FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 12, 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.
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
Statements of Shareholder's Equity 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
KANSAS GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
1999 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 37 $ 41
Accounts receivable (net) . . . . . . . . . . . . . . . . 81,482 66,513
Advances to parent company (net). . . . . . . . . . . . . 120,946 64,405
Inventories and supplies (net). . . . . . . . . . . . . . 43,841 43,121
Prepaid expenses and other. . . . . . . . . . . . . . . . 25,022 15,097
Total Current Assets. . . . . . . . . . . . . . . . . . 271,328 189,177
PROPERTY, PLANT AND EQUIPMENT (NET) . . . . . . . . . . . . 2,487,566 2,527,357
OTHER ASSETS:
Regulatory assets . . . . . . . . . . . . . . . . . . . . 252,965 260,789
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 88,643 80,648
Total Other Assets. . . . . . . . . . . . . . . . . . . 341,608 341,437
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $3,100,502 $3,057,971
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 66,545 $ 78,510
Accrued liabilities . . . . . . . . . . . . . . . . . . . 59,948 34,199
Accrued income taxes. . . . . . . . . . . . . . . . . . . 73,668 29,599
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 6,834 6,020
Total Current Liabilities . . . . . . . . . . . . . . . 206,995 148,328
LONG-TERM LIABILITIES:
Long-term debt (net). . . . . . . . . . . . . . . . . . . 684,240 684,167
Deferred income taxes and investment tax credits. . . . . 773,574 785,116
Deferred gain from sale-leaseback . . . . . . . . . . . . 201,080 209,951
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 94,882 92,165
Total Long-term Liabilities . . . . . . . . . . . . . . 1,753,776 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 . . . . . . . . . . . . . . . . . . . . 74,097 72,610
Total Shareholder's Equity. . . . . . . . . . . . . . . 1,139,731 1,138,244
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY . . . . . . . . $3,100,502 $3,057,971
The Notes to Financial Statements are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
September 30,
1999 1998
SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 217,986 $ 216,034
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 50,329 58,419
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 167,657 157,615
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 37,470 36,518
Depreciation and amortization . . . . . . . . . . . . 25,339 24,503
Selling, general and administrative expense . . . . . 17,866 15,531
Total Operating Expenses. . . . . . . . . . . . . 80,675 76,552
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 86,982 81,063
OTHER INCOME (EXPENSE). . . . . . . . . . . . . . . . . (755) (1,003)
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . 86,227 80,060
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 11,482 11,507
Interest expense on other . . . . . . . . . . . . . . 812 813
Total Interest Expense. . . . . . . . . . . . . . 12,294 12,320
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . 73,933 67,740
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 24,421 24,411
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 49,512 $ 43,329
The Notes to Financial Statements are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1999 1998
SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 499,066 $ 513,416
COST OF SALES . . . . . . . . . . . . . . . . . . . . . 110,120 121,307
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 388,946 392,109
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 117,820 111,002
Depreciation and amortization . . . . . . . . . . . . 75,583 73,612
Selling, general and administrative expense . . . . . 46,654 46,287
Total Operating Expenses. . . . . . . . . . . . . 240,057 230,901
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 148,889 161,208
OTHER INCOME (EXPENSE). . . . . . . . . . . . . . . . . (2,328) 10,475
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . 146,561 171,683
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 34,386 34,501
Interest expense on other . . . . . . . . . . . . . . 2,786 2,511
Total Interest Expense. . . . . . . . . . . . . . 37,172 37,012
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . 109,389 134,671
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 32,902 40,420
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 76,487 $ 94,251
The Notes to Financial Statements are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 76,487 $ 94,251
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 75,583 73,612
Amortization of gain from sale-leaseback. . . . . . . . . . (8,871) (8,871)
Changes in working capital items:
Accounts receivable (net) . . . . . . . . . . . . . . . . (14,969) (30,718)
Inventories and supplies (net). . . . . . . . . . . . . . (720) (143)
Prepaid expenses and other. . . . . . . . . . . . . . . . (9,926) (5,461)
Accounts payable. . . . . . . . . . . . . . . . . . . . . (11,966) (16,187)
Accrued liabilities . . . . . . . . . . . . . . . . . . . 25,749 16,171
Accrued income taxes. . . . . . . . . . . . . . . . . . . 44,069 25,077
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 815 1,936
Changes in other assets and liabilities . . . . . . . . . . (2,442) 13,046
Net cash flows from operating activities. . . . . . . . 173,809 162,713
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property plant and equipment (net) . . . . . . (42,252) (42,544)
Net cash flows (used in) investing activities . . . . . (42,252) (42,544)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . . - (45,000)
Advances to parent company (net). . . . . . . . . . . . . . (56,541) (85)
Retirements of long-term debt . . . . . . . . . . . . . . . (20) (85)
Dividends to parent company . . . . . . . . . . . . . . . . (75,000) (75,000)
Net cash flows (used in) financing activities. . . . . . (131,561) (120,170)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . (4) (1)
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . 41 43
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 37 $ 42
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized) . . . . . . . . . . . . . . . . . . . . . $ 60,760 $ 58,196
Income taxes . . . . . . . . . . . . . . . . . . . . . . . - 26,020
The Notes to Financial Statements are an integral part of these statements.
KANSAS GAS AND ELECTRIC COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Common Stock . . . . . . . . . . . . $1,065,634 $1,065,634 $1,065,634 $1,065,634
Retained Earnings:
Beginning balance. . . . . . . . . 49,585 69,767 72,610 68,845
Net income . . . . . . . . . . . . 49,512 43,329 76,487 94,251
Dividends to parent company . . . (25,000) (25,000) (75,000) (75,000)
Ending balance . . . . . . . . . . . 74,097 88,096 74,097 88,096
Total Shareholder's Equity . . . . . $1,139,731 $1,153,730 $1,139,731 $1,153,730
The Notes to Financial Statements are an integral part of these statements.
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
September 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 and nine months ended
September 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 MERGER AGREEMENT
On September 28, 1999, the KCC issued an order in connection with the
Kansas City Power & Light (KCPL) merger. On October 13, 1999, Western Resources
filed a petition with the KCC for reconsideration of certain portions of the KCC
order. Other parties to the proceedings also requested reconsideration of the
KCC's order. On November 4, 1999, the KCC issued its order on reconsideration.
Significant terms of the Kansas order are as follows:
- An electric rate moratorium of four years beginning on the date the
transaction closes
- Ability to retain all savings incurred during the moratorium period
- Ability to recover a portion of the remaining acquisition premium of
approximately $3.85 million per year for 35 years following the
completion of the rate moratorium
- A cap of $179.45 million for any future determination of stranded
costs which result from the merger
- Implementation of quality of service standards
- Ability to seek carrying charges on investments in new plant additions
during the rate moratorium period
- At the conclusion of the moratorium, Westar Energy, the new electric
company formed as a result of the merger, will be required to file a
consolidated cost of service study and separate cost of service
studies for each operating division.
On September 2, 1999, the Missouri Public Service Commission (MPSC)
approved the merger of Western Resources and KCPL. No further merger
proceedings are scheduled in Missouri. Significant terms of the Missouri order
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
- Agreements between Western Resources, KCPL, MPSC staff and the Office
of Public Counsel on quality of service standards and on cost
allocation methodology.
On September 14, 1999, Western Resources and the FERC staff filed a
Settlement Agreement with the FERC in connection with the KCPL merger. On
October 21, 1999, the Settlement Agreement was certified by a FERC
administrative law judge and sent to the FERC for approval without a hearing.
Western Resources expects the receipt of a FERC order around the end of the
year. The FERC order is subject to a 30-day period in which requests for
rehearing may be made. The Settlement Agreement provides that the settlement
will become effective on the first day of the month following the date the FERC
order becomes final.
On November 1, 1999, Western Resources received approval from the Nuclear
Regulatory Commission (NRC) regarding the KCPL merger, the formation of Westar
Energy, and the transfer of the ownership licenses to Westar Energy.
Further requests for reconsideration and appeals could delay the receipt
of the final regulatory approvals discussed above. Western Resources believes
that the merger could be finalized in the first quarter of 2000. The closing of
the merger is subject to the satisfaction or waiver of various regulatory and
other conditions and certain rights of termination as outlined in the merger
agreement.
Either party may terminate the merger if the merger does not close by
December 31, 1999, or if Western Resources' Index Price is less than or equal to
$29.78 on the tenth day prior to closing. Western Resources' Index Price was
$22.67 at November 8, 1999.
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 September 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 33% and 30% for the three and nine month periods ended
September 30, 1999, compared to 36% and 30% for the three and nine month periods
ended September 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.
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 management's approach to determining
business segments, the company has two business segments, electric operations
and nuclear generation. The company's fossil generation and power delivery
operations 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 September 30, 1999:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 217,986 $ - $ - $ 217,986
Allocated sales . . - 28,987 (28,987) -
Earnings before
interest and taxes 91,044 (4,817) - 86,227
Interest expense. . 12,294
Earnings before
income taxes . . . 73,933
Three Months Ended September 30, 1998:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 216,034 $ - $ - $ 216,034
Allocated sales . . 29,375 (29,375) -
Earnings before
interest and taxes 86,231 (6,171) - 80,060
Interest expense. . 12,320
Earnings before
income taxes . . . 67,740
Nine Months Ended September 30, 1999:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 499,066 $ - $ - $ 499,066
Allocated sales . . 78,803 (78,803) -
Earnings before
interest and taxes 166,717 (20,156) - 146,561
Interest expense. . 37,172
Earnings before
income taxes . . . 109,389
Nine Months Ended September 30, 1998:
Electric Nuclear Eliminating
Operations Generation Items Total
(Dollars in Thousands)
External sales. . . $ 513,416 $ - $ - $ 513,416
Allocated sales . . 87,901 (87,901) -
Earnings before
interest and taxes 187,386 (15,703) - 171,683
Interest expense. . 37,012
Earnings before
income taxes . . . 134,671
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 nine month
periods ended September 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, closing of the KCPL transaction,
successful integration of Western Resources, the company's and KCPL's businesses
and achievement of anticipated cost savings, 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 months ended September 30, 1999, increased $6
million compared to 1998, due primarily to increased wholesale sales and
decreased cost of sales. Net income for the nine months ended September 30,
1999, decreased $18 million compared to the same period of 1998. The decrease
in net income was primarily due to lower sales to retail customers because of
27% cooler weather than last year and the electric rate decreases that were
implemented on June 1, 1998, and June 1, 1999. A decrease in other income, due
primarily to no corporate-owned life insurance death proceeds being received in
1999, compared to approximately $14 million in 1998, also contributed to the
decrease in net income.
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 nine month periods ended September 30, 1999
and comparable periods of 1998.
Sales
The following table reflects changes in retail sales volumes for the three
and nine months ended September 30, 1999, from the comparable periods of 1998.
Three Months Nine Months
Ended Ended
Residential . . . . . (7.6)% (8.2)%
Commercial. . . . . . (0.2)% 1.0 %
Industrial. . . . . . 2.5 % (1.2)%
Other . . . . . . . . (2.8)% (1.3)%
Total Retail. . . . (2.1)% (2.9)%
Wholesale . . . . . . 17.6 % 3.4 %
Total . . . . . . . 1.0 % (1.9)%
Sales decreased $14 million for the nine months ended September 30, 1999,
from the comparable period of 1998, because of decreased retail sales volume.
Retail sales volumes were lower primarily because of 27% fewer cooling degree
days than the prior year and the effect of the electric rate decreases
implemented on June 1, 1998, and June 1, 1999. Higher wholesale sales partially
offset this decrease. Due to warmer than normal weather throughout the Midwest
in July and increased availability of our coal-fired generation stations, we
were able to sell more electricity to wholesale customers than last year.
Cost of Sales
Items included in energy cost of sales are fuel expense and purchased power
expense (electricity we purchase from others for resale).
Total cost of sales decreased approximately $8 million and $11 million for
the three and nine months ended September 30, 1999. The decreases were
primarily due to lower purchased power expense. This lower expense is primarily
due to decreases in KG&E's costs associated with the dispatching of electric
power.
OPERATING EXPENSES
Operating and Maintenance Expense
Total operating and maintenance expense increased $7 million for the nine
months ended September 30, 1999. The restarting of our Neosho generation
station, a boiler outage at our Gordon Evans generation station, and 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.
Other Income (Expense)
Other income (expense) includes miscellaneous income and expenses not
directly related to our operations. Other income and (expense) for the nine
months ended September 30, 1999, decreased $13 million, compared to the same
period in 1998. The decrease is primarily attributable to benefits received
during the first three quarters of 1998, from our corporate-owned life insurance
policies totaling $14 million.
Interest Expense
Interest expense includes the interest we paid on outstanding debt.
Interest expense has remained virtually unchanged for the three and nine months
ended September 30, 1999, compared to the same periods in 1998.
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 management's approach to determining business
segments, our company has two business segments, electric operations and nuclear
generation. Our fossil generation and power delivery operations are fully
integrated with those of Western Resources.
We, along with Western Resources, manage our business segments' performance
based on their earnings before interest and taxes (EBIT).
External sales reflect power produced for sale to wholesale and retail
customers. Allocated sales are external sales collected from customers by our
electric operations segment that are either retained by our electric operations
business segment based on demand and energy cost, or allocated to our nuclear
generation business segment based on demand and energy cost. The following
discussion identifies key factors affecting our business segments.
Electric Operations
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(Dollars in Thousands)
External sales . . . $ 217,986 $ 216,034 $ 499,066 $ 513,416
EBIT . . . . . . . . 91,044 86,231 166,717 187,386
Three Months Ended September 30, 1999, Compared to Three Months Ended
September 30, 1998: The slight increase in external sales is due to higher
wholesale sales, as explained above in "Operating Results, Sales." EBIT is
higher primarily because of the decreased cost of sales associated with the
lower cost of purchased power, as explained above in "Operating Results, Cost of
Sales."
Nine Months Ended September 30, 1999, Compared to Nine Months Ended
September 30, 1998: External sales and EBIT decreased for the nine months ended
because of the 36-day scheduled refueling and maintenance outage at Wolf Creek
during the second quarter of 1999.
Nuclear Generation
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(Dollars in Thousands)
Allocated sales . . . $ 28,987 $ 29,375 $ 78,803 $ 87,901
EBIT. . . . . . . . . (4,817) (6,171) (20,156) (15,703)
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.
Nuclear Generation's EBIT is negative because its transfer price is less
than its fixed costs.
Three Months Ended September 30, 1999, Compared to Three Months Ended
September 30, 1998: Allocated sales and EBIT did not materially change for the
three months ended September 30, 1999, compared to the same period of 1998.
Nine Months Ended September 30, 1999, Compared to Nine Months Ended
September 30, 1998: Allocated sales and EBIT decreased primarily due to the
scheduled refueling and maintenance outage at Wolf Creek during 1999.
LIQUIDITY AND CAPITAL RESOURCES
Other than operations, our primary source of short-term cash is from short-
term bank loans. At September 30, 1999, we had no short-term borrowings.
Protection One, Inc. (Protection One) a Delaware corporation, an 85% owned
subsidiary of our parent, Western Resources, is subject to compliance with
certain financial covenants pursuant to its senior credit facility. Senior
credit facility lenders have waived compliance with the current covenants
through December 3, 1999. Protection One currently believes it is likely,
absent successful implementation of alternatives discussed below, that it will
be unable to satisfy these covenants following the expiration of the waiver.
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.
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) was due for renewal on July 1, 1999. The contract
covers approximately 1,440 employees who are currently working under the terms
of the existing contract. Western Resources had reached a tentative agreement
with the IBEW leadership. The IBEW employees did not ratify the agreement on
October 27, 1999. Negotiations continue. Western Resources has experienced no
strikes or work stoppages as a result of the expiration of the contract. All
employees are provided by Western Resources.
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. The Mayor of Wichita and the Wichita City Council are
exploring ways to reduce the cost of electric service in Wichita. Our rates are
currently 5% below the national average for retail customers, but 20% higher
than the average rates charged to retail customers in territories served by
Western Resources' KPL division. 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.
Electric Utility Operations: 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 NERC's standards, it was 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. As of September
30, 1999, based on manhours as a measure of work effort, Western Resources
believes it is approximately 93% complete with its readiness efforts.
The estimated progress of Western Resources departments and business units,
exclusive of WCNOC, at September 30, 1999, based on percentage of completion in
manhours, is as follows:
Mission
Total Critical
Department/Business Unit Systems Systems
Fossil Fuel . . . . . . . . . . . 84% 100%
Power Delivery. . . . . . . . . . 82% 100%
Information Technology. . . . . . 97% 100%
Administrative. . . . . . . . . . 91% 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 $6.3 million, of
which $3.8 million represents IT costs and $2.5 million represents non-IT costs.
As of September 30, 1999, Western Resources has expensed approximately $6.0
million of these costs, of which $3.8 million represent IT costs and $2.2
million represent non-IT costs. Western Resources expects to incur the
remaining $0.3 million, of which substantially all represents non-IT costs, by
the end of 1999. Western Resources has allocated approximately $2.4 million of
the expensed costs to our company and we expect an additional $0.1 million to be
allocated for the remaining costs to be incurred.
WOLF CREEK NUCLEAR OPERATING CORPORATION: The table below sets forth
estimates of the status of the components of WCNOC's Year 2000 readiness program
at September 30, 1999.
Mission
Critical
Phase Systems
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 approximately
92% completed at September 30, 1999. The remaining non-mission critical
remediations are scheduled to be completed by December 31, 1999.
WCNOC has estimated the costs to complete the Year 2000 project at $3.5
million ($1.7 million, our share). As of September 30, 1999, $3.1 million
($1.4 million, our share) had been spent on the project. A summary of the
projected costs to complete and actual costs incurred through September 30,
1999, is as follows:
Projected Actual
Costs Costs
(Dollars in Thousands)
Wolf Creek Labor and Expenses. . $ 499 $ 484
Contractor Costs . . . . . . . . 1,254 924
Remediation Costs. . . . . . . . 1,763 1,661
Total. . . . . . . . . . . . . $3,516 $3,069
Approximately $3 million ($1.4 million, our share) of WCNOC's total Year
2000 cost is purchased items and installation costs associated with remediation.
A significant reduction in overall total Year 2000 costs continue to be realized
as alternate remediation paths are identified, eliminating 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.
WCNOC has filed its Year 2000 plan and status report with the NRC. In
September 1999, the NRC informed WCNOC that it had satisfied the requirements
for Year 2000 readiness.
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.
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 Nine Months Ended September 30, 1999 (filed
electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
None
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 November 12, 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
Nine
Months
Ended
Sept 30, Year Ended December 31,
1999 1998 1997 1996 1995 1994
Net Income. . . . . . . . . . . . . $ 76,487 $103,765 $ 52,128 $ 96,274 $110,873 $104,526
Taxes on Income . . . . . . . . . . 32,902 44,971 17,408 36,258 51,787 55,349
Net Income Plus Taxes. . . . . 109,389 148,736 69,536 132,532 162,660 159,875
Fixed Charges:
Interest on Long-Term Debt. . . . 34,386 45,990 46,062 46,304 47,073 47,827
Interest on Other Indebtedness. . 2,786 3,368 4,388 11,758 5,190 5,183
Interest on Corporate-owned
Life Insurance Borrowings . . . 24,610 32,368 31,253 27,636 25,357 20,990
Interest Applicable to Rentals. . 18,499 25,106 25,143 25,539 25,375 25,096
Total Fixed Charges . . . . . 80,281 106,832 106,846 111,237 102,995 99,096
Earnings (1). . . . . . . . . . . . $189,670 $255,568 $176,382 $243,769 $265,655 $258,971
Ratio of Earnings to Fixed Charges. 2.36 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
9-MOS
DEC-31-1999
SEP-30-1999
37
0
84,174
2,692
43,841
271,328
3,673,907
1,186,341
3,100,502
206,995
684,240
0
0
1,065,634
74,097
3,100,502
499,066
499,066
110,120
350,177
0
0
37,172
109,389
32,902
76,487
0
0
0
76,487
0
0
