<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-707
KANSAS CITY POWER & LIGHT COMPANY
(Exact name of registrant as specified in its charter)
Missouri 44-0308720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Walnut, Kansas City, Missouri 64106-2124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 556-2200
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes (X) No ( )
The number of shares outstanding of the registrant's Common stock at
October 30, 1997, was 61,892,915 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
September 30 December 31
1997 1996
ASSETS
UTILITY PLANT, at original cost
Electric $3,490,314 $3,472,607
Less-accumulated depreciation 1,291,399 1,238,187
Net utility plant in service 2,198,915 2,234,420
Construction work in progress 82,104 69,577
Nuclear fuel, net of amortization of
$99,751 and $84,540 40,137 39,497
Total 2,321,156 2,343,494
REGULATORY ASSET - RECOVERABLE TAXES 126,000 126,000
INVESTMENTS AND NONUTILITY PROPERTY 342,096 231,874
CURRENT ASSETS
Cash and cash equivalents 112,038 23,571
Customer accounts receivable, net of allowance
for doubtful accounts of $1,943 and $1,644 47,672 27,093
Other receivables 32,012 36,113
Fuel inventories, at average cost 15,956 19,077
Materials and supplies, at average cost 46,994 47,334
Deferred income taxes 4,852 2,737
Other 4,082 5,055
Total 263,606 160,980
DEFERRED CHARGES
Regulatory assets
Settlement of fuel contracts 8,544 9,764
KCC Wolf Creek carrying costs 0 1,368
Other 22,397 26,615
Other deferred charges 39,702 14,417
Total 70,643 52,164
Total $3,123,501 $2,914,512
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock-authorized 150,000,000 shares
without par value-61,908,726 shares issued-
stated value $449,697 $449,697
Retained earnings 444,984 455,934
Unrealized gain on securities available for sale 5,169 6,484
Capital stock premium and expense (1,664) (1,666)
Common stock equity 898,186 910,449
Cumulative preferred stock 89,062 89,062
Company-obligated mandatorily redeemable Preferred
Securities of subsidiary trust holding solely
KCPL Subordinated Debentures * 150,000 0
Long-term debt 936,480 944,136
Total $2,073,728 $1,943,647
CURRENT LIABILITIES
Notes payable to banks 935 0
Current maturities of long-term debt 73,752 26,591
Accounts payable 45,807 55,618
Accrued taxes 62,812 18,443
Accrued interest 17,862 21,054
Accrued payroll and vacations 21,855 25,558
Accrued refueling outage costs 12,278 7,181
Other 13,704 11,980
Total 249,005 166,425
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 631,859 643,189
Deferred investment tax credits 63,937 67,107
Other 104,972 94,144
Total 800,768 804,440
COMMITMENTS AND CONTINGENCIES
Total $3,123,501 $2,914,512
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
* The sole asset of the KCPL Financing I Trust is the $154,640,000 principal
amount of 8.3% Junior Subordinated Deferrable Interest Debentures due 2037
<PAGE>
<TABLE>
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Year to Date Twelve Months Ended
September 30 September 30 September 30
1997 1996 1997 1996 1997 1996
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
ELECTRIC OPERATING REVENUES $ 290,218 $ 270,202 $ 700,382 $ 703,031 $ 901,270 $ 907,105
OPERATING EXPENSES
Operation
Fuel 39,832 37,266 104,045 104,135 140,415 139,629
Purchased power 17,219 14,261 46,141 40,786 57,810 48,864
Other 49,897 44,216 141,358 133,234 188,843 175,526
Maintenance 15,973 16,601 52,553 54,039 70,009 73,424
Depreciation 27,464 26,992 83,037 76,569 110,380 101,115
Taxes
Income 38,762 33,429 61,128 65,769 63,514 79,252
General 27,648 27,457 72,366 75,269 94,345 98,043
Deferred Wolf Creek costs
amortization 0 2,904 1,368 8,712 4,273 11,616
Total 216,795 203,126 561,996 558,513 729,589 727,469
OPERATING INCOME 73,423 67,076 138,386 144,518 171,681 179,636
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds
used during construction 779 418 1,772 1,535 2,605 2,317
Miscellaneous income 11,263 2,154 23,724 4,843 23,724 5,660
Miscellaneous deductions (16,896) (33,865) (92,560) (48,578) (99,154) (50,271)
Income taxes 8,596 14,678 48,691 29,144 55,949 31,882
Total 3,742 (16,615) (18,373) (13,056) (16,876) (10,412)
INCOME BEFORE INTEREST CHARGES 77,165 50,461 120,013 131,462 154,805 169,224
INTEREST CHARGES
Long-term debt 15,261 13,097 44,777 39,726 58,990 53,372
Short-term debt 103 527 1,273 1,141 1,383 1,272
Miscellaneous 4,172 1,128 8,710 3,620 9,930 4,731
Allowance for borrowed funds
used during construction (518) (500) (1,891) (1,431) (2,407) (1,904)
Total 19,018 14,252 52,869 43,056 67,896 57,471
PERIOD RESULTS
Net income 58,147 36,209 67,144 88,406 86,909 111,753
Preferred stock
dividend requirements 952 948 2,866 2,840 3,816 3,812
Earnings available for
common stock 57,195 35,261 64,278 85,566 83,093 107,941
Average number of common
shares outstanding 61,896 61,902 61,896 61,902 61,897 61,902
Earnings per common share $0.92 $0.57 $1.04 $1.38 $1.34 $1.74
Cash dividends per
common share $0.405 $0.405 $1.215 $1.185 $1.620 $1.575
<F1>
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
Year to Date Twelve Months Ended
September 30 September 30
1997 1996 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 67,144 $ 88,406 $ 86,909 $111,753
Adjustments to reconcile net income
to net cash from operating
activities:
Depreciation 83,037 76,569 110,380 101,115
Amortization of:
Nuclear fuel 15,211 10,884 20,421 14,675
Deferred Wolf Creek costs 1,368 8,712 4,273 11,616
Other 6,049 4,104 7,452 6,106
Deferred income taxes (net) (10,168) 608 (19,438) 12,479
Deferred investment tax credit
amortization (3,170) (3,106) (4,227) (4,152)
Deferred storm costs 0 0 (8,885) 0
Deferred merger costs (5,712) 0 (5,712) 0
Allowance for equity funds used
during construction (1,772) (1,535) (2,605) (2,317)
Cash flows affected by changes in:
Receivables (16,478) (5,488) (9,528) 869
Fuel inventories 3,121 2,563 3,584 519
Materials and supplies 340 686 (505) (1,711)
Accounts payable (9,811) (6,524) (175) (1,276)
Accrued taxes 44,369 27,336 (4,250) (38,223)
Accrued interest (3,192) (3,623) 4,579 4,088
Wolf Creek refueling outage
accrual 5,097 (9,016) 7,731 (6,493)
Pension and postretirement benefit
obligations (4,335) (2,399) (2,020) (740)
Other operating activities 6,770 9,452 9,164 13,151
Net cash from operating
activites 177,868 197,629 197,148 221,459
CASH FLOWS FROM INVESTING ACTIVITIES
Utility capital expenditures (92,782) (76,624) (117,105) (121,304)
Allowance for borrowed funds used
during construction (1,891) (1,431) (2,407) (1,904)
Purchases of investments (98,500) (15,557) (118,305) (34,505)
Purchases of nonutility property (12,271) (15,380) (17,286) (15,380)
Sale of streetlights 21,500 0 21,500 0
Other investing activities (8,390) (4,445) (4,876) 838
Net cash from investing
activities (192,334) (113,437) (238,479) (172,255)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of mandatorily redeemable
Preferred Securities of
subsidiary trust 150,000 0 150,000 0
Issuance of long-term debt 66,292 25,441 176,292 45,662
Repayment of long-term debt (26,787) (54,230) (46,787) (54,230)
Net change in short-term borrowings 935 16,000 (34,065) 35,000
Dividends paid (78,094) (76,201) (104,096) (101,316)
Other financing activities (9,413) (363) (11,204) 2,646
Net cash from financing
activities 102,933 (89,353) 130,140 (72,238)
NET CHANGE IN CASH AND CASH
EQUIVALENTS 88,468 (5,161) 88,810 (23,034)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 23,571 28,390 23,229 46,263
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $112,039 $23,229 $112,039 $23,229
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $56,562 $45,560 $63,459 $51,893
Income taxes $0 $40,739 $17,605 $84,718
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(thousands of dollars)
Year to Date Twelve Months Ended
September 30 September 30
1997 1996 1997 1996
Beginning balance $455,934 $449,966 $462,171 $451,734
Net income 67,144 88,406 86,909 111,753
523,078 538,372 549,080 563,487
Dividends declared
Preferred stock - at required rates 2,892 2,847 3,827 3,820
Common stock 75,202 73,354 100,269 97,496
Ending balance $444,984 $462,171 $444,984 $462,171
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
KANSAS CITY POWER & LIGHT COMPANY
Statements made in this report which are not based on historical
facts are forward-looking and, accordingly, involve risks and
uncertainties that could cause actual results to differ materially
from those discussed. Any forward-looking statements are intended to
be as of the date on which such a statement is made. In connection
with the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, we are providing the following important factors
that could cause actual results to differ materially from provided
forward-looking information. These important factors include: (a) the
outcome of the pending Western Resources Inc. (Western Resources)
Merger; (b) future economic conditions in the regional, national and
international markets; (c) state, federal and foreign regulation and
possible additional reductions in regulated electric rates; (d)
weather conditions; (e) financial market conditions, including, but
not limited to changes in interest rates; (f) inflation rates; (g)
changing competition, including, but not limited to, the deregulation
of the United States electric utility industry, and the entry of new
competitors; (h) the ability to carry out marketing and sales plans;
(i) the ability to achieve generation planning goals and the
occurrence of unplanned generation outages; (j) nuclear operations;
(k) the ability to enter new markets successfully and capitalize on
growth opportunities in nonregulated businesses, and (l) adverse
changes in applicable laws, regulations or rules governing
environmental, tax or accounting matters. This list of factors may
not be all inclusive since it is not possible for us to predict all
possible factors.
Notes to Consolidated Financial Statements
In management's opinion, the consolidated interim financial
statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the results of
operations for the interim periods presented. These statements and
notes should be read in connection with the financial statements and
related notes included in our 1996 annual report on Form 10-K.
1. AGREEMENT AND PLAN OF MERGER WITH WESTERN RESOURCES
On February 7, 1997, Kansas City Power & Light Company (KCPL) and
Western Resources, Inc. (Western Resources) entered into an Agreement
and Plan of Merger (the Merger Agreement) to form a strategic business
combination. The effective time of the merger is dependent upon all
conditions of the Merger Agreement being met or waived. At the
effective time, KCPL will merge with and into Western Resources, with
Western Resources being the surviving corporation.
Western Resources first delivered an unsolicited exchange offer
to KCPL's Board of Directors during the second quarter of 1996. This
initial offer, subject to numerous conditions, proposed the exchange
of $28 (later increased to $31) worth of Western Resources stock for
each share of KCPL stock. After careful consideration, both offers
were rejected by KCPL's Board of Directors. In July 1996 Western
Resources commenced an exchange offer for KCPL common stock. In late
1996 KCPL began discussing a possible merger with Western Resources
leading to the Merger Agreement.
Under the terms of the Merger Agreement, KCPL common stock will
be exchanged for Western Resources common stock valued at $32.00,
subject to a conversion ratio limiting the amount of Western Resources
common stock that holders of KCPL common stock would receive per share
of KCPL common stock to no more than 1.1 shares (if Western Resources'
stock is priced at or below $29.09 per share), and no less than 0.917
shares (if Western Resources' stock is priced at or above $34.90 per
share). However, there is a provision in the Merger Agreement that
allows KCPL to terminate the merger if Western Resources' stock price
drops below $27.64 and either the Standard and Poor's Electric
Companies Index increases or the decline in Western Resources stock
price exceeds by approximately 5% any decline in this index. Western
Resources could avoid this termination by improving the conversion
ratio.
<PAGE>
The transaction is subject to several closing conditions
including approval by each company's shareholders, approval by a
number of regulatory authorities (statutory approvals) and dissenting
shares equaling less than 5.5% of KCPL's outstanding shares. If the
effective time has not occurred by June 30, 1998 (the termination
date), either party may terminate the agreement as long as they did
not contribute to the delay. This termination date will be
automatically extended to June 30, 1999, if all of the Merger
Agreement closing conditions have been met except for certain
conditions relating to statutory approvals.
The Merger Agreement does not allow KCPL to increase its common
stock dividend prior to the effective time or termination. It also
requires KCPL to redeem all outstanding shares of preferred stock
prior to completion of the merger.
If the Merger Agreement is terminated under certain
circumstances, a payment of $50 million will be due Western Resources
if, within two and one-half years following termination, KCPL agrees
to consummate a business combination with a third party that made a
proposal to combine prior to termination. Western Resources will pay
KCPL $5 million to $35 million if the Merger Agreement is terminated
and all closing conditions are satisfied other than conditions
relating to Western Resources receiving a favorable tax opinion, a
favorable letter from its accountants regarding pooling accounting,
favorable statutory approvals, or an exemption from the Public Utility
Holding Company Act of 1935.
In February 1997 KCPL paid UtiliCorp United Inc. (UtiliCorp) $53
million for agreeing to combine with Western Resources within two and
one-half years from the termination of KCPL's agreement to merge with
UtiliCorp. This agreement was terminated due to failure of KCPL
shareholders to approve the transaction with UtiliCorp.
During the first nine months of 1997, $5.7 million of merger-
related costs were deferred by KCPL and are included in Other deferred
charges. These costs will be expensed in the first reporting period
subsequent to closing of the merger.
2. SECURITIES AVAILABLE FOR SALE
Certain investments in equity securities are accounted for as
securities available for sale and adjusted to market value with
unrealized gains (or losses), net of deferred income taxes, reported
as a separate component of shareholders' equity.
The cost of securities available for sale held by KLT Inc. (KLT),
a wholly-owned subsidiary of KCPL, was $5 million as of September 30,
1997 and December 31, 1996. Unrealized gains, net of deferred income
taxes, decreased to $5.2 million at September 30, 1997, from $6.5
million at December 31, 1996.
3. CAPITALIZATION
From January 1, 1997 to September 30, 1997, KCPL repaid $16.5
million of secured medium-term notes. KCPL is authorized to issue up
to $300 million in unsecured medium-term notes under an indenture
dated December 1, 1996. As of September 30, 1997, no unsecured medium-
term notes had been issued.
In April 1997 KCPL Financing I (Trust), a wholly-owned subsidiary
of Kansas City Power & Light Company, issued $150,000,000 of 8.3%
preferred securities. The sole asset of the Trust is the $154,640,000
principal amount of 8.3% Junior Subordinated Deferrable Interest
Debentures, due 2037, issued by KCPL. The terms and interest payments
on these debentures correspond to the terms and dividend payments on
the preferred securities. These payments are reflected as
<PAGE>
Miscellaneous Interest Charges in the Consolidated Statement of Income
and are tax deductible by KCPL. We may elect to defer interest
payments on the debentures for a period up to 20 consecutive quarters,
causing dividend payments on the preferred securities to be deferred
as well. In case of a deferral, interest and dividends will continue
to accrue, along with quarterly compounding interest on the deferred
amounts. We may redeem all or a portion of the debentures after March
31, 2002, requiring an equal amount of preferred securities to be
redeemed at face value plus accrued and unpaid distributions. The
back-up undertakings in the aggregate provide a full and unconditional
guarantee of amounts due on the preferred securities.
4. COSTANERA INVESTMENT
In 1997 KLT invested $46 million for a 12 percent ownership
position in the largest fossil-fueled generator in Argentina. While
the cost method is used to account for this investment, Financial
Accounting Standards Board (FASB) Statement No. 115 -- Accounting for
Certain Investments in Debt and Equity Securities is not applicable
because the fair value of Class A stock is not readily determinable.
Because of a legally binding Consortium and Stockholders Contract
requiring the Class A shareholders to authorize the maximum dividend
distribution, KLT accrues estimated dividends before actual
declaration.
5. INTANGIBLE ASSETS
The application of purchase accounting for certain KLT
investments during 1997 resulted in $12 million of goodwill
recognition. These amounts are included in Other deferred charges on
the balance sheet and are being amortized over 10 to 15 years.
6. KANSAS RETAIL REVENUE REQUIREMENT
On June 19, 1997, the Kansas Corporation Commission formally
opened a case for the purpose of reviewing KCPL's Kansas retail
revenue requirement. We filed direct testimony and exhibits in the
case in August 1997. The Company and the KCC staff are in the process
of negotiating a stipulation and agreement which if approved by the
KCC would result in a $14 million revenue reduction and a $3 million
increase in depreciation beginning January 1998. About 39 percent of
KCPL's retail sales revenue, net of gross receipts tax, currently
comes from Kansas.
7. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
A new proposed rule requiring reduction of nitrogen oxide at our
Missouri plants and new air quality standards for ozone and
particulate matter control for all plants could eventually result in
additional compliance costs or installation of additional control
equipment. No estimate of these costs or when they will be incurred
is available at this time.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
REGULATION AND COMPETITION
As competition develops throughout the electric utility industry,
we are positioning Kansas City Power & Light Company (KCPL) to excel
in an open market. We are improving the efficiency of KCPL's electric
utility operations, lowering prices and offering new services. We now
offer customized energy packages to larger customers, including
options offering natural gas contracts. We have entered an Agreement
and Plan of Merger with Western Resources, Inc. (Western Resources).
This agreement was reached after nine months of activities related to
Western Resources' exchange offer (see Note 1 to the Consolidated
Financial Statements).
In December 1996 the Federal Energy Regulatory Commission (FERC)
issued a statement concerning electric utility mergers. Under the
statement, companies must demonstrate that their merger does not
adversely affect competition or wholesale rates. As remedies, FERC
may consider a range of conditions including transmission upgrades,
divestitures of generating assets or formation of independent system
operators.
Competition in the electric utility industry was accelerated with
the National Energy Policy Act of 1992. This gave FERC the authority
to require electric utilities to provide transmission line access to
independent power producers (IPPs) and other utilities (wholesale
wheeling). KCPL, already active in the wholesale wheeling market, was
one of the first utilities to receive FERC's approval of an open-
access tariff for wholesale wheeling transactions. In April 1996 FERC
issued an order requiring all owners of transmission facilities to
adopt open-access tariffs and participate in wholesale wheeling. We
have made the necessary filings to comply with that order.
FERC's April 1996 order has encouraged more movement toward
retail competition at the state level. An increasing number of states
have already adopted open access requirements for utilities' retail
electric service, allowing competing suppliers access to their retail
customers (retail wheeling). Many other states are actively
considering retail wheeling. Kansas has created a retail wheeling
task force to study and report on related issues. In Missouri, a
legislative committee has been formed to study the issue while the
Missouri Public Service Commission (MPSC) has established a task force
to plan for implementation of retail wheeling if authorized by law.
Competition through retail wheeling could result in market-based
rates below current cost-based rates. This would provide growth
opportunities for low-cost producers and risks for higher-cost
producers, especially those with large industrial customers. Lower
rates and the loss of major customers could result in under-utilized
assets (stranded investment) and place an unfair burden on the
remaining customer base or shareholders. Testimony filed in our
merger case in Kansas for KCPL indicates that stranded cost is
approximately $1 billion. An independent study prepared at the
request of the Kansas Corporation Commission (KCC) concluded that
there are no stranded costs. We cannot predict the extent that
stranded costs will be recoverable in future rates. If an adequate
and fair provision for recovery of these lost revenues is not
provided, certain generating assets may have to be evaluated for
impairment and appropriate charges recorded against earnings. In
addition to lower profit margins, market-based rates could also
require generating assets to be depreciated over shorter useful lives,
increasing operating expenses.
<PAGE>
Although Missouri and Kansas have not yet authorized retail
wheeling, we believe KCPL is positioned well to compete in an open
market with its diverse customer mix and pricing strategies. About
20% of KCPL's retail mwh sales are to industrial customers compared to
the utility industry average of about 35%. KCPL has a flexible rate
structure with industrial rates that are competitively priced within
our region. In addition, long-term contracts are in place or under
negotiation for a large portion of KCPL's industrial sales. There has
not been direct competition for retail electric service in our service
territory although there has been competition in the bulk power market
and between alternative fuels.
Increased competition could also force utilities to change
accounting methods. Financial Accounting Standards Board (FASB)
Statement No. 71 - Accounting for Certain Types of Regulation, applies
to regulated entities whose rates are designed to recover the costs of
providing service. An entity's operations could stop meeting the
requirements of FASB 71 for various reasons, including a change in
regulation or a change in the competitive environment for a company's
regulated services. For those operations no longer meeting the
requirements of regulatory accounting, regulatory assets would be
written off. KCPL's regulatory assets, totaling $157 million at
September 30, 1997, will be maintained as long as FASB 71 requirements
are met.
It is possible that competition could eventually have a
materially adverse affect on KCPL's results of operations and
financial position. Should competition eventually result in a
significant charge to equity, capital costs and requirements could
increase significantly.
NONREGULATED
KLT Inc. (KLT) is a wholly-owned subsidiary pursuing nonregulated
business ventures. Existing ventures include investments in domestic
and international nonregulated power production, energy services, oil
and gas reserves, telecommunications, telemetry technology, and
affordable housing limited partnerships.
KCPL had a total equity investment in KLT of $109 million as of
September 30, 1997. KLT's consolidated assets at September 30, 1997,
totaled $341 million. The growth of KLT accounts for most of the
increase in KCPL's consolidated investments and nonutility property
(see Capital Requirements and Liquidity section). The Agreement and
Plan of Merger with Western Resources includes a provision that
requires Western Resources' approval if annual investments exceed a
certain limit. Such investments do not include the cost of routine
regulated utility capital expenditures. Because annual investments
are restricted under this limit, KLT will reallocate its funds among
its investment plans.
RESULTS OF OPERATIONS
Three-month three months ended September 30, 1997,
period: compared with three months ended September
30, 1996
Nine-month nine months ended September 30, 1997,
period: compared with nine months ended September 30,
1996
Twelve-month twelve months ended September 30, 1997,
period: compared with twelve months ended September
30, 1996
<PAGE>
EARNINGS OVERVIEW
Earnings Per Share (EPS)
For the Periods Ended
September 30
Increase
1997 1996 (Decrease)
Three months ended $0.92 $0.57 $ .35
Nine months ended $1.04 $1.38 $(0.34)
Twelve months ended $1.34 $1.74 $(0.40)
EPS for the three-month period increased mainly due to more
favorable weather and continued load growth. In addition, EPS for the
three-months ended September 30, 1996, was reduced by $0.26 for merger
costs. The net effect of the rate reductions approved by the MPSC in
July 1996 lowered EPS for the three-month period by an estimated $0.02
per share.
KCPL's pursuit of its strategic options resulted in the September
1996 termination of a merger agreement with UtiliCorp United Inc.
(UtiliCorp) and the February 1997 announcement of our agreement to
combine with Western Resources. These actions triggered KCPL's
payment of $53 million to UtiliCorp under provisions of the UtiliCorp
merger agreement, lowering EPS for the nine-month period by $0.52.
The net effect of the rate reductions approved by the MPSC lowered EPS
for the nine-month period by an estimated $0.15. Increased
depreciation expense also negatively affected EPS for the nine-month
period. Partially offsetting these decreases are continued load
growth and lower deferred Wolf Creek amortization. In addition, EPS
for the nine-months ended 1996 was reduced by $0.31 for merger costs.
The decrease in EPS for the twelve-month period reflects the
decrease of EPS by $0.52 because of the payment to UtiliCorp and the
net effect of the rate reductions approved by the MPSC which lowered
EPS for the twelve-month period by an estimated $0.25. An increase in
depreciation expense also had a negative effect on EPS for the twelve-
month period. Factors contributing positively to EPS for the twelve-
month period included continued load growth, lower deferred Wolf Creek
amortization and an increase in subsidiary income. In addition, EPS
for the twelve-months ended 1996 was reduced by $0.31 for merger
costs.
<PAGE>
MEGAWATT-HOUR (MWH) SALES AND OPERATING REVENUES
Sales and revenue data:
(revenue change in millions)
Periods ended September 30, 1997 vs. September 30, 1996
Three Months Six Months Twelve Months
Mwh Revenues Mwh Revenues Mwh Revenues
Increase (decrease)
Retail Sales:
Residential 13 % 12 3 % 5 3 % 2
Commercial 9 % 7 4 % (3) 4 % (5)
Industrial 2 % 1 (4)% (3) (2)% (3)
Other 13 % (1) 3 % (1) 2 % (1)
Total Retail 9 % 19 2 % (2) 2 % (7)
Sales for Resale:
Bulk Power Sales (17)% 1 (6)% (2) (1)% 4
Other 4 % - 17 % - 23 % -
Total 20 (4) (3)
Other revenues - 1 (3)
Total Operating Revenues 20 $(3) $(6)
During 1996 the MPSC approved a new stipulation and agreement
authorizing a $20 million revenue reduction in two phases and an
increase in depreciation and amortization expense by $9 million per
year. In July 1996 we implemented phase one of the revenue reduction
designed to reduce revenues from commercial and industrial customers
by an estimated $9 million per year. This decrease is achieved with
an increase in summer revenues offset by a larger decrease in winter
revenues. This design more closely follows our increased costs of
generating electricity in the summer. The second phase of this
stipulation, implemented January 1, 1997, further reduces Missouri
residential, commercial and industrial revenues by an estimated $11
million per year. The effect of the stipulation changed revenues and
EPS as follows:
For the periods ended September 30
Three Months Six Months Twelve Months
1997 1996 1997 1996 1997 1996
Increase (decrease)
Revenues(in millions) 3 5 (10) 5 (20) 5
EPS 0.03 0.05 (0.10) 0.05 (0.20) 0.05
In June 1997 the KCC formally opened a case for the purpose of
reviewing KCPL's Kansas retail revenue requirement. Rates in Kansas
have not been adjusted since 1988. See Note 6 to the Consolidated
Financial Statements regarding a proposed $14 million revenue
reduction and a $3 million increase in depreciation beginning January
1998.
The higher mwh sales in September 1997 versus December 1996,
resulted in a higher customer accounts receivable balance at September
30, 1997, compared with December 31, 1996.
Three-month retail revenues increased from the prior year because
of increased mwh sales. Continued load growth and favorable weather,
as compared to the prior year, contributed to the increase in mwh
sales for the period. The Missouri rate reductions partially offset
the revenue increase for the three-month period. Nine- and twelve-
month retail revenues decreased primarily
<PAGE>
due to the rate reductions and reduced sales to a major industrial customer
because of a strike by its employees. Revenues from increased mwh sales
partially offset these decreases for the nine- and twelve-month periods.
KCPL has long-term sales contracts with certain major industrial
customers. These contracts are tailored to meet customers' needs in
exchange for their long-term commitment to purchase energy. Long-term
contracts are in place for a large portion of KCPL's industrial sales
and more contracts are under negotiation.
Bulk power sales vary with system requirements, generating unit
and purchased power availability, fuel costs and the requirements of
other electric systems. Outages at the LaCygne I and II generating
units in the second quarter of 1997 contributed to lower bulk power
mwh sales in the current nine- and twelve-month periods (see Fuel and
Purchased Power section). Wolf Creek's spring 1996 refueling outage
(see Wolf Creek section) contributed to lower bulk power mwh sales in
the prior twelve-month period. Lower bulk power sales in September
1997 compared to December 1996 and the conversion of a Note receivable
to an investment (see Capital Requirements and Liquidity section)
contributed to the lower Other receivables balance at September 30,
1997, compared to December 31, 1996.
Total revenue per mwh sold varies with changes in rate tariffs,
the mix of mwh sales among customer classifications and the effect of
declining price per mwh as usage increases. An automatic fuel
adjustment provision is included in only sales for resale tariffs,
which apply to less than 1% of revenues.
Future mwh sales and revenues per mwh will also be affected by
national and local economies, weather and customer conservation
efforts. Competition, including alternative sources of energy such as
natural gas, co-generation, IPPs and other electric utilities, may
also affect future sales and revenue.
FUEL AND PURCHASED POWER
Combined fuel and purchased power expenses for the three-month
period increased 11% while total mwh sales (total of retail and sales
for resale) increased 5%. The difference is due mainly to an
increased cost per kwh for purchased power in the current period.
Also combined fuel and purchased power expenses for the nine-month
period increased 4% on approximately equal total mwh sales with the
prior period. Additional replacement power expense incurred due to
LaCygne generating units outages is the main reason for the nine-month
period difference.
Combined fuel and purchased power expenses for the twelve-month
period increased 5% while total mwh sales increased 2%. The
additional increase in expense is due mainly to a $2 million increase
in capacity purchases and the replacement power expense incurred
during the LaCygne generating units outages. Partially offsetting
this, the prior twelve-month period includes the additional costs
incurred during Wolf Creek's 1996 refueling outage.
The MMBTU price of nuclear fuel remains substantially less than
the MMBTU price of coal, despite increasing 9% for the twelve-month
period. Nuclear fuel costs averaged 60% of the price of coal during
the current twelve months compared with 55% during the prior twelve-
month period. We expect this relationship and the price of nuclear
fuel to remain fairly constant through the year 2001. For the current
twelve-month period, coal represented about 70% of fuel burned and
nuclear fuel about 29%. In the prior twelve-month period, coal represented
about 76% of fuel burned and nuclear fuel about 23%. The increase in
nuclear fuel as a percentage of fuel burned is due mainly to outages
<PAGE>
during 1997 at LaCygne I and II, coal-fired generating units, and the
refueling outage at Wolf Creek in the prior period.
The MMBTU price of coal decreased 1% for the twelve month period.
Our coal procurement strategies continue to provide coal costs well
below the regional average. We expect coal costs to remain fairly
consistent with current levels through 2001.
OTHER OPERATION AND MAINTENANCE EXPENSES
Combined other operation and maintenance expenses for all periods
increased due largely to increases in station non-fuel operations,
system dispatch, transmission, distribution and customer accounts
expenses.
We continue to emphasize new technologies, improved work
methodologies and cost control. We are continuously improving our
work processes to provide increased efficiencies and improved
operations. Through the use of cellular technology, a majority of
customer meters are read automatically.
DEPRECIATION AND AMORTIZATION
The increase in depreciation expense for all periods reflects the
implementation of the MPSC stipulation and agreement discussed in the
revenue section as well as normal increases in depreciation from
capital additions. The stipulation and agreement, effective July 1,
1996, authorized a $9 million annual increase in depreciation expense
at about the same time the Missouri portion of Deferred Wolf Creek
costs became fully amortized in December 1996. This amortization
totaled about $9 million per year.
The Kansas portion of Deferred Wolf Creek costs became fully
amortized in the second quarter of 1997. Amortization of the Kansas
portion of this asset totaled about $3 million per year.
INCOME TAXES
The increase in operating income taxes for the three-month period
reflects higher taxable operating income in the current period.
The decrease in operating income taxes for the nine-month period
reflects lower taxable operating income. The decrease for the twelve-
month period reflects lower taxable operating income, adjustments
necessary to reflect the filing of the 1995 tax returns and the
settlement with the Internal Revenue Service regarding tax issues
included in the 1985 through 1990 tax returns.
General taxes decreased for the nine- and twelve-month periods
reflecting changes in Kansas tax law which reduced the mill levy
rates.
OTHER INCOME AND (DEDUCTIONS)
Miscellaneous Income
Miscellaneous income for all current periods includes increased
revenues from non-utility and subsidiary operations. Dividends
on the investment in a fossil-fuel generator in Argentina (see
Capital Requirements and Liquidity section) and revenues from a
subsidiary in which KLT obtained a controlling interest during
1997 contributed to the increase in miscellaneous income from
subsidiary operations.
<PAGE>
Miscellaneous Deductions
Miscellaneous deductions for the nine- and twelve-month periods
increased due to a $53 million payment to UtiliCorp in February
1997. The September 1996 termination of the UtiliCorp merger
agreement and the February 1997 announcement of our agreement to
combine with Western Resources, triggered the payment to
UtiliCorp under provisions of the UtiliCorp merger agreement.
Miscellaneous deductions for the prior periods included $26
million in the three-month period and $31 million in the nine-
and twelve-month periods in merger related costs.
All periods reflect increased non-utility expenses and subsidiary
operating and investing activities. Subsidiary expenses included
in Miscellaneous deductions increased by $9 million for the three-
month period, $18 million for the nine-month period and $20
million for the twelve-month period. The primary subsidiary
expenses that increased are cost of sales, administrative and
general labor and benefits, incentives for gas production,
provision for uncollectible notes receivable and outside
consulting services. Development of independent power producers,
increased gas operations and inclusion of three small companies
in which KLT obtained controlling interests during 1997 are the
primary activities that contributed to the increased expenses.
Income Taxes
Income taxes reflect the tax impact of the excess of
miscellaneous deductions over miscellaneous income.
Additionally, during the first nine months of 1997 we accrued tax
credits of $16 million, or three-fourths of the total expected
1997 credits, related to affordable housing partnership
investments and oil and gas investments. This is an increase of
$8 million compared with the tax credits accrued during the first
three quarters of 1996. Tax credits from the investments in
affordable housing more than offset the increase in interest
expense incurred from these investments. Non-taxable increase in
the cash surrender value of corporate-owned life insurance
contracts also affected the relationship between miscellaneous
deductions and income taxes.
INTEREST CHARGES
The increase in long-term interest expense for all periods
reflects higher average levels of long-term debt outstanding. The
higher levels of debt resulted mainly from additional financing for
new investments in unregulated ventures, funding of other corporate
capital requirements and financing by KLT to support expanding
subsidiary operations.
The increase in miscellaneous interest charges for all periods is
primarily due to interest charges incurred on the $150,000,000 of
preferred securities.
We use interest rate swap and cap agreements to limit the
interest expense on a portion of KCPL's variable-rate long-term debt.
We do not use derivative financial instruments for trading or other
speculative purposes. Although these agreements are an integral part
of our interest rate management, their incremental effect on interest
expense and cash flows is not significant.
<PAGE>
WOLF CREEK
Wolf Creek is one of KCPL's principal generating units
representing about 17% of accredited generating capacity. The plant's
operating performance has remained strong, contributing about 27% of
annual mwh generation while operating at an average capacity of 90%
over the last three years. It has the lowest fuel cost per MMBTU of
any of KCPL's generating units.
Wolf Creek's ninth refueling and maintenance outage began in
early October 1997. Currently, it is forecasted to be approximately a
45 to 50 day outage. The incremental operating, maintenance and
replacement power costs are accrued evenly over the unit's operating
cycle, normally 18 months. As actual outage expenses are incurred,
the refueling liability and related deferred tax asset are reduced.
Wolf Creek's eighth scheduled refueling and maintenance outage began
in early February 1996 and was completed in April 1996 (64 days). The
eighth outage started one month early when the plant was shut down
after water flow from the cooling lake was restricted by ice buildup
on an intake screen. This extended the length of the outage and was
the primary reason for the increase in Wolf Creek related replacement
power and maintenance expenses in 1996.
Currently, no major equipment replacements are expected, but an
extended shut-down of Wolf Creek could have a substantial adverse
effect on KCPL's business, financial condition and results of
operations. Higher replacement power and other costs would be
incurred as a result. Although not expected, an unscheduled plant
shut-down could be caused by actions of the Nuclear Regulatory
Commission reacting to safety concerns at the plant or other similar
nuclear units. If a long-term shut-down occurred, the state
regulatory commissions could consider reducing rates by excluding the
Wolf Creek investment from rate base.
Ownership and operation of a nuclear generating unit exposes KCPL
to risks regarding the cost of decommissioning the unit at the end of
its life and to potential retrospective assessments and property
losses in excess of insurance coverage.
CAPITAL REQUIREMENTS AND LIQUIDITY
See Note 3 to the Consolidated Financial Statements regarding
$150 million in financing obtained by KCPL in April 1997. Other
liquid resources of KCPL at September 30, 1997, included cash flows
from operations, $300 million of registered but unissued unsecured
medium-term notes and $343 million of unused bank lines of credit.
The unused lines consisted of KCPL's short-term bank lines of credit
of $300 million and KLT's long-term revolving line of credit of $43
million. Cash and cash equivalents increased by $88 million from
December 1996 to September 1997 primarily due to $21.5 million of
proceeds from the sale of streetlights to the City of Kansas City,
Missouri; increased seasonal revenues and the issuance of $150 million
of preferred securities.
KCPL continues to generate positive cash flows from operating
activities, although individual components of working capital will
vary with normal business cycles and operations including the timing
of receipts and payments. The timing of the Wolf Creek outage affects
the refueling outage accrual, deferred income taxes and amortization
of nuclear fuel.
The increase in accrued taxes from December 31, 1996, to
September 30, 1997, mainly reflects the timing of income tax and
property tax payments. Accelerated depreciation lowers tax payments
in the earlier years of an asset's life while increasing deferred tax
liabilities; this relationship reverses in the later years of an
asset's life. Our last significant generating plant addition was the
completion of Wolf Creek in 1985. Accelerated depreciation on Wolf
Creek ended in 1995.
<PAGE>
The $8.9 million incurred to repair damages from an October 1996
snow storm, recorded as a regulatory asset, lowered cash flows from
operating activities for the twelve-month period. Amortization of
these costs over five years began in 1997.
Subsidiary goodwill resulting from KLT investments, deferred
merger costs and unamortized debt expense all contributed to the
increase in Other deferred charges on the Consolidated Balance Sheet
from December 31, 1996, to September 30, 1997. Other deferred credits
increased due to an increase in Wolf Creek decommissioning
liabilities. Also, subsidiary minority interests included in Other
deferred credits increased as KLT obtained controlling interests in
new companies in 1997.
Cash used in investing activities varies with the timing of
utility capital expenditures and KLT's purchases of investments and
nonutility properties. KLT closed several investments during the
first nine months of 1997, increasing Investments and Nonutility
Property on the Consolidated Balance Sheet by approximately $100
million. These include a 12% ownership interest in the largest fossil-
fuel generator in Argentina and an ownership interest in Digital
Teleport, Inc. (DTI). DTI is constructing a state of the art, fiber
optic network throughout the region in anticipation of increased local
and long distance telephone competition. As part of the DTI
transaction, KLT converted a $9 million note receivable to the
investment in DTI.
Construction work in progress increased by $13 million from
December 1996 to September 1997 due to normal seasonal fluctuations in
the construction schedule, continued construction on major production
projects and system software upgrades.
Cash provided by financing activities increased for the nine- and
twelve-month periods due to additional long-term borrowings. Long-
term debt, including current maturities, increased by $39.5 million
from December 1996 to September 1997 primarily due to additional
borrowings by KLT on its long-term revolving line of credit. As
discussed in Note 3 to the Consolidated Financial Statements, KCPL
Financing I, a wholly-owned subsidiary of KCPL, issued $150,000,000 of
preferred securities in April 1997. The $53 million payment to
UtiliCorp, recorded as an expense, and KLT's purchases of investments
and nonutility properties were financed mostly by this financing and
additional long-term borrowings. Cash used in Other financing
activities increased for the nine- and twelve-month periods due
primarily to an increase in unamortized debt expense related to the
$150,000,000 financing.
KCPL's common dividend payout ratio was 121% for the current
twelve-month period and 91% for the prior twelve-month period compared
to 82% for the same period in 1995. The increase in the payout ratio
for both periods is due mainly to the significant merger related costs
expensed in both periods.
Day-to-day operations, utility construction requirements and
dividends are expected to be met with internally-generated funds.
Uncertainties affecting our ability to meet these requirements with
internally-generated funds include the effect of inflation on
operating expenses, the level of mwh sales, regulatory actions, the
availability of generating units and compliance with future
environmental regulations. A new proposed rule requiring reduction of
nitrogen oxide at our Missouri plants and new air quality standards
for ozone and particulate matter control for all plants could
eventually result in additional compliance costs or installation of
additional control equipment. No estimate of these costs or when they
will be incurred is available at this time. The funds needed for the
retirement of $425 million of maturing debt through the year 2001 will
be provided from operations, refinancings or short-term debt. We
might incur additional debt and/or issue additional equity to finance
growth or take advantage of new opportunities.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On July 18, 1997, in Kansas City Power & Light Company vs.
Western Resources, Inc. (previously discussed in the Company's
Form 10-K for the year ended December 31, 1996), the United
States District Court for the Western District of Missouri issued
an Order dismissing Intervenor Jack R. Manson's derivative
amended counterclaim alleging breach of directors' fiduciary
duties in connection with the proposed merger with UtiliCorp
United Inc. In early August 1997, Manson filed a motion to amend
the Order requesting the Court award his attorneys' fees in this
matter, and the Court, in an Order dated August 25, 1997, agreed
to consider the issue of attorneys' fees. Manson and his counsel
then filed an Application for an Award of Attorneys' Fees and
Related Disbursements seeking an award of over $6 million. On
September 23, 1997, Manson appealed the Order as amended, to the
United States Court of Appeals for the Eighth Circuit. It is our
opinion that any potential net liability to the Company resulting
from these proceedings would be nominal in amount.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
Exhibit 27. Financial Data Schedule (for the nine months ended
September 30, 1997).
Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
KANSAS CITY POWER & LIGHT COMPANY
Dated: November 4, 1997 By: /s/Drue Jennings
(Drue Jennings)
(Chief Executive Officer)
Dated: November 4, 1997 By: /s/Neil Roadman
(Neil Roadman)
(Principal Accounting Officer)
<PAGE>
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