<PAGE>
UNITED STATES
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 1-3562
UTILICORP UNITED INC.
(Exact name of registrant as specified in its charter)
Delaware 44-0541877
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 West Ninth Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 816-421-6600
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
registrant's classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 3, 1998
Common Stock, $1 par value 53,753,800
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Information regarding the consolidated condensed financial
statements is set forth on pages 3 through 14.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and
results of operations can be found on pages 15 through 26.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits and Reports on Form 8-K can be found on page 27.
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UTILICORP UNITED INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME--UNAUDITED
<TABLE>
<CAPTION>
Quarter Ended September 30,
DOLLARS IN MILLIONS 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Sales $3,808.6 $2,256.5
Cost of sales 3,560.9 2,019.5
- ---------------------------------------------------------------------------------------
GROSS PROFIT 247.7 237.0
- ---------------------------------------------------------------------------------------
Operating, administrative and maintenance expense 149.6 142.6
Depreciation and amortization 37.2 32.6
- ---------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 60.9 61.8
- ---------------------------------------------------------------------------------------
Other income (expense):
Equity in earnings from investments and partnerships 24.1 16.7
Other income 3.9 5.3
Minority interest and other expense (3.3) (5.8)
- ---------------------------------------------------------------------------------------
Total other income 24.7 16.2
- ---------------------------------------------------------------------------------------
EARNINGS BEFORE INTEREST AND TAXES 85.6 78.0
- ---------------------------------------------------------------------------------------
Interest expense:
Interest expense - long-term debt 27.7 28.2
Interest expense - short-term debt 6.9 3.9
Minority interest in income of partnership 2.2 2.2
- ---------------------------------------------------------------------------------------
Total interest expense 36.8 34.3
- ---------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 48.8 43.7
Income taxes 20.3 18.8
- ---------------------------------------------------------------------------------------
NET INCOME 28.5 24.9
- ---------------------------------------------------------------------------------------
EARNINGS AVAILABLE FOR COMMON SHARES $ 28.5 $ 24.9
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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UTILICORP UNITED INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME--UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
DOLLARS IN MILLIONS 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Sales $9,269.0 $5,866.2
Cost of sales 8,557.6 5,158.3
- --------------------------------------------------------------------------------------
GROSS PROFIT 711.4 707.9
- --------------------------------------------------------------------------------------
Operating, administrative and maintenance expense 412.4 411.6
Depreciation and amortization 110.3 95.7
Provision for asset impairments 27.7 26.5
- --------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 161.0 174.1
- --------------------------------------------------------------------------------------
Other income (expense):
Equity in earnings from investments and partnerships 107.3 54.1
Merger termination fee - 53.0
Other income 15.3 12.2
Minority interest and other expense (23.0) (18.4)
- --------------------------------------------------------------------------------------
Total other income 99.6 100.9
- --------------------------------------------------------------------------------------
EARNINGS BEFORE INTEREST AND TAXES 260.6 275.0
- --------------------------------------------------------------------------------------
Interest expense:
Interest expense - long-term debt 88.9 85.7
Interest expense - short-term debt 10.8 8.5
Minority interest in income of partnership 6.7 6.7
- --------------------------------------------------------------------------------------
Total interest expense 106.4 100.9
- --------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 154.2 174.1
Income taxes 58.9 71.0
- --------------------------------------------------------------------------------------
EARNINGS BEFORE EXTRAORDINARY ITEM 95.3 103.1
Loss on extinguishment of debt (net of income tax of $4.5) - 7.2
- --------------------------------------------------------------------------------------
NET INCOME 95.3 95.9
Preference dividends - .3
- --------------------------------------------------------------------------------------
EARNINGS AVAILABLE FOR COMMON SHARES $ 95.3 $ 95.6
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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UTILICORP UNITED INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
DOLLARS IN MILLIONS 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 166.2 $ 89.5
Funds on deposit 35.0 31.5
Accounts receivable, net 1,031.1 1,165.1
Inventories and supplies, at average cost 217.4 134.6
Price risk management assets 109.1 121.5
Prepayments and other 44.5 72.2
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,603.3 1,614.4
- ----------------------------------------------------------------------------------------------
Property, plant and equipment, net 2,492.1 2,480.3
Investments in subsidiaries and partnerships 672.6 691.2
Price risk management assets 183.7 161.5
Deferred charges 158.2 166.1
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $5,109.9 $5,113.5
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 79.3 $ 149.6
Short-term debt 383.8 113.8
Accounts payable 1,248.9 1,356.3
Accrued liabilities 72.4 13.8
Price risk management liabilities 125.9 123.7
Other current liabilities 87.2 52.7
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,997.5 1,809.9
- ----------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt, net 1,231.0 1,358.6
Deferred income taxes and credits 380.3 362.7
Price risk management liabilities 147.4 170.5
Minority interest 57.9 59.0
Other deferred credits 101.1 89.2
- ----------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 1,917.7 2,040.0
- ----------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable preferred securities
of partnership 100.0 100.0
Common shareowners' equity 1,094.7 1,163.6
Commitments and contingencies
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $5,109.9 $5,113.5
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
UTILICORP UNITED INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME--UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOLLARS IN MILLIONS 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
Net Income $28.5 $24.9 $95.3 $95.9
Other comprehensive income (loss)
Unrealized translation adjustments (10.3) (4.7) (26.5) (10.4)
- ---------------------------------------------------------------------------------------------------------
Comprehensive Income $18.2 $20.2 $68.8 $85.5
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF COMMON SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
DOLLARS IN MILLIONS 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
Common Stock: authorized 200,000,000 shares, par value
$1 per share; 53,753,800 shares issued at September 30,
1998 and December 31, 1997; authorized 20,000,000 shares of Class A
common stock, par value $1 per share, none issued
$ 53.8 $ 53.8
Premium on Capital Stock 986.6 999.1
Retained Earnings 175.4 152.8
Treasury Stock, at cost (1,619,251 and 235,075 shares at September 30,
1998 and December 31, 1997, respectively) (63.3) (10.8)
Accumulated Other Comprehensive Losses (57.8) (31.3)
- --------------------------------------------------------------------------------------------------------
TOTAL COMMON SHAREOWNERS' EQUITY $1,094.7 $1,163.6
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
UTILICORP UNITED INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS--UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
DOLLARS IN MILLIONS 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $95.3 $95.9
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization 110.3 95.7
Net changes in price risk management assets and liabilities (30.7) (12.4)
Deferred income taxes and credits 17.6 30.7
Equity in earnings from investments and partnerships (81.7) (54.1)
Dividends from investments and partnerships 25.3 25.0
Minority interests 2.0 5.3
Gain on sale of subsidiary stock (25.5) -
Provision for asset impairments 27.7 26.5
Loss on extinguishment of debt - 7.2
Changes in certain assets and liabilities:
Accounts receivable, net 139.5 33.1
Accounts receivable, sold - 45.0
Inventories and supplies (82.8) (30.4)
Prepayments and other 27.7 (20.5)
Deferred charges, net 7.9 8.2
Accounts payable (107.4) 91.6
Accrued liabilities, net 58.6 1.7
Other 41.1 (59.6)
- ----------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 224.9 288.9
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions (89.4) (117.0)
Redemption of investment in debt securities 100.1 -
Investments in international businesses (82.6) (3.6)
Other (43.3) (28.4)
- -----------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (115.2) (149.0)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
UTILICORP UNITED INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS--UNAUDITED, CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
DOLLARS IN MILLIONS 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock $ - $13.2
Treasury stock (acquired)/sold (52.5) 2.6
Issuance of long-term debt 26.4 20.1
Retirement of long-term debt (179.7) (106.5)
Retirement of preference stock - (25.0)
Short-term borrowings (repayments), net 257.8 (.1)
Cash dividends paid (72.7) (71.0)
Other (12.3) (1.3)
- ------------------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES (33.0) (168.0)
- ------------------------------------------------------------------------------------
Increase in cash and cash equivalents 76.7 (28.1)
Cash and cash equivalents at beginning of period 89.5 137.1
- ------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $166.2 $109.0
- ------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
8
<PAGE>
UTILICORP UNITED INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with the accounting policies
described in the consolidated financial statements and related notes included
in UtiliCorp's 1997 Annual Report on Form 10-K. It is suggested that those
consolidated financial statements be read in conjunction with this report.
The year end financial statements presented were derived from audited
financial statements of UtiliCorp United Inc. (the company or UtiliCorp), but
do not include all disclosures required by generally accepted accounting
principles. In the opinion of management, the accompanying consolidated
condensed financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary for a fair representation of the
financial position of the company and the results of its operations. Certain
estimates and assumptions that affect reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of sales and expenses during the reporting periods shown have been made in
preparing the consolidated condensed financial statements. Actual results
could differ from these estimates.
Certain prior year amounts in the consolidated financial statements
have been reclassified where necessary to conform to the 1998 presentation.
FINANCIAL INSTRUMENTS
TRADING OPERATIONS
The company uses a variety of financial instruments in connection
with price risk management services provided by Aquila Energy Corporation, a
wholly-owned subsidiary of the company. These financial instruments include
forward contracts which commit the company to purchase or sell energy in the
future; swap agreements which require payment to (or receipt of payments
from) counterparties based on the differential between specific prices for
the related commodity; futures and options contracts traded on the New York
Mercentile Exchange and other contractual arrangements. The value of all the
financial instruments used for price risk management activities are recorded
at market value with changes in value reflected in the statement of income.
9
<PAGE>
NON-TRADING ACTIVITIES FOR COMMODITY OPERATIONS
The company utilizes various exchange-traded and over-the-counter
financial instrument contracts to hedge anticipated purchases and sales of
natural gas and natural gas liquids. The financial instruments used are
futures, options, forward contracts and price and basis swaps. Financial
instruments used for non-trading activities are designated as a hedge at
inception where there is a direct relationship to the price risk associated
with the company's future sales and purchases of commodities used in the
company's operations. Financial instruments used to hedge anticipated
transactions are accounted for under the deferral method with gains and
losses on these transactions recognized in sales when the hedged transaction
occurs.
10
<PAGE>
UTILICORP UNITED INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
2. EARNINGS PER SHARE
The following table shows the amounts used in computing basic and
dilutive earnings per share and the effect on income and weighted average
number of shares of dilutive potential common stock for the three months and
nine months ending September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
IN MILLIONS, EXCEPT PER SHARE AMOUNTS September 30, September 30,
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
Earnings available for common shares $28.5 $24.9 $95.3 $95.6
Interest expense on convertible bonds - .1 .2 .2
- --------------------------------------------------------------------------------------------------------
Earnings available for common shares after
assumed conversion of dilutive securities $28.5 $25.0 $95.5 $95.8
- --------------------------------------------------------------------------------------------------------
Earnings per share:
Basic:
Earnings before extraordinary item $.55 $.46 $1.80 $1.91
Loss on retirement of debt -- -- -- (.13)
- --------------------------------------------------------------------------------------------------------
Earnings available for common shares $.55 $.46 $1.80 $1.78
- --------------------------------------------------------------------------------------------------------
Diluted:
Earnings before extraordinary item $.54 $.46 $1.77 $1.91
Loss on retirement of debt -- -- -- (.13)
- --------------------------------------------------------------------------------------------------------
Earnings available for common shares $.54 $.46 $1.77 $1.78
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Weighted average number of common shares
used in basic EPS 52.20 53.76 53.06 53.56
Per Share effect of dilutive securities:
Stock options .55 .08 .60 .09
Convertible bonds .23 .25 .23 .27
- --------------------------------------------------------------------------------------------------------
Weighted number of common shares and dilutive
potential common shares used in diluted EPS 52.98 54.09 53.89 53.92
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
UTILICORP UNITED INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
3. REGULATORY MATTER
In March 1998, the Missouri Public Service Commission ordered the
company to reduce its annual electric rates in Missouri by $16.9 million and
increase depreciation expense by $5.8 million beginning in April 1998. The
impact of this order will reduce EBIT by $16.3 million in 1998 and reduce
EBIT by $22.7 million in 1999 and beyond.
4. UNITED KINGDOM GAS SUPPLY CONTRACTS
In July 1998, United Gas, a wholly-owned subsidiary of UtiliCorp,
lost a long-standing dispute on a take-or-pay gas supply contract with a gas
supplier. United Gas and the supplier were disputing whether the supplier
made proper deliveries pursuant to the supply contract, which would enable
United Gas to avoid paying the required contract price. United Gas paid the
supplier the prevailing market prices which were lower than the contract
price. The difference between the two prices accumulated to approximately $38
million which had been previously recorded as a liability.
In a court ruling, a judge ordered United Gas to pay the gas cost
amount in accordance with the contract. In addition, United Gas is required
to pay interest to the supplier on the $38 million. This is estimated at
approximately $6.8 million.
In June 1998, UtiliCorp paid $25.6 million to a third party to
cancel two take-or-pay contracts effective April 1, 1998, that required the
company to take gas at significantly above market prices until 2005. The
third party also canceled UtiliCorp's obligations under a guarantee related
to the contracts. Between 1995 and 1997, the company reserved $19.0 million
against the estimated future losses on these contracts resulting in an
additional net settlement loss of $6.6 million.
5. COMPLETION OF AUSTRALIAN INITIAL PUBLIC OFFERING
In May 1998, UtiliCorp recorded a $.47 per share gain to reflect the
completed initial public offering of United Energy Limited (UEL). UEL sold
42% of its common stock, reducing UtiliCorp's ownership share in UEL from
12
<PAGE>
49.9% to 29%. Concurrent with the offering, UtiliCorp acquired an additional
5% in UEL from a prior joint venture partner. UtiliCorp's current ownership
is 34%.
6. PROVISION FOR ASSET IMPAIRMENTS
Retail Gas Marketing Assets
As part of a strategic planning process that was concluded in June,
the company's retail strategy was integrated into the company's networks and
energy merchant strategies. This strategy change altered the business plan
for certain retail businesses that were marginal performers. In addition,
certain retail gas marketers were acquired under a strategic plan that
assumed that retail markets would be competitive; however, the retail market
remains regulated. Given this business environment, the cash flows from these
businesses will not fully recover the price paid for the assets, requiring a
writedown of $13.2 million. This writedown is comprised of the following
items.
<TABLE>
<S> <C>
Retail gas marketing assets $10.7
Other 2.5
-----
Total $13.2
-----
</TABLE>
Independent Power Project (IPP) Investment
As part of a strategic evaluation, the company determined that its
IPP assets are not part of its core businesses and it is now in the process
of considering various alternatives. Through this strategic planning process,
a project-by-project review was performed and it was determined that the cash
flow from one of the IPP projects was not sufficient to recover invested
capital. As a result, a $6.5 million impairment was recorded.
EnergyOne L.L.C. Liquidation
In April 1998, UtiliCorp and PECO Energy Company (PECO) agreed to
disband the EnergyOne-SM- L.L.C. joint venture in recognition that a fully
competitive marketplace did not materialize as originally anticipated.
EnergyOne L.L.C. offered utilities a branded line of energy products and
services and other consumer services, all of which could be billed together.
With the pace of deregulation much slower than was assumed in its strategic
plan, EnergyOne L.L.C. was unable to sell its concept to other utilities. In
13
<PAGE>
connection with the disbanding of EnergyOne L.L.C., the company recorded an
$8.0 million reserve to cover severance costs, contract termination costs,
and asset write-offs. The company is continuing to use the EnergyOne brand in
its own utility service territories.
7. NEW ZEALAND ACQUISITION
In October 1998, the company acquired an additional 41% interest in
Power New Zealand Limited's (PNZ) common stock for approximately $206
million. The company's total ownership in PNZ after the additional investment
is 78.6%. Concurrent with this acquisition, the company sold its 39.6%
interest in WEL Energy Group and bought out the minority shareholder in the
company's New Zealand subsidiary. The acquisition will be recorded as a
purchase.
8. REPORTABLE SEGMENT RECONCILIATION
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOLLARS IN MILLIONS 1998 1997 1998 1997
- -----------------------------------------------------------------------------------
Sales:
Energy Delivery $214.5 $203.2 $825.9 $895.7
Generation 117.0 91.6 285.8 233.8
Aquila Gas Pipeline 202.7 254.3 705.9 736.0
Aquila Energy Marketing 3,197.1 1,650.4 7,172.0 3,785.4
International 78.8 55.8 280.7 211.8
Corporate/Other (1.5) 1.2 (1.3) 3.5
- -----------------------------------------------------------------------------------
Total $3,808.6 $2,256.5 $9,269.0 $5,866.2
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
EBIT
Energy Delivery $34.4 $29.8 $117.4 $121.6
Generation 30.8 20.0 59.0 56.5
Aquila Gas Pipeline 2.0 10.5 14.7 33.3
Aquila Energy Marketing 11.5 12.3 11.9 7.2
International 14.1 14.6 75.9 40.4
Corporate/Other (7.2) (9.2) (18.3) 16.0
- -----------------------------------------------------------------------------------
Total $85.6 $78.0 $260.6 $275.0
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
UTILICORP UNITED INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EXCEPT WHERE NOTED, THE FOLLOWING DISCUSSION REFERS TO THE
CONSOLIDATED ENTITY, UTILICORP UNITED INC. THE BUSINESS SEGMENTS OF THE
COMPANY INCLUDE THE FOLLOWING BUSINESS GROUPS: UTILICORP ENERGY DELIVERY
(UED), CONSISTING PRIMARILY OF TRANSMISSION AND DISTRIBUTION UTILITY
OPERATIONS; AQUILA ENERGY CORPORATION (AQUILA), CONSISTING PRIMARILY OF
ENERGY MARKETING (BOTH GAS AND ELECTRIC), AND GAS PROCESSING, GATHERING AND
TRANSMISSION; AND GENERATION, CONSISTING OF DOMESTIC ELECTRIC GENERATION AND
INDEPENDENT POWER PROJECTS. THE COMPANY ALSO HAS VARIOUS OPERATIONS THAT
INCLUDE GENERATION, GAS MARKETING, ELECTRIC DISTRIBUTION AND VARIOUS EQUITY
INVESTMENTS THAT ARE DISCUSSED IN THE INTERNATIONAL SECTION OF THIS REPORT.
THE LIQUIDITY AND CAPITAL RESOURCES SECTION IS PREPARED ON A CONSOLIDATED
BASIS.
FORWARD-LOOKING INFORMATION
This Form 10-Q contains forward-looking information. Although the
company believes that its expectations are based on reasonable assumptions,
it can give no assurance that its goals will be achieved. Important factors
that could cause actual results to differ materially from those in the
forward looking statements herein include changes in the prices of natural
gas, natural gas liquids and electricity, future deregulation initiatives and
their regulatory actions against the company, specifically, the successful
rollout of future products and services directly or through alliances,
changes in the future state or federal income tax rates and laws, changes in
the Canadian, Australian, New Zealand and British currencies relative to the
U.S. dollar and changes in interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the company's liquidity and capital
resources are sufficient and provide adequate financial flexibility. The
company's operations have historically generated strong positive cash flow,
which, along with the company's credit lines, accounts receivable sales
programs, common stock offerings and ability to issue public debt, have
provided adequate liquidity to meet the company's short-term and long-term
cash requirements, including requirements for acquisitions.
15
<PAGE>
The company uses its $280 million accounts receivable sales programs
to efficiently manage its working capital and provide immediate liquidity.
These programs were fully utilized at September 30, 1998. In addition to the
accounts receivable sales program, the company can issue up to $150 million
of commercial paper which is supported by a $250 million revolving credit
agreement. The company had $120 million of commercial paper borrowings at
September 30, 1998. The company anticipates that it will pursue loaning funds
to third parties prospectively to underwrite energy related contracts with
Aquila Energy.
SIGNIFICANT BALANCE SHEET MOVEMENTS
Total assets decreased $3.6 million since December 31, 1997. Working
capital, defined as current assets minus current liabilities excluding
interest-bearing debt, increased to $68.9 million compared to $67.9 million.
The company's inventory balance increased $82.8 million primarily due to
additional gas in storage for the upcoming winter heating season. The
additional inventory is held by Aquila Energy and will be used for
non-regulated purposes.
Cash balances also increased by $76.7 million at September 30,
1998, compared to December 31, 1997, primarily related to the timing of
scheduled payments over the reporting date. The increases in current assets
mentioned above is partially offset by increases in accrued liabilities of
$58.6 million and other liabilities of $34.5 million. These increases are due
to changes related to gas costs and timing of tax payments.
Short and long-term debt increased $72.1 million at September 30,
1998, compared to December 31, 1997, primarily due to settling gas supply
contracts, acquiring common stock and acquisition of additional ownership
interest in Power New Zealand last June.
Common shareholders equity decreased by $68.9 million at September
30, 1998, compared to December 31, 1997 due to acquiring treasury shares and
depreciating foreign currencies. The company acquired its common stock to
fund its existing stock plans and other corporate purposes.
RESULTS OF OPERATIONS
The results of operations for the 1998 and 1997 periods have been
impacted by several items which do not have a continuing effect on the
company's financial position or results of operations. The consolidated table
below summarizes the impact of the non-recurring items on earnings before
interest and taxes (EBIT) and diluted earnings per share (EPS).
16
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended September 30, Nine Months Ended September 30,
- ---------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
EBIT EPS EBIT EPS EBIT EPS EBIT EPS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS REPORTED $85.6 $.54 $78.0 $.46 $260.6 $1.77 $275.0 $1.78
NON-RECURRING ITEMS:
Merger termination fee (a) - - - - - - (53.0) (.61)
Provision for asset impairments (b) - - - - 27.7 .30 26.5 .30
UK contract settlements (c) - - - - 13.4 .15 6.5 .07
Loss on extinguishment of debt (d) - - - - - - - .13
Australia Initial Public Offering (e) - - - - (45.3) (.47) - -
- ----------------------------------------------------------------------------------------------------------------
NORMALIZED $85.6 $.54 $78.0 $.46 $256.4 $1.75 $255.0 $1.67
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
a) In 1997, Kansas City Power & Light (KCPL) paid the company a $53 million
termination fee which was recorded as other income in the first quarter of
1997. The payment was required when Western Resources Inc. and KCPL signed
a definitive agreement to merge.
b) In 1997, the company recorded a provision for impaired assets of $26.5
million related to certain technology and royalty assets. In 1998, the
company recorded a $27.7 million provision for impaired assets relating to
certain retail gas marketing assets, termination of EnergyOne L.L.C., and
the write-off of an independent power project.
c) In 1997, the company recorded a $5.0 million reserve against earnings for
unfavorable gas supply contracts in the United Kingdom. In 1998, the
company settled two above-market gas contracts at a net loss of $6.6
million. In addition, a court ruled against the company on a disputed gas
supply contract requiring the company to record $6.8 million in interest
related to the contract.
d) In 1997, the company retired, at a premium, $69.1 million of 10.5% debt.
The transaction resulted in an extraordinary loss of $7.2 million, net of
an income tax benefit of $4.5 million.
e) In 1998, United Energy Limited (UEL) sold to the public 42% of its common
stock resulting in a $45.3 million gain for UtiliCorp.
Normalized earnings or normalized income are terms used by management
to describe the recurring earnings or income of the company. These terms are not
meant to replace net income or other measures under generally accepted
accounting principles.
17
<PAGE>
ENERGY DELIVERY
The table below summarizes the operations of UtiliCorp Energy Delivery for the
following periods:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOLLARS IN MILLIONS 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------
Sales:
Electric $205.9 $173.7 $492.8 $424.5
Gas 65.4 69.7 445.4 524.2
Other 60.2 51.4 173.5 180.8
Purchases from Generation (117.0) (91.6) (285.8) (233.8)
- -----------------------------------------------------------------------------------------------
Total net sales 214.5 203.2 825.9 895.7
- -----------------------------------------------------------------------------------------------
Cost of sales:
Electric 3.5 3.2 10.6 10.5
Gas 28.1 32.4 262.0 329.5
Other 48.5 43.7 144.9 154.3
- -----------------------------------------------------------------------------------------------
Total cost of sales 80.1 79.3 417.5 494.3
- -----------------------------------------------------------------------------------------------
Gross profit 134.4 123.9 408.4 401.4
- -----------------------------------------------------------------------------------------------
Operating expenses:
Other operating 56.2 56.2 161.6 171.0
Maintenance 9.2 7.7 24.1 20.3
Taxes, other than income taxes 14.5 14.7 40.4 41.5
Depreciation and amortization 20.4 17.7 63.6 49.6
Provision for asset impairments - - 2.5 2.5
- -----------------------------------------------------------------------------------------------
Total operating expenses 100.3 96.3 292.2 284.9
- -----------------------------------------------------------------------------------------------
Other income .3 2.2 1.2 5.1
- -----------------------------------------------------------------------------------------------
EBIT 34.4 29.8 117.4 121.6
Non-recurring items:
Provision for asset impairments - - 2.5 2.5
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Normalized EBIT $34.4 $29.8 $114.9 $119.1
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
QUARTER-TO-QUARTER
Normalized EBIT increased $4.6 million or 15%, in the 1998 quarter
compared to 1997. This increase is primarily due to favorable weather and
increased usage of $7.5 million, a $3.1 million increase related to customer
growth and a $2.2 million increase related to a recovery plan to mitigate
mild winter weather experienced in the first quarter. The recovery plan
primarily consists of delays of certain expenditures and other discretionary
actions. Offsetting part of these increases was the Missouri rate reduction
which reduced EBIT by $8.2 million. The total ordered decrease is $16.9
million plus $5.8 million in increased depreciation. The annual impact for
1998 will reduce EBIT by $16.3 million and $22.7 million in 1999 and beyond.
18
<PAGE>
YEAR-TO-DATE
Normalized EBIT decreased $4.2 million in the 1998 period compared
to the 1997 period. This decrease is due to milder than normal weather which
reduced EBIT by $6.9 million in 1998 compared to 1997, reduced electric rates
in Missouri which decreased EBIT by $10.3 million partially offset by an
increase to EBIT for customer growth and usage of $15.9 million and the
impacts of the recovery plan discussed above.
In the second quarter of 1998, a $2.5 million provision for an asset
impairment was recorded. See footnote 6 for more information.
GENERATION
The table below summarizes the operations of Generation for the following
periods:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOLLARS IN MILLIONS 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------
Sales to affiliate and other $117.0 $91.6 $285.8 $233.8
Cost of sales 71.9 55.0 175.6 133.7
- ---------------------------------------------------------------------------------------------
Gross profit 45.1 36.6 110.2 100.1
- ---------------------------------------------------------------------------------------------
Operating expenses:
Other operating 14.5 12.2 40.3 35.5
Maintenance 3.0 4.1 10.6 11.6
Taxes, other than income taxes 1.7 1.7 5.3 5.2
Depreciation and amortization 6.7 4.1 15.7 12.1
Provision for asset impairments - - 6.5 -
- ---------------------------------------------------------------------------------------------
Total operating expenses 25.9 22.1 78.4 64.4
- ---------------------------------------------------------------------------------------------
Equity in earnings of investments
and partnerships 11.6 5.5 27.2 20.5
Other income (expense) - - - .3
- ---------------------------------------------------------------------------------------------
EBIT 30.8 20.0 59.0 56.5
Non-recurring items:
Provision for asset impairments - - 6.5 -
- ---------------------------------------------------------------------------------------------
Normalized EBIT $30.8 $20.0 $65.5 $56.5
- ---------------------------------------------------------------------------------------------
EBIT by business subunit:
Regulated power $19.6 $15.0 $39.5 $37.7
IPP 11.2 5.0 26.0 18.8
- ---------------------------------------------------------------------------------------------
Total $30.8 $20.0 $65.5 $56.5
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
QUARTER-TO-QUARTER
Normalized EBIT increased $10.8 million in the 1998 quarter compared
to the 1997 quarter. Approximately $6.2 million of the increase is from the
IPP business and the remaining from regulated power. EBIT from the IPP
business was positively impacted by a $3.6 million gain on the partial sale
of an IPP project, the impact of a generator failure at a project in 1997 and
improved project performance at various projects.
Regulated Power's EBIT increased $4.6 million due to increased
demand for power from Energy Delivery and for power sold off-system.
YEAR-TO-DATE
Normalized EBIT increased $9.0 million in the 1998 period compared
to the 1997 period. This increase is primarily due to the factors outlined in
the quarter discussion above.
Projected Capacity Requirements
The company projects that it will need approximately 500 mw's by
2001 to replace expiring purchased power contracts and to meet the growing
power demands from regulated customers. The company is evaluating various
alternatives that include building or contracting for this additional capacity.
20
<PAGE>
AQUILA ENERGY
The table below summarizes the operations of Energy Marketing and Aquila Gas
Pipeline for the following periods:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOLLARS IN MILLIONS 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------
Sales:
Energy marketing $3,197.1 $1,650.4 $7,172.0 $3,785.4
Aquila Gas Pipeline 202.7 254.3 705.9 736.0
- -----------------------------------------------------------------------------------------------------
Total sales 3,399.8 1,904.7 7,877.9 4,521.4
- -----------------------------------------------------------------------------------------------------
Cost of sales:
Cost of energy marketing 3,162.5 1,615.1 7,080.7 3,713.9
Aquila Gas Pipeline 184.6 226.9 643.5 642.7
- -----------------------------------------------------------------------------------------------------
Total cost of sales 3,347.1 1,842.0 7,724.2 4,356.6
- -----------------------------------------------------------------------------------------------------
Gross profit 52.7 62.7 153.7 164.8
- -----------------------------------------------------------------------------------------------------
Operating expenses:
Operating and maintenance 31.8 30.5 88.4 81.3
Depreciation, depletion and 7.4 7.0 22.4 19.9
amortization
Provision for asset impairments - - 10.7 15.5
- -----------------------------------------------------------------------------------------------------
Total operating expenses 39.2 37.5 121.5 116.7
- -----------------------------------------------------------------------------------------------------
Minority interest expense and other - 2.4 5.6 7.6
- -----------------------------------------------------------------------------------------------------
EBIT 13.5 22.8 26.6 40.5
Non-recurring items:
Provision for asset impairments - - 10.7 15.5
- -----------------------------------------------------------------------------------------------------
Normalized EBIT $13.5 $22.8 $37.3 $56.0
- -----------------------------------------------------------------------------------------------------
EBIT by business subunit:
Energy marketing $11.5 $12.3 $21.9 $14.6
Aquila Gas Pipeline 2.0 10.5 15.4 41.4
- -----------------------------------------------------------------------------------------------------
Total $13.5 $22.8 $37.3 $56.0
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
QUARTER-TO-QUARTER
Aquila Energy's normalized EBIT for the 1998 quarter decreased by
$9.3 million compared to the 1997 quarter. Approximately $8.5 million of this
decrease is attributable to the Aquila Gas Pipeline (AQP) operation.
AQP's EBIT was adversely impacted in 1998 by a $.09 per gallon or
28% decline in natural gas liquid (NGL) prices between the quarters stemming
from the downward pricing trend that has occurred all year. NGL prices tend
to move directly with oil prices which have fallen in 1998 compared to 1997.
In addition to NGL prices, NGL production volumes have decreased by 14,000
gallons per day or 37%. The NGL production decline is due to several factors.
The type of wells currently being drilled in the Austin Chalk, AQP's primary
gathering area, are deeper wells which produce dryer gas and less NGL's. In
addition, AQP is voluntarily bypassing lower NGL
21
<PAGE>
content gas due to the low NGL prices. NGL prices and production volumes are
expected to continue to be lower than in 1997 during the fourth quarter.
Energy Marketing's EBIT in 1998 was slightly below 1997 EBIT. A
growing proportion of EBIT is now coming from longer term contracts which is
expected to continue through the fourth quarter. During the quarter, EBIT
from Power Trading continued to post marked increases over 1997 results.
Power volumes increased 80% in the 1998 quarter compared to 1997.
The strong power marketing results in 1998 were offset by lower gas
marketing compared to 1997. In 1997, gas marketing had strong results and the
pricing environment provided profitable opportunities. In 1998, the pricing
environment was less volatile providing less opportunities than in 1997. Gas
marketing volumes have increased 32% to 9.5 billion cubic feet per day
compared to 7.2 billion cubic feet per day. The large volume increases in gas
and power marketing caused sales and cost of sales to increase in 1998 over
1997. The results from gas marketing and power marketing can vary from
quarter to quarter. The company manages the risk of earnings fluctuations by
having multiple portfolios that pertain to products, regions, and
commodities. Through a diverse total portfolio, earnings volatility is
believed to be mitigated.
YEAR-TO-DATE
Aquila Energy's normalized EBIT in the 1998 period decreased by
$18.7 million compared to the same period in 1997. The decrease is due to a
$26.0 million decrease in AQP's EBIT. AQP's EBIT decreased due to a 26%
decline in NGL prices, a 33% decline in NGL production and a 7% decline in
throughput volumes. The declines in NGL prices and production are for similar
reasons discussed in the quarter section. The decline in pipeline throughput
volumes was due to less drilling activity in AQP's gathering area resulting from
lower commodity prices. The throughput volumes in the third quarter of 1998
were 3% better than in 1997.
Energy Marketing EBIT increased $7.3 million in the 1998 period
compared to 1997. The increase relates primarily to the strong second quarter
performance from power marketing partially offset by lower gas marketing
results. In the second quarter, power prices were very volatile resulting
from hot temperatures, particularly in June. This pricing volatility
environment presented a positive opportunity to take profitable positions in
the market. In addition to strong power marketing results in 1998, the
portfolio value was enhanced by changes in the credit quality of certain
counterparties and regulatory changes.
22
<PAGE>
TERMINATED SALE OF AQUILA GAS PIPELINE
On August 6, 1998, AQP announced that it is no longer considering
selling the company. In March, AQP retained Merrill Lynch to explore various
strategic alternatives, including the possible sale of AQP, and has
determined that more value can be achieved through other means.
INTERNATIONAL
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOLLARS IN MILLIONS 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------
Sales:
Electric (Canada) $20.7 $20.2 $63.6 $66.4
Gas Marketing (primarily United
Kingdom) 58.1 35.6 217.1 145.4
- -------------------------------------------------------------------------------------------
Total Sales 78.8 55.8 280.7 211.8
- -------------------------------------------------------------------------------------------
Cost of Sales:
Cost of fuel and purchased
power (Canada) 7.4 6.2 22.5 20.8
Cost of gas marketing (United
Kingdom) 54.1 35.4 215.5 148.9
- -------------------------------------------------------------------------------------------
Total Cost of sales 61.5 41.6 238.0 169.7
- -------------------------------------------------------------------------------------------
Gross Profit 17.3 14.2 42.7 42.1
- -------------------------------------------------------------------------------------------
Operating expenses:
Operating and maintenance 7.3 7.7 21.5 22.8
Taxes, other than income taxes 3.0 2.9 9.2 8.6
Depreciation and amortization 2.7 2.7 8.6 8.3
- -------------------------------------------------------------------------------------------
Total Expense 13.0 13.3 39.3 39.7
- -------------------------------------------------------------------------------------------
Equity earnings in subsidiaries
and partnerships 8.9 11.5 77.2 34.3
Other income .9 2.2 (4.7) 3.7
- -------------------------------------------------------------------------------------------
EBIT 14.1 14.6 75.9 40.4
Non-recurring item :
Gain on sale - - (45.3) -
UK gas contracts reserve - - 13.4 5.0
- -------------------------------------------------------------------------------------------
Normalized EBIT $14.1 $14.6 $44.0 $45.4
- -------------------------------------------------------------------------------------------
EBIT by business subunit:
Australia $4.9 $7.0 $19.4 $23.0
New Zealand 2.9 2.5 8.1 7.8
United Kingdom 1.2 (2.1) .4 (4.7)
Canada 5.1 7.2 16.1 19.3
- -------------------------------------------------------------------------------------------
Normalized EBIT $14.1 $14.6 $44.0 $45.4
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
QUARTER-TO-QUARTER
Normalized EBIT in the 1998 quarter was $.5 million below the 1997
quarter. The decrease is due to the lower ownership interest in Australia
stemming from the initial public offering in May (discussed in more detail
below) and lower earnings from short-term investments in Canada.
23
<PAGE>
EBIT was favorably impacted by increased earnings from the United
Kingdom (UK) related to increased commodity trading margins, increased number
of customers and the settlement of the Midlands gas contracts.
The UK operation continues to expand its indirect customers in 1998.
For the 1998 quarter compared to the 1997 quarter, UK's customers in 1998
increased 264,000 to 334,000 over the same period last year. In October, the
UK obtained two new customers that will increase its indirect customers to
nearly 1 million which reflects the success of the strategy the UK revised
last fall to provide transportation risk management services to retail gas
aggregators.
YEAR-TO-DATE
International's normalized EBIT in 1998 was slightly below 1997.
This decrease is due to the impact of the initial public offering in
Australia which reduced the company's ownership interest in United Energy
Limited from 49.9% to 34%. This ownership change reduces 1998 EBIT from
Australia when compared to 1997. Prior to the initial public offering, United
Energy Limited paid off certain loans to UtiliCorp which reduced interest
expense. In terms of earnings per share, the results of the initial public
offering and debt paydown should offset and not impact earnings per share
from Australia. As part of the initial public offering, the company recorded
a $45.3 million pretax gain in equity earnings. The year-to-date periods were
also effected by the items discussed above for the quarter.
AUSTRALIAN DEREGULATION
The electricity industry in Victoria, Australia is being deregulated
in phases according to annual energy use with the largest customers becoming
contestable first. As of September 30, 1998, all customers with annual usage
greater than 160 mwh are able to choose their electricity supplier. On
January 1, 2001, all remaining customers will become contestable. Concurrent
with full deregulation, the tariff rates are expected to decrease, lowering
Australia's EBIT contribution to UtiliCorp in 2001 compared to earlier years.
ENERGYONE PARTNERSHIP
In April 1998, UtiliCorp and PECO Energy Company (PECO) agreed to
disband the EnergyOne L.L.C. joint venture in recognition that a fully
competitive marketplace did not materialize as originally anticipated.
EnergyOne L.L.C. offered utilities a branded line of energy products
24
<PAGE>
and services and other consumer services, all of which could be billed
together. With the pace of deregulation much slower than was assumed in its
strategic plan, EnergyOne L.L.C. was unable to sell its concept to other
utilities. In connection with the disbanding of EnergyOne L.L.C., the company
recorded an $8.0 million reserve to cover severance costs, contract
termination costs, and asset write-offs.
For the quarter ended September 30, 1998, the elimination of
EnergyOne L.L.C. activities improved the company's EBIT by $3.2 million over
1997.
YEAR 2000
At year 2000, a two-digit date of "00" may not be recognized by
computer systems, software applications, and certain operating controls
developed in the 1970s and 1980s as the year 2000, causing systems to shut
down or malfunction. UtiliCorp has established a Year 2000 Project Office to
coordinate the Year 2000 efforts of teams in the company's operating units to
ensure that its computer systems and applications will function properly
beyond 1999.
Many of the company's information systems and software are Year 2000
ready. UtiliCorp has undergone a major software system overhaul that consists
of new financial, customer information and support systems. The customer
information system is expected to be fully installed by 1999. These projects,
known internally as "Project BTU" are expected to replace at least 80% of
potentially affected software. Project BTU began in 1995 and was intended to
update the company's internal support systems and to position the company to
better serve its customers. Year 2000 compliance was incorporated into the
scope of deliverables of Project BTU. Total expenditures for the new systems
are estimated at approximately $190.6 million of which $130.0 million has
been spent to date.
The Year 2000 Project Office is also coordinating the identification
and testing of remaining software, information technology devices, embedded
technology systems, and services provided by third parties that may be
impacted by the year 2000. The Project Team is expected to have the
identification and testing phases completed by the end of 1998 and begin
remediation in 1999. At this time, the company does not have a contingency
plan, but it is expected that the Project Office will have developed a
contingency plan to address unforeseen issues by first quarter 1999. The
company is currently preparing budgets and estimates of remediation costs
25
<PAGE>
for this portion of its Year 2000 remediation of mission critical systems.
The remediation of certain non-mission critical systems is expected to extend
beyond 1999. The estimated cost of administering the Year 2000 efforts
through the Project Office is approximately $1.6 million through 2000.
Approximately $300,000 has been spent to date.
The company is evaluating the impact of internal and external Year
2000 issues on its operations to develop a model on which to base contingency
planning. The Project Team is conducting internal evaluations, discussions
with other utilities, and participating in industry-wide efforts being
conducted by the North American Electric Reliability Council and the Gas
Industry Standards Board to appropriately prepare and ensure the company's
efforts are in line with the rest of the industry.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133
established accounting and reporting standards for derivative instruments and
hedging activities requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that the company must formally document, designate,
and assess the effectiveness of transactions that receive hedge accounting.
SFAS 133 is required to be adopted for fiscal years beginning after June 15,
1999.
SFAS 133 will impact the company's hedging activities at Aquila
Energy and Aquila Gas Pipeline, corporate treasury activities, foreign
subsidiary trading activities and power contracts. The impact of SFAS 133 has
not been quantified.
26
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
(A) LIST OF EXHIBITS:
12 Statements re computation of ratios.
27 Financial Data Schedule--For the nine months ended
September 30, 1998.
(B) REPORTS ON FORM 8-K:
The company filed no reports on Form 8-K for the quarter ended
September 30, 1998.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UTILICORP UNITED INC.
By: /s/ Richard C. Green, Jr.
-------------------------
Richard C. Green, Jr.
Chairman of the Board and Chief Executive Officer
Date: November 10, 1998
By: /s/ James S. Brook
------------------
James S. Brook
Vice President, Controller and Chief Accounting Officer
Date: November 10, 1998
28
<PAGE>
UTILICORP UNITED INC.
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
INTEREST COVERAGE RATIOS
<TABLE>
<CAPTION>
12 MONTHS ENDED YEARS ENDED DEC 31,
SEPTEMBER 30,1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before provision for income taxes ....... $195,970 $223,800 $186,460 $131,812 $146,532 $116,366
Add:
Interest on long-term debt .............. 127,537 124,357 126,933 110,227 89,526 89,027
Interest on short-term debt and other ... 13,187 10,879 18,151 16,847 7,257 7,207
Portion of rents representative of
the interest factor ..................... 15,782 17,548 16,537 15,346 15,329 15,008
Income as adjusted ........................ $352,476 $376,584 $348,081 $274,232 $258,644 $227,608
Fixed Charges
Interest on long-term debt .............. $127,537 $124,357 $126,933 $110,227 $ 89,526 $ 89,027
Interest on short-term debt ............. 13,187 10,879 18,151 16,847 7,257 7,207
Portion of rents representative of
the interest factor ..................... 15,782 17,548 16,537 15,346 15,329 15,008
Fixed Charges ............................. $156,506 $152,784 $161,621 $142,420 $112,112 $111,242
RATIO OF EARNINGS TO FIXED CHARGES ........ 2.25 2.46 2.15 1.93 2.31 2.05
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ENDING SEPTEMBER 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 166
<SECURITIES> 0
<RECEIVABLES> 1031
<ALLOWANCES> 0
<INVENTORY> 217
<CURRENT-ASSETS> 1603
<PP&E> 2492
<DEPRECIATION> 0
<TOTAL-ASSETS> 5110
<CURRENT-LIABILITIES> 1998
<BONDS> 1331
0
0
<COMMON> 54
<OTHER-SE> 1041
<TOTAL-LIABILITY-AND-EQUITY> 5110
<SALES> 9269
<TOTAL-REVENUES> 9269
<CGS> 8558
<TOTAL-COSTS> 550
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> 154
<INCOME-TAX> 59
<INCOME-CONTINUING> 95
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.77
</TABLE>
