Missouri-based energy holding company and Motley Fool Income Investor recommendation Great Plains Energy (NYSE:GXP) expected a challenging year in 2005. Well, that's what it's getting. Second-quarter earnings, excluding the discontinued KLT Gas operation, fell a painful 38.8%, compared with the same period last year.

There was disappointing news from the company's cash cow, Kansas City Power & Light (KCP&L). This regulated utility division is 43.1% of total sales and accounts for a disproportionately large share of ongoing earnings (88.7% among core businesses). Sales for the second quarter fell slightly at 0.9%, and operating earnings fell 10.7%. Even favorable weather could not offset the reasons for the decline: higher operating expenses and loss of electric capacity caused by a scheduled refueling outage at the Wolf Creek nuclear facility.

For the first six months of 2005, KCP&L's earnings fell 26.4%. But today the company raised its 2005 earnings guidance for the regulated utility by a dime to a range of $1.96 to $2.03 per share -- in recognition of "tax planning" benefits coming in the third quarter. Revised guidance is still below the $2.08 KCP&L earned in 2004.

Sales were up 6% at the company's unregulated Strategic Energy division (56.9% of total sales, 11.3% of earnings among core businesses). That's where the good news ends for this competitive power-market participant. Earnings were down 60.2% from the comparable quarter last year, largely because of $7.2 million in Regional Transmission Organization (RTO) charges, despite $3 million net in favorable hedging fees.

Without delving too deeply, RTOs are effectively capacity-sharing agreements between utilities on a given grid. At points, companies may find themselves encumbered by such agreements, and at other times benefiting, as excess power (siphoned into the grid) finds a "home." The company's guidance for this division was lowered a dime to a range of $0.26 to $0.31 per share, compared with $0.59 last year.

For the year, Great Plains earnings guidance remains unchanged at $2.05 to $2.20 a share -- down from the $2.49 earned in 2004. The stock is down roughly 2% today, but it is still less than a dollar from its 52-week high. What gives?

Working in Great Plain's favor is the recently enacted Energy Policy Act of 2005, which repeals Depression-era regulations that limited U.S. utility ownership. Small regional electric companies could find themselves tempting acquisition morsels for Berkshire Hathaway (NYSE:BRKA) (NYSE:BRKB) or large utilities like Dominion (NYSE:D) and fellow Motley Fool Income Investor recommendation Southern Company (NYSE:SO).

Also working in the company's favor is its unregulated electric business. Companies like TXU (NYSE:TXU), Constellation Energy (CEG), and Duke Energy (NYSE:DUK) have seen their stock soar as they mastered the merchant power market. They might find the struggling Strategic Energy unit a hidden asset that would make Great Plains a tempting acquisition.

Great Plains, on its own, is expected to grow earnings at a painfully slow 3% per year for the next five years. Add in the 5.1% dividend, and that could provide a somewhat tempting total return. But, for this Foolish observer, the low-growth, total-return scenario will only make sense if the stock fades closer to its 52-week low (down 10% from its current level).

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Fool contributor W.D. Crotty owns shares in Southern Company. Click here to see the Fool's disclosure policy.