FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 requird
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 27, 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 No.
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets 3
Statements of Income 4 - 6
Statements of Cash Flows 7 - 8
Statements of Capitalization 9
Statements of Common Stock Equity 10
Notes to Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
<PAGE 3>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
ASSETS
UTILITY PLANT:
Electric plant in service . . . . . . . . . . . . . . . . $3,420,368 $3,390,406
Less - Accumulated depreciation . . . . . . . . . . . . . 880,341 833,953
2,540,027 2,556,453
Construction work in progress . . . . . . . . . . . . . . 39,637 32,874
Nuclear fuel (net). . . . . . . . . . . . . . . . . . . . 49,484 39,890
Net utility plant . . . . . . . . . . . . . . . . . . . 2,629,148 2,629,217
OTHER PROPERTY AND INVESTMENTS:
Decommissioning trust . . . . . . . . . . . . . . . . . . 20,696 16,944
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 7,603 11,561
28,299 28,505
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . 51 47
Accounts receivable and unbilled revenues (net) . . . . . 89,450 67,833
Advances to parent company . . . . . . . . . . . . . . . 151,440 64,393
Fossil fuel, at average cost. . . . . . . . . . . . . . . 15,824 13,752
Materials and supplies, at average cost . . . . . . . . . 30,826 30,921
Prepayments and other current assets. . . . . . . . . . . 23,312 16,662
310,903 193,608
DEFERRED CHARGES AND OTHER ASSETS:
Deferred future income taxes . . . . . . . . . . . . . . 102,789 102,789
Deferred coal contract settlement costs . . . . . . . . . 15,448 17,944
Phase-in revenues . . . . . . . . . . . . . . . . . . . . 48,248 61,406
Other deferred plant costs. . . . . . . . . . . . . . . . 31,601 31,784
Corporate-owned life insurance (net). . . . . . . . . . . 7,816 9,350
Unamortized debt expense. . . . . . . . . . . . . . . . . 26,151 27,777
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 39,864 40,430
271,917 291,480
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $3,240,267 $3,142,810
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see Statements) . . . . . . . . . . . . . . $1,998,531 $1,925,196
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . . 29,050 50,000
Long-term debt due within one year. . . . . . . . . . . . 16,000 -
Accounts payable. . . . . . . . . . . . . . . . . . . . . 44,319 49,093
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . 60,343 15,737
Accrued interest. . . . . . . . . . . . . . . . . . . . . 14,128 8,337
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 7,413 11,160
171,253 134,327
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes . . . . . . . . . . . . . . . . . . 675,201 689,169
Deferred investment tax credits . . . . . . . . . . . . . 73,783 74,841
Deferred gain from sale-leaseback . . . . . . . . . . . . 245,110 252,341
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 76,389 66,936
1,070,483 1,083,287
COMMITMENTS AND CONTINGENCIES (Note 3)
TOTAL CAPITALIZATION AND LIABILITIES . . . . . . . . . $3,240,267 $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
September 30,
1995 1994
<S> <C> <C>
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 202,382 $ 189,202
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 24,360 27,727
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 5,084 3,638
Power purchased . . . . . . . . . . . . . . . . . . . . . 2,276 1,376
Other operations. . . . . . . . . . . . . . . . . . . . . 27,831 26,092
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 11,460 9,957
Depreciation and amortization . . . . . . . . . . . . . . 18,309 19,141
Amortization of phase-in revenues . . . . . . . . . . . . 4,386 4,386
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 26,774 23,521
State income . . . . . . . . . . . . . . . . . . . . . 6,482 5,575
General . . . . . . . . . . . . . . . . . . . . . . . . 11,736 10,811
Total operating expenses. . . . . . . . . . . . . . . 138,698 132,224
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 63,684 56,978
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (2,248) (1,728)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . (852) 833
Income taxes (net) . . . . . . . . . . . . . . . . . . . 3,459 2,137
Total other income and deductions . . . . . . . . . . 359 1,242
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 64,043 58,220
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 11,759 11,934
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,194 1,249
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (746) (444)
Total interest charges. . . . . . . . . . . . . . . . 12,207 12,739
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 51,836 $ 45,481
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>
Nine Months Ended
September 30,
1995 1994
<S> <C> <C>
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 485,686 $ 480,793
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 61,756 71,662
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 14,848 11,733
Power purchased . . . . . . . . . . . . . . . . . . . . . 3,482 4,869
Other operations. . . . . . . . . . . . . . . . . . . . . 90,030 84,677
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 36,086 35,187
Depreciation and amortization . . . . . . . . . . . . . . 54,978 57,402
Amortization of phase-in revenues . . . . . . . . . . . . 13,158 13,158
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 42,252 41,594
State income . . . . . . . . . . . . . . . . . . . . . 10,944 10,160
General . . . . . . . . . . . . . . . . . . . . . . . . 35,122 34,947
Total operating expenses. . . . . . . . . . . . . . . 362,656 365,389
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 123,030 115,404
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (5,785) (3,721)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 1,978 3,641
Income taxes (net) . . . . . . . . . . . . . . . . . . . 7,278 5,375
Total other income and deductions . . . . . . . . . . 3,471 5,295
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 126,501 120,699
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 35,310 36,032
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 3,806 3,721
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (1,890) (1,368)
Total interest charges. . . . . . . . . . . . . . . . 37,226 38,385
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 89,275 $ 82,314
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
</TABLE>
<PAGE 6>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Twelve Months Ended
September 30,
1995 1994
<S> <C> <C>
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . $ 624,773 $ 616,890
OPERATING EXPENSES:
Fuel used for generation:
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . 80,477 94,443
Nuclear fuel. . . . . . . . . . . . . . . . . . . . . . 16,677 15,980
Power purchased . . . . . . . . . . . . . . . . . . . . . 5,757 5,690
Other operations. . . . . . . . . . . . . . . . . . . . . 120,413 110,998
Maintenance . . . . . . . . . . . . . . . . . . . . . . . 48,887 48,355
Depreciation and amortization . . . . . . . . . . . . . . 69,033 76,420
Amortization of phase-in revenues . . . . . . . . . . . . 17,544 17,545
Taxes:
Federal income. . . . . . . . . . . . . . . . . . . . . 50,870 48,361
State income . . . . . . . . . . . . . . . . . . . . . 13,211 12,038
General . . . . . . . . . . . . . . . . . . . . . . . . 45,267 45,468
Total operating expenses. . . . . . . . . . . . . . . 468,136 475,298
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . 156,637 141,592
OTHER INCOME AND DEDUCTIONS:
Corporate-owned life insurance (net). . . . . . . . . . . (7,418) (5,217)
Miscellaneous (net) . . . . . . . . . . . . . . . . . . . 3,416 4,530
Income taxes (net) . . . . . . . . . . . . . . . . . . . 9,193 7,288
Total other income and deductions . . . . . . . . . . 5,191 6,601
INCOME BEFORE INTEREST CHARGES. . . . . . . . . . . . . . . 161,828 148,193
INTEREST CHARGES:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 47,105 48,187
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 5,268 5,585
Allowance for borrowed funds used
during construction (credit). . . . . . . . . . . . . . (2,032) (1,585)
Total interest charges. . . . . . . . . . . . . . . . 50,341 52,187
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 111,487 $ 96,006
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>
Nine Months Ended
September 30,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 89,275 $ 82,314
Depreciation and amortization . . . . . . . . . . . . . . . 54,978 57,402
Other amortization (including nuclear fuel) . . . . . . . . 11,274 8,390
Gain on sales of utility plant (net of tax) . . . . . . . . (951) -
Deferred taxes and investment tax credits (net) . . . . . . (16,470) 14,442
Amortization of phase-in revenues . . . . . . . . . . . . . 13,158 13,158
Corporate-owned life insurance. . . . . . . . . . . . . . . (14,757) (13,600)
Amortization of gain from sale-leaseback. . . . . . . . . . (7,231) (7,230)
Amortization of acquisition adjustment. . . . . . . . . . . 1,724 -
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . (21,617) (48,056)
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . (2,072) (6,058)
Accounts payable. . . . . . . . . . . . . . . . . . . . . (4,774) (2,729)
Interest and taxes accrued. . . . . . . . . . . . . . . . 49,769 42,871
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (7,856) (3,844)
Changes in other assets and liabilities . . . . . . . . . . 7,591 (18,165)
Net cash flows from operating activities. . . . . . . . 152,041 118,895
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 65,850 65,646
Sales of utility plant. . . . . . . . . . . . . . . . . . . (1,723) -
Corporate-owned life insurance policies . . . . . . . . . . 25,643 24,588
Death proceeds of corporate-owned life insurance. . . . . . (250) -
Net cash flows used in investing activities . . . . . . 89,520 90,234
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (20,950) (113,500)
Advances to parent company (net). . . . . . . . . . . . . . (87,047) (2,760)
Bonds issued. . . . . . . . . . . . . . . . . . . . . . . . - 160,422
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (25) (46,440)
Other long-term debt (net). . . . . . . . . . . . . . . . . - (67,893)
Borrowings against life insurance policies (net). . . . . . 45,505 41,504
Net cash flows from (used in) financing activities . . . (62,517) (28,667)
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . 4 (6)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 47 63
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 51 $ 57
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 54,274 $ 50,157
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 31,100 21,658
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
</TABLE>
<PAGE 8>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Twelve Months Ended
September 30,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 111,487 $ 96,006
Depreciation and amortization . . . . . . . . . . . . . . . 69,033 76,420
Other amortization (including nuclear fuel) . . . . . . . . 13,789 11,436
Gain on sales of utility plant (net of tax) . . . . . . . . (951) -
Deferred taxes and investment tax credits (net) . . . . . . (5,563) 31,499
Amortization of phase-in revenues . . . . . . . . . . . . . 17,544 17,545
Corporate-owned life insurance. . . . . . . . . . . . . . . (18,403) (16,664)
Amortization of gain from sale-leaseback. . . . . . . . . . (9,641) (9,640)
Amortization of acquisition adjustment. . . . . . . . . . . 1,724 -
Changes in working capital items:
Accounts receivable and unbilled revenues (net) . . . . . (30,282) (8,776)
Fossil fuel . . . . . . . . . . . . . . . . . . . . . . . (2,172) (2,196)
Accounts payable. . . . . . . . . . . . . . . . . . . . . (4,047) (7,964)
Interest and taxes accrued. . . . . . . . . . . . . . . . 11,406 (2,353)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (4,934) (2,029)
Changes in other assets and liabilities . . . . . . . . . . 14,575 (23,957)
Net cash flows from operating activities. . . . . . . . 163,565 159,327
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . 90,084 89,168
Sales of utility plant. . . . . . . . . . . . . . . . . . . (1,723) -
Corporate-owned life insurance policies . . . . . . . . . . 27,473 26,169
Death proceeds of corporate-owned life insurance. . . . . . (250) -
Net cash flows used in investing activities . . . . . . 115,584 115,337
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (13,250) (19,700)
Advances to parent company (net). . . . . . . . . . . . . . 44,112 (93,889)
Bonds issued. . . . . . . . . . . . . . . . . . . . . . . . - 160,422
Bonds retired . . . . . . . . . . . . . . . . . . . . . . . (25) (121,440)
Other long-term debt (net). . . . . . . . . . . . . . . . . - (13,980)
Borrowings against life insurance policies (net). . . . . . 46,176 42,685
Dividends to parent company . . . . . . . . . . . . . . . . (125,000) -
Net cash flows from (used in) financing activities . . . (47,987) (45,902)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . (6) (1,912)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 57 1,969
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 51 $ 57
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 72,661 $ 69,921
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 37,951 37,595
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
</TABLE>
<PAGE 9>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CAPITALIZATION
(Dollars in Thousands)
(Unaudited)
<CAPTION>
September 30, December 31,
1995 1994
<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 . . . . . . . . . . . . . . . . . . . . . 248,845 159,570
Total common stock equity . . . . . . . . . . . . . . . . 1,314,479 66% 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). . . . . . . . . . 3,845 3,930
Long-term debt due within one year. . . . . . . . . . . . 16,000 -
Total long-term debt . . . . . . . . . . . . . . . . . 684,052 34% 699,992 36%
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . $1,998,531 100% $1,925,196 100%
(a) Market-Adjusted Tax Exempt Securities (MATES). As of September 30, 1995, the rates
on these bonds ranged from 3.77% to 3.80%.
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
</TABLE>
<PAGE 10>
<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 . . . . . . . . . . . . . . . . . . . . . 89,275
Balance September 30, 1995, 1,000 shares . . . . . . $1,065,634 $ 248,845
The NOTES TO FINANCIAL STATEMENTS are an integral part of these statements.
</TABLE>
<PAGE 11>
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).
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.
The financial statements have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the accompanying condensed
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of
the Company as of September 30, 1995 and December 31, 1994, and the results of
its operations for the three, nine and twelve month periods ended September
30, 1995 and 1994. These condensed financial statements should be read in
conjunction with the financial statements and the notes thereto included in
the Company's 1994 Annual Report on Form 10-K.
The accounting policies of the Company are in accordance with generally
accepted accounting principles as applied to regulated public utilities. The
accounting and rates of the Company are subject to requirements of the Kansas
Corporation Commission (KCC) and the Federal Energy Regulatory Commission
(FERC).
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121).
This Statement imposes stricter criteria for regulatory assets by requiring
that such assets be probable of future recovery at each balance sheet date.
The Company anticipates adopting this standard on January 1, 1996 and does not
expect that adoption will have a material impact on the financial position or
results of operations of the Company based on the current regulatory structure
in which the Company operates. This conclusion may change in the future if
increases in competition influence wholesale and retail pricing in this
industry.
<PAGE 12>
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:
September 30, December 31,
1995 1994
(Dollars in Millions)
Cash surrender value of contracts. . $364.5 $320.6
Borrowings against contracts . . . . (356.7) (311.2)
COLI (net) . . . . . . . . . . . $ 7.8 $ 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, nine and twelve months ended September 30, 1995,
income from increases in cash surrender value, net of premium and
administrative expenses and income from death proceeds, was $4.6 million,
$12.7 million and $16.7 million, respectively, compared to $3.9 million, $11.7
million and $14.4 million for the three, nine and twelve months ended
September 30, 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, nine and twelve months ended
September 30, 1995, interest expense on COLI borrowings was $6.9 million,
$18.5 million and $24.1 million, respectively, compared to $5.6 million, $15.4
million and $20.1 million for the three, nine, and twelve months ended
September 30, 1994, respectively. The U.S. Congress is considering
legislation which, if enacted, may substantially reduce or eliminate interest
deductions on loans from COLI policies purchased after June 20, 1986. The
Company purchased its COLI policies prior to June 20, 1986.
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.
2. RATE MATTERS AND REGULATION
KCC Rate Proceedings: On August 17, 1995, the Company filed with the KCC
a request to more rapidly recover its investment in its assets of Wolf Creek
over the next seven years. If the request is granted, depreciation expense
for Wolf Creek will increase by approximately $50 million for each of the next
seven years. As a result of this proposal, the Company will also seek to
reduce electric rates for its customers by approximately $9 million annually
for the same seven year period based upon this accelerated depreciation.
The request also reduces the annual depreciation by approximately $3
million for electric transmission, distribution and certain generating plant
assets to reflect the effect of increasing useful lives of these properties.
Historically, the methods and rates of depreciation used by the Company
have not varied materially from the methods and rates which would have been
used if the Company were not regulated and not subject to the provisions
prescribed by Statement of Financial Accounting Standards No.71, "Accounting
<PAGE 13>
for the Effects of Certain Types of Regulations" (SFAS 71). In the past, the
methods and rates have been determined by depreciation studies and approved by
the various regulatory bodies. The Company periodically evaluates its
depreciation rates considering the past and expected future experience in the
operation of its facilities. The proposal filed by the Company referred to
above, would bring the capital costs of Wolf Creek down to a level more
closely paralleling that of fossil-fueled generating facilities.
3. COMMITMENTS AND CONTINGENCIES
Manufactured Gas Sites: The Company was previously associated with six
former manufactured gas sites located in Kansas which may 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
in 1993 and 1994. 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 costs incurred for site investigation and risk
assessment in 1994 were minimal and are expected to be minimal in 1995. 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. 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.
<PAGE 14>
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.
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 $20.7 million and $16.9 million at September 30, 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 staff of the SEC has questioned certain of the current accounting
practices of the electric utility industry, regarding the recognition,
measurement and classification of decommissioning costs for nuclear generating
stations in the financial statements of electric utilities. In response to
these questions, the Financial Accounting Standards Board (FASB) has agreed to
review the accounting for removal costs, including decommissioning. If
current electric utility industry practices for such decommissioning are
changed: (1) annual provisions for decommissioning could increase, (2) the
estimated cost for decommissioning could be recorded as a liability rather
than as accumulated depreciation, and (3) trust fund income from the external
decommissioning trusts could be reported as investment income rather than as a
reduction to decommissioning expense. The Company has historically recorded
estimated decommissioning costs as a liability rather than including these
costs with accumulated depreciation.
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.
<PAGE 15>
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.
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, continue to
be subject to the EPA's rules-making procedures. The Company will follow the
development of these regulations and establish compliance strategies as
appropriate.
Federal Income Taxes: In April 1995, The Company reached a settlement
agreement, in principal, with the IRS on its examination of the Company's
federal income tax returns for the years 1984-1986 and 1987-1988. All issues
in these two cases are tentatively resolved. The Company is now revising the
tax calculations for the settlement. The Company anticipates an additional
assessment of approximately $7 million in tax and interest as a result of
these examinations. This assessment is expected to be offset by investment
tax credit carryforwards, alternative minimum tax credit carryforwards, or
deferred tax provisions.
<PAGE 16>
The IRS examination of the Company's federal income tax returns for the
years 1989-1990 is pending the completion of the 1984-1988 examinations.
Based upon the above settlement agreements and available tax credits, the
Company believes it will owe no tax for the years 1989-1990.
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.
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.
4. 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 39.1% and 39.0% for the three month periods,
37.3% and 38.6% for the nine month periods, and 36.5% and 38.6% for the twelve
months ended September 30, 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 17>
KANSAS GAS AND ELECTRIC COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with Item 7 of the
Company's Annual Report on Form 10-K for 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, nine and
twelve month periods ended September 30, 1995 and comparable periods of 1994.
FINANCIAL CONDITION
General: The Company had net income of $51.8 million for the third
quarter of 1995 compared to $45.5 million for the third quarter in 1994. The
increase in net income was primarily due to higher revenues as a result of
increased sales in all retail customer classes. The warmer summer
temperatures experienced in the Company's service territory during 1995, as
compared to 1994, resulted in an increased demand for air conditioning load.
Net income for the nine and twelve months ended September 30, 1995, was
$89.2 million and $111.5 million, respectively, compared to $82.3 million and
$96.0 million for the comparable periods of 1994, respectively. The increase
in net income is attributed to higher revenues in all retail customer classes.
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 September 30, 1995, short-term borrowing amounted
to $29 million compared to $50 million at December 31, 1994.
In 1986 the Company purchased corporate-owned life insurance policies on
certain of its employees. On June 1, 1995, the Company increased its
borrowings against the accumulated cash surrender values of the policies by
$42.4 million.
OPERATING RESULTS
The following discussion explains variances for the three, nine and
twelve months ended September 30, 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 18>
Increase (decrease) in electric sales volumes:
3 Months 9 Months 12 Months
Ended Ended Ended
Residential 16.8% (0.2)% 1.4%
Commercial 6.1% 1.9% 3.6%
Industrial 8.3% 5.7% 5.4%
Total Retail 10.4% 2.8% 3.7%
Wholesale & Interchange (4.1)% (22.9)% (34.9)%
Total electric sales 8.6% (1.6)% (4.2)%
Revenues for the third quarter of 1995 increased approximately seven
percent to $202.4 million, compared to third quarter 1994 revenues of $189.2
million, primarily due to increase sales in all retail customer classes. The
warmer summer temperatures experienced in the Company's service territory
during the third quarter of 1995 increased the number of cooling degree days
by fourteen percent, as compared to the third quarter of last year, which
increased customer demand for air conditioning load.
Revenues for the nine and twelve months ended September 30, 1995,
increased approximately one percent to $485.7 million and $624.8 million,
respectively, from revenues of $480.8 million and $616.9 million for the
comparable periods of 1994, respectively. The slight increases can be
attributed to higher revenues in all retail customer classes due to the warmer
summer temperatures during 1995 as compared to last year.
Operating Expenses: Total operating expenses increased $6.5 million for
the three months ended September 30, 1995, compared to the same period of
1994. The increase is attributable to increases in federal and state income
taxes as a result of higher net income and higher operating expenses due to
the increase in generation to meet customer demand for air conditioning load.
Total operating expenses for the nine and twelve months ended September
30, 1995, decreased approximately one percent compared to the same periods of
1994. These decreases are primarily the result of the decrease in the unit
cost of fossil fuel used for generation.
Partially offsetting these decreases was the expense related to the early
retirement programs, higher operations and maintenance costs, and the increase
in federal and state income taxes as a result of higher net income. In the
second quarter of 1995, $3.4 million related to early retirement programs was
recorded as an expense.
Other Income and Deductions: Other income and deductions, net of taxes,
decreased for the three, nine and twelve months ended September 30, 1995,
compared to the same periods of 1994 primarily as a result of increased
interest expense on higher COLI borrowings. (See Note 1 of Notes to Financial
Statements with respect to proposed legislation in the U.S. Congress relating
to COLI.) Also contributing to the increase was the beginning of the
amortization of the merger acquisition adjustment in August 1995. During the
third quarter of 1995, $1.7 million of the acquisition adjustment was
amortized.
<PAGE 19>
Partially offsetting these decreases for the nine and twelve months ended
was a $1.6 million gain realized from the sale of rail cars during the first
quarter of 1995.
Interest Expense: Interest expense decreased $0.5 million, $1.2 million,
and $1.8 million for the three, nine and twelve months ended September 30,
1995 compared to the same periods of 1994, respectively. These decreases
resulted primarily from lower debt balances. Also accounting for the decrease
was the impact of increased COLI borrowings which reduced the need for other
long-term debt and thereby reduced interest expense. COLI interest is
reflected in Other Income and Deductions on the Statements of Income. (See
Note 1 of Notes to Financial Statements with respect to proposed legislation
in the U.S. Congress relating to COLI.)
OTHER INFORMATION
Merger Implementation: In accordance with the KCC Merger order,
amortization of the acquisition adjustment commenced in August 1995. The
amortization will amount to approximately $20 million (pre-tax) per year for
40 years. Western Resources and the Company (combined companies) can recover
the amortization of the acquisition adjustment through cost savings under a
sharing mechanism approved by the KCC.
Based on the order issued by the KCC with regard to the recovery of the
acquisition premium, Western Resources and the Company (combined companies)
must achieve a level of savings on an annual basis (considering sharing
provisions) of approximately $27 million in order to recover the entire
acquisition premium. To the extent that the combined companies actual
operations and maintenance expense is lower than the KCC-stipulated utility
price index, the combined companies will show merger savings. Western
Resources has calculated 1994 annual savings, in conformance with the KCC
order, associated with the acquisition to be in excess of $27 million. As
Western Resources' management presently expects to continue this level of
savings, the amount is expected to be sufficient to allow the full recovery of
the acquisition premium.
KCC Rate Proceedings: On August 17, 1995, the Company filed a regulatory
package with the KCC to more rapidly recover its investment in its assets of
Wolf Creek over the next seven years. As a result of this proposed reduction,
the Company also sought permission to reduce electric rates by approximately
$9 million each year for the next seven years. The reduction in revenues is
anticipated to be partially offset by an annual $3 million reduction in the
depreciation of transmission and distribution assets. Additionally offsetting
the proposed rate decrease are $4.0 million in savings anticipated from the
early retirement programs completed in the second quarter of 1995. The
Company continues its Project BLUEPRINT, which is anticipated to further
reduce operation, maintenance, and construction expenditures. The regulatory
package speaks to regulators' concerns as well as addressing the Company's
short- and long-term needs. A decision is expected, from the KCC, by the
spring of 1996. For additional information relating to these rate
proceedings, see Note 2 of Notes to Financial Statements.
<PAGE 20>
KANSAS GAS AND ELECTRIC COMPANY
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K dated August 18, 1995
<PAGE 21>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KANSAS GAS AND ELECTRIC COMPANY
October 27, 1995 By Richard D. Terrill
Richard D. Terrill
Secretary, Treasurer and
General Counsel
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