Great Plains Energy Incorporated's CEO Discusses Q4 2010 Results - Earnings Call Transcript

Executives

M. Chesser - Chairman, Chief Executive Officer, Chairman of Executive Committee, Chairman of Kansas City Power & Light, Chairman of GMO, Chief Executive Officer of GMO and Chief Executive Officer of Kansas City Power & Light

James Shay - Chief Financial Officer and Senior Vice President of Finance & Strategic Planning

William Downey - President, Chief Operating Officer, Director, President of GMO, President of Kansas City Power & Light Company and Chief Operating Officer of KCP&L

Terry Bassham - Executive Vice President of Utility Operations - Kansas City Power & Light Company

Michael Cline - Vice President of Investor Relations and Treasurer

Analysts

Michael Lapides - Goldman Sachs Group Inc.

Erica Piserchia - Wunderlich Securities Inc.

Paul Ridzon - KeyBanc Capital Markets Inc.

Great Plains Energy Incorporated (GXP) Q4 2010 Earnings Call February 25, 2011 9:00 AM ET

Operator

Good morning. My name is Arnika and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Year End 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Michael Cline, Vice President of Investor Relations and Treasurer.

Michael Cline

Thank you, Arnika, and good morning. Welcome to Great Plains Energy’s 2010 Fourth Quarter and Year End Earnings Conference Call. Our senior executives presenting this morning are Mike Chesser, Chairman and CEO; Bill Downey, President and COO; Terry Bassham, Executive Vice President Utility Operations; and Jim Shay, Senior Vice President and CFO.

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.

Before I hand the call to Mike, I wanted to mention that our webcast today incorporates an updated or revised look to many of our traditional slides, as well as one or two new ones. These changes reflect the Investor Relations Team's ongoing efforts to incorporate the best practices into all of our materials, as well as incorporate input from you as to what you'd like to see and how we can make our information clearer. So as always, we welcome any feedback that you may have.

I also want to remind everyone that we issued our earnings release and 2010 10-K after the market close yesterday. They're available along with today's webcast slides and supplemental financial information regarding the quarter and full year 2010 on the main page of our website at www.greatplainsenergy.com. With that, it's now my pleasure to introduce Mike Chesser.

M. Chesser

Thanks, Michael, and good morning, everyone. We appreciate you joining our call today. I hope you've had the opportunity to read the press release we issued yesterday afternoon. We announced full year earnings per share of $1.53, which is in line with guidance we issued on the third quarter call. Jim is going to provide additional details around our 2010 numbers in his comments.

From my perspective, 2010 was a very solid year financially for us, even excluding the considerable help that we got from weather throughout the year. In particular, I think our diligent efforts to manage costs across the organization had a very positive impact.

Also, as you know, in recent years we have provided annual guidance on our year end conference call. However, the Missouri rate cases will have a major impact on our 2011 results and those outcomes are not known at this time. Therefore, we're planning to wait to see to issue current year guidance until those results are available and we've had an opportunity to thoroughly evaluate their impact. We will consider providing 2012 guidance at that time also. In the absence of specific guidance on today's call, Jim will provide a few considerations for 2011 and some preliminary thoughts regarding 2012 in his section.

As we've reflected on our many achievements in 2010 and the actions we've taken during the past several years to transform our company, a fitting theme, The Power of Progress, has emerged. We came into 2010 with both a long list of key priorities and a number of lingering uncertainties around our region's economy. We knew that our success would depend on how well we executed, not only in our daily operations but also in our activities to complete our five-year comprehensive energy plan or CEP. And I believe we rose to that challenge.

Our most significant achievement was the completion last summer of Iatan 2, an 850-megawatt coal power plant unit featured on the slide. This nearly $2 billion construction project, the largest in our history, excluding the effects of inflation, created thousands of Missouri construction jobs and launched an asset that will provide efficient, affordable energy to customers for decades to come. Not only was the summer 2010 in-service date consistent with our original CEP commitment, but we delivered the unit at a cost that is competitive with other plants constructed in this timeframe.

Following the end of construction of Iatan 2, the single remaining piece of the CEP is the Missouri regulatory approval to include the plant in our rates.

In November, the Kansas Corporation Commission issued its order in KCP&L's rate case. Our reaction to the order was mixed overall, as Bill will discuss in his comments. But nonetheless, we were very pleased with the commission's ruling that 99% of the project's total cost is prudent.

With the Kansas case completed, we know that many of you have been watching developments in KCP&L and GMO's rate cases in Missouri with a high degree interest. We recently concluded our hearings in those proceedings and believe we presented compelling arguments with respect to Iatan prudency, as well as other issues in the case.

And as I've indicated on past calls, the Missouri Public Service Commission's decisions in these proceedings is going to have significant influence on our financial, operating and credit profiles for years to come, and Bill will provide details on the timeline for the conclusion of these cases in his remarks.

So with the completion of Iatan 2, clearly our most significant accomplishment, we achieved a number of additional noteworthy successes in 2010. And we did this by leveraging our solid utility operations, dedicated resourceful employees and a spirit of collaboration with the community, political and regulatory stakeholders. These achievements included, first in 2010, J.D. Power & Associates residential and business customer satisfaction surveys, KCP&L was ranked Tier 1 among large utilities of both the Midwest region and nationwide. Second, our transmission and distribution systems expanded upon their track record of strong reliability, receiving a ReliabilityOne Best Performer Award for our region from the PA Consulting Group for the fourth straight year. Third, we completed the Spearville 2 Wind Energy Facility, resulting in a roughly 50% increase in our wind generation assets in Western Kansas. Fourth, we improved our credit profile with both rating agencies as evidenced by a shift in our outlook at both Standard & Poor's and Moody's from negative to stable. And finally, we achieved improved operating performance in our generation fleet, and Terry's going to talk about that further.

So as we look to 2011, a number of opportunities and challenges lay ahead. Though forecasters predicted an improved economy in our region, we continue to see varied results in terms of the weather-normalized energy consumption across our various customer categories as Terry will get into in more detail. We will also be watching closely this year for any new rules issued by the EPA. But let me emphasize that we remain committed to sound environmental stewardship and with the flexibility provided by the CEP investments, are well positioned to navigate through these current uncertainties.

And finally, as we evaluate future investments, we believe it's very important to distinguish between mandated and discretionary opportunities. Simply with regard to the discretionary investments, we will be keenly focused on how such projects would be financed, especially since issuing equity is not attractive in our current share price. We will also be mindful of the associated amount of regulatory lag and the overall impact on our credit profile before we move forward with discretionary investments. And this thinking has driven our current three-year capital expenditure plan, which Jim is going to be covering in his comments.

So to conclude, we enter 2011 a very different company from what we were just a few years ago. Over the past five years, we successfully completed the largest construction program in our history. We focused our business model by selling a nonregulated business, Strategic Energy, and buying a regulated entity equivalent. Along the way, we've established a strong regulatory track record. And we've done all this in the face of the toughest economic headwinds in many years. So we believe we are well positioned to manage the changing environment in our industry and importantly, leverage these investments that we have made to generate improved total returns in the years ahead. So with that, I'd now like to introduce Bill.

William Downey

Thank you, Mike, and good morning, everyone. I would like to spend a few minutes this morning updating you on our rate case activity. I'll start with KCP&L's rate case in Kansas, highlighted on Slide 8.

You will recall that our original request was for an annual increase of about $55 million or roughly 11.5%, which was based on an 11.25% return on equity and an equity ratio around 46%. During the rate case proceedings, we subsequently adjusted our request downward to about $51 million, primarily as a result of lowering our requested ROE to 10.75%. The Kansas Corporation Commission, or the KCC, issued its order in the case on November 22. We were granted a revenue increase of $21.8 million and that was subsequently increased to $22 million in a reconsideration order.

The KCC authorized an ROE of 10% and equity ratio of just under 50% and a Kansas jurisdictional rate base of $1.78 billion. New rates went into effect on December 1, 2010. Very importantly, the KCC disallowed only about $20 million of the Iatan 2 total budgeted project costs, which represent approximately $5 million on a KCP&L Kansas jurisdictional basis. In addition, there was a small $1 million disallowance related to Kansas jurisdictional portion of the Iatan 1 environmental retrofit project.

Our reaction to the order was mixed. As Mike commented, we were extremely pleased that the KCC supported our construction management policies and practices by disallowing only 1% of the total project cost on Iatan 2. We were, however, disappointed with the outcomes on a number of other issues, particularly ROE and depreciation. We also were disappointed at the commission's decision not to grant us an environmental rider for LaCygne. In December, we filed a petition for reconsideration with the KCC with respect to these and other matters. In early January, the commission generally reaffirmed its positions in the November 22 order, but did slightly increase our rates as I mentioned. We are preserving our options with respect to additional appeals, and as always, we'll keep you updated on any material developments.

Finally in Kansas, I'd also wanted to mention that there is a current vacancy on the KCC created by the expiration of Commissioner Joseph Harkins' term in January. Governor Brownback has not yet named a replacement.

Slide 9 contains several key elements of our pending rate cases in Missouri. We filed the cases last June requesting increases of about $92 million for KCP&L and $98 million at GMO. Earlier this week, we filed true-up testimony, which lowered our request for KCP&L to about $56 million and about $88 million at the GMO. The biggest driver of the significant reduction in KCP&L's request was lower fuel and purchase power costs. As you will recall, KCP&L does not have a fuel cost in Missouri.

Missouri Public Service Commission staff also filed its true-up case this week and maintained the ROE range of 8.5% to 9.5% it had recommended in November. Staff's true up case proposes rate increases for KCP&L ranging from $2.2 million at the lower ROE to $17 million at the higher ROE. For GMO in total, staff's recommended rate increase range from $15 million to $28 million. With regard to the prudency of costs incurred on the Iatan 1 and Iatan 2 projects, staff continued to take the same approach in its true-up as in its November 2010 construction audit and prudence review. Essentially, staff recommends disallowance of all audited expenditures as of October 31, 2010, in excess of the December 2006 control budget estimates for Iatan 1 and Iatan 2 of approximately $377 million and $1.685 billion, respectively.

Hearings began in January and concluded earlier this month. Of course, we cannot predict the final outcome of the cases. However, we believe we have presented strong and compelling support for our positions. We expect the MPSC orders to be issued early in the second quarter and new rates will be in effect at KCP&L and GMO on May 4 and June 4, respectively. As Mike mentioned, these cases will be an important driver of our financial results this year and going forward.

To conclude my comments regarding Missouri, I wanted to briefly mention changes that occurred recently on the Missouri Public Service Commission. Robert Clayton, who had been Chairman since early 2009, resigned that post earlier this month. He remains the commissioner. To replace Clayton as Chairman, Governor Nixon appointed Kevin Gunn, who has served as the commissioner since the March 2008. We do not anticipate that these changes will impact our pending cases. That wraps up my remarks, and I would now like to introduce Terry.

Terry Bassham

Thanks, Bill, and good morning. Good to have a chance to talk to everybody again. I will briefly cover four topics this morning. First, an overview of regulatory activity related to an environmental retrofit project at LaCygne. Second, a review of plant performance. Third, an update on the renewable energy front. And fourth, a discussion of customer energy consumption for the fourth quarter and full year 2010.

Slide 12 covers a filing we made earlier this week in Kansas. In this document, we're requesting predetermination of the rate-making treatment that would apply to the recovery of costs for our share of expenditures related to a potential environmental retrofit project at LaCygne units 1 and 2. You'll recall that Westar and KCP&L each own 50% of LaCygne station and KCP&L is the operator. The expenditures we are contemplating are consistent with the terms of a consent agreement with the Kansas Department of Health and Environment to bring the LaCygne station into compliance with best available retrofit technology, or BART as you heard it, limits by June 1, 2015.

The project includes a scrubber and baghouse for LaCygne 1, where we installed a selective catalytic reduction system, or SCR, in 2007 as part of the CEP. The project also includes what we call a full backend at LaCygne 2, consisting of an SCR, scrubber, baghouse and low NOx burners.

We're seeking predetermination for a total project cost of $1.23 billion, KCP&L's 50% shares, therefore, $615 million, and the Kansas jurisdictional portion is about $281 million. We believe this predetermination would provide clarity with respect to the KCC's support of the retrofit decision and its confirmation that the predefined cost level I just mentioned is reasonable.

Also as part of this case, we will be seeking a rider, which is similar in all respects to that which we requested in our recent rate preceding. The only major difference is that the current request would include costs for the LaCygne project only.

We will be pursuing this case in parallel with a new docket, which the KCC opened last month upon the recommendation of the KCC staff and the systems utility [indiscernible] board in view of current potential future environmental retrofit requirements for both KCP&L and Westar.

The docket will address three fundamental questions. First, is the capacity and/or energy provided by the plants to be retrofitted needed by the utility? Second, if the capacity and/or energy is needed, then is the decision to retrofit a more economically efficient choice than decommissioning the existing plant and building a new plant? And third, if the retrofit choice is the better choice, then has the utility chosen the best retrofitting option?

It's difficult at this early state to predict exactly how these two proceedings will be litigated in tandem. However, what is clear is that the KCC is fully aware of our needs to advance this matter promptly given our need to start construction in the third quarter of 2011 in order to meet our June 2015 deadline. We'll keep you apprised of the developments in the coming months.

With that now, I'll turn to operations. As depicted on Slide 13, in 2010, our combined equivalent availability factor, or EAF, was 83%, a 3 percentage point improvement over 2009 and our best performance since 2007. The EAF, excluding Iatan 2, which came online in late August and was subject to occasional downtime for final testing and fine tuning, was 85%. It's also noteworthy that the increase in performance over the past year occurred during a year when weather put a heavy demand on our units with net megawatt hours generation up 9% compared to 2009. We believe this is a result of the improvement initiatives that our supply organization has undertaken and the prudent capital investments we've made in our fleet.

Our coal plants performed extremely well throughout the year. The overall EAF for the coal fleet was 82%, a three percentage point improvement over 2009, and the EAF for our coal fleet, excluding Iatan 2, was our best since 2004. You'll note in the chart that EAF for the coal fleet in the fourth quarter of 2010 dropped compared to the 2009 quarter. This decline is primarily attributable to the planned outage at LaCygne 1, which began last November and is expected to conclude on schedule this month.

Wolf Creek delivered a 2010 EAF of 93%, a 7% improvement over 2009 despite two brief forced outages in March and October 2010. Also, you may recall that Wolf Creek was down for 43 days in the fourth quarter of 2009 for a regularly scheduled refueling outage which impacted both the full year and fourth quarter comparisons. The next scheduled outage at Wolf Creek is planned to begin next month. You will recall that in addition to normal course refueling, we have several major projects scheduled during the outage, including the replacement of all four turbine rotors. As a result, we expect the outage to be slightly longer than the one in 2009.

Next, I'll provide a few comments regarding our renewable energy activities on Slide 14. I'm pleased to report that in the fourth quarter of 2010, we successfully commissioned 32 new wind turbines representing 48 megawatts of capacity at our Spearville 2 site in Western Kansas. This increased our wind regeneration capacity at Spearville by nearly 50%. Our total capacity of 148 megawatts at Spearville, combined with 52 megawatts of renewable energy credits we repurchased in the fourth quarter of 2010, will put us in compliance with the Kansas renewable energy standards that will take effect later this year.

The specific requirement calls for KCP&L, along with other Kansas public electric utilities, to have renewable energy generation capacity equal to at least 10% of our three-year average Kansas peak retail demand. In Missouri, KCP&L and GMO, along with other certain utilities, are required to provide at least 2% of the electricity provided from renewable resources by 2011, increasing to 15% by 2021. Both companies expect to meet the requirements in 2011.

We also have a requirement under our 2007 collaboration agreement with the Sierra Club to pursue its additional wind generation by the end of next year subject to regulatory approval. We've issued RFPs for 100 megawatt project in that timeframe and are reviewing the responses. We're also evaluating our options for the remainder.

Next on Slide 15, I will close my section with a few comments on our retail customer consumption profile for the fourth quarter and the year compared to the same periods in 2009. As Mike mentioned, weather was really the story for us in 2010 from a consumption standpoint. For the full year, total retail megawatt hour sales rose approximately 6% compared to last year, while estimated weather-normalized sales were relatively flat. Compared to 2009, we estimate that weather contributed about $105 million in retail revenue. Compared to normal weather, the estimated full year revenue impact was about $60 million or about $0.18 to $0.20 per share. In terms of weather-normalized megawatt hour sales, results across our three customer segments varied through the year.

Sales grew just slightly for the full year, which you will recall is a small improvement compared to the expectations embedded in our initial 2010 earnings guidance. Our industrial segment was a consistent rough spot for 2010, and we continue to experience customer attrition in the industrial space during the year. Increased usage per customer overshadowed that effect and led to an overall volume increase of 3%.

On the flipside, the commercial sector was consistently weak throughout the year, which is not unexpected given that this sector is typically the last to benefit from an economic recovery.

The category that's been the most challenging to assess has been residential. The sector experienced weather-normalized megawatt hour sales growth in the first and third quarters, essentially flat volumes in the second quarter and a significant volume decline of nearly 5% in the fourth quarter that negated the gains earlier in the year.

As has been the case with a number of other utilities, it is difficult for us to pinpoint the drivers of a significant change in any single quarter. One potential contributor to the steep drop in the fourth quarter is conservation and efficiency, especially coming off a very hot summer when customers' bills are high. Other drivers could include continued weakness in employment in the region, as well as sluggish conditions in the real estate sector, both in terms of housing starts and existing home sales. We will continue to monitor this sector closely for signs of any developing trends.

Although projecting customer energy consumption remains challenging given the current economy, there are a few factors that appear to point to a higher weather-normalized retail sales in 2011. Jim will discuss this further in his section, and I'll now turn the call over to him.

James Shay

Thanks, Terry, and good morning, everyone. My comments this morning will focus on our quarterly and full year results. As Mike mentioned, we will not be providing 2011 EPS guidance today. I will, however, discuss at the conclusion of my remarks a few considerations for the year that we hope will be helpful. I will begin on Slide 17 with a few comments on our financial results for the full year compared to last year.

Great Plains Energy's earnings were about $210 million or $1.53 per share. This compares with earnings of just above $148 million or $1.14 per share in 2009. Our 2010 earnings per share was within the revised guidance range of $1.52 to $1.62 that we discussed on our third quarter call. These full year results were driven primarily by our Electric Utility segment, which I will discuss in a few moments.

Comparative results were also unfavorably affected in 2010 by our other category, which mainly include unallocated corporate charges and GMO's non-utility operations. This category included a loss in 2010 of approximately $25 million or $0.19 per share compared to a loss of $8 million or $0.07 per share in 2009. The main driver of the difference was a $16 million benefit in 2009 from a GMO tax audit settlement that we've discussed on a number of past calls.

As shown on Slide 18, Great Plains Energy had a loss of $5 million or $0.04 per share for the quarter compared with 2009 fourth quarter earnings of approximately $15 million or $0.11 per share. Key items reflected in the earnings decline of roughly $20 million or $0.15 per share include the following: first, an after-tax loss of about $8 million or $0.06 per share in the electric utility segment related to the impact of regulatory disallowances of certain costs related to the Iatan 1's environmental retrofit project and Iatan 2; and two, an after-tax loss of approximately $7 million or $0.05 per share in the other category due to a write down of affordable housing investments.

I will discuss the electric utility full year results on the next slide. For 2010, earnings for the Electric Utility segment were approximately $78 million higher than 2009 as reflected on Slide 19. The segment's gross margin increased nearly $235 million, mostly due to a $257 million increase in retail revenue, just under 60% of the retail revenue increase was due to a full year of new rates that went into effect in the third quarter of 2009, and slightly over 40% was due to favorable weather. As Terry mentioned, weather-normalized demand was essentially flat for the year.

As the chart indicates, operating expense rose about $61 million compared to 2009. Key contributors were the impact of disallowed costs on the Iatan 1 and 2 projects, higher O&M related to scheduled maintenance outages and increased general taxes. Other key drivers of full year results including higher depreciation and amortization, lower nonoperating income and higher tax expense are reflected on the chart and were also discussed in yesterday's press release.

Turning now to Slide 20. For the quarter, Electric Utility earnings decreased about $21 million compared to 2009. Gross margin fell about $5 million as the result of a decline of about $12 million in retail revenue. As Terry mentioned, weather-normalized sales declined significantly compared to the 2009 fourth quarter. Also contributing to the decrease in earnings was an increase in other operating expenses of about $21 million. Most of this is due to the $13 million impact of disallowances already discussed, as well as an approximate $5 million due to other accounting effects associated with the KCC November rate order.

Lower nonoperating income was also a driver for the quarter. This resulted mainly from a lower equity component of allowance for funds used during this construction as a result of lower construction work in progress balance. Under construction accounting in Missouri, we are booking a carrying cost on the Missouri jurisdictional share of Iatan 2. This generates a partial offset to interest expense, but we no longer have AFUDC [allowance for funds used during construction] equity as we did during the construction phase of the plant.

Turning now to Slide 21. We finished the year with a strong liquidity position with approximately $924 million of available capacity on our credit lines. As the maturity profile at the bottom of the chart shows, we have extensive debt refinancing requirements at both GMO and KCP&L in 2011. And at GMO in 2012, we expect to be in the market later this year with a parent company offering on behalf of GMO and also a KCP&L offering. The size and timing of these offerings are still to be determined based upon refinancing needs, projected CapEx-related funding and expected internally generated cash flows.

Slide 22 is a new slide we have added to provide increased visibility into our key credit ratios. We have reiterated many times on these calls that maintaining our credit quality is a top priority. The decisions by S&P and Moody's to raise our outlook from negative to stable in early 2010 was a positive step but both agencies indicated a desire to see our key metrics improve. As the charts indicate, we made good progress in 2010 in this regard. However, we plan to remain vigilant in our efforts to further strengthen our credit profile as we move forward. Reasonable outcomes in our pending rate cases in Missouri will be critical to that effort.

And in an October 2010 report, S&P outlined a 17% FFO-to-debt ratio and a 55% debt-to-capitalization ratio as representing reasonable near to midterm sustainable targets for us. These guidelines are one factor in our planning process as we look ahead over the next few years.

The chart on the left side of Slide 23 depicts our projected capital expenditures for 2011 through 2013. The right side of the chart shows the changes for 2011 and 2012 in total compared to last year's projections. I would like to highlight a few key items. First, spending for the LaCygne project that Terry described will occur later and the amount for 2011 and 2012 is expected to be lower than what was assumed in last year's forecast. The environmental line includes LaCygne-related expenditures of $63 million, $171 million and $195 million for 2011, '12 and '13, respectively, for a total of $429 million. As Terry mentioned, we filed for predetermination in Kansas for a total project cost of $1.23 billion which equates to $615 million or our 50% share. Nearly all of the difference between this amount and the 2011 to 2013 total I just mentioned is expected to be incurred in 2014 and the first half of 2015 prior to the expected in-service date of June 1, 2015.

Second, since we sometimes get questions regarding retrofit plans at Sibley 3, I wanted to mention that the environmental line does include $24 million for Sibley in 2013. If the EPA's proposed transport rule issued in July 2010 were adopted in its current form, it appears that a scrubber and baghouse would need to be in place at Sibley 3 by the summer of 2015. It is important to note, however, that alternatives proposed by the EPA for SO2 allowances for our Missouri plant could eliminate the need for the Sibley investment. If it is required, the bulk of the spending would not take place until 2014.

Third, expected transmission and delivery expenditures this year and in 2012 have declined compared to last year primarily due to slower growth in our service territory, fewer fleet vehicle purchases and reprioritizing of certain projects. The T&D line includes about $47 million in 2011 through 2013 related to new projects. Of this, about $41 million is related to the Sibley to Nebraska City 345 kV line we have discussed on the past several calls.

And fourth, as Bill mentioned, we have issued RFPs for 100 megawatts of wind in 2012 and are reviewing these responses. For purposes of projected capital spending, we have assumed that any renewable energy needs in 2011 to 2013 are satisfied with TPAs, purchases of Recs [ph] or other means not impacting capital expenditures. Again, we could consider this approach if equity financing were to become a viable option.

We have developed these projections with two important points firmly in mind. First, we want to continue to improve our credit profile on the years ahead, so we have to be judicious in terms of taking on incremental debt-to-fund capital expenditures. This is critical given the second point, which is that equity financing to fund CapEx remains an unattractive option at our current share price.

As I mentioned at the beginning of my remarks, we are not issuing EPS guidance at this time, however, to close out my section, I would like to leave you with a few thoughts and considerations for 2011 and a couple of factors to keep in mind for 2012.

Slide 24 is essentially the same slide we used on our second quarter call last August when we wanted to describe various complexities in 2011 in terms of our rate cases, construction accounting in Missouri and interest expense. In the interest of time, I will not cover these points again this morning but we can certainly take any questions you may have in Q&A or after the call.

On Slide 25, we have added a few considerations for 2011 to those that we discussed last summer. In the absence of specific guidance, we hope these factors will be useful as you begin to formulate or refine your view of GXP. Most of these items are self-explanatory, so again in the interest of time, I will not elaborate on them further. The only item I did want to mention is weather-normalized sales where we project an increase of 0.7% over 2010 to weather-normalized levels. This is based on the widely held view that the economy in the Kansas City region will gradually improve in 2011 with positive changes and a number of key statistics that have been shown to have a strong correlation with retail electricity consumption including housing starts, employment and gross regional product.

In terms of our three main segments, we are looking for strength in the commercial and industrial segments to more than offset weakness in the residential sector. We look forward to keeping you posted on key consumption trends as the years unfold. Though 2012 is several months away, I also wanted to briefly mention a few key drivers for next year as well. First, our equity units will convert around midyear. Second, the $500 million or 11.875% senior notes at GMO mature in July and are expected to be refinanced. Third, as discussed earlier, we will look to add 100 megawatts of wind through a PPA. And finally, we will have a full year's impact from the Missouri rate orders and a full year of traditional accounting treatment of Iatan 2. There are a number of factors that could also cause us to consider filing rate cases in late 2011 or 2012, but we have no definitive plans at this point to do so.

That concludes my comments. Thanks for your participation this morning, and I will now hand the call back to Mike.

M. Chesser

Thanks, Jim. I'd just like to offer a few points to wrap up. First, the Great Plains Energy of 2011 is a transformed company from where we were five years ago. In achieving that, we delivered on our commitments and executed with excellence, whether we're serving our customers, selling a business, buying a business, completing projects that double our rate base or navigating the regulatory process. We stayed the course and kept our focus. We may look different, but the employees and the management team that delivered the results in the face of these great obstacles are still the core of our company and our greatest assets.

We look optimistically towards the future. We have opportunities for organic growth through environmental transmission, renewable energy and ongoing reliability-related investment. Now our goal going forward will be to leverage the investments we have made and prudently capitalize on these promising areas. And in doing so, we will focus on identifying a path that meets customer needs, maximize the shareholder returns and continues to maintain our superior reliability and cost structures. So thank you very much for your attention this morning. Bill, Terry, Jim and I would be happy to take any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Paul Ridzon with KeyBanc.

Paul Ridzon - KeyBanc Capital Markets Inc.

Can you just give us kind of a sense of the local economy in the region, kind of what sectors are gaining traction, which ones are still kind of having a rough time of it?

M. Chesser

Well, as we've said, it is mixed. The residential housing sector is probably the weakest. But the good thing about the Kansas City area is that it doesn't ever have high highs or low lows. So the core business that we have here, centered around transportation, warehousing, we have Ford automotive plant who just announced that they're going to stay open and in fact get a second line. Obviously we have a lot of healthcare, life sciences type of businesses that are continuing to grow. So I'd say that to take a look at Kansas City, it's probably about at the norm for the U.S., has a diversified economy and not a lot of what I would call high-risk businesses to create a significant downturn.

Operator

Your next question comes from Erica Piserchia with Wunderlich Securities.

Erica Piserchia - Wunderlich Securities Inc.

First, on the sales forecast you mentioned just broadly Jim in your comments that when we think about 2011 sales, to think about strength in the commercial and industrial off settings and the residential. I'm just wondering if you could comment, does your assumption assume negative sort of growth in the residential or sort of flat like what we saw in 2010 weather-adjusted sales? Can you just talk a little bit more about the assumptions behind that?

James Shay

Yes, we have an overall forecast of 0.7%. But at this point, we're a little bit more hesitant to comment on any more levels of granularity other than kind of the macro trends that Mike just referred to.

Erica Piserchia - Wunderlich Securities Inc.

Second question, with regard to cash flow, do you expect to see any material changes due to bonus depreciation in terms of cash flow from 2010 to 2011?

James Shay

Given our significant NOL position, we don't realize the immediate benefit of that bonus depreciation that impacts our deferred tax balances, but they are important to us. They have longer term implications. But as I indicated in my comments, the real lever for us is to manage our cost of service within kind of the rate case ask [ph]and tightly monitor and control CapEx. We're using those as our primary levers to manage cash flow and we're also taking a little bit closer look at working capital.

Erica Piserchia - Wunderlich Securities Inc.

And then can you just remind me, I know it's early days yet but just any comments on sort of how you will seek to address environmental strategy in Missouri going forward? I know there's the option to request an environmental cost recovery mechanism, but that hasn't really been tapped significantly? I mean, I know it's early days but are there thoughts towards reinvigorating those discussions, or how are you thinking about that?

M. Chesser

I will let Terry talk to you about that.

Terry Bassham

Yes, Erica, obviously our focus right this minute is on Kansas because they have a very specific statute and process to follow, so that's where we're at right now. As we get into that process, we'll continue to look for opportunities to talk to Missouri, make sure that they're well aware of what we're doing and how and why we're doing it. They don't have as specific a process for predetermination, but as you mentioned, there is maybe some opportunity for different kinds of recovery. And we'll continue to talk to them about that. But right now our focus is on Kansas and finishing up the rate case on the Missouri side.

Erica Piserchia - Wunderlich Securities Inc.

Any update on the SPP transmission project as far as, I know that's sort of a longer term project for you but any other updates there?

M. Chesser

Well, we, as you know, we have the option to do it ourselves or we have the option to novate it to others that would be more than happy to do it, or we have the option to partner around a portion of it. So that's a decision we don't have to make for a while yet. But I do see that personally as a real potential value creator for our shareholders as we get our share price up to the point where we can finance it.

James Shay

Yes, in our capital plan, in my remarks, we noted that we've got $41 million in our three-year plan to fund the components that would need to be funded in that time period and the balance of the funding would occur thereafter.

Operator

[Operator Instructions] Your next question comes from Michael Lapides with Goldman Sachs.