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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.   20549

FORM 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR

o    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

          Indicate 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.

          Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

          Registrant meets the conditions of General Instruction H(1)(a) and (b) to Form 10-Q for certain wholly-owned subsidiaries and is therefore filing this form with a reduced disclosure format.

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FORWARD-LOOKING STATEMENTS

          Certain matters discussed 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:

          These lists are not all-inclusive because it is not possible to predict all possible factors.

          See “Item 1.  Business — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2001, for additional information on matters that could impact our operations and financial results.  Any forward-looking statement speaks only as of the date such statement was made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made except as required by applicable laws or regulations.

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PART I.  Financial Information

ITEM 1.  FINANCIAL STATEMENTS

KANSAS GAS AND ELECTRIC COMPANY

CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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KANSAS GAS AND ELECTRIC COMPANY

CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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KANSAS GAS AND ELECTRIC COMPANY

CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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KANSAS GAS AND ELECTRIC COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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KANSAS GAS AND ELECTRIC COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)

1.  DESCRIPTION OF BUSINESS

          Kansas Gas and Electric Company (KGE, the company, we, us or our) is a rate-regulated electric utility incorporated in 1990 in the State of Kansas.  We are a wholly owned subsidiary of Westar Energy, Inc. (Westar Energy) and we provide rate-regulated electric service using the name Westar Energy.  We are engaged principally in the generation, purchase, transmission, distribution and sale of electricity in southeastern Kansas, including the Wichita metropolitan area. 

          We own 47% of Wolf Creek Nuclear Operating Corporation (WCNOC), the operating company for Wolf Creek Generating Station (Wolf Creek).  We record our proportionate share of all transactions of WCNOC as we do other jointly owned facilities.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

          We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (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.  The accompanying consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the year ended December 31, 2001 (2001 Form 10-K).

Use of Management’s Estimates

          The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  In management’s opinion, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation of the financial statements, have been included.  The results of operations for the three and nine months ended September 30, 2002, are not necessarily indicative of the results to be expected for the full year.

Defeasance of Outstanding Debt

          Under GAAP, we are required to continue reporting as outstanding debt on our consolidated balance sheets the $135 million principal amount of our first mortgage bonds due December 15, 2003, until the funds deposited with the trustee are used to retire such bonds at maturity.  The cash deposited with the trustee is included in restricted cash on our consolidated balance sheet and can only be used for the purpose of repaying this indebtedness and related interest.  See Note 8 for discussion of debt financings completed during the second quarter of 2002.

Cumulative Effect of Accounting Change

          Effective January 1, 2001, we adopted Statement of Financial Accounting Standard (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS Nos. 137 and 138 (collectively, SFAS No. 133).  We use derivative instruments (primarily swaps, options and futures) to manage

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interest rate exposure and the commodity price risk inherent in fossil fuel purchases and electricity sales.  Under SFAS No. 133, all derivative instruments, including our energy trading contracts, are recorded on our consolidated balance sheets as either an asset or liability measured at fair value.  Changes in a derivative’s fair value must be recognized currently in earnings unless specific hedge accounting criteria are met.  Cash flows from derivative instruments are presented in net cash flows from operating activities.

          Derivative instruments used to manage commodity price risk inherent in fuel purchases and electricity sales are classified as energy trading contracts on our consolidated balance sheets.  Energy trading contracts representing unrealized gain positions are reported as assets; energy trading contracts representing unrealized loss positions are reported as liabilities.

          Prior to January 1, 2001, gains and losses on our derivatives used for managing commodity price risk were deferred until settlement.  These derivatives were not designated as hedges under SFAS No. 133.  Accordingly, on January 1, 2001, we recognized an unrealized gain of $12.9 million, net of $8.5 million of tax.  This gain is presented on our consolidated statement of income in our 2001 Form 10-K as a cumulative effect of a change in accounting principle.  Accounting for derivatives under SFAS No. 133 will increase volatility of our future earnings.

Accounting Changes

          On July 1, 2002, we began reporting mark-to-market gains and losses on energy trading contracts on a net basis, whether realized or unrealized, in our consolidated income statements. Prior to July 1, 2002, we reported gains on these contracts in sales and losses in cost of sales in our consolidated  income statement.  Subsequent to July 1, 2002, all gains and losses are reported in revenues.  See Note 3 for additional information on the effects of the accounting change.

          Additionally, in October 2002, the Financial Accounting Standards Board (FASB), through the Emerging Issues Task Force (EITF), rescinded Issue 98-10, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities.”  As a result, all new contracts that would otherwise have been accounted for under Issue 98-10 and that do not fall within the scope of SFAS No. 133 will no longer be marked-to-market and recorded in earnings beginning on October 25, 2002.  Effective January 1, 2003, a cumulative effect of a change in accounting principle will be recorded related to any remaining contracts that were accounted for under Issue 98-10 and that do not fall within the scope of SFAS No. 133.  We are currently evaluating the potential effect of this change in accounting principle.

Change in Depreciation Rates

          In its rate order of July 25, 2001, the Kansas Corporation Commission (KCC) extended the recovery period for certain of our generating assets for regulatory rate making purposes.  On April 1, 2002, we adopted the new depreciation rates as prescribed in the KCC order for GAAP purposes, after exhausting the available appeals process to contest the extension of our recovery periods for our LaCygne 2 and Wolf Creek generating stations.  This change is expected to reduce our annual depreciation expense in our GAAP financial statements by approximately $18 million.  See Note 4 for additional information.

Reclassifications

          Certain amounts in prior years have been reclassified to conform with classifications used in the current year presentation.

3.  FINANCIAL INSTRUMENTS, ENERGY TRADING AND RISK MANAGEMENT

          Our operations are exposed to market risks from changes in commodity prices and interest rates that could affect our results of operations and financial condition.  We manage our exposure to these market risks through our regular operating and financing activities and, when deemed appropriate, hedge these risks through the use of derivative financial instruments.  We use the term hedge to mean a strategy designed to manage risks of volatility in

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prices or rate movements on certain assets, liabilities or anticipated transactions by creating a relationship in which gains or losses on derivative instruments are expected to counterbalance the losses or gains on the assets, liabilities or anticipated transactions exposed to such market risks.  We use derivative instruments as risk management tools consistent with our business plans and prudent business practices and for energy trading purposes.

Energy Trading Contracts

          We engage in both trading and non-trading activities in our commodity price risk management activities.  We trade electricity, coal, natural gas and oil.  We utilize a variety of financial instruments, including forward contracts involving cash settlements or physical delivery of an energy commodity, options, swaps requiring payments (or receipt of payments) from counterparties based on the differential between specified prices for the related commodity and futures traded on electricity, natural gas and oil.

          We are involved in trading activities primarily to minimize risk from market fluctuations, capitalize on our market knowledge and enhance system reliability.  Net open positions exist or are established due to the origination of new transactions and our assessment of, and response to, changing market conditions.  To the extent we have open positions, we are exposed to the risk that fluctuating market prices could adversely impact our financial position or results from operations.

          We have considered a number of risks and costs associated with the future contractual commitments included in our energy portfolio.  These risks include credit risks associated with the financial condition of counterparties, product location (basis) differentials and other risks.  The counterparties in our portfolio are primarily large energy marketers and major utility companies.  The creditworthiness of our counterparties could positively or negatively impact our overall exposure to credit risk.  We maintain credit policies with regard to our counterparties that, in management’s view, minimize overall credit risk.

          We are also exposed to commodity price changes outside of trading activities.  We use derivatives for non-trading purposes and a mix of various fuel types primarily to reduce exposure relative to the volatility of market and commodity prices.  Due to the volatility of power market and gas prices, past prices cannot be used to predict future prices.

          Additional factors that affect our commodity price exposure are the quantity and availability of fuel used for generation and the quantity of electricity customers will consume.  Quantities of fossil fuel used for generation could vary dramatically year to year based on the particular fuel’s availability, price, deliverability, unit outages and nuclear refueling.  Our customers’ electricity usage could also vary dramatically year to year based on the weather or other factors.

Hedging Activity

          During the third quarter of 2001, Westar Energy entered into hedging relationships to manage commodity price risk associated with future natural gas purchases in order to protect us and our customers from adverse price fluctuations in the natural gas market.  Initially, Westar Energy entered into futures and swap contracts with terms extending through July 2004 to hedge price risk for a portion of our anticipated natural gas fuel requirements for our generation facilities.  We have designated these hedging relationships as cash flow hedges in accordance with SFAS No. 133.  Through the third quarter of 2002, we have burned 13,800,000 MMBtu.  In September 2002, we determined that we had overhedged approximately 8,280,000 MMBtu for the remaining period of the hedge and we recognized a gain in earnings of $2.8 million as a result of the discontinuance of this portion of the cash flow hedge.  We are currently forecasting that we need a notional volume of 4,830,000 MMBtu for the remainder of the hedged period of October 2002 through July 2004. 

          Effective October 4, 2001, we entered into a $500 million interest rate swap agreement with a term of two years.  At that time, the effect of the swap agreement was to fix the annual interest rate on the term loan at 6.18%.  In June 2002, we refinanced the term loan associated with this swap, which increased the effective rate of the swap to 6.43%.  At September 30, 2002, the variable rate in effect for the term loan was 4.82%.  Changes in the fair value of this cash flow hedge are due to fluctuations in the variable interest rate.

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          The following tables summarize the effects natural gas hedges had on our financial position and results of operations for the three and nine months ended September 30, 2002:

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Fair Value of Energy Trading Contracts

          The tables below show the fair value and the notional values of energy trading contracts outstanding for the nine months ended September 30, 2002, their sources and maturity periods:

          These contracts were valued through market exchanges and, where necessary, broker quotes and industry publications.  The sources of the fair values of the financial instruments related to these contracts are summarized in the following table:

Effects of Accounting Changes

          On July 1, 2002, we began reporting mark-to-market gains and losses on energy trading contracts on a net basis, whether realized or unrealized, in our consolidated income statements.  Prior to July 1, 2002, we reported gains on these contracts in sales and losses in cost of sales in our consolidated income statements.  Subsequent to July 1, 2002, all gains and losses are reported in revenues.  The changes are reflected in our consolidated financial statements for the third quarter of 2002.  Prior periods shown in our consolidated financial statements have been reclassified to reflect the effect of this change and to be comparable as required by GAAP.  As a result of the net presentation, we expect significant reductions in our energy revenues and expenses from those reported in prior periods, which will not affect gross profit or net income.  A summary of the effects of this change for the three and nine months ended September 30, 2002 and 2001 is as follows:

Changes to Income Statement

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Changes to Income Statement

          Additionally, in October 2002, the FASB, through the EITF, rescinded Issue 98-10.  As a result, all new contracts that would otherwise have been accounted for under Issue 98-10 and that do not fall within the scope of SFAS No. 133 will no longer be marked-to-market and recorded in earnings beginning on October 25, 2002.  Effective January 1, 2003, a cumulative effect of a change in accounting principle will be recorded related to any remaining contracts that were accounted for under Issue 98-10 and that do not fall within the scope of SFAS No. 133.  We are currently evaluating the potential effect of this change in accounting principle.

4.  RATE MATTERS AND REGULATION

KCC Rate Proceedings

          On November 27, 2000, Westar Energy and we filed applications with the KCC for an increase in retail rates.  On July 25, 2001, the KCC ordered an annual reduction in our electric rates of $41.2 million. 

          On August 9, 2001, Westar Energy and we filed petitions with the KCC requesting reconsideration of the July 25, 2001 order.  The petitions specifically asked for reconsideration of changes in depreciation, reductions in rate base related to deferred income taxes associated with the acquisition premium and a deferred gain on the sale and leaseback of our LaCygne 2 generating unit and several other issues.  On September 5, 2001, the KCC issued an order in response to our motion for reconsideration, which did not change our rate reduction.  On November 9, 2001, we filed an appeal of the KCC decisions with the Kansas Court of Appeals in an action captioned “Western Resources, Inc. and Kansas Gas and Electric Company vs. The State Corporation Commission of the State of Kansas.”  On March 8, 2002, the Court of Appeals upheld the KCC orders.  On April 8, 2002, Westar Energy and we filed a petition for review of the decision of the Court of Appeals with the Kansas Supreme Court.  Our petition for review was denied on June 12, 2002.

 KCC Investigations and Orders

          See Note 5 for a discussion of the order issued by the KCC on July 20, 2001 in the KCC’s docket investigating the proposed separation of Westar Energy’s electric utility businesses (including us) from its non-utility businesses and other aspects of Westar Energy’s unregulated businesses.

          Effective July 1, 2002, Westar Energy entered into an outsourcing agreement with a newly formed subsidiary of Protection One, named Protection One Data Services, Inc. (PODS), pursuant to which Westar Energy outsourced to PODS a significant portion of the services and functions previously performed by Westar Energy’s internal information technology department.  On August 16, 2002, the KCC initiated an investigation as to whether participation by Westar Energy and PODS in this transaction and relationship is consistent with Kansas law, including Westar Energy’s and our statutory obligation to provide efficient and reliable service to Kansas customers

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at just and reasonable rates.  A technical hearing concerning this matter is scheduled for December 12, 2002.  Subject to the outcome of the investigation, the KCC conditionally approved an accounting order to preserve the cost savings attributable under the agreement.

         On November 8, 2002, the KCC issued an order, which requires Westar Energy and us to initiate a corporate and financial restructuring, among other things.  See Note 5 for additional information.

FERC Proceeding

          On September 6, 2002, Westar Energy filed an application with the FERC seeking authorization to issue unsecured long-term debt securities, on or before October 31, 2004, in an amount not to exceed $650 million at any one time.  The proposed debt securities will be issued to retire currently outstanding securities and indebtedness related to Westar Energy’s electric operations, including our indebtedness and accrued and unpaid interest due at maturity.  On October 3, 2002, the KCC and MBIA Insurance Corporation (MBIA) filed motions with the FERC to intervene.  Neither of the intervenors opposed the issuance of the requested borrowing authority.  The KCC stated that it did not oppose the application based on Westar Energy’s continued action consistent with its declaration that the funds would be used to retire existing debt and not to add new debt or to increase the aggregate amount of Westar Energy’s or our outstanding debt.  We cannot predict what action the FERC will take regarding this matter.

5.  PNM TRANSACTION

PNM Transaction

          On May 28, 2002, Westar Energy gave notice to Public Service Company of New Mexico (PNM) of termination of the merger agreement with PNM.  On September 25, 2002, PNM and Westar Energy announced that litigation between them had been settled without the payment of any damages or fees.  Each side agreed to release all of its claims and potential claims in connection with the transaction.

KCC Proceedings and Orders

          The merger with PNM contemplated the completion of a rights offering for shares of Westar Industries, Inc. (Westar Industries), a wholly owned subsidiary of Westar Energy, prior to closing.  On May 8, 2001, the KCC opened an investigation of the proposed separation of Westar Energy’s electric utility businesses (including us) from its non-utility businesses, including the rights offering, and other aspects of its unregulated businesses.  The order opening the investigation indicated that the investigation would focus on whether the separation and other transactions involving Westar Energy’s unregulated businesses are consistent with its obligation to provide efficient and sufficient electric service at just and reasonable rates to its electric utility customers.  The KCC staff was directed to investigate, among other matters, the basis for and the effect of the Asset Allocation and Separation Agreement Westar Energy entered into with Westar Industries in connection with the proposed separation and the intercompany payable owed by Westar Energy to Westar Industries, the separation of Westar Industries, the effect of the business difficulties faced by Westar Energy’s unregulated businesses and whether they should continue to be affiliated with its electric utility business, and Westar Energy’s present and prospective capital structures.  On May 22, 2001, the KCC issued an order nullifying the Asset Allocation and Separation Agreement, prohibiting Westar Energy and Westar Industries from taking any action to complete the rights offering for common stock of Westar Industries, which was to be a first step in the separation, and scheduled a hearing to consider whether to make the order permanent. 

          On July 20, 2001, the KCC issued an order that, among other things:  (1) confirmed its May 22, 2001 order prohibiting Westar Energy and Westar Industries from taking any action to complete the proposed rights offering and nullifying the Asset Allocation and Separation Agreement; (2) directed Westar Energy and Westar Industries not to take any action or enter into any agreement not related to normal utility operations that would directly or indirectly increase the share of debt in Westar Energy’s capital structure applicable to its electric utility operations, which has the effect of prohibiting it from borrowing to make a loan or capital contribution to Westar Industries; and (3) directed Westar Energy to present a financial plan consistent with parameters established by the KCC’s order to restore financial health, achieve a balanced capital structure and protect ratepayers from the risks of its non-utility businesses.  In its order, the KCC also acknowledged that Westar Energy and we are currently operating efficiently and at reasonable cost and stated that it was not disapproving the PNM transaction or a split-off of Westar Industries.

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Westar Energy appealed the orders issued by the KCC to the District Court of Shawnee County, Kansas.  On February 5, 2002, the District Court issued a decision finding that the KCC orders were not final orders and that the District Court lacked jurisdiction to consider the appeal.  Accordingly, the matter was remanded to the KCC for review of the financial plan Westar Energy filed as ordered by the KCC as discussed below.

          On February 11, 2002, the KCC issued an order primarily related to procedural matters for the review of the financial plan.  In addition, the order required that Westar Energy and the KCC staff make filings addressing whether the filing of applications by Westar Energy and us at the Federal Energy Regulatory Commission (FERC), seeking renewal of existing borrowing authority, violated the July 20, 2001 KCC order directing that Westar Energy not increase the share of debt in its capital structure applicable to its electric utility operations.  The KCC staff subsequently filed comments asserting that the refinancing of existing indebtedness with new indebtedness secured by utility assets would in certain circumstances violate the July 20, 2001 KCC order.  The KCC filed a motion to intervene in the proceeding at FERC asserting the same position. 

          On March 26, 2002, the KCC issued an order in which it acknowledged that Westar Energy’s FERC filings technically did not violate the July 20, 2001 KCC order.  However, the KCC expressed concern that Westar Energy’s refinancing plans as described in the FERC filings could, when implemented, increase the share of debt in the capital structure applicable to Westar Energy’s electric utility operations.  By agreement with the KCC staff and other intervenors, the FERC applications were amended so that the requested authority was limited to short-term (12 months or less) borrowing authority and, as a result, the KCC’s and certain other parties’ interventions were withdrawn.  On June 14, 2002, the FERC issued orders approving Westar Energy’s and our applications for short-term borrowing authority. 

The Financial Plan

          The July 20, 2001 KCC order directed Westar Energy to present a financial plan to the KCC.  Westar Energy presented a financial plan to the KCC on November 6, 2001, which it amended on January 29, 2002.  The principal objective of the financial plan was to reduce Westar Energy’s total debt as calculated by the KCC to approximately $1.8 billion, a reduction of approximately $1.2 billion.  The financial plan contemplated that Westar Energy would proceed with a rights and warrants offering of Westar Industries common stock to Westar Energy’s shareholders and that, in the event that the PNM merger and related split-off did not close, Westar Energy would use its best efforts to sell its shares of Westar Industries common stock, or shares of its common stock, upon the occurrence of certain events. 

          On May 30, 2002, Westar Industries gave notice pursuant to a shareholder agreement with ONEOK of its intention to sell all of the common stock and preferred stock of ONEOK owned by Westar Industries.  ONEOK had until August 28, 2002 to purchase the stock, but advised Westar Industries that it would not purchase the stock.  Accordingly, Westar Industries is now free to pursue a sale of the stock and is free of certain restrictions (including percentage limitations on sales) contained in the shareholder agreement.  On August 29, 2002, Westar Industries announced that it intends to sell its ownership in the common stock and preferred stock of ONEOK, which represents an approximate 45% ownership interest in ONEOK.  Westar Industries plans to sell outright, or sell an option to purchase, all or a portion of the ONEOK stock it owns in privately negotiated transactions, or sales into the public market.  Under the shareholder agreement, ONEOK must take all commercially reasonable steps to assist Westar Industries in securing such regulatory approvals as may be necessary to allow a sale of the stock provided such approvals would not reasonably be expected to have a material adverse effect on ONEOK.  Westar Industries has until September 30, 2003 to complete a sale of the stock.  Westar Energy cannot predict the outcome of this proposed sale of ONEOK stock nor can they predict the net proceeds they would receive.  If the ONEOK stock is not sold, the original provisions of the shareholder agreement will return in full force and effect. 

          A hearing at the KCC that reviewed the financial plan began on July 2, 2002 and concluded July 11, 2002.  In conjunction with the hearing, on July 9, 2002, the KCC approved the sale of Westar Industries’ interest in ONEOK subject to, among other things, the condition that the net proceeds be used to decrease utility debt. 

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November 8, 2002 KCC Order

          On November 8, 2002, the KCC issued an order addressing Westar Energy’s proposed financial plan. The order contained the following findings and directions.

          Westar Energy and we are in the process of reviewing and assessing the order and its potential impact on its and our operations, financial condition and results of operations and Westar Energy expects to file a motion for reconsideration or clarification of some provisions of the order. Since the order was issued recently and Westar Energy and we are still assessing it, there may be additional issues arising from the order not discussed here.

6.  INCOME TAXES

          We have recorded income tax benefits for the interim periods using the federal statutory rate of 35%. The effective income tax rates set forth below are computed by dividing total income taxes by earnings before income taxes.