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Ks City Power & Light Co 1998 Annual Rept & Financial Statements as of 981231 & 1997 for Ks Electric Power Cooperative,Inc
	ML20195C001
Person / Time
Site:	Wolf Creek
Issue date:	12/31/1998
From:	Jennings D; KANSAS CITY POWER & LIGHT CO.
To:	;
Shared Package
ML20195B987	List: ML20195B981; ML20195B990; ML20195C001;
References
	NUDOCS 9906030336
	Download: ML20195C001 (74)
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r Kansas City Power & Light Company

. 1998 anmurtRepait

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':ESTERM RES URCES.,E C.

1998 FIN ANCI AL MEASURES dbilan m Milkony 1998 Iw7

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FINANCIAL DATA Sales $ 2,034

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5 2,152 -5.5 !

Earnings before interest, taxes, depreciation and anmrtiution (1151TDA) 568 1,333 -57.4 I arnings as ailable for common stock 44 495 -91.1 Cash I' low (rarnings plus depreciation and amortiution) . 316 751 -57.9 Adjusted Eat nings (earnings plus goodwill amortiution) . 92 520 -82.3

~Ii>tal Assets 7,951 6,960 14.2 1 mbedded cost of long. term debt 7.4% 7. 5%

OPER ATING D ATA 1:lectrie: ,

Sales (thousands of MWil) litility service 17,930 16,934 5.9 Wholesale 4,826 5,334 -9.5

'Iotal 22,756 22,268 2.2 Customers (as erage) 620,183 613,7I5 1.1 Monitored sersires customers (at year end) 1,541,526 953,097 61.7 Number of employees (at year end) . 6,960 5,548 25.5 COMMON STOCK D ATA 1.arnings per share $0.67 $7.59 -91.2 Cash flost per share $4.81 $11.54 -58.3 Adjusted earnings per share $1.40 $ 7.99 -82.5 Dividends per share $2.14 $ 2.10 1.9 :

liook salue per share $29.40 $ 30.88 -4.8 Market value per share (et 12/ 31) . , $33.250 $ 4 3.000 -22.7 Ascrage shares outstanding 65,633,743 65,127,803 0.8 Number of common shareholders 55.892 59,504 6.1 Annuali/cd dividend yield 6.4% 4.9"n s#

Ascrage daily volume traded 162,273 149,000 8.9 Price /carnings ratio 49.6 5.7 Multiple for cash flow per share 6.9 3.7 Multiple for adjusted earnings per share "

23.8 5.4 Common stoi k price range lhph $44.188 $4 3.4 38 low $32.563 $ 29.750 C0NTENTS 2 Company Profile 4 Ch irman's lxtter to Shareholders 8 Inside the CEO Perspective 10 Protection One 16 Utility Operations 22 ONEOK 28 Strategic Direction 33 Selected Financial Data p 34 Management's Disemsion and Analysis $f 48 Consolidated Financial Statements 53 Notes to the Consolidated Financial Statements ' V 72 Directors and Omcers 72 Corporate Information -h 73 Information for our Shareholders j a :

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

' LINE OF BUSINESS $ [hMMk ' jf N ' MONITORE D SERVICLS Protection One (NYSE: P00 1. argent residential and wromt. largest oserall nionitored seniccu ompany IN Vf'S FMF N I S Network Multifamily in the worhi sening more than 1.5 nullmn customen in ihe umica siairs Lifeline Systems Canada, tlic LLK. and htern 1 urope. Protcetion One hea<lquartcrs are Protection One Europe in Cuber City, Cahfornia. Protection One Mobile Protection One Monitoring Guardian international no. ales alarm monnoring nenicen as wcil as design, mstallation (0TC: GilS)

                                     . .                                                                     and .crvia oficcurity and hre alarm aystems throughout f lornia an I in New Wrk. Guardun in hea<hguartered in 11011) w ood, I lornla.

Ft I ( J RICll Y KPL Fully integrated clectric utihty generating and retaihng electricny Gener& t KGE in gans,, and selbng wholesale tlectritity nationu nic. Gcncratnig Transmission upacity of 5,H6 MW. Operates more than 6, kx) nules of transnnssion

                         . and Distribution lines. Sold ahnout 2 3 milhon MWil of ilet tncity m IW8 and wrses more tian 6.?O,nx) custome.n. licaihjuartered in Topeka, Kansas.

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ONEOK (NYSE: OKEl Saves 650,0(x) customers in Kansas under the operating name Dt 1 RIBill lON - Kansas Gas Service and 750,000 customen in Oklabonu under the name Oklahom4 Natural Gas. ONI OK also has operations m natural

  ;                                                                                                           gas storage, marketing and prmluction, llcathluartcred inluha, Oklahona.

Hanover Compressor Through % tar Capital, a w holly ow ned ,,ubsidury, we hohl im estments (NYSE: HC) in energy -related and paging companien, incluthng: llanos cr Comprewor, Paging Companies a leading pronder of a broad array of natu.ral gas tomprewion rental, operation and maintenantc menices m the thuted staics an,1 wh4i international markets Westar Communications, a grow ing paging (ompany, oliering nationwide pagmg sc nic es equity imestnu nts m urn.us pagmg

    .                                                                                                         companics across the linned staten.

SALES * - CASH F L O W* Fiscal year sales dollars by hne of business Incal yeaf cash h tw Ime of busmess is calculated as net income P.r, depreciation and anivt:tation Natural Gas Monitored Servg es Natur al Gas lowestment s 1,835,402 421.095 203.448 s 1.480

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Electnc Manifored Servnes t let tnc 1.611.685 115.1 E8 293 664

               'An msnbers shown m ttmusands Lne of bus ness measures are snown at Imn. i e . mounxed :.ervo n a ie natea1 ps suimoen roei t i tia r ,mnany riiantwu even inough 2   Western Resources owns only 8% and 45% respectively. of t%se combames AU natara( ps numtm are as of Ac t 31.1W Ah omer numtm are 6 of Dn ember M 1%

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

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

  *An numtes srwun thousands in.e no tenns measses se vue at laes. i e m=tmed waes and nata gas numtes refiect total compary numtes, even though WPSTPm NPs(Ki8tPs DWh$ DH4 8*.1% and 4R FPskP(lively Of thDse CompaNPS M haTJial ga$ fWmtrer5 We 45 Of August 31.1998 Ail OthPf viumles arg 35 of Deceml)er $1,1998,        3

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SHAREHOLDERS

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r i.wi l h L. u *,/: .; D AYl0 C. WITTIG Western Resources

      'i Chantman of the Board, Pressdent and Cheet Esecutwe Ott6cer
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5 r J T 1 ransition is the word i,nai best summarizes a 1998 activity for our company, from both a personnel and financial perspective. Thniughout the year, we experienced sescral leadership (hanges, most notably the retirement of John E. Ilay es, Jr., w ho led this company for nine years. o .- , last summer, John retired as chief executise ollicer and in early 1999, he stepped dow n as c hairman of the hoard. Ikith of those responsibilities hase been passed to me.We believe it's been a smooth and seamless transition for our company. w As a result, this is my first opportunity to address you in our annual report's letter from the chairman. I believe annual reports reflect the style and direction of a .>mpany. As a result, weNe chosen a simple, direct style to f communicate our message: we're fotwed on gnm ing the company, growing our customer base and growing the value g of your imestment. It's a simple, direct premise with simple, chreet and measurable results. o

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

4 l (Ibilars m Mill >om> 1998 I997 % changi-FINANCIAL DATA Sales . . . . $ 2,034 5 2,152 5.5 Earnings before interest, taxes, depreciation arid amorti/ation (I lilTIM) 568 1,333 57.4 .

1:arnings as allable for common stot k 44 495 91.1

                                                                                                                                                        ..3W Cash l~ low (rarnings plus depreciation and amortization) .                                      316               751            57.9 Adjusted 1:arnings (rarnings plus goodwill amortization) .                                        92                520          -82.3
 'Ihtal Assets .                          .       .           .            .                   7,951             6,960             14.2                        ,,

Embedded cost oflong term debt . . 7.4% 7. 5% OPER ATING DATA

                                                                                                                                                         )I 1:lectrie:                                                                                                                                            [,

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

Up 1:armngs per share $0.67 $7.59 91.2 w Cash flow per share . $4.81 $ 11.54 -58.3 Adjusted carnings per share $1.40 $ 7.99 -82.5 @

Disidends per 6 hare $2.14 $ 2.10 1.9 lionk salue per sharc . $29.40 $ 10.88 -4.8 C Market value per share (at 12/ 31) . $33.250 $ 4 3.0(M) -22.7 7, Ascrage shares outstanding .. 65.633,743 65,127,803 0,8 Number of conunon shareholders 55,892 59,504 -6.1 Annuali/cd dnidend yichl , 6.4% 4.9*o Ascrage daily solume traded . . . 162,273 149,000 8.9 Price /rarnings ratio . ... 49.6 5.7 Multiple for cash flow per sharc . 6.9 3.7 Multiple for adjusted carnings per share 23.8 5.4 Conunon stock price range liigh . .. $44.188 $ 4 3.418 ,, l .ow $32.563 $ 29.750 4 C0NTENTS 2 Company Profile 4 Chairman's lxtter to Shareholders 8 Inside the CEO Perspective :# 10 Protection One ,. 16 litility operations 22 ONEOK s 28 Strategic Direction 33 Selected Financial Data 34 Management's Discussion 'and Analysis ' ( 48 Consolidated f inancial Statements ;f 53 Notes to the Consolidated Financial Stateme'nts .L 72 Directors and Omccrs ' 72 Corporate Information .' . 73 Information for our Shareholders

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

W: ~ l Protection One (NYSE: POI) largest residential and semnd largest userall nunutored scrum c ompany Network Multifamily in the worhi sening more than 1.5 milhon customen in the unned stati n.

Lifeline Systems canada, the U.K. and western I urope. Protecta,n One hea.h iuarters are

    ,                                                                  Protection One Europe                     in Culver City, Cahfornia.
 "                                                                     Protection One Mobile Protection One Monitoring Guardian International                       lhuvides alarm monitoring servim as well as design, m talianon (0TC: GlC and sersim of sivurity and fire alarm systems throughout Ilonda and in New brk Guantian is heashpi artered in llollywomi, Ilonda.

KPL rully Aritegrated electric utihty generatmg and retadmg elettricity O'" h KGE

                                                            ,                                                    in Kansas and selhng whoicule electncity nanonwide. cencraung Transmissson capadtv    of 5,356 MW. Operates more than 6,Mm nules of transmimon and Destribution                                                                                     '
                                                               .                                                 hnes. Sohl almost 2 3 $nilhon MWil of elettricily in 1998 and scncs more than620,000 rustomers. Ilea<hjuartered in TopcLa, Kansas.

1' ' - ONEOK (NYSE: OKE) , Serves 650,000 customers in Kansas under the operating name K:nsas Gas Service arut 750,000 cuatomers m Oklahoma under the name Oklahoma Natural Gas. ONEOK also has operauon* m natural gas storage, marketing and production. licadquartered in Tulsa, Oklahoma. 1r ' ...i - - Hanover Compressor Through% tar capital, a w holly 4m ned subsidiary, we hohl imestmeni, i . (NYSE: HC) in energy-related ami paging companics, inclushng: llanmer Compresmr, Paging Companies a leading provider of a broad array of naiu,ral gas compremon rental, operation and maintenance services in the tinind staics and select international markets;htar Communications, a growing pagmg compam, offering nationwide paging senices; equity imcatments m sariom pagmg .. mmpanies across the Umted states.

SALES

C A S H F L OW*

Fiscal year sales dollars by line of business hscal year cash flow by Ime of business is calculated as not income plus depreciation and amorteation 0.

                     . Natural Gas                                               Monitored Services                      Natural Gas                                                  Irivestments 1,835,402                                                     421.095                             203.448                                                        1.480 i

Electnc M';nitored Services Electnc i

  !!                                                                               1.611.685                                115.1 E8                                                     293.884   l l

p s namn m ,eim imammnew nonws. een tw j[ -. hneers 2 shown Westeen m uiousna Resources ovms on4u 8%oraridtosiness n as,n 4W. respectwety. n ucomparues of those n aumAlli na*,al e . monma gas tiornberssem are as es ,,a31,1998 of Aug r.ataAHu,,t otbtn numters ,e as of (mc er'itw' 31.19% 4

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1. W (TERN RESOURCES, I N c '.

s Western W Resources Company Profile

                     . ESTERN RESOURCES (NYSE: WR)
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7_. ..;, .; .. . ; , y ,; . _ l NW E ON$0FH9LDINGS. 1 W 1; b Protection One (NYSE: POI) Largest residential and wcund largest overall musiitored scriites company Network Multifamily in the world sening rnore than 1.5 mala customen in the timted states, Lifeline Systems Canada, the ll.K. and Western I urope. Protection One headquar ters are Protection One Europe in Culver City, Cahfornia. Protection One Mobile Protection One Monitoring Guardian international Provides alarm monitoring wnicca as wcll as dcaign, instalianon (0TC: GilS) and wrvicr of security and fire alarm systems throughout f lorida and in New York. Guardian is headquartered in llolly wml, I'lorida. 4 KPL Fully integrated ricctric utihty generating and retading clectrisity Generaten. KGE in Kansas and alhng w holesale electritity nationaide. Generatmg capacity of 5,356 MW. Operates more than 6, No miles of transnnssion and Distribution ' hnes. S<dd almost 2 3 million MWil of clectricity in 1998 and wncs mote than 620,000 customers. lleadquartered inLpt La, Kansas t ONEOK (NYSE: OKE) Serves 650,000 customers in Kansas under the operatmg name Kansas Gas Service and 750,0(K) customers in Oklahoma under the name Oklahoma Natural Gas. ONI.OK also has operanons in natural gas storage, marketmg and pr<xtudion. licadquartered in Tulsa, Oklahoma. Hanover Compressor nrough Westar capital, a w holly. owned subsidiary, u r hoL1 imestments (f.YSE: HC) in energy.rclated and paging companics, includmg: llanmcr compressor, Paging Companies a leading proiider of a broad array of natural gas compression rental, operation and maintenance wrvices in the Linited States and select internanonal markets;Westar Commusiitations, a grow ing paging coinjuny, otTering nationnide pagmg menites; equity investments in sanous pagmg

      .                                                                                                            (umpanies acrms the Linited states.

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       ,,s S A L E S*                                                                             CASH F L O W*

hscal year sales dollars by line of business fiscal year cash flow by kne of business is calculated

     .j'                                                                                                                              as net income plus depreciation and amortaation Natural Gas                                          Monitored Services                      Natural Gas                                                  lwestments 1,835,402                                                 421.095                             203,448                                                        1.480 7

Electnc Monitored Sereces Dettoc 1,611.685 115.188 293.884

                    ' 'M numbers shown in thousands. Une al business measures are shown at 100% ; e . monwea sem es am naut usua mte acet iorat onmany ruirnter s. c#r. itu,urt 2 .. Western Resources owns only 85% and 4SA respectively. of t?mse companies All natmai gas nunibers are as of Aapst 31. } W,8 All other num!*rs Ne as of l'exernher 31. IM             l l
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WESTERN RESOURCi$, lHC. I i i pro wsunk j 1 ~ , ! Cosi of grou th a di be dron ased ihrough i spanuun and rehm ment Western Resourtru owns almut 85'o of Protection Onc,

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,i the Ikaler Prograin and Ins ri hain e on large ai quisitior s. Pranary                          111.8 million shares worth approximately 1957 milhon,                                I goal a to make Protecnon ( Dnr profitable and % )! tun.hng. New emphash                            or 514.54 per Western Resources share, u di be pla rd on crusi marketmg momton d i.tr uin products through af hhaird iompany rusionn r baso 'l he t ih hne aupuunon, dur to t h.sc in arrond quarter im u di add 4nopio c ustomers, u hn h a dl irrate another soun r for i row markrong opportumiin.

Continue to suppor ihn unntminti growth plam by f urmshmg tunihng Company owns about 12% of Guarilian international, ami busnu w *trairgy comulung as Guanhan npands mto uns markin worth about 5 3 mdlion at year.end 1998. Compirir thC proposed merger with Kamas City Power & 1ighi , I stimated salue of the electric utihty hohhng* of Writern knourir. Company to irrair htar i nergs cononur to prepart for eu ntual am be calculated by multiplying net clertric rarmngs by the indmtry rotad i ompention and univt fully thi syni rgin asadahlt heturen , prire to earnings ratio (14 and dnidmg by Wrntern Resourin iegulated and nonregulatid busnns hnem Iorpr jomt generanon average outstan&ng mnuimn shares: s125 milhon x 14.0 = s175 bdhon, pngerts with naphboring unknn to i nhanic pi almg c apauty Contmur or almut 126.56 per share of WCstern Resourcn Common atm L. to h.ok for r.irategn auluninon/ merger opportumtu s that surngthen our goal to ha ome a super n gional o mpentor m thC %du nt . sup;wirt wmplenon ut ( >NI OKi merger w ith %uthunt G.n Company i Company holds common and comertible preferred stin k equal to form larpnt natural gas loial dninbunon 6ompany m the timted to 4 5% ownership of ONEOK. Futimated market salue of UNI OK f s.tain. l>nclop new salm opportumors beturen gas, < lerinoty holdings is approximately 58 38.9 milhon. and im dule 8Ted he'r s si C5 buMni ssC4 Conimur to h..Ll equity in llanoser Comprnwr and mi rraw Company owns about 11% of llanmer Comprnsor, unntruents m attraitne pagmg c ompamn support Wtar Westar Communitations is a 100% nwned subsiihary of Etern Cornmunn anom of forts to espand marli t share and ri as h. Resources. Year.cnd 1998 market salue of atrategic imntments totaled about s288 milhon. e

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E BIT D A* C U S T O M E R S* Iarnings before interest. tanes. depreuation At yearend 1998, Western Resources has i and amortaation by hne of business access to more than 3 milhon customers j Natural Gas investments Monitored Services Electric 305.108 6,465 1.500 620 j'N f% "%, j i

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l Monitored ServK es flectnc Natural Gas 157.208 480.847 1.400 u nunt,-s snown in tusane- tme o' bonns measmes are shown at 1(>0s. , e . crunutores :,crvites and natti,at gas rimut>ers renect tota' company runtiers. even themgh Westem hewwtes owns ONy 8% ant 14% rem twi4 o' t'K:se companes 4 riatatal gas nautiers se as of Augu';t 31. lW8 M other twmtiers a'e as of Decerntier 31, IMB. -3

4 ..d W E S.t E 3t N R E S O U R C E s , I N C . Dear Felhnc SHAREHOLDERS i

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l;d e. . 1 DAVID C. WITTIG h Western Resources Cheneman of the Board Presodent and Cheet Esecurrve Offner 4 i

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I l ransition is llle word lllat hest sumnlarizes

         ,                                               :1998 activity for our company, from p

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

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           .                 f? E t t t R N A E S' 0 0 R C f i, ~ I N C ,

p.. ~ c y Dear Fellow a i SHAREHOLDERS -

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

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ransition is the word that aest summarizes y 1998 activity for our company, from a both a personnel and financial perspective.

           ?
        .f-Throughout the year, we experienced several leaden. hip changes, most notably the retirement of John i . Ilayes, Jr.,

q who led this company for nine years. d last summer, John retired as chief executiu oflicer and in early 1999, he stepped dow n as (hairman of the luard. Itoth of those responsibilities base been passed to me.We beliese it's been a smooth and scamicss transition for our company. m As a result, this is my first opportunity to address you in our annual report's letter from the chairman. I beliese annual reports reflut the style and direction of a company. As a result, we'se chosen a simple, direct style to communicate our message: we're focused on growing the compam, growing our customer base and gnm ing the salue of your imestment. It's a simple,ihrect premise with simple, direct and measurable results.

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

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

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u.1 _,W,J' ' ,U s+ e - Above Fl.i a Terrist vu e prewaent 14 . and seuetary tWR - 2,125 22 500 short s options! Dmd Witt g. Mestern Resour t es - WP - ?!9 369 301000 shares options! 11ith Moore e met utrve at e president ( tnet fmancial o'in er and t<eanorer. lWR - 4 670 34 936 bh d r e g og,tiofYhl (#rl b dup ti. F# et Ut'VR WK e prel6 dent and chief administr :,t've o'N or. <WR - 29 974 81 500 shares options) Ifight, Carl ht b etts,

             .i< c .e sioe n, o.. ner a.e de..en ,m .,, WR - n 13 2so ,b.res ont,onsi .ed                                                   1 Anem Jo Huret vic e preudent ir:'or marain te(-hnolog y iWR - 423 9 875 theres options)

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

927 541 50t; (591) 3,283 Eciuity . 888 1,345 1,169 1,082 (2,521) 1,963 a m., noi e u w-e u. coo, rue.. ,o -, ., ,, too c coo i e i,.nce.,a io msu, t,,e<,, i-(T Re:Newh 10L% of ONE OM's consanden kmxw Werrnst,an at August 31 1498 Weuer,i hesuines owns 45% All othe, Wo, mate o as of lecemtie,31.1996 d DVDl 10 i, l'#ttle,,ed 10 WeMs (r,ergy As we mme foruard to 1999 and beyond, we beliese the reshaping of Western Resources into a consumer sersices ,

company is the best approach to remain competitise and successful. As we complete this transition to a growth company, we will do our best to communicate with you about the changes taking place. l'inally, we were saddened with the death of our friend and colleague, Ken Wymore,4 5, w ho sersed as our senior vice president, electric operations. Our thoughts continue to be with his wife, Juanita, and his family. Sincerely, thid C.Witng Chairman of the lioani, Preslent and chm i set utisc Ollicer P

t S T E ft ti RESOURCES, INC.

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,                                (               r           CEO Perspective Can you explain 1998 earnings?

1 tmer earnings resulteil from sescral business ilecisions ticsigneti to better liosition the coml>any to com[itte. As ur h>cus on gnming

                              ,     (

energy anti monitoreil sersit es, we took sescral one-time charges against our 1998 carnings,incluihng the ticrision to exit the international lumer tirseloinnent businc.ss.1:xiting that business line alhm s us to focus on our consumer sersices businesses.

What is your interpretation of Western Resources

stock performance?

Western was forretl to reclute carnings jier share by $0.69 as l> art of our tuost ret ent Iate retjut tions. At a 14 }) rice /rarnings tuultijile, W' the not ell.etI has been to l'etlut e our jirice by 510.00 per share. 6:.aduG.b In achhtion, for the last sescral years, we hacl numerous one-time positise carnings a(ljustments th11 can't be countetl ost r the long tertu. There ucre gains in the stot L juirtfolio of imestments tr.g., theTyco stot k salch aml ur recrisetl corporate-ow nctl life insurance procretls in ext ess of actuarial projections. Wall htreet hatt herome usetl to those one-time carnings anti hatl (onsitleteti them as part of carnings going forwani.When they resisett their future estiinatch to ext luvIe one-time iterns, our stot k prit e suflerett. I beliese the market has incrreacted to these tiesclopments.

c. What steps will you take to improve the stock price performance in 1999 and beyond?

om c wm# ,,.. o ., our primary business hnes of energy anti monitoreil sersices are expected

  .                 . ..on... oom u ... . .                       to deliser sustained profitable gnm th in 1999 anil beyond.We c urrently
                    .om, t,,yo,niiv . 6,a ...i.on.

cxpect this carnings grow th to be in the 5 to 10 ;>cr(ent range iluritig the next few ycars, using 1999 as a hase.We hase a good litisint ss ;>lan, but that is not enough. Potential sharehohlers nectl to hear the story in onlcr to create demand for the stot L.We're sharpening our focus on imestor n lations anti will take the juisitise Western itesources ston to imestors sia a set of nationwide meetings in 1999. It is our sicu that LE

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CEO Perspective [ Can you explain 1998 earnings? "y - Lower carnings resulted from several business decisions designed

      =,                                                    to better position the company to compete. As we fiwus on growing

). energy and monitored services, we took several one-time charges against our 1998 carnings, including the decision to exit the international power desclopment business. Exiting that business 1 line allows us to licus on our consumer services businesses. I H What is your interpretation of k Western Resources' stock performance? hl Western was forced to reduce carnings per share by 50.69 as part l >'- p' ~ ' of our most recent rate reductions. At a 14 price /carnings multiple, yt the net efTect has been to reduce our price by $10.00 per share. i AwJ In addition, for the last several years, we had numerous one-time positise earnings adjustmer'ts that can't be counted over the long term. i . There were gains in the stock portfolio ofimotments (e.g., theTyco stock sale), and w e receised corporate-ow ned life insurance proceeds in excess of actuarial projections. Wall Street had become ustd to those one-time carnings and had considered them as part of carnings going forward.When they resised l their future estimates to exclude one-timr items, our stot k price sutTered. I believe the market has merreacted to these deselopments, p What steps will you take to improve the

,                                                     stock price performance in 1999 and beyond?

our primary busiww hnes ohmtgy and monitm d senicn are expcM

!                o.mo c. mei.a. n.. ch.,

p, em uw. .na . . .n. ..,. to deliser sustained profitable growth in 1999 and bevond. We currently

                 ..m. e .qu.nnna.e au..tiani.

expect this carnings growth to be in the 5 to 10 percent range during the next few years, using 1999 as a base. We have a good business plan, but that is not enough. Potential shareholders need to hear the story in order to create demand Ihr the stm k.We're sharpening our focus on imestor relations and will take the positive Western Resources story to imestors sia a set of nationwide meetings in 1999. It is our view that I s, l'

ESTER REs C 4 INC. a better cducated investor in a better shareholder.We will provide more information to our ow ners so that they can understand u hat is happening uith their imestment. Chat is your focus going forward? One, to complete a financially sound merger with KCPLTwo, to lhcus on operating synergies at Protection One. And threr, to more proactisely market to our existing customer base. What is your non regulated strategy?

     'Io seek out and pursue business knes that are compatible with our imestment criteria and growth strategies; i.e., customer growth and monthly recurring resenues.                                                         .

How do you get employees to think and perform more like owners of the company? The best way to elTect that is to reward employees with stock as part of compensation. We're mming to tie sasings plans and personal net worth desclopment for employees intoWestern itesources stock. lleginning this year, ollic crs and senior management uill recrise a portion of their base compensation in Western itesources stock, and the company's 401(k) match will be made in sto< k. What is Western Resources doing to prepare for the year 2000? Will the company be ready? We'gr been working on this project Ihr more than two years and have substantially completed work for becomingYear 2000-ready at the end of 1998.We will continue to test our systems throughout 1999 In addition to this internal process, w hich encompasses our operating companies KPL and KGli, we are working with our afliliated companics, vendors and suppliers for the uninterrupted continuation of all our casential business functions. Do you plan to change the company's dividend policy? The Western llesources dividend policy in place today is that of a profitahic regulated utility. Two things are happening in our businesses w hich could necessitate a mmhfication to this dividend policy. One is the potential deregulation of electricity, which will decrease the certainty of the electric retenue stream. Second, after the completion of the merger with KCPl., Western llesources will become a holding company with diierse imestments.Therefore,it may be appropriate to review the disidend policy in light of that structure. , Our goal is to maintain our current dividend. liut, in order to do so, we need greater participation in the imidend lleimestment Plan.

                                                                                                                          .f f A What will Western Resources look like five years from now?

Western licsources will be a comumer services company with substantialimestments in monitored scrsices and related products, electricity and natural gas. In most cases, Western itesources will hold a majority interest in these consumer services companics and will prornote cross-marketing strategics among them.

                                                                                                                              .d 9

WE6 FERN RESoGRCES. INC, i Protection One , Our goa s are to focus on operating synergies anc to profitably anc strategicaly grow this business. l

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PROFITABILITY Excludes One Time Events 5200,000 , [ 150,000 h 5$ $ l 100.000 - [ g Y 50.000 - f l E \ 0 - - 50.000 1998 1997 1996 j I EBITDA and Cash flow improved substantially for. Protection One in 1998 due to growth of the Dealer Program and acquisitions.' l i 10 e

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L lt's about growth. Sustained, www: profitable, strategic growth. # i,. lp Q just three years ago, Western licsources acquired its first two monitorcil security companics.~Inday, through l'rotection One, our monitorcil scrsices husir. css has grou n to herome one of the leading prosiilers of residential monitoring and ,,ccurity related 4

                                 ,                             4  sersiccs in North America.

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Proicction One, approsimately 85 percent owned hy Western 4

                         ' "                                    I itesources, shouhl reach the tuo million customer lesel in 1999
                                                       .. . i
                                 ~i                               These customers, w ho rely on us escry day, prosiile recurring A,   ,

4 monthly resenues.These customers gise us marketing act ess to all

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

Top, John Mat h, cheef executive officer. Protetten One-Nationwide, residential filonitored scrVices are growing in cAcess (POI - 111.115/311.600 shares / options), Bottom, Tom Rankm. president and chief operating officer, I"' I" U# Protect on One. (Pol - 117.951/311.600 shares / options) 3gl pgggg gggyg jag,

                                                                  ~lo maintain our profitahle and strategic grou th lincus, uc contentrated only on those acquisitions hest inceting our imestment criteria. Our tactical grow th has included properties w hit h:                                              -

n _fiarnnh strong rescnue and carmngs grouth vpportunnics; a offcr unportant geograplacfoothoIJr. a Jcinomtratc c1pcriens cJ, .rua cyful managernent; n poucu saluahic, state of the art flu uhtner; a prouJe logn al wnwhJatwn s) nergues; .$ ( a prnent signifuans. contunucJ grou th potentul. l 11'

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                    '                                                A prime exampic is our October 1998 agreement with Lifeline Systems, ACC0UNT C0NCEN                   TI0N ci^

Inc. Lifeline is the leading provider of personal emergency response

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M MORE THAN 125,000 M 20,000 - 125,000 services in North America, ofTering 24-hour monitoring to customers Elmi LE SS THAN 20,000 in their homes. Lifeline ofTers ecluipment and medical monitoring services United States and Canada to more than 400,000 subscribers through its relationships with more s

                                       $                             than 2,200 community hospitals in all 50 states and Canada.

W 9 With more than 70 percent market share of an attractive i demographic segment, Lifeline is nearly 10 times 1

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q larger than its nearest competitor and enjoys 0 a solid reputation for ofTering high f quality, dependable services. y , ,i 1 Lifeline shares our common 4 strategy of offering innovatisc g.j: t ; products and services, growing rapidly, and developing long-term value for our share-holders. Lifeline is an excellent addition to our Protection One family. 9 *k

                                     $                                                      Protection One Mobile Services has contracted with i                                                                                Mercedes llent to be the provider of an innovatise new sers cc available with 1999 S-Class sedans, p              ,

Europe Mercedes* new TeleAid system includes an " SOS" button w hich w ill

                                                                   . immediately establish voice contact with a Protection One representatise R    w ho can dispatch local police, fire or other emergency services.

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                                #                                ~ev Our Network Multifamily disision of Protection One is another strong player in its industry segment. Protection One's Network Multifamily
       #J                                                            division is the leader in the apartment security market with more than 320,000 current subscribers and more market share than all other
 ,                j                                                  competitors combined.

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

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1 6 Above, at the Protection One Call Center in Chatsoorth, CA. Michael Hildebrand, Jr , collectsons agency coordinator, Nicole Durand, sales and marketing representative, and Christine Charles, sales and marketing representative. Right. at Protection One in Topeka. KS. Kim Lesseski, e' customer account representative, (WR . 5 shares). -

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j Above. at the Protection One Call Center m Cnatsoorth. CA, Michael Hddebrand. Jr , collections agency coordmator. Nicole Durand. sales and marketing representative, and Christine Charles, salet and marketmg representative Right. at Pretection One m Topeka. KS. Kim lesseski. , customer account representative. (WR - 5 shares) . ..^

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    - WE E TE RN ;R E C       R C E L, lTC.                                                                                                  '

l ll l l y l incomes through increased occupancy rates, reduced turnoser and higher rents, u hile providing tenants a valuable amenity and peace of mind. I ess than 2% of the H milkon multifamily units in North America currently h.nc monitored security, a fact that allow = for high growth for this division of Protection One. Protection one's grow th strategy in 1999 and beyond is to grow subscribers at inner cost. Our dealer program does just that.This successful program allows dealers to sell and install Protection One sersices in their markets. Protection One offers dealers centrali/cd monitoring, sales education, training and l'Io/cclion One inaterials, customer leads, consulting services and national advertising. Once a

                 .                                        dealer installs a security system, Protection One purchases the account, receives is llle seronti-largest recurring monthly resenue from that subscriber and services the account.

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                                                           %.e view our Dealer Program as an important mgredient to growing monthly Conipully [N llle HUT [tl                 recurring resenues and strong financial performance.With Protection One, ne are working to desclop other low-cost ways to grow customer accounts, lHITllHIissilll0ielT HnaHy, we recognin that our best prospects are often our current customers.

fugtnenle<l llulusfrn With this in mind, we continue to design and market enhanced services. Recent initiatises, often ollered as a bundled pac kage with monitoring services, include: COMPANY CUSTOMERS ASSETS ANNUALIZED RANK Im*ond (muond REVENUES E catcndcJ scri tcc Uref erflon; imdiens) ADT SECURITY SERVICES 27 $2,700.0 $1.800.0 1 N rarrol and alarin rcsponse; a PROTECTION ONE 1.5 2.511.3 421.1 2 5 rno-nay micc commurncatwn;

 '.                SECURITYLINK (AMERITECH)     1.3        WA         422.4      3        5 surcrissed monitoring 3crisccs; DR'NK'S HOME SECURITY        06       252.0         207.2     4        5 cellular plwnc Imc back-up; HONEYWELL INC.               0.2        WA          220.8     5        5 molille scn kes.

kanked by number oftvuomerg As Protection One continues to grow as the prosidct ld (hoice for I' monitored sersices, we will strise to improse margins and achieve strong financial performant c. l l l a:

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l At the Chatsworth, CA, Call Center. Gail Carpenter, vice president customer operations. (Pol 10.000 options), and Thomme Ryan, vice president Chatsworth. (WR - 100 shares) Right. Cedrich Holmes, sales and marketmg representatwe. 7g

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                                                                                  . Eaciudes One: Time Events;
                   ,;                  m           !                              7; i
                                 ? ~.,                5600,000                                                                                                                   ,
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. / - 500,000

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                 / j-                     ;           400.000                                                                                                                       y .g       ,.

y** .l ' 300,000 - -

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l; 200,000 - - - 3 100.000 - - - i 0 - - - l 1998 1997 1996 EBITDA and cash flow measures for the utility hne of business benefited from a warmer than normal summer season . is !

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                                                                                        .             -V ,                s Ik At the Chatsworth, CA. Call Center. Gail Carpenter. vue pressdent, customer operations.

[ POI - 10 000 options). and Thomas Ryan, vue president. Chatsworth. (WR - 100 shares) Right. Cedrn k Holmes. saies and marmeting representative ., g

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WFSTIRN R E s o ll R C E S . fNC, -.j Ltility Operations , Mye continue to loon:or o 3portun111es to ex,anc the energy 11ortions oiour conraany tarougrinei;gers, acc uisitions anc alliances.

                               'We areaeeping our opti'ons oaen and f exi;a.e.

h-P R O FIT A BILIT Y Excludes One-Time Events 1

                                      $600.000 -                                           - - - -

l . - 500.000 - - - I O $ { 400.000 - - y j ~ 300.000 - - 200,000 -- - - h 100.000 - - - 0 - - - - ; 1998 1997 1996 i I EBITDA and Cash flow measures for the utility line of busiriess benefited from a warmer than riormal Summer season. 16

l WESTERN RESOURCES, INC,

                                                                                                                                                                                                     .t' In today's utility business,                                                                                                                                                                     3 size is essential.                                                                                                                                                                             .

n: Our long ter m goal, supportc<l in plans anil initiatises alrea<lv unclernav, is to become a super-regional energs competitor. We must base a strong marketing presence, a competitisc cost prolile anil substantial generation capacitt our merger with the Kansas City Power & l.ight Compam t KCPI), n w ill mme the electric si<le ol' our business (loser to critis al inass. 4, ; The merge <l compam, to be nameil htar I nergy, w ill 1.c i reated from the KGl. an<l KPl electric operatior.s of Western itesources anil the electric operations of KCPl . htern Resources will ow n i 80.1 per< cot of the common stot L of the nen (ompam. Ibrmer j KCPL sharehohk rs uill ow n the other 19.9 pcrt cm 1 htar ! [ s. l'ncrgy. htar i ncrgy will boast about 1.1 milhon , e o u s ustomers, v' 7 / ' \ ql

                                                                                                                                                                  \                                   u scrsed under the KCPI , KGl! anil KPI brand name. S u di trade I

as a separate, pure plas electric compam, with 58.2 b:: . ,n in asst ts d!M! Inore tilan $ 2 liillH)H in annual resenuc%.These finain i d strengtlis, coupled with control of almost 8,800 mcpan atis of generaung capacits, Top Tom Grennan, emetutive vue president. u dl make Westar I Hergy a strong compctitor in tbc Miducst. Ocorar operstmns, mR - 4 096'29 625 , sharen optional Bottom Wayne Kitt hen, The incrger prot ess is ucll undcru at We h.se recrised the approsal ,,,,,,,,,3,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,o of both htern Resourt es and KCPI sharehohlers. While there are a mu - 2 349 8.179sh.,ei optier s erntection One - $00 shares and Hanover Compressor-nutuber of regulators issues to be athlressetl, ne anti (ipate regulators 793,g, ,ny g, g, ,,,m, approsal in the state and federal jurivhctions in 1999 **"'e"**'"r*ad">"*"* (WR - 520 604 shares optmns) The htern Itcsr urt es/KCPI merger is a (lear example of our strategy to sci /c business opportunitics tonsistent with our grou th goals. It u di help espand our geographit footprint both through growing our customer 17

F WESTERN RESOURCES, INC. b t

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Above. Ron Hott. senior director corporate and community affairs (WR - 1.359 3.200 nr.aresc options } #,..,g .. Armette Bei k. vice president, customer servae. and chairman of the board and preudent, KGE, Oj(( {s((;j'[q -l

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

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

                                                                                  '                                                                                    p from the KGE and KPL clectric operations of Mstern llesources                                                                                                                           $

and the electric operations of KCPL. Western llesources uill on n <<) g1 I. ,

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

g KCPL shareholders will own the other 19.9 percent of Westar -

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Energy. Westar Energy will boast about 1.1 million electric customers, sersed under the KCPL, KGE and KPL brand names. It uill trade + b 1 as a separate, pure-play electric company, with 58.2 billion in assets n'

and more than s2 billion in annual resenues.These financial strengths, coupled with control of abnost 8,800 megawatts of generating capacity, Top. Tom Grennan, executive vice president. will make Westar Energy a stronf 'petitor in the Midwest. , electoc operations, (WR - 4.096/29 625 lel shares / options). Bottom. Wayne kitchen, The merger process is well unds _ . We have receised die api,roval ,,c,,,,,,,,,,,,,,,i,,,,,,,,,,,,,,,,,,,,,,

                                                                                                                                                                            , n; , i of imth Western llesources and KCPL shareholders. While there are a           (*" - 2 348 's. 79 shares / options. Protect on One - 500 shares and Hanover Compressor-number of reguIJtory issuch to be addressed, we anticipate regulatory         ,oo,,,,,,,,,,,,,,,,,,,,,,.,,,,,

approval in the state and federal jurisdictions in 1999 * *a* * *' * * r *ad * *** h

ac ' -

(WR - 520,-604 shares / options).

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

.m

WESTERN RESOURCES,INC. e

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Aoove. Ron Hort. sen.or director. t orporate and (ommunity affairs. ;WR -. 1.359 5 200 shares options) 33 y. . Annette Bec k vn e president. customer serv <t e, and chairman of the troard and president, W GI '[g l / i WR - 140 7,3103 shares options). and An mard Good. director. t untomer operations a =d 'E ..jj (_ (WR - 900 3 750 staves optionsi R.ght les Morgan vu e president generation servaes . .,[

          ! A R - 5 OfKs opt <ons!. orid (mo Maynard president and chief esec utive oft cer Wolf Creek Naclear OpeP elitfig C ors.or atton !WR - 200 shaven)                                                          -
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                                                                                                                                                   %4 base, and by adding to our generating capacity. And the merger will help us continue to be a low-cost energy provider - reducing our costs further through reorganization and economies of scale.

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

                                                                                            ,        g     KCPL        WESTAR ENERGY employees to think of safety as a w ay oflife.                                            620,000       451,000          1,071,000 l ELECTRIC CUSTOMERS                                                             h Our safety track record has been good during             l ANNUAL REVENUES              $1.61 tulhon   $939 mdhon       $2.55 bdhon the last few years. Since 1993, we have had              l ASSETS                       55.2 bdhon'     $3 bdhon         $8.2 tulhon 8,000 I

l a nearly steady decrease in safety incidents. l TRANSMISSIONimdes6.300 of hne) 1,700 GENERATING CAPACITY (MW) 5,356 3,361 8,717 Despite a slight upturn m. 1997, we base reduced total annual incidents more than 60 perce. > the '*" '*'* " '""""" * '" xca nwrge last six years. Our company goal for 1998 w., o reduce our safety incident rate to 4.0 or less.We came very close to that goal with a year-end rate of 4.42. In order to serve our customers, we are adding

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

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                                                                              ,                                              left. Lee Johnson. electric dist ibution supervisor. Doug Henry vic e president.

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

[' ' manager, system developer. (WR - 1.393/240 shares / options).

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                                                                                                                        .. . .         > b. h o t s T f R N . R t $QU R C ENg       $g [m pt Kansas. Reactivation of a steam turbine at Neosho Station near Parsons, C APlT AL Kansas, will add another 68 megawatts to our system.                                           EXPENDITURES The Gordon Esans Energy Center, northwest of Wichita, Kansas, will be                           150,174   97 the site of three new combustion turbines.Two of the units will begin serving                                       135.457 1

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

WESTERN RfSoURCES, INC. OXEOK Aggressive pursuit ~ ~

0. complementary acquisition !

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

o. ONEOK's ~uture orowth. D i

PROFITABILITY Cash flow is calculated as net income plus depreciation and amortization. l Illl

                                    $350,000 300.000 h     250,000                                                        S E  )

U $ 5 200,000 - - S 150.000 - 5 l 100.000 - - - 5 50.000 - - - 0 - - - -- 1998 1997 1996 ONE0K's EBITDA and cash flow both increased substantially in fiscal year 1998 due, in large part, to completion of the alkance between Western Resources and ONEOK. Western Resources contributed its a natural gas business to ONE0K in exchange for common and convertible preferred stock equal to a 45% ownership in ONEOK. 22

WESTERN R E S O U R C E S .' JNC. -. j.. 'I

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                             ,'y Yet another example of our

j forward-thinking, strategic .:

j approach to structuring 1 our business units is our : successful alliance with a 1 ONEOK, Inc. of Tulsa, Oklahoma. .. I) in late 1997, Western Resourt es contributed substantialh 3 . I all of its natural gas operations and awets to ()Nll)K in return , for corntuon and preferred stot k equal to a 4 3 percent ow nership position in ON1 OK.The resulting compam became the eighth :i r largest local natural gas <hstribution (ompant <1 I)C) in the nation, sersing more than 1.4 million natural gas custorners in approximately a

                                  }            h0 percent of Oklahoma and 67 percent of Kansas. More grow th shouhl he reali/cd in Iw9 to double the siec of ()NI OK again.

Instead of seasonalh fluctuating carnings f rom operations, ty pical in the natural gas industrs, Western Resources nou ret cises steady quarterl disidenik from ()NI.OK. A hne of l'usinew that presiously , required s20 million cash annualk realiecd a positise s40 million Top, Larry fIrummett, chmerman of the board cash l low alter restructuring, and chief cuecutive of4ter. ONE OK. Inc.. {0NEOK-OKE - 67.454 shares. WR - 250 shares) $s art (if the stratt git alliant c, Western Res(>Urt'es' liatural gas Middle, Gene Dubay president and chief operstmg off.c er, Kansas Gas Service Company. IOKE - 18 806 sharent and Ed Farrell. president O N j '(') K Kansas (jas hers it c. Willi a sinth ath transitiori, heath and chief operahng officer. Ohlahoma Natural Gas Company (OKE - 4.142 shares) Bottom. David K yle. president. ONEOM. Inc., (Ont - 53.812 shares). i

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                                                                                                                                         %8 Yet another example of our                                                                 *dn forward-thinking, strategic                                                                  $

approach to structuring ~j our business units IS our d, y. successful alliance with M1 ONE0K, Inc. of Tulsa, Oklahoma. di s

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In late 1997, Western Resources contributed substantially

                                                                                                                                              . ,t .

all ofits natural gas operations and a sets to ONEOK in return ' 09 for conunon and preferred stock equal to a 45 percent ownership N' I

position in ONEOK.The resulting company became the eighth <d largest local natural gas distribution company (1 DC) in the nation, N.f

                               ,y               serving more than 1.4 million natural gas customers in approximately                                       i
                           $f(jQ)
                              ' :S 80 percent of Oklahoma and 67 percent of Kansas. More growth                                    Q)

Ag Jih i W shouhl be reali/ed in 1999 to double the siec of ONEOK again. g Instead of seasonally lluctuating earnings from operations, typical in the natural gas industry, Western Resources now receises steady quarterly dividends from ONEOK. A line of business that previously j required $20 million cash annually realifed a positive 540 million Top, Larry Brs.mmett. chairman of the board cash jlow after TcStructuring, , and chief executive off car. ONEOK, Inc., {0 NEON.OKE - 67.454 shares. WR - 250 shares)* A8 part of the strategic alliance, Western Resources' natural gas Middle, Gene Dubay, president and chief operstmg off cor, Kansas Gas Serv 6ce Company, toke - 1s. sos shares), and Ed rarresi president ONE()K - Kansas Gas Sersice.With a smooth transition, nearly , and chief operahng omcer Oklahoma Natural , Gas Company,10KE - 4.142 shares), 1,500 former Western Resources employees transf. erred to the o Bottom, David Kyle, president. ONEOK. Inc., 10KE - 53.812 shares). a

6 wasyt ontsquacts,Inc. p' i g' new company.% day, Kansas Gas Sersice continues to deliser natural NONREGULATED REVENUES gas service to more than 660,000 customers in 341 Kansas communities and 20 Oklahoma communities. 863,497 ONEOK also acquired these Western llesources natural gas assets: a 12,232 mdes ofJsstributwn percIme; l 686.176 1 ( n a naturalgas transmsssion and gathermg ss stem y nsth 1.650 miles ofppchne; o 563,537 m a Kansas gas processmg plant with 15 mmcfper Jay capacity; z o n a 42 percent interest un a Ncn Me.uco plant with a 200 mmcf a per Jay capacity; a the .1hd Contment .lfarket Center olJering no-notsce naturalgas

            ;                                   transportatwn and nhecimg, parkmg. balancmg and storage serru cs 0                                  to TroJucers at market-bascJ rates; a a retail naturalgas marketing operation now Jomg busmess as Kansas Gas .11arkeimg; E a long-term transportation agreement; 1998    1997       1996 E - ss m               //       h nram p-n aJhtianalleased storagefacshtics that wsilenhance peak Jchrerabshty ofnaturalgas.

OhEOK noHregulHted All this was added to ONEOK's pre existing assets, including: 1Pl't'llHPS grPIC b $C E naturalgas service to rnore than 735,000 customers i l11) Srtll yelir l'Efl0 IllHillly E "' a iS,520 insics of Justribution. transmsssion and gathermg pipcime; elSUfr8tlllif..litrretiSetl E a naturalgas nhdesa!c rnarketmg company scresng 23 states gHS lililllfflfly tirilllly. fromarsly in the mid-continent region of the UniscJ States: E on on nership mterest in I 5 Oklahoma gas processing plants nsth a nct Jady capacity of 335 $b fofnaturalgas; E a productwn company with more than S5.2 bulbon cubicjeet of naturalgas reserses. l i l 1 l h h sq h

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s Above, witham Fa=* ell. vice presedent. gas marketmg. (OKE - 5.000 shares). Andrew _h t ;Dyj' d .

Helm. futures and basis trader. IOKE - 10.000 shares. WR - 3 000 shares, and Protection . ..

One - 750 shares l. and Sandra Douglas. gas marketing assistant. (OKE - 2 000 shares). R>ght. Jim Lecterby. operator. diggmg mathme, and Joe Andshkiewitz. workseig foreman. { . street. {0KE - 8 shares WR - 186 shares). __

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

1 m O This alliance nearly doubled ONEOK's asset base from 51.2 billion to V

                                                               $2.1 billion, prmiding ONEOK with the assets and resources needed to be a contender in the future unregulated gas industry.

T0TAL RETURN " "'""#' ' ' **' "* "#** l m y Corporation of 1.as Vegas, Nevada, anaounced that their J d lj boards of directors had unanimously apprmed a merger P! $200 l agreement. ONEOK's acquisition of Southwest Gas would 175 ; combine the financial strength of ONEOK with the country's 150 , fastest-growing gas distribution utility.The merger would f f 125 - create the largest independent gas distribution company in O l R the United States, sersing 2.6 million customers in fisc states. 'j ; 100 - f'h 75 - .' , - Southwest Gas will operate as a disision of ONEOK g_ _ and keep its name in the local markets it serves. ONI OK f] will rank as the primary gas distributor in Ari/ona, 25 - ~e g Kansas, Nevada and Oklahoma and will hase a strong

'~

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

1ugust 31.199/>, at Ibe end 1 in plans to build a new natural gas processing plant and gathermg system m

([l/leIbree)Purs.//ine/u(/c3 Carter County, Oklahoma, to process gas. f l j)Ti c(* UJujarreinti on unt/ At year-end, ONEOK announced the purchase of 5 50 million of convertible ussunit's reinres/nlent preferred stock of Magnum flunter itesources, Inc., one of the nation's D f o[(/iri(/etu/S. fastest-growing independent natural gas and oil exploration and deselopment b p d k

CE&TE. RESOURCEE,INC. Companies.The agreement includes ONEOK's ability to market certain ONE0K's proposed merger with Southwest Gas will double the size of the company of. Magnum ilunter,s natural gas production in the state of. Oklahoma, again ht more than doubled with the Western Resources alkance) and would create While total natural gas deregulation may be a few ) cars away, ONE.Ok, the largest natural gas local distribution has taken important steps in that direction. Deregulation in the CIcctric industry company in the country, moving DNE0K already has prmided ONEOK with the opportunity to transport gas to li>ur mto fast-growing markets in the Southwest. natural gas fired electric generating plants on ned by Public Service Company COMB 1NED of Oklahoma. S E RVIC E AR E A S mens Okl AHOM A N ATUR AL GAS ONEOK also is imobed profitably in nonregulated muums K ANS AS G AS SE RVICE ensum SOUTHWEST GAS CORPOR ATION purt hase and marketing of natural gas primarily to Midwest u holesale customers Rather than compete for baseload M t .;g' business, howeser, the ONEOK Gas Marketing Company L focuses its elli>rts on the intra-day, -month, and gear swing N - . , business,uhere margins and price volatility are higher.The ';- n* 1 company's aserage gross margins per thousand cubic feet have , , N %, L Q '* increased significantly pursuing this strategy. - -

                                                                                                   'Q As a business line whose only focus is natural gas, ONI:OK combines a regulated distribution and pipeline business uith the nonregulated operations of natural gas marketing, processing and production, to handle all phases of the natural gas business.This means all of ONEOK's financial, tet hnical, engineering, customer sersice and marketing resources are directed towanl                 AREAS SERVICED BY one goal: to become the premier natural gas prmider in the linited States.              mmm SOUTHWE ST G AS CORPOR ATION Aggressise pursuit of complementary accluisition opportunities will be an important part of future grow th. ONEOK is well capitaliicd to fund growth                                p-with a balance sheet short on debt and long on cash. Esidence of ONEOK's                         ;.e     %#
                                                                                             * .twsaa cny sohd financial fhoting is apparent in its recent stock perfi>rmance. Cumulatise                   '%

total return on ONEOK common stm k exceeds 50 percent, for the three-year period ending August 31,1998. Some beliese ONEOK stock is in the top La *se bt fh e performers among i DCs. g f

                                                                                                  . mon,ae LDS Angeir5 ..

2%, ,.w ' kga,, y 4

WESTERN RESOURCES,INC. l l l Strategic Direction L n a. We wiledntinue ras our transition

                     ?romYtraciti6nal utility
                                   .                             .                       ~

company

                                           ; e ( f,                          s
                                                                                      .4 to a consumer (services' company
                               .                    +,..             . :- - - .                                 n
                             ~wlta su             ]stantla . Investments s        in monitor $bserv^ ides,.
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                                                                                                                      =

Le_ectricity anc naturaJgas. 1$ 6 7 h

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1 1 INVESTMENT GROWTH

                                        $300.000 ---                     - - - - - - - -                                     -

_. 250.000 - - - - - -- - - - - - -- i; 200.000 -- --- - - - - - - - - i !-EO'

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                                 $         50,000 - - - - -                       -                            -             --

0 ~- -- -- - 1998 1997 The increase in investments reflects our continuing interest i in paging companies and the appreciation of our interest in Hanover Compressor. 28

I .pf f4 WESTERN RESOURCE $ INC, i e One of Western Resources'

greatest strengths is our proven t

 . and extensive track record in                                                                                                                     #

growing the company. s-. - s Three short years ago, our rustomer base was ain>ut 1.2 million. W l

     'linlav, through our ou ncrshijn interests in l'rotection ()ne
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                                                                                                                            }                               1 ant] ()Nl ()K, ur soon will hate atress to more than 4 million rustomers. (Ipon ronipletion of the Kansas City l'oucr & l.iglit Coml)ans ant l Southurst Gas transactions, ur uill hase access to          ,

more than 6 million customers. Wehe alemonstrateil our capahilits. htaying li>ruscal on grow th is the natt huoral at Western llesources. ( , A(romplishment of our ongoing arquisition plans will require * , b imestment gra(le crc <ht ratings, u his h u ill allou the Company to grou without putting untlue strain on company carnings. Completion of our merger with KCPl. shouhl help strengthin our creclit rating.Taking 'n j athantage of tattical grouth opportunitics hy the pru(lent use of lescrage ypp. poy, t,n,, ,,ecutive vice president iso will make the comparu attractise to the imestor serking long term " " ' ' ' " * " ' ' ' ""' " ' " ' ' " * * * " ' ' t heirman of the board Protection One, in\estment salue. and member of the ONEOK Board of Directors .e , (WR - 45 89 7 /60.000 shares / options Another asset is the strong, Acasonctl manJpciDent train ur ha\c in pId(c. ONEOn - S 972 sharesi Middle left. Jim Martm. vice presedent, mvestor relations and strategn h We think antl make decisions like ou nors herause ne are ou ncrs..Io. enrourage

planmng (WR - 1 847/14 625 shares 'optionsi p%

all our emplo\ces to rXp! ore non (l'atlBlitma! meth(H!s (>I buihling %a!ue, Bottom. (mda lethL admemstraftve assrstant II (WR - 100 opt.ons). and Knob 6.sm. associate. uc re ollering non-traditmnal compensation metho<ls.These metho<ls m.(lu<le torporate strategy (WR - 100 options) an I mployer Sto(k Ou nership l'rogram, as nell as c ompensation and 401(k) matt hcs in Western llesources ronunon stoi k.We helicsc these initiatises u ill help imprme mcrall perfin mam e h) entouraging emphners to huihl their wealth as they huihl yours. rs -

                                                                                                                                                                           .. a W E S T E R N R E S D U R h t s t it h ;                         [

m . t s g.

                                                                                                                                                             % VVr o               n One of Western Resources'                                                                                                                        io l                 u
 ~

greatest strengths is our proven

 . and extensive track record in                                                                                                                     Mc                  -

growing the company.

                                                                                           .b 3                                                     #$
                                                                                                                                                                    .d Three short years ago, our customer base was about 1.2 million.

[mj Today, through our on nership interests in Protection One > and ONEOK, we soon will base access to more than 4 million 6

                                                                                                     $                      1                                 <
                                                                                                                                                                    .j custorners. Upon completion of the Kansas City Power & Light                            '#                                                          .a

Sg Company and Southwest Gas transactions, we uill have access to , ,q

             -                                                              6 t s s.                                                                                  ir
                                                                                                 '                                                          > vi more than 6 million customers. We've demonstrated our capability.                 >

{ [ Staying Ibcused on growth is the watchword at Western Resources. ' h g . Accomplishment of our ongoing acquisition plans uill require M h a [ imestment grade credit ratings, which will allow the company to grow

                                                                                                                                                       ,            Jg
                                                                                                                                                                          -a without putting undue strain on company carnings. Completion of                                                                                                     7; our merger with KCPL should help strengthen our credit iating.Taking adsantage of tactical growth opportunities by the prudent use ofleverage             y,,,o,,,t,,,,,,,,,,,,,,,,,,,,,,,,,,,                                   ,        y also will make the company attractive to the imestor seeking long. term              chief strategic officer, Western Resources.                                       p chairman of the board. Protection One, imestment Value.

and member of the ONEOK Bo rd of Directors , (WR - 45.897/60.000 shares / options. Another asset is the strong, seasoned management team we have in place. onton - 5 972 sharest. unddie ieft. >>m uartin. ' vice president, investor relations and strategic i ?4 We think and make decismns like owners because we are ow ners..Ib encourage

plannmg. (WR - 1.847/14.625 shares / options l.

all our eniployees to explore non-traditional methods of building value, Bottom. Unda Luthi. admmestratsve assistant. (WR - 100 options). and Fook Kim, associate. -j'; we re offering non-traditional compensat. ion methods.These methods m.clude - corporate strategy. (WR - 100 options). an Employee Stock Ownership Program, as well as compensation and 401(k) O matches in Western Resources common stock.We believe these initiatives will U help improve merall perfbrmance by encouraging employees to build their ' wcalth as they build yours.

                                                                                                                                         ,e I   ;

Je - - Rua

n$tra .R E s o u n c t e ; ( N C . Western llesources is drisen by good customer service and focus on sharehokler salue. In terms of understanding the financial aspects of our business, we heliese we're ahead of our competition. We base a long-term strategy that gmerns our

                                                       "        ~"     "~' "        ~""'          ? "Y" "E            "~

A tllun/>cr ofone-linle iternS te(/ftver/ repor/c(/ Our rnain chauenge has been a need to clarify our sision, strategies and operating outlook to the financial conununity to increase understanding and confidence earnitlgs per S/lfire in In our stock value.We need to educate imestors regarding the real salue of.t he .

       / Nl. M(//flSle(/ c(f rtl[IlyS                  company, w hose stm k, we believe, remains undervalued in the market.

(in([ edS[lj[off' f('Sil//S /le/p % address this issue, and to play a key role in continued grow th, DouglasT. io preSen/ a /rner picInre Lake joined us in a newly created post as executise sice president and chief strategic ollicer on September 1,1998. At Western itesources, Lake, former ofongoing operating senior managing director, Ilear Stearns & Co., Inc., u ill head all corporate rcSn/13for //ie colnpuny. desclopment, corporate strategy and investor relations for the company. 1.ake and his title may he new, but the function of strategic planning and its EARNINGS ADJ. E ARNINGS* CASH FLOW

importance to our future is long standing.

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

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

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

WESTERN RESOURCES, I N C '. - i m .~. 7 v* r ' N' (

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Above. ton Fmney. president. Westar Commumcations. (WR - 356,6.100 shares / options). i . '- Gary Gifford distnct manager. KPL Pagmg, (WR - 398 sharest and Jennifer Kopp, semor customer care consultant, KPL Pagmg. (WR - 3 shares) Right, a Hanover

                                                                                                                                                                  . , .I' Compressor employee                                                                                                                    '

31

WESTERN RESOURCLS, INC.

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9 j L'g - Above L ori Finney president Westar Con.munn ahons WR - 356 6100 shares optionsi Gary G.ff ord disernt rnanager RPL Paging IWR - 398 shares) and Jennifee kopp sentOf C ultDnler ( Sf e C Oh5Ultaint KPL Pagmg ;WR - 3 shares 1 R.ght a Haerover 3 m-.s.o, er,.e ~ J M-%.._ . . . . . 31

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

      ,                                                                                                                         j n

1 WESTERN RESOURCES. INC. SELECTED FIN ANCI AL DATA 199808 1997m 1996 1995 1994 Year Emicd December 31, (thillars 6nThomands) RISTATED INCCCE STATEMENT DATA: kles: Energy . . ., . . $ 1,612.959 $ 1,999,418 $ 2,038,281 $ 1,743,930 $ 1,764,769 Security ... . .. . 421,095 152,347 8,546 344 - Total sales .. 2.034,054 2,151,765 2,046,827 1,744,274 1,764,769 income from operations . .. .. 230,514 154,425 388,553 373,721 370.672 Net income . . . . . . 47,756 499,518 168,950 181,676 187,447 Earnings available for common stock . . 44.165 494,599 154,111 168,257 174,029 December 31, (thillars inThomamin) B ALANCE SHEET D ATA: lbtal assets . $ 7,951,428 5 6,959,550 $ 6,647,781

                                                                                                                                          $ 5,490,677   $ 5,371,029 Long-term debt, preference stock, and other mandatorily redeemable securities                             . 3.283.064                2,458,034       1,951,583      1,641,263     1,507,028 Year Imled Detrmler 31 COCOCN STOCK DATA:

ILisic carnings per share $0.67 $7.59 $ 2.41 32.71 32.82 Dividends per share . . .. . . $2.14 $ 2.10 $2.06 $ 2.02 $1.98 tkmk value per share .. . $29.40 $ 30.88 $25.14 $ 24.71 $23.93 Ascrage shares outstanding (000's) . . 65.634 65,128 63,834 62,157 61,618 Interest coverage ratio (before income taxes, including AFUDC) . . 1.27 5.55 2.67 3.14 3.42 W intormaton reflects wntectf Ofinternatitelpower development actuties. E litformatOn reflect 1 the gain On the sale Of TyCO Common shares and reflects the st'ateglC alhance with ONE0K. e 6 33

E EVESTERN RE8oURCES, INC, i / M AN AG E M E N T'S DIS C U S SIO N AN D AN ALY SIS INTRODUCTION 1998 HIGHLIGHTS l Continued Expansion of Monitored Services In Management's Discussion and Analysis we explain the general financial condition and the operating suits for Western Resource"' Pmwion One,Inc. (Protection One) had a vear of rapid expansion Inc. and its subsidiaries.We explain: and continued grow th. During the year, Protection One doubled the e What factors impact our business siec of its customer base from about 750,000 customers to about o What our carnings and em.ts were in 1998 and 1997 1.5 million customers.This growth w as achies ed through acquisitions a Why these cae nings and costs difTered from year to year and Protection One's Dealer Program. , o flow our earnings and costs affect our overall financial condition During 1998, Protection One invested approximately 5549 million o What our capital expenditures were for 1998 in security company acquisitions. Highlights of this actisity include: o What we expect our capital expenditures to be for the years 1999 . m Network Multi lamd.y - A leadm.g prouder of. monitored . through 2(01 i uf N delh9 % gisihd&d g4 o How we plan to pay for these future capital expenditures ly 200,000 custorners. o Any other items that particularly affect our financial condition . .

               .                                                          s Multimedia h.ecurity Services - A purchase of assets, mcluding a or canunp brge secunty monitoring center in Wichita, Kansas, that added As you read Management's Discussion and Analysis, please refer to         about 147,000 customers, our Consohdated Statements ofincome on page 49.These statements        . Compagnie Europeenne de Telesecurite (CET) - An acquisition show our operating results for 1998, 1997 and 1996. In                    of a French monitored services provider which added 60,000 Management's Discussion and Analysis, we analyze and explain the          customers and established a major presence inWestern Europe, significant annual changes of specific line items in the Consolidated Statements ofIncome.                                                   Protection Or: banced these acquisitions primarily with cash advances from Gern Resources and frr m the sale of common Ftrward-Looking Statements                                             shares. In June, Protection One completed an equity offering Certain matters discussed here and elsew here in this Annual Report    that raised approximately 5406 million in aggregate proceeds. We are " forward looking statements"The Private Securities Litigation     purchased approximately 37.6 million Protection One common shares of the 42.8 million common shares sold.The shares, w hich sold Reform Act of 1995 has established that these statements qualify for safe harbors from liabihty. Furward.looking statements may include     for 59.50 per common share, increased our investment in Protection words like we "believe," anticipate,"" expect or words of similar   One by 5 357 million. Our approximate 85% imestment in Protection One totals about $1.1 billion at December 31, 1998.

meaning. Forward.looking statements describe our future plans, objectives, expectations or goals. Such statements address future During the year, Protection one refinanced a large portion of its esents and conditions concerning capital expenditures, carnings, debt by issuing 5250 million of senior unsecured notes, issuing litigation, rate and other regulatory matters, possible corporate 5350 million of senior subordinated notes and obtaining a l restructurings, mergers, acquisitions, dispositions, liquidity and 5500 million credit facility. Part of the proceeds from these olTerings capital renomces, interest and dividend rates, Year 2000 lasue, "cre used to repay a 5 395 milhon intercompany obligation to us. environmental matters, changing weather, nuclear operations, ability The Lifeline Transaction to enter new markets successfully and capitahic on growth opportu-nities in nonregulated businesses, ctents in foreign markets in w hich in October 1998, Protection One announced an agreement to , acquire Lifeline Systems, Inc., (ljfeline) a leading prmider of investments have been made, and accounting matters.What happens in each case could sary materialh from what we expect because of 24-hour personal emergency response and support services in North

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

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

WESTERN RESOURCES, INC. M AN AGE M E NT'S DISCUSSION AN D AN ALYSIS Innstment in ONEOK, Inc. These electric rate decreases have negatively impacted our net We received approximately 540 million in cash dividends from our i""'*C U'" '"tal ammal cunmlative effect of these rate decreases in ONI OK, Inc. (ONI OK) imestment in 1998. Tax rules allow us to appnaimately 575 million. All rate decreases are mmulatise. Itebatn exclude 70% of these dividends from the determination of taxable are one-time m ents and do not innuence future rates. income.This 70% exdusion sases us about 511 million in income Llectric utility net income totaled approximately $133 million, taxes annually. culuding one-thne ments, for 1998. LleMc utility net income

in December 1998, ONEOK announced its intention to purchase re0ccis a debt auotation of $ 1.9 billion. Wntar iLiergy, the new ;

Southw est Gas Corporation (Southwest). ONEOK will pay company to k (n atal as a resuk of the Kansas City Power & Light l Southwest sharehohlers 528.50 per comnmn shaic and assume debt Company (KCPL) merger, will assume 51.9 billion of debt from us , for a total transaction value of approximately $1.8 billion. ONI OK aml KGL after closing the KCPL merger. We expect to own an l

will add 1.2 million customers in higher grow th markets in Arirona, 80.1% interest in Wntar Energy whith will combine our electric Nevada and California to its existing base of 1.4 million customers as operations with those of KCPL. For more information on the KCPL j a result of this purchase.The merger is expected to create the largest incrger, see OTHLR INI ORMATION. !

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

(KPI) and Kansas Gas and Electric Company (KGil Sigmficant Operating rnults for 1998 also included pre-tax snerance terms of the unter are as follows: obhgations and employee lienents of approximately 520 million.

o We made permanent the May 1996 interim 58.7 million decrease OPERATING RESULTS

in K G L. rates on February 1,1997 o We reduced KGE's ratn by' $ 36 million annuallt on Operating results for 1998 are difficult to compare to 1997 due Februar) 1,1997

primarily to 1998 charges as discussed abme in 1998 lilGilllGilTS e We reduced KPL's rain by 510 million annualh on and the 1997 pre-tax gain on the sale olT)co International Ltd. (Ts co) February 1,1997 conunon stock of 5864 million. o We rebated 55 million to all of oar electric customers in addition to the gain on the sale ofTyco common stm k recorded in in January 1998 1997, we recorded charges uhich included 548 million of deferred o We reduced KGL's ratn by $ 10 million annually on June 1,1998 KCPI merger costs and approximately 524 million recorded by a We rchated 5 5 million to all of our electric customers Protection One to recogniec higher than expected customer attrition in January 1999 and to record costs related io the acquisition of Protection One. o We will reduce KGL's ratn bs s 10 million more annually on June 1,1999 35

westtRN af80URCr$.INC. M AN AG E M E NT'S DIS CU S SION AND AN ALYSIS in November 1997, we completed our strategic alliance with 1997 compared to 1996: Electric sales increased 3% because of our ONFOK and contributed substantially all of our natural gas business expansion of power marketing actisity in 1997. Iligher electric sales to ONEOK in cubange fi>r a 45% ownership interest in ONEOK, from power marketing were offset by our reduced electric rates Fullow ing the strategic alliance, the consolidated sales, related mst of implemented February 1,1997, which lowered revenues by an sales and operating expenses in 1997 for our natural gas business have estimated $46 million annually, been repbced in 1998 by irwestment earnings from ONEOK. Sales g3 and cost of sales from our natural gas business in 1997 wcre 5739 million and 5538 million. 1998 compared to 1997: Total electric cost of sales increased 83% in 1998 due mostly' to higher power marketing cost of sales. The following explains, significant changes from prior year results in sales, cost of sales, operating expenses, other income (expense), 1997 compared to 1996: Our pcmcr marketing activity in 1997 interest exgwnse,incume taxes and preferred and preference dividends. increased electric cost of sales by 570 million. Actual cost of fuel , to generate electricity (coal, nuclear fuel, natural gas or oil) and Energy sales primarily include electric sales, power marketing the amount of power purchased from other utilities were sales and, through Nm ember 1997, natural gas sales. Items included 514 million higher. For further explanations of cost of sales in energy cost of sales are fuel expense, purchased power increases, see the fi>ssil generation and nuclear generation business expense (including electricity we purchase from others for resale), segments discussion below. power marketing expense and, through November 1997, natural gas purchased. Depreciation and Amortization Expense 1998 compared to 1997: Depreciation and amortization expense Electric Utility decreased 522 million, or 12%, primarily because we had fully amor-Siles tired a regulatory asset during 1997.This decrease in amortization Electric sales include sales from fossil generation, power marketing expense increased 1998 carnings beliere interest and taxes from 1997. and power delisery operations.The KCC and the Federal Energy 1997 compared to 1996: Depreciation and amortization expense Regulatory Commission (FERC) authorire rates for our electric increased 513 million, or 8%, primarily due to fully amortizing a sales. Power marketing is only regulated by the FERC Our cledric regulatory asset associated with the %lf Creek nuclear generation sales vary with levels of energy deliseries. Changing weather alTect' facility (Wolf Creek). the amount of electricity our customers use.Very hot summers and scry cold winters prompt more demand, especially among our Stranded Costs residential customers. Mild weather reduces demand. The definition of stranded costs for a utility business is the investment in and carrying costs on property, plant and ecguipment and other Many things will alTect our future electric sales.They include: regulatory assets which exceed the amount that can be recovered in e The weather a competitise market. We currently apply accounting standards e Our electnc rates that recognize the cronomic effects of rate regulation and record i o Competitive forces regulatory assets and liabilities related to our fossil generation, a Customer conservation efTorts nuclear generation and power delivery operations. If we determine e Wholesale demand that we no longer meet the criteria of Statement of Financial e The overall economy of our service area Accounting Standards No. 71,* Accounting for the Effects of Certain Types of Regulation"(SFAS 71), we may have a material extraordi-1998 compared to 1997: Total electric sales increased 31% Electric n'ary non-cash charge to operations. ' Reasons for discontinuing

utility sales increased 6% due to increased retail energy deliveries as a SF$s 71 accounting treatment include increasing competition that result of warmer summer temperatures and power marketing sales restricts our ability to charge prices needed to recover costs already '

increased 448% Our annual 510 million electric rate decrease incurred and a significant change bv regulators from a cost-based rate , implemented on June 1,1998, partially ofTset this increase. regulation to another form of rate regulation.We periodically review , The follmving table reflects the change in electric energy deliveries, SFAS 71 criteria and believe our net regulatory assets, including those as measured by kilowatt hours, for retail customers for 1998 related *.o generation, are probable of future recmcry. If we discon. compared to 1997. tinue Si AS 71 accounting treatment based upon competitive or other events, we may significantly impact the value of our net regulatory assets and our utility plant investments, particularly Wolf Crcok. See Residential .. ... ,. 9.5% OTilER INFORMATION for initiatises taken to restructure the Commercial . 6E% electric industry in Kansas. 4 Industnal . 14% Other , .. .. . 10% Regulatory changes, including competition, couhl a(bersely impact Totairetail . . .. , . 59% our ability to recmer our imestment in these assets. As of December 31,1998, we have recorded regulatory assets which are currently subject to recovery in future rates of approximately 36

WESTERN R E S OUR C E s, IN C. M AN AG E M E N T'S DIS C U S SIO N AN D AN ALY SIS s 364 million. Of this amount, 5205 million h a receivable for income sale electric customers and the purchase of electricity for our retail tax benelits presiously pasmi on to customers.The remainder of customers. Our margin from pmcr marketing actisitics is signifi-the regulatory assets are items that may gise rise to stranded costs cantly less than our margins on our traditional electric sales. Our including coal contract settlement costs, deferred employee benefit power marketing activity has resulted in electric purchases and sales costs, deferred plant costs and debt issuance costs, made in areas outside of our historical marketing territory.Through December 31, 1998, our power marketing artisity has had an in a competitive environment, we may not be able to fully reemer . , . msigmh, cant effect on Ellfi.. our entire imestment m Wolf Creek. We presently own 47% of Wolf Creek. Our ou nership would increase to 94% w hen the KCPL 'Ihe availahdity of our generating units and purchased power from combination is completed.We also may base stranded costs from an other companies impacts power marketing sales. In 1998, due to inability to rermer our environmental remediation costs and long. warmer than normal weather throughout the Midwest and a lack , term fuel contract costs in a competithe environment. If we of power asailable for purchase on the wholesale market, the determine that we have stranded costs and we cannot recmcr our wholesale power market experienced extreme volatility in prices im estment in these assets, our future net utihty income will be low er and asailability. We beliese future volatility, such as that recently than our historical net utility income has been unless we compensate experienced in the market.could impact our cost of power purchased for the loss of such income with other measures. and impact our ability to participate in power trades. ElIctric Utility Business Segments Ell!T for 1998 decreased from 1997 because we had higher purchased We define and report our business segments based on how manage- P""" "P'"*" "I 5 5 milhon due to a coal fired generation station being unavailable f,or the summer. ment currently evaluates our business. Management has segmented our business based on thfrerence,in products and sersicca, prmluc- IillT fier 1997 decreased from 1996 due to higher cost of fuel and tion processes and management responsibility. We manage our purchased power expense discussed below, a 56 million expense of electric utility business segments' performance based on their carn- obsolete inventory and other increased operating and maintenance ings before interen and taxes (ElllT). ElilT does not represent cash npenses. flow from operations as defined by generally accepted accounting principles, should not be construed as an aiternatise to operating in 1997, actual cost of fossil fuel to generate electricity and the income and is indicative neither of operating performance nor cash anmunt of pown purchased from other utilities were $14 million flow s available to fund the cash needs of our company, items excluded higher than in 1996. Our Wolf Creek nuclear generating station w as from ElilT are signi6 cant components in understanding and assessing on ne in the founh quann of 1997 for scheduled maintenance and the financial performance of our company. We belies e presentation of mr La Cygne coal generation station was off.line during 1997 fi>r an 1:ltlT enhances an understanding of financial condition, resuha of cuended maintenance outge. As a result, we burned more natural operations and cash flow s because ElllT is used by our company to gas to gennate ekctricity at our facihties. Natural gas is more costly satisfy its debt sersice obligations, capital expenditures, dividends to burn than coal and nudear fuel for generating electricity. and other operational needs, as uell as to provide funds fi>r growth. Itailroad transportation limitations prevented scheduled fuel our computation of EHIT may not be comparable to other similarly delis cries, reducing our coal im entories.To compensate fier a lack of titled measures of other companies. mal, w e purchased more pow er from other utilities and burned more Allocated sales are external sales collected from customers by our **P'""I'* ""'"I E^ " '" * ""' ""' """'E} '*9 "I'" *'"' #" "I'" pow er delis erv segment that are allocated to our Ibssil generation and purchased more power from other utilities because our Wolf t reck and La C.y gne generating stations were not generating electricity

                                                                                                                                           .. or f.

nuclear generation business segments based on demand and c!) erg'y - cost. The following discuuion identifies key factors afTecting our P" "I I 9 7' electric business segments. Nuclear Generation . Fassli Generation N"5 * **58"os) 1%8 Iw7 Iw6 (Donas m housinds) 1998 1997 1996 Mocated sales . $117,517 $102.330 $100.592 Depreciation and amorteation . 39.583 65.902 57.242 External sales . $525.974 $208.836 $144.056 EBIT . 120.920) 160.968) (SL585) Mocated sales . 517,363 517.167 518.199 Depreciation and amorteation . 53.132 53,831 52,303 EBIT . 144.357 149.825 188.173 Nm lear fuel generation has no nternal sales because it provides all of its p<mer to its co-owners KGE, KCPI and Kansas Ilectric Power External sales increased mer the last two scars mmth because Cooperatise, Inc. The amounts ahme are our 47% share of Wolf

of increased power marketing sales of 5 31i million in 1998 and Creek's operaung resulto 570 million in 1997. In 1997, we made a strat< gic decision to expand Allocated sales and IlilT wcre higher in 1998 because Wolf our power marketing business to better utili/c our generating assets Cred opdated the entire } car uithout any outages. In 1997, the and reduce risk awociated uith energy prices.We npanded into both Wolf Creek facility w as oft line for 58 days for a x heduled the marketing of electricity and risk management sersices to w hole- maintenance outage. 37

WESTERN RESOURCES. INC. f M AN AG E M E N T'S DISCUSSION AND AN ALY SIS Depreciation and amortiration expense for 1998 cornpared to 1997 Restatement of 1997 Financial Statements: As a result of a decision decreased $26 million because we had fully amortiied a regulatory by Protection One to restate its 1997 fmancial statements, we base asset during 1997.This decrease in amortintion expense increased chosen to restate our financial statements to conform to the (hanges i IllT for 1998. refleued by Protection One.We do not belies e the restated operating

                                   .                                       results and financial position are materially different from those D; commissioning: Decommissioning is a nuclear m. dustry term for whic h were reported in our liecen ber 31,1997, Annual lleport on the Iirrmanent shut 4hm n of.a nuclear Ixmcr Islant w hen the Idant,s ibrm IOK/A. See Note 2 for f.urther discussion of the restatement.

license expires.The Nudear Regulatory L,ommission (N RC) will ter. minate a planti lic ense and release the property for unrestricted use 1998 compared to 1997: In 1998, Protection One operated and

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

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

External saiet 5421,095 $152.347 $8.546 Depreciation and amorteation . 117.651 41.179 944 Amortization of intangibles and depreciation expense totaled EBIT . 56.727 (38,517) (3.555) 5118 million in 1998. Protection One recorded $582 milhon of 36

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

                                                                                                                                                   $36 gross customer losses and net monthly recurring revenue loss as                                                                                 ===

meaningful statistics. If future losses were to increase substantially, Protection One could be required to shorten the 10-year pericxl used interest Expense to amortire the investment in new customers.The resulting increase 1998 compared to 1997: Interest expense represents the interest in amortization expense could be significant, in addition, the SEC we paid on outstanding debt. Interest expense increased 17% due to stalTis resiewing Protection One's amortization methculology used higher long term debt. Our long. term debt balance increased on customer accounts.The SEC staff has cluestioned the appropriate- $875 million due to our and Protection One's issuance of new long-ness of the current accounting method which Protection One term Jebt used to reduce existing short-term debt, to fund believes is consistent with industry practices. A significant change nonregulated operations and to finance a substantial portion of in the amortization methcxl would likely have a material etTect on Protection One's customer account growth. Lower short term debt the company's results of operations.The intangible amortization interest expense partially ofTset the higher long. term debt interest represents a non. cash charge to income.The net balance of customer expense. Our short term debt had a lower weighted aserage interest accounts ;.t December 31,1998, was approximately $ 1 billion. rate than the long. term debt w hich replaced it. ElllT increased 595 million in 1998, included in 1998 EBIT is a 1997 compared to 1996:We incurred 527 million more short term non-recurring gain approximating 516 million on the repurchase of debt interest in 1997. Average short term debt balances were higher customer contracts covered I y a financing arrangement. A charge of in 1997 because we used short term debt to finance our investment approximately $24 million adversely afTected 1997 ElllT.The charge in ADT Limited,(n hich later converted toTyco) and to purchase the was needed to recognize higher than expected customer attrition and assets of Westinghouse Security Systems, short-term debt interest to record costs related to the acquisition of Protection One. expense declined in the second half of 1997 after we used the 1997 compared to 1996: Monitored services sales increased proceeds from the sale of Tyco common stock and a long-term

   $ 144 million from a minimal amount recorded in 1996.This incicase       debt financin to reduce our short term debt balance. From December 31,1996, to December 31, 1997, our short-term debt is because of our December 30,1996, purchase of the net assets of
                                                        .               . balance decreased $744 mu.. lion. From 1996 to 1997, interest Westinghouse Security Systems, Inc., (Westmghouse Security recorded on long. term debt increased s 14 million, or 13%, due to the Systems) and the a uisition on November 24,1997, of 82.4% of Protectm.n One.                                                          issuance of $ 520 million in senior unsecured notes.

Oth:r Operating Expenses '"*" **" e in 1998, we recorded a 199 million charge to income associated with 1998 compared to 1997: Income tax expense declined significantly due to the decline in taxable net income. In 1998, charges, primarily our decision to exit the international power project development the char e to income to exit the mternational power development business as previously discussed in 1998 IIIGHLIGilTS. business, signilicantly lowered tax expense. Tax expense for 1997 in 1997, we recorded a charge totaling $48 million to write-off included taxes related to the gain on the sale of Tyco common stock. the original merger costs associated with the KCPL transaction. In Our effective tax rate also declined from 1997.This decline is largely ' addition, Protection One recorded a charge of $24 million in 1997 as attributable to non. taxable proceeds from our corporate owned hfc diseuued above in Monitored Services. insurance policies and the benefit of excluding 70% of ONEOK Oth:r income (Expense) dividends received from the determination of taxable income. Non. deductibk goodwill amortization, state income taxes, depreciation, Other income (expense) includes miscellaneous income and and other adjustments to our tax provision partially oft *ct the tax expenses not directly related to our operations. benefits described above. 39

WESTERN R E S O U ll C E S , INC. l M A N AG E M E N T'S DIS C U S SIO N AN D AN ALY SIS l l 1997 compared to 1996: Income taxes on the gain from the sale of tions, the Dealer Program and installations. Protection One ik>cs not Tyco common stock increased totalincome tax expense by approxi- anticipate its 1999 expansion activity to be as significant as in 1998. mately $ 345 million. Capital expenditures totaled 518 3 million in 1998, slightly less than Pr'ferred and Preference Dividends 1997 and 1996. We also purchased marketable securities and i i a tional interests in affordable housing tax credit projects. On April 1,1998, we redeemed the 7.58% preference stock due 2007. On July 1,1996, we redeemed all the 8.5% preference stock in October 1998, Protection One announced an agreement to duc 2016.These redemptions hase resulted in a significant decline in acquire Lifeline Systems, Inc., (Lifeline) a leading pro,ider of . i i preferred and preference digidends since 1996. In accordance with 24-hour personal emergency response and support services in North the terms of the KCPL merger agreement, we will be required to America. Based on the average closing price for the three trading days redeem all of the remaining prek rred stm k prior to the merger. prior to April 8,1999, the value of the consideration to be paid under

the merger agreement is approxiniately 5129.2 million or 522.05 per LIQUIDITY AND CAPITAL RESOURCES Lifeline share in cash and stock. Lifeline has advised Protection One Ovsrview that it is evaluating the restatement of Protection One's financial statements.The consideration to be given in the I.ifeline transaction is Most of. our cash requirements consist of. capital expenditures and by dq nble md is subject to change within certain parameters maintenance costs associated with the electric utility business, '

until the closing date. Interested parties should obtain the continued gnm th m the monitored services business and payment of most recent proxy / registration statement for further analysis of common stock dividends. Our ability to attract newssary financial the transaction. ~ capital on reasonable terms is critical to our merall busincu plan. llistorically, we base paid for acquisitions with cash on hand, or the on January 25,1999 Protection One's Board of Directors autho-issuance of stock or short-term debt. Our ability to prm ide the cash, rized a private placement of common shares to Westar Capital,Inc., a stock or debt to fund our capital expenditures depends upon many w holly-<m ned subsidiary of our company, things, including asailable resources, our financial condition and The private placement will allow us to maintain ownership in excess current market conditions. of 80%. of Protection One,s . issued and outstanding common shares As of December 31,1998, we had 516 million in cash and cash following the issuance of Protection shares to Lifeline sharehohlers. equivalents. We consider highly liquid debt instruments purchased We may also acquire shares of Protection One common stm k in open u ith a maturity of three months or less to be cash equivalents. Other

                                                        .              market or prisatelv* negotiated transactions depending upon market than operations, our primary source of.s hort-term cash is from short-conditions. Any open market or private purchases w d. i reduce or term bank loans, unsecured lines of credit and the sale of commercial                                                   .

climinate our need to purchase shares in the prisate placement to paper. At December 31,199h,, we had approximately 5 313 milhon of

                                                                   ,   maintain our ou nership of at least 80%..

short-term debt outstanding, of which 5148 milh.on was commercial paper and 5165 million was bank loans.We hase arrangements with Cash Flows from Financing Activities l certain banks to prmide unsecured short term lines of credit on a in July 1998, w eissued 5 30 million of 6.8% N nior Notes duc July 15, committed basis totaling approximately 5821 million. 2018.The notes are unsecured and unsubordinated obligations of the We have also registered securities for sale with the Securities and company. In July 1998, we Gled a shelf registration for 5800 million in 1:xchangs Commission. As of December 31, 1998, these included senior, unsecured obligations of the company. In August 1998, we 5400 million of unsecured senior notes, 550 mdlion of KGE first issued 5400 million of 6.25% Putable/ Callable Notes due on August ' mortgage bonds and approximately 11 million Western Resources 15,2018, putable/ callable on August 15,2003 under this shelf regis-common shares. tration. Proceeds from these issuances uere used to reduce short-term debt incurred in connection with investments in unregu- ! Our embedded cost of long-term debt was 7.4% at December 31, led opaim 6 adqtion of p ferred securities and other i 1998, a drop of 0.1% from December 31,1997. general corporate purposes. Cash Flows from Operating Activities On April 1,1998, we redeemed our 7.58% Proference Stock due Cash from operations increased significantly from 1997 because of 2007 at a premium, including dividends, for 5 5 3 million. two factors. First, taxes paid of aI, proximately 5345 million on the linancing activities provided Protection One with 5744 million of gain on the sale oi.T)co common stock reduced 1997 operating cash . cash. Protection one raised 5642 million through the ftdlowing new Dow. S.econdly,1998 m.cludes the first full year of. Protection One debt instruments: operations.This increased operating cash now from our monitored hersices busincu by about 590 million from 1997. Mrs m Wel Cash Flows from investing Activities August 17,1998: Senior unsecured 7 3/8% notes due in 2005. $250 Decernber 16,1998: Senior subordmated 81/8% notes due in 2009 . 350 During 1998, most of.our cash used f.or imesting purposes was to Decernber,1998. Bonowmgs under a revolvmg credit facility . 42 continue the growth of our monitored services business.We used net cash of about 5827 million to expand this business through acquisi- g S 4o

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

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

542 million.The facility matures in December 2001. Future Cash Requirements Among other restrictions, Protection One is required under the We behese that internally generated funds and new and existm '

                                                                                                              .                                                                                               i revolving credit facility to maintain a ratm ofcarnings bel. ore mterest,                                                                                    .

credit ag'reements will be suth,cient to meet our o ieratm and ca u.tal taxes, depreciation and amortization (EllrI.DA) to mterest ex >ense of not less than 2.75 to one and total debt cannot be greater than 5 times expenditure requirements, debt service and dividend iayments , annualv.ed most recent quarter ElllTDA for 1999 and 4.5 times through the year 2001. Uncertainties alTectm our ability to meet these requirements with internally generated funds m.clude the effect thercafter. In addition, in light of the restatement of its h,nancial statements, Protectm.n One has obtamed a bank waiver for >rior of competition and inflation on operating expenses, sales solume, regulatory actions, compliance with future emironmental regula-representations concerning its h,nancial statements. , i

tions, availability of carnings to pay dividends, the availability of.

Protection One also raised 5406 million in eggtgate proceeds gen (rating units and weather.The amount of these requirements and I through the sale of commt mck.We paid approximately 5357 niillion our ability to fund them will also be significantly impacted by the l I of the total amount raised; therefore, the proceeds net of applicable pending combination of our electric utility operations with KCPL. fees obtained from the sale ofcommon stock approximated 546 milhon. . In order to meet the needs of our electric utility customers, we plan Protection One used proceeds from these financing transactions to install three new combustion turbine generators for use as peaking primarily to fund acquisitions and Dealer Program growth. units.The installed capacity of the three new generators will approxi. Protection One also repaid 5512 million of existing debt, including a mate 300 MW.The first two units are scheduled to be placed in

  $ 395 million intercompany obligation with us.                                                                          operation in 2000 and the third is scheduled to be placed in operation              )

in 2001.We estimate that the project will require 5120 million in C: pit:I Structure capital resources through the completion of the projects in 2001. in Our capital structures at December 31,1998, and 1997 were as fo!;ows: addition, we are planning to return our inactive generation plant in Neosho, Kansas to active service in 1999 at an estimated cost of n98 s 50.7 milhon. Common stock . 37% 45% Preferred and preference stock . 1% 2% On january 4,1999, we and the Empire District Electric Company Wcstern Resources ob ated mandatonly redeemable (Empire) signed a memorandum of understanding that prmides for s ted t ntu e 4% 5% the joint ownership of a 500-megawatt combined cycle generating Long-tcrm debt . 58% 48% unit, which Empire will operate.We estimate that the project will htM . , 100% 100% require 590 million in capital resources and we will <m n 40% of the

generating unit. Construction of the unit is expected to begin in the 3.curity Ratings Standard & Poor,s Ratm s Grou > (S&P), Fitch Investors Service Our business requm , ,ignilkant capital imestment.We currently expect that throt me war 2001, we will need cash mostly for: , (Fitch) and Moody,n Investors S.ervice (Moody,s) are independent credit-rating agencies.These agencies rate our debt securities.These e ongoing utdg t onstruction and maintenance programs designed ratings indicate the agencies' assessment of our ability to pay interest to maintain and improve facilities prmiding electric service. and principal on these securities.These ratings afTect how much we

o Growth within the monitored services, including acquisition of will have to pay as interest on securities we sell to obtain additional customer accounts.

capital.The better the rating, the less interest we will have to pay on the new debt securities we sell. Capital expen htures for 1998 and anticipated capital expenditures for 1999 through 2001 are as follows: At December 31,1998, ratings w ith these agencies were as follows: _ _ _ _. .____ _. . Fossi Nuclear Power Morutored Westem Resources' Westem Resources' Westem Resources' Kansas Gas and Dectnc Generaton Generation Dehvery Semces Ott er Total M age Unsecured Short term Company's Mortgage Rt. tog Agency Bond atmg Debt Ratmg Debt Ratmg Bond Ratmg (DoHars m Thousands) S&P A. BBB A-2 BBB+ 1998 . S 46.400 525.800 578.000 $859.500 547.700 S1.057.400 Fitch . A- BBB+ F-2 A. 1999. 117.900 19.700 90.800 434 400 20.700 683.500 g.s A3 Baal P A3 2000. 149.900 32.200 79.700 355.100 2,300 619.200

 .__                - . . _ - _ _ _ .~ _ _ _                                          _-2__-      .-

2001 109.100 21.200 78.600 373.700 200 582.800 41

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

i I,nrough the year 2003. Protection One is required to retire its .

carmngs. After all ordered electric rate decreases are implemented, j 5500 million resohinao credit faciht} in the vcar 2001. At 1)ccen b. r our rates will range f. rom 73% to 90% of the national ascrage f.or 31,199M,142 million u as outstanding under this facility. retail customers. Ilecause of. these reduced rates, we expect to retain Dividend policy a substant;al part of our current wiume of energy deliseries in a ; competitis e em ironment. Our currently authorized quarterly dis idend Ihr 1999 of 5 3 h, cents per tummon share or 52.14 on an annual basis is paid from our carnings While operating in this competitis e emiromnent may place pressure and remains unt hanged from 1998. Our boani of directorn review n our on our profit margins, common dnidends and credit ratings, ue disidend policy on an annual basis.We expect the next resicw to be expect it to create opportunities. Wholesale and industrial customers maile in January 2(xx). Anmng the factors typically considered in deter- may pursue tugeneration, self-generation, retail uhecling, munici-mining our disidend policy are carnings, cash flow s, capitalisation pali <ation or relocation to other service territories in an attempt ratios, competition and regulatory conditions. In athhtian, we expect to cut their energy costs. Crecht rating agencies are applying more the boani of directors in its next res icw to consider s arious factors such stringent guidelines nhen rating utility companies due to increasing as greater participation in our ihvidend reimestment program, our competition. new. compensation plan that pays senior management part of their annual compensation in stock and our business profile upon We offer comIsctitise electric rates f.or industrial imIirmement projects and economic desclopment projects in an eft. ort to maintain completion of the KCPL merger, and increase electnc load. OTHER INFORMATION To better position oursches for the competitis e energy environment, C:mpetition and Enhanced Business Opportunities we are pursuing a merger with KCPI, we base consummated a strategic allianct with ONI:OK <>ec Note 8) and we hold a controb The linited States electric utility industry is emh ing from a regulated 1 imerm in Pmtection One (see Note 4). monopolistic market to a competitise marketplace.The 1992 I:ncrgy Policy Act began deregulating the electricity in Justry.The Fncrgy in light of competitise deselopments, we are pursuing the fbilowing Policy Act permitted the FLRC to order elect'ric utdities to allow strategicplan: third parties the use of their transmission nystems to sell electric a Maintain a strong core energy business. power to u holesale customers. A wholesale sale is defined as a utilit) a Seek out and pursue business lines that are compatible nith our sclhng electricity to a "mi&lleman" usually a city or its utility com- imestment cnteria and growth strategics; i.e., customer growth , pany, to resell to the ultimate retad customer. As part of the 1992 and monthiv, recurring revenues. KGE merger, we agreed to open acccus of our transmission 53 stem a Pmmow cSw.muketing strategies among our consumer senices for wholesale transactions. I ERC also requires us to prmide businesses. transmission scrsiccs to others under terms comparable to those - ue prmide to oursches.1)uring 1998, wholesale electric sales Year 2000 issue represented approximately 12% of total electric sales, excluding We ac currentiv addressing the effect of theYear 20(K)lssue on infor-

power marketing sales. mation sy stems and operations. We fac c the Year 2(KK) Issue because Various states base taken steps to allow retail customers to purchase many computer systems and applications abbreviate dates by climi-clectric pow er f rom pnn iders other than their local utility company. nating the first two digits of the year, assuming that these tuo digits The Kansas I egidature created a RetailWheelingTask f orce (thcTask are always "19." On January 1,20(X), some computer programs may lurce) in 1997 to study the clTects of a deregulated and competitise incorrectly recognire the date as January 1,1900. Some computer market for electric senices. I egislators, regulators, consumer sy stems and applications may incorrectly process critical information achocates and representatises from the electric industry made up the or may stop proccwing altogether because of the date abbrniation. last f orce. Several bilh w ere intnnluced to the Kamas l egislature in Calculations using dates beyond I)cccmber 31, 1999, may affect the 1998 legidatise session, but none passed, licatings on retail coniputer applications bi fore January 1,2000. u heehng bilh are being held in the 1999 legislature.The outcome of retad u herling legislation in K*nsas remains uncertain. 42

r WE5 FERN RESOURCLS, INC M AN AG E M E NT'S DISC U S SIO N AN D AN ALY SIS El:ctric Utility Operations:We bas e recognized the potential atherse We estimate that total costs to update all of our electric utility oper. effects the Year 2000 Issue couhl have on our utility operations. ating systems ihrYear 2000 readiness, exclutling costs associated w ith in 1996, we establishet' a formal Year 2000 readiness program m WCNOC discussed below, to be approximately $6.5 million, of imestigate and correct these pn>blems in the main computer systems uhi(h $4.2 million represents IT costs and $2.3 million represents of our company. In 1997, we expanded the program to include all non-IT costs. As of Decemba 31,1998, we have expended approxi. business units and departments of our utility operations, using a mately $4.1 million of these costs, of which 5 3.2 million represent common methodology.The Year 2000 issues concerning the Wolf IT costs and 50.9 million represent non IT costs. liased on w hat

 , Creek nuclear operating plant are discussed below,                              we know, we expect to incur the remaining 52.4 million, of which S 1.0 million represents IT costs and 51.4 million represents non-lT The goal of.ouri. car 2000 readiness program is to utentify and assess costs, by the end of 1999.These costs include labor costs li>r both all critical computer programs, computer hardware anti embethled company employees and contract personnel used m. ouri. car 2000
 ,  n- stems potentially atrected by thei. car 2000 date < hange, to repair or program, and non-labor costs for software tools used in our remedia-replace those systems found to be incompatible w ithi. car 2000 dates, and to deselop predetermined actions to be used as contingencies in

t. ion and testing efl. orts, replacement soft w are, replacement hardware, replacement embedded devices, and miscellaneous costs the esent any critical business function fails unexpectedly or is inter-associated with the.ir testing and replacement.

rupted.The program .isdirected

                                 .       by a written pohey which provides the guidance and methodology to the departments and business units             We have identilled the folhming major areas of risk relating to our to follow. Due to varying degrees of exposure of departments and               Year 2000 issue exposure: 1) vendors and suppliers,2) internal plant business units to theYear 2000 issue, some departments and business            controls and systems, 3) telecommunications, including phone units are further along in their readiness efforts than others.                systems and cellular phones,4) large customers, and 5) rail trans.

All departments base completed the awareness, imentory, and [mrtation.We consider vendors and suppliers a risk because of the assessment phases, and has e des cloped their initial contingency plans. lack ofcontrol we bas e over their operations. We are in the process of Most smaller departments and business units hase completed the contacting by letter each s endor or supplier critical to our operations assessment, remediation, and testing phases.The majority of our for information pertaining to theirYear 2000 readiness.We consider current efforts are in the remediation and testing phases. Oserall, our plant controls and sptems a risk due to the complexity, variety, based on manhours as a measure of work elTort, we beliese we are and extent of the embeckled spiems.We consider telecommunica-approximately 74% complete with our readiness efforts, tions a risk because it performs a critical function in a large number of our business processes and plant control functions.We consider large

    'I,be estimatsd trobiress     of our departments and busm.ess umts, I                                                                                                                 .

customers a risk because of the m. iluence their ekttrical usage exclusisc of Protection One and Wolf Creek Nudear O >cratinE I . . patterns base on our electrical generation and distribution systems. Corporation (WCNOC), at December 31, 1998, based on . manhours, is as f<dlows: W.e consider rad. transportation a risk because of our dependence I. or

                                                                                   &hm v of coal used at our coal-fired generating plants.

Percentage Departmenthmess umt compicon The most reasonably likely worst case scenario we anticipate is fossilFuel . 81% the loss or partial interruption of local and long-distance telephone Power Delivery 73% service, the interruption or significant delay to rail service affecting information Technology 76% the coal deliseries to our generating plants, the unscheduled Administratwe 69% shut-down of the Wolf Creek nuclear operating plant, the potential loss ofload from one or more large customers, and the loss of mini-

 . Our Year 2000 readiness program addresses all Information                      mal generating capacity in the region for brief periods of time.

Technology (IT) and non-IT issues u hk h may be impacted by theYear Approximately 62% ofour generating capacity utilizes coal as fuel. 1 2000 issue.We bas e included commercial computer software, indud - w..e are addressing these n.s ks in our contingency plans, and base or ing mainframe, dient/serser, and desktop software; internally . I n ill be implement.mg a number of action plam ma

                                                                                                                                       . ' dvance to mitigate
  .                                                                                                                                                           1 desdoped computer software, including mainf.rame, dient/serser, these and other potential ro. ks. Our contingency plans m. dude and desktop software; computer hardware, m. duding mainframe,                                                                            '

pre-established actions to deal with potential operational impacts. dient/serser, desktop, network, communications, and peripherals; I or example, w c has e installed a company.n ide trunked radio system des ices using embedded computer du.ps, mduding plant equipment,

                                                     .                         . which can be used m. place of. the commercial telecommunications controls, sensors, facihties equipment, heatmg, ventilating, and air                         .

1 sutems, m the esent those systenu are interrupted.We plan to place i condition.mg 0l\,At,) equipment; and relan.onsh.ips uith third party ' m scruce, at reduced output, generating units u hit h w ouhl normally sendors, suppliers, and customers. Our pn gram requires testing as a not be in service to help accommodate load shif.ts that would be method for senfu.nEi t thei. car 2000 readiness of an item. l.ur those caused by a large customer suddenly dropping or signih,cantly reduc-items u hit h are impossible to test, other methods are being used to .. . ing their elecincitv usage, or m the esent of unexpected loss of. some idenu.f) the readiness status, prmided adequate contingency plans are . T of. our generation capacity or generation capacity of others in the established to proside a workaround or backup l.or the item. Our - region. In addition, we generally maintain more than a 30-dy supph Year 2000 readiness clTorts for utility operations were substantially ' of. cual at eat h of our coal-fired generating plants, reducing the effect completed at the end of.1998 except for those items scheduled f,or of. any- temporary mterruption of rail transportation and an nonnat maintenance or upgrade during 1999 ' 43

WESTERN R E S O u R l; t s . I N C . M AN AG E M E NT'S DISC U S SION AND AN ALY SIS unscheduled temporary shut-down of the Wolf Creek nuclear aheduled for September 15,1999, and can be achiesed based on operating plant discussed below, the elTort underway.

                                                                        '  U""*i **"*8'*'"t ""PPort w as found to be aggressive at While all business units and departments base descloped contingency plans to cover essential business functions and anticipated pmsibl'c        Wolf Creek. Management at                        if Creek has dedicated the al nwourns nee            for sunessfu completion of the year 2000 Year 2000-related failure or interruption, these plans are continualh reviewed and updated based on information learned as ourYear 2000           "'achnm pmgram.

readiness clTorts proceed. Since Wolf Creek u as designed during the 1970s and 1980s, most of Cif Creek Nuclear Operating Corporation: WCNOC has been " N "#"II ""' ' " *"I' P"' '4 " P*'"' "# ""I " rninoprocenon. Dunng this time frame, the NRC would not allow evaluating and adjusting all know n date-sensitise systems and equip-ment for Year 2000 compliance. WCNOC is dc[ eloping a plan to cmnponents required for safe shutdown of the plant to contain microprocessors. For these reasons, there is minimalYear 2000 risk . elTect the readiness of the plant for the coming of theYear 2000.This plan is designed to closely parallel the guidance provided by the awiat w hh being able to safely shutd<m n the plant and maintain {

Nuclear Energy Institute and the NRC.WCNOC is partnering with n in a safe shutdown condition. During the years since original sescral industry groups to share information regarding evaluating consnuction, minopmnw based eintmnw components base items that areYear 2000 sensitive. As applications and desices are con- en added in non4afe shutdown applications. Some of these (only tw o identified thus far and no others are anticipated) could shutdown firmed to be Year 2000 non-compliant, business decisions are being made to repair or retire the item. the plant Special attention will be paid to these devices to ensure that there is minimal Year 2000 risk associated with them. On May 11,1998 the NRC issued Generic letter 98 01 entitled

Year 2000 Readiness of Computer S$ stems at Nuclear Pow er Plants" In t original sign and through plant modifications, microproces-This letter expressed the NRC's expectations with regard to Year sor based components were installed in plant monitoring applications 2000 readiness.The letter also requires the licensee to file itsYear such as the radiation monitoring equipment and the plant informa-2000 plan and status report no later than July 1,1999, tion computer. similarly, in the area of non plant operation computers and applications,WCNOC has sesera: items which will WCNOC is deseloping contingency plans to address risk associated require remediation.There is a possibility that these desices could with Year 2000 issues. These plans generally follow the guidance cause a Year 2000 problem. Failure to adequately remediate any contained in NUCLEAR ENERGY INSTITUTE / NUCLEAR Year 2000 prohk ms could require the plant's operations be limited UTILITY SOFTWA RE MANAGEMENT GROUP 98-07, or shutdown.

NUCLEAR UTILITY READINESS CONTINGENCY PLANNING. The steps to be taken inmlic the determination of which items WCNOC estimates that the most reasonably likely worst case present a critical ri k to the facility, review of the identitled risks, sanario would be a temporary plant shutdown due to external determining mitigation strategies, ahd ensuring that each responsible dwakal grid disturbances.While these disturbances may result organintion des elops appropriate contingency plans. in a tnnporary shutdown, the safety of the plant will not be compro-mised and the unit should mtart shortly after the grid disturbance In order to assess the licensees progress in preparing forYear 2000, has been corrected. the NRC scheduled audits at sarious nuclear power plant facilities e ta below sets forth estimates of the status of the components during 1998 and carh 1999. One of these auoits was conducted at

of WCNOC'sYear 2000 readiness program at December 31,1998. WCNOC during the month of Nmember 1998.The findings of this audit were as followo Estimatea Completion Percentage a o The NEl/NUSMG 97-07 guidance is being followed.The Wolf Phase Date ComNetion Creek licenser has not identified any systems needed for safe identification and assessment of plant components Mar 99 89% shutdown as havingYear 2000 problems. loentification and assessment of computers / software (Note 1) . Jun 99 64% o Wolf Creek is making use of its existing quahts assurance and Identification and assessment of other areas (Note 2) . Jun 99 47% mmhfication IroErams and imcedures I to achieseYear 2000 readi. identified remediations complete (Note 3) . Sep 99 31% ness. Furthermore, Wolf Creek is engaged in extensis e inf,ormation Comprehenswe testmg gudeknes 100% sharing and interfaces w ith other entities onYear 20001ssues. Comprehenswe testmg (Note 4) . Jun 99 13% o The need forYear 2000 contingency planning is understomi by the Contingency planning gmdehnes . 100% Wolf Creek licensee and in keeping uith the NEl/NUSMG 98-07 Cmt.ngency plann ng mdandial plans . Mar 99 15% recommendation, one indisidual has been designated as the single Note 1 - Several computers are on three year lease and will not be obtained untd 1999. point of contact for contingency planning. Note 2 - includes items such as measunngMest and telecommumcations eumpment. O Wolf Creek is at the detailed assessment phase except for the items Note 3 - Two major modihcations are currently scheduled to be completed after June 1999. the remaining remediations are presently scheduled for completion onor to of minimal si Enificance desi Snated as Limited use Databases ami July 1999, spreadsheets, which come under the category of 1.imited Note 4 - Several tests wm not be performed until remediations are complete. Use liardware/ Software. Year 2000 readiness for Wolf Creek is 44

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

with third-partv sendors and suppliers started earlier. Many remediations uill be completed before the end of the assessment ; criod. In addition, WCNOC is communicating liased on the results of its on going res iew s, Protection One belieses with others nith which its systems interface or on uhich thev relv

                                 ~                                              '

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

I W L t, "f E R N PtSOURCE5. INC. l M AN AG E M E N T'S DISCUSSION AND AN ALY SIS l of an energy comm<xlity, options, swaps u hich rc<iuire payments (or Investment Portfolio:We have approx:mately s288 million of ecjuity receipt of payments) from counterparties based on the differential and debt securities as of December ll,1998.We do not hedge these between specified prices for the celated commodity, and futures imestments and are exposed to the risa of changing market prices. traded on clectricity and natural gas. We classify these securities as "asailable for sale" for accounting purposes and mark them to market on the balane sheet at the end of w.e are mvohed m. trading actisities primarily to minimite risk f.rom each period, lloweser, net income is not affected until the securities market fluctuations, to maintain a market presence and to enhance . are sohl. Management estimates that its im estments w d. l generally be system nhabihtv. Althoub>h we attemIit to balance our fihssical and consistent with trends and mmements of the merall stock market imancial purt hase and sale contracts in terms of. (;uantities and " contract terms, net open positions can exist or are established due to harring any unusual situations. An irnmediate lO?o. change in the market price of our egm.t) securities wouhl hase a $ 11 million elTect the origination of. new transactions and our assessment of.,and : . . . on other comprehensn.e incoine. The salue of.t he debt securitics m resjn,nse to, changing market conditmns. Io the extent we hase an . .

                                             .                            Our portlidio changes im ersely with fluctuatiens in interest rates.

open position, we are exposed to the risk that fluctuating market 1 prices may adversely impact our financial position or results from Interest Rate Exposure: We have approximately $602 million of operations. sariable rate debt, including current maturities ofIIxed rate debt, as of December 11,1998. A 100 basis pomt change in each debt series We manane 6 and measure the exImsure of.our tradinE lsortfoh.o usmbibenclunark rate wouhl impact net income on an anned basis by a varianec/cmariance salue.at-risk (VAR) model, which simulates approximately 55 million. forward price curses in the energy markets to estunate the site of future Imtential losses. The quantification of market risk using VAR Merger Agreement with Kansas City Power & Light Company methodologies prmides a consistent measure of risk across diserse l On February 7,1997, we signed a merger agreement uith KCPL by energy markets ami products. T he use of tlas methoil requires a which KCPl. wouhl be merged with and into the company in number of key assumptions including the selection of a confidence ext hange for company sto< k. In December 1997, representatids of les el for losses and the estimated hohhng period. our financial achisor indicated that they beliesed it was unhkely that We expressVAR as a ymtential dollar loss based on a 95% conndence they would be in a position to issue a fairness opinion required for the lesel using a one-day hohling perioi As of December 31,1998, our merger on the basis of the previously announced terms. VAR (unaudited) for our trading activities was approximately s100,000 Our Risk Oversight Conunittee sets the VAR hmit. We On March 18, 1998, we and KCPL agreed to a r(strneturing of our February 7,1997, merger agreement which will resu! m. the employ additional risk control methanisms such as stress testing, f ion of Westar I:nergy, a new electric company. Under the daily loss limits, and commmhty position limits. terms of the merger agreement, our electric utihty operations uill be We base considered a number of risks and costs associated uith the transferred to KGl , and KCPl. and KGE w dl be merged into NKC, future contractual commitments in(luded in our energy portfolio, Inc., a subsidiary of the company. NKC, Inc. will be renamed Westar including credit risks associated with the financial condition of Energy. In addition, under the terms of the merger agreement, KCPL counterparties, product location (basis) difTerentials and other risks sharehohlers u ill receive company common stoc k w hic h is subject to u hich management policy dictates.The counterparties in our por trolio a collar mechanism of not less than A19 nor greater than .722, pro-consist primarily oflarge energs market-s and major utility compa. sided the amount of company common sto(k recrised may not nies. The creditworthiness of our counterparties (ould impact our exceed $ 30.00, and one share of Westar i ncrgy common stoc k per morall exposure to credit risk, either positisely or negatisely. KCPl. share.The htern Resouri cs index Pri< c is the 20 day as erage l h m ever, w e maintain crecht policies w ith regard to nur munterparties of the high and lou sale prices fi>r company common stot L on the . that in our management's view minimi/c overall credit risk. New Erk Stock Exchange ending ten days prior to (losing. If the Western Resources index Price is less than or equal to 529.78 on the We are also exposed to commodity price changes outside of trading hfth da prior to the efTectise date of the combination, either party activities. We use derisatises for non-trathng purposes primarily to

may terminate the at'reement. Upon consummation of the combina-reduce expmure relatise to the mlatility of cash market prices. Gisen the amount of p<mer purthased for utility operations during 1998, tid will a n himximately 80.l*6 of the outstanding equits of htar I nergy and KCPI sharehohlers will own approximately we nouhl base had exposure of approximately $5 million of operat- ~

19.9"o. As part of the combination,htar i nergy will assume all of ing income for a 10% increase in price per MW of electricity Based the Flectric utihty related assets and liabilities of htern Resources, upon mmbtu's of natural gas and fuel oil burned during 1998, w e had KCPL and KGI . exposure of approximately $4 milhon of operating income for a 10% ( hange in ascrage price paid per mmbtu. Quantities of natural gas and htar I nergy wdl assume 52.7 bdlion in debt, consisting of 51.9 billion clectricity could sary dramatically year in ycar based on weather, unit of indebtedness for borrowed money of Eter n Resources and outages and nuclear refueling. KGE, and $800 million of debt of KCPL long-term debt of the company, culuding Protection One, was 52.5 billion at 46

1 l w t sit e n nisouncts.inc I M AN AG E M E NT'S DISCUSSION AN D AN ALY SIS

 !)cccmber 31,1998. Linder the terms of the merger agreement,                 Affordable Housing Tax Credit Program it is intended that we will be released from our obligations with            in 1997, we receised authorization from the KCC to imest up to respect to our debt to be assumed by Westar Lnergy.                          $ j j 4 million in AlITC imestments. An example of an AlITC pnin t Pursuant to the merger agreement, we base agreed, among other                is housing for residents who are eldctly or meet certain income things, to call for redemption all outstanding shares of our 4 'Maries       n quinsnents. At Dannba 31,1998, we had imested approxi.

mately $65 million to punhase limited partnership interests.We are Preferred Stock, par salue $100 per share,4 '/,% Series Preferred conunitted to imesting approximately 525 million more in AllTC Stml, par salue $100 per share, and 5% Series Preferred Simk, par = imestments by April 1,2001.These investments are accounted for salue 5100 per share. - using the equity metlul of accounting, llased upon an order received Consummation of the merger is subject to customary conditions, from the KCC, income generated from the AllTC in esiments, On July 30,1998, our sharehoklers anil the sharclu.hlers of KCPL voted primarily tax credits, will be used to of fset costs associated uith to appios e the amef uled merger agreement at special meetings of share. postretirement and lmstemployment benefits olli red to our employees. holders.We estimate the transaction to close in 1999, subject to receipt of all necessary appnnals from regulatory and genernment agencies. PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE in testimony filed in Februars 1999, the ); CC staff recommended the in June 1998, the Iinancial Accounting Standards lloard issued

merger be apprmnl but with condaions which we beliese wouhl Statenient of financial Accounting Standards No.13 3," Accounting make the merger uneconomical.The metger agreement allows us to for Derisative instruments and liedging Actisitics" (Si AS 13 3). terminate the agreement if regulatory appnnals are not acceptable. This statement establishes accounting and reporting standards The KCC is under no ohhgation to accept the KCC stair recommen-

                                                                              '"luiring that esery denvatne mstrument, mcluding certain daisatise instruments embnkled in other contracts, be reconled in dation. In addition, legislation has been proposed in Kansas that couhl impact the transaction.We do not anticipate the proposed legislation         the balance sheet as either an asset or liabihty measured at its fair to pass in its current fi>rm.We are not ab!< ta predict u hether any of      '31"' SIAS I 3 3 '"luires that changes in the derivatisc's fair salue be these initiatises will be adopted or their impact on the transaction,        nwgnized currently in carnings unless specific hedge accounting w hich could be material.                                                    criteria are met. Special accounting for quahfying hedges allows a derisatise's gains and losses to ofTset related results on the hedged on August 7,1998, we and KCPL filed an amendn: application                   item in the income statement, and requires that a company must with thc I l itC to appnne the Western hesources/ KCPL merger and            formally document, designate and assess the effectiseness of the formation of Westar i nergy.                                             transactions that reccise hnige accounting. SI AS 133 is effictive li>r fiI } cars beginning after June 15,1999. SI AS 13 3 cannot be We have reccis ed procedural u hedule orders in Kansas and Missouri.

These schedules indicate hearing dates beginning May 3,1999, in "PPU "I "'"'actisely. SI AS 13 3 must be apphed to (a) derisatise Kansas and July 26,1999,in Missouri. instruments and (b) certain derisatise instruments embedded in by brid contracts that w cre issued, acquired, or substantin ly modified in Icbruary 1999, KCPL aihised us that its llawthorne generating sta- after December 31, 1997, and, at the company's election, before tion (a 479 MW coal facihty) suflired material damage to its boiler January 1,1998.The company will adopt SFAS 133 no later than w hich muhl pres ent the unit's operation for an extended period.We are January I,2000. Management is presently esaluating the impact that not able to ascertain at this time the impact of this matter on the merger. adoption of SFAS 133 will hase on the companfs financial position

.and results of operations. Adoption of Si AS 133, hcmever, could K t,i,i is a puhh.c utility wmpany engaged m. the generation, transmission, distribution, and sahi of electricity to customers in increase mlatihty in earnings and other comprehensive income, western Missouri and castern Kansas.We, KCPL and KGE hase joint in December 1998, the Emerging h*uesTask Force reathed consen- l interests in certain electric generating assets, including Wolf Crcok. Sus on issue No. 98- 10," Accounting f or Contract s im ohed in Energy Ior additional information, see Note 21. Following the (losing of Trading and 11isk Management Actisitics"(IITF lssue 98-10).1.lTI-the combination, Westar i nergy is expected to hase approximately issue 98 10 is effectise for fiscal ycars beginning after December 15, one million electric utility customers in Kansas and Missouri, 1998.1.lTF issue 98-10 requires energy trading contracts to be appnaimately 58.2 billion in assets and the ability to generate almost reconini at fair value on the balance sheet, with the changes in the fair 8,M)0 megan atts of electricity, salue included in carnings.The company will adopt EITI hsue 98-10 during 1999. Management does not expect the impact of adopting At December 31,1998, we had deferred appnnimately s 14 milh. on related to the K(,Pt transaction. T.hese costs will he m.oluded m. l'ITI Issue 98- 10 to be matcrial to the compam ,s financial position or results of operations.

the determination of. total consideration upon consummation of the tramaction. 47

p I' WESTERN RESOURCES. INC. CONSOLID ATED B AL ANCE SHEETS Dewmber 31, 1998 (Dollars inTimiands) 1997 ; A88ETS RtSTATro 1 CURRENT ASSETS: Cash and cash equivalents . .. . .... ..... .. .. . . ....... $ 16,394 $ 76,608 Accounts receivable (net) ..,, . . ...... .. . . . . . ........ . 222,715 325,043 Inventories and supplies (net) . . . . . .. . . . ... .. . ... . . ,,......... 95.590 86,398

       ' Marketable securities .               .... . ................. . . . . .. ....                                                                . ..             288.077                  75,258 Prepaid expenses and other - ...                      .       ..        ...........                       .... ..                 ..         . ..                 57,225                25,483
            - Total Current Assets . . .             .         ...         ....                    .....,....... .                            , ,.....                                          588,790

683 001 1 PROPERTY, PLANT AND EQUIPMENT (NET) . ..... . . .. . . .,,, . 3.795,143 3,786,528 OTHER ASSETS:

Investment in ONEOK . . . . .... .. . . .. .. . .. ......... 615.094 596,206 1 Customer accounts (net) . . . . . .... . ......... . ....... . ... 1,014,428 541,146 Goodwill (net) . . . . .. .. ... .. . ...... ... ... . ... .. .. 1,188.253 844,759 Regulatory assets . . ....... .. . ,, ..... ... . . .... . .. . .. 364,213 380,421 Other . . . . . . . . . . . . . .. ..... ... ........ . . ..... 294.296 221,700 Total other Assets . .. . . .. . . . ...... . ..... ...... _ 3,476.284 2,584,232 TOTAL ASSETS . . ....... . . . . .. ..... . . .,,. ,,.. . $ 7,951,428 $ 6,959,550 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities oflong term debt . . . . ...... ...... .. ... ..,,..... $ 165.838 $ 21,217 Short-term debt . . . . . ... . . .. ..... .... . . .....,... ..... 312,472 236,500 Accounts payable . .. . .. ....... ..... .. . .. ....... ..... . 127,834 151,166

      ' Accrued liabilities '. . . . . . . . . .        . ....                . . . . .                                    . . . . . ...... ...                         252,367                222,410 Accrued inmme taxes               ..... ...    ..                  ,,. .. .                   ...         ..... . .                  ..... .                       32,942                27,360 Deferred security revenues . .. .                     . ......                      , . . ,                    ..... ,,, .... ..                                   57,703                33,900 Other . . .     . . , . .       . .       .. ..... .. . .                              ,,...... . ...............                                                  85.690                47,737
           ' Total Current Liabilities          ... . ........ . .. .... .                                             .        ......                .....          1,034.846                 740,290 LO%G. TERM LIABILITIES:

Long-term debt (net) .. ... .. ... .. .. .. ., , , ...... . ..... 3,063.064 2,188,034 Western Resources obligated mandatorily redeemable preferred securities - of subsidiary trusts holding solely company subordinated debentures . . . ......... 220.000 220,000 Deferred income taxes and investment tax credits . ...,. , .......... ... .. 938,659 1,069,907 Minority interests . . . . .......... . ....... .. ... ... .. . . 205,822 165,530 Defened gain from sale-leaseback .. .. ... ,,. .. .. . . .... 209.951 221,779 Other . . . , ,,i... . . .. ...., .. . . ... .... ... 316,245 259,521 Total long-Term Liabilities . ..... ... ... .. ... ... . . 4,953,741 4,124,771 C0%MITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Cumulative preferred and preference stock . . . . , ,. ...... . 24,858 74,858 Common stock, par value $5 per share, authorized 85,000,000 shares, outstanding 65,909,442 and 65,409,603 shares, respectively , . .. . .. . ... . .. 329,548 327,048 Paid-in capital . . . . . . . . . .. ...... ... . . . .. . .. . 775,337 760,553 Retained carnings . . . .... .. . . . . . . . . ... 823.590 919,911 Accumulated other comprehensive income . .. . . ... .. .. _ 9.504 12,119 Total Shareholders' Equity . . ... . ...... .. . ... . . . . 1.962,841 2,094,489 TOTAL LIABILITIES & SHAREHOLDER $' EQUITY . . .. . .., . $ 7,951,428 $ 6,959,550

                                                                                                                                                                       - - . = = = = = - =

l 1 Tlte Notes tu Consolulated Finaiu sal Statements air an intcpall urt of this statement. I 4P

Y

WESTERN RESOURCES, INC. CONSOLID ATED STATEMENTS OF INCOME Year Ended Decendier it. (Dollars inThousanda, Encept l'ir Share Amounts) 1998 1997 1996

  $ ALES:                                                                                                                                                               10 STATI D Energy      . .           .           ... . ..                  .        ...                      ., . .. ...                            $ 1.612,959         $ 1,999,418      5 2,038,281 Security                  . ..... . ......                                      ...            .         . .               .                    421.095            152,347              S,546 Total Sales        .,,,. ..... ....... .                                       .                         .                   .            2.034.054         2,151,765         2,046,827 COST '0F S ALES:

Energy . .,..... . .. . .. . . ....,. ..... 691.468 928,723 879,328 Security . . ,.... ... ...... . . .. . .. .. .. _ 131,791 38,800 3,798 Total Cost of Sales . . . . . . .... . , , .. 823.259 967,523 883,126 GROSS PROilT . ... . . ... ... , .. . . . .. 1,210 795 1,184,242 1,163,701 OPER ATING EXPENSES: Operating and maintenana expense . ...,,. ... . .......,. 337,507 384,313 374,169 Depreciation and amortization ... ..., , ,,. .., , 280,673 256,725 201,331 Selling, general and administrative expense . . ... . , ,. .. . 263,185 316,479 199,448 Write-offinternational development activities . . . .. .. ... .. 98,916 -- - Write-off deferred merger costs . . . . . . .. . . . ... .. ,.

                                                                                                                                                            -              48,008                 -

Monitored services special charge . . . . ,. .. ., ....

                                                                                                                                                            -              24,292                 -

Total Operating Expenses .. . . . . .. ..... . . _ 980,281 1,029,817 775,148 INCOME l' ROM OPERATIONS . . .,, .,,. .. .. ,, _ 230.511 154,425 388,553 OTHER INCOME (EXPENSE): Investment earnings ..., . .. .. ., , .. , 21.739 37,784 20,647 Gain on sale ofTyco securities . . . . . . . . .. .... - 864,253 - Special charges from ADT . . . . ... . ....... . . .. (18,181) Minority interests . ..........., ,.... .. .......... . 382 3,586 - Other . . . .. . ... ....... .. . .... ,, . .. 34,207 16,265 12,841 Total Other income (Expense) . . . . . . .. .... . .. _ 56,328 921,888 15,307 EARNINGS IIEFORE INTEREST ANDTAXES . . ... .. . . ... 286,842 1,076,313 403,860 INTEREST EXPENSE: Interest expense on long term debt . . . . . ... . .. . 170,855 119,972 105,741 Interest expense on short-term debt and other .... .. .. . 55.265 73,836 46,810 Total Interest Expense ........ . .. . ... ..,, , _ 226.120 193,808 152,551 INCOME IlEFORE INCOME TAXES , . . .... ... . 60,722 882,505 251,309 INCOME TAXES . ... . .. ... . . .. . . . ... .,, 14,557 382,987 82,359 NET INCOME liEFORE EXTRAORDIN ARY G AIN , .. .. _ _ 46,165 499,518 168,950 EXTRAORDINARY GAIN, NET OF TAX . . . . 1.591 - -- NET INCOME . .. . . .. . . . .. 47,756 499,518 168.950 PREFERRED AND PREFERENCE DIVIDENDS . . . . . ... ... 3,591 4,919 14,819 FARNINGS AVAILAllLE I OR COMMON STOCK .. .... .. . $ 44,1_65___$ _494,5_99_

                                                                                                                                                                                     $    _154.,=111       1 AVERAGE COMMON SilARES OUTSTANDING                                           ....,                                    ..              ..        65,633,743        65,127,803        63,833,783          !

8ASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING: EARNINGS AVAILABLE FOR COMMON STOCK HFFORE EXTRAORDINARY GAIN . . . $0.65 $7,59 $ 2.41 EXTRAORDINARY GAIN . .. . . . .. . ..

                                                                                                                                            . _ _ _ _        .02                  -                --

EARNINGS AVAILAllLE FOR COMMON STOCK . . .. . $0.67 $7.59 $2.41 DIVIDENDS DECLARED PER COMMON SilARE , , .. $2.14 $ 2.10 $ 2.06 The Notes to Cmw lui.ned hnannal Statements are an integral p,irt of thin statement. Air

WE ST E R N R E SOUR C E S, INC, CONSOLID ATED ST ATE MENTS OF CASH FLOWS Year imicd Demnber 31, (IA,Ilars inThuin, ands) 1898 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: REsTATI D Net inmme . . . .. . .. ... . . . . . , , , $ 47,756 5 499,518 5 168,950 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary gain . . .. .. , ..... , (1,591) - - Depreciation and amortization , .. .. .. . .. . 280,673 256,725 201,331 Equity in earnings from imestments . .. ... ... . (6,064) (25,405) (9,373) (Gain)/ loss on sale of securities . . . .. . . 14,029 (864,253) - Write offinternational derclopment activities . . .. .... 98,916 - -

Write-off deferred merger costs . ... . . ...... . - 48,008 -

Monitored services special charge ..,.... . ... .

                                                                                                                                                   -          24,292                 --

Changes in working capital items (net of cifects from acquisitions): . Accounts receivable (net) . ,,.. . . .. . ... 118.844 14,156 -(47,474) Inventories and supplies (net) . .. ... ...... .. (8,000) 3,249 10,624 Marketable securitics ,,,,,. .. ... ., 6,293 (10,461) - Prepaid expenses and other ... ......... . . . (26,988) 9,230 (14,900) Accounts payable ............. . .. (33.613) (48,298) 15,353 Accrued liabihties . . . .. . . .. ., ,.. . . . (42,411) 68,623 10,26i Accrued income taxes . . . . . . . 5,582 9,869 26,377 Changes in other assets and liabilities .. . .. . .. ., (53,214) (73,810) (98,759) Net cash flim s from (used in) operating activities . . .... .. _ 400,212 (88,557) 262,390 CASH FLOWS USED IN INVESTING ACTIVITIES: Additions to property, plant and equipment (net) . . . .. . . ... (182,885) (207,989) (188,952) Customer account acquisitions . .. .. . , ., , (277,667) (45,163) - Monitored services acquisitions, net of cash acquired . . .. .., (549,196) (438,717) (368,535) Purchase of ADT common stock .. . .. .. ,.. - - (589,362) Proceeds from issuance of stoc k by subsidiary (net) . . ., .. ,. 45,565 - - Purchases of marketable securities , . . . , . ...,,,,.. . . . (261,036) - -- Proceeds from saic of market.4le securities , , ,,.... .. . .. 27,895 1,533,530 - Othe.r investments (net) . . .. ... . .. .... ... (91,451) (45,318) (6,563) Net cash ihm n (used in) from investing actititles . . ... .. (1.288,775) 796,343 (1,153,412) CASH FLOWS FROM FINANCING ACTIVITIES: Short term debt (net) ., ....... ..... . .. , . .. 75,972 (744,240) 777,290 Proceeds oflong term debt. . .. ...... . . . 1,096,238 520,000 225,000 Retirements oflong term debt ... .. . .... ..... .. (167,068) (293,977) (16,135) Issuance of other mandatorily redeemalde securities . . ,. ..... . - - 120.,000 issuance of common stoc k (net) .. . .. ... . .. 17,284 25,042 33,212 Redemption of preference stock .. .. ,, ., . (50,000) - (100.000) Cash dividends paid . ., ,. . .. .. (144.077) (141,727) (147,035) . Net cash flows from (used in) financing activitics . ..... , 828,349 (634,902) 892,332 NETINCREASE IDECREASE)IN CAsil AND CASil EQlllVA1ENTS (60,214) 72,884 1,310 \ CASH AND CASH EQUlVALENTS: lleginning of the period . .. . .. . , .

                                                                                                                                      . _ 76.608                3,724            2.414 End of the period             .   .             .....               .       .. . ...                     .        ...              $       16.394 .

S 76,608 $ 3,724 SUPPLEMENTAL DISCLOSURES OF CASH FLOW lNFORMATION CASH PAID FOR: Interest on fmancing activities (net of amount capitali7ed) . . . . $ 220,848 $ 193,468 $ 170,635 income taxes . . . .... , , ,..... . .. ... 47,196 404,548 66,692 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During 1997, the company contributed the net assets ofits natural gas business totaling approximately 5594 million to ONEOK in exchange for an ownership interest of 45% in ONEOK, I The Lies in Connoh, laird finandal statemenu are an integral l art of thh statrinent. 50

f WESTERN RESOURCES, INC. CONSOLID ATED ST ATEMENTS OF SH AREHOLDERS' EQUITY ikcomin 31. - (Ik!!ars inTimu* ands) 1998 1997 1996

   ' CU ULAfivE PREFERRED AND PREFERENCE STOCK:                                                                                                          RisTATiD fleginning balance , . . . . . -. , , . . , , . . , , , , ... . . ...                                      ......           $     74.858   $      74,858      5    174,858 Redemption of preference stock; , .                    . , , . . . . . . . . .. .                        .       ..

_ (50.000) - (100,(X)0) Ending balance . . . . , ...., ,. .. . . . .. . ... . _ 24,858 74,858 74,858

 ;   C0050N STOCK:                                                          ;

fleginning balance . . .. ..., ,, ,.... , , . ... . 327,048 323,126 314,280

 '        Issuance of common stock , , . . . . . , , , , ,                              ,       . , , ....
                                                                                                                               ... _          2,500           3,922             8,846 Ending balance .        . .,, ,.                  s ,         ,, ..        ,o   . , , ,,,                ,                       329,548        327,048            323,126
 ~* PAID.lN CAPITAL:

fleginning balance . . . . . , , , , , , , . , . . . . . . . , ,.... ,, ., 760,553 739,433 697,962 Expenses on common stock .. . . . . ... , , ..,, , .. - (5) - Issuance of common stock , ,,. , , ., , . , , 14,784 21,125 41,471 Ending balance .. . , , ,.. .. .. . . .. . . . . . .. ... . 775,337 760,553 739,433

    ~ RETAINED E ARNINGS:

lleginning balance , ,, , ... ..,,,.... . . . . ... 919.911 562,121 540,868 Net income . , ., ,,.,,... , , , , , . . . . . , . . . . . .. 47,756 499,518 168,950 Dividends on preferred and preference stock . . . . . . .. .. ,. (3,591) (4,919) (14,839) Dividends on common stock . . . . . , , , , . . . .. .. .,,,. (140,486) (:36,809) (131,611) jusuance of common stock . , , , . . . . . . ,,, (1,247) Ending balance ...... ......,., , . . . , , . . .. .. .. _ 823,590 919,911 562,121 ACCUMULATED OTHER COMPREHENSIVE INCOME: lleginning balance . .. . ; . ...,,,,,,...,, . . . . ...,. . . 12,119 - -- Unrealized (lon) gain on marketable accurities . , , ., , .. ,,. (3,215) 25,248 -- Unrealired loss on currency translation , , . . . . . ... ,, (1,026) - - Income tax benefit (expenne) . ........ , . . . . ...... ,,... 1,630 (13,129) - Ending balance . . . . . . ... .... .... . . . . ........... , 9,508 12,119 ,. Total Shareholders' Equity , . .... . .... . . , , ..,,,,,... $ 1,962._841__5 2,094d89_ $_1,699.5 38 e 1 i I l 4 l Tlw Notes to Cmmolutated hnancul $tatementure an integral part of thin statement, 51 l

WESTERN RESOURCES, I N'C . I CONSOLID ATED STATEMENTS OF COMPREHENSIVE INCOME Year Emled Dncmlier 31, (!bilars inhuun&) 1998 1997 199i. RESTATED . Net income . .. . . . . . . . . . . . . . . . .... ....... .. .... .. ....... . $ 47,756 $ 499,518 5 168,950 Other comprehensive (loss) income, twfore tax: Unrealized holding gains (losses) on marketable securities arising during the year . . . . . . . ... . ................ (17.244) 25,248 - Less: Reclassification adjustment for losses included in net income . . . . . ...., . 14,029 - - Unrealised (loss) gain on marketable semrities (net) . . ...... .... ...., (3,215) 25,248 -

Unrealized loss on currency trandation . . , . .. .. .... ., ..... (1.026) - -

Other comprehensive (loss) income, before tax , . . . . ......,... ... , , .. (4.241) 25,248 - income tax benelit (expense) . . . . . ... ...,...... ......,,.. ..., 1.630 (13,129) - ' Other comprehensive income, net of tax . . . .... ........ . . .. ., ... (2,611) 12.119 - Comprehensive income . . . ..... ........... . ...... . . ...... $ 45.145 $ 511,637 $ 168,950 CONSOLID ATED STATEMENTS OF CUMUL ATIVE ' PREFERRED AND PREFERENCE STOCK Dnendier 31 (Ibtlars tnbuuna) 1998 1997 CU3ULATIVE PREFERRED AND PREFERENCE STOCK: RESTATLD Preferred stock not subject to mandatory redemption, Par salue $100 per share, authorized 600,000 shares,- Outstanding - 41/2% Series, 138,576 shares .... , ... .....,,,,,....... . ......... .. $ 13.858 $ 13,858 41/4% 5eries,60,000 shares . ... .......... ...... .......... ..... .. 6,000' 6,000 5% Series, 50,000 shares ... ........ ......... .... ... . . . . . , . .... 5,000 5,000 24,858 24,858 Preference stock subject to mandatory redemption, Without par value, S 100 stated value, authorized 4,000,000 shares, Outstanding - 7.58% Series, 500,000 shares . . . . . , , , . . . . . . . . ... . .. .. . .. ..... . 50,000 TOTAL CUMLil.ATIVE i' REFERRED AND PREFERENCE STOCK . .. . . ., . ............ $ 24,858 $ '74,858 l I Tlw Notes to um*>hatnl finanEtal hutemenu are an 6ntrFral part of thae stairments. 52 1 __ a

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

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES deferred taxes of s13 million) was included in sharcholders' equity. D:scription of Business: Western Resources,Inc. (the company)is a

                                                                                                                       *PP*N**'"            * ""   *"d *
     ; publicly traded consumer services company.The company's pr mary at of approximately 550onn"n at Dnunber             31,1997.

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

Europe. In addition, through the company's 4 5% owns rship interest during omstruction ( Al UDC).The Al UDC rate was 6.00% in 1998, in ONEOK, Inc. (ONEOK), natural gas transminion and distribu. 5.80% in 1997 and 5.70% in 1996.The cost of additions to utility tion services are provided to approximately 1.4 millior, customers in plant and replacement units of property are capitaliicd. Maintenance

  ,  Oklahoma and Kansas. Rate regulated electric service is pnrzided by        costs and replacement of minor items of property are charged to KPL, a division of the company and Kansas Gas and Electric                expense as incurred.When units ordepreciable pmperty are retired, Cor ny (KGE), a w holly.owne i subsidiary. Monitored services are         they are removed from the plant accounts and the original cost plus prmided by Protection One, Inc. (Protection One), a publicly.             removal charges less sah age value are charged to accumulated depre.

tradn!, approximately 854 owned subsidiary, ciation. hwentories and supplies for the company's utility businen are

                                                                                ****" ""*E""***

Principles of Consolidation: The company prepares its financial statements in conformity with generally accepted accounting princi. In accordance with regulatory decisions made by the Kansas ples.The accompanying umsolidated financial statements include the Corporation Comminion (KCC), the acquisition premium of accounts of Western Resources and its wholly-owned and majority approximately 5801 milhon resulting from the acquisition of KGE in owned subsidiaries. All material intercompany accounts and 1992 is being amortired mer 40 yearm The acquisition premium transactions have been climinated. Common stm k investments that is classified as electric plant in service. Accumulated amortiution are not major ty-owned are acmunted for using the equity method as of December 31,1998 and 1997 totaled 568.0 million and when the company's investment allows it the abihty to exert 547.9 million, respectively. significant influence' Depreciation: Utility plant is depreciated on the straight-line method The company currently applies accounting standards for its rate at rates approved by regulatory authorities. Utility plant is depreci-regulated electric busincu that recognize the enmomic elTects of rate ated on an average annual composite basis using group rates that regulation in accordance with Statement of Financial Accounting approximated 2.88% during 1998,2.89% during 1997 and 2.97% Standards No.' 71," Accounting for the Effens of Certain Types of during 1996. Nonutility property, plant and equipment of approxi-Regulation" (SFAS 71) and, accordingly, has recorded regulatory mately 562 million at December 31, t998, is depreciated on a assets and liabilities w hen required by a regulatory order or w hen it is straight-line basis over the estimated useful lives of the related assets, probable, based on regulatory precedent, that future rates will allow Fuel Costs: The mst of nuclear fuel in pnxvn ofrefinement, conversion, for recovery of a regulatory asset, enrichment and fabrication is recorded as an asset at origmal cost and The 11nancial statements require management to make estimates and is amortiicd to expense based upon the quantity of heat produced for assumptiom that alTect the reported amounts of assets and liabilities, the generation of electricity. The accumulated amortization of to disclose contingent aucts and liabihties at the balance sheet dates nuclear fuel in the reactor at December 31,1998 and 1997, was and to report amounts of revenues and expenses during the reporting 5 39.5 million and $ 20.9 million, respectively. period. Actual resuhs couhl difTer from those estimates. Customer Accounts: Customer accounts are stated at cost.The cost

Ctsh and Cash Equivalents:The company a nsiders highly hquid includes amounts paid to dealers and the estimated fair value of mllateralized debt instruments purchased with a maturity of three accounts acquired in busineu acquisitions. Internal costs incurred in months or len to be cash equivalents. support of acquiring customer accounts are expensed as incurred.
Avril ble-for sale Securities: The company clanifies marketable The cost of cusiomer accounts is amortiicd on a straight line basis equity securities accounted for under the cost methml as available- mer a 10-year period. It is Protection one's policy to evaluate for-sale.These securities are reported at fair value based on quoted acquired customer acmunt 1o% on a quarterly basis utiliiing market prices. Cumulatise unrealized gains and losses, net of the historical lon rates for the customer accounts in total and, w hen nec-related tax effect, are reported as a separate component of share- essary, adjust amortiration over the remaining useful life. The holdes* cquity until realized. Current changes in unrealized gains and Securities and Exchange Commissmn (SI C) stallhas questioned the lones are reported as a componen: of other mmprehensive income. appropriatenen of the current accounting method u hich Protection One believes is consistent with industry practicca. A significant At Decrmber 31, 1998, an unreah.eed gain of s10 milhon (net of.

                                                                          . change m.the amortiution method u ould hLeiv 'have a material etrect deferred taxes of $12 million) was included m. shareholders, ecIuitv.
                                .                                               on the company.a      results of operations l.he accumulated amortira-These securities had a fair value of approximately 5288 million and'a                       -

tmn of customer accounts as of. December 31,1998 and 1997 was cost of approximately 5266 milhon at December 31,1998. At approximately 5117 nullion and 529 milhon, respectisch. December 31, 1997, an unreah.ied gain of $12 m. d lion (net of - 53

WESTERN RESOURCES. INC. NOTE S TO CONSOLID ATED FIN ANCI AL STATEMENTS

),

G2:dwill: Goodwill, which represents the excess of the punhase Sales: Energy sales are recogniecd as sersices are rendered and price over the fair s alue of net assets acquired, is generally amortired indude estimated amounts fier energy delivered but unbilled at the on a straight line basis over 40 years.The accumulated amortization end of each year. Unbilled salca of $ 39 million and 537 milhon are of goodwill as of December 31,1998 and 1997 approximated recorded as a component of accounts receivable (net) on the 5 32 mdlion and 59 million, respectively. Consolidated llalance Sheets at December 31,1998 and 1997, respectively. Security sales are recognized when installation of an R:gulatory Assets and Liabilities: Regulatory assets represent alarm system occurs and w hen monitoring or other security-related 3irobable future revenue asmciated with certain costs that will .- . sertnes are prouded. ' he reemered f. rom customers through the ratemaking pmcess.The company has recorded these regulatory assets in accordance with The company's allowance fi>r doubtful accounts receivable totaled si:AS 71. If the company were required to terminate application of $29.5 million and 58.4 million at December 31,1998 and 1997, that statement Ihr all ofits regulated operations, the company wouhl respecth ely. , base to record the amounts of all regulatory assets and liabilities in income Taxes: Deferred tax assets and liabilities are recognized for its Consolidated Statements of income at that time.The company's temporary dillirences in amounts recorded for financial reporting carnings would be reduced by the total amount in the table bel "i purposes and their respective tax bases. Imestment tax credits net of applicable income taxes. Regulatory assets reflected in the previously deferred are being amortiicd to income over the life of consolidated finaticial staternents are as hdlows: g ,y g, g g gg December 31' 1998 1997 Affordable Housing Tax Credit Program (AHTC):The company has

                                                       ""*""58""          received authorization from the KCC to invest up to 5114 millibn in Recoverable taxes .                                 $205,416    $212.996 AllTC investments. At December 31,1998 and 1997, the mmpany                       '

Debt issuance costs 73.635 75.336 Deferred employee beneht costs , , 36,128 37.875 had imested aEIiroximatelv <. 565 million and $17 million to I urchase Deferredplantcasts , 30.657 AllTC investments m. Im.uted partnerships.The company is com-

                                ,  .        . ,                    30.979 Coalcontract settlement casts                          12,259       16.032 mitted to imenting approximately 525 million more in AllTC Other regulatory assets .                      , ,      6.118        7,203 imestments by April 1,2001.These investments are accounted for Totalregulatory assets .                          $ 364.213   $ 380.421 using the equity method. liased upon an order received from the KCC, income generated from the AllTC investments, primarily tax e Recoverable income taxes: 1(ccoverable income taxes represent            credits, will be used to olTset costs asmciated with postretirement amounts due irom customers for accelerated tax benefits uhich           and postemployment benoits olTered to the company's employees.

hase been previously flowed through to customers and are . . . Risk Management: The company is imolved m. t radm.g activities expected to be recovered in the future as the accelerated tax . . benefits rescrse, primarily to mu. .umric risk f. rom market fluctuations, mainta.ma market presence and to enhance system reliability, in these activities, e Debt issuance costs: Debt reacquisition expenses are amortired the company utiliics a variety o"f financial instruments, including mer the remaining term of the reacquired debt or,if refinanced, foru ard contracts involving cash settlements or physical deinery of the term of the new debt. Debt issuance costs are amortired over an energy commodity, options, maps uhich require payments (or the term of the associated debt, ' receipt of payments) from counterparties based on the dillirential s Deferred employee benefit costs: Deferred employee benellt . between specified prices for the related commodity and futures costs are expected to be recovered from income generated through traded on electricity and natural gas. For the com;$any's trading the company's Alfordable lit usingTax Credit investment program, operation, the company accounts for these transactions at the time of a Deferred plant costs: Disallowances related to the Wolf Creek delivery or settlement, accruing in the interim ooly for net losses as , nuclear generating facility. they become esident on firm purchase commitments. e Coal contract settlement costs:The company deferred costs aeriated with the termination of.certain coal purchase contracts. Cash Surrender Value of Life Insurance:The folkminE amounts relate to corporate-owned life insurance polio.ca (Col.1) are , 4 These costs are being amortiicd mer periods ending in 2002 recorded in other long. term assets on the Consolidated llalance ud 2013. Sheets at December 31: The company expects to recoser all of the abme regulatory assets m 3999 3997 ratch. A return is alkmed on deferred plant costs and coal contract -- settlement costs and approximatelv 553 million of debt issuance Cash surrender value of pohcies . $587.5 $547.7 cost s. ' Borrowings against pohties . (558.5) (524.3) Minority Interests: Minority interests represent the minority CCLt tnet) . $ 29.0 $ 23 4 ' shareholders proportionate share of the shareholders egmty and net ---m - income of Protection One. ] M

l wt571RN RESOURCES. INC. I NOTES TO CONSOLID ATE D FIN ANCI AL STATEMENTS 1 Income is recorded for increases in cash surrender salue and net 2. RESTATEMENT OF 1997 FINANCIAL STATEMENTS death prixreds for approximately 83% of the cash surrender value and 85% of the policy borrowings at December 11,1998. Interest

                                                                              ^"" "I. * # ion             Pnsin on One, an 85 percent ow ned suhsidiary, to restate its 1997 linancial statements, the company has mcurred on amounts borrowed is off. set against policy income.

Income recognized from death proceeds is highly variable f. rom (hosen to restate its 1997 financial statements to conform to the changes adopted by Protection One..I.his restatement resultol f rom period to period. Death benefits recognized as other income approx-imated 513.7 million in 1998, 50.6 in 1997 and 5 5.5 in 1996.The

balance of the policies were acquired to mitigate the cost of postre. e lo expense as incurred, yard signs, including those whith were tirement and postemploy ment benefits, in accordance with an order removed and replaced, following the decision to transition all from the KCC. monitored sersicos operations to the Protection One brand in the fourth quarter of 1997.'Ihe costs of this tard sign change-out

, Na Pronouncements: Effecthe January 1,1998, the company ' had previously been estimated and accrued at December 31,1997. adopted the provisions of Statement of Financial Accounting This adjustment increased prnioush reported net income by Standards No.130," Reporting Comprehensise Income"(SFAS 130). approximatelv 55.7 million and decrl'ased current liabilitics b'v This statement establishes standards for reporting and display of 512.3 million'at December 31,1997. comprehensh e income and its components.

                                                                             , .Ib adjust certain purc hase price allocations, rnerse amounts in June 1998, the financial Accounting Standards lloard issued                which had prniously been accrued to transition new customers Statement of Iinancial Accounting Standards No. I 33,

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

as either an asset or liability measured at its fair salue. SFAS 133 The total elTect of the 1997 rntatement was to increase prnioudv requires that changes in the derivative's fair value be recognized reported net income in 1997 by approximately 55.4 million (50.0'8 currently in < arnings unless specific hedge accounting criteria are per common share) and increase prn iously reported retained carnings met. Speci.1 accounting for qualifying hedges allows a derivative's at I)ccember 31,1997, by the same amount.The restatement did not gains and losses to off. set related results on the hedged item in the impact proiously reportld saln and does not impact the company's income statement, and requires that a company must formally net cash flow. dee Note 22 for the impact of the restatement o' n document, designate, and assess the clTectiseness of transactions that quarterly results for 1998). receise hedge accounting and is effectise for fiscal years beginning after June 15,1999. SFAS I 3 3 cannot be applied retroactisely. SFAS 3. LEGAL PROCEEDINGS I 133 must be applied to (a) derivatise instruments and (b) certain ' I On January 8,1997, Innm atis e ilusinns Systems, I td. (Ills) filed suit deri ative instruments embedded in hsbrid contracts that wcre ) issued, acquired, or substantisch moddicil after December 31,1997 against the company anMntinghouw Liectric Corporation (WI C), and, at the company's election,liefore January 1,1998 The company Westinghouse Security Systems, Inc. s.WSS) and WestSec, Inc.

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

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

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

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

and income taxes.The table assumes acquisitions in 1998 occurred a" to migrate certain monitoring, customer sersice and financial opera-of January 1,1997. The 1997 acquisitions are assumed to have tions to new software and hardware platforms in the first quarter of occurred on January 1,1996. 1998. At December 31,1998, Protection One continued to use cer ,

Yes Ended Decemtier 31. (unaudited) 1998 1997 1996 tain components of this equipment due to unplanned delays Mars c husands, Except Per Share Data) experienced in the implementation of replacement systems.The Sales . $2,175.089 $2.462.849 $2,280,122 remaining equipment is expected to be fully retired in 1999. 133,581 Closure of duplicate facilities: Protection One committed to a plan c s . . 33.556 463264 Eamings per share . to ch>se 38 branch locations in cities with two or more branches and j

                                                 $ 0.51          $ 7.11          $ 2.09 where the customer base did not justify such a large presence. At ecen     er 31, W, aH sud locations were closed.The remaining The unaudited pro forma financial information is not necessarily amount accrued at December 31, 1998, represents obligations for indicative of the results of operations had the entities been combined vacated lease facilities and approximates $1 million.

for the entire period nor do they purport to be indicative of results w hich will be obtained in the future. Severance compensation and benefits: Upon the company's purchase of approximately 82.4% of Protenion One in November In October 1998, Protection One announced an agreement to 1997, the afTected employees wac notitied of their severance package. acquire lifeline Systems, Inc., (lifeline), a leading provider of 24-hour Actual payments approximated the amount accrued. u

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

                                                                           $25 per preferred security plus accrued interest and unpaid

5. RATE MATTERS AND REGULATION dividends. Holders of the securities are entitled to receive distribu-KCC Rate Proceedings: In January 1997, the KCC entered an order tions at an annual rate of 7 f the liquidation pn ference value of reducing electric rates for both KPL and KGE. Significant terms of $25. Distributions are payable quarterly and m substance are tax the order are as follows: dunMe by the company.These distributions are recorded as interest expense. The sole asset of the trust is 5103 mdlion a The company made permanent an interim 58.7 million rate reduc ~

principal amount of 7 Y.% Deferrable Interest Subordinated tion implemented by KGE in May 1996. This reduction was Debentures, Series A duc December 11,2025. elTectise February 1,1997. c The company reduced KGE's annual rates by $ 36 million elTective On July 31,1994 htun Resources Capital 11, a wholly.. owned February 1,1997, trust, of uhich the sole asset is subordinated debentures of the com-o The company reduced KPL's annual rates by 5 to million elTective pany, sohlin a public offering,4.8 million shares of 8 'We Cumulative FebruarI1,1997. 9"^"b I"**" "I""" "" * "b" "" "' "' " * ""' o The company rebated 55 million to all ofits electric customers in The trust interests represented by the preferred securities are

january 1998. dnmable at the option of htern Resources Capital 11, on or after July 31,2001, at 525 per preferred security plus accumulated and a The company reduced KGE's annual rates by an additional 510 million unpaid distributions. Ilolders of the securities are entitled to receive on June I,1998. distributions at an annual rate of 8 %'b of the liquidation preference o The company rebated an additional 55 million to all ofits electric s alue of $25. Distributions are payable quarterly and in substance are customers in January 1999, tax deductible by the company.There distribu'tions are recorded as a The company will reduce KGE's annual rates by an additional nterest expense [The sole asset of the trust is $124 million principal 510 million on June 1,1999, amount of 8 %"b Deferrable Interest Subordinated Debentures, All rate decreases are cumulative. Rebates are one-time e ents and do Series B due July 31,2036. not influence future rates. In addition to the company's obligations under the Subordinated

6. COMMON STOCK, PREFERRED STOCK' Debentures discussed abme, the company has agreed to guarantee, l PREFERENCE STOCK, AND OTHER a mbordinated basis,Iiayment of distributions on the Iireferred MANDATORILY REDEEMABLE SECURITIES securities..These undertakings constitute a full and unconditional guarantee by the company '

of the trust's obligations under the The company's Restated Articles of Incorporation, as amended, prefered se[urities. prmide for 85,000,000 authorized shares of common stock. At December 31,1998,65,909,442 shares were outstanding.

7. LONG TERM DEBT The mmpany has a Direct Stoc k Purchase Plan (DsPP). Shares issued The amount of the company's first mortgage bonds authoriicd by its under the DSPP may be either original issue shares or shares '

Mortge and Deed ofTrust, dated July 1,1939, as supplemented,is . punbased on the open market.The company issued original issue unlimitedJihe amount of KGE's first mortgage bonds authorized by shares under DSPP from January 1,1995 until October 15, 1997* the KGE Mortgage and Deed ofTrust, dated April 1,1940, as supple'- Between Nmember 1,1997 and March 16,1998, shares for DSPP mented,is limited to a maximum of 52 billion. Amounts of additional w cre satisfied on the open market. All other shares have been original bonds uhich may be issued are subject to property, carning's and

issue shares. During 1998, a total of 653,570 shares were issued '

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

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

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

W E S T g at N H E. s o u M C f $ , INC. l l NOTES TO CONSOLID ATED FIN ANCI AL STATEMENTS i l 1.ong-term debt outstandingis as follow n at December 31: Protection One maintains a 5 500 million resob ing credit facihty that 1998 1997 expires in December 2001. Under the terms of this agreement, Protntion One my, at its option, borrow at different market-based _ _ _ _ _ _ __ _ - .~ inwest rates. At December 11, 1998, 542.4 million was borrowed Western Resources First mortgage bond senes: under this facility. 71/4% due 1999 . S 125.000 S 125 000 The senior subordinated discount notes of Protection One contain

                                                                                                    """"#"      "      ' "*""E " "I *' " *                " "" " " '         7 d                                                    i,                 1 000 125,000                           to incur certain indebtedness, make restricted pay ments and merge,        .

81/2% due 2022 . 125.000 7.65% due 2023 . . 100,000 100,000 consohdaic or sell assets. I

525,0b 525 000 The convertible senior subordinated notes of Protection One are

                                                           '~~~~~ ~ ~

Ponation control bond senes: convertible at any time into common stock at a price of 511.19 per . J Vanable due 2032m . . 45,000 45,000 share.The indenture under whith these notes uere issued contains Vanable due 20320 30.500 30.500 cosenants w hich limit Protection One's ability to incur certain 6% due 2033 58.420 58,420 . mdebtedness. 133,920 133.920 KGE Among other restrictions, Protection one is required under the First mortgage bond senes: revolving credit facility to maintain a ratio of earnings before interest, 7.60 % due 2003 135.000 135.000 taxes, depreciation and amortiration (EltlTDA) to interest expensc of 61/2% due 2005 . 65,000 65.000 not less than 2.75 to one and tota: jebt cannot be greater than 5 times 6.20 % due 2006 . 100.000 100 000 annuali7ed most recent quarter ililTDA for 1999 and 4.5 times 1 300.000 300,000 thereafter. In addition,in light of the restatement ofits financial state-

                                                                          ~~               ~

ments, Protection One has obtained a bank waiser for prior Ponution control bond senes: 5.10 % due 2023 . . 13.673 13,757 representations concerning its financial statements. ifanabie due 2027G . 21,940 21,940 7.0 % due 2031 . . 327,500 327,500

8. STRATEGIC ALLIANCE WITH ONEOK, INC.

Vanable due 2032* . 14.500 14,500 Vanable due 20320 10,000 10,000 in Nmember 1997, the company completed its strategic alliance with l 387.613 387.697 ONEOK.The company contributed substantially all ofits regulated l and non. regulated natural gas business to ONEOK in exchange for a 7 unsecu d senior notes due 2004. 370,000 370,000 on ne p intcrest in WK 71/B% unsecured senior notes due 2009. 150.000 150.000 The company's ownership interest in ONEOK is comprised of 6.80% unsecured senior notes due 2018 29.985 approximatcly 3.2 million common shares and approximately , b cYa e 2 , 400.000 - 20.1 million comertible preferred shares, if all the preferred shares j _ _ _ . - une converted, the company would own approximately 45% of _ 99 85 ., 520? ONEOK's common shares presently outstanding.The agreement i Protection 0ne with ONEOK allow s the company to appoint two members to Revolving credit facihty . 42.417 - ONEOG boud of directors.The company accounts for its common l ub rd a e c unt no es du 2003' 53.950 102,500 ownership in accordance with the equity method of accounting. 13.625% unsecured senior subordinated Subsequent to the formation of the strategic alliance, the consoli . discount notes due 2005 . 125.590 171.926 dated energy resenues, related cost of sales and operating expenses 7.375% unsecured senior notes due 2005 250.000 - for the company's natural gas business base been replaced by ' B.125% unsecured senior subordmated 350.000 imestment earnings in ONEOK. notes due 2009 . ...... ...... - - i Customer repurchase agreement. due 1998 . - 69.129 Recourse financing agreements 0 93.541 -

9. SHORT-TERM DEBT Other 2.574 -

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

                                                                                                       ""     #          "                       #S "                "D"I g r de t ue tt one year .                       ]! B )

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

WESTERN REs0URCIS. INC. NOTES TO CONSOLID ATED FIN ANCI AL STATEMENTS In addition, the company has agreements with several banks to Clean Air Act: The company must comply with the provisions of borrow on an uncommitted, as available, basis at money. market rates The Clean Air Act Amendments of 1990 that require a two-phase

  . quoted by the banks.There are no costs, other than interest, for these                       reduction in certain emissions.The company has installed continuous agreements.The company also uses commercial paper to fund its                                  monitoring and reporting equipment to meet the acid rain require-short-term borrowing requirements.                                                            ments.The company does not expect material capital expenditures information regarding the company's short-term borrowings,                                       . lie required to meet Nase H suKur dioxide and nitrogen cornprised of borrowings under the credit agreements, bank hians mide requirements.

. and commercial paper,is as follows: Decommissioning: The company accrues decommissioning costs Duemer 31 n98 n9F over the expected life of the Wolf Creek generating facility.The he accrual is based on estimated unrecovered decommissioning costs . Borrow:ngs outstanding at year end: w hich consider inflation mer the remaining estimated life of the gen. Bank loans .,. ,...,,o.. . . .. $164.700 $161,000 crating facility and are net of expected earnings on amounts Cornrnercialpapernotes o . . . , 147,772 75,500 recovered from customers and deposited in an external trust fund. Total . . o .. .. . ... ,,, $312,472 $236.500 in February 1997, the KCC approsed the 1996 Decommissioning Cost Study. Ilased on the study, the company's share ofWolf Creek's Weighted average mterest rate on decommissioning costs, under the immediate dismantlement NukteNf , . . . 5.94% 6.28% method, is estimated to be approximately 5624 million during the Weighted average short-terrn debt period 2025 through 2033, or approximately $192 million in 1996 outstanding dunng the year , , , , . $529,255 $787,507 dollars.These custs wcre cakulated using an assumed inilation rate of Weighted daily average interest rates dunng the yearlincludmg fees) . 3.6%n er the remaining sersice life from 1996 of 29 years.

                                               .. . , ,                     5.93%          5.93%

Unused hnes of credit supporting cornrnercialpaper notes . $772,850 Decommissioning costs are currently being charged to operating

                                        .  . .            . o      $820.900 expense in accordance with the prior KCC orders. Electric rates charged to customers provide for recovery of these decommissioning

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

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

WESTERN RESOURCES. INC. NOTE S TO C ONSOLID ATE D FIN ANCI AL STATEMENTS compensate the public for valid claims.The Wolf Creek owners At December 31, 1998, the company's natural gas transportation (Owners) have purchased the maximum available private insurance commitments in 1998 dollars under the remaining terms of the of $200 million.The remaining balance is prmided by an assessment contracts was approximately 530.3 million. The natural gas l plan mandated by the Nuclear Regulatory Commission (NRC). transportation contracts prmide firm sersice to the company's gas Linder this plan, the Owners are jointly and sescrally subject to a burning facilities expiring at various times through 2010, retrospective assessment of up to $88.1 million ($41.4 million, company's share) in the esent there is a major nudcar incident 11. INTERNATIONAL POWER DEVELOPMENT ACTIVITIES imoleing any of the nation's licensed reactors.This assessment i' During the fourth quarter of 1998, management decided to exit the < subject to an inflation adjustment based on the Consumer Price Index international power development business.This business had been and applicable premium taxes.There is a limitation of $10 million conducted by the company's wholly owned subsidiary,The Wing (54.7 million, company's share) in retrospectise assessments per Group (Wing).The company auluired Wing in Iebruary 1996 in an , mcident, per year. acc uisition accounted for as a purthase. Wing's principal ollice was The Onners carry decontamination liability, premature decommis- located near llouston, Texas and power desclopment actisities were sioning liability and property damage insurance for Wolf Creek primarily conducted in emerging markets.The company has acquired totaling approximately $2.8 billion (s1.3 billion, company's shareb a 50% interest in a joint venture which has a 49% interest in four This insurance is provided by Nuclear Electric Insurance Limited 55 MW generating facilities in the People's Republic of China.The (NEIL). In the event of an accident, insurance proceeds must first be company also has a 37.50o interest in a 160 MW merchant generating used for reactor stabilization and site decontamination in accordance facility in Colombia, and a 9% interest in a 478 MW power generat. with a plan by the NRC.The company's share of any remaining ing facility in the Republic of Turkey. proceeds can be used for property damage. If an accident at Linbrable economic, political and regulatory deselopments in Wolf Creek exceeds $500 million in property damage and certain emerging markets where development efforts were focused decontamination expenses and the decision is made to decommission l required management to reexamine this business. In exiting this the plant, the company's share of any remaining proceeds can be used business, management has decided to discontinue existing develop-to make up a shortfall in the decommissioning trust fund. ment cfTorts and cease future development activity.The company The Ow ners also carry additional insurance w ith NEIL to cm cr costs had been spending approximately S10 million annually to fund of replacement power and other extra expenses incurred during a desclopment efTorts. prolonged outage resuhing from accidental property damage at \\idf Tk company w as required to record a t harge to income as a result of l Creek. Iflosses incurred at any of the nuclear plants in ured under the exit ng this l$usiness.The charge to earnings has been presented as a NEIL policies exceed premiums, rescrs es and other NEIL resources, separaic line item as a component of operating expenses in the the company may be hject to retrospective assessments under the accompaming Consolidated Statements of Income. The detailed

current policies of approximately $7 million per year. components of this charge are as follows:

                                                                                     ~                                             ~

Although the company maintains various insurance policies to prmide gn,3,, %s,ng omerage for potentiallosses and liabilities resulting from an accident Wntodown equity whestments to far market value . S57.030 or an extended outage, the company's insurance cm crage may not be Accrued exit fees, shutewn ed wance costs . 22.900 j adequate to coser the costs that could result from a catastrophic Deferred development costs associated vJh protects to be abandoned . o,735 accident or extended outage at Wolf Creek. Any substantial losses Unamortized goodwill associated with the acausition of Wing . 12.251 not cmcred by insurance, to the extent not recmcrable through Totalcharge . $98.916 l rates, would has e a material acherse effect on the company's financial - l condition and results of operations. Overall negatise cronon ic, competitive and political factors, Fu:1 Commitments:To supply a portion of the fuel requirements for together with currently anticipated cash flows, base reduced the its generating plants, the company has entered into sarious commit- value of certain equity imestments presently held. The decline in - ments to obtain nuclear fuel and coal. Some of these contracts contain value of these imestments required management to write down the proviiions for price escalation and minimum purchase commitments. i imestments to fair market salue. Management considers this decline At December 31, 1998, Wolf Creek's nuclear fuel commitments in salue to be other than temporary. In assessing the value, manage. l (company's share) were approximately $6.1 million for uranium ment talked to others with mvestment experience in emerging I concentrates expiring at various times through 2001, 524.9 million markets and applied a discounted cash now analysis to estimate fair l for enrichment expiring at s arious times through 2003 and market value. 560.1 million for fabrication through 202 5. In accordance with the exit plan, the company will discontinue all At December 31,1998, the company's coal contract commitments in desclopment activity on Icbruary 1,1999 and time all Wing of11ces. 1998 dollars under the remaining terms of the contracts were The employees of Wing were notified prior to December 31,1998, approximately $2.3 billion. The largest coal contract expires in of their termination ellectise ichruary 1,1999. Severance costs hase 2020, with the remaining coal contracts expiring at sarious times been accrued for the approximately 30 alTected employees.The com-through 2013. pany's exit plan calb for all significant aspects of the closure to be mmpleted during 1999. l 60

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

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

The mmpany's investments in unconwlidated subsidiaries which are tirement benefits, primarily medical benefit costs, during the years an employee provides service. am>unted for by the equity method are as fiellows: The following tables summarire the status of the company's pension Duneship at Yes [nded investment at December 31, and other postrctirement benellt plans: December 31. December 31. 1998 1998 1997 1998 1997 Pension Benehts Postretrement Benefits

 ,                                                         (Douss m Thousands)                   December 31,                                    1998                  1997                         1998                1997 ONEOK inc.m                              45%       $615,094 5596 206 56.064 51,970                                                                                     (Dours e Thousands)

Affordable Housing Tax Change in Bt ' Obgation: Credit hmited partnerships 0 5% to 30% 89,618 !!,571 - - O' g

 ,                                                                                                          n           ar .               $462.964 $483,862                               $ 83.673 $122.99s internationalcompanies Serece cost                                  7,952                11,337                      1.405              2,102 andjoint venturesG.           37% to 50%          10,500       16.299         -        -

Interest cost 31.278 35.836 5.763 9,098 Other , 32% - 3,312 (672) - Plan participants' contnbutions - - 858 1,122 m The company also received approximately $40 milhon of preferecJ and common dudends Benehts paid . (24,682) (27,764) (5.630) (10,167) m .m98. Refer to Note 8 for further mformation regardmg the company's strategic alliance Assumptionchanges , , 36,268 (19,184) 6.801 - Actuanaliosses ! gams) 10,095 (1.532) (5.351) 4,421 th nvestment I is aggregated. Indmdual mvestments are not significant. Based on an order Plan amendments - 6.866 - - received by the KCC, equity earnmgs from these mvestments are used to offset costs asso-ciated with postretirement and postemployment benefits offered to the company's Curta n nt e e s and Benefit obhgation,

0) Investment is aggregated. Indedual mvestments aca not significant. Dunng 1998, the end of year . $392,057 5462.964 $ 87,519 5 83,673 company recognized a nontemporary decline m value of its foreign equity investments as _ _ . _ _ _ _ - . _ . . . _ _ _ . _ . _ _ . . . . . _ _

discussed m Note 11. Change m Plan Assets: fa v The following summariecd financial infiirmation for the company's e8 ng o ye r $584,792 $496 206 $ 118 $ 78 imestment in ONh0K is presented as of and fiir the period ended Actuai return on plan assets . 66,106 113.235 6 3 Nm ember 30,1998 and 1997, the most recent period for which Employer contnbution . 2,197 2.220 5.679 10.204 public information is as ailable. han participants' contnbutions - - - - Benefits paid . (23.910) (26.869) (5,630) 110.167) November 30, 1998 1997 SettlementsW . (187,654) - - -

                                                                                                                                                                                                                      -            l (Dours m Thousanos)     fair value of plan assets,                                                                                                    j Balance Sheet:                                                                                       end of year .                      $441,531 $584,792                                $ 173 5 118                           -

Current assets . $ 404.358 5 532,681 funded status $ 49.474 $121.828 $(87.346) $ l83.555) Noncunent assets , 2.091,797 1,761,561 Unrecognized net (gainMoss . 0 04,023) 0 93.313) 1.814 (8281 Currentliabdmes . 338.466 443,080 Unrecognized transmon Non<urrent habdities 993.668 729.920 obhgation, net 244 1369) 56.159 60.146 Eauity 1.164.021 1,121.242 Unrecognized pnor Year Ended November 30, service cost . 36.309 39.763 (4.131) (4.592) 1998 1997 Accrued postretirement (Donas m Thousanos) benefit costs $ 117.9%) 5(32,091) S(33.504) S(28.829)

                                                                                                                                                                                     -         ~

locome Statement: Actuanal Assumptions; Revenues . $1.908.713 51.227.335 Discount rate . 6.75 % 7.5% 6.75% 7.5% Operating expenses . 1,767,286 1,134.024 Expected rate of return . 9.0% 9.0 % 9.0% 9.0% Net income 103,525 59.614 Compensation increase rate 4.75% 4 75% 4.75% 4.75% Components of net penodic benefit cost-

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

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

WESTERN RESOURCIS, .NC. NOTES TO CON SOLID ATE D FIN ANCI AL STATEMENTS 1 For measurement purposes, an annual health care cost grow th rate of Stock options and restricted shares under the LTISA plaa are as l 8% was assumed for 1998, decreasing one percent per year to live follows: percent in 2001 and thereafter.The health care cost trend rate has a

'~

significant cliert on the projected benefit obligation. Increasing the DehnE3 1998 199[ ~ kW Weghted Weeghted Weighted trend rate by one percent each year would increac the present value Amage Amage Amage of the accumulated projected benefit obligation by $2.1 million $f Eg,r f Epl s Er and the aggregate of the service and interest cost components by' - ' - - - - Outstanding. 50.2 million. beginning of year . 665 4 S30.282 205 7 $29.250 - S -

In acu>rdance with an order from the KCC, the company has Granted 925.3 40.293 459.7 30.750 205.7 29,250

deferred postretirement and postemployment expenses in excess of _ ] ] ] ] ] actual costs paid. In 1997, the company received authorization from Outstanding.

                                                                                                           ~                           ~                      -

the KCC to invest in AllTC imestments. Income from the AllTC end of year .1.590.7 $36106 665.4 S30.282 205,7 $29.250 investments will be used to ofTset the deferred and incremental costs Werghted-average far value associated with postrctirement and postemployment benefits olTered of options granted dunng to the company's employees.The income generated from the AllTC the year . S 6.55 $ 3.00 5 3.26 imestments replaces the income stream from corporate owned life Sto(k options and restricted shares issued and outstanding at insurance contracts purchased in 1993 and 1992 which was used for 1)ecember 31,1998, are as follows: the same purpose. Weighted weighted Range of Namber Average Aeage S:vings:The company maintains sasings plans in which substantially Enerose issued and Contractual Exerase all employees participate, with the exception of Protection One N umanena wears % employees.The company matches employees' contributions up to Options: specified maximum linuts.The funds of the plans are deposited with 1998 . $38.625 43125 788.800 10.0 S40.581 a trustec and invested at each employee's option in one or more imestment funds, meludinE a comI3any stock fund.The comIiany's fg , 3 ' j [j 3 1'454,200 contributions were 5 3.8 million, 55.0'million and 54.6 million f'or 1998,1997 and 1996, respectively. Restncted shares: 1998 38 625 136.500 4.0 38.625 Protedion One also maintains a savings plan. Contributions, made Totalissued . 1.590.700 at Protection One's election, are allocated among participants = = - based upon the respective contributions made by the participants An equal amount of dividend equisalents is issued to recipients through salary reductions during the year. Protection One's matching contributions may be made m Protectmn One common stock, in of stock options. The weighted-average grant-date fair value of cash or in a combination of both stock and cash. Protection One,s the dividend equivalent was $6.88 and $6.21 in 1998 and 1997, respectively.The value of each dividend equivalent is calculated as a matchinbi contrBetion to the Iilan for 1998 and 1997 was 5992,000 percentage of the accumulated dividends that would hase been paid and 534,000, respectively. or payable on a share of aimpany common stock.This percentage Protection One maintains a qualified employee stock purchase plan ranges from zero to 100%, based upon certain company performance that allows eligible employees to acquire shares of Protection One factors.The dividend equisalents expire after nine years from date common shares at 85% of fair market value of the common stock. of grant. . A total of 650,000 shares of common stock hase been reserved The fair value of 6tock options and dividend equisalents were for issuance in this program, estimated on the date of grant using the Illack-Scholes option-pricing Stick Based Compensation Plans: The company, excluding model.The model assumed the follow ing at 1)cccmber 31: . ,

                                                                         ---                                       ~ ~ - ~ ~

Protection One, has a long-term incentise and share award plan 3993 3997 i (LTISA Plan), which is a stock-based compensation plan.The LTISA y Plan was implemented to help ensure that key employees and board members (Plan Participants) were properly incented to mcrease y 6 6 Risk. free interest rate: shareholder value. Under the LTISA Plan, the company may grant Stock options . 4.87% 6.72% awards in the form of stock options, dividend equisalents, sharc Dnndend equivalentsm. 4 63% 6 36%

                                                                                '                            ^

appreciation rights, restricted shares, restricted share units, perfor- ng,nung an a$rd[,ercentage of 100% and mAe~nia[curnwaEon pe$od of fn$ yea mance shares and performance share units to Plan Participants. Lip to three million shares of common stock may be granted under the LTISA Plan. 62

W 1' 51 i R N RE50VRCES. INc. NOTES TO CON SOLID ATE D FIN ANCI AL STATEMENTS Prit:ction One Stock Warrants and Options: Protection One has The company hohls a call option for an athlitional 2,750,2 38 shares of outstandmg stock uarrants and options uhic h wcre considered Protection one common stoi k, exercisable at a call price of 515.50 reissued and exercisable upon the company's acquisition of per share.The option expires on the earlier of(i) 45 days following Protection One on Nosember 24,1997. The 19971 ong. Term the last date on w hich any Protection One comertible notes are still Incentise Plan (the LTIP), approved by the Protection One stock. outstanding or (ii) Octobcr 31,1999. holders on Nmember 24,1997, prmides for the an ard of incentive The we.ighted average f. air value of options granted during 1998 stoc k options to directors, oth. errs and key employees. Under th. and estimated on the date of grant was 56.87.The fair salue was . ITIP,4.2 million shares are rescrsed fiir issuance subject to such cak ulated using the following assumptions: adjustment as may be necessary to rc0cct changes in the number or Y'8' '"ded 0ecember 31, Linds of shares of common stock or othcr accurities of Protection 1998 One.The LTIP prmides for the granting of options that qualify as Dividend yield 0.00% incentive stos k options under the internal Resenue Code and options Expected stock price volatikty . 61.72% that do not so quahlv. Risk free mterest rate 5.50%

Expected option hfe 6 years 1)uring 1998, Protection One granted options under the LTP to purt haw an aggregate of 1,246,500 shares of common stock to The company accounts for both the company's and Protection One's ! cmploy ees, including 690,000 shares granted to officers of plans under Accounting Principles lloard Opinion No. 25, f Protection One. I ach option has a term of 10 ycars and sests 100% l

                                                                                                                          " Accounting for Stock Issued to Emplm ees7and the related interpre-on the third annitersary of the option grant.The purchase price of the                                                   tations. Ilad compensation expense l$cen determined pursuant to shares issuable pursuant to the options is equal to (or greater than) the                                                Statement of financial Accounting Standards No. I2 3," Accounting fair market s alue of the common stock at the date of the option grant.                                                  for Stock liased Compensation 7the company would base recognierd A summary of warrant and option activity for Protection One from                                                         additional compensation costs during 1998,1997 and 1996 as shown the date of the acquisition transaction is as follows:                                                                   in the table below.

1 Decenter 31, 1998 1997 Year ended December 31. 1998 1997 19 % Weighted Weighted (Dollars m Thousands, Except Per Share Amounts) A age

                                                                                                                 ,$c s,   Earnings avanable for common stock:
                                                                           $#{$

Shares Pnte Shares Pnce As reported $44.165 5494.599 5154.111 Outstanding beginnmg of yearm. 2.3o6.435 5 5.805 2.366.741 SS.805 Granted . 1.246.5# 11.033 - - Eammgs per common share (basic and ddutedh Exercised (109,595) 5.564 (306) 0.050 As reported 50.67 $7.59 S2.41 forfeited . (117.4381 10.770 - - Pro forma 0.65 7 59 2.41 Adjustment to May 1995 warrants . 36.837 - - - Outsteding, end of year . 3k22.739 5 7.494 366.435 55 805 Svit Dollar Life insurance Program:He company has established a split dollar life insurance program fi>r the benefit of the company and W There was no outstanding stock or options pnor to November 24.1997. certain of its executiscs. Under the program, the company has Stm k options and warrants issued and outstanding at I)cccmber 31, purchased a life insurance pohcy on the executis c's life, and, upon the 1998, are as follow *: executive's death, the executise's beneficiary is entitled to a death Rave of Number issued Weighted Average neighted Amage n t n an amount equal to de face amount d tk poky dud . Exemse Prce and outstandmg ]emanng ue tvears) Exercise Pnce by the greater of(i) all premiums paid by the company or (ii) the cash Exerosable: surrender salue of the policy, which amount, at the death of the S 6.375 S 9 125 136.560 6 S 6.588 cxecutise, will be returned to the company.The company retains an 8.000- 10.313 349.000 7 8.062 equity interest in the death benefit and cash surrender salue of the 13.750 15 500 142.000 7 14 883 policy to secure this repay ment obligation. 9.500 217.000 8 9 500 15.000 50.000 8 15 000 Subject to 'he conthtions described below, beginning on the earlier of 14 268 50.000 3 14 268 (i) three years from the date of the policy or (ii) the first day of the 3.633 103.697 2 3.633 next calendar year following the date of the executise's retirement, 0 167 428.400 5 0 167 the executive is allowed to transfer to the company from time to 3 890 786,277 6 3 890 time, in u hole or in Iiart, his interest in the death bendit under the 0 050 305 8 0.05J poh.cv at a discount equal to 51 for ca(h 51.50 of the portion of.

                                              . 63.239 merosa                                                                                                                    the < cath benefit for w hic h the executise officer may designate
  $11033                                     1.120.500                               9                  S11.033            the beneficiary, subject to adjustment based on the total return to 9 500- 12 500                          39.000                               9                    11.942 1.159.500 Total outstanding                           3.422.739 t3

WESTERN RESOURCES, INC. NOTES TO C ON SOLID ATE D FIN ANCI AL STATEMENTS sharehohlers from the date of the policy unless the participant retires The carrying values and estimated fair values of the company's from the osmpany within six months of the date of the participant's financial instruments are as follows: agreement. Any adjustment would result in an exchange of no more ran veue carrrns vsue than one dollar for each dollar of death benefit nor less than one Decenber 31, 1998 1997 1998 1997 dollar for each twu dollars of death benefit.The program has been designed such th-t upon the executive's death the company will "8'5 " D"8"d53 recover its premium payments from the policy and any' amounts paid Decommissioning trust . $ 52,093 $ 43,514 $ 52.093 $ 43.514 a ," by the company to the executise for the transfer of his interest in the , nt es 2,019,103 3.076,709

2.956.692 2.101.167 death benefit.The cash surrender value of these policies has been Redeemable preference recorded in other assets.The insurance premium and the estimated stock - 50,000 - 't,750 n

salue of the executives' agreements have been expensed. The Otp ab cuntes . 220.000 220.000 226.800 226,088 - company has accrued approximately 557 million at December 31, 1998 for this program. Under current tax rules, payments to certain participants m exchange for their interest m. the death benefits may In its commodity price risk management activities, the company, not be fully deductible by the company for income tax purposes; engages in bo6 traeng and non-trading activities. In these activities, the company utilizes a sariety of Imancial instruments, mcluding

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

                                                                                   ** ' "I" I" * "E '" " '*'"" " E " #* ' "'I an energy commodity, options, swaps which require payments (or The following methods and assumptions were used to estimate the                receipt of paymes.ts) from counterparties based on the dJferential fair value of each class of financial instruments for w hich it is practicable between specified prices for the related commodity, and futures to estimate that value as set forth in Statement of Financial                  traded on electricity and natural gas. For a discussion of the accounting Accounting Standards No.107 " Disclosures about Fair Value of                  policy for these instruments, see Note 1.

Financial Instruments" The company is involved in trading activities primarily to minimi7e Cash and cash equhalents, short-term borrowings and sariable-rate risk from market fluctuations, maintain a market presence and to debt are carried at cost which approximates fair salue.The decom- enhance system reliabilitv. Although the company attempts to balance missioning trust is recorded at fair value and is based on the quoted its physical and financial purchase and sale contracts in terms of market prices at December 31,1998 and 1997.The fair salue of quantities and contract terms, net open positions can exist or are fixed-rate debt, redeemable preference stock and other mandatorily established due to the origination of new transactions and the com-redeemable securities is estimated based on quoted market prices pany's assessment of, and response to, changing market conditions. for the same or similar issues or on the current rates ofTered for instruments of the same remaining maturities and redemption * ""Pany uses derivatives for non-trading purposes primarily to provisions.The estimated fair values of contracts related to commodi. reduce exposure relative to the volatility of cash market prices, ties hate been determined using quoted market prices of the same or December 31, 1998 1997 similar securities. National National Volumes Estimated youmes Estimated The recorded amounts of accounts receivable and other current usi ran value ms) rar value financial instruments approximate fair value, IDollars m Thousanos) Forward contracts: The fair salue estimates presented herein are based on information Purchased . 1.535.600 $46,361 359,200 $8,604 available at December 31,1998 and 1997.These fa.r value estimates

Sold . 1.535,600 46.141 359,200 8,806 have not been comprehensively revalued for the purpose of these hnancial statements since that date and current estimates of fair value Purchased . 148.800 $ 361 803.200 $1,607 may differ significantly from the amounts presented herein. liccause 6. Sold . 64.000 195 120.800 512 .

substantial portion of the company's operations are regulated, the company belicses that any gains or losses related to the retirement of furward contracts and options had a net unrealiecd gain of 540,000 at debt or redemption of preferred securitics would not hasc a material December 31, 1998, and a net unrealized loss of $127,000 at effect on the company 's financial position or results of operations. December 31,1997, 64

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

15. GAIN ON SALE OF EQUITY SECURITIES in accordance with various rate orders, the company has not yet i During 1996, the company acquired 27% of the common shares of ected thrmgh rates certain accelerated tax dedactions which ADT Limited, Inc. ( AD T) and made an of fer to acquire the remaining have been passed on to customers. As management belieses it is ADT common shares. ADT rejected this ofter and in July 1997, ADT probable that the net future increases in income taxes payable will be merged with Tyco International Ltd. (Tyco). ADT and Tyco recovered from customers, it has recorded a deferred asset for these completed their merger by exchanging ADT common stock for amounts.These assets also are a temporary diherence for which Tyco common stock. deferred income tax liabilities have been prm ided.

Following the ADT and Tyco merger, the company's equity The efTectise income tax rates set forth below are computed by investment in ADT became an available-for-sale security. During the dividing total federal and state income taxes by the sum of such taxes third quarter of 1997, the company sold itsTyco common shares for and net income.The difTerence between the ofTective tax rates and the approximately $1.5 billion.The company recorded a pre tax gain of federal statutory income tax rates are as follows: 5864 million on the sale and recorded tax expense of approximately Year Ended December 31, 1998 1997 1996 5 345 million in connection with this gain. - Effective incorne tax rate . . 24.0% 43.4% 32.8% Effect of:

16. INCOME TAXES State mcome taxes (4 5) (5.0) (51)

Income tax expense is composed of the following components at Amortization of mvestment tax credits . 10.0 0.8 2.7 Corporateowned hfe msurance pohcies . 15.0 0.9 3.7 j December 31: _._ Accelerated depreciation flow through 1 1998 1997 1996 and amortization. net (2.9) (0.4 ) (0.2) Adjustmerit to tax provision (11.3) (3.7) - marsin TWsaMd g g. Dividends received deduction . 16.0 - - FGderal . State .

                                                   $52,993 10.881
                                                                $336.150 72.143
                                                                                           $54.644 20,280 8 "'E        '           '

y ] D2ferred: Statutory federalincome tax rate . 35.0% 35.0% 35.0% federal . . . (39,067) (15.945) 14,808 State . (4,185) (2,6%) (615) Amortzabon ofinvestment 17. PROPERTY, PLANT AND EQUIPMENT tax credits . . 16.065) (6.665) (6.758) The following is a summary of property, plant and equipment at Total mcome tax expense , $14.557 $82 359 _ $382 987- . - . - - -_ _ _December 31: 1998 1997 linder SFAS 109, temporary difTerences gave rise to deferred tax assets and deferred tax liabilities as follows at December 31: _ s . $5 M 6 $5 M 95 1998 1997 Less-accumulated depreciation . 2.015.880 1.895.084 (Donars o thsaMd 3.630,2 % 3.669,611 Deferred tax assets: Constn.ction work m progress . 77.927 60.006 DefGrred gain on sale-leaseback . $ 92.427 $ 97.634 Nuc%ar fuel (net) . 39.497 40.6 % Secunty business deferred tax assets . 132.802 98,712 Net utikty plant . 3.747,720 3.770,313

               *                                                             .                  .008
                                                                          .                             Non utihty plant m service                                   62.324          20,237 Total deferred tax assets .           ,             $ 363,735                  $ 290.354       Less- accumulated depreciation .                             14.901            4.022
                                                             ===: = =- =                                                                                                    ~

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

                                                                                                                                                                 ===              "'

Accelerated depreciation and other $ 615.492 $ 625.176 The carrying value of long-lived assets, including intangibles, are Cafe re f tore nke taxes . Otbr . 85.987 112.555 reviewed for impairment whenever esents or changes in circum.

                                                             ~ - - ~

stances indicate they may not be recoverable. Total deferred tax habihties . . $1.198,749 $1,250.551

                                                                -C.Z
                                                                  . . .            -2'. 1.C 7 ineestment tax credits .                                  $ 103,645                 $ 109,710 Accumulated deferred mcome taxes, net .                   $ 9bkB                     Sk,069.907 cs

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

18. LEASES 19. SEGMENTS OF 81USINESS At December 31, 1998, the company had leases cmering various in 1998, the company adopted $FAS 131, " Disclosures about property and equipment.The company currently has no significant Segments of an Enterprise and Itclated information."This statement capital leases. requires the company to define and report the company's business Rental Iiayments fi>r operatm leases and estimated rental comnu.t-segments based on how management currentiv culuates its business.

ments are as follows: Mana ement has se mented its business based on differences in products and services, production processes, ana. management Year Ended December 31 asep responsibility liased on this approach, tbc company has identified four reportable segments: fossil generation, nuclear generation, 1996. $ 63.181 E ""' d'ti'#"I *"d """i*"'"d ''i'# 1997. 71.126 1998. Iq,ssil generation, nuclear generation and power delisery represent 70.7 % the three business segments that comprise the company's regulated ( Future Commitments: electric utility business in Kansas. fiassil generation produces power l 1999. R 355 2000. 58.573 for sale to external u holesale customers outside the company's his-2001. . , 55.073 torical marketing territory and internally to the power delivery 2002. . 55.293 segment. Power marketing is a component of the company's fossil 2003. , 57.530 generation segment which attempts to minimize market fluctuation Thereafter 650.893 risk, enhance system reliability and maintain a market presence. l Total . $941.717 Nuclear generation represents the company's 47% ownership in the Wolf Creek nuclear generating facility.This segment does not have in 1987, KGE sold and leased back its 50% undivided interest in the any external sales. The power delivery segment consists of the 1 a b,- gne 2 generating unit.The 1.a L,vgne 2 lease has an m.it. ial term transmission and distribution of power to approximately 620,000 of 29 years, with various options to renew the lease or repurchase the w elesale and retail customers in k.ansas. 50% undisided interest. KGE remains responsible for its share of The company's monitored services was expanded in Nm ember 1997 operation and maintenance costs and other related operating costs of with the acquisition of a majority interest in Protection One. i 1.a Cygne 2. The lease is an operating lease for financial reporting Protection One provides monitored sersices to approximately {' purposes. The company recognized a gain on the sale which was 1.5 million customers in North America, the United Kingdom, and deferred and is being amortiicd m er the initial lease term. Continental Europe. In 1992, the company deferred costs associated with the refinancing Other represents the company's non-utility~ operations and natural

of the secured facility bonds of theTrustee and owner of La Cygne 2. gas business. These msts are being amortired over the life of the lease and are included in operating expense. Approximately 520.3 million of The accounting policies of the segments are substantially the same as this deferral remained on the Consolidated 11 alan (c Sheet at those described in the summary of significant accounting policies. December 31,1998. The company evaluates segment performance based on carnings before interest and taxes. Unusual items, such as charges to income, Future minimum annual lease payments, included in the table abme, may be excluded from segment performance depending on the required under the 1.a Cygne 2 lease agreement are approximately nature of the charge or income.The company's ONEOK investment, 5 34.6 million for each year through 2002,5 39.4 million in 2003, and marketable securities investments and other equity method invest-55 37.2 million mer the remainder of the lease. KGE's lease expense, ments do not represent operating segments of the company.The net of amortization of the deferred gain and refinancing costs, was company has no single external customer from u hich it receives ten . approximately 528.9 million fiar 1998, 527.3 million for 1997, and percent or more ofits revenues. 522.5 million for 1996. u

WESTERN RLsOURCCs.INC NOTE S TO CONSOLID ATED FIN ANCI AL STATEMENTS Year Ended December 31,1998: [hmmatmg/ Fossi Nuclear Power Monitored Reconohng Generation Generation Dekvery Services Other (1) llems a Total (Dohars m Thousands) External sales , S 525.974 $ - $1,085,711 $ 421,095 $ 1,342 $ (68) $2,034,054 Allocated sales , 517,363 117,517 66,492 - - (701,372) - Depreciation and amortization , 53,132 39,583 68.297 117,651 2,010 - 280,673

Earnings before interest and taxes , 144,357 (20,920) 1%,398 56,727 (101,988) 12,268 286.842 int; rest expense , , . 226,120 Earnings before income taxes , , 60,722 Identifiable assets .. , , , 1,360,102 1,121,509 1,788.943 2,511,319 1,269,013 (99.458) 7,951,428 Year Ended December 31,1997:

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

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

20. JOINT OWNERSHIP OF UTILITY PLANTS

Westar Energy will assume 52.7 billion in debt, consisting of company's ownerste at Deumber 31.1998 51.9 biUion ofindebtedness for borrowed money of the company and , KGE, and 5800 million from KCPL. Long-term debt of the company, o$te7 inwstment NpNr NeUMWI Percent excluding Protection One, was 52.5 billion at December 31,1995, m%g and $2.1 billion at December 31,1997. Linder the terms of the La Cygne lla , Jun 1973 $ 162.756 S109,336 343 50 merger agreement, it is intended that the company will be released Jeffrey itbl . Jul1978 297,020 134.054 617 84 from its obligations with respect to the company's debt to be assumed hffrgy 2M . May 1980 292.555 128.210 622 84 by Westar Energy. , Jeffrey 3M , May 1983 405.054 160.671 621 84 Wolf CreekM . Sep 1985 1.377.348 429,934 547 47 ursuant to the merger agreement, the company has agreed, among

18) Jointly owned with KCPL other things, to redeem all outstanding shares of its 4 %% Series pg g ,, pq ; pg g, Ib) jointly owned with UtikCorp United inc.

M omity J owned with KCPL and Kansas Electnc Power Cooperatwe. Inc. SWA value $100 per share, and 5% Series Preferred Stock, par

                                                                                             & M00 p hm Amounts and capacity presented abme represent the company'*

Consummation of the merger is subject to customary conditions. On share.The company's share of operatmg expenses of the plants in July 30,1998, the company's shareholders and the shareholders of service above, as well as such expenses for a 50% undivided interest KdPL voted to approve the amended merger agreement at special in La Cygne 2 (representing 334 MW capacity) sold and leased hack meetings of shareholders.The company estimates the transaction to the company in 1987, are included in operating expenses on the to close in 1999, subject to receipt of all necessary approvals frmn Consolidated Statements of income. The company's share of other regulatory and government agencies. transactions associated w ith the plants is included in the appropriate classification in the company's consolidated financial statements. In testimony filed in February 1999, the KCC stafTrecommended the merger be apprmed but with conditions which we believe would

21. MERGUI AGREEMENT WITH make the merger uneconomical.The merger agreement allows the KANSAS CITY POWER & LIGHT COMPANY company to terminate the agreement if regulatory approvals are not acceptable.The KCC is under no obligation to accept the KCC staff On February 7,1997, the company~ signed a merger agreement with Kansas City Ptmer & L.ight Company (KCPL) by which KCPL would recormnemlation. In addition, legislation has been proposed in be mergeci with and into the company in exchange for company Kansas that could impact the transaction.The company does not stock. In December 1997, representati[es of the company's financial anticipate the proposed legislation to pass in its current form.ne company is not able to predict whether any of these initiatives will be advisor indicated that they believed it was unlikely that they would be adopted or their impact on the transaction, w hich could be material.

in a position to issue a fairness opinion required for the merger on the basis of the previously announced terms. On August 7,1998, the company and KCPL filed an amended appli. cation with the Federal Energy Regulatory Commission (FERC) to On March 18,1998, the company and KCPL agreed to a restructur-

approve the Western Resources /KCPL merger and the formation of ing of their February 7,1997, mcrger agreement which will result

                                                                                                  **  "#'E7' in the formation of htar Energy, a new regulated electric utility company. Under the terms of the merger agreement, the electric                           The company has received procedural schedule orders in Kansas and           ;

utility operations of the company will be transferred to KGE, and Missouri.These schedules indicate hearing dates beginning May 3, KCPL and KGE will be merged into NKC, Inc., a subsidiary of the 1999,in Kansas and July 26,1999,in Missouri, company. NKC, Inc. will be renamed Westar Energy. In addition, KCPL is a public utility company engaged in the generation, trans-under the terms of the merger agreement, KCPL shareholders will ~ mission, distribution, and sale of' electricity to customers in western receise company common stock which is subject to a collar mecha. Miwouri and castern Kansas.The company, KCPL and KGE have nism of not less than .449 nor greater than .722, provided the amount ' joint interests in certain electric generating assets, including i of company mmmon stock received may not exceed $ 30.00, and one g.g ;7gg l Share of Westar Energy common stock per KCPL share.The Western l Resources Index Price is the 20 day average of the high and low At December 31, 1998, the company had deferred approximately sale prices for company common stock on the NYSE ending ten days 514 million related to the KCPL transaction.These costs will be i prior to closing. If the Western Resources Index Price is less than or included in the determination of total consideration upon consum-equal to 529.78 on the fifth day prior to the effectise date mation of the transaction. of the combination, either party may terminate the agreement. For additional information on the Merger Agreement with Kansas Upon consummation of the combir,ation, the company will own Cit y Power & Light Company, see the company's Registration

                                                                                                ~                             ~                     ~

approximatcly 80.1% of the outstanding equity ofWestar Energy and Statement on Form S.4 filed on june 9,1998. KCPL shareholders will own approximately 19.9%. As part of the combination, Westar Energy will assume all of the electric utility related assets and liabilities of the company, KCPL and KGE. 68

l WESTERN REsoVRCfs.INC. i NOTES TO CONSOLID ATED FIN ANCI AL STATEMENTS ~ 1

22. QUARTERLY RESULTS (UNAUDITED)

The amounts in the table are unaudited but, in the opinion of management, contain all adjustmen:. (consisting only of normal recurring adjust-ments) necessary for a fair presentation of the results of such periods.The electric businc.ss of the company is seasonal in nature and, in the opinion of management, comparisons between the quarters of a year do not give a true indication of overall trends and changes in operations. Frst Second Third Fourth (Dollars m Thousands. Except Per Share Arnoums) , 1998 (RESTATED) Sales , $382,343 $463,301

                                                                                                                                                         $701,402          $487,008 income from operationsm                                                                            64,795                        72,314                  156,307           (62,902)

Net incomem, 29,813 31,006 71,422 (84.485) . Zarnings apphcable to common stock . . 28,583 29,209 71,140 (84,767) Basic earnings per share . $ 0.44 5 0.45 $ 1.08 S (1.29) Dnndends per share . S 0.535

                                                                                                                               $ 0.535                   $ 0.535           $ 0.535 Average common shares outstanding .                                                                65,410                        65,543                    65,707            65,870 Common stock pnce:

High , $ 44.188 $ 42.688 $ 41.625 $ 43.250 Low. , S 40.000 $ 36.875 $ 37.688 $ 32.563 1997 (RESTATED) Sales . .. $626,198 $454,006 $559,9% $ 511,565 income from operationsO 103,297 57,498 (116,761) 110.391 fiet income 12,3) 41,033 24.335 508,372 (74.222) Earnings apphcable to common stock . 39,803 23,106 (75,452) 507.142 Basic earnings per share , S 0.61 S 0.36

                                                                                                                                                         $      7.77       S (1.15)

Dividends per share , $ 0.525 $ 0.525 S 0,525 $ 0.525 Average common shares outstanding . 64,807 65,045 65,243 65,408 Common stock pnce: High $ 31.50 $ 32.75 $ 35.00 S 43.438 Low., , S 30 00 S 29.75 S 32.25 $ 33.625 l W The loss m the tourth Quarter of 1998 is pnmardy attnbutable to a $99 mdhon charge to mcome to exit the company's mternational power development business. ' O Dunng the fourth Quarter of 1997, the company expensed deferred costs of approximately $48 mAon associated with the onginal KCPL merger agreement. Protection One recorded a charge to income of approxim-* ?y $24 milhon. (3) Dunng the thud Quarter of 1997, the company recorded a pre-tax gain of approximately $664 mdhon upon selling its Tyco common stock. The summarieed information for the fourth quarter of 1997 and for each quarter in 1998 have been revised to reflect a restatement at Protection One,The restatement expenses yard signs previously capitalized and includes the impact of reversing the accrual for the signage charge pres iously recorded at December 31,1997 (see Note 2).The impact of the adjustments made to the company's previously reported quar-terly results in 1998, net of tax and net of the minority interest is as follows: 1998 . (Dollars m Thouunds) Expense yard signs as incurred . 5 8,312 Increase bad debt provision . 3,090 Other (554) Decrease o netincome . S 10.848 The impact of these adjustments on the quarterly results previously reported is as follows. ( Amounts are net of tax and net of minority interest): Net income Earnmgs Per Sha'e increase (Decrease) Increase (Decrease) (Dollars m Thousands) 1998 Fest Quarter S (655) $ (0.01) Second Quarter . (3.813) (0.05) Third Quarter . (1,343) (0.02) fourth Quarter . , (5.037) (0.08) 1997 Fourth Quarter , S 5,424 S 0.08 n

WESTERN RESOURCES. INC. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF WESTERN RESOURCES, INC.: l We have audited the accompanying consolidated balance sheets includes assessing the accounting principles used and significant and statements of cumulative preferred and preference stock of estimates made by management, as well as evaluating the merall Western Resources, Inc., and subsidiaries as of December 31, financial statement presentation. We believe that our audits 1998 and 1997, and the related consolidated statements of provide a reasonable basis for our opinion. , income, comprehensise income, cash flows, and shareholders' In our opinion, the financial statements referred to above present equity for each of the three years m.the perimi ended December 31, , fairiv, in all material respects, the consolidated financial position 1998.(1997 restated, see Note 2.)These consolidated financial - of Western Resources, Inc., and subsidiaries as of December 31, statements are the responsibility of the company,s management.

                    .                                              1998 and 1997, and the consolidated results of their operations                      j Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
                                                                  ""      " '"       "*" "'"*' " * "*          ""#1"*"I"* *P'^*              "" "

December 31, 1998, in conformity with generally accepted We conducted our audits in accordance with generally accepted accounting principles. auditing standards. Those standards require that we plan and

                            .                                                                                   ARTHllR ANDERSEN LLP perform the audits to obtam reasonable assurance about whether the financial statements are free of material misstatement. An     Kansas City, Missouri audit includes examining, on a test basis, evidence supporting the   January 27,1999 (Lxcept with respect to the matter discussed in Note 2, as to w hit h the date is amounts and disclosures in the financial statements. An audit also   3p,;i r,,3999,3 I

l

                                                                                                                                                      . 1 i

l I j l 70

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

Capacity Capacity @

1998 5,815 6,199 5,807 4,935 22,756 4,201 4.287 5,356 4,960 1997 5,310 5,803 5,714 5,441 22,268 4,016 4,102 5,312 4,984 , 1996 ' 5,265 5,667 5,622 6,013 22,567 3,997 4,077 5,312 4,978 1995 5,088 5,453 5,619 4,120 20,280 3,979 4,004 5,240 4,966 1994 5,003 5,368 5,410 4,005 19,786 3,720 3,730 5,230 4,960 1993 4,960 5,100 5,301 4,628 19,989 3,821 3,827 5,184 4,985 ; 4 Utility Plant l Electric Revenues ($1,000s) Customers (51,000s) l Other Average Groes Wars Reesdental Commercial Industrial & Misc. Total Total Addehons Total 1998 $428,680 $356,610 $257,186 $569,209 $1,611,685 620,183 $158,578 $5,724,103 , 1997 392,751 339,167 254,076 243,999 1,229,993 613,715 159,760 5,624,701 1996 403,588 351,806 262,989 179,050 1,197,433 605,971 138,474 5,516,752 1995 396,025 340,819 268,947 140,104 1.145,895 600,791 179,090 5,415,754 l 1994 388,271 334,059 265,838 133,613 1,121,781 593,859 164,305 5,293,995 l 1993 384,618 319,686 261,898 138,335 1,104,537 585,042 147,556 5,169,915 I m Consol"Jated income Statement data was prepared using tte ' Commercial Enterpnse Format? W Information reflees. 3e sales of the Missoun Properties. O information reflects the Strategic Alhance with ONEOK in November 1997. W Net of off system sales and purchases. l c) Consohdated Income Statement data was prepared usmg the traditional"Utdity Company format' l n

1 l WiSTCRN RESOURCES, INC. DIRECTORS, OFFICER S AND CORPOR ATE INFORM ATION DIRECTORS CORPORATE INFORMATION Irank J. Becker (62) John C. Dieus (65) Jane Drenner Sadaka (44) CORPORATE ADDRESSES Liected 1992 11ected 1990 Liected 1999 President Chairman and Retired Partner Western Resources het ker Investments, Inc. Cluef Execuuve Oiker Kellner, Dileo & Co. 8 I 8 South Kansas Avenue Lawremr, Kansas Capitol federal Savings New Wrk, New brk Epcka, KS 66612-1203 Commuten: Human Anoursa Togwka, Kansas Commnreet Corporare Pubhc Poh7. N"*"" A""""" LouisW Smith (55) www.wstnres.com Elected 1991 C. Q. Chandler (72) Liected 1992 President and Protection One,Inc. . Chairman of the thurd David 11. Hughes (70) Chief Executive Officer Llected 1988 Lwing Marion Kauffman Foundation 600 Corporate Pointe (N'I RUST hnancial Cor[w ration Wicluta, Kamas Retired Vice Chairman Kansas City, Missouri 12th Floor Commurea: Auda und hnam, Haumark Cards,Inc. Commmen: Corporars Pubhc Pohy, Shawnee Mission, Kansas Culver City, CA 90230 767I .

                                                                                         .Nommaring Commmea:Corporare Pubhc Poh      9,                                                wwwprotectionone.com Thomas R. Clesenger (61)                     H"*""     """'#"

Liectro 1975 David C.Wittig (43) ONEOK,Inc. f the Board, 100 West 5th Street Vi h a nsas RussellW. Meyer, jr. (66) C r Communen:Auda and haance, Ilected 1992 President and Chief Executive Officer P.O. Ilox 871 Ne-manng Chairman and Western Resources,Inc. Tulsa, OK 74102-0871 Chief Lxecutive 00icer Topeka, Kansas .

                                                                                                                                          ,g Cessna Aircraft Com[uny Wichita, Kansas Commuten: Auda anJ hnance,                                                         COMMON STOCK LISTING Nommanng Ticker Symbol (NYSE): WR Daily stock table listing:

WstnRes ANNUAL MEETING OFFICERS The annual meeting EXECUTIVE OFFICERS UTILITY OPERATIONS CORPORATE MANAGEMENT of shareholders will be at: 1:30 p.m., David C.Wittig (4 3) 1995' Annette M. Beck (36) 1982 james A. Martin (41) 1983 Wednesday, June 30,1999, at Chairman of the ikurd, Chairman of the 11oard Vke President, investor Relations President and Chief Exenstive Officer and President, KGE and Strategic Planmng k.ansas Expocentre Vice President, Customer Service Maner Conference Center Thomas L. Grennan (46) 1974 Carl A. Ricketts (41) 1982 One Expocentre Drive LxecutivcVkr Preudent, Douglas J. llenry (45) 1977 Vice President, Corporate Topeka, Kansas Llenric Ogwrations Vice President, h>wer Delivery Development Carl M. Koupal, Jr. (45) 1992 DIVIDENDS Anita J.11unt (16) 1989 Executive Vice President and Vkr President, WESTAR COMMUNICATIONS Antici Pated record and Chief Administrative 00icer InformationTechnology lori A. linney (17) 1984 payment dates for 1999 . President dir dends onWestern Resources DouglasT. Lake (48) 1998 Wayne A. Kitchen (48) 1987 E xecutive Vice President and Yke President, common stoc k: Chief fitrategic Ofiker Regulatory and Environmental RECORD i William B. Moore (46) 1978 Inlic D. Morgan (51) 1970 December 9,1998 Lecutive Vice Preudent, Vice President, Generatk n Services March 9 Chief Financial 00ker andTreasurer June 9 Rita A.Sharpe (40) 1977 Ykr President, Shared Services September 9 Richard D.Terrill (44) 19H0 Yin President, Law and Secretary PAYMENT january 4 April I july 1 Octobei I t > gc <4 twna,er n, ma War paned We.tcen Rem,urm or predete or u,mpany I Mr Wmig ,as cleded Charman ni the lhard to surmd John L Hayes, Jr., who reured a Charman eficctm January 27.1999 12

y I WESTERN RESOURCES, INC. SHAREHOLDER INFORM ATION AND ASSISTANCE The Shareholder Services Department is the transfer agent for DIRECT STOCK PURCHASE PLAN htern nesources' common and preferred stock. lt prmides infor- Western Resources ofkrs common shareholders a program to mation and assistance to shareholders, including inquiries regarding purchase adJitional shares of common stock. Options of the Direct lost, stolen or destroyed dividend checks or stock certificates, address Stock Purchase Plan (Plan) include full or partial reinvestment of changes and transfers of htern Resources stock. dividends, optional cash payments, automatic electronic invest. ment, and safekeeping of share certificates. Investors mav become a Dividend payments should reach shareholders on the dividend Western Resources shareholder through the Plan with a minimum

 . , payment date. If a divider d check is not renited within seven days initial investment of $ 250. Im estments are made on the first and the after the payment date, please notify Shareholder Services in writing      fificenth of each month or the first business day thereafter. Funds so that we may stop payment on the original check and reissue your         must be received by Shareholder Services at least three (3) business
    . dividend payment.

I days prior to an imestment date to be included in an investment. Always keep certificates in a safe place. Do not endorse the certifi- Certificate Safekeeping is a convenient feature of the Plan, cates until you are ready to transfer the stock. If a certificate is lost, Safekeeping is designed for investors who prefer to hohl their shares stolen or destroyed, please contact Sharehokler Services immedi- on account rather than receive stock certificates. Shareholders ately.This will assure that an unauthorized person is prevented from enrolled in the Safekeeping program receive a safekeeping receipt transferring your shares. An indemnity bond must be purchased by in place of a certificate. Reinvestment of dividends is not required the shareholder to replace stock certificates.The cost of the bond is to take advantage of Safekeeping. two percent of the current market value of the stock To recesse additional information about the Plan, please contact CONTACTING SHAREHOLDER SERVICES: Telephone: DIRECT DEPOSIT OF DMDENDS Toll. free number: 800-527-2495 Western Resources ofTers, at no charge, the option of direct ha thcTopeka area: 785 575 6394 (FAX 785-575-1796) deposit of dividends. Quarterly dividend payments are deposited Address: directly to your bank account the same day the dividends are paid. , Western Resources Participating shareholders receive a record of the transaction. I Shareholder Services Applicatiom for this service are available from Shareholder Services. P.O. liox 750320 The form must be receised at least 30 days prior to the disidend J Topeka, KS 66675-0320 Payment date. E mail Address: sharsves@wstnres.com DUPLICATE MAILINGS Please include a daytime telephone number in 'vuur correspondence. To eliminate duplicate mailings, possibly because of stock registered in more than one way, please contact Shareholder Services. Western CONTACTING INVESTOR RELATIONS: Resources is required, by law, to create a separate account for each Telephone: 785-575-6549 (FAX 785 575-8160) name when stock is held in similar but difkrent names (e.g. John A. Smith, John Smith, John A. Smith & Mary Smith JTTEN, etc.). Help james A. Martin us reduce mailing and record keeping costs by consolidating 'your Vice President, Investor Relations and Strategic Planning accounts.

   ,           Western Resources -

P.O. llox 889 STOCK TRANSFER AGENTS AND REGISTRARS Topeka, Kansas 66601-0889 PRIMARY TRANSFER AGENT: CO-AGENT: l 3 E-mail Address:investrel@wstnres.com % tern Resources,Inc. Continental Stm kTransfer i Shareholder Services & Trust Company i Cop.ics of the Form 10.K Annual Report to the Secun. . ties and P.O. Ilox 750320 2 Broadway,19 Floor Exchange Commission and other published reports can be obtamed New York,' New York 10004 Topeka, Kansas 66675-0320 1 without charge by contacting Im l h l ddress or by accessing the company;estor Re ations atTelephone: t e a 7ve 800as 527-2495 home page on the mternet at ! i http:/ / www.wstures.com. TRUSTEE FOR BONDS PrincipalTrustee, Paying Agent, and Registrar liarrisTrust and Sasings Bank i 11 West Monroe Street Chicago, Illinois 60603-4003 Call collect 312-461-6838 0 m . ,_ m , w _ ,. ~ .,

e 4d

 .j -

Highlights of the Year adollarn in thousands except per e. hare amountn 6 1998 1997 m Electric operating revenues 938,943 * " * " 3 $ g93,943 Net income $ 120,722 $ 76,560 Earnings available for common $ 116,838 $ 72,771 Average number of shares 61,883,973 61.894.863 Per common share; Earnings g nggi g i,jg, Dividends $ 1.64 $ 1.62 llook value $ g 4,4 3 g 34,39 Year-end stock price $ 29 Y. $ 29 b Iteturn on year-end common equity 339 y; Common dividend payout 87'i 1379 84 80 " 87 "" Utility capital expenditures $ 119,540 $ 124,734 Electric Operating Revenue Electric plant $ 3,576,490 $ 3.502,796 "'"""'""""'d"""" Selected statistics; Itetail megawatt-hour sales 13,441,850 12.689,173 Peak load - summer imm i 3,175 3.044 Peak load - winter imw n 2,117 2.002 Average number of retail customers 447,898 443.038 3 Number of common shareholders 22,070 24.300 3- ,$a t tj c E

~ ~

Capitalization i9 of totab 3 ; Common equity 47'i 43'1 5 Preferred stock 5'i 49 Mandatorily redeemable preferred securities Wi 7% long-term debt' 409 469

  ' Refe< tn $0.20 per ulaux < harges for merger related costs
 ' ReRects $0 59 per share chargen for merger triated costs
 ' bcludes current maturntwa 94 95 W 97                 98' Earnings Per Share & Dividenn
                                                                                                               - Ib'fhtta n $U 22 per nhare rhatge for e e.u of a valuettur) early triirenwrit program Certa,n    i   Forward-Look,ng          i      Inf ormat,on       i                                            wn-u$o m -~he-rorn - - a ma ~ u
                                                                                                               - Ib necia $0 59 ser share for merger rel eted eineta Statements made m this report which are not based on hintoncal facta are forward lookmg and.
                                                                                                               ~
                                                                                                                      **"#'"            ""I"""*" " ' " ' " " ' "

accordmgly, myolve risks and uncertamties that could cause actual results to differ matenally from those dincusaed. Any forward-huskmg statement > are mtended to be an of the date on w hich enth statement in made. In connectmn with the safe harl=ir prousions of the l'rnate Secunties latigatmn Reform Act of 1995. we are providmg the following miportant factors that could caune actual reautta to differ materially from pronded forward-lookmg mformation. These unportant facturn include s ai oiland the proposed Western Renourcen Inc. < Western Resources > merger isee Note 12 of the Consohdated N"'"jf ""* Fmancial Statementai; tb> future economic conditmns m the regional. natmnal and international market; (c) state, federal and foreign regulatmn and poenable additional reductmn* m regulated Nuclear Cual electne rates; dd 6 weather conditionn; sei fmancial market conditmna, meludmg but not hnuted to str. airs changen m interent raten; < ft mflatmn rates; <gi mcreased competition, meludmg, but not hnnted to, the deregulatmn of the l'mted States electne utihty industry. and the entry of new competitorn_ t hi abibty to carry out marketing and sales plann; sil utnhty to achieve generatmn plannmg goal, and the occurrence of unplanned generstmn outagen; W nuclear operatwnm s ki ability to enter new markets successfully and capitahre on growth opportunitien in nonregulated hurmennem <h unforeneen events that would prevent cor*ectmg internal or external information systemn for Year 2000 problems and im i adverne changen in appbcable laws, regulations ir rulen governing emiron-mental s meluding air quahty regulational, tax or accounting matters Than het of factors may not he all melunite smce it in not possible for up to predict all possible factor *- fuel Mix to Total BTU Cenerabot. Coallo kl ser nulkon Htu Nudear $o e ger nulhon litu Ratem neernve $o 77 per nulhon lito

                                                           ))iern's a idtla Xanaah (dy Ut allD{ Ma

Message to SharehoIders To Our Shareholders: and lower than expected revenues. However, KLT Inc.'s prospects for 1999 and beyond We continued to reshape Kansas City Power continue to be very positive.

 & Light Company last year in preparation for the exciting changes taking place in our              KLT Inc 's Energy Senices subsidiary                   ,

industry. We are pleased to report significant recently helped form Nationwide Electric Inc., progress toward our long-tenn financial and an aggregator of electrical contracting and strategic business plans, adding value maintenance companies servicing ) and diversity to your investment, commercial and indu.strial serving customers well, grow. clients. ing our markets efficiently gg and ensuring a successful transition to a competitive lis cu t indusny ciwnga marketplace.

                                                                                 )(CA f a. .1ucus.1[u!!q lu tnhty

7" '" "# ""

Financial results for the year were solid. Earnings in 1998 climbed to $1.89 per Expectations from customers, investors and share, from $1.18 in 1997, primarily due to employees are growing, and we are responding a very successful year in our core electric to those we serve. KCPL capitalizes on oppor-business. Retail sales of electricity were six tunities to better serve cumomers in its mass percent ahead oflast year, w hile retail markets through alliances and other business revenues climbed four percent; revenues were arrangements. These opportunities enhance impacted by a rate reduction for our Kansas customer service by bringing to market the customers. A proposed rate reduction for products and senices our customers want. Missouri customers is scheduled in 1999. In our custom markets, KCPL is meeting and . The economy in our area remains robust, beating the competition ihr energy-related dnving a strong electric-senice market and contracts where choice exists. KCPL creates , growing our customer base at a healthy growth in shareholder value by leveraging rate each year. its resources, products and relationships in these markets. l KLT Inc., one of KCPL's nonregulated subsidiaries, contributed slightly less to Last year was a pivotal year on the merger consolidated earnings than la.st year, due to front. Ily a large majority, shareholders the write-off ofinternational power projects approved the merger proposal to combine the

                                      ]hsu a a Idlls Xanas (dy in au cf as

l ekctric utility assets of KCPL and Western to the Company spanned six decades, and Resources into a new electric utility - Westar we owe him our deepest gratitude. Energy. KCPL shareholders would receive ur people are a critical element in achieving stock in two companies: Western Resources, a

* ""* " ^# * "' " "* P I "J"""

diversified consumer pmducts company with pe inne n an mmpt ry manner through-a strong gmwth profile, and Westar Energy, ou Fa w enh of employees' skills,

a larger ek etric utility poised to compete in ideas and knowledge converged to increase a changing industry. We began the regulatory approval process on state and federal levels in an L. Employees' ongoing work 1998 and hope to complete the merger by the to num computer and system compatibility end of 1999.

for the Year 2000 is just one example of their As the company continues to change the way commitment to company goals. it conducts business, we are also experiencing Awn ry pmpares fbr major changes a natural evolution in management. Bernie in the years ahead, KCPL is helping policy-Beaudoin, fbrmer Executive Vice President m enn ne an appmpriate transition to and CFO, was named KCPL's new President competition. State commissions in Missouri and elected to the Board of Directors effective nd Kansas are studying information on January 1999. Bernie brings to his new adon ga a fmm task ihrees; position a diverse mix of financial and inever, an official timeline under which the administrative experience, both essential to wo a sw mow o deregulate has not continued success in a changing industry, Bernie will be responsible fbr KCPL's internal operations and its transition to Westar We look forward to another challenging year in Energy. He will continue to focus on main. 1999 as we continue t o differentiate ourselves taining the superior operations of KCPL and from other utilities, form promising partner. the successful implementation of our strategic ships for growth and maintain our customer business plans. focus. We appreciate your confidence and u nw m long-term initiatives. Arthur Doyle, fonner KCPL Chainnan of the Board, is retiring from the Board this year after For the Board of Directors, more than 22 years as a Director. Art retired A V __ m

                                                                        " ' " ~ ~

from full-time employment in 1968. His service 2% > a in Xawu C4 in att 4 u

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b Differentiation What makes KCPL so difTerent? It's our customers - residential, commercial and people and the way we treat our customers. industrial - that if our service is not to The diversity of our people is our greatest their satisfaction, we make it right. Our strength. Their many skills, abilities, back- employees are empowered to write out a grounds and levels of experience help KCPL check on the spot if there's a problem. And . to serve its customers in ways other utilities that's a promise. haven't yet imagined. We know that we It's this same kind of thinking that brings need to do more than stand out from the about many new, innovative ideas at KCPL. rest; we need to be outstanding. By thinking difTerently, our employees initi-In 1995, KCPL's Promise Program began ate many forward.looking ideas. KCPL was the rise to higher levels of customer service. one of the first utilities in the country to This program makes a promise to all employ CellNet technology to automate its
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Our emplespcs maLo lhe dif(crems. d Va - . l VEi1CIS CREEN Ot XCM wc wchl haul tv ;ncrids fin higheu ! sect rf notemt > satisfactan r s ws pay le malt il tight
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ML20195C001: Difference between revisions

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ML20195C001: Difference between revisions

Latest revision as of 22:00, 16 December 2020

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