FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 16, 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.
2
KANSAS GAS AND ELECTRIC COMPANY
INDEX
Page
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets 3
Statements of Income 4 - 6
Statements of Cash Flows 7 - 8
Statements of Shareholder's Equity 9
Notes to Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
3
KANSAS GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
1999 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 36 $ 41
Accounts receivable (net) . . . . . . . . . . . . . . . . 64,776 66,513
Advances to parent company (net). . . . . . . . . . . . . 64,407 64,405
Inventories and supplies (net). . . . . . . . . . . . . . 45,358 43,121
Prepaid expenses and other. . . . . . . . . . . . . . . . 34,434 15,097
Total Current Assets. . . . . . . . . . . . . . . . . . 209,011 189,177
PROPERTY, PLANT AND EQUIPMENT (NET) . . . . . . . . . . . . 2,499,987 2,527,357
OTHER ASSETS:
Regulatory assets . . . . . . . . . . . . . . . . . . . . 254,454 260,789
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 96,620 80,648
Total Other Assets. . . . . . . . . . . . . . . . . . . 351,074 341,437
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $3,060,072 $3,057,971
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 76,772 $ 78,510
Accrued liabilities . . . . . . . . . . . . . . . . . . . 41,161 34,199
Accrued income taxes. . . . . . . . . . . . . . . . . . . 43,292 29,599
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 6,614 6,020
Total Current Liabilities . . . . . . . . . . . . . . . 167,839 148,328
LONG-TERM LIABILITIES:
Long-term debt (net). . . . . . . . . . . . . . . . . . . 684,209 684,167
Deferred income taxes and investment tax credits. . . . . 779,529 785,116
Deferred gain from sale-leaseback . . . . . . . . . . . . 204,037 209,951
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 109,239 92,165
Total Long-term Liabilities . . . . . . . . . . . . . . 1,777,014 1,771,399
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, without par value,
authorized and issued 1,000 shares . . . . . . . . . 1,065,634 1,065,634
Retained earnings . . . . . . . . . . . . . . . . . . . . 49,585 72,610
Total Shareholder's Equity. . . . . . . . . . . . . . . 1,115,219 1,138,244
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY . . . . . . . . $3,060,072 $3,057,971
The Notes to Financial Statements are an integral part of these statements.
4
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
June 30,
1999 1998
SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 147,170 $ 162,816
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 34,042 36,931
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 113,128 125,885
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 41,214 38,977
Depreciation and amortization . . . . . . . . . . . . 25,187 24,676
Selling, general and administrative expense . . . . . 14,992 18,120
Total Operating Expenses. . . . . . . . . . . . . 81,393 81,773
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 31,735 44,112
OTHER INCOME (EXPENSE). . . . . . . . . . . . . . . . . (318) 6,635
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . 31,417 50,747
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 11,451 11,505
Interest expense on other . . . . . . . . . . . . . . 1,165 828
Total Interest Expense. . . . . . . . . . . . . . 12,616 12,333
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . 18,801 38,414
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 4,731 9,907
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 14,070 $ 28,507
The Notes to Financial Statements are an integral part of these statements.
5
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
1999 1998
SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 281,080 $ 297,382
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 59,791 62,888
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 221,289 234,494
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 80,351 74,484
Depreciation and amortization . . . . . . . . . . . . 50,244 49,109
Selling, general and administrative expense . . . . . 28,787 30,756
Total Operating Expenses. . . . . . . . . . . . . 159,382 154,349
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 61,907 80,145
OTHER INCOME (EXPENSE). . . . . . . . . . . . . . . . . (1,573) 11,478
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . 60,334 91,623
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 22,904 22,994
Interest expense on other . . . . . . . . . . . . . . 1,974 1,698
Total Interest Expense. . . . . . . . . . . . . . 24,878 24,692
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . 35,456 66,931
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 8,481 16,009
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 26,975 $ 50,922
The Notes to Financial Statements are an integral part of these statements.
6
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
June 30,
1999 1998
SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 632,077 $ 619,210
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 146,263 139,880
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 485,814 479,330
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 156,369 161,174
Depreciation and amortization . . . . . . . . . . . . 99,957 115,040
Selling, general and administrative expense . . . . . 58,308 61,748
Total Operating Expenses. . . . . . . . . . . . . 314,634 337,962
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 171,180 141,368
OTHER INCOME (EXPENSE). . . . . . . . . . . . . . . . . (4,375) 8,287
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . 166,805 149,655
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 45,900 46,049
Interest expense on other . . . . . . . . . . . . . . 3,644 3,530
Total Interest Expense. . . . . . . . . . . . . . 49,544 49,579
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . 117,261 100,076
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 37,443 23,690
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 79,818 $ 76,386
The Notes to Financial Statements are an integral part of these statements.
7
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 26,975 $ 50,922
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 50,244 49,109
Amortization of gain from sale-leaseback. . . . . . . . . . (5,914) (5,914)
Changes in working capital items:
Accounts receivable (net) . . . . . . . . . . . . . . . . 1,737 (14,770)
Inventories and supplies (net). . . . . . . . . . . . . . (2,237) (754)
Prepaid expenses and other. . . . . . . . . . . . . . . . (19,337) (12,562)
Accounts payable. . . . . . . . . . . . . . . . . . . . . (1,738) 6,628
Accrued liabilities . . . . . . . . . . . . . . . . . . . 6,962 (16)
Accrued income taxes. . . . . . . . . . . . . . . . . . . 13,693 3,332
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 593 1,880
Changes in other assets and liabilities . . . . . . . . . . 6,701 16,592
Net cash flows from operating activities. . . . . . . . 77,679 94,447
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property plant and equipment (net) . . . . . . (27,662) (28,116)
Net cash flows (used in) investing activities . . . . . (27,662) (28,116)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . - (45,000)
Advances to parent company (net). . . . . . . . . . . . . . (2) 28,753
Retirements of long-term debt . . . . . . . . . . . . . . . (20) (85)
Dividends to parent company . . . . . . . . . . . . . . . . (50,000) (50,000)
Net cash flows (used in) financing activities. . . . . . (50,022) (66,332)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . (5) (1)
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . 41 43
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 36 $ 42
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 55,506 $ 51,694
Income taxes . . . . . . . . . . . . . . . . . . . . . . . - 19,220
The Notes to Financial Statements are an integral part of these statements.
8
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
June 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 79,818 $ 76,386
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 99,957 115,040
Amortization of gain from sale-leaseback. . . . . . . . . . (11,828) (11,828)
Changes in working capital items:
Accounts receivable (net) . . . . . . . . . . . . . . . . 16,648 (7,821)
Inventories and supplies (net). . . . . . . . . . . . . . (3,585) 1,846
Prepaid expenses and other. . . . . . . . . . . . . . . . (4,707) 4,310
Accounts payable. . . . . . . . . . . . . . . . . . . . . (11,842) 17,683
Accrued liabilities . . . . . . . . . . . . . . . . . . . 8,432 489
Accrued income taxes. . . . . . . . . . . . . . . . . . . 35,748 (8,325)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 701 1,936
Changes in other assets and liabilities . . . . . . . . . . (11,761) (9,223)
Net cash flows from operating activities. . . . . . . . 197,581 180,483
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property plant and equipment (net) . . . . . . (76,965) (70,740)
Net cash flows (used in) investing activities . . . . . (76,965) (70,740)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . - (10,000)
Advances to parent company (net). . . . . . . . . . . . . . (20,602) 349
Retirements of long-term debt . . . . . . . . . . . . . . . (20) (85)
Dividends to parent company . . . . . . . . . . . . . . . . (100,000) (100,000)
Net cash flows (used in) financing activities. . . . . . (120,622) (109,736)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . (6) 7
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . 42 35
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 36 $ 42
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 79,423 $ 71,770
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 18,300 51,220
The Notes to Financial Statements are an integral part of these statements.
9
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
Common Stock . . . . $1,065,634 $1,065,634 $1,065,634 $1,065,634 $1,065,634 $1,065,634
Retained Earnings:
Beginning balance. 60,515 66,260 72,610 68,845 69,767 93,381
Net income . . . . 14,070 28,507 26,975 50,922 79,818 76,386
Dividends to
parent company. (25,000) (25,000) (50,000) (50,000) (100,000) (100,000)
Ending balance . . 49,585 69,767 49,585 69,767 49,585 69,767
Total Shareholder's
Equity . . . . . . $1,115,219 $1,135,401 $1,115,219 $1,135,401 $1,115,219 $1,135,401
The Notes to Financial Statements are an integral part of these statements.
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 in the
production, purchase, transmission, distribution, and sale of electricity.
The company serves approximately 286,000 electric customers in southeastern
Kansas. At June 30, 1999, the company had no employees. All employees are
provided by the company's parent, Western Resources, which allocates costs
related to the parent's employees.
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 (GAAP) 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 GAAP 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 management's opinion, all adjustments, consisting only of normal
recurring adjustments considered necessary for a fair presentation, have been
included. The results of operations for the three or six months ended June
30, 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 KCC staff
which resulted in a set of settlement recommendations in connection with the
Kansas City Power & Light Company (KCPL) merger. At an administrative meeting
on August 11, 1999, the KCC Commissioners generally indicated their support of
the merger, however, they could not approve the merger under the terms of the
Stipulation and Agreement reached in May. The KCC is expected to issue an
order in October 1999.
11
In July 1999, a Settlement Agreement was reached with the Missouri Public
Service Commission (MPSC) staff, the Office of Public Counsel and other key
parties in connection with the KCPL merger. The stipulation and agreement
have been filed with the MPSC for its review and approval. Significant terms
of the Missouri settlement are as follows:
- An electric rate moratorium of three years beginning on the date the
transaction closes
- Westar Energy would make a one-time rate credit in the amount of $5
million to its Missouri retail customers at the beginning of the
second year of the merger
- Westar Energy's executive headquarters would be located in Kansas City.
Western Resources is currently negotiating with FERC staff and
intervenors. Hearings before FERC, if necessary, are scheduled to begin
October 25, 1999.
Western Resources and KCPL have filed an application with the Nuclear
Regulatory Commission to approve the Western Resources/KCPL merger and the
formation of Westar Energy.
For additional information on the Western Resources and KCPL 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 June 30, 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 25.2%, 23.9% and 31.9% for the three, six and
twelve month periods ended June 30, 1999, compared to 25.8 %, 23.9% and 23.7%
for the three, six and twelve month periods ended June 30, 1998. The
effective income tax rates vary from the Federal statutory rate due to the
permanent differences, including the amortization of investment tax credits,
and benefits from corporate-owned life insurance.
12
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
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 has two business segments, electric
operations and 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 its revenues.
Three Months Ended June 30, 1999:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 147,170 $ - $ - $ 147,170
Allocated sales . . - 20,598 (20,598) -
Earnings before
interest and taxes 45,531 (11,114) - 31,417
Interest expense. . 12,616
Earnings before
income taxes . . . 18,801
Three Months Ended June 30, 1998:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 162,816 $ - $ - $ 162,816
Allocated sales . . - 29,288 (29,288) -
Earnings before
interest and taxes 56,333 (5,586) - 50,747
Interest expense. . 12,333
Earnings before
income taxes . . . 38,414
13
Six Months Ended June 30, 1999:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 281,080 $ - $ - $ 281,080
Allocated sales . . - 49,816 (49,816) -
Earnings before
interest and taxes 75,673 (15,339) - 60,334
Interest expense. . 24,878
Earnings before
income taxes . . . 35,456
Six Months Ended June 30, 1998:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 297,382 $ - $ - $ 297,382
Allocated sales . . - 58,527 (58,527) -
Earnings before
interest and taxes 101,155 (9,532) - 91,623
Interest expense. . 24,692
Earnings before
income taxes . . . 66,931
Twelve Months Ended June 30, 1999:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 632,077 $ - $ - $ 632,077
Allocated sales . . - 108,806 (108,806) -
Earnings before
interest and taxes 193,532 (26,727) - 166,805
Interest expense. . 49,544
Earnings before
income taxes . . . 117,261
14
Twelve Months Ended June 30, 1998:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 619,210 $ - $ - $ 619,210
Allocated sales . . - 103,731 (103,731) -
Earnings before
interest and taxes 198,685 (49,030) - 149,655
Interest expense. . 49,579
Earnings before
income taxes . . . 100,076
15
KANSAS GAS AND ELECTRIC COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
In Management's Discussion and Analysis we explain the general financial
condition and the operating results for the company. We explain:
- What factors affect our business
- What our earnings and costs were for the three, six and twelve month
periods ended June 30, 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 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, compliance with debt covenants, 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 and regulatory developments; our regulatory and
competitive markets; and other circumstances affecting anticipated operations,
sales and costs.
FINANCIAL CONDITION
General
Net income for the three and six months ended June 30, 1999 of $14
million and $27 million decreased substantially from net income of $29 million
16
and $51 million for the same periods of 1998, respectively. The decreases in
net income were primarily due to lower sales to residential customers, an
electric rate decrease that was implemented on June 1, 1999, and a decrease in
other income. The decrease in other income was related to proceeds received
in 1998 from corporate-owned life insurance policies.
Net income for the twelve months ended June 30, 1999, of $80 million,
increased from net income of $76 million for the comparable period of 1998.
The increase was primarily attributable to increased sales because of warmer
weather during the summer of 1998, 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, six and twelve month periods ended
June 30, 1999 and comparable periods of 1998.
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 sales volumes. 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 sales volumes for the
three, six and twelve months ended June 30, 1999 from the comparable periods
of 1998.
3 Months 6 Months 12 Months
Ended Ended Ended
Residential (15.9)% (8.6)% 2.3%
Commercial 0.3% 1.9% 5.0%
Industrial (3.8)% (3.2)% (1.5)%
Wholesale (7.7)% (5.8)% (4.8)%
Total (6.6)% (3.8)% 0.4%
Sales decreased $16 million for the three and six months ended June 30,
1999, from the comparable periods of 1998. The decreases are a result of
decreased residential, industrial and wholesale sales volumes and the effect
of our $10 million electric rate reduction implemented on June 1, 1999.
17
Sales increased $13 million or 2% for the twelve months ended June 30,
1999, primarily due to increased residential sales volumes as a result of
warmer summer temperatures during 1998. Our June 1, 1999 electric rate
reduction partially offset this increase.
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
$3 million for the three and six months ended June 30, 1999 primarily due to
lower sales volumes.
Cost of sales were $6 million higher for the twelve months ended June 30,
1999. An increase in net generation, as a result of higher sales volumes to
our residential and commercial customers, caused our fuel costs to increase
for the twelve months ended June 30, 1999.
OPERATING EXPENSES
Operating and Maintenance Expense
Total operating and maintenance expense increased $2 million and $6
million for the three and six months ended June 30, 1999. The restarting of
our Neosho generation station, a boiler outage at our Gordon Evans generation
station, and preliminary refueling expenses at Wolf Creek contributed to the
increases.
Wolf Creek was taken off-line on April 3, 1999, for its tenth refueling
and maintenance outage. Wolf Creek was returned to service on May 9, 1999.
Total operating and maintenance expense decreased $5 million or 3% for
the twelve months ended June 30, 1999. The decrease is attributable to an
decrease in KGE's portion of costs shared with Western Resources which are
associated with the dispatching of electric power. This decrease is partially
offset by increased maintenance expenses as mentioned above.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $0.5 million and $1
million for the three and six months ended June 30, 1999 from the same periods
in 1998 as a result of an increase in our depreciable plant base.
18
Depreciation and amortization expense decreased $15 million for the
twelve months ended June 30, 1999 from 1998 primarily due to the complete
amortization of a regulatory asset in 1997.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased $3 million and $2
million for the three and six months ended June 30, 1999, from the same
periods in 1998. The decreases are primarily due to storm related restoration
expenses recorded during the second quarter of 1998.
Selling, general and administrative expense decreased $3 million for the
twelve months ended June 30, 1999, from the same period in 1998. The decrease
is also due to the storm related restoration expenses as mentioned above.
The decreases in selling, general and administrative expense were
partially offset by 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 has two business segments, electric
generation and nuclear generation. Our remaining operations of fossil
generation and power 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 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(Dollars in Thousands)
Allocated sales . $ 20,598 $ 29,288 $ 49,816 $ 58,527 $ 108,806 $ 103,731
EBIT. . . . . . . (11,114) (5,586) (15,339) (9,532) (26,727) (49,030)
Nuclear 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.
19
Allocated sales and EBIT decreased for the three and six months ended
June 30, 1999 compared to the same periods in 1998 due to a 36-day scheduled
refueling and maintenance outage at Wolf Creek during the second quarter of
1999.
Allocated sales and EBIT were higher for the twelve months ended June 30,
1999 compared to the same period in 1998 because Wolf Creek had a 36-day
scheduled refueling and maintenance outage in 1999 compared to a 58 day
scheduled refueling and maintenance outage in 1998. EBIT was also higher
because depreciation and amortization expense decreased because we had fully
amortized a regulatory asset during 1997.
Other Income (Expense)
Other income (expense) includes miscellaneous income and expenses not
directly related to our operations. Other income and (expense) for the three,
six and twelve months ended June 30, 1999 decreased $7 million, $13 million
and $13 million, respectively, compared to the same periods in 1998. The
decreases are attributed to benefits received during the first and second
quarters of 1998 pursuant to our corporate-owned life insurance policies
totaling $13 million.
Interest Expense
Interest expense includes the interest we paid on outstanding debt.
Interest expense has remained virtually unchanged for the three, six and
twelve months ended June 30, 1999 compared to the same periods in 1998.
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 June 30, 1999, we had no short-term borrowings.
Protection One, Inc. a Deleware corporation, an 85% owned subsidiary of
our parent, Western Resources, is subject to compliance with certain financial
covenants pursuant to its senior credit facility. Protection One currently
believes it is likely, absent successful implementation of alternatives
discussed below, that it will be unable to satisfy these covenants. Western
Resources' credit facility contains a cross default provision which would be
triggered in the event of a Protection One default. Protection One is
exploring alternatives to address these covenant restrictions, including the
sale of assets to reduce debt, seeking waivers or renegotiating these
covenants with lenders, or refinancing the facility.
20
While our internally generated cash is sufficient to fund operations, we
do not maintain independent short term credit facilities and rely on Western
Resources for short-term cash needs. If Western Resources is unable to borrow
under its credit facility, we could have a short-term liquidity issue which
could require us to obtain a credit facility for our short-term cash needs.
OTHER INFORMATION
Collective Bargaining Agreement
Western Resources' contract with the International Brotherhood of
Electrical Workers (IBEW) expired on July 1, 1999. The contract covered
approximately 1,440 employees who are currently working under the terms of the
contract. Western Resources has reached a tentative agreement with the IBEW
leadership. The IBEW employees will vote on the contract on September 1,
1999. Western Resources has experienced no strikes or work stoppages as a
result of the expiration of the contract.
Competition
On August 10, 1999, the Wichita City Council adopted a resolution
authorizing a study to determine the feasibility of creating a municipal
electric utility. We have an exclusive franchise with the City of Wichita
that expires March 2002. Customers within the City of Wichita account for
approximately 57% of our sales.
We will oppose any attempt by the City of Wichita to eliminate the
company as the electric provider to Wichita customers. In order to
municipalize our Wichita electric facilities, the City of Wichita would be
required to purchase our facilities or build a separate independent system.
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.
As of June 30, 1999, Western Resources has completed the remediation and
testing of mission critical systems necessary to continue providing electric
service to our customers. On June 30, Western Resources reported to the North
American Electric Reliability Council (NERC), that based on its standards,
they are 100% Year 2000 ready. However, additional testing and remediation of
non-mission critical systems, project administration and contingency planning
will continue through December 31, 1999. Overall, based on manhours as a
measure of work effort, Western Resources believes it is approximately 85%
complete with its readiness efforts.
21
The estimated progress of Western Resources departments and business
units, exclusive of WCNOC, at June 30, 1999, based on percentage of completion
in manhours and mission critical systems, is as follows:
Mission
Department/Business Unit Manhours Critical
Fossil Fuel . . . . . . . . . . . 76% 100%
Power Delivery. . . . . . . . . . 79% 100%
Information Technology. . . . . . 88% 100%
Administrative. . . . . . . . . . 84% 100%
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 $4.4 million represents IT costs and $2.5 million represents non-IT
costs. As of June 30, 1999 Western Resources has expensed approximately $5.5
million of these costs, of which $3.7 million represent IT costs and $1.8
million represent non-IT costs. Based on what they know, they expect to incur
the remaining $1.4 million, of which $0.7 million represents IT costs and $0.7
million represents non-IT costs, by the end of 1999. Western Resources has
allocated approximately $2.2 million of the expensed costs to our company and
we expect an additional $0.6 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 June 30, 1999.
Percentage
Phase Completion
Identification and assessment of plant components 100%
Identification and assessment of computers/software 100%
Identification and assessment of other areas 100%
Identified critical remediations complete 100%
Comprehensive testing guidelines 100%
Comprehensive testing 100%
Contingency planning guidelines 100%
Contingency planning individual plans 100%
Additional non-mission critical remediations continue with a goal to be
95% ready by September 30, 1999, and 100% ready by December 31, 1999.
22
WCNOC has estimated the costs to complete the Year 2000 project at $3.8
million ($1.8 million, our share). As of June 30, 1999, $2.7 million ($1.3
million, our share) had been spent on the project. A summary of the projected
costs to complete and actual costs incurred through June 30, 1999, is as
follows:
Projected Actual
Costs Costs
(Dollars in Thousands)
Wolf Creek Labor and Expenses. . $ 499 $ 367
Contractor Costs . . . . . . . . 1,254 920
Remediation Costs. . . . . . . . 1,995 1,390
Total. . . . . . . . . . . . . $3,748 $2,677
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. The total projected Year 2000 costs have decreased from the total
projected costs of $4.6 million at December 31, 1998, as alternate remediation
paths have been identified which have eliminated the need for extensive
equipment changeouts. 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.
23
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.
24
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 June 30, 1999 (filed
electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
None
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KANSAS GAS AND ELECTRIC COMPANY
Date August 16, 1999 By /s/ Richard D. Terrill
Richard D. Terrill
Secretary, Treasurer and
General Counsel
Exhibit 12
KANSAS GAS AND ELECTRIC COMPANY
Computations of Ratio of Earnings to Fixed Charges
(Dollars in Thousands)
Unaudited
Twelve
Months
Ended
June 30, Year Ended December 31,
1999 1998 1997 1996 1995 1994
Net Income. . . . . . . . . . . . . $ 79,818 $103,765 $ 52,128 $ 96,274 $110,873 $104,526
Taxes on Income . . . . . . . . . . 37,443 44,971 17,408 36,258 51,787 55,349
Net Income Plus Taxes. . . . . 117,261 148,736 69,536 132,532 162,660 159,875
Fixed Charges:
Interest on Long-Term Debt. . . . 45,900 45,990 46,062 46,304 47,073 47,827
Interest on Other Indebtedness. . 3,644 3,368 4,388 11,758 5,190 5,183
Interest on Corporate-owned
Life Insurance Borrowings . . . 31,570 32,368 31,253 27,636 25,357 20,990
Interest Applicable to Rentals. . 24,815 25,106 25,143 25,539 25,375 25,096
Total Fixed Charges . . . . . 105,929 106,832 106,846 111,237 102,995 99,096
Earnings (1). . . . . . . . . . . . $223,190 $255,568 $176,382 $243,769 $265,655 $258,971
Ratio of Earnings to Fixed Charges. 2.11 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.
5
1,000
6-MOS
DEC-31-1999
JUN-30-1999
36
0
67,119
2,343
45,358
209,011
3,666,339
1,166,352
3,060,072
167,839
684,209
0
0
1,065,634
49,585
3,060,072
281,080
281,080
59,791
219,173
0
0
24,878
35,456
8,481
26,975
0
0
0
26,975
0
0
