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, 1999
[ ] 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 17, 1999
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 Common Shareholders' Equity 8
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
<PAGE> 3
<TABLE>
KANSAS GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 43 $ 41
Accounts receivable (net) . . . . . . . . . . . . . . . . 57,759 66,513
Advances to parent company (net). . . . . . . . . . . . . 73,834 64,405
Inventories and supplies (net). . . . . . . . . . . . . . 43,696 43,121
Prepaid expenses and other. . . . . . . . . . . . . . . . 7,235 15,097
Total Current Assets. . . . . . . . . . . . . . . . . . 182,567 189,177
PROPERTY, PLANT AND EQUIPMENT (NET) . . . . . . . . . . . . 2,511,119 2,527,357
OTHER ASSETS:
Regulatory assets . . . . . . . . . . . . . . . . . . . . 259,317 260,789
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 82,848 80,648
Total Other Assets. . . . . . . . . . . . . . . . . . . 342,165 341,437
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $3,035,851 $3,057,971
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 57,437 $ 78,510
Accrued liabilities . . . . . . . . . . . . . . . . . . . 49,944 34,199
Accrued income taxes. . . . . . . . . . . . . . . . . . . 37,851 29,599
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 6,404 6,020
Total Current Liabilities . . . . . . . . . . . . . . . 151,636 148,328
LONG-TERM LIABILITIES:
Long-term debt (net). . . . . . . . . . . . . . . . . . . 684,178 684,167
Deferred income taxes and investment tax credits. . . . . 780,615 785,116
Deferred gain from sale-leaseback . . . . . . . . . . . . 206,993 209,951
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 86,280 92,165
Total Long-term Liabilities . . . . . . . . . . . . . . 1,758,066 1,771,399
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, without par value,
authorized and issued 1,000 shares . . . . . . . . . 1,065,634 1,065,634
Retained earnings . . . . . . . . . . . . . . . . . . . . 60,515 72,610
Total Shareholders' Equity. . . . . . . . . . . . . . . 1,126,149 1,138,244
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . $3,035,851 $3,057,971
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,
1999 1998
<S> <C> <C>
SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 133,910 $ 134,566
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 25,749 25,957
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 108,161 108,609
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 39,137 35,507
Depreciation and amortization . . . . . . . . . . . . 25,057 24,433
Selling, general and administrative expense . . . . . 13,795 12,636
Total Operating Expenses. . . . . . . . . . . . . 77,989 72,576
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 30,172 36,033
OTHER INCOME (EXPENSE). . . . . . . . . . . . . . . . . (1,255) 4,843
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . 28,917 40,876
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 11,453 11,489
Interest expense on other . . . . . . . . . . . . . . 809 870
Total Interest Expense. . . . . . . . . . . . . . 12,262 12,359
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . 16,655 28,517
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 3,750 6,102
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 12,905 $ 22,415
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,
1999 1998
<S> <C> <C>
SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 647,723 $ 605,220
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 149,152 129,489
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 498,571 475,731
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 154,132 170,320
Depreciation and amortization . . . . . . . . . . . . 99,446 118,933
Selling, general and administrative expense . . . . . 61,436 56,801
Total Operating Expenses. . . . . . . . . . . . . 315,014 346,054
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 183,557 129,677
OTHER INCOME (EXPENSE). . . . . . . . . . . . . . . . . 2,578 2,258
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . 186,135 131,935
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 45,954 46,069
Interest expense on other . . . . . . . . . . . . . . 3,307 3,701
Total Interest Expense. . . . . . . . . . . . . . 49,261 49,770
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . 136,874 82,165
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 42,619 18,794
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 94,255 $ 63,371
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,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 12,905 $ 22,415
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 25,057 24,433
Amortization of gain from sale-leaseback. . . . . . . . . . (2,958) (2,957)
Changes in working capital items:
Accounts receivable (net) . . . . . . . . . . . . . . . . 8,754 (160)
Inventories and supplies (net). . . . . . . . . . . . . . (575) (981)
Prepaid expenses and other. . . . . . . . . . . . . . . . 7,862 7,851
Accounts payable. . . . . . . . . . . . . . . . . . . . . (21,073) (20,935)
Accrued liabilities . . . . . . . . . . . . . . . . . . . 15,745 12,971
Accrued income taxes. . . . . . . . . . . . . . . . . . . 8,252 11,651
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 384 85
Changes in other assets and liabilities . . . . . . . . . . (7,636) (908)
Net cash flows from operating activities. . . . . . . . 46,717 53,465
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . (12,266) (14,091)
Net cash flows (used in) investing activities . . . . . (12,266) (14,091)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . - (45,000)
Advances to parent company (net). . . . . . . . . . . . . . (9,429) 30,720
Retirements of long-term debt . . . . . . . . . . . . . . . (20) (95)
Dividends to parent company . . . . . . . . . . . . . . . . (25,000) (25,000)
Net cash flows (used in) financing activities. . . . . . (34,449) (39,375)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT . . . . . 2 (1)
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . 41 43
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 43 $ 42
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 6,078 $ 6,618
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,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 94,255 $ 63,371
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 99,446 118,933
Amortization of gain from sale-leaseback. . . . . . . . . . (11,829) (11,828)
Changes in working capital items:
Accounts receivable (net) . . . . . . . . . . . . . . . . 9,055 (7,348)
Inventories and supplies (net). . . . . . . . . . . . . . (1,696) 1,252
Prepaid expenses and other. . . . . . . . . . . . . . . . 2,079 576
Accounts payable. . . . . . . . . . . . . . . . . . . . . (3,614) 16,919
Accrued liabilities . . . . . . . . . . . . . . . . . . . 4,228 (3,587)
Accrued income taxes. . . . . . . . . . . . . . . . . . . 21,988 229
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 2,287 (18)
Changes in other assets and liabilities . . . . . . . . . . (8,598) (7,947)
Net cash flows from operating activities. . . . . . . . 207,601 170,552
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant. . . . . . . . . . . . . . . . . (75,594) (85,938)
Net cash flows (used in) investing activities . . . . . (75,594) (85,938)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . - (10,000)
Advances to parent company (net). . . . . . . . . . . . . . (31,996) 25,482
Retirements of long-term debt . . . . . . . . . . . . . . . (10) (95)
Dividends to parent company . . . . . . . . . . . . . . . . (100,000) (100,000)
Net cash flows (used in) financing activities. . . . . . (132,006) (84,613)
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . 1 1
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . 42 41
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 43 $ 42
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 75,071 $ 72,622
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 37,520 45,100
The Notes to Financial Statements are an integral part of these statements.
</TABLE>
<PAGE> 8
<TABLE> KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Common Stock . . . . . . . . . . . . $1,065,634 $1,065,634 $1,065,634 $1,065,634
Retained Earnings:
Beginning balance. . . . . . . . . 72,610 68,845 66,260 102,889
Net income . . . . . . . . . . . . 12,905 22,415 94,255 63,371
Dividends to parent company. . . . (25,000) (25,000) (100,000) (100,000)
Ending balance . . . . . . . . . . 60,515 66,260 60,515 66,260
Total Shareholders' Equity . . . . . $1,126,149 $1,131,894 $1,126,149 $1,131,894
The Notes to Financial Statements are an integral part of these statements.
</TABLE>
<PAGE> 9
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 283,000 electric customers
in southeastern Kansas. At March 31, 1999, 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 1998 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).
In the opinion of the company's management, all adjustments, consisting
only of normal recurring adjustments considered necessary for a fair
presentation, have been included. The results of operations for the three
months ended March 31, 1999 are not necessarily indicative of the results to
be expected for the full year.
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
In May 1999, a Stipulation and Agreement was reached with the Kansas
Corporation Commission (KCC) staff which resulted in a set of settlement
recommendations in connection with the KCPL merger. These recommendations
have not been accepted by all parties and must be approved by the KCC. The
KCC will review the Stipulation and Agreement and issue an order based on the
agreement and the results of the technical hearings, which are in progress.
Significant terms of the recommended settlement are as follows:
<PAGE> 10
- An electric rate moratorium would be implemented for four years
beginning on the day the merger closes
- Westar Energy would make three rate rebates of $15 million each to
its Kansas retail customers on July 1 of 2001, 2002 and 2003
- Westar Energy would be allowed to include $300 million of the
acquisition premium (amount is net of related deferred income taxes
to be recorded) in its Kansas rate base
- Western Resources and KCPL would be allowed to earn a deferred return
on certain new generating facilities that will be completed during the
rate moratorium period. The deferred return would be calculated from
the date of commercial operation of these generating assets until the
earlier of the end of the rate moratorium or March 31, 2004.
Estimated expenditures by Western Resources that qualify for the
deferred return approximate $270 million.
For additional information on the Western Resources and Kansas City Power
& Light Company Merger Agreement, see Note 13 of the company's 1998 Annual
Report on Form 10-K.
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, 1999, 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 1998 Annual Report on Form 10-K.
4. INCOME TAXES
Total income tax expense included in the Statements of Income reflects
the Federal statutory rate of 35%. The Federal statutory rate produces
effective income tax rates of 22.5% and 31.1% for the three and twelve month
periods ended March 31, 1999, compared to 21.4% and 22.9% for the three and
twelve month periods ended March 31, 1998. The effective income tax rates
vary from the Federal statutory rate due to the permanent differences,
including the amortization of investment tax credits, benefits from corporate-
owned life insurance, and accelerated amortization of certain deferred income
taxes.
5. SEGMENTS OF BUSINESS
In 1998, the company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement requires the company to
define and report the company's business segments based on how management
currently evaluates its business. The company is evaluated from a segment
<PAGE> 11
perspective as a part of its parent company, Western Resources. The company
is an integral component of Western Resources and its financial position and
operations are managed as such. Based on the management approach to
determining business segments, the company only has one business segment.
This segment is nuclear generation. The company's remaining operations of
fossil generation and energy delivery are fully integrated with those of
Western Resources.
The accounting policies of the segments are substantially the same as
those described in the summary of significant accounting policies. The
company evaluates segment performance based on earnings before interest and
taxes. The company has no single external customer from which it receives ten
percent or more of revenues.
Three Months Ended March 31, 1999:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 133,910 $ - $ - $ 133,910
Allocated sales . . 29,218 (29,218) -
Earnings before
interest and taxes 33,142 (4,225) 28,917
Interest expense. . 12,262
Earnings before
income taxes . . . 16,655
Three Months Ended March 31, 1998:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 134,566 $ - $ - $ 134,566
Allocated sales . . 29,239 (29,239) -
Earnings before
interest and taxes 44,822 (3,946) 40,876
Interest expense. . 12,359
Earnings before
income taxes . . . 28,517
<PAGE> 12
Year Twelve Months Ended March 31, 1999:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 647,723 $ - $ - $ 647,723
Allocated sales . . 117,496 (117,496) -
Earnings before
interest and taxes 207,334 (21,199) - 186,135
Interest expense. . 49,261
Earnings before
income taxes . . . 136,874
Year Twelve Months Ended March 31, 1998:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 605,220 $ - $ - $ 605,220
Allocated sales . . 102,449 (102,449) -
Earnings before
interest and taxes 186,523 (54,588) - 131,935
Interest expense. . 49,770
Earnings before
income taxes . . . 82,165
<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, 1999 and 1998
- 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 1998 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 1998 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
Certain matters discussed here and elsewhere in this Annual Report 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, Year 2000 Issue,
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 $12.9 million for the three months ended March 31, 1999
decreased substantially from $22.4 million for the same period in 1998. The
decrease in net income was primarily due to higher operating expenses, a
decrease in other income, and an electric rate decrease that was implemented
on June 1, 1998. The decrease in other income was related to proceeds
received in 1998 from corporate-owned life insurance policies.
<PAGE> 14
Net income for the twelve months ended March 31, 1999, of $94.3 million,
increased from net income of $63.4 million for the comparable period of 1998.
The increase was primarily attributable to increased sales because of warmer
weather, lower operating expenses, and the completion of the amortization of a
regulatory asset in December 1997.
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, 1999 and comparable periods of 1998.
Sales
Sales are based on energy deliveries 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, 1999 from the comparable
periods of 1998.
3 Months 12 Months
Ended Ended
Residential (0.1)% 11.2%
Commercial 3.7% 7.7%
Industrial (2.6)% (0.2)%
Wholesale (3.2)% (8.6)%
Total (0.6)% 3.0%
Sales decreased slightly for the three months ended March 31, 1999, as a
result of decreased residential and industrial energy deliveries and the
effect of our $10 million electric rate reduction implemented on June 1, 1998.
Sales increased $42.5 million or 7% for the twelve months ended March 31,
1999, primarily due to increased residential energy deliveries as a result of
warmer summer temperatures. Our June 1, 1998 electric rate reduction
partially offset this increase.
<PAGE> 15
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 1999. Cost of sales were $19.7 million
higher for the twelve months ended March 31, 1999. With an increase in
customer demand for electricity and the availability of our Wolf Creek nuclear
generating station and La Cygne coal generating station during the twelve
months ended March 31, 1999, we produced more electricity. The increase in
net generation caused our fuel costs to increase for the twelve months ended
March 31, 1999.
OPERATING EXPENSES
Operating and Maintenance Expense
Total operating and maintenance expense increased $3.6 million or over
10% for the three months ended March 31, 1999. The increase is attributable
to an increase in KGE's portion of costs shared with Western Resources which
are associated with the dispatching of electric power. The restarting of our
Neosho generation station, a boiler outage at our Gordon Evans generation
station, and preliminary refueling expenses at Wolf Creek also contributed to
the increase.
Wolf Creek was taken off-line on April 3, 1999, for its tenth refueling
and maintenance outage. We anticipate our operating expenses (including cost
of sales) will increase in 1999 as a result of this outage. Wolf Creek was
returned to service on May 9, 1999.
Total operating and maintenance expense decreased $16.2 million or 9% for
the twelve months ended March 31, 1999. This decrease is primarily due to a
decrease in costs associated with the dispatching of electric power as
mentioned above.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $0.6 million for the
first quarter in 1999 from 1998 as a result of an increase in our plant
depreciation base. Depreciation and amortization expense decreased $19.5
million for the twelve months ended March 31, 1999 from 1998 primarily due to
the complete amortization of a regulatory asset in 1997.
<PAGE> 16
Selling, General and Administrative Expense
Selling, general and administrative expense increased $1.2 million and
$4.6 million for the three and twelve months ended March 31, 1999, from the
same periods in 1998. Most of these increases are attributable to higher
employee benefit costs.
Business Segments
We define and report our business segments based on how management
currently evaluates our business. We are evaluated from a segment perspective
as a part of our parent company, Western Resources. Our company is an
integral component of Western Resources and its financial position and
operations are managed as such. Based on the management approach to
determining business segments, our company only has one business segment.
This segment is nuclear generation. Our remaining operations of fossil
generation and energy delivery are fully integrated with those of Western
Resources.
We along with Western Resources manage our business segments' performance
based on our earnings before interest and taxes (EBIT).
Allocated sales are external sales collected from customers by our
electric operations segment that are allocated to our nuclear generation
business segment based on demand and energy cost. The following discussion
identifies key factors affecting our business segment.
Nuclear Generation
3 Months Ended 12 Months Ended
March 31, March 31,
1999 1998 1999 1998
(Dollars in Thousands)
Allocated sales . . . . . . . $ 29,218 $ 29,239 $117,496 $102,449
EBIT. . . . . . . . . . . . . (4,225) (3,946) (21,199) (54,588)
Nuclear fuel generation has no external sales because it provides all of
its power to its co-owners KGE, KCPL and Kansas Electric Power Cooperative,
Inc. The amounts above are our 47% share of Wolf Creek's operating results.
Allocated sales and EBIT were higher for the twelve months ended March
31, 1999 compared to the same period in 1998 because Wolf Creek operated the
entire period without any outages. In the fourth quarter of 1997, the Wolf
Creek facility was off line for 58 days for a scheduled maintenance outage.
EBIT was also higher because depreciation and amortization expense decreased
$26 million because we had fully amortized a regulatory asset during 1997.
On April 3, 1999, Wolf Creek was taken off-line for a schedule
maintenance outage. The outage was completed 36 days later on May 9, 1999.
<PAGE> 17
Other Income (Expense)
Other income (expense) includes miscellaneous income and expenses not
directly related to our operations. Other income and (expense) for the first
quarter decreased $6.1 million. The decrease is attributed to benefits
received during the first quarter of 1998 pursuant to our corporate-owned life
insurance policies totaling $6.8 million. Other income for the twelve months
ended March 31, 1999, realized a slight increase over the same period in 1998.
Interest Expense
Interest expense includes the interest we paid on outstanding debt. We
experienced a slight decrease in interest expense for the first quarter and
the twelve months ended March 31, 1999. Our average outstanding short-term
debt balances were lower during both periods which contributed to the
decreases in interest expense. After January 1998, no short-term debt has
been held.
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. At March 31, 1999, we had no short-term borrowings.
OTHER INFORMATION
Year 2OOO Issue
We, as part of the Western Resources Year 2000 readiness program, are
currently addressing the effect of the Year 2000 Issue on information systems
and operations. We face the Year 2000 Issue because many computer systems and
applications abbreviate dates by eliminating the first two digits of the year,
assuming that these two digits are always "19". On January 1, 2000, some
computer programs may incorrectly recognize the date as January 1, 1900. Some
computer systems and applications may incorrectly process critical information
or may stop processing altogether because of the date abbreviation.
Calculations using dates beyond December 31, 1999 may affect computer
applications before January 1, 2000.
Overall, based on manhours as a measure of work effort, Western Resources
believes it is approximately 76% complete with its readiness efforts.
<PAGE> 18
The estimated progress of Western Resources departments and business
units, exclusive of WCNOC, at March 31, 1999, based on manhours, is as
follows:
Percentage
Department/Business Unit Completion
Fossil Fuel . . . . . . . . . . . . . . 50%
Power Delivery. . . . . . . . . . . . . 74%
Information Technology. . . . . . . . . 87%
Administrative. . . . . . . . . . . . . 76%
Western Resources currently estimates that total costs to update all of
its electric utility operating systems for Year 2000 readiness, excluding
costs associated with WCNOC discussed below, to be approximately $6.9 million,
of which $4.3 million represents IT costs and $2.6 million represents non-IT
costs. As of March 31, 1999 Western Resources has expensed approximately $5.0
million of these costs, of which $3.7 million represent IT costs and $1.3
million represent non-IT costs. Based on what they know, they expect to incur
the remaining $1.9 million, of which $0.6 million represents IT costs and $1.3
million represents non-IT costs, by the end of 1999. Western Resources has
allocated approximately $2.0 million of the expensed costs to our company and
we expect an additional $0.8 million to be allocated for the remaining costs
to be incurred.
WOLF CREEK NUCLEAR OPERATING CORPORATION (WCNOC): The table below sets
forth estimates of the status of the components of WCNOC's Year 2000 readiness
program at March 31, 1999.
<TABLE>
Estimated
Completion Percentage
Phase Date Completion
<S> <C> <C>
Identification and assessment of plant components 100%
Identification and assessment of computers/software (Note 1) 100%
Identification and Assessment of Other Areas (Note 2) 100%
Identified mission critical remediations complete (Note 3) Oct 99 60%
Comprehensive testing guidelines 100%
Comprehensive testing (Note 4) Jun 99 55%
Contingency planning guidelines 100%
Contingency planning individual plans Jun 99 80%
Note 1 - Several computers are on three year lease and will not be obtained until 1999.
Note 2 - Includes items such as measuring/test and telecommunications equipment.
Note 3 - Two major modifications are currently scheduled to be completed after June 1999,
the remaining remediations are presently scheduled for completion prior to July 1999.
Note 4 - These tests are being used to define the options available for minor remediations.
Several other post-remediation tests will also be performed.
</TABLE>
WCNOC has established a goal of completing all assessments of affected
systems by the end of the second quarter of 1999, and has a goal to complete
mission critical remediations by the end of the third quarter, except for one
scheduled for October, 1999.
<PAGE> 19
WCNOC has estimated the costs to complete the Year 2000 project at $3.9
million ($1.8 million, our share). As of March 31, 1999, $2.0 million ($0.9
million, our share) had been spent on the project. A summary of the projected
costs to complete and actual costs incurred through March 31, 1999, is as
follows:
Projected Actual
Costs Costs
(Dollars in Thousands)
Wolf Creek Labor and Expenses. . $ 499 $ 319
Contractor Costs . . . . . . . . 1,004 733
Remediation Costs. . . . . . . . 2,245 966
Total. . . . . . . . . . . . . $3,748 $2,018
Approximately $2.9 million ($1.4 million, our share) of WCNOC's total
Year 2000 cost is purchased items and installation costs associated with
remediation. Of these remediation costs, $1.8 million ($0.8 million, our
share) are associated with seven major jobs which are completed or in
progress. All of these costs are being expensed as they are incurred and are
being funded on a daily basis along with our normal costs of operations.
<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company has not experienced any significant changes in its exposure
to market risk since December 31, 1998. For additional information on the
company's market risk, see the Form 10-K dated December 31, 1998.
<PAGE> 21
KANSAS GAS AND ELECTRIC COMPANY
Part II Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
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, 1999 (filed
electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
None
<PAGE> 22
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 17, 1999 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
(Dollars in Thousands)
<CAPTION>
Unaudited
Twelve
Months
Ended
March 31, Year Ended December 31,
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Net Income. . . . . . . . . . . . . $ 94,255 $103,765 $ 52,128 $ 96,274 $110,873 $104,526
Taxes on Income . . . . . . . . . . 42,619 44,971 17,408 36,258 51,787 55,349
Net Income Plus Taxes. . . . . 136,874 148,736 69,536 132,532 162,660 159,875
Fixed Charges:
Interest on Long-Term Debt. . . . 45,954 45,990 46,062 46,304 47,073 47,827
Interest on Other Indebtedness. . 3,307 3,368 4,388 11,758 5,190 5,183
Interest on Corporate-owned
Life Insurance Borrowings . . . 31,515 32,368 31,253 27,636 25,357 20,990
Interest Applicable to Rentals. . 24,961 25,106 25,143 25,539 25,375 25,096
Total Fixed Charges . . . . . 105,737 106,832 106,846 111,237 102,995 99,096
Earnings (1). . . . . . . . . . . . $242,611 $255,568 $176,382 $243,769 $265,655 $258,971
Ratio of Earnings to Fixed Charges. 2.29 2.39 1.65 2.19 2.58 2.61
(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, 1999 and the Statement of Income for the three months ended
March 31, 1999 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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 60,001
<ALLOWANCES> 2,242
<INVENTORY> 43,696
<CURRENT-ASSETS> 182,567
<PP&E> 3,658,170
<DEPRECIATION> 1,147,051
<TOTAL-ASSETS> 3,035,851
<CURRENT-LIABILITIES> 151,636
<BONDS> 684,178
0
0
<COMMON> 1,065,634
<OTHER-SE> 60,515
<TOTAL-LIABILITY-AND-EQUITY> 3,035,851
<SALES> 133,910
<TOTAL-REVENUES> 133,910
<CGS> 25,749
<TOTAL-COSTS> 103,738
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,262
<INCOME-PRETAX> 16,655
<INCOME-TAX> 3,750
<INCOME-CONTINUING> 12,905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,905
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
