KANSAS GAS & ELECTRIC CO /KS/ - 10-Q Quarterly Report

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

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.

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.

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.

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.

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