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Great Plains, Westar executives confident about merger approval in Q2

Great Plains Energy Inc. and Westar Energy Inc. executives remain confident that the proposed merger of the two neighboring electric utilities will close in June after negotiations with Missouri and Kansas regulators occur in March.

During Great Plains' fourth-quarter 2017 earnings call, Chairman, President and CEO Terry Bassham said he expects the company to achieve its targeted earnings per share of 6% to 8% per year through 2021 with efficiencies achieved from the merger and stable fuel, transmission and property tax costs in Missouri.

Bassham is "optimistic" that negotiations with state regulators will lead to closing the merger in the second quarter. Settlement hearings for the proposed merger with Kansas-based utility Westar Energy are scheduled for March 12-16 before the Missouri Public Service Commission and starting March 19 at the Kansas Corporation Commission.

An order is expected from Kansas regulators by June 5, Westar President and CEO Mark Ruelle said on a separate Feb. 22 earnings call. Missouri regulators do not have a specific deadline for an order, but Ruelle said he expects it to come around the same time as the Kansas ruling.

Filings by Kansas regulatory staff show disagreement with merger applicants on the allowed return on equity, but Bassham said he believes that the parties can come up with a way to manage the return if they can agree on the overall framework of the merger and how to move forward.

Great Plains Energy in July 2017 revised its merger proposal to use a stock transfer to form a new holding company, where Westar would own 52.5% and Great Plains the remaining 47.5%. The stock-for-stock transfer requires no transaction debt or exchange of cash, which appealed to state regulators after the KCC in April 2017 denied an earlier merger proposal. The May 31, 2016, proposal had involved an $8.6 billion cash-and-stock deal that would have had Great Plains assume approximately $3.6 billion in Westar debt.

The KCC staff on Jan. 29 recommended that the commission approve the stock-for-stock proposal on the condition that the agency also approves a staff-proposed "earnings review sharing plan," which more evenly balances the benefits of the merger between consumers and shareholders. The KCC staff's proposal includes conditions such as a 9.3% threshold return on equity and a five-year moratorium on rate cases.

Westar delivers electricity to 687,000 customers in eastern and central Kansas, while Great Plains Energy subsidiaries Kansas City Power & Light Co. and KCP&L Greater Missouri Operations Co. provide electricity to 850,000 customers in eastern Kansas and western Missouri. The combined company would have a market cap of $14.5 billion and about 13,100 MW of power supply, according to a joint Jan. 10 investor presentation.

Should the merger get state and federal approvals, Bassham expects renewables to form about 30% of the combined company's retail sales, an increase from each company's share today, he said on the call. As of the end of 2017, renewables formed about 19% of Great Plains' supply mix and 21% of Westar's, according to the Jan. 10 presentation. (Kansas Corporation Commission Docket No. 18-KCPE-095-MER; Missouri PSC Docket No. EM-2018-0012)

Earnings results

On an adjusted basis, which excludes merger costs and impacts from U.S. federal tax reform, Great Plains Energy reported 2017 earnings of $269.4 million, or $1.74 per share, according to its earnings release, beating consensus estimates from S&P Capital IQ of $1.58 per share. In 2016, the company earned $286 million, or $1.85 per share.

On an after-tax basis and including merger costs, Great Plains Energy reported a loss in earnings in 2017. Fourth-quarter 2017 earnings for Great Plains showed a loss of about $100.1 million, or 46 cents per share, compared to positive earnings of $83.2 million, or 39 cents a share, in the fourth quarter of 2016. In the fourth quarter of 2017, the company also had a one-time, noncash charge of $130.3 million from revaluing deferred taxes related to federal tax reform. For 2017, the company reported a loss of $143.5 million, or 67 cents per share, compared to positive results of $273.5 million, or $1.61 per share, in 2016.

In 2017, Westar Energy earned $324 million, or $2.27 per share, compared to $347 million, or $2.43 per share, in the prior year, according to its earnings release. The utility earned $34 million, or 24 cents per share, in fourth quarter 2017, which is $20 million less than results in fourth quarter 2016, and missed the S&P Capital IQ consensus normalized EPS estimate of 40 cents. The fourth-quarter results account for a $12 million write-off from deferred income tax due to the Tax Cuts and Jobs Act of 2017.