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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 in