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Great Plains Energy Incorporated (NYSE:GXP)

Q1 2013 Earnings Call

May 10, 2013 9:00 am ET

Executives

Kevin E. Bryant - Vice President of Investor Relations & Strategic Planning and Treasurer

Terry D. Bassham - Chairman of the Board, Chief Executive Officer and President

James C. Shay - Chief Financial Officer and Senior Vice President of Finance & Strategic Development

Scott H. Heidtbrink - Chief Operating Officer of Kansas City Power & Light Company and Executive Vice President of Kansas City Power & Light Company

Analysts

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Charles J. Fishman - Morningstar Inc., Research Division

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Andrew Levi - Caris & Company, Inc., Research Division

Paul Patterson - Glenrock Associates LLC

David A. Paz - BofA Merrill Lynch, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2013 earnings conference call. [Operator Instructions] I would now like to turn the call over to Mr. Kevin Bryant, Vice President of Investor Relations and Treasurer. Please begin.

Kevin E. Bryant

Thank you, Melissa, and good morning, everyone, and thank you for joining us for our first quarter 2013 earnings conference call. Let me begin by introducing the members of the Great Plains Energy management team who are here with me today. We have Terry Bassham, our new Chairman and Chief Executive Officer; and Jim Shay, Senior Vice President and Chief Financial Officer, who, in a few moments, will provide an overview of the first quarter results. Scott Heidbrink, our Executive Vice President and Chief Operating Officer of KCP&L, is also with us this morning and will be available during the question-and-answer portion of today's call.

Before we begin, I must remind you of the inherent uncertainties in any forward-looking statements in our discussion this morning. Slide 2 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.

I also want to remind everyone that we issued our earnings release and first quarter 2013 10-Q after the market closed yesterday. These items are available, along with today's webcast slides and supplemental financial information regarding the quarter, on the main page of our website.

With that, I'll now hand the call to Terry.

Terry D. Bassham

Thanks, Kevin, and good morning, everyone. Thank you for joining us on our call. Yesterday, we announced first quarter earnings of $25.6 million or $0.17 per share compared with a loss of $9.5 million or $0.07 per share last year. The improvement in earnings was primarily driven by new retail rates which became effective in January of this year, lower interest expense and favorable weather. The solid financial performance in the first quarter reinforces our view that we're well positioned to deliver earnings within our guidance range, and we are affirming our 2013 earnings per share range of $1.44 to $1.64. Jim will provide more details on the quarter in his comments.

We continue making progress on Transource Energy, our joint venture with American Electric Power. Earlier this week, FERC issued an order approving Transource Missouri settlement on the formula rate-based ROE. The commission approved a base ROE of 9.8% with a 55% cap on the equity component of the post-construction capital structure. Including the incentive rate components already approved by FERC, the weighted average all-in rate for the 2 SPP projects is 11.15%.

Last month, a stipulation and agreement was filed with the Missouri Public Service Commission that would authorize the transfer of transmission property related to our 2 Southwest Power Pool regional projects to Transource Missouri and to allow Transource Missouri to construct, own and operate the projects. We anticipate an order from the commission this summer.

Following approval in Missouri, KCP&L and GMO must also seek approval from the SPP to novate the projects to Transource. The SPP will then submit its approval of the novation to FERC for final approval. We anticipate receiving the final necessary regulatory approvals to novate these projects by the end of the year.

At our Wolf Creek nuclear unit, the refueling outage was completed, and the unit returned to service in April. We're planning a mid-cycle outage for modifications and maintenance work in spring of 2014 with the next refueling outage expected to begin in the first quarter of 2015.

Regarding RFPs that we and our co-owners initiated last year to review all options to improve the unit's performance, the review process continues and we expect to have an update later this year on what, if any, changes might be made. We'll keep you updated on further developments.

Construction of the state-of-the-art environmental control equipment at our La Cygne generating station continues with the installation of the low-NOx burners for unit 2 wrapping up this month. The project remains on budget and on schedule with major construction continuing through the middle of 2014 and completion targeted for the second quarter of 2015.

In conclusion, we began the year focused on a set of priorities that included improving our earnings and credit profile by reducing regulatory lag and diligently managing O&M expenditures, providing reliable customer service, successfully novating our 2 regional SPP projects to Transource Missouri and keeping the environmental upgrade project at La Cygne on schedule and on budget. We believe we're off to a solid start, and we remain focused on execution in 2013 and beyond.

Thank you for your continued interest. And now for more details for the first quarter, I'll turn the call over to Jim.

James C. Shay

Thank you, Terry, and good morning, everyone. I'll begin with Slide 6, which provides a comparison of the 2013 first quarter earnings per share reconciliation versus 2012. As Terry indicated, our 2013 earnings per share were $0.17 compared with a loss of $0.07 in 2012. The primary drivers behind the $0.24 per share increase were: first, earnings of $0.09 per share due to new retail rates, which became effective in our Kansas jurisdiction on January 1 and in Missouri on January 26; second, an $0.08 per share decrease in interest expense due to the maturity of $500 million of high-coupon GMO senior notes in mid-2012, a lower interest rate on the refinanced debt that was underlying Great Plains Energy equity units and the impact from the early recognition of the remaining interest obligation of the subordinated debt underlying the equity units in 2012; third, a $0.07 per share benefit resulting from favorable weather compared to last year; fourth, a $0.07 per share impact primarily due to the unplanned outage at Wolf Creek in the first quarter of 2012; and finally, an estimated $0.02 per share from weather-normalized demand primarily due to an increase in residential demand.

These increases were partially offset by about a $0.06 per share decrease in other margin primarily due to increased fuel and purchase power expense at KCP&L in Missouri, where there is no fuel recovery mechanism; and an estimated $0.03 per share from a variety of other factors, including increased general taxes. First quarter 2013 earnings for the Electric Utility segment and Other category can be found in the earnings release we issued yesterday.

Turning to Slide 7. As Terry mentioned, we are affirming our 2013 earnings per share guidance of $1.44 to $1.64, and we are assuming normal weather for the remainder of the year.

For the first quarter, total retail megawatt hour sales increased 5.8% compared to last year, with the increase primarily driven by weather. Heating degree days for the quarter were up approximately 41% compared to last year and up about 3% compared to normal. Compared to normal weather, first quarter pretax gross margin was favorable by approximately $2 million or about $0.01 per share.

On a weather-normalized basis, excluding the impact of leap day sales in 2012, demand was up about 0.6% compared to the same period last year, which is in line with our expectations. Accordingly, we continue to believe flat to 1% load growth is an appropriate assumption for the full year. Unadjusted for leap day sales, in 2012, demand was down about 0.6%.

In March, we issued $300 million of 10-year senior unsecured notes at KCP&L at a coupon rate of 3.15%. Proceeds from the transaction were used to repay outstanding commercial paper at KCP&L. We also expect to issue long-term debt at GMO later this year.

Finally, Standard & Poor's recently raised its rating outlook to positive from stable for Great Plains Energy, KCP&L and GMO, citing a manageable capital spending program and stabilizing financial measures. We believe this is a testament of our objective to strengthen key credit metrics while maintaining a competitive and growing dividend.

Thanks for your time this morning. Terry, Scott and I would now be available to answer any questions you may have.

Terry D. Bassham

Thank you, everyone, for joining us this morning. Do we have any questions?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ali Agha, SunTrust.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Terry or Jim, could you also give us an update on where you stand on your coal transportation contracts, and when do you expect that renewal to be completed? And any insights on the savings that could be generated? Where do you stand on that process?

James C. Shay

Sure. We have completed that negotiation and work, so it's now in place for 2013. It's a confidential contract, so we don't give actual dollar amounts. But just kind of a reminder of size, our coal ultimate all-in cost is about half product, half transportation, and so this would affect the half that's transportation-related. We should see the benefits the rest of this year and see a full years' worth of that benefit starting next year.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So fair to say that the pricing is below where it was in the previous contract?

James C. Shay

It is improvement on the transportation price that was in place before, that's correct.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And secondly, can you also remind us, over the next 3 years, you're going to be potentially staying out of a rate case, '13, '14 and '15. What should we be thinking about in terms of O&M growth or reduction for you guys over that period? And how should we be thinking about the lag given that you're not going to be in rate case more for that period?

Terry D. Bassham

Well, a couple of things. The first is we will have one case, as you might call it. It's an abbreviated case we would expect to file in Kansas later this year. I think Westar has filed a similar case now, so we'll be following them as we get later in the year, which would allow us to include CWIP and rate base related to La Cygne. But you're right, aside from that, our current plan is not to make another filing related to general rate cases until La Cygne is complete, and that would be somewhere in the 2015 time period. Our expectation around O&M would be to manage it within our rates. So in general, with flat demand, if that were the case, we'd try to hold on in flat. But if we see some O&M -- some growth in demand, there might be some needed growth in O&M. Our expectation is to manage those consistent with our operations and our current rates, which are in place, to avoid any additional regulatory lag.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And so lastly, given that scenario, of this '13 base, if you will, how should we be thinking about earnings growth for you guys next couple of years? Essentially driven by load growth, is that a fair way to think about it?

Terry D. Bassham

Load growth and, again, once effective, the rate increase in Kansas for La Cygne, which admittedly will be smaller, but expected -- prospective growth are in those 2 areas.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And the 4% to 5%, is that a fair target to be thinking about?

Terry D. Bassham

That's kind of our expectation, that's correct.

James C. Shay

In terms of...

Terry D. Bassham

Rate base growth.

James C. Shay

Rate base growth, yes.

Terry D. Bassham

Which, again, will be reflected in that case filed in '15.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Yes, but EPS growth should follow rate base growth?

Terry D. Bassham

No, because we won't be filing rate cases. So you won't see our ability to include that growth in rate base in actual rates until we have a case. So that'll be -- earnings will be a little more muted than that, obviously.

Operator

Your next question comes from the line of Charles Fishman, Morningstar.

Charles J. Fishman - Morningstar Inc., Research Division

You had, I think, 2 quarters now of weather-normalized demand growth, and you reiterated the flat to 1%. Are you feeling like maybe you could -- are you thinking more that the flat is probably not going to happen and you're going to experience something like 0.5% or maybe even the upper half of that range now?

Terry D. Bassham

I would love to claim success. But we've had a volatile period over the last couple of years, and I'm not really comfortable doing that yet. I would say that the growth that you're seeing in the residential sector is supported with all the metrics around housing. So it doesn't appear to be a fluke that residential is improving. We've got reduced foreclosures. We've got increased building permits, reduced inventories, all the things that would suggest that the housing market in Kansas City is improving like it is across the country. So we feel good about that. But in terms of calling our shot this early in the year, it's probably a little bit early, but we certainly feel good with the trend we're reporting out today.

Charles J. Fishman - Morningstar Inc., Research Division

And then I see on your priorities for '13, you still list ISRS tracker. I recall, a few weeks ago, either the Star or the Post had some -- had an article that indicated that was pretty much pulled from this year's legislative session. So the fact that you have it listed in your priorities to me indicates that you're going to try and resurrect this thing for the next legislative session?

Terry D. Bassham

Well, a couple of things in terms of this session. There, I believe -- -- ISRS, as it's called, as it was originally filed, it's probably running out of time to be processed. The session ends a week from today, on the 17th. There are other pieces of that, which are still being discussed, but there's really no way to know how that will fit into the calendar and all the other things that are going on there. Certainly, if the session ends and we haven't made any changes, from that perspective, there's an opportunity to address some or all of those issues again next year, but those are things we'll evaluate over the course of the next year and see if the session starts again there. Our earnings guidance for the year did not include any assumption around an ISRS passage. So it doesn't really affect us in '13 in terms of our earnings guidance range.

Operator

Your next question comes from the line of Brian Russo, Ladenburg Thalmann.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

You previously conveyed a 2016 rate base of $6.5 billion. Is that still accurate?

Terry D. Bassham

It is.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And should we assume that's what you'll earn on in '16?

Terry D. Bassham

Well, again -- so from a timing perspective, that's kind of the build-up of rate base, ongoing construction, La Cygne, all the things that would be natural for a utility during this period without a rate case. The timing of the rate case in the '15 period will affect when and how much of '16 actually reflects that total amount. So for example, we believe and are on schedule to have La Cygne completed by the mid-summer of '15, and we could file a little before that to try to move that process along. But we're also going to be asking for some other things in that case. For example, we'll be asking for the addition of a fuel factor in KCP&L MO. So that could affect the timing to some degree, but I couldn't tell you sitting here today that we'll see 12 months of that increase in '16. What I can tell you is in that '15, '16 timeframe, we'll process that case and obviously want to maximize the benefit of that along the way.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And in your -- the 2015 rate case filings, is there any accounting mechanisms you could file for to help alleviate some of the lag that the La Cygne costs will create prior to new rates?

Terry D. Bassham

You're talking about the risk around a lag between the day it goes in service and the date rates go effective?

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Correct.

Terry D. Bassham

Yes, we have traditionally, on large projects like that, been able to get an extension of what we might call construction accounting. And therefore, we haven't -- we didn't see it on Iatan, and I don't think we would see it here, a lag from operation to rates effective.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay, great. And I know there was an unplanned outage at Wolf Creek a couple of weeks ago. Any comments on that?

Terry D. Bassham

We're still -- we've got an air conditioner that's being worked on, and we expect it to be back up shortly. Everything's on track.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And I notice your O&M declined to $155 million versus $163 million. Is that primarily related to the absence of the first quarter '12 Wolf Creek outage, or is that an illustration of your cost controls?

Terry D. Bassham

Well, it's a little of both, but certainly Wolf Creek being a big part of that. But we're certainly managing our overall O&M very closely.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And then lastly, with the sharp move up in gas prices, are you seeing any benefit on your off system or wholesale sales at GMO?

Terry D. Bassham

It's been -- yes, we would see a little of both. So we would see an effect on both sides, is a way to say that. We're certainly seeing a little benefit on the off-system sales side. But remember, if we've got a unit down or something else going and we're in the market, well, then that costs us a little money. So -- but net-net, as gas prices improve, that's a positive for us, because we expect our units to be running.

Operator

Your next question comes from the line of Paul Ridzon, KeyBanc.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Just following Ali Agha's question. You have 45% rate base growth, obviously, without rate relief. You're not going to be able to chew that in EPS. But once you get the rate cases filed, we should see a kind of a big step-up to get kind of back on that trajectory, is that fair?

Terry D. Bassham

Yes. I mean, we would expect the dollars that we would include in rate base at that point to be fully collected and earning.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

And then secondly, I know you leap-day and weather-normalize the sales, but I think that the Ford plant is still out. Have you -- can you give us a sense of what sales would've done apples-to-apples if the Ford plant was still up at the same production levels?

Terry D. Bassham

Yes. I think I can describe it. About half, if you will, of that reduction in industrial is related to the Ford plant. So first of all, the -- to the extent that the Ford's down year-over-year, that certainly returns in the third and fourth quarter. You may not have seen, though, in addition to that, Ford announced, about 2 weeks ago, the addition of a third F-150 line at their plant here in Kansas City, which adds another piece of that line. So as a result, not only will we be back with the transit and replacement of the Escape in the third or fourth quarter, by the end of the year, we also expect to see a third line of the F-50 (sic) [F-150] in line and up and running as well. In addition to that, we had -- of the other half, we had one single customer go out that made up a piece of that. But otherwise, we're right online with what we expected for the year.

Operator

Your next question comes from the line of Michael Lapides, Goldman Sachs.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Just kind of some nuts-and-bolts questions. First of all, in guidance, what's embedded for the drag, if any, for kind of the impact of not having a fuel clause at KCP&L Missouri? And how did first quarter track versus what's in your guidance for that drag?

Terry D. Bassham

Well, there's not really embedded a drag. I mean, I would say that the range of our guidance includes some probably additional range, if you will, because of the fact we don't have a fuel factor at KCP&L MO. But in essence, for the first quarter, we had a little bit of a drag because of some work we were doing around Iatan 2, so margin-wise, we were buying a little power that we normally wouldn't. But in general, it's tracking right along with what we expected. We're getting our units ready for summer so that everything is up and running, take advantage of the warm weather that's coming up on us.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Okay. Is there a way, like a rule of thumb, for investors to think about, hey, look, if power prices are above a certain level, it's a positive contributor to kind of your EBITDA or net income levels, and if they're below a certain level, it's kind of on the negative side? Just trying to think about this in terms of puts and takes until you get a fuel clause in place in 2016.

Terry D. Bassham

And really, I guess you're probably talking around gas prices and how they affect power prices?

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Either that, or just regional kind of like SPP hub power price level.

Terry D. Bassham

I don't -- I wouldn't tell you that I've got a rule of thumb to be able to do that. When we prepare for our fuel factor or our fuel filing in our rate cases, we do a modeling of prices, and it includes availability of power transmissions. It's a fairly complicated process to kind of estimate over the year what we expect our fuel prices will be. Certainly, as gas goes up, we would expect a benefit, as I'd have said before on the wholesale sales side. And as long as our units are running as expected, that's a positive -- net positive. To put a benchmark or a way to measure that, it'd be pretty hard, I'd have to say.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Okay. I hadn't fully gone through the Q. Any changes to your forward CapEx plans?

Terry D. Bassham

No, none at all.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Okay. And then finally, just 2 things, and this may be a Jim Shay question for the balance sheet. One, noticed that deferred taxes as a current asset is actually a really small number. Just trying to think about that. Because thinking through you guys as a noncash taxpayer for the next few years, I would've potentially thought that would've been a bigger number.

James C. Shay

Yes. I mean, there's not going to be -- we're not going to be a cash taxpayer. I'd have to take a look at the specific change you're talking about. But with bonus depreciation being extended after year end, that did impact movement between current and deferred. But I'd have to -- maybe offline, we can take a look at the question. But the punchline is we're not going to be a cash taxpayer for the foreseeable future, as we've previously communicated.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

And then finally, when would you expect the ARC to go into effect in Kansas?

Terry D. Bassham

The ARC?

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

The abbreviated rate case.

Terry D. Bassham

Okay, I'm sorry. Yes. Well, we need to file before the end of the year. So probably the late third quarter is probably when we will -- trying to track what happens in Westar is the -- I think this is going to be a process that we'll learn from the Kansas commission as they do that. But later, probably late third quarter.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Is when you'll file. And is there -- this doesn't fall under the 240-day clock in Kansas? It's a more expedited process, or same day?

Terry D. Bassham

No, my sense of it is that it's not expedited. I think Westar had asked in some pleadings to expedite it, and I don't think they did. So it's probably more -- still an 8 months. So if we file in the third quarter, it'd be 8 after that. If we wait until the fourth quarter, it'll be 8 months after that. It'll all be intended to try to pull in as many of those dollars as we can as we're building La Cygne.

Operator

Your next question comes from the line of Andy Levi, Avon Capital.

Andrew Levi - Caris & Company, Inc., Research Division

Just a couple of questions. And I apologize, my phone's been ringing off the hook, so they may have been asked already. On the residential sales of 3% growth, what do you attribute that to? I don't know if you went over that.

Terry D. Bassham

Well, just -- what I said briefly in terms of overall and, in particular, residential, since it was kind of the leading, is that we're not ready to declare a firm trend for the entire year. But any of the metrics you would look at from a housing perspective to be explanatory, if you will, of the numbers, everything supports the number. We've got reduced foreclosures. We've got increased housing permits, construction permits, reduced inventory. We look a lot like the rest of the country does in that housing is coming back in those areas where there's growth, and we see that as supportive of our number. We're still early in the year, and we want to be cautious. But we do think the first quarter is representative of our flat to 1% range overall for the year.

Andrew Levi - Caris & Company, Inc., Research Division

And in your flat to 1% growth, I know you didn't give a breakdown of details, but was it weighted...

Terry D. Bassham

Yes.

Andrew Levi - Caris & Company, Inc., Research Division

A certain way? So did you expect like a decline in industrial and this growth in residential, or was this growth in residential a positive surprise for you?

Terry D. Bassham

Well, you know what? Certainly, for the quarter, I'd say the number -- the size of the number is a little bit of a positive surprise for us. We expected growth, but that's a nice number for the first quarter. It is weighted in the sense that about 42% of our overall growth, our overall demand comes from residential, and we said many times that residential is the driver for our growth. And so to the extent that we have more growth in residential than we do, say, industrial, that's a positive because it's a heavier piece of our total load.

Andrew Levi - Caris & Company, Inc., Research Division

Okay. But it's a little above what you were expecting, I guess, is what you're saying?

Terry D. Bassham

It was -- for the quarter, it was a positive surprise with that, I'd have to say. Again, we're not declaring victory for the year, but it was better than we expected, I guess.

Andrew Levi - Caris & Company, Inc., Research Division

Okay. I hear you. And then on the O&M, where you did also a good job, even with Wolf Creek going away, did you guys have a lot of snow out there in the first quarter?

Terry D. Bassham

We had a little bit of snow. We had some late snow that falls really into the second quarter. So our biggest snows were -- biggest surprise in terms of snow, we did have 2 snows kind of back-to-back in the first quarter. One was a very -- they were both about 11 inches. One was light. It didn't cause us much in the way of operational issues. The one the very next week was wet and heavier, and that took a little bit more in terms of our outage response. But we were proud of our crews. We got everybody out and back on very quickly and had no real issues.

Andrew Levi - Caris & Company, Inc., Research Division

I guess what I was trying to get at, actually, just saw this with a few other companies, was that some of the O&M, because of, let's say, a lot of snow, was deferred, whether it was tree trimming or whatever it may be, until the second or third quarter because -- just because of the weather. So kind of the opposite of storm costs. You guys didn't have anything like that, did you?

Terry D. Bassham

No, no. We didn't have any real effects of the storms other than just to get folks back on, nothing that affected our really day-to-day operations for the quarter.

Andrew Levi - Caris & Company, Inc., Research Division

Okay. And the third question I have just kind of relates around the La Cygne abbreviated case, and just want to understand kind of -- because just playing with the numbers. You've recovered some -- some of your CWIP is already in rates, is that correct?

Terry D. Bassham

We were able to collect -- we were able to put some of our CWIP on La Cygne in rate base in the last case.

Andrew Levi - Caris & Company, Inc., Research Division

Right. That's about $70 million, is that correct?

Terry D. Bassham

Yes.

Andrew Levi - Caris & Company, Inc., Research Division

Okay. I just wanted to make sure I got that right because I heard some of the other questions. And then on the wholesale side, I know Michael kind of went over this with you. But can you give us any more color on the wholesale side on prices this year versus last year, or what -- or margins or anything like that, how the first quarter was versus last year on the wholesale side? Obviously, the part that you profit on or hopefully profit on.

Terry D. Bassham

Well, I'd describe it like this. Gas prices are certainly up year-over-year from last quarter -- last first quarter to this quarter, and we think that's a trend that will continue. I think it's stabilized to maybe slightly growing. I'm sure there's lots of people with opinions around the gas prices, but that's kind of what we see. That is a positive for us on the wholesale sales side. I would say, at this point, we kind of consider ourselves on target for the year from what's in rates. So it's a little early in the year, again, to declare that prices and our sales would be such that there's a positive we could talk about. But obviously, that's what we're working out throughout the year if price is increasing. As sales increase, we might be able to do that, but we're in good shape so far.

Scott H. Heidtbrink

This is Scott Heidtbrink. I would just add, too, that you've got to look at the timing of when the gas prices come up. So they came up, but you're at kind of a slow load time. They're already dropping a little bit again, and so you've just kind of got to watch. And if they're up during the summer when you have a higher market, that's better for you. So you also have to watch that.

Andrew Levi - Caris & Company, Inc., Research Division

But don't you sell most of your wholesale in the first and fourth quarters because in the summer, you use it for your native load?

Terry D. Bassham

Well, that was the case before we built Iatan 2. And so now that Iatan 2 is available, we certainly have more capacity to make sales even on -- even in the summer. So in a very, very, very hot time period, we may have everything dedicated to retail. Unless it's extremely hot, we have some power now that we have a brand-new unit out at Iatan.

Andrew Levi - Caris & Company, Inc., Research Division

How much does that give you as far as power that you could actually sell into the wholesale market on a normal weather day in the summer?

Terry D. Bassham

It's -- it all depends on what's happening on the transmission system. I couldn't give you a kind of a pinpoint. Again, we added 850 megawatts to our system, which now we don't have to buy power, if you will, for our normal summer process and peak. But it'll depend on transmission, it'll depend on what the wind's doing from a wind turbine perspective. So you just take it literally hour by hour, day by day. There's not really a way to kind of generally describe that, I don't think.

Operator

Your next question comes from the line of Paul Patterson, Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

Just going back to the infrastructure legislation, it sounded to me that you indicated that you planned on revisiting this next year. And I was just wondering if you could just give us a flavor. I mean, you're there in the trenches sort of dealing with this. What -- how we should think about the potential next year and sort of lessons learned? Just I mean, as you know, there was, I think, nuke tracker legislation that sort of failed, and I think Ameren was trying to do and stuff in the past. And just how should we sort of think -- I'm just trying to get sort of a thought process in terms of sort of legislative strategy next year.

Terry D. Bassham

Well, the way I would describe next year is that we'll finish the session up. We'll see what, if anything, happens over the next week. And then we'll, as most folks do, take a break. We've been talking about this stuff for the last several months. We'll regroup around what's happening, what got passed, what didn't get passed. And then we'll visit with our legislators and talk to them about the things that we think are important and were there some ways in which it was presented which could be presented better or are there ways that they could be presented in pieces. And we'll reevaluate whether, next year, that's really an opportunity. Those things get affected by election cycles. They get affected by lots of things. And so I would say that we will continue to look at ways to improve the regulatory environment in Missouri. I would say that the positive is that we were able to have that conversation. We may or may not get something passed, but there were many legislators who were willing to talk to us and listen to us and hear issues and, I think, ultimately will be supportive. But we've got to kind of work through that, and we've probably got another year to do that.

Paul Patterson - Glenrock Associates LLC

Okay. So it means -- but just for the remainder of this year -- okay, I think I got the picture. Okay. So let me ask you this, in terms of the CapEx program or you mentioned sort of the accounting associated with the construction, what have you, do you see that potentially changing if you were to get some -- if you were to get relief, let's say, in terms of this CapEx outlook?

Terry D. Bassham

The accounting around La Cygne we talked about earlier?

Paul Patterson - Glenrock Associates LLC

Well, that or -- I mean, I'm just trying to think in terms of the -- when we talk about rate base growth going as it is and your ability to go in for rate cases and what have you, you mentioned -- I mean, I'm just sort of thinking, is there some ability -- and not necessarily specifically with La Cygne. But I mean, all the -- but I'm sort of saying, in general, I'm just sort of thinking if you were able to get a tracker or stuff, that would sort of -- it would seem that would give some sort of relief here in terms of -- it would change the outlook, potentially. That's all I am sort of asking.

Terry D. Bassham

I'm sorry. Yes, I understand you now. Yes. I mean, the purpose for ISRS was not necessarily to pass through any costs we weren't already going to recover, but to be able to pass them through faster to allow us to synch recovery with spend and therefore spend some additional dollars earlier to improve our system and help the growth of our system for the benefit of our customers. So if we were able to get ISRS top legislation, we would have the ability then to take on maybe some projects earlier and pass those through quicker to allow us to improve our system. And that could improve/change our CapEx profile in the interim.

Operator

Your next question comes from the line of David Paz, Wolfe Research.

David A. Paz - BofA Merrill Lynch, Research Division

I just wanted to follow up on an earlier question regarding the projected rate base, 2016, the $6.5 billion number.

Terry D. Bassham

Yes.

David A. Paz - BofA Merrill Lynch, Research Division

That -- is that -- that's based on CapEx through '15, I believe, just given the historic test year that you had in Missouri?

Terry D. Bassham

Yes.

Operator

[Operator Instructions] Your next question is a follow-up from Ali Agha, SunTrust.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Terry, I wanted to come back to clear on one point here. You all have been very clear that one of your key goals is to reduce regulatory lag. And the way the system is set up perfectly -- it's not perfect. But to get it down to 50 basis points, you think, is kind of where you can get to in that scenario. So putting that as the backdrop and given the fact that you're not going to have a major rate case with rates in effect until '16, I'm just trying to get a better handle on how you are looking at the '14, '15 interim years leading up to that. And clearly, cost reduction is going to be a key factor. You've talked to us about that. So I want to get a little more granularity into, what is it that you can really do in that interim period? And as we are thinking about the lag, should we be thinking that the lag can be kept where it is in '13, that costs can help you keep that? Or in effect, should we think the lag should go up over the next couple of years without rate case relief? So I'm just trying to get a better sense of how you are seeing the next couple of years before the rate increases in '16.

Terry D. Bassham

Sure. From a rate base perspective, obviously, that would continue to be booked. But the real lag happens to us on O&M, and we've got it basically trued up as of the rate case. There's always things that increase, things that decrease. It's our job to manage it. We've talked about the fact that property tax is probably going to go up some. We've got to manage that a little bit, for example. But the bottom line is, is we're attacking to improve margins regardless of those kinds of things, things we have talked about. For example, our attrition, where we plan to use attrition with very, very tight management of our overall headcount to make sure we take advantage of that over the next several years. We're certainly looking at reducing overtime on outages. Again, we've talked about, until the market comes back, that we're able to take a little more time around getting the unit back up, and as a result, we can do that more efficiently and cheaper. We've got an ongoing supply chain process that continues to be very effective in reducing our ongoing costs. And so those are just some examples, but the bottom line on it is we expect to maintain our O&M management to the point that regulatory lag does not grow, and it kind of bounces around, if you will, in a very narrow range on what we've talked about it, at the top end of our 50 to 100 basis points.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

So I mean, to be clear, should we think, wherever you end up in '13 on the lag basis, that the goal would be to keep the lag at that level for the next couple of years, not let it go -- but it won't go down, either?

Terry D. Bassham

Yes, within a range right in there, absolutely.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And the fact that any cost savings that you are going to incur now, you get to keep until you have to true them up in the next rate case, that won't help you in the next few years?

Terry D. Bassham

Yes. No, that is exactly right. I mean, that -- the negative of not filing a rate case is, obviously, you can recover costs that may have increased. The benefit is if you can reduce costs and your rates are stable and maybe you've got a little growth, you're able to hold on to any of those savings. So that's exactly what we would be doing to help manage that lag.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So lastly, I mean, just summing it all up. So I guess what I'm confused by is you're not seeing a scenario where EPS growth can keep track with rate-base growth the next couple of years, even without the rate case, I mean, from this cost reduction and load growth help that you may get?

Terry D. Bassham

We really haven't given guidance in that regard. But I would say that absent some increasing growth, that we're not currently seeing that, that would be difficult. We've certainly continued to work to maximize our earnings growth. But without a rate case and without growth and demand, it's all going to be about managing costs. Now if we get some demand in there, that obviously provides us with some opportunity that we wouldn't and haven't had in the last couple of years.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And you're assuming that 0 to 1% demand growth continues for the next couple of years?

Terry D. Bassham

Well, we haven't given earnings guidance or haven't given demand guidance beyond this year. And again, as volatile as it's been in the past, I'd rather wait and see as we progress throughout this year before we give '14 demand guidance, if you will. What we said is 0% to 1% in this year.

Operator

Your next question as is a follow-up from the line of Michael Lapides, Goldman Sachs.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Apologies, asked and answered.

Operator

Your next question is a follow-up from the line of Brian Russo, Ladenburg Thalmann.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Just curious, Westar yesterday said that the weather-normalized residential sales were up 1.5% in the first quarter of '13. And I'm just curious if you could just maybe discuss the differences in the service territories in Kansas. And is there a way for you to break out weather-normalized sales growth in Kansas versus Missouri for your service territory?

Terry D. Bassham

Well, I can do the former, and probably not the latter. Even though we're neighbors, especially on our western edge, our territories are different. Their territory runs from the edge of our territory here in Kansas City all the way down to Wichita. They tend to have more rural territories. They have a lot more acreage or coverage than we do. We're a little more urban. And so our drivers of demand tend to be considerably different between Kansas City and Wichita, for example, or Topeka. So we do have different territories from that perspective. I don't know candidly how that would necessarily drive residential sales. But what I certainly can say is residential is a large part of our success, and that's why this first quarter's been a good quarter for us.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And any split between weather-normalized sales in Missouri versus Kansas, or we should just kind of assume the 0 to 1% in both territories?

Terry D. Bassham

There's certainly not a material difference between Missouri and Kansas in our service territory. If you look at what happened in Wichita versus what happened in St. Louis, that could be different. But for us, living right on the state line, you run north and south as much as you would necessarily east and west in our territory to see any material weather difference, and there wouldn't be for us.

Operator

Your next question is a follow-up from the line of Andy Levi, Avon Capital.

Andrew Levi - Caris & Company, Inc., Research Division

Just kind of piggybacking off of Ali's line of questioning, you mentioned the word range as far as lag. So you kind of talked about the -- where the upside was on the lag. What kind of range are we talking about on the downside, potentially?

Terry D. Bassham

Well, again, for earnings guidance this year, we've characterized it around lag because of that discussion, and it's 50 to 150. But what we've also said is that our goal was to be at 100 or better. And we've kind of said we want to be on the top end of that range. So that -- when I said range, that's what I was talking about, is our prior target to reach 50, which we've always talked about. But certainly, on the high end or the top half of that range is what we're focused on. That's what I meant by lag range over the next several years.

Andrew Levi - Caris & Company, Inc., Research Division

Okay. So the downside would be, what, kind of the 150, and the upside about 50? Is that kind of the way to think about it?

Terry D. Bassham

That's our guidance range for this year. That -- it could change next year if things improve. But certainly, our focus will always be to minimize regulatory lag and earn as close to that allowed return as we've got. And without rate cases, that involves demand growth and management of our O&M, very, very tightly.

Operator

[Operator Instructions] And there's no further audio questions at this time. Mr. Bryant, do you have any closing remarks?

Terry D. Bassham

This is Terry. Thank you. And thanks, everybody, for joining us this morning. We're very happy to give everybody an up-to-date progress report on our first quarter. And we remain committed to our strategy, as we talked about. So thank you for all your questions this morning, and we look forward to talking to you soon. Thank you. Thank you, operator.

Operator

Thank you for joining today's first quarter 2013 earnings conference call. You may now disconnect your lines.

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