Name	Age	Current Position(s)	Year First Assumed an Officer Position
Michael J. Chesser (a)	60	Chairman of the Board and Chief Executive Officer – Great Plains Energy and KCP&L	2003
William H. Downey (b)	64	President and Chief Operating Officer – Great Plains Energy and KCP&L	2000
Terry Bassham (c)	48	Executive Vice President - Finance and Strategic Development and Chief Financial Officer – Great Plains Energy and KCP&L	2005
Barbara B. Curry (d)	54	Senior Vice President – Human Resources and Corporate Secretary – Great Plains Energy and KCP&L	2005
Michael L. Deggendorf (e)	47	Senior Vice President – Delivery – KCP&L	2005
Scott H. Heidtbrink (f)	47	Senior Vice President - Supply – KCP&L	2008
John R. Marshall (g)	59	Executive Vice President – Utility Operations - KCP&L	2005
William G. Riggins (h)	50	General Counsel and Chief Legal Officer – Great Plains Energy and KCP&L	2000
Lori A. Wright (i)	46	Vice President and Controller – Great Plains Energy and KCP&L	2002

ITEM 1A.  RISK FACTORS

 

Actual results in future periods for Great Plains Energy and KCP&L could differ materially from historical results and the forward-looking statements contained in this report.  The companies’ business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond the companies’ control.  Additional risks and uncertainties not presently known or that the companies’ management currently believes to be immaterial may also adversely affect the companies.   This information, as well as the other information included in this report and in the other documents filed with the SEC, should be carefully considered before making an investment in the securities of Great Plains Energy and KCP&L.  Risk factors of KCP&L and GMO are also risk factors of Great Plains Energy.

 

Regulatory and Environmental Risks:

 

Complex utility and environmental regulation could adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

KCP&L and GMO are subject to, or affected by, extensive federal and state utility regulation, including by the MPSC, KCC, FERC, NRC, SPP and NERC.  They must also comply with environmental legislation and associated regulations.  In the Company’s business planning and management of operations, it must address the effects of existing and proposed regulation on its businesses and changes in the regulatory framework, including initiatives by federal and state legislatures, regional transmission organizations, utility regulators and taxing authorities.  Failure of KCP&L or GMO to obtain adequate rates or regulatory approvals in a timely manner, adoption of new regulations by federal or state agencies, or changes to current regulations and interpretations of such regulations may materially affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

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The outcome of retail rate proceedings could have a material impact on the business and is largely outside the Company’s control.

The rates that KCP&L and GMO are allowed to charge their customers are the single most important item influencing their results of operations, financial position and cash flows.  These rates are subject to the determination, in large part, of governmental entities outside of KCP&L’s and GMO’s control, including the MPSC, KCC (for KCP&L) and FERC.  KCP&L and GMO are also exposed to cost-recovery shortfalls due to the inherent lag in the rate-setting process, especially during periods of significant cost inflation, as utility rates in Missouri and Kansas are set on the basis of historical costs and are not subject to adjustment (other than for fuel and purchased power for KCP&L in Kansas and GMO) between rate cases.

 

As a part of the Missouri and Kansas stipulations approved by the MPSC and KCC in 2005, KCP&L began implementation of its Comprehensive Energy Plan.  Under the Comprehensive Energy Plan, KCP&L agreed to undertake certain projects, including Iatan No. 2, installing a new wind-powered generating facility, installing environmental upgrades to certain existing plants, infrastructure improvements and demand management, distributed generation, and customer efficiency and affordability programs.  In March 2007, KCP&L entered into a Collaboration Agreement with the Sierra Club and Concerned Citizens of Platte County that provides for increases in KCP&L’s wind generation capacity and energy efficiency initiatives, reductions in certain emission permit levels at its Iatan and LaCygne generating stations, and projects to offset certain carbon dioxide emissions.  The wind generation, energy efficiency and emission permit reductions are conditioned on regulatory approval.  

 

A reduction or rejection by the MPSC or KCC of rate increase requests reflecting the costs of projects under the Comprehensive Energy Plan or Collaboration Agreement, or other costs and expenses, could lead to lowered credit ratings, reduced access to capital markets, increased financing costs, lower flexibility due to constrained financial resources and increased collateral security requirements, which could materially and adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position, and cash flows.  In response to competitive, economic, political, legislative and regulatory pressures, KCP&L and GMO may be subject to rate moratoriums, rate refunds and limits on rate increases or rate reductions, including phase-in plans designed to spread the impact of rate increases over an extended period of time for the benefit of customers.  Any or all of these could have a significant adverse effect on Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

 

Regulatory requirements regarding utility operations may increase costs and may expose KCP&L and GMO to compliance penalties.

The MPSC and KCC have the authority to implement utility operational standards and requirements, such as vegetation management standards, facilities inspection requirements and quality of service standards.  KCP&L agreed to quality of service standards in Kansas in connection with the GMO acquisition.  The costs of new or modified operational standards and requirements could have an adverse effect on Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows as a result of increased operations or maintenance and capital expenditures for new facilities or to repair or improve existing facilities.  Failure to meet quality of service, operational or other standards and requirements could expose KCP&L or GMO to penalties or other adverse rate consequences.

 

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The Company is subject to current and potential environmental laws and the incurrence of environmental liabilities, any or all of which may adversely affect the Company’s business and financial results.

The Company is subject to regulation by federal, state and local authorities with regard to air quality and other environmental matters, through KCP&L’s and GMO’s operations.  The generation, transmission and distribution of electricity produces and requires proper management and disposal of certain hazardous products and wastes, which 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 Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

 

There is also a risk that new environmental laws and regulations, and new judicial interpretations of environmental laws and regulations, could adversely affect KCP&L’s and GMO’s operations.  In particular, various stakeholders, including legislators, regulators, shareholders and non-governmental organizations, as well as utilities and other companies in many business sectors, are considering ways to address climate change, including through the regulation of CO 2 and other greenhouse gas emissions and efforts to encourage or mandate the use of renewable resources, energy efficiency and demand response management.  In November 2008, Missouri voters approved an initiative that requires at least 2% of electricity to come from renewable resources by 2011, increasing to 15% by 2021.  The governor of Kansas supports mandatory renewable energy portfolio standards, and bills that would establish such standards have been introduced in the 2009 Kansas Legislature.  The Kansas Department of Health and Environment (KDHE) has indicated that it intends to engage industries and stakeholders to establish goals and strategies for reducing CO 2 emissions.  Additional federal and/or state legislation or regulation to release greenhouse gas emissions may be enacted in the near future.  Further, pursuant to the Collaboration Agreement, KCP&L agreed to pursue a set of initiatives including energy efficiency, additional wind generation, lower emission permit levels at its Iatan and LaCygne stations and other initiatives designed to offset CO 2 emissions.  KCP&L’s current generation capacity is primarily coal-fired and is estimated to produce about one ton of CO 2 per MWh, or approximately 17 million tons per year.  GMO’s current generation capacity also is primarily coal-fired and is estimated to produce approximately 6 million tons of CO 2 per year.  Requirements to reduce greenhouse gas emissions may cause KCP&L and GMO to incur significant costs relating to their ongoing operations (through additional environmental control equipment, retiring and replacing existing generation, or selecting more costly generation alternatives), to procure emission allowance credits, or due to the imposition of taxes, fees or other governmental charges as a result of such emissions.  Rules issued by the Environmental Protection Agency (EPA) regarding emissions of mercury, nitrogen oxides and sulfur dioxides are also in a state of flux.  Such rules have been overturned by the courts and remanded to the EPA to be revised consistent with the court orders.  It is unclear what standards will be imposed in the future, when KCP&L and GMO may have to comply with any new standards or what costs may ultimately be required to comply with such standards.  

 

New facilities, or modifications of existing facilities, may require new environmental permits or amendments to existing permits.  Delays in the environmental permitting process, denials of permit applications, conditions imposed in permits and the associated uncertainty may materially affect the cost and timing of the environmental retrofit projects included in the Comprehensive Energy Plan, among other projects, and thus materially affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

 

Under current law, KCP&L and GMO are also generally responsible for any liabilities associated with the environmental condition of their properties, including properties that they have previously owned or operated, such as manufactured gas plants (MGP), regardless of whether they were responsible for the contamination or whether the liabilities arose before, during or after the time they owned or operated the properties.  KCP&L and GMO may not be allowed by the MPSC or KCC to recover all of their costs for environmental expenditures through rates in the future.  The incurrence of material environmental costs or liabilities, without related rate recovery, could have a material adverse effect on Great Plains Energy’s or KCP&L’s results of operations, financial position and cash flows.  See the notes to the consolidated financial statements for additional information regarding environmental matters.

 

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The Federal Clean Air Act requires companies to obtain permits and, if necessary, install control equipment to reduce emissions when making a major modification or a change in operation of an existing facility if either is expected to cause a significant net increase in regulated emissions.  In 2004, the EPA notified Westar Energy, Inc. (Westar) that certain projects completed at the Jeffrey Energy Center violated certain New Source Review permitting requirements.  GMO is an 8% owner of the facility, which is operated by Westar, and is generally responsible for its 8% share of the facility’s operating costs and capital expenditures.  On February 4, 2009, the Attorney General of the United States filed a complaint against Westar alleging that it violated the Clean Air Act and related federal and state regulations by making major modifications to the Jeffrey Energy Center beginning in 1994 without first obtaining appropriate permits authorizing this construction and without installing and operating best available control technology to control emissions.  Resolution of this matter potentially could involve the installation and operation of new emission control systems at Jeffrey Energy Center, surrender of emission allowances, interruptions or shut-down of operations at the Jeffrey Energy Center, applications for new or modified permits, audits of Jeffrey Energy Center operations, actions to otherwise mitigate any resulting harm to public health and the environment, and assessment of a civil penalty of up to $37,500 per day for each violation.  GMO’s 8% portion of such costs could be significant.  The ultimate outcome of these matters cannot presently be determined, nor can the liability that could potentially result from a negative outcome presently be reasonably estimated.  There is no assurance these costs, if any, could be recovered in rates, and any failure to recover such costs could have a significant effect on Great Plains Energy’s results of operations, financial position and cash flows.

 

In 2008, KCP&L received a subpoena from a federal grand jury seeking documents relating to capital projects at Iatan No. 1.  KCP&L expects to complete the delivery of responsive documents by early March 2009.  KCP&L believes that it is in compliance in all material respects with all relevant laws and regulations; however, the ultimate outcome of these grand jury activities or possible civil or administrative proceedings regarding capital projects at Iatan No. 1 and other coal units cannot presently be determined, nor can the liability that could potentially result from a negative outcome presently be reasonably estimated.  There is no assurance these costs, if any, could be recovered in rates, and any failure to recover such costs could have a significant effect on Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

Due to all of the above, KCP&L’s and GMO’s projected capital and other expenditures for environmental compliance are subject to significant uncertainties, including the timing of implementation of any new or modified environmental requirements, the emissions limits imposed by such requirements and the types and costs of the compliance alternatives selected by KCP&L and GMO.  As a result, costs to comply with environmental requirements cannot be estimated with certainty, and actual costs could be significantly higher than projections.  Other new environmental laws and regulations affecting the operations of KCP&L and GMO may be adopted, and new interpretations of existing laws and regulations could be adopted or become applicable to KCP&L and GMO or their facilities, any of which may adversely affect Great Plains Energy’s and KCP&L’s business and substantially increase their environmental expenditures or liabilities in the future.

 

Financial Risks:

 

Financial market disruptions and declines in the credit ratings of Great Plains Energy, KCP&L or GMO may increase financing costs and/or limit access to the credit markets, which may adversely affect liquidity and results.

KCP&L’s capital requirements are expected to be substantial over the next several years.  The acquisition of GMO has further increased the Company’s overall capital requirements, and the capital requirements of GMO over the next several years are expected to be substantial as it implements generation and environmental projects.  The Company relies on access to short-term money markets, revolving credit facilities provided by financial institutions and long-term capital markets as significant sources of liquidity for capital requirements not satisfied by cash flows from operations.  The Company also relies on bank-provided credit facilities for credit support, such as letters of credit, to support operations.  The amount of credit support required for KCP&L and GMO operations varies with a number of factors, including the amount and price of wholesale power purchased or sold.  

 

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Great Plains Energy, KCP&L, GMO and certain of their securities are rated by Moody's Investors Service and Standard & Poor's.  These ratings impact the companies’ cost of funds and Great Plains Energy’s ability to provide credit support for its subsidiaries.  The interest rates on borrowings under KCP&L’s revolving credit agreement and on a substantial portion of Great Plains Energy’s and GMO’s debt are subject to increase as their respective credit ratings decrease.  The Company has agreed to not seek rate recovery of GMO interest costs in excess of equivalent investment-grade debt, and the MPSC approval of the GMO acquisition is conditioned on the requirement that any post-acquisition financial effects of a credit downgrade of Great Plains Energy, KCP&L or GMO occurring as a result of the acquisition would be borne by shareholders and not utility customers.  The amount of collateral or other credit support required under power supply agreements is also dependent on credit ratings.  

 

The capital and credit markets have been experiencing unprecedented levels of volatility and disruption.  If current levels of market disruption and volatility continue or worsen, or if there is a decrease in Great Plains Energy’s, KCP&L’s or GMO’s credit ratings, there can be no assurance that the companies would not experience an adverse effect on their access to capital and cost of funds, dilution resulting from equity issuances at reduced prices, increases in the amount of collateral or other credit support obligations required to be posted with contractual counterparties, increased nuclear decommissioning trust and pension and other post-retirement benefit plan funding requirements, issuance of secured rather than unsecured debt, rate case disallowance of KCP&L’s or GMO’s costs of capital, or reductions in Great Plains Energy’s ability to provide credit support for its subsidiaries.  Any of these results could adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.  In addition, market disruption and volatility could have an adverse impact on Great Plains Energy’s, KCP&L’s or GMO’s lenders, suppliers and other counterparties or on KCP&L’s, GMO’s, including MPS Merchant, customers, causing them to fail to meet their obligations.

 

A sustained decline in Great Plains Energy’s stock price below book value may result in goodwill impairments that could adversely affect Great Plains Energy’s results of operations and financial position, as well as credit facility covenants.

The GMO acquisition resulted in Great Plains Energy recording approximately $156 million in goodwill.  Accounting rules require goodwill to be tested for impairment annually and when an event occurs indicating that it is possible that an impairment exists.  The Company’s annual impairment testing is conducted in September.  Subsequent to September 2008, financial market disruptions and volatility have resulted in Great Plains Energy’s stock trading at a price below carrying value.  If the stock price continues to be below carrying value, the accounting rules may require Great Plains Energy to conduct another goodwill impairment test.  There is no assurance that the results of this additional test will not require Great Plains Energy to recognize an impairment of goodwill.  An impairment of GMO acquisition goodwill would reduce net income and may adversely affect Great Plains Energy’s results of operations and financial position, and could result in a breach of the debt to total capitalization covenants in Great Plains Energy’s and GMO’s revolving credit agreements.

Great Plains Energy has guaranteed substantially all of the outstanding debt of GMO and payments under these guarantees may adversely affect Great Plains Energy’s liquidity.

In connection with the GMO acquisition, Great Plains Energy issued guarantees covering substantially all of the outstanding debt of GMO and has guaranteed a $400 million revolving credit facility that was entered into by GMO subsequent to the acquisition.  The guarantees were a factor in GMO receiving investment-grade ratings and the guarantees obligate Great Plains Energy directly to pay amounts owed by GMO to the holders of the guaranteed debt in the event GMO defaults on its payment obligations.  Any guarantee payments could adversely affect Great Plains Energy’s liquidity.

 

The inability of Great Plains Energy’s subsidiaries to provide sufficient dividends to allow Great Plains Energy to pay dividends to its shareholders and meet its financial obligations would have an adverse effect.

Great Plains Energy is a holding company with no significant operations of its own.  The primary source of funds for payment of dividends to its shareholders and its financial obligations is dividends paid to it by its subsidiaries, particularly KCP&L and GMO.  KCP&L has committed to state regulatory commissions to maintain a 35%

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equity to total capitalization ratio, and Great Plains Energy, KCP&L and GMO have similar covenants in their revolving credit facilities.  In addition, under federal law, KCP&L and GMO may pay dividends generally only out of retained earnings.  The ability of Great Plains Energy’s subsidiaries to pay dividends or make other distributions, and accordingly, Great Plains Energy’s ability to pay dividends on its common stock and meet its financial obligations principally depends on the actual and projected earnings and cash flow, capital requirements and general financial position of its subsidiaries, as well as on regulatory factors, financial covenants, general business conditions and other matters.

Market performance, increased retirements and changes in retirement plan regulations could significantly impact retirement plan funding requirements and associated cash needs and expenses.

Substantially all of KCP&L’s employees participate in defined benefit and post-retirement plans.  GMO’s former employees in its Missouri utility operations and certain other operations have accrued benefits in GMO’s defined benefit and post-retirement plans.  If KCP&L employees retire when they become eligible for retirement through 2011, or if these plans experience adverse market returns on investments (as has been the case during the 2008 period), or if interest rates materially fall, KCP&L and GMO contributions to the plans could rise substantially over historical levels.  In addition, assumptions related to future costs, returns on investments, interest rates and other actuarial assumptions, including projected retirements, have a significant impact on Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

 

The Pension Protection Act of 2006 (PPA) alters the manner in which pension plan assets and liabilities are valued for purposes of calculating required pension contributions and changes the timing of required contributions to underfunded plans.  The funding rules, which became effective in 2008, could significantly affect the Company’s funding requirements.  In addition, the Financial Accounting Standards Board (FASB) has a project to reconsider the accounting for expense recognition related to pensions and other post-retirement benefits, which may result in accelerated expense.

 

The use of derivative contracts in the normal course of business could result in losses that could negatively impact Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

Great Plains Energy, KCP&L, GMO, including MPS Merchant, use derivative instruments, such as swaps, options, futures and forwards, to manage commodity and financial risks.  Losses could be recognized as a result of volatility in the market values of these contracts, if a counterparty fails to perform, or if the underlying transactions which the derivative instruments are intended to hedge fail to materialize.  In the absence of actively quoted market prices and pricing information from external sources, the valuation of these financial instruments can involve management’s judgment or use of estimates.  As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts.

 

As a service provider to GMO, KCP&L may have exposure to GMO’s financial performance and operations.

GMO has no employees of its own.  KCP&L employees operate and manage GMO’s properties, and KCP&L charges GMO for the cost of these services.  These arrangements may pose risks to KCP&L, including possible claims arising from actions of KCP&L employees in operating GMO’s properties and providing other services to GMO.  KCP&L’s claims for reimbursement for services provided to GMO are unsecured and rank equally with other unsecured obligations of GMO.  KCP&L’s ability to be reimbursed for the costs incurred for the benefit of GMO depends on the financial ability of GMO to make such payments.

 

Customer and Weather-Related Risks:

 

Severe weather and changes in customer demand due to sustained financial market disruptions, downturns or sluggishness in the economy, weather conditions or otherwise may adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

The results of operations, financial position and cash flows of Great Plains Energy and KCP&L can be materially affected by changes in weather and customer demand.  KCP&L and GMO estimate customer demand based on historical trends to procure fuel and purchased power.  Sustained downturns or sluggishness in the economy

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generally affect the markets in which KCP&L and GMO operate.  KCP&L’s electricity sales volume declined in 2008 compared to 2007, and retail demand for KCP&L and GMO is expected to be lower in 2009 than it was in 2008 assuming normal weather conditions.  If the current financial market disruptions or economic downturn continue or worsen, overall electricity sales volumes may further decline and/or bad debt expense may increase, which could materially affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

 

Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities.  KCP&L and GMO are significantly impacted by seasonality, with approximately one-third of their retail electric revenues recorded in the third quarter.  Unusually mild winter or summer weather can adversely affect sales.  In addition, severe weather, including but not limited to tornados, snow, rain and ice storms can be destructive causing outages and property damage that can potentially result in additional expenses and lower revenues.  Some of KCP&L’s and GMO’s stations use water from the Missouri River for cooling purposes.  Low water and flow levels, which have been experienced in recent years, can increase maintenance costs at these stations and, if these levels were to get low enough, could cause modifications to plant operations.

 

Integration and Operational Risks:

 

Only a portion of the costs associated with the GMO acquisition will be recovered through utility rates, and the expected cost benefits of the GMO transaction may not be realized, which could adversely affect Great Plains Energy’s results of operations, financial position and cash flows.

The MPSC order approving the GMO transaction provides that the transaction costs will not be recovered through utility rates, and that the Missouri jurisdictional portion of transition costs (estimated to be $33.1 million at December 31, 2008) will be eligible for recovery through utility rates only to the extent the costs are offset by benefits resulting from the acquisition.  The KCC order approving the GMO transaction limited KCP&L’s recovery of transition costs through Kansas rates to $10.0 million.  At December 31, 2008, Great Plains Energy had $43.1 million of regulatory assets related to transition costs, which included $25.5 million at KCP&L and $17.6 million at GMO.

 

Great Plains Energy and KCP&L expect to achieve various benefits, including cost savings and operating efficiencies in connection with the acquisition.  Approximately half of the total estimated cost savings over the first five years following the GMO acquisition are expected to come from reductions in GMO’s corporate overhead and other costs that are not being recovered, and are not expected to be recovered, through utility rates.  If these costs are not able to be eliminated as anticipated, Great Plains Energy’s results of operations, financial position and cash flows could be negatively impacted.

 

The benefits of integrating KCP&L’s and GMO’s utility businesses may be less than expected, which could adversely affect the Company’s regulatory treatment and results of operations, financial position and cash flows.

Great Plains Energy and KCP&L expect to achieve synergies through the ongoing integration of KCP&L and GMO utility operations.  This integration poses significant challenges due to the size and complexity of each organization.  The Company has dedicated substantial efforts and resources since the GMO acquisition was announced to plan for and implement an efficient and successful integration of utility operations.  Great Plains Energy and KCP&L believe that the anticipated benefits will be achieved.  However, there is no assurance that the utility operations integration will be completed successfully or in a timely manner, or result in the anticipated benefits.  Failure to achieve the anticipated cost reductions or customer service levels could result in adverse regulatory actions and could negatively affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

 

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Operations risks may adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

The operation of KCP&L’s and GMO’s electric generation, transmission and distribution systems involves many risks, including breakdown or failure of equipment, processes and personnel performance; problems that delay or increase the cost of returning facilities to service after outages, operating limitations that may be imposed by equipment conditions, environmental, safety or other regulatory requirements; fuel supply or fuel transportation reductions or interruptions; transmission scheduling constraints; and catastrophic events such as fires, explosions, severe weather or other similar occurrences.  An equipment outage or constraint can:

 

·	in the case of generation equipment, directly affect operating costs, increase capital needs and costs, increase purchased power needs and costs and reduce wholesale sales opportunities;

 

·	in the case of transmission equipment, affect operating costs, increase capital needs and costs, require changes in the source of generation and affect wholesale sales opportunities; and

 

·	in the case of distribution systems, affect revenues and operating costs, increase capital needs and costs, and affect the ability to meet regulatory service metrics and customer expectations.

 

With the exception of Hawthorn No. 5, which was substantially rebuilt in 2001, all of KCP&L’s coal-fired generating units and its nuclear generating unit were constructed prior to 1986.  All of GMO’s coal-fired generating units were constructed prior to 1984.  The age of these generating units increases the risk of unplanned outages and higher maintenance expense.  Training, preventive maintenance and other programs have been implemented, but there is no assurance that these programs will prevent or minimize future breakdowns or failures of KCP&L’s or GMO’s generation facilities.

 

KCP&L and GMO currently have general liability and property insurance in place to cover their facilities in amounts that management considers appropriate.  These policies; however, do not cover KCP&L’s or GMO’s transmission or distribution systems, and the cost of repairing damage to these systems may adversely affect Great Plains Energy’s or KCP&L’s results of operations, financial position and cash flows.  Such policies are subject to certain limits and deductibles and generally do not include business interruption coverage.  Insurance coverage may not be available in the future at current costs or on commercially reasonable terms, and the insurance proceeds received for any loss of, or any damage to, any of KCP&L’s or GMO’s facilities may not be sufficient to restore the loss or damage.

 

These and other operating events may reduce Great Plains Energy’s and KCP&L’s revenues, increase their costs, or both, and may materially affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

 

The cost and schedule of construction projects may materially change and expected performance may not be achieved.

KCP&L’s and GMO’s businesses are capital intensive, and require significant capital investments to maintain existing facilities, for projected environmental projects and to add new facilities, including Iatan No. 2, an estimated 850 MW (of which electric utility’s share is 620 MW) coal-fired generating plant.  The acquisition of GMO by Great Plains Energy increases Great Plains Energy’s exposure to the risks associated with the ongoing Iatan construction project.  The risks of any construction project include the possibilities that actual costs may exceed current estimates, delays may occur in obtaining permits and materials, suppliers and contractors may not perform as required under their contracts, there may be inadequate availability or increased cost of qualified craft labor, the scope and timing of projects may change, and that other events beyond KCP&L’s or GMO’s control may occur that may materially affect the schedule, cost and performance of these projects.

 

The demand for additional environmental control equipment has increased substantially with many utilities in the United States starting similar projects to address changing environmental regulations.  This demand has constrained labor and material resources for such projects, and there is a risk that such constraints may increase if new laws or regulations, including limitations on greenhouse gas emissions, are imposed. 

 

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These and other risks could materially increase the estimated costs of construction projects, delay the in-service dates of projects, adversely affect the performance of the projects, and/or require KCP&L or GMO to purchase additional electricity to supply their respective retail customers until the projects are completed.  KCP&L and GMO are not permitted to start recovering the costs of these projects until they are completed and put into service.  Thus, these risks may significantly affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

 

Failure of one or more generation plant co-owners to pay their share of construction, operations and maintenance costs could increase Great Plains Energy’s and KCP&L’s costs and capital requirements.

KCP&L owns 47% of Wolf Creek, 50% of LaCygne Station, 70% of Iatan No. 1 and 55% of Iatan No. 2.  GMO owns 18% of both Iatan units and 8% of Jeffrey Energy Center.  The remaining portions of these facilities are owned by other utilities that are contractually obligated to pay their proportionate share of capital and other costs and, in the case of Iatan No. 2, construction costs.

 

While the ownership agreements provide that a defaulting co-owner’s share of the electricity generated can be sold by the non-defaulting co-owners, there is no assurance that the revenues received will recover the increased costs borne by the non-defaulting co-owners.  The Iatan No. 2 co-owners have provided financial assurances related to their respective construction cost obligations, but there is a risk that such assurances may not be sufficient in the event of a co-owner default.  During the construction period, the Iatan No. 2 agreements provide for re-allocations of part or all of a defaulting co-owner’s share of the facility to the non-defaulting owners, which would increase the capital requirements, operations and maintenance costs of the non-defaulting owners.  Occurrence of these or other events could materially increase Great Plains Energy’s and KCP&L’s costs and capital requirements.

 

An aging workforce and increasing demand for skilled craft labor poses operational and planning challenges.

Through 2012, approximately 22% of KCP&L employees (who manage both KCP&L and GMO operations) will be eligible to retire with full pension benefits.  This is a general industry issue, which has increased the demand for and cost of skilled craft labor for both companies and contractors.  KCP&L and GMO use contractors for a substantial portion of their construction and maintenance work.  Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to the new employees, or the future availability and cost of contract labor may adversely affect the ability to manage and operate Great Plains Energy’s and KCP&L’s businesses.

 

Commodity Price Risks:

 

Changes in commodity prices could have an adverse effect on Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

KCP&L and GMO engage in the wholesale and retail marketing of electricity and are exposed to risks associated with the price of electricity.  KCP&L and GMO generate, purchase and sell electricity in the retail and wholesale markets.  To the extent that exposure to the price of electricity is not successfully hedged, Great Plains Energy and KCP&L could experience losses associated with the changing market price for electricity.

 

Increases in fuel, fuel transportation and purchased power prices could have an adverse impact on Great Plains Energy’s and KCP&L’s costs.

KCP&L’s Kansas retail rates contain an energy cost adjustment (ECA) mechanism.  KCP&L’s Missouri retail rates do not contain a similar provision.  GMO’s retail electric rates contain a fuel adjustment clause mechanism under which 95% of the difference between actual fuel and purchased power costs and the amount of fuel and purchased power costs provided in base rates is passed along to GMO’s customers.  GMO’s steam rates contain a quarterly cost adjustment under which 80% of the difference between actual fuel costs and base fuel costs is passed along to GMO’s steam customers.  As a result, KCP&L and GMO are exposed to varying degrees of risk from changes in the market prices of coal, natural gas, nuclear fuel

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and purchased power.  Changes in KCP&L’s or GMO’s fuel mix due to electricity demand, plant availability, transportation issues, fuel prices, fuel availability and other factors can also adversely affect KCP&L’s or GMO’s fuel and purchased power costs.

 

KCP&L and GMO do not hedge their respective entire exposure from fuel and transportation price volatility.  Forward prices for coal have increased, principally due to international demand, and management expects prices will continue to increase.  The majority of KCP&L’s and GMO’s rail transportation contracts expire in 2010.  KCP&L and GMO will pay tariff rates after 2010, which are typically higher.  Management also expects the cost of nuclear fuel to increase significantly in 2010.  Consequently, Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows may be materially impacted by changes in these prices until increased costs are recovered in Missouri retail rates.

 

Wholesale electricity sales affect revenues, creating earnings volatility.

The levels of KCP&L and GMO wholesale sales depend on the wholesale market price, transmission availability and the availability of generation for wholesale sales, among other factors.  A substantial portion of wholesale sales are made in the spot market, and thus KCP&L and GMO have immediate exposure to wholesale price changes.  Wholesale power prices can be volatile and generally increase in times of high regional demand and high natural gas prices.  While an allocated portion of wholesale sales are reflected in KCP&L’s Kansas ECA, GMO’s and KCP&L’s Missouri rates are set on an estimated amount of wholesale sales.  KCP&L and GMO will not recover any shortfall in non-firm wholesale electric sales margin and for KCP&L, any amount above the level reflected in Missouri retail rates will be returned to Missouri retail customers in a future rate case.  Declines in wholesale market price or availability of generation or transmission constraints in the wholesale markets could reduce KCP&L’s and GMO's wholesale sales.  These events could adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

 

KCP&L is exposed to risks associated with the ownership and operation of a nuclear generating unit, which could result in an adverse effect on Great Plains Energy’s and KCP&L’s business and financial results.

KCP&L owns 47% of Wolf Creek.  The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities, including Wolf Creek.  In the event of non-compliance, the NRC has the authority to impose fines, shut down the facilities, or both, depending upon its assessment of the severity of the situation, until compliance is achieved.  Any revised safety requirements promulgated by the NRC could result in substantial capital expenditures at Wolf Creek.

 

Wolf Creek has the lowest fuel cost per MWh of any of KCP&L's generating units.  An extended outage of Wolf Creek, whether resulting from NRC action, an incident at the plant or otherwise, could have a substantial adverse effect on KCP&L's results of operations, financial position and cash flows in the event KCP&L incurs higher replacement power and other costs that are not recovered through rates.  If a long-term outage occurred, the state regulatory commissions could reduce rates by excluding the Wolf Creek investment from rate base.

 

Ownership and operation of a nuclear generating unit exposes KCP&L to risks regarding decommissioning costs at the end of the unit's life.  KCP&L contributes annually to a tax-qualified trust fund to be used to decommission Wolf Creek.  The funding level assumes a projected level of return on trust assets.  If the actual return on trust assets is below the projected level, KCP&L could be responsible for the balance of funds required; however, should this happen, management believes a rate increase would be allowed ensuring full recovery of decommissioning costs over the remaining life of the unit.

 

20

KCP&L is also exposed to other risks associated with the ownership and operation of a nuclear generating unit, including, but not limited to, potential liability associated with the potential harmful effects on the environment and human health resulting from the operation of a nuclear generating unit and the storage, handling and disposal of radioactive materials, and to potential retrospective assessments and losses in excess of insurance coverage.  Any such risks could adversely affect Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

Litigation Risks:

 

The outcome of legal proceedings cannot be predicted.  An adverse finding could have a material adverse effect on Great Plains Energy’s and KCP&L’s financial condition.

Great Plains Energy, KCP&L and GMO are party to various material litigation and regulatory matters arising out of their business operations.  The ultimate outcome of these matters cannot presently be determined, nor, in many cases, can the liability that could potentially result from a negative outcome in each case presently be reasonably estimated.  The liability that Great Plains Energy, KCP&L and GMO may ultimately incur with respect to any of these cases in the event of a negative outcome may be in excess of amounts currently reserved and insured against with respect to such matters and, as a result, these matters may have a material adverse effect on Great Plains Energy’s and KCP&L’s results of operations, financial position and cash flows.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

21

 

ITEM 2.  PROPERTIES

 

Electric Utility Generation Resources

				Year	Estimated 2009				Primary
		Unit		Completed	MW Capacity				Fuel
Base Load		Wolf Creek		1985		545	(a)		Nuclear
		Iatan No. 1		1980		494	(a)		Coal
		LaCygne No. 2		1977		341	(a)		Coal
		LaCygne No. 1		1973		368	(a)		Coal
		Hawthorn No. 5 (b)		1969		563			Coal
		Montrose No. 3		1964		176			Coal
		Montrose No. 2		1960		164			Coal
		Montrose No. 1		1958		170			Coal
Peak Load		West Gardner Nos. 1, 2, 3 and 4		2003		308			Natural Gas
		Osawatomie		2003		76			Natural Gas
		Hawthorn No. 9		2000		130			Natural Gas
		Hawthorn No. 8		2000		76			Natural Gas
		Hawthorn No. 7		2000		75			Natural Gas
		Hawthorn No. 6		1997		136			Natural Gas
		Northeast Black Start Unit		1985		2			Oil
		Northeast Nos. 17 and 18		1977		109			Oil
		Northeast Nos. 13 and 14		1976		106			Oil
		Northeast Nos. 15 and 16		1975		99			Oil
		Northeast Nos. 11 and 12		1972		100			Oil
Wind		Spearville Wind Energy Facility (c)		2006		15			Wind
Total KCP&L						4,053
Base Load		Iatan No. 1		1980		127	(a)		Coal
		Jeffrey Energy Center Nos. 1, 2 and 3		1978, 1980, 1983		174	(a)		Coal
		Sibley Nos. 1, 2 and 3		1960, 1962, 1969		474			Coal
		Lake Road Nos. 2 and 4		1957, 1967		126			Coal and Natural Gas
Peak Load		South Harper Nos. 1, 2 and 3		2005		315			Natural Gas
		Crossroads Energy Center		2002		300			Natural Gas
		Ralph Green No. 3		1981		71			Natural Gas
		Greenwood Nos. 1, 2, 3 and 4		1975-1979		253			Natural Gas/Oil
		Lake Road No. 5		1974		61			Natural Gas/Oil
		Lake Road Nos. 1 and 3		1951, 1962		33			Natural Gas/Oil
		Lake Road Nos. 6 and 7		1989, 1990		43			Oil
		Nevada		1974		21			Oil
Total GMO						1,998
Total Great Plains Energy						6,051
(a)	Share of a jointly owned unit.
(b)	The Hawthorn Generating Station returned to commercial operation in 2001 with a new boiler, air quality
	control equipment and an uprated turbine following a 1999 explosion.
(c)	The 100.5 MW Spearville Wind Energy Facility's accredited capacity is 15 MW pursuant to SPP reliability standards.

 

22

 

KCP&L owns 50% of LaCygne Nos. 1 and 2, 70% of Iatan No. 1 and 47% of Wolf Creek.  GMO owns 18% of Iatan No. 1 and 8% of Jeffrey Energy Center Nos. 1, 2 and 3.  See Note 7 to the consolidated financial statements for information regarding KCP&L’s Comprehensive Energy Plan and the construction of new generation capacity.

Electric Utility Transmission and Distribution Resources

Electric utility’s electric transmission system interconnects with systems of other utilities for reliability and to permit wholesale transactions with other electricity suppliers.  Electric utility has over 3,000 miles of transmission lines, approximately 17,000 miles of overhead distribution lines and over 7,000 miles of underground distribution lines in Missouri and Kansas.  Electric utility has all the franchises necessary to sell electricity within its retail service territory.  Electric utility’s transmission and distribution systems are continuously monitored for adequacy to meet customer needs.  Management believes the current systems are adequate to serve customers.

 

Electric Utility General

Electric utility’s principal plants and properties, insofar as they constitute real estate, are owned in fee simple except for the Spearville Wind Energy Facility, which is on land held under easements and the Crossroads Energy Center, which is contractually controlled.  Certain other facilities are located on premises held under leases, permits or easements.  Electric utility’s electric transmission and distribution systems are for the most part located over or under highways, streets, other public places or property owned by others for which permits, grants, easements or licenses (deemed satisfactory but without examination of underlying land titles) have been obtained.

 

Substantially all of the fixed property and franchises of KCP&L, which consist principally of electric generating stations, electric transmission and distribution lines and systems, and buildings (subject to exceptions, reservations and releases), are subject to a General Mortgage Indenture and Deed of Trust dated as of December 1, 1986.  Mortgage bonds totaling $158.8 million, securing Environmental Improvement Revenue Refunding (EIRR) bonds, were outstanding at December 31, 2008.

 

Substantially all of the fixed property and franchises of GMO’s St. Joseph Light & Power division is subject to a General Mortgage Indenture and Deed of Trust dated as of April 1, 1946.  Mortgage bonds totaling $14.6 million were outstanding at December 31, 2008.

 

ITEM 3.  LEGAL PROCEEDINGS

 

Other Proceedings

The companies are parties to various lawsuits and regulatory proceedings in the ordinary course of their respective businesses.  For information regarding material lawsuits and proceedings, see Notes 2, 7, 16 and 17 to the consolidated financial statements.  Such descriptions are incorporated herein by reference.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

23

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

GREAT PLAINS ENERGY

Great Plains Energy common stock is listed on the New York Stock Exchange under the symbol GXP.  At February 23, 2009, Great Plains Energy’s common stock was held by 30,151 shareholders of record.  Information relating to market prices and cash dividends on Great Plains Energy's common stock is set forth in the following table.

	Common Stock Price Range (a)												Common Stock
	2008						2007						Dividends Declared
Quarter	High			Low			High			Low			2009				2008			2007
First	$	28.85		$	24.35		$	32.67		$	30.42		$	0.2075	(b)		$	0.415		$	0.415
Second		26.76			24.67			33.18			28.82							0.415			0.415
Third		26.20			21.92			29.94			26.99							0.415			0.415
Fourth		22.43			17.09			30.45			28.32							0.415			0.415
(a) Based on closing stock prices.
(b) Declared February 10, 2009, and payable March 20, 2009, to shareholders of record as of February 27, 2009.

Regulatory Restrictions

Under stipulations with the MPSC and KCC, Great Plains Energy has committed to maintain consolidated common equity of not less than 30% of total capitalization.

 

Dividend Restrictions

Great Plains Energy's Articles of Incorporation contain certain restrictions on the payment of dividends on Great Plains Energy's common stock in the event common equity falls to 25% of total capitalization.  If preferred stock dividends are not declared and paid when scheduled, Great Plains Energy could not declare or pay common stock dividends or purchase any common shares.  If the unpaid preferred stock dividends equal four or more full quarterly dividends, the preferred shareholders, voting as a single class, could elect members to the Board of Directors.

 

Equity Compensation Plans

Great Plains Energy’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, director shares, director deferred share units and performance shares to directors, officers and other employees of the Company and KCP&L.

 

Effective with the July 14, 2008, acquisition of GMO, Great Plains Energy assumed GMO’s equity compensation plans.  Stock options outstanding under those plans at the time of acquisition were converted into Great Plains Energy stock options.  Great Plains Energy does not intend to issue any new grants or awards under the assumed plans.

 

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The following table provides information, as of December 31, 2008, regarding the number of common shares to be issued upon exercise of outstanding options, warrants and rights, their weighted average exercise price, and the number of shares of common stock remaining available for future issuance.  The table excludes shares issued or issuable under Great Plains Energy’s defined contribution savings plans.

Number of securities

remaining available

Number of securities

for future issuance

to be issued upon

Weighted-average

under equity

exercise of

exercise price of

compensation plans

outstanding options,

outstanding options,

(excluding securities

warrants and rights

warrants and rights

reflected in column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans

approved by security holders

Great Plains Energy Long-Term Incentive Plan

423,983

(1)

$    25.52

(2)

3,284,689

GMO incentive plans (stock options)

411,357

89.55

416,146

Equity compensation plans

not approved by security holders

-

-

-

Total

835,340

$    76.10

3,700,835

(1)

Includes 314,511 performance shares at target performance levels and options for 109,472 shares of Great Plains

Energy common stock outstanding at December 31, 2008.

(2)

The 314,511 performance shares have no exercise price and therefore are not reflected in the weighted average exercise price.

Purchases of equity securities

There were no purchases by Great Plains Energy of its equity securities during the fourth quarter of 2008.

 

KCP&L

KCP&L is a wholly owned subsidiary of Great Plains Energy, which holds the one share of issued and outstanding KCP&L common stock.

 

Regulatory Restrictions

Under the Federal Power Act, KCP&L can pay dividends only out of retained or current earnings.  Under stipulations with the MPSC and KCC, KCP&L has committed to maintain consolidated common equity of not less than 35% of total capitalization.

 

Equity Compensation Plan

KCP&L does not have an equity compensation plan; however, KCP&L officers and certain employees participate in Great Plains Energy’s Long-Term Incentive Plan.  The GMO incentive plans that were assumed by Great Plains Energy upon the acquisition include stock options held by certain KCP&L employees.

 

25

 

ITEM 6. SELECTED FINANCIAL DATA

Year Ended December 31	2008			2007			2006			2005			2004
Great Plains Energy (a)	(dollars in millions except per share amounts)
Operating revenues	$	1,670		$	1,293		$	1,140		$	1,131		$	1,092
Income from continuing operations (b)	$	120		$	121		$	137		$	135		$	132
Net income	$	155		$	159		$	128		$	162		$	183
Basic earnings per common
share from continuing operations	$	1.16		$	1.41		$	1.74		$	1.79		$	1.81
Basic earnings per common share	$	1.51		$	1.86		$	1.62		$	2.15		$	2.51
Diluted earnings per common
share from continuing operations	$	1.16		$	1.40		$	1.73		$	1.79		$	1.81
Diluted earnings per common share	$	1.51		$	1.85		$	1.61		$	2.15		$	2.51
Total assets at year end	$	7,869		$	4,832		$	4,359		$	3,842		$	3,796
Total redeemable preferred stock, mandatorily
redeemable preferred securities and long-
term debt (including current maturities)	$	2,627		$	1,103		$	1,142		$	1,143		$	1,296
Cash dividends per common share	$	1.66		$	1.66		$	1.66		$	1.66		$	1.66
SEC ratio of earnings to fixed charges		2.26			2.53			3.50			3.09			2.77
KCP&L
Operating revenues	$	1,343		$	1,293		$	1,140		$	1,131		$	1,092
Net income	$	125		$	157		$	149		$	144		$	145
Total assets at year end	$	5,229		$	4,292		$	3,859		$	3,340		$	3,335
Total redeemable preferred stock, mandatorily
redeemable preferred securities and long-
term debt (including current maturities)	$	1,377		$	1,003		$	977		$	976		$	1,126
SEC ratio of earnings to fixed charges		2.87			3.53			4.11			3.87			3.37

(a)	Great Plains Energy’s results include GMO only from the July 14, 2008, acquisition date.

(b)	This amount is before income (loss) from discontinued operations, net of income taxes, of $35.0 million, $38.3 million, $(9.1) million, $27.2 million and $50.3 million in 2008 through 2004, respectively.

 

26

 

ITEM 7.  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 are KCP&L, GMO, KLT Inc. and Services.  Great Plains Energy acquired GMO on July 14, 2008.  Great Plains Energy’s sole reportable business segment is electric utility for the periods presented.  As presented herein, for periods prior to 2008, Great Plains Energy’s electric utility segment is the same as the previously reported KCP&L segment.

 

Electric utility consists of KCP&L, a regulated utility, and GMO’s regulated utility operations, which include its Missouri Public Service and St. Joseph Light & Power divisions.  Electric utility has over 6,000 MWs of generating capacity and engages in the generation, transmission, distribution and sale of electricity to over 820,000 customers in the states of Missouri and Kansas.  Electric utility’s retail electricity rates are below the national average of investor-owned utilities.  KCP&L’s nuclear unit, Wolf Creek, accounts for approximately 15% of electric utility’s base load capacity.  In November 2008, the NRC approved WCNOC’s application for a new operating license for Wolf Creek, extending its operating period from 2025 to 2045.

 

2008 Earnings Overview

Great Plains Energy’s 2008 earnings were $152.9 million, or $1.51 per share, including income of $35.0 million from the discontinued operations of Strategic Energy and income of $12.5 million from GMO after its acquisition.  For 2007, earnings were $157.6 million, or $1.85 per diluted share, including income of $38.3 million from the discontinued operations of Strategic Energy.  Earnings in 2008 were favorably impacted by the acquisition of GMO, new retail rates at KCP&L and an increase in Allowance for Funds Used During Construction (AFUDC).  These favorable impacts were more than offset by mild summer weather, a decrease in wholesale sales, and increased fuel, purchased power and operating expenses at KCP&L.

 

Strategic Focus

In 2008, Great Plains Energy refocused the company on its core regulated utility business.  Great Plains Energy sold Strategic Energy, its major non-regulated business, acquired GMO, continued to make progress on the Comprehensive Energy Plan and filed requests for retail rate increases.  These items are described in more detail as follows:

 

·	Sale of Strategic Energy – Discontinued Operations

In April 2008, the Board of Directors approved management’s recommendation to sell Strategic Energy and Great Plains Energy entered into an agreement with Direct Energy Services, LLC (Direct Energy), a subsidiary of Centrica plc, under which Direct Energy acquired all of Great Plains Energy’s interest in Strategic Energy.  On June 2, 2008, Great Plains Energy completed the sale of Strategic Energy.  Strategic Energy is reported as discontinued operations for the periods presented.  See Note 24 to the consolidated financial statements for additional information.

 

·	GMO Acquisition

On July 14, 2008, Great Plains Energy closed its acquisition of GMO.  On October 17, 2008, GMO changed its name from Aquila, Inc. to KCP&L Greater Missouri Operations Company.  Prior GMO shareholders received $1.80 in cash plus 0.0856 of a share of Great Plains Energy common stock for each share of GMO common stock.  The total purchase price of the acquisition was approximately $1.7 billion.  Immediately prior to Great Plains Energy’s acquisition of GMO, Black Hills Corporation (Black Hills) acquired GMO’s electric utility assets in Colorado and its gas utility assets in Colorado, Kansas, Nebraska and Iowa.  See Note 2 to the consolidated financial statements for additional information.

27

 

·	Comprehensive Energy Plan – Iatan No. 1 environmental and Iatan No. 2

·

In the first quarter of 2009, KCP&L completed construction of the Iatan No. 1 environmental project and Iatan common facilities.  KCP&L’s share of the total projected cost excluding AFUDC is in the table below and includes KCP&L’s 70% share of costs directly associated with Iatan No. 1 and KCP&L’s 61% share of estimated costs of Iatan common facilities that will be used by both Iatan No. 1 and Iatan No. 2.  The vast majority of the common facilities costs were previously included in the Iatan No. 2 cost estimates disclosed in the Company’s quarterly reports on Form 10-Q during 2008.  Great Plains Energy’s total share of Iatan No. 1 is 88%, which consists of KCP&L’s 70% share and GMO’s 18% share.  Great Plains Energy’s total share of Iatan common facilities is 79%, which consists of KCP&L’s 61% share and GMO’s 18% share.  Great Plains Energy’s share of the total projected cost excluding AFUDC of the Iatan No. 1 environmental project and Iatan common facilities is in the table below.

 

·

Iatan No. 1 has been off-line for a scheduled outage since mid-October 2008 for a unit overhaul and to tie in the environmental equipment.  Iatan No. 1 was originally scheduled to be back on-line in February 2009, but, during start-up, a high level of vibration was experienced.  Repairs to the turbine could delay the in-service date of Iatan No. 1, by up to two months.  Management believes that a delay of that duration could still be accommodated in the current KCP&L and GMO rate cases; however, there could be a corresponding delay in the effective date of the MPSC rate orders from the current August 5, 2009, date.  Management is unable to predict the length of such a delay, if any.

 

·

KCP&L’s approximate 55% share of the total projected cost of Iatan No. 2 excluding AFUDC is in the table below.  The reduction in the range from the previously disclosed Iatan No. 2 cost estimates reflects removal of costs for common facilities discussed above.  These costs were previously included in the Iatan No. 2 cost estimates disclosed in the Company’s quarterly reports on Form 10-Q during 2008.  Great Plains Energy’s total share of Iatan No. 2 is 73%, which consists of KCP&L’s 55% share and GMO’s 18% share.  Great Plains Energy’s 73% share of the total projected cost excluding AFUDC of Iatan No. 2 is in the table below.  The anticipated in-service date for Iatan No. 2 is the summer of 2010.

KCP&L
		Current Estimate				Previous Estimate
		Range				Range				Change
		(millions)
Iatan No. 1 (70% share)		$    242	-	$    262		$    330	-	$    350		$    (88)	-	$    (88)
Iatan No. 2 (55% share)		847	-	904		994	-	1,051		(147)	-	(147)
Iatan Common (61% share)		235	-	235		-	-	-		235	-	235
Total		$ 1,324	-	$ 1,401		$ 1,324	-	$ 1,401		$        -	-	$       -

Great Plains Energy
		Current Estimate				Previous Estimate
		Range				Range				Change
		(millions)
Iatan No. 1 (88% share)		$    307	-	$    332		$    415	-	$    440		$  (108)	-	$  (108)
Iatan No. 2 (73% share)		1,125	-	1,201		1,321	-	1,397		(196)	-	(196)
Iatan Common (79% share)		304	-	304		-	-	-		304	-	304
Total		$ 1,736	-	$ 1,837		$ 1,736	-	$ 1,837		$        -	-	$        -

 

 

28

 

·	Regulatory Proceedings

KCP&L filed requests for annual retail rate increases with the MPSC and KCC in the third quarter of 2008 to include its interest in the Iatan No. 1 environmental project in rate base and to recover overall increased costs of service.  GMO filed requests for annual retail rate increases with the MPSC in the third quarter of 2008 to include its interest in the Iatan No. 1 environmental project and other capital additions in rate base and to recover overall increased costs of service.  Any authorized changes to retail rates are expected to be effective in the third quarter of 2009.  The following table details the rate increases requested by both KCP&L and GMO by jurisdiction.

			Annual Revenue Increase
						Additional						Return			Rate-making
Rate Jurisdiction (a)		File Date	Traditional (b)			Amortization			Total (c)			on Equity			Equity Ratio
			(millions)
GMO (MPS)		9/5/2008	$	66.0		$	-		$	66.0			10.75	%		53.82	%
GMO (L&P)		9/5/2008		17.1			-			17.1			10.75	%		53.82	%
GMO (Steam)		9/5/2008		1.3			-			1.3			10.75	%		53.82	%
KCP&L (MO)		9/5/2008		86.4			15.1			101.5			10.75	%		53.82	%
KCP&L (KS)		9/5/2008		60.4			11.2			71.6			10.75	%		55.39	%
	Total		$	231.2		$	26.3		$	257.5
(a)	Rate Jurisdiction Areas:
	GMO (MPS): Represents the area served by GMO's Missouri Public Service division
	GMO (L&P): Represents the area served by GMO's St. Joseph Light & Power division
	GMO (Steam): GMO steam customers in the St. Joseph, Missouri, area
	KCP&L (MO): KCP&L Missouri customers (not in former Aquila service territory)
	KCP&L (KS): KCP&L Kansas customers
(b)	The amounts in this column reflect the revenue requirements calculated using the traditional rate case
	methodologies, which exclude additional amortization amounts to help maintain cash flow levels
(c)	Excludes amounts recovered through KCP&L’s Kansas ECA and most of GMO’s FAC and QCA

In February 2009, the MPSC and KCC staffs filed their respective testimony regarding the requests for annual rate increases filed by KCP&L and GMO.  The following table details the rate increases recommended by the MPSC and KCC staffs by KCP&L and GMO jurisdiction.

		Annual Revenue Increase
					Additional						Return			Rate-making
Rate Jurisdiction		Traditional			Amortization			Total			on Equity			Equity Ratio
		(millions)
GMO (MPS) (a)		$	46.0		$	-		$	46.0			9.75	%		51.03	%
GMO (L&P) (a)			22.8			-			22.8			9.75	%		51.03	%
GMO (Steam) (a)			1.0			-			1.0			9.75	%		51.03	%
KCP&L (MO) (a)			45.2		(b)				45.2			9.75	%		50.65	%
KCP&L (KS)			42.6			11.2			53.8			11.40	%		50.76	%
	Total	$	157.6		$	11.2		$	168.8
(a)	Annual revenue increase and return on equity based on the mid-point of MPSC staff's return on
	equity range.
(b)	Amount not included in the MPSC staff's February 2009 testimony, but will be included in the
	second quarter 2009 true up.

 

29

 

2009 Outlook

In 2009, electric utility   is expected to have lower retail demand than in 2008 as a result of the slowing economy assuming normal weather conditions.  If the current economic downturn continues or worsens, overall electricity MWh sales may continue to decline and/or bad debt expense may increase, which could materially affect Great Plains Energy’s results of operations, financial position and cash flows.  Electric utility’s retail rates for GMO and in Kansas for KCP&L are covered by fuel recovery mechanisms, which are described under the heading “Electric Utility Results of Operations.”  KCP&L’s Missouri retail rates do not include a fuel recovery mechanism, meaning changes in costs will not be reflected in rates until new rates are authorized by regulators.  This regulatory lag between the time costs change and when they are reflected in rates applies to all costs, other than those included in fuel recovery mechanisms.  In the current rising cost environment, regulatory lag can be expected to have an adverse impact on Great Plains Energy’s results of operations.  Additionally, continuing instability in the capital and credit markets have adversely affected, and could continue to adversely affect, Great Plains Energy’s access to and cost of capital.

 

In response to these trends, management has taken the following measures:

 

·	eliminated or deferred capital spending in 2009 and 2010,

 

·	tightly managing operations and maintenance expense,

 

·	freezing external hiring for all but essential skills and

 

·	reduced the common stock dividend by 50%, from an annual level of $1.66 per share to $0.83 per share.

 

RELATED PARTY TRANSACTIONS

 

See Note 19 to the consolidated financial statements for information regarding related party transactions.

 

ENVIRONMENTAL MATTERS

 

See Note 16 to the consolidated financial statements for information regarding environmental matters.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures.  Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates that could have been used could have a material impact on Great Plains Energy’s results of operations and financial position.  Management has identified the following accounting policies as critical to the understanding of Great Plains Energy’s results of operations and financial position.  Management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Board of Directors.

 

Pensions

Great Plains Energy and KCP&L incur significant costs in providing non-contributory defined pension benefits.  The costs are measured using actuarial valuations that are dependent upon numerous factors derived from actual plan experience and assumptions of future plan experience.

 

Pension costs are impacted by actual employee demographics (including age, life expectancies, compensation levels and employment periods), earnings on plan assets, the level of contributions made to the plan, and plan amendments.  In addition, pension costs are also affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and pension costs.

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The assumed rate of return on plan assets was developed based on the weighted average of long-term returns forecast for the expected portfolio mix of investments held by the plan.  The assumed discount rate was selected based on the prevailing market rate of fixed income debt instruments with maturities matching the expected timing of the benefit obligation.  These assumptions, updated annually at the measurement date, are based on management’s best estimates and judgment; however, material changes may occur if these assumptions differ from actual events.  See Note 10 to the consolidated financial statements for information regarding the assumptions used to determine benefit obligations and net costs.

 

The following table reflects the sensitivities associated with a 0.5% increase or a 0.5% decrease in key actuarial assumptions.  Each sensitivity reflects the impact of the change based on a change in that assumption only.

						Impact on				Impact on
						Projected				2008
	Change in					Benefit				Pension
Actuarial assumption	Assumption					Obligation				Expense
						(millions)
Discount rate		0.5	%	increase		$	(49.0	)		$	(4.3	)
Rate of return on plan assets		0.5	%	increase			-				(2.0	)
Discount rate		0.5	%	decrease			52.3				4.4
Rate of return on plan assets		0.5	%	decrease			-				2.0

Pension expense for KCP&L is recorded in accordance with rate orders from the MPSC and KCC.  The orders allow the difference between pension costs under Statement of Financial Accounting Standards (SFAS) No. 87, “Employers’ Accounting for Pensions” and SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and pension costs for ratemaking to be recorded as a regulatory asset or liability with future ratemaking recovery or refunds, as appropriate.  KCP&L recorded 2008 pension expense of $33 million after allocations to the other joint owners of generating facilities and capitalized amounts in accordance with the 2007 MPSC and KCC rate orders.

 

GMO records pension expense in accordance with rate orders from the MPSC.  The difference between this expense and SFAS No. 87 expense is recorded as a regulatory asset or liability.  See Note 10 to the consolidated financial statements for additional discussion of the accounting for pensions.

 

Market conditions and interest rates significantly affect the future assets and liabilities of the plan.  It is difficult to predict future pension costs, changes in pension liability and cash funding requirements due to volatile market conditions.

 

Regulatory Matters

Electric utility is subject to the provisions of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.”  Accordingly, Great Plains Energy and KCP&L have recorded assets and liabilities on their consolidated balance sheets resulting from the effects of the ratemaking process, which would not otherwise be recorded under GAAP.  Regulatory assets represent incurred costs that are probable of recovery from future revenues.  Regulatory liabilities represent: amounts imposed by rate actions of electric utility’s regulators that may require refunds to customers; amounts provided in current rates that are intended to recover costs that are expected to be incurred in the future for which electric utility remains accountable; or a gain or other reduction of allowable costs to be given to customers over future periods.  Future recovery of regulatory assets is not assured, but is generally subject to review by regulators in rate proceedings for matters such as prudence and reasonableness.  Future reductions in revenue or refunds for regulatory liabilities generally are not mandated, pending future rate proceedings or actions by the regulators.

 

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Management regularly assesses whether regulatory assets and liabilities are probable of future recovery or refund by considering factors such as decisions by the MPSC, KCC or FERC on electric utility’s rate case filings; decisions in other regulatory proceedings, including decisions related to other companies that establish precedent on matters applicable to electric utility; and changes in laws and regulations.  If recovery or refund of regulatory assets or liabilities is not approved by regulators or is no longer deemed probable, these regulatory assets or liabilities are recognized in the current period results of operations.  Electric utility’s continued ability to meet the criteria for application of SFAS No. 71 may be affected in the future by restructuring and deregulation in the electric industry.  In the event that SFAS No. 71 no longer applied to a deregulated portion of electric utility’s operations, the related regulatory assets and liabilities would be written off unless an appropriate regulatory recovery mechanism is provided.  Additionally, these factors could result in an impairment on utility plant assets as determined pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.”  See Note 7 to the consolidated financial statements for additional information.

 

Impairments of Assets, Intangible Assets and Goodwill

Long-lived assets and intangible assets subject to amortization are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable as prescribed under SFAS No. 144.

 

Goodwill is tested for impairment at least annually and more frequently when indicators of impairment exist as prescribed under SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 requires that if the fair value of a reporting unit is less than its carrying value including goodwill, the implied fair value of the reporting unit goodwill must be compared with its carrying value to determine the amount of impairment.  Great Plains Energy allocates goodwill from the GMO acquisition to KCP&L and GMO reporting units for impairment testing based upon the percentage of synergies expected from each reporting unit.

 

Impairment analyses require management to make assumptions about future sales, operating costs and discount rates over the life of the related asset, or in some cases over an indefinite life.  Potential impairment indicators include such factors as current period losses combined with a history of losses, or a projection of continuing losses or a significant decrease in the market price of the asset under review.  Management’s assumptions about these factors require significant judgment and under different assumptions, the fair value of an asset could be materially different.

 

Accounting standards require a company to recognize an impairment in the current period results of operations if the sum of the undiscounted expected future cash flows from the company’s asset is less than the carrying value of the asset.  The impairment recognized is the difference between the fair value and carrying value of the asset.

 

During the fourth quarter of 2008, extraordinary levels of volatility and disruption in the stock market resulted in Great Plains Energy’s equity securities trading at a stock price below carrying value.  Management concluded that the fair value of the Company supported the GMO acquisition goodwill.  However, there can be no assurance that continued market volatility with declines of extended duration and severity will not trigger impairment testing in the future, which could result in an impairment of goodwill prospectively.

 

Derivative Accounting

MPS Merchant’s long-term natural gas contracts that qualify as derivatives under SFAS No. 133, ‘‘Accounting for Derivative and Hedging Activities,’’ are recorded under the mark-to-market method of accounting.  MPS Merchant’s portfolio consists of natural gas contracts that are settled by the delivery of the commodity or cash.  The market prices or fair values used in determining the value of MPS Merchant’s portfolio are management’s best estimates utilizing information such as closing exchange rates, over-the-counter quotes, historical volatility and the potential impact on market prices of liquidating positions in an orderly manner over a reasonable amount of time under current market conditions.  As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised.  As a result, operating results can be affected by revisions to prior accounting estimates.

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The fair value of these derivative contracts are recorded as current or long-term derivative assets or liabilities.  Changes in market prices will affect the recorded fair value of contracts.  Natural gas market prices vary based upon a number of factors.  Changes in the fair value of contracts will affect earnings in the period of the change for contracts under fair value accounting, while changes in forward market prices related to contracts under accrual accounting will affect earnings in future periods to the extent those prices are realized.

 

Derivative liabilities are discounted using the Company’s credit standing, versus the receivable side of these transactions, which are discounted based on the counterparties’ credit standings.  As these spreads narrow, non-cash mark-to-market losses are recorded; as they widen, non-cash mark-to-market gains are recorded.  These gains and losses can fluctuate if the Company’s credit or the credit of a group of counterparties deteriorates or improves significantly.

 

Management cannot predict whether, or to what extent, the factors affecting market prices may change, but those changes could be material and could be either favorable or unfavorable.

 

Income Taxes

Income taxes are accounted for using the asset/liability approach in accordance with SFAS No. 109, “Accounting for Income Taxes.”  Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse.  Deferred investment tax credits are amortized ratably over the life of the related property.  Deferred tax assets are also recorded for net operating loss, capital loss and tax credit carryforwards.  The Company is required to estimate the amount of taxes payable or refundable for the current year and the deferred tax liabilities and assets for future tax consequences of events reflected in the Company’s consolidated financial statements or tax returns.  This process requires management to make assessments regarding the timing and probability of the ultimate tax impact.  The Company records valuation allowances on deferred tax assets if it is determined that it is more likely than not that the asset will not be realized.

 

Additionally, the Company establishes reserves for uncertain tax positions based upon management’s judgment regarding potential future challenges to those positions in accordance with FASB Interpretation (FIN) No. 48 “Accounting for Uncertainty in Income Taxes,”   an interpretation of SFAS No. 109, “Accounting for Income Taxes.”  Interest related to unrecognized tax benefits is recognized in interest expense and penalties are recognized as a non-operating expense.  The accounting estimates related to the liability for uncertain tax positions require management to make judgments regarding the sustainability of each uncertain tax position based on its technical merits.  If it is determined that it is more likely than not a tax position will be sustained based on its technical merits, the impact of the position is recorded in the Company’s consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement.  These estimates are updated at each reporting date based on the facts, circumstances and information available.  Management is also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to the unrecognized tax benefits will occur during the next twelve months.  See Note 22 to the consolidated financial statements for additional information.

 

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GREAT PLAINS ENERGY RESULTS OF OPERATIONS

 

The following table summarizes Great Plains Energy’s comparative results of operations.  GMO’s results of operations are only included from the date of the acquisition, July 14, 2008, through December 31, 2008.

	2008			2007			2006
	(millions)
Operating revenues	$	1,670.1		$	1,292.7		$	1,140.4
Fuel		(311.4	)		(245.5	)		(229.5	)
Purchased power		(208.9	)		(101.0	)		(26.4	)
Other operating expenses		(639.8	)		(523.0	)		(462.7	)
Skill set realignment deferral (costs)		-			8.9			(9.4	)
Depreciation and amortization		(235.0	)		(175.6	)		(152.7	)
Operating income		275.0			256.5			259.7
Non-operating income and expenses		21.1			3.2			9.3
Interest charges		(111.3	)		(91.9	)		(70.1	)
Income tax expense		(63.8	)		(44.9	)		(60.3	)
Minority interest in subsidiaries		(0.2	)		-			-
Loss from equity investments		(1.3	)		(2.0	)		(1.9	)
Income from continuing operations		119.5			120.9			136.7
Income (loss) from discontinued operations		35.0			38.3			(9.1	)
Net income		154.5			159.2			127.6
Preferred dividends		(1.6	)		(1.6	)		(1.6	)
Earnings available for common shareholders	$	152.9		$	157.6		$	126.0

2008 compared to 2007

Great Plains Energy’s 2008 earnings available for common shareholders decreased to $152.9 million, or $1.51 per share, from $157.6 million, or $1.85 per diluted share in 2007.  A higher number of common shares, primarily due to the issuance of 32.2 million shares for the acquisition of GMO, diluted 2008 earnings per share by $0.28.

 

Electric utility’s net income decreased $13.7 million in 2008 compared to 2007.  This decrease was primarily due to mild summer weather, a decrease in wholesale sales, higher fuel costs, higher purchased power prices and planned and unplanned plant outages which led to increased operating expenses at KCP&L.  Also, in 2007, KCP&L received authorization from the MPSC and KCC to defer $8.9 million of skill set realignment costs incurred in 2006 resulting in lower expenses in 2007.  Partially offsetting these decreases were increased retail revenues primarily due to new retail rates at KCP&L effective January 1, 2008 and an increase in AFUDC at KCP&L.  The acquisition of GMO increased electric utility’s net income $17.9 million.

 

Great Plains Energy’s corporate and other activities loss from continuing operations decreased $12.3 million in 2008 compared to 2007, primarily due to $3.4 million of after-tax income related to the release of a legal reserve described in Note 17 to the consolidated financial statements, the reversal of $3.6 million of after-tax interest expense related to unrecognized tax benefits, a $3.8 million after-tax favorable impact from the deferral in 2008 of merger transition costs incurred in 2007 to a regulatory asset and a $4.6 million after-tax change in the fair value of Forward Starting Swaps (FSS).  The acquisition of GMO increased Great Plains Energy’s corporate and other activities loss $5.4 million.

 

2007 compared to 2006

Great Plains Energy’s 2007 earnings available for common shareholders increased to $157.6 million, or $1.85 per diluted share, from $126.0 million, or $1.61 per diluted share in 2006.  A higher number of common shares, primarily due to the issuance of 5.2 million shares to the holders of FELINE PRIDES SM in February 2007 and 5.2 million shares in May 2006, diluted 2007 earnings per share by $0.17.

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Electric utility’s net income increased $7.2 million in 2007 compared to 2006 due to increased retail and wholesale revenues, which more than offset the impact of planned and unplanned outages during the first half of the year that lead to increased fuel, purchased power and operating expenses.  Additionally, in 2006 KCP&L recorded $9.3 million of skill set realignment costs and in 2007 received authorization from the MPSC and KCC to defer $8.9 million of these costs to be amortized in future years.

 

Great Plains Energy’s corporate and other activities recognized an additional $23.0 million net loss in 2007 compared to 2006, which was primarily attributable to a decline in available tax credits from affordable housing investments and overall higher expenses at the holding company, including $11.7 million of transition costs related to the anticipated acquisition of GMO, and a $10.3 million after-tax loss for the fair value of FSS entered into by Great Plains Energy during 2007.

 

ELECTRIC UTILITY RESULTS OF OPERATIONS

 

The following table summarizes the electric utility segment results of operations.

	2008			2007			2006
	(millions)
Operating revenues	$	1,670.1		$	1,292.7		$	1,140.4
Fuel		(311.4	)		(245.5	)		(229.5	)
Purchased power		(209.9	)		(101.0	)		(26.4	)
Other operating expenses		(624.2	)		(500.4	)		(451.5	)
Skill set realignment deferral (costs)		-			8.9			(9.3	)
Depreciation and amortization		(235.0	)		(175.6	)		(152.7	)
Operating income		289.6			279.1			271.0
Non-operating income and expenses		21.3			4.2			11.1
Interest charges		(96.9	)		(67.2	)		(60.9	)
Income tax expense		(70.9	)		(59.3	)		(71.6	)
Net income	$	143.1		$	156.8		$	149.6

Electric utility’s residential customers’ usage is significantly affected by weather.  Bulk power sales, the major component of wholesale sales, vary with system requirements, generating unit and purchased power availability, fuel costs and requirements of other electric systems.  Electric utility’s revenues contain certain fuel recovery mechanisms as follows:

 

·

KCP&L’s Kansas retail rates effective January 1, 2008, contain an ECA tariff.  The ECA tariff reflects the projected annual amount of fuel, purchased power, emission allowances, transmission costs and asset-based off-system sales margin.  These projected amounts are subject to quarterly re-forecasts.  Any difference between the ECA revenue collected and the actual ECA amounts for a given year (which may be positive or negative) is recorded as an increase to or reduction of retail revenues and deferred as a regulatory asset or liability to be recovered from or refunded to Kansas retail customers over twelve months beginning April 1 of the succeeding year.

 

·

GMO’s electric retail rates contain a FAC under which 95% of the difference between actual fuel and purchased power costs and the amount of fuel and purchased power costs provided in base rates is passed along to GMO’s customers.  The FAC cycle consists of an accumulation period of six months beginning in June and December.  FAC rate approval is requested every six months for a twelve month recovery period.  The FAC is recorded as an increase to or reduction of retail revenues and deferred as a regulatory asset or liability to be recovered from or refunded to GMO’s electric retail customers.

 

·	GMO’s steam rates contain a Quarterly Cost Adjustment (QCA) under which 80% of the difference between actual fuel costs and base fuel costs is passed along to GMO’s steam customers.  The QCA is

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recorded as an increase to or reduction of other revenues and deferred as a regulatory asset or liability to be recovered from or refunded to GMO’s steam customers.

 

KCP&L’s Missouri retail rates do not contain a similar adjustment mechanism, meaning that changes in costs will not be reflected in rates until new rates are authorized by the MPSC.  This regulatory lag between the time costs change and when they are reflected in rates applies to all costs not included in fuel recovery mechanisms as described above.  In the current rising cost environment, regulatory lag can be expected to have an adverse impact on Great Plains Energy’s results of operations.

 

Generation fuel mix can substantially change the fuel cost per MWh generated.  Generation fuel mix can be significantly impacted by planned and unplanned plant outages.  Nuclear fuel cost per MWh generated is substantially less than the cost of coal per MWh generated, which is significantly lower than the cost of natural gas and oil per MWh generated.  The cost per MWh for purchased power is generally significantly higher than the cost per MWh of coal and nuclear generation.  Electric utility continually evaluates its system requirements, the availability of generating units, its demand-side management and efficiency programs, availability and cost of fuel supply and purchased power, and the requirements of other electric systems to provide reliable power economically.

 

Electric Utility Revenues and MWh Sales

				%					%
	2008			Change (a)		2007			Change			2006
Retail revenues	(millions)
Residential	$	605.5		NM		$	433.8			13		$	384.3
Commercial		620.7		NM			492.1			11			442.6
Industrial		142.2		NM			106.8			7			99.8
Other retail revenues		13.3		NM			9.9			12			8.8
Provision for rate refund (excess Missouri
wholesale margin)		(2.9	)	NM			(1.1	)	NA				-
Fuel recovery mechanism under recovery		30.7		NM			-		NA				-
Total retail		1,409.5		NM			1,041.5			11			935.5
Wholesale revenues		230.1		NM			234.0			23			190.4
Other revenues		30.5		NM			17.2			19			14.5
Total revenues	$	1,670.1		NM		$	1,292.7			13		$	1,140.4

				%					%
	2008			Change (a)		2007			Change			2006
Retail MWh sales	(thousands)
Residential		7,047		NM			5,597			3			5,413
Commercial		9,227		NM			7,737			5			7,403
Industrial		2,721		NM			2,161			1			2,148
Other retail MWh sales		94		NM			92			8			86
Total retail		19,089		NM			15,587			4			15,050
Wholesale MWh sales		5,237		NM			5,635			21			4,676
Total MWh sales		24,326		NM			21,222			8			19,726
(a) Not meaningful due to the acquisition of GMO on July 14, 2008.

Retail revenues increased $368.0 million in 2008 compared to 2007.  The acquisition of GMO increased retail revenue $306.2 million.  New retail rates, effective January 1, 2008, at KCP&L also increased retail revenue.  These increases were partially offset by mild summer weather in 2008, with a 27% decrease in cooling degree days.

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Retail revenues increased $106.0 million in 2007 compared to 2006 primarily due to new retail rates effective January 1, 2007, growth in the number of customers and higher usage per customer.  In addition, favorable weather in 2007, with a 22% increase in heating degree days partially offset by a 5% decrease in cooling degree days, contributed to the increase in retail revenue.

 

The following table provides cooling degree days (CDD) and heating degree days (HDD) for the last three years at the Kansas City International Airport.  CDD and HDD are used to reflect the demand for energy to cool or heat homes and buildings.

	2008				% Change				2007				% Change				2006
CDD		1,196				(27	)			1,637				(5	)			1,724
HDD		5,590				14				4,925				22				4,052

Wholesale revenues decreased $3.9 million in 2008 compared to 2007 due to an 11% decrease in wholesale MWh sales resulting from less generation at KCP&L due to plant outages.  This decrease was partially offset by a 9% increase in the average market price power per MWh to $46.34, primarily due to higher natural gas prices.  The acquisition of GMO increased wholesale revenues $8.6 million.

 

Wholesale revenues increased $43.6 million in 2007 compared to 2006 due to a 21% increase in wholesale MWh sales resulting from increased generation due to greater plant availability in the second half of the year.

 

Electric Utility Fuel and Purchased Power

				%						%
	2008			Change			2007			Change			2006
Net MWhs Generated by Fuel Type	(thousands)
Coal		16,793		NM (a)				14,894			(1	)		15,056
Nuclear		3,994			(18	)		4,873			11			4,395
Natural gas and oil		486		NM (a)				544			(4	)		564
Wind		419			38			305		NM				106
Total Generation		21,692		NM (a)				20,616			2			20,121
(a) Not meaningful due to the acquisition of GMO on July 14, 2008.

KCP&L’s coal base load equivalent availability factor for 2008, decreased to 78% from 80% in 2007 and from 83% in 2006.  GMO’s coal base load equivalent availability factor since the July 14, 2008, acquisition was 66% which was negatively impacted by scheduled plant outages in the last half of 2008.

 

KCP&L’s nuclear unit, Wolf Creek, accounts for approximately 15% of electric utility’s base load capacity.  Wolf Creek’s latest refueling outage began on March 20, 2008, and there were several increases in work scope during the outage that extended the restart until May 14, 2008.  A primary driver of the work scope increases was modifications to piping systems associated with the emergency core cooling systems.  As a result of the outage, the capacity and equivalent availability factor for Wolf Creek decreased to 83% in 2008 compared to 100% for 2007.

 

Fuel expense increased $65.9 million in 2008 compared to 2007.  The acquisition of GMO increased fuel expense $58.1 million.  The remaining increase was at KCP&L, primarily due to higher coal and coal transportation costs and less nuclear in the fuel mix, which has a lower cost compared to other fuel types.  These increases were partially offset by decreased MWhs generated by KCP&L, primarily due to lower system requirements.

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Fuel expense increased $16.0 million in 2007 compared to 2006 primarily due to higher coal and coal transportation costs and a 2% increase in MWhs generated, excluding wind generation, which has no fuel cost.  This increase was partially offset by changes in the fuel mix with more nuclear and less coal and natural gas in the fuel mix.

 

Purchased power expense increased $108.9 million in 2008 compared to 2007.  The acquisition of GMO increased purchased power expense $90.9 million.  The remaining increase at KCP&L was primarily due to a 26% increase in the average price per MWh as a result of higher natural gas prices.  Additionally, an 8% increase in MWh purchases primarily due to the impact of the Wolf Creek refueling outage increased purchased power expense.  These increases were partially offset by $6.9 million in recoveries from a litigation settlement regarding a 2005 transformer failure.

 

Purchased power expense increased $74.6 million in 2007 compared to 2006 primarily due to a 240% increase in MWh purchases to support increased retail load, the impact of planned and unplanned outages in the first half of 2007 and increased purchases for resale to satisfy firm wholesale MWh sales commitments when it was more economical to purchase power rather than delivering MWhs generated at KCP&L’s plants.  This increase was slightly offset by a 10% decrease in the average price per MWh.

 

Electric Utility Other Operating Expenses (including utility operating expenses, maintenance, general taxes and other)

Electric utility’s other operating expenses increased $123.8 million in 2008 compared to 2007 primarily due to the following:

 

·	the acquisition of GMO increased operating expenses $95.9 million,

 

·	increased plant operations and maintenance expenses of $12.2 million due to plant outages,

 

·	increased employee-related costs of $5.5 million,

 

·	increased property taxes of $3.0 million due to higher assessments and higher mill levies and

 

·	increased gross receipts tax expense of $2.1 million due to the increase in revenues.

 

Electric utility’s other operating expenses increased $48.9 million in 2007 compared to 2006 primarily due to the following:

 

·	increased pension expenses of $18.4 million due to the increased level of pension costs in KCP&L’s rates effective January 1, 2007,

 

·	increased plant operations and maintenance expenses of $9.7 million primarily due to planned and unplanned outages in the first half of 2007 and the addition of the Spearville Wind Energy Facility in the third quarter of 2006,

 

·	increased transmission expenses of $7.7 million primarily due to increased transmission usage charges as a result of the increased wholesale MWh sales and higher SPP fees,

 

·	increased gross receipts tax expense of $3.6 million due to the increase in revenues,

 

·	increased labor expense of $2.8 million primarily due to filling open positions,

 

·	increased equity compensation expense of $1.9 million and

 

·	increased property taxes of $1.6 million primarily due to increases in mill levies.

 

Partially offsetting the increases in other operating expenses was decreased incentive compensation expense of $5.7 million.

 

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Electric Utility Skill Set Realignment

In 2005 and early 2006, management undertook a process to assess, improve and reposition the skill sets of employees for implementation of KCP&L’s Comprehensive Energy Plan.  KCP&L recorded $9.3 million in 2006 related to this workforce realignment process reflecting severance, benefits and related payroll taxes provided by KCP&L to employees.  In 2007, KCP&L received authorization from the MPSC and KCC to establish $8.9 million in regulatory assets for these costs and amortize them over five years for the Missouri jurisdictional portion and ten years for the Kansas jurisdictional portion effective with new rates on January 1, 2008.

Electric Utility Depreciation and Amortization

Electric utility’s depreciation and amortization costs increased $59.4 million in 2008 compared to 2007.  The acquisition of GMO increased depreciation and amortization $30.7 million.  The remaining increase at KCP&L was primarily due to additional amortization pursuant to rate case orders of $21.7 million combined with normal depreciation activity for capital additions.

 

Electric utility’s depreciation and amortization costs increased $22.9 million in 2007 compared to 2006 primarily due to additional amortization pursuant to 2006 rate case orders of $11.9 million and a $4.5 million increase due to wind generation assets placed in service in the third quarter of 2006.

 

Electric Utility Non-Operating Income and Expenses

Electric utility’s non-operating income and expenses increased $17.1 million in 2008 compared to 2007.  The acquisition of GMO increased non-operating income and expenses $2.1 million.  The remaining increase at KCP&L was primarily due to an increase in the equity component of AFUDC resulting from a higher construction work in progress balance due to Comprehensive Energy Plan projects.

Electric Utility Interest Charges

Electric utility’s interest charges increased $29.7 million in 2008 compared to 2007.  The acquisition of GMO increased interest charges $24.6 million.  The remaining increase at KCP&L was primarily due to interest on $350.0 million of 6.375% unsecured Senior Notes issued in March 2008, partially offset by an increase in the debt component of AFUDC resulting from a higher construction work in progress balance due to Comprehensive Energy Plan projects.

 

Electric utility’s interest charges increased $6.3 million in 2007 compared to 2006 due to an increase in short-term borrowings to support expenditures related to KCP&L’s Comprehensive Energy Plan.

 

Electric Utility Income Tax Expense

Electric utility’s income tax expense increased $11.6 million in 2008 compared to 2007.  The acquisition of GMO increased income taxes $11.1 million.  The remaining increase was primarily due to an increase of $20.3 million as a result of an increase in the composite tax rate reflecting the sale of Strategic Energy, mostly offset by decreased pre-tax income and increased wind credits.  See Note 22 to the consolidated financial statements for a reconciliation of effective income tax rates for the periods.

 

Electric utility’s income tax expense decreased $12.3 million in 2007 compared to 2006 primarily due to $4.1 million of wind credits and a $7.3 million increase in the allocation of tax benefits from holding company losses pursuant to Great Plains Energy’s intercompany tax allocation agreement.

 

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GREAT PLAINS ENERGY SIGNIFICANT BALANCE SHEET CHANGES (December 31, 2008 compared to December 31, 2007)

 

The following table summarizes significant balance sheet changes due to the acquisition of GMO.

	Total			December 31, 2008					Remaining
	Change			GMO					Change
Assets	(millions)
Cash and cash equivalents	$	37.1			$	31.5			$	5.6
Funds on deposit		10.8				10.8				-
Receivables, net		76.3				109.2				(32.9	)
Fuel inventories, at average cost		51.1				35.3				15.8
Materials and supplies, at average cost		35.3				31.0				4.3
Refundable income taxes		10.0				3.4				6.6
Deferred income taxes		25.0				23.2				1.8
Assets held for sale		16.3				16.3				-
Derivative instruments - current		4.1				4.2				(0.1	)
Other nonutility property and investments		33.6				35.9				(2.3	)
Net utility plant in service		1,504.6				1,425.7				78.9
Construction work in progress		1,128.9				510.6				618.3
Regulatory assets		424.7				215.7				209.0
Goodwill		156.0				156.0				-
Derivative instruments - long-term		13.0				13.0				-
Liabilities
Notes payable		162.0				174.0				(12.0	)
Current maturities of long-term debt		70.4				70.7				(0.3	)
Accounts payable		176.6				121.7				54.9
Accrued taxes		8.2				7.1				1.1
Accrued interest		55.8				52.2				3.6
Pension and post-retirement liability - current		3.4				3.1				0.3
Derivative instruments - current		41.8				5.9				35.9
Other current liabilities		33.6				32.1				1.5
Deferred income taxes		(220.9	)			(194.8	)			(26.1	)
Deferred tax credits		78.5				5.6				72.9
Asset retirement obligations		29.8				12.4				17.4
Pension and post-retirement liability - long-term		288.4				35.0				253.4
Regulatory liabilities		65.3				93.6				(28.3	)
Other deferred credits and other liabilities		39.3				54.1				(14.8	)
Long-term debt		1,453.7				1,080.1				373.6

The following are significant balance sheet changes in addition to the impacts due to the acquisition of GMO.

 

·

Great Plains Energy’s receivables, net decreased $32.9 million due to a $29.2 million decrease in receivables from joint owners primarily related to Comprehensive Energy Plan projects and a $22.7 million decrease in receivables from wholesale power sales.  Partially offsetting these decreases was a $10.0 million receivable related to KCP&L’s Series 2008 EIRR bonds issued in May 2008 and a $12.0 million increase in customer receivables due to new retail rates and higher usage due to colder weather in December 2008.

 

·	Great Plains Energy’s fuel inventories increased $15.8 million at KCP&L primarily due to decreased generation resulting from planned and unplanned plant outages and increased coal and coal transportation prices.

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·	Great Plains Energy’s construction work in progress increased $618.3 million at KCP&L primarily due to a $536.1 million increase related to KCP&L’s Comprehensive Energy Plan, including $369.8 million related to the construction of Iatan No. 2 and $166.3 million for environmental upgrades.

 

·

Great Plains Energy’s regulatory assets increased $209.0 million at KCP&L due to a reduction of plan assets in the pension and post-retirement plans as a result of unprecedented levels of volatility and disruption in the stock and credit markets.  As a regulated utility, KCP&L expects to recover any pension and post-retirement liabilities from ratepayers and, as a result, recorded a regulatory asset to offset losses in plan assets.

 

·	Great Plains Energy’s accounts payable increased $54.9 million due to increased payables related to Comprehensive Energy Plan projects, higher purchased power prices and the timing of cash payments.

 

·

Great Plains Energy’s derivative instruments – current liabilities increased $35.9 million primarily due to a $63.7 million decline in the fair value of FSS that were assigned from Great Plains Energy to KCP&L, partially offset by a decrease of $28.0 million at KCP&L related to the settlement of a Treasury Lock (T-Lock) simultaneously with the issuance of $350.0 million of 6.375% Senior Notes in March 2008.

 

·	Great Plains Energy’s deferred tax credits increased $72.9 million due to recognition of $74.2 million of advanced coal credits.  See Note 22 to the consolidated financial statements for additional information on the advanced coal credits.

 

·

Great Plains Energy’s asset retirement obligations increased $17.4 million primarily due to KCP&L recording $14.2 million of changes in cost estimates and timing used in computing the present value of certain asbestos Asset Retirement Obligations (AROs).  See Note 9 to the consolidated financial statements for additional information.

 

·	Great Plains Energy’s pension and post-retirement liability – long-term increased $253.4 million due to unprecedented levels of volatility and disruption in the stock and credit markets which resulted in large reductions in the value of plan assets.

 

·	Great Plains Energy’s regulatory liabilities decreased $28.3 million at KCP&L primarily due to a reclassification to accumulated depreciation, consistent with ratemaking treatment, of the regulatory liability for additional Wolf Creek amortization (Missouri) of $14.6 million.

 

·	Great Plains Energy’s other – deferred credits and other liabilities decreased $14.8 million due to the payment against and release of a legal reserve.

 

·	Great Plains Energy’s long-term debt increased $373.6 million due to KCP&L’s issuance of $350.0 million of 6.375% Senior Notes in March 2008 and $23.4 million of Series 2008 EIRR bonds in May 2008.

 

CAPITAL REQUIREMENTS AND LIQUIDITY

 

Great Plains Energy operates through its subsidiaries and has no material assets other than the stock of its subsidiaries.  Great Plains Energy’s ability to make payments on its debt securities and its ability to pay dividends is dependent on its receipt of dividends or other distributions from its subsidiaries, proceeds from the issuance of its securities and borrowing under its revolving credit facility.

 

Great Plains Energy’s capital requirements are principally comprised of debt maturities and electric utility’s utility construction and other capital expenditures.  These items as well as additional cash and capital requirements are discussed below.

 

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Great Plains Energy's liquid resources at December 31, 2008, consisted of $61.1 million of cash and cash equivalents on hand and $832.2 million of unused bank lines of credit.  The unused lines consisted of $207.9 million from KCP&L's revolving credit facility, $289.2 million from GMO’s credit facilities and $335.1 million from Great Plains Energy's revolving credit facility.  At February 20, 2009, Great Plains Energy’s unused bank lines of credit decreased $202.9 million from the amount at December 31, 2008, primarily to support expenditures for Comprehensive Energy Plan projects.  See Note 12 to the consolidated financial statements for more information on these agreements.

 

Great Plains Energy intends to meet day-to-day cash flow requirements including interest payments, retirement of maturing debt, construction requirements (excluding KCP&L’s Comprehensive Energy Plan), dividends and pension benefit plan funding requirements, discussed below, with a combination of internally generated funds and proceeds from the issuance of short-term and long-term debt, equity securities or equity-linked securities.  Great Plains Energy’s intention to meet a portion of these requirements with internally generated funds may; however, be impacted by the effect of inflation on operating expenses, the level of MWh sales, regulatory actions, compliance with environmental regulations and the availability of generating units.  In addition, Great Plains Energy may issue debt, equity and/or equity-linked securities to finance growth or take advantage of new opportunities.

 

KCP&L currently expects to fund its Comprehensive Energy Plan from a combination of internal and external sources including, but not limited to, contributions from rate increases, capital contributions to KCP&L from Great Plains Energy's security issuances and new short and long-term debt financing.

 

KCP&L’s primary means of short-term financing is the issuance of commercial paper.  Commercial paper market conditions were extremely difficult in the late third quarter and early fourth quarter of 2008.  Despite this, KCP&L maintained uninterrupted access to the commercial paper market, although at higher rates and shorter terms than historically.  As the fourth quarter progressed, conditions in the commercial paper market improved and KCP&L benefited in terms of both longer available terms and lower rates.

 

In February 2009, Great Plains Energy reduced its annual common dividend from $1.66 per common share to $0.83 per common share, which will reduce annual cash requirements for dividend payments by approximately $100 million from the level required if the prior dividend had been maintained.

 

Great Plains Energy presently believes it has the necessary liquidity to effectively conduct business operations for much of 2009 if capital markets were to become inaccessible.  Instability in the capital and credit markets such as which occurred in the fourth quarter of 2008, could adversely affect Great Plains Energy’s access and cost of needed capital.

Cash Flows from Operating Activities

Great Plains Energy generated positive cash flows from operating activities for the periods presented.  The increase in cash flows from operating activities for Great Plains Energy in 2008 compared to 2007 reflects an increase in KCP&L’s cash flows due to a decrease in accounts receivable from wholesale sales and joint owners and tax refunds received in 2008 partially offset by payment of $41.2 million for the settlement of three T-Locks.  Other changes in working capital are detailed in Note 3 to the consolidated financial statements.

 

The increase in cash flows from operating activities for Great Plains Energy in 2007 compared to 2006 reflects an increase in KCP&L’s cash flows due to higher retail and wholesale revenues more than offsetting higher operating expenses combined with $24.0 million in proceeds from sales of SO 2 emission allowances in 2007.  This increase was partially offset by a $15.5 million increase in deferred acquisition costs at Great Plains Energy and a lower retail margin per MWh without the impact of unrealized fair value gains and losses at Strategic Energy.  Other changes in working capital detailed in Note 3 to the consolidated financial statements also impacted operating cash flows.

 

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Cash Flows from Investing Activities

Great Plains Energy’s cash used for investing activities varies with the timing of utility capital expenditures and purchases of investments and nonutility property.  Investing activities are offset by the proceeds from the sale of properties and insurance recoveries.

 

Great Plains Energy’s utility capital expenditures increased $512.2 million in 2008 compared to 2007.  The acquisition of GMO increased cash utility capital expenditures $213.2 million and KCP&L’s cash utility capital expenditures increased $299.0 million due to a $285.7 million increase related to KCP&L’s Comprehensive Energy Plan.

 

In 2008, Great Plains Energy completed the sale of Strategic Energy and received gross cash proceeds of $307.7 million.  At the time of the sale, Strategic Energy had $88.9 million of cash, resulting in proceeds from the sale of Strategic Energy, net of cash sold of $218.8 million.

 

On July 14, 2008, Great Plains Energy closed its acquisition of GMO.  Great Plains Energy paid cash consideration of $0.7 billion.  At the time of the acquisition, GMO had approximately $1.0 billion of cash from the sale of its electric utility assets in Colorado, Kansas, Nebraska and Iowa to Black Hills.

 

Great Plains Energy’s utility capital expenditures increased $35.6 million in 2007 compared to 2006 due to KCP&L’s cash utility expenditures, including $27.0 million related to KCP&L’s Comprehensive Energy Plan.

 

Cash Flows from Financing Activities

Great Plains Energy’s cash flows from financing activities in 2008 reflect KCP&L’s issuance of $350.0 million of 6.375% unsecured Senior Notes that mature in 2018.  The proceeds were used to repay short-term borrowings.  GMO repaid $169.0 million on a credit agreement that was terminated in the third quarter of 2008 and subsequently borrowed $110.0 million under its new revolving credit facility.  Additionally, GMO terminated various other credit agreements and paid $12.5 million of termination fees.

 

Great Plains Energy’s cash flows from financing activities in 2007 reflect KCP&L’s repayment and issuance of Senior Notes; Great Plains Energy’s issuance, at a discount, of $100.0 million of 6.875% Senior Notes that mature in 2017; an increase in short-term borrowings and the $12.3 million settlement of an equity forward contract at Great Plains Energy.  KCP&L’s cash flows from financing activities in 2007 reflect KCP&L’s repayment of its $225.0 million of 6.00% Senior Notes at maturity, issuance, at a discount, of $250.0 million of 5.85% Senior Notes that mature in 2017, and an increase in short-term borrowings.  KCP&L’s short-term borrowings have increased primarily to support expenditures related to its Comprehensive Energy Plan.

 

Great Plains Energy’s cash flows from financing activities in 2006 reflect Great Plains Energy’s proceeds of $144.3 million from the issuance of 5.2 million shares of common stock at $27.50 per share in May 2006.  Fees related to this issuance were $5.2 million.  Great Plains Energy used the proceeds to make a $134.6 million equity contribution to KCP&L to support expenditures related to KCP&L’s Comprehensive Energy Plan.

 

Financing Authorization

Under stipulations with the MPSC and KCC, Great Plains Energy and KCP&L maintain common equity at not less than 30% and 35%, respectively, of total capitalization.  KCP&L’s long-term financing activities are subject to the authorization of the MPSC.  In 2008, the MPSC increased KCP&L’s authorization to issue long-term debt and to enter into interest rate hedging instruments in connection with such debt to $1.4 billion through December 31, 2009.  KCP&L has utilized $850.0 million of this amount with the issuance of its 6.05% unsecured senior notes maturing in 2035, its 5.85% unsecured senior notes maturing in 2017 and it 6.375% unsecured Senior Notes maturing in 2018, leaving $550.0 million of authorization remaining.  In addition, in February 2009, KCP&L received authorization to issue $196.5 million in mortgage bonds to insurers of KCP&L’s $196.5 million aggregate principal amount of EIRR Bonds Series 2005 and Series 2007, if and as required under the terms of the insurance agreements due to the issuance of other mortgage bonds by KCP&L.  See Note 13 to the consolidated financial statements for more information on these insurance agreements.

 

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In December 2008, FERC authorized KCP&L to have outstanding at any time up to a total of $1.1 billion in short-term debt instruments through December 2010.  The authorization is subject to four restrictions: (i) proceeds of debt backed by utility assets must be used for utility purposes; (ii) if any utility assets that secure authorized debt are divested or spun off, the debt must follow the assets and also be divested or spun off; (iii) if any proceeds of the authorized debt are used for non-utility purposes, the debt must follow the non-utility assets (specifically, if the non-utility assets are divested or spun off, then a proportionate share of the debt must follow the divested or spun off non-utility assets); and (iv) if utility assets financed by the authorized short-term debt are divested or spun off to another entity, a proportionate share of the debt must also be divested or spun off.  At December 31, 2008, there was $719.8 million available under this authorization.  KCP&L is also authorized to participate in the Great Plains Energy money pool.  The money pool is an internal financing arrangement in which funds deposited into the money pool could be lent on a short-term basis to KCP&L and GMO.  At December 31, 2008, there were no borrowings under the money pool.

 

GMO has $500.0 million of FERC short-term debt authorization.  At December 31, 2008, there was $326.0 million available under this authorization.

 

Significant Financing Activities

Great Plains Energy

Great Plains Energy has an effective shelf registration statement for the sale of unspecified amounts of securities that was filed and became effective in May 2006.

 

On August 14, 2008, Great Plains Energy entered into a Sales Agency Financing Agreement with BNY Mellon Capital Markets, LLC (BNYMCM).  Under the terms of the agreement, Great Plains Energy may offer and sell up to 8,000,000 shares of its common stock from time to time through BNYMCM, as agent, for a period of no more than three years.  The Company will pay BNYMCM a commission equal to 1% of the sales price of all shares sold under the agreement.  As of December 31, 2008, 189,300 shares had been sold for $3.5 million in net proceeds through BNYMCM.

 

During 2007, Great Plains Energy issued $100.0 million of 6.875% unsecured Senior Notes.  Great Plains Energy used the proceeds to make a $94.0 million equity contribution to KCP&L.

 

In February 2007, Great Plains Energy exercised its rights to redeem its $163.6 million FELINE PRIDES senior notes in full satisfaction of each holder’s obligation to purchase the Company’s common stock under the purchase contracts and issued 5.2 million shares of common stock to the holders of the FELINE PRIDES purchase contracts.

 

In April 2007, Great Plains Energy elected to terminate a forward sale agreement with Merrill Lynch Financial Markets, Inc. for 1.8 million shares of Great Plains Energy common stock and settle it in cash.  Based on the difference between Great Plains Energy’s average stock price of $32.60 over the period used to determine the settlement and the then-applicable forward price of $25.58, Great Plains Energy paid $12.3 million to Merrill Lynch Financial Markets, Inc.

 

In 2007, Great Plains Energy entered into three FSS, with a total notional amount of $250.0 million, to hedge against interest rate fluctuations on future issuances of long-term debt.  The three FSS were designed to effectively remove most of the interest rate uncertainty and, to the extent that swap spreads correlate with credit spreads, some degree of credit spread uncertainty with respect to the debt to be issued, thereby enabling Great Plains Energy to predict with greater assurance its future interest costs on that debt.  Following a change in financing plans, Great Plains Energy assigned the three FSS to KCP&L.

 

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KCP&L

KCP&L has an effective shelf registration statement providing for the sale of up to $900.0 million of investment grade notes and general mortgage bonds that became effective in January 2008.  There is currently $550.0 million of capacity under this registration statement.

 

In March 2008, KCP&L issued $350.0 million of 6.375% unsecured Senior Notes, maturing in 2018.  KCP&L settled three T-Locks simultaneously with the issuance of its $350.0 million 10-year long-term debt and paid $41.2 million in cash for the settlement.

 

In 2008, KCP&L remarketed several series of EIRR bonds that were auction rate securities, i.e. the interest rates were periodically reset through an auction process, as follows:

 

·	secured Series 1992 EIRR bonds maturing in 2017 totaling $31.0 million at a fixed rate of 5.25% through March 31, 2013,

 

·	secured Series 1993A EIRR bonds maturing in 2023 totaling $40.0 million at a fixed rate of 5.25% through

March 31, 2013,

 

·	unsecured Series 2007B EIRR bonds maturing in 2035 totaling $73.2 million at a fixed rate of 5.375% through March 31, 2013,

 

·	secured Series 1993B EIRR bonds maturing in 2023 totaling $39.5 million at a fixed rate of 5.00% through

March 31, 2011, and

 

·	unsecured Series 2007A EIRR bonds maturing in 2035 into two series: Series 2007A-1 totaling $63.3 million at a fixed rate of 5.125% through March 31, 2011 and Series 2007A-2 totaling $10.0 million at a fixed rate of 5.00% through March 31, 2010.

 

After these remarketing activities, none of KCP&L’s EIRR bonds are in auction rate mode.

 

In May 2008, KCP&L’s Series 2008 EIRR bonds totaling $23.4 million maturing in 2038 were issued.  Proceeds of the bonds will be used to pay for a portion of the costs at the Iatan Nos. 1 and 2 projects included in KCP&L’s Comprehensive Energy Plan.  The proceeds were deposited with a trustee, and will be used to reimburse KCP&L for qualifying expenditures.  At December 31, 2008, KCP&L had received $13.4 million in cash proceeds and had a $10.0 million short-term receivable for the proceeds that were deposited with the trustee.  The bonds have an initial long-term interest rate of 4.90% until June 30, 2013.  At the end of the initial long-term interest rate period, the bonds are subject to mandatory tender; however, KCP&L is not obligated to pay the purchase price of the bonds on the mandatory tender date.  If the bonds are not successfully remarketed, the bonds will bear interest at a daily rate equal to 10% per annum until all of the bonds are successfully remarketed.

 

In 2007, KCP&L’s Series 2007A and 2007B unsecured EIRR Bonds totaling $146.5 million maturing in 2035 were issued.  The EIRR Bonds Series 2007A and 2007B are covered by a municipal bond insurance policy issued by Financial Guaranty Insurance Company (FGIC).  The insurance agreement between KCP&L and FGIC provides for reimbursement by KCP&L for any amounts that FGIC pays under the municipal bond insurance policy.  The insurance policy is in effect for the term of the bonds.  The policy also restricts the amount of secured debt KCP&L may issue.  In the event KCP&L issues debt secured by liens not permitted by the agreement, KCP&L is required to issue and deliver to FGIC first mortgage bonds or similar securities equal in principal amount to the principal amount of the EIRR Bonds Series 2007A and 2007B then outstanding.  The proceeds from the issuance of $146.5 million EIRR Bonds Series 2007A and 2007B were used for the repayment of $146.5 million of Series 1998 A, B and D EIRR bonds.

 

In 2007, KCP&L issued $250.0 million of 5.85% unsecured Senior Notes.  The proceeds from this issuance were used to repay a short-term intercompany loan from Great Plains Energy.  KCP&L used the proceeds from the intercompany loan to repay its $225.0 million unsecured 6.00% Senior Notes at maturity.

 

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Debt Agreements

See Note 12 to the consolidated financial statements for discussion of revolving credit facilities.

 

Projected Utility Capital Expenditures

Great Plains Energy’s cash utility capital expenditures, excluding AFUDC to finance construction, were $1,023.7 million, $511.5 million and $475.9 million in 2008, 2007 and 2006, respectively.  Utility capital expenditures projected for the next three years, excluding AFUDC, are detailed in the following table.

	2009			2010			2011
Base utility construction expenditures	(millions)
Generating facilities	$	104.3		$	129.5		$	247.0
Distribution and transmission facilities		161.7			219.3			301.1
General facilities		52.6			47.1			68.8
Total base utility construction expenditures		318.6			395.9			616.9
Comprehensive Energy Plan capital expenditures
Iatan No. 2 (KCP&L Share)		276.8			113.4			-
Environmental		43.1			-			-
Customer programs & asset management		11.1			5.1			-
Total Comprehensive Energy Plan capital expenditures		331.0			118.5			-
Nuclear fuel		20.6			28.7			22.9
Iatan No. 2 (GMO Share)		90.7			37.3			-
Other environmental		31.4			41.4			216.3
Customer programs & asset management		6.3			3.7			4.3
Total utility capital expenditures	$	798.6		$	625.5		$	860.4

This utility capital expenditure plan is subject to continual review and change.

 

Pensions

The Company maintains defined benefit plans for substantially all active and inactive employees, including officers, of KCP&L, GMO and WCNOC and incurs significant costs in providing the plans.  Funding of the plans equals or exceeds the minimum requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA).  In 2008, the Company contributed $29.3 million to the plans to satisfy the ERISA funding requirements and the 2007 MPSC and KCC rate orders and in 2007 contributed $32.7 million to the plans, all paid by KCP&L.

 

The Company expects to contribute $45.2 million to the plans in 2009 to satisfy the funding requirements of ERISA and the MPSC and KCC rate orders, of which the majority will be paid by KCP&L.  This doesn’t include additional voluntary contributions that may be made to address funding levels affected by recent market declines.  Due to the economic downturn, The Worker, Retiree and Employer Recovery Act (WRERA) was signed into law on December 23, 2008, to provide some funding relief from the requirements of the PPA which was generally effective for plan years beginning in 2008.  Among other things, WRERA relaxes the PPA transition rules for phasing in liability targets.

 

With the GMO acquisition on July 14, 2008, Black Hills assumed the pension obligation and a portion of the plan assets related to the current and former employees of GMO’s electric and gas utility operations acquired by Black Hills under the terms of the purchase agreement.  The final transfer of plan assets is expected to be completed in the first quarter of 2009 at which time the Company expects to make a voluntary contribution of approximately $12 million to sustain the funded status of the plans.

 

Management believes the Company has adequate access to capital resources through a combination of cash flows from operations and existing lines of credit to support the funding requirements.

 

46

 

Credit Ratings

At December 31, 2008, the major credit rating agencies rated Great Plains Energy’s and KCP&L’s securities as detailed in the following table.

	Moody's		Standard
	Investors Service		& Poor's
Great Plains Energy
Outlook	Negative		Stable
Corporate Credit Rating	-		BBB
Preferred Stock	Ba1		BB+
Senior Unsecured Debt	Baa2		BBB-
KCP&L
Outlook	Negative		Stable
Senior Secured Debt (a)	A2		BBB
Senior Unsecured Debt	A3		BBB
Commercial Paper	P-2		A-2
GMO
Outlook	Negative		Stable
Senior Secured Debt (b)	Baa2		BBB+
Senior Unsecured Debt (b)	Baa2		BBB
(a) In February 2009, Standard and Poor's upgraded to BBB+
(b) reflects Great Plains Energy guarantee

A securities rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency.  Great Plains Energy and KCP&L view maintenance of strong credit ratings as extremely important and to that end an active and ongoing dialogue is maintained with the agencies with respect to results of operations, financial position, and future prospects.  While a decrease in these credit ratings would not cause any acceleration of Great Plains Energy’s, KCP&L’s or GMO’s debt, it could increase interest charges under Great Plains Energy’s 6.875% Senior Notes due 2017, GMO’s 11.875% Senior Notes due 2012, GMO’s 7.95% Senior Notes due 2011 and Great Plains Energy’s, KCP&L’s and GMO’s revolving credit agreements.  A decrease in credit ratings could also have an adverse impact on Great Plains Energy’s, KCP&L’s and GMO’s access to capital, the cost of funds, the amounts of collateral required under power supply agreements and Great Plains Energy’s ability to provide credit support for its subsidiaries.

 

Additionally, in KCP&L’s bond insurance policies on its secured 1992 series EIRR bonds totaling $31.0 million, its Series 1993A and 1993B EIRR bonds totaling $79.5 million, its secured and unsecured EIRR Bonds Series 2005 totaling $35.9 million and $50.0 million, respectively, and its EIRR Bonds Series 2007A and 2007B totaling $146.5 million, KCP&L has agreed to limits on its ability to issue additional mortgage bonds based on the mortgage bond’s credit ratings.  See Note 13 to the consolidated financial statements.

 

The MPSC approval of the GMO acquisition is conditioned on the requirement that any post-acquisition financial effects of a credit downgrade of Great Plains Energy, KCP&L or GMO occurring as a result of the acquisition would be borne by shareholders and not utility customers.  The Company also has agreed not to seek rate recovery of GMO interest costs in excess of equivalent investment-grade debt.

 

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Supplemental Capital Requirements and Liquidity Information

The information in the following table is provided to summarize Great Plains Energy’s cash obligations and commercial commitments.

Payment due by period		2009			2010			2011			2012			2013			After 2013			Total
Long-term debt		(millions)
	Principal	$	70.7		$	1.1		$	485.4		$	513.5		$	12.7		$	1,428.6		$	2,512.0
	Interest		187.5			182.7			163.1			116.5			86.3			878.9			1,615.0
Lease commitments
	Operating lease		18.3			16.7			15.9			15.6			14.2			167.3			248.0
	Capital lease		0.2			0.3			0.3			0.3			0.3			5.4			6.8
Pension plans (a)			45.2		(a)			(a)			(a)			(a)			(a)				45.2
Purchase commitments
	Fuel		186.2			170.8			90.6			74.6			84.9			147.7			754.8
	Purchased capacity		33.5			29.6			19.9			14.1			13.1			11.7			121.9
	Comprehensive Energy Plan		376.2			74.3			-			-			-			-			450.5
	Non-regulated natural gas
	transportation		5.5			5.5			5.0			2.6			2.6			8.2			29.4
	Other		70.3			27.4			13.4			7.5			7.3			37.1			163.0
Total contractual commitments (a)		$	993.6		$	508.4		$	793.6		$	744.7		$	221.4		$	2,684.9		$	5,946.6
(a)	The Company expects to make contributions to the pension plans beyond 2009 but the amounts are not yet determined.
	Total contractual commitments for 2010, 2011, 2012, 2013, after 2013 and Total do not reflect expected pension plan
	contributions for periods beyond 2009.

Long-term debt includes current maturities.  Great Plains Energy’s long-term debt principal excludes $2.2 million of discounts on senior notes.  Variable rate interest obligations are based on rates as of December 31, 2008.  See Note 13 to the consolidated financial statements for additional information.

 

Lease commitments end in 2032 and include capital and operating lease obligations.  Lease obligations also include railcars to serve jointly-owned generating units where KCP&L is the managing partner.  KCP&L will be reimbursed by the other owners for approximately $2.0 million per year ($18.2 million total) of the amounts included in the table above.

 

The Company expects to contribute $45.2 million to the pension plans in 2009, of which the majority will be paid by KCP&L.  Additional contributions to the plans are expected beyond 2009 in amounts at least sufficient to meet ERISA funding requirements; however, these amounts have not yet been determined.

 

Fuel commitments consist of commitments for nuclear fuel, coal, coal transportation costs and natural gas.  KCP&L and GMO purchase capacity from other utilities and nonutility suppliers.  Purchasing capacity provides the option to purchase energy if needed or when market prices are favorable.  KCP&L has capacity sales agreements not included above that total $11.2 million per year for 2009 through 2011, $6.9 million in 2012 and $1.6 million in 2013.  Comprehensive Energy Plan represents contractual commitments for projects included in KCP&L’s Comprehensive Energy Plan including jointly owned units.  KCP&L expects to be reimbursed by other owners, including GMO, for their respective share of Iatan No. 2 and environmental retrofit costs included in the Comprehensive Energy Plan contractual commitments.  Non-regulated natural gas transportation consists of MPS Merchant’s commitments.  Other represents individual commitments entered into in the ordinary course of business.

 

Great Plains Energy adopted the provisions of FIN No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes” on January 1, 2007.  At December 31, 2008, the total liability for unrecognized tax benefits for Great Plains Energy was $97.3 million.  Great Plains Energy is

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unable to determine reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.  See Note 22 to the consolidated financial statements for information regarding the recognition of tax benefits in the next twelve months, which is not expected to have a cash impact.

 

Great Plains Energy has long-term liabilities recorded on its consolidated balance sheet at December 31, 2008, that do not have a definitive cash payout date and are not included in the table above.

 

Off-Balance Sheet Arrangements

In the normal course of business, Great Plains Energy and certain of its subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries.  Such agreements include, for example, guarantees, stand-by letters of credit and surety bonds.  These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries’ intended business purposes.

 

The majority of these agreements guarantee the Company’s own future performance, so a liability for the fair value of the obligation is not recorded.  At December 31, 2008, Great Plains Energy has provided $1,144.6 million of credit support for certain subsidiaries as follows:

 

·	Great Plains Energy letters of credit totaling $4.0 million to KCP&L counterparties, which expire in 2009,

 

·	Great Plains Energy direct guarantees to GMO counterparties totaling $88.9 million, which expire in 2009,

 

·	Great Plains Energy letters of credit totaling $30.9 million to GMO counterparties, which expire in 2009, and

 

·	Great Plains Energy guarantees of GMO long-term debt totaling $1,020.8 million, which includes debt with maturity dates ranging from 2009-2023.

 

The following GMO credit facilities also are guaranteed by Great Plains Energy.

 

·

$65 million revolving line of credit dated April 22, 2005, with Union Bank of California, expiring April 22, 2009.  This facility is also secured by the accounts receivable from GMO’s Missouri regulated utility operations.  At December 31, 2008, there was $64.0 million outstanding under this facility.

 

·	$400 million revolving line of credit dated September 23, 2008, with a group of banks, expiring September 23, 2011.  At December 31, 2008, there was $110.0 million outstanding under this facility.

 

None of the guaranteed obligations are subject to default or prepayment as a result of downgrading of GMO securities, although such a downgrading has in the past, and could in the future, increase interest charges under GMO’s revolving lines of credit and GMO’s 11.875% Senior Notes due 2012 and 7.95% Senior Notes due 2011.

 

At December 31, 2008, GMO had issued letters of credit totaling $14.4 million as credit support to certain counterparties.

 

KCP&L is contingently liable for guaranteed energy savings under an agreement with a customer, guaranteeing an aggregate value of approximately $1.9 million over the next two years.  A subcontractor would indemnify KCP&L for any payments made by KCP&L under this guarantee.

 

KCP&L has guarantees related to bond insurance policies for its secured 1992 series EIRR bonds totaling $31.0 million, its Series 1993A and 1993B EIRR bonds totaling $79.5 million, its EIRR Bond Series 2005 totaling $85.9 million and its EIRR Bonds Series 2007A and 2007B totaling $146.5 million.  The insurance agreement between KCP&L and the issuer of the bond insurance policies provides for reimbursement by KCP&L for any amounts the insurer pays under the bond insurance policies.  As the insurers’ credit ratings are below KCP&L’s credit ratings, the bonds are rated at KCP&L’s credit ratings.

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New Accounting Standards

See Note 26 to the consolidated financial statements for information regarding new accounting standards.

 

KANSAS CITY POWER & LIGHT COMPANY

 

MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

 

The following discussion of KCP &L results of operations includes KCP&L, an integrated, regulated electric utility and for 2007 and 2006 includes HSS, formerly an unregulated subsidiary of KCP&L, which was transferred from KCP&L to KLT Inc. on January 2, 2008.

 

The following table summarizes KCP&L's consolidated comparative results of operations.

	2008			2007			2006
	(millions)
Operating revenues	$	1,343.0		$	1,292.7		$	1,140.4
Fuel		(253.3	)		(245.5	)		(229.5	)
Purchased power		(119.0	)		(101.0	)		(26.4	)
Other operating expenses		(528.3	)		(500.6	)		(451.5	)
Skill set realignment deferral (costs)		-			8.9			(9.3	)
Depreciation and amortization		(204.3	)		(175.6	)		(152.7	)
Operating income		238.1			278.9			271.0
Non-operating income and expenses		19.2			4.3			9.6
Interest charges		(72.3	)		(67.2	)		(61.0	)
Income tax expense		(59.8	)		(59.3	)		(70.3	)
Net income	$	125.2		$	156.7		$	149.3

KCP&L Revenues and MWh Sales

				%						%
	2008			Change			2007			Change			2006
Retail revenues	(millions)
Residential	$	463.0			7		$	433.8			13		$	384.3
Commercial		521.1			6			492.1			11			442.6
Industrial		109.9			3			106.8			7			99.8
Other retail revenues		10.6			8			9.9			12			8.8
Provision for rate refund (excess
Missouri wholesale margin)		(2.9	)	NM				(1.1	)	NA				-
Kansas ECA under recovery		1.6		NA				-		NA				-
Total retail		1,103.3			6			1,041.5			11			935.5
Wholesale revenues		221.5			(5	)		234.0			23			190.4
Other revenues		18.2			7			17.2			19			14.5
KCP&L revenues	$	1,343.0			4		$	1,292.7			13		$	1,140.4

 

50

 

				%						%
	2008			Change			2007			Change			2006
Retail MWh sales	(thousands)
Residential		5,413			(3	)		5,597			3			5,413
Commercial		7,704			-			7,737			5			7,403
Industrial		2,061			(5	)		2,161			1			2,148
Other retail MWh sales		80			(14	)		92			8			86
Total retail		15,258			(2	)		15,587			4			15,050
Wholesale MWh sales		5,030			(11	)		5,635			21			4,676
KCP&L MWh sales		20,288			(4	)		21,222			8			19,726

Retail revenues increased $61.8 million in 2008 compared to 2007 primarily due to new retail rates effective January 1, 2008, partially offset by mild summer weather in 2008, with a 27% decrease in cooling degree days.

 

Retail revenues increased $106.0 million in 2007 compared to 2006 primarily due to new retail rates effective January 1, 2007, growth in the number of customers and higher usage per customer.  In addition, favorable weather in 2007, with a 22% increase in heating degree days partially offset by a 5% decrease in cooling degree days, contributed to the increase in retail revenue.

 

Wholesale revenues decreased $12.5 million in 2008 compared to 2007 due to an 11% decrease in wholesale MWh sales resulting from less generation due to plant outages, partially offset by a 9% increase in the average market price power per MWh to $46.34, primarily due to higher natural gas prices.

 

Wholesale revenues increased $43.6 million in 2007 compared to 2006 due to a 21% increase in wholesale MWh sales resulting from increased generation due to greater plant availability in the second half of the year.

 

KCP&L Fuel and Purchased Power

				%						%
	2008			Change			2007			Change			2006
Net MWhs Generated by Fuel Type	(thousands)
Coal		14,646			(2	)		14,894			(1	)		15,056
Nuclear		3,994			(18	)		4,873			11			4,395
Natural gas and oil		378			(31	)		544			(4	)		564
Wind		419			38			305		NM				106
Total Generation		19,437			(6	)		20,616			2			20,121

KCP&L’s coal base load equivalent availability factor for 2008 decreased to 78% from 80% in 2007 and was 83% in 2006.

 

KCP&L’s nuclear unit, Wolf Creek, accounts for approximately 19% of its base load capacity.  Wolf Creek’s latest refueling outage began on March 20, 2008, and there were several increases in work scope during the outage that extended the restart until May 14, 2008.  A primary driver of the work scope increases was modifications to piping systems associated with the emergency core cooling systems.  As a result of the outage, the capacity and equivalent availability factor for Wolf Creek decreased to 83% in 2008, compared to 100% for 2007.

 

Fuel expense increased $7.8 million in 2008 compared to 2007 primarily due to higher coal and coal transportation costs and less nuclear in the fuel mix, which has a lower cost compared to other fuel types.  These increases were partially offset by decreased MWhs generated primarily due to lower system requirements.

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Fuel expense increased $16.0 million in 2007 compared to 2006 primarily due to higher coal and coal transportation costs and a 2% increase in MWhs generated, excluding wind generation, which has no fuel cost.  This increase was partially offset by changes in the fuel mix with more nuclear and less coal and natural gas in the fuel mix.

 

Purchased power expense increased $18.0 million in 2008 compared to 2007 primarily due to a 26% increase in the average price per MWh as a result of higher natural gas prices.  Additionally, an 8% increase in MWh purchases due to the impact of plant outages in the first half of the year increased purchased power expense.  These increases were partially offset by $6.5 million in recoveries from a litigation settlement regarding a 2005 transformer failure.

 

Purchased power expense increased $74.6 million in 2007 compared to 2006 primarily due to a 240% increase in MWh purchases to support increased retail load, the impact of planned and unplanned outages in the first half of 2007 and increased purchases for resale to satisfy firm wholesale MWh sales commitments when it was more economical to purchase power rather than delivering MWhs generated at KCP&L’s plants.  This increase was slightly offset by a 10% decrease in the average price per MWh.

 

KCP&L Other Operating Expenses (including operating expenses, maintenance, general taxes and other)

KCP&L’s other operating expenses increased $27.7 million in 2008 compared to 2007 primarily due to the following:

 

·	increased plant operations and maintenance expenses of $12.2 million due to plant outages,

 

·	increased employee-related costs of $5.5 million,

 

·	increased property taxes of $3.0 million due to plant additions and increased mill levies and

 

·	increased gross receipts tax expense of $2.1 million due to the increase in revenues.

 

KCP&L’s other operating expenses increased $49.1 million in 2007 compared to 2006 primarily due to the following:

 

·	increased pension expenses of $18.4 million due to the increased level of pension costs in KCP&L’s rates effective January 1, 2007,

 

·	increased plant operations and maintenance expenses of $9.7 million primarily due to planned and unplanned outages in the first half of 2007 and the addition of the Spearville Wind Energy Facility in the third quarter of 2006,

 

·	increased transmission expenses of $7.7 million primarily due to increased transmission usage charges as a result of the increased wholesale MWh sales and higher SPP fees,

 

·	increased gross receipts tax expense of $3.6 million due to the increase in revenues,

 

·	increased labor expense of $2.8 million primarily due to filling open positions,

 

·	increased equity compensation expense of $1.9 million and

 

·	increased property taxes of $1.6 million primarily due to increases in mill levies.

 

Partially offsetting the increase in other operating expenses was decreased incentive compensation expense of $5.7 million.

 

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KCP&L Skill Set Realignment

In 2005 and early 2006, management undertook a process to assess, improve and reposition the skill sets of employees for implementation of KCP&L’s Comprehensive Energy Plan.  KCP&L recorded $9.3 million in 2006 related to this workforce realignment process reflecting severance, benefits and related payroll taxes provided by KCP&L to employees.  In 2007, KCP&L received authorization from the MPSC and KCC to establish $8.9 million in regulatory assets for these costs and amortize them over five years for the Missouri jurisdictional portion and ten years for the Kansas jurisdictional portion effective with new rates on January 1, 2008.

 

KCP&L Depreciation and Amortization

KCP&L’s depreciation and amortization costs increased $28.7 million in 2008 compared to 2007 primarily due to additional amortization pursuant to rate case orders of $21.7 million combined with normal depreciation activity for capital additions.  KCP&L’s depreciation and amortization costs increased $22.9 million in 2007 compared to 2006 primarily due to additional amortization pursuant to 2006 rate case orders of $11.9 million and a $4.5 million increase due to wind generation assets placed in service in the third quarter of 2006.

 

KCP&L Non-operating Income and Expenses

KCP&L’s non-operating income and expenses increased $14.9 million in 2008 compared to 2007 primarily due to an increase in the equity component of AFUDC resulting from a higher construction work in progress balance due to KCP&L’s Comprehensive Energy Plan projects.

KCP&L Interest Charges

KCP&L’s interest charges increased $5.1 million in 2008 compared to 2007 primarily due to interest on $350.0 million of 6.375% unsecured Senior Notes issued in March 2008, partially offset by an increase in the debt component of AFUDC resulting from a higher construction work in progress balance due to KCP&L’s Comprehensive Energy Plan projects.  KCP&L’s interest charges increased $6.2 million in 2007 compared to 2006 due to an increase in short-term borrowings to support expenditures related to KCP&L’s Comprehensive Energy Plan.

 

KCP&L Income Tax Expense

KCP&L’s income tax expense increased $0.5 million in 2008 compared to 2007 primarily due to an increase of $20.3 million as a result of an increase in the composite tax rate reflecting the sale of Strategic Energy, mostly offset by decreased pre-tax income and increased wind credits.  See Note 22 to the consolidated financial statements for a reconciliation of effective income tax rates for the periods.

 

KCP&L’s income tax expense decreased $11.0 million in 2007 compared to 2006 primarily due to $4.1 million of wind credits and a $7.3 million increase in the allocation of tax benefits from holding company losses pursuant to Great Plains Energy’s intercompany tax allocation agreement.

 

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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

In the ordinary course of business, Great Plains Energy and KCP&L face risks that are either non-financial or non-quantifiable.  Such risks principally include business, legal, operations and credit risks and are not represented in the following analysis.  See Item 1A. Risk Factors and Item. 7 MD&A for further discussion of risk factors.

 

Great Plains Energy and KCP&L are exposed to market risks associated with commodity price and supply, interest rates and equity prices.  Management has established risk management policies and strategies to reduce the potentially adverse effects the volatility of the markets may have on its operating results.  During the ordinary course of business, under the direction and control of an internal risk management committee, Great Plains Energy’s and KCP&L’s hedging strategies are reviewed to determine the hedging approach deemed appropriate based upon the circumstances of each situation.  Though management believes its risk management practices to be effective, it is not possible to identify and eliminate all risk.  Great Plains Energy and KCP&L could experience losses, which could have a material adverse effect on its results of operations or financial position, due to many factors, including unexpectedly large or rapid movements or disruptions in the energy markets, from regulatory-driven market rule changes and/or bankruptcy or non-performance of customers or counterparties, and/or failure of underlying transactions that have been hedged to materialize.

 

Derivative instruments are frequently utilized to execute risk management and hedging strategies.  Derivative instruments, such as futures, forward contracts, swaps or options, derive their value from underlying assets, indices, reference rates or a combination of these factors.  These derivative instruments include negotiated contracts, which are referred to as over-the-counter derivatives, and instruments listed and traded on an exchange.

 

Interest Rate Risk

Great Plains Energy and KCP&L manage interest expense and short and long-term liquidity through a combination of fixed and variable rate debt.  Generally, the amount of each type of debt is managed through market issuance, but interest rate swap and cap agreements with highly rated financial institutions may also be used to achieve the desired combination.  Using outstanding balances and annualized interest rates as of December 31, 2008, a hypothetical 10% increase in the interest rates associated with long-term variable rate debt would result in an increase of $0.3 million in interest expense for 2009.  Additionally, interest rates impact the fair value of long-term debt.  A change in interest rates would impact Great Plains Energy and KCP&L to the extent they redeemed any of their outstanding long-term debt.  Great Plains Energy’s and KCP&L’s book values of long-term debt were above fair value by 15% and 18%, respectively, at December 31, 2008.

 

KCP&L had $380.2 million of commercial paper outstanding at December 31, 2008.  The principal amount of the commercial paper, which will vary during the year, will drive KCP&L’s commercial paper interest expense.  Assuming that $380.2 million of commercial paper was outstanding for all of 2009, a hypothetical 10% increase in commercial paper rates would result in an increase of $2.0 million in interest expense for 2009.

 

Commodity Risk

Great Plains Energy and KCP&L engage in the wholesale and retail marketing of electricity and are exposed to risk associated with the price of electricity.

 

KCP&L's wholesale operations include the physical delivery and marketing of power obtained through its generation capacity and long, intermediate and short-term capacity or power purchase agreements.  The agreements contain penalties for non-performance to limit KCP&L’s energy price risk on the contracted energy.  KCP&L also enters into additional power purchase agreements with the objective of obtaining the most economical energy to meet its physical delivery obligations to customers.  KCP&L is required to maintain a capacity margin of at least 12% of its peak summer demand.  This net positive supply of capacity and energy is maintained through its generation assets and capacity and power purchase agreements to protect it from the potential operational failure of one of its power generating units.  KCP&L continually evaluates the need for

54

additional risk mitigation measures in order to minimize its financial exposure to, among other things, spikes in wholesale power prices during periods of high demand.

 

KCP&L's sales include the sales of electricity to its retail customers and bulk power sales of electricity in the wholesale market.  KCP&L continually evaluates its system requirements, the availability of generating units, availability and cost of fuel supply, the availability and cost of purchased power and the requirements of other electric systems; therefore, the impact of the hypothetical amounts that follow could be significantly reduced depending on the system requirements and market prices at the time of the increases.  A hypothetical 10% increase in the market price of power could result in a $3.1 million decrease in operating income for 2009 related to purchased power.  In 2009, approximately 74% of KCP&L’s net MWhs generated are expected to be coal-fired.  KCP&L currently has almost all of its coal requirements for 2009 under contract.  A hypothetical 10% increase in the market price of coal could result in less than a $1.0 million increase in fuel expense for 2009.  KCP&L has also implemented price risk mitigation measures to reduce its exposure to high natural gas prices.  A hypothetical 10% increase in natural gas and oil market prices could result in an increase of $0.8 million in fuel expense for 2009.  At December 31, 2008, KCP&L had hedged approximately 31% and 3% of its 2009 and 2010, respectively, projected natural gas usage for generation requirements to serve retail load and firm MWh sales.  At December 31, 2007, KCP&L had hedged approximately 35% and 4% of its 2008 and 2009, respectively, projected natural gas usage for generation requirements to serve retail load and firm MWh sales.  KCP&L’s Kansas ECA allows for the recovery of increased fuel and purchased power costs from Kansas retail customers.

 

In the GMO regulated electric operations in 2008, approximately 55% of the power sold was generated and the remaining 45% was purchased through long-term contracts or in the open market.  GMO has a FAC that allows it to adjust retail electric rates based on 95% of the difference between actual fuel and purchased power costs and the amount of fuel and purchased power costs provided in base rates.

 

Several measures have been taken to mitigate commodity price risk exposure in GMO’s electric utility operations. One of these measures is contracting for a diverse supply of coal to meet 82% and 60% of its 2009 and 2010, respectively, native load fuel requirements of coal-fired generation.  The price risk associated with natural gas and on-peak spot market purchased power requirements is also mitigated through a hedging plan using New York Mercantile Exchange (NYMEX) futures contracts and options.  This is a multi-year hedging plan.  As of December 31, 2008, GMO had financial contracts in place to hedge approximately 65% and 4% of expected on-peak natural gas and natural gas equivalent purchased power price exposure for 2009 and 2010, respectively.  The mark-to-market value of these contracts at December 31, 2008, was a liability of $6.9 million.

 

Additional factors that affect commodity price exposure are the quantity and availability of fuel used for generation and the quantity of electricity customers consume.  Quantities of fossil fuel used for generation vary from year to year based on the availability, price and deliverability of a given fuel type as well as planned and scheduled outages at facilities that use fossil fuels.  Customers' electricity usage could also vary from year to year based on the weather or other factors.

 

Market Risk – MPS Merchant

MPS Merchant is exposed to market risk, including changes in commodity prices.  To manage the volatility relating to these exposures, MPS Merchant enters into various derivative transactions in accordance with the risk management policy.  The trading portfolios consist of natural gas contracts that are settled by the delivery of the commodity or cash.  These contracts take many forms, including futures, forwards, swaps and options.  Although MPS Merchant maintains a number of transactions which are fully hedged via back-to-back deals, the business also retains two contractual obligations that are not fully hedged.  MPS Merchant is exposed to intra-month natural gas price volatility, with contracts that have a fixed price set at the beginning of each month at which customers have an option to purchase gas from MPS Merchant within the month.  Customers typically exercise this option when natural gas prices rise, thereby creating an exposure for MPS Merchant.  A hypothetical 10% increase in the daily price of natural gas, versus the First of Month Index (FOM), could result in a $13.7 million

55

pre-tax decrease in MPS Merchant non-operating income in 2009.  MPS Merchant manages this risk daily with monthly and daily swaps.  These index-based transactions continue through the year 2017.

 

Transactions carried out in connection with trading activities that are derivatives under SFAS No. 133 are accounted for under the mark-to-market method of accounting.  Under SFAS No. 133, MPS Merchant’s energy commodity trading contracts, including physical transactions (mainly gas) and financial instruments, are recorded at fair value.  As part of the valuation of the portfolio, Great Plains Energy values the credit risks associated with the financial condition of counterparties and the time value of money.  Quoted market prices from published sources or comparable transactions in liquid markets are used to value the contracts.  If actively quoted market prices are not available, brokers are contracted or other external sources or comparable transactions are used to obtain current values of the contracts.  In addition, the market prices or fair values used in determining the value of the portfolio are best estimates utilizing information such as historical volatility, time value, counterparty credit and the potential impact on market prices of liquidating the positions in an orderly manner over a reasonable period of time under current market conditions.  When market prices are not readily available or determinable, certain contracts are recorded at fair value using an alternative approach such as model pricing.

 

MPS Merchant is also exposed to credit risk.  Credit risk is measured by the loss that would be recorded if counterparties failed to perform pursuant to the terms of the contractual obligations less the value of any collateral held.  The following table provides information on MPS Merchant’s credit exposure to customers at December 31, 2008.

	Exposure
	Before Credit			Credit			Net
Rating	Collateral			Collateral			Exposure
External rating	(millions)
Investment grade	$	2.4		$	-		$	2.4
Non-investment grade		-			-			-
No external rating		41.6			2.0			39.6
Total	$	44.0		$	2.0		$	42.0

External ratings are determined by using publicly available credit ratings of the counterparty.  If a counterparty has provided a guarantee by a higher rated entity, the determination has been based on the rating of its guarantor.  Investment grade counterparties are those with a minimum senior unsecured debt rating of BBB- from Standard & Poor’s or Baa3 from Moody’s Investors Service.

 

Investment Risk

KCP&L maintains trust funds, as required by the NRC, to fund its share of decommissioning the Wolf Creek nuclear power plant.  As of December 31, 2008, these funds were invested primarily in domestic equity securities and fixed income securities and are reflected at fair value on KCP&L’s balance sheets.  The mix of securities is designed to provide returns to be used to fund decommissioning and to compensate for inflationary increases in decommissioning costs; however, the equity securities in the trusts are exposed to price fluctuations in equity markets and the value of fixed rate fixed income securities are exposed to changes in interest rates.  A hypothetical increase in interest rates resulting in a hypothetical 10% decrease in the value of the fixed income securities would have resulted in a $6.0 million reduction in the value of the decommissioning trust funds at December 31, 2008.  A hypothetical 10% decrease in equity prices would have resulted in a $3.5 million reduction in the fair value of the equity securities at December 31, 2008.  KCP&L's exposure to investment risk associated with the decommissioning trust funds is in large part mitigated due to the fact that KCP&L is currently allowed to recover its decommissioning costs in its rates.