ML20247J855

1988 Annual Rept,Kansas Gas & Electric Co

ML20247J855
Person / Time
Site:	Wolf Creek
Issue date:	12/31/1988
From:	Cadman W KANSAS GAS & ELECTRIC CO.
To:
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ML20247J852	List: ML20247J847 ML20247J855 ML20247J866
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NUDOCS 8904050106
Download: ML20247J855 (45)

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1988 AnnualReport Kansas Gas and Electric Company Letter to Our Shareholders P roviding KG&E's mission is to provide excellent service to customers and a profit to excellent service to shareholders. It is intentionally a dual mission because neither one - excellent service or a profit - can be achieved for long at the expense of the other. To carry customers and a profit out this mission over the next five years, we have three principal objectives:

for shareholders is

• To so satisfy customers with our service and price that we are their energy supplier of choice; our mission.

• To achieve earnings per share which assure a reasonable return to shareholders and are sufficient to permit the board to consider an annual dividend of $2.36 per share by December 31,1993;

• To maintain a work force of properly placed, well-trained and motivated employees.

Accomplishing these objectives will be difficult. While no one can predict the future, we believe the opportunity exists for these objectives to be achieved. The

$29 million rate increase which went into effect on January 1,1989, was the final step in the rate phase-in plan for the Wolf Creek Generating Station, after elimination of a $15.6 million rate increase which had been scheduled for January 1, 1992. With no plans to build additional generating facilities and with firm cost control, we intend to hold rates stable at least through 1993. This should bring our rates more into line with the national and Kansas averages.

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We continue to make progress in our efforts to more fully utilize existing 5 generating facilities. Retail kilowatthour sales increased by 3.5% in 1988, after growing by 4% in 1987. To achieve our goals over the next five years we must increase retail sales by 2.7% annually. Holding the line on rates is an important part of our efforts to increase sales. Conversely, increased sales provide the revenues needed to hold down rate increases.

An increase in quarterly common stock dividends in November, from 37c to 40c, made 1988 the third consecutive year in which we raised dividermds. The 8.1%

increase also keeps dividend growth well above the industry average while we work to restore our quarterly dividend to its former level of 59c. Earnings per share of common stock were $2.10 in 1988 compared with restated earnings of $1.72 in 1987.

Two regulatory matters developed at year-end which cause some concern. The Kansas Corporation Commission ruled that $14.4 million of the $29 million rate e will succeed increase effective January 1,1989, should be interim and subject to refund pending the outcome of a cost of service audit covering 1988. Additionally, the KCC directed because we have a os to show cause why we should not be required to refund $6.4 million to cover what te m f skilled, the KCC staff cqnsiders to have been excess fuel costs paid by our customers during outages of Wolf Creek Station in late 1987 and early 1988. We believe the cost of competent and highly service audit will show a need for the full $29 million increase on a permanent basis. .

m tivated employees And, with Wolf Creek's lifetime and annual capacity factors being above industry averages, a refund based on the outages in question would be unreasonable. who have proven The next five years will be exciting and challenging for us as we work to achieve .

themselves in l our principal objectives and fulfill our mission. We will succeed because we have a team of skilled, competent and highly motivated employees who have proven severe tests.

themselves in severe tests over the last decade and who know where we intend to go I and how we intend to get there.

Thank you for your support and please let us know if you have questions or comments.

Sincerely, Wilson K. Cadman Chainnan of the Board arul President March 9,1989 2

Financial Highlights, Five-Year Comparison (Dallars in Thousands except per share data) 1988 1987(a) 1986(a) 1985 1984 Operating Revenues $ 526,220 $ 514,332 $ 498,634 $ 412,115 $ 410,753 Net income $ 77,183 $ 72,322 $ 14,856 $ 97,732 $ 121,858 I Earnings Applicable to Common Stock $ 76,362 $ 69,846 $ 5,669 $ 83,377 $ 106,495 i i

Average Shares of Common Stock i Outstanding 36,398,070 40,522,801 40,752,852 39,118,105 34,698,342 ,

Common Stock Per Share Data  ;

Earnings $ 2.10 $ 1.72 $ 0.14 $ 2.13 $ 3.07 l Cash Dividends $ 1.51 $ 1,39 $ 1.225 $ 2.065 $ 2.36 Indicated Year-End Dividend Rate $ 1.60 $ 1.48 $ 1.36 $ 1.18 $ 2.36 Market %lue Year-End $ 20,75 $ 19.25 $ 22.875 $ 14.125 $ 17.25 Book %lue (Moody's Net 'limgible Assets)

Year-End $ 19.78 $ 19.21 $ 18.87 $ 20.12 $ 20.38 l Available Capacity (Megawatts) 2,376 2,399 2,435 2,097 2,099 System Peak Responsibility (Megawatts) 1,677 1,653 1,627 1,612 1,633 Reserve Capacity (Megawatts) 699 746 808 485 466  !

Average Use Per Residential Customer (Kilowatthours) 9,726 9,314 9,202 9,435 9,812 j Average Price Per Residential Kilowatthour 9.01 c 9.02c 8.93c 7.13c 6.98c Number of Customers at Year-End 251,849 249,970 247,726 246,017 242,666 Long-Term Debt $ 775,763 $ 1,016,096 $ 1,063,464 $ 1,047,420 $ 991,004 Redemption Required Preferm! Stock $ -

$ 18,000 $ 76,000 $ 78,000 Total Utility Plant (Net) $ 1,897,829 $ 1,926,536 $ 2,028,592 $ 2,217,478 $ 2,064,721 Total Assets $ 2,442,661 $ 2,571,972 $ 2.282.860 $ 2.444.789 $ 2.226,266 (a) See notes I and 2 of the Notes to Financial Statements for restatements due to adoption of various accounting starulards.

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Highlights Earnings available for common stock were up 9% from 1987. Earnings per share of common stock were $2.10 compared to restated 1987 earnings of $1.72. Factors leading to improvement include the completion in June of the buying back of 6 million shares of common stock, reducing preferred stock dividends by $2 million because of preferred stock redemption, reducing interest expense, and receiving $20 million in revenues primarily from short-term investment of proceeds from the September 1987 sale and leaseback of LaCygne 2.

Retail kilowatthour sales increased 3.5% Residential kilowatthour sales were up 5.4%

from 1987 with industrial higher by 2.8% and use by commercial customers up 2.6% Peak demand for electricity on August 15 was 1% over the 1987 peak and a record of 1,677 rnegawatts.

In 1988,38% of new homes. constructed in our service area were heated with heat pumps, up from 25% in 1987 and 10% in 1986.

- Through February 1989,122 expanded, re-opened or

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[{ql new companies, accounting for 3,900 new jobs and 58,000 kilowatts of new electrical load, were being served on the y-  ;; ,-l- company's Economic Development Rider. This rate has been available only three years.

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j js The tallest office building in Kansas, Wichita's Epic

' 7" Center, now uses an ice bank storage system for air s i, g j conditioning. At night electricity makes ice which cools the W.)

A air during the daytime. Installation was completed in May and the system proved highly successful during its first p A summer season. The effectiveness of a demonstration system

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installed in 1985 led the company to recommend this 7

technology.

g Mark Verrer, benefits analyst, spent 13 weeks, an luiur a ueek, in an 8th grade social studies class as furt ofJunior Achievement project Business to -sim.a xa am. america mks." j PRO)ECT

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Project living Green launched in September supports ec<nunnic ,

development by irr. proving the appearance of KG8E communities. How ,

a community lauks often tells the unrLI ulun Lind of place it is to hve and

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In 1988, the company invested $1.9 million in research and development. This included

$400,000 in company projects and those undertaken with other Kansas utilities and major state universities through the Kansas Electric Utility Research Program. In addition, $1.5 million was invested through the Electric Power Research Institute. Since 1986, we have participated with EPRI in a study of extending the life of generating units. Our involvement has concentrated on our gas-fired generators which range in age fmm 22 to 37 years.

In 1988 the company restated its 1987 financial statements resul<ng from adoption of SFAS 92. This restatement brings the company into compliance with three new standards issued by the Financial Accounting Standards Board during the last three years. (See notes 1 and 2 of the Notes to Financial Statements).

Since 1986, the company has worked to develop an alternative billing system. The result is the patented PowerStat that enables customers to pay for electrical energy in advance by purchasing a magnetic card tc4 activate a special switch. Key advantages for customers are that the PowerStat eliminates deposits and informs the customer of how much money is being spent for electricity, how much has been used and how much is available before more money is required. For utilities, costs are lowered. We are currently testing 40 units with customer volunteers. PowerStat is being developed by CIC Systems, Inc. of Nashville, Tennessee. KG&E owns a 50% interest in CIC Systems. ,

Reportable accident rate in 1988 was just 1.85 accidents per 100,000 hours0 days <br />0 hours <br />0 weeks <br />0 months <br /> worked. This compares to 1.87 in 1987 I when company employees achieved the best safe-working 4 l, - ' : /

record in the nation for an electric utility in our class.  ?' - " i ,,3 For the fourth consecutive year, the President's Council on Private Sector Initiative awarded the "C" Flag to the company because of Project DESERVE, the program operated with the ,

3 American Red Cross to provide emergency energy assistance # -

for the elderly and severely disabled. In 1988, Project '

DESERVE made 1,807 grants totaling more than $255,000 contributed from customers, the company and its employees. /

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The patented 1% erStat tells customers how much they are spendmg for A

• electricity at any time as u ell as how much they spent the previous day and numth.

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Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations The 1986 and 1987 financial statements have been restated to reflect the adoption of various accounting standards in 1987 and 1988. The effects of adopting the various accounting standards are discussed in Notes 1 and 2 of the Notes to Financial Statements and are reflected in the accompanying financial statements.

Earnings and Dividends Earnings applicable to common stock (earnings for common) were $76 million in 1988, an increase of 9% over the 1987 earnings for common, as restated to reflect the adoption

- of Statement of Financial Accounting Standards No. 92, Regtdated Enterprises - Accatmting for Phase-in Plans (SFAS 92).

E.arnings and Dividends Paid Per Share The 1988 increase in earnings for common reflects an nw increase in net income and reduced preferred dividends. The decrease in preferred dividends results from the retirement of ix .

preferred stock by the Company in 1986 and 1987. The increase in net income reflects the benefits of improved revenues, income from short-term investments and reduced a -!'

C interest expense whi:h more than offset the increased 2*

,$ $ operating expenses. The 1987 earnings for common were d W $70 million compared to $6 million in 1986. The 1986 N q?:{ earmngs for common have been restated to reflect an after h,

Q ?u tax loss of $55 million associated with the adoption of 7

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In 1988, the Company's return on average common equity was 10.6% compared to 9.2% for 1987 and 0.7% for 1986.

The return on average common equity for 1986, excluding ta ra w n. um - the effect of adopting SFAS 90, would have been 7.6%.

The 1988 earnings per share of common stock was $2.10, an increase of 22% over the restated 1987 earnings per share of $1.72. A significant portion of the increase in 1988 earnings per share resulted from the Company's purchase of approximately 6 million shares of the Company's common stock. The 1987 earnings per share of common stock increased $1.58 over the restated 1986 earnings per share of 14 cents.

The 1986 earnings per share of common stock include a $1.34 per share after tax loss associated with the adoption of SFAS 90.

l The Earnings and Dividends Paid Per Share graph depicts the earnings for common l and dividend.s paid on a per share basis for the five year period 1984 through 1988.

Dividends paid per common share were $1.51 in 1988, an increase of 12 cents from 1987.

In Nosember 1968, the Board of Directors declared a quarterly dividend cf 40 cents per share, an increase of 3 cents or 8.1% over the dividend paid in each of the previous four quarters. The 1987 diviJends paid per common share were $1.39, an increase of 16% cents over 1986. In November 1987, the dividend was increased to 37 cents, a 3 cent or 8.8%

increase over the dividend paid in each of the previous four quarters.

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Operating Revenues and Sales Changes in Operating Revenues Operating revenues were $526 million in 1988, $514 million in 1987 and $499 million in 1986. The increase in um 1988 was due primarily to greater kilowatthour (kWh) sales.

im The 1987 increase resulted from an increase in retail rates u- and greater kWh sales. The Changes in Operating Revenues

+- graph provides the major comoonents that account for operating revenue changes for the past five years.

'"-- Electric sales increased 2% and 5% for 1988 and 1987, with retail sales increasing 3% in 1988 and 4% in 1987.

Warmer than normal weather in the summer of 1988 and

,_ increased usage by industrial customers account for the retail m

increases. The 1987 retail sales increase of 4% represents the is__

increased usage by a major chemical manufacturer and

_ _ adJitional customers in the residential and commercial m n_._N_ N categories. The Sales graph presents the components of a kWh sales for the past fivc ; ear A A A A A Operating Expenses Fuel and purchased power expense increased by less than a n. .. m ro,i s.i.. ens whoi. i. .oa o,6 , 1% in 1988 after a decrease of 6% in 1987. The 1988

- increase resulted from a combination of changes in the price of fuel and the mix of the various types of fuel used. The 1987 decrease resulted from a reduction in the amount of purchased power required in addition to a decrease in the cost of the fuels used Other operation and maintenance expenses increased 24% in 1988 and 11% in 1987. The lease of the La Cygne 2 coal-fired generating unit (La Cygne 2) accounts for 65% and 53% of these increases. The remainder of the other operation and maintenance expense increase in 1988 over 1987 is due to additional boiler maintenance at La Cygne 2, a major outage at Murray Gill Steam Electric Station and an unscheduled outage at the Wolf Creek Generating Station (Wolf Creek).

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Depreciation expense decreased 2% in 1988 and 15% in 1987. The 1988 decrease was due primarily to the effect of removing La Cygne 2 from plant in-service due to its sale in 1987. Increasing the depreciable life of Wolf Creek from 30

. to 40 years and the sale of La Cygne 2 resulted in the 1987 decrease.

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< 4fj Other income Items Investment income from short-term investments increased p%}yd dm 4 jd T; i$ s @a "]'

k3 to $20 million in 1988 from $7 million in 1987. The 4

9%i remaining proceeds of the La Cygne 2 sale were generally invested in short-term securities. The Company anticipates a portion of the proceeds may be used to retire $100 million of EEE first mortgage bonds due the first quarter of 1989, with the remainder available for general corporate purposes. Future

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investment income will be reduced to the extent the 1988 year end balance of $154 million of the proceeds is sun,.... i ass c m .,a en u,,, a ww.u. . a o,6,,

expended.

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Capital Requirements and Resources Capital Resources and Liquidity I

The Company's construction program is focused on serving new load and improvement of present electric facilities. No new generating facilities are currently planned. The Company anticipates that estimated ct.sh requirements of $352 million for construction, including the purchase of nuclear fuel, through 1993 will be generated internally. Additional capital requirements through 1993, including debt maturities and sinking fund requirements of $217 1 million, are anticipated to be provided from internal sources with adequate external funds believed to be available, if needed. The Company's construction expenditures including nuclear fuel for the past five years and estimates for the five years 1989 through 1993 are provided in the Total Construction Expenditures graph.

During 1988, the Company retired all $24 million of its 14%% Series First Mortgage Bonds and purchased 3,981,499 shares ofits common stock. At December 31,1988, the Company held 6,036,799 shares of its Total Consget.on t ,

Eynditures common stock. The Board of Directors has authori:ed an

" -' additional purchase of up to four million shares ofits common stock. l The Company has the following bank facilities:

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• The Company has authority from the Federal Energy w Regulatory Commission to make short-term borrowings up to $225 million. At December 31,1988, the Company

• ~ had short-term bank lines of credit totaling $75 million, w- D. of which $22 million was outstanding at year end. In

addition, the Company had $68 million outstar. ding

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through other short-term credit arrangements.

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• The Company has two long-term revolving credit loan agreements totaling $200 million. The first agreement, 55 reduced from $100 to $50 million in August 1988, will be

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further reduced to $25 million in December 1992, and will exp:re in December 1993. The second agreement for

$150 million will be reduced by $37.5 million annuahy a c.,a c ..,m.io, e ,,.6,.,,. AFC beg nning June 1,1991, and expires in June 1994.

Outstanding balances on December 31,1988, were :ero and $30 million, respectively.

Rate Developments Modif: cation of the Rate Stabilization Plan On July 15,1988, the Kansas Corporation Commission (KCC) issued an orJer that modified the rate stabilization plan (plan) approved in March 1987. The order modifying the plan was the result of a cost of service audit by the KCC staff. The audit was required by the September 1987 KCC order approving the sale and leaseback of La Cygne 2.

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Changes to the plan included:

1. All phase-in revenues and carrying charges were determined on a net of tax basis.

2. All temporary excess capacity disallowances will be included in rate base effective January 1,1989.

3. Accrual of phase-in revenues was discontinued effective December 31,1988. l

4. Effective January 1,1989, the accumulated phase-in revenues asset of $91.6 million, net of related income taxes, will receive rate base treatment. Effective the same date, the Company will begin amortizing the phase-in revenue asset on a straight-line basis over a period of nine and one-half years, which brings the plan into compliance with SFAS 92.

5. The $15.6 million rate increase scheduled for January 1,1992, was eliminated.

6. The Company will not be entitled to any further rate increases until January 1,1992, l barring extraordinary circumstances.

All components of the plan not addressed by the July 1988 order remain in effect. Two key components of the plan not modified by the July order were the $29 million rate increase, which was effective January 1,1989, and the Company's commitment to include in its l revenue requirements an $800 million stream of income from corporate owned life insurance. [

On December 30,1988, the KCC ordered $14.4 million of the January 1,1989, rate i increase interim and subject to refund. The interim portion of the increase is contingent upon the results of an audit of the Company's cost of service by the KCC staff using 1988 ,

I financial results. The audit, which is to be completed by June 1989, may be followed by a hearing on the Company's rates. As a result of the cost of service audit being conducted, i an appeal of the July order by a group of industrial customers has been withdrawn. On February 22,1989, the Company appealed to the Kansas Court of Appeals and the District Court of Shawnee County, the December 1988 order making $14.4 million of the January 1,1989, rate increase interim and subject to refund.

See Note 2 of the Notes to Financial Statements for further discussion of rate matters.

KCC Schedules Show Cause Hearing On December 30,1988, the KCC directed the Company to show why it should not be required to refund any of the fuel costs, estimated by the KCC staff to be $6.4 million, which were passed through its fuel adjustment clause as a result of Wolf Creek being offline 71 days more than scheduled between September 27,1987, and February 16,1988. A hearing l l will be held this spring. The Company believes that the fuel costs as billed were proper, i

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Management Statement of Responsibility for Financial Statements The management of Kansas Gas and Electric Company is responsible for the financial statements, notes thereto, and other information in this report. The accompanying financial statements have been prepared by management in accordance with generally accepted accounting principles. The accounting system is in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission and the State Corporation Commission of the State of Kansas.

The integrity of the accounting records is upheld by a comprehensive system of internal accounting controls, monitored on a regular basis by the internal audit staff of the Company. This system is complemented by a set of accounting policies and procedures which provide the necessary guidance needed to institute effective internal control.

The Board of Directors maintains its oversight responsibility through an Audit Committee, consisting of three outside directors. The Committee meets with management, the internal auditors, and the independent auditors in connection with its review of matters relating to the Company's financial reporting; the Company's internal audit program; the Company's system of internal accounting controls; and services of the independent auditors. The Committee meets with the auditors without management present in order to assure independent treatment of matters brought to its attention. The Committee also recommends to the Directors the selection of independent auditors.

Wicbita, Kansas James T. Clark February 3,1989 Vice President - Accounting 10

Statements ofIncome For the Years Ended Decen ber 31 1988 1987 1986 (Thousands)

Operating Revenues (Note 2) $ 526,220 $ 514,332 $ 498,634 Operating Expenses Fuel and purchased power 104,462 103,944 110,417 Other operation 128,464 99,699 88,564 Maintenance 50,011 43,952 41,048 Total operation and maintenance 282,937 247,595 240,029 Ikpreciation 70,981 72,419 84,908 income taxes (Note 8) 3,152 22,788 21,139 Other taxes 32,614 30,764 25,176 Total operating expenses 394,684 373,566 371,252 Operating income 131,536 140,766 127,382 Other income and Deductions Phase-in revenues (Note 2) 45,011 47,838 57,518 Allowance for other funds used during construction -

(431) (680)

Investment income 19,668 7,281 4,221 Miscellaneous - net 5,263 1,345 1,256 Income taxes - net (Note 8) (25,112) (23,273) (29,639)

Total other income and deductions 44,830 32,760 32,676 Loss from Application of SFAS 90 (Note 2)

Disallowed plant costs - - 89,183 income taxes - - (34,475)

Net effect of SFAS 90 - - 54,708 Income before Interest Charges and Cumulative Effect of a Change in Accounting Method 176,366 173,526 105,350 Interest Charges Long-term debt 86,093 93,733 98,202 Other interest 13,023 7,143 2,650 Allowance for borrowed funds used during construction 67 328 560 Tc,tal interest charges - net 99,183 101,204 101,412 Income before Cumulative Effect of a Change in Accounting Method 77,183 72,322 3,938 Cumulative Effect to January 1,1986 of Accruing Unbilled Revenues (Net of income Taxes of $10,763) - - 10,918 Net income 77,183 72,322 14,856 Preferred Stock Dividends 821 2,476 9,187 Earnings Applicable to Common Stock $ 76,362 $ 69,846 $ 5,669 Average Shares of Common Stock Outstanding 36,398,070 40,522,801 40,752,852 Earnings (Loss) Per Share of Common Stock:

Before change in accounting principle $ 2,10 $ 1.72 $ (0.13)

Cumulative effect - -

0.27 Total $ 2.10 $ 1.72 $ 0.14 See notes to fincmcial statements.

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Balance Sheets December 31 1988 1987 (Thousands)

Assets Electric Plant - at Original Cost (Notes 2 and 5)

Plant in service $2,350,577 $2,321,992 Less accumulated depreciation 478,946 414,640 Net plant in service 1,871,631 1,907,352 Construction work in progress 10,401 5,483 Electric plant held for future use - net 6,627 6,727 Nuclear fuel - net 9,170 6,974 Total electric plant - net 1,897,829 1,926,536 Other Property and Investments Special deposits (Note 5) 16,347 38,846 Other 2,396 559 Total other property and investments 18,743 39,405 Current Assets Cash and cash equivalents 3,977 7,662 Short term investments 154,382 297,851 s Accounts receivable and unbilled revenues 38,356 35,383 Fossil fuel - at average cost 21,573 23,125 Materials and supplies - at average cost 28,642 27,022 Prepayments and other current assets 7,332 7,989 T>tal current assets 254,262 399,032 Deferred Debits Deferred regulatory revenue 81,470 62,154 Phase-in revenues (Note 2) 166,673 121,662 Unamortized debt expense 7,404 9,299 Other 16,280 13,884 Total deferred debits 271,827 206,999 Total $2,442,661 $2,571,972 Capitalization and Liabilities Capitalization (See Statements of Capitali:ation)

Common stock equity $ 691,336 $ 744,785 Preferred stock 18,701 18,701 Long-term debt 775,763 1,016.096 Tital capit di:ation 1,485,800 1,779,582 Current Liabilities Short term borrowines (Note 3) 90,200 47,000 Securities due within one year (Note 5) 102,480 8,300 Accounts payable 70,267 55,251 Interest accrued 21,781 24,830 Tixes accrued 15,026 32,156 Customers' deposits 3,865 3,548 Tital current liabilities 303,619 171,085 Deferred Credits and Other Liabilities Deferred income taxes (Note 8) 251,816 204,390 Deferred investment tax credits (Note 8) 75,808 76,284 Customers' advances 15,449 20,824 Deferred gain from side leaseback (Note 6) 310,169 319,807 Total deferred credits and other liabilities 653,242 621,305 Commitments and Contingencies (Notes 2 and 9)

Total $2,442,661 $2,571,972 See notes to[mancLd statements.

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Statements of Cash Flows For the Years Eruled December 3 I Increase fDecrease) in Cash and Cash Equivalents 1938 1987 1986 (Thotaands)

Cash Flows from Operating Activities l Net income $ 77,183 $ 72,322 $ 14,856 Adjustments to reconcile net income to net cash provided:

Depreciation and amorti:ation 80,967 84,319 105,990 Deferred income taxes 26,118 (55,576) 28,450 Deferred investment tax credits - net (476) 51,596 (1,384)

Phase-in revenues (45,011) (47,838) (57,518)

Cash surrender values (3,372) 327 -

Disallowed plant cost - - 89,183 Customer advances (4,260) (752) 14,242 Amortization of gain on sale-leaseback (9,638) (2,410) -

Changes in current assets and liabilities:

Accounts receivable and unbilled revenues (2,973) 6,124 (21,996)

Other current assets 589 3,324 (6,391)

Accounts payable 15,016 12,769 (3,889)

Accrued liabilities (20,179) 26,992 (7,432)

Other current liabilities 317 232 485 Other 4,444 (7,434) (2,920)

Net cash provided by operating activities 118,725 143,995 151,676 Cash Flows from Financing Activities Proceeds from:

Issuance of first mortgage bonds - - 50,000 Issuance of common stock 3,016 533 4,814 Revolving bank loans 115,000 150,000 25,000 Special deposits 22,499 (22,988) 7,87 5 Other long-term debt 144 923 20,902 Borrowings against cash surrender value oflife insurance policies 26,342 45,944 -

Short term terrowing agreements - net 43,200 39,500 7,500 Redemptions of:

First mortgage lmnds (26,300) (38,300) (9,300)

Revolving bank loans (235,000) (170,000) (5,000)

Other long-term debt - (20,000) (124,700)

Preferred stock - (23,000) (100,000)

Purchases of treasury stxk (77,629) (39,259) -

Dividends paid (56,019) (58,536) (59,115)

Net cash used in financing activities (184,747) (135,183) (182,024)

Cash Flows from Invesiing Activities Additions to electric plant (less allowance for other funds used during construction) (52,854) (53,920) (41,488)

Corporate owned life insurance policies (2ti,380) (47,121) -

Proceeds from sale leaseback - 392,100 -

Purchase of short-term investments (16,592) (373,723) -

Drawdown of short-term investments 160,000 76,000 -

Other investments (1,837) - -

Net cash provided by (used in) investing activities 62,337 (6,664) (41,488)

Net increase (Decrease) in Cash and Cash Equivalents (3,685) 2,148 (71,836)

Cash and Cash Equivalents at Beginning of Year 7,662 5,514 77,350 Cash and Cash Equivalents at End of Year $ 3,977 $ 7,662 $ 5,514 See notes to firumcial statements.

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Statements of Capitalization December 31 1988 1987 (Thousands)

Common Stock Equity (See Statements of Common Stock Equity)

Common stock, without par value, authori:ed 50,000,000 shares $ 636,661 42.9 % $ 633,645 35.6 %

Retained earnings 171,298 11.5 150,134 8.5 Other paid-in capital 265 -

265 -

Subtotal 808,224 54.4 784,044 44.1 Treasury stock, at cost (116,888) (7.9) (39,259) g)

Total Common Stock Equity 691,336 46.5 744,785 41.9 Cumulative Preferred Stock (Note 4)

Redemption not required:

4W%, $100 par value; authori:ed and outstanding 82,01i shares 8,201 8,201 Serial, $100 par value; authori:ed 255,000 shares:

4.28% series, outstanding 45,000 shares 4,500 4,500 4.32% series, outstanding 60,000 shares 6,000 6,000 Tbtal Cumulative Preferred Stock. 18,701 1.3 18,701 3 long-Term Debt (Note 5)

First Mortgage Bonds:

Series Due 1988 1987 Series Due 1988 1987 16 % 1986-96 $ 18,100 $ 20,400 7%% 2002 $ 25,000 $ 25,000 14%% 1987-88 - 24,000 6.8% 2004' 14,500 14,500 13h % 1989 100,000 100,000 9%% 2005 40,000 40,000 4%% 1991 7,000 7,000 8%% 2006 25,000 25,000 14.05 % 1991 30,000 30,000 8W% 2007 25,000 25,000 14W% 1991 20,000 20,000 6% 2007 10,000 10,000 5%% 1996 16,000 16,000 5%% 2007 21,940 21,040 8h% 2000 35,000 35,000 8%% 2008 30,000 30,000 8%% 2001 35,000 35,000 9%% 2016 50,000 50,000 T>tal First Mortgage Bonds 502,540 528,8E Other Long-Term Debt:

Pollution Control Revenue Bonds:

5%% senes 2003 15,000 15,000 Adjustable rate series 2013 63,000 63,000 Adjustable rate series 2013 87,000 87,000 Adjustable rate series 2014 98,000 98.000 Adjustable rate series 2015 79.500 79,500 Revolving bank loan 1991-94 30,000 150,000 Other long-term agreements 3,214 3,070 Unamorti:ed premium and discount net (11) (14)

Tbtal Other Long-Term Debt 375,703 495,556 Securities due within one year (102,480) (8,300)

Total long-Term Debt 775,763 52.2 1,016,096 57.1 Total Capitali:ation $1,485,800 100.0 % $ 1,779,582 100.0 %

See notes to financial statements.

14 w- _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ _ ._

I Statements of Common Stock Equity For the Years Ended December 31, I988, I987 and 1986 Common Stock Treasury Stock Other Shares Paid-In Retained l

It, sued Amount Capital Earnings Shares Amount Total l (Thousands except Shares)

Balance January 1,1986 40,464,810 $628,298 $1,661 $ 184,336 $814,295 Net income 14,856 14,856 Cash dividends:

Common stock - $1.225 per share (49,928) (49,928)

Preferred stock (9,187) (9,187)

Dividend reinvestment and employee stock purchase and ownership plans 334,889 4,814 4,814 Capital stock expense (66) (66) loss on reacquired preferred stock (1,396) (3,659) (5,055)

Balance December 31,1986 40,799,699 633,112 265 136,352 769,729 Net income 72,322 72,322 Cash dividends:

Common stock - $1.39 per share (56,060) (56,060)

Preferred stock (2,476) (2,476)

Purchase of treasury stock (2,055,300) $ (39,259) (39,259)

Employee stock purchase and ownership plans 23,548 533 533 loss on reacquired preferred stock (4) (4)

Balance December 31,1987 40,823,247 633,645 265 150,134 (2,055,300) (39,259) 744,785 Net ir come 77,183 77,183 Cash dividends:

Common stock - $1,51 per share (55,198) (55,198)

Preferred stock (821) (821)

Purchase of treasury stock (3,981,499) (77,629) (77,629)

Encloyee stock purchase and ownership plans 157,338 3,016 3,016 Balance December 31,1988 40,980,585 $636,661 $ 265 $ 171,298 (6,036,799) $(116,888) $691,336 See notes to fincmcial statements.

e 15

Notes to Financial Statements

1. Summary of Sig.nificant Accounting Policies Depreciation For financial reporting purposes, the Company uses the straight-line method to depreciate the original cost of System of Accounts - The Company is subject to the jurisdiction of the State Corporation Commission of the State of property over its estimate i remaining service hfe. The provision Kansas (KCC) and the Federal Energy Regulatory Commission for depreciation stated as a percent of original cost of depreciable property was 2.9% for 1988 and 1987 and 3.4% for 1986.

(FERC) and maintains its accounts in accordance with the uniform system of accounts prescribed by these regulatory Income Taxes The Company adopted Statement of Financial commissions. As a regulated utility, the a-counting principles Accounting Standards No. 96, Accounting for income Taxes (SFAS applied by the Company differ in certain respects from those 96) in 1987, and elected to restate its 1986 financial statements to applied by non-regulated business. conform to the provisions of this statement. This statement Electric Plant The cost of plant includes contracted work, requires the Company to establish deferred tax liabilities or assets, direct labor and materials, allocable engineering, supervision, as appropriate, for all temporary dif ferences, and to adjust deferred tax balances to reflect changes in tax rates expected to general and administrative costs, and allowance for funds used be in effect during the perials in which the temporary differences during construction (AFC). AFC is defined in the applicable reverse. The significant temporary differences that give rise to the regulatory s" stem of accounts as the net cost during the period of construction of borrowed funds used for construction purposes, net accumulated deferred income tax liabilities include accelerated including nuclear fuel, and a reasonable rate on other funds when tax depreciation, AFC, unamorti:ed investment tax credits, deferred gain from sale-leaseback, and phase-in revenues.

soused.

In accordance with various rate orders received from the KCC, Maintenance and repairs of property, and replacements and renewals of items determined to be less than units of property, are the Company has not yet collected through rates the amounts necessary to pay a significant portion of the net deferred income charged to operating expenses. The cost of units of property replaced or renewed, plus removal costs, less salvage, is charged to tax liabilities. As the Company believes it is probable that the net future increases in income taxes payable will be recovered accumulated depreciation, and the cost of related replacements and renewals is added to electric plant. Betterments are charged from customers through future rates, it has recorded net deferred regulatory revenue assets for the portions of the net income tax to electric plant.

liabihties not yet collected through rates. These assets are also a Short Term Investments Short-term investments represent temporary difference for which deferred income tax liabilities the unexpended proceeds from the sale-leaseback described in have been provided at each balance sheet date.

Note 6. These investments consist primarily of certificates of deposit and variable rate municipal and state debt instruments Investment Tax Credits The Tax Reform Act of 1986 having an average maturity of approximately 30 days and variable repealed the investment tax credit on property placed into service after December 31,1985, subject to certain transition rules. In rate preferred stock. Cost of these investments approximates accordance with KCC requirements,insestment tax credits market.

relating to utility property placed into service are deferred when Cash Surrender Value of Life Insurance Policies - Other utilized and are being amortized to income over the remaining deferred debits include the following amounts related to corporate lives of the related property.

owned life insurance contracts:

Statements of Cash Flows For purposes of the statements of 1988 1987 cash flows, the Company considers highly liquid debt instruments, (Malknu) except those classified as short-term investments, purchased with

$ 75.5 $ 45.7 a maturity of three months or less to be cash equivalents.

Cash surrender value of contracts Borrowings against contracts (72.3) (45.9) The amounts of interest (net of amounts capitalized) and Net $ 3.2 $ (0.2) income taxes paid for each of the three years in the periods ended December 31, are as follows:

Revenues Prior to January 1,1986, operatmg revenues included amounts actually billed for services rendered. To provide 1988 19n7 1986 a better matching of the Company's revenues and expenses, (Thomands) ef fective January 1,1986, the Company adopted a change in Interest $97,020 $98 248- $ 105,552 accounting method to provide for accrual of estimated unbilled Incm. - t xes $ 5,900 $ 34,800 $ -

revenues. Unbilled revenues result from services delivered since the period covered by the latest billings to customers. The Reciaaification Certain amounts in prior years have been cumulative effect to January 1,1986 of this accounting change reclassified to conform with classifications used in current year increascd 1986 net income approximately $10.9 million (net of presentation, related income taxes of $10.8 million).

2. Regulatory Matters Fuel Costs - The cost of nuclear fuel in process of refinement, in July 1988, the KCC issued an order mothfying the rate conversion, enrichment, and fabrication is recorded as an asset at stabilization plan (plan) approved in March 1987. Mahficatiens original cost and is amorti:ed to expense based upon the quantity of heat enduced for the generation of electricity. The accumulated to the plan included:

amorti:ation of nuclear fuel in the reactor at December 31,1988

• All phase in revenues and carrying charges were determined and 1987 was $9.6 and $22.8 mdlion, respectively. The on a net of tax basis and the carrying charges on temporary Company's rate schedules incluJe a fuel adjustment clause which excess capacity disallowance were calculated on a net plant permits current recoveries of fuel costm basis.

• All temporary excess capacity disallowances will be included in rate base ef fective January 1,1989.

16 E --- - -_ _ _ _ _ _ _ _ _ - _ _ _ _ _ _ ____ ___ _

• Accrual of phase-in revenues was discontinued effective 4. Cumulative Preferred Stock December 31,1988- The call prices at December 31,1988, on the 4W%,4.28% and

• Effective January 1,1989, the accumulated phase-in revenues 4.32% series preferred stocks were $110, $101 and $101.64, asset of $9L6 mdlion, net of related income taxes, will respectively. The embedded costs of preferred stock at December receive rate base treatment. Effective the same date, the 31,1988,1987 and 1986 were 4.44%,4.44% and 8.38%,

Company will begin amorti:ing the phase-in revenue asset on respectively.

a straight-line basis over 9h years.

5 i _ng-Term Debt j

• The $15.6 million rate increase scheduled for January 1,1992 was ebminated. Required redemptions and sinhing fund payments for 1989 through 1993 for long-term debt are $102.5, $2.5, $59.5, $2.5 and i

• The Company will not be entitled to any further rate

$2.5 million, respectively. The redemption requirements for 1992 increases until January 1,1992 barring extraordinary circumstances, wou d be increased by $248 million in the event that the irrevocable letter of credit agreements with respect to the $63, 4 Three components of the March 1987 order not modified were $87 and $98 million adjustable rate series are not extended or

. (1) the Company,s commitment to include in its revenue other arrangements for collateral are not made.

regmrements an $800 million stream of net income generated .

First mortgage bonds may be issued m. additional amounts, over the next 40 years through corporate-owned life insurance limited by property, earnings and other provisions of the {

policies; (2) the depreciation rate for Wolf Creek at 2.6%, a Company's Mongage dated April 1,1940, as supplemented decrease from 3.4% as a result of a change in its depreciable life from 30 to 40 years; and (3) the $29 million rate increase effective (Mortgage). Electric plant is subject to the lien of the Mortgage except for transportanon equipment.

Januaiy 1,1989; however, $14.4 million of the increase was subsequently made interim and subject to refund contingent on The 6.8% series, due 2004, and the 5%% and 6% series due an audit by the dCC of the Company's 1988 financials and 2007 are pledged as collateral for pollution control revenue hinds hearings after lune 1989. Management believes the Company's issued by Kansas municipahties, current rates reasonably reflect its cost of service. The four adjustable rate series pollution control revenue bonds The KCC's modifications to the plan bring it in compliance are secured by irrevocable letters of credit. Interest r.us for these l

i with the requirements of Statement of Financial Accounting h)nds are variable and are determined on the basis of prevailing Standards No. 92, Regulated Enterprises - Accmmting for Phase-in market rates for debt instruments of like tenor and quMity. The Plans (SFAS 92), but also result in changes to the amounts of Company is required to maintain special deposits to be usc d for phase-in revenues and related deferred income taxes previously debt service for the $87 and $98 million adjustable rate series.

recorded in 1987 in connection with the plan. As permitted by Such accounts may be used for interest payments, but must be SFAS 92, the Company restated its 1987 financial statements for subsequently replenished to the required account balance of $15.7 these changes; accordingly, the G:mpany's 1987 net income and milhon. The following information is applicable to these issues:

earnings per share amounts have been reduced by approximately Weighted

$25.1 million and $0.62, respectis ely. With the adoption of SFAS Letters of Credit Average Net 92, the Company discontinued in efforts to seek from the Description -Expiration Dates Interest Rate Securities anJ Exchange Commis ion an exemption from certain 39g3 39g7 provnions of SFAS 92.

Or December 30,1988, the KC directed the Gimpany to bies d e 013 sisw why it should not be require}to refund any of the 6mfuel costs, Series due 2013 May I and estimated by KCC staff to be $6.- nillion, which were passed December 2,1992

$87 million 5.4% 5.0%

through its fuel adjustment clause as a result cf Wolf Creek being Series due 2014 off line 71 days more than schede ed between September 27,1987 and February 16,1988. Manageme at believes the Gimpany's fuel g ;f,*d 2015 costs as billed - ac proper.

$79.5 million A ugust 15, 1994 6.2% 6.0%

Statement of Financial Accounting Standards No. 90 (SFAS

90) . In December 1986, the Financial Accounting Standards The Company has two revolving bank loans. One loan, due Board (FASB) issued SFAS 90, Regulated Enterprises - Accounting 1993, is comprised of a revolving credit loan up to $50 million for Abandonments omi r9sallou ances of Plant Costs, which the until December 19,1992, followed by a $25 million loan. A Company aJopted in 1987. As required by this statement, the second loan, due 1994, enables the Company to borrow up to Company recognied an after tax loss of $54.7 million in i:s 1986 $l$0 million on a revolving credit basis until June 30,1991, at financial statemeno to recogni:e the effects of Wolf Creek related which time the maximum borrowing limit is reduced by $37.5 disallowances (princeally the KCC's disallowance of a return million. The limit is further reduced by an additional $37.5 on approximately $12'> million of the Company's investment in million on both June 30,1992 and 1993, and the loan terminates Wolf Creek). on June 30,1994. Both loans may be repaid prior to their due dates wahout penalty. The weighted average interest rate, 1

3. Short-Term Borrowings including fees, was 8.7% for 1938 and 7.7% for 1987. 1 At December 31,1988, the Company had bank credit The embedded costs of long-term debt at December 31,1988, arrangements available of $75 mdlion. Maximum short term 1987 and 1986 were 8.96%,8.93% and 8.88%, respectively, borrowings outstandmg during 1988 and 1987 were $137 million on July 6,1988 and $156 million on November 10 and 11,1987. 6. Sale and Leaseback of La Cygne 2 l The weighted average interest rates, including fees, were 8.1% for in September 1987, the Company sold and leased back its 50%

1988 and 1987. undivided interest in La Cygne 2. The lease has an initial term of 29 years with various options to renew the lease or repurchase 17

the 50% undivided interest. The Company remains responsible Gmtribution accrued for December (.1) (.1) l for all operation and maintenance costs, and othe related Pension liability recognized in the I operating costs of La Cygne 2. The Company has determined the balance sheet at December 31 $ (3.0) $ (2.4) lease is an operating lea.se for financial reporting purposes.

h Miowing were used in the determination of actuarial The gain of approximately $322 million realized at the date of present values of the projected benefit obligations at . November 30:

the sale has been deferred for financial reporting purposes, and is being amortized over the initial lease term in proportion to the 1988 1987 related lease expense. The Cmupany's 1988 and 1987 lease Weighted average discount rate 8.0% 8.0%

expense, net of amortization of the deferred gain, is approximately Rate of increase in future

$30 and $7.5 million, respectively. compensation 6.0% 6.0%

Future minimum annual lease payments required under the long-term rate of return agreement are as follows (in thousands): on assets 8.0% 8.0%

Company sponsors defined contribution plans for all 1989 $ 41 erup! yees. The Company's matching contribution is based on the 1990 41l737 856 Cmnpany s performance during the prior year and employee 1991 41 856 c ntributions. The total expense for the plans was $1.2 million in 1092 41,856 41,856 1988 and 1987.

1993 Thereafter 1,096,420 8. Income Taxes The effective federal income tax rates differ from the amounts

7. Benefit Plans computed by applying the federal statutory rates to income before The Company has noncontributory, defm.ed benefit pension federal income taxes. The reasons, with related percentage plans for all employees. Plan benefits are generally based on years yggyc,,,37,;

of service and the employee s highest aggregate compensation m five consecutive years of the final ten years of service. Due to the 1988 1987 1986 present funding status of the plans, the Company's current Statutory federal income tax rate 34 % 40 % 46 %

funding nolicy is to contribute the minimum amount required by Add (Deduct) income tax effects of:

federal law Accelerated amortization of Net periodic pension cost for 1988,1987 and 1986 included the deferred income tax credits following components: (Note 2) (9) (11) (33) ect dchange in tax rates - -

B 1988 1987 1986 Depreciation 5 8 35 Miillions) I3enefit from state income taxes (3) (5) (7)

Service cost - benefits earned Amorti:ation of investment during period $ 2.6 $ 2.7 $ 3.0 tax credit (3) (1) (3)

Interest cost on projected benefit Other items - net (no one item obligaron 5.6 5.3 4.9 nakes up more than 2%) ~_(1) 2 3 Actual return on assets (14.2) 2.9 (18.1) Effective federal income tax rate 23% 33 % 59 %

Net amorti:ation and deferral 7.5 (9.1) 12.3 Net periodic pension cost $ 1.5 $ 1.8 $ 2.1 Income taxes as recorded in the Statements of Income are:

The followmg table sets forth the plans' funded status at 1988 1987 1986 November 30,1988 and 1987 (the plan years) and a reconciliation (Thomands) of such status to the December 31,1988 and 1987 financial Operating expenses:

statements: Currently payable -

1988 1987 Federal $ 3,000 $ 32,858 $ -

Actuarial present value at November 30:

gjjgjgmy State (1,102) 15,736 -

Vested benefit obligation $ 56.5 $ 49.8 Uf'*d' g 2,761 (65,729) 19,190 Accumulated benefit obligation $ 60.6 $ 53.9 State 3,611 (11,763) 3,333 Plan assets at November 30 Investment tax credit -

(principally common stock of public Deferral 2,541 54,542 -

companit s and U.S. government Amorti:ation (2,659) (2,856) (1,384) securities) $ 89.4 $ 78.4 Total 8,152 22,788 21,139 Projected benefit obligation at Other income and November 30 (79.0) (69.8) deductions:

Plan assets in excess of projected Currently payable -

benefit obhgation at November 30 10.4 8.6 Federal 4,622 1,017 -

Unrecogni:ed net gain from past State 1,102 430 -

experience different from that Deferred -

assumed (16.4) (10.0) Federal 15,963 18,781 25,608 Prior service cost not yet recogni:ed State 3,783 3,135 4,031

.in net perioJic pension cost 6.0 2.2 Investment tax credit Recognition of net asset at amorti:ation (358) (90) -

January 1,1986 over 18 years (2.9) (3.1) Total 25,112 23,273 29,639 18 i

_ o

Disallowance of beyond those presently provided through rates, are under review plant costs <leferred by the Company.

(Note 2) - - (34,475) Nuclear Insurance - During 1988, the Price Anderson Act was extended to August 1,2002 with some significant changes. The Change m, accountmg most significant change increased the combined public liability method for unbilled limit of the owners of 113 nuclear power plants from $695 million revenues-deferred (Note 2) - - 10,763 to $7.7 billion for a single nuclear incident. The Wolf Creek income tax expense - net 5 33,264 $ 46,061 5 27,0.M Owners (Owners) have purchased the maximum available private insuram e in n and the balance is provided by an 1988 1987 1986 assessment plan mandated by the Nuclear Regulatory Comnu,ss, ion.

Deferred income taxes Under this plan, the Owners are jointly and severally subject to a consist of: retrospective assessment of up to $63 million ($29.6 million, Accelerated Company's share)in the event there is a nuclear incident depreciation $ 30,803 $ 33,228 $ 54,780 involving any of the nation's licensed reactors. If the Owners' Disallowance of plant share of claims and legal costs per incident exceed $63 million, costs (Note 2) 1,236 1,236 (34,475) the Owners may be surcharged up to an additional 5% of $63 Phase in revenue 5 million ($3.15 million). There is a limitation of $10 mih.on ($4.7 (Note 2) 18,771 21,916 26,876 anillion, Company's share) in retrospective assessments per Unbilled revenues (1,975) (2,550) 10,199 incident per year.

Accelerated The Company carries the maximum property and amortization (11,799) (13,015) (13,920) decontamination insurance, approximately $L7 billion, provided Net operating tax loss (2,069) 47,291 (13,160) by a combination of" nuclear insurance pools" and Nuclear Deferred gain on Electric Insurance Limited (NEIL). The minimum coverage sale-leaseback 3,713 (140,926) -

currently required by the Nuclear Regulatory Commission is $1.06 Alternative minimum billion. The Company also carries additional insurance with tax credits (10,163) - -.

NEIL to cover the costs of replacement power during a prolonged Other net _.J2,399) (2,756) (1,850) outage at Wolf Creek. If losses incurred under the NEIL policies Total $ 26,118 $_(55 5_7_6)2 $ 28,450 exceed premiums, reserves and other NEll resources, the Company may be suNect to retmmec&e awessments. As d At December 31,1988, the Company has unused investment December 31,1988, the maximum potential retnupective tax credits of approximately $25.5 mil; ion available for carry-assessments to the Company under the NEIL policies total forward to future years which, if not utili:ed, will expire in the "PP'"*I*"'";Y $34 "I;II""'

years 2000 through 2002. These credits have been applied in determining the Company's net deferred income tax liability and Directors' and 0fficers' Insurance One of the Company's corresponding deferred regulatory revenue asset at December 31, c rriers of directors, and of ficers liability insurance is a mutual 1988. hs addition, the Company has net operating loss carry, insurance company. The Company is subj,ect to a retrospective forwards for regular income tax purposes of $5.5 million which assessment of up to $22.8 million in the event there are losses will expire in 2003 and alternative minimum tax credits which which exceed premiums reserves or resources of this insurer.

carry forward without expiration of $10.2 million which may be Litigation In December 1987, Kansas City Power & Light used to offset future regular tax to the extent of the ahernative Company (KCPL), the operator of jointly owned La Cygne 1, minimum tax. requested suspension of shipments of high sulfur coal imm a long-term supplier in order to comply with various state and

9. 6 - aitments and Contingencies federal air emission standards, in January 1988, KCPL fded suit Spent Nuclear Fuel Disposal- Under the Nuclear Waste Policy against this long-term supplier to determine the rights and Act of 1982, the U.S. Department of Energy (DOE) is responsible obligations of the parties under this contract, in February 1989, I for the ultimate storage and disposal of spent nuclear fuel the long-term supplier countersued for breach of contract and bad removed from nuclear reactors. Under a contract with the DOE faith, claiming damages exceeding $75 million. The owners for disposal of spent nuclear fuel, the Company pays a quarterly believe they have valid claims for reduction or ehmination of the fee to DOE of I mill per kilowarthour on net nuclear generation. amount of coal to be taken unJer contract.

I Such fees were $3.1, $3.1 and $3.3 million in 1988,1987 and in February 1987, Chevron U.S.A., Inc. (Chevron) filed suit 1986, respectively. against the Company's gas supplier alleging a failure to purchase Decommissioning The Company's share of Wolf Creek contracted amounts of natural gas and failing to pay contractually i

decommissioning costs is estimated to be approximately $105 agreed price increases. In January 1988, the suppher (ded a third million in 1988 dollars. Decommissioning costs are being charged party complaint seeking recovery for any damages from the to operating expenses. Electric rates charged to customers provide Company. In January 1989, Chevron filed a motion to amend its for recovery of these decommissioning costs over the life of Wolf complaint to seek damages in excess of $250 million.

Creek. Amounts so collected from customers are deposited in an Management believes the Company has, at all times, fulfilled its external trust fund and will be used solely for the physical contractual obligations with respect to the supplier and has acted decommissioning of the plant. At December 31,1988 and 1987, in good faith.

l $2.7 and $1.8 milhon, respectively, were on deposit in the While the resolution of these matters may have an impact on decommissioning fund. During 1988, the Nuclear Regulatory the financial results of the year in which the matter is seuled, Commission issued final regulations on decommissioning licensed management be6 -s that the uhimate disposition of these nuclear facilities which require among other ti ings, that licensed matters w 11 n- nave a material aJverse effect upon the business electric utilities submit a decommissioning ten rt within two or financial p>sition of the Company.

years. The effects these new regulations will have on the Company, including a determination of funding requirements 19 L-_------_-------_--------------_

10. Jomt Ownership of Utility Plants 1987 compeny'. ownership at December 3 t,1988 4th Qtr. 3rd Qtr. 2nd Otr. let Qtr.

In- Invest- Operating Service ment in Accumulated Net Per- Revenues $111,034 $164,492 $124,905 $113,901 Dates Millions Depreciation (MW) c_ent Operating La Cygne June Income 19,063 54,034 35,586 32,083 1(a) 1973 $ 121 $ 6 '. 343 50 Net Income 6,499 37,288 10,990 11,545 Jeffrey July Earnings 1(b) 1978 64 20 133 20 Applicable Jeffrey May to Common 2(b) 1980 63 16 134 20 Stock 6,294 36,586 16,288 10,678 Jeffrey May Average 3(b) 1983 89 17 136 20 Shares Wolf Creek Sept. Outstanding 39,661 40,820 40,818 40,801 1(c) 1985 1,355 131 530 47 Earnings Per (a) Jointly owned with Kansas City Power & Light Company. Share $ 0.16 $ 0.90 $ 0.40 $ 0.26 (b) Jointly owned with The Kansas Power and Light Company, As discussed in Note 2, the Company elected to adopt SFAS 92 Central Telephone and Utilities Corp. and Missouri Public in 1988 by restating its 1987 financial statements. Accordingly, Service Company. the results for all 1987 quarters have been restated to reflect the (c) Jointly owned with Kansas City Power & Light Company adoption of SFAS 92. The effects of adopting SFAS 92 were to and Kansas Electric Power Cooperative, Inc. decrease 1987 first, second, third and fourth quarter net income Amounts and capacity represent the Company's share and have amounts previously recorded by $7.6, $5.8, $5.9 and $5.9 million, been financed by the Company. The Company's share of respectively or $0.19, $0.14, $0.14 and $0.15 per share, operating expenses of the plants in service above, as well as such respectively.

expenses (or a 50% undivided interest in La Cygne 2 The Company's business is subject to seasonal fluctuations with (representing 315 MW capacity) sold and leased back to the the peak period occurring during the summer months.

Company in 1987, are included in the operating expenses on the Accordingly, earnings information for any three-month period Statements of income. The Company's share of other transactions should not be considered as a basis for estimating results of of the plants is included in the appropriate classification in the operations for a full year.

Company's financial statements.

Market Prices and Dividend Rates of Common Stock

11. Quarterly Financial Statistics (Unaudited) liigh/ low Market Price Dividends (Thousands, except earnings per share) gggg Common-NYSE 1988 1987 1988 1987 First Quarter $21W $18% $25% $21% $.37 $.34 4th Otr. 3rd Qtr. 2nd Qtr. Ist Qtr. Second Quarter 20% 18 % 23% 18 % .37 .34 Operating Lird Quarter 20% 18 % 25 % 19 % .37 .34 l Revenues $118,528 $174,099 $115,279 $118,314 Fourth Quarter 21 % 19 22 4 16 .40 .37 Operating The Company had 32,716 common stockholders as of income 18,812 61,162 25,969 25,593 December 31,1988.

Net Income 7,060 46,139 12,363 11,621 Earnings Applicable to Common Stock 6,855 45,034 12,157 11,416 Average Shares Outstanding 34,943 34,826 37,457 38,399 Earnings Per l Share $ 0.20 $ 1.32 $ 0.32 $ 0.30 20

l i

Independent Auditors' Report To the Stockhoklers and the Board of Directors of Kansas Gas and Electric Company:

We have audited the accompanying balance sheets and statements :f capitali:ation of Kansas Gas and Electric Company as of December 31,1988 and 1987 and the related statements of income, common stock equity, and cash flows for each of the three years in the period ended December 31,1988. These financial statements are the responsibility of the Comsmy's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits ir, accordance with generally accepted auditing standards. Those standards require that we plan and perform - udit 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 amount 3 and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31,1988 and 1987, and the results of its operations and its cash flows for each of the three years in the period ended December 31,1988 in conformity with generally accepted accounting principles, f As discussed in Note 1 to the financial statements, in 1986 the Company changed its method of recogni:ing unbilled revenues and, in 1988, the Company retroactively changul its method of accounting for phase-in revenues to conform with Statement of Financial Accounting Standards No. 92.

Kansas City, Missouri Deloitte Haskins & Sells  !

February 3,1989 j l

l 21

i Comparative Electric Statements _

Annual Compound Growth Rates.  !

5 10 i 1988_ 1987 1986 Year Year l

Electric Operating Revenues (Timasands) 1 Residential $ 197,109 $ 187,256 $ 181,605 6.8 10.3 i Commercial 133,049 129,667 125,979 8.4 9.5  !

Industrial 154,368 155,644 151,699 6.0 7.8 Public street and highway lighting 5,570 5,472 5,385 6.4 10.6 Retail 490,096 478,039 464,668 6.9 9.3 Wholesale 26,240 26,383 24,756 (8.7) (2.8)

Total sales of electricity 516,336 504,422 489,424 5.7 . 8.1 Other 9,884 9,910 9,210 53.4 22.2 Total electric c,perating revenues $ 526,220 $ 514,332 $ 498,634 6.0 8.2 Sales in Kilowatthours (Timusands)

Residential 2,187,725 2,076,150 2,034,158 0.8 1.2 Commercial 1,725,446 1,681,847 1,658,665 2.5 2.1 Industrial 2,941,944 2,862,695 2,671,181 3.7 0.9 Public street and highway lighting 51,307 53,022 54,792 (4.7) (2.0)

Retail 6,906,422 6,673,714 6,418,796 2.4 1,3 Wholesale 1,166,714 1,253,644 1,157,888 0.9 (4.7)

Total kilowarthours sold 8,073,136 7,927.358 7.576.684 2.1 0.1 Customers at End of Year Residential 226,235 224,162 222,283 1.1 1.5 Commercial 20,432 20,619 20,286 0.9 0.7 Industrial 4,346 4,365 4,356 (0.8) 2.5 Public street and highway lighting 797 785 762 4.0 6.8 Retail 251,810 249,931 247,687 1.1 1.5 Wholesale 39 39 39 (0.5) (9.1)

Total electric customers 251,849 249,970 247,726 1.1 1.5 Residential Average kilowatthours per customer 9,726 9,314 9,202 (0.4) (0.4) t Average revenue per customer $ 876.27 $ 840.07 $ 821.51 5.5 8.6 Average revenue per kilowatthour 9.01 < 9.02c 8.93c 5.9 9.1 Kilowatthours Generated and Purchased (Timusands)

Generated (net after station use) 8,429,402 8,348,820 7,879,853 4.4 0.4 Purchased 307,487 226,251 350,405 (22.9) (0.8)

Total available 8,736,889 8,575,071 8,230,258 1.9 0.3 Less: Company use, line loss, etc. 663,753 647,713 653,574 (0.3) 3.2 Total kilowarthours sold 8,073,136 7,927.358 7,576,684 2.1 0.1 Average BTU per Net Kilowatthour Generated i1,033 11,010 11,001 0.1 0.2 Average Fuel Cost per Millior: BTU $ 1.10 $ 1,10 $ 1.20 (10.1) 0.1 Power Resources (Megawatts)

Available capacity 2,376 2,399 2,435 1.9 2.0 System peak responsibility 1,677 1,653 1,627 (0.31 0.8 Reserve capacity 699 746 808 _ 8.7 5.8 Utility Plant at Original Cost (Thousands)

Beginning of year $ 2,373,210 $2,450,673 $2,556,439 7.3 11.8 Capital expenditures 52,853 53,489 40,808 (27.4) (9.1)

Retirements 30,856 130,952 146,574 29.4 26.8 End of year 2,395,207 2,373,210 2,450,673 4.5 10.1 Accumulated depreciation 497,378 446,674 422,081 13.4 12.0 Net utility plant $1.897,829 $ 1,926,536 $2,028,592 2.7 9.7 1,315 1,275 2,410 (8.2) (0.5)

{ployees at End of Year 22

Registrars StackholderInformation Preferred Stock:

Annual Meeting BANK IV Wichita, N.A.

The annual stockholders' meeting will be held May 24, Common Stock:

1989, at the General Office of the company,120 East First, BANK IV Wichita, N.A., and Wichita. Proxies for this meeting will be solicited by First National Bank of Chicago management. A proxy statement will be mailed t Bonds: Trustee, Registrar and Paying Agent stockholders about April 14, 1989. Morgan Guaranty Trust Company of New York 30 West Breadway 1988 Annual Report New York, New York 10015 This report is prepared primarily for the information o{ Stock Exchange Listing company stockholders and is not issued in connection with the sale, or offer for sale of, or solicitaten of an offer to buy The company's conunon stock is listed on the New York and Pacific Stock Exchanges.

any securities of the company.

Stock Symbol: KGE General Offices Stockholder Records and Dividend Reinvestment 120 East First KG&E Stockhokler Records Department P.O. Box 208 P.O. Box 208 Wichita, Kansas 672010208 Wichita, Kansas 67201-0208 Phone: (316) 2641141 Phone: Kansas - (ce'.i collect)

Transfer Agents (316) 261-6640 Outside Kansas j Preferred Stock: 1-800-527-2495, Ext. 6640 First National Bank in Wichit Additional Information Trust Department Box One The company's form 10-K is filed with the Securities and l l Wichita, Kansas 67201 Exchange Commission and is available upon request from l that agency or from the company. I Ft t n i Bank in Wichita Fur cqy of KG&E's " Financial and Statistical Report 1978-1988 or other mformation, contact:

Trust Department KG&E Investor Relations Department Bm One Wichita, Kansas 67201 P.O. Box 208 Wichita, Kansas 672010208 First National Bank of Chicago Phone: Kansas - (call collect)

Stock Transfer - Suite 0122 (316) 261-6380 One First National Pla:a Outside Kansas Chicago, Illinois 60670 1-800-527-2495, Ext. 6380 Service Area Map F e ,

1 1

-~

Map legend Generating Station, Capability and Fuel j

' Cities with Customer l Gor 1,n Evans Steam I

\ Services Ofhces e Elecmc Statnin. 510 MW.

/' Naroral Gas

./ - L ,

'. ' ' /

.s I~ ' ,{.

', Transmission Lmes Interconnections and 7 hluta Steam Elecenc Stanon. 3 MW, Diesel

~"

Power Pool Memberships

' 'q 3 Murray Gdi Steam Elecmc 9 k'"""" ' '"'"'"

1- '} Direct interconnections are

' maintained with 10 other $tgne Steam Electnc l .- .',,,

a .%. utihties anJ the company is sranon.6% MW*t, G>al e

l  ; .M ; a member of the Southwest 5 Wolf Creek Generanng i

).  :

Power Pool. Power n Stanon, s10 MW*. Nudear W t- - - ' . --- d*

regularly transmitted to anJ 6 Jeffrev Energy Center.+

7 ,' '

4 from other utihties to ensure 401 MW'. Coal j 7' jQ rehabihry and economy.

• lomsh outwJ u irh other

""h"#' CI O*

1- [,${

omnou $ll3,,',,",',,,,,"d y y ,," "

lancJ loneerm.

+ locarcJ B0 mdes norrhaar of Twhsta Nor shou n on mat >

23

Kansas Gas and Electric Comparty Key Nmnber 10

. Bulk Rate P.O. Box 208 U.S. Postage Wichita, Kansas 67201 PAID.

Permit 165 Address Gnrection Requested Wichita, KS Return Estage Guaranteed Directors

• Frank J. Becker (1981) Robert T. Crain (1981) Donald C. Slawson (1983)

(I,4,7) Chainnan ami Chief Exectawe (2,5) Crain Realty Gnnluny, Fort Scott, KS (3,7) Ch,irman of the hard and President, Officer, First National Slawson Compmies, Wichita, KS Ralph Foster (1970)

Ikmk & Trust Co.' El Dorado' KS (4,7) Vice President General Counsel of the Dr. Newton Smith (1985)

Glenn Biggs (1986) Compmy, Wichita, KS (5) Physician, Arkansas City, KS (6) Chairman and Chief Exectaire Officer, Donald A.Johnston (1980) Lawrence E. Walsh (1986)

Gill Onnymr,es, San Antonio, TA (6) Attorney and Former Federal District (2,5) Corp > rate General Manager, Howard Brenneman (1985) Maupintour, Inc., Lawrence, KS Court Jiulge, Oklahorna City, OK (2) Investment / Financial Omsultant,

"'"'""'" Glenn L Koester (1986)

Vice President - Nuclear of the Gnnymy, W

'"'" l

\

Wilson K. Cadman (1978) Wichita, KS A. Dwight Button (1976)

(1,7! Chairman of the Rurd and President Retired Chairman of the Rurd, of the Gnnpany, Wichita, KS Fourth Fmancial Corp., Wichita KS 7, nui C uelExeaa.;ve Officer, C.T. Carter (1968) Cessna Aircraft Compmy, Wichita, KS y. car deced and commmee an % mens (1,3) Retired Vice President, Pipeline Transpntion, Atlantic Richfield Gnnymv, James J. Noone (1986) . commioce.: (1) E xecutive; (2) Gunnensation (6) Attorney and Retired Admm. .estrarne frulependence, KS and Benc6t; 0) Audie; H) shareholder Jiulge for the District Cart of Sedgwick Rdadorm;-(5) Nominating; (6) Special C.Q. Chandler (1974) County, Wichita, KS uriganon; m Plannmg -

(I.4,5,7) Clu2irnum of the hard, First .

Nacimal f3ank in Wichita, KS Mar).orie I. Setter (1980) ,

(4) President, Setter & Associates, Inc.,

Advertising and Public Reknions, Wichita, KS Officers Wilson K. Cadman,61* Robert L. Rives,55* William B. Moore, 36 W.R. Whitmer, 55 Chairman of the fhrrd and Presdent Gnmp %ce Presdent Mce Presdent - Firuince Weasurer Kent R. Brown,44* James T. Clark,48 Tom Underwomi,51 Verna L Ridgeway,61 Group Mce Preshfent %ce Pre 3 dent - Accountmg %ce Presdent - Human Remurces Asustant Mce hesden - Omsumer Affairs Richard M. Haden,49* Ralph Foster,60* E.D. Prothro,56 J.E Klassen,59 Gmup Mce Presdent %cc Presdent - General Opunsel Omtroller and Annrant Secrentry Assisr4mr Treasurier James S. Ilaines, Jr.,42* Glenn L Koester,63* Richard D. Terrill,34 Jack Skelton,58 Group Mce Presdent Vice Pressfent - Nuclear Secretary and Arrorney Aussrant Secretary

• Policy Group Member

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