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 June 30, 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 July 30, 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 - 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 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)
June 30, December 31,
1997 1996
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . . . . . . . . . $3,507,286 $3,487,213
Less - Accumulated depreciation . . . . . . . . . . . . . 1,015,523 974,451
2,491,763 2,512,762
Construction work in progress . . . . . . . . . . . . . . 38,143 33,197
Nuclear fuel (net). . . . . . . . . . . . . . . . . . . . 43,998 38,461
Net utility plant . . . . . . . . . . . . . . . . . . . 2,573,904 2,584,420
INVESTMENTS AND OTHER PROPERTY:
Decommissioning trust . . . . . . . . . . . . . . . . . . 34,638 33,041
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 9,746 9,093
44,384 42,134
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . 35 44
Accounts receivable and unbilled revenues (net) . . . . . 73,603 75,671
Advances to parent company . . . . . . . . . . . . . . . 44,154 250,733
Fossil fuel, at average cost. . . . . . . . . . . . . . . 13,710 13,459
Materials and supplies, at average cost . . . . . . . . . 29,909 30,187
Prepayments and other current assets. . . . . . . . . . . 34,037 16,991
195,448 387,085
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes . . . . . . . . . . . . . . 206,800 164,520
Corporate-owned life insurance (net). . . . . . . . . . . 10,863 10,341
Regulatory assets . . . . . . . . . . . . . . . . . . . . 110,913 122,388
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 3,907 7,999
332,483 305,248
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $3,146,219 $3,318,887
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (See Statements):
Common stock equity . . . . . . . . . . . . . . . . . . . $1,159,015 $1,182,351
Long-term debt (net). . . . . . . . . . . . . . . . . . . 684,065 684,068
1,843,080 1,866,419
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . . 10,000 222,300
Accounts payable. . . . . . . . . . . . . . . . . . . . . 70,931 48,819
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . 37,012 35,358
Accrued interest. . . . . . . . . . . . . . . . . . . . . 8,143 9,445
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 6,940 6,726
133,026 322,648
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . . . . . . . . . 784,389 753,511
Deferred investment tax credits . . . . . . . . . . . . . 68,099 69,722
Deferred gain from sale-leaseback . . . . . . . . . . . . 227,693 233,060
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 89,932 73,527
1,170,113 1,129,820
COMMITMENTS AND CONTINGENCIES (Note 2)
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . $3,146,219 $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
June 30,
1997 1996
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 148,826 $ 163,038
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 16,355 21,828
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 5,999 5,618
Power purchased . . . . . . . . . . . . . . . . . . . . . 4,186 2,464
Other operations. . . . . . . . . . . . . . . . . . . . . 37,857 38,307
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 14,405 15,439
Depreciation and amortization . . . . . . . . . . . . . . 24,183 23,494
Amortization of phase-in revenues . . . . . . . . . . . . 4,386 4,386
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 5,864 7,592
State income . . . . . . . . . . . . . . . . . . . . . 1,802 2,433
General . . . . . . . . . . . . . . . . . . . . . . . . 8,986 12,047
Total operating expenses. . . . . . . . . . . . . . . 124,023 133,608
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 24,803 29,430
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (749) (1,565)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 783 556
Income taxes (net). . . . . . . . . . . . . . . . . . . . 2,655 2,738
Total other income and deductions . . . . . . . . . . 2,689 1,729
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 27,492 31,159
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 11,525 11,583
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 999 2,694
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (524) (371)
Total interest charges. . . . . . . . . . . . . . . . 12,000 13,906
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 15,492 $ 17,253
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)
Six Months Ended
June 30,
1997 1996
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 292,617 $ 308,072
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 33,122 43,980
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 12,290 7,375
Power purchased . . . . . . . . . . . . . . . . . . . . . 7,352 6,824
Other operations. . . . . . . . . . . . . . . . . . . . . 71,760 69,676
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 27,166 27,338
Depreciation and amortization . . . . . . . . . . . . . . 48,720 46,862
Amortization of phase-in revenues . . . . . . . . . . . . 8,772 8,772
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 11,663 12,672
State income . . . . . . . . . . . . . . . . . . . . . 3,518 3,992
General . . . . . . . . . . . . . . . . . . . . . . . . 20,356 24,088
Total operating expenses. . . . . . . . . . . . . . . 244,719 251,579
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 47,898 56,493
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (3,469) (3,749)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 1,341 1,571
Income taxes (net). . . . . . . . . . . . . . . . . . . . 5,454 5,327
Total other income and deductions . . . . . . . . . . 3,326 3,149
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 51,224 59,642
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 23,007 23,299
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 2,556 4,369
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (1,003) (979)
Total interest charges. . . . . . . . . . . . . . . . 24,560 26,689
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 26,664 $ 32,953
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
6
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
June 30,
1997 1996
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 639,115 $ 648,636
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 80,966 87,176
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 24,877 17,036
Power purchased . . . . . . . . . . . . . . . . . . . . . 12,011 10,195
Other operations. . . . . . . . . . . . . . . . . . . . . 136,804 125,353
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 48,771 50,768
Depreciation and amortization . . . . . . . . . . . . . . 98,167 89,872
Amortization of phase-in revenues . . . . . . . . . . . . 17,544 17,545
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 35,147 47,707
State income . . . . . . . . . . . . . . . . . . . . . 9,981 12,567
General . . . . . . . . . . . . . . . . . . . . . . . . 42,451 46,943
Total operating expenses. . . . . . . . . . . . . . . 506,719 505,162
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 132,396 143,474
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (1,969) (2,880)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 3,167 3,625
Income taxes (net). . . . . . . . . . . . . . . . . . . . 10,480 13,271
Total other income and deductions . . . . . . . . . . 11,678 14,016
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 144,074 157,490
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 46,012 46,821
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 9,945 6,947
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (1,868) (2,665)
Total interest charges. . . . . . . . . . . . . . . . 54,089 51,103
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 89,985 $ 106,387
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)
Six Months Ended
June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 26,664 $ 32,953
Depreciation and amortization . . . . . . . . . . . . . . . 48,720 46,862
Amortization of nuclear fuel. . . . . . . . . . . . . . . . 9,803 5,602
Amortization of phase-in revenues . . . . . . . . . . . . . 8,772 8,772
Corporate-owned life insurance. . . . . . . . . . . . . . . (13,930) (12,593)
Amortization of gain from sale-leaseback. . . . . . . . . . (5,367) (4,820)
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . 2,068 (5,162)
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . (251) 2,627
Accounts payable. . . . . . . . . . . . . . . . . . . . . 22,112 7,695
Interest and taxes accrued. . . . . . . . . . . . . . . . 352 2,868
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (16,047) 10,076
Changes in other assets and liabilities . . . . . . . . . . (5,349) (39,894)
Net cash flows from operating activities. . . . . . . . 77,547 54,986
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 46,221 31,314
Corporate-owned life insurance policies . . . . . . . . . . 24,557 22,468
Death proceeds of corporate-owned life insurance policies . (1,810) -
Net cash flows used in investing activities . . . . . . 68,968 53,782
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (212,300) 200,000
Advances to parent company (net). . . . . . . . . . . . . . 206,579 (179,355)
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (65) (16,135)
Borrowings against life insurance policies. . . . . . . . . 47,782 44,321
Repayments of borrowings against life insurance policies. . (584) -
Dividends to parent company . . . . . . . . . . . . . . . . (50,000) (50,000)
Net cash flows from (used in) financing activities . . . (8,588) (1,169)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . (9) 35
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 44 53
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 35 $ 88
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 54,342 $ 50,652
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 20,100 17,600
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
8
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 89,985 $ 106,387
Depreciation and amortization . . . . . . . . . . . . . . . 98,167 89,872
Amortization of nuclear fuel. . . . . . . . . . . . . . . . 19,886 12,862
Amortization of phase-in revenues . . . . . . . . . . . . . 17,544 17,545
Corporate-owned life insurance. . . . . . . . . . . . . . . (31,050) (32,476)
Amortization of gain from sale-leaseback. . . . . . . . . . (10,187) (9,639)
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . 8,049 (13,672)
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . 1,185 1,714
Accounts payable. . . . . . . . . . . . . . . . . . . . . 12,453 3,552
Interest and taxes accrued. . . . . . . . . . . . . . . . 16,618 (2,770)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (21,702) 20,977
Changes in other assets and liabilities . . . . . . . . . . 24,773 (19,867)
Net cash flows from operating activities. . . . . . . . 225,721 174,485
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 83,539 84,696
Corporate-owned life insurance policies . . . . . . . . . . 27,736 27,176
Death proceeds of corporate-owned life insurance. . . . . . (11,255) (10,333)
Net cash flows used in investing activities . . . . . . 100,020 101,539
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (240,000) 225,000
Advances to parent company (net). . . . . . . . . . . . . . 170,149 (122,399)
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (65) (16,135)
Borrowings against life insurance policies. . . . . . . . . 49,439 45,789
Repayment of borrowings against life insurance policies . . (5,277) (5,185)
Dividends to parent company . . . . . . . . . . . . . . . . (100,000) (200,000)
Net cash flows from (used in) financing activities . . . (125,754) (72,930)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . (53) 16
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 88 72
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 35 $ 88
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 82,402 $ 73,651
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 34,600 41,660
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
9
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CAPITALIZATION
(Dollars in Thousands)
(Unaudited)
June 30, 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 . . . . . . . . . . . . . . . . . . . . . 93,381 116,717
Total common stock equity . . . . . . . . . . . . . . . . 1,159,015 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). . . . . . . . . . 3,632 3,694
Total long-term debt . . . . . . . . . . . . . . . . . 684,065 37% 684,068 37%
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . $1,843,080 100% $1,866,419 100%
(a) Market-Adjusted Tax Exempt Securities (MATES). As of June 30, 1997, the rate
on these bonds ranged from 3.75% to 4.15%.
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
10
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 . . . . . . . . . . . . . . . . . . . . . 26,664
Dividend to parent company . . . . . . . . . . . . . (50,000)
BALANCE JUNE 30, 1997, 1,000 shares. . . . . . . . . $1,065,634 $ 93,381
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
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.
12
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's best current estimate of
the most likely range of environmental costs to be incurred per site based
upon limited current information presently available is approximately $100,000
to $10 million. It should be noted that additional information and testing
could result in costs significantly below or in excess of the amounts noted
above to be incurred. 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.
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:
June 30, December 31,
1997 1996
(Dollars in Millions)
Cash surrender value of contracts.(1). . $452.3 $404.6
Borrowings against contracts . . . . . . (441.4) (394.3)
COLI (net) . . . . . . . . . . . . . $ 10.9 $ 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 June 30,
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 $6.7 million, $10.9 million,
and $26.1 million for the three, six and twelve months ended June 30, 1997,
respectively, compared to $5.4 million, $10.2 million and $24.7 million for
the three, six and twelve months ended 1996, respectively. The interest
expense deduction taken was $7.4 million, $14.4 million and $28.1 million for
the three, six and twelve months ended June 30, 1997, respectively, compared
to $7.0 million, $13.9 million and $27.6 million for the three, six and twelve
months ended June 30, 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.
13
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 June 30,
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.
The company's investment in the decommissioning fund, including
reinvested earnings approximated $34.6 million and $33.0 million at June 30,
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.
14
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 1998. 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
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.
15
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.
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:
16
June 30, December 31,
1997 1996
(Dollars in Thousands)
Coal contract settlement costs $ 10,848 $ 11,655
Deferred plant costs 31,125 31,272
Phase-in revenues 17,545 26,317
Debt issuance costs 44,517 45,989
Other regulatory assets 6,878 7,155
Total regulatory assets $110,913 $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%. The Federal statutory rate produces
effective income tax rates of 24.4% and 29.7% for the three month periods,
26.7% and 25.6% for the six month periods, and 27.8% and 30.6% for the twelve
month periods ended June 30, 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 combined with
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.
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, six and
twelve month periods ended June 30, 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 $15.5 million and $26.7 million
for the three and six months ended June 30, 1997 compared to $17.3 million and
$33.0 million for the same periods in 1996, respectively. The decreases in
net income were primarily due to the implementation of a $36.3 million rate
reduction on February 1, 1997 and mild spring temperatures experienced within
the company's service territory. See Note 3 of the Notes to Financial
Statements for more information on the rate proceedings.
Net income for the twelve months ended June 30, 1997, of $90.0 million,
decreased from net income of $106.4 million for the comparable period of 1996.
The decrease was primarily attributable to mild spring temperatures, 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 June
30, 1997 short-term borrowing amounted to $10 million compared to $222.3
million at December 31, 1996.
18
In June 1997, the company increased its borrowings against the
accumulated cash surrender values of corporate-owned life insurance policies
by $45.1 million and received an additional $2.0 million from increased
borrowings on Wolf Creek Nuclear Operating Company policies. Total 1997 COLI
borrowings have amounted to $47.8 million.
OPERATING RESULTS
The following discussion explains variances for the three, six and twelve
months ended June 30, 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, six
and twelve months ended June 30, 1997 from the comparable periods of 1996.
Increase (decrease) in electric sales volumes:
3 Months 6 Months 12 Months
Ended Ended Ended
Residential (7.7)% (4.8)% (3.9)%
Commercial (3.9)% (1.3)% 0.3 %
Industrial (1.0)% (3.0)% (3.8)%
Total Retail (3.7)% (3.0)% (2.8)%
Wholesale & Interchange (22.4)% 18.1% 69.8%
Total electric sales (8.5)% 1.5% 9.6%
Revenues for the three and six months ended June 30, 1997, of $148.8
million and $292.6 million, decreased approximately nine and five percent from
revenues of $163.0 million and $308.1 million for the comparable periods of
1996. Revenues 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 and mild spring temperatures.
Revenues for the twelve months ended June 30, 1997, decreased
approximately two percent to $639.1 million from revenues of $648.6 million
for the comparable period of 1996. The decrease can be primarily attributed
to 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.
Partially offsetting the decrease in revenues for the six and twelve
months ended June 30, 1997 were the increases in interchange sales due to the
increased sales to power brokers as a result of the increase in competition
within the wholesale market.
19
Operating Expenses: Total operating expenses decreased approximately
seven and three percent for the three and six months ended June 30, 1997,
respectively, compared to the same periods of 1996. The decreases were
primarily due to decreased federal and state income taxes due to the decrease
in net income.
Total operating expenses remain virtually unchanged for the twelve months
ended June 30, 1997 compared to the same period of 1996. The increase in
other operating expenses due to the increase in net generation as a result of
increased sales to interchange customers was offset by the decreases in
federal and state income taxes due to the decrease in net income.
Other Income and Deductions: Other income and deductions, net of taxes,
increased for the three and six months ended June 30, 1997, compared to the
same periods of 1996 due to the receipt of death benefit proceeds from COLI
policies and the increase in cash surrender values of COLI policies.
Other income and deductions, net of taxes, decreased for the twelve
months ended June 30, 1997, compared to the same period of 1996 due to lower
income tax credits.
Interest Expense: Interest expense decreased approximately fourteen and
eight percent for the three and six months ended June 30, 1997, respectively,
compared to the same periods of 1996. The decreases can be attributed to the
decrease in short-term debt during the first six months of 1997.
Interest expense increased approximately six percent for the twelve
months ended June 30, 1997, compared to the same period of 1996. The increase
resulted primarily from the higher short-term debt balances during 1997 as
compared to 1996.
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 June 30, 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 July 30, 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 Fixed Charges
and Preferred and Preference Dividend Requirements
(Dollars in Thousands)
Unaudited
Twelve
Months
Ended
June 30,
1997 1996 1995 1994 1993
Net Income. . . . . . . . . . . . . $ 89,985 $ 96,274 $110,873 $104,526 $108,103
Taxes on Income . . . . . . . . . . 34,648 36,258 51,787 55,349 46,896
Net Income Plus Taxes. . . . . 124,633 132,532 162,660 159,875 154,999
Fixed Charges:
Interest on Long-Term Debt. . . . 46,012 46,304 47,073 47,827 53,908
Interest on Other Indebtedness. . 9,945 11,758 5,190 5,183 6,075
Interest on Corporate-owned
Life Insurance Borrowings . . . 28,084 27,636 25,357 20,990 11,865
Interest Applicable to Rentals. . 25,501 25,539 25,375 25,096 24,967
Total Fixed Charges . . . . . 109,542 111,237 102,995 99,096 96,815
Earnings (1). . . . . . . . . . . . $234,175 $243,769 $265,655 $258,971 $251,814
Ratio of Earnings to Fixed Charges. 2.14 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
6-MOS
DEC-31-1997
JUN-30-1997
PER-BOOK
2,573,904
44,384
195,448
332,483
0
3,146,219
1,065,634
0
93,381
1,159,015
0
0
684,065
10,000
0
0
0
0
0
0
1,293,139
3,146,219
292,617
9,727
229,538
244,719
47,898
3,326
51,224
24,560
26,664
0
26,664
0
23,007
77,547
0
0
