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Great Plains Energy (GXP)Stock (Electric Utilities Industry, Energy Industry)
 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] Critics contend that 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] In 2008, Great Plains sold its Strategic Energy consultant unit to Direct Energy Services, LLC for $300 million. [5] 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.
[edit] Business Overview
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.[6][7] Great Plains provides approximately 96% of its electricity through coal and nuclear fuel, with the remainder provided by wind, natural gas, and oil. [2]
Outside of its acquisition of Aquila, Great Plains intends to increase its rate base by $1.5 billion (more than 60%) through 2010. [8] The majority of this sum will be invested to expand generating capacity by 15% to meet future customer demand. [8] [edit] Business Segments
[edit] Acquisition of AquilaOn February 7, 2007, Great Plains agreed to purchase Aquila, Inc.’s Missouri-based electric utility assets for $1.6 billion in cash and stock. [14] 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.[15] 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,[16] which will add 1748 MW of generating capacity to the company's Missouri operations.[17] In 2007, Aquila had revenue of $1.5 billion and a net income loss of $5.4 million,[18] 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. [17] [edit] Sale of Strategic Energy LLCOn 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. [19] 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. [11] [edit] Trends and Forces[edit] Rising Fuel Costs Pose Risk to Great Plains Energy’s MarginsGreat 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,[17] 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. [20] 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. [13] [edit] Government Regulation of Retail Electricity Prices Promotes Stable Revenue OutlookGreat 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. [21] No legislation authorizing retail choice of electricity has been introduced in Missouri and Kansas for several years. [10] [edit] Climate Change Regulation Will Adversely Affect Great PlainsGreat 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.[22] Senator Barack Obama, the presumed 2008 Democratic nominee for President, has pledged to reduce carbon emissions by 80% below 1990 levels by 2050. [23] Senator John McCain, the presumed Republican candidate, supports a cap-and-trade carbon system. 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. [24] 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. [11] In 2007, the company added 100MW in new wind generation capacity and began upgrading technology at existing plants to improve air quality.[25] It is currently constructing a 850MW high-efficiency coal power plant, scheduled to be operational in 2010. [25] [edit] CompetitionAlthough 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. [10]
 Great Plains Energy2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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