SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission File Number 1-3523
WESTERN RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
KANSAS 48-0290150
(State or Other Jurisdiction of (Employer
Incorporation or Organization) Identification No.)
818 KANSAS AVENUE, TOPEKA, KANSAS 66612
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number Including Area Code (785) 575-6300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 2000
Common Stock, $5.00 par value 68,646,867
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WESTERN RESOURCES, INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Consolidated Statements of Shareholders' Equity 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 28
Part II. Other Information
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
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<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
March 31, December 31,
2000 1999
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 1,690 $ 12,444
Restricted cash . . . . . . . . . . . . . . . . . . . . . 17,732 14,558
Accounts receivable (net) . . . . . . . . . . . . . . . . 198,012 229,200
Inventories and supplies (net). . . . . . . . . . . . . . 112,141 112,392
Marketable securities . . . . . . . . . . . . . . . . . . 29,137 177,128
Prepaid expenses and other. . . . . . . . . . . . . . . . 85,479 57,246
Total Current Assets. . . . . . . . . . . . . . . . . . 444,191 602,968
PROPERTY, PLANT AND EQUIPMENT (NET) . . . . . . . . . . . . 3,903,963 3,889,444
OTHER ASSETS:
Investment in ONEOK . . . . . . . . . . . . . . . . . . . 589,288 590,109
Customer accounts (net) . . . . . . . . . . . . . . . . . 1,107,451 1,138,902
Goodwill (net). . . . . . . . . . . . . . . . . . . . . . 1,088,929 1,102,157
Regulatory assets . . . . . . . . . . . . . . . . . . . . 363,723 366,004
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 324,010 318,622
Total Other Assets. . . . . . . . . . . . . . . . . . . 3,473,401 3,515,794
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $7,821,555 $8,008,206
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt. . . . . . . . . . . $ 47,848 $ 111,667
Short-term debt . . . . . . . . . . . . . . . . . . . . . 643,911 705,421
Accounts payable. . . . . . . . . . . . . . . . . . . . . 136,398 132,834
Accrued liabilities . . . . . . . . . . . . . . . . . . . 221,548 226,786
Accrued income taxes. . . . . . . . . . . . . . . . . . . 50,341 40,328
Deferred security revenues. . . . . . . . . . . . . . . . 58,768 61,148
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 84,938 73,011
Total Current Liabilities . . . . . . . . . . . . . . . 1,243,752 1,351,195
LONG-TERM LIABILITIES:
Long-term debt (net). . . . . . . . . . . . . . . . . . . 2,807,074 2,883,066
Western Resources obligated mandatorily redeemable
preferred securities of subsidiary trusts holding
solely company subordinated debentures. . . . . . . . . 220,000 220,000
Deferred income taxes and investment tax credits. . . . . 999,840 982,548
Minority interests. . . . . . . . . . . . . . . . . . . . 198,705 193,499
Deferred gain from sale-leaseback . . . . . . . . . . . . 195,165 198,123
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 258,825 279,451
Total Long-term Liabilities . . . . . . . . . . . . . . 4,679,609 4,756,687
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Cumulative preferred stock. . . . . . . . . . . . . . . . 24,858 24,858
Common stock, par value $5 per share, authorized
150,000,000 shares, outstanding 68,084,715 and
67,401,657 shares, respectively. . . . . . . . . . . . . 344,568 341,508
Paid-in capital . . . . . . . . . . . . . . . . . . . . . 823,645 820,945
Retained earnings . . . . . . . . . . . . . . . . . . . . 712,948 691,016
Accumulated other comprehensive income (net). . . . . . . 6,548 37,788
Treasury stock, at cost, 828,918 and 900,000 shares,
respectively . . . . . . . . . . . . . . . . . . . . . . (14,373) (15,791)
Total Shareholders' Equity. . . . . . . . . . . . . . . 1,898,194 1,900,324
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . $7,821,555 $8,008,206
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
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<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 334,829 $ 312,035
Security. . . . . . . . . . . . . . . . . . . . . . . . . . 149,341 148,547
Total Sales . . . . . . . . . . . . . . . . . . . . . . . 484,170 460,582
COST OF SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . 127,625 106,653
Security. . . . . . . . . . . . . . . . . . . . . . . . . . 48,576 41,274
Total Cost of Sales . . . . . . . . . . . . . . . . . . . 176,201 147,927
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . . 307,969 312,655
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . . . . 86,208 79,082
Depreciation and amortization . . . . . . . . . . . . . . . 106,369 83,770
Selling, general and administrative expense . . . . . . . . 85,042 71,868
Total Operating Expenses. . . . . . . . . . . . . . . . . 277,619 234,720
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . 30,350 77,935
OTHER INCOME (EXPENSE):
Investment earnings . . . . . . . . . . . . . . . . . . . . 118,069 22,890
Minority interests. . . . . . . . . . . . . . . . . . . . . (611) 700
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 515 (418)
Total Other Income (Expense). . . . . . . . . . . . . . 117,973 23,172
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . . . . 148,323 101,107
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . . . . 51,442 59,151
Interest expense on short-term debt and other . . . . . . . 18,584 11,649
Total Interest Expense. . . . . . . . . . . . . . . . . 70,026 70,800
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . 78,297 30,307
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 36,973 9,560
NET INCOME BEFORE EXTRAORDINARY GAIN. . . . . . . . . . . . . 41,324 20,747
EXTRAORDINARY GAIN, NET OF TAX. . . . . . . . . . . . . . . . 18,492 -
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . 59,816 20,747
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . . 282 282
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . . $ 59,534 $ 20,465
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . 67,734,125 66,089,199
BASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING:
Earnings available for common stock before
extraordinary gain. . . . . . . . . . . . . . . . . . . . $ 0.61 $ 0.31
Extraordinary gain. . . . . . . . . . . . . . . . . . . . . 0.27 -
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . . $ 0.88 $ 0.31
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . . $ .535 $ .535
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $59,816 $20,747
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains/(losses) on marketable
securities arising during the period. . . . . . . . . . 46,217 (21,382)
Less: Reclassification adjustment for gains
included in net income. . . . . . . . . . . . . . . . . (98,260) -
Unrealized loss on marketable securities (net). . . . . . (52,043) (21,382)
Unrealized gain/(loss) on currency translation . . . . . 451 (1,102)
Other comprehensive loss, before tax. . . . . . . . . . (51,592) (22,484)
INCOME TAX (BENEFIT) EXPENSE. . . . . . . . . . . . . . . . 20,352 (9,013)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX . . . . . . . (31,240) (13,471)
COMPREHENSIVE INCOME. . . . . . . . . . . . . . . . . . . . $28,576 $ 7,276
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 59,816 $ 20,747
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain. . . . . . . . . . . . . . . . . . . . (18,492) -
Depreciation and amortization . . . . . . . . . . . . . . 106,369 83,770
Amortization of gain on sale-leaseback. . . . . . . . . . (2,958) (2,958)
Equity in earnings from investments . . . . . . . . . . . (4,068) (5,644)
Gain on sale of marketable securities . . . . . . . . . . (98,260) -
Minority interests . . . . . . . . . . . . . . . . . . . 611 (700)
Accretion of discount note interest . . . . . . . . . . . (5,085) (1,659)
Changes in working capital items:
Accounts receivable (net) . . . . . . . . . . . . . . . 32,537 28,069
Inventories and supplies. . . . . . . . . . . . . . . . 251 (8,379)
Prepaid expenses and other. . . . . . . . . . . . . . . (29,582) 9,088
Accounts payable. . . . . . . . . . . . . . . . . . . . 3,564 (41,308)
Accrued liabilities . . . . . . . . . . . . . . . . . . (5,238) (22,691)
Accrued income taxes. . . . . . . . . . . . . . . . . . 10,013 12,907
Deferred revenue. . . . . . . . . . . . . . . . . . . . (2,610) 3,691
Other . . . . . . . . . . . . . . . . . . . . . . . . . (1,229) (2,195)
Changes in other assets and liabilities . . . . . . . . . 21,806 (14,394)
Net cash flows from operating activities. . . . . . . 67,445 58,344
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Additions to property, plant and equipment (net). . . . . (64,486) (41,571)
Customer account acquisitions . . . . . . . . . . . . . . (13,180) (78,601)
Security alarm monitoring acquisitions, net of cash
acquired . . . . . . . . . . . . . . . . . . . . . . . - (20,722)
Purchases of marketable securities. . . . . . . . . . . . - (10,464)
Proceeds from sale of marketable securities . . . . . . . 194,149 2,887
Other investments (net) . . . . . . . . . . . . . . . . . 4,918 (7,264)
Net cash flows from (used in) investing activities. . 121,401 (155,735)
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . (61,510) 55,653
Proceeds of long-term debt. . . . . . . . . . . . . . . . 6,087 81,583
Retirements of long-term debt . . . . . . . . . . . . . . (113,471) -
Issuance of common stock issued (net) . . . . . . . . . . 5,760 5,692
Cash dividends paid . . . . . . . . . . . . . . . . . . . (36,673) (35,659)
Reissuance of treasury stock. . . . . . . . . . . . . . . 9,394 -
Acquisition of treasury stock . . . . . . . . . . . . . . (9,187) -
Net cash flows (used in) from financing activities. . (199,600) 107,269
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . . (10,754) 9,878
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . 12,444 16,394
End of the period . . . . . . . . . . . . . . . . . . . . $ 1,690 $ 26,272
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized . . . . . . . . . . . . . . . . . . . . . . $ 95,068 $ 78,882
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 72 256
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
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<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
CUMULATIVE PREFERRED STOCK:
Par value $100 per share, authorized
600,000 shares, outstanding -
4 1/2% Series, 138,576 shares. . . . . . . . $ 13,858 $ 13,858
4 1/4% Series, 60,000 shares . . . . . . . . 6,000 6,000
5% Series, 50,000 shares . . . . . . . . . . 5,000 5,000
Beginning balance. . . . . . . . . . . . . . . 24,858 24,858
Redemption of preference stock . . . . . . . . - -
Ending balance . . . . . . . . . . . . . . . . 24,858 24,858
COMMON STOCK:
Beginning balance. . . . . . . . . . . . . . . 341,508 329,548
Issuance of common stock . . . . . . . . . . . 3,060 1,220
Ending balance . . . . . . . . . . . . . . . . 344,568 330,768
PAID-IN-CAPITAL:
Beginning balance. . . . . . . . . . . . . . . 820,945 775,337
Issuance on common stock . . . . . . . . . . . 2,700 4,472
Ending balance . . . . . . . . . . . . . . . . 823,645 779,809
RETAINED EARNINGS:
Beginning balance. . . . . . . . . . . . . . . 691,016 823,590
Net income . . . . . . . . . . . . . . . . . . 59,816 20,747
Dividends on preferred and
preference stock . . . . . . . . . . . . . . (282) (282)
Dividends on common stock. . . . . . . . . . . (36,391) (35,377)
Issuance of treasury stock . . . . . . . . . . (1,211) -
Ending balance . . . . . . . . . . . . . . . . 712,948 808,678
ACCUMULATED OTHER COMPREHENSIVE INCOME (NET):
Beginning balance. . . . . . . . . . . . . . . 37,788 9,508
Unrealized loss on
equity securities. . . . . . . . . . . . . . (52,043) (21,382)
Unrealized gain (loss) on
currency translation . . . . . . . . . . . . 451 (1,102)
Income tax benefit . . . . . . . . . . . . . . 20,352 9,013
Ending balance . . . . . . . . . . . . . . . . 6,548 (3,963)
TREASURY STOCK:
Beginning balance. . . . . . . . . . . . . . . (15,791) -
Issuance of treasury stock . . . . . . . . . . 10,605 -
Purchase of treasury stock . . . . . . . . . . (9,187) -
Ending balance . . . . . . . . . . . . . . . . (14,373) -
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . $1,898,194 $1,940,150
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
WESTERN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Western Resources, Inc. (the company) is a
publicly-traded, consumer services company. The company's primary business
activities are providing electric generation, transmission and distribution
services to approximately 634,000 customers in Kansas and providing monitored
services to approximately 1.6 million customers in North America, the United
Kingdom and continental Europe. Rate regulated electric service is provided by
KPL, a division of the company, and Kansas Gas and Electric Company (KGE), a
wholly-owned subsidiary. Monitored services in North America are provided by
Protection One, Inc. (Protection One), a publicly-traded, approximately
85%-owned subsidiary. Monitored services in the United Kingdom and continental
Europe are provided by Protection One International, Inc. and Protection One UK,
Plc. (collectively referred to as Protection One Europe), see also Note 3. In
addition, through the company's 45% ownership interest in ONEOK, Inc. (ONEOK),
natural gas transmission and distribution services are provided to approximately
1.4 million customers in Oklahoma and Kansas. The company's investments in
Protection One, Protection One Europe and ONEOK are owned by Westar Capital,
Inc. (Westar Capital), a wholly-owned subsidiary.
Principles of Consolidation: The company's unaudited consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and in
accordance with the instructions to Form 10-Q. Accordingly, certain information
and footnote disclosures normally included in financial statements presented in
accordance with GAAP have been condensed or omitted. These consolidated
financial statements and notes should be read in conjunction with the
Consolidated Financial Statements and the notes included in the company's 1999
Annual Report on Forms 10-K and 10-K/A.
In management's opinion, all adjustments, consisting only of normal
recurring adjustments considered necessary for a fair presentation of the
financial statements, have been included. The results of operations for the
three months ended March 31, 2000, are not necessarily indicative of the results
to be expected for the full year.
New Pronouncements: In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133, as
amended, is effective for fiscal years beginning after June 15, 2000. SFAS 133
cannot be applied retroactively. The company is currently evaluating commodity
contracts and financial instruments to determine what, if any, effect adopting
SFAS 133 might have on its financial statements. The company has not yet
<PAGE>
quantified all effects of adopting SFAS 133 on its financial statements;
however, SFAS 133 could increase volatility in earnings and other comprehensive
income. The company plans to adopt SFAS 133 as of January 1, 2001.
Goodwill: Goodwill represents the excess of the purchase price over the
fair value of net assets acquired. Protection One has historically amortized
goodwill on a straight-line basis over 40 years. Protection One re-evaluated
the original assumptions and rationale utilized in the establishment of the
estimated useful life of goodwill. Protection One concluded that due to
continued losses and increased levels of attrition experienced in 1999, the
estimated useful life of goodwill should be reduced from 40 years to 20 years.
As of January 1, 2000, the remaining goodwill, net of accumulated amortization,
is being amortized over its remaining useful life based on a 20-year life.
Protection One Europe made a similar change. Based on Protection One's and
Protection One Europe's existing account bases at January 1, 2000, the company
anticipates that this will result in an increase in aggregate annual goodwill
amortization of approximately $34 million prospectively for Protection One and
Protection One Europe.
Restricted Cash: The company's restricted cash consists primarily of cash
held in escrow pursuant to certain letters of credit and one of Protection One's
1998 acquisitions.
Reclassifications: Certain amounts in prior years have been reclassified
to conform with classifications used in the current year presentation.
2. CORPORATE RESTRUCTURING
On March 28, 2000, the company's board of directors approved the separation
of its electric and non-electric utility businesses. The separation is
currently expected to be effected through an offer to be made to shareholders
prior to year end 2000. The offer will be described in materials furnished to
Western Resources' shareholders. The impact on the company's financial position
and operating results cannot be determined until the final details of the offer
are determined. The company's goal is to complete the separation in the fourth
quarter of 2000, but no assurance can be given that the separation will be
completed by that time or at all.
3. PROTECTION ONE EUROPEAN OPERATIONS
On February 29, 2000, Westar Capital purchased the continental European and
United Kingdom operations of Protection One, and certain investments held by a
subsidiary of Protection One, for an aggregate purchase price of $244 million.
The consideration given included cash and certain Protection One debt
securities. The basis of the net assets sold did not change and no gain or loss
was recorded for this related party transaction. Terms of the agreement were
approved by the independent directors of the boards of directors of Protection
One and Protection One Alarm Monitoring, Inc. upon the recommendation of a
special committee of the Protection One board of directors. The special
committee obtained a fairness opinion from an investment banker with regard to
this transaction. See also Note 6 for further discussion of the debt securities
that were transferred as a result
<PAGE>
of this transaction.
4. DIVIDEND POLICY
The company's board of directors reviews the company's dividend policy from
time to time. Among the factors the board of directors considers in determining
the company's dividend policy are earnings, cash flows, capitalization ratios,
competition and regulatory conditions. In January 2000, the company's board of
directors declared a first-quarter 2000 dividend of 53 1/2 cents per share that
was paid on April 3, 2000. In March 2000, the company announced a new dividend
policy in conjunction with the announcement of the separation of the company's
electric and non-electric utility businesses. The new dividend policy will
result in quarterly dividends of $0.30 per share, or $1.20 per share on an
annual basis, to be effective with the anticipated declaration of the July 2000
dividend. The company believes the new dividend policy would be reconsidered if
the separation, discussed in Note 2, were materially delayed or modified.
5. MARKETABLE SECURITIES
During the first quarter of 2000, the company sold a significant portion
of an equity investment in a gas compression company and realized a pre-tax gain
of $73.7 million. The company also sold other securities during the first
quarter and realized a pre-tax gain of $24.5 million.
See also Note 3 to Consolidated Financial Statements in the company's 1999
Annual Report on Forms 10-K and 10-K/A for discussion of the sale of marketable
securities in 1999.
6. GAIN ON EXTINGUISHMENT OF DEBT
In the first quarter of 2000, Westar Capital purchased $59.5 million face
value of Protection One bonds on the open market. A portion of these debt
securities was transferred to Protection One in connection with the purchase of
Protection One's European operations. Protection One also purchased $6 million
face value of its bonds on the open market in the first quarter of 2000. An
extraordinary gain of $18.5 million, net of tax, was recognized on these
retirements.
7. INCOME TAXES
The company's effective income tax rate for the three month period ended
March 31, 2000, was 47.2% compared to 31.5% for the three month period ended
March 31, 1999. The company estimates its effective tax rate to be 27.3% for
the fiscal year ending December 31, 2000, which is lower than the effective tax
rate for the quarter ended March 31, 2000. The effective tax rate for the first
quarter includes income tax expense on the sale of marketable securities at the
<PAGE>
statutory rate.
In addition to the factors discussed above, the effective tax rate for the
quarter varied from the Federal statutory rate due to the tax benefit of
excluding 70% of the dividends received from ONEOK, the generation and
utilization of tax credits from Affordable Housing investments, the amortization
of prior years' investment tax credits, the amortization of non-deductible
goodwill, the flow-through of tax benefits from corporate-owned life insurance,
and the deduction for state income taxes.
8. RATE MATTERS AND REGULATION
KCC Proceedings: On March 16, 2000, the Kansas Industrial Consumers (KIC),
an organization of commercial and industrial users of electricity in Kansas,
filed a complaint with the Kansas Corporation Commission (KCC) requesting an
investigation of Western Resources' and KGE's rates. The KIC alleges that these
rates are not based on current costs. The company filed a motion to dismiss the
complaint on April 24, 2000. The company will continue to oppose this request
vigorously.
FERC Proceeding: In September 1999, the City of Wichita filed a complaint
with the Federal Energy Regulatory Commission (FERC) against the company,
alleging improper affiliate transactions between KPL and KGE. The City of
Wichita is asking that FERC equalize the generation costs between KPL and KGE,
in addition to other matters. FERC has issued an order setting this matter for
hearing and has referred the case to a settlement judge. The hearing has been
suspended pending settlement discussions between the parties. The company
believes that the City of Wichita's complaint is without merit and intends to
defend against it vigorously.
On April 28, 2000, Westar Generating II, Inc. (Westar Generating II), a
wholly-owned subsidiary of the company, filed an initial rate application with
the FERC regarding two 74 MW combustion turbine units currently being
installed. The rate filing, to be effective June 1, 2000, will allow Westar
Generating II to charge the company a monthly fee for the right to utilize the
capacity of these two units.
9. LEGAL PROCEEDINGS
The Securities and Exchange Commission (SEC) commenced a private
investigation in 1997 relating to, among other things, the timeliness and
adequacy of disclosure filings with the SEC by the company with respect to
securities of ADT Ltd. The company is cooperating with the SEC staff in this
investigation.
<PAGE>
The company, its subsidiary Westar Capital, Protection One, its subsidiary
Protection One Alarm Monitoring, Inc. (Monitoring), and certain present and
former officers and directors of Protection One are defendants in a purported
class action litigation pending in the United States District Court for the
Central District of California, "Ronald Cats, et al., v. Protection One, Inc.,
et. al.", No. CV 99-3755 DT (RCx). Pursuant to an Order dated August 2, 1999,
four pending purported class actions were consolidated into a single action. In
March 2000, plaintiffs filed a Second Consolidated Amended Class Action
Complaint (the Amended Complaint). Plaintiffs purport to bring the action on
behalf of a class consisting of all purchasers of publicly traded securities of
Protection One, including common stock and notes, during the period of February
10, 1998, through November 12, 1999. The Amended Complaint asserts claims under
Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934 against Protection One, Monitoring, and certain present and
former officers and directors of Protection One based on allegations that
various statements concerning Protection One's financial results and operations
for 1997 and 1998 were false and misleading and not in compliance with Generally
Accepted Accounting Principals. Plaintiffs allege, among other things, that
former employees of Protection One have reported that Protection One lacked
adequate internal accounting controls and that certain accounting information
was unsupported or manipulated by management in order to avoid disclosure of
accurate information. The Amended Complaint further asserts claims against the
company and Westar Capital as controlling persons under Sections 11 and 15 of
the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. A claim is also asserted under Section 11 of the
Securities Act of 1933 against Protection One's auditor, Arthur Andersen LLP.
The Amended Complaint seeks an unspecified amount of compensatory damages and an
award of fees and expenses, including attorneys' fees. The company and
Protection One believe that all the claims asserted in the Amended Complaint are
without merit and intend to defend against them vigorously. The company and
Protection One cannot currently predict the impact of this litigation which
could be material.
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 disposition
of such matters will not have a material adverse effect upon the company's
overall financial position or results of operations. See also Note 8 for
discussion of regulatory proceedings.
1O. COMMITMENTS AND CONTINGENCIES
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 analysis. At March 31, 2000, the costs incurred
for preliminary site investigation and risk assessment have been minimal. In
<PAGE>
accordance with the terms of the strategic alliance with ONEOK, ownership of
twelve of these sites and the responsibility for clean-up of these sites were
transferred to ONEOK. The ONEOK agreement limits the company's future liability
associated with these sites to an immaterial amount. The company's investment
earnings from ONEOK, as recorded in investment earnings on the accompanying
Consolidated Income Statements, could be impacted by these costs if insurance
and rate allowances do not cover these potential contingencies.
Split Dollar Life Insurance Program: Obligations under the company's split
dollar life insurance program can increase and decrease based on the company's
total return to shareholders and payments to plan participants. The related
liability decreased approximately $12.8 million for the three month period ended
March 31, 2000, as a result of payments under the plan.
Decommissioning: On September 1, 1999, Wolf Creek submitted the 1999
Decommissioning Cost Study to the KCC for approval. The KCC approved the 1999
Decommissioning Cost Study on April 26, 2000. Based on the study, the company's
share of Wolf Creek's decommissioning costs, under the immediate dismantlement
method, is estimated to be approximately $631 million during the period 2025
through 2034, or approximately $221 million in 1999 dollars. These costs were
calculated using an assumed inflation rate of 3.6% over the remaining service
life from 1999 of 26 years.
For additional information on Commitments and Contingencies, see Note 12
to Consolidated Financial Statements in the company's 1999 Annual Report on
Forms 10-K and 10-K/A.
11. SEGMENTS OF BUSINESS
The company has segmented its business based on differences in products and
services, production processes, and management responsibility. Based on this
approach, the company has identified four reportable segments: fossil
generation, nuclear generation, power delivery and monitored services.
Fossil generation, nuclear generation and power delivery represent the
three business segments that comprise the company's electric utility business.
Fossil generation produces power for sale internally to the power delivery
segment and to external wholesale customers within and outside the company's
historical marketing territory. Power marketing is a component of the company's
fossil generation segment which attempts to minimize market fluctuation risk,
enhance system reliability and improve efficiency of power plant operations.
Nuclear generation represents the company's 47% ownership in the Wolf Creek
nuclear generating facility. This segment does not have any external sales.
The power delivery segment consists of the transmission and distribution of
power to the company's retail customers in Kansas and the customer service
provided to these customers. Monitored services represents the company's
security alarm monitoring business in North America, the United Kingdom and
continental Europe. Other represents the company's non-utility operations and
natural gas investment.
<PAGE>
The accounting policies of the segments are substantially the same as those
described in the summary of significant accounting policies in the company's
1999 Annual Report on Forms 10-K and 10-K/A. The company evaluates segment
performance based on earnings before interest and taxes.
<TABLE>
Three Months Ended March 31, 2000:
<CAPTION>
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services (1)Other Items Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
External sales. . . $ 100,764 $ - $ 233,731 $ 149,341 $ 332 $ 2 $ 484,170
Allocated sales . . 128,392 29,480 67,370 - - (225,242) -
Earnings before
interest and taxes 45,352 (5,346) 12,457 (17,231) 116,149 (3,058) 148,323
Interest expense. . 70,026
Earnings before
income taxes . . . 78,297
</TABLE>
<TABLE>
Three Months Ended March 31, 1999:
<CAPTION>
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services Other Items Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
External sales. . . $ 79,361 $ - $ 232,340 $ 148,547 $ 331 $ 3 $ 460,582
Allocated sales . . 125,662 29,218 69,380 - - (224,260) -
Earnings before
interest and taxes 47,225 (4,225) 15,631 17,542 27,813 (2,879) 101,107
Interest expense. . 70,800
Earnings before
income taxes . . . 30,307
(1) Earnings before interest and taxes includes investment earnings of $118.1 million which is
primarily due to the sale of marketable securities as discussed in Note 5.
</TABLE>
12. SUBSEQUENT EVENTS
Retirement of Protection One Debt: Through May 9 of the second quarter of
2000, Westar Capital purchased $45.1 million face value of Protection One bonds
in the open market. An extraordinary gain of $11.8 million, net of tax, is
expected to be recognized on this retirement.
Registration of Western Resources Debt: On April 28, 2000, the company
filed a shelf registration statement with the SEC to register $500 million of
first mortgage bonds. The registration statement became effective May 8, 2000.
The proceeds of the sale of the securities, if and when issued, are expected to
be used to pay off short-term indebtedness.
Marketable Securities: During the second quarter of 2000, the company sold
the remaining portion of an equity investment in a gas compression company and
realized a gain of $17.4 million.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
In Management's Discussion and Analysis we explain the general financial
condition and the operating results for Western Resources, Inc. (the company)
and its subsidiaries. We explain:
- What factors impact our business
- What our earnings and costs were for the three months ending
March 31, 2000, and 1999
- Why these earnings and costs differed from period to period
- How our earnings and costs affect our overall financial condition
- Any other items that particularly affect our financial condition
or earnings.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations updates the information provided in the 1999 Annual
Reports on Forms 10-K and 10-K/A and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our 1999 Annual Reports on Forms 10-K and 10-K/A.
Forward-Looking Statements
Certain matters discussed here and elsewhere in this Form 10-Q are
"forward-looking statements." The Private Securities Litigation Reform Act of
1995 has established that these statements qualify for safe harbors from
liability. Forward-looking statements may include words like we "believe,"
"anticipate," "expect" or words of similar meaning. Forward-looking statements
describe our future plans, objectives, expectations, or goals. Such statements
address future events and conditions concerning capital expenditures, earnings,
litigation, rate and other regulatory matters, the outcome of Protection One
accounting issues reviewed by the Securities and Exchange Commission (SEC) staff
as disclosed in previous filings, possible corporate restructurings, mergers,
acquisitions, dispositions, liquidity and capital resources, compliance with
debt covenants, interest and dividends, the impact of Protection One's financial
condition on our consolidated results, environmental matters, changing weather,
nuclear operations, ability to enter new markets successfully and capitalize on
growth opportunities in non-regulated businesses, events in foreign markets in
which investments have been made, accounting matters, and the overall economy of
our service area. What happens in each case could vary materially from what we
expect because of such things as electric utility deregulation, including
ongoing municipal, state and federal activities, such as the Wichita
municipalization proceedings; future economic conditions; legislative and
regulatory developments; our regulatory and competitive markets; and other
circumstances affecting anticipated operations, sales and costs.
<PAGE>
SUMMARY OF SIGNIFICANT ITEMS
Gain on Extinguishment of Debt
In the first quarter of 2000, Westar Capital, Inc. (Westar Capital), a
wholly-owned subsidiary, purchased $59.5 million face value of Protection One
bonds on the open market. A portion of these debt securities was transferred to
Protection One in connection with the purchase of Protection One's European
operations. Protection One also purchased $6 million face value of its bonds on
the open market in the first quarter of 2000. An extraordinary gain of $18.5
million, net of tax, was recognized on these retirements.
Marketable Securities
During the first quarter of 2000, we sold a significant portion of an
equity investment in a gas compression company and realized a pre-tax gain of
$73.7 million. During the second quarter of 2000, we sold the remaining portion
of this investment and realized a subsequent pre-tax gain of $17.4 million. We
also sold other securities during the first quarter and realized a pre-tax gain
of $24.5 million.
See also Note 3 to Consolidated Financial Statements in our 1999 Annual
Report on Forms 10-K and 10-K/A for discussion of the sale of marketable
securities in 1999.
Monitored Services Change in Estimate of Useful Life of Goodwill
Protection One re-evaluated the original assumptions and rationale utilized
in the establishment of the estimated useful life of goodwill. Protection One
concluded that due to continued losses and increased levels of attrition
experienced in 1999, the estimated useful life of goodwill should be reduced
from 40 years to 20 years. As of January 1, 2000, the remaining goodwill, net
of accumulated amortization, is being amortized over its remaining useful life
based on a 20-year life. Protection One International, Inc. and Protection One
UK, Plc. (collectively referred to as Protection One Europe) made a similar
change. Based on Protection One's and Protection One Europe's existing account
bases at January 1, 2000, we anticipate that this will result in an increase in
aggregate annual goodwill amortization of approximately $34 million
prospectively for Protection One and Protection One Europe.
Corporate Restructuring
On March 28, 2000, our board of directors approved the separation of our
electric and non-electric utility businesses. The separation is currently
expected to be effected through an offer to be made to shareholders prior to
year end 2000. The offer will be described in materials furnished to our
shareholders. The impact on our financial position and operating results cannot
be determined until the final details of the offer are determined. Our goal is
to complete the separation in the fourth quarter of 2000, but no assurance can
be given that the separation will be completed by that time or at all.
<PAGE>
OPERATING RESULTS
Western Resources Consolidated
The following discussion explains significant changes in operating results
between the three months ended March 31, 2000, and March 31, 1999. Basic
earnings per share were $0.88 compared to $0.31 in the first quarter of 1999.
The significant increase is primarily attributable to increased investment
earnings from the sale of our investments in a gas compression company and other
marketable securities. Also contributing to this increase is the extraordinary
gain on the retirement of Protection One bonds.
Higher amortization of intangible assets due to a change in amortization
method for customer accounts, a change in the estimate of the useful life of
goodwill from 40 years to 20 years and operating losses from our monitored
services segment partially offset the increase from investment earnings. For
further discussion of the impact of the accounting changes, see discussion below
in "Monitored Services Business Segment."
A decline in electric utility operating income primarily resulting from
scheduled maintenance of generating units also partially offset the increase
from investment earnings.
The following table reflects the increases/(decreases) in electric sales
volumes for the three months ended March 31, 2000, from the comparable period of
1999.
2000 1999 % Change
(Thousands of Megawatthours)
Residential. . . . . 1,222 1,201 1.8 %
Commercial . . . . . 1,420 1,394 1.8 %
Industrial . . . . . 1,340 1,365 (1.8)%
Other. . . . . . . . 231 265 (12.8)%
Total retail . . . 4,213 4,225 (0.3)%
System hedging . . . 643 - -
Wholesale. . . . . . 1,673 1,197 39.8 %
Total. . . . . . . 6,529 5,422 20.4 %
Utility operations' sales increased $22.8 million in the first quarter of
2000 from $311.7 million to $334.5 million, primarily due to higher wholesale
sales volumes as discussed below under "Fossil Generation." Utility operations'
sales include all electric sales, including power produced for sale to Power
Delivery and power produced for sale to external wholesale customers located
within and outside our historical marketing territory. Despite higher sales,
EBIT decreased $6.4 million from $55.8 million to $49.4 million due to higher
cost of sales of $20.9 million which was primarily a result of increased
purchased power expense and higher fossil fuel expense. Higher operating
expenses, which increased by $9.4 million because of increased maintenance
expense, also contributed to the lower EBIT.
<PAGE>
For more detailed information regarding our Utility Operations, see the
business segments discussion below.
BUSINESS SEGMENTS
We have segmented our business based on differences in products and
services, production processes, and management responsibility. Based on this
approach, we have identified four reportable segments: Fossil Generation,
Nuclear Generation, Power Delivery and Monitored Services.
Fossil Generation, Nuclear Generation and Power Delivery represent the
three business segments that comprise our electric utility business. Fossil
Generation produces power for sale internally to the Power Delivery segment and
to external wholesale customers within and outside the company's historical
marketing territory. Power marketing is a component of our Fossil Generation
segment which attempts to minimize market fluctuation risk, enhance system
reliability and improve efficiency of power plant operations. Nuclear
Generation represents our 47% ownership in the Wolf Creek nuclear generating
facility. This segment does not have any external sales. The Power Delivery
segment consists of the transmission and distribution of power to our retail
customers in Kansas and the customer service provided to these customers.
Monitored Services represents our security alarm monitoring business in North
America, the United Kingdom and continental Europe. Other represents our
non-utility operations and natural gas investment.
The following discussion identifies key factors affecting our electric
business segments for the three month periods ending March 31, 2000, and March
31, 1999.
2000 1999
Fossil Generation: (Dollars in Thousands)
External sales. . . . . . . . . . $100,764 $ 79,361
Internal sales. . . . . . . . . . 128,392 125,662
EBIT. . . . . . . . . . . . . . . 45,352 47,225
Nuclear Generation:
Internal sales. . . . . . . . . . $ 29,480 $ 29,218
EBIT. . . . . . . . . . . . . . . (5,346) (4,225)
Power Delivery:
External sales. . . . . . . . . . $233,731 $232,340
Internal sales. . . . . . . . . . 67,370 69,380
EBIT. . . . . . . . . . . . . . . 12,457 15,631
Fossil Generation
External sales increased $21.4 million due to 40% higher wholesale sales
volumes to wholesale customers within our service territory. The wholesale
sales increased due to increased wholesale market opportunities and greater
system
<PAGE>
availability, allowing us to sell more electricity to wholesale customers than
we did in 1999. The increased wholesale market opportunities are due to a
larger trading operation and increased involvement in the market for our system.
External sales were also affected by lower power marketing sales which were
$5.8 million, or 12%, lower than in the first quarter of 1999. The related cost
of sales was $7.7 million, or 16% lower. Our involvement in the wholesale
market varies from quarter to quarter based on current marketing opportunities
and availability of generation.
Internal sales increased $2.7 million due to a higher internal transfer
price charged to Power Delivery. Internal sales to Power Delivery are made at
an internal transfer price which is based upon an assumed competitive market
price for capacity and energy.
Despite higher sales, EBIT was lower due to higher electric cost of sales
and higher operating expenses, including increased maintenance expense for a
planned maintenance outage at a KGE generating unit.
Electric cost of sales reflected higher purchased power expense and higher
fossil fuel expense. We had higher purchased power expense in 2000 compared to
1999 primarily due to an increased number of system hedging transactions.
Fossil fuel expense also increased by $6.5 million, or 20% primarily due to
increased use of coal at our generating stations to support our system needs and
our wholesale sales.
At certain times, we enter into transactions to reduce exposure relative
to the volatility of cash market prices. The system hedging sales discussed
above represent the settlement of such transactions. During the first quarter of
1999, we had no material system hedging transactions. However, during the last
quarter of 1999, hedging transactions were entered into in order to maintain
system reliability in the event of any Year 2000 problems. These hedging
transactions were settled during the first quarter of 2000. These transactions
resulted in a loss of approximately $1 million.
Nuclear Generation
Nuclear Generation has no external sales because it provides all of its
power to its co-owners KGE, Kansas City Power and Light Company and Kansas
Electric Power Cooperative, Inc. Internal sales include the internal transfer
price that Nuclear Generation charges to Power Delivery. The amounts in the
table above are our 47% share of Wolf Creek's operating results. EBIT is
negative because internal sales are less than Wolf Creek's costs. Internal
sales and EBIT did not materially change because there were no Wolf Creek
outages in either period.
<PAGE>
Power Delivery
Power Delivery's external sales consist of the transmission and
distribution of power to our Kansas electric customers and the customer service
provided to them. Internal sales include an intra-segment transfer price for
charges for the use of the distribution lines and transformers.
External sales increased $1.4 million primarily due to increased retail
kilowatt hour sales.
Internal sales were $2.0 million lower due to reduced retail transmission
service revenues which resulted from a change in pricing methodology.
EBIT decreased $3.2 million primarily due to a $2.7 million higher expense
related to the internal transfer price charged by Fossil Generation.
Monitored Services
Protection One and Protection One Europe comprise our monitored services
business. The results discussed below reflect monitored services on a stand-
alone basis. These results do not take into consideration Protection One's
minority interest of approximately 15% at March 31, 2000, and March 31, 1999.
Three Months Ended
March 31,
2000 1999
(Dollars in Thousands)
External sales. . . . . . . . . . $149,341 $148,547
EBIT. . . . . . . . . . . . . . . (17,231) 17,542
EBIT decreased $34.8 million due to higher cost of sales, higher
depreciation and amortization expense and higher selling, general and
administrative expenses.
Cost of sales increased $7.3 million primarily due to increased
compensation costs for additional personnel at Protection One's monitoring
stations to improve the level of customer service.
Depreciation and amortization expense increased $20.1 million. As
discussed in our 1999 Annual Report on Forms 10-K and 10-K/A, Protection One
changed its customer amortization method from a 10-year straight line method to
a 10-year declining balance method. Protection One Europe made a similar
change. Customer amortization increased from $26.7 million for the first
quarter of 1999 to $33.4 million for the first quarter of 2000.
As discussed in the "Summary of Significant Items" above, Protection One
also changed its estimate of useful life of goodwill from 40 years to 20 years.
Protection One Europe made a similar change. These changes resulted in an
aggregate $5.7 million increase in our goodwill amortization in the first
quarter of 2000. Additionally, in the first quarter of 2000, Protection One's
<PAGE>
depreciation expense increased by $4.8 million due to a change in the estimated
life of certain information systems installed in 1999 which accelerated the
depreciation of these systems.
Selling, general and administrative expenses increased $7.4 million
primarily due to an increase in Protection One's bad debt and collection
expenses of approximately $2.1 million, and an increase of $1.6 million in
Protection One's subcontract expense primarily for outside information
technology support for the new billing and collection software Protection One
began utilizing in November 1999.
Western Resources Consolidated
Other Income (Expenses)
Other income (expense) includes income and expenses not directly related
to our operations. The increase in other income during 2000 is primarily
related to a $73.7 million gain on the sale of part of our investment in a gas
compression company and a $24.5 million gain on the sale of our other marketable
securities.
Interest Expense
Interest expense decreased approximately $0.8 million, or 1.1%. Long-term
debt interest expense was $7.7 million lower due to decreased long-term debt
balances resulting from the retirement of $125 million of first mortgage bonds
in 1999 and the repurchase and retirement of $155.4 million face value of
Protection One bonds in the fourth quarter of 1999 and the first quarter of
2000. Short-term debt interest expense was $6.9 million higher due to increased
short-term borrowings under our credit facilities as discussed below in
"Liquidity and Capital Resources."
Income Taxes
Our effective income tax rate for the three month period ended March 31,
2000, was 47.2% compared to 31.5% for the three month period ended March 31,
1999. We estimate our effective tax rate to be 27.3% for the fiscal year ending
December 31, 2000, which is lower than the effective tax rate for the quarter
ended March 31, 2000. The effective tax rate for the first quarter includes
income tax expense on the sale of marketable securities at the statutory rate.
In addition to the factors discussed above, the effective tax rate for the
quarter varied from the Federal statutory rate due to the tax benefit of
excluding 70% of the dividends received from ONEOK, the generation and
utilization of tax credits from Affordable Housing investments, the amortization
of prior years' investment tax credits, the amortization of non-deductible
goodwill, the flow-through of tax benefits from corporate-owned life insurance,
and the deduction for state income taxes.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We had $1.7 million in cash and cash equivalents at March 31, 2000. We
consider highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. At March 31, 2000, we had approximately
$643.9 million of short-term debt outstanding, of which $443.4 million was
commercial paper. All of the outstanding commercial paper will mature by May
19, 2000, and is expected to be refinanced with short-term borrowings under our
credit facilities. Current maturities of long-term debt were $47.8 million at
March 31, 2000.
We also had $17.7 million of restricted cash at March 31, 2000. Our
restricted cash consists primarily of cash held in escrow pursuant to certain
letters of credit and one of Protection One's 1998 acquisitions.
As of March 31, 2000, we had arrangements with certain banks to provide
unsecured short-term lines of credit on a committed basis totaling approximately
$992 million.
The unsecured short-term lines of credit included three revolving credit
facilities with various banks as follows:
Amount Facility Termination Date
$242 million 364-day June 30, 2000
500 million 5-year March 17, 2003
250 million 6 1/2-month June 30, 2000
In March 2000, we amended all of these credit facilities to reflect the
possibility of borrowing from them rather than using them to provide support for
commercial paper borrowings. Our cost of borrowing short term debt is about
1.5% higher under the revolvers versus commercial paper. Due to the lowering of
our credit ratings in March 2000, as discussed below, we no longer participate
in the commercial paper market but, instead, borrow directly from our revolving
credit facilities.
Amendments to the credit facilities include increased pricing to reflect
credit quality and the potential drawn nature of credit facilities rather than
support for commercial paper, redefinition of the total debt to capital
financial covenant, limitation on use of proceeds from sale of first mortgage
bonds requiring repayment of debt outstanding under the credit facilities before
proceeds may be used for other purposes, and a commitment to use our "best
efforts" to pledge first mortgage bonds to support our credit facilities if our
senior unsecured credit rating drops below "investment grade" (bonds rated below
BBB by Standard & Poor's (S&P) and Fitch and below Baa by Moody's Investors
Service (Moody's)). As indicated by the table below, at May 9, 2000, our
mortgage bonds were rated above investment grade by S&P and below investment
grade by Fitch and Moody's.
<PAGE>
In order to maintain adequate short-term borrowing capacity, we are
pursuing discussions with our lenders, which we expect to be successful, to
replace or further amend these credit facilities prior to their maturity.
In January 2000, we reached an agreement with our banks under our current
credit facilities to eliminate a cross-default provision relating to Protection
One and its subsidiaries, provided we do not increase our investment in
Protection One by more than $125 million.
On April 28, 2000, we filed a shelf registration statement with the SEC to
register $500 million of first mortgage bonds. The registration statement
became effective May 8, 2000. The proceeds of the sale of the securities, if
and when issued, are expected to be used to pay off short-term indebtedness.
S&P, Fitch Investors Service (Fitch) and Moody's are independent credit-
rating agencies that rate our debt securities. These ratings indicate the
agencies' assessment of our ability to pay interest and principal on these
securities.
<TABLE>
<CAPTION>
As of May 9, 2000, ratings with these agencies were as follows:
Western KGE's Protection Protection
Resources' Western KGE's Senior One One
Mortgage Resources' Mortgage Unsecured Senior Senior
Bond Unsecured Bond Debt Unsecured Subordinated
Rating Agency Rating Debt Rating Rating Debt Unsecured Debt
<S> <C> <C> <C> <C> <C> <C> <C>
S&P BBB- BB- BB+ BB- B+ B-
Fitch BB+ BB BB+ BB B+ B-
Moody's Ba1 Ba2 Ba1 - B2 Caa1
</TABLE>
Credit rating agencies are applying more stringent guidelines when rating
utility companies due to increasing competition and utility investment in non-
utility businesses. On March 29, 2000, S&P, Moody's and Fitch lowered the credit
ratings of the company. Additionally, our ratings at S&P remain on credit watch
with negative implications and Moody's has said the outlook is negative.
On March 24, 2000, Moody's downgraded their ratings on Protection One's
outstanding securities with outlook remaining negative.
Cash Flows from Operating Activities
Net cash flow from operations did not change materially between the first
quarter of 2000 and the first quarter of 1999. The gain on sale of marketable
securities in 2000 was offset by changes in working capital.
Cash Flows from Investing Activities
Investing activities provided net cash flow of $121.4 million in the first
quarter of 2000 due primarily to proceeds of $194.1 million received from the
sale of marketable securities.
<PAGE>
Investing activities used net cash flow of $155.7 million in the first
quarter of 1999 due primarily to Protection One's use of approximately $99.3
million for customer account and security alarm monitoring acquisitions.
Cash Flows Used in Financing Activities
We had a net use of cash for financing activities totaling $199.6 million
in the first quarter of 2000 due primarily to payments on debt. We used the
proceeds from the sale of marketable securities to reduce short-term debt by
$61.5 million, to retire $75 million in current maturities of first mortgage
bonds and to purchase and retire Protection One bonds.
We had net cash from financing activities totaling $107.3 million in the
first quarter of 1999 due primarily to proceeds of short-term and long-term debt
of $137.2 million.
Debt Repurchase Plan
We may from time-to-time purchase our debt securities and preferred stock.
The timing and terms of purchases, and the amount of debt actually purchased,
will be determined by the company based on market conditions and other factors.
We may also purchase Protection One debt securities. Purchases are expected to
be made in the open market or through negotiated transactions.
Dividend Policy
Our board of directors reviews our dividend policy from time to time.
Among the factors the board of directors considers in determining our dividend
policy are earnings, cash flows, capitalization ratios, competition and
regulatory conditions. In January 2000, our board of directors declared a
first-quarter 2000 dividend of 53 1/2 cents per share that was paid on April 3,
2000. In March 2000, we announced a new dividend policy in conjunction with the
announcement of the separation of the company's electric and non-electric
utility businesses. The new dividend policy will result in quarterly dividends
of $0.30 per share, or $1.20 per share on an annual basis, to be effective with
the anticipated declaration of the July 2000 dividend. We believe the new
dividend policy would be reconsidered if the separation were materially delayed
or modified.
OTHER INFORMATION
Electric Utility
City of Wichita Proceeding: In December 1999, the Wichita, Kansas, City
Council authorized the hiring of an outside consultant to determine the
feasibility of creating a municipal electric utility to replace KGE as the
supplier of electricity in Wichita. KGE's rates are currently 7% below the
national average for retail customers. The average rates charged to retail
customers in territories served by our KPL division are 19% lower than KGE's
<PAGE>
rates. Customers within the Wichita metropolitan area account for approximately
25% of our total energy sales. KGE has an exclusive franchise with the City of
Wichita to provide retail electric service that expires March 2002. Under
Kansas law, KGE will continue to have the exclusive right to serve the customers
in Wichita following the expiration of the franchise, assuming the system is not
municipalized. See also "FERC Proceedings" below regarding a complaint filed
with the Federal Energy Regulatory Commission (FERC) against KGE by the City of
Wichita.
KCC Proceeding: On March 16, 2000, the Kansas Industrial Consumers (KIC),
an organization of commercial and industrial users of electricity in Kansas,
filed a complaint with the Kansas Corporation Commission (KCC) requesting an
investigation of Western Resources' and KGE's rates. The KIC alleges that these
rates are not based on current costs. We filed a motion to dismiss the
complaint on April 24, 2000. We will continue to oppose this request
vigorously.
FERC Proceedings: In September 1999, the City of Wichita filed a complaint
with the FERC against us, alleging improper affiliate transactions between KPL
and KGE. The City of Wichita is asking that FERC equalize the generation costs
between KPL and KGE, in addition to other matters. FERC has issued an order
setting this matter for hearing and has referred the case to a settlement
judge. The hearing has been suspended pending settlement discussions between
the parties. We believe that the City of Wichita's complaint is without merit
and intend to defend against it vigorously.
On April 28, 2000, Westar Generating II, Inc. (Westar Generating II), a
wholly-owned subsidiary of the company, filed an initial rate application with
the FERC regarding two 74 MW combustion turbine units currently being installed.
The rate filing, to be effective June 1, 2000, will allow Westar Generating II
to charge the company a monthly fee for the right to utilize the capacity of
these two units.
Nuclear Decommissioning: On September 1, 1999, Wolf Creek submitted the
1999 Decommissioning Cost Study to the KCC for approval. The KCC approved the
1999 Decommissioning Cost Study on April 26, 2000. Based on the study, our
share of Wolf Creek's decommissioning costs, under the immediate dismantlement
method, is estimated to be approximately $631 million during the period 2025
through 2034, or approximately $221 million in 1999 dollars. These costs were
calculated using an assumed inflation rate of 3.6% over the remaining service
life from 1999 of 26 years.
For additional information on Nuclear Decommissioning, see Note 12 to
Consolidated Financial Statements in our 1999 Annual Report on Forms 10-K and
10-K/A.
<PAGE>
Monitored Services Business
Attrition: Customer attrition for Protection One's business segments is
summarized below:
Trailing Twelve Months
Ended March 31,
2000 _ 1999
North America . . . . . . . 16.1 % 8.9 %
Europe (a). . . . . . . . . 10.2 % (b)
Multifamily . . . . . . . . 8.3 % 4.5 %
Total Protection One. . . 14.3 % 8.1 %
(a) Europe represents annualized activity through February 29, 2000.
(b) European operations were acquired in 1998.
The quarterly annualized attrition rate for Protection One's North America
segment in the first quarter of 2000 was 11.9% as compared to 11.2% in the first
quarter of 1999. Protection One experienced high levels of attrition for its
North America segment in 1999 with quarterly annualized attrition reaching peak
levels of 19.1% and 16.3% in the third and fourth quarters. Protection One
believes the significant decrease in attrition for the North America segment
over the last three quarters is a result of efforts to improve customer service
and billing and collection practices.
SEC Review: As previously disclosed, Protection One was advised in 1999
by the Division of Corporation Finance of the SEC that, in the view of the
staff, there are errors in Protection One's financial statements which are
material and which have had the effect of inflating earnings commencing with the
year 1997. They have had extensive discussions with the SEC staff about the
methodology they used to amortize customer accounts, the purchase price
allocation to customer accounts in the Network Multifamily and Westinghouse
Security Systems acquisitions and other matters. These discussions are
continuing. The SEC staff has not indicated it concurs with, nor has the SEC
staff determined not to object to, the restatements to Protection One's
financial statements made in 1999, the change in accounting principle for
customer accounts, or the change in estimated useful life of goodwill.
Protection One cannot predict whether the SEC staff will make additional
comments or take other action that will further impact our financial
statements or the effect or timing of any such action.
Related Party Transactions: On February 29, 2000, Westar Capital purchased
the continental European and United Kingdom operations of Protection One, and
certain investments held by a subsidiary of Protection One, for an aggregate
purchase price of $244 million. The consideration given included cash and
certain Protection One debt securities. The basis of the net assets sold did
not change and no gain or loss was recorded for this related party transaction.
Terms of the agreement were approved by the independent directors of the boards
of directors of Protection One and Protection One Alarm Monitoring, Inc. upon
the recommendation of a special committee of the Protection One board of
directors.
<PAGE>
The special committee obtained a fairness opinion from an investment banker with
regard to this transaction. See also Note 6 of the Notes to Consolidated
Financial Statements for further discussion of debt securities that were
transferred as a result of this transaction.
Market Risk
During the three months ended March 31, 2000, the company's balance in
marketable securities declined approximately $107 million from December 31,
1999, due to the sale of a significant portion of our marketable security
portfolio.
Subsequent to the sale of the remaining portion of our investment in a gas
compression company, the value of our marketable security portfolio is not
material and we do not expect to be materially impacted by changes in the market
prices of our remaining investments.
The company has not experienced any other significant changes in its
exposure to market risk since December 31, 1999. For additional information on
the company's market risk, see the Forms 10-K and 10-K/A dated December 31,
1999.
New Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended, is
effective for fiscal years beginning after June 15, 2000. SFAS 133 cannot be
applied retroactively. We are currently evaluating commodity contracts and
financial instruments to determine what, if any, effect adopting SFAS 133 might
have on our financial statements. We have not yet quantified all effects of
adopting SFAS 133 on our financial statements; however, SFAS 133 could increase
volatility in earnings and other comprehensive income. We plan to adopt SFAS
133 as of January 1, 2001.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to market risk disclosure is set forth in Other
Information of Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations included herein.
<PAGE>
WESTERN RESOURCES, INC.
Part II Other Information
ITEM 1. LEGAL PROCEEDINGS
The company, its subsidiary Westar Capital, Protection One, its subsidiary
Protection One Alarm Monitoring, Inc. (Monitoring), and certain present and
former officers and directors of Protection One are defendants in a purported
class action litigation pending in the United States District Court for the
Central District of California, "Ronald Cats, et al., v. Protection One, Inc.,
et. al.", No. CV 99-3755 DT (RCx). Pursuant to an Order dated August 2, 1999,
four pending purported class actions were consolidated into a single action. In
March 2000, plaintiffs filed a Second Consolidated Amended Class Action
Complaint (the Amended Complaint). Plaintiffs purport to bring the action on
behalf of a class consisting of all purchasers of publicly traded securities of
Protection One, including common stock and notes, during the period of February
10, 1998, through November 12, 1999. The Amended Complaint asserts claims under
Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934 against Protection One, Monitoring, and certain present and
former officers and directors of Protection One based on allegations that
various statements concerning Protection One's financial results and operations
for 1997 and 1998 were false and misleading and not in compliance with Generally
Accepted Accounting Principals (GAAP). Plaintiffs allege, among other things,
that former employees of Protection One have reported that Protection One lacked
adequate internal accounting controls and that certain accounting information
was unsupported or manipulated by management in order to avoid disclosure of
accurate information. The Amended Complaint further asserts claims against the
company and Westar Capital as controlling persons under Sections 11 and 15 of
the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. A claim is also asserted under Section 11 of the
Securities Act of 1933 against Protection One's auditor, Arthur Andersen LLP.
The Amended Complaint seeks an unspecified amount of compensatory damages and an
award of fees and expenses, including attorneys' fees. The company and
Protection One believe that all the claims asserted in the Amended Complaint are
without merit and intend to defend against them vigorously. The company and
Protection One cannot currently predict the impact of this litigation which
could be material.
For other proceedings affecting the company, see Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations which
is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 12 - Computation of Ratio of Consolidated Earnings
to Fixed Charges for Three Months Ended
March 31, 2000 (filed electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
Form 8-K filed January 3, 2000 - Press release reporting that
Kansas City Power & Light Company terminated the proposed
merger with Western Resources.
Form 8-K filed January 26, 2000 - Press release reporting that
Western Resources reached an agreement with its banks to
eliminate the cross-default provisions relating to Protection
One, Inc.
Form 8-K filed January 27, 2000 - Press release reporting Western
Resources declaration of a first quarter dividend and that the
board of directors will consider a stock dividend for the
balance of the current annual dividend.
Form 8-K filed March 1, 2000 - Press release reporting Westar
Capital's purchase of Protection One, Inc.'s continental
European and United Kingdom operations, and certain other
assets of Protection One.
Form 8-K filed March 29, 2000 - Press release announcing Western
Resources plans to separate its electric utility business
from its non-electric business, reporting 1999 earnings
results and announcing dividend policy; investor presentation.
Form 8-K filed April 10, 2000 - Press release announcing Western
Resources may from time-to-time purchase its debt securities
and preferred stock.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Western Resources, Inc.
Date May 11, 2000 By /s/ WILLIAM B. MOORE
William B. Moore, Executive
Vice President, Chief Financial
Officer and Treasurer
Date May 11, 2000 By /s/ LEROY P. WAGES
Leroy P. Wages, Controller
<PAGE>
Exhibit 12
WESTERN RESOURCES, INC.
Computations of Ratio of Earnings to Fixed Charges and
Computations of Ratio of Earnings to Combined Fixed Charges
and Preferred and Preference Dividend Requirements
(Dollars in Thousands)
<TABLE>
<CAPTION>
Unaudited
Three
Months
Ended
March 31, Year Ended December 31,
2000 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Earnings from
continuing operations(1) . . . $ 74,920 $(48,798) $ 58,088 $ 872,739 $255,052 $265,068
Fixed Charges:
Interest expense . . . . . . . 70,026 294,104 226,120 193,225 152,551 123,821
Interest on Corporate-owned
Life Insurance Borrowings. . 9,769 36,908 38,236 36,167 35,151 32,325
Interest Applicable to
Rentals. . . . . . . . . . . 7,270 34,252 32,796 34,514 32,965 31,650
Total Fixed Charges. . . . 87,065 365,264 297,152 263,906 220,667 187,796
Distributed income of equity
investees . . . . . . . . . . . 672 3,728 3,812 - - -
Preferred and Preference Dividend
Requirements:
Preferred and Preference
Dividends. . . . . . . . . . 282 1,129 3,591 4,919 14,839 13,419
Income Tax Required. . . . . . 186 746 1,095 3,770 7,562 6,160
Total Preferred and
Preference Dividend
Requirements . . . . . . 468 1,875 4,686 8,689 22,401 19,579
Total Fixed Charges and Preferred
and Preference Dividend
Requirements. . . . . . . . . 87,533 367,139 301,838 272,595 243,068 207,375
Earnings (2) . . . . . . . . . . $162,657 $320,194 $359,052 $1,136,645 $475,719 $452,864
Ratio of Earnings to Fixed
Charges . . . . . . . . . . . . 1.87 0.88 1.21 4.31 2.16 2.41
Ratio of Earnings to Combined Fixed
Charges and Preferred and Preference
Dividend Requirements. . . . . 1.86 0.87 1.19 4.17 1.96 2.18
(1) Earnings from continuing operations consists of loss or earnings before extraordinary gain and
income taxes adjusted for minority interest and undistributed earnings from equity investees.
(2) Earnings are deemed to consist of net income to which has been added income taxes (including net
deferred investment tax credit), fixed charges and distributed income of equity investees.
Fixed charges consist of all interest on indebtedness, amortization of debt discount and
expense, and the portion of rental expense which represents an interest factor. Preferred and
preference dividend requirements consist of an amount equal to the pre-tax earnings which would
be required to meet dividend requirements on preferred and preference stock.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000, AND THE CONSOLIDATED STATEMENT OF
INCOME AND THE CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1690
<SECURITIES> 29137
<RECEIVABLES> 237319
<ALLOWANCES> 39307
<INVENTORY> 112141
<CURRENT-ASSETS> 444191
<PP&E> 6116421
<DEPRECIATION> 2212458
<TOTAL-ASSETS> 7821555
<CURRENT-LIABILITIES> 1243752
<BONDS> 2807074
220000
24858
<COMMON> 344568
<OTHER-SE> 1528768
<TOTAL-LIABILITY-AND-EQUITY> 7821555
<SALES> 484170
<TOTAL-REVENUES> 484170
<CGS> 176201
<TOTAL-COSTS> 176201
<OTHER-EXPENSES> 277619
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70026
<INCOME-PRETAX> 78297
<INCOME-TAX> 36973
<INCOME-CONTINUING> 41324
<DISCONTINUED> 0
<EXTRAORDINARY> 18492
<CHANGES> 0
<NET-INCOME> 59816
<EPS-BASIC> 0.88
<EPS-DILUTED> 0.88
</TABLE>
