Missouri-based energy holding company and Motley Fool Income Investor recommendation Great Plains Energy
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
Also working in the company's favor is its unregulated electric business. Companies like TXU
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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