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10-Q
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016

OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission File Number 1-3523
WESTAR ENERGY, INC.
(Exact name of registrant as specified in its charter)

Kansas
 
48-0290150
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
818 South Kansas Avenue, Topeka, Kansas 66612
 
(785) 575-6300
(Address, including Zip code and telephone number, including area code, of registrant’s principal executive offices)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    X       No          
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes    X      No          
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Act). Check one:
Large accelerated filer    X      Accelerated filer            Non-accelerated filer              Smaller reporting company          
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes             No    X  
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Stock, par value $5.00 per share
 
141,681,275 shares
(Class)
 
(Outstanding at April 27, 2016)


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TABLE OF CONTENTS
 
 
 
Page
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


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GLOSSARY OF TERMS
The following is a glossary of frequently used abbreviations or acronyms that are found throughout this report.
Abbreviation or Acronym
 
Definition
2015 Form 10-K
 
Annual Report on Form 10-K for the year ended December 31, 2015
AFUDC
 
Allowance for funds used during construction
ASU
 
Accounting Standard Update
CAA
 
Clean Air Act
CCB
 
Coal combustion byproducts
CO
 
Carbon monoxide
CO2
 
Carbon dioxide
COLI
 
Corporate-owned life insurance
CPP
 
Clean Power Plan
EPA
 
Environmental Protection Agency
EPS
 
Earnings per share
FASB
 
Financial Accounting Standards Board
FERC
 
Federal Energy Regulatory Commission
FPA
 
Federal Power Act
GAAP
 
Generally Accepted Accounting Principles
GHG
 
Greenhouse gas
JEC
 
Jeffrey Energy Center
KCC
 
Kansas Corporation Commission
KGE
 
Kansas Gas and Electric Company
La Cygne
 
La Cygne Generating Station
Moody’s
 
Moody’s Investors Service
NAAQS
 
National Ambient Air Quality Standards
NAV
 
Net Asset Value
NDT
 
Nuclear Decommissioning Trust
NOx
 
Nitrogen oxides
PM
 
Particulate matter
PPB
 
Parts per billion
RECA
  
Retail energy cost adjustment
ROE
 
Return on equity
RSU
 
Restricted share unit
RTO
 
Regional transmission organization
S&P
 
Standard & Poor’s Ratings Services
SO2
 
Sulfur dioxide
SPP
 
Southwest Power Pool, Inc.
VIE
 
Variable interest entity
Wolf Creek
 
Wolf Creek Generating Station


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FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Form 10-Q are “forward-looking statements.” The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like we “believe,” “anticipate,” “target,” “expect,” “estimate,” “intend” and words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals. Such statements address future events and conditions concerning matters such as, but not limited to:

-
amount, type and timing of capital expenditures,
-
earnings,
-
cash flow,
-
liquidity and capital resources,
-
litigation,
-
accounting matters,
-
possible corporate restructurings, acquisitions and dispositions,
-
compliance with debt and other restrictive covenants,
-
interest rates and dividends,
-
environmental matters,
-
regulatory matters,
-
nuclear operations, and
-
the overall economy of our service area and its impact on our customers’ demand for electricity and their ability to pay for service.

What happens in each case could vary materially from what we expect because of such things as:

-
risks related to operating in a heavily regulated industry that is subject to unpredictable political, legislative, judicial and regulatory developments, which can impact our operations, results of operations, and financial condition,
-
the difficulty of predicting the magnitude and timing of changes in demand for electricity, including with respect to emerging competing services and technologies and conservation and energy efficiency measures,
-
the impact of weather conditions, including as it relates to sales of electricity and prices of energy commodities,
-
equipment damage from storms and extreme weather,
-
economic and capital market conditions, including the impact of inflation or deflation, changes in interest rates, the cost and availability of capital and the market for trading wholesale energy,
-
the impact of changes in market conditions on employee benefit liability calculations and funding obligations, as well as actual and assumed investment returns on invested plan assets,
-
the impact of changes in estimates regarding our Wolf Creek Generating Station (Wolf Creek) decommissioning obligation,
-
the existence or introduction of competition into markets in which we operate,
-
the impact of changing laws and regulations relating to air and greenhouse gas (GHG) emissions, water emissions, waste management and other environmental matters,
-
risks associated with execution of our planned capital expenditure program, including timing and receipt of regulatory approvals necessary for planned construction and expansion projects as well as the ability to complete planned construction projects within the terms and time frames anticipated,
-
cost, availability and timely provision of equipment, supplies, labor and fuel we need to operate our business,
-
availability of generating capacity and the performance of our generating plants,
-
changes in regulation of nuclear generating facilities and nuclear materials and fuel, including possible shutdown or required modification of nuclear generating facilities,
-
additional regulation due to Nuclear Regulatory Commission oversight to ensure the safe operation of Wolf Creek, either related to Wolf Creek’s performance, or potentially relating to events or performance at a nuclear plant anywhere in the world,
-
uncertainty regarding the establishment of interim or permanent sites for spent nuclear fuel storage and disposal,
-
homeland and information and operating systems security considerations,
-
changes in accounting requirements and other accounting matters,
-
changes in the energy markets in which we participate resulting from the development and implementation of real time and next day trading markets, and the effect of the retroactive repricing of transactions in such markets following execution because of changes or adjustments in market pricing mechanisms by regional transmission organizations (RTOs) and independent system operators,

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-
reduced demand for coal-based energy because of actual or potential climate impacts and the development of alternate energy sources,
-
current and future litigation, regulatory investigations, proceedings or inquiries,
-
cost of fuel used in generation and wholesale electricity prices, and
-
other factors discussed elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Form 10-K), including in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other reports we file from time to time with the Securities and Exchange Commission.

These lists are not all-inclusive because it is not possible to predict all factors. This report should be read in its entirety and in conjunction with our 2015 Form 10-K. No one section of this report deals with all aspects of the subject matter and additional information on some matters that could impact our consolidated financial results may be included in our 2015 Form 10-K. The reader should not place undue reliance on any forward-looking statement, as forward-looking statements speak only as of the date such statements were made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made.



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PART I. FINANCIAL INFORMATION

ITEM I.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

WESTAR ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Par Values)
(Unaudited)
 
As of
 
As of
 
March 31, 2016
 
December 31, 2015
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
3,471

 
$
3,231

Accounts receivable, net of allowance for doubtful accounts of $6,790 and $5,294, respectively
225,090

 
258,286

Fuel inventory and supplies
301,340

 
301,294

Prepaid expenses
20,271

 
16,864

Regulatory assets
98,368

 
109,606

Other
27,039

 
27,860

Total Current Assets
675,579

 
717,141

PROPERTY, PLANT AND EQUIPMENT, NET
8,675,925

 
8,524,902

PROPERTY, PLANT AND EQUIPMENT OF VARIABLE INTEREST ENTITIES, NET
265,655

 
268,239

OTHER ASSETS:
 
 
 
Regulatory assets
746,741

 
751,312

Nuclear decommissioning trust
183,455

 
184,057

Other
258,242

 
260,015

Total Other Assets
1,188,438

 
1,195,384

TOTAL ASSETS
$
10,805,597

 
$
10,705,666

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current maturities of long-term debt
$
125,000

 
$

Current maturities of long-term debt of variable interest entities
26,842

 
28,309

Short-term debt
316,800

 
250,300

Accounts payable
230,307

 
220,969

Accrued dividends
52,695

 
49,829

Accrued taxes
128,152

 
83,773

Accrued interest
86,222

 
71,426

Regulatory liabilities
31,461

 
25,697

Other
76,454

 
106,632

Total Current Liabilities
1,073,933

 
836,935

LONG-TERM LIABILITIES:
 
 
 
Long-term debt, net
3,039,239

 
3,163,950

Long-term debt of variable interest entities, net
111,239

 
138,097

Deferred income taxes
1,619,112

 
1,591,430

Unamortized investment tax credits
209,040

 
209,763

Regulatory liabilities
250,545

 
267,114

Accrued employee benefits
456,541

 
462,304

Asset retirement obligations
276,718

 
275,285

Other
82,025

 
88,825

Total Long-Term Liabilities
6,044,459

 
6,196,768

COMMITMENTS AND CONTINGENCIES (See Notes 3, 10 and 11)


 


EQUITY:
 
 
 
Westar Energy, Inc. Shareholders’ Equity:
 
 
 
Common stock, par value $5 per share; authorized 275,000,000 shares; issued and outstanding 141,628,562 shares and 141,353,426 shares, respective to each date
708,143

 
706,767

Paid-in capital
2,003,311

 
2,004,124

Retained earnings
959,936

 
945,830

Total Westar Energy, Inc. Shareholders’ Equity
3,671,390

 
3,656,721

Noncontrolling Interests
15,815

 
15,242

Total Equity
3,687,205

 
3,671,963

TOTAL LIABILITIES AND EQUITY
$
10,805,597

 
$
10,705,666


The accompanying notes are an integral part of these condensed consolidated financial statements.

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WESTAR ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
 
 
Three Months Ended March 31,
 
2016
 
2015
REVENUES
$
569,450

 
$
590,807

OPERATING EXPENSES:
 
 
 
Fuel and purchased power
100,058

 
155,482

SPP network transmission costs
60,760

 
56,812

Operating and maintenance
77,757

 
85,080

Depreciation and amortization
83,640

 
74,586

Selling, general and administrative
56,456

 
55,418

Taxes other than income tax
48,968

 
37,871

Total Operating Expenses
427,639

 
465,249

INCOME FROM OPERATIONS
141,811

 
125,558

OTHER INCOME (EXPENSE):
 
 
 
Investment earnings
2,016

 
2,480

Other income
9,477

 
2,814

Other expense
(5,543
)
 
(5,713
)
Total Other Income (Expense)
5,950

 
(419
)
Interest expense
40,431

 
44,298

INCOME BEFORE INCOME TAXES
107,330

 
80,841

Income tax expense
38,622

 
27,678

NET INCOME
68,708

 
53,163

Less: Net income attributable to noncontrolling interests
3,123

 
2,183

NET INCOME ATTRIBUTABLE TO WESTAR ENERGY, INC.
$
65,585

 
$
50,980

BASIC AND DILUTED EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING ATTRIBUTABLE TO WESTAR ENERGY, INC. (See Note 2):
 
 
 
Basic earnings per common share
$
0.46

 
$
0.38

Diluted earnings per common share
$
0.46

 
$
0.38

AVERAGE EQUIVALENT COMMON SHARES OUTSTANDING:
 
 
 
Basic
141,992,846

 
132,395,497

Diluted
142,311,228

 
135,539,631

DIVIDENDS DECLARED PER COMMON SHARE
$
0.38

 
$
0.36



The accompanying notes are an integral part of these condensed consolidated financial statements.




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WESTAR ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

 
Three Months Ended March 31,
 
2016
 
2015
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
 
 
 
Net income
$
68,708

 
$
53,163

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
83,640

 
74,586

Amortization of nuclear fuel
8,329

 
4,960

Amortization of deferred regulatory gain from sale leaseback
(1,374
)
 
(1,374
)
Amortization of corporate-owned life insurance
5,261

 
5,747

Non-cash compensation
2,491

 
2,226

Net deferred income taxes and credits
33,984

 
26,573

Allowance for equity funds used during construction
(2,464
)
 
(1,950
)
Changes in working capital items:
 
 
 
Accounts receivable
33,196

 
31,042

Fuel inventory and supplies
109

 
(18,404
)
Prepaid expenses and other
7,712

 
4,638

Accounts payable
(31,158
)
 
17,321

Accrued taxes
49,339

 
40,007

Other current liabilities
(28,984
)
 
(20,327
)
Changes in other assets
21,933

 
(17,034
)
Changes in other liabilities
(11,846
)
 
12,394

Cash Flows from Operating Activities
238,876

 
213,568

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
 
 
 
Additions to property, plant and equipment
(220,849
)
 
(187,223
)
Purchase of securities - trusts
(13,712
)
 
(7,345
)
Sale of securities - trusts
16,332

 
7,847

Proceeds from investment in corporate-owned life insurance
23,963

 
1,144

Investment in affiliated company
(655
)
 

Other investing activities
(2,840
)
 
(717
)
Cash Flows used in Investing Activities
(197,761
)
 
(186,294
)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
 
 
 
Short-term debt, net
66,500

 
167,800

Proceeds from long-term debt of variable interest entities
162,048

 

Retirements of long-term debt

 
(125,000
)
Retirements of long-term debt of variable interest entities
(190,355
)
 
(27,925
)
Repayment of capital leases
(675
)
 
(886
)
Borrowings against cash surrender value of corporate-owned life insurance
963

 
1,045

Repayment of borrowings against cash surrender value of corporate-owned life insurance
(22,837
)
 
(899
)
Issuance of common stock
657

 
8,206

Distributions to shareholders of noncontrolling interests
(2,550
)
 
(1,076
)
Cash dividends paid
(49,665
)
 
(43,787
)
Other financing activities
(4,961
)
 
(3,234
)
Cash Flows used in Financing Activities
(40,875
)
 
(25,756
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
240

 
1,518

CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
3,231

 
4,556

End of period
$
3,471

 
$
6,074



The accompanying notes are an integral part of these condensed consolidated financial statements.

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WESTAR ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Dollars in Thousands)
(Unaudited)

 
Westar Energy, Inc. Shareholders
 
 
 
 
 
 
Common stock shares
 
Common
stock
 
Paid-in
capital
 
Retained
earnings
 
Non-controlling
interests
 
Total
equity
Balance as of December 31, 2014
 
131,687,454

 
$
658,437

 
$
1,781,120

 
$
855,299

 
$
6,451

 
$
3,301,307

Net income
 

 

 

 
50,980

 
2,183

 
53,163

Issuance of stock
 
262,827

 
1,314

 
6,892

 

 

 
8,206

Issuance of stock for compensation and reinvested dividends
 
215,873

 
1,080

 
1,948

 

 

 
3,028

Tax withholding related to stock compensation
 

 

 
(3,234
)
 

 

 
(3,234
)
Dividends declared on common stock
($0.36 per share)
 

 

 

 
(48,107
)
 

 
(48,107
)
Stock compensation expense
 

 

 
2,205

 

 

 
2,205

Tax benefit on stock compensation
 

 

 
1,073

 

 

 
1,073

Distributions to shareholders of noncontrolling interests
 

 

 

 

 
(1,076
)
 
(1,076
)
Other
 

 

 
(1,217
)
 

 

 
(1,217
)
Balance as of March 31, 2015
 
132,166,154

 
$
660,831

 
$
1,788,787

 
$
858,172

 
$
7,558

 
$
3,315,348

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
 
141,353,426

 
$
706,767

 
$
2,004,124

 
$
945,830

 
$
15,242

 
$
3,671,963

Net income
 

 

 

 
65,585

 
3,123

 
68,708

Issuance of stock
 
14,907

 
75

 
582

 

 

 
657

Issuance of stock for compensation and reinvested dividends
 
260,229

 
1,301

 
1,104

 

 

 
2,405

Tax withholding related to stock compensation
 

 

 
(4,961
)
 

 

 
(4,961
)
Dividends declared on common stock
($0.38 per share)
 

 

 

 
(54,805
)
 

 
(54,805
)
Stock compensation expense
 

 

 
2,462

 

 

 
2,462

Distributions to shareholders of noncontrolling interests
 

 

 

 

 
(2,550
)
 
(2,550
)
Cumulative effect of accounting change - stock compensation
 

 

 

 
3,326

 

 
3,326

Balance as of March 31, 2016
 
141,628,562

 
$
708,143

 
$
2,003,311

 
$
959,936

 
$
15,815

 
$
3,687,205



The accompanying notes are an integral part of these condensed consolidated financial statements.

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WESTAR ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. DESCRIPTION OF BUSINESS

We are the largest electric utility in Kansas. Unless the context otherwise indicates, all references in this Quarterly Report on Form 10-Q to “the company,” “we,” “us,” “our” and similar words are to Westar Energy, Inc. and its consolidated subsidiaries. The term “Westar Energy” refers to Westar Energy, Inc., a Kansas corporation incorporated in 1924, alone and not together with its consolidated subsidiaries.

We provide electric generation, transmission and distribution services to approximately 702,000 customers in Kansas. Westar Energy provides these services in central and northeastern Kansas, including the cities of Topeka, Lawrence, Manhattan, Salina and Hutchinson. Kansas Gas and Electric Company (KGE), Westar Energy’s wholly owned subsidiary, provides these services in south-central and southeastern Kansas, including the city of Wichita. Both Westar Energy and KGE conduct business using the name Westar Energy. Our corporate headquarters is located at 818 South Kansas Avenue, Topeka, Kansas 66612.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

We prepare our unaudited condensed consolidated financial statements in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles (GAAP) for the United States of America have been condensed or omitted. Our condensed consolidated financial statements include all operating divisions, majority owned subsidiaries and variable interest entities (VIEs) of which we maintain a controlling interest or are the primary beneficiary reported as a single reportable segment. Undivided interests in jointly-owned generation facilities are included on a proportionate basis. Intercompany accounts and transactions have been eliminated in consolidation. In our opinion, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation of the consolidated financial statements, have been included.

The accompanying condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in our 2015 Form 10-K.

Use of Management’s Estimates

When we prepare our condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, including those related to depreciation, unbilled revenue, valuation of investments, forecasted fuel costs included in our retail energy cost adjustment (RECA) billed to customers, income taxes, pension and post-retirement benefits, our asset retirement obligations including the decommissioning of Wolf Creek, environmental issues, VIEs, contingencies and litigation. Actual results may differ from those estimates under different assumptions or conditions. The results of operations for the three months ended March 31, 2016, are not necessarily indicative of the results to be expected for the full year.


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Fuel Inventory and Supplies

We state fuel inventory and supplies at average cost. Following are the balances for fuel inventory and supplies stated separately.
 
As of
 
As of
 
March 31, 2016
 
December 31, 2015
 
(In Thousands)
Fuel inventory
$
113,965

 
$
113,438

Supplies
187,375

 
187,856

Fuel inventory and supplies
$
301,340

 
$
301,294


Allowance for Funds Used During Construction

Allowance for funds used during construction (AFUDC) represents the allowed cost of capital used to finance utility construction activity. We compute AFUDC by applying a composite rate to qualified construction work in progress. We credit other income (for equity funds) and interest expense (for borrowed funds) for the amount of AFUDC capitalized as construction cost on the accompanying consolidated statements of income as follows:
 
Three Months Ended March 31,
 
2016
 
2015
 
(Dollars In Thousands)
Borrowed funds
$
2,008

 
$
2,029

Equity funds
2,464

 
1,950

Total
$
4,472

 
$
3,979

Average AFUDC Rates
5.2
%
 
4.0
%

Earnings Per Share

We have participating securities in the form of unvested restricted share units (RSUs) with nonforfeitable rights to dividend equivalents that receive dividends on an equal basis with dividends declared on common shares. As a result, we apply the two-class method of computing basic and diluted earnings per share (EPS).

To compute basic EPS, we divide the earnings allocated to common stock by the weighted average number of common shares outstanding. Diluted EPS includes the effect of issuable common shares resulting from our forward sale agreements, if any, and RSUs with forfeitable rights to dividend equivalents. We compute the dilutive effect of potential issuances of common shares using the treasury stock method.

    

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The following table reconciles our basic and diluted EPS from net income. 
 
Three Months Ended March 31,
 
2016
 
2015
 
(Dollars In Thousands, Except Per Share Amounts)
Net income
$
68,708

 
$
53,163

Less: Net income attributable to noncontrolling interests
3,123

 
2,183

Net income attributable to Westar Energy, Inc.
65,585

 
50,980

 Less: Net income allocated to RSUs
135

 
118

Net income allocated to common stock
$
65,450

 
$
50,862

 
 
 
 
Weighted average equivalent common shares outstanding – basic
141,992,846

 
132,395,497

Effect of dilutive securities:
 
 
 
RSUs
318,382

 
175,876

Forward sale agreements

 
2,968,258

Weighted average equivalent common shares outstanding – diluted (a)
142,311,228

 
135,539,631

 
 
 
 
Earnings per common share, basic
$
0.46

 
$
0.38

Earnings per common share, diluted
$
0.46

 
$
0.38

_______________
(a)We had no antidilutive securities for the three months ended March 31, 2016 and 2015.


Supplemental Cash Flow Information
 
 
Three Months Ended March 31,
 
2016
 
2015
 
(In Thousands)
CASH PAID FOR (RECEIVED FROM):
 
 
 
Interest on financing activities, net of amount capitalized
$
30,415

 
$
38,927

Interest on financing activities of VIEs
4,150

 
5,651

Income taxes, net of refunds
(383
)
 

NON-CASH INVESTING TRANSACTIONS:
 
 
 
Property, plant and equipment additions
130,532

 
63,265

NON-CASH FINANCING TRANSACTIONS:
 
 
 
Issuance of stock for compensation and reinvested dividends
2,405

 
3,028

Assets acquired through capital leases
180

 
294


New Accounting Pronouncements
    
We prepare our consolidated financial statements in accordance with GAAP for the United States of America. To address current issues in accounting, the Financial Accounting Standards Board (FASB) issued the following new accounting pronouncements which may affect our accounting and/or disclosure.


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Leases

In February 2016, the FASB issued Accounting Standard Update (ASU) No. 2016-02 which requires lessees to recognize right-of-use assets and lease liabilities, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months. Leases are to be classified as either financing or operating leases, with that classification affecting the pattern of expense recognition in the income statement. Accounting for leases by lessors is largely unchanged. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The guidance requires a modified retrospective approach for all leases existing at the earliest period presented, or entered into by the date of initial adoption, with certain practical expedients permitted. We are evaluating the guidance and have not yet determined the impact on our consolidated financial statements.

Stock-based Compensation

In March 2016, the FASB issued ASU No. 2016-09 as part of its simplification initiative. The areas for simplification involve several aspects of the accounting for stock-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We have elected to adopt effective January 1, 2016.
    
Under current GAAP, if the tax deduction for a stock-based payment award exceeds the compensation cost recorded for financial reporting, the additional tax benefit is recognized in additional paid-in capital and referred to as an excess tax benefit. Tax deficiencies were recognized either as an offset to the accumulated excess tax benefits, if any, or as reduction of income. The issuance of this ASU reflects the FASB’s decision that all prospective excess tax benefits and tax deficiencies should be recognized as income tax benefits and expense. Upon initial adoption, we recorded a $3.3 million cumulative effect adjustment to retained earnings for excess tax benefits that had not previously been recognized.

Further, the issuance of this ASU reflects the FASB’s decision that cash flows related to excess tax benefits should be classified as cash flows from operating activities on the consolidated statements of cash flows. Upon adoption, we have retrospectively presented cash flows from operating activities and cash flows used in financing activities on the accompanying condensed consolidated statements of cash flows for the three months ended March 31, 2015, as $1.1 million higher than as previously reported.

Financial Instruments

In May 2015, the FASB issued ASU No. 2015-07, which removes the requirement to categorize certain investments measured at net asset value (NAV) per share within the fair value hierarchy. The guidance is effective for fiscal years beginning after December 15, 2015. We have adopted this guidance as of January 1, 2016. The adoption was limited to disclosure and does not have a material impact on our consolidated financial statements. See Note 4 “Financial Instruments and Trading Securities.”


3. RATE MATTERS AND REGULATION

KCC Proceedings

In December 2015, the Kansas Corporation Commission (KCC) approved an order allowing us to adjust our prices to include costs incurred for property taxes. The new prices were effective in January 2016 and are expected to increase our annual retail revenues by approximately $5.0 million.

In March 2016, the KCC issued an order allowing us to adjust our retail prices, subject to refund, to include updated transmission costs as reflected in the transmission formula rate (TFR). The new prices were effective in April 2016 and are expected to increase our annual retail revenues by approximately $25.3 million.

We will update our retail prices with the KCC later this year to reflect the TFR with the reduced return on equity (ROE) as described below. We estimate the annualized impact of this update on our retail revenues will be a decrease of approximately $20.0 million.


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FERC Proceedings

In March 2016, the Federal Energy Regulatory Commission (FERC) approved a settlement reducing our base return on equity (ROE) used in determining our TFR. The settlement results in an ROE of 10.3%, which consists of a 9.8% base ROE plus a 0.5% incentive ROE for participation in an RTO. As of March 31, 2016, we have recorded a regulatory liability of $16.7 million for our estimated refund obligation from the refund effective date of August 20, 2014, through March 31, 2016.

In May 2016, our TFR that includes projected 2016 transmission capital expenditures and operating costs was revised to reflect the reduced ROE. The estimated revenue impact for 2016, as compared to 2015, is expected to be an increase of approximately $24.0 million.


4. FINANCIAL INSTRUMENTS AND TRADING SECURITIES

Values of Financial Instruments

GAAP establishes a hierarchical framework for disclosing the transparency of the inputs utilized in measuring assets and liabilities at fair value. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy levels. In addition, we measure certain investments that do not have a readily determinable fair value at NAV, which are not included in the fair value hierarchy. Further explanation of these levels and NAV is summarized below.

Level 1 - Quoted prices are available in active markets for identical assets or liabilities. The types of assets and liabilities included in level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on public exchanges.

Level 2 - Pricing inputs are not quoted prices in active markets, but are either directly or indirectly observable. The types of assets and liabilities included in level 2 are typically liquid investments in funds which have a readily determinable fair value calculated using daily NAVs, other financial instruments that are comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or other financial instruments priced with models using highly observable inputs.

Level 3 - Significant inputs to pricing have little or no transparency. The types of assets and liabilities included in level 3 are those with inputs requiring significant management judgment or estimation.

Net Asset Value - Investments that do not have a readily determinable fair value are measured at NAV. These investments do not consider the observability of inputs, therefore, they are not included within the fair value hierarchy. We include in this category investments in private equity, real estate and alternative investment funds. The underlying alternative investments include collateralized debt obligations, mezzanine debt and a variety of other investments.

We record cash and cash equivalents, short-term borrowings and variable-rate debt on our consolidated balance sheets at cost, which approximates fair value. We measure the fair value of fixed-rate debt, a level 2 measurement, based on quoted market prices for the same or similar issues or on the current rates offered for instruments of the same remaining maturities and redemption provisions. The recorded amount of accounts receivable and other current financial instruments approximates fair value.

We measure fair value based on information available as of the measurement date. The following table provides the carrying values and measured fair values of our fixed-rate debt.
 
As of March 31, 2016
 
As of December 31, 2015
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In Thousands)
Fixed-rate debt
$
3,080,000

 
$
3,386,212

 
$
3,080,000

 
$
3,259,533

Fixed-rate debt of VIEs
137,963

 
152,155

 
166,271

 
179,030



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Recurring Fair Value Measurements

The following table provides the amounts and their corresponding level of hierarchy for our assets that are measured at fair value. 
As of March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
NAV
 
Total
 
 
(In Thousands)
Nuclear Decommissioning Trust:
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
 
$

 
$
46,313

 
$

 
$
5,830

 
$
52,143

International equity funds
 

 
31,846

 

 

 
31,846

Core bond fund
 

 
24,650

 

 

 
24,650

High-yield bond fund
 

 
14,493

 

 

 
14,493

Emerging market bond fund
 

 
13,715

 

 

 
13,715

Combination debt/equity/other funds
 

 
11,071

 

 

 
11,071

Alternative investment fund
 

 

 

 
14,862

 
14,862

Real estate securities fund
 

 

 

 
20,649

 
20,649

Cash equivalents
 
26

 

 

 

 
26

Total Nuclear Decommissioning Trust
 
26

 
142,088

 

 
41,341

 
183,455

Trading Securities:
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
 

 
17,776

 

 

 
17,776

International equity fund
 

 
4,321

 

 

 
4,321

Core bond fund
 

 
11,657

 

 

 
11,657

Cash equivalents
 
156

 

 

 

 
156

Total Trading Securities
 
156

 
33,754

 

 

 
33,910

Total Assets Measured at Fair Value
 
$
182

 
$
175,842

 
$

 
$
41,341

 
$
217,365

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
NAV
 
Total
 
 
(In Thousands)
Nuclear Decommissioning Trust:
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
 
$

 
$
50,872

 
$

 
$
6,050

 
$
56,922

International equity funds
 

 
33,595

 

 

 
33,595

Core bond fund
 

 
25,976

 

 

 
25,976

High-yield bond fund
 

 
15,288

 

 

 
15,288

Emerging market bond fund
 

 
13,584

 

 

 
13,584

Combination debt/equity/other funds
 

 
11,343

 

 

 
11,343

Alternative investment fund
 

 

 

 
16,439

 
16,439

Real estate securities fund
 

 

 

 
10,823

 
10,823

Cash equivalents
 
87

 

 

 

 
87

Total Nuclear Decommissioning Trust
 
87

 
150,658

 

 
33,312

 
184,057

Trading Securities:
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
 

 
17,876

 

 

 
17,876

International equity fund
 

 
4,430

 

 

 
4,430

Core bond fund
 

 
11,423

 

 

 
11,423

Cash equivalents
 
159

 

 

 

 
159

Total Trading Securities
 
159

 
33,729

 

 

 
33,888

Total Assets Measured at Fair Value
 
$
246

 
$
184,387

 
$

 
$
33,312

 
$
217,945



    


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Some of our investments in the Nuclear Decommissioning Trust (NDT) are measured at NAV and do not have readily determinable fair values. These investments are either with investment companies or companies that follow accounting guidance consistent with investment companies. In certain situations, these investments may have redemption restrictions. The following table provides additional information on these investments.
 
As of March 31, 2016
 
As of December 31, 2015
 
As of March 31, 2016
 
Fair Value
 
Unfunded
Commitments
 
Fair Value
 
Unfunded
Commitments
 
Redemption
Frequency
 
Length of
Settlement
 
(In Thousands)
 
 
 
 
Nuclear Decommissioning Trust:
 
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
$
5,830


$
3,829

 
$
6,050

 
$
1,948

 
(a)
 
(a)
Alternative investment fund (b)
14,862

 

 
16,439

 

 
Quarterly
 
65 days
Real estate securities fund
20,649



 
10,823

 

 
Quarterly
 
(c)
Total Nuclear Decommissioning Trust
$
41,341

 
$
3,829

 
$
33,312

 
$
1,948

 
 
 
 
_______________
(a)
This investment is in four long-term private equity funds that do not permit early withdrawal. Our investments in these funds cannot be distributed until the underlying investments have been liquidated, which may take years from the date of initial liquidation. Two funds have begun to make distributions. Our initial investment in the third fund occurred in the third quarter of 2013. In the first quarter of 2016, we committed to investing in a fourth fund. The terms are expected to be 15 years, subject to the general partner’s right to extend the term for up to three additional one-year periods for both the third and fourth fund.
(b)
There is a holdback on final redemptions.
(c)
This investment is in two real estate funds. In April 2016, we received proceeds for the first investment in the amount of the investment’s fair value as of March 31, 2016. Redemptions of the second fund are allowed on the last business day of the calendar quarter, or such other day or days as the investment manager may determine, and redemptions are granted as soon as reasonably possible with notice of at least 65 days. There is a holdback on final redemptions.

Price Risk

We use various types of fuel, including coal, natural gas, uranium and diesel to operate our plants and also purchase power to meet customer demand. Our prices and consolidated financial results are exposed to market risks from commodity price changes for electricity and other energy-related products as well as from interest rates. Volatility in these markets impacts our costs of purchased power, costs of fuel for our generating plants and our participation in energy markets. We strive to manage our customers’ and our exposure to market risks through regulatory, operating and financing activities and, when we deem appropriate, we economically hedge a portion of these risks through the use of derivative financial instruments for non-trading purposes.

Interest Rate Risk

We have entered into numerous fixed and variable rate debt obligations. We manage our interest rate risk related to these debt obligations by limiting our exposure to variable interest rate debt, diversifying maturity dates and entering into treasury yield hedge transactions. We may also use other financial derivative instruments such as interest rate swaps.


5. FINANCIAL INVESTMENTS

We report our investments in equity and debt securities at fair value and use the specific identification method to determine their realized gains and losses. We classify these investments as either trading securities or available-for-sale securities as described below.


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Trading Securities

We hold equity and debt investments that we classify as trading securities in a trust used to fund certain retirement benefit obligations. As of March 31, 2016, and December 31, 2015, we measured the fair value of trust assets at $33.9 million. We include unrealized gains or losses on these securities in investment earnings on our consolidated statements of income. For the three months ended March 31, 2016 and 2015, we recorded unrealized gains of $0.5 million and $0.7 million, respectively, on the assets still held.

Available-for-Sale Securities

We hold investments in a trust for the purpose of funding the decommissioning of Wolf Creek. We have classified these investments as available-for-sale and have recorded all such investments at their fair market value as of March 31, 2016, and December 31, 2015.

Using the specific identification method to determine cost, we realized a loss on our available-for-sale securities of $1.6 million during the three months ended March 31, 2016, and a gain of $0.2 million during the three months ended March 31, 2015. We record net realized and unrealized gains and losses in regulatory liabilities on our consolidated balance sheets. This reporting is consistent with the method we use to account for the decommissioning costs we recover in our prices. Gains or losses on assets in the trust fund are recorded as increases or decreases, respectively, to regulatory liabilities and could result in lower or higher funding requirements for decommissioning costs, which we believe would be reflected in the prices paid by our customers.

The following table presents the cost, gross unrealized gains and losses, fair value and allocation of investments in the NDT fund as of March 31, 2016, and December 31, 2015.
 
 
 
 
Gross Unrealized
 
 
 
 
Security Type
 
Cost
 
Gain
 
Loss
 
Fair Value
 
Allocation
 
 
(Dollars In Thousands)
 
 
As of March 31, 2016:
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
 
$
45,147

 
$
7,099

 
$
(103
)
 
$
52,143

 
28
%
International equity funds
 
31,101

 
1,553

 
(808
)
 
31,846

 
17
%
Core bond fund
 
24,459

 
191

 

 
24,650

 
13
%
High-yield bond fund
 
15,941

 

 
(1,448
)
 
14,493

 
9
%
Emerging market bond fund
 
15,106

 

 
(1,391
)
 
13,715

 
7
%
Combination debt/equity/other funds
 
8,113

 
2,958

 

 
11,071

 
6
%
Alternative investment fund
 
15,000

 

 
(138
)
 
14,862

 
9
%
Real estate securities fund
 
20,636

 
13

 

 
20,649

 
11
%
Cash equivalents
 
26

 

 

 
26

 
<1%

Total
 
$
175,529

 
$
11,814

 
$
(3,888
)
 
$
183,455

 
100
%
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015:
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
 
$
49,488

 
$
7,436

 
$
(2
)
 
$
56,922

 
32
%
International equity funds
 
33,458

 
1,372

 
(1,235
)
 
33,595

 
18
%
Core bond fund
 
26,397

 

 
(421
)
 
25,976

 
14
%
High-yield bond fund
 
17,047

 

 
(1,759
)
 
15,288

 
8
%
Emerging market bond fund
 
16,306

 

 
(2,722
)
 
13,584

 
7
%
Combination debt/equity/other funds
 
8,239

 
3,104

 

 
11,343

 
6
%
Alternative investment fund
 
15,000

 
1,439

 

 
16,439

 
9
%
Real estate securities fund
 
11,026

 

 
(203
)
 
10,823

 
6
%
Cash equivalents
 
87

 

 

 
87

 
<1%

Total
 
$
177,048

 
$
13,351

 
$
(6,342
)
 
$
184,057

 
100
%


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The following table presents the fair value and the gross unrealized losses of the available-for-sale securities held in the NDT fund aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2016, and December 31, 2015. 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
(In Thousands)
As of March 31, 2016:
 
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
$

 
$

 
$
668

 
$
(103
)
 
$
668

 
$
(103
)
International equity funds

 

 
6,591

 
(808
)
 
6,591

 
(808
)
High-yield bond fund
14,493

 
(1,448
)
 

 

 
14,493

 
(1,448
)
Emerging market bond fund

 

 
13,715

 
(1,391
)
 
13,715

 
(1,391
)
Alternative investments
14,862

 
(138
)
 

 

 
14,862

 
(138
)
Total
$
29,355

 
$
(1,586
)
 
$
20,974

 
$
(2,302
)
 
$
50,329

 
$
(3,888
)
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
$

 
$

 
$
668

 
$
(2
)
 
$
668

 
$
(2
)
International equity funds

 

 
6,717

 
(1,235
)
 
6,717

 
(1,235
)
Core bond funds
25,976

 
(421
)
 

 

 
25,976

 
(421
)
High-yield bond fund
15,288

 
(1,759
)
 

 

 
15,288

 
(1,759
)
Emerging market bond fund

 

 
13,584

 
(2,722
)
 
13,584

 
(2,722
)
Real estate securities fund

 

 
10,823

 
(203
)
 
10,823

 
(203
)
Total
$
41,264

 
$
(2,180
)
 
$
31,792

 
$
(4,162
)
 
$
73,056

 
$
(6,342
)


6. DEBT FINANCING

In February 2016, KGE, as lessee to the La Cygne Generating Station (La Cygne) sale-leaseback, effected a refunding of $162.1 million in outstanding bonds maturing in March 2021. The stated interest rate of the bonds was reduced from 5.647% to 2.398%. See Note 12, “Variable Interest Entities,” for additional information regarding our La Cygne sale-leaseback.


7. TAXES

We recorded income tax expense of $38.6 million with an effective income tax rate of 36% for the three months ended March 31, 2016, and income tax expense of $27.7 million with an effective income tax rate of 34% for the same period of 2015. The increase in the effective income tax rate for the three months ended March 31, 2016, was due primarily to an increase in income before income taxes.

As of March 31, 2016, and December 31, 2015, our unrecognized income tax benefits totaled $2.9 million. We do not expect significant changes in our unrecognized income tax benefits in the next 12 months.

As of March 31, 2016, and December 31, 2015, we had no amounts accrued for interest related to our unrecognized income tax benefits. We accrued no penalties at either March 31, 2016, or December 31, 2015.

As of March 31, 2016, and December 31, 2015, we had recorded $1.5 million for probable assessments of taxes other than income taxes.



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8. PENSION AND POST-RETIREMENT BENEFIT PLANS

The following table summarizes the net periodic costs for our pension and post-retirement benefit plans prior to the effects of capitalization.
 
 
Pension Benefits
 
Post-retirement Benefits
Three Months Ended March 31,
 
2016
 
2015
 
2016
 
2015
 
 
(In Thousands)
Components of Net Periodic Cost (Benefit):
 
 
 
 
 
 
 
 
Service cost
 
$
4,664

 
$
5,348

 
$
271

 
$
361

Interest cost
 
10,959

 
10,753

 
1,393

 
1,422

Expected return on plan assets
 
(10,663
)
 
(10,059
)
 
(1,709
)
 
(1,654
)
Amortization of unrecognized:
 
 
 
 
 
 
 
 
Prior service costs
 
246

 
130

 
114

 
114

Actuarial loss (gain), net
 
5,388

 
7,661

 
(280
)
 
95

Net periodic cost (benefit) before regulatory adjustment
 
10,594

 
13,833

 
(211
)
 
338

Regulatory adjustment (a)
 
3,306

 
1,797

 
(486
)
 
1,013

Net periodic cost (benefit)
 
$
13,900

 
$
15,630

 
$
(697
)
 
$
1,351

 _______________
(a)
The regulatory adjustment represents the difference between current period pension or post-retirement benefit expense and the amount of such expense recognized in setting our prices.

During the three months ended March 31, 2016 and 2015, we contributed $6.8 million and $8.5 million, respectively, to the Westar Energy pension trust.


9. WOLF CREEK PENSION AND POST-RETIREMENT BENEFIT PLANS

As a co-owner of Wolf Creek, KGE is indirectly responsible for 47% of the liabilities and expenses associated with the Wolf Creek pension and post-retirement benefit plans. The following table summarizes the net periodic costs for KGE’s 47% share of the Wolf Creek pension and post-retirement benefit plans prior to the effects of capitalization.
 
 
Pension Benefits
 
Post-retirement Benefits
Three Months Ended March 31,
 
2016
 
2015
 
2016
 
2015
 
 
(In Thousands)
Components of Net Periodic Cost (Benefit):
 
 
 
 
 
 
 
 
Service cost
 
$
1,687

 
$
1,899

 
$
32

 
$
34

Interest cost
 
2,414

 
2,254

 
81

 
79

Expected return on plan assets
 
(2,431
)
 
(2,261
)
 

 

Amortization of unrecognized:
 
 
 
 
 
 
 
 
Prior service costs
 
14

 
14

 

 

Actuarial loss (gain), net
 
1,089

 
1,482

 
(4
)
 
1

Net periodic cost before regulatory adjustment
 
2,773

 
3,388

 
109

 
114

Regulatory adjustment (a)
 
483

 
(304
)
 

 

Net periodic cost
 
$
3,256

 
$
3,084

 
$
109

 
$
114

 _______________
(a)
The regulatory adjustment represents the difference between current period pension or post-retirement benefit expense and the amount of such expense recognized in setting our prices.

During the three months ended March 31, 2016 and 2015, we funded $1.6 million and $1.3 million of Wolf Creek’s pension plan contributions, respectively.



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10. COMMITMENTS AND CONTINGENCIES

Environmental Matters

Cross-State Air Pollution Rule

In November 2015, the Environmental Protection Agency (EPA) proposed the Cross-State Air Pollution Update Rule. The proposed rule addresses interstate transport of nitrogen oxides (NOx) emissions in 23 states including Kansas, Missouri and Oklahoma during the ozone season and the impact from the formation of ozone on downwind states with respect to the 2008 ozone National Ambient Air Quality Standards (NAAQS). Starting with the 2017 ozone season, the proposed rule will revise the existing ozone season allowance budgets for Missouri and Oklahoma and will establish an ozone season budget for Kansas. We are currently evaluating the impact of the proposed rule on our operations, and it could have a material impact on our operations and consolidated financial results.

National Ambient Air Quality Standards

Under the federal Clean Air Act (CAA), the EPA sets NAAQS for certain emissions known as the “criteria pollutants” considered harmful to public health and the environment, including two classes of particulate matter (PM), ozone, NOx (a precursor to ozone), carbon monoxide (CO) and sulfur dioxide (SO2), which result from fossil fuel combustion. Areas meeting the NAAQS are designated attainment areas while those that do not meet the NAAQS are considered nonattainment areas. Each state must develop a plan to bring nonattainment areas into compliance with the NAAQS. NAAQS must be reviewed by the EPA at five-year intervals.

In October 2015, the EPA strengthened the ozone NAAQS by lowering the standards from 75 parts per billion (ppb) to 70 ppb. As a result of this change, the EPA is required to make attainment/nonattainment designations for the revised standards by October 2017. We are currently reviewing this final rule and cannot at this time predict the impact it may have on our operations. Nonattainment designations in or surrounding our areas of operations could have a material impact on our consolidated financial results.

In December 2012, the EPA strengthened an existing NAAQS for one class of PM.  In December 2014, the EPA designated the entire state of Kansas as unclassifiable/in attainment with the standard.  We do not believe this will have a material impact on our operations or consolidated financial results.

In 2010, the EPA revised the NAAQS for SO2. In March 2015, a federal court approved a consent decree between the EPA and environmental groups. The decree includes specific SO2 emissions criteria for certain electric generating plants that, if met, requires the EPA to promulgate attainment/nonattainment designations for areas surrounding these plants by July 2016. Tecumseh Energy Center is our only generating station that meets this criteria. In February 2016, the EPA proposed to accept the State of Kansas recommendation to designate the areas surrounding the facility as unclassifiable. We are working with Kansas Department of Health and Environment to determine the impact of this proposed designation. In addition, we continue to communicate with our regulatory agencies regarding these standards and evaluate what impact the revised NAAQS could have on our operations and consolidated financial results. If areas surrounding our facilities are designated in the future as nonattainment and/or we are required to install additional equipment to control emissions at our facilities, it could have a material impact on our operations and consolidated financial results.

Greenhouse Gases

Burning coal and other fossil fuels releases carbon dioxide (CO2) and other gases referred to as GHG. Various regulations under the federal CAA limit CO2 and other GHG emissions, and other measures are being imposed or offered by individual states, municipalities and regional agreements with the goal of reducing GHG emissions.


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In October 2015, the EPA published a rule establishing new source performance standards that limit CO2 emissions for new, modified and reconstructed coal and natural gas fueled electric generating units to various levels per Megawatt hour depending on various characteristics of the units. In October 2015, the EPA also published a rule establishing guidelines for states to regulate CO2 emissions from existing power plants. The standards for existing plants are known as the Clean Power Plan (CPP). Under the CPP, interim emissions performance rates must be achieved beginning in 2022 and final emissions performance rates must be achieved by 2030. Legal challenges to the CPP were filed by groups of states and industry members, including our company, in the U.S. Court of Appeals for the D.C. Circuit beginning in October 2015, and more challenges are expected. In January 2016, the U.S. Court of Appeals for the D.C. Circuit denied a request to stay the CPP pending review.  However, the U.S. Court of Appeals for the D.C. Circuit placed the case on an expedited review schedule with oral arguments scheduled for June 2016.  Based on the U.S. Court of Appeals for the D.C. Circuit denial of the petition for stay, state and industry groups petitioned the U.S. Supreme Court for a stay.  In February 2016, the U.S. Supreme Court granted the stay request. Due to the future uncertainty of the CPP, we cannot at this time determine the impact on our operations or consolidated financial results, but we believe the costs to comply could be material.

Water
    
We discharge some of the water used in our operations. This water may contain substances deemed to be pollutants. Revised rules governing such discharges from coal-fired power plants were issued in November 2015. The final rule establishes limitations or forces the elimination of wastewater associated with coal combustion residual handling. Implementation timelines for these requirements will vary from 2019 to 2023. We are evaluating the final rule at this time and cannot predict the resulting impact on our operations or consolidated financial results, but believe costs to comply could be material.

In October 2014, the EPA’s final standards for cooling intake structures at power plants to protect aquatic life took effect. The standards, based on Section 316(b) of the federal Clean Water Act (CWA), require subject facilities to choose among seven best available technology options to reduce fish impingement. In addition, some facilities must conduct studies to assist permitting authorities to determine whether and what site-specific controls, if any, would be required to reduce entrainment of aquatic organisms. Our current analysis indicates this rule will not have a significant impact on our coal plants that employ cooling towers. Biological monitoring may be required for La Cygne and Wolf Creek. We are currently evaluating the rule’s impact on those two plants and cannot predict the resulting impact on our operations or consolidated financial results, but we do not expect it to be material.

In June 2015, the EPA along with the U.S. Army Corps of Engineers issued a final rule, effective August 2015, defining the Waters of the United States for purposes of the CWA. This rulemaking has the potential to impact all programs under the CWA. Expansion of regulated waterways is possible under the rule depending on regulating authority interpretation, which could impact several permitting programs. Various states have filed lawsuits challenging the rule and, in October 2015, the U.S. Court of Appeals for the Sixth Circuit issued an order that temporarily stays implementation of the rule nationwide pending the outcome of the various legal challenges. We are currently evaluating the final rule. The resulting impact of the rule could have a material impact on our operations or consolidated financial results.

Regulation of Coal Combustion Byproducts

In the course of operating our coal generation plants, we produce coal combustion byproducts (CCBs), including fly ash, gypsum and bottom ash. We recycle some of our ash production, principally by selling to the aggregate industry. The EPA published a rule to regulate CCBs in April 2015, which we believe will require additional CCB handling, processing and storage equipment and closure of certain ash disposal areas. While we cannot at this time estimate the full impact and costs associated with future regulations of CCBs, we believe the impact on our operations or consolidated financial results could be material.

SPP Revenue Crediting

We are a member of the Southwest Power Pool, Inc. (SPP) RTO, which coordinates the operation of a multi-state interconnected transmission system. The SPP has been engaged in a process whereby it is seeking to allocate revenue credits under its Open Access Transmission Tariff to sponsors of certain transmission system upgrades. Qualifying upgrades are those that are not financed through general rates paid by all customers and that result in additional revenue to the SPP. The SPP is also evaluating whether sponsors are entitled to revenue credits for previously completed upgrades, and whether members will be obligated to pay for revenue credits attributable to these historical upgrades.


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We believe it is reasonably possible that we will be required to pay sponsors for revenue credits attributable to historical upgrades. However, due to the complexity of the process, including the large number of transmission service requests associated with the upgrades at issue, the number of years included in the process and complexity surrounding the manner in which revenue credits are allocated, we are unable to estimate an amount, or a range of amounts, we may owe, or the impact on our consolidated financial results. We believe any amounts we may owe would be recovered in our future prices.

Storage of Spent Nuclear Fuel

In 2010, the Department of Energy (DOE) filed a motion with the Nuclear Regulatory Commission (NRC) to withdraw its then pending application to construct a national repository for the disposal of spent nuclear fuel and high-level radioactive waste at Yucca Mountain, Nevada. An NRC board denied the DOE’s motion to withdraw its application and the DOE appealed that decision to the full NRC. In 2011, the NRC issued an evenly split decision on the appeal and also ordered the licensing board to close out its work on the DOE’s application by the end of 2011 due to a lack of funding. These agency actions prompted the states of Washington and South Carolina, and a county in South Carolina, to file a lawsuit in a federal Court of Appeals asking the court to compel the NRC to resume its license review and to issue a decision on the license application. In August 2013, the court ordered the NRC to resume its review of the DOE’s application. The NRC has not yet issued its decision.

Wolf Creek is currently evaluating alternatives for expanding its existing on-site spent nuclear fuel storage to provide additional capacity prior to 2025. We cannot predict when, or if, an off-site storage site or alternative disposal site will be available to receive Wolf Creek’s spent nuclear fuel and will continue to monitor this activity.

FERC Proceedings

See Note 3, “Rate Matters and Regulation - FERC Proceedings,” for information regarding a settlement of a complaint that was filed by the KCC against us with the FERC under Section 206 of the Federal Power Act.


11. LEGAL PROCEEDINGS

We and our subsidiaries are involved in various legal, environmental and regulatory proceedings. We believe that adequate provisions have been made and accordingly believe that the ultimate disposition of such matters will not have a material effect on our consolidated financial results. See Note 3, “Rate Matters and Regulation,” and Note 10, “Commitments and Contingencies,” for additional information.


12. VARIABLE INTEREST ENTITIES

In determining the primary beneficiary of a VIE, we assess the entity’s purpose and design, including the nature of the entity’s activities and the risks that the entity was designed to create and pass through to its variable interest holders. A reporting enterprise is deemed to be the primary beneficiary of a VIE if it has (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. The trusts holding our 8% interest in Jeffrey Energy Center (JEC) and our 50% interest in La Cygne unit 2 are VIEs of which we are the primary beneficiary.

We assess all entities with which we become involved to determine whether such entities are VIEs and, if so, whether or not we are the primary beneficiary of the entities. We also continuously assess whether we are the primary beneficiary of the VIEs with which we are involved. Prospective changes in facts and circumstances may cause us to reconsider our determination as it relates to the identification of the primary beneficiary.


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8% Interest in Jeffrey Energy Center

Under an agreement that expires in January 2019, we lease an 8% interest in JEC from a trust. The trust was financed with an equity contribution from an owner participant and debt issued by the trust. The trust was created specifically to purchase the 8% interest in JEC and lease it to a third party, and does not hold any other assets. We meet the requirements to be considered the primary beneficiary of the trust. In determining the primary beneficiary of the trust, we concluded that the activities of the trust that most significantly impact its economic performance and that we have the power to direct include (1) the operation and maintenance of the 8% interest in JEC, (2) our ability to exercise a purchase option at the end of the agreement at the lesser of fair value or a fixed amount and (3) our option to require refinancing of the trust’s debt. We have the potential to receive benefits from the trust that could potentially be significant if the fair value of the 8% interest in JEC at the end of the agreement is greater than the fixed amount. The possibility of lower interest rates upon refinancing the debt also creates the potential for us to receive significant benefits.

50% Interest in La Cygne Unit 2

Under an agreement that expires in September 2029, KGE entered into a sale-leaseback transaction with a trust under which the trust purchased KGE’s 50% interest in La Cygne unit 2 and subsequently leased it back to KGE. The trust was financed with an equity contribution from an owner participant and debt issued by the trust. The trust was created specifically to purchase the 50% interest in La Cygne unit 2 and lease it back to KGE, and does not hold any other assets. We meet the requirements to be considered the primary beneficiary of the trust. In determining the primary beneficiary of the trust, we concluded that the activities of the trust that most significantly impact its economic performance and that we have the power to direct include (1) the operation and maintenance of the 50% interest in La Cygne unit 2 and (2) our ability to exercise a purchase option at the end of the agreement at the lesser of fair value or a fixed amount. We have the potential to receive
benefits from the trust that could potentially be significant if the fair value of the 50% interest in La Cygne unit 2 at the end of
the agreement is greater than the fixed amount. In February 2016, KGE effected a refunding of the $162.1 million in outstanding bonds maturing March 2021. See Note 6, “Debt Financing,” for additional information.

Financial Statement Impact

We have recorded the following assets and liabilities on our consolidated balance sheets related to the VIEs described above.
 
As of
 
As of
 
March 31, 2016
 
December 31, 2015
 
(In Thousands)
Assets:
 
 
 
Property, plant and equipment of variable interest entities, net
$
265,655

 
$
268,239

Regulatory assets (a)
9,428

 
9,088

 
 
 
 
Liabilities:
 
 
 
Current maturities of long-term debt of variable interest entities
$
26,842

 
$
28,309

Accrued interest (b)
19

 
2,457

Long-term debt of variable interest entities, net
111,239

 
138,097

_______________
(a) Included in long-term regulatory assets on our consolidated balance sheets.
(b) Included in accrued interest on our consolidated balance sheets.

All of the liabilities noted in the table above relate to the purchase of the property, plant and equipment. The assets of the VIEs can be used only to settle obligations of the VIEs and the VIEs’ debt holders have no recourse to our general credit. We have not provided financial or other support to the VIEs and are not required to provide such support. We did not record any gain or loss upon initial consolidation of the VIEs.



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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain matters discussed in Management’s Discussion and Analysis are “forward-looking statements.” The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like we “believe,” “anticipate,” “target,” “expect,” “estimate,” “intend” and words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals.


INTRODUCTION

We are the largest electric utility in Kansas. We produce, transmit and sell electricity at retail to customers in Kansas under the regulation of the KCC. We also supply electric energy at wholesale to municipalities and electric cooperatives in Kansas under the regulation of FERC. We have contracts for the sale or purchase of wholesale electricity with other utilities.

In Management’s Discussion and Analysis, we discuss our operating results for the three months ended March 31, 2016, compared to the same period of 2015, our general financial condition and significant changes that occurred during 2016. As you read Management’s Discussion and Analysis, please refer to our condensed consolidated financial statements and the accompanying notes, which contain our operating results.


SUMMARY OF SIGNIFICANT ITEMS

Earnings Per Share

Following is a summary of our net income and basic EPS.
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
Change
 
 
(Dollars In Thousands, Except Per Share Amounts)
Net income attributable to Westar Energy, Inc.
 
$
65,585

 
$
50,980

 
$
14,605

Earnings per common share, basic
 
0.46

 
0.38

 
0.08

    
Net income and basic EPS increased for the three months ended March 31, 2016, compared to the same period in 2015, due primarily to higher prices, lower operations and maintenance expense and an increase in corporate-owned life insurance (COLI) benefits. Lower sales partially offset these increases as a result of being the fifth warmest winter in over a century. Additional shares issued in 2015 also impacted 2016 EPS. Had we not issued those shares, EPS would have been approximately $0.03 higher in 2016. See the discussion under “—Operating Results” below for additional information.

Current Trends

The following is an update to and is to be read in conjunction with “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 Form 10-K.

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Environmental Regulation

We are subject to various federal, state and local environmental laws and regulations. Environmental laws and regulations affecting our operations are overlapping, complex, subject to changes, have become more stringent over time and are expensive to implement. There are a variety of final and proposed laws and regulations that could have a material adverse effect on our operations and consolidated financial results, including those relating to:

further regulation of GHGs by the EPA, including regulations pursuant to the Clean Power Plan, and future legislation that could be proposed by the U.S. Congress;
various proposed and expected regulations governing air emissions including those relating to NAAQS (particularly those relating to PM, NOx, ozone, CO and SO2) and the Cross-State Air Pollution Rule;
the definition of Waters of the United States for purposes of the CWA; and,
the regulation of CCB.

In February 2016, the U.S. Supreme Court granted a request to stay the CPP pending the outcome of various legal challenges. See Note 10, “Commitments and Contingencies,” for additional information on environmental matters.


CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Note 2 of the Notes to Condensed Consolidated Financial Statements, “Summary of Significant Accounting Policies,” contains a summary of our significant accounting policies, many of which require the use of estimates and assumptions by management. The policies highlighted in our 2015 Form 10-K have an impact on our reported results that may be material due to the levels of judgment and subjectivity necessary to account for uncertain matters or their susceptibility to change.

From December 31, 2015, through March 31, 2016, we did not experience any significant changes in our critical accounting estimates. For additional information, see our 2015 Form 10-K.



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Table of Contents

OPERATING RESULTS

We evaluate operating results based on EPS. We have various classifications of revenues, defined as follows:

Retail: Sales of electricity to residential, commercial and industrial customers. Classification of customers as residential, commercial or industrial requires judgment and our classifications may be different from other companies. Assignment of tariffs is not dependent on classification. Other retail sales of electricity include lighting for public streets and highways, net of revenue subject to refund.

Wholesale: Sales of electricity to electric cooperatives, municipalities and other electric utilities and RTOs, the prices for which are either based on cost or prevailing market prices as prescribed by FERC authority. Revenues from these sales are either included in the RECA or used in the determinations of base rates at the time of our next general rate review.

Transmission: Reflects transmission revenues, including those based on tariffs with the SPP.

Other: Miscellaneous electric revenues including ancillary service revenues and rent from electric property leased to others. This category also includes transactions unrelated to the production of our generating assets and fees we earn for services that we provide for third parties.

Electric utility revenues are impacted by things such as rate regulation, fuel costs, technology, customer behavior, the economy and competitive forces. Changing weather also affects the amount of electricity our customers use as electricity sales are seasonal. As a summer peaking utility, the third quarter typically accounts for our greatest electricity sales. Hot summer temperatures and cold winter temperatures prompt more demand, especially among residential and commercial customers, and to a lesser extent, industrial customers. Mild weather reduces customer demand. Our wholesale revenues are impacted by, among other factors, demand, cost and availability of fuel and purchased power, price volatility, available generation capacity, transmission availability and weather.


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Table of Contents

Three Months Ended March 31, 2016, Compared to Three Months Ended March 31, 2015

Below we discuss our operating results for the three months ended March 31, 2016, compared to the results for the three months ended March 31, 2015. Significant changes in results of operations shown in the table immediately below are further explained in the descriptions that follow.
 
Three Months Ended March 31,
 
2016
 
2015
 
Change
 
% Change
 
(Dollars In Thousands, Except Per Share Amounts)
REVENUES:
 
 
 
 
 
 
 
Residential
$
179,290

 
$
181,294

 
$
(2,004
)
 
(1.1
)
Commercial
165,673

 
161,305

 
4,368

 
2.7

Industrial
100,697

 
96,479

 
4,218

 
4.4

Other retail
(14,381
)
 
539

 
(14,920
)
 
(a)

Total Retail Revenues
431,279

 
439,617

 
(8,338
)
 
(1.9
)
Wholesale
67,412

 
86,755

 
(19,343
)
 
(22.3
)
Transmission
63,915

 
58,585

 
5,330

 
9.1

Other
6,844

 
5,850

 
994

 
17.0

Total Revenues
569,450

 
590,807

 
(21,357
)
 
(3.6
)
OPERATING EXPENSES:
 
 
 
 
 
 
 
Fuel and purchased power
100,058

 
155,482

 
(55,424
)
 
(35.6
)
SPP network transmission costs
60,760

 
56,812

 
3,948

 
6.9

Operating and maintenance
77,757

 
85,080

 
(7,323
)
 
(8.6
)
Depreciation and amortization
83,640

 
74,586

 
9,054

 
12.1

Selling, general and administrative
56,456

 
55,418

 
1,038

 
1.9

Taxes other than income tax
48,968

 
37,871

 
11,097

 
29.3

Total Operating Expenses
427,639

 
465,249

 
(37,610
)
 
(8.1
)
INCOME FROM OPERATIONS
141,811

 
125,558

 
16,253

 
12.9

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Investment earnings
2,016

 
2,480

 
(464
)
 
(18.7
)
Other income
9,477

 
2,814

 
6,663

 
236.8

Other expense
(5,543
)
 
(5,713
)
 
170

 
3.0

Total Other Income (Expense)
5,950

 
(419
)
 
6,369

 
(a)

Interest expense
40,431

 
44,298

 
(3,867
)
 
(8.7
)
INCOME BEFORE INCOME TAXES
107,330

 
80,841

 
26,489

 
32.8

Income tax expense
38,622

 
27,678

 
10,944

 
39.5

NET INCOME
68,708

 
53,163

 
15,545

 
29.2

Less: Net income attributable to noncontrolling interests
3,123

 
2,183

 
940

 
43.1

NET INCOME ATTRIBUTABLE TO WESTAR ENERGY, INC.
$
65,585

 
$
50,980

 
$
14,605

 
28.6

BASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING ATTRIBUTABLE TO WESTAR ENERGY, INC.
$
0.46

 
$
0.38

 
$
0.08

 
21.1

DILUTED EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING ATTRIBUTABLE TO WESTAR ENERGY, INC.
$
0.46

 
$
0.38

 
$
0.08

 
21.1

_______________
(a) Change greater than 1,000%


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Table of Contents

Gross Margin

Fuel and purchased power costs fluctuate with electricity sales and unit costs. As permitted by regulators, we adjust our retail prices to reflect changes in the costs of fuel and purchased power. Fuel and purchased power costs for wholesale customers are recovered at prevailing market prices or based on a predetermined formula with a price adjustment approved by FERC. As a result, changes in fuel and purchased power costs are offset in revenues with minimal impact on net income. In addition, SPP network transmission costs fluctuate due primarily to investments by us and other members of the SPP for upgrades to the transmission grid within the SPP RTO. As with fuel and purchased power costs, changes in SPP network transmission costs are mostly reflected in the prices we charge customers with minimal impact on net income. For these reasons, we believe gross margin is useful for understanding and analyzing changes in our operating performance from one period to the next. We calculate gross margin as total revenues, including transmission revenues, less the sum of fuel and purchased power costs and amounts billed by the SPP for network transmission costs. Accordingly, gross margin reflects transmission revenues and costs on a net basis. The following table summarizes our gross margin for the three months ended March 31, 2016 and 2015.
 
Three Months Ended March 31,
  
2016
 
2015
 
Change
 
% Change
 
(Dollars in Thousands)
Revenues
$
569,450

 
$
590,807

 
$
(21,357
)
 
(3.6
)
Less: Fuel and purchased power expense
100,058

 
155,482

 
(55,424
)
 
(35.6
)
SPP network transmission costs
60,760

 
56,812

 
3,948

 
6.9

Gross Margin
$
408,632

 
$
378,513

 
$
30,119

 
8.0


The following table reflects changes in electricity sales for the three months ended March 31, 2016 and 2015. No electricity sales are shown for transmission or other as they are not directly related to the amount of electricity we sell. 
 
Three Months Ended March 31,
  
2016
 
2015
 
Change
 
% Change
 
(Thousands of MWh)
ELECTRICITY SALES:
 
 
 
 
 
 
 
Residential
1,397


1,554

 
(157
)
 
(10.1
)
Commercial
1,659


1,731

 
(72
)
 
(4.2
)
Industrial
1,302


1,324

 
(22
)
 
(1.7
)
Other retail
20


20

 

 

Total Retail
4,378

 
4,629

 
(251
)
 
(5.4
)
Wholesale
1,875

 
2,571

 
(696
)
 
(27.1
)
Total
6,253

 
7,200

 
(947
)
 
(13.2
)

Gross margin increased for the three months ended March 31, 2016, compared to the same period in 2015, due primarily to higher prices partially offset by lower sales. The lower retail electric sales were attributable principally to warmer winter weather, which particularly impacts residential and commercial electricity sales. During the three months ended March 31, 2016, compared to the same period in 2015, there were approximately 15% fewer heating degree days, marking the fifth warmest winter in over a century.
    


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Income from operations is the most directly comparable measure to our presentation of gross margin that is calculated and presented in accordance with GAAP in our consolidated statements of income. Our presentation of gross margin should not be considered in isolation or as a substitute for income from operations. Additionally, our presentation of gross margin may not be comparable to similarly titled measures reported by other companies. The following table reconciles income from operations with gross margin for the three months ended March 31, 2016 and 2015.
 
Three Months Ended March 31,
  
2016
 
2015
 
Change
 
% Change
 
(Dollars in Thousands)
Gross margin
$
408,632

 
$
378,513

 
$
30,119

 
8.0

Less: Operating and maintenance expense
77,757

 
85,080

 
(7,323
)
 
(8.6
)
Depreciation and amortization expense
83,640

 
74,586

 
9,054

 
12.1

Selling, general and administrative expense
56,456

 
55,418

 
1,038

 
1.9

Taxes other than income tax
48,968

 
37,871

 
11,097

 
29.3

Income from operations
$
141,811

 
$
125,558

 
$
16,253

 
12.9


Operating Expenses and Other Income and Expense Items

 
Three Months Ended March 31,
  
2016
 
2015
 
Change
 
% Change
 
(Dollars in Thousands)
Operating and maintenance expense
$
77,757

 
$
85,080

 
$
(7,323
)
 
(8.6
)

Operating and maintenance expense decreased for the three months ended March 31, 2016, compared to the same period in 2015, due primarily to:

lower distribution maintenance expense of $4.1 million due partially to focusing our labor resources on capital improvements as part of a plan to improve long-term reliability; and
a $1.9 million decrease in operating and maintenance costs related to retiring three generating units in late 2015.
                                                                  
 
Three Months Ended March 31,
  
2016
 
2015
 
Change
 
% Change
 
(Dollars in Thousands)
Depreciation and amortization expense
$
83,640

 
$
74,586

 
$
9,054

 
12.1

Depreciation and amortization expense increased during the three months ended March 31, 2016, compared to the same period of 2015, due primarily to additions at our power plants, including air quality controls at La Cygne.

 
Three Months Ended March 31,
 
2016
 
2015
 
Change
 
% Change
 
(Dollars in Thousands)
Taxes other than income tax
$
48,968

 
$
37,871

 
$
11,097

 
29.3

Taxes other than income tax increased for the three months ended March 31, 2016, compared to the same period in 2015, due primarily to a $11.5 million increase in property tax expense, which is offset in retail revenues.


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Three Months Ended March 31,
 
2016
 
2015
 
Change
 
% Change
 
(Dollars in Thousands)
Other Income   
$
9,477

 
$
2,814

 
$
6,663

 
236.8

Other income increased during the three months ended March 31, 2016, compared to the same period in 2015, due primarily to an increase in COLI benefits of $6.5 million.

 
Three Months Ended March 31,
  
2016
 
2015
 
Change
 
% Change
 
(Dollars in Thousands)
Income tax expense
$
38,622

 
$
27,678

 
$
10,944

 
39.5

Income tax expense increased for the three months ended March 31, 2016, compared to the same period in 2015, due primarily to higher income before income taxes.

FINANCIAL CONDITION

A number of factors affected amounts recorded on our balance sheet as of March 31, 2016, compared to December 31, 2015.
  
 
As of
 
As of
 
 
 
 
  
March 31, 2016
 
December 31, 2015
 
Change
 
% Change
 
(Dollars in Thousands)
Regulatory assets
$
845,109

 
$
860,918

 
$
(15,809
)
 
(1.8
)
Regulatory liabilities
282,006

 
292,811

 
(10,805
)
 
(3.7
)
Net regulatory assets
$
563,103

 
$
568,107

 
$
(5,004
)
 
(0.9
)

Total regulatory assets decreased due primarily to the following items:
a $9.6 million decrease in deferred employee benefit costs;
a $5.5 million decrease in amounts deferred for property taxes;
a $4.0 million decrease in amounts deferred for Wolf Creek refueling and maintenance outages; and
a $3.9 million decrease in amounts due from customers for future income taxes; however,
partially offsetting these decreases was a $6.3 million increase in unrecovered amounts related to the retirement of analog meters prior to the end of their remaining useful lives due to modernization of meter technology.

Total regulatory liabilities decreased due primarily to the following reasons:

a $16.8 million decrease due to spending more than collected for the cost to remove retired plant assets; and
a $10.0 million decrease in refund obligations related to amounts we have collected from our customers in excess of our actual cost of fuel and purchased power; however,
partially offsetting these decreases was a FERC settlement approval that resulted in a $16.7 million estimated refund obligation that was previously accrued in other current liabilities. See Note 3 of the Notes to Condensed Consolidated Financial Statements, “Rate Matters and Regulation - FERC Proceedings,” for a discussion of the FERC settlement.


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Table of Contents

 
As of
 
As of
 
 
 
 
  
March 31, 2016
 
December 31, 2015
 
Change
 
% Change
 
(Dollars in Thousands)
Current maturities of long-term debt of variable interest entities
$
26,842

 
$
28,309

 
$
(1,467
)
 
(5.2
)
Long-term debt of variable interest entities
111,239

 
138,097

 
(26,858
)
 
(19.4
)
Total long-term debt of variable interest entities
$
138,081

 
$
166,406

 
$
(28,325
)
 
(17.0
)

Total long-term debt of VIEs decreased due to the VIEs that hold the JEC and La Cygne leasehold interests having made principal payments totaling $28.3 million.

 
As of
 
As of
 
 
 
 
  
March 31, 2016
 
December 31, 2015
 
Change
 
% Change
 
(Dollars in Thousands)
Short-term debt
$
316,800

 
$
250,300

 
$
66,500

 
26.6

Short-term debt increased due to increases in issuances of commercial paper used primarily to fund capital expenditures, working capital and other corporate purposes.

 
As of
 
As of
 
 
 
 
  
March 31, 2016
 
December 31, 2015
 
Change
 
% Change
 
(Dollars in Thousands)
Accrued taxes
$
128,152

 
$
83,773

 
$
44,379

 
53.0

Accrued taxes increased due primarily to a $39.4 million increase in accrued property taxes.

 
As of
 
As of
 
 
 
 
  
March 31, 2016
 
December 31, 2015
 
Change
 
% Change
 
(Dollars in Thousands)
Deferred income taxes
$
1,619,112

 
$
1,591,430

 
$
27,682

 
1.7

Deferred income taxes increased due primarily to the use of accelerated depreciation methods and the utilization of previously deferred net operating losses during the period.


LIQUIDITY AND CAPITAL RESOURCES

Overview

Available sources of funds to operate our business include internally generated cash, short-term borrowings under Westar Energy’s commercial paper program and revolving credit facilities and access to capital markets. We expect to meet our day-to-day cash requirements including, among other items, fuel and purchased power, dividends, interest payments, income taxes and pension contributions, using primarily internally generated cash and short-term borrowings. To meet the cash requirements for our capital investments, we expect to use internally generated cash, short-term borrowings, and proceeds from the issuance of debt and equity securities in the capital markets. When such balances are of sufficient size and it makes economic sense to do so, we also use proceeds from the issuance of long-term debt and equity securities to repay short-term borrowings, which are principally related to investments in capital equipment and the redemption of bonds and for working capital and general corporate purposes. Uncertainties affecting our ability to meet cash requirements include, among others, factors affecting revenues described in “—Operating Results” above, economic conditions, regulatory actions, compliance with environmental regulations and conditions in the capital markets.


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Table of Contents

Short-Term Borrowings

Westar Energy maintains a commercial paper program pursuant to which it may issue commercial paper up to a maximum aggregate amount outstanding at any one time of $1.0 billion. This program is supported by Westar Energy’s revolving credit facilities. Maturities of commercial paper issuances may not exceed 365 days from the date of issuance and proceeds from such issuances will be used to temporarily fund capital expenditures, to redeem debt on an interim basis, for working capital and/or for other general corporate purposes. As of April 27, 2016, Westar Energy had $362.6 million of commercial paper issued and outstanding.

Westar Energy has two revolving credit facilities in the amounts of $730.0 million and $270.0 million. The $730.0 million facility will expire in September 2019, $20.7 million of which will expire in September 2017. The $270.0 million credit facility will expire in February 2017. As long as there is no default under the facilities, the $730.0 million facility may be extended an additional year and the aggregate amount of borrowings under the $730.0 million and $270.0 million facilities may be increased to $1.0 billion and $400.0 million, respectively, subject to lender participation. All borrowings under the facilities are secured by KGE first mortgage bonds. Total combined borrowings under the revolving credit facilities and the commercial paper program may not exceed $1.0 billion at any given time. As of April 27, 2016, no amounts were borrowed and $20.2 million in letters of credit had been issued under the $730.0 million facility. No amounts were borrowed and no letters of credit were issued under the $270.0 million facility as of the same date.

Long-Term Debt Financing

In February 2016, KGE, as lessee to the La Cygne sale-leaseback, effected a refunding of $162.1 million in outstanding bonds maturing in March 2021. The stated interest rate of the bonds was reduced from 5.647% to 2.398%. See Note 12 of the Notes to Condensed Consolidated Financial Statements, “Variable Interest Entities,” for additional information regarding our La Cygne sale-leaseback.

Debt Covenants

We were in compliance with our debt covenants as of March 31, 2016.

Impact of Credit Ratings on Debt Financing

Moody’s Investors Service (Moody’s) and Standard & Poor’s Ratings Services (S&P) are independent credit-rating agencies that rate our debt securities. These ratings indicate each agency’s assessment of our ability to pay interest and principal when due on our securities.

In general, more favorable credit ratings increase borrowing opportunities and reduce the cost of borrowing. Under Westar Energy’s revolving credit facilities and commercial paper program, our cost of borrowings is determined in part by credit ratings. However, Westar Energy’s ability to borrow under the credit facilities and commercial paper program are not conditioned on maintaining a particular credit rating. We may enter into new credit agreements that contain credit rating conditions, which could affect our liquidity and/or our borrowing costs.

Factors that impact our credit ratings include a combination of objective and subjective criteria. Objective criteria include typical financial ratios, such as total debt to total capitalization and funds from operations to total debt, among others, future capital expenditures and our access to liquidity including committed lines of credit. Subjective criteria include such items as the quality and credibility of management, the political and regulatory environment we operate in and an assessment of our governance and risk management practices.

As of April 27, 2016, our ratings with the agencies are as shown in the table below.
 
Westar
Energy
First
Mortgage
Bond
Rating
 
KGE
First
Mortgage
Bond
Rating
 
Westar Energy Commercial Paper
 
Rating
Outlook
Moody’s
A2
 
A2
 
P-2
 
Stable
S&P
A
 
A
 
A-2
 
Stable

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Summary of Cash Flows
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
Change
 
% Change
 
 
(Dollars In Thousands)
Cash flows from (used in):
 
 
 
 
 
 
 
 
Operating activities
 
$
238,876

 
$
213,568

 
$
25,308

 
11.9

Investing activities
 
(197,761
)
 
(186,294
)
 
(11,467
)
 
(6.2
)
Financing activities
 
(40,875
)
 
(25,756
)
 
(15,119
)
 
(58.7
)
Net increase in cash and cash equivalents
 
$
240

 
$
1,518

 
$
(1,278
)
 
(84.2
)
 
Cash Flows from Operating Activities

Cash flows from operating activities increased due principally to our having paid $25.0 million less for coal and natural gas, $10.0 million less for interest and $7.1 million less for the Wolf Creek refueling outage and receiving $6.1 million more in COLI proceeds. Partially offsetting these increases was our having received $19.9 million less for wholesale power sales and transmission services.
Cash Flows used in Investing Activities
Cash flows used in investing activities increased due primarily to our having invested $33.6 million more in additions to property, plant and equipment. Partially offsetting this increase was our having received $22.8 million more from our investment in COLI.

Cash Flows used in Financing Activities

Cash flows used in financing activities increased due principally to our having redeemed $162.4 million more in long-term debt of VIEs, issuing $101.3 million less in commercial paper, repaying $21.9 million more for borrowings against the cash surrender value of COLI, issuing $7.5 million less in common stock and paying $5.9 million more in dividends. Partially offsetting these increases was our having issued $162.0 million more in long-term debt of VIEs and redeeming $125.0 million less in long-term debt.

Pension Contribution

During the three months ended March 31, 2016, we contributed $6.8 million to the Westar Energy pension trust. We funded $1.6 million of Wolf Creek’s pension plan contributions during the same period.


OFF-BALANCE SHEET ARRANGEMENTS

From December 31, 2015, through March 31, 2016, our off-balance sheet arrangements did not change materially. For additional information, see our 2015 Form 10-K.


CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

From December 31, 2015, through March 31, 2016, our contractual obligations and commercial commitments did not change materially outside the ordinary course of business. For additional information, see our 2015 Form 10-K.



33

Table of Contents

OTHER INFORMATION

Changes in Prices

See Note 3 of the Notes to Condensed Consolidated Financial Statements, “Rate Matters and Regulation,” for information on our prices.    

New Accounting Pronouncements

See Note 2 of the Notes to Condensed Consolidated Financial Statements, “Summary of Significant Accounting Policies,” for information on accounting pronouncements.    


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, including changes in commodity prices, counterparty credit, interest rates, and debt and equity instrument values. From December 31, 2015, to March 31, 2016, no significant changes occurred in our market risk exposure. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2015 Form 10-K for additional information.


ITEM 4. CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. In addition, the disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports under the Exchange Act is accumulated and communicated to management, including the chief executive officer and the chief financial officer, allowing timely decisions regarding required disclosure. As of the end of the period covered by this report, based on an evaluation carried out under the supervision and with the participation of management, including the chief executive officer and the chief financial officer, of the effectiveness of our disclosure controls and procedures, the chief executive officer and the chief financial officer have concluded that our disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting during the three months ended March 31, 2016, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information on legal proceedings is set forth in Notes 3, 10 and 11 of the Notes to Condensed Consolidated Financial Statements, “Rate Matters and Regulation,” “Commitments and Contingencies” and “Legal Proceedings,” respectively, which are incorporated herein by reference.


ITEM 1A. RISK FACTORS

     There were no material changes in our risk factors from December 31, 2015, through March 31, 2016. For additional information, see our 2015 Form 10-K.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.



34

Table of Contents

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.
 

ITEM 5. OTHER INFORMATION
    
Investors should note that we announce material financial information in SEC filings, press releases and public conference calls. In accordance with SEC guidance, we may also use the Investor Relations section of our website (http://www.WestarEnergy.com, under “Investors”) to communicate with investors about our company. It is possible that the financial and other information we post there could be deemed to be material information. The information on our website is not part of this document.


ITEM 6. EXHIBITS
 
31(a)
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 certifying the quarterly report provided for the period ended March 31, 2016
31(b)
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 certifying the quarterly report provided for the period ended March 31, 2016
32
 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 certifying the quarterly report provided for the quarter ended March 31, 2016 (furnished and not to be considered filed as part of the Form 10-Q)
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

35

Table of Contents

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.
 
 
 
 
 
WESTAR ENERGY, INC.
 
 
 
 
 
 
 
Date:
 
May 3, 2016
 
By:
 
/s/ Anthony D. Somma
 
 
 
 
 
 
Anthony D. Somma
 
 
 
 
 
 
Senior Vice President, Chief Financial Officer and Treasurer

36
Exhibit


Exhibit 31(a)
WESTAR ENERGY, INC.
CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark A. Ruelle, certify that:

1.
I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2016, of Westar Energy, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
a.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 
Date:
May 3, 2016
 
By:
/s/   Mark A. Ruelle     
 
 
 
 
Mark A. Ruelle
 
 
 
 
President and Chief Executive Officer
 
 
 
 
Westar Energy, Inc.
 
 
 
 
 


Exhibit


Exhibit 31(b)
WESTAR ENERGY, INC.
CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Anthony D. Somma, certify that:

1.
I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2016, of Westar Energy, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date:
May 3, 2016
 
By:
/s/ Anthony D. Somma
 
 
 
 
Anthony D. Somma
 
 
 
 
Senior Vice President, Chief Financial Officer and Treasurer
 
 
 
 
Westar Energy, Inc.
 
 
 
 
 



Exhibit


Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Westar Energy, Inc. (the Company) on Form 10-Q for the quarter ended March 31, 2016 (the Report), which this certification accompanies, Mark A. Ruelle, in my capacity as Director, President and Chief Executive Officer of the Company, and Anthony D. Somma, in my capacity as Senior Vice President, Chief Financial Officer and Treasurer of the Company, certify that the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:
May 3, 2016
 
By:
/s/   Mark A. Ruelle        
 
 
 
 
Mark A. Ruelle
 
 
 
 
President and Chief Executive Officer

Date:
May 3, 2016
 
By:
/s/   Anthony D. Somma
 
 
 
 
Anthony D. Somma
 
 
 
 
Senior Vice President, Chief Financial Officer and Treasurer