WESTERN RESOURCES INC /KS, 10-Q, 2000-11-13

WESTERN RESOURCES INC /KS
10-Q, 2000-11-13
ELECTRIC & OTHER SERVICES COMBINED

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<PAGE>

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 September 30, 2000
-----------------------------------------------

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 November 9, 2000
----------------------------- ------------------------------
Common Stock, $5.00 par value 69,979,875
<PAGE>

WESTERN RESOURCES, INC.
INDEX

Page No.
--------

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets 4

Consolidated Statements of Income 5 - 6

Consolidated Statements of Comprehensive Income 7

Consolidated Statements of Cash Flows 8

Consolidated Statements of Shareholders' Equity 9

Notes to Consolidated Financial Statements 10

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21

Item 3. Quantitative and Qualitative Disclosures About
Market Risk 36

Part II. Other Information

Item 1. Legal Proceedings 37

Item 2. Changes in Securities and Use of Proceeds 37

Item 3. Defaults Upon Senior Securities 37

Item 4. Submission of Matters to a Vote of Security Holders 37

Item 5. Other Information 38

Item 6. Exhibits and Reports on Form 8-K 38

Signatures 39

2
<PAGE>

WESTERN RESOURCES, INC.

FORWARD-LOOKING STATEMENTS

Certain matters discussed 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,
liquidity and capital resources, litigation, rate and other regulatory matters,
outcome of the Securities and Exchange Commission (SEC) Staff's review of
Protection One accounting issues, possible corporate restructurings, mergers,
acquisitions, dispositions, including the proposed separation of Westar
Industries, Inc. from the company's electric utility businesses and the
consummation of the acquisition of the electric operations of Western Resources,
Inc. by Public Service Company of New Mexico, compliance with debt covenants,
interest and dividends, Protection One's financial condition and its impact 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, ongoing
municipal, state and federal activities, such as the Wichita municipalization
efforts; future economic conditions; legislative and regulatory developments;
regulatory and competitive markets; and other circumstances affecting
anticipated operations, sales and costs.

3
<PAGE>

WESTERN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)

<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
ASSETS

CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents................................................................ $ 6,693 $ 12,444
Restricted cash.......................................................................... 21,115 14,558
Accounts receivable (net)................................................................ 175,653 229,200
Inventories and supplies (net)........................................................... 106,966 112,392
Marketable securities.................................................................... 7,222 177,128
Prepaid expenses and other............................................................... 50,440 40,876
----------- -----------
Total Current Assets................................................................... 368,089 586,598
----------- -----------

PROPERTY, PLANT AND EQUIPMENT (NET)....................................................... 3,965,634 3,889,444
----------- -----------

OTHER ASSETS:
Restricted cash.......................................................................... 36,275 -
Investment in ONEOK...................................................................... 589,118 590,109
Customer accounts (net).................................................................. 1,037,136 1,138,902
Goodwill (net)........................................................................... 1,033,433 1,102,157
Regulatory assets........................................................................ 358,514 366,004
Other.................................................................................... 410,754 334,992
----------- -----------
Total Other Assets..................................................................... 3,465,230 3,532,164
----------- -----------

TOTAL ASSETS.............................................................................. $ 7,798,953 $ 8,008,206
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt..................................................... $ 39,356 $ 111,667
Short-term debt.......................................................................... 57,000 705,421
Accounts payable......................................................................... 166,992 132,834
Accrued liabilities...................................................................... 208,889 226,786
Accrued income taxes..................................................................... 63,267 40,328
Deferred security revenues............................................................... 52,114 61,148
Other.................................................................................... 108,590 73,011
----------- -----------
Total Current Liabilities.............................................................. 696,208 1,351,195
----------- -----------

LONG-TERM LIABILITIES:
Long-term debt (net)..................................................................... 3,274,627 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......................................... 966,281 982,548
Minority interests....................................................................... 191,760 193,499
Deferred gain from sale-leaseback........................................................ 189,251 198,123
Other.................................................................................... 282,144 279,451
----------- -----------
Total Long-term Liabilities............................................................ 5,124,063 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 69,581,164 and
67,401,657 shares, respectively......................................................... 347,906 341,508
Paid-in capital.......................................................................... 840,281 820,945
Retained earnings........................................................................ 773,914 691,016
Accumulated other comprehensive income (loss) (net)...................................... (8,277) 37,788
Treasury stock, at cost, 0 and 900,000 shares,
respectively............................................................................ - (15,791)
----------- -----------
Total Shareholders' Equity............................................................. 1,978,682 1,900,324
----------- -----------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................................ $ 7,798,953 $ 8,008,206
=========== ===========

The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>

4
<PAGE>

WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
2000 1999
----------- -----------
SALES:
<S> <C> <C>
Energy................................................................................... $ 623,157 $ 495,867
Security................................................................................. 139,388 150,873
----------- -----------
Total Sales............................................................................ 762,545 646,740
----------- -----------

COST OF SALES:
Energy................................................................................... 315,974 174,099
Security................................................................................. 49,736 48,060
----------- -----------
Total Cost of Sales.................................................................... 365,710 222,159
----------- -----------

GROSS PROFIT.............................................................................. 396,835 424,581
----------- -----------

OPERATING EXPENSES:
Operating and maintenance expense........................................................ 84,943 84,715
Depreciation and amortization............................................................ 103,982 138,989
Selling, general and administrative expense.............................................. 84,371 100,137
----------- -----------
Total Operating Expenses............................................................... 273,296 323,841
----------- -----------

INCOME FROM OPERATIONS.................................................................... 123,539 100,740
----------- -----------

OTHER INCOME (EXPENSE):
Investment earnings...................................................................... 16,113 12,216
Gain on sale of Mobile Services Group.................................................... - 17,249
Minority interests....................................................................... 3,522 6,533
Other.................................................................................... 656 (1,888)
----------- -----------
Total Other Income (Expense).......................................................... 20,291 34,110
----------- -----------

EARNINGS BEFORE INTEREST AND TAXES........................................................ 143,830 134,850
----------- -----------

INTEREST EXPENSE:
Interest expense on long-term debt....................................................... 48,865 61,045
Interest expense on short-term debt and other............................................ 26,028 14,831
----------- -----------
Total Interest Expense................................................................ 74,893 75,876
----------- -----------

EARNINGS BEFORE INCOME TAXES.............................................................. 68,937 58,974

INCOME TAXES.............................................................................. 13,288 9,964
----------- -----------

NET INCOME BEFORE EXTRAORDINARY GAIN...................................................... 55,649 49,010

EXTRAORDINARY GAIN, NET OF TAX............................................................ 6,716 -
----------- -----------

NET INCOME................................................................................ 62,365 49,010

PREFERRED DIVIDENDS....................................................................... 282 282
----------- -----------

EARNINGS AVAILABLE FOR COMMON STOCK....................................................... $ 62,083 $ 48,728
=========== ===========

AVERAGE COMMON SHARES OUTSTANDING......................................................... 69,382,338 67,554,168

BASIC AND DILUTED EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING (See Note 1):
Basic earnings available before extraordinary gain....................................... $0.80 $0.72
=========== ===========
Diluted earnings available before extraordinary gain..................................... $0.80 $0.72
=========== ===========

Basic earnings available after extraordinary gain........................................ $0.89 $0.72
=========== ===========
Diluted earnings available after extraordinary gain...................................... $0.89 $0.72
=========== ===========

DIVIDENDS DECLARED PER COMMON SHARE....................................................... $.300 $.535

The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>

5
<PAGE>

WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
2000 1999
----------- -----------
SALES:
<S> <C> <C>
Energy................................................................................... $ 1,376,677 $ 1,133,243
Security................................................................................. 419,319 447,967
----------- -----------
Total Sales............................................................................ 1,795,996 1,581,210
----------- -----------

COST OF SALES:
Energy................................................................................... 616,562 390,605
Security................................................................................. 141,489 129,848
----------- -----------
Total Cost of Sales.................................................................... 758,051 520,453
----------- -----------

GROSS PROFIT.............................................................................. 1,037,945 1,060,757
----------- -----------

OPERATING EXPENSES:
Operating and maintenance expense........................................................ 253,235 253,194
Depreciation and amortization............................................................ 317,038 309,528
Selling, general and administrative expense.............................................. 247,040 246,136
Write-off international development activities........................................... - (4,930)
----------- -----------
Total Operating Expenses............................................................... 817,313 803,928
----------- -----------

INCOME FROM OPERATIONS.................................................................... 220,632 256,829
----------- -----------

OTHER INCOME (EXPENSE):
Investment earnings...................................................................... 168,069 49,661
Gain on sale of Mobile Services Group.................................................... - 17,249
Minority interests....................................................................... 3,830 8,382
Other.................................................................................... 1,036 (1,343)
----------- -----------
Total Other Income (Expense).......................................................... 172,935 73,949
----------- -----------

EARNINGS BEFORE INTEREST AND TAXES........................................................ 393,567 330,778
----------- -----------

INTEREST EXPENSE:
Interest expense on long-term debt....................................................... 149,273 180,335
Interest expense on short-term debt and other............................................ 67,958 39,839
----------- -----------
Total Interest Expense................................................................ 217,231 220,174
----------- -----------

EARNINGS BEFORE INCOME TAXES.............................................................. 176,336 110,604

INCOME TAXES.............................................................................. 54,170 22,357
----------- -----------

NET INCOME BEFORE EXTRAORDINARY GAIN...................................................... 122,166 88,247

EXTRAORDINARY GAIN, NET OF TAX............................................................ 42,555 -
----------- -----------

NET INCOME................................................................................ 164,721 88,247

PREFERRED DIVIDENDS....................................................................... 846 847
----------- -----------

EARNINGS AVAILABLE FOR COMMON STOCK....................................................... $ 163,875 $ 87,400
=========== ===========

AVERAGE COMMON SHARES OUTSTANDING......................................................... 68,618,763 66,766,230

BASIC AND DILUTED EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING (See Note 1):
Basic earnings available before extraordinary gain....................................... $1.77 $1.31
=========== ===========
Diluted earnings available before extraordinary gain..................................... $1.76 $1.31
=========== ===========

Basic earnings available after extraordinary gain........................................ $2.39 $1.31
=========== ===========
Diluted earnings available after extraordinary gain...................................... $2.38 $1.31
=========== ===========

DIVIDENDS DECLARED PER COMMON SHARE....................................................... $1.135 $1.605

The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>

6
<PAGE>

WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
2000 1999
----------- -----------

<S> <C> <C>
NET INCOME................................................................................ $ 62,365 $ 49,010
----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains/(losses) on marketable
securities arising during the period................................................... 76 (65,380)
Less: Reclassification adjustment for (gains)
included in net income................................................................. (1) (211)
----------- -----------
Change in unrealized gain/(losses) on marketable
securities (net)....................................................................... 75 (65,591)
Change in unrealized (loss)/gain on currency translation................................. (9,702) 1,879
----------- -----------
Other comprehensive (loss) income, before tax.......................................... (9,627) (63,712)

INCOME TAX BENEFIT........................................................................ 3,695 25,340
----------- -----------

OTHER COMPREHENSIVE (LOSS), NET OF TAX.................................................... (5,932) (38,372)
----------- -----------

COMPREHENSIVE INCOME...................................................................... $ 56,433 $ 10,638
=========== ===========

<CAPTION>
Nine Months Ended
September 30,
-------------------------
2000 1999
----------- -----------

<S> <C> <C>
NET INCOME................................................................................ $ 164,721 $ 88,247
----------- -----------

OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains/(losses) on marketable
securities arising during the period................................................... 44,939 (80,546)
Less: Reclassification adjustment for (gains)
included in net income................................................................. (115,630) (72)
----------- -----------
Change in unrealized (loss) on marketable securities (net)............................... (70,691) (80,618)
Change in unrealized (loss)/gain on currency translation................................. (10,737) 338
----------- -----------
Other comprehensive (loss), before tax................................................. (81,428) (80,280)

INCOME TAX BENEFIT........................................................................ 35,363 32,003
----------- -----------

OTHER COMPREHENSIVE (LOSS), NET OF TAX.................................................... (46,065) (48,277)
----------- -----------

COMPREHENSIVE INCOME...................................................................... $ 118,656 $ 39,970
=========== ===========

The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>

7
<PAGE>

WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

Nine Months Ended
September 30,
---------------------
2000 1999
--------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 164,721 $ 88,247
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain..................................... (42,555) -
Depreciation and amortization.......................... 317,038 309,528
Amortization of gain on sale-leaseback................. (8,872) (8,872)
Equity in earnings from investments.................... (8,171) (7,645)
Gain on sale of Mobile Services Group.................. - (17,249)
(Gain) loss on sale of marketable securities........... (115,630) 4,608
Minority interests..................................... (3,830) (8,382)
Accretion of discount note interest.................... (6,107) (5,057)
Write-off international development activities......... - (4,930)
Change in restricted cash.............................. (51,823) 2,996
Changes in working capital items:
Accounts receivable (net)............................. (71,453) (29,829)
Inventories and supplies.............................. 5,426 (7,588)
Prepaid expenses and other............................ (9,564) (18,910)
Accounts payable...................................... 34,158 (24,795)
Accrued liabilities................................... (17,897) 9,139
Accrued income taxes.................................. 22,939 47,136
Deferred security revenues............................ (9,034) 4,664
Other................................................. 43,162 (9,646)
Changes in other assets and liabilities................ (65,635) (52,377)
--------- ---------
Net cash flows from operating activities............ 176,873 271,038
--------- ---------

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Additions to property, plant and equipment (net)....... (231,725) (186,569)
Customer account acquisitions.......................... (27,456) (207,657)
Security alarm monitoring acquisitions, net of cash
acquired............................................. - (27,408)
Proceeds from sale of Mobile Services Group, net of
cash paid............................................ - 19,087
Purchases of marketable securities..................... - (11,999)
Proceeds from sale of marketable securities............ 217,098 30,946
Investment in Paradigm................................. - (32,009)
Other investments (net)................................ 4,256 8,696
--------- ---------
Net cash flows (used in) investing activities....... (37,827) (406,913)
--------- ---------

CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Short-term debt (net).................................. (648,421) 168,483
Proceeds of long-term debt............................. 606,471 180,688
Retirements of long-term debt.......................... (187,549) (125,422)
Proceeds from accounts receivable sale (net)........... 125,000 -
Issuance of common stock (net)......................... 25,734 29,487
Cash dividends paid.................................... (78,743) (108,243)
Reissuance of treasury stock........................... 21,898 -
Acquisition of treasury stock.......................... (9,187) -
--------- ---------
Net cash flows (used in) from financing activities.. (144,797) 144,993
--------- ---------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.... (5,751) 9,118

CASH AND CASH EQUIVALENTS:
Beginning of the period................................ 12,444 16,394
--------- ---------
End of the period...................................... $ 6,693 $ 25,512
========= =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized).......................................... $ 249,690 $ 252,535
Income taxes........................................... 17,515 1,065

The Notes to Consolidated Financial Statements are an integral part of these
statements.

8
<PAGE>

WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
CUMULATIVE PREFERRED STOCK:
Par value $100 per share,
authorized 600,000 shares,
outstanding -
<S> <C> <C> <C> <C>
4 1/2% Series, 138,576 shares...... $ 13,858 $ 13,858 $ 13,858 $ 13,858
4 1/4% Series, 60,000 shares....... 6,000 6,000 6,000 6,000
5% Series, 50,000 shares........... 5,000 5,000 5,000 5,000
---------- ---------- ---------- ----------
Ending balance....................... 24,858 24,858 24,858 24,858
---------- ---------- ---------- ----------

COMMON STOCK:
Beginning balance.................... 344,568 335,844 341,508 329,548
Issuance of common stock............. 3,338 2,527 6,398 8,823
---------- ---------- ---------- ----------
Ending balance....................... 347,906 338,371 347,906 338,371
---------- ---------- ---------- ----------

PAID-IN-CAPITAL:
Beginning balance.................... 826,524 801,860 820,945 775,337
Issuance of common stock and other... 13,757 8,464 19,336 34,987
---------- ---------- ---------- ----------
Ending balance....................... 840,281 810,324 840,281 810,324
---------- ---------- ---------- ----------

RETAINED EARNINGS:
Beginning balance.................... 732,684 791,330 691,016 823,590
Net income........................... 62,365 49,010 164,721 88,247
Dividends on preferred stock......... (282) (282) (846) (847)
Dividends on common stock............ (20,854) (36,464) (77,897) (107,396)
Issuance of treasury stock........... 1 - (3,080) -
---------- ---------- ---------- ----------
Ending balance....................... 773,914 803,594 773,914 803,594
---------- ---------- ---------- ----------

ACCUMULATED OTHER COMPREHENSIVE
INCOME (NET):
Beginning balance.................... (2,345) (397) 37,788 9,508
Change in unrealized gain/(loss) on
equity securities.................. 75 (65,591) (70,691) (80,618)
Change in unrealized (loss)/gain on
currency translation............... (9,702) 1,879 (10,737) 338
Income tax benefit................... 3,695 25,340 35,363 32,003
---------- ---------- ---------- ----------
Ending balance....................... (8,277) (38,769) (8,277) (38,769)
---------- ---------- ---------- ----------

TREASURY STOCK:
Beginning balance.................... (50) - (15,791) -
Issuance of treasury stock........... 50 - 24,978 -
Purchase of treasury stock........... - - (9,187) -
---------- ---------- ---------- ----------
Ending balance....................... - - - -
---------- ---------- ---------- ----------

TOTAL SHAREHOLDERS' EQUITY............. $1,978,682 $1,938,378 $1,978,682 $1,938,378
========== ========== ========== ==========

The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>

9
<PAGE>

WESTERN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business: Western Resources, Inc. (the company, Western
Resources) is a publicly-traded, consumer services company. The company's
primary business activities are providing electric generation, transmission and
distribution services to approximately 636,000 customers in Kansas and providing
monitored services to approximately 1.5 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)
which are 100% owned by the company. 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 Industries, Inc., previously named
Westar Capital, Inc., (Westar Industries), 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. See Note 10 below regarding discussions
with the Securities and Exchange Commission (SEC) staff concerning certain
accounting matters.

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 and nine months ended September 30, 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 continuing to evaluate
commodity contracts, financial instruments and other contracts to determine if
they will be considered derivatives under SFAS 133. Through the end of the
third quarter, the company has identified derivatives utilized in its energy
trading and risk management activities. The company's energy trading contracts
are currently recorded at fair value on the balance sheet, with the changes in
the fair value included in net income, in accordance with Emerging Issues Task
Force Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and
Risk Management Activities." The company has not yet 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, and be able to quantify its effects.

Goodwill: Goodwill represents the excess of the purchase price over the
fair value of net assets acquired. Protection One historically amortized

10
<PAGE>

goodwill on a straight-line basis over 40 years. In the first quarter of 2000,
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, increased levels of attrition
experienced in 1999 and other factors, 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.

The change in estimate resulted in additional goodwill amortization for the
three months ended September 30, 2000, of approximately $8.6 million. The
resulting reduction to net income was $6.7 million. For the nine months ended
September 30, 2000, the resulting additional goodwill amortization was $25.8
million, resulting in a reduction to net income of $20.1 million.

Earnings Per Share: The company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128) in 1998. SFAS 128
establishes standards for computing and presenting earnings per share (EPS) and
requires the presentation of both basic and diluted EPS. Diluted earnings per
share is calculated by adjusting outstanding shares assuming issuance of all
potentially dilutive shares.

Prior to this period, basic and diluted earnings per share have been the
same. The diluted EPS amounts shown in the year-to-date Consolidated Financial
Statements reflect the inclusion of employee restricted share awards and other
stock compensation.

The following represents a reconciliation from basic earnings per share to
diluted earnings per share:

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
2000 1999 2000 1999
------- ------- -------- -------
(Amounts in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Earnings available for common stock
before extraordinary gain............................ $ 0.80 $ 0.72 $ 1.77 $ 1.31
Extraordinary gain.................................... 0.09 - 0.62 -
------- ------- -------- -------
Earnings available for common stock................... $ 0.89 $ 0.72 $ 2.39 $ 1.31
======= ======= ======== =======

DILUTED EARNINGS PER SHARE:
Earnings available for common stock
before extraordinary gain............................ $ 0.80 $ 0.72 $ 1.76 $ 1.31
Extraordinary gain.................................... 0.09 - 0.62 -
------- ------- -------- -------
Earnings available for common stock................... $ 0.89 $ 0.72 $ 2.38 $ 1.31
======= ======= ======== =======

DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Denominator for basic earnings per share
- weighted average shares............................ 69,382 67,554 68,619 66,766
</TABLE>

11
<PAGE>

<TABLE>
<CAPTION>
Effect of dilutive securities:
<S> <C> <C> <C> <C>
Employee stock options............................... 4 - 1 -
Restricted share awards.............................. 224 40 120 24
Stock for compensation............................... 310 3 132 4
------- ------- -------- -------
Denominator for diluted earnings per share
- weighted average shares............................ 69,920 67,597 68,872 66,794
======= ======= ======== =======
</TABLE>

Restricted Cash: The company's restricted cash consists primarily of cash
held in escrow pursuant to the terms of a pre-paid capacity and transmission
agreement and certain letters of credit.

Reclassifications: Certain amounts in prior years have been reclassified
to conform with classifications used in the current year presentation.

2. CORPORATE RESTRUCTURING AND STRATEGIC ALTERNATIVES

On March 28, 2000, the company's board of directors approved the separation
of its electric utility and non-electric utility businesses (Westar Industries).
On May 18, 2000, the company announced that its board of directors had
authorized its management to explore strategic alternatives for the electric
utility businesses.

On October 5, 2000, Westar Industries filed a registration statement with
the Securities and Exchange Commission (SEC) which covers the proposed sale of
approximately 9.9% of Westar Industries common stock, now owned by the company,
through the exercise of non-transferable rights proposed to be distributed by
the company to its shareholders. After completion of the rights offering,
assuming full exercise of the rights, the company will own approximately 90.1%
of Westar Industries. The registration statement has not become effective.

On November 9, 2000, the company announced that its board of directors
approved an agreement under which Public Service Company of New Mexico
(PNM) will acquire the electric utility businesses of the company in a stock-
for-stock transaction. Under the terms of the agreement, PNM and the company
will become a subsidiary of a new holding company to be named at a future date.
Prior to the consummation of this combination, Westar Industries will be spun
off to Western Resources' shareholders.

The new holding company will issue 55 million of its shares, subject to
certain adjustments, to the company's shareholders and Westar Industries. Before
any adjustments, the new holding company will have approximately 95 million
shares outstanding, of which approximately 42.1% will be owned by former PNM
shareholders and 57.9% will be owned by the company's shareholders and Westar
Industries. The transaction is conditioned upon approval from both the company's
and PNM's shareholders and customary regulatory approvals. The company and PNM
expects the transaction to be completed within the next 12 to 15 months.

The impact of these transactions on the company's financial position and
operating results cannot be determined until the final terms and timing of the
transactions are determined. The company can give no assurance as to whether or
when the rights offering will be consummated or whether or when the separation
of the electric and non-electric utility businesses of the company, or the
consummation of the acquisition of the company by PNM may occur.

3. 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

12
<PAGE>

determining the company's dividend policy are earnings, cash flows,
capitalization ratios, competition, financial loan covenants and regulatory
conditions. In March 2000, the company announced a quarterly dividend of $0.30
per share, or $1.20 per share on an annual basis. On October 2, 2000, the third
quarter dividend was paid at the rate of $0.30 per common share.

4. SALE OF ACCOUNTS RECEIVABLE

On July 28, 2000, the company and KGE entered into an agreement to sell, on
an ongoing basis, all of their accounts receivable arising from the sale of
electricity, to WR Receivables Corporation, a special purpose entity wholly
owned by the company. The agreement expires on July 26, 2001, and is annually
renewable upon agreement by both parties. The special purpose entity has sold
and, subject to certain conditions, may from time to time sell, up to $125
million (and upon request, subject to certain conditions, up to $175 million) of
an undivided fractional ownership interest in the pool of receivables to a
third-party, multi-seller receivables funding entity affiliated with a lender.
As of September 30, 2000, net proceeds of $125 million were received by the
company.

5. DEBT

On June 28, 2000, the company entered into a $600 million, multi-year term
loan that replaced two revolving credit facilities which matured on June 30,
2000. The proceeds of the term loan were used to retire short-term debt. The
term loan is secured by first mortgage bonds of the company and KGE and has a
maturity date of March 17, 2003.

Maturities of the term loan through March 17, 2003, are as follows:

Principal
Amount
Year (Dollars in Thousands)
-----------------------------------------
2000 . . . . . . . . . . . $ 3,000
2001 . . . . . . . . . . . 6,000
2002 . . . . . . . . . . . 6,000
2003 . . . . . . . . . . . 585,000

The terms of the loan contain requirements for maintaining certain
consolidated leverage ratios, interest coverage ratios and consolidated debt to
capital ratios. The company is in compliance with all of these requirements.

Interest on the term loan is payable on the expiration date of each
borrowing under the facility or quarterly if the term of the borrowing is
greater than three months. The weighted average annual interest rate, including
fees, on the term loan at September 30, 2000, was 10.23%.

The company also has an arrangement with certain banks to provide a
revolving credit facility on a committed basis totaling $500 million. The
facility is secured by first mortgage bonds of the company and KGE and expires
on March 17, 2003. As of September 30, 2000, borrowings on this facility were
$57.0 million.

13
<PAGE>

6. GAIN ON EXTINGUISHMENT OF DEBT

In the third quarter of 2000, Westar Industries purchased $37.4 million
face value of Protection One bonds in the open market. An extraordinary gain of
$6.7 million, net of tax of $3.6 million, was recognized on these retirements.

For the nine months ended September 30, 2000, Westar Industries purchased
$141.9 million face value of Protection One bonds in the open market. A portion
of these debt securities was transferred to Protection One in exchange for cash
and the settlement of certain intercompany payables and receivables. Protection
One also purchased $30.5 million face value of its bonds on the open market. An
extraordinary gain of $42.6 million, net of tax of $22.9 million, was recognized
on these retirements.

7. INCOME TAXES

The company has recorded income tax benefits for the interim periods using
the effective tax rate method. Under this method, the company computes the tax
related to year-to-date income, except for significant unusual or extraordinary
items, at an estimated annual effective tax rate. The company individually
computes and recognizes, when the transaction occurs, income tax expense related
to significant unusual or extraordinary items, such as the gain on marketable
securities recorded in 2000. The company anticipates an effective annual tax
rate of approximately 32.0% based on the effective tax rate method described
above. The company's effective income tax rates for the three and nine months
ended September 30, 2000, were 19.3% and 30.7% compared to 16.9% and 20.2% for
the three and nine months ended September 30, 1999.

The difference between the company's effective tax rate and the statutory
rate is primarily attributable to the tax benefit of excluding from taxable
income, in accordance with IRS rules, 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 tax benefits from corporate-owned
life insurance and the deduction for state income taxes.

8. RATE MATTERS AND REGULATION

City of Wichita: In December 1999, the City Council of Wichita, Kansas,
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. In 1999, KGE's rates were 5% below the national average
for retail customers and the average rates charged to retail customers in
territories served by our KPL division were 19% lower than KGE's rates.
Customers within the Wichita metropolitan area account for approximately 25% of
our total energy sales. KGE has a 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 Proceeding" below regarding a complaint filed with the Federal
Energy Regulatory Commission (FERC) against the company by the City of Wichita.

KCC Proceedings: On March 16, 2000, the Kansas Industrial Consumers (KIC),
an organization of commercial and industrial users of electricity in

14
<PAGE>

Kansas, filed a complaint with the Kansas Corporation Commission (KCC)
requesting an investigation of Western Resources' and KGE's rates. Western
Resources, KGE and the KCC staff reached an agreement on August 8, 2000, for
Western Resources and KGE to file a rate case on or before November 25, 2000. On
September 18, 2000, the KCC issued an order approving the agreement. Pursuant to
this order, the company will file an application for a change in rates by
November 27, 2000, which will include a cost allocation study and separate cost
of service studies for Western Resources and KGE, as well as revenue
requirements on a combined company basis by December 29, 2000.

FERC Proceeding: In September 1999, the City of Wichita filed a complaint
with the FERC against the company, alleging improper affiliate transactions
between KPL and KGE. The City of Wichita asked that the FERC equalize the
generation costs between KPL and KGE, in addition to other matters. A hearing
on the case was held at FERC on October 11 and 12, 2000. On November 13, 2000,
FERC dismissed the complaint.

9. LEGAL PROCEEDINGS

The 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.

The company, its subsidiary Westar Industries, 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 ("Amended Complaint"). Plaintiffs purported 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 Principles. Plaintiffs allege,
among other things, that former employees of Protection One have reported that
Protection One lacked adequate internal accounting controls and that certain
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 Industries 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. On June 12, 2000,
the company, Protection One and the other defendants filed motions to dismiss in
part the Amended Complaint. On August 31, 2000, the plaintiffs filed their
papers in opposition to our motions. These motions are currently pending. The
company and Protection One believe that all the claims asserted in the Amended
Complaint are without merit, however the company and Protection One cannot

15
<PAGE>

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

SEC Review: As previously disclosed, Protection One has been advised by the
Staff of the Division of Corporation Finance of the Securities and Exchange
Commission that, in its view, there are errors in Protection One's previously
filed financial statements that are material and which, in the view of the
Staff, have had the effect of inflating reported earnings commencing with the
year ended December 31, 1997. Protection One has had extensive discussions with
the Staff and exchanged numerous letters extending over a period of more than 20
months about the purchase price allocated to intangible customer accounts in the
Westinghouse Security Systems acquisition, the methodology Protection One used
to amortize intangible customer accounts and other matters.

In a letter from the SEC Staff to Protection One dated May 16, 2000, the
Staff stated that "the information that [Protection One] provided strongly
suggests the presence of departures from GAAP in Western Resources' accounting
for the acquisition of Westinghouse Security System[s], and in the subsequent
accounting for those acquired assets by Protection One." More specifically, the
Staff's letter states that it is concerned that Western Resources and Protection
One "improperly inflated" reported earnings following the Westinghouse Security
Systems acquisition. This letter also contains comments and requests for
information concerning the initial and final valuation of Westinghouse Security
Systems' customer accounts, the $12.75 million write down of the value of
customer accounts acquired from Westinghouse Security Systems that was recorded
in the fourth quarter of 1997, shortening of the estimated life of customer
accounts acquired from Westinghouse Security Systems no later than the end of
1997 and the valuation of acquired alarm monitoring software.

Protection One responded by letter dated May 31, 2000, to each of the
comments contained in the Staff's May 16th letter, indicated its strong
disagreement with the views of the Staff and stated its belief that there are no
issues of "inflated earnings," "departures from GAAP," or "errors" in its
historic financial statements. The company's and Protection One's independent
public accountants, Arthur Andersen LLP, indicated they concurred with the
accounting decisions of Protection One.

16
<PAGE>

After another exchange of letters in June as a result of which Protection
One supplied more information to the Staff, on July 6, 2000, Protection One
personnel and their advisors met with members of the Staff.

Thereafter, in a letter to Protection One dated July 7, 2000, the Staff
stated that Protection One's financial statements should be "revised to reflect
corrections of accounting errors and revisions of disclosures" as more fully
discussed in the July 7th letter. The Staff's letter discussed six areas which
it believed required changes. Four of those areas related to the acquisition of
the security business of Westinghouse. The remaining two areas related to the
accounting for ordinary amortization of security accounts and the accounting for
the effects of unanticipated customer attrition. Among other things, the Staff
stated its view that aspects of Protection One's accounting for the acquisition
of the Westinghouse security business "could" be indicative of "manipulative
intent" -- a statement with which the company and Protection One strongly
disagree.

By letter dated July 25, 2000, Protection One advised the Staff of
Protection One's strong disagreement with the views of the Staff regarding these
accounting matters. Arthur Andersen LLP has reviewed the correspondence, been
consulted on responses to the SEC and have confirmed to the SEC staff that they
are not aware of modifications needed to fairly present the company's or
Protection One's historical financial statements.

On July 25, 2000, the Staff advised Protection One orally that this matter
had been referred to the Enforcement Division of the SEC for consideration. By
letter dated July 27, 2000, the Staff advised Protection One that they had
reviewed Protection One's letter of July 25th and requested that Protection One
amend its filings "in a manner that is fully responsive to our July 7th letter
without further delay." The Staff advised that if amendments were not filed
promptly, they would consider what action, if any, would be appropriate under
the circumstances. In Protection One's July 25th letter, Protection One had
requested the opportunity to meet again together with more senior members of the
Staff to discuss these matters further. A meeting with the Staff took place on
September 8, 2000.

In October 2000, Protection One was notified by the SEC of the Staff's
position on the outstanding open issues. The Staff has requested that
Protection One obtain an appraisal of the Westinghouse accounts and revise the
purchase price allocation for such accounts based on the fair value determined
by such appraisal, implement an eight-year accelerated amortization method on
the Westinghouse accounts, revalue a financing transaction secured by customer
accounts consistent with the results of the appraisal and reverse the $12.75
million write down recorded by Protection One in December 1997 of the value of
customer accounts acquired in the Westinghouse transaction. Upon completion of
the appraisal, the Staff has requested that Protection One restate its
historical financial statements to reflect such adjustments. Protection One is
in the process of hiring an appraiser to independently determine the fair value
of the Westinghouse accounts. Once completed, Protection One will evaluate the
results, communicate with the Staff of the SEC and decide upon the necessary
accounting revisions. Were the company and Protection One to make revisions to
their financial statements, based upon their understanding of the Staff's
request, such revisions could result in a material adverse effect on Protection
One's and the company's financial position and results of operations.

At present, neither the company nor Protection One are able to predict the
outcome of these accounting matters. To date, Protection One's discussions with
the Staff have occurred over 20 months and the process of

17
<PAGE>

resolving these matters could extend over a protracted period. Neither the
company nor Protection One can predict what action the Staff may take, including
enforcement action, that will further impact the company or its financial
statements, or the effect or timing of any such action if taken.

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. As of September 30, 2000, the costs
incurred for preliminary site investigation and risk assessment have been
minimal. In 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 nine month period ended
September 30, 2000, as a result of payments under the plan.

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, 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. On May 26, 2000, the company filed an
application with the KCC requesting approval of the funding of the company's
decommissioning trust on this basis. Approval was granted by the KCC on
September 13, 2000.

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.

Our electric utility business is comprised of Fossil Generation, Nuclear
Generation and Power Delivery. Fossil Generation produces power for sale
internally to the Power Delivery segment and externally to wholesale customers.
A component of our Fossil Generation segment is power marketing which attempts
to minimize market fluctuation risk and enhance system reliability.

18
<PAGE>

Nuclear Generation represents the company's 47% ownership in the Wolf Creek
nuclear generating facility. This segment has only internal sales because it
provides all of its power to its co-owners. 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.

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.

Three Months Ended September 30, 2000:
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........................ $245,010 $ - $377,745 $139,388 $ 386 $ 16 $762,545
Internal sales........................ 169,117 27,940 85,492 - - (282,549) -
Earnings before
interest and taxes................... 43,220 (5,731) 112,268 (17,239) 17,141 (5,829) 143,830
Interest expense...................... 74,893
Earnings before taxes................. 68,937

</TABLE>

<TABLE>
<CAPTION>
Three Months Ended September 30, 1999:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services (2)Other Items Total
---------- ---------- -------- -------- -------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
External sales......................... $148,251 $ - $347,301 $150,873 $ 315 $ - $ 646,740
Internal sales......................... 158,141 28,987 84,366 - - (271,494) -
Earnings before
interest and taxes.................... 82,383 (4,817) 94,084 (39,804) 6,202 (3,198) 134,850
Interest expense....................... 75,876
Earnings before taxes.................. 58,974
</TABLE>

Nine Months Ended September 30, 2000:

<TABLE>
<CAPTION>
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services (3)Other Items Total
---------- ---------- -------- -------- -------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
External sales......................... $503,283 $ - $872,296 $419,319 $ 1,072 $ 26 $1,795,996
Internal sales......................... 432,942 86,733 223,395 - - (743,070) -
Earnings before
interest and taxes.................... 154,061 (13,935) 154,280 (54,875) 165,516 (11,480) 393,567
Interest expense....................... 217,231
Earnings before taxes.................. 176,336
</TABLE>

19
<PAGE>

Nine Months Ended September 30, 1999:

<TABLE>
<CAPTION>
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services (4)Other Items Total
---------- ---------- -------- -------- -------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
External sales......................... $305,786 $ - $826,488 $447,967 $ 968 $ 1 $1,581,210
Internal sales......................... 421,493 78,803 224,048 - - (724,344) -
Earnings before
interest and taxes.................... 176,304 (20,156) 133,557 (8,286) 57,524 (8,165) 330,778
Interest expense....................... 220,174
Earnings before taxes.................. 110,604

</TABLE>

(1) Earnings before interest and taxes includes investment earnings of $16.1
million.
(2) Earnings before interest and taxes includes investment earnings of $12.2
million.
(3) Earnings before interest and taxes includes investment earnings of $168.1
million.
(4) Earnings before interest and taxes includes investment earnings of $49.7
million.

20
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------

INTRODUCTION

Unless the context otherwise indicates, all references in this report on
Form 10-Q to the "company," "Western Resources," "we," "us" or "our" or similar
words are to Western Resources, Inc. and its other wholly-owned subsidiaries.

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 those
reports. In this section we discuss the general financial condition and
operating results for Western Resources. We explain:

- What factors impact our business
- What our earnings and costs were for the three and nine months
ending September 30, 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.

SUMMARY OF SIGNIFICANT ITEMS

Corporate Restructuring and Strategic Alternatives

On March 28, 2000, our board of directors approved the separation of our
electric utility and non-electric utility businesses (Westar Industries). On May
18, 2000, we announced that our board of directors had authorized our management
to explore strategic alternatives for the electric utility businesses.

On October 5, 2000, Westar Industries filed a registration statement with
the Securities and Exchange Commission (SEC) which covers the proposed sale of
approximately 9.9% of Westar Industries common stock, now owned by us, through
the exercise of non-transferable rights proposed to be distributed by us to our
shareholders. After completion of the rights offering, assuming full exercise of
the rights, we will own approximately 90.1% of Westar Industries. The
registration statement has not become effective.

On November 9, 2000, we announced that our board of directors approved an
agreement under which Public Service Company of New Mexico (PNM) will acquire
our electric utility businesses in a stock-for-stock transaction. Under the
terms of the agreement, PNM and we will become a subsidiary of a new holding
company to be named at a future date. Prior to the consummation of this
combination, Westar Industries will be spun off to Western Resources'
shareholders.

The new holding company will issue 55 million of its shares, subject to
certain adjustments, to our shareholders and Westar Industries. Before any
adjustments, the new holding company will have approximately 95 million shares
outstanding, of which approximately 42.1% will be owned by former PNM
shareholders and 57.9% will be owned by the company's shareholders and Westar
Industries. The transaction is conditioned upon approval from both our and PNM's
shareholders and customary regulatory approvals. We expect the transaction to be
completed within the next 12 to 15 months.

21
<PAGE>

The impact of these transactions on our financial position and operating
results cannot be determined until the final terms and timing of the
transactions are determined. We can give no assurance as to whether or when the
rights offering will be consummated or whether or when the separation of our
electric and non-electric utility businesses, or the consummation of the
acquisition of the company by PNM may occur.

Gain on Extinguishment of Debt

Monitored Services Change in Estimate of Useful Life of Goodwill

In the first quarter of 2000, 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,
increased levels of attrition experienced in 1999 and other factors, 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.

OPERATING RESULTS

Western Resources Consolidated

Our business is segmented 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. We also have other non-utility operations
and our ONEOK investment that are discussed in "Other Results" below when
changes are material.

22
<PAGE>

reliability. Nuclear Generation represents our 47% ownership in the Wolf Creek
nuclear generating facility. This segment has only internal sales because it
provides all of its power to its co-owners. 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.

Basic earnings per share were $0.89 for the three months ended September
30, 2000, compared to $0.72 for the three months ended September 30, 1999. This
increase was primarily because Protection One recorded the cumulative effect of
a change in accounting principle relating to depreciation and amortization
expense of $47.3 million in the third quarter of 1999. As discussed in our 1999
Annual Report on Form 10-K, Protection One and Protection One Europe changed
their amortization methods from a 10-year straight line method to a 10-year
declining balance method. Also contributing to the increase in earnings per
share was the extraordinary gain of $6.7 million, net of tax of $3.6 million, on
the retirement of Protection One bonds. Partially offsetting these increases was
a change in the estimated life of goodwill and operating losses from our
monitored services segment.

Basic earnings per share were $2.39 for the nine months ended September 30,
2000, compared to $1.31 for the nine months ended September 30, 1999. This
increase is primarily attributable to increased investment earnings from the
sale of our investments in a gas compression company and other marketable
securities, the extraordinary gain on the retirement of Protection One bonds,
and improved electric operations. Partially offsetting these increases was a
change in the estimated life of goodwill and operating losses from our monitored
services segment. See "Monitored Services" below for further discussion of these
factors and their overall impact.

Overview of Utility Operations

The following table reflects the increases in electric sales volumes,
excluding power marketing for the three and nine months ended September 30,
2000, from the comparable periods of 1999.

Three Months Ended September 30,

2000 1999 % Change
------ ------ --------
(Thousands of MWH)
Residential...................... 2,287 2,010 13.8 %
Commercial....................... 2,018 1,881 7.3 %
Industrial....................... 1,541 1,505 2.4 %
Other............................ 26 26 - %
------ ------ -----
Total retail.................... 5,872 5,422 8.3 %
Wholesale........................ 1,776 1,690 5.1 %
------ ------ -----
Total........................... 7,648 7,112 7.5 %
====== ====== =====

Nine Months Ended September 30,
2000 1999 % Change
------ ------ --------
(Thousands of MWH)
Residential...................... 4,880 4,420 10.4 %
Commercial....................... 4,985 4,767 4.6 %
Industrial....................... 4,392 4,293 2.3 %
Other............................ 80 80 - %
------ ------ -----

23
<PAGE>

Total retail.................... 14,337 13,560 5.7 %
Wholesale........................ 5,030 4,185 20.2 %
------ ------ -----
Total........................... 19,367 17,745 9.1 %
====== ====== =====

Three Months Ended September 3O, 2OOO, Compared to Three Months Ended
September 3O, 1999: Utility operating sales increased $127.2 million, from
$495.6 million to $622.8 million, primarily due to higher retail and wholesale
sales volumes and higher power marketing sales. Offsetting the increase in sales
was higher cost of sales of $141.8 million. The higher cost of sales was due to
higher power marketing expense, increased purchased power expense and higher
fuel expense incurred to meet the demand for more electricity. Although sales
increased, earnings before interest and taxes (EBIT) decreased $21.9 million
primarily due to the higher cost of sales and increased operating expenses.

Nine Months Ended September 3O, 2OOO, Compared to Nine Months Ended
September 3O, 1999: Utility operating sales increased $243.3 million, from
$1,132.3 million to $1,375.6 million primarily due to higher retail and
wholesale sales volumes and higher power marketing sales. Partially offsetting
the increase in sales were higher cost of sales of $225.9 million. The higher
cost of sales was due to higher power marketing expense, increased purchased
power expense and higher fuel expense incurred to meet the demand for more
electricity. EBIT increased $4.7 million primarily due to higher sales.

Business Segments - Utility Operations: The following table reflects key
information for our electric utility business segments:

Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Fossil Generation: (Dollars in Thousands)
External sales......... $245,010 $148,251 $503,283 $305,786
Internal sales......... 169,117 158,141 432,942 421,493
EBIT................... 43,220 82,383 154,061 176,304

Nuclear Generation: (1)
Internal sales......... $ 27,940 $ 28,987 $ 86,733 $ 78,803
EBIT................... (5,731) (4,817) (13,935) (20,156)

Power Delivery:
External sales......... $377,745 $347,301 $872,296 $826,488
Internal sales......... 85,492 84,366 223,395 224,048
EBIT................... 112,268 94,084 154,280 133,557

(1) Our 47% share of Wolf Creek's operating results.

Fossil Generation

Fossil Generation's external sales consist of the power produced and
purchased for sale to wholesale customers. Internal sales consist of the power
produced for sale to Power Delivery which delivers the power to our retail
customers. The internal transfer price for these sales is based on an assumed
competitive market price for capacity and energy.

Three Months Ended September 3O, 2OOO, Compared to Three Months Ended

24
<PAGE>

September 3O, 1999: External sales increased $96.8 million primarily due to
power marketing sales which were $104.4 million, or 129%, higher. Lower
wholesale sales partially offset the increase in power marketing sales. Since
1997, we have gradually increased the size of our power trading operation in an
effort to better utilize our market knowledge and to mitigate the risk
associated with energy prices.

Electric cost of sales was $141.8 million higher primarily due to higher
power marketing expense of $112.5 million, a 168% increase. The remaining
increase in electric cost of sales is due to higher fossil fuel expense and
higher purchased power expense used to meet the demand for more electricity.
EBIT was $39.2 million lower because of a $45.0 million decrease in gross
profit.

Nine Months Ended September 3O, 2OOO, Compared to Nine Months Ended
September 3O, 1999: External sales increased $197.5 million primarily due to
power marketing sales which were $181.9 million, or 107%, higher and wholesale
sales volumes which were 20% higher. We had more wholesale market opportunities
because of our larger trading operation which has increased our involvement in
the market as discussed above.

Electric cost of sales were $225.9 million higher primarily due to higher
power marketing expense of $178.6 million, a 118% increase. In addition, we had
higher purchased power expense of $15.8 million, or a 75% increase, primarily to
meet the higher demand for wholesale sales. Additionally, we incurred an
increase in fossil fuel expense of $29.7 million, or 15%, primarily to meet the
demand for more electricity and due to increased cost of natural gas. See the
Market Risk Disclosure for further discussion. EBIT was $22.2 million lower
because of a $28.3 million decrease in gross profit.

Nuclear Generation

Nuclear Generation has only internal 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. KGE owns 47% of Wolf Creek Nuclear Operating
Corporation (WCNOC), the operating company for Wolf Creek Generating Station
(Wolf Creek). Internal sales are priced at the internal transfer price that
Nuclear Generation charges to Power Delivery. EBIT is negative because internal
sales are less than Wolf Creek's costs.

Three Months Ended September 3O, 2OOO, Compared to Three Months Ended
September 3O, 1999: Internal sales and EBIT declined primarily due to Wolf Creek
experiencing an unplanned outage of approximately three days due to a
transformer fire that caused the unit to shut down as a safety precaution. Wolf
Creek resumed operation with no significant damage being experienced as a result
of this incident. Operations and maintenance expense increased $2.0 million
primarily due to an increase in maintenance and engineering expenses.

Nine Months Ended September 3O, 2OOO, Compared to Nine Months Ended
September 3O, 1999: Internal sales and EBIT improved primarily due to the timing
of regularly scheduled refueling and maintenance outages. Wolf Creek shut down
on September 29, 2000, for a scheduled refueling and maintenance outage and
began returning to service on November 7, 2000. The prior refueling and
maintenance outage was during the spring of 1999. Therefore, the nine months
ended September 30, 1999, included the effects of the entire 1999 outage while
the same period of 2000 only includes two days of the 2000 planned outage. Wolf
Creek has a scheduled refueling and maintenance outage approximately every 18
months with the next outage
25
<PAGE>

scheduled to occur in the spring of 2002. During an outage, Wolf Creek produces
no power.

Power Delivery

The Power Delivery segment's external sales consist of the transmission and
distribution of power to our electric customers and the customer service
provided to them. Internal sales consist of the intra-segment transfer price
charged to Fossil Generation and Nuclear Generation for the use of the
distribution lines and transformers.

Three Months Ended September 3O, 2OOO, Compared to Three Months Ended
September 3O, 1999: External sales increased $30.4 million, or 9%. We
experienced a 14% increase in residential sales volumes primarily due to a 26%
increase in cooling degree days which increased the demand for power on our
system. EBIT increased $18.2 million also due to higher retail sales volumes.

Nine Months Ended September 3O, 2OOO, Compared to Nine Months Ended
September 3O, 1999: External sales increased $45.8 million, or 6%. We
experienced a 10% increase in residential sales volumes primarily due to a 26%
increase in cooling degree days which increased the demand for power on our
system. EBIT increased $20.7 million also due to higher retail sales volumes.

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 September 30, 2000, and September 30,
1999.

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
External sales .... $ 139,388 $ 150,873 $ 419,319 $ 447,967
EBIT .............. (17,239) (39,804) (54,875) (8,286)
</TABLE>

Three Months Ended September 3O, 2OOO, Compared to Three Months Ended
September 3O, 1999: Sales decreased by $11.5 million primarily due to a decline
in Protection One's average customer base. In North America, Protection One had
a net decrease of 57,417 customers in the third quarter of 2000 as compared to a
net decrease of 16,219 customers in the third quarter of 1999. The average
customer base for the third quarters of 2000 and 1999 was 1,113,822 and
1,238,655, or a decrease of 124,833 customers. The decrease in customers is
primarily attributable to the fact that Protection One's present customer
acquisition strategies have not been able to generate accounts in a sufficient
volume to replace accounts lost through attrition. Protection One does not
expect its customer acquisitions to replace all accounts lost through attrition
at least through the first half of 2001. Accordingly, Protection One's total
customer base is likely to decline based upon historical rates of attrition
which is likely to result in declining revenues. Protection One's focus remains
on the completion of its current infrastructure projects, the development of
cost effective marketing programs, the development of its commercial business
and the generation of positive cash flow. Protection One Europe had a net
increase of 10,816 customers. The increase is primarily attributable to a
greater number of salesmen.

26
<PAGE>

EBIT increased $22.6 million primarily because depreciation and
amortization expense decreased $37.2 million. As discussed in our 1999 Annual
Report on Form 10-K, Protection One and Protection One Europe changed their
customer account amortization methods from a 10-year straight line method to a
10-year declining balance method as of the third quarter in 1999. The cumulative
effect of this change in accounting principle was recorded in the third quarter
of 1999 and amounted to approximately $47.3 million.

EBIT was also affected by three other factors: 1) Sales decreased $11.5
million as discussed above, 2) Other income decreased because Protection One
recorded a $17.2 million gain on the sale of Mobile Services in the third
quarter of 1999, and 3) Protection One and Protection One Europe had increased
goodwill amortization expense of $8.6 million because they changed their
estimate of the useful life of goodwill from 40 years to 20 years.

Nine Months Ended September 3O, 2OOO, Compared to Nine Months Ended
September 3O, 1999: Sales decreased $28.6 million primarily due to a decline in
Protection One's customer base. In North America, Protection One had a net
decrease of 119,529 customers in the first nine months of 2000 as compared to a
net increase of 34,498 customers in the first nine months of 1999. The average
customer base for the first nine months of 2000 declined to 1,144,878 from
1,213,296 resulting in a net decrease of 68,418 customers. This decrease in
customers is primarily attributable to the factors discussed above.

EBIT decreased $46.6 million due to lower sales, higher cost of sales, and
lower other income. Cost of sales increased $11.6 million due to increased
compensation costs for additional personnel hired to improve the level of
customer service at Protection One's monitoring stations, an increase in the
cost of parts and materials, and increased vehicle costs. Other income decreased
because Protection One recorded a $17.2 million gain on the sale of the Mobile
Services Group in the third quarter of 1999.

Depreciation and amortization expense did not materially change. The
cumulative effect of the change in accounting principle of approximately $47.3
million recorded in the third quarter of 1999 was offset by increased
amortization expense of $25.8 million associated with the change in estimate of
the useful life of goodwill from 40 years to 20 years and higher depreciation
expense of $10.2 million due to accelerated depreciation of Protection One's
accounting systems installed in 1999. Protection One has decided to move to
another accounting system in 2000 which is better suited for its needs.

OTHER RESULTS

We have other sources of income and expense not directly related to our
operations, as outlined below.

Other Income (Expenses)

Three Months Ended September 3O, 2OOO, Compared to Three Months Ended
September 3O, 1999: Other income decreased $13.2 million primarily due to the
$17.2 million gain on the sale of the Mobile Services Group that Protection One
recorded in the third quarter of 1999.

Nine Months Ended September 3O, 2OOO, Compared to Nine Months Ended
September 3O, 1999: The increase in other income is primarily related to a $91.1
million gain on the sale of our remaining investment in a gas

27
<PAGE>

compression company and a $24.5 million gain on the sale of other marketable
securities. These increases were partially offset by a decrease in other income
in the third quarter primarily due to the $17.2 million gain on the sale of
Protection One's Mobile Services Group recorded in the third quarter of 1999.

Interest Expense

Three Months Ended September 3O, 2OOO, Compared to Three Months Ended
September 3O, 1999: We repaid long-term debt during 1999 and during the first
and second quarters of 2000 causing long-term debt interest expense to decrease
by $12.2 million for the third quarter. The repayments included $125 million of
Western Resources' first mortgage bonds in 1999 and $262.3 million face value of
Protection One bonds in the fourth quarter of 1999 and during the nine months
ended September 30, 2000. These repayments were initially made with short-term
debt. On June 28, 2000, we entered into a $600 million, multi-year term loan
that increased our long-term debt balance. For more information on this term
loan, see the Liquidity and Capital Resources section below.

Short-term debt interest expense was $11.2 million higher due to increased
short-term borrowings under our credit facilities.

Nine Months Ended September 3O, 2OOO, Compared to Nine Months Ended
September 3O, 1999: Our long-term debt interest expense decreased by $31.1
million because of reduced long-term debt as discussed above.

Short-term debt interest expense was $28.1 million higher due to increased
short-term borrowings under our credit facilities. The majority of this short-
term debt was repaid in the third quarter of 2000 with proceeds from the $600
million term note.

Income Taxes

We have recorded income tax benefits for the interim periods using the
effective tax rate method. Under this method, we compute the tax related to
year-to-date income, except for significant unusual or extraordinary items, at
an estimated annual effective tax rate. We individually compute and recognize,
when the transaction occurs, income tax expense related to significant unusual
or extraordinary items, such as the gain on marketable securities recorded in
2000. We anticipate an effective annual tax rate of approximately 32.0% based on
the effective tax rate method described above. Our effective income tax rates
for the three and nine months ended September 30, 2000, were 19.3% and 30.7%
compared to 16.9% and 20.2% for the three and nine months ended September 30,
1999.

The difference between our effective tax rate and the statutory rate is
primarily attributable to the tax benefit of excluding from taxable income, in
accordance with IRS rules, 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 tax benefits from corporate-owned life insurance
and the deduction for state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

The following discussion explains significant factors in liquidity and

28
<PAGE>

capital resources at September 30, 2000.

We had $6.7 million in cash and cash equivalents at September 30, 2000. We
consider cash equivalents to be highly liquid debt instruments purchased with a
maturity of three months or less. We also had $21.1 million of restricted cash
classified as a current asset. The current asset portion of our restricted cash
consists primarily of cash held in escrow as required by certain letters of
credit. In addition, we had $36.3 million of restricted cash classified as a
long-term asset which consists primarily of cash held in escrow required by the
terms of a pre-paid capacity and transmission agreement.

Current maturities of long-term debt were $39.4 million. Short-term debt
outstanding was $57.0 million.

On June 28, 2000, we entered into a $600 million, multi-year term loan that
replaced two revolving credit facilities which matured on June 30, 2000. The
proceeds of the term loan were used to retire short-term debt. The term loan is
secured by first mortgage bonds of the company and KGE and has a maturity date
of March 17, 2003.

Maturities of the term loan through March 17, 2003, are as follows:

Interest on the term loan is payable on the expiration date of each
borrowing under the facility or quarterly if the term of the borrowing is
greater than three months. The weighted average interest rate, including fees,
on the term loan at September 30, 2000, was 10.23%.

For the nine months ended September 30, 2000, Westar Industries purchased
$141.9 million face value of Protection One bonds in the open market. $104.6
million of these debt securities were transferred to Protection One in exchange
for cash and the settlement of certain intercompany payables and receivables.
Protection One also purchased $30.5 million face value of its bonds on the open
market. An extraordinary gain of $42.6 million, net of tax of $22.9 million, was
recognized on these retirements.

Sale of Accounts Receivable

On July 28, 2000, we and KGE entered into an agreement to sell, on an

29
<PAGE>

ongoing basis, all of our accounts receivable arising from the sale of
electricity, to WR Receivables Corporation, a special purpose entity wholly
owned by the company. The agreement expires on July 26, 2001, and is annually
renewable upon agreement by both parties. The special purpose entity has sold
and, subject to certain conditions, may from time to time sell, up to $125
million (and upon request, subject to certain conditions, up to $175 million) of
an undivided fractional ownership interest in the pool of receivables to a
third-party, multi-seller receivables funding entity affiliated with a lender.
As of September 30, 2000, net proceeds of $125 million were received by Western
Resources.

Cash Flows from Operating Activities

Cash provided by operations decreased from $271.0 million for the nine
months ended September 30, 1999, to $176.9 million for the same period of 2000.
The primary reasons for this decrease are related to income taxes paid on the
sale of marketable securities in 2000 and cash required to be escrowed in 2000
for certain contractual agreements as discussed in Liquidity and Capital
Resources. Changes in working capital also contributed to this decrease in cash
flow from operations.

Cash Flows (used in) Investing Activities

Investing activities used net cash flow of $37.8 million in the first nine
months of 2000. The proceeds on sale of marketable securities of approximately
$217.1 million was offset by $231.7 million of capital additions which included
costs associated with two new combustion turbine generators which were placed in
service in June 2000.

Investing activities used net cash flow of $406.9 million in the first nine
months of 1999 due primarily to Protection One's use of approximately $235.1
million for customer account and security alarm business acquisitions.

Cash Flows (used in) from Financing Activities

We had a net use of cash for financing activities totaling $144.8 million
in the first nine months of 2000 due primarily to net payments on short-term and
long-term debt and dividend payments. In June 2000, we received $600 million of
proceeds on a multi-year term loan, which was used to replace two revolving
credit facilities, which matured at the end of the second quarter. The proceeds
from the sale of marketable securities and accounts receivable were also used to
reduce short-term debt and to retire long-term debt.

We had net cash provided from financing activities totaling $145.0 million
in the first nine months of 1999 due primarily to proceeds of short-term and
long-term debt of $349.2 million offset by payments on long-term debt totaling
$125.4 million and dividend payments of $108.2 million.

Debt and Equity Repurchase Plans

We and Protection One may, from time to time, purchase our and Protection
One's debt and equity securities in the open market or through negotiated
transactions. The timing and terms of purchases, and the amount of debt or
equity actually purchased, will be determined by the company and Protection One
based on market conditions and other factors.

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, financial loan
covenants and regulatory conditions. In March 2000, we announced a quarterly
dividend of $0.30 per share, or $1.20 per share on an annual basis. On October
2, 2000, the third quarter dividend was paid at the rate of $0.30

30
<PAGE>

per common share.

OTHER INFORMATION

Earnings Per Share

The company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128) in 1998. SFAS 128 establishes standards for
computing and presenting earnings per share (EPS) and requires the presentation
of both basic and diluted EPS. Diluted earnings per share is calculated by
adjusting outstanding shares assuming issuance of all potentially dilutive
shares.

The following represents a reconciliation from basic earnings per share to
diluted earnings per share:

<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Earnings available for common stock
before extraordinary gain............................ $ 0.80 $ 0.72 $ 1.77 $ 1.31
Extraordinary gain.................................... 0.09 - 0.62 -
------- ------- -------- -------
Earnings available for common stock................... $ 0.89 $ 0.72 $ 2.39 $ 1.31
======= ======= ======== =======

DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Denominator for basic earnings per share
- weighted average shares............................ 69,382 67,554 68,619 66,766
Effect of dilutive securities:
Employee stock options............................... 4 - 1 -
Restricted share awards.............................. 224 40 120 24
Stock for compensation............................... 310 3 132 4
------- ------- -------- -------
Denominator for diluted earnings per share
- weighted average shares............................ 69,920 67,597 68,872 66,794
======= ======= ======== =======
</TABLE>

Electric Utility

31
<PAGE>

municipalized. See also "FERC Proceeding" below regarding a complaint filed
with the Federal Energy Regulatory Commission (FERC) against us by the City of
Wichita.

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. Western Resources, KGE and
the KCC staff reached an agreement on August 8, 2000, for Western Resources and
KGE to file a rate case on or before November 25, 2000. On September 18, 2000,
the KCC issued an order approving the agreement. Pursuant to this order, the
company will file an application for a change in rates by November 27, 2000,
which will include a cost allocation study and separate cost of service studies
for Western Resources and KGE, as well as revenue requirements on a combined
company basis by December 29, 2000.

FERC Proceeding: 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 asked that the FERC equalize the generation costs
between KPL and KGE, in addition to other matters. A hearing on the case was
held at FERC on October 11 and 12, 2000. On November 13, 2000, FERC dismissed
the complaint.

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. On May 26, 2000, we filed an application with the KCC
requesting approval of the funding of our decommissioning trust on this basis.
Approval was granted by the KCC on September 13, 2000.

Monitored Services Business

Attrition: Customer attrition has a direct impact on Protection One's
results of operations since it affects both its revenues and amortization
expense. Any significant change in the pattern of Protection One's historical
attrition experience would have a material effect on its results of operations.

Protection One experienced high levels of attrition for North America in
1999 with successive quarterly annualized attrition of 11.2%, 15.9%, 19.1%, and
16.3%. The quarterly annualized attrition rate for North America for each of the
first three successive quarters of 2000 was 11.9%, 14.2% and 18.3%.

In the second quarter of 2000, Protection One disclosed that they had
identified approximately 30,000 customer accounts which were either incorrectly
entered into its system, represented duplicate existing accounts or represented
accounts for which credit and collection activities had not occurred. These
accounts remained in Protection One's balance of customer accounts at the end of
the second quarter. During the third quarter Protection One completed its review
of these accounts by performing additional analysis and collection procedures.
Where necessary, Protection One discontinued its monitoring service and attrited
the account.

Our monitored services segment had a net decrease of 101,000 customers

32
<PAGE>

from September 30, 1999 to September 30, 2000. The decrease in customers is
primarily attributable to the significant decrease in the number of accounts
being purchased by Protection One from dealers which has not yet been offset by
purchases from other customer acquisition strategies.

Protection One does not expect its customer acquisitions to replace all
accounts lost through attrition at least through the first half of 2001.
Accordingly, Protection One's total customer base is likely to decline based
upon historical rates of attrition which is likely to result in declining
revenues. Protection One's current focus remains on the completion of its
current infrastructure projects, the development of cost effective marketing
programs, development of our commercial business and the generation of positive
cash flow.

Protection One responded by letter dated May 31, 2000, to each of the
comments contained in the Staff's May 16th letter, indicated its strong
disagreement with the views of the Staff and stated its belief that there are no
issues of "inflated earnings," "departures from GAAP," or "errors" in their
historic financial statements. Our and Protection One's independent public
accountants, Arthur Andersen LLP, indicated they concurred with the accounting
decisions of Protection One.

33
<PAGE>

acquisition of the security business of Westinghouse. The remaining two areas
related to the accounting for ordinary amortization of security accounts and the
accounting for the effects of unanticipated customer attrition. Among other
things, the Staff stated its view that aspects of Protection One's accounting
for the acquisition of the Westinghouse security business "could" be indicative
of "manipulative intent" -- a statement with which we and Protection One
strongly disagree.

By letter dated July 25, 2000, Protection One advised the Staff of
Protection One's strong disagreement with the views of the Staff regarding these
accounting matters. Arthur Andersen LLP has reviewed the correspondence, been
consulted on responses to the SEC and have confirmed to the SEC Staff that they
are not aware of modifications needed to fairly present our or Protection One's
historical financial statements.

In October 2000, Protection One was notified by the SEC of the Staff's
position on the outstanding open issues. The Staff has requested that Protection
One obtain an appraisal of the Westinghouse accounts and revise the purchase
price allocation for such accounts based on the fair value determined by such
appraisal, implement an eight-year accelerated amortization method on the
Westinghouse accounts, revalue a financing transaction secured by customer
accounts consistent with the results of the appraisal and reverse the $12.75
million write down recorded by Protection One in December 1997 of the value of
customer accounts acquired in the Westinghouse transaction. Upon completion of
the appraisal, the Staff has requested that Protection One restate its
historical financial statements to reflect such adjustments. Protection One is
in the process of hiring an appraiser to independently determine the fair value
of the Westinghouse accounts. Once completed, Protection One will evaluate the
results, communicate with the Staff of the SEC and decide upon the necessary
accounting revisions. Were we and Protection One to make revisions to our
financial statements, based upon our understanding of the Staff's request, such
revisions could result in a material adverse effect on Protection One's and our
financial position and results of operations.

At present, neither we nor Protection One are able to predict the outcome
of these accounting matters. To date, Protection One's discussions with the
Staff have occurred over 20 months and the process of resolving these matters
could extend over a protracted period. Neither we nor Protection One can predict
what action the Staff may take, including enforcement action, that will further
impact us or our financial statements, or the effect or timing of any such
action if taken.

Market Risk Disclosure

We are exposed to market risk, including changes in commodity prices,
equity instrument investment prices and interest rates. Since December 31, 1999,
we have not experienced any significant changes in our exposure to

34
<PAGE>

market risk except for the impacts of changes in our equity security portfolio
and in natural gas prices.

Decline in Equity Price Risk: During the nine months ended September 30,
2000, our balance in marketable securities declined approximately $169.9 million
from December 31, 1999, due to the sale of a significant portion of our
marketable security portfolio. The value of our marketable security portfolio
has declined significantly and we do not expect to be materially impacted by
changes in the market prices of our remaining investments.

Change in Commodity Price Exposure: We use a mix of various fuel types,
including natural gas, to operate our system which helps lessen our risk
associated with any one fuel type. Natural gas prices increased this summer
throughout the nation. From September 30, 1999, to September 30, 2000, we
experienced a 39% increase in our average cost per MMBtu for natural gas
purchased, or $0.92 per MMBtu. The higher natural gas prices increased our total
cost of gas purchased for the nine months ended September 30, 2000, by
approximately $8.4 million although we decreased the quantity burned by 2.0
million MMBtu. In an effort to mitigate natural gas price risk, we enter into
hedging agreements. These hedging agreements were utilized to minimize our
exposure to increased natural gas prices. Our future exposure to changes in
natural gas prices will be dependent upon the market prices for natural gas and
the extent and effectiveness of any hedging agreements which we may enter into.

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 continuing to evaluate commodity contracts,
financial instruments and other contracts to determine if they will be
considered derivatives under SFAS 133. Through the end of the third quarter, we
have identified derivatives utilized in our energy trading and risk management
activities. Our energy trading contracts are currently recorded at fair value on
the balance sheet, with the changes in the fair value included in net income, in
accordance with Emerging Issues Task Force Issue No. 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities." 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, and be able to quantify
its effects.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------

Information relating to the 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.

36
<PAGE>

WESTERN RESOURCES, INC.
Part II Other Information

ITEM 1. LEGAL PROCEEDINGS
--------------------------

The company, its subsidiary Westar Industries, 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 ("Amended Complaint"). Plaintiffs purported 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 Principles (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
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 Industries 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. On June 12, 2000,
the company, Protection One and the other defendants filed motions to dismiss in
part the Amended Complaint. On August 31, 2000, the plaintiff's filed their
papers in opposition to our motions. These motions are currently pending. The
company and Protection One believe that all the claims asserted in the Amended
Complaint are without merit, however 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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

None

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<PAGE>

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 Nine Months Ended
September 30, 2000 (filed electronically)

Exhibit 27 - Financial Data Schedule (filed electronically)

(b) Reports on Form 8-K filed during the quarter ended September 30, 2000:

Form 8-K filed July 28, 2000 - Press release disclosing the status
of the SEC Staff review of Protection One and Western Resources
accounting matters.

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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 November 13, 2000 By /s/ JAMES A. MARTIN
--------------------------------- --------------------------------------
James A. Martin
Senior Vice President
and Treasurer

Date November 13, 2000 By /s/ LEROY P. WAGES
--------------------------------- --------------------------------------
Leroy P. Wages, Controller