FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-7324
KANSAS GAS AND ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
KANSAS 48-1093840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 208
WICHITA, KANSAS 67201
(Address of Principal Executive Offices)
316/261-6611
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 12, 1998
Common Stock (No par value) 1,000 Shares
Registrant meets the conditions of General Instruction H(1)(a) and (b) to
Form 10-Q and is therefore filing this form with a reduced disclosure format.
KANSAS GAS AND ELECTRIC COMPANY
INDEX
Page
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets 3
Statements of Income 4 - 6
Statements of Comprehensive Income 7
Statements of Cash Flows 8 - 9
Statements of Common Shareowners' Equity 10
Notes to Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Part II. Other Information
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
KANSAS GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 42 $ 43
Accounts receivable, (net). . . . . . . . . . . . . . . . 81,424 66,654
Advances to parent company (net). . . . . . . . . . . . . 43,805 72,558
Inventories and supplies, at average cost . . . . . . . . 41,773 41,019
Prepaid expenses and other. . . . . . . . . . . . . . . . 29,727 17,165
Total Current Assets. . . . . . . . . . . . . . . . . . 196,771 197,439
PROPERTY, PLANT AND EQUIPMENT (net) . . . . . . . . . . . . 2,535,660 2,565,175
OTHER ASSETS:
Regulatory assets . . . . . . . . . . . . . . . . . . . . 275,656 278,568
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 55,004 75,926
Total Other Assets. . . . . . . . . . . . . . . . . . . 330,660 354,494
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $3,063,091 $3,117,108
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . . $ - $ 45,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . 88,614 81,986
Accrued liabilities . . . . . . . . . . . . . . . . . . . 32,729 32,745
Accrued income taxes. . . . . . . . . . . . . . . . . . . 7,544 4,212
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 5,912 4,032
Total Current Liabilities . . . . . . . . . . . . . . . 134,799 167,975
LONG-TERM LIABILITIES:
Long-term debt (net). . . . . . . . . . . . . . . . . . . 684,105 684,128
Deferred income taxes and investment tax credits. . . . . 808,551 820,838
Deferred gain from sale-leaseback . . . . . . . . . . . . 215,865 221,779
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 84,370 87,909
Total Long-term Liabilities . . . . . . . . . . . . . . 1,792,891 1,814,654
COMMITMENTS AND CONTINGENCIES
SHAREOWNERS' EQUITY (See Statements):
Common stock, without par value,
authorized and issued 1,000 shares . . . . . . . . . 1,065,634 1,065,634
Retained earnings . . . . . . . . . . . . . . . . . . . . 69,767 68,845
Total Shareowners' Equity . . . . . . . . . . . . . . . 1,135,401 1,134,479
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY . . . . . . . . . $3,063,091 $3,117,108
The Notes to Financial Statements are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
June 30,
1998 1997
SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 162,816 $ 148,826
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 36,791 26,540
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 126,025 122,286
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 39,117 48,123
Depreciation and amortization . . . . . . . . . . . . 24,676 28,569
Selling, general and administrative expense . . . . . 18,120 13,173
Total Operating Expenses. . . . . . . . . . . . . 81,913 89,865
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 44,112 32,421
OTHER INCOME (EXPENSE). . . . . . . . . . . . . . . . . 6,635 606
INCOME BEFORE INTEREST AND TAXES. . . . . . . . . . . . 50,747 33,027
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 11,505 11,525
Interest expense on short-term debt and other . . . . 828 999
Total Interest Expense. . . . . . . . . . . . . . 12,333 12,524
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . 38,414 20,503
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 9,907 5,011
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 28,507 $ 15,492
The Notes to Financial Statements are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 297,382 $ 292,617
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 62,711 52,764
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 234,671 239,853
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 74,661 93,301
Depreciation and amortization . . . . . . . . . . . . 49,109 57,492
Selling, general and administrative expense . . . . . 30,756 26,275
Total Operating Expenses. . . . . . . . . . . . . 154,526 177,068
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 80,145 62,785
OTHER INCOME (EXPENSE). . . . . . . . . . . . . . . . . 11,478 (831)
INCOME BEFORE INTEREST AND TAXES. . . . . . . . . . . . 91,623 61,954
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 22,994 23,007
Interest expense on short-term debt and other . . . . 1,698 2,556
Total Interest Expense. . . . . . . . . . . . . . 24,692 25,563
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . 66,931 36,391
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 16,009 9,727
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 50,922 $ 26,664
The Notes to Financial Statements are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
June 30,
1998 1997
SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 619,210 $ 639,115
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 139,541 117,854
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 479,669 521,261
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 161,513 174,255
Depreciation and amortization . . . . . . . . . . . . 115,040 115,711
Selling, general and administrative expense . . . . . 61,748 54,254
Total Operating Expenses. . . . . . . . . . . . . 338,301 344,220
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 141,368 177,041
OTHER INCOME (EXPENSE). . . . . . . . . . . . . . . . . 8,287 3,549
INCOME BEFORE INTEREST AND TAXES. . . . . . . . . . . . 149,655 180,590
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 46,049 46,012
Interest expense on short-term debt and other . . . . 3,530 9,945
Total Interest Expense. . . . . . . . . . . . . . 49,579 55,957
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . 100,076 124,633
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 23,690 34,648
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 76,386 $ 89,985
The Notes to Financial Statements are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
June 30,
1998 1997
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 28,507 $ 15,492
Other comprehensive income. . . . . . . . . . . . . . . . . - -
Comprehensive income. . . . . . . . . . . . . . . . . . . . $ 28,507 $ 15,492
Six Months Ended
June 30,
1998 1997
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 50,922 $ 26,664
Other comprehensive income. . . . . . . . . . . . . . . . . - -
Comprehensive income. . . . . . . . . . . . . . . . . . . . $ 50,922 $ 26,664
Twelve Months Ended
June 30,
1998 1997
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 76,386 $ 89,985
Other comprehensive income. . . . . . . . . . . . . . . . . - -
Comprehensive income. . . . . . . . . . . . . . . . . . . . $ 76,386 $ 89,985
The Notes to Financial Statements are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 50,922 $ 26,664
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 49,109 57,492
Amortization of gain from sale-leaseback. . . . . . . . . . (5,914) (5,367)
Changes in working capital items:
Accounts receivable, (net). . . . . . . . . . . . . . . . (14,770) 2,068
Inventories and supplies. . . . . . . . . . . . . . . . . (754) 27
Prepaid expenses and other. . . . . . . . . . . . . . . . (12,562) (17,046)
Accounts payable. . . . . . . . . . . . . . . . . . . . . 6,628 22,112
Accrued liabilities . . . . . . . . . . . . . . . . . . . (16) (4,215)
Accrued income taxes. . . . . . . . . . . . . . . . . . . 3,332 4,651
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,880 130
Changes in other assets and liabilities . . . . . . . . . . 16,592 14,802
Net cash flows from operating activities. . . . . . . . 94,447 101,318
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (net). . . . . . (28,116) (45,541)
Net cash flows (used in) investing activities . . . . . (28,116) (45,541)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (45,000) (212,300)
Advances to parent company (net). . . . . . . . . . . . . . 28,753 206,579
Retirements of long-term debt . . . . . . . . . . . . . . . (85) (65)
Dividends to parent company . . . . . . . . . . . . . . . . (50,000) (50,000)
Net cash flows (used in) financing activities. . . . . . (66,332) (55,786)
NET (DECREASE) IN CASH AND CASH EQUIVALENT. . . . . . . . . . (1) (9)
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . 43 44
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 42 $ 35
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 51,694 $ 54,342
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 19,220 20,100
The Notes to Financial Statements are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
June 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 76,386 $ 89,985
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 115,040 115,711
Amortization of gain from sale-leaseback. . . . . . . . . . (11,828) (10,187)
Changes in working capital items:
Accounts receivable, (net). . . . . . . . . . . . . . . . (7,821) 8,049
Inventories and supplies. . . . . . . . . . . . . . . . . 1,846 1,821
Prepaid expenses and other. . . . . . . . . . . . . . . . 4,310 (3,610)
Accounts payable. . . . . . . . . . . . . . . . . . . . . 17,683 12,453
Accrued liabilities . . . . . . . . . . . . . . . . . . . 489 (4,981)
Accrued income taxes. . . . . . . . . . . . . . . . . . . (8,335) 21,745
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,936 191
Changes in other assets and liabilities . . . . . . . . . . (9,223) 21,206
Net cash flows from operating activities. . . . . . . . 180,483 252,383
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (net). . . . . . (70,740) (82,520)
Net cash flows (used in) investing activities . . . . . (70,740) (82,520)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (10,000) (240,000)
Advances to parent company (net). . . . . . . . . . . . . . 349 170,149
Retirements of long-term debt . . . . . . . . . . . . . . . (85) (65)
Dividends to parent company . . . . . . . . . . . . . . . . (100,000) (100,000)
Net cash flows (used in) financing activities. . . . . . (109,736) (169,916)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . 7 (53)
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . 35 88
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 42 $ 35
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 71,770 $ 82,402
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 51,220 34,600
The Notes to Financial Statements are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF COMMON SHAREOWNERS' EQUITY
(Dollars in Thousands)
(Unaudited)
Accumulated
Other
Comprehensive
Common Retained Income
Stock Earnings (net)
BALANCE DECEMBER 31, 1995, 1,000 shares. . . . . . $1,065,634 $ 120,443 $ -
Net income . . . . . . . . . . . . . . . . . . . . 96,274
Dividend to parent company . . . . . . . . . . . . (100,000)
BALANCE DECEMBER 31, 1996, 1,000 shares. . . . . . 1,065,634 116,717 -
Net Income . . . . . . . . . . . . . . . . . . . . 52,128
Dividend to parent company . . . . . . . . . . . . (100,000)
BALANCE DECEMBER 31, 1997, 1,000 shares. . . . . . 1,065,634 68,845 -
Net Income . . . . . . . . . . . . . . . . . . . . 50,922
Dividend to parent company . . . . . . . . . . . . (50,000)
BALANCE JUNE 30, 1998, 1,000 shares. . . . . . . . $1,065,634 $ 69,767 $ -
The Notes to Financial Statements are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Kansas Gas and Electric Company (the company,
KGE) is a rate-regulated electric utility and wholly-owned subsidiary of
Western Resources, Inc. (Western Resources). The company is engaged
principally in the production, purchase, transmission, distribution, and sale
of electricity. The company serves approximately 280,000 electric customers
in southeastern Kansas. At December 31, 1997, the company had no employees.
All employees are provided by the company's parent, Western Resources which
allocates costs related to the employees of the company.
The company owns 47% of Wolf Creek Nuclear Operating Corporation
(WCNOC), the operating company for Wolf Creek Generating Station (Wolf Creek).
The company records its proportionate share of all transactions of WCNOC as it
does other jointly-owned facilities.
The company's unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q.
Accordingly, certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements and notes should be read in conjunction with the financial
statements and the notes included in the company's 1997 Annual Report on Form
10-K. The accounting and rates of the company are subject to requirements of
the Kansas Corporation Commission (KCC) and the Federal Energy Regulatory
Commission (FERC).
New Pronouncements: Effective January 1, 1998, the company adopted the
provisions of Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130). This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This statement established
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS 133 requires that all derivatives be recognized as either
assets or liabilities in the balance sheet and that these instruments be
measured at fair value. The company will adopt SFAS 133 no later than January
1, 2000. Management is presently evaluating the impact that adoption of SFAS
133 will have on the company's financial position and results of operations.
Reclassifications: Certain amounts in prior years have been reclassified
to conform with classifications used in the current year presentation.
2. WESTERN RESOURCES AND KANSAS CITY POWER & LIGHT COMPANY MERGER AGREEMENT
On February 7, 1997, Kansas City Power & Light Company (KCPL) and Western
Resources entered into an agreement whereby KCPL would be combined with
Western Resources. In December 1997, representatives of Western Resources'
financial advisor indicated that they believed it was unlikely that they would
be in a position to issue a fairness opinion required for the merger on the
basis of the previously announced terms.
On March 18, 1998, Western Resources and KCPL announced a restructuring
of their February 7, 1997 merger agreement which will result in the formation
of Westar Energy, a new regulated electric utility company. Under the terms
of the merger agreement, the electric utility operations of Western Resources
will be transferred to the company, and KCPL and the company will be merged
into NKC, Inc., a subsidiary of Western Resources. NKC, Inc. will be renamed
Westar Energy. In addition, under the merger agreement, KCPL shareowners will
receive $23.50 of Western Resources common stock per KCPL share, subject to a
collar mechanism, and one share of Westar Energy common stock per KCPL share.
Upon consummation of the combination, Western Resources will own approximately
80.1% of the outstanding equity of Westar Energy and KCPL shareowners will own
approximately 19.9%. As part of the combination, Westar Energy will assume
all of the electric utility related assets and liabilities of Western
Resources, KCPL, and the company.
Westar Energy will assume $2.7 billion in debt, consisting of $1.9
billion of indebtedness for borrowed money of Western Resources and the
company, and $800 million from KCPL. Long-term debt of Western Resources and
the company was $2.1 billion at June 30, 1998. Under the terms of the merger
agreement, it is intended that Western Resources will be released from its
obligations with respect to the company's debt to be assumed by Westar Energy.
Consummation of the merger is subject to customary conditions. On July
30, 1998 the Western Resources' shareowners and the shareowners of KCPL voted
to approve the amended merger agreement at special meetings of shareowners.
Western Resources estimates the transaction to close by mid-1999, subject to
receipt of all necessary approvals from regulatory and government agencies.
On August 7, 1998 Western Resources and KCPL filed an amended application
with the Federal Energy Regulatory Commission (FERC) to approve the Western
Resources/KCPL merger and the formation of Westar Energy.
KCPL is a public utility company engaged in the generation, transmission,
distribution, and sale of electricity to customers in western Missouri and
eastern Kansas. The company, KCPL and Western Resources have joint interests
in certain electric generating assets, including Wolf Creek.
At June 30, 1998, Western Resources had deferred approximately $7 million
related to the KCPL transaction. These costs will be included in the
determination of total consideration upon consummation of the transaction.
3. COMMITMENTS AND CONTINGENCIES
Manufactured Gas Sites: The company is associated with three former
manufactured gas sites which may contain coal tar and other potentially
harmful materials. The company and the Kansas Department of Health and
Environment (KDHE) entered into a consent agreement governing all future work
at the three sites. The terms of the consent agreement will allow the company
to investigate these sites and set remediation priorities based upon the
results of the investigations and risk analyses. At June 30, 1998, the costs
incurred for preliminary site investigation and risk assessment have been
minimal.
For additional information on Commitments and Contingencies, see Note 2
of the company's 1997 Annual Report on Form 10-K.
4. INCOME TAXES
Total income tax expense included in the Statements of Income reflects
the Federal statutory rate of 35%. The Federal statutory rate produces
effective income tax rates of 25.8% and 24.4% for the three month periods,
23.9% and 26.7% for the six month periods, and 23.7% and 27.8% for the twelve
month periods ended June 30, 1998 and 1997, respectively. The effective
income tax rates vary from the Federal statutory rate due to the permanent
differences, including the amortization of investment tax credits, and
accelerated amortization of certain deferred income taxes.
KANSAS GAS AND ELECTRIC COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
In Management's Discussion and Analysis we explain the general financial
condition and the operating results for the company. We explain:
- What factors affect our business
- What our earnings and costs were for the three, six and twelve month
periods ended June 30, 1998 and 1997
- Why these earnings and costs differed from period to period
- How our earnings and costs affect our overall financial condition
- Any other items that particularly affect our financial condition or
earnings
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations updates the information provided in the 1997 Annual
Report on Form 10-K and should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in
the company's 1997 Annual Report on Form 10-K.
Forward-Looking Statements: Certain matters discussed here and elsewhere
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," "expect" or words of similar meaning.
Forward-looking statements describe our future plans, objectives, expectations
or goals. Such statements address future events and conditions concerning
capital expenditures, earnings, litigation, rate and other regulatory matters,
possible corporate restructurings, mergers, acquisitions, dispositions,
liquidity and capital resources, interest and dividend rates, environmental
matters, changing weather, nuclear operations and accounting matters. What
happens in each case could vary materially from what we expect because of such
things as electric utility deregulation, including ongoing state and federal
activities; future economic conditions; legislative developments; our
regulatory and competitive markets; and other circumstances affecting
anticipated operations, sales and costs.
FINANCIAL CONDITION
General: Net income for the three and six months ended June 30, 1998 of
$28.5 million and $50.9 million increased substantially from net income of
$15.5 million and $26.7 million for the same periods in 1997, respectively.
The increases in net income were primarily due to increased electric sales
because of warmer than normal weather, lower operating and maintenance costs,
the completion of the amortization of phase-in revenues in December 1997, and
increased other income.
Net income for the twelve months ended June 30, 1998, of $76.4 million,
decreased from net income of $90.0 million for the comparable period of 1997.
The decrease was primarily attributable to a $36.3 million rate reduction on
February 1, 1997, and increased cost of sales.
OPERATING RESULTS
The following discussion explains significant changes in results of
sales, cost of sales, operating expenses, other income (expense), interest
expense and income taxes between the three, six and twelve month periods ended
June 30, 1998 and comparable periods of 1997.
Sales: Sales are based on sales volumes and rates authorized by the
Kansas Corporation Commission (KCC) and the Federal Energy Regulatory
Commission (FERC). Rates charged for the sale and delivery of electricity are
designed to recover the cost of service and allow investors a fair rate of
return. Our sales vary with levels of energy deliveries. Changing weather
affects the amount of energy our customers use. Very hot summers and very
cold winters prompt more demand, especially among our residential customers.
Mild weather reduces demand.
Many things will affect our future sales. They include:
- The weather
- Our electric rates
- Competitive forces
- Customer conservation efforts
- Wholesale demand
- The overall economy of our service area
The following table reflects changes in retail electric energy deliveries
for the three, six and twelve months ended June 30, 1998 from the comparable
periods of 1997.
3 Months 6 Months 12 Months
Ended Ended Ended
Residential 20.1% 11.4% 7.0%
Commercial 11.2% 7.6% 5.3%
Industrial 1.8% 2.9% 3.4%
Total Retail 9.4% 6.6% 5.0%
Sales increased 9.4% for the three months and 1.6% for the six months
ended June 30, 1998, primarily due to the increase in residential energy
deliveries as a result of warmer spring temperatures.
Partially offsetting these increases in sales was the implementation of
an electric rate reduction of $10.0 million on June 1, 1998.
Sales decreased 3.1% for the twelve months ended June 30, 1998, primarily
due to electric rate decreases we implemented on February 1, 1997. Although
energy deliveries increased, it was not enough to compensate for our lower
electric rates. Also contributing to the decrease in sales was the decrease
in wholesale and interchange sales.
Cost of Sales: Items included in cost of sales are fuel expense and
purchased power expense (electricity we purchase from others for resale).
Electric fuel costs are included in base rates. Therefore, if we wished
to recover an increase in fuel costs, we would have to file a request for
recovery in a rate filing with the KCC which could be denied in whole or in
part. Any increase in fuel costs from the projected average which the company
did not recover through rates would reduce our earnings. The degree of any
such impact would be affected by a variety of factors, however, and thus
cannot be predicted.
Due to warmer than normal weather throughout the Midwest and lack of
power available for purchase on the wholesale market, the wholesale power
market has seen extreme volatility in prices and availability. This
volatility could impact our cost of power purchases.
Actual cost of fuel to generate electricity (coal, nuclear fuel, natural
gas or oil) and the amount of power purchased from other utilities increased
for each of the three periods ending June 30, 1998. Cost of sales were $10.3
million, $9.9 million, and $21.7 million higher for the three, six and twelve
months ended June 30, 1998, respectively. With an increase in customer demand
for electricity and the availability of our La Cygne coal generation station
during 1998, we produced more electricity during the first six months of 1998
than in 1997. The increase in net generation caused our fossil fuel costs to
increase for the three and six month periods ended June 30, 1998.
The twelve month increase was primarily due to two of our generating
stations being unavailable to produce power. Our Wolf Creek nuclear
generating station was off-line in the fourth quarter of 1997 for scheduled
maintenance and our La Cygne coal generation station was off-line during 1997
for an extended maintenance outage. As a result, we purchased more power from
other utilities and burned more natural gas to generate electricity at our
facilities. Natural gas is more costly to burn than coal and nuclear fuel for
generating electricity.
OPERATING EXPENSES
Operating and Maintenance Expense: Total operating and maintenance
expense decreased $9.0 million, $18.6 million, and $12.7 million for the
three, six and twelve months ended June 30, 1998, respectively. The decreases
were attributable to a decrease in KGE's portion of costs shared with Western
Resources which are associated with the dispatching of electric power.
Depreciation and Amortization Expense: Depreciation and amortization
expense decreased $3.9 million and $8.4 million for the three and six months
ended June 30, 1998 from the same periods in 1997, respectively, due to the
completion of the amortization of phase-in revenues in December 1997. During
the first six months of 1997, we recorded $8.8 million of amortization for
phase-in revenues. Depreciation and amortization expense for the twelve
months ended June 30, 1998 decreased less than $0.7 million from 1997 due to
the additional amortization of $8.8 million relating to phase-in revenues
recorded during the fourth quarter of 1997.
Selling, General and Administrative Expense: Selling, general and
administrative expense increased $4.9 million, $4.5 million, and $7.5 million
for the three, six and twelve months ended June 30, 1998, respectively. Storm
related restoration expenses and increased labor costs attributed to the
increases.
Other Income and Deductions: Other income (expense) includes
miscellaneous income and expenses not directly related to our operations.
Other income and (expense) for the second quarter of 1998 increased $6.0
million. Other income and (expense) for the six and twelve months ended June
30, 1998, increased $12.3 million and $4.7 million, respectively.
Interest Expense: Interest expense includes the interest we paid on
outstanding debt. We realized a decrease in interest expense for each of the
three periods ending June 30, 1998. Our average outstanding short-term debt
balances were lower during all three periods which attributed to the decreases
in interest expense. The interest we paid on long-term debt remained
virtually unchanged for all three periods.
LIQUIDITY AND CAPITAL RESOURCES:
The company's liquidity is a function of its ongoing construction and
maintenance program designed to improve facilities which provide electric
service and meet future customer service requirements. Our ability to provide
the cash or debt to fund our capital expenditures depends upon many things,
including available resources, our financial condition and current market
conditions.
Other than operations, our primary source of short-term cash is from
short-term bank loans and unsecured lines of credit. At June 30, 1998, there
were no short-term borrowings compared to $45.0 million at December 31, 1997.
Proceeds from the repayment of advances to the company's parent company have
been used to repay all current outstanding short-term debt. The proceeds
received are reflected in the decrease in current assets, advances to parent
company (net) on the Balance Sheets.
MERGERS AND ACQUISITIONS
Western Resources and Kansas City Power & Light Company Merger Agreement:
On February 7, 1997, KCPL and Western Resources entered into an agreement
whereby KCPL would be combined with Western Resources. In December 1997,
representatives of Western Resources' financial advisor indicated that they
believed it was unlikely that they would be in a position to issue a fairness
opinion required for the merger on the basis of the previously announced
terms.
On March 18, 1998, Western Resources and KCPL announced a restructuring
of their February 7, 1997 merger agreement which will result in the formation
of Westar Energy, a new regulated electric utility company. Under the terms
of the merger agreement, the electric utility operations of Western Resources
will be transferred to the company, and KCPL and the company will be merged
into NKC, Inc., a subsidiary of Western Resources. NKC, Inc. will be renamed
Westar Energy. In addition, under the merger agreement, KCPL shareowners will
receive $23.50 of Western Resources common stock per KCPL share, subject to a
collar mechanism, and one share of Westar Energy common stock per KCPL share.
Upon consummation of the combination, Western Resources will own approximately
80.1% of the outstanding equity of Westar Energy and KCPL shareowners will own
approximately 19.9%. As part of the combination Westar Energy will assume all
of the electric utility related assets and liabilities of Western Resources,
KCPL, and the company.
Westar Energy will assume $2.7 billion in debt, consisting of $1.9
billion of indebtedness for borrowed money of Western Resources and the
company, and $800 million from KCPL. Long-term debt of Western Resources and
the company was $2.1 billion at June 30, 1998. Under the terms of the merger
agreement, it is intended that Western Resources will be released from its
obligations with respect to the company's debt to be assumed by Westar Energy.
Consummation of the merger is subject to customary conditions. On July
30, 1998 the Western Resources' shareowners and the shareowners of KCPL voted
to approve the amended merger agreement at special meetings of shareowners.
Western Resources estimates the transaction to close by mid-1999, subject to
receipt of all necessary approvals from regulatory and government agencies.
On August 7, 1998 Western Resources and KCPL filed an amended application
with the Federal Energy Regulatory Commission (FERC) to approve the Western
Resources/KCPL merger and the formation of Westar Energy.
KCPL is a public utility company engaged in the generation, transmission,
distribution, and sale of electricity to customers in western Missouri and
eastern Kansas. The company, KCPL and Western Resources have joint interests
in certain electric generating assets, including Wolf Creek. Following the
closing of the combination, Westar Energy is expected to have approximately
one million electric utility customers in Kansas and Missouri, approximately
$8.2 billion in assets and the ability to generate more than 8,000 megawatts
of electricity.
At June 30, 1998, Western Resources had deferred approximately $7 million
related to the KCPL transaction. These costs will be included in the
determination of total consideration upon consummation of the transaction.
OTHER INFORMATION
YEAR 2000 ISSUE: We are currently addressing the effect of the Year 2000
Issue on our reporting systems and operations. We face the Year 2000 Issue
because many computer systems and applications abbreviate dates by eliminating
the first two digits of the year, assuming that these two digits are always
"19". On January 1, 2000, some computer programs may incorrectly recognize
the date as January 1, 1900. Some computer systems may incorrectly process
critical financial and operational information, or stop processing altogether
because of the date abbreviation. Calculations using the year 2000 will
affect computer applications before January 1, 2000.
We have recognized the potential adverse effects the Year 2000 Issue
could have on our company. In 1996, we established a formal Year 2000
remediation program to investigate and correct these problems in the main
computer systems of our company. In 1997, we expanded the program to include
all business units and departments of our company. The goal of our program is
to identify and assess every critical system potentially affected by the Year
2000 date change and to repair or replace those systems found to be
incompatible with Year 2000 dates.
We have completed approximately 75% of our contingency plan for all
business units and departments of our company with the exception of WCNOC.
WCNOC is currently pursuing their own contingency plan and their management
does not believe that WCNOC will be substantially impacted. Our contingency
plan includes pre-established action plans to work around any unforeseen
operational impacts surrounding the century date change.
We have identified four major areas of risk: 1) Vendors and suppliers, 2)
Banks and Financial Institutions, 3) Telecommunications, including phone
systems and cellular phones and 4) Large customers. We are addressing these
risks in our contingency plan and expect no significant operational impact on
our ability to serve our customers, pay suppliers, or operate other areas of
our business.
We plan to have our Year 2000 readiness efforts substantially completed
by the end of 1998, excluding WCNOC. WCNOC is pursuing their own Year 2000
plan. Western Resources currently estimates that total costs to update all of
its and our systems for year 2000 compliance will be approximately $12
million. As of June 30, 1998 Western Resources has expensed approximately $3
million of these costs and based on what they now know, they expect to incur
an additional $9 million in 1998 to complete our efforts. Western Resources
has allocated a portion of these costs to our company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
KANSAS GAS AND ELECTRIC COMPANY
Part II Other Information
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Information required by Item 4 is omitted pursuant to General
Instruction H(2)(b) to Form 10-Q.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
for 12 Months Ended June 30, 1998 (filed
electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
KANSAS GAS AND ELECTRIC COMPANY
Date August 12, 1998 By /s/ Richard D. Terrill
Richard D. Terrill
Secretary, Treasurer and
General Counsel
Exhibit 12
KANSAS GAS AND ELECTRIC COMPANY
Computations of Ratio of Earnings to Fixed Charges and
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred and Preference Dividend Requirements
(Dollars in Thousands)
Unaudited
Twelve
Months
Ended
June 30, Year Ended December 31,
1998 1997 1996 1995 1994 1993
Net Income. . . . . . . . . . . . . $ 76,386 $ 52,128 $ 96,274 $110,873 $104,526 $108,103
Taxes on Income . . . . . . . . . . 23,690 17,408 36,258 51,787 55,349 46,896
Net Income Plus Taxes. . . . . 100,076 69,536 132,532 162,660 159,875 154,999
Fixed Charges:
Interest on Long-Term Debt. . . . 46,049 46,062 46,304 47,073 47,827 53,908
Interest on Other Indebtedness. . 3,530 4,388 11,758 5,190 5,183 6,075
Interest on Corporate-owned
Life Insurance Borrowings . . . 33,630 31,253 27,636 25,357 20,990 11,865
Interest Applicable to Rentals. . 24,904 25,143 25,539 25,375 25,096 24,967
Total Fixed Charges . . . . . 108,113 106,846 111,237 102,995 99,096 96,815
Earnings (1). . . . . . . . . . . . $208,189 $176,382 $243,769 $265,655 $258,971 $251,814
Ratio of Earnings to Fixed Charges. 1.93 1.65 2.19 2.58 2.61 2.60
(1) Earnings are deemed to consist of net income to which has been added income taxes (including net
deferred investment tax credit) and fixed charges. Fixed charges consist of all interest on
indebtedness, amortization of debt discount and expense, and the portion of rental expense which
represents an interest factor.
5
1,000
6-MOS
DEC-31-1998
JUN-30-1998
42
0
83,285
1,861
41,773
196,771
3,626,965
1,091,305
3,063,091
134,799
684,105
0
0
1,065,634
69,767
3,063,091
297,382
297,382
62,711
217,237
0
0
24,692
66,931
16,009
50,922
0
0
0
50,922
0
0
