ML20217G431
| ML20217G431 | |
| Person / Time | |
|---|---|
| Site: | Wolf Creek  |
| Issue date: | 12/31/1997 |
| From: | Hayes J External (Affiliation Not Assigned) |
| To: | |
| Shared Package | |
| ML20217G327 | List: |
| References | |
| NUDOCS 9804290130 | |
| Download: ML20217G431 (72) | |
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WESTERN resources.INC. 1997 FIN ANCI AL' PERFORM ANCE (Dollars in Milhons) 1997* 1996 % Change l l FINANCIAL DATA Sales . . . . . . . . $ 2,152 $ 2,047 5.1 Cost of Sales ... . 967 883 9.5 Operating Expenses . . . . 1,042 775 34.5 Net income . . 494 169 192.3 ! Total Assets . . . 6,977 6,648 4.9 Embedded cost of long-term debt . . 7.5% 7.6% ( Interest coverage ratio (before income taxes, including AFUDC) . S.52 2.67 1 OPERATING DATA Electric: l Sales (thousands of MWH) Utility service . 16,934 16,659 1.7 Wholesale 5,334 5.908 -9.7 Total . . . . 22,268 22,567 -1.3 Customers (average) . 613,715 605,971 1.3 Natural gas: j Sales (thousands of MCF) Utility service ,
. 91,314 107,086 -14.7 Transportation . . . 41,635 45.947 -9.4 Total. 132,949 153.033 13.1 Customers (average) . 651,895 650,257 0.3 Monitored security customers (at year end) . 953,097 424,080 124.7 Number of employees (at year end) .. 2,412 5,960 -59.5 q COMMON STOCK DATA Earnings per share . $7.51 $2.41 211.6 Dividends per share . . . . $2.10 $2.06 1.9 l Book value per share . , . $30.79 $25.14 22.5 Market value per share (at 12/31) $43.000 $30.875 39.3 Average shares outstanding 65,127,803 63,833,783 2.0 Number of common shareowners 59,504 63,470 -6.2 Return on average common equity . 26.2% 9.7%
i Annualized dividend yield 4.9% 6.7% Average daily volume traded 149,000 196.441 -24.2 Price / earnings ratio . . . 5.7 12.8 Common stock price range High $43.438 $34.875 l l Low . . $29.750 $28.000 i 1
- Includes results of gala on sale of Tyco common shares.
l WESTERN H E s o O R C E s. I N c. WESTERN RESOURCES - 1 C 0 M P A N Y P R O F l L E WESTERN RESOURCES (NYSE:WR) KPL Fully integrated electric utility producing and retailing electricity KGE in Kansas and selling wholesale electricity nationwide. Gervarating capacity of more than 5,312 MW. Operates more than 11,500 miles of transrnbsion lines. Serves more than 613,000 customers in Kansas and is headquartered in Topeka, Kansas. Protection One Protection One, the second largest monitored security t:ompany in'the U.S., serves more than one million customers in 48
/' / (NASDAQ: ALRM) ,
states. Protection OP/. has regional headquarters in Culver City,
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Cahfornia, and Irving, Texos, as well as major service centers in Oregon, California, Texas, Kansas and Florida.
.1 , Guardian Guardian provides Olarm monitoring services as weli as (OTC: GilS) design, installation and service of sacurity ed fire alarm
' systems throughout Florida. Guardian is headquartered in Dilywood, Florida.
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ONEOK Serves 650,000 customers in Kansas under the operating
<.bh.. (NYSE: OKE) name of Kansas Gas Service and 750,000 customers in Oklahoma under the name Oklahoma Natural Gas. ONEOK also has operations in natural gas storage, marketing and
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production. Headquartered in Tulsa, Oklahoma. Y Onsite Operates nationally to assist Industrial, institutional and (OTC: ONSE) commercial customers to reduce energy costs. Offers a full g, range of consulting services. Based in Carlsbad, California. Onsite has offices in five states, r- , Hanover Compressor Leading provider of natural gas compression rental (NYSE: HC) equipment, operation and maintenance services in the U.S. and South America. 1 ( - .' - THE WING GROUP Of fers structuring and financial expertise for international l
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Whollyowned subsidiary of Western Resources. Offers paging services to customers throughout Kansas
~
WESTAR COMMUNICATIONS and Oklahoma. Serves about 7,500 customers. i 2
WESTERN R E S o u R c E s I N C. I 3 TitATEGRES/ PLANS . HIGHL80 HTS OF 1997 l . Continue to strengthen operations to compete Produced more than 22,018 rnegawatt-hours (MWH) of electncity. ; in the coming deregulated marketplace by Retail sales up about two percent to 16.933 MWH. Retail customers controlling costs and seeking new methods to grew one percent and electric revenues exceeded $1.1 billion, grow revenues and optimize asset deployment. j i l Mergtd Westar Security with Protection One. Acquired Centennial
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Continue building a strong national brand and grow market share. Continue acquisitions Security Holdings, Network Multi-Family and reg,ched greement with and optimize customer growth. Pursue more Multimedia, adding more than 600,000 customers. Company owns affinity marketing agreements. Take advantage 82.4% of F'rotection One worth almost $780 million at year end 1997, of non-seasonal recurring monthly revenues. Western Resources invested $7.5 million in November in return for equity in Guardian worth more than $9 million at year end. Through Protection One, we own a 41% interest in Guardian. Maximize performance of natural gas assets Completed strategic alliance contributing Western Resources' natural and improve Western Resources' cash flow. gas assets to ONEOK to create the eighth largest natural gas local ; distribution company in the nation. Transaction valued at $596 million, closed 'at November 26. Company holds preferred and common stock equal to 45% onnership of ONEOK. l Hold equity position in national energy Strategic adiance created by combining Western Resources' energy services company. services business with Onsite in return for 30% equity position in Onsite. Transaction was completed in November and valued at about $3 million. Continue to hold remaining investment of Sold about 2.1 million shares when Hanover began trading publicly 3.1 million shares valued at about $65 million in June, for net proceeds of about $37.7 million. We still hold shares at year end 1997, equal to about 11% of Hanover. Continue structuring medium to large power invested in two 55-megawatt power plants in the Henan province of generation projects on a fee-for-expertise basis, the People's Republic of China. Continued development projects in the with option to participate as an equity partner. Republic of Turkey and Colombia and established affinity partnerships with other international companies. Grow market share and explore other Previously was part of the Wes+.ar Security Services subsidiary, but opportunities in the communications area. retained as a whollyowned operation of Western Resources when security assets were combined with Protection One. 3
.. iii.i WESTERN RESOURCES. I N C.
PUTTINGTHEPIECESTOGETHER
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WESTERN R E s o u R C E s, I N C. Continue to strengthen operations to compete Produced more than 22,018 megawatt-hours (MWH) of electricity. in the coming deregulated marketplace by Retail sales up about two percent to 16,933 MWH. Retail customers controlhng costs and seeking new methods to grew one percent and electric revenues exceeded $1.1 billion. grow revenues and optimize asset deployment. Continue building a strong national brand Merged Westar Security with Protection One. Acquired Centennial and grow market share. Continue acquisitions Secunty Holdings, Network Multi Family and reached agreement with and optimize customer growth. Pursue more Multimedia, adding more than 600,000 customers. Company owns affinity marketing agreements. Take advantage 82.4% of Protection One worth almost $780 million at year end 1997. of non-seasonal recurring monthly revenues. Western Resources invested $7.5 million in November in return for equity in Guardian worth more than $9 milhon at year end. Through Protection One, we own a 41% interest in Guardian. Maximize performance of natural gas assets Completed strategic alliance contributing Western Resources
- natural and improve Western Resources' cash flow, gas assets to ONEOK to create the eighth largest natural gas local distribution company in the nation. Transaction valued at $596 million, closed at November 26. Company holds preferred and common stock equal to.45% ownership of ONEOK.
Hold equity position in national energy Strategic alliance created by combining Western Resources' energy services company. services business with Onsite in return for 30% equity position in Onsite. Transaction was completed in November and valued at about $3 million. Continuo to hold remaining investment of Sold about 2.1 million shares when Hanover began trading publicly 3.1 milhon shares valued at about $65 milhon in June, for net proceeds of about $37,7 million. We still hold shares at year end 1997. equal to about 11% of Hanover. Continue structuring medium to large power invested in two 55 megawatt power plants in the Henan province of generation projects on a fee-for-expertise basis, the People's Republic of China. Continued development prc;ects in the with option to participate as an equity partner. Republic of Turkey and Colombia and established affinity partnerships with other international companies. l Grow market share and explore other Previously was part of the Westar Security Services subsidiary, but opportunities in the communications area. retained as a wholly-owned operation of Western Resources when security assets were combined with Protection One. 3
WESTERh RESOURCES, I N C. PUTTINGTHEPIECESTOGETHER
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WESTERN RESOURCf$. I N C, DE AR FELLOW SH ARE0WNERS: The future of our company is b change. Successful, vital businesses constantly ovolve by seeking new opportunities -like pieces cf an ever-growing puzzle. They carefully select and j reshape those pieces to create a logical, beneficial fit. This is how your company has advanced in 1997. We're working hard for our shareowners, putting the pieces together in strategic, innovative ways that will contribute important new strength and returns to l Western Resources. The company continued to add value to your investment in 1997. O Total return for Western Resources shareowners exceeded 48 percent in 1997. o Western Resources
- stock price in 1997 closed at $43.00 per share, up 39.3 percent from 1996's year-end price of $30.875. Our stock performance reflects the market's confidence in the performance and strategic direction of the company.
c Earnings increased to $7.51 per share, up $5.10 over last year, bolstered by profits gained through above-average returns on unregulated investments. s
WESTERN RESOURCES, i f, C . m Solid financial management strengthenad our credit ratings, enabled the reduction of short term debt and assisted the continued, aggressive pursuit of our business plan. We are strategically assessing the opportunities the rapidly changing energy business offers - and molcilt g them into valuable form. This requires thoughtful vision, coupled with expertise and diligence. We strive every day to learn and implement new ways of building increased value for our sharcowners, customers and employees. For example: m in 1997 and early 1998, we grew our monitored security bush. 3s. The combination with Protection One, and the acquisitions of Centennial Security Holdings, Network Multi-Family and Multimedia Security, created the second largest security cornpany in the United States with rnore than one million monitored security customers in 48 states. m Our investments in unregulated interests have paid off handsomely. We realized a pre-tax gain of approximately $864 million for about 18 million shares of Tyco Intemational Ltd. stock liquidated this last year following conversion from our original investment of $589 million in ADT shares. Also, in the second quarter, we recorded a pre-tax gain of $11.S million from the sale of about 2.1 million shares of Hanover Compressor stock, while continuing to hold 3.1 million shares. m Our strategic alliance with ONEOK, completed November 26, gives Western Resources 4S percent ownership of the nation's eighth largest natural gas distribution company, e in February 1997, we reached a merger agreement with Kansas City Power & Light Company. As a result of changes in both companies sluce the agreement was signed, we are meeting to discuss alternative terms of a potential merger that will be in the best interest of shareowners. m Western Resources' international arm, The Wing Group, is pursuing power projects in the emerging economics of China, Turkey and South America. Enduring businesses draw strength and structure from the past, and inspiration from the future. Since 1924, founded as The Kansas Power and Light C;mpany, Western Resources has built a firm foundation as a premier provider of electricity. Steady, regulated, localized growth brought our company to the point where in .' 990 The Kansas Power and Light Comparty had: a 1.1 million electric and natural gas customers; e About $2 billion in total assets; ; e Less than S900 million in market value. 6
l WESTERN R E S o U R C E S, I N C. l r
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a 44 . s John E. Hayes, Jr., ,
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5... hghh -. t> _f-Now, following the last few years of accelerating growth, your company has: a Access to more than 3.3 million security, natural gas and electric customers nationwide; a Almost $7 billion total assets; and I a More than $2.8 billion in market value. l Most importantly, our monitored security business gives us access to more than 60 percent of U.S. households. That's a solid footing upon which to establish a marketing advantage for our l future. And a bright future is anticipated, as we pursue a near term customer base goal of more than five million customers nationally. Our competitive spirit is strong, and our innovative vision is sound. We appreciate your investment support of Western Resources. We thank you for joining us as we mold and assemble the pieces that will help shape our future.
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John E. Hayes, Jr. Western Resources Chairman of the Board and Chief Executive Officer T
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WESTERN RESOURCE 5. I N C. For most of its history, the ener has been closely regulated, highly localized and, often, taken for granted. Now, change is coming. Deregulation is on the way. The energy business-and your investment in it-will be evolving into ) the future. Deregulation will lead to competition. Competition will create consumer choice. And consumer choice will bring nationwide opportunity. Opportunity which your company, Western Resources, already is molding into shape. o The energy market is huge. It totals more than $210 billion per year. Electricity is the largest market in the country for a single commodity. o The U.S. electricity market is extremely fragmented. Some 3,200 entities sell electricity in this country. About 220 of these are investor-owned utilities, like Western Resources. o There is no single dominant provider. Unlike the long distance telephone industry, no electricity company has more than a four percent market share. Western Resources now has about one percent, making ours the 43rd largest electric company in the nation, among those 220. a Electricity pricing varies tremendously - from about four cents per kilowatt-hour in the Midwest to almost 18 cents on the east and west coasts. The spread in industrial price is even larger. A low-cost provider will be able to attract large blocks of new business. ! 9
WESTERN RESOURCEE, I N C. So for those with the imagination to see it, and the skill and determination to gain their share, tremendous opportunity is available. Western Resources will strive to successfully meet j these opportunities with the following strategies: m Build a branded national presence. With competition, energy markets will gradually open across the country. Companies with established brand awareness will be quickest to benefit. Already, our energy and security businesses give Western Resources marketing access to 60 percent of United States households. As energy competition arrives, we will have the foundation to establish a brand presence nationwide. m Seek above average returns on energy-related investments. Growth requires investment. Further investment is fueled by returns. In recent years, Western Resources has done an outstanding job of leveraging Investments into significant cash values. Returns on our sale of Hanover Compressor and Tyco international Ltd. stock netted Western Resources more than $526 million. These funds helped propel our strategic initiatives. We will continue to inyt st in both short- and long-term opportunities that fit our objectives and offer the potential to increase shareowner value, a Continue strategic management of assets. To grow and prosper, we will focus efforts on expanding those lines of business that provide customer services on a recurring monthly basis. We will seek to improve our core assets through additional partnerships and affinity relation-ships with others who have complementary competencies. We will monetize assets not fitting our objectives. Such well-crafted growth will help Western Resources maintain and enhance our most valuable customer offerings. Western Resources continues to seek innovative opportunities offering a fit with our evolving business. For example, in 1995, when Western Resources acquired its first two security companies, some considered this move to be a departure from the energy business. I.ct's take a look at how monitored security has a logical affinity with energy: o Operational skill sets are much the same. Both monitored security and energy companies EARNINGS AND DIVIDENDS Earnings Dollars Per Share Dividends sale of inves,tments helped boost gy earnings to s7.51 per share in 1997. 96 n pygggggy m 94 93
$2.00 $4.00 $6.00 $8.00 10
WESTERN HE50UHCt!. INC. maintain 24-hour, seven-days-a--week response centers. Administration, billing, marketing and installation issues are similar to the energy business. o Both markets are extremely fragmented. More than 11,000 security companies exist nationwide. The number one provider has less than 10 percent market share. In fewer than three years, Western Resources, through its ownershio position in Protection One, has already grown to number two. We enjoy a unique opportunity to be a leader in consolidating the industry. The monitored security business also offers key advantages that enhance our core business. For example: o Security offers huge domestic growth potential. Electricity has long been available coast to coast, so most gains must now be made in market share. However, security services have reached only about 10 percent of U.S. households. Growth is now averaging 10 to 15 percent per year, and a vast. untapped market remains. o Security revenues are unaffected by seasonal changes. Month after month, year after year, security services of fer a steady revenue stream. Renewable, multi-year contracts make this business even more reliable. This strengthens our company's cash flow, and helps provide funds for additional growth. o Security is marketed nationwide. Because the security business is not regulated I!ke the utility business, we have the immediate opportunity to build a solid brand identity from coast to coast. This will offer advantages over our competitors when energy-delivery competition becomes a reahty. Far from abandoning our core competencies, we're working diligently to grow our assets in strategically advantageous ways. We will continue to enter investments that offer a stream-lined fit with our skill sets. We plan our growth to be organic, with emphasis on strong manage-ment, marketing expertise, product innovation and cost control. Historically, in the regulated en'*ironment, localism was mandated, in the globally competitive future, we believe a geographically broader business presence will be beneficial. COMMON STOCK VALUES Market Book Dollars Per Share, at 12/31 Commr.n stoch share pnce so.urd gy w:w.a m . .w .,:: . n ,-- w 1. . .~ >.a v. . ; n , w more than 39% in 1997 to close 96
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WESTERN RESOURCES. $ N C. Thriving businesses will expand their vision to encompass strategically related sectors and markets previously unimagined. Therefore, we seek to strategically expand and coordinate our markets and our methods - nationwide and worldwide. For example, we've structured our strategic alliance with ONEOK Inc. of Tulsa, Oklahoma, to optimize our natural gas assets while expanding our accec; 'o energy and potential security customers. Since 1906, ONEOK has been Oklahoma's largest natural gas utility, currently providing gas to 75 percent of that state. Our alliance was finalized on November 26,1997, and provides substantial benefits to both partners: a ONEOK will handle natural gas business. Western Resources contributed approximately 624,000 Kansas and 30,000 Oklahoma gas customers,10,000 miles of pipeline and 1,563 employees to ONEOK. ONEOK will handle the resulting gas business, totaling more than 1.3 million customers
- making it the nation's eighth largest natural gas distribution company.
m Western Resources owns 45 percent of ONEOK. That makes Western Resources ONEOK's largest sharcowner. While maintaining a substantial interest in the natural gas business, Western Resources will have the opportunity to concentrate on expanding our electric and security businesses. o Western Resources gains access to more than 730,000 new customers. This alliance allows Western Resources to market security services to ONEOK customers. The future Western Resources is building also includes new pieces to come from overseas opportunities - moving products and services into the international market. We are investigating and refining worldwide opportunities in energy, security and related areas. Here are several reasons why the international market offers great potential: o Overseas, partners are wanted for new sources of electric power. Governments in emerging economics need new sources of electric power to lift their economies. They cannot entirely fund these necessary infrastructure improvements themselves, so they are selling state-owned enterprises and/or seeking private investors to fund change. stock PRICE PERFORM ANCE Western Resources Dow Jones Industrials One Year Performance as of 12/31/97 S&P Utilities company common stock performed 5146 130 better than major financial indicators ]
~120 ,&'
by increasing more than $12, or 39%, k _110
)r ,
during the year. -100' MAR 97 JUN 97 EEP 97 DEC 97 Chart represents the value of $100 invested on December 31,1996, mcluding stock pnce appreciation and reinvestment of dividends. 12
WESTERN R E S O U R C E S, I N C. o A large amount of new generating capacity is needed. The U.S. Energy Information Administration (EIA) projects worldwide growth in electricity demand at 63 percent between 1990 and 2010. Most growth will come from emerging economies in Asia, South America, Africa, Eastern Europe and the Middle East. o The business opportunities are significant. The EIA growth projection calls for the rough equivalent of two new $500 million plants a week. That's about a billion dollars a week for new power plants - every week - through 2010. Through The Wing Group, Western Resources is a potential partner to help meet these needs. We offer expertise in structuring and financing projects in natural gas or coal-fired power generation. And we have specialized experience in all aspects of project development and completion. The Wing Group, Western Resources' international arm. Through this subsidiary we are participating in the worldwide trend toward privatized power in emerging economies. The Wing Group now has projects under development in the People's Republic of China, Colombia and the Republic of Turkey. This business offers us an opportunity to learn about offshore opportunities for the future. We're I excited about its double-digit growth potential. And we're pleased to supply expertise and capital that may dramatically improve the prospects of a better life for people around the world. Western Resources has carefully evaluated its alliances, regionally, nationally and internationally. We draw strength from partnering and investing with those businesses that enhance our company with strategic expertise, capability and focus. Our company mission - to be the leading provider of energy, security and related products and services -is executed with these deliberate strategies: ) o Maintain and grow our strong core energy business. l o Build a branded presence nationwide. o Seek above-average returns on energy-related investments. TOTAL RETURN Western Resources S&P 600 Annual Average Returns as of 12/31/97 S&P Doctric Total annual return on the cornpany's avorwwwwwwwwwww.hueur.n ahsten ! 1 Year . - stock was more than 48% in 1997, 3***""#**" ' outperforming both the s&P Electric ' and S&P 500 indexes- 5 Years - gmEJ!sma 10% 20% 30% 40% 50% 13
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WESTERN RESOURCES, I N C. While we focus on the big picture, we will not forget that success remains in the details -details attended to on a delly basis by the thousands of dedicated, spirited, Iznovative thinkers at Western Resources. These people. every day, are bringing life to our goals: o Ensuring superior customer satisfaction. We are more than an energy company. We strive to make life a little easier for our customers, to provide comfort in their lifestyles, and valuable choice in their business plans. o Offering beneficial new products and services. Customers want and demand convenience. Western Resources seeks to meet this need through new offerings such as tailored security systems, power quality and electrotechnology solutions. o Building customer loyalty. We're winning loyalty from current customers and gaining new customers through our focus on added value and superior service. By clearly differentiating ourselves from our competition, Western Resources plans to beat our competition. o improving our communities. Our obligation to good citizenship is a high priority. Our corporate culture emphasizes making a difference in our communities by making them better and safer. We provide time and resources to support a wealth of charitable and community projects year round, such as: the United Way, the March of Dimes, Partnership in Education, Meals on Wheels arid food banks, to name a few. o Caring for the world around us. Citizenship also means leaving the environment safe for future l generations. Through the company's employee-led Green Teams, we actively support more than 50 ongoing conservation, wildlife and habitat restoration projects. We are proud of our contributions to our local and international environments. The future will be a prosperous place for those with the vision to recognize the newest cnd most valuable pieces to the puzzle of success-and the skill and wisdom to reshape them for the most beneficial fit. With this in mind, Western Resources is dedicated to r:maining an outstanding choice for customers and for investors. I 15
WESTERN resources,INC. I J ( G L 0 S S A R Y l AFUDC - Allowance for funds used during construction. A z f Margin - For gas sales, the difference between the cost ( lof gas and its sales price. For electric sales, the difference l method of compensating a utility for financing costs it incurs - during construction of new facilities prior to the inclusion of between the sum of the cost of fuel and purchased power l and the sales price. those facillues in rates. Book value per share - Common stock equity per common . MCF- One thousand standard cubic feet. A measure of shire outstanding. natural gas volume.- Distribution - A system of receiving gas or electricity in its Monthly recurring revenues (MRR) - Revenue which is wholesale form and delivering it at acceptable conditions generally derived from contracts for an initial normancelable l l to retail customers. term. For example, the monthly billing to a customer receiving monitoring services from a security provider. l Earnings per share of common stock (EPS) - Portion of l l company's profit allocated to each outstanding share of MW (megawatt) - 1,000 kilowatts of electricity. The generating l . common stock. EPS is determined by dividing net income capacity of utility plants is expressed in megawatts. (less dividends for preferred and preference stock) by the average number of common stock shares outstanding. NRC (Nuclear Regulatory Commission) - The independent federal agency that regulates the civilian uses of nuclear Enhanced monitored security services - Enhanced services materials in the United States. include Extended Service Protection, Twoway Voice Communi-cation, Alarm Response (direct response by alarm company Price-eamings ratio (P/E)- A measure of the market personnel instead of law enforcement authorities) and Medical value of the company's common shares to the earnings per share of common stock. To calculate this ratio, divide identification Cards.- I the price of a stock by its earnings per share. Also known FERC (Federal Energy Regulatory Commission)- An as the " earnings multiple."
- independent, five-member commission within the Department of Energy responsible for setting rates and charges for the Rate base - The value, specified by the regulatory commission,
' transportation and sale of interstate natural gas and electricity, upon which a utility is permitted to earn a specified rate of l
return. Usually it is specified as the value of net plant plus Generating capacity - The maximum amount of electricity working capital. 8 l G given power plant is able to produce, usually expressed in megawatts. Retum on common equity (ROE) - The amount, expressed as a percentage, earned on the company's common stock equity Interest coverage ratio - A measure of a company's ability for a given period. It is calculated by dividing net income less to service its debt. To determine, divide income before income preferred and preference dividends by common stock equity, taxes, interest charges and AFUDC, by interest expense, .. excluding AFUDC. Security service centers - Monitoring stations that provide l 24-hours-a-day, seven days a week remote electronic monitoring KCC (Kansas Corporation Commission) - The regulatory of and response to customer alarm systems. Personnel at ser-body in Kansas that determines rates utilities may charge vice centers also provide direct customer service, scheduling - for their services,11 has three members, who are appointed and perform telemarketing. by the Governor. Telecommunications - The transmission of voice, data or KWH (kilowatt-hour) .- 1,000 watthours; a basic unit of electric video signals. energy equal to one kilowatt of power supplied to or taken from an electric circuit steadily for one hour. The amount of electricity Transmission lines - For electricity, wires or cables through sold or consumed is measured in kilowatt-hours. which high voltage electric power is moved from point to point. Load -The amount of electric power delivered o' required at any Wheeling - Electric utility operation wherein transmission - specific point on a system. Load also refers to the amount of facilities of one system are used to transmit power produced electricity required by a customer or a piece of equipment. When by another system. the term refers to the sum of the demand in an electric system, Wholesale customer - One who purchases energy in order it is usually er. pressed in megawatts. to M L 16
WESTERN RESOURCES, I N C. SELECTED FINANCI AL DATA (Dollars in Thousands) 1997til 1996 1995 1994(2) 1993 Year Ended December 31, l INCOME STATEMENT DATA: Sales: Energy , , . .. . $ 1,999,418 $ 2.038,281 $ 1,743,930 $ 1,764,769 $ 2,028,411 Security . . . .. . 152,347 8,546 344 - - Total sales , 2,151,765 2,046,827 1,744,274 1,764,769 2,028,411 income from operations . 142,925 388,553 373,721 370,672 370,338 Net income , , 494,094 168,950 181,676 187,447 177,370 l Earnings available for common stock 489,175 154,111 168,257 174,029 163,864 l I December 31. (Dollars in Thousands) CALANCE SHEET DATA: !- Total assets , $ 6,976,960 $ 6,647,781 $ 5,490,677 $ 5,371,029 $ 5,412,048 L l Long-term debt, preference stock, and i other mandatorily redeemable securities 2,451,855 1,951,583 1,641,263 1,507,028 1,673,988 i ! Year Ended December 31, I l COMMON STOCK DATA: Basic earnings per share , $7.51 $2.41 $2.71 $2.82 $2.76 Dividends per share , ,, ,, $2.10 $2.06 $2.02 $1.98 $1.94 l Book value per share . , , $30.79 $25.14 $24.71 $23.93 $23.08 ! 1 Average shares outstanding (000's) . . . 65,128 63,834 62,157 61,618 59,294 l Interest coverage ratio (before income taxes, including AFUDC) 5,52 2.67 3.14 3.42 2.79
]
i (1)Information reflects the gain on the sale of Tyco common shares.
- (2)Information reflects the sales of the M:ssoun Properties.
t l TOTAL SALES smions of Dollars l Total sales were up in 1997. ,eflecting ,7 increased activity in the monitored 96 security business. 95 94 93 . 1.25 1.5 1.75 2.0 2.25 11
i l WESTERN RESOURCES. INC. MANAGEMENT'S DISCUSSION AND AN ALYSIS INT:::0 DUCTION future events and conditions concerning capital expenditures, In Management's Discussion and Analysis we explain the eamings, litigation, rate and other regulatory matters, possible gen:ral financial condition and the operating results for Western corporate restructurings, mergers, acquisitions, dispositions, Resources, Inc. and its subsidiaries. We explah: liquidity and caphi resources, interest and dividend rates, environmental matters, changing weather, nuclear operations a What factors impact our business and accounting matters. What happens in each case could vary a What our earnings and costs were in 1997 and 1996 materially from what we expect because of such things as elec-e Why these earnings and costs differed from year to year tric utility deregulation, including ongoing state and federal a How our earnings artd costs affect our overall financial activities; future economic conditions; legislative developments; condition our regulatory and competitive markets; and other circum-a What our capital expenditures were for 1997 stances affecting anticipated operations, revenues and costs. o What we expect our capital expenditures to be for the years 1998 through 2000 1997 HIGHLIGHTS o How we plan to pay for these future capital expenditures Gain on Sale of Equity Securities: During the third quarter of o Any other items that particularly affect our financial 1997, we sold all of our Tyco Internationa! Ltd. (Tyco) common f condition or earnings shares for approximately $1.5 billion. We recorded a pre-tax gain of approximately $864 million on the sale which is included As you read Management's Discussion and Analysis, please b *h lee
- on the Consolidated Statements of income.
refer to our Consolidated Statements of income on page 29. We recorded tax expense of approximately $345 million in con-These statements show our operating results for 1997,1996 nection with this gain. The tax on the gain is included in
- Income and 1995. In Management's Discussion and Analysis, we es" on the Consolidated Statements of income. As discussed analyze and explain the significant annual changes of specific further in
- Financial Condition" below, this significantly affected line items in the Consolidated Statements of income.
our financial results for 1997(see Note 2). F;rward-Looking Statements: Certain matters discussed here Purchase of Protection One, Inc.: On July 30,1997, we agreed and elsewhere in this Annual Report are
- forward-looking to combine our security alarm monitoring business with statements
- The Private Securities Litigation Reform Act of Protection One, Inc. (Protection One), a publicly held security 1995 has established that these statements qualify for safe alarm monitoring provider. On November 24,1997, we com-harbors from liability. Forward-looking statements may include leted the transaction by contributing approximately $532 million words like we *believe"
- anticipate"
- expect" or words of similar in security alarm monitoring business net assets and approxi-m:aning. Forward-looking statements describe our future plans, mately $258 million in cash. The cash contributed included objectives, expectations or goals. Such statements address funds used for a special dividend of $7.00 per common share to CAPITALIZATION
SUMMARY
At 12/31 The company's capital structure at ,7 December 31,1997, was 45% commoi 96 stock equity,2% preferred and preference 95 stock,5% other mandatority redeemable 94 securities and 48% long term debt. 83 20% 40% 60% 80% 100% Long-Term Debt Common Stock Preferred end Preference Stock other Mandatorily Redeemable Securttlee 18
WESTERN H E s o u R C E s, I N C. M AN AGEMENT'S DISCUSSION AND AN ALYSIS Protection One shareowners, option holders and warrant would be in a position to issue a required fairness opinion for holders other than Western Resources. In exchange for our net the merger on the basis of the previously announced terms. security alarm monitoring business assets and cash, we r:ceived 82.4% ownership in Protection One. We entered the We canceled our shareowner meeting scheduled for January 21, security alarm monitonng business to make our company more 1998, to approve the merger. KCPL canceled a similar meeting diverse and to achieve growth. 1 r its shareowners. We and KCPL have met to discuss altema-tive terms of a potential merger. We cannot predict the timing or in December 1997 Protection One recorded a special non- the ultimate outcome of these discussions. recurring charge of approximately $40 million. Approximately
$28 million of this charge reflects the elimination of redundant On January 13, 1998, the Kansas Corporation Commission facilites and activities and the write-off of inventory and other (KCC) issued an order suspending the merger proceedings and Essets which are no longer of continuing value to Protection waived an eight month time requirement to approve the merger.
One. The remaining $12 million of this charge reflects the esth On January 26,1998, the Missouri Public Service Commission mit d costs to transition all security alarm monitoring (MPSC) issued an order suspending the merger proceedings. operations to the Protection One brand. Protection One intends We and KCPL have agreed to these suspensions. On January 9, to complete these activities by the fourth quarter of 1998. 1998, we asked the Federal Energy Regulatory Commission (FERC) to hold the docket on our proposed merger in abeyance Strategic Alliance with ONEOK inc.: On December 12,1996, until March 10, 1998, at which time we will advise the FERC we agreed to form a strategic al!iance with ONEOK Inc. (ONEOK) whether to continue to hold the docket in abeyance or that a to combine the natural gas assc-ts of both companies. In new agreement has been reached with KCPL. November 1997, we completed this strategic all'ance. We contributed substantially all of our regulated and non-regulated As of December 31, 1997, we had spent and deferred on the n tural gas business net assets totaling approximately consolidated balance sheet approximately $53 million in our
$594 million to a new company which merged with ONEOK and efforts to acquire KCPL. We had planned to expense these adopted the name ONEOK. ONEOK operates its natural gas costs in the first period following the merger. Given the status of business in Kansas using the name Kansas Gas Service the KCPL transaction, we have reviewed the deferred costs and Company. In exchange for our contribution, we received a 45% have determined that for accounting purposes, $48 million of ownership interest in ONEOK. The structure of the strategic the deferred costs should be expensed. We recorded a tiliince had no immediate income tax consequences to our special non-recurring charge of $29 million after taxes, or $0.44 company or our shareowners. per share in December 1997, to expense the costs that were incurred solely as a result of the original merger agreement. At Our 45% ownership interest in ONEOK is comprised of 3.1 million December 31,1997, we had deferred approximately $5 million common shares and approximately 19.9 million convertible related to the KCPL transaction currently being negotiated. See pr;fttred shares. If we converted all the preferred shares, we
- Financial Condition" below and Note 5.
would own approximately 45% of ONEOK's common shares pr;sently outstanding. Our agreement with ONEOK allowed us to Other Security Alarm Monitoring Business Purchases: We tppoint two mev.bers to ONEOK's board of directors. ONEOK acquired Network Multi-Family Security Corporation (Network curr:ntly pays a common dividend of $1.20 per share. The initial Multi-Family), a security alarm monitoring provider for multhunit annual dividend rate on the convertible preferred shares is dwellings based in Dallas, Texas, for approximately $171 million
$1.80 per share. in cash in September 1997. On February 4,1998, Protection One exercised its option to acquire the stock of Network Merger Agreement with Kansas City Power & Light Company: Holdings, Inc., the parent company of Network Multi-Family, from On February 7,1997, we entered into a merger agreement with us for approximately $178 millicn. We expect this transaction to i Kansas City Power & Light Company (KCPL). The merger agree- occur in the first quarter of 1998. We expect Protection One to ]
ment contemplated a tax-free, stock for stock exchange valued borrow money from a revolving credit agreement provided by ! at cpproximately $2 billion or $32 in value for each common Westar Capital, a subsidiary of Western Resources, to purchase I shir3 of KCPL. In December 1997, representatives of our finan- Network Multi-Family, j ciil advisor indicated that they be4eved it was unlikely that they j 19
cfEsTERN QE5ouRCES. I N C. CANAGEMENT'S DISCUSSION AND AN ALYSIS in November 1997, we acquired Centennial Security Holdings, All rate decreases are cumulative. Rebates are one-time events Inc. (Centennial) for approximately $94 million in cash, and do not influence future rates. See
- Financial Condition" C.,ntennial is based in Madison, New Jersey, and provides secur- below and Note 8.
ity cirrm monitoring services to more than 50,000 customers in Ohio, Michigan, New Jersey, New York and Pennsylvania. We FINANCIAL CONDITION contributed our Centennial security alarm monitoring business to Protection One on November 24,1997. 1997 compared to 1996: Earnings increased to $489 million for 1997 from $154 million for 1996, an improvement of 218%. In March 1998, Protection One acquired the subscribers and Basic earnings per share rose to $7.51 for 1997 compared to ess;ts of Wichita, Kansas-based Multimedia Security Services, $2.41 for 1996, an increase of 212%. Basic earnings per share Inc., for approximately $220 million in cash. Multimedia Security is calcusated based upon the average weighted number of l Services, Inc., has approximately 140,000 subscribers con- common shares outstanding during the period. There were no ) c'.,ntrated primarily in California, Florida, Kansas, Oklahoma significant amounts of dilutive securities outstanding at l and Texas. We expect Protection One to borrow money from a December 31,1997 or 1996. Four factors primarily affected r;volving credit agreement provided by Westar Capital to 1997 earnings and basic earnings per share compared to 1996: complete this transaction. s The gain on the sale of the Tyco common stock increased eamings Mm taas h N mWon aM basb eaegs Other Investments: In December 1997, we invested per s am W $7R
$28 million to acquire an interest in two 55-megawatt power plints in the People's Republic of China. We invested approxl_ s The write-off of approximately $48 million in costs related mat ly $3 million in power projects in the Republic of Turkey and to the KCPL Merger decreased basic earnings per share by $0.44 Colombia in 1997 (see Note 7). We also invested in other miscillaneous investments. " The operating results and special one-time charges from our first full year of security alarm monitoring business reduced Electric Rate Decrease: On May 23,1996, we reduced our 1997 earnings by $47 million and basic earnings per share q clectric rates to Kansas Gas and Electric Company (KGE) by $0.72 l cultomers by $8.7 million annually on an interim basis. On a Our reduced electric rates implemented on February 1,1997, October 22, 1996, the KCC Staff, the City of Wichita, the decreased revenues by $46 million and basic earnings per
' Citirns Utility Ratepayer Board and we filed an agreement share by $0.42 cking the KCC to reduce our retail electric rates. The KCC cpproyud this agreement on January 15, 1997. Per the Dividends declared for 1997 increased four cents per common agreement: share to $2.10 per share. On January 29,1998, the Board of a We made permaneni the May 1996 interim $8.7 million Directors declared a dividend of 531/2 cents per common decrease in KGE rates on February 1,1997 share for the first quarter of 1998, an increase of one cent from o We reduced KGE's rates by $36 million annually the previous quarter. on February 1,1997 Our book value per common share was $30.79 at December 31, o We reduced KPL's rates by $10 million annually 1997, compared to $25.14 at December 31,1996. The 1997 on February 1,1997 closing stock price of $43.00 was 140% of book value and 39% o We rebated $5 million to all of our electric customers higher than the closing price of $30.875 on December 31,1996. in January 1998 Book value is the total common stock equity divided by the com-o We will reduce KGE's rates by $10 million more annually mon shares outstanding at December 31. There were on June 1,1998 65,409,603 common shares outstanding at December 31,1997. o We will rebate $5 million to all of our electric customers 1996 compared to 1995: Basic eamings per share were $2.41 in January 1999 based on 63,833,783 average common shares for 1996, a e We will reduce KGE's rates by $10 million more annually decrease from $2.71 in 1995. Net income for 1996 decreased on June 1,1999 to $169 million from $182 million. The decrease in basic earn-ings per share and net income is primarily due to the impact of 20
WESTERN RESOURCES. I N C. M AN AGEMENT'S DISCUSSION AND AN ALYSIS an $11.8 million or $0.19 per share charge, net of tax, attribut- power marketing activity is significantly less than our margins on able to one-time restructuring and other charges recorded by other energy sales. Our power marketing activity has resulted in ADT Limited (ADT). Abnormally cool summer weather during the energy purchases and sales made in areas outside of our his-third quarter of 1996 and the $8.7 million electric rate decrease to torical marketing territory. In 1997, this additional power KGE customers also lowered earnings. marketing activity had an insignificant effect on operating income. Higher electric revenues from power marketing were off-set by our reduced electric rates implemented February 1,1997. OP.TATING RESULTS Reduced electric rates lowered 1997 revenues by an estimated in our "1997 Highlights'l we discussed five factors that most $46 million compared to 1996. The rate decreases we have tignificantly changed our operating results for 1997 compared agreed to make will impact future revenues. 131996. Natural gas revenues decreased $58 million or seven percent in The following explains significant changes from prior year results 1997 compared to 1996 because we transferred our net natural in revenues, cost of sales, operating expenses, other income gas business assets to ONEOK as of November 30,1997, and ( xpense), interest expense, income taxes and preferred and we had warmer than normal weather in the first quarter of 1997, pr;ference dividends, in December 1997, we began reporting investment income for Aftir 1997, because of the ONEOK alliance, we will no longer ONEOK based upon our common and preferred equity interests. sep;rately report natural gas operations financial information in Security alarm monitoring business revenues increased our financial statements or in our Management's Discussion $144 million from our minimal 1996 security alarm monitoring tnd Analysis. Also, we had minimal security alarm monitoring business revenues. This increase is because of our December business operations in 1995 and, therefore, we do not discuss 31,1996, purchase of the net assets of Westinghouse Security Erlations relating to it between 1996 and 1995. Systems, Inc., (Westinghouse Security Systems) and our acqui-sition on November 24,1997, of 82.4% of Protection One. As a G: venues: Energy revenues include electric revenues, power m;rk; ting revenues, natural gas revenues and other insignifi. result, we have included a full year of operating results from cint energy-related revenues. Certain state regulatory Westinghouse Security Systems and one month of operating results from Protection One. See "1997 Highlights" above and commissions and the FERC authorize rates for our electric r; venues. Our energy revenues vary with levels of sales volume. Note 3. Changing weather affects the amount of energy our customers 1996 compared to 1995: Electric revenues were five percent use. Very hot summers and very cold winters prompt more higher in 1996 compared to 1995. Our service territory experi-dem nd, especially among our residential customers. Mild enced colder winter and warmer spring temperatures during the weather reduces demand. first six months of 1996 compared to 1995 which yielded higher M;ny things will af fect our future energy sales. They include: sales in the residential and commercial customer classes. We exper enced a 17% increase in heating degree days during the ah first quarter of 1996 and had double the cooling degree days e Our electric rates during the second quarter of 1996 compared to the same o Competitive forces periods in 1995. Partially offsetting the increase in electric o Customer conservation efforts revenues was abnormally cool summer weather during the third o Wholesale demand quarter of 1996 compared to 1995 and a KCC-ordered electric o The overall economy of our service area rate decrease of $6.7 million for KGE customers (see Note 8). 1997 compared to 1996: Electric revenues increased three Colder winter temperatures, higher natural gas costs passed on to customers as permitted by the KCC and more as-available pere;nt because of revenues of $70 million from the expansion of power marketing activity in 1997. Our involvement in electric natural gas sales increased regulated natural gas revenues l power marketing anticipates a deregulated electric utility indus. 29% for 1996 as compared to 1995. The natural gas revenue increase approved by the KCC on July 11,1996, raised try. We are involved in both the marketing of electricity and risk ] management services to wholesale electric customers and the regulated natural gas revenues $14 million for the last six j purchase of electricity for our retail customers. Our margin from months of 1996. { l l l I 21 I L 1
)
WESTEnN RESOURCES, INC. M AN AGEMENT'S DISCUSSION AND AN ALYSIS 1 Cost of Sales: Items included in energy cost of sales are fuel 1996 compared to 1995: Energy business cost of sales was expense, purchased power expense (electricity we purchase $220 million higher in 1996 than 1995. We purchased more from others for resale), power marketing expense and natural power from otner utilities because our Wolf Creek nuclear gis purchased, items included in security alarm monitoring cost generating station was off-line in the first quarter of 1996 for a of sites are the cost of direct monitoring and the cost of planned refueling outage. Higher net generation due to warmer instilling security monitoring equipment that is not capitalized. weather and higher customer demand for air conditioning during the second quarter of 1996 also contributed to the higher fuel 1997 compared to 1996: Energy business cost of sales was and purchased power expeases.
$49 million or six percent higher. Our power marketing activity in 1997 increased energy cost of sales by $70 million. Security alarm monitoring cost of sales increased $4 rnillion due to the purchases of several small security alarm monitoring Actu 1 cost of fuel to generate electricity (coal, nuclear fuel, companies.
n tural gas or oil) and the amount of power purchased from other utilities were $14 million higher in 1997 than in 1996. Our Wolf Creek nuclear generating station was off-line in the fourth OMAUNG UMSES quitter of 1997 for scheduled maintenance and our La Cygne operating and Maintenance Expense: Operating and mainte-coil generation station was off-line during 1997 for an extended nance expense increased slightly from 1996 to 1997. Operating m intenance outage. As a result, we burned more natural gas to and maintenance expense increased $23 million or six percent gin rate electricity at our facilities. Natural gas is more costly to from 1995 to 1996 due to expenses associated with our regu. bum than coal and nuclear fuel for generating electricity. lated natural gas transmission service provider, Mid Continent l Market Center, f Railroad transportation limitations prevented scheduled fuel deliveries, reducing our coal inventories. To compensate for low Depreciation and Amortization Expense: The amortization of coal inventories, we purchased more power from other utilities capitalized security alarm monitoring accounts and goodwill fo/ and burned more expensive natural gas to meet our energy our security alarm monitoring business increased our deprecia-trquirements. We also purchased more power from other tion and amortization expense approximately $41 million for utilities because our Wolf Creek and La Cygne generating 1997 versus 1996. A full year of amortization of the acquisition stations were not generating electricity for parts of 1997. adjustment for the 1992 acquisition of KGE increased our depreciation and amortization expense for 1996 compared to Due to the contribution of our natural gas business to ONEOK, 1995 by approximately $14 million. our natural gas cost of sales decreased $24 million. We will no long r reflect such costs in our financial statements. Selling, General and Administrative Expense: Selling, general l and administrative expense has increased $113 million from j The security alarm monitoring cost of sales increased $35 million. 1996 to 1997. Higher employee benefit costs of approximately The increase is a result of the purchase of the assets of l $30 million and higher security alarm monitoring business l _W:stinghouse Security Systems on December 31,1996, and our selling, general and administrative expense of approximately acquisition on November 24,1997, of 82.4% of Protection One.
$83 million caused this increase. The security alarm monitoring CAPITAL EXPENDITURES MHNons of Donare Crpital expenditures increased substantially p in 1997 because of expansion in the security 96 stirm monitoring business. 95 94 93 25 125 225 325 22 4 .
. . . .._ . .___m
WESTERN Resources.INC. M AN AGEMENT'S DISCUSSION AND AN ALYSIS business increase is because of our December 31,1996, pur- LIQUIDITY AND CAPITAt RESOURCES chase of the assets of Westinghouse Security Systems and our Overview: Most of our cash requirements consist of capital acquisition on November 24,1997, of 82.4% of Protection One. expenditures and maintenance costs associated with the electric utility business, continued growth in the security alarm Othsr: We recorded a special non-recurring charge in December 1997 to expense $48 million of deferred KCPL Merger costs. m nitoring business, payment of common stock dividends and investments in foreign power projects. Our ability to attract Protection One recorded a special non-recurring charge of necessary financial capital on reasonable terms is critical to our $40 million in December 1997 to reflect the phase out of overall business plan. Historically, we have paid for acquisitions certain bus'iv ss activities which are no longer of continuing value with cash on hand or the issuance of stock or short-term debt. to Protection One, to eliminate redundant facilities and activities Our ability to provide the cash, stock or debt to fund our capital and to bring all customers under the Protection One brand. expenditures depends upon many things, including available resources, our financial condition and current market conditions. Othar income (Expense): Other income (expense) includes miscellaneous income and expenses not directly related to our As of December 31,1997, we had $77 million in cash and cash operations. The gain on the sale of Tyco common stock increased equivalents. We consider highly liquid debt instruments Other income $864 million for 1997 compared to 1996. Other purchased with a maturity of three months or less to be cash income (expense) decreased slightly from 1995 to 1996. equivalents. Our cash and cash equivalents increased $73 million from December 31,1996, due to cash held by Protection One. Intsrest Expense: Interest expense includes the interest we paid Other than operations, our primary source of short-term cash is on outstanding debt. We recognized $27 million more short-term from short-term bank loans, unsecured lines of credit and the debt interest in 1997 than in 1996. Average short-term debt bal- sale of commercial paper. At December 31,1997, we had ances were higher in 1997 than 1996 because we used approximately $237 million of short-term debt outstanding, short-term debt to finance our investment in ADT and to purchase of which $76 million was commercial paper. An additional the assets of Westinghouse Security Systems. Short-term debt
$773 million of short-term debt was available from committed interest expense declined in the second half of 1997 after we credit arrangements.
used the proceeds from the sale of Tyco common stock and a iong-term debt financing to reduce our short-term debt balance. Other funds are available to us from the sale of securities we From December 31,1996, to December 31,1997, our short-term register for sale with the Securities and Exchange Commission ,, debt balance decreased $744 million. From 1996 to 1997, (SEC). As of December 31,1997, these included $30 million of interest recorded on long-term debt increased $14 million or 13% Western Resources first mortgage bonds which may also be due to the issuance of $520 million in senior unsecured notes. issued as unsecured senior notes at our option, $50 million of KGE first mortgage bonds and approximately 11 million Western We had $16 million more in interest expense on short-term and Resources common shares. other debt in 1996 than in 1995 because we used short-term debt to finance our investment in ADT and we issued Western Our embedded cost of long-term cei4 war,7.5% at December 31. Resources obligated mandatorily redeemable preferred securi- 1997, a drop of 0.1% from December 31,1996. ties of subsidiary trusts. We also recognized $10 million more long-term debt interest in 1996 compared to 1995 due to a Cash Flows from Operating Activities: Cash provided by operations declined $355 million from 1996 primarily due to higher revolving credit agreement balance. income taxes paid on the gain on the sale of Tyco stock. Income Taxes: Income taxes on the gain from the sale of Tyco individual items of working capital will vary with our normal common stock increased total income tax expense by approxi- business cycles and operations, including the timing of receipts mately $345 million for 1997 compared to 1996. Income taxes and payments. Amortization of goodwill and subscriber did not vary significantly from 1995 to 1996. accounts associated with the security alarm monitoring business increased because security alarm monitoring opera-Przfatred and Preference Dividends: We redeemed all of our tions were small during 1996. 8.50% preference stock due 2016 on July 1,1996; therefore, 1997 preferred and preference dividends were $10 million Cash Flows from investing Activities: Cash used in investing lower compared to 1996. Preferred and preference dividends activities varies with the timing of capital expenditures, acquisi-varied slightly from 1995 to 1996, tions and investments. For 1997, we had positive net cash flow 23
WESTERN REs0URCES, INC. M AN AGEMENT'S DISCUSSION AND AN ALYSIS from investing activities because of the receipt of approximately At December 31, 1997, ratings with these agencies were as
$1.5 billion in proceeds on the sale of Tyco common stock. follows:
We had two significant investing activities during 1997 which Westem western NEle ic partially offset the proceeds from the sale of the Tyco common Resources' Resources' Company's Mortgage short term Mortgage tock. We invested $484 million to acquire security alarm Ratng Agency Bond Raung Debt Rating Bond Rating monitoring companies and accounts. We also invested approxi- S&P. . A- A-2 BBB+ m;tly $31 million in international power projects in the People's Fitch.. A- F-2 A-R:public of China, the Republic of Turkey and Colombia. M dy's . . A3 P-2 A3 Cash Flows from Financing Activities:We paid off $275 million Future Cash Requirements: We believe that internally generated borrowed under a multi-year revolving credit agreement with funds and new and existing credit agreements will be sufficient t hort-term debt in the first quarter of 1997. to meet our operating and capital expenditure requirements, debt service and dividend payments through the year 2000. In August 1997, we issued $520 million in convertible first Uncertainties affecting our ability to meet these requirements mortgage bonds. We used the proceeds, after expenses, to with Internally generated funds include the effect of competition reduce short-term debt. In November 1997, we converted the and inflation on operating expenses, sales volume, regulatory first mortgage bonds into unsecured senior notes having the actions, compliance with future environmental regulations, the time principal amount, interest rate and maturity date as the availability of generating units and weather, first mortgage bonds. This conversion satisfied mortgage r:quirements to retire bonds in order to release our natural gas We believe that we will meet the needs of our electric utility properties from the mortgage and contribute them to ONEOK customers without adding any major generation facilities in the (see Note 15). next five years. We used a portion of the proceeds from the sale of Tyco Our business requires a significant capital investment. We common stock to reduce short-term debt. In aggregate, currently expect that through the year 2000, we will need cash our short-term debt has declined from $981 million at mostly for: December 31,1996, to $237 million at December 31,1997. m Ongoing utility construction and maintenance program Cap.".al Structure: Our capital structures at December 31. designed to maintain and improve facilities providing 1997 and 1996 were as follows: electric service 1997 1996 m Growth within the security alarm monitoring business, Corrrnon stock.. 45% 45% including acquisition of subscriber accounts PrJerred and preference stock . 2% 2% e Investment opportunities in international power Westem Resources obligated mandatority redeemable development projects and generation facilities preferred securities of subsidiary trusts holding solely company subordinated debentures . 5% 6% 3 1 Capital expenditures for 1997 and anticipated capital expendi-
= = -
tures for 1998 through 2000 are as follows: Security Ratings: Standard & Poor's Ratings Group (S&P), Fitch secunty Ala m Inv:stors Service (Fitch) and Moody's investors Service "' """""" '"'** '" **' (Moody's) are independent credit-rating agencies. These ; ag:ncies rate our preferred equity and debt securities. These 1997. $159,800 $ 45.200 $30.500 517,300 $252.800 l ratings indicate the agencies' assessment of our ability to pay 1998. 142.000 216.900 52.500 41.700 453.100 l Int:r:st, dividends and principal on these securities. These ' "' l f3 ratings affect how much we will have to pay as interest or - dividends on securities we sell to obtain additional capital. The Capital expenditures in 1997 included an additional $47 million bett:r the rating, the less we will have to pay on preferred equity end debt securities we sell, in improvements to our natural gas system. Because we contributed our natural gas business net assets to ONEOK, we i 24
WESTERN RESOURCES. I N C. C AN AGEMENT'S DISCUSSION AND AN ALYSIS will not incur any direct capital expenditures related to that Wheeling Task Force (the Task Force) to study the effects of a business in future years. deregulated and competitive market for electric services. Legislators, regulators, consumer advocates and representa-
*El:ctric" capital expenditures include the cost of nuclear fuel.
tives from the electric industry make up the Task Force. The
" Security Alarm Monitoring" capital expenditures include antici- Task Force submitted a bill to the Kansas Legislature without pated acquisitions of subscriber accounts. recommendation. This bill seeks competitive retail electric
- International" expenditures include commitments to intemational service on July 1, 2001. The bill was introduced to the Kansas power development projects and generation facilities. "Other. Legislature in the opening days of the 1998 legislative session, primirily represents our commitments to our Af fordable Housing but is not expected to coine to a vote this year. The Task Force Trx Credit program (AHTC). See discussion in "Other Infor, also is evaluating how to recover certain investments in genera-mation* below. tion and related facilities which were approved and incurred under the existing regulatory model. Some of these investments Thess estimates are prepared for planning purposes and may may not be recoverable in a competitive marketplace. We have be r: vised (see Note 7). Electric expenditures will be signifi- opposed the Task Force's bill for this reason. These unrecov-cintly more than shown in the table above if we complete the ered investments are commonly called " stranded costs
- See merger with KCPL (see Note 5). " Stranded Costs" below for further discussion. Until a bill is passed by the Kansas Legislature, we cannot predict its impact Bond maturities and preference stock sinking fund requirements on our company, but the impact could be material.
will r: quire cash of approximately $303 million through the year 2002. Protection One is required to retire long-term debt of We believe successful providers of en?rgy in a deregulated market tpproximately $63 million through 1999. will provide energy-related services We believe consumers will demand innovative options and ins'st on efficient products and Our currently authorized quarterly dividend of 531/2 cents per services to meet their energy-related needs. We believe that our common share or $2.14 on an annual basis is paid from our strong core utility business provides a platform to offer the earnings. The payment of dividends is at the discretion of our efficient energy products and services that customers wili borrd of directors. Each quarter, the board makes a determina-desire. We continue to seek new ways to add value to the lives tion on the amount of dividends to declare, considering such and businesses of our customers. We recognize that our current m;tt rs as future earnings expectations and our financial customer base must expand beyond our existing service area, co @ on. We view every person in the United States and abroad as a potential customer. CTHER INFORM ATION Increased competition for retail electricity sales may reduce C:mpetition and Enhanced Business Opportunities: The future electric utility earnings compared to our historical electric Unit:d States electric utility industry is evolving from a regulated utility earnings. After all electric rate decreases are imple-monopolistic market to a competitive marketplace. The 1992 mented, our rates will range from 73% to 91% of the national En:rgy Policy Act began deregulating the electricity industry. The average for retail customers. Because of these reduced rates, Energy Policy Act permitted the Federal Energy Regulatory we expect to retain a substantial part of our current sales Commission (FERC) to order electric utilities to allow third volume in a competitive environment. Finally, we believe the p;rties the use of their transmission systems to sell electric deregulated energy market may prove beneficial to us. We also . power to wholesale customers. A wholesale sale is defined as a lan to compensate for competitive pressure in our current reg-utility selling electricity to a " middleman," usually a city or its ulated business with the nationwide security alarm monitoring utility company, to resell to the ultimate retail customer. As part Mfer M custmes of the 1992 KGE merger, we agreed to open access of our trans-( mizsion system for wholesale transactions. FERC also requires While operating in this competitive environment may place I us to provide transmission services to others under terms pressure on our profit margins, common dividends and credit comparable to those we provide to ourselves. During 1997, ratings, we expect it to create opportunities. Wholesale and wholesale electric revenues represented approximately 12% of industrial customers may pursue cogeneration, self-generation, totil electric revenues. retail wheeling. municipalization or relocation to other service territories in an attempt to cut their energy costs. Credit rating V;rious states have taken steps to allow retail customers t agencies are applying more stringent guidelines when rating purchase electric power from providers other than their local utility companies due to increasing competition. l utility company. The Kansas Legislature has created a Retail j i 25 I l
WESTERN resources,INc. M AN AGEMENT'S DISCUSSION AND AN ALYSIS W3 offer competitive electric rates for industrial improvement ment based upon competitive or other etents, we may signifi-projects and economic development projects in an effort to cantly impact the value of our net regulatory assets and our mIintain and increase electric load. utility plant investments, particularly the Wolf Creek facility. See
" Competition and Enhanced Business Opportunities" above for in light of competitive developments, we are pursuing the follow- initiatives taken to restructure the electric industry in Kansas. s ing strategic plan: )
o Mrintain a strong core energy business Regulatory changes, including competition, could advers9ly o Build a national branded presence impact our ability to recover our investment in these assets. \s
, we aw mcoM mgda% asses, o Crrate value through energy-related investments which are currently subject to recovery in future rates, of appm-To better position ourselves for the competitive energy environ- imately $380 million. Of this amount, $213 million is a ment, we have consummated a strategic alliance with ONEOK receivable for income tax benefits previously passed on to (see Note 4), have acquired a controlling interest in Protection customers. The remainder of the regulatory assets are items One (see Note 3) and continue to develop international power tt Lt may give rise to stranded cces including coal contract projects. settlement costs, deferred employee benefit costs, deferred plant costs and debt issuance costs.
Str nded Costs: The definition of stranded costs for a utility butiness is the investment in and carrying costs on property, in a competitive environment, we may not be able to fully plint and equipment and other regulatory assets which exceed recover our entire investment in Wolf Creek. We presently own the amount that can be recovered in a competitive market. We 47% of Wolf Creek. Our ownership would increase to 94% if the currently apply accounting standards that recognize the KCPL merger is completed. We also may have stranded costs economic effects of rate regulation and record regulatory from an inability to recover our environmental remediation costs assets and liabilities related to our generation, transmission and long-term fuel contract costs in a competitive environment. cnd distribution operations. If we determine that we no longer If we determine that we have stranded costs and we cannot meet the criteria of Statement of Financial Accounting recover our investment in these assets, our future net utility Standards No. 71, " Accounting for the Effects of Certain Types income will be lower than our historical net utility income has of Regulation" (SFAS 71), we may have a material extraordinary been unless we compensate for the loss of such income with non-cash charge to operations. Reasons for discontinuing SFAS other measures. 71 accounting treatment include increasing competition that ar su a m en ahssing h eh of N restricts our ability to charge prices needed to recover costs Year 2000 Issue on our reporting systems and operations. We already incurred and a significant change by regulators from a ace N h M hse Mcause many computer systems and cost-based rate regulation to another form of rate regulation. We . applications abbreviate dates by eliminating the first two digits periodically review SFAS 71 criteria and believe our net regula-pa , as u ng a se sa always W On tory assets, including those related to generation, are probable January 1, 2000, some computer programs may incorrectly of future recovery, if we discontinue SFAS 71 accounting treat-EMBEDDED COST OF DEBT Percent Our embedded cost of debt continued ,7 ,. to decrease this year to 7.5% from 96 7.6% in 1996. 95 . o 94 93 2 4 6 8 10 26 l
r WESTERN RESOURCES, I N C. M ANAGEMENT'S DISCUSSION AND AN ALYSIS recognize the date as January 1,1900. Some computer radioactivity of a nuclear plant to a level mandated by the NRC. syst:ms may incorrectly process critical financial and opera- The NRC requires companies with nuclear power plants to tiond information or stop processing a70gether because of the prepare formal financial plans. These plans ensure that funds dote abbreviation. Calculations using the year 2000 will affect required for decommissioning will be accumulated during the computer applications before Januacy 1,2000, estimated remaining life of the related nuclear power plant. We have recognized the potential adverse effects the Ycar 2000 The SEC staff has questioned the way electric utilities recog-Issue could have on our company. In 1996, we established a nize, measure and classify decommissioning costs for nuclear formal Year 2000 remediation program to investigate and electric generating stations in their financial statements. In correct these problems in the main computer systams of our respoase to the SEC's questions, the Financial Accounting company, in 1997, we expanded the program to include all Standards Board is reviewing the accounting for closure and business units and departments of our company. The goal of removal costs, including decommissioning of nuclear power our program is to identify and assess every critical system plants. If current accounting practices for nuclear power plant pot ntially affected by the year 2000 date change and to repair decommissioning are changed, the following could occur; or r place those systems found to be incompatible with year a Our annual decommissioning expense could be higher 2000 dates. than in 1997 We plan to have our year 2000 readiness efforts substantially a The estimated cost for decommissioning could be recorded completed by the end of 1998. We expect no significant opera- as a liability (rather than as accumulated depreciation) tional impact on our ability to serve our customers, pay " The increased costs could be recorded as additional suppliers, or operate other areas of our business, investment in the Wolf Creek plant We currently estimate that total costs to update all of our We do not believe that such changes, if required, would systems for year 2000 compliance will be approximately $7 million. adversely affect our operating results due to our current ability In 1997, we expormed approximately $3 million of these costs to recover decommissioning costs through rates (see Note 7). rnd based on what we now know, we expect to incur about Regulatory issues: On November 27,1996, the KCC issued a
$4 million in 1998 to complete our efforts.
Suspension Order and on December 3,1996, the KCC issued Affordable Hevning tax Credit Program: We have received an order which suspended, subject to refund, the collect;on of ruthorization from the KCC to invest up to $114 million in AHTC costs related to purchases from Kansas Pipeline Partnership investments, An example of an AHTC project is housing for included in our cost of natural gas. On November 25,1997, the r;sidents who are elderly or meet certain income requirements. At KCC issued its order lifting the suspension and closing the Dec:mber 31,1997, the company had invested approximately docket.
$17 million to purchase limited partnership interests. We are n unumn issue u anuay 1998, committed to investing approxiniately $55 million more in AHTC the company adopted Statement of Financial Accounting investments by January 1, 2000. These investments are egen s a s , sms a an accounted for using the ec;uity method of accounting. Based Enterprise and Related Information" (SFAS 131). This statement upon an order received from the KCC, income generated from establishes standards for public business enterprises to report !
th3 AHTC investmer'ts, primarily tax credits, will be used to n a abng seges in Wm aM annual offset costs associated with postretirement and postemploy-na een m s se en s am nd ment benefits offered to our employees. Tax credits are required until 1999. Operating segments are defined as compo-recognized in the year generated. nents of an enterprise about which separate ' financial Decommissloabg: Decornmissioning is a nuclear industry term information is available that is evaluated regularly by the chief for the permanent shut-down of a nuclear power plant when the operating decision maker in deciding how to allocate resources plint's license expires. The Nuclear Regulatory Commission and assess performance. Adoption of the disclosure require-(NRC) will terminate a plant's license and release the property ments of SFAS 131 will impact the presentation of the for unrestricted use when a company has reduced the residual company's business segments. 27
WESTERN R E s o U R C E s - l N C. CONSOLIDATED BALANCE SHEETS December 31, (Dollars in Thousands) 199T 1996' ASSETS-CU3ENT ASSETS: L Cash and cash equivalents . ,, ,... ... . . . . . . . . . . . . . . . . . . . . $ 76,60s $ '3,724
- Accounts receivable (net) . . .. . 4 . . . . . . . . . . . . . . .. . ........ 325.043 318,966 inventories and supplies, net . . , . . . . . . , . . . . . . . . . . . . . . . . . . , .. . . . . -86,398 135.255' Marketable securities . . ............. . . . . . . . . . . . . . . . . . .. ... , . 75,256 -
Prepaid expenses and other . . .... ..,... . . . . . . . . . . ......... . 25,483 36,503
- Total Current Assets . . .... . . . . . . . . . . . , . . . . . . . , . . . 588,790 494.448 P3tPERTY, PLANT AND EQUIPMENT, NET . . . . . . . . . . . . . ... .... . . . 3,706,528 4,384,017 CTHER ASSETS:
t_ L investment in ADT . . . ......... .. . . . . . . . . . . . . . . . .... . . , . . - 590,102
' investment in 0NEOK . . . . .... ..... . . . . . . . , . . . . .... . . 598,206: -
Subscriber accounts . . . . ,. ..... ......... . . . . . . . . . ..... 4 . . . 549,152 265.530 Gc odwill (net) .. ...... . .... ......... . . . . . . . . . .... . . . . 854,163 225,892 Regulatory asset * . . . . . . . . . . . .. . . . . . . . . . . . . .... .. 380,421 ' 458,296 Other ..... ... . .... . ..... , . . . . . . . . . . . . . . , . 221,700 229.496 Total Other Assets . . . . . . . ., , . . . , . . . . . . .. . . 2,801,642 1.769,316 Total Assets . . .. . ... , . .. . . . . . . . . . .. .. . . . . $ 6,976,980 $ 6,647,781 LIABILITIES AND SHARE 0WNERS' EQUITY L . . CU2 RENT LIABILITIES: Current maturities of long-term debt , ... . . . . . . . . . . . . $ 21,217 $ - Short-term debt . ,,. .. ... .. . . . . . . . . . . . . . . 236,500 980,740 Accounts payable . . .. .. . . . . . ... . . . . 151,166 180,540 Accrued liabilities . , ,, , ,. . . . . . . . . . .. . . ... . . 249,447- 140,204 Accrued income taxes . . . .. .. . . . . . . . . .. ..... . . . 27,360 27.053 Other . . . .. .. .. ..... . . . . , . .. . . . 89,106 23,555 Total Current Liabilities ....... . . . . . . . . . . . . . . . . . . 774.796 1.352.092 LGNG. TERM LI ABILITIES: Long-term debt (net) . . . . . . . . . . . . . . . .. . ... ...... 2,181,855 1.681.583 Western Resources oblJgated mandatorily redeemable preferred securities of subsidiary trusts holding solely company subordinated debentures . . . . . . .... ...... - 220,000 220,000 Deferred income taxes and investment tax credits . . . . . . . .. . . . , . . . 1,065,565 1,235,900 Minority interests . . , ... . . . . . . . . . .... 164,379 -
, Deferred gain from sale-leaseback . . . ...... . . . . . . . . .. . . . 221,779 233,060 Other..... . ..... . . . ... . . . . . . . . . . ... . . 259,521 225.608 Total Long-term Liabilities .. . . . . . . . . . .. . ... . 4,113,099 3.596,151 COCMITMENTS AND CONTINGENCIES SHACE0WNERS' EQUITY:
Cumulative preferred and preference stock . . . . . . , . . . . . .. , . . . . . . .. . . 74,858 74,858 Common stock, par value $5 per share, authorized 85.000,000 shares, outstanding 65,409,603 and 64,625.259 shares, respectively . . ... . . . . . . . . . . .. ... . . . . 327,048 323,126 Paid 4n capital ., , . .. . ... . ..., . . . . . . , . . . 760,553 739,433 Retained earnings . . . .,, . . . . . . . . . . . . . . 914,487 562.121 Net change in unrealized gain on equity secunties (net) . . . . . . . 4 . . . . 12.119 - Total Shareowners' Equity . .,. .... . . . . . . . . . . . . .... ... . 2,089,065 2,699,538 Total Liabilities & Sharoowners' Squity . . . . . . . . . . . . . . . .. . , , , $ 6,976,960 $ 6,647,781 ine Notes to Consondated Financial Statements are an integral part of this statement. 2e
WESTERN R E s O U R C E S. -l N C. CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, (Dollars in Thousands, Except Per Share Amounts) 1997 1996 1995 SALES: Energy . ,, . . . .. . .. ... . . $ 1,999,418 $ 2,038,281 $ 1,743,930 Security ... . , ,. . . .. . . . . 152,347 8,546 344 Total Sales . . . .. . . . . . . . . 2,151,765 2.046.827 1.744,274 C*ST CF SALES: Energy . . ,,,...... .. . . . .. . .. 928,324 879.328 658 935 Security . .. . . . .. . . . . .. .. '38,800 3,798 68
- Total Cost of Sales . . . . . ,... . . .. . 967,124 883.126 659,003 GROSS PROFIT , , .... .... .. . . . .. 1.184,641 1,163,701 1,085,271 CPER ATING EXPENSES:
Operating and maintenance expense , . . . .. .., , . . 383,912 374,369 351,589 Depreciation and amortization . ... , .. . .. 256,725 201,331 177,830 Selling, general and administrative expense .. . . . 312,927 199,448 182,131 Writeeff of deferred merger costs . . 48,008 - - Security asset impairment charge . . . . 40,144 - - Total Operating Expenses .. . . . ... .. . 1.041,716 775,148 711.550 INCOME FROM OPERATIONS , . . . . , . 142,925 388,553 373,721
~ CTHE2 INCOME (EXPENSE)s Grin on sale of Tyco securities . . . . 864,253 - -
Special charges from ADT . .. ... . . . (18,181) - Investment earnings . ... . . . . . . . 25,646 20,647 - Minority interest .. . . . . , 4,737 - - Other . . .. . .. , , .. . . 28,403 12,841 18,657
- Total Other income (Expense) . . . . , 923,039 15,307 18,657 INCOME BEFORE INTEREST AND TAXES ,.. . . . 1,065,964 403,860 392.378 I
i INTEREST EXPENSE: Int rest expense on long-term debt , , .. . .. .. . 119,389 105,741 95.962 Intirest expense on short-term debt and other .,. . . . 73,836 46,810 30.360 Total interest Expense .. . , ,. ,, , . 193,225 152,551 126,322 INCOME BEFORE INCOME TAXES . . . . ... . . .. . . 872,739 251,309 266.056 i l INCOME TAXES . . , ,. ..,, . , , . . . . . . 378,645 82,359 84,380 NET INCOME . . ..... ... . . . .. 494,094 168,950 181,676 PREFERRED AND PREFERENCE DMDENDS , . . 4,919 14,839 13,419 l EARNINGS AVAILABLE FOR COMMON STOCK . .. . . $ 489,175 $ 154,111 $ 168,257 AVERAGE COMMON SHARES OUTSTANDING , ... . ., ... . . 65,127,803 63,833,783 62,157,125 BASIC EARNINGS PER AVERAGE COMMON SHARE OlHSTANDING , . $7.51 $2.41 $2.71 DMDENDS DECLARED PER COMMON SHARE . . . . . . $2.10 $2.06 $2.02 l i
)
l i The Nctas to Consohdated Financial Statements are an integral part of this staternent. 29 c
WESTERN R E $ o u R C E s, I N C.' I CONSOLIDATED STATEMENTS OF CASH FLOWS w Yiar Ended December 31, 1 Dollars in Thousands) 1997 1996 .1995 CASH FLOWS FROM OPERATINe ACTIVITIES: .I
. Net income . . ........ ... . .. . ... . .. . $ 494,094 $ 168.950 $ 181,676
' Adjustments to reconcile net income to net cash provided by operating activities:
i
' Depreciation and amortization . .. . . .. . ...... .. 256,725 201,331 177.830 Gain on sale of securities , , .. . . . ... , . .. . ,.. (864.253) - --
Equity in eamings from investments . . . . ... ,.. ........ (25,405) (S.373) - - Write-off of deferred merger costs . .... . . ... ... 48,008. - - Security asset impairment charge ., ... .... . . 40,144 - -
' Changes in working capital items (net of effects from acquisitions):
- Accounts receivable, net .. . . . . . . . .., , ...... 14,156 (47,474) ~ (37,532)
Inventories and supplies . . .. . .., . .. .. . 3,249 10.624 (715) l Marketable securities ... . . ... ...... (10,481) - - L Prepaid expenses and other . .,, .. ..... . .. . 9,230 (14,900) 6,058
. Accounts payable . . . . . . .. . . .... ,... ., , (48,298) 15,353 18,578 l- Accrued liabilities . . . . . ......... ... 65,071 10,261 (5.079)
- l. Accrued income taxes . . . . . . . ... .. . 9,889 26,377 (14,209) l Other . . . . .... . ..... ..... .... (8,584). '(4,824) . (28,642).
- Changes in other assets and liabilities . .... . .. ... . . . (69,353) 487,285). 5.134 Net cash flows (used in) from operating activities .. ..... . ,. (85,808) 269,040 303,999 lL CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (net) ....... . , , 210,738 195.602 232.252 Customer account acquisitions . . . . , . .... ... . 45,163 - - Proceeds from sale of securities . . .,. . . , . . (1,533,530) - - Security alarm monitoring acquisitions, net of cash, acquired . . . 438,717 368,535 - j Purchase of ADT common stock . .. .. . ..... .,. - 589,362 .- Other investments (net) . . . . . . .. .. .. 45,318 6,563 15,408 Net cash flows (from) used in investing activities . . . . ... (793,594) 1.160.062 247,660 CA2H FLOWS FROM FINANCING ACTIVITIES: Short-term debt (net) . . . . .. . . . .. . '(744,240) 777,290 (104,750)' Proceeds of long-term debt i . . . . , , ,. . . 520,000 225.000 50,000 Retirements of long-term debt . . . . . . . . .... .. ... . (293,977) (16,135) (105)
. Issuance of other mandatorily redeemable securities . ... .., ,.. - 120,000 100,000
- Issuance of common stock (net) . . .,, . , , .. 25,042 Q3.212 36,161 7 Redemption of preference stock . , . ,. . ...., .. . ., -
(100.000) - I Cash dividends paid . . . .. . .. . . . . . . (141,727) (147,035) (137.946) Net cash flows (used in) from financing activities . .. (634,902) 892,332 (56.640)
. NET INCREASE (DECREASE) IN CASH AND CASH EQUlVALENTS , .. .. . . 72,884 1,310 (301)
CASH AND CASH EQUIVALENTS: Beginriing of the period . . . , ,. ,,... .... .. 3,724 2,414 1 2,7_15 End of the period ....... .... .. . .. . . .. .. $ 76,608 $ 3.724 $ 2.414
' SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMAfl0N
' CASH PAID FOR:
Interest on financing activities (net of amount capitalized) . ... . $ 193,468 $ 170,635 t 136,526
- Income taxes . .. . ,. . .. .. ... . ... .,. ... 404,548 66,692 84.811 l
' SUPPLEMENTAL SCHEDULE OF N0hCASH INVESTING AND FINANCING ACTIVITIES: ;
I Ouring 1997 the company contributed the net assets of its natural gas business totaling approximately $594 million to ONEOK in exchange for an ownership interest of 45% in ONEOK. . I
' The Notes to Consolidated Financial Statements are an integral part of this staternent.
30; \
WESTERN R E s o U R C E s, I N C. I CONSOLIDATED STATEMENTS OF CUMULATIVE PREFERRED AND PREFERENCE STOCK December 31, (Dollars in Thousands) 1997 1996 j CUL'ULATIVE PREFERRED AND PREFERENCE STOCK: Preferred stock not subject to mandatory redemption, par value $100 per share, authorized 600,000 shares, outstanding - 41/2% Series, 138,576 shares . . , ,.. .. . .. ... .. .. $ 13,858 $ 13,858 41/4% Series,60,000 shares . ..,,,. .. ... .. . .. ,. .. . . 6,000 6,000 5% Series,50,000 shares . ,,,,, 5,000
. . . .. .4 , ... . ... .. 5.000 24,858 24,858 Preference stock subject to mandatory redemption, without par value, $100 stated value, authorized 4,000,000 shares, outstanding -
7.58% Series, 500.000 sheres. . .. .. . . .. . 50,000 50,000 TOTAL CUMULATIVE PREFERRED AND PREFERENCE STOCK . .. . . ... . . ., 6 74,858 $ 74,858 CONSOLIDATED STATEMENTS OF COMMON SHA?E0WNERS' EQUITY Unrealized Gain Common Paidin Retained on Equity (Dollars in Thousands) Stock Capital Earnings Secunties (net) CALANCE DECEMBER 31,1994 61,617,873 shares . . . . , , ., $ 308,089 $ 667,992 $ 498,374 $ - Net income . . ,, . . , , . . . 181,676
' CIsh dividends:
Preferred and preference stock . , , , .. .. . (13.419) Common stock, $2.02 per share . . . . . . (125,763) Expenses on common stock . . . . .... ... . . (772) issuance of 1,238,088 shares of common stock . . . . , , 6,191 30,742 CALANCE DECEMBER 31,1095 62.855.961 shares , , . . . . . . . .. 314,280 697,962 540,868 - Net income < . . .,. ,, ,. ..... 168,950 Cash dividends: Preferred and preference stock , , .. . . . (14,839) Common stock, $2.06 per share . . . . . .. (131,611) Issuance of 1,769,298 shares of common stock . . ... 8,846 41,471 (1,247) CALANCE DECEMBER 31,1996 i 64,625,259 shares . ..., , . ., . .... 323,126 739,433 562.121 - Net income . . . . . . .. . .. . .. 494,094 Cash dividends: Preferred and preference stock . .. . ... . (4,919) Common stock, $2.10 per share , ,... ., (136,809) Expenses on common stock . , . ... (5) issuance of 784,344 shares of common stock . . . . . . 3,922 21.125 Ntt change in unrealized gain on equity securities (net of tax effect of $13,129)'. . . . . . . 12,119 FALANCE DECEMBER 31,1997 , 65,409,603 shares . . . .. . . .. . , $ 327,048 $ 760,553 $ 914.487 $ 12,119 i The Notes to Consolidated Financial Statements are an integral part of this statement. 31
WESTERN RESouRLES, INC. NOTES TO CONSOLIDATED FIN ANCIAL STATEMENTS , {
- 1. SUP.t!WiARY OF SIGNIFICANT ACCOUNTING POLICIES At December 31,1997, an unrealized gain of $12 million (net of deferred taxes of $13 million) was included in shareowners' Description of Business: Western Resources, Inc. (the company) equity. These securities had a fair value of approximately $75 is a publicly traded holding company. The company's primary million and a cost of approximately $50 million at December 31, business activities are providing electric generation, transmis-sion and distribution services to approximately 614,000 1997. There were no available-for-sale securities held at December 31,1996.
customers in Kansas; providing security alarm monitoring ser-vices to approximately 950,000 customers located throughout Property, Plant and Equipment: Property, plant and equipment the United States, providing natural gas transmission and distri- is stated at cost. For utility plant, cost includes contracted ser-bution services to approximately 1.4 million customers in~ vices, direct labor and materials, indirect charges for Oklahoma and Kansas through its investment in ONEOK Inc. engineering, supervision, general and administrative costs and (ONE0K) and investing in international power projects. Rate an allowance for funds used during construction (AFUDC). The ! r:gulated electric service is provided by KPL, a division of AFUDC rate was 5.80% in 1997,5.70% in 1996 and 6.31% in the company and Kansas Gas and Electric Company (KGE), a 1995. The cost of additions to utility plant and replacement wholly-owned subsidiary. Security services are primarily pro- units of property are capitalized. Maintenance costs and vided by Protection One, Inc. (Protection One), a publicly-traded, replacement of minor items of property are charged to expense 82.4%. owned subsidiary. as incurred. When units of depreciable property are retired, they are removed from the plant accounts and the original cost plus Principles of Consolidation: The company prepares its financial removal charges less salvage value are charged to accumulated st;tements in conformity with generally accepted accounting depreciation. principles. The accompanying consolidated financial statements include the accounts of Western Resources and its wholly- In accordance with regulatory decisions made by the KCC, the owned and majority-owned subsidiaries. All material acquisition premium of approximately $801 million resulting int:rcompany accounts and transactions have been eliminated. from the acquisition of KGE in 1992 is being amortized over 40 Common stock investments that are not majority-owned are years. The acquisition premium is classified as electric plant in accounted for using the equity method when the company's service. Accumulated amortization through December 31,1997 iny:stment allows it the ability to exert significant influence. totaled $47.9 million. The company currently applies accounting standards for its rate Depreciation: Utility plant is depreciated on the straight-line rrgulated e!ectric business that recognize the economic effects method at rates approved by regulatory authorities. Utility plant of rate regulation in accordance with Statement of Financial is depreciated on an average annual composite basis using Accounting Standards No. 71, " Accounting for the Effects of group rates that approximated 2.89% during 1997, 2.97% during C:rtain Types of Regulation," (SFAS 71) and, accordingly, has 1996 and 2.84% during 1995. Nonutility property, plant and recorded regulatory assets and liabilities when required by a equipment of approximately $20 million is depreciated on a regulatory order or when it is probable, based on regulatory straight-line basis over the estimated useful lives of the related precedent, that future rates will allow for recovery of a regula- assets. Fuel Costs: The cost of nuclear fuel in process of refinement, The financial statements require management to make esti- conversion, enrichment and fabrication is recorded as an asset mites and assumptions that affect the reported amounts of at original cost and is amortized to expense based upon assets and liabilities, to disclose contingent assets and liabili- the quantity of heat produced for the generation of electricity. ti:s at the balance sheet dates and to report amounts of The accumulated amortization of nuclear fuel in the reactor r v:nues and expenses during the reporting period. Actual at December 31,1997 and 1996, was $20.9 million and r:sults could differ from those estimates. $25.3 million, respectively. Cash and Cash Equivalents:The company considers highly liquid Subscriber Accounts: The direct costs incurred to install a secu-collateralized debt Instruments purchased with a maturity of rity system for a customer are capitalized. These costs include three months or less to be cash equivalents. the costs of accounts purchased, the estimated fair value at the date of the acquisition for accounts acquired in business combi-Av:llable-for-sale Securities: The company classifies mar-nations, equipment, direct labor and other direct costs for k: table equity securities accounted for under the cost method es cvailable-for. sale. These securities are reported at fair value internally generated accounts. These costs are amortized on a straight-line basis over the average expected life of a subscriber bIsed on quoted market prices. Unrealized gains and losses, ccount, currently ten years. It is the company's policy to peri-net of the related tax effect, are reported as a separate compo-odically evaluate subscriber account attrition utilizing historical nent of shareowners' equity until realized. attrition experience. l 32 L. ..
WESTFRN RESOURCES, I N c. a.
- h0TES TO CONSOLID ATED plN ANCI AL STATEMENTS
. coodwlil: Goodwill,.which represents the excess of the pur- Issuance costs other than the refinancing of the La Cygne 2 chise price over the fair value of net assets acquired, is . lease, are not included in rate base and, therefore, do not earn g:nerally amortized on a straight line basis over 40 years. a return. On November 30, 1997, deferred costs associated R:gulatory Assets and Liabilities: Regulatory assets represent w th the service line replacement program and the deferred cost probable future revenue associated with certain costs that will . " ' * "" "
be recovered from customers through the ratemaking process.
- The company has recorded these regulatory assets in accor- Minority interests: Minority interests represent the minority '
dInce with Statement of Financial Accounting Standards No. 71, shareowner's proportionate share of the shareowners'. equity
" Accounting for the Effects of Certain Types of Regulation? If and net income of Protection One.
th3 company were required to terminate application of that statement for all of its regulated operations, the company would Sales: Energy sales are recognized as services are rendered hive to record the amounts of all regulatory assets and liabili- and include estimated amounts for energy delivered but unbilled ot the end of each year. Unbilled revenue of $37 million and $83 tirs in its Consohdated Statements of Income at that time. The company's earnings would be reduced by the total net amount million is recorded as a component of accounts receivable (net) in the table below, net of applicable income taxes. Regulatory . n the Consolidated Balance Sheets at December 31,1997 and 1996, respectively. Security sales are recognized when installa-Essets reflected in the consolidated financial statements at Decsmber 31,1997, are as follows: tion of an alarm system occurs and when monitoring or other secunty-related services are provided.' December 31. 1997 1996 goe,,, %, The company's allowance for doubtful accounts receivable totaled
$23.4 million, which included approximately $20 million of Recoverable taxes- . . . - $212.996 $217.257 Protection One allowance for doubtful accounts receivable,~ and tatit issuance costs . . 75.336 78.532
> Deferred employee benefit costs ..
.. .. 3L875 40.834
$6.3 million at December 31,1997 and 1996, respectively. l Deterred plant costs .. 30.979 31.272 income Taxes: Deferred tax assets and liabilities are recognized '
Coal contract settlement costs , 16.032
. . 21.037 for temporary differences in amounts recorded for financial Othar regulatory assets . . . . . .. 7,203 8.794 Phasein revenues.,
reporting purposes and their respective tax bases, investment 26.317 Deferred cost of natural gas purchased.. tax credits previously deferred are being amortized to income 21.332 Service line replacement.. . . - 12.921 over the life of the property which gave rise to the credits. Totai regulatory assets.. $380A21 $458,296
~ ~
Affordable Housing Tax Credit Program (AHTC): The. company has received authorization from the HCC to invest up to e' Recoverable income taxes: Recoverable income taxes repre. $114 million in AHTC investments. At December 31,1997, the sent amounts due from customers for accelerated tax benefits company had invested approximately.$17 million to purchase {
. which have been flowed through to customers and are expected - AHTC investments in limited partnerships. The company is l to be recovered when the accelerated tax benefits reverse. committed to investing approximately $55 million more in AHTC j investments by January 1, 2000. These investments are 'e Debt issuance costs: Debt reacquisition expenses are amor-accounted for using the equity method. Based upon an order '
tiztd over the remaining term of the reacquired debt or, if received from the KCC, income generated from the AHTC invest-1 rsfinanced, the term of the new debt. Debt issuance costs are ment, primarily tax credits, will be used to offset costs amortized over the term of the associated debt. associated with postretirement and postemployment benefits a Deferred employee benefit costs: Deferred employee benefit of fered to the company's employees. Tax credits are recognized _ costs will be recovered from income generated from the in the year generated. company's Affordable Housing Tax Credit investment program. Risk Management: To minimize the risk from market fluctuations e Deferred plent costs: Disallowances related to the Wolf Creek - in the price of electricity, the company' Utilizes financial and inuclear generating facility. commodity instruments (derivatives) to reduce price risk. Gains j e Coal contract settlement costs: The company deferred costs or losses on derivatives associated with firm commitments are j
; tssociated with the termina'!on of certain coal purchase generally recognized as adjustments to r:ost of sales or rev-
~
contracts. These costs are being amortized over periods enues when the associated transactions affect earnings. Gains ending in 2002 and 2013.. or losses on derivatives associated with forecasted transactions are generally recognized when such forecasted transactions
--The company expects to recover all of the above regulatory aWet eamMgs.
tssits in rates. The regulatory assets noted above, with the exc ption of some coal contract settlement costs and debt j l 33
WCsTERN D E s o O R C E s, I N C. NOTES TO CONSOLID ATED FIN ANCI AL STATEMENTS N:w Pronouncements: In 1997, the company adopted Protection One is a publicly traded security company. The corrF St:timent of Financial Accounting Standards. No.128, pany paid approximately $258 million in cash and contributed
*Etmings Per Share" (SFAS 128). Basic earnings per share all of its existing security business net assets, other than is cilculated based upon the average weighted number of ' Network MultbFamily, in exchange for its ownership interest in common shares outstanding during the period. There were no - Protection One. Amounts contributed included funds used to pay significant amounts of dilutive securities outstanding at existing Protection One common shareowners, option holders Dec:mber 31,1997,1996 and 1995. and warrant holders a dividend of $7.00 per common share. The ccmpany has an option to purchase up to 2.8 million additional Effective January 1,1997, the company adopted the provisions common shares of Protection One for $15.50 per share. The of Statement of Position -(SOP) 961, . " Environmental ption period extends to a date not later than October 31,
.R; mediation Liabilities." This statement provides authoritative company assWnd aWma% M mEm o%
guidance for recognition, measurement, display and disclosure total purchase price. to subsenber accounts and approximately of environmental remediation liabilities in financial statements, m n g w m cmnem we Nse sxW Adoption of this statement did not have a material effect upon e sch amn3 am Mng amoM w a th3 company's overall financial position or results of operations, ten years and goodwill is being amortized over 40 years. Reclassifications: Certain amounts in prior years have been Consideration paid, assets acquired and liabilities assumed in reclissified to conform with classifications used in the current connection with these security acquisitions is summarized as yeir presentation. g pars msands)
- 2. CAIN ON EALE OF EQUITY SECURITIES __
During 1996, the company acquired 27% of the common shares n oic s ui . . , $1.001.094 of ADT Limited, Inc. (ADT) and made an offer to acquire the Cash paid, net of cash acquired of $88.822.~ (438.717) r:maining ADT common shares. ADT rejected this offer and in July 1997, ADT merged with Tyco international Ltd. (Tyco). ADT and Totalliabilities assurned.. . . $ 562.377
' Tyco completed their merger by exchanging ADT common stock for Tyco common stock. The following unaudited, pro forma information for the com-p ny's security business segment has been prepared assuming Following the ADT and Tyco merger, the company's equity invest- m an
" " o n ac @
ment in ADT beceme an available-for-sale security. During the s s wcuM aN Ng.mnmg M ead peh third quarter of 1997, the company sold its Tyco common shares 1997 1996
' for ipproximately $1.5 billion. The company recorded a pre-tax mam m Trmandsm per share da:a) gain of $864 million on the sale and recorded tax expense of
$345 million in connection with this gain. Net revenues.. $284.411 $241.841 Net loss.. (47,290) (24.762)
- 3. SECURITY ALARM MONITORING BUSINESS PURCHJiadES Net ioss per share.. ($0.73) ($0.39)
In 1997 the company acquired three monitored security alarm i The pro forma financial information is not necessarily indicative j companies. Each acquisition was accounted for as a purchase of the results of operations had the entities been combined for l and, accordingly, the operating results for each acquired corn _ the entire period, nor do they purport to be indicative of results l pany have been included in the company's consolidated which wiM be obtained in the future, finincial statements since the date of acquisition. Preliminary purchase price allocations have been made based upon the fair in December 1997, Protection One recorded a special norFrecur-vilue of the net assets acquired. The company acquired ring charge of approximately $40 million. Approximately $28 Network Muiti Fomily Security Corporation (Network Multi Family) million of this charge reflects the elimination of redundant facili-in September,1997 for approximately $171 million and ties and activities and the write-off of inventory and other assets acquired Centennial Holdings, Inc. (Centennial) in November which are no longer of continuing value to Protection One. The 1997 for approximately $94 million. The company also acquired remaining $12 million of this charge reflects the estimated En approximate 82.4% equity interest in Protection One in costs to transition all security alarm monitoring operations to November 1997. the Protection One brand. Protection One intends to complete these exit activities by the fourth quarter of 1998. 34 .
WESTERN RESOURCES, I N C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in .irnuary 1998, Protection One announced that it will acquire 6. INVESTMENTS IN SUSSIDIARIES the monitored security alarm business of Multimedia Security The consolidated financial statements include the company's Services, Inc. (Multimedia Security), for approximately $220 mil-lion in cash. The acquisition is expected to close in the first equity investments in ONEOK, Guardian International (Guardian) and Onsite Energy Corporation (Onsite). The company's equity quirter of 1998. - Multimedia Security has approximately Ir, vestments, net of the amortization of goodwill in these 140,000. subscribers concentrated primarily in California, Florida, Kansas, Oklahoma and Texas' entities, at December 31,1997 and equity in earnings in 1997, are as follows:
-.On February 4,1998, Protection One exercised its option to ownersmo Eque ' tcquire the stock of Network Holdings, Inc., the parent company Percentage investment in Eamings of Network , Multi-Family, kom the company for approximately *H 'n Thousands) . $178 million. The company expects Protection One to borrow ,45%
ONE0K inc.a .. . ,
$596.206 $1.970 money from a revolving credit agreement provided by WeGtar Guardian a ., , '41% 9,173 ' 25 Capital, a subsidiary' of Western Resources, to purchese Onsite* .. , , 30% 3.312 -
Network MultLFamily. (1) includes equity eamings on the company's common stock investment between oNEoK and the company.
- 4. STRATEGIC ALLIANCE WITH ONEOK INC. (2) The company acquired a common and convertible preferred stock interest in .
Guardian, a Florida-oased secunty alarm monitoring company, during october in November 1997, the company completed its strategic alliance 1997. in exchange for cash. with ONEOK. The company contributed substantially all of its (3) The company acquired a common and convertible preferred stock interest in re6ulated and non-regulated natural gas business to ONEOK in 0"te, a Califorma energy senrices empany dudng october,1997, in exchange
. exchange for a 45% ownership interest in ONEOK.
Summarized combined financial information for the company's The company's ownership interest in ONEOK is comprised of equity investments is presented below.' epproximately 3.1 million common shares and approximately L 19.9 million convertible preferred shares.'If all the preferred cemwr 31. im shires were converted, the company would own approximately Balance Sheet: 45% of.ONEGK's common shares presently outstanding. The Current assets- .. . .. . . . $ 535.348 agreement with GNEOK allows the company to appoint two mem. Non<:urrent assets . .. .. 1.771.900 bers to ONEOK's board of directors. The company will account for . Current liabilities. . .. . . 445.770 its common ownership in accordance with the equity method of Nork:urrent liabilities .. . , ,. , 737.975
- accounting. Subsequent to the formation of the . strategic Equity . . . .. - 1,123.503 Elliince, the consolidated energy revenues, related cost of sales Year erMed December 31.1997 (nd operating expenses for the company's naturalgas business goon ,,in thousanos) - have been replaced by investment earnings in ONEOK. Imme statement Revenues. . . ... $1.241.164 I a @ w nses- 1.147,8 %
- 5. CERGER AGREEMENT WITH Net income...
57.248
)
MANSAS CITY POWER & LIGHT COMPANY - . . i i
. The original merget agreement signed with KCPL on February 7, -
Balance sheet and income statement information is presented
~ 1997, is currently being renegotiated and the regulatory as of and for the most recent twelve-month period for which ;rpproval process for the original merger agreement has been public information is available. ONEOK's balance sheet and suspended. in December 1997, representatives of our financial income statement information is presented as of and for the advi3or indicated that they believed it was unlikely that they twelve months ended ' November 30, 1997. Guardian and ' would be in a position to issue a required fairness opinion for Onsite's balance sheet and income statement information is the merger on the basis of the previously announced terms. The presented as of and for the twelve months ended September comp ny cannot predict the timing or the ultimate outcome of 30, 1997. The company cannot give any assurance as to the - these discussions.
accuracy of the public information so obtained. Given the status of the KCPL transaction, we have reviewed the During 1997, the company's equity investment in ADT was deftrred costs and have determined that for accounting pur-converted to an available-for-sale security investment in Tyco. poszs, $48 million of the deferred costs should be expensed. The company recognized equity in earnings from the ADT invest-
- These costs were expensed in the fourth quarter of 1997.
ment of $24 million and $7 million in 1997 and 1996, respectively. At December 31,1996, the company's 27% invest-ment in ADT was approximately $597 million. 35 e . . . . . . . . . . . , . .
VfESTERN RE5oURcES. I N c. NOTES TO CONSOLIDATED FIN ANCI AL STATEMENTS
- 7. COMMITMENTS AND CONTINGENCIES Decommissioning costs are currently being charged to operating expenses in accordance with the prior KCC orders. Electric rates As part of its ongoing operations and construction program, the charged to customers provide for recovery of these decommis-company has commrtments under purchase orders and con- sioning costs over the life of Wolf Creek. Amounts expensed tracts which have an unexpended balance of approximately approximated $3.7 million in 1997 and will increase annually to
$87.8 million at December 31,1997. $5.6 million in 2024. These expenses are deposited in an intemational Power Project Commitments: The company has external trust fund. The average after tax expected return on ownership interests in international power generation projects trust assets is 5.7%. under construction in Colombia and the Republic of Turkey and The company's investment in the decommissioning fund, including in existing power generation facilities in the People's Republic of reinvested earnings approximated $43.5 million and $33.0 million China. In 1998, commitments are not expected to exceed at December 31,1997 and December 31,1996, respectively. $53 million. Currently, equity commitments beyond 1998 Trust fund eamings accumulate in the fund balance and epproximate $88 million. increase the recorded decommissioning liability. Manufactured Gas Sites: The company has been associated The SEC staff has questioned the way electric utilities recognize, with 15 former manufactured gas sites located in Kansas which measure and classify decommissioning costs for nuclear electric m y contain coal tar and other potentially harmful materials. generating stations in their financial statements. In response to The company and the Kansas Department of Health and the SEC's questions, the Financial Accounting Standards Board Environment (KDHE) entered into a consent agreement govern- is reviewing the accounting for closure and removal costs, ing ell future work at the 15 sites. The terms of the consent including decommissioning of nuclear power plants, if current agreement will allow the company to investigate these sites and accounting practices for nuclear power plant decommissioning s t remediation priorities based upon the results of the investi- are changed, the following could occur: gations and risk analyses. At December 31,1997, the costs incurred for preliminary site investigation and risk assessment
- The company's annual decommissioning expense could h ve been minimal, in accordance with the terms of the strate. be higher than in 1997 gic alliance with 0,NEOK, ownership of twelve of these sites and
- The estimated cost for decommissioning could be recorded the responsibility for clean-up of these sites were transferred to as a liability (rather than as accumulated depreciation)
ONEOK. The ONEOK agreement limits our future liability to an a The increased costs could be recorded as additional immaterial amount. Our share of ONEOK income could be investment in the Wolf Creek plant impacted by these costs. H@d Clrn Air Act: The company must comply with the provisions of would adversely affect its operating results due to its current Th3 Clean Air Act Amendments of 1990 that require a two-phase ability to recover decommissioning costs through rates, i reduction in certain emissions. The company has installed continuous monitoring and reporting equipment to meet the Nuclyar insurance: The company carries premature decomm.is-sioning insurance which has several restrictions. One of these ccid rain requirements. The company does not expect material is that it can only be used if Wolf Creek incurs an accident capital expenditures to be required to meet Phase ll sulfur exceeding $500 million in expenses to safety stabilize the reactor, dioxide and nitrogen oxide requirements. to decontam,nate i the reactor and reactor station site in accor-Dmmmissioning: The company accrues decommissioning dance with a plan approved by the Nuclear Regulatory costs over the expected life of the Wolf Creek generating facility. Commission (NRC) and to pay for on-site property damages. Th3 accrual is based on estimated unrecovered decommission- This decommissioning insurance will only be available if the ing costs which consider inflation over the remaining estimated insurance funds are not needed to implement the NRC-approved lif.t of the generating facility and are net of expected earnings on plan for stabilization and decontamination. amounts recovered from customers and deposited in an external p ; truit fund. owners of nuclear power plants to $8.9 billion for a s. ingle in F;,bruary 1997, the KCC approved the 1996 Decommissioning nuclear incident. If this liability limitation is insufficient, the U.S. Cost Study. Based on the study, the company's share of Wolf Congress will consider taking whatever action is necessary to Crmk's decommissioning costs, under the immediate compensate the public for valid claims. The Wolf Creek owners dismantlement method, is estimated to be approximately (Owners) have ourchased the maximum available private insur-
$624 million during the period 2025 through 2033, or approxi- ance of $200 nd "on. The remaining balance is provided by an mat:ly- $192 million in 1996 dollars. These costs were assessment plan mandated by the NRC. Under this plan, the cilculated using an assumed inflation rate of 3.6% over the Owners are jointly and severally subject to a retrospective r:miining service life from 1996 of 29 years. assessment of up to $79.3 million ($37.3 million, company's 32
! I l WESTERN RE5oURCES. I N C. b JTES TO CONSOLID ATED FIN ANCI AL STATEMENTS l I sh:rs) in the event there is a major nuclear incident involving 8. RATE MATTERS AND REGULATION cny of the nation's licensed reactors. This assessment is MCC Rate Proceedings: In January 1997, the KCC approved an subject to an inflation adjustment based on the Consumer Price agreement that reduced electric rates for both KPL and KGE. Index (nd applicable premium taxes. There is a limitation of Significant terms of the agreement are as follows:
$10 million ($4.7 million, company's share) in retrospective assessments per incident, per year.
- The company made permanent an interim $8.7 million rate reduction implemented by KGE in May 1996. This reduction The Owners carry decontamination liability, premature decom- was effective February 1,1997.
missioning liability and property damage insurance for Wolf a The company reduced KGE's annual rates by $36 million Creek totaling approximately $2.8 billion ($1.3 billion, company's effective February 1,1997. thir ). This insurance is provided by Nuclear Electric insurance
= The company reduced KPL's annual rates by $10 million Limited (NEIL). In the event of an accident, insurance proceeds effective February 1,1G37.
mu 1 first be used for reactor stabilization and site decontami-m The company rebated $5 million to all of its electric customers nation. The company's share of any remaining proceeds can be in January 1998.
' used for property damage or premature decommissioning costs.
e The company will reduce KGE's annual rates by an additional Pr:mrture decommissioning coverage applies only if an accident
$10 rnillion on June 1,1998.
Et Wolf Creek exceeds $500 million in property damage and a The company will rebate an additional $5 million to all of its decommissioning expenses and only after trust funds have electric customers in January 1999.
= The company will reduce KGE's annual rates by an additional The Owners also carry additional insurance with NEIL to cover $10 million on June 1,1999, colts of replacement power and other extra expenses incurred during a prolonged outage resulting from accidental property All rate decreases are cumulative. Rebates are one-time events d mage at Wolf Creek, if losses incurred at any of the nuclear and do not influence future rates.
plants insured under the NEIL policies exceed premiums, r serves and other NEIL resources, the company may be 9. LEGAL PROCEEDINGS subject to retrospective assessments under the current policies On January 8,1997, innovative Business Systems, Ltd. (IBS) of :pproximately $9 million per year. filed suit against the company and Westinghouse Electric
- Although the company maintains various insurance policies to Corporation (WEC), Westinghouse Security Systems, Inc. (WSS) provide coverage for potential losses and liabilities resulting and WestSec, Inc. (WestSec), a wholly-owned subsidiary of the from an accident or an extended outage, the company's insur- company established to acquire the assets of WSS, in Dallas n, exas, dsW M $ause M MW aHegng, cnca coverage may not be adequate to cover the costs that could result from a catastrophic accident or extended outage at among mWngs, Wad oMad h MC and inMerence with contract against the company in connect. ion with the sale by Wolf Creek. Any substantial' losses not covered by insurance, to the extent not recoverable through rates, would have a material WEC of the assets of WSS to the company. IBS claims that WEC adverse effeet on the company's financial condition and results mproperly transferred software owned by IBS to the company of operations. and that the company is not entitled to its use. The company has demanded WEC defend and indemnify it. WEC and the Fuel Commitments: To supply a portion of the fuel requirements company have denied IBS' allegations and are vigorously for its generating plants, the company has entered into various defending against them. Management does not believe that the commitments to obtain nuclear fuel and coal. Some of these ultimate disposition of thb matter will have a material adverse contracts contain provisions for price escalation and minimum effect upon the company s overall financial condition or results purchase commitments. At December 31, 1997, Wolf Creek's of operations.
nuclear fuel commitments (company's share) were approximately
$9.9 million for uranium concentrates expiring at various times through 2001, $35.1 million for enrichment expiring at various leg Wed W glm meeN hpM times through 2003 and $67.4 million for fabrication through 2025.
aM
- l. ing!y believes that the ultimate dispositions of these matters will )
At December 31, 1997, the company's coal contract commit- not have a material adverse effect upon the company's overall l ments in 1997 dollars under the remaining terms of the financial position or results of operations. I contracts were approximately $2.4 billion. The largest coal ! contract expires in 2020, with the remaining coal contracts cxpiring at various times through 2013. ll 37 i
g,- 5 wrsTERN R E S O U R C E s,' I N C.
. NOTES TO'CONSOLID ATED FIN ANCI AL STATEMENTS
~ 10. E!PLOYEE BENEFlf PLANS Postretirement and Postemployment Benefits: The company accrues the cost of postretirement benefits, primarily medical
' P u rion: The. company maintains qualified noncontributory benefit costs, during the years an employee provides service.
- defined benefit pension plans covering substantially all utility The company accrues postemployment benefits when the liability
, cmployees. Pension benefits are based on years of service and has been incurred.
the cmployee's compensation during the five highest paid con-
.secutive years out of ten before retirement. The company's Based on actuarial projections and adoption of the transrtion l policy is to fund pension costs accrued, subject to limitations method of implementation which allows a 20-year amortization set by the Employee Retirement income Security Act of 1974 of the accumulated benefit obligation, postretirement benefits End the Intemal Revenue Code. expense approximated $16.6 million, $16.4 million and
$15.0 million for 1997,1996 and 1995, respectively. The com-Stilty Continuation: The company maintains a norulualified pany's total postretirement benefit obligation approximated Executive Salary Continuation Program for the benefit of certain $83.7 million and $123.0 million at December 31,'1997 and minagement employees, including executive of ficers.
1996, respectively. The following table summarizes the status Thi following tables provide information on the components of of the company's postretirement benefit- plans for financial pension and salary continuation costs funded status and actu- statement purposes and the related amounts included .in the Tri:1 tssumptions for the company: Consolidated Balance Sheets: Meer ended December 31 1997 1996 1995 Decembe' 31. 1997 1996 5 (Dolldrs in Thousands) (D0llars in Thousands) SFAS 87 Expense: Reconciliation of Funded Status:, J Servicecost. . .. , $11.337 $11.644 $11.059 Actuanal present value of interest cost on projected postretirement benefit obligations: benefit oNigation.. .. ?S.836 . 34.003 32,416 Retirees.. . . . . .. . $ 53.910 $ 76,588 $ 81,402 Acuve employees fuHy eligible.. 6.814 - 10.060 7,645 (Gain) on plan assets.. . . (113,287) (65,799) (102.731) Deferred investment gain . . 30,119 Active employees not
- . 73.731 70.810 fully elig10le. .. . . , . 22,949 36.345 34.144 Net amortization.. .. 1,084 2,140 1,132 Other , . . . . . 519 - -
Total" . . . . 83.673 122.993 123.191
' Net expense., , $12,686 Fair value of plan assets . . . 118 78 46'
. .. $ 9.220 $12.107 Funded status.. .. . (83,555) (122.915) (123.145)
Unrecognized prior service cost . . (4.592) (8.157) (8,900) Decernber 31. 1997 1996 1995 111,443 Unrecognized transibon obligation . 60.146 104.920 Mars in Thousands) Unrecognized net (gain)... . -(828) (8.137) (7.271) Reconciliation of Funded Status: Accrued postretirement Actuarlat present value - benefit costs.. . . . ${ 28,829) $G4.289) $(27.873) of benefitobligations: Vested .. .. . . $365.809 $347,734 $331.027 Norsested . 23.220 war ended Decene 31, 1997 1996 2995
.. . . 21.024- 21.775 Total o .. . .. . . ~ $386.833 $370.954 $352.802 Actuanal Assumptions:
~
Discount rate . . . 7.5% 7.5% 7.5% j
~; Plan assets (principany debt Annual salary increase rate. . 4.75% 4.75% 4.75%
and equity securities) Expected rate of return. 9.0% 9.0% 9.0% at fair value... ., ., $584.792 . $495.993 $444.608 Projected benefit obligabon . . . 462.964 483.862 456.707 Funded statas . . .. . . _ , .. .. 121.828 12.131 (12.099) For measurement purposes, an annual health care cost growth Unrecognized transition asset... , . (369) (448) (527) rate of 9% was assumed for 1997, decreasing one percent per j Unrecognized pnor service costs.... .. . . 39.763 62,434 5'.087 year to five percent in 2001 and thereafter. The health care cost .l
- Unrecognized net (gain) a... . .. . . '(193.313) (103.132) (75.312) trend rate has a significant ef fect on the projected benefit oblig- l
[ Accrued liability.. . ..
$(32.091) . $(20.015) $(30.851) ation, increasing the trend rate by one percent each year would l
increase the present value of the accumulated projected benefit j
- Wnnded December 31, 1997 - 1996 1995 obligation by $3.5 million and the aggregate of the service and l interest cost components by $0.3 million.
(- Actaard Assumptions; l alary increase rate.. . . . 3.54 7 % 47 % 47 accence @ an o@ hm W E, h compay has ! Longterm rate of retum.. . . . . . . 9A9.25% 859.0% 859.0% deferred postretirement and postemployment expenses in g excess of actual costs paid. In 1997 the company received i J aa l L
WESTERN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCI AL STATEMENTS cuthorization from the KCC to invest in AHTC investments, mance share units to Plan Participants. Up to three million income from the AHTC investments will be used to offset the shares of common stock may be granted under the LTISA Plan. d:ferr1d and incremental costs associated with postretirement The LTISA Plan granted 459,700 and 205,700 stock options end postemployment benefits offered to the company s employ-and 459,700 and 205,700 dividend equivalents to Plan ces. The income generated from the AHTC investments replaces Participants during 1997 and 1996, respectively. The exercise the income stream from COLI contracts purchased in 1992 and rice of the stock options granted was $30.75 and $29.25 in 1993 which was used for the same purpose. 1997 and 1996, respectively. These options vest in nine years, S:vings: The company maintains savings plans in which sub- Accelerated vesting allows stock options to vest within three stantiilly all employees participate. The company matches years, dependent upon certain company performance factors. employees' contributions up to specified maximum limits. The The options expire in approximately ten years. The weighted-funds of the plans are deposited with a trustee and invested at average grant-date fair value of the dividend equivalent was each employee's option in one or more investment funds, $6.21 and $5.82 in 1997 and 1996, respectively. The value of including a company stock fund. The company's contributions each dividend equivalent is calculated as a percentage of the were $5.0 million, $4.6 million and $5.1 million for 1997,1996 accumulated dividends that would have been paid or payable on end 1995, respectively, a share of company common stock. This percentage ranges fr m zer to 100%, based upon certain company performance Protection One also maintains a savings plan. Contributions, factors. The dividend equivalents expire after nine years from made at Protection One's election, are allocated among partich pants based upon the respective contributions made by the a adng at beh E MW. participants through salary reductions during the year, Prot:ction One's matching contrioutions may be made in The fair value of stock options and dividend equivalents were Prot ction One common stock, in cash or in a combination of estimated on the date of grant using the Black-Schoies option-both stock and cash. Protection One's matching contribution to pricing model. The model assumed a dividend yield of 6.58% the plan for 1997 was $34,000, and 6.33%, expected volatility of 13.56% and 14.12%; and a a pa s W N aM M, Protection One maintains a qualified employee stock purchase mspe$ Mbnah, N sM o@ mW assW a plan that allows eligible employees to acquire shares of Protection One common shares at 85% of fair market value of ns ra ad & 6 W N aM M . the common stock. A total of 650,000 shares of common stock mspek N Mend @alent nWel assh a nsh interest rate of G.36% and 6.61% for 1997 and 1996, respec-have been reserved for issuance in this program. tively, an award percentage of 100% and a dividend Stock Bu.ed Compensation Plans: The company has two stock- accumulation period of five years. bised compensation plans, a long-term incentive and shar The LTl Program is a performance-based stock plan which award plan (LTISA Plan) and a long-term incentive program (LTl awards performance shares to executive officers (Program Progrim). The company accounts for these plans under Participants) of the company equal in value to 10% of the Accounting Pnnciples Board Opinion No. 25 and the related 9 ,s annual base compensation. Each performance share is int:rpretations. Had compensation cost been determined pur-equal in value to one share of the campany's common stock, suint to Statement of Financial Accounting Standards No.123, Each Program Participant may be entitled to receive a common
" Accounting for Stock-Based Compensation" (SFAS 123), the company would have recognized additional compensation costs e d M m m h es awarded multiplied by a distribution percentage not to exceed dunng 1997,1996 and 1995. However, recognition of the cc m-110%. This distribution percentage is based upon the Program pensition costs would not have been material to the Participants' and the company's performance. Program - Consolidated Statements of income nor would these costs have Participants also receive cash equivalent to dividends on affect:d basic earnings per share.
common stock for performance shares awarded. The LTISA Plan was implemented to help ensure that rnanah,ers in 1995, the company granted 14,756 performance shares, ! : and board members (Plan Participants) were properly incented with a weighted-average fair value of $28.81. The fair value of to increase shareowner value, it was established to replace the each performance share is based on market price at the date of comp ny's LTl Program, discussed below. Under the LTISA Plan, grant. No performance shares were granted in 1997 or 1996. At the company may grant awards in the form of stock options, December 31,1997, shares granted in 1995 no longer have a dividend equivalents, share appreciation nghts, restricted remaining contractual life and will be paid in March 1998. shares, restricted share units, performance shares and perfor-39 i L
. w E S T E R N ' R E S o V R C E S, { N C,
' NOTES TO CONSOLIDATED FIN ANCI AL STATEMENTS
~ 11. PROTECTION ONE STOCK WARRANTS AND OPTIONF Cash and cash equivalents, short-term borrowings and variable.
rate debt are carried at cost which approximates fair value. The Prot 5ction One has outstanding stock warrants and options decommissioning trust is recorded at fair value and is based on which were considered reissued and exercisable upon the the quoted market prices at December 31,1997 and 1996. The company's acquisition of Protection One on November 24. fair value of fixed-rate debt, redeemable preference stock and 1997. In lieu of adjusting the number of outsttJiding options and . other mandatorily redeemable securities is estimated based on vctrrnts, holders of options or warrants received a $7 per share quoted market prices for the same or similar issues or on the
. equiv lent cash payrnent in the acquisition, Stock option activity current rates offered for instruments of the same rer.1aining; ' subsequent to the acquisition was as follows: .
maturities and redemption provisions. The estimated fair values j8'g g py, ,,ng, of contracts related to commodities have been determined
- using quoted market prices of the same or similar securities.
Balance at November 24,1997 , . . 2,198,389 $0.05- $16.375
- The recorded amount of accounts receivable and other current Granted ... . . m , , .
bercised. . . . . . . . . (306) $0.05 financial instruments approximate fair value, The fair value estimates presented herein are based on infor-Ba DecemtAr 31,1997. 2,198.083 $0.05- $16.375 mation available at December 31,1997 and 1996. These fair value estimates have not beep comprehensively revalued for Stock options and warrants outstanding at December 31,1997 the purpose of these financial statements since that date and tra ts follows: current estimates of fair value may differ significantly from the amounts presented herein. Because a substantial portion of the i wEPnce e s R s) ere se c company's operations are regulated, the company believes that
$5.875 $9.125 244.560 8 $ 6.566 . any gains or losses related to the retirement of debt or redemp ,
$8.00. $10.313 444.000 8 $ 8.076 ~ tion of preferred securities would not have a material effect on
$12.125 -$16.375 1 000 8 $14 57 the company's financial position or results of operations.
$15.00 50,000 9 $ 15.00 The carrying values and estimated fair values of the company's
$0.05 1,425 9 $ 0.05 financial instruments are as follows:
$3.633 103.697 4 $ 3.633 carrymg veue Fair value
$0.167 462.001 6 $ 0.167 ..
December 31, 1997 ' 1996 1997 1996
$6 60 ~ 466,400 8 $ 6.60 (Dollars in Thousands)
Decommissioning ! The company holds a call option for an additional 2,750,238 trust.. .
. $ 43,514 '$ 33.041 $ 43.514 $ 33.041 shirss of Protection One, exercisable at a price of $15.50. The Fixed < ate debt . ._ 2,019,103 1,224,743 2.101,167 1,260,722 option expires no later than October 31,1999.- Redeemable preference stock . 50,000 50,000 51,750 52.500 Crrtrin options outstanding have been issued as incentive gnirds to directors, officers, and key employees in accordance (j '%
with Protection One's 1994 Stock Option Plan. Had the fair securtbes.. . 220,000 220.000 226,088 214,800 Jv;lue based method been used to determine compensation expense for these stock options, recognition of the compensa- The company is involved in both the marketing of electricity and , tion costs would not have been material. risk management services to wholesale electric customers and l the purchase of electricity for the company's retail customers. In )
- 12. FAIR VALUE OF FINANCIAL INSTRUMENTS addition to the purchase and sale of electricity, the company j engages in price risk management activities, including the use The following methods and assumptions were used to estimate ]
f f rward contracts, futures, swap agreements and put and call the ftir value of each class of financial instruments for which it options. The availability and use of these types of contracts '
' is practicable to estimate that value as set forth in Statement of allow the company to manage and hedge its contractual com- l
. Fintncial Accounting Standards No. 3 07
- Disclosures about Fair mitments, reduce its exposure relative to the volatility of cash Value of FinancialInstruments."
market prices and take advantage of selected arbitrage oppor. tunities via open positions. Such open positions during 1997 were not material to the company's finar'cial position or results of operation. l 40 L
1 WESTERN RESOURCES, INC. l NOTES TO CONSOLIDATED FIN ANCI AL STATEMENTS i in g neral, the company does not seek to take significant com- Preference Stock Subject to Mandatory Redemption: The modity risk for the purpose of generating margins in the ordinary mandatory sinking fund provisions of the 7.58% Series prefer-course of its trading activities. The company has established a ence stock require the company to redeem 25,000 shares risk management policy designed to limit the company's annually beginning on April 1, 2002 and each April 1 through exposure to price risk, and it continually monitors and reviews 2006 and the remaining shares on April 1,2007, all at $100 per this policy to ensure that it is resoonsive to changing business share. The company may, at its option, redeem up to an addi-conditions. This policy requires that, in general, positions taken tional 25,000 shares on each April 1 at $100 per share. The with derivatives be offset by positions in physical transactions 7.58% Series also is redeemable in whole or in part, at the or other derivatives. Due to the illiquid nature of the merging option of the company, subject to certain restrictions on refund-clectric markets, net open positions in terms of price, volume ing. at a redemption price of $103.79, $103.03 and $102.27 cnd specified delivery point can occur. per share beginning April 1,1997,1998 and 1999, respectively. December 31, 1997 1996 Other Mandatority Redeemable Securities: On December 14, wonal wonal 1995, Western Resources Capital 1, a wholly-owned trust, Ns$ hNN kssi ammmS's) { % j $" issued four million preferred securities of 7-7/8% Cumulative toparon nousanasi Quarterly income Preferred Securities, Series A, for $100 mil-Forward lion. The trust interests represented by the preferred securities ccatracts .. 359.200 $9,086 $202 - - - are redeemable at the option of Western Resources Capital I, on 924.000 $1,790 ($329) - - - or after December 11,2000, at $25 per preferred security plus futures . .. -
$- $- 6.540.000 $16.032 $2.061 accrued interest and unpaid dividends. Holders of the securities N urd gas .
are entitled to receive distributions at an annual rate of 7-7/8% swaps.. .
$~ $- 2.344.000 $ 5.500 $1.315 of the liquidation preference value of $25. Distributions are payable quarterly and in substance are tax deductible by the in i4ovember 1997, the company contributed its netural gas company. These distributions are recorded as interest expense, mirketing business to ONEOK. As a result, the company did not The sole asset of the trust is $103 million principal amount of hivs any natural gas futures or natural gas swaps as of 7 7/8% Deferrable interest Subordinated Debentures, Series A Dectmber 31,1997. due December 11,2025 (the Subordinated Debentures).
On July 31,1996, Western Resources Capital 11, a wholly-owned
- 13. COMMON STOCK, PREFERRED STOCK, trust, of which the sole asset is subordinated debentures of the PREFERENCE STOCK AND OTHER company, sold in a public offen. n g,4.8 million shares of 8-1/2%
MANDATORILY REDEEMABLE SECURITIES Cumulative Quarterly income Preferred Securities, Series B, for The company's Restated Articles of incorporation, as amended. $120 million. The trust interests represented by the preferred provide for 85,000,000 authorized shares of common stock. At securities are redeemable at the option of Western Resources Deccmber 31,1997,65,409,603 shares were outstanding. Capital 11, on or after July 31,2001, at $25 per preferred secu-rity plus accumulated and unpaid distributions. Holders of the The company has a Direct Stock Purchase Plan (DRIP). Shares issued under the DRIP may be either original issue shares or securities are entitled to receive distributions at an annual rate
. shires purchased on the open market. The company has issued of 8-1/2% of the liquidation preference value of $25.
Distributions are payable quarterly and in substance are tax original issue shares under DRIP from January 1,1995 until deductible by the company. These distributions are recorded as October 15, 1997. On November 1,1997. DRIP began issuing interest expense. The sole asset of the trust is $124 million shires purchased on the open market. During 1997, a total , principal amount of 8-1/2% Deferrable Interest Subordinated of 837,549 shares were issued under DRIP including 784,344 Debentures, Series B due July 31,2036. orCnal issue shares and 53,205 shares purchased on the open market. At December 31, 1997, 1,244.617 shares were in addition to the company's obligations under the Subordinated I av;ilable under the DRIP registration statement. Debentures, the company has agreed to guarantee, on a subor- I Preferred Stock Not Subject to Mandatory Redemption: The dinated basis, payment of distributions on the preferred securities. These undertakings constitute a full and uncondr cumulative preferred stock is redeemable in whole or in part on tional guarantee by the company of the trusts' obligations under j
. 30 to 60 days notice at the option of the company.
the preferred securities. l 4 I l l 1 41
L a
' t'I E S 1 E R N RESOURCES, $ N C.
u
. NOTES TO CONSOLID ATED FIN ANCI AL STATEMENTS
- 14. LEASES - subject to property, earnings and certain restrictive provisions of each mortgage,
' At December 31,1997, the company had leases covering various -
property and equipment. The company currently has no signifi- Debt discount and expenses are being amortized over the cant capital leases. remaining lives of each issue. During the years 1998 through - 2002, $21 million of other long-term debt will mature in 1998, R:ntil payments for operating leases and estimated rental
$125 million of bonds and $42 million of other long-term debt commitments are as follows:
will mature in 1999, $75 million of bonds will mature in 2000
., 3 Og and $100 million of bonds will mature in 2002; No other bonds m, gnou,,n33 will mature during this time period.
$ 63,353 Long-term debt outstanding is as follows at December 31:
1995.. . . . .. . ~ 10C3 . .. . . . . . 63.181 1997 1996 1997. . .. .. . , 71,126 ... (Donars Chousands) Future Commitments: First mortgage bond series: 0"* 66, 8 71/4% due 1999. . , $ 125,000 $ 125,000 8 7/8% due 2000. . . . 75,000 75.000
" 5 100,000 71/4% due 2002. . . . 100.000
. 2001.". ..
. . . . . . 50,303 81/2% due 2022. .. ,. 125.000 125.000
! Th br.. .. 6 ,
525.000 525.000
. Toti . . . . . . . . . . $935.948 PoHution controlbond series:
Variable due 20328.. . . . 45.000 45.000
' in 1987, KGE sold and leased back its 50% undivided interest in Variable due 2032a.. . . 30,500 30.500 6% due 2033. . 58,420 58.420 the La Cygne 2 generating unit. The La Cygne 2 lease has an .. .. .
133.920 133,920
; initial term of 29 years, with various options to renew the lease or repurchase the 50% undivided interest. KGE remains respon- $ mortgage bond series:
sible for its share of operation and maintenance costs and other 7,60 % due 2003.. 135.000 135,000
- relatid operating costs of La Cygne 2. The lease is an operating 61/2% due 2005. . . . 65,000 65,000
-lease for financial reporting purposes. The company recognized 6.20 % due 2006 m . . . . . 100,000 100.000 a gain on the sale which was deferred and is being amortized .
300,000 300,000 Pollution control bond series:
. ov:r the initial lease term.
5.10 % due 2023.. . 13,757 13.822 In 1992, the company deferred costs associated with the Variable due 2027* . . .. . . . 21,940 21,940 refinincing of the secured facility bonds of the Trustee and - 7.0 % due 2031... 327.500 327,500 owner of La Cygne 2. These costs are being amortized over the Vanable due 2032'*.. . . 14.500 14.500 Variable due 2032a. 10,000 10.000 lifa of the' lease and are included in operating' expense. . 387.697 387,762 Approximately $21.4 million of this deferral remained on the Consolidated Balance Sheet at December 31,1997. Revolving credit agreement,. . - 275.000 L Western Resources 6 7/8% unsecured Future minimum annual lease payments, included in the table senior notes due 2004.. . 370,4 0 - above, required under the La Cygne 2 lease agreement are Westem Resources 71/8% unsecured senior notes due 2009,, 150,000 approximately $34.6 million for each year through 2002 and . L $576.6 million over the remainder of the lease. KGE's lease ho"no u2 171,926 - a txpense, net of amortization of the deferred gain and refinancing Protection One 6.75% convertible senior !
. costs, was approximately $27.3 million for 1997 and $22.5 million subordinated discount notes due 2003.. 102.500 - !
- b. : for 1996 and 1995. Other longterm agreements.. 67.748 65.190 l.ess:
'15. LONG-TERM DERT Unamortized debt discount.. . , . 5.719 5,289
" " N"' "
The gmount of the company's first mortgage bonds authorized 85 $L681.58 by.its Mortgage and Deed of Trust, dated July 1,1939, as
. supplemented, is unlimited. The amount of KGE's first mortgage R es
, 3j3 9 %, (4) 3.85% and (5) 3.89%
L bonds authorized by the KGE Mortgage and Deed of Trust, dated April 1,1940, as supplemented, is limited to a maximum of Protection One maintains a $100 million revolving credit facility
. $2 billion.~ Amounts of additional bonds which may be issued are that expires in January 2000. Under the terms of this agreement,
- 42 :
I L 2
l 1 l WESTERN R E s o u R C t s, I N C. N'CTES TO' CONSOLIDATED FINANCI AL STATEMENTS Protection' One may, at its option, borrow at different market- Under SFAS 109, temporary differences gave rise to deferred tax b: sed interest rates. At December 31, 1997, there were no ~ assets and deferred tax liabilities as follows at December 31: borrowings under this facility. g (Donas e Thousands)
' 16. SHORT TERM DEBT - Deferred tax assets:
Defened gain on saie-leaseback.. . $ 97.634 $ 99.466 The company has arrangements with certain banks to provide Security business deferred tax assets.. . 103,054 - unsecured short-term lines of credit on a committed basis Other.. . 94.009 30,195 .
- totaling approximately $773 million. The agreements provide Total deferred tax assets . . .. $ 294.696 $ 129.661 the company with the ability to borrow at different market-based Oefened tax liabilities:
. int: rest rates. The company pays commitment or facility fees in Accelerated depreciation and other.. $ 625.176 $ 654.102 support of these lines of credit. Under the terms of the agree. Acquisition premium.. 299.162 307.242 Deferred future income taxes , 213.658 - 217,257.
- mints, the company is required, among other restrictions, to . .
maintain a total debt to total capitalization ratio of not greater Otw- , . . . --- . 112.555 61.432 taMefened tax habMes , $1.250,551 $1.240.033
. thin 65% at all times. The unused portion of these lines of credit are used to provide support for commercial paper, investment tax credds . . . $ 109.710 $ 125.528 in addition, the company has agreements with several banks to Accumulated deferred income taxes, net . $1.065.565 $1.235.900
- borrow on an uncommitted, as available, basis at money-market rat:s quoted by the banks. There are no costs, other than inter- in accordance with various rate orders, the company has not yet est, for these agreements. The company also uses commercial collected through rates certain accelerated tax deductions p;per to fund ns short-term borrowing requirements. which have been passed on to customers. As management believes it is probable that the net future increases in income
,information_ regarding the company's short-term .borrowings, taxes payable will be recovered from customers, it has recorded comprised of borrowings under the credit agreements, bank loans and commercial paper, is as follows: a MM assd for mese amounts. Rese assds also am a temporary difference for which deferred income tax liabilities December 31, 1997 1996 1995 have been provided.
. (Donas in thousands) . .,
- Borrowings outstanding at year end: The effective income tax rates set forth below.are computed by Lires of credit. $ - $525,000 $ -
dividing total federal and state income taxes by the sum of such Bank loans.. . . 161,000 162.300 177.600 taxes and net income. The difference between the effective tax . Commercial paper notes . 75,500 293.440 25.850 rates and the federal statutory income tax rates are as follows: Total . .. . . $236.500 $980,740 $203.450 Weighted everage interest rate War ended December 31, im m6 m5 on debt outstanding at year end (including fees); Effective income Tax Rate .. 43.4 % 32.8 % - 31.8 %
. . . 6.28% 5.94% 6.02%
Weighted average short term debt Effect of outstanding during the year . $787,507 $491,136 $301.871 State income taxes.. (5.0) (5.1) (4.3)
- Weighted daily average interest rates . Amortization of investment tax crec.ts.. . 0.8 2.7 2.5 i dunng the year (including fees).. 5.93% 5.72% 0.15% Corporateowned life insurance policies . 0.9 3.7 3.2 thssed lines of credit supporting Accelerated depreciation flow ecmmercial paper notes.. . $772,850 $447,850 $121,075 through and amortization, net . , (0.4) (0.2) (0.2)
Adjustment to tax provision . (3.7) - - Other- . (1.0) 1.1 2.0
- 17. INCOME TAXES . . .
- Income tax expense is composed of the following components at December 31:
1997 1996 1995 (Donars in Thousands)
' CurrentlyPayable:-
Federal . . .. , $336.150 . $54.644 $50,674 State . . . . . 72.143 ' 20.280 17,003 Deferred: Federal . .. . . (19.766) 14,808 ~ 22,911 State . . . . . (3,217) (615) 601 An:ortization ofinvestment Tax credits... . . . .. . (6.065) 46.758) (6.809)
- Totalincome tax expense .. .. 4 $378.645 $82,359 $84,380 43 l
- ~ . . . .
cesTERN RESOURCES, INc. N@TES TO CONSOLID ATED FIN ANCI AL STATEMENTS
'18. PROPERTY, PLANT AND EQUIPMENT 20. SEGMENTS OF WUSINESS The following is a summary of property, plant and equipment at The company is a diversified energy and security alarm monitoring December 31: service company principally engaged in the generation, trans-f I 1997 1996 mission, distribution and sale of electricity in Kansas' and (Dones esands) a security alarm monitoring provider for residential and multi-family units operating in 48 states in the U.S. through Electnc plant in service . $5,564,695 $5,448,489 Protection One.
Natural gas plant in serwce.. - 834,330 5,064,695 6,282,819 Electric consists of the company's regulated electric utility Less- Accurnulated depreciation.. 1,895,084 2,058.596 business. Natural gas includes the company's regulated and 3.669,611 4,224.223 non-regulated natural gas business. Security alarm monituring Construction work in progress ,. 60,006 93,834 includes the company's security alarm monitoring business Nuclear fuel (net).. 40M96 38A61 activities, including installation activities. Energy related Net utility plant .. 3,770,313 4,356,518 includes the company's international power development projects c ut ed eciation. , O Net property, plant and equipment . $3,786.528 $4,384,017 Ear ended December 31, 1997 1996 1995 The carrying value of long-lived assets, including intangibles (oonars onousanos) are reviewed for impairment whenever events or changes in Sales: Electric ,. $1.160,166 $1,197,441 $1,146,869
. circumstances indicate they may not be recoverable. .
Natural gas (1) . 739,059 797,021 436.692
- 19. JOINT OWNERSHIP OF UTIUTY PLANTS Energy related . 100,193 43,819 160,369
~
$2,15D65 $f046,8N $1,744.N4 Compants ownersnip at December 31,1997 _
Net
'"" U P Ir>Sennce Accumulated $ 360,321 investment Depreciation % Electric .. $ 207.026 $ 347,097 Dates (MW)
Natural gas (1), 27,840 43.111 8,457 (Douars in Thousanos) Secunty alarm monitoring , (48,442) (3,553) (787) La Cygne 1(a) , Jun 1973 $ 162,400 $109,481 343 50 Energy related . (43,499) 1,898 5,730 Jeffrey lib) Jul1978 291.624 131,397 617 84 $ 142,925 $ 388,553 $ 373.721 - Jeffrey 2(b) May 1980 290,468 121,854 617 84 idente mets a Deer 3t Jef frey 3(b) . May 1983 403,046 153,084 605 84 $4,735,335 $4,740,817 Electric , $4,640,322 Wolf Creek (c).. Sep 1985 1,380,660 399,551 547 47 623,198 Natural gas (1) .. - 724.302 (a) jointly owned with KCPL Security alarm monitoring . 1,504,738 ' 488,849 5,615 (b) Jointiy owned with UtahCorp United inc. Energy related * *
- 831,900 699,295 121.047 (c) Josntly owned with KCPL and Kansas Electnc Power cooperative, Inc.
$6,976.960 $6,647,781 $5.490,677 Depreciation and amonizatM Amounts and capacity presented above represent the com-ect , , $ 18 $ , $ 7 pany's share. The company's share of operating expenses of , 5 the plants in service above, as well as such expenses for a 50% Security alarm monitoring . 41,179 944 45 undivided interest in La Cygne 2 (representing 334 MW capacity) Energy related . 2,266 2,282 1.713 sold and leased back to the company in 1987, are included in $ 256,725 $ 201,331 $ 177,830 operating expenses on the Consolidated Statements of income. capital expenditures:
The company's share of other transactions associated with Electnc .. $ 159,760 $ 138,475 $ 179,090 the plants is included in the appropriate classification in the Natural gas (i)'. 47,151 57,128 62.901 Secunty alarm monitonng . 45,163 - - company's Consolidated Financial Statements. Energy related . 47,84'
$ 299,919 $ 195,603 $ 241,991 (1) on Novernber 30,1997, the cwpany Contnbuted substantially all of its natural gas segrnent in exchange for an equity interest in oNEoK.
1 w
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WESTERN RESOURCES, INC. NOTES TO CONSOLIDATED FIN ANCI AL STATEMENTS 31 QUARTERLY RESULTS (UNAUDITED) The amounts in the table are unaudited but, in the opinion of management, contain all adjustments (consisting only of normal recur. ring adjustnents) necessary for a fair presentation of the results of such periods. The business of the company is seasonal in nature and, in the opinion of management, comparisons between the quarters of a year do not give a true indication of overall trends and changes in operations, First Second Third Fourth (Dollars in Thousanos. Encept Per Share Amounts) 1997 Sales $ 626,198 $ 454,006 3 559,996 $ 511.565 income from operations (1) 103,297 57,498 110,391 (128,261) Net income (1).(2) , 41.033 24,335 508,372 (79,646) Eamings applicable to common stock , 39,803 23.106 507,142 (80,876) Basic earnings per bhare . $ 0.61 $ 0.36 $ 7.77 $ (1.23) Dividends per share.. $ 0.525 $ 0.525 $ 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 $ 43.438 1.ow . $ 30.00 $ 29.75 $ 32.25 $ 33.625 1996 Sales $ 555.623 $ 436.123 $ 490,175 $ 564,906 income from operatens , 95.475 73,1 % 129,504 90,378 Net income . . 44,789 28,746 62.949 32,466 Eamings applicable to common stock , 41,434 25,392 56,049 31,236 Basic earnings per share $ 0.66 $ 0.40 $ 0.87 $ 0.48 Dividends per share , $ 0.515 $ 0.515 $ 0.515 5 0.515 Average common shares outstanding , . 63,164 63.466 64,161 64,523
. Common stock pnce:
High . $ 34.875 $ 30.75 $ 30.75 $ 31.75 Low. $ 29.25 $ 28.00 $ 28.25 $ 28.625 (1) During the fourth quarter of 1997, the company expensed deferred costs of approximately $48 melhon associated with the ongrnal KCPL merger agreement. Protection one recorded a special charge to income of approximately $40 miillon. (2) During the third quarter of 1997, the company recorded a pre tan gain of approximately $864 mdhon upon selkng its Tyco common stock. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREoWNERS AND BOARD OF DIRECTORS OF WESTERN RESOURCES, INC.: We have audited the accompanying consolidated balance sheets and statements of cumulative preferred and preference stock of Western Resources, Inc., and subsidiaries as of December 31,1997 and 1996, and the related consolidated statements of income, cash flows, and common shareowners' equity for each of the three years in the period ended December 31,1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits, We conducted our audits in accordance with generally accepted auditing standards, 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 15e financial statements An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation We believe that our audits provide a reasonable basis for our opinion, in our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Western Resources, Inc., and subsidiaries as of December 31,1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted
- accounting principles, ARTHUR ANDERSEN LLP Kansas City, Missouri, January 29,1998 45
' Cf E S T E R N -R E 6 O U R C E S, I N C. ' ELEVEN YEAR COMPAR ATIVE DATA INC ME STATEMENT DATA ($1,000s);
operauenom Total ' Total Total Cost of Gross Operating Income from
/ Years Sales - Sales - Profit Expenses OperatKms 1997- $2,151,765 $967,124 $1,184,641 $1,041,716 $142,925 '
1996 2,046,827' 883,126 1,163,701 775,148 388,553
.1995.. 1,744,274 659,003' 1,085,271 711,550 373,721 Operating Expenses (2)
Depre. Total Fuel Power Natural ciation & Operating Used for Purchased Gas . Other Maire .. Amorth Operating
- Yeirs - Revenues Generation (net) Purchases Operations tenance ration Taxes income 1994<3) $1,764,769 $234,328 $15,438 $312.576 $438,945 $113,186 $174,942 . $200,304 $275,050 '
'1993 ' 2,028,411 250,328 16,396. 500,189 467,915 ~ 117,843 181,909 201,471' 292,360 1992t4, 1,639,422 '200,779 '14,819 403,326 379,264 101,611 -157,171 142,731 239,721 1991 1,162,178- 146,256 5.335 439,323 193,319 60,515 85,735 102,074 129,621' 1990- 1,149,755 148,681 2,658 456,868 178,448 57,817 76,815 96,478 131,990 1989. 1,127,623 149,796 148 451,896 171,094 58,442 73,305 - 97,406' 125,536-1988- 1,166,114 148,787 (2,356) 486,347 165,234' 55,128 70,406 112,146 130,422-
'1987 1,166,458 . 't44,495 '2,328 - 485,995 153,789 49,598 67,804 ~ 124,115 138,334 ELECTRIC STATISTICS: Company System suppey MwH seies (1,0cos) . et Peak Hour (Not MW)
System System Peak Accredsted Net Responsi- Generating . System Years ' Residential ' Commercial industrial Other Total Load bilrty (6) Capacity . Capacrty (5) 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 3,842 4,473 4,419 3.119 15,853 3,583 3,590 5,139 4,807 1992(4)
- 1991' 2,556 3,051 1,947 1,984 s) 9,538(a> 1,973 1,959 2,622 2,367
'1990 - 2,403 2,952 1,954 1,820 - 9,129 1,957 1,948 - 2,589 2,344 1989' 2,248 2,814 1,925 2,077 9,064 1,838 1,823 2,589 2,345 1988 2,296 - 2,782 1,877 2,174 9,129 1,926 1,919 2,526 2,287 '
1987- 2,153 2,633 1,816 2,001 8,603 1,818 1,821 2,505 2.241
' N ATUR AL' GAS STATISTICS: ,gp g gan,)
Average Cost of Gas Purchased Transportation Total Per MCF
~ Years Residemani Commercial industrial Other
-1997- 47,602 16,968 296 26,448 41,635 132,949 $3.64
-1996 62,728 22,841 450 21,067 45,947 153,033 3.20
-1995 55,810 - 21,245 548 17,078 48,292 142,973 2.68 1994<m 64,804 26.526 605 43 51,059 143,037 3.06 1993 110,045 47,536 1,490 41 73,574 232,686 3.05
'1992 93,779 40,556 2,214 94 68,425 205,068 2.74 1991 97,297 47,075 2,655 14,960(s) 78,055 240,042 8) 2.87 1990 95.247' 43,973 3.207 1,361 72,623 216,411 2.90
-1989, ' 104,057 47,339 5,637 1,403 58,025 216,461 2,75 1988 104,471 52,567 19,929 2,455 37,424 216,846 2.57 94,842 50,946 29,917 2,101 24,584 202,390 2.67
.1987 I -(1) Conschdated income Statement data was ' prepared using the " Commercial Enterpnse Format? (4)Information reflects the merger with KGE on March 31,1992.
(2) Consohdated income Statement data was prepared using the traditional " Utility Company Formar" (5) Ne' of off-system sales and purchases. (6) Restated to reflect two-forene stock split on May 5,1987. l
. (3)Information reflects the sales of the Missouri Properties, 46 '
WESTERN RESOURCES, t h C. Other snoeme (ECpense) (1) laterest Enpense (1) income Tames, Earnings, and Dividends (1) income Eamings Earnings Dividends Other Before Preferred & Applicable per Declared per Irttome Long Term . Short-Term income income . Net Preference to Common Comraon Common (Expense) Debt Debt Taxes Taxes income Dividends Stock Share Share
$923,039 $119,389 $73,836 $872,739 $378,645 $494,094 $ 4,919 $489,175 $7.51 $2.10 -
15,307 105,741 46,R10 251,309 82,359 168,950 14,839 154,111 2.41 2.06 18,657 95,962 30,360 - 266,056 84,380 181,676 13,419 168,257 2,71 2.02-Other income and Deductions (a) laterest Chetsse(2) income, Earnings, and Dividends (2)
- Other Eamings Eormngs Dividends income & Preferred & Applicable per Declared per Deductions Long Term AFUDC- Net Preference to Common Common Common (Net) Debt Other . Debt income Dmdends Stock Share (6) Share (6)
$31,314 $ 98,483 $23,101 $(2,G67) $187,447 - $13,418 $174,029 $2.82 - $1.98
.25,185 123,551 19,255 (2,631) 177,370 13,506 163,864 2.76 1.94
'33,634 117,464 20,009 (2,002) 127,884 12,751 115,133 2.20 1.90 3,351 51,267 10,490 (1,070) 89,645 6,377 83,268(s) 2.41 ts) 2.04m 9,012 51,542 11.022 (1,181) 79,619 1,744 77,875 2.25 1.80 859 46,378 8,742 (1,503) .72,778 1,857 70,921 2.05 1,76
, (461) 44,362 7,135- (1,327) 79,791 1,970 77,821 -2.25 1,72 1,563 48,185 3,517 (496) 88,691 3,700 84,991 2.46 1.65 Utility Plant Electric Revenues ($1,000s) Customers ($1,000s) Other Average ~ Gross Residential Commercial industrial & Misc. 1otal Total Additions Total
$332,751 $339,167 $254,076 $243,999 $1,229,993 - 613,715 $159,760 $5,624,701 403,588 351,806 262,989 179,050 1,197,433 605.971 138,474 5.516,752 396,025 340,819 268,947 140,104 1,145,895 600,791 179,090 5,415,754 '
388,271 334,059 265,838 133,613 1,121,781 593,859 164,305 5,293,995 384,618 319,686 261,898 - 138,335 1,104,537 585,042 147,556 5,169,915 396,917 271,303 -211,593 103,072 882,885 577,918 93,340 5,048,903 160,831 149,152 78,138 83,718 471,839 306,203 42,387 1,684,147 - 152,509 146,001 79,225 85,972- 463,707 303,535 46,697 1,649,367 142,308 139,567 78,267 92,201 452,343 300,028 54,207 1,613,055 149,155 138,318 77,201 96,486 461,160 295,072 62,010 1,563,444 249,914 143,084 82.972 93,755 . 469,725 295,371 52,792 1,510,067 Utility Plant Natural Gas Revenues ($1,000s) Customers ($1,000s) Other Average Gross
- Residential Commercial Industrial & Misc. Total Total Additions Total
;; , $312,665 ^ $100,394 8 1,632 $86,160 $500,851. 651,895 $ 41,057 $ -
', 352,905 .120,927 2,885 71.997 548,714 650.257 52,040 744,897 274.550 94,349 3,051 54,226 426,176 648,016 53.162 700,255 332,348 125,570 3,472 34,772 496,162 684,809 64.125 750,496
- 529,260 209,344 7,294 58.924 804,822 1,092,713 100,324 1,129,792 440,239 169,470 7,804 55,850 673,363 1,083,467 89,520 1,040,373
' 433,871 182,486 10.546 63,436 690,339 1,067,840 865,448 80.630 439,956 176,279 12,994 56.819 686,048 1,059,140 84,553 789,428 430,250 .172,628 18,021 54,381 , 675,280 1,053,787 91,613 708,787 418,190 181,506 57,434 47,824 704,954 1,042,140 50,227 620,803 390,218 178,402 87,207 40,906 696,733 1,030,422 49,906 572,382
. (7) includes special, one-time dmdent of $0.18 per share paid February 28,1991, (8) tr:Studes cumulative effect to January 1,1991, of change in revenue recognition, a $17,360.000 or $0.50 per share increase.
The cumulative offact of this change increased natural gas sales by 14.838,00V MCF and electric sales by 256,000 MWH. 47
c tllf E $ 7 E R N R E S O U R c E S, I N C. DIRECTORSi' 0FFICERS AND CORPOR ATE INFORMATION CORPOR ATE INFORMATION Cl%ECTORS John H. Robinnen (70) CORPORATE ADDRESS
- Frank J. Booker (61) . John C. Dieus (64)
Elected 1992 Elected 1990 Elected 1991 Western Resources
, Prrsident . Chairman Chairman Emeritus 818 South Kansas Avenue Beck:r investments, Inc. Capitol Federal Savings ' Black & Veatch Kansas City, Missouri Topeka, Kansas 66612-1203 Lawrtnce, Kansas and Loan Association Committees: Human Resources Topeka. Kansas Committees: Human Resources 785-675-6300 Committees: Corporate Public Intemet:
Gene A. Budig (58) Policy, Human Resources 1muis W. Smith (54) ' Elected 1991 - http://www.wstnres.com Electcd 1987 Pr ddInt . John E. Hayes, Jr. (60) President and
' American League of Elected 1989 Chief Executive Officer COMMON STOCK LISTING Prof ssional Baseball Clubs Chairman of the Board Ewing Marion Kauffman er SymW MR M New York, New York and Chief Executive Officer Foundation Commluees; Human Resources Western Resources, Inc. . Kansas City, Missouri Daily stock table listing:
Topeka, Kansas Committees; Corporate Public WstnRes C. Q. Chandler (71) Policy, Nom /nating Elected 1992 David H. Hughes (49) ' ANNUAL MEETING Elected 1988 David C. Wittig (42)
' Chdrman of the Board The annual meeting INTRUST Financial Corporation - Retired Vice Chairman Elected 1996 Wichita, Kansas Hallmark Cards, Inc. President of shareowners will be at:
Shawnee Mission, Kansas Western Resources, Inc. Comm!!!ees; Audit and finance 11:00 a.m., Committees: Corporate Public Topeka, Kansas Thomas R. Clevenger (62) Policy, Human Resources Tue= day, May 12,1998, at
' Elected 1975 - Kansas Expocentre investments Rusee5 W. Meyer, Jr. (65) Maner Conference Center Wichita. Kansas Elected 1992 - One Expocentre Drive Committees: Audit and Anance, Chairman and Chief Executive Officer Topeka, Kansas Nom /nating Cessna Aircraft Company Wichita, Kansas DIVIDENDS Corn t s: Audit and Anance, Anticipated record and g
payment dates for 1998 dividends on Western
. CFFICERS .
Resources common stock: (EXECUTIVE OFFICERS CORPORATE MANAGEMENT UTILITY OPERATIONS Dec ber 9,1997
. John E. Hayes, Jr. (60) 1989 Richard M. Haden (58) 1966 Thomas L. Greneian (45) 1974 March 9 Chiirman of the Board and Executive Vice President, Vice Presidenta June 9 Chief Executive Officer Shared Services Generation Services September 9 Devid C. Wittig (42) 1995 Wayne Kitchen (47) 1987 William B. Moore (45) 1978 Payment Przsident Vice President, Regulatory Affairs Chairman of the Board and January 2 President, KGE April 1 Normen E. Jackson (60) 1960 James A. Martin (40)1963 Exzcutive Vice President, Vice President. Finance and July 1 Electric Operations Treasurer THE WING GROUP October 1 John B. Wing (51) 1996 Steven L. Kitchen (52) 1964 Carl Ricketts (40) 1982 Vice President. Labor Chairman of the Board
' Exscutive Vice President and and Chief Executive Officer Chief Financial Officer Rita A. Sharpe (39) 1977 Carl M. Koupal, Jr. (44) 1992 Chief Executive Officer and John L Davis (50) 1996 President. Westar Capital President and Chief
~ Executive Vice President and Operating Officer Chief Administrative officer Kenneth T. Wymore (45) 1974 John K. Rosenberg (52) 1979 Vice President, Management WESTAR COMMUNICATIONS Executive Vice President and information Systems and General Counsel Telecommunications Lorl A. Finney (39) 1984 President Jerry D. Courington (52) 1977 Controller v
Richard D. Terrill (43) 1900 Secretary and Associate General Counsel ( ) Age as of December 31,1997 D;te joined Western Resources or predecessor company
. At
. .. .. j C______
l l WESTERN DEsoURcES, INC. l l SH ARE0WNER INFORM ATION AND ASSISTANCE Tha Shareholder Services Department provides information DIRECT STOCK PURCHASE PLAN and essistance to shareowners, including inquiries regarding Western Resources offers common shareowners a program to lost, stolen or destroyed dividend checks or stock certificates, purchase additional shares of common stock. Options of the address changes and transfers of Western Resources stock. Direct Stock Purchase (Plan) include full or partial reinvestment l Dividend payments should reach shareowners on the dividend f dividends, optional cash payments, automatic electronic p:yment date. If a dividend check is not received within seven investment, and safekeeping of share certificates. Investors d ys after the payment date, please notify Shareholder Services may become a Western Resources shareowner through the in writing so that we may stop payment on the original check and Plan with a minimum initial investment of $250. Investments r issue your dividend payment. are made on the first and the fifteenth of each month or the f rst business day thereafter. Shir; holder Services is the transfer agent for Western Certificate Safekeeping is a convenient feature of the Plan. RIIources' common and preferred stock. Always keep certifi. Safekeeping is designed for investors who prefer to hold their cat:s in a safe place and do not endorse until you are ready to shares on account rather than receive stock certificates. tran;fer the stock. Shareowners enrolled in the Safekeeping program receive a if a certificate is lost, stolen or destroyed, please contact Safekeeping receipt in place of a certificate. Reinvestment of Shir; holder Services immediately. This will assure that an dividends is not required to take advantage of Safekeeping. unauthorized person is prevented from transferring shares. An To receive additional information about the Plan, please con-f indemnity bond must be purchased by the shareowner to tact Shareholder Services at the number listed above. r: place stock certificates. The cost of the bond is two percent of the current market value of the stocks. DIRECT DEPOSIT OF DIVIDENDS Western Resources offers, at no charge, the option of direct c NTACTING SHAREHOLDER SERVICES: deposit of dividends. Quarterly dividend payments are , T;l: phone: deposited directly to your bank account the same day the divi- f Toll-free number: 800-527-2495 dends are paid. Participating shareowners receive a record of j in the Topeka area: 785-5756394 (FAX 785-575-1796). the transaction. Applications for this service are available Western Resources fr m Shareholder Services. The form must be received at j Shareholder Services least 30 days prior to the dividend payment date. P.O. Box 750320 DUPLICATE MAILINGS Topeka, KS 666750320. To elim.inate duplicate mailings, possibly because of stock regis- , E-mill Address: sharsvcs@wstnres.com tered in more than one way, please write Shareholder Services. ! Pinse include a daytime telephone number in your correspon- Western Resources is required, by law, to create a separate j d nca, account for each name when stock is held in similar but differ- ! ent names (e.g. John A. Smith, John Smith, John A. Smith & CON 12CTING INVESTOR RELATloNs: Mary Smith JT TEN, etc.). Help us reduce mailing and record Trl: phone: 785 575-8227 (FAX 785-575-1796) keeping costs by consolidating your accounts. Bruce R. Burns STOCK TRANSFER AGENTS AND REGISTRARS Manager of Investor Relations Western Resources Western Resources P.O. Box 750320 P.O. Box 889 Topeka, Kansas 66675-0320 Topeka, Kansas 66601-0889 Continental Stock Transfer & Trust Company E-m il Address: investrel@wstnres.com 2 Broadway,19 Floor Copiis of the Form 10-K, Annual Report to the Securities and New York, New York 10004 Exchange Commission and other published reports can be obtilned without charge by contacting investor Relations at the TRUSTEE FoR bonds cbove address. Principal Trustee, Paying Agent, and Registrar i Harris Trust and Savings Bank 111 West Monroe Street Chicago, Illinois 60603-4003 Call collect 312-4614838 O This riport was printed on recycled paper using soytased inks.
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Deloitte&
ToucheLLP O Kansas Electric Power Cooperative, Inc. i Financial Statements for the Years Ended ,
December 31,1997 and 1996, and Independent Auditors' Report l
l 1
i DeloitteTouche Tohmatsu international
)
Deloitte&
ToucheLLP l Suite 400 Telephone:(816) 474-6180 1010 Grand Avenue Kansas City, Missouri 64106-2232 i
INDEPENDENT AUDITORS' REPORT Board of Trustees Kansas Electric Power Cooperative, Inc.
We have audited the accompanying balance sheets of Kansas Electric Power Cooperative, Inc. ("KEPCo") as of December 31,1997 and 1996, and the related statements of operations, changes in patronage capital and cash ,
flows for the years then ended. These financial statements are the responsibility of the Cooperative's l management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards and 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 w eli as evaluating the overall financial statement presentation. We believe that our audits provide a seasonable basis for our opinion.
i As more fully described in Note 3 to the financial statements, certain depreciation and amortization methods have been used in the preparation of the financial statements w hich 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, such financial statements present fairly, in all material respects, the financial position of Kansas Electric Power Cooperative, Inc. as of December 31,1997 and 1996, and the results ofits operations, changes in its patronage capital and its cash flows for the years then ended in conformity with generally accepted accounting principles.
The accompanying 1997 financial statements have been prepared assuming KEPCo will continue as a going concern. As discussed in Note 2 to the financial statements, KEPCo may face difficulties in meeting its long-term debt obligations in the event retail w heeling takes effect m Kansas, w hich raises substantial doubt abut the ability of KEPCo to continue as a going concern. The financial statements do not include any adjur,ments that might result from the outcome of this uncertainty.
In accordance with Government Auditing Standards, we have also issued a report dated January 30,1998 on our consideration of KEPCo's internal control structure and a report dated January 30,1998 on its compliance with laws and regulations.
Y ffY Llh January 30,1998 DeloitteTouche Tohmatsu international I
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KANSAS ELECTRIC POWER COOPERATIVE, INC.
STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31,1997 AND 1996 1997 1996 OPERATING REVENUE:
Member $ 76,439,911 $ 75.921.301 Nonmember 509.096 436,132 Total operating revenue 76,949,007 76,357,433 OPERATING EXPENSES:
Power purchased 35,825,442 35,133,129 Nuclear fuel 2,501,840 2,495,323 Nuclear plant operations 3,511,874 3,239,174
( Nuclear plant maintenance Nuclear plant administrative and general 2,055,704 4,393,186 2,204,772 4,855,107 Administrative and general 3,171,466 2,906,738 Amortization of deferred charges 681,824 826,982
{ Depreciation 5,024,125 .,20,720 Total operating expenses 57,165,461 56,281,945 Operating margin 19,783,546 20,075.488 INTEREST AND OTilER NONOPERATING INCOME 1,747,221 1,396,517 income before interest expense 21,530,767 21,472,005 INTEREST EXPENSE ON LONG-TERM DEBT 16,732,450 16.246,562 Net margin 5 4.798,317 $ 5,225,443 See notes to financial statements.
KANSAS ELECTRIC POWER COOPERATIVE, INC.
STATEMENTS OF CHANGES IN PATRONAGE CAPITAL YEARS ENDED DECEMBER 31,1997 AND 1996 Unrealized Patrcnage Gain On Capital /
Memberships investments (Deficit) Total BALANCE. DECEMBER 31,1995 $ 2.900 $ 230,670 $ 4,459,628 $ 4,693,198 Unrealized gain on investments 235,522 235.522 Net margin 5,225,443 5,225,443 Patronage capital distributions (4,459,628) (4,459,628)
B ALANCE, DECEMBER 31,1996 2,900 466,192 5,225,443 5,694,535 Unrealized gain on investments 333,293 333,293 Membership fees 100 100 Net margin 4,798,317 4,798,317 l Patronage capital distributions (2,591,872) (2,591,872)
BALANCE, DECEMBER 31,1997 $ 3,000 $ 799,485 $ 7,431,888 $ 8,234,373 l See notes to Gnancial statements, I
i 4
KANSAS ELECTRIC POWER COOPERATIVE, INC.
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,1997 AND 1996 1997 1996 RECONCILIATION Of NET MARGIN TO NET CASil PROVIDED IW OPERATING ACTIVITIES Net margin 5 4.798.317 5 5.225.443 Adjustments to reconcile net margin to nel cash from operating activities Depreciation 5.024.125 4.620.720 Net change in unrealized gam on investments 333.293 235.522 Amortization of nuclear fuel 2.501.840 2.495.323 Amortization of deferred charges 681.824 826.982 Amortization of deferred incremental outage costs 1.720.789 2.117.349 Amortization of bond issue costs 348.504 406.281 Accretion of discount - bond f und reserse (2.255) (2.255) increase in decommissionmg fund assets (682.987) (331.563)
(Increase) decrease in deferred charges (29.671) 119.635 Increase in decommissionmg hability 682,987 331.563 increase in deferred incremental outage costs (3.194.067) (2.977.080) increase (decrease)in arbitrage rebate pay able 282,058 (571.856)
Increase in Wolf Creek Nuclear Operatmg Corp liabihties 75.293 145.165 Net change in current assets and liabilities:
Accounts receis able from members 95,120 (305.504)
Materials and supphes inventory (5.476) 53.406 Other assets and prepaid expenses 21.675 (60.806)
Accounts pay able 1.859.630 263.906 Payroll and payroll related liabilities 47.250 (11.249)
Accrued property taxes (189.022) (69.722)
Accrued interest pay able (258.829) (2.111.075)
Total adjustments 9.312.08I 5.1#4.742 Net cash prosided by operatmg actnities 14.110.398 10.3 h'{.185 CASit FLOWS FROM INVESTING ACTIVITIES-Nuclear fuel purchases (2.791.307) (528.618)
Plant additions (1.116.406) (1.173,126)
Wolf Creek Nuclear Operating Corp insestments (430.343) (384,181)
(Purchases) sales of short-term iMestments (816.080) 168.025 Purchases of other investments (l.747.733) (3.786.070)
Decrease in intestments in associated organizations 6.672 6.824 increase m bond fund reserve (144.613)
Net cash used by ingesting actnities (7.039.810) (5.697.146)
CASiliLOWS FROM FINANCING ACTIVITIES Repayment oflong-icrm debt (4.781.228) (5.552.463)
Penalties paid for repricing long-term debt (1.415.752)
Imanced penalties for repriemg long-term debt 1.020.556 Ices paid for refinancmg long term debt (3.323.602)
Patronage capital distributions paid (4.459.628)
Membership fees 100 Net cash used by financmg actiuties (12.564.358) 15.938.659)
DECREASE IN CASil ANI)CAMI1 QUIVALENTS (5.493.770) (1.255.620)
CASil AND CASil EQUlVALENTS. ilfGINNING Of YEAR 9.963.775 11.219.395 CASil ANDCASilEQUIVALENTS.ENDOf YEAR 5 4.470.005 5 9.963.775
$UPPLEMENTAL kNf0RMATION.
Interest paid 5 16.484.478 518.377.637 Property tases paid 5 2.811.022 5 3.040.840 '
See notes to financial statements KANSAS ELECTRIC POWER COOPERATIVE, INC.
( NOTES TO FINANCIAL STATEMENTS
) YEARS ENDED DECEMBER 31,1997 AND 1996 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 power supply contracts. KEPCo is governed by a Board of Trustees representing each ofits 22 members, which collectively serve more than 100,000 electric customers in two-thirds of rural Kansas. KEPCo is under thejurisdiction 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. GOING CONCERN MATTERS
> KEPCo currently applies accounting standards that recognize the economic effects of rate regulation pursuant to Statement of Financiel Accounting Standards ("SFAS") No. 71, Accc>untingfor the E[/ects ofCertain 7) pes ofRegulation, 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 would be an extraordinary non-cash charge to operations of an amount that would be material. Criteria that could give rise to the l discontinuance of SFAS No. 71 include,(1) increasing competition that restricts KEPCo's ability to establish prices to recover specific costs, and (2) a signiGeant change i, the manner in which 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 SFAS 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 Nuclear Generating Station (" Wolf Creek") and necessitate the write off of regulatory assets. At this time, the effect of competition and the amount of regulatory assets w hich could be recovered in such an environment cannot be predicted.
i As discussed in Note 3, the KCC issued an order effective February 1,1987, requiring KEPCo to use present worth (sinking fund) depreciation and amortization, w hich is a method that is not in accordance with generally accepted accounting principles. If depreciation and amortization were determined in accordance with generally accepted accounting principles, patronage capital at December 31,1997 would reflect a deficit (liabilities in excess of assets) of approximately $39,000,000.
I The electric utility industry in the United States is rapidly evolving from a historically regulated monopolistic market to a dynamic and competitive integrated marketplace. The 1992 Energy Policy Act began the process of deregulation of the electricity industry by permitting the Federal Energy Regulatory Commission 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.
House Bill No. 2619 (the "Act") was introduced into the 1998 Kansas legislative session by the Committee on Utilities The proposed Act would establish competition in retail sales to electric generation service in the State of Kansas (commonly known as " retail wheeling") as early as July 1, 2001. The proposed Act allows for the recovery by utilities of costs in excess of competitive levels in amounts to be determined by the KCC. The impact of the proposed Act on the operations of KEPCo is uncertain at this time, although management of KEPCo believes their present rges may not be competitive in a retail wheeling environment.
Management of KEPCo has had discussions with the Rural Utilities Service ("RUS") to seek solutions to what management believes to be burdensome debt service. The Federal Government recognized I concerns related to the risks faced by electric cooperatives in a retail wheeling environment and passed the U.S. Farm Bill of 1996. This bill contains provisions that allow the Department of Agriculture the g authority to compromise, adjust, reduce or charge off debt or claims owed to the government by RUS B electric borrowers such as KEPCo. The RUS has finalized regulations to implement the provisions contained in the Farm Bill and managerr.ent is continuing discussions with the RUS, but cannot predict what, if any, actions the RUS will take.
Based on the uncertainties described above, KEPCo may have difficulties in meeting its long-term g obligations in the event retail wheeling takes effect in Kansas, which may indicate that KEPCo will be g unable to continue as a going concern for a reasonable period of time. The accompanying 1997 financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification ofliabilities that might result from the outcome of these uncertainties or that might be necessary should KEPCo be unable to continue as a going concern.
- 3. DEPARTURES FROM GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Effective February 1,1987, the KCC issued an order to KEPCo requiring the use of present wonh (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 Statement of Financial Accounting Standards ("SFAS") No. 92, Accountingfor Phase-In Plans. The effect of these departures is to os erstate the following amounts in the financial statements:
1997 1996 Net utility plant $ 41,675,100 $ 38,543,583
[ Deferred charges 5,540,148 5,207,902
! Patronage capital 47,215,248 43,751,485 Net margin 3,463,763 2,971,338
- 4.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES l 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 statement 3 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 7
I System ofAccounts - KEPCo maintains its accounting records substantially in accordance with the RUS Uniform System of Accounts and in accordance with accounting practices prescribed by the KCC (see Note 14 - RUS Development). Utility Plant and Depreciation - Utility plant is stated at cost. The costs of repairs and minor replacements are charged to operating expense 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 electric plant in service was computed on the straight line method at a 3.44% 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. The composite rates for the years ended December 31,1997 and 1996 were 2.40% and 2.21%, respectively. Pursuant to a KCC rate order dated March 27,1992, all additions, betterments and 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 follows: Transportation and equipment 25 to 33% OfGee furniture and fixtures 10 to 20% Leasehold improvements 20 % Transmission equipment 10 % Nuclear Fuel- The cost of nuclear fuel in process of refinement, conversion, enrichment and fabrication is recorded as an asset at original cost and is amonized to nuclear fuel expense based upon the quantity of heat produced for the generation of electric power. The permanet disposal of spent fuel is the responsibility of the Depa tment 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. Investments in Associated Organizations - Investments in associated organizations are carried at cost and consist principally of patronage capital cenificates, capital term certificates and subordinated term certificates of the National Rural Utilities Cooperative Finance Corporation ("CFC"). 1 Cash Equivalents - All highly liquid investments purchased with an original maturity of three months or less are 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 SFAS No.115, Accountmgfor Certain Investments in Debt and Equity Securities, based on KEPCo*s intended use of such securities. Equity securities are carried at fair value l based on quoted market prices for those or similar securities, with the unrealized gain / loss included as a separate component of capitalization. Investments in debt securities are classified as held-to-maturity in accordance with SFAS No. I 15, based on KEPCo's intent to hold such securities to maturity and its ability to do so. Debt securities are 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 other investments. 1 l r l
Materials andSupplies Inventory - Materials and supplies inventory for 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 revenue bonds, mortgage notes payable to the CFC and fees for repricing debt, and are being amortized using the interest method over the remaining life of the bonds. Decommissioning Fund Assets / Decommissioning Liability - As of December 31,1997 and 1996.
$3,467,355 and $2,784,368, respectively, has been collected and is being retained in an interest-bearing trust fund to be used for the physical decommissioning of Wolf Creek. The decommissioning funds have been invested by the trustee primarily in U.S. government and agency obligations, which are carried at cost, and Homestead mutual funds, which are carried at estimated fair market value. During 1989, the KCC extended the estimated useful life of Wolf Creek to 40 years from the original estimate of 30 years only for the determination of decommissioning costs to be recognized for ratemaking purposes. 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. KEPCo is responsible for a 6% share of the decommissioning costs for Wolf Creek. KEPCo's current provision for decommissioning, based upon the 1997 decommissioning study, is being charged to operations over the life of the plant. Such provision totaled $239,896 and $266,896 in 1997 and 1996, respectively.
In addition, the Financial Accounting Standards Board is currently deliberating the accounting for certain liabilities related to closure or removal oflong lived assets, including decommissioning, which could result in the issuance of a new accounting standard. KEPCo is not able to predict what efibet such changes would have on its results of operations, financial position, or related regulatory practices until the final issuance of the revised accounting guidance, but such effect could be material. Cash Surrender Value ofLife insurance Cemtracts - The foilowing amounts related to Wol(Creek Nuclear Operating Corporation ("WCNOC") corporate-owned life insurance contracts, primarily with one highly-rated major insurance company, are includea in WCNOC investments on the balance sheets: 1997 1996 Cash surrender value of contracts $ 2.214,426 $ I,964,447 Borrowings against contracts 358,587 358,587 Net $ 1,855,839 51,605,860 Income Taxes - 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. It is management's opinion that KEPCo has met the requirements of this section and will continue to do so for the foreseeable future. Accordingly, provisions for income taxes have not been reflected in the accompanying financial statements. Rates - 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. 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. 9
Reclassifications - KEPCo has reclassiGed the presentation of certain prior year information to conform with the current year presentation. Long-Lived Assets - Management periodically reviews lang-lived assets for impairment relating to events or changes in circumstances that would indicate that 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 be required to be sritten down to its fair value, with the loss recognized in the statement of operations. Interest Rate Swap Agreements - Financial derivatives transactions include interest rate swap agreements, which are contractual agreements to exchange, or " swap," a series ofinterest rate payments over a speciGed 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 "counterparty"), whereby KEPCo swapped the variable interest rate on their CFC notes for a Oxed interest rate with the counterparty over the life of the debt (see Note 10).
- 5. WOLF CREEK NUCLEAR GENERATING STATION KEPCo owns 6% of Wolf Creek which is located near Burlington, Kansas. The remainder is owned by the Kansas City Power & Light Company (KCPL - 47%) and Kansas Gas & Electric Company (KGE -
47%). KGE is a wholly owned subsidiary of Western Resources, Inc. Substantially all of KEPCo's utility plant consists ofits 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% of the operations, 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 requirueents of SFAS No. 92. If depreciation on electric plant in service was calculated using a method in accordance with generally accepted accounting principles, depreciation expense would be increased and KEPCo's operating margin would [ be decreased by $3,131,517 and $2,594.637 for the years ended December 31,1997 and 1996, ) respectively, in addition, net utility plant would be decreased and patronage capital would be decreased by $41.675.100 and $38.543,583 as of December 31,1997 and 1996, respectively. I i 6, SIIORT-TERM AND OTIIER INVESTMENTS Short-term and other investments consist of the following as of December 31: 1997 1996 Amortized Fair Amortized Fair Cost Value Cost Value Short-term investments: Available-for-sale - llomestead mutual funds $ 1,162,180 $ 1,961,665 $ 1,082,099 $ 1,548,291 Ileid-to-maturity - l U.S. government agency securities 2,502,940 2,502,940 2,100,234 2,100,234 3,665,120 4,464,605 3,182,333 3,648,525 Other investments - 11 eld-to-maturity - U.S. government agency securities 6,988,543 6,988,543 5,240,810 5,240,810
$ 10,653,663 $ 11.453,148 $ 8,423,143 $ 8,889,335 Included in capitalization is $799,485 and $466,192 of unrealized gains on available-for-sale equity securities as of December 31,1997 and 1996, respectively. The amortized cost of U, S, government agency securities approximated fair value as of December 31,1997 and 1996.
l The contractual maturities of debt securities classified as held-to-maturity as of December 31,1997 are as follows: l l Amortized Fair l Cost Value Due within one year $ 2,502,940 $ 2,502,940 Due after one year through five years 2,014,250 2,014,250 Due after th e years through ten years 1,459,992 1,459,992 l Due after ten y ears 3,514,301 3,514,301 l
$ 9,491,483 $ 9,491,483 7, ilOND FUND RESERVE KEPCo has entered into a bond covenant whereby the Cooperative is required to maintain, with a trustee, a Bond Fund Reserve of a stipulated amount of approximately $3.9 million, sufficient to satisfy certain future interest and principal obligations. The amount held in the Bond Fund Reserve is invested by the trustee in tax-exempt municipal securities, pursuant to the restrictions of the indenture agreement, w hich are carried at cost.
- 8. INVESTMENTS IN ASSOCIATED ORGANIZATIONS At December 31,1997 and 1996, investments in associated organizations consisted of the following:
1997 1996 CFC: Membership $ 1,000 $ 1,000 Capital terrn certificates 395,970 395,970 Subordinated term cer:ificates 2,205,000 2,205,000 I Patronage capital certificates Other 20,419 120,426 29,956 117,561 I 9. DEFERRED CHARGES
$ 2,742,815 $ 2,749,487 Disailowed 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 I Wolf Creek (approximately $21.3 million net of accumulated amortization as of December 31,1997). A 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 period from I September 3,1985 through January 31,1987, over a 27.736 year period starting February 1,1987.
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 i dated January 30.1987. The method used by KEPCo constitutes a phase-in plan w hich does not meet the reghirements 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 I would be increased and KEPCo's operating margin would be decreased by $332,246 and $376,701 for the years ended December 31,1997 and 1996, respectis ely. In addition, deferred charges would be decreased and patronage capital would be decreased by $5,540,148 and $5.207,902 as of December 31, 1997 and 1996, respectively. Deconunissioning and Decontamination Assessments - The Energy Policy Act of 1992 established a i fund to pay for the decontamination and decommissioning of nuclear enrichment facilities operated by the DOE. A portion of this fund 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. I KEPCo has recorded its portion of this liability w hich is being paid over 15 years. KEPCo has also recorded a related deferred asset w hich approximated $766,000 and $814,000 as of December 31,1997 and 1996, respectively, and is being amortized to nuclear fuel expense over the 15 year assessment period. DeferredIncremental uurage Costs - On April 9,1991, the KCC issued an order that a' lowed KEPCo to defer its 6% share of the incremental operating, maintenance and replacement power costs associated with the refueling of Wolf Creek. Such costs are deferred during each outage and are being amortized over the approximate 18 month operating cycle coincident with the recognition of the related revenues.
- 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:
1997 1996 l Mortgage notes payable to the FFB at rates varying from 5.501% to 9.206%, payable in quarterly installments through 2018. $ 120,429,102 $ 123,429.355 ! Mortgage notes payable to the CFC at a rate of 7.597% payable semi-annually, 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 semi-annually, principal payments commencing in 1989 and continuing annually through 2002. 6,050,000 7,030.975 Floating / fixed rate pollution control revenue bonds, City of Burlington, Kansas, Pooled Series 1985C, variable interest rate (3.75% at December 31,1997) payable annually through 2015. 38,300,000 39,100,000 216,119,102 220,900,330 Less current portion 7,692,480 4,857,236
$ 208,426,622 $ 216.043,094 Aggregate maturities of mortgage notes payable to FFB and CFC and floating / fixed rate pollution control revenue bonds as of December 31,1997 after the repricing of certain FFB mortgage notes payable as discussed below, are as follows:
Year Amount 1998 $ 7,692,480 1999 5.574,505 2000 5,907,839 2001 6,553,508 2002 6,769,082 Thereafter 183,621,688
$ 216,119.102 l
l l
r 1 At December 31,1997, KEPCo has FFB approved loans guaranteed by RUS with balances of
$120,429,402. Of this amount, $4,317,750 currently has a maturity date of March 31,1998. Upon maturity of each short-term advance, KEPCo may renew the advance for another two year period or elect to extend the maturity date on a long-term basis. The above schedule oflong-term debt maturities assumes that $1,684,178 of the $4,317,750, which matures on March 31,1998, will be extended based on the above options while the remaining $2.633.571 will be paid on its maturity date of March 31, 1998.
l 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% of total assets (unless such distribution is approved by RUS - See Note 16). On January 19,1996, KEPCo remarketed $11.5 million of mortgage notes payable to the FFB. The new l interest rates vary from 5.501% to 5.507% compared to the old rates of 7.520% to 7.674% and are
- projected to save KEPCo $2 million over the life of the notes.
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 l (the " Series 1997 Certificates") in the Series 1997 Trust through a public offering. The refinancing l allowed CFC to purchase the outstanding notes of the 1988 Grantor Trust (such notes had fixed interest j rates ranging from 9.3 to 10%), amend them to reduce the guaranteed interest rate payable by KEPCo, l and have the Trustee transfer the notes with the Guarantees of RUS attached to a new grantor trust. ; l 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% payable to Morgan os er the life of the debt. The variable rate ofinterest will then be paid by Morgan to the Series 1997 Certificate Holders. l The Swap Agreement has a total notional principal amount of approximately $57.3 million, and will be i 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. Hown er, 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 payrnent from Morgan. KEPCo is also exposed to credit loss in the event of noncompliance by Morgan to the Swap Agreement. Ilowever, KEPCo does not anticipate nonperformance by Morgan. i
- 11. SIIORT-TERM HORROWINGS KEPCo has available a $12 million line of credit with the CFC that expires in February 1998. The line remained unused as of December 31,1997.
i l l
l l l 12. OPERATING LEASE l KEPCo leases of0ce space and equipment under noncancellable operating leases. The office space l 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 31,1997 are as follows: Year Amount l 1998 $ 116,255 i 1999 104,822 l
$ 221,077 The related rental expense for 1997 and 1996 was $103,200 and $91,205, respectively.
l
- 13. BENEFIT PLANS National Rural Electric Cooperative Association ("NRECA ") Retirement and Security Program -
KEPCo participates in the NRECA retiren'ent 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 benents and plan assets are not determined or allocated by individual employee. KEPCo's pension expense, under this program, was $67,345 and
$31,666 for the years ended December 31,1997 and 1996. respectively.
l ! 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%, dependent on the employee's level of participation, of the respective employee's base pay to provide additional retirement benents. KEPCo contributed $39,108 and $32,528 to the plan in 1997 and 1996, respectively, i l Wolf Creek Nuclear Operating Corporation Retirement Plan - KEPCo has an obligation to the l WCNOC Retirement Plan for its 6% ownership interest in Wolf Creek. This plan provides for benents l upon retirement, normally at age 65, in accordance with the Employee Retirement income Security Act of 1974. KEPCo has satis 0ed at least its minimum funding requirements. Benents under this plan reDect the employee's compensation, years of service and age at retirement. 1 1 a Provisions for pensions are determined under the rules prescribed by SFAS No. 87. The following sets forth KEPCo's share of ^e plan's actuarial present value and funded status and a reconciliation of such status to the Snancial statements as of December 31: 1997 1996 Accumulated beneSt obligation: Vested $ 1,344,943 $ 1,157.683 Nonvested 320.042 260,451 Total $ 1,664,985 $ 1,418,134 Fair value of plan assets $ 1,903,344 $ 1,422,968 Projected benefit obligation 2,571,980 2,320,988 Projected beneSt obligation in excess of plan assets (768,636) (898,020) Unamortized transition amount 101,606 108,864 Unrecognized net gain (364.395) (276,677) Unrecognized prior service cost 42,037 45,155 Accrued pension liability (included in WCNOC liabilities) $ (989,388) $(1,020.678) Plan assets are invested in insurance contracts, corporate bonds, equity securities, U.S. Government securities and short-term investments. Actuarial assumptions: 1997 1996 Discount rate 7.5 % 7.5 % Annual salary increase rate 5.0 % 5.0 % Long-term rate of return 9.25 % 9.25 % KliPCo's share of the net periodic pension costs were as follows for the years ended December 31: 1997 1996 Senice cost $ 183,016 $ 166,227 Interest cost on projected beneSt obligation 189,400 164,164 Actual return on plan assets (270,763) (207,364) Other 150,434 121,933 Total pension expense $ 252,087 $ 244,960 l
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- 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 separately (but notjointly) 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. In the opinion of the general counsel of KEPCo, 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. Nuc/ car Liability andInsurance - The Price-Anderson Act and its amendments currently limit the public liability, including attorney costs, of nuclear reactor owners for claims that could arise from a nuclear incident to $8.9 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 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 arejointly and severally subject to a retrospective assessment of up to $79.3 million ($4.7 million - 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 retrospective assessments per incident per year.
The owners of Wolf Creek also have decontamination liability, premature decommissioning liability and 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. The remaining proceeds, if any, can be used for property damage or premature decommissioning costs up to $1.3 billion ($78 million - KEPCo's share). The owners of Wolf Creek also carry additional insurance with NEIL to cover costs of replacement power and other extra expenses incurred during a prolonged outage resulting from accidental property damage at Wolf Creek. Iflosses 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 approdmately $1 million. f 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 substantial losses not covered by insurance, to the extent not recoverable through rates, could have a material adserse effect on KEPCo's financial position and results of operations. 1
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Decommissioning - 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 accordance with a plan approved by the NRC, and to pay for on-site property damages. This I decommissioning insurance will only be available if the insurance funds are not needed to implement the NRC-approved plan for stabilization and decontamination. l Nuclear Fuel Commitments - At December 31,1997, Wolf Creek's nuclear fuel commitments (KEPCo's share) were approximately $1.26 million for uranium concentrates through 2000, $4.5 l million for enrichment through 2003 and $8.6 million for fabrication through 2025. l I RUS Development - KEPCo has received notification from the RUS that, because KEPCo's financial l statements are not in conformance with generally accepted accounting principles, as discussed in Note 3, the RUS will evaluate all requests for action on the basis of financial information prepared as if the straight line method of depreciation and amortization had been used. l 15. FAIR VALUE OF FINANCIAL INSTRUMENTS i The following methods and assumptions were used to estimate the fair value of each class of financial l 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-Term and Other investments, Decommissioning Trust, investments in Associated Organizations and Bond Fund Rescere - The fair value of these assets is based on quoted market t prices as of December 31,1997, Variable-Rate Debt - The carrying amount approximates the fair value because of the short-term variable rates of those debt instruments. Fived-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 the same remaining maturities. The estimated fair values of the Company's financial instruments are as follows: December 31,1997 Carrying Value Fair Value Cash and cash equivalents $ 4,470,005 $ 4,470,005 Short-term investments 4,464,605 4,464,605 Other investments 6,988,543 6,988,543 Investments in associated organizations (including restricted assets) 2,742,815 3,476,618 Bond fund reserve 4,079,464 4,346.726 Decommisisioning trust 3.467,355 3,467,355 Variable-rate debt 38,300,000 38,300,000 Fixed-rate debt 177,819,102 187,407,387 l 1 i
- 16. PATRONAGE CAPITAL 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. The 1995 margin allocated of $4,459,628 was paid out in cash after approval was received from RUS on January 28,1997. Of the $5,225,443 of 1996 margins allocated to members, $2,591,872 was paid out in cash to the members on January 14,1998, after approval was received from RUS to distribute approximately half of the 1996 margins allocated. RUS's approval to distribute the 1996 marg:ns required that approximately an equal amount would be used to prepay FFB debt that is eligible for prepayment on March 31,1998 (Note 10). If KEPCo's financial statements were adjusted to eliminate the exception to generally accepted accounting principles, total patronage capital would have been a deficit. This would result in no allocation to members.
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