10-Q 1 wr-09302016x10q.htm 10-Q Document


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, 2016

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 1-3523

straightcolorlra04.jpg
WESTAR ENERGY, INC.
(Exact name of registrant as specified in its charter)

Kansas
 
48-0290150
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
818 South Kansas Avenue, Topeka, Kansas 66612
 
(785) 575-6300
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes    X      No          
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Act). Check one:
Large accelerated filer    X      Accelerated filer            Non-accelerated filer              Smaller reporting company          
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes             No    X  
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Stock, par value $5.00 per share
 
141,786,012 shares
(Class)
 
(Outstanding at October 26, 2016)

1



TABLE OF CONTENTS
 
 
 
Page
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


2


GLOSSARY OF TERMS
The following is a glossary of frequently used abbreviations or acronyms that are found throughout this report.
Abbreviation or Acronym
 
Definition
2015 Form 10-K
 
Annual Report on Form 10-K for the year ended December 31, 2015
2016 2Q Form 10-Q
 
Quarterly Report on Form 10-Q for the quarter ended June 30, 2016
AFUDC
 
Allowance for funds used during construction
ASU
 
Accounting Standard Update
CAA
 
Clean Air Act
CCB
 
Coal combustion byproducts
CO
 
Carbon monoxide
CO2
 
Carbon dioxide
COLI
 
Corporate-owned life insurance
CPP
 
Clean Power Plan
CWA
 
Clean Water Act
DOE
 
Department of Energy
DOJ
 
Department of Justice
EPA
 
Environmental Protection Agency
EPS
 
Earnings per share
FASB
 
Financial Accounting Standards Board
FERC
 
Federal Energy Regulatory Commission
GAAP
 
Generally Accepted Accounting Principles
GHG
 
Greenhouse gas
Great Plains Energy
 
Great Plains Energy Incorporated
HSR Act
 
Hart-Scott-Rodino Antitrust Improvements Act
JEC
 
Jeffrey Energy Center
KCC
 
Kansas Corporation Commission
KDHE
 
Kansas Department of Health & Environment
KGE
 
Kansas Gas and Electric Company
La Cygne
 
La Cygne Generating Station
Merger
 
Pending acquisition of Westar Energy, Inc. by Great Plains Energy Incorporated
Missouri Commission
 
Public Service Commission of the State of Missouri
Moody’s
 
Moody’s Investors Service
NAAQS
 
National Ambient Air Quality Standards
NAV
 
Net Asset Value
NDT
 
Nuclear Decommissioning Trust
NOx
 
Nitrogen oxides
NRC
 
Nuclear Regulatory Commission
OPC
 
Office of Public Counsel
PM
 
Particulate matter
PPB
 
Parts per billion
RECA
 
Retail energy cost adjustment
ROE
 
Return on equity
RSU
 
Restricted share unit
RTO
 
Regional transmission organization
S&P
 
Standard & Poor’s Ratings Services
SEC
 
Securities and Exchange Commission
SO2
 
Sulfur dioxide
SPP
 
Southwest Power Pool, Inc.
TFR
 
Transmission Formula Rate
VIE
 
Variable interest entity
Wolf Creek
 
Wolf Creek Generating Station

3


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,” “estimate,” “intend” and words of similar meaning. Forward-looking statements describe our future plans, objectives, expectations or goals. Such statements address future events and conditions concerning matters such as, but not limited to:

-
the pending acquisition (merger) of Westar Energy, Inc. by Great Plains Energy Incorporated (Great Plains Energy),
-
amount, type and timing of capital expenditures,
-
earnings,
-
cash flow,
-
liquidity and capital resources,
-
litigation,
-
accounting matters,
-
possible corporate restructurings, acquisitions and dispositions,
-
compliance with debt and other restrictive covenants,
-
interest rates and dividends,
-
environmental matters,
-
regulatory matters,
-
nuclear operations, and
-
the overall economy of our service area and its impact on our customers’ demand for electricity and their ability to pay for service.

What happens in each case could vary materially from what we expect because of such things as:

-
risks related to operating in a heavily regulated industry that is subject to unpredictable political, legislative, judicial and regulatory developments, which can impact our operations, results of operations, and financial condition,
-
the difficulty of predicting the magnitude and timing of changes in demand for electricity, including with respect to emerging competing services and technologies and conservation and energy efficiency measures,
-
the impact of weather conditions, including as it relates to sales of electricity and prices of energy commodities,
-
equipment damage from storms and extreme weather,
-
economic and capital market conditions, including the impact of inflation or deflation, changes in interest rates, the cost and availability of capital and the market for trading wholesale energy,
-
the impact of changes in market conditions on employee benefit liability calculations and funding obligations, as well as actual and assumed investment returns on invested plan assets,
-
the impact of changes in estimates regarding our Wolf Creek Generating Station (Wolf Creek) decommissioning obligation,
-
the existence or introduction of competition into markets in which we operate,
-
the impact of changing laws and regulations relating to air and greenhouse gas (GHG) emissions, water emissions, waste management and other environmental matters,
-
risks associated with execution of our planned capital expenditure program, including timing and receipt of regulatory approvals necessary for planned construction and expansion projects as well as the ability to complete planned construction projects within the terms and time frames anticipated,
-
cost, availability and timely provision of equipment, supplies, labor and fuel we need to operate our business,
-
availability of generating capacity and the performance of our generating plants,
-
changes in regulation of nuclear generating facilities and nuclear materials and fuel, including possible shutdown or required modification of nuclear generating facilities,
-
additional regulation due to Nuclear Regulatory Commission (NRC) oversight to ensure the safe operation of Wolf Creek, either related to Wolf Creek’s performance, or potentially relating to events or performance at a nuclear plant anywhere in the world,
-
uncertainty regarding the establishment of interim or permanent sites for spent nuclear fuel storage and disposal,
-
homeland and information and operating systems security considerations,
-
changes in accounting requirements and other accounting matters,
-
changes in the energy markets in which we participate resulting from the development and implementation of real time and next day trading markets, and the effect of the retroactive repricing of transactions in such markets

4


following execution because of changes or adjustments in market pricing mechanisms by regional transmission organizations (RTOs) and independent system operators,
-
reduced demand for coal-based energy because of actual or potential climate impacts and the development of alternate energy sources,
-
current and future litigation, regulatory investigations, proceedings or inquiries,
-
cost of fuel used in generation and wholesale electricity prices,
-
certain risks and uncertainties associated with the merger, including, without limitation, those related to:
-
the timing of, and the conditions imposed by, regulatory approvals required for the merger;
-
the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement or could otherwise cause the failure of the merger to close;
-
the failure of Great Plains Energy to obtain any financing necessary to complete the merger;
-
the outcome of any legal proceedings, regulatory proceedings or enforcement matters that have been or may be instituted in connection with the merger;
-
the receipt of an unsolicited offer from another party to acquire our assets or capital stock (or those of Great Plains Energy) that could interfere with the proposed merger;
-
the timing to consummate the proposed transaction;
-
disruption from the proposed transaction making it more difficult to maintain relationships with customers, employees, regulators or suppliers;
-
the diversion of management time and attention on the transaction;
-
the amount of costs, fees, expenses and charges related to the merger; and
-
the effect and timing of changes in laws or in governmental regulations (including environmental laws and regulations) that could adversely affect our participation in the merger; and
-
other factors discussed elsewhere in this report, in our Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Form 10-K), including in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 (2016 2Q Form 10-Q), including in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 1A. Risk Factors,” and in other reports we file from time to time with the Securities and Exchange Commission (SEC), including the proxy statement and other materials that we have filed or will file with the SEC in connection with the merger.

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 2015 Form 10-K and the other reports we file from time to time with the SEC. No one section of this report deals with all aspects of the subject matter and additional information on some matters that could impact our consolidated financial results may be included in our 2015 Form 10-K or the other reports we file from time to time with the SEC. The reader should not place undue reliance on any forward-looking statement, as forward-looking statements speak only as of the date such statements were made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made.



5


PART I.    FINANCIAL INFORMATION
ITEM I.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

WESTAR ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Par Values)
(Unaudited)
 
As of
 
As of
 
September 30, 2016
 
December 31, 2015
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
3,937

 
$
3,231

Accounts receivable, net of allowance for doubtful accounts of $4,175 and $5,294, respectively
322,386

 
258,286

Fuel inventory and supplies
290,080

 
301,294

Prepaid expenses
15,625

 
16,864

Regulatory assets
91,999

 
109,606

Other
38,276

 
27,860

Total Current Assets
762,303

 
717,141

PROPERTY, PLANT AND EQUIPMENT, NET
9,038,197

 
8,524,902

PROPERTY, PLANT AND EQUIPMENT OF VARIABLE INTEREST ENTITIES, NET
260,488

 
268,239

OTHER ASSETS:
 
 
 
Regulatory assets
731,859

 
751,312

Nuclear decommissioning trust
198,796

 
184,057

Other
252,775

 
260,015

Total Other Assets
1,183,430

 
1,195,384

TOTAL ASSETS
$
11,244,418

 
$
10,705,666

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current maturities of long-term debt
$
125,000

 
$

Current maturities of long-term debt of variable interest entities
26,842

 
28,309

Short-term debt
182,900

 
250,300

Accounts payable
228,046

 
220,969

Accrued dividends
52,822

 
49,829

Accrued taxes
119,938

 
83,773

Accrued interest
61,833

 
71,426

Regulatory liabilities
22,547

 
25,697

Other
97,100

 
106,632

Total Current Liabilities
917,028

 
836,935

LONG-TERM LIABILITIES:
 
 
 
Long-term debt, net
3,388,221

 
3,163,950

Long-term debt of variable interest entities, net
111,218

 
138,097

Deferred income taxes
1,737,359

 
1,591,430

Unamortized investment tax credits
207,595

 
209,763

Regulatory liabilities
243,754

 
267,114

Accrued employee benefits
445,442

 
462,304

Asset retirement obligations
283,941

 
275,285

Other
85,442

 
88,825

Total Long-Term Liabilities
6,502,972

 
6,196,768

COMMITMENTS AND CONTINGENCIES (See Notes 4, 11 and 12)


 


EQUITY:
 
 
 
Westar Energy, Inc. Shareholders’ Equity:
 
 
 
Common stock, par value $5 per share; authorized 275,000,000 shares; issued and outstanding 141,743,883 shares and 141,353,426 shares, respective to each date
708,719

 
706,767

Paid-in capital
2,013,449

 
2,004,124

Retained earnings
1,078,799

 
945,830

Total Westar Energy, Inc. Shareholders’ Equity
3,800,967

 
3,656,721

Noncontrolling Interests
23,451

 
15,242

Total Equity
3,824,418

 
3,671,963

TOTAL LIABILITIES AND EQUITY
$
11,244,418

 
$
10,705,666


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

6


WESTAR ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
 
 
Three Months Ended September 30,
 
2016
 
2015
REVENUES
$
764,654

 
$
732,829

OPERATING EXPENSES:
 
 
 
Fuel and purchased power
155,673

 
163,943

SPP network transmission costs
57,939

 
57,487

Operating and maintenance
86,758

 
80,444

Depreciation and amortization
84,972

 
77,184

Selling, general and administrative
60,582

 
60,485

Taxes other than income tax
48,154

 
37,682

Total Operating Expenses
494,078

 
477,225

INCOME FROM OPERATIONS
270,576

 
255,604

OTHER INCOME (EXPENSE):
 
 
 
Investment earnings
2,619

 
314

Other income
13,353

 
637

Other expense
(5,887
)
 
(5,392
)
Total Other Income (Expense)
10,085

 
(4,441
)
Interest expense
40,897

 
44,306

INCOME BEFORE INCOME TAXES
239,764

 
206,857

Income tax expense
81,211

 
66,293

NET INCOME
158,553

 
140,564

Less: Net income attributable to noncontrolling interests
3,833

 
2,561

NET INCOME ATTRIBUTABLE TO WESTAR ENERGY, INC.
$
154,720

 
$
138,003

BASIC AND DILUTED EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING ATTRIBUTABLE TO WESTAR ENERGY, INC. (See Note 2):
 
 
 
Basic earnings per common share
$
1.09

 
$
0.97

Diluted earnings per common share
$
1.08

 
$
0.97

AVERAGE EQUIVALENT COMMON SHARES OUTSTANDING:
 
 
 
Basic
142,090,706

 
141,622,697

Diluted
142,577,945

 
141,838,178

DIVIDENDS DECLARED PER COMMON SHARE
$
0.38

 
$
0.36



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

























7



WESTAR ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
 
 
Nine Months Ended September 30,
 
2016
 
2015
REVENUES
$
1,955,552

 
$
1,913,199

OPERATING EXPENSES:
 
 
 
Fuel and purchased power
374,361

 
459,504

SPP network transmission costs
173,925

 
171,651

Operating and maintenance
250,135

 
248,263

Depreciation and amortization
252,838

 
228,529

Selling, general and administrative
192,762

 
179,567

Taxes other than income tax
145,529

 
113,047

Total Operating Expenses
1,389,550

 
1,400,561

INCOME FROM OPERATIONS
566,002

 
512,638

OTHER INCOME (EXPENSE):
 
 
 
Investment earnings
6,916

 
4,427

Other income
26,212

 
18,572

Other expense
(14,338
)
 
(13,737
)
Total Other Income
18,790


9,262

Interest expense
121,011

 
134,120

INCOME BEFORE INCOME TAXES
463,781

 
387,780

Income tax expense
160,376

 
127,810

NET INCOME
303,405

 
259,970

Less: Net income attributable to noncontrolling interests
10,760

 
7,277

NET INCOME ATTRIBUTABLE TO WESTAR ENERGY, INC.
$
292,645

 
$
252,693

BASIC AND DILUTED EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING ATTRIBUTABLE TO WESTAR ENERGY, INC. (See Note 2):
 
 
 
Basic earnings per common share
$
2.06

 
$
1.84

Diluted earnings per common share
$
2.05

 
$
1.82

AVERAGE EQUIVALENT COMMON SHARES OUTSTANDING:
 
 
 
Basic
142,039,320

 
136,686,263

Diluted
142,413,189

 
138,181,585

DIVIDENDS DECLARED PER COMMON SHARE
$
1.14

 
$
1.08



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


8



WESTAR ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

 
Nine Months Ended September 30,
 
2016
 
2015
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
 
 
 
Net income
$
303,405

 
$
259,970

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
252,838

 
228,529

Amortization of nuclear fuel
22,518

 
18,528

Amortization of deferred regulatory gain from sale leaseback
(4,121
)
 
(4,121
)
Amortization of corporate-owned life insurance
13,779

 
15,309

Non-cash compensation
7,025

 
6,280

Net deferred income taxes and credits
160,429

 
126,602

Allowance for equity funds used during construction
(7,894
)
 
(2,034
)
Changes in working capital items:
 
 
 
Accounts receivable
(64,100
)
 
(21,437
)
Fuel inventory and supplies
11,680

 
(28,814
)
Prepaid expenses and other
(385
)
 
(22,742
)
Accounts payable
9,736

 
(4,979
)
Accrued taxes
40,711

 
51,867

Other current liabilities
(61,879
)
 
(66,000
)
Changes in other assets
(4,377
)
 
1,394

Changes in other liabilities
13,208

 
26,512

Cash Flows from Operating Activities
692,573

 
584,864

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
 
 
 
Additions to property, plant and equipment
(821,936
)
 
(486,515
)
Purchase of securities - trusts
(43,252
)
 
(20,752
)
Sale of securities - trusts
44,326

 
20,957

Investment in corporate-owned life insurance
(14,648
)
 
(14,845
)
Proceeds from investment in corporate-owned life insurance
24,242

 
65,962

Investment in affiliated company
(655
)
 

Other investing activities
(3,095
)
 
(781
)
Cash Flows used in Investing Activities
(815,018
)
 
(435,974
)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
 
 
 
Short-term debt, net
(67,402
)
 
46,000

Proceeds from long-term debt
396,472

 

Proceeds from long-term debt of variable interest entities
162,048

 

Retirements of long-term debt
(50,000
)
 
(275,000
)
Retirements of long-term debt of variable interest entities
(190,357
)
 
(27,933
)
Repayment of capital leases
(2,327
)
 
(1,759
)
Borrowings against cash surrender value of corporate-owned life insurance
55,952

 
57,726

Repayment of borrowings against cash surrender value of corporate-owned life insurance
(22,921
)
 
(63,894
)
Issuance of common stock
2,003

 
257,169

Distributions to shareholders of noncontrolling interests
(2,551
)
 
(1,076
)
Cash dividends paid
(152,787
)
 
(137,616
)
Other financing activities
(4,979
)
 
(3,234
)
Cash Flows from (used in) Financing Activities
123,151

 
(149,617
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
706

 
(727
)
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
3,231

 
4,556

End of period
$
3,937

 
$
3,829



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

9



WESTAR ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)

 
Westar Energy, Inc. Shareholders
 
 
 
 
Common stock shares
 
Common
stock
 
Paid-in
capital
 
Retained
earnings
 
Non-controlling
interests
 
Total
equity
Balance as of December 31, 2014
131,687,454

 
$
658,437

 
$
1,781,120

 
$
855,299

 
$
6,451

 
$
3,301,307

Net income

 

 

 
252,693

 
7,277

 
259,970

Issuance of stock
9,229,357

 
46,147

 
211,022

 

 

 
257,169

Issuance of stock for compensation and reinvested dividends
352,078

 
1,760

 
6,248

 

 

 
8,008

Tax withholding related to stock compensation

 

 
(3,234
)
 

 

 
(3,234
)
Dividends declared on common stock
($1.08 per share)

 

 

 
(150,271
)
 

 
(150,271
)
Stock compensation expense

 

 
6,212

 

 

 
6,212

Tax benefit on stock compensation

 

 
1,231

 

 

 
1,231

Distributions to shareholders of noncontrolling interests

 

 

 

 
(1,076
)
 
(1,076
)
Other

 

 
(3,395
)
 

 

 
(3,395
)
Balance as of September 30, 2015
141,268,889

 
$
706,344

 
$
1,999,204

 
$
957,721

 
$
12,652

 
$
3,675,921

 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
141,353,426

 
$
706,767

 
$
2,004,124

 
$
945,830

 
$
15,242

 
$
3,671,963

Net income

 

 

 
292,645

 
10,760

 
303,405

Issuance of stock
40,441

 
202

 
1,801

 

 

 
2,003

Issuance of stock for compensation and reinvested dividends
350,016

 
1,750

 
5,565

 

 

 
7,315

Tax withholding related to stock compensation

 

 
(4,979
)
 

 

 
(4,979
)
Dividends declared on common stock
($1.14 per share)

 

 

 
(163,002
)
 

 
(163,002
)
Stock compensation expense

 

 
6,938

 

 

 
6,938

Distribution to shareholders of noncontrolling interests

 

 

 

 
(2,551
)
 
(2,551
)
Cumulative effect of accounting change - stock compensation

 

 

 
3,326

 

 
3,326

Balance as of September 30, 2016
141,743,883

 
$
708,719

 
$
2,013,449

 
$
1,078,799

 
$
23,451

 
$
3,824,418



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

10




WESTAR ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. DESCRIPTION OF BUSINESS

We are the largest electric utility in Kansas. Unless the context otherwise indicates, all references in this Quarterly Report on Form 10-Q to “the Company,” “we,” “us,” “our” and similar words are to Westar Energy, Inc. and its consolidated subsidiaries. The term “Westar Energy” refers to Westar Energy, Inc., a Kansas corporation incorporated in 1924, alone and not together with its consolidated subsidiaries.

We provide electric generation, transmission and distribution services to approximately 704,000 customers in Kansas. Westar Energy provides these services in central and northeastern Kansas, including the cities of Topeka, Lawrence, Manhattan, Salina and Hutchinson. Kansas Gas and Electric Company (KGE), Westar Energy’s wholly owned subsidiary, provides these services in south-central and southeastern Kansas, including the city of Wichita. Both Westar Energy and KGE conduct business using the name Westar Energy. Our corporate headquarters is located at 818 South Kansas Avenue, Topeka, Kansas 66612.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

We prepare our unaudited condensed consolidated financial statements in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles (GAAP) for the United States of America have been condensed or omitted. Our condensed consolidated financial statements include all operating divisions, majority owned subsidiaries and variable interest entities (VIEs) of which we maintain a controlling interest or are the primary beneficiary reported as a single reportable segment. Undivided interests in jointly-owned generation facilities are included on a proportionate basis. Intercompany accounts and transactions have been eliminated in consolidation. In our opinion, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of the condensed consolidated financial statements, have been included.

The accompanying condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in our 2015 Form 10-K.

Use of Management’s Estimates

When we prepare our condensed consolidated financial statements, we are required 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, including those related to depreciation, unbilled revenue, valuation of investments, forecasted fuel costs included in our retail energy cost adjustment (RECA) billed to customers, income taxes, pension and post-retirement benefits, our asset retirement obligations including the decommissioning of Wolf Creek, environmental issues, VIEs, contingencies and litigation. Actual results may differ from those estimates under different assumptions or conditions. The results of operations for the three and nine months ended September 30, 2016, are not necessarily indicative of the results to be expected for the full year.

11



Fuel Inventory and Supplies

We state fuel inventory and supplies at average cost. Following are the balances for fuel inventory and supplies stated separately.
 
As of
 
As of
 
September 30, 2016
 
December 31, 2015
 
(In Thousands)
Fuel inventory
$
95,936

 
$
113,438

Supplies
194,144

 
187,856

Fuel inventory and supplies
$
290,080

 
$
301,294


Allowance for Funds Used During Construction

Allowance for funds used during construction (AFUDC) represents the allowed cost of capital used to finance utility construction activity. We compute AFUDC by applying a composite rate to qualified construction work in progress. We credit other income (for equity funds) and interest expense (for borrowed funds) for the amount of AFUDC capitalized as construction cost on the accompanying consolidated statements of income as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars In Thousands)
Borrowed funds
$
2,537

 
$
466

 
$
6,884

 
$
3,047

Equity funds
2,647

 

 
7,894

 
2,034

Total
$
5,184

 
$
466

 
$
14,778

 
$
5,081

Average AFUDC Rates
3.6
%
 
1.0
%
 
4.2
%
 
2.8
%

Earnings Per Share

We have participating securities in the form of unvested restricted share units (RSUs) with nonforfeitable rights to dividend equivalents that receive dividends on an equal basis with dividends declared on common shares. As a result, we apply the two-class method of computing basic and diluted earnings per share (EPS).

To compute basic EPS, we divide the earnings allocated to common stock by the weighted average number of common shares outstanding. Diluted EPS includes the effect of issuable common shares resulting from our forward sale agreements, if any, and RSUs with forfeitable rights to dividend equivalents. We compute the dilutive effect of potential issuances of common shares using the treasury stock method.


12


The following table reconciles our basic and diluted EPS from net income. 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars In Thousands, Except Per Share Amounts)
Net income
$
158,553

 
$
140,564

 
$
303,405

 
$
259,970

Less: Net income attributable to noncontrolling interests
3,833

 
2,561

 
10,760

 
7,277

Net income attributable to Westar Energy, Inc.
154,720

 
138,003

 
292,645

 
252,693

 Less: Net income allocated to RSUs
325

 
304

 
605

 
563

Net income allocated to common stock
$
154,395

 
$
137,699

 
$
292,040

 
$
252,130

 
 
 
 
 
 
 
 
Weighted average equivalent common shares outstanding – basic
142,090,706

 
141,622,697

 
142,039,320

 
136,686,263

Effect of dilutive securities:
 
 
 
 
 
 
 
RSUs
487,239

 
215,481

 
373,869

 
197,373

Forward sale agreements

 

 

 
1,297,949

Weighted average equivalent common shares outstanding – diluted (a)
142,577,945

 
141,838,178

 
142,413,189

 
138,181,585

 
 
 
 
 
 
 
 
Earnings per common share, basic
$
1.09

 
$
0.97

 
$
2.06

 
$
1.84

Earnings per common share, diluted
$
1.08

 
$
0.97

 
$
2.05

 
$
1.82

_______________
(a) We had no antidilutive securities for the three and nine months ended September 30, 2016 and 2015.

Supplemental Cash Flow Information
 
 
Nine Months Ended September 30,
 
2016
 
2015
 
(In Thousands)
CASH PAID FOR:
 
 
 
Interest on financing activities, net of amount capitalized
$
100,828

 
$
119,173

Interest on financing activities of VIEs
5,846

 
10,430

Income taxes, net of refunds
13,004

 
126

NON-CASH INVESTING TRANSACTIONS:
 
 
 
Property, plant and equipment additions
94,007

 
60,155

NON-CASH FINANCING TRANSACTIONS:
 
 
 
Issuance of stock for compensation and reinvested dividends
7,315

 
8,008

Assets acquired through capital leases
1,310

 
2,246



13


New Accounting Pronouncements

We prepare our consolidated financial statements in accordance with GAAP for the United States of America. To address current issues in accounting, the Financial Accounting Standards Board (FASB) issued the following new accounting pronouncements which may affect our accounting and/or disclosure.
    
Statement of Cash Flows

In August 2016, the FASB issued Accounting Standard Update (ASU) No. 2016-15, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Among other clarifications, the guidance requires that cash proceeds received from the settlement of corporate-owned life insurance (COLI) policies be classified as cash inflows from investing activities and that cash payments for premiums on COLI policies may be classified as cash outflows for investing activities, operating activities or a combination of both. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. Retrospective application is required. We are evaluating the guidance and do not expect it to have a material impact on our consolidated financial statements.

Stock-based Compensation

In March 2016, the FASB issued ASU No. 2016-09 as part of its simplification initiative. The areas for simplification involve several aspects of the accounting for stock-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We have elected to adopt effective January 1, 2016.
    
Prior to the adoption of ASU 2016-09, if the tax deduction for a stock-based payment award exceeded the compensation cost recorded for financial reporting, the additional tax benefit was recognized in additional paid-in capital and referred to as an excess tax benefit. Tax deficiencies were recognized either as an offset to the accumulated excess tax benefits, if any, or as reduction of income. The issuance of this ASU reflects the FASB’s decision that all prospective excess tax benefits and tax deficiencies should be recognized as income tax benefits and expense. Upon initial adoption, we recorded a $3.3 million cumulative effect adjustment to retained earnings for excess tax benefits that had not previously been recognized.

Further, the issuance of this ASU reflects the FASB’s decision that cash flows related to excess tax benefits should be classified as cash flows from operating activities on the consolidated statements of cash flows. Upon adoption, we have retrospectively presented cash flows from operating activities on the accompanying condensed consolidated statements of cash flows for the nine months ended September 30, 2015, as $1.2 million higher than as previously reported, and cash flows used in financing activities as $1.2 million higher than as previously reported.
    
Leases

In February 2016, the FASB issued ASU No. 2016-02, which requires a lessee to recognize right-of-use assets and lease liabilities, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months. Leases are to be classified as either financing or operating leases, with that classification affecting the pattern of expense recognition in the income statement. Accounting for leases by lessors is largely unchanged. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The guidance requires a modified retrospective approach for all leases existing at the earliest period presented, or entered into by the date of initial adoption, with certain practical expedients permitted. We are evaluating the guidance and believe application of the guidance will result in an increase to our assets and liabilities on our consolidated financial statements.


14


Financial Instruments - Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, which requires financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis. The measurement of expected losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We are evaluating the guidance and have not yet determined the impact on our consolidated financial statements.

Financial Instruments - Net Asset Value

In May 2015, the FASB issued ASU No. 2015-07, which removes the requirement to categorize certain investments measured at net asset value (NAV) per share within the fair value hierarchy. The guidance is effective for fiscal years beginning after December 15, 2015. We have adopted this guidance as of January 1, 2016. The adoption was limited to disclosure and does not have a material impact on our consolidated financial statements. See Note 5, “Financial Instruments and Trading Securities.”
    
Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, which addresses revenue from contracts with customers. The objective of the new guidance is to establish principles to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue from contracts with customers. This guidance was effective for fiscal years beginning after December 15, 2016. However, in August 2015, the FASB deferred the effective date by one year. Early application of the standard is permitted for fiscal years beginning after December 15, 2016. The standard permits the use of either the retrospective application or cumulative effect transition method. We are continuing to analyze the new standard and have not yet selected a transition method or determined the impact on our consolidated financial statements but we do not expect it to be material.

    

15


3. PENDING MERGER

On May 29, 2016, we entered into an agreement and plan of merger with Great Plains Energy, a Missouri corporation, providing for the merger of a wholly-owned subsidiary of Great Plains Energy with and into Westar Energy, with Westar Energy surviving as a wholly-owned subsidiary of Great Plains Energy. At the closing of the merger, our shareholders will receive cash and shares of Great Plains Energy. Each issued and outstanding share of our common stock, other than certain restricted shares, will be canceled and automatically converted into $51.00 in cash, without interest, and a number of shares of Great Plains Energy common stock equal to an exchange ratio that may vary between 0.2709 and 0.3148, based upon the volume-weighted average share price of Great Plains Energy common stock on the New York Stock Exchange for the 20 consecutive full trading days ending on (and including) the third trading day immediately prior to the closing date of the transaction. Based on the closing price per share of Great Plains Energy common stock on the trading day prior to announcement of the merger, our shareholders would receive an implied $60.00 for each share of Westar Energy common stock.
The closing of the merger is subject to customary conditions including, among others, receipt of required regulatory approvals. On June 28, 2016, we and Great Plains Energy filed a joint application with the Kansas Corporation Commission (KCC) requesting approval of the merger. Unless otherwise agreed to by the applicants, Kansas law imposes a 300-day time limit on the KCC’s review of the joint application.  On September 27, 2016, the KCC issued an order setting a procedural schedule for the application, with a KCC order date of April 24, 2017.  On October 18, 2016, the KCC issued an order stating that, if the KCC staff or other interested parties believe that the joint application does not adequately address the standards by which public utility mergers should be evaluated in Kansas, KCC staff or other interested parties should file for relief, including the potential dismissal of the joint application.
In addition, the Public Service Commission of the State of Missouri (Missouri Commission) opened an investigation to determine whether it has jurisdiction over the merger and on August 3, 2016, issued its order closing the investigation. On October 11, 2016, a consumer group filed complaints against us and Great Plains Energy with the Missouri Commission seeking to have the Missouri Commission assert jurisdiction over the merger, and various parties have intervened in these complaints. On October 12, 2016, and on October 26, 2016, the Missouri Commission staff and the Office of the Public Counsel (OPC), respectively, announced that each had entered into a Stipulation and Agreement with Great Plains Energy that, among other things, provided that Missouri Commission staff and the OPC would not file a complaint, or support another complaint, to assert that the Missouri Commission has jurisdiction over the merger. The Stipulation and Agreements are subject to approval by the Missouri Commission, and the Missouri Commission has not ruled on the related consumer complaints. If the Missouri Commission rejects the Stipulation and Agreement, or rules in favor of the consumer complaints, and determines that the Missouri Commission has jurisdiction over the merger, approval of the Missouri Commission also will be required in order to consummate the merger.
On July 11, 2016, we and Great Plains filed a joint application with the Federal Energy Regulatory Commission (FERC) requesting approval of the merger. On July 22, 2016, Wolf Creek filed a request with the NRC to approve an indirect transfer of control of Wolf Creek’s operating license.
On September 26, 2016, we and Great Plains Energy filed the antitrust notifications required under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) to complete the merger. We and Great Plains Energy received early termination of the statutory waiting period under the HSR Act on October 21, 2016.
Also on September 26, 2016, the proposed merger was approved by our shareholders. Concurrently, shareholders of Great Plains Energy approved various matters necessary for Great Plains Energy to complete the merger.
The merger agreement, which contains customary representations, warranties and covenants, may be terminated by either party if the merger has not occurred by May 31, 2017. The termination date may be extended six months in order to obtain regulatory approvals. If the merger agreement is terminated under these circumstances, including the failure to obtain regulatory approvals, Great Plains Energy must pay us a termination fee of $380.0 million.
The merger agreement also provides for certain other termination rights for both us and Great Plains Energy. If (a) the merger agreement is terminated by either party because the end date occurred, or by us because Great Plains Energy is in breach of the merger agreement and (b) prior to such termination, an alternative acquisition proposal is made to Great Plains Energy or its board of directors or has been publicly disclosed and not withdrawn and within 12 months after termination of the merger agreement Great Plains Energy enters into an acquisition proposal, Great Plains Energy must pay us a termination fee of $180.0 million. In addition, if either party terminates the merger agreement because the end date occurred, or if Great Plains Energy terminates the merger agreement because we are in breach of the merger agreement, and (a) prior to such termination, an alternative acquisition proposal is made to us or our board of directors or is publicly disclosed and not withdrawn, and (b)

16


within 12 months after termination of the merger agreement, we enter into a definitive agreement or consummate a transaction with respect to an acquisition proposal, we must pay Great Plains Energy a termination fee of $280.0 million.
In connection with this transaction, we have incurred merger-related expenses. During the three and nine months ended September 30, 2016, we incurred approximately $1.9 million and $9.8 million, respectively, of merger-related expenses, which are included in our selling, general, and administrative expenses. We expect total merger-related expenses will be approximately $30.0 million, with the majority of the expenses to coincide with the closing of the merger.
We are currently involved in litigation relating to the merger. See Note 11, “Commitments and Contingencies - Department of Justice Proceedings,” and Note 12, “Legal Proceedings,” for more information on legal matters.


4. RATE MATTERS AND REGULATION

KCC Proceedings

In October 2016, we filed an abbreviated rate review with the KCC to update our prices to include capital costs related to La Cygne Generating Station (La Cygne) environmental upgrades, investment to extend the life of Wolf Creek, costs related to programs to improve grid resiliency and costs associated with investments in other environmental projects during 2015. If approved, we estimate that the new prices will increase our annual retail revenues by approximately $17.4 million. The KCC is required to issue an order on our request within 240 days of our filing, which is in June 2017.

In December 2015, the KCC approved an order allowing us to adjust our prices to include costs incurred for property taxes. The new prices were effective in January 2016 and are expected to increase our annual retail revenues by approximately $5.0 million.

In June 2016, the KCC approved an order allowing us to adjust our retail prices to include updated transmission costs as reflected in the transmission formula rate (TFR), along with the reduced return on equity (ROE) as described below. The updated prices were retroactively effective April 2016 and the estimated revenue impact for 2016, as compared to 2015, is expected to be an increase of approximately $7.0 million. We have begun refunding our previously recorded refund obligation and as of September 30, 2016, we have a remaining refund obligation of $2.7 million, which is included in current regulatory liabilities on our balance sheet.
 
FERC Proceedings

Our TFR that includes projected 2017 transmission capital expenditures and operating costs will become effective in January 2017 and is expected to increase our annual transmission revenues by approximately $29.6 million.

In March 2016, the FERC approved a settlement reducing our base ROE used in determining our TFR. The settlement results in an ROE of 10.3%, which consists of a 9.8% base ROE plus a 0.5% incentive ROE for participation in an RTO. The updated prices were retroactively effective January 2016 and the estimated revenue impact for 2016, as compared to 2015, is expected to be an increase of approximately $24.0 million. This increase also reflects estimated recovery of increased transmission capital expenditures and operating costs. We have begun refunding our previously recorded refund obligation and as of September 30, 2016, we have a remaining refund obligation of $4.6 million, which is included in current regulatory liabilities on our balance sheet.


5. FINANCIAL INSTRUMENTS AND TRADING SECURITIES

Values of Financial Instruments

GAAP establishes a hierarchical framework for disclosing the transparency of the inputs utilized in measuring assets and liabilities at fair value. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy levels. In addition, we measure certain investments that do not have a readily determinable fair value at NAV, which are not included in the fair value hierarchy. Further explanation of these levels and NAV is summarized below.


17


Level 1 - Quoted prices are available in active markets for identical assets or liabilities. The types of assets and liabilities included in level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on public exchanges.

Level 2 - Pricing inputs are not quoted prices in active markets, but are either directly or indirectly observable. The types of assets and liabilities included in level 2 are typically liquid investments in funds which have a readily determinable fair value calculated using daily NAVs, other financial instruments that are comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or other financial instruments priced with models using highly observable inputs.

Level 3 - Significant inputs to pricing have little or no transparency. The types of assets and liabilities included in level 3 are those with inputs requiring significant management judgment or estimation.

Net Asset Value - Investments that do not have a readily determinable fair value are measured at NAV. These investments do not consider the observability of inputs, therefore, they are not included within the fair value hierarchy. We include in this category investments in private equity, real estate and alternative investment funds. The underlying alternative investments include collateralized debt obligations, mezzanine debt and a variety of other investments.


We record cash and cash equivalents, short-term borrowings and variable-rate debt on our consolidated balance sheets at cost, which approximates fair value. We measure the fair value of fixed-rate debt, a level 2 measurement, based on quoted market prices for the same or similar issues or on the current rates offered for instruments of the same remaining maturities and redemption provisions. The recorded amount of accounts receivable and other current financial instruments approximates fair value.

We measure fair value based on information available as of the measurement date. The following table provides the carrying values and measured fair values of our fixed-rate debt.
 
As of September 30, 2016
 
As of December 31, 2015
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In Thousands)
Fixed-rate debt
$
3,430,000

 
$
3,850,563

 
$
3,080,000

 
$
3,259,533

Fixed-rate debt of VIEs
137,962

 
150,877

 
166,271

 
179,030



18


Recurring Fair Value Measurements

The following table provides the amounts and their corresponding level of hierarchy for our assets that are measured at fair value. 
    
As of September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
NAV
 
Total
 
 
(In Thousands)
Nuclear Decommissioning Trust:
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
 
$

 
$
53,950

 
$

 
$
5,171

 
$
59,121

International equity funds
 

 
37,357

 

 

 
37,357

Core bond fund
 

 
27,985

 

 

 
27,985

High-yield bond fund
 

 
17,686

 

 

 
17,686

Emerging markets bond fund
 

 
16,007

 

 

 
16,007

Combination debt/equity/other funds
 

 
12,816

 

 

 
12,816

Alternative investments fund
 

 

 

 
17,886

 
17,886

Real estate securities fund
 

 

 

 
9,737

 
9,737

Cash equivalents
 
201

 

 

 

 
201

Total Nuclear Decommissioning Trust
 
201

 
165,801

 

 
32,794

 
198,796

Trading Securities:
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
 

 
18,004

 

 

 
18,004

International equity fund
 

 
4,482

 

 

 
4,482

Core bond fund
 

 
12,009

 

 

 
12,009

Total Trading Securities
 

 
34,495

 

 

 
34,495

Total Assets Measured at Fair Value
 
$
201

 
$
200,296

 
$

 
$
32,794

 
$
233,291

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
NAV
 
Total
 
 
(In Thousands)
Nuclear Decommissioning Trust:
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
 
$

 
$
50,872

 
$

 
$
6,050

 
$
56,922

International equity funds
 

 
33,595

 

 

 
33,595

Core bond fund
 

 
25,976

 

 

 
25,976

High-yield bond fund
 

 
15,288

 

 

 
15,288

Emerging markets bond fund
 

 
13,584

 

 

 
13,584

Combination debt/equity/other funds
 

 
11,343

 

 

 
11,343

Alternative investments fund
 

 

 

 
16,439

 
16,439

Real estate securities fund
 

 

 

 
10,823

 
10,823

Cash equivalents
 
87

 

 

 

 
87

Total Nuclear Decommissioning Trust
 
87

 
150,658

 

 
33,312

 
184,057

Trading Securities:
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
 

 
17,876

 

 

 
17,876

International equity fund
 

 
4,430

 

 

 
4,430

Core bond fund
 

 
11,423

 

 

 
11,423

Cash equivalents
 
159

 

 

 

 
159

Total Trading Securities
 
159

 
33,729

 

 

 
33,888

Total Assets Measured at Fair Value
 
$
246

 
$
184,387

 
$

 
$
33,312

 
$
217,945




19


Some of our investments in the Nuclear Decommissioning Trust (NDT) are measured at NAV and do not have readily determinable fair values. These investments are either with investment companies or companies that follow accounting guidance consistent with investment companies. In certain situations, these investments may have redemption restrictions. The following table provides additional information on these investments.
 
As of September 30, 2016
 
As of December 31, 2015
 
As of September 30, 2016
 
Fair Value
 
Unfunded
Commitments
 
Fair Value
 
Unfunded
Commitments
 
Redemption
Frequency
 
Length of
Settlement
 
(In Thousands)
 
 
 
 
Nuclear Decommissioning Trust:
 
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
$
5,171


$
3,689

 
$
6,050

 
$
1,948

 
(a)
 
(a)
Alternative investments fund (b)
17,886

 

 
16,439

 

 
Quarterly
 
65 days
Real estate securities fund (b)
9,737



 
10,823

 

 
Quarterly
 
65 days
Total
$
32,794

 
$
3,689

 
$
33,312

 
$
1,948

 
 
 
 
_______________
(a)
This investment is in four long-term private equity funds that do not permit early withdrawal. Our investments in these funds cannot be distributed until the underlying investments have been liquidated, which may take years from the date of initial liquidation. Two funds have begun to make distributions. Our initial investment in the third fund occurred in the third quarter of 2013. Our initial investment in the fourth fund occurred in the second quarter of 2016. The term of the third and fourth fund is 15 years, subject to the general partner’s right to extend the term for up to three additional one-year periods.
(b)
There is a holdback on final redemptions.

Price Risk

We use various types of fuel, including coal, natural gas, uranium and diesel to operate our plants and also purchase power to meet customer demand. Our prices and consolidated financial results are exposed to market risks from commodity price changes for electricity and other energy-related products as well as from interest rates. Volatility in these markets impacts our costs of purchased power, costs of fuel for our generating plants and our participation in energy markets. We strive to manage our customers’ and our exposure to market risks through regulatory, operating and financing activities and, when we deem appropriate, we economically hedge a portion of these risks through the use of derivative financial instruments for non-trading purposes.

Interest Rate Risk

We have entered into numerous fixed and variable rate debt obligations. We manage our interest rate risk related to these debt obligations by limiting our exposure to variable interest rate debt, diversifying maturity dates and entering into treasury yield hedge transactions. We may also use other financial derivative instruments such as interest rate swaps.


6. FINANCIAL INVESTMENTS

We report our investments in equity and debt securities at fair value and use the specific identification method to determine their realized gains and losses. We classify these investments as either trading securities or available-for-sale securities as described below.

Trading Securities

We hold equity and debt investments that we classify as trading securities in a trust used to fund certain retirement benefit obligations. As of September 30, 2016, and December 31, 2015, we measured the fair value of trust assets at $34.5 million and $33.9 million, respectively. We include unrealized gains or losses on these securities in investment earnings on our consolidated statements of income. For the three and nine months ended September 30, 2016, we recorded an unrealized gain of $1.0 million and $2.2 million, respectively, on assets still held. For the three and nine months ended September 30, 2015, we recorded an unrealized loss of $1.5 million and $0.8 million, respectively, on assets still held.


20


Available-for-Sale Securities

We hold investments in a trust for the purpose of funding the decommissioning of Wolf Creek. We have classified these investments as available-for-sale and have recorded all such investments at their fair market value as of September 30, 2016, and December 31, 2015.

Using the specific identification method to determine cost, we realized no gains or losses during the three months ended September 30, 2016, and a loss of $1.5 million during the nine months ended September 30, 2016. We realized a loss of $0.5 million for the three months ended September 30, 2015, and a loss of $1.0 million for the nine months ended September 30, 2015. We record net realized and unrealized gains and losses in regulatory liabilities on our consolidated balance sheets. This reporting is consistent with the method we use to account for the decommissioning costs we recover in our prices. Gains or losses on assets in the trust fund are recorded as increases or decreases, respectively, to regulatory liabilities and could result in lower or higher funding requirements for decommissioning costs, which we believe would be reflected in the prices paid by our customers.

The following table presents the cost, gross unrealized gains and losses, fair value and allocation of investments in the NDT fund as of September 30, 2016, and December 31, 2015.
 
 
 
 
Gross Unrealized
 
 
 
 
Security Type
 
Cost
 
Gain
 
Loss
 
Fair Value
 
Allocation
 
 
(Dollars In Thousands)
 
 
As of September 30, 2016:
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
 
$
50,397

 
$
8,861

 
$
(137
)
 
$
59,121

 
30
%
International equity funds
 
34,199

 
3,262

 
(104
)
 
37,357

 
19
%
Core bond fund
 
27,280

 
705

 

 
27,985

 
14
%
High-yield bond fund
 
17,805

 

 
(119
)
 
17,686

 
9
%
Emerging market bond fund
 
16,242

 

 
(235
)
 
16,007

 
8
%
Combination debt/equity/other funds
 
9,088

 
3,728

 

 
12,816

 
6
%
Alternative investment fund
 
15,000

 
2,886

 

 
17,886

 
9
%
Real estate securities fund
 
9,500

 
237

 

 
9,737

 
5
%
Cash equivalents
 
201

 

 

 
201

 
<1%

Total
 
$
179,712

 
$
19,679

 
$
(595
)
 
$
198,796

 
100
%
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015:
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
 
$
49,488

 
$
7,436

 
$
(2
)
 
$
56,922

 
32
%
International equity funds
 
33,458

 
1,372

 
(1,235
)
 
33,595

 
18
%
Core bond fund
 
26,397

 

 
(421
)
 
25,976

 
14
%
High-yield bond fund
 
17,047

 

 
(1,759
)
 
15,288

 
8
%
Emerging market bond fund
 
16,306

 

 
(2,722
)
 
13,584

 
7
%
Combination debt/equity/other funds
 
8,239

 
3,104

 

 
11,343

 
6
%
Alternative investment fund
 
15,000

 
1,439

 

 
16,439

 
9
%
Real estate securities fund
 
11,026

 

 
(203
)
 
10,823

 
6
%
Cash equivalents
 
87

 

 

 
87

 
<1%

Total
 
$
177,048

 
$
13,351

 
$
(6,342
)
 
$
184,057

 
100
%


21


The following table presents the fair value and the gross unrealized losses of the available-for-sale securities held in the NDT fund aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2016, and December 31, 2015. 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
(In Thousands)
As of September 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
$
1,710

 
$
(137
)
 
$

 
$

 
$
1,710

 
$
(137
)
International equity funds

 

 
7,954

 
(104
)
 
7,954

 
(104
)
High-yield bond fund

 

 
17,686

 
(119
)
 
17,686

 
(119
)
Emerging market bond fund

 

 
16,007

 
(235
)
 
16,007

 
(235
)
Total
$
1,710

 
$
(137
)
 
$
41,647

 
$
(458
)
 
$
43,357

 
$
(595
)
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
Domestic equity funds
$

 
$

 
$
668

 
$
(2
)
 
$
668

 
$
(2
)
International equity funds

 

 
6,717

 
(1,235
)
 
6,717

 
(1,235
)
Core bond funds
25,976

 
(421
)
 

 

 
25,976

 
(421
)
High-yield bond fund
15,288

 
(1,759
)
 

 

 
15,288

 
(1,759
)
Emerging market bond fund

 

 
13,584

 
(2,722
)
 
13,584

 
(2,722
)
Real estate securities fund

 

 
10,823

 
(203
)
 
10,823

 
(203
)
Total
$
41,264

 
$
(2,180
)
 
$
31,792

 
$
(4,162
)
 
$
73,056

 
$
(6,342
)


7. DEBT FINANCING

In June 2016, Westar Energy issued $350.0 million in principal amount of first mortgage bonds bearing a stated interest at 2.55% and maturing July 2026. The bonds were issued as “Green Bonds,” and all proceeds from the bonds will be used for renewable energy projects, primarily the construction of the Western Plains Wind Farm.

Also in June 2016, KGE redeemed and reissued $50.0 million in principal amount of pollution control bonds maturing June 2031. The stated rate of the bonds was reduced from 4.85% to 2.50%.

In February 2016, KGE, as lessee to the La Cygne sale-leaseback, effected a redemption and reissuance of $162.1 million in outstanding bonds maturing in March 2021. The stated interest rate of the bonds was reduced from 5.647% to 2.398%. See Note 13, “Variable Interest Entities,” for additional information regarding our La Cygne sale-leaseback.


8. TAXES

We recorded income tax expense of $81.2 million with an effective income tax rate of 34% for the three months ended September 30, 2016, and income tax expense of $66.3 million with an effective income tax rate of 32% for the same period of 2015. We recorded income tax expense of $160.4 million with an effective income tax rate of 35% for the nine months ended September 30, 2016, and income tax expense of $127.8 million with an effective income tax rate of 33% for the same period of 2015. The increase in the effective income tax rate for the three and nine months ended September 30, 2016, was due primarily to an increase in income before income taxes.

As of September 30, 2016, and December 31, 2015, our unrecognized income tax benefits totaled $2.2 million and $2.9 million, respectively. We do not expect significant changes in our unrecognized income tax benefits in the next 12 months.


22


As of September 30, 2016, we had $0.1 million accrued for interest related to our unrecognized income tax benefits compared to no amount as of December 31, 2015. We accrued no penalties at either September 30, 2016, or December 31, 2015.

As of September 30, 2016, and December 31, 2015, we had recorded $1.5 million for probable assessments of taxes other than income taxes.


9. PENSION AND POST-RETIREMENT BENEFIT PLANS

The following tables summarize the net periodic costs for our pension and post-retirement benefit plans prior to the effects of capitalization.
 
 
Pension Benefits
 
Post-retirement Benefits
Three Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
(In Thousands)
Components of Net Periodic Cost (Benefit):
 
 
 
 
 
 
 
 
Service cost
 
$
4,633

 
$
5,348

 
$
271

 
$
361

Interest cost
 
10,922

 
10,753

 
1,392

 
1,422

Expected return on plan assets
 
(10,664
)
 
(10,059
)
 
(1,708
)
 
(1,654
)
Amortization of unrecognized:
 
 
 
 
 
 
 
 
Prior service costs
 
174

 
130

 
113

 
114

Actuarial loss (gain), net
 
5,146

 
8,033

 
(279
)
 
95

Net periodic cost (benefit) before regulatory adjustment
 
10,211

 
14,205

 
(211
)
 
338

Regulatory adjustment (a)
 
3,306

 
1,548

 
(486
)
 
1,013

Net periodic cost (benefit)
 
$
13,517

 
$
15,753

 
$
(697
)
 
$
1,351

 _______________
(a)
The regulatory adjustment represents the difference between current period pension or post-retirement benefit expense and the amount of such expense recognized in setting our prices.

 
 
Pension Benefits
 
Post-retirement Benefits
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
(In Thousands)
Components of Net Periodic Cost (Benefit):
 
 
 
 
 
 
 
 
Service cost
 
$
13,930

 
$
16,044

 
$
813

 
$
1,082

Interest cost
 
32,802

 
32,261

 
4,178

 
4,268

Expected return on plan assets
 
(31,990
)
 
(31,177
)
 
(5,125
)
 
(4,961
)
Amortization of unrecognized:
 
 
 
 
 
 
 
 
Prior service costs
 
594

 
390

 
341

 
342

Actuarial loss (gain), net
 
15,680

 
23,746

 
(839
)
 
284

Net periodic cost (benefit) before regulatory adjustment
 
31,016

 
41,264

 
(632
)
 
1,015

Regulatory adjustment (a)
 
9,919

 
4,880

 
(1,458
)
 
3,038

Net periodic cost (benefit)
 
$
40,935

 
$
46,144

 
$
(2,090
)
 
$
4,053

 _______________
(a)
The regulatory adjustment represents the difference between current period pension or post-retirement benefit expense and the amount of such expense recognized in setting our prices.

During the nine months ended September 30, 2016 and 2015, we contributed $15.7 million and $29.7 million, respectively, to the Westar Energy pension trust.



23


10. WOLF CREEK PENSION AND POST-RETIREMENT BENEFIT PLANS

As a co-owner of Wolf Creek, KGE is indirectly responsible for 47% of the liabilities and expenses associated with the Wolf Creek pension and post-retirement benefit plans. The following tables summarize the net periodic costs for KGE’s 47% share of the Wolf Creek pension and post-retirement benefit plans prior to the effects of capitalization.
 
 
Pension Benefits
 
Post-retirement Benefits
Three Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
(In Thousands)
Components of Net Periodic Cost (Benefit):
 
 
 
 
 
 
 
 
Service cost
 
$
1,687

 
$
1,899

 
$
31

 
$
34

Interest cost
 
2,413

 
2,254

 
81

 
79

Expected return on plan assets
 
(2,431
)
 
(2,261
)
 

 

Amortization of unrecognized:
 
 
 
 
 
 
 
 
Prior service costs
 
14

 
14

 

 

Actuarial loss (gain), net
 
1,090

 
1,482

 
(3
)
 
1

Net periodic cost before regulatory adjustment
 
2,773

 
3,388

 
109

 
114

Regulatory adjustment (a)
 
483

 
(304
)
 

 

Net periodic cost
 
$
3,256

 
$
3,084

 
$
109

 
$
114

 _______________
(a)
The regulatory adjustment represents the difference between current period pension or post-retirement benefit expense and the amount of such expense recognized in setting our prices.

 
 
Pension Benefits
 
Post-retirement Benefits
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
(In Thousands)
Components of Net Periodic Cost (Benefit):
 
 
 
 
 
 
 
 
Service cost
 
$
5,061

 
$
5,696

 
$
95

 
$
103

Interest cost
 
7,241

 
6,761

 
244

 
236