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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 June 30, 2003
    OR

¨

 

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

incorporation or organization)

    

(I.R.S. Employer

Identification Number)

 

P.O. BOX 208

Wichita, Kansas 67201

(316) 261-6611


(Address, including Zip code and telephone number, including area code, of registrant’s principal executive offices)

 


 

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.  Yes  x  No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  x    No  ¨

 

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

 

Common Stock, No Par Value      1,000 Shares

    
(Class)      (Outstanding at August 8, 2003)

 

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.

 


 


TABLE OF CONTENTS

 

         Page

PART I. Financial Information     
Item 1.  

Financial Statements

    
   

Consolidated Balance Sheets

   4
   

Consolidated Statements of Income (Loss) and Comprehensive Income

   5-6
   

Consolidated Statements of Cash Flows

   7
   

Notes to Consolidated Financial Statements

   8
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   14
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

   22
Item 4.  

Controls and Procedures

   22
PART II. Other Information     
Item 1.  

Legal Proceedings

   23
Item 2.  

Changes in Securities and Use of Proceeds

   23
Item 3.  

Defaults Upon Senior Securities

   23
Item 4.  

Submission of Matters to a Vote of Security Holders

   23
Item 5.  

Other Information

   23
Item 6.  

Exhibits and Reports on Form 8-K

   23
Signature    24

 

2


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,” “target,” “expect,” “pro forma,” “estimate,” “intend” 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; liquidity and capital resources; litigation; accounting matters; possible corporate restructurings, mergers, acquisitions and dispositions; the sale of assets proposed in Westar Energy, Inc.’s Debt Reduction and Restructuring Plan approved by the Kansas Corporation Commission on July 25, 2003; compliance with debt and other restrictive covenants; interest and dividends; environmental matters; nuclear operations; and the overall economy of our service area.

 

What happens in each case could vary materially from what we expect because of such things as: electric utility deregulation or re-regulation; regulated and competitive markets; ongoing municipal, state and federal activities; economic conditions; changes in accounting requirements and other accounting matters; changing weather; rate and other regulatory matters; the impact of changes and downturns in the energy industry and the market for trading wholesale electricity; the sale of Westar Energy, Inc.’s interests in ONEOK, Inc., and the proposed sale of Westar Energy, Inc.’s interests in Protection One, Inc.; the impact on Westar Energy, Inc. of the federal grand jury subpoena by the United States Attorney’s Office requesting certain information from Westar Energy, Inc.; the impact on Westar Energy, Inc. of the outcome of the investigation being conducted by the Federal Energy Regulatory Commission regarding power trades with Cleco Corporation and its affiliates and other power marketing and transmission transactions; political, legislative and regulatory developments; regulatory, legislative and judicial actions; the impact of the purported shareholder and employee class action lawsuits filed against Westar Energy, Inc.; the impact of changes in interest rates generally; homeland security considerations; coal, natural gas and oil prices; and other circumstances affecting anticipated operations, sales and costs.

 

These lists are not all-inclusive because it is not possible to predict all factors. This report should be read in its entirety and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2002. No one section of the report deals with all aspects of the subject matter and additional information on some matters that could impact our operations and financial results may be included in our Annual Report on Form 10-K for the year ended December 31, 2002. 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.

 

3


KANSAS GAS AND ELECTRIC COMPANY

 

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)

 

     June 30,    December 31,
     2003

   2002

ASSETS

             

CURRENT ASSETS:

             

Cash and cash equivalents

   $ 7,297    $ 6,150

Restricted cash

     140,152      145,282

Accounts receivable, net

     69,702      50,738

Inventories and supplies

     67,968      65,555

Energy trading contracts

     21,315      11,039

Prepaid expenses and other

     46,597      24,158
    

  

Total Current Assets

     353,031      302,922
    

  

PROPERTY, PLANT AND EQUIPMENT, NET

     2,373,746      2,375,645
    

  

OTHER ASSETS:

             

Regulatory assets

     304,003      238,294

Energy trading contracts

     4,988      4,525

Other

     94,204      85,007
    

  

Total Other Assets

     403,195      327,826
    

  

TOTAL ASSETS

   $ 3,129,972    $ 3,006,393
    

  

LIABILITIES AND SHAREHOLDER’S EQUITY

             

CURRENT LIABILITIES:

             

Current maturities of long-term debt

   $ 135,000    $ 135,000

Accounts payable

     38,071      31,182

Payable to affiliates

     25,910      24,077

Accrued liabilities

     81,898      66,169

Energy trading contracts

     15,950      9,480

Deferred tax liability

     14,562      13,470

Other

     6,828      6,929
    

  

Total Current Liabilities

     318,219      286,307
    

  

LONG-TERM LIABILITIES:

             

Long-term debt, net

     549,543      549,486

Deferred income taxes and investment tax credits

     713,526      714,256

Deferred gain from sale-leaseback

     156,724      162,638

Energy trading contracts

     3,331      2,616

Other

     283,827      171,709
    

  

Total Long-Term Liabilities

     1,706,951      1,600,705
    

  

COMMITMENTS AND CONTINGENCIES (Note 5)

             

SHAREHOLDER’S EQUITY:

             

Common stock, without par value; authorized and issued 1,000 shares

     1,065,634      1,065,634

Accumulated other comprehensive income, net

     2,843      430

Retained earnings

     36,325      53,317
    

  

Total Shareholder’s Equity

     1,104,802      1,119,381
    

  

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY

   $ 3,129,972    $ 3,006,393
    

  

 

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

 

4


KANSAS GAS AND ELECTRIC COMPANY

 

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)

 

    

Three Months Ended

June 30,


 
     2003

    2002

 

SALES

   $ 172,165     $ 161,873  

COST OF SALES

     41,191       46,842  
    


 


GROSS PROFIT

     130,974       115,031  
    


 


OPERATING EXPENSES:

                

Operating and maintenance

     56,260       55,737  

Depreciation and amortization

     22,989       22,395  

Selling, general and administrative

     16,737       17,806  
    


 


Total Operating Expenses

     95,986       95,938  
    


 


INCOME FROM OPERATIONS

     34,988       19,093  
    


 


OTHER INCOME (EXPENSES), NET

     (1,441 )     (693 )
    


 


INTEREST EXPENSE:

                

Interest expense on long-term debt

     10,887       11,027  

Interest expense on short-term debt and other

     906       752  
    


 


Total Interest Expense

     11,793       11,779  
    


 


EARNINGS BEFORE INCOME TAXES

     21,754       6,621  

Income tax expense (benefit)

     5,770       (1,000 )
    


 


NET INCOME

   $ 15,984     $ 7,621  
    


 


OTHER COMPREHENSIVE INCOME, NET OF TAX:

                

Unrealized holding gain on cash flow hedges arising during the period

   $ 2,199     $ 3,601  

Reclassification adjustment for (gain) loss included in net income

     (766 )     823  

Income tax expense

     (570 )     (1,666 )
    


 


Total other comprehensive gain, net of tax

     863       2,758  
    


 


COMPREHENSIVE INCOME

   $ 16,847     $ 10,379  
    


 


 

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

 

5


KANSAS GAS AND ELECTRIC COMPANY

 

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)

 

    

Six Months Ended

June 30,


 
     2003

    2002

 

SALES

   $ 344,835     $ 310,556  

COST OF SALES

     84,116       85,710  
    


 


GROSS PROFIT

     260,719       224,846  
    


 


OPERATING EXPENSES:

                

Operating and maintenance

     111,695       107,870  

Depreciation and amortization

     45,335       48,987  

Selling, general and administrative

     32,337       43,350  
    


 


Total Operating Expenses

     189,367       200,207  
    


 


INCOME FROM OPERATIONS

     71,352       24,639  
    


 


OTHER INCOME (EXPENSES), NET

     (3,853 )     (4,075 )
    


 


INTEREST EXPENSE:

                

Interest expense on long-term debt

     21,959       21,758  

Interest expense on short-term debt and other

     1,597       1,522  
    


 


Total Interest Expense

     23,556       23,280  
    


 


EARNINGS (LOSS) BEFORE INCOME TAXES

     43,943       (2,716 )

Income tax expense (benefit)

     10,935       (8,976 )
    


 


NET INCOME

   $ 33,008     $ 6,260  
    


 


OTHER COMPREHENSIVE INCOME, NET OF TAX:

                

Unrealized holding gain on cash flow hedges arising during the period

   $ 4,773     $ 16,733  

Reclassification adjustment for (gain) loss included in net income

     (766 )     1,488  

Income tax expense

     (1,594 )     (7,248 )
    


 


Total other comprehensive gain, net of tax

     2,413       10,973  
    


 


COMPREHENSIVE INCOME

   $ 35,421     $ 17,233  
    


 


 

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

 

6


KANSAS GAS AND ELECTRIC COMPANY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

    

Six Months Ended

June 30,


 
     2003

    2002

 

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:

                

Net income

   $ 33,008     $ 6,260  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation and amortization

     45,335       48,987  

Amortization of nuclear fuel

     7,070       5,881  

Amortization of deferred gain from sale-leaseback

     (5,914 )     (5,914 )

Net deferred taxes

     (1,233 )     (5,085 )

Net changes in energy trading assets and liabilities

     453       3,942  

Loss on sale of property

     —         1,423  

Changes in working capital items:

                

Restricted cash

     5,130       (10,281 )

Accounts receivable, net

     (8,720 )     (7,827 )

Inventories and supplies

     (2,413 )     2,289  

Prepaid expenses and other

     (22,439 )     (23,879 )

Accounts payable

     6,888       (3,950 )

Accrued and other current liabilities

     15,629       670  

Changes in other, assets

     (8,442 )     (16,020 )

Changes in other, liabilities

     27,191       14,670  
    


 


Cash flows from operating activities

     91,543       11,166  
    


 


CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:

                

Additions to property, plant and equipment, net

     (42,224 )     (34,738 )

Proceeds from disposition of property

     —         1,205  
    


 


Cash flows used in investing activities

     (42,224 )     (33,533 )
    


 


CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:

                

Funds in trust for debt repayment

     —         (135,000 )

Advances from parent company, net

     1,833       157,275  

Retirements of long-term debt

     (5 )     —    

Dividends to parent company

     (50,000 )     —    
    


 


Cash flows (used in) from financing activities

     (48,172 )     22,275  
    


 


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     1,147       (92 )

CASH AND CASH EQUIVALENTS:

                

Beginning of period

     6,150       5,564  
    


 


End of period

   $ 7,297     $ 5,472  
    


 


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

                

CASH PAID FOR:

                

Interest on financing activities, net of amount capitalized

   $ 18,560     $ 38,794  

 

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

 

7


KANSAS GAS AND ELECTRIC COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(Unaudited)

 

1.   DESCRIPTION OF BUSINESS

 

Kansas Gas and Electric Company is a rate-regulated electric utility incorporated in 1990 in the State of Kansas. Unless the context otherwise indicates, all references in this Form 10-Q to “the company,” “KGE,” “we,” “us,” “our” or similar words are to Kansas Gas and Electric Company. We are a wholly owned subsidiary of Westar Energy, Inc. (Westar Energy) and we provide rate-regulated electric service, together with the electric utility operations of Westar Energy, using the name Westar Energy. We provide electric generation, transmission and distribution services to approximately 300,000 customers 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), our nuclear powered generating facility. 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 generally accepted accounting principles (GAAP) for the United States of America 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, 2002 (2002 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, liabilities, revenues and expenses, and related 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. We evaluate our estimates on an on-going basis, including those related to bad debts, inventories, depreciation, revenue recognition, investments, intangible assets, income taxes, decommissioning of Wolf Creek, asset retirement obligations, environmental issues, contingencies and litigation. Actual results may differ from those estimates under different assumptions or conditions. In our 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 six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year.

 

Consolidation of Variable Interest Entities

 

In January 2003, the Financial Accounting Standards Board (FASB) issued Financial Interpretation Number (FIN) 46, “Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51.” This interpretation provides guidance related to identifying variable interest entities (previously known generally as special purpose entities or SPEs) and determining whether such entities should be consolidated. Certain disclosures are required when FIN 46 becomes effective if it is reasonably possible that a company will consolidate or disclose information about a variable interest entity when it initially applies FIN 46. This interpretation must be applied immediately to

 

8


variable interest entities created or obtained after January 31, 2003. For those variable interest entities created or obtained on or before January 31, 2003, we must apply the provisions of FIN 46 by the third quarter of 2003. We are currently evaluating the effect of FIN 46.

 

Accounting for Energy Trading Contracts

 

In October 2002, the Emerging Issues Task Force (EITF), reached consensus on EITF Issue No. 02-03, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.” EITF Issue No. 02-03, in part, rescinded EITF Issue No. 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 No. 98-10 and that do not fall within the scope of Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS Nos. 137, 138 and 149 (collectively SFAS No. 133), can no longer be marked-to-market and recorded in earnings as of October 25, 2002. We are not affected by this change in accounting principle and are not required to reclassify any of our contracts since our energy trading contracts qualify as derivative instruments under the guidance of SFAS No. 133. EITF Issue No. 02-03 also requires that energy trading contracts and derivatives, whether settled financially or physically, be reported in the income statement on a net basis effective January 1, 2003. We began to classify our energy trading contracts on a net basis during the third quarter of 2002.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component and amends the definition of an underlying, which is a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 except for certain implementation issues and certain provisions of forward purchase and sale contracts and for hedging relationships designated after June 30, 2003. We are currently evaluating the effect of SFAS No. 149.

 

Reclassifications

 

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

 

3.   RATE MATTERS AND REGULATION

 

KCC Orders and Debt Reduction and Restructuring Plan

 

On November 8, 2002, the Kansas Corporation Commission (KCC) issued an order directing Westar Energy to file a financial plan and to address additional concerns regarding Westar Energy’s level of debt and the structure of Westar Energy. Following Westar Energy’s filing of a motion for reconsideration and clarification of this order, the KCC issued an order on December 23, 2002 providing further direction in these matters. These orders led Westar Energy to file a Debt Reduction and Restructuring Plan (the Debt Reduction Plan) with the KCC on February 6, 2003.

 

On February 10, 2003, the KCC issued an order granting limited reconsideration of its December 23, 2002 order. The KCC also stated that the Debt Reduction Plan appears to make a good-faith effort to address the concerns expressed in the KCC’s prior orders and that the KCC needed additional time to review the Debt Reduction Plan prior to addressing other issues raised in Westar Energy’s petition for reconsideration of the December 23, 2002 order.

 

On July 21, 2003, Westar Energy and Westar Industries, Inc. (Westar Industries), a wholly owned subsidiary of Westar Energy, entered into a Stipulation and Agreement (Stipulation) with the KCC staff and certain other intervenors in the docket considering the Debt

 

9


Reduction Plan. In the Stipulation, the parties to the Stipulation asked the KCC to issue an order approving the Debt Reduction Plan, subject to the terms and conditions of the Stipulation. The KCC issued an order approving the Stipulation on July 25, 2003. The principal terms of the Stipulation are as follows:

 

    Westar Energy agrees to fully implement the Debt Reduction Plan by December 31, 2004, unless prevented by events beyond its control, in which case the deadline for implementation may be extended by the KCC upon a proper showing by Westar Energy.

 

    Westar Energy commits to reduce its debt to a level consistent with investment grade bond ratings and to have a capital structure containing at least 40% common equity by December 31, 2004. This commitment replaces a requirement imposed in a previous KCC order that Westar Energy reduce utility debt to $1.67 billion by August 1, 2003.

 

    Westar Energy and we will file requests for a change in rates on May 1, 2005, based on a test year consisting of the twelve months ending December 31, 2004. Prior to May 1, 2005, Westar Energy and we will not make a filing to increase our Kansas jurisdictional electric rates and the other parties to the Stipulation will not file a rate complaint or motion for Westar Energy and us to show cause why Westar Energy’s and our rates should not be reduced.

 

    Westar Energy and we will pay rebates to our Kansas jurisdictional customers on May 1, 2005 in the amount of $10.5 million and on January 1, 2006 in the amount of $10 million. Westar Energy and we will also pay a rebate to customers of the amounts Westar Energy recovers from David C. Wittig, Westar Energy’s former president, chief executive officer and chairman, and Douglas T. Lake, Westar Energy’s former executive vice president and chief strategic officer, for compensation totaling approximately $2.3 million paid to them that was included in electric rates during calendar years 1998 through 2002, net of costs incurred by Westar Energy to effect such recovery. See Note 10 for more information about Westar Energy’s effort to recover compensation from Mr. Wittig and Mr. Lake.

 

    Westar Industries will transfer to Westar Energy all of its stock in ONEOK, Inc. and all of its cash in excess of $2 million within 30 days of the order.

 

The Debt Reduction Plan and certain of the related KCC orders discussed above are discussed in further detail in our 2002 Form 10-K.

 

4.   INCOME TAXES

 

We have recorded income tax expense of $5.8 million and $10.9 million for the three and six months ended June 30, 2003, respectively, compared to income tax benefit of $1.0 million and $9.0 million for the same periods of 2002, using the effective tax rate method. Under this method, we compute the tax related to year-to-date income, except for significant, unusual or extraordinary items, at an estimated annual effective tax rate. We individually compute and recognize, when the transaction occurs, income tax expense related to significant, unusual or extraordinary items.

 

5.   COMMITMENTS AND CONTINGENCIES

 

EPA New Source Review

 

The Environmental Protection Agency (EPA) is conducting an enforcement initiative to determine whether modifications at a number of coal-fired power plants owned by Westar Energy and other utilities are subject to New Source Review requirements or New Source Performance Standards under Section 114 of the Clean Air Act (Section 114). Jeffrey Energy Center (JEC), which is 20% owned by us, is included in this initiative. This initiative focuses on whether expenditures at the plants were for routine maintenance or whether the expenditures were for substantial

 

10


modifications or resulted in improved operations. The EPA requires updating of emission controls when expenditures result in substantial modifications or improved operations.

 

The EPA has requested information from Westar Energy under Section 114. The request required Westar Energy to provide responses to specific EPA questions regarding certain projects and maintenance activities that the EPA believes may have violated the New Source Performance Standard and New Source Review requirements of the Clean Air Act. Westar Energy filed its response to the initial information requests from the EPA on April 30, 2003 and submitted additional requested information on June 16, 2003. Westar Energy is cooperating with this review but is unable to predict the outcome. Westar Energy and we believe that maintenance and capital activities performed at JEC were generally routine in nature and typical for the utility industry. However, no assurance can be given that the EPA will not assert that the expenditures resulted in substantial modifications or improved operations at JEC or that the EPA will not initiate an enforcement action to require that emission controls be updated at JEC. As part of its enforcement initiative, the EPA has initiated civil enforcement actions against other unaffiliated utilities that have received requests for information under Section 114. If required, the costs to update emission controls at JEC could be material.

 

Nuclear Decommissioning Study

 

The KCC issued an order on April 16, 2003 approving the August 2002 decommissioning study for Wolf Creek as discussed in our 2002 Form 10-K. On June 2, 2003, we filed a funding schedule with the KCC to reflect the KCC’s April 16, 2003 order. We anticipate a KCC order on the funding schedule in the third quarter of 2003.

 

6.   ASSET RETIREMENT OBLIGATIONS

 

In June 2001, FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 provides accounting requirements for the recognition and measurement of liabilities associated with the retirement of tangible long-lived assets. Under the standard, these liabilities are recognized at fair value as incurred and capitalized and depreciated over the appropriate period as part of the cost of the related tangible long-lived assets. The adoption of SFAS No. 143 does not impact income. Any income effects are offset by a regulatory asset created pursuant to SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.” Retirement obligations associated with long-lived assets included within the scope of SFAS No. 143 are those for which a legal obligation exists under enacted laws, statutes, written or oral contracts, including obligations arising under the doctrine of promissory estoppel.

 

We adopted SFAS No. 143 on January 1, 2003, which required us to recognize and estimate the liability for our 47% share of the estimated cost to decommission Wolf Creek. SFAS No. 143 requires the recognition of the present value of the asset retirement obligation we incurred at the time Wolf Creek was placed in service in 1985. On January 1, 2003, we recorded an asset retirement obligation of $74.7 million. In addition, we increased our property and equipment balance, net of accumulated depreciation, by $10.7 million. We also established a regulatory asset for $64.0 million, which represents the accretion of the liability since 1985 and the increased depreciation expense associated with the increase in plant.

 

11


The following is a reconciliation of the asset retirement obligation, which is included in our consolidated balance sheet in other long-term liabilities:

 

    

As of

June 30, 2003


     (In Thousands)

Beginning asset retirement obligation

   $ —  

Transition liability

     74,745

Liabilities settled

     —  

Accretion expense

     2,975

Estimated cash flows revisions

     —  
    

Ending asset retirement obligation

   $ 77,720
    

 

The following presents pro forma asset retirement obligation information as if SFAS No. 143 had been adopted at January 1, 2002:

 

    

As of

June 30, 2003


  

As of

December 31, 2002


     (In Thousands)

Liabilities incurred:

             

Reported

   $ 77,720    $ —  

Pro forma

     77,720      74,745

 

7.   LEGAL PROCEEDINGS

 

We are involved in various legal, environmental and regulatory proceedings. We believe adequate provisions have been made and accordingly believe that the ultimate disposition of such matters will not have a material adverse effect upon our overall financial position or results of operations. See also Note 3 for discussion of KCC regulatory proceedings, Note 8 for discussion of the Special Committee investigation and Note 10 for information about potential liabilities to Mr. Wittig and Mr. Lake.

 

8.   SPECIAL COMMITTEE INVESTIGATION

 

In September 2002, Westar Energy’s board of directors appointed a Special Committee of directors to investigate management matters and matters that are the subject of a grand jury investigation and a Securities and Exchange Commission (SEC) inquiry. The Special Committee retained counsel and other advisors. The Special Committee completed its investigation and issued a report to Westar Energy’s board of directors on May 7, 2003 concerning the conclusions and recommendations reached as a result of the investigation. The investigation did not result in adjustments to Westar Energy’s or our previously filed financial statements.

 

9.   RELATED PARTY TRANSACTIONS

 

Our cash management function, including cash receipts and disbursements, is performed by Westar Energy. An intercompany account is used to record net receipts and disbursements between KGE and Westar Energy and between KGE and WR Receivables Corporation. The net amount payable to affiliates approximated $25.9 million at June 30, 2003 and $24.1 million at December 31, 2002 as reflected in our consolidated balance sheets.

 

Westar Energy provides all employees we utilize. Certain operating expenses have been allocated to us from Westar Energy. These expenses are allocated, depending on the nature of the expense, based on allocation studies, net investment, number of customers, and/or other appropriate factors. We believe such allocation procedures are reasonable.

 

12


We have declared dividends to Westar Energy for the three and six months ended June 30, 2003 of $25.0 million and $50.0 million, respectively.

 

10. POTENTIAL LIABILITIES TO DAVID C. WITTIG AND DOUGLAS T. LAKE

 

On June 13, 2003, Westar Energy filed a demand for arbitration with the American Arbitration Association asserting claims against Mr. Wittig and Mr. Lake arising out of their previous employment with Westar Energy. Among other things, Westar Energy is seeking to recover compensation and benefits previously paid to Mr. Wittig and Mr. Lake and to avoid compensation and other benefits Mr. Wittig and Mr. Lake claim to be owed to them as a result of their previous employment with Westar Energy. See Note 19 of the Notes to Consolidated Financial Statements in our 2002 Form 10-K, “Potential Liabilities to David C. Wittig and Douglas T. Lake,” for additional information about our potential liabilities to Mr. Wittig and Mr. Lake. Westar Energy is unable to predict the outcome of the arbitration.

 

11. SUBSEQUENT EVENT—SALE OF ACCOUNTS RECEIVABLE

 

On July 23, 2003, the term of the agreement pursuant to which Westar Energy and we transfer an undivided percentage ownership interest in a revolving pool of our accounts receivable arising from the sale of electricity to a multi-seller conduit administered by an independent financial institution through the use of a special purpose entity (SPE) was extended through July 21, 2004. For additional information, see Note 4 of the Notes to Consolidated Financial Statements in our 2002 Form 10-K, “Accounts Receivable.”

 

13


KANSAS GAS AND ELECTRIC COMPANY

 

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

INTRODUCTION

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations updates the information provided in our 2002 Form 10-K, and should be read in conjunction with that report. In this section, we discuss our general financial condition, significant changes and operating results. We explain:

 

  -   what factors impact our business,

 

  -   what our earnings and costs were for the three and six months ended June 30, 2003 and 2002,

 

  -   why these earnings and costs differ from period to period,

 

  -   how our earnings and costs affect our overall financial condition, and

 

  -   any other items that particularly affect our financial condition or earnings.

 

SUMMARY OF SIGNIFICANT ITEMS

 

KCC Orders and Westar Energy’s Debt Reduction and Restructuring Plan

 

On November 8, 2002, the KCC issued an order directing Westar Energy to file a financial plan and to address additional concerns regarding Westar Energy’s level of debt and the structure of Westar Energy. Following Westar Energy’s filing of a motion for reconsideration and clarification of this order, the KCC issued an order on December 23, 2002 providing further direction in these matters. These orders led Westar Energy to file the Debt Reduction Plan with the KCC on February 6, 2003.

 

On February 10, 2003, the KCC issued an order granting limited reconsideration of its December 23, 2002 order. The KCC also stated that the Debt Reduction Plan appears to make a good-faith effort to address the concerns expressed in the KCC’s prior orders and that the KCC needed additional time to review the Debt Reduction Plan prior to addressing other issues raised in Westar Energy’s petition for reconsideration of the December 23, 2002 order.

 

On July 21,2003, Westar Energy and Westar Industries entered into the Stipulation with the KCC staff and certain other intervenors in the docket considering the Debt Reduction Plan. In the Stipulation, the parties to the Stipulation asked the KCC to issue an order approving the Debt Reduction Plan, subject to the terms and conditions of the Stipulation. The KCC issued an order approving the Stipulation on July 25, 2003. The principal terms of the Stipulation are as follows:

 

    Westar Energy agrees to fully implement the Debt Reduction Plan by December 31, 2004, unless prevented by events beyond its control, in which case the deadline for implementation may be extended by the KCC upon a proper showing by Westar Energy.

 

    Westar Energy commits to reduce its debt to a level consistent with investment grade bond ratings and to have a capital structure containing at least 40% common equity by December 31, 2004. This commitment replaces a requirement imposed in a previous KCC order that Westar Energy reduce utility debt to $1.67 billion by August 1, 2003.

 

    Westar Energy and we will file requests for a change in rates on May 1, 2005, based on a test year consisting of the twelve months ending December 31, 2004. Prior to May 1, 2005, Westar Energy and we will not make a filing to increase our Kansas jurisdictional electric rates and the other parties to the Stipulation will not file a rate complaint or motion for Westar Energy and us to show cause why Westar Energy’s and our rates should not be reduced.

 

14


    Westar Energy and we will pay rebates to our Kansas jurisdictional customers on May 1, 2005 in the amount of $10.5 million and on January 1, 2006 in the amount of $10 million. Westar Energy and we will also pay a rebate to customers of the amounts Westar Energy recovers from Mr. Wittig and Mr. Lake for compensation totaling approximately $2.3 million paid to them that was included in electric rates during calendar years 1998 through 2002, net of costs incurred by Westar Energy to effect such recovery. See Note 10 of the Notes to Consolidated Financial Statements, “Potential Liabilities of David C. Wittig and Douglas T. Lake,” for more information about our efforts to recover compensation from Mr. Wittig and Mr. Lake.

 

    Westar Industries will transfer to Westar Energy all of its stock in ONEOK, Inc. and all of its cash in excess of $2 million within 30 days of the order.

 

The Debt Reduction Plan and certain of the related KCC orders discussed above are discussed in further detail in our 2002 Form 10-K.

 

CRITICAL ACCOUNTING POLICIES

 

Since December 31, 2002, we have not experienced any significant changes in our critical accounting policies. For additional information on our critical accounting policies, see our 2002 Form 10-K.

 

15


OPERATING RESULTS

 

The following discussion explains significant changes in operating results for the three and six months ended June 30, 2003 and 2002. Our electric sales for the three and six months ended June 30, 2003 and 2002 are as follows:

 

     Three Months Ended June 30,

 
     2003

     2002

     % Change

 
     (Dollars in Thousands)  

Residential

   $  47,231      $  49,114      (3.8 )

Commercial

   42,537      43,150      (1.4 )

Industrial

   38,787      38,225      1.5  
    
    
        

Total

   128,555      130,489      (1.5 )

Network Integration (a)

   7,470      7,462      0.1  

Other (b)

   6,051      5,431      11.4  
    
    
        

Total retail

   142,076      143,382      (0.9 )

Wholesale and Interchange

   30,089      18,491      62.7  
    
    
        

Total

   $172,165      $161,873      6.4  
    
    
        

 

     Six Months Ended June 30,

 
     2003

     2002

     % Change

 
     (Dollars in Thousands)  

Residential

   $ 94,128      $ 92,336      1.9  

Commercial

     79,058        79,510      (0.6 )

Industrial

     75,109        73,539      2.1  
    

    

        

Total

     248,295        245,385      1.2  

Network Integration (a)

     14,931        14,951      (0.1 )

Other (b)

     12,137        10,790      12.5  
    

    

        

Total retail

     275,363        271,126      1.6  

Wholesale and Interchange

     69,472        39,430      76.2  
    

    

        

Total

   $ 344,835      $ 310,556      11.0  
    

    

        

                        

(a)    Network Integration: Reflects a network transmission tariff that requires us to pay to the Southwest Power Pool (SPP) all expenses associated with transporting power. The expense for the three and six months ended June 30, 2003 was $8.0 million and $16.1 million, respectively, compared to $8.1 million and $16.2 million for the same periods of 2002, respectively. The SPP then pays us for transmitting power to the point of delivery into our retail distribution system. These receipts from the SPP are reflected in revenues in the network integration classification.

(b)    Other: Includes public street and highway lighting and miscellaneous electric revenues.

 

16


The following tables reflect changes in electric sales volumes, as measured by thousands of megawatt hours (MWh) of electricity, for the three and six months ended June 30, 2003 and 2002. No sales volumes are shown for network integration because this activity is not related to electricity we generate.

 

     Three Months Ended June 30,

 
     2003

     2002

   % Change

 
     (Thousands of MWh)  

Residential

   604      655    (7.8 )

Commercial

   672      674    (0.3 )

Industrial

   869      851    2.1  

Other

   12      12    —    
    
    
      

Total retail

   2,157      2,192    (1.6 )

Wholesale and Interchange

   881      733    20.2  
    
    
      

Total

   3,038      2,925    3.9  
    
    
      
     Six Months Ended June 30,

 
     2003

     2002

   % Change

 
     (Thousands of MWh)  

Residential

   1,249      1,274    (2.0 )

Commercial

   1,258      1,244    1.1  

Industrial

   1,695      1,645    3.0  

Other

   22      22    —    
    
    
      

Total retail

   4,224      4,185    0.9  

Wholesale and Interchange

   1,921      1,872    2.6  
    
    
      

Total

   6,145      6,057    1.5  
    
    
      

 

Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002: Total sales increased $10.3 million, or 6%. Retail sales decreased slightly. Wholesale and interchange sales increased $11.6 million, or 63%, due primarily to higher market prices, and a 20% increase in wholesale and interchange sales volumes due primarily to increased market demand.

 

Cost of sales is comprised of fuel used for generation and purchased power. Cost of sales decreased $5.7 million, or 12%, due primarily to a $7.6 million decrease in costs associated with the dispatching of electric power. This cost is substantially higher in 2002 because the Wolf Creek outage occurred in the second quarter of 2002, which caused us to use more expensive sources of generation during the 2002 period.

 

During the three months ended June 30, 2003, operating expenses remained constant. Income from operations increased $15.9 million due primarily to the increase in sales and decrease in cost of sales.

 

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002: Total sales increased $34.3 million, or 11%. Retail sales increased approximately 2% due primarily to increased industrial sales volumes, which were influenced by regional market conditions. Wholesale and interchange sales increased $30.0 million, or 76%, due to higher market prices and the 3% increase in sales volumes.

 

Cost of sales decreased $1.6 million, or 2%, which consists primarily of a $4.0 million decrease in costs associated with the dispatching of electric power, that was partially offset by an increase of $1.8 million in purchased power costs. These fluctuations were primarily the result of the Wolf Creek outage as discussed above.

 

Operating expenses decreased $10.8 million, or 5%, primarily as a result of a decrease in selling, general and administrative expenses. The 2002 selling, general and administrative expenses were higher due to the severance charges that were allocated to us during the first quarter of 2002. Income from operations increased $46.7 million due primarily to the increase in sales and decrease in operating expenses.

 

17


LIQUIDITY AND CAPITAL RESOURCES

 

Overview

 

Westar Energy believes it will have sufficient cash to fund future operations of its business (including us), debt reductions, including the rebates to customers Westar Energy and we are required to make in 2005 and 2006, and the payment of dividends, from a combination of cash on hand, cash flow, proceeds from the sales of its non-utility and non-core assets and available borrowings under its revolving credit facility. Uncertainties affecting its ability to meet these requirements include, among others, the factors affecting sales described above, economic conditions, including the impact of inflation on operating expenses, regulatory actions, including the KCC orders received in the last quarter of 2002 and first quarter of 2003, Westar Energy’s ability to implement the Debt Reduction Plan and compliance with future environmental regulations.

 

Most of our cash requirements consist of capital expenditures and maintenance costs designed to improve and maintain facilities that provide electric service and to 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.

 

Our internally generated cash is generally sufficient to fund operations and debt service payments. We do not maintain independent short-term credit facilities and rely on Westar Energy for short-term cash needs. If Westar Energy is unable to borrow under its credit facilities, we could have a short-term liquidity issue that could require us to obtain a credit facility for our short-term cash needs, which could result in higher borrowing costs.

 

Capital Resources

 

Westar Energy’s Debt Reduction Plan provides for a systematic disposal of its non-utility and non-core assets and, if necessary, the issuance of Westar Energy equity securities. The proceeds of these transactions will be used to reduce debt. Westar Energy may reduce its and our debt pursuant to terms stated in the debt agreements or through open market purchases or tender offers. Westar Energy may engage a financial advisor to assist in completing debt repurchases in the most cost-effective manner.

 

Cash Flows from Operating Activities

 

Our primary source of operating cash flows is from our electric utility operations. Cash flows from operating activities increased $80.3 million, to $91.5 million in 2003 from $11.2 million in 2002. This increase is mostly attributable to the increase in utility gross margin for 2003 compared to 2002 and the $29.9 million increase in changes in working capital items.

 

Cash Flows (used in) from Financing Activities

 

During 2002, we received advances from Westar Energy of $157.3 million, of which $135.0 million was deposited with a trustee for the retirement of first mortgage bonds due December 15, 2003. In 2003, we paid $50.0 million of dividends to Westar Energy.

 

Contractual Obligations

 

Since December 31, 2002, we have not experienced any material changes in our contractual obligations for operations in the ordinary course of business. For additional information on our contractual obligations, see our 2002 Form 10-K.

 

18


Sale of Accounts Receivable

 

On July 28, 2000, Westar Energy and we entered into an agreement under which we transfer an undivided percentage ownership interest in a revolving pool of our accounts receivable arising from the sale of electricity to a multi-seller conduit administered by an independent financial institution through the use of a SPE. We account for this transfer as a sale in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” The agreement is annually renewable upon agreement by all parties. On July 23, 2003, the term of the agreement pursuant to which Westar Energy and we transfer an undivided percentage ownership interest in a revolving pool of our accounts receivable arising from the sale of electricity to a multi-seller conduit administered by an independent financial institution through the use of a special purpose entity was extended through July 21, 2004.

 

We record administrative expense on the undivided interest owned by the conduit, which was $0.3 million for the three months ended June 30, 2003 and 2002, and $0.6 million for the six months ended June 30, 2003 and 2002. These expenses are included in other income (expense) in our consolidated statements of income.

 

The outstanding balance of SPE receivables was $66.4 million at June 30, 2003 and $48.2 million at December 31, 2002, which is net of an undivided interest of $100.0 million and $110.0 million, respectively, in receivables sold by the SPE to the conduit. Our retained interest in the SPE’s receivables is reported at fair value and is subordinate to, and provides credit enhancement for, the conduit’s ownership interest in the SPE’s receivables. Our retained interest is available to the conduit to pay any fees or expenses due to the conduit and to absorb all credit losses incurred on any of the SPE’s receivables. The retained interest is included in accounts receivable, net, in our consolidated balance sheets.

 

A termination event will be triggered under the terms of the agreement if Westar Energy’s credit rating ceases to be at least BB- by Standard & Poor’s Ratings Group or if the issuer credit rating for Westar Energy ceases to be at least Ba3 by Moody’s Investors Service. If a termination event were to occur, the administrative agent would be required to give notice to us at least five business days prior to a termination of the facility. This notice provision allows for the administrative agent to waive the termination event by not giving notice or, in the event notice is given, allows us to repay the facility.

 

Consolidation of Variable Interest Entities

 

In January 2003, FASB issued FIN 46, which provides guidance related to identifying variable interest entities (previously known generally as special purpose entities or SPEs) and determining whether such entities should be consolidated. Certain disclosures are required when FIN 46 becomes effective if it is reasonably possible that a company will consolidate or disclose information about a variable interest entity when it initially applies FIN 46. This interpretation must be applied immediately to variable interest entities created or obtained after January 31, 2003. For those variable interest entities created or obtained on or before January 31, 2003, we must apply the provisions of FIN 46 by the third quarter of 2003. We are currently evaluating the effect of FIN 46.

 

OTHER INFORMATION

 

Related Party Transactions

 

Our cash management function, including cash receipts and disbursements, is performed by Westar Energy. An intercompany account is used to record net receipts and disbursements between KGE and Westar Energy and between KGE and WR Receivables Corporation. The net amount payable to affiliates approximated $25.9 million at June 30, 2003 and $24.1 million at December 31, 2002 as reflected in our consolidated balance sheets.

 

Westar Energy provides all employees we utilize. Certain operating expenses have been allocated to us from Westar Energy. These expenses are allocated, depending on the nature of the expense, based on allocation studies, net investment, number of customers, and/or other appropriate factors. We believe such allocation procedures are reasonable.

 

19


We have declared dividends to Westar Energy for the three and six months ended June 30, 2003 of $25.0 million and $50.0 million, respectively.

 

Termination of Shared Services Agreement

 

Westar Energy owns an investment in ONEOK, Inc. (ONEOK) and maintains a shared services agreement with ONEOK pursuant to which Westar Energy and ONEOK provide customer service functions to each other, including meter reading, customer billing and call center operations. Effective December 2003, ONEOK gave Westar Energy notice of termination of the shared services agreement. Following termination, Westar Energy will allocate to us our portion of the expenses for providing these services internally. We expect termination of this agreement will increase our annual costs for these services by approximately $4 to $5 million.

 

Hedging Activities

 

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 anticipated natural gas fuel requirements for generation facilities. Westar Energy has designated these hedging relationships as cash flow hedges in accordance with SFAS No. 133.

 

In 2002, due to the increased availability of coal units and because we began burning more oil as use of oil became more economically favorable than gas, we did not burn our forecasted amount of natural gas. In September 2002, we determined that we had over-hedged approximately 8,280,000 MMBtu for the remaining period of the hedge. As a result of the discontinuance of this portion of the cash flow hedge, we recognized a gain in earnings of $2.8 million. As of June 30, 2003, we forecasted a notional volume of 4,312,500 MMBtu for the remainder of the hedged period through July 2004. Our use of hedge accounting is contingent on burning sufficient quantities of natural gas to meet our forecasts. If we fail to meet those forecasts, we could lose our ability to use hedge accounting, which could result in greater volatility to our results of operations due to fluctuating natural gas prices. We operate our system in the most economical manner and will continue to do so by using the pricing systems available to us.

 

20


The following table summarizes the effects the natural gas hedge had on our financial position and results of operations for the three and six months ended June 30, 2003:

 

     Natural Gas Hedge (a)

 
     (Dollars in Thousands)  

As of June 30, 2003:

        

Fair value of derivative instruments:

        

Current

   $ 5,399  

Long-term

     2,151  
    


Total

   $ 7,550  
    


Three Months Ended June 30, 2003:

        

Change in amounts in accumulated other comprehensive income

   $ 2,199  

Adjustment for gain included in net income

     (766 )

Estimated income tax expense

     (570 )
    


Net Comprehensive Gain

   $ 863  
    


Six Months Ended June 30, 2003:

        

Change in amounts in accumulated other comprehensive income

   $ 4,773  

Adjustment for gain included in net income

     (766 )

Estimated income tax expense

     (1,594 )
    


Net Comprehensive Gain

   $ 2,413  
    


Anticipated reclassifications to earnings in the next 12 months (b)

   $ 5,399  

Duration of hedge designation as of June 30, 2003

     13 months  

        

(a)    Natural gas hedge assets and liabilities are classified in the balance sheets as energy trading contracts. Due to the volatility of gas commodity prices, it is probable that gas prices will increase and decrease over the remaining 13 months that these relationships are in place.

(b)    The actual amounts that will be reclassified to earnings could vary materially from this estimated amount due to changes in market conditions.

 

Fair Value of Energy Trading Contracts

 

The tables below show fair value of energy trading contracts outstanding for the six months ended June 30, 2003, their sources and maturity periods:

 

     Fair Value of Contracts

     (In Thousands)

Net fair value of contracts outstanding at the beginning of the period

   $ 3,467

Less contracts realized or otherwise settled during the period

     669

Plus fair value of new contracts entered into during the period

     4,224
    

Fair value of contracts outstanding at the end of the period

   $ 7,022
    

 

21


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:

 

     Fair Value of Contracts at End of Period

Sources of Fair Value   

Total Fair

Value


   

Maturity

Less Than

1 Year


   

Maturity

1-3 Years


   

Maturity

4-5 Years


  

Maturity in

Excess of

5 Years


     (In Thousands)

Prices actively quoted (futures)

   $ 8,184     $ 6,033     $ 2,151     $ —      $ —  

Prices provided by other external sources (swaps and forwards)

     2,362       2,481       (119 )     —        —  

Prices based on the Black Option Pricing model (options and other) (a)

     (3,524 )     (3,149 )     (375 )     —        —  
    


 


 


 

  

Total fair value of contracts outstanding

   $ 7,022     $ 5,365     $ 1,657     $ —      $ —  
    


 


 


 

  


(a)   The Black Option Pricing model is a variant of the Black-Scholes Option Pricing model.

 

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have not experienced any significant changes in our exposure to market risk since December 31, 2002. For additional information on our market risk, see our 2002 Form 10-K, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”

 

ITEM 4.   CONTROLS AND PROCEDURES

 

As of June 30, 2003 an evaluation was carried out by our management, including our principal executive officer and principal financial and accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. These controls and procedures were designed to ensure that material information relating to the company and its subsidiaries are communicated to the principal executive officer and the principal financial and accounting officer. Based upon that evaluation, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective, in all material respects, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, of information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

 

There have been no changes in our internal controls identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect internal controls.

 

22


KANSAS GAS AND ELECTRIC COMPANY

 

PART II. Other Information

 

ITEM 1.   LEGAL PROCEEDINGS

 

Information on our legal proceedings is set forth in Notes 3, 7, 8 and 10 of the Notes to Consolidated Financial Statements, “Rate Matters and Regulation,” “Legal Proceedings,” “Special Committee Investigation” and “Potential Liabilities to David C. Wittig and Douglas T. Lake,” respectively, which are incorporated herein by reference.

 

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:

 

31(a)   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 certifying the quarterly report provided for the period ended June 30, 2003
31(b)   Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 certifying the quarterly report provided for the period ended June 30, 2003
32(a)   Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 certifying the quarterly report provided for the quarter ended June 30, 2003 (furnished and not to be considered filed as part of the Form 10-Q)

 

(b) Reports on Form 8-K filed during the three months ended June 30, 2003: None

 

23


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 8, 2003


      By:  

/s/    MARK A. RUELLE       


               

Mark A. Ruelle,

Vice President and Treasurer

(Principal Financial and Accounting Officer)

 

24