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WIKI ANALYSIS
Great Plains Energy Corporation is a regulated electric and gas utility that supplies energy to 506,000 retail customers in Missouri and Kansas.[1] It is the parent company of Kansas City Power and Light (KCP&L), which accounted for 98% of Great Plains' net income in 2007. [1] The company has a generating capacity of 4000 megawatts.[1] In 2007, 75% of Great Plains’ generating capacity was based on coal and natural gas, making the company vulnerable to swings in fossil fuel prices and carbon emissions legislation. [2]
In 2007, Great Plains agreed to buy Aquila, Inc. and all of its Missouri-based electric utilities for $1.7 billion in a plan that was projected to save $222 million over five years and $549 million over a decade. [3] The purchase of Aquila, coupled with the construction of a $2 billion power plant in Weston, has the potential to hurt the company’s credit rating. .[4] The company has denied any negative effects would happen, and, after the close of the deal, Standard & Poor's affirmed its ratings for Great Plains and raised its rating for Aquila out of junk status. [5]
In 2008, Great Plains sold its Strategic Energy consultant unit to Direct Energy Services, LLC for $300 million. [6] The sale made Great Plains a 100% regulated entity, which guarantees the company a stable revenue outlook but limits potential income since retail prices must be approved by regulators.
Business Overview
| 2007 | 2006 | 2005 | 2004 | 2003 | |
| Revenue ($M) | 3267.1 | 2675.3 | 2604.9 | 2464 | 2148 |
| Net income ($M) [7] [8] | 159.2 | 127.6 | 162.3 | 180.8 | 144.9 |
As a regulated electric utility, Great Plains’ revenue has grown steadily for the last five years and its income has remained consistently positive between $127 and $181 million annually.[7][8] Great Plains provides approximately 96% of its electricity through coal and nuclear fuel, with the remainder provided by wind, natural gas, and oil. [2]
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Outside of its acquisition of Aquila, Great Plains intends to increase its rate base by $1.5 billion (more than 60%) through 2010. [9] The majority of this sum will be invested to expand generating capacity by 15% to meet future customer demand. [9]
Business Segments
- Kansas City Power & Light Company (39.6% of revenue, 98.5% of net income [10]): KCP&L is a regulated electric utility that generates and distributes electricity to 506,000 customers in 24 counties in western Missouri and eastern Kansas. [1] KCP&L’s retail revenue accounts for 81% of its total operating revenue, while wholesale and bulk power sales account for the rest. [1] Its customers include approximately 446,100 residences, 57,600 commercial firms, and 2,300 industrials, municipalities, and other electric utilities. [1] KCP&L has over 4000 MW of generating capacity. The addition of its new coal-fired plant in Iatan in 2010 will add 435 MW to KCP&L’s generating capacity. [11] With 98% of KCP&L’s electricity supply originating in the Powder River Basin, a localized catastrophe has the potential to cause far-reaching disruptions, although the acquisition of Aquila will geographically diversify Great Plains’ power supply. [12]
- Strategic Energy (60.4% of revenue, 24.1% of net income) [10]: Strategic Energy is an independent energy consultant firm that connects businesses with competitively priced energy products and designs comprehensive energy strategies for them.[13] The unit does not generate any electricity of its own. [13] Strategic Energy operates in deregulated states with competitive electric utilities industries, including California, Connecticut, Illinois, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania and Texas.[14] The firm provides services to 25,700 companies and government entities. [14] Strategic Energy was sold to Direct Energy Services, LLC on June 2, 2008 for $300 million.[6]
- Other (-22.6% of net income): Other includes support services, unallocated corporate charges such as executive compensation, and financing activities between Great Plains' subsidiaries. [10]
Acquisition of Aquila
On February 7, 2007, Great Plains agreed to purchase Aquila, Inc.’s Missouri-based electric utility assets for $1.6 billion in cash and stock. [15] On July 1, 2008, the Missouri Public Service Commission approved the merger in a 2-1 vote following a long controversy in which Great Plains was criticized for planning to make its customers pay too much of the cost for acquiring Aquila.[16] Regulators decided Great Plains’ Missouri customers would not have to pay for $47.2 million in transaction costs for acquiring Aquila. [3] Following close of the agreement for $1.7 billion on July 14, 2008, Great Plains acquired Missouri Public Service and St. Joseph Light and Power, as well as all of Aquila’s Missouri plants and natural gas contracts. KCP&L will assume operation of Aquila's utilities in Missouri beginning in 2008,[17] which will add 1748 MW of generating capacity to the company's Missouri operations.[18]
In 2007, Aquila had revenue of $1.5 billion and a net income loss of $5.4 million,[19] although Great Plains expects the acquisition to save $198 over five years and $547 million over the next decade.[4] Some critics contend the $1.7 billion purchase, coupled with the company’s construction of a new $2 billion power plant in Weston, has the potential to hurt the company’s credit rating, which would increase its costs for borrowing money. Great Plains has denied that would happen. [4] Additionally, all of Aquila's Missouri power plants are fueled by fossil fuels, increasing Great Plains' exposure to carbon emissions regulation. [18]
Sale of Strategic Energy LLC
On April 2, 2008, Great Plains Energy announced the sale of its Strategic Energy subsidiary to Direct Energy Services, LLC for $300 million in cash. The sale was completed on June 2, 2008. [20] The Strategic Energy unit was Great Plain’s only unregulated subsidiary. Following the sale of Strategic Energy, Great Plains became a 100% regulated utility, resulting in a more stable earnings outlook. [12]
Trends and Forces
Rising Fuel Costs Pose Risk to Great Plains Energy’s Margins
Great Plains’ regulated status makes it difficult to pass on increases in fuel costs to its customers. As a result, increases in fuel prices cut into the company’s profit margins.
Coal: In 2007, 72% of KCP&L's generating capacity was based on coal.[2] KCP&L's reliance on coal and other fossil fuels is poised to increase in 2008 with the acquisition of Aquila's Missouri utilities,[18] making the company vulnerable to swings in coal prices and carbon emissions legislation. JP Morgan forecasts the price of coal will increase over 60% in 2008 due to surging demand from developing nations. [21]
Nuclear: The cost of uranium hexafluoride and conversion services to Great Plains will remain relatively stable through 2009 due to contracts already in place. From 2009 through 2018, the company expects an increase in the price of nuclear fuel due to greater market demand. Even with this anticipated increase, however, the cost of nuclear fuel per MWh is expected to remain less than the cost of other fuel sources per MWh. [14]
Government Regulation of Retail Electricity Prices Promotes Stable Revenue Outlook
Great Plains Energy’s subsidiaries have legal monopolies over retail electricity in its areas of service in Missouri and Kansas, bringing stability to the company’s operating outlook through a guaranteed customer base. However, Great Plains’ regulated status also makes it more difficult for the company to adjust retail prices based on swings in the cost of fuel since regulators must approve changes in electricity rates. Beginning in 2008, Kansas retail rates contain an Energy Cost Adjustment provision which provides for a firm profit margin in the event fuel costs rise. Missouri retail rates do not contain such a provision, so a rise in fuel costs would adversely affect Great Plain’s net income until regulators authorize an increase in rates. [2] In December 2007, the Missouri Public Service Commission authorized KCP&L a return on equity of 10.75%, close to the 11.25% allowed rate of return Great Plains had sought. [22]
No legislation authorizing retail choice of electricity has been introduced in Missouri and Kansas for several years. [11]
Climate Change Regulation Will Adversely Affect Great Plains
Great Plains’ reliance on fossil fuels makes it vulnerable to carbon emissions regulation. In February 2008, JP Morgan Chase, Citigroup, and Morgan Stanley stated that they would institute a set of "Carbon Principles" in which they would give investment priority to clean energy groups. A series of international meetings are currently taking place, culminating in the Copenhagen conference to be held in late 2009 with the goal of establishing a global climate change agreement to reduce greenhouse gas emissions.[23] President-elected Barack Obama has pledged to reduce carbon emissions by 80% below 1990 levels by 2050. [24] If carbon emissions caps are adopted at the Copenhagen conference and domestic legislation increases the cost of fossil fuels, Great Plains’ business prospects will suffer.
As of 2008, twenty-six states had adopted binding Renewable Portfolio Standards, policies that require electricity providers to obtain a minimum percentage of their power from renewable energy sources. Kansas has not yet adopted such a requirement, while Missouri has set nonbinding renewable energy goals. [25] Since Great Plains generates 75% of its electricity from fossil fuels, the passage of binding Renewable Portfolio Standards by Missouri or Kansas would have adverse effects on the company’s operating outlook. [2]
Great Plains intends to proactively invest in environmental technologies before being required to do so by federal or state legislation. [12] In 2007, the company added 100MW in new wind generation capacity and began upgrading technology at existing plants to improve air quality.[26] It is currently constructing a 850MW high-efficiency coal power plant, scheduled to be operational in 2010. [26]
Competition
Although Great Plains is the sole retail electricity utility in its areas of operation in Missouri and Kansas, it still competes with other energy companies and technologies. For example, customers have the ability to install other sources of energy, such as installing their own solar panels. KCP&L also competes with other power suppliers in the wholesale power market in surrounding areas where it does not have a statutory monopoly. The company’s wholesale power revenue accounted for 17% of its total revenue over the last three years. [11]
| GXP | EIX | AEP | DUK | Entergy | Exelon | PSEG | |
|---|---|---|---|---|---|---|---|
| Revenue (FY 2007, USD Billions) | 3.3 [27] | 13.1[28] | 13.4[29] | 12.7[30] | 11.5 [31] | 18.9 [32] | 12.9 [33] |
| Generation Capacity (Megawatts) | 4,000[34] | 14,500[35] | 38,000[36] | 40,000 (include int'l)[37] | 30,000 | 33,000 | 17,000 |
| Customers (Millions) | 0.506[38] | 4.8 (SCE)[39] | 5[40] | 3.9[41] | 2.4 | 6.1 | 21 |
| % Nuclear Power | 24[42] | 16.9 (SCE)[43] | 6.1[44] | 35[45] | 31 | 66 | 23 |
| After Tax Profit Margins (%) | 4.93[46] | 9.97[47] | 8.53[48] | 11.98[49] | 10.10 [50] | 14.41 [51] | 10.26 [52] |
References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 GXP 2007 10-K, Item 1 “Business," page 7
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 2.6 GXP 2007 10-K, Item 1 “Business," page 9
- ↑ 3.0 3.1 News Tribune, “Missouri regulators approve Great Plains-Aquila buyout.”
- ↑ 4.0 4.1 4.2 Yahoo Business "Great Plains Energy closes deal to buy Aquila"
- ↑ Black Hills and Great Plains close Aquila deal
- ↑ 6.0 6.1 Kansas City Business Journal, "S&P affirms Great Plains Energy rating"
- ↑ 7.0 7.1 GXP 2007 10-K, Item 8 "Consolidated Financial Statement," page 59
- ↑ 8.0 8.1 GXP 2005 10-K, Item 8 "Consolidated Financial Statement," page 57
- ↑ 9.0 9.1 Morningstar Analyst Report: GXP “Strategy”
- ↑ 10.0 10.1 10.2 GXP 2007, 10-K, Item 8 "Consolidated Financial Statement," page 114
- ↑ 11.0 11.1 11.2 GXP 2007 10-K, Item 1 "Business," page 8
- ↑ 12.0 12.1 12.2 Morningstar Analyst Report: GXP
- ↑ 13.0 13.1 Kansas City Business Journal, "Strategic Energy, LLC Company Profile"
- ↑ 14.0 14.1 14.2 GXP 2007 10-K, Item 1 "Business," page 10
- ↑ GXP 2007 10-K, Item 1 “Business," page 6
- ↑ Associated Press, “Mo. Regulators approve Great Plains-Aquila deal”
- ↑ Aquila: Providing Energy For Better Living
- ↑ 18.0 18.1 18.2 ILA 2007 10-K, Item 1 "Business," page 7
- ↑ ILA 2007 10-K, Item 8 "Business," page 58
- ↑ Reuters “Great Plains Energy Incorporated Announces Completion of Strategic Energy Sale to Centrica PLC’s Direct Energy
- ↑ Reuters, “JP Morgan raises 2008 coal price forecast”
- ↑ KCP&L wins reduced rate increase
- ↑ Copenhagen 2009, “The Government’s Goals for COP15”
- ↑ CNN Election Center: Issues: Environment
- ↑ US Department of Energy
- ↑ 26.0 26.1 Great Plains Energy, “Comprehensive Energy Plan.”
- ↑ GXP 2007 10-K, Item 8 "Consolidated Financial Statement," page 59
- ↑ EIX's 2007 Annual Report , page 104
- ↑ AEP 2007 10-K, Item 1 “Business,” page 2
- ↑ DUK 2007 10-K, Item 8 “Financial Statement,” page 40
- ↑ [ http://finance.google.com/finance?q=NYSE%3AETR Google Finance ETR]
- ↑ Google Finance EXC
- ↑ Google Finance PSEG
- ↑ GXP 2007 10-K, Item 1 “Business," page 8
- ↑ EIX's 2006 Annual Report (Pg 18 & 29)
- ↑ AEP's Investor Page)
- ↑ DUK's Energy Business Segments
- ↑ GXP 2007 10-K, Item 1 “Business," page 12
- ↑ EIX's 2006 Annual Report (Pg 17)
- ↑ AEP's Investor Page)
- ↑ DUK's Energy Business Segments
- ↑ GXP 2007 10-K, Item 1 “Business," page 9
- ↑ EIX's 2006 Annual Report (Pg 19)
- ↑ AEP's 2006 Annual Report (Item 2)
- ↑ DUK's 2006 10-k (Pg 11)
- ↑ Google Finance GXP
- ↑ Google Finance EIX
- ↑ Google Finance AEP
- ↑ Google Finance DUK
- ↑ [ http://finance.google.com/finance?q=NYSE%3AETR Google Finance ETR]
- ↑ Google Finance EXC
- ↑ Google Finance PSEG
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