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Risk Factors
WESTAR ENERGY INC /KS ITEM 1A RISK FACTORS Like other companies in our industry, our consolidated financial results will be impacted by weather, the economy of our service territory and the performance of our customers
Our common stock price and creditworthiness will be affected by national and international macroeconomic trends, general market conditions and the expectations of the investment community, all of which are largely beyond our control
In addition, the following statements highlight risk factors that may affect our consolidated financial condition and results of operations
These are not intended to be an exhaustive discussion of all such risks, and the statements below must be read together with factors discussed elsewhere in this document and in our other filings with the SEC Our Revenues Depend Upon Rates Determined by the KCC The KCC regulates many aspects of our business and operations, including the retail rates that we charge customers for electric service
Retail rates are set by the KCC using a cost-of-service approach that takes into account historical operating expenses, fixed obligations and recovery of capital investments
Using this approach, the KCC sets rates at a level calculated to recover such costs and a permitted return on investment
Other parties to a rate review or the KCC staff may contend that our rates are excessive
Effective January 2006, the KCC authorized changes in our rates that left our rates virtually unchanged and approved various other changes in our rate structure
The KCC also approved the RECA, which is based on the actual cost of fuel and purchased power expense less margins earned on wholesale sales, and the ECRR, which is based on capital expenditures made to upgrade our equipment to meet stricter environmental standards required by the Clean Air Act
Our Costs May Not be Fully Recovered in Retail Rates Once established by the KCC, our rates generally remain fixed until changed in a subsequent rate review, except to the extent the KCC permits us to modify our tariffs using interim adjustment clauses, such as the RECA and the ECRR We may elect to file a rate review to request a change in our rates or intervening parties may request that the KCC review our rates for possible adjustment, subject to any limitations that may have been ordered by the KCC Equipment Failures and Other External Factors Can Adversely Affect Our Results The generation and transmission of electricity requires the use of expensive and complicated equipment
While we have a maintenance program in place, generating plants are subject to unplanned outages because of equipment failure
In these events, we must either produce replacement power from our less efficient units or purchase power from others at unpredictable and potentially higher cost in order to supply our customers and perform our contractual agreements
In addition, this can prevent us from having power to sell in the wholesale market
Coal deliveries from the PRB region of Wyoming, which is the primary source for our coal, have been slower than expected due primarily to problems with the rail tracks used to deliver our coal and operational problems at the mines where the coal is obtained
If rail delivery cycle times do not improve, we may be required to continue our coal conservation efforts and take other compensating measures
These measures include, but are not limited to, reducing coal consumption by revising normal dispatch of generation units, purchasing power or using more expensive power to serve customers and decreasing or, if necessary, eliminating market-based wholesale sales
In addition, decisions or mistakes by other utilities may adversely affect our ability to use transmission lines to deliver or import power, thus subjecting us to unexpected expenses or to the cost and uncertainty of public policy initiatives
These factors, as well as weather, interest rates, economic conditions, fuel availability, deliverability and prices, price volatility of fuel and other commodities and transportation availability and costs are largely beyond our control
Costs that are not recovered through the RECA could have a material adverse effect on our consolidated earnings, cash flows and financial position
We engage in energy marketing transactions to reduce risk from market fluctuations, enhance system reliability and increase profits
The events mentioned above could reduce our ability to participate in energy marketing opportunities, which could reduce our profits
18 ______________________________________________________________________ [44]Table of Contents We May Have Material Financial Exposure Under the Clean Air Act and Other Environmental Regulations On January 22, 2004, the EPA notified us that certain projects completed at Jeffrey Energy Center violated pre-construction permitting requirements under the Clean Air Act
This notification was delivered as part of an investigation by the EPA regarding maintenance activities that have been conducted since 1980 at Jeffrey Energy Center
The EPA has informed us that it has referred this matter to the DOJ for it to consider whether to pursue an enforcement action in federal district court
The remedy for a violation could include fines and penalties and an order to install new emission control systems at Jeffrey Energy Center and at certain of our other coal-fired power plants, the associated cost of which could be material
Our activities are subject to environmental regulation by federal, state, and local governmental authorities
These regulations generally involve the use of water, discharges of effluents into the water, emissions into the air, the handling, storage and use of hazardous substances, and waste handling, remediation and disposal, among others
Congress or the State of Kansas may enact legislation and the EPA or the State of Kansas may propose new regulations or change existing regulations that could require us to reduce certain emissions at our plants
Such action could require us to install costly equipment, increase our operating expense and reduce production from our plants
The degree to which we will need to reduce emissions and the timing of when such emissions control equipment may be required is uncertain
Both the timing and the nature of required investments depend on specific outcomes that result from interpretation of regulations, new regulations, legislation, and the resolution of the EPA investigation described above
Although we expect to recover capital expenditures directly tied to environmental improvement through our rates, we can provide no assurance that we would be able to fully and timely recover all or any increased operating and maintenance costs relating to environmental compliance
Failure to recover these associated costs could have a material adverse effect on our consolidated financial condition or results of operations
Competitive Pressures from Electric Industry Deregulation Could Adversely Affect Our Revenues and Reported Earnings We currently apply the accounting principles of SFAS Nodtta 71, “Accounting for the Effects of Certain Types of Regulation,” to our regulated business
At December 31, 2005, we had recorded dlra275dtta0 million of regulatory assets, net of regulatory liabilities
At December 31, 2004, we had recorded dlra334dtta6 million of regulatory assets, net of regulatory liabilities
In the event that we determined that we could no longer apply the principles of SFAS Nodtta 71, either as a result of the establishment of retail competition in our service territory or an expectation that permitted rates would not allow us to recover these costs, we would be required to record a charge against income in the amount of the remaining unamortized net regulatory assets
We Face Financial Risks From Our Nuclear Facility Risks of substantial liability arise from the ownership and operation of nuclear facilities, including, among others, structural problems at a nuclear facility, the storage, handling and disposal of radioactive materials, limitations on the amounts and types of insurance coverage commercially available, uncertainties with respect to the cost and technological aspects of nuclear decommissioning at the end of their useful lives and costs or measures associated with public safety
In the event of an extended or unscheduled outage at Wolf Creek, we would be required to generate power from less efficient units, purchase power in the open market to replace the power normally produced at Wolf Creek and we would have less power available for sale by us in the wholesale markets
If we were not permitted by the KCC to recover these costs, such events could have an adverse impact on our consolidated financial condition