be these initiatises will be adopted or their impact on the transaction, nwgnized currently in carnings unless specific hedge accounting w hich could be material. criteria are met. Special accounting for quahfying hedges allows a derisatise's gains and losses to ofTset related results on the hedged on August 7,1998, we and KCPL filed an amendn: application item in the income statement, and requires that a company must with thc I l itC to appnne the Western hesources/ KCPL merger and formally document, designate and assess the effectiseness of the formation of Westar i nergy. transactions that reccise hnige accounting. SI AS 133 is effictive li>r We have reccis ed procedural u hedule orders in Kansas and Missouri. fiI } cars beginning after June 15,1999. SI AS 13 3 cannot be "PP "I "'"'actisely. SI AS 13 3 must be apphed to (a) derisatise U These schedules indicate hearing dates beginning May 3,1999, in instruments and (b) certain derisatise instruments embedded in Kansas and July 26,1999,in Missouri. by brid contracts that w cre issued, acquired, or substantin ly modified in Icbruary 1999, KCPL aihised us that its llawthorne generating sta-after December 31, 1997, and, at the company's election, before tion (a 479 MW coal facihty) suflired material damage to its boiler January 1,1998.The company will adopt SFAS 133 no later than w hich muhl pres ent the unit's operation for an extended period.We are January I,2000. Management is presently esaluating the impact that not able to ascertain at this time the impact of this matter on the merger. adoption of SFAS 133 will hase on the companfs financial position .and results of operations. Adoption of Si AS 133, hcmever, could K t,i,i is a puhh.c utility wmpany engaged m. the generation, transmission, distribution, and sah of electricity to customers in increase mlatihty in earnings and other comprehensive income, i western Missouri and castern Kansas.We, KCPL and KGE hase joint in December 1998, the Emerging h*uesTask Force reathed consen-l interests in certain electric generating assets, including Wolf Crcok. Sus on issue No. 98-10," Accounting f or Contract s im ohed in Energy Ior additional information, see Note 21. Following the (losing of Trading and 11isk Management Actisitics"(IITF lssue 98-10).1.lTI-the combination, Westar i nergy is expected to hase approximately issue 98 10 is effectise for fiscal ycars beginning after December 15, one million electric utility customers in Kansas and Missouri, 1998.1.lTF issue 98-10 requires energy trading contracts to be appnaimately 58.2 billion in assets and the ability to generate almost reconini at fair value on the balance sheet, with the changes in the fair 8,M)0 megan atts of electricity, salue included in carnings.The company will adopt EITI hsue 98-10 during 1999. Management does not expect the impact of adopting At December 31,1998, we had deferred appnnimately s 14 milh.on l'ITI Issue 98-10 to be matcrial to the compam,s financial position or related to the K(,Pt transaction. T.hese costs will he m.oluded m. results of operations. the determination of. total consideration upon consummation of the tramaction. 47

p I' WESTERN RESOURCES. INC. CONSOLID ATED B AL ANCE SHEETS Dewmber 31, (Dollars inTimiands) 1998 1997 A88ETS RtSTATro 1 CURRENT ASSETS: Cash and cash equivalents. 16,394 76,608 Accounts receivable (net) 222,715 325,043 Inventories and supplies (net)......... 95.590 86,398 ' Marketable securities. 288.077 75,258 Prepaid expenses and other - 57,225 25,483 - Total Current Assets... 683 001 588,790 1 PROPERTY, PLANT AND EQUIPMENT (NET) 3.795,143 3,786,528 OTHER ASSETS: Investment in ONEOK 615.094 596,206 1 Customer accounts (net) 1,014,428 541,146 Goodwill (net)........ 1,188.253 844,759 Regulatory assets 364,213 380,421 Other.. 294.296 221,700 Total other Assets. _ 3,476.284 2,584,232 TOTAL ASSETS.. $ 7,951,428 $ 6,959,550 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities oflong term debt. 165.838 21,217 Short-term debt. 312,472 236,500 Accounts payable.................... 127,834 151,166 ' Accrued liabilities '.......... 252,367 222,410 Accrued inmme taxes 32,942 27,360 Deferred security revenues. 57,703 33,900 Other... 85.690 47,737 ' Total Current Liabilities 1,034.846 740,290 LO%G. TERM LIABILITIES: Long-term debt (net) 3,063.064 2,188,034 Western Resources obligated mandatorily redeemable preferred securities - of subsidiary trusts holding solely company subordinated debentures. 220.000 220,000 Deferred income taxes and investment tax credits 938,659 1,069,907 Minority interests... 205,822 165,530 Defened gain from sale-leaseback 209.951 221,779 Other... ,,i.... 316,245 259,521 Total long-Term Liabilities 4,953,741 4,124,771 C0%MITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Cumulative preferred and preference stock.. 24,858 74,858 Common stock, par value $5 per share, authorized 85,000,000 shares, outstanding 65,909,442 and 65,409,603 shares, respectively, 329,548 327,048 Paid-in capital........ 775,337 760,553 Retained carnings. 823.590 919,911 Accumulated other comprehensive income. _ 9.504 12,119 Total Shareholders' Equity. 1.962,841 2,094,489 TOTAL LIABILITIES & SHAREHOLDER $' EQUITY $ 7,951,428 $ 6,959,550 - -. = = = = = - = l 1 Tlte Notes tu Consolulated Finaiu sal Statements air an intcpal urt of this statement. l 4P \\

Y

WESTERN RESOURCES, INC. CONSOLID ATED STATEMENTS OF INCOME Year Ended Decendier it. (Dollars inThousanda, Encept l'ir Share Amounts) 1998 1997 1996 $ ALES: 10 STATI D Energy $ 1.612,959 $ 1,999,418 5 2,038,281 Security 421.095 152,347 S,546 Total Sales 2.034.054 2,151,765 2,046,827 COST '0F S ALES: Energy 691.468 928,723 879,328 Security.. _ 131,791 38,800 3,798 Total Cost of Sales.. 823.259 967,523 883,126 GROSS PROilT. 1,210 795 1,184,242 1,163,701 OPER ATING EXPENSES: Operating and maintenana expense. 337,507 384,313 374,169 Depreciation and amortization 280,673 256,725 201,331 Selling, general and administrative expense.. 263,185 316,479 199,448 Write-offinternational development activities.. 98,916 Write-off deferred merger costs..... 48,008 Monitored services special charge.... 24,292 Total Operating Expenses _ 980,281 1,029,817 775,148 INCOME l' ROM OPERATIONS _ 230.511 154,425 388,553 OTHER INCOME (EXPENSE): Investment earnings 21.739 37,784 20,647 Gain on sale ofTyco securities 864,253 Special charges from ADT... (18,181) Minority interests. 382 3,586 Other.. 34,207 16,265 12,841 Total Other income (Expense)...... _ 56,328 921,888 15,307 EARNINGS IIEFORE INTEREST ANDTAXES.. 286,842 1,076,313 403,860 INTEREST EXPENSE: Interest expense on long term debt..... 170,855 119,972 105,741 Interest expense on short-term debt and other 55.265 73,836 46,810 , _ 226.120 193,808 152,551 Total Interest Expense INCOME IlEFORE INCOME TAXES, 60,722 882,505 251,309 14,557 382,987 82,359 INCOME TAXES. NET INCOME liEFORE EXTRAORDIN ARY G AIN _ _ 46,165 499,518 168,950 EXTRAORDINARY GAIN, NET OF TAX. 1.591 NET INCOME. 47,756 499,518 168.950 PREFERRED AND PREFERENCE DIVIDENDS.... 3,591 4,919 14,819 FARNINGS AVAILAllLE I OR COMMON STOCK 44,1_65___$ _494,5_99_ _154.,=111 1 AVERAGE COMMON SilARES OUTSTANDING 65,633,743 65,127,803 63,833,783 8ASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING: EARNINGS AVAILABLE FOR COMMON STOCK HFFORE EXTRAORDINARY GAIN. $0.65 $7,59 $ 2.41 .02 EXTRAORDINARY GAIN EARNINGS AVAILAllLE FOR COMMON STOCK $0.67 $7.59 $2.41 DIVIDENDS DECLARED PER COMMON SilARE $2.14 $ 2.10 $ 2.06 The Notes to Cmw lui.ned hnannal Statements are an integral p,irt of thin statement. Air

WE ST E R N R E SOUR C E S,

INC, CONSOLID ATED ST ATE MENTS OF CASH FLOWS Year imicd Demnber 31, (IA,Ilars inThuin, ands) 1898 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES:

REsTATI D Net inmme. 47,756 5 499,518 5 168,950 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary gain. (1,591) Depreciation and amortization, 280,673 256,725 201,331 Equity in earnings from imestments. (6,064) (25,405) (9,373) (Gain)/ loss on sale of securities... 14,029 (864,253) Write offinternational derclopment activities 98,916 Write-off deferred merger costs 48,008 Monitored services special charge 24,292 Changes in working capital items (net of cifects from acquisitions): Accounts receivable (net). 118.844 14,156 -(47,474) Inventories and supplies (net). (8,000) 3,249 10,624 Marketable securitics 6,293 (10,461) Prepaid expenses and other (26,988) 9,230 (14,900) Accounts payable (33.613) (48,298) 15,353 Accrued liabihties... (42,411) 68,623 10,26i Accrued income taxes. 5,582 9,869 26,377 Changes in other assets and liabilities (53,214) (73,810) (98,759) Net cash flim s from (used in) operating activities.. _ 400,212 (88,557) 262,390 CASH FLOWS USED IN INVESTING ACTIVITIES: Additions to property, plant and equipment (net)... (182,885) (207,989) (188,952) Customer account acquisitions (277,667) (45,163) Monitored services acquisitions, net of cash acquired (549,196) (438,717) (368,535) Purchase of ADT common stock (589,362) Proceeds from issuance of stoc k by subsidiary (net) 45,565 Purchases of marketable securities,... (261,036) Proceeds from saic of market.4le securities, 27,895 1,533,530 Othe.r investments (net) (91,451) (45,318) (6,563) Net cash ihm n (used in) from investing actititles. (1.288,775) 796,343 (1,153,412) CASH FLOWS FROM FINANCING ACTIVITIES: Short term debt (net) 75,972 (744,240) 777,290 Proceeds oflong term debt. 1,096,238 520,000 225,000 Retirements oflong term debt (167,068) (293,977) (16,135) Issuance of other mandatorily redeemalde securities. 120.,000 issuance of common stoc k (net) 17,284 25,042 33,212 Redemption of preference stock (50,000) (100.000) Cash dividends paid (144.077) (141,727) (147,035). Net cash flows from (used in) financing activitics 828,349 (634,902) 892,332 NETINCREASE IDECREASE)IN CAsil AND CASil EQlllVA1ENTS (60,214) 72,884 1,310 \\ CASH AND CASH EQUlVALENTS: lleginning of the period. . _ 76.608 3,724 2.414 End of the period 16.394 S 76,608 3,724 SUPPLEMENTAL DISCLOSURES OF CASH FLOW lNFORMATION CASH PAID FOR: Interest on fmancing activities (net of amount capitali7ed).. 220,848 193,468 170,635 income taxes.. 47,196 404,548 66,692 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During 1997, the company contributed the net assets ofits natural gas business totaling approximately 5594 million to ONEOK in exchange for an ownership interest of 45% in ONEOK, I The Lies in Connoh, laird finandal statemenu are an integral l art of thh statrinent. 50

f WESTERN RESOURCES, INC. CONSOLID ATED ST ATEMENTS OF SH AREHOLDERS' EQUITY ikcomin 31. - (Ik!!ars inTimu* ands) 1998 1997 1996 ' CU ULAfivE PREFERRED AND PREFERENCE STOCK: RisTATiD fleginning balance,..... -.,,..,, 74.858 74,858 5 174,858 Redemption of preference stock;,. _ (50.000) (100,(X)0) Ending balance...., _ 24,858 74,858 74,858 C0050N STOCK: fleginning balance.. 327,048 323,126 314,280 Issuance of common stock,,.....,,,,, 2,500 3,922 8,846 Ending balance. 329,548 327,048 323,126 s, ,o ~* PAID.lN CAPITAL: fleginning balance.....,,,,,,,.,.. 760,553 739,433 697,962 Expenses on common stock (5) Issuance of common stock, 14,784 21,125 41,471 Ending balance...,, 775,337 760,553 739,433 ~ RETAINED E ARNINGS: lleginning balance, 919.911 562,121 540,868 Net income. 47,756 499,518 168,950 Dividends on preferred and preference stock... (3,591) (4,919) (14,839) Dividends on common stock... (140,486) (:36,809) (131,611) jusuance of common stock (1,247) Ending balance _ 823,590 919,911 562,121 ACCUMULATED OTHER COMPREHENSIVE INCOME: lleginning balance.... ;. 12,119 Unrealized (lon) gain on marketable accurities (3,215) 25,248 Unrealired loss on currency translation (1,026) Income tax benefit (expenne). 1,630 (13,129) Ending balance...... 9,508 12,119 Total Shareholders' Equity,. $ 1,962._841__5 2,094d89_ $_1,699.5 38 e 1 i I 4 l Tlw Notes to Cmmolutated hnancul $tatementure an integral part of thin statement, 51

WESTERN RESOURCES, I N'C. I CONSOLID ATED STATEMENTS OF COMPREHENSIVE INCOME Year Emled Dncmlier 31, (!bilars inhuun&) 1998 1997 199i. RESTATED . Net income................. $ 47,756 $ 499,518 5 168,950 Other comprehensive (loss) income, twfore tax: Unrealized holding gains (losses) on marketable securities arising during the year....... (17.244) 25,248 Less: Reclassification adjustment for losses included in net income..... 14,029 Unrealised (loss) gain on marketable semrities (net).. (3,215) 25,248 Unrealized loss on currency trandation.., (1.026) Other comprehensive (loss) income, before tax,.... (4.241) 25,248 income tax benelit (expense).... 1.630 (13,129) Other comprehensive income, net of tax... (2,611) 12.119 Comprehensive income... $ 45.145 $ 511,637 $ 168,950 CONSOLID ATED STATEMENTS OF CUMUL ATIVE ' PREFERRED AND PREFERENCE STOCK Dnendier 31 (Ibtlars tnbuuna) 1998 1997 CU3ULATIVE PREFERRED AND PREFERENCE STOCK: RESTATLD Preferred stock not subject to mandatory redemption, Par salue $100 per share, authorized 600,000 shares,- Outstanding - 41/2% Series, 138,576 shares...., $ 13.858 $ 13,858 41/4% 5eries,60,000 shares. 6,000' 6,000 5% Series, 50,000 shares 5,000 5,000 24,858 24,858 Preference stock subject to mandatory redemption, Without par value, S 100 stated value, authorized 4,000,000 shares, Outstanding - 7.58% Series, 500,000 shares.... 50,000 TOTAL CUMLil.ATIVE i' REFERRED AND PREFERENCE STOCK. $ 24,858 $ '74,858 l I Tlw Notes to um*>hatnl finanEtal hutemenu are an 6ntrFral part of thae stairments. 52 1 a

h1 W E S T I:RN REs0URCES, INC. NOTES TO CONSOLID ATED FIN ANCI AL STATEMENTS

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES deferred taxes of s13 million) was included in sharcholders' equity.

• PP*N**'"
• "" *"d
• D:scription of Business: Western Resources,Inc. (the company)is a at of approximately 550 nn"n at Dnunber 31,1997.

publicly traded consumer services company.The company's pr mary o

businen activities are prm iding electric generation, transmission and Property, Plant and Equipment: Property, plant and equipment is distribution services to approximately 620,000 custo.ncrs in Kansas stated at cost. For utility plant, cost includes contracted services, and providing monitored services to approximately 1. 5 million cus. direct labor and matenals, indirect charges for engineering, supervi-tomers in North America, the United Kingdom anil Continental sion, general and administrative nists and an allowance for funds used

• Europe. In addition, through the company's 4 5% owns rship interest during omstruction ( Al UDC).The Al UDC rate was 6.00% in 1998, in ONEOK, Inc. (ONEOK), natural gas transminion and distribu.

5.80% in 1997 and 5.70% in 1996.The cost of additions to utility tion services are provided to approximately 1.4 millior, customers in plant and replacement units of property are capitaliicd. Maintenance Oklahoma and Kansas. Rate regulated electric service is pnrzided by costs and replacement of minor items of property are charged to KPL, a division of the company and Kansas Gas and Electric expense as incurred.When units ordepreciable pmperty are retired, Cor ny (KGE), a w holly.owne i subsidiary. Monitored services are they are removed from the plant accounts and the original cost plus prmided by Protection One, Inc. (Protection One), a publicly. removal charges less sah age value are charged to accumulated depre. tradn!, approximately 854 owned subsidiary, ciation. hwentories and supplies for the company's utility businen are ""*E""*** Principles of Consolidation: The company prepares its financial statements in conformity with generally accepted accounting princi. In accordance with regulatory decisions made by the Kansas ples.The accompanying umsolidated financial statements include the Corporation Comminion (KCC), the acquisition premium of accounts of Western Resources and its wholly-owned and majority approximately 5801 milhon resulting from the acquisition of KGE in owned subsidiaries. All material intercompany accounts and 1992 is being amortired mer 40 yearm The acquisition premium transactions have been climinated. Common stm k investments that is classified as electric plant in service. Accumulated amortiution are not major ty-owned are acmunted for using the equity method as of December 31,1998 and 1997 totaled 568.0 million and when the company's investment allows it the abihty to exert 547.9 million, respectively. significant influence' Depreciation: Utility plant is depreciated on the straight-line method The company currently applies accounting standards for its rate at rates approved by regulatory authorities. Utility plant is depreci-regulated electric busincu that recognize the enmomic elTects of rate ated on an average annual composite basis using group rates that regulation in accordance with Statement of Financial Accounting approximated 2.88% during 1998,2.89% during 1997 and 2.97% Standards No.' 71," Accounting for the Effens of Certain Types of during 1996. Nonutility property, plant and equipment of approxi-Regulation" (SFAS 71) and, accordingly, has recorded regulatory mately 562 million at December 31, t998, is depreciated on a assets and liabilities w hen required by a regulatory order or w hen it is straight-line basis over the estimated useful lives of the related assets, probable, based on regulatory precedent, that future rates will allow for recovery of a regulatory asset, Fuel Costs: The mst of nuclear fuel in pnxvn ofrefinement, conversion, enrichment and fabrication is recorded as an asset at origmal cost and The 11nancial statements require management to make estimates and is amortiicd to expense based upon the quantity of heat produced for assumptiom that alTect the reported amounts of assets and liabilities, the generation of electricity. The accumulated amortization of to disclose contingent aucts and liabihties at the balance sheet dates nuclear fuel in the reactor at December 31,1998 and 1997, was and to report amounts of revenues and expenses during the reporting 5 39.5 million and $ 20.9 million, respectively. period. Actual resuhs couhl difTer from those estimates. Customer Accounts: Customer accounts are stated at cost.The cost

• Ctsh and Cash Equivalents:The company a nsiders highly hquid includes amounts paid to dealers and the estimated fair value of mllateralized debt instruments purchased with a maturity of three accounts acquired in busineu acquisitions. Internal costs incurred in months or len to be cash equivalents.

support of acquiring customer accounts are expensed as incurred.

• Avril ble-for sale Securities: The company clanifies marketable The cost of cusiomer accounts is amortiicd on a straight line basis equity securities accounted for under the cost methml as available-mer a 10-year period. It is Protection one's policy to evaluate for-sale.These securities are reported at fair value based on quoted acquired customer acmunt 1o% on a quarterly basis utiliiing market prices. Cumulatise unrealized gains and losses, net of the historical lon rates for the customer accounts in total and, w hen nec-related tax effect, are reported as a separate component of share-essary, adjust amortiration over the remaining useful life. The holdes* cquity until realized. Current changes in unrealized gains and Securities and Exchange Commissmn (SI C) stallhas questioned the lones are reported as a componen: of other mmprehensive income.

appropriatenen of the current accounting method u hich Protection One believes is consistent with industry practicca. A significant At Decrmber 31, 1998, an unreah.eed gain of s10 milhon (net of. change m.the amortiution method u ould hLeiv have a material etrect deferred taxes of $12 million) was included m. shareholders, ecIuitv. on the company.a results of operations l.he accumulated amortira-These securities had a fair value of approximately 5288 million and'a 31,1998 and 1997 was tmn of customer accounts as of. December cost of approximately 5266 milhon at December 31,1998. At approximately 5117 nullion and 529 milhon, respectisch. December 31, 1997, an unreah.ied gain of $12 m. lion (net of d 53

WESTERN RESOURCES. INC. NOTE S TO CONSOLID ATED FIN ANCI AL STATEMENTS ) G2:dwill: Goodwill, which represents the excess of the punhase Sales: Energy sales are recogniecd as sersices are rendered and price over the fair s alue of net assets acquired, is generally amortired indude estimated amounts fier energy delivered but unbilled at the on a straight line basis over 40 years.The accumulated amortization end of each year. Unbilled salca of $ 39 million and 537 milhon are of goodwill as of December 31,1998 and 1997 approximated recorded as a component of accounts receivable (net) on the 5 32 mdlion and 59 million, respectively. Consolidated llalance Sheets at December 31,1998 and 1997, respectively. Security sales are recognized when installation of an R:gulatory Assets and Liabilities: Regulatory assets represent alarm system occurs and w hen monitoring or other security-related 3irobable future revenue asmciated with certain costs that will sertnes are prouded. he reemered f. rom customers through the ratemaking pmcess.The company has recorded these regulatory assets in accordance with The company's allowance fi>r doubtful accounts receivable totaled si:AS 71. If the company were required to terminate application of $29.5 million and 58.4 million at December 31,1998 and 1997, that statement Ihr all ofits regulated operations, the company wouhl respecth ely. base to record the amounts of all regulatory assets and liabilities in income Taxes: Deferred tax assets and liabilities are recognized for its Consolidated Statements of income at that time.The company's temporary dillirences in amounts recorded for financial reporting carnings would be reduced by the total amount in the table bel "i purposes and their respective tax bases. Imestment tax credits net of applicable income taxes. Regulatory assets reflected in the previously deferred are being amortiicd to income over the life of consolidated finaticial staternents are as hdlows: g ,y g, g g gg December 31' 1998 1997 Affordable Housing Tax Credit Program (AHTC):The company has received authorization from the KCC to invest up to 5114 millibn in ""*""58"" Recoverable taxes. $205,416 $212.996 AllTC investments. At December 31,1998 and 1997, the mmpany Debt issuance costs 73.635 75.336 had imested aEIiroximatelv 565 million and $17 million to I urchase Deferred employee beneht costs, 36,128 37.875 AllTC investments m. Im.uted partnerships.The company is com-Deferredplantcasts, 30.657 30.979 Coalcontract settlement casts 12,259 16.032 mitted to imenting approximately 525 million more in AllTC Other regulatory assets. 6.118 7,203 imestments by April 1,2001.These investments are accounted for $ 364.213 $ 380.421 using the equity method. liased upon an order received from the Totalregulatory assets. KCC, income generated from the AllTC investments, primarily tax e Recoverable income taxes: 1(ccoverable income taxes represent credits, will be used to olTset costs asmciated with postretirement amounts due irom customers for accelerated tax benefits uhich and postemployment benoits olTered to the company's employees. hase been previously flowed through to customers and are Risk Management: The company is imolved m. t radm.g activities expected to be recovered in the future as the accelerated tax primarily to mu..umric risk f. rom market fluctuations, mainta.ma benefits rescrse, market presence and to enhance system reliability, in these activities, e Debt issuance costs: Debt reacquisition expenses are amortired the company utiliics a variety o"f financial instruments, including mer the remaining term of the reacquired debt or,if refinanced, foru ard contracts involving cash settlements or physical deinery of the term of the new debt. Debt issuance costs are amortired over an energy commodity, options, maps uhich require payments (or the term of the associated debt, receipt of payments) from counterparties based on the dillirential s Deferred employee benefit costs: Deferred employee benellt. between specified prices for the related commodity and futures costs are expected to be recovered from income generated through traded on electricity and natural gas. For the com;$any's trading the company's Alfordable lit usingTax Credit investment program, operation, the company accounts for these transactions at the time of a Deferred plant costs: Disallowances related to the Wolf Creek delivery or settlement, accruing in the interim ooly for net losses as nuclear generating facility. they become esident on firm purchase commitments. e Coal contract settlement costs:The company deferred costs Cash Surrender Value of Life Insurance:The folkminE amounts aeriated with the termination of.certain coal purchase contracts. relate to corporate-owned life insurance polio.ca (Col.1) are, 4 These costs are being amortiicd mer periods ending in 2002 recorded in other long. term assets on the Consolidated llalance ud 2013. Sheets at December 31: The company expects to recoser all of the abme regulatory assets m 3999 3997 ratch. A return is alkmed on deferred plant costs and coal contract settlement costs and approximatelv 553 million of debt issuance Cash surrender value of pohcies. $587.5 $547.7 cost s. Borrowings against pohties. (558.5) (524.3) Minority Interests: Minority interests represent the minority CCLt tnet). $ 29.0 $ 23 4 shareholders proportionate share of the shareholders egmty and net ---m income of Protection One. ] M

l wt571RN RESOURCES. INC. NOTES TO CONSOLID ATE D FIN ANCI AL STATEMENTS 1 Income is recorded for increases in cash surrender salue and net

2. RESTATEMENT OF 1997 FINANCIAL STATEMENTS death prixreds for approximately 83% of the cash surrender value

^"" "I. * # ion Pnsin on One, an 85 percent ow ned and 85% of the policy borrowings at December 11,1998. Interest mcurred on amounts borrowed is off. set against policy income. suhsidiary, to restate its 1997 linancial statements, the company has Income recognized from death proceeds is highly variable f. (hosen to restate its 1997 financial statements to conform to the rom period to period. Death benefits recognized as other income approx-changes adopted by Protection One..I.his restatement resultol f rom imated 513.7 million in 1998, 50.6 in 1997 and 5 5.5 in 1996.The balance of the policies were acquired to mitigate the cost of postre. e lo expense as incurred, yard signs, including those whith were tirement and postemploy ment benefits, in accordance with an order removed and replaced, following the decision to transition all from the KCC. monitored sersicos operations to the Protection One brand in , Na Pronouncements: Effecthe January 1,1998, the company the fourth quarter of 1997.'Ihe costs of this tard sign change-out had previously been estimated and accrued at December 31,1997. adopted the provisions of Statement of Financial Accounting This adjustment increased prnioush reported net income by Standards No.130," Reporting Comprehensise Income"(SFAS 130). approximatelv 55.7 million and decrl'ased current liabilitics b'v This statement establishes standards for reporting and display of 512.3 million'at December 31,1997. comprehensh e income and its components. ,.Ib adjust certain purc hase price allocations, rnerse amounts in June 1998, the financial Accounting Standards lloard issued which had prniously been accrued to transition new customers Statement of Iinancial Accounting Standards No. I 33,

• Accounting and adjust an obligation to repurchase certain customer accounts for Derivatise Instruments and liedging Actisities"(SI AS 13 3).This sohl under a financing agreement to c>timated fair salue.These statement establishes accounting and reporting standards requiring adjustments reduced net income by approximately 50.3 million that every derivatise instrument, including certain derisatise instru-and reduced current liabilities by approximately 522.2 million at ments emhnkled in other contracts, be recorded in the balance sheet December 31,1997.

as either an asset or liability measured at its fair salue. SFAS 133 The total elTect of the 1997 rntatement was to increase prnioudv requires that changes in the derivative's fair value be recognized reported net income in 1997 by approximately 55.4 million (50.0'8 currently in < arnings unless specific hedge accounting criteria are per common share) and increase prn iously reported retained carnings met. Speci.1 accounting for qualifying hedges allows a derivative's at I)ccember 31,1997, by the same amount.The restatement did not gains and losses to off. set related results on the hedged item in the impact proiously reportld saln and does not impact the company's income statement, and requires that a company must formally net cash flow. dee Note 22 for the impact of the restatement o' n document, designate, and assess the clTectiseness of transactions that quarterly results for 1998). receise hedge accounting and is effectise for fiscal years beginning after June 15,1999. SFAS I 3 3 cannot be applied retroactisely. SFAS

3. LEGAL PROCEEDINGS I

133 must be applied to (a) derivatise instruments and (b) certain I deri ative instruments embedded in hsbrid contracts that wcre On January 8,1997, Innm atis e ilusinns Systems, I td. (Ills) filed suit ) issued, acquired, or substantisch moddicil after December 31,1997 against the company anMntinghouw Liectric Corporation (WI C), and, at the company's election,liefore January 1,1998 The company Westinghouse Security Systems, Inc. s.WSS) and WestSec, Inc. will adopt SI AS 133 no later than January I',2000. Management is MntSech a w holly-ow ned subsidiary of the company estabhshed to ~ presently evalusing the impact that adoption of SFAS I 33 will have acquire the assets of WSS, in Dallas County, Texas district court on the company's financial position and resuhn of operations. (Cause No 97-00184) alleging, among other things, breac h of. Adoption of SFAS 13 3, himner, could increase solatilitv in carnings nintract by WI C and interference w ith contract against the company . and other comprehen'isc income. in connection with the sale by WLC of the assets of WSS to the company. On Nmember 9,1998, WFC settled this matter and the in Denmber 1998, the Emerging issuesTask lurce reat hed consensus litigation was thsmissed. on issur No. 9810,"Accountimi for Contracts intohed in Energy ' Tra<hng and Risk Management A'ctisitin"(FITF 1* sue 98-10). LIT [ The SLC has commenced a prisate imntigation relating, among Issue 98-10 is effective for fiscal ycars beginning after December 15, otha thing, to tk tiinchnm and a&quaq oNndosun Mnp w a 1998. LITF issue 98-10 requires energy trailing contracts to be the SFC by the company with respect to securitics of ADT Ltd.The recorded at f air value on the balance sheet, with the changes in the fair annpany is cooperating nith the SLC stalTrelating to the imntigation. salue included in carnings.The company will adopt LITI Issue 98-10 The company understands that class action lawsuits relating to the during 1999. Management does not expect the impact of adopting Protection One restatement of 1997 and 1998 linancial statements LITF lssue 98-10 to be material to the company's financial position or and subsequent decrease in stmL price wcre recently filed naming roults of operations. Protection One, Wntern Resources and certain officers of R ct:ssifications: Certain amounts in prior y ears have been reclassified Protection One.The company has not yet been sened with a copy to mnform with classifications used in the current y car prnentauon. of the law suits. The company cannot predict the outcome or ih'c effect of this litigation.

Wi sT s R N RE5oURCES, INC. NOTES TO CONSOLID ATED FIN ANCI AL STATEMENTS The company and its subsidiaries are involved in various other legal, personal emergency response and support services in North America. environmental and regulatory proceedings. Management believes Hased on the average closing price for the three trading days prior to that adequate pnwision has been made and accordingly believes that April 8,1999, the value of the consideration to be paid under the the ultimate dispmitions of these matters will not have a material merger agreement is approximately 5129.2 million or 522.05 per adscrie effect upon the company's morall financial position or resuhs Lifeline share in cash and stock. Lifeline has advised Protection One ofoperations. that it is evaluating the restatement of Protection One's financial statements.The consideration to be given in the Lifeline transaction is

4. MONITORED SERVICES BUSINESS by design variable and is subject to change within certain parameters,

During 1998, the company continued its growth in the monitored until the closing date. Interested parties should obtain the most security business throug'h its ownership in Protection One. recent proxy / registration statement for further analysis of the t'*""'"I"" ' Protection One experienced rapid growth in its customer base i f as a result of several significant acquisitions.The more significant In December 1997, Protection One incurred charges of approxi-acquisitions were Protection One's purchase of the assets of mately 524 million to recognire higher than expected customer Multimedia Security Services for approximately $233 million and its attrition and record costs related to the acquisition of Protection pur hase of the stock of Compagnie Europeenne deTelesecurite for One.These charges are as follows: approximately 5140 million. Each acquisition was accounted for as a g,,, %g purchase and, accordingly, the operating results for each acquired Imparment of customer accounts. $ 12,750 company have been included in the company's consolidated financial ne erre te costs statements since the date of acquisition. Total purchase consideration [ti 3.558 has been allocated to the net assets acquired based on estimates of fair Disposition of fixed assets. 4,128 value. Protection One's purchase price alh> cations for 1998 acquisi-Closure of duphcate facilities.. 1,991 tions are preliminary and may be adjusted as additional information is Severance compensation and benefits.. 1.865 obtained. During the first quarter of 1998, the company transferred 33,$47 its imestment in Network Multi family to Protection One at a mat that approximated 5180 million. Totalcharges. $ 24,292 Consideration paid, assets acquired and liabilities assumed in Impairment of customer accounts: Protection One wrote dewn the connection with these and other acquisitions made by Protection One during 1998 were as follows: value of the customer base of part of its busine6s due to excess customer losses experienced in 1997.The excess customer losses Mars o nwsando were due to (1) the efTects of transitioning the customer base from Far value of assets acqured, net of cash acqured... $B20.251 one service provider to another and,(2) the relative quality of certain Cash paid, net of cash accured 549,1% classes of customer accounts acquired in an acquisition due to use of Totalliabdities assumed.. $271,055 a prior aggressive marketing plan accompanied by limited credit checking. The following table presents the unaudited pro forma financial inventory and other asset losses: Protection One reduced the value information comidering Protection One's monitored services acqui-of inventory held at branches due to conversion to the external sitions in 1998 and 1997.The pro forma information reflects the Dealer Program as its primary marketing channel. actual operating results of each company prior to its acquisition and Disposition of fixed assets: Protection One reduced the net book includes adjustments to interest expense, intangible amortization' value of computer and telecommunication equipment due to plans

• and income taxes.The table assumes acquisitions in 1998 occurred a" to migrate certain monitoring, customer sersice and financial opera-of January 1,1997. The 1997 acquisitions are assumed to have tions to new software and hardware platforms in the first quarter of occurred on January 1,1996.

1998. At December 31,1998, Protection One continued to use cer, Yes Ended Decemtier 31. (unaudited) 1998 1997 1996 tain components of this equipment due to unplanned delays Mars c husands, Except Per Share Data) experienced in the implementation of replacement systems.The Sales. $2,175.089 $2.462.849 $2,280,122 remaining equipment is expected to be fully retired in 1999. Closure of duplicate facilities: Protection One committed to a plan 33.556 463264 133,581 c s to ch>se 38 branch locations in cities with two or more branches and j Eamings per share. $ 0.51 $ 7.11 $ 2.09 where the customer base did not justify such a large presence. At er 31, W, aH sud locations were closed.The remaining ecen The unaudited pro forma financial information is not necessarily amount accrued at December 31, 1998, represents obligations for indicative of the results of operations had the entities been combined for the entire period nor do they purport to be indicative of results vacated lease facilities and approximates $1 million. w hich will be obtained in the future. Severance compensation and benefits: Upon the company's In October 1998, Protection One announced an agreement to purchase of approximately 82.4% of Protenion One in November acquire lifeline Systems, Inc., (lifeline), a leading provider of 24-hour 1997, the afTected employees wac notitied of their severance package. Actual payments approximated the amount accrued. u

l WESTERN RESOURCES. INC. NOTE S TO CONSOLID ATED FIN ANCI AL STATEMENTS Protection One recognized a non recurring gain in 1998 when Other Mandatorily Redeemable Securities: On December 14, customer accounts were repurchased pursuant to a financing 1995, Western Resources Capital 1, a w holly-owned trust, issued four agreement. Terms of the agreement required Protection One to million preferred securities of 7 %% Cumulative Quarterly income purchase these accounts at fair value.The purchase price negotiated Preferred Securities, Series A, for 5100 million.The trust interests was less than the estimated value. As a result, a non-recurring gain represented by the preferred securities are redeemable at the option which approximated 516 million was recorded as other income. of htern Resources Capital I, on or after December 11, 2000, at $25 per preferred security plus accrued interest and unpaid

5. RATE MATTERS AND REGULATION dividends. Holders of the securities are entitled to receive distribu-tions at an annual rate of 7 f the liquidation pn ference value of KCC Rate Proceedings: In January 1997, the KCC entered an order reducing electric rates for both KPL and KGE. Significant terms of

$25. Distributions are payable quarterly and m substance are tax the order are as follows: dunMe by the company.These distributions are recorded as interest expense. The sole asset of the trust is 5103 mdlion a The company made permanent an interim 58.7 million rate reduc ~ principal amount of 7 Y.% Deferrable Interest Subordinated tion implemented by KGE in May 1996. This reduction was Debentures, Series A duc December 11,2025. elTectise February 1,1997. c The company reduced KGE's annual rates by $ 36 million elTective On July 31,1994 htun Resources Capital 11, a wholly.. owned February 1,1997, trust, of uhich the sole asset is subordinated debentures of the com-o The company reduced KPL's annual rates by 5 to million elTective pany, sohlin a public offering,4.8 million shares of 8 'We Cumulative FebruarI,1997. 9"^"b I"**" "I""" "" * "b" "" "' "' " * ""' 1 o The company rebated 55 million to all ofits electric customers in The trust interests represented by the preferred securities are ~ january 1998. dnmable at the option of htern Resources Capital 11, on or after a The company reduced KGE's annual rates by an additional 510 million July 31,2001, at 525 per preferred security plus accumulated and unpaid distributions. Ilolders of the securities are entitled to receive on June I,1998. distributions at an annual rate of 8 %'b of the liquidation preference o The company rebated an additional 55 million to all ofits electric s alue of $25. Distributions are payable quarterly and in substance are customers in January 1999, tax deductible by the company.There distribu'tions are recorded as a The company will reduce KGE's annual rates by an additional nterest expense [The sole asset of the trust is $124 million principal 510 million on June 1,1999, amount of 8 %"b Deferrable Interest Subordinated Debentures, All rate decreases are cumulative. Rebates are one-time e ents and do Series B due July 31,2036. not influence future rates. In addition to the company's obligations under the Subordinated

6. COMMON STOCK, PREFERRED STOCK' Debentures discussed abme, the company has agreed to guarantee, l

PREFERENCE STOCK, AND OTHER a mbordinated basis,Iiayment of distributions on the Iireferred MANDATORILY REDEEMABLE SECURITIES securities..These undertakings constitute a full and unconditional guarantee by the company of the trust's obligations under the The company's Restated Articles of Incorporation, as amended, prefered se[urities. prmide for 85,000,000 authorized shares of common stock. At December 31,1998,65,909,442 shares were outstanding.

7. LONG TERM DEBT The mmpany has a Direct Stoc k Purchase Plan (DsPP). Shares issued The amount of the company's first mortgage bonds authoriicd by its under the DSPP may be either original issue shares or shares Mortge and Deed ofTrust, dated July 1,1939, as supplemented,is

. punbased on the open market.The company issued original issue unlimitedJihe amount of KGE's first mortgage bonds authorized by shares under DSPP from January 1,1995 until October 15, 1997* the KGE Mortgage and Deed ofTrust, dated April 1,1940, as supple'- Between Nmember 1,1997 and March 16,1998, shares for DSPP mented,is limited to a maximum of 52 billion. Amounts of additional w cre satisfied on the open market. All other shares have been original bonds uhich may be issued are subject to property, carning's and

• issue shares. During 1998, a total of 653,570 shares were issued certain restrictive provisions of each mortgage.

under DSPP including 499,839 original issue shares and 153,731 shares purchased on the open market. At December 31, 1998, Debt discount and expenses are being amortired mer the remaining 591,047 shares wcre available under the DSPP registration lises of each issue. During the ycars 1999 through 2003,5125 million statement, of bonds will mature in 1999,575 million of bonds will mature in 2000,5100 million of bonds will mature in 2002 and 5135 million of Pref:rred Stock Not Subject to Mandatory Redemption: The bonds will mature in 2003. No other bonds will mature during this cumulative preferred stock is redeemable in w hole or in part on 30 to time perimi. 60 days notice at the option of the company. The company's unsecured debt represents general obligations that Pr:f:rence Stock Subject to Mandatory Redemption: On April 1, are not secured by any of the company's properties or assets, i

998, the mmpany redeemed the 7.58% Preference Stm k due 2007 Any unsecured delit nill be subordinat[d to all secured debt of at a premium, including disidends, for $ 5 3 million.

i th company, including it's iirst mortgage bonds. The notes are j structurally subordinated to all secured and unsecured debt of the i company's subsidiaries. 57

W E S T g at N H E. s o u M C f $, INC. NOTES TO CONSOLID ATED FIN ANCI AL STATEMENTS i l 1.ong-term debt outstandingis as follow n at December 31: Protection One maintains a 5 500 million resob ing credit facihty that 1998 1997 expires in December 2001. Under the terms of this agreement, .~ Protntion One my, at its option, borrow at different market-based inwest rates. At December 11, 1998, 542.4 million was borrowed Western Resources First mortgage bond senes: under this facility. 71/4% due 1999. S 125.000 S 125 000 The senior subordinated discount notes of Protection One contain ' "*""E " "I *' "

• 7 d

i, 1 000 to incur certain indebtedness, make restricted pay ments and merge, 81/2% due 2022. 125,000 125.000 consohdaic or sell assets. 7.65% due 2023. 100,000 100,000 525,0b 525 000 The convertible senior subordinated notes of Protection One are ~ Ponation control bond senes: '~~~~~ ~ ~ convertible at any time into common stock at a price of 511.19 per. J Vanable due 2032m. 45,000 45,000 share.The indenture under whith these notes uere issued contains Vanable due 20320 30.500 30.500 cosenants w hich limit Protection One's ability to incur certain 6% due 2033 58.420 58,420 mdebtedness. 133,920 133.920 KGE Among other restrictions, Protection one is required under the First mortgage bond senes: revolving credit facility to maintain a ratio of earnings before interest, 7.60 % due 2003 135.000 135.000 taxes, depreciation and amortiration (EltlTDA) to interest expensc of 61/2% due 2005. 65,000 65.000 not less than 2.75 to one and tota: jebt cannot be greater than 5 times 6.20 % due 2006. 100.000 100 000 annuali7ed most recent quarter ililTDA for 1999 and 4.5 times 1 300.000 300,000 thereafter. In addition,in light of the restatement ofits financial state-Ponution control bond senes: ~~ ~ ments, Protection One has obtained a bank waiser for prior 5.10 % due 2023.. 13.673 13,757 representations concerning its financial statements. ifanabie due 2027G. 21,940 21,940 7.0 % due 2031.. 327,500 327,500

8. STRATEGIC ALLIANCE WITH ONEOK, INC.

Vanable due 2032*. 14.500 14,500 Vanable due 20320 10,000 10,000 in Nmember 1997, the company completed its strategic alliance with 387.613 387.697 ONEOK.The company contributed substantially all ofits regulated and non. regulated natural gas business to ONEOK in exchange for a p intcrest in WK on ne 7 unsecu d senior notes due 2004. 370,000 370,000 71/B% unsecured senior notes due 2009. 150.000 150.000 The company's ownership interest in ONEOK is comprised of 6.80% unsecured senior notes due 2018 29.985 approximatcly 3.2 million common shares and approximately cYa e 2 400.000 20.1 million comertible preferred shares, if all the preferred shares b j une converted, the company would own approximately 45% of _ 9 85., 520? ONEOK's common shares presently outstanding.The agreement 9 Protection 0ne with ONEOK allow s the company to appoint two members to Revolving credit facihty. 42.417 ONEOG boud of directors.The company accounts for its common ownership in accordance with the equity method of accounting. ub rd a e c unt no es du 2003' 53.950 102,500 13.625% unsecured senior subordinated Subsequent to the formation of the strategic alliance, the consoli. discount notes due 2005. 125.590 171.926 dated energy resenues, related cost of sales and operating expenses 7.375% unsecured senior notes due 2005 250.000 for the company's natural gas business base been replaced by B.125% unsecured senior subordmated notes due 2009. 350.000 imestment earnings in ONEOK. i Customer repurchase agreement. due 1998. 69.129 Recourse financing agreements 0 93.541

9. SHORT-TERM DEBT Other 2.574 The company has arrangements with certain banks to prmide unse-l I

918.072 343.555 cured short term lines of credit on a committed basis totaling Other long term agreements. 8.325 4.798 approximately 5821 million.The agreements provide the company Unamortged debt premium. 13,918 with the ability to borrow at ditTerent market. based interest rates. Less: The company pass commitment or facility fees in support of these

1. S "

"D"I g r de t ue tt one year. ]! B ) ( required, among other restrictions, to maintain a total debt to total Long term debt (net). 53,063.064 S2.188 034 capitalization ratio of not greater than 65% at all times.The unused Ratas at December 31.1998; portion of these lines of credit are used to proside support for m3 55%. 03 45% W3.50%, *3.75%, N3.75% andW15% implicit rate for operatog commercial paper. lease agreements sold mth recourse - avensge term approximately 4 yeart to

WESTERN REs0URCIS. INC. NOTES TO CONSOLID ATED FIN ANCI AL STATEMENTS In addition, the company has agreements with several banks to Clean Air Act: The company must comply with the provisions of borrow on an uncommitted, as available, basis at money. market rates The Clean Air Act Amendments of 1990 that require a two-phase . quoted by the banks.There are no costs, other than interest, for these reduction in certain emissions.The company has installed continuous agreements.The company also uses commercial paper to fund its monitoring and reporting equipment to meet the acid rain require-short-term borrowing requirements. ments.The company does not expect material capital expenditures information regarding the company's short-term borrowings, . lie required to meet Nase H suKur dioxide and nitrogen cornprised of borrowings under the credit agreements, bank hians mide requirements. . and commercial paper,is as follows: Decommissioning: The company accrues decommissioning costs Duemer 31 n98 n9F over the expected life of the Wolf Creek generating facility.The he accrual is based on estimated unrecovered decommissioning costs . Borrow:ngs outstanding at year end: w hich consider inflation mer the remaining estimated life of the gen. Bank loans $164.700 $161,000 crating facility and are net of expected earnings on amounts ,...,,o.. Cornrnercialpapernotes o 147,772 75,500 recovered from customers and deposited in an external trust fund. Total.. o $312,472 $236.500 in February 1997, the KCC approsed the 1996 Decommissioning Cost Study. Ilased on the study, the company's share ofWolf Creek's Weighted average mterest rate on decommissioning costs, under the immediate dismantlement NukteNf method, is estimated to be approximately 5624 million during the 5.94% 6.28% Weighted average short-terrn debt period 2025 through 2033, or approximately $192 million in 1996 outstanding dunng the year $529,255 $787,507 dollars.These custs wcre cakulated using an assumed inilation rate of Weighted daily average interest rates 3.6%n er the remaining sersice life from 1996 of 29 years. dunng the yearlincludmg fees). 5.93% 5.93% Unused hnes of credit supporting Decommissioning costs are currently being charged to operating cornrnercialpaper notes. $820.900 $772,850 expense in accordance with the prior KCC orders. Electric rates o charged to customers provide for recovery of these decommissioning

10. COMMITMENTS AND CONTINGENCIES costs over the life of Wolf Creek. Amounts expensed approximated 53.8 million in 1998 and will increase annually to 55.6 million in As part of its ongoing operations and construction program, the 2024.These amounts are deposited in an external trust fund.The company has commitments under purchase orders and contract" average after. tax expected return on trust assets is 5.7%

which have an unexpended balance of approximately 586.9 million at December 31,1998. The company's investment in the decommissioning fund, including reimested earnings approximated 552.1 million and 543.5 million AffIrdable Housing Tax Credit Program: At December 31, 1998, at December 31,1998 and 1997, respectively. Trust fund earnings the company had invested approximately $65 mdlion to purchase recumulate in the fund balance and increase the recorded decommis. AlITC investments in hmited partnerships.The cumpany is committed sioning liability, to imesting approximately $25 million more in AHTC investments by April 1,2001, 'Ihe Financial Accounting Standards lloard is reviewing the accounting for dosure and removal cats, including decommissioning of nuclear M:nufactured Gas Sites:The company has been associated with 15 power plants. If current accounting practices for nuclear power plant 4 former manufactured gas sites located in Kansas which may contain decommissioning are changed, the following could occur: coal tar and other potentially harmful materiah.The company and the Kansas Department of llealth and Emironment (KDHE) entered a The nunpany's annual decommissioning expense could be higher j than in 1998 into a consent agreement governing all future work at the 15 sites. The terms of the consent agreement will allow the company to imes. e The estimated cost for decommissioning could be recorded as a tigate these sites and set remediation priorities based upon the results liability (rather than as accumulated depreciation) of the investigations and risk analysis. At December 31,1998, the " The increased costs could be recorded as additionalinvestment in costs incurred for preliminary site investigation and risk assessment theWolf Creek plant j hase been minimal, !n accordance with the terms of the strategic The company does not beliese that such changes, if required, wouhl ) alliance with ONEOK, ownership of twelve of these sites and the adversely alTect its operating results due to its current ability to responsibility for clean-up of these sites were transferred to recover decommissioning costa through rates. ONEOK. The ONEOK agreement limits the company's future liability associated with these sites to an immaterial amount.The Nuclear Insurance:The Price-Anderson Act limits the combined company's investment earnings from ONEOK could be impacted by public liability of the on ners of nuclear 1xmcr plants to 59.7 billion these costs. for a single nuclear incident. If this liability limitation is insullicient, j the U.S. Congress will consider taking whatever action is necessary to 59 l

WESTERN RESOURCES. INC. NOTE S TO C ONSOLID ATE D FIN ANCI AL STATEMENTS compensate the public for valid claims.The Wolf Creek owners At December 31, 1998, the company's natural gas transportation (Owners) have purchased the maximum available private insurance commitments in 1998 dollars under the remaining terms of the of $200 million.The remaining balance is prmided by an assessment contracts was approximately 530.3 million. The natural gas plan mandated by the Nuclear Regulatory Commission (NRC). transportation contracts prmide firm sersice to the company's gas Linder this plan, the Owners are jointly and sescrally subject to a burning facilities expiring at various times through 2010, retrospective assessment of up to $88.1 million ($41.4 million, company's share) in the esent there is a major nudcar incident

11. INTERNATIONAL POWER DEVELOPMENT ACTIVITIES imoleing any of the nation's licensed reactors.This assessment i' During the fourth quarter of 1998, management decided to exit the subject to an inflation adjustment based on the Consumer Price Index international power development business.This business had been and applicable premium taxes.There is a limitation of $10 million conducted by the company's wholly owned subsidiary,The Wing (54.7 million, company's share) in retrospectise assessments per Group (Wing).The company auluired Wing in Iebruary 1996 in an mcident, per year.

acc uisition accounted for as a purthase. Wing's principal ollice was The Onners carry decontamination liability, premature decommis-located near llouston, Texas and power desclopment actisities were sioning liability and property damage insurance for Wolf Creek primarily conducted in emerging markets.The company has acquired totaling approximately $2.8 billion (s1.3 billion, company's shareb a 50% interest in a joint venture which has a 49% interest in four This insurance is provided by Nuclear Electric Insurance Limited 55 MW generating facilities in the People's Republic of China.The (NEIL). In the event of an accident, insurance proceeds must first be company also has a 37.50o interest in a 160 MW merchant generating used for reactor stabilization and site decontamination in accordance facility in Colombia, and a 9% interest in a 478 MW power generat. with a plan by the NRC.The company's share of any remaining ing facility in the Republic of Turkey. proceeds can be used for property damage. If an accident at Linbrable economic, political and regulatory deselopments in Wolf Creek exceeds $500 million in property damage and certain emerging markets where development efforts were focused decontamination expenses and the decision is made to decommission required management to reexamine this business. In exiting this l the plant, the company's share of any remaining proceeds can be used business, management has decided to discontinue existing develop-to make up a shortfall in the decommissioning trust fund. ment cfTorts and cease future development activity.The company The Ow ners also carry additional insurance w ith NEIL to cm cr costs had been spending approximately S10 million annually to fund of replacement power and other extra expenses incurred during a desclopment efTorts. prolonged outage resuhing from accidental property damage at \\\\idf Tk company w as required to record a t harge to income as a result of l Creek. Iflosses incurred at any of the nuclear plants in ured under the exit ng this l$usiness.The charge to earnings has been presented as a NEIL policies exceed premiums, rescrs es and other NEIL resources, separaic line item as a component of operating expenses in the the company may be hject to retrospective assessments under the accompaming Consolidated Statements of Income. The detailed current policies of approximately $7 million per year. components of this charge are as follows: ~ ~ Although the company maintains various insurance policies to prmide ~ gn,3,, %s,ng omerage for potentiallosses and liabilities resulting from an accident Wntodown equity whestments to far market value. S57.030 or an extended outage, the company's insurance cm crage may not be Accrued exit fees, shutewn ed wance costs. 22.900 j adequate to coser the costs that could result from a catastrophic Deferred development costs associated vJh protects to be abandoned. o,735 accident or extended outage at Wolf Creek. Any substantial losses Unamortized goodwill associated with the acausition of Wing. 12.251 not cmcred by insurance, to the extent not recmcrable through Totalcharge. $98.916 l rates, would has e a material acherse effect on the company's financial l condition and results of operations. Overall negatise cronon ic, competitive and political factors, Fu:1 Commitments:To supply a portion of the fuel requirements for together with currently anticipated cash flows, base reduced the its generating plants, the company has entered into sarious commit-value of certain equity imestments presently held. The decline in - ments to obtain nuclear fuel and coal. Some of these contracts contain value of these imestments required management to write down the proviiions for price escalation and minimum purchase commitments. imestments to fair market salue. Management considers this decline i At December 31, 1998, Wolf Creek's nuclear fuel commitments in salue to be other than temporary. In assessing the value, manage. l (company's share) were approximately $6.1 million for uranium ment talked to others with mvestment experience in emerging I concentrates expiring at various times through 2001, 524.9 million markets and applied a discounted cash now analysis to estimate fair l for enrichment expiring at s arious times through 2003 and market value. 560.1 million for fabrication through 202 5. In accordance with the exit plan, the company will discontinue all At December 31,1998, the company's coal contract commitments in desclopment activity on Icbruary 1,1999 and time all Wing of11ces. 1998 dollars under the remaining terms of the contracts were The employees of Wing were notified prior to December 31,1998, approximately $2.3 billion. The largest coal contract expires in of their termination ellectise ichruary 1,1999. Severance costs hase 2020, with the remaining coal contracts expiring at sarious times been accrued for the approximately 30 alTected employees.The com-through 2013. pany's exit plan calb for all significant aspects of the closure to be mmpleted during 1999. l 60

i WESTERN R E s O U R C f s, IN C. NOTE S TO C ON SOLID AT E D FIN ANCI AL STATEMENTS

12. UNCONSOLIDATED SUBSIDIARIES Postretirement Benefits:The company accrues the cost of postre.

The mmpany's investments in unconwlidated subsidiaries which are tirement benefits, primarily medical benefit costs, during the years am>unted for by the equity method are as fiellows: an employee provides service. The following tables summarire the status of the company's pension Duneship at investment at Yes [nded and other postrctirement benellt plans: December 31. December 31, December 31. 1998 1998 1997 1998 1997 Pension Benehts Postretrement Benefits (Douss m Thousands) December 31, 1998 1997 1998 1997 ONEOK inc.m 45% $615,094 5596 206 56.064 51,970 (Dours e Thousands) Affordable Housing Tax Change in Bt ' Obgation: Credit hmited partnerships 0 5% to 30% 89,618 !!,571 O' g n ar. $462.964 $483,862 $ 83.673 $122.99s internationalcompanies Serece cost 7,952 11,337 1.405 2,102 andjoint venturesG. 37% to 50% 10,500 16.299 Interest cost 31.278 35.836 5.763 9,098 Other, 32% 3,312 (672) Plan participants' contnbutions 858 1,122 m The company also received approximately $40 milhon of preferecJ and common dudends Benehts paid. (24,682) (27,764) (5.630) (10,167) m.m98. Refer to Note 8 for further mformation regardmg the company's strategic alliance Assumptionchanges, 36,268 (19,184) 6.801 Actuanaliosses ! gams) 10,095 (1.532) (5.351) 4,421 th nvestment is aggregated. Indmdual mvestments are not significant. Based on an order I Plan amendments 6.866 received by the KCC, equity earnmgs from these mvestments are used to offset costs asso-Curta n nt e e s and ciated with postretirement and postemployment benefits offered to the company's Benefit obhgation,

0) Investment is aggregated. Indedual mvestments aca not significant. Dunng 1998, the end of year.

$392,057 5462.964 $ 87,519 5 83,673 company recognized a nontemporary decline m value of its foreign equity investments as discussed m Note 11. Change m Plan Assets: fa v The following summariecd financial infiirmation for the company's e8 ng o ye r $584,792 $496 206 $ 118 $ 78 imestment in ONh0K is presented as of and fiir the period ended Actuai return on plan assets. 66,106 113.235 6 3 Nm ember 30,1998 and 1997, the most recent period for which Employer contnbution. 2,197 2.220 5.679 10.204 public information is as ailable. han participants' contnbutions Benefits paid. (23.910) (26.869) (5,630) 110.167) November 30, 1998 1997 SettlementsW. (187,654) (Dours m Thousanos) fair value of plan assets, j Balance Sheet: end of year. $441,531 $584,792 $ 173 5 118 Current assets. $ 404.358 5 532,681 funded status $ 49.474 $121.828 $(87.346) $ l83.555) Noncunent assets, 2.091,797 1,761,561 Unrecognized net (gainMoss. 0 04,023) 0 93.313) 1.814 (8281 Currentliabdmes. 338.466 443,080 Unrecognized transmon Non<urrent habdities 993.668 729.920 obhgation, net 244 1369) 56.159 60.146 Eauity 1.164.021 1,121.242 Unrecognized pnor service cost. 36.309 39.763 (4.131) (4.592) Year Ended November 30, 1998 1997 Accrued postretirement (Donas m Thousanos) benefit costs $ 117.9%) 5(32,091) S(33.504) S(28.829) locome Statement: Actuanal Assumptions; ~ Revenues. $1.908.713 51.227.335 Discount rate. 6.75 % 7.5% 6.75% 7.5% Operating expenses. 1,767,286 1,134.024 Expected rate of return. 9.0% 9.0 % 9.0% 9.0% Net income 103,525 59.614 Compensation increase rate 4.75% 4 75% 4.75% 4.75% Components of net penodic benefit cost-

13. EMPLOYEE BENEFIT PLANS interest cost 31.278 35.836 5.763 9,098 P;nsion:The company maintains qualified noncontributory defined Expected return on plan asseu.

(39,069) (39.556) (11) (4 ) benefit pension plans coscring substantially all utility employees. Amortization ot unrecognized Pension benefits are based on years of service and the employce'" transmon obhgation. net. (32) 179) 3.988 6,202 compensation during the fisc highest paid consecutise years out of Amortization of unrecognized,~ior ten before retirement.The company's policy in to fund pension costs serwce costs. 3.455 4.918 (461) (720) accrued, subject to limitations set by the Employer Hetirement Amortization of 8 8*" "' ' b" (' ) ( 96) 007) income Security Act of 1974 and the Internal Resenue Code. 9 The company also maintains a non-qualified becutise Salary Net penodic benefit cost. S (2,301) S 9.220 $ 10,288 $ 16.571 Continuation Program for the benefit of certain management employees, including executive ollicers. (11 The pension and postretirement benefit plans recorded a curtailment expense due to the significant reduction m future years of service due to the transfer of employees to OMOK in Nwember 1997. In July 1998, pension plan assets were transferred to DMOK resulting j m a settlement loss. 61

WESTERN RESOURCIS, .NC. NOTES TO CON SOLID ATE D FIN ANCI AL STATEMENTS For measurement purposes, an annual health care cost grow th rate of Stock options and restricted shares under the LTISA plaa are as 8% was assumed for 1998, decreasing one percent per year to live follows: percent in 2001 and thereafter.The health care cost trend rate has a DehnE3 '~ 199[ ~ kW 1998 significant cliert on the projected benefit obligation. Increasing the Weghted Weeghted Weighted trend rate by one percent each year would increac the present value Amage Amage Amage of the accumulated projected benefit obligation by $2.1 million $f Eg,r f Epl s Er and the aggregate of the service and interest cost components by 50.2 million. Outstanding. beginning of year. 665 4 S30.282 205 7 $29.250 - S -

• In acu>rdance with an order from the KCC, the company has Granted 925.3 40.293 459.7 30.750 205.7 29,250 deferred postretirement and postemployment expenses in excess of

~ ] ] ] ] ] actual costs paid. In 1997, the company received authorization from Outstanding. ~ ~ the KCC to invest in AllTC imestments. Income from the AllTC end of year .1.590.7 $36106 665.4 S30.282 205,7 $29.250 investments will be used to ofTset the deferred and incremental costs Werghted-average far value associated with postrctirement and postemployment benefits olTered of options granted dunng to the company's employees.The income generated from the AllTC the year. S 6.55 $ 3.00 5 3.26 imestments replaces the income stream from corporate owned life Sto(k options and restricted shares issued and outstanding at insurance contracts purchased in 1993 and 1992 which was used for 1)ecember 31,1998, are as follows: the same purpose. Weighted weighted Range of Namber Average Aeage S:vings:The company maintains sasings plans in which substantially Enerose issued and Contractual Exerase N umanena wears all employees participate, with the exception of Protection One employees.The company matches employees' contributions up to Options: specified maximum linuts.The funds of the plans are deposited with 1998. $38.625 43125 788.800 10.0 S40.581 a trustec and invested at each employee's option in one or more fg, j [j 3 3 imestment funds, meludinE a comI3any stock fund.The comIiany's contributions were 5 3.8 million, 55.0'million and 54.6 million f'or 1'454,200 1998,1997 and 1996, respectively. Restncted shares: 1998 38 625 136.500 4.0 38.625 Protedion One also maintains a savings plan. Contributions, made Totalissued. 1.590.700 at Protection One's election, are allocated among participants = = - based upon the respective contributions made by the participants through salary reductions during the year. Protection One's matching An equal amount of dividend equisalents is issued to recipients contributions may be made m Protectmn One common stock, in of stock options. The weighted-average grant-date fair value of cash or in a combination of both stock and cash. Protection One,s the dividend equivalent was $6.88 and $6.21 in 1998 and 1997, matchinbi contrBetion to the Iilan for 1998 and 1997 was 5992,000 respectively.The value of each dividend equivalent is calculated as a and 534,000, respectively. percentage of the accumulated dividends that would hase been paid or payable on a share of aimpany common stock.This percentage Protection One maintains a qualified employee stock purchase plan ranges from zero to 100%, based upon certain company performance that allows eligible employees to acquire shares of Protection One factors.The dividend equisalents expire after nine years from date common shares at 85% of fair market value of the common stock. of grant. A total of 650,000 shares of common stock hase been reserved for issuance in this program, The fair value of 6tock options and dividend equisalents were estimated on the date of grant using the Illack-Scholes option-pricing Stick Based Compensation Plans: The company, excluding model.The model assumed the follow ing at 1)cccmber 31: Protection One, has a long-term incentise and share award plan ~ ~ - ~ ~ i 3993 3997 (LTISA Plan), which is a stock-based compensation plan.The LTISA y 6 6 Plan was implemented to help ensure that key employees and board y members (Plan Participants) were properly incented to mcrease Risk. free interest rate: shareholder value. Under the LTISA Plan, the company may grant Stock options. 4.87% 6.72% awards in the form of stock options, dividend equisalents, sharc Dnndend equivalentsm. 4 63% 6 36% appreciation rights, restricted shares, restricted share units, perfor-ng,nung an a$rd[,ercentage of 100% and mAe~nia[curnwaEon pe$od of fn$ yea ^ mance shares and performance share units to Plan Participants. Lip to three million shares of common stock may be granted under the LTISA Plan. 62

W 1' 51 i R N RE50VRCES. INc. NOTES TO CON SOLID ATE D FIN ANCI AL STATEMENTS Prit:ction One Stock Warrants and Options: Protection One has The company hohls a call option for an athlitional 2,750,2 38 shares of outstandmg stock uarrants and options uhic h wcre considered Protection one common stoi k, exercisable at a call price of 515.50 reissued and exercisable upon the company's acquisition of per share.The option expires on the earlier of(i) 45 days following Protection One on Nosember 24,1997. The 19971 ong. Term the last date on w hich any Protection One comertible notes are still Incentise Plan (the LTIP), approved by the Protection One stock. outstanding or (ii) Octobcr 31,1999. holders on Nmember 24,1997, prmides for the an ard of incentive The we. hted average f. air value of options granted during 1998 ig stoc k options to directors, oth. errs and key employees. Under th. ITIP,4.2 million shares are rescrsed fiir issuance subject to such and estimated on the date of grant was 56.87.The fair salue was adjustment as may be necessary to rc0cct changes in the number or cak ulated using the following assumptions: Linds of shares of common stock or othcr accurities of Protection Y'8' '"ded 0ecember 31, 1998 One.The LTIP prmides for the granting of options that qualify as Dividend yield 0.00% incentive stos k options under the internal Resenue Code and options Expected stock price volatikty. 61.72% that do not so quahlv. Risk free mterest rate 5.50% ~ Expected option hfe 1)uring 1998, Protection One granted options under the LTP to 6 years purt haw an aggregate of 1,246,500 shares of common stock to The company accounts for both the company's and Protection One's cmploy ees, including 690,000 shares granted to officers of plans under Accounting Principles lloard Opinion No. 25, f Protection One. I ach option has a term of 10 ycars and sests 100% " Accounting for Stock Issued to Emplm ees7and the related interpre-on the third annitersary of the option grant.The purchase price of the tations. Ilad compensation expense l$cen determined pursuant to shares issuable pursuant to the options is equal to (or greater than) the Statement of financial Accounting Standards No. I2 3," Accounting fair market s alue of the common stock at the date of the option grant. for Stock liased Compensation 7the company would base recognierd A summary of warrant and option activity for Protection One from additional compensation costs during 1998,1997 and 1996 as shown the date of the acquisition transaction is as follows: in the table below. Decenter 31, 1998 1997 Year ended December 31. 1998 1997 19 % Weighted Weighted (Dollars m Thousands, Except Per Share Amounts) $#{$ ,$c s, Earnings avanable for common stock: A age Shares Pnte Shares Pnce As reported $44.165 5494.599 5154.111 Outstanding beginnmg of yearm. 2.3o6.435 5 5.805 2.366.741 SS.805 Granted. 1.246.5# 11.033 Eammgs per common share (basic and ddutedh Exercised (109,595) 5.564 (306) 0.050 As reported 50.67 $7.59 S2.41 forfeited. (117.4381 10.770 Pro forma 0.65 7 59 2.41 Adjustment to May 1995 warrants. 36.837 Outsteding, end of year. 3k22.739 5 7.494 366.435 55 805 Svit Dollar Life insurance Program:He company has established a split dollar life insurance program fi>r the benefit of the company and W There was no outstanding stock or options pnor to November 24.1997. certain of its executiscs. Under the program, the company has Stm k options and warrants issued and outstanding at I)cccmber 31, purchased a life insurance pohcy on the executis c's life, and, upon the 1998, are as follow *: executive's death, the executise's beneficiary is entitled to a death Rave of Number issued Weighted Average neighted Amage t n an amount equal to de face amount d tk poky dud n Exemse Prce and outstandmg ]emanng ue tvears) Exercise Pnce by the greater of(i) all premiums paid by the company or (ii) the cash Exerosable: surrender salue of the policy, which amount, at the death of the S 6.375 S 9 125 136.560 6 S 6.588 cxecutise, will be returned to the company.The company retains an 8.000- 10.313 349.000 7 8.062 equity interest in the death benefit and cash surrender salue of the 13.750 15 500 142.000 7 14 883 policy to secure this repay ment obligation. 9.500 217.000 8 9 500 15.000 50.000 8 15 000 Subject to 'he conthtions described below, beginning on the earlier of 14 268 50.000 3 14 268 (i) three years from the date of the policy or (ii) the first day of the 3.633 103.697 2 3.633 next calendar year following the date of the executise's retirement, 0 167 428.400 5 0 167 the executive is allowed to transfer to the company from time to 3 890 786,277 6 3 890 time, in u hole or in Iiart, his interest in the death bendit under the 0 050 305 8 0.05J poh.cv at a discount equal to 51 for ca(h 51.50 of the portion of. . 63.239 the < cath benefit for w hic h the executise officer may designate merosa $11033 1.120.500 9 S11.033 the beneficiary, subject to adjustment based on the total return to 9 500- 12 500 39.000 9 11.942 1.159.500 Total outstanding 3.422.739 t3

WESTERN RESOURCES, INC. NOTES TO C ON SOLID ATE D FIN ANCI AL STATEMENTS sharehohlers from the date of the policy unless the participant retires The carrying values and estimated fair values of the company's from the osmpany within six months of the date of the participant's financial instruments are as follows: agreement. Any adjustment would result in an exchange of no more carrrns vsue ran veue than one dollar for each dollar of death benefit nor less than one Decenber 31, 1998 1997 1998 1997 dollar for each twu dollars of death benefit.The program has been designed such th-t upon the executive's death the company will "8'5 " D"8"d53 recover its premium payments from the policy and any amounts paid Decommissioning trust. $ 52,093 $ 43,514 $ 52.093 $ 43.514 a by the company to the executise for the transfer of his interest in the nt es 2.956.692 2,019,103 3.076,709 2.101.167 death benefit.The cash surrender value of these policies has been Redeemable preference recorded in other assets.The insurance premium and the estimated stock 50,000 't,750 salue of the executives' agreements have been expensed. The Otp n ab cuntes. 220.000 220.000 226.800 226,088 company has accrued approximately 557 million at December 31, 1998 for this program. Under current tax rules, payments to certain participants m exchange for their interest m. the death benefits may In its commodity price risk management activities, the company, not be fully deductible by the company for income tax purposes; engages in bo6 traeng and non-trading activities. In these activities, the company utilizes a sariety of Imancial instruments, mcluding "I" I" * "E '" "

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

'*'"" " E " #* "'I an energy commodity, options, swaps which require payments (or The following methods and assumptions were used to estimate the receipt of paymes.ts) from counterparties based on the dJferential fair value of each class of financial instruments for w hich it is practicable between specified prices for the related commodity, and futures to estimate that value as set forth in Statement of Financial traded on electricity and natural gas. For a discussion of the accounting Accounting Standards No.107 " Disclosures about Fair Value of policy for these instruments, see Note 1. Financial Instruments" The company is involved in trading activities primarily to minimi7e Cash and cash equhalents, short-term borrowings and sariable-rate risk from market fluctuations, maintain a market presence and to debt are carried at cost which approximates fair salue.The decom-enhance system reliabilitv. Although the company attempts to balance missioning trust is recorded at fair value and is based on the quoted its physical and financial purchase and sale contracts in terms of market prices at December 31,1998 and 1997.The fair salue of quantities and contract terms, net open positions can exist or are fixed-rate debt, redeemable preference stock and other mandatorily established due to the origination of new transactions and the com-redeemable securities is estimated based on quoted market prices pany's assessment of, and response to, changing market conditions. for the same or similar issues or on the current rates ofTered for instruments of the same remaining maturities and redemption

• ""Pany uses derivatives for non-trading purposes primarily to provisions.The estimated fair values of contracts related to commodi.

reduce exposure relative to the volatility of cash market prices, ties hate been determined using quoted market prices of the same or December 31, 1998 1997 similar securities. National National Volumes Estimated youmes Estimated The recorded amounts of accounts receivable and other current usi ran value ms) rar value financial instruments approximate fair value, IDollars m Thousanos) Forward contracts: The fair salue estimates presented herein are based on information Purchased. 1.535.600 $46,361 359,200 $8,604 available at December 31,1998 and 1997.These fa.r value estimates Sold. 1.535,600 46.141 359,200 8,806 have not been comprehensively revalued for the purpose of these hnancial statements since that date and current estimates of fair value Purchased. 148.800 $ 361 803.200 $1,607 may differ significantly from the amounts presented herein. liccause 6. Sold. 64.000 195 120.800 512 substantial portion of the company's operations are regulated, the company belicses that any gains or losses related to the retirement of furward contracts and options had a net unrealiecd gain of 540,000 at debt or redemption of preferred securitics would not hasc a material December 31, 1998, and a net unrealized loss of $127,000 at effect on the company 's financial position or results of operations. December 31,1997, 64

WESTERN RESOURCES.INC, NOTES TO C O N S OLID ATED FIN ANCI AL STATEMENTS l l

15. GAIN ON SALE OF EQUITY SECURITIES in accordance with various rate orders, the company has not yet i

During 1996, the company acquired 27% of the common shares of ected thrmgh rates certain accelerated tax dedactions which ADT Limited, Inc. ( AD T) and made an of fer to acquire the remaining have been passed on to customers. As management belieses it is ADT common shares. ADT rejected this ofter and in July 1997, ADT probable that the net future increases in income taxes payable will be merged with Tyco International Ltd. (Tyco). ADT and Tyco recovered from customers, it has recorded a deferred asset for these completed their merger by exchanging ADT common stock for amounts.These assets also are a temporary diherence for which Tyco common stock. deferred income tax liabilities have been prm ided. Following the ADT and Tyco merger, the company's equity The efTectise income tax rates set forth below are computed by investment in ADT became an available-for-sale security. During the dividing total federal and state income taxes by the sum of such taxes third quarter of 1997, the company sold itsTyco common shares for and net income.The difTerence between the ofTective tax rates and the approximately $1.5 billion.The company recorded a pre tax gain of federal statutory income tax rates are as follows: 5864 million on the sale and recorded tax expense of approximately Year Ended December 31, 1998 1997 1996 5 345 million in connection with this gain. Effective incorne tax rate. 24.0% 43.4% 32.8% Effect of:

16. INCOME TAXES State mcome taxes (4 5)

(5.0) (51) Income tax expense is composed of the following components at Amortization of mvestment tax credits. 10.0 0.8 2.7 December 31: Corporateowned hfe msurance pohcies. 15.0 0.9 3.7 j Accelerated depreciation flow through 1 1998 1997 1996 and amortization. net (2.9) (0.4 ) (0.2) marsin TWsaMd Adjustmerit to tax provision (11.3) (3.7) Dividends received deduction. 16.0 g g. 8 "'E State. 10.881 72.143 20,280 y ] FGderal. $52,993 $336.150 $54.644 D2ferred: Statutory federalincome tax rate. 35.0% 35.0% 35.0% federal. (39,067) (15.945) 14,808 State. (4,185) (2,6%) (615) Amortzabon ofinvestment

17. PROPERTY, PLANT AND EQUIPMENT tax credits.

16.065) (6.665) (6.758) The following is a summary of property, plant and equipment at Total mcome tax expense, $14.557 _ $382 987-. -. - - -_ _ _ $82 359 December 31: 1998 1997 linder SFAS 109, temporary difTerences gave rise to deferred tax assets and deferred tax liabilities as follows at December 31: s $5 M 6 $5 M 95 1998 1997 Less-accumulated depreciation. 2.015.880 1.895.084 (Donars o thsaMd 3.630,2 % 3.669,611 Deferred tax assets: Constn.ction work m progress. 77.927 60.006 DefGrred gain on sale-leaseback. $ 92.427 $ 97.634 Nuc%ar fuel (net). 39.497 40.6 % Secunty business deferred tax assets 132.802 98,712 Net utikty plant. 3.747,720 3.770,313 .008 Non utihty plant m service 62.324 20,237 Total deferred tax assets. $ 363,735 $ 290.354 Less-accumulated depreciation. 14.901 4.022

==: = =-

~ Defgrrad tax liabihties: Net property, plant and equipment. $3.795,143 $3,786.528

=

Accelerated depreciation and other $ 615.492 $ 625.176 Cafe re f tore nke taxes. The carrying value of long-lived assets, including intangibles, are Otbr. 85.987 112.555 reviewed for impairment whenever esents or changes in circum. ~ - - ~ stances indicate they may not be recoverable. Total deferred tax habihties.. $1.198,749 $1,250.551 -C.Z -2'. 1.C 7 ineestment tax credits. $ 103,645 $ 109,710 Accumulated deferred mcome taxes, net. $ 9bkB Sk,069.907 cs

WE$7fRN H E f. U U R C E S, INC i NOTES TO CONSOLID ATE D FIN ANCI AL STATEMENTS

18. LEASES

19. SEGMENTS OF 81USINESS At December 31, 1998, the company had leases cmering various in 1998, the company adopted $FAS 131, " Disclosures about property and equipment.The company currently has no significant Segments of an Enterprise and Itclated information."This statement capital leases.

requires the company to define and report the company's business I segments based on how management currentiv culuates its business. Rental iayments fi>r operatm leases and estimated rental comnu.t-ments are as follows: Mana ement has se mented its business based on differences in products and services, production processes, ana. management Year Ended December 31 asep responsibility liased on this approach, tbc company has identified four reportable segments: fossil generation, nuclear generation, 1996. $ 63.181 E ""' d'ti'#"I *"d """i*"'"d ''i'# 1997. 71.126 Iq,ssil generation, nuclear generation and power delisery represent 1998. 70.7 % the three business segments that comprise the company's regulated ( Future Commitments: electric utility business in Kansas. fiassil generation produces power l 1999. R 355 for sale to external u holesale customers outside the company's his-2000. 58.573 2001. 55.073 torical marketing territory and internally to the power delivery 2002. 55.293 segment. Power marketing is a component of the company's fossil 2003. 57.530 generation segment which attempts to minimize market fluctuation Thereafter 650.893 risk, enhance system reliability and maintain a market presence. l Total. $941.717 Nuclear generation represents the company's 47% ownership in the Wolf Creek nuclear generating facility.This segment does not have in 1987, KGE sold and leased back its 50% undivided interest in the any external sales. The power delivery segment consists of the 1 a b, gne 2 generating unit.The 1.a L,vgne 2 lease has an m.. ial term transmission and distribution of power to approximately 620,000 it w elesale and retail customers in k.ansas. of 29 years, with various options to renew the lease or repurchase the 50% undisided interest. KGE remains responsible for its share of The company's monitored services was expanded in Nm ember 1997 operation and maintenance costs and other related operating costs of with the acquisition of a majority interest in Protection One. 1.a Cygne 2. The lease is an operating lease for financial reporting Protection One provides monitored sersices to approximately { purposes. The company recognized a gain on the sale which was 1.5 million customers in North America, the United Kingdom, and deferred and is being amortiicd m er the initial lease term. Continental Europe. In 1992, the company deferred costs associated with the refinancing Other represents the company's non-utility operations and natural of the secured facility bonds of theTrustee and owner of La Cygne 2. gas business. ~ ~ These msts are being amortired over the life of the lease and are included in operating expense. Approximately 520.3 million of The accounting policies of the segments are substantially the same as this deferral remained on the Consolidated 11 alan (c Sheet at those described in the summary of significant accounting policies. December 31,1998. The company evaluates segment performance based on carnings before interest and taxes. Unusual items, such as charges to income, Future minimum annual lease payments, included in the table abme, may be excluded from segment performance depending on the required under the 1.a Cygne 2 lease agreement are approximately nature of the charge or income.The company's ONEOK investment, 5 34.6 million for each year through 2002,5 39.4 million in 2003, and marketable securities investments and other equity method invest-55 37.2 million mer the remainder of the lease. KGE's lease expense, ments do not represent operating segments of the company.The net of amortization of the deferred gain and refinancing costs, was company has no single external customer from u hich it receives ten approximately 528.9 million fiar 1998, 527.3 million for 1997, and percent or more ofits revenues. 522.5 million for 1996. u

WESTERN RLsOURCCs.INC NOTE S TO CONSOLID ATED FIN ANCI AL STATEMENTS Year Ended December 31,1998: [hmmatmg/ Fossi Nuclear Power Monitored Reconohng Generation Generation Dekvery Services Other (1) llems a Total (Dohars m Thousands) External sales, S 525.974 $ - $1,085,711 $ 421,095 $ 1,342 (68) $2,034,054 Allocated sales, 517,363 117,517 66,492 (701,372) Depreciation and amortization, 53,132 39,583 68.297 117,651 2,010 280,673 Earnings before interest and taxes, 144,357 (20,920) 1%,398 56,727 (101,988) 12,268 286.842 int; rest expense, 226,120 Earnings before income taxes 60,722 Identifiable assets 1,360,102 1,121,509 1,788.943 2,511,319 1,269,013 (99.458) 7,951,428 Year Ended December 31,1997: Ehmmatmg/ fossd Nuclear Power Monitored Reconcilmg Generation Generation Delivery Services (3) Other 14,51 Items 16! Total (Dollars in Thousarids) External sales, $ 208.836 $ - $1,021,212 $ 152,347 $ 769,416 (46) $2,151,765 Allocated sales., 517,167 102,330 66,492 (685,989) Depreciation and amortization. 53,831 65,902 63,590 41,179 32,223 256,725 Earnings before Interest and taxes, 149,825 (60,968) 173.809 (38,517) 914,747 (62,583) 1.076.313 Interest expense, 193,808 Earnings before income taxes 882,505 Identifiable assets 1,337,591 1,154,522 1,721,021 1.593,286 1,238.088 (84,958) 6,959.550 Year Ended December 31,19% Ehmmatog/ Fossd Nuclear Power Monitored Reconcihng Generation Generation Dehvery Services Other 151 Items Total (Dollars mIhousarids) External sales, $ 144,056 $ - $1,053,359 $ 8.546 $ 840,827 39 $2,046.827 Allocated sales, 518,199 100,592 71,492 (690,283) Depreciation and amortization, 52,303 57,242 60,713 944 30.129 201,331 Earnings before interest and taxes. 188,173 (51,585) 218,936 (3,555) 62,385 (10,494) 403,860 Int rest expense, 152,551 Earnings before income taxes 251,309 identifiable assets 1,330.048 1,190,335 1,637,980 488.849 2,000,569 6,647,781 (1) Earrvngs before mterest and taxes (EBIT) includes investment earnings of $21.7 milhon and wnteoff of international power development activities of $98 9 milkon. Oidentifiable assets mcludes ehminating and reclassing balances to consokdate the monitored services business. (3) EBIT includes monitored services speaal charge of $24.3 million. '4) EBIT includes ovestment earnings of $37.8 milkon and gam on sale of Tyco secunties of $864.2 milhon. (5) includes natural gas operations. The company contnbuted substantially all of its natural gas busmess m exchange for a 4% equity interest m ONE0K m November 1997. t6) EBIT includes wntecff of deferred merger costs of S48 milhon, Identifiable assets mcludes eliminating and reclassing balances to consohdate the monitored services business. Ge graphic information: Prior to 1998, the company did not base international sales or international property, plant and equipment.The company's sales and property, plant and equipment as of and for the period ending December 31,1998 are as follow - - - - - _ ~.. -.. -. -. North Amenca Intemational Operations Operations Total IDollars m Tnousands) Extemal sales. $1.990,329 $43,725 $2,034,054 3,787,872 7,271 3,795.143 Property, plant and equipment, net i l l c7

r 7 WESTERN fl E S O U R C E S. INC. NOTES TO C ON SOLID ATE D FIN ANCI AL STATEMENTS

20. JOINT OWNERSHIP OF UTILITY PLANTS Westar Energy will assume 52.7 billion in debt, consisting of company's ownerste at Deumber 31.1998 51.9 biUion ofindebtedness for borrowed money of the company and

~ KGE, and 5800 million from KCPL. Long-term debt of the company, o$te7 NpNr inwstment NeUMWI Percent excluding Protection One, was 52.5 billion at December 31,1995, and $2.1 billion at December 31,1997. Linder the terms of the m%g La Cygne lla, Jun 1973 $ 162.756 S109,336 343 50 merger agreement, it is intended that the company will be released Jeffrey itbl. Jul1978 297,020 134.054 617 84 from its obligations with respect to the company's debt to be assumed hffrgy 2M. May 1980 292.555 128.210 622 84 by Westar Energy. Jeffrey 3M, May 1983 405.054 160.671 621 84 Wolf CreekM. Sep 1985 1.377.348 429,934 547 47 ursuant to the merger agreement, the company has agreed, among other things, to redeem all outstanding shares of its 4 %% Series

18) Jointly owned with KCPL pg g

pq

pg g,

Ib) jointly owned with UtikCorp United inc. SWA value $100 per share, and 5% Series Preferred Stock, par M omity owned with KCPL and Kansas Electnc Power Cooperatwe. Inc. J & M00 p hm Amounts and capacity presented abme represent the company'* Consummation of the merger is subject to customary conditions. On share.The company's share of operatmg expenses of the plants in July 30,1998, the company's shareholders and the shareholders of service above, as well as such expenses for a 50% undivided interest KdPL voted to approve the amended merger agreement at special in La Cygne 2 (representing 334 MW capacity) sold and leased hack meetings of shareholders.The company estimates the transaction to the company in 1987, are included in operating expenses on the to close in 1999, subject to receipt of all necessary approvals frmn Consolidated Statements of income. The company's share of other regulatory and government agencies. transactions associated w ith the plants is included in the appropriate classification in the company's consolidated financial statements. In testimony filed in February 1999, the KCC stafTrecommended the merger be apprmed but with conditions which we believe would

21. MERGUI AGREEMENT WITH make the merger uneconomical.The merger agreement allows the KANSAS CITY POWER & LIGHT COMPANY company to terminate the agreement if regulatory approvals are not On February 7,1997, the company signed a merger agreement with acceptable.The KCC is under no obligation to accept the KCC staff Kansas City Ptmer & L.ight Company (KCPL) by which KCPL would recormnemlation. In addition, legislation has been proposed in

~ be mergeci with and into the company in exchange for company Kansas that could impact the transaction.The company does not stock. In December 1997, representati[es of the company's financial anticipate the proposed legislation to pass in its current form.ne advisor indicated that they believed it was unlikely that they would be company is not able to predict whether any of these initiatives will be in a position to issue a fairness opinion required for the merger on the adopted or their impact on the transaction, w hich could be material. basis of the previously announced terms. On August 7,1998, the company and KCPL filed an amended appli. On March 18,1998, the company and KCPL agreed to a restructur-cation with the Federal Energy Regulatory Commission (FERC) to ing of their February 7,1997, mcrger agreement which will result approve the Western Resources /KCPL merger and the formation of ~ "#'E7' in the formation of htar Energy, a new regulated electric utility company. Under the terms of the merger agreement, the electric The company has received procedural schedule orders in Kansas and utility operations of the company will be transferred to KGE, and Missouri.These schedules indicate hearing dates beginning May 3, KCPL and KGE will be merged into NKC, Inc., a subsidiary of the 1999,in Kansas and July 26,1999,in Missouri, company. NKC, Inc. will be renamed Westar Energy. In addition, KCPL is a public utility company engaged in the generation, trans-under the terms of the merger agreement, KCPL shareholders will mission, distribution, and sale of' electricity to customers in western ~ receise company common stock which is subject to a collar mecha. Miwouri and castern Kansas.The company, KCPL and KGE have nism of not less than.449 nor greater than.722, provided the amount joint interests in certain electric generating assets, including i of company mmmon stock received may not exceed $ 30.00, and one

g. ;7gg g

Share of Westar Energy common stock per KCPL share.The Western Resources Index Price is the 20 day average of the high and low At December 31, 1998, the company had deferred approximately sale prices for company common stock on the NYSE ending ten days 514 million related to the KCPL transaction.These costs will be i prior to closing. If the Western Resources Index Price is less than or included in the determination of total consideration upon consum-equal to 529.78 on the fifth day prior to the effectise date mation of the transaction. of the combination, either party may terminate the agreement. For additional information on the Merger Agreement with Kansas Upon consummation of the combir,ation, the company will own Cit y Power & Light Company, see the company's Registration approximatcly 80.1% of the outstanding equity ofWestar Energy and Statement on Form S.4 filed on june 9,1998. ~ ~ ~ KCPL shareholders will own approximately 19.9%. As part of the combination, Westar Energy will assume all of the electric utility related assets and liabilities of the company, KCPL and KGE. 68

WESTERN REsoVRCfs.INC. i NOTES TO CONSOLID ATED FIN ANCI AL STATEMENTS ~

22. QUARTERLY RESULTS (UNAUDITED)

The amounts in the table are unaudited but, in the opinion of management, contain all adjustmen:. (consisting only of normal recurring adjust ments) necessary for a fair presentation of the results of such periods.The electric businc.ss of the company is seasonal in nature and, in the opinion of management, comparisons between the quarters of a year do not give a true indication of overall trends and changes in operations. Frst Second Third Fourth (Dollars m Thousands. Except Per Share Arnoums) 1998 (RESTATED) Sales, $382,343 $463,301 $701,402 $487,008 income from operationsm 64,795 72,314 156,307 (62,902) Net incomem, 29,813 31,006 71,422 (84.485) . Zarnings apphcable to common stock. 28,583 29,209 71,140 (84,767) Basic earnings per share. 0.44 5 0.45 1.08 S (1.29) Dnndends per share. S 0.535 $ 0.535 $ 0.535 $ 0.535 Average common shares outstanding. 65,410 65,543 65,707 65,870 Common stock pnce: High, $ 44.188 $ 42.688 $ 41.625 $ 43.250 Low. S 40.000 $ 36.875 $ 37.688 $ 32.563 1997 (RESTATED) Sales. $626,198 $454,006 $559,9% $ 511,565 income from operationsO 103,297 57,498 110.391 (116,761) fiet income 12,3) 41,033 24.335 508,372 (74.222) Earnings apphcable to common stock. 39,803 23,106 507.142 (75,452) Basic earnings per share, S 0.61 S 0.36 7.77 S (1.15) Dividends per share, $ 0.525 $ 0.525 S 0,525 $ 0.525 Average common shares outstanding. 64,807 65,045 65,243 65,408 Common stock pnce: High $ 31.50 $ 32.75 $ 35.00 S 43.438 Low., S 30 00 S 29.75 S 32.25 $ 33.625 l W The loss m the tourth Quarter of 1998 is pnmardy attnbutable to a $99 mdhon charge to mcome to exit the company's mternational power development business. O Dunng the fourth Quarter of 1997, the company expensed deferred costs of approximately $48 mAon associated with the onginal KCPL merger agreement. Protection One recorded a charge to income of approxim-* ?y $24 milhon. (3) Dunng the thud Quarter of 1997, the company recorded a pre-tax gain of approximately $664 mdhon upon selling its Tyco common stock. The summarieed information for the fourth quarter of 1997 and for each quarter in 1998 have been revised to reflect a restatement at Protection One,The restatement expenses yard signs previously capitalized and includes the impact of reversing the accrual for the signage charge pres iously recorded at December 31,1997 (see Note 2).The impact of the adjustments made to the company's previously reported quar-terly results in 1998, net of tax and net of the minority interest is as follows: 1998 (Dollars m Thouunds) Expense yard signs as incurred. 5 8,312 Increase bad debt provision. 3,090 Other (554) Decrease o netincome. S 10.848 The impact of these adjustments on the quarterly results previously reported is as follows. ( Amounts are net of tax and net of minority interest): Net income Earnmgs Per Sha'e increase (Decrease) Increase (Decrease) (Dollars m Thousands) 1998 Fest Quarter S (655) $ (0.01) Second Quarter. (3.813) (0.05) Third Quarter. (1,343) (0.02) fourth Quarter. (5.037) (0.08) 1997 Fourth Quarter, S 5,424 S 0.08 n

WESTERN RESOURCES. INC. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF WESTERN RESOURCES, INC.: We have audited the accompanying consolidated balance sheets includes assessing the accounting principles used and significant and statements of cumulative preferred and preference stock of estimates made by management, as well as evaluating the merall Western Resources, Inc., and subsidiaries as of December 31, financial statement presentation. We believe that our audits 1998 and 1997, and the related consolidated statements of provide a reasonable basis for our opinion. income, comprehensise income, cash flows, and shareholders' In our opinion, the financial statements referred to above present equity for each of the three years m.the perimi ended December 31, fairiv, in all material respects, the consolidated financial position 1998.(1997 restated, see Note 2.)These consolidated financial of Western Resources, Inc., and subsidiaries as of December 31, statements are the responsibility of the company,s management. 1998 and 1997, and the consolidated results of their operations j Our responsibility is to express an opinion on these consolidated "*" "'"*' " * "* ""#1"*"I"* *P'^* "" " financial statements based on our audits. December 31, 1998, in conformity with generally accepted We conducted our audits in accordance with generally accepted accounting principles. auditing standards. Those standards require that we plan and ARTHllR ANDERSEN LLP perform the audits to obtam reasonable assurance about whether the financial statements are free of material misstatement. An Kansas City, Missouri audit includes examining, on a test basis, evidence supporting the January 27,1999 (Lxcept with respect to the matter discussed in Note 2, as to w hit h the date is amounts and disclosures in the financial statements. An audit also 3p,;i r,,3999,3 I l 1 i l I j 70

WisitRN REs00NCE5, INC SIX YE AR COMPAR ATIVE DATA INCOE STATEMENT DATA ($1,000s): Operationsm Total Total Total Cast of Cross Operating income from Wars sales sales Preat Espenses Operanens 1998 $2,034,054 $823,259 $1,210.795 $ 980,281 $230,514 19972 2,151,765 967,523 1,184,242 1,029,817 154,425 1996 . 2,046,827 883,126 1,163,701 775,148 388,553 1995 1,744,274 659,001 1,085,271 711,550 373,721 Other income (Expenselm interest Expensem income, Taxes. Earnings, and Dividendem saue income Earangs Earnings Dnddends Other sofere Preferred & Avaltoide for per Declared per e income Long-Teren short-Term biceme income Not Preference Common Commen Cosmnen Voare (Empense) Debt Ostt Tames Teses - Income Div6demis stock share share 1998 $ 56,328 $170,855 ' $55.265 $ 60,722 $ 14,557 $ 47,756 $ 3,591 $ 44,165 $0.67 $2.14 1997m 921,888 119,972 73,836 882,505 382,987 499,518 4,919 494,599 7.59 2.10 1996 15,307 105,741 46,810 251,309 82,359 168,950 14,839 154,111 2.41 2.06 1995 18,657 95,962 30,360 266,056 84,380 181,676 13,419 168,257 2.71 2.02 Operating Expensess Depre-Total Fuel Power Natural c6aten & operaung used ter purchased ses other usin. Amore. operaung Wars Revenues Generallen (not) Purchases Operanens tenance samen Tases income 1994io $ 1,764,769 5234,328 515,438 5312,576 5438,945 5113,186 5174,942 5200,304 5275,050 1993 2,028,411 250,328 16,396 500,189 467,915 117,843 181,909 201,471 292,360 Other Income and Deductionsm interest Char 8esm income, Earnings, and Dividendsm Other Earnings Earnings D6v6dends income & Preferred & Appikalde per Declared per Deductens Long Term AFuDC-Not Preference to Common Common Commen Wars (Not) Debt Other Debt income Devidends stock shareW shareW 1994io $31,314 5 98,483 523,101 5(2,667) 5187,447 513,418 5174,029 52.82 $1.98 J 1993 25,185 123,551 19,255 (2,631) 177,370 13,506 163,864 2,76 1.94 j i ELECTRIC STATISTICS: MWH Sales (1,000s) Company System Supply at Peak Hour (Not MW) system tratom reak Accredited Met Responsi-Generaung system Wars Reentenbal Conwnercial Mustrial Other Total Lead idilty

• Capacity Capacity @

1998 5,815 6,199 5,807 4,935 22,756 4,201 4.287 5,356 4,960 1997 5,310 5,803 5,714 5,441 22,268 4,016 4,102 5,312 4,984 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 4,960 1993 4,960 5,100 5,301 4,628 19,989 3,821 3,827 5,184 4,985 4 Utility Plant Electric Revenues ($1,000s) Customers (51,000s) Other Average Groes Wars Reesdental Commercial Industrial & Misc. Total Total Addehons Total 1998 $428,680 $356,610 $257,186 $569,209 $1,611,685 620,183 $158,578 $5,724,103 1997 392,751 339,167 254,076 243,999 1,229,993 613,715 159,760 5,624,701 1996 403,588 351,806 262,989 179,050 1,197,433 605,971 138,474 5,516,752 1995 396,025 340,819 268,947 140,104 1.145,895 600,791 179,090 5,415,754 l 1994 388,271 334,059 265,838 133,613 1,121,781 593,859 164,305 5,293,995 1993 384,618 319,686 261,898 138,335 1,104,537 585,042 147,556 5,169,915 I m Consol"Jated income Statement data was prepared using tte ' Commercial Enterpnse Format? W Information reflees. 3e sales of the Missoun Properties. O information reflects the Strategic Alhance with ONEOK in November 1997. W Net of off system sales and purchases. c) Consohdated Income Statement data was prepared usmg the traditional"Utdity Company format' n

1 l WiSTCRN RESOURCES, INC. DIRECTORS, OFFICER S AND CORPOR ATE INFORM ATION DIRECTORS CORPORATE INFORMATION Irank J. Becker (62) John C. Dieus (65) Jane Drenner Sadaka (44) CORPORATE ADDRESSES Liected 1992 11ected 1990 Liected 1999 Western Resources President Chairman and Retired Partner het ker Investments, Inc. Cluef Execuuve Oiker Kellner, Dileo & Co. 8 I 8 South Kansas Avenue Lawremr, Kansas Capitol federal Savings New Wrk, New brk Epcka, KS 66612-1203 Commuten: Human Anoursa Togwka, Kansas Commnreet Corporare Pubhc Poh. LouisW Smith (55) 7 N"*"" A""""" www.wstnres.com C. Q. Chandler (72) Elected 1991 Liected 1992 President and Protection One,Inc. Chairman of the thurd David 11. Hughes (70) Chief Executive Officer (N'I RUST hnancial Cor[w ration Llected 1988 Lwing Marion Kauffman Foundation 600 Corporate Pointe Wicluta, Kamas Retired Vice Chairman Kansas City, Missouri 12th Floor Commurea: Auda und hnam, Haumark Cards,Inc. Commmen: Corporars Pubhc Pohy, Culver City, CA 90230 767I Shawnee Mission, Kansas .Nommaring Thomas R. Clesenger (61) Commmea:Corporare Pubhc Poh, wwwprotectionone.com 9 H"*"" Liectro 1975 David C.Wittig (43) ONEOK,Inc. 100 West 5th Street RussellW. Meyer, jr. (66) C r f the Board, Vi h a nsas Communen:Auda and haance, Ilected 1992 President and Chief Executive Officer P.O. Ilox 871 Chairman and Western Resources,Inc. Tulsa, OK 74102-0871 Ne-manng Chief Lxecutive 00icer Topeka, Kansas ,g Cessna Aircraft Com[uny Wichita, Kansas Commuten: Auda anJ hnance, COMMON STOCK LISTING Nommanng Ticker Symbol (NYSE): WR Daily stock table listing: WstnRes ANNUAL MEETING OFFICERS The annual meeting of shareholders will be at: EXECUTIVE OFFICERS UTILITY OPERATIONS CORPORATE MANAGEMENT 1:30 p.m., David C.Wittig (4 3) 1995' Annette M. Beck (36) 1982 james A. Martin (41) 1983 Wednesday, June 30,1999, at Chairman of the ikurd, Chairman of the 11oard Vke President, investor Relations k.ansas Expocentre President and Chief Exenstive Officer and President, KGE and Strategic Planmng Vice President, Customer Service Maner Conference Center Thomas L. Grennan (46) 1974 Carl A. Ricketts (41) 1982 One Expocentre Drive LxecutivcVkr Preudent, Douglas J. llenry (45) 1977 Vice President, Corporate Topeka, Kansas Llenric Ogwrations Vice President, h>wer Delivery Development DIVIDENDS Carl M. Koupal, Jr. (45) 1992 Anita J.11unt (16) 1989 Executive Vice President and Vkr President, WESTAR COMMUNICATIONS Antici ated record and P Chief Administrative 00icer InformationTechnology lori A. linney (17) 1984 payment dates for 1999 President DouglasT. Lake (48) 1998 Wayne A. Kitchen (48) 1987 dir dends onWestern Resources E xecutive Vice President and Yke President, common stoc k: Chief fitrategic Ofiker Regulatory and Environmental RECORD i William B. Moore (46) 1978 Inlic D. Morgan (51) 1970 December 9,1998 Lecutive Vice Preudent, Vice President, Generatk n Services March 9 Chief Financial 00ker andTreasurer June 9 Rita A.Sharpe (40) 1977 September 9 Richard D.Terrill (44) 19H0 Ykr President, Shared Services Yin President, Law and Secretary PAYMENT january 4 April I july 1 Octobei I t > gc <4 twna,er n, ma War paned We.tcen Rem,urm or predete or u,mpany I Mr Wmig,as cleded Charman ni the lhard to surmd John L Hayes, Jr., who reured a Charman eficctm January 27.1999 12

y I WESTERN RESOURCES, INC. SHAREHOLDER INFORM ATION AND ASSISTANCE The Shareholder Services Department is the transfer agent for DIRECT STOCK PURCHASE PLAN htern nesources' common and preferred stock. lt prmides infor-Western Resources ofkrs common shareholders a program to mation and assistance to shareholders, including inquiries regarding purchase adJitional shares of common stock. Options of the Direct lost, stolen or destroyed dividend checks or stock certificates, address Stock Purchase Plan (Plan) include full or partial reinvestment of changes and transfers of htern Resources stock. dividends, optional cash payments, automatic electronic invest. Dividend payments should reach shareholders on the dividend ment, and safekeeping of share certificates. Investors mav become a Western Resources shareholder through the Plan with a minimum ., payment date. If a divider d check is not renited within seven days initial investment of $ 250. Im estments are made on the first and the after the payment date, please notify Shareholder Services in writing fificenth of each month or the first business day thereafter. Funds so that we may stop payment on the original check and reissue your must be received by Shareholder Services at least three (3) business . dividend payment. days prior to an imestment date to be included in an investment. I Always keep certificates in a safe place. Do not endorse the certifi-Certificate Safekeeping is a convenient feature of the Plan, cates until you are ready to transfer the stock. If a certificate is lost, Safekeeping is designed for investors who prefer to hohl their shares stolen or destroyed, please contact Sharehokler Services immedi-on account rather than receive stock certificates. Shareholders ately.This will assure that an unauthorized person is prevented from enrolled in the Safekeeping program receive a safekeeping receipt transferring your shares. An indemnity bond must be purchased by in place of a certificate. Reinvestment of dividends is not required the shareholder to replace stock certificates.The cost of the bond is to take advantage of Safekeeping. two percent of the current market value of the stock To recesse additional information about the Plan, please contact CONTACTING SHAREHOLDER SERVICES: Telephone: DIRECT DEPOSIT OF DMDENDS Toll. free number: 800-527-2495 Western Resources ofTers, at no charge, the option of direct ha thcTopeka area: 785 575 6394 (FAX 785-575-1796) deposit of dividends. Quarterly dividend payments are deposited Address: directly to your bank account the same day the dividends are paid. Western Resources Participating shareholders receive a record of the transaction. I Shareholder Services Applicatiom for this service are available from Shareholder Services. P.O. liox 750320 The form must be receised at least 30 days prior to the disidend J Topeka, KS 66675-0320 Payment date. E mail Address: sharsves@wstnres.com DUPLICATE MAILINGS Please include a daytime telephone number in vuur correspondence. To eliminate duplicate mailings, possibly because of stock registered in more than one way, please contact Shareholder Services. Western CONTACTING INVESTOR RELATIONS: Resources is required, by law, to create a separate account for each Telephone: 785-575-6549 (FAX 785 575-8160) name when stock is held in similar but difkrent names (e.g. John A. Smith, John Smith, John A. Smith & Mary Smith JTTEN, etc.). Help james A. Martin us reduce mailing and record keeping costs by consolidating 'your Vice President, Investor Relations and Strategic Planning accounts. Western Resources - P.O. llox 889 STOCK TRANSFER AGENTS AND REGISTRARS Topeka, Kansas 66601-0889 PRIMARY TRANSFER AGENT: CO-AGENT: 3 E-mail Address:investrel@wstnres.com % tern Resources,Inc. Continental Stm kTransfer i Shareholder Services & Trust Company i Cop.ics of the Form 10.K Annual Report to the Secun.. ties and P.O. Ilox 750320 2 Broadway,19 Floor Exchange Commission and other published reports can be obtamed Topeka, Kansas 66675-0320 New York,' New York 10004 1 without charge by contacting Im l h l ddress or by accessing the company;estor Re ations at t e a 7ve as home page on the mternet at i Telephone: 800 527-2495 http:/ / www.wstures.com. TRUSTEE FOR BONDS PrincipalTrustee, Paying Agent, and Registrar liarrisTrust and Sasings Bank i 11 West Monroe Street Chicago, Illinois 60603-4003 Call collect 312-461-6838 0 m .,_ m, w _,. ~.,

e 4 d .j -

Highlights of the Year adollarn in thousands except per e. hare amountn 6 1998 1997 m Electric operating revenues 3 938,943 g93,943 Net income 120,722 76,560 Earnings available for common 116,838 72,771 Average number of shares 61,883,973 61.894.863 Per common share; Earnings g nggi g i,jg, Dividends 1.64 1.62 llook value g 4,4 3 g 34,39 Year-end stock price 29 Y. 29 b Iteturn on year-end common equity 339 y; 84 80 " 87 "" Common dividend payout 87'i 1379 Utility capital expenditures 119,540 124,734 Electric Operating Revenue "'"""'""""'d"""" Electric plant $ 3,576,490 $ 3.502,796 Selected statistics; Itetail megawatt-hour sales 13,441,850 12.689,173 Peak load - summer imm i 3,175 3.044 Peak load - winter imw n 2,117 2.002 Average number of retail customers 447,898 443.038 3 Number of common shareholders 22,070 24.300 3- ,$a tj E t c ~ ~ Capitalization i9 of totab 3 Common equity 47'i 43'1 5 Preferred stock 5'i 49 Mandatorily redeemable preferred securities Wi 7% long-term debt' 409 469 ' Refe< tn $0.20 per ulaux < harges for merger related costs ' ReRects $0 59 per share chargen for merger triated costs ' bcludes current maturntwa 94 95 W 97 98' Earnings Per Share & Dividenn - Ib'fhtta n $U 22 per nhare rhatge for e e.u of a valuettur) early triirenwrit program Certa,n Forward-Look,ng Inf ormat,on wn-u$o m -~he-rorn - - a ma ~ u i i i - Ib necia $0 59 ser share for merger rel eted eineta Statements made m this report which are not based on hintoncal facta are forward lookmg and. ~ ""I"""*" accordmgly, myolve risks and uncertamties that could cause actual results to differ matenally from those dincusaed. Any forward-huskmg statement > are mtended to be an of the date on w hich enth statement in made. In connectmn with the safe harl=ir prousions of the l'rnate Secunties latigatmn Reform Act of 1995. we are providmg the following miportant factors that could caune actual reautta to differ materially from pronded forward-lookmg mformation. These unportant facturn include s ai oiland the proposed Western Renourcen Inc. < Western Resources > merger isee Note 12 of the Consohdated N"'"jf ""* Fmancial Statementai; tb> future economic conditmns m the regional. natmnal and international market; (c) state, federal and foreign regulatmn and poenable additional reductmn* m regulated Nuclear Cual electne rates; dd 6 weather conditionn; sei fmancial market conditmna, meludmg but not hnuted to str. airs changen m interent raten; < ft mflatmn rates; <gi mcreased competition, meludmg, but not hnnted to, the deregulatmn of the l'mted States electne utihty industry. and the entry of new competitorn_ t hi abibty to carry out marketing and sales plann; sil utnhty to achieve generatmn plannmg goal, and the occurrence of unplanned generstmn outagen; W nuclear operatwnm s ki ability to enter new markets successfully and capitahre on growth opportunitien in nonregulated hurmennem <h unforeneen events that would prevent cor*ectmg internal or external information systemn for Year 2000 problems and im i adverne changen in appbcable laws, regulations ir rulen governing emiron-mental s meluding air quahty regulational, tax or accounting matters Than het of factors may not he all melunite smce it in not possible for up to predict all possible factor *- fuel Mix to Total BTU Cenerabot. Coallo kl ser nulkon Htu Nudear $o e ger nulhon litu Ratem neernve $o 77 per nulhon lito ))iern's a idtla Xanaah (dy Ut allD{ Ma

Message to SharehoIders To Our Shareholders: and lower than expected revenues. However, KLT Inc.'s prospects for 1999 and beyond We continued to reshape Kansas City Power continue to be very positive. & Light Company last year in preparation for the exciting changes taking place in our KLT Inc 's Energy Senices subsidiary industry. We are pleased to report significant recently helped form Nationwide Electric Inc., progress toward our long-tenn financial and an aggregator of electrical contracting and strategic business plans, adding value maintenance companies servicing ) and diversity to your investment, commercial and indu.strial serving customers well, grow. clients. ing our markets efficiently gg and ensuring a successful transition to a competitive lis cu t indusny ciwnga marketplace. )(CA f a..1ucus.1[u!!q lu tnhty 7" '" Financial results for the year were solid. Earnings in 1998 climbed to $1.89 per Expectations from customers, investors and share, from $1.18 in 1997, primarily due to employees are growing, and we are responding a very successful year in our core electric to those we serve. KCPL capitalizes on oppor-business. Retail sales of electricity were six tunities to better serve cumomers in its mass percent ahead oflast year, w hile retail markets through alliances and other business revenues climbed four percent; revenues were arrangements. These opportunities enhance impacted by a rate reduction for our Kansas customer service by bringing to market the customers. A proposed rate reduction for products and senices our customers want. Missouri customers is scheduled in 1999. In our custom markets, KCPL is meeting and The economy in our area remains robust, beating the competition ihr energy-related dnving a strong electric-senice market and contracts where choice exists. KCPL creates growing our customer base at a healthy growth in shareholder value by leveraging rate each year. its resources, products and relationships in these markets. KLT Inc., one of KCPL's nonregulated subsidiaries, contributed slightly less to Last year was a pivotal year on the merger consolidated earnings than la.st year, due to front. Ily a large majority, shareholders the write-off ofinternational power projects approved the merger proposal to combine the ]hsu a a Idlls Xanas (dy in au cf as

ekctric utility assets of KCPL and Western to the Company spanned six decades, and Resources into a new electric utility - Westar we owe him our deepest gratitude. Energy. KCPL shareholders would receive ur people are a critical element in achieving stock in two companies: Western Resources, a I " ^# * "' " "* P "J""" diversified consumer pmducts company with n an mmpt ry manner through-pe inne a strong gmwth profile, and Westar Energy, enh of employees' skills, ou Fa w a larger ek etric utility poised to compete in ideas and knowledge converged to increase a changing industry. We began the regulatory approval process on state and federal levels in L. Employees' ongoing work an 1998 and hope to complete the merger by the to num computer and system compatibility end of 1999. for the Year 2000 is just one example of their As the company continues to change the way commitment to company goals. it conducts business, we are also experiencing Awn ry pmpares fbr major changes a natural evolution in management. Bernie in the years ahead, KCPL is helping policy-Beaudoin, fbrmer Executive Vice President m enn ne an appmpriate transition to and CFO, was named KCPL's new President competition. State commissions in Missouri and elected to the Board of Directors effective nd Kansas are studying information on January 1999. Bernie brings to his new adon ga a fmm task ihrees; position a diverse mix of financial and inever, an official timeline under which the administrative experience, both essential to wo a sw mow o deregulate has not continued success in a changing industry, Bernie will be responsible fbr KCPL's internal operations and its transition to Westar We look forward to another challenging year in Energy. He will continue to focus on main. 1999 as we continue t o differentiate ourselves taining the superior operations of KCPL and from other utilities, form promising partner. the successful implementation of our strategic ships for growth and maintain our customer business plans. focus. We appreciate your confidence and u nw m long-term initiatives. Arthur Doyle, fonner KCPL Chainnan of the Board, is retiring from the Board this year after For the Board of Directors, more than 22 years as a Director. Art retired AV m " ' " ~ ~ from full-time employment in 1968. His service 2% > a in Xawu C4 in att 4 u

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b Differentiation What makes KCPL so difTerent? It's our customers - residential, commercial and people and the way we treat our customers. industrial - that if our service is not to The diversity of our people is our greatest their satisfaction, we make it right. Our strength. Their many skills, abilities, back-employees are empowered to write out a grounds and levels of experience help KCPL check on the spot if there's a problem. And to serve its customers in ways other utilities that's a promise. haven't yet imagined. We know that we It's this same kind of thinking that brings need to do more than stand out from the about many new, innovative ideas at KCPL. rest; we need to be outstanding. By thinking difTerently, our employees initi-In 1995, KCPL's Promise Program began ate many forward.looking ideas. KCPL was the rise to higher levels of customer service. one of the first utilities in the country to This program makes a promise to all employ CellNet technology to automate its .]hans a Lute xuuas C4 in attet u

Our emplespcs maLo lhe dif(crems. d Va - l VEi1CIS CREEN Ot XCM wc wchl haul tv ;ncrids fin higheu ! sect rf notemt > satisfactan r s ws pay le malt il tight )bO! A Cla % l:H M AC. I .n.: - x 4,,;7.

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Differentiation distriluttion system. CellNet, an advanced On the operations side,1998 was a very wireless information technology, provides successful year, lletail sales climbed to customer and usage infbrmation that will unexpectedly high levels, and our employees bring to KCPL a significant competitive worked diligently to meet the increased advantage in the future. demand. Total system plant availability, including Ibuil-fueled plants and Wolf Innovative fuel procurement practices Creek nuclear plant, was 859, consistently enable KCPL to be one of the lowest-cost above an industry average of 814. producers of energy in the region. The transfer of ownership of Kansas City, Underlying our successes are a fi w simple Missouri's streetlights to the City of values: to maintain integrity and excellence Kansas City establishes a new business for in all we do; to dedicate ourselves to superior KCPL to provide lighting services here in customer relationships; *n commit ourselves our area and in other parts of the country. to long-term profitability and growth; to Our information technology group strives work to improve the community around us; l ihr innovation and excellence ir. technology, and to treat each other with mutual respect continually searching for new ways to and fairness and embrace our differences. enhance our service to customers. Our goal is to continue to be a company customers respect. ]heu 4 a Lute Xanuu ('ay in anef a

Castomer Foeus Customers' expectations of their electric The Business Center is a very successful provider are growing, and at KCPL we are initiative implemented in 1998, developed to growing to meet the challenge. Competition proactively serve KCPL's top 700 commercial for retail electric sales has not yet entered and industrial customers. Comprised of a our service territory, but that's not stopping team of energy experts, this group is available us from developing and offering a broad during expanded hours to provide quick, mix of energy-related products and service focused responses to customers' energy needs e solutions that satisfy customers' needs while and offer business solutions through an array diversifying KCPils revenue stream. From of products and services. consumer surge protection products to Currently, the Business Center provides this comprehensive energy consultations, KCPL personalized, value-added senice to KCPL's has the solution. larger commercial and industrial customers. Jhars e a littin Xansas City in aff of a

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4 MICH AEL MILLER t ']hc &uimn (snis s (rtidEA cn culltms ts nesds ichile tuddarq ulatieruhips (cs a crmpclitive (ulins Customer Focus The goal of the ilusiness Center is to expand heating, cooling, plumbing, home warranties, its customer base to include more commercial senice contracts and more. and industrial customers, with increased IISS, through its investment in ll.S. communication through a future web site Andrews Enterprises t RSAE), is meeting and informational newsletter customer needs neross the country as it e llome Senice Solutions Inc. (llSSi, KCP11s builds a network of home senice companies newest nonregulated subsidiary, is i.elping nationwide. Worry Free Senice*, now also i grow KCPL in another direction - residential under IISS, bundles replacement equipment, i products and services. IISS owns and invests preventive maintenance and repairs of in companies providing products and service residential and small commercial heating, solutions to residential customers, focusing on cooling and ventilation equipment into a one-stop worry free solution. ]ku 4 a twta xauas C4 & attof a

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1 pm Partnerships An elTective partnership brings together providing customers with cost-saving energy groups whose strengths complement each solutions that improve their businesses and other and add value to the relationship. KCPL bring them a distinct competitive advantage. seeks out the opportunity to partner with all These partnerships will strengthen KCPUs of our customers, from our largest industrials position in a deregulated environment and to the many residential customers we serve. enhance KCPUs value to customers. These partnerships bring to customers the Our customers benefit also from another long-energy-related products and services they told held partnership we value and nurture - our us they want and build a loyal customer base partnership with the greater Kansas City in preparation for competition. community. KCPUs countless community KCPL plugs into the needs ofits larger investments provide education opportunities commercial and industrial customers by (br children, development opportunities for Jheu a a taa xvuas (4 in anelu

We bdicco in the powa el cut pecph. l 1 .L a ADELE LISK0 ERAINA ASEME VICTOR POIRIER i 9 Out lasgo ualcmiu ivcl "Wc u y } u c.Si wac " '1CA1 palm u witir b y le RCAf as a pinino ic inic.s the we ny cu! rf casunwoty initiativa such as hcfp thu'1 haincasa tan mauttnining spun hems ^s Schncs ('ily at 'linirn,Slatirn vtr sc 1[jichn!!y ' ) caling and ccelwg.sy stwt ' a critu?g cd.p schnn sduratirn cntop sisc cuattdiy ths Xivuas (ity 1Mauan and its pusiAni D 1. Taric{licir }llGtt 4 0 $illl9 ND}tAQJ { $4 99 R$$Df MA. 5 ^

E_. ,4 .y i)c N I Parinerships area youth, environmental aid, preservation opportunities to KI.T Inc. This strategy is of Kansas City's history and more. One such an ef4ctive means of achieving even greater inu+tment is helping to bring Science City to growth Ihr the consolidated company. the people of Kansas City. Initially a dream of Investments in telecommunications, oil those at the Kansas City Museum, Science and gas development and production, energy City will be an educational and entertaining services and aflbrdable housing are included experience ihr the community, hou. ed in the in Kl.T Inc/s diversified portfblio of businesses. reno cated historic Union Station. These investments provide significantly higher Kl.T Inc., a w holly-owned nonregulated growth in shareholder value than KCPils subsidiary of KCPL, partners with a variety regulated busines.4 and capitahze on the of businesses whose access to new and competencies KCPL demonstrates. emerging markets prmide future growth e b; k ip r 3 GhG O Q $4$$h QMARO fl$y 4M di i 84 0 t

Officers and Directors KCPL Officers

• KLT Inc. Officers' Board of Directors Drue Jennings,52 Ronald G. Wasson,54 Drue Jennings*

Chairman of the Board and President Chairman of the lloard and Chief Executive Omcer 1995 Chief Executive Omcer 1980 Mark G. English,47 Bernard J. Beaudoin Bernard J. Beaudoin",58 Vice President - President President General Counsel and Dr. David L. Bodde 1984 Corporate Secretary Charles N. Kimball Professor of Technology 1995 Marcus Jackson,47 and Innovation at the Bloch School of Executive Vice President and David M. McCoy,51 11usiness and Public Administration. Chief Financial Omcer Vice President - University of Missouri-Kansas City 1989 Business Development William 11. Clark

• 1996 John J. DeStefano,49 President, Senior Vice President -

Floyd R. Pendleton,55 Urban league of Greater Kansas City llusiness Development Vice President - commuruly sert ice agemy 1989 llusiness Development Robert J. Dineen 3992 Jeanie Sell Latz,47 Chairman of the flourd, Senior Vice President - James P. Gilligan,42 layne Christensen Company Corporate Services. Treasurer drilling scrcices company Corporate Secretary and 1997 Chieflegal Omcer Arthur J. Doyle ' Teresa Cook,38 Itetired Chairman of the Board 3993 Controller W. Thomas Grant 11 Frank L. Branca 51 1997 Chairman of the lloard, President and Vice President -

• Lishng includes name, ude Chief Executive Omcer, Production and year named KLTinc. officer.

LalDne,Ine. 39g9 a ventralized laboratory that markets Charles R. Cole,52 clinical, substarwe abuse and insurance Vice President - Laboratory scrcices Customer Services George E. Nettels, Jr. 3999 Chairman of the Ibard, Doug M. Morgan,56 Midwest Minerals, Inc. Vice President - construction mineralprewessing Informatnan Technology and quarry operahans 1994 President, Yampa liesource Associates, Inc. Richard A. Spring,44 Vice President - Dr. Linda ihod Talbott i Transmission & Environmental Services President, 1994 Talbott & Associat s C""""I"'"'" I" ""'## # P ""

• i"#-

1. l Bailus M. Tate Jr.,52 phdandaropu management and dmlopment Vice President -

to foundahans and corporahons fluman itesources Chairman. Center for Philanthropic 3994 Iradership i Neil Roadman,53 Robert 11. M,est* Controller Chairman of the Board, 1980 llutler Manufacturing Company Andrea Bielsker,40 supplier of non-residential building Treasurer systems 1996 ' Member, Executsee Committee

• Listing includes age, title "Mr. Ihryle retires (nan the lhard a nd year promoted to officer.

sn May 1999.

• • Mr. Beaudoin twcome Prrsident in,lanuary 1999.

]heu a a Idtim Xansas (4 k allof as

{ } M a n a g e ni e n t ' s Discussion and Analysis of Finaacial C e a ditie n aad Results ef 0peratiens 14tatus of Merger in Kansas and Missouri in 1999, we do not anticipate See Note 12 to the Consolidated Financial any comprehensive legislation passing in 1999. Statements for the current status of the proposed In Kansas, a retail wheeling task force, formed by Western Resources Inc. (Western Resources) the legislature, proposed a restructuring bill that merger, in December 1996 the Federal Energy would implement retail competition on July 1,2001. Regulatory Commission (FERC) issued a statement Two of the key points were: 1) the Kansas concerning electric utility mergers. Under the Corporation Commission (KCC) would determine statement, companies must demonstrate that the amount of under-utihzed assets (stranded costs) their merger does not adversely affect competition each utility would be allowed to recover and or wholesale rates. As a result, FERC may consider

2) a unit charge per kwh would be assessed to all a number of remedies including transmission customers for recovery of competitive transition upgrades, divestitures of generating assets or costs (such costs include stranded costs, other formation ofindependent system operators.

regulatory assets, nuclear decommissioning, etc.). Regulation and Competition In Missouri, a retail wheeling task force formed As competition develops throughout the electric by the Missouri Public Service Commission (MPSCI utility industry, we are positioning Kansas City issued its report in May 1998. The report identified Power & Light Company (KCPL) to excel in an issues and various options for the legislature to open market. We are continuing to improve the address. Also, a legislative committee has been eiTiciency of KCPL's electric utility operations, formed to study the issue, lowering prices and offering new services. In particular, KCPL's value-added services for Retail acecas could result in market-based rates large energy users now include contracts for below current cost-based rates providing growth natural gas commodities, opportunities for low-cost producers and risks for higher-cost producers, especially those with Competition in the electric utility industry accel-large industrial customers. Lower rates and the erated with the passage of the National Energy loss of major customers could result in stranded Pulicy Act of 1992. This Act gave FERC the authority costs and place an unfair burden on the remaining to require electrie utilities to provide transmission customer base or shareholders. Testimony filed in line access to independent power producers (IPPs) the merger case in Kansas indicates stranded costs and other utilities (wholesals wheeling). In April of approximately s1 billion for KCPL. An indepen-1998 FERC issued an order requiring all owners i dent study prepared at the request of the KCC e i of transmission facilities to adopt open-access tariffs concluded there are no stranded costs. We cannot and participate in wholesale wheeling. We made i predict whether any stranded costs would be the necessary filings to comply with that order. recoverable in future rates. If an adt4: ate and FERC's April 1996 order encouraged more fair provision for recovery oflost revenues is not movement toward retail competition at the state provided certain generating assets may have to level. An increasing number of states have already be evaluated for impairment and appropriate adopted open access requirements for utihties' charges recorded against earnings. In addition to retail electric service, allowing competing suppliers lower profit margins, market based rates could access to their retail customers (retail wheeling). require generating assets to be depreciated over Many other states are actively considering retail shorter useful lives, increasing operating expenses. wheeling including Kansas and Missouri. While KCPL is positioned to compete in an open market retail whechng legislation is likelj to be introduced with its diverse customer mix and pricing strategies. vtanapment4 etumi a andnaatph O

Industrial customers make up about 21% of KCPUs development and production, telecommunications retail mwh sales, well below the utility industry and affordable housing limited partnerships. average. KCPils flexible industrial rate structure KCPUs equity investment in KLT was $119 million is competitive with other companies in the region. as of December 31,1998 and 1997. KLTs net income in addition, we luwe entered into or are negotiating for 1998 totaled $4.6 million compared to $6.0 long-term contracts for a large portion of KCPUs j million in 1997. KLT's consolidated assets at industrial sales. Although no direct competition i December 31,1998, totaled $311 million. for retail electric service currently exists within KCPUs service territory, it exists in the bulk power In 1998, liome Service Solutions Inc. (HSS), a new market and between alternative fuel suppliers wholly-owned subsidiary of KCPL, invested in and KCPL. We also are currently encountering R.S. Andrews Enterprises, Inc. (RSAE), a consumer third party energy management companies services company in Atlanta, Georgia. RSAE seeking to initiate relationships with large users expects to make future acquisitions in other key in KCPL's service territory in an attempt to U.S. markets. Also in 1998, HSS formed Worry enhance their chances to directly supply electricity Free, Inc. and acquired the Worry Free non-if retail wheeling is authorized. regulated assets from KCPL. Worry Free Inc. pmvides residential services including preventative increased competition could also force utilities to maintenance and warranty services for heating change accounting methods. Financial Accounting and air conditioning equipment. KCPUs equity Standards Board (FASB) Statement No. 71 - investment in Home Service Solutions Inc. was Accounting for Certain Types of Regulation, opplies $21 million as of December 31,1998. to regulated entities whose rates are designed to recover the costs of providing service. A utility's Earnings Overview operations could stop meeting the requirements of Earnings per share (EPS) for 1998 of $1.89 FASB 71 for various reasons, including a change increased $0.71 from 1997. Continued load growth in regulation or a change in the competitive and warmer than normal summer weather in 1998 environment for a company's regulated services. compared to cooler than normal summer weather For those operations no longer meeting the in 1997 contribute d to the increase in EPS in 1998. requirements of regulatory accounting, regulatory An additional increase in EPS resulted from assets would be written off. KCPL can maintain l decreased merger expenses from $60 million its $135 million of ngulatory assets at December 31, I ($0.59 per share)in 1997 to $15 million ($0.20 1998, as long as FASB 71 requirements are met. per share)in 1998. Kansas rate reduction accruals = l decreased EPS $0.14. Additionally, increases in Competition could eventually have a materially depreciation expense decreased EPS for the year. adverse affect on KCPUs results of operations and financial position. Should competition eventually EPS for 1997 of $1.18 decreased $0.51 from 1996. result in a significant charge to equity, capital EPS decnased because merger expenses increased costs and requirements could increase significantly. from $31 million ($0.31 per share)in 1996 to $60 million ($0.59 per share)in 1997. The net effect Nonregulated Opportunities of the rate reductions approved by the MPSC KLT Inc. (KLTh a wholly-owned subsidiary of KCPL, pursues nonregulated business ventures. l lowered EPS for 1997 by an estimated $0.17. { i Additionally, increases in depreciation expense i in 1998, KLT sold the common stock of KLT l l decreased EPS for 1997. Partially ofTsetting these Power Inc., a wholly-owned subsidiary of KLT, t i decreases were continued load growth, lower i resulting in an after tax gain of approximately deferred Wolf Creek amortization and increased $2.4 million. Remaining ventures include subsidiary income, investments in energy services, oil and gas 17tanagamman knuien and &te a 0 i i

1 c Megawatt Hour (Mwh) Sales and Electric Operating Revenues Sales and Revenue Datz Increase (Decrease) from Prior Year 1998 1997 Mwh Revenues Mwh Revenues (revenue change in millions) Retail: Residential 8% $ 19 5% $9 Commercial 5% 13 4% (1) Industrial 4% 3 (4)% (3) Other 8% (4) 1% (3) htal retail 6% 31 3% 2 Sales for resale: Bulk power sales 8% 11 (22)4 (12) Other 4% 19 % 1 %tal 42 (9) Other revenues 1 1 htal electric operating revenues 8 43 $(8) The KCC approved a rate settlement agreement, On January 20,1999, a stipulation and agreement efTective January 1,1998, authorizing a $14.2 among KCPL, the MPSC staff and public counsel million annual revenue reduction and an annual was filed with the MPSC subject to approval by increase in depreciation expense of $2.8 million. the MPSC. The essential components of the Pending the approval of a new Kansas rate design, stipulation are as follows: we accrued, for refund to customers, $24.2 million

• Commencing with electric service provided during 1998. The new rate design was approved on or after March 1,1999, KCPL will in December 1998 and directed KCPL to refund, reduce its annual Missouri electric rev-starting March 1,1999, the $14.2 million we e ues by 3.2 percent, or about $15 million.

accrued plus the amount that we accrue for

• The parties will not file a request for an

1. 1. '" 5" January and February 1999. The accrual for the refund of those rates, before the earlier of rate refund is recorded in Other in Current September 1. 2001, or the closing of the Liabilities on the Consolidated Balance Sheet

• KCPI/ Western Resources merger; such rates During 1996 the MPSC approved a stipulation and I e

agreement authorizing a $20 million revenue March 1, 2002, or one year following clos- ,mg of the merger. reduction in two phases and increasing depreciation and amortization expense by $9 million per year.

• In the merger case, staff and public coun-sel reserve the right to recommend a rate In July 1996 we implemented phase one and reduction, upon closing of the merger, as a reduced revenues from commercial and industrial condition of Commission approval of an customers by an estimated $9 million per year.

alternative regulatory plan. They also The second phase of t.his stipulation, implemented reserve the right to recommend rate reduc. January 1,1997, further reduced Missouri tions that would be efTective no sooner residential, commercial and industrial revenues than one year following closing of the by an estimated $11 million per year. "F"- ?!!anapmenta mimua= andstaatyna O

I Warmer than normal summer weather and con-i and customer conservation efforts. Competition, tinued load growth increased retail mwh sales in l including alternative sources of energy such as 1998 compared with 1997, Load growth consists natural gas, co-generation, IPPs and other electric of higher usage per customer as well as new utilities, may also afTect future sales and revenue. I customer additions. As a result of the warmer Fuel and Purchased Power weather KCPL set a new summer peak demand Combined fuel and purchased power expenses for for the consumption of energy of 3,175 megawatts. 1998 increawd 79 from 1997 while total mwh sales Less than 19 of revenues include an automatic (total of retail and sales for resale) increased by fuel adjustment provision.

69. The price per unit of purchased power increased Other retail revenues in 1998 decreased from 1997 in 1998 compared to 1997 due to decreased while Other retail mwh sales increased reflecting purchased power availability and the widespread the sale of the public streetlight system to the

! use of market-based rates in the competitive I City of Kansas City, Missouri in August 1997. ! wholesale market. Even with the increase in the i KCPL reduced the rate per mwh paid by the City price per unit of purchased power, KCPL's price as a result of the sale agreement. The new rate per unit of total generation and purchased power is for electricity only while the old rate was for in 1998 remained consistent with 1997. Purchased electricity and equipment charges. The City power expenses include capacity purchases that I entered into a separate maintenance agreement 1 provide a cost-effectise alternative to constructing with KCPL when it purchased the atmetlight system. new capacity. Purchased power expenses also j Retail mwh sales for 1997 increased 34 over 1996 expenses incurred during the llawthorn 5 and while retail revenues remained relatively flat [ LaCygne 1 generating units outages. due largely to the Missouri revenue reductions l discussed above. Industrial sales and revenues Combined fuel and purchased power expenses for declined primarily due to reduced sales to a major 1997 remained consistent with 1996 levels while industrial customer as a result of a strike by its total mwh sales decreased by 3%. Purchased employees. Summer temperatures in 1997 and 1996 f power expenses increased by about $7 million in were below normal. Despite this mild weather, i 1997 over 1996 as KCPL incurred additional retail mwh sales increased due to load growth. ! replacement power expenses during outages at the LaCygne generating units in 1997. The cost I Bulk power sales vary with system requirements, per kwh for i archased power was significantly generating unit and purchased power availability, higher than the cost per kwh of generation. fuel costs and requirements of other electric systems. The price per mwh and quantity of bulk power Nuclear fuel costs per MMilTU remained sub-sak s inemased in 1998 compared to 1997 increasing stantially less than the MMilTU price of coal. bulk power revenues. Partially ofTsetting this Nuclear fuel costa per MMBTU decreased 69 i increase are decreased bulk power revenues due ' during 1998 and increased 19 during 1997. to an outage at the llawthorn 5 generating unit in Nuclear fuel costa per MMBTU averaged about 1998. Outages at the LaCygne 1 and 2 generating ! 60% of the MMBTU price of coal for the last three units in the second quarter of 1997 contributed years. We expect the price of nuclear fuel to to lower bulk power mwh sales in 1997. l remain fairly constant through the year 2001. ! During 1998 fossil plants represented about I Future mwh sales and revenues per mwh may be l 709 of total generation and the nuclear plant aflected by national and local economies, weather j about 304. During 1997 fossil plants represented l m-,-~~s awn 9

about 74% of total generation and the nuclear Wolf Creek costs became fully amortized in plant about 26%. December 1996. This amortization totaled about The cost of coal burned declined 5% in 1998 compared to 1997 and declined slightly in 1997 Taxes compared to 1996. KCPils coal procurement Operating income taxes decreased $9 million in strategies continue to provide coal costs below the 1996 compand to 1995. The decrease was primarily regional average. We expect coal costs to remain due to adjustments reflecting the filing of the fairly consistent with 1998 levels through 2001. 1995 tax returns and the settlement with the ~ Internal Revenue Service (IRS) regarding tax Other Operation and Maintenance Expenses issues included in the 1985 through 1990 tax Combined other operation and maintenance returns. Operating income taxes increased by expenses for 1998 declined slightly from 1997 due $3 million in 1997 from this lower than normal to lower non-fuel production operations and lower 1996 level. Operating income taxes increased administrative and general expenses, partially $8 million in 1998 compared to 1997 reflecting omet by increased advertising expenses. Combined higher taxable operating income. other operation and maintenance expenses for 1997 Components of general taxes: increased from 1996 due largely to increases in 1998 1997 1996 system dispatch, customer accounts expenses and (thousands) Wolf Creek non-fuel outage-related operations. Property $ 41,398 $ 43,529 $ 45,519 Gross receipts 42,140 40,848 42,554 ' We continue to emphasize new technologies. Other 10,048 8,920 9,175 improved work methodologies and cost control. Tbtal $ 93,586 $ 93.297 $ 97,248 We continuously improve our work processes to Property taxes decreased in 1998 compared to 1997 provide increased efficiencies and improved reflecting changes in Kansas tax law which operations. Through the use of cellular technology reduced the mill levy rates and lower Missouri and more than 90% of KCPils customer meters are Kansas property tax assessed valuations in 1998. read automatically. Property taxes decreased in 1997 compared to Depreciation and Amortization 1996 reflecting changes in Kansas tax law which The increase in depreciation expense in 1998 reduced the mill levy rates. Gross receipts taxes compared to 1997 reflected the implementation increased in 1998 compared to 1997 reflecting of the KCC settlement agreement as well os higher billed Missouri revenues. normal increases in depreciation from capital Other Income and (Deductions) additions. The KCC nettlement agreement, Miscellaneous income and (deductions)- net effective January 1,1998, authorized a $2.8 million includes the following significant items: annual increase in depreciation expense. Year Ended December 31 1998 1997 1996 The increase in depreciation expense in 1997 (millions) compared to 1996 reflected the implementation Merger-related expenses $(15) $(60) $(31) of the 1996 MPSC stipulation and agreement as KLT* (22) (16) (10) Other (5) (3) (9) well as normal increases in depreciation from capital additions. The stipulation and agreement, and (deductions) - net $(42) $(79) $(50) effective July 1,1996, authorized a $9 million annual increase in depreciation expense at ulmt taxes and interrut chargen una about $5 millwn in the same time the Missouri portion of Deferred 1998. $6 million in 1997 and ($11 million in 1996. 9 Management's Giusujen and Analysia O

l Merger-related expenses in 1998 included costa l in tax credits and reduced net income resulted associated with the new and abandoned Western l in a significant impact on the efTective income Resources merger structures. Merger-related I tax rate in 1997. Accrued taxes on the balance expenses were higher in 1997 due primarily to the sheet at December 31,1997, were lower than nor- $53 million payment to UtiliCorp United inc. l mal because $9 million of these tax credits did (UtiliCorp)in February 1997. The September 1996 not reduce estimated tax payments since these termination of the UtiliCorp merger agreement amounts could only be refunded by the IRS after and the February 1997 merger agreement with l the 1997 tax return was filed in 1998. Non-tax. Western Resources triggered the payment to j able increases in the cash surrender value of cor. UtiliCorp under provisions of the UtiliCorp porate-owned life insurance contracts also affect-merger agreement. Merger-related expenses in ed the relationship between miscellaneous 1997 also included $7 million of costs associated income and (deductions)- net and income taxes. with the abandoned Western Resourres merger Interest Charges i structure. long. term debt interest expense decreased in 1998 KLT's 1998 operations were afTeeted by the compare <l to 1997 reflecting lower average levels following significant factors: of long-term debt outstanding. The lower average

• The gain on the sale of the common stock levels of debt reflected $61 million in scheduled of KLT Power Inc. of $4 million.

debt repayments made by KCPL in 1998.

• A $9 million loss on a KLT equity Lcmg-term debt interest expense increased in 1997 investment in Digital Teleport, Inc.

I (DTI) due to developmental costs l compared to 1996 reflecting higher average levels Henn e ng. W @r amage l levels of debt maulted mainly fmm financing by KLT incurred by DTI in 1998. i

• KLT's $6 million write down ofits invest-ment in a power station in China. After j to support expanding subsidiary operations and this writeofi, KLT has no other recorded funding of other corporate capital requirements.

assets in foreign countries. The average interest rate on long-term debt, 1 Miscellaneous (deductions) from KLT increased , including current maturities, was about 64 during $6 million in 1997 compared to 1996 primarily l the last three years. l We use interest rate swap and cap agreements to due to increased costs due to increased oil and gas development and production, g g gg; g i ~ Other Income and (Deductions)- Income taxes ; of KLT's variable-rate, bank credit agreement and { reflect the tax impact on total miscellaneous KCPL's variaHe-rate,long term debt. Although income and (deductions)- net. Additionally,

these agreements are an integral part ofinterest we accrued tax credits of $25 million in 1998 and rate management, the incremental effect on f

$23 million in 1997 related to KLT's investments l interest expense and cash flows is not significant, We do not use derivative financial instruments in affordable housing limited partnerships and oil and gas investments. In 1996 we accrued tax { for speculative purposes. credits of $12 million related primarily to KLT's Mandatorily redeemable Preferred Securities investments in affordable housing limited i interest expense reflects interest charges incurred partnerships. Tax credits in 1997 increased on the $150 million of 8.39 preferred securities reflecting an $8 million increase in tax credits i d in WH 1991 related to oil and gas investments. This increase f i Anatal'b &iMMAAion ad Anniyaib O

x._________ i i ower and other costs. Although not expected, Wolf Creek p Wolf Creek is one of KCPils principal generating an unscheduled plant shut-down could be units representing about 164 ofits accredited l caused by actions of the Nuclear Regulatory generating capacity. The plant's operating j Commission reacting to safety concerns at the performance has remained strong, contributing plant or other similar nuclear units. If a long-about 26% of the annual mwh generation while term shut-down occurred, the state regulatory operating at an average capacity of 88% over the l commissions could reduce rates by excluding the last three years. Wolf Creek has the lowest fuel f Wolf Creek investment from rate base. cost per MMBTU of any of KCP11s generating units. ! Ownership and operation of a nuclear generating i During 1998 Wolf Creek generated more mwhs unit exposes KCPL to risks regarding decom-than in any previous year. i missioning costs at the end of the unit's life and to We accrue the incremental operating, maintenance l potential retrospective assessments and property and replacement power costs for planned outages j losses in excess ofinsurance coverage. These evenly over the unit's operating cycle, normally l risks are more fully discussed in the related 18 months. As actual outage expenses am incurred, sections of Notes 1 and 4 to the Consolidated { the refueling liability and related deferred tax Financial Statements. I asset are reduced. Wolf Creek's tenth mfueling and Environmental Matters maintenance outage is scheduled for the spring ( KCPIls operations must comply with federal, state of 1999 and is estimated to be a 40-day outage. and local environmental laws and regulations. Wolf Creek's ninth refueling and maintenance The generation and transmission of electricity outage, budgeted for 35 days, began in early l produces and requires disposal of certain products October 1997 and was completed in December 1997 l and by-products, including polychlorinated biphenyl (58 days). The extended length of the ninth outage l (PCIle), asbestos and other potentially hatardous was caused by several equipment problems, materials. The Federal Comprehensive Wolf Creek's eighth refueling and maintenance i Environmental Response, Compensation and i outage, budgeted for 45 days, began in early L Liability Act (the Superfund law) imposes strict February 1996 and was completed in April 1996 l joint and severalliabihty for those who generate, (64 days). The eighth outage started one month

transport or deposit hazardous waste. This liability early when the plant was shut down after water l extends to the current property owner as well as flow from the cooling lake was restricted by ice l prior owners

dnee the time of contamination.

\\ buildup on an intake screen. Actual costs of the 1997 and 1996 outages were $6 million and $2 l We continually conduct environmental audits designed to detect contamination and ensure million in excess of the costs estimated and j compliance with governmental regulations. accrued for the outages. Ilowever, compliance programs needed to meet new Wolf Creek's assets represent about 41% of utility l and future environmental laws and regulations total assets and its operating expenses represent governing water and air quality, including car-i about 199 of utility operating expenses. No i bon dioxide emissions, nitrogen oxide emissions, major equipment replacements are currently I hazardous waste handling and disposal, toxic sub-projected. An extended shut-down of Wolf Creek stances and the effects of electromagnetic fields, could have a substantial adverse effect on could require substantial changes to operations KCP11s business, financial condition and results or facilities (see Note 4 to the Consolidated of operations because of higher replacement Financial Statements). ) i m.,-n-:aam O

Impact of the Year 2000 Issue remediation, testing and monitoring efforts will The Year 2000 Issue has resulted from the use of be approximately $7 million. These costs will be computer systems and applications that use two expensed as incurred. digits instead of four to define the year. Computer Regarding the Wolf Creek Nuclear Generating programs with date-sensitive software could rec. Station, we believe we are in compliance with ognize the date of *00" as the Year 1900 rather the Nuclear Regulatory Commission's Year 2000 than the Year 2000. Unless corrected some computer regulations and will file the required status systems and applications could incorrectly process I response with the Commission before July 1,1999. information resulting in miscalculatwns or The Commission performed an on-site audit of system disruptione. l Wolf Creek's Year 2000 project plans in November We have assersed the potential of the Year 2000 l 1998, and no areas of concern were identified. Issue on KCPUs Information Technology (IT) and l Control systems at Wolf Creek utilize analog non-IT proceses and operations. Beginning in 1997, l componeras that are not date-sensitive which we established a Year 2000 team responsible for mitigates Year 2000 concerns relative to critical evaluating, identifying and correcting problems in operations of the plant. All assessments of afTected all critical computer software, hardware and systems are expected to be completed by the end embedded systems. We utilized both internal and j ef the second quarter in 1999 with remediation external resounes in this process. Because we have I being completed by the end of the third quarter. I invested approximately $56 million in new Year l The Commission guidelines are being followed in 2000 ready technologies over the past several years, l the development of contingency plans. we identified fewer issues than some companies. i l We initiated communications with all large suppliers The assessment of all of KCPUs mWor systems I and customers to evaluate KCPUs vulnerability to t impacted by the Year 2000 Issue has been completed failure of others to remediate their Year 2000 luues. and remediation efforts are well underway. We are While no major issues have been discovered, we substantially complete with readiness efTorts for cannot be certain their systems will not impact KCPUs myor processes with the exception of the KCPUs operations. Thus, we have developed a new customer information system. We expect the number of contingency plans to mitigate potential implementation of the new customer information problems with third party failures. For example, we j system and testing to be completed by mid-1999;, plan to increase the 1999 fuel inventory by 20% over however, as a contingency measure, the current ! 1998 levels in case coal delivery problems develop. customer billing system is being modified to be 1i The most reasonable likely worse case scenario Year 2000 ready in case installation of the new l system is delaved. l would be the loss or partialinterruption of KCPUs ) electrical system which is connected to other On an ongoing basis, we are sharing information f utihties throughout the United Statet and Canada, with other electric industry organizations such east of the Rocky Mountains. This interconnection as the Electric Power Research Institute in order is cuential to the reliability, stability and opera-to adequately anticipate and plan for potential tional integrity of each connected electric utility. problems. We will participate in two scheduled KCPL could encounter difficulties supplying electric industry-wide drills in April and September 1999. service if other interconnected utilities fail to The monitoring phase of KCPUs Year 2000 project achieve Year 2000 comphance and create an unstable will continue through at least the first quarter of condition on the grid. 2000. We believe the total costs of the awessment, 9Hanagement's kusion andanalysis O

We are addressing this and other potential

• Testing and ensuring functional Year 2000 risks by implementing a number of emergency radio systems are operational action plans including:

for generating stations.

• Preparing for the possibility ofisolating
• Working with kical authorities to establish a portion of KCPL electric systems from a means of communicating if telephones are disruption.

not available. l

• Participating in operating contingency
• Ensuring readiness to execute the generation plans and drills developed by the and systems black start procedures.

Southwest Power Pool and the North Proj,ected Construction Expenditures American Electric Reliability Council.

• Implementing and testing radio l Total utility capital expenditures, excluding allowance for funds used during construction, were communication for pemnnel manning

$120 million in 1998. The utility construction ) critical operation pointa. expenditures are projected for the next five years as follows: i Construction Expenditures: 1 1999 2000 2001 2002 2003 Total (milhonal Generating facilities $ 74 $ 49 $ 49 $ 39 $ 27 $238 Nuclear fuel 4 19 13 12 25 73 Transmission facilities 4 6 7 10 17 44 Distribution and _ eneral facilities 70 53 51 48 45 267 g Total $152 $127 $120 $109 $114 $622 This construction expenditure plan is subject to cor tinual review and change. Operating leases may be used to replace some of the above expenditures. l 9 %nagemanfe Osatassan and 42nalysia O

1 1 l I I \\ Capital Requirements and Liquidity l of proceeds from the sale of the common stock of l KLT Power Inc. Additionally, KLT made several KCPL's liquid resources at December 31,1998, ii large investments during 1997. Partially offsettir.g included cash flows from operations; $300 million i these activities, KCPL received $21.5 million of of registered but unissued, unsecured medium-term i proceds in 1997 from the sale of streetlights to the notes; $150 million of registered but unissued, City of Kansas City, Missouri at a minimal gain. 1 preferred securities and $281 million of unused bank lines of cmdit. The unused lines include KCPL's Cash used for financing activities increased in 1998, short-term bank lines of credit of $210 million and compared to 1997, due primarily to $103 million KLT's bank credit agreement of $71 raillion. of debt repayments. KLT used most of the proceeds from the sale of KLT Power Inc. to make payments KCPL continues to generate positive cash flows on its bank credit agreement. KCPL made $61 from operating activities. Individual components million in scheduled repayments of long-term debt of working capital will vary with normal business in 1998. Cash from financing activities increased cycles and operations such as the income tax refunds in 1997 due to proceeds from the issuance of $150 applicable to 1997 received during 1998. Cash from million of preferred securities and borrowings by KLT operating activities also incmased in 1998 compared on its bank credit agreement. The majority of cash to 1997 due to increases in net income and non cash from financing activities in 1997 was used to pay expenses. The majority of the increases in non-cash merger expenses and finance additional purchases expenses were due to the Kansas rate refunds ofinvestments and nonutility properties by KLT. accrued but not refundable until March 1999; losses from KLT's equity investment in Digital KCPL's common d vidend payout ratio was 874 in Teleport, Inc., a company developing a midwest 1998,137% in 1997 and 94% in 1996. The 1997 regional fiber optic network; and the refueling out. payout ratio is higher due mainly to $60 million age amrual. The timing of the Wolf Creek outage in merger-related expenses in 1997. also affects the refueling outage accrual, deferred We expect to meet day to-day operations, utility income taxes and amortization of nuclear fuel. I construction requirements and dividends with l Fuel inventories increased from December 31,1997, l internally-generated funds. KCPL might not be to December 31,1998, because coal inventory l able to meet these requirements with internally-levels were only at 75% of targeted levels at j generated funds because of the effect ofinflation December 31,1997, compared to 106% of targeted on operating expenses, the level of mwh sales, levels at December 31,1998. Construction work in ! regulatory actions, compliance with future progress increased $17 million from December 31, ! environmental regulations and the availabihty of 1997, to December 31,1998, because of continued generating units (see Note 14 to the Consolidated construction on production projects and system Financial Statements). The funds needed to retire softwam upgrades. Current maturities oflong-term l $392 million of debt that matures in the next five I debt inemased because KLTs bank credit agmement, years will be provided fmm oprations, refinancings or I expires in October 1999. short-term debt. KCPL may issue additional debt ) j and/or additional equity to financo growth or tak e Cash used for investing activities varies with the i i I advantage of new opportunities. timing of utility capital expenditures and purchases ! i l ofinvestments and nonutility properties. Cash used for investing activities decreased in 1998 compared j to 1997 partly due to KLT receiving $53 million i f l l mm-n em,aaan O o

i i i C o n s olid a t e d-S t a t e m e n t s of income Year Ended December 81 1998 1997 1996 (thousands) Electric Operating Revenues 8 938,941 $ 895,943 $ 903,919 Operating Expenses Operation Fuel 143,349 134,509 140,505 Purchased power 63,818 59,247 52,465 Other 188,991 191,897 180,719 Maintenance 70,998 70,892 71,495 Depreciation 115,452 110,898 103,912 Income taxes 78,782 71,113 68,155 I General taxes 93,586 93,297 97,248 Deferred Wolf Creek costs amortization 1,368 11,617 Tbtal 754,776 733,221 726,106 j Operating Income 184,165 162,722 177,813 Other Income and (Deductions) Allowance for equity funds used during construction 3,816 2,407 2,368 Miscellaneous income and (deductiona)- net (41,501) (79,421) (50,329) Income taxes 45,982 63,034 36,402 Total 8,297 (13,980) (11,559) Income Before Interest Charges 192,462 148,742 166,254 Interest Charges i Long-term debt 57,012 60,298 53,939 Short-term debt 295 1,382 1,251 Mandatorily redeemable Preferred Securities 12,450 8,853 Miscellaneous 4,457 3,990 4,840 Allowance for borrowed funds used during construction (2,474) (2,341) (1,947) Total 71,740 72,182 58,083 Net income 120,722 76,560 108,171 Preferred stock dividend requirements 3,884 3,789 3,790 Earnings available for common stock $ 116,838 8 72,771 8 104,381 Average number of common shares outstanding 61,884 61,895 61,902 Basic and diluted earnings per common share 1,89 1.18 1.69 Cash dividends per common share 1.64 1.62 1.59 Consolidated Statemenis oi Retained Earnings e Year Ended December 31 1998 1997 1996 (thounends) Beginning Balance $ 428,452 $ 455,934 $ 449,966 Net income 120,722 76,560 108,171 549,174 532,494 558,137 Dividends Declared Preferred stock - at required rates 3,980 3,773 3,782 Common stock 101,495 100,269 98,421 Endirg Balance $ 443,699 $ 428,452 $ 455,934 The accompanying Notes to Consolidated Financsal Statements are on integml part of these statements, l Qty & & Nght &Qay O c

= I i C a n's e l i d a t e d Balance Sheets December 31 December 31 1998 1997 (thousands) ASSETS Utility Plant, at Original Cost Electric $ 3,576,490 $ 3,502,796 less-accumulated depreciation 1,410,773 1,314,154 Net utility plant in service 2,165,717 2,188,642 Construction work in progress 110,528 93,264 Nuclear fuel, net of amortization of $105,661 and $86,516 40,203 41,649 Total 2,316,448 2,323,555 bgulatory Asset. Recoverable Tases 109,000 123,000 Investments and Nonutility Property 343,247 345,126 l Current Assets Cash and cash equivalents 43,213 74,098 Electric customer accounts receivable, net of allowance for doubtful accounts of $1,886 and $1,941 31,150 28,741 Other receivables 38,981 33,492 Fuel inventories, at average cost 18,749 13,824 Materials and supplies, at average cost. 45,363 46,579 Deferred income taxes 4,799 648 Other 5,926 7.155 Total 188,181 204,537 Deferred Charges Regulatory assets 26,229 30,017 Other deferred charges 29,259 31,798 Total 55,488 61,815 Total 8 3,012,364 $ 3,058,0't3 CAPITALIZATION AND LIABILITIES Capitalization (see statements) $ 1,880,147 $ 2,051,489 Current Liabilities Notes payable to banks 10,000 1,243 Current maturities oflong-term debt 163,630 74,180 Accounts payable 61,7C4 57,568 Accrued taxes 15,625 1,672 Accrued interest 23,380 22,360 Accrued payroll and vncations 21,684 23,409 Accrued refueling outage costs 12,315 1,664 Other 28,874 15,068 Total 337,272 197,164 Deferred Credits and Other Liabilities Deferred income taxes 625,426 638,679 Deferred investment tax credits 58,786 63.257 Other - 110,733 107,444 l htal 794,945 809,380 l Commitments and Contingencies (Note 4) %tal $ 3,012.364 $ 3,058,033 The acconpanying Nutn to Consolidated hnancial Statements are on integral part of these statements. 1 I $ 9 & &b & $D W ^W l 9 L

C e a s slid a t e d 5tateaeats ef C a pit alir a tie n December 31 December 31 1998 .1997 (thousands) Common Stock Equity Common stock-150,000,000 shares authorized without par value 61,908,726 shares issued, stated value 449,697 449,697 Retained earnings hee statementst 443,699 428,452 a-Accumulated other comprehensive income Unrealized gain on securities available for sale 74 1,935 l Capital stock premium and expense (1,668) (1,664) Ltal 891,802 878,420 Cumult.tive Preferred Stock. $100 Par Value 3.80%.100,000 shares issued 10,000 10,000 4.50% 100,000 shares issued 10,000 10,000 4.20%. 70,000 shares issued 7,000 7,000 4.35%.120,000 shares issued 12,000 12,000 No Par Value 4.27%* - 500,000 shares issued 50,000 50,000 $100 Par Value. Redeemable 4.00% 62 62 Total 89,062 89,062 Company-obilgated Mandatorily Redeemable Preferred Securities of subsidiary trust holding solely KCPL Subordinated Dehentures 150,000 150,000 Long-term Debt (excluding current maturities) General Mortgage Bonds ] Medium-Term Notes due 1998-2008,6.95% and 6.92% weighted-average rate 338,500 407,500 4.23%* EnvironmentalImprovement Revenue Refunding Bonds due 2012-23 158,768 158,768 Guaranty of Pollution Control Bonda 4.31% as of December 31,1997, due 2015-17 196,500 Environmental Improvement Revenue Refunding Bonde j 4.28%

• Series A & B due 2015 106,500 4.50% Series C due 2017 50,000 4.35% Series D due 2017 40,000 Subsidiary Obligations Affordable llousing Notes due 2000-06,8.42%

and 8.48% weighted-average rate 54,775 61,207 Bank Credit Agreement due October 31,1999, 6.67% weighted-average rate as of December 31,1997 107,500 Other Long-Term Notes 740 2.532 htal 749,283 934,007 Total $ 1,880.147 $ 2.051,489

• %riable rate senrities, weighted. average rate as of December 31,199&

The aceumpanying Notes to Consohdated Financial Statements are an integral part of these statements. M Cats M & M C==+=nq O

Coasolidated Statemenis of Cash Flows 4 l Year Ended December 81 1998 1997 1996 (thousands) Cash Flows from Operating Activities Net income $ 120,722 8 76,560 $ 108,171 Adjustmeats to reconcile net income to net cash from operating activities: Depreciation 115,452 110,898 103,912 Amortization of: Nuclear fuel 19,146 16,836 16,094 Deferred Wolf Creek costs 1,368 11,617 Other 9,071 8,223 5,50's Deferred income taxes (net) (2,468) 4,780 (8,662) Investment tax credit amortization (4,471) (3,850) (4,163) Losses from equity investments 11,683 2,748 3,268 Deferred storm costs (8,885) Kansas rate refund accrual 14,200 Allowance for equity funds used during construction (3,819) (2,407) (2,368) Other operating activities (Note 1) 23,144 (6,672) (7,582) Net cash from operating activities 302,663 208,484 216,909 Cash Flows from Investing Activities Utility capital expenditures (119,540) (124,734) (100,947) Allowance for borrowed funds used during construction (2,474) (2,341) (1,947) Purchases ofinvestments (55,154) (107,603) (35,362) Purchases of nonutility property (22,611) (15,733) (20,395) Sale of KLT Power 53,033 Sale of streetlights 21,500 Other investing activities 8,008 (8,902) (931) Net cash from investing activities (138,738) (237,813) (159,582) Cash Flows from Financing Activities lasuance of mandatorily redeemable Preferred Securities 150,000 Issuance oflong-term debt 7,406 66,292 135,441 Repayment oflong-term debt (102,880) (28,832) (74,230) Net change in short-term borrowings 8,757 1,243 (19,000) Dividends paid (105,475) (104,042) (102,203) Other financing activities (2,818) (4,805) (2,154) Net cash from financing activities (194,810) 79,856 (62,146) Net Change in Cash and Cash Equivalents (30,885) 50,527 (4,819) Cash and Cash Equivalents at Beginning of Year 74,098 23,571 28,390 Cash and Cash Equivalents at End of Year $ 43,213 $ 74,098 $ 23,571 Cash Paid During the Year for Interest (net of smount capitalized) $ 71,696 $ 71,272 $ 52,457 income taxes $ 24,788 $ 22,385 $ 58,344 The accompanying Notes to Consohdated Financial Statements are an integral part of these statements. 1 Aam (4 A Ar44iA,uw O u

F C e n s olid a t e d S t a t e m e n t s of C o m p f e h e n siv e income ' Year Ended Decessber 31 1998 1997 1996 (thousands) Net income $ 130.722 $ 76,560 $ 108,171 Other comprehensive income (loss): - Unrealized gain (loss) on securities available for sale (2,915) (7,138) 10,171 Income tax benefit (expense) 1,054 2,589 (3,687) Net unrealized gain (loss) on securities available for sale - (1,861) (4,549) 6,484 Comprehensive income 8 118,861 8 72.011 8 114,655 The accompanying Notes to Consolidated Financial Statements are an integralpart of these statements. Notes to C e n s olid a t e d Fin a n cial Statemenis L Summary af Signifieant in Atlanta, Georgia. Also in 1998, HSS formed Aeceuniing Pallcies Worry Free, Inc. and acquired the Worry Free assets from KCPL Worry Free provides residential The Company services including preventative maintenance and Kansas City Power & Light Company is a medium-warranty services for heating and air condition-sized electric utility with more than 451,000 i ing equipment.' customers at year-end in western Missouri and eastern Kansas. About 95% of KCPL% retail revenues Currently, the electric utility accounts for about are from the Kansas City metropolitan area, an 89% of consolidated assets and about 96% of net agribusiness center and major regional center income. Intercompany balances and transactions for wholesale, retail and service companies. About have been eliminated. KLT and HSS revenues two-thirds of KCPL's retail sales are to Missouri and expenses are classified as Other Income customers, the remainder to Kansas customers. and (Deductions) and Interest Charges in the income statement. The consolidated financial statements include the accounts of Kansas City Power & Light Company, The accounting records conform to the ac. counting KLT Inc. (KLT) and Home Service Solutions Inc. standards set by the Federal Energy Regulatory (HSS). KLT and HSS are wholly-owned, non, Commission (FERC) and generally accepted regulated subsidiaries. The consolidated entity accounting principles. These standards require is referred to as KCPL. We formed KLT in 1992 the use of estimates and assumptions that affect as a holding company for various nonregulated amounts reported in the financial statements and business ventures. Existing ventures include the disclosure of commitments and contingencies, investments in energy services, oil and gas Cash and Cash Equivalents development and production, telecommunications Cash and cash equivalents consists of highly liquid and affordable housing limited partnerships. We investments with original maturities of three formed HSS in 1998 and invested in R.S. Andrews months or less. Enterprises, Inc., a consumer sernees company j \\ - ~t c O L j

Notes t o ~C o a s olid a t e d Financial Statemenis (continued) Fair Value of Financial Instruments Refueling Outage Costs). When property units are The stated values of financial instruments as of retired or otherwise disposed, the original cost, net December 31,1998 and 1997, approximated fair of salvage and removal,is charged to accumulated market values. KCPIls incremental borrowing depreciation, rate for similar debt was used to determine fair AFDC represents the cost of borrowed funds and a value if quoted market prices were not available. return on eqttity funds used to finance construction Securities Available for Sale projects. AFDC on horrowed funds reduces interest Certain investments in equity securities are charges. AFDC on equity funds is shown as a accounted for as securities available for sale and noncash item in Other Income and (Deductions). adjusted to market value with unrealized gains The rates uned to compute gross AFDC are or (losses) reported as a separate component of compounded semi-annually and averaged 9.3% comprehensive income. for 1998,8.6% for 1997 and 8.50f for 1996. The cost of securities available for sale held by KLT Depreciation is computed using the straight-line was $4.8 million as of December 31,1998, and $5.1 method over the estimated lives of depreciable million as of December 31,1997 Net unrealized property based on rates approved by state gains were $0.1 million at December 31,1998, ar d regulatory authorities. Annual depreciation rates $1.9 million at December 31,1997. average about 39 Investments in Affordable Housing Wolf Creek Hefueling Outage Costa Limited Partnerships Forecasted incremental costs to be incurred during Through December 31,1998, KLT had invested scheduled Wolf Creek Generating Station (Wolf $104 million in affordable housing limited partner-Creek) refueling outages are accrued monthly over ships. About $73 million of these investments the unit's operating cycle, normally about 18 months. were recorded at cost; the equity method was used Estimated incremental costs, which include for the remainder. We reduce tax expense in operating, maintenance and replacement power the year tax credits are generated. A change in expenses, are based on budgeted outage costs accounting principle relating to investments made and the estimated outage duration. Changes to after May 19,1995, requires the use of the equity or variances from those estimates are recorded method when a company owns more than 5% in a when known or probable, limited partnership investment. Of the investmenta Nuclear Plant Decommissioning Costs recorded at cost, $69 million exceed this 5% level The Missouri Public Service Commission (MPSC) and but were made before May 19,1995. the Kansas Corporation Commission f.KCC) require Utility Plant the owners of Wolf Creek to submit an updated Utility plant is stated at historical costs of construe-decommissioning cost study every three years. tion. These costs include taxes, an allowance for The following table shows the decommissioning funds used during construction 4AFDC) and cost estimates and the escalation rates and earnings payroll-related costs including pensions and other assumptions approved by the MPSC in 1998 and the fringe benefits. Replacements, improvements and KCC in 1997. The decommissionmg cost estimates additions to units of property are capitalized. are based on the immediate dismantlement method Repairs of property and replacements ofitems not and include the costs of decontamination, dis-considered to be units of property are expensed as mantlement and site restoration. We do not expect incurred (except as discussed under Wolf Creek plant decommissioning to start before 2025. Xanana City Ames &.tightCmpany O t

Noles to C o n s olid a t e d Financial Statements (continued) l KCC MPSC _ ' cannot predict the afkt of any such changes,if any, Future cost of on results of operations, financial peition, or mlat44 decommissioning: m a pra ms. H weve, we do M anucipate Total Station (banonni $ 1.3 $ 1.8 47% share <mmmno 8 624 $832 results of operations to be significantly affected as long as KCPL is regulated. I Current cost of i decommissioning (in 1996 doHars): Nuclear Fuel Total Station <mahon.) $ 409 $ 409 i We amortizo nuclear fuel to fuel expense based on 47% share (mahuno $ 192 $ 192 l the quantity of heat produced during generation of l electricity. Under the Nuclear Waste Policy Act of sca ation factor 3.60% 4.50% Annual return j 1982, the Department of Energy (DOE)is responsible ) on trust sesets 6.80 % 7.664 for the permanent disposal of spent nuclear fuel. For this future disposal of spent nuclear fuel, KCPL KCPL contributes about $3 million annually to a pays the DOE a quarterly fee of one-tenth of a cent tax qualified trust fund to be used to decommission for each kilowatt-hour of net nuclear generation Wolf Creek. These costs are cinrged to other delivered and sold. These disposal cuts am charged operation expenses and recovered in billings to { to fuel expense, customers (rates). Contributions to the trust will increase slightly in 2000. These funding levels A permanent disposal site m1y not he available for assume a certain return on trust assets. If the the industry until 2010 or later, although an interim actual return on trust assets is below the anticipated ; facility may be available earlier. Under current level, we believe a rate increase will be allowed l DOE policy, once a permanent site is available, the ensuring full recovery of decommissioning costs ! DOE will accept spent nuclear fuel first from the over the remaining life of the unit. I owners with the oldest spent fuel. As a result, dispmal services for Wolf Creek may not be available The trust fund balance, including reinvested before 2016. Wolf Creek has an on-site, temporary earnings, was $47 million at Demmler 31,1998, and storage facility for spent nuclear fuel. Under current $40 million at Dember 31,1997. These assets are regulatory guidelines, this facihty can pmvide reflected in Investments and Nonutility Pmpeny. storage spam until about 2005. WolfCreek has starml The related liabihties for decommissioning are included ,I plans to increase its on-site storage capacity for all in Deferred Credits and Other Liabilities - Other. spent fuel expected to be generated by Wolf Creek in 1996 the Fmancial Amounting Standarxis Iknux! through the end ofits licensed life in 2025. (FASB) issued an Exposure Draft of a proposed RegulatoryAssets Statement of FinancialI.ccounting Standards, FASB Statement No. 71 - Accounting for Certain I Accounting for Certain Liabilities Related to Types of Regulation, apphes to regulated entities Closure or Removal of Long-Lived Assets, that

whose rates are designed to recover the costs of addrimed the accounting for deannmissioning costs. In i

pmvidmg service. Under this statement, we defer un November 1997 the FASB decided to reconsider the . the Inlanm sWt items allom! by a annmission's rate I scope of the statement. The FASB expects to issue l l ortkr or when it is prohnble, Imrl on regulatory past another Exposure Draft in 1999. l } practices, that future rates will recover the amorti-zation of the deferred costa. If FASB 71 were not If current electric utility industry accounting j practices for decommissioning costs change, annual i applicable, the unamortized balance of $135.2 i decommissioning expmus could increase and tmst ! million of KCPL's regulatory assets, net of the relat-fund income from the external decommissioning ! ed tax benefit, would be written off f trusts could be reported as investment income. We j i Xmuas fjy g%en & Jigkl(ampuung

i -Notes to C o n s olid a t e d Financial S t a t e m'e n t s (continued) l i Amortization December 31,1998 Ending period Deferred Charges (milhone) Coal contract termination casts 8 6.5 - 2002 1996 snowstorm costs 5.3 2001 Decommission and decontaminate federal uranium enrichment facilities 5.5 2007 Premium on redeemed debt 7.2 2023 Other 1.7 2006 Total 26.2 Recoverable Taxes 109.0 'Ibtal Regulatory Assets 8 135.2 Revenue Recognition We amortize investment tax credits to income over We use cycle billing and accrue estimated unbilled the mmaining service lives of the related properties, revenue at the end of each reporting period. Derivative Financial Instruments Income Tazes We use interest rate swap and cap agreements to - The balance sheet includes deferred income taxes reduce the impact of changes in interest rates on for all temporary differences between the tax baris vanable-rate debt. The net effect of these agree-of an asset or liability and that reported in the ments is recorded as interest expense. Interest financial statements. These deferred tax assets rate swap agreements effectnely fix the interest and liabilities are determined by using the tax rates on a portion of KCPIls variable-rate debt. rates scheduled by the tax law to be in effect when Interest rate caps limit the interest rate on a the differences reverse, portion of KCP11s variable-rate debt by setting a maximum rate. These agreements are not a4usted Regulatory Asset - Recoverable Taxes mainly to market value as they are used only to manage reflects the future revenue mquirements necessary interest expense and the intent is to hold them until to recover the tax benefits of existing temporary 4 their termination date. differenwa previously passed through to customers. We record operating income tax expense based on Environmental Matters ratemaking principles. However, if the method used We accrue environmental costs when it is probable fur the balance sheet were reflected in the income a liability has been incurred and the amount of statement, net income would remain the same, the liability can be reasonably estimated. Basic and Diluted Earnings per Common Share Calculation 1998 __1,997 1996 (milhonal Net Income $ 120.7 $ 76.6 $ 108.2 Less: Preferred stock dividend requirements 3.9 4 3.8 3.8_ Earnings available for common stock $ 116.8 72.8 $ 104.4 Divided by: Average number of common shares outstanding 61.9 61.9 61.9 Basic and diluted earnings per common share 1.89 $ 1.18 $ 1.69 .% nam C4 M & 4M Ca+==s 0 <u

i Notes to Consolidated Fin a n cial Statements (c o niin u e d) Consolidated Statements of Cash Flows - Other Operating Activities 1998 1997 1996 Cash flows affected by changes in: (thoussods) Receivaldes 8 (7,898) 973 $ 1,462 Fuel inventoriea (4,925) 5,253 3,026 Materiah and supplies 1,216 755 (159) e Accounts asynble 4,196 1,950 3.112 Accrued tac 13,953 (16,771) (21,283) Accrued interes. 1,020 1,306 4,148 y Wolf Creek refueling outage accrual 10,651 (5,517)

6,382)

Other 4,931 5,379 8,494 'Ibtal 8 23,144 $ (6.672) $ (7,582) q J l Change in Accounting Estimate employees, including ofTicers. Benefits under in 1998 we adopted the American Institute of these plans reflect the employees' compensation, J Certified Public *rcountants Statement of , years of service and age at ret'irement. KCPL l Position (SOP) 98 Accounting for the Costs of satisfies the minimum funding requirements i Computer Software Developed or Obtained For under the Employee Retirement income Sw'ty Internal Use. Act of 1974. Because we adopted SOP 98-1 for 1998, net In addition to providitig pension benefits, KCPL j income increased approximately $3.2 million provides certain postretirement health care ] ($0.05 per share). Net income increased because and lifs insurance benefits for substantially all we capitalized payroll costs for employees f retired employees. I developing the software. We expensed such costs l We accrue the cost of postretirement health care in prior years. We amortize capitalized software i1 and life insurance benefits during an employee's costs on a straight-line basis over estimated i years of service and recover these accruals through service lives of 5 to 10 years. I rates. We fund the portion of net periodic postre-

2. Pension Plans and 0tlier tirement benefit costs that are tax deductible.

Employee Benefits j KCPL has defined benefit pension plans for its Pension Benefits Other Benefits 1998 1997 1998 1997 Change in benefit obligation (thousands) Benefit obligation at beginning of year $ 334,017 $ 307,050 $ 33,198 $ 32,190 Service cost 9,661 8,427 532 514 Interest cost 24,892 24,258 2,429 2,518 Contribution by participants 169 159 Actuarial loss 39,214 17,307 2,980 929 Benefits paid (22,875) (22,707) (2,832) 12,763) Benefits paid by KCPL (321) (318) (254) (349) Benefit obligation at end of year (a) $ 384,588 $ 334,017 8 36,222 8 33,198 (al Based on weighted ovemge discount mies of 6.76% sn 1998 Lnd 7.5% in 1997; and increasen in futurw salary levels of 4% to 6% in 1998 and 1997 Xnune City hamn & JiqMComang

Noles to C o n s o li d a t e d Financial Statemenis (coniinued) Pension Benefits Other Benefits 1998 1997 1998 1997 Change in plan as sets (thousands) Fair value of plan assets at beginning of year 8 423,331 $ 363,285 $ 4,970 $ 3,620 Actual return on plan assets 5,131 75,436 380 241 Contributions by employer and participants 2.242 7,317 3,846 3,872 i Benefits paid (22,875) (22,707) (2,832) (2,763) Fair value of plan assets at end of year 8 407,829 8 423,331 8 6.364 $ 4,970 Funded status $ 23,241 8 89,314 $ (29,858) $ (28,228) Unrecognized actuarial (gain) loss (31,907) (96,662) 370 (2,424) Unrecognized prior service cost 3,921 4,468 555 632 Unrecognized transition obligation (6,397) (8,469) 16,442 17,616 Accrued benefit cost $ (11,142) $ (11,349) $ (12.491) $ (12,404) Pension Benefits Other Benefits 1998 1997 1996 1998 1997 1996 Components of net periodic Benefit cost (thousands) Service cost 8 9,661 $ 8,427 $ 6,164 $ 532 $ 514 $ 574 Interest cost 24.892 24,258 23,379 2,429 2,518 2,520 Expected return on plan assets (29,806) (25,142) (24,334) (203) (118) (97) Amortization of prior service cost 547 491 491 77 77 77 Recognized net actuarial loss (gain) (910) (622) 431 8 (25) 26 Transition obligation (2,072) (2,072) (2,072) 1,174 1,174 1,174 Net periodic benefit cost 8 2,312 $ 5,340 $ 6,059 8 4,017 $ 4,140 $ 4,274 Long. term rates of return on pension assets of 9.0% to 9.25% were used. Actuarial assumptions include an increase in the market price is above the exerrise price. Unexercied annual health cam cost trend rate for 1999 of 8%, options expim ten years aRer the grant date, decreasing gradually over a two-year period to its We follow Accounting Principles Board Opinion 25 1 ultimate level of 6% The health care plan mquires { - Accounting for Stock issued to Employees and retirres to share in the met when pmmiums exceed a i related interpretations in accounting for this plan. certain amount. An inemase or decrease m,the Because of the dividend equivalents pmvision, we assumed health can cost trend rate by 1% peryear expensed $0.1 million in 1998, $1.2 million in 1997 would only inemase or decmase the benefit obligation I and $1.4 million in 1996. The expense includes i as of Decemler 31,1998, by about $600,000 and the j - accumulated and reinvested dividends phis the + combined service and interest costs of the net periodic i appreciation in stock price since the grant date. If postatirement benefit met for 1998 by about $60,000. i the stock price decreases below the exerrise price, Stock Options we would reverse the cumulative expense related to l The exercise price of stock options granted equaled i thme options. the market price of KCPils common stock on the l ! FASB Statement No.123 - Acmunting for Stock-grant date. One half of all options granted vested one l Based Compensation requires certain discleums year after the grant date, the other half vested two l, mgarding expense and value of options granted using years after the grant date. An amount equal to the I the fair-value method even though we follow APB quarterly dividends paid on KCP11s co.nmon stock l Opinion 25. We have expimmed approximately the shame tdividend equivalents) awrues on the options i name amount as required by FASB 123. For options i for the benefit of option holders, The option holders l outstanding at December 31,1998, grant prices range am entitled to stock for their accumulated dividend frum $20.625 to $26.188 and the weighted-average equivalents only if the options are exerrised when the remaining contractual life is 5.8 years. Xanm C4 hmu &.CoM C=was u

g 'N o t e s. t o t.C o n s o li d a t e d Financial Statements (continued) 3 Stock option activity over the last three years is summarized below: 1998 1997 1996 shares price

• shares price
• shares price
• Outstanding at January 1 265,250

$23.12 298,875 $22.96 266,125 $22.14 - Granted - 59,000 26.19 Exercised (143,875) 22.68 (33,625) 21.75 (26,250) 22.27 Canceled (23,500) 24.54 Outstanding at December 31 97,875 823.41 265,250 $23.12 298,875 $22.96 Exercisable as of December 31 97,875 823.41 235,750 $22.73 206,500 $22.02

• weigMed. average priw lincome Taxes Income tax expense consisted of the following:

1998 1997 1996 (thousands) Current income taxes: Federal $ 32,621 $ 2,801 $ 35,816 State 7,118 4,348 8,762 Total 39,739 7,149 44,578 Deferred income taxes, net: Federal (2,225) 4,108 (7,441) State (243) 672 (1,221) Total (2,468) 4,780 (8,662) Investment tax credit amortization and reversals (4,4,7p (3,850) (4,163) Total income tax expense $ 32,800 $ 8,079 $ 31,753 KCPils effective income tax rates differed from the statutory federal rates mainly due to the following: 1998 1997 1996 Federal statutory income tax rate 35.0% 35.09 35.0% 1 Differences between book and tax depreciation not normalized 2.1 3.7 (0.4) Amortization ofinvestment tax credits (2.9) (4.5) (3.0) Federal income tax credits (14.6) (26.0) (9.1) State income taxes 2.9 3.9 3.5 Other (1.1) (2.6) (3.3) Effective income tax rate 21.4% 9.5% 22.7% The tax effects of mWor temporary differences resulting in deferred tax assets and liabilities in the i halance sheets are as follows: December 31 1998 1997 (thousands) l Plant related $ 547.223 $ 558,629 Recoverable taxes 42,000 48,000 Other 31,404 31,402 Net deferred income tax liability 8 620,627 $ 638,031 The net deferred income tax liability consisted of the following-December 31. 1998 1997 (thousands) Gross deferred income tax assets $ (64,564) $ (61,358) Gross deferred income tax liabilities . _ _ 685,191 ,699,389 Net deferred income tax liability 8 620,627 8 638,031 Xaaaa4 (4 Ama4 & 4 & (m,nas O

o-Notes to C o n s olid a t e d Fin a n cial Statements ( c o nii n u e d )

4. Commiimenis and Wolf Creek exceed. $soo million in property Contingencies damage and dec,mtamination expenses, and only Nuclear Liability and' Insurance after trust funds have been exhausted (see Note 1 - Nuclear Plant Decommissioning Costst Liability Insurance The Price-Anderson Act currently limits the com.

The Owners also carry additional insurance bined public liability of nuclear reactor owners from NEIL to cover costa of evplacement power to $9.7 billion for claims that could arise from and other extra expenses incurred in the event of a single nuclear incident. The owners of Wolf a pmlonged outage resulting from accidental Creek (the Owners) carry the maximum avail. property damage at Wolf Creek, able commercialinsurance of $0.2 billion. Under all NEIL policies, KCPL is subject to Secondary Financial Protection (SFPi, an retrospective assessments if NEILlosses, for assessment plan mandated by the Nuclear each policy year, exceed the accumulated funds Regulatory Commission, provides insurance available to the insurer under that policy. for the $9.5 billion balance. The ertimated maximum amount of retrospective Under SFP,if there were a catastrophic assessments to KCPL under the current policies nuclear incident involving any of the nation's could total about $7 million. licensed reacton, the Owners would be subject to In the event of a catastrophic loss at Wolf a maximum retrospective assessment per inci-Creek, the insurance coverage may not be dent of up to $88 million ($41 million, KCPUs adequate to cover pmperty damage and extra share). The Owners are jointly and severally expenses incurred. Uninsured losses, to the liable for these charges, payable at a rate not t extent not recovered through rates, would be exceed $10 million ($5 miUion, KCPUs share) assumed by KCPL and could have a material, per incident per year, excluding applicable pre

• adverse effect on KCPUs financial condition mium taxes. The assessment, most recently and results of operations.

revised in 1998, is subject to an inflation adjustment every five years based on the Low Level Waste Consumer Price Index. The low-Imel Radioactive Waste Policy Amendments Act of 1985 mandated that the various Property, Decontaminstion, states, individually or thmugh interstate compacts, Premature Decommissioning and develop alternative low-level radioactive waste him hpense Insumace disposal facilities. The states of Kansas, Nebraska, The Owners also carry $2.8 billion ($1.3 Arkansas, louisiana and Oklahoma formed the billion, KCPUs share) of property damage, Central Interstate low-level Radioactive Waste = decontamination and premature decommission' Compact and sch.cted a site in northern Nebraska ing insurance for loss resulting from damage to locate a disposal facility. WCNOC and the owners to the Wolf Creek facilities. Nuclear Electric of the other five nuclear units in the compact pro-Insuranm Limited (NEIL) pnnus this insurance, vide most of the pre-construction financing for this l In the event of an accident, insurance pro. project. As of December 31,1998, KCPUs net invest. ceeds must first be used for reactor stabilization ment on its books was $7.3 million for this project. and site decontamination. KCPUs share of any Significant opposition to the project has been raised remaining proceeds can be used for property by Nebraska officials and residents in the area of damage restoration and premature decommis-the pmposed facility, and attempts have been made sioning costs. Premature decommissioning through litigation and proposed legislation in coverage applies only if an accident at Nebraska to slow down or stop development of the Xanm C4 bane LtieM Cam==v L

Notes to C o n s olid a t e d Fin a n cial Statements (continued) facility. On December 18,1998, the application Without the implementation regulations, the for a license to construct this project was denied. realimpact of the standards on KCPL cannot On January 15,1999, a request for a contested be determined. However, the impact on KCPL case hearing on the denial of the license was filed. and other utilities that use fossil fuels could be The contested case hearing must be granted. substantial. Under the new fine particulate reg-There is a reasonable possibdity that the contested ulations the EPA is in the process ofimplement-case hearing will be stayed for a significant period ing a three-year study of fine particulate emis-of time. If such a stay occurs, a greater possibility siens. Until this testing and review period has of reversing the license denial will exist when the been completed, KCPL cannot determine addi-e contested case hearing ultimately is conducted. tional compliance costa,if any, associated with Nuclear Fuel Commitments As cf December 31,1998, KCPUs portion of Nitrwgen oxide Wolf Creek nuclear luel commitments included in 1997 the EPA also issued new proposed $25 million for enrichment through 2003, regulations on reducing nitrogen oxide (NO ) x $60 million for fabrication through 2025 and emissions. The EPA announced in 1998 final $6 million for uranium and conversion through 2001. regulations implementing reductions in NOx emissions. These regulations require 22 states, 1 Environmental Matters I including Missouri, to submit plans for control. KCPUs policy is to act in an environmentally ling NO emissions by September 1999. The regu-x responsible manner and use the latest technology I lations require a significant reduction in NO* available to avoid and treat contamination. emissions from 1990 levels at KCPUs Missouri We continually conduct environmental audits coal-fired plants by the year 2003. designed to ensure compliance with governmental regulations and detect contamination. However, 'Ib achieve these reductions, KCPL would need to governmental bodies may impose additional or more incur significantly higher capital costs or purchase rigid environmental regulations that could require power or NO emissions allowances. It is possible x substantial changes to operations or facilities. that purchased power or emissions allowances Monitoring Equipment and Cerfeln Air 7bric Substances Preliminary analysis of the regulations indicate The Clean Air Act Amendments of1990 that selective catalytic reduction technology will required KCPL to spend about $5 million in be required for some of the KCPL units, as well as prior years for the installation of continuous other changes. Currently, we estimate that addi. emission monitoring equipment to satisfy the tional capital expenditures to comply with these e requirements under the acid rain provision. Also f regulations could range from $90 to $150 milhon a study under the Act could require regulation of over the period from 1999 to 2002. Operations and certain air toxic substances, including mercury. maintenance expenses could also increase by more We cannot predict the likehhood of any such reg-than $10 million per year, beginning in 2003. ulations or compliance costs. l We continue to refine these preliminary I Air Particulate Matter j estimates and explore alternatives to comply with I In July 1997 the United States Environmental these new regulations to minimize, to the extent Protection Agency (EPA) published new air quali-possible, KCPUs capital costs and operating ty standards for particulate matter. Additional erpenses. The ultimate cost of these regulations regulations implementing these new particu-could be significantly difrerent than the amounts late standards have not been finalized. estimated above. f I knm C4 W 4MCm ( \\ l

l Notes to Consolidated Fin a n cial Statements (c o niin u e d) i ~ KCPL and several other western Missouri utilities during the last three years. The remaining rental l filed suit against the EPA over the inclusion of commitments under these leases total $170 milhon. western Missouriin the NO reduction pmgram. Obligations for the years 1999 thmugh 2003 average x This matter is in the early stage oflitigation and $14 million per year. Capitalleases are not material the outcome cannot be predicted at this time. and are included in these amounts. Carbon Diaride As the managing partner of three jointly-owned At a December 1997 meeting in Kyoto, Japan, generating units, KCPL has entered into leases for the Clinton Administration supported changes to railcars to serve those units. We have reflected the International Global Climate Change treaty the entire lease commitment in the above amounts which would require a seven percent reduction although about $2 million per year ($32 million in United States carbon dioxide (COs) emissions total) will be reimbursed by the other owners. below 1990 levels. President Clinton stated KCPL has a lease agreement that expires in 2000 that this change in the treaty would not be for a combustion turbine. This lease commitment submitted to the U.S. Senate at this time where ratification is uncertain. If future reductions of the turbine has not been accepted by KCPL. electric utility cog emissions are eventually The operating lease commitment could be as much required, the financial impact upon KCPL could as $50 million, be substantial. Purchased Capacity Commitments KCPL purchases capacity from other utilities and KCPUs share of coal purchased under existing nonutility suppliers. Purchasing capacity provides contracts was $37 million in 1998, $38 million in - the option to purchase energy if needed or when 1997 and $36 million in 1996. Under these coal market prices are favorable. This is a cost-efTective contracts, KCPUs remaining share of purchase alternative to new constructien. As of December 31, commitments totals $80 million. Obligations for 1998, contracts to purchase capacity totaled the years 1999 through 2003 total $35, $17, $9, $222 million through 2016. KCPL purchased capacity $9 and $10 million, respectively. The remainder of about $26 million during each of the last three of KCPUs coal requirements will be fulfilled years. For the years 1999 through 2003, these through spot market purchases. KCPL has freight commitments average $20 million per year. For the commitments for delivery of coal for the next seven next five years, net capacity purchases average years of approximately $15 to $20 million per year, about 7% of KCPUs 1998 total available capacity. Leases KCPL has a transmission line lease with another

5. Segment and Related inf afmation utility whereby, with FERC approval, the rental We adopted SFAS No.131 - Disclosures About s

payments can be increased by the lescor. If this Segments of an Enterprise and Related Information. occurs, we can cancel the lease if we are able to KCPUs reportable segments are strategic business secure an alternative transmission path, units. Electric Operations includes the regulated Commitments under this lease total $2 million electric utility, unallocated corporate charges and per year and $51 million over the remaining life wholly-owned subsidiaries on an equity basis. of the lease ifit is not canceled. KLT is a holding company for various nonregulated business ventures. The Other column represents Rental expense for other leases including railcars, the operations ofliSS. computer equipment, buildings, transmission line j and other items was $20 to $23 million per year j Xanm City beene &.tipAt Cavane O

Notes to C o n s o li d a t e d Financial Statements (continued) l The summary of significant accounting policies Income and (Deductions) and Interest Charges applies to all of the segments. We evaluate in the Consolidated Statements ofIncome. performance based on profit or loss from operations The table below reflects summarized financial and return on capital investment, We eliminate f

information concerning KCPIls reportable segments.

all intersegment sales and transfers. We include ; KLT and ilSS revenues and expenses in Other Electric Intersegment Consolidated Operations KLT Inc. Other Eliminations Totals 1998 (thousands) Electric Operating Income * $ 184,165 $ 184,165 Miscellaneous Income' 21,808 $ 25,246 $ 733 $ (4,486) 43,301 Miscellaneous Deductions * (36,496) (47,373) (933) (84,802) Income taxes on Other Income and (Deductions) 5.694 40,210 78 45,982 Interest Charges (58,265) (13,475) (71,740) Net Income 120,722 4,608 (122) (4,486) 120,722 Assets 2,831,052 310,750 24,239 (153,677) 3,012,364 1997 Electric Operating Income- $ 162,722 $ 162,722 Miscellaneous Income' 20,407 $ 24,651 $ (6,037) 39,021 Miscellaneous Deductions * (77,614) (40,828) (118,442) Income taxes on Other Income and (Deductions) 27,279 35,755 63,034 Interest Charges (58,641) (13,541) (72,182) j Net Income 76,560 6,037 (6,037) 76,560 Assets 2,835,414 346,154 (123,535) 3,058,033 1996 Electric Operating Income $ 177,813 $ 177,813 a Miscellaneous Income' 1,978 $ 1,453 $ 1,412 4,843 Miscellaneous Deductions * (43,408) (11,764) (55,172) Income taxes on Other Income and (Deductions) 18,188 18,214 36,402 Interest Charges (48,769) (9,314) (58,083) Net Income (Loss) 108,171 (1,412) 1,412 108,171 Assets 2,749,828 224,308 (59,624) 2,914,512 a Refer to the Consolidated Statements ofincome for detad of Electric Operatsons revenues and expenses, b includes nonregulated revenues, interest and dindend income, and losses from equity investments. c includes nwegulated expenses and rnerger related expenses. Xanm Cile has* !< JieAt Compans t

Notes t o.C o n s olid a t e d. Fin a n cial Statements (c o n tin u e d)

6. IniangibIe Asseis not declare or pay common stock dividends or The application of purchase accounting for certain purchase any common shares. If the unpaid investments msulted in about $17 million in goodwill preferred stock dividends equal four or more full at December 31,1998. These amounts are included quarterly dividends, the preferred shareholders, in Other deferred charges and Investments and voting as a single class, could elect members to Nonutility Property on the consolidated balance the Board of Directors.

sheets and amortized over 10 to 40 years. Preferred Stock and Redeemable Preferred Stock

7. Sale of Accounts Receiyable Scheduled mandatory sinking fund requirements As of December 31,1998 and 1997, we sold with limited recourse $60 million of customer accounts are 1,600 shares per year. Shares issued totaled receivable. Related costs of approximately $3.5 9,557 as of December 31,1998 and 11,157 as of million for each of the last three years were included ecem er 31,1R Eam IMd by KM, to in Other Income and (Deductions)- Miscellaneous meet future sinking fund requirements totaled income and (deductions). net.

8,934 as of December 31,1998 and 10,534 as of 8.Shart Term Bank Lines of Credit December 31,1997. The cost of the shares held Under minimal fee arrangements, unused short. is reflected as a reduction of the capital account. term bank lines of credit totaled $210 million As of December 31,1998,0.4 million shares of as of December 31,1998 and $300 million as of $100 par Cumulative Preferred Stock,1.6 million December 31,1997, shares of Cumulative No Par Preferred Stock and

9. Common Stack Equity, Preferred 11 milli n shares of no par Preference Stock were authorir.ed. We have the option to redeem the Stock, Redeemable Preferred

$89 mEon ofinued Cumulative hdened Stock Stock and Mandatorily at price 8 approximating par or stated value. Redeemable Preferred Securities 1 Comunon Stock Equity Mandatority Redeemable KCPL has shares of common stock registered with Preferred Securities i the Securities and Exchange Commission for a In April 1997 KCPL Financing I (Trust), a wholly-Dividend Reinvestment and Stock Purchase Plan owned subsidiary of KCPL, issued $150,000,000 (the Plan). The Plan allows common shareholders, of 8.3% preferred securities. The sole asset of the directors and employees to purchase shares of the Trust is the $154,640,000 principal amount of common stock by reinvesting dividends or making 8.3% Junior Subordinated Deferrable Interest optional cash payments. We currently purchase Debentures, due 2037, issued by KCPL. The terms shares for the Plan on the open market. and interest payments on these debentures e trespond to the terms and dividend payments on KCPL held 10,706 shares as of December 31,1998 the preferred securities. We deduct these payments j and 35,811 shares as of December 31,1997 ofits for tax purposes. We may elect to defer interest common stock to be used for future distribution. paym nts on the debentures for a period up to We include the cost of these shares in Investments 20 consecutive quarters, causing dividend payments and Nonutility Property, on the preferred securities to be deferred as well. The Restated Articles of Consolidation contain a In case of a deferral, interest and dividends will restriction related to the payment of dividends continue to accrue, along with quarterly compounding in the event common equity falls to 25% of total interest on the deferred amounts. We may redeem capitalization, if preferred stock dividends are not all or a portion of the debentures after March 31, declared and paid when scheduled, KCPL could 2002, requiring an equal amount of preferred Xansas C4 Psmer &.tioM Can==v O v

Notes to C o n s olid a t e d Financial Statements (continued) securities to be redecined at face value plus accrued rate bank credit agreement. This swap agreement and unpaid distributions. The back-up undertakings matures in 1999 and effectively fixes the interest in the aggregate provide a full and unconditional j rate to a weighted-average rate of 5.77%. guarantee of amounts due on the preferred soci.rities. These swap and cap agreements are with several

10. l.ong-term Deb t highly rated financial institutions and simply limit General Mortgage Bonds and KCPL's exposure to increases in interest rates.

Unsecured Notes They do not subject KCPL to any material credit KCPL is authorized to issue mortgage bonds under or market riska. The fair value of these agreements the General Mortgage Indenture and Deed of is immaterial and is not reflected in the financial Trust dated December 1,1986, as supplemented. statements. Although derivatives are an integral i The Indenture creates a mo. ' gage lien on sub. part of KCPL's interest rate management, the stantially all utility plant. effect on interest expense for each of the last three years was less than $0.6 million. As of December 31,1998, $56G million general mortgage bonds were pledged under the Indenture Subsidiary Obligations to secure the outstanding medium-term notes and KLT has a bank credit agreement for $150 million revenue refunding bonds. collateralized by the capital stock of KLT's direct subsidiaries. Under this revolving credit agreement, KCPL is also authorized to issue up to $300 million KLT had borrowings at December 31,1998, of in unsecured medium. term notes under an indenture $79 million. This debt is classified as current dated December 1,1996. This indenture prohibits maturities since the agreement expires in October KCPL from issuing additional general mortgage 1999. The affordable housing notes are collateralized bonds while any unsecured notes are outstanding. by the affordable housing investments. We have not issued any unsecured notes. Scheduled Maturities Interest Rate Swap and Cap Agreements Long-term debt maturities for the years 1999 As of December 31,1998, KCPL had entered into through 2003 are $164, $67, $93, $39 and $29 two interest rate swap agreements to limit the million, respectively. interest rate on $30 million oflong-term debt. The swap agreements mature in 2001 and effectively

11. }Oint1y-0wned Electric fix the interest rate to a weighted average rate Utility Plants of 3.88%. Also, as of December 31,1998, KLT had KCPUs share ofjointly-owned electric utility plants entered into an interest rate swap agreement to as of December 31,1998, is as follows (in millions limit the interest rate on $40 million ofits variable-of dollarsh e

Wolf Creek LaCygne latan KCPL's share. _ _ _. _ _. Unit Units Unit 47% 50% 70% Utility plant in service $ 1,347 $ 300 $ 245 Estimated accumulated depreciation (productwn plant only) $ 427 Id7 145 Nr: lear fuel, net 40 KCPUs accredited capacity-megawatts $47 677 469 M C4 Pma4MComow

Notes to Consolidated Financial Statements (coatinued) Each owner must fund its own portion of the plant's with past practice exercising good business operating expenses and capital expenditures. judgment, but requires KCPL to redeem all out-KCPils share of direct expenses is included in the standing shares of cumulative prefermd stock befom appropriate operating expense classifications in consummation of the proposed transactions. the income statement. Western Resources, Inc. If the Amended Agreement is terminated under (Western Resources) also owns a 47% share of the certain circumstances and KCPL, within two and Wolf Creek unit and a 50% share of the LaCygne one half years following termination, agrees to units (see Note 12). consummate a business combination with a third

12. Amended and Restaied Plan af

! party that made a proposal to combine before Merger with Western Resource: termination, a payment of $50 million win be due Western Resources. Under certain circumstances, KCPL began discussing a merger with Western - if KCPL determines not to consummate its merger Resources in 1996. A merger agmement was entend - into Westar Energy due to its inability to receive a into on February 7,1997. In December 1997 KCPL favorable tax opinion from its legal counsel, it canceled its previously scheduled special meeting l must pay Western Resources $5 million. Western of shareholders to vote on the transaction because Resources will pay KCPL $5 million to $35 million Westem Resourws advised KCPL that its investment if the Amended Agreement is terminated and all bankers, Salomon Smith Barney, had indicated that closing conditions are satisfied other than conditions it was unlikely that Salomon would be in a position relating to Western Resources aceiving a favorable to issue a fairness opinion. During 1997 KCPL I j tax opinion from its legal counsel, favorable incurred and deferred $7 million of merger-related statutory appmvals or an exemption fmm the Public costs that were expensed in December 1997. I Utility Holding Company Act of 1935. I On March 18,1998, KCPL and Western Resources I On July 30,1998, KCPIls and Western Resources' entered into an Amended and Restated Agmement I shareholders approved the Amended Agreement and Plan of Merger (Amended Agreement). This at special meetings of shareholders. Ilowever, the Amended Agreement provides for the combination j transaction is still subject to several other closing l of the regulated electric utilities of KCPL and i conditions, including: Western Resources into Westar Energy, a new

• 8pproval by a number of regulatory and company, using purchase accounting. Westar Energy <

governmental agencies (applications for would be owned approximately 80.1% by Western I l approval filed during 1998), Resources and approximately 19.9% by KCPL !

• receipt of the final orders from the various shareholders. ECPL shareholders would receive -

federal and state regulators on terms and I for each share of KCPL's stock one sham of Westar I conditions which would not have a material Energy common stock and a fraction of a share of adverse effect on the benefits anticipated by Western Resources mmmon stock. The value of the Western Resources in the merger, transaction to KCPL shareholders cannot be e reasonable satisfaction by Western Resources determined until closing. If Western Resources that it will be exempt from all of the provisions average stock price for a twenty day period just of the Public Utility Holding Company Act of prior to closing is less than or equal to $29.78 either ' 1935 other than Section 9(aX2) thereof. I party can terminate this Amended Agreement. We cannot predict when or if the closing conditions I will be met. If the merger has not closed by The Amended Agreement allows the KCPL Board December 31,1999, either party may terminate discretion to make changes (including increases) j the Amended Agreement. in the KCPL Common Stock dividend consistent. I Ja = C 4 A m 6 4 8 ca * =w L_

Notes to C o n s o li d a t e d Financial Statemenis (continued)

13. Quarterly Operating Results (unaudited)

Quarter 1st 2nd 3rd 4th 1998 (millions) Operating revenues 8 196 240 313 190 Operating income 30 51 77 26 Net income 14 39 59 9 Basic and diluted earnings per common share 0.22 0.60 0.94 0.13 Quarter 1st 2nd 3rd 4th 1997 (millions) Operating revenues 195 8 215 290 196 Operating income 28 37 73 25 Net income ' (15) 24 58 10 Basic and diluted earnings per common share (0.26) $ 0.37 0.92 0.14 The quarterly data is subject to seasonal fluctu-

14. Subsequeni Events ations with peak periods occurring during the summer months.

On January 26,1999, a stipulation and agreement j among KCPL, the MPSC staff and public counsel In February 1997 KCPL paid UtiliCorp United Inc. l was filed with the MPSC. Subject to MPSC approval, (UtiliCorp) $53 million for agreeing to combine the stipulation and agreement would reduce annual with Western Resources within two and one-half revenues from Missouri customers by about years from the termination of KCPUs agreement $15 million. to merge with UtiliCorp. This agreement was terminated due to failure of KCPL shareholders to On February 17,1999, an explosion occurred at approve the transaction with UtiliCorp. Additionally, KCPUs Hawthorn Generating Station. The cause of the ccurrence at the 11-story boiler of $7 million of merger related costs were expensed in December 1997 (see Note 12). the station's 479 megawatt Unit No. 5 is not yet known. Damage to the unit, while extensive, j has not been fully evaluated. KCPL has up to $300 million of all risks property coverage insurance and up to $100 million of boiler and machinery coverage insurance. The nature and extent ofinsurance coverage for this loss is o being determined. We are evaluating several j alternatives regarding sources of power supply ( to replace the power generated at the station. I i I ) 1 1 X=am C4 M.tiek C=+uw

I l l Report of Independent Accountants l To the Shareholders and Board of Directors Kansas City Power & Light Company: We have audited the accompanying consolidated estimates made by management, as well as balance sheets and statements of capitalization of evaluating the overall fmancial statement Kansas City Power & Light Company and. presentation. We believe that our audits provide Subsidiaries as of December 31,1998 and 1997, a reasonable basis for our opinion. and the related consolidated statements ofincome, in our opinion, the fmancial statements referred to retained earnings, cash flows and comprehensive above present fairly, in all material respects, the income for each of the three years in the period consolidated financial position of Kansas City ended December 31,1998. These financial state. Power & Light Company and Subsidiaries as of ments are the responsibihty of the Company's December 31,1998 and 1997, and the consolidated management. Our responsibihty is to express an results of their operations and their cash flows for opinion on these financial statements based on each of the three years in the period ended our audits. December 31,1998,in conformity with generally We conducted our audits in accordance with accepted accounting principles. generally accepted auditing standards. Those standards require that we plan and perform the -i d audit to obtain reasonable assurance about N'^ 5 2' ww whether the financial statements are free of material misstatement. An audit includes January 29,1999, except with respect to the second examining, on a test basis, evidence supportm.g paragraph of Note 14, as to which the date is the amounts and disclosures in the financial statementa. An audit also includes assessing the accounting principles used and significant h Xanw C4 Ame & 4htCom l t

Summary of Operations and Financial Data Cummary or Earnings (thousands) 1998 1997 1996 1995 1994 1988 Operating Revenues 988,941 895,943 903,919 885,955 868.272 h 791,650 _ Operating Expenses 754,776 733,221 726,106 718,907 718,581 ! 611,406 Operating Income 184,165 162,722 177,813 167,048 149,691 180,244 Other Income c.nd (Deductious) 8,397 (13,980) (11,559) 10,060 2,500 15,267 Income Before ' Interest Charges 192,482 148,742 166,254 177,108 152,191 195,511 interest Charges 71,740 72,182 58,083 54,522 4_7,,416 89.856 Net Income 120,722 76,560 108,171 122,586 104,775 l 105,655 Pmferred and Preference l Stock Dividend

Requirements 3.884 3,789 3,790 4,011 3,457 6,681 Available for Common Stock 118,838 8

72,771 104,381 118,575 101,318 l$ 98,974 Ccpitallsallon (thousands)' l Common Stock Equity 8 891,802 8 878,420 910,449 897,938 874,699 i $ 810,801 Ihferred Stock 80,000 89,000 89,000 89,000 89,000 92,000 Preferred Stock' 62 62 62 1,436 1,596 2,556 Preferred Securities

• 150,000 150,000 Long-term Debt 912,913

$ 1,008,187 970.727 8 909,516 831,889 i$ 992,897 Csamon Stock Data Average Shares Outstandmg tthousands) ' 81,884 61,895 61,902 61,902 61,903 61,878 Earnings per Coinmon Share 1.89 1.18 1.69 1.92 1.64 1.60 Return on Year-end Common Equity 13.1% 8.3% 11.5 % 13.2% 11.6 % 12.2% Cash Dividends per Share 1.64 1.62 1.59 1.54 1.50 1,17 Book Value per Share - 14.41 14.19 14.71 14.50 14.13 13.10 Common Stock. Equity Ratio 47,4% 42.8 % 46.8% 49.2% 49.6% 43.9% Common Stock Price High 8 31 % 29 % 29% 26% 23 % 16% _ Low 28 27% 23% 21K $ 18% 12% Other Data and Ratios Utility Capital i Expenditures (thoussads) 119,540 124,734 100,947 134,070 124,965 !$ 95,022 Tbtal Assets (thousands) $ 3,012,364 $ 3,058,033 $ 2,914,512 $ 2,882,506 8 2,770,397,8 2,647,415 Ratio of Earnings I to Fixed Charges 2.87 2.03 3.06 3.94 4.07 2.75 'includen amounts to be redeemed orpurchased and current maturities

• Ridermable

{ M C4 b== d 4MC o n

Electric Statistics Electric Sales Statistics _ _ _. _ _. _ _ 1998 .,_ 199,7_ 1996_ 1995 1994 1988 Revenues (thousands) Residential 8 334,228 .115,240 306,340 306,171 8 288,872 8 266,745 Commercial 391,921 379,307 379,824 370,467 361,254 326,716 Industrial 119,316 116,269 119,395 114,539 116,271 112,699 Other 7,459 11,589 14,488 14,303 14,223 13,716 _ + htal retail 852,924 822,399 820,047 805,480 780,620 719,876 Bulk power 71,121 59,647 71,894 65,749 76,180 55,114 Other sales for resale 4,056 4,055 3,549 3,143 3,459 4,826 e Atal. 928,101 886,101 895,490 874,372 860,259 l 779,816 Other electric revenues 10,840 9,842 8,429 11,583 8,013 t 3,652 ~%tal 8 938,941 895,97 3 ~ 53,919 885,955 3 868 172 !$ 783,468 - Megawatt Hour Sales ' esidential 4,413,732 4,087,618 3,906,196 3,879,975 3,644,789 3,251,764 R Commercial 8,204,153 5,897,781 5,659,237 5,422,077 5,283,884 4,554,053 Industrial 2,755,710 2,640,294 2,737,464 2,573,883 2,561,695 2,229,379 Other 68,255 63,480

62200, 65,492 69,612

_ 71,539 _ htal retail 13,441,850 12,689,173 12,365,597 11,941,427 11,559,980 10,106,735 Bulk power 3,435,974 3,177,576 4,071,222 4,045,225 4,733,951 2.841,579 Other sales.fo.r. resale- - - - - 124.584-119,926-100,809 78,127 87,334 113,605.- - Average Number of Customers Residential 393,173 388,547 381,389 377,302 372,098 351,199 Commercial 52,031 51,655 50,677 49,797 49,763 46,316 Industrial 2,575 2,716 2,814 2,677 2,271 2.479 Other 119 120 123 131 130 132 ~%tal retail U7,896 1 43,058 435,003 429,907 424,262 ] 400,126 ~^ ~ Bulk power 25 27 28 22 32 22 Other sales for resale 11 11 12 11 12 11 %tal 447,934 443,076 435,043 429,940 424,306 I 400,159 Residential Sales Average mwh per customer 11.2 10.5 10.2 10.3 9.8 9.3 Average revenue per kwh 7.8e 7.7e 7.8e 7.9e 7,9e 82e Load Statistics Net generation-mwh 16,538,214 15,415,784 16,128,325 15,852,834 16,158,937 12,706,839 @rchased-mwh 1,256,094 1,397,130 1.2_18,715 _ 969,525 980,306 1,053,228 %tal-mwh 17,794,308 16,812,914 17,347,040 16,822,359 17,139.243 i 13,760,067 Maximum net hourly demand in j 8 megawatts-winter 2,117 2,002 2,012 1,864 1,810 1,573 4 megawatta-summer 3,175 3,044 2,987 2.909 2,714 2,656 Net generating capability in megawatts (summer) 3,361 3,297 3,134 3,103 3,098 2,992 Net capacity (sold) purchased summer (megawatts) 272 399 408 426 453 36 Btu per kwh generated.. 10,539 10,594 10,669 10,619 10,553 _ _ 10,797 Number of Employees j December 31 2,233 2,298 2,297 2,330 2,362 ! 2,863 December SI adjusted' 2,550 2,594 2,602 2,643 2,738 ! 3.214

• Excludes employees allocated to other participatung companies at Lacygne and latan stations and includes employees allocated from Wolf Creek.

Xansas C4 h,=s anL4AiCneans O L

Shareholder Infofmation Form 10-K Annual Meeting of Shareholdern Copies of KCPilm 1998 annual report Gled with All shareholders will receive in March proxy the Securities and Exchange Commission on material 8 and information about KCPils annual Form 10-K will be provided at no charge to any shareholders' meeting, to be held on May 4,1999 shareholder or benencial owner of shares in in Kansas City, Missouri. More details will be KCPils stock upon written request to: available in the proxy materials. Any questions Corporate Secretary may be directed to investor llelations at Kanman City Power & l.ight Company 800-245-5275. P.O. Ilox 418679 Kannan City, Minnouri 64141-9679 Dividend Heinvestment and Stock Purchase Plan i Stock Data e KCPL ofTers its common stock shareholders the KCPL stock is traded on the New York Stock Exchange (NYSE1 and the Chicago Stock opportunity to increase their investment through a Dividend Reinvestment and Stock Purchase Exchange, under the ticker symbol KLT. Plan. Quarterly common stock dividends may be Shareholders of record as of Decemler 31,199x: automatically reinvested to purchase common 22.070. stock. Optional cash amounts, ranging from $100 All dividends paid by KCPL in 1998 were to $5,000, may also le invested monthly toward determined to be dividend income and no the purchase of additional sharem Shareholders portion was considered a return of capital. may choose to surrender their stock certificates to the transfer agent for deposit (safekeepings in World Wide Web Site their Dividend Reimestment accounts. For more Information available includes Company news infbrmation or an authorization form. contact relea es, stock quotes, customer account informa-Investor f(clations, UMll llank, n.a., or visit tion and information about KCPlls products and KCPils website at www kepl.com. services. You can visit the site at www.kepl.com. Common Stock Dividends Paid Direct Deposit of Dividends (,on vem.ent direct deposit of dividends is available Quarter 1999 1998 1997 to shareholders w ho wi3h to have dividends First $ 0.415 $ 0.405 $ 0 405 deposited directly to personal checking, savings or Second 0.405 0405 other accounts. Electing direct deposit will change Third 0.415 0.405 only the mailing of dividends. Annual reports and Fourth 0.415 0.405 proxy materials will not be afTected. For an enrolb ment form, please contact imestor Relations or Preferred Stock Dividends UMil Bank, n.a., or visit KCPils website at Quarterly dividends on preferred stock were declared www.kepl com. in each quarter of 1998 and 1997 as follows: Cumulative Preferred Stock Registered Shareholder Inquirien For account information or assistance, including Series Amount change of address, stock transfers, dividend 3.809 $ 0.95 payments, duplicate accounts or to report a lor.t 4 00q 1.00 certificate, please contact investor Relations at 4.20':; 1.05 800-245-5275. 1 4.359 1.0875 e 4.509 1.125 Financial Inquiries Security anahsts and investment professionals Two-Year Common Stock flintory KCPI's common stock price range was as follows: seeking Hnancial information about KCPL may contact Investor Relations at 816-556-2312. 1998 1997 Quarter liigh Low liigh low Transfer Agent and Stock Regintrar First S 31% $ 28% $ 294 $ 28 UMil llank, n a. Second 31% 28 % 29 - 27:' Securities Transfer Division Third 30% 28 29 % 2M4 PO. Ilox 410064 Fourth 31 % 28% 291+ 279 Kansas City. Missouri 64141-0064 816-h60-7766

U Kansas City Power & Light b 12 91 W a l u s t ll a n s a s C i t y Missesti 64105 s G r 9 l I

ARTHUR ~ ANDERSEN 1 l L* Lf I I m M -e--wwa.V g _1/

ARTHUR ANDERSEN LLP KANSAS ELECTRIC POWER COOPERATIVE, INC. FINANCIAL STATEMENTS AS OF DECEMBER 31,1998 AND1997 TOGETHER WITH AUDITORS' REPORT I

ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Trustees of Kansas Electric Power Cooperative, Inc.: We have audited the accompanying balance sheet of Kansas Electric Power Cooperative, Inc., (KEPCo) as of December 31,1998, and the related statements of revenues and expenses, cash flows, changes in patronage capital, and comprehensive income for the year then ended. These financial statements are the responsibility of KEPCo's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of KEPCo as of December 31,1997, were audited by other auditors whose report dated January 30,1998, on those statements was qualified with respect to substantial doubt about the ability of KEPCo to continue as a going concern in the event industry restructuring occurred in Kansas in 1998 (Note 3), and with respect to certain depreciation and amortization methods that do not conform to generally accepted accounting principles. We conducted our audit in accordance with generally accepted auditing standards and the standards for financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As more fully described in Note 4 to the financial statements, certain depreciation and amortization methods have been used in the preparation of the financial statements which do not, in our opinion, conform to generally accepted accounting principles. In our opinion, except for the effects on the financial statements of the matters referred to in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of KEPCo as of December 31,1998, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued a report dated February 26,1999, on our consideration of KEPCo's internal control structure and a report dated February 26,1999, on its compliance with laws and regulations. & M cc P Kansas City, Missouri, February 26,1999

KANSAS ELECTRIC POWER COOPERATIVE, INC. BALANCE SilEETS DECEMBER 31,1998 AND 1997 ASSETS 1998 1997 UTILITY PLANT: In-service $ 203,392,429 $ 203,204,033 Less-Allowances for depreciation 42,345,132 38,258,340 161,047,297 164,945,693 Construction work in progress 761,307 717,081 Nuclear fuel, net of amortization 4,857,027 4,920,141 166,665,631 170,582,915 RESTRICTED ASSETS: Investments in the National Rural Utilities Cooperative Finance Corporation 2,613,261 2,622,389 Bond fund reserve 4,088,788 4,079,464 Decommissioning fund 3,927,828 3,467,355 Investments in associated organizations 122,049 120,426 10,751,926 10,289,634 CURRENT ASSETS: Cash and cash equivalents 5,548,140 4,470,005 Short-term investments 3,426,212 4,464,605 Member accounts receivable 5,336,610 6,266,901 Materials and supplies, at average cost 2,196,896 2,163,109 Other assets and prepaid expenses 541,327 623,373 17,049,185 17,987,993 OTHER LONG-TERM ASSETS: Deferred charges-Wolf Creek disallowed costs (less accumulated amortization of $5,339,056 and $4,686,520 for 1998 and 1997, respectively) 20,643,864 21,296,400 Deferred Department of Energy decommissioning costs 698,508 765,950 Deferred incremental outage costs 532,814 2,661,721 Other deferred charges (less accumulated amortization of $190,704 and 50 for 1998 and 1997 respectively) 2,306,987 2,497,691 Unamortized debt issue costs 5,170,695 5,593,231 Wolf Creek nuclear operating investments 3,602,367 3,206,626 Other investments 9,309,848 6,988,543 42,265,083 43,010,162 $ 236,731,825 $ 241,870,704 (continued)

KANSAS ELECTRIC POWER COOPER ATIVE, INC. BALANCE SHEETS DECEMI1ER 31,1998 AND 1997 (continued) PATRONAGE CAPITAL AND LIABILITIES 1998 1997 li PATRONAGE CAPITAL: Memberships 3,000 3,000 Patronage capital (payment restricted as indicated) 10,759,339 7,431,888 Unrealized gain in market value ofinvestments 962,577 799,485 I 11,724,916 8,234,373 LONG-TERM DEBT: I Federal Financing Bank 114,667,212 120,429,102 Cooperative Finance Corporation 56,390,000 57,390,000 Pollution control revenue bonds 37,500,000 38,300,000 208,557,212 216,119,102 Less-Current maturities of long-term debt (6,774,705) (7,692,480) 201,782,507 208,426,622 I OTHER LONG-TERM LIABILITIES: Deferred Department of Energy decommissioning costs 638,636 707,031 Wolf Creek decommissioning liability 3,927,828 3,467,355 Wolf Creek nuclear operating liabilities 2,310,841 2,259,740 Arbitrage rebate payable 563,483 429,502 7,440,788 6,863,628 CURRENT LIABILITIES: I Current maturities of long-term debt 6,774,705 7,692,480 Accounts payable 5,783,509 6,370,194 Payroll and payroll related liabilities 155,984 96,392 I Accrued property taxes 1,165,509 1,289,415 Accrued interest payable 499,264 305,728 Patrenage capital distributions payable 1,404,643 2,591,872 I 15,783,614 18,346,081 $ 236,731,825 5 241,870,704 I The accompanying notes are an integral part of these financial statements.

F I I KANSAS El ECTRIC POWER COOPER ATIVE, INC. STATEMENTS OF REVENUES AND EXPENSES FOR THE YEARS ENDED DECEMBER 31,1998 AND 1997 I 1998 1997 OPERATING REVENUES: Sales of electric energy $ 75,736,191 $ 76,439,911 I Other 665,188 509,096 76,401,379 76,949,007 OPERATING EXPENSES: Power purchased 36,028,125 35,825,442 Nuclear fuel 2,908,466 2,501,840 Nuclear plant operations 6,242,869 6,246,379 Nuclear plant maintenance 2,491,909 2,354,231 i Nuclear plant administrative and general 1,404,077 1,360,154 Administrative and general 3,598,049 3,171,466 Amortization of deferred charges 843,240 681,824 Depreciation 5,087,567 5,024,125 58,604,302 57,165,461 Net operating revenues 17,797,077 19,783,546 INTEREST AND OTHER DEDUCTIONS: Interest on long-term debt 14,050,051 16,347,956 Amortization of debt issue costs 431,536 348,504 I Other interest expense 120,453 35,990 14,602,040 16,732,450 Net operating rnargin 3,195,037 3,051,096 OTHER INCOME AND EXPENSE: Interest income 1,585,473 1,682,710 I Otherincome (expense) (48,416) 64,511 1,537,057 1,747,221 Net rnargin $ 4,732,094 $ 4,798,317 1,e _ganxing.. a,e an,.g,al ga,t of the,e fi_ial s,at_ I I

KANSAS ELECTRIC POWER COOPER ATIVE, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,1998 AND 1997 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net margin $ 4,732,094 $ 4,798,317 Adjustments to reconcile net margin to net cash I provided by operations-Depreciation and amortization 5,087,567 5,024,125 Amortization of nuclear fuel 2,908,466 2,501,840 Amortization of deferred charges 843,240 681,824 Amortization of deferred incremental outage costs 2,128,906 1,720,789 Decrease (increase) in deferred charges 67,442 (29,671) Increase in deferred incremental outage costs (3,194,067) l Increase in decommissioning liability 460,473 682,987 Increase in arbitrage rebate payable 133,981 282,058 Change in other long-term liabilities (17,292) 75,293 I Changes in current assets and liabilities-Member accounts receivable 930,290 35,850 Materials and supplies inventory (33,787) (5,476) Other assets and prepaid expenses 82,046 80,945 Accounts payable (586,685) 1,859,630 Payroll and payroll related liabilities 59,592 47,250 Accrued property taxes (123,906) (189,022) Accrued interest payable 193,536 (258,829) Net cash provided by operating activities 16,865,963 14,113,843 CASH FLOWS FROM INVESTING ACTIVITIES: p Additions to electric plant (1,233,398) (1,116,406) Additions to nuclear fuel (2,845,352) (2,791,307) 1 Wolf Creek nuclear operating investment (395,741) (430,343) Increase in decommissioning fund assets (460,473) (682,987) Net change in unrealized gain on investments 163,092 333,293 Increase in other restricted investments (1,819) (140,196) Sales (purchases) of short-term investments 1,038,393 (816,080) Purchases of other investments (2,321,304) (1,747,733) Net cash used in investing activities (6,056,602) (7,391,759) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (7,561,890) (4,781,228) 1 Fees paid for refinancing long-term debt (3,323,602) Amortization of debt issue costs 422,536 348,504 Deferred patronage dividends paid (2,591,872) (4,459,628) l Membership fees 100 Net cash used infinancing activities (9,731,226) (12,215,854) Net increase (decrease) in cash and cash equivalents 1,078,135 (5,493,770) CASH AND CASH EQUIVALENTS AT: Beginning of year 4,470,005 9,963,775 End of year $ 5,548,140 $ 4,470,005 The accompanying notes are an integral part of these financial statements.

KANSAS ELECTRIC POWER COOPER ATIVE, INC. STATEMENTS OF ClIANGES IN PATRON AGE CAPITAL FOR TlIE YEARS ENDED DECEMITER 31,1998 AND 1997 Unrealized Gain On Patronage Memberships investments Capital Total llALANCE, December 31,1996 2,900 466,192 $ 5,225,443 $ 5,694,535 Unrealized gain market value of investments 333,293 333,293 Membership fees 100 100 Net margin 4,798,317 4,798,317 Patronage capital distributions (2,591,872) (2,591,872) BALANCE, December 31,1997 3,000 799,485 7,431,888 8,234,373 Unrealized gain market value of I investments 163,092 163,092 Net margin 4,732,094 4,732,094 Patronage capital distributions (1,404,643) (1,404,643) BALANCE, December 31,1998 3,000 962,577 $ 10,759,339 $ 11,724,916 I KANSAS ELECTRIC POWER COOPER ATIVE, INC. STATEMENTS OF COMPRElIENSIVE INCOME FOR Ti1E YEARS ENDED DECEMilER 31,1998 AND 1997 I 1998 1997 NET MARGIN $ 4,732,094 $ 4,798,317 CliANGE IN UNREALIZED GAIN IN M ARKET VALUE OFINVESTMENTS 163,092 333,293 COMPREllENSIVE INCOME $ 4,895,186 $ 5,131,610 I Tbe a_gan,1 s _,es a,e an,n,es,ai ga,.,,bme E_iai s,a,_ w

v KANSAS ELECTRIC POWER COOPERATIVE, INC. NOTES TO FINANCIAL STATEMENTS D_ECEMBER 31,1998 AND 1997

1. NATURE OF OPERATIONS:

Kansas Electric Power Cooperative, Inc. (KEPCo), headquartered in Topeka, Kansas, was incorporated in 1975 as a not-for-profit generation and transmission cooperative (G&T). It is KEPCo's responsibility to procure an adequate and reliable power supply for its 22 distribution rural electric cooperative members pursuant to all requirements of its power supply contracts. KEPCo is governed by a board of trustees representing each of its 22 members, which collectively serves more than 100,000 electric customers in two-thirds of rural Kansas. KEPCo is under the jurisdiction of the Kansas Corporation Commission (KCC) and was granted a limited certificate of convenience and authority in 1980 to act as a G&T public utility.

2.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES: Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. System of Accounts KEPCo maintains its accounting records substantially in accordance with the Rural Utilities Service (RUS) Uniform System of Accounts and in accordance with accounting practices prescribed by the KCC (Note 14 - RUS Development). Utility Plant and Depreciation Utility plant is stated at cost. The cost of repairs and minor replacements are charged to operating expenses as appropriate. Costs of renewals and betterments are capitalized. The original cost of utility plant retired and the cost of removal,less salvage, are charged to accumulated depreciation. Through January 31,1987, the provision for depreciation for an electric plant-in-service was computed on the straight-line method at a 3.44 percent annual composite rate. Effective February 1,1987,in accordance with an order issued by the KCC, the provision for depreciation is computed on a present-worth (sinking fund) method which provides for increasing annual provisions over 27.736 years. Pursuant to a KCC rate order dated December 30,1998, the depreciable life was extended to reflect a full 30-year plant life. The composite rates for the years ended December 31,1998 and 1997, were 2.50 percent and 2.40 percent, respectively. Pursuant to a KCC rate order dated March 27,1992, all additions, betterments and

I improvements after January 1,1992, are depreciated over the remaining life of the plant on a straight-line basis. The provision for depreciation computed on a straight-line basis for electric and other components of utility plant as follows: Transportation and equipment 25 to 33 percent Office furniture and fixtures 10 to a percent I Leasehold improvements 20 percent Transmission equipment 10 percent Nuclear Fuel The cost of nuclear fuel in process of refinement, conversion, enrichment and fabrication is I recorded as an asset at original cost and is amortized to nuclear fuel expenses based upon the quantity of heat produced for the generation of electric power. The permanent disposal of I spent fuelis the responsibility of the Department of Energy (DOE). KEPCo pays one mill per net kwh of nuclear generation to the DOE for the future disposal service. These disposal costs are charged to nuclear fuel expense. Cash and Cash Equivalents All highly liquid investments purchased with an original maturity of three months or less are I considered to be cash equivalents and are stated at cost which approximates market. Short-Term and Other Investments Investments in equity securities are classified as available-for-sale in accordance with Statement I of Financial Accounting Standards (SFAS) No.115, " Accounting for Certain Investments in Debt and Equity Securities", based on KEPCo's intended use of such securities. Equity securities are carried at fair value based on quoted market prices for those or similar securities, .E with the unrealized gain / loss included as a separate component of capitalization. Investments 3 in debt securities are classified as held-to-maturity in accordance with SFAS No.115, based on KEPCo's intent to hold such securities to maturity and its ability to do so. Debt securities are I carried at amortized cost. In the balance sheet, investments in debt securities with an original maturity greater than three months and a remaining maturity less than one year are presented as current assets, and investments with a remaining maturity greater than one year are presented as long-term investments. Materials and Supplies Inventory Materials and supplies inventory for Wolf Creek Nuclear Generating Station (Wolf Creek) are stated at cost determined by the average cost method. Unamortized Debt Issue Costs Unamortized debt issue costs relate to the issuance of the floating / fixed rate pollution control I revenue bonds, mortgage notes payable to the National Rural Utilities Cooperative Finance Corporation (CFC) and fees for repricing debt. These costs are being amortized using the interest method over the remaining life of the bonds. I I

_ _ _ - _ _ _ DecommissioninyJund Assets /Decommissioninn Liability As of December 31,1998 and 1997, $3,927,828 and $3,467,355, respectively, has been collected I and is being retained in an interest bearing trust fund to be used for the physical decommissioning of Wolf Creek. The trustee invests the decommissioning funds primarily in U.S. government and agency obligations, which are carried at cost, and Homestead mutual I funds, which are carried at estimated fair market value. During 1989, the KCC extended the estimated usefullife of Wolf Creek to 40 years from the original estimates of 30 years only for the determination of decommissioning costs to be recognized for ratemaking purposes. I Additionally, on March 3,1997, the KCC approved a 1996 Wolf Creek decommissioning cost study which increased the estimate of total decommissioning costs to $409 million in 1996 dollars. Using a 4.4 percent real rate of return and 3.60 percent for the rate of inflation, the total I cost of decommissioning is approximately $1.3 billion in 1998 dollars. KEPCo is responsible for 6 pexent of the decommissioning costs for Wolf Creek or about $78 million. KEPCo's current provision for decommissioning, based on the 1996 decommissioning study,is being charged to operations over the life of the plant. Such provision totaled $213,456 and $239,896 for 1998 and 1997, respectively. In addition, the Financial Accounting Standards Board is currently deliberating the accounting for certain liabilities related to closure or removal of long-lived assets, including decommissioning, which could result in the issuance of a new accounting standard. KEPCo is not able to predict what effect such changes would have on its results of operations, financial position or related regulatory practices until the finalissuance of the revised accounting guidance, but such effect could be material. Cash Surrender Value of Life Insurance Contracts The following amounts related to Wolf Creek Nuclear Operating Corporation (WCNOC) I corporate-owned life insurance contracts, primarily with one highly rated major insurance company, are included in Wolf Creek nuclear operating investments on the balance sheets: 1998 1997 Cash surrender value of contracts $2,451,949 $2,214,426 Borrowings against contracts 358,587 358,587 I Net $2,093.362 $1.855.839 Income Taxes I As a tax-exempt cooperative, KEPCo is exempt from income taxes under Section 501(c)(12) of. the Internal Revenue Code of 1986, as amended. Accordingly, provisions for income taxes have not been reflected in the accompanying financial statements. Rates I The KCC has authority to establish KEPCo's electric rates to meet the times interest earned ratio and debt service coverage set forth by the RUS. 1 M

_ _ _ _ - _ _ _ _ _ _ _ _ _ - _ _ _ _ _ _ _ - _ _ _ _ _ - _ In 1998, KEPCo voluntarily proposed to apply a rate reduction of 8.65 percent to all KEPCo member cooperatives. As of December 30,1998, the KCC subsequently granted an order for KEPCo to apply a rate reduction of 9.88 percent. The rate reduction was applied to KEPCo's I revenues beginning July 13,1998. Revenues Revenues from the sale of electricity are recorded based on usage by member cooperatives and customers, and on contracts and scheduled power usages, as appropriate. Lonn-Lived Assets Management periodically reviews long-lived assets for impairment relating to events or changes in circumstances that would indicate the carrying amount of an asset may not be recoverable. In the event a long-lived asset was determined to be impaired, such asset would I be required to be written down to its fair value, with the loss recognized in the statement of revenues and expenses. Interest Rate Swap Agreements Financial derivatives transactions include interest rate swap agreementn, which are contractual I agreements to exchange, or " swap " a series of interest rate payments over a specified period, based on a common underlying notional amount but differing interest rate indices. KEPCo has entered into a forward interest rate swap agreement with an investment banker (the I counterparty), whereby KEPCo swapped the variable interest rate on their CFC notes for a fixed interest rate with the counterparty over the life of the debt (Note 10). Reclassifications KEPCo has reclassified the presentation of certain prior year information to conform with the I current year presentation.

3. FACTORS THAT COULD AFFECT FUTURE OPERATING RESULTS:

I KEPCo currently applies accounting standards that recognize the economic effects of rate regulation pursuant to SFAS No. 71, " Accounting for the Effect of Certain Types of Regulation," and accordingly, has recorded regulatory assets and liabilities related to its generation, transmission and distribution operations. In the event KEPCo determines that it no longer meets the criteria of SFAS No. 71, the accounting impact could be a noncash charge to operations of an amount that would be material. Criteria that could give rise to the discontinuance of SFAS No. 71 include: (1) increasing competition that restricts KEPCo's ability to establish prices to recover specific costs, and (2) a significant change in the manner rates are set by regulators from a cost-based regulation to another form of regulation. KEPCo periodically reviews these criteria to ensure the continuing application of SFAS No. 71 is appropriate. Any changes that would require KEPCo to discontinue the application of SFAS I No. 71 due to increased competition, regulatory changes or other events may significantly impact the valuation of KEPCo's only utility plant,its investment in Wolf Creek and necessitate the write-off of regulatory assets. At this time, the effect of competition and the amount of regulatory assets which could be recovered in such an environment cannot be predicted. w

- - - - - The electric utility industry in the U.S. is evolving from a historically regulated monopolistic market to a dynamic and competitive integrated marketplace. The 1992 Energy Policy Act began the process of restructuring of the electric utility industry by permitting the Federal Energy Regulatory Conunission to order electric utilities to allow third parties to sell electric power to wholesale customers over their transmission systems. Many states are currently moving toward opening the retail segment to competition. In 1996, the Kansas Legislature established a Task Force to study and establish a framework for transition of the electric utility industry to competition in retail sales of generation service. The Task Force produced a comprehensive report and proposed legislation that would restructure the electric utility industry in Kansas. The Task Force bill was introduced during the 1998 Kansas Legislature as House Bill 2619, however, the bill did not receive a hearing in the House Utilities Committee and received no consideration during the Session. In addition, legislation to address utility tax inequities and other transition steps necessary to restructure the industry were introduced in 1998, but those bills also were not considered during the Session. The threat of industry restructuring during the 1998 Legislative Session, was the basis of the 1997 audit opinion regarding uncertainty over KEPCo's ability to meet its long-term debt obligations. This uncertainty gave rise to the going concern opinion. The 1999 Session of the Kansas Legislature has not taken action on industry restructuring. Only two bills were introduced in the Kansas House to address retail wheeling, neither received formal consideration in the Utilities Committee. No restructuring bills were introduced in the Senate. Key deadlines have passed in the 1999 Session and it appears that no restructuring measures will be passed.

4. DEPARTURES FROM GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:

Effective February 1,1987, the KCC issued an order to KEPCo requiring the use of present worth (sinking fund) depreciation and amortization. As more fully described in Notes 5 and 9, such depreciation and amortization practices constitute phase-in plans which do not meet the requirements of SFAS No. 92, " Accounting for Phase-In Plans". The effect of these departures is to overstate the following amounts in the financial statements: 1998 1997 Net utility plant $43,937,081 $41,675,100 Deferred charges 5,824,410 5,540,148 Patronage capital 49,761,491 47,215,248 Net margin 2,546,243 3,463,763

5. WOLF CREEK NUCLEAR GENERATING STATION:

KEPCo owns 6 percent Wolf Creek which is located near Burlington, Kansas. The remainder is owned by the Kansas City Power & Light Company (KCPL - 47 percent) and Kansas Gas & Electric Company (KGE - 47 percent). KGE is a wholly owned subsidiary of Western Resources, Inc. Substantially all of KEPCo's utility plant consists of its share of Wolf Creek. KEPCo is entitled to a proportionate share of the capacity and energy from Wolf Creek which is used to supply a portion of KEPCo's members' requirements. KEPCo is billed for 6 percent of

_ _ _ _ _ _ - _ _ _ _ - _ - _ _ _ - _ - _ - - the operaticns, maintenance, administrative and general costs, and cost of plant additions related to Wolf Creek. All operations are accounted for in the same manner as would be a wholly owned facility. The KCC declared Wolf Creek commercially operable on September 3,1985. KEPCo's total investment includes interest and administrative costs during construction. Effective February 1,1987, the KCC issued an order to KEPCo to utilize a present worth (sinking fund) depreciation method that does not conform with generally accepted accounting principles and which constitutes a phase-in plan that does not meet the requirements of SFAS No. 92. If depreciation on electric plant-in-service was calculated using a method in accordarce with generally accepted accounting principles, depreciation expense would be increased and KEPCo's operating margin would be decreased by $2,261,982 and $3,131,517 for the years ended December 31,1998 and 1997, respectively. In addition, net utility plant would be decreased and patronage capital would be decreased by $49,761,491 and $41,675,100 as of December 31,1998 and 1997, respectively.

6. SHORT-TERM AND OTHER INVESTMENTS:

Short-term and other investments consist of the following as of December 31: 1998 1997 Fair Fair Cost Value Cost Value Short-term investments: Available-for-sale-Homestead mutual funds $ 1,162,180 $ 2,124,757 $ 1,162,180 $ 1,961,665 Held-to-maturity-U.S. government agency securities 1,301,455 1,301,455 2,502,940 2,502,h3 2,463,635 3,426,212 3,665,120 4,464,605 Other investments: Held-to-maturity-U.S. government agency securities 9,309,848 9,287,785 6,988,543 6,988,543 $11,773,483 $12.713.997 $10.653.663 $11.453.148 Included in capitalization were $962,577 and $799,485 of unrealized gains on available-for-sale equity securities as of December 31,1998 and 1997, respectively. The amortized cost of U.S. government agency securities, not held as other investments, approximated fair values as of December 31,1998 and 1997. ) l L

- The contractual maturities of debt securities classified as held-to-maturity as of December 31, 1998 are as follows: Cost Due within one year $ 1,301,455 I Due after one year through five years 1,494,830 Due after five years through ten years 2,605,000 Due after ten years 5,210,018 I $_10.611.303 The fair value of these debt securities approximate cost as of December 31,1998.

7. BOND FUND RESERVE:

KEPCo has entered into a bond covenant whereby KEPCo is required to maintain, with a trustee, a Bond Fund Reserve of approximately $3.9 million. This stipulated amount is a sufficient to satisfy certain future interest and principle obligations. The amount held in the Fg Bond Fund Reserve is invested by the trustee in tax-exempt municipal securities, pursuant to the restrictions of the indenture agreement, which are carried at cost.

8. INVESTMENTSIN ASSOCIATED ORGANIZATIONS:

Investments in associated organizations are carried at cost and consist principally of patronage capital certificates, capital term certificates and subordinated term certificates of the CFC. At December 31,1998 and 1997, investments in associated organizations consisted of the following: 1998 1997 I CFC-Membership 1,000 1,000 Capital term certificates 395,970 395,970 Subordinated term certificates 2,205,000 2,205,000 Patronage capital certificates 11,291 20,419 Other 122,049 120,426 $2.735.310 $2.742.815

9. DEFERRED CHARGES:

Disallowed Costs Effective October 1,1985, the KCC issued a rate order relating to KEPCo's investment in Wolf Creek which disallowed approximately $26.0 million of KEPCo's investment in Wolf Creek (approximately $20.6 million net of accumulated amortization as of December 31,1998), A l subsequent rate order, effective February 1,1987, allows KEPCo to recover these disallowed costs and other costs related to the disallowed portion (recorded as deferred charges) for the i period from September 3,1985, through January 31,1987, over a 27.736-year perica starting February 1,1987. Pursuant to a KCC rate order dated December 30,1998, the disallowed portions recovery period was extended to a 30-year period. KEPCo is using present worth (sinking fund) amortization to recover the disallowed costs which enables it to meet the times interest earned ratio and debt service requirements in the KCC rate order dated January 30, 1987. The method used by KEPCo constitutes a phase-in plan which does not meet the requirements of SFAS No. 92. If amortization to recover the disallowed costs was calculated using a method in accordance with generally accepted accounting principles, amortization of deferred charges would be increased and KEPCo's operating margin would be decreased by $284,263 and $332,246 for the years ended December 31,1998 and 1997, respectively. In addition, deferred charges would be decreased and patronage capital would be decreased by $5,824,410 and $5,540,148 as of December 31,1998 and 1997, respectively. Decommissioning and Decontamination Assessments The Energy Policy Act of 1992 established a fund to pay for the decontamination and g decommissioning of nuclear enrichment facilities operated by the DOE. A portion of this fund g not to exceed $2.25 billion is to be collected from utilities that have purchased enrichment services from the DOE. This portion is limited to no more than $150 million each year and will be in the form of annual assessments that will not be imposed for more than 15 years. KEPCo I. has recorded its portion of this liability which is being paid over 15 years. KEPCo has also recorded a related deferred asset which approximated $699,000 and $766,000 as of December 31,1998 and 1997, respectively, and is being amortized to nuclear fuel expense over I the 15-year assessment period. Deferred incremental Outage Costs In 1991, the KCC issued an order that allowed KEPCo to defer its 6 percent share of the incremental operating, maintenance and replacement power costs associated with the periodic refueling of Wolf Creek. Such costs are deferred during each refueling outage and are being amortized over the approximate 18-month operating cycle coincident with the recognition of the related revenues. I

10. LONG-TERM DEBT:

Long-term debt consists of mortgage notes payable to the United States of America acting through the Federal Financing Bank (FFB), the CFC and others. Substantially, all of KEPCo's assets are pledged as collateral. The terms of the notes as of December 31 are as follows: 1998 1997 Mortgage notes payable to the FFB at rates varying from 5.501% to 9.206%, payable in quarterly installments through 2018. $114,667,212 $120,429,102 I Mortgage notes payable to the CFC at a rate of l 7.597%, payable semiannually, principal payments commencing in 2003 and continuing annually through 2017. 51,340,000 51,340,000 Mortgage notes payable to the CFC at a rate of 7.597%, payable semiannually, principal payments commencing in 1989 and continuing annually through 2002. 5,050,000 6,050,000

9 1998 1997 Floating / fixed rate pollution control revenue bonds, City of Burlington, Kansas, Pooled Series 1985C, variable interest rate (3.04% at December 31,1998) payable annually through 2015. $ 37,500,000 $ 38,300,000 208,557,212 216,119,102 Less-Current portion 6,774,705 7,692,480 $201,782.507 $20M26A22 Aggregate maturities of mortgage notes payable to FFB and CFC and floating / fixed rate pollution control revenue bonds as of December 31,1998, after the repricing of certain FFB mortgage notes payable as discussed below, are as follows: Year Amount 1999 $ 6,774,705 2000 5,701,524 2001 6,349,061 2002 6,564,717 Thereafter 183,167,205 $208.557.212 At December 31,1998, KEPCo has FFB approved loans guaranteed by RUS with balances of $114,667,212. Of this amount, $3,270,063 will mature in 1999 and $1,404,642 will be used to prepay FFB debt in 1999. In addition, restrictive covenants require KEPCo to design rates that would enable it to maintain a times interest earned ratio and debt-service coverage of at least one-to-one in at least two out of every three years and prohibits distributions of net patronage capital or margins until, after giving effect to any such distribution, total patronage capital equals or exceeds 20 percent of total assets unless such distribution is approved by RUS (Note 16). On December 18,1997, KEPCo's mortgage notes payable to the CFC were refinanced by establishing a new Grantor Trust Series 1997 (the Series 1997 Trust), and issuing certificates of beneficial interest (the Series 1997 Certificates) in the Series 1997 Trust through a public offering. The refinancing allowed CFC to purchase the outstanding notes of the 1988 Grantor Trust (such notes had fixed interest rates ranging from 9.3 to 10 percent), amend them to reduce the guaranteed interest rate payable by KEPCo, and have the Trustee transfer the notes with the Guarantees of RUS attached to a new grantor trust. KEPCo simultaneously entered into a forward interest rate swap agreement (the Swap Agreement) with Morgan Guaranty Trust Company of New York (Morgan). The Swap Agreement allowed KEPCo to swap the variable interest rate on the modified notes for a fixed interest rate of 7.597 percent payable to Morgan over the life of the debt. Morgan will then pay the variable rate of interest to the Series 1997 Certificate Holders. The Swap Agreement has a total notional principal amount of approximately $57.3 million and will be in effect until the maturity of the Series 1997 Certificates. KEPCo and RUS have the right to prepay or purchase the Outstanding Notes and the Series 1997 Certificates at any time.

_ There are no prepayment penalties attached to this right. However, any termination payment [ owing under the Swap Agreement,if any, must be paid by KEPCo or RUS prior to terminating the Swap Agreement. Consequently, depending on the market conditions in the future, KEPCo or RUS could be obligated to make a payment to Morgan or could be entitled to receive a payment from Morgan. KEPCo is also exposed to possible credit loss in the event of noncompliance by Morgan to the Swap Agreement. However, KEPCo does not anticipate nonperformance by Morgan.

11. SHORT-TERM BORROWINGS:

In February 1999, the CFC approved a $10 million line of credit for KEPCo for a term of 12 months. Prior to this date a $12 million line of credit had been maintained. There were no { outstanding borrowings at December 31,1998.

12. OPERATING LEASE:

KEPCo leases office space and equipment under noncancellable operating leases. The office space minimum lease payments can be increased to the extent that taxes and insurance paid by { the lessor exceed 1987 levels. Future minimum lease payments at December 31,1998, are as follows: { Year Amount 1999 $116,258 2000 13,058 $122,3.16 { The related rental expense for 1998 and 1997 was $103,200.

13. BENEFIT PLANS:

National Rural Electric Cooperative Association (NRECA) Retirement and Security Program KEPCo participates in the NRECA retirement and security program for its employees. All employees of members of NRECA are eligible to participate in the program. In the master multiemployer plan which is available to all members of NRECA, the accumulated benefits and [ plan assets are not determined or allocated by individual employees. KEPCo's pension t expense, under this program, was $91,427 and $67,345 for the years ended December 31,1998 and 1997, respectively. Substantially all employees of KEPCo also participate in the NRECA Savings Plan 401(k) option. Under the plan, KEPCo contributes an amount not to exceed 4 percent, dependent upon the employce's level of participation, of the respective employee's base pay to provide additional retirement benefits. KEPCo contributed $41,446 and $39,108 to the plan in 1998 and 1997, respectively.

i Wolf Creek Nuclear Operating Corporation Retirement Plan KEPCo has an obligation to the WCNOC retirement plan for its 6 percent ownership interest in Wolf Creek. This plan provides for benefits upon retirement, normally at age 65. In accordance with the Employee Retirement Income Security Act of 1974, KEPCo has satisfied at least its minimum funding requirements. Benefits under this plan reflect the employee's compensation, ye.trs of service and age at retirement. Disclosure for pensions is determined under the rules prescribed by SFAS No.132. The I following sets forth KEPCo's share cf the plan's charges in benefit obligation, plan assets, and funded status, as of December 31: Changes in benefit obligation-Benefit obligation at beginning of year $2,626,890 $2,373,328 l Service cost 188,136 183,016 Interest cost 208,862 189,400 Actuarial (gain) loss 297,417 (45,090) Benefits paid (61,497) (73,764) Benefit obligation at end of year $3M5MQ,8 $2,626,890 Plan assets are invested in insurance contracts, corporate bonds, equity securities, U.S. government securities and short-term investments. 1998 1997 Changes in plan assets-I Fair value of plan assets at beginning of year $1,903,344 $1,422,967 Actual return on plan assets 280,545 270,764 Contributions during the year 280,536 283,277 I Benefits paid (61,497) (73,764) Fair value of plan assets at end of year $2A02.928 $1303Jdj Funded status $ (856,879) $ (768,636) Unrecognized net transition obligation 94,349 101,606 Unrecognized prior service cost 38,918 42,037 I Unrecognized net gain (218,557) (364,395) Accrued benefit cost $ (942.169) $ (989,388) I 1998 1997 Actuarial assumptions-Discount rate 7.50 % 7.50 % Annual salary increase rate 5.00 5.00 Long-term rate of return 9.25 9.25 l M

. KEPCo's share of the net periodic pension costs were as follows for the years ended December 31: 1998 1997 Service cost $188,136 $183,016 ' Interest cost on projected benefit obligation 208,862 189,400 [ Actual return on plan assets (280,545) (270,764) Other 116,865 150,434 Totalpension expense $233.318 $252hE6

14. COMMITMENTS AND CONTINGENCIES:

{ Litigation There is a provision in the Wolf Creek operating agreement whereby the owners treat certain [ claims and losses arising out of the operation of Wolf Creek as a cost to be born by the owners i separately (but not jointly)in proportion to their ownership shares. Each of the owners has agreed to indemnify the others in such cases. As is the case with other electric utilities, KEPCo, from time-to-time, is subject to various actions which occasionally include punitive damage claims. KEPCo maintains insurance providing liability coverage; however, the insurance companies generally reserve the right to challenge insurance coverage for punitive damage recoveries. As of December 31,1998, it is the opinion of the general counsel of KEPCo that there is not a significant probability that, as a (- result of pending or threatened personal injury actions, KEPCo will be liable for payment of actual or punitive damages in an amount material to the financial position of KEPCo. { Nuclear Liability and Insurance The Price-Anderson Act, and its amendments, currently limit the public liability, including j attorney costs, of nuclear reactor owners for claims that could arise from a nuclear incident to I $9.7 billion. If this liability limitation is insufficient, Congress will take whatever action is necessary to compensate the public for valid claims. The Wolf Creek owners (Owners) have [ liability insurance coverage of this amount which consists of the maximum available private I_ insurance of $200 million and the balance is provided by an assessment plan mandated by the Nuclear Regulatory Commission (NRC). Under this plan, the Owners are jointly and severally ( - subject to a retrospective assessment of up to $88.1'million ($5.3 mi%on - KEPCo's share), in the event there is a nuclear incident involving any of the nation's licensed reactors. This assessment is subject to an inflation adjustment based on the Consumer Price Index and [ applicable premium taxes. There is a limitation of $10 million ($600,000 - KEPCo's share) in 1-retrospective assessments per incident per year. ( The Owners also have decontamination liability, premature decommissioning liability and r . property damage insurance for loss resulting from damage to the Wolf Creek facilities in the amount of $2.8 billion ($165 million - KEPCo's share). This insurance is provided by Nuclear . Electric Insurance Limited (NEIL). In the event of an accident, insurance proceeds must first be used for reactor stabilization and site decontamination in accordance with a plan approved by the NRC. The remaining proceeds, if any, can be used for property damage. If an accident at r L Wolf Creek exceeds $500 million in property damage and decontamination expenses and the decisioa is made to decommission the plant, KEPCo's share of the remaining proceeds can be used to make up a shortfallin the decommissioning trust fund. The Owners also carry additionalinsurance with NEIL to cover costs of replacement power and other extra expenses incurred during a prolonged outage resulting from accidental property damage at Wolf Creek. If losses incurred at any of the nuclear plants insured under the NEIL policies exceed premiums, reserves and other NEIL resources, KEPCo may be subject to retrospective assessments under the current policies of approxi:nately $1 million. Although KEPCo maintains various insurance policies to provide coverage for potential losses and liabilities resulting from an accident or an extended outage, KEPCo's insurance coverage may not be adequate to cover the costs that could result from a catastrophic accident or extended outage at Wolf Creek. Any substantiallosses not covered by insurance, to the extent not recoverable through rates, could have a materially adverse effect on KEPCo's financial position and results of operations. Decommissioning Insurances KEPCo carries premature decommissioning insurance which has several restrictions. One of these is that it can only be used if Wolf Creek incurs an accident exceeding $500 million in expenses to safely stabilize the reactor, to decontaminate the reactor and reactor station site in acco'rdance with a plan approved by the NRC, and to pay for on-site property damages. This decommissioning insurance will only be available if the insurance funds are not needed to implement the NRC-approved plan for stabilization and decontamination. Nuclear Fuel Commitments At December 31,1998, KEPCo's share of Wolf Creek's nuclear fuel commitments were approximately $774,000 for uranium concentrates and conversion expiring at various times through 2001, $3.17 million for enrichment expiring at various times through 2003, and $7.67 million for fabrication through 2025.

15. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The following methods and assumptiops were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value as set forth in SFAS No. 107: Cash and Cash Equivalents-The carrying amount approximates the fair value because of the short-term maturity of these investments. Short-Terrn and Other Intestruents, Decorntnissioning Trust, Inivstrnents in Associated Organizations and Bond Fund Reserie-The fair value of these assets is based on quoted market prices as of December 31,1998. Variable-Rate Debt-The carrying amount approximates the fair value because of the short-term variable rates of those debt instruments. I

- Fixed-Rate Debt-The fair value of the fixed-rate debt is based on the sum of the estimated value of each issue, taking into consideration the current rates offered to KEPCo for debt of similar remaining maturities. The estimated fair values of the Company's financial instruments are as follows: December 31,1998 Carrying Fair Value Value Cash and cash equivalents $ 5,548,140 $ 5,548,140 Short-term investments 3,426,212 3,426,212 Other investments 9,309,848 9,287,785 Investments in associated organizations (including restricted assets) 2,735,310 3,399,580 Bond fund reserve 4,088,788 4,277,608 Decommissioning trust 3,927,828 3,927,828 Fixed-rate debt 171,057,212 190,212,248 Variable-rate debt 37,500,000 37,500,000

16. PATRONAGECAPITAL:

In accordance with KEPCo's by-laws, KEPCo's current margins are to be allocated to members. KEPCo's current policy is to allocate margins to the members based on revenues collected from the members as a percentage of total revenues. If KEPCo's financial statements were adjusted to climinate the exception to generally accepted accounting principles, total patronage capital would have been a deficit. This would result in no allocation to members. I l i &}}