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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
or
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______to_______
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification Number
0-33207 GREAT PLAINS ENERGY INCORPORATED 43-1916803
(A Missouri Corporation)
1201 Walnut Street
Kansas City, Missouri 64106
(816) 556-2200
www.greatplainsenergy.com
1-707 KANSAS CITY POWER & LIGHT COMPANY 44-0308720
(A Missouri Corporation)
1201 Walnut Street
Kansas City, Missouri 64106
(816) 556-2200
www.kcpl.com
Each of the following classes or series of securities registered pursuant to
Section 12(b) of the Act is registered on the New York Stock Exchange:
Registrant Title of each class
Great Plains Energy Incorporated Cumulative Preferred Stock par value $100 per share 3.80%
Cumulative Preferred Stock par value $100 per share 4.50%
Cumulative Preferred Stock par value $100 per share 4.35%
Common Stock without par value
Securities registered pursuant to Section 12(g) of the Act. None.
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-3 of the Act.)
Great Plains Energy Incorporated Yes X No ___
Kansas City Power and Light Company Yes___ No X
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of Great Plains Energy Incorporated (based on the closing price
of its common stock on the New York Stock Exchange on June 28, 2002, was
approximately $1,259,842,574. All of the common equity of Kansas City Power and
Light Company is held by Great Plains Energy Incorporated, an affiliate of
Kansas City Power & Light Company.
On February 26, 2003, Great Plains Energy Incorporated had 69,189,049 shares of
common stock outstanding. The aggregate market value of the common stock held by
nonaffiliates of Great Plains Energy Incorporated (based upon the closing price
of its common stock on the New York Stock Exchange on February 26, 2003) was
approximately $1,542,915,793. On February 26, 2003, Kansas City Power & Light
Company had one share of common stock outstanding and held by Great Plains
Energy Incorporated.
Documents Incorporated by Reference
Portions of the 2003 Proxy Statement of Great Plains Energy Incorporated to be
filed with the Securities and Exchange Commission are incorporated by reference
in Part III of this report.
TABLE OF CONTENTS
Page
Number
Cautionary Statements Regarding Forward-Looking Information 3
Glossary of Terms 4
PART I
Item 1 Business 6
Item 2 Properties
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 21
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters 21
Item 6 Selected Financial Data 23
Item 7 Management's Discussion and Analysis of Financial Conditions
and Results of Operation 24
Item 7A Quantitative and Qualitative Disclosures About Market Risks 54
Item 8 Consolidated Financial Statements and Supplementary Data
Great Plains Energy
Consolidated Statements of Income 56
Consolidated Balance Sheets 57
Consolidated Statements of Capitalization 58
Consolidated Statements of Cash Flows 59
Consolidated Statements of Comprehensive Income 60
Consolidated Statements of Retained Earnings 60
Kansas City Power & Light Company
Consolidated Statements of Income 61
Consolidated Balance Sheets 62
Consolidated Statements of Capitalization 63
Consolidated Statements of Cash Flows 64
Consolidated Statements of Comprehensive Income 65
Consolidated Statements of Retained Earnings 65
Great Plains Energy
Kansas City Power & Light Company
Notes to Consolidated Financial Statements 66
Item 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 119
PART III
Item 10 Directors and Officers of the Registrants 119
Item 11 Executive Compensation 121
Item 12 Security Ownership of Certain Beneficial Owners and Management 127
Item 13 Certain Relationships and Related Transactions 127
Item 14 Controls and Procedures 128
PART IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 128
2
Great Plains Energy Incorporated and Kansas City Power & Light Company
separately file this combined Annual Report on Form 10-K. Information contained
herein relating to an individual registrant and its subsidiaries is filed by
such registrant on its own behalf. Each registrant makes representations only as
to information relating to itself and its subsidiaries.
This report should be read in its entirety. No one section of the report deals
with all aspects of the subject matter.
CAUTIONARY STATEMENTS REGARDING CERTAIN FORWARD-LOOKING INFORMATION
Statements made in this report that are not based on historical facts are
forward-looking, may involve risks and uncertainties, and are intended to be as
of the date when made. In connection with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, the registrants are providing
a number of important factors that could cause actual results to differ
materially from the provided forward-looking information. These important
factors include:
o future economic conditions in the regional, national and international markets
o market perception of the energy industry and the Company
o changes in business strategy, operations or development plans
o state and federal legislative and regulatory actions or developments,
including deregulation, re-regulation and restructuring of the electric
utility industry and constraints placed on the Company's actions by the 35 Act
o adverse changes in applicable laws, regulations, rules, principles or
practices governing tax, accounting and environmental matters including,
but not limited to, air quality
o financial market conditions including, but not limited to, changes in interest
rates
o ability to maintain current credit ratings
o availability and cost of capital
o inflation rates
o effectiveness of risk management policies and procedures and the ability of
counterparties to satisfy their contractual commitments
o impact of terrorist acts
o increased competition including, but not limited to, retail choice in the
electric utility industry and the entry of new competitors
o ability to carry out marketing and sales plans
o weather conditions including weather-related damage
o cost and availability of fuel
o ability to achieve generation planning goals and the occurrence of unplanned
generation outages
o delays in the anticipated in-service dates of additional generating capacity
o nuclear operations
o ability to enter new markets successfully and capitalize on growth
opportunities in non-regulated businesses
o performance of projects undertaken by our non-regulated businesses and the
success of efforts to invest in and develop new opportunities, and
o other risks and uncertainties.
This list of factors is not all-inclusive because it is not possible to predict
all factors.
3
GLOSSARY OF TERMS
The following is a glossary of frequently used abbreviations or acronyms that
are found throughout this report:
Abbreviation or Acronym Definition
35 Act Public Utility Holding Company Act of 1935
ABO Accumulated Benefit Obligation
APB Accounting Principles Board
ARB Accounting Research Bulletin
Bracknell Bracknell Corporation
CO2 Carbon Dioxide
COLI Corporate Owned Life Insurance
CellNet CellNet Data Systems Inc.
Clean Air Act Clean Air Act Amendments of 1990
Compact Central Interstate Low-Level Radioactive Waste Compact
Consolidated KCP&L KCP&L and its subsidiary HSS
DIP Loan Debtor-in-Possession Financing
DOE Department of Energy
DTI DTI Holdings, Inc. and its subsidiaries Digital Teleport, Inc.
and Digital Teleport of Virginia, Inc.
Digital Teleport Digital Teleport, Inc.
EIRR Environmental Improvement Revenue Refunding
ELC Environmental Lighting Concepts, Inc.
EPA Environmental Protection Agency
EPS Earnings per share
ERISA Employee Retirement Income Security Act of 1974
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
GAAP Generally Accepted Accounting Principles
GPP Great Plains Power Incorporated, a wholly-owned subsidiary
of Great Plains Energy
Great Plains Energy Great Plains Energy Incorporated
HSS Home Service Solutions Inc., a wholly-owned subsidiary of KCP&L
Holdings DTI Holdings, Inc.
IBEW International Brotherhood of Electrical Workers
IEC Innovative Energy Consultants Inc., a wholly-owned subsidiary
of Great Plains Energy
IRS Internal Revenue Service
KCC The State Corporation Commission of the State of Kansas
KCP&L Kansas City Power & Light Company, a wholly-owned subsidiary
of Great Plains Energy
KLT Gas KLT Gas Inc., a wholly-owned subsidiary of KLT Inc.
KLT Energy Services KLT Energy Services Inc., a wholly-owned subsidiary of KLT Inc.
KLT Inc. KLT Inc., a wholly-owned subsidiary of Great Plains Energy
KLT Investments KLT Investments Inc., a wholly-owned subsidiary of KLT Inc.
KLT Telecom KLT Telecom Inc., a wholly-owned subsidiary of KLT Inc.
MAC Material Adverse Change
MACT Maximum Achievable Control Technology
MISO Midwest Independent System Operator
MmBtu Million British Thermal Units
4
MPSC Missouri Public Service Commission
MW Megawatt
MWh Megawatt hour
NEIL Nuclear Electric Insurance Limited
NERC North American Electric Reliability Council
NOx Nitrogen Oxide
NRC Nuclear Regulatory Commission
OCI Other Comprehensive Income
RSAE R.S. Andrews Enterprises, Inc., a subsidiary of HSS
RTO Regional Transmission Organization
Reardon Reardon Capital, L.L.C.
Receivables Company Kansas City Power & Light Receivables Company
SEC Securities and Exchange Commission
SPP Southwest Power Pool, Inc.
SFAS Statement of Financial Accounting Standards
Strategic Energy Strategic Energy, L.L.C, a subsidiary of KLT Energy Services
WCNOC Wolf Creek Nuclear Operating Corporation
Wolf Creek Wolf Creek Nuclear Operating Station
Worry Free Worry Free, a wholly-owned subsidiary of HSS
5
PART I
ITEM 1. BUSINESS
General
Great Plains Energy Incorporated and Kansas City Power & Light Company are
separate registrants in this combined annual report. The terms "Great Plains
Energy", "Company", "KCP&L" and "consolidated KCP&L" are used throughout this
report. "Great Plains Energy" and the "Company" refer to Great Plains Energy
Incorporated and its consolidated subsidiaries, unless otherwise indicated.
"KCP&L" refers to Kansas City Power & Light Company, and "consolidated KCP&L"
refers to KCP&L and its consolidated subsidiaries.
Great Plains Energy
Great Plains Energy, a Missouri corporation incorporated in 2001, is a public
utility holding company registered with and subject to the regulation of the
Securities and Exchange Commission (SEC) under the Public Utility Holding
Company Act of 1935 (35 Act). Through a corporate restructuring consummated on
October 1, 2001, Great Plains Energy became the parent company and sole owner of
the common stock of KCP&L. This restructuring was implemented through an
agreement and plan of merger whereby KCP&L merged with a wholly-owned subsidiary
of Great Plains Energy, with KCP&L continuing as the surviving company and
wholly-owned subsidiary of Great Plains Energy. Each outstanding share of KCP&L
stock was exchanged for a share of Great Plains Energy stock. As a result, Great
Plains Energy replaced KCP&L as the listed entity on the New York Stock
Exchange, with the trading symbol GXP. In connection with the reorganization,
KCP&L transferred to Great Plains Energy its interest in two wholly-owned
subsidiaries, KLT Inc. and Great Plains Power Incorporated (GPP).
Great Plains Energy does not own or operate any significant assets other than
the stock of its subsidiaries. Great Plains Energy's primary direct subsidiaries
are KCP&L and KLT Inc. KCP&L is described below. KLT Inc. is an investment
company that primarily holds, directly or indirectly, interests in Strategic
Energy, L.L.C. (Strategic Energy), KLT Gas Inc. (KLT Gas), DTI Holdings, Inc.
(Holdings) and affordable housing limited partnerships. Strategic Energy
provides power supply coordination services in several electricity markets
offering retail choice. KLT Gas explores for, develops and produces
unconventional natural gas resources, including coalbed methane properties.
Holdings, through its subsidiaries, provides telecommunications access and
connectivity to secondary and tertiary markets. Holdings and its subsidiaries
are currently in bankruptcy: for further information see Item 3.
Consolidated Kansas City Power & Light Company
KCP&L, a Missouri corporation incorporated in 1922, is an integrated electric
utility company serving retail customers in the states of Missouri and Kansas.
KCP&L has one wholly-owned subsidiary, Home Service Solutions Inc. (HSS). HSS
provides energy-related services to residential and commercial customers through
its subsidiaries.
Recent Developments
In November 2002, Great Plains Energy increased it ownership interest in
Strategic Energy from 83% to 89% for $15.1 million in stock and notes. See Note
9 to the consolidated financial statements.
In December 2001, Holdings and its two subsidiaries filed voluntary petitions
for reorganization under the bankruptcy code. See Note 19 to the consolidated
financial statements for additional discussion of these bankruptcy proceedings.
6
Business Segments of Great Plains Energy and KCP&L
Consolidated KCP&L's sole reportable business segment is KCP&L. Great Plains
Energy, through its direct and indirect subsidiaries, has three reportable
business segments: KCP&L, Strategic Energy and KLT Gas.
For information regarding the revenues, income and assets attributable to the
Company's reportable business segments, see Note 13 to the consolidated
financial statements, which is incorporated by reference. Comparative financial
information and discussion regarding the Company's and KCP&L's reportable
business segments can be found in Management's Discussion and Analysis starting
on page 24.
Regulation - General
Great Plains Energy and its subsidiaries are subject to SEC regulations,
including the 35 Act, on matters such as the structure of utility systems,
transactions among affiliates, acquisitions, business combinations, the issuance
and sale of securities, and engaging in business activities not directly related
to the utility or energy business. Consistent with the requirements under the 35
Act, Great Plains Energy plans to form a service company in early 2003. Unless
specifically exempted, the Company is required to submit reports providing
detailed information concerning the organization, financial structure, and
operations of Great Plains Energy and its subsidiaries. Several proposals
regarding the 35 Act have been introduced in Congress in the past few years;
however, the prospects for legislative reform or repeal are highly uncertain at
this time.
Other regulatory matters affecting KCP&L, Strategic Energy and KLT Gas are
described later in this Item 1 in the discussion on each of these reportable
business segments.
Capital Program and Financing
For information on the Company's and KCP&L's capital program and financial
needs, see Management's Discussion and Analysis, Capital Requirements and
Liquidity section on page 46 and Notes 14 and 15 to the consolidated financial
statements.
KCP&L
KCP&L, headquartered in downtown Kansas City, Missouri, engages in the
generation, transmission, distribution and sale of electricity. KCP&L has
approximately 485,000 customers located in all or portions of 24 counties in
western Missouri and eastern Kansas. Customers included over 425,000 residences,
almost 55,000 commercial firms, and almost 2,500 industrials, municipalities and
other electric utilities. KCP&L's retail revenues averaged 91% of its total
operating revenues over the last three years. Wholesale firm power, bulk power
sales and miscellaneous electric revenues accounted for the remainder of utility
revenues. KCP&L is significantly impacted by seasonality with approximately
one-third of its revenues recorded in the third quarter. KCP&L's total electric
revenues accounted for approximately 54%, 66% and 85% of Great Plains Energy's
consolidated revenues in 2002, 2001 and 2000, respectively.
Regulation
KCP&L is regulated by the Missouri Public Service Commission (MPSC) and The
State Corporation Commission of the State of Kansas (KCC) with respect to retail
rates, accounting matters, standards of service and, in certain cases, the
issuance of securities, certification of facilities and service territories.
KCP&L is classified as a public utility under the Federal Power Act, and
accordingly is subject to regulation by the Federal Energy Regulatory Commission
(FERC). By virtue of its 47% ownership interest in Wolf Creek Nuclear Operating
Station (Wolf Creek), KCP&L is subject to regulation not common to fossil
generating units. Operation of nuclear plants is intensively regulated by the
Nuclear Regulatory Commission (NRC), which has broad power to impose licensing
and safety-related
7
requirements. KCP&L is also subject to the jurisdiction of the SEC under the 35
Act, as described above.
At the end of January 2002, a severe ice storm occurred throughout large
portions of the Midwest, including the greater Kansas City metropolitan area. In
August 2002, the MPSC approved KCP&L's application for an accounting authority
order related to the Missouri jurisdictional portion of the storm costs. The
order allowed KCP&L to defer and amortize $20.1 million, representing the
Missouri impact of the storm, through January 2007. In October 2002, the Staff
of the MPSC concluded a review of the Missouri jurisdictional earnings for KCP&L
and determined that the current rate levels did not warrant further action.
Missouri jurisdictional retail revenues averaged 58% of KCP&L's total retail
revenue over the last three years.
In the second quarter of 2002, the KCC approved the stipulation and agreement
that KCP&L had reached with the Commission staff and the Citizens Utility
Ratepayers Board with regard to treatment of the Kansas portion of the ice storm
costs. Under the stipulation and agreement, KCP&L received a rate moratorium
until 2006 in exchange for KCP&L's agreement to not seek recovery of the $16.5
million expense for the Kansas jurisdictional portion of the storm costs and to
reduce rates by $12 - $13 million in 2003. Additionally, KCP&L agreed to
determine depreciation expense of Wolf Creek using a 60 year life instead of a
40 year life effective January 2003, which results in a reduction of expense by
approximately $8 million in 2003. KCP&L also agreed to file a rate case by May
15, 2006. In December 2002, the KCC approved tariffs implementing the
stipulation and agreement, which resulted in a reduction of $12.4 million in
annual Kansas retail revenues, effective January 1, 2003. Kansas jurisdictional
retail revenues averaged 42% of KCP&L's total retail revenue over the last three
years.
Under the FERC Order 2000, "Regional Transmission Organizations" (FERC Order
2000), KCP&L, as an investor-owned utility, is strongly encouraged to join a
FERC approved Regional Transmission Organization (RTO). RTOs combine regional
transmission operations of utility businesses into a regional organization that
schedules transmission services and monitors the energy market to ensure
regional transmission reliability and non-discriminatory access. During the
first quarter of 2002, the Southwest Power Pool (SPP) and the Midwest
Independent System Operator (MISO) voted to consolidate the two organizations to
create a larger Midwestern RTO, a non-profit organization that will operate in
twenty states and one Canadian province. KCP&L is a member of the SPP. The
consolidation is expected to be completed during the second quarter of 2003 and
has received FERC approval. The FERC has already approved an RTO proposal
submitted by the MISO. Additionally, regulatory approvals would have to be
received from the MPSC and the KCC prior to KCP&L's participation in an RTO.
During 2003, KCP&L expects to make filings with the MPSC and KCC seeking
permission to participate in the RTO resulting from the merger of SPP and MISO.
During February 2003, KCP&L submitted to MISO a conditional application to
joining the RTO resulting from the merger of SPP and MISO.
During the third quarter of 2002, the FERC issued a Notice of Proposed
Rulemaking to Remedy Undue Discrimination through Open Access Transmission
Service and Standard Electricity Market Design. The proposed rulemaking is
designed to establish a single non-discriminatory open access transmission
tariff with a single transmission service that is applicable to all users of the
interstate transmission grid. All public utilities that own, control or operate
interstate transmission facilities would be required to become independent
transmission providers, turn over the operation of their transmission facilities
to an RTO that meets the definition of an independent transmission provider or
contract with an entity that meets the definition of an independent transmission
provider. KCP&L filed comments with the FERC on the proposed rulemaking in
November 2002. The FERC has recently announced that it will issue a white paper
on Standard Electricity Market Design in April 2003 and accept comments on that
paper before issuing a final rule, which is now expected in the third or fourth
8
quarter of 2003. KCP&L believes its participation in the RTO resulting from the
merger of SPP and MISO would fulfill the majority of the requirements of this
proposed rulemaking.
Competition
For years the electric industry was relatively stable, characterized by
vertically integrated electric companies. During recent years however, federal
and state developments aimed at promoting competition resulted in much industry
restructuring. The industry is moving from a fully regulated industry, comprised
of integrated companies that combine generation, transmission and distribution,
to an industry comprised of competitive wholesale generation markets with
continuing regulation of transmission and distribution. However, the pace of
restructuring has slowed significantly due primarily to public and governmental
reactions to issues associated with deregulation efforts in California and the
collapse of its wholesale electric energy market.
At the federal level, the FERC remains committed to the development of wholesale
generation markets. Although its proposal for the development of RTOs to
facilitate markets has been delayed, it has undertaken an initiative to
standardize wholesale markets in the United States. At the state level, concerns
raised by the California experiences have stalled new retail competition
initiatives and slowed the separation of generation from regulated transmission
and distribution assets. As changes in the retail and wholesale markets have
occurred, regulators and legislators in different jurisdictions have not
coordinated these changes. In some cases, actions by one jurisdiction may
conflict with actions by another, creating potentially incompatible obligations
for public utilities. Management believes the transition to competition will
continue, although at a slower pace, particularly at the state level. To date,
Missouri and Kansas have not proposed legislation authorizing retail choice.
Management believes it is too early to predict what the ultimate timing or
effects of changes in the energy industry will be, or how potentially
incompatible regulatory obligations will be resolved. Restructuring issues are
complex and are continually affected by events at the federal and state levels.
However, these changes may result in fundamental alterations in the way
traditional integrated utilities like KCP&L conduct business. Management also
believes that competition for electric generation services has created new risks
and uncertainties in the industry. The uncertainties include future prices of
generation service in the wholesale and retail markets, supply and demand
volatility, and changes in customer profiles that may impact margins on various
electric service offerings. These uncertainties create additional risk for
participants in the industry, including KCP&L, and may result in increased
volatility in operating results.
If Missouri or Kansas were to pass legislation authorizing retail choice, KCP&L
may no longer be able to apply regulated utility accounting principles to some,
or all, of its operations and may be required to write off certain regulatory
assets and liabilities. See Note 4 to the consolidated financial statements for
additional information regarding regulatory assets and liabilities.
Power Supply
KCP&L is a member of the SPP reliability region. As one of the ten regional
members of North American Electric Reliability Council (NERC), SPP is
responsible for maintaining reliability in its area through coordination of
planning and operations. As a member of the SPP, KCP&L must maintain a capacity
margin of at least 12% of its projected peak summer demand. This net positive
supply of capacity and energy is maintained through its generation assets and
capacity and power purchase agreements. The capacity margin insures the
reliability of electric energy in the SPP region in the event of operational
failure of power generating units utilized by the members of the SPP.
KCP&L's maximum system net hourly summer peak load of 3,374 megawatts (MW)
occurred on August 28, 2000. The maximum winter peak load of 2,382 MW occurred
on December 18, 2000.
9
During 2002, the winter peak load was 2,105 MW and the summer peak load was
3,335 MW. The projected peak summer demand for 2003 is 3,447 MW.
KCP&L's generation assets account for 97% of its 4,167 MW of projected 2003
capacity. The remainder of KCP&L's capacity requirements will be met by capacity
purchases net of capacity sales. Additionally, KCP&L has adequate generation
assets to provide service through 2004 and is currently evaluating various
purchase and construction options to meet capacity and energy requirements
through 2010.
The majority of KCP&L's rates do not contain an automatic fuel adjustment clause
to recover or pass through fuel costs to customers without the delay required by
a rate case. Consequently, to the extent the price of coal, coal transportation,
nuclear fuel, nuclear fuel processing or purchased power increased significantly
after the expiration of the contracts described in this section, KCP&L's
earnings may be adversely affected until the increases could be reflected in
rates, which could be an extended period of time.
The principal sources of fuel for KCP&L's electric generation are coal and
nuclear fuel. KCP&L expects to satisfy about 98% of its 2003 fuel requirements
from these sources with the remainder provided by natural gas and oil. The
actual 2002 and estimated 2003 fuel mix and delivered cost per megawatt hour
(MWh) generated are as follows:
Fuel cost (cents) per
Fuel Mix net MWh generated
Estimated Actual Estimated Actual
Fuel 2003 2002 2003 2002
Coal 75 % 75 % 0.92 0.92
Nuclear 23 23 0.41 0.42
Other 2 2 4.85 3.48
Total Generation 100 % 100 % 0.89 0.86
During 2003, KCP&L's generating units, including jointly-owned units, are
projected to burn approximately 11.7 million tons of coal. KCP&L has entered
into coal-purchase contracts with various suppliers in Wyoming's Powder River
Basin, the nation's principal supplier of low-sulfur coal. These contracts, with
expiration dates ranging from 2003 through 2005, will satisfy approximately 95%
of the projected coal requirements for 2003 and 55% for 2004 and 2005. The
remainder of KCP&L's coal requirements will be fulfilled through additional
contracts or spot market purchases. KCP&L has also entered into rail
transportation contracts with various railroads for moving coal from Powder
River Basin to its generating units. These contracts, with expiration dates
ranging from 2005 through 2020, will provide transportation services for all of
the coal KCP&L transports from Powder River Basin to its generating units.
KCP&L owns 47% of Wolf Creek Nuclear Operating Corporation (WCNOC), the
operating company for Wolf Creek, its only nuclear generating unit. Wolf Creek
purchases uranium and has it processed for use as fuel in its reactor. In the
first step, uranium concentrates are chemically converted to uranium
hexafluoride, which is suitable for enrichment. During enrichment, the
fissionable isotope of uranium contained in uranium hexafluoride is concentrated
by removing a large part of the non-fissionable isotope resulting in enriched
uranium hexafluoride suitable for further processing into nuclear fuel pellets.
Finally, the enriched uranium hexafluoride is further processed into ceramic
pellets, which are then encased in metal tubes and arranged into fuel assemblies
in the fabrication process.
The owners of Wolf Creek have on hand or under contract 100% of their uranium
and conversion needs for 2003 and 78% of the uranium and conversion needed for
operation of Wolf Creek through
10
March 2008. The balance is expected to be obtained through the spot market and
contract purchases. The owners also have under contract 100% of Wolf Creek's
uranium enrichment needs for 2003 and 80% of the uranium enrichment required to
operate Wolf Creek through March 2008. The balance of Wolf Creek's enrichment
needs are expected to be obtained through spot market and contract purchases.
Fabrication requirements are under contract through 2024.
Under the Nuclear Waste Policy Act of 1982, the Department of Energy (DOE) is
responsible for the permanent disposal of spent nuclear fuel. KCP&L pays the DOE
a quarterly fee of one-tenth of a cent for each kilowatt-hour of net nuclear
generation delivered and sold for the future disposal of spent nuclear fuel.
These disposal costs are charged to fuel expense. In 2002, the U.S. Senate
approved Yucca Mountain, Nevada as a long-term geologic repository. The DOE is
currently in the process of preparing an application to obtain the NRC license
to proceed with construction of the repository. Management cannot predict when
this site may be available. Under current DOE policy, once a permanent site is
available, the DOE will accept spent nuclear fuel first from the owners with the
oldest spent fuel. Wolf Creek has completed an on-site storage facility that is
designed to hold all spent fuel generated at the plant through the end of its
40-year licensed life in 2025.
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated the
development of low-level radioactive waste disposal facilities. The states of
Kansas, Nebraska, Arkansas, Louisiana and Oklahoma formed the Central Interstate
Low-Level Radioactive Waste Compact (Compact) and selected a site in northern
Nebraska to locate a disposal facility. Nebraska officials opposed the facility
and Nebraska has given notice of its withdrawal from the Compact. Currently, the
low-level waste from Wolf Creek is being processed and disposed of in other
federally-approved sites. See Note 10 to the consolidated financial statements
for additional information regarding low-level waste.
At times, KCP&L purchases power to meet the requirements of its customers.
Management believes KCP&L will be able to obtain enough power to meet its future
demands due to the coordination of planning and operations in the SPP region;
however, price and availability of power purchases may be significantly impacted
during periods of excess demand. KCP&L purchased power, as a percent of MWh
requirements, totaled 5%, 6%, and 11%, in 2002, 2001 and 2000, respectively.
Environmental Matters
KCP&L's operations are subject to regulation by federal, state and local
authorities with regard to air and other environmental matters. The generation
and transmission of electricity produces and requires disposal of certain
hazardous products which are subject to these laws and regulations. In addition
to imposing continuing compliance obligations, these laws and regulations
authorize the imposition of substantial penalties for noncompliance, including
fines, injunctive relief and other sanctions. Failure to comply with these laws
and regulations could have a material adverse effect on KCP&L.
KCP&L operates in an environmentally responsible manner and seeks to use current
technology to avoid and treat contamination. KCP&L regularly conducts
environmental audits designed to ensure compliance with governmental regulations
and to detect contamination. Governmental bodies, however, may impose additional
or more restrictive environmental regulations that could require substantial
changes to operations or facilities at a significant cost. Expenditures to
comply with environmental laws and regulations have not been material in amount
during the periods presented and are not expected to be material in the upcoming
years with the exception of the issues discussed below.
Certain Air Toxic Substances
In July 2000, the National Research Council published its findings of a study
under the Clean Air Act Amendments of 1990 (Clean Air Act) which stated that
power plants that burn fossil fuels, particularly coal, generate the greatest
amount of mercury emissions. As a result, in December 2000, the
11
Environmental Protection Agency (EPA) announced it would propose Maximum
Achievable Control Technology (MACT) requirements by December 2003 to reduce
mercury emissions and issue final rules by December 2004. Until the rules are
proposed, KCP&L cannot predict the likelihood or compliance costs of such
regulations.
Air Particulate Matter
In July 1997, the EPA revised ozone and particulate matter air quality standards
creating a new eight-hour ozone standard and establishing a new standard for
particulate matter less than 2.5 microns (PM-2.5) in diameter. These standards
were challenged in the U. S. Court of Appeals for the District of Columbia
(Appeals Court) that decided against the EPA. Upon further appeal, the U. S.
Supreme Court reviewed the standards and remanded the case back to the Appeals
Court for further review, including a review of whether the standards were
arbitrary and capricious. On March 26, 2002, the Appeals Court issued its
decision on challenges to the 8-hour ozone and PM-2.5 national ambient air
quality standards (NAAQS). This decision denies all state, industry and
environmental groups petitions for review and thus upheld as valid the EPA's new
8-hour ozone and PM-2.5 NAAQS. In so doing, the court held that the EPA acted
consistently with the Clean Air Act in setting the standards at the levels it
chose and the EPA's actions were reasonable and not arbitrary and capricious,
and cited the deference given the EPA's decision-making authority. The court
stated that the extensive records established for each rule supported the EPA's
actions in both rulemakings.
This decision by the Appeals Court removed the last major hurdle to the EPA's
implementation of stricter ambient air quality standards for ozone and fine
particles. The EPA has not yet issued regulations incorporating the new
standards. Until new regulations are issued, KCP&L is unable to estimate the
impact of the new standards. However, the impact on KCP&L and all other
utilities that use fossil fuels could be substantial. In addition, the EPA is
conducting a three-year study of fine particulate ambient air levels. Until this
testing and review period has been completed, KCP&L cannot determine additional
compliance costs, if any, associated with the new particulate regulations.
Nitrogen Oxide
The EPA announced in 1998 regulations implementing reductions in Nitrogen Oxide
(NOx) emissions. These regulations initially called for 22 states, including
Missouri, to submit plans for controlling NOx emissions. The regulations require
a significant reduction in NOx emissions from 1990 levels at KCP&L's Missouri
coal-fired plants by the year 2003.
In December 1998, KCP&L and several other western Missouri utilities filed suit
against the EPA over the inclusion of western Missouri in the NOx reduction
program based on the 1-hour NOx standard. On March 3, 2000, a three-judge panel
of the District of Columbia Circuit of the U.S. Court of Appeals sent the NOx
rules related to Missouri back to the EPA, stating the EPA failed to prove that
fossil plants in the western part of Missouri significantly contribute to ozone
formation in downwind states. On March 5, 2001, the U.S. Supreme Court denied
certiorari, making the decision of the Court of Appeals final.
In February 2002, the EPA issued proposed Phase II NOx SIP Call regulation which
specifically excludes the fossil plants in the western part of Missouri from the
NOx SIP Call. To date, the EPA has not issued its final Phase II NOx SIP Call
regulation. If fossil plants in western Missouri are required to implement NOx
reductions, KCP&L would need to incur significant capital costs, purchase power
or purchase NOx emission allowances. Preliminary analysis of the regulations
indicates that selective catalytic reduction technology, as well as other
changes, may be required for some of the KCP&L units. Currently, KCP&L estimates
that additional capital expenditures to comply with these regulations could
range from $40 million to $60 million. Operations and maintenance expenses could
also increase by more than $2.5 million per year. KCP&L continues to refine
these preliminary estimates and explore alternatives. The ultimate cost of these
regulations, if any, could be significantly different from the amounts estimated
above.
12
Carbon Dioxide
At a December 1997 meeting in Kyoto, Japan, delegates from 167 nations,
including the United States, agreed to a treaty (Kyoto Protocol) that would
require a seven percent reduction in United States carbon dioxide (CO2)
emissions below 1990 levels. Although the United States agreed to the Kyoto
Protocol, the treaty has not been sent to Congress for ratification. The
financial impact on KCP&L of future requirements in the reduction of CO2
emissions cannot be determined until specific regulations are adopted.
Clean Air Legislation
Congress has debated numerous bills that would make significant changes to the
current federal Clean Air Act including potential establishment of nationwide
limits on power plant emissions for several specific pollutants. These bills
have the potential for a significant financial impact on KCP&L through the
installation of new pollution control equipment to achieve compliance with the
new nationwide limits. The financial consequences to KCP&L cannot be determined
until the final legislation is passed. KCP&L will continue to monitor the
progress of these bills.
Proposed Water Use Regulations
In February 2002, the EPA issued proposed rules related to certain existing
power producing facilities that employ cooling water intake structures that
withdraw 50 million gallons or more per day and use 25% or more of that water
for cooling purposes. The proposed rules establish national minimum performance
requirements designed to minimize adverse environmental impact. The EPA must
take final action by August 2003. KCP&L will continue to monitor the progress of
this rulemaking. The impact of these proposed rules has not yet been quantified,
however, KCP&L's generating stations would be affected.
Strategic Energy
Strategic Energy, an 89% indirect subsidiary of Great Plains Energy, provides
power supply coordination services by entering into long-term contracts with its
customers to supply electricity that Strategic Energy purchases under long-term
contracts to manage its customers electricity needs. In return, Strategic Energy
receives an ongoing management fee, which is included in the contracted sales
price for the electricity. Strategic Energy operates in several electricity
markets offering retail choice, including Pennsylvania, California, Ohio, New
York, Massachusetts and Texas. Strategic Energy is targeting expansion into two
additional states in 2003, which would expand its operations into eight of the
sixteen states that offer retail choice. Strategic Energy also provides
strategic planning and consulting services in the natural gas and electricity
markets. Strategic Energy's total revenues accounted for approximately 42%, 28%
and 12% of Great Plains Energy's consolidated revenues in 2002, 2001 and 2000,
respectively.
At December 31, 2002, Strategic Energy provided power supply coordination
services on behalf of approximately 33,100 commercial, institutional and small
manufacturing accounts. Strategic Energy's customer base is very diverse.
Strategic Energy served over 5,200 customers, including numerous Fortune 500
companies, smaller companies, and governmental entities. Based solely on current
signed contracts and expected usage, Strategic Energy anticipates future MWh
sales of 14.0 million, 8.2 million, 5.3 million, and 1.2 million for the years
2003 through 2006, respectively. Strategic Energy expects to also supply
additional MWh sales in these years through growth in existing markets by
re-signing existing customers and signing new customers as well as through
expansion into new markets.
Power Supply
To supply its retail contracts, Strategic Energy purchases long-term blocks of
electricity under forward contracts in fixed quantities at fixed prices from
power suppliers based on projected usage. Strategic Energy does not own any
generation, transmission or distribution facilities. Strategic Energy sells any
13
excess retail supply of electricity back into the wholesale market. The proceeds
from the sale of excess supply of electricity are recorded as a reduction of
purchased power.
In the normal course of business, Great Plains Energy and KLT Inc. enter into
various agreements providing financial or performance assurance to third parties
on behalf of Strategic Energy. Such agreements include, for example, guarantees,
stand-by letters of credit and surety bonds. These agreements are entered into
primarily to support or enhance the creditworthiness otherwise attributed to
Strategic Energy on a stand-alone basis, thereby facilitating the extension of
sufficient credit to accomplish Strategic Energy's intended business purposes.
Strategic Energy enters into forward contracts with multiple suppliers. At
December 31, 2002, Strategic Energy's five largest suppliers under forward
supply contracts represented 69% of the total future committed purchases. In the
event of supplier non-delivery or default, Strategic Energy's results of
operations could be affected to the extent that the cost of replacement power
exceeded the combination of the contracted price with the supplier and the
amount of collateral held by Strategic Energy to mitigate its market risk with
the supplier. Strategic Energy's results of operations could also be affected,
in a given period, if it was required to make a payment upon termination of a
supplier contract to the extent that the contracted price with the supplier
exceeded the market value of the contract. Strategic Energy monitors its
counterparty credit risk by evaluating the credit quality and performance of its
suppliers on a routine basis and by, among other things, adjusting the amount of
collateral required from its suppliers, as part of its risk management policy
and practices.
Regulation
Strategic Energy, as a participant in the wholesale electricity and transmission
markets, is subject to FERC jurisdiction. Additionally, Strategic Energy is
subject to regulation by state regulatory agencies in states where Strategic
Energy has retail customers. Each state has a public utilities commission that
publishes rules related to retail choice. Each state's rules are distinct and
may conflict. These rules do not restrict the amount Strategic Energy can charge
for its services, but can have an impact on Strategic Energy's ability to
profitably serve in any jurisdiction.
During the third quarter of 2002, the FERC issued a Notice of Proposed
Rulemaking to Remedy Undue Discrimination through Open Access Transmission
Service and Standard Electricity Market Design. The proposed rulemaking is
designed to establish a single non-discriminatory open access transmission
tariff with a single transmission service that is applicable to all users of the
interstate transmission grid. Strategic Energy has evaluated the impact of the
proposed rulemaking on its operations and provided comments to the FERC that are
generally supportive of the provisions of the proposal, but suggested some
changes to the proposed rule. The FERC has recently announced that it will issue
a white paper on Standard Electricity Market Design in April 2003 and accept
comments on that paper before issuing a final rule, which is now expected in the
third or fourth quarter of 2003.
Competition
Strategic Energy currently provides retail electricity services in six states
where electricity retail choice has occurred. Strategic Energy has two national
competitors that operate in most or all of the same states in which Strategic
Energy has operations. In addition to these national competitors, Strategic
Energy faces competition in certain markets from deregulated utility affiliates
that have been formed by the host regulated utility to capitalize on retail
choice in their home market territory. Additionally, Strategic Energy, as well
as its other competitors, must compete with the host utility in order to
convince customers to switch away from their service offerings. The principal
methods of competition are price, service and product differentiation. Strategic
Energy competes in all of these areas.
14
KLT Gas
KLT Gas is focused on exploring for, developing, and producing unconventional
natural gas resources, including coalbed methane properties. KLT Gas believes
that unconventional natural gas resources provide an economically attractive
alternative source of supply to meet the growing demand for natural gas in North
America. Additionally, KLT Gas' management team has experience and expertise in
identifying, testing and producing unconventional natural gas properties and, as
a result, it believes its expertise provides a competitive advantage in this
niche of the exploration and production sector. Because it has a longer,
predictable reserve life and lower development cost, management believes
unconventional natural gas exploration is inherently lower risk than
conventional gas exploration.
Although gas prices have been volatile historically, KLT Gas continues to
believe that the long-term future price scenarios for natural gas appear strong.
Environmental concerns, especially air quality, and the increased demand for
natural gas for new electric generating capacity are contributing to this
projected growth in demand.
Regulation
KLT Gas' exploration and production activities are regulated extensively at the
federal, state and local levels including environmental, health and safety
regulations. Regulated matters include permits for discharges of wastewaters and
other substances generated in connection with drilling operations; bonds or
other financial responsibility requirements to cover drilling contingencies and
well plugging and abandonment costs; and reports concerning operations, the
spacing of wells and unitization and pooling of properties. At various times,
regulatory agencies have imposed price controls and limitations on oil and gas
production. In addition, at the federal level, the FERC regulates interstate
transportation of natural gas under the Natural Gas Act. Other regulated matters
include marketing, pricing, transportation and valuation of royalty payments.
Competition
KLT Gas is an independent natural gas company that frequently competes for
reserve acquisitions, exploration leases, licenses, concessions, marketing
agreements, equipment and labor against companies with financial and other
resources substantially larger than KLT Gas' resources. In addition, many of KLT
Gas' competitors have been operating in the same core areas for a much longer
time than KLT Gas or have established strategic long-term positions in
geographic regions in which KLT Gas may seek new entry.
Great Plains Energy and Consolidated KCP&L Employees
At December 31, 2002, Great Plains Energy had 3,046 employees. Consolidated
KCP&L had 2,854 employees, including 1,397 represented by three local unions of
the International Brotherhood of Electrical Workers (IBEW). KCP&L has labor
agreements with Local 1613, representing clerical employees (expires March 31,
2005), with Local 1464, representing outdoor workers (expires January 31, 2006),
and with Local 412, representing power plant workers (expires February 29,
2004).
15
Executive Officers
Year Assumed
An Officer
Name Age Current Position(s) Position
Bernard J. Beaudoin 62 Chairman of the Board, President and Chief Executive 1984
Officer - Great Plains Energy Incorporated
Chairman of the Board and Chief Executive Officer - Kansas
City Power & Light Company
Andrea F. Bielsker 44 Senior Vice President - Finance, Chief Financial Officer and 1996
Treasurer - Great Plains Energy Incorporated
Senior Vice President - Finance, Chief Financial Officer and
Treasurer - Kansas City Power & Light Company
John J. DeStefano 53 President - Great Plains Power Incorporated 1989
President - Home Service Solutions Inc.
President - Worry Free Services, Inc.
William H. Downey 1 57 Executive Vice President - Great Plains Energy Incorporated 2000
President - Kansas City Power & Light Company
Stephen T. Easley 2 47 Vice President - Generation Services - Kansas City Power & 2000
Light Company
William P. Herdegen III 3 48 Vice President - Distribution Operations - Kansas City 2001
Power & Light Company
Jeanie S. Latz 51 Executive Vice President - Corporate and Shared Services and 1991
Secretary - Great Plains Energy Incorporated
Secretary - Kansas City Power & Light Company
Nancy J. Moore 53 Vice President - Customer Services - Kansas City Power & 2000
Light Company
1 Mr. Downey was President of Unicom Energy Services Company Inc. from
1997-1999; and Vice President of Commonwealth Edison Company from 1992-1999.
2 Mr. Easley was Director of Construction at KCP&L from October 1999-April 2000;
Assistant to the Chief Financial Officer at KCP&L in 1999; and Vice President,
Business Development Americas with KLT Power Inc. from March 1996-November 1998.
3 Mr. Herdegen was Chief Operating Officer at Laramore, Douglass and Popham in
2001 and Vice President and Director of Utilities Practice at System Development
Integration, a consulting company, from 1999 to 2001; and held various positions
at Commonwealth Edison during 1976-1999.
16
Year Assumed
An Officer
Name Age Current Position(s) Position
Douglas M. Morgan 60 Vice President - Information Technology and Support 1994
Services - Great Plains Energy Incorporated
Brenda Nolte 4 50 Vice President - Public Affairs - Great Plains Energy 2000
Incorporated
William G. Riggins 44 General Counsel - Great Plains Energy Incorporated 2000
Richard A. Spring 48 Vice President - Transmission Services - Kansas City Power & 1994
Light Company
Andrew B. Stroud, Jr. 5 44 Vice President - Human Resources - Great Plains Energy 2001
Incorporated
Lori A. Wright 6 40 Controller - Great Plains Energy Incorporated 2002
Controller - Kansas City Power & Light Company
Richard M. Zomnir 7 54 President and Chief Executive Officer - Strategic Energy 2003
All of the above individuals have been officers or employees in a responsible
position with the Company for the past five years except as noted in the
footnotes. The term of office of each officer commences with his or her
appointment by the Board of Directors and ends at such time as the Board of
Directors may determine. Gregory J. Orman resigned his position as Executive
Vice President - Corporate Development and Strategic Planning of Great Plains
Energy effective December 31, 2002.
There are no family relationships between any of the executive officers, nor any
arrangement or understanding between any executive officer and any other person
involved in officer selection.
4 Ms. Nolte was Vice President, Corporate Affairs, with AMC Entertainment from
1997-2000.
5 Mr. Stroud was Vice President-Global Human Resources of Evenflo Company, Inc.
in 2000-2001; and held various management positions at PepsiCo during 1991-2000.
6 Ms. Wright served as Assistant Controller for Kansas City Power & Light
Company from 2001 until named Controller in 2002; and was Director of Accounting
and Reporting with American Electric Power Company, Inc. (which acquired Central
& South West) in 2000-2001; and Assistant Controller with Central & South West
Corporation in 1997-2000.
7 Mr. Zomnir founded the predecessor to Strategic Energy in 1991 and has served
as its President and Chief Executive Officer since that time.
17
Available Information
Great Plains Energy's website is www.greatplainsenergy.com, and KCP&L's website
is www.kcpl.com. Information contained on the companies' websites is not
incorporated herein except to the extent specifically so indicated. Both
companies make available, free of charge, on or through their websites their
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable
after the companies electronically file such material with, or furnish it to,
the SEC. In addition, the companies make available on or through their websites
all other reports, notifications and certifications filed electronically with
the SEC.
ITEM 2. PROPERTIES
KCP&L Generation Resources
KCP&L's generating facilities consist of the following:
Unit Year Completed Estimated 2003 Primary Fuel
MW Capacity
Existing Units
Base Load Wolf Creek (a) 1985 550 (b) Nuclear
Iatan 1980 469 (b) Coal
LaCygne 2 1977 337 (b) Coal
LaCygne 1 1973 344 (b) Coal
Hawthorn 9 (c) 2000 137 Gas
Hawthorn 6 (d) 1997 132 Gas
Hawthorn 5 (e) 1969 565 Coal
Montrose 3 1964 176 Coal
Montrose 2 1960 164 Coal
Montrose 1 1958 170 Coal
Peak Load Hawthorn 8 (d) 2000 77 Gas
Hawthorn 7 (d) 2000 77 Gas
Northeast 13 and 14 (d) 1976 114 Oil
Northeast 17 and 18 (d) 1977 117 Oil
Northeast 15 and 16 (d) 1975 116 Oil
Northeast 11 and 12 (d) 1972 111 Oil
Northeast Black Start Unit 1985 2 Oil
West Gardner 1, 2, 3, and 4 (f) 2003 308 Gas
Osawatomie (f) 2003 77 Gas
Total 4,043
(a) Wolf Creek is one of KCP&L's principal generating facilities and has the
lowest fuel cost of any of its generating facilities.
(b) KCP&L's share of a jointly-owned unit.
(c) Heat Recovery Steam Generator portion of combined cycle.
(d) Combustion turbines.
(e) On February 17, 1999, an explosion occurred at the Hawthorn Generating
Station. The station returned to commercial operation on June 20, 2001,
with a new boiler, air quality control equipment and an uprated turbine.
(f) Combustion turbines currently under construction. Completion is scheduled
for the spring and summer of 2003.
KCP&L owns the Hawthorn Station (Jackson County, Missouri), Montrose Station
(Henry County, Missouri), Northeast Station (Jackson County, Missouri), West
Gardner Station (Johnson County, Kansas) and Osawatomie (Miami County, Kansas).
KCP&L also owns 50% of the 688 MW LaCygne 1 Unit and 674 MW LaCygne 2 Unit in
Linn County, Kansas; 70% of the 670 MW Iatan Station in Platte County, Missouri;
and 47% of the 1,170 MW Wolf Creek in Coffey County, Kansas.
18
KCP&L Transmission and Distribution Resources
KCP&L's electric transmission system interconnects with systems of other
utilities to permit bulk power transactions with other electricity suppliers.
KCP&L owns approximately 1,700 miles of transmission lines, approximately 9,000
miles of overhead distribution lines, and approximately 3,500 miles of
underground distribution lines in Missouri and Kansas. KCP&L has all the
franchises necessary to sell electricity within the territories from which
substantially all of its gross operating revenue is derived. KCP&L's
distribution and transmission systems are continuously monitored for adequacy to
meet customer needs. Management believes the current systems are adequate to
serve its customers.
KCP&L General
KCP&L's principal plants and properties, insofar as they constitute real estate,
are owned in fee simple. Certain other facilities are located on premises held
under leases, permits or easements. KCP&L's electric transmission and
distribution systems are for the most part located over or under highways,
streets, other public places or property owned by others for which permits,
grants, easements or licenses (deemed satisfactory but without examination of
underlying land titles) have been obtained.
Substantially all of the fixed property and franchises of KCP&L, which consists
principally of electric generating stations, electric transmission and
distribution lines and systems, and buildings subject to exceptions and
reservations, are subject to a General Mortgage Indenture and Deed of Trust
dated as of December 1, 1986.
KLT Gas
KLT Gas leases mineral rights on properties located in Colorado, Texas, Wyoming,
Kansas and Nebraska. At December 31, 2002, these leased properties cover
approximately 255,000 undeveloped acres. The testing of this acreage is in
accordance with KLT Gas' exploration plan and capital budget. The timing of the
testing may vary from current plans based upon obtaining the required
environmental and regulatory approvals and permits and future changes in market
conditions. KLT Gas continues to seek and identify new lease prospects in
addition to its existing portfolio of properties.
Item 3. Legal Proceedings
DTI Bankruptcy
On December 31, 2001, a subsidiary of KLT Telecom, DTI Holdings, Inc. (Holdings)
and its subsidiaries, Digital Teleport, Inc. (Digital Teleport) and Digital
Teleport of Virginia, Inc., filed separate voluntary petitions in Bankruptcy
Court for the Eastern District of Missouri for reorganization under Chapter 11
of the U.S. Bankruptcy Code in Case Nos. 01-54369-399, 01-54370-399 and
01-54371-399. These cases have been consolidated for joint procedural
administration. Holdings and its two subsidiaries are collectively called "DTI".
The filings enable DTI to continue to conduct its business operations while
attempting to resolve its financial obligations. KLT Telecom is a creditor in
the proceedings, and KCP&L has an immaterial trade claim in the Digital Teleport
bankruptcy proceedings. KLT Telecom agreed to provide up to $5 million in
debtor-in-possession financing (DIP Loan) to Digital Teleport for a term of 18
months during the bankruptcy process if it achieves certain financial goals. The
Bankruptcy Court approved the DIP Loan on February 18, 2002, but no advances
have been made under the DIP Loan to date.
In December 2002, Digital Teleport entered into an agreement to sell
substantially all of its assets (Asset Sale) to CenturyTel Fiber Company II, LLC
(Century Tel), a nominee of CenturyTel, Inc. (Asset Purchase Agreement). The
Asset Sale was approved by the Bankruptcy Court in February 2003, but the Asset
Purchase Agreement contains conditions to closing which include, among other
items, the receipt of all necessary regulatory approvals, which must either be
satisfied or waived by July 15, 2003.
19
In the Digital Teleport bankruptcy case, KLT Telecom, KLT Inc., KCP&L, Great
Plains Energy, Digital Teleport and the Official Unsecured Creditors Committee
of Digital Teleport entered into a Settlement Agreement as of December 23, 2002
(Teleport Settlement Agreement). The Teleport Settlement Agreement, if approved
by the Bankruptcy Court, resolves all material issues and disputes among the
parties to that agreement. The Teleport Settlement Agreement does not resolve
any claims that Holdings or its creditors may have against the Company; however,
as discussed below, settlement discussions have commenced in the Holdings
bankruptcy case. Digital Teleport and Digital Teleport of Virginia have prepared
a Chapter 11 plan (Chapter 11 Plan) and disclosure statement reflecting the
Asset Sale and the terms of the Teleport Settlement Agreement and expect that a
confirmation hearing will be held by the Bankruptcy Court in May 2003. The
Chapter 11 Plan contemplates that Digital Teleport and Digital Teleport of
Virginia will be liquidated after distribution of those companies' assets to
their creditors pursuant to the Chapter 11 Plan and the Teleport Settlement
Agreement.
In an objection to a motion by Digital Teleport for an extension of time in
which to propose a Chapter 11 plan, the largest creditor of Holdings (the
Creditor) asserted that Holdings, Digital Teleport and their creditors have
claims against KLT Telecom, KLT Inc., KCP&L and Great Plains Energy based on
theories of breach of contract, fraudulent conveyance, recharacterization of
debt, subordination and breach of fiduciary duty. Among other things, the
Creditor asserted that certain tax benefits should have been paid to Holdings
and Digital Teleport, rather than to KLT Telecom as provided in the October 1,
2001, Great Plains Energy tax allocation agreement. The Creditor has not
otherwise pursued these claims at this time, and the Company believes that it
has meritorious defenses to these claims. Further, Holdings, the principal
creditors of Holdings (including the Creditor), KLT Telecom, KLT Inc., KCP&L,
and Great Plains Energy are in the process of negotiating a separate settlement
agreement which, if finalized and approved by the Bankruptcy Court, is
anticipated to resolve the Holdings bankruptcy case and any claims that might be
asserted in the Holdings bankruptcy case against the Company, and to provide
payment to the creditors of Holdings from a portion of the proceeds KLT Telecom
otherwise would receive from the Asset Sale. If the separate settlement
agreement is finalized, it is anticipated that the Chapter 11 Plan will be
modified to add Holdings as a proponent and to include the terms of the Holdings
Settlement Agreement. For further information regarding the DTI bankruptcy
proceedings, see Note 19 to the consolidated financial statements, which is
incorporated by reference.
Central Interstate Low-Level Radioactive Waste Compact Litigation
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated that the
various states, individually or through interstate compacts, develop alternative
low-level radioactive waste disposal facilities. The states of Kansas, Nebraska,
Arkansas, Louisiana and Oklahoma formed the Compact and selected a site in
northern Nebraska to locate a disposal facility. WCNOC and the owners of the
other five nuclear units in the Compact provided most of the pre-construction
financing for this project. KCP&L's net investment in the Compact was $7.4
million at December 31, 2002 and 2001.
Significant opposition to the project has been raised by Nebraska officials and
residents in the area of the proposed facility and attempts have been made
through litigation and proposed legislation in Nebraska to slow down or stop
development of the facility. On December 18, 1998, the application for a license
to construct this project was denied. After the license denial, WCNOC and others
filed a lawsuit in federal court contending Nebraska officials acted in bad
faith while handling the license application. In September 2002, the U.S.
District Court Judge presiding over the Central Interstate Compact Commission's
federal "bad faith" lawsuit against the State of Nebraska issued his decision in
the case finding clear evidence that the State of Nebraska acted in bad faith in
processing the license application for a low-level radioactive waste disposal
site in Nebraska and rendered a judgment in the amount of $151.4 million against
the state. The state has appealed this decision to the 8th Circuit, U.S. Court
of Appeals. Based on the favorable outcome of this trial, in KCP&L's opinion,
there is a greater possibility of reversing the state's license denial once the
decision in this case is final.
20
In May 1999, the Nebraska legislature passed a bill withdrawing Nebraska from
the Compact. In August 1999, the Nebraska Governor gave official notice of the
withdrawal to the other member states. Withdrawal will not be effective for five
years and will not, of itself, nullify the site license proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2002, no matter was submitted to a vote of security
holders through the solicitation of proxies or otherwise for either Great Plains
Energy or KCP&L.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Great Plains Energy
Great Plains Energy common stock is listed on the New York Stock Exchange under
the symbol GXP. Prior to October 1, 2001, the Company was listed on the New York
Stock Exchange under the symbol KLT. At December 31, 2002, Great Plains Energy's
common stock was held by 17,131 shareholders of record. Information relating to
market prices and cash dividends on Great Plains Energy's common stock is set
forth below:
Common Stock Price Range Common Stock
2002 2001 Dividends Declared
Quarter High Low High Low 2003 2002 2001
First $26.98 $24.40 $27.56 $23.60 $ 0.415 $0.415 $0.415
Second 25.07 20.35 26.75 23.63 0.415 0.415
Third 22.45 15.69 26.13 23.70 0.415 0.415
Fourth 23.59 17.66 27.35 23.19 0.415 0.415
Regulatory Restrictions
Under the 35 Act, Great Plains Energy and KCP&L can pay dividends only out of
retained or current earnings, unless authorized to do so by the SEC. Under
stipulations with the MPSC and KCC, Great Plains Energy and KCP&L have committed
to maintain consolidated common equity of not less than 30% and 35%,
respectively. In their application under the 35 Act to establish a registered
holding company structure, Great Plains Energy and KCP&L committed to maintain a
consolidated common equity capitalization of at least 30%.
Dividend Restrictions
Great Plains Energy's Articles of Incorporation contain certain restrictions on
the payment of dividends on Great Plains Energy's common stock in the event
common equity falls to 25% of total capitalization. If preferred stock dividends
are not declared and paid when scheduled, Great Plains Energy could not declare
or pay common stock dividends or purchase any common shares. If the unpaid
preferred stock dividends equal four or more full quarterly dividends, the
preferred shareholders, voting as a single class, could elect members to the
Board of Directors.
Issuance of Unregistered Securities
On November 7, 2002, Great Plains Energy entered into an Agreement and Plan of
Merger (Agreement) with [OBJECT OMITTED] (ELC), Gregory J. Orman and Mark R.
Schroeder (ELC shareholders) and Innovative Energy Consultants Inc. (IEC), a
wholly-owned subsidiary of Great Plains Energy. The ELC Shareholders received
$15.1 million in merger consideration. As part of the merger consideration, on
November 7, 2002, Great Plains Energy issued 387,596 additional shares of its
common stock to the ELC Shareholders. The Agreement valued such shares at
approximately $8 million.
21
The issuance of the common stock by Great Plains Energy to the ELC Shareholders
is a transaction not involving a public offering, and is exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
The facts relied on to make this exemption available include, without
limitation, the following: (i) the offering did not involve any general
solicitation or advertising, but was limited to the two ELC Shareholders; (ii)
the offering was made to the ELC Shareholders solely in connection with the
acquisition and merger of ELC into IEC; (iii) the number of common shares issued
constituted approximately 0.6% of the then-issued and outstanding shares of
Great Plains Energy; and (iv) the representations and covenants of the ELC
Shareholders contained in the Agreement regarding, among other things,
investment intent, status as accredited investors, access to information and
restrictions on transferring the common stock.
KCP&L
Great Plains Energy holds all the outstanding shares of KCP&L's common stock.
Under the indenture relating to KCP&L's 8.3% Junior Subordinated Deferrable
Interest Debentures, due 2037 (Debentures), which are held by KCP&L Financing I,
KCP&L may not declare or pay any dividends on any shares of its capital stock if
at the time (i) there is an event of default (as defined in the indenture), (ii)
KCP&L is in default with respect to its payment of any obligations under its
guarantee of preferred securities issued by KCP&L Financing I, or (iii) KCP&L
has elected to defer payments of interest on the Debentures.
Equity Compensation Plan
Great Plains Energy has one equity compensation plan which authorizes the
issuance of Great Plains Energy common stock. The equity compensation plan has
been approved by the shareholders of Great Plains Energy. The following table
provides information, as of December 31, 2002, regarding the number of common
shares to be issued upon exercise of outstanding options, warrants and rights,
their weighted average exercise price, and the number of shares of common stock
remaining available for future issuance under the equity compensation plan. The
table excludes shares issued or issuable under Great Plains Energy's defined
contribution savings plans.
Number of securities
remaining available
for future issuance
Number of securities to Weighted average under equity
be issued upon exercise exercise price of compensation
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
Equity compensation plans
approved by security holders 541,500 (1) $25.21 (2) 2,135,000
Equity compensation plans not
approved by security holders - - -
Total 541,500 (1) $25.21 (2) 2,135,000
(1) Includes 144,500 performance shares and options for 397,000 shares of Great
Plains Energy common stock outstanding at December 31, 2002.
(2) The 144,500 performance shares have no exercise price and therefore are not
reflected in the weighted average exercise price.
22
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31 2002 (b) 2001 (b) 2000 (b) 1999 1998
(dollars in millions except per share amounts)
Great Plains Energy (a)
Operating revenues $ 1,862 $ 1,462 $ 1,116 $ 921 $ 973
Income (loss) before extraordinary
item and cumulative effect of
changes in accounting principles (c) $ 129 $ (40) $ 129 $ 82 $ 121
Net income (loss) $ 126 $ (24) $ 159 $ 82 $ 121
Basic and diluted earnings (loss) per
common share before extraordinary
item and cumulative effect of changes in
accounting principles $ 2.04 $ (0.68) $ 2.05 $ 1.26 $ 1.89
Basic and diluted earnings (loss) per
common share $ 1.99 $ (0.42) $ 2.54 $ 1.26 $ 1.89
Total assets at year end $ 3,507 $ 3,464 $ 3,294 $ 2,990 $ 3,012
Total mandatorily redeemable preferred
securities $ 150 $ 150 $ 150 $ 150 $ 150
Total redeemable preferred stock and long-
term debt (including current maturities) $ 1,189 $ 1,195 $ 1,136 $ 815 $ 913
Cash dividends per common share $ 1.66 $ 1.66 $ 1.66 $ 1.66 $ 1.64
Ratio of earnings to fixed charges 2.85 (d) 3.02 2.38 2.98
Consolidated KCP&L (a)
Operating revenues $ 1,071 $ 1,351 $ 1,116 $ 921 $ 973
Income before extraordinary
item and cumulative effect of
changes in accounting principles (c) $ 99 $ 104 $ 129 $ 82 $ 121
Net income $ 96 $ 120 $ 159 $ 82 $ 121
Total assets at year end $ 3,139 $ 3,146 $ 3,294 $ 2,990 $ 3,012
Total mandatorily redeemable preferred
securities $ 150 $ 150 $ 150 $ 150 $ 150
Total redeemable preferred stock and long-
term debt (including current maturities) $ 1,170 $ 1,164 $ 1,136 $ 815 $ 913
Ratio of earnings to fixed charges 2.80 2.11 3.02 2.38 2.98
(a) Great Plains Energy's consolidated financial statements include
consolidated KCP&L, KLT Inc., GPP and IEC. KCP&L's consolidated financial
statements include its wholly owned subsidiary HSS. In addition, KCP&L's
consolidated results of operations include KLT Inc. and GPP for all periods
prior to the October 1, 2001 formation of the holding company.
(b) See Management's Discussion for explanations of 2002, 2001 and 2000 results.
(c) In 2002, this amount is before the $3.0 million cumulative effect of a
change in accounting principle. For further information, see Note 6 to the
consolidated financial statements. In 2001, this amount is before the $15.9
million after tax extraordinary gain on early extinguishment of debt. For
further information, see Note 19 to the consolidated financial statements.
In 2000, this amount is before the $30.1 million after tax cumulative
effect of changes in pension accounting. For further information, see Note
7 to the consolidated financial statements.
(d) An $80.0 million deficiency in earnings caused the ratio of earnings to
fixed charges to be less than a one-to-one coverage. A $195.8 million net
write-off before income taxes related to the bankruptcy filing of DTI was
recorded in 2001.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results of
Operations that follow are a combined presentation for Great Plains Energy and
KCP&L, both registrants under this filing. The discussion and analysis by
management focuses on those factors that had a material effect on the financial
condition and results of operations of the registrants during the periods
presented. It should be read in conjunction with the accompanying consolidated
financial statements and related notes.
Great Plains Energy Incorporated
Effective October 1, 2001, Great Plains Energy became the holding company of
KCP&L, GPP and KLT Inc. As a diversified energy company, its reportable business
segments include:
o KCP&L, an integrated electric utility in the states of Missouri and Kansas,
provides reliable, affordable electricity to retail customers;
o Strategic Energy provides power supply coordination services in several
electricity markets offering retail choice, including Pennsylvania,
California, Ohio, New York, Massachusetts and Texas; and
o KLT Gas explores for, develops and produces unconventional natural gas
resources.
Effective October 1, 2001, all outstanding KCP&L shares were exchanged one for
one for shares of Great Plains Energy. The Great Plains Energy trading symbol
"GXP" replaced the KCP&L trading symbol "KLT" on the New York Stock Exchange.
During 2002, the Company's management revised its corporate business strategy.
The goal is to become a premier diversified energy company that achieves annual
growth in earnings per share in a financially disciplined manner. To achieve
this goal, Great Plains Energy intends to focus on its three reportable segments
of business:
o Stressing operational excellence in the utility operations of KCP&L;
o Expanding Strategic Energy's business model into new markets; and
o Developing KLT Gas into a leading unconventional natural gas exploration
company.
Critical Accounting Policies
Pensions
KCP&L incurs significant costs in providing non-contributory defined pension
benefits. The costs are developed from actuarial valuations that are dependent
upon numerous factors resulting from actual plan experience and assumptions of
future plan experience.
Pension costs are impacted by actual employee demographics (including age,
compensation levels and employment periods), the level of contributions made to
the plan, earnings on plan assets and plan amendments. In addition, pension
costs are also affected by changes in key actuarial assumptions, including
anticipated rates of return on plan assets and the discount rates used in
determining the projected benefit obligation and pension costs.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 87,
"Employers' Accounting for Pensions", changes in pension obligations associated
with these factors may not be immediately recognized as pension costs on the
income statement. KCP&L generally recognizes gains and losses by amortizing over
a five-year period the rolling five-year average of unamortized gains and
losses. The key assumptions used in developing our 2002 pension disclosures were
a 6.75% discount
24
rate, a 9.0% expected return on plan assets and a 4.1% compensation rate
increase. These are consistent with the prior years' assumptions except that the
discount rate was 7.25% and 8.00% in 2001 and 2000, respectively.
The following chart reflects the sensitivities associated with a 0.5 percent
increase or decrease in certain actuarial assumptions. Each sensitivity reflects
an evaluation of the change based solely on a change in that assumption.
Impact on Impact on
Projected Impact on 2002
Change in Benefit Pension Pension
Actuarial assumption Assumption Obligation Liability Expense
(millions)
Discount rate 0.5% increase $ (20.2) $ (7.6) $ (1.0)
Rate of return on plan assets 0.5% increase - - (1.8)
Discount rate 0.5% decrease 20.6 9.4 1.1
Rate of return on plan assets 0.5% decrease - - 1.8
In selecting an assumed discount rate, fixed income security yield rates for
30-year Treasury bonds and corporate high-grade bond yields are considered. The
assumed rate of return on plan assets is the weighted average of long-term
returns forecast for the type of investments held by the plan.
In 2002, KCP&L recorded non-cash expense of approximately $5.5 million, a $17.7
million increase from the previous year. Pension expense for 2003 is expected to
be approximately $18.1 million, an increase of $12.6 million over 2002. The
increase is due primarily to lower returns on plan assets.
KCP&L's pension plan assets are primarily made up of equity and fixed income
investments. The market value of the plan assets has been affected by the sharp
declines in equity markets since the third quarter of 2000. During 2001, plan
assets declined in value by approximately $170 million. During 2002, the plan
continued to experience losses as plan assets declined an additional $71 million
in market value. At December 31, 2002, the fair value of pension plan assets was
$324.2 million.
As a result of the decline in the equity markets and lower discount rates in
2002, the total Accumulated Benefit Obligation (ABO) of the plans exceeded the
fair value of plan assets at December 31, 2002. As prescribed by SFAS No. 87,
KCP&L has recorded a minimum pension liability of $63.1 million. This was offset
by an intangible asset of $19.2 million, the balance of unamortized prior
service costs, with the remaining $43.9 million charged to common equity through
Other Comprehensive Income (OCI). The impact on OCI, net of deferred tax, was
$26.8 million. However, there was no impact on net income. The impact on OCI
could reverse in future periods to the extent the fair value of trust assets
exceeds the ABO.
Absent a substantial recovery in the equity markets, pension costs, cash funding
requirements and the additional pension liability could substantially increase
in future years.
Regulatory Matters
As a regulated utility, KCP&L is subject to the provisions of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation". Accordingly, KCP&L
has recorded assets and liabilities on its balance sheet resulting from the
effects of the ratemaking process, which would not be recorded under generally
accepted accounting principles (GAAP) if KCP&L was not regulated. Regulatory
assets represent incurred costs that have been deferred because they are
probable of future recovery in customer rates. Regulatory liabilities generally
represent probable future reductions in revenue or refunds to customers. At
December 31, 2002, KCP&L's regulatory assets and liabilities totaled $128.9
25
million and $103.6 million, respectively. KCP&L's continued ability to meet the
criteria for application of SFAS No. 71 may be affected in the future by
competitive forces and restructuring in the electric industry. In the event that
SFAS No. 71 no longer applied to all, or a separable portion of KCP&L's
operations, the related regulatory assets and liabilities would be written off
unless an appropriate regulatory recovery mechanism is provided. Additionally,
these factors could result in an impairment of utility plant assets as
determined pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-lived Assets." See Note 4 to the consolidated financial statements for a
discussion of regulatory assets and liabilities.
At the end of January 2002, a severe ice storm occurred throughout large
portions of the Midwest, including the greater Kansas City metropolitan area. In
the second quarter of 2002, the KCC approved the stipulation and agreement that
KCP&L had reached with the Commission staff and the Citizens Utility Ratepayers
Board with regard to treatment of the Kansas portion of the ice storm costs.
Under this stipulation and agreement, KCP&L received a rate moratorium until
2006 in exchange for KCP&L's agreement to not seek recovery of the $16.5 million
expense for the Kansas jurisdictional portion of the storm costs and reduce
rates by $12 - $13 million in 2003. Additionally, KCP&L agreed to determine
depreciation expense of Wolf Creek using a 60 year life instead of a 40 year
life effective January 2003, which results in a reduction of expense by
approximately $8 million in 2003. KCP&L also agreed to file a rate case by May
15, 2006. In December 2002, the KCC approved tariffs implementing the
stipulation and agreement, which resulted in a reduction of $12.4 million in
annual Kansas retail revenues, effective January 1, 2003.
Effective August 2002, the MPSC approved KCP&L's application for an accounting
authority order related to the Missouri jurisdictional portion of the storm
costs. The order allows KCP&L to defer and amortize $20.1 million, representing
the Missouri impact of the storm, through January 2007. The amortization began
in September 2002 and totaled $1.5 million in 2002. KCP&L will amortize
approximately $4.6 million annually for the remainder of the amortization
period. In October 2002, the Staff of the MPSC concluded its review of the
Missouri jurisdictional earnings for KCP&L and determined that the current rate
levels did not warrant action.
Asset Impairment, including Goodwill and Other Intangible Assets
Long-lived assets and intangible assets subject to amortization are periodically
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable as prescribed under
SFAS No. 144. SFAS No. 144 requires that if the sum of the undiscounted expected
future cash flows from an asset is less than the carrying value of the asset, an
asset impairment must be recognized in the financial statements. The amount of
impairment recognized is calculated by subtracting the fair value of the asset
from the carrying value of the asset. The adoption of SFAS No. 144 had no impact
on Great Plains Energy and consolidated KCP&L.
Goodwill is tested for impairment at least annually and more frequently when
indicators of impairment exist as prescribed under SFAS No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 requires that if the fair value of a
reporting unit is less than its carrying value including goodwill, the implied
fair value of the reporting unit goodwill must be compared with its carrying
value to determine the amount of impairment. See Note 6 to the consolidated
financial statements for information regarding the impact of adopting SFAS No.
142 on goodwill and goodwill amortization.
Goodwill of $15.9 million was recorded in conjunction with KLT Energy Services'
indirect ownership acquisitions of Strategic Energy from 1999 through 2001. At
December 31, 2001, the unamortized balance of goodwill associated with Strategic
Energy was $14.1 million. During 2002, additional goodwill of $12.0 million was
recorded at IEC related to its 6% indirect ownership acquisition of Strategic
Energy. Strategic Energy's transition and 2002 annual impairment tests have been
completed and there was no impairment of the Strategic Energy goodwill. At
December 31, 2002, the
26
unamortized balance of Strategic Energy goodwill on Great Plains Energy's
balance sheet was $26.1 million.
Goodwill has been recorded by R.S. Andrews Enterprises, Inc. (RSAE) at various
times as it purchased property and businesses. At December 31, 2002, the
unamortized balance of RSAE goodwill was $20.0 million.
RSAE's goodwill was reviewed for impairment as of January 1, 2002, as required
under the implementation provisions of SFAS No. 142. Based upon the results of a
third party study and budgeted 2002 revenue, RSAE recorded a $3.0 million
impairment of goodwill. The impairment is reflected as a cumulative effect to
January 1, 2002, of a change in accounting principle.
During September 2002, the Company conducted its first annual impairment test on
RSAE's goodwill based on a discounted cash flow model. The model assumed a
discount rate of 6.8% and sales growth of 3% for five years with revenues stable
thereafter. The model indicated no additional impairment had occurred.
Management believes that the accounting estimates related to impairment analyses
required under SFAS No. 142 and SFAS No. 144 are critical accounting estimates.
The estimates are highly susceptible to change from period to period because it
requires company management to make assumptions about future sales, operating
costs and discount rates over an indefinite life. Historically, actual margins
and volumes have fluctuated and, to a great extent, fluctuations are expected to
continue. The estimates of future margins are based upon internal budgets, which
incorporate estimates of customer growth, business expansion and weather trends,
among other items.
Related Party Transactions
In November 2002, the Board of Directors of the Company approved a merger of ELC
into IEC. Gregory J. Orman, former Executive Vice President - Corporate
Development and Strategic Planning of the Company was the majority shareholder
of ELC and received $10.1 million in Company common stock and a note. See Note 9
to the consolidated financial statements.
In September 2000, KLT Energy Services exercised an option to purchase shares of
Bracknell Corporation (Bracknell) common stock owned by Reardon Capital, L.L.C.
(Reardon) and received a majority of the shares in 2000 and a warrant to
purchase the remainder. In May 2001, KLT Energy Services exercised the warrant
for 274,976 shares and sold 278,600 shares in June 2001. In November 2001,
Bracknell common stock ceased trading and as a result KLT Energy Services wrote
off its remaining investment in Bracknell. Gregory J. Orman, former Executive
Vice President - Corporate Development and Strategic Planning of Great Plains
Energy and former President and CEO of KLT Inc., owned 55% of the membership
interests of Reardon and approximately 1% of Bracknell. See Note 9 to the
consolidated financial statements.
27
Great Plains Energy Results of Operations
2002 2001 2000
(millions)
Operating revenues $1,861.9 $1,461.9 $1,115.9
Fuel (159.7) (163.8) (153.1)
Purchased power - KCP&L (46.2) (65.2) (105.7)
Purchased power - Strategic Energy (685.4) (329.0) (84.4)
Revenues, net of
fuel and purchased power 970.6 903.9 772.7
Other operating expenses (527.4) (516.5) (447.1)
Depreciation and depletion (151.6) (158.8) (132.4)
Gain (loss) on property 0.1 (171.4) 99.1
Operating income 291.7 57.2 292.3
Loss from equity investments (1.2) (0.4) (19.4)
Non-operating income (expenses) (23.9) (29.5) (15.4)
Interest charges (89.1) (103.3) (75.7)
Income taxes (48.3) 35.9 (53.2)
Early extinguishment of debt - 15.9 -
Cumulative effects of changes
in accounting principles (3.0) - 30.1
Net income (loss) 126.2 (24.2) 158.7
Preferred dividends (1.7) (1.6) (1.6)
Earnings (loss) available for common stock $ 124.5 $ (25.8) $ 157.1
2002 compared to 2001
Great Plains Energy's 2002 earnings, as detailed in the table below, increased
to $124.5 million, or $1.99 per share, from a loss of $25.8 million, or $(0.42)
per share, compared to the same period of 2001.
Earnings (Loss) Per
Earnings (Loss) Great Plains Energy Share
2002 2001 2000 2002 2001 2000
(millions)
KCP&L $102.9 $ 96.8 $ 56.4 $ 1.64 $ 1.57 $ 0.91
Subsidiary operations (4.2) (5.5) (13.5) (0.06) (0.09) (0.22)
Cumulative effect of changes
in accounting principles (3.0) - 30.1 (0.05) - 0.49
Consolidated KCP&L 95.7 91.3 73.0 1.53 1.48 1.18
Strategic Energy 29.7 21.8 5.9 0.48 0.35 0.09
KLT Gas - 14.3 79.2 - 0.23 1.28
Other non-regulated operations (0.9) (169.1) (1.0) (0.02) (2.74) (0.01)
Earnings excluding extraordinary item 124.5 (41.7) 157.1 1.99 (0.68) 2.54
Early extinguishment of debt - 15.9 - - 0.26 -
Great Plains Energy $124.5 $(25.8) $157.1 $ 1.99 $(0.42) $ 2.54
KCP&L's increase in earnings is the result of warmer summer 2002 weather
compared to 2001, continued load growth and a 40% increase in wholesale MWh
sales, which combined with other net positive impacts of the return to service
of Hawthorn No. 5 in mid-2001 to more than offset increased expenses. The
increased expenses included the January 2002 ice storm costs and increased
administrative and general expenses primarily from increased pension expenses.
28
Strategic Energy's earnings increased $22.9 million, excluding earnings during
2001 of $15.0 million from the sale of power purchased from one supplier under
wholesale contracts that expired at the end of 2001. The increase is due to
continued growth in retail electric sales resulting from increases in customer
accounts and MWh's served. This was partially offset by increased salaries and
benefits and an increase in income taxes as a result of increased sales in
states with higher income tax rates for the current year.
During 2002, KLT Gas focused on the acquisition of additional leased acreage and
the testing and development of several unconventional natural gas properties.
KLT Gas' earnings in 2001 reflect the $12.0 million after tax gain on the sale
of its 50% equity ownership in Patrick KLT Gas, LLC.
Other non-regulated operations included, among other things, a $3.8 million
increase in earnings primarily due to lower reductions in affordable housing
limited partnerships in 2002 compared to 2001. Additionally, 2001 reflects
$173.8 million related to both DTI operating losses incurred in 2001 and the
$140.0 million net write-off following DTI's bankruptcy filings at the end of
2001. As a result of DTI's filing for bankruptcy protection, DTI is not included
in 2002 results of operations.
The 2002 cumulative effect of changes in accounting principles reflects RSAE's
write-down of goodwill due to the adoption of SFAS No. 142. In 2001, prior to
KLT Telecom's purchase of a majority ownership in DTI, DTI completed a tender
offer for 50.4% of its outstanding senior discount notes. This transaction
resulted in a $15.9 million extraordinary gain on the early extinguishment of
debt.
2001 compared to 2000
Great Plains Energy's 2001 earnings decreased from $157.1 million or $2.54 per
share in 2000, to a loss of $25.8 million, or $(0.42) per share.
KCP&L's increase in earnings was primarily the result of the significant net
positive impacts of the return to service of Hawthorn No. 5 in mid-2001. A
significant reduction in purchased power expense, especially in the summer
months, combined with reduced fuel cost per MWh generated more than offset
increased fuel costs primarily due to an increase in MWh's generated and
increased operating expenses including depreciation and interest charges. KCP&L
recorded $12.7 million of income taxes in 2000 for a proposed Internal Revenue
Service (IRS) adjustment related to corporate-owned life insurance (COLI).
Additionally, subsidiary operations in 2000 included a $12.2 million write-down
of the investment in RSAE.
Strategic Energy's earnings increased $15.9 million primarily due to growth in
retail electric sales and higher earnings during 2001 than in 2000 on wholesale
sales of the power supplied under wholesale contracts, particularly during the
summer months of 2001.
KLT Gas' earnings decreased $64.9 million primarily due to the sale in late 2000
of producing natural gas properties for an after tax gain of $68.0 million. The
2000 gain and the loss of gas production revenue were partially offset by the
$12.0 million after tax gain on KLT Gas' 2001 sale of its 50% equity ownership
in Patrick KLT Gas, LLC.
Other non-regulated operations included $173.8 million related to both DTI
operating losses in 2001 and the $140.0 million net write-off following DTI's
bankruptcy filing at the end of 2001 partially offset by $9.1 million of equity
losses in DTI in 2000. Also included was a $6.7 million decrease primarily
attributable to recording more reductions in affordable housing limited
partnerships in 2001 than 2000.
In 2001, prior to KLT Telecom's purchase of majority ownership in DTI, DTI
completed a tender offer for 50.4% of its outstanding senior discount notes.
This transaction resulted in a $15.9 million extraordinary gain on the early
extinguishment of debt. The cumulative effect to January 1, 2000,
29
reflects KCP&L's change in methods of amortizing unrecognized net gains and
losses and determination of expected return related to its accounting for
pension expense.
For further discussion regarding each segment's results of operations, see its
respective section below.
Consolidated KCP&L
The following discussion of consolidated KCP&L results of operations includes
KCP&L, an integrated electric utility and HSS, an unregulated subsidiary of
KCP&L. References to KCP&L, in the discussion that follows, reflect only the
operations of the integrated electric utility. The discussion excludes the
results of operations for GPP and KLT Inc. and subsidiaries, which were
transferred to Great Plains Energy on October 1, 2001.
Consolidated KCP&L Business Overview
As an integrated electric utility, KCP&L engages in the generation,
transmission, distribution and sale of electricity.
KCP&L's power business will have over 4,000 megawatts of generating capacity
following the completion of five combustion turbine units that will add 385
megawatts of peaking capacity. During 2001, KCP&L entered into a $200 million,
five-year construction and synthetic operating lease transaction for the five
combustion turbines. During 2002, the lease was amended to reduce the amount
financed from the previously estimated $200 million to $176 million to reflect
changes in the estimated cost for the purchase, installation, assembly and
construction of the five combustion turbines. Construction began during the
third quarter of 2002 with the expected commercial operation of the five
combustion turbines in the spring and summer 2003.
KCP&L's delivery business consists of transmission and distribution facilities
that serve almost 485,000 customers as of December 31, 2002. KCP&L continues to
experience load growth approximating the historical average of 2.0% to 2.5%
annually through increased customer usage and additional customers. Rates
charged for electricity are below the national average.
At the end of January 2002, a severe ice storm occurred throughout large
portions of the Midwest, including the greater Kansas City metropolitan area. At
its peak, the storm caused over 300,000 customer outages throughout the KCP&L
service territory, an unprecedented level in the KCP&L's 120-year history. Crews
from other utilities in numerous states were called in to assist in the
restoration of power and power was restored in nine days. Costs related to the
January ice storm were approximately $51.3 million of which $14.7 million were
capital expenditures and therefore charged to utility plant. KCP&L expensed
$16.5 million for the Kansas jurisdictional portion of the storm costs and
deferred $20.1 million of the storm costs applicable to Missouri. In January
2003, Edison Electric Institute honored KCP&L for exemplary performance and
dedication in restoring power to customers during the storm and recognized KCP&L
by awarding it the association's annual "Emergency Response Award".
Under the FERC Order 2000, KCP&L, as an investor-owned utility, is strongly
encouraged to join a FERC approved RTO. RTOs combine regional transmission
operations of utility businesses into a regional organization that schedules
transmission services and monitors the energy market to ensure regional
transmission reliability and non-discriminatory access. During the first quarter
of 2002, the SPP and the MISO voted to consolidate the two organizations to
create a larger Midwestern RTO, a non-profit organization that will operate in
twenty states and one Canadian province. KCP&L is a member of the SPP. The
consolidation is expected to be completed during the second quarter of 2003 and
has received FERC approval. The FERC has already approved an RTO proposal
submitted by the MISO. Additionally, regulatory approvals would have to be
received from the MPSC and the KCC prior to KCP&L's participation in an RTO.
During 2003, KCP&L expects to make filings with the MPSC and
30
KCC seeking permission to participate in the RTO resulting from the merger of
SPP and MISO. During February 2003, KCP&L submitted to MISO a conditional
application to joining the RTO resulting from the merger of SPP and MISO.
During the third quarter of 2002, the FERC issued a Notice of Proposed
Rulemaking to Remedy Undue Discrimination through Open Access Transmission
Service and Standard Electricity Market Design. The proposed rulemaking is
designed to establish a single non-discriminatory open access transmission
tariff with a single transmission service that is applicable to all users of the
interstate transmission grid. All public utilities that own, control or operate
interstate transmission facilities would be required to become independent
transmission providers, turn over the operation of their transmission facilities
to an RTO that meets the definition of an independent transmission provider or
contract with an entity that meets the definition of an independent transmission
provider. KCP&L filed comments with the FERC on the proposed rulemaking in
November 2002. The FERC has recently announced that it will issue a white paper
on Standard Electricity Market Design in April 2003 and accept comments on that
paper before issuing a final rule, which is now expected in the third or fourth
quarter of 2003. KCP&L's participation in the RTO resulting from the merger of
SPP and MISO would fulfill the majority of the requirements of this proposed
rulemaking.
KCP&L has a wholly-owned unregulated subsidiary, HSS, that holds investments in
businesses primarily in residential services. HSS is comprised of two direct
subsidiaries, RSAE and Worry Free. HSS is evaluating strategic alternatives
concerning its investments, which could include a possible sale of a portion or
all of the business.
In 2001, HSS increased its ownership in RSAE, a consumer services company
headquartered in Atlanta, Georgia, from 49% to 72%. Accordingly, HSS changed its
method of accounting for RSAE from the equity method to consolidation. During
2001, HSS recorded losses from its investment in RSAE that resulted in a
negative investment balance. As a result of these losses, the minority interest
in RSAE was reduced to zero. Accordingly, as long as RSAE is consolidated, any
future losses of RSAE would be recorded by HSS at 100%, which will further
decrease the investment below zero.
31
Consolidated KCP&L Results of Operations
The following table summarizes consolidated KCP&L's comparative results of
operations. For comparative purposes only, 2001 and 2000 presented below have
been restated to exclude the results of operations for KLT Inc. and subsidiaries
and GPP, which were transferred to Great Plains Energy on October 1, 2001.
Therefore, 2001 and 2000 presented below do not agree with 2001 and 2000
presented in KCP&L's consolidated statements of income and should only be used
in the context of the discussion and analysis that follows.
2002 2001 2000
(millions)
Operating revenues $1,071.3 $1,033.7 $ 955.8
Fuel (159.7) (163.8) (153.1)
Purchased power (46.2) (65.2) (105.7)
Revenues, net of
fuel and purchased power 865.4 804.7 697.0
Other operating expenses (468.8) (435.9) (387.9)
Depreciation and depletion (147.9) (138.7) (126.0)
Loss on property - (1.6) (9.9)
Operating income 248.7 228.5 173.2
Loss from equity investments - (0.1) (6.6)
Non-operating income (expenses) (5.1) (4.9) (15.0)
Interest charges (82.0) (79.8) (62.8)
Income taxes (62.9) (51.3) (44.3)
Cumulative effect of a change
in accounting principle (3.0) - 30.1
Net income 95.7 92.4 74.6
Preferred dividends - (1.1) (1.6)
Earnings (loss) available for common stock $ 95.7 $ 91.3 $ 73.0
Consolidated KCP&L's earnings increased $4.4 million in 2002 compared to 2001,
as a result of warmer summer 2002 weather compared to 2001, continued load
growth, and a 40% increase in wholesale MWh sales. These factors combined with
other net positive impacts of the return to service of Hawthorn No. 5 in
mid-2001 to more than offset increased expenses. The increased expenses included
$18.0 million of January 2002 ice storm costs and $25.4 million in increased
KCP&L administrative and general expenses primarily attributable to increased
pension expenses.
The Company adopted SFAS No. 142, effective January 1, 2002. In accordance with
SFAS No. 142, the Company completed its transition impairment test of RSAE
goodwill and determined that a $3.0 million write-down of goodwill was required.
As a result, KCP&L's consolidated 2002 net income reflects the $3.0 million
cumulative effect to January 1, 2002, of a change in accounting principle.
Ongoing annual impairment tests are required by SFAS No. 142. RSAE completed its
first annual impairment test in September 2002. The test indicated no
impairment.
Consolidated KCP&L's earnings increased $18.3 million in 2001 compared to 2000,
primarily due to the significant net positive impacts of the return to service
of Hawthorn No. 5 in mid-2001. A $40.5 million reduction in purchased power
expense, primarily in the summer months, combined with reduced fuel cost per MWh
generated more than offset the increased KCP&L fuel costs associated with
increased MWh's generated and increased operating expenses including a $12.7
million increase in depreciation and a $17.0 million increase in interest
charges. KCP&L recorded $12.7 million of additional income taxes in 2000 for a
proposed IRS adjustment related to COLI. Additionally, in 2000, HSS recorded a
$12.2 million write-down of its investment in RSAE.
32
Effective January 1, 2000, KCP&L changed its methods of amortizing unrecognized
net gains and losses and the determination of expected return related to its
accounting for pension expense. Accounting principles required KCP&L to record
the cumulative effect of these changes, resulting in a $30.1 million increase in
2000 earnings.
Consolidated KCP&L Sales Revenues and MWh Sales
% %
2002 Change 2001 Change 2000
Retail revenues (millions)
Residential $ 367.4 5 $ 348.8 (1) $ 352.1
Commercial 418.6 2 411.8 1 406.3
Industrial 93.7 (10) 103.9 (19) 127.6
Other retail revenues 8.6 3 8.3 2 8.1
Total retail 888.3 2 872.8 (2) 894.1
Wholesale revenues 108.0 36 79.3 78 44.5
Other revenues 13.6 (12) 15.4 15 13.4
KCP&L electric revenues 1,009.9 4 967.5 2 952.0
Subsidiary revenues 61.4 (7) 66.2 *NM 3.7
Consolidated KCP&L revenues $1,071.3 4 $1,033.7 8 $ 955.7
*NM -- Not meaningful due to 2001 consolidation of RSAE
% %
2002 Change 2001 Change 2000
Retail MWh sales (thousands)
Residential 5,004 6 4,729 - 4,725
Commercial 6,902 2 6,798 2 6,687
Industrial 1,968 (8) 2,130 (21) 2,713
Other retail MWh sales 83 6 78 3 76
Total retail 13,957 2 13,735 (3) 14,201
Wholesale MWh sales 4,969 40 3,558 107 1,718
KCP&L electric MWh sales 18,926 9 17,293 9 15,919
Retail revenues improved slightly in 2002 compared to 2001 due to warmer 2002
summer weather and continued load growth which increased residential and
commercial revenues $25.4 million mostly offset by a reduction in industrial
revenues. The reduction in industrial revenues was primarily due to a weakened
economy and the loss of $4.4 million in revenues from one of KCP&L's major
industrial customers. Load growth consists of higher usage-per-customer and the
addition of new customers. The average number of both residential and commercial
customers increased approximately 2% in 2002 as compared to 2001. Less than 1%
of revenues include an automatic fuel adjustment provision.
Excluding the impact of the loss of $22.9 million in revenues from one of
KCP&L's major industrial customers, retail revenues and MWh sales remained
relatively consistent in 2001 compared to 2000. Extremely mild weather during
the second half of 2001 mostly offset the colder winter and warmer spring and
early summer weather experienced in the first half of 2001 and continued load
growth. The average number of both residential and commercial customers
increased approximately 2% in 2001 as compared to 2000.
The major industrial customer declared bankruptcy on February 7, 2001, and
closed its Kansas City, Missouri facilities on May 25, 2001. KCP&L has continued
to be able to mitigate the effect of the loss with other sales.
33
Bulk power sales, the major component of wholesale sales, vary with system
requirements, generating unit and purchased power availability, fuel costs and
requirements of other electric systems. Wholesale MWh sales increased 40% in
2002 compared to 2001 and 107% in 2001 compared to 2000 due to increased bulk
power MWh's sold. Additionally, wholesale sales revenue increased $1.7 million
in 2002 compared to 2001 and $2.5 million in 2001 compared to 2000 due to
additional capacity sales beginning in the last half of 2001.
KCP&L Fuel and Purchased Power
The fuel cost per MWh generated and the purchased power cost per MWh have a
significant impact on the results of operations for KCP&L. Generation fuel mix
can change the fuel cost per MWh generated substantially. Nuclear fuel costs per
MWh generated remain substantially less than the cost of coal per MWh generated.
Replacement power costs for planned Wolf Creek outages are accrued evenly over
the unit's operating cycle. KCP&L expects its cost of nuclear fuel to remain
fairly constant through the year 2008. Coal has a significantly lower cost per
MWh generated than natural gas and oil. KCP&L's procurement strategies continue
to provide delivered coal costs below the regional average. The cost per MWh for
purchased power is still significantly higher than the fuel cost per MWh of coal
and nuclear generation. KCP&L continually evaluates its system requirements, the
availability of generating units, availability and cost of fuel supply,
availability and cost of purchased power and the requirements of other electric
systems to provide reliable power economically. Fossil plants averaged 74% of
total generation and the nuclear plant the remainder over the last three years.
Fuel costs decreased $4.1 million in 2002 compared to 2001, despite a 12%
increase in generation. Lower fuel cost per MWh generated due to additional coal
and less natural gas and oil in the generation fuel mix was the primary reason
for the decline in fuel costs. The return to service of Hawthorn No. 5, a low
cost coal-fired unit, in mid-2001 contributed to the change in generation fuel
mix. Significantly lower natural gas prices and a reduction in the cost of
uranium during 2002 also contributed to the lower fuel cost. Fuel costs
increased $10.7 million in 2001 compared to 2000 primarily due to a 13% increase
in MWh's generated partially offset by a reduction in the fuel cost per MWh
generated. The increase in MWh's generated was primarily due to Hawthorn No. 5,
a coal-fired unit, returning to operation in mid-2001 and the impact of the
scheduled 2000 outage at Wolf Creek, a nuclear unit. The additional availability
of these two low fuel cost units in 2001 changed the generation fuel mix and
lowered the cost per MWh generated.
Purchased power expenses decreased $19.0 million in 2002 compared to 2001. Cost
per MWh purchased decreased approximately 31% in 2002 compared to 2001 due to
regional energy availability, a less volatile energy market and decreased MWh
purchases during peak hours. Also contributing to the decrease was a 15%
decrease in MWh's purchased due to the increased availability of KCP&L
generating units. Purchased power expenses decreased $40.5 million in 2001
compared to 2000 primarily due to a 38% decrease in MWh's purchased in 2001
compared to 2000. The decrease in MWh's purchased was primarily due to the
increased availability of KCP&L's generating units during 2001 compared to 2000.
Increased availability also allowed KCP&L to reduce its cost of purchased
capacity by $7.6 million in 2001 as compared to 2000. In addition, the cost per
MWh was down 4% in 2001 compared to 2000.
Consolidated KCP&L Other Operating Expenses (including operating, maintenance
and general taxes)
KCP&L's other operating expenses increased $43.0 million in 2002 compared to
2001 primarily due to the following:
o expensing the $16.5 million Kansas jurisdictional portion of the January 2002
ice storm and amortizing $1.5 million of the Missouri jurisdictional portion
of the ice storm
o increased administrative and general expenses:
34
o $17.7 million increased pension expense due to a significant decline in the
market value of plan assets
o $3.3 million increased injuries and damages expenses resulting from
additional claims and the settlement of outstanding claims
o $3.2 million increased general taxes primarily due to increases in property
tax levy rates
HSS' other expenses decreased $10.1 million in 2002 compared to 2001 due to the
closure of some RSAE locations and the implementation of cost saving strategies
at RSAE.
KCP&L's other operating expenses decreased $17.3 million in 2001 compared to
2000 primarily due to the following:
o $3.7 million decreased operating expenses for replacement power insurance
because of the availability of Hawthorn No. 5
o decreased administrative and general expenses including:
o $2.0 million of additional customer information system software consulting
in 2000
o $2.7 million of advertising not continued in 2001
o $4.5 million decrease in pension expense due to strong returns on plan
assets
HSS' other expenses increased $65.3 million primarily due to the consolidation
of RSAE following HSS' increase in its ownership from 49% to 72% in 2001.
Consolidated KCP&L Depreciation
Consolidated KCP&L's depreciation expense increased $9.2 million in 2002
compared to 2001 and $12.7 million in 2001 compared to 2000. The primary reason
for the increases was increased capital additions relating to Hawthorn No. 5,
which was returned to service mid-2001. Additionally, KCP&L paid $40.8 million
to exercise its purchase option on the previously leased Hawthorn No. 6 unit in
late 2001 and Hawthorn Nos. 7, 8 and 9 units were placed in service in mid-2000.
Consolidated KCP&L Interest Charges
Consolidated KCP&L's interest charges increased $2.2 million in 2002 compared to
2001 and $17.0 million in 2001 compared to 2000 primarily because of increased
interest expense on long-term debt and decreased allowance for borrowed funds
used to finance construction, partially offset by a decreased interest expense
on short-term debt. A portion of the proceeds from long-term debt issuances has
been used to pay down short-term debt.
Long-term debt interest expense
KCP&L's long-term debt interest expense increased $3.0 million in 2002 compared
to 2001, primarily due to higher average levels of long-term debt outstanding.
Lower average rates on variable rate long-term debt partially offset the higher
average levels of long-term debt. The higher average levels of debt outstanding
primarily reflect the issuances of long-term debt in 2001 and the 2002 issuance
of $225.0 million of unsecured, fixed-rate senior notes partially offset by
$227.0 million of scheduled debt repayments during 2002.
KCP&L's long-term debt interest expense increased $12.3 million in 2001 compared
to 2000 reflecting higher average levels of long-term debt outstanding,
partially offset by the impact of decreases in variable interest rates. The
higher average levels of debt primarily reflect the issuances of long-term debt
in 2000 and $150.0 million of unsecured, fixed-rate senior notes issued in
November 2001, partially offset by $80.0 million of scheduled debt repayments.
Short-term debt interest expense
KCP&L's short-term debt interest expense decreased $7.7 million in 2002 compared
to 2001. Average interest rates were down more than 50% and average levels of
outstanding commercial paper were
35
down more than 70% in 2002 compared to 2001. KCP&L had no commercial paper
outstanding at December 31, 2002.
KCP&L's short-term debt interest expense decreased $2.2 million in 2001 compared
to 2000 primarily due to lower average interest rates on commercial paper,
partially offset by higher average levels of outstanding commercial paper during
2001 compared to 2000. KCP&L had $62.0 million and $55.6 million of commercial
paper outstanding at December 31, 2001 and 2000, respectively.
Capitalized interest
Allowance for borrowed funds used to finance construction decreased $8.2 million
in 2002 compared to 2001 and $3.0 million in 2001 compared to 2000 because of
decreased construction work in progress primarily due to the return to service
of Hawthorn No. 5 in mid-2001.
Wolf Creek
Wolf Creek, a nuclear unit, represents about 15% of KCP&L's generating capacity.
This percentage will decline slightly with KCP&L's expected 2003 addition of
five leased combustion turbines. Wolf Creek's operating performance has remained
strong over the last three years, contributing an average of 26% of KCP&L's
annual MWh generation while operating at an average capacity of 92%. Wolf Creek
has the lowest fuel cost per MWh generated of any of KCP&L's generating units.
KCP&L accrues the incremental operating, maintenance and replacement power costs
for planned outages evenly over the unit's operating cycle, normally 18 months.
As actual outage expenses are incurred, the refueling liability and related
deferred tax asset are reduced. Wolf Creek returned to service on April 27,
2002, following a 35-day refueling and maintenance outage that began on March
23, 2002. During the outage, a complete inspection of the reactor vessel head
indicated no corrosion or other problems of the type experienced at the
Davis-Besse nuclear plant in Ohio. The next outage is scheduled for the fall of
2003 and is estimated to be a 35-day outage.
Wolf Creek's assets represent about 33% of KCP&L's assets and its operating
expenses represent about 19% of KCP&L's operating expenses. An extended
shut-down of Wolf Creek could have a substantial adverse effect on KCP&L's
business, financial condition and results of operations because of higher
replacement power and other costs. Although not expected, the NRC could impose
an unscheduled plant shut-down, reacting to safety concerns at the plant or
other similar nuclear units. If a long-term shut-down occurred, the state
regulatory commissions could reduce rates by excluding the Wolf Creek investment
from rate base.
There has been significant opposition and delays to, development of a low-level
radioactive waste disposal facility. See Note 10 to the consolidated financial
statements for additional information. An inability to complete this project
would require KCP&L to write-off its net investment in the project, which was
$7.4 million at December 31, 2002. KCP&L, and the other owners of Wolf Creek,
could also still be required to participate in development of an alternate site.
Ownership and operation of a nuclear generating unit exposes KCP&L to risks
regarding decommissioning costs at the end of the unit's life and to potential
retrospective assessments and property losses in excess of insurance coverage.
These risks are more fully discussed in the related sections of Notes 1 and 10
to the consolidated financial statements.
Montrose No. 3
Montrose No. 3, a 176 MW unit, returned to service at the end of the third
quarter 2002 following a forced outage due to damage to the turbine blades in
the combined high and intermediate pressure section of the turbine. Additional
maintenance, including replacing blades in the low pressure section of the
turbine to mitigate a long outage in the next few years and maintenance
originally scheduled for
36
October 2002, was also completed during the three-month outage. The
unanticipated outage costs were approximately $4.3 million of capital
expenditures, $0.9 million in additional operations and maintenance expense and
$4.0 million in net fuel and purchased power expense in 2002. These amounts do
not reflect the $1.0 million expected to be recovered from insurance in 2003.
Hawthorn No. 5
On June 20, 2001, Hawthorn No. 5 was returned to commercial operation. The
coal-fired unit has a capacity of 565 megawatts and was rebuilt following a
February 1999 explosion that destroyed the boiler. Hawthorn No. 5 has been
nationally recognized in the 2001 National Energy Policy Report for its use of
best available pollution control technology. Under KCP&L's property insurance
coverage, KCP&L received an additional $30 million in insurance recoveries in
2001, increasing the total insurance recoveries received to date to $160
million. The recoveries have been recorded as an increase in accumulated
depreciation on the consolidated balance sheet. Expenditures, excluding
capitalized interest and insurance proceeds, for rebuilding Hawthorn No. 5 were
$35.6 million in 1999, $207.6 million in 2000, and $72.9 million in 2001.
KCP&L Projected Utility Capital Expenditures
Total utility capital expenditures, excluding allowance for funds used to
finance construction, were $132.0 million, $262.0 million and $401.0 million in
2002, 2001, and 2000, respectively. Utility capital expenditures projected for
the next five years are as follows:
2003 2004 2005 2006 2007 Total
(millions)
Generating facilities $ 36.6 $ 42.2 $ 46.9 $ 28.5 $ 18.9 $173.1
Nuclear fuel 20.5 21.0 0.7 23.1 25.0 90.3
Distribution and transmission facilities 73.8 75.8 73.1 74.0 71.5 368.2
General facilities 6.3 5.8 2.8 2.7 1.1 18.7
Total $137.2 $144.8 $123.5 $128.3 $116.5 $650.3
This utility capital expenditure plan is subject to continual review and change.
KCP&L is currently evaluating various purchase and construction options to meet
capacity and energy requirements in 2005 through 2010. Consequently, the table
does not reflect utility capital expenditures for new capacity.
Peaking capacity totaling 385 megawatts is being added pursuant to a $176
million construction and operating lease transaction as discussed in the KCP&L
Business Overview.
Strategic Energy
Strategic Energy Business Overview
Strategic Energy provides power supply coordination services by entering into
long-term contracts with its customers to supply electricity that Strategic
Energy purchases under long-term contracts to manage its customers electricity
needs. In return, Strategic Energy receives an ongoing management fee, which is
included in the contracted sales price for the electricity. Strategic Energy
operates in several electricity markets offering retail choice, including
Pennsylvania, California, Ohio, New York, Massachusetts and Texas. Strategic
Energy is targeting expansion into two additional states in 2003, which would
expand its operations into eight of the sixteen states that offer retail choice.
Strategic Energy also provides strategic planning and consulting services in the
natural gas and electricity markets.
In the normal course of business, Great Plains Energy and KLT Inc. enter into
various agreements providing financial or performance assurance to third parties
on behalf of Strategic Energy. Such agreements include, for example, guarantees,
stand-by letters of credit and surety bonds. These agreements are entered into
primarily to support or enhance the creditworthiness otherwise attributed
37
to Strategic Energy on a stand-alone basis, thereby facilitating the extension
of sufficient credit to accomplish Strategic Energy's intended business
purposes.
In 2001, KLT Energy Services exchanged its ownership of $4.7 million of
preferred stock in another energy service company for additional ownership in
Strategic Energy. This transaction increased KLT Energy Services' indirect
ownership in Strategic Energy from 72% to 83%. During the fourth quarter of
2002, IEC acquired a 6% indirect ownership position in Strategic Energy in
exchange for $15.1 million in common stock and notes issued by Great Plains
Energy and IEC. As of December 31, 2002, Great Plains Energy's indirect
ownership in Strategic Energy totals 89%.
In 2000, Strategic Energy also provided retail gas services to commercial,
institutional and small manufacturing customers. Strategic Energy elected to
exit this business in the first quarter of 2001 to focus on power supply
coordination services and had phased out of retail gas services at the end of
2001. Strategic Energy made this decision after evaluating the organizational
demands, growth prospects and relative levels of profitability of both
businesses. As the marketplace and Strategic Energy's business evolves,
Strategic Energy may elect to re-enter the market for retail gas services.
At December 31, 2002, Strategic Energy provided power supply coordination
services on behalf of approximately 33,100 commercial, institutional and small
manufacturing accounts. Strategic Energy's customer base is very diverse.
Strategic Energy served over 5,200 customers, including numerous Fortune 500
companies, smaller companies, and governmental entities. Based solely on current
signed contracts and expected usage, Strategic Energy anticipates future MWh
sales of 14.0 million, 8.2 million, 5.3 million, and 1.2 million for the years
2003 through 2006, respectively. Strategic Energy expects to also supply
additional MWh sales in these years through growth in existing markets by
re-signing existing customers and signing new customers as well as through
expansion into new markets.
Strategic Energy enters into forward contracts with multiple suppliers. At
December 31, 2002, Strategic Energy's five largest suppliers under forward
supply contracts represented 69% of the total future committed purchases. In the
event of supplier non-delivery or default, Strategic Energy's results of
operations could be affected to the extent that the cost of replacement power
exceeded the combination of the contracted price with the supplier and the
amount of collateral held by Strategic Energy to mitigate its market risk with
the supplier. Strategic Energy's results of operations could also be affected,
in a given period, if it was required to make a payment upon termination of a
supplier contract to the extent that the contracted price with the supplier
exceeded the market value of the contract. Strategic Energy monitors its
counterparty credit risk by evaluating the credit quality and performance of its
suppliers on a routine basis and by, among other things, adjusting the amount of
collateral required from its suppliers, as part of its risk management policy
and practices.
Strategic Energy maintains a commodity-price risk management strategy that uses
forward physical energy purchases and derivative instruments to minimize
significant, unanticipated earnings fluctuations caused by commodity-price
volatility. As a result of supplying electricity to retail customers under fixed
rate contracts, Strategic Energy's policy is to match customers' demand with
fixed price purchases. In certain markets where Strategic Energy operates,
entering into forward fixed price contracts is cost prohibitive. By entering
into swap contracts for a portion of its forecasted purchases in these markets,
the future purchase price of electricity is effectively fixed under these swap
contracts. The swap contracts limit the unfavorable effect that price increases
will have on electricity purchases. Under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", all of the swap agreements are
currently designated as cash flow hedges resulting in the difference between the
market value of energy and the hedge value being recorded as comprehensive
income (loss). At December 31, 2002 and 2001, the accumulated comprehensive gain
(loss), net of income taxes and minority interest, reflected in Great Plains
Energy's consolidated statements of capitalization included a $0.8 million gain
and $11.7 million loss, respectively, related to such cash flow hedges. However,
38
substantially all of the energy hedged with the swaps has been sold to customers
through contracts at prices different than the fair market value used to value
the swaps. Therefore, Strategic Energy does not anticipate realizing the gain
(loss) represented in comprehensive income.
During the third quarter of 2002, the FERC issued a Notice of Proposed
Rulemaking to Remedy Undue Discrimination through Open Access Transmission
Service and Standard Electricity Market Design. The proposed rulemaking is
designed to establish a single non-discriminatory open access transmission
tariff with a single transmission service that is applicable to all users of the
interstate transmission grid. Strategic Energy has evaluated the impact of the
proposed rulemaking on its operations and provided comments to the FERC that are
generally supportive of the provisions of the proposal, but suggested some
changes to the proposed rule. The FERC has recently announced that it will issue
a white paper on Standard Electricity Market Design in April 2003 and accept
comments on that paper before issuing a final rule, which is now expected in the
third or fourth quarter of 2003.
Strategic Energy Results of Operations
The following table summarizes Strategic Energy's comparative results of
operations.
2002 2001 2000
(millions)
Operating revenues $789.5 $411.9 $129.6
Purchased power (685.4) (329.0) (84.4)
Revenues, net of
purchased power 104.1 82.9 45.2
Other operating expenses (37.6) (38.7) (30.9)
Depreciation (0.9) (0.3) (0.4)
Operating income 65.6 43.9 13.9
Non-operating income (expenses) (10.4) (6.4) (4.2)
Interest charges (0.3) (0.5) (0.2)
Income taxes (25.2) (15.2) (3.6)
Net income $ 29.7 $ 21.8 $ 5.9
Strategic Energy's net income increased $22.9 million in 2002 compared to 2001,
excluding earnings during 2001 of $15.0 million from the sale of power purchased
from one supplier under wholesale contracts that expired at the end of 2001. The
increased net income in 2002 compared to 2001 is primarily due to continued
growth in retail electric sales from the expansion into new markets and
continued sales efforts in existing markets, partially offset by increased labor
and benefits as well as other general and administrative expenses and income
taxes due to increased sales in states with higher income tax rates. Strategic
Energy's net income increased $15.9 million in 2001 compared to 2000, primarily
due to growth in retail electric sales and higher earnings during 2001 than in
2000 on wholesale sales of the power supplied under the wholesale contracts
discussed above.
39
Strategic Energy Operating Revenues
Operating revenues from Strategic Energy increased $377.6 million in 2002
compared to 2001 and $282.3 million in 2001 compared to 2000. The following
table reflects Strategic Energy's operating revenues.
% %
2002 Change 2001 Change 2000
(millions)
Electric - Retail $759.5 142 $313.3 446 $ 57.4
Electric - Wholesale 28.8 (65) 82.7 58 52.3
Gas and other 1.2 (92) 15.9 (20) 19.9
Total Operating Revenues $789.5 92 $411.9 218 $129.6
At December 31, 2002, Strategic Energy served over 5,200 customers, an increase
from approximately 3,400 customers and 2,000 customers at the end of 2001 and
2000, respectively. These customers represented approximately 33,100 accounts at
the end of 2002, compared to about 19,500 accounts and 7,000 accounts at the end
of 2001 and 2000, respectively. Strategic Energy may provide periodic billing
credits to its customers resulting from its power supply coordination efforts.
The amounts credited back to the customer are treated as a reduction of retail
electric revenues when determined to be payable.
Retail electric revenues increased $446.2 million in 2002 compared to 2001
primarily due to increased retail MWh sales, partially offset by an 8% decrease
in average retail revenues per MWh. Retail MWh's sold increased 162% to 11.8
million in 2002 from 4.5 million in 2001, primarily from continued growth in
existing markets and expansion into new markets during 2002. Growth in existing
markets came primarily from strong sales efforts in re-signing existing
customers as well as signing new customers. Expansion into new markets
contributed 2.8 million in MWh sales and approximately $166 million of retail
electric revenues during 2002. Several factors contribute to changes in the
average retail revenues per MWh, including the underlying price of the
commodity, the nature and type of products offered and the mix of sales by
geographic market.
Retail electric revenues increased $255.9 million in 2001 compared to 2000
primarily due to an increase in retail MWh sales and an increase in average
retail revenues per MWh. Retail MWh's sold increased 221% from 1.4 million in
2000, primarily from growth in existing markets and expansion into new markets
during 2001. The increase in average retail revenues per MWh in 2001 compared to
2000 is due to higher bundled product sales in 2001 and expansion into new
markets, which had higher average commodity prices than the average for
Strategic Energy's existing markets.
Wholesale electric revenues decreased $53.9 million in 2002 compared to 2001 and
increased $30.4 million in 2001 compared to 2000 primarily due to the sale of
power during 2001 purchased from one supplier under wholesale contracts that
expired at the end of 2001.
During the third quarter of 2001, Strategic Energy began to phase out its
natural gas retail supply service, which was completely phased out during the
fourth quarter of 2001. This is the primary reason for the decrease in gas and
other sales revenues in 2002 compared to 2001.
Strategic Energy Purchased Power
To supply its retail contracts, Strategic Energy purchases long-term blocks of
electricity under forward contracts in fixed quantities at fixed prices from
power suppliers based on projected usage. Strategic Energy sells any excess
retail supply of electricity back into the wholesale market. The proceeds from
the sale of excess supply of electricity is recorded as a reduction of purchased
power. The gross
40
amount of excess retail supply sales that reduced purchased power was $126.4
million, $95.6 million and $29.5 million in 2002, 2001 and 2000, respectively.
As previously discussed, Strategic Energy operates in several retail choice
electricity markets. The cost of supplying electricity to retail customers can
vary widely by geographic market. This variability can be affected by many
factors including, among other items, geographic differences in the cost per MWh
of purchased power and capacity charges due to regional purchased power
availability and requirements of other electricity providers and differences in
transmission charges. However, Strategic Energy has mitigated the effects of
higher supply costs by entering into long-term, full-requirements contracts with
customers that are priced to the customers based on the cost of the associated
supply contract.
Purchased power increased $356.4 million in 2002 compared to 2001 and $244.6
million in 2001 compared to 2000 primarily due to the increases in electric MWh
sales discussed above. Additionally, purchased power expense as a percentage of
electric revenues increased in 2002 compared to 2001 primarily due to purchases
of power from one supplier during 2001 under wholesale contracts that expired at
the end of 2001. Purchased power expense as a percentage of electric revenues
also increased in 2001 compared to 2000. The 2001 increase in purchased power as
a percentage of electric revenues was due to a significant increase in the
percentage of Strategic Energy's total MWh sales derived from retail MWh sales
compared to 2000. Strategic Energy's wholesale electric MWh sales in both 2001
and 2000 had a higher gross margin (revenues less cost of energy supplied) than
its retail electric MWh sales.
Strategic Energy Other Operating Expenses
Strategic Energy's other operating expenses as a percentage of operating
revenues decreased to 4.8% in 2002 from 9.4% and 23.8% in 2001 and 2000,
respectively, due to Strategic Energy's efforts in leveraging its infrastructure
and the effects of achieving economies of scale. Strategic Energy continued to
experience increased labor and benefits as well as other general and
administrative expenses during 2002, following the growth in retail electric
sales, expansion into new markets and increased fuel management and consulting
activities. Other operating expenses in 2001 include the cost of commercial gas
sales of about $15.5 million, from Strategic Energy's natural gas retail supply
service, which was phased out by the end of 2001. As a result, other operating
expenses (excluding the cost of commercial gas sales) increased $14.4 million in
2002 compared to 2001. Contributing to this increase were higher labor and
benefit costs from the addition of employees and increasing health care related
costs, higher profit sharing and deferred compensation expense which are tied to
earnings and financial performance, and higher other general and administrative
expenses associated with higher sales volumes, geographic market expansion, and
regulatory and market development initiatives. Operating expenses increased $7.8
million in 2001 compared to 2000 primarily due to increased labor and benefits
costs from the addition of employees during 2001 as well as increased other
general and administrative expenses during 2001, following the pattern of growth
in sales and expansion of activities discussed above.
Strategic Energy Non-operating Income (Expenses)
Non-operating income (expenses) includes non-operating income less minority
interest expense and non-operating expenses. In 2002 compared to 2001,
non-operating income (expenses) increased $4.0 million primarily due to a gain
of $1.4 million recognized on the sale of gas contracts during the second
quarter of 2001 and an increase in minority interest expense of $2.8 million,
which represents the share of Strategic Energy's net income not attributable to
Great Plains Energy's indirect ownership interest in Strategic Energy. In 2001
compared to 2000, non-operating income (expenses) increased $2.2 million
primarily due to an increase in minority interest expense of $3.6 million,
offset by the gain of $1.4 million recognized on the sale of gas contracts
during the second quarter of 2001.
41
KLT Gas
KLT Gas Business Overview
KLT Gas is focused on exploring for, developing and producing unconventional
natural gas resources, including coalbed methane properties. KLT Gas believes
that unconventional natural gas resources provide an economically attractive
alternative source of supply to meet the growing demand for natural gas in North
America. Additionally, KLT Gas' management team has experience and expertise in
identifying, testing and producing unconventional natural gas properties and, as
a result, it believes its expertise provides a competitive advantage in this
niche of the exploration and production sector. Because it has a longer,
predictable reserve life and lower development cost, management believes
unconventional natural gas exploration is inherently lower risk than
conventional gas exploration.
Although gas prices have been volatile historically, KLT Gas continues to
believe that the long-term future price scenarios for natural gas appear strong.
Environmental concerns, especially air quality, and the increased demand for
natural gas for new electric generating capacity are contributing to this
projected growth in demand.
KLT Gas' properties are located in Colorado, Texas, Wyoming, Kansas, and
Nebraska. These leased properties cover approximately 255,000 undeveloped acres.
The testing of this acreage is in accordance with KLT Gas' exploration plan and
capital budget. KLT Gas estimates capital expenditures of approximately $30
million to $40 million annually for the years 2003 through 2005. The timing of
the testing may vary from current plans based upon obtaining the required
environmental and regulatory approvals and permits and future changes in market
conditions. KLT Gas continues to seek and identify new prospects in addition to
its existing portfolio of properties.
In 2002, KLT Gas focused on the acquisition of additional leased acreage and the
testing and development of several unconventional natural gas exploration
projects. KLT Gas is in the early stages of testing a new prospect in Colorado
and continuing pilot development at a Powder River Basin project and two
additional projects in the Rocky Mountain region. KLT Gas continued production
at its South Texas property.
KLT Gas Results of Operations
The following table summarizes KLT Gas' comparative results of operations.
2002 2001 2000
(millions)
Operating revenues $ 1.1 $ 0.3 $ 30.5
Other operating expenses (9.6) (9.4) (22.3)
Depreciation and depletion (2.5) (1.8) (6.0)
Gain on property 0.2 23.8 107.9
Operating income (loss) (10.8) 12.9 110.1
Income from equity investments - 1.0 3.6
Non-operating income (expenses) 0.8 0.3 5.3
Interest charges (0.3) - (3.5)
Income taxes 10.3 0.1 (36.3)
Net income $ - $ 14.3 $ 79.2
KLT Gas is currently testing gas properties following its most recent sale of
property during the second quarter of 2001. KLT Gas' 2001 net income included
its second quarter Patrick KLT Gas, LLC sale
42
which resulted in a $12.0 million after tax gain. KLT Gas' 2000 net income
included its third and fourth quarter sales of producing natural gas properties,
resulting in a $68.0 million after tax gain.
KLT Gas Operating Revenues
Operating revenues increased $0.8 million in 2002 compared to 2001 primarily due
to the effect of gas hedging activities during 2001, partially offset by
declining production at KLT Gas' South Texas property during 2002. Operating
revenues decreased $30.2 million in 2001 compared to 2000 primarily due to the
sale of producing natural gas properties in the third and fourth quarters of
2000 and the effect of gas hedging activities. KLT Gas unwound the majority of
its gas hedge derivatives with an offsetting swap transaction during the second
quarter of 2001. The fair market value of the swap was recorded in gas revenues.
KLT Gas Income Taxes
KLT Gas recorded tax credits related to its investment in natural gas properties
of $6.5 million, $6.0 million and $7.1 million in 2002, 2001 and 2000,
respectively. The law that allowed substantially all of these credits expired at
the end of 2002.
Other Non Regulated Activities
Investment in Affordable Housing Limited Partnerships - KLT Investments
KLT Investments Inc.'s (KLT Investments) earnings in 2002 totaled $10.4 million
(including an after tax reduction of $5.7 million in its affordable housing
investment) compared to earnings of $6.6 million in 2001 (including an after tax
reduction of $8.6 million in its affordable housing investment) and earnings of
$13.3 million in 2000 (including an after tax reduction of $1.5 million in its
affordable housing investment).
Pretax reductions in affordable housing investments were $9.0 million, $13.5
million and $2.4 million in 2002, 2001 and 2000, respectively. Pretax reductions
in its affordable housing investments are estimated to be $13 million, $7
million, $7 million, and $6 million for the years 2003 through 2006,
respectively. The reductions in 2002, 2001 and 2000 and estimated future
reductions are based on comparisons of the cost for those properties accounted
for by the cost method to the total projected residual value of the properties
and remaining tax credits to be received. These projections are based on the
latest information available but the ultimate amount and timing of actual
reductions could be significantly different from the above estimates. The
properties underlying the partnership investment are subject to certain risks
inherent in real estate ownership and management. Even after the estimated
reductions, earnings from the investments in affordable housing are expected to
be positive for the next four years.
KLT Investments accrued tax credits related to its investments in affordable
housing limited partnerships of $19.3 million, $19.2 million and $19.2 million
in 2002, 2001 and 2000, respectively.
Subsidiary of KLT Telecom Files for Bankruptcy - DTI
The accounting treatment related to DTI and its 2001 bankruptcy is complex and
is addressed in greater detail in Note 19 to the consolidated financial
statements; consequently, Note 19 in its entirety is incorporated by reference
in this portion of Management's Discussion and Analysis and should be read as a
component of this discussion.
In 1997, KLT Telecom originally purchased, for $45 million, a 47% equity
ownership of DTI, a facilities-based telecommunications company headquartered in
St. Louis. DTI's operating losses reduced this original equity investment to
zero by June 2000. In February 2001, KLT Telecom increased its ownership to
83.6% by purchasing additional shares at a cost of approximately $40 million,
and in conjunction with such purchase made a $94 million loan to Holdings. Also
in February 2001, KLT
43
Telecom made a commitment to obtain or arrange a $75 million revolving credit
facility for Digital Teleport Inc. KLT Telecom loaned Digital Teleport Inc. $47
million during 2001 under this and other arrangements. DTI intended to refinance
part of these loans. However, a new senior credit facility from bank lenders was
not obtained due to, among other things, the downturn in the telecommunications
industry.
Starting in the second quarter of 2001, DTI conserved cash by more narrowly
focusing its strategy to providing connectivity in secondary and tertiary
markets in a five state region. DTI actively explored its strategic alternatives
including a merger, sale of assets and all other types of recapitalization
including bankruptcy. DTI originally thought that the industry downturn would be
only temporary. However, during the fourth quarter the combination of a lack of
additional financing, continued decline of the telecommunication industry, and
the cash requirements of maintaining its long-haul assets resulted in DTI making
the decision to abandon certain of its long-haul assets and file for
reorganization under Chapter 11 of the U.S. Bankruptcy Code.
On December 31, 2001, a subsidiary of KLT Telecom, Holdings and its
subsidiaries, Digital Teleport and Digital Teleport of Virginia, Inc., filed
separate voluntary petitions in Bankruptcy Court for the Eastern District of
Missouri for reorganization under Chapter 11 of the U.S. Bankruptcy Code. These
cases have been consolidated for joint procedural administration. Holdings and
its two subsidiaries are collectively called "DTI". The filings enable DTI to
continue to conduct its business operations while attempting to resolve its
financial obligations. KLT Telecom agreed to provide up to $5 million in a DIP
Loan to Digital Teleport for a term of 18 months during the bankruptcy process
if it achieves certain financial goals. The Bankruptcy Court approved the DIP
Loan on February 18, 2002, but no advances have been made under the DIP Loan to
date.
In December 2002, Digital Teleport entered into an agreement to sell
substantially all of its assets (Asset Sale) to CenturyTel Fiber Company II, LLC
(Century Tel), a nominee of CenturyTel, Inc. (Asset Purchase Agreement). The
Asset Sale was approved by the Bankruptcy Court on February 13, 2003, but the
Asset Purchase Agreement contains conditions to closing which include among
other items the receipt of all necessary regulatory approvals, which must either
be satisfied or waived by July 15, 2003.
In the Digital Teleport bankruptcy case, KLT Telecom, KLT Inc., KCP&L, Great
Plains Energy, Digital Teleport and the Official Unsecured Creditors Committee
of Digital Teleport entered into a Settlement Agreement as of December 23, 2002
(Teleport Settlement Agreement). The Teleport Settlement Agreement, if approved
by the Bankruptcy Court, resolves all material issues and disputes among the
parties to that agreement. The Teleport Settlement Agreement does not resolve
any claims that Holdings or its creditors may have against the Company; however,
as discussed below, settlement discussions have commenced in the Holdings
bankruptcy case. Digital Teleport and Digital Teleport of Virginia have prepared
a Chapter 11 plan (Chapter 11 Plan) and disclosure statement reflecting the
Asset Sale and the terms of the Teleport Settlement Agreement and expect that a
confirmation hearing will be held by the Bankruptcy Court in May 2003. The
Chapter 11 Plan contemplates that Digital Teleport and Digital Teleport of
Virginia will be liquidated after distribution of those companies' assets to
their creditors pursuant to the Chapter 11 Plan and the Teleport Settlement
Agreement.
In an objection to a motion by Digital Teleport for an extension of time in
which to propose a Chapter 11 plan, the largest creditor of Holdings (the
Creditor) asserted that Holdings, Digital Teleport and their creditors have
claims against KLT Telecom, KLT Inc., KCP&L and Great Plains Energy based on
theories of breach of contract, fraudulent conveyance, recharacterization of
debt, subordination and breach of fiduciary duty. Among other things, the
Creditor asserted that certain tax benefits should have been paid to Holdings
and Digital Teleport, rather than to KLT Telecom as provided in the October 1,
2001 Great Plains Energy tax allocation agreement. The Creditor has not
otherwise pursued these claims at this time, and the Company believes that it
has meritorious defenses to these claims. Further,
44
Holdings, the principal creditors of Holdings (including the Creditor), KLT
Telecom, KLT Inc., KCP&L, and Great Plains Energy are in the process of
negotiating a separate settlement agreement which, if finalized and approved by
the Bankruptcy Court, is anticipated to resolve the Holdings bankruptcy case and
any claims that might be asserted in the Holdings bankruptcy case against the
Company, and to provide payment to the creditors of Holdings from a portion of
the proceeds KLT Telecom otherwise would receive from the Asset Sale. If the
separate settlement agreement is finalized, it is anticipated that the Chapter
11 Plan will be modified to add Holdings as a proponent and to include the terms
of the Holdings Settlement Agreement. For further information regarding the DTI
bankruptcy proceedings, see Note 19 to the consolidated financial statements.
The operating results of DTI have been included for the period February 8, 2001
(date of acquisition) through September 30, 2001, for consolidated KCP&L and
through December 31, 2001, for Great Plains Energy. Because of DTI's bankruptcy
filings, KLT Telecom no longer has control over nor can it exert significant
control over DTI. As a consequence, as of December 31, 2001, DTI was
de-consolidated and is presented on the cost basis. Consequently, KLT Telecom
did not include in its financial results the ongoing results of operations,
earnings or losses incurred by DTI during 2002 and will not do so during the
remaining period of the DTI bankruptcy proceedings.
Because of the bankruptcy filings, a $195.8 million net write-off was included
in (Gain) Loss on Property in operating expenses on Great Plains Energy's 2001
Consolidated Statement of Income. A corresponding tax benefit of $55.8 million
was included in income taxes. The net impact of the bankruptcy to income was a
$140.0 million reduction.
Income taxes reported in 2001 do not reflect the entire effect of the net
write-off because of the uncertainty of recognizing future tax deductions while
in the bankruptcy process. If additional DTI assets are abandoned or sold during
the bankruptcy process, or additional tax losses not already reflected are
incurred by DTI, future tax benefits will be recorded.
Other
During 2001, KLT Energy Services wrote off its $6.2 million investment in the
common stock of Bracknell due to a decline in its share price and the bankruptcy
filing of one of Bracknell's subsidiaries. In 2000, KLT Inc. realized losses on
its investment in CellNet Data Systems Inc. (CellNet) of $3.1 million after tax.
Significant Balance Sheet Changes
(December 31, 2002 compared to December 31, 2001)
o Great Plains Energy's receivables increased $48.9 million primarily due
to a $48.4 million increase in Strategic Energy's receivables as a
result of the strong growth in its power supply coordination services
and a $7.7 million increase in consolidated KCP&L's receivables
partially offset by a $4.7 million decrease in KLT Gas' receivables.
Consolidated KCP&L's receivables increased primarily due to a $7.3
million increase in KCP&L's receivables due to an increase in bulk
power sales.
o Great Plains Energy's affordable housing limited partnerships decreased
$12.5 million primarily due to a reduction in the valuation of the
properties held by KLT Investments.
o Great Plains Energy's goodwill increased $9.0 million due to an
increase of $12.0 million related to IEC's purchase of a 6% indirect
ownership interest in Strategic Energy partially offset by a decrease
in consolidated KCP&L goodwill of $3.0 million due to the cumulative
effect write-down of goodwill at RSAE.
o Great Plains Energy's other deferred charges increased $8.6 million
primarily due to an $8.5 million increase in consolidated KCP&L's other
deferred charges. Consolidated KCP&L's other deferred charges increase
was primarily due to a $4.3 million increase in KCP&L's fair value of
interest rate hedging derivatives and a $3.8 million increase in
intangible assets at RSAE
45
reflecting the purchase of a trademark and logo and the extension of an
employment contract and non-compete agreement with a key employee.
o Great Plains Energy's notes payable decreased $99.7 million primarily
due to Great Plains Energy paying down $110.0 million of its short-term
credit facility with proceeds from the November 2002 equity offering.
This decrease was partially offset by Great Plains Energy borrowings in
2002 primarily used to make a capital contribution to KCP&L and a $3.4
million increase in consolidated KCP&L's notes payable due to
additional borrowing by RSAE on its short-term credit facility for
general corporate purposes.
o Great Plains Energy's and consolidated KCP&L's commercial paper
decreased $62.0 million primarily due to KCP&L paying down commercial
paper with cash flow from operations and a capital contribution from
Great Plains Energy.
o Great Plains Energy's current maturities of long-term debt decreased
$104.7 million primarily due to a $102.5 million decrease in
consolidated KCP&L's current maturities of long-term debt. Consolidated
KCP&L's decrease was primarily due to refinancing $200.0 million of
maturing KCP&L medium-term notes with the issuance of KCP&L unsecured
senior notes and a $27.0 million decrease due to KCP&L retiring
medium-term notes partially offset by a $124.0 million increase in the
current portion of KCP&L's medium-term notes.
o Great Plains Energy's and consolidated KCP&L's Environmental
Improvement Revenue Refunding (EIRR) bonds classified as current
decreased $96.5 million due to the remarketing of $146.5 Series 1998 A,
B and D bonds to a five-year term offset by $50.0 million of Series
1998 C bonds classified as current due to the scheduled remarketing in
August 2003.
o Great Plains Energy's accounts payable increased $1.6 million primarily
due to a $42.5 million increase in Strategic Energy's accounts payable
as a result of the strong growth in its power supply coordination
services, mostly offset by a $35.4 million decrease in consolidated
KCP&L's accounts payable and a $5.4 million decrease in KLT Gas'
accounts payable. Consolidated KCP&L's accounts payable decreased
primarily due to the timing of cash payments by KCP&L.
o Great Plains Energy's and consolidated KCP&L's pension liability
increased $44.6 million primarily due to KCP&L's $42.2 million
additional minimum pension liability as a result of a significant
decline in the market value of pension plan assets.
o Great Plains Energy's combined accrued taxes liability and current
income tax asset increased $46.0 million to a liability of $29.3
million primarily due to a $49.6 million increase in consolidated
KCP&L's accrued tax. Consolidated KCP&L's increase is primarily due to
a $50.4 million increase in KCP&L's accrued tax due to the timing of
income tax payments.
Capital Requirements and Liquidity
Great Plains Energy operates through its subsidiaries and has no material assets
other than the stock of its subsidiaries. Great Plains Energy's ability to make
payments on its debt securities and its ability to pay dividends is dependent on
its receipt of dividends from its subsidiaries and proceeds from the sale of its
securities.
Great Plains Energy's capital requirements are principally comprised of KCP&L's
utility capital expenditures, KLT Gas' capital expenditures, and KCP&L's pension
benefit plan funding requirements discussed below. Capital expenditures are
discussed in Management's Discussion and Analysis consolidated KCP&L and KLT Gas
sections. Additional cash and capital requirements for the companies, including
long-term debt requirements, are discussed below.
Great Plains Energy's liquid resources at December 31, 2002, included cash flows
from operations of subsidiaries, $65.3 million cash on hand and $367.0 million
of unused bank lines of credit. The unused lines consisted of $126.0 million
from KCP&L's short-term bank lines of credit, $30.0 million from Strategic
Energy's bank line of credit, and $211.0 million from Great Plains Energy's
revolving credit facilities.
46
Great Plains Energy terminated its $129 million bridge revolving credit facility
in the first quarter of 2002 and replaced it with a $205 million 364-day
revolving credit facility syndicated with a group of banks. Also during 2002,
Great Plains Energy entered into a $20 million 364-day revolving credit facility
with a bank. The $205 million facility contains a material adverse change (MAC)
clause that requires Great Plains Energy to represent, prior to receiving any
funding, that no MAC has occurred. The $20 million facility does not contain a
MAC clause. Great Plains Energy's available liquidity under these facilities is
not impacted by a decline in credit ratings unless the downgrade occurs in the
context of a merger, consolidation or sale. The Company is currently negotiating
the renewal and consolidation of these facilities.
Strategic Energy increased its bank line of credit in 2002 to $30 million from
$10 million. The line of credit contains a MAC clause. This agreement requires
Strategic Energy to represent, prior to receiving any funding, that no MAC has
occurred.
KCP&L's primary sources of liquidity are cash flows from operations and
bilateral credit lines totaling $126.0 million with six banks (as of December
31, 2002). KCP&L uses these lines to provide support for its issuance of
commercial paper, which had all been repaid at December 31, 2002. These bank
facilities are each for a 364-day term and mature at various times throughout
the year. Four of the facilities totaling $76.0 million can be extended for one
year under their term out provisions. KCP&L has MAC clauses in two agreements
covering $50.0 million of available bilateral credit lines. These two agreements
require KCP&L to represent, prior to receiving any funding, that no MAC has
occurred. KCP&L's available liquidity under these facilities is not impacted by
a decline in credit ratings unless the downgrade occurs in the context of a
merger, consolidation or sale. A default by KCP&L on other indebtedness is a
default under these bank line agreements. Under the terms of certain bank line
agreements, KCP&L is required to maintain a consolidated indebtedness to
consolidated capitalization ratio not greater than 0.65 to 1.0 at all times. At
December 31, 2002, the consolidated indebtedness to consolidated capitalization
ratio calculated in accordance with the covenant was 0.60 to 1.0; therefore, the
Company was in compliance with the covenant.
Under the indenture relating to KCP&L's 8.3% Junior Subordinated Deferrable
Interest Debentures, due 2037 (Debentures), which are held by KCP&L Financing I,
KCP&L may not declare or pay any dividends on any shares of its capital stock if
at the time (i) there is an event of default (as defined in the indenture), (ii)
KCP&L is in default with respect to its payment of any obligations under its
guarantee of preferred securities issued by KCP&L Financing I, or (iii) KCP&L
has elected to defer payments of interest on the Debentures.
Great Plains Energy has agreements with KLT Investments associated with notes
KLT Investments issued to acquire its affordable housing investments. Prior to
forming Great Plains Energy, KCP&L had these agreements. Great Plains Energy
agreed not to take certain actions including, but not limited to, merging,
dissolving or causing the dissolution of KLT Investments, or withdrawing amounts
from KLT Investments if the withdrawals would result in KLT Investments to not
be in compliance with minimum net worth and cash balance requirements. The
agreements also give KLT Investments' lenders the right to have KLT Investments
repurchase the notes if Great Plains Energy's senior debt rating falls below
investment grade, or if Great Plains Energy ceases to own at least 80% of
KCP&L's stock. At December 31, 2002, KLT Investments had $19.7 million in
outstanding notes, including current maturities.
Pursuant to agreements with the MPSC and the KCC, KCP&L maintains its common
equity at not less than 35% of total capitalization. Additionally, Great Plains
Energy maintains its consolidated common equity at no less than 30% of total
consolidated capitalization.
47
KCP&L's consolidated statements of cash flows include KLT Inc. and GPP for all
the periods prior to the October 1, 2001 formation of the holding company. The
presentation of the prior years statements of cash flows for Great Plains Energy
is provided for comparative purposes and is identical to the statements of cash
flows for consolidated KCP&L, prior to the formation of the holding company. The
effect of DTI on the statements of cash flows is detailed in Note 19 to the
consolidated financial statements.
Great Plains Energy and consolidated KCP&L generated positive cash flows from
operating activities for all periods presented. The increase for Great Plains
Energy and consolidated KCP&L in 2002 compared to 2001 is due to the changes in
working capital detailed in Note 2 to the consolidated financial statements. The
individual components of working capital vary with normal business cycles and
operations. Also, the timing of the Wolf Creek outage affects the refueling
outage accrual, deferred income taxes and amortization of nuclear fuel. The
increase for Great Plains Energy and consolidated KCP&L in 2001 compared to 2000
is due to increased net income before non-cash expenses. The increased net
income before non-cash expenses was partially offset by the changes in working
capital detailed in Note 2 to the consolidated financial statements.
Great Plains Energy's and consolidated KCP&L's cash used for investing
activities varies with the timing of utility capital expenditures and purchases
of investments and nonutility property. Investing activities are offset by the
proceeds from the sale of properties and insurance recoveries. With KCP&L's
mid-2001 completion of the rebuild of Hawthorn No. 5, utility capital
expenditures and the allowance for borrowed funds used during construction
decreased $139.1 million in 2002 compared to 2001 and $142.0 million in 2001
compared to 2000. The decreases in 2002 compared to 2001 would have been greater
if not for $14.7 million of KCP&L capital expenditures as a result of the
January 2002 ice storm. Cash used for purchases of investments and nonutility
property in 2002 compared to 2001 decreased primarily reflecting KLT Telecom's
2001 investments in DTI and DTI's 2001 purchases of telecommunications property.
The increase in 2001 compared to 2000 for the DTI investments and purchased
property was partially offset by KLT Gas' investments in gas properties during
2000. Proceeds from the sale of properties decreased significantly in 2002
compared to 2001 because of KLT Gas' 2001 sale of its equity ownership in
Patrick KLT Gas, LLC. Proceeds from the sale of properties also decreased
significantly in 2001 compared to 2000 because the proceeds from the sale of KLT
Gas properties in 2000 more than offset the 2001 sale.
Great Plains Energy completed a public offering of 6.9 million of Great Plains
Energy common shares at $22 per share, raising $151.8 million in gross proceeds
in late 2002. Expenses to issue the stock totaled $6.1 million, which is
included in other financing activities. Great Plains Energy repaid $178.8
million of debt balances in 2002 compared to net borrowings in 2001 of $197.2
million. Included in the Great Plains Energy's amounts, consolidated KCP&L
repaid $57.2 million of debt balances in 2002 compared to net borrowings of
$171.0 million in 2001. The repayments in 2002 compared to the borrowings in
2001 reflect decreased investing activities in utility capital expenditures,
nonutility property and investments discussed above. Cash from Great Plains
Energy financing activities increased in 2001 compared to 2000 primarily because
short-term borrowings increased $140.7 million in 2001 compared to a $183.1
million decrease in 2000. However, this change in short-term borrowings was
partially offset by a $264.1 million decrease in long-term debt issuances, net
of repayments. Cash from consolidated KCP&L financing activities increased
similarly in 2001 compared to 2000, but exclude the fourth quarter 2001 $99.5
million repayment of KLT Inc.'s bank credit agreement and a fourth quarter 2001
$124.0 million increase in short term borrowings by Great Plains Energy.
On November 7, 2002, Great Plains Energy entered into an Agreement and Plan of
Merger (Agreement) with ELC, the ELC shareholders and IEC, a wholly-owned
subsidiary of Great Plains Energy. The ELC Shareholders received $15.1 million
in merger consideration. As part of the merger
48
consideration, on November 7, 2002, Great Plains Energy issued 387,596
additional shares of its common stock to the ELC Shareholders. The Agreement
valued such shares at approximately $8 million. The remainder of the merger
consideration was in short-term notes, which were paid in January 2003.
In early 2003, KCP&L received a total of approximately $100 million as an equity
contribution from Great Plains Energy. KCP&L repaid $104.0 million of
medium-term notes included in current maturities on its December 31, 2002,
balance sheet.
The Company's common dividend payout ratio was 81% (excluding the cumulative
effect of a change in accounting principle) in 2002, 104% (excluding the
extraordinary item and the DTI net write-off) in 2001, and 81% (excluding the
cumulative effect of changes in accounting principles) in 2000. See the Results
of Operations sections for discussion of significant factors impacting earnings
in 2002, 2001 and 2000.
KCP&L expects to meet day-to-day operating requirements including interest
payments, construction requirements (excluding new generating capacity) and
dividends with internally-generated funds. However, it might not be able to meet
these requirements with internally-generated funds because of the effect of
inflation on operating expenses, the level of MWh sales, regulatory actions,
compliance with future environmental regulations and the availability of
generating units. The funds Great Plains Energy and consolidated KCP&L need to
retire maturing debt (detailed below) will be provided from operations, the
issuance of long and short-term debt and/or the issuance of equity or
equity-linked instruments. In addition, the Company may issue debt, equity
and/or equity-linked instruments to finance growth or take advantage of new
opportunities.
Great Plains Energy filed a registration statement in April 2002 for the
issuance of an aggregate amount up to $300 million of any combination of senior
debt securities, subordinated debt securities, trust preferred securities,
convertible securities, or common stock. The registration statement became
effective in November 2002 and Great Plains Energy issued $151.8 million of
common stock. The proceeds were used for repayment of debt and general corporate
purposes.
As a registered public utility company, Great Plains Energy must receive
authorization from the SEC under the 35 Act to issue equity or debt. Great
Plains Energy is currently authorized to issue up to $450.0 million of debt and
equity. Great Plains Energy has utilized $423.8 million of this amount as
follows: (i) $39.0 million in preferred stock issued in connection with the
October 1, 2001, reorganization; (ii) $225.0 million in revolving credit
facilities and (iii) $159.8 million in common equity issued in a public offering
and in connection with IEC's acquisition of an indirect ownership interest in
Strategic Energy. Great Plains Energy is seeking an additional $750 million in
authorization from the SEC and anticipates the SEC will act on the application
in 2003.
In 2002, KCP&L issued $225 million of 6.0% unsecured senior notes, maturing in
2007. The proceeds from the issuance were primarily used to refinance maturing
unsecured medium-term notes.
KCP&L plans to file a registration statement in 2003 for up to $255 million in
debt securities. This will preserve KCP&L's flexibility to access the capital
markets for long-term debt if required.
KCP&L has entered into a revolving agreement, which expires in October 2003, to
sell all of its right, title and interest in the majority of its customer
accounts receivable to Receivables Company, which in turn sells most of the
receivables to outside investors. KCP&L expects the agreement to be renewed
annually. See Note 3 to the consolidated financial statements.
49
Pensions
KCP&L maintains defined benefit plans for substantially all of its employees.
Our policy is to fund the plan on an actuarial basis to provide assets
sufficient to meet benefits to be paid to plan participants consistent with the
funding requirements of the Employee Retirement Income Security Act of 1974
(ERISA). Contributions of $1.6 million and $1.0 million were made in 2002 and
2001, respectively.
Due to sharp declines in the debt and equity markets since the third quarter of
2000, the value of assets held in the trusts to satisfy pension plan obligations
has decreased significantly. As a result, under the minimum funding requirements
of ERISA, KCP&L will be required to fund approximately $9.7 million and $20.9
million during 2003 and 2004, respectively. Management believes KCP&L has
adequate access to capital resources through cash flows from operations or
through existing lines of credit to support this funding.
Participants in the plans may request a lump-sum cash payment upon termination
of their employment, which could result in increased cash requirements from
pension plan assets and KCP&L being required to accelerate future funding. While
it is difficult to estimate future cash requirements due to uncertain market
conditions and other factors, additional funding may be required in future
years.
Under the terms of the pension plans, KCP&L reserves the right to amend or
terminate the plans, and from time to time benefits have changed. See Note 7 to
the consolidated financial statements for further discussion.
Credit Ratings
At December 31, 2002, the major credit rating agencies rated the Companies'
securities as follows:
Moody's Standard
Investor Service and Poor's
Great Plains Energy
Outlook Negative Stable
Corporate Credit Rating - BBB
Bank Credit Facility Baa2 -
Preferred Stock Ba1 BB+
Senior Unsecured Debt Baa2 (preliminary) BBB- (preliminary)
Subordinated Debt Baa3 (preliminary) BBB- (preliminary)
KCP&L
Outlook Negative Stable
Senior Secured Debt A1 BBB
Senior Unsecured Debt A2 BBB
Commercial Paper P-1 A-2
These ratings reflect the current views of these rating agencies and no
assurances can be given that these ratings will continue for any given period of
time. The Companies view maintenance of strong credit ratings as being extremely
important; however, and to that end, an active and ongoing dialogue is
maintained with the agencies with respect to the Companies' results of
operations, financial position, and future prospects.
None of the Companies' outstanding debt, except for the notes associated with
affordable housing investments discussed above, is impacted by a decline in
credit ratings, which would cause the acceleration of interest and/or principal
payments in the event of a ratings downgrade, unless the downgrade occurs in the
context of a merger, consolidation, or sale. However, in the event of a
50
downgrade the Companies and/or their subsidiaries may be subject to increased
interest costs on their credit facilities. Additionally, in one bond agreement,
KCP&L has agreed to limits on its ability to issue additional mortgage bonds
based on the bond's credit ratings. See Note 15 to the consolidated financial
statements.
Supplemental Capital Requirements and Liquidity Information
The following information is provided to summarize cash obligations and
commercial commitments.
Great Plains Energy Contractual Cash Obligations
Payment due by period 2003 2004 2005 2006 2007 After 2007 Total
(millions)
Long-term debt,
including current maturities $ 134.1 $ 60.6 $ 254.2 $ 2.6 $ 227.0 $ 507.6 $1,186.1
Lease obligations 30.1 33.9 36.1 37.2 14.7 114.7 266.7
Other long-term obligations, net 588.2 360.8 267.5 68.5 20.9 160.4 1,466.3
Total contractual obligations $ 752.4 $ 455.3 $ 557.8 $ 108.3 $ 262.6 $ 782.7 $2,919.1
Consolidated KCP&L Contractual Cash Obligations
Payment due by period 2003 2004 2005 2006 2007 After 2007 Total
(millions)
Long-term debt,
including current maturities $ 124.9 $ 55.8 $ 250.9 $ 0.9 $ 226.5 $ 507.3 $1,166.3
Lease obligations 29.2 33.2 35.6 36.8 14.3 114.3 263.4
Other long-term obligations, net 87.8 61.3 45.4 18.4 12.3 148.8 374.0
Total contractual obligations $ 241.9 $ 150.3 $ 331.9 $ 56.1 $ 253.1 $ 770.4 $1,803.7
Long-term debt, including current maturities excludes $0.9 million discount on
senior notes and the $4.3 million fair value adjustment to the EIRR bonds
related to SFAS No. 133. EIRR bonds classified as current liabilities of $81
million due 2017 are included here on their final due date. See Note 15 to the
consolidated financial statements.
Lease obligations includes capital and operating lease obligations; capital
lease obligations are less than 5% of the total. Lease obligations also includes
leases for railcars to serve jointly-owned generating units where KCP&L is the
managing partner. KCP&L will be reimbursed by the other owners for about $1.9
million per year ($24.4 million total). Lease obligations excludes a commitment
to either purchase leased combustion turbines at termination of the construction
leasing agreement for a price equal to amounts expended by the Lessor or sell
the turbines on behalf of the Lessor while guaranteeing the Lessor's receipt of
an amount equal to 83.21% of the amounts expended. See Note 10 to the
consolidated financial statements for additional information.
Other long-term obligations include commitments for KCP&L's share under
contracts for acquisition of coal, and nuclear fuel including the DOE
assessment; and capacity purchases for KCP&L. KCP&L has capacity sales
agreements not included above that total $12.8 million for 2003, $11.8 million
per year for 2004 through 2007, and $49.3 million after 2007. Great Plains
Energy also includes Strategic Energy's purchased power commitments of $500.4
million, 299.5 million, $222.1 million, $50.1 million, $8.6 million and $11.6
million for 2003 through 2007 and after 2007, respectively.
Guarantees
In the normal course of business, Great Plains Energy and certain of its
subsidiaries enter into various agreements providing financial or performance
assurance to third parties on behalf of certain subsidiaries. Such agreements
include, for example, guarantees, stand-by letters of credit and surety bonds.
These agreements are entered into primarily to support or enhance the
creditworthiness
51
otherwise attributed to a subsidiary on a stand-alone basis, thereby
facilitating the extension of sufficient credit to accomplish the subsidiaries'
intended business purposes.
As prescribed in Financial Accounting Standards Board (FASB) Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", the Company will begin
recording a liability for the fair value of obligations it undertakes for
guarantees issued after December 31, 2002. The interpretation does not encompass
guarantees of the Company's own future performance, such as Great Plains
Energy's guarantees to support Strategic Energy power purchases and regulatory
requirements; however, these guarantees are included in the presentation below.
KCP&L will record an immaterial amount for the fair value of guarantees expected
to be issued in 2003 for the residual value of vehicles and heavy equipment
under an operating lease.
Other Commercial Commitments Outstanding
Amount of commitment expiration per period
2003 2004 2005 2006 2007 After 2007 Total
(millions)
Consolidated KCP&L Guarantees $ 1.8 $ 1.8 $ 1.8 $ 1.5 $ 1.5 $ 4.4 $ 12.8
Great Plains Energy Guarantees,
including consolidated KCP&L $178.0 $ 1.8 $ 11.4 $ 1.5 $ 2.4 $ 45.9 $241.0
Great Plains Energy and KLT Inc. have provided $202.3 million of guarantees to
support Strategic Energy power purchases and regulatory requirements. Strategic
Energy's current power supply contracts end in 2010; however, 94% expire by the
end of 2005. As of December 31, 2002, guarantees related to Strategic Energy are
as follows:
o Great Plains Energy direct guarantees to counterparties totaling $68.7
million and KLT Inc. direct guarantees to counterparties totaling $60.4
million, with varying expiration dates
o Great Plains Energy indemnifies the issuers of surety bonds totaling
$61.2 million, of which $51.6 million expire in 2003 and $9.6 million
expire in 2005
o Great Plains Energy guarantees related to letters of credit totaling
$11.9 million, all of which expire in 2003
RSAE has a $25 million line of credit with a commercial bank, which Great Plains
Energy supports through an agreement that ensures adequate capital to operate
RSAE. KCP&L is contingently liable for guaranteed energy savings under
agreements with several customers.
KLT Inc. issued a letter of credit, currently $0.9 million, related to the sale
of demand side management credits by Custom Energy, LLC, which renews annually
and has five years remaining.
KCP&L has entered agreements guaranteeing an aggregate value of approximately
$12.8 million over the next eight years. In most cases a subcontractor would
indemnify KCP&L for any payments made by KCP&L under these guarantees.
The table above does not include the following guarantees because they do not
require a future cash payment:
o Custom Energy, LLC has guaranteed construction performance bonds totaling
$9.7 million which are secured by KLT Energy Services' ownership interest
in Custom Energy. These bonds are expected to expire in 2003.
o RSAE and its subsidiary, R. S. Andrews of Maryland, have secured notes to
an individual and a company totaling $4.1 million. The security for the
notes includes a pledge of RSAE stock in R. S. Andrews of Maryland and a
security interest in all of R. S. Andrews of Maryland assets. In
52
the event of default on either of the notes, RSAE's investment in R. S.
Andrews of Maryland would be at risk to satisfy the notes.
The table above does not include the following guarantees:
KCP&L Financing I, a trust, has issued $150.0 million of preferred securities.
In connection with the issuance of the preferred securities, KCP&L issued a
preferred securities guarantee, which guarantees the payment of any accrued and
unpaid distributions, the redemption price and payments upon dissolution,
winding-up or termination of the trust, all to the extent that the trust has
funds available therefore. At December 31, 2002, there were no accrued and
unpaid distributions.
In December 2002, KCP&L obtained bond insurance policies as a credit enhancement
to its Series 1993A and 1993B EIRR bonds, which total $79.5 million. The
insurance agreement between KCP&L and the issuer of the bond insurance policies,
provides for reimbursement by KCP&L for any amounts the insurer pays under the
bond insurance policies.
Environmental Matters
KCP&L's operations are subject to regulation by federal, state and local
authorities with regard to air and other environmental matters. The generation
and transmission of electricity produces and requires disposal of certain
hazardous products which are subject to these laws and regulations. In addition
to imposing continuing compliance obligations, these laws and regulations
authorize the imposition of substantial penalties for noncompliance, including
fines, injunctive relief and other sanctions. Failure to comply with these laws
and regulations could have a material adverse effect on KCP&L.
KCP&L operates in an environmentally responsible manner and seeks to use current
technology to avoid and treat contamination. KCP&L regularly conducts
environmental audits designed to ensure compliance with governmental regulations
and to detect contamination. Governmental bodies, however, may impose additional
or more restrictive environmental regulations that could require substantial
changes to operations or facilities at a significant cost. See Note 10 to the
consolidated financial statements.
53
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Great Plains Energy and consolidated KCP&L are exposed to market risks
associated with commodity price and supply, interest rates and equity prices.
Market risks are handled in accordance with established policies, which may
include entering into various derivative transactions. In the normal course of
business, Great Plains Energy and consolidated KCP&L also face risks that are
either non-financial or non-quantifiable. Such risks principally include
business, legal, operational and credit risks and are not represented in the
following analysis.
Commodity Risk
KCP&L and Strategic Energy engage in the wholesale and retail marketing of
electricity and accordingly, are exposed to risk associated with the price of
electricity.
KCP&L's wholesale operations include the physical delivery and marketing of
power obtained through its generation capacity and long, intermediate and
short-term capacity/energy contracts. KCP&L maintains a capacity margin of at
least 12% of its peak summer demand. This net positive supply of capacity and
energy is maintained through its generation assets and capacity and power
purchase agreements to protect it from the potential operational failure of one
of its owned or contracted power generating units. The agreements contain
penalties for non-performance to protect KCP&L from energy price risk on the
contracted energy. KCP&L also enters into additional power purchase agreements
with the objective of obtaining the most economical energy to meet its physical
delivery obligations to its customers. KCP&L continually evaluates the need for
additional risk mitigation measures in order to minimize its financial exposure
to, among other things, spikes in wholesale power prices during periods of high
demand.
KCP&L's sales include the sales of electricity to its retail customers and bulk
power sales of electricity in the wholesale market. KCP&L continually evaluates
its system requirements, the availability of generating units, availability and
cost of fuel supply, the availability and cost of purchased power and the
requirements of other electric systems; therefore, the impact of the
hypothetical amounts that follow could be significantly reduced depending on the
system and market prices at the time of the increases. During 2002,
approximately 75% of KCP&L's net MWh's generated was coal-fired. A hypothetical
10% increase in the market price of coal could have resulted in a $2.9 million
decrease in pretax earnings for 2002. KCP&L currently has approximately 95% of
its coal requirements for 2003 under contract. Approximately 10% of the 2003
expected delivered cost of coal is subject to the market price of coal, which is
approximately one-half of the amounts subject to the market price of coal in
2002. KCP&L has implemented price risk mitigation measures to reduce its
exposure to high natural gas prices. A hypothetical 10% increase in natural gas
and oil market prices would have resulted in a decrease of less than $1.0
million in pretax earnings. Approximately 75% of KCP&L's summer 2003 projected
gas generation requirements for retail and firm wholesale sales are price
protected through its hedging program, which is consistent with the percentages
hedged in 2002. A hypothetical 10% increase in the cost of purchased power could
have resulted in a $2.8 million decrease in pretax earnings for 2002.
Strategic Energy maintains a commodity-price risk management strategy that uses
forward physical energy purchases and derivative instruments to minimize
significant, unanticipated earnings fluctuations caused by commodity-price
volatility. As a result of supplying electricity to retail customers under
fixed rate contracts, Strategic Energy's policy is to match customers' demand
with fixed price purchases. In certain markets where Strategic Energy operates,
entering into forward fixed price contracts is cost prohibitive. By entering
into swap contracts for a portion of its forecasted purchases in these markets,
the future purchase price of electricity is effectively fixed under these swap
contracts. The swap contracts limit the unfavorable effect that price increases
will have on electricity purchases.
54
KLT Gas is exposed to commodity price risk on the natural gas it produces.
Financial hedge instruments can be used to mitigate its exposure to market price
fluctuations on approximately 85% of
its daily gas sales in accordance with its risk management policy. Currently,
KLT Gas is producing an insignificant volume of gas and the price risk is
minimal.
KCP&L and Strategic Energy are not required to record energy transactions at
fair value. Commitments to purchase and sell energy and energy-related products
except for derivatives that qualify as cash flow hedges are currently carried at
cost. KCP&L and Strategic Energy report the revenue and expense associated with
all energy contracts at the time the underlying physical transaction closes
consistent with industry practice and the business philosophy of
generating/purchasing and delivering physical power to customers.
Interest Rate Risk
Great Plains Energy manages interest expense and short and long-term liquidity
through a combination of fixed rate and variable rate debt. Generally, the
amount of each type of debt is managed through market issuance, but interest
rate swap and cap agreements with highly rated financial institutions may be
used to achieve the desired combination. Using outstanding balances and
annualized interest rates as of December 31, 2002, a hypothetical 10% increase
in the interest rates associated with variable rate debt would have resulted in
a decrease of less than $1.0 million in pretax earnings for 2002. Additionally,
interest rates impact the fair value of long-term debt. A change in interest
rates would impact the Company to the extent it redeemed any of its outstanding
debt. At December 31, 2002, stated values approximate fair value.
Equity Price Risk
KCP&L maintains trust funds, as required by the NRC, to fund certain costs of
decommissioning its Wolf Creek nuclear power plant. KCP&L does not expect Wolf
Creek decommissioning to start before 2025. As of December 31, 2002, these funds
were invested primarily in domestic equity securities and fixed income
securities and are reflected at fair value on the KCP&L's balance sheets. The
mix of securities is designed to provide returns to be used to fund
decommissioning and to compensate for inflationary increases in decommissioning
costs; however the equity securities in the trusts are exposed to price
fluctuations in equity markets, and the value of fixed rate fixed income
securities are exposed to changes in interest rates. Investment performance and
asset allocation are periodically reviewed. A hypothetical increase in interest
rates resulting in a hypothetical 10% decrease in the value of the fixed income
securities would have resulted in a $3.9 million reduction in the value of the
decommissioning trust funds. A hypothetical 10% decrease in equity prices would
have resulted in a $2.3 million reduction in the fair value of the equity
securities as of December 31, 2002. KCP&L's exposure to equity price market risk
associated with the decommissioning trust funds is in large part mitigated due
to the fact that KCP&L is currently allowed to recover its decommissioning costs
in its rates.
KLT Investments has affordable housing notes that require the greater of 15% of
the outstanding note balances or the next annual installment to be held as cash,
cash equivalents or marketable securities. A hypothetical 10% decrease in market
prices of the securities held as collateral would have resulted in a decrease of
less than $1.0 million in pretax earnings for 2002.
55
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
GREAT PLAINS ENERGY
Consolidated Statements of Income
Year Ended December 31 2002 2001 2000
(thousands)
Operating Revenues
Electric revenues - KCP&L $ 1,009,868 $ 967,479 $ 951,960
Electric revenues - Strategic Energy 788,278 396,004 111,844
Other revenues 63,736 98,435 52,064
Total 1,861,882 1,461,918 1,115,868
Operating Expenses
Fuel 159,666 163,846 153,144
Purchased power - KCP&L 46,214 65,173 105,722
Purchased power - Strategic Energy 685,370 329,003 84,449
Gas purchased and production expenses 3,531 16,932 30,396
Other 332,650 323,663 249,926
Maintenance 91,944 77,802 74,466
Depreciation and depletion 151,593 158,771 132,378
General taxes 99,351 98,060 92,228
(Gain) Loss on property (92) 171,477 (99,118)
Total 1,570,227 1,404,727 823,591
Operating income 291,655 57,191 292,277
Loss from equity investments (1,173) (376) (19,441)
Minority interest in subsidiaries (10,753) (2,899) (4,376)
Non-operating income 6,893 12,348 21,643
Non-operating expenses (20,055) (38,889) (32,620)
Interest charges 89,094 103,332 75,686
Income (loss) before income taxes, extraordinary item and
cumulative effect of changes in accounting principles 177,473 (75,957) 181,797
Income taxes 48,285 (35,914) 53,166
Income (loss) before extraordinary item and cumulative effect
of changes in accounting principles 129,188 (40,043) 128,631
Early extinguishment of debt, net of income taxes (Note 19) - 15,872 -
Cumulative effect to January 1 of changes in
accounting principles (Note 6 and 7) (3,000) - 30,073
Net income (loss) 126,188 (24,171) 158,704
Preferred stock dividend requirements 1,646 1,647 1,649
Earnings (Loss) available for common stock $ 124,542 $ (25,818) $ 157,055
Average number of common shares outstanding 62,623 61,864 61,864
Basic and diluted earnings (loss) per common share
before extraordinary item and cumulative effect of
changes in accounting principles $ 2.04 $ (0.68) $ 2.05
Early extinguishment of debt - 0.26 -
Cumulative effect to January 1 of changes in
accounting principles (0.05) - 0.49
Basic and diluted earnings (loss) per common share $ 1.99 $ (0.42) $ 2.54
Cash dividends per common share $ 1.66 $ 1.66 $ 1.66
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
56
GREAT PLAINS ENERGY
Consolidated Balance Sheets
December 31 December 31
2002 2001
(thousands)
ASSETS
Current Assets
Cash and cash equivalents $ 65,302 $ 29,034
Receivables 200,972 152,114
Fuel inventories, at average cost 21,311 22,246
Materials and supplies, at average cost 50,800 50,696
Current income taxes - 31,031
Deferred income taxes 3,233 5,061
Other 19,543 19,167
Total 361,161 309,349
Nonutility Property and Investments
Affordable housing limited partnerships 68,644 81,136
Gas property and investments 45,419 43,385
Nuclear decommissioning trust fund 63,283 61,766
Other 63,964 63,616
Total 241,310 249,903
Utility Plant, at Original Cost
Electric 4,428,433 4,332,464
Less-accumulated depreciation 1,885,389 1,793,786
Net utility plant in service 2,543,044 2,538,678
Construction work in progress 39,519 51,265
Nuclear fuel, net of amortization of
$121,951 and $127,101 21,506 33,771
Total 2,604,069 2,623,714
Deferred Charges
Regulatory assets 128,901 124,406
Prepaid pension costs 85,945 88,337
Goodwill 46,058 37,066
Other deferred charges 39,295 30,724
Total 300,199 280,533
Total $ 3,506,739 $ 3,463,499
LIABILITIES AND CAPITALIZATION
Current Liabilities
Notes payable $ 44,679 $ 144,404
Commercial paper - 62,000
Current maturities of long-term debt 134,092 238,767
EIRR bonds classified as current 81,000 177,500
Accounts payable 175,547 173,956
Accrued taxes 29,257 14,324
Accrued interest 16,407 13,262
Accrued payroll and vacations 28,000 26,422
Accrued refueling outage costs 8,292 12,979
Other 32,816 35,810
Total 550,090 899,424
Deferred Credits and Other Liabilities
Deferred income taxes 593,169 594,704
Deferred investment tax credits 41,565 45,748
Accrued nuclear decommissioning costs 64,584 63,040
Pension liability 73,251 28,692
Other 81,275 85,393
Total 853,844 817,577
Capitalization (see statements) 2,102,805 1,746,498
Commitments and Contingencies (Note 10)
Total $ 3,506,739 $ 3,463,499
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
57
GREAT PLAINS ENERGY
Consolidated Statements of Capitalization
December 31 December 31
2002 2001
(thousands)
Long-term Debt (excluding current maturities)
General Mortgage Bonds
Medium-Term Notes due 2004-07,
7.55%* and 7.28%** weighted-average rate $ 55,000 $ 179,000
2.48%* and 2.71%** EIRR bonds due 2012-23 158,768 158,768
EIRR bonds classified as current liabilities (31,000) (31,000)
Senior Notes
7.125% due 2005 250,000 250,000
6.500% due 2011 150,000 150,000
6.000% due 2007 225,000 -
Unamortized discount (915) (660)
EIRR bonds
2.41%* and 3.25%** Series A & B due 2015 109,607 106,500
4.50%*** Series C due 2017 50,000 50,000
2.41%* and 3.25%** Series D due 2017 41,183 40,000
EIRR bonds classified as current liabilities (50,000) (146,500)
Subsidiary Obligations
R.S. Andrews Enterprises, Inc. long-term debt
5.70%* and 8.14%** weighted-average rate due 2004-16 6,128 2,832
Affordable Housing Notes
7.84%* and 8.16%** weighted-average rate due 2004-08 10,564 19,746
Total 974,335 778,686
Company-obligated Mandatorily Redeemable Preferred Securities
of a trust holding solely KCP&L Subordinated Debentures 150,000 150,000
Cumulative Preferred Stock
$100 Par Value
3.80% - 100,000 shares issued 10,000 10,000
4.50% - 100,000 shares issued 10,000 10,000
4.20% - 70,000 shares issued 7,000 7,000
4.35% - 120,000 shares issued 12,000 12,000
Total 39,000 39,000
Common Stock Equity
Common stock-150,000,000 shares authorized without par value
69,196,322 and 61,908,726 shares issued, stated value 609,497 449,697
Capital stock premium and expense (7,744) (1,656)
Retained earnings (see statements) 363,579 344,815
Treasury stock (4) (903)
Accumulated other comprehensive loss
Income (loss) on derivative hedging instruments 927 (12,110)
Minimum pension obligation (26,785) (1,031)
Total 939,470 778,812
Total $ 2,102,805 $ 1,746,498
* Weighted-average rate as of December 31, 2002
** Weighted-average rate as of December 31, 2001
*** Weighted-average rate as of December 31, 2002 and 2001
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
58
GREAT PLAINS ENERGY
Consolidated Statements of Cash Flows
Year Ended December 31 2002 2001 2000
(thousands)
Cash Flows from Operating Activities
Net income (loss) $ 126,188 $ (24,171) $ 158,704
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Early extinguishment of debt, net of income taxes - (15,872) -
Cumulative effect of changes in accounting priciples 3,000 - (30,073)
Depreciation and depletion 151,593 158,771 132,378
Amortization of:
Nuclear fuel 13,109 17,087 15,227
Other 12,496 16,755 11,940
Deferred income taxes (net) 15,594 (301) (29,542)
Investment tax credit amortization (4,183) (4,289) (4,296)
Loss from equity investments 1,173 376 19,441
(Gain) Loss on property (92) 171,477 (99,118)
Allowance for equity funds used during construction (299) (3,616) (4,001)
Deferred storm costs (20,149) - -
Minority interest 10,753 2,899 4,376
Other operating activities (Note 2) 28,022 (40,255) 18,837
Net cash from operating activities 337,205 278,861 193,873
Cash Flows from Investing Activities
Utility capital expenditures (131,158) (262,030) (401,041)
Allowance for borrowed funds used during construction (979) (9,197) (12,184)
Purchases of investments (7,134) (46,105) (55,531)
Purchases of nonutility property (12,605) (66,119) (25,466)
Proceeds from sale of assets 7,821 66,460 225,958
Hawthorn No. 5 partial insurance recovery - 30,000 50,000
Loan to DTI prior to majority ownership - (94,000) -
Other investing activities (6,953) 10,306 18,967
Net cash from investing activities (151,008) (370,685) (199,297)
Cash Flows from Financing Activities
Issuance of common stock 151,800 - -
Issuance of long-term debt 228,876 249,597 500,445
Repayment of long-term debt (238,897) (193,145) (179,858)
Net change in short-term borrowings (168,805) 140,747 (183,099)
Dividends paid (107,424) (104,335) (104,335)
Other financing activities (15,479) (6,883) (5,925)
Net cash from financing activities (149,929) 85,981 27,228
Net Change in Cash and Cash Equivalents 36,268 (5,843) 21,804
Cash and Cash Equivalents at Beginning of Year 29,034 34,877 13,073
Cash and Cash Equivalents at End of Year $ 65,302 $ 29,034 $ 34,877
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
59
GREAT PLAINS ENERGY
Consolidated Statements of Comprehensive Income
Year Ended December 31 2002 2001 2000
(thousands)
Net Income (Loss) $ 126,188 $ (24,171) $ 158,704
Other comprehensive loss:
Gain (loss) on derivative hedging instruments 17,584 (43,706) -
Income tax (expense) benefit (7,138) 18,136 -
Net gain (loss) on derivative hedging instruments 10,446 (25,570) -
Minimum pension obligation (42,218) (1,691) -
Income tax benefit 16,464 660 -
Net minimum pension obligation (25,754) (1,031) -
Reclassification to revenues and expenses, net of tax 2,591 (3,983) 2,337
Comprehensive income (loss) before cumulative
effect of a change in accounting principles,
net of income taxes 113,471 (54,755) 161,041
Cumulative effect to January 1, 2001, of a change
in accounting principles, net of income taxes - 17,443 -
Comprehensive Income (Loss) $ 113,471 $ (37,312) $ 161,041
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
GREAT PLAINS ENERGY
Consolidated Statements of Retained Earnings
Year Ended December 31 2002 2001 2000
(thousands)
Beginning Balance $ 344,815 $ 473,321 $ 418,952
Net Income (Loss) 126,188 (24,171) 158,704
471,003 449,150 577,656
Dividends Declared
Preferred stock - at required rates 1,646 1,647 1,649
Common stock 105,778 102,688 102,686
Ending Balance $ 363,579 $ 344,815 $ 473,321
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
60
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Income
Year Ended December 31 2002 2001 2000
(thousands)
Operating Revenues
Electric revenues $ 1,009,868 $ 1,256,121 $ 1,063,804
Other revenues 61,445 94,773 52,064
Total 1,071,313 1,350,894 1,115,868
Operating Expenses
Fuel 159,666 163,846 153,144
Purchased power 46,214 304,862 190,171
Gas purchased and production expenses - 17,454 30,396
Other 279,207 304,704 249,926
Maintenance 91,858 77,172 74,466
Depreciation and depletion 147,925 152,893 132,378
General taxes 97,699 97,288 92,228
(Gain) Loss on property 59 (22,026) (99,118)
Total 822,628 1,096,193 823,591
Operating income 248,685 254,701 292,277
Loss from equity investments - (501) (19,441)
Minority interest in subsidiaries - (1,276) (4,376)
Non-operating income 4,838 11,996 21,643
Non-operating expenses (9,937) (33,160) (32,620)
Interest charges 82,020 97,653 75,686
Income before income taxes, extraordinary item and
cumulative effect of changes in accounting principles 161,566 134,107 181,797
Income taxes 62,867 30,288 53,166
Income before extraordinary item and cumulative
effect of changes in accounting principles 98,699 103,819 128,631
Early extinguishment of debt, net of income taxes (Note 19) - 15,872 -
Cumulative effect to January 1 of changes in accounting
principles (Note 6 and 7) (3,000) - 30,073
Net income 95,699 119,691 158,704
Preferred stock dividend requirements - 1,098 1,649
Earnings available for common stock $ 95,699 $ 118,593 $ 157,055
The disclosures regarding KCP&L included in the accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
61
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Balance Sheets
December 31 December 31
2002 2001
(thousands)
ASSETS
Current Assets
Cash and cash equivalents $ 179 $ 962
Receivables 70,170 62,511
Fuel inventories, at average cost 21,311 22,246
Materials and supplies, at average cost 50,800 50,696
Deferred income taxes 3,233 5,061
Other 10,644 11,484
Total 156,337 152,960
Nonutility Property and Investments
Nuclear decommissioning trust fund 63,283 61,766
Other 41,414 40,797
Total 104,697 102,563
Utility Plant, at Original Cost
Electric 4,428,433 4,332,464
Less-accumulated depreciation 1,885,389 1,793,786
Net utility plant in service 2,543,044 2,538,678
Construction work in progress 39,519 51,265
Nuclear fuel, net of amortization
of $121,951 and $127,101 21,506 33,771
Total 2,604,069 2,623,714
Deferred Charges
Regulatory assets 128,901 124,406
Prepaid pension costs 85,945 88,337
Goodwill 19,952 22,952
Other deferred charges 39,256 30,724
Total 274,054 266,419
Total $ 3,139,157 $ 3,145,656
LIABILITIES AND CAPITALIZATION
Current Liabilities
Notes payable $ 23,850 $ 20,404
Commercial paper - 62,000
Current maturities of long-term debt 124,911 227,383
EIRR bonds classified as current 81,000 177,500
Accounts payable 77,618 113,029
Accrued taxes 65,455 15,895
Accrued interest 15,462 11,327
Accrued payroll and vacations 24,538 22,581
Accrued refueling outage costs 8,292 12,979
Other 12,630 14,562
Total 433,756 677,660
Deferred Credits and Other Liabilities
Deferred income taxes 615,967 630,699
Deferred investment tax credits 41,565 45,748
Accrued nuclear decommissioning costs 64,584 63,040
Pension liability 73,251 28,692
Other 51,230 46,494
Total 846,597 814,673
Capitalization (see statements) 1,858,804 1,653,323
Commitments and Contingencies (Note 10)
Total $ 3,139,157 $ 3,145,656
The disclosures regarding KCP&L included in the accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
62
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Capitalization
December 31 December 31
2002 2001
(thousands)
Long-term Debt (excluding current maturities)
General Mortgage Bonds
Medium-Term Notes due 2004-07,
7.55%* and 7.28%** weighted-average rate $ 55,000 $ 179,000
2.48%* and 2.71%** EIRR bonds due 2012-23 158,768 158,768
EIRR bonds classified as current liabilities (31,000) (31,000)
Senior Notes
7.125% due 2005 250,000 250,000
6.500% due 2011 150,000 150,000
6.000% due 2007 225,000 -
Unamortized discount (915) (660)
EIRR bonds
2.41%* and 3.25%** Series A & B due 2015 109,607 106,500
2.41%* and 3.25%** Series D due 2017 41,183 40,000
4.50%*** Series C due 2017 50,000 50,000
EIRR bonds classified as current liabilities (50,000) (146,500)
Subsidiary Obligations
R.S. Andrews Enterprises, Inc. long-term debt
5.70%* and 8.14%** weighted-average rate due 2004-16 6,128 2,832
Total 963,771 758,940
Company-obligated Mandatorily Redeemable Preferred Securities
of a trust holding solely KCP&L Subordinated Debentures 150,000 150,000
Common Stock Equity
Common stock-1,000 shares authorized without par value
1 share issued, stated value 562,041 526,041
Retained earnings (see statements) 209,606 219,524
Accumulated other comprehensive income (loss)
Income (loss) on derivative hedging instruments 171 (151)
Minimum pension obligation (26,785) (1,031)
Total 745,033 744,383
Total $ 1,858,804 $ 1,653,323
* Weighted-average rate as of December 31, 2002
** Weighted-average rate as of December 31, 2001
*** Weighted-average rate as of December 31, 2002 and 2001
The disclosures regarding KCP&L included in the accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
63
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Cash Flows
Year Ended December 31 2002 2001 2000
(thousands)
Cash Flows from Operating Activities
Net income $ 95,699 $ 119,691 $ 158,704
Adjustments to reconcile net income to net cash
from operating activities:
Early extinguishment of debt, net of income taxes - (15,872) -
Cumulative effect of changes in accounting principles 3,000 - (30,073)
Depreciation and depletion 147,925 152,893 132,378
Amortization of:
Nuclear fuel 13,109 17,087 15,227
Other 9,581 15,717 11,940
Deferred income taxes (net) 11,355 12,867 (29,542)
Investment tax credit amortization (4,183) (4,289) (4,296)
Loss from equity investments - 501 19,441
(Gain) Loss on property 59 (22,026) (99,118)
Allowance for equity funds used during construction (299) (3,616) (4,001)
Deferred storm costs (20,149) - -
Other operating activities (Note 2) 19,204 (35,322) 23,213
Net cash from operating activities 275,301 237,631 193,873
Cash Flows from Investing Activities
Utility capital expenditures (132,039) (262,030) (401,041)
Allowance for borrowed funds used during construction (979) (9,197) (12,184)
Purchases of investments (3,421) (41,548) (55,531)
Purchases of nonutility property (1,279) (49,254) (25,466)
Proceeds from sale of assets - 64,072 225,958
Hawthorn No. 5 partial insurance recovery - 30,000 50,000
Loan to DTI prior to majority ownership - (94,000) -
Other investing activities (7,289) 8,087 18,967
Net cash from investing activities (145,007) (353,870) (199,297)
Cash Flows from Financing Activities
Issuance of long-term debt 228,876 249,597 500,445
Repayment of long-term debt (227,513) (93,099) (179,858)
Net change in short-term borrowings (58,554) 14,524 (183,099)
Dividends paid - (78,246) (104,335)
Dividends paid to Great Plains Energy (105,617) (25,677) -
Cash of KLT Inc. and GPP dividended to - (19,115) -
Great Plains Energy
Equity contribution from Great Plains Energy 36,000 39,000 -
Other financing activities (4,269) (4,660) (5,925)
Net cash from financing activities (131,077) 82,324 27,228
Net Change in Cash and Cash Equivalents (783) (33,915) 21,804
Cash and Cash Equivalents at Beginning of Year 962 34,877 13,073
Cash and Cash Equivalents at End of Year $ 179 $ 962 $ 34,877
The disclosures regarding KCP&L included in the accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
64
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Comprehensive Income
Year Ended December 31 2002 2001 2000
(thousands)
Net income $ 95,699 $ 119,691 $ 158,704
Other comprehensive income (loss):
Income (loss) on derivative hedging instruments 702 (39,952) -
Income tax (expense) benefit (274) 16,590 -
Net income (loss) on derivative hedging instruments 428 (23,362) -
Minimum pension obligation (42,218) (1,691) -
Income tax benefit 16,464 660 -
Net minimum pension obligation (25,754) (1,031) -
Reclassification to revenues and expenses, net of tax (106) (7,687) 2,337
Comprehensive income before cumulative
effect of a change in accounting principles,
net of income taxes 70,267 87,611 161,041
Cumulative effect to January 1, 2001, of a change
in accounting principles, net of income taxes - 17,443 -
Comprehensive Income $ 70,267 $ 105,054 $ 161,041
The disclosures regarding KCP&L included in the accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Retained Earnings
Year Ended December 31 2002 2001 2000
(thousands)
Beginning Balance $ 219,524 $ 473,321 $ 418,952
Net Income 95,699 119,691 158,704
315,223 593,012 577,656
Dividends Declared
Preferred stock - at required rates - 824 1,649
Common stock - 77,011 102,686
Common stock held by Great Plains Energy 105,617 25,677 -
Equity dividend of KLT Inc. and GPP
to Great Plains Energy - 269,976 -
Ending Balance $ 209,606 $ 219,524 $ 473,321
The disclosures regarding KCP&L included in the accompanying Notes to
Consolidated Financial Statements are an integral part of these statements.
65
GREAT PLAINS ENERGY INCORPORATED
KANSAS CITY POWER & LIGHT COMPANY
Notes to Consolidated Financial Statements
The notes to consolidated financial statements that follow are a combined
presentation for Great Plains Energy and consolidated KCP&L, both registrants
under this filing.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Great Plains Energy, a Missouri corporation incorporated in 2001, is a public
utility holding company registered with and subject to the regulation of the SEC
under the 35 Act. Through a corporate restructuring, which was consummated on
October 1, 2001, Great Plains Energy became the parent company and sole owner of
the common stock of KCP&L. This restructuring was implemented through an
agreement and plan of merger whereby KCP&L merged with a wholly-owned subsidiary
of Great Plains Energy, with KCP&L continuing as the surviving company and
wholly-owned subsidiary of Great Plains Energy. Each outstanding share of KCP&L
stock was exchanged for a share of Great Plains Energy stock. As a result, Great
Plains Energy replaced KCP&L as the listed entity on the New York Stock
Exchange, with the trading symbol GXP. In connection with the reorganization,
KCP&L transferred to Great Plains Energy its interest in two wholly-owned
subsidiaries, KLT Inc. and GPP. Great Plains Energy does not own or operate any
significant assets other than the stock of its subsidiaries.
Great Plains Energy currently has four direct subsidiaries:
o KCP&L is an integrated electric utility company that serves retail
customers in the states of Missouri and Kansas. KCP&L is one of Great
Plains Energy's three reportable segments. KCP&L has one wholly-owned
subsidiary, HSS. HSS has invested in two companies, RSAE and Worry
Free. RSAE and Worry Free provide energy-related residential and
commercial services.
o KLT Inc. is an investment company that primarily holds interests in
Strategic Energy, KLT Gas, DTI and affordable housing limited
partnerships. Strategic Energy and KLT Gas are the other two reportable
segments of Great Plains Energy. DTI has filed voluntary bankruptcy
petitions. See Note 19 for additional information concerning DTI's
bankruptcy petitions.
o GPP focuses on the development of wholesale generation. During 2002,
management decided to limit the operations of GPP until market
conditions improve or the Company makes further changes in its business
strategy. GPP has made no significant investments to date.
o IEC was formed to acquire and hold an interest in Strategic Energy. See
Note 9 for additional information concerning IEC's acquisition of an
indirect interest in Strategic Energy. IEC does not own or operate any
assets other than its indirect interest in Strategic Energy.
The operations of Great Plains Energy and its subsidiaries are divided into
three reportable segments: KCP&L, Strategic Energy and KLT Gas. Great Plains
Energy's legal structure differs from the functional management and financial
reporting of its reportable segments. Other activities not considered reportable
segment primarily include the operations of HSS and GPP, all KLT Inc. operations
other than Strategic Energy and KLT Gas and holding company operations.
66
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original
maturities of three months or less. For Great Plains Energy this includes
Strategic Energy's cash held in trust of $11.4 million at December 31, 2002 and
$2.2 million at December 31, 2001.
Strategic Energy has entered into collateral arrangements with selected
electricity power suppliers that require selected customers to remit payment to
lockboxes that are held in trust and managed by a Trustee. As part of the trust
administration, the Trustee remits payment to the supplier for electricity
purchased by Strategic Energy. Any excess remittances into the lockboxes are
remitted back to Strategic Energy after the disbursement to the supplier has
been made.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Investments and Nonutility Property--Consolidated KCP&L's investments and
nonutility property includes the nuclear decommissioning trust fund recorded at
fair value. Fair value is based on quoted market prices of the investments held
by the fund. In addition to consolidated KCP&L's investments, Great Plains
Energy's investments and nonutility property include KLT Investments' affordable
housing limited partnerships and trading equity securities. The fair value of
KLT Investments' affordable housing limited partnership total portfolio, based
on the discounted cash flows generated by tax credits, tax deductions and sale
of properties, approximates book value. KLT Investments' other trading equity
securities are recorded at fair value based on quoted market prices of the
investments held. The fair values of other various investments are not readily
determinable and the investments are therefore stated at cost.
Long-term debt--The incremental borrowing rate for similar debt was used to
determine fair value if quoted market prices were not available. The stated
values approximate fair market values.
Investments in Affordable Housing Limited Partnerships
At December 31, 2002, KLT Investments had $68.6 million in affordable housing
limited partnerships. About 67% of these investments were recorded at cost; the
equity method was used for the remainder. Tax expense is reduced in the year tax
credits are generated. The investments generate future cash flows from tax
credits and tax losses of the partnerships. The investments also generate cash
flows from the sales of the properties. For most investments, tax credits are
received over ten years. KLT Investments projects tax credits to run through
2009. A change in accounting principle relating to investments made after May
19, 1995, requires the use of the equity method when a company owns more than 5%
in a limited partnership investment. Of the investments recorded at cost, $44.2
million exceed this 5% level but were made before May 19, 1995. KLT Investments'
management does not anticipate making additional investments in affordable
housing limited partnerships at this time.
On a quarterly basis, KLT Investments compares the cost of those properties
accounted for by the cost method to the total of projected residual value of the
properties and remaining tax credits to be received. Estimated residual values
are based on studies performed by an independent firm. Based on the latest
comparison, KLT Investments reduced its investments in affordable housing
limited partnerships by $9.0 million, $13.5 million and $2.4 million in 2002,
2001 and 2000, respectively. Projected annual reductions of the book cost for
the years 2003 through 2006 total $13 million, $7 million, $7 million and $6
million, respectively. Even after these reductions, earnings from affordable
housing are expected to be positive for the years 2003 through 2006.
These projections are based on the latest information available but the ultimate
amount and timing of actual reductions made could be significantly different
from the above estimates.
67
Securities Available for Sale
In 2000, CellNet completed a sale of its assets to a third party causing KLT
Inc.'s investment in CellNet to become worthless. Accordingly, in March 2000,
KLT Inc. realized losses on its investment in CellNet of $3.1 million after tax.
Utility Plant
KCP&L's utility plant is stated at historical costs of construction. These costs
include taxes, an allowance for the cost of borrowed and equity funds used to
finance construction and payroll-related costs, including pensions and other
fringe benefits. Replacements, improvements and additions to units of property
are capitalized. Repairs of property and replacements of items not considered to
be units of property are expensed as incurred (except as discussed under Wolf
Creek Refueling Outage Costs). When property units are retired or otherwise
disposed, the original cost, net of salvage and removal, is charged to
accumulated depreciation. Substantially all utility plant is pledged as
collateral for KCP&L's mortgage bonds under the General Mortgage Indenture and
Deed of Trust dated December 1, 1986, as supplemented.
The balances of utility plant in service with a range of depreciable lives are
listed in the table below:
December 31
Utility Plant In Service 2002 2001
(thousands)
Production (23 - 42 years) $ 2,712,170 $ 2,681,060
Transmission (27 - 76 years) 282,117 247,626
Distribution (8 - 75 years) 1,218,606 1,180,056
General (5 - 50 years) 215,540 223,722
Total $ 4,428,433 $ 4,332,464
Through December 31, 2002, KCP&L has received $160 million in insurance
recoveries related to property destroyed in the February 17, 1999, explosion at
the Hawthorn No. 5 generating unit. Recoveries received have been recorded as an
increase in accumulated depreciation.
As prescribed by the FERC, AFDC is charged to the cost of the plant. AFDC is
included in the rates charged to customers by KCP&L over the service life of the
property. AFDC equity funds are included as a non-cash item in non-operating
income and AFDC borrowed funds are a reduction of interest charges. The rates
used to compute gross AFDC are compounded semi-annually and averaged 4.4% in
2002, 6.8% in 2001 and 7.5% in 2000.
Natural Gas Properties
The Company does not have significant oil and gas producing activities based on
the results of the significance tests preformed as prescribed in SFAS No. 69,
"Disclosures About Oil and Gas Producing Activities." KLT Gas follows the full
cost method of accounting for its natural gas properties, substantially all of
which were undeveloped at December 31, 2002. The full cost method requires that
all costs associated with property acquisition, exploration and development
activities be capitalized. Any excess of book value over the present value (10%
discount rate) of estimated future net revenues (at year-end prices) from the
natural gas reserves is expensed. All natural gas property interests owned by
KLT Gas are located in the United States.
Natural gas property and equipment included in gas property and investments on
Great Plains Energy's consolidated balance sheets totaled $45.0 million, net of
$8.5 million of accumulated depreciation, in 2002 and $39.9 million, net of $5.0
million of accumulated depreciation, in 2001.
68
Other Nonutility Property
Great Plains Energy's and consolidated KCP&L's other nonutility property
includes land, buildings, vehicles, general office equipment and software and is
recorded at historical cost, net of accumulated depreciation, and has a range of
depreciable lives of 3 to 43 years.
Depreciation, Depletion and Amortization
Depreciation of KCP&L's utility plant other than nuclear fuel is computed using
the straight-line method over the estimated lives of depreciable property based
on rates approved by state regulatory authorities. Annual depreciation rates
average about 3%. Depreciation of nonutility property is computed using the
straight-line method. Excluding DTI, annual depreciation rates for the years
2002, 2001 and 2000 were 19.3%, 15.3% and 13.3%, respectively.
KCP&L amortizes nuclear fuel to fuel expense based on the quantity of heat
produced during the generation of electricity. Regulatory assets and liabilities
are amortized consistent with the recovery period.
Prior to adoption of SFAS No. 142 on January 1, 2002, Great Plains Energy and
consolidated KCP&L amortized goodwill using the straight-line method over a 15
and 40 year life. See Note 6 for additional information concerning the adoption
of SFAS No. 142.
Depletion, depreciation and amortization of natural gas properties are
calculated using the units of production method. The depletion per mmBtu was
$4.61 in 2002, $1.35 in 2001, and $0.63 in 2000. The depletion per mmBtu in 2002
reflected downward revisions in reserve estimates. Unproved gas properties are
not amortized but are assessed for impairment either individually or on an
aggregated basis.
Nuclear Fuel
Under the Nuclear Waste Policy Act of 1982, the DOE is responsible for the
permanent disposal of spent nuclear fuel. KCP&L pays the DOE a quarterly fee of
one-tenth of a cent for each kilowatt-hour of net nuclear generation delivered
and sold for the future disposal of spent nuclear fuel. These disposal costs are
charged to fuel expense. In 2002, the U.S. Senate approved Yucca Mountain,
Nevada as a long-term geologic repository. The DOE is currently in the process
of preparing an application to obtain the NRC license to proceed with
construction of the repository. Management cannot predict when this site may be
available. Under current DOE policy, once a permanent site is available, the DOE
will accept spent nuclear fuel first from the owners with the oldest spent fuel.
Wolf Creek has completed an on-site storage facility that is designed to hold
all spent fuel generated at the plant through the end of its 40-year licensed
life in 2025.
Wolf Creek Refueling Outage Costs
KCP&L accrues forecasted incremental costs to be incurred during scheduled Wolf
Creek refueling outages monthly over the unit's operating cycle, normally about
18 months. Estimated incremental costs, which include operating, maintenance and
replacement power expenses, are based on budgeted outage costs and the estimated
outage duration. Changes to or variances from those estimates are recorded when
known or are probable.
Nuclear Plant Decommissioning Costs
The MPSC and the KCC require KCP&L and the other owners of Wolf Creek to submit
an updated decommissioning cost study every three years. The most recent study
was submitted to the MPSC and the KCC on August 30, 2002, and is the basis for
the decommissioning cost estimates in the table below. The MPSC has since
approved continuation of funding at the previously approved level. The KCC is
expected to rule on the new decommissioning cost estimate and the associated
escalation and earnings assumptions in the spring of 2003. The escalation rates
and earnings assumptions shown in
69
the table below are those that were last explicitly approved by the MPSC and the
KCC. The decommissioning cost estimates are based on the immediate dismantlement
method and include the costs of decontamination, dismantlement and site
restoration. KCP&L does not expect plant decommissioning to start before 2025.
KCC MPSC
Future cost of decommissioning:
Total Station $1.1 billion $1.3 billion
47% share $497 million $606 million
Current cost of decommissioning (in 2002 dollars):
Total Station $468 million $468 million
47% share $220 million $220 million
Annual escalation factor 3.60% 4.50%
Annual return on trust assets 6.93% 7.66%
KCP&L contributes about $3 million annually to a tax-qualified trust fund to be
used to decommission Wolf Creek. These costs are charged to other operating
expenses and recovered in billings to customers. These funding levels assume a
certain return on trust assets. If the actual return on trust assets is below
the anticipated level, KCP&L believes a rate increase would be allowed ensuring
full recovery of decommissioning costs over the remaining life of the station.
The trust fund balance, including reinvested earnings, was $63.3 million at
December 31, 2002, and $61.8 million at December 31, 2001. The related
liabilities for decommissioning are included in Deferred Credits and Other
Liabilities -- Other.
The Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations"
on January 1, 2003. See Note 12 for discussion of asset retirement obligations
including those associated with nuclear plant decommissioning costs.
Regulatory Matters
KCP&L is subject to the provisions of SFAS No. 71. Pursuant to SFAS No. 71,
KCP&L defers items on the balance sheet resulting from the effects of the
ratemaking process, which would not be recorded under GAAP if KCP&L was not
regulated. See Note 4 for additional information concerning regulatory matters.
Revenue Recognition
KCP&L and Strategic Energy recognize revenues on sales of electricity when the
service is provided. KLT Gas records natural gas sales revenues based on the
amount of gas sold to purchasers on its behalf. Receivables recorded at December
31, 2002 and 2001, include $27.2 million and $28.9 million, respectively, for
electric services provided but not yet billed by KCP&L, and $57.3 million and
$48.5 million, respectively, for electric services provided, but not yet billed
by Strategic Energy. See Note 3 for additional information on receivables.
To supply its retail contracts, Strategic Energy purchases long-term blocks of
electricity under forward contracts in fixed quantities at fixed prices from
power suppliers based on projected usage. Strategic Energy sells any excess
retail supply of electricity back into the wholesale market. The proceeds from
the sale of excess supply of electricity are recorded as a reduction of
purchased power. The gross amount of excess retail supply sales that reduced
purchased power was $126.4 million, $95.6 million and $29.5 million in 2002,
2001 and 2000, respectively.
70
Property Gains and Losses
Net gains and losses from the sales of assets, businesses, and net asset
impairments are recorded in operating expenses. See Note 19 for additional
information regarding the net impairment of DTI assets.
Asset Impairments
Long-lived assets and intangible assets subject to amortization are periodically
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable as prescribed under
SFAS No. 144. SFAS No. 144 requires that if the sum of the undiscounted expected
future cash flows from an asset to be held and used is less than the carrying
value of the asset, an asset impairment must be recognized in the financial
statements. The amount of impairment recognized is the excess of the carrying
value of the asset over its fair value.
Goodwill is tested for impairment at least annually and more frequently when
indicators of impairment exist as prescribed under SFAS No. 142. SFAS No. 142
requires that if the fair value of a reporting unit is less than its carrying
value including goodwill, an impairment charge for goodwill must be recognized
in the financial statements. To measure the amount of the impairment loss to
recognize, the implied fair value of the reporting unit goodwill would be
compared with its carrying value. See Note 6 for information regarding the
impact of adopting SFAS No. 142 on goodwill and goodwill amortization.
Income Taxes
Great Plains Energy and its subsidiaries file consolidated federal and combined
and separate state income tax returns. Income taxes for consolidated or combined
subsidiaries are allocated to the subsidiaries based on separate company
computations of taxable income or loss. In accordance with 35 Act requirements,
the holding company allocates its own net income tax benefits to its direct
subsidiaries based on the positive taxable income of each company in the
consolidated federal or combined state returns. KCP&L uses the separate return
method to compute its income tax provision. For the years ended December 31,
2002 and 2001, there were no differences between the separate return method used
to compute KCP&L's tax provision and the formula to compute the amount it owed
to Great Plains Energy under the allocation previously described.
The consolidated balance sheets include deferred income taxes for all temporary
differences between the tax basis of an asset or liability and that reported in
the financial statements. These deferred tax assets and liabilities are
determined by using the tax rates scheduled by the tax law to be in effect when
the differences reverse. A tax valuation allowance is recorded when it is more
likely than not that a deferred tax asset will not be realized. See Note 19 for
additional information concerning the valuation allowance related to DTI.
Regulatory Asset -- Recoverable taxes reflects the future revenue requirements
necessary to recover the tax benefits of existing temporary differences
previously passed through to KCP&L customers. KCP&L records operating income tax
expense based on ratemaking principles.
Tax credits are recognized in the year generated except for certain KCP&L
investment tax credits that have been deferred and amortized over the remaining
service lives of the related properties.
Environmental Matters
Environmental costs are accrued when it is probable a liability has been
incurred and the amount of the liability can be reasonably estimated.
Basic and Diluted Earnings (Loss) per Common Share Calculation
There was no dilutive effect on Great Plains Energy's earnings per share from
other securities in 2002, 2001 or 2000. To determine earnings (loss) per common
share, preferred stock dividend requirements
71
are deducted from both income before extraordinary item and cumulative effect of
changes in accounting principles and net income before dividing by average
number of common shares outstanding. The earnings (loss) per share impact of the
extraordinary item and the cumulative effect of changes in accounting principles
is determined by dividing each by the average number of common shares
outstanding.
Earnings per share for KCP&L and Great Plains Energy are the same in 2000 prior
to the formation of the holding company. The following table reconciles Great
Plains Energy's basic and diluted earnings (loss) per common share calculation:
Income Shares EPS
2002 (thousands except per share amounts)
Income before cumulative effect $ 129,188
Less: Preferred stock dividend requirement 1,646
Basic EPS
Income available to common stockholders 127,542 62,623 $ 2.04
Add: effect of dilutive securities 1
Diluted EPS $ 127,542 62,624 $ 2.04
Income (Loss) Shares EPS
2001 (thousands except per share amounts)
Loss before extraordinary item $ (40,043)
Less: Preferred stock dividend requirement 1,647
Basic EPS
Income available to common stockholders (41,690) 61,864 $(0.68)
Add: effect of dilutive securities -
Diluted EPS $ (41,690) 61,864 $(0.68)
Income Shares EPS
2000 (thousands except per share amounts)
Income before cumulative effect $ 128,631
Less: Preferred stock dividend requirement 1,649
Basic EPS
Income available to common stockholders 126,982 61,864 $ 2.05
Add: effect of dilutive securities 19
Diluted EPS $ 126,982 61,883 $ 2.05
Options to purchase 394,723 shares of common stock as of December 31, 2002, were
excluded from the computation of diluted earnings per share because the option
exercise prices were greater than the average market price of the common shares
at the end of the respective periods. Options to purchase 277,902 shares of
common stock as of December 31, 2001, were excluded from the diluted earnings
calculation because the Company had a net loss from operations; therefore no
potential common shares are included in the calculation because the effect is
always anti-dilutive.
72
2. SUPPLEMENTAL CASH FLOW INFORMATION
Great Plains Energy Other Operating Activities
2002 2001 2000
Cash flows affected by changes in: (thousands)
Receivables $ (43,858) $ (32,680) $ (42,565)
Fuel inventories 1,339 (1,444) 1,787
Materials and supplies (104) (4,294) (113)
Accounts payable 1,591 9,495 66,765
Accrued taxes and current income taxes 45,964 (31,133) 13,430
Accrued interest 3,145 667 (2,865)
Wolf Creek refueling outage accrual (4,687) 11,089 (5,166)
Pension and postretirement benefit obligations 3,774 (22,577) (12,653)
Other 20,858 30,622 217
Total other operating activities $ 28,022 $ (40,255) $ 18,837
Cash paid during the period:
Interest $ 83,818 $ 84,907 $ 76,395
Income taxes $ 17,709 $ 21,614 $ 80,445
During November 2002, Great Plains Energy indirectly acquired an additional 6%
ownership in Strategic Energy through its recently created subsidiary, IEC. The
$15.1 million consideration paid for the 6% ownership consisted of $8.0 million
in Great Plains Energy common stock and promissory notes of $4.7 million (issued
by Great Plains Energy) and $2.4 million (issued by IEC). The promissory notes
were paid in January 2003. This transaction had no effect on Great Plains
Energy's consolidated statement of cash flows for the year ended December 31,
2002. See Note 9 for additional information regarding this transaction.
On February 8, 2001, KLT Telecom increased its equity ownership in DTI to a
majority ownership. On December 31, 2001, DTI filed voluntary petitions in
Bankruptcy Court. As a result, DTI was consolidated and its operations were
included in KLT Telecom's results of operations from February 8, 2001, through
December 31, 2001, prior to the bankruptcy filings at which time DTI was
de-consolidated. See Note 19 for additional information concerning the
bankruptcy filings.
73
The table below reflects a reconciliation of DTI's effect on Great Plains
Energy's consolidated statement of cash flows for the year ended December 31,
2001, to the cash invested in DTI during 2001.
2001
Cash Flows from Operating Activities (thousands)
Amounts included in net income (loss) $(248,437)
Depreciation 17,907
Goodwill amortization 2,481
Loss on property (net impairment) 195,835
Other operating activities
Accretion of Senior Discount Notes and
amortization of the discount 16,364
Other 1,719
DTI adjustment to operating activities 234,306
Net cash from operating activities $ (14,131)
Cash Flows from Investing Activities
Purchase of additional ownership in DTI (39,855)
Purchase of nonutility property (33,648)
Loans to DTI prior to consolidation (94,000)
Other investing activities 3,002
DTI effect on cash from investing activities (164,501)
Cash Flows from Financing Activities
DTI effect on cash from financing activities (2,223)
Cash flows from DTI investment $(180,855)
Cash invested in DTI
Loan to DTI holdings $ (94,000)
Operating loans to Digital Teleport, Inc. (47,000)
Purchase of additional ownership in DTI (39,855)
Cash used for DTI investment $(180,855)
Consolidated KCP&L Other Operating Activities
2002 2001 2000
Cash flows affected by changes in: (thousands)
Receivables $ (7,659) $ (43,604) $ (42,565)
Fuel inventories 1,339 (1,444) 1,787
Materials and supplies (104) (4,294) (113)
Accounts payable (35,411) (14,878) 66,765
Accrued taxes and current income taxes 49,560 (1,995) 13,430
Accrued interest 4,135 610 (2,865)
Wolf Creek refueling outage accrual (4,687) 11,089 (5,166)
Pension and postretirement benefit obligations 3,774 (22,577) (12,653)
Other 8,257 41,771 4,593
Total other operating activities $ 19,204 $ (35,322) $ 23,213
Cash paid during the period:
Interest $ 75,754 $ 82,867 $ 76,395
Income taxes $ 11,330 $ 21,470 $ 80,445
74
As described in Note 1, KCP&L distributed, as a dividend, its ownership in KLT
Inc. and GPP to Great Plains Energy on October 1, 2001. The effect of this
transaction on KCP&L's consolidated statement of cash flows for the year ended
December 31, 2001, is summarized in the table that follows.
Effect of dividend to Great Plains Energy: October 1, 2001
Assets (thousands)
Cash $ 19,115
Equity securities 283
Receivables 101,539
Nonutility property and investment 529,121
Goodwill 75,534
Other assets 8,542
Total assets $ 734,134
Liabilities and Accumulated Other Comprehensive Income
Notes payable $ 3,077
Accounts payable 67,853
Accrued taxes (1,050)
Accrued interest 1,878
Deferred income taxes (23,868)
Deferred telecommunications revenue 45,595
Other liabilities and deferred credits 54,340
Long-term debt 329,788
Accumulated other comprehensive income (13,455)
Total liabilities and accumulated other
comprehensive income 464,158
Equity dividend of KLT Inc. and GPP to Great Plains Energy $ 269,976
During the first quarter of 2001, KLT Telecom increased its equity ownership in
DTI to a majority ownership and HSS increased its equity ownership in RSAE to a
majority ownership. The effect of these transactions is summarized in the tables
that follow. The initial consolidation of DTI (February 8, 2001) and RSAE
(January 1, 2001) are excluded from both Great Plains Energy and KCP&L's
consolidated statement of cash flows for the year December 31, 2001. See Note 19
for information concerning of DTI's bankruptcy filings.
75
DTI RSAE
(thousands)
Cash paid to obtain majority ownership $ (39,855) $ (560)
Subsidiary cash 4,557 1,053
Purchase of DTI and RSAE, net of cash received $ (35,298) $ 493
Initial consolidation of subsidiaries:
Assets
Cash $ 4,557 $ 1,053
Receivables 1,012 4,078
Other nonutility property and investments 363,825 6,267
Goodwill 62,974 24,496
Other assets 5,143 3,919
Eliminate equity investment (67,660) (7,200)
Total assets $ 369,851 $ 32,613
Liabilities
Notes payable $ 5,300 $ 10,057
Accounts payable 31,299 6,219
Accrued taxes 2,414 24
Deferred income taxes 7,437 -
Other liabilities and deferred credits 46,531 13,418
Loan from KLT Telecom (a) 94,000 -
Long-term debt 182,870 2,895
Total liabilities $ 369,851 $ 32,613
(a) KLT Telecom provided a $94 million loan to DTI for the completion of the
tender offer of 50.4 percent of DTI's Senior Discount Notes prior to
increasing its DTI investment to a majority ownership.
Sales of KLT Gas properties
KLT Gas sold producing natural gas properties during 2000. The transactions are
summarized in the table below.
2000
(thousands)
Cash proceeds $ 125,958
Preferred stock redeemed (a) 100,000
Total cash proceeds 225,958
Equity securities 10,000
Receivable 1,243
Total proceeds 237,201
Cost basis in property sold (87,785)
Accounts payable (b) (23,168)
Other assets and liabilities (b) (15,670)
Gain on sale before income tax 110,578
Income tax (42,606)
Gain on sale, net of income tax $ 67,972
(a) The preferred stock received in September 2000 was redeemed in December
2000.
(b) Includes $7.9 million of incentive compensation.
76
3. RECEIVABLES
The Company's accounts receivables are comprised of the following:
December 31
2002 2001
(thousands)
Receivables Company $ 19,168 $ 25,723
KCP&L other receivables 51,002 36,788
Consolidated KCP&L receivables 70,170 62,511
Great Plains Energy other receivables 130,802 89,603
Great Plains Energy receivables $ 200,972 $ 152,114
KCP&L has entered into a revolving agreement, which expires in October 2003, to
sell all of its right, title and interest in the majority of its customer
accounts receivable to Kansas City Power & Light Receivables Company
(Receivables Company), which in turn sells most of the receivables to outside
investors. KCP&L expects the agreement to be renewed annually. Accounts
receivable sold under this revolving agreement totaled $89.2 million at December
31, 2002, and $95.7 million at December 31, 2001. These sales included unbilled
receivables of $27.2 million and $28.9 million at December 31, 2002 and 2001,
respectively. As a result of the sales to outside investors, Receivables
Company received $70 million in cash, which was forwarded to KCP&L as
consideration for its sale. The agreement is structured as a true sale under
which the creditors of Receivables Company are entitled to be satisfied out of
the assets of Receivables Company prior to any value being returned to KCP&L or
its creditors.
KCP&L sells its receivables at a fixed price based upon the expected cost of
funds and charge-offs. These costs comprise KCP&L's loss on the sale of accounts
receivable and are included in non-operating expenses. KCP&L services the
receivables and receives an annual servicing fee of 0.25% of the outstanding
principal amount of the receivables sold and retains any late fees charged to
customers. Management is still evaluating whether KCP&L will be required to
consolidate Receivables Company under FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities".
Information regarding KCP&L's sale of accounts receivable is reflected in the
following table.
For the years ended December 31 2002 2001 2000
(thousands)
Gross proceeds on sale of
accounts receivable $ 957,222 $ 949,045 $ 972,436
Collections 974,669 952,122 942,612
Loss on sale of accounts receivable 4,558 8,776 13,032
Late fees 2,572 3,045 2,474
KCP&L other receivables at December 31, 2002 and 2001, consist primarily of
receivables from partners in jointly-owned electric utility plants, wholesale
sales receivables and accounts receivable held by RSAE and Worry Free. Great
Plains Energy other receivables at December 31, 2002 and 2001, are primarily the
accounts receivable held by Strategic Energy including unbilled revenues held by
Strategic Energy of $57.3 million and $48.5 million December 31, 2002 and 2001,
respectively.
77
4. REGULATORY MATTERS
Regulatory Assets and Liabilities
As discussed in Note 1, KCP&L is subject to the provisions of SFAS No. 71.
Accordingly, KCP&L has recorded assets and liabilities on its balance sheet
resulting from the effects of the ratemaking process, which would not be
recorded under GAAP for non-regulated entities. Regulatory assets represent
incurred costs that have been deferred because they are probable of future
recovery in customer rates. Regulatory liabilities generally represent probable
future reductions in revenue or refunds to customers. KCP&L's continued ability
to meet the criteria for application of SFAS No. 71 may be affected in the
future by competitive forces and restructuring in the electric industry. In the
event that SFAS No. 71 no longer applied to all, or a separable portion, of
KCP&L's operations, the related regulatory assets and liabilities would be
written off unless an appropriate regulatory recovery mechanism is provided.
Amortization
ending December 31 December 31
period 2002 2001
Regulatory Assets (millions)
Taxes recoverable through future rates $ 100.0 $ 108.0
Coal contract termination costs 2003 1.6 6.4
Decommission and decontaminate federal
uranium enrichment facilities 2007 3.3 3.9
Loss on reaquired debt 2023 4.7 5.1
January 2002 incremental ice storm costs 2007 18.6 -
Other (a) 2006 0.7 1.0
Total Regulatory Assets $ 128.9 $ 124.4
Regulatory Liabilities
Taxes recoverable through future rates $ (100.0) $ (108.0)
Emission allowances (b) (3.6) (3.5)
Total Regulatory Liabilities $ (103.6) $ (111.5)
(a) $0.5 million earns a return on investment in the rate making process.
(b) Consistent with the MPSC order establishing regulatory treatment, no
amortization is being recorded.
Retail Rate Matters
At the end of January 2002, a severe ice storm occurred throughout large
portions of the Midwest, including the greater Kansas City metropolitan area. At
its peak, the storm caused over 300,000 customer outages throughout the KCP&L
territory. Costs related to the January ice storm were approximately $51.3
million of which $14.7 million were capital expenditures and therefore recorded
to utility plant. KCP&L expensed $16.5 million for the Kansas jurisdictional
portion of the storm costs and deferred as a regulatory asset $20.1 million of
the storm costs applicable to Missouri.
In the second quarter of 2002, the KCC approved the stipulation and agreement
that KCP&L had reached with the KCC staff and the Citizens Utility Ratepayers
Board with regard to treatment of the Kansas portion of the ice storm costs.
Under this stipulation and agreement, KCP&L received a rate moratorium until
2006 in exchange for KCP&L's agreement to not seek recovery of the $16.5 million
expense for the Kansas jurisdictional portion of the storm costs and to reduce
rates by $12 - $13 million in 2003. Additionally, KCP&L agreed to determine
depreciation expense of Wolf Creek using a 60 year life instead of a 40 year
life effective January 2003, which results in a reduction of expense by
approximately $8 million in 2003. KCP&L will record a regulatory asset for the
reduction in depreciation expense. KCP&L also agreed to file a rate case by May
15, 2006. In December 2002, the KCC approved tariffs implementing the
stipulation and agreement, which resulted in a reduction of $12.4 million in
annual Kansas retail revenues, effective January 1, 2003.
78
Effective August 2002, the MPSC approved KCP&L's application for an accounting
authority order related to the Missouri jurisdictional portion of the storm
costs. The order allowed KCP&L to defer and amortize $20.1 million, representing
the Missouri impact of the storm, through January 2007. The amortization began
in September 2002 and totaled $1.5 million in 2002. KCP&L will amortize
approximately $4.6 million annually for the remainder of the amortization
period. In October 2002, the Staff of the MPSC concluded its review of the
Missouri jurisdictional earnings for KCP&L and determined that the current rate
levels do not warrant action.
5. EQUITY METHOD INVESTMENTS
See Note 19 for information regarding 2001 activity in KLT Telecom's investment
in DTI.
Sale of KLT Investments II 's Ownership of Downtown Hotel Group
On May 31, 2001, KLT Investments II sold its 25% ownership of Kansas City
Downtown Hotel Group, L.L.C. for total proceeds of $3.8 million resulting in a
$1.4 million after tax gain.
Sale of KLT Gas Properties
On June 28, 2001, KLT Gas sold its 50% ownership in Patrick KLT Gas, LLC for
total proceeds of $42.3 million resulting in a $12.0 million after tax gain.
After the acquisition of majority ownership in RSAE (see Note 2 for additional
information) and the sales of the equity method investments discussed above, the
Company has no remaining equity method investments other than affordable housing
limited partnerships held by KLT Investments.
6. GOODWILL AND INTANGIBLE PROPERTY
SFAS No. 142, "Goodwill and Other Intangible Assets"
The Company adopted SFAS No. 142 on January 1, 2002. Under the new standard,
goodwill is no longer amortized, but rather is tested for impairment upon
adoption and at least annually thereafter. The annual test may be performed
anytime during the year, but must be performed at the same time each year.
Strategic Energy's transition and 2002 annual impairment tests have been
completed and there was no impairment of the Strategic Energy goodwill. Goodwill
reported on Great Plains Energy's consolidated balance sheets associated with
the Company's ownership in Strategic Energy totaled $26.1 million and $14.1
million at December 31, 2002 and 2001, respectively. The 2002 increase in
goodwill was a result of IEC's acquisition of a 5.8% indirect ownership interest
in Strategic Energy.
After the transition impairment test of RSAE goodwill, the Company recorded a
$3.0 million write-down of goodwill. The goodwill write-down is reflected as a
cumulative effect to January 1, 2002, of a change in accounting principle. RSAE
completed its first annual impairment test in September 2002. The test indicated
no impairment. Goodwill reported on Great Plains Energy's and consolidated
KCP&L's balance sheets associated with HSS' ownership interest in RSAE totaled
$20.0 million and $23.0 million at December 31, 2002 and 2001, respectively.
The following table adjusts the reported 2001 and 2000 Great Plains Energy and
consolidated KCP&L income statement information to add back goodwill
amortization as if the non-amortization provisions of SFAS No. 142 had been
applied during all periods presented.
79
Great Plains Energy
2001 2000 (a)
(thousands except per share amounts)
Income (loss) before extraordinary item and cumulative
effect, as reported $ (40,043) $ 128,631
Add back: Goodwill amortization 3,713 412
Income (loss) before extraordinary item and cumulative effect (36,330) 129,043
Early extinguishment of debt, net of income taxes 15,872 -
Cumulative effect to January 1, 2000, of changes in
accounting principles, net of income taxes - 30,073
Net (loss) income, as adjusted (20,458) 159,116
Preferred stock dividend requirements 1,647 1,649
Earnings (loss) available for common stock, as adjusted $ (22,105) $ 157,467
Basic and diluted earnings (loss) per common share before
extraordinary item and cumulative effect, as reported $ (0.68) $ 2.05
Add back: Goodwill amortization 0.06 0.01
Basic and diluted earnings (loss) per common share before
extraordinary item and cumulative effect, as adjusted (0.62) 2.06
Early extinguishment of debt 0.26 -
Cumulative effect to January 1, 2000, of changes in
accounting principles - 0.49
Basic and diluted earnings (loss) per common share, as adjusted $ (0.36) $ 2.55
(a) Great Plains Energy and consolidated KCP&L are the same for 2000.
Consolidated KCP&L
2001
(thousands)
Income before extraordinary item, as reported $ 103,819
Add back: Goodwill amortization 2,879
Income before extraordinary item 106,698
Early extinguishment of debt, net of income taxes 15,872
Net income, as adjusted 122,570
Preferred stock dividend requirements 1,098
Earnings available for common stock, as adjusted $ 121,472
Other Intangible Assets
KCP&L electric utility plant on the consolidated balance sheets included
intangible computer software of $41.6 million, net of accumulated amortization
of $42.4 million, in 2002 and $48.2 million, net of accumulated amortization of
$33.0 million, in 2001.
Other intangible assets on the consolidated KCP&L balance sheets include
intangible computer software, the Worry Free service mark, and an RSAE
trademark, logo and non-compete agreement totaling $4.7 million, net of
accumulated amortization of $0.4 million, in 2002 and $0.6 million, net of
accumulated amortization of $0.2 million, in 2001.
KLT Gas' gas property and investments on the consolidated balance sheets
included intangible drilling costs of $20.8 million in 2002 and $17.7 million in
2001.
Other intangible assets on the Great Plains Energy consolidated balance sheets
include other intangible computer software of $1.8 million, net of accumulated
amortization of $0.6 million, in 2002 and $1.2 million, net of accumulated
amortization of $0.1 million, in 2001.
80
7. PENSION PLANS AND OTHER EMPLOYEE BENEFITS
Changes in Pension Accounting Principles
Effective January 1, 2000, KCP&L changed its methods of amortizing unrecognized
net gains and losses and determination of expected return related to its
accounting for pension expense. These changes were made to reflect more timely
in pension expense the gains and losses incurred by the pension funds. KCP&L's
current method is to recognize gains and losses by amortizing over a five-year
period the rolling five-year average of unamortized gains and losses and
determine the expected return by multiplying the assumed long-term rate of
return times the fair value of plan assets. Accounting principles required KCP&L
to record the cumulative effect of these changes by increasing 2000 earnings by
$30.1 million or $0.49 per share. Adoption of the new methods of accounting for
pensions has led and will continue to lead to greater fluctuations in pension
expense in the future.
Pension Plans and Other Employee Benefits
KCP&L has defined benefit pension plans for its employees, including officers
and Wolf Creek employees. Benefits under these plans reflect the employees'
compensation, years of service and age at retirement. KCP&L satisfies the
minimum funding requirements under the ERISA.
There were no significant amendments to the plans in 2002. During 2001, the
plans, other than those at Wolf Creek, were amended resulting in an increase to
the benefit obligation of $6.8 million. The increase was due primarily to an
amendment to the non-management plan, which improved benefits to employees with
at least thirty years of service who elected lump sum distributions.
During 2000, the plans were amended, except for those of Wolf Creek, which
resulted in a $42.0 million increase in the benefit obligation. The amendments
changed the mortality tables used and added enhanced benefit options. The
enhancements include improved early retirement benefits for employees who retire
after their age plus their years of service equals at least 85. The options also
include lump sum distributions. During 2001, the plans experienced lump sum
distributions related to these enhancements in excess of $33.0 million.
Primarily as a result of the significant decline in the market value of plan
assets, in 2002 the Company had a minimum pension liability of $63.1 million
offset by an intangible asset of $19.2 million and OCI of $43.9 million ($26.8
million net of tax). In 2001, the Company's minimum pension liability was $20.0
million offset by an intangible asset of $18.3 million and OCI of $1.7 million
($1.0 million net of tax). Because these adjustments were non-cash, their effect
has been excluded from the Consolidated Statements of Cash Flows.
In addition to providing pension benefits, KCP&L provides certain postretirement
health care and life insurance benefits for substantially all retired employees.
KCP&L accrues the cost of postretirement health care and life insurance benefits
during an employee's years of service and recovers these accruals through rates.
KCP&L funds the portion of net periodic postretirement benefit costs that are
tax deductible. Beginning in 2001, management employees who resign with 25 years
or more of service are eligible for life insurance benefits.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $219.1 million, $185.8 million, and $121.8 million,
respectively, as of December 31, 2002 and $207.7 million, $176.6 million, and
$160.7 million, respectively, as of December 31, 2001. Net periodic benefit
costs reflect total plan benefit costs prior to the effects of capitalization
and sharing with joint-owners of power plants. The pension benefits table below
provides information relating to the funded status of all defined benefit
pension plans on an aggregate basis.
81
Pension Benefits Other Benefits
2002 2001 2002 2001
Change in projected benefit obligation (thousands)
PBO at beginning of year $ 421,126 $ 411,960 $ 41,224 $ 36,858
Service cost 13,360 11,152 757 729
Interest cost 30,272 31,905 2,951 2,918
Contribution by participants - - 785 459
Amendments - 6,790 247 960
Actuarial loss 29,174 22,853 7,181 3,185
Benefits paid (42,482) (28,807) (3,715) (3,432)
Benefits paid by KCP&L (934) (1,381) (494) (454)
Settlements 284 (33,346) - -
PBO at end of year (a) $ 450,800 $ 421,126 $ 48,936 $ 41,223
Change in plan assets
Fair value of plan assets at beginning of year $ 395,015 $ 564,947 $ 9,459 $ 8,096
Actual return on plan assets (29,983) (112,397) 321 601
Contributions by employer and participants 1,619 1,017 5,032 4,193
Benefits paid (42,482) (28,807) (3,758) (3,432)
Settlements - (29,745) - -
Fair value of plan assets at end of year $ 324,169 $ 395,015 $ 11,054 $ 9,458
Prepaid (accrued) benefit cost
Funded status $(126,631) $ (26,111) $ (37,882) $ (31,765)
Unrecognized actuarial loss 157,438 58,686 11,947 4,649
Unrecognized prior service cost 44,769 47,296 1,344 1,282
Unrecognized transition obligation 512 (230) 11,744 12,919
Net prepaid (accrued) benefit cost $ 76,088 $ 79,641 $ (12,847) $ (12,915)
Amounts recognized in the consolidated balance sheets
Prepaid benefit cost $ 85,945 $ 88,337 $ - $ -
Accrued benefit cost (9,857) (8,696) (12,847) (12,915)
Minimum pension liability adjustment (63,142) (19,994) - -
Intangible asset 19,233 18,303 - -
Accumulated other comprehensive income 43,909 1,691 - -
Net amount recognized in balance sheets $ 76,088 $ 79,641 $ (12,847) $ (12,915)
(a) Based on weighted-average discount rates of 6.75%, 7.25%, and 8.0% in 2002,
2001 and 2000, respectively; and increases in future salary levels of 4.1%
in 2002, 2001 and 2000.
Pension Benefits Other Benefits
2002 2001 2000 2002 2001 2000
Components of net periodic benefit cost (thousands)
Service cost $ 13,360 $ 11,152 $ 9,384 $ 757 $ 729 $ 547
Interest cost 30,272 31,905 26,538 2,951 2,918 2,543
Expected return on plan assets (34,144) (48,967) (39,571) (503) (403) (361)
Amortization of prior service cost 4,313 3,884 488 194 78 78
Recognized net actuarial loss (gain) (7,237) (11,333) (5,913) 100 32 2
Transition obligation (742) (2,023) (2,072) 1,174 1,174 1,174
Net settlements 284 (1,738) - - - -
Net periodic benefit cost $ 6,106 $ (17,120) $(11,146) $ 4,673 $ 4,528 $ 3,983
Long-term rates of return on pension assets of 9.0% to 9.25% were used.
Actuarial assumptions include an increase in the annual health care cost trend
rate for the year 2002 and thereafter of 9.9%. The health care plan requires
retirees to share in the cost when premiums
82
exceed a certain amount. A 1% point change in the assumed health care cost trend
rate would have the following effects as of December 31, 2002:
Increase Decrease
(thousands)
Effect on total service and interest component $ 297 $ (216)
Effect on postretirement benefit obligation $ 2,926 $ (2,222)
Employee Savings Plans
Great Plains Energy has defined contribution savings plans that cover
substantially all employees. The Company matches employee contributions, subject
to limits. The annual cost of the plans was $3.2 million in 2002 and $2.9
million for both 2001 and 2000.
Strategic Energy Phantom Stock Plan
Strategic Energy has a phantom stock plan that provides incentive in the form of
deferred compensation based upon the award of performance units, the value of
which is related to the increase in financial growth and performance of
Strategic Energy. Strategic Energy's annual cost for the plan was $5.9 million
in 2002 and $3.4 million in 2001. There was no expense recognized in 2000.
Stock Options
The Company has one equity compensation plan, which has been approved by its
shareholders. The equity compensation plan is a long-term incentive plan that
permits the grant of restricted stock, stock options, limited stock appreciation
rights and performance shares to officers and other employees of the Company and
its subsidiaries. The maximum number of shares of Great Plains Energy common
stock that may be issued under the plan is 3.0 million with 2.1 million shares
remaining available for future issuance.
Stock Options Granted 1992 - 1996
The exercise price of stock options granted equaled the market price of the
Company's common stock on the grant date. One-half of all options granted vested
one year after the grant date, the other half vested two years after the grant
date. An amount equal to the quarterly dividends paid on Great Plains Energy's
common stock shares (dividend equivalents) accrues on the options for the
benefit of option holders. The option holders are entitled to stock for their
accumulated dividend equivalents only if the options are exercised when the
market price is above the exercise price. At December 31, 2002, the market price
of Great Plains Energy's common stock was $22.88, which exceeded the grant price
for one of the three years that options granted were still outstanding.
Unexercised options expire ten years after the grant date.
Great Plains Energy follows Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for these options. Great Plains Energy recognizes annual expense
equal to accumulated and reinvested dividends plus the impact of the change in
stock price since the grant date. Great Plains Energy expensed $0.1 million in
2002, $(0.3) million in 2001 and $1.1 million in 2000.
For options outstanding at December 31, 2002, grant prices range from $20.6250
to $26.1875 and the weighted-average remaining contractual life is 2.9 years.
Stock Options Granted 2001 and 2002
Stock options were granted under the plan at the fair market value of the shares
on the grant date. The options vest three years after the grant date and expire
in ten years if not exercised. Exercise prices range from $24.90 to $25.98 and
the remaining contractual life is 8.7 years. Great Plains Energy
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follows APB Opinion 25 to account for these options. No compensation cost is
recognized because the option exercise price is equal to the market price of the
underlying stock on the date of grant.
All stock option activity for the last three years is summarized below:
2002 2001 2000
Shares Price* Shares Price* Shares Price*
Outstanding at January 1 250,375 $ 25.14 88,500 $ 23.57 89,875 $ 23.57
Granted 181,000 24.90 193,000 25.56 - -
Exercised (34,375) 23.00 (31,125) 23.27 (1,375) 23.88
Outstanding at December 31 397,000 $ 25.21 250,375 $ 25.14 88,500 $ 23.57
Exercisable as of December 31 23,000 $ 24.81 57,375 $ 23.73 88,500 $ 23.57
* weighted-average price
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, "Accounting for Stock-Based Compensation". Under this statement,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the vesting period. The pro forma amounts have been
determined as if the Company had accounted for its stock options under SFAS No.
123. The stock options granted in 1992 - 1996 were all 100% vested prior to the
year 2000 and therefore would have no compensation cost in the years 2000 - 2002
under SFAS No. 123. The fair value for the stock options granted in 2001 and
2002 was estimated at the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions:
2002 2001
Risk-free interest rate 4.57 % 5.53 %
Dividend yield 7.68 % 6.37 %
Stock volatility 27.503 % 25.879 %
Expected option life (in years) 10 10
The option valuation model requires the input of highly subjective assumptions,
primarily stock price volatility, changes in which can materially affect the
fair value estimate. Compensation cost would have been $0.4 million and $0.2
million in 2002 and 2001, respectively under SFAS No. 123. The pro forma
information is as follows:
2002 2001 2000
(thousands except per share amounts)
Net income (loss), as reported $ 126,188 $ (24,171) $ 158,704
Pro forma net income (loss) as if fair
value method were applied $ 125,990 $ (24,479) $ 159,366
Basic and diluted earnings (loss)
per common share, as reported $ 1.99 $ (0.42) $ 2.54
Basic and diluted earnings (loss)
per common share, pro forma $ 1.99 $ (0.42) $ 2.55
The effects of applying SFAS No. 123 in this pro forma disclosure may not be
representative of effects on net income for future years due to the timing and
number of options granted under the equity compensation plan.
Performance Shares
In 2001, 144,500 performance shares were granted. The issuance of performance
shares is contingent upon achievement, over a four-year period, of company and
individual performance goals.
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Performance shares have an intrinsic value equal to the market price of a share
on the date of grant. Pursuant to APB Opinion 25, expense is accrued for
performance shares over the period services are performed if attainment of the
performance goals appears probable. No compensation expense was recorded in 2002
or 2001.
8. INCOME TAXES
Income tax expense consisted of the following:
Great Plains Energy 2002 2001 2000
Current income taxes: (thousands)
Federal $ 27,505 $ (32,628) $ 76,076
State 9,369 1,304 10,928
Total 36,874 (31,324) 87,004
Deferred income taxes:
Federal 13,915 9,785 (9,846)
State 1,679 (943) (469)
Total 15,594 8,842 (10,315)
Investment tax credit amortization (4,183) (4,289) (4,296)
Total income tax expense 48,285 (26,771) 72,393
Less: Deferred taxes on the cumulative effect
of changes in accounting principles - - 19,227
Deferred taxes on early extinguishment
of debt - 9,143 -
Total $ 48,285 $ (35,914) $ 53,166
Consolidated KCP&L 2002 2001 2000
Current income taxes: (thousands)
Federal $ 47,027 $ 17,601 $ 76,076
State 8,668 4,109 10,928
Total 55,695 21,710 87,004
Deferred income taxes:
Federal 9,391 18,968 (9,846)
State 1,964 3,042 (469)
Total 11,355 22,010 (10,315)
Investment tax credit amortization (4,183) (4,289) (4,296)
Total income tax expense 62,867 39,431 72,393
Less: Deferred taxes on the cumulative effect
of changes in accounting principles - - 19,227
Deferred taxes on early extinguishment
of debt - 9,143 -
Total $ 62,867 $ 30,288 $ 53,166
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The effective income tax rates differed from the statutory federal rates mainly
due to the following:
Great Plains Energy 2002 2001 2000
Federal statutory income tax rate 35.0 % (35.0)% 35.0 %
Differences between book and tax
depreciation not normalized 1.9 1.4 0.7
Proposed IRS Adjustment (see Note 10) - - 4.6
Amortization of investment tax credits (2.4) (8.4) (1.9)
Federal income tax credits (11.3) (41.6) (9.2)
State income taxes 4.1 0.5 2.9
Valuation allowance - 31.0 -
Other 0.4 (0.5) (0.8)
Effective income tax rate 27.7 % (52.6)% 31.3 %
Consolidated KCP&L 2002 2001 2000
Federal statutory income tax rate 35.0 % 35.0 % 35.0 %
Differences between book and tax
depreciation not normalized 2.1 0.5 0.7
Proposed IRS Adjustment (see Note 10) - - 4.6
Amortization of investment tax credits (2.6) (2.7) (1.9)
Federal income tax credits (a) - (10.6) (9.2)
State income taxes 4.4 2.9 2.9
Other 0.7 (0.3) (0.8)
Effective income tax rate 39.6 % 24.8 % 31.3 %
(a) KLT Investments and KLT Gas generated the federal income tax credits in 2001
and 2000. Great Plains Energy and consolidated KCP&L are the same prior to
the October 1, 2001, formation of the holding company.
The tax effects of major temporary differences resulting in deferred tax assets
and liabilities in the balance sheets are as follows:
Great Plains Energy Consolidated KCP&L
December 31 2002 2001 2002 2001
(thousands)
Plant related $ 521,979 $ 533,521 $ 521,979 $ 533,521
Recoverable taxes 39,000 42,000 39,000 42,000
Pension and postretirement benefits 6,194 21,474 6,194 21,474
Tax credit carryforwards (21,150) (19,183) - -
Gas properties related 6,230 (9,535) - -
Nuclear fuel outage (3,233) (5,061) (3,233) (5,061)
AMT credit (4,093) (4,258) - -
Other 29,230 14,906 48,794 33,704
Net deferred tax liability before
valuation allowance 574,157 573,864 612,734 625,638
Valuation allowance (See Note 19) 15,779 15,779 - -
Net deferred tax liability $ 589,936 $ 589,643 $ 612,734 $ 625,638
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The net deferred income tax liability consisted of the following:
Great Plains Energy Consolidated KCP&L
December 31 2002 2001 2002 2001
(thousands)
Gross deferred income tax assets $(129,741) $(125,413) $ (91,000) $ (73,640)
Gross deferred income tax liabilities 719,677 715,056 703,734 699,278
Net deferred income tax liability $ 589,936 $ 589,643 $ 612,734 $ 625,638
9. RELATED PARTY TRANSACTIONS AND RELATIONSHIPS
In January of 1997, KLT Energy Services acquired approximately 71% of Custom
Energy from ELC. In February of 1999, Custom Energy acquired 100% of the
outstanding ownership interest in Strategic Energy from SE Holdings, L.L.C. (SE
Holdings) in exchange for 25% of the ownership interest in Custom Energy. In a
December 1999 reorganization, Custom Energy changed its name to Custom Energy
Holdings and transferred all of its operations to a new wholly owned subsidiary
called Custom Energy. After the reorganization, Custom Energy Holdings' assets
consisted of its ownership interests in Strategic Energy and Custom Energy.
Through a series of transactions, KLT Energy Services had increased its indirect
ownership position in Strategic Energy to approximately 83% as of December 31,
2001. In a July 2002 transaction, Custom Energy was distributed to KLT Energy
Services and a third-party investor, resulting in Strategic Energy being the
sole subsidiary of Custom Energy Holdings. ELC continued to own a 6% indirect
ownership interest in Strategic Energy, while SE Holdings owns an 11% interest
in Strategic Energy. Richard Zomnir, President and Chief Executive Officer of
Strategic Energy, holds a 56% interest in SE Holdings. Gregory Orman, former
Executive Vice President - Corporate Development and Strategic Planning of Great
Plains Energy and former President and CEO of KLT Inc., held a 67% interest in
ELC. The other 33% interest in ELC was held by an employee of Great Plains
Energy. Both persons were officers and shareholders of ELC before they became
officers or employees of the Company.
On November 5, 2002, the Board of Directors of the Company approved the merger
of ELC into IEC, a recently created wholly-owned subsidiary of the Company. The
merger was consummated on November 7, 2002, with IEC being the surviving company
after the merger. In exchange for their entire ownership interest in ELC, the
two shareholders received $15.1 million in Great Plains Energy common stock and
notes issued by Great Plains Energy and IEC. Great Plains Energy issued 387,596
common shares of Great Plains Energy common stock, valued at $8.0 million, which
was distributed to the ELC shareholders in proportion to their interests in that
company. Great Plains Energy also issued a promissory note to Mr. Orman in the
principal amount of approximately $4.7 million, and IEC issued a promissory note
to the other shareholder of ELC in the principal amount of approximately $2.4
million. Both notes were paid in January 2003.
As a result of the merger, Great Plains Energy now holds an 89% indirect
ownership interest in Strategic Energy through KLT Energy Services and IEC.
Certain employees of Strategic Energy, including Mr. Zomnir, indirectly hold
through SE Holdings the remaining ownership interest in Strategic Energy.
Custom Energy Holdings' business and affairs are controlled and managed by a
three member Management Committee composed of one representative designated by
KLT Energy Services, one representative designated by IEC and one representative
designated by SE Holdings. Certain actions (including amendment of Custom Energy
Holdings' operating agreement, approval of actions in contravention of the
operating agreement, approval of a dissolution of Custom Energy Holdings,
additional capital contributions and assumption of recourse indebtedness)
require the unanimous consent of all the members of Custom Energy Holdings.
Certain other actions (including mergers with
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Custom Energy Holdings, acquisitions by Custom Energy Holdings, assumption of
non-recourse indebtedness, sales of substantial assets, approval of
distributions, filing of registration statements, partition of assets, admission
of new members and transfers of interests in Custom Energy Holdings) can be
approved by the Management Committee, but to the extent they affect the rights,
obligations, assets or business of Strategic Energy, the approval of the
Strategic Energy Management Committee is also required.
Strategic Energy's business and affairs are controlled and managed exclusively
by a four member Management Committee composed of two representatives designated
by KLT Energy Services, one representative designated by IEC and one
representative designated by SE Holdings. Certain actions (including amendment
of Strategic Energy's operating agreement, approval of actions in contravention
of the operating agreement, approval of transactions between Strategic Energy
and affiliates of its members, approval of a dissolution of Strategic Energy,
and assumption of recourse indebtedness) require the unanimous consent of all
the Management Committee representatives of Strategic Energy.
On September 30, 2000, KLT Energy Services exercised an option to purchase
1,411,765 shares of Bracknell common stock owned by Reardon. KLT Energy Services
received 1,136,789 common shares of Bracknell at $4.25 per share and a warrant
to purchase the remaining 274,976 shares at an exercise price of $4.25 per
share. In May 2001, KLT Energy Services exercised the warrant for 274,976 shares
at $4.25 per share and sold 278,600 shares of Bracknell common stock in June
2001 at $4.48 per share. In November 2001, Bracknell common stock ceased trading
at a last sale price of $0.13 per share and KLT Energy Services wrote off its
investment in Bracknell. Bracknell common stock is no longer traded. Gregory
Orman, former Executive Vice President - Corporate Development and Strategic
Planning of Great Plains Energy and former President and CEO of KLT Inc., owned
55% of the membership interests of Reardon and approximately 1% of Bracknell.
10. COMMITMENTS AND CONTINGENCIES
Nuclear Liability and Insurance
Liability Insurance
The Price-Anderson Act currently limits the combined public liability of nuclear
reactor owners to $9.4 billion for claims that could arise from a single nuclear
incident. The owners of Wolf Creek, a nuclear generating station, (the Owners)
carry the maximum available commercial insurance of $0.2 billion. Secondary
Financial Protection, an assessment plan mandated by the NRC, provides insurance
for the $9.2 billion balance.
Under Secondary Financial Protection, if there were a catastrophic nuclear
incident involving any of the nation's licensed reactors, the Owners would be
subject to a maximum retrospective assessment per incident of up to $88 million
($41 million, KCP&L's 47% share). The Owners are jointly and severally liable
for these charges, payable at a rate not to exceed $10 million ($5 million,
KCP&L's 47% share) per incident per year, excluding applicable premium taxes.
The assessment, most recently revised in 1998, is subject to an inflation
adjustment based on the Consumer Price Index and renewal of the Price-Anderson
Act by Congress.
Property, Decontamination, Premature Decommissioning and Extra Expense Insurance
The Owners also carry $2.8 billion ($1.3 billion, KCP&L's 47% share) of property
damage, decontamination and premature decommissioning insurance for loss
resulting from damage to the Wolf Creek facilities. Nuclear Electric Insurance
Limited (NEIL) provides this insurance.
In the event of an accident, insurance proceeds must first be used for reactor
stabilization and NRC mandated site decontamination. KCP&L's share of any
remaining proceeds can be used for further
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decontamination, property damage restoration and premature decommissioning
costs. Premature decommissioning coverage applies only if an accident at Wolf
Creek exceeds $500 million in property damage and decontamination expenses, and
only after trust funds have been exhausted.
The Owners also carry additional insurance from NEIL to cover costs of
replacement power and other extra expenses incurred in the event of a prolonged
outage resulting from accidental property damage at Wolf Creek.
Under all NEIL policies, KCP&L is subject to retrospective assessments if NEIL
losses, for each policy year, exceed the accumulated funds available to the
insurer under that policy. The estimated maximum amount of retrospective
assessments to KCP&L under the current policies could total about $24.5 million.
In the event of a catastrophic loss at Wolf Creek, the insurance coverage may
not be adequate to cover property damage and extra expenses incurred. Uninsured
losses, to the extent not recovered through rates, would be assumed by KCP&L and
could have a material, adverse effect on its financial condition, results of
operations and cash flows.
Low-Level Waste
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated that the
various states, individually or through interstate compacts, develop alternative
low-level radioactive waste disposal facilities. The states of Kansas, Nebraska,
Arkansas, Louisiana and Oklahoma formed the Central Interstate Low-Level
Radioactive Waste Compact and selected a site in northern Nebraska to locate a
disposal facility. WCNOC and the owners of the other five nuclear units in the
Compact provided most of the pre-construction financing for this project.
KCP&L's net investment in the Compact was $7.4 million at December 31, 2002 and
2001.
Significant opposition to the project has been raised by Nebraska officials and
residents in the area of the proposed facility and attempts have been made
through litigation and proposed legislation in Nebraska to slow down or stop
development of the facility. On December 18, 1998, the application for a license
to construct this project was denied. After the license denial, WCNOC and others
filed a lawsuit in federal court contending Nebraska officials acted in bad
faith while handling the license application. In September 2002, the U.S.
District Court Judge presiding over the Central Interstate Compact Commission's
federal "bad faith" lawsuit against the State of Nebraska issued his decision in
the case finding clear evidence that the State of Nebraska acted in bad faith in
processing the license application for a low-level radioactive waste disposal
site in Nebraska and rendered a judgment in the amount of $151.4 million against
the state. The state has appealed this decision to the 8th Circuit, U.S. Court
of Appeals. Based on the favorable outcome of this trial, in KCP&L's opinion,
there is a greater possibility of reversing the state's license denial once the
decision in this case is final.
In May 1999, the Nebraska legislature passed a bill withdrawing Nebraska from
the Compact. In August 1999, the Nebraska Governor gave official notice of the
withdrawal to the other member states. Withdrawal will not be effective for five
years and will not, of itself, nullify the site license proceeding.
Environmental Matters
KCP&L's operations are subject to regulation by federal, state and local
authorities with regard to air and other environmental matters. The generation
and transmission of electricity produces and requires disposal of certain
hazardous products which are subject to these laws and regulations. In addition
to imposing continuing compliance obligations, these laws and regulations
authorize the imposition of substantial penalties for noncompliance, including
fines, injunctive relief and other sanctions. Failure to comply with these laws
and regulations could have a material adverse effect on KCP&L.
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KCP&L operates in an environmentally responsible manner and seeks to use current
technology to avoid and treat contamination. KCP&L regularly conducts
environmental audits designed to ensure compliance with governmental regulations
and to detect contamination. Governmental bodies, however, may impose additional
or more restrictive environmental regulations that could require substantial
changes to operations or facilities at a significant cost. At December 31, 2002
and 2001, KCP&L had $1.9 million accrued for environmental remediation expenses
covering water monitoring at one site and unasserted claims for remediation at a
second site. The amounts accrued were established on an undiscounted basis and
KCP&L does not currently have an estimated time frame over which the accrued
amounts may be paid out. Expenditures to comply with environmental laws and
regulations have not been material in amount during the periods presented and
are not expected to be material in the upcoming years with the exception of the
issues discussed below.
Certain Air Toxic Substances
In July 2000, the National Research Council published its findings of a study
under the Clean Air Act which stated that power plants that burn fossil fuels,
particularly coal, generate the greatest amount of mercury emissions. As a
result, in December 2000, the EPA announced it would propose Maximum Achievable
Control Technology (MACT) requirements by December 2003 to reduce mercury
emissions and issue final rules by December 2004. Until the rules are proposed,
KCP&L cannot predict the likelihood or compliance costs of such regulations.
Air Particulate Matter
In July 1997, the EPA revised ozone and particulate matter air quality standards
creating a new eight-hour ozone standard and establishing a new standard for
particulate matter less than 2.5 microns (PM-2.5) in diameter. These standards
were challenged in the U. S. Court of Appeals for the District of Columbia
(Appeals Court) that decided against the EPA. Upon further appeal, the U. S.
Supreme Court reviewed the standards and remanded the case back to the Appeals
Court for further review, including a review of whether the standards were
arbitrary and capricious. On March 26, 2002, the Appeals Court issued its
decision on challenges to the 8-hour ozone and PM-2.5 national ambient air
quality standards (NAAQS). This decision denies all state, industry and
environmental groups petitions for review and thus upheld as valid the EPA's new
8-hour ozone and PM-2.5 NAAQS. In so doing, the court held that the EPA acted
consistently with the Clean Air Act in setting the standards at the levels it
chose and the EPA's actions were reasonable and not arbitrary and capricious,
and cited the deference given the EPA's decision-making authority. The court
stated that the extensive records established for each rule supported the EPA's
actions in both rulemakings.
This decision by the Appeals Court removed the last major hurdle to the EPA's
implementation of stricter ambient air quality standards for ozone and fine
particles. The EPA has not yet issued regulations incorporating the new
standards. Until new regulations are issued, KCP&L is unable to estimate the
impact of the new standards. However, the impact on KCP&L and all other
utilities that use fossil fuels could be substantial. In addition, the EPA is
conducting a three-year study of fine particulate ambient air levels. Until this
testing and review period has been completed, KCP&L cannot determine additional
compliance costs, if any, associated with the new particulate regulations.
Nitrogen Oxide
The EPA announced in 1998 regulations implementing reductions in NOx emissions.
These regulations initially called for 22 states, including Missouri, to submit
plans for controlling NOx emissions. The regulations require a significant
reduction in NOx emissions from 1990 levels at KCP&L's Missouri coal-fired
plants by the year 2003.
In December 1998, KCP&L and several other western Missouri utilities filed suit
against the EPA over the inclusion of western Missouri in the NOx reduction
program based on the 1-hour NOx standard. On March 3, 2000, a three-judge panel
of the District of Columbia Circuit of the U.S. Court of Appeals sent
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the NOx rules related to Missouri back to the EPA, stating the EPA failed to
prove that fossil plants in the western part of Missouri significantly
contribute to ozone formation in downwind states. On March 5, 2001, the U.S.
Supreme Court denied certiorari, making the decision of the Court of Appeals
final.
In February 2002, the EPA issued proposed Phase II NOx SIP Call regulation which
specifically excludes the fossil plants in the western part of Missouri from the
NOx SIP Call. To date, the EPA has not issued its final Phase II NOx SIP Call
regulation.
If fossil plants in western Missouri are required to implement NOx reductions,
KCP&L would need to incur significant capital costs, purchase power or purchase
NOx emission allowances. Preliminary analysis of the regulations indicates that
selective catalytic reduction technology, as well as other changes, may be
required for some of the KCP&L units. Currently, KCP&L estimates that additional
capital expenditures to comply with these regulations could range from $40
million to $60 million. Operations and maintenance expenses could also increase
by more than $2.5 million per year. KCP&L continues to refine these preliminary
estimates and explore alternatives. The ultimate cost of these regulations, if
any, could be significantly different from the amounts estimated above.
Carbon Dioxide
At a December 1997 meeting in Kyoto, Japan, delegates from 167 nations,
including the United States, agreed to a treaty (Kyoto Protocol) that would
require a seven percent reduction in United States carbon dioxide (CO2)
emissions below 1990 levels. Although the United States agreed to the Kyoto
Protocol, the treaty has not been sent to Congress for ratification. The
financial impact on KCP&L of future requirements in the reduction of CO2
emissions cannot be determined until specific regulations are adopted.
Clean Air Legislation
Congress has debated numerous bills that would make significant changes to the
current federal Clean Air Act including potential establishment of nationwide
limits on power plant emissions for several specific pollutants. These bills
have the potential for a significant financial impact on KCP&L through the
installation of new pollution control equipment to achieve compliance with the
new nationwide limits. The financial consequences to KCP&L cannot be determined
until the final legislation is passed. KCP&L will continue to monitor the
progress of these bills.
Proposed Water Use Regulations
In February 2002, the EPA issued proposed rules related to certain existing
power producing facilities that employ cooling water intake structures that
withdraw 50 million gallons or more per day and use 25% or more of that water
for cooling purposes. The proposed rules establish national minimum performance
requirements designed to minimize adverse environmental impact. The EPA must
take final action by August 2003. KCP&L will continue to monitor the progress of
this rulemaking. The impact of these proposed rules has not yet been quantified,
however, KCP&L's generating stations would be affected.
Nuclear Fuel Commitments
As of December 31, 2002, KCP&L's 47% share of Wolf Creek nuclear fuel
commitments included $21.5 million for enrichment through 2006, $57.5 million
for fabrication through 2025 and $5.7 million for uranium and conversion through
2003.
Coal Contracts
KCP&L's share of coal purchased under existing contracts was $49.5 million in
2002, $44.6 million in 2001, and $31.1 million in 2000. Under these coal
contracts, KCP&L's remaining share of purchase commitments totals $105.1
million. Obligations for the years 2003 through 2005 based on estimated
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prices for those years total $46.0 million, $28.5 million and $30.6 million,
respectively. The remainder of KCP&L's coal requirements will be fulfilled
through additional contracts or spot market purchases.
Purchased Capacity Commitments
KCP&L purchases capacity from other utilities and nonutility suppliers.
Purchasing capacity provides the option to purchase energy if needed or when
market prices are favorable. This can be a cost-effective alternative to new
construction. KCP&L capacity purchases totaled $18.5 million, $17.7 million and
$25.4 million in 2002, 2001 and 2000, respectively. As of December 31, 2002,
contracts to purchase capacity totaled $90.5 million through 2016. These
commitments average $19 million in 2003 and 2004, $10 million in 2005 and $4
million in 2006 and 2007. Capacity sales contracts to supply municipalities in
the years 2003 through 2007 average $12 million per year. For the next five
years, net capacity contracts average under 1% of KCP&L's estimated 2003 total
available generating capacity.
Strategic Energy Purchased Power Energy Commitments
Strategic Energy has entered into agreements to purchase electricity at various
fixed prices to meet estimated supply requirements. Commitments at December 31,
2002, under these agreements total $1,092.3 million through 2010. Commitments
for the years 2003 through 2007 total $500.4 million, $299.5 million, $222.1
million, $50.1 million, and $8.6 million, respectively. See Note 17 for further
discussion.
Leases
Great Plains Energy's lease expense, excluding DTI, was about $27.4 million,
$30.6 million and $27.9 million during 2002, 2001 and 2000, respectively. The
remaining rental commitments under leases total $266.7 million ending in 2028.
Obligations for the years 2003 through 2007 average $30.4 million per year.
These amounts exclude possible termination payments under the synthetic lease
arrangement discussed below.
Consolidated KCP&L Leases
Consolidated KCP&L's lease expense, excluding DTI, was $25.7 million, $29.6
million and $27.3 million during 2002, 2001 and 2000, respectively. The
remaining rental commitments under leases total $263.4 million ending in 2028.
Obligations for the years 2003 through 2007 average $29.8 million per year.
These amounts exclude possible termination payments under the synthetic lease
arrangement discussed below.
KCP&L has a transmission line lease with another utility through September 2025
whereby, with the FERC's approval, the rental payments can be increased by the
lessor. If this occurs and KCP&L is able to secure an alternative transmission
path, KCP&L can cancel the lease. Commitments under this lease total $1.9
million per year and $43.0 million over the remaining life of the lease,
assuming it is not canceled.
KCP&L's expense for other leases, including railcars, computer equipment,
buildings, transmission line and other items, approximated $25 million annually
for the last three years. The remaining rental commitments under these leases
total $186.6 million through 2028. Obligations for the years 2003 through 2007
average $21 million per year. Capital leases are not material and are included
in these amounts.
As the managing partner of three jointly-owned generating units, KCP&L has
entered into leases for railcars to serve those units. KCP&L has reflected the
entire lease commitment in the above amounts although about $1.9 million per
year ($24.4 million total) will be reimbursed by the other owners.
In 2001, KCP&L entered into a synthetic lease arrangement with a Trust (Lessor)
to finance the purchase, installation, assembly and construction of five
combustion turbines and related property and
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equipment that will add 385 MWs of peaking capacity (Project). The Trust is a
special-purpose entity and has an aggregate financing commitment from
third-party equity and debt participants of $176 million, amended during the
third quarter 2002 to adjust the amount financed from the previously estimated
$200 million to reflect a reduction in the estimated cost for the purchase,
installation, assembly and construction of the five combustion turbines. In
accordance with SFAS No. 13 "Accounting for Leases," and related EITF issues
(including EITF Issue No. 90-15, "Impact of Non-substantive Lessors, Residual
Value Guarantees, and Other Provisions in Leasing Transactions" and EITF Issue
No. 97-10, "The Effect of Lessee Involvement in Asset Construction"), the
Project and related lease obligations are not included in KCP&L's consolidated
balance sheet. The Lessor has appointed KCP&L as supervisory agent responsible
for completing construction of the Project by no later than June 2004. The
initial lease term is approximately three and one quarter years, beginning at
the date of construction completion, which is expected to be June 2003. At the
end of the lease term (October 2006), KCP&L may choose to sell the Project for
the Lessor, guaranteeing to the Lessor a residual value for the Project in an
amount which may be up to 83.21% of the project cost. If KCP&L does not elect
the sale option, KCP&L must either extend the lease, if it can obtain the
consent of the Lessor, or purchase the Project for the outstanding project cost.
KCP&L also has contingent obligations to the Lessor upon an event of a default
during both the construction period and lease period. Upon a default in the
construction period, KCP&L's maximum obligation to the Lessor equals (i) in the
circumstances of bankruptcy, fraud, illegal acts, misapplication of funds and
willful misconduct, 100% of then-incurred project costs, and (ii) in all other
circumstances, an amount which may be up to 89.9% of then-incurred project costs
that are capitalizable in accordance with GAAP. At December 31, 2002, cumulative
project costs were approximately $127.4 million. Upon a default during the lease
period, KCP&L's maximum obligation to the Lessor equals 100% of project costs.
KCP&L's rental obligation, which reflects interest payments only, is expected to
be approximately $28.2 million in the aggregate.
In January 2003, the FASB issued Interpretation No. 46. The Interpretation
clarifies the application of ARB No. 51, "Consolidated Financial Statements", to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties (Variable Interest Entities). The Trust, acting as
Lessor in the synthetic lease arrangement discussed above, is considered a
Variable Interest Entity under the Interpretation. Because KCP&L has variable
interests in the Trust, including among other things, a residual value guarantee
provided to the Lessor, KCP&L is the primary beneficiary of the Trust.
Accordingly, KCP&L will be required to consolidate the Trust at July 1, 2003.
Great Plains Energy's and consolidated KCP&L's utility plant and long-term debt
will increase $176 million upon consolidation of the Trust.
Other Consolidated KCP&L Leases
RSAE has entered into capital leases for vehicles, office equipment and
software. Lease expense was about $1 million per year in 2002 and 2001.
Obligations average about $2 million per year for the years 2003 and 2004, $1
million in 2005 and $0.5 million in 2006 and 2007.
Other Great Plains Energy Leases
Great Plains Energy's other subsidiaries have entered operating leases for
buildings, compressors, communications equipment and other items. Lease expense
was about $1.7 million in 2002 and about $1 million per year during 2001 and
2000. Obligations average about $1 million per year for the years 2003 and 2004
and $0.5 million per year for the years 2005 through 2007.
Put Option Held by Minority Interests in Strategic Energy
As of November 7, 2002, Great Plains Energy indirectly owns 89% of Strategic
Energy. SE Holdings has a put option to sell all or part of its 11% interest in
Strategic Energy to Custom Energy Holdings at any time within the 90 days
following January 31, 2004, under certain circumstances, at fair market
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value. Fair market value would be determined by the mutual agreement of the
parties, or if an agreement cannot be reached, by third party appraisal.
Internal Revenue Service Settlement - Corporate-Owned Life Insurance
During 2000, KCP&L recorded a $12.7 million charge for the federal and states
income tax impact of the proposed disallowance of interest deductions on COLI
loans and assessed interest on the disallowance for tax years 1994 to 1998. In
November 2002, KCP&L accepted a settlement offer related to COLI from the IRS.
The offer allows 20% of the interest originally deducted and taxes only 20% of
the gain on surrender of the COLI policies. KCP&L surrendered the policies in
February 2003. Acceptance of the offer had an immaterial impact on earnings.
KCP&L will make cash payments to the IRS in 2003 of approximately $11.2 million
to satisfy the liability. KCP&L paid $1.5 million to the IRS in 2001 related to
the disallowance of the COLI deduction.
11. GUARANTEES
In the normal course of business, Great Plains Energy and certain of its
subsidiaries enter into various agreements providing financial or performance
assurance to third parties on behalf of certain subsidiaries. Such agreements
include, for example, guarantees, stand-by letters of credit and surety bonds.
These agreements are entered into primarily to support or enhance the
creditworthiness otherwise attributed to a subsidiary on a stand-alone basis,
thereby facilitating the extension of sufficient credit to accomplish the
subsidiaries' intended business purposes.
As prescribed in FASB Interpretation No. 45, the Company will begin recording a
liability for the fair value of the obligation it has undertaken for guarantees
issued after December 31, 2002. The liability recognition requirements of FASB
Interpretation No. 45 are to be applied on a prospective basis to guarantees
issued or modified after December 31, 2002, while the disclosure requirements
are to be applied to all guarantees. The interpretation does not encompass
guarantees of the Company's own future performance. KCP&L believes it will
record an immaterial amount for the fair value of guarantees expected to be
issued in 2003 for the residual value of vehicles and heavy equipment under an
operating lease.
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The following table reflects Great Plains Energy's and consolidated KCP&L's
maximum potential amount of future payments that could be required under
guarantees and describes those guarantees:
Maximum potential
amount of future
payments under
Guarantor guarantee Nature of Guarantee
(millions)
KCP&L $12.8 Guaranteed energy savings under agreements with several
customers that expire over the next 8 years. In most cases, a
subcontractor would indemnify KCP&L for any payments made
by KCP&L under these guarantees.
KCP&L 8.1 Guarantees for residual value of vehicles and heavy equipment
under an operating lease. Guaranteed residual values average
approximately $0.7 million per year through 2012.
Total consolidated KCP&L 20.9
KLT Inc. 0.9 KLT Inc. issued a letter of credit related to the sale of demand
side management credits by Custom Energy, L.L.C. which
renews annually and has 5 years remaining.
KLT Energy Services 3.0 Custom Energy, L.L.C. has indemnified construction performance
bonds totaling $9.7 million, which are secured by KLT Energy
Services' $3.0 million ownership interest in Custom Energy, L.L.C.
These bonds are expected to expire in 2003.
Total Great Plains Energy $24.8
KCP&L has also entered into a synthetic lease arrangement with a Trust (Lessor).
At the end of the lease term (October 2006), KCP&L may choose to sell the
project for the Lessor, guaranteeing to the Lessor a residual value for the
Project in an amount which may be up to 83.21% of the project cost. As a result
of the new consolidation requirements of FASB Interpretation No. 46, the
synthetic lease arrangement will be consolidated in the third quarter of 2003.
See Note 10 for additional information regarding KCP&L's synthetic lease
arrangement.
12. ASSET RETIREMENT OBLIGATIONS
During 2001, the FASB issued SFAS No. 143. SFAS No. 143 provides accounting
requirements for the recognition and measurement of liabilities associated with
the retirement of tangible long-lived assets. Under the standard, these
liabilities are recognized at fair value as incurred and capitalized as part of
the cost of the related long-lived asset. Accretion of the liabilities due to
the passage of time is recorded as an operating expense. Effective January 1,
2003, the Company adopted the provisions of SFAS No. 143.
The adoption of SFAS No. 143 required KCP&L to recognize an estimated liability
for its 47% share of the estimated cost to decommission Wolf Creek. The
liability to decommission Wolf Creek was incurred when the plant was placed in
service in 1985. The estimated liability is based on a third party nuclear
decommissioning study conducted in 2002, that is updated every three years for
filing with the MPCS and the KCC. To calculate the retirement obligation, KCP&L
used a credit-adjusted risk free discount rate of 6.42%. This rate is based on
the rate KCP&L could issue 30-year bonds, adjusted downward to reflect the
portion of the anticipated costs in current year dollars that have been funded
to
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date through the tax-qualified trust fund. The cumulative impact of prior
decommissioning accruals recorded consistent with rate orders from its
regulatory commissions has been reversed and a new regulatory contra-asset for
such amounts has been established. Amounts collected through these rate orders
have been deposited in a legally restricted external trust fund, the fair market
value of which was $63.3 million at December 31, 2002.
KCP&L also must recognize, where possible to estimate, the future costs to
settle other legal liabilities including the removal of water intake structures
on rivers, capping/filling of piping at levees following steam power plant
closures and capping/closure of ash landfills. Estimates for these liabilities
are based on internal engineering estimates of third party costs to remove the
assets in satisfaction of legal obligations and have been discounted using
credit adjusted risk free rates ranging from 5.25% to 7.50% depending on the
anticipated settlement date.
KLT Gas has estimated liabilities for gas well plugging and abandonment,
facility removal and surface restoration. These estimates are based upon
internal estimates of third party costs to satisfy the legal obligations and
have been discounted using credit adjusted risk free rates ranging from 6.00% to
7.25%, depending upon the anticipated settlement date.
Revisions to the estimated liabilities of KCP&L and KLT Gas could occur due to
changes in the decommissioning or other cost estimates, extension of the nuclear
operating license or changes in federal or state regulatory requirements.
In conjunction with the adoption of SFAS No.143 in January 2003, KCP&L recorded
an asset retirement obligation of $99.2 million and increased property and
equipment, net of accumulated depreciation, by $18.3 million. KCP&L is a
regulated utility subject to the provisions of SFAS No. 71. As a result, the
$80.9 million cumulative effect of the adoption of SFAS No. 143 was recorded as
a regulatory asset and therefore, had no impact on net income.
As a result of its adoption of SFAS No. 143, KLT Gas recorded an asset
retirement obligation of $1.3 million, increased property and equipment by $1.0
million and increased operating expense by $0.3 million. KLT Gas did not reflect
the $0.2 million ($0.3 million of operating expense reduced by $0.1 million of
income tax) as a cumulative effect due to its immateriality.
If the provisions of SFAS No. 143 had been applied to the consolidated balance
sheets presented, Consolidated KCP&L's liability for asset retirement
obligations would have been $99.2 million and $93.1 million at December 31, 2002
and 2001, respectively. Great Plains Energy's liability for asset retirement
obligations would have also included the KLT Gas liabilities of $1.3 million and
$1.1 million at December 31, 2002 and 2001, respectively.
KCP&L has legal asset retirement obligations for certain other assets where it
is not possible to estimate the time period when the obligations will be
settled. Consequently, the retirement obligations cannot be measured at this
time. For transmission easements obtained by condemnation, KCP&L must remove its
transmission lines if the line is de-energized. It is extremely difficult to
obtain siting for new transmission lines. Consequently, KCP&L does not
anticipate de-energizing any of its existing lines. KCP&L also operates, under
state permits, ash landfills at several of its power plants. While the life of
the ash landfill at one plant can be estimated and is included in the estimated
liabilities above, the future life of ash landfills at other permitted landfills
cannot be estimated. KCP&L can continue to maintain permits for these landfills
after the adjacent plant is closed.
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13. SEGMENT AND RELATED INFORMATION
Great Plains Energy
Great Plains Energy has three reportable segments based on its method of
internal reporting, which generally segregates the reportable segments based on
products and services, management responsibility and regulation. During 2002,
the Company's management revised its corporate business strategy focusing on the
following three reportable business segments: (1) KCP&L, an integrated electric
utility, generates, transmits and distributes electricity; (2) Strategic Energy
delivers electricity to retail customers under long-term contracts for wholesale
power purchased under long-term contracts, operating in several retail choice
electricity markets; and (3) KLT Gas explores for, develops, and produces
unconventional natural gas resources, including coalbed methane properties.
"Other" includes the operations of HSS and GPP, all KLT Inc. operations other
than Strategic Energy and KLT Gas, unallocated corporate charges and
intercompany eliminations. The summary of significant accounting policies
applies to all of the reportable segments. Segment performance is evaluated
based on net income.
The tables below reflect summarized financial information concerning Great
Plains Energy's reportable segments. Prior year information has been restated to
conform to the current presentation.
Strategic Great Plains
2002 KCP&L Energy KLT Gas Other Energy
(millions)
Operating revenues $1,009.9 $ 789.5 $ 1.1 $ 61.4 $1,861.9
Depreciation and depletion (144.3) (0.9) (2.5) (3.9) (151.6)
Loss from equity investments - - - (1.2) (1.2)
Interest charges (80.3) (0.3) (0.3) (8.2) (89.1)
Income taxes (63.4) (25.2) 10.3 30.0 (48.3)
Cumulative effect of a change
in accounting principle - - - (3.0) (3.0)
Net income (loss) 102.9 29.7 - (6.4) 126.2
Strategic Great Plains
2001 KCP&L Energy KLT Gas Other Energy
(millions)
Operating revenues $ 967.5 $ 411.9 $ 0.3 $ 82.2 $1,461.9
Depreciation and depletion (136.3) (0.3) (1.8) (20.4) (158.8)
Income (loss) from equity investments - - 1.0 (1.4) (0.4)
Interest charges (78.1) (0.5) - (24.7) (103.3)
Income taxes (51.6) (15.2) 0.1 102.6 35.9
Early extinguishment of debt - - - 15.9 15.9
Net income (loss) 98.0 21.8 14.3 (158.3) (24.2)
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Strategic Great Plains
2000 KCP&L Energy KLT Gas Other Energy
(millions)
Operating revenues $ 952.0 $ 129.6 $ 30.5 $ 3.8 $1,115.9
Depreciation and depletion (124.3) (0.4) (6.0) (1.7) (132.4)
Income (loss) from equity investments - - 3.6 (23.0) (19.4)
Interest charges (62.8) (0.2) (3.5) (9.2) (75.7)
Income taxes (52.9) (3.6) (36.3) 39.6 (53.2)
Cumulative effect of a change
in accounting principle 30.1 - - - 30.1
Net income (loss) 88.1 5.9 79.2 (14.5) 158.7
Strategic KLT Great Plains
KCP&L Energy Gas Other Energy
2002 (millions)
Assets $3,084.5 $ 226.0 $ 49.8 $ 146.4 $3,506.7
Capital and investment expenditures (a) 135.5 2.1 8.7 4.6 150.9
2001
Assets(b) $3,089.4 $ 129.1 $ 57.6 $ 188.3 $3,464.4
Capital and investment expenditures (a) 265.8 1.5 25.0 82.0 374.3
2000
Assets $2,980.9 $ 47.7 $ 239.6 $ 25.7 $3,293.9
Net equity method investments (c) - - 21.7 8.6 30.3
Capital and investment expenditures (a) 406.1 0.2 45.2 30.5 482.0
(a) Capital and investment expenditures reflect annual amounts for the
periods presented.
(b) KCP&L assets do not match the KCP&L assets in the consolidated KCP&L segment
table due to the reclassification of accrued taxes to current income taxes
during consolidation with Great Plains Energy.
(c) Excluding affordable housing limited partnerships.
Consolidated KCP&L
On October 1, 2001, consolidated KCP&L distributed, as a dividend, its ownership
interest in KLT Inc. and GPP to Great Plains Energy. As a result, those
companies are direct subsidiaries of Great Plains Energy and have not been
included in consolidated KCP&L's results of operations and financial position
since October 1, 2001.
The table below reflects summarized financial information for the years 2002 and
2001 concerning consolidated KCP&L's reportable segment. For the year 2000,
consolidated KCP&L's segment information is identical to the Great Plains Energy
segment information presented above. Other includes the operations of HSS and
immaterial intercompany eliminations.
Consolidated
2002 KCP&L Other KCP&L
(millions)
Operating revenues $1,009.9 $ 61.4 $1,071.3
Depreciation and depletion (144.3) (3.6) (147.9)
Interest charges (80.3) (1.7) (82.0)
Income taxes (63.4) 0.5 (62.9)
Cumulative effect of a change
in accounting principle - (3.0) (3.0)
Net income (loss) 102.9 (7.2) 95.7
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Subsidiaries
transferred to Consolidated
2001 KCP&L Other Great Plains Energy KCP&L
(millions)
Operating revenues $ 967.5 $ 66.2 $ 317.2 $1,350.9
Depreciation and depletion (136.3) (2.4) (14.3) (153.0)
Loss from equity investments - (0.1) (0.4) (0.5)
Interest charges (78.1) (1.7) (17.8) (97.6)
Income taxes (51.6) 0.3 20.9 (30.4)
Early extinguishment of debt - - 15.9 15.9
Net income (loss) 98.0 (5.6) 27.3 119.7
Subsidiaries
transferred to Consolidated
KCP&L Other Great Plains Energy KCP&L
2002 (millions)
Assets $ 3,084.5 $ 54.7 $ - $ 3,139.2
Capital and investment expenditures (a) 135.5 1.2 - 136.7
2001
Assets $ 3,092.5 $ 53.1 $ - $ 3,145.6
Capital and investment expenditures (a) 265.8 1.1 85.9 352.8
(a) Capital and investment expenditures reflect annual amounts for the
periods presented.
14. SHORT-TERM BORROWINGS AND SHORT-TERM BANK LINES OF CREDIT
During the first quarter of 2002, Great Plains Energy terminated its $129
million bridge revolving credit facility. Great Plains Energy replaced the
bridge facility with a $205 million syndicated 364-day, revolving credit
facility with a group of banks. During June 2002, Great Plains Energy entered
into a separate $20 million 364-day revolving credit facility with a bank. At
December 31, 2002, Great Plains Energy had $14.0 million of outstanding
borrowings, at an average interest rate of 2.27%, under the facilities. At
December 31, 2001, Great Plains Energy had $124 million of outstanding
borrowings under its $129 million bridge revolving credit facility with a
weighted-average interest rate of 3.0%.
Both facilities require a ratio of Great Plains Energy indebtedness to
consolidated capitalization of not more than 0.65 to 1.0. At December 31, 2002,
the total indebtedness to consolidated capitalization calculated in accordance
with the covenant was 0.55 to 1.0; therefore, the Company was in compliance with
the covenant. A default by Great Plains Energy or any of its significant
subsidiaries on more than $25 million of indebtedness is also a default under
both facilities. Both facilities also require the ratio of consolidated EBITDA
for the four quarters ending on such date to consolidated interest charges be
less than 2.0 to 1.0. At December 31, 2002, the ratio was 5.99; therefore, the
Company was in compliance with the covenant.
Strategic Energy has a $30 million short-term bank credit agreement that expires
in March 2003. At December 31, 2002 and 2001, Strategic Energy had no short-term
borrowings outstanding.
KCP&L's short-term borrowings consist of funds borrowed from banks or through
the sale of commercial paper as needed. As of December 31, 2002, there was no
commercial paper outstanding. The weighted-average interest rate on the $62.0
million of commercial paper outstanding as of December 31, 2001, was 3.2%. Under
minimal fee arrangements, KCP&L's short-term bank lines of credit totaled $126.0
million as of December 31, 2002, and $196.0 million with $134.0 million unused
as of December 31, 2001.
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A default by KCP&L on other indebtedness is a default under these bank line
agreements. Under the terms of certain bank line agreements, KCP&L is required
to maintain a consolidated indebtedness to consolidated capitalization ratio not
greater than 0.65 to 1.0 at all times. At December 31, 2002, the consolidated
indebtedness to consolidated capitalization ratio calculated in accordance with
the covenant was 0.60 to 1.0; therefore, the Company was in compliance with the
covenant.
RSAE has a $25.0 million short-term bank credit agreement that increased from
$22.0 million at December 31, 2001. Great Plains Energy has entered into a
support agreement with RSAE and the lender that ensures adequate capital to
operate RSAE. At December 31, 2002, RSAE had $23.6 million of outstanding
borrowings under the agreement with a weighted-average interest rate of 4.75%.
At December 31, 2001, RSAE had $20.4 million of outstanding borrowings under the
agreement with a weighted-average interest rate of 6.8%.
15. LONG-TERM DEBT AND EIRR BONDS CLASSIFIED AS CURRENT LIABILITIES
KCP&L General Mortgage Bonds
KCP&L has issued mortgage bonds under the General Mortgage Indenture and Deed of
Trust dated December 1, 1986, as supplemented. The Indenture creates a mortgage
lien on substantially all utility plant. Mortgage bonds secure $337.8 million
and $364.8 million of medium-term notes and EIRR bonds (see discussion below) at
December 31, 2002 and 2001, respectively.
In December 2002, KCP&L secured bond insurance policies as a credit enhancement
to its Series 1993A and 1993B EIRR bonds, which aggregate $79.5 million. The
insurance agreement between KCP&L and XL Capital Assurance Inc. (XLCA), the
issuer of the bond insurance policies, provides for reimbursement by KCP&L for
any amounts that XLCA pays under the bond insurance policies. The insurance
agreement contains a covenant that the indebtedness to total capitalization
ratio of KCP&L and its consolidated subsidiaries will not be greater than 0.68
to 1.0. KCP&L is also restricted from issuing additional bonds under its General
Mortgage Indenture if, after giving effect to such additional bonds, the
proportion of secured debt to total indebtedness would be more than 75%, or more
than 50% if the long term rating for such bonds by Standard & Poor's or Moody's
Investors Service would be at or below A- or A3, respectively. In the event of a
default under the insurance agreement, XLCA may take any available legal or
equitable action against KCP&L, including seeking specific performance of the
covenants.
The EIRR bonds are subject to mandatory redemption within 120 to 180 days of a
final determination by the IRS or a court that, as a result of KCP&L failing to
perform any of its agreements relating to the bonds, interest paid or payable on
the bonds is or was includable in the bondholders' gross income for Federal tax
purposes.
KCP&L EIRR Bonds Classified as Current Liabilities
A $31.0 million variable-rate, secured EIRR bond with a final maturity in 2017
is remarketed on a weekly basis, with full liquidity support provided by a
364-day credit facility with one bank. This facility requires KCP&L to
represent, as both a condition to renewal and prior to receiving any funding
under the facility, that no MAC has occurred. KCP&L's available liquidity under
this credit line is not impacted by a decline in credit ratings unless the
downgrade occurs in the context of a merger, consolidation, or sale.
The 4.50% interest rate on KCP&L's $50.0 million Series C unsecured EIRR bonds
expires on August 31, 2003. If the bonds could not be remarketed, KCP&L would be
obligated to either purchase or retire the bonds. The $50.0 million Series C
unsecured EIRR bonds and the $31.0 million discussed previously totaled $81.0
million and were classified as current liabilities at December 31, 2002.
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In 2001, KCP&L remarketed three series of unsecured EIRR bonds at a fixed rate
of 3.25% through August 29, 2002: its Series A and B, $106.5 million due 2015,
and Series D, $40.0 million due 2017. The Series A, B and D EIRR bonds and the
$31.0 million discussed previously totaled $177.5 million and were classified as
current liabilities at December 31, 2001. In 2002, KCP&L remarketed its Series
A, B and D EIRR bonds totaling $146.5 million to a five-year fixed interest rate
of 4.75% ending October 1, 2007.
KCP&L Unsecured Notes
At December 31, 2002, KCP&L had a total of $200.8 million of unsecured EIRR
bonds outstanding. The Series C EIRR bonds, $50.0 million due 2017, have a fixed
rate of 4.50% through August 31, 2003, and are classified as current liabilities
at December 31, 2002. In 2002, KCP&L remarketed its 1998 Series A, B and D EIRR
bonds totaling $146.5 million to a five-year fixed interest rate of 4.75% ending
October 1, 2007. The final maturity for Series A and B bonds is 2015 and the
final maturity for Series D is 2017. At the end of the fixed interest rate
period, the bonds will be subject to mandatory redemption or purchase and KCP&L
anticipates remarketing the bonds at which time a new interest rate period and
mode will be determined. KCP&L has classified the 1998 Series A, B and D EIRR
bonds as long-term debt consistent with the five-year term of the remarketing.
Under the previous one-year remarketing term, these three series were classified
as current liabilities.
Simultaneously with the remarketing, KCP&L entered into an interest rate swap
for the $146.5 million based on LIBOR to effectively create a floating interest
rate obligation. The transaction is a fair value hedge with the assumption of no
ineffectiveness under SFAS No. 133. The fair value of the swap is recorded on
KCP&L's balance sheet as an asset with an offset to the respective debt balances
and has no impact on earnings. Future changes in the fair market value of the
swap will be similarly recorded on the balance sheet with no impact on earnings.
At December 31, 2002, the fair value of the swap was $4.3 million. See Note 17
for additional discussion of the interest rate swap.
KCP&L has a total of $625.0 million of outstanding unsecured senior notes at
December 31, 2002. In 2002, KCP&L issued $225.0 million of 6.0% unsecured senior
notes, maturing in 2007. The proceeds from the issuance were primarily used to
refinance maturing unsecured medium-term notes.
Other Consolidated KCP&L Long-Term Debt
RSAE's long-term debt consists mainly of loans for buildings, leasehold
improvements and equipment.
Other Great Plains Energy Long-Term Debt
KLT Investments' affordable housing notes are collateralized by the affordable
housing investments. Most of the notes also require the greater of 15% of the
outstanding note balances or the next annual installment to be held as cash,
cash equivalents or marketable securities. The equity securities held as
collateral for these notes, included in other investments and nonutility
property on the consolidated balance sheets, were $9.3 million at December 31,
2002 and $12.0 million at December 31, 2001.
Scheduled Maturities
Great Plains Energy's long-term debt maturities for the years 2003 through 2007
are $134.1 million, $60.6 million, $254.2 million, $2.6 million and $227.0
million, respectively. These amounts include consolidated KCP&L's long-term debt
maturities for the years 2003 through 2007, of $124.9 million (including $104.0
million of medium term notes called in early 2003), $55.8 million, $250.9
million, $0.9 million and $226.5 million, respectively. In early 2003, KCP&L
received a total of approximately $100 million as an equity contribution from
Great Plains Energy, which was used to repay the $104.0 million of medium-term
notes included in current maturities at December 31, 2002.
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16. COMMON STOCK EQUITY, PREFERRED STOCK, REDEEMABLE PREFERRED STOCK AND
MANDATORILY REDEEMABLE PREFERRED SECURITIES
Common Stock Equity
In 2002, Great Plains Energy filed a registration statement for the issuance of
an aggregate amount up to $300 million of any combination of senior debt
securities, subordinated debt securities, trust preferred securities,
convertible securities or common stock. During November 2002, Great Plains
Energy issued 6.9 million shares of common stock at $22 per share under this
registration with $151.8 million in gross proceeds to be used for repayment of
debt at Great Plains Energy and KCP&L and for general corporate purposes.
Issuance costs of $6.1 million are reflected in Great Plains Energy's capital
stock premium and expense line in the December 31, 2002, consolidated statement
of capitalization.
Also during November 2002, Great Plains Energy issued 0.4 million shares of
common stock valued at $8.0 million in conjunction with the purchase of an
additional indirect ownership interest in Strategic Energy. See Note 9 for
additional information concerning this transaction.
As of December 31, 2002 and 2001, the Company held 152 shares and 35,916 shares,
respectively, of its common stock. The cost of these shares is included in
treasury stock on the consolidated statements of capitalization. The shares are
held for future distribution upon exercise of options issued in conjunction with
the Company's equity compensation plan.
Great Plains Energy has 3.0 million shares of common stock registered with the
SEC for a Dividend Reinvestment and Direct Stock Purchase Plan (Plan). The Plan
allows for the purchase of common shares by reinvesting dividends or making
optional cash payments. Great Plains Energy currently purchases shares for the
Plan on the open market.
Great Plains Energy has 8.3 million shares of common stock registered with the
SEC for a defined contribution savings plan. The Company matches employee
contributions, subject to limits.
Under the 35 Act, Great Plains Energy and KCP&L can pay dividends only out of
retained or current earnings, unless authorized to do so by the SEC. Under
stipulations with the MPSC and KCC, Great Plains Energy and KCP&L have committed
to maintain consolidated common equity of not less than 30% and 35%,
respectively. In their application under the 35 Act to establish a registered
holding company structure, GPE and KCP&L committed to maintain a consolidated
common equity capitalization of at least 30%.
Great Plains Energy's Articles of Incorporation contain a restriction related to
the payment of dividends in the event common equity falls to 25% of total
capitalization. If preferred stock dividends are not declared and paid when
scheduled, Great Plains Energy could not declare or pay common stock dividends
or purchase any common shares. If the unpaid preferred stock dividends equal
four or more full quarterly dividends, the preferred shareholders, voting as a
single class, could elect the smallest number of Directors necessary to
constitute a majority of the full Board of Directors.
Under the indenture relating to KCP&L's 8.3% Junior Subordinated Deferrable
Interest Debentures, due 2037 (Debentures), which are held by KCP&L Financing I,
KCP&L may not declare or pay any dividends on any shares of its capital stock if
at the time (i) there is an event of default (as defined in the indenture), (ii)
KCP&L is in default with respect to its payment of any obligations under its
guarantee of preferred securities issued by KCP&L Financing I, or (iii) KCP&L
has elected to defer payments of interest on the Debentures.
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In March 2002, Great Plains Energy made a $36.0 million capital contribution to
KCP&L increasing capital stock premium and expense to $75.0 million, which is
reflected in common stock in the KCP&L consolidated statement of capitalization.
In early 2003, Great Plains Energy made an additional capital contribution to
KCP&L of approximately $100 million, which was used to pay down long-term debt.
Preferred Stock
As of December 31, 2002, 1.6 million shares of Cumulative No Par Preferred Stock
and 11 million shares of no par Preference Stock were authorized under Great
Plains Energy's Articles of Incorporation. Great Plains Energy has the option to
redeem the $39.0 million of issued Cumulative Preferred Stock at prices
approximating par or stated value.
Mandatorily Redeemable Preferred Securities
In 1997, KCP&L Financing I (Trust) issued $150,000,000 of 8.3% preferred
securities. The sole asset of the Trust is the $154,640,000 principal amount of
8.3% Junior Subordinated Deferrable Interest Debentures, due 2037, issued by
KCP&L. The terms and interest payments on these debentures correspond to the
terms and dividend payments on the preferred securities. KCP&L deducts these
payments for tax purposes. KCP&L may elect to defer interest payments on the
debentures for a period up to 20 consecutive quarters, causing dividend payments
on the preferred securities to be deferred as well. In case of a deferral,
interest and dividends will continue to accrue, along with quarterly compounding
interest on the deferred amounts. KCP&L may redeem all or a portion of the
debentures at anytime but has not elected to redeem any at this time. If KCP&L
redeems all or a portion of the debentures, the Trust must redeem an equal
amount of preferred securities at face value plus accrued and unpaid
distributions. The back-up undertakings in the aggregate provide a full and
unconditional guarantee of amounts due on the preferred securities.
17. DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, the Company adopted SFAS No. 133. SFAS No. 133 requires that
every derivative instrument be recorded on the balance sheet as an asset or
liability measured at its fair value and that changes in the fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met.
SFAS No. 133 requires that as of the date of initial adoption, the difference
between the fair market value of derivative instruments recorded on the balance
sheet and the previous carrying amount of those derivatives be reported in net
income or other comprehensive income, as appropriate, as a cumulative effect of
a change in accounting principle. The adoption of SFAS No. 133 on January 1,
2001, required the Company to record a $0.2 million expense, net of $0.1 million
of income tax. The Company did not reflect this immaterial amount as a
cumulative effect. This entry increased interest expense by $0.6 million and
reduced purchased power expense by $0.3 million. The Company also recorded $17.4
million, net of $12.6 million of income tax, as a cumulative effect of a change
in accounting principle applicable to comprehensive income for its cash flow
hedges. Cash flow hedges are derivative instruments used to mitigate the
exposure to variability in expected future cash flows attributable to a
particular risk.
Derivative Instruments and Hedging Activities
The Company's activities expose it to a variety of market risks including
interest rates and commodity prices. Management has established risk management
policies and strategies to reduce the potentially adverse effects that the
volatility of the markets may have on its operating results.
The Company's interest rate risk management strategy uses derivative instruments
to adjust the Company's liability portfolio to optimize the mix of fixed and
floating rate debt within an established range. The Company maintains
commodity-price risk management strategies that use derivative
103
instruments to minimize significant, unanticipated earnings fluctuations caused
by commodity price volatility.
The Company's risk management activities, including the use of derivatives, are
subject to the management, direction and control of internal Risk Management
Committees.
Interest Rate Risk Management
KCP&L utilizes interest rate management derivatives to adjust the Company's
liability portfolio to optimize the mix of fixed and floating rate debt within
an established range.
In 2002, KCP&L remarketed its 1998 Series A, B, and D EIRR bonds totaling $146.5
million to a 5-year fixed interest rate of 4.75% ending October 1, 2007.
Simultaneously with the remarketing, KCP&L entered into an interest rate swap
for the $146.5 million based on LIBOR to effectively create a floating interest
rate obligation. The transaction is a fair value hedge with the assumption of no
ineffectiveness under SFAS No. 133. The fair value of the swap is recorded on
KCP&L's balance sheet as an asset with an offset to the respective debt balances
and has no impact on earnings. Future changes in the fair market value of the
swap will be similarly recorded on the balance sheet with no impact on earnings.
At December 31, 2002, the fair value of the swap was $4.3 million.
KCP&L has two interest rate swap agreements in place to fix the interest rate on
$30 million of floating-rate long-term debt. These swaps do not meet the
criteria to qualify for hedge accounting. The swap agreements terminate in 2003
and effectively fix the interest at a weighted-average rate of 3.88%. The fair
market values of these agreements are recorded as current assets or liabilities
and changes in the fair market value of these instruments is recorded as
interest expense in the income statement.
In 2000, KCP&L issued $200 million of unsecured, floating rate medium-term
notes. Simultaneously, KCP&L entered into interest rate cap agreements to hedge
the interest rate risk on the notes. The cap agreements were designated as cash
flow hedges. The difference between the fair market value of the cap agreements
recorded on the balance sheet at initial adoption and the unamortized premium
was reported in interest expense. Both the notes and the cap agreements have
matured.
Commodity Risk Management
KCP&L's risk management policy is to use derivative hedge instruments to
mitigate its exposure to market price fluctuations on a portion of its projected
gas generation requirements for retail and firm wholesale sales. These hedging
instruments are designated as cash flow hedges. The fair market value of these
instruments is recorded as current assets or current liabilities. When the gas
is purchased and to the extent the hedge is effective at mitigating the impact
of a change in the purchase price of gas, the amounts in other comprehensive
income are reclassified to the consolidated income statement. To the extent that
the hedges are not effective, the ineffective portion of the changes in fair
market value are recorded directly in fuel expense.
Strategic Energy maintains a commodity-price risk management strategy that uses
forward physical energy purchases and derivative instruments to minimize
significant, unanticipated earnings fluctuations caused by commodity-price
volatility. An option that was designated as a cash flow hedge expired on
December 31, 2001. The option allowed Strategic Energy to purchase up to 270 MWs
of power at a fixed rate of $21 per MWh. The fair market value of this option
and swap agreements designated as cash flow hedges at January 1, 2001, was
recorded as a current asset and a cumulative effect of a change in accounting
principle in comprehensive income.
As a result of supplying electricity to retail customers under fixed rate
contracts, Strategic Energy's policy is to match customers' demand with fixed
price purchases. In certain markets where Strategic Energy operates, entering
into forward fixed price contracts is cost prohibitive. By entering into swap
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contracts for a portion of its forecasted purchases in these markets, the future
purchase price of electricity is effectively fixed under these swap contracts
protecting Strategic Energy from price volatility. The swap contracts limit the
unfavorable effect that price increases will have on electricity purchases.
Under SFAS No. 133, the majority of the swap agreements are designated as cash
flow hedges resulting in the difference between the market value of energy and
the hedge value being recorded as comprehensive income (loss). To the extent
that the hedges are not effective, the ineffective portion of the changes in
fair market value will be recorded directly in purchased power.
At January 1, 2001, Strategic Energy also had five swap agreements that did not
qualify for hedge accounting. The fair market value of these swaps at January 1,
2001, was recorded as an asset or liability on the consolidated balance sheet
and an adjustment to the cost of purchased power. The change in the fair market
value was recorded in purchased power. All of these swaps expired in 2002.
KLT Gas' risk management policy is to use firm sales agreements or financial
hedge instruments to mitigate its exposure to market price fluctuations on up to
85% of its daily natural gas production. These hedging instruments are
designated as cash flow hedges. The fair market value of these instruments at
January 1, 2001, was recorded as current assets or current liabilities, as
applicable, and the cumulative effect of a change in accounting principle in
comprehensive income. When the gas is sold and to the extent the hedge is
effective at mitigating the impact of a change in the sales price of gas, the
amounts in other comprehensive income are reclassified to the consolidated
income statement. To the extent that the hedges are not effective, the
ineffective portion of the changes in fair market value are recorded directly in
gas revenues. KLT Gas is currently developing gas properties; therefore, no
production was hedged in 2002.
The amounts recorded related to the cash flow hedges in OCI are summarized in
the following tables:
Great Plains Energy activity for 2002
Increase
December 31 (Decrease) in December 31
2001 OCI Reclassified 2002
Assets (millions)
Other current assets $ (0.2) $ 2.7 $ 0.5 $ 3.0
Liabilities and capitalization
Other current liabilities (12.7) 6.1 5.0 (1.6)
Accumulated OCI 12.1 (10.4) (2.6) (0.9)
Deferred income taxes 8.5 (7.2) (2.0) (0.7)
Other deferred credits (7.7) 8.8 (0.9) 0.2
Consolidated KCP&L activity for 2002
Increase
December 31 (Decrease) in December 31
2001 OCI Reclassified 2002
Assets (millions)
Other current assets $ (0.2) $ 0.6 $ (0.1) $ 0.3
Liabilities and capitalization
Other current liabilities (0.1) 0.1 - -
Accumulated OCI 0.2 (0.4) - (0.2)
Deferred income taxes 0.1 (0.3) 0.1 (0.1)
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Great Plains Energy activity for 2001
Cumulative
Effect to Increase
January 1, (Decrease) in December 31
2001 OCI Reclassified 2001
Assets (millions)
Other current assets $ 44.5 $ (20.6) $ (24.1) $ (0.2)
Liabilities and capitalization
Other current liabilities (6.8) (20.8) 14.9 (12.7)
Accumulated OCI (17.4) 25.6 3.9 12.1
Deferred income taxes (12.7) 18.1 3.1 8.5
Other deferred credits (7.6) (2.3) 2.2 (7.7)
Consolidated KCP&L activity for 2001
Cumulative Transferred
Effect to Increase to Great
January 1, (Decrease) in Plains December 31
2001 OCI Reclassified Energy 2001
Assets (millions)
Other current assets $ 44.5 $ (20.6) $ (24.1) $ - $ (0.2)
Liabilities and capitalization
Other current liabilities (6.8) (15.7) 7.4 15.0 (0.1)
Accumulated OCI (17.4) 23.4 7.6 (13.4) 0.2
Deferred income taxes (12.7) 16.6 5.6 (9.4) 0.1
Other deferred credits (7.6) (3.7) 3.5 7.8 -
Reclassified to earnings
Great Plains Energy Consolidated KCP&L
2002 2001 2002 2001
(millions)
Gas revenues $ (0.2) $ (3.9) $ - $ (3.7)
Fuel expense 0.1 - 0.1 -
Purchased power expense (5.4) 13.1 - 20.4
Minority interest 0.9 (2.2) - (3.5)
Income taxes 2.0 (3.1) (0.1) (5.6)
OCI $ (2.6) $ 3.9 $ - $ 7.6
18. JOINTLY-OWNED ELECTRIC UTILITY PLANTS
KCP&L's share of jointly-owned electric utility plants as of December 31, 2002,
is as follows (in millions of dollars):
Wolf Creek LaCygne Iatan
Unit Units Unit
KCP&L's share 47% 50% 70%
Utility plant in service $1,360 $ 324 $ 260
Estimated accumulated depreciation 584 218 170
Nuclear fuel, net 22 - -
KCP&L's accredited capacity--MWs 550 681 469
Each owner must fund its own portion of the plant's operating expenses and
capital expenditures.
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KCP&L's share of direct expenses is included in the appropriate operating
expense classifications in the Great Plains Energy and Consolidated KCP&L
Statements of Income.
19. DTI HOLDINGS, INC. AND SUBSIDIARIES
On December 31, 2001, a subsidiary of KLT Telecom, DTI Holdings, Inc. (Holdings)
and its subsidiaries, Digital Teleport Inc. (Digital Teleport) and Digital
Teleport of Virginia, Inc., filed separate voluntary petitions in Bankruptcy
Court for the Eastern District of Missouri for reorganization under Chapter 11
of the U.S. Bankruptcy Code which cases have been procedurally consolidated.
Holdings and its two subsidiaries are collectively called "DTI". The filings
enable DTI to continue to conduct its business operations while attempting to
resolve its financial obligations. DTI is a telecommunications company
headquartered in St. Louis that focuses on providing access and connectivity to
secondary and tertiary markets. KLT Telecom agreed to provide up to $5 million
in debtor-in-possession financing (DIP Loan) to Digital Teleport for a term of
18 months during the bankruptcy process if it achieves certain financial goals.
If KLT Telecom provides loans under the DIP Loan agreements, it will have
priority repayment over most other Digital Teleport obligations to the extent of
such DIP loan advances. The Bankruptcy Court approved the DIP Loan on February
18, 2002, but no advances have been made under the DIP Loan to date.
KLT Telecom originally acquired a 47% interest in DTI in 1997. On February 8,
2001, KLT Telecom acquired control of DTI by purchasing shares from the majority
shareholder, Richard D. Weinstein (Weinstein), increasing its ownership to
83.6%. In connection with the February 8, 2001, Purchase Agreement, KLT Telecom
granted Weinstein a put option. The put option allows Weinstein to sell his
remaining shares to KLT Telecom during a period beginning September 1, 2003, and
ending August 31, 2005. The put option provides for an aggregate exercise price
for these remaining shares equal to their fair market value with an aggregate
floor amount of $15 million. The floor amount of the put option was fully
reserved during the fourth quarter of 2001, as discussed below.
Prior to the DTI bankruptcy filings, KLT Telecom's $175.2 million book value of
its investment in, and loans to, DTI included a February 1, 2001, $94 million
loan to Holdings, the proceeds of which were used by Holdings to repurchase a
portion of its Senior Discount Notes, and $47 million in principal amount of
loans to Digital Teleport under various arrangements. The $47 million of loans
are secured, to the extent permitted by law or agreement, by Digital Teleport
Inc.'s assets. In December 2001, KLT Telecom converted $84 million of the $94
million loan to Holdings, plus accrued interest of approximately $8.5 million,
to an equity contribution to Holdings.
The Company obtained from legal counsel an opinion which stated that, based upon
and subject to the analysis, limitations and qualifications set forth in the
opinion, a court applying Missouri law and acting reasonably in a properly
presented and argued case would hold that the corporate veil of DTI would not be
pierced with respect to Great Plains Energy and its subsidiaries and therefore
neither Great Plains Energy nor its subsidiaries would be required to fund,
beyond KLT Telecom's current equity investment in or loans to DTI, directly,
indirectly or through guarantees, any of the present, past or future
liabilities, commitments or obligations of DTI, except for the DIP Loan and
certain performance bonds.
In December 2002, Digital Teleport entered into an agreement to sell
substantially all of its assets (Asset Sale) to CenturyTel Fiber Company II, LLC
(Century Tel), a nominee of CenturyTel, Inc. (Asset Purchase Agreement). The
Asset Sale was approved by the Bankruptcy Court on February 13, 2003, but the
Asset Purchase Agreement contains conditions to closing, which include among
other items the receipt of all necessary regulatory approvals, which must either
be satisfied or waived by July 15, 2003. The Asset Sale, if it is consummated,
will produce $38 million of gross sale proceeds, subject to certain closing
adjustments, $3.8 million of which will be escrowed (Escrow Funds). The Escrow
Funds will be disbursed 180 days following the closing of the Asset Sale,
subject to any reduction for the amount of
107
claims by Century Tel for breaches of representations and warranties of Digital
Teleport under the Asset Purchase Agreement. Assuming full release of that
escrow, the proceeds of the Asset Sale together with Digital Teleport's cash on
hand are expected to total approximately $47 million (Anticipated Assets).
The Company believes that KLT Telecom has a valid and perfected security
interest in virtually all of Digital Teleport's assets to secure repayment of
approximately $50 million (including accrued interest) of indebtedness which
would entitle KLT Telecom to receive all of the Anticipated Assets, leaving no
distribution to other creditors of Digital Teleport. The Bankruptcy Court,
however, has not ruled on the validity of KLT Telecom's security interest in
Digital Teleport's assets, and there is a possibility that the Bankruptcy Court
would disallow this security interest or otherwise subordinate KLT Telecom's
claims to other Digital Teleport creditors' claims. To expedite the Digital
Teleport bankruptcy case process, including the resolution of creditors' claims
and possible claims against the Company, KLT Telecom, KLT Inc., KCP&L, Great
Plains Energy, Digital Teleport and the Official Unsecured Creditors Committee
of Digital Teleport entered into a Settlement Agreement as of December 23, 2002
(Teleport Settlement Agreement). The Teleport Settlement Agreement does not
resolve any claims that Holdings or its creditors may have against the Company;
however, as discussed below, settlement discussions have commenced in the
Holdings bankruptcy case. The Teleport Settlement Agreement, if approved by the
Bankruptcy Court, resolves all material issues and disputes among the parties to
that agreement. Under the Teleport Settlement Agreement, Digital Teleport, the
Creditors Committee and three members of the Creditors Committee holding claims
against Digital Teleport will release claims and possible causes of action
against the Company and any other entity currently or previously a member of the
Great Plains Energy or KCP&L consolidated tax group, and creditors receiving
payments will be deemed to receive such payments in full satisfaction of their
claims against Digital Teleport. In addition, the Teleport Settlement Agreement
provides for the receipt by KLT Telecom of an assignment of claims of Digital
Teleport, the Creditors Committee and the bankruptcy estate of Digital Teleport
against Weinstein, any officer or director of Digital Teleport, or any other
person or entity.
The Teleport Settlement Agreement does not purport to resolve (i) three priority
proofs of claim by the Missouri Department of Revenue in the aggregate amount of
$2,848,446 (collectively, the MODOR Claim); (ii) an unsecured proof of claim by
Gary Douglass, the former Chief Financial Officer of DTI, in the amount of
$2,055,900 (Douglass Claim); or (iii) any claims by Holdings against KLT
Telecom, KLT Inc., KCP&L and Great Plains Energy, or by creditors of Holdings,
including the holders of $265 million of Senior Discount Notes of Holdings as to
which no proof of claim has been filed in the Digital Teleport bankruptcy
proceeding. Digital Teleport has filed objections to the Douglass Claim and
MODOR Claim asserting that each claim should be disallowed in full. The Teleport
Settlement Agreement provides for a pro rata distribution from the Anticipated
Assets ranging from 82.5% to 90% of the sum of (i) the non-priority unsecured
claims of approximately $10.3 million held by Digital Teleport's trade creditors
(Trade Claims), (ii) an amended claim of $1 million by Union Electric Co. d/b/a
Ameren UE (Amended Ameren Claim), and (iii) the allowed, non-priority unsecured
portions, if any, of the Douglass Claim and the MODOR Claim, with the exact
percentage being determined by the extent to which the MODOR Claim and the
Douglass Claim are resolved in the Digital Teleport bankruptcy proceeding and
are not disallowed. Upon approval of the Teleport Settlement Agreement by the
Bankruptcy Court, after the payment of administrative, secured and priority
claims (which claims, excluding the MODOR Claim, are estimated to total
approximately $3 million) the balance of the Anticipated Assets is expected to
be distributed to KLT Telecom, subject to the resolution of the MODOR Claim and
the Douglass Claim, and subject, further, to a possible payment to the creditors
of Holdings as described below.
Upon closure of the proposed Asset Sale, KLT Telecom will pay a base sum of $1.6
million to certain executives of Digital Teleport for entering into employment
agreements required as a condition precedent to the proposed Asset Sale. This
sum will be increased based upon the amount of Escrow Funds released to Digital
Teleport, but the sum is not anticipated to exceed $2.5 million.
108
Digital Teleport and Digital Teleport of Virginia have prepared a Chapter 11
plan (Chapter 11 Plan) and disclosure statement reflecting the Asset Sale and
Teleport Settlement Agreement and expect that a confirmation hearing will be
held by the Bankruptcy Court in May 2003. While confirmation of the Chapter 11
Plan is subject to a vote of creditors and the approval of the Bankruptcy Court,
it is currently expected that, if the Bankruptcy Court approves the Teleport
Settlement Agreement, the Chapter 11 Plan will be confirmed due to the level of
support for the plan by certain members of the Creditors Committee. The Chapter
11 Plan contemplates that Digital Teleport and Digital Teleport of Virginia will
be liquidated after distribution of those companies' assets to their creditors
pursuant to the Chapter 11 Plan and the Teleport Settlement Agreement.
In an objection to a motion by Digital Teleport for an extension of time in
which to propose a Chapter 11 plan, the largest creditor of Holdings (the
Creditor) asserted that Holdings, Digital Teleport and their creditors have
claims against KLT Telecom, KLT Inc., KCP&L and Great Plains Energy based on
theories of breach of contract, fraudulent conveyance, recharacterization of
debt, subordination and breach of fiduciary duty. Among other things, the
Creditor asserted that certain tax benefits should have been paid to Holdings
and Digital Teleport, rather than to KLT Telecom as provided in the October 1,
2001, Great Plains Energy tax allocation agreement. The Creditor has not
otherwise pursued these claims at this time, and the Company believes that it
has meritorious defenses to these claims. Further, Holdings, the principal
creditors of Holdings (including the Creditor), KLT Telecom, KLT Inc., KCP&L,
and Great Plains Energy are in the process of negotiating a separate settlement
agreement which, if finalized and approved by the Bankruptcy Court, is
anticipated to resolve the Holdings bankruptcy case and any claims that might be
asserted in the Holdings bankruptcy case against the Company, and to provide
payment to the creditors of Holdings from a portion of the proceeds KLT Telecom
otherwise would receive from the Asset Sale. If the separate settlement
agreement is finalized, it is anticipated that the Chapter 11 Plan will be
modified to add Holdings as a proponent and to include the terms of the Holdings
Settlement Agreement.
The ultimate impact of the Asset Sale, the Teleport Settlement Agreement and/or
the potential separate settlement agreement in the Holdings bankruptcy case will
not be determined until final resolution of the matters set forth above.
The operating results of DTI have been included for the period February 8, 2001
(date of acquisition) through September 30, 2001, for consolidated KCP&L and
through December 31, 2001, for Great Plains Energy. Because of DTI's filing for
bankruptcy protection under the U.S. Bankruptcy Code, KLT Telecom no longer has
control over nor can it exert significant control over DTI. As a consequence, as
of December 31, 2001, DTI was de-consolidated and is presented on the cost
basis. Consequently, KLT Telecom did not include in its financial results the
ongoing results of operations, earnings or losses incurred by DTI during 2002
and will not do so during the remaining period of the DTI bankruptcy.
During the fourth quarter of 2001, the following were recognized in the
financial statements of the Company related to the activities of DTI:
o Wrote off $60.8 million of goodwill related to the purchase of DTI in
February 2001.
o Recorded a $342.5 million impairment of DTI's assets resulting in a
negative KLT Telecom investment of $228.1 million.
o The Company recorded a reduction in the negative investment of $207.5
million. This reduction resulted in a net impairment charge of $195.8
million ($342.5 million impairment of DTI's assets plus the $60.8
million write-off of goodwill less the $207.5 million adjustment of KLT
Telecom's investment) and a remaining negative investment of $20.6
million. This remaining negative investment represents the possible
commitments and guarantees relating to DTI including the $5 million for
DIP financing and the $15 million aggregate floor of the Weinstein put
option. The
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$20.6 million is included in Deferred Credits and Other Liabilities -
Other on Great Plains Energy's consolidated balance sheet at both
December 31, 2001 and 2002.
The net of the above items resulted in Great Plains Energy recording in 2001 a
$195.8 million loss on property and $55.8 million of related income tax
benefits. The $55.8 million income tax benefits applicable to this net write-off
is net of a $15.8 million tax valuation allowance due to the uncertainty of
recognizing future tax deductions while in the bankruptcy process. The $55.8
million income tax benefit reflects the impact of DTI's 2001 abandonment of $104
million of its long-haul assets in addition to other expected tax deductions. If
additional assets of DTI are sold or abandoned during the bankruptcy process, or
additional tax losses not already reflected are incurred by DTI, KLT Telecom
will record tax benefits associated with these additional tax deductions at that
time. The amount of additional tax deductions will be limited by KLT Telecom's
tax basis in DTI. DTI's tax losses have continued to be included in Great Plains
Energy's consolidated tax return. In accordance with the tax allocation
agreement with DTI, cash tax savings are shared with DTI only to the extent DTI
generates taxable income to utilize such losses. The Company will reconsider the
$15.8 million tax valuation allowance at the conclusion of the bankruptcy
process.
The following are condensed DTI consolidated financial statements for the year
ended December 31, 2001:
Net Assets
De-consolidated by
DTI Consolidated Balance Sheet December 31, 2001 KLT Telecom
(millions)
Assets
Property and equipment, net $ 46.9
Other 6.1
Total assets $ 53.0 $ (53.0)
Liabilities
Current liabilities not subject to compromise $ 0.2 0.2
Liabilities subject to compromise
Loans from KLT Telecom 57.0
Deferred revenue 45.8 45.8
Interest payable to KLT Telecom 3.0
Other 31.9 31.9
Senior discount notes
Held by KLT Telecom 8.5
Held by others 203.2 203.2
Total liabilities subject to compromise 349.4
Stockholders' equity (deficit) (296.6)
Total liabilities and stockholders'
equity (deficit) $ 53.0 $ 228.1
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DTI Consolidated Statement of Income for the Year Ended December 31, 2001
(millions)
Telecommunications service revenues $ 17.4
Operating expenses
Provision for impairment of long-lived assets (a) (342.5)
Other (44.2)
Interest expense net of interest income (31.9)
Loss before income tax benefit and extraordinary item (401.2)
Income tax benefit 37.9
Gain on early extinguishment of debt 57.2
Net loss $(306.1)
(a) The write-down of assets was determined by DTI in accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". The write-down reflects the abandonment of $104
million of long-haul assets and the impairment of the rest of the
telecommunication network and equipment. The impairment is primarily a
result of the downward trends in certain segments of the economy,
particularly with respect to previously expected growth of demand in
technology and telecommunications, the accompanying deterioration in value
of DTI's operating assets and its Chapter 11 filing. The fair value used in
the impairment analysis was derived primarily from the discounted cash
flows from continued future operations.
DTI Consolidated Statement of Cash Flows for the Year Ended December 31, 2001
(millions)
Net cash used in operating activities $ (10.8)
Net cash used in investing activities (41.2)
Cash provided by financing activities 42.9
Net decrease in cash and cash equivalents $ (9.1)
Reconciliation of DTI consolidated financial statements to DTI financial
results included in Great Plains Energy consolidated financial statements
(millions)
Loss before income tax benefit and extraordinary item $ (401.2)
Loss before consolidation on February 8, 2001 7.1
Goodwill write-off (60.8)
Reduction to KLT Telecom's negative investment in DTI 207.5
Total $ (247.4)
Net DTI write-off $ (195.8)
DTI operational loss, excluding net write-off (51.6)
Total equal to the above (247.4)
Other (1.0)
Total included in loss before income taxes (248.4)
Income tax benefits recorded by KLT Telecom 74.6
Loss before extraordinary item (173.8)
Early extinguishment of debt 15.9
DTI loss included in Great Plains Energy
consolidated net loss $ (157.9)
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Extraordinary Item - Early Extinguishment of Debt
The KLT Telecom gain on early extinguishment of debt resulted from DTI's
completion of a successful tender offer for 50.4 percent of its outstanding
Senior Discount Notes prior to KLT Telecom acquiring a majority ownership in
DTI. The $15.9 million early extinguishment of debt has been reduced by the
losses previously recorded by DTI but not reflected by KLT Telecom, and is net
of $9.1 million of income tax.
20. QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly operating results for Great Plains Energy and consolidated KCP&L are
identical prior to the October 1, 2001, formation of a holding company.
Great Plains Energy
Quarter
1st 2nd 3rd 4th
2002 (millions)
Operating revenue $ 358.8 $ 465.4 $ 585.0 $ 452.7
Operating income 15.3 78.4 135.9 62.1
Income (loss) before cumulative effect (2.9) 36.0 68.8 27.3
Net income (loss) (5.9) 36.0 68.8 27.3
Basic and diluted earning (loss) per common
share before cumulative effect $ (0.05) $ 0.57 $ 1.11 $ 0.41
Basic and diluted earning (loss) per common
share $ (0.10) $ 0.57 $ 1.11 $ 0.41
2001
Operating revenue $ 280.2 $ 346.5 $ 480.9 $ 354.3
Operating income (loss) 7.4 75.8 131.7 (157.7)
Income (loss) before extraordinary item (3.0) 36.2 55.6 (128.8)
Net income (loss) 12.9 36.2 55.6 (128.9)
Basic and diluted earning (loss) per common
share before extraordinary item $ (0.06) $ 0.58 $ 0.89 $ (2.09)
Basic and diluted earning (loss) per common
share $ 0.20 $ 0.58 $ 0.89 $ (2.09)
Net income (loss) in the fourth quarter of 2001 includes a loss of $140.0
million due to the net write-off of the investment in DTI.
Consolidated KCP&L
Quarter
1st 2nd 3rd 4th
2002 (millions)
Operating revenue $ 212.2 $ 264.2 $ 351.5 $ 243.4
Operating income 6.7 66.9 124.6 50.5
Income (loss) before cumulative effect (8.0) 27.1 62.3 17.3
Net income (loss) (11.0) 27.1 62.3 17.3
2001
Operating revenue $ 280.2 $ 346.5 $ 480.9 $ 243.3
Operating income 7.4 75.8 131.7 39.8
Income (loss) before cumulative effect (3.0) 36.2 55.6 15.0
Net income 12.9 36.2 55.6 15.0
112
First quarter 2002 income statement information as reported in the March 31,
2002, Form 10-Q has been restated to reflect the cumulative effect to January 1,
2002, of a change in accounting principle for the $3.0 million RSAE goodwill
write-down. Certain reclassifications have been made to previously reported
amounts in the 2001 Form 10-Q's, reflecting reclassifications of revenues and
purchased power recorded by Strategic Energy. There is no impact to net income
as a result of these adjustments. Revenues reported in the 2001 Form 10-Q's were
$281.9 million, $354.3 million and $492.6 million for the first, second and
third quarters of 2001, respectively. The quarterly data is subject to seasonal
fluctuations with peak periods occurring during the summer months.
113
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Great Plains Energy Incorporated
We have audited the accompanying consolidated balance sheet and consolidated
statement of capitalization of Great Plains Energy Incorporated and subsidiaries
(the "Company") as of December 31, 2002, and the related consolidated statements
of income, comprehensive income, retained earnings and cash flows for the year
then ended. Our audit also included the 2002 financial statement schedules
listed in the Index at Item 15. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Great Plains Energy
Incorporated and subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedules, when considered in relation
to the 2002 basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
As discussed in Note 6 to the consolidated financial statements, on January 1,
2002, the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
/s/DELOITTE & TOUCHE LLP
Kansas City, Missouri
February 27, 2003
114
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Kansas City Power & Light Company
We have audited the accompanying consolidated balance sheet and consolidated
statement of capitalization of Kansas City Power & Light Company and
subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of income, comprehensive income, retained earnings and
cash flows for the year then ended. Our audit also included the 2002 financial
statement schedules listed in the Index at Item 15. These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Kansas City Power & Light
Company and subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedules, when considered in relation
to the 2002 basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
As discussed in Note 6 to the consolidated financial statements, on January 1,
2002, the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
/s/DELOITTE & TOUCHE LLP
Kansas City, Missouri
February 27, 2003
115
Report of Independent Accountants
To the Shareholders and the Board of Directors of
Great Plains Energy Incorporated:
We have audited the accompanying consolidated balance sheet and statement of
capitalization of Great Plains Energy Incorporated and Subsidiaries as of
December 31, 2001, and the related consolidated statements of income,
comprehensive income, retained earnings, and cash flows for each of the two
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
consolidated financial statements of DTI Holdings, Inc. and Subsidiaries
(Debtors-in-Possession) (an 83.6 percent owned entity), as of and for the year
ended December 31, 2001, which statements reflect total assets of $53.0 million
as of December 31, 2001 and total revenues of $17.4 million and a net loss of
$306.1 million for the year ended December 31, 2001. Those statements were
audited by other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for DTI
Holdings, Inc. and Subsidiaries is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Great Plains Energy Incorporated
and Subsidiaries at December 31, 2001, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2001
in conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 17 to the consolidated financial statements, the Company
adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", as amended on January 1, 2001. As discussed in Note 7 to the
consolidated financial statements, the Company changed its method of accounting
for pensions in 2000.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Kansas City, Missouri
February 5, 2002, except with respect to Note 13, as to which the date is May
22, 2002, and except with respect to the 2001 and 2000 transitional disclosures
relating to the adoption of Statement of Financial Accounting Standards No. 142
as described in Note 6, as to which the date is February 21, 2003
116
Report of Independent Accountants
To the Shareholder and the Board of Directors of
Kansas City Power & Light Company:
We have audited the accompanying consolidated balance sheet and statement of
capitalization of Kansas City Power & Light Company (a wholly-owned subsidiary
of Great Plains Energy Incorporated) and Subsidiaries as of December 31, 2001,
and the related consolidated statements of income, comprehensive income,
retained earnings and cash flows for each of the two years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the consolidated
financial statements of DTI Holdings, Inc. and Subsidiaries
(Debtors-in-Possession) (an 83.6 percent owned entity), as of and for the year
ended December 31, 2001, which statements reflect total assets of $53.0 million
as of December 31, 2001 and total revenues of $17.4 million and a net loss of
$306.1 million for the year ended December 31, 2001. Those statements were
audited by other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for DTI
Holdings, Inc. and Subsidiaries is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Kansas City Power & Light Company
and Subsidiaries at December 31, 2001, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2001
in conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 17 to the consolidated financial statements, the Company
adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", as amended on January 1, 2001. As discussed in Note 7 to the
consolidated financial statements, the Company changed its method of accounting
for pensions in 2000.
As discussed in Note 1 to the consolidated financial statements, on October 1,
2001 the Company completed its corporate reorganization creating a holding
company structure.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Kansas City, Missouri
February 5, 2002, except with respect to Note 13, as to which the date is May
22, 2002, and except with respect to the 2001 transitional disclosures relating
to the adoption of Statement of Financial Accounting Standards No. 142 as
described in Note 6, as to which the date is February 21, 2003
117
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of DTI Holdings, Inc.
We have audited the balance sheets of DTI Holdings, Inc. and subsidiaries
(Debtors-in-Possession) (the "Company") as of December 31, 2001, and the related
statements of operations and stockholder's equity (deficit) and of cash flows
for the year ended June 30, 2000, the six-month period ended December 31, 2000
and the year ended December 31, 2001. These financial statements (which are not
included herein) are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of DTI Holdings, Inc. and subsidiaries as of
December 31, 2001, and the results of their operations and their cash flows for
the year ended June 30, 2000, the six-month period ended December 31, 2000 and
the year ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to those financial statements, the Company has filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code. The financial
statements do not purport to reflect or provide for the consequences of the
bankruptcy proceedings. In particular, such financial statements do not purport
to show (a) as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to prepetition liabilities, the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company; or (d) as to operations, the
effect of any changes that may be made in its business.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to those financial
statements, the Company's recurring losses from operations, negative working
capital, and stockholders' capital deficiency raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also discussed in Note 1 to those financial statements. The
financial statements do not include adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 3 to those financial statements, the Company determined
that the carrying value of its long-lived assets had been impaired during the
year. In accordance with Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed of,
the Company recorded an impairment charge of approximately $342 million at
December 31, 2001.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
January 30, 2002
118
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
General Note
Pursuant to General Instruction G to Form 10-K, the Great Plains Energy
information required by Part III (Items 10, 11, 12 and 13) of Form 10-K will
either be (i) incorporated by reference from the Definitive Proxy Statement for
Great Plains Energy's 2002 Annual Meeting of Shareholders, to be filed with the
SEC not later than March 31, 2003, or (ii) included in an amendment to this
report filed with the SEC on Form 10-K/A not later than 120 days after December
31, 2002.
The following information is provided in connection with KCP&L.
Directors
The directors of KCP&L are the same as those for Great Plains Energy. The ten
nominees listed below are all of the current directors and have consented to
stand for election to the Board of Great Plains Energy. If they are elected to
serve by the shareholders of Great Plains Energy at the Annual Meeting on May 6,
2003, they will also be elected to the KCP&L Board.
Nominees for Directors
Bernard J. Beaudoin Director since 1999
Mr. Beaudoin, 62, is Chairman of the Board, President and Chief
Executive Officer of Great Plains Energy. He is also Chairman of the
Board and Chief Executive Officer of KCP&L. He was elected Chairman of
the Board and named Chief Executive Officer of Great Plains Energy in
2001. He was elected President in 1999. Previously, he was President of
KLT Inc., a wholly-owned subsidiary of Great Plains Energy. Mr.
Beaudoin served as a member of the Executive Committee during 2002.
David L. Bodde Director since 1994
Dr. Bodde, 60, holds the Charles N. Kimball Chair in Technology and
Innovation (since 1996) at the Bloch School of Business, University of
Missouri-Kansas City. He serves on the board of The Commerce Funds. Dr.
Bodde served as a member of the Audit and Governance Committees during
2002.
Mark A. Ernst Director since 2000
Mr. Ernst, 44, is Chairman of the Board, President and Chief Executive
Officer of H&R Block Inc., a provider of tax preparation, investment,
mortgage and accounting services. He was elected Chairman of the Board
in 2002, Chief Executive Officer in 2001 and President in 1999.
Previously, he was Chief Operating Officer of H&R Block. He also serves
on the board of SCS Transportation. Mr. Ernst served on the Audit and
Compensation Committees during 2002.
Randall C. Ferguson, Jr. Director since 2002
Mr. Ferguson, 51, is the retired Senior Location Executive (1998-2003)
for the IBM Western Region. IBM is a leading creator and manufacturer
of advanced information technologies, including computer systems,
software, network systems, storage devices and microelectronics. Mr.
Ferguson served on the Audit Committee during 2002.
119
William K. Hall Director since 2000
Mr. Hall, 59, is Chairman and Chief Executive Officer (since 2000) of
Procyon Technologies Inc., a Chicago-based holding company with
investments in the aerospace and defense industries. He was previously
President and Chief Executive Officer of Falcon Building Products, Inc.
Mr. Hall serves on the boards of Actuant Corporation, A. M. Castle &
Co., GenCorp and Woodhead Industries. Mr. Hall served on the
Compensation and Executive Committees during 2002.
Luis A. Jimenez Director since 2001
Mr. Jimenez, 58, is Senior Vice President and Chief Strategy Officer
(since 1999) of Global Growth and Futures Strategy with Pitney Bowes, a
Fortune 300 provider of messaging solutions, office products and
financial services. Previously, he was Vice President and Practice
Leader, Telecommunications and Media, Latin America, for Arthur D.
Little, Inc., an international management consulting firm. Mr. Jimenez
served on the Governance Committee during 2002.
James A. Mitchell Director since 2002
Mr. Mitchell, 61, is the Executive Fellow, Leadership (since 1999), at
the Center for Ethical Business Cultures. He is the retired Executive
Vice President of Marketing and Products (1993-1999) of American
Express Company. Mr. Mitchell served on the Governance Committee during
2002.
William C. Nelson Director since 2000
Mr. Nelson, 65, is Chairman (since 2001) of George K. Baum Asset
Management, an asset management advisor. He is the retired Chairman
(1990-2000) of Bank of America Midwest. He serves on the board of DST
Systems. Mr. Nelson served on the Audit and Compensation Committees
during 2002.
Linda H. Talbott Director since 1983
Dr. Talbott, 62, is President (since 1975) of Talbott & Associates,
international consultants in strategic planning, philanthropic
management and development to foundations, corporations, and the
nonprofit sector. Dr. Talbott served as a member of the Executive and
Governance Committees during 2002.
Robert H. West Director since 1980
Mr. West, 64, is the retired Chairman (1986-1999) of Butler
Manufacturing Company, a supplier of non-residential building systems,
specialty components, and construction services. He serves on the
boards of Astec Industries, Inc., Burlington Northern Santa Fe
Corporation and Commerce Bancshares, Inc. Mr. West served as a member
of the Audit, Compensation and Executive Committees during 2002.
Executive Officers
The information with respect to executive officers of the registrants contained
in this Form 10-K under "Item 1. Business-Executive Officers of Registrants" is
incorporated herein by reference.
120
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table contains compensation data for KCP&L executive
officers for fiscal years ended December 31, 2002, 2001 and 2000.
Annual Compensation Long Term Compensation
Awards Payouts
Other Annual Restricted Securities LTIP All Other
Compensation Stock Award(s) Underlying Payouts Compensation
Name and Principal Position Year Salary($) Bonus ($) ($) (2) ($) Options/SARs ($) (3)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Bernard J. Beaudoin (1) 2002 415,000 186,750 0 55,000 0 51,486
Chairman of the Board and 2001 400,000 0 0 55,000 0 36,971
Chief Executive Officer 2000 325,000 162,535 0 0 0 33,174
Andrea F. Bielsker (1) 2002 200,000 60,000 0 13,000 0 18,569
Senior Vice President-Finance, 2001 180,000 0 0 13,000 0 15,565
Chief Financial Officer and 2000 140,000 63,991 0 0 0 11,213
Treasurer
William H. Downey (1)(4) 2002 260,000 78,000 0 20,000 0 14,382
President 2001 250,000 0 0 20,000 0 5,645
2000 65,000 54,000 0 0 0 698
Stephen T. Easley 2002 200,000 50,000 0 13,000 0 5,242
Vice President-Generation 2001 160,000 0 0 6,000 0 6,833
Services 2000 115,455 63,000 0 0 0 4,980
Jeanie Sell Latz (1) 2002 210,000 63,000 0 13,000 0 29,353
Secretary 2001 200,000 0 0 13,000 0 27,056
2000 180,000 83,506 0 0 0 19,121
(1) Includes compensation received from Great Plains Energy and KCP&L.
(2) While the five named executive officers receive certain perquisites
from the Company, such perquisites did not reach in any of the reported
years the threshold for reporting of the lesser of either $50,000 or
ten percent of salary and bonus set forth in the applicable rules of
the Securities and Exchange.
(3) For 2002, amounts include:
* Flex dollars under the Flexible Benefits Plan: Beaudoin - $18,310;
Bielsker -$11,707; Downey - $3,867; Easley - $2,104; and
Latz - $17,867
* Deferred Flex Dollars: Beaudoin - $16,157; and Downey - $650
* Above-market interest paid on deferred compensation: Beaudoin -
$4,569; Bielsker - $862; Downey - $2,065; and Latz - $5,186
* Great Plains Energy contribution under the Great Plains Energy
Employee Savings Plus Plan: Beaudoin - $5,563; Bielsker - $5,521;
Downey -$5,563; Easley - $3,138; and Latz - $5,533
* Contribution to Deferred Compensation Plan: Beaudoin - $6,887;
Bielsker - $479; Downey - $2,237; and Latz - $767
(4) Mr. Downey was employed as Executive Vice President-KCPL and
President-KCPL Delivery effective September 25, 2000.
121
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential
Realizable Value
of Assumed Annual Alternative
Rates of Stock to (f) and
Price Appreciation (g): Grant
Individual Grants For Option Term Date Value
Number of Percent of Total
Securities Options/SARs
Underlying Granted to Exercise or Grant Date
Options/SARs Employees in Base Price Expiration 5% 10% Present
Name Granted (#) Fiscal Year ($/Sh) Date ($) ($) Value ($) (1)
(a) (b) (c) (d) (e) (f) (g) (f)
Bernard J. Beaudoin 55,000 30.4% $24.90 02-05-2012 $ 173,173
Andrea F. Bielsker 13,000 7.2% $24.90 02-05-2012 $ 40,932
William H. Downey 20,000 11% $24.90 02-05-2012 $ 62,972
Stephen T. Easley 13,000 7.2% $24.90 02-05-2012 $ 40,932
Jeanie S. Latz 13,000 7.2% $24.90 02-05-2012 $ 40,932
(1) The grant date valuation was calculated by using the binomial option
pricing formula, a derivative of the Black-Scholes model. The
underlying assumptions used to determine the present value of the
option were as follows:
Annualized Stock Volatility: 27.503%
Time of Exercise (Option Term): 10 years
Risk Free Interest Rate: 4.57%
Exercise Price (Equal to the Fair Market Value): $24.90
Average Dividend Yield: 7.68%
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
Shares
Acquired Number of Unexercised Value of Unexercised In-the-Money
on Value Options/SARs at Fiscal Year End Options/SARs at Fiscal Year End
Exercise Realized (#) ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
(a) (b) (c) (d) (e)
Bernard J. Beaudoin 0 0 0 / 110,000 0 / 0
Andrea F. Bielsker 0 0 0 / 26,000 0 / 0
William H. Downey 0 0 0 / 40,000 0 / 0
Stephen T. Easley 0 0 0 / 19,000 0 / 0
Jeanie S. Latz 0 0 12,000 / 26,000 $9,020 / 0
(1) All unexercisable options were out-of-the-money on December 31, 2002.
122
Pension Plans
The Company has a non-contributory pension plan (Great Plains Energy Pension
Plan) for its management employees providing for benefits upon retirement,
normally at age 65. In addition, a supplemental retirement benefit is provided
for executive officers. The following table shows examples of single life option
pension benefits (including unfunded supplemental retirement benefits) payable
upon retirement at age 65 to the named executive officers:
Average Annual Base Salary Annual Pension for
for Highest Years of Service Indicated
36 Months
15 20 25 30 or more
150,000 45,000 60,000 75,000 90,000
200,000 60,000 80,000 100,000 120,000
250,000 75,000 100,000 125,000 150,000
300,000 90,000 120,000 150,000 180,000
350,000 105,000 140,000 175,000 210,000
400,000 120,000 160,000 200,000 240,000
450,000 135,000 180,000 225,000 270,000
500,000 150,000 200,000 250,000 300,000
Each eligible employee with 30 or more years of credited service, or whose age
and years of service add up to 85, is entitled to a total monthly annuity equal
to 50% of their average base monthly salary for the period of 36 consecutive
months in which their earnings were highest. The monthly annuity will be
proportionately reduced if their years of credited service are less than 30 or
do not add up to 85. The compensation covered by the Great Plains Energy Pension
Plan -- base monthly salary -- excludes any bonuses and other compensation. The
Great Plains Energy Pension Plan provides that pension amounts are not reduced
by Social Security benefits. The estimated credited years of service for the
named executive officers in the Summary Compensation table are as follows:
Credited
Officer Years of Service
Bernard J. Beaudoin 22 years
Andrea F. Bielsker 18 years
William H. Downey 2 years
Stephen T. Easley 6 years
Jeanie S. Latz 22 years
Eligibility for supplemental retirement benefits is limited to executive
officers selected by the Compensation Committee of the Board; all the named
executive officers are participants. The total retirement benefit payable at the
normal retirement date is equal to 2% of highest average earnings, as shown
above, for each year of credited service up to 30 (maximum of 60% of highest
average earnings). The actual retirement benefit paid equals the target
retirement benefit less retirement benefits payable under the management pension
plan. A liability accrues each year to cover the estimated cost of future
supplemental benefits.
The Internal Revenue Code imposes certain limitations on pensions that may be
paid under tax qualified pension plans. In addition to the supplemental
retirement benefits, the amount by which pension benefits exceed the limitations
will be paid outside the qualified plan and accounted for by Great Plains Energy
as an operating expense.
123
Great Plains Energy Severance Agreements
Great Plains Energy has severance agreements (Severance Agreements) with certain
executive officers, including the named executives, to ensure their continued
service and dedication and their objectivity in considering on behalf of Great
Plains Energy any transaction which would change the control of the company.
Under the Severance Agreements, an executive officer would be entitled to
receive a lump-sum cash payment and certain insurance benefits during the
three-year period after a Change in Control (or, if later, the three-year period
following the consummation of a transaction approved by Great Plains Energy's
shareholders constituting a Change in Control) if the officer's employment was
terminated by:
o Great Plains Energy other than for cause or upon death or disability;
o the executive officer for "Good Reason" (as defined in the Severance
Agreements); and
o the executive officer for any reason during a 30-day period commencing one
year after the Change in Control or,
if later, commencing one year following consummation of a transaction
approved by Great Plains Energy's shareholders constituting a change in
control (a Qualifying Termination).
A Change in Control is defined as:
o an acquisition by a person or group of 20% or more of the Great Plains
Energy common stock (other than an acquisition from or by Great Plains
Energy or by a Great Plains Energy benefit plan);
o a change in a majority of the Board; and
o approval by the shareholders of a reorganization, merger or consolidation
(unless shareholders receive 60% or more of the stock of the surviving
company) or a liquidation, dissolution or sale of substantially all of
Great Plains Energy's assets.
Upon a Qualifying Termination, Great Plains Energy must make a lump-sum cash
payment to the executive officer of:
o the officer's base salary through the date of termination;
o a pro-rated bonus based upon the average of the bonuses paid to the
officer for the last five fiscal years;
o any accrued vacation pay;
o two or three times the officer's highest base salary during the prior 12
months;
o two or three times the average of the bonuses paid to the officer for the
last five fiscal years;
o the actuarial equivalent of the excess of the officer's accrued pension
benefits including supplemental retirement benefits computed without
reduction for early retirement and including two or three additional years
of benefit accrual service, over the officer's vested accrued pension
benefits; and
o the value of any unvested contributions for the benefit of the officer
under the Great Plains Energy Employee Savings Plus Plan.
In addition, Great Plains Energy must offer health, disability and life
insurance plan coverage to the officer and his dependents on the same terms and
conditions that existed immediately prior to the Qualifying Termination for two
or three years, or, if earlier, until the executive officer is covered by
equivalent plan benefits. Great Plains Energy must make certain "gross-up"
payments regarding tax obligations relating to payments under the Severance
Agreements as well as provide reimbursement of certain expenses relating to
possible disputes that might arise.
124
Payments and other benefits under the Severance Agreements are in addition to
balances due under the Great Plains Energy Long-Term Incentive Plan and Annual
Incentive Plan. Upon a Change in Control (as defined in the Great Plains Energy
Long-Term Incentive Plan), all stock options granted in tandem with limited
stock appreciation rights will be automatically exercised.
Director Compensation
The directors of KCP&L receive the following compensation for serving on the
Boards of Great Plains Energy and KCP&L.
Non-employee members of the Board received an annual retainer of $30,000 in 2002
($15,000 of which was used to acquire shares of Great Plains Energy Common stock
through Great Plains Energy's Dividend Reinvestment and Direct Stock Purchase
Plan on behalf of each non-employee member of the Board). An additional retainer
of $3,000 was paid to those non-employee directors serving as chair of a
committee. Attendance fees of $1,000 for each Board meeting and $1,000 for each
committee meeting attended were also paid in 2002. Directors may defer the
receipt of all or part of the cash retainers and meeting fees.
Great Plains Energy also provides life and medical insurance coverage for each
non-employee member of the Board. The total premiums paid by Great Plains Energy
for this coverage for all participating non-employee directors in 2002 was
$18,362.40.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Great Plains Energy is composed of
four independent directors. The Compensation Committee recommends to the Board
the executive compensation structure and administers the policies and plans that
govern compensation for the executive officers. Executive compensation is
consistent with the Great Plains Energy total remuneration philosophy which
provides:
Given Great Plains Energy's strategies in the competitive and demanding
energy marketplace, attracting and retaining talent is a top priority.
Great Plains Energy is committed to establishing total remuneration
levels which are performance-based, competitive with the energy or
utility market for jobs of similar scope to enable the organization to
recruit and retain talented personnel at all levels in a dynamic and
complex marketplace. This will be established through base salary,
benefits and performance-based annual and long-term incentives. The
incentive targets will be consistent with current trends in the energy
or utility sector and the incentive measures will be appropriately tied
to shareholder and customer interests.
The Compensation Committee has not adopted a policy concerning the Internal
Revenue Services' rules on the deductibility of compensation in excess of
$1,000,000.
Base Salaries
The Compensation Committee reviews executive officer salaries regularly, at
least once every twelve months, and makes adjustments as warranted. The
Compensation Committee also compares annually executive compensation with
national compensation surveys. Base salaries were established for 2002 on the
basis of:
o job responsibilities and complexity;
o individual performance under established guidelines;
o competitiveness for comparable positions in companies of similar size
within the industry; and
o sustained performance of the company.
125
Annual Incentives
Under the Great Plains Energy Annual Incentive Plan in 2002 (the "Plan"),
executives received incentive compensation based upon the achievement of a
specific corporate performance target based on Economic Value Added (EVA(R))1.
Under the Plan, when shareholder value is increased by the amount of the annual
EVA(R) goal, bonuses are paid at a target level that varies to reflect a
participant's level of responsibility. A minimum level of EVA(R) improvement has
to be achieved before any bonus is awarded. EVA(R) improvement above the annual
goal results in payouts above the target level. In 2002, the EVA(R) goal was met
and bonuses were earned at the target level in the amounts set forth in the
Summary Compensation Table.
Long-Term Incentive Plan
The Great Plains Energy Long-Term Incentive Plan, as approved by the
shareholders in May 2002, provides for grants by the Compensation Committee of
stock options, restricted stock, performance shares and other stock-based
awards. The Compensation Committee believes that equity interests in Great
Plains Energy by its executive officers more closely aligns the interests of
management with shareholders and has established stock ownership guidelines for
executive officers based on their level within the organization. Compliance with
these guidelines is taken into consideration in determining grants under the
Long-Term Incentive Plan. Stock options were granted in 2002 in the amounts set
forth in the Summary Compensation Table. The stock options were granted at an
exercise price equal to the fair market value on the date of issuance.
Chief Executive Officer
In determining the base salary for Bernard J. Beaudoin, the Chairman of the
Board, President and Chief Executive Officer in 2002, the Compensation Committee
considered:
o financial performance of the company;
o cost and quality of services provided;
o leadership in enhancing the long-term value of the company; and
o relevant salary data including information supplied by the EEI.
Incentive awards to Mr. Beaudoin in 2002 under the Annual Incentive Plan and
Long-Term Incentive Plan were determined in the same manner as other executive
officers.
COMPENSATION COMMITTEE
William C. Nelson (Chairman)
Mark A. Ernst
William K. Hall
Robert H. West
1EVA(R)is a registered trademark of Stern Stewart & Co. in the United States of
America, France, the United Kingdom, Canada, Australia and Mexico.
126
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Great Plains Energy is the sole shareholder of KCP&L.
The following table shows beneficial ownership of Great Plains Energy's common
stock by the named executive officers, directors and all directors and officers
of Great Plains Energy and KCP&L as of January 31, 2003. The total of all shares
owned by directors and officers represents less than 1% of Great Plains Energy's
common stock.
Shares of Common Stock
Name of Beneficial Owner Beneficially Owned
Named Executive Officers
Bernard J. Beaudoin 12,538 (1)(2)
Andrea F. Bielsker 2,797 (1)
William H. Downey 4,267 (1)
Stephen T. Easley 699 (1)
Jeanie S. Latz 16,268 (1)
Other Director Nominees
David L. Bodde 6,593 (3)
Mark A. Ernst 5,414
Randall C. Ferguson, Jr. 1,221
William K. Hall 8,491
Luis A. Jimenez 1,494
James A. Mitchell 2,121
William C. Nelson 1,796
Linda H. Talbott 7,362
Robert H. West 5,249 (4)
All Executive Officers and Directors As A 149,375 (1)
Group (26 persons)
(1) Includes shares held in the Great Plains Energy's Employee Savings Plus
Plan and exercisable non-qualified stock option grants under the
Long-Term Incentive Plan.
(2) Includes 2,879 shares of restricted stock issued under the Long-Term
Incentive Plan.
(3) The nominee disclaims beneficial ownership of 1,000 shares
reported and held by nominee's mother.
(4) The nominee disclaims beneficial ownership of 1,000 shares reported and
held by nominee's wife.
See Item 5, Market for the Registrants' Common Equity and Related Shareholder
Matters, for information on Great Plains Energy's equity compensation plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 7, 2002, Innovative Energy Consultants Inc., a wholly-owned
subsidiary of Great Plains Energy, merged with Environmental Lighting Concepts,
Inc., with Innovative Energy Consultants continuing as the surviving corporation
and a wholly-owned subsidiary of Great Plains Energy. At the time of the merger,
Gregory J. Orman was Executive Vice President - Corporate Development and
Strategic Planning of Great Plains Energy, and owned approximately 67% of the
stock of Environmental Lighting Concepts. Environmental Lighting Concepts' only
significant asset was a 5.8% indirect ownership interest in Strategic Energy, an
indirect subsidiary of Great Plains Energy, and the merger increased Great
Plains Energy's indirect ownership in Strategic Energy from approximately
127
83% to approximately 89%. The merger consideration was based on a valuation
analysis by Merrill Lynch and Company. On the date of the merger, Mr. Orman
received $10.07 million from Great Plains Energy for his interest in
Environmental Lighting Concepts in the form of 258,917 shares of Great Plains
Energy common stock, valued at $5.34 million, and a short-term note for $4.73
million which was subsequently paid on January 2, 2003.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days in advance of the filing of this report, Great Plains Energy and
KCP&L carried out evaluations, under the supervision and with the participation
of each company's management, including the chief executive officer and chief
financial officer of those companies and the disclosure committee, of the
effectiveness of the companies' disclosure controls and procedures. Based upon
these evaluations, the chief executive officer and chief financial officer of
Great Plains Energy and KCP&L have concluded that the disclosure controls and
procedures of those companies are functioning effectively to provide reasonable
assurance that the information required to be disclosed by those companies in
the reports that they file or submit under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes to Great Plains Energy's or KCP&L's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation described above.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
Page
No.
Great Plains Energy
a. Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000 56
b. Consolidated Balance Sheets - December 31, 2002 and 2001 57
c. Consolidated Statements of Capitalization - December 31, 2002 and 2001 58
d. Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 59
e. Consolidated Statements of Comprehensive Income and Consolidated Statements of Retained
Earnings for the years ended December 31, 2002, 2001 and 2000 60
f. Notes to Consolidated Financial Statements 66
g. Independent Auditors' Report - Deloitte & Touche LLP to the Board of Directors and
Shareholders of Great Plains Energy 114
128
h. Report of Independent Accountants - PricewaterhouseCoopers LLP to the Shareholders and
Board of Directors of Great Plains Energy 116
i. Report of Independent Accountants - Deloitte & Touche, LLP to the Board of Directors and
Stockholders of DTI Holdings, Inc. 118
KCP&L
j. Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000 61
k. Consolidated Balance Sheets - December 31, 2002 and 2001 62
l. Consolidated Statements of Capitalization - December 31, 2002 and 2001 63
m. Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 64
n. Consolidated Statements of Comprehensive Income and Consolidated Statements of Retained
Earnings for the years ended December 31, 2002, 2001 and 2000 65
o. Notes to Consolidated Financial Statements 66
p. Independent Auditors' Report - Deloitte & Touche LLP to the Board of Directors and
Shareholder of KCP&L 115
q. Report of Independent Accountants - PricewaterhouseCoopers LLP to the Shareholder and
the Board of Directors of KCP&L 117
r. Independent Auditors' Report - Deloitte & Touche LLP to the Board of Directors and
Stockholders of DTI Holdings, Inc. 118
Financial Statement Schedules
Great Plains Energy
a. Schedule II - Valuation and Qualifying Accounts 136
b. Report of Independent Accountants - PricewaterhouseCoopers LLP to the Shareholders
and the Board of Directors of Great Plains Energy 138
KCP&L
c. Schedule II - Valuation and Qualifying Accounts 137
d. Report of Independent Accountants - PricewaterhouseCoopers LLP to the Shareholder
and the Board of Directors of KCP&L 139
129
Exhibits
Great Plains Energy Documents
Exhibit
Number Description of Document
2.1 * Agreement and Plan of Merger among Kansas City Power & Light
Company, Great Plains Energy Incorporated and KCP&L Merger Sub
Incorporated dated as of October 1, 2001 (Exhibit 2 to Form 8-K
dated October 1, 2001).
3.1.a * Articles of Incorporation of Great Plains Energy Incorporated
dated as of February 26, 2001 (Exhibit 3.i to Form 8-K filed
October 1, 2001).
3.1.b * By-laws of Great Plains Energy Incorporated dated March 13, 2001
(Exhibit 3.ii to Form 8-K filed October 1, 2001).
4.1.a * Resolution of Board of Directors Establishing 3.80% Cumulative
Preferred Stock (Exhibit 2-R to Registration Statement,
Registration No. 2-40239).
4.1.b * Resolution of Board of Directors Establishing 4.50% Cumulative
Preferred Stock (Exhibit 2-T to Registration Statement,
Registration No. 2-40239).
4.1.c * Resolution of Board of Directors Establishing 4.20% Cumulative
Preferred Stock (Exhibit 2-U to Registration Statement,
Registration No. 2-40239).
4.1.d * Resolution of Board of Directors Establishing 4.35% Cumulative
Preferred Stock (Exhibit 2-V to Registration Statement,
Registration No. 2-40239).
4.1.e Underwriting Agreement among Great Plains Energy
Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as representative of the several
underwriters, dated November 21, 2002.
10.1.a + Amended Long-Term Incentive Plan, effective as of May 7, 2002.
10.1.b + Annual Incentive Compensation Plan dated February 2003.
10.1.c *+ Indemnification Agreement with each officer and director
(Exhibit 10-f to Form 10-K for year ended December 31, 1995).
10.1.d *+ Restated Severance Agreement dated January 2000 with
certain executive officers (Exhibit 10-e to Form 10-K for
the year ended December 31, 2000).
10.1.e *+ Supplemental Executive Retirement Plan Amended and Restated
November 1, 2000 (Exhibit 10-f to Form 10-K for the year ended
December 31, 2000).
10.1.f *+ Nonqualified Deferred Compensation Plan (Exhibit 10-b to Form
10-Q for the period ended March 31, 2000).
130
10.1.g + Agreement between Great Plains Energy Incorporated and Gregory
J. Orman dated December 31, 2002.
10.1.h + Employment Agreement between Strategic Energy, L.L.C. and
Richard M. Zomnir dated June 13, 2002.
10.1.i *+ KLT Gas Inc. Compensation Program effective January 1, 2001
(Exhibit 10-l to Form 10-K for the year ended December 31, 2000).
10.1.j *+ Amendment No. 1 to KLT Gas Inc. Compensation Program dated as
of October 31, 2001 (Exhibit 10.1.m to Form 10-K for the year
ended December 31, 2001).
10.1.k * Demand Promissory Note and Pledge Agreement between DTI
Holdings, Inc. and KLT Telecom Inc. dated February 1, 2001
(Exhibit 10-t to Form 10-K for the year ended December 31, 2000).
10.1.l * Credit Agreement between KLT Telecom Inc. and Digital Teleport,
Inc. dated February 21, 2001 (Exhibit 10-u to Form 10-K for the
year ended December 31, 2000).
10.1.m * Amendment No. 1 dated April 30, 2001, to Credit Agreement among
KLT Telecom Inc. and Digital Teleport, Inc. (Exhibit 10-c to
Form 10-Q for the period ended June 30, 2001).
10.1.n * Amendment No. 2 dated June 4, 2001 to Credit Agreement between
KLT Telecom Inc. and Digital Teleport, Inc. (Exhibit 10-c to
Form 10-Q for the period ended June 30, 2001).
10.1.o * Credit Agreement between KLT Telecom Inc. and Digital Teleport,
Inc. dated as of September 25, 2001 (Exhibit 10 to Form 10-Q for
the period ended September 30, 2001).
10.1.p * First Amendment dated as of October 23, 2001 to Credit Agreement
between KLT Telecom Inc. and Digital Teleport, Inc. (Exhibit
10.1.s to Form 10-K for the year ended December 31, 2001).
10.1.q * Credit Agreement dated as of March 13, 2002 among Great
Plains Energy Incorporated, BNP Paribas, Bank One of
America, N.A. and Bank One, N.A. (Exhibit 10.3.a. to Form
10-Q for the period ended March 31, 2002).
10.1.r * Support Agreement between Great Plains Energy Incorporated and
R. S. Andrews Enterprises, Inc. dated October 25, 2001 (Exhibit
10.1.a. to Form 10-Q for the period ended March 31, 2002).
10.1.s * Guarantee and Suretyship Agreement between Great Plains
Energy Incorporated and PNC Bank, National Association
dated March 8, 2002 (Exhibit 10.2.a. to Form 10-Q for the
period ended March 31, 2002).
131
10.1.t * General Agreement of Indemnity issued by Great Plains
Energy Incorporated and Strategic Energy, L.L.C. in favor
of Federal Insurance Company and subsidiary or affiliated
insurers dated May 23, 2002 (Exhibit 10.1.a. to Form 10-Q
for the period ended June 30, 2002).
10.1.u * Agreement of Indemnity issued by Great Plains Energy
Incorporated and Strategic Energy, L.L.C. in favor of Federal
Insurance Company and subsidiary or affiliated insurers dated
May 23, 2002 (Exhibit 10.1.b. to Form 10-Q for the period ended
June 30, 2002).
10.1.v * Guaranty issued by Great Plains Energy Incorporated in favor of
El Paso Merchant Energy, L.P. dated June 14, 2002 (Exhibit
10.1.c. to Form 10-Q for the period ended June 30, 2002).
10.1.w * Line of Credit Agreement between Great Plains Energy
Incorporated and LaSalle Bank National Association dated
as of June 14, 2002 (Exhibit 10.1.d. to Form 10-Q for the
period ended June 30, 2002).
10.1.x * Guaranty issued by Great Plains Energy Incorporated in favor of
PG&E Trading-Power, L.P. dated July 26, 2002 (Exhibit 10.1.a.
to Form 10-Q for the period ended September 30, 2002).
10.1.y * Agreement and Plan of Merger among Environmental Lighting
Concepts, Inc., Mark R. Schroeder and Gregory J. Orman,
Innovative Energy Consultants Inc. and Great Plains Energy
Incorporated dated November 7, 2002 (Exhibit 10 to Form 8-K
dated November 7, 2002).
10.1.z Settlement Agreement dated as of December 23, 2002, by and
between Digital Teleport, Inc., the Official Unsecured Creditors
Committee of Digital Teleport, Inc., KLT Inc., KLT Telecom Inc.,
Kansas City Power & Light Company and Great Plains Energy
Incorporated.
10.1.aa Asset Purchase Agreement dated as of December 26, 2002 by
and between Digital Teleport, Inc., CenturyTel Fiber
Company II, LLC and CenturyTel, Inc.
12.1 Ratio of Earnings to Fixed Charges
16 * Letter of PricewaterhouseCoopers LLP (Exhibit 16 to Form 8-K/A
dated February 8, 2002).
21.1 List of Wholly-Owned Subsidiaries of Great Plains Energy Inc.
23.1.a Consent of Counsel.
23.1.b Consent of Independent Accountants-PricewaterhouseCoopers LLP.
23.1.c Consent of Independent Accountants-Deloitte & Touche LLP.
23.1.d Consent of Independent Accountants-Deloitte & Touche LLP
24.1 Powers of Attorney.
132
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Filed with the SEC as exhibits to prior registration statements (except as
otherwise noted) and are incorporated herein by reference and made a part
hereof. The exhibit number and file number of the documents so filed, and
incorporated herein by reference, are stated in parenthesis in the description
of such exhibit.
+ Indicates management contract or compensatory plan or arrangement.
Copies of any of the exhibits filed with the SEC in connection with this
document may be obtained from Great Plains Energy upon written request.
KCP&L Documents
Exhibit Number Description of Document
2.2 * Agreement and Plan of Merger among Kansas City Power & Light
Company, Great Plains Energy Incorporated
and KCP&L Merger Sub Incorporated dated as of October 1, 2001
(Exhibit 2 to Form 8-K dated October 1, 2001).
3.2.a * Restated Articles of Consolidation of Kansas City Power & Light
Company, as amended October 1, 2001 (Exhibit 3-(i) to Form 10-Q
for the period ended September 30, 2001).
3.2.b * By-laws of Kansas City Power & Light Company, as amended on
November 7, 2000 (Exhibit 3-b to Form 10-K for the year ended
December 31, 2000).
4.2.a * General Mortgage and Deed of Trust dated as of December 1,
1986, between Kansas City Power & Light Company and UMB Bank,
n.a. (formerly United Missouri Bank of Kansas City, N.A.),
Trustee (Exhibit 4-bb to Form 10-K for the year ended December
31, 1986).
4.2.b * Fourth Supplemental Indenture dated as of February 15, 1992, to
Indenture dated as of December 1, 1986 (Exhibit 4-y to Form 10-K
for the year ended December 31, 1991).
4.2.c * Fifth Supplemental Indenture dated as of September 15, 1992, to
Indenture dated as of December 1, 1986 (Exhibit 4-a to quarterly
report on Form 10-Q for the period ended September 30, 1992).
4.2.d * Sixth Supplemental Indenture dated as of November 1, 1992, to
Indenture dated as of December 1, 1986 (Exhibit 4-z to
Registration Statement, Registration No. 33-54196).
4.2.e * Seventh Supplemental Indenture dated as of October 1, 1993, to
Indenture dated as of December 1, 1986 (Exhibit 4-a to quarterly
report on Form 10-Q for the period ended September 30, 1993).
4.2.f * Eighth Supplemental Indenture dated as of December 1, 1993, to
Indenture dated as of December 1, 1986 (Exhibit 4 to Registration
Statement, Registration No. 33-51799).
133
4.2.g * Ninth Supplemental Indenture dated as of February 1, 1994, to
Indenture dated as of December 1, 1986 (Exhibit 4-h to Form 10-K
for year ended December 31, 1993).
4.2.h * Indenture for Medium-Term Note Program dated as of February 15,
1992, between Kansas City Power & Light Company and The Bank of
New York (Exhibit 4-bb to Registration Statement, Registration
No. 33-45736).
4.2.i * Indenture for Medium-Term Note Program dated as of November 15,
1992, between Kansas City Power & Light Company and The Bank of
New York (Exhibit 4-aa to Registration Statement, Registration
No. 33-54196).
4.2.j * Amended and Restated Declaration of Trust of Kansas City Power
& Light Company Financing I dated April 15, 1997 (Exhibit 4-a to
Form 10-Q for the period ended March 31, 1997).
4.2.k * Indenture dated as of April 1, 1997 between the Company and The
First National Bank of Chicago, Trustee (Exhibit 4-b to Form 10-Q
for the period ended March 31, 1997).
4.2.l * First Supplemental Indenture dated as of April 1, 1997 to the
Indenture dated as of April 1, 1997 between the Company and The
First National Bank of Chicago, Trustee (Exhibit 4-c to Form 10-Q
for the period ended March 31, 1997).
4.2.m * Preferred Securities Guarantee Agreement dated April 15, 1997
(Exhibit 4-d to Form 10-Q for the period ended March 31, 1997).
4.2.n * Indenture for $150 million aggregate principal amount of 6.50%
Senior Notes due November 15, 2011 and $250 million aggregate
principal amount of 7.125% Senior Notes due December 15, 2005
dated as of December 1, 2000, between Kansas City Power & Light
Company and The Bank of New York (Exhibit 4-a to Report on Form
8-K dated December 18, 2000).
4.2.o * Indenture for $225 million aggregate principal amount of 6.00%
Senior Notes due 2007, Series B, dated March 1, 2002 between The
Bank of New York and Kansas City Power & Light Company (Exhibit
4.1.b. to Form 10-Q for the period ended March 31, 2002).
10.2.a * Railcar Lease dated as of April 15, 1994, between Shawmut Bank
Connecticut, National Association, and Kansas City Power & Light
Company (Exhibit 10 to Form 10-Q for the period ended June 30,
1994).
10.2.b * Railcar Lease dated as of January 31, 1995, between First
Security Bank of Utah, National Association, and Kansas City
Power & Light Company (Exhibit 10-o to Form 10-K for the year
ended December 31, 1994).
10.2.c * Railcar Lease dated as of September 8, 1998, with CCG Trust
Corporation (Exhibit 10(b) to Form 10-Q for the period ended
September 30, 1998).
10.2.d * Amended and Restated Lease dated as of October 12, 2001 between
Kansas City Power & Light Company and Wells Fargo Bank Northwest,
National Association (Exhibit 10.2.d to Form 10-K for the year
ended December 31, 2001).
134
10.2.e * Purchase and Sale Agreement dated October 29, 1999 between
Kansas City Power & Light Company and Kansas City Power & Light
Receivables Company (Exhibit 10-m to Form 10-K for year ended
December 31, 1999).
10.2.f Insurance agreement between Kansas City Power & Light Company and
XL Capital Assurance Inc., dated December 5, 2002.
12.2 Ratio of Earnings to Fixed Charges
16.2 * Letter of PricewaterhouseCoopers LLP (Exhibit 16 to Form 8-K/A
dated February 8, 2002).
23.2.a Consent of Counsel.
23.2.b Consent of Independent Accountants - PricewaterhouseCoopers LLP.
23.2.c Consent of Independent Accountants - Deloitte & Touche, LLP
23.2.d Consent of Independent Accountants - Deloitte & Touche, LLP
24.2 Powers of Attorney.
99.2 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Filed with the SEC as exhibits to prior registration statements (except as
otherwise noted) and are incorporated herein by reference and made a part
hereof. The exhibit number and file number of the documents so filed, and
incorporated herein by reference, are stated in parenthesis in the description
of such exhibit.
Copies of any of the exhibits filed with the SEC in connection with this
document may be obtained from KCP&L upon written request.
Reports on Form 8-K
Great Plains Energy
Great Plains Energy filed a report on Form 8-K dated November 7, 2002, including
an Agreement and Plan of Merger among Great Plains Energy, Environmental
Lighting Concepts, Inc. Innovative Energy Consultants Inc., Gregory J. Orman and
Mark R. Schroeder (the ELC Shareholders). Mr. Orman was at the time Executive
Vice President - Corporate Development and Strategic Planning of Great Plains
Energy, and Mr. Schroeder is an employee of a Great Plains Energy subsidiary.
Pursuant to the Agreement and Plan of Merger, the ELC Shareholders received
$15.08 million of merger consideration. As part of the merger consideration,
Great Plains Energy issued 387,596 shares of its common stock to the ELC
Shareholders. The remainder of the merger consideration was in the form of
short-term notes issued by Great Plains Energy and Innovative Energy Consultants
Inc. As a result of the merger, Great Plains Energy's indirect ownership of
Strategic Energy, L.L.C., increased from 82.75% to 88.55%.
Great Plains Energy filed a report on Form 8-K dated November 14, 2002,
including a press release announcing earnings guidance for 2003, and a press
release announcing plans for a public offering of six million of newly issued
common shares.
135
Great Plains Energy filed a report on Form 8-K dated December 16, 2002,
including a press release announcing the resignation of Gregory J. Orman as
Executive Vice President - Corporate Development and Strategic Planning of Great
Plains Energy and as President and Chief Executive Officer of KLT Inc., and his
retention as a company advisor effective December 31, 2002.
KCP&L
KCP&L did not file any reports on Form 8-K during the fourth quarter of 2002.
Schedule II - Valuation and Qualifying Accounts and Reserves
Great Plains Energy
Valuation and Qualifying Accounts
Years Ended December 31, 2002, 2001 and 2000
Additions
Charged
Balance At To Costs Charged Balance
Beginning And To Other At End
Description Of Period Expenses Accounts Deductions Of Period
(millions)
Year Ended December 31, 2002:
Allowance for uncollectible accounts $ 7.3 $ 8.0 $ 3.5 (a) $ 9.6 (b) $ 9.2
Legal reserves 2.0 3.5 - 1.7 (c) 3.8
Environmental reserves 1.9 - - - (d) 1.9
Tax valuation allowance 15.8 - - - 15.8
Other reserves (f) 1.2 1.9 0.5 (i) 2.3 (j) 1.3
Year Ended December 31, 2001:
Allowance for uncollectible accounts $ 7.9 $ 6.2 $ 2.9 (a) $ 9.7 (b) $ 7.3
Legal reserves 1.6 0.9 - 0.5 (c) 2.0
Environmental reserves 2.0 - - 0.1 (d) 1.9
Tax valuation allowance (e) - 15.8 - - 15.8
Other reserves (g) 0.7 0.9 - 0.4 (k) 1.2
Year Ended December 31, 2000:
Allowance for uncollectible accounts $ 7.1 $ 8.0 $ 2.5 (a) $ 9.7 (b) $ 7.9
Legal reserves 1.5 0.7 - 0.6 (c) 1.6
Environmental reserves 2.1 - - 0.1 (d) 2.0
Tax valuation allowance - - - - -
Other reserves (h) 0.3 0.6 - 0.2 (l) 0.7
(a) Recoveries. Charged to other accounts for the year ended December 31,
2002, includes the establishment of an allowance of $0.3 million.
(b) Uncollectible accounts charged off. Deductions for the year ended December
31, 2001, include an adjustment of $1.2 million based on a change in
estimated collectibility.
(c) Payment of claims
(d) Payment of expenses
(e) A tax valuation allowance of $15.8 million was recorded at KLT Telecom in
2001 to reduce the income tax benefits arising primarily form DTI's 2001
abandonment of its $104.0 million of long-haul assets. The allowance as
necessary due to the uncertainty of recognizing future tax deductions while
DTI is in the bankruptcy process.
(f) Other reserves at December 31, 2002, include property and casualty
insurance reserves, medical insurance reserves and warranty repair reserves
for RSAE.
(g) Other reserves at December 31, 2001, include property and casualty
insurance reserves, inventory reserves and warranty repair reserves for
RSAE.
(h) Other reserves at December 31, 2000, include warranty repair reserves for
RSAE.
136
(i) Primarily the establishment of medical insurance reserves and contributions
from Cobra insurance premiums.
(j) Payment of claims on property and casualty and medical insurance reserves,
expenses incurred on warranty repair reserves and inventory reserve
adjustments.
(k) Payment of claims on property and casualty insurance reserves and expenses
incurred on warranty repair reserves.
(l) Expenses incurred on warranty repair reserves.
Kansas City Power & Light Company
Valuation and Qualifying Accounts
Years Ended December 31, 2002, 2001 and 2000
Additions
Charged
Balance At To Costs Charged Balance
Beginning And To Other At End
Description Of Period Expenses Accounts Deductions Of Period
(millions)
Year Ended December 31, 2002:
Allowance for uncollectible accounts $ 6.4 $ 3.9 $ 3.0 (a) $ 7.3 (b) $ 6.0
Legal reserves 2.0 3.5 - 1.7 (c) 3.8
Environmental reserves 1.9 - - - (d) 1.9
Tax valuation allowance - - - - -
Other reserves(e) 1.2 1.9 0.5 (h) 2.3 (i) 1.3
Year Ended December 31, 2001:
Allowance for uncollectible accounts $ 7.9 $ 5.4 $ 2.9 (a) $ 9.8 (b) $ 6.4
Legal reserves 1.6 0.9 - 0.5 (c) 2.0
Environmental reserves 2.0 - - 0.1 (d) 1.9
Tax valuation allowance - - - - -
Other reserves(f) 0.7 0.9 - 0.4 (j) 1.2
Year Ended December 31, 2000:
Allowance for uncollectible accounts $ 7.1 $ 8.0 $ 2.5 (a) $ 9.7 (b) $ 7.9
Legal reserves 1.5 0.7 - 0.6 (c) 1.6
Environmental reserves 2.1 - - 0.1 (d) 2.0
Tax valuation allowance - - - - -
Other reserves(g) 0.3 0.6 - 0.2 (k) 0.7
(a) Recoveries
(b) Uncollectible accounts charged off. Deductions for the year ended December
31, 2001, include an adjustment of $1.2 million based on a change in
estimated collectibility and an adjustment of $0.9 million related to
Strategic Energy reflecting the October 1, 2001, KCP&L dividending up its
100% ownership of KLT Inc. to Great Plains Energy.
(c) Payment of claims
(d) Payment of expenses
(e) Other reserves at December 31, 2002, include property and casualty
insurance reserves, medical insurance reserves and warranty repair reserves
for RSAE.
(f) Other reserves at December 31, 2001, include property and casualty
insurance reserves, inventory reserves and warranty repair reserves for
RSAE.
(g) Other reserves at December 31, 2000, include warranty repair reserves for
RSAE.
(h) Primarily the establishment of medical insurance reserves and contributions
from Cobra insurance premiums.
(i) Payment of claims on property and casualty and medical insurance reserves,
expenses incurred on warranty repair reserves and inventory reserve
adjustments.
(j) Payment of claims on property and casualty insurance reserves and expenses
incurred on warranty repair reserves.
(k) Expenses incurred on warranty repair reserves.
137
Report of Independent Accountants
To the Shareholders and the Board of Directors of
Great Plains Energy Incorporated:
Our audits of the consolidated financial statements of Great Plains Energy
Incorporated referred to in our report dated February 5, 2002, except with
respect to Note 13, as to which the date is May 22, 2002, and except with
respect to the to the 2001 and 2000 transitional disclosures relating to the
adoption of Statement of Financial Accounting Standards No. 142 as described
in Note 6, as to which the date is February 21, 2003, appearing in this Annual
Report on Form 10-K also included an audit of the 2001 and 2000 information
included in the financial statement schedule listed in Item 15 of this Form
10-K. In our opinion, the 2001 and 2000 information included in this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Kansas City, Missouri
February 5, 2002
138
Report of Independent Accountants
To the Shareholder and the Board of Directors of
Kansas City Power & Light Company:
Our audits of the consolidated financial statements of Kansas City Power & Light
Company referred to in our report (which has an explanatory paragraph regarding
the corporate reorganization which occurred on October 1, 2001), dated February
5, 2002, except with respect to Note 13, as to which the date is May 22, 2002,
and except with respect to the to the 2001 transitional disclosures relating to
the adoption of Statement of Financial Accounting Standards No. 142 as described
in Note 6, as to which the date is February 21, 2003, appearing in this Annual
Report on Form 10-K also included an audit of the 2001 and 2000 information
included in the financial statement schedule listed in Item 15 of this Form
10-K. In our opinion, the 2001 and 2000 information included in this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Kansas City, Missouri
February 5, 2002
139
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
GREAT PLAINS ENERGY INCORPORATED
Date: February 28, 2003 By: /s/Bernard J. Beaudoin
Bernard J. Beaudoin
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, President )
/s/Bernard J. Beaudoin and Chief Executive Officer )
Bernard J. Beaudoin (Principal Executive Officer) )
)
Senior Vice President - Finance, )
/s/Andrea F. Bielsker Chief Financial Officer and )
Andrea F. Bielsker Treasurer )
(Principal Financial Officer) )
)
/s/Lori A. Wright Controller )
Lori A. Wright (Principal Accounting Officer) )
)
David L. Bodde* Director ) February 28, 2003
)
Mark A. Ernst* Director )
)
Randall C. Ferguson, Jr.* Director )
)
William K. Hall* Director )
)
Luis A. Jimenez* Director )
)
James A. Mitchell* Director )
)
William C. Nelson* Director )
)
Linda H. Talbott* Director )
)
Robert H. West* Director )
*By /s/Bernard J. Beaudoin
Bernard J. Beaudoin
Attorney-in-Fact*
140
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
KANSAS CITY POWER & LIGHT COMPANY
Date: February 28, 2003 By: /s/Bernard J. Beaudoin
Bernard J. Beaudoin
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board and Chief Executive )
/s/Bernard J. Beaudoin Officer )
Bernard J. Beaudoin (Principal Executive Officer) )
)
Senior Vice President - Finance, )
/s/Andrea F. Bielsker Chief Financial Officer and )
Andrea F. Bielsker Treasurer )
(Principal Financial Officer) )
)
/s/Lori A. Wright Controller )
Lori A. Wright (Principal Accounting Officer) )
)
David L. Bodde* Director ) February 28, 2003
)
Mark A. Ernst* Director )
)
Randall C. Ferguson, Jr.* Director )
)
William K. Hall* Director )
)
Luis A. Jimenez* Director )
)
James A. Mitchell* Director )
)
William C. Nelson* Director )
)
Linda H. Talbott* Director )
)
Robert H. West* Director )
*By /s/Bernard J. Beaudoin
Bernard J. Beaudoin
Attorney-in-Fact*
141
CERTIFICATION
I, Bernard J. Beaudoin, certify that:
1. I have reviewed this annual report on Form 10-K of Great Plains Energy
Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 28, 2003
By: /s/Bernard J. Beaudoin
Bernard J. Beaudoin
Chairman of the Board, President and
Chief Executive Officer
142
CERTIFICATION
I, Andrea F. Bielsker, certify that:
1. I have reviewed this annual report on Form 10-K of Great Plains Energy
Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 28, 2003
By: /s/Andrea F. Bielsker
Andrea F. Bielsker
Senior Vice President - Finance,
Chief Financial Officer and
Treasurer
143
CERTIFICATION
I, Bernard J. Beaudoin, certify that:
1. I have reviewed this annual report on Form 10-K of Kansas City Power &
Light Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 28, 2003
By: /s/Bernard J. Beaudoin
Bernard J. Beaudoin
Chairman of the Board and
Chief Executive Officer
144
CERTIFICATION
I, Andrea F. Bielsker, certify that:
1. I have reviewed this annual report on Form 10-K of Kansas City Power &
Light Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 28, 2003
By: /s/Andrea F. Bielsker
Andrea F. Bielsker
Senior Vice President - Finance,
Chief Financial Officer and
Treasurer
145