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DRUE JENNINGS
CHAIRMAN OF THE BOARD
[LOGO]
AND PRESIDENT
1201 WALNUT
P.O. BOX 418679
KANSAS CITY, MO 64141-9679
July 5, 1996
Dear Shareholder:
In rejecting Western Resources' merger proposals and reaffirming its support for
KCPL's strategic merger with UtiliCorp, THE KCPL BOARD OF DIRECTORS HAS SOUGHT
TO OBTAIN THE BEST VALUE FOR ALL KCPL SHAREHOLDERS. Your Board has considered
the potential future value of Western's stock -- which is what you would own if
Western were to succeed in its efforts to acquire KCPL -- and the validity of
Western's dividend promises.
KCPL has concluded that Western's projected earnings of a combined Western/KCPL
entity are based on OVERSTATED merger-related savings assumptions and
UNDERSTATED rate reduction assumptions. Based on the factors and the
calculations outlined in this letter, KCPL believes that Western's 1998
projected earnings per share would be approximately $0.32 (or 13%) less than
what Western asserts. KCPL believes that a $0.32 per share earnings shortfall
for Western would have the following effects:
- WESTERN'S PROJECTED DIVIDEND RATE MAY NOT BE SUSTAINABLE, AND
- THERE WOULD BE A NEGATIVE IMPACT ON THE VALUE OF WESTERN'S STOCK IN 1998
EQUALLING APPROXIMATELY $3.68 PER SHARE, WHICH IS DERIVED BY MULTIPLYING
THE $0.32 PER SHARE EARNINGS SHORTFALL BY A PRICE/EARNINGS RATIO OF
11.5.(1)
For these reasons, among others, we strongly urge you to support the
KCPL/UtiliCorp merger by signing, dating and mailing the enclosed WHITE proxy
card today.
WHAT IS WESTERN'S STOCK REALLY WORTH?
OUR CONCLUSION THAT WESTERN HAS OVERSTATED ITS MERGER-RELATED SAVINGS
ASSUMPTIONS AND UNDERSTATED ITS RATE REDUCTION ASSUMPTIONS IS BASED ON THE
FOLLOWING:
- WESTERN FACES SIGNIFICANT RATE REDUCTIONS. We believe that the Kansas
Corporation Commission (KCC) will impose rate reductions on Western far in
excess of the $8.7 million per year over seven years that Western has
proposed. IN FACT, THE STAFF OF THE KCC HAS RECOMMENDED AN IMMEDIATE RATE
REDUCTION OF $105 MILLION PER YEAR, TWELVE TIMES GREATER THAN WESTERN'S
PROPOSAL.
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(1) Utility industry average as calculated in Merrill Lynch report dated June
24, 1996.
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- THESE ANTICIPATED RATE REDUCTIONS COULD IMPERIL WESTERN'S ABILITY TO
DELIVER PROMISED DIVIDENDS TO KCPL SHAREHOLDERS. If the KCC follows its
own staff's recommendation and imposes a $105 million annual rate
reduction, then virtually all of Western's projected earnings for 1998(2)
would be required to pay dividends at the rate promised to KCPL
shareholders. KCPL THEREFORE QUESTIONS THE RELIABILITY OF WESTERN'S
DIVIDEND PROMISES AND BELIEVES THAT AN INABILITY TO SUSTAIN DIVIDENDS AT
WESTERN'S PROMISED RATE COULD NEGATIVELY IMPACT WESTERN'S STOCK PRICE.
- RATE DISPARITIES BETWEEN WESTERN'S OWN CUSTOMERS ARE SIGNIFICANT, AND MAY
REQUIRE WESTERN TO FURTHER LOWER ITS RATES. KCPL BELIEVES THAT WESTERN WILL
BE UNDER PRESSURE TO REDUCE RATES FOR ITS KANSAS GAS AND ELECTRIC (KGE)
CUSTOMERS, AND ANY SUCH REDUCTION TO WESTERN'S REVENUE BASE WOULD FURTHER
HAMPER WESTERN'S ABILITY TO MAKE ITS PROMISED DIVIDEND PAYMENTS.
Testimony before the KCC indicates that if the rates charged to Western's
KGE customers were reduced to equal the rates charged to Western's Kansas
Power and Light (KPL) customers, Western would suffer a $171 million annual
revenue reduction. Even if the KCC follows its own staff's recommendation
and the entire $105 million annual rate reduction is applied to KGE
customers, Western would still face a rate disparity of approximately $65
million per year. In an increasingly deregulated utility environment, KCPL
believes that Western must address the rate disparity issue because
Western's customers may otherwise choose to purchase cheaper power from
Western's competitors.
- KCPL BELIEVES THAT WESTERN'S CLAIMED MERGER-RELATED SAVINGS ARE
UNREALISTIC, AND WESTERN WILL NOT BE ALLOWED TO RETAIN 70% OF WHATEVER
SAVINGS DO RESULT FROM A COMBINATION WITH KCPL. KCPL BELIEVES THAT
REDUCTIONS IN MERGER-RELATED SAVINGS REALIZED AND/OR RETAINED WILL FURTHER
HAMPER WESTERN'S ABILITY TO MAKE ITS PROMISED DIVIDEND PAYMENTS.
Based on a review of Western's claimed merger-related savings, KCPL
believes that Western has significantly overstated the amount of such
savings that would result from a KCPL/Western combination. In addition,
both the KCC (in its order regarding the merger of KPL and KGE) and the
Missouri Public Service Commission (in the pending Union Electric/CIPSCO
merger) have advocated an equal (50-50) sharing of savings between
shareholders and customers. In contrast, Western's proposal contemplates
that it be allowed to keep 70% of merger-related savings.
These and other reasons for KCPL's rejection of Western's proposals are set
forth in a letter that I sent to John Hayes, Western's chief executive officer,
on June 24, 1996. If you would like to review that letter, it is reprinted on
pages 43-46 of the KCPL proxy statement dated June 26, 1996 sent to you last
week.
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(2) This calculation is based on (i) Western's own projection of earnings for
1998 assuming a Western/KCPL combination, as reported in Amendment No. 1 to
Registration Statement on Form S-4 dated June 19, 1996 filed by Western with
the Securities and Exchange Commission (the Western S-4) and (ii) a
reduction of such projections, calculated by KCPL, to reflect the full rate
decrease recommended by the staff of the KCC.
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As shareholders of KCPL, you have a unique opportunity to help determine the
future course of KCPL. The value of your investment in KCPL could very well
depend on that decision. Your Board of Directors -- which at all times has been
acutely aware of its fiduciary responsibilities to you -- has unanimously
concluded that Western's proposal is NOT in your best interests. We urge you to
vote FOR
the KCPL/UtiliCorp transaction on the enclosed WHITE proxy card. Please sign,
date and return the WHITE proxy card today. If you have any questions or need
assistance in voting your shares, please call KCPL Investor Relations at
800-245-5275 or our proxy solicitor, D.F. King & Co., at 800-714-3312.
On behalf of KCPL, I thank you for your continued trust and support.
Sincerely,
[SIG]
Drue Jennings
Chairman of the Board, President
and Chief Executive Officer
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ASK YOURSELF WHAT WESTERN'S STOCK IS REALLY WORTH
<TABLE>
<S> <C>
Western Forecast of 1998 Earnings Per Share for Western/KCPL
Combination(1) $ 2.45
Adjustment to Reflect $105 Million Rate Reduction Recommended by
Kansas Corporation Commission Staff(2) (0.21)
Adjustment to Reflect Overstatement of Merger-Related Savings by
Western(3) (0.11)
Revised Estimate of Western's 1998 Earnings per Share for West-
ern/KCPL Combination $ 2.13
Implied Reduction in Western Common Stock value in 1998 based on
assumed price/earnings ratio of 11.5(4) $ 3.68
</TABLE>
As shown in the above chart, KCPL believes that Western's earnings forecasts are
overstated because they do not include the $105 million annual threatened rate
reductions and because Western's merger-related savings estimates are
overstated. IF WESTERN'S EARNINGS ARE OVERSTATED BY $0.32 AS SHOWN IN THE ABOVE
CHART, THEN MULTIPLYING SUCH $0.32 OVERSTATEMENT BY AN ASSUMED PRICE/EARNINGS
RATIO OF 11.5 INDICATES THAT THERE COULD BE A NEGATIVE IMPACT ON THE VALUE OF
WESTERN'S STOCK IN 1998 EQUALLING APPROXIMATELY $3.68 PER SHARE.
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(1) As reported in the Western S-4. In the Western S-4, Western estimated
earnings per share for 1998 based on Western's closing stock price of $28.75
on June 14, 1996 resulting in an exchange ratio of 1.07826.
(2) Assumes that Western underestimated the rate reduction by $46.3 million,
derived by subtracting from KCC staff's recommended $105 million annual rate
reduction both (i) Western's proposal for an $8.7 million rate reduction and
(ii) Western's proposal for $50 million accelerated depreciation of its
investment in the Wolf Creek nuclear plant. The $46.3 million adjustment as
reduced by 40% to reflect the effect of taxes results in an after-tax
adjustment of $27.78 million, which results in a reduction to earnings per
share of approximately $0.21 based upon 132,223,000 shares outstanding.
(3) Assumes that $70.421 million in first year savings claimed by Western in
the Western S-4 are overstated by $23.474 million. KCPL's analysis of
Western's claimed merger-related savings indicates that Western
overestimated total purchasing savings by 62.7% and overestimated total
administrative savings by 48.5%. Applying such percentages to the first year
purchasing and administrative savings in the Western S-4 indicates that
first year merger-related savings are overstated by slightly more than
one-third. One-third of Western's estimate of $70.421 million equals $23.474
million. The $23.474 million adjustment as reduced by 40% to reflect the
effect of taxes results in an after-tax adjustment of $14.084 million, which
results in a reduction to earnings per share of approximately $0.11 based
upon 132,223,000 shares outstanding.
(4) Utility industry average as calculated in Merrill Lynch report dated June
24, 1996.
The foregoing materials contain certain statements of opinion and belief of
KCPL. Certain information in these materials is provided to facilitate an
analysis of the potential value of Western's proposal. The implied reduction, if
any, in Western's common stock value may be greater or less than indicated
above.
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