FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-7324
KANSAS GAS AND ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
KANSAS 48-1093840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 208
WICHITA, KANSAS 67201
(Address of Principal Executive Offices)
316/261-6611
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 8, 1995
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.
<page 2>
KANSAS GAS AND ELECTRIC COMPANY
INDEX
Page
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets 3
Statements of Income 4 - 5
Statements of Cash Flows 6 - 7
Statements of Capitalization 8
Statements of Common Stock Equity 9
Notes to Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
<page 3>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
March 31, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . . . . . . . . . $3,407,455 $3,390,406
Less - Accumulated depreciation . . . . . . . . . . . . . 851,335 833,953
---------- ----------
2,556,120 2,556,453
Construction work in progress . . . . . . . . . . . . . . 30,979 32,874
Nuclear fuel (net). . . . . . . . . . . . . . . . . . . . 42,263 39,890
---------- ----------
Net utility plant . . . . . . . . . . . . . . . . . . . 2,629,362 2,629,217
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Decommissioning trust . . . . . . . . . . . . . . . . . . 17,827 16,944
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 8,628 11,561
---------- ----------
26,455 28,505
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . 57 47
Accounts receivable and unbilled revenues (net) . . . . . 61,439 67,833
Advances to parent company . . . . . . . . . . . . . . . 72,442 64,393
Fossil fuel, at average cost. . . . . . . . . . . . . . . 14,344 13,752
Materials and supplies, at average cost . . . . . . . . . 30,465 30,921
Prepayments and other current assets. . . . . . . . . . . 10,574 16,662
---------- ----------
189,321 193,608
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes . . . . . . . . . . . . . . 102,789 102,789
Deferred coal contract settlement costs . . . . . . . . . 17,114 17,944
Phase-in revenues . . . . . . . . . . . . . . . . . . . . 57,020 61,406
Other deferred plant costs. . . . . . . . . . . . . . . . 31,723 31,784
Corporate-owned life insurance (net). . . . . . . . . . . 9,592 9,350
Unamortized debt expense. . . . . . . . . . . . . . . . . 27,230 27,777
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 38,140 40,430
---------- ----------
283,608 291,480
---------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $3,128,746 $3,142,810
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see Statements) . . . . . . . . . . . . . . $1,943,072 $1,925,196
---------- ----------
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . . 10,000 50,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . 39,530 49,093
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . 37,886 15,737
Accrued interest. . . . . . . . . . . . . . . . . . . . . 13,787 8,337
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 10,186 11,160
---------- ----------
111,389 134,327
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . . . . . . . . . 684,763 689,169
Deferred investment tax credits . . . . . . . . . . . . . 75,408 74,841
Deferred gain from sale-leaseback . . . . . . . . . . . . 249,931 252,341
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 64,183 66,936
---------- ----------
1,074,285 1,083,287
COMMITMENTS AND CONTINGENCIES (Note 2) ---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . $3,128,746 $3,142,810
========== ==========
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
</TABLE>
<page 4>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1995 1994
<S> <C> <C>
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 138,557 $ 136,604
---------- ----------
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 18,229 20,839
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 4,688 3,863
Power purchased . . . . . . . . . . . . . . . . . . . . . 683 1,252
Other operations. . . . . . . . . . . . . . . . . . . . . 30,405 30,631
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 12,267 11,340
Depreciation and amortization . . . . . . . . . . . . . . 18,353 19,119
Amortization of phase-in revenues . . . . . . . . . . . . 4,386 4,386
Taxes (see Statements):
Federal income. . . . . . . . . . . . . . . . . . . . . 7,270 6,469
State income . . . . . . . . . . . . . . . . . . . . . 2,075 1,710
General . . . . . . . . . . . . . . . . . . . . . . . . 11,634 12,117
---------- ----------
Total operating expenses. . . . . . . . . . . . . . . 109,990 111,726
---------- ----------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 28,567 24,878
---------- ----------
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (1,716) (1,235)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 2,099 858
Income taxes (net) (see Statements) . . . . . . . . . . . 1,635 1,787
---------- ----------
Total other income and deductions . . . . . . . . . . 2,018 1,410
---------- ----------
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 30,585 26,288
---------- ----------
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 11,768 12,093
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,505 1,353
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (560) (368)
---------- ----------
Total interest charges. . . . . . . . . . . . . . . . 12,713 13,078
---------- ----------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 17,872 $ 13,210
========== ==========
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
</TABLE>
<page 5>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Twelve Months Ended
March 31,
1995 1994
<S> <C> <C>
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 621,833 $ 615,120
---------- ----------
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 87,773 92,998
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 14,387 14,431
Power purchased . . . . . . . . . . . . . . . . . . . . . 6,575 9,109
Other operations. . . . . . . . . . . . . . . . . . . . . 114,834 122,041
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 48,915 47,215
Depreciation and amortization . . . . . . . . . . . . . . 70,691 75,811
Amortization of phase-in revenues . . . . . . . . . . . . 17,544 17,545
Taxes (see Statements):
Federal income. . . . . . . . . . . . . . . . . . . . . 51,013 40,805
State income . . . . . . . . . . . . . . . . . . . . . 12,792 9,863
General . . . . . . . . . . . . . . . . . . . . . . . . 44,609 45,817
---------- ----------
Total operating expenses. . . . . . . . . . . . . . . 469,133 475,635
---------- ----------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 152,700 139,485
---------- ----------
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (5,835) 5,137
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 6,320 3,853
Income taxes (net) (see Statements) . . . . . . . . . . . 7,138 5,568
---------- ----------
Total other income and deductions . . . . . . . . . . 7,623 14,558
---------- ----------
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 160,323 154,043
---------- ----------
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 47,502 51,897
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 5,335 5,871
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (1,702) (1,307)
---------- ----------
Total interest charges. . . . . . . . . . . . . . . . 51,135 56,461
---------- ----------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 109,188 $ 97,582
========== ==========
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
</TABLE>
<page 6>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 17,872 $ 13,210
Depreciation and amortization . . . . . . . . . . . . . . . 18,353 19,119
Other amortization (including nuclear fuel) . . . . . . . . 3,534 2,806
Gain on sales of utility plant (net of tax) . . . . . . . . (940) -
Deferred taxes and investment tax credits (net) . . . . . . (5,282) 1,907
Amortization of phase-in revenues . . . . . . . . . . . . . 4,386 4,386
Corporate-owned life insurance. . . . . . . . . . . . . . . (4,976) (4,519)
Amortization of gain from sale-leaseback. . . . . . . . . . (2,410) (2,410)
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . 6,394 (26,956)
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . (592) (4,662)
Accounts payable. . . . . . . . . . . . . . . . . . . . . (9,563) (4,891)
Interest and taxes accrued. . . . . . . . . . . . . . . . 27,599 36,519
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 5,570 4,891
Changes in other assets and liabilities . . . . . . . . . . 7,480 (4,998)
---------- ----------
Net cash flows from operating activities. . . . . . . . 67,425 34,402
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 21,240 18,500
Sales of Utility plant. . . . . . . . . . . . . . . . . . . (1,583) -
Corporate-owned life insurance policies . . . . . . . . . . 417 281
Death proceeds of corporate-owned life insurance. . . . . . (250) -
---------- ----------
Net cash flows used in investing activities . . . . . . 19,824 18,781
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (40,000) (124,200)
Advances to parent company (net). . . . . . . . . . . . . . (8,049) 61,847
Bonds issued. . . . . . . . . . . . . . . . . . . . . . . . - 113,982
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (25) -
Other long-term debt (net). . . . . . . . . . . . . . . . . - (67,893)
Borrowings against life insurance policies (net). . . . . . 483 645
---------- ----------
Net cash flows from (used in) financing activities . . . (47,591) (15,619)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . 10 2
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 47 63
---------- ----------
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 57 $ 65
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 6,058 $ 5,993
Income taxes . . . . . . . . . . . . . . . . . . . . . . . - -
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
</TABLE>
<page 7>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Twelve Months Ended
March 31,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 109,188 $ 97,582
Depreciation and amortization . . . . . . . . . . . . . . . 70,691 75,811
Other amortization (including nuclear fuel) . . . . . . . . 11,633 12,184
Gain on sales of utility plant (net of tax) . . . . . . . . (940) -
Deferred taxes and investment tax credits (net) . . . . . . 18,160 22,115
Amortization of phase-in revenues . . . . . . . . . . . . . 17,544 17,545
Corporate-owned life insurance. . . . . . . . . . . . . . . (17,703) (22,015)
Amortization of gain from sale-leaseback. . . . . . . . . . (9,640) (9,640)
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . (23,371) (706)
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . (2,088) 419
Accounts payable. . . . . . . . . . . . . . . . . . . . . (6,674) 2,447
Interest and taxes accrued. . . . . . . . . . . . . . . . (4,412) 6,490
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (243) (16,700)
Changes in other assets and liabilities . . . . . . . . . . 1,297 (14,818)
---------- ----------
Net cash flows from operating activities. . . . . . . . 163,442 170,714
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 92,620 69,851
Sales of Utility plant. . . . . . . . . . . . . . . . . . . (1,583) -
Corporate-owned life insurance policies . . . . . . . . . . 26,554 27,119
Death proceeds of corporate-owned life insurance. . . . . . (250) (10,157)
---------- ----------
Net cash flows used in investing activities . . . . . . 117,341 86,813
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (21,600) (90,200)
Advances to parent company (net). . . . . . . . . . . . . . 58,503 (52,771)
Bonds issued. . . . . . . . . . . . . . . . . . . . . . . . 46,440 178,982
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (46,465) (140,000)
Other long-term debt (net). . . . . . . . . . . . . . . . . - (13,980)
Borrowings against life insurance policies (net). . . . . . 42,013 183,284
Revolving credit agreement (net). . . . . . . . . . . . . . - (150,000)
Dividends to parent company . . . . . . . . . . . . . . . . (125,000) -
---------- ----------
Net cash flows from (used in) financing activities . . . (46,109) (84,685)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . (8) (784)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 65 849
---------- ----------
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 57 $ 65
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 68,609 $ 72,660
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 30,509 29,354
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
</TABLE>
<page 8>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CAPITALIZATION
(Dollars in Thousands)
<CAPTION>
March 31, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
COMMON STOCK EQUITY (see Statements):
Common stock, without par value, authorized and issued
1,000 shares. . . . . . . . . . . . . . . . . . . . . . . $1,065,634 $1,065,634
Retained earnings . . . . . . . . . . . . . . . . . . . . . 177,442 159,570
---------- ----------
Total common stock equity . . . . . . . . . . . . . . . . 1,243,076 64% 1,225,204 64%
---------- ----------
</TABLE>
<TABLE>
LONG-TERM DEBT:
First Mortgage Bonds:
<S> <C> <C> <C> <C> <C>
Series Due 1995 1994
5-5/8% 1996 $ 16,000 $ 16,000
7.6% 2003 135,000 135,000
6-1/2% 2005 65,000 65,000
6.20% 2006 100,000 100,000
316,000 316,000
Pollution Control Bonds:
5.10% 2023 13,957 13,982
Variable (a) 2027 21,940 21,940
7.0% 2031 327,500 327,500
Variable (a) 2032 14,500 14,500
Variable (a) 2032 10,000 10,000
387,897 387,922
---------- ----------
Total bonds. . . . . . . . . . . . . . . . . . . . . . 703,897 703,922
Less:
Unamortized premium and discount (net). . . . . . . . . . 3,901 3,930
---------- ----------
Total long-term debt . . . . . . . . . . . . . . . . . 699,996 36% 699,992 36%
---------- ----------
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . $1,943,072 100% $1,925,196 100%
========== ==========
(a) Market-Adjusted Tax Exempt Securities (MATES). As of March 31, 1995, the rate
on these bonds ranged from 4.05% to 4.08%.
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
</TABLE>
<page 9>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF COMMON STOCK EQUITY
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Common Retained
Stock Earnings
<S> <C> <C>
BALANCE DECEMBER 31, 1992, 1,000 shares. . . . . . . $1,065,634 $ 71,941
Net income . . . . . . . . . . . . . . . . . . . . . 108,103
---------- ----------
BALANCE DECEMBER 31, 1993, 1,000 shares. . . . . . . 1,065,634 180,044
Net income . . . . . . . . . . . . . . . . . . . . . 104,526
Dividend to parent company . . . . . . . . . . . . . (125,000)
---------- ----------
BALANCE DECEMBER 31, 1994, 1,000 shares. . . . . . . 1,065,634 159,570
Net Income . . . . . . . . . . . . . . . . . . . . . 17,872
---------- ----------
Balance March 31, 1995, 1,000 shares . . . . . . . . $1,065,634 $ 177,442
========== ==========
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
</TABLE>
<page 10>
KANSAS GAS AND ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES AND OTHER INFORMATION
General: On March 31, 1992, Western Resources, Inc. (Western Resources)
through its wholly-owned subsidiary KCA Corporation (KCA), acquired all of the
outstanding common and preferred stock of Kansas Gas and Electric Company
(KG&E) for $454 million in cash and 23,479,380 shares of Western Resources
common stock (the Merger). Simultaneously, KCA and KG&E merged and adopted
the name of Kansas Gas and Electric Company.
The Company owns 47% of the Wolf Creek Nuclear Operating Corporation
(WCNOC), the operating company for the Wolf Creek Generating Station (Wolf
Creek). The Company records its proportionate share of all transactions of
WCNOC as it does other jointly-owned facilities.
Cash Surrender Value of Life Insurance Contracts: The following amounts
related to corporate-owned life insurance contracts (COLI), primarily with one
highly rated major insurance company, are recorded on the balance sheets:
March 31, December 31,
1995 1994
(Dollars in Millions)
Cash surrender value of contracts. . $321.3 $320.6
Borrowings against contracts . . . . (311.7) (311.2)
------ ------
COLI (net) . . . . . . . . . . . $ 9.6 $ 9.4
COLI borrowings will be repaid upon receipt of proceeds from death
benefits under contracts. Increases in the cash surrender value of contracts,
resulting from premiums and investment earnings, are recognized as income on a
tax free basis in Corporate-owned Life Insurance (net) on the Statements of
Income. For the three and twelve months ended March 31, 1995, income from
increases in cash surrender value, net of premium and administrative expenses,
was $3.9 million and $16.1 million, respectively, compared to $3.5 million and
$19.9 million for the three and twelve months ended March 31, 1994,
respectively. Interest expense on COLI borrowings is recorded as a tax
deductible expense in Corporate-owned Life Insurance (net) on the Statements
of Income. For the three and twelve months ended March 31, 1995, interest
expense on COLI borrowings was $5.6 million and $21.9 million, respectively,
compared to $4.7 million and $14.8 million for the three and twelve months
ended March 31, 1994, respectively.
Statements of Cash Flows: For purposes of the Statements of Cash Flows,
cash and cash equivalents include cash on hand and highly liquid
collateralized debt instruments purchased with maturities of three months or
less.
<page 11>
2. COMMITMENTS AND CONTINGENCIES
Manufactured Gas Sites: The Company was previously associated with six
former manufactured gas sites which contain coal tar and other potentially
harmful materials. The Company and the Kansas Department of Health and
Environment (KDHE) conducted preliminary assessments of these sites at minimal
cost. The results of the preliminary investigations determined the Company
does not have a connection to two of the sites.
The Company and KDHE entered into a consent agreement governing all
future work at the four remaining 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 analysis.
The prioritized sites will be investigated over a 10 year period. The
agreement will allow the Company to set mutual objectives with the KDHE in
order to expedite effective response activities and to control costs and
environmental impact. The Company is aware of other utilities in Region VII
of the EPA (Kansas, Missouri, Nebraska, and Iowa) which have incurred
remediation costs for such sites ranging between $500,000 and $10 million,
depending on the site and that the KCC has permitted another Kansas utility to
recover its remediation costs through rates. To the extent that such
remediation costs are not recovered through rates, the costs could be material
to the Company's financial position or results of operations depending on the
degree of remediation and number of years over which the remediation must be
completed.
Spent Nuclear Fuel Disposal: Under the Nuclear Waste Policy Act of 1982,
the U.S. Department of Energy (DOE) is responsible for the ultimate storage
and disposal of spent nuclear fuel removed from nuclear reactors. Under a
contract with the DOE for disposal of spent nuclear fuel, the Company pays a
quarterly fee to DOE of one mill per kilowatthour on net nuclear generation.
These fees are included as part of nuclear fuel expense.
The Company along with the other co-owners of Wolf Creek are among 14
companies that filed a lawsuit on June 20, 1994, seeking an interpretation of
the DOE's obligation to begin accepting spent nuclear fuel for disposal in
1998. The Federal Nuclear Waste Policy Act requires DOE ultimately to accept
and dispose of nuclear utilities' spent fuel. The DOE has filed a motion to
have this case dismissed. The issue to be decided in this case is whether DOE
must begin accepting spent fuel in 1998 or at a future date. Wolf Creek
contains an on-site spent fuel storage facility which, under current
regulatory guidelines, provides space for the storage of spent fuel through
the year 2006 while still maintaining full core off-load capability. The
Company believes adequate additional storage space can be obtained as
necessary.
Decommissioning: On June 9, 1994, the KCC issued an order approving the
decommissioning costs of the 1993 Wolf Creek Decommissioning Cost Study which
estimates the Company's share of Wolf Creek decommissioning costs, under the
immediate dismantlement method, to be approximately $595 million primarily
during the period 2025 through 2033, or approximately $174 million in 1993
dollars. These costs were calculated using an assumed inflation rate of 3.45%
over the remaining service life, in 1993, of 32 years.
<page 12>
Decommissioning costs are being charged to operating expenses in
accordance with the KCC order. Electric rates charged to customers provide
for recovery of these decommissioning costs over the life of Wolf Creek.
Amounts so expensed ($3.5 million in 1994 increasing annually to $5.5 million
in 2024) and earnings on trust fund assets are deposited in an external trust
fund. The assumed return on trust assets is 5.9%.
The Company's investment in the decommissioning fund, including
reinvested earnings was $17.8 million and $16.9 million at March 31, 1995 and
December 31, 1994, respectively. These amounts are reflected in
Decommissioning Trust, and the related liability is included in Deferred
Credits and Other Liabilities, Other, on the Balance Sheets.
The Company carries $118 million in premature decommissioning insurance.
The insurance coverage has several restrictions. One of these is that it can
only be used if Wolf Creek incurs an accident exceeding $500 million in
expenses to safely stabilize the reactor, to decontaminate the reactor and
reactor station site in accordance with a plan approved by the Nuclear
Regulatory Commission (NRC), and to pay for on-site property damages. If the
amount designated as decommissioning insurance is needed to implement the
NRC-approved plan for stabilization and decontamination, it would not be
available for decommissioning purposes.
Nuclear Insurance: The Price-Anderson Act limits the combined public
liability of the owners of nuclear power plants to $8.9 billion for a single
nuclear incident. The Wolf Creek owners (Owners) have purchased the maximum
available private insurance of $200 million and the balance is provided by an
assessment plan mandated by the NRC. Under this plan, the Owners are jointly
and severally subject to a retrospective assessment of up to $79.3 million
($37.3 million, Company's share) in the event there is a major nuclear
incident involving any of the nation's licensed reactors. This assessment is
subject to an inflation adjustment based on the Consumer Price Index and
applicable premium taxes. There is a limitation of $10 million ($4.7 million,
Company's share) in retrospective assessments per incident per year.
The Owners carry decontamination liability, premature decommissioning
liability, and property damage insurance for Wolf Creek totalling
approximately $2.8 billion ($1.3 billion, Company's share). This insurance is
provided by a combination of "nuclear insurance pools" ($500 million) and
Nuclear Electric Insurance Limited (NEIL) ($2.3 billion). In the event of an
accident, insurance proceeds must first be used for reactor stabilization and
site decontamination. The Company's share of any remaining proceeds can be
used for property damage up to $1.2 billion (Company's share) and premature
decommissioning costs up to $118 million (Company's share) in excess of funds
previously collected for decommissioning (as discussed under
"Decommissioning").
The Owners also carry additional insurance with NEIL to cover costs of
replacement power and other extra expenses incurred during a prolonged outage
resulting from accidental property damage at Wolf Creek. If losses incurred
at any of the nuclear plants insured under the NEIL policies exceed premiums,
reserves, and other NEIL resources, the Company may be subject to
retrospective assessments of approximately $13 million per year.
<page 13>
Although the Company maintains various insurance policies to provide
coverage for potential losses and liabilities resulting from an accident or an
extended outage, the Company's insurance coverage may not be adequate to cover
the costs that could result from a catastrophic accident or extended outage at
Wolf Creek. Any substantial losses not covered by insurance, to the extent
not recoverable through rates, would have a material adverse effect on the
Company's financial position and results of operations.
Clean Air Act: The Clean Air Act Amendments of 1990 (the Act) require a
two-phase reduction in sulfur dioxide and oxides of nitrogen (NOx) emissions
effective in 1995 and 2000 and a probable reduction in toxic emissions. To
meet the monitoring and reporting requirements under the acid rain program,
the Company installed continuous monitoring and reporting equipment at a total
cost of approximately $2.3 million. The Company does not expect additional
equipment to reduce sulfur emissions to be necessary under Phase II. Although
the Company has no units subject to Phase I regulations, the owners obtained
an early substitution permit to bring the co-owned La Cygne Station under the
Phase I regulations.
The NOx and air toxic limits, which were not set in the law, will be
specified in future EPA regulations. The EPA's proposed NOx regulations were
ruled invalid by the U.S. Court of Appeals for the District of Columbia
Circuit and until such time as the EPA resubmits new proposed regulations, the
Company will be unable to determine its compliance options or related
compliance costs.
Federal Income Taxes: During 1991, the Internal Revenue Service (IRS)
completed an examination of the Company's federal income tax returns for the
years 1984 through 1988. In October 1993, the Company received another
examination report for the years 1989 and 1990 covering the same issues
identified in the previous examination report. In April 1995, after
approximately four years of negotiations with the Appeals Office of the IRS,
the Company reached agreement on the ultimate disposition of the issues raised
in the examination reports. Based on the settlement agreement, management
believes that adequate tax reserves have been provided and the settlement will
have no effect on the Company's financial position or results of operations.
Fuel Commitments: To supply a portion of the fuel requirements for its
generating plants, the Company has entered into various commitments to obtain
nuclear fuel, coal, and natural gas. Some of these contracts contain
provisions for price escalation and minimum purchase commitments. At
December 31, 1994, WCNOC's nuclear fuel commitments (Company's share) were
approximately $12.6 million for uranium concentrates expiring at various times
through 1997, $122.9 million for enrichment expiring at various times through
2014, and $56.5 million for fabrication through 2012. At December 31, 1994,
the Company's coal and natural gas contract commitments in 1994 dollars under
the remaining terms of the contracts were $721 million and $9 million,
respectively. The largest coal contract was renegotiated in early 1993 and
expires in 2020, with the remaining coal contracts expiring at various times
through 2013. The majority of natural gas contracts expire in 1995 but have
automatic one-year extension provisions. In the normal course of business,
additional commitments and spot market purchases will be made to obtain
adequate fuel supplies.
<page 14>
Energy Act: As part of the 1992 Energy Policy Act, a special assessment
is being collected from utilities for a uranium enrichment, decontamination,
and decommissioning fund. The Company's portion of the assessment for Wolf
Creek is approximately $7 million, payable over 15 years. Management expects
such costs to be recovered through the ratemaking process.
3. INCOME TAXES
Total income tax expense included in the Statements of Income reflects
the Federal statutory rate of 35 percent. The Federal statutory rate produces
effective income tax rates of 30.1% and 32.6% for the three month periods and
34.2% and 31.6% for the twelve month periods ended March 31, 1995 and 1994,
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.
<page 15>
KANSAS GAS AND ELECTRIC COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with Item 7 of the
Company's Annual Report on Form 10-K for 1994.
The following updates the information provided in the 1994 Form 10-K, and
analyzes the changes in the results of operations between the three and twelve
month periods ended March 31, 1995 and comparable periods of 1994.
FINANCIAL CONDITION
General: The Company had net income of $17.9 million for the first
quarter of 1995 compared to $13.2 million for the first quarter in 1994. The
increase in net income was primarily due to higher revenues, resulting from
increased commercial and industrial sales, and lower fuel and purchased power
expenses. Also contributing to the increase was a $1.6 million gain from the
sale of rail cars.
Net income for the twelve months ended March 31, 1995, of $109.2 million,
increased from net income of $97.6 million for the comparable period of 1994.
The increase was primarily due to increased sales to all retail customer
classes. Also contributing to the increase in net income were lower fuel and
purchase power expenses, and reduced other operations expenses.
Liquidity and Capital Resources: The KG&E common and preferred stock was
redeemed in connection with the Merger, leaving 1,000 shares of common stock
held by Western Resources. The debt structure of the Company and available
sources of funds were not affected by the Merger.
The Company's short-term financing requirements are satisfied through
short-term bank loans and borrowings under unsecured lines of credit
maintained with banks. At March 31, 1995, short-term borrowing amounted to
$10 million compared to $50 million at December 31, 1994.
OPERATING RESULTS
The following discussion explains variances for the three and twelve
months ended March 31, 1995, to the comparable periods of 1994.
Revenues: The Company's revenues vary with levels of usage as a result
of changing weather conditions during comparable periods and are sensitive to
seasonal fluctuations between consecutive periods.
<page 16>
Increase (decrease) in electric sales volumes:
3 Months 12 Months
Ended Ended
Residential (3.2)% 1.4%
Commercial 1.5% 3.6%
Industrial 9.8% 5.2%
Total Retail 3.6% 3.6%
Wholesale & Interchange (42.5)% (44.1)%
Total electric sales (8.4)% (7.7)%
Revenues for the first quarter of 1995 increased approximately one
percent to $138.6 million, compared to first quarter 1994 revenues of $136.6
million, primarily due to increases in commercial and industrial sales as a
result of customer growth. Partially offsetting these increases were
decreases in residential and wholesale and interchange sales due to the milder
winter temperatures experienced during the first quarter of 1995 compared to
last year. Also offsetting the increase was an additional $1 million
(Company's share) of amortization of the final merger refund for the three
months ended March 31, 1995 compared to 1994.
Revenues for the twelve months ended March 31, 1995, increased
approximately one percent to $621.8 million from revenues of $615.1 million
for the comparable period of 1994. The increase can be attributed to
increased sales in all retail customer classes as a result of customer growth.
Partially offsetting these increases in retail sales was a decrease in
wholesale and interchange sales. The decrease was primarily due to the higher
sales during the twelve months ended March 31, 1994, to other utilities while
their generating units were down due to the 1993 floods. Also offsetting the
increase for the twelve months ended March 31, 1995, was an additional $2.8
million (Company's share) of amortization of the final merger refund.
Operating Expenses: Total operating expenses decreased approximately two
percent for the first quarter and approximately one percent for the twelve
months ended March 31, 1995 compared to the same periods of 1994. These
decreases can be attributed to decreases in fuel and purchase power expenses.
As discussed previously, the decrease is primarily due to lower sales to
wholesale and interchange customers.
Partially offsetting these decreases for the twelve months ended March
31, 1995, was increased federal income taxes due to the completion at December
31, 1993, of the accelerated amortization of deferred income tax reserves
relating to the allowance for borrowed funds used during construction
capitalized for Wolf Creek. The completion of the amortization of these
deferred income tax reserves increased income taxes and thereby reduced net
income by approximately $9 million for the twelve months ended March 31, 1995
compared to 1994.
Other Income and Deductions: Other income and deductions, net of taxes,
increased in the first quarter of 1995 compared to the first quarter of 1994
primarily as a result of a $1.6 million gain realized from the sale of rail
cars.
<page 17>
Other income and deductions, net of taxes, decreased to $7.6 million for
the twelve months ended March 31, 1995 from $14.6 million for the twelve
months ended March 31, 1994. The decrease was primarily due to additional
interest expense on increased COLI borrowings. Also contributing to the
decrease was the receipt of death benefit proceeds from COLI policies during
the twelve months ended March 31, 1994.
Interest Expense: Interest expense decreased approximately three percent
for the first quarter and approximately nine percent for the twelve months
ended March 31, 1995 compared to the same periods of 1994. These decreases
resulted primarily from lower interest rates on variable-rate debt due to
refinancing of higher cost fixed-rate debt. Also accounting for the decrease
was the impact of increased COLI borrowings which reduce the need for other
long-term debt and thereby reduced interest expense. COLI interest is
reflected in Other Income and Deductions on the Income Statement.
OTHER INFORMATION
Merger Implementation: In accordance with the KCC Merger order,
amortization of the acquisition adjustment will commence August 1995. The
amortization will amount to approximately $20 million (pre-tax) per year for
40 years. Western Resources and the Company (combined companies) can recover
the amortization of the acquisition adjustment through cost savings under a
sharing mechanism approved by the KCC. While the combined companies have
achieved savings from the Merger, there is no assurance that the savings
achieved will be sufficient to, or the cost savings sharing mechanism will
operate as to, fully offset the amortization of the acquisition adjustment.
Early Retirement: In April 1995, Western Resources announced a voluntary
early retirement program for employees 55 years of age and older with a
minimum of 10 years of service as of July 1, 1995. Approximately 420
employees are eligible for the voluntary retirement program. Although Western
Resources is not able to predict the cost of the early retirement program at
this time, the total cost, assuming all 420 eligible employees accept early
retirement, would be approximately $9 million in the second quarter of 1995
with cost savings estimated to be approximately $12 million for 1995. Western
Resources anticipates approximately 50 percent of the eligible employees will
accept early retirement. Although the Company has no employees, costs of the
early retirement program along with any cost savings realized by Western
Resources would be allocated to the Company.
<page 18>
KANSAS GAS AND ELECTRIC COMPANY
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Information required by Item 4 is omitted pursuant to General Instruction
H(2)(b) to Form 10-Q.
Item 5. Other Information
Rate Plan: In April 1995, the Company announced it intends to file a
proposal with the KCC in the summer of 1995 to increase the depreciation on
the assets of Wolf Creek Generating Station by $56 million annually for seven
years beginning in 1996. As a result, the Company will also seek to reduce
electric rates by approximately $9 million annually for the same seven year
period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
None
<page 19>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KANSAS GAS AND ELECTRIC COMPANY
May 8, 1995 By Richard D. Terrill
Richard D. Terrill
Secretary, Treasurer and
General Counsel
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