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Great Plains Energy Incorporated (NYSE:GXP)

Q1 2011 Earnings Call

May 06, 2011 9:00 am ET

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 Development

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

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.

Unknown Analyst -

Operator

Good morning. My name is Vanessa and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Michael Cline, Vice President of Investor Relations and Treasurer. Please go ahead, sir.

Michael Cline

Thank you, Vanessa, and good morning. Welcome to Great Plains Energy’s First Quarter 2011 Earnings Conference Call. Our senior executives presenting this morning are Mike Chesser, Chairman and CEO; Bill Downey, Executive Vice Chairman; Terry Bassham, President and COO; 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 Mike begins his remarks, I wanted to remind everyone that we issued our earnings release and first quarter 2011 10-Q after the market closed this past Tuesday. They're available along with today's webcast slides and supplemental financial information regarding the quarter on the main page of our website at www.greatplainsenergy.com. With that, I'll now hand the call to Mike Chesser.

M. Chesser

Thanks, Michael and good morning, everyone. We appreciate you joining us on the call today. I'd like to start this morning by discussing a key change in our senior management team. Earlier this week, we announced that Bill Downey would step down from his position as President and Chief Operating Officer effective immediately. Bill has assumed the role of Executive Vice Chairman of Great Plains Energy before retiring at the end of August. As you all know, he has had a long and distinguished career in this industry with 29 years at Commonwealth Edison and the last 11 years at Great Plains. I can't begin to capture the magnitude of his contributions in just a few minutes but suffice it to say that Bill has been a huge force behind the transformation of our company.

The success of the Comprehensive Energy Plan from planning to construction to regulatory treatment is due in large part to his diligence and his leadership. In addition, he's been a trusted colleague and a good friend and I would like to take this opportunity to thank him for his dedicated service to Great Plains and wish him the best in his retirement. We also announced earlier this week that effective immediately, Terry Bassham will succeed Bill as President and Chief Operating Officer. As you know, most recently, Terry served as Executive Vice President of Utility Operations and prior to that, he was our CFO for 5 years. Terry's excellent leadership ability, combined with his regulatory, legal, financial and operational background, make him an outstanding successor to Bill. So I'd like to publicly congratulate Terry on his new role and I look forward to working with him to leverage the platform that we've built over the past few years to drive shareholder returns as we go forward.

Next, I'd like to provide a few comments or our quarterly results. In our press release on Tuesday, we announced first quarter earnings of $0.01 per share compared to $0.15 per share last year. Jim is going to provide additional details in his comments but I wanted to highlight 3 key points before the year -- behind the year-over-year change. First, our results this quarter included a negative effect of about $0.07 per share from KCP&L's recent rate case outcome in Missouri and the organizational realignment and voluntary separation program we announced.

Second, we had a negative effect of about $0.04 of regulatory lag. And finally, about $0.03 was a result of lower customer consumption, which fell about 3% on a weather normalized basis. As a result, we are reducing our demand outlook for the year, However, I'd like to emphasize that this is based on our actual results for the first quarter and does not reflect a change in our view for the rest of 2011.

As Terry is going to discuss further, we believe a confluence of factors contributed to the drop in demand for electric heat in the quarter. However, we do not expect those negative dynamics to persist during the summer cooling season. While we combined this view with the projected regional economic growth of about 3% for the year, we feel confident with our forecast of about 1% growth in weather normalized demand for the rest of 2011.

I also wanted to briefly discuss earnings guidance. You will recall that we do not provide 2011 guidance on our February call due to our pending rate case in Missouri and their importance to our 2011 earnings. As I will discuss in a minute, we have resolution in the Missouri rate cases after receiving KCP&L's order last month and GMO's earlier this week. However, we have not had the opportunity to thoroughly evaluate the impact of GMO's case and as such, are not issuing 2011 guidance for today's call. Our plan is to provide guidance for both 2011 and 2012 on our second quarter call in early August.

In the aftermath of the nuclear disaster in Japan, there has been significant media focus of the nuclear industry in the United States. Our Wolf Creek Plant has received attention as well following the NRC's indication that the plant is 1 of the 3 in the country requiring additional oversight. Terry will discuss this detail in his comments but I'd like to clarify a few key points right up front. Wolf Creek has been 1 of 3 U.S. plants in what is called the degraded cornerstone status. However, the 3 indicators that triggered the move to that status have all returned to top performance. Based on recent plant performance and public feedback from the NRC team that conducted a recent inspection, we expect the plant to be moved out of the degraded cornerstone status and back to the top-performing category. The unit has operated safely and reliably for 25 years and we're committed to maintaining that successful track record.

Terry is also going to share with you some thoughts related to the recent EPA pronouncements with regard to industrial boilers, utility boilers and water intake structures. As I'm sure you're aware, the active and dynamic nature of EPA's deliberations makes predicting final requirements and time lines extremely difficult. But as the debate continues, I'd like to emphasize that we will continue to advocate for appropriate implementation periods that reduce rate impacts for our customers. Though the environment is uncertain, we believe that our proactive environmental efforts in recent years has been a service very well. With respect to utility boiler roles in particular, our coal fleet is currently about 60% to 65% scrubbed, which effectively positions us to manage whatever the final outcome may be.

The completion of Missouri rate cases is a significant accomplishment. As we described in our year-end call, the single remaining piece of the Comprehensive Energy Plan or CEP was the regulatory approval to include Iatan 2, an 850-megawatt supercritical coal plant and the cornerstone of the plan in our rates. We were very gratified with the Missouri Public Service Commission by a unanimous vote in both the KCP&L and GMO cases ruled that virtually all the costs incurred to complete Iatan 2 were prudent. We disagree however, with the commission's disallowance of a portion of the cost of the Crossroads Energy Center and related transmission costs. We are evaluating our options regarding appeal and the ongoing operation of that unit.

Overall however, these cases continue to pattern a constructive regulatory treatment we have received in both Missouri and Kansas throughout the entire 5-year term of the Comprehensive Energy Plan.

Since the conclusion of the Missouri rate cases also marks the conclusion of the CEP, I think it's important for us to take a minute to reflect on what this landmark program has meant for our company. Since 2005, we've invested nearly $2 billion in projects under the CEP, which has more than doubled KCP&L's rate base. In addition to Iatan 2, these projects included renewable energy generation assets, environmental retrofits of Iatan 1 and LaCygne and asset management energy efficiency and demand response programs.

In addition to the regulatory support I mentioned, another hallmark of the plan has been our excellent execution throughout. And I'd like to take this opportunity to thank our many employees and stakeholders as they have worked tirelessly over the past several years in support of our efforts in Kansas and Missouri.

The CEP has clearly demonstrated our collaborative spirit among a utility, regulators, customers, environmental groups and other key stakeholders can achieve a positive outcome for everybody. With the physical and regulatory elements of the CEP now in place, we felt that a leaner more efficient organization was essential to position our company for optimal, long-term performance. So to that end, in early March, we announced an organization realignment and a voluntary separation program for all nonunion, KCP&L employees. Though such a decision is never easy, we thought it was imperative given the changing nature of our industry and the economic environment in which we are operating. These organizational changes will help us manage overall costs within the level reflected in our retail electric rates and represent a major step towards our long-term goal to achieve tier 1 cost structure. Jim is going to talk more about the impacts of that program in his section.

So to conclude, our total shareholder returns over the past few years have not kept pace with the rest of the industry. This was largely due to the numerous risks, especially regulatory, that we have confronted the process of transforming our company. But we tackled these challenges head on and we're a stronger organization because of it. We appreciate your support during this time as well. We now plan to reward that patience and provide attractive returns for our shareholders as we go forward. With that, I'd 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 Missouri rate case results of KCP&L and GMO and our petition for reconsideration in KCP&L's Kansas rate case. I'll begin with KCP&L's rate case in Missouri, highlighted on Slide 7. You will recall that our original request in June of 2010 was for an annual increase of about $92 million, which was based on an 11% ROE and an equity ratio around 46%. We subsequently reduced our request to $66.5 million, primarily as a result of lower fuel and purchase power costs as well as other updates to the case. Our request assumed a revenue requirement offset of about $29 million from off system sales margin, which I will discuss more in a moment. Missouri Public Service Commission issued its order in the case on April 12. We were granted a revenue increase of approximately $35 million, including a revenue requirement offset from off system sales margin of around $46 million. The Missouri Public Service Commission authorized an ROE of 10%, an equity ratio of 46% and a KCP&L jurisdictional rate base of $2,036,000,000.

As Mike mentioned, the MPSC disallowed only about $21 million or about 1% of Iatan 2's total budgeted project cost. This translated to about $6 million on a KCP&L Missouri jurisdictional basis, excluding allowance for funds used during construction or AFUDC. In addition, the commission disallowed $1.6 million of total costs related to the Iatan 1 environmental project, which represented approximately $600,000 on KCP&L's Missouri jurisdictional basis excluding AFUDC. As Jim will discuss, most of these disallowances were anticipated and the pretax loss of about $17 million that we recorded in 2010, following the Kansas Commission's order in KCP&L's rate case there. I think it is noteworthy and a strong testament to our execution of the Iatan 2 project that both the Kansas and Missouri Commissions deemed virtually all of the costs we incurred to be prudent.

We were also gratified at the positive comments made by several of the MPSC commissioners regarding the projects' management during their public discussion on the case prior to the final order. I would like to once again acknowledge and thank our project team, contractors, vendors and the many KCP&L employees who made this outstanding outcome possible.

I also want to point out one other element of the case related to off system sales margin. In the absence of a fuel cost for KCP&L and Missouri, we have a mechanism whereby a threshold amount of wholesale margin is established as an offset to the revenue requirement for purposes of determining the customer base rate increase. KCP&L retains that margin that we generate up and including the threshold while any excess is returned to customers in the next rate case.

The case KCP&L filed assumes continuation of the mechanism deployed throughout the Comprehensive Energy Plan and included in Missouri jurisdictional threshold of about $29 million as I indicated. However, in the most recent case, the MPSC decided to raise the threshold to about $46 million. So we are confident that the strong performance of our fleet will allow us to achieve this threshold. The increase does put more of the company's ability to earn its revenue requirement at risk.

Now turning to Slide 8. I will provide a brief overview of our GMO rate case. You will recall that our original request last June was for an annual increase of about $98 million, which was based on the same ROE and capital structure assumptions as in KCP&L's case. GMO reduced its request during the course of the rate case proceedings to around $89 million. Because the MPSC issued its order less than 48 hours ago, I am somewhat limited in terms of what I am able to share with you this morning. We are still working through the details and also await the commission's staff's report to quantify the effect of the final order. That report is expected later today or early next week and we will issue an 8-K once the details are known. Because most of the issues in the issues in the GMO case were common to the KCP&L, GMO expected and received like treatment on a number of important issues, most notably the prudency ruling on the Iatan projects and ROE. However, as Mike also mentioned, we were disappointed that the commission disallowed about $50 million of the cost of Crossroads from rate base along with about $5 million per year of related transmission expense. We are currently evaluating the operational, appellate and valuation implications of this portion of the ruling and we'll make additional disclosures as appropriate.

Before I hand the call to Terry, I would like to provide you with an update on the petition for reconsideration we filed last December, following the Kansas Commission's order in KCP&L's rate case. In that case, the KCC authorized a recovery of $5.6 million of rate case expense over a 4 year period. The amount authorized was lower than the $8.6 million requested by KCP&L but higher than the $2.1 million filed by the Citizens Utility Ratepayer Board or CURB. Both KCP&L and CURB subsequently filed petitions for reconsideration for the treatment of rate case expenses. The commission has agreed to a hearing on the issue and pending final resolution has deemed the $5.6 million authorized in the case to be an interim authorization subject to refund. A procedural schedule has not been established. While the docket is in process, we are preserving our options to subsequently appeal other components of the KCC's order for KCP&L. As always, we will keep you apprised of any updates. Thank you for your attention this morning. It has been a pleasure working with you over the years and I wish all of you a much continued success. With that, I would like to introduce Terry for a review of operations.

Terry Bassham

Thanks, Bill and good morning, everyone. I have 4 areas to cover with you this morning. First an overview of regulatory activity related to the environmental retrofit project at our LaCygne units. Second a review of plant performance. Third, a brief discussion of our initial assessment of the EPA's recent proposal with respect to hazardous air pollutants in water intake structures. And finally, a discussion of customer energy consumption for the quarter.

I will start with an update on a predetermination filing in Kansas on Slide 11. As you may recall, in February, we filed predetermination of the rate making treatment that will apply the costs recovery for our share of costs of potential environmental retrofit project at LaCygne 1 and 2. In our filing, we are seeking predetermination for an estimated total project cost of $1.23 billion. KCP&L and Westar are both 50% owners of the generating stations therefore KCP&L's estimated share is $615 million and the Kansas jurisdictional portion is about $281 million.

Also, you may remember from our February call that our predetermination filing is proceeding in parallel with a separate docket opened by the KCC to look broadly at the issue of environmental retrofits for coal plants in the state. In addition to staff, interveners in both dockets include CURB, Sierra Club and the Great Plains Alliance for Clean Energy. A formal procedural schedule has not been set, however, we expect hearings to be held in July with an order on predetermination no later than August 22. Pending filing resolution in the predetermination case, we are in the final negotiating stages with potential EPC contractors for the project. This will put us in a position to start construction quickly assuming we receive a positive outcome in August.

Next, I'll move on to plant performance as depicted on Slide 12. For the first quarter our combined equivalent availability factor or EAF was 75%, 5 points below the 2010 comparable period. This decrease is due primarily to the plant outage at LaCygne 1, which began last November and concluded in March. Despite the lower overall EAF, net megawatt hour generation increased about 6% compared to the first 3 months of last year due to the inclusion of Iatan 2. Wolf Creek delivered a first quarter 2011 EAF of 86%, a 6% decline from the same period in 2010. Late in the first quarter, 2011, Wolf Creek began its refueling outage and is expected to conclude later this month. In addition to the refueling outage, we plan to complete several major maintenance projects during this outage, including the replacement of all 4 turbine rotors and piping replacement and essential service water system.

As Mike mentioned, I want to spend a few minutes discussing Wolf Creek given some recent media attention. In late March, the NRC identified Wolf Creek as 1 of 3 U.S. major plants requiring increased oversight because they were in what is known as degraded cornerstone status. Wolf Creek moved to this status in the first quarter of 2010 because of 3 performance indicators, reported in the third quarter of 2009 and first quarter of 2010, that crossed the threshold from green to top performance level to white, the second level. As of the end of the first quarter, 2011 all 3 of the white indicators have returned to green. However, in order for the unit to move out of degraded cornerstone status, the plant must successfully complete a supplemental NRC inspection. NRC performed this inspection in February. In April the agency indicated in a public meeting that the inspection team would recommend to the NRC management that white performance indicators be closed. This would result in Wolf Creek returning to the top level of performance. We expect to receive final notification from NRC in the coming months.

Though we are clearly not satisfied with the units degraded cornerstone status, I think it is important to keep the recent headlines in proper context. The NRC and Wolf Creek share a common goal of protecting the health and safety of the public. Wolf Creek has been safely providing clean energy since 1985. The plant is working cooperatively with the NRC to restore and sustain performance with regulatory parameters. Wolf Creek has had a station-wide improvement effort underway for more than a year that is driving improvement in many operational areas. The unit will continue to focus aggressively on equipment and organizational performance to sustain high levels of safe and reliable operations.

Similar to many our peers we've been keenly focused on the EPA's recent issued final industrial boiler mat rule. The final rule does not apply KCP&L's and GMO's electricity generating boilers but would apply to most of GMO's lake road boilers, which also serve steam customers and to auxiliary boilers at other generating facilities. We've also assessed the implication of EPA's proposed utility boiler mat rule. As Mike discussed, the EPA's process in moving forward final rules is very fluid and we believe that the final rules are likely to be different from the current proposal. That being said, as currently proposed, we estimate the rule could result in retrofits at plants totaling about 1,250 megawatts of capacity and a possible shutdown of some of our older coal units with total capacity of about 535 megawatts. At this point, we think that compliance cost related to those 2 rules would likely be captured in the approximate $1 billion estimate for compliance costs we have previously disclosed.

We've also been evaluating the effects of the EPA's proposed water rule. Again, we expect final rules to differ from the initial proposal and therefore, can't provide an estimate of the expected mitigation costs. We are closely monitoring progress towards a final rule in the months ahead.

I'll conclude my section with a few comments on our retail customer consumption profile. Slide 14 provides the metrics for the first quarter of 2011. For the quarter, total retail megawatt hour sales decreased 2.2% while estimated weather normalized sales decreased to 3.2%. Compared to the 2010 quarter, we estimate the favorable winter weather contributed an increase of 1% in megawatt hour sales and approximately $4 million in retail revenue. Compared to normal, the positive revenue impact in the 2011 quarter was approximately $13 million or in the neighborhood of $0.04 from an EPS perspective.

As Mike mentioned, in terms of weather normalized sales volumes, the first quarter was challenging. Megawatt hour sales to our industrial customers were flat compared to 2010 after increasing 3% for the full year 2010. Volumes to commercial customers fell 1.7% continuing the trend of weaker comparative quarterly sales in this segment that started in the second quarter of 2010. Consumption in these sectors tends to be tied closely to regional economic conditions, which have remained mixed.

A particular note with regard to weather normalized sales was the nearly 6% decline we experienced in residential volumes compared to a year earlier. This is on the heels of a nearly 5% decline in our customer category in the fourth quarter 2010. Although residential continues to be one of the most challenging categories to assess, we believe a number of factors may have contributed to the decline in the quarter, including switching to natural gas heat given natural gas prices which on average were about 16% below last year, conversion from less efficient to more efficient heat pumps, customer conservation triggered by rate designed component of KCP&L's Kansas case, specifically I'm referring to a large rate increase in the range of about 30% that impacted our Kansas customers in the all electric rate class and the mixed overall economic environment as I mentioned before.

As we indicated in Tuesday's earnings release, we are lowering our projections for the change in weather normalized sales for the year to essentially flat from our previous assumption of 0.7% growth. As Mike mentioned, this was triggered by first quarter volumes that were below our expectations across all customer groups. Keep in mind that the first quarter generally represents roughly 20% to 25% of both our annual sales volume and revenue. We're not changing our outlook for the balance of 2011 at this point and currently project that total weather normalized demand will grow about 1% over the rest of the year compared to the same period last year. We are comfortable with this view because 3 of the first quarter drivers I mentioned, natural gas prices, or efficient equipment and rate design issue are not expected to be important factors as we move into the summer cooling season. As far as the economy, the current projection for full year gross metro product growth for Kansas City is in the 3% range. Forecasters point to rising sales tax receipts, strength in manufacturing, life sciences, biofuels, petroleum sectors and expansion plans among financial and professional service firms as key contributors to positive growth for the balance of the year.

Before turning over to Jim, I'll wrap up with some key historically economic indicators for Kansas City area on Slide 15. As you can see, we have started to see improvement in unemployment, personal income and gross metro product. Housing starts have remained sluggish but the developing favorable trends in the other metrics should eventually be reflected here as well. We will continue to keep you posted on the key developments in the local economy as we go forward. That wraps up my section. I'll turn it over to Jim for the financials.

James Shay

Thank you, Terry and good morning, everyone. My comments this morning will focus on our first quarter results. As Mike mentioned, due to the timing of the GMO rate case order, we will not be providing 2011 EPS guidance today, however, we do plan to provide 2011 and 2012 guidance as well as preliminary 2013 drivers on our second quarter call. I will begin on Slide 17 with a few comments on our consolidated financial results for the first quarter. Great Plains Energy's earnings for the quarter were about $2 million or $0.01 per share. This compares to earnings of $19.9 million or $0.15 per share for the same period last year. Lower consolidated earnings were driven by the Electric Utility segment. As Mike indicated, the main contributors were the following: First about $0.07 per share from our recent rate case outcomes in Missouri and the organizational realignment and voluntary separation program we announced; second, about $0.04 per share from regulatory lag and about $0.03 from lower customer consumption. I will next describe the electric utility details on the next slide.

Moving to Slide 18. For the quarter, electric utility earnings decreased approximately $18 million compared to 2010. Gross margins fell about $8 million due in part to a decline of about $6 million in retail revenue. The margin was boosted by new retail rates in Kansas and favorable weather. These effects were more than offset by lower weather normalized sales volumes as Terry discussed. Also contributing to the decline in gross margin was about $5 million of additional fuel costs related to the new coal transportation contract for KCP&L in Missouri where we do not have a fuel recovery mechanism. These costs are included in KCP&L's new rates as of May 4. Also contributing to the decrease in earnings was an increase in other operating expenses of about $12 million. Most of this was due to an impact of about $2 million from the disallowances of the Iatan 1 environmental retrofit and Iatan 2 projects and approximately $5 million of other costs resulting from Missouri rate case orders. Also, there was an approximate $4 million increase in general taxes mainly attributable to property tax expense related to Iatan. It is important to note that absent of these factors, O&M expense compared to a year ago was essentially flat.

Electric utilities results also reflected a separately categorized pretax expense of approximately $10 million in the first quarter for the voluntary separation program Mike mentioned. This represents the costs related to those individuals who elected to participate before the end of the quarter, a pretax expense of about $4.5 million related to employees who made their election during the first week of April will be recognized in the second quarter.

Depreciation and amortization expense decreased approximately $10 million compared to the last year's quarter. There are several pieces to this. I'll start with the drivers that decreased depreciation. First, the regulatory amortization mechanism that existed for KCP&L during the CEP no longer exists in Kansas after December 1, 2010. In the first quarter of 2010, Kansas regulatory amortization totaled approximately $8.3 million. As an aside, regulatory amortization continues for KCP&L and Missouri until the effective rate -- expected date of the new retail rates on May 4. Second, depreciation expense in the 2011 quarter includes a reduction compared to 2010 of approximately $9.5 million due to lower depreciation rates established in KCP&L's 2010 Kansas rate case.

These drivers that decreased depreciation and amortization were partially offset by 2 factors. First, effective December 1, 2010, D&A expense now includes depreciation for the Kansas jurisdictional share of Iatan 2. For the quarter, this amount was about $4.4 million and second, we had about $3.6 million of increased depreciation related to other capital additions.

Lower nonoperating income of approximately $10 million was a driver for the quarter. This resulted mainly from a lower equity component of AFUDC as a result of lower construction work in progress. As a reminder, under construction accounting in Missouri, we are booking a carrying cost on the Missouri jurisdictional share of Iatan 2 until the effective date of the new rates for KCP&L and GMO. Though this generates a partial offset to interest expense, we have significantly lowered AFUDC equity, than was the case during the construction phase of the plant.

Though we have not provided 2011 guidance, I wanted to remind you of a few factors that have transpired year-to-date that may impact our results for the year. First, our lower full year weather normalized sales volume projection as Mike and Terry mentioned. Second, we recognized about $0.04 per share of expenses in the first quarter related to the voluntary separation program and will book another $0.02 in the second quarter. Third, we recognized $0.03 of Missouri rate case related expenses in the first quarter based on the KCP&L rate case outcome. For issues common to KCP&L and GMO this reflected GMO's portion of those costs as well. As Bill indicated, we are working through the final GMO order and will reflect any additional costs in the second quarter.

Turning now to Slide 20, we ended the quarter with a strong liquidity position with approximately $692 million of available capacity on our credit lines. In early February, GMO borrowed on its revolving credit facility to fund a long-term debt maturity of approximately $140 million. Also, though not reflected in the first quarter balances, in early April, KCP&L issued commercial paper in order to purchase about $113 million of its tax-exempt bonds that were subject to remarketing. KCP&L felt this action was prudent given the continuing difficult conditions in the tax-exempt market.

As a maturity profile at the bottom of the chart shows, we do have extensive debt refinancing requirements to both GMO and KCP&L in 2011 and the GMO in 2012. As discussed on past calls, we expect to be in the market later this year with the KCP&L debt offering and the Great Plains Energy debt offering on behalf of GMO. The size and timing of these offerings are still to be determined and will be based upon refinancing needs, projected CapEx related funding and expected internally generated cash flow.

And finally, with respect to our credit profile, on Slide 21, I wanted to mention that we conducted our annual meetings with S&P and Moody's in March. The tone of both meetings was constructive and both agencies recognize and appreciate our continued focus on credit quality. Since our annual meetings, both firms have published updated opinions affirming the current ratings and outlook for the GPE family of companies. That concludes my comments. Thank you for your participation this morning and I will now hand the call back to Mike.

M. Chesser

Okay, thanks very much Jim. At this point, we'd be happy to take any questions that you all may have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Andy Levy from Caris & Company.

Unknown Analyst -

Just a few questions. Just on Crossroads, what was revenue requirement on the $50 million? Do you guys know? So if we kind of want to back that out of your request.

M. Chesser

I don't have a revenue requirement -- number directly related to the $50 million, I don't think. It depends what the total was - I forgot -- we will have to look into that. And we're still having to evaluate, kind of, the impact all that would have on the ultimate valuation of the assets and profits.

Unknown Analyst -

Got it. That I guess is separate, right? Whether you have to write off a portion of that. And then, the ROE, what was -- I mean, if you got a 10% ROE, what is the revenue sensitivity there so if I want to back that out?

M. Chesser

The cost of service impact of 10% versus the...

Unknown Analyst -

What you asked for in your case?

James Shay

It's about $10 million.

Unknown Analyst -

$10 million, okay. And then just back on the sales issue, I guess we should probably carry that into 2012, if you understand what I'm talking about as far as using a base to grow off of.

Terry Bassham

I don't think you'd see the same kind of reduction in 2012. I mean, I think the adjustment was a result of the higher electric rates.

Unknown Analyst -

I understand as far as reduction but as far as the base that we're using to grow our 2012 number off of.

M. Chesser

Yes. Our longer-term correlation has really been with respect to low growth and GDP has really been consistent with other utilities. We've had some lag over the last periods and I think we've got a reasonable appropriate forecast for the rest of the year. We'll really have another significant data point when we get to August in terms of another quarter of results and we'll really be providing clarity in our August call with respect to how we see 2012 demand growth and some of the sensitivities around it.

James Shay

We could well see continued improvement in the local economy which would have a favorable impact for the first quarter next year.

Unknown Analyst -

Okay. And then the last question, earlier in the year, you gave us beyond the drivers you kind of went over already for 2011, can you just give us, remind us of the 2011 drivers for earnings, you had, I guess, disclosed that in various presentations.

M. Chesser

Yes, we had a number of factors that we reviewed. We talked about clearly, first and foremost the timing of the KCP&L Missouri and GMO rate cases. Obviously, the May, June timing has a significant impact not having those rates in for that period of time. We talked about the regulatory lag from the KCP&L rail contracts and that, we forecasted that there would be an impact and there actually was an impact of $0.02 that impacted the first quarter. Then we really just talked about some of the construction accounting issues with respect to the in-service date of Iatan and how the capitalization effect and when we'll start depreciation and the plant expensing O&M given the timing of rates. So those were the bigger factors that we reviewed on past calls, along with the in the first quarter, we talked about the 0.7% growth assumption, which we've now reduced down to flat for the year.

Unknown Analyst -

And I guess your expectation is sometime at the end of the day, we should get a revenue number from the commission on the latest rate case?

Terry Bassham

Well, the earliest end of the day today and perhaps in the next week, I believe the Missouri Commission has a formal holiday on Monday. And so, it's not clear. It could be as late as next Tuesday.

Unknown Analyst -

And you guys can't really ballpark it, can you? I mean I assume your regulatory...

Terry Bassham

I don't think no, There's a number of complicated issues in there and I think that, that would not be appropriate.

Operator

Your next question comes from the line of Erica Piserchia from Wunderlich.

Erica Piserchia - Wunderlich Securities Inc.

Congratulations though on your retirement. That's great. I guess just first quickly, on the guidance, I think you mentioned giving the 2013 drivers on the second quarter call as well, do you anticipate clarifying your environmental strategy at that point, how do we think about that? And then also equity financing needs, I think you guys indicated at this point that you don't anticipate additional equity through 2012 and I just wanted to clarify whether that's still the case.

Terry Bassham

Let me try that on a couple of fronts here. There's a lot going on in D.C. right now in terms of trying to find ways to get more flexibility around the EPA rules either through work with EPA or even potentially legislation. So we may have a little more clarity in -- I mean in August but we're still going to have stay very flexible around that. My hope is that we will be able to convince the folks who work with other Midwest utilities to give us more time to make some of these environmental retrofits so that we can mitigate the impact of customers and stop what they call a train wreck of everybody at the same time trying to buy this environmental equipment. So we're going to stay fluid on that but we won't be nailing down any investment plans outside of LaCygne. So that's the comment on that. Now in terms of equity, we have some discretionary opportunities potentially in the areas of transmission and if we decide to go pursue something like that past the 2012 time frame, there may be some equity required for that. I'm not sure we will have that nailed down either but I'd like to have that as an opportunity. We'd obviously only issue the equity if it were going to be accretive.

M. Chesser

And in terms of 2013 drivers, we really want to provide some more insight into our strategies moving forward to improve total shareholder returns, how we think about capital allocation strategies, how we think about the cash dividend, what are some of the regulatory things that we're thinking about to minimize regulatory lag and how we're thinking about the cost structure of the business. So those are really the types of things that we want to articulate as part of the 2013 drivers.

Erica Piserchia - Wunderlich Securities Inc.

Okay. Yes. Actually on a follow-up to that, interesting that you should mention that because it seems that on the transmission if you were to issue additional finance through that presumably, that would be for spending that you would get to recognize returns on a more timely fashion versus say, your Distribution businesses as they currently stand right, I mean...

M. Chesser

You're right on with that Erica. The transmission returns prescribed by FERC are pretty attractive and they also include [indiscernible].

Erica Piserchia - Wunderlich Securities Inc.

Okay And then I guess just to follow on to what Jim was just mentioning, when you think about the future potential environmental spending that could be required here, do you, can you just remind us whether you intend to pursue any similar type of pre-approval and on the Missouri side, as far as -- now I know there's legislatively environmental cost recovery mechanism in place but do you anticipate sort of exploring some of those options as well to the extent you might have to do some more spending there?

M. Chesser

That's what we'll be laying out for you in August but we do recognize in a flatter growth environment that we're likely to be seeing -- the industry is likely to be seeing -- in the years ahead, we're going to have to find ways to get more timely recovery. So there's a number of strategies around that we'll be talking to you about.

Erica Piserchia - Wunderlich Securities Inc.

Okay and then can you just remind us about, I suppose you will probably be addressing the dividend policy as well but you kind of run that based off what your target payout structure is, is that right?

M. Chesser

On the dividend, yes, we recognize a couple of things. First of all, we recognize that our investors put a lot of value on the dividend in our stock and we target a 50% to 70% payout ratio and currently we're on the lower end of that. So we're going to be taking a hard -- the Board of Directors is going to be taking a hard look in the months ahead -- what we might want to do there.

Erica Piserchia - Wunderlich Securities Inc.

Okay. And then I just have one last question, this is sort of just drilling into the first quarter on sales. Terry, I know you mentioned that one of the factors driving that was switching to gas heating. And I just want to understand a little bit better because I guess I thought last quarter in the first quarter -- sorry, last year in 2010 in the first quarter that, that was also sort of a driver. I would have guessed -- I guess that anybody that was sort of switching over would have made those adjustments. So I mean, do you get the sense that the large portion of your customers that would have switched to gas heating have kind of done that already or I'm just surprised to see an incremental impact again this year.

M. Chesser

Well, keep in mind what we're talking about was quarter-over-quarter. So we were comparing first quarter of '10 to the first quarter of '11. And yes, in the last quarter, we were talking about the fourth quarter of '09, comparing to fourth quarter of '10, I guess. So you still have throughout winter if people switch over to gas then you would have that impact shown in both quarters. But for next year, we don't think that there is going to be increased switching. We think the impact of the increase in electric rates combined with the lower natural gas prices will have been seen.

James Shay

Erica, we also had -- last this past December, a very big increase in the electric heat rate that was not the case in the previous winter quarter.

Operator

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

Michael Lapides - Goldman Sachs Group Inc.

Congrats on a good quarter and Bill, you will definitely be missed by the industry. How should -- what is the best way to quantify the impact not just in 2011 but longer term of the lag in Kansas City KCP&L Missouri regarding the recovery of rail and coal transportation cost?

M. Chesser

Well, there should be no additional lag. As we've described, that big contract after a long advantageous contract that was re-upped at the end of the year caused the lag until this rate case got it included. But with this rate case including those costs in KCP&L and in particular with the factors and others, there shouldn't be a lag related to rail going forward.

Michael Lapides - Goldman Sachs Group Inc.

Meaning your other coal plants don't have rail contracts that are relatively low compared to current market levels that are coming due in the next couple of years?

M. Chesser

No, this was kind of a universal contract pulling coal from the PRB and generally serves all but one of our units, which already had been renegotiated a couple of years ago. So we're current, I would say, for several years on coal transportation

Michael Lapides - Goldman Sachs Group Inc.

Okay. How should we also think about the risk of not being able to achieve the wholesale margin kind of sharing level? I mean, when I look at current forward prices in the SPP right now they're still pretty low for the 2011, 2012 time frame. At those current forwards, could you actually meet that level?

M. Chesser

Yes, I would say that if you recall a couple of years ago and in our last case, we had kind of the opposite problem as we look at these numbers, prices were dropping. Whereas we're setting these targets, prices were getting worse. We're kind of at the bottom end of that range now. And so, we're in a better position from that perspective to say it's not likely to drop a lot, and so we think we can manage that. Certainly, there's a little more risk because it's a larger number. But we think it's manageable and we would see the opportunity possibly over time for prices maybe to even increase. And that's probably more likely than decreasing materially, which puts us in a better position to protect ourselves.

Michael Lapides - Goldman Sachs Group Inc.

Got it. Last question, I wanted to see in the check rate base level so as of, though, if I think about Kansas City Power & Light, the just over $2 billion in Missouri, I think it was $1.8 billion in Kansas, can you refresh me what the GMO rate base level approved in these cases?

M. Chesser

$1.5 billion for GMO and $400 million for St. Jo, a total of $5.8 billion.

Michael Lapides - Goldman Sachs Group Inc.

So if I think about $5.8 billion in kind of roughly a 46%, 47% equity layer and a 10 spot ROE, that gets to $260 million, $270 million of net income. And if I use -- if I assume the impact of the convert, that's almost $2 a share but not assuming of annualized earnings. How should we think about what the economic impact of the lag generally is?

M. Chesser

Well, we talked about that over the last couple of years obviously regulatory lag then at a higher level than previous years given both. All we have been going on and increases in costs and the 11 month process it takes to process a rate case, I think what we've talked about that our goal is to be in a much more normalized position with regard to regulatory lag, and that traditionally, that would be around 100 basis points, give or take dependent on what's going on. So that would kind be the nature of a healthy utility on an ongoing basis.

Terry Bassham

And Mike, I think all utilities are going to be plagued by lower growth rates than we've seen historically. Sometimes, these growth rates covered a lot of sins in terms of increasing costs. So we're going to have to look for alternate regulatory mechanisms as well and we'll be talking more about that in August.

Michael Lapides - Goldman Sachs Group Inc.

Okay. But if I assume, if I just took kind of the 5.8 and annualize that out and that's not assuming future rate base growth, so I mean, that's a conservative number and the 9 and earn to 9 ROE, that gets you just around $1.80 or so. So then comes the question, how much other -- I wanted just to make sure I understand the level of holding company or non-utility related costs that aren't recoverable in rates.

James Shay

Well, the 2 main pieces of our balance sheet that's not included in rates are obviously the net operating losses from the merger, which again provide us cash benefits over many years and the goodwill. Those are the 2 primary pieces of nonregulated assets we have on the balance sheet.

Michael Lapides - Goldman Sachs Group Inc.

Okay, what about OpEx?

James Shay

On the hold co side?

Michael Lapides - Goldman Sachs Group Inc.

Yes.

James Shay

That's about a nickel a share a year, pretty stable.

Michael Lapides - Goldman Sachs Group Inc.

And no plans to have future financings at the hold co that or at that side?

James Shay

No, does it in the refinancing, no new.

Operator

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

Paul Ridzon - KeyBanc Capital Markets Inc.

Once we think about you going back in for the next series of rate cases or is that going to be on the August call?

M. Chesser

Yes, we would expect in August as we give guidance on '12, obviously to give you a lot more specifics around that. We've kind of talked about the confluence of events that could affect the timing of that request. But as we roll out our '12 guidance obviously that will include a little more specificity around our regulatory activities for the year as well.

Paul Ridzon - KeyBanc Capital Markets Inc.

And then what's your latest thinking on some of the transmission opportunities that you've alluded to in the past?

Terry Bassham

Well, we're still evaluating that. We have a major project, close to $300 million I guess from certainly up towards Iowa and that could be a project that we could do or that could be a project that we could use to form a partnership with others to look at a more sustainable investment stream over a longer period of time. So we're looking at all those options but we consider that to be a little long term plus for our company.

Paul Ridzon - KeyBanc Capital Markets Inc.

Would that be part jurisdictional? Part jurisdictional?

Terry Bassham

Yes, it would be, yes.

Paul Ridzon - KeyBanc Capital Markets Inc.

And then just any update on incremental wind that could be coming.

Terry Bassham

Well again, we have a commitment to look, to build additional wind with the Sierra Club. I think we talked about another beyond 125 megawatts we're putting in. There's probably another 300 megawatts or so. And there again, we could do it with a PPA, or we have the option to build it and put that in rate base. But again, a lot has to do with how we manage the issues around regulatory lag.

Paul Ridzon - KeyBanc Capital Markets Inc.

And just with natural gas pricing down here, does that impact all your decision making process on wind?

Terry Bassham

Well, there's a lot of things that could potentially impact wind, lower natural gas prices is one, the tax subsidy is another. You know, as the federal government looks for ways to improve the deficit I believe that they could well begin looking at some of these tax subsidies that make wind economical. So there's no guarantees of building wind going forward but if it plays out that it is favorable, we certainly will look at that opportunity.

Operator

Your next question is a follow-up question from the line of Andy Levy from Caris & Company.

Unknown Analyst -

Doing an increase, if there were or were not, whatever the case may be, what is the timing or which board meeting will that be discussed at?

Terry Bassham

All we're saying is that we're evaluating it this year.

Unknown Analyst -

Okay, but you can't give us an idea third quarter or fourth quarter, like that?

Terry Bassham

Right. We want to see how the economy grows through the summer and all the other factors that will affect us but we do believe that as I said in my remarks that we're through the difficult period of raising capital, tough recession and all the things that impacted our dividend. We're looking at a growth rate going forward that we'll be comfortable to other utilities in the industry and we've always been objective to get back on a steadily increasing dividend trend.

Unknown Analyst -

Okay. So basically, you want us to kind of see how the year goes but the bottom line is your desire and I don't want to put words in your mouth but your desire is to try to get back to group average, I guess, as far as growth and yield.

Terry Bassham

Exactly.

Operator

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

Michael Lapides - Goldman Sachs Group Inc.

O&M growth rates excluding kind of the onetimers like the voluntary severance program.

Terry Bassham

Can you say that again, Michael, we only got the second half of the your...

Michael Lapides - Goldman Sachs Group Inc.

Oh, I'm sorry -- what do you just expect with the inclusion of Iatan 2 for O&M growth rate and excluding kind of voluntary severance package program, kind of onetimer items.

Terry Bassham

Well, we have been excluding those factors, we've been close to flat over the last year or 2. And we don't expect to grow at the rate of inflation, I would say, but we're obviously going to see some growth in some material cost. But we have the objective of continuing to improve efficiency throughout the organization and our goal is to be top tier in the industry and we're probably about tier 2 right now.

Michael Lapides - Goldman Sachs Group Inc.

How do we think about the savings you expect to get from the voluntary severance program? And also, is there any lag in getting the Iatan 2 O&M included in rates?

James Shay

On the O&M for Iatan 2, no, that was included in this case so there's no lag there. And in terms of the savings, obviously from a net pick-up, we've got to recover or cover our onetime cost this year and then you would see the full impact of those removed jobs next year in the 2012 O&M.

William Downey

Yes, and as we've indicated in the 8-K when we filed it, we're looking at getting efficient as possible in all areas, cost areas of the business but also wanting to get ahead of the curve of potentially other known cost increases so we can keep our overall cost of service in line with rates, is really the strategy to minimize regulatory lag between now and the next rate case.

Operator

There are no further questions at this time. I would like to turn the call over to Michael Chesser for closing remarks.

M. Chesser

Okay, well, again thank you, all very much. As we discussed many times on past calls over the past several years, we transformed our company by focusing on and expanding regulated operations. We now look to leverage that strong platform that we've put in place and our solid regulatory track records producing approved returns to our investors as we go forward. So we're looking forward to sharing our plans with you in this regard starting with our guidance discussion in August. Thank you all very much for your attention this morning. Bill, Terry, Jim and I will look forward to seeing you in future meetings.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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