Great Plains Energy 10-K 2010
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year endedDecember 31, 2009
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______to_______
Each of the following classes or series of securities registered pursuant to Section 12(b) of the Act is registered on the New York Stock Exchange:
Securities registered pursuant to Section 12(g) of the Act: Kansas City Power & Light Company Common Stock without par value.
This combined annual report on Form 10-K is being filed by Great Plains Energy Incorporated (Great Plains Energy) and Kansas City Power & Light Company (KCP&L). KCP&L is a wholly owned subsidiary of Great Plains Energy and represents a significant portion of its assets, liabilities, revenues, expenses and operations. Thus, all information contained in this report relates to, and is filed by, Great Plains Energy. Information that is specifically identified in this report as relating solely to Great Plains Energy, such as its financial statements and all information relating to Great Plains Energy’s other operations, businesses and subsidiaries, including KCP&L Greater Missouri Operations Company (GMO), does not relate to, and is not filed by, KCP&L. KCP&L makes no representation as to that information. Neither Great Plains Energy nor its other subsidiaries have any obligation in respect of KCP&L’s debt securities and holders of such securities should not consider Great Plains Energy’s or its other subsidiaries’ financial resources or results of operations in making a decision with respect to KCP&L’s debt securities. Similarly, KCP&L has no obligation in respect of securities of Great Plains Energy or its other subsidiaries.
CAUTIONARY STATEMENTS REGARDING CERTAIN FORWARD-LOOKING INFORMATION
Statements made in this report that are not based on historical facts are forward-looking, may involve risks and uncertainties, and are intended to be as of the date when made. Forward-looking statements include, but are not limited to, the outcome of regulatory proceedings, cost estimates of the Comprehensive Energy Plan and other matters affecting future operations. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the registrants are providing a number of important factors that could cause actual results to differ materially from the provided forward-looking information. These important factors include: future economic conditions in regional, national and international markets and their effects on sales, prices and costs, including but not limited to possible further deterioration in economic conditions and the timing and extent of any economic recovery; prices and availability of electricity in regional and national wholesale markets; market perception of the energy industry, Great Plains Energy and KCP&L; changes in business strategy, operations or development plans; effects of current or proposed state and federal legislative and regulatory actions or developments, including, but not limited to, deregulation, re-regulation and restructuring of the electric utility industry; decisions of regulators regarding rates the companies can charge for electricity; adverse changes in applicable laws, regulations, rules, principles or practices governing tax, accounting and environmental matters including, but not limited to, air and water quality; financial market conditions and performance including, but not limited to, changes in interest rates and credit spreads and in availability and cost of capital and the effects on nuclear decommissioning trust and pension plan assets and costs; impairments of long-lived assets or goodwill; credit ratings; inflation rates; effectiveness of risk management policies and procedures and the ability of counterparties to satisfy their contractual commitments; impact of terrorist acts; increased competition including, but not limited to, retail choice in the electric utility industry and the entry of new competitors; ability to carry out marketing and sales plans; weather conditions including, but not limited to, weather-related damage and their effects on sales, prices and costs; cost, availability, quality and deliverability of fuel; ability to achieve generation planning goals and the occurrence and duration of planned and unplanned generation outages; delays in the anticipated in-service dates and cost increases of additional generating capacity and environmental projects; nuclear operations; workforce risks, including, but not limited to, retirement compensation and benefits costs; the timing and amount of resulting synergy savings from the GMO acquisition; and other risks and uncertainties.
This list of factors is not all-inclusive because it is not possible to predict all factors. Part I Item 1A Risk Factors included in this report should be carefully read for further understanding of potential risks for each of Great Plains Energy and KCP&L. Other sections of this report and other periodic reports filed by each of Great Plains Energy and KCP&L with the Securities and Exchange Commission (SEC) should also be read for more information regarding risk factors. Each forward-looking statement speaks only as of the date of the particular statement. Great Plains Energy and KCP&L undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
GLOSSARY OF TERMS
The following is a glossary of frequently used abbreviations or acronyms that are found throughout this report.
ITEM 1. BUSINESS
Great Plains Energy Incorporated and Kansas City Power & Light Company are separate registrants filing this combined annual report. The terms “Great Plains Energy,” “Company,” and “KCP&L” are used throughout this report. “Great Plains Energy” and the “Company” refer to Great Plains Energy Incorporated and its consolidated subsidiaries, unless otherwise indicated. “KCP&L” refers to Kansas City Power & Light Company and its consolidated subsidiaries. “Companies” refers to Great Plains Energy Incorporated and its consolidated subsidiaries and KCP&L and its consolidated subsidiaries.
Information in other Items of this report as to which reference is made in this Item 1. is hereby incorporated by reference in this Item 1. The use of terms such as “see” or “refer to” shall be deemed to incorporate into this Item 1. the information to which such reference is made.
GREAT PLAINS ENERGY INCORPORATED
Great Plains Energy, a Missouri corporation incorporated in 2001 and headquartered in Kansas City, Missouri, is a public utility holding company and does not own or operate any significant assets other than the stock of its subsidiaries. Great Plains Energy’s wholly owned direct subsidiaries with operations or active subsidiaries are as follows:
Great Plains Energy’s sole reportable business segment is electric utility. For information regarding the revenues, income and assets attributable to the electric utility business segment, see Note 23 to the consolidated financial statements. Comparative financial information and discussion regarding the electric utility business segment can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
The electric utility segment consists of KCP&L, a regulated utility, and, since the July 14, 2008, acquisition date of GMO, GMO’s regulated utility operations which include its Missouri Public Service and St. Joseph Light & Power divisions. Electric utility serves over 820,000 customers located in western Missouri and eastern Kansas. Customers include approximately 724,000 residences, 95,000 commercial firms, and 2,300 industrials, municipalities and other electric utilities. Electric utility’s retail revenues averaged approximately 85% of its total operating revenues over the last three years. Wholesale firm power, bulk power sales and miscellaneous electric revenues accounted for the remainder of electric utility’s revenues. Electric utility is significantly impacted by seasonality with approximately one-third of its retail revenues recorded in the third quarter. Electric utility’s total electric revenues were 100% of Great Plains Energy’s revenues over the last three years. Electric utility’s net
income accounted for approximately 104%, 119% and 130% of Great Plains Energy’s income from continuing operations in 2009, 2008 and 2007, respectively.
KCP&L and GMO are regulated by the Public Service Commission of the State of Missouri (MPSC), and KCP&L is also regulated by The State Corporation Commission of the State of Kansas (KCC), with respect to retail rates, certain accounting matters, standards of service and, in certain cases, the issuance of securities, certification of facilities and service territories. KCP&L and GMO are also subject to regulation by the Federal Energy Regulatory Commission (FERC) with respect to transmission, wholesale sales and rates, and other matters, the Southwest Power Pool, Inc. (SPP) and the North American Electric Reliability Corporation (NERC). KCP&L has a 47% ownership interest in the Wolf Creek Generating Station (Wolf Creek), which is subject to regulation by the Nuclear Regulatory Commission (NRC), with respect to licensing, operations and safety-related requirements.
Missouri and Kansas jurisdictional retail revenues averaged approximately 70% and 30%, respectively, of electric utility’s total retail revenues in 2009. See Item 7. MD&A, Critical Accounting Policies section and Note 7 to the consolidated financial statements for additional information concerning regulatory matters.
In December 2009, KCP&L filed a rate increase request with KCC, with new rates expected to be effective in the fourth quarter of 2010. See Note 7 to the consolidated financial statements for additional information.
Missouri and Kansas continue on the fully integrated utility model and no legislation authorizing retail choice has been introduced in Missouri or Kansas for several years. As a result, electric utility does not compete with others to supply and deliver electricity in its franchised service territory, although other sources of energy can provide alternatives to electric utility customers. If Missouri or Kansas were to pass and implement legislation authorizing or mandating retail choice, electric utility may no longer be able to apply regulated utility accounting principles to deregulated portions of its operations and may be required to write off certain regulatory assets and liabilities.
Electric utility competes in the wholesale market to sell power in circumstances when the power it generates is not required for customers in its service territory. In this regard, electric utility competes with owners of other generating stations and other power suppliers, principally utilities in its region, on the basis of availability and price. Electric utility’s wholesale revenues averaged approximately 13% of its total revenues over the last three years.
Electric utility has over 6,000 MWs of generating capacity. The projected peak summer demand for 2010 is 5,515 MW. Electric utility expects to meet its projected capacity requirements through 2018 with its generation assets, capacity purchases and demand-side management and efficiency programs. As part of KCP&L’s Comprehensive Energy Plan, electric utility expects to have Iatan No. 2, a coal-fired plant, in service in the fall of 2010, which will add approximately 620 MW (electric utility’s share) to electric utility’s generating capacity.
KCP&L and GMO are members of the SPP. SPP is a Regional Transmission Organization (RTO) mandated by FERC to ensure reliable supply of power, adequate transmission infrastructure and competitive wholesale prices of electricity. As members of the SPP, KCP&L and GMO are required to maintain a capacity margin of at least 12% of their projected peak summer demand. This net positive supply of capacity and energy is maintained through their generation assets and capacity, power purchase agreements and peak demand reduction programs. The capacity margin is designed to ensure the reliability of electric energy in the SPP region in the event of operational failure of power generating units utilized by the members of the SPP.
The principal fuel sources for electric utility’s electric generation are coal and nuclear fuel. It is expected, with normal weather, that approximately 97% of 2010 generation will come from these sources with the remainder provided by wind, natural gas and oil. The actual 2009 and estimated 2010 fuel mix and delivered cost in cents per net kWh generated are in the following table.
GMO’s retail rates and KCP&L’s retail rates in Kansas contain certain fuel recovery mechanisms. KCP&L’s Missouri retail rates do not contain a fuel recovery mechanism. To the extent the price of fuel or purchased power increases significantly, or if electric utility’s lower cost units do not meet anticipated availability levels, Great Plains Energy’s net income may be adversely affected unless and until the increased cost could be reflected in KCP&L’s Missouri retail rates.
During 2010, electric utility’s generating units, including jointly owned units, are projected to burn approximately 17 million tons of coal. KCP&L and GMO have entered into coal-purchase contracts with various suppliers in Wyoming's Powder River Basin (PRB), the nation's principal supply region of low-sulfur coal, and with local suppliers. The coal to be provided under these contracts will satisfy approximately 90% of the projected coal requirements for 2010 and approximately 55% for 2011, 40% for 2012, 35% for 2013 and 25% for 2014. The remainder of the coal requirements will be fulfilled through additional contracts or spot market purchases. KCP&L and GMO have entered into coal contracts over time at higher average prices affecting coal costs for 2010 and beyond.
KCP&L and GMO have also entered into rail transportation contracts with various railroads to transport coal from the PRB to their generating units. The transportation services to be provided under these contracts will satisfy approximately 70% of the projected requirements for 2010. The remainder of coal transportation is under tariff rates. The majority of KCP&L’s and GMO’s rail transportation contracts expire in 2010. After 2010, rail transportation costs are anticipated to be significantly higher.
KCP&L owns 47% of Wolf Creek Nuclear Operating Corporation (WCNOC), the operating company for Wolf Creek, which is electric utility’s only nuclear generating unit. Wolf Creek purchases uranium and has it processed for use as fuel in its reactor. This process involves conversion of uranium concentrates to uranium hexafluoride, enrichment of uranium hexafluoride and fabrication of nuclear fuel assemblies. The owners of Wolf Creek have on hand or under contract all of the uranium and conversion services needed to operate Wolf Creek through March 2014 and approximately 80% after that date through September 2018. The owners also have under contract 100% of the uranium enrichment and fabrication required to operate Wolf Creek through March 2026.
Management anticipates the cost of nuclear fuel to increase significantly in 2010, after which increases are expected to be moderate. Even with this anticipated increase, management expects nuclear fuel cost per MWh generated to remain less than the cost of generation from other fuel sources. See Note 6 to the consolidated financial statements for additional information regarding nuclear plant.
At December 31, 2009, KCP&L had hedged approximately 68% and 11% of its 2010 and 2011, respectively, projected natural gas usage for generation requirements to serve retail load and firm MWh sales. At December 31, 2009, GMO had hedged approximately 55% and 3% of its 2010 and 2011, respectively, expected on-peak natural gas usage and natural gas equivalent purchased power.
Purchased Capacity and Power
KCP&L and GMO have distinct rate and dispatching areas. As a result, KCP&L and GMO do not joint-dispatch their respective generation. GMO has long-term purchased capacity and power agreements for approximately 235 MW. KCP&L purchases power to meet its customers’ needs when it does not have sufficient available generation or when the cost of purchased power is less than KCP&L’s cost of generation or to satisfy firm power commitments. Management believes electric utility will be able to obtain enough power to meet its future demands due to the coordination of planning and operations in the SPP region; however, price and availability of power purchases may be impacted during periods of high demand. Electric utility’s purchased power, as a percentage of MWh requirements, averaged approximately 18%, 15% and 7% for 2009, 2008 and 2007, respectively.
See Note 16 to the consolidated financial statements for information regarding environmental matters.
KANSAS CITY POWER & LIGHT COMPANY
KCP&L, headquartered in Kansas City, Missouri, is an integrated, regulated electric utility that engages in the generation, transmission, distribution and sale of electricity. KCP&L serves approximately 509,000 customers located in western Missouri and eastern Kansas. Customers include approximately 450,000 residences, 57,000 commercial firms, and 2,000 industrials, municipalities and other electric utilities. KCP&L’s retail revenues averaged approximately 83% of its total operating revenues over the last three years. Wholesale firm power, bulk power sales and miscellaneous electric revenues accounted for the remainder of KCP&L’s revenues. KCP&L is significantly impacted by seasonality with approximately one-third of its retail revenues recorded in the third quarter. Missouri and Kansas jurisdictional retail revenues averaged approximately 56% and 44%, respectively, of total retail revenues.
GREAT PLAINS ENERGY AND KCP&L EMPLOYEES
At December 31, 2009, Great Plains Energy and KCP&L had 3,197 employees, including 1,941 represented by three local unions of the International Brotherhood of Electrical Workers (IBEW). KCP&L has labor agreements with Local 1613, representing clerical employees (expires March 31, 2013), with Local 1464, representing transmission and distribution workers (expires January 31, 2012), and with Local 412, representing power plant workers (expires February 28, 2010). An agreement has been reached and submitted for ratification with Local 412.
Great Plains Energy and KCP&L have the same executive officers. All of the individuals in the following table have been officers or employees in a responsible position with the Company for the past five years except as noted in the footnotes. The executive officers were reappointed to the indicated positions by the respective boards of directors, effective January 1, 2010, for a one-year term ending on January 1, 2011, unless otherwise determined by the boards. There are no family relationships between any of the executive officers, nor any
arrangement or understanding between any executive officer and any other person involved in officer selection. Each executive officer holds the same position with GMO as he or she does with KCP&L.
Great Plains Energy’s website is www.greatplainsenergy.com and KCP&L’s website is www.kcpl.com. Information contained on the companies’ websites is not incorporated herein. Both companies make available, free of charge, on or through their websites, their annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after the companies electronically file such material with, or furnish it to, the SEC. In addition, the companies make available on or through their websites all other reports, notifications and certifications filed electronically with the SEC.
The public may read and copy any materials that the companies file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. For information on the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at http://www.sec.gov that contains reports, proxy statements and other information regarding the companies.
ITEM 1A. RISK FACTORS
Actual results in future periods for Great Plains Energy and KCP&L could differ materially from historical results and the forward-looking statements contained in this report. The companies’ business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond the companies’ control. Additional risks and uncertainties not presently known or that the companies’ management currently believes to be immaterial may also adversely affect the companies. This information, as well as the other information included in this report and in the other documents filed with the SEC, should be carefully considered before making an investment in the securities of Great Plains Energy and KCP&L. Risk factors of KCP&L are also risk factors of Great Plains Energy.
Regulatory and Environmental Risks:
Complex utility and environmental regulation could adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
The companies are subject to, or affected by, extensive federal and state utility regulation, including by the MPSC, KCC, FERC, NRC, SPP and NERC. They must also comply with environmental laws, regulations, permits and agreements. The companies must address in their business planning and management of operations the effects of existing and proposed laws and regulations and potential changes in the regulatory framework, including initiatives by federal and state legislatures, RTOs, utility regulators and taxing authorities. Failure of the companies to obtain adequate rates or regulatory approvals in a timely manner, new or changed laws, regulations, standards, interpretations or other legal requirements, and increased compliance costs and potential non-compliance consequences may materially affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows. Certain of these risks are addressed in greater detail below.
The outcome of retail rate proceedings could have a material impact on the business and is largely outside the companies’ control.
The rates that the companies are allowed to charge their customers are the single most important item influencing their results of operations, financial position and cash flows. These rates are subject to the determination, in large part, of governmental entities outside of the companies’ control, including the MPSC, KCC (for KCP&L) and FERC. The companies are also exposed to cost-recovery shortfalls due to the inherent “regulatory lag” in the rate-setting process, especially during periods of significant cost inflation or declining retail usage, as utility rates in Missouri and Kansas are generally based on historical information and are not subject to adjustment (other than principally for fuel and purchased power for KCP&L in Kansas and for GMO) between rate cases.
As a part of the Missouri and Kansas stipulations approved by the MPSC and KCC in 2005, KCP&L began implementation of its Comprehensive Energy Plan. Under the Comprehensive Energy Plan,
KCP&L agreed to undertake certain projects, including constructing Iatan No. 2, installing a new wind-powered generating facility, installing environmental upgrades to certain existing plants, infrastructure improvements and demand management, distributed generation, and customer efficiency and affordability programs. In March 2007, KCP&L entered into a Collaboration Agreement with the Sierra Club and Concerned Citizens of Platte County that provides for increases in KCP&L’s wind generation capacity and energy efficiency initiatives, reductions in certain emission permit levels at its Iatan and LaCygne generating stations, and projects to offset certain CO2 emissions. The wind generation, energy efficiency and emission permit reductions are conditioned on regulatory approval.
In addition to the Collaboration Agreement and Comprehensive Energy Plan energy efficiency provisions, there are mandatory renewable energy standards in Missouri and Kansas and there is the potential for future federal or state mandatory energy efficiency requirements. The companies have implemented certain energy efficiency programs, and are evaluating expanded energy efficiency programs as one of the elements to meet environmental requirements and future customer energy needs. The companies currently recover energy efficiency program expenses on a deferred basis. While there are ongoing regulatory proceedings in Missouri and Kansas to address recovery of and earnings on the investments of utilities in renewable energy and energy efficiency programs, until the rules are set and programs are approved, the effects on Great Plains Energy’s and KCP&L’s plans and future results cannot be reasonably estimated.
The MPSC order approving the GMO acquisition provides that the transaction costs will not be recovered through utility rates, and that the Missouri jurisdictional portion of transition costs will be eligible for recovery through utility rates only to the extent the costs are offset by benefits resulting from the acquisition. These costs continue to be deferred until the MPSC authorizes their rate recovery. The KCC order approving the GMO acquisition limited KCP&L’s recovery of transition costs through Kansas rates to $10.0 million over a five year period in new rates anticipated to be effective in the fourth quarter of 2010.
Failure to timely recover the full cost of projects under the Comprehensive Energy Plan or Collaboration Agreement, or the impact of renewable energy and energy efficiency programs, or other utility costs and expenses due to regulatory disallowances, regulatory lag or other factors could lead to lowered credit ratings, reduced access to capital markets, increased financing costs, lower flexibility due to constrained financial resources and increased collateral security requirements, which could materially and adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position, and cash flows. In response to competitive, economic, political, legislative, public perception and regulatory pressures, the companies may be subject to rate moratoriums, rate refunds, limits on rate increases, lower allowed returns on investment or rate reductions, including phase-in plans designed to spread the impact of rate increases over an extended period of time for the benefit of customers. Any or all of these could have a significant adverse effect on Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
Regulatory requirements regarding utility operations may increase costs and may expose Great Plains Energy and KCP&L to compliance penalties.
The NRC extensively regulates nuclear power plants, including Wolf Creek. The FERC, NERC and SPP have implemented and enforce an extensive set of transmission system reliability, cyber security and critical infrastructure protection standards that apply to public utilities, including the companies. The MPSC and KCC have the authority to implement utility operational standards and requirements, such as vegetation management standards, facilities inspection requirements and quality of service standards. KCP&L agreed to quality of service standards in Kansas in connection with the GMO acquisition. The costs of new or modified regulations, standards and other requirements could have an adverse effect on Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows as a result of increased operations or maintenance and capital expenditures for new facilities or to repair or improve
existing facilities. In addition, failure to meet quality of service, reliability, operational or other standards and requirements could expose Great Plains Energy or KCP&L to penalties, additional compliance costs, or adverse rate consequences.
The companies are subject to current and potential environmental requirements and the incurrence of environmental liabilities, any or all of which may adversely affect their business and financial results.
The companies are subject to extensive federal, state and local environmental laws, regulations and permit requirements relating to air and water quality, waste management and disposal, natural resources and health and safety. In addition to imposing continuing compliance obligations and remediation costs for historical and pre-existing conditions, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. There is also a risk that new environmental laws and regulations, new judicial interpretations of environmental laws and regulations, or the requirements in new or renewed environmental permits could adversely affect the companies’ operations. In addition, there is also a risk of lawsuits brought by third parties alleging violations of environmental commitments or requirements, creation of a public nuisance or other matters, and seeking injunctions or monetary or other damages and certain federal courts have held that state and local governments and private parties have standing to bring climate change tort suits seeking company-specific emission reductions and damages.
The companies’ environmental permits are subject to periodic renewal, which may result in more stringent permit conditions and limits. New facilities, or modifications of existing facilities, may require new environmental permits or amendments to existing permits. Delays in the environmental permitting process, public opposition and challenges, denials of permit applications, limits or conditions imposed in permits and the associated uncertainty may materially adversely affect the cost and timing of the projects, and thus materially adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
The companies would seek recovery of capital costs and expenses for environmental compliance and remediation through rate increases; however, there can be no assurance that such rate increases would be granted. As discussed above, Great Plains Energy and KCP&L may be subject to materially adverse rate treatment in response to competitive, economic, political, legislative, public perception of the companies’ environmental reputation and regulatory pressures. The costs of compliance or noncompliance with these environmental requirements, or remediation costs, or adverse outcomes of lawsuits, or failure to timely recover environmental costs, could have a material adverse effect on Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows. Certain of these matters are discussed in more detail below. See Note 16 to the consolidated financial statements for additional information regarding certain significant environmental matters.
Air and Climate Change
equipment to achieve compliance, cannot be reasonably estimated at this time. Such requirements could have the potential for a significant financial and operational impact on Great Plains Energy and KCP&L.
Missouri law requires at least 2% of the electricity provided by certain utilities, including KCP&L and GMO, to come from renewable resources by 2011, increasing to 15% by 2021. Kansas law requires certain utilities, including KCP&L, to have renewable energy generation capacity equal to at least 10% of their three-year average Kansas peak retail demand by 2011, increasing to 15% by 2016 and 20% by 2020. The American Clean Energy and Security Act of 2009, passed by the U.S. House of Representatives, would establish a 20% renewable electricity standard by 2020, starting with an initial 6% requirement by 2012. The American Clean Energy Leadership Act of 2009, passed by the Senate Energy and Natural Resources Committee, contains lower renewable portfolio standards. These bills would also establish a greenhouse gas cap and trade program, requiring KCP&L, GMO and other affected entities to comply by surrendering allowances or offsets for each ton of greenhouse gas emitted.
In addition to the potential for new environmental laws, the Environmental Protection Agency (EPA) is considering the regulation of greenhouse gases under the existing Clean Air Act. Among other actions, the EPA has proposed rules that focus on facilities emitting over 25,000 tons of greenhouse gases per year. These proposed rules would establish new thresholds for greenhouse gas emissions, defining when Clean Air Act permits under the New Source Review and Title V operating permits programs would be required for new or existing industrial facilities. Most of Great Plains Energy’s and KCP&L’s generating facilities would be affected by these proposed rules. Additional federal and/or state legislation or regulation respecting greenhouse gas emissions may be proposed or enacted in the near future. Further, pursuant to the Collaboration Agreement, KCP&L agreed to pursue a set of initiatives including energy efficiency, additional wind generation, lower emission permit levels at its Iatan and LaCygne stations and other initiatives designed to offset CO2 emissions. Requirements to reduce greenhouse gas emissions may cause Great Plains Energy and KCP&L to incur significant costs relating to their ongoing operations (through additional environmental control equipment, retiring and replacing existing generation, or selecting more costly generation alternatives), to procure emission allowance credits, or due to the imposition of taxes, fees or other governmental charges as a result of such emissions.
Rules issued by the EPA regarding emissions of mercury, NOX, SO2 and particulates are also in a state of flux. Such rules have been overturned by the courts and remanded to the EPA to be revised consistent with the court orders. The EPA is expected to develop proposed standards in 2010, based on maximum achievable control technology (MACT), for mercury and potentially other hazardous air pollutant emissions. In addition, the EPA has notified KCP&L that MACT determinations and schedules of compliance are required for KCP&L’s Iatan No. 2 and Hawthorn No. 5 generating units. The Missouri and Kansas state environmental agencies have submitted to the EPA their determinations that the Kansas City area is an ozone nonattainment area, and must submit by 2013 implementation plans outlining how the area will meet the standards. Additionally, the EPA has proposed to strengthen the national ambient air quality standard for ozone and in February 2009, the Circuit Court for the District of Columbia remanded the EPA’s fine particulate (PM2.5) standards. Great Plains Energy’s and KCP&L’s current estimates of capital expenditures (exclusive of Allowance for Funds Used During Construction (AFUDC) and property taxes) to comply with the currently effective Clean Air Interstate Rule (CAIR) and with the best available retrofit technology (BART) rule is a range of approximately $0.8 billion - $0.9 billion. However, it is unknown what requirements and standards will be imposed in the future and when the companies may have to comply, the effects of the MACT determinations and schedules of compliance, or what costs may ultimately be required.
The Clean Air Act requires companies to obtain permits and, if necessary, install control equipment to reduce emissions when making a major modification or a change in operation of an existing facility if either is expected to cause a significant net increase in regulated emissions. In 2004, the EPA notified Westar Energy, Inc. (Westar) that certain projects completed at the Jeffrey Energy Center violated certain
New Source Review permitting requirements. GMO is an 8% owner of the facility, which is operated by Westar, and is generally responsible for its 8% share of the facility’s operating costs and capital expenditures. In February 2009, the Attorney General of the United States filed a complaint against Westar alleging that it violated the Clean Air Act and related federal and state regulations by making major modifications to the Jeffrey Energy Center beginning in 1994 without first obtaining appropriate permits authorizing this construction and without installing and operating best available control technology to control emissions. In January 2010, Westar entered into a settlement agreement, which is pending court approval. If approved, the settlement agreement would require, among other things, the installation of a selective catalytic reduction (SCR) at one of the three Jeffrey Energy Center units by the end of 2014 and the payment of a $3 million civil penalty. Depending on the NOX emission reductions attained by that SCR and attainable through the installation of other controls at the other two units, the settlement agreement requires the installation of a second SCR on one of the other two units by the end of 2016. Westar has estimated that if both SCRs are required, the total capital cost could be up to approximately $500 million. There is no assurance that GMO’s share of these costs would be recovered in rates, and any failure to recover such costs could have a significant effect on Great Plains Energy’s results of operations, financial position and cash flows.
The Clean Water Act and associated regulations enacted by the EPA form a comprehensive program to preserve water quality. All of the companies’ generating facilities, and certain of their other facilities, are subject to the Clean Water Act.
Solid and hazardous waste generation, storage, transportation, treatment and disposal is regulated at the federal and state levels under various laws and regulations. The companies principally use coal in generating electricity and dispose of the combustion products in both on-site facilities and facilities owned by third parties. In response to an incident at a Tennessee Valley Authority coal combustion product containment area, federal legislation has been introduced and the EPA has indicated that it will propose regulations regarding the handling and disposal of coal combustion products. If enacted, any new laws and regulations, especially if coal combustion products are classified as hazardous waste, could
have a material adverse effect on Great Plains Energy’s or KCP&L’s results of operations, financial position and cash flows.
Under current law, the companies are also generally responsible for any liabilities associated with the environmental condition of their properties, including properties that they have previously owned or operated, such as manufactured gas plants (MGP), regardless of whether they were responsible for the contamination or whether the liabilities arose before, during or after the time they owned or operated the properties. In addition, the EPA has given advance notice of a proposed rulemaking to impose financial assurance requirements for various classes of facilities, including electric generation, transmission and distribution, that produce, transport, treat, store or dispose of certain hazardous substances.
Due to all of the above, Great Plains Energy’s and KCP&L’s projected capital and other expenditures for environmental compliance are subject to significant uncertainties, including the timing of implementation of any new or modified environmental requirements, the emissions limits imposed by such requirements and the types and costs of the compliance alternatives selected by Great Plains Energy and KCP&L. As a result, costs to comply with environmental requirements cannot be estimated with certainty, and actual costs could be significantly higher than projections. Other new environmental laws and regulations affecting the operations of the companies may be adopted, and new interpretations of existing laws and regulations could be adopted or become applicable to the companies or their facilities, any of which may materially adversely affect Great Plains Energy’s and KCP&L’s business, adversely affect the companies’ ability to continue operating its power plants as currently done and substantially increase their environmental expenditures or liabilities in the future.
Financial market disruptions and declines in credit ratings may increase financing costs and/or limit access to the credit markets, which may adversely affect liquidity and results.
Great Plains Energy’s and KCP&L’s capital requirements are expected to be substantial over the next several years. Great Plains Energy and KCP&L rely on access to short-term money markets, revolving credit facilities provided by financial institutions and long-term capital markets as significant sources of liquidity for capital requirements not satisfied by cash flows from operations. Great Plains Energy and KCP&L also rely on bank-provided credit facilities for credit support, such as letters of credit, to support operations. The amount of credit support required for operations varies with a number of factors, including the amount and price of wholesale power purchased or sold.
Great Plains Energy, KCP&L, GMO and certain of their securities are rated by Moody's Investors Service and Standard & Poor's. These ratings impact the companies’ cost of funds and Great Plains Energy’s ability to provide credit support for its subsidiaries. The interest rates on borrowings under KCP&L’s revolving credit agreement and on a substantial portion of Great Plains Energy’s and GMO’s debt are subject to increase as their respective credit ratings decrease. The Company has agreed to not seek rate recovery of GMO interest costs in excess of equivalent investment-grade debt, and the MPSC approval of the GMO acquisition is conditioned on the requirement that any post-acquisition financial effects of a credit downgrade of Great Plains Energy, KCP&L or GMO occurring as a result of the acquisition would be borne by shareholders and not utility customers. The amount of collateral or other credit support required under power supply agreements is also dependent on credit ratings.
The capital and credit markets recently experienced unprecedented levels of volatility and disruption. Though market conditions have stabilized, there is no assurance that conditions will not deteriorate in the future. Adverse market conditions or decreases in Great Plains Energy’s, KCP&L’s or GMO’s credit ratings could have material adverse effects on the companies. These effects could include, among others: reduced access to capital and increased cost of funds; dilution resulting from equity issuances at reduced prices; increases in the amount of collateral or other credit support obligations required to be posted with contractual counterparties; increased nuclear decommissioning trust and pension and other post-retirement benefit plan funding requirements; rate case
disallowance of KCP&L’s or GMO’s costs of capital; or reductions in Great Plains Energy’s ability to provide credit support for its subsidiaries. Any of these results could adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows. In addition, market disruption and volatility could have an adverse impact on Great Plains Energy’s or KCP&L’s lenders, suppliers and other counterparties or customers, causing them to fail to meet their obligations.
A sustained decline in Great Plains Energy’s stock price below book value may result in goodwill impairments that could adversely affect Great Plains Energy’s results of operations and financial position, as well as credit facility covenants.
The GMO acquisition resulted in Great Plains Energy recording $169 million in goodwill. Accounting rules require goodwill to be tested for impairment annually and when an event occurs indicating that it is possible that an impairment exists. Great Plains Energy’s stock traded at a price below carrying value throughout 2009. If the stock price continues to be below carrying value, the accounting rules may require Great Plains Energy to conduct additional goodwill impairment tests. There is no assurance that the results of these additional tests will not require Great Plains Energy to recognize an impairment of goodwill. An impairment of goodwill would reduce net income and shareholders’ equity, may adversely affect Great Plains Energy’s results of operations and financial position, and could result in a breach of the debt to total capitalization covenants in Great Plains Energy’s and GMO’s revolving credit agreements.
Great Plains Energy has guaranteed substantially all of the outstanding debt of GMO and payments under these guarantees may adversely affect Great Plains Energy’s liquidity.
In connection with the GMO acquisition, Great Plains Energy issued guarantees covering substantially all of the outstanding debt of GMO and has guaranteed a $400 million revolving credit facility that GMO entered into subsequent to the acquisition. The guarantees were a factor in GMO receiving investment-grade ratings and the guarantees obligate Great Plains Energy to pay amounts owed by GMO directly to the holders of the guaranteed debt in the event GMO defaults on its payment obligations. Great Plains Energy may also guarantee debt that GMO may issue in the future. Any guarantee payments could adversely affect Great Plains Energy’s liquidity.
The inability of Great Plains Energy’s subsidiaries to provide sufficient dividends to Great Plains Energy, or the inability otherwise of Great Plains Energy to pay dividends to its shareholders and meet its financial obligations would have an adverse effect.
Great Plains Energy is a holding company with no significant operations of its own. The primary source of funds for payment of dividends to its shareholders and its other financial obligations is dividends paid to it by its subsidiaries, particularly KCP&L and GMO. The ability of Great Plains Energy’s subsidiaries to pay dividends or make other distributions, and accordingly, Great Plains Energy’s ability to pay dividends on its common stock and meet its financial obligations principally depends on the actual and projected earnings and cash flow, capital requirements and general financial position of its subsidiaries, as well as on regulatory factors, financial covenants, general business conditions and other matters.
In addition, Great Plains Energy, KCP&L and GMO are subject to certain corporate and regulatory restrictions and financial covenants that could affect their ability to pay dividends. Great Plains Energy’s articles of incorporation restrict the payment of common stock dividends in the event common equity is 25% or less of total capitalization. In addition, if preferred stock dividends are not declared and paid when scheduled, Great Plains Energy could not declare or pay common stock dividends or purchase any common shares. If the unpaid preferred stock dividends equal four or more full quarterly dividends, the preferred shareholders, voting as a single class, could elect the smallest number of directors necessary to constitute a majority of the full Great Plains Energy Board of Directors (Board). Certain conditions in the MPSC and KCC orders authorizing the holding company structure require Great Plains Energy and KCP&L to maintain consolidated common equity of at least 30% and 35%, respectively, of total capitalization (including only the amount of short-term debt in excess of the amount of construction work in progress). Under the Federal Power Act, KCP&L and GMO generally can pay dividends only out of retained earnings. The revolving credit agreements of Great Plains Energy, KCP&L and GMO contain a covenant requiring each company to maintain a consolidated indebtedness to consolidated total
capitalization ratio of not more than 0.65 to 1.00. In addition, Great Plains Energy is prohibited from paying dividends on its common and preferred stock in the event its Equity Unit contract payments or interest payments on the debt underlying the Equity Units are deferred until such deferrals have been paid. While these corporate and regulatory restrictions and financial covenants are not expected to affect the companies’ ability to pay dividends at the current level in the foreseeable future, there is no assurance that adverse financial results would not trigger such restrictions or covenants and reduce or eliminate the companies’ ability to pay dividends.
Market performance, increased retirements and retirement plan regulations could significantly impact retirement plan funding requirements and associated cash needs and expenses.
Substantially all of KCP&L’s employees participate in defined benefit and post-retirement plans. GMO’s former employees in its Missouri utility operations and certain other operations also have accrued benefits in defined benefit and post-retirement plans. The costs of these plans depend on a number of factors, including the rates of return on plan assets, the level and nature of the provided benefits, discount rates, the interest rates used to measure required minimum funding levels, changes in benefit design, changes in laws or regulations, and the Company’s required or voluntary contributions to the plans. If the rate of retirements exceeds planned levels, or if these plans experience adverse market returns on investments (as was the case in 2008), or if interest rates materially fall, the Company’s contributions to the plans could rise substantially over historical levels. In addition, changes in accounting requirements and assumptions related to future costs, returns on investments, interest rates and other actuarial assumptions, including projected retirements, could have a significant impact on Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
The use of derivative contracts in the normal course of business could result in losses that could negatively impact Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
Great Plains Energy and KCP&L use derivative instruments, such as swaps, options, futures and forwards, to manage commodity and financial risks. Losses could be recognized as a result of volatility in the market values of these contracts, if a counterparty fails to perform, or if the underlying transactions which the derivative instruments are intended to hedge fail to materialize. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these financial instruments can involve management’s judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts.
As a service provider to GMO, KCP&L may have exposure to GMO’s financial performance and operations.
GMO has no employees of its own. KCP&L employees operate and manage GMO’s properties, and KCP&L charges GMO for the cost of these services. These arrangements may pose risks to KCP&L, including possible claims arising from actions of KCP&L employees in operating GMO’s properties and providing other services to GMO. KCP&L’s claims for reimbursement for services provided to GMO are unsecured and rank equally with other unsecured obligations of GMO. KCP&L’s ability to be reimbursed for the costs incurred for the benefit of GMO depends on the financial ability of GMO to make such payments.
Customer and Weather-Related Risks:
Severe or unusual weather and changes in customer consumption due to sustained financial market disruptions, downturns or sluggishness in the economy, technological advances, weather conditions, or otherwise may adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
The results of operations, financial position and cash flows of Great Plains Energy and KCP&L can be materially affected by changes in weather and customer consumption. Great Plains Energy and KCP&L estimate customer consumption based on historical trends to procure fuel and purchased power. Sustained downturns or sluggishness in the economy generally affect the markets in which Great Plains Energy and KCP&L operate. KCP&L’s retail consumption, on both a nominal and weather-adjusted basis, declined in 2009 compared to 2008. If financial markets or the economy worsen, overall electricity sales volumes may further decline and/or bad debt expense may increase, which could materially affect Great Plains Energy’s and KCP&L’s results of
operations, financial position and cash flows. Additionally, technological advances or other energy conservation measures could reduce customer consumption, which could affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities. Great Plains Energy and KCP&L are significantly impacted by seasonality, with approximately one-third of their retail electric revenues recorded in the third quarter. Unusually mild winter or summer weather (as was experienced in 2009) can adversely affect sales. In addition, severe weather, including but not limited to tornados, snow, rain and ice storms can be destructive causing outages and property damage that can potentially result in additional expenses, lower revenues and additional capital restoration costs. Some of the companies’ stations use water from the Missouri River for cooling purposes. Low water and flow levels, which have been experienced in past years, can increase maintenance costs at these stations and, if these levels were to get low enough, could require modifications to plant operations. The possible effects of climate change (such as increased temperatures, increased occurrence of severe weather or reduced precipitation, among other possible results) could potentially increase the volatility of demand and prices for energy commodities, the frequency and impact of severe weather, and decrease water and flow levels, any of which could materially affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
Operations risks may adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
The operation of the companies’ electric generation, transmission, distribution and information systems involves many risks, including breakdown or failure of equipment, processes and personnel performance; problems that delay or increase the cost of returning facilities to service after outages, operating limitations that may be imposed by equipment conditions, environmental, safety or other regulatory requirements; fuel supply or fuel transportation reductions or interruptions; transmission scheduling constraints; and catastrophic events such as fires, explosions, terrorism, severe weather or other similar occurrences. An equipment or system outage or constraint can, among other things:
With the exception of Hawthorn No. 5, which was substantially rebuilt in 2001, all of KCP&L’s coal-fired generating units and its nuclear generating unit were constructed prior to 1986. All of GMO’s coal-fired generating units were constructed prior to 1984. The age of these generating units increases the risk of unplanned outages and higher maintenance expense. Training, preventive maintenance and other programs have been implemented, but there is no assurance that these programs will prevent or minimize future breakdowns or failures of the companies’ generation facilities.
The companies currently have general liability and property insurance in place to cover their facilities in amounts that management considers appropriate. These policies, however, do not cover the companies’ transmission or distribution systems, and the cost of repairing damage to these systems may adversely affect Great Plains Energy’s or KCP&L’s results of operations, financial position and cash flows. Such policies are subject to certain limits and deductibles and do not include business interruption coverage. Insurance coverage may not be
available in the future at current costs or on commercially reasonable terms, and the insurance proceeds received for any loss of, or any damage to, any of the companies’ facilities may not be sufficient to restore the loss or damage.
These and other operating events may reduce Great Plains Energy’s and KCP&L’s revenues, increase their costs, or both, and may materially affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
The cost and schedule of construction projects may materially change and expected performance may not be achieved.
Great Plains Energy’s and KCP&L’s businesses are capital intensive, and require significant capital investments to maintain existing facilities, for projected environmental projects and to add new facilities, including Iatan No. 2, an estimated 850 MW (of which electric utility’s share is 620 MW) coal-fired generating plant. The risks of any construction project include the possibilities that actual costs may exceed current estimates, delays may occur in obtaining permits and materials, suppliers and contractors may not perform as required under their contracts, there may be inadequate availability or increased cost of qualified craft labor, the scope and timing of projects may change, and other events beyond the companies’ control may occur that may materially affect the schedule, cost and performance of these projects.
The demand for additional environmental control equipment has increased substantially with many utilities in the United States starting similar projects to address changing environmental regulations. This demand has constrained labor and material resources for such projects, and there is a risk that such constraints may increase if new laws or regulations, including limitations on greenhouse gas emissions, are imposed.
These and other risks could materially increase the estimated costs of construction projects, delay the in-service dates of projects, adversely affect the performance of the projects, and/or require the companies to purchase additional electricity to supply their respective retail customers until the projects are completed. The companies currently are not permitted to start recovering the costs of these projects until they are completed and put into service. Thus, these risks may significantly affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
Failure of one or more generation plant co-owners to pay their share of construction or operations and maintenance costs could increase Great Plains Energy’s and KCP&L’s costs and capital requirements.
KCP&L owns 47% of Wolf Creek, 50% of LaCygne Station, 70% of Iatan No. 1 and 55% of Iatan No. 2. GMO owns 18% of both Iatan units and 8% of Jeffrey Energy Center. The remaining portions of these facilities are owned by other utilities that are contractually obligated to pay their proportionate share of capital and other costs and, in the case of Iatan No. 2, construction costs.
While the ownership agreements provide that a defaulting co-owner’s share of the electricity generated can be sold by the non-defaulting co-owners, there is no assurance that the revenues received will recover the increased costs borne by the non-defaulting co-owners. The Iatan No. 2 co-owners have provided financial assurances related to their respective construction cost obligations, but there is a risk that such assurances may not be sufficient in the event of a co-owner default. During the construction period, the Iatan No. 2 agreements provide for re-allocations of part or all of a defaulting co-owner’s share of the facility to the non-defaulting owners, which would increase the capital requirements, operations and maintenance costs of the non-defaulting owners. Occurrence of these or other events could materially increase Great Plains Energy’s and KCP&L’s costs and capital requirements.
An aging workforce and increasing demand for skilled craft labor poses operational and planning challenges.
Through 2013, approximately 22% of KCP&L employees (who manage electric utility’s operations) will be eligible to retire with full pension benefits. This is a general industry issue, which has increased the demand for and cost of skilled craft labor for both companies and contractors. The companies use contractors for a portion of
their construction and maintenance work. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to the new employees, or the future availability and cost of contract labor may adversely affect the ability to manage and operate Great Plains Energy’s and KCP&L’s businesses.
Commodity Price Risks:
Changes in commodity prices could have an adverse effect on Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
The companies engage in the wholesale and retail marketing of electricity and are exposed to risks associated with the price of electricity. To the extent that exposure to the price of electricity is not successfully hedged, Great Plains Energy and KCP&L could experience losses associated with the changing market price for electricity.
Increases in fuel, fuel transportation and purchased power prices could have an adverse impact on Great Plains Energy’s and KCP&L’s costs.
KCP&L’s Kansas retail rates contain an energy cost adjustment (ECA) mechanism. KCP&L’s Missouri retail rates do not contain a similar provision. GMO’s retail electric rates contain a fuel adjustment clause (FAC) mechanism under which 95% of the difference between actual fuel and purchased power costs and the amount of fuel and purchased power costs provided in base rates is passed along to GMO’s customers. GMO’s steam rates contain a quarterly cost adjustment (QCA) under which 85% of the difference between actual fuel costs and base fuel costs is passed along to GMO’s steam customers. As a result, KCP&L and GMO are exposed to varying degrees of risk from changes in the market prices of fuel for generation of electricity and purchased power. Changes in the companies’ fuel mix due to electricity demand, plant availability, transportation issues, fuel prices, fuel availability and other factors can also adversely affect Great Plains Energy’s and KCP&L’s fuel and purchased power costs.
The companies do not hedge their respective entire exposure from fuel and transportation price volatility. Forward prices for coal have increased, principally due to international demand, and management expects prices will continue to increase. The majority of the companies’ rail transportation contracts expire in 2010 and consequently it is expected that rail transportation costs will increase significantly in 2011. Management also expects the cost of nuclear fuel to increase significantly in 2010. Consequently, Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows may be materially impacted by changes in these prices unless and until increased costs are recovered in Missouri retail rates.
Wholesale electricity sales affect revenues, creating earnings volatility.
The levels of Great Plains Energy and KCP&L wholesale sales depend on the wholesale market price, transmission availability and the availability of generation for wholesale sales, among other factors. A substantial portion of wholesale sales are made in the spot market, and thus the companies have immediate exposure to wholesale price changes. Wholesale power prices can be volatile and generally increase in times of high regional demand and high natural gas prices. While an allocated portion of wholesale sales are reflected in GMO’s FAC and KCP&L’s Kansas ECA, KCP&L’s Missouri rates are set on an estimated amount of wholesale sales. KCP&L will not recover any shortfall in non-firm wholesale electric sales margin from the level included in Missouri rates and any amount above the level reflected in Missouri retail rates will be returned to Missouri retail customers in a future rate case. Declines in wholesale market price, availability of generation, transmission constraints in the wholesale markets, or low wholesale demand could reduce the companies’ wholesale sales. These events could adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
KCP&L is exposed to risks associated with the ownership and operation of a nuclear generating unit, which could result in an adverse effect on Great Plains Energy’s and KCP&L’s business and financial results.
KCP&L owns 47% of Wolf Creek. The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities, including Wolf Creek. In the event of non-compliance, the NRC has the authority to impose fines, shut down the facilities, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. Any revised safety requirements promulgated by the NRC could result in substantial capital expenditures at Wolf Creek.
Wolf Creek has the lowest fuel cost per MWh of any of KCP&L's generating units. An extended outage of Wolf Creek, whether resulting from NRC action, an incident at the plant or otherwise, could have a substantial adverse effect on KCP&L's results of operations, financial position and cash flows in the event KCP&L incurs higher replacement power and other costs that are not recovered through rates. If a long-term outage occurred, the state regulatory commissions could reduce rates by excluding the Wolf Creek investment from rate base.
Ownership and operation of a nuclear generating unit exposes KCP&L to risks regarding decommissioning costs at the end of the unit's life. KCP&L contributes annually to a tax-qualified trust fund to be used to decommission Wolf Creek. The funding level assumes a projected level of return on trust assets. If the actual return on trust assets is below the projected level, KCP&L could be responsible for the balance of funds required and may not be allowed to recover the balance through rates.
KCP&L is also exposed to other risks associated with the ownership and operation of a nuclear generating unit, including, but not limited to, potential liability associated with the potential harmful effects on the environment and human health resulting from the operation of a nuclear generating unit and the storage, handling and disposal of radioactive materials. Under the structure for insurance among owners of nuclear generating units, KCP&L is also liable for potential retrospective premium assessments (subject to a cap) per incident at any commercial reactor in the country and losses in excess of insurance coverage. Any such risks could adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
The outcome of legal proceedings cannot be predicted. An adverse finding could have a material adverse effect on Great Plains Energy’s and KCP&L’s financial condition.
Great Plains Energy and KCP&L are party to various material litigation and regulatory matters arising out of their business operations. The ultimate outcome of these matters cannot presently be determined, nor, in many cases, can the liability that could potentially result from a negative outcome in each case presently be reasonably estimated. The liability that Great Plains Energy and KCP&L may ultimately incur with respect to any of these cases in the event of a negative outcome may be in excess of amounts currently reserved and insured against with respect to such matters and, as a result, these matters may have a material adverse effect on Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
Electric Utility Generation Resources
KCP&L owns 50% of LaCygne Nos. 1 and 2, 70% of Iatan No. 1 and 47% of Wolf Creek. GMO owns 18% of Iatan No. 1 and 8% of Jeffrey Energy Center Nos. 1, 2 and 3. Electric utility expects to have Iatan No. 2, a new coal-fired plant in service in the fall of 2010, which will add approximately 620 MW to electric utility’s generating capacity. KCP&L owns 55% and GMO owns 18% of Iatan No. 2.
Electric Utility Transmission and Distribution Resources
Electric utility’s electric transmission system interconnects with systems of other utilities for reliability and to permit wholesale transactions with other electricity suppliers. Electric utility has over 3,000 miles of transmission lines, approximately 18,000 miles of overhead distribution lines and over 7,000 miles of underground distribution lines in Missouri and Kansas. Electric utility has all material franchise rights necessary to sell electricity within its retail service territory. Electric utility’s transmission and distribution systems are continuously monitored for adequacy to meet customer needs. Management believes the current systems are adequate to serve customers.
Electric Utility General
Electric utility’s generating plants are located on property owned (or co-owned) by KCP&L or GMO, except the Spearville Wind Energy Facility which is located on easements and the Crossroads Energy Center which is contractually controlled. Electric utility’s service centers, electric substations and a portion of its transmission and distribution systems are located on property owned or leased by electric utility. Electric utility’s transmission and distribution systems are for the most part located above or underneath highways, streets, other public places or property owned by others. Electric utility believes that it has satisfactory rights to use those places or properties in the form of permits, grants, easements, licenses or franchise rights; however, it has not necessarily undertaken efforts to examine the underlying title to the land upon which the rights rest. Great Plains Energy’s and KCP&L’s headquarters are located in leased office space.
Substantially all of the fixed property and franchises of KCP&L, which consist principally of electric generating stations, electric transmission and distribution lines and systems, and buildings (subject to exceptions, reservations and releases), are subject to a General Mortgage Indenture and Deed of Trust dated as of December 1, 1986. Mortgage bonds totaling $755.3 million were outstanding at December 31, 2009.
Substantially all of the fixed property and franchises of GMO’s St. Joseph Light & Power division is subject to a General Mortgage Indenture and Deed of Trust dated as of April 1, 1946. Mortgage bonds totaling $13.5 million were outstanding at December 31, 2009.
ITEM 3. LEGAL PROCEEDINGS
The companies are parties to various lawsuits and regulatory proceedings in the ordinary course of their respective businesses. For information regarding material lawsuits and proceedings, see Notes 2, 7, 16 and 17 to the consolidated financial statements. Such descriptions are incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
GREAT PLAINS ENERGY
Great Plains Energy common stock is listed on the New York Stock Exchange under the symbol GXP. At February 23, 2010, Great Plains Energy’s common stock was held by 23,273 shareholders of record. Information relating to market prices and cash dividends on Great Plains Energy's common stock is set forth in the following table.
For information regarding dividend restrictions, see Note 14 to the consolidated financial statements.
Purchases of equity securities
The following table provides information regarding purchases by the Company of its equity securities during the fourth quarter of 2009.
KCP&L is a wholly owned subsidiary of Great Plains Energy, which holds the one share of issued and outstanding KCP&L common stock.
For information regarding dividend restrictions, see Note 14 to the consolidated financial statements.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GREAT PLAINS ENERGY INCORPORATED
Description of Business
Great Plains Energy is a public utility holding company and does not own or operate any significant assets other than the stock of its subsidiaries. Great Plains Energy’s direct subsidiaries are KCP&L, GMO, KLT Inc. and Services. Great Plains Energy acquired GMO on July 14, 2008. Great Plains Energy’s sole reportable business segment is electric utility for the periods presented.
Electric utility consists of KCP&L, a regulated utility, and GMO’s regulated utility operations, which include its Missouri Public Service and St. Joseph Light & Power divisions. Electric utility has over 6,000 MWs of generating capacity and engages in the generation, transmission, distribution and sale of electricity to over 820,000 customers in the states of Missouri and Kansas. Electric utility’s retail electricity rates are below the national average of investor-owned utilities.
2009 Earnings Overview
Great Plains Energy’s 2009 earnings available for common shareholders were $148.5 million, or $1.14 per share compared to 2008 earnings available for common shareholders of $152.9 million, or $1.51 per share. A higher number of common shares outstanding diluted 2009 earnings per share by $0.33. Income from continuing operations increased to $151.9 million in 2009 compared to $119.7 million in 2008. The increase in income from continuing operations is attributable to the inclusion of GMO for the full year, new retail rates, decreased purchased power prices, an increase in the equity component of AFUDC and decreased income taxes. These increases were partially offset by unfavorable weather, a decline in weather-normalized customer usage driven by weakened economic conditions, a decrease in wholesale sales prices, increased depreciation expense due to placing the Iatan environmental equipment in service and increased interest expense due to the issuance of new long-term debt in 2009.
Great Plains Energy is focused on completing and pursuing appropriate regulatory treatment of its investments under the Comprehensive Energy Plan and development of the next strategic plan, called the Sustainable Resource Strategy. These items, amoung others, are described in more detail as follows:
With Iatan No. 2 scheduled to be placed in-service in the fall of 2010, Great Plains Energy has begun the next iteration of its collaborative strategic planning process to develop a successor strategy, called the Sustainable Resource Strategy. The Sustainable Resource Strategy is a scenario-based framework to develop, evaluate and implement robust long-term resource plans with the flexibility to adapt to future environmental requirements, electricity consumption, technology developments, customer preferences, economic and capital market conditions and other factors. The Sustainable Resource Strategy framework will be completed in 2010.
In 2010, KCP&L will begin a five-year, $48 million SmartGrid demonstration project that includes, but is not limited to, investment in an urban core area within Kansas City that has been designated as the Green Impact Zone. This SmartGrid demonstration project will include investments in technology including rooftop solar applications, consumer devices for monitoring and managing residential energy usage and automated meter devices that deliver real-time usage information and pricing signals. The U.S. Department of Energy (DOE) will fund half of the project with American Recovery and Reinvestment Act funding, with the remainder of the investments being funded by KCP&L and a coalition of SmartGrid industry partners. KCP&L expects to finalize the agreement with the DOE in the near future, which is expected to detail reporting requirements of the project and terms required to satisfy the conditions of the grant.
The following table summarizes all recent requests for retail rate increases with KCC and the MPSC.
RELATED PARTY TRANSACTIONS
See Note 19 to the consolidated financial statements for information regarding related party transactions.
See Note 16 to the consolidated financial statements for information regarding environmental matters.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates that could have been used could have a material impact on Great Plains Energy’s results of operations and financial position. Management has identified the following accounting policies as critical to the understanding of Great Plains Energy’s results of operations and financial position. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Board of Directors.
Great Plains Energy and KCP&L incur significant costs in providing non-contributory defined pension benefits. The costs are measured using actuarial valuations that are dependent upon numerous factors derived from actual plan experience and assumptions of future plan experience.
Pension costs are impacted by actual employee demographics (including age, life expectancies, compensation levels and employment periods), earnings on plan assets, the level of contributions made to the plan, and plan amendments. In addition, pension costs are also affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and pension costs.
The assumed rate of return on plan assets was developed based on the weighted average of long-term returns forecast for the expected portfolio mix of investments held by the plan. The assumed discount rate was selected based on the prevailing market rate of fixed income debt instruments with maturities matching the expected timing of the benefit obligation. These assumptions, updated annually at the measurement date, are based on management’s best estimates and judgment; however, material changes may occur if these assumptions differ from actual events. See Note 10 to the consolidated financial statements for information regarding the assumptions used to determine benefit obligations and net costs.
The following table reflects the sensitivities associated with a 0.5% increase or a 0.5% decrease in key actuarial assumptions. Each sensitivity reflects the impact of the change based on a change in that assumption only.
Pension expense for KCP&L is recorded in accordance with rate orders from the MPSC and KCC. The orders allow the difference between pension costs under GAAP and pension costs for ratemaking to be recorded as a regulatory asset or liability with future ratemaking recovery or refunds, as appropriate. KCP&L recorded 2009 pension expense of $33 million after allocations to the other joint owners of generating facilities and capitalized amounts in accordance with the MPSC and KCC rate orders.
GMO records pension expense in accordance with rate orders from the MPSC. The difference between this expense and GAAP expense is recorded as a regulatory asset or liability. See Note 10 to the consolidated financial statements for additional discussion of the accounting for pensions.
Market conditions and interest rates significantly affect the future assets and liabilities of the plan. It is difficult to predict future pension costs, changes in pension liability and cash funding requirements due to volatile market conditions.
Great Plains Energy and KCP&L have recorded assets and liabilities on their consolidated balance sheets resulting from the effects of the ratemaking process, which would not otherwise be recorded under GAAP. Regulatory assets represent incurred costs that are probable of recovery from future revenues. Regulatory liabilities represent: amounts imposed by rate actions of electric utility’s regulators that may require refunds to customers; amounts provided in current rates that are intended to recover costs that are expected to be incurred in the future for which electric utility remains accountable; or a gain or other reduction of allowable costs to be given to customers over future periods. Future recovery of regulatory assets is not assured, but is generally subject to review by regulators in rate proceedings for matters such as prudence and reasonableness. Future reductions in revenue or refunds for regulatory liabilities generally are not mandated, pending future rate proceedings or actions by the regulators.
Management regularly assesses whether regulatory assets and liabilities are probable of future recovery or refund by considering factors such as decisions by the MPSC, KCC or FERC on electric utility’s rate case filings; decisions in other regulatory proceedings, including decisions related to other companies that establish precedent on matters applicable to electric utility; and changes in laws and regulations. If recovery or refund of regulatory assets or liabilities is not approved by regulators or is no longer deemed probable, these regulatory assets or liabilities are recognized in the current period results of operations. Electric utility’s continued ability to meet the criteria for recording regulatory assets and liabilities may be affected in the future by restructuring and deregulation in the electric industry. In the event that the criteria no longer applied to a deregulated portion of electric utility’s operations, the related regulatory assets and liabilities would be written off unless an appropriate regulatory recovery mechanism is provided. Additionally, these factors could result in an impairment on utility plant assets. See Note 7 to the consolidated financial statements for additional information.
Impairments of Assets, Intangible Assets and Goodwill
Long-lived assets and intangible assets subject to amortization are required to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable as prescribed under GAAP.
Goodwill is tested for impairment at least annually and more frequently when indicators of impairment exist as prescribed under GAAP which requires that if the fair value of a reporting unit is less than its carrying value including goodwill, the implied fair value of the reporting unit goodwill must be compared with its carrying value to determine the amount of impairment, which is required to be recognized in the current period results of operations. Great Plains Energy’s regulated electric utility operations are considered one reporting unit for assessment of impairment, as they are included within the same operating segment and have similar economic characteristics.
Great Plains Energy’s stock traded at a price below carrying value throughout 2009. If Great Plains Energy’s stock continues to trade at a price below carrying value, there can be no assurance future market volatility with
declines of extended duration and severity will not trigger impairment testing, which could result in an impairment of goodwill prospectively.
The annual impairment test for the GMO acquisition goodwill was conducted in September 2009. Fair value of the reporting unit exceeded the carrying amount by over $900 million, including goodwill; therefore, there was no impairment of goodwill.
The determination of fair value of the reporting unit consisted of two valuation techniques: an income approach consisting of a discounted cash flow analysis and a market approach consisting of a determination of reporting unit invested capital using market multiples derived from the historical revenue, EBITDA and net utility asset values and market prices of stock of electric and gas company regulated peers. The results of the two techniques were evaluated and weighted to determine a point within the range that management considered representative of fair value for the reporting unit, which involves a significant amount of management judgment.
The discounted cash flow analysis is most significantly impacted by two assumptions: estimated future cash flows and the discount rate applied to those cash flows. Management determined the appropriate discount rate based on the weighted average cost of capital (WACC). The WACC takes into account both the cost of equity and after-tax cost of debt. Estimated future cash flows are based on Great Plains Energy’s internal business plan, which assumes the occurrence of certain events in the future, such as the outcome of future rate filings, future approved rates of return on equity, anticipated earnings/returns related to future capital investments, continued recovery of cost of service and the renewal of certain contracts. Management also makes assumptions regarding the run rate of operation, maintenance and general and administrative costs based on the expected outcome of the aforementioned events. Should the actual outcome of some or all of these assumptions differ significantly from the current assumptions, revisions to current cash flow assumptions could cause the fair value of Great Plains Energy’s reporting unit to be significantly different in future periods and could result in a future impairment charge to goodwill.
The market approach analysis is most significantly impacted by management’s selection of relevant electric and gas company regulated peers as well as the determination of an appropriate control premium to be added to the calculated invested capital of the reporting unit, as control premiums associated with a controlling interest are not reflected in the quoted market price of a single share of stock. Management determined an appropriate control premium by using an average of control premiums for recent acquisitions in the industry. Changes in results of peer companies, selection of different peer companies and future acquisitions with significantly different control premiums could result in a significantly different fair value of Great Plains Energy’s reporting unit.
Income taxes are accounted for using the asset/liability approach. Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse. Deferred investment tax credits are amortized ratably over the life of the related property. Deferred tax assets are also recorded for net operating loss, capital loss and tax credit carryforwards. The Company is required to estimate the amount of taxes payable or refundable for the current year and the deferred tax liabilities and assets for future tax consequences of events reflected in the Company’s consolidated financial statements or tax returns. This process requires management to make assessments regarding the timing and probability of the ultimate tax impact. The Company records valuation allowances on deferred tax assets if it is determined that it is more likely than not that the asset will not be realized.
Additionally, the Company establishes reserves for uncertain tax positions based upon management’s judgment regarding potential future challenges to those positions. The accounting estimates related to the liability for uncertain tax positions require management to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If it is determined that it is more likely than not a tax position will be sustained based on its technical merits, the impact of the position is recorded in the Company’s consolidated
financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. These estimates are updated at each reporting date based on the facts, circumstances and information available. Management is also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to the unrecognized tax benefits will occur during the next twelve months. See Note 22 to the consolidated financial statements for additional information.
GREAT PLAINS ENERGY RESULTS OF OPERATIONS
The following table summarizes Great Plains Energy’s comparative results of operations. GMO’s results of operations are only included subsequent to the July 14, 2008, date of acquisition.
2009 compared to 2008
Great Plains Energy’s 2009 earnings available for common shareholders decreased to $148.5 million, or $1.14 per share, from $152.9 million, or $1.51 per share in 2008. A higher number of common shares outstanding diluted 2009 earnings per share by $0.33. Great Plains Energy’s significant share issuances were 32.2 million common shares for the acquisition of GMO in July 2008 and 11.5 million common shares in May 2009.
Electric utility’s net income increased $14.7 million in 2009 compared to 2008 reflecting the inclusion of GMO for the full year in 2009. Additionally, the impact of new retail rates, decreased purchased power prices, an increase in the equity component of AFUDC and decreased income taxes increased electric utility’s net income. These increases were mostly offset by unfavorable weather, a decline in customer usage driven by weakened economic conditions, a decrease in wholesale sale prices, increased depreciation expense due to placing the Iatan environmental equipment in service and increased interest expense due to the issuance of new long-term debt in 2009.
Great Plains Energy’s corporate and other activities loss from continuing operations decreased $17.4 million in 2009 compared to 2008 primarily attributable to a $16.0 million tax benefit due to the settlement of GMO’s 2003-2004 tax audit in 2009 partially offset by $11.4 million of after-tax interest expense for Equity Units issued in 2009. Additionally, 2008 reflects a $5.7 million after-tax loss for the change in fair value of interest rate hedges.
2008 compared to 2007
Great Plains Energy’s 2008 earnings available for common shareholders decreased to $152.9 million, or $1.51 per share, from $157.6 million, or $1.85 per share in 2007. A higher number of common shares outstanding, primarily due to the issuance of 32.2 million shares for the acquisition of GMO, diluted 2008 earnings per share by $0.28.
Electric utility’s net income decreased $13.7 million in 2008 compared to 2007. This decrease was primarily due to mild summer weather, a decrease in wholesale sales, higher fuel costs, higher purchased power prices and planned and unplanned plant outages which led to increased operating expenses at KCP&L. Also, in 2007, KCP&L received authorization from the MPSC and KCC to defer $8.9 million of skill set realignment costs incurred in 2006 resulting in lower expenses in 2007. Partially offsetting these decreases were increased retail revenues primarily due to new retail rates at KCP&L effective January 1, 2008 and an increase in AFUDC at KCP&L. The acquisition of GMO increased electric utility’s net income $17.9 million.
Great Plains Energy’s corporate and other activities loss from continuing operations decreased $12.3 million in 2008 compared to 2007, primarily due to $3.4 million of after-tax income related to the release of a legal reserve in 2008, the reversal of $3.6 million of after-tax interest expense related to unrecognized tax benefits in 2008, a $3.8 million after-tax favorable impact from the deferral in 2008 of merger transition costs incurred in 2007 to a regulatory asset and a $4.6 million after-tax change in the fair value of Forward Starting Swaps (FSS). The acquisition of GMO increased Great Plains Energy’s corporate and other activities loss $5.4 million.
ELECTRIC UTILITY RESULTS OF OPERATIONS
The following table summarizes the electric utility segment results of operations.
Electric utility’s residential customers’ usage is significantly affected by weather. Bulk power sales, the major component of wholesale sales, vary with system requirements, generating unit and purchased power availability, fuel costs and requirements of other electric systems. Electric utility’s revenues contain certain fuel recovery mechanisms as follows:
KCP&L’s Missouri retail rates do not contain a fuel recovery mechanism, meaning that changes in fuel and purchased power costs will not be reflected in rates until new rates are authorized by the MPSC creating a regulatory lag between the time costs change and when they are reflected in rates. This regulatory lag applies to all costs not included in fuel recovery mechanisms as described above. In the current rising cost environment, regulatory lag can be expected to have an adverse impact on Great Plains Energy’s results of operations. Additionally, KCP&L’s retail rates in Missouri reflect a set level of non-firm wholesale electric sales margin. KCP&L will not recover any shortfall in non-firm wholesale electric sales margin from the level included in Missouri retail rates and any amount of margin above the level reflected in Missouri retail rates will be returned to KCP&L Missouri retail customers in a future rate case.
Generation fuel mix can substantially change the fuel cost per MWh generated and can be significantly impacted by planned and unplanned plant outages. Nuclear fuel cost per MWh generated is substantially less than the cost of coal per MWh generated. The cost of natural gas and oil per MWh generated is substantially higher than the cost of coal and nuclear fuel per MWh generated. The cost per MWh for purchased power is generally significantly higher than the cost of coal and nuclear fuel per MWh generated. Electric utility continually evaluates its system requirements, the availability of generating units, its demand-side management and efficiency programs, availability and cost of fuel supply and purchased power, and the requirements of other electric systems to provide reliable power economically.
Management anticipates the cost of nuclear fuel to increase significantly in 2010, after which increases are expected to be moderate. Even with this anticipated increase, management expects nuclear fuel cost per MWh generated to remain less than the cost of generation from other fuel sources. With Iatan No. 2 scheduled to be placed in-service in the fall of 2010, management expects there to be more lower-cost coal generation in the fuel mix, lower requirements for purchased power and more generation available for wholesale sales. The majority of KCP&L’s and GMO’s rail transportation contracts expire in 2010. After 2010, rail transportation costs, a substantial component of the cost of coal per MWh generated, are anticipated to be significantly higher.
Electric Utility Revenues and MWh Sales