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 March 31, 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 May 15, 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 - 5
Statements of Cash Flows 6 - 7
Statements of Capitalization 8
Statements of Common Stock Equity 9
Notes to Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
KANSAS GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
March 31, December 31,
1996 1995
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . . . . . . . . . $3,445,906 $3,427,928
Less - Accumulated depreciation . . . . . . . . . . . . . 917,362 893,728
2,528,544 2,534,200
Construction work in progress . . . . . . . . . . . . . . 37,618 40,810
Nuclear fuel (net). . . . . . . . . . . . . . . . . . . . 53,674 53,942
Net utility plant . . . . . . . . . . . . . . . . . . . 2,619,836 2,628,952
OTHER PROPERTY AND INVESTMENTS:
Decommissioning trust . . . . . . . . . . . . . . . . . . 27,044 25,070
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 8,146 7,885
35,190 32,955
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . 60 53
Accounts receivable and unbilled revenues (net) . . . . . 68,215 76,490
Advances to parent company . . . . . . . . . . . . . . . 116,991 34,948
Fossil fuel, at average cost. . . . . . . . . . . . . . . 14,923 17,522
Materials and supplies, at average cost . . . . . . . . . 30,771 31,458
Prepayments and other current assets. . . . . . . . . . . 9,597 17,128
240,557 177,599
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes . . . . . . . . . . . . . . 208,367 208,367
Deferred coal contract settlement costs . . . . . . . . . 13,875 14,612
Phase-in revenues . . . . . . . . . . . . . . . . . . . . 39,475 43,861
Other deferred plant costs. . . . . . . . . . . . . . . . 31,473 31,539
Corporate-owned life insurance (net). . . . . . . . . . . 8,058 7,279
Unamortized debt expense. . . . . . . . . . . . . . . . . 25,059 25,605
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 43,807 32,645
370,114 363,908
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $3,265,697 $3,203,414
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (See Statements):
Common stock equity . . . . . . . . . . . . . . . . . . . $1,176,777 $1,186,077
Long-term debt (net). . . . . . . . . . . . . . . . . . . 683,976 684,082
1,860,753 1,870,159
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . . 112,000 50,000
Long-term debt due within one year. . . . . . . . . . . . 16,000 16,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . 51,772 50,783
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . 27,618 17,766
Accrued interest. . . . . . . . . . . . . . . . . . . . . 14,212 7,903
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 6,418 6,608
228,020 149,060
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . . . . . . . . . 799,796 800,934
Deferred investment tax credits . . . . . . . . . . . . . 72,158 72,970
Deferred gain from sale-leaseback . . . . . . . . . . . . 240,290 242,700
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 64,680 67,591
1,176,924 1,184,195
COMMITMENTS AND CONTINGENCIES (Note 2)
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . $3,265,697 $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
March 31,
1996 1995
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 145,034 $ 138,557
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 22,152 18,229
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 1,757 4,688
Power purchased . . . . . . . . . . . . . . . . . . . . . 4,360 683
Other operations. . . . . . . . . . . . . . . . . . . . . 31,369 30,405
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 11,899 12,267
Depreciation and amortization . . . . . . . . . . . . . . 23,368 18,353
Amortization of phase-in revenues . . . . . . . . . . . . 4,386 4,386
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 3,457 7,270
State income . . . . . . . . . . . . . . . . . . . . . 1,191 2,075
General . . . . . . . . . . . . . . . . . . . . . . . . 12,041 11,634
Total operating expenses. . . . . . . . . . . . . . . 115,980 109,990
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 29,054 28,567
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (2,184) (1,716)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 1,015 2,099
Income taxes (net). . . . . . . . . . . . . . . . . . . . 598 1,635
Total other income and deductions . . . . . . . . . . (571) 2,018
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 28,483 30,585
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 11,716 11,768
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,675 1,505
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (608) (560)
Total interest charges. . . . . . . . . . . . . . . . 12,783 12,713
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 15,700 $ 17,872
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
March 31,
1996 1995
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 630,345 $ 621,833
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 84,515 87,773
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 16,494 14,387
Power purchased . . . . . . . . . . . . . . . . . . . . . 8,254 6,575
Other operations. . . . . . . . . . . . . . . . . . . . . 118,840 114,834
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 47,688 48,915
Depreciation and amortization . . . . . . . . . . . . . . 84,694 70,691
Amortization of phase-in revenues . . . . . . . . . . . . 17,545 17,544
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 44,517 51,013
State income . . . . . . . . . . . . . . . . . . . . . 11,659 12,792
General . . . . . . . . . . . . . . . . . . . . . . . . 46,648 44,609
Total operating expenses. . . . . . . . . . . . . . . 480,854 469,133
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 149,491 152,700
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (3,136) (5,835)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 3,800 6,320
Income taxes (net). . . . . . . . . . . . . . . . . . . . 8,049 7,138
Total other income and deductions . . . . . . . . . . 8,713 7,623
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 158,204 160,323
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 47,021 47,502
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 5,360 5,335
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (2,878) (1,702)
Total interest charges. . . . . . . . . . . . . . . . 49,503 51,135
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 108,701 $ 109,188
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)
Three Months Ended
March 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 15,700 $ 17,872
Depreciation and amortization . . . . . . . . . . . . . . . 18,362 18,353
Other amortization (including nuclear fuel) . . . . . . . . 1,226 3,534
Gain on sales of utility plant (net of tax) . . . . . . . . - (940)
Deferred taxes and investment tax credits (net) . . . . . . (1,950) (5,282)
Amortization of phase-in revenues . . . . . . . . . . . . . 4,386 4,386
Corporate-owned life insurance. . . . . . . . . . . . . . . (5,940) (4,976)
Amortization of gain from sale-leaseback. . . . . . . . . . (2,410) (2,410)
Amortization of acquisition adjustment. . . . . . . . . . . 5,006 -
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . 8,275 6,394
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . 2,599 (592)
Accounts payable. . . . . . . . . . . . . . . . . . . . . 989 (9,563)
Interest and taxes accrued. . . . . . . . . . . . . . . . 16,161 27,599
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 8,027 5,570
Changes in other assets and liabilities . . . . . . . . . . (9,129) 7,480
Net cash flows from operating activities. . . . . . . . 61,302 67,425
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 16,118 21,240
Sales of utility plant. . . . . . . . . . . . . . . . . . . - (1,583)
Corporate-owned life insurance policies . . . . . . . . . . - 417
Death proceeds of corporate-owned life insurance. . . . . . - (250)
Net cash flows used in investing activities . . . . . . 16,118 19,824
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . 62,000 (40,000)
Advances to parent company (net). . . . . . . . . . . . . . (82,042) (8,049)
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (135) (25)
Borrowings against life insurance policies. . . . . . . . . - 556
Repayment of borrowings against life insurance policies . . - (73)
Dividends to parent company . . . . . . . . . . . . . . . . (25,000) -
Net cash flows from (used in) financing activities . . . (45,177) (47,591)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . 7 10
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 53 47
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 60 $ 57
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ - $ 6,058
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 6,300 -
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
March 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 108,701 $ 109,188
Depreciation and amortization . . . . . . . . . . . . . . . 72,959 70,691
Other amortization (including nuclear fuel) . . . . . . . . 12,885 11,633
Gain on sales of utility plant (net of tax) . . . . . . . . (11) (940)
Deferred taxes and investment tax credits (net) . . . . . . 7,183 18,160
Amortization of phase-in revenues . . . . . . . . . . . . . 17,545 17,544
Corporate-owned life insurance. . . . . . . . . . . . . . . (29,512) (17,703)
Amortization of gain from sale-leaseback. . . . . . . . . . (9,640) (9,640)
Amortization of acquisition adjustment. . . . . . . . . . . 11,735 -
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . (6,776) (23,371)
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . (579) (2,088)
Accounts payable. . . . . . . . . . . . . . . . . . . . . 12,242 (6,674)
Interest and taxes accrued. . . . . . . . . . . . . . . . (10,471) (4,412)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 477 (243)
Changes in other assets and liabilities . . . . . . . . . . (2,084) 1,297
Net cash flows from operating activities. . . . . . . . 184,654 163,442
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 88,816 92,620
Sales of utility plant. . . . . . . . . . . . . . . . . . . (140) (1,583)
Corporate-owned life insurance policies . . . . . . . . . . 29,930 26,554
Death proceeds of corporate-owned life insurance. . . . . . (10,333) (250)
Net cash flows used in investing activities . . . . . . 108,273 117,341
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . 102,000 (21,600)
Advances to parent company (net). . . . . . . . . . . . . . (44,548) 58,503
Bonds issued. . . . . . . . . . . . . . . . . . . . . . . . - 46,440
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (135) (46,465)
Borrowings against life insurance policies. . . . . . . . . 46,490 42,086
Repayment of borrowings against life insurance policies . . (5,185) (73)
Dividends to parent company . . . . . . . . . . . . . . . . (175,000) (125,000)
Net cash flows from (used in) financing activities . . . (76,378) (46,109)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . 3 (8)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 57 65
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 60 $ 57
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 65,750 $ 68,609
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 48,400 30,509
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CAPITALIZATION
(Dollars in Thousands)
(Unaudited)
March 31, 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 . . . . . . . . . . . . . . . . . . . . . 111,143 120,443
Total common stock equity . . . . . . . . . . . . . . . . 1,176,777 63% 1,186,077 63%
LONG-TERM DEBT:
First Mortgage Bonds:
Series Due 1996 1995
5-5/8% 1996 $ 16,000 $ 16,000
7.6% 2003 135,000 135,000
6-1/2% 2005 65,000 65,000
6.20% 2006 100,000 100,000
316,000 316,000
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. . . . . . . . . . . . . . . . . . . . . . 703,762 703,897
Less:
Unamortized premium and discount (net). . . . . . . . . . 3,786 3,815
Long-term debt due within one year. . . . . . . . . . . . 16,000 16,000
Total long-term debt . . . . . . . . . . . . . . . . . 683,976 37% 684,082 37%
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . $1,860,753 100% $1,870,159 100%
(a) Market-Adjusted Tax Exempt Securities (MATES). As of March 31, 1996, the rate
on these bonds ranged from 3.40% to 3.45%.
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 . . . . . . . . . . . . . . . . . . . . . 15,700
Dividend to parent company . . . . . . . . . . . . . (25,000)
BALANCE MARCH 31, 1996, 1,000 shares . . . . . . . . $1,065,634 $ 111,143
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 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. 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 March 31, 1996 and
December 31, 1995, and the results of its operations for the three and twelve
month periods ended March 31, 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.
In January 1996, the Company adopted the Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). This
Statement imposes stricter criteria for regulatory assets by requiring that
such assets be probable of future recovery at each balance sheet date. The
Company believes that the adoption of this standard does not have a material
impact on the financial position or results of operations of the Company based
on the current regulatory structure in which the Company operates. This
conclusion may change in the future if increases in competition influence
wholesale and retail pricing in this industry.
On April 24, 1996, the Federal Energy Regulatory Commission 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
had analyzed the effect of this order on its operations and does not expect it
to have a material adverse effect.
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:
March 31, December 31,
1996 1995
(Dollars in Millions)
Cash surrender value of contracts. . $361.1 $360.3
Borrowings against contracts . . . . (353.0) (353.0)
COLI (net) . . . . . . . . . . . $ 8.1 $ 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 $4.7 million and $23.5 million
for the three and twelve months ended March 31, 1996, respectively, compared
to $3.9 million and $16.1 million for the three and twelve months ended 1995,
respectively. The interest expense deduction taken was $6.9 million and
$26.6 million for the three and twelve months ended March 31, 1996,
respectively, compared to $5.6 million and $21.9 million for the three and
twelve months ended 1995, respectively.
Federal legislation is pending, which, if enacted, may substantially
reduce or eliminate the tax deduction for interest on COLI borrowings, and
thus reduce a significant portion of the net income stream generated by the
COLI contracts (See Note 7 of the Company's 1995 Annual Report on Form 10-K).
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 $10 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 $27.0 million and $25.1 million at March 31,
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 FASB is expected to issue new accounting standards for
removal costs, including decommissioning in 1996. 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. At this time, 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.
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. If the amount designated as decommissioning
insurance is needed to implement the NRC-approved plan for stabilization and
decontamination, it would not be available for decommissioning purposes.
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.
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
until the evaluation is finished later this year. 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 20.5% and 30.1% for the three month periods and
30.7% and 34.2% for the twelve month periods ended March 31, 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 KGE's investment in its assets of Wolf Creek
over the next seven years. If the requested acceleration of depreciation of
Wolf Creek is granted, depreciation expense for Wolf Creek will increase by
approximately $50 million for each of the next seven years. As a result of
this proposal, Western Resources will also seek to reduce electric rates for
KGE customers by approximately $8.7 million annually for the same seven year
period.
On April 15, 1996, Western Resources filed an application with the KCC
requesting an order approving its proposal to merge with KCPL and for other
related relief. The application includes a proposal which would provide a
rate reduction of $10 million for KGE retail electric customers. These rate
reductions are in addition to the cumulative reductions currently proposed in
Western Resources' existing rate plan filed August 17, 1995. A five year
moratorium on electric rate increases for KGE retail customers is also
proposed.
On April 19, 1996, the KCC issued an order consolidating certain issues
from the August 17, 1995 filing, including accelerating recovery of the
Company's investment in its assets of Wolf Creek, with the application filed
before the KCC on April 15, 1996. The order also authorized the immediate
implementation of the $8.7 million reduction in electric rates for KGE
customers, as proposed by Western Resources, subject to later adjustments.
5. WESTERN RESOURCES' 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), Western Resources proposed an offer to merge with KCPL.
On April 22, 1996, KCPL's Board of Directors rejected Western Resources'
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, Western Resources filed proxy materials
with the SEC for use in soliciting proxies from KCPL shareholders against the
approval of the UCU/KCPL merger. KCPL's annual shareholders meeting is
scheduled for May 22, 1996. Western Resources believes its offer is
financially superior for KCPL shareholders and is actively seeking to have
KCPL shareholders vote against the proposed Merger. On April 22, 1996,
Western Resources announced its intention to commence an offer to exchange
shares of its 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.
Pursuant to the Offer, each KCPL common share would be entitled to receive
$28.00 worth of Western Resources common stock, subject to certain limitations
as set forth below. According to KCPL's quarterly report on Form 10-Q dated
March 31, 1996, there were issued and outstanding 61,908,726 shares of KCPL
common stock.
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 $28.00 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 be less than
0.833 nor greater than 0.985. On May 6, 1996, Western Resources announced a
change in the terms of the Offer so that the Exchange Ratio would not be less
than 0.91 nor greater than 0.985, and presented the new offer to the KCPL
Board. There has been no response to the new offer from KCPL as of the date
of this report.
Western Resources intends to acquire, after consummation of the Offer,
the remaining KCPL shares pursuant to a merger of it and KCPL (the Merger).
Western Resources has filed applications with the KCC and Missouri Public
Service Commission seeking approval of the Merger. See Note 4 for discussion
of rate proceedings.
Western Resources' 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 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 Merger are subject to various conditions,
including approvals from shareholders, regulatory and other governmental
agencies.
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 the information provided in the 1995 Form 10-K, and
analyzes the changes in the results of operations between the three and twelve
month periods ended March 31, 1996 and comparable periods of 1995.
FINANCIAL CONDITION
General: The Company had net income of $15.7 million for the first
quarter of 1996 compared to $17.9 million for the first quarter in 1995. The
decrease in net income was primarily due to the amortization of the
acquisition adjustment as a result of the Merger and higher fuel and purchase
power expenses, resulting from Wolf Creek's eighth refueling and maintenance
outage during the first quarter of 1996.
Net income for the twelve months ended March 31, 1996, of $108.7 million,
remained virtually unchanged from net income of $109.2 million for the
comparable period of 1995. The slight decrease was primarily due to the
amortization of the acquisition adjustment and higher fuel costs.
Liquidity and Capital Resources: The KGE common and preferred stock was
redeemed in connection with the Merger, leaving 1,000 shares of common stock
held by Western Resources. The debt structure of the Company and available
sources of funds were not affected by the Merger.
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 March 31, 1996, short-term borrowing amounted to
$112 million compared to $50 million at December 31, 1995.
On April 11, bank credit arrangements of $200 million were entered into,
under which $50 million is currently outstanding.
OPERATING RESULTS
The following discussion explains variances for the three and twelve
months ended March 31, 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 and
twelve months ended March 31, 1996 from the comparable periods of 1995.
Increase (decrease) in electric sales volumes:
3 Months 12 Months
Ended Ended
Residential 9.2% 2.8%
Commercial 5.3% 2.1%
Industrial 3.5% 3.6%
Total Retail 5.5% 2.9%
Wholesale & Interchange 11.2% 0.7%
Total electric sales 6.4% 2.6%
Revenues for the first quarter of 1996 increased approximately five
percent to $145.0 million, compared to first quarter 1995 revenues of $138.6
million, primarily due to increased sales in all retail customer classes as a
result of colder winter temperatures experienced during the first quarter of
1996 compared to 1995. The Company's service territory experienced a 17%
increase in the number of heating degree days during the first quarter of
1996, as compared to the first quarter of 1995.
Revenues for the twelve months ended March 31, 1996, increased
approximately one percent to $630.3 million from revenues of $621.8 million
for the comparable period of 1995. The slight increase can be attributed to
increased sales in all retail customer classes as a result of colder winter
temperatures as discussed above.
Operating Expenses: Total operating expenses increased approximately
five percent for the first quarter and approximately three percent for the
twelve months ended March 31, 1996 compared to the same periods of 1995.
These increases can be primarily attributed to the amortization of the
acquisition adjustment and increased fuel and purchased power expenses due to
Wolf Creek having been taken off-line for its eighth refueling and maintenance
outage. Also contributing to the twelve month ended increase was the expense
of $3.4 million related to the early retirement programs which was recorded in
the second quarter of 1995.
The amortization of the acquisition adjustment, which began in August
1995, amounted to $5.0 million and $11.7 million for the three and twelve
months ended March 31, 1996, respectively.
Partially offsetting the increase in fuel expense for the first quarter
of 1996 was the decrease in nuclear fuel expense which was due to Wolf Creek's
refueling and maintenance outage.
Other Income and Deductions: Other income and deductions, net of taxes,
decreased for the first quarter of 1996 compared to the first quarter of 1995,
primarily as a result of the gain realized from the sale of rail cars which
was recorded during the first quarter of 1995. Increased interest expense on
higher COLI borrowings also contributed to the decrease.
Other income and deductions, net of taxes, increased to $8.7 million for
the twelve months ended March 31, 1996 from $7.6 million for the twelve months
ended March 31, 1995. The increase was primarily due to receipt of death
benefit proceeds under COLI contracts during the fourth quarter of 1995.
Interest Expense: Interest expense increased less than one percent for
the first quarter ended March 31, 1996, compared to the first quarter of 1995.
The slight increase can be attributed to the increase in short-term debt
during the first quarter of 1996.
Interest expense for the twelve months ended March 31, 1996, decreased
approximately three percent, compared to the same period of 1995. The
decrease resulted primarily from the increase in allowance for funds used
during construction (AFUDC) charges due to a higher AFUDC rate. Also
accounting for the decrease was the impact of increased COLI borrowings which
reduce the need for other long-term debt and thereby reduced interest expense.
COLI interest is reflected in Other Income and Deductions on the Income
Statement.
OTHER INFORMATION
Merger Implementation: In accordance with the KCC Merger order,
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 (combined companies) can recover
the amortization of the acquisition adjustment through cost savings under a
sharing mechanism approved by the KCC.
KCC Rate Proceedings: See Note 4 of the Notes to Financial Statements.
KANSAS GAS AND ELECTRIC COMPANY
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Information required by Item 4 is omitted pursuant to General Instruction
H(2)(b) to Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(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
May 15, 1996 By /s/ Richard D. Terrill
Richard D. Terrill
Secretary, Treasurer and
General Counsel
UT
1,000
3-MOS
DEC-31-1996
MAR-31-1996
PER-BOOK
2,619,836
35,190
240,557
370,114
0
3,265,697
1,065,634
0
111,143
1,176,777
0
0
683,976
112,000
0
0
16,000
0
0
0
1,276,944
3,265,697
145,034
4,050
111,332
115,980
29,054
(571)
28,483
12,783
15,700
0
15,700
0
11,716
61,302
0
0
