-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RsKJyTopHHuLY+7XpICMaKFW83ffsZClZlw8CtAiwG8ZDsaWG3GHsnuUukKQpDAs RjqQpMBbaEKazW8Fs9Vlew== 0000054507-99-000014.txt : 19990518 0000054507-99-000014.hdr.sgml : 19990518 ACCESSION NUMBER: 0000054507-99-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN RESOURCES INC /KS CENTRAL INDEX KEY: 0000054507 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 480290150 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03523 FILM NUMBER: 99625640 BUSINESS ADDRESS: STREET 1: 818 KANSAS AVE CITY: TOPEKA STATE: KS ZIP: 66612 BUSINESS PHONE: 9135756300 FORMER COMPANY: FORMER CONFORMED NAME: KANSAS POWER & LIGHT CO DATE OF NAME CHANGE: 19920507 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ______________________ Commission File Number 1-3523 WESTERN RESOURCES, INC. (Exact Name of Registrant as Specified in Its Charter) KANSAS 48-0290150 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 818 KANSAS AVENUE, TOPEKA, KANSAS 66612 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (785) 575-6300 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 17, 1999 Common Stock, $5.00 par value 66,398,457 WESTERN RESOURCES, INC. INDEX Page No. Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income 4 - 5 Consolidated Statements of Comprehensive Income 6 Consolidated Statements of Cash Flows 7 - 8 Consolidated Statements of Cumulative Preferred and Preference Stock 9 Consolidated Statements of Shareholders' Equity 10 Notes to Consolidated Financial Statements 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About 27 Market Risk Part II. Other Information Item 1. Legal Proceedings 28 Item 2. Changes in Securities and Use of Proceeds 28 Item 3. Defaults Upon Senior Securities 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits and Reports on Form 8-K 29 Signature 30 WESTERN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
March 31, December 31, 1999 1998 ASSETS CURRENT ASSETS: Cash and cash equivalents . . . . . . . . . . . . . . . . $ 26,272 $ 16,394 Accounts receivable (net) . . . . . . . . . . . . . . . . 188,750 222,715 Inventories and supplies (net). . . . . . . . . . . . . . 104,146 95,590 Marketable securities . . . . . . . . . . . . . . . . . . 274,218 288,077 Prepaid expenses and other. . . . . . . . . . . . . . . . 49,613 57,225 Total Current Assets. . . . . . . . . . . . . . . . . . 642,999 680,001 PROPERTY, PLANT AND EQUIPMENT (NET) . . . . . . . . . . . . 3,788,263 3,795,143 OTHER ASSETS: Investment in ONEOK . . . . . . . . . . . . . . . . . . . 619,690 615,094 Customer accounts (net) . . . . . . . . . . . . . . . . . 1,073,772 1,014,428 Goodwill (net). . . . . . . . . . . . . . . . . . . . . . 1,181,450 1,188,253 Regulatory assets . . . . . . . . . . . . . . . . . . . . 362,245 364,213 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 319,351 294,296 Total Other Assets. . . . . . . . . . . . . . . . . . . 3,556,508 3,476,284 TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $7,987,770 $7,951,428 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt. . . . . . . . . . . $ 235,009 $ 165,838 Short-term debt . . . . . . . . . . . . . . . . . . . . . 368,125 312,472 Accounts payable. . . . . . . . . . . . . . . . . . . . . 86,526 127,834 Accrued liabilities . . . . . . . . . . . . . . . . . . . 262,661 252,367 Accrued income taxes. . . . . . . . . . . . . . . . . . . 45,849 32,942 Deferred security revenues. . . . . . . . . . . . . . . . 61,329 57,703 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 85,201 85,690 Total Current Liabilities . . . . . . . . . . . . . . . 1,144,700 1,034,846 LONG-TERM LIABILITIES: Long-term debt (net). . . . . . . . . . . . . . . . . . . 3,070,428 3,063,064 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. . . . . 931,384 938,659 Minority interests. . . . . . . . . . . . . . . . . . . . 204,697 205,822 Deferred gain from sale-leaseback . . . . . . . . . . . . 206,994 209,951 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 269,417 316,245 Total Long-term Liabilities . . . . . . . . . . . . . . 4,902,920 4,953,741 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Cumulative preferred and preference stock . . . . . . . . 24,858 24,858 Common stock, par value $5 per share, authorized 85,000,000 shares, outstanding 66,153,689 and 65,909,442 shares, respectively. . . . . . . . . . . . . 330,768 329,548 Paid-in capital . . . . . . . . . . . . . . . . . . . . . 779,809 775,337 Retained earnings . . . . . . . . . . . . . . . . . . . . 808,678 823,590 Accumulated other comprehensive income (net) . . . . . . (3,963) 9,508 Total Shareholders' Equity. . . . . . . . . . . . . . . 1,940,150 1,962,841 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . . . . . . . . $7,987,770 $7,951,428 The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Three Months Ended March 31, 1999 1998 SALES: Energy. . . . . . . . . . . . . . . . . . . . . . . . . . $ 312,035 $ 305,548 Security. . . . . . . . . . . . . . . . . . . . . . . . . 148,547 76,795 Total Sales . . . . . . . . . . . . . . . . . . . . . . 460,582 382,343 COST OF SALES: Energy. . . . . . . . . . . . . . . . . . . . . . . . . . 106,653 106,310 Security. . . . . . . . . . . . . . . . . . . . . . . . . 41,274 23,993 Total Cost of Sales . . . . . . . . . . . . . . . . . . 147,927 130,303 GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . 312,655 252,040 OPERATING EXPENSES: Operating and maintenance expense . . . . . . . . . . . . 79,082 77,702 Depreciation and amortization . . . . . . . . . . . . . . 83,770 60,925 Selling, general and administrative expense . . . . . . . 71,868 48,618 Total Operating Expenses. . . . . . . . . . . . . . . . 234,720 187,245 INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . . . 77,935 64,795 OTHER INCOME (EXPENSE): Investment earnings . . . . . . . . . . . . . . . . . . . 22,890 19,356 Minority interest . . . . . . . . . . . . . . . . . . . . 700 (72) Other . . . . . . . . . . . . . . . . . . . . . . . . . . (418) 4,232 Total Other Income (Expense). . . . . . . . . . . . . 23,172 23,516 EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . . . 101,107 88,311 INTEREST EXPENSE: Interest expense on long-term debt. . . . . . . . . . . . 59,151 38,957 Interest expense on short-term debt and other . . . . . . 11,649 11,443 Total Interest Expense. . . . . . . . . . . . . . . . 70,800 50,400 EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . . . 30,307 37,911 INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . 9,560 8,098 NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 20,747 29,813 PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . 282 1,230 EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . $ 20,465 $ 28,583 AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . 66,089,199 65,409,603 BASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING . . . . $ 0.31 $ 0.44 DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . $ .535 $ .535 The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Twelve Months Ended March 31, 1999 1998 SALES: Energy. . . . . . . . . . . . . . . . . . . . . . . . . . $1,619,446 $1,711,054 Security. . . . . . . . . . . . . . . . . . . . . . . . . 492,847 196,856 Total Sales . . . . . . . . . . . . . . . . . . . . . . 2,112,293 1,907,910 COST OF SALES: Energy. . . . . . . . . . . . . . . . . . . . . . . . . . 691,811 738,337 Security. . . . . . . . . . . . . . . . . . . . . . . . . 149,072 43,739 Total Cost of Sales . . . . . . . . . . . . . . . . . . 840,883 782,076 GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . 1,271,410 1,125,834 OPERATING EXPENSES: Operating and maintenance expense . . . . . . . . . . . . 338,887 368,878 Depreciation and amortization . . . . . . . . . . . . . . 303,518 256,972 Selling, general and administrative expense . . . . . . . 286,560 311,755 Write-off international development activities. . . . . . 98,916 - Write-off deferred merger costs . . . . . . . . . . . . . - 48,008 Monitored services special charge . . . . . . . . . . . . - 24,292 Total Operating Expenses. . . . . . . . . . . . . . . . 1,027,881 1,009,905 INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . . . 243,529 115,929 OTHER INCOME (EXPENSE): Gain on sale of Tyco securities . . . . . . . . . . . . . - 864,253 Investment earnings . . . . . . . . . . . . . . . . . . . 53,331 31,392 Minority interest . . . . . . . . . . . . . . . . . . . . 1,154 3,786 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,624 35,891 Total Other Income (Expense). . . . . . . . . . . . . 56,109 935,322 EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . . . 299,638 1,051,251 INTEREST EXPENSE: Interest expense on long-term debt. . . . . . . . . . . . 191,049 135,134 Interest expense on short-term debt and other . . . . . . 55,471 59,589 Total Interest Expense. . . . . . . . . . . . . . . . 246,520 194,723 EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . . . 53,118 856,528 INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . 16,019 368,230 NET INCOME BEFORE EXTRAORDINARY GAIN. . . . . . . . . . . . 37,099 488,298 EXTRAORDINARY GAIN, NET OF TAX. . . . . . . . . . . . . . . 1,591 - NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 38,690 488,298 PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . 2,643 4,919 EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . $ 36,047 $ 483,379 AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . 65,801,314 65,276,370 BASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING: EARNINGS AVAILABLE FOR COMMON STOCK BEFORE EXTRAORDINARY GAIN. . . . . . . . . . . . . . . . . . . . $ 0.53 $ 7.41 EXTRAORDINARY GAIN. . . . . . . . . . . . . . . . . . . . . 0.02 - EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . $ 0.55 $ 7.41 DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . $ 2.14 $ 2.11 The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in Thousands) (Unaudited)
Three Months Ended March 31, 1999 1998 Net income. . . . . . . . . . . . . . . . . . . . . . . . . $20,747 $29,813 Other comprehensive (loss) income, before tax: Unrealized (loss) gain on marketable securities (net) . . (21,382) 14,465 Unrealized (loss) on currency translation . . . . . . . . (1,102) - Other comprehensive (loss) income, before tax . . . . . . . (22,484) 14,465 Income tax benefit (expense). . . . . . . . . . . . . . . . 9,013 (5,754) Other comprehensive (loss) income, net of tax . . . . . . . (13,471) 8,711 Comprehensive income. . . . . . . . . . . . . . . . . . . . $ 7,276 $38,524 The Notes to Consolidated Financial Statements are an integral part of these statements. WESTERN RESOURCES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in Thousands) (Unaudited) Twelve Months Ended March 31, 1999 1998 Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 38,690 $488,298 Other comprehensive (loss) income, before tax: Unrealized holding (losses) gains on marketable securities arising during the period. . . . . . . . . . (53,091) 39,713 Less: Reclassification adjustment for losses included in net income. . . . . . . . . . . . . . . . . 14,029 - Unrealized (loss) gain on marketable securities (net) . . (39,062) 39,713 Unrealized (loss) on currency translation . . . . . . . . (2,128) - Other comprehensive (loss) income, before tax . . . . . . . (41,190) 39,713 Income tax benefit (expense). . . . . . . . . . . . . . . . 16,397 (18,883) Other comprehensive (loss) income, net of tax . . . . . . . (24,793) 20,830 Comprehensive income. . . . . . . . . . . . . . . . . . . . $13,897 $509,128 The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
Three Months Ended March 31, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 20,747 $ 29,813 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . 83,770 60,925 Equity in earnings from investments . . . . . . . . . . . (5,644) (5,576) Accretion of discount note interest. . . . . . . . . . . . (1,659) - Changes in working capital items (net of effects from acquisitions): Accounts receivable (net) . . . . . . . . . . . . . . . 28,069 146,248 Inventories and supplies (net). . . . . . . . . . . . . (8,379) (5,709) Prepaid expenses and other. . . . . . . . . . . . . . . 9,088 3,348 Accounts payable. . . . . . . . . . . . . . . . . . . . (41,308) (56,099) Accrued liabilities . . . . . . . . . . . . . . . . . . (22,691) 12,112 Accrued income taxes. . . . . . . . . . . . . . . . . . 12,907 10,435 Deferred revenue. . . . . . . . . . . . . . . . . . . . 3,691 (422) Other . . . . . . . . . . . . . . . . . . . . . . . . . (2,195) 20,532 Changes in other assets and liabilities . . . . . . . . . (18,052) (1,869) Net cash flows from operating activities. . . . . . . 58,344 213,738 CASH FLOWS USED IN INVESTING ACTIVITIES: Additions to property, plant and equipment (net). . . . . (41,571) (33,908) Customer account acquisitions . . . . . . . . . . . . . . (78,601) (64,703) Monitored services acquisitions, net of cash acquired . . (20,722) (274,030) Purchases of marketable securities. . . . . . . . . . . . (10,464) - Proceeds from sales of marketable securities. . . . . . . 2,887 - Other investments (net) . . . . . . . . . . . . . . . . . (7,264) (59,041) Net cash flows (used in) investing activities . . . . (155,735) (431,682) CASH FLOWS FROM FINANCING ACTIVITIES: Short-term debt (net) . . . . . . . . . . . . . . . . . . 55,653 225,750 Proceeds of long-term debt. . . . . . . . . . . . . . . . 81,583 764 Retirements of long-term debt . . . . . . . . . . . . . . - (35,732) Issuance of common stock (net). . . . . . . . . . . . . . 5,692 - Cash dividends paid . . . . . . . . . . . . . . . . . . . (35,659) (35,570) Net cash flows from financing activities. . . . . . . 107,269 155,212 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . 9,878 (62,732) CASH AND CASH EQUIVALENTS: Beginning of the period . . . . . . . . . . . . . . . . . 16,394 76,608 End of the period . . . . . . . . . . . . . . . . . . . . $ 26,272 $ 13,876 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID FOR: Interest on financing activities (net of amount capitalized). . . . . . . . . . . . . . . . . . . . . . $ 78,882 $ 56,591 Income taxes. . . . . . . . . . . . . . . . . . . . . . . 256 161 The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
Twelve Months Ended March 31, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 38,690 $ 488,298 Extraordinary gain. . . . . . . . . . . . . . . . . . . . (1,591) - Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . 303,518 256,972 Loss (gain) on sale of securities . . . . . . . . . . . . 14,029 (864,253) Accretion of discount note interest . . . . . . . . . . . (1,659) - Equity in earnings from investments . . . . . . . . . . . (6,132) (17,804) Write-off of deferred merger costs. . . . . . . . . . . . - 48,008 Write-off of international development activities . . . . 98,916 - Monitored services special charge . . . . . . . . . . . . - 24,292 Changes in working capital items (net of effects from acquisitions): Accounts receivable (net) . . . . . . . . . . . . . . . 665 112,980 Inventories and supplies. . . . . . . . . . . . . . . . (10,670) (24,824) Marketable securities . . . . . . . . . . . . . . . . . 6,293 (10,461) Prepaid expenses and other. . . . . . . . . . . . . . . (21,248) 5,038 Accounts payable. . . . . . . . . . . . . . . . . . . . (18,822) (39,043) Accrued liabilities . . . . . . . . . . . . . . . . . . (77,214) 67,497 Accrued income taxes. . . . . . . . . . . . . . . . . . 8,054 2,367 Deferred revenue. . . . . . . . . . . . . . . . . . . . 4,113 (422) Other . . . . . . . . . . . . . . . . . . . . . . . . . (22,727) 17,814 Changes in other assets and liabilities . . . . . . . . . (69,397) (57,057) Net cash flows from operating activities. . . . . . . 244,818 9,402 CASH FLOWS USED IN INVESTING ACTIVITIES: Additions to property, plant and equipment (net). . . . . (190,548) (202,160) Customer account acquisition. . . . . . . . . . . . . . . (291,565) (106,510) Purchases of marketable securities. . . . . . . . . . . . (271,500) - Proceeds from sales of securities . . . . . . . . . . . . 30,782 1,533,530 Monitored services acquisitions, net of cash acquired . . (295,888) (712,747) Proceeds from issuance of stock by subsidiary (net) . . . 45,565 - Other investments (net) . . . . . . . . . . . . . . . . . (39,674) (85,560) Net cash flows (used in ) from investing activities . (1,012,828) 426,553 CASH FLOWS FROM FINANCING ACTIVITIES: Short-term debt (net) . . . . . . . . . . . . . . . . . . (94,125) (764,487) Proceeds of long-term debt. . . . . . . . . . . . . . . . 1,177,057 519,357 Retirements of long-term debt . . . . . . . . . . . . . . (131,336) (54,102) Issuance of common stock (net). . . . . . . . . . . . . . 22,976 17,656 Redemption of preference stock. . . . . . . . . . . . . . (50,000) - Cash dividends paid . . . . . . . . . . . . . . . . . . . (144,166) (142,792) Net cash flows from (used in) financing activities. . 780,406 (424,368) NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . 12,396 11,587 CASH AND CASH EQUIVALENTS: Beginning of the period . . . . . . . . . . . . . . . . . 13,876 2,289 End of the period . . . . . . . . . . . . . . . . . . . . $ 26,272 $ 13,876 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID FOR: Interest on financing activities (net of amount capitalized). . . . . . . . . . . . . . . . . . . . . . $ 258,380 $ 168,413 Income taxes. . . . . . . . . . . . . . . . . . . . . . . 47,602 59,809 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the fourth quarter of 1997 the company contributed the net assets of its natural gas business totaling approximately $594 million to ONEOK in exchange for a 45% ownership interest in ONEOK. The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CUMULATIVE PREFERRED STOCK (Dollars in Thousands) (Unaudited)
March 31, December 31, 1999 1998 Preferred stock not subject to mandatory redemption, Par value $100 per share, authorized 600,000 shares, outstanding - 4 1/2% Series, 138,576 shares. . . . . . . . . . $ 13,858 $ 13,858 4 1/4% Series, 60,000 shares . . . . . . . . . . 6,000 6,000 5% Series, 50,000 shares . . . . . . . . . . . . 5,000 5,000 Total Preferred Stock. . . . . . . . . . . . . . . . $ 24,858 $ 24,858 The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC. CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY (Dollars in Thousands) (Unaudited)
Three Months Ended Twelve Months Ended March 31, March 31, 1999 1998 1999 1998 Cumulative Preferred and Preference Stock: Beginning balance. . . . . . . $ 24,858 $ 74,858 $ 74,858 $ 74,858 Redemption of preference stock - - (50,000) - Ending balance . . . . . . . . 24,858 74,858 24,858 74,858 Common Stock: Beginning balance. . . . . . . 329,548 327,048 327,048 324,361 Issuance of common stock . . . 1,220 - 3,720 2,687 Ending balance . . . . . . . . 330,768 327,048 330,768 327,048 Paid-in-Capital: Beginning balance. . . . . . . 775,337 760,553 760,553 745,584 Expenses on common stock . . . - - - (5) Issuance on common stock . . . 4,472 - 19,256 14,974 Ending balance . . . . . . . . 779,809 760,553 779,809 760,553 Retained Earnings: Beginning balance. . . . . . . 823,590 919,911 913,500 567,882 Net income . . . . . . . . . . 20,747 29,813 38,690 488,298 Dividends on preferred and preference stock . . . . . . (282) (1,230) (2,643) (4,919) Dividends on common stock. . . (35,377) (34,994) (140,869) (137,761) Ending balance . . . . . . . . 808,678 913,500 808,678 913,500 Accumulated Other Comprehensive Income (net): Beginning balance. . . . . . . 9,508 12,119 20,830 - Unrealized gain (loss) on equity securities. . . . . . (21,382) 14,465 (39,062) 39,713 Unrealized gain (loss) on currency translation . . . . (1,102) - (2,128) - Income tax benefit (expense) . 9,013 (5,754) 16,397 (18,883) Ending balance . . . . . . . . (3,963) 20,830 (3,963) 20,830 Total Shareholders' Equity $1,940,150 $2,096,789 $1,940,150 $2,096,789 The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business: Western Resources, Inc. (the company) is a publicly traded consumer services company. The company's primary business activities are providing electric generation, transmission and distribution services to approximately 620,000 customers in Kansas and providing monitored services to approximately 1.6 million customers in North America, the United Kingdom and Continental Europe. 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. 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 are provided by Protection One, Inc. (Protection One), a publicly-traded, approximately 85%-owned subsidiary. Principles of Consolidation: The company's unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles have been condensed or omitted. These consolidated financial statements and notes should be read in conjunction with the financial statements and the notes included in the company's 1998 Annual Report on Form 10-K. In the opinion of the company's management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included. The results of operations for the three months ended March 31, 1999, are not necessarily indicative of the results to be expected for the full year. Certain purchase price allocations for acquisitions made in 1998 by Protection One were made on a preliminary basis and are subject to change based on the final determination of net asset values and completion of appraisals. New Pronouncements: On January 1, 1999, the company adopted Emerging Issues Task Force Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" (EITF Issue 98-10). EITF Issue 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with the changes in the fair value included in earnings. Adoption of EITF 98-10 resulted in an increase in operating income of approximately $800,000 for the first quarter of 1999. Reclassifications: Certain amounts in prior years have been reclassified to conform with classifications used in the current year presentation. 2. INTERNATIONAL POWER DEVELOPMENT ACTIVITIES The company terminated the employment of employees of the Wing Group (Wing) during the first quarter of 1999, in accordance with the company's previously announced plans to exit the international power development business. In addition to these terminations, all development activity was discontinued. Certain exit activities which occurred during the first quarter, as contemplated in the exit plan, included closing Wing offices and handling other matters related to terminating the activity of this subsidiary. Through March 31, 1999, approximately $1.7 million has been expended as costs to exit these activities of which $0.2 million was incurred for severance costs. All amounts expended during the quarter ended March 31, 1999, were charged to the exit cost accruals established as of December 31, 1998. Management is not aware of any factors which would change its conclusions regarding the write-down of equity investments recorded during the fourth quarter of 1998. The company is evaluating all of its options in regard to these equity investments including selling or otherwise terminating the company's participation in these investments. At March 31, 1999, approximately $21.2 million of accrued exit fees and shut down costs are included in accrued liabilities on the accompanying Consolidated Balance Sheet. Exit fees for the former principal officers of Wing represent the largest outstanding obligation related to the company's remaining exit plan. The company plans to complete all significant aspects of this closure by the end of 1999. 3. MERGER AGREEMENT WITH KANSAS CITY POWER & LIGHT COMPANY (KCPL) In May 1999, a Stipulation and Agreement was reached with the Kansas Corporation Commission (KCC) staff which resulted in a set of settlement recommendations in connection with the KCPL merger. These recommendations have not been accepted by all parties and must be approved by the KCC. The KCC will review the Stipulation and Agreement and issue an order based on the agreement and the results of the technical hearings, which are in progress. Significant terms of the recommended settlement are as follows: - An electric rate moratorium would be implemented for four years beginning on the day the merger closes - Westar Energy would make three rate rebates of $15 million each to its Kansas retail customers on July 1 of 2001, 2002 and 2003 - Westar Energy would be allowed to include $300 million of the acquisition premium (amount is net of related deferred income taxes to be recorded) in its Kansas rate base - The company and KCPL would be allowed to earn a deferred return on certain new generating facilities that will be completed during the rate moratorium period. The deferred return would be calculated from the date of commercial operation of these generating assets until the earlier of the end of the rate moratorium or March 31, 2004. Estimated expenditures by the company that qualify for the deferred return approximate $270 million. For additional information on the Merger Agreement with Kansas City Power & Light Company, see Note 21 of the company's 1998 Annual Report on Form 10-K. 4. LEGAL PROCEEDINGS The Securities and Exchange Commission (SEC) has commenced a private investigation relating, among other things, to 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 relating to the investigation. In April 1999, three alleged class action litigations were filed in the United States District Court for the Central District of California against Protection One, Inc. and certain of its present and former officers. In one of the actions, Western Resources, Inc. was also named as a defendant. The three actions are: "David Lyons v. Protection One., Inc., Western Resources, Inc., James M. Mackenzie, Jr., John W. Hesse, and John E. Mack, III," No. 99-CV-3755 (C.D.Cal.) (filed April 7, 1999); "Randall Karkutt v. Protection One, Inc., James M. Mackenzie, Jr., and John W. Hesse," No. 99-CV-3798 (C.D.Cal.) (filed April 8, 1999); and "David Shaev v.Protection One, Inc., John E. Mack, III, James H. Mackenzie, Jr., and John Hesse," No. 99-CV-4147 (C.D.Cal.) (filed April 20, 1999). The actions are purportedly brought on behalf of purchasers of the common stock of Protection One, Inc. during periods beginning February 10, 1998 ("Karkutt"), February 12, 1998 ("Shaev"), or April 23, 1998, ("Lyons") and ending April 1, 1999. All three complaints assert claims under Sections 10(b) and 20 of the Securities Exchange Act of 1934 based on allegations that various statements made by the defendants concerning the financial results of Protection One, Inc. were false and misleading and not in compliance with generally accepted accounting principles. The complaints seek unspecified amounts of damages and an award of fees and expenses, including attorneys fees. The company and Protection One believe these actions are without merit and intend to defend against them vigorously. The company and its subsidiaries are involved in various other legal, environmental and regulatory proceedings. Management believes that adequate provision has been made and accordingly believes that the ultimate dispositions of these matters will not have a material adverse effect upon the company's overall financial position or results of operations. 5. COMMITMENTS AND CONTINGENCIES Manufactured Gas Sites: The company has been associated with 15 former manufactured gas sites located in Kansas which may contain coal tar and other potentially harmful materials. The company and the Kansas Department of Health and Environment (KDHE) entered into a consent agreement governing all future work at the 15 sites. The terms of the consent agreement will allow the company to investigate these sites and set remediation priorities based upon the results of the investigations and risk analysis. At March 31, 1999, 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 could be impacted by these costs. Amortization of Customer Accounts: The SEC staff has questioned the appropriateness of the amortization method used by Protection One for its intangible asset, customer accounts. These costs are currently amortized on a straight-line basis over a 10-year period which Protection One believes is appropriate and consistent with industry practices and its attrition experience. Protection One routinely evaluates historical loss rates for customer accounts on an aggregate basis and, when necessary, adjusts amortization over the remaining estimated useful life. A change in Protection One's present amortization method which would materially accelerate the recognition of amortization expense would have a material adverse effect on the company's results of operations. Protection One anticipates resolution of this issue during the second quarter of 1999. 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. During the first quarter of 1999, the related liability decreased about $4 million. For additional information on Commitments and Contingencies, see Note 10 of the company's 1998 Annual Report on Form 10-K. 6. INCOME TAXES Total income tax expense included in the Consolidated Statements of Income reflects the Federal statutory rate of 35%. The Federal statutory rate produces effective income tax rates of 31.5% and 30.2% for the three and twelve month periods ended March 31, 1999 compared to 21.4% and 43.0% for the three and twelve month periods ended March 31, 1998. The effective income tax rates vary from the Federal statutory rate due to permanent differences, including dividend income, the amortization of investment tax credits, and accelerated amortization of certain deferred income taxes. 7. SEGMENTS OF BUSINESS In 1998, the company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement requires the company to define and report the company's business segments based on how management currently evaluates its business. Management 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.
Three Months Ended March 31, 1999: Eliminating/ Fossil Nuclear Power Monitored Reconciling Generation Generation Delivery Services Other Items Total (Dollars in Thousands) External sales. . . $ 79,361 $ - $ 232,340 $ 148,547 $ 331 $ 3 $ 460,582 Allocated sales . . 125,662 29,218 69,380 - - (224,260) - Earnings before interest and taxes 47,225 (4,225) 15,631 17,542 27,813 (2,879) 101,107 Interest expense. . 70,800 Earnings before income taxes . . . 30,307 Three Months Ended March 31, 1998: Eliminating/ Fossil Nuclear Power Monitored Reconciling Generation Generation Delivery Services Other Items Total (Dollars in Thousands) External sales. . . $ 74,167 $ - $ 231,076 $ 76,795 $ 313 $ (8) $ 382,343 Allocated sales . . 119,891 29,239 16,623 - - (165,753) - Earnings before interest and taxes 40,255 (3,946) 23,176 11,333 13,483 4,010 88,311 Interest expense. . 50,400 Earnings before income taxes . . . 37,911 Twelve Months Ended March 31, 1999: Eliminating/ Fossil Nuclear Power Monitored Reconciling Generation Generation Delivery Services (1)Other Items Total (Dollars in Thousands) External sales. . . $ 531,168 $ - $1,086,975 $ 492,847 $ 1,360 $ (57) $2,112,293 Allocated sales . . 523,134 117,496 119,249 - - (759,879) - Earnings before interest and taxes 151,327 (21,199) 188,853 62,936 (87,658) 5,379 299,638 Interest expense. . 246,520 Earnings before income taxes . . . 53,118 Twelve Months Ended March 31, 1998: Eliminating/ Fossil Nuclear Power Monitored Reconciling Generation Generation Delivery (2)Services (3,4)Other (5)Items Total (Dollars in Thousands) External sales. . . $ 246,225 $ - $1,020,752 $ 196,856 $ 442,116 $ 1,961 $1,907,910 Allocated sales . . 517,366 102,449 66,492 - - (686,307) - Earnings before interest and taxes 148,239 (54,588) 170,089 (33,833) 875,884 (54,540) 1,051,251 Interest expense. . 194,723 Earnings before income taxes . . . 856,528 (1) Earnings before interest and taxes (EBIT) includes investment earnings of $22.4 million and write-off of international power development activities of $98.9 million. (2) EBIT includes monitored services special charge of $24.3 million. (3) EBIT includes investment earnings of $41.6 million and gain on sale of Tyco securities of $864.2 million. (4) Includes natural gas operations. The company contributed substantially all of its natural gas business in exchange for a 45% equity interest in ONEOK in November 1997. (5) EBIT includes write-off of deferred merger costs of $48 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION In Management's Discussion and Analysis we explain the general financial condition and the operating results for Western Resources, Inc. and its subsidiaries. We explain: - What factors impact our business - What our earnings and costs were for the three and twelve month periods ending March 31, 1999, and 1998 - Why these earnings and costs differed from period to period - How our earnings and costs affect our overall financial condition - Any other items that particularly affect our financial condition or earnings The following Management's Discussion and Analysis of Financial Condition and Results of Operations updates the information provided in the 1998 Annual Report on Form 10-K and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in our 1998 Annual Report on Form 10-K. Forward-Looking Statements Certain matters discussed here and elsewhere in this Form 10-Q are "forward-looking statements." The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like we "believe," "anticipate," "expect" or words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals. Such statements address future events and conditions concerning capital expenditures, earnings, litigation, rate and other regulatory matters, possible corporate restructurings, mergers, acquisitions, dispositions, liquidity and capital resources, interest and dividend rates, Year 2000 Issue, environmental matters, changing weather, nuclear operations, ability to enter new markets successfully and capitalize on growth opportunities in nonregulated businesses, events in foreign markets in which investments have been made, and accounting matters. What happens in each case could vary materially from what we expect because of such things as electric utility deregulation, including ongoing state and federal activities; future economic conditions; legislative developments; our regulatory and competitive markets; and other circumstances affecting anticipated operations, sales and costs. OPERATING RESULTS Western Resources Consolidated Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998: Basic earnings per share for the first quarter in 1999 were $O.31 per common share compared to $O.44 per common share in the first quarter of 1998. The primary reasons for this decline are the electric rate decreases that were implemented on June 1, 1998, and certain non-recurring gains that were recorded in the first quarter of 1998. These non-recurring gains were related to proceeds received in 1998 from corporate owned life insurance policies and to a gain on the repurchase of certain customer contracts in our monitored services business segment. Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31, 1998: Operating results are difficult to compare because of Protection One's acquisition activity in 1998, a $99 million charge to income in the fourth quarter of 1998 to exit the international power development business and the pre- tax gain on the sale of Tyco International Ltd. (Tyco) common stock of $864 million recorded in the third quarter of 1997. In addition to the gain on the sale of Tyco common stock recorded in 1997, we recorded charges in the fourth quarter of 1997 which included $48 million of deferred KCPL merger costs and approximately $24 million recorded by Protection One to recognize higher than expected customer attrition and to record costs related to the acquisition of Protection One. In November 1997, we completed our strategic alliance with ONEOK and contributed substantially all of our natural gas business to ONEOK in exchange for a 45% ownership interest in ONEOK. Following the strategic alliance, the consolidated sales, related cost of sales and operating expenses for our former natural gas business have been replaced by investment earnings from ONEOK. Sales and cost of sales from our former natural gas business for the twelve months ended March 31, 1998, were $284 million and $172 million. Electric Utility The sales and cost of sales of the electric utility business are included in energy sales and cost of sales in the Consolidated Statements of Income. For the twelve months ended March 31, 1998, energy sales includes natural gas sales through November 1997, and energy cost of sales includes natural gas purchased through November 1997. Net income from our electric utility business improved 8% to $20 million for the three months ended March 31, 1999, due to increased wholesale sales volumes. Net income for the twelve months ended March 31, 1999, were $72 million higher than the comparable period in 1998 because of higher sales. We experienced warmer weather during the summer months in 1998 than we did in 1997 which resulted in increased net income by $20 million. The effect of our electric rate decrease lowered twelve month net income by $5 million. Also, in December 1997, we recorded a charge totaling approximately $48 million to write- off the original merger costs associated with the KCPL merger. The following table reflects the increases in electric sales volumes for the three and twelve months ended March 31, 1999, from the comparable periods of 1998. Three Months Twelve Months Ended Ended Residential. . . . . 1.4 % 9.4% Commercial . . . . . 1.8 % 6.4% Industrial . . . . . (0.6)% 0.8% Other. . . . . . . . - 0.5% Total retail . . . 0.8 % 5.4% Wholesale. . . . . . 17.8 % 4.4% Total. . . . . . . 4.3 % 5.2% Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998: Sales between periods remained relatively constant. Sales volume increased 4% due to wholesale sales volumes and power marketing sales. The increase in volume, however, was offset by the effect of the electric rate decrease implemented on June 1, 1998. This rate decrease had an effect of reducing sales for the first quarter of 1999 by $2.3 million. This rate decrease was implemented in accordance with a 1997 order from the Kansas Corporation Commission. Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31, 1998: Total electric sales increased 28%. Electric utility sales increased 7% due to increased retail sales volumes as a result of warmer summer temperatures and a power marketing sales increase of 229%. A $10 million electric rate decrease implemented on June 1, 1998, partially offset this increase. Total electric cost of sales increased 66% due mostly to higher power marketing cost of sales. Depreciation and amortization expense decreased $17 million, or 10%, primarily because we had fully amortized a regulatory asset during 1997. Electric Utility Business Segments We manage our electric utility business segments' performance based on their earnings before interest and taxes (EBIT). Allocated sales are external sales collected from customers by our power delivery segment that are allocated to our fossil generation and nuclear generation business segments based on demand and energy cost. The following discussion identifies key factors affecting our electric business segments. Fossil Generation Three Months Ended Twelve Months Ended March 31, March 31, 1999 1998 1999 1998 (Dollars in Thousands) External sales. . . . . . . $ 79,361 $ 74,167 $531,168 $246,225 Allocated sales . . . . . . 125,662 119,891 523,134 517,366 EBIT. . . . . . . . . . . . 47,225 40,255 151,327 148,239 Fossil generation's external sales reflect power produced for sale to external wholesale customers outside our historical marketing territory and internally to the power delivery segment. Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998: External sales increased $5 million due primarily to higher wholesale sales. Allocated sales increased $5 million because of increases in demand for power and energy related to increased retail customer sales. Higher sales partially offset by higher operating expenses increased EBIT by $7 million. Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31, 1998: External sales increased mostly because of increased power marketing sales of $384 million compared to $117 million. Through March 31, 1999, our power marketing activity has had an insignificant effect on EBIT. Nuclear Generation Three Months Ended Twelve Months Ended March 31, March 31, 1999 1998 1999 1998 (Dollars in Thousands) Allocated sales . . . . . . $ 29,218 $ 29,239 $117,496 $102,449 EBIT. . . . . . . . . . . . (4,225) (3,946) (21,199) (54,588) Nuclear generation has no external sales because it provides all of its power to its co-owners KGE, KCPL and Kansas Electric Power Cooperative, Inc. The amounts above are our 47% share of Wolf Creek's operating results. Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31, 1998: Allocated sales and EBIT were higher because Wolf Creek operated the entire period without any outages. In the fourth quarter of 1997, the Wolf Creek facility was off-line for 58 days for a scheduled maintenance outage. EBIT was also higher because depreciation and amortization expense decreased because we had fully amortized a regulatory asset during 1997. On April 3, 1999, Wolf Creek was taken off-line for a schedule maintenance outage. The outage was completed 36 days later on May 9, 1999. Power Delivery Three Months Ended Twelve Months Ended March 31, March 31, 1999 1998 1999 1998 (Dollars in Thousands) External sales. . . . . . . $232,340 $231,076 $1,086,975 $1,020,752 Allocated sales . . . . . . 69,380 16,623 119,249 66,492 EBIT. . . . . . . . . . . . 15,631 23,176 188,853 170,089 Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998: Allocated sales were $53 million higher because the customer service operations of Power Delivery are now allocated a fee for use of the distribution lines and transformers. Allocated sales to other business segments increased $5 million because of increases in demand for power and energy related to increased retail customer sales. EBIT decreased $8 million. Five percent milder weather than same quarter last year decreased EBIT by $3 million. Higher sales allocated to other business segments also decreased EBIT by $5 million. Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31, 1998: In addition to our normal customer growth, we experienced warmer weather during the summer months in 1998 than we did in 1997 which improved external sales, allocated sales and EBIT. Monitored Services Protection One operates and manages our monitored services business. The results discussed below reflect Protection One on a stand-alone basis and do not take into consideration the minority interest of about 15% at March 31, 1999. Three Months Ended Twelve Months Ended March 31, March 31, 1999 1998 1999 1998 (Dollars in Thousands) External sales. . . . . . . $148,547 $ 76,795 $492,847 $196,856 EBIT. . . . . . . . . . . . 17,542 11,333 62,936 (33,833) External sales, EBIT and operating results for both the three and twelve months ended March 31, 1999, have increased significantly following Protection One's acquisitions of security businesses in Europe in the second quarter and late in the third quarter of 1998 and the continued growth of Protection One's North American operations. Results for the three and twelve months ended March 31, 1998, reflect only the operations of Protection One's North American operations. During the first quarter of 1998, Protection One added approximately 374,000 customers through acquisitions. Included in twelve months ended March 31, 1999, EBIT is a non-recurring gain approximating $16 million on the repurchase of customer contracts covered by a financing arrangement. A charge of approximately $24 million adversely affected twelve months ended March 31, 1998, EBIT. The charge was needed to recognize higher than expected customer attrition and to record costs related to the acquisition of Protection One. The following table reflects the change in Protection One's operating results for the three months ended March 31, 1999, compared to the three months ended March 31, 1998: Increase/ % (Decrease) Change (Dollars in Thousands) Sales. . . . . . . . . . . . . . . . $71,752 93% Cost of sales. . . . . . . . . . . . 17,281 72% Gross profit . . . . . . . . . . . 54,471 103% Selling, general and administrative. 20,093 98% Amortization of intangibles and depreciation . . . . . . . . . . . 21,886 106% Other operating expenses . . . . . . 3,399 98% Operating expenses . . . . . . . . 45,378 102% Operating income . . . . . . . . . 9,093 112% Other income (expense) . . . . . . . (2,884) (89%) Earnings before interest and taxes $6,209 55% The SEC staff is reviewing Protection One's amortization methodology used for customer accounts. The SEC staff has questioned the appropriateness of the current accounting method which Protection One believes is appropriate and consistent with industry practices and its attrition experience. A change in Protection One's present amortization method which would materially accelerate the recognition of amortization expense would have a material adverse effect on the company's results of operations. The intangible amortization represents a non-cash charge to income. Protection One anticipates resolution of this issue during the second quarter of 1999. Other Operating Expenses Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31, 1998: In December 1998, we recorded a $99 million charge to income associated with our decision to exit the international power project development business. In December 1997, we recorded a charge totaling approximately $48 million to write-off the original merger costs associated with the KCPL transaction and Protection One recorded a charge of approximately $24 million to recognize higher than expected customer attrition and to record costs related to the acquisition of Protection One. Other Income (Expense) Other income (expense) includes miscellaneous income and expenses not directly related to our operations. Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998: Investments earnings increased due to more income earned on higher balances of marketable securities. This increase was partially offset by lower other income due to less COLI death proceeds received. Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31, 1998: Other income decreased $879 million due to the following factors: (Dollars in Millions ) Twelve Months Ended March 31, 1998 Other income (expense). . . . . . . . . . . $935 Twelve Months Ended March 31, 1998 Non-recurring gain on the sale of our TYCO common stock. . . . . . . . . . . . (864) Investment earnings recorded on Hanover and ADT investments. . . . . . . . . . . (22) Twelve Months Ended March 31, 1999 Increase in earnings from the investment in ONEOK . . . . . . . . . . . . . . . . 23 Recorded investment losses . . . . . . . . (22) Non-recurring Protection One gains. . . . . 16 Other miscellaneous . . . . . . . . . . . . (10) Twelve Months Ended March 31, 1999 Other income (expense). . . . . . . . . . . $56 Interest Expense Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998: Interest expense increased 40% primarily because Protection One borrowed additional long-term debt to fund acquisitions and to acquire customer accounts. During the first quarter of 1999, Protection One added approximately 113,000 customers. Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31, 1998: Our long-term debt interest expense increased $56 million due to our and Protection One's issuance of new long-term debt used to reduce existing short-term debt, to fund nonregulated operations and to finance a substantial portion of Protection One's customer account growth. Lower short-term debt interest expense partially offset the higher long-term debt interest expense. Our short-term debt had a lower weighted average interest rate than the long-term debt which replaced it. Income Taxes Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998: Income tax expense increased slightly. The effective tax rate increased from 21% to 31% primarily due to non-taxable proceeds from our corporate-owned life insurance policies received in the first quarter of 1998. Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31, 1998: Income tax expense decreased significantly due to the decline in taxable earnings. For twelve months ended March 31, 1999, the charge to income to exit the international power development business, significantly lowered tax expense. Tax expense for twelve months ended March 31, 1998, included taxes related to the gain on the sale of Tyco common stock. Our effective tax rate also declined. This decline is largely attributable to non-taxable proceeds from our corporate-owned life insurance policies and the benefit of excluding 70% of ONEOK dividends received from the determination of taxable income. LIQUIDITY AND CAPITAL RESOURCES We had $26 million in cash and cash equivalents at March 31, 1999. We consider highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At March 31, 1999, we had approximately $368 million of short-term debt outstanding, of which $199 million was commercial paper. An additional $821 million of short-term debt was available from committed credit arrangements. Current maturities of long-term debt were $235 million at March 31, 1999. CASH FLOW DISCUSSION Cash Flows from Operating Activities Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998: Cash from operations decreased significantly primarily because of receivables collected in the first quarter of 1998 as part of the settlement of our strategic alliance with ONEOK. Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31, 1998: Cash from operations increased significantly because of two factors. First, taxes paid of approximately $345 million on the gain on the sale of Tyco common stock reduced twelve months ended March 31, 1998, operating cash flow. Secondly, twelve months ended March 31, 1999, includes the first full year of Protection One operations. Cash Flows Used In Investing Activities Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998: Cash used in investing activities decreased significantly primarily due to more acquisitions of monitored services companies in the first quarter of 1998. Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31, 1998: Cash used in investing activities increased significantly primarily due to the proceeds received in the third quarter of 1997 from the gain on sale of Tyco common stock offsetting the cash used during the twelve months ended March 31, 1998. Cash Flows from Financing Activities Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998: Cash from financing activities decreased 27% because we issued less short- term debt. Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March 31, 1998: Cash from financing activities increased significantly primarily due to additional borrowings incurred for the acquisitions of monitored services companies. OTHER INFORMATION Investment in ONEOK, Inc. In December 1998, ONEOK and Southwest Gas Corporation (Southwest Gas) agreed to a merger under which ONEOK would pay $28.50 a share in cash for each Southwest Gas share. In February 1999, Southwest Gas advised ONEOK that it had received an unsolicited offer of $32 per share of common stock from Southern Union Company (Southern Union). Also in February, Southwest Gas's board of directors authorized Southwest Gas's management to begin substantive discussions regarding Southern Union's unsolicited offer of $32 a share. On April 25, 1999, Southwest Gas accepted a revised purchase price of $30 a share from ONEOK, and terminated negotiations with Southern Union. On April 27, 1999, Southern Union announced an increased bid of $33.50 a share for Southwest Gas. On May 4, 1999, Southwest Gas rejected the revised unsolicited bid by Southern Union saying it does not believe Southern Union could finance the transaction or gain regulatory approval in a timely manner. A federal judge has issued a temporary restraining order blocking Southern Union from pursuing a takeover of Southwest Gas. Year 2OOO Issue We are currently addressing the effect of the Year 2000 Issue on information systems and operations. We face the Year 2000 Issue because many computer systems and applications abbreviate dates by eliminating the first two digits of the year, assuming that these two digits are always "19". On January 1, 2000, some computer programs may incorrectly recognize the date as January 1, 1900. Some computer systems and applications may incorrectly process critical information or may stop processing altogether because of the date abbreviation. Calculations using dates beyond December 31, 1999, may affect computer applications before January 1, 2000. Electric Utility Operations: Overall, based on manhours as a measure of work effort, we believe we are approximately 76% complete with our readiness efforts. The estimated progress of our departments and business units, exclusive of Protection One and Wolf Creek Nuclear Operating Corporation (WCNOC), at March 31, 1999, based on manhours, is as follows: Percentage Department/Business Unit Completion Fossil Fuel . . . . . . . . . . . . . . . 50% Power Delivery . . . . . . . . . . . . . 74% Information Technology. . . . . . . . . . 87% Administrative. . . . . . . . . . . . . . 76% We estimate that total costs to update all of our electric utility operating systems for Year 2000 readiness, excluding costs associated with WCNOC discussed below, to be approximately $6.9 million, of which $4.3 million represents IT costs and $2.6 million represents non-IT costs. As of March 31, 1999, we have expended approximately $5.0 million of these costs, of which $3.7 million represent IT costs and $1.3 million represent non-IT costs. We expect to incur the remaining $1.9 million, of which $0.6 million represents IT costs and $1.3 million represents non-IT costs, by the end of 1999. Wolf Creek Nuclear Operating Corporation: The table below sets forth estimates of the status of the components of WCNOC's Year 2000 readiness program at March 31, 1999.
Estimated Completion Percentage Phase Date Completion Identification and assessment of plant components 100% Identification and assessment of computers/software 100% Identification and Assessment of Other Areas 100% Identified critical remediations complete (Note 1) Oct 99 60% Comprehensive testing guidelines 100% Comprehensive testing (Note 2) Jun 99 55% Contingency planning guidelines 100% Contingency planning individual plans Jun 99 80% Note 1 - Two major modifications are currently scheduled to be completed after June 1999, the remaining remediations are presently scheduled for completion prior to July 1999. Note 2 - These tests are being used to define the options available for minor remediations. Several other post-remediation tests will also be performed.
WCNOC has established a goal of completing all assessments of affected systems by the end of the second quarter of 1999, and has a goal to complete critical remediations by the end of the third quarter, except for one scheduled for October, 1999. WCNOC has estimated the costs to complete the Year 2000 project at $3.9 million ($1.8 million, our share). As of March 31, 1999, $2.0 million ($0.9 million, our share) had been spent on the project. A summary of the projected costs to complete and actual costs incurred through March 31, 1999, is as follows: Projected Actual Costs Costs (Dollars in Thousands) Wolf Creek Labor and Expenses. . $ 499 $ 319 Contractor Costs . . . . . . . . 1,004 733 Remediation Costs. . . . . . . . 2,245 966 Total. . . . . . . . . . . . . $3,748 $2,018 Approximately $2.9 million ($1.4 million, our share) of WCNOC's total Year 2000 cost is purchased items and installation costs associated with remediation. Of these remediation costs, $1.8 million ($0.8 million, our share) are associated with seven major jobs which are completed or in progress. All of these costs are being expensed as they are incurred and are being funded on a daily basis along with our normal costs of operations. Monitored Services Operations: Protection One estimates the total cost to update all critical operating systems for Year 2000 readiness will be approximately $5 million. As of March 31, 1999, approximately $1.8 million of these costs had been incurred. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company has not experienced any significant changes in its exposure to market risk since December 31, 1998. For additional information on the company's market risk, see the Form 10-K dated December 31, 1998. WESTERN RESOURCES, INC. Part II Other Information Item 1. Legal Proceedings In April 1999, three alleged class action litigations were filed in the United States District Court for the Central District of California against Protection One, Inc. and certain of its present and former officers. In one of the actions, Western Resources, Inc. was also named as a defendant. The three actions are: "David Lyons v. Protection One., Inc., Western Resources, Inc., James M. Mackenzie, Jr., John W. Hesse, and John E. Mack, III," No. 99-CV-3755 (C.D.Cal.) (filed April 7, 1999); "Randall Karkutt v. Protection One, Inc., James M. Mackenzie, Jr., and John W. Hesse," No. 99-CV-3798 (C.D.Cal.) (filed April 8, 1999); and "David Shaev v.Protection One, Inc., John E. Mack, III, James H. Mackenzie, Jr., and John Hesse," No. 99-CV-4147 (C.D.Cal.) (filed April 20, 1999). The actions are purportedly brought on behalf of purchasers of the common stock of Protection One, Inc. during periods beginning February 10, 1998 ("Karkutt"), February 12, 1998 ("Shaev") or April 23, 1998 ("Lyons") and ending April 1, 1999. All three complaints assert claims under Sections 10(b) and 20 of the Securities Exchange Act of 1934 based on allegations that various statements made by the defendants concerning the financial results of Protection One, Inc. were false and misleading and not in compliance with generally accepted accounting principles. The complaints seek unspecified amounts of damages and an award of fees and expenses, including attorneys fees. The company and Protection One believe these actions are without merit and intend to defend against them vigorously. 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 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 12 Months Ended March 31, 1999 (filed electronically) Exhibit 27 - Financial Data Schedule (filed electronically) (b) Reports on Form 8-K: Form 8-K filed January 28, 1999 - Press release regarding annual earnings and dividend declared. Form 8-K filed April 1, 1999 - Press release reporting Western Resources extends filing period for 10-K. Form 8-K filed May 11, 1999 - Press release and employee update reporting Western Resources and KCPL Reach Merger Settlement with KCC staff and others. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Western Resources, Inc. Date May 17, 1999 By /s/ WILLIAM B. MOORE William B. Moore, Executive Vice President, Chief Financial Officer and Treasurer EX-12 2 Exhibit 12 WESTERN RESOURCES, INC. Computations of Ratio of Earnings to Fixed Charges and Computations of Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements (Dollars in Thousands)
Unaudited Twelve Months Ended March 31, Year Ended December 31, 1999 1998 1997 1996 1995 1994 Net Income . . . . . . . . . . . $ 38,690 $ 47,756 $ 499,518 $168,950 $181,676 $187,447 Taxes on Income. . . . . . . . . 16,019 14,557 382,987 86,102 83,392 99,951 Net Income Plus Taxes. . . . 54,709 62,313 882,505 255,052 265,068 287,398 Fixed Charges: Interest on Long-Term Debt . . 191,049 170,855 119,972 105,741 95,962 98,483 Interest on Other Indebtedness 37,396 37,190 55,761 34,685 27,487 20,139 Interest on Other Mandatorily Redeemable Securities. . . . 18,075 18,075 18,075 12,125 372 - Interest on Corporate-owned Life Insurance Borrowings. . 37,371 38,236 36,167 35,151 32,325 26,932 Interest Applicable to Rentals. . . . . . . . . . . 32,651 32,796 34,514 32,965 31,650 29,003 Total Fixed Charges. . . . 316,542 297,152 264,489 220,667 187,796 174,557 Preferred and Preference Dividend Requirements: Preferred and Preference Dividends. . . . . . . . . . 2,643 3,591 4,919 14,839 13,419 13,418 Income Tax Required. . . . . . 1,094 1,095 3,771 7,562 6,160 7,155 Total Preferred and Preference Dividend Requirements . . . . . . 3,737 4,686 8,690 22,401 19,579 20,573 Total Fixed Charges and Preferred and Preference Dividend Requirements. . . . . . . . . 320,279 301,838 273,179 243,068 207,375 195,130 Earnings (1) . . . . . . . . . . $371,251 $359,465 $1,146,994 $475,719 $452,864 $461,955 Ratio of Earnings to Fixed Charges . . . . . . . . . . . . 1.17 1.21 4.34 2.16 2.41 2.65 Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements 1.16 1.19 4.20 1.96 2.18 2.37 (1) Earnings are deemed to consist of net income to which has been added income taxes (including net deferred investment tax credit) and fixed charges. Fixed charges consist of all interest on indebtedness, amortization of debt discount and expense, and the portion of rental expense which represents an interest factor. Preferred and preference dividend requirements consist of an amount equal to the pre-tax earnings which would be required to meet dividend requirements on preferred and preference stock.
EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 AND THE CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS DEC-31-1999 MAR-31-1999 26272 274218 220039 31289 104146 642999 5855585 2067322 7987770 1144700 3070428 220000 24858 330768 1584524 7987770 460582 460582 147927 147927 234720 0 70800 30307 9560 20747 0 0 0 20747 0.31 0.31
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