Michael Chesser – Chairman, CEO
Terry Bassham – Executive Vice President, CEO
William Downey – President, COO
Paul Patterson – Glenrock Associates
Paul Ridzon – Keybanc
[Charles Charatt – Credit Suisse]
Great Plains Energy (GXP) Q4 2008 Earnings Call February 12, 2009 9:00 AM ET
I would like to welcome everyone to the fourth quarter year end 2008 earnings call. (Operator Instructions) Mr. Michael Kline, you may begin your conference.
Good morning everyone. Welcome to Great Plains Energy's fourth quarter and year end 2008 earnings conference call. Joining me on the call today are Mike Chesser, Chairman and CEO of Great Plains Energy and Kansas City Power and Light who will provide a strategic overview including the company's decision to revise 2009 earnings guidance and the Board of Directors decision to reduce the common stock dividend, Bill Downey, President and COO of Great Plains Energy who will discuss utility operations and Terry Bassham, Executive Vice President and CFO of Great Plains Energy who will provide details on Great Plains Energy's fourth quarter and full year financial results and provide additional details around our 2009 revised guidance as well as the dividend action.
Also joining us on the call today is John Marshall, Executive Vice President, Utility Operations who will be available for questions.
Since some of our remarks will be forward-looking, I must remind you of the uncertainties inherent in such comments. The second slide included in this webcast as well as the disclosure in our SEC filings, contain a list of some of the factors that could cause future results to differ materially from our expectations.
Before I hand the call to Mike, I want to remind everyone that we closed the Aquila acquisition on July 14, 2008. In October 2008 we officially changed the Aquila name to KCP&L Greater Missouri operations. For brevity, throughout this morning's presentation we'll refer to the former Aquila and GMO.
I'd now like to introduce Mike Chesser, Chairman and CEO of Great Plains Energy and Kansas City Power and Light.
Good morning everyone and thank you for joining us today. By now I'm sure you've read yesterday afternoon's press releases announcing our 2008 results, the downward revision of our 2009 earnings guidance and a 50% reduction in our common dividend. In just a moment I'll detail some of the key drivers behind these prudent and necessary actions, but first let me take a couple of minutes to remind you of the significant steps Great Plains Energy took in 2008 to refocus our efforts and our resources in our regulated core business and in the process expand a strong regional utility.
2008 was by any definition, a transformational year; a year in which we completed a number of landmark steps to focus the company of our core electric utility operations expand our regulated footprint and advance our efforts to provide clean, affordable and reliable energy for our region for years to come.
In June, we completed a sale of strategic energy and received slightly over $300 million in pre-tax cash proceeds which we redeployed in our utility operations. The value that was realized from the sale looked very attractive then, and looks even more so now given developments in the competitive supply market of the past several months.
On July 14, after a 17 month approval process, we completed our second transformational event, the acquisition of Aquila. We then quickly moved to integrate the operations to begin capturing the benefits for shareholders and customers. In today's rising cost environment, the synergies we expected to achieve from this transaction are an important part of our plan to maintain affordable energy prices for the customers and the communities that we serve.
Our comprehensive energy plan is also transforming the company with significant progress on two large projects; major plan overhaul and air quality control system installation at Iantan 1 and the construction of Iantan 2.
I wanted to make you aware of a new development at Iantan. As you know, the unit has been down for a scheduled outage since the middle of October to complete the unit overhaul and to tie in the air quality control system. We closed the breaker on February 2 which concluded the air quality control system work and then went into start up mode.
During start up, we experienced a high level vibration that caused us to re-open and dissemble the turbine rotor in order to assess the situation. We're still in the preliminary stages of investigation and evaluation at this point, but our early estimate is that repairs could delay the in service date of the unit which had been targeted for late February by one or two months.
We believe that a delay of that duration could still be accommodated with the schedule of the rate cases in process and that it will not result in a significant earnings impact for 2009, but we will keep you posted as we learn more.
Returning to 2008, it's definitely been a busy year. Any one of these significant accomplishments would have been a substantial achievement. As we've discussed in past calls, our long term earnings growth story is in essence, a rate based growth story.
Prudent investment in rate base requires significant capital that must be generated internally or raised in the capital markets. Unfortunately, the economic and financial market forces in the past several months, particularly those shown on this slide have pressured available capital from both sources.
These factors were considered when we rolled out our 2009 earnings guidance of $1.30 to $1.60 per share in November. However, since that guidance was issued, we've seen additional deterioration and uncertainty. Beginning with our fourth quarter 2007 conference call, we've been talking with you about the decreasing demand across our service territory that we've been seeing as a result of the downturn in the economy.
Since we provided earnings guidance in November, this trend has not abated and the outlook has actually deteriorated. In our November guidance, we projected that our 2009 retail megawatt hour sales volume would increase slightly. Based on newly available data, we now have revised that view and expect that retail sales volume will decline by 7/10th of a cent for 2009.
The effect of that downturn goes beyond 2009 and developments during the past couple of months has significantly increased our uncertainty around when and how much the economy will recovery. We're projecting positive demand growth in 2010 and 2011, but lower megawatt hour sales than were previously forecasted. Terry will talk more about the specific assumptions in his comments.
In addition to the effect of the economy on demand, financial markets have remained difficult as well. This has caused us to reassess our assumptions around the cost and the amount of debt and equity financing required over the next few years. Similar to the broad economy, it's not possible to predict when the markets will improve and by how much, so we've been conservative as we've developed our view. Again, Terry will address this in his section.
We are facing the challenges I've just described head on with proactive, responsive and prudent measures that will strengthen our long term financial flexibility. We've reduced our 2009 guidance as Terry will talk more about in a few minutes. We've eliminated or deferred another $170 million of capital from 2009/2010. This is on top of the $270 million of capital we had previously deferred as we disclosed in November.
We froze external hiring for all but essential skills and are intensely focused on managing operations and maintenance expense, and we've announced that we are reducing our common stock dividend by 50% from an annual level of $1.66 per share to $.83 per share.
We recognize how significant this is for many of our shareholders, so I'd like to spend a few minutes elaborating on our decision around the dividend and how we believe it benefits the company going forward.
I've already talked about the high degree of uncertainty in the economy. That translates into uncertainties for our business and a need for increased financial flexibility. Our 2008 pay out ratio and our projected 2009 pay out ratio even with our previous guidance were the highest in the industry by a significant margin.
Maintaining the previous dividend while lowering our 2009 guidance, would have increased that disparity. We do not believe that dividend policy should be changed based on short term factors; however the current situation combined with the economic uncertainty I talked about, were strong contributors to our decision.
Preserving internal capital becomes even more important in an environment for raising external capital is difficult and increasingly costly. This action will provide cash annually. This represents capital we will reinvest in projects that drive our regulated growth and reduce the amount we have to raise in the capital markets.
While the action we've taken with respect to the dividend was not taken lightly. We believe it is in the long term best interests of the company because it will reduce the amount of debt and equity we need to raise externally, we expect to see improved earnings per share and an improved credit profile over time.
A strong credit profile is critical to us and the conditions of the global credit markets over the past several months have demonstrated that maintaining that focus is not only important, but imperative.
Improved EPS should translate into improved valuation and therefore the ability to raise equity in the future to finance our growth at a more attractive valuation than if the dividend had been maintained.
And finally, it will bring our pay out in line with the rest of the industry. As the economic picture improves, and our earnings and cash flow follow suit, we will be in a position to reconsider the level of the dividend. As always in doing so, we would evaluate that in the context of our situation and the objectives at the time.
We've used this chart in the past for quarterly calls as well as a number of other presentations to describe the compelling drivers of our growth story as we look to the future. Bill will update you on our progress of many of these on his comments, and we'll keep you posted on the others in the quarters ahead.
Suffice it to say, our path to growth remains intact. We continue to move forward to implement the initiatives that will shape our success in the years ahead. The steps we've taken today position us to weather the current downturn in the economy and emerge stronger as markets begin to recover.
At this point, I'd like to introduce Terry who will take you through the financial information.
Good morning everyone. I have a lot to share with you this morning. Normally I would start with fourth quarter and year end results, but I know this morning most of you are focused on our revised '09 guidance and dividend reduction, so I'll do things in reverse this morning.
As Mike mentioned, we realize that our announcement was disappointing to our shareholders, especially since we provided guidance in November. However, in light of what Mike has already shared with you in some additional detail, it was a prudent and responsive action to take to provide the company with increased financial flexibility during this economic and financial market downturn to strengthen the company's long term financial outlook and credit profile.
I'll start first with what has changed in our view for 2009 since we provided guidance in November. As Mike discussed, and is depicted here in the waterfall chart, the two biggest factors driving our guidance change are reduced retail sales and increased financing costs.
I'll start first with changes to our financing plans. As time has passed, we believe we have better clarity around the financial markets and where our cost of financing will be in 2009. In November, as you may recall the debt capital markets had slowed almost to a standstill. We had no ability to predict when and at what cost we would be able to access the debt market. As a result, we anticipate using our short term revolving credit facility more heavily in 2009.
Improvement in the debt market over the past several weeks gives us a better sense of that market for us in 2009 and we do plan to issue some long debt this year to free up our available liquidity, though that debt will carry a higher cost than we've seen in recent history, and certainly higher than commercial paper funding.
Higher assumed rates account for about 40% of the financing related impact shown on the chart. Most of the rest of the is due to the higher amount of debt we anticipate in 2009 primarily as a result of higher '08 CapEx and decreased 2009 operating cash flow as a result of less revenue partially offset by additional 2009 CapEx eliminations or deferrals.
I'll discuss our financing plans in the next couple of slides. The second driver is our expectations around KCP&L sales volume growth rate and customer growth. Our forecast is based on new economic forecast data for our service territory. In 2009, we are now projecting a retail sales volume decline of .7% next year. This compares to our projection of a volume increase of .5% just a couple of months ago.
There's also another bucket of miscellaneous items that have changed. These items would not on a stand alone basis have caused us to adjust guidance. Also as you can see, we've tightened our belts and have identified cuts in operational support areas focused on reaching overtime at tier one cost structure.
This next slide shows our projected capital expenditures for 2009 through 2011. Compared to our November projections, we've reduced our CapEx for 2009 by an additional $50 million and for 2010 by an additional $120 million. I won't go through each line but will point out that the majority of the reduction is in base utility construction expenditures and more specifically in T&V as a direct result of lower customer growth forecasts.
CapEx in 2011 in about $30 million higher than our November 2008 estimate primarily related to a delay of our metalwork that has been assumed in 2010. The story here is that we are and have been working hard to adjust CapEx to address the impacts of the uncertain and difficult economy and financial markets.
We continue to believe that we've created a needed balance between prudent, necessary near term reductions and maintaining investments needed to achieve operational and strategic goals. We'll continue to evaluate our plans in the context of a changing economy and changing markets as we go forward.
This is snapshot of our sources and uses of cash for the period '09 through 2011. You can see with the dividend reduction, we are able to save over $350 million in cash over the three year period and thus lower our financing needs significantly. The dividend reduction not only saves cash, but it has an equity lick effect of issuing equity at essentially book value.
As we think about how we'll finance the remaining cash needs, maintaining our credit rating is and will continue to be a priority. We've had very high level discussions about our revised plans with SAP and Moody's but have not presented it to them in detail yet. We will do so at the end of the month.
In terms of our 2009 credit metrics, factoring in our revised guidance, additional CapEx cuts and new financing assumptions, including the reduction in dividend, we anticipate FFO debt at around 12%, FFO interest coverage at around three times and debt to total Cap at around 60%. We expect these metrics to steadily improve in 2010 and beyond.
These next four charts are updates to our 2009 assumptions that we shared with you in November. Many of the assumptions have not changed, so I'll go through these fairly quickly and focus on what has changed since November. To make it easy to identify key changes, they are noted in red text.
The main point on this page is just to provide you a bit more detail on the impact we are seeing from the slowdown in the economy and our service territory. As we've been talking about this morning, projected sales volume is expected to decline in 2009.
As we look at 2010 and 2011, we do so a bit of demand improvement in KCP&L but still below 2% growth rate we have seen historically. And GMO we anticipate will be up slightly below its 2003/2007 average of 2.5% to 3% as well. On a consolidated basis in 2010/2011 we anticipate retail sales will grow an average of 1.4%.
In terms of wholesale, things will continue to work as they have for KCP&L Kansas. Wholesale will be captured in fuel costs. KCP&L Missouri will have a new margin threshold based into the new base rates that will go into effect in 2009. Anything above that, while it would provide a short term cash benefit, would be booked as a regulatory liability and returned to customers in the next case also for GMO using base rates.
Our assumptions around financing continue to be a key piece of our outlook. As Mike mentioned we have eliminated or postponed and additional $170 million made in CapEx in 2009 and 2010, making our near term CapEx reductions nearly $450 million. However, we still have a significant amount of financing to complete over the next three years to complete our investments under the comprehensive energy plan and fund other CapEx needs as well as the dividend.
As I discussed on an early chart, we're forecasting a total free cash flow deficit of about $.9 billion over the 2009/2011 period. As the chart indicates, we expect to finance this with equal amounts of debt and equity. Our 2009 guidance assumes the issuance of $200 million in common stock in the 2009/2010 period. We're also assuming $200 million of equity in 2011.
How and when we complete the equity issuances is of course subject to market conditions, liquidity needs, rate case timing and a number of other considerations.
I've already talked about the $400 million of long term debt we expect to do at KCP&L in 2009. In 2010 and 2011 we project about $1 billion of long term about half of which would be for refinancing and the other half to meet new requirements.
On the regulatory front, Bill will provide a bit more color in his section, but as you can see here we have increased our ROE number for our Iantan 2 rate case that we anticipate will be filed later this year. This increase will be more representative of our actual cost of equity.
I should also mention that as Mike indicated, we have not assumed a significant impact in 2009 earnings from the one or two month delay in Iantan 1. This is based on our current view that the delay will not materially affect the procedural schedules of the current rate cases.
To this slide we have also added our anticipated resource portfolio mix. This is not a number that we can spread evenly across the year due to the impact by this number by planned outages and the refueling of Wolf Creek in late summer.
As expected, the percent of our coal requirements under contract has increased since November. We truly now procure almost all of its coal requirements for 2009.
We've already talked about CapEx. The tax information is very similar to what we covered in our third quarter call; however I did want to point out a small nuance that is occasionally overlooked in calculating our effective tax rate. Remember, earnings from AFUDC equity are not taxed and thus is one of the factors lowering our effective tax rate to around 30%.
We've shown this graph before, but it's worth quickly touching on to remind you of large construction work in progress balance we're projecting as we're in high gear over the next couple of years completing Iantan 2. There is a direct impact on AFUDC's which is becoming a significant factor in our earnings.
The growth looked at AFUDC and the growth that drives it is depicted in this chart, likewise the import to our earnings story in 2009, 2010 and 2011. Next, I'll touch briefly on our 2008 fourth quarter results before turning the call over to Bill.
As usual, I'm going to focus my earnings related remarks this morning primarily on core earnings. We believe core earnings to be measure of our performance. However, since core earnings are a non-GAAP measure, I wanted to start by providing a breakdown by segment of both our reported and core earning share as shown on the slide.
In the appendix to our press release and this web cast, we have a reconciliation of GAAP to non-GAAP core earnings. For 2008, Great Plains Energy had core earnings of $138.5 million or $1.37 per share. For the same period in 2007 core earnings were $125.9 million or $1.48 per share.
For fourth quarter, Great Plains had core earnings of $9.3 million or $0.08 per share. For the same period in 2007 core earnings were $27.5 million or $0.32 per share.
I'll cover the specific operational drivers of the numbers for the year in quarter over the next few slides, but let me first point out a couple of key items. GMO was acquired on July 14 as we reported in November, contributed earnings of $17.4 million or $0.15 per share during the third quarter. GMO had a loss during the fourth quarter of $4.9 million or $0.04 per share. For the year to date period since July 14, this works out to be $12.5 million or $0.12 per share.
Also in connection with the GMO acquisition Great Plains Energy issued 2.2 million shares which resulted in a $0.03 per share correlation in the fourth quarter and $0.26 for the year.
I'm not going to dwell on the fourth quarter results since you have the information on this slide and in the press release listed here for your reference.
Year to date core earnings for the Electric Utilities segment were $162.8 million or $1.61 per share. GMO's $17.9 million contribution for a partial year translated into $0.17 per share on a year to date basis.
Retail revenues increased $368 million in 2008 compared to '07. The acquisition of GMO increased retail revenues $306.2 million. KCP&L's $62 million increase in revenue was due primarily to new retail rates effective January 1, 2008 partially offset by $27.3 million impact from unfavorable weather in 2008 primarily in the third quarter.
KCP&L's wholesale revenues decreased $12.5 million in 2008 compared to '07 due to an 11% decrease in wholesale megawatt hour sales resulting in less generation in KCP&L energies. This decrease was partially offset by an increase in average market prior price of 9% due to higher natural gas prices.
An additional contributor on the plus side for KCP&L for 2008 was allowance for funds used during construction or AFUDC which increased by $20 million compared to last year.
As I mentioned on the earnings assumption slides, construction continues on Iantan 2 through the balance of 2009 and next year. This will be a growing piece of earnings story for the electric utility segment. On the negative side, KCP&L purchase power expense was about $18 million than 2007. This was attributable to both higher power volumes as a result of planned outages in the first half of the year as well as the average prices that were 20% higher than 2007.
Fuel expense also went up $7.8 million in 2008 compared to 2007 primarily due to higher coal and transportation costs and less nuclear in the fuel mix due to Wolf Creek's refueling outage in the second quarter.
In our other segment which mainly includes unallocated corporate charges in GMO's non utility operations had a core loss of $6.4 million or $0.05 per share for the quarter and a loss of $24.3 million for the year or $0.24 per share. Reflected in these numbers is a loss of $4.2 million in GMO's non utility operations for the quarter and $5.4 million for the year.
This slide gives you a sense of where Great Plains Energy KCP&L and GMO stand with respect to access to short term credit as of the end of the year. The combined availability was over $800 million. We continue to feel positively about our short term liquidity position.
Our debt refinancing requirements are virtually non existent over the next 24 months with only $68 million in late 2009. After that we have nothing until early 2011. However, as I mentioned earlier, we do anticipate issuing $400 million long term debt this year and expect to use the proceeds primarily for repayment of short term debt.
There is a lot to cover this morning. I know you'll have questions and on the call today and after Bill provides an update on our operations but perhaps even questions or issues that you would like to discuss afterward. To that end, I want to mention that Michal, Allan and I from our team are going to New York tomorrow and Boston on Friday to meet face to face with many of you. If you're interested in meeting, please contact our IR department.
In addition to this week's meetings we have set aside time over the next several weeks to be on the road for additional discussions for investors as needed. Thanks for you attention. Now, I'll hand the call over to Bill.
Good morning everyone. I know yesterday's announcement is front and center for everyone this morning; therefore I will keep my comments brief so that we can get right to your questions.
As usual, we have key things happening in a number of areas that I'd like to update you on. I'd like to spend a few minutes on operational issues.
First and foremost, in 2008 was the successful completion and integration of the GMO acquisition which both strengthened and extended our utility platform. We already are seeing operational and financial benefits from this transaction.
Importantly, during the integration and continuing today, customer satisfaction and reliability have been key areas of focus. In December we had our first opportunity as a combined company to respond to a storm restoration event, and I'm pleased to report that it went very well. In addition to successfully handling our own storm outages this year, our combined company crews provided restoration assistance on 10 occasions in 2008.
Residential customer satisfaction has been strong despite the challenging times our customers encountered in 2008. Based on 2008 J.D. Power survey results, our combined electric utilities are ranked in tier one among peer groups of utilities for 2008.
As Mike discussed, we are seeing the downturn in the economy impact our service territory not only from a customer usage standpoint but through a few other stress indicators as well. For example, bad debt write offs at KCP&L were up about $600,000 for the year compared to 2007 as a percentage of sales. There was a moderate increase from .51% of revenue to .54%.
At GMO we obviously don't have the year on year comparison, but as a percentage of sales, the write offs from the mid July closing through year end were just below 6/10 of a percent of revenue. As you can imagine, we are closely monitoring these trends and are working to find ways to help our customers and minimize the trickle down effects from the downturn of the economy.
Turning next to plant performance, as the blue line on this chart shows, the Wolf Creek nuclear unit has run at essentially 100% power since the completion of its last refueling outage in mid May. As a reminder the next refueling outage is scheduled for the fall of 2009.
As expected, KCP&L and GMO coal availability and capacity factors for the fourth quarter were lower than normal due to the FCR installation in GMO's Sidley3 plant and the outage of the air quality control system tie in and all of the scheduled maintenance work performed at Iantan 1.
Both plants were down for most of the quarter while the work was conducted. I'll cover the scope and the progress on these projects in just a minute on the next slide. As we discussed on last quarter's call, we are projecting that for 2009 the equivalent availability factor or EAF for our fossil fleet will be approximately 80% in 2009 and the projected capacity factor or CF will be roughly 77%. These assumptions haven't changed in the revised 2009 earnings guidance Mike and Terry have discussed.
In 2010 and 2011 we are forecasting an EAF in the 80% to 85% range and a capacity factor to remain relatively constant at around 77%.
Next I'll describe our progress on each of our major construction projects. Mike mentioned an issue that developed in the startup of Iantan 1. I don't have a great deal to add to his comments at this stage given that the event just happened late last week and we are in the very early stages of assessing the cause and identifying the potential impacts.
Based on our review to date, we estimate that we're looking at a delay of one or two months in the regulatory and service date of the air quality control system. We are talking to the parties and working to identify what if any adjustments need to be made to the rate case schedules.
While this delay is disappointing it doesn't diminish the fact that a lot of great work had been done to reach this point. The scope of the Iantan 1 outage has been one of the largest in KCP&L's history. Sometimes overlooked is that this project was not just the installation of the environmental equipment, but a major unit overhaul.
Beyond the environmental work we upgraded the control system to digital, installed burners, completed a generator stator rewind, installed a new high pressure turbine rotor, added a submerged flight conveyor and completed a chemical cleaning of the boiler. We also performed routing and preventative maintenance.
I also mentioned earlier, the outage during the quarter for the FCR installation at Sibley 3 which began on October 28 and was completed in late December. The FCR is currently in testing to determine whether it has satisfied it's in service criteria. We're confident this will be concluded well in advance of the true up date in the rate case.
We continue to make steady progress on Iantan 2 and continue the target completion in the summer of 2010. To give you a feel for progress, we currently have approximately 96% of the material procured for the plant and major contractor work is now approximately 60% complete. As we communicated on the third quarter earnings call, we are in the process of doing a cost reforecast update on Iantan 2 and expect to communicate the results of that to on our first quarter earnings call in May.
We do not see anything at this point that leads us to believe there will be any change to the total cost range we disclosed in May of 2008.
With respect to environmental projects at La Cygene, we have selected Sargent & Lundy as the owners engineer and we currently are developing a contracting strategy. As we communicated on our third quarter earnings call, we will continue to move forward on this project. However, we have extended significant expenditures until 2010 and beyond in response to pressures in the economy and the financial markets.
We disclosed previously that we have been evaluating alternatives around wind. Through two recently signed agreements, we have preserved flexibility to pursue wind in 2010. We have entered into an agreement to acquire 32 wind turbines equivalent to just under 50 megawatts but have not yet made definitive plans to move forward with construction of the project.
We also have an option to construct a 35 turbine project equivalent to just over 50 megawatts with a developer to be completed by May 31, 2010. KCP&L must determine whether to exercise the option on or before September 30 of this year.
As you might expect, the November elections have brought about some changes in our two states. In Missouri, Proposition C which creates a mandatory renewable portfolio standard passed with 66% of the vote. Proposition C requires that investor on electric utilities generate or purchase electricity from renewable energy sources equaling at least 2% of retail sales by 2011.
That requirement would increase incrementally to at least 15% by 2021 including at least 2% from solar energy. KCP&L endorsed this measure because the initiative which also protects utilities and consumers by ensuring that the cost of compliance and associated rate impact is limited to a maximum average rate increase of 1%.
We expect the Missouri Public Service Commission to formally begin the rule making process of Proposition C in March of this year. Also in Missouri Jay Nixon, a Democrat who had been the state's Attorney General was elected by nearly 60% of the vote.
Two days into his tenure Governor Nixon appointed Commissioner Robert Layton as Chairman of the Public Service Commission replacing Jeff Davis. Governor Nixon will have two appointments to make to the PSC this year as the terms of both Chairman Layton and Commissioner Connie Murray expire at the end of April.
In Kansas, during its legislative session, Governor Sebelius is proposing an omnibus energy package that would include a mandatory renewable energy standard and language enabling that metering. KP&L is supportive of the intent of the legislation and has been working with the administration to craft feasible language.
Currently the bill has received a hearing in the House Committee on Energy and has been passed to a sub committee that is dealing with all energy and environment legislation.
Finally, in late November the Kansas Corporation Commission issued its order on Docket 441 dealing with the cost recovery and incentives for energy efficiency programs. In 2009 we will likely file under this order for approval and recovery for some of our energy efficiency programs.
One of our key efforts this quarter has been to respond to a high volume of data requests related to our five rate filings that we made in September and to begin to prepare for possible hearings in Missouri and Kansas.
The top chart on this page is just to remind you of the specific details for each of our filings. As you can see our total request is for $257.5 million to cover costs for necessary air quality investments, new supply to meet our regions growth and other operating costs associated with KCP&L's comprehensive energy plan as well as increases in operating expenses and fuel costs for KCP&L in Missouri.
Our most recent development on the rate case front was last week when we received the positions of the Kansas Corporation's Commission's staff and the Citizen's Utility Rate Payers Board, or CURP in KCP&L's Kansas case.
While the staff revenue requirement of $42.6 million was less than our asked of $60.4 million, their recommended return on equity of 11.4% and cost of capital of 8.79% were higher than our initial asks of 10.7% and 8.75% respectively. This reflects their recognition of the current difficult financial markets that we are experiencing.
We will begin settlement conferences with the parties in the Kansas case later this month and if settlement isn't reached, hearings will begin in March. We have not received testimony from parties from the Missouri case as yet, but expect it this week. We are looking forward to working collaboratively with the parties in both states to work through these filings and will keep you apprised of our progress over the next couple of months.
With that, I'd like to hand the call back to Mike for some concluding remarks before we get to your questions.
We have covered quite a bit this morning. I'd like to leave you with the understanding that our long term rate base and earnings growth story remains unchanged and that we continue to execute well with our comprehensive energy plan and our integration with the Aquila and the achievement of those synergies.
But it's also clear to us that we are operating in a very uncertain economy with lower sales and higher capital costs as have been described. Nobody really knows how long that will continue. It could linger for a couple of years.
So given this, we feel strongly that the action that we are announcing today to reduce our dividend is the prudent thing to do. It's something that will help us preserve our financial strength and flexibility and very importantly, it will help us secure the earnings growth that will flow from the rate base growth that you see on this slide.
So with that, I'd be happy to take any questions you might have.
(Operator Instructions) Your first question comes from Paul Patterson – Glenrock Associates
Paul Patterson – Glenrock Associates
I wanted to touch base with you on the dividend reduction and exactly what has changed since November, because it seems to me that if the financial markets were anything in worse shape then, it looks as though you've reduced CapEx and it is just the earnings outlook deteriorated? Could you just give us a little bit more flavor on what really changed this very strong commitment it seemed to the dividend at the time to the reversal that we've had in the last few days.
From my perspective Paul, there's three things. The first is that we have received updated forecasts, economic forecasts that we've cranked through our forecast models and as Terry mentioned, that drove our projected sales growth from a positive .5% to a negative .7%. That may not seem line a lot but it really does have a significant impact on the bottom line and that's of course a big part of why we reduced our earnings guidance.
Secondly, the cost of the capital markets continued to grow and we have a considerable amount of money that we have to raise in those markets. So those are the two main drivers. The third thing for me is how long this economic downturn may last. As you hear the speculation today, early on we were saying well we might be pulling out the end of second half of this year.
Now, there's no sign of that. There's no optimism so this could be one year or a couple of years. So there are three things I think are significantly different today than they were back in November.
The one thing I would add to your point I think is, yes markets have opened a little bit. Certainly the volatility around those markets is what caused this pause in the fall and so as we've discussed, we had expected to lean on our short term debt balances. Now that we believe we've got the ability to go to the market and as Mike said, do some longer term debt to provide some financial flexibility, that's going to cause an increase in costs, no doubt.
So it's not just the changes we've seen which I think Mike covered very well, but it's also a little more clarity around the volatility in those markets that caused us to make some more definitive financing plans that over the short run will be more expensive than we expected, causing the guidance in large part to be adjusted for '09.
As you would expect, we're in continuous touch in this region with commercial real estate brokers and builders and so forth and just the continued decline and their optimism for the last several months has also been a real concern for us.
Paul Patterson – Glenrock Associates
In terms of the level of equity, it looks like you have reduced your equity plans from 2009 through 2011 by $200 million in terms of the equity issuance. On the other hand, you have about $350 million of additional equity coming in through the dividend reduction I guess is a way to look at it, and it looks like you have now planned on less CapEx. What's causing the requirement for new equity? Is it lower earnings projections that you have? Is it the rating agencies? Could you give a little more flavor for that?
It's a combination of all those things. Obviously we would have liked to have been able to eliminate the need to go to equity market at all, but again, we have done what a lot of folks have done to address those needs by reducing pretty significantly our CapEx. But we are in the middle of a large construction program, a commitment that we made to provide the growth for our earnings in the future that we can't cut back on so there is some limit to how much CapEx we can move out of that process.
Given the lower earnings and given the current price and given our need to finish our construction program, we see it as unlikely that we can completely eliminate our equity needs, but as you noted, we've reduced those needs over the next two years by over $200 million.
Paul Patterson – Glenrock Associates
On Slide 11, the CapEx reduction for 2010 is $170 million and on Slide 16 it's $140 million for 2011. Could you just tell me what the difference is there? Is the $140 million additional? How does that relate to each other? Additional reduction of $140 million of 2009 to 2011 Cap Ex is what you have there.
The capital expenditures for '09 and '10 are actually down $170 million and then for '11, they're up $30 million.
Your next question comes from Paul Ridzon – Keybanc.
Paul Ridzon – Keybanc
Looking at Slide 29, your rate based projections don't seem to have changed despite lower CapEx. What's driving that?
There are obviously some reductions overall, but in general the major additions to our rate base are the large projects so although we have seen and as we discussed here, some reduction to CapEx expectations, the major impacts on our rate base in each of these sections are our larger projects which as I described before, we're not changing our anticipated work on Iantan 1, 2 and then we'll see after that.
Paul Ridzon – Keybanc
Would it be fair to characterize the dividend action as kind of a temporary stop gap to fund some near term shortfalls and then once we're through the woods we could see a meaningful pick up in the dividend level?
Let me give you a sense of that. Number one, we have always said that we are a strong dividend paying stock and we're committed to that philosophy. This will, we believe reduce our payout ratio over the next couple of years down to a level where if the economy picks up and these investments go on rate base, we will be in a position to consider growing the dividend and I look forward to that as being a healthy environment for us to be in.
Paul Ridzon – Keybanc
What's your long term goal as far as capitalization ratios?
We've always said that in a steady state condition that we think 70% payout ratio is a good target, so 50% to 70% payout is probably the kind of thing that we would look forward to over the next five years, and we expect with this rate base clearing to go online, that will allow us to consider increasing the dividend.
I would say that an expected capitalization for a company like us would ultimately be around 50% to 60%.
Your next question comes from [Charles Charatt – Credit Suisse]
[Charles Charatt – Credit Suisse]
On the Legacy debt coming due in the next couple of years, where do you plan on refinancing that if you plan on ever raising additional debt at that entity?
We'll take a look at that but not necessarily, but no. The current plan is not to do that.
[Charles Charatt – Credit Suisse]
So you'd raise it at Chesapeake?
There are no further questions.
Again, as Terry indicated we plan to be broadly available to you in the next several weeks. Terry, Michael and I will be in New York later this week. We look forward, if any of you have individual questions or you'd like to talk about any of the things we covered on the call, please don't hesitate to reach out to us.
Thank you very much for joining us today.
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