Great Plains Energy Incorporated

views updated

Great Plains Energy Incorporated

1201 Walnut St.
Kansas City, Missouri 64141-9679
U.S.A.
Telephone: (816) 556-2200
Fax: (816) 556-2418
Web site: http://www.greatplainsenergy.com

Public Company
Incorporated: 1922 as Kansas City Power & Light Company
Employees: 2,475
Sales: $2.14 billion (2003)
Stock Exchanges: New York
Ticker Symbol: GXP
NAIC: 221112 Fossil Fuel Electric Power Generation; 221113 Nuclear Electric Power Generation; 221121 Electric Bulk Power Transmission and Control; 221122 Electric Power Distribution

Great Plains Energy Incorporated is the holding company for Kansas City Power & Light Company (KCPL), which serves both residential and commercial customers in 24 counties in western Missouri and eastern Kansas, an area that covers some 4,600 square miles. Nearly a half million residents use the electricity provided by KCPL. Great Plains Energy's other principal subsidiary is Strategic Energy, which the company plans to use to expand into new territories.

Arrival of Electricity in Kansas: Late 1800s

KCPL and Great Plains Energy exist today because a young man named Edwin Ruthven Weeks witnessed an electric arc light demonstration at a Philadelphia exposition in 1876. Weeks, who eventually became the company's first superintendent, was so impressed that he immediately returned home and persuaded three men—Joseph S. Chick, L.R. Moore, and Judge William Holmes—to consider investing in the new technology. Holmes became the first president of the new company. In 1881 the men purchased an exclusive contract for $4,000 to provide power to two counties; in 1882 they incorporated the Kawsmouth Electric Light Company.

Originally serving 13 commercial customers, the plant became one of the first to use dynamos with automatic regulators. The system utilized Professor Elihu Thomson's Thomson-Houston regulator, an invention that balanced electric output to make service possible to multiple customers. Downtown Kansas City was the first section of town to be lighted; by the end of 1882, 48 merchants utilized the system.

The company reincorporated as the Kansas City Electric Light Company in 1885—the earliest of many corporate changes. As former company President Robert A. Olson explained in Kansas City Power & Light Company: The First Ninety Years, "A popular reason for the change of name was that 'Kawsmouth' suggested some hungry monster. Today we might say it did not project the right image." That same year, the company's chief competitor, Kansas City Gas Works, was demolished in an explosion. Former customers turned to the electric company for lighting. The system was at capacity by 1887.

Because the early Thomson-Houston arc lighting system was bulky and required frequent adjustments, residential customers began demanding incandescent lights. Weeks developed the Edison Electric Light & Power Company to meet this need and tied its operations closely to the Kansas City Electric Light Company.

New Management Bringing New Struggles and Successes: Early 1900s

Over the course of the next decade, increased competition, rate wars, and the 1893 financial panic created difficult times for the utility industry. Rather than invest the significant amount of capital needed for expansion, Kansas City Electric Light Company's directors looked around for a purchaser. J. Ogden Armour, one of the owners of the Metropolitan Street Railway Company of Kansas City and heir to the famous meat-packing company, became interested in the floundering firm. He and several associates purchased the Kansas City Electric Company in early 1900. Meanwhile, the company's pioneer, Edwin Weeks, became friends with Thomas Edison and eventually founded the National Electric Light Association, later known as the Edison Electric Institute.

Infused with new capital, the company was able to buy up competing electric suppliers and eliminate costly duplication of power distribution lines. Eventually the Kansas City Electric Light Company was the city's only source for electrical power, warranting a new power plant. The new plant, built in 1903, near the Kaw River on Central Avenue, was nearly destroyed by a flood that poured 20 feet of water and mud into the plant shortly after its completion; but after three months of cleanup, service was resumed. One year later a larger plant was constructed at Second and Grand River. Kansas City Electric Light Company also began supplying steam heat to the downtown area.

Armour and his partners managed two major businesses, the lighting system and the street railway. Because they expected the streetcar industry to grow more rapidly than the electric industry, any planning for expansion of power-production facilities was geared toward the railway system. Increasing power demands of the railway system took precedence over the needs of electrical customers. Eventually this dual operation took a toll on Kansas City Electric Light Company.

When Armour took steps to refinance his corporate debt around 1911, investors had become wary of dealing with a company combining railway and electrical interests. The company suffered from this new tide of opposition and, in 1911, went into receivership. After five difficult years, the U.S. District Court approved a reorganization plan. The street railway was separated from the electric company, although the streetcar interests retained control of several major power plants. The new electric corporation formed at this time was named Kansas City Light & Power Company. John H. Lucas, the former attorney for both railway and electric companies, was appointed president.

Armour was still the company's principal stockholder, but he and Lucas wanted an experienced manager leading the company. They hired 55-year-old Joseph F. Porter. The well-known electrical equipment installer and troubleshooter took over in the fall of 1917. He found the weakened company's most urgent needs were for more energy and more efficient plants. Porter ordered work begun on the Northeast Power station, the company's first modern generating complex. Savings from this new plant helped the company's net income increase from $8,550 in 1919 to $562,000 in 1920, and reach $2.6 million five years later. All the while rates to customers decreased.

Increased construction costs forced the company to refinance, prompting a second reincorporation, as Kansas City Power and Light Company in 1919. Three years later, another reorganization occurred when the company acquired the Carroll County Electric Company. At this time, the company underwent its final name change, becoming the Kansas City Power & Light Company. In 1923, Armour's interest was sold; one year later, the Continental Gas & Electric Corporation purchased the controlling interest. Under the umbrella of the United Light and Power holding company system, the corporation maintained this position until 1950.

Under Porter's 21-year watch the company prospered. He enlarged KCPL's service territory through acquisition of other utilities in western Missouri and eastern Kansas, and he increased generating capacity from 60 to 260 megawatts. Assured of a strong financial base, he was able to order construction of the 32-story Power & Light office building. This structure became the tallest building west of the Mississippi River at the time of its construction and has remained a prominent feature on the downtown Kansas City skyline ever since. Capitalization rose from $7 million to $82.5 million under his leadership. In 1938 Porter resigned his position as president, though he remained chairman of the board until his death in 1942. Olson offered this statement, written by Porter in 1934, to demonstrate Porter's philosophy of change: "We were a struggling utility, held in low esteem by the community . . . but we became a corporation recognized by all alike as a fair-dealing organization which had adequately, effectively served and developed the territory."

Growth and Rising Demand for Power: Mid-1900s

World War II slowed any domestic industrial expansion, including activity at KCPL. Instead the utility concentrated on providing service to 129 defense industries. The end of the war created new demands for service though. Harry B. Munsell, a quick decision-maker who was committed to customer relations, became KCPL's president and soon instituted several changes. In 1947 KCPL interconnected utilities in Missouri, Kansas, and Iowa for the first time, enabling the various companies involved to share reserve capacity. The Hawthorn Station, situated on the Missouri River, was started in 1948, and the first of two units were completed in 1951. Two other units followed and were fully operational by 1955. The total power output from this plant nearly doubled the company's capacity prior to its construction. The units burned coal or natural gas or a combination of both. In 1950 the holding company dissolved and KCPL again became independent.

In 1952 KCPL acquired assets of Eastern Kansas Utilities, but still found that additional power was required. Work began in 1954 on the Montrose Station in Henry County, Missouri. This site was selected on the basis of close proximity to west central Missouri's surface coal mines and was made possible by the development of high-voltage transmission lines to carry electrical current over longer distances.

In the early 1950s the advent of air conditioning caused such a strain on the power system—one window unit could more than double a customer's energy usage—that KCPL managers realized a drastic change was needed to meet demands. In 1954 KCPL adopted a new concept called load center system design. Large capacity distribution substations, each serving up to 15 square miles, were constructed to ease the handling of large electric loads. The company sold several assets in the late 1950s and early 1960s to raise capital and concentrate operations around Kansas City.

Company Perspectives:

Great Plains Energy pursues attractive total returns by managing diverse energy-related businesses to achieve stability, disciplined growth and a substantial dividend for shareholders.

In 1960 Harry Munsell retired as president; he died one year later. Recalling Munsell's impact during 13 years at the helm of KCPL, Olson stated, "His years were marked by significant efforts to expand, modernize, and decentralize, and his leadership prepared the company for the decade of opportunity that was ahead."

The demand for power in and around Kansas City was not leveling off. Analyses indicated the company's customer load was doubling every ten years. Because the need for additional power was so great, five utilities in western Missouri and Kansas entered into a 33-year cooperative agreement called the Mokan Pool in 1962. This enabled the participants to share reserve capacity and coordinate planning of expensive new generating facilities.

Diversification and Continued Growth: 1960s to Early 1990s

In 1969 KCPL built its first large-scale service center, a 500-megawatt addition to the Hawthorn Station. The five units at the station were constructed to burn either coal or natural gas. The first phase of the 1,370-megawatt, two-unit La Cygne station began operating in 1973, burning high-sulfur coal. This facility became the largest single investment ever made in Kansas upon completion in 1977, at a cost of $190 million. Due to inflation, this was more than twice the cost of the Hawthorn Station.

Customers' conservation measures taken after the 1973 Arab oil embargo affected operations. Growth slowed within the company as demand decreased. Concern for the environment grew nationwide during these years, resulting in expensive pollution-control requirements. KCPL adopted several cost-cutting measures in response to these events. In 1975 KCPL sold distribution properties in Wyandotte County, Kansas, to Kansas City's Board of Public Utilities. KCPL sold other distribution facilities and the city's traffic signal system in 1977.

That same year construction began on a 1,150-megawatt nuclear facility called Wolf Creek near Burlington, Kansas, about 90 miles southwest of Kansas City. The plant was erected to supplement KCPL's coal-fired systems. In 1980 the coal-burning Iatan station, located about 40 miles northwest of Kansas City, began operating, while Wolf Creek opened in the fall of 1985. Since construction, the Wolf Creek nuclear plant, which represented almost 16 percent of KCPL's generating capacity, had been closed five times for refueling. The $3.05 billion facility attracted some negative publicity for KCPL over subsequent rate increases.

In the early 1980s, KCPL celebrated a centennial of operation. At this time the utility underwent an extensive reorganization, streamlining financial operations and emphasizing personnel training and development. The company also adopted KCPLAN, a formal corporate strategy for the future. In developing this plan, KCPL consulted with an advisory panel representing various community interests. KCPLAN detailed strategies for energy conservation, pricing policies, and production facility rehabilitation.

In 1990 KCPL sold its steam system to Trigen Energy Corporation with the provision that the steam not be used to generate competing electricity. During the same year, KCPL attempted a hostile takeover of Kansas Gas and Electric Company—the first attempt of this kind by a utility company in more than 50 years. Kansas Gas and Electric held half interest in KCPL's La Cygne and Wolf Creek generating facilities and some insiders noted that the two companies disagreed on expansion plans. KCPL management felt that the company would benefit from Kansas Gas and Electric's excess capacity and tendered an offer of $27 per share directly to stockholders. After Kansas Gas and Electric took measures to fight the takeover and considered merging with other companies, KCPL dropped the pursuit at the end of the year.

Compliance with federal pollution regulations became a major challenge facing KCPL and other utilities, especially after the Clean Air Act of 1990. The measure was designed to decrease acid rain by reducing sulfur dioxide emitted into the atmosphere by ten million tons between 1980 and 2000. The government began using an emission credit system in 1990, so that electric companies using coal-burning plants would receive credits allowing a limited amount of sulfur dioxide emissions and then could purchase more credits if their emissions were above target levels. KCPL anticipated these regulations as early as 1983 and began using low-sulfur coal from mines in Wyoming. The company expected to have extra credits available to sell to other utilities because of this early compliance.

Key Dates:

1882:: Kawsmouth Electric Light Company is founded.
1885:: The company reincorporates as Kansas City Electric Light Company.
1900:: J. Ogden Armour and partners acquire Kansas City Electric Light Company.
1916:: The company is reorganized as Kansas City Light & Power Company.
1917:: Joseph F. Porter is appointed president.
1919:: Reincorporation creates Kansas City Power and Light Company.
1922:: Name is changed once more to Kansas City Power & Light Company.
1923:: The company buys Carroll County Electric Company.
1924:: Continental Gas & Electric Corporation purchases the controlling interest in Kansas City Power & Light.
1950:: The holding company dissolves, leaving Kansas City Power & Light (KCPL) independent.
1977:: Construction of Wolf Creek, a nuclear power plant, begins.
1997:: KCPL agrees to merge with Western Resources, Inc.
2000:: KCPL ends merger talks with Western Resources, Inc.
2001:: The company reorganizes and forms holding company Great Plains Energy Inc., with its holdings including Kansas City Power & Light Company, Strategic Energy, LLC, and KLT Gas Inc.
2004:: Company announces that it is exiting the gas exploration and development business.

In 1991 KCPL transferred headquarters from the landmark Power & Light Building, which had been occupied by the utility for more than 60 years, to new offices at 1201 Walnut. This was part of a $23 million upgrade of corporate facilities, which also included construction of two service centers to handle an increased customer base. Company representatives indicated that moving into state-of-the-art, all-electric offices would help KCPL test new technology, thereby speeding availability to customers.

That same year KCPL initiated several programs to increase responsiveness to the concerns of employees, customers, and the community. After realizing that some employees were failing tests for promotions because they were unable to read, the company started a confidential literacy program for plant employees and their families. In addition, in response to public concerns about utilities' adverse impact on the environment, KCPL opened the Environmental and Research Services Division to oversee regulatory compliance and design community programs. Some of the environmental issues with which this division was involved included planting native prairie grass near power plants, reinstating the peregrine falcon to the area by attaching nests to downtown Kansas City buildings, and restoring wetlands. KCPL executives hoped that community involvement would increase employee morale, improve the company's public image, and facilitate expansion by demonstrating environmentally safe practices.

Uncertainty and Reorganization: Mid-1990s to 2000s

In the mid-1990s KCPL became embroiled in discussions of mergers and hostile takeovers that lasted for several years. In 1994 KCPL entered merger talks with Western Resources, Inc., a Topeka-based energy provider. KCPL rejected Western's advances, however, and two years later, in January 1996, KCPL agreed to merge with UtiliCorp United Inc. The deal, worth an estimated $1.3 billion, would result in the 12th biggest energy provider in the nation, serving some 2.2 million customers and having $6.4 billion in assets. UtiliCorp, which also was based in Kansas City, had grown significantly in the mid-1990s through acquisitions, including pipelines in Kansas and Missouri. It provided electricity and gas to areas in the United States as well as to Canada, Britain, New Zealand, Australia, and Jamaica.

Shortly after KCPL and UtiliCorp announced the merger plans, Western tried to intervene by tendering a hostile bid to purchase KCPL for about $1.7 billion. Western, which had about 600,000 electricity customers in eastern Kansas and some 650,000 gas customers in Kansas and Oklahoma, acquired Kansas City Gas in 1992 and was looking to expand further. Western claimed its deal would benefit ratepayers more than a UtiliCorp merger would. KCPL responded by rejecting Western's offer. KCPL Chairman Drue Jennings voiced his displeasure regarding Western's unfriendly takeover bid by stating, "It's a brazen, 11th-hour, desperation attempt to derail a very formidable new competitor." UtiliCorp increased its offer from $1.35 billion to $1.7 billion in the hope that KCPL shareholders would back the UtiliCorp merger, and in June 1996 Western upped its bid to $1.9 billion. In the summer of 1996 shareholders of UtiliCorp and KCPL voted on the proposed merger. While UtiliCorp shareholders supported it, KCPL voted it down.

In 1997, a year after Western's hostile takeover attempt was initiated, KCPL agreed to sell the company to Western in a friendly, $2 billion deal. Yet another year later, the companies continued to negotiate. In March 1998 KCPL and Western agreed to combine KCPL with KPL and KGE, Western's two electricity subsidiaries, to form a new company—Westar Energy. The plan was to put $800 million of KCPL's debt into Westar and the remaining $350 million into Western. Western would own 80.1 percent of the new company, with the remaining 19.9 percent going to KCPL shareholders. Westar would be dedicated entirely to electricity and would have an estimated annual revenue of $2.1 billion.

In spite of the company's preoccupation with talks of mergers and takeovers, business continued, as did diversification. In early 1997 KCPL announced that it had acquired a major stake in Digital Teleport Inc., a St. Louis-based telecommunications firm building a fiber optics system in Missouri, through its subsidiary KLT Telecom Inc. Digital Teleport planned to provide local telephone service to Kansas City residents in the summer of 1997 and to expand throughout the Midwest. The company would divest its telecom interests in the early 2000s.

In early 1999 an explosion at KCPL's Hawthorne electric power generating plant resulted in the near-total destruction of a boiler building. The plant produced some 15 percent of KCPL's electricity, but it was undergoing routine maintenance and was not operational at the time of the explosion. Although KCPL's net costs in 1999 were expected to go up an additional $6.5 million as a result of the blast, the company said they did not anticipate a rise in customers' bills. KCPL moved ahead with plans for reconstruction and hoped to have the new boiler plant operational by the summer of 2001.

Nearly four years after hints of a merger between Western and KCPL began, the deal died. On January 3, 2000, KCPL withdrew from the agreement, blaming Western's falling stock price. Western's stock traded at $16.125 per share at the time of KCPL's withdrawal. In March 1998, when the two companies came to a revised merger agreement, Western's stock traded at $43.125 per share. In the stock purchase deal made between Western and KCPL, the lower stock price meant the deal was worth less than $1.3 billion in early 2000, a significant drop compared with the original amount of $2 billion.

No longer bound to another company, KCPL announced its desire to form a holding company, Great Plains Energy Incorporated, with three units: a competitive power generation company that would include the company's power plants (Great Plains Power), a regulated utility company (KCPL), and an unregulated subsidiary (KLT). The new structure was intended to make KCPL more competitive in a deregulated energy market. KCPL received the green light from the Missouri Public Service Commission for the restructuring in August 2001, and on October 1, 2001, Great Plains Energy was established.

Great Plains Energy restructured again in 2002 into three units: KCPL; Strategic Energy, LLC, which delivered wholesale power in competitive marketplaces; and KLT Gas, which specialized in the development and exploration of natural gas properties, specifically coalbed methane. For 2003 KCPL reported sales of $2.1 billion, a 15 percent increase compared with 2002. Net income was $144.9 million, which also represented a 15 percent increase over the previous year. After again rethinking its position in the competitive power generation market, Great Plains Energy decided in February 2004 to exit the natural gas production business and to remain focused on its original mainstay, electricity.