FORM U-3A-2
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
Statement by Holding Company Claiming
Exemption Under Rule 2 from the
Provisions of the Public Utility Holding
Company Act of 1935
Western Resources, Inc.
<PAGE>
Western Resources, Inc. ("WRI") hereby files with the Securities and
Exchange Commission, pursuant to Rule 2, its statement claiming exemption as a
holding company from the provisions of the Public Utility Holding Company Act
of 1935 (the "Act") and submits the following information:
1. WRI is a Kansas corporation whose principal executive offices are
located at 818 Kansas Ave., Topeka, Kansas, 66612. WRI's mailing address is
P.O. Box 889, Topeka, Kansas 66601.
WRI's principal business consists of the production, purchase,
transmission, distribution and sale of electricity and the transportation and
sale of natural gas. Currently, WRI provides retail electric service to
approximately 329,000 industrial, commercial, and residential customers in 323
Kansas communities. WRI also provides wholesale electric generation and
transmission services to numerous municipal customers located in Kansas and,
through interchange agreements, to surrounding integrated systems. As a
natural gas utility, WRI distributes gas in Kansas and northeastern Oklahoma.
WRI provides natural gas service to approximately 650,000 retail customers.
WRI's subsidiaries are as follows:
A. Kansas Gas and Electric Company ("KGE"), a Kansas
corporation, with its principal offices at 120 East First Street,
Wichita, Kansas, 67201. KGE provides electric services to customers in
the southeastern portion of Kansas, including the Wichita metropolitan
area. At December 31, 1996, it rendered electric services at retail to
approximately 277,000 residential, commercial and industrial customers
and provided wholesale electric generation and transmission services to
numerous municipal customers located in Kansas, and through interchange
agreements, to surrounding integrated systems. KGE does not own or
operate any gas properties.
<PAGE>
KG&E's subsidiaries are:
Wolf Creek Nuclear Operating Corproation ("WCNOC"), a Delaware
Corporation, with principal offices at 1550 Oxen Lane, N.E.,
Burlington, Kansas 66839. WCNOC is owned 47% by KG&E and operates the
Wolf Creek Generating Station on behalf of the plant's owners.
Mid-America Services Company, a Kansas corporation, with
principal offices at 120 E. 1st Street, Wichita, Kansas 67201, is
currently dormant.
B. Westar Capital, Inc. ("Westar Capital"), a Kansas corporation, with
principal offices at 818 Kansas Avenue, Topeka, Kansas 66612. Westar Capital
is a holding company for certain non-regulated business subsidiaries of the
Company. Westar Capital's subsidiaries (as defined in the Act) are:
ADT Limited, a Bermuda corporation with principal offices
at 1750 Clint Moore Road, Florida 33431. ADT is a provicer of
electronic security services and vehicle auction services.
Westar Capital owns approximately 27% of ADT's common stock and
uses the equity method to account for the investment.
Hanover Compressor Company, a Delaware corporation, with
principal offices at 12001 N. Houston Rosslyn, Houston, Texas,
77086. Hanover Compressor Company offers compression services to
the natural gas industry. Westar Capital owns approximately 23%
of Hanover's common stock and uses the equity method to account
for the investment.
Westar Financial Services, Inc., a Kansas corporation, with
principal offices at 818 Kansas Avenue, Topeka, Kansas 66612.
Westar Financial Services, Inc. is engaged in the funding of
activities of other subsidiaries of Western Resources, Inc.
WestSec, Inc., a Kansas corporation, with principal offices
at 4221 West John Carpenter Freeway, Irving, Texas 75063.
WestSec, Inc. is engaged in the business of monitored home and
business security systems.
Westar Limited Partners, Inc., a Kansas corporation, with
principal offices at 818 Kansas Avenue, Topeka, Kansas 66612.
Westar Limited Partners, Inc. participates in limited
partnerships related to the business of WRI.
Valence, L.L.C., a Kansas limited liability company, with
principal offices at 7001 Oxford Street, Minneapolis, Minnesota
55426. Valence, L.L.C., in which Westar Limited has a 40%
interest, develops, manufactures, produces and distributes
electronic parts, equipment and products.
Thunderbird Limited, III, L.P., a Kansas limited
partnership, is a low income housing project in which Westar
Limted is a 82% limited partner.
Thunderbird Montery, L.P., a Kansas limited partnership, is
a low income housing project in which Westar Limited is a 99%
limited partner.
Oakwood Manor, L.P., a Kansas limited partnership, is a low
income housing project, in which Westar Limited is a 99% limited
partner.
C. Westar Energy, Inc. ("Westar Energy"), a Kansas corporation, with
principal offices at 818 Kansas Avenue, Topeka, Kansas 66612. Westar Energy,
Inc. provides services to large commercial and industrial customers. Westar
Energy's subsidiaries are:
Westar Gas Marketing, Inc., a Kansas corporation, with principal
offices at 1100 SW Wanamaker Road, Ste. 101, Topeka, Kansas 66604.
Westar Gas Marketing, Inc. arranges natural gas purchasing,
transportation, and delivery for natural gas users.
Westar Gas Company, a Delaware corporation, with principal
offices at 1100 SW Wanamaker Road, Ste. 101, Topeka, Kansas 66604.
Westar Gas Company gathers and processes natural gas in Oklahoma and
Kansas.
Indian Basin Venture I & II, New Mexico joint ventures, with
principal offices at 1100 SW Wanamaker Road, Ste. 101, Topeka, Kansas
66604. Indian Basin Ventures operates a gas processing plant in New
Mexico.
Westar Electric Marketing, Inc., a Kansas corporation, with
principal offices at 818 Kansas Ave., Topeka, Kansas 66612. Westar
Electric Marketing, Inc. arranges electric marketing and brokering to
commercial and industrial customers on a wholesale level.
Westar Business Services, Inc., a Kansas corporation, with
principal offices at 818 Kansas Ave., Topeka, Kansas 66612. Westar
Business Services, Inc. is a provider of energy related services to
commercial and industrial customers.
D. Westar Security, Inc. ("Westar Security"), a Kansas corporation,
with principal offices at 4221 West John Carpenter Freeway, Irving, Texas
75063. Westar Security identifies and develops consumer products and
services related to the energy business. Westar Security's subsidiaries are:
Secure America Alarm Systems, Inc., a Kansas corporation, with
principal offices at 14227 W. 95th Street, Lenexa, Kansas 66215.
Secure America is engaged in the business of monitored home and
business security systems.
Sentry Protective Alarms, Inc., a Kansas corporation with
principal offices at 14227 W. 95th Street, Lenexa, Kansas 66215.
Sentry Protective Alarms, Inc. is engaged in the business of monitored
home and business security systems.
Sentry Protective Alarms, Inc., a California corporation with
principal offices at 14227 W. 95th Street, Lenexa, Kansas 66215.
Sentry Protective Alarms, Inc. is engaged in the business of monitored
home and business security systems.
Security Monitoring Services, Inc., a Florida corporation, with
principal offices at 725 South State Road 434, Longwood, Florida 32752.
Security Monitoring Services, Inc. is engaged in the business of
monitored home and business security systems.
Nexstar, Inc., a Florida corporation, with principal offices at
725 South State Road 434, Longwood, Florida 32752. Nexstar, Inc. is
engaged in the business of monitored home and business security
systems.
Safeguard Alarms, Inc., a Misosuri corporation, with principal
offices at 14227 W. 95th Street, Lenexa, Kansas 66225. Safeguard
Alarms, Inc. is engaged in the business of monitored home and business
security systems.
Westar Communications, Inc., a Kansas corporation, with
principal offices at 1324 S. Kansas Avenue, Topeka, Kansas 66612.
Westar Communications, Inc. operates a paging system in Kansas.
Westar Security Services, Inc., a Kansas corporation, with
principal offices at 1324 S. Kansas Avenue, Topeka, Kansas 66612.
Westar Security Services, Inc. is engaged in the business of
monitored home and business security systems.
E. Mid Continent Market Center, a Kansas corporation, with principal
offices at 818 Kansas Ave., Topeka, Kansas 66612. Mid Continent Market
Center offers natural gas transportation, wheeling, parking, balancing and
storage services to natural gas producers. Mid Continent Market Center's
subsidiaries are:
Market Center Gathering, Inc., a Kansas corporation, with
principal offices at 818 Kansas Avenue, Topeka, Kansas 66612. Market
Center Gathering, Inc. facilitates the operation of gas gathering
systems.
F. Western Resources Capital I and II, Delaware business trusts were
established for the purpose of issuing securities.
G. Gas Service Energy Corporation, a Delaware corporation, is
currently dormant.
H. KPL Funding, Inc., a Kansas corporation, is currently dormant.
I. The Kansas Power and Light Company, a Kansas corporation, is
currently dormant.
J. WR Services, Inc., a Kansas corporation, is currently dormant.
K. Rangeline, Inc., a Kansas corporation is currently dormant.
L. The Wing Group, Limited Co., a Delaware corporation, with principal
offices at 1610 Woodstead Court, The Woodlands, Texas 77380. The Wing Group,
Limted Co. is a deveveloper of international power generation projects.
M. CPI-Western Power Holdings, Ltd., a Bermuda Limited Liability
Company. WRI owns 50% of CPI-Western Power Holdings, Ltd. a master joint
venture which invests in power generation projects in China.
N. Western Resources (Bermuda) Ltd., a Bermuda Limited Liability
Company is a holding company to hold the interest of WRI in CPI-Western Power
Holdings, Ltd.
2(a). The principal electric generating stations of WRI, all of which
are located in Kansas, are as follows:
Accredited
Capacity - MW
Name and Location (WRI's Share)
Coal
JEC Unit 1, near St. Marys................... 469
JEC Unit 2, near St. Marys................... 470
JEC Unit 3, near St. Marys................... 450
Lawrence Energy Center, near Lawrence........ 557
Tecumseh Energy Center, near Tecumseh........ 236
Subtotal........................... 2,182
Gas/Oil
Hutchinson Energy Center, near Hutchinson.... 495
Abilene Energy Center, near Abilene.......... 66
Tecumseh Energy Center, near Tecumseh........ 39
Subtotal........................... 600
Total Accredited Capacity 2,782 MW
WRI maintains 19 interconnections with other public utilities to permit
direct extra-high voltage interchange. It is a member of the MOKAN Power
Pool consisting of eleven utilities in Kansas and western Missouri. WRI is
also a member of the Southwest Power Pool, the regional coordinating council
for electric utilities throughout the south-central United States.
WRI owns a transmission and distribution system which enables it to
supply its service area. Transmission and distribution lines, in general,
are located by permit or easement on public roads and streets or the lands of
others. All such transmission and distribution systems are located within
the State of Kansas. In addition, WRI owns and operates transmission,
distribution and other facilities related to supplying natural gas service to
its customers in Kansas and Oklahoma.
2(b). The principal electric generating stations of KGE, all of which
are located in Kansas, are as follows:
Accredited
Capacity - MW
Name and Location (KGE's Share)
Nuclear
Wolf Creek, near Burlington ................. 547
Coal
LaCygne Unit 1, near LaCygne ................ 343
LaCygne Unit 2, near LaCygne ................ 335
JEC Unit 1, near St. Mary's ................. 147
JEC Unit 2, near St. Mary's ................. 147
JEC Unit 3, near St. Mary's ................. 141
Subtotal .......................... 1,113
Gas/Oil
Gordon Evans, Wichita ....................... 534
Murray Gill, Wichita ........................ 333
Subtotal .......................... 867
Diesel
Wichita, Wichita ............................ 3
Total Accredited Capacity 2,530 MW
KGE maintains 17 interconnections with other public utilities to permit
direct extra-high voltage interchange. It is a member of the MOKAN Power
Pool consisting of eleven utilities in Kansas and western Missouri. KGE is
also a member of the Southwest Power Pool, the regional coordinating council
for electric utilities throughout the south-central United States.
KGE owns a transmission and distribution system which enables it to
supply its service area. Transmission and distribution lines, in general,
are located by permit or easement on public roads and streets or the lands of
others. All such transmission and distribution systems are located within
the State of Kansas.
3(a). For the year ended December 31, 1996, WRI sold 8,423,691,000 Kwh
of electric energy at retail, 3,202,342,000 Kwh of electric energy at
wholesale, and 107,086,000 Mcf of natural gas at retail. For the year ended
December 31, 1996, KGE sold 8,235,237,000 Kwh of electric energy at retail
and 2,705,930,000 Kwh of electric energy at wholesale. All of KGE's sales
were within the State of Kansas.
(b). During 1996, neither WRI nor its subsidiaries distributed or
sold electric energy at retail outside the State of Kansas. During 1996, WRI
distributed or sold at retail 4,272,000 Mcf of natural gas in the state of
Oklahoma, representing 4.0% of the retail natural gas sales of WRI.
(c). During 1996, WRI sold, at wholesale, 273,296 Kwh of electric
energy to adjoining public utilities through interconnections at the Kansas
state line. During 1996, KGE sold, at wholesale, 1,764,203 Kwh of electric
energy to adjoining public utilities through interconnections at the Kansas
state line. During 1996, neither WRI or KGE sold natural or manufactured gas
at wholesale outside the state of Kansas or at the Kansas state line.
(d). During 1996, WRI purchased 760,081 Kwh of electric energy from
outside the State of Kansas or at the Kansas state line. During 1996, WRI
purchased 3,416,565 Mcf of natural gas outside the state of Kansas or at the
state line. During 1996, KGE purchased 446,554 Kwh of electric energy from
outside the State of Kansas or at the Kansas State line.
4. During the reporting period, neither WRI nor its subsidiaries held,
directly or indirectly, any interest in an EWG or a foreign utility company.
<PAGE>
The above-named claimant has caused this statement to be duly executed on its
behalf by its authorized officer on this 27th day of February, 1997.
Western Resources, Inc.
By: /s/ Richard D. Terrill
Richard D. Terrill
Secretary and Associate
General Counsel
Corporate Seal
Name, title and address of officer to whom notices and correspondence
concerning this statement should be addressed:
Richard D. Terrill
Secretary and Associate General Counsel
Western Resources, Inc.
P.O. Box 889
818 Kansas Avenue
Topeka, Kansas 66601
913-575-6322
913-575-8136 (FAX)
<PAGE>
EXHIBIT A
A consolidating statement of income and surplus of the claimant and its
subsidiary companies for the last calendar year, together with a
consolidating balance sheet of claimant and its subsidiary companies as of
the close of such calendar year:
<PAGE>
<TABLE>
Exhibit A-1
WESTERN RESOURCES, INC.
CONSOLIDATING BALANCE SHEET
December 31, 1996
(Dollars in Thousands)
<CAPTION>
Kansas Gas Westar
Western and Capital
Resources Electric MCMC Consolidated
<S> <C> <C> <C> <C>
ASSETS (Exhibit A-2)
UTILITY PLANT:
Electric plant in service . . . . . . . . $1,961,276 $3,574,980 - $ -
Natural gas plant in service. . . . . . . 729,348 - 104,982 -
2,690,624 3,574,980 104,982 -
Less - Accumulated depreciation . . . . . 1,031,780 1,062,218 52,365 -
1,658,844 2,512,762 52,617 -
Construction work in progress . . . . . . 50,615 33,197 10,022 -
Nuclear fuel (net). . . . . . . . . . . . - 38,461 - -
Net utility plant. . . . . . . . . . . 1,709,459 2,584,420 62,639 -
INVESTMENTS AND OTHER PROPERTY:
Utility investments (net) . . . . . . . . 1,233,117 - - -
Non-utility investments (net) . . . . . . 288,250 - - 1,105,946
Decommissioning trust . . . . . . . . . . - 33,041 - -
Other . . . . . . . . . . . . . . . . . . 220 9,093 - -
1,521,587 42,134 - 1,105,946
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . (574) 44 21 171
Accounts receivable and
unbilled revenues (net) . . . . . . . . 172,446 75,671 741 11,806
Accounts receivable - associated companies 34,184 250,733 (2,073) -
Notes receivable - associated companies . 461,350 - - -
Fossil fuel, at average cost. . . . . . . 25,602 13,459 - -
Gas stored underground (average cost) . . 30,385 - (358) -
Materials and supplies (average cost) . . 30,916 30,187 - 4,386
Prepayments and other current assets. . . 5,721 16,990 3,532 1,090
760,030 387,084 1,863 17,453
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes. . . . . . . 54,273 164,520 (1,536) -
Corporate-owned life insurance (net). . . 75,838 10,341 - -
Regulatory assets (Note 9). . . . . . . . 118,652 122,387 - -
Other . . . . . . . . . . . . . . . . . . 33,245 8,001 (4) -
282,008 305,249 (1,540) -
TOTAL ASSETS . . . . . . . . . . . . . $4,273,084 $3,318,887 $ 62,962 $ 1,123,399
CAPITALIZATION AND LIABILITIES
CAPITALIZATION. . . . . . . . . . . . . . . $2,631,863 $1,866,419 $ 50,766 $ 294,955
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . 433,440 222,300 - 325,000
Notes payable - associated companies. . . 226,804 - - 442,477
Accounts payable. . . . . . . . . . . . . 69,665 48,819 91 15,230
Accounts payable - associated companies . 250,744 - - 31,950
Accrued taxes . . . . . . . . . . . . . . 47,559 35,358 3,851 (10,479)
Accrued interest and dividends. . . . . . 56,691 9,445 - 57
Other . . . . . . . . . . . . . . . . . . 29,258 6,726 59 73
1,114,161 322,648 4,001 804,308
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . 347,222 753,511 7,048 2,920
Deferred investment tax credits . . . . . 54,665 69,722 1,141 -
Deferred gain from sale-leaseback . . . . - 233,060 - -
Other . . . . . . . . . . . . . . . . . . 125,173 73,527 6 21,216
527,060 1,129,820 8,195 24,136
COMMITMENTS AND CONTINGENCIES
TOTAL CAPITALIZATION AND LIABILITIES. . $4,273,084 $3,318,887 $ 62,962 $ 1,123,399
</TABLE>
<PAGE>
<TABLE>
Exhibit A-1
WESTERN RESOURCES, INC.
CONSOLIDATING BALANCE SHEET
December 31, 1996
(Dollars in Thousands)
(Continued)
<CAPTION>
Westar Westar GSEC and
Security Energy The KPL
Consolidated Consolidated Wing Group Funding
<S> <C> <C> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . $ - $ - $ - $ -
Natural gas plant in service. . . . . . . - - - -
- - - -
Less - Accumulated depreciation . . . . . - - - -
- - - -
Construction work in progress . . . . . . - - - -
Nuclear fuel (net). . . . . . . . . . . . - - - -
Net utility plant. . . . . . . . . . . - - - -
INVESTMENTS AND OTHER PROPERTY:
Utility investments (net) . . . . . . . . - - - -
Non-utility investments (net) . . . . . . 26,380 23,204 13,684 -
Decommissioning trust . . . . . . . . . . - - - -
Other . . . . . . . . . . . . . . . . . . - - - -
26,380 23,204 13,684 -
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . 94 3,300 668 -
Accounts receivable and
unbilled revenues (net) . . . . . . . . 2,393 55,765 144 -
Accounts receivable - associated companies - - (164) 11
Notes receivable - associated companies . - - - -
Fossil fuel, at average cost. . . . . . . - - - -
Gas stored underground (average cost) . . - - - -
Materials and supplies (average cost) . . 650 28 - -
Prepayments and other current assets. . . 87 749 - -
3,224 59,842 648 11
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes. . . . . . . - - - -
Corporate-owned life insurance (net). . . - - - -
Regulatory assets (Note 9). . . . . . . . - - - -
Other . . . . . . . . . . . . . . . . . . 556 (191) 2,943 -
556 (191) 2,943 -
TOTAL ASSETS . . . . . . . . . . . . . $ 30,160 $ 82,855 $ 17,275 $ 11
CAPITALIZATION AND LIABILITIES
CAPITALIZATION. . . . . . . . . . . . . . . $ 8,955 $ 25,516 $ 12,643 $ 11
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . - - - -
Notes payable - associated companies. . . 20,038 (1,165) - -
Accounts payable. . . . . . . . . . . . . 762 45,986 (13) -
Accounts payable - associated companies . - (3) - -
Accrued taxes . . . . . . . . . . . . . . (1,339) 9,320 (457) -
Accrued interest and dividends. . . . . . - - 4,000 -
Other . . . . . . . . . . . . . . . . . . 288 300 102 -
19,749 54,438 3,632 -
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . 30 (359) - -
Deferred investment tax credits . . . . . - - - -
Deferred gain from sale-leaseback . . . . - - - -
Other . . . . . . . . . . . . . . . . . . 1,426 3,260 1,000 -
1,456 2,901 1,000 -
COMMITMENTS AND CONTINGENCIES
TOTAL CAPITALIZATION AND LIABILITIES. . $ 30,160 $ 82,855 $ 17,275 $ 11
</TABLE>
<PAGE>
<TABLE> Exhibit A-1
WESTERN RESOURCES, INC.
CONSOLIDATING BALANCE SHEET
December 31, 1996
(Dollars in Thousands)
(Continued)
<CAPTION>
Western Western
Resources Eliminating Resources
Captial I & II Entries Consolidated
<S> <C> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . $ - $ - $ 5,536,256
Natural gas plant in service. . . . . . . - - 834,330
- - 6,370,586
Less - Accumulated depreciation . . . . . - - 2,146,363
- - 4,224,223
Construction work in progress . . . . . . - - 93,834
Nuclear fuel (net). . . . . . . . . . . . - - 38,461
Net utility plant. . . . . . . . . . . - - 4,356,518
INVESTMENTS AND OTHER PROPERTY:
Utility investments (net) . . . . . . . . - (1,233,117) -
Non-utility investments (net) . . . . . . - (292,028) 1,165,436
Decommissioning trust . . . . . . . . . . - - 33,041
Other . . . . . . . . . . . . . . . . . . - - 9,313
- (1,525,145) 1,207,790
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . - - 3,724
Accounts receivable and
unbilled revenues (net) . . . . . . . . - - 318,966
Accounts receivable - associated companies - (282,691) -
Notes receivable - associated companies . 226,804 (688,154) -
Fossil fuel, at average cost. . . . . . . - - 39,061
Gas stored underground (average cost) . . - - 30,027
Materials and supplies (average cost) . . - - 66,167
Prepayments and other current assets. . . - 8,334 36,503
226,804 (962,511) 494,448
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes. . . . . . . - - 217,257
Corporate-owned life insurance (net). . . - - 86,179
Regulatory assets (Note 9). . . . . . . . - - 241,039
Other . . . . . . . . . . . . . . . . . . - - 44,550
- - 589,025
TOTAL ASSETS . . . . . . . . . . . . . $ 226,804 $(2,487,656) $ 6,647,781
CAPITALIZATION AND LIABILITIES
CAPITALIZATION. . . . . . . . . . . . . . . $ 226,804 $(1,516,811) $ 3,601,121
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . - - 980,740
Notes payable - associated companies. . . - (688,154) -
Accounts payable. . . . . . . . . . . . . - - 180,540
Accounts payable - associated companies . - (282,691) -
Accrued taxes . . . . . . . . . . . . . . - - 83,813
Accrued interest and dividends. . . . . . - - 70,193
Other . . . . . . . . . . . . . . . . . . - - 36,806
- (970,845) 1,352,092
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . - - 1,110,372
Deferred investment tax credits . . . . . - - 125,528
Deferred gain from sale-leaseback . . . . - - 233,060
Other . . . . . . . . . . . . . . . . . . - - 225,608
- - 1,694,568
COMMITMENTS AND CONTINGENCIES
TOTAL CAPITALIZATION AND LIABILITIES. . $ 226,804 $(2,487,656) $ 6,647,781
</TABLE>
<PAGE>
<TABLE> Exhibit A-1
WESTERN RESOURCES, INC.
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 1996
(Dollars in Thousands,
except Per Share Amounts)
<CAPTION>
Kansas Gas Westar
Western and Capital
Resources Electric MCMC Consolidated
<S> <C> <C> <C> <C>
(Exhibit A-2)
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . $ 542,863 $ 654,570 $ - $ -
Natural gas . . . . . . . . . . . . . . . 548,714 - 23,219 12,943
Total operating revenues. . . . . . . . 1,091,577 654,570 23,219 12,943
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . 154,166 91,824 - -
Nuclear fuel. . . . . . . . . . . . . . - 19,962 - -
Power purchased . . . . . . . . . . . . . 16,109 11,483 - -
Natural gas purchases . . . . . . . . . . 354,755 - - -
Other operations. . . . . . . . . . . . . 183,177 134,720 16,227 11,586
Maintenance . . . . . . . . . . . . . . . 50,179 48,943 - -
Depreciation and amortization . . . . . . 80,822 96,309 3,295 49
Amortization of phase-in revenues . . . . - 17,544 - -
Taxes
Federal income. . . . . . . . . . . . . 33,901 36,156 - -
State income. . . . . . . . . . . . . . 8,580 10,455 - -
General . . . . . . . . . . . . . . . . 50,869 46,183 - -
Total operating expenses. . . . . . . 932,558 513,579 19,522 11,635
OPERATING INCOME. . . . . . . . . . . . . . 159,019 140,991 3,697 1,308
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . - (2,249) - -
Special charges from ADT. . . . . . . . . (18,181) - - -
Equity in earnings of investees
and other . . . . . . . . . . . . . . . 128,900 3,397 - 9,683
Income taxes (net). . . . . . . . . . . . (7,363) 10,353 - -
Total other income and deductions . . . 103,356 11,501 - 9,683
INCOME BEFORE INTEREST CHARGES. . . . . . . 262,375 152,492 3,697 10,991
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . 59,437 46,304 - -
Other . . . . . . . . . . . . . . . . . . 35,320 11,758 301 26,119
Allowance for borrowed funds used
during construction (credit). . . . . . (1,332) (1,844) (49) -
Total interest charges. . . . . . . . 93,425 56,218 252 26,119
NET INCOME. . . . . . . . . . . . . . . . . 168,950 96,274 3,445 (15,128)
PREFERRED AND PREFERENCE DIVIDENDS. . . . . 14,839 - - -
EARNINGS APPLICABLE TO COMMON STOCK . . . . $ 154,111 $ 96,274 $ 3,445 $ (15,128)
AVERAGE COMMON SHARES OUTSTANDING . . . . . 63,833,783
EARNINGS PER AVERAGE COMMON
SHARE OUTSTANDING . . . . . . . . . . . . $ 2,41
</TABLE>
<PAGE>
<TABLE> Exhibit A-1
WESTERN RESOURCES, INC.
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 1996
(Dollars in Thousands,
except Per Share Amounts)
(Continued)
<CAPTION>
Westar Westar GSEC and
Security Energy The KPL
Consolidated Consolidated Wing Group Funding
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . $ - $ - $ - $ -
Natural gas . . . . . . . . . . . . . . . 10,784 243,799 9,927 -
Total operating revenues. . . . . . . . 10,784 243,799 9,927 -
OPERATING EXPENSES:
Fuel used for generation
Fossil fuel . . . . . . . . . . . . . . - - - -
Nuclear fuel. . . . . . . . . . . . . . - - - -
Power purchased . . . . . . . . . . . . . - - - -
Natural gas purchases . . . . . . . . . . - - - -
Other operations. . . . . . . . . . . . . 11,510 240,510 10,265 -
Maintenance . . . . . . . . . . . . . . . - - - -
Depreciation and amortization . . . . . . 890 1,734 623 -
Amortization of phase-in revenues . . . . - - - -
Taxes:
Federal income. . . . . . . . . . . . . - - - -
State income. . . . . . . . . . . . . . - - - -
General . . . . . . . . . . . . . . . . - - - -
Total operating expenses. . . . . . . 12,400 242,244 10,888 -
OPERATING INCOME. . . . . . . . . . . . . . (1,616) 1,555 (961) -
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . - - - -
Special charges from ADT. . . . . . . . . - - - -
Equity in earnings of investees
and other . . . . . . . . . . . . . . . (8) 3,092 - -
Income taxes (net). . . . . . . . . . . . - - - -
Total other income and deductions . . . (8) 3,092 - -
INCOME BEFORE INTEREST CHARGES. . . . . . . (1,624) 4,647 (961) -
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . - - - -
Other . . . . . . . . . . . . . . . . . . 707 160 - -
Allowance for borrowed funds used
during construction (credit). . . . . . - - - -
Total interest charges. . . . . . . . 707 160 - -
NET INCOME. . . . . . . . . . . . . . . . . (2,331) 4,487 (961) -
PREFERRED AND PREFERENCE DIVIDENDS. . . . . - - - -
EARNINGS APPLICABLE TO COMMON STOCK . . . . $ (2,331) $ 4,487 $ (961) $ -
AVERAGE COMMON SHARES OUTSTANDING . . . . .
EARNINGS PER AVERAGE COMMON
SHARE OUTSTANDING . . . . . . . . . . . .
</TABLE>
<PAGE>
<TABLE>
Exhibit A-1
WESTERN RESOURCES, INC.
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 1996
(Dollars in Thousands,
except Per Share Amounts)
(Continued)
<CAPTION>
Western Western
Resources Eliminating Resources
Capital I & II Entries Consolidated
<S> <C> <C> <C>
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . $ - $ - $ 1,197,433
Natural gas . . . . . . . . . . . . . . . - - 849,386
Total operating revenues. . . . . . . . - - 2,046,819
OPERATING EXPENSES:
Fuel used for generation
Fossil fuel . . . . . . . . . . . . . . - - 245,990
Nuclear fuel. . . . . . . . . . . . . . - - 19,962
Power purchased . . . . . . . . . . . . . - - 27,592
Natural gas purchases . . . . . . . . . . - - 354,755
Other operations. . . . . . . . . . . . . - - 607,995
Maintenance . . . . . . . . . . . . . . . - - 99,122
Depreciation and amortization . . . . . . - - 183,722
Amortization of phase-in revenues . . . . - - 17,544
Taxes:
Federal income. . . . . . . . . . . . . - - 70,057
State income. . . . . . . . . . . . . . - - 19,035
General . . . . . . . . . . . . . . . . - - 97,052
Total operating expenses. . . . . . . - - 1,742,826
OPERATING INCOME. . . . . . . . . . . . . . - - 303,993
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . - - (2,249)
Special charges from ADT. . . . . . . . . - - (18,181)
Equity in earnings of investees
and other . . . . . . . . . . . . . . . 12,500 (125,841) 31,723
Income taxes (net). . . . . . . . . . . . - - 2,990
Total other income and deductions . . . 12,500 (125,841) 14,283
INCOME BEFORE INTEREST CHARGES. . . . . . . 12,500 (125,841) 318,276
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . - - 105,741
Other . . . . . . . . . . . . . . . . . . - (27,555) 46,810
Allowance for borrowed funds used
during construction (credit). . . . . . - - (3,225)
Total interest charges. . . . . . . . - (27,555) 149,326
NET INCOME. . . . . . . . . . . . . . . . . 12,500 (98,286) 168,950
PREFERRED AND PREFERENCE DIVIDENDS. . . . . 12,125 (12,125) 14,839
EARNINGS APPLICABLE TO COMMON STOCK . . . . $ 375 $ (86,161) $ 154,111
AVERAGE COMMON SHARES OUTSTANDING . . . . . 63,833,783
EARNINGS PER AVERAGE COMMON
SHARE OUTSTANDING . . . . . . . . . . . . $ 2,41
</TABLE>
<PAGE>
<TABLE> Exhibit A-1
WESTERN RESOURCES, INC.
CONSOLIDATING STATEMENT OF RETAINED EARNINGS
December 31, 1996
(Dollars in Thousands)
<CAPTION>
Kansas Gas Westar
Western and Capital
Resources Electric MCMC Consolidated
<S> <C> <C> <C> <C>
(Exhibit A-2)
BALANCE AT BEGINNING OF PERIOD. . . . . . $ 540,868 $ 120,443 $ 1,262 $ (2,639)
ADD:
Net income. . . . . . . . . . . . . . . 168,950 96,274 3,445 (15,128)
Total . . . . . . . . . . . . . . . . 709,818 216,717 4,707 (17,767)
DEDUCT:
Cash dividends:
Preferred and preference stock. . . . . 14,839 - - -
Common stock. . . . . . . . . . . . . . 131,611 100,000
Issuance of shares of common stock. . . . 1,247 - - -
Total . . . . . . . . . . . . . . . . 147,697 100,000 - -
BALANCE AT END OF PERIOD. . . . . . . . . $ 562,121 $ 116,717 $ 4,707 $ (17,767)
Westar Westar The GSEC and
Security Energy Wing KPL
Consolidated Consolidated Group Funding
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD. . . . . . $ (487) $ - $ - $ -
ADD:
Net income. . . . . . . . . . . . . . . (2,331) 4,487 (961) -
Total . . . . . . . . . . . . . . . . (2,818) 4,487 (961) -
DEDUCT:
Cash dividends:
Preferred and preference stock. . . . . - - - -
Common stock. . . . . . . . . . . . . . - - - -
Issuance of shares of common stock. . . . - - - -
Total . . . . . . . . . . . . . . . . - - - -
BALANCE AT END OF PERIOD. . . . . . . . . $ (2,818) $ 4,487 $ (961) $ -
Western Western
Resources Eliminating Resources
Captial I & II Entries Consolidated
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD. . . . . . $ - $ (118.579) $ 540,868
ADD:
Net income. . . . . . . . . . . . . . . 12,500 (98,286) 168,950
Total . . . . . . . . . . . . . . . . 12,500 (216,865) 709,818
DEDUCT:
Cash dividends:
Preferred and preference stock. . . . . 12,125 (12,125) 14,839
Common stock. . . . . . . . . . . . . . 375 (100,375) 131,611
Issuance of shares of common stock. . . . - - 1,247
Total . . . . . . . . . . . . . . . . 12,500 (112,500) 147,697
BALANCE AT END OF PERIOD. . . . . . . . . $ - $ (104,365) $ 562,121
</TABLE>
<PAGE>
<TABLE> Exhibit A-2
WESTAR CAPITAL, INC.
CONSOLIDATING BALANCE SHEET
December 31, 1996
(Dollars in Thousands)
<CAPTION>
Westar Westar
Westar Financial Limited
Capital Services Partners WestSec
<S> <C> <C> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . . $ - $ - $ - $ -
Natural gas plant in service. . . . . . . . - - - -
- - - -
Less - Accumulated depreciation . . . . . . - - - -
- - - -
Construction work in progress . . . . . . . - - - -
Nuclear fuel (net). . . . . . . . . . . . . - - - -
Net utility plant. . . . . . . . . . . . - - - -
INVESTMENTS AND OTHER PROPERTY:
Utility investments (net) . . . . . . . . - - - -
Non-utility investments (net) . . . . . . 1,091,453 - 7,730 168,165
Decommissioning trust . . . . . . . . . . . - - - -
Other . . . . . . . . . . . . . . . . . . . - - - -
1,091,453 - 7,730 168,165
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . (318) - 258 231
Accounts receivable and
unbilled revenues (net) . . . . . . . . . 172 23 637 10,974
Accounts receivable - associated companies. - - - -
Notes receivable - associated companies . . - - - -
Fossil fuel, at average cost. . . . . . . . - - - -
Gas stored underground (average cost) . . . - - - -
Materials and supplies (average cost) . . . - - - 4,386
Prepayments and other current assets. . . . 47 - - 1,043
(99) 23 895 16,634
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes. . . . . . . . - - - -
Corporate-owned life insurance (net). . . . - - - -
Regulatory assets . . . . . . . . . . . . - - - -
Other . . . . . . . . . . . . . . . . . . . - - - -
- - - -
TOTAL ASSETS . . . . . . . . . . . . . . $ 1,091,354 $ 23 $ 8,625 $ 184,799
CAPITALIZATION AND LIABILITIES
CAPITALIZATION. . . . . . . . . . . . . . . . $ 229,955 $ 235 $ 2,730 $ 223,437
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . 325,000 - - -
Notes payable - associated companies. . . . 437,148 (260) 5,589 -
Accounts payable. . . . . . . . . . . . . . 640 - - 14,590
Accounts payable - associated companies . . 96,470 40 440 (65,000)
Accrued taxes . . . . . . . . . . . . . . . (12,509) - 142 1,888
Accrued interest and dividends. . . . . . . 57 - - -
Other . . . . . . . . . . . . . . . . . . . 73 - - -
846,879 (220) 6,171 (48,522)
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . . 3,188 8 (276) -
Deferred investment tax credits . . . . . . - - - -
Deferred gain from sale-leaseback . . . . . - - - -
Other . . . . . . . . . . . . . . . . . . . 11,332 - - 9,884
14,520 8 (276) 9,884
COMMITMENTS AND CONTINGENCIES
TOTAL CAPITALIZATION AND LIABILITIES. . . $ 1,091,354 $ 23 $ 8,625 $ 184,799
</TABLE>
<PAGE>
<TABLE> Exhibit A-2
WESTAR CAPITAL, INC.
CONSOLIDATING BALANCE SHEET
December 31, 1996
(Dollars in Thousands)
(Continued)
<cpation>
Westar (1) Westar
Gas Co Consolidating Capital
Consolidated Entries Consolidated
<S> <C> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . . $ - $ - $ -
Natural gas plant in service. . . . . . . . - - -
- - -
Less - Accumulated depreciation . . . . . . - - -
- - -
Construction work in progress . . . . . . . - - -
Nuclear fuel (net). . . . . . . . . . . . . - - -
Net utility plant. . . . . . . . . . . . - - -
INVESTMENTS AND OTHER PROPERTY:
Utility investments (net) . . . . . . . . - - -
Non-utility investments (net) . . . . . . - (161,402) 1,105,946
Decommissioning trust . . . . . . . . . . . - - -
Other . . . . . . . . . . . . . . . . . . . - - -
- (161,402) 1,105,946
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . - - 171
Accounts receivable and
unbilled revenues (net) . . . . . . . . . - - 11,806
Accounts receivable - associated companies. - - -
Notes receivable - associated companies . . - - -
Fossil fuel, at average cost. . . . . . . . - - -
Gas stored underground (average cost) . . . - - -
Materials and supplies (average cost) . . . - - 4,386
Prepayments and other current assets. . . . - - 1,090
- - 17,453
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes. . . . . . . . - - -
Corporate-owned life insurance (net). . . . - - -
Regulatory assets (Note _). . . . . . . . - - -
Other . . . . . . . . . . . . . . . . . . . - - -
- - -
TOTAL ASSETS . . . . . . . . . . . . . . $ - $ (161,402) $ 1,123,399
CAPITALIZATION AND LIABILITIES
CAPITALIZATION. . . . . . . . . . . . . . . . $ - $ (161,402) $ 294,955
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . - - 325,000
Notes payable - associated companies. . . . - - 442,477
Accounts payable. . . . . . . . . . . . . . - - 15,230
Accounts payable - associated companies . . - - 31,950
Accrued taxes . . . . . . . . . . . . . . . - - (10,479)
Accrued interest and dividends. . . . . . . - - 57
Other . . . . . . . . . . . . . . . . . . . - - 73
- - 804,308
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . . - - 2,920
Deferred investment tax credits . . . . . . - - -
Deferred gain from sale-leaseback . . . . . - - -
Other . . . . . . . . . . . . . . . . . . . - - 21,216
- - 24,136
COMMITMENTS AND CONTINGENCIES
TOTAL CAPITALIZATION AND LIABILITIES. . . $ - $ (161,402) $ 1,123,399
(1) Westar Gas Company was realigned under Westar Engery in September of 1996.
</TABLE>
<PAGE>
<TABLE>
Exhibit A-2
WESTAR CAPITAL, INC.
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 1995
(Dollars in Thousands,
except Per Share Amounts)
<CAPTION>
Westar Westar
Westar Financial Limited
Capital Services Partners WestSec (2)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . $ - $ - $ - $ -
Natural gas . . . . . . . . . . . . . . . . - - - -
Total operating revenues. . . . . . . . . - - - -
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . - - - -
Nuclear fuel. . . . . . . . . . . . . . . - - - -
Power purchased . . . . . . . . . . . . . . - - - -
Natural gas purchases . . . . . . . . . . . - - - -
Other operations. . . . . . . . . . . . . . 356 - 145 -
Maintenance . . . . . . . . . . . . . . . . - - - -
Depreciation and amortization . . . . . . . - - - -
Amortization of phase-in revenues . . . . . - - - -
Taxes:
Federal income. . . . . . . . . . . . . . - - - -
State income. . . . . . . . . . . . . . . - - - -
General . . . . . . . . . . . . . . . . . - - - -
Total operating expenses. . . . . . . . 356 - 145 -
OPERATING INCOME. . . . . . . . . . . . . . . (356) - (145) -
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . - - - -
Equity in earnings of investees
and other . . . . . . . . . . . . . . . . 11,347 - 407 -
Income taxes (net). . . . . . . . . . . . . - - - -
Total other income and deductions . . . . 11,347 - 407 -
INCOME BEFORE INTEREST CHARGES. . . . . . . . 10,991 - 262 -
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . - - - -
Other . . . . . . . . . . . . . . . . . . . 26,119 - 46 -
Allowance for borrowed funds used during
construction (credit) . . . . . . . . . . - - - -
Total interest charges. . . . . . . . . 26,119 - 46 -
NET INCOME. . . . . . . . . . . . . . . . . . (15,128) - 216 -
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . - - - -
EARNINGS APPLICABLE TO COMMON STOCK . . . . . $ (15,128) $ - $ 216 $ -
(2) WestSec was acquired on December 31, 1996 and therefore is included in the consolidated
assets but contributed no income during 1996.
</TABLE>
<PAGE>
<TABLE> Exhibit A-2
WESTAR CAPITAL, INC.
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 1995
(Dollars in Thousands,
except Per Share Amounts)
(Continued)
<CAPTION>
Westar (1) Westar
Gas Co Consolidating Capital
Consolidated Entries Consolidated
<S> <C> <C> <C>
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . $ - $ - $ -
Natural gas . . . . . . . . . . . . . . . . 12,943 - 12,943
Total operating revenues. . . . . . . . . 12,943 - 12,943
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . - - -
Nuclear fuel. . . . . . . . . . . . . . . - - -
Power purchased . . . . . . . . . . . . . . - - -
Natural gas purchases . . . . . . . . . . . - - -
Other operations. . . . . . . . . . . . . . 11,085 - 11,586
Maintenance . . . . . . . . . . . . . . . . - - -
Depreciation and amortization . . . . . . . 49 - 49
Amortization of phase-in revenues . . . . . - - -
Taxes:
Federal income. . . . . . . . . . . . . . - - -
State income. . . . . . . . . . . . . . . - - -
General . . . . . . . . . . . . . . . . . - - -
Total operating expenses. . . . . . . . 11,134 - 11,635
OPERATING INCOME. . . . . . . . . . . . . . . 1,809 - 1,308
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . - - -
Equity in earnings of investees
and other . . . . . . . . . . . . . . . . 2,726 (4,797) 9,683
Income taxes (net). . . . . . . . . . . . . - - -
Total other income and deductions . . . . 2,726 (4,797) 9,683
INCOME BEFORE INTEREST CHARGES. . . . . . . . 4,535 (4,797) 10,991
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . - - -
Other . . . . . . . . . . . . . . . . . . . 208 (254) 26,119
Allowance for borrowed funds used during
construction (credit) . . . . . . . . . . - - -
Total interest charges. . . . . . . . . 208 (254) 26,119
NET INCOME. . . . . . . . . . . . . . . . . . 4,327 (4,543) (15,128)
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . - - -
EARNINGS AVAILABLE TO COMMON STOCK. . . . . . $ 4,327 $ (4,543) $ (15,128)
(1) Westar Gas Company was realigned under Westar Engery in September of 1996.
</TABLE>
<PAGE>
<TABLE> Exhibit A-2
WESTAR CAPITAL, INC.
CONSOLIDATING STATEMENT OF RETAINED EARNINGS
December 31, 1995
(Dollars in Thousands)
<CAPTION>
Westar Westar
Westar Financial Limited
Capital Services Partners WestSec (2)
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD. . . . . . . . $ (2,639) $ 234 $ (1,237) $ -
ADD:
Net income. . . . . . . . . . . . . . . . . (15,128) 216 -
Total . . . . . . . . . . . . . . . . . . (17,767) 234 (1,021) -
DEDUCT:
Cash dividends:
Preferred and preference stock. . . . . . . - - - -
Common stock. . . . . . . . . . . . . . . . - - - -
Total . . . . . . . . . . . . . . . . . . - - - -
BALANCE AT END OF PERIOD. . . . . . . . . . . $ (17,767) $ 234 $ (1,021) $ -
Westar (1) Westar
Gas Co Consolidating Capital
Consolidated Entries Consolidated
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD. . . . . . . . $ 7,261 $ (6,258) $ (2,639)
ADD:
Net income. . . . . . . . . . . . . . . . . 4,327 (4,543) (15,128)
Total . . . . . . . . . . . . . . . . . . 11,588 (10,801) (17,767)
DEDUCT:
Realignment of Subsidiary . . . . . . . . . . 11,588 (11,588) -
Cash dividends:
Preferred and preference stock. . . . . . . - - -
Common stock. . . . . . . . . . . . . . . . - - -
Total . . . . . . . . . . . . . . . . . . - - -
BALANCE AT END OF PERIOD. . . . . . . . . . . $ - $ 787 $ (17,767)
(1) Westar Gas Company was realigned under Westar Energy in September of 1996.
(2) WestSec was acquired on December 31, 1996 and therefore is included in the consolidated
assets but contributed no income during 1996.
</TABLE>
<PAGE>
WESTERN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General: The Consolidated Financial Statements of Western Resources,
Inc. (the company) and its wholly-owned subsidiaries, include KPL, a
rate-regulated electric and gas division of the company, Kansas Gas and
Electric Company (KGE), a rate-regulated electric utility and wholly-owned
subsidiary of the company, Westar Security, Inc. (Westar Security) a
wholly-owned subsidiary which provides monitored electronic security
services, Westar Energy, Inc. a wholly-owned subsidiary which provides
non-regulated energy services, Westar Capital, Inc. (Westar Capital) a
wholly-owned subsidiary which holds equity investments in technology and
energy-related companies, The Wing Group Limited (The Wing Group), a
wholly-owned developer of international power projects, and Mid Continent
Market Center, Inc. (Market Center), a regulated gas transmission service
provider. KGE owns 47% of Wolf Creek Nuclear Operating Corporation (WCNOC),
the operating company for Wolf Creek Generating Station (Wolf Creek). The
company records its proportionate share of all transactions of WCNOC as it
does other jointly-owned facilities. All significant intercompany
transactions have been eliminated.
The company is an investor-owned holding company. The company is engaged
principally in the production, purchase, transmission, distribution and sale
of electricity, the delivery and sale of natural gas, and electronic security
services. The company serves approximately 606,000 electric customers in
eastern and central Kansas and approximately 650,000 natural gas customers in
Kansas and northeastern Oklahoma. The company's non-utility subsidiaries
provide electronic security services to approximately 400,000 customers
throughout the United States, market natural gas primarily to large
commercial and industrial customers, develop international power projects,
and provide other energy-related products and services.
The company prepares its financial statements in conformity with generally
accepted accounting principles as applied to regulated public utilities. The
accounting and rates of the company are subject to requirements of the Kansas
Corporation Commission (KCC), the Oklahoma Corporation Commission (OCC), and
the Federal Energy Regulatory Commission (FERC). The financial statements
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, to disclose contingent assets and
liabilities at the balance sheet dates, and to report amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The company currently applies accounting standards that recognize the
economic effects of rate regulation Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation", (SFAS 71) and, accordingly, has recorded regulatory assets and
liabilities related to its generation, transmission and distribution
operations. In 1996, the KCC initiated a generic docket to study electric
restructuring issues. A retail wheeling task force has been created by the
Kansas Legislature to study competitive trends in retail electric services.
During the 1997 session of the Kansas Legislature, bills have been introduced
to increase competition in the electric industry. Among the matters under
consideration is the recovery by utilities of costs in excess of competitive
cost levels. There can be no assurance at this time that such costs will be
recoverable if open competition is initiated in the electric utility market.
In the event the company determines that it no longer meets the criteria set
forth in SFAS 71, the accounting impact would be an extraordinary non-cash
charge to operations of an amount that would be material. Criteria that give
rise to the discontinuance of SFAS 71 include, (1) increasing competition
that restricts the company's ability to establish prices to recover specific
costs, and (2) a significant change in the manner in which rates are set by
regulators from a cost-based regulation to another form of regulation. The
company periodically reviews these criteria to ensure the continuing
application of SFAS 71 is appropriate. Based on current evaluation of the
various factors and conditions that are expected to impact future cost
recovery, the company believes that its net regulatory assets are probable of
future recovery. Any regulatory changes that would require the company to
discontinue SFAS 71 based upon competitive or other events may significantly
impact the valuation of the company's net regulatory assets and its utility
plant investments, particularly the Wolf Creek facility. At this time, the
effect of competition and the amount of regulatory assets which could be
recovered in such an environment cannot be predicted. See Note 9 for further
discussion on regulatory assets.
In January, 1996, the company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" (SFAS 121). This Statement imposes
stricter criteria for regulatory assets by requiring that such assets be
probable of future recovery at each balance sheet date. Based on the current
regulatory structure in which the company operates, the adoption of this
standard did not have a material impact on the financial position or results
of operations of the company. This conclusion may change in the future as
competitive factors influence wholesale or retail pricing in the electric
industry.
Utility Plant: Utility plant is stated at cost. For constructed plant,
cost includes contracted services, direct labor and materials, indirect
charges for engineering, supervision, general and administrative costs, and
an allowance for funds used during construction (AFUDC). The AFUDC rate was
5.7% in 1996, 6.31% in 1995, and 4.08% in 1994. The cost of additions to
utility plant and replacement units of property are capitalized. Maintenance
costs and replacement of minor items of property are charged to expense as
incurred. When units of depreciable property are retired, they are removed
from the plant accounts and the original cost plus removal charges less
salvage are charged to accumulated depreciation.
In accordance with regulatory decisions made by the KCC, amortization of
the acquisition premium of approximately $801 million resulting from the KGE
purchase began in August of 1995. The premium is being amortized over 40
years and has been classified as electric plant in service. Accumulated
amortization through December 31, 1996 totaled $27.5 million. See Note 9 for
further information concerning the amortization of this premium.
Depreciation: Depreciation is provided on the straight-line method based
on estimated useful lives of property. Composite provisions for book
depreciation approximated 2.97% during 1996, 2.84% during 1995, and 2.87%
during 1994 of the average original cost of depreciable property. In the
past, the methods and rates have been determined by depreciation studies and
approved by the various regulatory bodies. The company periodically
evaluates its depreciation rates considering the past and expected future
experience in the operation of its facilities.
Environmental Remediation: Effective January 1, 1997, the company adopted
the provisions of Statement of Position (SOP) 96-1, "Environmental
Remediation Liabilities". This statement provides authoritative guidance for
recognition, measurement, display, and disclosure of environmental
remediation liabilities in financial statements. The company is currently
evaluating and in the process of estimating the potential liability
associated with environmental remediation. Management does not expect the
amount to be significant to the company's results of operations as the
company will seek recovery of these costs through rates as has been permitted
by the KCC in the case of another Kansas utility. Additionally, the adoption
of this statement is not expected to have a material impact on the company's
financial position. To the extent that such remediation costs are not
recovered through rates, the costs may be material to the company's operating
results, depending on the degree of remediation required and number of years
over which the remediation must be completed.
Cash and Cash Equivalents: For purposes of the Consolidated Statements of
Cash Flows, the company considers highly liquid collateralized debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
Income Taxes: The company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" (SFAS 109). Under SFAS 109, deferred tax assets and
liabilities are recognized based on temporary differences in amounts recorded
for financial reporting purposes and their respective tax bases. Investment
tax credits previously deferred are being amortized to income over the life
of the property which gave rise to the credits (See Note 10).
Revenues: Operating revenues for both electric and natural gas services
include estimated amounts for services rendered but unbilled at the end of
each year. Revenues for security services are recognized in the period
earned. Unbilled revenues of $83 million and $66 million are recorded as a
component of accounts receivable and unbilled revenues (net) on the
Consolidated Balance Sheets as of December 31, 1996 and 1995, respectively.
The company's recorded reserves for doubtful accounts receivable totaled
$6.3 million and $4.9 million at December 31, 1996 and 1995, respectively.
Debt Issuance and Reacquisition Expense: Debt premium, discount, and
issuance expenses are amortized over the life of each issue. Under
regulatory procedures, debt reacquisition expenses are amortized over the
remaining life of the reacquired debt or, if refinanced, the life of the new
debt. See Note 9 for more information regarding regulatory assets.
Risk Management: The company is exposed to fluctuations in price on the
portfolio of natural gas transactions resulting from marketing activities of
a non-regulated subsidiary. To minimize the risk from market fluctuations,
the company enters into natural gas futures, swaps and options in order to
hedge existing physical natural gas purchase or sale commitments. These
financial instruments are designated as hedges of the underlying physical
commitments and as such, gains or losses resulting from changes in market
value of the various derivative instruments are deferred and recognized in
income when the underlying physical transaction is closed. See Note 5 for
further information.
Fuel Costs: The cost of nuclear fuel in process of refinement,
conversion, enrichment, and fabrication is recorded as an asset at original
cost and is amortized to expense based upon the quantity of heat produced for
the generation of electricity. The accumulated amortization of nuclear fuel
in the reactor at December 31, 1996 and 1995, was $25.3 million and $28.5
million, respectively.
Cash Surrender Value of Life Insurance Policies: The following amounts
related to corporate-owned life insurance policies (COLI) are recorded in
Corporate-owned life insurance (net) on the Consolidated Balance Sheets:
At December 31,
1996 1995
(Dollars in Millions)
Cash surrender value of policies (1) . $ 563.0 $ 479.9
Borrowings against policies. . . . . . (476.8) (435.8)
COLI (net). . . . . . . . . . $ 86.2 $ 44.1
(1) Cash surrender value of policies as presented represents the value of the
policies as of the end of the respective policy years and not as of December
31, 1996 and 1995.
Income is recorded for increases in cash surrender value and net death
proceeds. Interest expense is recognized for COLI borrowings except for
certain policies entered into in 1992 and 1993. The net income generated
from COLI contracts purchased prior to 1992 including the tax benefit of the
interest deduction and premium expenses are recorded as Corporate-owned life
insurance (net) on the Consolidated Statements of Income. The income from
increases in cash surrender value and net death proceeds was $25.4 million in
1996, $22.7 million in 1995, and $15.6 million in 1994. The interest expense
deduction taken was $27.6 million for 1996, $25.4 million for 1995, and $21.0
million for 1994.
The COLI policies entered into in 1992 and 1993 were established to
mitigate the cost of postretirement and postemployment benefits. As approved
by the KCC, the company is using the net income stream generated by these
COLI policies to offset the costs of postretirement and postemployment
benefits. A regulatory asset totaling $41 million and $35 million is
outstanding at December 31, 1996 and 1995, respectively, related to deferred
postretirement and postemployment costs.
On August 2, 1996, Congress passed legislation that will phase out tax
benefits associated with the 1992 and 1993 COLI policies. The loss of tax
benefits will significantly reduce the COLI earnings. The company is
evaluating other methods to replace the 1992 and 1993 COLI policies. The
company also has the ability to seek recovery of postretirement and
postemployment costs through the ratemaking process. Regulatory precedents
established by the KCC are expected to permit the accrued costs of
postretirement and postemployment benefits to be recovered in rates. If a
suitable COLI replacement product cannot be found, or these costs cannot be
recovered in rates, the company may be required to expense the regulatory
asset. The company currently expects to be able to find a suitable COLI
replacement. The legislation had minimal impact on the Company's COLI
policies entered into prior to 1992. (See Notes 9 and 12).
Reclassifications: Certain amounts in prior years have been reclassified
to conform with classifications used in the current year presentation.
2. NON-REGULATED SUBSIDIARIES
Certain non-regulated subsidiaries use natural gas futures, swaps and
options contracts to reduce the effects of natural gas commodity price
volatility on operating results which include price risk and basis risk.
Price risk is the difference in price between the physical commodity being
hedged and the price of the futures contracts used for hedging. Natural gas
options held to hedge price risk provide the right, but not the requirement,
to buy or sell natural gas at a fixed price. Basis risk is the risk that an
adverse change in the futures market will not be completely offset by an
equal and opposite change in the cash price of the commodity being hedged.
Basis risk exists in natural gas primarily due to the geographical price
differentials between cash market locations and futures contract delivery
locations. In general, the company's risk management policy requires that
positions taken with derivatives be offset by positions in physical
transactions or other derivatives. All of the company's financial
instruments are held for purposes other than trading.
The derivative instruments used to hedge commodity transactions have
historically had a high correlation with commodity prices and are expected to
continue to do so. The correlation of indices and prices is regularly
evaluated by management to ensure that the instruments continue to be
effective hedges. In the event that the correlation falls below allowable
levels, the gains or losses associated with hedging instruments are
recognized in the current period to the extent that correlation was lost.
The maturity of the derivative instruments is timed to coincide with the
hedged transaction. If the hedged transaction is terminated early or if an
anticipated transaction fails to occur, the deferred gain or loss associated
with the derivative instrument is recognized in the period and the hedge is
closed.
The company has historically used natural gas futures and options
contracts traded on the New York Mercantile Exchange and natural gas
financial swaps with various third parties to reduce exposure to price risk
when gas is not bought and sold simultaneously. At December 31, 1996, the
company had a deferred gain of $3.4 million representing unrealized gains on
forward commitments that will mature through the year 2000.
The consolidated financial statements include the company's investments in
ADT and Hanover Compressor Company (Hanover) each accounted for under the
equity method of accounting. The company's investments (not including the
amortization of goodwill) in these entities are as follows:
1996 1995
(Dollars in Thousands)
Ownership
Interest
ADT 27% $596,598 $ -
Hanover 24% 64,166 55,963
The company's equity in earnings of these entities is as follows:
Year Ended December 31 1996 1995
(Dollars in Thousands)
ADT $ 7,236 $ -
Hanover 2,137 33
Summarized combined financial information of ADT and Hanover is presented
below:
As of and for the year ended December 31, 1996(1) 1995(1)
(Dollars in Thousands)
Balance Sheet:
Current assets $ 531,275 $ 43,603
Noncurrent assets 2,295,824 207,316
Current liabilities 433,845 20,333
Noncurrent liabilities 1,493,900 64,390
Equity 899,354 166,196
Income Statement:
Revenues 1,887,180 95,964
Operating expenses 2,559,707 90,350
Net income (loss) (670,326)(2) 5,614
(1) Information presented for ADT is based on ADT's quarterly report on Form
10-Q. ADT's balance sheet information and results of operations represent
the twelve months ended September 30, 1996, based on publicly available
information. Hanover's financial information is presented as of November 30,
1996, the most recent information available. The company cannot give any
assurance of the accuracy of the information so obtained.
(2) ADT's net income through September 30, 1996 as reported in its Form 10-Q
for the nine months ended September 30, 1996, includes a one-time charge
related to the adoption of SFAS 121. This charge for approximately $745
million was incurred prior to the company's investment in ADT. The company
cannot give any assurance of the accuracy of the information so obtained.
3. PROPOSED MERGER WITH KANSAS CITY POWER & LIGHT COMPANY
On April 14, 1996, in a letter to Mr. A. Drue Jennings, Chairman of the
Board, President and Chief Executive Officer of Kansas City Power & Light
Company (KCPL), the company proposed an offer to merge with KCPL (KCPL
Merger).
On November 15, 1996, the company and KCPL announced that representatives
of their respective boards and managements met to discuss the proposed merger
transaction. On February 7, 1997, KCPL and the company entered into an
agreement to merge the two companies.
The merger agreement provides for a tax-free, stock-for-stock transaction
valued at approximately $2 billion. Under the terms of the agreement, KCPL
shareowners will receive $32 of company common stock per KCPL common share,
subject to an exchange ratio collar of not less than 0.917 to no more than
1.100 common shares. Consummation of the KCPL Merger is subject to customary
conditions including obtaining the approval of KCPL's and the company's
shareowners and various regulatory agencies. The company expects to be able
to close the KCPL Merger in the first half of 1998. See Note 9 for
discussion of rate proceedings.
The KCPL Merger, will create a company with more than two million security
and energy customers, $8.8 billion in total assets, $2.7 billion in annual
revenues and more than 8,000 megawatts of electric generation resources. As a
result of the merger agreement, the company terminated its exchange offer
that had been effective since July 3, 1996.
The KCPL Merger is designed to qualify as a pooling of interests for
financial reporting purposes. Under this method, the recorded assets and
liabilities of the company and KCPL would be carried forward at historical
amounts to a combined balance sheet. Prior period operating results and the
consolidated statements of financial position, cash flows and capitalization
would be restated to effect the combination for all periods presented.
KCPL is a public utility company engaged in the generation, transmission,
distribution, and sale of electricity to approximately 430,000 customers in
western Missouri and eastern Kansas. KCPL and the company have joint
interests in certain electric generating assets, including Wolf Creek.
As of December 31, 1996, the company has incurred approximately $32
million of transaction costs associated with the KCPL Merger. The company
anticipates expensing these costs in the first reporting period subsequent to
closing the KCPL Merger. As of December 31, 1996, costs incurred have been
included in Deferred Charges and Other Assets, Other on the Consolidated
Balance Sheets.
4. ADT LIMITED, INC.
Investment in ADT Limited, Inc.: During 1996, the company purchased
approximately 38 million common shares of ADT Limited, Inc. (ADT) for
approximately $589 million. The shares purchased represent approximately 27%
of ADT's common shares making the company the largest shareowner of ADT.
These purchases were financed entirely with short-term borrowings. ADT is
North America's largest monitored security services company with $1.8 billion
in annual revenues. ADT has approximately 1.2 million customers in North
America and abroad and has approximately 18,000 employees. The company uses
the equity method of accounting for this investment. Goodwill of
approximately $369 million is associated with this investment and is being
amortized over 40 years and is presented net in Equity in earnings of
investees and other on the Consolidated Statements of Income. Accumulated
amortization approximates $6.5 million at December 31, 1996.
ADT recently announced that it would record a net charge to income of
approximately $76 million during 1996. This charge is primarily related to
one-time restructuring charges resulting from its merger with another
security company, partially offset by a gain on the sale of assets. The
company recognized its share of this charge equal to $11.8 million or
approximately $0.19 per share, net of tax, as a component of Equity in
earnings of investees and other on the Consolidated Statements of Income.
Proposed Acquisition of ADT: On December 18, 1996, the company announced
its offer to exchange $22.50 in cash and shares of the company's common stock
for each remaining outstanding common share of ADT not already owned by the
company (ADT Offer). The value of the ADT Offer, assuming the company's
average stock price prior to closing is above $29.75 per common share, is
approximately $3.5 billion, including the company's existing investment in
ADT. Based upon the closing stock price of the company on December 17, 1996,
approximately 63.1 million shares of company common stock would be issuable
pursuant to the acquisition of ADT. However, the actual number of shares of
company common stock that would be issuable in connection with the ADT Offer
will depend on the exchange ratio and the number of shares outstanding on the
expiration date of the exchange offer.
The ADT Offer of $22.50 consists of $15.00 in company common stock up to a
maximum of 0.50420 of a share of company common stock and $7.50 in cash for
each outstanding ADT share. Concurrent with the announcement of the ADT
Offer on December 18, 1996, the company filed a registration statement on
Form S-4 with the Securities and Exchange Commission (SEC) related to the ADT
Offer. Review of the prospectus and proxy statements relating to the ADT
Offer by the SEC is pending. The ADT Offer will be subject to the approval
of ADT and company shareowners and certain regulatory authorities. On
January 23, 1997, the waiting period for the Hart-Scott-Rodino Antitrust
Improvement Act expired. On February 7, 1997, the company received regulatory
approval from the KCC to issue company common stock and debt necessary for
the ADT Offer. See Note 5 for summary financial information concerning ADT.
5. PROPOSED STRATEGIC ALLIANCE
On December 12, 1996, the company and ONEOK Inc. (ONEOK) announced an
agreement to form a strategic alliance combining the natural gas assets of
both companies. Under the agreement for the proposed strategic alliance, the
company will contribute its natural gas business to a new company (New Oneok)
in exchange for a 45% equity interest. The recorded net property value being
contributed at December 31, 1996 is estimated at $600 million (unaudited). No
gain or loss is anticipated as a result of the proposed transaction. The
proposed transaction is subject to satisfaction of customary conditions,
including approval by ONEOK shareowners and regulatory authorities. The
company is working towards consummation of the transaction during the summer
of 1997.
The equity interest would be comprised of approximately 3.0 million common
shares and 19.3 million convertible preferred shares. Upon consummation of
the proposed alliance, the company will record its common equity interest in
New Oneok's earnings using the equity method of accounting. Earnings for the
convertible preferred shares held will be recognized and recorded based upon
preferred dividends paid. The convertible preferred shares are expected to
pay an initial dividend rate of $1.80 per share. For its fiscal year ended
August 31, 1996, ONEOK reported operating revenues of $1.2 billion and net
income of $52.8 million.
The structure of the proposed alliance is not expected to have any
immediate income tax consequences to either company or to either company's
shareowners.
6. ACQUISITIONS
On December 31, 1996, Westar Capital bought the assets of Westinghouse
Security Systems, Inc. (WSS). This acquisition, which was accounted for as a
purchase, significantly expands the scope of the company's security service
operations. Westar Capital paid approximately $358 million in cash, subject
to adjustment, to purchase the assets and assume certain liabilities of WSS.
Based on a preliminary estimate of the purchase price allocation, the company
recorded approximately $275 million of goodwill to be amortized over 40
years. This balance is included in Security business and other property on
the accompanying Consolidated Balance Sheets. Since the transaction closed
on December 31, 1996, no operating results are reflected on the Consolidated
Statements of Income. For the year ended December 31, 1996, WSS reported
$110 million in revenues. As of December 31, 1996, the company consolidated
WSS' financial position in the accompanying Consolidated Balance Sheets. The
company financed this acquisition with short-term borrowings.
During 1996, the company also acquired The Wing Group and three small
security system companies. The Wing Group develops international power
projects. In connection with these acquisitions, the company gave
consideration of approximately $33.8 million in cash and 683,333 shares of
common stock. In connection with the acquisitions, liabilities were assumed
as follows:
(Dollars in Millions)
Fair value of assets acquired $ 38.8
Consideration paid $(33.8)
Liabilities assumed $ 5.0
Each acquisition was accounted for as a purchase. Goodwill related to
these acquisitions of approximately $32.9 million is presented in the
Consolidated Balance Sheets as Security business and other property and is
being amortized over 20 years. Accumulated amortization of approximately
$943,000 has been recognized to date.
The purchase agreement related to The Wing Group allows the company, at
its option, to purchase ownership interests in power projects in which the
former owners of The Wing Group have rights. In 1996, the company gave
shares of common stock to the former owners of The Wing Group in return for a
nine percent equity interest in a power project in Turkey. See Note 8 for
information with respect to investment commitments made by the company on
behalf of The Wing Group.
7. LEGAL PROCEEDINGS
The company has requested that the District Court for the Southern
District of Florida require that ADT hold a special shareowners meeting no
later than March 20, 1997. In its filing, the company claims that the ADT
board of directors has breached its fiduciary and statutory duties and that
there is no reason to delay the special meeting until July 8, 1997 as
established by ADT. See Note 3 for additional information regarding the
proposed acquisition of ADT.
On December 26, 1996, an ADT shareowner filed a purported class action
complaint against ADT, ADT's board of directors, the company and the
company's wholly-owned subsidiary, Westar Capital in the Civil Division of
the Circuit Court of the Fifteenth Judicial Circuit in Palm Beach County,
Florida. (Charles Gachot v. ADT, Ltd., Western Resources, Inc., Westar
Capital, Inc., Michael A. Ashcroft, et al., Case No. 96-10912-AN) The
complaint alleges, among other things, that the company and Westar Capital
are breaching their fiduciary duties to ADT's shareowners by failing to offer
"an appropriate premium for the controlling interest" in ADT and by holding
"an effective blocking position" that prevents independent parties from
bidding for ADT. The complaint seeks preliminary and permanent relief
enjoining the company from acquiring the outstanding shares of ADT and
unspecified damages. The company believes it has good and valid defenses to
the claims asserted and does not anticipate any material adverse effect upon
its overall financial condition or results of operations.
Subject to the approval of the KCC, the company entered into five new gas
supply contracts with certain entities affiliated with The Bishop Group, Ltd.
(Bishop entities) which are currently regulated by the KCC. A contested
hearing was held for the approval of those contracts. While the case was
under consideration by the KCC, the FERC issued an order under which it
extended jurisdiction over the Bishop entities. On November 3, 1995, the KCC
stayed its consideration of the contracts between the company and the Bishop
entities until the FERC takes final appealable action on its assertion of
jurisdiction over the Bishop entities.
On June 28, 1996, the KCC issued its order by dismissing the company's
application for approval of the contracts and of recovery of the related
costs from its customers. The company appealed this ruling and on January
24, 1997, the Kansas Court of Appeals reversed the KCC order and upheld the
contracts and the company's recovery of related costs from its customers were
approved by operation of law.
As part of the acquisition of WSS on December 31, 1996, WSS assigned to
WestSec, a wholly-owned subsidiary of Westar Capital established to acquire
the assets of WSS, a software license with Innovative Business Systems (IBS)
which is integral to the operation of its security business. On January 8,
1997, IBS filed litigation in Dallas County, Texas in the 298th Judicial
District Court concerning the assignment of the license to WestSec,
(Innovative Business Systems (Overseas) Ltd., and Innovative Business
Software, Inc. v. Westinghouse Electric Corporation, Westinghouse Security
Systems, Inc., WestSec, Inc., Western Resources, Inc., et al., Cause No.
97-00184). The company and Westar Capital have demanded WSS defend and
indemnify them. While the loss of use of the license may have a material
impact on the operations of WestSec, management of the company currently
does not believe that the ultimate disposition of this matter will have a
material adverse effect upon the company's overall financial condition or
results of operations.
The company and its subsidiaries are involved in various other legal,
environmental, and regulatory proceedings. Management believes that adequate
provision has been made and accordingly believes that the ultimate
dispositions of these matters will not have a material adverse effect upon
the company's overall financial position or results of operations.
8. COMMITMENTS AND CONTINGENCIES
As part of its ongoing operations and construction program, the company
has commitments under purchase orders and contracts which have an unexpended
balance of approximately $69.9 million at December 31, 1996. Approximately
$12.8 million is attributable to modifications to upgrade the three turbines
at Jeffrey Energy Center to be completed by December 31, 1998.
In January 1994, the company entered into an agreement with Oklahoma
Municipal Power Authority (OMPA). Under the agreement, the company received
a prepayment of approximately $41 million for which the company will provide
capacity and transmission services to OMPA through the year 2013.
Manufactured Gas Sites: The company has been associated with 15 former
manufactured gas sites located in Kansas which may contain coal tar and other
potentially harmful materials. The company and the Kansas Department of
Health and Environment (KDHE) entered into a consent agreement governing all
future work at the 15 sites. The terms of the consent agreement will allow
the company to investigate these sites and set remediation priorities based
upon the results of the investigations and risk analyses. The prioritized
sites will be investigated over a ten year period. The agreement will allow
the company to set mutual objectives with the KDHE in order to expedite
effective response activities and to control costs and environmental impact.
The costs incurred for site investigation and risk assessment in 1996 and
1995 were minimal. In accordance with the terms of the ONEOK agreement,
ownership of twelve of the aforementioned sites will be transferred to New
Oneok upon closing. The ONEOK agreement limits the company's liabilities to
an immaterial amount for future remediation of these sites.
Superfund Sites: The company is one of numerous potentially responsible
parties at a groundwater contamination site in Wichita, Kansas (Wichita site)
which is listed by the EPA as a Superfund site. The company has previously
been associated with other Superfund sites of which the company's liability
has been classified as de minimis and any potential obligations have been
settled at minimal cost. In 1994, the company settled Superfund obligations
at three sites for a total of $57,500. No Superfund obligations have been
settled since 1994. The company's obligation at the Wichita site appears to
be limited based on this experience. In the opinion of the company's
management, the resolution of this matter is not expected to have a material
impact on the company's financial position or results of operations.
Clean Air Act: The Clean Air Act Amendments of 1990 (the Act) require a
two-phase reduction in certain emissions. To meet the monitoring and
reporting requirements under the acid rain program, the company has installed
continuous monitoring and reporting equipment at a total cost of
approximately $10 million as of December 31, 1996. The company does not
expect material expenditures to be needed to meet Phase II sulfur dioxide
requirements.
The nitrogen oxides and toxic limits, which were not set in the law, were
proposed by the EPA in January 1996. The company is currently evaluating the
steps it would need to take in order to comply with the proposed new rules,
but is unable to determine its compliance options or related compliance
costs, which could be material, until the evaluation is finished. The
company will have three years from the date the limits were proposed to
comply with the new rules.
Decommissioning: The company accrues decommissioning costs over the
expected life of the Wolf Creek generating facility. The accrual is based on
estimated unrecovered decommissioning costs which consider inflation over the
remaining estimated life of the generating facility and are net of expected
earnings on amounts recovered from customers and deposited in an external
trust fund.
On August 30, 1996, WCNOC submitted the 1996 Decommissioning Cost Study to
the KCC for approval. Approval of this study is still pending. Based on the
study, the company's share of these decommissioning costs, under the
immediate dismantlement method, is estimated to be approximately $624 million
during the period 2025 through 2033, or approximately $192 million in 1996
dollars. These costs were calculated using an assumed inflation rate of 3.6%
over the remaining service life from 1996 of 29 years.
Decommissioning costs are currently being charged to operating expenses in
accordance with the prior KCC orders. Electric rates charged to customers
provide for recovery of these decommissioning costs over the life of Wolf
Creek. Amounts expensed approximated $3.7 million in 1996 and will increase
annually to $5.6 million in 2024. These expenses are deposited in an
external trust fund. The average after tax expected return on trust assets
is 5.7%.
The company's investment in the decommissioning fund, including reinvested
earnings approximated $33.0 million and $25.1 million at December 31, 1996
and December 31, 1995, respectively. Trust fund earnings accumulate in the
fund balance and increase the recorded decommissioning liability. These
amounts are reflected in Investments and Other Property, Decommissioning
trust, and the related liability is included in Deferred Credits and Other
Liabilities, Other, on the Consolidated Balance Sheets.
The staff of the SEC has questioned certain current accounting practices
used by nuclear electric generating station owners regarding the recognition,
measurement, and classification of decommissioning costs for nuclear electric
generating stations. In response to these questions, the Financial Accounting
Standards Board is expected to issue new accounting standards for removal
costs, including decommissioning, in 1997. If current electric utility
industry accounting practices for such decommissioning costs are changed: (1)
annual decommissioning expenses could increase, (2) the estimated present
value of decommissioning costs could be recorded as a liability rather than
as accumulated depreciation, and (3) trust fund income from the external
decommissioning trusts could be reported as investment income rather than as
a reduction to decommissioning expense. When revised accounting guidance is
issued, the company will also have to evaluate its effect on accounting for
removal costs of other long-lived assets. The company is not able to predict
what effect such changes would have on results of operations, financial
position, or related regulatory practices until the final issuance of revised
accounting guidance, but such effect could be material.
The company carries premature decommissioning insurance which has several
restrictions. One of these is that it can only be used if Wolf Creek incurs
an accident exceeding $500 million in expenses to safely stabilize the
reactor, to decontaminate the reactor and reactor station site in accordance
with a plan approved by the NRC, and to pay for on-site property damages.
This decommissioning insurance will only be available if the insurance funds
are not needed to implement the NRC-approved plan for stabilization and
decontamination.
Nuclear Insurance: The Price-Anderson Act limits the combined public
liability of the owners of nuclear power plants to $8.9 billion for a single
nuclear incident. If this liability limitation is insufficient, the U.S.
Congress will consider taking whatever action is necessary to compensate the
public for valid claims. The Wolf Creek owners (Owners) have purchased the
maximum available private insurance of $200 million and the balance is
provided by an assessment plan mandated by the NRC. Under this plan, the
Owners are jointly and severally subject to a retrospective assessment of up
to $79.3 million ($37.3 million, company's share) in the event there is a
major nuclear incident involving any of the nation's licensed reactors. This
assessment is subject to an inflation adjustment based on the Consumer Price
Index and applicable premium taxes. There is a limitation of $10 million
($4.7 million, company's share) in retrospective assessments per incident,
per year.
The Owners carry decontamination liability, premature decommissioning
liability, and property damage insurance for Wolf Creek totaling
approximately $2.8 billion ($1.3 billion, company's share). This insurance
is provided by a combination of "nuclear insurance pools" ($500 million) and
Nuclear Electric Insurance Limited (NEIL) ($2.3 billion). In the event of an
accident, insurance proceeds must first be used for reactor stabilization and
site decontamination. The company's share of any remaining proceeds can be
used for property damage or premature decommissioning costs up to $1.3
billion (company's share). Premature decommissioning insurance cost recovery
is the excess of funds previously collected for decommissioning (as discussed
under "Decommissioning").
The Owners also carry additional insurance with NEIL to cover costs of
replacement power and other extra expenses incurred during a prolonged outage
resulting from accidental property damage at Wolf Creek. If losses incurred
at any of the nuclear plants insured under the NEIL policies exceed premiums,
reserves, and other NEIL resources, the company may be subject to
retrospective assessments under the current policies of approximately $8
million per year.
Although the company maintains various insurance policies to provide
coverage for potential losses and liabilities resulting from an accident or
an extended outage, the company's insurance coverage may not be adequate to
cover the costs that could result from a catastrophic accident or extended
outage at Wolf Creek. Any substantial losses not covered by insurance, to
the extent not recoverable through rates, would have a material adverse
effect on the company's financial condition and results of operations.
Fuel Commitments: To supply a portion of the fuel requirements for its
generating plants, the company has entered into various commitments to obtain
nuclear fuel and coal. Some of these contracts contain provisions for price
escalation and minimum purchase commitments. At December 31, 1996, WCNOC's
nuclear fuel commitments (company's share) were approximately $15.4 million
for uranium concentrates expiring at various times through 2001, $59.4
million for enrichment expiring at various times through 2003, and $70.3
million for fabrication through 2025. At December 31, 1996, the company's
coal contract commitments in 1996 dollars under the remaining terms of the
contracts were approximately $2.6 billion. The largest coal contract expires
in 2020, with the remaining coal contracts expiring at various times through
2013.
Energy Act: As part of the 1992 Energy Policy Act, a special assessment
is being collected from utilities for a uranium enrichment, decontamination,
and decommissioning fund. The company's portion of the assessment for Wolf
Creek is approximately $7 million, payable over 15 years. Management expects
such costs to be recovered through the ratemaking process.
Investment Commitments: During 1996, The Wing Group obtained ownership
interests in independent power generation projects under construction in
Turkey and Colombia. The Wing Group or other non-regulated Western
subsidiaries are committed to future funding of equity interests in these
projects. In 1997, commitments are not expected to exceed $31 million.
Currently, equity commitments beyond 1997 are approximately $3 million. The
company has also committed $105 million through June of 1998 to power
generation projects in the People's Republic of China.
9. RATE MATTERS AND REGULATION
Utility expenses and credits recognized as regulatory assets and
liabilities on the Consolidated Balance Sheets are recognized in income as
the related amounts are included in service rates and recovered from or
refunded to customers in utility revenues. The company expects to recover
the following regulatory assets in rates:
December 31, 1996 1995
(Dollars in Thousands)
Coal contract settlement costs $ 21,037 $ 27,274
Service line replacement 12,921 14,164
Post employment/retirement benefits (See
Note 12) 40,834 35,057
Deferred plant costs 31,272 31,539
Phase-in revenues 26,317 43,861
Debt issuance costs (See Note 1) 78,532 80,354
Deferred cost of gas purchased 21,332 20,318
Other regulatory assets 8,794 9,826
Total regulatory assets $241,039 $262,393
Coal Contract Settlements: In March 1990, the KCC issued an order
allowing KGE to defer its share of a 1989 coal contract settlement with the
Pittsburg and Midway Coal Mining Company amounting to $22.5 million. This
amount was recorded as a deferred charge and is included in Deferred Charges
and Other Assets, Regulatory assets, on the Consolidated Balance Sheets. The
settlement resulted in the termination of a long-term coal contract. The KCC
permitted KGE to recover this settlement as follows: 76% of the settlement
plus a return over the remaining term of the terminated contract (through
2002) and 24% to be amortized to expense with a deferred return equivalent to
the carrying cost of the asset.
In September 1994, the FERC issued an order allowing the company to defer
$24.5 million in costs associated with the buy-out of a long-term coal supply
contract with American Metal Climax (AMAX) to supply the Lawrence and
Tecumseh Energy Centers. The deferred costs are included in the Deferred
Charges and Other Assets, Regulatory assets, section of the Consolidated
Balance Sheets and are amortized monthly to expense over the life of the
original AMAX contract (through 2013).
Deferred Plant Costs: In 1986, KGE recognized the effects of Wolf Creek
related disallowances in accordance with Statement of Financial Accounting
Standards No. 90 "Regulated Enterprises - Accounting for Abandonments and
Disallowances of Plant Costs".
Phase-in Revenues: In 1988, the KCC ordered the accrual of phase-in
revenues to be discontinued by KGE effective December 31, 1988. KGE began
amortizing the phase-in revenue asset on a straight-line basis over 9 l/2
years beginning January 1, 1989. At December 31, 1996, approximately $26
million of deferred phase-in revenues remain to be recovered.
Deferred Cost of Gas Purchased: The company, under rate orders from the
KCC, OCC, and FERC, recovers increases in fuel and natural gas costs through
fuel adjustment clauses for wholesale and certain retail electric customers
and various cost of gas riders (COGR) for natural gas customers. The KCC and
the OCC require the annual difference between actual gas cost incurred and
cost recovered through the application of the COGR be deferred and amortized
through rates in subsequent periods.
KCC Rate Proceedings: On August 17, 1995, the company and KGE filed three
proceedings with the KCC. The first sought a $36 million increase in
revenues from the company's natural gas distribution business. In separate
dockets, the company and KGE filed with the KCC a request to more rapidly
recover KGE's investment in its assets of Wolf Creek over the next seven
years by increasing depreciation by $50 million each year and a request to
reduce annual depreciation expense by approximately $11 million for electric
transmission, distribution and certain generating plant assets to reflect the
useful lives of these properties more accurately. The company sought to
reduce electric rates for KGE customers by approximately $8.7 million
annually in each of the seven years of accelerated Wolf Creek depreciation.
On April 15, 1996, the KCC issued an order allowing a revenue increase of
$33.8 million in the company's natural gas distribution business. On May 3,
1996, the company filed a Petition for Reconsideration and on July 11, 1996,
the KCC issued its Order on Reconsideration allowing the revenue to be
increased to $34.4 million.
On May 23, 1996, the company implemented an $8.7 million electric rate
reduction to KGE customers on an interim basis. On October 22, 1996, the
company, the KCC Staff, the City of Wichita, and the Citizens Utility
Ratepayer Board filed an agreement with the KCC whereby the company's retail
electric rates would be reduced, subject to approval by the KCC. This
agreement was approved on January 15, 1997. Under the agreement, on February
1, 1997, KGE's rates were reduced by $36.3 million and, in addition, the May
1996 interim reduction became permanent. KGE's rates will be reduced by
another $10 million effective June 1, 1998, and again on June 1, 1999. KPL's
rates were reduced by $10 million effective February 1, 1997. Two one-time
rebates of $5 million will be credited to the company's customers in January
1998 and 1999. The agreement also fixed annual savings from the merger with
KGE at $40 million. This level of merger savings provides for complete
recovery of and a return on the acquisition premium.
On April 15, 1996, the company filed an application with the KCC
requesting an order approving its proposal to merge with KCPL and for other
related relief. On July 29, 1996, the company filed its First Amended
Application with the KCC in its proceeding for approval to merge with KCPL.
The amended application proposed an incentive rate mechanism requiring all
regulated earnings in excess of the merged company's 12.61% return on equity
to be split among customers, shareowners, and additional depreciation on Wolf
Creek.
On November 27, 1996, the KCC issued a Suspension Order and on December 3,
1996, an order was issued which suspended, subject to refund, costs related
to purchases from Kansas Pipeline Partnership included in the company's COGR.
On December 12, 1996, the company filed a Petition for Reconsideration or For
More Definite Statement by Staff of the Issues to be addressed in this
Docket. On January 2, 1997, the KCC issued an order directing Staff to file
within sixty days, a Bill of Particulars, specifying which charges from
Kansas Pipeline Partnership it asserts are inappropriate for inclusion in the
company's COGR. The company does not expect this proceeding to have a
material adverse effect on its results of operations.
On January 24, 1992, the KCC issued an order allowing the company to
continue the deferral of service line replacement program costs incurred
since January 1, 1992, including depreciation, property taxes, and carrying
costs for recovery. As part of the natural gas distribution rate case
settlement on July 11, 1996 (See discussion of natural gas distribution rate
case above), the company was permitted to begin amortizing these costs in
July 1996. Approximately $431,000 will be amortized each month through June
1999. At December 31, 1996, approximately $12.9 million of these deferrals
have been included in Deferred Charges and Other Assets, Regulatory assets,
on the Consolidated Balance Sheets. These deferrals will become a
responsibility of New Oneok, when the alliance with ONEOK is consummated.
MPSC Proceedings: On May 3, 1996, the company filed an application with
the MPSC requesting an order approving its proposal to merge with KCPL. The
application includes the same regulatory plan as proposed before the KCC and
includes an annual rate reduction of $21 million for KCPL retail electric
customers.
FERC Proceedings: On August 22, 1996, the company filed with the FERC an
application for approval of its proposed merger with KCPL. On December 18,
1996, the FERC issued a Merger Policy Statement (Policy Statement) which
articulates three principal factors the FERC will apply for analyzing
mergers: (1) effect on competition, (2) customer protection, and (3) effect
on regulation. The FERC has requested the company to and the company will
revise its filing to comply with the specific requirements of the Policy
Statement.
10. INCOME TAXES
Under SFAS 109, temporary differences gave rise to deferred tax assets and
deferred tax liabilities at December 31, 1996 and 1995, respectively, as
follows:
1996 1995
(Dollars in Thousands)
Deferred tax assets:
Deferred gain on sale-leaseback. . . . . $ 99,466 $ 105,007
Alternative minimum tax carryforwards. . 250 18,740
Other. . . . . . . . . . . . . . . . . . 29,945 30,789
Total deferred tax assets. . . . . . . $ 129,661 $ 154,536
Deferred Tax Liabilities:
Accelerated depreciation and other . . . $ 654,102 $ 653,134
Acquisition premium. . . . . . . . . . . 307,242 315,513
Deferred future income taxes . . . . . . 217,257 282,476
Other. . . . . . . . . . . . . . . . . . 61,432 70,883
Total deferred tax liabilities . . . . $1,240,033 $1,322,006
Accumulated deferred
income taxes, net. . . . . . . . . . . . $1,110,372 $1,167,470
In accordance with various rate orders received from the KCC and the
OCC, the company has not yet collected through rates the amounts necessary to
pay a significant portion of the net accumulated deferred income tax
liabilities. As management believes it is probable that the net future
increases in income taxes payable will be recovered from customers, it has
recorded a deferred asset for these amounts. These assets are also a
temporary difference for which deferred income tax liabilities have been
provided.
11. COMMON STOCK, PREFERRED STOCK, PREFERENCE STOCK,
AND OTHER MANDATORILY REDEEMABLE SECURITIES
The company's Restated Articles of Incorporation, as amended, provide for
85,000,000 authorized shares of common stock. At December 31, 1996,
64,625,259 shares were outstanding.
The company has a Dividend Reinvestment and Stock Purchase Plan (DRIP).
Shares issued under the DRIP may be either original issue shares or shares
purchased on the open market. The company has been issuing original issue
shares since January 1, 1995 with 935,461 shares issued in 1996 under the
DRIP. At December 31, 1996, 2,082,166 shares were available under the DRIP
registration statement.
Not Subject to Mandatory Redemption: The cumulative preferred stock is
redeemable in whole or in part on 30 to 60 days notice at the option of the
company.
Subject to Mandatory Redemption: On July 1, 1996, all shares of the
company's 8.50% Preference Stock due 2016 were redeemed.
The mandatory sinking fund provisions of the 7.58% Series preference stock
require the company to redeem 25,000 shares annually beginning on April 1,
2002, and each April 1 through 2006 and the remaining shares on April 1,
2007, all at $100 per share. The company may, at its option, redeem up to an
additional 25,000 shares on each April 1 at $100 per share. The 7.58% Series
also is redeemable in whole or in part, at the option of the company, subject
to certain restrictions on refunding, at a redemption price of $104.55,
$103.79, and $103.03 per share beginning April 1, 1996, 1997, and 1998,
respectively.
Other Mandatorily Redeemable Securities: On December 14, 1995, Western
Resources Capital I, a wholly-owned trust, issued four million preferred
securities of 7-7/8% Cumulative Quarterly Income Preferred Securities, Series
A, for $100 million. The trust interests represented by the preferred
securities are redeemable at the option of Western Resources Capital I, on or
after December 11, 2000, at $25 per preferred security plus accrued interest
and unpaid dividends. Holders of the securities are entitled to receive
distributions at an annual rate of 7-7/8% of the liquidation preference value
of $25. Distributions are payable quarterly, and in substance are tax
deductible by the company. These distributions are recorded as interest
charges on the Consolidated Statements of Income. The sole asset of the
trust is $103 million principal amount of 7-7/8% Deferrable Interest
Subordinated Debentures, Series A due December 11, 2025 (the Subordinated
Debentures).
On July 31, 1996, Western Resources Capital II, a wholly-owned trust, of
which the sole asset is subordinated debentures of the company, sold in a
public offering, 4.8 million shares of 8-1/2% Cumulative Quarterly Income
Preferred Securities, Series B, for $120 million. The trust interests
represented by the preferred securities are redeemable at the option of
Western Resources Capital II, on or after July 31, 2001, at $25 per preferred
security plus accumulated and unpaid distributions. Holders of the
securities are entitled to receive distributions at an annual rate of 8-1/2%
of the liquidation preference value of $25. Distributions are payable
quarterly, and in substance are tax deductible by the company. These
distributions are recorded as interest charges on the Consolidated Statements
of Income. The sole asset of the trust is $124 million principal amount of
8-1/2% Deferrable Interest Subordinated Debentures, Series B due July 31,
2036.
The preferred securities are included under Western Resources obligated
mandatorily redeemable preferred securities of subsidiary trusts holding
solely company subordinated debentures (Other Mandatorily Redeemable
Securities) on the Consolidated Balance Sheets and Consolidated Statements of
Capitalization.
In addition to the company's obligations under the Subordinated
Debentures, the company has agreed, pursuant to guarantees issued to the
trusts, the provisions of the trust agreements establishing the trusts and
related expense agreements, to guarantee, on a subordinated basis, payment of
distributions on the preferred securities (but not if the applicable trust
does not have sufficient funds to pay such distributions) and to pay all of
the expenses of the trusts (collectively, the "Back-up Undertakings").
Considered together, the Back-up Undertakings constitute a full and
unconditional guarantee by the company of the trusts obligations under the
preferred securities.
12. EMPLOYEE BENEFIT PLANS
Pension: The company maintains qualified noncontributory defined benefit
pension plans covering substantially all employees. Pension benefits are
based on years of service and the employee's compensation during the five
highest paid consecutive years out of ten before retirement. The company's
policy is to fund pension costs accrued, subject to limitations set by the
Employee Retirement Income Security Act of 1974 and the Internal Revenue
Code.
Salary Continuation: The company maintains a non-qualified Executive
Salary Continuation Program for the benefit of certain management employees,
including executive officers.
The following tables provide information on the components of pension and
salary continuation costs under Statement of Financial Accounting Standards
No. 87 "Employers' Accounting for Pension Plans" (SFAS 87), funded status and
actuarial assumptions for the company:
Year Ended December 31, 1996 1995 1994
(Dollars in Thousands)
SFAS 87 Expense:
Service cost. . . . . . . . . . $ 11,644 $ 11,059 $ 10,197
Interest cost on projected
benefit obligation. . . . . . 34,003 32,416 29,734
(Gain) loss on plan assets. . . (65,799) (102,731) 7,351
Deferred investment gain (loss) 30,119 70,810 (38,457)
Net amortization. . . . . . . . 2,140 1,132 245
Net expense . . . . . . . . $ 12,107 $ 12,686 $ 9,070
December 31, 1996 1995 1994
(Dollars in Thousands)
Reconciliation of Funded Status:
Actuarial present value of
benefit obligations:
Vested . . . . . . . . . . . $347,734 $331,027 $278,545
Non-vested . . . . . . . . . 23,220 21,775 19,132
Total. . . . . . . . . . . $370,954 $352,802 $297,677
Plan assets (principally debt
and equity securities) at
fair value . . . . . . . . . . . $495,993 $444,608 $375,521
Projected benefit obligation . . . 483,862 456,707 378,146
Funded status. . . . . . . . . . . 12,131 (12,099) (2,625)
Unrecognized transition asset. . . (448) (527) (2,205)
Unrecognized prior service costs . 62,434 57,087 47,796
Unrecognized net (gain). . . . . . (103,132) (75,312) (56,079)
Accrued liability. . . . . . . . $(29,015) $(30,851) $(13,113)
Year Ended December 31, 1996 1995 1994
Actuarial Assumptions:
Discount rate. . . . . . . . . . 7.5% 7.5% 8.0-8.5%
Annual salary increase rate. . . 4.75% 4.75% 5.0%
Long-term rate of return . . . . 8.5-9.0% 8.5-9.0% 8.0-8.5%
Postretirement: The company follows the provisions of Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106). This statement
requires the accrual of postretirement benefits other than pensions,
primarily medical benefit costs, during the years an employee provides
service.
Based on actuarial projections and adoption of the transition method of
implementation which allows a 20-year amortization of the accumulated benefit
obligation, postretirement benefits expenses approximated $16.4 million,
$15.0 million, and $12.4 million for 1996, 1995, and 1994, respectively. The
company's total postretirement benefit obligation approximated $123.0 million
and $123.2 million at December 31, 1996 and 1995, respectively. In addition,
the company received an order from the KCC permitting the initial deferral of
SFAS 106 expense in excess of amounts previously recognized. The following
table summarizes the status of the company's postretirement benefit plans for
financial statement purposes and the related amounts included in the
Consolidated Balance Sheets:
December 31, 1996 1995 1994
(Dollars in Thousands)
Reconciliation of Funded Status:
Actuarial present value of postretirement
benefit obligations:
Retirees. . . . . . . . . . . . $ 76,588 $ 81,402 $68,570
Active employees fully eligible . 10,060 7,645 13,549
Active employees not fully eligible 36,345 34,144 32,484
Total . . . . . . . . . . . . 122,993 123,191 114,603
Fair value of plan assets . . . . . 78 46 -
Funded status . . . . . . . . . . . (122,915) (123,145) (114,603)
Unrecognized prior service cost . . (8,157) (8,900) ( 9,391)
Unrecognized transition obligation. 104,920 111,443 117,967
Unrecognized net (gain) . . . . . . (8,137) (7,271) ( 14,489)
Accrued postretirement benefit costs $(34,289) $(27,873) $(20,516)
Year Ended December 31, 1996 1995 1994
Actuarial Assumptions:
Discount rate . . . . . . . . . . 7.5 % 7.5 % 8.0-8.5%
Annual salary increase rate . . . 4.75 % 4.75 % 5.0 %
Expected rate of return . . . . . 9.0 % 9.0 % 8.5 %
For measurement purposes, an annual health care cost growth rate of 10%
was assumed for 1996, decreasing one percent per year to five percent in 2001
and thereafter. The health care cost trend rate has a significant effect on
the projected benefit obligation. Increasing the trend rate by one percent
each year would increase the present value of the accumulated projected
benefit obligation by $5.5 million and the aggregate of the service and
interest cost components by $0.5 million.
Postemployment: The company adopted Statement of Financial Accounting
Standards No. 112 "Employers' Accounting for Postemployment Benefits" (SFAS
112) in the first quarter of 1994, which established accounting and reporting
standards for postemployment benefits. The statement requires the company to
recognize the liability to provide postemployment benefits when the liability
has been incurred. The company received an order from the KCC permitting the
initial deferral of SFAS 112 expense.
In accordance with the provision of an order from the KCC, the company has
deferred postretirement and postemployment expenses representing the excess
expense incurred upon adoption of SFAS 106 and SFAS 112. In 1992 and 1993,
the company purchased COLI policies whose associated income stream was
intended to offset actual postretirement and postemployment costs incurred.
See Note 1 regarding legislative action related to COLI. As of December 31,
1996 and 1995, the company recognized a regulatory asset for postretirement
expense of approximately $31.6 million and $25.3 million and for
postemployment expense of approximately $9.3 million and $9.8 million,
respectively.
Savings: The company maintains savings plans in which substantially all
employees participate. The company matches employees' contributions up to
specified maximum limits. The funds of the plans are deposited with a
trustee and invested at each employee's option in one or more investment
funds, including a company stock fund. The company's contributions were $4.6
million, $5.1 million, and $5.1 million for 1996, 1995, and 1994,
respectively.
Stock Based Compensation Plans: The company has two stock-based
compensation plans, a long term incentive and share award plan (LTISA Plan)
and a long term incentive program (LTI Program). The company accounts for
these plans under Accounting Principles Board Opinion No. 25 and the related
Interpretations. Had compensation cost been determined pursuant to Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), the company would have recognized compensation
costs during 1996 and 1995. However, recognition of the compensation costs
would not have been material to the Consolidated Statements of Income nor
would these costs have affected earnings per share.
The LTISA Plan was implemented to help ensure that managers and board
members (Plan Participants) were properly incented to increase shareowner
value. It was established to replace the company's LTI Program, discussed
below. Under the LTISA Plan, the company may grant awards in the form of
stock options, dividend equivalents, share appreciation rights, restricted
shares, restricted share units, performance shares, and performance share
units to Plan Participants. Up to three million shares of common stock may
be granted under the LTISA Plan.
In 1996, the LTISA Plan granted 205,700 stock options and 205,700 dividend
equivalents to Plan Participants. The exercise price of the stock options
granted was $29.25. These options vest in nine years. Accelerated vesting
allows stock options to vest within three years, dependent upon certain
company performance factors. The options expire in approximately ten years.
The weighted-average grant-date fair value of the dividend equivalent was
$5.82. The value of each dividend equivalent is calculated as a percentage
of the accumulated dividends that would have been paid or payable on a share
of company common stock. This percentage ranges from zero to 100%, based
upon certain company performance factors. The dividend equivalents expire
after nine years from the date of grant. All stock options and dividend
equivalents granted were outstanding at December 31, 1996.
The fair value of stock options and dividend equivalents were estimated on
the date of grant using the Black-Scholes option-pricing model. The model
assumed a dividend yield of 6.33%, expected volatility of 14.12%; and an
expected life of 8.7 years. Additionally, the stock option model assumed a
risk-free interest rate of 6.45%. The dividend equivalent model assumed a
risk-free interest rate of 6.61%, an award percentage of 100% and a dividend
accumulation period of five years.
The LTI Program is a performance-based stock plan which awards performance
shares to executive officers (Program Participants) of the company equal in
value to 10% of the officer's annual base compensation. Each performance
share is equal in value to one share of the company's common stock. Each
Program Participant may be entitled to receive a common stock distribution
based on the value of performance shares awarded multiplied by a distribution
percentage not to exceed 110%. This distribution percentage is based upon
the Program Participants' and the company's performance. Program
Participants also receive cash equivalent to dividends on common stock for
performance shares awarded.
In 1995, the company granted 14,756 performance shares, with a weighted
verage fair value of $28.81. The fair value of each performance share is
based on market price at the date of grant. No performance shares were
granted in 1996. As of December 31, 1996, shares granted in 1995 have a
remaining contractual life of one year.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value as set forth in Statement of Financial Accounting
Standards No. 107 "Disclosures about Fair Value of Financial Instruments":
Cash and cash equivalents, short-term borrowings and variable-rate debt
are carried at cost which approximates fair value. The decommissioning trust
is recorded at fair value and is based on the quoted market prices at
December 31, 1996 and 1995. The fair value of fixed-rate debt, redeemable
preference stock, and other mandatorily redeemable securities is estimated
based on quoted market prices for the same or similar issues or on the
current rates offered for instruments of the same remaining maturities and
redemption provisions. The estimated fair values of contracts related to
commodities have been determined using quoted market prices of the same or
similar securities.
The carrying values and estimated fair values of the company's financial
instruments are as follows:
Carrying Value Fair Value
December 31, 1996 1995 1996 1995
(Dollars in Thousands)
Decommissioning trust. . .$ 33,041 $ 25,070 $ 33,041 $ 25,070
Fixed-rate debt. . . . . . 1,224,743 1,240,877 1,260,722 1,294,365
Redeemable preference
stock. . . . . . . . . . 50,000 150,000 52,500 160,405
Other mandatorily
redeemable securities. . 220,000 100,000 214,800 102,000
December 31, 1996 1995
Notional Notional
Volumes Estimated Gain/ Volumes Estimated Gain/
(mmbtu's) Fair Value (loss) (mmbtu's) Fair Value (loss)
Natural gas
futures 6,540,000 $16,032 $2,061 7,440,000 $16,380 $2,678
Natural gas
swaps 2,344,000 $ 5,500 $1,315 2,624,000 $ 3,406 $ 18
The recorded amount of accounts receivable and other current financial
instruments approximate fair value.
The fair value estimates presented herein are based on information
available as of December 31, 1996 and 1995. These fair value estimates have
not been comprehensively revalued for the purpose of these financial
statements since that date, and current estimates of fair value may differ
significantly from the amounts presented herein. Because a substantial
portion of the company's operations are regulated, the company believes that
any gains or losses related to the retirement of debt or redemption of
preferred securities would not have a material effect on the company's
financial position or results of operations.
14. LONG-TERM DEBT
The amount of the company's first mortgage bonds authorized by its
Mortgage and Deed of Trust, dated July 1, 1939, as supplemented, is
unlimited. The amount of KGE's first mortgage bonds authorized by the KGE
Mortgage and Deed of Trust, dated April 1, 1940, as supplemented, is limited
to a maximum of $2 billion. Amounts of additional bonds which may be issued
are subject to property, earnings, and certain restrictive provisions of each
Mortgage.
Debt discount and expenses are being amortized over the remaining lives of
each issue. During the years 1997 through 2001, $125 million of bonds will
mature in 1999 and $75 million of bonds will mature in 2000. No other bonds
will mature and there are no cash sinking fund requirements for preference
stock or bonds during this time period.
The company maintains a $350 million revolving credit agreement that
expires on October 5, 1999. Under the terms of this agreement, the company
may, at its option, borrow at different market-based interest rates and is
required, among other restrictions, to maintain a total debt to total
capitalization ratio of not greater than 65% at all times. A facility fee is
paid on the $350 million commitment. The unused portion of the revolving
credit facility may be used to provide support for commercial paper. At
December 31, 1996, the company had $275 million borrowed under the facility
and had available $75 million of unused capacity under the facility.
Long-term debt outstanding at December 31, 1996 and 1995, was as follows:
1996 1995
(Dollars in Thousands)
Western Resources
First mortgage bond series:
7 1/4% due 1999. . . . . . . . . . . . . $ 125,000 $ 125,000
8 7/8% due 2000. . . . . . . . . . . . . 75,000 75,000
7 1/4% due 2002. . . . . . . . . . . . . 100,000 100,000
8 1/2% due 2022. . . . . . . . . . . . . 125,000 125,000
7.65% due 2023. . . . . . . . . . . . . 100,000 100,000
525,000 525,000
Pollution control bond series:
Variable due 2032 (1). . . . . . . . . . 45,000 45,000
Variable due 2032 (2). . . . . . . . . . 30,500 30,500
6% due 2033. . . . . . . . . . . . . 58,420 58,420
133,920 133,920
KGE
First mortgage bond series:
5 5/8% due 1996. . . . . . . . . . . . . - 16,000
7.60 % due 2003. . . . . . . . . . . . . 135,000 135,000
6 1/2% due 2005. . . . . . . . . . . . . 65,000 65,000
6.20 % due 2006. . . . . . . . . . . . . 100,000 100,000
300,000 316,000
Pollution control bond series:
5.10 % due 2023. . . . . . . . . . . . . 13,822 13,957
Variable due 2027 (3). . . . . . . . . . 21,940 21,940
7.0 % due 2031. . . . . . . . . . . . . 327,500 327,500
Variable due 2032 (4). . . . . . . . . . 14,500 14,500
Variable due 2032 (5). . . . . . . . . . 10,000 10,000
387,762 387,897
Revolving credit agreement . . . . . . . . . 275,000 50,000
Other long-term agreements . . . . . . . . . 65,190 -
Less:
Unamortized debt discount. . . . . . . . 5,289 5,554
Long-term debt due within one year . . . - 16,000
Long-term debt (net). . . . . . . . . . . . $1,681,583 $1,391,263
Rates at December 31, 1996: (1) 3.68%, (2) 3.582%, (3) 3.55%,
(4) 3.60% and (5) 3.52%
15. SHORT-TERM DEBT
The company has arrangements with certain banks to provide unsecured
short-term lines of credit on a committed basis totaling $973 million. The
agreements provide the company with the ability to borrow at different
market-based interest rates. The company pays commitment or facility fees in
support of these lines of credit. Under the terms of the agreements, the
company is required, among other restrictions, to maintain a total debt to
total capitalization ratio of not greater than 65% at all times. The unused
portion of these lines of credit are used to provide support for commercial
paper.
In addition, the company has agreements with several banks to borrow on an
uncommitted, as available, basis at money-market rates quoted by the banks.
There are no costs, other than interest, for these agreements. The company
also uses commercial paper to fund its short-term borrowing requirements.
Information regarding the company's short-term borrowings, comprised of
borrowings under the credit agreements, bank loans and commercial paper, is
as follows:
December 31, 1996 1995 1994
(Dollars in Thousands)
Borrowings outstanding at year end:
Lines of credit $525,000 $ - $ -
Bank loans 162,300 177,600 151,000
Commercial paper notes 293,440 25,850 157,200
Total $980,740 $203,450 $308,200
Weighted average interest rate on
debt outstanding at year end
(including fees) 5.94% 6.02% 6.25%
Weighted average short-term debt
outstanding during the year $491,136 $301,871 $214,180
Weighted daily average interest
rates during the year
(including fees) 5.72% 6.15% 4.63%
Unused lines of credit supporting
commercial paper notes $447,850 $121,075 $145,000
16. LEASES
At December 31, 1996, the company had leases covering various property and
equipment. The company currently has no capital leases.
Rental payments for operating leases and estimated rental commitments are
as follows:
Operating
Year Ended December 31, Leases
(Dollars in Thousands)
1994 $ 55,076
1995 63,353
1996 66,181
Future Commitments:
1997 60,247
1998 52,643
1999 47,276
2000 43,877
2001 42,592
Thereafter 688,231
Total $ 934,866
In 1987, KGE sold and leased back its 50% undivided interest in the La
Cygne 2 generating unit. The La Cygne 2 lease has an initial term of 29
years, with various options to renew the lease or repurchase the 50%
undivided interest. KGE remains responsible for its share of operation and
maintenance costs and other related operating costs of La Cygne 2. The lease
is an operating lease for financial reporting purposes.
As permitted under the La Cygne 2 lease agreement, the company in 1992
requested the Trustee Lessor to refinance $341.1 million of secured facility
bonds of the Trustee and owner of La Cygne 2. The transaction was requested
to reduce recurring future net lease expense. In connection with the
refinancing on September 29, 1992, a one-time payment of approximately $27
million was made by the company which has been deferred and is being
amortized over the remaining life of the lease and included in operating
expense as part of the future lease expense. At December 31, 1996,
approximately $22.5 million of this deferral remained on the Consolidated
Balance Sheets.
Future minimum annual lease payments, included in the table above,
required under the La Cygne 2 lease agreement are approximately $34.6 million
for each year through 2001 and $611 million over the remainder of the lease.
The gain realized at the date of the sale of La Cygne 2 has been deferred
for financial reporting purposes, and is being amortized ($9.7 million per
year) over the initial lease term in proportion to the related lease expense.
KGE's lease expense, net of amortization of the deferred gain and a one-time
payment, was approximately $22.5 million for 1996, 1995, and 1994.
17. JOINT OWNERSHIP OF UTILITY PLANTS
Company's Ownership at December 31, 1996
In-Service Invest- Accumulated Net Per-
Dates ment Depreciation (MW) cent
(Dollars in Thousands)
La Cygne 1 (a) Jun 1973 $ 160,541 $ 105,043 343 50
Jeffrey 1 (b) Jul 1978 290,617 121,307 616 84
Jeffrey 2 (b) May 1980 289,944 115,025 617 84
Jeffrey 3 (b) May 1983 389,350 152,579 591 84
Wolf Creek (c) Sep 1985 1,382,000 369,182 547 47
(a) Jointly owned with KCPL
(b) Jointly owned with UtiliCorp United Inc.
(c) Jointly owned with KCPL and Kansas Electric Power Cooperative, Inc.
Amounts and capacity presented above represent the company's share. The
company's share of operating expenses of the plants in service above, as well
as such expenses for a 50% undivided interest in La Cygne 2 (representing 335
MW capacity) sold and leased back to the company in 1987, are included in
operating expenses on the Consolidated Statements of Income. The company's
share of other transactions associated with the plants is included in the
appropriate classification in the company's Consolidated Financial
Statements.
18. SEGMENTS OF BUSINESS
The company is a public utility principally engaged in the generation,
transmission, distribution, and sale of electricity in Kansas and the
transportation, distribution, and sale of natural gas in Kansas and Oklahoma.
Substantially all of the results of operations and financial position of
the natural gas segment will be exchanged for an equity interest in New Oneok
in the strategic alliance which is expected to close in the third quarter of
1997. Upon contribution of the natural gas net assets to New Oneok, the
company will record its equity investment in New Oneok.
Year Ended December 31, 1996 1995 1994(1)
(Dollars in Thousands)
Operating revenues:
Electric. . . . . . . . . . . $1,197,433 $1,145,895 $1,121,781
Natural gas(2). . . . . . . . 849,386 597,405 642,988
2,046,819 1,743,300 1,764,769
Operating expenses excluding
income taxes:
Electric. . . . . . . . . . . 843,672 788,900 768,317
Natural gas . . . . . . . . . 810,062 584,494 625,780
1,653,734 1,373,394 1,394,097
Income taxes:
Electric. . . . . . . . . . . 84,108 96,719 100,078
Natural gas . . . . . . . . . 4,984 (5,522) (4,456)
89,092 91,197 95,622
Operating income:
Electric. . . . . . . . . . . 269,653 260,245 253,386
Natural gas . . . . . . . . . 34,340 18,464 21,664
$ 303,993 $ 278,709 $ 275,050
Identifiable assets at
December 31:
Electric. . . . . . . . . . . $4,379,435 $4,470,359 $4,346,312
Natural gas . . . . . . . . . 769,417 712,858 654,483
Other corporate assets(3) . . 1,498,929 307,460 370,234
$6,647,781 $5,490,677 $5,371,029
Other Information--
Depreciation and amortization:
Electric. . . . . . . . . . . $ 152,549 $ 133,452 $ 123,696
Natural gas . . . . . . . . . 31,173 26,833 33,702
183,722 $ 160,285 $ 157,398
Maintenance:
Electric. . . . . . . . . . . $ 81,972 $ 87,942 $ 88,162
Natural gas . . . . . . . . . 17,150 20,699 25,024
$ 99,122 $ 108,641 $ 113,186
Capital expenditures:
Electric. . . . . . . . . . . $ 138,361 $ 153,931 $ 152,384
Nuclear fuel. . . . . . . . . 2,629 28,465 20,590
Natural gas . . . . . . . . . 58,519 54,431 64,722
$ 199,509 $ 236,827 $ 237,696
(1) Information reflects the sales of the Missouri Properties (Note 19).
(2) For the years ended December 31, 1996 and 1995, operating revenues
associated with the natural gas segment include immaterial amounts of
revenues related to operations of non-regulated subsidiaries in non-gas
related businesses.
(3) As of December 31, 1996, this balance principally represents the equity
investment in ADT, security business and other property, non-utility assets
and deferred charges. As of December 31, 1995 and 1994, this balance
represents primarily cash, non-utility assets and deferred charges.
The portion of the table above related to the Missouri Properties is as
follows:
1994
(Dollars in Thousands, Unaudited)
Natural gas revenues. . . . . . . . . $ 77,008
Operating expenses excluding
income taxes. . . . . . . . 69,114
Income taxes. . . . . . . . . . . . . 2,897
Operating income. . . . . . . . . . . 4,997
Identifiable assets . . . . . . . . . -
Depreciation and amortization . . . . 1,274
Maintenance . . . . . . . . . . . . . 1,099
Capital expenditures. . . . . . . . . 3,682
19. SALES OF MISSOURI NATURAL GAS DISTRIBUTION PROPERTIES
On January 31, 1994, the company sold substantially all of its Missouri
natural gas distribution properties and operations to Southern Union Company
(Southern Union) for $404 million. The company sold the remaining Missouri
properties to United Cities Gas Company (United Cities) for $665,000 on
February 28, 1994. The properties sold to Southern Union and United Cities
are referred to herein as the "Missouri Properties."
During the first quarter of 1994, the company recognized a gain of
approximately $19.3 million, net of tax, on the sales of the Missouri
Properties. As of the respective dates of the sales of the Missouri
Properties, the company ceased recording the results of operations, and
removed the assets and liabilities from the Consolidated Balance Sheets
related to the Missouri Properties. The gain is reflected in Other Income
and Deductions, on the Consolidated Statements of Income.
The following table reflects the approximate operating revenues and
operating income included in the company's consolidated results of operations
for the year ended December 31, 1994, related to the Missouri Properties:
1994
Percent
of Total
Amount Company
(Dollars in Thousands, Unaudited)
Operating revenues. . . . . . . . . . $ 77,008 4.8%
Operating income. . . . . . . . . . . 4,997 1.9%
Separate audited financial information was not kept by the company for the
Missouri Properties. This unaudited financial information is based on
assumptions and allocations of expenses of the company as a whole.
20. QUARTERLY RESULTS (UNAUDITED)
The amounts in the table are unaudited but, in the opinion of management,
contain all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of such periods. The business
of the company is seasonal in nature and, in the opinion of management,
comparisons between the quarters of a year do not give a true indication of
overall trends and changes in operations.
First Second Third Fourth
(Dollars in Thousands, except Per Share Amounts)
1996
Operating revenues. . . . . . . $555,622 $436,121 $490,172 $564,904
Operating income. . . . . . . . 75,273 59,020 93,587 76,113
Net income. . . . . . . . . . . 44,789 28,746 62,949 32,466
Earnings applicable to
common stock. . . . . . . . . 41,434 25,392 56,049 31,236
Earnings per share. . . . . . . $ 0.66 $ 0.40 $ 0.87 $ 0.48
Dividends per share . . . . . . $ 0.515 $ 0.515 $ 0.515 $ 0.515
Average common shares
outstanding . . . . . . . . . 63,164 63,466 64,161 64,523
Common stock price:
High. . . . . . . . . . . . . $ 34.875 $ 30.75 $ 30.75 $ 31.75
Low . . . . . . . . . . . . . $ 29.25 $ 28.00 $ 28.25 $ 28.625
1995
Operating revenues. . . . . . . $443,375 $372,295 $470,289 $457,341
Operating income. . . . . . . . 69,441 49,891 99,481 59,896
Net income. . . . . . . . . . . 41,575 21,716 71,905 46,480
Earnings applicable to
common stock. . . . . . . . . 38,220 18,362 68,550 43,125
Earnings per share. . . . . . . $ 0.62 $ 0.30 $ 1.10 $ 0.69
Dividends per share . . . . . . $ 0.505 $ 0.505 $ 0.505 $ 0.505
Average common shares
outstanding . . . . . . . . . 61,747 61,886 62,244 62,712
Common stock price:
High. . . . . . . . . . . . . $ 33.375 $ 32.50 $ 32.875 $ 34.00
Low . . . . . . . . . . . . . $ 28.625 $ 30.25 $ 29.75 $ 31.00
<TABLE> <S> <C>
<ARTICLE> OPUR3
<CIK> 0000054507
<NAME> WESTERN RESOURCES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-ASSETS> 6,647,781
<TOTAL-OPERATING-REVENUES> 1,742,826
<NET-INCOME> 168,950
</TABLE>
