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liabilities related to our electric utility
operations. If we determine that we no longer meet the criteria
of SFAS No. 71, we may have a material non-cash charge to earnings.
Reasons for discontinuing SFAS No. 71 accounting treatment include
increasing competition that restricts our ability to charge prices
needed to recover costs already incurred or a significant change
by regulators from a cost-based rate regulation to another form
of rate regulation. We periodically review SFAS No. 71 criteria
and believe our net regulatory assets, including those related to
generation, are probable of future recovery. If we discontinue SFAS
No. 71 accounting treatment based upon competitive or other events,
such as successful municipalization by areas we serve, the value
of our net regulatory assets and our utility plant investments,
particularly Wolf Creek, may be significantly impacted.
Regulatory changes could adversely impact
our ability to recover our investment in these assets. As of December
31, 2002, we have recorded regulatory assets that are currently
subject to recovery in future rates of approximately $360.3 million.
Of this amount, $198.9 million is a receivable for income tax benefits
previously passed on to customers. The remainder of the regulatory
assets are items that may give rise to stranded costs, including
debt issuance costs, deferred employee benefit costs, deferred plant
costs and coal contract settlement costs.
In a competitive
environment, we may not be able to fully
recover our entire investment in Wolf
Creek. KGE presently owns 47% of Wolf
Creek. We may also have stranded costs
from an inability to recover our environmental
remediation costs and long-term fuel
contract costs in a competitive environment.
If we determine that we have stranded
costs and we cannot recover our investment
in these assets, our future net utility
income will be lower than our historical
net utility income has been unless we
compensate for the loss of such income
with other measures.
EPA
New Source Review
The Environmental
Protection Agency (EPA) is conducting
an enforcement initiative at a number
of coal-fired 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 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.
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Superfund Sites
In December 1999,
we were identified as one of more than
1,000 potentially responsible parties
at an EPA Superfund site in Kansas City,
Kansas (Kansas City site). Based upon
previous experience and the limited
nature of our business transactions
with the previous owners of the site,
our obligation, if any, at the Kansas
City site is not expected to have a
material impact on our financial position
or results of operations.
Nuclear
Decommissioning
Decommissioning
is a nuclear industry term for the permanent
shutdown of a nuclear power plant and
the removal of radioactive components
in accordance with Nuclear Regulatory
Commission (NRC) requirements. The NRC
will terminate a plant’s license and
release the property for unrestricted
use when a company has reduced the residual
radioactivity of a nuclear plant to
a level mandated by the NRC. The NRC
requires companies with nuclear plants
to prepare formal financial plans to
fund decommissioning. These plans are
designed so that funds required for
decommissioning will be accumulated
prior to the termination of the license
of the related nuclear power plant.
We accrue decommissioning
costs over the expected life of the
Wolf Creek generating facility. The
accrual is based on estimated unrecovered
decommissioning costs, which consider
inflation over the remaining estimated
life of the generating facility and
are net of expected earnings on amounts
recovered from customers and deposited
in an external trust fund.
The KCC reviews
our decommissioning fund financial plans
in two phases. Phase one is the approval
of the decommissioning study, the current
year dollar amount and the future year
dollar amount. Phase two is the filing
of a “funding schedule” by the owner
of the nuclear facility detailing its
plans of how to fund the future year
dollar amount for the pro rata share
of the plant.
On February 25,
2002, we filed an application with the
KCC to modify the funding schedule to
reflect an assumed life of Wolf Creek
through 2045 (see Note 3 of the Notes
to Consolidated Financial Statements,
“Rate Matters and Regulation”). This
modification was granted on March 8,
2002. The filing reflects the current
estimate in 1999 dollars of $221 million,
but a future estimate in 2045 through
2054 of $1.28 billion. An updated decommissioning
and dismantlement cost estimate was
filed with the KCC on August 30, 2002.
Costs outlined by this study were developed
to decommission Wolf Creek following
a shutdown. The analyses relied upon
the sitespecific, technical information
developed in 1999, updated to reflect
current plant conditions and operating
assumptions. Based on this study, our
share of Wolf Creek’s decommissioning
costs, under the immediate dismantlement
method, is estimated to be approximately
$220 million in 2002 dollars. These
costs include decontamination, dismantling
and site restoration and are not inflated,
escalated, or discounted over the period
of expenditure. We anticipate a KCC
order on the August 2002 decommissioning
study in the second quarter of 2003.
The actual decommissioning costs may
vary from the estimates because of changes
in technology and changes in costs for
labor, materials and equipment.
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