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GXP > SEC Filings for GXP > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for GREAT PLAINS ENERGY INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GREAT PLAINS ENERGY INCORPORATED
EXECUTIVE SUMMARY
Description of Business
Great Plains Energy is a public utility holding company and does not own or operate any significant assets other than the stock of its subsidiaries. Great Plains Energy's direct subsidiaries with operations or active subsidiaries are KCP&L and GMO. Great Plains Energy's sole reportable business segment is electric utility for the periods presented.
Electric utility consists of KCP&L, a regulated utility, GMO's regulated utility operations, which include its Missouri Public Service and L&P divisions, and GMO Receivables Company. Electric utility has over 6,600 MWs of generating capacity and engages in the generation, transmission, distribution and sale of electricity to approximately 826,800 customers in the states of Missouri and Kansas. Electric utility's retail electricity rates are below the national average of investor-owned utilities.
Earnings Overview
Great Plains Energy's earnings available for common shareholders for the three months ended September 30, 2012, increased to $145.8 million or $0.95 per share from $126.1 million or $0.91 per share for the same period in 2011 driven by:
favorable weather, with a 6% increase in cooling degree days;

a $12.7 million decrease in interest expense primarily due to a $6.9 million decrease related to GMO's $500.0 million 11.875% Senior Notes, which were repaid at maturity in July 2012, a $3.5 million decrease due to lower interest rate debt, and a $2.6 million decrease related to the release of uncertain tax positions; and

the three months ended September 30, 2011, included the impact from flooding along the Missouri River, which decreased gross margin by an estimated $16 million due to coal conservation and increased other operating expenses $3.4 million.

These increases were partially offset by a decrease in weather-normalized retail demand. In addition, a higher number of shares outstanding due to the issuance of 17.1 million shares in connection with the June 2012 settlement of the purchase contracts underlying the Equity Units diluted earnings per share by $0.09.
Great Plains Energy's earnings available for common shareholders year to date September 30, 2012, increased to $194.0 million or $1.34 per share from $171.1 million or $1.24 per share for the same period in 2011 driven by:
new retail rates in Missouri effective May 4, 2011, for KCP&L and June 25, 2011, for GMO;

favorable weather, with a 16% increase in cooling degree days partially offset by the impact of unfavorable weather during the first quarter of 2012; and

year to date September 30, 2011, included:

             the impact from flooding along the Missouri River, which decreased
              gross margin by an estimated $16 million due to coal conservation
              and increased other operating expenses $3.4 million;


             an estimated $11 million decrease in gross margin from the impact
              of an extended refueling outage at Wolf Creek;

$12.7 million of expense relating to a voluntary separation program; and


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             a $2.3 million loss relating to the impact of disallowed
              construction costs for the Iatan No. 1 environmental project and
              Iatan No. 2 and $3.9 million of expenses related to other
              accounting effects of the KCP&L and GMO 2011 MPSC rate orders.

These increases were partially offset by:
a decrease in weather-normalized retail demand;

an estimated $20 million impact at Wolf Creek due to an unplanned outage in the first quarter of 2012, increased amortization from the 2011 extended refueling outage and increased other operating expenses; and

a $14.8 million increase in interest expense primarily due to the deferral to a regulatory asset of $22.1 million of Iatan Nos. 1, 2 and common facilities construction accounting carrying costs during 2011, partially offset by a $5.3 million decrease related to GMO's $500.0 million 11.875% Senior Notes, which were repaid at maturity in July 2012, and a $2.6 million decrease related to the release of uncertain tax positions.

In addition, a higher number of shares outstanding due to the issuance of 17.1 million shares in connection with the June 2012 settlement of the purchase contracts underlying the Equity Units diluted earnings per share by $0.06. Wolf Creek Regulation and Operating Costs On January 13, 2012, Wolf Creek experienced a loss of off-site power resulting in an unplanned shutdown of the unit. Wolf Creek returned to service on March 27, 2012. The NRC conducted an investigation and increased its oversight of Wolf Creek following the loss of off-site power. Operating costs at Wolf Creek increased year to date September 30, 2012, due to the unplanned outage. Great Plains Energy is planning to expend more resources at Wolf Creek that will result in future increases in operating costs due to increased NRC oversight and efforts to comply with new industry-wide regulations adopted by the NRC earlier this year after a review of U.S. nuclear power plant safety prompted by Japan's Fukushima Daiichi nuclear power plant event in 2011.
As a result of the 2012 unplanned outage and the extended refueling outage that occurred in 2011, Wolf Creek's next refueling outage was rescheduled from the third quarter of 2012 to the first quarter of 2013. KCP&L Kansas Rate Case Proceedings
On April 20, 2012, KCP&L filed an application with KCC to request an increase to its retail revenues of $63.6 million, with a return on equity of 10.4% and a rate-making equity ratio of 51.8%. In September 2012, KCP&L revised its requested return on equity to 10.3%. The request includes recovery of costs related to significant upgrades at its generating facilities, including environmental upgrades at the La Cygne Station; investments in additional wind generation; and increased investments in electrical infrastructure. KCP&L is also requesting that KCC approve a change to depreciation rates to reflect the increase in plant in service as well as a change to the current method of allocating costs between its Kansas and Missouri jurisdictions to better reflect KCP&L's summer peaking business. Testimony from KCC staff and other parties regarding the case was filed on August 22, 2012. The KCC staff's testimony recommended a return on equity of 9.2% and a revenue increase of approximately $27.5 million.
In October 2012, KCP&L adjusted its requested increase to retail revenues to $56.4 million as the net result of updates to the case, which includes a non-unanimous stipulation and agreement filed in September 2012 by KCP&L and KCC staff to settle a number of issues in the case. The stipulation and agreement is pending KCC approval. The outcome of the KCP&L Kansas rate case will likely be different than either of the positions of KCP&L or KCC staff. The decision of the KCC cannot be predicted. The increase to retail revenues is anticipated to be effective in January 2013.
KCP&L Missouri Rate Case Proceedings
On February 27, 2012, KCP&L filed an application with the MPSC to request an increase to its retail revenues of $105.7 million, with a return on equity of 10.4% and a rate-making equity ratio of 52.5%. In September 2012, KCP&L revised its requested return on equity to 10.3%. The request includes recovery of costs related to


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improving and maintaining infrastructure to continue to be able to provide reliable electric service and also includes a lower annual offset to the revenue requirement for the Missouri jurisdictional portion of KCP&L's annual non-firm wholesale electric sales margin (wholesale margin offset). KCP&L currently expects that it will not be able to achieve the $45.9 million wholesale margin offset currently reflected in its retail rates due to transmission congestion, regional demand and low wholesale power prices. Testimony from MPSC staff and other parties regarding the case was filed on August 2, 2012. The MPSC staff's testimony recommended a return on equity range of 8.0% to 9.0% and a revenue increase range of approximately $16.5 million to $33.7 million.
In November 2012, the MPSC issued an order approving multiple stipulation and agreements to settle a number of the issues in the case. An order on the remaining issues in the case is anticipated to be received to accommodate the increase to retail revenues to be effective in late January 2013. The final outcome of the KCP&L Missouri rate case will likely be different than either of the positions of KCP&L or MPSC staff. The final decision of the MPSC cannot be predicted.
In a March 2011 order, the MPSC required KCP&L and GMO to apply to the Internal Revenue Service (IRS) to reallocate approximately $26.5 million of Iatan No. 2 qualifying advance coal project tax credits from KCP&L to GMO. KCP&L and GMO did apply to the IRS but in September 2011, the IRS denied KCP&L's and GMO's request. In November 2012, the MPSC issued an order that does not require a reallocation of Iatan No. 2 qualifying advance coal project tax credits from KCP&L to GMO.
GMO Missouri Rate Case Proceedings
On February 27, 2012, GMO filed an application with the MPSC to request an increase to its retail revenues of $58.3 million for its Missouri Public Service division and $25.2 million for its L&P division, with a return on equity of 10.4% and a rate-making equity ratio of 52.5%. In September 2012, GMO revised its requested return on equity to 10.3% for both its Missouri Public Service and L&P divisions. The requests include recovery of costs related to improving and maintaining infrastructure to continue to be able to provide reliable electric service, costs related to energy efficiency and demand side management programs, and increased fuel costs. Testimony from MPSC staff and other parties regarding the case was filed on August 9, 2012. The MPSC staff's testimony recommended a return on equity range of 8.0% to 9.0%, with a revenue increase of $0.4 million to $11.9 million for GMO's Missouri Public Service division and $0.7 million to $4.6 million for its L&P division.
In November 2012, the MPSC issued an order approving multiple stipulation and agreements to settle a number of the issues in the case. An order on the remaining issues in the case is anticipated to be received to accommodate the increase to retail revenues to be effective in late January 2013. The final outcome of the GMO Missouri rate case will likely be different than either of the positions of GMO or MPSC staff. The final decision of the MPSC cannot be predicted.
In December 2011, GMO filed a request with the MPSC seeking to recover costs for new and enhanced energy efficiency and demand side management programs under MEEIA. In November 2012, the MPSC issued an order approving a stipulation and agreement to settle all of the issues in the MEEIA request. Transmission Investment Opportunities
In April 2012, Great Plains Energy announced that GPE Transmission Holding Company LLC (GPETHC), a newly-formed wholly-owned subsidiary of Great Plains Energy, and AEP Transmission Holding Company, LLC (AEPTHC) formed a new company to exclusively pursue, develop, construct, own and operate competitive electric transmission projects. The new company, Transource Energy, LLC (Transource), is 86.5% owned by AEPTHC, a subsidiary of American Electric Power Company, Inc., and 13.5% owned by GPETHC. Transource plans to initially pursue competitive regional transmission projects in the PJM Interconnection, SPP and Midwest Independent Transmission System Operator transmission regions with plans to pursue competitive electric transmission projects in additional regions as they mature.
GMO has an SPP-approved regional transmission project for the Missouri portion of an approximately 175-mile, 345kV transmission line from Sibley, Missouri to Nebraska City, Nebraska with an estimated cost of $380 million for GMO's portion of the line and an expected 2017 in-service date. KCP&L and GMO jointly have an SPP-


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approved regional transmission project for an approximately 30-mile, 345kV transmission line, with estimated construction costs of $65 million and an expected 2015 in-service date, from KCP&L's and GMO's Iatan generating station to KCP&L's Nashua substation.
On August 31, 2012, KCP&L and GMO filed a request with the MPSC to authorize the transfer at cost of certain transmission property related to the two SPP-approved regional transmission projects to Transource Missouri, LLC (Transource Missouri), a wholly-owned subsidiary of Transource. On August 31, 2012, Transource Missouri filed a request with the MPSC seeking a Certificate of Convenience and Necessity (CCN) to construct, finance, own, operate and maintain the projects. MPSC approval is anticipated in the third quarter of 2013. Also on August 31, 2012, Transource Missouri filed a request with FERC seeking incentive rate treatment and acceptance of a formula transmission rate to recover the cost of current and future projects. In October 2012, FERC issued an order approving certain incentive rate treatments and conditionally accepting the formula transmission rate for Transource Missouri, subject to the outcome of an administrative hearing or settlement expected during 2013. Following approvals from FERC and the MPSC, KCP&L and GMO must also seek approval from the SPP to novate the projects to Transource Missouri. The SPP will then submit its approval of the novation to FERC for final approval. Great Plains Energy expects that final approval will be obtained so that the projects can be transferred by the fourth quarter of 2013.

ENVIRONMENTAL MATTERS
See Note 10 to the consolidated financial statements for additional information
regarding environmental matters.
RELATED PARTY TRANSACTIONS
See Note 12 to the consolidated financial statements for information regarding
related party transactions.
GREAT PLAINS ENERGY RESULTS OF OPERATIONS
The following table summarizes Great Plains Energy's comparative results of
operations.
                                                  Three Months Ended            Year to Date
                                                     September 30               September 30
                                                   2012         2011         2012          2011
                                                                    (millions)
Operating revenues                             $   746.2      $ 773.7     $ 1,829.5     $ 1,831.7
Fuel                                              (164.7 )     (146.5 )      (422.1 )      (365.8 )
Purchased power                                    (17.9 )      (68.1 )       (69.5 )      (178.4 )
Transmission of electricity by others               (9.8 )       (8.6 )       (25.9 )       (23.1 )
Gross margin (a)                                   553.8        550.5       1,312.0       1,264.4
Other operating expenses                          (207.9 )     (221.9 )      (631.8 )      (626.3 )
Voluntary separation program                           -            -             -         (12.7 )
Depreciation and amortization                      (68.9 )      (65.9 )      (204.2 )      (205.9 )
Operating income                                   277.0        262.7         476.0         419.5
Non-operating income and expenses                    0.2          0.1          (4.9 )        (0.5 )
Interest charges                                   (48.1 )      (60.8 )      (170.8 )      (156.0 )
Income tax expense                                 (82.6 )      (75.4 )      (104.9 )       (90.6 )
Loss from equity investments                        (0.1 )          -          (0.2 )        (0.1 )
Net income                                         146.4        126.6         195.2         172.3
Less: Net income attributable to
noncontrolling interest                             (0.2 )       (0.1 )           -             -
Net income attributable to Great Plains Energy     146.2        126.5         195.2         172.3
Preferred dividends                                 (0.4 )       (0.4 )        (1.2 )        (1.2 )
Earnings available for common shareholders     $   145.8      $ 126.1     $   194.0     $   171.1

(a) Gross margin is a non-GAAP financial measure. See explanation of gross margin below.


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Three Months Ended September 30, 2012 Compared to September 30, 2011 Great Plains Energy's earnings available for common shareholders for the three months ended September 30, 2012, increased to $145.8 million or $0.95 per share from $126.1 million or $0.91 per share for the same period in 2011. Electric utility's net income increased $8.0 million for the three months ended September 30, 2012, compared to the same period in 2011 driven by favorable weather, with a 6% increase in cooling degree days, and the three months ended September 30, 2011, included the impact from flooding along the Missouri River, which decreased gross margin by an estimated $16 million due to coal conservation and increased other operating expenses $3.4 million. These increases were partially offset by a decrease in weather-normalized retail demand.
Great Plains Energy's corporate and other activities had earnings of $3.9 million for the three months ended September 30, 2012, compared to a loss of $7.8 million for the same period in 2011 primarily due to a $2.1 million decrease in after-tax interest expense as a result of lower interest rate debt, a $1.6 million decrease in after-tax interest expense related to the release of uncertain tax positions, and a $1.5 million increase in income tax benefits relating to the release of uncertain tax positions. In addition, the three months ended September 30, 2011, included expenses of $2.3 million from the resolution of certain general tax related matters. Year to Date September 30, 2012 Compared to September 30, 2011 Great Plains Energy's earnings available for common shareholders year to date September 30, 2012, increased to $194.0 million or $1.34 per share from $171.1 million or $1.24 per share for the same period in 2011.
Electric utility's net income increased $20.3 million year to date September 30, 2012, compared to the same period in 2011 driven by:
new retail rates in Missouri effective May 4, 2011, for KCP&L and June 25, 2011, for GMO;

favorable weather, with a 16% increase in cooling degree days partially offset by the impact of unfavorable weather during the first quarter of 2012; and

year to date September 30, 2011, included:

             the impact from flooding along the Missouri River, which decreased
              gross margin by an estimated $16 million due to coal conservation
              and increased other operating expenses $3.4 million;


             an estimated $11 million impact from an extended refueling outage
              at Wolf Creek;

$12.7 million of expense relating to a voluntary separation program; and

             a $2.3 million loss relating to the impact of disallowed
              construction costs for the Iatan No. 1 environmental project and
              Iatan No. 2 and $3.9 million of expenses related to other
              accounting effects of the KCP&L and GMO 2011 MPSC rate orders.

These increases were partially offset by:
a decrease in weather-normalized retail demand;

an estimated $20 million impact at Wolf Creek due to an unplanned outage in the first quarter of 2012, increased amortization from the 2011 extended refueling outage and increased other operating expenses; and

a $24.7 million increase in interest expense primarily due to the deferral to a regulatory asset of $22.1 million of Iatan Nos. 1, 2 and common facilities construction accounting carrying costs during 2011, partially offset by a $5.3 million decrease related to GMO's $500.0 million 11.875% Senior Notes, which were repaid at maturity in July 2012.

Great Plains Energy's corporate and other activities loss decreased $2.6 million year to date September 30, 2012, compared to the same period in 2011 primarily due to a $1.6 million decrease in after-tax interest expense related to the release of uncertain tax positions and expenses of $2.3 million included in the three months ended


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September 30, 2011, related to the resolution of certain general tax related matters. These decreases were partially offset by a $1.8 million after-tax loss on the sale of real estate property in 2012 and a $2.2 million tax benefit in 2011 from the reversal of tax valuation allowances. Gross Margin
Gross margin is a financial measure that is not calculated in accordance with GAAP. Gross margin, as used by Great Plains Energy and KCP&L, is defined as operating revenues less fuel, purchased power and transmission of electricity by others. Expenses for fuel, purchased power and transmission of electricity by others, offset by wholesale sales margin, are subject to recovery through cost adjustment mechanisms, except for KCP&L's Missouri retail operations. As a result, operating revenues increase or decrease in relation to a significant portion of these expenses. Management believes that gross margin provides a more meaningful basis for evaluating electric utility's operations across periods than operating revenues because gross margin excludes the revenue effect of fluctuations in these expenses. Gross margin is used internally to measure performance against budget and in reports for management and the Board. The Companies' definition of gross margin may differ from similar terms used by other companies.

ELECTRIC UTILITY RESULTS OF OPERATIONS
The following table summarizes the electric utility segment results of
operations.
                                         Three Months Ended            Year to Date
                                            September 30               September 30
                                          2012         2011         2012          2011
                                                           (millions)
Operating revenues                    $   746.2      $ 773.7     $ 1,829.5     $ 1,831.7
Fuel                                     (164.7 )     (146.5 )      (422.1 )      (365.8 )
Purchased power                           (17.9 )      (68.1 )       (69.5 )      (178.4 )
Transmission of electricity by others      (9.8 )       (8.6 )       (25.9 )       (23.1 )
Gross margin (a)                          553.8        550.5       1,312.0       1,264.4
Other operating expenses                 (207.6 )     (218.2 )      (623.8 )      (620.8 )
Voluntary separation program                  -            -             -         (12.7 )
Depreciation and amortization             (68.9 )      (65.9 )      (204.2 )      (205.9 )
Operating income                          277.3        266.4         484.0         425.0
Non-operating income and expenses          (0.5 )        0.6          (3.7 )        (0.5 )
Interest charges                          (48.4 )      (50.2 )      (149.5 )      (124.8 )
Income tax expense                        (86.5 )      (82.9 )      (120.6 )      (109.8 )
Net income                            $   141.9      $ 133.9     $   210.2     $   189.9

(a) Gross margin is a non-GAAP financial measure. See explanation of gross margin under Great Plains Energy's Results of Operations.


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Electric Utility Gross Margin and MWh Sales The following tables summarize electric utility's gross margin and MWhs sold.

                                Revenues and Costs         %            MWhs Sold           %
Three Months Ended September
30                               2012         2011       Change      2012       2011      Change
Retail revenues                     (millions)                         (thousands)
Residential                  $   358.5      $ 354.3          1      2,999      3,018         (1 )
Commercial                       272.8        271.2          1      2,934      2,990         (2 )
Industrial                        54.9         57.9         (5 )      791        828         (5 )
Other retail revenues              4.9          5.1         (1 )       29         29          -
Kansas property tax
surcharge                          1.7            -        N/A        N/A        N/A        N/A
Fuel recovery mechanism           10.5         32.2        (67 )      N/A        N/A        N/A
Total retail                     703.3        720.7         (2 )    6,753      6,865         (2 )
Wholesale revenues                31.8         41.9        (24 )    1,429      1,206         19
Other revenues                    11.1         11.1          -        N/A        N/A        N/A
Operating revenues               746.2        773.7         (4 )    8,182      8,071          1
Fuel                            (164.7 )     (146.5 )       12
Purchased power                  (17.9 )      (68.1 )      (74 )
Transmission of electricity
by others                         (9.8 )       (8.6 )       14
Gross margin (a)             $   553.8      $ 550.5          1

(a) Gross margin is a non-GAAP financial measure. See explanation of gross margin under Great Plains Energy's Results of Operations.

                                Revenues and Costs          %            MWhs Sold           %
Year to Date September 30       2012          2011        Change      2012       2011      Change
Retail revenues                     (millions)                          (thousands)
Residential                  $   785.3     $   773.0          2      7,115      7,431         (4 )
Commercial                       704.1         676.4          4      8,187      8,209          -
Industrial                       153.1         149.6          2      2,401      2,422         (1 )
Other retail revenues             14.8          14.4          3         89         88          1
Kansas property tax
surcharge                          4.6             -        N/A        N/A        N/A        N/A
Fuel recovery mechanism           20.7          63.8        (68 )      N/A        N/A        N/A
Total retail                   1,682.6       1,677.2          -     17,792     18,150         (2 )
Wholesale revenues               114.0         121.0         (6 )    4,708      3,595         31
Other revenues                    32.9          33.5         (2 )      N/A        N/A        N/A
Operating revenues             1,829.5       1,831.7          -     22,500     21,745          3
Fuel                            (422.1 )      (365.8 )       15
Purchased power                  (69.5 )      (178.4 )      (61 )
Transmission of electricity
by others                        (25.9 )       (23.1 )       12
Gross margin (a)             $ 1,312.0     $ 1,264.4          4

(a) Gross margin is a non-GAAP financial measure. See explanation of gross margin under Great Plains Energy's Results of Operations.

Electric utility's gross margin increased $3.3 million for the three months . . .

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