Environmental Matters
General
We currently hold all federal and state environmental approvals
required for the operation of all of our generating units. We believe
we are currently in substantial compliance with all air quality
regulations (including those pertaining to particulate matter, sulfur
dioxide (SO2) and nitrogen oxide (NOx)) promulgated by the State
of Kansas and the Environmental Protection Agency (EPA).
The JEC and LaCygne 2 units have met: (1) the federal SO2 standards
through the use of low-sulfur coal; (2) the federal particulate
matter standards through the use of electrostatic precipitators;
and (3) the federal NOx standards through boiler design and operating
procedures. The JEC units are also equipped with flue gas scrubbers
providing additional SO2 and particulate matter emission reduction
capability when needed to meet permit limits.
The Kansas Department of Health and Environment regulations applicable
to our other generating facilities prohibit the emission of more
than 3.0 pounds of SO2 per MMBtu of heat input. We meet these standards
through the use of low-sulfur coal and by all coalburning facilities
being equipped with flue gas scrubbers and/or electrostatic precipitators.
Because of the strong demand for generation in 2002, we consumed
more SO2 allowances than were allocated to us by the EPA. We made
up the shortfall by utilizing allowances we had previously procured
in the open market. In anticipation of another strong year in generation,
we will be actively pursuing the purchase of additional SO2 allowances
for 2003, which could approximate $3.0 million in additional costs.
We must comply, and are currently in compliance, with the provisions
of The Clean Air Act Amendments of 1990 that require a two-phase
reduction in some emissions. We have installed continuous monitoring
and reporting equipment to meet the acid rain requirements. We have
not had to make any material capital expenditures to meet Phase
II SO2 and NOx requirements.
All of our generating facilities are in substantial compliance
with the Best Practicable Technology and Best Available Technology
regulations issued by the EPA pursuant to the Clean Water Act of
1977.
EPA New
Source Review
The EPA is conducting an enforcement
initiative at a number of coalfired
power plants in an effort to determine
whether modifications at those facilities
were subject to New Source Review requirements
or New Source Performance Standards
under the Clean Air Act. The EPA has
requested information from us under
Section 114(a) of the Clean Air Act
(Section 114). A Section 114 information
request requires us 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. The EPA contends
that power plants are required to update
emission controls at the time of major
maintenance or capital activity. We
believe that maintenance and capital
activities performed at our power plants
are generally routine in nature and
are typical for the industry. We are
complying with this information request,
but cannot predict the outcome of this
investigation at this time. Should the
EPA determine to take
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action, the resulting
additional costs to comply could be
material. We would expect to seek recovery
through rates of any settlement amounts.
The EPA has initiated civil enforcement
actions against other unaffiliated utilities as part of its initiative.
Settlement agreements entered into in connection with some of these
actions have provided for expenditures to be made over extended
time periods.
Additional information with respect to
Environmental Matters is discussed in Note 17 of the Notes to Consolidated
Financial Statements, “Commitments and Contingencies,” and such
information is incorporated herein by reference.
MONITORED SERVICES OPERATIONS
General
We provide property monitoring services
through Protection One and Protection One Europe to approximately
1.1 million customers in the United States and approximately 55,000
customers in continental Europe. Revenues are generated primarily
from recurring monthly payments for monitoring and maintaining the
alarm systems that are installed in customers’ homes and businesses.
Services are provided to residential (both single-family and multifamily
residences), commercial and wholesale customers. Currently, the
United States customers are primarily in the residential market
and the European customers are primarily in the commercial market.
Proposed Dispositions
The Debt Reduction Plan contemplates
the sale of our interests in Protection One Europe with a targeted
closing of mid-2003 and the sale of our interest in Protection One
with a targeted closing by late 2003 or early 2004. Consistent with
the Debt Reduction Plan, our board of directors has authorized management
to explore alternatives for disposing of our investments in Protection
One and Protection One Europe and we have retained financial advisors
to assist with the possible sales. A special committee composed
of independent directors of Protection One’s board of directors
has been formed and the committee has also retained a financial
advisor. As a result of these decisions, these operations were classified
as discontinued operations during the first quarter of 2003 under
the provisions of SFAS No. 144.
As discontinued operations, we will be
required to determine the fair value of our investment, which will
be the net amount we expect to realize from the sale of the investment.
The investment must be reported at the lesser of our recorded basis
or the estimated fair value. If the fair value is less than our
recorded basis, we will be required to record an expense equal to
the amount, which could be material, by which our basis exceeds
the estimated fair value.
We solicited and received indications of value for Protection One
Europe from potential buyers. These indications of value are within a
range we would be willing to accept. They indicated the recorded
goodwill for Protection One Europe had no value. Accordingly, we
recorded a $36 million impairment charge in the fourth quarter of
2002 to reflect the impairment of all remaining goodwill at Protection
One Europe. We are willing to accept offers in the indicated range due
to our ability to use the tax loss on this sale to offset the taxes that
would otherwise be due from our sale of other investments. We will
recognize a $58 million tax benefit in the first quarter of 2003 when
Protection One Europe is classified as a discontinued operation.
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