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, 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 May 15, 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.
<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 Comprehensive Income 6
Statements of Cash Flows 7 - 8
Statements of Common Shareowners' Equity 9
Notes to Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. Other Information
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
<page 3>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 42 $ 43
Accounts receivable, (net). . . . . . . . . . . . . . . . 66,814 66,654
Advances to parent company (net). . . . . . . . . . . . . 41,838 72,558
Inventories and supplies, at average cost . . . . . . . . 42,000 41,019
Prepaid expenses and other. . . . . . . . . . . . . . . . 9,314 17,165
Total Current Assets. . . . . . . . . . . . . . . . . . 160,008 197,439
PROPERTY, PLANT AND EQUIPMENT (net) . . . . . . . . . . . . 2,549,494 2,565,175
OTHER ASSETS:
Regulatory assets . . . . . . . . . . . . . . . . . . . . 277,112 278,568
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 73,135 75,926
Total Other Assets. . . . . . . . . . . . . . . . . . . 350,247 354,494
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $3,059,749 $3,117,108
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . . $ - $ 45,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . 61,051 81,986
Accrued liabilities . . . . . . . . . . . . . . . . . . . 45,716 32,745
Accrued income taxes. . . . . . . . . . . . . . . . . . . 15,863 4,212
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 4,117 4,032
Total Current Liabilities . . . . . . . . . . . . . . . 126,747 167,975
LONG-TERM LIABILITIES:
Long-term debt (net). . . . . . . . . . . . . . . . . . . 684,064 684,128
Deferred income taxes and investment tax credits. . . . . 815,289 820,838
Deferred gain from sale-leaseback . . . . . . . . . . . . 218,821 221,779
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 82,934 87,909
Total Long-term Liabilities . . . . . . . . . . . . . . 1,801,108 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 . . . . . . . . . . . . . . . . . . . . 66,260 68,845
Total Shareowners' Equity . . . . . . . . . . . . . . . 1,131,894 1,134,479
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY . . . . . . . . . $3,059,749 $3,117,108
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,
1998 1997
<S> <C> <C>
SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 134,566 $ 143,791
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 25,920 26,224
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 108,646 117,567
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 35,544 45,178
Depreciation and amortization . . . . . . . . . . . . 24,433 28,923
Selling, general and administrative expense . . . . . 12,636 13,102
Total Operating Expenses. . . . . . . . . . . . . 72,613 87,203
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 36,033 30,364
OTHER INCOME (EXPENSE). . . . . . . . . . . . . . . . . 4,843 (1,437)
INCOME BEFORE INTEREST AND TAXES. . . . . . . . . . . . 40,876 28,927
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 11,489 11,482
Interest expense on short-term debt and other . . . . 870 1,557
Total Interest Expense. . . . . . . . . . . . . . 12,359 13,039
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . 28,517 15,888
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 6,102 4,716
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 22,415 $ 11,172
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,
1998 1997
<S> <C> <C>
SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 605,220 $ 653,327
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 129,290 121,224
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 475,930 532,103
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 170,519 178,649
Depreciation and amortization . . . . . . . . . . . . 118,933 115,022
Selling, general and administrative expense . . . . . 56,801 54,700
Total Operating Expenses. . . . . . . . . . . . . 346,253 348,371
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 129,677 183,732
OTHER INCOME (EXPENSE). . . . . . . . . . . . . . . . . 2,258 2,648
INCOME BEFORE INTEREST AND TAXES. . . . . . . . . . . . 131,935 186,380
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 46,069 46,070
Interest expense on short-term debt and other . . . . 3,701 11,640
Total Interest Expense. . . . . . . . . . . . . . 49,770 57,710
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . 82,165 128,670
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 18,794 36,924
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 63,371 $ 91,746
The Notes to Financial Statements are an integral part of these statements.
</TABLE>
<page 6>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 22,415 $ 11,172
Other comprehensive income. . . . . . . . . . . . . . . . . - -
Comprehensive income. . . . . . . . . . . . . . . . . . . . $ 22,415 $ 11,172
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Twelve Months Ended
March 31,
1998 1997
<S> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 63,371 $ 91,746
Other comprehensive income. . . . . . . . . . . . . . . . . - -
Comprehensive income. . . . . . . . . . . . . . . . . . . . $ 63,371 $ 91,746
The Notes to Consolidated 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>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 22,415 $ 11,172
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 24,433 28,923
Amortization of gain from sale-leaseback. . . . . . . . . . (2,957) (2,410)
Changes in working capital items:
Accounts receivable, (net). . . . . . . . . . . . . . . . (160) 16,205
Inventories and supplies. . . . . . . . . . . . . . . . . (981) 394
Prepaid expenses and other. . . . . . . . . . . . . . . . 7,851 7,101
Accounts payable. . . . . . . . . . . . . . . . . . . . . (20,935) (4,687)
Accrued liabilities . . . . . . . . . . . . . . . . . . . 12,971 12,848
Accrued income taxes. . . . . . . . . . . . . . . . . . . 11,651 4,406
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 85 289
Changes in other assets and liabilities . . . . . . . . . . (908) (3,974)
Net cash flows from operating activities. . . . . . . . 53,465 70,267
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . (14,091) (16,318)
Net cash flows (used in) investing activities . . . . . (14,091) (16,318)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (45,000) (212,300)
Advances to parent company (net). . . . . . . . . . . . . . 30,720 183,413
Retirements of long-term debt . . . . . . . . . . . . . . . (95) (65)
Dividends to parent company . . . . . . . . . . . . . . . . (25,000) (25,000)
Net cash flows (used in) financing activities. . . . . . (39,375) (53,952)
NET (DECREASE) IN CASH AND CASH EQUIVALENT. . . . . . . . . . (1) (3)
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . 43 44
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 42 $ 41
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 6,618 $ 8,414
Income taxes . . . . . . . . . . . . . . . . . . . . . . . - 7,000
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
March 31,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 63,371 $ 91,746
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 118,933 115,022
Amortization of gain from sale-leaseback. . . . . . . . . . (11,828) (9,640)
Changes in working capital items:
Accounts receivable, (net). . . . . . . . . . . . . . . . (7,348) 8,749
Inventories and supplies. . . . . . . . . . . . . . . . . 1,252 2,442
Prepaid expenses and other. . . . . . . . . . . . . . . . 576 (293)
Accounts payable. . . . . . . . . . . . . . . . . . . . . 16,919 (7,640)
Accrued liabilities . . . . . . . . . . . . . . . . . . . (3,587) (2,110)
Accrued income taxes. . . . . . . . . . . . . . . . . . . 229 22,450
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (18) 484
Changes in other assets and liabilities . . . . . . . . . . (7,947) 15,422
Net cash flows from operating activities. . . . . . . . 170,552 236,632
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . (85,938) (68,256)
Net cash flows (used in) investing activities . . . . . (85,938) (68,256)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . (10,000) (102,000)
Advances to parent company (net). . . . . . . . . . . . . . 25,482 49,670
Retirements of long-term debt . . . . . . . . . . . . . . . (95) (16,065)
Dividends to parent company . . . . . . . . . . . . . . . . (100,000) (100,000)
Net cash flows (used in) financing activities. . . . . . (84,613) (168,395)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . 1 (19)
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . 41 60
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 42 $ 41
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 72,622 $ 80,805
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 45,100 32,800
The Notes to Financial Statements are an integral part of these statements.
</TABLE>
<page 9>
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF COMMON SHAREOWNERS' EQUITY
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Accumulated
Other
Comprehensive
Common Retained Income
Stock Earnings (net)
<S> <C> <C> <C>
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 . . . . . . . . . . . . . . . . . . . . 22,415
Dividend to parent company . . . . . . . . . . . . (25,000)
BALANCE MARCH 31, 1998, 1,000 shares . . . . . . . $1,065,634 $ 66,260 $ -
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. 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.
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
<page 11>
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 of debt of KCPL. Long-term debt of Western
Resources and the company was $2.1 billion at March 31, 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 including
obtaining the approval of Western Resources' and KCPL's shareowners and
various regulatory agencies. Western Resources estimates the transaction to
close by mid-1999, subject to receipt of all necessary approvals.
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.
On March 23, 1998, Western Resources and KCPL filed a letter informing
the FERC that they had signed a revised merger agreement, dated March 18,
1998. Western Resources sent similar letters on March 24, 1998 to the KCC and
the Missouri Public Service Commission (MPSC). Western Resources and KCPL
will submit appropriate modifications to the merger filings at FERC, the KCC
and the MPSC as soon as practicable.
At March 31, 1998, Western Resources had deferred approximately $6
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 March 31, 1998, the costs
incurred from 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.
<page 12>
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 21.4% and 29.7% for the three month periods and
22.9% and 28.7% for the twelve month periods ended March 31, 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.
<page 13>
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 and twelve month
periods ended March 31, 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 of $22.4 million for the three months ended March
31, 1998 increased substantially from $11.2 million for the same period in
1997. The increase in net income was primarily due to increased other income
and the completion of the amortization of phase-in revenues in December 1997.
Net income for the twelve months ended March 31, 1998, of $63.4 million,
decreased from net income of $91.7 million for the comparable period of 1997.
The decrease was primarily attributable to a $36.3 million rate reduction on
February 1, 1997, and an $8.7 million interim rate reduction which became
permanent on February 1, 1997.
<page 14>
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 and twelve month periods ended
March 31, 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 and twelve months ended March 31, 1998 from the comparable
periods of 1997.
3 Months 12 Months
Ended Ended
Residential 2.6% 0.4%
Commercial 3.8% 1.6%
Industrial 4.2% 2.7%
Total Retail 3.6% 1.7%
Sales decreased 6.4% for the three months and 7.4 % for the twelve months
ended March 31, 1998, primarily due to the electric rate decreases we
implemented on February 1, 1997. Although energy deliveries increased in both
periods, it was not enough to compensate for our lower electric rates.
Reduced electric rates lowered first quarter 1998 sales by an estimated $4.0
million. Also contributing to the decrease in sales was the decrease in
wholesale and interchange sales.
Cost of Sales: Items included in energy 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.
Actual cost of fuel to generate electricity (coal, nuclear fuel, natural
gas or oil) and the amount of power purchased from other utilities decreased
slightly for the first quarter of 1998. Cost of sales were $8.1 million
<page 15>
higher for the twelve months ended March 31, 1998. 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 over 21% for the three months ended March 31, 1998. This
decrease in attributable to a decrease in KGE's portion of costs shared with
Western Resources which are associated with the dispatching of electric power.
Total operating and maintenance expense decreased $8.1 million or over 4%
for the twelve months ended March 31, 1998. This decrease is primarily due to
a decrease in our property taxes of $6.8 million and reduced costs associated
with the dispatching of electric power as mentioned above.
Depreciation and Amortization Expense: Depreciation and amortization
expense decreased $4.5 million for the first quarter in 1998 from 1997 due to
the completion of the amortization of phase-in revenues in December 1997.
During the first quarter of 1997, we recorded $4.4 million of amortization for
phase-in revenues. Depreciation and amortization expense increased $3.9
million for the twelve months ended March 31, 1998 from 1997 due to the
additional amortization of $8.8 million relating to phase-in revenues recorded
during 1997.
Other Income and Deductions: Other income (expense) includes
miscellaneous income and expenses not directly related to our operations.
Other income and (expense) for the first quarter increased $6.3 million.
Interest Expense: Interest expense includes the interest we paid on
outstanding debt. We realized a decrease in interest expense of $0.7 million
for the first quarter and $7.9 million for the twelve months ended March 31,
1998. Our average outstanding short-term debt balances were lower during both
periods which attributed to the decreases in interest expense. The interest
we paid on long-term debt remained virtually unchanged for both 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 March 31, 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.
<page 16>
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 of debt of KCPL. Long-term debt of Western
Resources and the company was $2.1 billion at March 31, 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 including
obtaining the approval of Western Resources' and KCPL's shareowners and
various regulatory agencies. Western Resources estimates the transaction to
close by mid-1999, subject to receipt of all necessary approvals.
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.
On March 23, 1998, Western Resources and KCPL filed a letter informing
the FERC that they had signed a revised merger agreement, dated March 18,
1998. Western Resources sent similar letters on March 24, 1998 to the KCC and
the Missouri Public Service Commission (MPSC). Western Resources and KCPL
will submit appropriate modifications to the merger filings at FERC, the KCC
and the MPSC as soon as practicable.
At March 31, 1998, Western Resources had deferred approximately $6
million related to the KCPL transaction. These costs will be included in the
determination of total consideration upon consummation of the transaction.
<page 17>
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 March 31, 1998 (filed
electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
None
<page 18>
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 May 15, 1998 By /s/ Richard D. Terrill
Richard D. Terrill
Secretary, Treasurer and
General Counsel
<TABLE>
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)
<CAPTION>
Unaudited
Twelve
Months
Ended
March 31, Year Ended December 31,
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net Income. . . . . . . . . . . . . $ 63,371 $ 52,128 $ 96,274 $110,873 $104,526 $108,103
Taxes on Income . . . . . . . . . . 18,794 17,408 36,258 51,787 55,349 46,896
Net Income Plus Taxes. . . . . 82,165 69,536 132,532 162,660 159,875 154,999
Fixed Charges:
Interest on Long-Term Debt. . . . 46,069 46,062 46,304 47,073 47,827 53,908
Interest on Other Indebtedness. . 3,701 4,388 11,758 5,190 5,183 6,075
Interest on Corporate-owned
Life Insurance Borrowings . . . 32,987 31,253 27,636 25,357 20,990 11,865
Interest Applicable to Rentals. . 25,024 25,143 25,539 25,375 25,096 24,967
Total Fixed Charges . . . . . 107,781 106,846 111,237 102,995 99,096 96,815
Earnings (1). . . . . . . . . . . . $189,946 $176,382 $243,769 $265,655 $258,971 $251,814
Ratio of Earnings to Fixed Charges. 1.76 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.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet at March 31, 1998 and the Statement of Income for the three months ended
March 31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 42
<SECURITIES> 0
<RECEIVABLES> 68,826
<ALLOWANCES> 2,012
<INVENTORY> 42,000
<CURRENT-ASSETS> 160,008
<PP&E> 3,624,730
<DEPRECIATION> 1,075,236
<TOTAL-ASSETS> 3,059,749
<CURRENT-LIABILITIES> 126,747
<BONDS> 684,064
0
0
<COMMON> 1,065,634
<OTHER-SE> 66,260
<TOTAL-LIABILITY-AND-EQUITY> 3,059,749
<SALES> 134,566
<TOTAL-REVENUES> 134,566
<CGS> 25,920
<TOTAL-COSTS> 98,533
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,359
<INCOME-PRETAX> 28,517
<INCOME-TAX> 6,102
<INCOME-CONTINUING> 22,415
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,415
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
