SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission File Number 1-3523
WESTERN RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
KANSAS 48-0290150
(State or Other Jurisdiction of (Employer
Incorporation or Organization) Identification No.)
818 KANSAS AVENUE, TOPEKA, KANSAS 66612
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number Including Area Code (913) 575-6300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 25, 1996
Common Stock, $5.00 par value 64,401,042
WESTERN RESOURCES, INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4 - 6
Consolidated Statements of Cash Flows 7 - 8
Consolidated Statements of Capitalization 9
Consolidated Statements of Common Stock Equity 10
Notes to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Part II. Other Information
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
WESTERN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1996 1995
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . . . . . . . . $5,429,669 $5,341,074
Natural gas plant in service. . . . . . . . . . . . . . 819,864 787,453
6,249,533 6,128,527
Less - Accumulated depreciation . . . . . . . . . . . . 2,027,759 1,926,520
4,221,774 4,202,007
Construction work in progress . . . . . . . . . . . . . 83,321 100,401
Nuclear fuel (net). . . . . . . . . . . . . . . . . . . 44,072 53,942
Net utility plant. . . . . . . . . . . . . . . . . . 4,349,167 4,356,350
OTHER PROPERTY AND INVESTMENTS:
Net non-utility investments . . . . . . . . . . . . . . 628,521 99,269
Decommissioning trust . . . . . . . . . . . . . . . . . 30,627 25,070
659,148 124,339
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . 969 2,414
Accounts receivable and unbilled revenues (net) . . . . 232,682 257,292
Fossil fuel, at average cost. . . . . . . . . . . . . . 44,191 54,742
Gas stored underground, at average cost . . . . . . . . 47,665 28,106
Materials and supplies, at average cost . . . . . . . . 62,160 57,996
Prepayments and other current assets. . . . . . . . . . 38,008 20,973
425,675 421,523
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes. . . . . . . . . . . . . . 282,476 282,476
Deferred coal contract settlement costs . . . . . . . . 22,599 27,274
Phase-in revenues . . . . . . . . . . . . . . . . . . . 30,703 43,861
Corporate-owned life insurance (net). . . . . . . . . . 86,484 44,143
Other deferred plant costs. . . . . . . . . . . . . . . 31,339 31,539
Unamortized debt expense. . . . . . . . . . . . . . . . 56,931 56,681
Other . . . . . . . . . . . . . . . . . . . . . . . . . 138,669 102,491
649,201 588,465
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . $6,083,191 $5,490,677
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see statement):
Common stock equity . . . . . . . . . . . . . . . . . . $1,615,060 $1,553,110
Cumulative preferred and preference stock . . . . . . . 74,858 174,858
Western Resources obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures. . . . . . . . . . . . 220,000 100,000
Long-term debt (net). . . . . . . . . . . . . . . . . . 1,466,526 1,391,263
3,376,444 3,219,231
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . 646,400 203,450
Long-term debt due within one year. . . . . . . . . . . - 16,000
Accounts payable. . . . . . . . . . . . . . . . . . . . 111,878 149,194
Accrued taxes . . . . . . . . . . . . . . . . . . . . . 106,884 68,569
Accrued interest and dividends. . . . . . . . . . . . . 59,918 62,157
Other . . . . . . . . . . . . . . . . . . . . . . . . . 38,655 40,266
963,735 539,636
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . . . . . . . . 1,167,550 1,167,470
Deferred investment tax credits . . . . . . . . . . . . 127,218 132,286
Deferred gain from sale-leaseback . . . . . . . . . . . 235,470 242,700
Other . . . . . . . . . . . . . . . . . . . . . . . . . 212,774 189,354
1,743,012 1,731,810
COMMITMENTS AND CONTINGENCIES (Notes 3 and 5)
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . $6,083,191 $5,490,677
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
September 30,
1996 1995
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . . . . . . . . $ 355,459 $ 371,153
Natural gas . . . . . . . . . . . . . . . . . . . . . . . 134,713 99,136
Total operating revenues. . . . . . . . . . . . . . . . 490,172 470,289
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 69,046 70,001
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 6,299 5,084
Power purchased . . . . . . . . . . . . . . . . . . . . . 7,584 5,992
Natural gas purchases . . . . . . . . . . . . . . . . . . 36,229 29,146
Other operations. . . . . . . . . . . . . . . . . . . . . 146,486 121,651
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 17,039 26,851
Depreciation and amortization . . . . . . . . . . . . . . 46,179 38,934
Amortization of phase-in revenues . . . . . . . . . . . . 4,386 4,386
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 29,892 35,421
State income. . . . . . . . . . . . . . . . . . . . . . 8,021 8,725
General . . . . . . . . . . . . . . . . . . . . . . . . 25,424 24,617
Total operating expenses. . . . . . . . . . . . . . . 396,585 370,808
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 93,587 99,481
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . 2,648 (2,248)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 5,766 3,235
Income taxes (net). . . . . . . . . . . . . . . . . . . . 399 2,585
Total other income and deductions . . . . . . . . . . 8,813 3,572
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 102,400 103,053
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 25,464 24,193
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 14,763 8,091
Allowance for borrowed funds used during
construction (credit) . . . . . . . . . . . . . . . . . (776) (1,136)
Total interest charges. . . . . . . . . . . . . . . . 39,451 31,148
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 62,949 71,905
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . 6,900 3,355
EARNINGS APPLICABLE TO COMMON STOCK . . . . . . . . . . . . $ 56,049 $ 68,550
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . 64,161,329 62,243,794
EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING . . . . . . . $ .87 $ 1.10
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . $ .515 $ .505
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . . . . . . . . $ 918,675 $ 886,921
Natural gas . . . . . . . . . . . . . . . . . . . . . . . 563,240 399,038
Total operating revenues. . . . . . . . . . . . . . . . 1,481,915 1,285,959
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 190,634 164,092
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 13,674 14,848
Power purchased . . . . . . . . . . . . . . . . . . . . . 22,481 11,636
Natural gas purchases . . . . . . . . . . . . . . . . . . 236,313 171,482
Other operations. . . . . . . . . . . . . . . . . . . . . 425,732 344,826
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 72,030 81,315
Depreciation and amortization . . . . . . . . . . . . . . 131,594 116,219
Amortization of phase-in revenues . . . . . . . . . . . . 13,158 13,158
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 56,700 60,027
State income. . . . . . . . . . . . . . . . . . . . . . 15,784 15,808
General . . . . . . . . . . . . . . . . . . . . . . . . 75,935 73,735
Total operating expenses. . . . . . . . . . . . . . . 1,254,035 1,067,146
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 227,880 218,813
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (1,101) (5,785)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 16,835 9,921
Income taxes (net). . . . . . . . . . . . . . . . . . . . 1,384 4,891
Total other income and deductions . . . . . . . . . . 17,118 9,027
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 244,998 227,840
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 78,568 72,042
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 32,338 23,516
Allowance for borrowed funds used during
construction (credit) . . . . . . . . . . . . . . . . . (2,392) (2,914)
Total interest charges. . . . . . . . . . . . . . . . 108,514 92,644
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 136,484 135,196
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . 13,609 10,064
EARNINGS APPLICABLE TO COMMON STOCK . . . . . . . . . . . . $ 122,875 $ 125,132
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . 63,598,963 61,960,602
EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING . . . . . . . $ 1.93 $ 2.02
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . $ 1.545 $ 1.515
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
September 30,
1996 1995
OPERATING REVENUES:
Electric. . . . . . . . . . . . . . . . . . . . . . . . . $1,177,649 $1,139,888
Natural gas . . . . . . . . . . . . . . . . . . . . . . . 761,583 557,191
Total operating revenues. . . . . . . . . . . . . . . . 1,939,232 1,697,079
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 238,536 212,102
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 18,251 16,677
Power purchased . . . . . . . . . . . . . . . . . . . . . 26,584 17,418
Natural gas purchases . . . . . . . . . . . . . . . . . . 328,621 233,169
Other operations. . . . . . . . . . . . . . . . . . . . . 563,358 465,111
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 99,356 112,741
Depreciation and amortization . . . . . . . . . . . . . . 172,186 152,201
Amortization of phase-in revenues . . . . . . . . . . . . 17,545 17,544
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 69,276 74,119
State income. . . . . . . . . . . . . . . . . . . . . . 18,571 19,510
General . . . . . . . . . . . . . . . . . . . . . . . . 99,039 95,195
Total operating expenses. . . . . . . . . . . . . . . 1,651,323 1,415,787
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 287,909 281,292
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . 2,016 (7,418)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 26,593 11,737
Income taxes (net). . . . . . . . . . . . . . . . . . . . 4,298 6,184
Total other income and deductions . . . . . . . . . . 32,907 10,503
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 320,816 291,795
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 102,488 95,830
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 39,070 30,732
Allowance for borrowed funds used during
construction (credit) . . . . . . . . . . . . . . . . . (3,706) (3,351)
Total interest charges. . . . . . . . . . . . . . . . 137,852 123,211
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 182,964 168,584
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . 16,964 13,418
EARNINGS APPLICABLE TO COMMON STOCK . . . . . . . . . . . . $ 166,000 $ 155,166
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . 63,385,462 61,874,216
EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING . . . . . . . $ 2.62 $ 2.51
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . $ 2.05 $ 2.01
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 136,484 $ 135,196
Depreciation and amortization . . . . . . . . . . . . . . 120,324 114,653
Other amortization (including nuclear fuel) . . . . . . . 10,793 11,274
Gain on sales of utility plant (net of tax) . . . . . . . - (951)
Deferred taxes and investment tax credits (net) . . . . . (79) (9,216)
Amortization of phase-in revenues . . . . . . . . . . . . 13,158 13,158
Corporate-owned life insurance. . . . . . . . . . . . . . (23,334) (39,102)
Amortization of gain from sale-leaseback. . . . . . . . . (7,230) (7,231)
Amortization of acquisition adjustment. . . . . . . . . . 19,806 1,724
Noncash earnings in equity of investees . . . . . . . . . (19,359) -
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . 24,610 7,781
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 10,551 (6,501)
Gas stored underground. . . . . . . . . . . . . . . . . (19,559) (971)
Accounts payable . . . . . . . . . . . . . . . . . . . (37,316) (29,208)
Accrued taxes . . . . . . . . . . . . . . . . . . . . . 38,315 38,687
Other . . . . . . . . . . . . . . . . . . . . . . . . . 6,252 (752)
Changes in other assets and liabilities . . . . . . . . . (41,895) 12,150
Net cash flows from operating activities. . . . . . . 231,521 240,691
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . 137,980 166,743
Sales of utility plant. . . . . . . . . . . . . . . . . . - (1,723)
Non-utility investments (net) . . . . . . . . . . . . . . 522,092 14,127
Corporate-owned life insurance policies . . . . . . . . . 53,265 54,046
Death proceeds of corporate-owned life insurance policies (9,010) (854)
Net cash flows used in investing activities . . . . . 704,327 232,339
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . 442,950 19,415
Bonds retired . . . . . . . . . . . . . . . . . . . . . . (16,135) (105)
Revolving credit agreements (net) . . . . . . . . . . . . 75,000 -
Other long-term debt issued . . . . . . . . . . . . . . . 200 -
Other mandatorily redeemable securities . . . . . . . . . 120,000 -
Redemption of preference stock. . . . . . . . . . . . . . (100,000) -
Borrowings against life insurance policies. . . . . . . . 45,136 47,727
Repayment of borrowings against life insurance policies . (4,611) (115)
Common stock issued (net) . . . . . . . . . . . . . . . . 21,554 26,707
Dividends on preferred, preference and common stock . . . (112,733) (103,014)
Net cash flows from (used in) financing activities. . 471,361 (9,385)
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . (1,445) (1,033)
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . 2,414 2,715
End of the period . . . . . . . . . . . . . . . . . . . . $ 969 $ 1,682
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized). . . . . . . . . . . . . . . . . . . . . . $ 136,479 $ 111,871
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 67,333 69,995
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 182,964 $ 168,584
Depreciation and amortization . . . . . . . . . . . . . . . 155,936 150,687
Other amortization (including nuclear fuel) . . . . . . . . 14,712 13,789
Gain on sales of utility plant (net of tax) . . . . . . . . - (951)
Deferred taxes and investment tax credits (net) . . . . . . 24,109 9,234
Amortization of phase-in revenues . . . . . . . . . . . . . 17,545 17,544
Corporate-owned life insurance. . . . . . . . . . . . . . . (12,780) (42,748)
Amortization of gain from sale-leaseback. . . . . . . . . . (9,639) (9,641)
Amortization of acquisition adjustment. . . . . . . . . . . 24,811 1,724
Noncash earnings in equity of investees . . . . . . . . . . (19,359) -
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . (20,703) (49,886)
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . 1,072 (8,856)
Gas stored underground. . . . . . . . . . . . . . . . . . (1,472) (3,592)
Accounts payable. . . . . . . . . . . . . . . . . . . . . 10,470 (2,433)
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . (19,396) (14,565)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 15,183 19,128
Changes in other assets and liabilities . . . . . . . . . . (65,679) 26,520
Net cash flows from operating activities . . . . . . . 297,774 274,538
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 208,064 249,510
Sales of utility plant. . . . . . . . . . . . . . . . . . . - (1,723)
Non-utility investments (net) . . . . . . . . . . . . . . . 523,373 18,488
Corporate-owned life insurance policies . . . . . . . . . . 54,394 55,876
Death proceeds of corporate-owned life insurance policies . (19,343) (854)
Net cash flows used in investing activities . . . . . . 766,488 321,297
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . 318,785 108,315
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (16,135) (105)
Revolving credit agreement (net). . . . . . . . . . . . . . 125,000 -
Other long-term debt issued . . . . . . . . . . . . . . . . 200 -
Other mandatorily redeemable securities . . . . . . . . . . 220,000 -
Redemption of preference stock. . . . . . . . . . . . . . . (100,000) -
Borrowings against life insurance policies (net). . . . . . 46,688 48,390
Repayment of borrowings against life insurance policies . . (9,880) (107)
Common stock issued (net) . . . . . . . . . . . . . . . . . 31,008 26,707
Dividends on preferred, preference and common stock . . . . (147,665) (136,870)
Net cash flows from financing activities. . . . . . . . 468,001 46,330
NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . .. . . . . (713) (429)
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . . 1,682 2,111
End of the period . . . . . . . . . . . . . . . . . . . . . $ 969 $ 1,682
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized). . . . . . . . . . . . . . . . . . . . . . . $ 161,156 $ 137,552
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . 82,149 88,020
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1996 1995
COMMON STOCK EQUITY (see statement):
Common stock, par value $5 per share,
Authorized 85,000,000 shares, outstanding
64,236,915 and 62,855,961 shares, respectively . $ 321,184 $ 314,280
Paid-in capital. . . . . . . . . . . . . . . . . . 729,716 697,962
Retained earnings. . . . . . . . . . . . . . . . . 564,160 540,868
1,615,060 48% 1,553,110 48%
CUMULATIVE PREFERRED AND PREFERENCE STOCK:
Preferred stock not subject to mandatory redemption,
Par value $100 per share, authorized
600,000 shares, outstanding -
4 1/2% Series, 138,576 shares. . . . . . . . . 13,858 13,858
4 1/4% Series, 60,000 shares . . . . . . . . . 6,000 6,000
5% Series, 50,000 shares . . . . . . . . . . . 5,000 5,000
24,858 24,858
Preference stock subject to mandatory redemption,
Without par value, $100 stated value,
Authorized 4,000,000 shares, outstanding -
7.58% Series, 500,000 shares . . . . . . . . . 50,000 50,000
8.50% Series, 1,000,000 shares . . . . . . . . - 100,000
50,000 150,000
74,858 2% 174,858 6%
WESTERN RESOURCES OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST
HOLDING SOLELY COMPANY
SUBORDINATED DEBENTURES. . . . . . . . . . . . . 220,000 7% 100,000 3%
LONG-TERM DEBT:
First mortgage bonds . . . . . . . . . . . . . . . 825,000 841,000
Pollution control bonds. . . . . . . . . . . . . . 521,682 521,817
Revolving credit agreements. . . . . . . . . . . . 125,000 50,000
Other long-term debt . . . . . . . . . . . . . . . 200 -
Less:
Unamortized premium and discount (net) . . . . . 5,356 5,554
Long-term debt due within one year . . . . . . . - 16,000
1,466,526 43% 1,391,263 43%
Total Capitalization. . . . . . . . . . .. . . . . . $3,376,444 100% $3,219,231 100%
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY
(Dollars in Thousands)
(Unaudited)
Common Paid-in Retained
Stock Capital Earnings
BALANCE DECEMBER 31, 1994, 61,617,873 shares. . . . . $308,089 $667,992 $498,374
Net income. . . . . . . . . . . . . . . . . . . . . . 135,196
Cash dividends:
Preferred and preference stock. . . . . . . . . . . (10,064)
Common stock, $1.515 per share. . . . . . . . . . . (94,027)
Expenses on common stock. . . . . . . . . . . . . . . (693)
Issuance of 910,907 shares of common stock. . . . . . 4,555 22,845
BALANCE SEPTEMBER 30, 1995, 62,528,780 shares . . . . 312,644 690,144 529,479
Net income. . . . . . . . . . . . . . . . . . . . . . 46,480
Cash dividends:
Preferred and preference stock. . . . . . . . . . . (3,355)
Common stock, $.505 per share . . . . . . . . . . . (31,736)
Expenses on common stock. . . . . . . . . . . . . . . (79)
Issuance of 327,181 shares of common stock. . . . . . 1,636 7,897
BALANCE DECEMBER 31, 1995, 62,855,961 shares. . . . . 314,280 697,962 540,868
Net income. . . . . . . . . . . . . . . . . . . . . . 136,484
Cash dividends:
Preferred and preference stock. . . . . . . . . . . (13,609)
Common stock, $1.545 per share. . . . . . . . . . . (98,336)
Issuance of 1,380,954 shares of common stock. . . . . 6,904 31,754 (1,247)
BALANCE SEPTEMBER 30, 1996, 64,236,915 shares . . . . $321,184 $729,716 $564,160
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES AND OTHER INFORMATION
General: The Consolidated Financial Statements of Western Resources,
Inc. (the Company) and its wholly-owned subsidiaries, include KPL, a
rate-regulated electric and gas division of the Company, Kansas Gas and Electric
Company (KGE), a rate-regulated electric utility and wholly-owned subsidiary
of the Company, the Westar companies and The Wing Group, non-utility
subsidiaries, and Mid Continent Market Center, Inc., a regulated gas
transmission service provider. KGE owns 47% of Wolf Creek Nuclear Operating
Corporation (WCNOC), the operating Company for Wolf Creek Generating Station
(Wolf Creek). The Company records its proportionate share of all transactions
of WCNOC as it does other jointly-owned facilities. All significant
intercompany transactions have been eliminated.
The Company prepares its financial statements in conformity with
generally accepted accounting principles as applied to regulated public
utilities. The accounting and rates of the Company are subject to
requirements of the Kansas Corporation Commission (KCC), the Oklahoma
Corporation Commission (OCC), and the Federal Energy Regulatory Commission
(FERC). The financial statements require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, to
disclose contingent assets and liabilities at the balance sheet date, and to
report amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. These consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's 1995 Annual Report on Form 10-K and
the KGE Annual Report on Form 10-K incorporated by reference in the Company's
1995 Annual Report on Form 10-K.
On April 24, 1996, FERC issued its final rule on Order No. 888,
Promoting Wholesale Competition Through Open Access Non-discriminatory
Transmission Services by Public Utilities; Recovery of Stranded Costs by
Public Utilities and Transmitting Utilities. The Company has analyzed the
effect of this order on its operations and does not expect it to have a
material adverse effect.
Consolidated Statements of Cash Flows: For purposes of the Consolidated
Statements of Cash Flows, the Company considers highly liquid collateralized
debt instruments purchased with a maturity of three months or less to be cash
equivalents.
Cash Surrender Value of Life Insurance Contracts: The following amounts
related to corporate-owned life insurance contracts (COLI) are recorded in
Corporate-owned Life Insurance (net) on the Consolidated Balance Sheets:
September 30, December 31,
1996 1995
(Dollars in Millions)
Cash surrender value of contracts. . . $562.8 $479.9
Borrowings against contracts . . . . . (476.3) (435.8)
COLI (net). . . . . . . . . . $ 86.5 $ 44.1
Income is recorded for increases in cash surrender value and net death
proceeds. Interest expense is recognized for COLI borrowings except for
certain contracts entered into in 1993 and 1992. The net income generated
from COLI contracts purchased prior to 1992 including the tax benefit of the
interest deduction and premium expenses are recorded as Corporate-owned Life
Insurance (net) on the Consolidated Statements of Income. The income from
increases in cash surrender value and net death proceeds was $9.5 million,
$19.7 million, and $29.6 million for the three, nine, and twelve months ended
September 30, 1996, respectively, compared to $4.6 million, $12.7 million, and
$16.7 million for the three, nine, and twelve months ended September 30, 1995,
respectively. The interest expense deduction taken was $6.9 million, $20.8
million, and $27.6 million for the three, nine, and twelve months ended
September 30, 1996, respectively, compared to $6.9 million, $18.5 million,
and $24.1 million for the three, nine, and twelve months ended September 30,
1995, respectively.
The COLI contracts entered into in 1993 and 1992 were established to
mitigate the cost of postretirement and postemployment benefits. As approved
by the KCC, the Company is using the net income stream generated by these COLI
policies to offset the costs of postretirement and postemployment benefits. A
significant portion of this income stream relates to the tax deduction
currently taken for interest incurred on contract borrowings under these COLI
policies. The amount of the interest deduction used to offset these benefits
costs was $1.8 million, $5.7 million, and $8.0 million for the three, nine,
and twelve months ended September 30, 1996, respectively, compared to $1.8
million, $4.7 million, and $6.0 million for the three, nine, and twelve months
ended September 30, 1995, respectively.
On August 2, 1996, Congress passed the Health Insurance Portability and
Accountability Act of 1996 which was signed into law by President Clinton on
August 21, 1996. This act eliminates tax benefits associated with the 1993
and 1992 COLI contracts after 1998. With the enactment of this legislation or
should the income stream generated by the 1993 and 1992 COLI contracts not be
sufficient to offset postretirement and postemployment benefit costs on an
accrual basis, the KCC order allows the Company to seek recovery of a
deficiency through the ratemaking process. Regulatory precedents established
by the KCC generally permit the accrual costs of postretirement and
postemployment benefits to be recovered in rates. The act has minimal impact
on the Company's COLI contracts entered into prior to 1992. See Note 5 to the
Consolidated Financial Statements of the Company's 1995 Form 10-K for
additional disclosure.
Reclassifications: Certain amounts in prior years have been
reclassified to conform with classifications used in the current year
presentation.
2. PROPOSED MERGER WITH KANSAS CITY POWER & LIGHT COMPANY
On April 14, 1996, in a letter to Mr. A. Drue Jennings, Chairman of the
Board, President and Chief Executive Officer of Kansas City Power & Light
Company (KCPL), the Company proposed an offer to merge with KCPL.
On April 22, 1996, KCPL's Board of Directors rejected the Company's
proposal and announced its intention to proceed with a merger agreement
entered into on January 19, 1996 with UtiliCorp United Inc. (UCU). Following
the rejection of the April 14 offer, the Company filed proxy materials with
the Securities and Exchange Commission (SEC) for use in soliciting proxies
from KCPL shareholders against the approval of the UCU/KCPL merger. On April
22, 1996, the Company announced its intention to commence an offer to exchange
shares of Company common stock for each KCPL share (the Offer) and filed with
the SEC a registration statement on Form S-4 relating to such exchange offer.
On July 3, the registration statement became effective and on July 8, exchange
offer materials were mailed to KCPL shareholders. The Company's exchange
offer for KCPL is set to expire at 5 p.m. EDT October 25, 1996 unless extended
by the Company.
The number of shares of Company common stock to be delivered per KCPL
share pursuant to the Offer would be equal to the quotient (rounded to the
nearest 1/100,000) determined by dividing $31 by the average of the high and
low sales prices of Company common stock on the New York Stock Exchange for
each of the twenty consecutive trading days ending with the second trading day
immediately preceding the expiration of the Offer (the Exchange Ratio),
provided that the Exchange Ratio would not have been less than 0.91 nor
greater than 0.985.
On May 20, 1996, KCPL announced that it had reached a restructured
merger agreement with UCU. On May 20, 1996 KCPL also filed suit against the
Company and a KCPL shareholder in the Federal District Court for the Western
District of Missouri (the Court) for a declaratory order, among other things,
determining that the restructured transaction was legal pursuant to Missouri
law, that its adoption was not a breach of fiduciary duty, and that a simple
majority of shares voted would be required to approve the transaction rather
than the vote of two-thirds of all outstanding shares required for approval of
the original proposal.
On August 2, 1996, the Court denied KCPL's request with respect to the
requisite vote, holding a two-thirds vote of outstanding shares would be
required to approve the restructured transaction. As a result, KCPL postponed
the special shareholder meeting until August 16, 1996.
On September 16, 1996, The Corporation Trust Company, the independent,
third-party company hired by KCPL to count votes cast by KCPL shareowners at
the KCPL August 16 special meeting, certified that of the 61.9 million KCPL
shares outstanding, 23.5 million (or about 38%) voted for the UCU/KCPL merger.
Consequently, KCPL terminated its merger agreement with UCU on September 17,
1996.
The Company intends to acquire, after consummation of the Offer the
remaining KCPL shares pursuant to a merger of the Company and KCPL (the "KCPL
Merger").
The Company has filed applications with the KCC, Missouri Public Service
Commission (MPSC), and FERC seeking approval of the KCPL Merger. The Company
will also need approval from the Nuclear Regulatory Commission (NRC). See
Note 4 for discussion of rate proceedings.
The Company's proposal is designed to qualify as a pooling of interests
for financial reporting purposes. Under this method, the recorded assets and
liabilities of the Company and KCPL would be carried forward at historical
amounts to a combined balance sheet. Prior period operating results and the
consolidated statements of financial position, cash flows and capitalization
would be restated to effect the combination for all periods presented.
KCPL is a public utility company engaged in the generation,
transmission, distribution, and sale of electricity to approximately 430,000
customers in western Missouri and eastern Kansas. KCPL and the Company have
joint interests in certain electric generating assets, including Wolf Creek.
Completion of the Offer and the KCPL Merger are subject to various
conditions, including approvals from shareholders, regulatory and other
governmental agencies.
As of September 30, 1996, the Company estimates it has incurred
approximately $28 million of transaction costs associated with the KCPL
Merger. The Company anticipates expensing all of these costs upon either the
closing or termination of the Offer.
The KCPL Merger proposal contains certain analyses and statements with
respect to the financial condition, results of operations and business of the
Company following the consummation of the Offer and the KCPL Merger, including
statements relating to the cost savings that will be realized from the KCPL
Merger. Such analyses and statements include forward looking statements with
respect to, among other things: (1) expected cost savings from the KCPL
Merger; (2) normal weather conditions; (3) future national and regional
economic and competitive conditions; (4) inflation rates; (5) regulatory
treatment; (6) future financial market conditions; (7) interest rates; (8)
future business decisions; and (9) other uncertainties, which though
considered reasonable by the Company, are beyond the Company's control and
difficult to predict.
3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal,
environmental, and regulatory proceedings. Management believes that adequate
provision has been made within the Consolidated Financial Statements for these
other matters and accordingly believes their ultimate dispositions will not
have a material adverse effect upon the Company's overall financial position
or results of operations.
4. RATE MATTERS AND REGULATION
The Company, under rate orders from the KCC, OCC, and FERC, recovers
increases in fuel and natural gas costs through fuel adjustment clauses for
wholesale and certain retail electric customers and various purchased gas
adjustment clauses (PGA) for natural gas customers. The KCC and the OCC
require the annual difference between actual gas cost incurred and cost
recovered through the application of the PGA be deferred and amortized through
rates in subsequent periods.
KCC Rate Proceedings: On August 17, 1995, the Company and KGE filed
three proceedings with the KCC. The first sought a $36 million increase in
revenues from the Company's natural gas distribution business. In separate
dockets, the Company and KGE filed with the KCC a request to more rapidly
recover KGE's investment in its assets of Wolf Creek over the next seven years
by increasing depreciation by $50 million each year and a request to reduce
annual depreciation expense by approximately $11 million for electric
transmission, distribution and certain generating plant assets to reflect the
useful lives of these properties more accurately. The Company sought to
reduce electric rates for KGE customers by approximately $8.7 million annually
in each of the seven years of accelerated Wolf Creek depreciation.
On April 15, 1996, the KCC issued an order allowing a revenue increase
of $33.8 million in the Company's natural gas distribution business. On May
3, 1996, the Company filed a Petition for Reconsideration and on July 11,
1996, the KCC issued its Order On Reconsideration allowing the revenue to be
increased to $34.4 million.
On May 23, 1996, the Company implemented an $8.7 million electric rate
reduction to KGE customers on an interim basis. On October 22, 1996, the
Company, the KCC Staff, the City of Wichita, and the Citizens Utility
Ratepayer Board filed an agreement at the KCC whereby the Company's retail
electric rates would be reduced, subject to approval by the KCC. Under the
agreement, on February 1, 1997, KGE's rates would be reduced by $36.3 million
and the May, 1996 interim reduction would become permanent. KGE's rates would
be reduced by another $10 million effective June 1, 1998, and again on June 1,
1999. KPL's rates would be reduced by $10 million effective February 1, 1997.
Two one-time rebates of $5 million would be credited to the Company's
customers in January 1998 and 1999. The agreement also fixes annual savings
from the merger with KGE at $40 million, of which approximately $13 million is
to be allocated to amortization of the KGE merger acquisition premium approved
by the KCC and the remainder to be divided equally between shareholders and
customers.
On April 15, 1996, the Company filed an application with the KCC
requesting an order approving its proposal to merge with KCPL and for other
related relief. On July 29, 1996, the Company filed its First Amended
Application with the KCC in its proceeding for approval to merge with KCPL.
The amended application reflected the increase in the Company's offer for KCPL
from $28 to $31 per share and proposed an incentive rate mechanism requiring
all regulated earnings in excess of the merged Company's 12.61% return on
equity to be split among customers, shareholders, and additional depreciation
on Wolf Creek.
MPSC Proceedings: On May 3, 1996, the Company filed an application with
the MPSC requesting an order approving its proposal to merge with KCPL. The
application includes the same regulatory plan as proposed before the KCC and
includes an annual rate reduction of $21 million for KCPL retail electric
customers.
FERC Proceedings: On August 22, 1996, the Company filed an application
with the FERC under section 203 of the Federal Power Act requesting an order
approving its proposal to merge with KCPL.
5. COMMITMENTS AND CONTINGENCIES
Manufactured Gas Sites: The Company has been associated with 15 former
manufactured gas sites located in Kansas which may contain coal tar and other
potentially harmful materials. The Company and the Kansas Department of
Health and Environment (KDHE) entered into a consent agreement governing all
future work at the 15 sites. The terms of the consent agreement will allow
the Company to investigate these sites and set remediation priorities based
upon the results of the investigations and risk analysis. The prioritized
sites will be investigated over a 10 year period. The agreement will allow
the Company to set mutual objectives with the KDHE in order to expedite
effective response activities and to control costs and environmental impact.
The costs incurred for site investigation and risk assessment in 1995 were
minimal. The Company is aware of other Midwestern utilities which have
incurred remediation costs ranging between $500,000 and $14 million per site.
The KCC has permitted another Kansas utility to recover its remediation costs
through rates. To the extent that such remediation costs are not recovered
through rates, the costs could be material to the Company's financial position
or results of operations depending on the degree of remediation required and
number of years over which the remediation must be completed.
Superfund Sites: The Company is one of numerous potentially responsible
parties at a groundwater contamination site in Wichita, Kansas (Wichita site)
which is listed by the EPA as a Superfund site. The Company has previously
been associated with other Superfund sites of which the Company's liability
has been classified as de minimis and any potential obligations have been
settled at minimal cost. In 1994, the Company settled Superfund obligations
at three sites for a total of $57,500. No Superfund obligations have been
settled since 1994. The Company's obligation at the Wichita site appears to be
limited based on this experience. In the opinion of the Company's management,
the resolution of these matters is not expected to have a material impact on
the Company's financial position or results of operations.
Clean Air Act: The Clean Air Act Amendments of 1990 (the Act) require a
two-phase reduction in certain emissions. To meet the monitoring and
reporting requirements under the acid rain program, the Company installed
continuous monitoring and reporting equipment at a total cost of approximately
$10 million by the December 31, 1995 deadline. The Company expects some
additional equipment acquisitions and other expenditures to be needed to meet
Phase II sulfur dioxide requirements. Current estimated costs for Phase II
are approximately $5 million.
The nitrogen oxides and toxic limits, which were not set in the law,
were proposed by the EPA in January 1996. The Company is currently evaluating
the steps it will need to take in order to comply with the proposed new rules,
but is unable to determine its compliance options or related compliance costs,
which could be substantial, until the evaluation is finished. The Company will
have three years to comply with the new rules.
Decommissioning: The Company accrues decommissioning costs over the
expected life of the Wolf Creek generating facility. The accrual is based on
estimated unrecovered decommissioning costs which consider inflation over the
remaining estimated life of the generating facility and are net of expected
earnings on amounts recovered from customers and deposited in an external
trust fund.
On June 9, 1994, the KCC issued an order approving the estimated
decommissioning costs of the 1993 Wolf Creek Decommissioning Cost Study which
estimates the Company's share of Wolf Creek decommissioning costs, under the
immediate dismantlement method, to be approximately $595 million during the
period 2025 through 2033, or approximately $174 million in 1993 dollars.
These costs were calculated using an assumed inflation rate of 3.45% over the
remaining service life, in 1993, of 32 years.
Decommissioning costs are being charged to operating expenses in
accordance with the KCC order. Electric rates charged to customers provide
for recovery of these decommissioning costs over the life of Wolf Creek.
Amounts expensed approximated $3.6 million in 1995 and will increase annually
to $5.5 million in 2024. These expenses are deposited in an external trust
fund. The average after tax expected return on trust assets is 5.9%
The Company's investment in the decommissioning fund, including
reinvested earnings approximated $30.6 million and $25.1 million at September
30, 1996 and December 31, 1995, respectively. Trust fund earnings accumulate
in the fund balance and increase the recorded decommissioning liability.
These amounts are reflected in Decommissioning Trust, and the related
liability is included in Deferred Credits and Other Liabilities, Other, on the
Consolidated Balance Sheets.
The staff of the SEC has questioned certain current accounting practices
used by nuclear electric generating station owners regarding the recognition,
measurement, and classification of decommissioning costs for nuclear electric
generating stations. In response to these questions, the Financial Accounting
Standards Board is expected to issue new accounting standards for removal
costs, including decommissioning, in 1997. If current electric utility
industry accounting practices for such decommissioning costs are changed: (1)
annual decommissioning expenses could increase, (2) the estimated present
value of decommissioning costs could be recorded as a liability rather than as
accumulated depreciation, and (3) trust fund income from the external
decommissioning trusts could be reported as investment income rather than as a
reduction to decommissioning expense. When revised accounting guidance is
issued, the Company will also have to evaluate its effect on accounting for
removal costs of other long-lived assets. The Company is not able to predict
what effect such changes would have on results of operations, financial
position, or related regulatory practices until the final issuance of revised
accounting guidance, but such effect could be material.
The Company carries premature decommissioning insurance which has
several restrictions. One of these is that it can only be used if Wolf Creek
incurs an accident exceeding $500 million in expenses to safely stabilize the
reactor, to decontaminate the reactor and reactor station site in accordance
with a plan approved by the NRC, and to pay for on-site property damages.
This decommissioning insurance will only be available if the insurance funds
are not needed to implement the NRC-approved plan for stabilization and
decontamination.
Nuclear Insurance: The Price-Anderson Act limits the combined public
liability of the owners of nuclear power plants to $8.9 billion for a single
nuclear incident. If this liability limitation is insufficient, the U.S.
Congress will consider taking whatever action is necessary to compensate the
public for valid claims. The Wolf Creek owners (Owners) have purchased the
maximum available private insurance of $200 million and the balance is
provided by an assessment plan mandated by the NRC. Under this plan, the
Owners are jointly and severally subject to a retrospective assessment of up
to $79.3 million ($37.3 million, Company's share) in the event there is a
major nuclear incident involving any of the nation's licensed reactors. This
assessment is subject to an inflation adjustment based on the Consumer Price
Index and applicable premium taxes. There is a limitation of $10 million
($4.7 million, Company's share) in retrospective assessments per incident, per
year.
The Owners carry decontamination liability, premature decommissioning
liability, and property damage insurance for Wolf Creek totaling approximately
$2.8 billion ($1.3 billion, Company's share). This insurance is provided by a
combination of "nuclear insurance pools" ($500 million) and Nuclear Electric
Insurance Limited (NEIL) ($2.3 billion). In the event of an accident,
insurance proceeds must first be used for reactor stabilization and site
decontamination. The Company's share of any remaining proceeds can be used
for property damage or premature decommissioning costs up to $1.3 billion
(Company's share). Premature decommissioning insurance cost recovery is
excess of funds previously collected for decommissioning (as discussed under
"Decommissioning").
The Owners also carry additional insurance with NEIL to cover costs of
replacement power and other extra expenses incurred during a prolonged outage
resulting from accidental property damage at Wolf Creek. If losses incurred
at any of the nuclear plants insured under the NEIL policies exceed premiums,
reserves, and other NEIL resources, the Company may be subject to
retrospective assessments under the current policies of approximately $11
million per year. Effective November 15, 1996, the Company's potential
retrospective assessment will be reduced to $8 million per year.
Although the Company maintains various insurance policies to provide
coverage for potential losses and liabilities resulting from an accident or an
extended outage, the Company's insurance coverage may not be adequate to cover
the costs that could result from a catastrophic accident or extended outage at
Wolf Creek. Any substantial losses not covered by insurance, to the extent
not recoverable through rates, would have a material adverse effect on the
Company's financial condition and results of operations.
Fuel Commitments: To supply a portion of the fuel requirements for its
generating plants, the Company has entered into various commitments to obtain
nuclear fuel, coal, and natural gas. Some of these contracts contain
provisions for price escalation and minimum purchase commitments. At December
31, 1995, WCNOC's nuclear fuel commitments (Company's share) were
approximately $15.3 million for uranium concentrates expiring at various times
through 2001, $120.8 million for enrichment expiring at various times through
2014, and $72.7 million for fabrication through 2025. At December 31, 1995,
the Company's coal contract commitments in 1995 dollars under the remaining
terms of the contracts were approximately $2.5 billion. The largest coal
contract expires in 2020, with the remaining coal contracts expiring at
various times through 2013.
Energy Act: As part of the 1992 Energy Policy Act, a special assessment
is being collected from utilities for a uranium enrichment, decontamination,
and decommissioning fund. The Company's portion of the assessment for Wolf
Creek is approximately $7 million, payable over 15 years. Management expects
such costs to be recovered through the ratemaking process.
6. INCOME TAXES
Total income tax expense included in the Consolidated Statements of
Income reflects the Federal statutory rate of 35%. The Federal statutory rate
produces effective income tax rates of 37.4%, 34.9%, and 34.7% for the three,
nine, and twelve month periods ended September 30, 1996 compared to 37.0%,
34.9%, and 34.7% for the three, nine, and twelve month periods ended September
30, 1995. The effective income tax rates vary from the Federal statutory rate
due to permanent differences, including the amortization of investment tax
credits, and accelerated amortization of certain deferred income taxes.
7. INVESTMENTS
During 1996, the Company has purchased approximately 34 million common
shares of ADT Limited (ADT) for approximately $500 million. The shares
purchased represent approximately 24% of ADT's common equity. Goodwill of
approximately $295 million is associated with this investment and is being
amortized over 40 years. The Company accounts for this investment using the
equity method and includes the investment in net non-utility investments on
the accompanying Consolidated Balance Sheets.
On July 1, 1996, ADT and Republic Industries, Inc. (Republic) announced
plans to combine, in which ADT would become a wholly-owned subsidiary of
Republic. On September 30, 1996, the agreement between ADT and Republic was
terminated.
WESTERN RESOURCES, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's 1995 Annual Report on Form 10-K. The following
updates the information provided in the 1995 Annual Report on Form 10-K and
analyzes certain changes in the results of operations between the three, nine,
and twelve month periods ended September 30, 1996 and comparable periods of
1995.
Certain matters discussed in this Form 10-Q are "forward-looking
statements" intended to qualify for the safe harbors from liability
established by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements
that describe the Company's future plans, objectives or goals are also
forward-looking statements. Such statements address future events and
conditions concerning capital expenditures, earnings, litigation, rate and
other regulatory matters, the pending KCPL Merger, liquidity and capital
resources, interest rates, changing weather conditions, and accounting
matters. Actual results in each case could differ materially from those
currently anticipated in such statements, by reason of factors such as
electric utility restructuring, including the ongoing state and federal
activities; future economic conditions; developments in the legislative,
regulatory and competitive markets in which the Company operates; and other
circumstances affecting anticipated revenues and costs.
FINANCIAL CONDITION
General: Net income for the third quarter of 1996 was $62.9 million,
down from net income of $71.9 million for the same period of 1995. The
Company earned $0.87 per share of common stock for the third quarter of 1996,
a decrease of $0.23 per share from the third quarter of 1995. Operating
revenues were $490 million and $470 million for the three months ended
September 30, 1996 and 1995, respectively.
Net income for the nine and twelve months ended September 30, 1996, was
$136.5 million and $183.0 million, respectively, compared to $135.2 million
and $168.6 million for the same periods of 1995. The Company earned $1.93
and $2.62 per share of common stock, respectively, for the nine and twelve
months ended September 30, 1996 compared to $2.02 and $2.51 for the comparable
periods of 1995. Operating revenues were $1.5 billion and $1.9 billion for
the nine and twelve months ended September 30, 1996, respectively. These
revenues compare to $1.3 billion and $1.7 billion for the same periods of
1995.
The changes in net income and operating revenues are primarily due to
the reasons discussed below in Results of Operations. The earnings per share
for the three months ended September 30, 1996 have decreased compared to prior
year due to decreased sales in all retail customer classes compared to last
year. The earnings per share for the nine months ended September 30, 1996 as
compared to prior year reflect an increase of two million shares outstanding.
Earnings per share for the twelve months ended September 30, 1996 have
increased compared to prior year due to increased electric and gas sales.
A quarterly dividend of $0.515 per share was declared in the third
quarter of 1996, for an indicated annual rate of $2.06 per share. The book
value per share was $25.14 at September 30, 1996, up from $24.71 at December
31, 1995. There were 64,161,329 and 62,243,794 average shares outstanding
for the third quarter of 1996 and 1995, respectively.
As of September 30, 1996, the Company estimates it has incurred
approximately $28 million of transaction costs associated with the KCPL
Merger. The Company anticipates expensing all of these costs upon either the
closing or termination of the Offer. (See Note 2 of the Notes to Consolidated
Financial Statements for additional information on the proposed KCPL Merger.)
Liquidity and Capital Resources: The Company's short-term financing
requirements are satisfied, as needed, through the sale of commercial paper,
short-term bank loans and borrowings under unsecured lines of credit
maintained with banks. At September 30, 1996, short-term borrowings amounted
to $646 million, of which $252 million was commercial paper. Short-term debt
increased from December 31, 1995 primarily as a result of the Company's
purchase of an approximate 24% common equity interest in ADT. (See Note 7 for
further discussion of the Company's investment in ADT.)
At September 30, 1996, the Company had short-term bank credit
arrangements available of $423 million, of which $200 million was outstanding.
On October 11, 1996, the Company increased its bank credit arrangements
available to $523 million.
During the third quarter, the Company borrowed $125 million under its
revolving credit agreement.
On July 1, 1996, all shares of the Company's 8.50% Preference Stock due
2016 were redeemed.
On July 31, 1996, Western Resources Capital II, a wholly owned trust, of
which the sole asset is subordinated debentures of the Company, sold in a
public offering 4.8 million preferred securities of 8-1/2% Cumulative
Quarterly Income Preferred Securities, Series B, for $120 million. The trust
interests represented by the preferred securities are redeemable at the option
of Western Resources Capital II, on or after July 31, 2001, at $25 per
preferred security plus accrued interest and unpaid dividends. Holders of the
securities are entitled to receive distributions at an annual rate of 8-1/2%
of the liquidation preference value of $25. Distributions are payable
quarterly, and in substance are tax deductible by the Company. The sole asset
of the trust is $124 million principal amount of 8-1/2% Deferrable Interest
Subordinated Debentures, Series B due July 31, 2036.
The securities are shown as Western Resources Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust holding solely
Subordinated Debentures (Other Mandatorily Redeemable Securities) on the
Consolidated Balance Sheets and Consolidated Statements of Capitalization.
See Note 7 of the Company's 1995 Annual Report on Form 10-K for additional
information.
RESULTS OF OPERATIONS
Revenues: The Company's revenues vary with levels of usage as a result
of changing weather conditions during comparable periods and are sensitive to
seasonal fluctuations between consecutive periods. Future electric and
natural gas sales will continue to be affected by weather conditions,
competing fuel sources, wholesale demand, and the overall economy of the
Company's service area.
The following table reflects changes in electric sales for the three,
nine and twelve months ended September 30, 1996 from the comparable periods of
1995.
Increase (Decrease) in electric sales volumes:
3 Months 9 Months 12 Months
ended ended ended
Residential (10.3)% 2.8% 3.0%
Commercial (3.6)% 3.4% 2.5%
Industrial (3.6)% 0.8% 1.5%
Total retail sales (6.0)% 2.3% 2.3%
Wholesale and interchange 41.9% 39.7% 35.5%
Total electric sales 2.6% 9.5% 8.7%
Electric revenues decreased four percent for the three months ended
September 30, 1996 compared to 1995. The decrease is largely due to decreased
residential sales as mild summer temperatures decreased the demand for air
conditioning load, compared to last year. The Company's service territory
experienced a 23% decrease in the number of cooling degree days during the
third quarter of 1996, as compared to the third quarter of 1995 and a 17%
lower than normal number of cooling degree days.
Electric revenues were higher four percent and three percent,
respectively for the nine and twelve months ended September 30, 1996 compared
to the same periods of 1995. The increase was due to higher sales in the
residential and commercial customer classes and wholesale and interchange as a
result of warmer spring and colder winter temperatures experienced during the
first six months of 1996 compared to 1995.
The following table reflects changes in natural gas sales for the three,
nine, and twelve months ended September 30, 1996 from the comparable periods
of 1995.
Increase (Decrease) in natural gas sales volumes:
3 Months 9 Months 12 Months
ended ended ended
Residential 1.8% 12.1% 11.3%
Commercial (48.4)% (0.8)% (3.0)%
Industrial (32.7)% (16.7)% (15.3)%
Transportation (15.6)% (7.5)% (10.1)%
Total Deliveries 1.5% 3.7% 5.0%
Natural gas revenues increased 25% for the three months ended September
30, 1996 compared to September 30, 1995 as a result of as available gas sales
(See the Company's 1995 Annual Report on Form 10-K for additional explanation
of as available gas sales). Natural gas revenues increased 28% for both the
nine and twelve months ended September 30, 1996 compared to the same periods
of 1995 as a result of colder winter temperatures. Natural gas revenues for
all periods ending September 30, 1996 were also higher due to the gas revenue
increase ordered by the KCC on July 11, 1996. (For additional information on
the gas rate increase, see Note 4 of the Notes to Consolidated Financial
Statements.)
Operating Expenses: The amortization of the acquisition adjustment
related to the KGE merger, increased natural gas purchases as a result of
increased as-available gas sales, and increases in other operations expenses
attributable to increased activity and expansion in the Company's unregulated
subsidiaries resulted in operating expense increasing 7% for the three months
ended September 30, 1996. The increase in operating expenses was partially
offset by decreased maintenance expense and income tax expense for the three
months ended September 30, 1996.
Total operating expenses increased 18% and 17% for the nine and twelve
months ended September 30, 1996 compared to the same periods of 1995.
Increases in these periods are primarily attributable to the amortization of
the acquisition adjustment related to the KGE merger and increased fuel
expense, purchased power, and natural gas purchases due to Wolf Creek having
been taken off-line for its eighth refueling and maintenance outage during the
first quarter of 1996. Also contributing to the increases in fuel and
purchased power expenses was the increase in net generation due to the
increase in customer demand for air conditioning load during the second
quarter of 1996. The increase in operating expenses was partially offset by
decreased maintenance expense and income tax expense for both periods.
The amortization of the acquisition adjustment associated with the
Company's 1992 acquisition of KGE, which began in August 1995, amounted to
$5.0 million, $15.0 million, and $20.0 million for the three, nine, and twelve
months ended September 30, 1996, respectively.
Other Income and Deductions: Other income and deductions, net of taxes,
increased $5.2 million, $8.1 million, and $22.4 million for the three, nine,
and twelve months ended September 30, 1996 compared to same periods of 1995.
These increases are attributable to earnings from subsidiary investments.
Interest Charges and Preferred and Preference Dividend Requirements:
Total interest charges increased 27%, 17%, and 12% for the three, nine, and
twelve months ended September 30, 1996 from the comparable periods in 1995,
respectively. The increases for the three and nine months ended interest
charges reflects interest paid on higher short-term debt balances and balances
under the Company's revolving credit agreement. The increase in the twelve
months interest charges was a result of interest paid on higher short-term
debt balances and distributions on mandatorily redeemable preferred
securities. See discussion above in Liquidity and Capital Resources regarding
higher short-term debt balances.
WESTERN RESOURCES, INC.
Part II Other Information
Item 5. Other Information
Proposed Merger with Kansas City Power & Light Company: See Note 2 of the
Notes to Consolidated Financial Statements.
Rate Plans: See Note 4 of the Consolidated Financial Statements.
Investments: See Note 7 of the Consolidated Financial Statements.
Plans to Partner with China Power International Holdings Ltd. (CPI): On
September 18, 1996, the Company announced its plans to partner with CPI in
several power development projects. The agreement, which may involve an initial
investment of up to $100 million, includes acquiring an interest in seven power
plants and the option to expand the capacity of existing plants in the Peoples'
Republic of China.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 12 - Computation of Ratio of Consolidated Earnings to
Fixed Charges for 12 Months Ended September 30,
1996 (filed electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
Exhibit 99 - Kansas Gas and Electric Company's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1996 (filed electronically)
(b) Reports on Form 8-K:
Form 8-K dated July 23, 1996 - 6/30/96 earnings release.
Form 8-K dated July 26, 1996 - Press release about KCC Staff and
the Company reaching agreement in rate case.
Form 8-K dated October 24, 1996 - Press release about KCC Staff
and the Company reaching an amended agreement in rate case.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Western Resources, Inc.
Date October 25, 1996 By /s/ S. L. KITCHEN
S. L. Kitchen, Executive Vice President
and Chief Financial Officer
Date October 25, 1996 By /s/ JERRY D. COURINGTON
Jerry D. Courington,
Controller
Exhibit 12
WESTERN RESOURCES, INC.
Computations of Ratio of Earnings to Fixed Charges and
Computations of Ratio of Earnings to Combined Fixed Charges
and Preferred and Preference Dividend Requirements
(Dollars in Thousands)
Unaudited
Twelve
Months
Ended
September 30, Year Ended December 31,
1996 1995 1994 1993 1992 1991
Net Income . . . . . . . . . . . $182,964 $181,676 $187,447 $177,370 $127,884 $ 89,645
Taxes on Income. . . . . . . . . 83,549 83,392 99,951 78,755 46,099 42,527
Net Income Plus Taxes . . . 266,513 265,068 287,398 256,125 173,983 132,172
Fixed Charges:
Interest on Long-Term Debt . . 102,488 95,962 98,483 123,551 117,464 51,267
Interest on Other Indebtedness 31,464 27,487 20,139 19,255 20,009 10,490
Interest on Other Mandatorily
Redeemable Securities. . . . 7,606 372 - - - -
Interest on Corporate-owned
Life Insurance Borrowings. . 35,597 32,325 26,932 16,252 5,294 -
Interest Applicable to
Rentals. . . . . . . . . . . 31,642 31,650 29,003 28,827 27,429 5,089
Total Fixed Charges. . . . 208,797 187,796 174,557 187,885 170,196 66,846
Preferred and Preference Dividend
Requirements:
Preferred and Preference
Dividends. . . . . . . . . . 16,964 13,419 13,418 13,506 12,751 6,377
Income Tax Required. . . . . . 7,746 6,160 7,155 5,997 4,596 3,025
Total Preferred and Preference
Dividend Requirements. . . 24,710 19,579 20,573 19,503 17,347 9,402
Total Fixed Charges and Preferred
and Preference Dividend
Requirements. . . . . . . . . 233,507 207,375 195,130 207,388 187,543 76,248
Earnings (1) . . . . . . . . . . $475,310 $452,864 $461,955 $444,010 $344,179 $199,018
Ratio of Earnings to Fixed Charges 2.28 2.41 2.65 2.36 2.02 2.98
Ratio of Earnings to Combined Fixed
Charges and Preferred and Preference
Dividend Requirements. . . . . 2.04 2.18 2.37 2.14 1.84 2.61
(1) Earnings are deemed to consist of net income to which has been added income taxes (including
net deferred investment tax credit) and fixed charges. Fixed charges consist of all interest
on indebtedness, amortization of debt discount and expense, and the portion of rental expense
which represents an interest factor. Preferred and preference dividend requirements consist
of an amount equal to the pre-tax earnings which would be required to meet dividend
requirements on preferred and preference stock.
UT
1,000
9-MOS
DEC-31-1996
SEP-30-1996
PER-BOOK
4,349,167
659,148
425,675
649,201
0
6,083,191
321,184
729,716
564,160
1,615,060
270,000
24,858
1,466,526
394,700
0
251,700
0
0
0
0
2,060,347
6,083,191
1,481,915
71,100
1,181,551
1,254,035
227,880
17,118
244,998
108,514
136,484
13,609
122,875
98,336
78,568
231,521
1.93
0
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-7324
KANSAS GAS AND ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
KANSAS 48-1093840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 208
WICHITA, KANSAS 67201
(Address of Principal Executive Offices)
316/261-6611
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 25, 1996
Common Stock (No par value) 1,000 Shares
Registrant meets the conditions of General Instruction H(1)(a) and (b) to Form
10-Q and is therefore filing this form with a reduced disclosure format.
KANSAS GAS AND ELECTRIC COMPANY
INDEX
Page
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets 3
Statements of Income 4 - 6
Statements of Cash Flows 7 - 8
Statements of Capitalization 9
Statements of Common Stock Equity 10
Notes to Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Part II. Other Information
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
KANSAS GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1996 1995
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . . . . . . . . . $3,476,803 $3,427,928
Less - Accumulated depreciation . . . . . . . . . . . . . 956,599 893,728
2,520,204 2,534,200
Construction work in progress . . . . . . . . . . . . . . 31,394 40,810
Nuclear fuel (net). . . . . . . . . . . . . . . . . . . . 44,072 53,942
Net utility plant . . . . . . . . . . . . . . . . . . . 2,595,670 2,628,952
OTHER PROPERTY AND INVESTMENTS:
Decommissioning trust . . . . . . . . . . . . . . . . . . 30,627 25,070
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 8,745 7,885
39,372 32,955
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . 64 53
Accounts receivable and unbilled revenues (net) . . . . . 86,241 76,490
Advances to parent company . . . . . . . . . . . . . . . 227,419 34,948
Fossil fuel, at average cost. . . . . . . . . . . . . . . 15,628 17,522
Materials and supplies, at average cost . . . . . . . . . 30,286 31,458
Prepayments and other current assets. . . . . . . . . . . 23,114 17,128
382,752 177,599
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes . . . . . . . . . . . . . . 208,367 208,367
Deferred coal contract settlement costs . . . . . . . . . 12,396 14,612
Phase-in revenues . . . . . . . . . . . . . . . . . . . . 30,703 43,861
Other deferred plant costs. . . . . . . . . . . . . . . . 31,339 31,539
Corporate-owned life insurance (net). . . . . . . . . . . 10,474 7,279
Unamortized debt expense. . . . . . . . . . . . . . . . . 23,969 25,605
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 40,261 32,645
357,509 363,908
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $3,375,303 $3,203,414
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (See Statements):
Common stock equity . . . . . . . . . . . . . . . . . . . $1,184,766 $1,186,077
Long-term debt (net). . . . . . . . . . . . . . . . . . . 684,037 684,082
1,868,803 1,870,159
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . . 210,000 50,000
Long-term debt due within one year. . . . . . . . . . . . - 16,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . 43,772 50,783
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . 56,875 17,766
Accrued interest. . . . . . . . . . . . . . . . . . . . . 14,270 7,903
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 6,604 6,608
331,521 149,060
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . . . . . . . . . 789,040 800,934
Deferred investment tax credits . . . . . . . . . . . . . 70,534 72,970
Deferred gain from sale-leaseback . . . . . . . . . . . . 235,470 242,700
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 79,935 67,591
1,174,979 1,184,195
COMMITMENTS AND CONTINGENCIES (Note 2)
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . $3,375,303 $3,203,414
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
September 30,
1996 1995
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 193,198 $ 202,382
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 29,082 24,360
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 6,299 5,084
Power purchased . . . . . . . . . . . . . . . . . . . . . 1,916 2,276
Other operations. . . . . . . . . . . . . . . . . . . . . 31,355 27,831
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 11,388 11,460
Depreciation and amortization . . . . . . . . . . . . . . 23,847 20,033
Amortization of phase-in revenues . . . . . . . . . . . . 4,386 4,386
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 18,156 26,774
State income . . . . . . . . . . . . . . . . . . . . . 4,825 6,482
General . . . . . . . . . . . . . . . . . . . . . . . . 12,512 11,736
Total operating expenses. . . . . . . . . . . . . . . 143,766 140,422
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 49,432 61,960
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . 2,648 (2,248)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 1,091 872
Income taxes (net). . . . . . . . . . . . . . . . . . . . 2,563 3,459
Total other income and deductions . . . . . . . . . . 6,302 2,083
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 55,734 64,043
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 11,505 11,759
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 3,937 1,194
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (444) (746)
Total interest charges. . . . . . . . . . . . . . . . 14,998 12,207
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 40,736 $ 51,836
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 501,270 $ 485,686
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 73,062 61,756
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 13,674 14,848
Power purchased . . . . . . . . . . . . . . . . . . . . . 8,740 3,482
Other operations. . . . . . . . . . . . . . . . . . . . . 101,031 90,030
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 38,726 36,086
Depreciation and amortization . . . . . . . . . . . . . . 70,709 56,702
Amortization of phase-in revenues . . . . . . . . . . . . 13,158 13,158
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 30,828 42,252
State income . . . . . . . . . . . . . . . . . . . . . 8,817 10,944
General . . . . . . . . . . . . . . . . . . . . . . . . 36,600 35,122
Total operating expenses. . . . . . . . . . . . . . . 395,345 364,380
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 105,925 121,306
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (1,101) (5,785)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 2,662 3,702
Income taxes (net). . . . . . . . . . . . . . . . . . . . 7,890 7,278
Total other income and deductions . . . . . . . . . . 9,451 5,195
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 115,376 126,501
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 34,804 35,310
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 8,306 3,806
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (1,423) (1,890)
Total interest charges. . . . . . . . . . . . . . . . 41,687 37,226
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 73,689 $ 89,275
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
September 30,
1996 1995
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 639,452 $ 624,773
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 91,898 80,477
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 18,251 16,677
Power purchased . . . . . . . . . . . . . . . . . . . . . 9,835 5,757
Other operations. . . . . . . . . . . . . . . . . . . . . 128,877 120,413
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 50,696 48,887
Depreciation and amortization . . . . . . . . . . . . . . 93,686 70,757
Amortization of phase-in revenues . . . . . . . . . . . . 17,545 17,544
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 36,906 50,870
State income . . . . . . . . . . . . . . . . . . . . . 10,416 13,211
General . . . . . . . . . . . . . . . . . . . . . . . . 47,719 45,267
Total operating expenses. . . . . . . . . . . . . . . 505,829 469,860
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 133,623 154,913
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . 2,016 (7,418)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 3,844 5,140
Income taxes (net). . . . . . . . . . . . . . . . . . . . 9,698 9,193
Total other income and deductions . . . . . . . . . . 15,558 6,915
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 149,181 161,828
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 46,567 47,105
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 9,690 5,268
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (2,363) (2,032)
Total interest charges. . . . . . . . . . . . . . . . 53,894 50,341
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 95,287 $ 111,487
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 73,689 $ 89,275
Depreciation and amortization . . . . . . . . . . . . . . . 55,691 54,978
Other amortization (including nuclear fuel) . . . . . . . . 10,777 11,274
Gain on sales of utility plant (net of tax) . . . . . . . . - (951)
Deferred taxes and investment tax credits (net) . . . . . . (14,330) (16,470)
Amortization of phase-in revenues . . . . . . . . . . . . . 13,158 13,158
Corporate-owned life insurance. . . . . . . . . . . . . . . (23,334) (14,757)
Amortization of gain from sale-leaseback. . . . . . . . . . (7,230) (7,231)
Amortization of acquisition adjustment. . . . . . . . . . . 15,018 1,724
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . (9,751) (21,617)
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . 1,894 (2,072)
Accounts payable. . . . . . . . . . . . . . . . . . . . . (7,011) (4,774)
Interest and taxes accrued. . . . . . . . . . . . . . . . 45,476 49,769
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (2,664) (7,856)
Changes in other assets and liabilities . . . . . . . . . . (4,966) 7,591
Net cash flows from operating activities. . . . . . . . 146,417 152,041
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 47,430 65,850
Sales of utility plant. . . . . . . . . . . . . . . . . . . - (1,723)
Corporate-owned life insurance policies . . . . . . . . . . 24,905 25,643
Death proceeds of corporate-owned life insurance. . . . . . (9,010) (250)
Net cash flows used in investing activities . . . . . . 63,325 89,520
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . 160,000 (20,950)
Advances to parent company (net). . . . . . . . . . . . . . (192,471) (87,047)
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (16,135) (25)
Borrowings against life insurance policies. . . . . . . . . 45,136 45,578
Repayment of borrowings against life insurance policies . . (4,611) (73)
Dividends to parent company . . . . . . . . . . . . . . . . (75,000) -
Net cash flows (used in) financing activities. . . . . . (83,081) (62,517)
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . 11 4
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 53 47
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 64 $ 51
,
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 59,873 $ 54,274
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 21,600 31,100
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 95,287 $ 111,487
Depreciation and amortization . . . . . . . . . . . . . . . 73,663 69,033
Other amortization (including nuclear fuel) . . . . . . . . 14,696 13,789
Gain on sales of utility plant (net of tax) . . . . . . . . - (951)
Deferred taxes and investment tax credits (net) . . . . . . 5,991 (5,563)
Amortization of phase-in revenues . . . . . . . . . . . . . 17,545 17,544
Corporate-owned life insurance. . . . . . . . . . . . . . . (37,125) (18,403)
Amortization of gain from sale-leaseback. . . . . . . . . . (9,639) (9,641)
Amortization of acquisition adjustment. . . . . . . . . . . 20,023 1,724
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . 3,208 (30,282)
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . 196 (2,172)
Accounts payable. . . . . . . . . . . . . . . . . . . . . (547) (4,047)
Interest and taxes accrued. . . . . . . . . . . . . . . . (3,326) 11,406
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 3,213 (4,934)
Changes in other assets and liabilities . . . . . . . . . . 1,968 14,575
Net cash flows from operating activities. . . . . . . . 185,153 163,565
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 75,518 90,084
Sales of utility plant. . . . . . . . . . . . . . . . . . . - (1,723)
Corporate-owned life insurance policies . . . . . . . . . . 29,609 27,473
Death proceeds of corporate-owned life insurance. . . . . . (19,343) (250)
Net cash flows used in investing activities . . . . . . 85,784 115,584
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . 180,950 (13,250)
Advances to parent company (net). . . . . . . . . . . . . . (75,979) 44,112
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (16,135) (25)
Borrowings against life insurance policies. . . . . . . . . 46,604 46,249
Repayment of borrowings against life insurance policies . . (9,796) 73
Dividends to parent company . . . . . . . . . . . . . . . . (225,000) (125,000)
Net cash flows (used in) financing activities. . . . . . (99,356) (47,987)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . 13 (6)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 51 57
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 64 $ 51
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 77,407 $ 72,661
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 32,600 37,951
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CAPITALIZATION
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1996 1995
COMMON STOCK EQUITY (see Statements):
Common stock, without par value, authorized and issued
1,000 shares. . . . . . . . . . . . . . . . . . . . . . . $1,065,634 $1,065,634
Retained earnings . . . . . . . . . . . . . . . . . . . . . 119,132 120,443
Total common stock equity . . . . . . . . . . . . . . . . 1,184,766 63% 1,186,077 63%
LONG-TERM DEBT:
First Mortgage Bonds:
Series Due 1996 1995
5-5/8% 1996 $ - $ 16,000
7.6% 2003 135,000 135,000
6-1/2% 2005 65,000 65,000
6.20% 2006 100,000 100,000
300,000 316,000
Pollution Control Bonds:
5.10% 2023 13,822 13,957
Variable (a) 2027 21,940 21,940
7.0% 2031 327,500 327,500
Variable (a) 2032 14,500 14,500
Variable (a) 2032 10,000 10,000
387,762 387,897
Total bonds. . . . . . . . . . . . . . . . . . . . . . 687,762 703,897
Less:
Unamortized premium and discount (net). . . . . . . . . . 3,725 3,815
Long-term debt due within one year. . . . . . . . . . . . - 16,000
Total long-term debt . . . . . . . . . . . . . . . . . 684,037 37% 684,082 37%
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . $1,868,803 100% $1,870,159 100%
(a) Market-Adjusted Tax Exempt Securities (MATES). As of September 30, 1996, the rate
on these bonds ranged from 3.55% to 3.63%.
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF COMMON STOCK EQUITY
(Dollars in Thousands)
(Unaudited)
Common Retained
Stock Earnings
BALANCE DECEMBER 31, 1993, 1,000 shares. . . . . . . $1,065,634 $ 180,044
Net income . . . . . . . . . . . . . . . . . . . . . 104,526
Dividend to parent company . . . . . . . . . . . . . (125,000)
BALANCE DECEMBER 31, 1994, 1,000 shares. . . . . . . 1,065,634 159,570
Net income . . . . . . . . . . . . . . . . . . . . . 110,873
Dividend to parent company . . . . . . . . . . . . . (150,000)
BALANCE DECEMBER 31, 1995, 1,000 shares. . . . . . . 1,065,634 120,443
Net Income . . . . . . . . . . . . . . . . . . . . . 73,689
Dividend to parent company . . . . . . . . . . . . . (75,000)
BALANCE SEPTEMBER 30, 1996, 1,000 shares . . . . . . $1,065,634 $ 119,132
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES AND OTHER INFORMATION
General: Kansas Gas and Electric Company (the Company, KGE) is a
rate-regulated electric utility and wholly-owned subsidiary of Western
Resources, Inc. (Western Resources). The Company is engaged in the production,
purchase, transmission, distribution, and sale of electricity. The Company
serves approximately 275,000 electric customers in southeastern Kansas.
On March 31, 1992, Western Resources through its wholly-owned subsidiary
KCA Corporation (KCA), acquired all of the outstanding common and preferred
stock of KGE. Simultaneously, KCA and KGE merged and adopted the name of KGE
(the KGE Merger).
The Company owns 47% of the Wolf Creek Nuclear Operating Corporation
(WCNOC), the operating company for the Wolf Creek Generating Station (Wolf
Creek). The Company records in its financial statements its proportionate
share of all transactions of WCNOC as it does other jointly-owned facilities.
The Company prepares its financial statements in conformity with
generally accepted accounting principles as applied to regulated public
utilities. The accounting and rates of the Company are subject to
requirements of the Kansas Corporation Commission (KCC) and the Federal Energy
Regulatory Commission (FERC). The financial statements require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, to disclose contingent assets and liabilities at the balance
sheet date, and to report amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion
of the Company, the accompanying condensed financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company as of September 30, 1996
and December 31, 1995, and the results of its operations for the three, nine
and twelve month periods ended September 30, 1996 and 1995. These condensed
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 1995 Annual Report
on Form 10-K.
On April 24, 1996, FERC issued its final rule on Order No. 888, Promoting
Wholesale Competition Through Open Access Non-discriminatory Transmission
Services by Public Utilities; Recovery of Stranded Costs by Public Utilities
and Transmitting Utilities. The Company has reviewed this order and does not
expect it to have a material effect on operations.
Cash Surrender Value of Life Insurance Contracts: The following amounts
related to corporate-owned life insurance contracts (COLI) are recorded in
Corporate-owned Life Insurance (net) on the balance sheets:
September 30, December 31,
1996 1995
(Dollars in Millions)
Cash surrender value of contracts. . $404.0 $360.3
Borrowings against contracts . . . . (393.5) (353.0)
COLI (net) . . . . . . . . . . . $ 10.5 $ 7.3
Income is recorded for increases in cash surrender value and net death
proceeds. Interest expense is recognized for COLI borrowings. The net income
generated from COLI contracts, including the tax benefit of the interest
deductions and premium expenses, are recorded as Corporate-owned Life
Insurance (net) on the Statements of Income. The income from increases in
cash surrender value and net death proceeds was $9.5 million, $19.7 million
and $29.6 million for the three, nine and twelve months ended September 30,
1996, respectively, compared to $4.6 million, $12.7 million and $16.7 million
for the three, nine and twelve months ended 1995, respectively. The interest
expense deduction taken was $6.9 million, $20.8 million and $27.6 million for
the three, nine and twelve months ended September 30, 1996, respectively,
compared to $6.9 million, $18.5 million and $24.1 million for the nine and
twelve months ended 1995, respectively. On August 2, 1996, Congress passed
the Health Insurance Portability and Accountability Act of 1996 which was
signed into law by President Clinton on August 21, 1996. The act is expected
to have minimal impact on the Company's COLI contracts.
Cash and Cash Equivalents: For purposes of the Statements of Cash Flows,
cash and cash equivalents include cash on hand and highly liquid
collateralized debt instruments purchased with maturities of three months or
less.
2. COMMITMENTS AND CONTINGENCIES
Manufactured Gas Sites: The Company has been associated with three former
manufactured gas sites which may contain coal tar and other potentially
harmful materials. The Company and the Kansas Department of Health and
Environment (KDHE) entered into a consent agreement governing all future work
at the three sites. The terms of the consent agreement will allow the Company
to investigate these sites and set remediation priorities based upon the
results of the investigations and risk analysis. The prioritized sites will
be investigated over a 10 year period. The agreement will allow the Company
to set mutual objectives with the KDHE in order to expedite effective response
activities and to control costs and environmental impact. The costs incurred
for site investigation and risk assessment in 1995 and 1994 were minimal. The
Company is aware of other Midwestern utilities which have incurred remediation
costs ranging between $500,000 and $14 million per site. The KCC has
permitted another Kansas utility to recover its remediation costs through
rates. To the extent that such remediation costs are not recovered through
rates, the costs could be material to the Company's financial position or
results of operations depending on the degree of remediation and number of
years over which the remediation must be completed.
Decommissioning: The Company accrues decommissioning costs over the
expected life of the Wolf Creek generating facility. The accrual is based on
estimated unrecovered decommissioning costs which consider inflation over the
remaining estimated life of the generating facility and are net of expected
earnings on amounts recovered from customers and deposited in an external
trust fund.
On June 9, 1994, the KCC issued an order approving the estimated
decommissioning costs of the 1993 Wolf Creek Decommissioning Cost Study which
estimates the Company's share of Wolf Creek decommissioning costs, under the
immediate dismantlement method, to be approximately $595 million during the
period 2025 through 2033, or approximately $174 million in 1993 dollars.
These costs were calculated using an assumed inflation rate of 3.45% over the
remaining service life, in 1993, of 32 years.
Decommissioning costs are being charged to operating expenses in
accordance with the KCC order. Electric rates charged to customers provide
for recovery of these decommissioning costs over the life of Wolf Creek.
Amounts expensed approximated $3.6 million in 1995 and will increase annually
to $5.5 million in 2024. These expenses are deposited in an external trust
fund. The average after tax expected return on trust assets is 5.9%
The Company's investment in the decommissioning fund, including
reinvested earnings approximated $30.6 million and $25.1 million at September
30, 1996 and December 31, 1995, respectively. Trust fund earnings accumulate
in the fund balance and increase the recorded decommissioning liability.
These amounts are reflected in Decommissioning Trust, and the related
liability is included in Deferred Credits and Other Liabilities, Other, on the
Balance Sheets.
The staff of the Securities and Exchange Commission (SEC) has questioned
certain current accounting practices used by nuclear electric generating
station owners regarding the recognition, measurement and classification of
decommissioning costs for nuclear electric generating stations. In response to
these questions, the Financial Accounting Standards Board is expected to issue
new accounting standards for removal costs, including decommissioning in 1997.
If current electric utility industry accounting practices for such
decommissioning costs are changed: (1) annual decommissioning expenses could
increase, (2) the estimated present value of decommissioning costs could be
recorded as a liability rather than as accumulated depreciation, and (3) trust
fund income from the external decommissioning trusts could be reported as
investment income rather than as a reduction to decommissioning expense.
When revised accounting guidance is issued, the Company will also have to
evaluate its effect on accounting for removal costs of other long-lived
assets. The Company is not able to predict what effect such changes would
have on results of operations, financial position, or related regulatory
practices until the final issuance of revised accounting guidance, but such
effect could be material.
The Company carries premature decommissioning insurance which has several
restrictions. One of these is that it can only be used if Wolf Creek incurs
an accident exceeding $500 million in expenses to safely stabilize the
reactor, to decontaminate the reactor and reactor station site in accordance
with a plan approved by the Nuclear Regulatory Commission (NRC), and to pay
for on-site property damages. This decommissioning insurance will only be
available if the insurance funds are not needed to implement the NRC-approved
plan for stabilization and decontamination.
Nuclear Insurance: The Price-Anderson Act limits the combined public
liability of the owners of nuclear power plants to $8.9 billion for a single
nuclear incident. If this liability limitation is insufficient, the U.S.
Congress will consider taking whatever action is necessary to compensate the
public for valid claims. The Wolf Creek owners (Owners) have purchased the
maximum available private insurance of $200 million and the balance is
provided by an assessment plan mandated by the NRC. Under this plan, the
Owners are jointly and severally subject to a retrospective assessment of up
to $79.3 million ($37.3 million, Company's share) in the event there is a
major nuclear incident involving any of the nation's licensed reactors. This
assessment is subject to an inflation adjustment based on the Consumer Price
Index and applicable premium taxes. There is a limitation of $10 million
($4.7 million, Company's share) in retrospective assessments per incident, per
year.
The Owners carry decontamination liability, premature decommissioning
liability, and property damage insurance for Wolf Creek totaling approximately
$2.8 billion ($1.3 billion, Company's share). This insurance is provided by a
combination of "nuclear insurance pools" ($500 million) and Nuclear Electric
Insurance Limited (NEIL) ($2.3 billion). In the event of an accident,
insurance proceeds must first be used for reactor stabilization and site
decontamination. The Company's share of any remaining proceeds can be used
for property damage or premature decommissioning costs up to $1.3 billion
(Company's share). Premature decommissioning insurance cost recovery is
excess of funds previously collected for decommissioning (as discussed under
"Decommissioning").
The Owners also carry additional insurance with NEIL to cover costs of
replacement power and other extra expenses incurred during a prolonged outage
resulting from accidental property damage at Wolf Creek. If losses incurred
at any of the nuclear plants insured under the NEIL policies exceed premiums,
reserves, and other NEIL resources, the Company may be subject to
retrospective assessments of approximately $11 million per year. Effective
November 15, 1996, the Company's potential retrospective assessment will be
reduced to $8 million per year.
Although the Company maintains various insurance policies to provide
coverage for potential losses and liabilities resulting from an accident or an
extended outage, the Company's insurance coverage may not be adequate to cover
the costs that could result from a catastrophic accident or extended outage at
Wolf Creek. Any substantial losses not covered by insurance, to the extent
not recoverable through rates, would have a material adverse effect on the
Company's financial position and results of operations.
Clean Air Act: The Clean Air Act Amendments of 1990 (the Act) require a
two-phase reduction in certain emissions. To meet the monitoring and
reporting requirements under the acid rain program, the Company installed
continuous monitoring and reporting equipment at a total cost of approximately
$2.3 million by the December 31, 1995 deadline. The Company expects some
additional equipment acquisitions and other expenditures to be needed to meet
Phase II sulfur dioxide requirements. Current estimated costs for Phase II
are approximately $5 million.
The nitrogen oxides and toxic limits, which were not set in the law, were
proposed by the EPA in January 1996. The Company is currently evaluating the
steps it will need to take in order to comply with the proposed new rules, but
is unable to determine its compliance options or related compliance costs,
which could be substantial, until the evaluation is finished. The Company will
have three years to comply with the new rules.
Fuel Commitments: To supply a portion of the fuel requirements for its
generating plants, the Company has entered into various commitments to obtain
nuclear fuel, coal, and natural gas. Some of these contracts contain
provisions for price escalation and minimum purchase commitments. At
December 31, 1995, WCNOC's nuclear fuel commitments (Company's share) were
approximately $15.3 million for uranium concentrates expiring at various times
through 2001, $120.8 million for enrichment expiring at various times through
2014, and $72.7 million for fabrication through 2025. At December 31, 1995,
the Company's coal and natural gas contract commitments in 1995 dollars under
the remaining terms of the contracts were $643 million. The largest coal
contract expires in 2020, with the remaining coal contracts expiring at
various times through 2013.
Energy Act: As part of the 1992 Energy Policy Act, a special assessment
is being collected from utilities for a uranium enrichment, decontamination,
and decommissioning fund. The Company's portion of the assessment for Wolf
Creek is approximately $7 million, payable over 15 years. Management expects
such costs to be recovered through the ratemaking process.
3. INCOME TAXES
Total income tax expense included in the Statements of Income reflects
the Federal statutory rate of 35 percent. The Federal statutory rate produces
effective income tax rates of 33.4% and 39.1% for the three month periods,
30.1% and 37.3% for the nine month periods, and 28.3% and 36.5% for the twelve
month periods ended September 30, 1996 and 1995, respectively. The effective
income tax rates vary from the Federal statutory rate due to the permanent
differences, including the amortization of investment tax credits, and
accelerated amortization of certain deferred income taxes.
4. RATE MATTERS AND REGULATION
KCC Rate Proceedings: On August 17, 1995, the Company filed with the KCC
a request to more rapidly recover its investment in its assets of Wolf Creek
over the next seven years. The request involved acceleration of depreciation
of Wolf Creek by $50 million for each of the next seven years. The Company
sought to reduce electric rates for its customers by approximately $8.7
million annually for the seven year period. The Company also requested to
extend the service life of certain of its transmission and distribution assets
for both the Company's and KPL's electric jurisdictions.
On May 23, 1996, the Company implemented an $8.7 million electric rate
reduction to its customers on an interim basis. On October 22, 1996, Western
Resources, the Company, the KCC Staff, the City of Wichita, and the Citizens
Utility Ratepayer Board filed an agreement at the KCC whereby the Company's
retail electric rates would be reduced, subject to approval by the KCC. Under
the agreement, on February 1, 1997, the Company's rates would be reduced by
$36.3 million and the May, 1996 interim reduction would become permanent. The
Company's rates would be reduced by another $10 million effective
June 1, 1998, and again on June 1, 1999. The KCC, at its discretion, may
allocate to the Company some portion of two one-time rebates of $5 million to
be credited to its customers in January 1998 and 1999.
On April 15, 1996, Western Resources filed an application with the KCC
requesting an order approving its proposal to merge with Kansas City Power &
Light Company (KCPL) and for other related relief. On July 29, 1996, Western
Resources filed its First Amended Application with the KCC in its proceeding
for approval to merge with KCPL. The amended application reflected the
increase in Western Resources' offer for KCPL from $28 to $31 per share and
proposed an incentive rate mechanism requiring all regulated earnings in
excess of the merged Company's 12.61% return on equity to be split among
customers, shareholders, and additional depreciation on Wolf Creek.
FERC Proceedings: On August 22, 1996, Western Resources filed an
application with the FERC under section 203 of the Federal Power Act
requesting an order approving its proposal to merge with KCPL.
5. WESTERN RESOURCES' PROPOSED MERGER WITH KANSAS CITY POWER & LIGHT COMPANY
On April 14, 1996, Western Resources proposed an offer to merge with
KCPL.
Western Resources currently has a registration statement on Form S-4
filed with the SEC to exchange shares of Western Resources common stock for
each KCPL share (the Offer). Western Resources' exchange offer for KCPL is
set to expire at 5 p.m. EDT October 25, 1996 unless extended by Western
Resources.
The number of shares of Western Resources common stock to be delivered
per KCPL share pursuant to the Offer would be equal to the quotient (rounded
to the nearest 1/100,000) determined by dividing $31 by the average of the
high and low sales prices of Western Resources common stock on the New York
Stock Exchange for each of the twenty consecutive trading days ending with the
second trading day immediately preceding the expiration of the Offer (the
Exchange Ratio), provided that the Exchange Ratio would not have been less
than 0.91 nor greater than 0.985.
Western Resources intends to acquire, after consummation of the Offer,
the remaining KCPL shares pursuant to a merger of Western Resources and KCPL
(the KCPL Merger).
Western Resources has filed applications with the KCC, Missouri Public
Service Commission, and FERC seeking approval of the KCPL Merger. Western
Resources will also need approval from the NRC. See Note 4 of the Notes to
Financial Statements for discussion of rate proceedings.
Completion of the Offer and the KCPL Merger are subject to various
conditions, including approvals from shareholders, regulatory and other
governmental agencies.
The KCPL Merger proposal contains certain analyses and statements with
respect to the financial condition, results of operations and business of the
Company following the consummation of the Offer and the KCPL Merger, including
statements relating to the cost savings that will be realized from the KCPL
Merger. Such analyses and statements include forward looking statements with
respect to, among other things: (1) expected cost savings from the KCPL
Merger; (2) normal weather conditions; (3) future national and regional
economic and competitive conditions; (4) inflation rates; (5) regulatory
treatment; (6) future financial market conditions; (7) interest rates; (8)
future business decisions; and (9) other uncertainties, which though
considered reasonable by the Company, are beyond the Company's control and
difficult to predict.
KANSAS GAS AND ELECTRIC COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with Item 7 of the
Company's Annual Report on Form 10-K for 1995. The following updates certain
information provided in the 1995 Form 10-K, and analyzes the changes in the
results of operations between the three, nine and twelve month periods ended
September 30, 1996 and comparable periods of 1995.
Certain matters discussed in this Form 10-Q are "forward-looking
statements" intended to qualify for the safe harbors from liability
established by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements
that describe the Company's future plans, objectives or goals are also
forward-looking statements. Such statements address future events and
conditions concerning capital expenditures, earnings, litigation, rate and
other regulatory matters, the pending KCPL Merger, liquidity and capital
resources, interest rates, changing weather conditions, and accounting
matters. Actual results in each case could differ materially from those
currently anticipated in such statements, by reason of factors such as
electric utility restructuring, including the ongoing state and federal
activities; future economic conditions; developments in the legislative,
regulatory and competitive markets in which the Company operates; and other
circumstances affecting anticipated revenues and costs.
FINANCIAL CONDITION
General: The Company had net income of $40.7 million for the third
quarter of 1996 compared to $51.8 million for the third quarter in 1995. The
decrease in net income was primarily due to lower revenues as a result of
decreased sales in all retail customer classes and the amortization of the
acquisition adjustment as a result of the KGE Merger.
Net income for the nine and twelve months ended September 30, 1996, was
$73.7 million and $95.3 million, respectively, compared to $89.3 million and
$111.5 million for the comparable periods in 1995, respectively. These
decreases were primarily due to the amortization of the acquisition adjustment
as a result of the KGE Merger and higher operating expenses, resulting from
Wolf Creek's eighth refueling outage during the first quarter of 1996. An
increase in net generation due to increased sales to interchange customers
during 1996 also contributed to higher operating expenses. These higher
expenses offset the increases in sales and revenues the Company experienced
during the nine and twelve months ended September 30, 1996 as compared to the
same periods of 1995.
Liquidity and Capital Resources: All 1,000 shares of the Company's common
stock are held by Western Resources.
The Company's short-term financing requirements are satisfied through
short-term bank loans and borrowings under unsecured lines of credit
maintained with banks. At September 30, 1996, short-term borrowing amounted
to $210 million compared to $50 million at December 31, 1995.
During 1996, the Company has increased its borrowings against the
accumulated cash surrender values of the corporate-owned life insurance
policies by $43.3 million and received $1.8 million from increased borrowings
on Wolf Creek Nuclear Operating Company policies.
OPERATING RESULTS
The following discussion explains variances for the three, nine and
twelve months ended September 30, 1996, to the comparable periods of 1995.
Revenues: The Company's revenues vary with levels of usage as a result
of changing weather conditions during comparable periods and are sensitive to
seasonal fluctuations between consecutive periods. Future electric sales will
continue to be affected by weather conditions, competing fuel sources,
wholesale demand, and the overall economy of the Company's service area.
The following table reflects changes in electric sales for the three,
nine and twelve months ended September 30, 1996 from the comparable periods of
1995.
Increase (Decrease) in electric sales volumes:
3 Months 9 Months 12 Months
Ended Ended Ended
Residential (9.0)% 4.4% 3.7%
Commercial (2.6)% 3.4% 2.4%
Industrial (8.3)% (1.4)% (0.3)%
Total Retail (7.0)% 1.6% 1.6%
Wholesale & Interchange 137.4% 84.5% 63.1%
Total electric sales 8.2% 12.9% 10.1%
Revenues for the three months ended September 30, 1996, of $193.2 million
decreased approximately five percent from revenues of $202.4 million for the
comparable period of 1995. The decrease was largely due to decreased
residential sales as a result of cooler summer temperatures experienced during
the third quarter of 1996 compared to 1995.
The Company's service territory experienced a 15% decrease in the number
of cooling degree days during the third quarter of 1996, as compared to the
third quarter of 1995 and 18% lower than normal number of cooling degree days.
Revenues for the nine and twelve months ended September 30, 1996,
increased approximately three and two percent to $501.3 million and $639.5
million, respectively, from revenues of $485.7 million and $624.8 million for
the comparable periods of 1995, respectively. The increases are primarily
attributable to increased interchange and residential sales as a result of
warmer spring temperatures experienced during the second quarter of 1996
compared to 1995.
Operating Expenses: Total operating expenses increased two percent for
the three months ended September 30, 1996 compared to the same period of 1995.
The increase was primarily attributable to the amortization of the acquisition
adjustment and increased fuel and other operating expenses due to the increase
in net generation as a result of the increase in sales to interchange
customers.
Total operating expenses increased approximately nine and eight percent
for the nine and twelve months ended September 30, 1996 compared to the same
periods of 1995. The increases were primarily due to the amortization of the
acquisition adjustment, increased fuel and other operating expenses and Wolf
Creek being off-line for its eight refueling and maintenance outage during the
first quarter of 1996. Also contributing to the increases in fuel and
operating expenses was the increase in net generation due to increased sales
to interchange customers and demand for air conditioning load from residential
customers during the spring months of 1996.
The amortization of the acquisition adjustment, which began in August
1995, amounted to $5.0 million, $15.0 million and $20.0 million for the three,
nine and twelve months ended September 30, 1996, respectively.
Partially offsetting these increases in operating expenses for the three,
nine and twelve months ended September 30, 1996, was the decrease in federal
and state income taxes due to the decrease in net income during each period.
Other Income and Deductions: Other income and deductions, net of taxes,
increased for the three, nine and twelve months ended September 30, 1996,
compared to the same periods of 1995 primarily due to the receipt of death
benefit proceeds under COLI contracts during the third quarter of 1996 and the
fourth quarter of 1995. The reclassification of income taxes applicable to
the amortization of acquisition adjustment also contributed to the increase.
Interest Expense: Interest expense increased $2.8 million, $4.5 million
and $3.6 million for the three, nine and twelve months ended September 30,
1996, compared to the same periods of 1995. These increases are primarily
attributable to higher interest expense on short-term debt during 1996 as
compared to 1995.
OTHER INFORMATION
Amortization: In accordance with the KCC order relating to the
acquisition of the Company by Western Resources, amortization of the
acquisition adjustment commenced in August 1995. The amortization will amount
to approximately $20 million (pre-tax) per year for 40 years. Western
Resources and the Company can recover the amortization of the acquisition
adjustment through cost savings under a sharing mechanism approved by the KCC.
KANSAS GAS AND ELECTRIC COMPANY
Part II Other Information
Item 5. Other Information
Proposed Merger of Western Resources with Kansas City Power & Light
Company: See Note 5 of the Notes to Financial Statements.
Rate Plans: See Note 4 of the Notes to Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges for
12 Months Ended September 30, 1996 (filed electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KANSAS GAS AND ELECTRIC COMPANY
Date October 25, 1996 By /s/ Richard D. Terrill
Richard D. Terrill
Secretary, Treasurer and
General Counsel
