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, 1997
[ ] 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 14, 1997
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.
2
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
3
KANSAS GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
1997 1996
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . . . . . . . . . $3,498,128 $3,487,213
Less - Accumulated depreciation . . . . . . . . . . . . . 997,390 974,451
2,500,738 2,512,762
Construction work in progress . . . . . . . . . . . . . . 35,224 33,197
Nuclear fuel (net). . . . . . . . . . . . . . . . . . . . 35,810 38,461
Net utility plant . . . . . . . . . . . . . . . . . . . 2,571,772 2,584,420
INVESTMENTS AND OTHER PROPERTY:
Decommissioning trust . . . . . . . . . . . . . . . . . . 33,707 33,041
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 9,407 9,093
43,114 42,134
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . 41 44
Accounts receivable and unbilled revenues (net) . . . . . 59,466 75,671
Advances to parent company . . . . . . . . . . . . . . . 67,321 250,733
Fossil fuel, at average cost. . . . . . . . . . . . . . . 13,046 13,459
Materials and supplies, at average cost . . . . . . . . . 30,206 30,187
Prepayments and other current assets. . . . . . . . . . . 9,890 16,991
179,970 387,085
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes . . . . . . . . . . . . . . 164,520 164,520
Corporate-owned life insurance (net). . . . . . . . . . . 9,862 10,341
Regulatory assets . . . . . . . . . . . . . . . . . . . . 116,717 122,388
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 6,293 7,999
297,392 305,248
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $3,092,248 $3,318,887
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (See Statements):
Common stock equity . . . . . . . . . . . . . . . . . . . $1,168,523 $1,182,351
Long-term debt (net). . . . . . . . . . . . . . . . . . . 684,034 684,068
1,852,557 1,866,419
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . . 10,000 222,300
Accounts payable. . . . . . . . . . . . . . . . . . . . . 44,132 48,819
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . 48,629 35,358
Accrued interest. . . . . . . . . . . . . . . . . . . . . 13,386 9,445
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 7,058 6,726
123,205 322,648
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . . . . . . . . . 747,633 753,511
Deferred investment tax credits . . . . . . . . . . . . . 68,910 69,722
Deferred gain from sale-leaseback . . . . . . . . . . . . 230,650 233,060
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 69,293 73,527
1,116,486 1,129,820
COMMITMENTS AND CONTINGENCIES (Note 2)
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . $3,092,248 $3,318,887
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
4
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
1997 1996
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 143,791 $ 145,034
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 16,767 22,152
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 6,291 1,757
Power purchased . . . . . . . . . . . . . . . . . . . . . 3,166 4,360
Other operations. . . . . . . . . . . . . . . . . . . . . 33,903 31,369
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 12,761 11,899
Depreciation and amortization . . . . . . . . . . . . . . 24,537 23,368
Amortization of phase-in revenues . . . . . . . . . . . . 4,386 4,386
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 5,799 5,080
State income . . . . . . . . . . . . . . . . . . . . . 1,716 1,559
General . . . . . . . . . . . . . . . . . . . . . . . . 11,370 12,041
Total operating expenses. . . . . . . . . . . . . . . 120,696 117,971
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 23,095 27,063
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (2,720) (2,184)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 558 1,015
Income taxes (net). . . . . . . . . . . . . . . . . . . . 2,799 2,589
Total other income and deductions . . . . . . . . . . 637 1,420
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 23,732 28,483
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 11,482 11,716
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,557 1,675
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (479) (608)
Total interest charges. . . . . . . . . . . . . . . . 12,560 12,783
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 11,172 $ 15,700
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
5
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
March 31,
1997 1996
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 653,327 $ 630,345
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 86,439 84,515
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 24,496 16,494
Power purchased . . . . . . . . . . . . . . . . . . . . . 10,289 8,254
Other operations. . . . . . . . . . . . . . . . . . . . . 137,254 118,840
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 49,805 47,688
Depreciation and amortization . . . . . . . . . . . . . . 97,478 84,694
Amortization of phase-in revenues . . . . . . . . . . . . 17,544 17,545
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 36,875 48,323
State income . . . . . . . . . . . . . . . . . . . . . 10,612 12,521
General . . . . . . . . . . . . . . . . . . . . . . . . 45,512 46,648
Total operating expenses. . . . . . . . . . . . . . . 516,304 485,522
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 137,023 144,823
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (2,785) (3,136)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 2,940 3,800
Income taxes (net). . . . . . . . . . . . . . . . . . . . 10,563 12,717
Total other income and deductions . . . . . . . . . . 10,718 13,381
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 147,741 158,204
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 46,070 47,021
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 11,640 5,360
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (1,715) (2,878)
Total interest charges. . . . . . . . . . . . . . . . 55,995 49,503
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 91,746 $ 108,701
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
6
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 11,172 $ 15,700
Depreciation and amortization . . . . . . . . . . . . . . . 24,537 23,368
Amortization of nuclear fuel. . . . . . . . . . . . . . . . 5,014 1,198
Amortization of phase-in revenues . . . . . . . . . . . . . 4,386 4,386
Corporate-owned life insurance. . . . . . . . . . . . . . . (5,512) (5,940)
Amortization of gain from sale-leaseback. . . . . . . . . . (2,410) (2,410)
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . 16,205 8,275
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . 413 2,599
Accounts payable. . . . . . . . . . . . . . . . . . . . . (4,687) 989
Interest and taxes accrued. . . . . . . . . . . . . . . . 17,212 16,161
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 7,828 8,027
Changes in other assets and liabilities . . . . . . . . . . (3,988) (11,051)
Net cash flows from operating activities. . . . . . . . 70,170 61,302
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 16,477 16,118
Corporate-owned life insurance policies . . . . . . . . . . 415 -
Net cash flows used in investing activities . . . . . . 16,892 16,118
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (212,300) 62,000
Advances to parent company (net). . . . . . . . . . . . . . 183,413 (82,042)
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (65) (135)
Borrowings against life insurance policies. . . . . . . . . 671 -
Dividends to parent company . . . . . . . . . . . . . . . . (25,000) (25,000)
Net cash flows from (used in) financing activities . . . (53,281) (45,177)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . (3) 7
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 44 53
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 41 $ 60
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 8,414 $ 6,321
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 7,000 6,300
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
7
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
March 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 91,746 $ 108,701
Depreciation and amortization . . . . . . . . . . . . . . . 97,478 84,694
Amortization of nuclear fuel. . . . . . . . . . . . . . . . 19,501 12,484
Gain on sales of utility plant (net of tax) . . . . . . . . - (11)
Amortization of phase-in revenues . . . . . . . . . . . . . 17,544 17,545
Corporate-owned life insurance. . . . . . . . . . . . . . . (29,285) (29,512)
Amortization of gain from sale-leaseback. . . . . . . . . . (9,640) (9,640)
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . 8,749 (6,776)
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . 1,877 (579)
Accounts payable. . . . . . . . . . . . . . . . . . . . . (7,640) 12,242
Interest and taxes accrued. . . . . . . . . . . . . . . . 20,185 (10,471)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 4,222 477
Changes in other assets and liabilities . . . . . . . . . . (2,709) 5,500
Net cash flows from operating activities. . . . . . . . 212,028 184,654
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 68,991 88,816
Sales of utility plant. . . . . . . . . . . . . . . . . . . - (140)
Corporate-owned life insurance policies . . . . . . . . . . 26,062 29,930
Death proceeds of corporate-owned life insurance. . . . . . (9,445) (10,333)
Net cash flows used in investing activities . . . . . . 85,608 108,273
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (102,000) 102,000
Advances to parent company (net). . . . . . . . . . . . . . 49,670 (44,548)
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (16,065) (135)
Borrowings against life insurance policies. . . . . . . . . 46,649 46,490
Repayment of borrowings against life insurance policies . . (4,693) (5,185)
Dividends to parent company . . . . . . . . . . . . . . . . (100,000) (175,000)
Net cash flows from (used in) financing activities . . . (126,439) (76,378)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . (19) 3
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 60 57
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 41 $ 60
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 80,805 $ 72,071
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 32,800 48,400
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
8
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CAPITALIZATION
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
1997 1996
COMMON STOCK EQUITY (see Statements):
Common stock, without par value, authorized and issued
1,000 shares. . . . . . . . . . . . . . . . . . . . . . . $1,065,634 $1,065,634
Retained earnings . . . . . . . . . . . . . . . . . . . . . 102,889 116,717
Total common stock equity . . . . . . . . . . . . . . . . 1,168,523 63% 1,182,351 63%
LONG-TERM DEBT:
First Mortgage Bonds:
Series Due 1997 1996
7.6% 2003 135,000 135,000
6-1/2% 2005 65,000 65,000
6.20% 2006 100,000 100,000
300,000 300,000
Pollution Control Bonds:
5.10% 2023 13,757 13,822
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
387,697 387,762
Total bonds. . . . . . . . . . . . . . . . . . . . . . 687,697 687,762
Less:
Unamortized premium and discount (net). . . . . . . . . . 3,663 3,694
Total long-term debt . . . . . . . . . . . . . . . . . 684,034 37% 684,068 37%
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . $1,852,557 100% $1,866,419 100%
(a) Market-Adjusted Tax Exempt Securities (MATES). As of March 31, 1997, the rate
on these bonds ranged from 3.69% to 3.74%.
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
9
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF COMMON STOCK EQUITY
(Dollars in Thousands)
(Unaudited)
Common Retained
Stock Earnings
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 . . . . . . . . . . . . . . . . . . . . . 96,274
Dividend to parent company . . . . . . . . . . . . . (100,000)
BALANCE DECEMBER 31, 1996, 1,000 shares. . . . . . . 1,065,634 116,717
Net Income . . . . . . . . . . . . . . . . . . . . . 11,172
Dividend to parent company . . . . . . . . . . . . . (25,000)
BALANCE MARCH 31, 1997, 1,000 shares . . . . . . . . $1,065,634 $ 102,889
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
11
KANSAS GAS AND ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES AND OTHER INFORMATION
General: Kansas Gas and Electric Company (the company) 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 277,000 electric customers in southeastern Kansas. At December
31, 1996, the company had no employees. All employees are provided by the
company's parent, Western Resources which allocates costs related to the
employees of the company.
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.
The company currently applies accounting standards that recognize the
economic effects of rate regulation Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation",
(SFAS 71) and, accordingly, has recorded regulatory assets and liabilities
related to its generation, transmission and distribution operations. In 1996,
the KCC initiated a generic docket to study electric restructuring issues. A
retail wheeling task force has been created by the Kansas Legislature to study
competitive trends in retail electric services. During the 1997 session of
the Kansas Legislature, bills were introduced to increase competition in the
electric industry. Among the matters under consideration is the recovery by
utilities of costs in excess of competitive cost levels. There can be no
assurance at this time that such costs will be recoverable if open competition
is initiated in the electric utility market. In the event the company
determines that it no longer meets the criteria for SFAS 71, the accounting
impact would be an extraordinary non-cash charge to operations of an amount
that would be material. Criteria that give rise to the discontinuance of SFAS
71 include, (1) increasing competition that restricts the company's ability to
establish prices to recover specific costs, and (2) a significant change in
the manner in which rates are set by regulators from a cost-based regulation
to another form of regulation. The company periodically reviews these
criteria to ensure the continuing application of SFAS 71 is appropriate.
Based on current evaluation of the various factors and conditions that are
expected to impact future cost recovery, the company believes that its net
regulatory assets are probable of future recovery. Any regulatory changes
that would require the company to discontinue SFAS 71 based upon competitive
or other events may significantly impact the valuation of the company's net
11
regulatory assets and its utility plant investments, particularly the Wolf
Creek facility. At this time, the effect of competition and the amount of
regulatory assets which could be recovered in such an environment cannot be
predicted. See Note 3 for further discussion on regulatory assets.
Environmental Remediation: Effective January 1, 1997, the company
adopted the provisions of Statement of Position (SOP) 96-1, "Environmental
Remediation Liabilities". This statement provides authoritative guidance for
recognition, measurement, display, and disclosure of environmental remediation
liabilities in financial statements. The company is currently evaluating and
in the process of estimating the potential liability associated with
environmental remediation. Management does not expect the amount to be
significant to the company's results of operations as the company will seek
recovery of these costs through rates as has been permitted by the KCC in the
case of another Kansas utility. Additionally, the adoption of this statement
is not expected to have a material impact on the company's financial position.
To the extent that such remediation costs are not recovered through rates,
the costs may be material to the company's operating results, depending on the
degree of remediation required and number of years over which the remediation
must be completed.
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,
1997 1996
(Dollars in Millions)
Cash surrender value of contracts.(1). . $404.8 $404.6
Borrowings against contracts . . . . . . (394.9) (394.3)
COLI (net) . . . . . . . . . . . . . $ 9.9 $ 10.3
(1) Cash surrender value of contracts as presented represents the value of the
policies as of the end of the respective policy years and not as of March 31,
1997 and December 31, 1996.
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 $4.2 million and $24.9 million
for the three and twelve months ended March 31, 1997, respectively, compared
to $4.7 million and $23.5 million for the three and twelve months ended 1996,
respectively. The interest expense deduction taken was $6.9 million and $27.7
million for the three and twelve months ended March 31, 1997, respectively,
compared to $6.9 million and $26.6 million for the three and twelve months
ended March 31, 1996, respectively.
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.
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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 analyses. The prioritized sites will
be investigated over a ten 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. As of March 31,
1997, the costs incurred for site investigation and risk assessment have been
minimal. Since the site investigations are preliminary, no formal agreement
on costs to be incurred has been reached, and the minimum potential liability
would not be material to the financial statements, an accrual for these
environmental contingencies has not been reflected in the accompanying
financial statements. 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.
Approval of the 1996 Decommissioning Cost Study was received from the KCC
on February 28, 1997. Based on the study, the company's share of these
decommissioning costs, under the immediate dismantlement method, is estimated
to be approximately $624 million during the period 2025 through 2033, or
approximately $192 million in 1996 dollars. These costs were calculated using
an assumed inflation rate of 3.6% over the remaining service life from 1996 of
29 years.
Decommissioning costs are currently being charged to operating expenses
in accordance with the prior KCC orders. Electric rates charged to customers
provide for recovery of these decommissioning costs over the life of Wolf
Creek. Amounts expensed approximated $3.7 million in 1996 and will increase
annually to $5.6 million in 2024. These expenses are deposited in an external
trust fund. The average after tax expected return on trust assets is 5.7%.
An updated funding schedule, on which the contributions are not materially
different, was submitted to the KCC on March 10, 1997. Approval of this
funding schedule is still pending with the KCC.
13
The company's investment in the decommissioning fund, including
reinvested earnings approximated $33.7 million and $33.0 million at March 31,
1997 and December 31, 1996, respectively. Trust fund earnings accumulate in
the fund balance and increase the recorded decommissioning liability. These
amounts are reflected in Investments and Other Property, Decommissioning
trust, and the related liability is included in Deferred Credits and Other
Liabilities, Other, on the 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 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 the
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
14
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 $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.
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 has installed
continuous monitoring and reporting equipment at a total cost of approximately
$2.3 million as of December 31, 1996. The company does not expect material
expenditures to be needed to meet Phase II sulfur dioxide requirements.
In the fourth quarter of 1996, the Environmental Protection Agency (EPA)
issued new standards applying to NOx emissions from the company's effected
coal units. Jeffrey Energy Center will require operational modifications and
possible minor capital investments to modify the emission controls. The
company will have until the year 2000 to comply.
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 and coal. Some of these contracts contain provisions for price
escalation and minimum purchase commitments. At December 31, 1996, WCNOC's
nuclear fuel commitments (company's share) were approximately $15.4 million
for uranium concentrates expiring at various times through 2001, $59.4 million
for enrichment expiring at various times through 2003, and $70.3 million for
fabrication through 2025. At December 31, 1996, the company's coal contract
commitments in 1996 dollars under the remaining terms of the contracts were
approximately $671 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.
15
3. RATE MATTERS AND REGULATION
Utility expenses and credits recognized as regulatory assets and
liabilities on the Consolidated Balance Sheets are recognized in income as the
related amounts are included in service rates and recovered from or refunded
to customers in utility revenues. The company expects to recover the
following regulatory assets in rates:
March 31, December 31,
1997 1996
(Dollars in Thousands)
Coal contract settlement costs $ 11,252 $ 11,655
Deferred plant costs 31,199 31,272
Phase-in revenues 21,931 26,317
Debt issuance costs 45,252 45,989
Other regulatory assets 7,083 7,155
Total regulatory assets $116,717 $122,388
See Note 3 included in the company's 1996 Annual Report on Form 10-K for
additional information regarding regulatory assets.
KCC Rate Proceedings: On May 23, 1996, the company implemented an $8.7
million electric rate reduction 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 with the KCC whereby the
company's retail electric rates would be reduced, subject to approval by the
KCC. This agreement was approved on January 15, 1997. Under the agreement,
on February 1, 1997, the company's rates were reduced by $36.3 million, and in
addition, the May 1996 interim reduction became permanent. The company's
rates will be reduced by another $10 million effective June 1, 1998, and again
on June 1, 1999. Two one-time rebates of $5 million will be credited to
customers of Western Resources in January 1998 and 1999. A portion of these
rebates will be credited to the company's customers. The agreement also fixed
annual savings from the 1992 merger with Western Resources at $40 million.
This level of merger savings provides for complete recovery of and a return on
the acquisition premium.
4. 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 29.7% and 20.5% for the three month periods and
28.7% and 30.7% for the twelve month periods ended March 31, 1997 and 1996,
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.
5. WESTERN RESOURCES AND KANSAS CITY POWER & LIGHT COMPANY MERGER AGREEMENT
On February 7, 1997, Kansas City Power & Light Company (KCPL) and Western
Resources entered into an agreement whereby KCPL would be merged with and into
Western Resources (KCPL Merger). The merger agreement provides for a
tax-free, stock-for-stock transaction valued at approximately $2 billion.
Under the terms of the agreement, KCPL shareholders will receive $32 of
Western Resources common stock per KCPL share, subject to an exchange ratio
collar of not less than 0.917 to no more than 1.100 common shares.
Consummation of the KCPL Merger is subject to customary conditions including
obtaining the approval of KCPL's and Western Resources' shareholders and
various regulatory agencies. Western Resources expects to be able to close
the KCPL Merger in the first half of 1998.
16
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, Western Resources, and the company
have joint interests in certain electric generating assets, including Wolf
Creek.
17
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 1996.
The following updates the information provided in the 1996 Form 10-K, and
analyzes the changes in the results of operations between the three and twelve
month periods ended March 31, 1997 and comparable periods of 1996.
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. Such
statements address future plans, objectives, expectations and events or
conditions concerning various matters such as capital expenditures, earnings,
litigation, rate and other regulatory matters, pending transactions,
liquidity and capital resources, 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 ongoing state and federal activities; future economic conditions;
legislation; regulation; competition; and other circumstances affecting
anticipated rates, revenues and costs.
FINANCIAL CONDITION
General: The company had net income of $11.2 million for the first
quarter of 1997 compared to $15.7 million for the first quarter in 1996. The
decrease in net income was primarily due to the implementation of a $36.3
million rate reduction on February 1, 1997. See Note 3 of the Notes to
Financial Statements for more information on the rate proceedings.
Net income for the twelve months ended March 31, 1997, of $91.7 million,
decreased from net income of $108.7 million for the comparable period of 1996.
The decrease was primarily attributable to increased interest charges and the
$36.3 million rate reduction, and a May 1996 interim rate reduction of $8.7
million which became permanent on February 1, 1997.
Liquidity and Capital Resources: The company's liquidity is a function
of its ongoing construction and maintenance program designed to improve
facilities which provide electric service and meet future customer service
requirements.
The company's short-term financing requirements are satisfied through
short-term bank loans and uncommitted loan participation agreements. At March
31, 1997 short-term borrowing amounted to $10 million compared to $222.3
million at December 31, 1996.
In January 1997, the company increased its borrowings $0.7 million
against the accumulated cash surrender values of corporate-owned life
insurance policies.
18
OPERATING RESULTS
The following discussion explains variances for the three and twelve
months ended March 31, 1997, to the comparable periods of 1996.
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 revenues
will continue to be affected by weather conditions, the electric rate
reduction which was implemented on February 1, 1997, competing fuel sources,
customer conservation efforts, 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, 1997 from the comparable periods of 1996.
Increase (decrease) in electric sales volumes:
3 Months 12 Months
Ended Ended
Residential (1.7)% 2.5%
Commercial 1.6% 3.5%
Industrial (5.0)% (3.2)%
Total Retail (2.3)% 0.3%
Wholesale & Interchange 89.3% 129.9%
Total electric sales 13.4% 18.5%
Revenues for the first quarter of 1997 decreased approximately one
percent to $143.8 million, compared to first quarter 1996 revenues of $145.0
million. Revenues for the first quarter of 1997 decreased in all retail
customer classes. These decreases are primarily due to the implementation of
a $36.3 million rate reduction on February 1, 1997.
Partially offsetting the decrease in revenues for the first quarter of
1997 was the increase in interchange sales due to the increased sales to power
brokers.
Revenues for the twelve months ended March 31, 1997, increased
approximately four percent to $653.3 million from revenues of $630.3 million
for the comparable period of 1996. The increase can be primarily attributed
to increased interchange sales to power brokers as a result of the increase in
competition within the wholesale market.
Partially offsetting the increase was the implementation of the above
mentioned rate reduction and a May 1996 $8.7 million interim rate reduction
which became permanent on February 1, 1997.
Operating Expenses: Total operating expenses increased approximately two
percent for the first quarter of 1997 compared to the first quarter of 1996.
The slight increase was primarily due to increased other operating and
maintenance expenses due to the increase in net generation as a result of
increased sales to interchange customers.
19
Total operating expenses increased approximately six percent for the
twelve months ended March 31, 1997 compared to the same period of 1996. 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 increased sales to interchange customers.
Other Income and Deductions: Other income and deductions, net of taxes,
decreased for the three and twelve months ended March 31, 1997, compared to
the same periods of 1996 due to increased corporate-owned life insurance
expense for the three month period and lower income tax credits for the twelve
month period.
Interest Expense: Interest expense decreased less than two percent for
the first quarter ended March 31, 1997, compared to the first quarter of 1996.
The slight decrease can be attributed to the decrease in short-term debt
during the first quarter of 1997.
Interest expense increased approximately thirteen percent for the twelve
months ended March 31, 1997, compared to the same period of 1996. The
increase resulted primarily from the higher short-term debt balances during
1996 as compared to 1995.
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.
20
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 12 - Computation of Ratio of Earnings to Fixed Charges
for 12 Months Ended March 31, 1997 (filed
electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
None
21
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 May 14, 1997 By /s/ Richard D. Terrill
Richard D. Terrill
Secretary, Treasurer and
General Counsel
Exhibit 12
KANSAS GAS AND ELECTRIC COMPANY
Computations of Ratio of Earnings to Fixed Charges and
Computation of Ratio of Earnings to Combined Fiaxed Charges
and Preferred and Preference Dividend Requirements
(Dollars in Thousands)
Unaudited
Twelve
Months
Ended
March 31,
1997 1996 1995 1994 1993
Net Income. . . . . . . . . . . . . $ 91,746 $ 96,274 $110,873 $104,526 $108,103
Taxes on Income . . . . . . . . . . 36,924 36,258 51,787 55,349 46,896
Net Income Plus Taxes. . . . . 128,670 132,532 162,660 159,875 154,999
Fixed Charges:
Interest on Long-Term Debt. . . . 46,070 46,304 47,073 47,827 53,908
Interest on Other Indebtedness. . 11,640 11,758 5,190 5,183 6,075
Interest on Corporate-owned
Life Insurance Borrowings . . . 27,674 27,636 25,357 20,990 11,865
Interest Applicable to Rentals. . 25,521 25,539 25,375 25,096 24,967
Total Fixed Charges . . . . . 110,905 111,237 102,995 99,096 96,815
Earnings (1). . . . . . . . . . . . $239,575 $243,769 $265,655 $258,971 $251,814
Ratio of Earnings to Fixed Charges. 2.16 2.19 2.58 2.61 2.60
1992
Pro Forma April 1 | January 1
1992 (2) to Dec. 31 | to March 31
(Successor) |(Predecessor)
Net Income. . . . . . . . . . . . . $ 77,981 $ 71,941 | $ 6,040
Taxes on Income . . . . . . . . . . 20,378 23,551 | (3,173)
Net Income Plus Taxes. . . . . 98,359 95,492 | 2,867
|
Fixed Charges: |
Interest on Long-Term Debt. . . . 57,862 42,889 | 14,973
Interest on Other Indebtedness. . 15,121 11,777 | 3,344
Interest on Corporate-owned |
Life Insurance Borrowings . . . 7,155 5,294 | 1,861
Interest Applicable to Rentals. . 30,212 22,133 | 8,079
Total Fixed Charges . . . . . 110,350 82,093 | 28,257
|
Earnings (1). . . . . . . . . . . . $208,709 $177,585 | $ 31,124
|
Ratio of Earnings to Fixed Charges. 1.89 2.16 | 1.10
(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.
(2) The pro forma information for the year ended December 31, 1992 was derived by combining the
historical information of the three month period ended March 31, 1992 (Predecessor) and the nine
month period ended December 31, 1992 (Successor). No purchase accounting adjustments were made
for periods prior to the Merger in determining pro forma amounts because such adjustments
would be immaterial. (See Note 1 of Notes to Financial Statements)
UT
1,000
3-MOS
DEC-31-1997
MAR-31-1997
PER-BOOK
2,571,772
43,114
179,970
297,392
0
3,092,248
1,065,634
0
102,889
1,168,523
0
0
687,034
10,000
0
0
0
0
0
0
1,229,691
3,092,248
143,791
4,716
113,181
120,696
23,095
637
23,732
12,560
11,172
0
11,172
0
11,482
70,170
0
0
