Ice Storm
In late January 2002, a severe ice storm
swept through our utility service area
causing extensive damage and loss of
power to numerous customers. Through
December 31, 2002, we incurred $19.3
million for restoration costs, a portion
of which was capitalized. We have deferred
and recorded as a regulatory asset on
our December 31, 2002 consolidated balance
sheet restoration costs of approximately
$15.0 million. We have received an accounting
authority order from the KCC that allows
us to accumulate and defer for potential
future recovery all operating and carrying
costs related to storm restoration.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of results
of operations and financial condition
are based upon our consolidated financial
statements, which have been prepared
in accordance with GAAP. The preparation
of consolidated financial statements
requires us to make estimates and assumptions
that affect the reported amounts of
assets, liabilities, revenues and expenses,
and related disclosure of contingent
assets and liabilities. We evaluate
our estimates on an on-going basis,
including those related to bad debts,
inventories, depreciation, revenue recognition,
investments, customer accounts, goodwill,
intangible assets, income taxes, pensions,
post-retirement and postemployment benefits,
decommissioning of Wolf Creek Generating
Station (Wolf Creek), environmental
issues, contingencies and litigation.
We base our estimates on historical
experience and on various other assumptions
that are believed to be reasonable under
the circumstances, the results of which
form the basis for making judgments
about the carrying values of assets
and liabilities that are not readily
apparent from other sources. Actual
results may differ from these estimates
under different assumptions or conditions.
Note 2 of the Notes to Consolidated Financial
Statements, “Summary of Significant
Accounting Policies,” provides a summary
of the significant accounting policies
and methods used in the preparation
of our consolidated financial statements.
The following is a brief description
of the more significant accounting policies
and methods used by us.
Regulatory Accounting
We currently apply accounting standards
for our regulated utility operations
that recognize the economic effects
of rate regulation in accordance with
SFAS No. 71, “Accounting for the Effects
of Certain Types of Regulation,” and,
accordingly, have recorded regulatory
assets and liabilities when required
by a regulatory order or based on regulatory
precedent.
Regulatory assets represent incurred costs that have been deferred
because they are probable of future recovery in customer rates.
Regulatory liabilities represent obligations to make refunds to
customers for previous collections for costs that are not likely
to be incurred in the future. We have recorded these regulatory
assets and liabilities in accordance with SFAS No. 71. If we were
required to terminate application of SFAS No. 71 for all of our
regulated operations,
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we would have to record the amounts of
all regulatory assets and liabilities in our consolidated statements
of income at that time. As of December 31, 2002, this would reduce
our earnings by approximately $351.9 million, net of applicable
income taxes.
SFAS No. 71 applies to our
electric utility business segment. We do not anticipate the discontinuation
of SFAS No. 71 in the foreseeable future. See “— Other Information
— Electric Utility — Stranded Costs” for additional discussion of
the application of SFAS No. 71.
Depreciation
Utility plant
is depreciated on the straight-line
method at the lesser of rates set by
the KCC or rates based on the estimated
remaining useful lives of the assets,
which are based on an average annual
composite basis using group rates that
approximated 2.66% during 2002, 3.03%
during 2001 and 2.99% during 2000.
In its rate order
of July 25, 2001, the KCC extended the
estimated service life for certain of
our generating assets, including Wolf
Creek and the LaCygne 2 generating station,
for regulatory rate making purposes.
The estimated retirement date for Wolf
Creek was extended from 2025 to 2045,
although our operating license for Wolf
Creek expires in 2025, and the estimated
retirement date for LaCygne 2 was extended
to 2032, although the term of our lease
for LaCygne 2 expires in 2016. On April
1, 2002, we adopted the new depreciation
rates as prescribed in the KCC order.
We continue to depreciate Wolf Creek
over the term of our operating license,
and we continue to depreciate LaCygne
2 over the term of our lease. We have
created a regulatory asset for the amount
that our depreciation expense exceeds
our regulatory depreciation expense.
On an annual basis,
our depreciation expense will be reduced
by approximately $30.0 million as a
result of these extensions. If our generating
license for Wolf Creek is not renewed
or the term of our lease for LaCygne
2 is not extended, we will need to seek
relief from the KCC to recover the remaining
cost of these assets.
Pension Benefit Plans
The reported costs
of our pension benefit plans, which
include our portion of Wolf Creek Nuclear
Operating Corporation’s costs, are impacted
by the factors listed below.
- Pension
costs are impacted by earnings
on plan assets, plan amendments,
contributions made to the plan
and employee demographics (including
age, compensation levels and employment
periods).
- Pension
costs may be significantly affected
by changes in actuarial assumptions,
including anticipated rates of
return on plan assets and discount
rates used in determining the
projected benefit obligation and
pension costs.
- Our 2002
discount rate assumption ranged
from 6.50% to 6.75%. Our discount
rate was 7.25% in 2001 and ranged
from 7.25% to 7.75% in 2000. When
our discount rate assumption decreases,
our expense increases.
- Our expected
rate of return assumption ranged
from 9.0% to 9.25%, which is consistent
with long-term results of the
plans. The return assumption was
the same for 2002, 2001 and 2000.
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