Unassociated Document

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

or

[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______to_______

   
Exact name of registrant as specified in charter,
   
Commission
 
state of incorporation, address of principal
 
I.R.S. Employer
File Number
 
executive offices and telephone number
 
Identification Number
         
001-32206
 
GREAT PLAINS ENERGY INCORPORATED
 
43-1916803
   
(A Missouri Corporation)
   
   
1201 Walnut Street
   
   
Kansas City, Missouri 64106
   
   
(816) 556-2200
   
   
www.greatplainsenergy.com
   
         
1-707
 
KANSAS CITY POWER & LIGHT COMPANY
 
44-0308720
   
(A Missouri Corporation)
   
   
1201 Walnut Street
   
   
Kansas City, Missouri 64106
   
   
(816) 556-2200
   
   
www.kcpl.com
   

Each of the following classes or series of securities registered pursuant to Section 12(b) of the Act is registered on the New York Stock Exchange:

Registrant
Title of each class
Great Plains Energy Incorporated
Cumulative Preferred Stock par value $100 per share
3.80%
 
Cumulative Preferred Stock par value $100 per share
4.50%
 
Cumulative Preferred Stock par value $100 per share
4.35%
 
Common Stock without par value
 
 
Income PRIDESSM
 

Securities registered pursuant to Section 12(g) of the Act.  None.

 

 

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Great Plains Energy Incorporated
Yes
 X  
No
    
 
Kansas City Power & Light Company
Yes
    
No
 X  
                                   
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Great Plains Energy Incorporated
Yes
    
No
 X  
 
Kansas City Power & Light Company
Yes
 X  
No
    
               
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Great Plains Energy Incorporated
Yes
 X  
No
    
 
Kansas City Power & Light Company
Yes
    
No
 X  
               
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to the Form 10-K.         
               
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Great Plains Energy Incorporated
Large accelerated filer
 X  
Accelerated filer
    
 
Non-accelerated filer
    
Kansas City Power & Light Company
Large accelerated filer
     
Accelerated filer
    
 
Non-accelerated filer
 X
                                   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Great Plains Energy Incorporated
Yes
    
No
 X  
 
Kansas City Power & Light Company
Yes
     
No
 X
                                   
The aggregate market value of the voting and non-voting common equity held by non-affiliates of Great Plains Energy
Incorporated (based on the closing price of its common stock on the New York Stock Exchange on June 30, 2005) was
approximately $2,380,255,632. All of the common equity of Kansas City Power & Light Company is held by Great Plains
Energy Incorporated, an affiliate of Kansas City Power & Light Company.
                                   
On February 28, 2006, Great Plains Energy Incorporated had 74,835,687 shares of common stock outstanding. The
aggregate market value of the common stock held by non-affiliates of Great Plains Energy Incorporated (based upon the
closing price of its common stock on the New York Stock Exchange on February 28, 2006) was approximately
$2,115,604,125. On February 28, 2006, Kansas City Power & Light Company had one share of common stock outstanding
and held by Great Plains Energy Incorporated.
                                   
                                   
Documents Incorporated by Reference
Portions of the 2006 Proxy Statement of Great Plains Energy Incorporated to be filed with the Securities and Exchange
Commission are incorporated by reference in Part III of this report.
 
 
 
TABLE OF CONTENTS
       
Page
       
Number
 
Cautionary Statements Regarding Forward-Looking Information
 
 3
 
Glossary of Terms
 
 4
 
PART I
 
 
Item 1
Business
 
 6
Item 1A
Risk Factors
 
 15
Item 1B
Unresolved Staff Comments
 
 20
Item 2
Properties
 
 21
Item 3
Legal Proceedings
 
 22
Item 4
Submission of Matters to a Vote of Security Holders
 
 24
 
PART II
   
Item 5
Market for the Registrant's Common Equity, Related Stockholder Matters
 
 
   
and Issuer Purchases of Equity Securities
 
 24
Item 6
Selected Financial Data
 
 26
Item 7
Management's Discussion and Analysis of Financial Condition
   
   
and Results of Operation
 
 27
Item 7A
Quantitative and Qualitative Disclosures About Market Risks
 
 54
Item 8
Consolidated Financial Statements and Supplementary Data
   
   
Great Plains Energy
   
     
Consolidated Statements of Income
 
 57
     
Consolidated Balance Sheets
 
 58
     
Consolidated Statements of Cash Flows
 
 60
     
Consolidated Statements of Common Stock Equity
 
 61
     
Consolidated Statements of Comprehensive Income
 
 62
   
Kansas City Power & Light Company
   
     
Consolidated Statements of Income
 
 63
     
Consolidated Balance Sheets
 
 64
     
Consolidated Statements of Cash Flows
 
 66
     
Consolidated Statements of Common Stock Equity
 
 67
     
Consolidated Statements of Comprehensive Income
 
 68
   
Great Plains Energy
   
   
Kansas City Power & Light Company
 
 
     
Notes to Consolidated Financial Statements
 
 69
Item 9
Changes in and Disagreements With Accountants on Accounting
 
 
   
and Financial Disclosure
 
 123
Item 9A
Controls and Procedures
 
 123
Item 9B
Other Information
 
 126
 
PART III
 
 
Item 10
Directors and Executive Officers of the Registrants
 
 126
Item 11
Executive Compensation
 
 129
Item 12
Security Ownership of Certain Beneficial Owners and Management
   
   
and Related Stockholder Matters
 
 138
Item 13
Certain Relationships and Related Transactions
 
 139
Item 14
Principal Accounting Fees and Services
 
 139
 
PART IV
   
Item 15
Exhibits, Financial Statement Schedules
 
 140
 
2
Great Plains Energy Incorporated and Kansas City Power & Light Company separately file this combined Annual Report on Form 10-K. Information contained herein relating to an individual registrant and its subsidiaries is filed by such registrant on its own behalf. Each registrant makes representations only as to information relating to itself and its subsidiaries. This report should be read in its entirety. No one section of the report deals with all aspects of the subject matter.
 
Kansas City Power & Light Company is not required to file reports with the Securities and Exchange Commission (SEC) under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act); however, Kansas City Power & Light Company has continued to file such reports, including this Annual Report on Form 10-K, with the SEC voluntarily and will continue to do so. In addition, Kansas City Power & Light Company may determine to register its common stock under Section 12(g) of the Exchange Act and upon the effectiveness of the registration it will be required to file such reports.
 
CAUTIONARY STATEMENTS REGARDING CERTAIN FORWARD-LOOKING INFORMATION
Statements made in this report that are not based on historical facts are forward-looking, may involve risks and uncertainties, and are intended to be as of the date when made. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the registrants are providing a number of important factors that could cause actual results to differ materially from the provided forward-looking information. These important factors include:
 
·  
future economic conditions in the regional, national and international markets, including but not limited to regional and national wholesale electricity markets
·  
market perception of the energy industry and the Company
·  
changes in business strategy, operations or development plans
·  
effects of current or proposed state and federal legislative and regulatory actions or developments, including, but not limited to, deregulation, re-regulation and restructuring of the electric utility industry
·  
adverse changes in applicable laws, regulations, rules, principles or practices governing tax, accounting and environmental matters including, but not limited to, air quality
·  
financial market conditions and performance including, but not limited to, changes in interest rates and in availability and cost of capital and the effects on the Company’s pension plan assets and costs
·  
credit ratings
·  
inflation rates
·  
effectiveness of risk management policies and procedures and the ability of counterparties to satisfy their contractual commitments
·  
impact of terrorist acts
·  
increased competition including, but not limited to, retail choice in the electric utility industry and the entry of new competitors
·  
ability to carry out marketing and sales plans
·  
weather conditions including weather-related damage
·  
cost, availability, quality and deliverability of fuel
·  
ability to achieve generation planning goals and the occurrence and duration of unplanned generation outages
·  
delays in the anticipated in-service dates of additional generating capacity
·  
nuclear operations
·  
ability to enter new markets successfully and capitalize on growth opportunities in non-regulated businesses
·  
performance of projects undertaken by the Company’s non-regulated businesses and the success of efforts to invest in and develop new opportunities and
·  
other risks and uncertainties.

This list of factors is not all-inclusive because it is not possible to predict all factors. Item 1A. Risk Factors included in this report should be carefully read for further understanding of potential risks to the companies. Other sections of this report and other periodic reports filed by the companies with the SEC should also be read for more information regarding risk factors.
 
3
GLOSSARY OF TERMS
 
The following is a glossary of frequently used abbreviations or acronyms that are found throughout this report.
 
Abbreviation or Acronym
 
Definition
     
ARO
 
Asset Retirement Obligation
BART
 
Best available retrofit technology
CAIR
 
Clean Air Interstate Rule
CAMR
 
Clean Air Mercury Rule
Clean Air Act
 
Clean Air Act Amendments of 1990
CO2
 
Carbon Dioxide
Company
 
Great Plains Energy Incorporated and its subsidiaries
Consolidated KCP&L
 
KCP&L and its wholly owned subsidiaries
Digital Teleport
 
Digital Teleport, Inc.
DOE
 
Department of Energy
DTI
 
DTI Holdings, Inc. and its subsidiaries, Digital Teleport, Inc.
    and Digital Teleport of Virginia, Inc.
EBITDA
 
Earnings before interest, income taxes, depreciation and amortization
EEI
 
Edison Electric Institute
EIRR
 
Environmental Improvement Revenue Refunding
EPA
 
Environmental Protection Agency
EPS
 
Earnings per common share
FASB
 
Financial Accounting Standards Board
FELINE PRIDESSM
 
Flexible Equity Linked Preferred Increased Dividend Equity Securities,
   
    a service mark of Merrill Lynch & Co., Inc.
FERC
 
The Federal Energy Regulatory Commission
FIN
 
Financial Accounting Standards Board Interpretation
GAAP
 
Generally Accepted Accounting Principles
GPP
 
Great Plains Power Incorporated
Great Plains Energy
 
Great Plains Energy Incorporated and its subsidiaries
Holdings
 
DTI Holdings, Inc.
HSS
 
Home Service Solutions Inc., a wholly owned subsidiary of KCP&L
IEC
 
Innovative Energy Consultants Inc., a wholly owned subsidiary
    of Great Plains Energy
ISO
 
Independent System Operator
KCC
 
The State Corporation Commission of the State of Kansas
KCP&L
 
Kansas City Power & Light Company, a wholly owned subsidiary
    of Great Plains Energy
KLT Gas
 
KLT Gas Inc., a wholly owned subsidiary of KLT Inc.
KLT Gas portfolio
 
KLT Gas natural gas properties
KLT Inc.
 
KLT Inc., a wholly owned subsidiary of Great Plains Energy
KLT Investments
 
KLT Investments Inc., a wholly owned subsidiary of KLT Inc.
KLT Telecom
 
KLT Telecom Inc., a wholly owned subsidiary of KLT Inc.
KW
 
Kilowatt
kWh
 
Kilowatt hour
MAC
 
Material Adverse Change
MD&A
 
Management’s Discussion and Analysis of Financial Condition and
   
    Results of Operations

4
 
 
Abbreviation or Acronym
 
Definition
     
MISO
 
Midwest Independent Transmission System Operator, Inc.
MPSC
 
Public Service Commission of the State of Missouri
MW
 
Megawatt
MWh
 
Megawatt hour
NEIL
 
Nuclear Electric Insurance Limited
NOx
 
Nitrogen Oxide
NPNS
 
Normal Purchases and Normal Sales
NRC
 
Nuclear Regulatory Commission
OCI
 
Other Comprehensive Income
PJM
 
PJM Interconnection
PRB
 
Powder River Basin
PURPA
 
Public Utility Regulatory Policy Act
Receivables Company
 
Kansas City Power & Light Receivables Company, a wholly owned
    subsidiary of KCP&L
RTO
 
Regional Transmission Organization
SEC
 
Securities and Exchange Commission
SECA
 
Seams Elimination Charge Adjustment
SE Holdings
 
SE Holdings, L.L.C.
Services
 
Great Plains Energy Services Incorporated
SFAS
 
Statement of Financial Accounting Standards
SO2
 
Sulfur Dioxide
SPP
 
Southwest Power Pool, Inc.
Strategic Energy
 
Strategic Energy, L.L.C., a subsidiary of KLT Energy Services
T - Lock
 
Treasury Lock
Union Pacific
 
Union Pacific Railroad Company
WCNOC
 
Wolf Creek Nuclear Operating Corporation
Wolf Creek
 
Wolf Creek Generating Station
Worry Free
 
Worry Free Service, Inc., a wholly owned subsidiary of HSS
 
 

5
 
PART I
 
ITEM 1. BUSINESS
 
General
Great Plains Energy Incorporated and Kansas City Power & Light Company are separate registrants filing this combined annual report. The terms “Great Plains Energy,” “Company,” “KCP&L” and “consolidated KCP&L” are used throughout this report. “Great Plains Energy” and the “Company” refer to Great Plains Energy Incorporated and its consolidated subsidiaries, unless otherwise indicated. “KCP&L” refers to Kansas City Power & Light Company, and “consolidated KCP&L” refers to KCP&L and its consolidated subsidiaries.
 
Information in other Items of this report as to which reference is made in this Item 1. is hereby incorporated by reference in this Item 1. The use of terms such as see or refer to shall be deemed to incorporate into this Item 1. the information to which such reference is made.
 
GREAT PLAINS ENERGY
Great Plains Energy, a Missouri corporation incorporated in 2001 and headquartered in Kansas City, Missouri, is a public utility holding company and does not own or operate any significant assets other than the stock of its subsidiaries. Great Plains Energy has four direct subsidiaries with operations or active subsidiaries:
 
·  
KCP&L is described below.
 
·  
KLT Inc. is an intermediate holding company that primarily holds, directly or indirectly, interests in Strategic Energy, L.L.C. (Strategic Energy), which provides competitive retail electricity supply services in several electricity markets offering retail choice, and affordable housing limited partnerships. KLT Inc. also wholly owns KLT Gas Inc. (KLT Gas). See Note 8 to the consolidated financial statements for additional information regarding KLT Gas discontinued operations.
 
·  
Innovative Energy Consultants Inc. (IEC) is an intermediate holding company that holds an indirect interest in Strategic Energy. IEC does not own or operate any assets other than its indirect interest in Strategic Energy. When combined with KLT Inc.’s indirect interest in Strategic Energy, the Company owns just under 100% of the indirect interest in Strategic Energy.
 
·  
Great Plains Energy Services Incorporated (Services) provides services at cost to Great Plains Energy and its subsidiaries, including consolidated KCP&L.
 
Great Plains Energy’s wholly owned subsidiary, Great Plains Power Incorporated (GPP), focused on the development of wholesale generation. GPP sold all of its capital assets related to the siting and permitting process for construction of Iatan No. 2, a coal-fired generating plant, to KCP&L, at cost, during 2005. GPP was dissolved in 2005.
 
Executing On Strategic Intent
For a discussion of the Company’s strategic intent and KCP&L’s comprehensive energy plan, please refer to the Executing On Strategic Intent section in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 5 to the consolidated financial statements for additional discussion of KCP&L’s comprehensive energy plan.
 

6
 
CONSOLIDATED KCP&L
KCP&L, a Missouri corporation incorporated in 1922, is an integrated, regulated electric utility, which provides electricity to customers primarily in the states of Missouri and Kansas. KCP&L’s wholly owned subsidiary, Home Service Solutions Inc. (HSS), sold its wholly owned subsidiary Worry Free Service, Inc. (Worry Free) in February 2005 and completed the disposition of its interest in R.S. Andrews Enterprises, Inc. (RSAE) in June 2003. After these sales, HSS has no active operations.
 
Business Segments of Great Plains Energy and KCP&L
Consolidated KCP&L’s sole reportable business segment is KCP&L. Great Plains Energy, through its direct and indirect subsidiaries, has two reportable business segments: KCP&L and Strategic Energy.
 
For information regarding the revenues, income and assets attributable to the Company's reportable business segments, see Note 17 to the consolidated financial statements. Comparative financial information and discussion regarding the Company’s and KCP&L’s reportable business segments can be found in Item 7. MD&A.
 
Regulation - General
Regulatory matters affecting KCP&L and Strategic Energy are described below in the discussion on each of these reportable business segments.
 
Capital Program and Financing
For information on the Company's and KCP&L’s capital program and financial needs, see Item 7. MD&A, Capital Requirements and Liquidity section and Notes 18 and 19 to the consolidated financial statements.
 
KCP&L
KCP&L, headquartered in Kansas City, Missouri, engages in the generation, transmission, distribution and sale of electricity. KCP&L serves approximately 500,000 customers located in all or portions of 24 counties in western Missouri and eastern Kansas. Customers include approximately 440,000 residences, over 55,000 commercial firms, and over 2,200 industrials, municipalities and other electric utilities. KCP&L’s retail revenues averaged approximately 82% of its total operating revenues over the last three years. Wholesale firm power, bulk power sales and miscellaneous electric revenues accounted for the remainder of utility revenues. KCP&L is significantly impacted by seasonality with approximately one-third of its retail revenues recorded in the third quarter. KCP&L’s total electric revenues averaged approximately 45% of Great Plains Energy’s revenues over the last three years. KCP&L’s income from continuing operations accounted for approximately 88%, 86% and 67% of Great Plains Energy’s income from continuing operations in 2005, 2004 and 2003, respectively.
 
Regulation
KCP&L is regulated by the Public Service Commission of the State of Missouri (MPSC) and The State Corporation Commission of the State of Kansas (KCC) with respect to retail rates, certain accounting matters, standards of service and, in certain cases, the issuance of securities, certification of facilities and service territories. KCP&L is classified as a public utility under the Federal Power Act and accordingly, is subject to regulation by the Federal Energy Regulatory Commission (FERC). By virtue of its 47% ownership interest in Wolf Creek Generating Station (Wolf Creek), KCP&L is subject to regulation by the Nuclear Regulatory Commission (NRC), with respect to licensing, operations and safety-related requirements.
 
Missouri jurisdictional retail revenues averaged 57% of KCP&L’s total retail revenue over the last three years. Kansas jurisdictional retail revenues averaged 43% of KCP&L’s total retail revenue over the last three years. See Item 7. MD&A, Critical Accounting Policies section and Note 5 to the consolidated financial statements for additional information concerning regulatory matters.
 
7
Missouri and Kansas Rate Case Filings
In February 2006, KCP&L filed rate cases with the MPSC and the KCC. For information on these rate cases, see Note 5 to the consolidated financial statements for additional discussion of KCP&L’s comprehensive energy plan.
 
Southwest Power Pool Regional Transmission Organization
Under FERC Order 2000, KCP&L, as an investor-owned utility, is strongly encouraged to join a FERC approved RTO. See Note 5 to the consolidated financial statements for further information.
 
Competition
Missouri and Kansas continue on the fully integrated utility model and no legislation authorizing retail choice has been introduced in Missouri or Kansas for several years. As a result, KCP&L does not compete with others to supply and deliver electricity in its franchised service territory, although other sources of energy can provide alternatives to KCP&L’s customers. If Missouri or Kansas were to pass and implement legislation authorizing or mandating retail choice, KCP&L may no longer be able to apply regulated utility accounting principles to deregulated portions of its operations and may be required to write off certain regulatory assets and liabilities.
 
KCP&L does compete in the wholesale market to sell power in circumstances when power generated is not required for customers in its service territory. KCP&L competes in this regard with other owners of generating stations, principally utilities in its region, on the basis of availability and price. In recent years these wholesale sales have been an important source of revenues to KCP&L.
 
Power Supply
KCP&L is a member of the Southwest Power Pool, Inc. (SPP) reliability region. As one of the ten regional members of the North American Electric Reliability Council, SPP is responsible for maintaining reliability in its area through coordination of planning and operations. As a member of the SPP, KCP&L is required to maintain a capacity margin of at least 12% of its projected peak summer demand. This net positive supply of capacity and energy is maintained through its generation assets and capacity, power purchase agreements and peak demand reduction programs. The capacity margin is designed to ensure the reliability of electric energy in the SPP region in the event of operational failure of power generating units utilized by the members of the SPP.
 
KCP&L’s maximum system net hourly summer peak load of 3,610 MW occurred on August 21, 2003. The maximum winter peak load of 2,563 MW occurred on December 7, 2005. During 2005, the summer peak load was 3,512 MW. The projected peak summer demand for 2006 is 3,595 MW. KCP&L expects to meet its projected capacity requirements for the years 2006 through 2009 with its generation assets and through short-term capacity purchases, additional demand-side management and efficiency programs and the addition of wind generation. As part of its comprehensive energy plan, KCP&L expects to have Iatan No. 2 in service in 2010.
 
8
 
Fuel
The principal sources of fuel for KCP&L’s electric generation are coal and nuclear fuel. KCP&L expects, with normal weather, to satisfy approximately 98% of its 2006 fuel requirements from these sources with the remainder provided by natural gas and oil. The actual 2005 and estimated 2006 fuel mix and delivered cost in cents per net kWh generated are in the following table.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel cost in cents per
 
 
 
Fuel Mix (a)
 
net kWh generated
 
 
 
Estimated
Actual
Estimated
Actual
Fuel
 
2006
2005
2006
2005
Coal
   
77
%
 
77
%
 
1.24
   
1.01
 
Nuclear
   
21
   
21
   
0.44
   
0.44
 
Natural gas and oil
   
2
   
2
   
11.15
   
8.29
 
Total Generation
   
100
%
 
100
%
 
1.22
   
1.06
 
(a) Fuel mix based on percent of total MWhs generated.

Less than 1% of KCP&L’s rates contain an automatic fuel adjustment clause. Consequently, to the extent the price of coal, coal transportation, nuclear fuel, nuclear fuel processing, natural gas or purchased power increase significantly after the expiration of the contracts described in this section, or if KCP&L’s lower fuel cost units do not meet anticipated availability levels, KCP&L’s net income may be adversely affected until the increased cost could be reflected in rates.
 
Coal
During 2006, KCP&L’s generating units, including jointly owned units, are projected to burn approximately 13.5 million tons of coal. KCP&L has entered into coal-purchase contracts with various suppliers in Wyoming's Powder River Basin (PRB), the nation's principal supply region of low-sulfur coal, and with local suppliers. These contracts will satisfy all projected coal requirements for 2006 and 2007 and 84%, 35% and 22% respectively, for 2008 through 2010. The remainder of KCP&L’s coal requirements will be fulfilled through additional contracts or spot market purchases. KCP&L has entered into its coal contracts over time at higher average prices affecting coal costs for 2006 and beyond.
 
KCP&L has also entered into rail transportation contracts with various railroads for moving coal from the PRB to its generating units. These contracts will satisfy approximately all of the projected requirements for 2006 and 2007 and 98%, 78% and 77%, respectively, for 2008 through 2010; however, KCP&L has been experiencing coal delivery issues. Coal transportation costs are expected to increase in 2006 and beyond. See Note 15 to the consolidated financial statements regarding a rate complaint case against Union Pacific Railroad Company. See Item 7. MD&A, KCP&L Business Overview for additional information.
 
Nuclear Fuel
KCP&L owns 47% of Wolf Creek Nuclear Operating Corporation (WCNOC), the operating company for Wolf Creek, its only nuclear generating unit. Wolf Creek purchases uranium and has it processed for use as fuel in its reactor. This is a three step process that involves conversion of uranium concentrates to uranium hexafluoride, enrichment of uranium hexafluoride and fabrication of nuclear fuel assemblies. The owners of Wolf Creek have on hand or under contract 100% of the uranium and conversion services needed to operate Wolf Creek through September 2009. The owners also have under contract 100% of the uranium enrichment required to operate Wolf Creek through March 2008. Fabrication requirements are under contract through 2024. Letters of intent have been issued with suppliers for a substantial portion of Wolf Creek’s uranium, conversion and enrichment requirements extending through at least 2017.
 
9
 
All uranium, uranium conversion and uranium enrichment arrangements, as well as the fabrication agreement, have been entered into in the ordinary course of business. However, contraction and consolidation among suppliers of these commodities and services, coupled with increasing worldwide demand and past inventory drawdowns, have introduced some uncertainty as to Wolf Creek's ability to replace some of these contracts in the event of a protracted supply disruption. Great Plains Energy’s management believes this potential problem is common to the nuclear industry. Accordingly, in the event the affected contracts were required to be replaced, Great Plains Energy’s and Wolf Creek's management believes that the industry and government would work together to minimize disruption of the nuclear industry's operations, including Wolf Creek's operations.
 
See Note 4 to the consolidated financial statements for additional information regarding nuclear plant.
 
Natural Gas
KCP&L is projecting decreased use of natural gas during 2006 as a result of KCP&L’s projected normal summer weather and fewer plant outages in 2006. KCP&L has hedged approximately 45% of its 2006 projected natural gas usage for generation requirements to serve retail load and firm MWh sales.
 
Purchased Power
At times, KCP&L purchases power to meet its customers’ needs. Management believes KCP&L will be able to obtain enough power to meet its future demands due to the coordination of planning and operations in the SPP region; however, price and availability of power purchases may be impacted during periods of high demand. KCP&L’s purchased power, as a percent of MWh requirements, averaged approximately 5% for 2005, 2004 and 2003.
 
Environmental Matters
KCP&L’s operations are subject to regulation by federal, state and local authorities with regard to air and other environmental matters. The generation and transmission of electricity produces and requires disposal of certain hazardous products that are subject to these laws and regulations. In addition to imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. Failure to comply with these laws and regulations could have a material adverse effect on KCP&L.
 
KCP&L operates in an environmentally responsible manner and seeks to use current technology to avoid and treat contamination. KCP&L regularly conducts environmental audits designed to ensure compliance with governmental regulations and to detect contamination. Environmental-related legislation is continuously introduced in Congress. Such legislation typically includes various compliance dates and compliance limits. Such legislation could have the potential for a significant financial impact on KCP&L, including the installation of new pollution control equipment to achieve compliance. However, KCP&L would seek recovery of capital costs and expenses for such compliance through rates. KCP&L will continue to monitor proposed legislation. See Note 13 to the consolidated financial statements for additional information regarding environmental matters.
 
STRATEGIC ENERGY
Great Plains Energy owns just under 100% of the indirect interest in Strategic Energy. Strategic Energy provides competitive retail electricity supply services by entering into power supply contracts to supply electricity to its end-use customers. Of the states that offer retail choice, Strategic Energy operates in California, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania and Texas. In addition to competitive retail electricity supply services, Strategic Energy records insignificant wholesale revenues and purchased power expense incidental to the retail services provided. Strategic Energy also provides strategic planning, consulting and billing and scheduling services in the natural gas and electricity markets.
 
10
 
Strategic Energy provides services to approximately 51,000 commercial, institutional and small manufacturing accounts for approximately 10,300 customers including numerous Fortune 500 companies, smaller companies and governmental entities. Strategic Energy’s projected MWh deliveries for 2006 based on signed contracts and expected additional MWh contracts and deliveries are in the range of 16 to 18 million MWhs. Based solely on expected usage under current signed contracts, Strategic Energy has forecasted future MWh commitments (backlog) of 10.4 million, 4.3 million and 2.3 million for the years 2006 through 2008, respectively.
 
Strategic Energy’s revenues averaged approximately 55% of Great Plains Energy’s revenues over the last three years. Strategic Energy’s net income accounted for approximately 17%, 24% and 21% of Great Plains Energy’s income from continuing operations in 2005, 2004 and 2003, respectively.
 
Strategic Energy’s growth objective is to continue to expand in retail choice states and continue to earn its share of a large and growing market opportunity. Strategic Energy’s continued success is dependent on a number of industry and operational factors including, but not limited to, the ability to contract for wholesale MWhs to meet its customers’ needs at prices that are competitive with the host utility territory rates and with current and/or future competitors, the ability to provide value-added customer services and the ability to attract and retain employees experienced in providing service in retail choice states.
 
Power Supply
Strategic Energy does not own any generation, transmission or distribution facilities. Strategic Energy purchases blocks of electricity from power suppliers based on forecasted peak demand for its retail customers. Management believes it will have adequate access to energy in the markets it serves.
 
Regulation
Strategic Energy, as a participant in the wholesale electricity and transmission markets, is subject to FERC jurisdiction. Additionally, Strategic Energy is subject to regulation by state regulatory agencies in states where Strategic Energy is licensed to sell power. Each state has a public utility commission and rules related to retail choice. Each state’s rules are distinct and may conflict. These rules do not restrict the amount Strategic Energy can charge for its services, but can have an impact on Strategic Energy’s ability to provide retail electricity services in any jurisdiction.
 
Texas
During 2005, the Public Utility Commission of Texas (Texas PUC) opened a project to review rules related to the Price-to-Beat (PTB) and Provider of Last Resort. Should the Texas PUC change the current PTB mechanism to one that is less reflective of market-based rates, the change could have an impact on this competitive market and Strategic Energy’s prospects for growth in Texas.
 
Seams Elimination Charge Adjustment
Seams Elimination Charge Adjustment (SECA) is a transitional pricing mechanism authorized by FERC and intended to compensate transmission owners for the revenue lost as a result of FERC’s elimination of regional through and out rates between PJM Interconnection (PJM) and the Midwest Independent Transmission System Operator, Inc. (MISO) during a 16-month transition period from December 1, 2004, through March 31, 2006. See Note 5 to the consolidated financial statements for further information regarding SECA.
 
Transmission
In many markets, RTOs/ISOs manage the power flows, maintain reliability and administer transmission access for the electric transmission grid in a defined region. RTOs/ISOs coordinate and monitor communications among the generator, distributor and retail electricity provider. Additionally, RTOs/ISOs manage the real-time electricity supply and demand, and direct the energy flow. Through these activities RTOs/ISOs maintain a reliable energy supply within their region.
 
11
 
As a competitive retail electricity supplier, Strategic Energy must register with each RTO/ISO in order to operate in the markets covered by their grids. Strategic Energy primarily engages with PJM, New England RTO (formerly ISO-New England), California ISO, New York ISO, Electric Reliability Council of Texas (ERCOT) and MISO.
 
In some cases, RTO/ISOs provide Strategic Energy with all or a combination of the data for billing, settlement, application of electricity rates and information regarding the imbalance of electricity supply. In addition, they provide balancing energy services and ancillary services to Strategic Energy in the fulfillment of providing services to retail end users. Strategic Energy must go through a settlement process with each RTO/ISO in which the RTO/ISO compares scheduled power with actual meter usage during a given time period and adjusts the original costs charged to Strategic Energy through a revised settlement. All participants in the RTOs/ISOs have exposure to other market participants. In the event of default by a market participant within the RTOs/ISOs, the uncollectible balance is generally allocated to the remaining participants in proportion to their load share.
 
RTOs/ISOs may continue to modify the market structure and mechanisms in an attempt to improve market efficiency. In addition, existing regulations may be revised or reinterpreted and new laws and regulations may be adopted or become applicable to Strategic Energy’s activities. These actions could have an effect on Strategic Energy’s results of operations. Strategic Energy participates extensively, together with other market participants, in relevant RTO/ISO governance and regulatory issues.
 
Competition
Strategic Energy operates in several retail choice electricity markets. Strategic Energy has several competitors that operate in most or all of the same states in which it provides services to customers. Some of these competitors also operate in states other than where Strategic Energy has operations. Strategic Energy also faces competition in certain markets from regional suppliers and deregulated utility affiliates formed by holding companies affiliated with regulated utilities to provide retail load in their home market territories. Strategic Energy’s competitors vary in size from small companies to large corporations, some of which have significantly greater financial, marketing, and procurement resources than Strategic Energy. Additionally, Strategic Energy, as well as its other competitors, must compete with the host utility in order to convince customers to switch from the host utility. In most markets, there is a regulatory lag that slows the adjustment of host public utility rates in response to changes in wholesale prices, which may negatively affect Strategic Energy’s ability to compete in a rising wholesale price environment. The principal elements of competition are price, service and product differentiation.
 
GREAT PLAINS ENERGY AND CONSOLIDATED KCP&L EMPLOYEES
At December 31, 2005, Great Plains Energy had 2,382 employees. Consolidated KCP&L had 2,078 employees, including 1,335 represented by three local unions of the International Brotherhood of Electrical Workers (IBEW). KCP&L has labor agreements with Local 1613, representing clerical employees (expires March 31, 2008), with Local 1464, representing transmission and distribution workers (expires January 31, 2009), and with Local 412, representing power plant workers (expires February 28, 2007).
 
All of the individuals in the following table have been officers or employees in a responsible position with the Company for the past five years except as noted in the footnotes. The term of office of each officer commences with his or her appointment by the Board of Directors and ends at such time as the Board of Directors may determine. There are no family relationships between any of the executive officers, nor any arrangement or understanding between any executive officer and any other person involved in officer selection. 
 
12
 
Officers of Great Plains Energy
 
Name
Age
Current Position(s)
Year First Assumed
An Officer Position
       
Michael J. Chesser (a)*
57
Chairman of the Board and Chief Executive Officer
2003
William H. Downey (b)*
61
President and Chief Operating Officer
2000
Terry Bassham (c)*
45
Executive Vice President, Finance and Strategic Development and Chief Financial Officer
2005
Michael W. Cline (d)
44
Treasurer and Chief Risk Officer
2003
Barbara B. Curry (e)*
51
Senior Vice President, Corporate Services and Corporate Secretary
2005
Michael L. Deggendorf (f)
44
Vice President, Public Affairs
2005
Stephen T. Easley (g)*
50
Senior Vice President, Supply - KCP&L
2000
Mark G. English (h)*
54
General Counsel and Assistant Secretary
2003
Chris B. Giles (i)*
52
Vice President, Regulatory Affairs - KCP&L
2005
Todd A. Kobayashi (j)
38
Vice President, Strategy and Investor Relations
2005
Shahid Malik (k)*
45
Executive Vice President
President and Chief Executive Officer - Strategic Energy
2004
John R. Marshall (l)*
56
Senior Vice President, Delivery - KCP&L
2005
William G. Riggins (m)*
47
Vice President, Legal and Environmental Affairs and General Counsel - KCP&L
2000
Lori A. Wright (n)*
43
Controller
2002
John J. DeStefano (o)*
56
President - Great Plains Power Incorporated
President - Home Service Solutions Inc.
1989

 
13
 
 
Officers of KCP&L
 
Name
Age
Current Position(s)
Year First Assumed
An Officer Position
       
Michael J. Chesser (a)*
57
Chairman of the Board
2003
William H. Downey (b)*
61
President and Chief Executive Officer
2000
Terry Bassham (c)*
45
Chief Financial Officer
2005
Lora C. Cheatum (p)*
49
Vice President, Administrative Services
2005
Michael W. Cline (d)
44
Treasurer
2003
F. Dana Crawford (q)*
55
Vice President, Plant Operations
2005
Barbara B. Curry (e)*
51
Secretary
2005
Stephen T. Easley (g)*
50
Senior Vice President, Supply
2000
Mark G. English (h)
54
Assistant Secretary
2003
Chris B. Giles (i)*
52
Vice President, Regulatory Affairs
2005
William P. Herdegen III (r)*
51
Vice President, Customer Operations
2001
John R. Marshall (l)*
56
Senior Vice President, Delivery
2005
William G. Riggins (m)*
47
Vice President, Legal and Environmental Affairs and General Counsel
2000
Marvin L. Rollison (s)
53
Vice President, Corporate Culture and Community Strategy
2005
Richard A. Spring *
51
Vice President, Transmission
1994
Lori A. Wright (n)*
43
Controller
2002
*
Designated an executive officer.
(a)
Mr. Chesser was previously Chief Executive Officer of United Water (2002-2003) and President and Chief Executive Officer of GPU Energy (2000-2002).
(b)
Mr. Downey was previously Executive Vice President of Great Plains Energy (2001- 2003) and Executive Vice President of KCP&L (2000-2002) and President - KCP&L Delivery Division (2000-2002).
(c)
Mr. Bassham was previously Executive Vice President, Chief Financial and Administrative Officer (2001-2005) and Executive Vice President and General Counsel (2000-2001) of El Paso Electric Company.
(d)
Mr. Cline was previously Treasurer of Great Plains Energy (2005), Assistant Treasurer of Great Plains Energy and KCP&L (2003-2005), Director, Corporate Finance (2001-2002), and Assistant Treasurer-Corporate Finance of Corning Inc. (2001).
(e)
Ms. Curry was previously Senior Vice President, Retail Operations (2003-2004), Executive Vice President, Global Human Resources (2001-2003) and Executive Vice President, Corporate Services (1997-2001) of TXU Corporation.
(f)
Mr. Deggendorf was previously Senior Director, Energy Solutions of KCP&L (2002-2005), Senior Vice President of Everest Connections, a cable services company (2000-2002) and Vice President of UtiliCorp Communications (2000-2002).
(g)
Mr. Easley was previously Vice President, Generation Services (2002-2005), President and CEO of GPP (2001-2002) and Vice President - Business Development of KCP&L Power Division (2000-2001). He was promoted to Senior Vice President, Supply of KCP&L in March 2005.
(i)
 
Mr. Giles was previously Senior Director, Regulatory Affairs and Business Planning (2004-2005) and Director, Regulatory Affairs of KCP&L (1993-2004).
 
 
14
 
(j)
Mr. Kobayashi was previously Investor Relations Officer (2002-2005) and Director-Investor Relations and Corporate Development of Lante Corporation, a technology consulting firm (2000-2002).
(k)
Mr. Malik was appointed as President and Chief Executive Officer of Strategic Energy effective November 10, 2004 and was appointed Executive Vice President of Great Plains Energy effective January 1, 2006. Mr. Malik was previously a partner of Sirius Solutions LLP, a consulting company, (2002-2004) and President of Reliant Energy Wholesale Marketing Group (1999-2002).
(l)
Mr. Marshall was previously President of Coastal Partners, Inc., a strategy consulting company (2001-2005), Senior Vice President, Customer Service of Tennessee Valley Authority (2002-2004), and President of Duquesne Light Company (1999-2001).
(m)
Mr. Riggins was previously General Counsel of Great Plains Energy (2000-2005).
(n)
Ms. Wright served as Assistant Controller of KCP&L from 2001 until named Controller in 2002 and was Director of Accounting and Reporting of American Electric Power Company, Inc. (2000-2001).
(o)
Mr. DeStefano retired December 31, 2005.
(p)
Ms. Cheatum was previously Interim Vice President, Human Resources (2004-2005) and Director, Human Resources (2001-2004) of KCP&L, and Regional Human Resources Director (1999-2001) of McLane Distribution, a division of Wal-Mart.
(q)
Mr. Crawford was previously Plant Manager (1994-2005) of KCP&L’s LaCygne Generating Station.
(r)
Mr. Herdegen was Chief Operating Officer of Laramore, Douglass and Popham, an engineering consulting company, (2001) and Vice President and Director of Utilities Practice of System Development Integration, a consulting company, (1999-2001).
(s)  Mr. Rollison was previously Supervisor-Engineering (2000-2005).
 
Available Information
Great Plains Energy’s website is www.greatplainsenergy.com and KCP&L’s website is www.kcpl.com. Information contained on the companies’ websites is not incorporated herein. Both companies make available, free of charge, on or through their websites, their annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after the companies electronically file such material with, or furnish it to, the SEC. In addition, the companies make available on or through their websites all other reports, notifications and certifications filed electronically with the SEC.
 
ITEM 1A. RISK FACTORS
 
Actual results in future periods for Great Plains Energy and consolidated KCP&L could differ materially from historical results and the forward-looking statements contained in this report. Factors that might cause or contribute to such differences include, but are not limited to, those discussed below. 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. The risk factors described below, as well as the other information included in this Annual Report and in the other documents filed with the SEC, should be carefully considered before making an investment in the Company’s securities. Risk factors of consolidated KCP&L are also risk factors for Great Plains Energy.
 
The Company has Regulatory Risks
The Company is subject to extensive federal and state regulation, as described below. Failure 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 the Company’s business and its results of operations and financial position. The Energy Policy Act of 2005 repealed the Public Utility Holding Company Act of 1935, as amended, and provided certain utility customer protection authority to FERC and the states. The Energy Policy Act of 2005, among other things, also requires FERC to perform a study of competition in wholesale and retail electricity markets and authorizes the creation of an Electric Reliability Organization (ERO) to establish
 
15
 
and enforce mandatory reliability standards subject to FERC oversight. The final rule for ERO development and processes for insuring reliable grid operations was issued in February 2006. Management has not yet determined the impact of this final rule. FERC is in the process of establishing rules implementing the Energy Policy Act of 2005, and there is the risk that the rules may adversely affect operations, the results of operations and financial condition of the Company.

KCP&L is regulated by the MPSC and KCC with respect to retail rates, certain accounting matters, standards of service and, in certain cases, the issuance of securities and certification of facilities and service territories. Failure to obtain adequate and timely rate relief may adversely affect KCP&L’s results of operations and financial condition. KCP&L is also subject to regulation by FERC with respect to the issuance of short-term debt, wholesale electricity sales and transmission matters and the NRC as to nuclear operations.

Strategic Energy is a participant in the wholesale electricity and transmission markets, and is subject to FERC regulation with respect to wholesale electricity sales and transmission matters. Additionally, Strategic Energy is subject to regulation by state regulatory agencies in states where it has retail customers. Each state has a public utility commission and rules related to retail choice. Each state's rules are distinct and may conflict. These rules do not restrict the amount Strategic Energy can charge for its services, but can have an impact on Strategic Energy's ability to provide retail electricity services in each state. Additionally, each state regulates the rates of the host public utility, and the timing and amount of changes in host public utility rates can materially affect Strategic Energy’s results of operations and financial position.

The Company has Financial Market and Ratings Risks
The Company relies on access to both short-term money markets and longer-term capital markets as a significant source of liquidity for capital requirements not satisfied by cash flows from operations. KCP&L’s capital requirements are expected to increase substantially over the next several years as it implements the generation and environmental projects in its comprehensive energy plan. The Company’s management believes that it will maintain sufficient access to these financial markets at a reasonable cost based upon current credit ratings and market conditions. However, changes in market conditions or credit ratings could adversely affect its ability to access financial markets at a reasonable cost, impact the rate treatment provided KCP&L, or both, and therefore materially affect its results of operations and financial position.
 
Great Plains Energy, KCP&L and certain of their securities are rated by Moody's Investors Service and Standard & Poor's. These ratings impact the Company’s cost of funds and Great Plains Energy’s ability to provide credit support for its subsidiaries.
 
The Company’s Financial Statements Reflect the Application of Critical Accounting Policies
The application of the Company’s critical accounting policies reflects complex judgments and estimates. These policies include industry-specific accounting applicable to regulated public utilities, accounting for pensions, long-lived and intangible assets, goodwill and derivative instruments. The adoption of new Generally Accepted Accounting Principles (GAAP) or changes to current accounting policies or interpretations of such policies may materially affect the Company’s results of operations and financial position.
 
The Company is Subject to Environmental Laws and the Incurrence of Environmental Liabilities
The Company is subject to regulation by federal, state and local authorities with regard to air and other environmental matters primarily through KCP&L’s operations. The generation, transmission and distribution of electricity produces and requires disposal of certain hazardous products, 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
 
16
 
fines, injunctive relief and other sanctions. KCP&L regularly conducts environmental audits designed to ensure compliance with governmental regulations and to detect contamination. Failure to comply with these laws and regulations could have a material adverse effect on Great Plains Energy and consolidated KCP&L results of operations and financial position.
 
New environmental laws and regulations affecting KCP&L’s operations may be adopted, and new interpretations of existing laws and regulations could be adopted or become applicable to KCP&L or its facilities, which may substantially increase its environmental expenditures in the future. 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 or conditions imposed in permits may materially affect the cost and timing of the generation and environmental retrofit projects included in the comprehensive energy plan, among other projects, and thus materially affect KCP&L’s results of operations and financial position. In addition, KCP&L may not be able to recover all of its costs for environmental expenditures through rates in the future. Under current law, KCP&L is also generally responsible for any on-site liabilities associated with the environmental condition of its facilities that it has previously owned or operated, regardless of whether the liabilities arose before, during or after the time it owned or operated the facilities. The incurrence of material environmental costs or liabilities, without related rate recovery, could have a material adverse effect on KCP&L’s results of operations and financial position. See Note 13 to the consolidated financial statements for additional information regarding environmental matters.
 
Great Plains Energy’s Ability to Pay Dividends and Meet Financial Obligations Depends on its Subsidiaries
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. 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, will depend 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.
 
KCP&L and Strategic Energy are Affected by Demand, Seasonality and Weather
The results of operations of KCP&L and Strategic Energy can be materially affected by changes in weather and customer demand. KCP&L and Strategic Energy estimate customer demand based on historical trends, to procure fuel and purchased power. Differences in customer usage from these estimates due to weather or other factors could materially affect KCP&L’s and Strategic Energy’s results of operations.
 
Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities. KCP&L is significantly impacted by seasonality with approximately one-third of its retail revenues recorded in the third quarter. Strategic Energy is impacted by seasonality, but to a much lesser extent. 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. KCP&L’s Iatan and Hawthorn stations use water from the Missouri River for cooling purposes. Low water and flow levels, which have been experienced in recent years, can increase KCP&L’s maintenance costs at these stations and, if these levels get low enough, could cause KCP&L to modify plant operations.
 
KCP&L and Strategic Energy have Commodity Price Risks
KCP&L and Strategic Energy engage in the wholesale and retail marketing of electricity and, accordingly, are exposed to risks associated with the price of electricity. Strategic Energy routinely
 
17
 
enters into contracts to purchase and sell electricity in the normal course of business. KCP&L generates, purchases and sells electricity in the retail and wholesale markets.
 
Fossil Fuel and Transportation Prices Impact KCP&L’s Costs
Less than 1% of KCP&L's rates contain an automatic fuel adjustment clause, exposing KCP&L to risk from changes in the market prices of coal and natural gas used to generate power and in the cost of coal and natural gas transportation. Changes in KCP&L’s fuel mix due to electricity demand, plant availability, transportation issues, fuel prices and other factors can also adversely affect KCP&L’s fuel costs.

KCP&L does not hedge its entire exposure from fossil fuel and transportation price volatility. As a consequence, its results of operations and financial position may be materially impacted by changes in these prices, until increased costs are recovered in rates.

Wholesale Electricity Prices Affect Costs and Revenues
KCP&L's ability to maintain or increase its level of wholesale sales depends on the wholesale market price, transmission availability and the availability of KCP&L’s generation for wholesale sales, among other factors. A substantial portion of KCP&L’s wholesale sales are made in the spot market, and thus KCP&L has immediate exposure to wholesale price changes. Declines in wholesale market price or availability of generation or transmission constraints in the wholesale markets, could reduce KCP&L's wholesale sales and adversely affect KCP&L’s results of operations and financial position.

KCP&L is also exposed to risk because at times it purchases power to meet its customers’ needs. The cost of these purchases may be affected by the timing of customer demand and/or unavailability of KCP&L’s lower-priced generating units. Wholesale power prices can be volatile and generally increase in times of high regional demand and high natural gas prices.

Strategic Energy operates in competitive retail electricity markets, competing against the host utilities and other retail suppliers. Wholesale electricity costs, which account for a significant portion of its operating expenses, can materially affect Strategic Energy’s ability to attract and retain retail electricity customers at profitable prices. There is also a regulatory lag that slows the adjustment of host public utility rates in response to changes in wholesale prices. This lag can negatively affect Strategic Energy’s ability to compete in a rising wholesale price environment. Strategic Energy manages wholesale electricity risk by establishing risk limits and entering into contracts to offset some of its positions to balance energy supply and demand; however, Strategic Energy does not hedge its entire exposure to electricity price volatility. As a consequence, its results of operations and financial position may be materially impacted by changes in the wholesale price of electricity.
 
KCP&L has Operations Risks
The operation of KCP&L’s electric generation, transmission and distribution systems involves many risks, including breakdown or failure of equipment or processes; operating limitations that may be imposed by equipment conditions, environmental or other regulatory requirements; fuel supply or fuel transportation reductions or interruptions; transmission scheduling; and catastrophic events such as fires, explosions, severe weather or other similar occurrences.
 
These and other operating events may reduce KCP&L’s revenues or increase its costs, or both, and may materially affect KCP&L’s results of operations and financial position.
 
KCP&L has Construction-Related Risks
KCP&L’s comprehensive energy plan includes the construction of an estimated 850 MW coal-fired generating plant, 100.5 MW of wind generation and environmental retrofits at two existing coal-fired units. KCP&L has not recently managed a construction program of this magnitude. There are risks
 
18
 
that actual costs may exceed budget estimates, delays may occur in obtaining permits and materials, suppliers and contractors may not perform as required under their contracts, and events beyond KCP&L’s control may occur that may materially affect the schedule, budget and performance of these projects. These risks may increase the costs of these construction projects, require KCP&L to purchase additional electricity to supply its retail customers until the projects are completed, or both, and may materially affect KCP&L’s results of operations and financial position.

KCP&L has Retirement-Related Risks
Through 2010, approximately 30% of KCP&L’s current employees will be eligible to retire with full pension benefits. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to the new employees, may adversely affect KCP&L’s ability to manage and operate its business.

Substantially all of KCP&L’s employees participate in defined benefit and postretirement plans. If KCP&L employees retire when they become eligible for retirement through 2010, or if KCP&L’s plans experience adverse market returns on its investments, or if interest rates materially fall, KCP&L’s pension expense and contributions to the plans could rise substantially over historical levels. The timing and number of employees retiring and selecting the lump sum payment option could result in pension settlement charges that could materially affect KCP&L’s results of operations. In addition, assumptions related to future costs, returns on investments, interest rates and other actuarial assumptions, including projected retirements, have a significant impact on KCP&L’s results of operations and financial position. Proposed legislation pending in Congress on pension reform could result in increased pension funding requirements. The Financial Accounting Standards Board (FASB) has a project to reconsider the accounting for pensions and other post-retirement benefits. This project may result in accelerated expense, liability recognition and contributions.
 
KCP&L has Nuclear Exposure
KCP&L owns 47% (548 MW) 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. Although not expected, 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 and financial position 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 anticipated level, KCP&L could be responsible for the balance of funds required. If returns are lower than the expected level, management believes a rate increase would be allowed ensuring full recovery of decommissioning costs over the remaining life of the unit.
 
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
 
19
 
storage, handling and disposal of radioactive materials, and to potential retrospective assessments and losses in excess of insurance coverage.
 
Strategic Energy Operates in Competitive Retail Electricity Markets
Strategic Energy has several competitors that operate in most or all of the same states in which it serves customers. Some of these competitors also operate in states other than where Strategic Energy has operations. It also faces competition in certain markets from regional suppliers and deregulated utility affiliates formed by holding companies affiliated with regulated utilities to provide retail load in their home market territories. Strategic Energy's competitors vary in size from small companies to large corporations, some of which have significantly greater financial, marketing and procurement resources than Strategic Energy. Additionally, Strategic Energy, as well as its other competitors, must compete with the host utility in order to convince customers to switch from the host utility. Strategic Energy’s results of operations and financial position are impacted by the success Strategic Energy has in attracting and retaining customers in these markets.
 
Strategic Energy has Wholesale Electricity Supplier Credit Risk
Strategic Energy has credit risk exposure in the form of the loss that it could incur if a counterparty failed to perform under its contractual obligations. Strategic Energy enters into forward contracts with multiple suppliers. In the event of supplier non-delivery or default, Strategic Energy’s results of operations could be affected to the extent the cost of replacement power exceeded the combination of the contracted price with the supplier and the amount of collateral held by Strategic Energy to mitigate its credit risk with the supplier. Strategic Energy’s results of operations could also be affected, in a given period, if it were required to make a payment upon termination of a supplier contract to the extent the contracted price with the supplier exceeded the market value of the contract at the time of termination.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
20
 
ITEM 2. PROPERTIES
 
KCP&L Generation Resources
                       
 
 
 
 
Year
 
Estimated 2006
 
Primary
 
 
Unit
 
Completed
 
MW Capacity
 
Fuel
Base Load
Wolf Creek
 
1985
   
548
(a)
 
Nuclear
 
   
Iatan No. 1
 
1980
   
456
(a) (b)
 
Coal
 
   
LaCygne No. 2
 
1977
   
341
(a)
 
Coal
 
   
LaCygne No. 1
 
1973
   
370
(a)
 
Coal
 
   
Hawthorn No. 5 (c)
 
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 (e)
2003
   
308
   
Natural Gas
   
Osawatomie (e)
 
2003
   
77
   
Natural Gas
   
Hawthorn No. 9 (d)
 
2000
   
130
   
Natural Gas
   
Hawthorn No. 8 (e)
 
2000
   
77
   
Natural Gas
   
Hawthorn No. 7 (e)
 
2000
   
77
   
Natural Gas
   
Hawthorn No. 6 (e)
 
1997
   
136
   
Natural Gas
   
Northeast Nos. 17 and 18 (e)
 
1977
   
117
   
Oil
 
   
Northeast Nos. 15 and 16 (e)
 
1975
   
116
   
Oil
 
   
Northeast Nos. 13 and 14 (e)
 
1976
   
114
   
Oil
 
   
Northeast Nos. 11 and 12 (e)
 
1972
   
111
   
Oil
 
   
Northeast Black Start Unit
 
1985
   
2
   
Oil
 
Total
 
 
 
 
 
4,053
 
 
 
 
(a)
KCP&L's share of a jointly owned unit.
                 
(b)
The Iatan No. 2 air permit limits KCP&L's accredited capacity of Iatan No. 1 to 456 MWs from 469 MWs
 
until the air quality control equipment included in the comprehensive energy plan is operational.
(c)
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.
(d)
Heat Recovery Steam Generator portion of combined cycle.
(e)
Combustion turbines.
 
KCP&L owns the Hawthorn Station (Jackson County, Missouri), Montrose Station (Henry County, Missouri), Northeast Station (Jackson County, Missouri), West Gardner Station (Johnson County, Kansas) and Osawatomie Station (Miami County, Kansas). KCP&L also owns 50% of the 740 MW LaCygne No. 1 and 682 MW LaCygne No. 2 (Linn County, Kansas), 70% of the 651 MW Iatan No. 1 (Platte County, Missouri) and 47% of the 1,166 MW Wolf Creek Unit (Coffey County, Kansas). See Note 5 to the consolidated financial statements for information regarding KCP&L’s comprehensive energy plan and the proposed addition of new capacity.
 
KCP&L Transmission and Distribution Resources
KCP&L’s electric transmission system interconnects with systems of other utilities for reliability and to permit wholesale transactions with other electricity suppliers. KCP&L owns over 1,700 miles of transmission lines, approximately 9,000 miles of overhead distribution lines and over 3,700 miles of underground distribution lines in Missouri and Kansas. KCP&L has all the franchises necessary to sell electricity within the territories from which substantially all of its gross operating revenue is derived.
 
KCP&L’s transmission and distribution systems are continuously monitored for adequacy to meet customer needs. Management believes the current systems are adequate to serve its customers.
 
21
 
KCP&L General
KCP&L’s principal plants and properties, insofar as they constitute real estate, are owned in fee simple. Certain other facilities are located on premises held under leases, permits or easements. KCP&L 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 consists principally of electric generating stations, electric transmission and distribution lines and systems, and buildings subject to exceptions and reservations, are subject to a General Mortgage Indenture and Deed of Trust dated as of December 1, 1986. General mortgage bonds totaling $159.3 million were outstanding at December 31, 2005.
 
ITEM 3. LEGAL PROCEEDINGS
 
Weinstein v. KLT Telecom
Richard D. Weinstein (Weinstein) filed suit against KLT Telecom Inc. (KLT Telecom) in September 2003 in the St. Louis County, Missouri Circuit Court. KLT Telecom acquired a controlling interest in DTI Holdings, Inc. (Holdings) in February 2001 through the purchase of approximately two-thirds of the Holdings stock held by Weinstein. In connection with that purchase, KLT Telecom entered into a put option in favor of Weinstein, which granted Weinstein an option to sell to KLT Telecom his remaining shares of Holdings stock. The put option provided for an aggregate exercise price for the remaining shares equal to their fair market value with an aggregate floor amount of $15 million and was exercisable between September 1, 2003, and August 31, 2005. In June 2003, the stock of Holdings was cancelled and extinguished pursuant to the joint Chapter 11 plan confirmed by the Bankruptcy Court. In September 2003, Weinstein delivered a notice of exercise of his claimed rights under the put option. KLT Telecom rejected the notice of exercise. KLT Telecom denied that Weinstein has any remaining rights or claims pursuant to the put option and denied any obligation to pay Weinstein any amount under the put option. Subsequent to KLT Telecom’s rejection of his notice of exercise, Weinstein filed suit alleging breach of contract. Weinstein sought damages of at least $15 million, plus statutory interest. In April 2005, summary judgment was granted in favor of KLT Telecom, and Weinstein has appealed this judgment to the Missouri Court of Appeals for the Eastern District. The $15 million reserve has not been reversed pending the outcome of the appeal process, which management expects will conclude in early 2006.
 
Hawthorn No. 5 Litigation
KCP&L filed suit on April 3, 2001, in Jackson County, Missouri Circuit Court against multiple defendants who are alleged to have responsibility for the 1999 boiler explosion at KCP&L’s Hawthorn No. 5 generating unit, which was subsequently reconstructed and returned to service. KCP&L and National Union Fire Insurance Company of Pittsburgh, Pennsylvania (National Union) entered into a subrogation allocation agreement under which recoveries in this suit are generally allocated 55% to National Union and 45% to KCP&L. Certain defendants have been dismissed from the suit and various defendants settled, with KCP&L receiving a total of $38.2 million under the terms of the subrogation allocation agreement. Trial of this case with the one remaining defendant resulted in a March 2004 jury verdict finding KCP&L’s damages as a result of the explosion were $452 million. After deduction of amounts received from pre-trial settlements with other defendants and an amount for KCP&L’s comparative fault (as determined by the jury), the verdict would have resulted in an award against the defendant of approximately $97.6 million (of which KCP&L would have received $33 million pursuant to the subrogation allocation agreement after payment of attorney’s fees). In response to post-trial pleadings filed by the defendant, in May 2004, the trial judge reduced the award against the defendant to $0.2 million. Both KCP&L and the defendant have appealed this case to the Court of Appeals for the Western District of Missouri. Oral arguments are expected in the first quarter of 2006.
 
22
 
KCP&L Stipulations and Agreements
On March 28, 2005, and April 27, 2005, KCP&L filed Stipulations and Agreements with the MPSC and KCC, respectively, containing a regulatory plan and other provisions. The Stipulations and Agreements are discussed in Note 5 to the consolidated financial statements, which is incorporated herein by reference. Parties to the MPSC Stipulation and Agreement are KCP&L, the Staff of the MPSC, the City of Kansas City, Missouri, Office of Public Counsel, Praxair, Inc., Missouri Industrial Energy Consumers, Ford Motor Company, Aquila, Inc., The Empire District Electric Company, Missouri Joint Municipal Electric Utility Commission and the Missouri Department of Natural Resources. Parties to the KCC Stipulation and Agreement are KCP&L, the Staff of the KCC, Sprint Nextel Corporation and the Kansas Hospital Association.
 
The MPSC issued its Report and Order, approving the Stipulation and Agreement, on July 28, 2005, and the KCC issued its Order Approving Stipulation and Agreement on August 5, 2005. On September 22, 2005, the Sierra Club and Concerned Citizens of Platte County, two nonprofit corporations, filed a petition for review in the Circuit Court of Cole County, Missouri, seeking to review and set aside the MSPC Report and Order. On October 21, 2005, the Sierra Club filed a petition for review in the District Court of Shawnee County, Kansas, seeking to set aside or remand the KCC order. Although subject to the appeal, the MPSC and KCC orders remain in effect pending the court’s decision. The appeals are expected to be decided by the courts in 2006.
 
KCP&L Rate Cases
On February 1, 2006, KCP&L filed retail rate cases with the MPSC and KCC, requesting annual rate increases effective January 1, 2007, of approximately $55.8 million (11.5%) and $42.3 million (10.5%), respectively, over current levels. Hearings on these cases are expected to begin in September 2006 and the decisions of the MPSC and KCC are expected in December 2006.
 
Kansas City Power & Light Company v. Union Pacific Railroad Company
On October 12, 2005, KCP&L filed a rate complaint case with the Surface Transportation Board (STB) charging that Union Pacific Railroad Company’s (Union Pacific) rates for transporting coal from the PRB in Wyoming to KCP&L’s Montrose Station are unreasonably high. Prior to the end of 2005, the rates were established under a contract with Union Pacific. Efforts to extend the term of the contract were unsuccessful and Union Pacific is the only service for coal transportation from the PRB to Montrose Station. KCP&L charged that Union Pacific possesses market dominance over the traffic and requested the STB prescribe maximum reasonable rates. Management anticipates filing opening evidence by mid-year 2006 and the STB issuing its decision toward the end of 2007. Until the STB case is finalized, KCP&L is paying tariff rates subject to refund.
 
Tech Met, Inc., et al. v. Strategic Energy
On November 21, 2005, a class action complaint for breach of contract was filed against Strategic Energy in the Court of Common Pleas of Allegheny County, Pennsylvania. The five named plaintiffs purportedly represent the interests of customers in Pennsylvania who entered into Power Supply Coordination Service Agreements (Agreement) for electricity service. The complaint seeks monetary damages, attorney fees and costs and a declaration that the customers may terminate their Agreement with Strategic Energy. Strategic Energy has filed preliminary objections asking the court to order plaintiffs to file an amended complaint that conforms to applicable court rules.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
During the fourth quarter of 2005, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise for either Great Plains Energy or KCP&L.
 
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 28, 2006, Great Plains Energy’s common stock was held by 14,186 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
 
Common Stock
 
 
 
2005
 
2004
 
Dividends Declared
 
Quarter
 
High
 
Low
 
High
 
Low
 
2006
 
2005
2004
 
First
 
$
31.61
 
$
29.56
 
$
35.29
 
$
31.66
 
$
0.415
 (a)  
 
 
$
0.415
 
$
0.415
 
Second
   
32.25
   
29.77
   
34.36
   
29.23
           
0.415
   
0.415
 
Third
   
32.63
   
29.82
   
31.71
   
28.62
           
0.415
   
0.415
 
Fourth
   
30.23
   
27.27
   
30.71
   
28.17
           
0.415
   
0.415
 
(a) Declared February 7, 2006.
                           

Regulatory Restrictions
Under stipulations with the MPSC and KCC, Great Plains Energy has committed to maintain consolidated common equity of not less than 30%.
 
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.
24
 
Equity Compensation Plan
The Company’s Long-Term Incentive Plan is an equity compensation plan approved by its shareholders. The Long-Term Incentive Plan permits the grant of restricted stock, stock options, limited stock appreciation rights and performance shares to officers and other employees of the Company and its subsidiaries. The following table provides information, as of December 31, 2005, 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 under the Long-Term Incentive Plan. The table excludes shares issued or issuable under Great Plains Energy’s defined contribution savings plans.
 
                           
 
 
 
 
 
 
 
 
 
 
 
Number of securities
                     
remaining available
                     
for future issuance
   
Number of securities to
Weighted-average
 
under equity
   
be issued upon exercise
exercise price of
 
compensation plans
   
of 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
   
284,216
(1)
 
 $
 25.56
(2)
   
2,014,496
 
Equity compensation plans not
                       
 
approved by security holders
 
 
-
 
 
 
-
 
 
 
-
 
 
Total
 
 
284,216
 
 
$
 25.56
 
 
 
2,014,496
 
(1)
Includes 172,761 performance shares at target performance levels and options for 111,455 shares of Great Plains
 
Energy common stock outstanding at December 31, 2005.
(2)
The 172,761 performance shares have no exercise price and therefore are not reflected in the weighted average
 
exercise price.

Purchases of Equity Securities
The following table provides information regarding purchases by the Company of its equity securities during the fourth quarter of 2005.
                           
Issuer Purchases of Equity Securities
                     
Maximum Number
               
Total Number of
(or Approximate
               
Shares (or Units)
Dollar Value) of
   
Total
     
Purchased as
Shares (or Units)
   
Number of
 Average
Part of Publicly
that May Yet Be
   
Shares
 Price Paid
Announced
Purchased Under
   
(or Units)
per Share
Plans or
the Plans or
Month
Purchased
(or Unit)
Programs
Programs
October 1 - 31
 
5,862
(1)
 $
30.12
   
-
   
N/A
 
November 1 - 30
 
1,390
(1)
 
28.54
   
-
   
N/A
 
December 1 - 31
 
-
 
 
-
 
 
-
 
 
N/A
 
  Total
 
7,252
 
$
29.82
 
 
-
 
 
N/A
 
(1)
Represents shares of common stock surrendered to the Company by certain officers to pay taxes
 
related to the vesting of restricted common stock.
25
 
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%.
 
Equity Compensation Plan
KCP&L does not have an equity compensation plan; however, KCP&L officers participate in Great Plains Energy’s Long-Term Incentive Plan.
 
ITEM 6. SELECTED FINANCIAL DATA
                       
Year Ended December 31
 
2005
 
2004
 
2003
 
2002
 
2001
 
Great Plains Energy (a)
 
(dollars in millions except per share amounts)
Operating revenues
 
$
2,605
 
$
2,464
 
$
2,148
 
$
1,802
 
$
1,399
 
Income (loss) from continuing operations (b)
 
$
164
 
$
174
 
$
190
 
$
137
 
$
(28
)
Net income (loss)
 
$
162
 
$
181
 
$
145
 
$
126
 
$
(24
)
Basic and diluted earnings (loss) per common
                       
share from continuing operations
 
$
2.18
 
$
2.39
 
$
2.72
 
$
2.16
 
$
(0.49
)
Basic and diluted earnings (loss) per
                               
common share
 
$
2.15
 
$
2.49
 
$
2.07
 
$
1.99
 
$
(0.42
)
Total assets at year end
 
$
3,834
 
$
3,799
 
$
3,682
 
$
3,517
 
$
3,464
 
Total redeemable preferred stock, mandatorily
                               
redeemable preferred securities and long-
                               
term debt (including current maturities)
 
$
1,143
 
$
1,296
 
$
1,347
 
$
1,332
 
$
1,342
 
Cash dividends per common share
 
$
1.66
 
$
1.66
 
$
1.66
 
$
1.66
 
$
1.66
 
SEC ratio of earnings to fixed charges
   
3.61
   
3.51
   
4.23
   
2.99
   
(c
)
                                 
Consolidated KCP&L (a)
                               
Operating revenues
 
$
1,131
 
$
1,092
 
$
1,057
 
$
1,013
 
$
1,287
 
Income from continuing operations (d)
 
$
144
 
$
143
 
$
126
 
$
103
 
$
116
 
Net income
 
$
144
 
$
143
 
$
117
 
$
96
 
$
120
 
Total assets at year end
 
$
3,339
 
$
3,337
 
$
3,303
 
$
3,139
 
$
3,146
 
Total redeemable preferred stock, mandatorily
                               
redeemable preferred securities and long-
                               
term debt (including current maturities)
 
$
976
 
$
1,126
 
$
1,336
 
$
1,313
 
$
1,311
 
SEC ratio of earnings to fixed charges
   
3.87
   
3.34
   
3.69
   
2.88
   
2.07
 
(a)  
Great Plains Energy’s consolidated financial statements include results for all subsidiaries in operation for the periods presented. KCP&L’s consolidated financial statements include its wholly owned subsidiary HSS. In addition, KCP&L’s consolidated results of operations include KLT Inc. and GPP for all periods prior to the October 1, 2001, formation of Great Plains Energy.
(b)  
This amount is before discontinued operations of $(1.9), $7.3, $(44.8), $(7.5) and $4.3 million in 2005 through 2001, respectively. In 2002, this amount is before a $3.0 million cumulative effect of a change in accounting principle.
(c)  
An $87.1 million deficiency in earnings caused the ratio of earnings to fixed charges to be less than a one-to-one coverage. A $195.8 million net write-off before income taxes related to the bankruptcy filing of DTI was recorded in 2001.
(d)  
This amount is before discontinued operations of $(8.7), $(4.0) and $3.6 million in 2003 through 2001, respectively. In 2002, this amount is before a $3.0 million cumulative effect of a change in accounting principle.
 
26
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The MD&A that follows is a combined presentation for Great Plains Energy and consolidated KCP&L, both registrants under this filing. The discussion and analysis by management focuses on those factors that had a material effect on the financial condition and results of operations of the registrants during the periods presented. It should be read in conjunction with the accompanying consolidated financial statements and related notes. See Item 1A. Risk Factors for further discussion of the companies’ risk factors.
 
Great Plains Energy is a public utility holding company and does not own or operate any significant assets other than the stock of its subsidiaries. Great Plains Energy’s direct subsidiaries with operations or active subsidiaries are KCP&L, KLT Inc., IEC and Services. As a diversified energy company, Great Plains Energy’s reportable business segments include KCP&L and Strategic Energy.
 
EXECUTING ON STRATEGIC INTENT
 
During 2005, the Company initiated several important steps in executing on its Strategic Intent.
 
KCP&L’s Comprehensive Energy Plan
KCP&L continues to make progress in implementing its comprehensive energy plan and received orders from the MPSC and KCC in 2005. The orders were on agreements reached among KCP&L, the Commissions’ staffs and certain key parties in the respective jurisdictions. The Sierra Club and Concerned Citizens of Platte County have appealed the MPSC order, and the Sierra Club has appealed the KCC order. These appeals are expected to be decided in 2006. Although subject to these appeals, the MPSC and KCC orders remain in effect pending the applicable court’s decision.
 
In February 2006, KCP&L filed requests with the MPSC and KCC for annual rate increases of $55.8 million or 11.5% and $42.3 million or 10.5%, respectively. Iatan No. 2 detailed project engineering and design has begun and plant construction is expected to start in 2006. KCP&L has selected a developer and contractor for the construction of a 100.5 MW wind project in Kansas and management expects the project to be completed in time for inclusion in rates in 2007. See Note 5 to the consolidated financial statements for more information on the comprehensive energy plan.
 
Strategic Energy’s Business Plan
Strategic Energy is addressing the rising electricity price environment by focusing on four key areas.
 
·  
Positioning - Strategic Energy is focused on retail choice markets where host utility electricity prices adjust quickly to changes in the wholesale markets and a consultative sales approach to provide value to customers.
 
·  
Procurement - Strategic Energy is focused on strategies to gain price improvement through load aggregation to increase the volume purchased from certain suppliers. Strategic Energy has continued to invest in talent to improve procurement practices as well as identify and take advantage of opportunities to manage retail portfolio load requirements.
 
·  
Products - Strategic Energy is focused on designing and marketing products to address customers’ needs in a high price environment. In 2005, over half of Strategic Energy’s new sales were attributable to the introduction of new products or product extensions into new customer classes. In 2006, management expects to introduce additional new and innovative products and services in each of Strategic Energy’s customer classes. The introduction of these products and services will strive to meet customers’ expectations in challenging and dynamic retail choice markets.
 
27
 
·  
Productivity - New systems are in the process of being implemented and are anticipated to improve operational scalability. Focusing on dynamic markets also enhances productivity by enabling Strategic Energy to maximize general and administrative resources.
 
KCP&L BUSINESS OVERVIEW
 
KCP&L is an integrated, regulated electric utility that engages in the generation, transmission, distribution and sale of electricity. KCP&L has over 4,000 MWs of generating capacity and has transmission and distribution facilities that provide electricity to approximately 500,000 customers in the states of Missouri and Kansas. KCP&L has continued to experience modest load growth. Load growth consists of higher usage per customer and the addition of new customers. Retail electricity rates are below the national average.
 
KCP&L’s residential customers’ usage patterns are 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. Less than 1% of revenues include an automatic fuel adjustment provision. KCP&L’s coal base load equivalent availability factor decreased to 82% in 2005 from 84% in 2004, reflecting scheduled and forced plant outages. The 176 MW Montrose No. 3 generator step-up transformer (GSU) failed in late May 2005. KCP&L leased a spare GSU until the failed GSU was repaired and installed during the fourth quarter of 2005. In August 2005, Hawthorn No. 5’s GSU failed, which resulted in a 32-day outage. A spare GSU was installed in September; however, the size of the spare GSU limits the output of the unit to net 500 MW. The 65 MW decrease in Hawthorn No. 5 capability will continue until a new transformer is installed, currently expected in June 2006. The outage to install the repaired GSU is expected to be completed in 14 days.
 
KCP&L’s nuclear unit, Wolf Creek, accounts for approximately 20% of its base load capacity and over a three-year period averaged over 20% of KCP&L’s MWhs generated. Wolf Creek’s availability was approximately 13% lower in 2005 compared to 2004 due to its scheduled spring 2005 refueling outage. Replacement power costs for scheduled Wolf Creek outages are accrued evenly over the unit’s 18-month operating cycle. KCP&L expects its cost of nuclear fuel to remain relatively stable through 2009 because of contracts in place.
 
The fuel cost per MWh generated and the purchased power cost per MWh has a significant impact on the results of operations for KCP&L. Generation fuel mix can substantially change the fuel cost per MWh generated. 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 significantly higher than the cost per MWh of coal and nuclear generation. KCP&L continually evaluates its system requirements, the availability of generating units, availability and cost of fuel supply and purchased power, and the requirements of other electric systems to provide reliable power economically.
 
KCP&L expects its fuel expense to increase significantly in 2006 due to projected increases in the cost of coal and coal transportation. The anticipated increase in delivered coal prices is expected to affect most regional utilities; therefore, the increase is not expected to materially erode KCP&L’s position as a low cost regional electricity generator.
 
Rail companies have experienced longer cycle times for coal deliveries to utilities across the country since the third quarter of 2004. Western rail service further deteriorated in 2005 due to two train derailments that occurred on the primary rail line serving the PRB. Maintenance to repair significant sections of track on this rail line began in 2005 and is expected to be completed by the end of 2006. These repairs must be completed before normal train operations from the PRB can resume, which affects all users of PRB coal. Approximately 98% of KCP&L’s coal requirements come from the PRB
 
28
 
and originate on the Burlington Northern Santa Fe and the Union Pacific railroads, both of which have been affected by the current rail situation. As a result, most utilities, including KCP&L, have coal inventories that are below desired levels. KCP&L implemented coal conservation measures by reducing coal generation in 2005 and expects to continue these measures for at least the first half of 2006. This reduction in coal generation in the marketplace caused upward pressure on both pricing for next power generation fuel sources (natural gas and/or oil) and wholesale electricity prices in 2005 and is expected to continue into 2006. The rail companies have indicated that they expect the impact related to the 2006 maintenance program to be less than the 10% to 15% reduction in deliveries experienced in 2005, but have offered no estimate on the likely reduction. Management cannot predict with any certainty the 2006 impact of the situation; however, an inability to obtain timely delivery of coal to meet generation requirements could materially impact KCP&L’s results of operations. Management is monitoring the situation closely and steps will be taken, as necessary, to maintain an adequate energy supply for KCP&L’s retail load and firm MWh sales.
 
STRATEGIC ENERGY BUSINESS OVERVIEW
 
Great Plains Energy owns just under 100% of the indirect interest in Strategic Energy. Strategic Energy does not own any generation, transmission or distribution facilities. Strategic Energy provides competitive retail electricity supply services by entering into power supply contracts to supply electricity to its end-use customers. Of the states that offer retail choice, Strategic Energy operates in California, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania and Texas.
 
In addition to competitive retail electricity supply services, Strategic Energy records insignificant wholesale revenues and purchased power expense incidental to the retail services provided. Strategic Energy also provides strategic planning, consulting and billing and scheduling services in the natural gas and electricity markets. The cost of supplying electricity to retail customers can vary widely by geographic market. This variability can be affected by many factors, including, but not limited to, geographic differences in the cost per MWh of purchased power, renewable energy requirements and capacity charges due to regional purchased power availability and requirements of other electricity providers and differences in transmission charges.
 
Strategic Energy provides services to approximately 51,000 commercial, institutional and small manufacturing accounts for approximately 10,300 customers including numerous Fortune 500 companies, smaller companies and governmental entities. In response to marketplace trends, Strategic Energy has designed and introduced new products tailored for specific market conditions and segments. Strategic Energy offers an array of products, including fixed price, index-based and month-to-month renewal products, designed to meet the various requirements of a diverse customer base in evolving markets. Strategic Energy’s volume-based customer retention rate, excluding month-to-month customers on market-based rates, for 2005 was 76%. The corresponding volume-based customer retention rate including month-to-month customers on market-based rates was 86%.
 
In some markets, wholesale power prices in 2005 rose faster than host utility rates. In markets where this occurred, the savings competitive suppliers could offer to customers were reduced or in some markets were unavailable. Additionally, in those markets where wholesale power prices were lower than host utility rates, Strategic Energy faced strong competition from other competitive suppliers. These factors, among others, contributed to reductions in MWhs delivered and average retail gross margin per MWh in 2005 compared to 2004.
 
At the end of 2005, Strategic Energy experienced improvement in certain key metrics, including strong backlog growth, longer contract durations and higher retention rates. Management believes a combination of factors contributed to the improved metrics, including successful focus on positioning, procurement, products and productivity, as well as a changing market environment. Customer perceptions about the longer-term price of electricity may be changing as a result of the prolonged
 
29
 
period of high and volatile power prices seen in the last few years and customers may be more willing to enter into long-term contracts in order to achieve price certainty. Also, a decrease in near-term power prices at the end of 2005 may have provided a catalyst for some customers to convert from month-to-month service to term contracts. Management believes, but cannot assure, that these trends may continue into 2006.
 
Strategic Energy currently expects the retail gross margin per MWh (retail revenues less retail purchased power divided by retail MWhs delivered) delivered in 2006 to average $4.25 to $4.75 and the retail gross margin per MWh on new customer contracts entered into in 2006 to average from $3.00 to $4.00. Strategic Energy expects to realize additional retail gross margin on fixed price contracts of up to $0.50 per MWh over the life of the contract. The additional expected margin is derived from management of the retail portfolio load requirements. These activities include benefits from financial transmission rights and auction revenue rights, short-term load balancing activities, short-term arbitrage activities and identifying and executing on favorable transmission paths. MWhs delivered in 2006 are projected to range from 16 to 18 million. Based solely on expected usage under current signed contracts, Strategic Energy has forecasted future MWh commitments (backlog) of 10.4 million, 4.3 million and 2.3 million for the years 2006 through 2008, respectively. Strategic Energy expects to deliver additional MWhs in these years through new and renewed term contracts and MWh deliveries to month-to-month customers.
 
LOWER EARNINGS EXPECTED IN 2006
 
Great Plains Energy’s projected net income is expected to decrease in 2006. The decrease in projected net income for 2006 is due to a significant increase in fuel cost and related transportation expenses at KCP&L, lower volume and lower anticipated average retail gross margins at Strategic Energy and the absence of certain tax benefits recorded in 2005. These factors are expected to more than offset projected operational efficiencies at both KCP&L and Strategic Energy, KCP&L’s retail load growth, higher wholesale volume and higher allowance for equity funds used during construction related to the comprehensive energy plan.
 
Through 2010, approximately 30% of KCP&L’s current employees are eligible to retire with full pension benefits. The timing and number of employees retiring and selecting the lump sum payment option could result in settlement charges that could materially affect KCP&L’s 2006 results of operations.
 
RELATED PARTY TRANSACTIONS
 
See Note 12 to the consolidated financial statements for information regarding related party transactions.
 
CRITICAL ACCOUNTING POLICIES
 
The preparation of financial statements in conformity with 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 the results of operations and financial position. Management has identified the following accounting policies deemed critical to the understanding of the companies’ 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 for Great Plains Energy and KCP&L.
 
30
 
Pensions
The companies 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, compensation levels and employment periods), the level of contributions made to the plan, earnings on plan assets 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.
 
These actuarial assumptions are updated annually in accordance with Statement of Financial Accounting Standards (SFAS) No. 87, “Employers’ Accounting for Pensions.” In selecting an assumed discount rate, the prevailing market rate of fixed income debt instruments with maturities matching the expected timing of the benefit obligation was considered. 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. These assumptions are based on management’s best estimates and judgment; however, material changes may occur if these assumptions differ from actual events. See Note 9 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 solely on a change in that assumption only.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact on
 
 
 
Impact on
 
 
 
 
 
 
 
Projected
 
Impact on
 
2005
 
 
 
Change in
 
Benefit
 
Pension
 
Pension
 
Actuarial assumption
 
Assumption
 
Obligation
 
Liability
 
Expense
 
 
 
 
 
 
 
(millions)
 
Discount rate
   
0.5
%
 
increase
 
$
(32.9
)
$
(18.1
)
$
(2.3
)
Rate of return on plan assets
   
0.5
%
 
increase
   
-