Great Plains Energy Incorporated F1Q09 Earnings Call Transcript

Great Plains Energy Incorporated (GXP)

F1Q09 Earnings Call

May 12, 2009 8:00 am ET

Executives

Michael Cline - Vice President Investor Relations and Treasurer

Mike Chesser - Chairman and CEO

Bill Downey - President and COO

Terry Bassham - Executive Vice President and CFO

John Marshall - Executive Vice President, Utility Operations

Analysts

Paul Patterson – Glenrock Associates

Paul Ridzon – KeyBanc

Scott Engstrom - Blenheim Capital

Steve Fleishman - Catapult Capital Management

Michael Lapides - Goldman Sachs

Michael Goldenberg - Luminous Management

Presentation

Operator

(Operator Instructions) Welcome everyone to the First Quarter 2009 Earnings Conference Call. Now I would like to turn the conference over to Mr. Michael Cline, Vice President of Investor Relations and Treasurer.

Michael Cline

Welcome to Great Plains Energy's first quarter 2009 earnings conference call. Joining me on the call today are Mike Chesser, Chairman and CEO of Great Plains Energy and Kansas City Power & Light who will provide a strategic overview, Bill Downey, President and COO of Great Plains Energy and Kansas City Power & Light who will discuss KCP&L operations and Terry Bassham, Executive Vice President and CFO of Great Plains Energy who will provide details on Great Plains Energy's first quarter 2009 financial results. 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 and 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 have three items to highlight for you this morning. First I want to again remind everyone that we closed the Aquila acquisition on July 14, 2008. In October 2008 we officially changed the Aquila name to Kansas City Power & Light Greater Missouri Operations. For brevity, throughout this morning's presentation we'll refer to the former Aquila and GMO.

Second, Great Plains Energy provides the financial information in its earnings releases in accordance with GAAP. In prior quarters the company also provided core earnings, a non-GAAP measure that excluded the effects of discontinued operations, certain unusual items and mark to market gains and losses on energy contracts.

The company believes that in prior periods core earnings provided a meaningful indicator of results that was comparable among periods because it excluded the effects of these items. As noted in our press release given that the financial statement impacts of strategic energy ceased at the end of last year. Beginning this quarter the company will no longer provide core earnings.

Finally, last evening we announced a public offering of common stock and mandatory convertible securities. SEC rules limit what we can say on this call given that the transaction is in process. While we are allowed to talk about our results and business I must caution you that we will not be discussing the offering in our prepared remarks and will not be able to address questions relating to the transaction.

I'd now like to introduce Mike Chesser, Chairman and CEO of Great Plains Energy and Kansas City Power & Light.

Mike Chesser

By now I’m sure you’ve read yesterday afternoons press releases announcing our first quarter results and the reaffirmation of our 2009 earnings guidance range of $1.10 to $1.40 per share. We’ve had a productive first few months in 2009 as we made steady progress on our comprehensive energy plan and most importantly our long term path to growth that we have been updating you on each quarter.

Bill and Terry will cover our operational and financial performance in detail in just a few minutes but I’d like to touch on some recent successes. As most of you know, we are in the fourth year of our five year comprehensive energy plan. The last two and largest components of that plan include the air quality control system installation at Iatan 1 and the construction of Iatan 2 the 850 megawatt high efficiency coal fired power plant which is scheduled to come online in the summer of 2010.

As a reminder Iatan 1 was down for a scheduled outage to complete the unit overhaul and to tie the AQS system in beginning in the middle of October. I’m pleased to report that we brought the unit back online in early April and the AQS satisfied the in-service testing criteria on April 19^th. As a result it will be included in rate days in our pending rate cases.

A second very positive development is the settlements that we reached with the parties to all the rate cases we filed in Missouri last September. I’ll let Bill and Terry cover the details of the settlements but suffice it to say we are pleased to have achieved fair rate increases and a reasonable resolution of the prudence issue surrounding the Iatan 1 project. In the process we continued to effectively and diligently operate within a complex regulatory framework.

Finally, KCP&L coal fleet excluding Iatan 1 performed well in the first quarter with equivalent availability and capacity factors up roughly six to seven percentage points over last year’s first quarter. We believe this improved performance is directly related to increased training, focused O&M and capital investments and effective planned adage management. We’re encouraged by the first quarter’s results and will continue to keep you posted on this progress.

I did want to mention that we are pleased with the Missouri energy efficiency investment act that was introduced earlier this year in the Missouri Legislature and has successfully passed the Senate. This is a positive bill as the Act updates Missouri’s energy regulations to allow recovery of and a return on energy efficiency investments.

This will help drive an increase in energy efficiency which will benefit both customers and shareholders. The bill continues to receive wide support from environmental groups, customer advocates and businesses and provides an opportunity to make a positive change to our current energy policy. We’re hopeful that it will receive final approval during the last week of the legislative session.

This slide describes major steps that we are taking to create shareholder value as we look to the nearing completion of the largest construction program in KCP&L history. Bill is going to update you on progress on many of these in his comment but with the successful in-service testing of Iatan 1under our belt and the favorable settlements reached in the Missouri rate cases we have achieved another significant milestone.

While the downturn in the economy and the turbulent financial markets may have presented challenges we continue to move forward to implement the initiatives that will shape our success in the years ahead. The steps we either have taken or are pursuing currently include eliminating or deferring $450 million of capital spending over the next two years, suspending external hiring for all but essential skills, reducing and tightly managing operations and maintenance expenses, and raising capital in difficult markets in a manner that balances shareholder, regulatory, and credit objectives.

Freeing up valuable internal capital by reducing the dividend, these steps will position us to weather these challenges and emerge stronger as the economy and financial markets begin to recover.

At this point I’d like to introduce Bill who will take you through the operational details for the quarter.

Bill Downey

As usual we’ve had a busy first quarter from an operational, regulatory, and legislative standpoint. I’ll start with an operations update. First and foremost on April 19 we successfully completed in-service testing for the Iatan 1 air quality control system. As we discussed on the year end earnings call in February, during the startup of Iatan 1 after the unit overhaul and tie in of the AQCS system we experienced a high level of vibration that caused us to reopen and disassemble the turban rotor in order to assess the situation.

We found that the turban rotor shaft had been damaged in startup and had to be shipped back to GE for repair. This caused the delay in getting the plant back online to begin our testing of the AQCS. However, we were able to work with the parties to the various rate cases to modify the procedural schedules for true up to compensate for the delay. This did however result in slippage in the effective dates for new rates until mid August in KCP&L Kansas rate case and September 1^st for the Missouri cases.

Another major environmental project the new Selective Catalytic Reduction system at Sibley 3 also met its in-service criteria during the quarter and will be included in the rate base in the GMO cases. Iatan 2 construction is 50% to 60% complete and continues to be on track to be online in the summer of 2010. We expect to have an updated cost estimate for you on our second quarter earnings call in August.

In addition to the first quarter successes at Iatan that I just covered, the performance of KCP&L other plants improved in the first quarter of 2009 over last year. I’ll provide a bit more detail in my fleet performance section in a few minutes.

We used JD Power to measure our performance in the area of customer satisfaction. They will issue their full year 2009 residential survey results in July but we have the benefit of receiving quarterly updates to track our progress. Based on the first three quarters of results our customer satisfaction ranks in the first quartile among the Midwest large utilities group.

Despite being in the middle of our third rate case in recent years and the challenging times our customers are encountering we anticipate that our residential customer satisfaction and reliability metrics will remain strong when the final results are available in a few months.

Finally, we are seeing the effects of the downturn in the economy in weather normalized year over year MWh sales declines. However, electric utility customer receivables over 90 days were up only slightly in the first quarter of this year as a result of increased federal energy assistance funding for our customers and specific actions we are taking to limit exposure. Our write offs as a percentage of electric utility revenues for the first three months of 2009 were slightly lower then 2008. We will continue to monitor this closely.

This is a new chart tracking our synergy accomplishments that I thought you might find informative. As you can see, we continue to make steady progress on the integration of the GMO acquisition and continue to see operational and financial benefits from this transaction being identified and captured. We determined our actual synergies based on comparable 2006 costs inflated and adjusted for known and measurable changes.

Our original integration planning and testimony contemplated $643 million in synergies. The amount achieved through the first quarter of 2009 totals just under $100 million. When combined with the projected synergies through the end of the first five years post-acquisition of about $570 million this results in total projected synergies of approximately $670 million over the period. We still anticipate that our regulated synergies will far exceed transition costs.

As shown on the chart, regulated synergies represent just under $270 million or 40% of the total. As you may recall, in order to be able to recover transition costs in Missouri we are required to demonstrate that annual regulatory synergy savings exceed the annual level of amortization of transition costs. Of the approximately $100 million of achieved savings I just discussed just over $30 million are regulated synergies. Annual regulated transition cost amortization over all of our regulated jurisdictions would be just under $10 million based on March 31, 2009, transition costs.

I’ll turn next to plant performance. As expected, KCP&L Coal Fleet equivalent availability and capacity factors for the first quarter were lower than normal due to the outage at Iatan 1 which lasted the entire quarter. In addition, GMO had lower equivalent availability and capacity factors as a result of Sibley 3 being down for part of the quarter to complete its environmental upgrades.

However, excluding Iatan 1 KCP&L coal plant equivalent availability and capacity factor in the first quarter of 2009 were 75% and 69% respectively. This was a good improvement over first quarter 2008 equivalent availability of 67% and capacity factor of 63% again excluding Iatan. We’re encouraged that the efforts and focus Mike mentioned in his remarks appear to be paying off and we’ll continue our diligence in that regard.

The Wolf Creek nuclear unit had 100% equivalent availability and capacity factors for the 2009 first quarter. After operating at equivalent availability and capacity factors of 79% in the first quarter of 2008, as a result of the extended planned refueling outage. As a reminder, the next refueling outage is schedule for the fall of 2009.

Many of you have seen the media reports that Wolf Creek went offline on April 28^th. The root cause of the outage was traced to a defective fuse holder design which caused the loss of power that ultimately led to the inadvertent closure of a valve that regulates feed water a steam generator. The repair was completed and the unit returned to full power on May 4^th.

I’ll turn next to regulatory and legislative development and we’ll start with Missouri. I know many of you are interested in the changes in the composition of the Missouri Public Service Commission given that we have a new Democratic Governor. On April 21^st Governor Jay Nixon announced the appointment of Democrat Joseph Bindbeutel to the commission replacing Republican Commissioner Connie Murray whose term expired on April 28^th.

Most recently, Mr. Bindbeutel serviced under the then Attorney General Nixon as senior chief council for the agriculture and environment division. His confirmation is pending approval by the Missouri Senate.

As Mike mentioned, we worked with the parties to our Missouri rate cases to achieve constructive outcomes and we’re able to reach settlements in all of our Missouri rate cases. The KCP&L Missouri case was formalized in the Stipulation and Agreement filed with Public Service Commission on April 24. The GMO Steam case was formalized with the Stipulation filed yesterday and we anticipate formalizing our agreement and principal in the GMO Electric case with the Stipulation in the next couple of weeks.

The key provisions of the settlements are shown here on the slide. I’ll start first with KCP&L Missouri details. First the $95 million rate increase which is about 95% of the amount that we filed for in September of last year. This amount includes $10 million of additional amortization. Second, with respect to prudence the parties may challenge the prudence of the cost of the Iatan 1 environmental project and the cost of facilities used in common by Iatan 1 and Iatan 2 in KCP&L next rate case.

However, the Missouri jurisdictional portion of any proposed rate base disallowances will not exceed $30 million in aggregate. Third, our off system sales margin threshold was set at $30 million. This implies a Missouri jurisdictional threshold of about $17 million which is about $36 million below the implied level in our September filings. This reflects the steep decline in natural gas prices since that time. Terry will talk more about that later.

Since the higher threshold was an offset to the revenue requirement we initially filed we will be impacted by regulatory lag in the form of a portion of current cost of service not being recovered in the new rates. The final key provision was the establishment of a regulatory asset for carrying costs and depreciation on Iatan 1 and 2 common facility costs and any Iatan 1 AQCS costs accounted for as plant and service but not included in rate base in this case.

The Stipulation sets May 30, 2009, as the true up date in the case for Iatan costs. Since not all Iatan 1 and common costs will have been approved for payments by that time due to contractor retention arrangements and other factors, this treatment will apply to those costs.

Next I’ll summarize the outcomes in the GMO cases. The GMO electric settlement agreement provides for among other things an increase in annual revenues of $48 million for GMO MPS jurisdiction and $15 million for the L&P jurisdiction effective September 1, 2009. Similar to the KCP&L Missouri settlement, prudence with respect to GMO portion of Iatan 1 and common costs will be addressed in the next rate case. However, the GMO Missouri portion of any proposed rate base prudence disallowances will not exceed $15 million in aggregate.

The Electric settlement agreement also continues the fuel adjustment clauses in both of GMO jurisdictions. Finally, GMO treatment mirrors KCP&L in terms of carry costs and depreciation for Iatan 1 AQCS and common costs accounted for as plant and service but not yet included in rate base. The Steam agreement provides for an increase in annual revenues of approximately $1 million effective July 1, 2009. Additionally, the agreement allows for the quarterly cost adjustment fuel sharing mechanism to be established at 85% above the fuel costs in base rates which is an improvement over the current 80% threshold.

In summary, we are very pleased with the settlements and believe they further enhance our track record of managing complex and challenging regulatory processes to successful conclusions. Things have also been active in Kansas. Former Lieutenant Governor Mark Parkinson replaced Kathleen Sebelius as Governor when Sebelius was named Secretary of Health and Human Services in the Obama cabinet.

Prior to assuming her new post in Washington, Governor Sebelius reappointed Republican Commissioner Michael Moffet whose term had expired in March to the Kansas Corporation Commission. The terms of the other two KCC Commissioners, Chairman Thomas Wright and Joseph Harkins expire in March 2010 and March 2011 respectively.

In early march KCP&L and the parties to our Kansas rate case filed a joint motion to modify the procedural schedule. The principal purpose of which was to allow additional time for the parties to evaluate Iatan common costs. The Kansas Corporation Commission subsequently granted the parties joint motion.

The staffs and intervener’s testimony regarding their audit of the Iatan costs to be filed in late May and the hearings in the case are scheduled to be held in the week of June 22^nd. We anticipate having new rates in place shortly after the KCC issues its final order which is expected on August 14^th.

You may recall that Proposition C which was passed in Missouri last November requires that investor owned electric utilities generate or purchase electricity from renewable energy sources such as solar, wind, biomass and hydro power 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. The measure limits the associated rate impact to 1%.

Proposition C is in the rule making phase at the Missouri Public Service Commission. No formal draft has been issued to date. The biggest discussion issues and rule making are the formulas used for calculating the 1% rate impact provision and the 2% solar energy threshold.

Also in Missouri, as Mike mentioned, Senate Bill 376 has been proposed and if enacted would require the Public Service Commission to allow recovery of and return on energy efficiency investments. The Missouri Senate approved the bill by an overwhelming majority and it awaits floor action in the House this week.

In Kansas an omnibus energy bill has made its way through the House and Senate and awaits Governor Parkinson’s signature. The key component of the bill is a mandatory renewable portfolio standard with targets of 10% by 2011, 15% by 2016 and 20% by 2020. Similar to Missouri, the Kansas bill would limit the associated rate impact to 1%.

That wraps up my prepared remarks. Next up is Terry for a discussion of the financials.

Terry Bassham

My comments this morning are focused on the results for the quarter, reaffirmation of our 2009 guidance range, liquidity, and credit ratings. I’ll start with the results for the quarter. As we noted in our press release beginning this quarter we’re no longer providing core earnings. As a result, my remarks this morning are focused primarily on GAAP earnings.

I’ll start first with an overview and then I’ll provide some additional color on the next couple graphics. Great Plains Energy earnings for the first quarter were $21.3 million or $0.18 per share including a $16 million or $0.13 per share tax benefit from the GMO 2003-2004 federal tax audit settlement as reported in the other segment. This compares to earnings of $47.1 million or $0.55 per share in the 2008 comparable period.

Compared to last year, earnings this quarter were negatively impacted by lower retail and wholesale revenues partially offset by lower purchase power expense and higher AFUDC and KCP&L. Conversely lower expenses from our corporate and other activities had a positive impact on the first quarter 2009.

Since we reported both GAAP and core results in 2008 for comparison purposes I’ll point out that the first quarter of 2008 shown on this chart included two sizeable items that were excluded from core earnings. First were earnings of $52.9 million or $0.62 per share from a discontinued operations of strategic energy. Second was a loss of $13.7 million or $0.16 per share lost from the mark to market impact of interest rate hedges.

Electric Utility earnings fell $9.6 million in the first quarter compared to the same period in 2008. Revenue increased 41% as a result of the inclusion of GMO top line of about $142 million. KCP&L revenue was down $20 million or 7% compared to last year. About $16 million of the $20 million drop in KCP&L revenue was due to wholesale where we saw 33% decrease in the average market price per MWh compared to 2008 primarily due to lower natural gas prices and an 18% decrease in MWh sold resulting from a reduction of available generation due to the planned extended outage at Iatan 1.

The other driver of KCP&L revenue decline was a 2% or roughly $4 million drop in retail revenue compared to last year. Unfavorable weather was the primary cause. Heating degree days this year were about 14% below 2008 which negatively impacted revenue by about $4.5 million. Though KCP&L overall demand as weather normalized MWh sales was 0.8% lower then last year this impact was essentially offset by pricing impacts at the lower usage levels leaving weather normalized revenue about flat. Also, though GMO was not included in our first quarter 2008 numbers sales were about flat compared to a year ago.

We often get questions about how our three key sectors; residential, commercial, and industrial are performing from a retail demand perspective so I thought I would share some additional detail. Residential growth in MWh sales at both KCP&L and GMO were positive at 1.5% and 3.2% respectively. Commercial MWh sales at KCP&L were down 1.6% and up 0.3% at GMO. Industrial MWh sales were down 5.4% at KCP&L and down 10.5% at GMO compared to the same period last year.

The overall change in MWh sales data captures changes in both customer count and customer usage for the first quarter 2009 residential sales made up 41% of total MWh sales, commercial sales 46% and industrial 13%. Based upon first quarter results and the company’s view of the remainder of the year we can reaffirm our expectation of approximately 0.7% drop in overall weather normalized MWh demand at GPE for the year.

As the chart indicates, first quarter 2009 earnings per positively impacted by lower purchase power expense at KCP&L. Though volume was up due to the Iatan outage processes were almost half of 2008 levels. Also benefiting earnings in the 2009 quarter was a $6 million increase in the equity component of AFUDC resulting from a higher construction work in process balance due to the CEP projects. Though I won’t be able to make year on year comparisons for GMO until later in the year, GMO utility operations loss of $1 million are about $0.01 a share was better then our internal expectations.

In our other segment which mainly includes unallocated corporate charges and GMO non-utility operations we reported earnings of $13.9 million or $0.12 per share for the quarter compared to a loss of $22.8 million or $0.27 per share for the same period in 2008. Reflected in the first quarter 2009 numbers is a benefit of $17.2 million from GMO non-utility operations the biggest piece of which is $16 million or $0.13 per share from the settlement of GMO 2003-2004 federal tax audit.

I’ll now move on to a few comments about 2009 guidance. As we indicated in our press release we’re reaffirming our 2009 range of $1.10 to $1.40 per share. In doing so we are taking a number of recent developments into account including the following. The rate increases outlined in the proposed Missouri rate case settlements, delays in the effective dates of rates in Missouri and Kansas compared to our original assumptions.

The impact of the continued low level of natural gas prices on wholesale opportunities for KCP&L, the impact of actual and announced share issuances, lower short term interest rates then we anticipated, the GMO tax benefit realized in the first quarter and additional O&M capital opportunities we are pursuing. We continue to keep a close eye on retail demand, first quarter was a little behind expectations but there’s nothing so far that would cause us to revise our full year demand forecast.

I’ll turn next to a few graphics on our liquidity, credit ratings and capital structure. We ended the quarter with nearly $900 million of availability liquidity on a consolidated basis which increased by about $50 million compared to year end 2008 despite over $300 million of consolidated capital expenditures during the quarter. Our liquidity benefited from two financings during the quarter the proceeds of which were used primarily to repay short term debt at KCP&L.

In March, KCP&L issued $400 million of tenure first mortgage bonds at a coupon rate of 7.15%. Also in March Great Plains Energy sold $50 million of common stock through our safe program. Of the $1.5 billion of consolidated credit line capacity shown on this chart over 90% matures in 2011 so we did not have significant immediate maturities to contend with. We are going to be looking to renew at KCP&L accounts receivable securitization structure and put a new securitization in place for GMO in the third quarter. We expect the total of the two lines to be in the $125 to $150 million range.

We had some activity with respect to our credit ratings in the first quarter. Moody’s downgraded the ratings of rated entities in the GPE family by one notch which lowered the Senior Unsecured ratings of Great Plains Energy and GMO from Baa2 to Baa3 and KCP&L from A3 to Baa1. Moody’s left KCP&L short term rating unchanged at Prime-2 and the outlook at all entities at Negative.

S&P changed the outlook for all entities from stable to negative. In addition, KCP&L Commercial Paper rating was lowered from A-2 to A-3. S&P took no immediate actions on the long term ratings of any of our entities.

For both agencies the main influence behind their actions as they articulated in their reports was that our credit metrics were weak for our current rating. As I mentioned on our year end 2008 call, maintaining our credit rating is important. With one key driver of the equity issuance we did through Safe during the first quarter and will be a consideration as we make other capital structure and financing decisions going forward.

As well, we have a number of recent regulatory and operational accomplishments that we believe will be viewed favorably by the agencies including our recent positive rate case settlements in Missouri, the successful completion of the Iatan 1 project and the strong performance of our coal fleet in the first quarter. We maintain a strong dialogue with the agencies on these types of developments and will continue that going forward.

That concludes my comments and I appreciate your time. With that I’ll hand the call back over to Mike.

Mike Chesser

The point I’d like to emphasize here is that by the end of 2010 and the completion of Iatan 2 we will have invested approximately $2 billion in KCP&L multi-year comprehensive energy plan since its inception in 2004. These investments will ensure a clean affordable and reliable electric power for customers in our region for years to come and equally as importantly in the process we will have created a platform for long term shareholder value.

Also as a reminder we’ve made investments in renewable energy by adding 100 megawatts of wind and we’ve improved air quality through the installation of environmental retrofits at Racine 1 and the recent completion of and air quality control system at Iatan 1. We’ve also made investments in energy efficiency and infrastructure improvements to improve the overall reliability of our network. In addition, with the $1.7 billion acquisition of GMO last year our company expanded its vertically integrated electric utility footprint as well as its rate base and platform for growth.

In sum, we believe that our compelling rate base growth even in light of our recent capital preservation measures, paired with our company’s key strengths listed here presents a very solid investment for our shareholders.

Now I’d like to ask the operator to open up the lines for questions. As a reminder we will not be able to address any questions specifically related to the offerings announced yesterday so we’d appreciate it if you would keep your questions focused on the quarter and other operational topics that we touched on during the presentation.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Paul Patterson – Glenrock Associates

Paul Patterson – Glenrock Associates

The $1.10 to $1.40 in guidance, does that include, it sounds like it does include the $16 million from the 2003-2004 tax settlement.

Mike Chesser

Yes it does.

Paul Patterson – Glenrock Associates

Are there any other unusual items in guidance that we should be thinking about that you might be encountering?

Mike Chesser

That’s it, that the only non-standard item.

Paul Patterson – Glenrock Associates

You mentioned the safe issuance which you guys issued about $3.8 million shares. In light of what we got in terms of the announcement of the equity being issued are you guys going to access that some more, its wasn’t completely clear whether or not there might be additional safe issuances.

Mike Chesser

We are not able to talk about any of our equity strategies this call; we’ll be able to cover that on the later call.

Paul Patterson – Glenrock Associates

Could you clarify what you did say on this call with respect to the issuance of additional safe access?

Terry Bassham

We didn’t really address additional safe. What we talked about was that the issuance of the safe as well as the other factors listed were included in our current guidance, including the financing that you’re aware of. Other than that we’re really not allowed to talk a whole lot more about that. There’s another venue for that as you’re aware through the press release.

Paul Patterson – Glenrock Associates

Can you tell me why you guys are issuing so much more equity then you guys were apparently planning on previously at this point in time, can that be discussed?

Mike Chesser

No, that’s a subject for the next call.

Paul Patterson – Glenrock Associates

On the cash flow it looked like the operating cash flow was a little bit weak and it looks like the forward start swaps might be part of that. Could you just elaborate a little bit why OCF seems to be low this quarter?

Terry Bassham

What did you say might be part of it?

Paul Patterson – Glenrock Associates

I might be wrong, forward start swaps, the FSS, the interest rate swaps might be part of it, I wasn’t clear.

Terry Bassham

That is, you’re right.

Paul Patterson – Glenrock Associates

Could you tell us how that might be working, how that might come back or how we should think about operating cash flow like that going forward?

Terry Bassham

It’s slightly depressed because of the hedges moving forward obviously that’s been settled. We shouldn’t have that impact going forward.

Paul Patterson – Glenrock Associates

This is just a quarterly impact is that right?

Terry Bassham

Yes, absolutely.

Operator

Your next question comes from Paul Ridzon – KeyBanc

Paul Ridzon – KeyBanc

On the rate cases, will you be able to address sales trends, weaker demand in your true up or is it just a capital issue?

Terry Bassham

The settlement that we’ve announced today obviously in Missouri would resolve all those issues. The settlement we discussed described the actual rate recovery to the extent there’s reduced demand ongoing throughout the year but obviously we’ve picked up in the next rate case. Everything that’s occurred to the point of settlement obviously gets rolled in. There’ll be some true up in Kansas because its not yet occurred and so that would pull in some things but otherwise its pretty much resolved in Missouri until the next case.

Paul Ridzon – KeyBanc

Can you get demand issues in Kansas addressed in this true up?

Terry Bassham

No, Kansas is a little more limited it primarily looks at capital structure and rate base.

Paul Ridzon – KeyBanc

If we look forward to, obviously the story is all about 2011, what should we assume as holding company costs. Previously I was using $0.10 to $0.15, have you found any opportunities that could whittle that down a bit.

Terry Bassham

We keep looking at that opportunity. I think that number is fine to use today but we do continue to look at ways to limit that. I don’t see any reason to think it would be any higher then that.

Paul Ridzon – KeyBanc

Can you review with us what your last update for the Iatan 2 costs was?

Terry Bassham

That is in our 10-K, I knew you were going to test me, but it’s not changed since then. I believe you want Iatan 2 only?

Paul Ridzon – KeyBanc

Yes.

Terry Bassham

$1.8 to $1.92 billion. I can get that number for you, it’s the one in the 10-K. We haven’t updated since then.

Paul Ridzon – KeyBanc

Can you review your CapEx by year through ’11?

Terry Bassham

We’ve also got that in the K.

Paul Ridzon – KeyBanc

Has that changed given deferrals or eliminations of CapEx?

Terry Bassham

We’ve included in our current disclosure the deferrals that have occurred and our current structure would have total utility construction in ’09 and $800 million, 2010 $625 million, and 2011 currently is at $860 million.

Paul Ridzon – KeyBanc

You don’t give ’12 yet do you?

Terry Bassham

No, I’m trying to remember what the case shows. That’s really what we’ve been talking about is ’09, ’10, and ’11.

Mike Chesser

The 2011 number assumes a return to a normal economy and historic break rates. If that were not to occur especially on the P&D side that number could be lower.

Paul Ridzon – KeyBanc

You’ve got more opportunity to real in come CapEx if you need to.

Mike Chesser

Yes.

Terry Bassham

On page 28 of the K current total Great Plains Energy estimate is $1.7 to $1.83 billion. It’s discussed on page 28 of the K.

Operator

Your next question comes from Scott Engstrom - Blenheim Capital

Scott Engstrom - Blenheim Capital

On the tax benefit, was that in the guidance when you originally contemplated it?

Terry Bassham

Obviously when you give a range of guidance and ours was pretty broad there are things that could affect it either way. Yes, those were one of the things that depending on when and if it came through in the year it would have been obviously one of the things that could have pushed the guidance to the high end as the year went on.

Scott Engstrom - Blenheim Capital

One way to think about it as you were putting together was high end of the range with the tax benefit if you didn’t get it maybe closer to the lower end.

Terry Bassham

That’s one of several things that could have impacted. Obviously things have been volatile. That’s exactly right on that single issue.

Scott Engstrom - Blenheim Capital

At KCP&L itself in the quarter there was a negative effective tax rate. Is that primarily from the production tax credits? What is implied in the guidance, what would be a reasonable range to use for a tax rate at KCP&L?

Terry Bassham

It is because the tax credits in the quarter and I’d say I still think a number in 30% range effective.

Scott Engstrom - Blenheim Capital

With the GMO financials you filed last night just thinking about in particular the income statement for year 12/31/08 showing a negative operating income. As rolling that forward and excluding the economic situation which certainly wasn’t contemplated in your plans when you did the acquisition. Running up that negative operating income to a positive number the two sources of that are synergies and the rate cases or is there anything else in those financials that doesn’t really represent what the going forward look is.

Terry Bassham

Obviously a big piece of that as well is the interest rate that effects negatively that it wasn’t in rates and the rates were improved when we brought them to investment grade so that’s another piece.

Scott Engstrom - Blenheim Capital

I was focusing at the EBIT line and above. Is it two primary drivers that takes that sort of the accretive look that when you initially did the transaction are synergies and rate changes.

Mike Chesser

You said exclude the economy but that’s also a key factor. We expect over time that the area surrounding Kansas City Aquila represent will be growing more rapidly then the center part of that.

Operator

Your next question comes from Steve Fleishman - Catapult Capital Management

Steve Fleishman - Catapult Capital Management

This might be repetitive to discuss but when you gave your key assumptions for 2009 at the end of the year you talked about a tax rate including tax credits of 30.8%. Is that still the rough ballpark or is going to be lower then that.

Terry Bassham

That’s in the ballpark.

Steve Fleishman - Catapult Capital Management

That’s a mix of the tax credits and the fact that you have a lot of AFDC?

Terry Bassham

Right.

Steve Fleishman - Catapult Capital Management

Bill mentioned in his comments on Missouri that there’ll be some continued regulatory lag. Could you just repeat what you were saying there and maybe could you give us a sense of how much built in lag there is so to speak?

Mike Chesser

Quantifying it would be kind of hard but I think as Bill was describing is built into the original ask in KCP&L in Missouri in particular was the large credit for expected up system sales based upon gas look back in August/September last year when the filing was made. As that dropped dramatically over the year we’ve seen across the country that credit dropped. As a result of that had a very good settlement here but obviously a piece of that was that if we had filed the case exactly as we did back in September with the current gas forecast the ask would have been higher because the credit would have been smaller.

Steve Fleishman - Catapult Capital Management

What was the size of the credit in your ask?

Mike Chesser

Originally it was $90 million on aggregate basis. On a KCP&L basis $53 million and it dropped down to in the $17 to $18 million range. That would be the change to effectively the ask. Because of the way the law works once you filed your top in ask without starting the time clock over you can’t increase your ask in total.

Terry Bassham

We won’t be able to deal with that until the next rate case filing which would be toward the end of this year.

Steve Fleishman - Catapult Capital Management

Could you go through those sales numbers you gave out in the quarter by class?

Terry Bassham

Looking at a mix residential makes up about 41% and industrial 13%, commercial being the balance. On a per class we had KCP&L positive residential at 1.5%, GMO positive 3.2%, offset by commercial KCP&L down 1.6% and GMO about flat up 0.3%. Industrial then was down 5.4% at KCP&L and down 10.5% at GMO compared to a year ago.

Steve Fleishman - Catapult Capital Management

You said the weather was worse then last year so what drove residential sales up is that just core growth?

Terry Bassham

Again what we’re seeing is still growth in customer count and we also remember had a rate increase. From a revenue perspective we had the benefit of that as well comparatively.

Steve Fleishman - Catapult Capital Management

I’m sorry, are these revenue numbers or KWh sales numbers?

Terry Bassham

What I gave you was KWh sales numbers but we also had revenue impact from that perspective. For these numbers it’s basically just customer growth and continued usage.

Mike Chesser

One of the dynamics that we’re seeing is continued conversion to heat pumps in the winter months from gas. I think that’s part of what’s driving it. In general our economy here is more robust I think then maybe the average around the country and we also have a lower industrial concentration. Our penetration rate on new electric heaters is 80% in the commercial market and over 90% in the residential market.

Operator

Your next question comes from Michael Lapides - Goldman Sachs

Michael Lapides - Goldman Sachs

When you think about longer term earnings meaning once Iatan 2 is in rates can you talk about things that might keep you from earning your authorized return and these are more whether they’re structural or how your jurisdictions may differ from other jurisdictions. Just trying to think about normalized earnings power and the risk around realizing a normalized earnings power.

Mike Chesser

There are a couple things when you look at our company. One is our rates as a starting point are still 30% below the national average. We think that we have an ability as rates around the country are increasing to increase our rates and still remain very competitive. I think that’s an important point. Also, a lot of our investments that we’re making are investments that are going to be mandated.

We have renewable portfolio standards around wind. We have air quality standards so I think that’s going to help us. Finally, hopefully down the road we’ll be making investments in energy efficiency which will really allow customers to have more control over their costs. I think if we continue the tradition we have of having a strong community, political and regulatory relationship we ought to be able to have these costs installed in rate base and have the kind of earnings we talked about.

Terry Bassham

One thing I might add to that is recall that we still don’t have a fuel factor at KCP&L Missouri so obviously depending on the volatility in the marketplace that can affect you positively or negatively. Then obviously what’s affected us to some degree in the past has been able to manage the capital market access around CapEx. We really, really are focused on working to minimize the regulatory lag by getting the cost of service capital structure in shape and in place the next case so we can avoid that kind of serial rate case filing.

Michael Lapides - Goldman Sachs

Is there any shot at all of being able to have forward changes to rates either, down the road, past Iatan 2 either for environmental projects or for others? I know in Kansas that your neighbor there has the ECRR for real time recovery if environmental CapEx. Know post the CEP if that’s doable or post Iatan 2 if that’s doable in both Kansas and Missouri for you?

Mike Chesser

That’s going to be a subject that I think every utility is going to be looking at over the next five years. If we’re having to make these kinds of capital investments there is a lot of risk in regulatory lag embedded. We were fortunate in our comprehensive energy plan to be able to cut back on the regulatory lag and have the true up process. Without that major capital investments are going to be a real issue.

The other thing I’ll point out is certain kinds of investments like energy efficiency can be trued up on an annual basis and that reduces the risks. Renewable energy the same way wind investments you can pretty much get in rate base pretty quickly. That is going to be a real factor to be considered.

Michael Lapides - Goldman Sachs

You referenced the $400 million in capital spending that you may be able to defer, is all of that capital or is some of that O&M and when do you make that call, when do you communicate that to the street in terms of when you’re going to adjust the CapEx forecast going forward?

Mike Chesser

We actually have deferred that $450 million and it is in our current capital forecast. It is all capital. Most of it is associated with the lower load growth. Some of it is also associated with the wind that we’ve pushed back in later years.

Michael Lapides - Goldman Sachs

This isn’t incremental to what’s in the K; this was what was announced last quarter.

Mike Chesser

This was announced in first quarter. Yes.

Operator

Your next question comes from Michael Goldenberg - Luminous Management

Michael Goldenberg - Luminous Management

On dilution and EPS, I understand the common equity but the equity units that you were issuing for accounting purposes are they going to increase your shares outstanding right away or is it only three years from time that dilution is going to kick in for EPS reporting purposes?

Terry Bassham

I’m not allowed to really talk about the transactions specifically but in general the way those work is until the shares are issued there’s no dilution. I can’t talk past that.

Michael Goldenberg - Luminous Management

This has very little to do with transactions. With transactions like these dilution only takes place when shares are issued which could be three years from now or whatever right?

Terry Bassham

In general things like that work that way. I’ll leave it at that.

Michael Goldenberg - Luminous Management

On core EPS versus GAAP EPS what was the internal thinking behind using GAAP EPS versus core EPS for guidance and reporting purposes?

Terry Bassham

Obviously with strategic energy we had huge swings in our earnings that were related to mark to market accounting on that book that made it very difficult to see what was really happening especially at the utility. Many times it dwarfed the actual activity at the utility so as a whole it was difficult to see. We thought that was a very good even though non-GAAP a very good way of looking at what’s happening more regularly over time.

As strategic has come out there are things from time to time that we describe clearly as either one time or things that wouldn’t effect us going forward but we don’t have that on a regular basis such that GAAP earnings we think now are as descriptive as any other measure and really the more appropriate one at this point. This didn’t have the need based on the production and volatility after strategic was sold.

Mike Chesser

It’s really a matter of being more transparent. Core earnings can always be subjective what’s in and what’s out. We think we’re better to give you the base numbers and explain the different impacts.

Michael Goldenberg - Luminous Management

Can you repeat what you said about synergy savings versus transition cost amortization and what happens if one is higher then the other versus what happens if one is lower then the other?

Terry Bassham

If I understood your question correctly, we got an order from the commission which basically says that we need to earn our transition costs. Theoretically if we didn’t generate enough regulatory synergies those being synergies or saved dollars actually in rates to rate payers we couldn’t recover our transition cost. That’s the simple statement. What we said here was we’re on track we think to generate sufficient regulated synergies to ultimately recover all our transition costs.

Michael Goldenberg - Luminous Management

If you beat those you can earn those in between rate cases periods of time?

Terry Bassham

Yes, the way regulatory lag works is any savings that we generate between rate cases we get to keep until the next case. Absolutely. That’s the way the cost of service works. It’s the positive side to regulatory lag; just the opposite of the negative side you see when costs go up and you don’t recover them until the next rate case.

Michael Goldenberg - Luminous Management

But if it’s under transition cost amortization then in the next rate case they won’t give you the benefit of the doubt and won’t put into rates?

Terry Bassham

We have several years to earn them but to the extent we don’t generate and prove enough synergies to cover our transition costs we wouldn’t recover them.

Michael Goldenberg - Luminous Management

That’s on a going forward basis they’re not going to claw back what you recovered in previous rate cases.

Terry Bassham

No, they’re not allowed to claw back, that’s not allowed.

Mike Chesser

We do have to conclude here. We have one more question that we’ll take.

Operator

Your last question comes from Paul Ridzon – KeyBanc

Paul Ridzon – KeyBanc

Interest rate hedges in the first quarter ’09 are we done with that?

Terry Bassham

We’re done. Those were applied to the $400 million issuance we did.

Mike Chesser

At this point I think we’ll have to wrap up the call. Thank you all very much for your interest and your questions. We believe we did have a strong quarter. We look forward to continuing to keep you up to date on our path of growth as we go forward. Thank you very much.

Operator

This does conclude today’s conference call. You may now disconnect.

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