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Great Plains Energy 10-Q 2005

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2005

 

or

 

o TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission
File Number
Registrant, State of Incorporation,
Address and Telephone Number
I.R.S. Employer
Identification Number



001–32206 GREAT PLAINS ENERGY INCORPORATED
(A Missouri Corporation)
1201 Walnut Street
Kansas City, Missouri 64106
(816) 556–2200
www.greatplainsenergy.com

43–1916803
1–707 KANSAS CITY POWER & LIGHT COMPANY
(A Missouri Corporation)
1201 Walnut Street
Kansas City, Missouri 64106
(816) 556–2200
www.kcpl.com

44–0308720

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Great Plains Energy Incorporated   Yes  X

No  _

Kansas City Power & Light Company Yes  _

No  X

 

Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Great Plains Energy Incorporated   Yes  X

No  _

Kansas City Power & Light Company   Yes  _

No  X

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Great Plains Energy Incorporated   Yes  _

No  X

Kansas City Power & Light Company   Yes  _

No  X

 

As of October 31, 2005, the number of shares outstanding of (i) Great Plains Energy’s common stock was 74,694,629 and (ii) Kansas City Power & Light Company’s common stock was one, which was held by Great Plains Energy Incorporated.

 

 

Great Plains Energy Incorporated and Kansas City Power & Light Company separately file this combined Quarterly Report on Form 10-Q. Information contained herein relating to an individual registrant and its subsidiaries is filed by such registrant on its own behalf. Each registrant makes representations only as to information relating to itself and its subsidiaries.

 

This report should be read in its entirety. No one section of the report deals with all aspects of the subject matter. It should be read in conjunction with the consolidated financial statements and related notes and with the management’s discussion and analysis included in the companies’ 2004 Form 10-K.

 

Kansas City Power & Light Company is not required to file reports with the Securities and Exchange Commission (SEC) under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act); however, Kansas City Power & Light Company has continued to file such reports, including this Quarterly Report on Form 10-Q, with the SEC voluntarily and will continue to do so. In addition, Kansas City Power & Light Company may determine to register its common stock under Section 12(g) of the Exchange Act and upon the effectiveness of the registration it will be required to file such reports.

 

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. 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 the regional, national and international markets, including but not limited to regional and national wholesale electricity markets

market perception of the energy industry and the Company

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 and constraints placed on the Company’s actions by the Public Utility Holding Company Act of 1935

adverse changes in applicable laws, regulations, rules, principles or practices governing tax, accounting and environmental matters including, but not limited to, air quality

financial market conditions and performance including, but not limited to, changes in interest rates and in availability and cost of capital and the effects on the Company’s pension plan assets and costs

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 weather-related damage

cost, availability, quality and deliverability of fuel

ability to achieve generation planning goals and the occurrence and duration of unplanned generation outages

delays in the anticipated in-service dates of additional generating capacity

nuclear operations

ability to enter new markets successfully and capitalize on growth opportunities in non-regulated businesses

performance of projects undertaken by the Company’s non-regulated businesses and the success of efforts to invest in and develop new opportunities and

other risks and uncertainties.

 

This list of factors is not all-inclusive because it is not possible to predict all factors.

 

2

 

GLOSSARY OF TERMS

The following is a glossary of frequently used abbreviations or acronyms that are found throughout this report.

 

Abbreviation or Acronym

 

Definition

 

 

 

35 Act

 

Public Utility Holding Company Act of 1935, as amended

BART

 

Best available retrofit technology

CAIR

 

Clean Air Interstate Rule

CAMR

 

Clean Air Mercury Rule

Clean Air Act

 

Clean Air Act Amendments of 1990

CO2

 

Carbon Dioxide

Company

 

Great Plains Energy Incorporated and its subsidiaries

Consolidated KCP&L

 

KCP&L and its wholly owned subsidiaries

Digital Teleport

 

Digital Teleport, Inc.

DOE

 

Department of Energy

DTI

 

DTI Holdings, Inc. and its subsidiaries, Digital Teleport, Inc.

and Digital Teleport of Virginia, Inc.

EBITDA

 

Earnings before interest, income taxes, depreciation and amortization

EEI

 

Edison Electric Institute

EIRR

 

Environmental Improvement Revenue Refunding

EPA

 

Environmental Protection Agency

EPS

 

Earnings per common share

FASB

 

Financial Accounting Standards Board

FELINE PRIDESSM

 

Flexible Equity Linked Preferred Increased Dividend Equity Securities,

 

 

a service mark of Merrill Lynch & Co., Inc.

FERC

 

The Federal Energy Regulatory Commission

FIN

 

Financial Accounting Standards Board Interpretation

Great Plains Energy

 

Great Plains Energy Incorporated and its subsidiaries

Holdings

 

DTI Holdings, Inc.

HSS

 

Home Service Solutions Inc., a wholly owned subsidiary of KCP&L

IEC

 

Innovative Energy Consultants Inc., a wholly owned subsidiary

of Great Plains Energy

KCC

 

The State Corporation Commission of the State of Kansas

KCP&L

 

 

Kansas City Power & Light Company, a wholly owned subsidiary

of Great Plains Energy

KLT Gas

 

KLT Gas Inc., a wholly owned subsidiary of KLT Inc.

KLT Gas portfolio

 

KLT Gas natural gas properties

KLT Inc.

 

KLT Inc., a wholly owned subsidiary of Great Plains Energy

KLT Investments

 

KLT Investments Inc., a wholly owned subsidiary of KLT Inc.

KLT Telecom

 

KLT Telecom Inc., a wholly owned subsidiary of KLT Inc.

KW

 

Kilowatt

kWh

 

Kilowatt hour

MAC

 

Material Adverse Change

MISO

 

Midwest Independent Transmission System Operator, Inc.

MPSC

 

State of Missouri Public Service Commission

MW

 

Megawatt

MWh

 

Megawatt hour

NEIL

 

Nuclear Electric Insurance Limited

NOx

 

Nitrogen Oxide

NRC

 

Nuclear Regulatory Commission

OCI

 

Other Comprehensive Income

 

 

3

 

Abbreviation or Acronym

 

Definition

 

 

 

PJM

 

PJM Interconnection

PURPA

 

Public Utility Regulatory Policy Act

Receivables Company

 

Kansas City Power & Light Receivables Company, a wholly owned

subsidiary of KCP&L

RTO

 

Regional Transmission Organization

SEC

 

Securities and Exchange Commission

SECA

 

Seams Elimination Charge Adjustment

SE Holdings

 

SE Holdings, L.L.C.

Services

 

Great Plains Energy Services Incorporated

SFAS

 

Statement of Financial Accounting Standards

SO2

 

Sulfur Dioxide

SPP

 

Southwest Power Pool, Inc.

Strategic Energy

 

Strategic Energy, L.L.C., a subsidiary of KLT Energy Services

T - Lock

 

Treasury Lock

WCNOC

 

Wolf Creek Nuclear Operating Corporation

Wolf Creek

 

Wolf Creek Generating Station

Worry Free

 

Worry Free Service, Inc., a wholly owned subsidiary of HSS

 

 

4

 

 

 

PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements

GREAT PLAINS ENERGY

Consolidated Balance Sheets
(Unaudited)

September 30
2005
December 31
2004

ASSETS (thousands)
Current Assets
   Cash and cash equivalents     $ 58,414   $ 127,129  
   Restricted cash    17,500    7,700  
   Receivables, net    338,381    247,184  
   Fuel inventories, at average cost    19,650    21,121  
   Materials and supplies, at average cost    56,985    54,432  
   Deferred income taxes    -    13,065  
   Assets of discontinued operations    1,255    749  
   Derivative instruments    92,797    6,372  
   Other    8,890    14,485  

      Total    593,872    492,237  

Nonutility Property and Investments  
   Affordable housing limited partnerships    28,424    41,317  
   Nuclear decommissioning trust fund    89,888    84,148  
   Other    18,865    32,739  

      Total    137,177    158,204  

Utility Plant, at Original Cost  
   Electric    4,913,145    4,841,355  
   Less-accumulated depreciation    2,286,249    2,196,835  

      Net utility plant in service    2,626,896    2,644,520  
   Construction work in progress    60,751    53,821  
   Nuclear fuel, net of amortization of $111,262 and $127,631    31,104    36,109  

      Total    2,718,751    2,734,450  

Deferred Charges and Other Assets  
   Regulatory assets    160,237    144,345  
   Prepaid pension costs    105,583    119,811  
   Goodwill    87,624    86,767  
   Derivative instruments    30,563    2,275  
   Other    56,573    60,812  

      Total    440,580    414,010  

      Total   $ 3,890,380   $ 3,798,901  

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

5


GREAT PLAINS ENERGY

Consolidated Balance Sheets
(Unaudited)

September 30
2005
December 31
2004

LIABILITIES AND CAPITALIZATION (thousands)
Current Liabilities
   Notes payable     $ -   $ 20,000  
   Commercial paper    13,600    -  
   Current maturities of long-term debt    251,607    253,230  
   EIRR bonds classified as current    -    85,922  
   Accounts payable    222,663    199,952  
   Accrued taxes    112,501    46,993  
   Accrued interest    12,936    11,598  
   Accrued payroll and vacations    27,657    32,462  
   Accrued refueling outage costs    5,525    13,180  
   Deferred income taxes    21,030    -  
   Supplier collateral    17,500    7,700  
   Liabilities of discontinued operations    112    2,129  
   Derivative instruments    11,634    2,434  
   Other    24,645    22,497  

      Total    721,410    698,097  

Deferred Credits and Other Liabilities  
   Deferred income taxes    616,512    632,160  
   Deferred investment tax credits    30,670    33,587  
   Asset retirement obligations    117,203    113,674  
   Pension liability    95,496    95,805  
   Regulatory liabilities    63,300    4,101  
   Derivative instruments    6,134    112  
   Other    75,092    84,311  

      Total    1,004,407    963,750  

Capitalization  
   Common shareholders' equity  
      Common stock-150,000,000 shares authorized without par value  
            74,728,020 and 74,394,423 shares issued, stated value    775,561    765,482  
      Unearned compensation    (2,396 )  (1,393 )
      Capital stock premium and expense    (30,851 )  (32,112 )
      Retained earnings    490,386    451,491  
      Treasury stock-34,868 and 28,488 shares, at cost    (1,049 )  (856 )
      Accumulated other comprehensive income (loss)    393    (41,018 )

         Total    1,232,044    1,141,594  
   Cumulative preferred stock $100 par value  
      3.80% - 100,000 shares issued    10,000    10,000  
      4.50% - 100,000 shares issued    10,000    10,000  
      4.20% - 70,000 shares issued    7,000    7,000  
      4.35% - 120,000 shares issued    12,000    12,000  

         Total    39,000    39,000  
   Long-term debt (Note 8)    893,519    956,460  

         Total    2,164,563    2,137,054  

Commitments and Contingencies (Note 12)  

      Total   $ 3,890,380   $ 3,798,901  

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

6

GREAT PLAINS ENERGY
Consolidated Statements of Income
(Unaudited)

Three Months Ended
September 30
Year to Date
September 30
2005 2004 2005 2004

Operating Revenues (thousands)
   Electric revenues – KCP&L     $ 352,974   $ 323,287   $ 858,272   $ 844,447  
   Electric revenues - Strategic Energy    429,407    390,747    1,099,895    1,022,887  
   Other revenues    446    817    1,495    2,495  

      Total    782,827    714,851    1,959,662    1,869,829  

Operating Expenses  
   Fuel    73,935    52,257    160,228    135,113  
   Purchased power – KCP&L    28,303    14,015    56,590    43,835  
   Purchased power – Strategic Energy    386,499    358,879    1,003,201    930,637  
   Other    76,358    79,108    240,628    236,748  
   Maintenance    19,230    19,276    69,140    63,306  
   Depreciation and amortization    38,382    37,999    114,485    112,084  
   General taxes    31,197    28,468    83,619    78,492  
   (Gain) loss on property    3,419    (613 )  1,906    (771 )

      Total    657,323    589,389    1,729,797    1,599,444  

Operating income    125,504    125,462    229,865    270,385  
Non-operating income    3,563    1,626    15,334    4,595  
Non-operating expenses    (4,699 )  (6,914 )  (15,671 )  (13,393 )
Interest charges    (17,904 )  (17,973 )  (53,777 )  (55,278 )

Income from continuing operations before income taxes,  
   minority interest in subsidiaries and loss from equity  
   investments    106,464    102,201    175,751    206,309  
Income taxes    (17,300 )  (35,161 )  (32,396 )  (67,273 )
Minority interest in subsidiaries    -    1,283    (7,805 )  848  
Loss from equity investments, net of income taxes    (69 )  (461 )  (758 )  (1,074 )

Income from continuing operations    89,095    67,862    134,792    138,810  
Discontinued operations, net of income taxes (Note 7)    1,780    8,067    (1,826 )  6,048  

Net income    90,875    75,929    132,966    144,858  
Preferred stock dividend requirements    412    412    1,235    1,235  

Earnings available for common shareholders   $ 90,463   $ 75,517   $ 131,731   $ 143,623  

Average number of common shares outstanding    74,653    74,270    74,561    71,251  

Basic and diluted earnings (loss) per common share
  
   Continuing operations   $ 1.19   $ 0.91   $ 1.79   $ 1.93  
   Discontinued operations    0.02    0.11    (0.02 )  0.09  

Basic and diluted earnings per common share   $ 1.21   $ 1.02   $ 1.77   $ 2.02  

Cash dividends per common share   $ 0.415   $ 0.415   $ 1.245   $ 1.245  

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

7

GREAT PLAINS ENERGY
Consolidated Statements of Cash Flows
(Unaudited)

Year to Date September 30 2005 2004

Cash Flows from Operating Activities (thousands)
Net income     $ 132,966   $ 144,858  
   Less: Discontinued operations, net of income taxes    (1,826 )  6,048  

      Income from continuing operations    134,792    138,810  
Adjustments to reconcile income to net cash from operating activities:  
      Depreciation and amortization    114,485    112,084  
      Amortization of:  
         Nuclear fuel    9,396    10,585  
         Other    8,035    8,345  
      Deferred income taxes, net    (15,736 )  8,112  
      Investment tax credit amortization    (2,917 )  (2,988 )
      Loss from equity investments, net of income taxes    758    1,074  
      (Gain) loss on property    1,906    (771 )
      Minority interest in subsidiaries    7,805    (848 )
      Other operating activities (Note 4)    1,663    43,981  

            Net cash from operating activities    260,187    318,384  

Cash Flows from Investing Activities  
Utility capital expenditures    (260,589 )  (137,073 )
Allowance for borrowed funds used during construction    (1,174 )  (1,175 )
Purchases of investments    (17,640 )  (2,664 )
Purchases of nonutility property    (4,822 )  (5,121 )
Proceeds from sale of assets and investments    47,781    6,731  
Purchase of additional indirect interest in Strategic Energy    -    (90,166 )
Hawthorn No. 5 partial insurance recovery    10,000    30,810  
Hawthorn No. 5 partial litigation settlements    -    1,139  
Other investing activities    (679 )  (4,585 )

            Net cash from investing activities    (227,123 )  (202,104 )

Cash Flows from Financing Activities  
Issuance of common stock    7,462    151,872  
Issuance of long-term debt    85,922    163,600  
Issuance fees    (2,031 )  (10,158 )
Repayment of long-term debt    (88,417 )  (213,261 )
Net change in short-term borrowings    (6,400 )  (87,000 )
Dividends paid    (94,071 )  (89,543 )
Other financing activities    (4,244 )  (7,123 )

            Net cash from financing activities    (101,779 )  (91,613 )

Net Change in Cash and Cash Equivalents    (68,715 )  24,667  
Cash and Cash Equivalents from Continuing Operations  
   at Beginning of Year    127,129    114,227  

Cash and Cash Equivalents from Continuing Operations  
   at End of Period   $ 58,414   $ 138,894  

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

8

GREAT PLAINS ENERGY
Consolidated Statements of Common Shareholders' Equity
(Unaudited)

Year to Date September 30 2005 2004

Shares Amount Shares Amount
Common Stock (thousands, except share amounts)
Beginning balance      74,394,423   $ 765,482    69,259,203   $ 611,424  
Issuance of common stock    257,222    7,745    5,062,456    151,872  
Issuance of restricted common stock    76,375    2,334    -    -  

      Ending balance    74,728,020    775,561    74,321,659    763,296  

Unearned Compensation  
Beginning balance         (1,393 )       (1,633 )
Issuance of restricted common stock         (2,334 )       -  
Forfeiture of restricted common stock         188         -  
Compensation expense recognized         1,143         402  

      Ending balance         (2,396 )       (1,231 )

Capital Stock Premium and Expense  
Beginning balance         (32,112 )       (7,240 )
Issuance of common stock         -         (5,600 )
FELINE PRIDESSM purchase contract  
   adjustment, allocated fees and expenses         -         (19,657 )
Other         1,261         87  

      Ending balance         (30,851 )       (32,410 )

Retained Earnings  
Beginning balance         451,491         391,750  
Net income         132,966         144,858  
Loss on reissuance of treasury stock         -         (194 )
Dividends:  
   Common stock         (92,836 )       (88,308 )
   Preferred stock - at required rates         (1,235 )       (1,235 )
   Options         -         (71 )

      Ending balance         490,386         446,800  

Treasury Stock  
Beginning balance    (28,488 )  (856 )  (3,265 )  (121 )
Treasury shares acquired    (6,380 )  (193 )  (40,183 )  (1,204 )
Treasury shares reissued    -    -    29,460    910  

      Ending balance    (34,868 )  (1,049 )  (13,988 )  (415 )

Accumulated Other Comprehensive Income (Loss)  
Beginning balance         (41,018 )       (36,886 )
Derivative hedging activity, net of tax         41,996         3,156  
Minimum pension obligation, net of tax         (585 )       -  

      Ending balance         393         (33,730 )

Total Common Shareholders' Equity        $ 1,232,044        $ 1,142,310  

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

9

GREAT PLAINS ENERGY
Consolidated Statements of Comprehensive Income
(Unaudited)

Three Months Ended
September 30
Year to Date
September 30
2005 2004 2005 2004

(thousands)
Net income     $ 90,875   $ 75,929   $ 132,966   $ 144,858  

Other comprehensive income  
   Gain (loss) on derivative hedging instruments    80,317    (9,812 )  99,540    6,977  
   Income taxes    (33,097 )  4,325    (41,468 )  (3,041 )

      Net gain (loss) on derivative hedging instruments    47,220    (5,487 )  58,072    3,936  
   Reclassification to expenses, net of tax    (12,571 )  579    (16,076 )  (780 )

      Derivative hedging activity, net of tax    34,649    (4,908 )  41,996    3,156  

   Change in minimum pension obligation    -    -    (60 )  -  
   Income taxes    (548 )  -    (525 )  -  

      Net change in minimum pension obligation    (548 )  -    (585 )  -  

Comprehensive income   $ 124,976   $ 71,021   $ 174,377   $ 148,014  

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

10

KANSAS CITY POWER & LIGHT COMPANY
Consolidated Balance Sheets
(Unaudited)

September 30 December 31
2005 2004

ASSETS (thousands)
Current Assets            
   Cash and cash equivalents   $ 796   $ 51,619  
   Receivables, net    108,410    63,366  
   Fuel inventories, at average cost    19,650    21,121  
   Materials and supplies, at average cost    56,985    54,432  
   Deferred income taxes    6,609    12,818  
   Prepaid expenses    7,576    12,511  
   Derivative instruments    6,201    363  

      Total    206,227    216,230  

Nonutility Property and Investments  
   Nuclear decommissioning trust fund    89,888    84,148  
   Other    9,051    20,576  

      Total    98,939    104,724  

Utility Plant, at Original Cost  
   Electric    4,913,145    4,841,355  
   Less-accumulated depreciation    2,286,249    2,196,835  

      Net utility plant in service    2,626,896    2,644,520  
   Construction work in progress    60,751    53,821  
   Nuclear fuel, net of amortization of $111,262 and $127,631    31,104    36,109  

      Total    2,718,751    2,734,450  

Deferred Charges and Other Assets  
   Regulatory assets    160,237    144,345  
   Prepaid pension costs    105,583    116,024  
   Derivative instruments    -    674  
   Other    28,478    20,947  

      Total    294,298    281,990  

      Total   $ 3,318,215   $ 3,337,394  


The disclosures regarding KCP&L included in the accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

11


KANSAS CITY POWER & LIGHT COMPANY
Consolidated Balance Sheets
(Unaudited)

September 30 December 31
2005 2004

LIABILITIES AND CAPITALIZATION (thousands)
Current Liabilities            
   Notes payable to Great Plains Energy   $ -   $ 24  
   Commercial paper    13,600    -  
   Current maturities of long-term debt    250,000    250,000  
   EIRR bonds classified as current    -    85,922  
   Accounts payable    78,285    84,105  
   Accrued taxes    111,620    34,497  
   Accrued interest    10,977    9,800  
   Accrued payroll and vacations    22,802    22,870  
   Accrued refueling outage costs    5,525    13,180  
   Other    8,263    8,327  

      Total    501,072    508,725  

Deferred Credits and Other Liabilities  
   Deferred income taxes    620,830    654,055  
   Deferred investment tax credits    30,670    33,587  
   Asset retirement obligations    117,203    113,674  
   Pension liability    94,266    90,491  
   Regulatory liabilities    63,300    4,101  
   Derivative instruments    2,208    -  
   Other    43,792    42,832  

      Total    972,269    938,740  

Capitalization  
   Common shareholder's equity  
      Common stock-1,000 shares authorized without par value  
                                       1 share issued, stated value    887,041    887,041  
      Retained earnings    268,430    252,893  
      Accumulated other comprehensive loss    (38,857 )  (40,334 )

         Total    1,116,614    1,099,600  
   Long-term debt (Note 8)    728,260    790,329  

      Total    1,844,874    1,889,929  

Commitments and Contingencies (Note 12)  

      Total   $ 3,318,215   $ 3,337,394  


The disclosures regarding KCP&L included in the accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

12


KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Income
(Unaudited)

Three Months Ended Year to Date
September 30 September 30
2005 2004 2005 2004

Operating Revenues (thousands)
   Electric revenues     $ 352,974   $ 323,287   $ 858,272   $ 844,447  
   Other revenues    -    366    113    1,220  

      Total    352,974    323,653    858,385    845,667  

Operating Expenses  
   Fuel    73,935    52,257    160,228    135,113  
   Purchased power    28,303    14,015    56,590    43,835  
   Other    60,912    63,504    195,738    190,457  
   Maintenance    19,225    19,264    69,111    63,277  
   Depreciation and amortization    36,776    36,513    109,836    108,839  
   General taxes    30,091    27,449    80,100    75,667  
   (Gain) loss on property    3,602    (613 )  3,089    (771 )

      Total    252,844    212,389    674,692    616,417  

Operating income    100,130    111,264    183,693    229,250  
Non-operating income    2,822    1,393    13,665    3,857  
Non-operating expenses    (2,477 )  (2,211 )  (4,257 )  (5,839 )
Interest charges    (15,015 )  (15,313 )  (45,116 )  (49,701 )

Income before income taxes and minority interest  
   in subsidiaries    85,460    95,133    147,985    177,567  
Income taxes    (16,512 )  (32,503 )  (31,943 )  (63,946 )
Minority interest in subsidiaries    -    1,283    (7,805 )  3,804  

Net income   $ 68,948   $ 63,913   $ 108,237   $ 117,425  


The disclosures regarding KCP&L included in the accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

13


KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Cash Flows
(Unaudited)

Year to Date September 30 2005 2004

Cash Flows from Operating Activities (thousands)
Net income     $ 108,237   $ 117,425  
Adjustments to reconcile income to net cash from operating activities:  
      Depreciation and amortization    109,836    108,839  
      Amortization of:  
         Nuclear fuel    9,396    10,585  
         Other    5,850    5,770  
      Deferred income taxes, net    (32,575 )  6,782  
      Investment tax credit amortization    (2,917 )  (2,988 )
      (Gain) loss on property    3,089    (771 )
      Minority interest in subsidiaries    7,805    (3,804 )
      Other operating activities (Note 4)    50,399    49,050  

            Net cash from operating activities    259,120    290,888  

Cash Flows from Investing Activities  
Utility capital expenditures    (265,361 )  (137,073 )
Allowance for borrowed funds used during construction    (1,174 )  (1,175 )
Purchases of investments    (2,664 )  (2,664 )
Purchases of nonutility property    (113 )  (233 )
Proceeds from sale of assets    31,203    5,251  
Hawthorn No. 5 partial insurance recovery    10,000    30,810  
Hawthorn No. 5 partial litigation settlements    -    1,139  
Other investing activities    (679 )  (4,589 )

            Net cash from investing activities    (228,788 )  (108,534 )

Cash Flows from Financing Activities  
Issuance of long-term debt    85,922    -  
Repayment of long-term debt    (85,922 )  (209,140 )
Net change in short-term borrowings    13,576    (6,541 )
Dividends paid to Great Plains Energy    (92,700 )  (88,801 )
Equity contribution from Great Plains Energy    -    150,000  
Issuance fees    (2,031 )  (1,361 )

            Net cash from financing activities    (81,155 )  (155,843 )

Net Change in Cash and Cash Equivalents    (50,823 )  26,511  
Cash and Cash Equivalents at Beginning of Year    51,619    26,520  

Cash and Cash Equivalents at End of Period   $ 796   $ 53,031  


The disclosures regarding KCP&L included in the accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

14


KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Common Shareholder's Equity
(Unaudited)

Year to Date September 30 2005 2004

Shares Amount Shares Amount
Common Stock (thousands, except share amounts)
Beginning balance      1   $ 887,041    1   $ 662,041  
Equity contribution from Great Plains Energy     -     -     -     150,000  

    Ending balance    1    887,041    1    812,041  

Retained Earnings  
Beginning balance          252,893          228,761  
Net income          108,237          117,425  
Dividends:  
   Common stock held by Great Plains Energy          (92,700 )        (88,801 )

      Ending balance          268,430          257,385  

Accumulated Other Comprehensive Loss  
Beginning balance          (40,334 )        (35,244 )
Derivative hedging activity, net of tax          4,015          (57 )
Minimum pension obligation, net of tax          (2,538 )        -  

   Ending balance          (38,857 )        (35,301 )

Total Common Shareholder’s Equity         $ 1,116,614         $ 1,034,125  


The disclosures regarding KCP&L included in the accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

15


KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Comprehensive Income
(Unaudited)

Three Months Ended Year to Date
September 30 September 30
2005 2004 2005 2004

(thousands)
Net income     $ 68,948   $ 63,913   $ 108,237   $ 117,425  

Other comprehensive income  
   Gain on derivative hedging instruments    9,193    158    6,902    565  
   Income taxes    (3,478 )  (62 )  (2,598 )  (220 )

      Net gain on derivative hedging instruments    5,715    96    4,304    345  
   Reclassification to expenses, net of tax    (286 )  (402 )  (289 )  (402 )

      Derivative hedging activity, net of tax    5,429    (306 )  4,015    (57 )

   Change in minimum pension obligation    (3,170 )  -    (3,230 )  -  
   Income taxes    669    -    692    -  

      Net change in minimum pension obligation    (2,501 )  -    (2,538 )  -  

Comprehensive income   $ 71,876   $ 63,607   $ 109,714   $ 117,368  


The disclosures regarding KCP&L included in the accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

16

GREAT PLAINS ENERGY INCORPORATED

KANSAS CITY POWER & LIGHT COMPANY

Notes to Consolidated Financial Statements

The notes to consolidated financial statements that follow are a combined presentation for Great Plains Energy Incorporated and Kansas City Power & Light Company, both registrants under this filing. The terms “Great Plains Energy,” “Company,” “KCP&L” and “consolidated 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 “consolidated KCP&L” refers to KCP&L and its consolidated subsidiaries.

1.

ORGANIZATION

Great Plains Energy, a Missouri corporation incorporated in 2001, is a public utility holding company registered with and subject to the regulation of the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935, as amended (35 Act). Great Plains Energy does not own or operate any significant assets other than the stock of its subsidiaries.

Great Plains Energy has four direct subsidiaries with operations or active subsidiaries:

 

KCP&L is an integrated, regulated electric utility that provides electricity to customers primarily in the states of Missouri and Kansas. KCP&L’s wholly owned subsidiary, Home Service Solutions Inc. (HSS) sold its wholly owned subsidiary, Worry Free Service, Inc. (Worry Free) in February 2005.

 

KLT Inc. is an intermediate holding company that primarily holds, directly or indirectly, interests in Strategic Energy, L.L.C. (Strategic Energy) and affordable housing limited partnerships. KLT Inc. also wholly owns KLT Gas Inc. (KLT Gas). See Note 7 for additional information regarding KLT Gas discontinued operations.

 

Innovative Energy Consultants Inc. (IEC) is an intermediate holding company that holds an indirect interest in Strategic Energy. IEC does not own or operate any assets other than its indirect interest in Strategic Energy. When combined with KLT Inc.’s indirect interest in Strategic Energy, the Company owns just under 100% of the indirect interest in Strategic Energy. Strategic Energy provides competitive electricity supply services in several electricity markets offering retail choice.

 

Great Plains Energy Services Incorporated (Services) provides services at cost to Great Plains Energy and its subsidiaries, including consolidated KCP&L, as a service company under the 35 Act.

The operations of Great Plains Energy and its subsidiaries are divided into two reportable segments, KCP&L and Strategic Energy. Great Plains Energy’s legal structure differs from the functional management and financial reporting of its reportable segments. Other activities not considered a reportable segment include the operations of HSS, Services, all KLT Inc. operations other than Strategic Energy, and holding company operations.

2.

CASH

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with original maturities of three months or less. For Great Plains Energy, this includes Strategic Energy’s cash held in trust of $27.7 million and $21.0 million at September 30, 2005, and December 31, 2004, respectively.

 

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Strategic Energy has entered into collateral arrangements with selected electricity power suppliers that require selected customers to remit payment to lockboxes that are held in trust and managed by a Trustee. As part of the trust administration, the Trustee remits payment to the supplier of electricity purchased by Strategic Energy. On a monthly basis, any remittances into the lockboxes in excess of disbursements to the supplier are remitted back to Strategic Energy.

Restricted Cash

Strategic Energy has entered into Master Power Purchase and Sale Agreements with its power suppliers. Certain of these agreements contain provisions whereby, to the extent Strategic Energy has a net exposure to the purchased power supplier, collateral requirements are to be maintained. Collateral posted in the form of cash to Strategic Energy is restricted by agreement, but would become unrestricted in the event of a default by the purchased power supplier. Strategic Energy’s restricted cash collateral was $17.5 million and $7.7 million at September 30, 2005, and December 31, 2004.

3.

BASIC AND DILUTED EARNINGS PER COMMON SHARE CALCULATION

There was no significant dilutive effect on Great Plains Energy’s EPS from other securities for the three months ended and year to date September 30, 2005 and 2004. To determine basic EPS, preferred stock dividend requirements are deducted from income from continuing operations and net income before dividing by average number of common shares outstanding. The earnings (loss) per share impact of discontinued operations, net of income taxes, is determined by dividing discontinued operations, net of income taxes, by the average number of common shares outstanding. Diluted EPS, calculated using the treasury stock method, assumes the issuance of common shares applicable to stock options, performance shares and FELINE PRIDESSM.

The following table reconciles Great Plains Energy’s basic and diluted EPS from continuing operations.



Three Months Ended
September 30
Year to Date
September 30
2005 2004 2005 2004

Income (thousands, except per share amounts)
Income from continuing operations     $ 89,095   $ 67,862   $ 134,792   $ 138,810  
Less: preferred stock dividend requirements    412    412    1,235    1,235  

Income available to common shareholders   $ 88,683   $ 67,450   $ 133,557   $ 137,575  

Common Shares Outstanding  
Average number of common shares outstanding    74,653    74,270    74,561    71,251  
Add: effect of dilutive securities    30    66    72    83  

Diluted average number of common shares outstanding    74,683    74,336    74,633    71,334  

Basic and diluted EPS from continuing operations   $ 1.19   $ 0.91   $ 1.79   $ 1.93  


As of September 30, 2005 and 2004, there were no significant anti-dilutive shares applicable to stock options or performance shares. As of September 30, 2005 and 2004, 6.5 million FELINE PRIDES had no dilutive effect because the number of common shares to be issued in accordance with the settlement rate, assuming applicable market value equal to the average price during the period, would be equal to the number of shares Great Plains Energy could re-purchase in the market at the average price during the period.

In November 2005, the Board of Directors declared a quarterly dividend of $0.415 per share on Great Plains Energy’s common stock. The common dividend is payable December 20, 2005, to shareholders of record as of November 29, 2005. The Board of Directors also declared regular dividends on Great Plains Energy’s preferred stock, payable March 1, 2006, to shareholders of record as of February 7, 2006.

 

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4.

SUPPLEMENTAL CASH FLOW INFORMATION

Great Plains Energy Other Operating Activities

Year to Date September 30 2005 2004

Cash flows affected by changes in: (thousands)
    Receivables     $ (63,682 ) $ (62,118 )
    Fuel inventories    2,328    1,470  
    Materials and supplies    (2,553 )  2,741  
    Accounts payable    28,027    17,284  
    Accrued taxes    53,525    81,993  
    Accrued interest    1,191    186  
Wolf Creek refueling outage accrual    (7,655 )  7,645  
Deposits with suppliers    82    836  
Pension and postretirement benefit assets and obligations    6,045    917  
Allowance for equity funds used during construction    (1,081 )  (1,497 )
Other    (14,564 )  (5,476 )

        Total other operating activities   $ 1,663   $ 43,981  

Cash paid during the period:  
    Interest   $ 54,263   $ 53,560  
    Income taxes   $ 24,141   $ 24,509  


Consolidated KCP&L Other Operating Activities

Year to Date September 30 2005 2004

Cash flows affected by changes in: (thousands)
    Receivables     $ (20,401 ) $ (13,600 )
    Fuel inventories    2,328    1,470  
    Materials and supplies    (2,553 )  2,741  
    Accounts payable    (2,706 )  (19,221 )
    Accrued taxes    66,946    63,409  
    Accrued interest    1,177    (867 )
Wolf Creek refueling outage accrual    (7,655 )  7,645  
Pension and postretirement benefit assets and obligations    2,336    4,408  
Allowance for equity funds used during construction    (1,081 )  (1,497 )
Other    12,008    4,562  

        Total other operating activities   $ 50,399   $ 49,050  

Cash paid during the period:  
    Interest   $ 42,067   $ 48,092  
    Income taxes   $ 32,404   $ 23,780  


Significant Non-Cash Items

As of September 30, 2005, KCP&L had sold SO2 emission allowances totaling $57.3 million of which $26.3 million was recorded in receivables. During the first quarter of 2005, HSS completed the sale of Worry Free. As part of the transaction, HSS received cash of $0.3 million and notes receivable totaling $5.2 million, net of a $3.0 million allowance. The notes receivable had no effect on Great Plains Energy’s and consolidated KCP&L’s cash flows with the exception of $0.3 million receipt of payments on the notes during 2005.

 

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5.

RECEIVABLES

The Company’s receivables are detailed in the following table.


September 30
2005
December 31
2004

Consolidated KCP&L (thousands)
    Customer accounts receivable (a)     $ 56,228   $ 19,866  
    Allowance for doubtful accounts    (1,730 )  (1,722 )
    Other receivables    53,912    45,222  

       Consolidated KCP&L receivables    108,410    63,366  
Other Great Plains Energy  
    Other receivables    235,164    188,499  
    Allowance for doubtful accounts    (5,193 )  (4,681 )

       Great Plains Energy receivables   $ 338,381   $ 247,184  

(a) Customer accounts receivable included unbilled receivables of $39.3 million
     and $31.2 million at September 30, 2005, and December 31, 2004, respectively.

Consolidated KCP&L’s other receivables at September 30, 2005, consisted primarily of receivables for the sale of SO2 emission allowances, receivables from partners in jointly owned electric utility plants and wholesale sales receivables. At December 31, 2004, the balance consisted primarily of receivables from partners in jointly owned electric utility plants, wholesale sales receivables and accounts receivable held by Worry Free. Great Plains Energy’s other receivables at September 30, 2005, and December 31, 2004, consisted primarily of accounts receivable held by Strategic Energy, including unbilled receivables of $112.0 million and $103.0 million, respectively.

During the third quarter of 2005, KCP&L entered into a new three-year revolving agreement to sell all of its retail electric accounts receivable to Kansas City Power & Light Receivables Company (Receivables Company), which in turn sold an undivided percentage ownership interest in the accounts receivable to Victory Receivables Corporation, an independent outside investor. In accordance with Statement of Financial Accounting Standards (SFAS) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” the agreements qualify as a sale under which the creditors of Receivables Company are entitled to be satisfied out of the assets of Receivables Company prior to any value being returned to KCP&L or its creditors. Accounts receivable sold by KCP&L to Receivables Company under this revolving agreement totaled $124.5 million at September 30, 2005. Accounts receivable sold by Receivables Company to the outside investor under this revolving agreement totaled $70 million at September 30, 2005. The proceeds of this sale were forwarded to KCP&L as consideration for its sale. The new agreement allows for a maximum outstanding principal amount sold to the outside investor of $100 million during the period June 1 through October 31, and $70 million during the period November 1 through May 31 of each year.

Under the agreement, KCP&L sells its receivables at a fixed price based upon the expected cost of funds and charge-offs. These costs comprise KCP&L’s loss on the sale of accounts receivable. KCP&L services the receivables and receives an annual servicing fee of 2.5% of the outstanding principal amount of the receivables sold to Receivables Company. KCP&L does not recognize a servicing asset or liability since management determined the collection agent fee earned by KCP&L approximates market value.

 

20

 

Information regarding KCP&L’s sale of accounts receivable to Receivables Company under the new agreement is reflected in the following table.


Three Months Ended and
Year to Date September 30, 2005
KCP&L Receivables
Company
Consolidated
KCP&L

(thousands)
Receivables (sold) purchased     $ (400,742 ) $ 330,742   $ (70,000 )
Collections    273,742    (273,742 )  -  
(Gain) loss on sale of accounts receivable (a)    4,007    (2,750 )  1,257  
Servicing fees    739    (739 )  -  
Fees to outside investor    -    (703 )  (703 )

Cash flows during the period
  
Cash proceeds from sale of receivables (b)   $ 343,742   $ (273,742 ) $ 70,000  
Servicing fees    739    (739 )  -  

(a) The net loss is the result of the timing difference inherent in collecting receivables and over
     the life of the agreement will net to zero.
(b) During the third quarter of 2005, Receivables Company received $70 million cash from the
     outside investor for the sale of accounts receivable, which was then forwarded to KCP&L for
     consideration of its sale.

KCP&L had a revolving agreement, which expired in January 2005, to sell all of its right, title and interest in the majority of its customer accounts receivable to Receivables Company, which in turn sold most of the receivables to independent outside investors. The expired agreement was structured as a true sale under which the creditors of Receivables Company were entitled to be satisfied out of the assets of Receivables Company prior to any value being returned to KCP&L or its creditors. Accounts receivable sold under the expired revolving agreement totaled $84.9 million at December 31, 2004. As a result of the sale to the outside investors, Receivables Company received up to $70 million in cash, which was forwarded to KCP&L as consideration for its sale. At December 31, 2004, Receivables Company had received $65.0 million in cash.

Information regarding KCP&L’s sale of accounts receivable to Receivables Company under the expired agreement is reflected in the following table.


Three Months Ended
September 30
Year to Date
September 30
2004 2005 2004

Gross proceeds on sale of (thousands)
     accounts receivable     $ 295,559   $ 46,124   $ 730,999  
Collections    290,372    44,287    709,170  
Loss on sale of accounts receivable    856    34    2,132  
Late fees    695    112    1,707  

 

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6.

ACQUIRED INTANGIBLE ASSETS

In May 2004, Great Plains Energy, through IEC, completed its purchase of an additional 11.45% indirect interest in Strategic Energy bringing Great Plains Energy’s indirect ownership interest in Strategic Energy to just under 100%. The acquired share of intangible assets and related liabilities are detailed in the following table.


September 30, 2005 December 31, 2004


Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization

Amortized intangible assets (millions)
    Supply contracts     $ 26 .5 $ (16 .4)   $ 26 .5 $ (7 .7)
    Customer relationships    17 .0  (4 .0)    17 .0  (1 .9)
    Asset information systems    1 .9  (0 .7)    1 .9  (0 .3)

       Total    45 .4  (21 .1)    45 .4  (9 .9)
Unamortized intangible assets  
    Strategic Energy trade name    0 .7    0 .7

          Total intangible assets   $ 46 .1 $ (21 .1)   $ 46 .1 $ (9 .9)

Amortized related liabilities  
    Retail contracts   $ 26 .5 $ (16 .4)   $ 26 .5 $ (7 .7)


Amortization expense for the acquired share of intangible assets and related liabilities is detailed in the following tables.


Three Months Ended
September 30
Year to Date
September 30
2005 2004 2005 2004

(millions)
Intangible assets     $ 3.7   $ 3.7   $ 11.2   $ 6.2  
Related liabilities    (2.9 )  (2.9 )  (8.7 )  (4.8 )

   Net amortization expense   $ 0.8   $ 0.8   $ 2.5   $ 1.4  



Estimated Amortization Expense

2005(a) 2006 2007 2008 2009

(millions)
Intangible assets     $ 3.8   $ 10.6   $ 3.3   $ 2.8   $ 2.9  
Related liabilities    (2.9 )  (7.2 )  -    -    -  

   Net amortization expense   $ 0.9   $ 3.4   $ 3.3   $ 2.8   $ 2.9  

(a) Amount represents the remaining estimated amortization expense for 2005.

 

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7.

KLT GAS DISCONTINUED OPERATIONS

In February 2004, the Board of Directors approved the sale of the KLT Gas natural gas properties (KLT Gas portfolio) and discontinuation of the gas business. Since the approval, the KLT Gas portfolio has been reported as discontinued operations in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-lived Assets.” During 2004, KLT Gas completed sales of substantially all of the KLT Gas portfolio. At September 30, 2005, and December 31, 2004, KLT Gas had $1.3 million and $0.7 million of current assets and $0.1 million and $2.1 million of current liabilities recorded in assets and liabilities from discontinued operations, respectively. During the second quarter of 2005, a legal reserve related to these discontinued operations was recorded. During the third quarter of 2005, KLT Gas reached an agreement to settle the arbitration for less than the amount reserved. See Note 14 for more information. The following table summarizes the discontinued operations.


Three Months Ended
September 30
Year to Date
September 30


2005 2004 2005 2004
(millions)
Revenues     $ -   $ -     $ -   $ 1.6  

Gain (loss) from operations, including  
    impairments, before income taxes    3.2    13.0      (2.8 )  9.3  
Income taxes    (1.4 )  (5.0 )    1.0    (3.3 )

    Discontinued operations, net of income taxes   $ 1.8   $ 8.0     $ (1.8 ) $ 6.0  


The following table summarizes the cash flows from the discontinued operations.


Year to Date September 30 2005 2004

(millions)
Net cash from operating activities     $ (0 .8) $ (17 .0)
Net cash from investing activities    0 .3  19 .6

Net change in cash and cash equivalents    (0 .5)  2 .6
Cash and cash equivalents at beginning of year    0 .6  0 .2

Cash and cash equivalents at end of period  
   included in assets of discontinued operations   $ 0 .1 $ 2 .8

 

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8.

CAPITALIZATION

Great Plains Energy and consolidated KCP&L’s long-term debt is detailed in the following table.


Year Due September 30
2005
December 31
2004

Consolidated KCP&L (thousands)
    General Mortgage Bonds
        7.95% Medium-Term Notes     2007     $ 500   $ 500  
        3.29%* and 2.26%** EIRR bonds   2012-2035    158,768    158,768  
   Senior Notes  
        7.125%   2005    250,000    250,000  
        6.500%   2011    150,000    150,000  
        6.000%   2007    225,000    225,000  
        Unamortized discount        (300 )  (465 )
   EIRR bonds  
        2.29%*** Series A & B   2015    104,896    106,991  
        2.38%** Series C        -    50,000  
        2.29%*** Series D   2017    39,396    40,183  
        4.65% Series 2005   2035    50,000    -  
   2.10%** Combustion Turbine Synthetic Lease        -    145,274  
   Current liabilities  
        EIRR bonds classified as current        -    (85,922 )
        Current maturities        (250,000 )  (250,000 )

           Total consolidated KCP&L excluding current liabilities        728,260    790,329  

Other Great Plains Energy
  
   4.25% FELINE PRIDES Senior Notes   2009    163,600    163,600  
   7.71%* and 7.64%** Affordable Housing Notes   2005-2008    3,266    5,761  
   Current maturities        (1,607 )  (3,230 )

           Total consolidated Great Plains Energy excluding current maturities $ 893,519   $ 956,460  

*  Weighted-average rate as of September 30, 2005
**  Weighted-average rate as of December 31, 2004
***  Weighted-average rate as of September 30, 2005, and December 31, 2004

During the third quarter of 2005, KCP&L redeemed its secured 1994 series EIRR bonds totaling $35.9 million by issuing secured EIRR Bonds Series 2005 also totaling $35.9 million; $14.0 million at a fixed rate of 4.05% until maturity at March 1, 2015, and $21.9 million at a fixed rate of 4.65% until maturity at September 1, 2035. KCP&L also redeemed its unsecured Series C EIRR bonds totaling $50.0 million by issuing unsecured EIRR Bonds Series 2005 also totaling $50.0 million at a fixed rate of 4.65% until maturity at September 1, 2035. The previous interest rate periods on these two series, with interest rates of 2.25% and 2.38%, respectively, expired on August 31, 2005. Both of the redeemed series were classified as current liabilities at December 31, 2004. Both of the new EIRR Bonds Series 2005 are covered by municipal bond insurance policies issued by XL Capital Assurance Inc. (XLCA). The insurance agreements between KCP&L and XLCA provide for reimbursement by KCP&L for any amounts that XLCA pays under the municipal bond insurance policies. The insurance policies are in effect for the term of the bonds. The insurance agreements contain a covenant that the indebtedness to total capitalization ratio of KCP&L and its consolidated subsidiaries will not be greater than 0.68 to 1.00. At September 30, 2005, KCP&L was in compliance with this covenant. KCP&L is also restricted from issuing additional bonds under its General Mortgage Indenture if, after giving effect to such additional bonds, the proportion of secured debt to total indebtedness would be more than 75%, or more than 50% if the long term rating for such bonds by Standard & Poor’s or Moody’s Investors Service would be at or below A- or A3, respectively. The insurance agreement covering the unsecured

 

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EIRR Bond Series 2005 also requires KCP&L to provide XLCA with $50.0 million of general mortgage bonds as collateral for KCP&L’s obligations under the insurance agreement in the event KCP&L issues general mortgage bonds (other than refundings of outstanding general mortgage bonds) resulting in the aggregate amount of outstanding general mortgage bonds exceeding 10% of total capitalization. In the event of a default under the insurance agreements, XLCA may take any available legal or equitable action against KCP&L, including seeking specific performance of the covenants.

KCP&L exercised its early termination option in the Combustion Turbine Synthetic Lease and purchased the leased property during the second quarter of 2005.

Amortization of Debt Expense

Great Plains Energy’s and consolidated KCP&L’s amortization of debt expense is detailed in the following table.


Three Months Ended
September 30
Year to Date
September 30
2005 2004 2005 2004

(millions)
Consolidated KCP&L     $ 0 .6 $ 0 .5 $ 1 .7 $ 1 .5
Other Great Plains Energy    0 .1  0 .3  0 .5  0 .9

   Total Great Plains Energy   $ 0 .7 $ 0 .8 $ 2 .2 $ 2 .4


Short-Term Borrowings And Short-Term Bank Lines of Credit

Great Plains Energy has a $550 million revolving credit facility with a group of banks that expires in December 2009. A default by Great Plains Energy or any of its significant subsidiaries of other indebtedness totaling more than $25.0 million is a default under the facility. Under the terms of this agreement, Great Plains Energy is required to maintain a consolidated indebtedness to consolidated capitalization ratio, as defined in the agreement, not greater than 0.65 to 1.00 at all times. At September 30, 2005, the Company was in compliance with this covenant. At September 30, 2005, Great Plains Energy had no outstanding borrowings and had issued letters of credit totaling $22.2 million under the credit facility as credit support for Strategic Energy. At December 31, 2004, Great Plains Energy had $20.0 million of outstanding borrowings with an interest rate of 3.04% and had issued letters of credit totaling $8.0 million under the credit facility as credit support for Strategic Energy.

KCP&L has a $250 million revolving credit facility with a group of banks that expires in December 2009, to provide support for its issuance of commercial paper and other general purposes. A default by KCP&L on other indebtedness totaling more than $25.0 million is a default under the facility. Under the terms of the agreement, KCP&L is required to maintain a consolidated indebtedness to consolidated capitalization ratio, as defined in the agreement, not greater than 0.65 to 1.00 at all times. At September 30, 2005, KCP&L was in compliance with this covenant. At September 30, 2005, KCP&L had $13.6 million of commercial paper outstanding and no cash borrowings under the facility. The weighted-average interest rate of the commercial paper was 3.95%. At December 31, 2004, KCP&L had no cash borrowings or commercial paper outstanding.

Strategic Energy has a $125 million revolving credit facility with a group of banks that expires in June 2007. Great Plains Energy has guaranteed $25.0 million of this facility. A default by Strategic Energy of other indebtedness, as defined in the facility, totaling more than $7.5 million is a default under the facility. Under the terms of this agreement, Strategic Energy is required to maintain a minimum net worth of $62.5 million, a maximum funded indebtedness to EBITDA ratio of 2.25 to 1.00, a minimum fixed charge coverage ratio of at least 1.05 to 1.00 and a minimum debt service coverage ratio of at least 4.00 to 1.00, as those terms are defined in the agreement. In the event of a breach of one or

 

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more of these four covenants, so long as no other default has occurred, Great Plains Energy may cure the breach through a cash infusion, a guarantee increase or a combination of the two. At September 30, 2005, Strategic Energy was in compliance with these covenants. At September 30, 2005, $80.3 million in letters of credit had been issued and there were no cash borrowings under the agreement. At December 31, 2004, $69.2 million in letters of credit had been issued and there were no cash borrowings under the agreement.

9.

PENSION PLANS AND OTHER EMPLOYEE BENEFITS

Pension Plans and Other Employee Benefits

The Company maintains defined benefit pension plans for substantially all employees, including officers, of KCP&L, Services and Wolf Creek Nuclear Operating Corporation (WCNOC). Pension benefits under these plans reflect the employees’ compensation, years of service and age at retirement.

In addition to providing pension benefits, the Company provides certain postretirement health care and life insurance benefits for substantially all retired employees of KCP&L, Services and WCNOC. The cost of postretirement benefits charged to KCP&L are accrued during an employee's years of service and recovered through rates.

During the third quarter of 2005, KCP&L received approvals from the State of Missouri Public Service Commission (MPSC) and The State Corporation Commission of the State of Kansas (KCC) on its previously filed agreements regarding its comprehensive energy plan. The agreements establish KCP&L’s annual pension costs before amounts capitalized at $22 million through the creation of a regulatory asset or liability for future recovery from or refund to customers, as appropriate. In accordance with the agreements, KCP&L reduced pension expense retroactive to January 1, 2005, for the difference between pension expense under SFAS No. 87, “Employers’ Accounting for Pensions” and the amount allowed for ratemaking. This resulted in a $10.8 million net reduction in pension expense and the establishment of a corresponding regulatory asset and liability. See Note 13 for additional information regarding KCP&L’s regulatory matters.

The following tables provide the components of net periodic benefit costs prior to the effects of capitalization and sharing with joint-owners of power plants.


Pension Benefits Other Benefits
Three Months Ended September 30 2005 2004 2005 2004

Components of net periodic benefit cost (thousands)
   Service cost     $ 4,376   $ 4,174   $ 235   $ 237  
   Interest cost    7,508    7,535    711    773  
   Expected return on plan assets    (8,153 )  (7,926 )  (161 )  (167 )
   Amortization of prior service cost    1,066    1,072    57    60  
   Recognized net actuarial loss    4,674    1,980    125    184  
   Transition obligation    14    14    295    293  
   Net settlements    -    466    -    -  

        Net periodic benefit cost before      
          regulatory adjustment    9,485    7,315    1,262    1,380  

   Regulatory adjustment    (10,804 )  -    -    -  

        Net periodic benefit cost after      
          regulatory adjustment   $ (1,319 ) $ 7,315   $ 1,262   $ 1,380  

 

 

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Pension Benefits Other Benefits
Year to Date September 30 2005 2004 2005 2004

Components of net periodic benefit cost (thousands)
   Service cost     $ 13,023   $ 12,447   $ 705   $ 714  
   Interest cost    22,388    22,510    2,135    2,317  
   Expected return on plan assets    (24,345 )  (23,703 )  (481 )  (502 )
   Amortization of prior service cost    3,198    3,213    173    178  
   Recognized net actuarial loss    13,960    5,830    373    552  
   Transition obligation    42    40    883    881  
   Net settlements    -    1,332    -    -  

        Net periodic benefit cost before      
          regulatory adjustment   $ 28,266   $ 21,669   $ 3,788   $ 4,140  

   Regulatory adjustment    (10,804 )  -    -    -  

        Net periodic benefit cost after      
          regulatory adjustment   $ 17,462   $ 21,669   $ 3,788   $ 4,140  


Equity Compensation

The Company’s Long-Term Incentive Plan is an equity compensation plan approved by its shareholders. The Long-Term Incentive Plan permits the grant of restricted stock, stock options, limited stock appreciation rights and performance shares to officers and other employees of the Company and its subsidiaries. In accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, compensation expense and accrued dividends related to equity compensation are recognized over the stated vesting period. Forfeitures of equity compensation are recognized when incurred and previously recorded compensation expense related to the forfeited shares is reversed. The maximum number of shares of Great Plains Energy common stock that can be issued under the plan is 3.0 million. At September 30, 2005, 2.0 million shares remained available for future issuance.

Performance Shares

The payment of performance shares is contingent upon achievement of specific performance goals over a stated period of time as approved by the Compensation and Development Committee of the Company’s Board of Directors. The number of performance shares ultimately paid can vary from the number of shares initially granted depending on Company performance over stated vesting periods. Performance shares have a value equal to the fair market value of the shares on the grant date with accruing dividends. Year to date September 30, 2005, performance shares granted totaled 182,130; 17,024 of these shares were forfeited. Additionally, year to date September 30, 2005, 5,690 of the 19,313 granted performance shares outstanding at December 31, 2004, were forfeited. Performance shares granted and outstanding totaled 178,729 at September 30, 2005. For the three months ended and year to date September 30, 2005, the Company recognized compensation expense of $0.5 million and $1.2 million, respectively, for performance shares and reversed an insignificant amount of previously recognized compensation expense related to forfeited shares. There was no compensation expense for performance shares for the same periods of 2004.

Restricted Stock

Restricted stock cannot be sold or otherwise transferred by the recipient prior to vesting and has a value equal to the fair market value of the shares on the grant date. Restricted stock granted year to date September 30, 2005, totaled 76,375 shares; 6,214 of these shares were forfeited. Restricted stock shares issued in 2005 vest on a graded schedule over a stated period of time with accruing reinvested dividends. For the three months ended and year to date September 30, 2005, the Company recognized compensation expense of $0.4 million and $1.1 million, respectively, for restricted stock and reversed an insignificant amount of previously recognized compensation expense related to forfeited shares. For the same periods in 2004, the Company recognized compensation expense of $0.2 million and $0.4 million, respectively.

 

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Cash-Based Long-Term Incentives

In 2005, Strategic Energy initiated long-term incentives designed to reward officers and key members of management with Great Plains Energy restricted stock (issued under the Long-Term Incentive Plan) and a cash performance payment for achieving specific performance goals over stated periods of time, commencing January 1, 2005. The restricted stock compensation expense is discussed in the preceding paragraph. For the three months ended and year to date September 30, 2005, compensation expense of $0.2 million and $1.0 million, respectively, was recognized for the cash-based incentives.

10.

INCOME TAXES

Components of income taxes are detailed in the following tables.


Three Months Ended
September 30
Year to Date
September 30
Great Plains Energy 2005 2004 2005 2004

Current income taxes (thousands)
    Federal     $ 39,444   $ 23,426   $ 49,930   $ 50,688  
    State    653    937    103    7,193  

      Total    40,097    24,363    50,033    57,881  

Deferred income taxes  
    Federal    (2,336 )  13,675    108    12,923  
    State    (18,081 )  3,016    (15,844 )  2,667  

      Total    (20,417 )  16,691    (15,736 )  15,590  

Investment tax credit amortization    (972 )  (996 )  (2,917 )  (2,988 )

    Total income tax expense    18,708    40,058    31,380    70,483  
    Less: Income taxes on discontinued  
              operations (Note 7)  
                 Current taxes    1,408    (2,581 )  (1,016 )  (4,268 )
                 Deferred taxes    -    7,478    -    7,478  

Income taxes on continuing operations   $ 17,300   $ 35,161   $ 32,396   $ 67,273  



Three Months Ended
September 30
Year to Date
September 30
Consolidated KCP&L 2005 2004 2005 2004

Current income taxes (thousands)
    Federal     $ 45,073   $ 24,292   $ 63,210   $ 51,657  
    State    1,651    3,405    4,225    8,495  

      Total    46,724    27,697    67,435    60,152  

Deferred income taxes  
    Federal    (10,713 )  4,894    (13,763 )  5,721  
    State    (18,527 )  908    (18,812 )  1,061  

      Total    (29,240 )  5,802    (32,575 )  6,782  

Investment tax credit amortization    (972 )  (996 )  (2,917 )  (2,988 )

Income taxes on continuing operations   $ 16,512   $ 32,503   $ 31,943   $ 63,946  


 

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Effective Income Tax Rates

The effective income tax rates reflected in the financial statements and the reasons for their differences from the statutory federal rates are detailed in the following tables.


Three Months Ended
September 30
Year to Date
September 30
Great Plains Energy 2005 2004 2005 2004

Federal statutory income tax rate      35.0 %  35.0 %  35.0 %  35.0 %
Differences between book and tax  
    depreciation not normalized    1.1    0.3    1.3    0.6  
Amortization of investment tax credits    (0.9 )  (0.9 )  (1.8 )  (1.4 )
Federal income tax credits    (2.1 )  (2.8 )  (4.5 )  (4.5 )
State income taxes    2.3    2.2    1.8    3.0  
Income tax contingency, net    (7.1 )  -    (4.2 )  -  
Rate change on deferred taxes    (10.7 )  -    (7.1 )  -  
Other    (0.5 )  0.7    (1.4 )  -  

    Effective income tax rate    17.1 %  34.5 %  19.1 %  32.7 %



Three Months Ended
September 30
Year to Date
September 30
Consolidated KCP&L 2005 2004 2005 2004

Federal statutory income tax rate      35.0 %  35.0 %  35.0 %  35.0 %
Differences between book and tax  
    depreciation not normalized    1.4    0.4    1.5    0.7  
Amortization of investment tax credits    (1.1 )  (1.0 )  (2.1 )  (1.6 )
State income taxes    2.3    2.9    2.3    3.4  
Income tax contingency, net    (2.2 )  -    (0.8 )  -  
Rate change on deferred taxes    (13.7 )  -    (8.4 )  -  
Parent company tax benefits    (2.0 )  (4.7 )  (3.2 )  (2.5 )
Other    (0.4 )  1.1    (1.5 )  0.3  

    Effective income tax rate    19.3 %  33.7 %  22.8 %  35.3 %


For the three months ended and year to date September 30, 2005, Great Plains Energy’s income taxes were reduced by $16.4 million and $17.6 million, respectively, and consolidated KCP&L’s income taxes were reduced by $15.1 million and $15.9 million, respectively, due to the favorable impact of sustained audited positions on the companies’ composite tax rates. Great Plains Energy’s income tax expense was also reduced by $5.7 million due to events during the three months ended September 30, 2005, that strengthened the probability of sustaining tax deductions taken on previously filed tax returns.

SFAS No. 109, “Accounting for Income Taxes” requires the companies to adjust deferred tax balances to reflect tax rates that are anticipated to be in effect when the differences reverse. The largest component of the companies’ decreases in income tax expense related to the sustained audited positions resulted from adjusting KCP&L’s deferred tax balance to its lower composite tax rate. The impact of the composite tax rate reductions on KCP&L’s deferred tax balances resulted in an $11.7 million tax benefit for both the Company and consolidated KCP&L.

 

29

 

Deferred Income Taxes

The tax effects of major temporary differences resulting in deferred income tax assets and liabilities in the consolidated balance sheets are in the following table.


Great Plains Energy Consolidated KCP&L
September 30
2005
December 31
2004
September 30
2005
December 31
2004

Current deferred income taxes (thousands)
    Nuclear fuel outage     $ 2,077   $ 5,061   $ 2,077   $ 5,061  
    Derivative instruments    (31,686 )  (1,156 )  (2,332 )  90  
    Accrued vacation    4,756    4,523    4,596    3,829  
    Other    3,823    4,637    2,268    3,838  

      Net current deferred income tax asset  
         (liability)    (21,030 )  13,065    6,609    12,818  

Noncurrent deferred income taxes  
    Plant related    (552,093 )  (556,543 )  (552,093 )  (556,543 )
    Income taxes on future regulatory recoveries  (86,264 )  (81,000 )  (86,264 )  (81,000 )
    Derivative instruments    (10,799 )  (529 )  -    -  
    Pension and postretirement benefits    (5,783 )  (9,047 )  (6,197 )  (9,239 )
    Storm related costs    (2,287 )  (3,650 )  (2,287 )  (3,650 )
    Debt issuance costs    (2,894 )  (2,822 )  (2,894 )  (2,822 )
    Gas properties related    (3,035 )  (3,356 )  -    -  
    SO2 emission allowance sales    22,611    1,295    22,611    1,295  
    Tax credit carryforwards    15,766    23,661    -    -  
    Alternative minimum tax credit carryforward  4,093    4,093    -    -  
    State net operating loss carryforward    476    476    -    -  
    Other    4,173    (4,262 )  6,294    (2,096 )

      Net noncurrent deferred tax liability  
         before valuation allowance    (616,036 )  (631,684 )  (620,830 )  (654,055 )
      Valuation allowance    (476 )  (476 )  -    -  

      Net noncurrent deferred tax liability    (616,512 )  (632,160 )  (620,830 )  (654,055 )

         Accumulated deferred income tax  
            liability, net   $ (637,542 ) $ (619,095 ) $ (614,221 ) $ (641,237 )


The increase in Great Plains Energy’s current and noncurrent deferred income tax liabilities at September 30, 2005, compared to December 31, 2004, related to derivative instruments is due to increases in the fair value of Strategic Energy’s energy related derivative instruments as a result of increase in forward market prices for power. The increase in Great Plains Energy’s and consolidated KCP&L’s noncurrent deferred income tax asset at September 30, 2005, compared to December 31, 2004, related to SO2 emission allowance sales is due to regulatory treatment under the comprehensive energy plan approved by the MPSC and KCC. In the third quarter of 2005, KCP&L sold SO2 emission allowances under the approved plan for a total of $56.6 million.

11.

RELATED PARTY TRANSACTIONS AND RELATIONSHIPS

Pursuant to a service agreement approved by the SEC under the 35 Act, consolidated KCP&L receives various support and administrative services from Services. These services are billed to consolidated KCP&L at cost, based on payroll and other expenses, incurred by Services for the benefit of consolidated KCP&L. These costs totaled $7.0 million and $37.9 million for the three months ended and year to date September 30, 2005, respectively, and $15.3 million and $46.3 million for the same periods in 2004. These costs consisted primarily of employee compensation, benefits and fees associated with various professional services. At September 30, 2005, and December 31, 2004,

 

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consolidated KCP&L had a net intercompany payable to Services of $0.9 million and $9.2 million, respectively. On August 1, 2005, approximately 80% of Services’ employees were transferred to KCP&L to better align resources with the operating business.

12.

COMMITMENTS AND CONTINGENCIES

Nuclear Liability and Insurance

The owners of Wolf Creek, a nuclear generating station, (Owners) maintain nuclear insurance for Wolf Creek in four areas: liability, worker radiation, property and accidental outage. These policies contain certain industry standard exclusions, including, but not limited to, ordinary wear and tear, and war. Both the nuclear liability and property insurance programs subscribed to by members of the nuclear power generating industry include industry aggregate limits for non-certified acts of terrorism and related losses, as defined by the Terrorism Risk Insurance Act, including replacement power costs. An industry aggregate limit of $0.3 billion exists for liability claims, regardless of the number of non-certified acts affecting Wolf Creek or any other nuclear energy liability policy or the number of policies in place. An industry aggregate limit of $3.2 billion plus any reinsurance recoverable by Nuclear Electric Insurance Limited (NEIL), the Owners’ insurance provider, exists for property claims, including accidental outage power costs for acts of terrorism affecting Wolf Creek or any other nuclear energy facility property policy within twelve months from the date of the first act. These limits are the maximum amount to be paid to members who sustain losses or damages from these types of terrorist acts. For certified acts of terrorism, the individual policy limits apply. In addition, industry-wide retrospective assessment programs (discussed below) can apply once these insurance programs have been exhausted.

Liability Insurance

Pursuant to the Price-Anderson Act, which was reauthorized through December 31, 2025, by the Energy Policy Act of 2005, the Owners are required to insure against public liability claims resulting from nuclear incidents to the full limit of public liability, which is currently $10.8 billion. This limit of liability consists of the maximum available commercial insurance of $0.3 billion, and the remaining $10.5 billion is provided through an industry-wide retrospective assessment program mandated by law, known as the Secondary Financial Protection (SFP) program. Under the SFP program, the Owners can be assessed up to $100.6 million ($47.3 million, KCP&L’s 47% share) per incident at any commercial reactor in the country, payable at no more than $15 million ($7.1 million, KCP&L’s 47% share) per incident per year effective with the Energy Policy Act of 2005. This assessment is subject to an inflation adjustment based on the Consumer Price Index and applicable premium taxes. This assessment is in addition to worker radiation claims insurance. In addition, the U.S. Congress could impose additional revenue-raising measures to pay claims.

Property, Decontamination, Premature Decommissioning and Extra Expense Insurance

The Owners carry decontamination liability, premature decommissioning liability and property damage insurance for Wolf Creek totaling approximately $2.8 billion ($1.3 billion, KCP&L's 47% share). NEIL provides this insurance.

In the event of an accident, insurance proceeds must first be used for reactor stabilization and site decontamination in accordance with a plan mandated by the Nuclear Regulatory Commission (NRC). KCP&L’s share of any remaining proceeds can be used for further decontamination, property damage restoration and premature decommissioning costs. Premature decommissioning coverage applies only if an accident at Wolf Creek exceeds $500 million in property damage and decontamination expenses, and only after trust funds have been exhausted.

 

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Accidental Nuclear Outage Insurance

The Owners also carry additional insurance from NEIL to cover costs of replacement power and other extra expenses incurred in the event of a prolonged outage resulting from accidental property damage at Wolf Creek.

Under all NEIL policies, the Owners are subject to retrospective assessments if NEIL losses, for each policy year, exceed the accumulated funds available to the insurer under that policy. The estimated maximum amount of retrospective assessments under the current policies could total about $26.5 million ($12.4 million, KCP&L’s 47% share) per policy year.

In the event of a catastrophic loss at Wolf Creek, the insurance coverage may not be adequate to cover property damage and extra expenses incurred. Uninsured losses, to the extent not recovered through rates, would be assumed by KCP&L and the other owners and could have a material adverse effect on KCP&L’s financial condition, results of operations and cash flows.

Low-Level Waste

The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated that the various states, individually or through interstate compacts, develop alternative low-level radioactive waste disposal facilities. The states of Kansas, Nebraska, Arkansas, Louisiana and Oklahoma formed the Central Interstate Low-Level Radioactive Waste Compact (Compact) and selected a site in northern Nebraska to locate a disposal facility. WCNOC and the owners of the other five nuclear units in the Compact provided most of the pre-construction financing for this project.

On December 18, 1998, the application for a license to construct this project was denied. After the license denial, WCNOC, the Compact Commission (Commission) and others filed a lawsuit in federal court contending Nebraska officials acted in bad faith while handling the license application. In September 2002, the U.S. District Court Judge presiding over the lawsuit issued his decision in the case finding that the State of Nebraska acted in bad faith in processing the license application for a low-level radioactive waste disposal site in Nebraska and rendered a judgment on behalf of the Commission in the amount of $151.4 million against the state. After the U.S. Court of Appeals affirmed the decision, Nebraska and the Commission settled the case by Nebraska agreeing to pay the Commission a one-time amount of $145.8 million. At the request of the Commission, WCNOC along with other members of the Compact, filed with the Commission their claims for refund. On August 1, 2005, WCNOC received a return of its investment of $19.6 million ($9.2 million, KCP&L’s 47% share), including pre-judgment interest and attorney’s fees. The Commission continues to explore alternative long-term waste disposal capability and has retained a portion of the settlement, above the amounts returned, until it determines what role it will take in the development of alternative disposal capability. The maximum additional amount WCNOC might receive from the Commission-retained portion of the settlement is $2.5 million ($1.2 million, KCP&L’s 47% share). The Commission has stated that it plans to make a decision on the amount, if any, by January 2006. At September 30, 2005, KCP&L’s balance sheet no longer reflects an investment in the Compact. KCP&L's net investment in the Compact was $7.4 million at December 31, 2004.

Wolf Creek continues to dispose of its low-level radioactive waste at the reopened disposal facility at Barnwell, South Carolina. South Carolina intends to gradually decrease the amount of waste it allows from outside its compact until around 2008 when it intends to no longer accept waste from generators outside its compact. Wolf Creek remains able to dispose of some of its radioactive waste at a facility in Utah. Although management is unable to predict when a permanent disposal facility for Wolf Creek low-level radioactive waste might become available, this issue is not expected to affect continued operation of Wolf Creek.

 

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Environmental Matters

The Company is subject to regulation by federal, state and local authorities with regard to air and other environmental matters primarily through KCP&L’s operations. The generation, transmission and distribution of electricity produces and requires disposal of certain hazardous products that are subject to these laws and regulations. In addition to imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. Failure to comply with these laws and regulations could have a material adverse effect on consolidated KCP&L and Great Plains Energy.

KCP&L operates in an environmentally responsible manner and seeks to use current technology to avoid and treat contamination. KCP&L regularly conducts environmental audits designed to ensure compliance with governmental regulations and to detect contamination. At September 30, 2005 and December 31, 2004, KCP&L had $0.3 million accrued for environmental remediation expenses. The accrual covers water monitoring at one site. The amounts accrued were established on an undiscounted basis and KCP&L does not currently have an estimated time frame over which the accrued amounts may be paid out.

Environmental-related legislation is continuously introduced in Congress. Such legislation typically includes various compliance dates and compliance limits. Such legislation could have the potential for a significant financial impact on KCP&L, including the installation of new pollution control equipment to achieve compliance. However, KCP&L would seek recovery of capital costs and expenses for such compliance through rates. KCP&L will continue to monitor proposed legislation.

The following table contains estimates of expenditures to comply with environmental laws and regulations described below. The allocation between states is based on location of the facilities and has no bearing as to recovery in jurisdictional rates.


Clean Air Estimated Required Estimated
Environmental Expenditures Missouri Kansas Total Timetable

(millions)
CAIR $388 - $561 $        -           $388 - $561 2005 - 2015
Incremental BART 57 - 83 210 - 304 267 - 387 2005 - 2013
Incremental CAMR 52 - 83 4 - 6 56 - 89 2016 - 2018
Comprehensive Energy Plan retrofits (171) (101) (272) 2006 - 2008

Estimated required environmental expenditures
   above the Comprehensive Energy Plan retrofits $326 - $556 $113 - $209 $439 - $765

 

Expenditure estimates provided in the table above include, but are not limited to, the accelerated environmental upgrade expenditures contemplated in the MPSC and KCC agreements discussed in Note 13. KCP&L’s expectation is that any such expenditures will be recovered through rates.

Clean Air Interstate Rule

In the May 12, 2005, Federal Register, the Environmental Protection Agency (EPA) published the Clean Air Interstate Rule (CAIR), which requires reductions in SO2 and NOx emissions in 28 states including Missouri. This final regulation was effective July 11, 2005.

The reduction in both SO2 and NOx emissions will be accomplished through establishment of permanent statewide caps for NOx effective January 1, 2009, and SO2 effective January 1, 2010. More restrictive caps will be effective on January 1, 2015. KCP&L’s coal-fired plants located in Missouri are subject to CAIR, while its coal-fired plants in Kansas are not.

 

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KCP&L expects to meet the emissions reductions required by CAIR at its Missouri plants through a combination of pollution control capital projects and the purchase of emission allowances in the open market as needed. The final rule establishes a market-based cap-and-trade program. Missouri will establish an emission allowance allocation mechanism through a State Implementation Plan (SIP) that is expected to be issued by December 2006. Facilities will demonstrate compliance with CAIR by holding sufficient allowances for each ton of SO2 and NOx emitted in any given year with SO2 emission allowances transferable among all regulated facilities nationwide and NOx emission allowances transferable among all regulated facilities within the 28 CAIR states. KCP&L will also be allowed to utilize unused SO2 emission allowances that it has banked from previous years of the Acid Rain Program to meet the more stringent CAIR requirements. KCP&L is currently allocated approximately 50,000 SO2 emission allowances per year and emits approximately 50,000 tons of SO2 per year. KCP&L had accumulated over 190,000 allocated SO2 emission allowances. KCP&L is permitted to sell excess SO2 emission allowances up to $120.0 million or 176,000 allowances in accordance with KCP&L’s comprehensive energy plan as approved by the MPSC and KCC. During the third quarter of 2005, KCP&L sold 64,500 SO2 emission allowances for $56.6 million. See Note 13 for more information.

Analysis of the final rule indicates that selective catalytic reduction technology for NOx control and scrubbers for SO2 control will likely be required for some of KCP&L’s Missouri plants. The timing of the installation of such control equipment is currently being developed. KCP&L continues to refine the preliminary cost estimates detailed in the table above and explore alternatives. The ultimate cost of these regulations could be significantly different from the amounts estimated. As discussed below, certain of the control technology for SO2 and NOx will also aid in the control of mercury.

Best Available Retrofit Technology Rule

In the July 6, 2005, Federal Register, the EPA published regulations on best available retrofit technology (BART) that amended its July 1999 regional haze regulations regarding emission controls for industrial facilities emitting air pollutants that reduce visibility. The BART regulations apply to specific eligible facilities and were effective September 6, 2005. KCP&L coal-fired plants on the BART eligible list include La Cygne Nos. 1 and 2 in Kansas and Iatan No. 1 and Montrose No. 3 in Missouri. The CAIR suggests that states in CAIR that meet the CAIR requirement may also meet BART requirements for individual sources. Missouri is considering this proposal as part of the CAIR SIP, but no final decision has been reached. Kansas is not a CAIR state and therefore BART will likely impact La Cygne Nos. 1 and 2. The BART rule directs state air quality agencies to identify whether emissions from sources subject to BART are below limits set by the state, or whether retrofit measures are needed to reduce emissions. States must submit a BART implementation plan in 2007 with required emission controls. If emission controls to comply with BART are required at La Cygne Nos. 1 and 2, additional capital expenditures will be required. KCP&L continues to refine its preliminary cost estimates detailed in the table above and explore alternatives. The ultimate cost of these regulations could be significantly different from the amounts estimated.

Mercury Emissions

In July 2000, the National Research Council published its findings of a study under the Clean Air Act, which stated that power plants that burn fossil fuels, particularly coal, generate the greatest amount of mercury emissions from man-made sources. In the March 29, 2005, Federal Register, the EPA reversed its December 2000 finding that it was “appropriate and necessary” to regulate fossil fuel-fired power plants under section 112 of the Clean Air Act, concluding that the earlier finding lacked foundation and that recent information demonstrates that it is not appropriate or necessary to regulate fossil fuel-fired power plants under section 112. The EPA therefore removed coal- and oil-fired power plants from the section 112(c) list. Under section 112 of the Clean Air Act, the EPA would have been required to issue Maximum Available Control Technology standards for affected facilities and would have been prohibited from using cap and trade provisions for achieving compliance.

 

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In the May 12, 2005, Federal Register, the EPA published the Clean Air Mercury Rule (CAMR), which regulates mercury emissions from coal-fired power plants located in 48 states, including Kansas and Missouri, under the New Source Performance Standards of the Clean Air Act. This final regulation was effective July 18, 2005.

The rule establishes a market-based cap-and-trade program that will reduce nationwide utility emissions of mercury in two phases. The first phase cap is effective January 1, 2010, and establishes a permanent nationwide cap of 38 tons of mercury for coal-fired power plants. The first phase cap is anticipated to be met by KCP&L taking advantage of mercury reductions achieved through capital expenditures to comply with CAIR and BART. The second phase is effective January 1, 2018, and establishes a permanent nationwide cap of 15 tons of mercury for coal-fired power plants. When fully implemented, the rule will reduce utility emissions of mercury by nearly 70% from current emissions of 48 tons per year.

Facilities will demonstrate compliance with the standard by holding allowances for each ounce of mercury emitted in any given year and allowances will be readily transferable among all regulated facilities nationwide. Under the cap-and-trade program, KCP&L will be able to purchase mercury allowances or elect to install pollution control equipment to achieve compliance. While it is expected that mercury allowances will be available in sufficient quantities for purchase in the 2010-2018 timeframe, the significant reduction in the nationwide cap in 2018 may hamper KCP&L’s ability to obtain reasonably priced allowances beyond 2018. KCP&L expects capital expenditures will be required to install additional pollution control equipment to meet the second phase cap. During the ensuing years, KCP&L will closely monitor advances in technology for removal of mercury from Powder River Basin coal and expects to make decisions regarding second phase removal based on then available technology to meet the January 1, 2018 compliance date. The ultimate cost of this rule could be significantly different from the amounts estimated in the table above. KCP&L is a participant in the Department of Energy (DOE) project at the Sunflower Electric Holcomb plant to investigate control technology options for mercury removal from coal-fired plants burning sub-bituminous coal.

On October 21, 2005, the EPA agreed to reconsider certain aspects of the rule and to invite additional comments on certain aspects of the rule. However, in its reconsideration notice, which was published in the October 28, 2005, Federal Register, the EPA reiterated its position that the methodology used for the risk analysis is performed to justify the CAMR is sound and scientifically justified. Comments are due by December 19, 2005. The EPA’s actions to de–list mercury under section 112 of the Clean Air Act and issue CAMR remain controversial and subject to challenge.

Carbon Dioxide

At a December 1997 meeting in Kyoto, Japan, delegates from 167 nations, including the U.S., agreed to a treaty (Kyoto Protocol) that would require a 7% reduction in U.S. CO2 emissions below 1990 levels, a nearly 30% cut from current levels. On March 28, 2001, the Bush administration announced it will not negotiate implementation of the Kyoto Protocol and it will not send the Kyoto Protocol to the U.S. Senate for ratification.

On February 14, 2002, President Bush unveiled his Clear Skies Initiative, which included a climate change policy. The climate change policy is a voluntary program that relies heavily on incentives to encourage industry to voluntarily limit emissions. The strategy includes tax credits, energy conservation programs, funding for research into new technologies, and a plan to encourage companies to track and report their emissions so that companies could gain credits for use in any future emissions trading program. The greenhouse strategy links growth in emissions of greenhouse gases to economic output. The administration's strategy is intended to reduce the greenhouse gas intensity of the U.S. economy by 18% over the next 10 years. Greenhouse gas intensity measures the ratio of greenhouse gas emissions to economic output as measured by Gross Domestic Product (GDP). Under

 

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this plan, as the economy grows, greenhouse gases also would continue to grow, although at a slower rate than they would have without these policies in place. When viewed per unit of economic output, the rate of emissions would drop. The plan projects that the U.S. would lower its rate of greenhouse gas emissions from an estimated 183 metric tons per $1 million of GDP in 2002 to 151 metric tons per $1 million of GDP by 2012.

On December 19, 2002, KCP&L joined the Power Partners through Edison Electric Institute (EEI). Power Partners is a voluntary program with the DOE under which utilities commit to undertake measures to reduce, avoid or sequester CO2 emissions. On January 17, 2003, the EEI sent a letter to numerous Administration officials, in which the EEI committed to work with the government over the next decade to reduce the power sector’s CO2 emissions per kWh generated (carbon intensity) by the equivalent of 3% to 5% of the current level. On December 13, 2004, Power Partners entered into a cooperative umbrella memorandum of understanding (MOU) with the DOE. This MOU contains supply and demand-side actions as well as offset projects that will be undertaken to reduce the power sector’s CO2 emissions per kWh generated over the next decade consistent with the EEI commitment of 3% to 5%.

Air Particulate Matter and Ozone

In July 1997, the EPA revised ozone and particulate matter air quality standards creating a new eight-hour ozone standard and establishing a new standard for particulate matter less than 2.5 microns (PM-2.5) in diameter. On December 17, 2004, the EPA designated the Kansas City area as attainment with respect to the PM-2.5 NAAQS. In the May 3, 2005, Federal Register, the EPA published a final rule that designated Jackson, Platte, Clay and Cass counties in Missouri and Johnson, Linn, Miami and Wyandotte counties in Kansas as attainment with respect to the eight-hour ozone National Ambient Air Quality Standards (NAAQS) effective June 2, 2005.

Water Use Regulations

On February 16, 2004, the EPA finalized the Phase II rule implementing Section 316(b) of the Clean Water Act establishing standards for cooling water intake structures at existing facilities effective September 7, 2004. This final regulation is applicable to certain existing power producing facilities that employ cooling water intake structures that withdraw 50 million gallons or more per day and use 25% or more of that water for cooling purposes. KCP&L is required to complete a Section 316(b) comprehensive demonstration study on each of its generating facilities’ intake structures by the end of 2007, the studies are expected to cost a total of $1.2 million to $2.0 million. Depending on the outcome of the comprehensive demonstration studies, facilities may be required to implement technological, operational or restoration measures to achieve compliance. Compliance with the final rule is expected to be achieved between 2011 and 2014. Until the Section 316(b) comprehensive demonstration studies are completed, the impact of this final rule cannot be quantified.

Energy Policy Act of 2005

On August 8, 2005, President Bush signed into law the Energy Policy Act of 2005. The Energy Policy Act of 2005 repeals, effective February 8, 2006, the 35 Act, which places certain limitations and approval requirements on registered public utility holding company systems with respect to matters such as acquisitions, business combinations and activities, securities and affiliate transactions, and provides certain utility customer protection authority to the Federal Energy Regulatory Commission (FERC) and the states. Among other things, the Energy Policy Act of 2005 also revises the Public Utility Regulatory Policy Act (PURPA) to eliminate mandatory power purchase obligations; requires FERC to provide transmission investment incentives; accelerates depreciation on transmission lines and pollution control equipment; provides for the extension of production tax credits for wind energy generation; requires large municipals and cooperatives to provide open transmission access; requires a study of competition in wholesale and retail electricity markets; and authorizes the creation of an Electric Reliability Organization to establish and enforce mandatory reliability standards subject to

 

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FERC oversight. Management has not yet fully determined its impact on Great Plains Energy and consolidated KCP&L.

Pennsylvania Gross Receipts Tax Contingency

In January 2005, Strategic Energy was advised by the Pennsylvania Department of Revenue of a potential tax deficiency relating to state gross receipts tax on Strategic Energy’s Provider of Last Resort (POLR) revenues from 2000 to 2002. During the first quarter of 2005, Strategic Energy reached a final settlement with the State of Pennsylvania for all three years with no deficiency related to the POLR revenues.

Income Tax Contingencies

Management evaluates and records contingent tax liabilities based on the probability of ultimately sustaining the tax deductions or income positions. Management assesses the probabilities of successfully defending the tax deductions or income positions based upon statutory, judicial or administrative authority.

At September 30, 2005, and December 31, 2004, the Company had $5.7 million and $13.4 million, respectively, of liabilities for contingencies related to tax deductions or income positions taken on the Company’s tax returns. Consolidated KCP&L had liabilities of $1.7 million and $3.7 million at September 30, 2005, and December 31, 2004, respectively. Management believes the tax deductions or income positions are properly treated on such tax returns, but has recorded reserves based upon its assessment of the probabilities that certain deductions or income positions may not be sustained when the returns are audited. The tax returns containing these tax deductions or income positions are currently under audit or will likely be audited. The timing of the resolution of these audits is uncertain. If the positions are ultimately sustained, the Company will reverse these tax provisions to income. If the positions are not ultimately sustained, the Company may be required to make cash payments plus interest and/or utilize the Company’s federal and state credit carryforwards. In the third quarter of 2005, the Company reversed $8.1 million of previously recorded contingent tax liabilities primarily due to sustained audited tax positions and the occurrence of events that strengthen the probability of successfully defending deductions taken on its tax returns. During the third quarter of 2005, consolidated KCP&L reversed $1.6 million of contingent tax liabilities.

13.

REGULATORY MATTERS

Executing On Strategic Intent

KCP&L has continued to make progress in implementing its comprehensive energy plan during 2005. In the third quarter of 2005, KCP&L received approvals from the MPSC and KCC on its previously filed agreements regarding its comprehensive energy plan. The agreements were reached between KCP&L, the Commission staffs and certain key parties in the respective jurisdictions. The Sierra Club and Concerned Citizens of Platte County have appealed the MPSC order, and the Sierra Club has appealed the KCC order. These appeals are expected to be decided in 2006. Although subject to these appeals, the MPSC and KCC orders remain in effect pending the applicable court’s decision.

 

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The following are brief descriptions of the major provisions of the approved agreements.

 

KCP&L will make energy infrastructure investments as detailed in the approved agreements and summarized in the table below.


Estimated
Capital
Project Details Expenditures

(millions)
Iatan No. 2     Building and owning up to 500 MW of an 800-900 MW coal        
         fired plant with an estimated completion date of June 2010     $ 733  
Wind Generation (a)   Installation of 100 MW of wind generation in 2006    131  
Environmental   Retrofit of selected existing coal plants    272  
Asset Management   Enhanced system performance and reliability    42  
Customer Programs   Various demand management, distributed generation and  
       efficiency programs    53  

Total (b) (c)       $ 1,231  

(a) The agreements call for the possible addition of another 100 MW of wind generation in 2008 if
     supported by a detailed evaluation.
(b) Includes approximately $17 million of investments related to a substation and transmission lines.
     Wind generation includes approximately $2 million of transmission and distribution investment.
     The agreement submitted to the MPSC included approximately $43 million for a potential railroad
     bridge. This amount was removed in the third quarter and is excluded from the total estimated
     capital expenditures.
(c) These amounts are estimates. Because of the magnitude of these investments and the length of time
     to implement the comprehensive energy plan, actual expenditures may differ from these estimates.

 

KCP&L’s current rates will remain in place until 2007, unless significant events impact KCP&L. The first rate case will be filed in 2006, with any rate adjustments going into effect in 2007. The last rate case defined in the agreements is expected to be filed in 2009, with rates effective near the time Iatan No. 2 is placed in service. Two additional rate cases could be filed in 2007 and 2008 at KCP&L’s discretion.

 

The Kansas agreement allows KCP&L to recover, on a dollar-for-dollar basis with no profit to the company, actual fuel and purchased power expense incurred through an energy cost adjustment that would take effect for Kansas in 2007. Similarly, an interim energy charge, based on forecasted costs and subject to customer refund, would take effect for Missouri customers in 2007.

 

KCP&L may sell SO2 emission allowances during the term of the agreements. The sales proceeds will be recorded as a regulatory liability for ratemaking purposes and will be amortized over time. KCP&L is permitted to sell SO2 emission allowances up to $120.0 million or 176,000 allowances. In the third quarter of 2005, KCP&L sold $56.6 million of SO2 emission allowances. See Regulatory Assets and Liabilities below.

 

KCP&L’s annual pension costs before amounts capitalized, for regulatory purposes, are established at $22 million until 2007 through the creation of a regulatory asset or liability, as appropriate. In the third quarter of 2005, KCP&L reduced pension expense retroactive to January 1, 2005, consistent with the approved agreements. See Note 9 for additional information.

 

The depreciable life of Wolf Creek for Missouri regulatory purposes has been increased from 40 to 60 years. The Missouri agreement calls for $10.3 million, on an annual jurisdictional basis, of additional amortization expense to be recorded to offset the reduction in depreciation expense due to the change in depreciable life. The 60-year Missouri depreciable life will match the

 

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current Kansas regulatory depreciable life. In the third quarter of 2005, KCP&L began recording depreciation and amortization expense in accordance with the approved agreement.

 

The agreements are intended to provide KCP&L with regulatory mechanisms to be able to recover the prudent costs of its investments as they are placed in service and an ability to maintain targeted credit ratios over the five-year term of the agreements.

The agreements provide regulatory clarity on certain items. However, normal regulatory risk will continue to exist as the commissions establish rates in the rate cases, including, but not limited to, the actual amount of costs to be recovered through rates, the return on equity, the capital structure utilized and expenses to be recovered. KCP&L projects that, if the cost of the plan is included in rate base, the rate increases to support the five year plan and increasing operating expenses would average approximately 3-4% annually, over the same time period.

The comprehensive energy plan is currently expected to be funded through a mix of sources as detailed in the following table.


Funding Source

Anticipated contribution from rate increases   25 % - 35 %
Capital contributions to KCP&L from Great Plains Energy's
   proceeds of new equity financing   20 % -   30 %
Debt financing 20 % - 30 %
Capital contributions to KCP&L from Great Plains Energy's
   proceeds of 2004 FELINE PRIDES equity in 2007 13 %
Internal funds and other 5 % - 10 %


Actual funding sources may differ from this estimated mix and may be affected by various factors, including, but not limited to, the results of the rate proceedings and market conditions.

Regulatory Assets and Liabilities

KCP&L is subject to the provisions of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.” Accordingly, KCP&L has recorded assets and liabilities on its balance sheet resulting from the effects of the ratemaking process, which would not be recorded under GAAP for non-regulated entities. Regulatory assets represent costs incurred that have been deferred because future recovery in customer rates is probable. Regulatory liabilities generally represent probable future reductions in revenue or refunds to customers. KCP&L’s continued ability to meet the criteria for application of SFAS No. 71 may be affected in the future by competitive forces and restructuring in the electric industry. In the event that SFAS No. 71 no longer applied to all, or a separable portion, of KCP&L’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 of utility plant assets if the cost of the assets could not be expected to be recovered in customer rates. Whether an asset has been impaired is determined pursuant to the requirements of SFAS No. 144.

 

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Amortization
ending period
September 30
2005
December 31
2004

Regulatory Assets (millions)
    Taxes recoverable through future rates         $ 86.3   $ 81.0  
    Decommission and decontaminate federal uranium  
      enrichment facilities    2007    1.5    2.0  
    Loss on reacquired debt    2037    7.3    7.7  
    January 2002 incremental ice storm costs (Missouri)    2007    6.1    9.5  
    Change in depreciable life of Wolf Creek (Kansas)    2045    21.2    15.5  
    Change in depreciable life of Wolf Creek (Missouri)    2045    1.7    -  
    Cost of removal         10.6    13.9  
    Asset retirement obligations         9.8    11.4  
    Pension costs cap         11.6    -  
    Other    Various    4.1    3.3  

      Total Regulatory Assets        $ 160.2   $ 144.3  

Regulatory Liabilities  
    Emission allowances        $ 60.8   $ 4.1  
    Pension accounting method difference         0.8    -  
    Additional Wolf Creek amortization (Missouri)         1.7    -  

      Total Regulatory Liabilities        $ 63.3   $ 4.1  


Except as noted below, regulatory assets for which costs have been incurred have been included (or are expected to be included, for costs incurred subsequent to the most recent rate case) in KCP&L’s rate base, thereby providing a return on invested costs when included in rate base. Certain regulatory assets do not result from cash expenditures and therefore do not represent investments included in rate base or have offsetting liabilities that reduce rate base. The pension accounting method difference (which may be either a regulatory asset or liability) and certain insignificant items in Regulatory Assets – Other are not included in rate base.

Southwest Power Pool Regional Transmission Organization

Under FERC Order 2000, KCP&L, as an investor-owned utility, is strongly encouraged to join a FERC approved Regional Transmission Organization (RTO). RTOs combine transmission operations of utility businesses into regional organizations that schedule transmission services and monitor the energy market to ensure regional transmission reliability and non-discriminatory access. The Southwest Power Pool (SPP), of which KCP&L is a member, obtained approval from FERC as an RTO in a January 24, 2005, order. KCP&L intends on participating in the SPP RTO and during the third quarter of 2005, KCP&L filed applications with the MPSC and KCC seeking authorization to participate in the SPP RTO.

During 2005, a cost/benefit analysis was completed under the direction of the SPP Regional State Committee (composed of state commissioners from the states where the SPP RTO operates). The analysis indicates that implementation of an energy imbalance market within the SPP region would provide net benefits of approximately $373 million over a 10-year period to the transmission-owning members of the SPP RTO; however, there was no significant documented impact for KCP&L over the 10-year period. During June 2005, SPP filed its plans for the energy imbalance market with FERC. These plans include a May 1, 2006, start date for the energy imbalance market. During the third quarter of 2005, FERC issued an order rejecting this filing. In its order, FERC stated that “significant modification or elaboration” is needed before FERC can make its determination. SPP plans to make a revised filing in early 2006.

 

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FERC Market Power Inquiry

KCP&L is authorized by FERC to sell wholesale power at market-based rates. As a condition of that authority, KCP&L must submit to FERC an updated market power analysis every three years. KCP&L submitted its most recent update in 2004. In December 2004, FERC issued an order finding that KCP&L potentially has generation market power in its own control area and the control area of the Kansas City, Kansas Board of Public Utilities (KCBPU). With respect to those control areas, FERC instructed KCP&L (i) to submit a delivered price test (DPT) analysis demonstrating that KCP&L does not possess generation market power; (ii) propose generation market power mitigation measures; or (iii) accept FERC’s default cost-based rates for wholesale power sales or propose alternate cost-based rates (with cost support for such rates).

In February 2005, KCP&L submitted a DPT analysis demonstrating that, if KCP&L’s native load obligations are considered, KCP&L does not possess market power in its control area or the control area of KCBPU. On October 20, 2005, the FERC ruled that KCP&L had successfully rebutted the presumption of market power and terminated the proceeding.

Seams Elimination Charge Adjustment

Seams Elimination Charge Adjustment (SECA) is a transitional pricing mechanism authorized by FERC and intended to compensate transmission owners for the revenue lost as a result of FERC’s elimination of regional through and out rates between PJM Interconnection (PJM) and the Midwest Independent Transmission System Operator, Inc. (MISO) during a 16-month transition period from December 1, 2004 through March 31, 2006. Each relevant PJM and MISO zone and the load-serving entities within that zone are allocated a portion of the SECA based on transmission services provided to that zone during 2002 and 2003. There are several unresolved matters and legal challenges to the SECA that are pending before FERC on rehearing. Management is unable to predict the outcome of legal and regulatory challenges to the SECA mechanism.

In the second quarter of 2005, PJM and MISO began invoicing Strategic Energy for these charges, based on allocations in compliance filings made by transmission owners and accepted by FERC, subject to refund and adjustment. Strategic Energy recorded purchased power expenses totaling $3.3 million and $10.5 million for the three months ended and year to date for these charges covering billings for the transition period through September 30, 2005. The compliance filings allocate approximately $1 million of charges per month, through March 2006. In the third quarter of 2005, Strategic Energy began to bill a portion of its SECA costs to its retail customers.

Management believes that a number of issues exist related to the SECA allocations. FERC established a schedule for resolution of certain SECA issues, including the issue of shifting SECA allocations to the shipper. The shipper in Strategic Energy’s situation is the wholesale supplier, which, through a contract with Strategic Energy, delivered power to various zones in which Strategic Energy was supplying retail customers. In most instances, the shipper was the purchaser of through and out transmission service and therefore included the cost of the through and out rate in its energy price. Management believes, but cannot assure, that Strategic Energy should not ultimately be responsible for the current level of SECA charges.

14.

LEGAL PROCEEDINGS

Framatome

On August 25, 2005, WCNOC filed a lawsuit against Framatome ANP, Inc., and Framatome ANP Richland, Inc. (Framatome) in the District Court of Coffey County, Kansas. The suit alleges various claims against Framatome related to the design, licensing and installation of a digital control system. The suit seeks recovery of approximately $16 million in damages from Framatome.

 

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Strategic Energy

On March 23, 2004, Robert C. Haberstroh filed suit for breach of employment contract and violation of the Pennsylvania Wage Payment Collection Act against Strategic Energy Partners, Ltd. (Partners), SE Holdings, L.L.C. (SE Holdings) and Strategic Energy in the Court of Common Pleas of Allegheny County, Pennsylvania. Mr. Haberstroh claims that he acquired an equity interest in Partners under the terms of his employment agreement and that through a series of transactions, Mr. Haberstroh’s equity interest became an equity interest in SE Holdings. In 2001, Mr. Haberstroh’s employment was terminated and SE Holdings redeemed his equity interest. Mr. Haberstroh is seeking the loss of his non-equity compensation (including salary, bonus and benefits) and equity compensation and associated distributions (his equity interest in SE Holdings).

Strategic Energy has filed a counterclaim against Mr. Haberstroh for breach of contract. SE Holdings, and its direct and indirect owners, have agreed to indemnify Strategic Energy and IEC against any judgment or settlement of Mr. Haberstroh’s claim that relates to his alleged equity interest in SE Holdings, up to approximately $8 million plus any dividends or interest received in relation to his alleged interest.

KLT Gas

On July 28, 2004, KLT Gas received a Notice and Demand for Arbitration Pursuant to Joint Operating Agreement from SWEPI LP doing business as Shell Western E&P and formerly known as Shell Western E&P Inc. (Shell). Prior to the October 2004 sale (with a July 1, 2004, effective date) of KLT Gas’ working interests in certain oil and gas leases in Duval County, Texas to Shell, KLT Gas had a 50% working interest in the leases. Shell held the other 50% working interest and was the operator of the properties under a joint operating agreement, as amended. Through arbitration, Shell sought recovery from KLT Gas of 50% of the fees, costs and settlements incurred in three lawsuits and Texas Railroad Commission proceedings, which Shell asserted totaled approximately $5.9 million for KLT Gas’ share, including interest. During the third quarter of 2005, the parties reached a confidential agreement to settle the matter for an amount less than was reserved in the second quarter of 2005 resulting in an $1.8 million after-tax gain reported as discontinued operations during the third quarter related to the reserve reversal.

Hawthorn No. 5 Subrogation Litigation

KCP&L filed suit on April 3, 2001, in Jackson County, Missouri Circuit Court against multiple defendants who are alleged to have responsibility for the 1999 Hawthorn No. 5 boiler explosion. KCP&L and National Union Fire Insurance Company of Pittsburgh, Pennsylvania (National Union) have entered into a subrogation allocation agreement under which recoveries in this suit are generally allocated 55% to National Union and 45% to KCP&L. Certain defendants have been dismissed from the suit and various defendants have settled with KCP&L. Trial of this case with the one remaining defendant resulted in a March 2004 jury verdict finding KCP&L’s damages as a result of the explosion were $452 million. After deduction of amounts received from pre-trial settlements with other defendants and an amount for KCP&L’s comparative fault (as determined by the jury), the verdict would have resulted in an award against the defendant of approximately $97.6 million (of which KCP&L would have received $33 million pursuant to the subrogation allocation agreement after payment of attorney’s fees). In response to post-trial pleadings filed by the defendant, in May 2004 the trial judge reduced the award against the defendant to $0.2 million. Both KCP&L and the defendant have appealed this case to the Court of Appeals for the Western District of Missouri. Oral arguments are expected in the first quarter of 2006.

KLT Telecom

On December 31, 2001, a subsidiary of KLT Telecom Inc. (KLT Telecom), DTI Holdings, Inc. (Holdings) and its subsidiaries Digital Teleport Inc. (Digital Teleport) and Digital Teleport of Virginia, Inc., filed separate voluntary petitions in the Bankruptcy Court for the Eastern District of Missouri for reorganization under Chapter 11 of the U.S. Bankruptcy Code. DTI Holdings and its two subsidiaries

 

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are collectively called “DTI.” In 2003, the Bankruptcy Court confirmed the plan of reorganization for these three companies.

KLT Telecom originally acquired a 47% interest in DTI in 1997. On February 8, 2001, KLT Telecom acquired control of DTI by purchasing shares from another Holdings shareholder, Richard D. Weinstein (Weinstein), increasing its ownership to 83.6%. In connection with this purchase, KLT Telecom granted Weinstein a put option. The put option provided for the sale by Weinstein of his remaining shares in Holdings to KLT Telecom during a period beginning September 1, 2003, and ending August 31, 2005. The put option provides for an aggregate exercise price for these remaining shares equal to their fair market value with an aggregate floor amount of $15 million. The floor amount of the put option was fully reserved during 2001. On September 2, 2003, Weinstein delivered to KLT Telecom notice of the exercise of his put option. KLT Telecom declined to pay Weinstein any amount under the put option because, among other things, the stock of Holdings had been cancelled and extinguished pursuant to the joint Chapter 11 plan confirmed by the Bankruptcy Court. Weinstein has sued KLT Telecom for allegedly breaching the put option and seeks damages of at least $15 million plus statutory interest. In April 2005, summary judgment in the Weinstein litigation was granted in favor of KLT Telecom, and Weinstein has appealed this judgment to the Missouri Court of Appeals for the Eastern District. The $15 million reserve has not been reversed pending the outcome of the appeal process, which management expects will conclude in the first quarter of 2006.

15.

ASSET RETIREMENT OBLIGATIONS

In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations.” FIN No. 47 clarifies that the term conditional asset retirement obligation, as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligation,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Great Plains Energy and consolidated KCP&L are required to adopt the provisions of FIN No. 47 by December 31, 2005, although earlier adoption is permitted. Management is currently evaluating the impact of FIN No. 47, and has not yet determined the impact on Great Plains Energy and consolidated KCP&L’s consolidated financial statements. KCP&L is a regulated utility subject to the provisions of SFAS No. 71 and management believes it is probable that any differences between expenses under SFAS No. 143, including FIN No. 47, and expenses recovered currently in rates will be recoverable in future rates.

16.

SEGMENT AND RELATED INFORMATION

Great Plains Energy

Great Plains Energy has two reportable segments based on its method of internal reporting, which generally segregates the reportable segments based on products and services, management responsibility and regulation. The two reportable business segments are KCP&L, an integrated, regulated electric utility and Strategic Energy, a competitive electricity supplier. Other includes the operations of HSS, Services, all KLT Inc. operations other than Strategic Energy, unallocated corporate charges, consolidating entries and intercompany eliminations. Intercompany eliminations include insignificant amounts of intercompany financing related activities. The summary of significant accounting policies applies to all of the reportable segments. For segment reporting, each segment’s income taxes include the effects of allocating holding company tax benefits. Segment performance is evaluated based on net income.

 

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The following tables reflect summarized financial information concerning Great Plains Energy’s reportable segments.


Three Months Ended
September 30, 2005
KCP&L Strategic
Energy
Other Great Plains
Energy

(millions)
Operating revenues     $ 353.0   $ 429.9   $ -   $ 782.9  
Depreciation and amortization    (36.7 )  (1.6 )  (0.1 )  (38.4 )
Interest charges    (15.0 )  (0.7 )  (2.2 )  (17.9 )
Income taxes    (16.4 )  (9.4 )  8.5    (17.3 )
Loss from equity investments    -    -    (0.1 )  (0.1 )
Discontinued operations    -    -    1.8    1.8  
Net income    69.1    18.1    3.7    90.9  



Three Months Ended
September 30, 2004
KCP&L Strategic
Energy
Other Great Plains
Energy

(millions)
Operating revenues     $ 323.3   $ 391.1   $ 0.4   $ 714.8  
Depreciation and amortization    (36.3 )  (1.4 )  (0.3 )  (38.0 )
Interest charges    (15.2 )  (0.3 )  (2.5 )  (18.0 )
Income taxes    (32.6 )  (3.9 )  1.3    (35.2 )
Loss from equity investments    -    -    (0.5 )  (0.5 )
Discontinued operations    -    -    8.0    8.0  
Net income (loss)    64.2    13.4    (1.7 )  75.9  



Year to Date
September 30, 2005