FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 29, 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 15
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
3
KANSAS GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1997 1996
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . . . . . . . . . $3,515,682 $3,487,213
Less - Accumulated depreciation . . . . . . . . . . . . . 1,033,113 974,451
2,482,569 2,512,762
Construction work in progress . . . . . . . . . . . . . . 44,128 33,197
Nuclear fuel (net). . . . . . . . . . . . . . . . . . . . 39,160 38,461
Net utility plant . . . . . . . . . . . . . . . . . . . 2,565,857 2,584,420
INVESTMENTS AND OTHER PROPERTY:
Decommissioning trust . . . . . . . . . . . . . . . . . . 42,081 33,041
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 10,108 9,093
52,189 42,134
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . 44 44
Accounts receivable and unbilled revenues (net) . . . . . 81,343 75,671
Advances to parent company (net). . . . . . . . . . . . . 35,999 250,733
Fossil fuel, at average cost. . . . . . . . . . . . . . . 10,685 13,459
Materials and supplies, at average cost . . . . . . . . . 29,192 30,187
Prepayments and other current assets. . . . . . . . . . . 25,758 16,991
183,021 387,085
DEFERRED CHARGES AND OTHER ASSETS:
Regulatory asset - recoverable taxes. . . . . . . . . . . 206,800 164,520
Regulatory assets . . . . . . . . . . . . . . . . . . . . 105,129 122,388
Corporate-owned life insurance (net). . . . . . . . . . . 10,899 10,341
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 3,527 7,999
326,355 305,248
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $3,127,422 $3,318,887
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see statements):
Common stock equity . . . . . . . . . . . . . . . . . . . $1,165,790 $1,182,351
Long-term debt (net). . . . . . . . . . . . . . . . . . . 684,096 684,068
1,849,886 1,866,419
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . . - 222,300
Accounts payable. . . . . . . . . . . . . . . . . . . . . 51,138 48,819
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . 38,789 35,358
Accrued interest. . . . . . . . . . . . . . . . . . . . . 13,737 9,445
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 7,134 6,726
110,798 322,648
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . . . . . . . . . 782,682 753,511
Deferred investment tax credits . . . . . . . . . . . . . 67,288 69,722
Deferred gain from sale-leaseback . . . . . . . . . . . . 224,736 233,060
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 92,032 73,527
1,166,738 1,129,820
COMMITMENTS AND CONTINGENCIES (Note 2)
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . $3,127,422 $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
September 30,
1997 1996
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 191,066 $ 193,198
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 28,861 29,082
Nuclear fuel (net). . . . . . . . . . . . . . . . . . . 6,388 6,299
Power purchased . . . . . . . . . . . . . . . . . . . . . (474) 1,916
Other operations. . . . . . . . . . . . . . . . . . . . . 38,055 31,355
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 12,420 11,388
Depreciation and amortization . . . . . . . . . . . . . . 24,000 23,847
Amortization of phase-in revenues . . . . . . . . . . . . 4,386 4,386
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 19,486 18,156
State income . . . . . . . . . . . . . . . . . . . . . 4,802 4,825
General . . . . . . . . . . . . . . . . . . . . . . . . 10,662 12,512
Total operating expenses. . . . . . . . . . . . . . . 148,586 143,766
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 42,480 49,432
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (2,811) 2,648
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 797 1,091
Income taxes (net). . . . . . . . . . . . . . . . . . . . 3,382 2,563
Total other income and deductions . . . . . . . . . . 1,368 6,302
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 43,848 55,734
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 11,526 11,505
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 975 3,937
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (428) (444)
Total interest charges. . . . . . . . . . . . . . . . 12,073 14,998
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 31,775 $ 40,736
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)
Nine Months Ended
September 30,
1997 1996
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 483,683 $ 501,270
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 61,983 73,062
Nuclear fuel (net). . . . . . . . . . . . . . . . . . . 18,678 13,674
Power purchased . . . . . . . . . . . . . . . . . . . . . 6,878 8,740
Other operations. . . . . . . . . . . . . . . . . . . . . 109,816 101,031
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 39,586 38,726
Depreciation and amortization . . . . . . . . . . . . . . 72,719 70,709
Amortization of phase-in revenues . . . . . . . . . . . . 13,158 13,158
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 31,149 30,828
State income . . . . . . . . . . . . . . . . . . . . . 8,320 8,817
General . . . . . . . . . . . . . . . . . . . . . . . . 31,018 36,600
Total operating expenses. . . . . . . . . . . . . . . 393,305 395,345
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 90,378 105,925
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (6,280) (1,101)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 2,138 2,662
Income taxes (net). . . . . . . . . . . . . . . . . . . . 8,836 7,890
Total other income and deductions . . . . . . . . . . 4,694 9,451
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 95,072 115,376
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 34,533 34,804
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 3,531 8,306
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (1,431) (1,423)
Total interest charges. . . . . . . . . . . . . . . . 36,633 41,687
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 58,439 $ 73,689
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
September 30,
1997 1996
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 636,983 $ 639,452
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 80,745 91,898
Nuclear fuel (net). . . . . . . . . . . . . . . . . . . 24,966 18,251
Power purchased . . . . . . . . . . . . . . . . . . . . . 9,621 9,835
Other operations. . . . . . . . . . . . . . . . . . . . . 143,505 128,877
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 49,803 50,696
Depreciation and amortization . . . . . . . . . . . . . . 98,319 93,686
Amortization of phase-in revenues . . . . . . . . . . . . 17,544 17,545
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 36,477 39,089
State income . . . . . . . . . . . . . . . . . . . . . 9,958 10,910
General . . . . . . . . . . . . . . . . . . . . . . . . 40,601 47,719
Total operating expenses. . . . . . . . . . . . . . . 511,539 508,506
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 125,444 130,946
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (7,428) 2,016
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 2,873 3,844
Income taxes (net). . . . . . . . . . . . . . . . . . . . 11,299 12,375
Total other income and deductions . . . . . . . . . . 6,744 18,235
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 132,188 149,181
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 46,033 46,567
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 6,983 9,690
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (1,852) (2,363)
Total interest charges. . . . . . . . . . . . . . . . 51,164 53,894
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 81,024 $ 95,287
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)
Nine Months Ended
September 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 58,439 $ 73,689
Depreciation and amortization . . . . . . . . . . . . . . . 72,719 70,709
Amortization of nuclear fuel. . . . . . . . . . . . . . . . 14,910 10,694
Amortization of phase-in revenues . . . . . . . . . . . . . 13,158 13,158
Corporate-owned life insurance policies . . . . . . . . . . (20,649) (23,334)
Amortization of gain from sale-leaseback. . . . . . . . . . (8,324) (7,230)
Changes in other working capital items:
Accounts receivable and unbilled revenues (net) . . . . . (5,672) (9,751)
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . 2,774 1,894
Accounts payable. . . . . . . . . . . . . . . . . . . . . 2,319 (7,011)
Interest and taxes accrued. . . . . . . . . . . . . . . . 7,723 45,476
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (6,311) (2,664)
Changes in other assets and liabilities . . . . . . . . . . (6,143) (19,213)
Net cash flows from operating activities. . . . . . . . 124,943 146,417
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 66,923 47,430
Corporate-owned life insurance policies . . . . . . . . . . 25,104 24,905
Death proceeds of corporate-owned life insurance policies . (1,810) (9,010)
Net cash flows used in investing activities . . . . . . 90,217 63,325
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (222,300) 160,000
Advances to parent company (net). . . . . . . . . . . . . . 214,734 (192,471)
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (65) (16,135)
Borrowings against life insurance policies. . . . . . . . . 48,488 45,136
Repayments of borrowings against life insurance policies. . (583) (4,611)
Dividends to parent company . . . . . . . . . . . . . . . . (75,000) (75,000)
Net cash flows from (used in) financing activities . . . (34,726) (83,081)
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . 0 11
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 44 53
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 44 $ 64
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 57,609 $ 59,873
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 52,100 21,600
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
September 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 81,024 $ 95,287
Depreciation and amortization . . . . . . . . . . . . . . . 98,319 93,686
Amortization of nuclear fuel. . . . . . . . . . . . . . . . 19,901 14,201
Amortization of phase-in revenues . . . . . . . . . . . . . 17,544 17,545
Corporate-owned life insurance policies . . . . . . . . . . (27,028) (37,125)
Amortization of gain from sale-leaseback. . . . . . . . . . (10,734) (9,639)
Changes in other working capital items:
Accounts receivable and unbilled revenues (net) . . . . . 4,898 3,208
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . 4,943 196
Accounts payable. . . . . . . . . . . . . . . . . . . . . 7,366 (547)
Interest and taxes accrued. . . . . . . . . . . . . . . . (18,619) (3,326)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 774 3,213
Changes in other assets and liabilities . . . . . . . . . . 3,298 8,454
Net cash flows from operating activities. . . . . . . . 181,686 185,153
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 88,125 75,518
Corporate-owned life insurance policies . . . . . . . . . . 25,846 29,609
Death proceeds of corporate-owned life insurance. . . . . . (2,245) (19,343)
Net cash flows used in investing activities . . . . . . 111,726 85,784
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (210,000) 180,950
Advances to parent company (net). . . . . . . . . . . . . . 191,420 (75,979)
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (65) (16,135)
Borrowings against life insurance policies. . . . . . . . . 49,330 46,604
Repayment of borrowings against life insurance policies . . (665) (9,796)
Dividends to parent company . . . . . . . . . . . . . . . . (100,000) (225,000)
Net cash flows from (used in) financing activities . . . (69,980) (99,356)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . (20) 13
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 64 51
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 44 $ 64
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 76,448 $ 77,407
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 62,600 32,600
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)
September 30, December 31,
1997 1996
COMMON STOCK EQUITY (see statement):
Common stock, without par value, authorized and issued
1,000 shares. . . . . . . . . . . . . . . . . . . . . . . $1,065,634 $1,065,634
Retained earnings . . . . . . . . . . . . . . . . . . . . . 100,156 116,717
Total common stock equity . . . . . . . . . . . . . . . . 1,165,790 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). . . . . . . . . . 3,601 3,694
Total long-term debt . . . . . . . . . . . . . . . . . 684,096 37% 684,068 37%
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . $1,849,886 100% $1,866,419 100%
(a) Market-Adjusted Tax Exempt Securities (MATES). As of September 30, 1997,
the rate on these bonds was 3.83%.
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 . . . . . . . . . . . . . . . . . . . . . 58,439
Dividend to parent company . . . . . . . . . . . . . (75,000)
BALANCE SEPTEMBER 30, 1997, 1,000 shares . . . . . . $1,065,634 $ 100,156
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. The company
has 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. These
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the company's 1996 Annual Report
on Form 10-K.
The company currently applies accounting standards that recognize the
economic effects of rate regulation pursuant to 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.
The Kansas Legislature has created a Retail Wheeling Task Force (the Task
Force) to study the implications of a deregulated and more competitive market
for electric services. The Task Force is primarily composed of legislators,
regulators, consumer advocates and representatives from the electric industry.
A draft bill under consideration by the Task Force would implement competition
for retail electric service beginning July 1, 2001. The Task Force is also
evaluating how certain investments which were approved and incurred under the
existing regulatory model should be recovered. Certain of these investments
may not be recoverable. These investments are commonly referred to as
"stranded costs". At this date, it is not possible to predict the results of
the Task Force's effect or the impact it may have on the company.
There can be no assurance at this time that stranded costs will be fully
recoverable if open competition is initiated in the electric utility market.
In the event the company determines that it no longer meets the criteria set
forth in SFAS 71, the accounting impact would be an extraordinary non-cash
12
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 recoverability of the company's net regulatory assets and certain
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's best current estimate of
the most likely range of remediation costs to be incurred based upon limited
current information presently available is approximately $1.5 million to $6
million. 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 certain remediation
costs through rates. Clean up costs will depend upon the degree of
remediation required and number of years over which the remediation must be
completed. Management believes that adequate provision has been made for
these costs and accordingly believes that the ultimate disposition of this
matter will not have a material adverse effect upon the company's overall
financial position or results of operations.
Cash Surrender Value of Life Insurance Contracts: The following amounts
related to corporate-owned life insurance contracts (COLI) are recorded in
Corporate-owned Life Insurance (net) on the balance sheets:
September 30, December 31,
1997 1996
(Dollars in Millions)
Cash surrender value of contracts.(1). . $453.1 $404.6
Borrowings against contracts . . . . . . (442.2) (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 September
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 $5.4 million, $16.3 million,
and $22.0 million for the three, nine and twelve months ended September 30,
1997, respectively, compared to $9.5 million, $19.7 million and $29.6 million
for the three, nine and twelve months ended 1996, respectively. The interest
expense deduction taken was $8.2 million, $22.6 million and $29.4 million for
the three, nine and twelve months ended September 30, 1997, respectively,
13
compared to $6.9 million, $20.8 million and $27.6 million for the three, nine
and twelve months ended September 30, 1996, respectively.
Reclassifications: Certain amounts in prior years have been reclassified
to conform with classifications used in the current year presentation.
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 September 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.
For additional information on Commitments and Contingencies, see Note 2
of the company's 1996 Annual Report on Form 10-K.
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:
September 30, December 31,
1997 1996
(Dollars in Thousands)
Coal contract settlement costs $ 10,442 $ 11,655
Deferred plant costs 31,052 31,272
Phase-in revenues 13,159 26,317
Debt issuance costs 43,781 45,989
Other regulatory assets 6,695 7,155
Total $105,129 $122,388
See Note 3 included in the company's 1996 Annual Report on Form 10-K for
additional information regarding regulatory assets.
14
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 39.7% and 33.4% for the three month periods,
34.4% and 30.1% for the nine month periods, and 30.2% and 28.3% for the
twelve month periods ended September 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 mid-1998.
KCPL is a public utility company engaged in the generation, transmission,
distribution, and sale of electricity to customers in western Missouri and
eastern Kansas. KCPL, Western Resources, and the company have joint interests
in certain electric generating assets, including Wolf Creek.
15
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, nine and
twelve month periods ended September 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. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements
that describe the company's future plans, objectives, expectations or goals
are also forward-looking statements. Such statements address future events
and conditions concerning capital expenditures, earnings, litigation, rate and
other regulatory matters, liquidity and capital resources, interest rates,
environmental matters, changing weather conditions, nuclear operations, and
accounting matters. Actual results in each case could differ materially from
those currently anticipated in such statements, by reason of factors such as
electric utility restructuring, including the ongoing state and federal
activities; future economic conditions; developments in the legislative,
regulatory and competitive markets in which the company operates; and other
circumstances affecting anticipated operations, revenues and costs.
FINANCIAL CONDITION
General: The company had net income of $31.8 million and $58.4 million
for the three and nine months ended September 30, 1997 compared to $40.7
million and $73.7 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 the positive impact on income
for the third quarter of 1996 resulting from the receipt of death benefit
proceeds under COLI contracts which were recorded during that quarter. See
Note 3 of the Notes to Financial Statements for more information on the rate
proceedings, and Note 1 for information on COLI.
Net income for the twelve months ended September 30, 1997, of $81.0
million, decreased from net income of $95.3 million for the comparable period
of 1996. The decrease was primarily attributable to the $36.3 million rate
reduction, a May 1996 interim rate reduction of $8.7 million which became
permanent on February 1, 1997, and the positive impact on income resulting
from the receipt of death benefit proceeds under COLI contracts which were
recorded during the third quarter of 1996 and fourth quarter of 1995.
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.
16
The company's short-term financing requirements are satisfied through
short-term bank loans and uncommitted loan participation agreements. At
September 30, 1997 short-term borrowings amounted to $0 million compared to
$222.3 million at December 31, 1996. Proceeds from the repayment of advances
to the company's parent company have been used to repay all current
outstanding short-term debt. The proceeds received are reflected in the
decrease in Current Assets, Advances to parent company (net) on the Balance
Sheets.
In June 1997, the company increased its borrowings against the
accumulated cash surrender values of COLI policies by $45.1 million and
received an additional $2.0 million from increased borrowings on WCNOC COLI
policies. Total 1997 COLI borrowings have amounted to $48.5 million.
OPERATING RESULTS
The following discussion explains variances for the three, nine and
twelve months ended September 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, electric utility regulatory
restructuring, 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 September 30, 1997 from the comparable periods of
1996.
Increase (decrease) in electric sales volumes:
3 Months 9 Months 12 Months
Ended Ended Ended
Residential 12.9% 2.3% 3.2%
Commercial 3.9% 0.7% 2.3%
Industrial 3.0% (0.9)% (0.8)%
Total Retail 6.5% 0.5% 1.2%
Wholesale & Interchange (50.8)% (8.8)% 20.2%
Total electric sales (6.7)% (1.6)% 5.1%
Revenues for the three months ended September 30, 1997, of $191.1 million
decreased approximately one percent from revenues of $193.2 million for the
comparable period of 1996. The slight decrease is primarily due to the
decrease in interchange sales to power brokers. Although retail sales
increased for the third quarter, revenues were negatively effected by rate
reductions.
Revenues for the nine and twelve months ended September 30, 1997, of
$483.7 million and $637.0 million, decreased approximately four and one
percent, respectively, from revenues of $501.3 million and $639.5 million for
the comparable periods of 1996. Revenues decreased in all retail customer
classes. These decreases are primarily attributable to the implementation of
the a $36.3 million rate reduction on February 1, 1997 and a May 1996 $8.7
million interim rate reduction which became permanent on February 1, 1997.
17
Partially offsetting the decrease in revenues for the twelve months ended
September 30, 1997 was the increase in interchange sales to power brokers.
Interchange sales to power brokers operate on a low profit margin and are
immaterial to the company's operating income.
Operating Expenses: Total operating expenses increased approximately
three percent for the three months ended September 30, 1997, compared to the
same period of 1996. The increase was primarily attributable to increases in
other operating and maintenance expenses due to a coal-fired plant being
off-line for unscheduled maintenance and an incremental increase in the
La Cygne 2 generating unit monthly lease payment.
Total operating expenses remain virtually unchanged for the nine months
ended September 30, 1997 compared to the same period of 1996. Decreases in
fossil fuel and purchase power expenses were partially offset by an increase
in nuclear fuel expense due to Wolf Creek having been taken off-line for its
eighth refueling and maintenance outage during the first quarter of 1996.
Increased other operations expense as a result of a coal-fired plant being
off-line for unscheduled maintenance and an the increase in La Cygne's monthly
lease payment also contributed to the offset.
Total operating expenses increased less than one percent for the twelve
months ended September 30, 1997 compared to the same period of 1996.
Increases in other operating expenses due to the increase in La Cygne's
monthly lease payment and the increase in net generation as a result of
increased sales to interchange customers were offset by decreases in property
taxes and federal and state income taxes due to the decrease in net income.
Wolf Creek was taken off-line on October 4, 1997 for its ninth refueling
and maintenance outage. The outage is expected to last approximately 60 days
during which time electric demand will be met primarily by the company's
coal-fired operating units. The company anticipates its operating expenses will
increase during the fourth quarter of 1997 as a result of Wolf Creek being
taken out of service.
Other Income and Deductions: Other income and deductions, net of taxes,
decreased for the three, nine, and twelve months ended September 30, 1997,
compared to the same periods of 1996 due to the positive impact on income
during the earlier periods resulting from receipt of death benefit proceeds
from COLI policies recorded during the third quarter of 1996 and the fourth
quarter of 1995. The increase in interest expense of $1.3 million relating to
COLI borrowings for the three months ended September 30, 1997, also
contributed to the decreases.
Interest Expense: Interest expense decreased $2.9 million, $5.1 million,
and $2.7 million for the three, nine, and twelve months ended September 30,
1997, respectively, compared to the same periods of 1996. These decreases are
attributed to the decrease in short-term debt balance held during the first
nine months of 1997. Proceeds from the repayment of advances to the company's
parent company have been used to repay all current outstanding short-term
debt. The proceeds received are reflected in the decrease in Current Assets,
Advances to parent company (net) on the Balance Sheets.
18
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 September 30, 1997 (filed
electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
None
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KANSAS GAS AND ELECTRIC COMPANY
Date October 29, 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
September 30,
1997 1996 1995 1994 1993
Net Income. . . . . . . . . . . . . $ 81,024 $ 96,274 $110,873 $104,526 $108,103
Taxes on Income . . . . . . . . . . 35,136 36,258 51,787 55,349 46,896
Net Income Plus Taxes. . . . . 116,160 132,532 162,660 159,875 154,999
Fixed Charges:
Interest on Long-Term Debt. . . . 46,033 46,304 47,073 47,827 53,908
Interest on Other Indebtedness. . 6,983 11,758 5,190 5,183 6,075
Interest on Corporate-owned
Life Insurance Borrowings . . . 29,436 27,636 25,357 20,990 11,865
Interest Applicable to Rentals. . 25,480 25,539 25,375 25,096 24,967
Total Fixed Charges . . . . . 107,932 111,237 102,995 99,096 96,815
Earnings (1). . . . . . . . . . . . $224,092 $243,769 $265,655 $258,971 $251,814
Ratio of Earnings to Fixed Charges. 2.08 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.
UT
1,000
9-MOS
DEC-31-1997
SEP-30-1997
PER-BOOK
2,565,857
52,189
183,021
326,355
0
3,127,422
1,065,634
0
100,156
1,165,790
0
0
684,096
0
0
0
0
0
0
0
1,277,536
3,127,422
483,683
30,633
353,836
393,305
90,378
4,694
95,072
36,633
58,439
0
58,439
0
34,533
124,943
0
0
