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Great Plains Energy Incorporated (NYSE:GXP)

Q3 2013 Earnings Call

November 08, 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

Analysts

Charles J. Fishman - Morningstar Inc., Research Division

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

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

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

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

Steven I. Fleishman - Wolfe Research, LLC

Paul Patterson - Glenrock Associates LLC

Operator

Good day, ladies and gentlemen, and welcome to the Great Plains Energy Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Kevin Bryant, Vice President, Investor Relations and Treasurer. Sir, you may begin.

Kevin E. Bryant

Thank you very much, Sam. Good morning, everyone, and thank you for joining us for our third quarter 2013 earnings 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, Chairman and Chief Executive Officer; and Jim Shay, Senior Vice President and Chief Financial Officer, who, in a few moments, will both provide an overview of our third quarter results. Scott Heidtbrink, Executive Vice President and Chief Operating Officer of KCP&L, is also with us this morning and will be available during the Q&A portion of today's call.

Before we begin, I must remind you of the 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 results to differ materially from our expectations.

I also want to remind everyone that we issued our earnings release and third quarter 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 over to Terry.

Terry D. Bassham

Thanks, Kevin, and thank you, everybody, for joining us. Yesterday, we announced third quarter earnings of $142.7 million, or $0.93 per share, compared to earnings of $145.8 million or $0.95 per share last year. Positive drivers for the quarter include new retail rates, which became effective in January this year, and increased weather-normalized customer demand.

Weather was cooler when compared to last year's very high summer, reducing cooling degree days by about 18%. Our strong operational performance and continued focus on cost management resulted in our solid results for the first 9 months of the year with earnings per share of $1.51. As a result, we're nearing our 2013 earnings per share guidance range to $1.54 to $1.64. Jim will provide more details in the quarter and year-to-date results in his comments. We're pleased to near our guidance range to the upper half of the original range consistent with our goal we outlined for you earlier this year.

A big part of our success is reducing lag on our allowed return. It's been the truing up of our cost structure and most recent rate cases and implementing mechanisms to more closely track costs. Moving forward, we are continuing to push for riders or trackers to recover costs which were not controllable and should be more timely recovered.

For example, we expect transmission costs to be -- to increase above what is currently recovered and due to retail rates that were effective earlier this year. It helped mitigate the result in lag, KCP&L and GMO have requested authorization from the Missouri Public Service Commission to implement an Accounting Authority Order or we'll call AAO. If granted the AAO will track incremental transmission costs from the effective date of rates in KCP&L and GMO's most general rate cases until the next general rate case proceeding in which recovery of tracked transmission costs will be addressed.

We expect an order from the commission in the first quarter of 2014, and we'll keep you updated as this document moves forward. We also expect to see legislated relief in Missouri for increased property taxes. We've a rider in Kansas for these increases and hope to achieve a tracker in Missouri. We also to continue to make regulatory progress on Transource energy, our joint venture with AEP. Last week, the SPP Board approved KCP&L and GMOs application to no wait, our 2 SPP regional projects, to Transource Missouri. Subsequently, SPP submitted its application for acceptance of the novation to the FERC. We anticipate FERC's acceptance and close the transaction in the first quarter of 2014 and look forward to Transource's growth in the competitive transmission market.

Turning next to Slide 5. Earlier this week, our Board of Directors approved an increase in our quarterly common stock dividend of nearly 6%, raising it from $0.2175 to $0.23 per share, or $0.87 to $0.92 per share on an annual basis. This action marks the third consecutive year we have increased the dividend and represents a 3-year average growth rate of approximately 3.5% since 2010.

As we look ahead, we are targeting a dividend growth rate for 2016 of 4% to 6%, supported by our expected rate base growth. We're also narrowing our target dividend payout ratio from 50% - 70%, to 55% - 70%. On the completion of the environmental upgrade at La Cygne in 2015, we expect our capital needs to return to a more normalized level, which will provide additional cash flow and dividend flexibility. These actions reinforce our confidence in the future of our business plan and believe that a competitive, sustainable increasing dividend is an important driver of our total shareholder returns. Now with that, I'll hand the call over to Jim.

James C. Shay

Thank you, Terry, and good morning, everyone. I'll begin with Slide 7, which provides a comparison of 2013 to 2012. As Terry indicated, our third quarter 2013 earnings were $0.93 per share, compared with $0.95 per share last year. Although there are a number of puts and takes, the relatively modest decrease in year-over-year earnings was primarily driven by weather that was closer to normal this year.

Recall 2012 was one of the hottest summers on record in our service territory. Year-to-date, through September 30, earnings were $1.51 per share, compared to $1.34 per share last year. The $0.17 per share year-over-year increase was largely driven by new retail rates, increased weather-normalized retail demand and lower interest expense. The increase was partially offset by the impacts of weather, and other margin primarily due to increased transmission and other cost.

Year-over-year, operations and maintenance expense was impacted by an increase in the cost of certain regulatory items, including pension, expense trackers, investments in energy efficiency programs under the Missouri Energy Efficiency Investment Act, or MEEIA, and sold rebates provided in Missouri customers, all of which are recovered with our new retail rates.

Third quarter 2013 and year-to-date earnings for the Electric Utility segment and Other category can be found in the earnings release we issued yesterday.

Turning to Slide 8. As Terry mentioned, we are pleased to announce that we are narrowing our 2013 guidance range to $1.54 to $1.64. Our weather-normalized retail load growth for the third quarter increased 2.8% compared to 2012. We believe the following load growth -- we believe the favorable load growth is reflective of our strengthening service territory, a comparison to last year's extremely warm summer weather that impacted customer usage, and the impact in 2012 of the production line at the Ford motor company's Kansas City assembly plant that was temporarily shut down for retooling in addition to a few other small plant closings.

Year-to-date, our weather-normalized load growth is up 1% compared to 2012, which is in line with our full year expectations of flat to 1%. We have been tracking for some time a number of positive drivers in our service territory, including unemployment trends, housing starts and a number of other factors. These drivers materialize into solid load growth during the third quarter.

From a sector standpoint, weather-normalized residential demand was up 3.3% for the quarter, which marks the first 3 consecutive quarters of growth in this sector, which typically makes up approximately 70 -- excuse me, 40% of our retail sales, since the late 2009 and early 2010 timeframe. Commercial sector was up 1.9% and is consistent with what we have historically seen with commercial trends -- commercial demand trends typically following the residential sector. An increase in the industrial segment of 4.2% was favorably impacted by the Ford plant, which accounted for approximately 40% of the increase.

We also saw an increase in year-over-year demand with some of our industrial customers. We have maintained our cost management discipline in 2013, which has contributed to our solid financial results for the first 9 months of the year. Year-to-date, through September, operations and maintenance expense has increased approximately $8 million, which includes a little more than $17 million of regulatory amortizations, pension costs trackers and energy-efficiency expenses, which are recovered in our new retail rates. Year-to-date O&M also includes approximately $10 million of other cost decreases.

Cost management will continue to be an important area of focus. On the financing front, our efforts to lower interest costs, strengthen our balance sheet and enhance our liquidity continued in the third quarter. GMO completed a $350 million private placement issuance at August, with proceeds from the offering ultimately used to pay off the Great Plains Energy $250 million, up 2.75% senior notes that matured during the month. The remainder of the proceeds were used to pay down outstanding commercial paper at GMO. This transaction represents GMO's first standalone long-term debt financing since our acquisition in 2008.

Finally, last month, we amended certain terms on Great Plains Energy's, KCP&L and GMO's credit facilities, including extending the maturity by approximately 2 years to October 2018. We also removed Great Plains Energy's guarantee of GMO's credit facility. Total capacity for the 3, 5-year facilities remains at $1.25 billion.

This concludes our prepared remarks, and we thank you for your time this morning. Terry, Scott and I would now be happy to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Charles Fishman of MorningStar.

Charles J. Fishman - Morningstar Inc., Research Division

On the dividend payout ratio change. I mean, it sounds like La Cygne is probably the main driver, but -- is my thinking correct that we're seeing an improved environment in Missouri that maybe gives you a little more confidence on the earnings and cash flow going forward that also entered into the -- just thinking of the Board on this payout ratio change?

Terry D. Bassham

Yes, this is Terry. And absolutely, I would say that we are very encouraged with our growth rate numbers. And although the comparison of this year to last, given kind of the anomaly of what happened last year -- it's still part of our analysis to determine kind of what an ongoing rate is. I think it's clear to us that we have growth returning to our territory, and we're very excited about that. That included with reduced cash flow on capital expenses as we moved to La Cygne, both were factors in that adjustment.

Charles J. Fishman - Morningstar Inc., Research Division

So then -- that legislation, and I forget the bill number in Missouri that you were active in the last year, that finally made it out of committee in a month of that, the full House or Senate there. I don't recall. I mean, is that something it will stop pursue in addition to the property tax trackers and transmission trackers?

Terry D. Bassham

Yes. So there's a couple of things there. One is what we've talked about here and as we continue to work on every front to minimize lag and more timely recover all our costs. But there is risk is the kind of the term used for the bill you're talking about last year would be in addition to that, an opportunity to spend additional capital and recovery at more timely on infrastructure investment. And yes, we would anticipate working with Ameren and Empire and the other utilities in the state on that issue again this year. And that would certainly be an exciting opportunity to update our system and kind of hardened certain parts of our system and recover those costs more timely.

Operator

Our next question comes from Paul Ridzon of KeyBanc.

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

When did the Ford plant come up? And is it up to full load?

Terry D. Bassham

I'm sorry, when did -- say it again?

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

The Ford plant.

Terry D. Bassham

No, the increase you've seen here is actually incremental growth in the sense that they added an additional Ford F-150 line. So they're building more trucks here, the most popular truck in the country, actually. The actual retooling for the new transit van is running a little bit behind original schedule. It won't happen until early '14. And so we'll see another additional increase at Ford in '14 year-over-year based on the transit start.

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

How many megawatts is the transit line? Do you have a sense of that?

Terry D. Bassham

We can get that number for you. It replaces what dropped last year. And again, the F-150 is incremental. We can distinguish by looking at past data, which is which -- and we'll get that for you.

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

And are you pretty confident that, I mean, last year, pretty much a year ago today, it wasn't a great day for your stock, given that some demand concerns. Do you think that was really just an anomaly?

Terry D. Bassham

Yes, I mean, I think it was a bit of -- a bit of overreaction to a single quarter's report out. Again, as a reminder for the folks on the phone, we had record temperatures from May through July. Actually, July was the hottest July on record in Kansas City. And then we had normal temperatures in August and September. And we talked about it at the time that you've got folks in August and September we were dealing with historically high bills, that didn't really have a choice but to run air conditioners, given the heat and had the ability to do some good old-fashioned energy efficiency and try to manage down their usage they all pay for those bills. And the normal things that were happening in our economy. But certainly those numbers, we think, were an anomaly. And again, weather normalization gets a little tougher as the numbers get that extreme. So we absolutely believe that was kind of a hiccup, given extreme weather, and is much more representative this year of the growth happening in the Kansas City area.

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

You said that degree days were down 18%. What was it down versus normal?

Terry D. Bassham

4.

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

4. Okay.

Operator

Our next question comes from Brian Russo of Ladenburg.

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

I'm just curious, have any other utility is been granted this accounting order that you guys are pursuing for the transmission cost deferral?

Terry D. Bassham

Utilities are granted accounting orders all the time for various issues. For example, if you had a big storm run through and you have a huge expenditure of storm expense, oftentimes, you can get an accounting or we've received one for the past storm several years ago. Accounting order are not that unusual. They're fact-based. And so we're a little different here because of the way our fuel runs in our system and because of the SPC process. But accounting orders are not that unusual. The actual result of the request will be fact-based. And so we feel good about it, but we want that to work through the process.

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

It is -- could you quantify kind of the EPS drag you're incurring on this, on the delay in the transmission cost recovery?

Terry D. Bassham

Yes, I think it's around $0.03 or $0.04. I mean, it's important to us.

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

Okay. And then, lastly, with your revised guidance to the upper half of the guidance range. I mean, what does that in context of your kind of 50 to 150 basis points of targeted lag?

Terry D. Bassham

Yes, so our range was originally 50 to 150. But when we gave that range, we made it clear that our focus was on the top end of that range which is what we've done today. And so this would put it between 50 and about 100. And so we're working again to be at the top end of that original range, and we're very happy to announce that move today.

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

Okay, great. And then I realized you've got a fairly large capital expenditure program and you won't have the new rates in Missouri until 2016. Do you think the upper end of the reg lag with 50 to 100, do you think that's sustainable until we get into '16? Or will we see degradation of that?

Terry D. Bassham

You will see us continue to work on the high end of that range. We are committed to cost management. I think our ability to do that this year speaks to that. We'll continue to do that. Our work on riders and trackers and other way is to mitigate any kind of uncontrollable costs to try to get those recovered on a timely basis, reflect our commitment to that. And I feel you'll continue to see us work on the high end of that range on an ongoing basis.

Operator

Our next question comes from Michael Lapides of Goldman Sachs.

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

One or 2, and these may be more for Jim at this point, 1 or 2 kind of detailed questions. First of all, of the rate increases, both at KCP&L and GMO, that were granted, what's left to be taken? Meaning, you've kind of quantified the cents per share impact for the broader company. But is there a way you can break it out of what's remaining on the rate increases that you took at each of the subsidiaries?

James C. Shay

Yes, Michael, I'm a little unclear on the question. We have the full impact of the orders reflected in the financials. I'm a little unclear on the question.

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

Well -- the rate increases went into effect at the -- right around the beginning of the year, still there's probably some of the rate increase you haven't taken that you're still going to get in the fourth quarter. And a tiny little bit. I think, in January of next year. I'm just try to think about given the -- that it's volumetrically sensitive a little bit, what's left over to take?

James C. Shay

Yes, we'll have full rates in effect for Kansas for all 12 months. And for Missouri, we'll have, wind up having a 11 months effectively. So as you think -- it's like really, there just be one month as the Missouri rates would be the additional benefit that '14 would pick up, if that's the question. And obviously, the fourth quarter, we've got a full -- the full benefit of the new rates for the entire period.

Terry D. Bassham

Michael, certainly, from a volumetric perspective, a large piece of our earnings are driven by the summer. And so in terms of cents per share impact of those increases, we've seen a very large chunk of the value that because usage in the fall and even early winter is a little lesser. We do have a January, as Jim mentioned, for our Missouri. And January can be cold and we got some opportunity there, if you will.

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

Got it, okay. On the property tax trackers, what is the annual property tax tracker that you're receiving in Kansas right now? And what is the amount you'd likely request in Missouri? I'm just trying to quantify what the impacts are in both states.

Terry D. Bassham

Yes. Well, so the impact in both states would be probably around $0.08, maybe $0.08 or $0.09. Remember that now, Missouri is 65% to 70%, and Kansas is about 35-ish, is that right? So you take the total and divide, we see the opportunity on the tracker in Missouri to be worth about a nickel. So that's again a portion of the total.

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

Okay. So in other words, you're already getting the 3 or 4s. I want to make sure I understand. The Kansas tracker, what -- are you getting another increase in 2014 and 2015? Like, is there an annual increase each year or was it a one-time step up?

Terry D. Bassham

No, no, it's a -- we have a tracker for costs, those costs in Kansas as they come through. So any increase will be flow through.

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

Okay. And that tracker's worth a couple of cents roughly?

Terry D. Bassham

It all depends on what the property tax increase in Kansas is. But yes. And I'm being reminded that in Kansas, it's actually a rider. That's even better from a cash flow perspective.

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

Okay. And then the Missouri tracker, what's the timeline for getting potential approval of this?

Terry D. Bassham

Well, we've got a -- and remember that as we file a rate case, we would true it up as well. But between now and then, what we're trying to do is capture that difference. If we file something and went through the legislative process starting in January, hopefully, we'd have something signed in the summer. It's kind of a typical process. And so you do that between, say, July and August, and it should be -- what effect it has, how much it is and how it works then be defined by the words in the bill. But the hope would be that we can recover any of those differences until the next rate case is filed.

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

Okay. And the property tax growth rates are basically a drag on earnings right now of a couple of cents or a little bit more?

Terry D. Bassham

Yes, a little bit more, actually. That were to drag in a sense that we don't offset them. But as you've seen, we're working to offset those. But this would be a pickup from that perspective.

Operator

Our next question comes from Ali Agha of SunTrust.

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

Terry, I wanted just to clarify a couple of things. One, the -- on the transmission accounting order, that drag of $0.03 to $0.04 that you mentioned, that is something that you are experiencing this year and if you get that tracker that should go away in next year, is that the way we should look at that?

Terry D. Bassham

That's correct.

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

Okay. And so, also taking in this Missouri tracker that you're looking at, roughly the $0.05 or so of drag. So if I'm right here, if you get that as both of those trackers, all else being equal, there's about $0.08, $0.09 of incremental earnings that you would pick up next year that currently you're not getting. Is that the way to look at this?

Terry D. Bassham

That is. We are offsetting those costs, but we offset other cost when we have increases that we can't control, if you will, as they come through. These 2 were opportunities, we believe, to get assistance because we don't control them and they're costs that clearly should be paid by ratepayers. So waiting until the next rate case -- is not appropriate, so we're pushing hard there. Your description, though, of the effect is exactly right.

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

Okay. And then apart from that, given the cost cutting program, which is ongoing, as you mentioned. So if you look at your O&M for 2013, all stack based, how should we think about overall O&M growth going forward for the company?

Terry D. Bassham

So if you look at what's happening this year, I think what we've described is that we have a -- an increase in total year-over-year O&M, but those things that are increased are included in the revenue, which was recovered in the rate cases. And absent those numbers, we are flat to actually a little bit better this year over last year. As we go forward, we'll continue to work hard on that trend. And given inflation and load growth, the facts that could happen to those and then our ability to manage, we may not be exactly flat. But we would expect to be very close to managing that within our lag numbers, which our focus again is to make sure that we are earning our -- on the regulated returns, as I discussed in the earlier question.

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

Right. So flat to maybe up 1%, but at or below inflation. Is that fair to call that?

Terry D. Bassham

We'll give you some more specificity when we give our earnings guidance in February. And then, again, it'll be somewhat dependent on growth and inflation, like you mentioned, and other things. But certainly, we're working hard to maintain those costs like we did this year. And we'll be looking at our opportunities to earn that return, which is, at the end of the day, what's we're focused on.

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

Right. And the 4% to 6% annual dividend growth target that you're looking at going forward, over what period of time are you looking at that? And assuming you stay in that range, does that keep your payout ratio relatively constant? Or given the flexibility, do you think the payout ratio creeps as you put that strategy?

Terry D. Bassham

Yes, I think what you're asking is the 4% to 6% growth we're talking about, keep us on the low end of that payout ratio range. And I think it does kind of early on. As we move forward, we'll be obviously looking at whether or not that range out to change again, once, we've completed La Cygne, we look at the cash flow from that, looking at load growth, those kind of things. We think that with our service territory load growth, completing our construction and opportunities around our cash, that we'll continue to look at that range and ratio. And we'll be able to compare those then to our growth rates. But right now, it's kind of in the low end of that payout ratio.

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

My last question. I think you guys have been pretty clear that you don't see the need for equity in '15, which is the year you'll be truing up your balance sheet for your next rate case. Given that fact, I mean, is there any reason for us to assume you may issue equity in '16, given that you won't have a rate case balance sheet throughout requirement the year after that? So is it fair to assume if you don't need it in '15, there's no real reason for equity in '16 either?

Terry D. Bassham

We don't have any plans for that, unless there was some investment of some sort that would drive that need right now, the way we stand, you're exactly right.

James C. Shay

And we don't have any tax payment needs through 2018. We've got a strong NOL position. So we won't be a cash taxpayer of 2018, which helps us as we think about equity.

Operator

Our next question comes from Steven Fleishman of Wolfe Research.

Steven I. Fleishman - Wolfe Research, LLC

Terry, just a question on Transource. So you maybe aware AEP is planning to lay out a lot more of their transition growth plans at EI. Could you give us a sense of -- in looking at Transource and that mix, could you just clarify again, what part is Transource versus any other part, so we'd know might what might be kind of consistent with yours? And if they announce more, are you also going to talk about more Transource projects at EI?

Terry D. Bassham

Well, so, first of all, we have a Transource Board. So obviously, any Transource announcement to work, we are working very close with AEP and have really enjoyed our partnership with AEP in that regard. I would suspect that a lot of what you hear from AEP will be related to ongoing current transmission projects they have. And those tend to be more utility projects, not the competitive Transource projects. So I mean, it kind of falls in 3 buckets. Transource covers those competitive areas in the country other than Texas, because they already have a partnership, and those things, which are inherent to their service territories. And so what we've seen in the past quarter from them related more of the shorter-term, near-term. And so I would expect that to continue. As we look forward to a longer run rate, then that would, I think, probably entail a whole lot of Transource information. And that's still kind of in progress, obviously, because we're in the startup phases, if you will, of those bids and those participation in the markets that are open for those projects. So certainly as -- we work very closely with AEP and as Transource begins to ramp up those projects, we'll be lock step in our announcement around those.

Steven I. Fleishman - Wolfe Research, LLC

Okay. One other question on cost. Could pension be any material impact next year, particularly if discount rates end up being higher?

Terry D. Bassham

Well, it could help cash maybe. But remember that we have trackers in both states. And so at that perspective it's not an earnings issue. Obviously, if funding went down, it could be cash benefits.

Operator

Our next question comes from Paul Patterson of Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

A lot of my questions have been answered. But just to sort of circle back on sales growth in Slide 12. Really remarkable residential sales growth, weather-normalized. And I was just wondering, I mean, could you just -- sorry if I missed this, the customer levels growth over there. And it just seems remarkable just in general from what we're seeing from the last several quarters from most of the utilities in your area and outside your area, sort of all around the country. I was sort of wondering if you could elaborate a little more as to why you think it's that much of a rebound.

Terry D. Bassham

So I think this is a good question. And this is an important thing I think we try to reflect, and let me make -- try to be clearer. Remember, these are year-over-year numbers. Again, so to the extent that we believe and we did at the time and we believe now, that the numbers reflected last year in sales declines were an anomaly. There were not a reflection of actual ongoing growth. It was a effect of the weather -- a extreme weather impact, not only on the calculations, but also on people's response to the bills that were coming in. Then our growth rates compared to that drop last year, they should be a little higher. So I mean, we're not declaring today that we believe we've got 3% growth in our territory on a quarter-over-quarter basis. What we do believe strongly, though, is that we've got growth in our territory, and that it's solid growth. As we continue to watch how that develops, we'll be able to maybe give you more sense and obviously, give you a sense of our expectations for next year in our earnings guidance. But again, we gave flat to 1% for this year understanding that anomaly, and we're on the high end of that. So we feel very good about where we're at. But certainly, the quarter is a reflection partly of its comparison to last year, which was -- which was an anomaly, we believe.

Paul Patterson - Glenrock Associates LLC

Okay. So, I guess, cautiously optimistic, I guess, is sort of how we should think about in terms of going forward in terms of future growth rates?

Terry D. Bassham

Well, I'm extremely optimistic. My only caution is on kind of what the -- kind of the percentage is. Again, it's a little hard to give a kind of an ongoing growth rate when we've got again, the larger impact that happened in industrial and the up and down that it caused by last year's weather. But we are certainly very optimistic about the growth in our territory. And again, it'd be easy just to say that. But if you recall, we've been talking about the metrics that support our growth, especially around residential, for several quarters. But indicating that the reflection in electricity sales has been a bit muted, and I think we're starting to see it. So is reflective of metrics that we've talked about before, which is housing store starts and those kind of things.

Paul Patterson - Glenrock Associates LLC

What has customer growth been in the residential sector for year-to-date? Do you have those numbers?

Terry D. Bassham

Yes, about 1%.

Paul Patterson - Glenrock Associates LLC

Is that 1% for the residential. Okay, I got you.

Operator

[Operator Instructions] Our next question comes from Paul Ridzon of KeyBanc.

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

On the $0.03 to $0.04 of transmission drag, is that a growing number?

Terry D. Bassham

Well, in theory, it is. These are based upon the growth in the SPP projects. And so, over time, it could, it hasn't grown quickly. And certainly, we'll have a fuel factor in place with our next case in '16. So this is a temporary issue. And we're offsetting with other cost controls to not let it have an impact. But as we manage those costs, it's an opportunity to recover some of those kind of uncontrollables. It's -- it will grow in the future. But in the future, we'll have a traditional factor way of recovering it through rates.

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

So for '14, we should think it essentially flat with '13, the $0.03 to $0.04?

Terry D. Bassham

Yes, yes, that's kind of same range. It could be a little bit bigger.

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

And if you're successful in any of these legislative efforts, would we see that $0.08 to $0.09 come back? Or would that take the pressure off and you'd be able to spend a little bit more elsewhere?

Terry D. Bassham

Well, we will not start spending O&M simply because we have additional revenue. So it would be clear about that. Having said that, there'll be other factors that could drive O&M, such as growth, hopefully, and some other stuff. But no, don't -- we certainly would not see incremental recovery of costs as an opportunity to spend additional O&M. We'll maintain that solid focus on O&M regardless.

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

These issues haven't put you in an unsustainable austerity mode?

Terry D. Bassham

No -- I know there are some investors who have not -- who want us to cut maybe some additional cost. But we continue to watch sustainability because reliability for our customers, on a long-term basis, remains extremely important to our long-term shareholder value returns. And so we work hard to make sure that it's a process improvement or a sustainable cut that can be maintained. Otherwise, we file for rate cases. And the day after, we are in need of dollars, and that makes no sense either.

Operator

Our next question comes from Michael Lapides of Goldman Sachs.

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

Terry, quick follow-up. When you're done with La Cygne, you will still have a handful of smaller coal plants that remain uncontrolled from an environmental standpoint. When do you have to make the decisions regarding what you're going to do to add controls or what you're going to do replace that capacity?

Terry D. Bassham

Well, we're coming, we're getting there. If you look at our IRP that was filed in Missouri this last spring, it would suggest that the first of the shutdown would happen at Montrose on a single unit in '16. And obviously, if that remains on track, we'll need to start processes for both community and employee and investor announcement that would say now is the time to start moving that direction. The others are scattered, '16, '18, '20 kind of periods. So we are nearing the time where we will make decisions, do we spend CapEx on these units? Do we spend money on the back end of these units in some way? Or are we going to shut them down? So that's -- the time is near and no doubt.

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

What does that mean in terms of potential needs for new supply?

Terry D. Bassham

Well, it depends on a couple of things. #1, growth. Obviously, if we have growth need, that has to be met, we'll have to look at that. You can look at opportunities for renewables, look at additional wind opportunities. You can look at repowering a station or a unit. So we have one -- we have some units that could be converted from coal to gas. If you look at our current IRP that was filed again with those same assumptions around retirements, we don't need generation until 2016 or 2026. The issue with that, obviously, is a load growth assumption that exists. And so if we have a better load growth, we might need something sooner.

Operator

And at this time, I'm not showing any further questions. I would like to turn the call back to Terry Bassham for any further remarks.

Terry D. Bassham

Thanks, Sam. And thank you, everybody, for joining us this morning. Obviously, I think as most of the companies are doing, we're headed to EI. So for those of you in the call that are headed to that direction, we'll see you there. Otherwise, we appreciate everybody dialing in on for our call. Thank you much.

Operator

Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.

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