we expected to realize annual operating cost savings of approximately $0.9 million. The cost savings will be treated as a regulatory liability in accordance with a March 26, 2002, KCC order. For the year ended December 31, 2002, we recorded $0.5 million in cost savings as a regulatory liability.      Protection One Europe On February 29, 2000, Westar Industries purchased the European operations of Protection One, and certain investments held by a subsidiary of Protection One, for an aggregate purchase price of $244 million. Westar Industries paid approximately $183 million in cash and transferred Protection One debt securities with a market value of approximately $61 million to Protection One. Cash proceeds from the transaction were used to reduce the outstanding balance owed to Westar Industries on Protection One’s revolving credit facility. No gain or loss was recorded on this intercompany transaction and the net book value of the assets was unaffected. Hedging Activity We use financial and physical instruments to hedge a portion of our anticipated fossil fuel needs. At the time we enter into these transactions, we are unable to determine what the value will be when the agreements are actually settled. In an effort to mitigate fuel commodity price market risk, we use hedging arrangements to reduce our exposure to increased coal, natural gas and oil prices. Our future exposure to changes in fossil fuel prices will be dependent upon the market prices and the extent and effectiveness of any hedging arrangements into which we enter. See Note 6 of the Notes to Consolidated Financial Statements, “Financial Instruments, Energy Trading and Risk Management — Derivative Instruments and Hedge Accounting — Hedging Activities,” for detailed information regarding hedging relationships and an interest rate swap we entered into during the third quarter of 2001. ITEM 7A. QUANTITATIVE AND QUALITATIVE                    DISCLOSURES ABOUT MARKET RISK Market Price Risks Our hedging and trading activities involve risks, including commodity price risk, equity price risk, interest rate risk and credit risk. Commodity price risk is the risk that changes in commodity prices may impact the price at which we are able to buy and sell electricity and purchase fuels for our generating units. These commodities have experienced price volatility in the past and can be expected to do so in the future. This volatility may increase or decrease future earnings. Equity price risk is the risk we may be exposed to based on changes in the market value of our equity securities. Interest rate risk is the risk of loss associated with movements in market interest rates. During 2002, we used an interest rate swap to manage our exposure to variable interest rates. The swap converted $500 million of variable rate debt to a fixed rate. In the future, we may continue to use swaps or other financial instruments to manage interest rate risk.		Credit risk is the risk of loss resulting from non-performance by a counterparty of its contractual obligations. We have exposure to credit risk and counterparty default through our retail, power marketing and trading activities. We maintain credit policies intended to reduce overall credit risk and actively monitor these policies to reflect changes and scope of operations. We employ additional credit risk control mechanisms when appropriate, such as letters of credit, parental guarantees and standardized master netting agreements from counterparties that allow for some of the offsetting of positive and negative exposures. Credit exposure is monitored and, when necessary, the activity with a specific counterparty is limited until credit enhancement is provided. Results actually achieved from hedging and trading activities could vary materially from intended results and could materially affect our financial results depending on the success of our credit risk management efforts. Commodity Price Exposure We engage in both financial and physical trading to manage our commodity price risk. We trade electricity, coal, natural gas and oil. We use a variety of financial instruments, including forward contracts, options and swaps and trade energy commodity contracts daily. We also use hedging techniques to manage overall fuel expenditures. We procure physical product under fixed price agreements and spot market transactions. We are involved in trading activities primarily to reduce risk from market fluctuations, capitalize on our market knowledge and enhance system reliability. Net open positions exist, or are established, due to the origination of new transactions and our assessment of, and response to, changing market conditions. To the extent we have open positions, we are exposed to the risk that changing market prices could have a material, adverse impact on our financial position or results of operations. We manage and measure the market price risk exposure of our trading portfolio using a variance/covariance value-at-risk (VaR) model. VaR measures the predicted worst-case loss at a specific confidence level over a specified period of time. In addition to VaR, we employ additional risk control processes such as stress testing, daily loss limits, and commodity position limits. We expect to use the same VaR model and control processes in 2003. The use of the VaR method requires a number of key assumptions, including the selection of a confidence level for losses and the estimated holding period. We express VaR as a potential dollar loss based on a 95% confidence level using a one-day holding period. The calculation includes derivative commodity instruments used for both trading and risk management purposes. The VaR amounts for 2002 and 2001 were as follows: