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, 1999
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
November 9, 1999, was 61,898,020 shares.
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
September 30 December 31
1999 1998
(thousands)
ASSETS
UTILITY PLANT, at original cost
Electric $3,589,745 $3,576,490
Less-accumulated depreciation 1,498,704 1,410,773
Net utility plant in service 2,091,041 2,165,717
Construction work in progress 147,445 110,528
Nuclear fuel, net of amortization of
103,725 and $105,661 29,734 40,203
Total 2,268,220 2,316,448
REGULATORY ASSET - RECOVERABLE TAXES 109,000 109,000
INVESTMENTS AND NONUTILITY PROPERTY 364,030 343,247
CURRENT ASSETS
Cash and cash equivalents 36,753 43,213
Electric customer accounts receivable, net of
allowance for doubtful accounts
of $3,495 and $1,886 111,327 31,150
Other receivables 35,348 38,981
Fuel inventories, at average cost 22,314 18,749
Materials and supplies, at average cost 45,520 45,363
Deferred income taxes 1,928 4,799
Other 2,743 5,926
Total 255,933 188,181
DEFERRED CHARGES
Regulatory assets 34,047 26,229
Other deferred charges 15,210 29,259
Total 49,257 55,488
Total $3,046,440 $3,012,364
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see statements) $1,771,473 $1,880,147
CURRENT LIABILITIES
Notes payable to banks 16,774 10,000
Commercial paper 84,900 0
Current maturities of long-term debt 189,248 163,630
Called cumulative preferred stock 50,000 0
Accounts payable 68,117 61,764
Accrued taxes 61,411 15,625
Accrued interest 11,114 23,380
Accrued payroll and vacations 20,769 21,684
Accrued refueling outage costs 4,945 12,315
Other 13,326 28,874
Total 520,604 337,272
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 589,658 625,426
Deferred investment tax credits 55,450 58,786
Other 109,255 110,733
Total 754,363 794,945
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
Total $3,046,440 $3,012,364
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
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KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
September 30 December 31
1999 1998
(thousands)
COMMON STOCK EQUITY
Common stock-150,000,000 shares authorized
without par value 61,908,726 shares issued,
stated value $ 449,697 $ 449,697
Retained earnings (see statements) 438,284 443,699
Accumulated other comprehensive income (loss)
Unrealized gain (loss) on securities available
for sale (586) 74
Capital stock premium and expense (1,668) (1,668)
Total 885,727 891,802
CUMULATIVE PREFERRED STOCK
$100 Par Value
3.80% - 100,000 shares issued 10,000 10,000
4.50% - 100,000 shares issued 10,000 10,000
4.20% - 70,000 shares issued 7,000 7,000
4.35% - 120,000 shares issued 12,000 12,000
No Par Value
5.35%* - 500,000 shares issued 0 50,000
$100 Par Value - Redeemable
4.00% 62 62
Total 39,062 89,062
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY KCPL
SUBORDINATED DEBENTURES 150,000 150,000
LONG-TERM DEBT (excluding current maturities)
General Mortgage Bonds
Medium-Term Notes due 2000-2008, 6.96% and
6.95% weighted-average rate 296,500 338,500
4.01%* Environmental Improvement Revenue
Refunding Bonds due 2012-23 158,768 158,768
Environmental Improvement Revenue Refunding Bonds
4.08%* Series A & B due 2015 106,500 106,500
4.50% Series C due 2017 50,000 50,000
4.35% Series D due 2017 40,000 40,000
Subsidiary Obligations
Affordable Housing Notes due 2000-08, 8.34%
and 8.42% weighted-average rate 44,916 54,775
Other Long-Term Notes 0 740
Total 696,684 749,283
Total $1,771,473 $1,880,147
* Variable rate securities, weighted-average rate as of September 30, 1999
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
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KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30 1999 1998
(thousands)
ELECTRIC OPERATING REVENUES $300,658 $313,462
OPERATING EXPENSES
Operation
Fuel 41,397 41,039
Purchased power 53,397 31,273
Other 51,635 49,631
Maintenance 16,596 18,597
Depreciation 29,047 28,857
Income taxes 27,119 39,058
General taxes 27,418 27,934
Total 246,609 236,389
OPERATING INCOME 54,049 77,073
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds
used during construction 816 912
Miscellaneous income and
(deductions) - net (12,368) (12,162)
Income taxes 11,663 10,804
Total 111 (446)
INCOME BEFORE INTEREST CHARGES 54,160 76,627
INTEREST CHARGES
Long-term debt 12,754 14,056
Short-term debt 1,097 72
Mandatorily redeemable Preferred
Securities 3,113 3,113
Miscellaneous 659 1,076
Allowance for borrowed funds
used during construction (920) (575)
Total 16,703 17,742
Net income 37,457 58,885
Preferred stock
dividend requirements 984 973
Earnings available for
common stock $36,473 $57,912
Average number of common
shares outstanding 61,898 61,888
Basic and diluted earnings
per common share $0.59 $0.94
Cash dividends per
common share $0.415 $0.415
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
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KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Year to Date September 30 1999 1998
(thousands)
ELECTRIC OPERATING REVENUES $708,339 $748,599
OPERATING EXPENSES
Operation
Fuel 96,808 112,624
Purchased power 82,711 54,317
Other 145,856 143,320
Maintenance 47,386 50,842
Depreciation 88,544 86,238
Income taxes 54,767 70,854
General taxes 71,320 72,135
Total 587,392 590,330
OPERATING INCOME 120,947 158,269
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds
used during construction 2,502 2,735
Miscellaneous income and
(deductions) - net (34,666) (25,995)
Income taxes 36,337 31,168
Total 4,173 7,908
INCOME BEFORE INTEREST CHARGES 125,120 166,177
INTEREST CHARGES
Long-term debt 39,009 43,426
Short-term debt 2,235 239
Mandatorily redeemable Preferred
Securities 9,338 9,338
Miscellaneous 2,387 3,183
Allowance for borrowed funds
used during construction (2,327) (1,816)
Total 50,642 54,370
Net income 74,478 111,807
Preferred stock
dividend requirements 2,875 2,930
Earnings available for
common stock $71,603 $108,877
Average number of common
shares outstanding 61,898 61,878
Basic and diluted earnings
per common share $1.16 $1.76
Cash dividends per
common share $1.245 $1.225
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
4
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KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Twelve Months Ended September 30 1999 1998
(thousands)
ELECTRIC OPERATING REVENUES $898,681 $944,160
OPERATING EXPENSES
Operation
Fuel 127,533 143,088
Purchased power 92,012 67,423
Other 191,527 193,859
Maintenance 67,542 69,181
Depreciation 117,758 114,099
Income taxes 62,695 80,839
General taxes 92,771 93,066
Total 751,838 761,555
OPERATING INCOME 146,843 182,605
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds
used during construction 3,583 3,370
Miscellaneous income and
(deductions) - net (50,172) (36,580)
Income taxes 51,151 45,511
Total 4,562 12,301
INCOME BEFORE INTEREST CHARGES 151,405 194,906
INTEREST CHARGES
Long-term debt 52,595 58,947
Short-term debt 2,291 348
Mandatorily redeemable Preferred
Securities 12,450 12,450
Miscellaneous 3,661 4,204
Allowance for borrowed funds
used during construction (2,985) (2,266)
Total 68,012 73,683
Net income 83,393 121,223
Preferred stock
dividend requirements 3,829 3,853
Earnings available for
common stock $79,564 $117,370
Average number of common
shares outstanding 61,899 61,893
Basic and diluted earnings
per common share $1.29 $1.90
Cash dividends per
common share $1.66 $1.63
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
5
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KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year to Date September 30 1999 1998
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 74,478 $ 111,807
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 88,544 86,238
Amortization of:
Nuclear fuel 11,430 14,323
Other 8,785 6,802
Deferred income taxes (net) (32,498) 896
Investment tax credit amortization (3,336) (3,433)
Fuel contract settlement (13,391) 0
Losses from equity investments 14,757 7,387
Asset impairments 20,362 0
Gain on sale of Nationwide Electric, Inc.
stock (19,835) 0
Kansas rate refund accrual (14,200) 11,174
Allowance for equity funds used
during construction (2,502) (2,735)
Other operating activities (Note 2) (57,898) 28,988
Net cash from operating activities 74,696 261,447
CASH FLOWS FROM INVESTING ACTIVITIES
Utility capital expenditures (118,937) (71,941)
Allowance for borrowed funds used
during construction (2,327) (1,816)
Purchases of investments (23,444) (22,338)
Purchases of nonutility property (40,836) (13,686)
Sale of KLT Power 0 53,033
Sale of Nationwide Electric, Inc. stock 39,617 0
Hawthorn No. 5 partial insurance recovery 80,000 0
Other investing activities (1,778) (7,924)
Net cash from investing activities (67,705) (64,672)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 10,889 10,405
Repayment of long-term debt (37,870) (122,730)
Net change in short-term borrowings 91,674 5,498
Dividends paid (79,893) (78,829)
Other financing activities 1,749 (2,736)
Net cash from financing activities (13,451) (188,392)
NET CHANGE IN CASH AND CASH
EQUIVALENTS (6,460) 8,383
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 43,213 74,098
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 36,753 $ 82,481
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $ 61,577 $ 58,915
Income taxes $ 30,722 $ 468
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
6
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KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended September 30 1999 1998
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 83,393 $ 121,223
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 117,758 114,099
Amortization of:
Nuclear fuel 16,253 15,948
Other 11,054 8,976
Deferred income taxes (net) (35,862) 15,844
Investment tax credit amortization (4,374) (4,113)
Fuel contract settlement (13,391) 0
Losses from equity investments 19,053 7,348
Asset impairments 26,390 1,134
Gain on sale of Nationwide Electric, Inc.
stock (19,835) 0
Deferred merger costs 0 5,712
Kansas rate refund accrual (11,174) 11,174
Allowance for equity funds used
during construction (3,583) (3,370)
Other operating activities (Note 2) (69,770) (1,912)
Net cash from operating activities 115,912 292,063
CASH FLOWS FROM INVESTING ACTIVITIES
Utility capital expenditures (166,536) (103,893)
Allowance for borrowed funds used
during construction (2,985) (2,266)
Purchases of investments (56,260) (31,441)
Purchases of nonutility property (49,761) (17,148)
Sale of KLT Power 0 53,033
Sale of Nationwide Electric, Inc. stock 39,617 0
Hawthorn No. 5 partial insurance recovery 80,000 0
Other investing activities 14,154 (8,436)
Net cash from investing activities (141,771) (110,151)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 7,890 10,405
Repayment of long-term debt (17,820) (124,775)
Net change in short-term borrowings 94,933 5,806
Dividends paid (106,539) (104,777)
Other financing activities 1,667 1,872
Net cash from financing activities (19,869) (211,469)
NET CHANGE IN CASH AND CASH
EQUIVALENTS (45,728) (29,557)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 82,481 112,038
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 36,753 $ 82,481
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $ 74,358 $ 73,625
Income taxes $ 55,042 $ 22,853
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
7
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<TABLE>
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Year to Date Twelve Months Ended
September 30 September 30 September 30
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
(thousands)
Net income $ 37,457 $ 58,885 $ 74,478 $ 111,807 $ 83,393 $ 121,223
Other comprehensive loss:
Unrealized loss on
securities available for sale (4,935) (3,594) (1,035) (1,940) (2,010) (7,016)
Income tax benefit 1,784 1,301 375 702 727 2,544
Net unrealized loss on
securities available for sale (3,151) (2,293) (660) (1,238) (1,283) (4,472)
Comprehensive Income $ 34,306 $ 56,592 $ 73,818 $ 110,569 $ 82,110 $ 116,751
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three Months Ended Year to Date Twelve Months Ended
September 30 September 30 September 30
1999 1998 1999 1998 1999 1998
(thousands)
Beginning balance $ 427,449 $ 429,216 $ 443,699 $ 428,452 $ 461,430 $ 444,984
Net income 37,457 58,885 74,478 111,807 83,393 121,223
464,906 488,101 518,177 540,259 544,823 566,207
Dividends declared
Preferred stock - at required rates 934 981 2,830 3,022 3,788 3,903
Common stock 25,688 25,690 77,063 75,807 102,751 100,874
Ending balance $ 438,284 $ 461,430 $ 438,284 $ 461,430 $ 438,284 $ 461,430
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
8
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KANSAS CITY POWER & LIGHT COMPANY
CERTAIN FORWARD-LOOKING INFORMATION
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 statement is made. In connection with the safe
harbor provisions of the Private Securities Litigation Reform Act of
1995, we are providing a number of important factors that could cause
actual results to differ materially from provided forward-looking
information. These important factors include:
- - the proposed Western Resources Inc. (Western Resources) merger
- - future economic conditions in the regional, national and
international markets
- - state, federal and foreign regulation
- - weather conditions
- - financial market conditions, including, but not limited to
changes in interest rates
- - inflation rates
- - increased competition, including, but not limited to, the
deregulation of the United States electric utility industry, and the
entry of new competitors
- - ability to carry out marketing and sales plans
- - ability to achieve generation planning goals and the occurrence
of unplanned generation outages
- - nuclear operations
- - ability to enter new markets successfully and capitalize on
growth opportunities in nonregulated businesses
- - unforeseen events that would prevent correcting internal or
external information systems for Year 2000 problems
- - adverse changes in applicable laws, regulations or rules
governing environmental (including air quality regulations), 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 1998 annual report on Form 10-K.
1. AMENDED AND RESTATED PLAN OF MERGER WITH WESTERN RESOURCES
A merger agreement was entered into with Western Resources on February
7, 1997. In December 1997 KCPL canceled its previously scheduled
special meeting of shareholders to vote on the transaction because
Western Resources advised KCPL that its investment bankers, Salomon
Smith Barney, had indicated that it was unlikely that Salomon would be
in a position to issue a fairness opinion. During 1997 KCPL incurred
and deferred $7 million of merger-related costs that were expensed in
December 1997.
On March 18, 1998, KCPL and Western Resources entered into an Amended
and Restated Agreement and Plan of Merger (Amended Agreement). This
Amended Agreement would provide for the combination of the regulated
electric utilities of KCPL and Western Resources into Westar
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Energy, a new company, using purchase accounting. Westar Energy would be
owned approximately 80.1% by Western Resources and approximately 19.9% by
KCPL shareholders. KCPL shareholders would receive for each share of
KCPL's stock one share of Westar Energy common stock and a fraction of
a share of Western Resources common stock. The value of such
transaction to KCPL shareholders cannot be determined until a twenty-
day period ending the tenth trading day prior to closing. The Amended
Agreement also requires KCPL to redeem all outstanding shares of cumulative
preferred stock before consummation of the proposed transaction.
The status of the approvals of the merger is as follows:
1) Shareholder Approval
On July 30, 1998, KCPL's and Western Resources' shareholders
approved the Amended Agreement at special meetings of
shareholders.
2) Missouri Public Service Commission (MPSC) Approval
On September 2, 1999, the Missouri Public Service Commission
(MPSC) issued an order approving the transaction. The most
significant provisions of the order provide:
- that the parties would not file a request for a change in Missouri
electric rates or a refund of those rates for three years beginning
with the closing of the merger.
- a $5 million refund to Missouri retail customers one year
following the closing.
- no recovery of the acquisition premium or transaction costs.
- discontinuance of use of the KCPL name and logo in connection
with unregulated products and services eighteen months after closing.
3) Kansas Corporation Commission (KCC) Approval
On September 28, 1999, the Kansas Corporation Commission (KCC)
issued an order approving the transaction subject to certain
conditions. The most significant provisions of the order are as
follows:
- The KCC denied inclusion of the acquisition premium in Westar's
cost of service in any ratemaking or stranded cost proceeding.
- There would be a four-year rate moratorium for Westar. During
that period, Westar would be permitted to retain all merger savings
and may apply for accounting authority orders regarding carrying
charges for new construction.
- After the moratorium, for a period of 35 years, Westar would be
allowed to keep an estimated $3.85 million per year of merger
savings.
- Westar would be subject to customer service standards
that include significant penalties for non-compliance.
Petitions for reconsideration or clarification of the KCC order
were filed by several parties, including KCPL, Western Resources
and the KCC Staff. On November 4, 1999, the KCC declined to make
any significant changes to its order.
4) Federal Energy Regulatory Commission (FERC) Approval
In September 1999, KCPL and Western Resources reached a
settlement agreement with FERC staff and all parties except the
City of Wichita. The most significant provisions of the
settlement agreement are as follows:
- Westar agrees to join a FERC approved Regional Transmission
Organization (RTO) and must file an application to do so by October
15, 2000.
- Westar must file for a single system transmission rate under the
RTO no later than four years from the effective date of the merger.
- Until a single system rate is filed, Westar would charge open
access transmission customers a single system rate based on the zone
of delivery.
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- If the merger becomes effective prior to Westar joining an RTO,
Westar must transfer functional control of the transmission
facilities over to an independent transmission entity (ITE). The
ITE must have the authority under FERC Order 888 to designate
facilities for control for reliability, security, access or market
power mitigation purposes. The ITE must have authority to
redispatch for reliability.
- Westar's transmission facilities must operate as one control
area.
- Westar would not file to increase rates for wholesale requirements
customers to become effective before four years after the merger is
consummated.
- Fourteen current wholesale customers have the option to have
their fuel adjustment clauses eliminated.
We cannot predict when or if approval by the FERC will be granted or
whether the other remaining closing conditions will be met, including
the approval by the Department of Justice. If all approvals have not
been received by December 31, 1999 or if the average stock price is
below $29.78 for a twenty-day period ending the tenth trading day prior to
closing, either party may terminate the Amended Agreement.
If the Amended Agreement is terminated under other circumstances and
KCPL, within two and one-half years following termination, agrees to
consummate a business combination with a third party that made a
proposal to combine before termination, a payment of $50 million would
be due Western Resources. Western Resources would have to pay KCPL $5
million to $35 million if the Amended Agreement is terminated because
of Western Resources' inability to receive a favorable tax opinion from its
legal counsel, favorable statutory approvals or an exemption from the Public
Utility Holding Company Act of 1935.
2. CONSOLIDATED STATEMENTS OF CASH FLOWS - OTHER OPERATING ACTIVITIES
Year to Date Twelve Months Ended
1999 1998 1999 1998
Cash flows affected by changes in: (thousands)
Receivables $ (76,544) $ (34,992) $ (49,450) $ (17,541)
Fuel inventories (3,565) (3,509) (4,981) (1,377)
Materials and supplies (157) 1,917 (858) 2,332
Accounts payable 6,353 (3,669) 14,218 8,092
Accrued taxes 45,786 61,770 (2,031) 630
Accrued interest (12,266) (3,829) (7,417) 669
Wolf Creek refueling outage
accrual (7,370) 8,168 (4,887) (2,446)
Other (10,135) 3,132 (14,364) 7,729
Total $ (57,898) $ 28,988 $ (69,770) $ (1,912)
3. 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) reported as a separate component of
comprehensive income.
The cost of securities available for sale held by KLT Inc. (KLT) as of
September 30, 1999 and December 31, 1998 was $4.8 million.
Accumulated net unrealized losses were $0.6 million at September 30,
1999, and accumulated net unrealized gains were $0.1 million at
December 31, 1998.
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4. EQUITY METHOD INVESTMENTS
We use the equity method to account for equity investments when
management can exert influence over the operations of the investee.
We had equity method investments, excluding affordable housing limited
partnerships, of approximately $59 million at September 30, 1999. The
following companies, which we account for as equity method
investments, had on their books total assets of $504 million at
September 30, 1999 and a combined net loss of $34 million for the nine
months ended September 30, 1999. KCPL's wholly-owned subsidiaries
held ownership percentages in these companies at September 30, 1999,
as follows:
KLT
- - Kansas City Downtown Hotel Group, L.L.C., 25%
- - DTI Holdings, Inc., 47%
- - Lyco Energy Corporation, 30%
- - Custom Energy, L.L.C., 47%
- - Custom Lighting Services L.L.C., 50%
Home Service Solutions Inc. (HSS)
- - R.S. Andrews Enterprises, Inc., 49%
5. CAPITALIZATION
KCPL Financing I (Trust), a wholly-owned subsidiary of KCPL, has
previously 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.
6. SEGMENT AND RELATED INFORMATION
In 1998 we adopted SFAS No. 131 - Disclosures About Segments of an
Enterprise and Related Information. KCPL's reportable segments are
strategic business units. Electric Operations includes the regulated
electric utility, unallocated corporate charges and wholly-owned
subsidiaries on an equity basis. KLT is a holding company for various
nonregulated business ventures. The Other column represents the
operations of HSS and KLT Iatan Inc. (Iatan).
We evaluate performance based on profit or loss from operations and
return on capital investment. We eliminate all intersegment sales and
transfers. We include KLT, HSS and Iatan revenues and expenses in
Other Income and (Deductions) and Interest Charges in the Consolidated
Statements of Income.
The tables below reflect summarized financial information concerning
KCPL's reportable segments.
Electric Intersegment Consolidated
Operations KLT Inc. Other Eliminations Totals
Three Months Ended (thousands)
September 30, 1999
Electric Operating
Income (a) $ 54,049 $ 54,049
Miscellaneous
income (b) 6,907 $ 19,100 $ 760 $ 766 27,533
Miscellaneous
deductions(c) (11,663) (27,368) (870) - (39,901)
Income taxes on
Other Income and
(Deductions) 1,206 10,432 25 - 11,663
Interest Charges (13,858) (2,845) - - (16,703)
Net income(loss) 37,457 (681) (85) 766 37,457
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Electric Intersegment Consolidated
Operations KLT Inc. Other Eliminations Totals
Three Months Ended (thousands)
September 30, 1998
Electric Operating
Income (a) $ 77,073 $ 77,073
Miscellaneous
income (b) 4,922 $ 7,060 $ 129 $ (2,188) 9,923
Miscellaneous
deductions(c) (10,868) (11,217) - (22,085)
Income taxes on
Other Income and
(Deductions) 1,324 9,480 - 10,804
Interest Charges (14,478) (3,264) - (17,742)
Net income 58,885 2,059 129 (2,188) 58,885
Nine Months Ended
September 30, 1999
Electric Operating
Income (a) $120,947 $120,947
Miscellaneous
income (b) 16,003 $16,952 $ 1,747 $ 2,514 37,216
Miscellaneous
deductions(c) (25,128) (42,930) (3,824) - (71,882)
Income taxes on
Other Income and
(Deductions) 1,832 33,775 730 - 36,337
Interest Charges (41,678) (8,964) - - (50,642)
Net income(loss) 74,478 (1,167) (1,347) 2,514 74,478
Nine Months Ended
September 30, 1998
Electric Operating
Income (a) $158,269 $158,269
Miscellaneous
income (b) 16,768 $26,182 $ 129 $ (9,105) 33,974
Miscellaneous
deductions(c) (25,758) (34,211) - (59,969)
Income taxes on
Other Income and
(Deductions) 3,779 27,389 - 31,168
Interest Charges (43,986) (10,384) - (54,370)
Net income 111,807 8,976 129 (9,105) 111,807
Twelve Months Ended
September 30, 1999
Electric Operating
Income (a) $146,843 $146,843
Miscellaneous
income (b) 21,043 $22,044 $ 2,351 $ 7,133 52,571
Miscellaneous
deductions(c) (35,866) (62,120) (4,757) - (102,743)
Income taxes on
Other Income and
(Deductions) 3,747 46,596 808 - 51,151
Interest Charges (55,957) (12,055) - - (68,012)
Net income(loss) 83,393 (5,535) (1,598) 7,133 83,393
Twelve Months Ended
September 30, 1998
Electric Operating
Income (a) $182,605 $182,605
Miscellaneous
income (b) 24,072 $34,897 $ 129 $(12,460) 46,638
Miscellaneous
deductions(c) (36,480) (46,738) - (83,218)
Income taxes on
Other Income and
(Deductions) 7,220 38,291 - 45,511
Interest Charges (59,564) (14,119) - (73,683)
Net income 121,223 12,331 129 (12,460) 121,223
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(a) Refer to the Consolidated Statements of Income for detail of
Electric Operations revenues and expenses.
(b) Includes nonregulated revenues, interest and dividend income,
income and losses from equity investments and gains on sales of
property.
(c) Includes nonregulated expenses, losses on sales of property,
asset impairments and merger-related expenses.
Identifiable Assets
September 30, 1999 December 31, 1998
(thousands)
Electric Operations $ 2,879,827 $ 2,831,052
KLT Inc. 293,495 310,750
Other 44,242 24,239
Intersegment
Eliminations (171,124) (153,677)
Consolidated Totals $ 3,046,440 $ 3,012,364
7. ENVIRONMENTAL MATTERS
KCPL's policy is to act in an environmentally responsible manner and
use the latest technology available to avoid and treat contamination.
We continually conduct environmental audits designed to ensure
compliance with governmental regulations and to detect contamination.
However, governmental bodies may impose additional or more rigid
environmental regulations that could require substantial changes to
operations or facilities.
Monitoring Equipment and Certain Air Toxic Substances
The Clean Air Act Amendments of 1990 required KCPL to spend about
$5 million in prior years for the installation of continuous
emission monitoring equipment to satisfy the requirements under
the acid rain provision. Also, a study under the Act could
require regulation of certain air toxic substances, including
mercury. We cannot predict the likelihood of any such
regulations or compliance costs.
Air Particulate Matter
In July 1997 the United States Environmental Protection Agency
(EPA) published new air quality standards for particulate matter.
Additional regulations implementing these new particulate
standards have not been finalized. Without the implementation
regulations, the impact of the standards on KCPL cannot be
determined. However, the impact on KCPL and other utilities that
use fossil fuels could be substantial. Under the new fine
particulate regulations the EPA is in the process of implementing
a three-year study of fine particulate emissions. Until this
testing and review period has been completed, KCPL cannot
determine additional compliance costs, if any, associated with
the new particulate regulations.
Nitrogen Oxide
In 1997 the EPA also issued new proposed regulations on reducing
nitrogen oxide (NOx) emissions. The EPA announced in 1998 final
regulations implementing reductions in NOx emissions. These
regulations initially called for 22 states, including Missouri,
to submit plans for controlling NOx emissions. The regulations
require a significant reduction in NOx emissions from 1990 levels
at KCPL's Missouri coal-fired plants by the year 2003. The
United States Court of Appeals for the District of Columbia
subsequently issued a stay of the
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requirement to issue these plans for controlling NOx emissions
pending further order from the Court.
To achieve these proposed reductions, KCPL would need to incur
significantly higher capital costs, purchase power or purchase
NOx emissions allowances. It is possible that purchased power or
emissions allowances may be too costly or unavailable.
Preliminary analysis of the regulations indicate that selective
catalytic reduction technology will be required for some of the
KCPL units, as well as other changes. Currently, we estimate
that additional capital expenditures to comply with these
regulations could range from $40 million to $60 million.
Operations and maintenance expenses could also increase by more
than $2.5 million per year. These capital expenditure estimates
do not include the costs of the new air quality control equipment
to be installed at Hawthorn No. 5 (see Hawthorn No. 5 on page
29). The new air control equipment designed to meet current
environmental standards will also comply with the proposed
requirements discussed above.
We continue to refine our preliminary estimates and explore
alternatives to comply with these new regulations in order to
minimize, to the extent possible, KCPL's capital costs and
operating expenses. The ultimate cost of these regulations could
be significantly different from the amounts estimated above.
In December 1998, KCPL and several other western Missouri
utilities filed suit against the EPA over the inclusion of
western Missouri in the NOx reduction program. The plaintiffs
filed their initial briefs in April 1999. The EPA filed its
brief on July 1, 1999. Reply briefs have been filed and oral
arguments occurred on November 9, 1999. The outcome cannot be
predicted at this time.
A three-judge panel of the D.C. Circuit of the U.S. Court of
Appeals found certain portions of the NOx control program
unconstitutional. The EPA has requested a hearing before all
judges of the court and oral argument in this case occurred on
November 9, 1999. If the panel's decision is upheld, the effect
will be to decrease the severity of the standards with which KCPL
ultimately may need to comply.
Carbon Dioxide
At a December 1997 meeting in Kyoto, Japan, the Clinton
Administration supported changes to the International Global
Climate Change treaty which would require a seven percent
reduction in United States carbon dioxide (CO2) emissions below
1990 levels. The Administration has not submitted this change to
the U.S. Senate where ratification is uncertain. If future
reductions of electric utility CO2 emissions are eventually
required, the financial impact upon KCPL could be substantial.
8. LOW-LEVEL WASTE
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated
that the various states, individually or through interstate compacts,
develop alternative low-level radioactive waste disposal facilities.
The states of Kansas, Nebraska, Arkansas, Louisiana and Oklahoma
formed the Central Interstate Low-Level Radioactive Waste Compact and
selected a site in Nebraska on which to locate a disposal facility.
Wolf Creek Nuclear Operating Corporation (WCNOC) and the owners of the
other five nuclear units in the compact have provided most of the pre-
construction financing for this project. KCPL's net investment on its
books was approximately $7.5 million at September 30, 1999 and
December 31, 1998.
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Significant opposition to the project has been raised by Nebraska
officials and residents in the area of the proposed facility, and
attempts have been made through litigation and proposed legislation in
Nebraska to slow down or stop development of the facility. On
December 18, 1998, the application for a license to construct this
project was denied. On January 15, 1999, a request for a contested
case hearing on the denial of the license was filed. On April 16,
1999, a U.S. District Court judge in Nebraska issued an injunction
staying indefinitely any further activity on the contested case
hearing. In May 1999 the state of Nebraska appealed the injunction.
The possibility of reversing the license denial will be greater when
the contested case hearing ultimately is conducted than it would have
been had the hearing been conducted immediately. In May 1999, the
Nebraska legislature passed a bill withdrawing Nebraska from the
Compact. In August 1999, the Nebraska governor gave official notice
of the withdrawal to the other member states. Withdrawal will not be
effective for five years.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STATUS OF MERGER
See Note 1 to the Consolidated Financial Statements for the current
status of the proposed Western Resources Inc. (Western Resources)
merger. 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 a result, FERC
may consider a number of remedies including transmission upgrades,
divestitures of generating assets or formation of independent system
operators.
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 continuing to improve the efficiency of KCPL's
electric utility operations, lowering prices and offering new
services. In particular, KCPL's value-added services for large energy
users now include contracts for natural gas commodities.
Competition in the electric utility industry accelerated with the
passage of the National Energy Policy Act of 1992. This Act gave FERC
the authority to require electric utilities to provide transmission
line access to independent power producers (IPPs) and other utilities
(wholesale wheeling). In April 1996 FERC issued an order requiring
all owners of transmission facilities to adopt open-access tariffs and
participate in wholesale wheeling. We made the necessary filings to
comply with that order.
FERC's April 1996 order 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, including Kansas and Missouri. While
retail wheeling legislation was introduced in Kansas and Missouri in
1999, no comprehensive legislation was passed.
Retail access could result in market-based rates below current cost-
based rates, providing 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 stranded costs and place an unfair burden on the
remaining customer base or shareholders. Testimony filed in the
merger case in Kansas indicated stranded costs of approximately $1
billion for KCPL. An independent study prepared at the request of the
Kansas Corporation Commission (KCC) concluded there are no stranded
costs. We cannot predict whether any stranded costs would be
recoverable in future rates. If an adequate and fair provision for
recovery of lost revenues is not provided, certain generating assets
may have to be evaluated for impairment and appropriate charges
recorded against earnings. In addition to lowering profit margins,
market-based rates could require generating assets to be depreciated
over shorter useful lives, increasing operating expenses.
KCPL is positioned to compete in an open market with its diverse
customer mix and pricing strategies. Industrial customers make up
about 21% of KCPL's retail mwh sales, well below the utility industry
average. KCPL's flexible industrial rate structure is competitive
with other companies'
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rate structures in the region. In addition, we
have entered into long-term contracts for a significant portion of
KCPL's industrial sales. Although no direct competition for retail
electric service currently exists within KCPL's service territory, it
exists in the bulk power market and between alternative fuel suppliers
and KCPL. In addition, third-party energy management companies are
seeking to initiate relationships with large users in KCPL's service
territory in an attempt to enhance their chances to supply electricity
directly when retail wheeling is authorized.
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. A utility'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
can maintain its $143 million of regulatory assets at September 30,
1999, as long as FASB 71 requirements are met.
Competition could eventually have a materially adverse effect on
KCPL's results of operations and financial position. Should
competition eventually result in a significant charge to equity,
capital requirements and related costs could increase significantly.
NONREGULATED OPPORTUNITIES
KLT Inc. (KLT), a wholly-owned subsidiary of KCPL, pursues
nonregulated business ventures. Existing ventures include investments
in energy services, oil and gas development and production,
telecommunications and affordable housing limited partnerships.
KCPL's equity investment in KLT was $119 million as of September 30,
1999 and 1998. KLT's loss for the nine months ended September 30,
1999, totaled $1.2 million compared to income of $9.0 million for the
nine months ended September 30, 1998. (See KLT earnings per share
analysis on page 23 for significant factors impacting KLT's operations
and resulting net income for all periods.) KLT's consolidated assets
at September 30, 1999, totaled $293 million.
Home Service Solutions Inc. (HSS), a wholly-owned subsidiary of KCPL,
pursues nonregulated business ventures, primarily in residential
services. HSS has an investment in R.S. Andrews Enterprises, Inc.
(RSAE), a consumer services company in Atlanta, Georgia. RSAE expects
to continue making acquisitions in key U.S. markets. Additionally,
Worry Free Service, Inc., a wholly-owned subsidiary of HSS, provides
residential services, including preventative maintenance and warranty
services for heating and air conditioning equipment.
KCPL's equity investment in HSS was $39.5 million as of September 30,
1999 and $21 million as of September 30, 1998. HSS' loss for the nine
months ended September 30, 1999, totaled $0.4 million compared to
income of $0.1 million for the nine months ended September 30, 1998.
HSS' consolidated assets at September 30, 1999, totaled $44 million.
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RESULTS OF OPERATIONS
Three-month period: Three months ended September 30, 1999,
compared with three months ended September
30, 1998
Nine-month period: Nine months ended September 30, 1999,
compared with nine months ended September 30,
1998
Twelve-month period: Twelve months ended September 30, 1999,
compared with twelve months ended September
30, 1998
EARNINGS OVERVIEW
For the Periods Ended September 30
Earnings per EPS Excluding Decrease Excluding
Share (EPS) Merger Expenses Merger Expenses
1999 1998 1999 1998
Three months ended $0.59 $0.94 $0.60 $1.03 $(0.43)
Nine months ended $1.16 $1.76 $1.19 $1.95 $(0.76)
Twelve months ended $1.29 $1.90 $1.33 $2.16 $(0.83)
EPS, excluding merger expenses for all periods, decreased primarily
due to the following factors:
- The approximate $15 million Missouri rate reduction, effective
March 1, 1999, reduced EPS by $0.05 this quarter and $0.10 for the
nine and twelve months ended September 30, 1999.
- Intense and prolonged heat during the last half of July produced
a new summer peak demand of 3,251 megawatts and increased kilowatt-
hour consumption. Because of these conditions, purchased power prices
and volumes exceeded the prior year. These higher purchased power
expenses, net of the increased revenues, lowered EPS by approximately
$0.18 for all periods.
- The impact of the unavailability of Hawthorn No. 5 (see page 29).
- Earnings per share from KLT decreased $0.04 for the three-month
period, $0.16 for the nine-month period and $0.29 for the twelve-month
period (see KLT earnings per share analysis on page 23).
- Milder than normal weather during all periods, despite intense
heat in July 1999, compared to warmer than normal weather in the
three, nine and twelve months ended September 30, 1998.
Additionally, the approximately $14 million Kansas rate reduction,
effective January 1, 1998, reduced EPS by $0.03 for the twelve-month
period.
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<PAGE>
MEGAWATT-HOUR (MWH) SALES AND OPERATING REVENUES
Sales and revenue data:
(revenue change in millions)
Periods ended September 30, 1999 versus September 30, 1998
Three Months Nine Months Twelve Months
Mwh Revenues Mwh Revenues Mwh Revenues
Increase (decrease)
Retail Sales:
Residential (5)% $ (6) (3)% $ (10) (3)% $ (12)
Commercial (2)% (1) - % (5) - % (6)
Industrial - % 2 - % 3 1 % 2
Other 2 % - 2 % - 2 % -
Total Retail (3)% (5) (1)% (12) (1)% (16)
Sales for Resale:
Bulk Power Sales (29)% (7) (48)% (26) (40)% (28)
Other (4)% - (3)% - (7)% -
Total (12) (38) (44)
Other revenues (1) (2) (1)
Total Operating
Revenues $ (13) $ (40) $ (45)
In 1999 the MPSC approved a stipulation and agreement that called for
KCPL to reduce its annual Missouri electric revenues by 3.2%, or about
$15 million after March 1, 1999. Revenues decreased by about $5
million for the three-month period and $10 million for the nine- and
twelve-month periods as a result of the Missouri rate reduction.
The KCC approved a rate settlement agreement, effective January 1,
1998, authorizing a $14.2 million annual revenue reduction and an
annual increase in depreciation expense of $2.8 million. Pending the
approval of a new Kansas rate design, we accrued $14.2 million during
1998 for refund to customers. The new rate design was approved in
December 1998 and directed KCPL to refund, starting March 1, 1999, the
$14.2 million we accrued during 1998, plus the amount that we accrued
for January and February 1999. The KCC rate settlement agreement
reduced revenues by $14 million for the twelve months ended September
30, 1999, and $11 million for the twelve months ended September 30,
1998.
Retail mwh sales decreased 3% for the three-month period and decreased
1% for the nine- and twelve-month periods primarily due to milder
weather, despite intense heat in July 1999, partially offset by
continued load growth. Load growth consists of higher usage per
customer as well as the addition of new customers. Less than 1% of
revenues include an automatic fuel adjustment provision.
Bulk power sales vary with system requirements, generating unit and
purchased power availability, fuel costs and the requirements of other
electric systems. The unavailability of Hawthorn No. 5 contributed to
the decreased bulk power mwh sales of 29% for the three-month period,
48% for the nine-month period and 40% for the twelve-month period. In
addition, the Spring 1999 Wolf Creek refueling and maintenance outage
contributed to the decreased bulk power mwh sales for the nine- and
twelve-month periods. Partially offsetting these declines in bulk
power mwh sales, the Fall 1998 outage at Hawthorn No. 5 and the Fall
1998 outage at LaCygne No. 1 resulted in decreased bulk power mwh
sales during the three-, nine- and twelve-months ended September 30,
1998.
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<PAGE>
Further, the extended 1997 Wolf Creek outage contributed to
reduced bulk power mwh sales for the twelve months ended September 30,
1998.
Future mwh sales and revenues per mwh could be affected by national
and local economies, weather, customer conservation efforts and
availability of generating units. 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
Percentage change for the period
Combined fuel
and purchased Total MWH
power expenses sales *
Increase(Decrease)
Three-month period 31 % (6)%
Nine-month period 8 % (11)%
Twelve-month period 4 % (9)%
* Total of retail and sales for resale
For all periods, the unavailability of Hawthorn No. 5 resulted in
increased purchased power expenses partially offset by decreased fuel
expenses at Hawthorn No. 5. Additionally, as a result of the intense
and prolonged heat in the Midwest during the last half of July 1999,
KCPL incurred approximately $18 million in higher costs including
purchased power expenses, net of the increased revenues (see Hawthorn
No. 5 on page 29). Prices for purchased power in the wholesale market
escalated during the last half of July 1999, reflecting constrained
transmission and limited generating capacity in the region. Normal
costs of $20 to $30 per mwh of purchased power in the Midwest and
South rose to more than $3,000 per mwh. Because of these market
conditions and the unavailability of Hawthorn No. 5, KCPL incurred
purchased power costs of $35 million in July 1999, an increase of $25
million over July 1998. These higher prices are the reason that
Combined fuel and purchased power expenses increased while Total MWH
sales decreased. The three, nine and twelve months ended September
30, 1998 included increased purchased power expenses due to Fall 1998
outages at LaCygne No. 1 and Hawthorn No. 5.
Nuclear fuel costs per MMBTU, which decreased 3% for the twelve-month
period, remained substantially less than the MMBTU price of coal.
Nuclear fuel costs per MMBTU averaged about 57% of the MMBTU price of
coal for the twelve months ended September 30, 1999, and about 60% of
the MMBTU price of coal for the twelve months ended September 30,
1998. We expect the price of nuclear fuel to remain fairly constant
through the year 2001. During the twelve months ended September 30,
1999, fossil plants represented about 71% of total generation and the
nuclear plant about 29%. For the twelve months ended September 30,
1998, fossil plants represented about 76% of total generation and the
nuclear plant about 24%.
The cost of coal per MMBTU increased 2% for the twelve-month period
because Hawthorn No. 5 was unavailable. The cost of coal per MMBTU at
Hawthorn No. 5 was lower than the average cost of coal per MMBTU at
most of KCPL's other coal-fired plants. KCPL's coal procurement
strategies continue to provide coal costs below the regional average.
We expect coal costs to remain fairly consistent with current levels
through 2001.
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OTHER OPERATION AND MAINTENANCE EXPENSES
Combined other operation and maintenance expenses during the three-
month period remained constant while they declined slightly during the
nine- and twelve-month periods. As a result of the February 17, 1999,
boiler explosion at Hawthorn No. 5, Hawthorn No. 5's other operation
and maintenance expenses decreased for all periods. The nine- and
twelve-month period declines in maintenance expenses were partially
offset by increased maintenance expenses at LaCygne No. 2 during a
scheduled outage in Spring 1999. In addition, maintenance expenses
were increased during the three months ended September 30, 1998, due
to outages at LaCygne No. 1 and Hawthorn No. 5. During the Wolf Creek
outage completed in December 1997, actual costs incurred were $3.5
million in excess of the estimated and accrued costs increasing
combined other operation and maintenance expenses for the twelve
months ended September 30, 1998.
Partially offsetting the decreased maintenance expenses were increases
in the bad debt provision for customer accounts receivable during the
three months ended September 30, 1999. As a result customer accounts
expenses increased in all periods. Furthermore, advertising expenses
increased for all periods.
We continue to emphasize new technologies, improved work methodology
and cost control. We continuously improve our work processes to
provide increased efficiencies and improved operations. For example,
through the use of cellular technology, more than 90% of KCPL's
customer meters are read automatically.
DEPRECIATION
The increase in depreciation expense for all periods reflected normal
increases in depreciation from capital additions offset by a $1.7
million decrease in depreciation expense for the nine months ended
September 30, 1999 because of the partial retirement of Hawthorn No. 5
property due to the February 1999 explosion.
TAXES
Operating income taxes decreased for all periods, reflecting lower
taxable operating income.
Components of general taxes:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1999 1998 1999 1998 1999 1998
(thousands)
Property $ 10,741 $ 10,508 $ 32,224 $ 31,525 $ 42,097 $ 41,350
Gross receipts 14,158 14,472 32,077 32,922 41,295 42,006
Other 2,519 2,954 7,019 7,688 9,379 9,710
Total $ 27,418 $ 27,934 $ 71,320 $ 72,135 $ 92,771 $ 93,066
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OTHER INCOME AND (DEDUCTIONS)
KLT summarized operations
Three months Nine months Twelve months
ended ended ended
September 30 September 30 September 30
1999 1998 1999 1998 1999 1998
(millions, except for earnings per share)
Miscellaneous income and
(deductions) - net * $ (8.3)$ (4.1) $ (26.0)$ (8.0) $ (40.2)$ (11.8)
Income taxes 10.4 9.5 33.8 27.4 46.6 38.2
Interest charges (2.8) (3.3) (9.0) (10.4) (12.0) (14.1)
Net income $ (0.7)$ 2.1 $ (1.2)$ 9.0 $ (5.6)$ 12.3
KLT Earnings per share $(0.01)$ 0.03 $ (0.02)$ 0.14 $ (0.09)$ 0.20
* To table on page 24
KLT earnings per share analysis
Three months Nine months Twelve months
ended ended ended
September 30 September 30 September 30
1999 1998 1999 1998 1999 1998
(earnings per share)
KLT excluding items below $ 0.10 $ 0.06 $ 0.23 $ 0.20 $ 0.29 $ 0.27
Sale of Nationwide Electric 0.20 - 0.20 - 0.20 -
Write down of Lyco
investment (0.03) - (0.03) - (0.03) -
Write off of note
receivable (0.05) - (0.05) - (0.05) -
1998 KLT Power transactions - 0.04 - 0.04 (0.06) 0.04
KLT Telecom - Telemetry
Solutions (0.17) (0.02) (0.20) (0.03) (0.22) (0.04)
KLT Telecom - Digital
Teleport Inc. (0.06) (0.05) (0.17) (0.07) (0.22) (0.07)
KLT Earnings per share $(0.01)$ 0.03 $(0.02)$ 0.14 $(0.09) $ 0.20
KLT Telecom consisted primarily of investments in Telemetry Solutions
and Digital Teleport Inc. (DTI). As a result of the inability of
Telemetry Solutions subsidiaries to bring their products to market,
KLT Telecom made the decision in the third quarter of 1999 to cease
funding Telemetry Solutions and wrote off its investment. (Both the
write off of the investment ($0.13 per share) and the operating losses
incurred prior to the write off are included on the line KLT Telecom -
Telemetry Solutions in the earnings per share table above). We expect
that KLT Telecom's loss for calendar year 1999 from its investment in
DTI will be approximately the same as the loss incurred for the twelve
months ended September 30, 1999.
The enlarged scope of the business plans of DTI accelerated the time
and increased the magnitude of network depreciation expenses. KLT
Telecom's total losses from its investment in DTI are limited to its
$45 million equity investment. By December 31, 1999, the equity
investment in DTI is estimated to be approximately $15 million,
limiting the magnitude of possible future losses.
DTI is creating a 20,000-route mile, digital fiber optic network
comprised of 20 regional rings interconnecting primary, secondary and
tertiary cities in 37 states. By providing high-capacity voice and
data transmission services to and from secondary and tertiary cities,
as well as primary
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markets, DTI intends to become a leading wholesale
provider of regional communications transport services to
interexchange carriers and other communications companies. We
continue to expect long-term value from KLT's 47% ownership of DTI.
Miscellaneous income and (deductions) - net
Three months Nine months Twelve months
ended ended ended
September 30 September 30 September 30
1999 1998 1999 1998 1999 1998
(millions)
Merger-related expenses $ (1.0) $ (5.8) $ (2.1) $ (12.0) $ (2.6) $ (16.3)
* From table on page 23 (8.3) (4.1) (26.0) (8.0) (40.2) (11.8)
Other (3.1) (2.3) (6.6) (6.0) (7.4) (8.5)
Total Miscellaneous
income and
(deductions) - net $(12.4) $(12.2) $(34.7) $ (26.0) $(50.2) $ (36.6)
Other Income and (Deductions) - Income taxes
Other Income and (Deductions) - Income taxes for all periods reflects
the tax impact on total miscellaneous income and (deductions) - net.
Additionally, KLT accrued tax credits of $21 million for the nine
months ended September 30, 1999, and $19 million for the nine months
ended September 30, 1998. KLT accrued tax credits of $27 million for
the twelve months ended September 30, 1999 and $26 million for the
twelve months ended September 30, 1998.
INTEREST CHARGES
Long-term debt interest expense decreased for all periods, reflecting
lower average levels of outstanding long-term debt. The lower average
levels of debt reflect scheduled debt repayments made by KCPL,
repayments of affordable housing notes made by KLT and lower average
levels of debt by KLT on its bank credit agreement.
We use interest rate swap and cap agreements to limit the volatility
in interest expense on a portion of KLT's variable-rate, bank credit
agreement and KCPL's variable-rate, long-term debt. Although these
agreements are an integral part of interest rate management, the
incremental effect on interest expense and cash flows is not
significant. We do not use derivative financial instruments for
speculative purposes.
WOLF CREEK
Wolf Creek is one of KCPL's principal generating units, representing
about 19% of KCPL's generating capacity, excluding the Hawthorn No. 5
generating unit. The plant's operating performance has remained
strong over the last three years, contributing about 28% of the annual
mwh generation while operating at an average capacity of 91%. Wolf
Creek has the lowest fuel cost per MMBTU of any of KCPL's generating
units.
We accrue the incremental operating, maintenance and replacement power
costs for planned outages 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.
24
<PAGE>
Wolf Creek's tenth refueling and maintenance outage, estimated to be a
40-day outage, began April 3, 1999, and was completed May 9, 1999.
Actual costs of the 1999 outage were $1 million less than the
estimated and accrued costs for the outage. The 36-day outage was the
shortest refueling and maintenance outage in Wolf Creek's history.
Wolf Creek's ninth refueling and maintenance outage, budgeted for 35
days, began in early October 1997 and was completed in December 1997
(58 days). Several equipment problems caused the extended length of
the ninth outage. Actual costs of the 1997 outage were $6 million in
excess of the estimated and accrued costs for the outage.
No major equipment replacements are currently projected. An extended
shut-down of Wolf Creek could have a substantial adverse effect on
KCPL's business, financial condition and results of operations because
of higher replacement power and other costs. Although not expected,
the Nuclear Regulatory Commission could impose an unscheduled plant
shut-down, reacting to safety concerns at the plant or other similar
nuclear units. If a long-term shut-down occurred, the state
regulatory commissions could reduce rates by excluding the Wolf Creek
investment from rate base.
Ownership and operation of a nuclear generating unit exposes KCPL to
risks regarding decommissioning costs at the end of the unit's life
and to potential retrospective assessments and property losses in
excess of insurance coverage.
ENVIRONMENTAL MATTERS
KCPL's operations must comply with federal, state and local
environmental laws and regulations. The generation and transmission
of electricity produces and requires disposal of certain products and
by-products, including polychlorinated biphenyl (PCBs), asbestos and
other potentially hazardous materials. The Federal Comprehensive
Environmental Response, Compensation and Liability Act (the Superfund
law) imposes strict joint and several liability for those who
generate, transport or deposit hazardous waste. This liability
extends to the current property owner, as well as prior owners back to
the time of contamination.
We continually conduct environmental audits to detect contamination
and ensure compliance with governmental regulations. However,
compliance programs need to meet new and future environmental laws and
regulations governing water and air quality including carbon dioxide
emissions, nitrogen oxide emissions, hazardous waste handling and
disposal, toxic substances and the effects of electromagnetic fields.
Therefore, compliance programs could require substantial changes to
operations or facilities (see Note 7 to the Consolidated Financial
Statements).
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue resulted from computer systems and applications
using two digits instead of four to define the year. Computer
programs with date-sensitive software could recognize the date of "00"
as the Year 1900 rather than the Year 2000. Unless corrected, some
computer systems and applications could incorrectly process
information resulting in miscalculations or system disruptions.
We have assessed the potential of the Year 2000 Issue on KCPL's
Information Technology (IT) and non-IT processes and operations.
Beginning in 1997, we established a Year 2000 team responsible for
evaluating, identifying and correcting problems in all critical
computer software, hardware and embedded systems. We utilized both
internal and external resources in this process. Because we have
invested approximately $73 million in new Year 2000 ready technologies
over the past several years, we identified fewer issues than some
companies.
25
<PAGE>
We completed readiness efforts for KCPL's mission-critical systems and
processes and submitted our readiness report and statement to the
North America Electric Reliability Council (NERC) on June 30, 1999.
The critical control systems at all our base load generating units are
currently running with the date set beyond year 2000. The
identification, assessment and remediation efforts of all other KCPL
systems impacted by Year 2000 issues have been completed and have
undergone final implementation. These include the new customer
information system and financial and operations support systems.
Testing of these systems which was to be completed by the end of the
third quarter of 1999 continues due to an unforeseen upgrade to the
operating system software that had been previously declared compliant
by the manufacturer. Testing will be completed in the fourth quarter
of 1999.
On an ongoing basis, we are sharing information with other electric
industry organizations, such as the Electric Power Research Institute,
Edison Electric Institute and NERC in order to adequately anticipate
and plan for potential problems. We participated in an industry-wide
drill April 9, 1999 coordinated by the NERC. The drill simulated
partial loss of telecommunications and found that our contingency
procedures and backup systems worked well. We also participated in
another industry-wide drill, coordinated by NERC, on September 9,
1999, which was a "dress rehearsal" for the transition to Year 2000.
The monitoring phase of KCPL's Year 2000 project will continue through
at least the first quarter of 2000. Total costs of the assessment,
remediation, testing and monitoring efforts will be approximately $7
million. These costs are expensed as incurred.
Two separate independent reviews of the Year 2000 project were
conducted to evaluate and validate the progress and effectiveness of
our Year 2000 processes and methodologies, including an audit of
embedded systems. Both audits resulted in favorable reporting. Based
on recommendations received in the independent reviews, improvements
have been made to the methods of detailed due diligence documentation.
Regarding the Wolf Creek Nuclear Generating Station, we believe we are
in compliance with the Nuclear Regulatory Commission's (NRC) Year 2000
regulations. The NRC performed an on-site audit of Wolf Creek's Year
2000 project plans in November 1998, and no areas of concern were
identified. Control systems at Wolf Creek utilize analog components
that are not date-sensitive which mitigates Year 2000 concerns about
critical operations of the plant. All assessments of affected systems
were completed by the end of the second quarter in 1999 and Wolf Creek
submitted a statement of Year 2000 readiness to the NRC in June 1999.
The Commission guidelines are being followed in the development and
implementation of contingency plans.
We initiated communications with all major suppliers and customers to
evaluate KCPL's vulnerability to the failure of others to remediate
their Year 2000 issues. While no major issues have been discovered,
we cannot be certain their systems will not impact KCPL's operations.
Thus, we have developed a number of contingency plans to mitigate
potential problems with third party failures.
The most reasonable likely worse case scenario would be the loss or
partial interruption of KCPL's electrical system which is connected to
other utilities throughout the United States and Canada, east of the
Rocky Mountains. This interconnection is essential to the
reliability, stability and operational integrity of each connected
electric utility. KCPL could encounter difficulties supplying
electric service if other interconnected utilities fail to achieve
Year 2000 compliance and create an unstable condition on the grid.
We have addressed these and other potential Year 2000 risks by
implementing a number of action plans, including:
26
<PAGE>
- Participating in operating contingency plans and drills developed
by the Southwest Power Pool and the NERC.
- Implementing and testing radio communication for personnel
manning critical operation points.
- Testing functional emergency radio systems and ensuring they are
operational for generating stations.
- Working with local authorities and testing systems to establish a
means of communicating if telephones are not available.
- Ensuring readiness to execute the generation and systems black
start procedures.
SIGNIFICANT BALANCE SHEET CHANGES (September 30, 1999 compared to
December 31, 1998)
- Net utility plant in service decreased by $74.7 million primarily
due to the $80 million partial insurance recovery, for the Hawthorn
No. 5 boiler explosion, that is included in accumulated depreciation.
- Cash and cash equivalents decreased by $6.5 million and
commercial paper, a current liability, increased $84.9 million due to
expenditures exceeding cash receipts. Partially offsetting these
expenditures, KLT's cash increased by $15.7 million primarily due to
proceeds from the sale of stock in Nationwide Electric, Inc. in
September 1999.
- Investments and nonutility property increased $20.8 million
primarily due to the following:
- $11.1 million increase in HSS' investment in R. S. Andrews
Enterprises
- $ 9.0 million increase in HSS' Worry Free equipment - net of
depreciation
- $ 4.5 million decrease in investments and nonutility property by
KLT mainly because of the sale of an investment, asset impairments
and equity losses offset by additional purchases of gas investments,
as well as recording an interest in Custom Energy as an equity
investment rather than in consolidation, beginning January 1999,
due to a reduction in ownership.
- $ 4.0 million increase in KCPL's decommissioning trust fund
- Electric customer accounts receivable increased $80.2 million
primarily because KCPL terminated the accounts receivable sales
facility utilized to sell $60 million of accounts receivables in
addition to normal seasonal load growth at higher summer electric
rates. KCPL entered into another accounts receivables sales agreement
to sell currently $60 million of its accounts receivables in the
fourth quarter of 1999.
- Deferred regulatory assets increased $7.8 million due to the
buyout of a fuel contract less normal amortization.
- Other deferred charges decreased $14.0 million primarily
reflecting the change in KLT's ownership in Custom Energy to less than
50% and the September 1999 write off of Telemetry Solutions by KLT
Telecom. The change in ownership in Custom Energy changed KLT's
accounting treatment of the investment from consolidation to an equity
investment, removing Custom Energy's deferred charges from KLT's
books.
- Current maturities of long-term debt increased $25.6 million
primarily reflecting a $42.0 million increase due to maturing medium-
term notes partially offset by $21.5 million in retirements of medium-
term notes. Moreover, KLT's borrowings on its bank credit agreement
increased by $5.5 million since December 31, 1998.
- Accrued taxes increased $45.8 million primarily due to the timing
of income tax and property tax payments.
27
<PAGE>
- Other current liabilities decreased $15.5 million primarily due
to the rate refund to Kansas retail customers in March 1999, of which
$14.2 million was accrued at December 31, 1998.
- A payment to the IRS in 1999 for the settlement of certain
outstanding issues decreased deferred income taxes by $13 million and
accrued interest by $7 million.
CAPITAL REQUIREMENTS AND LIQUIDITY
As of November 10, 1999, KCPL's liquid resources included cash flows
from operations and $254 million of unused bank lines of credit. The
unused lines consisted of KCPL's short-term bank lines of credit of
$190 million and KLT's bank credit agreement of $64 million. KLT's
availability on its bank credit agreement reflects $23.5 million in
repayments made after September 30, 1999 using proceeds from the
September 30, 1999 sale of the stock in Nationwide Electric, Inc. On
September 30, 1999, KCPL had $85 million of commercial paper
borrowings. During the fourth quarter of 1999, KCPL will issue
significant additional commercial paper as needed in order to redeem
$50 million of preferred stock, retire maturing long-term debt and
finance day-to-day operations not expected to be met with internally
generated funds.
KCPL continues to generate positive cash flows from operating
activities. Cash from operating activities decreased for the nine-
and twelve-month periods primarily due to decreased net income before
non-cash expenses, the buyout of a fuel contract, the refund of
amounts accrued for the Kansas rate adjustment, a payment of $20
million to the IRS to settle certain outstanding issues and a
reduction of cash receipts of $60 million because KCPL stopped selling
its accounts receivable through an accounts receivable sales facility.
Cash used in investing activities varies with the timing of utility
capital expenditures and purchases of investments and nonutility
properties. Cash used for investing activities increased for the nine-
and twelve-month periods primarily due to increased utility capital
expenditures. Additionally, the nine and twelve months ended
September 30, 1998 reflected the proceeds from the 1998 sale of KLT
Power Inc. Partially offsetting these increases, the nine and twelve
months ended September 30, 1999 reflected the proceeds from the sale
of the Nationwide Electric, Inc. stock by KLT Energy Services and $80
million in partial insurance recoveries related to Hawthorn No. 5.
Cash used for financing activities decreased for the nine- and twelve-
month periods primarily due to $85 million of commercial paper that
KCPL borrowed during 1999. Additionally, the nine and twelve months
ended September 30, 1999 reflected less in repayments of long-term
debt compared to the nine and twelve months ended September 30, 1998.
KLT primarily used the proceeds from the sale of KLT Power Inc. in
1998 to repay borrowings under its bank credit agreement.
KCPL's common dividend payout ratio was 129% for the twelve months
ended September 30, 1999, and 86% for the twelve months ended
September 30, 1998.
Except as discussed above, we expect KCPL to meet day-to-day
operations, utility construction requirements (excluding new
generating capacity) and dividends with internally generated funds.
KCPL might not be able to meet these requirements with internally-
generated funds because of the effect of inflation on operating
expenses, the level of mwh sales, regulatory actions, compliance with
future environment regulations and the availability of generating
units (see discussion below). The funds needed to retire $361 million
of maturing debt through the year 2003 will be provided from
operations, refinancings or short-term debt. KCPL might issue
additional debt and/or additional equity to finance growth or take
advantage of new opportunities.
28
<PAGE>
HAWTHORN NO. 5
On February 17, 1999, an explosion occurred at the 476-megawatt, coal-
fired Hawthorn Generating Station Unit No. 5 (Hawthorn No. 5). The
boiler, which was destroyed, was not operating at the time, and there
were no injuries. Though the cause of the explosion is still under
investigation, preliminary results indicate that an explosion of
accumulated gas in the boiler's firebox caused the damage. KCPL has
property insurance coverage with limits of $300 million. Through
September 30, 1999, KCPL has received $80 million in insurance
recoveries under this coverage and has recorded the recoveries in
Utility Plant - accumulated depreciation on the Consolidated Balance
Sheet.
After the explosion at Hawthorn No. 5, we estimated, assuming normal
weather and operating conditions, a net increase in expense of between
$6.5 million and $11.5 million (before tax) for the year 1999. This
estimate included the effect of increased net replacement power costs,
reduced bulk power sales and reduction of certain operating and
maintenance expenses. At the end of September 1999, the net increase
in expense for 1999, excluding the July 1999 heat storm, was estimated
at $10 million. However, weather during July 1999 was abnormal.
Intense and prolonged heat during the last half of July 1999
contributed to a reduction of core utility business earnings per share
of $0.18, lowering EPS during all periods (see page 19 for further
discussion). A portion of this reduction in EPS can be attributed to
the unavailability of Hawthorn No. 5. However, it is not possible to
estimate the impact of the unavailability of Hawthorn No. 5 on the
reduction in EPS as a result of the July 1999 heat storm or to revise
our original 1999 estimated net increase in expense, which was
significantly exceeded.
We have entered into a contract for construction of a new coal-fired
boiler to permanently replace the lost capacity of Hawthorn No. 5.
The new unit, expected to have a capacity of 540 megawatts, should be
completed in the summer of 2001. However, we are continuing to
evaluate alternatives to replace the power generated by Hawthorn No. 5
prior to completing the new coal-fired boiler in the summer of 2001.
We believe that we can secure sufficient power to meet the energy
needs of KCPL's customers. Prior to the explosion, we had planned to
bring on line Hawthorn No. 6, a 141-megawatt, gas-fired combustion
turbine (accepted under a lease arrangement and placed into commercial
operation in July 1999) and an additional 294 megawatts of capacity by
the summer of 2000. The additional 294 megawatts of capacity involves
re-powering an existing unit and adding two new combustion turbines.
29
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PATRICIA S. LANG, ON BEHALF OF HERSELF AND ALL OTHERS
SIMILARLY SITUATED V. KANSAS CITY POWER & LIGHT COMPANY. On
October 8, 1999, a First Amended Class Action Complaint was
filed against the Company in the United States District
Court, Western District of Missouri by Patricia Lang on
behalf of herself and all others similarly situated. The
complaint alleges plaintiff seeks to bring a claim of race
discrimination as a class action on behalf of herself and
all other current and former African American employees from
May 11, 1994 to the present. The complaint alleges that
plaintiff and members of the proposed class are subjected to
a hostile and offensive working environment, denied
promotional opportunities, compensated less than similarly
situated or less qualified Caucasian employees; and are
disciplined and/or terminated when they complain of racially
discriminatory practices at the company. The complaint
seeks a money award for alleged lost wages and fringe
benefits, alleged wage differentials, as well as punitive
damages, attorneys fees and costs of the action together
with an injunction prohibiting the company from retaliating
against anyone participating in the litigation and
continuing monitoring of the Company's compliance with anti-
discrimination laws. Because of the vagueness of the
complaint, it also is not possible at this time to evaluate
the materiality of the relief sought by the proposed class
if certified. However, if no class is certified by the
court, and we believe that we will be able to successfully
defend the certification of any class action, then the
relief sought by the individual plaintiff in this action
would not be material to the company's financial condition
or result of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
Exhibit 27 Financial Data Schedule (for the six months
ended September 30, 1999)
REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities
and Exchange Commission for the quarter ended September 30,
1999.
<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 10, 1999 By: /s/Drue Jennings
(Drue Jennings)
(Chief Executive Officer)
Dated: November 10, 1999 By: /s/Neil Roadman
(Neil Roadman)
(Principal Accounting Officer)
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