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Westar Energy, Inc. (NYSE:WR)

Q4 2011 Earnings Conference Call

February 24, 2012 10:00 AM ET

Executives

Bruce Burns – Director of Investor Relations

Tony Somma – Senior Vice President, Chief Financial Officer & Treasurer

Mark Ruelle – President & Chief Executive Officer

Doug Sterbenz – Executive Vice President & Chief Operating Officer

Michael Lennen – Vice President, Regulatory Affairs

Greg Greenwood – Senior Vice President, Strategy

Andy Levi – Caris & Company

Travis Miller – Morningstar

Mike Lapides – Goldman Sachs

Sarah Akers – Wells Fargo

Ashar Khan – Visium Asset Management

Shar Pourreza – Citigroup

David Paz – Bank of America

Michael Bates – D.A. Davidson

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Westar Energy earnings conference call. My name is Jeff and I will be your operator for today. At this time, all participants are in a listen-only mode. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Bruce Burns, Director of Investor Relations. And you have the floor, sir.

Bruce Burns

Thank you, good morning. I am Bruce Burns, Director of Investor Relations for Westar Energy. Welcome to our year-end 2011 conference call.

Last night, we filed our 10-K and posted it along with the earnings release and supplemental materials on our Website at westarenergy.com. They could be found under Supplemental Materials within our Investors section of our Website. Some of our remarks will be forward-looking. So, I remind you of uncertainties inherent in our comments during this call or that we may have included in materials that supplement the release.

Commenting this morning will be Tony Somma, CFO; and Mark Ruelle, CEO. Other members of our senior management team are also available to answer questions.

Tony will offer highlights on the quarter, comment on earnings guidance and the updated CapEx forecast for 2012 through 2014, including an update on major projects. Mark will comment on regulatory activities, EPA regulations, offer a few thoughts on the Kansas economy and share some specifics on our dividend increase.

With that, I will turn the call to Tony.

Tony Somma

Thanks Bruce. Good morning. Earnings and earnings per share for the quarter were $19 million and $0.16 respectively compared with $5 million and $0.04 in 2010. EPS for the quarter reflect additional shares issued to fund investment in our utility infrastructure. For the quarter, gross margin increased $6m or 2%, due mostly to higher price as measured by heating degree days.

Weather in the fourth quarter was a bit milder than the fourth quarter of 2010. We estimate weather costs us about $0.01 a share. On the expense side, O&M for the quarter was about $9 million or 8% lower, excluding a $4 million increase in SPP transmission cost, most of which has a revenue offset.

Principal reasons for the lower O&M were a $11 million for reduced maintenance expense and a $2 million reduction in storm amortization. Those decreases were partially offset by a $3 million increase in property taxes, which like transmission has a revenue offset.

SG&A expenses also decreased by about $11 million, due primarily to lower compensation expense. In combination, O&M and SG&A excluding SPP transmission costs and legal settlements, were 11% lower for the quarter and 2% higher for the full year 2011. Depreciation expense increased $2 million, in line with guidance, largely reflecting plant additions.

During the quarter, we settled a forward equity sale from 12 months earlier by issuing an additional 8.5 million shares and receiving proceeds of almost $200 million. This raised our equity ratio to 52.6%, the level used in the settlement agreement in our rate filing. With respect to credit ratings, in January, Moody’s upgraded all of our ratings by one notch. Our secured debt is now A3 and we have a P2 commercial paper rating.

We returned to the commercial paper market in January, the first time in over a decade, which reduces our cost of short-term debt. As far as additional financing needs for the foreseeable future in light of current interest rates look for us to issue first mortgage bonds.

Now, let me turn to our updated CapEx forecast. As has been the case for the last several years, our plans call for utility plans and investment of almost $2.5 billion over the next three years. Two-thirds of this year’s plan and investment is to satisfy environmental regulations and support the Southwest Power Pool’s efforts to ensure reliable transmission.

We are investing an air quality project at our Lawrence and Jeffrey Energy Centers in our jointly-owned La Cygne station that Great Plains manages. I will only touch briefly on each of those major projects, as not much has changed with all projects running at or below budget and no change in our expected completion dates.

The $300 million air quality upgrade at Lawrence is slated for completion by year-end and well below its original cost estimate. Construction of the SCR at Jeffrey continue as planned, with equipment to be in service by the end of 2014. Its cost estimate remains at $240 million. The most significant single project underway is at La Cygne, our share is estimated to be just over $600 million, with the project target for completion by June 2015.

Turning to transmission, we expect to complete our Wichita to Oklahoma line this spring, a couple of months early and well on our budget at a cost of $80 million. In addition, the SPP has identified significant transmission improvements required in the region. We estimate our investment will be about $0.5 billion over the next three years. This year, we will invest about $140 million in transmission infrastructure improvements.

By year-end, we estimate our total transmission investment to be around $900 million. While not including our CapEx estimate, our Prairie Wind joint venture project continues to progress and scheduled to be completed late 2014. We have reflected our $35 million estimated investment in the venture in the footnotes of the CapEx table.

In our release last night, we issued 2012 earnings guidance of $1.85 to $2.00 per share. Guidance is conditioned upon the KCC approving the stipulation agreement in our rate review as well as the typical factors including such things as weather, the economy, COLI proceeds, of which we received none last year, and other factors we can’t control, all of which we detail in our supplemental materials.

Our 2012 guidance reflects about $14 million in COLI proceeds, or $0.11 per share. We will record two-thirds of that amount in Q1 based on results already experienced to date. With that, let me turn things over to Mark.

Mark Ruelle

Thanks Tony. Last August, we filed an application to adjust our base rate. We reached to compromise this month with only one party opposing the settlement. It calls for a $50 million increase, which is about 55% of our request and about a 3% increase. Although it’s for much less than we asked for, all things considered is adequate. We strongly encourage the KCC to adopt the settlement as written and we expect the order in late April with new rates in May.

Approval of the settlement will allow us to significantly increase tree trimming, cover other increased costs to provide reliable service, in addition to allowing us to raise needed capital on reasonable terms to fund utility infrastructure.

The Cross-State Rule has commanded a lot of attention since enacted last July. Because of our particular circumstances, it was a greater concern in even the recently finalized MATS rule mostly as to timing. Fortunately, we obtained relief on two fronts. First, the order is stayed, while the court reviews it. Second, the EPA has made some modestly helpful technical corrections. We are still concerned about the cost of all of these rules, our concerns about grid reliability have largely been assuaged.

With respect to the proposed MATS rule, we don’t expect it to have a significance of a challenge as it may be for others, largely because we have already completed or have underway projects at all of our major plants to address most of the concerns targeted by MATS. For us, the most significant MATS issue will be for mercury and to address sulfur and acid gases at three of our older smallest coal-fired stations. For those smaller units, we are encouraged by our early test of Drizorbine [ph]. But in any event, those units reflect only 250 megawatts.

We believe we have a clear path forward on MATS with much less capital required in the future than we have already undertaken in the past. The majority of the incremental investment, which we estimate to be only about $40 million will begin late next year and continue over the next few years.

Turning to the Kansas economy, it continues at a steady pace with unemployment still significantly favorable to the nation. Much of Kansas industry continues to improve as manufacturing, pet food processing and chemical and oil production leading the way. As some of you may know, Boeing announced late last year that it was pulling out of Kansas. Let me help you put that into perspective.

Since the sale of its much larger Wichita commercial operations to Spirit AeroSystems back in ’05, Boeing’s Wichita operations have been limited to military. Although disappointing, its pullout is not material to us. As a side note, commercial aviation continues at near capacity and Spirit will complete its expansion this year.

But even as the Kansas economies fare better than average like many utilities, we continue to see more careful consumption of electricity by customers. This is evidenced by projecting only a 1% increase in weather-normalized kilowatt hour sales in our earnings drivers this year.

As many of you may know, Wolf Creek has been offline for several weeks. Having tracked down the issues, the plant is about ready to move towards startup. We expect it to be back online in March. While it’s never a good time to have a base load plant offline, market and weather conditions couldn’t be more favorable for it.

Before taking questions, let me say a few words about our dividend. We have a longstanding policy of recognizing that investors expect a significant portion of their returns to come in the form of income. We set a long-term payout target of 60% to 75% of earnings. Last night, we announced a $0.01 or 3% increase in our quarterly common dividend. This results in an indicated annual dividend of $1.32 per share consistent with the policy.

We are now ready for questions from the financial community. Members of the media, we invite you to contact Gina Penzig at 785-575-8089 if you have questions. Jeff, would you open up the line for questions, please?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Andy Levi with Caris & Company. Please proceed.

Andy Levi – Caris & Company

Wow, I am never first.

Mark Ruelle

Hi Andy.

Andy Levi – Caris & Company

How are you guys doing?

Tony Somma

Good morning.

Andy Levi – Caris & Company

Just a few questions and I assume you can hear me. Just first on Wolf Creek, can you guys just give us an idea, just a little bit more detail on kind of why the plant has been down so long and what type of repairs have been made or being made and kind of what the issue is? And then, also relating to Wolf Creek, I assume there is some type of O&M associated with it, and I think it is in your guidance, but just to confirm that and I don’t know if you can give us the level of O&M that would be or that is estimated to be? And then, I have got one other question.

Mark Ruelle

Let me start with Wolf Creek, I will turn it over to Doug Sterbenz who is our Executive Vice President and Chief Operating Officer. With regard to any incremental O&M, our best test that it’s already worked into guidance.

Doug Sterbenz

Yes, this Doug. The plant was shut down on January 13th, due to the failure of a breaker in the plant switchyard. That breaker has been replaced, we know why that breaker failed. We have inspected the new breaker and other breakers around it to make sure they don’t have similar problems.

During the shutdown, the plant also lost offsite power because of an auxiliary transformer in the plant that tripped due to some protection relaying. Of course, emergency generators then took over and cooled the plant off and shut it down in a safe manner.

It’s taken us a few weeks, but we finally have found the problem. During the last outage, some relay wiring for this transformer was replaced. That wiring was not properly installed by our contractor and it caused to short. That short caused that transformer to trip and thus the loss of offsite power.

That will be sure that this same wiring does not cause more shorts, we need to inspect the other ends of each of these wires. So, we simply cannot guarantee that there is not an issue unless we inspect this wiring, which we are currently doing. The Wolf Creek plant and the owners have kept the NRC informed every step of the way. Events like these do require the NRC to have a public hearing, which they have scheduled.

Before this latest news on this relay wiring, the plant would have been back online next week, but we think now it will be back on later in March.

Andy Levi – Caris & Company

That’s terrific. And just on the O&M, how much O&M was included in guidance?

Tony Somma

Andy, this is Tony Somma, good morning. We are not going to kind of give a real-time update on the cost and you can imagine we are compiling those costs and what we knew at that time, we said guidance, which was the other day, we think we have adequately have that incorporated in guidance.

Andy Levi – Caris & Company

Okay. You can’t give us a range, or is it bigger than a red box or anything like that?

Tony Somma

No.

Mark Ruelle

It’s in the guidance. So, that should give you some clue.

Andy Levi – Caris & Company

I know, I have some other motivations on that, because you already have 47% owner. And then the second question, Mark, I had the pleasure of listening to you on the stand about two weeks ago, I thought you did very well. But there was a lot of questions about ROE relating to the settlement and I just wanted to get your thoughts on that, there are some stuff in the local papers, but just any thoughts on how we should expect that to possibly play out? And then, relating to that, if there were a small adjustment downward to the ROE, just trying to figure out how the settlement was kind of constructed, could that possibly lead to a small revenue reduction or would revenue numbers stay the same or would it just be a lower ROE?

Mark Ruelle

Those are all good questions. As you know, if you read the settlement carefully, it does not actually include a stated ROE in the settlement. What it does because we have to state something for purposes of calculating AFUDC to exceed short-term debt, to the extent construction work in progress exceed short-term debt, you create weighted cost which include some equity. So, you have to state something for that for accounting purposes and then for the environment writer, you have to state something. But for the settlement itself, it’s actually silent with regard to ROE.

There was a lot of discussion of ROE as you correctly identified. I think a lot of people look at sort of treasury rates and CDs and want to assume that the cost of risk capital is equally low, and as we all know on this call, it’s not. So, a lot of the testimony was explaining why risk capital is different than what you can get at the CD that’s guaranteed, while it’s different than US Treasuries when operation twist is going on and the Fed is trying to defibrillate the economy. That’s not the cost of equity. And so, we spend a lot of time talking about that.

One of the things we were very clear about is letting the Commission know that we compete for capital and the people with whom we compete for capital on average have been receiving authorized returns on the low-end at 10 and something kind of in the 10% to 10.4% range. I think the fourth quarter is 10.3% or 10.4% or something on average. So, we spent a lot of time talking about that.

We have encouraged the Commission to accept the settlement. You noticed I didn’t say was a great settlement. It was one we are exceedingly about. I said, it was adequate settlement, and all things considered, it’s adequate, but some of those considerations are the fact that people continue to be concerned about the economy and their own circumstance and those are all relevant, but I assure you those are part of the things reflected in this settlement. As I indicated, it’s a compromise. It included a number of parties, the staff. Some of our large customers signed on to it. A few of the large customers didn’t sign on to support it, but they agreed not to oppose it. And only the consumer advocate wanted to oppose it, and they were proposing ROE like 8 or something. So, that explains why they weren’t part of it.

Let me put in perspective what ROE does in terms of our revenue requirement. 100 basis points is worth about 30 or so million dollars worth of revenue. So, if someone were to change it, you can make that calculation. We were strongly encouraging of them not breaching a threshold and trying to set new ground and put Kansas at a disadvantage, because electrical infrastructure and reliable electrical infrastructure is clearly critical for a jobs agenda. And our state is serious about its jobs agenda. They are making hard decisions on taxes, doing serious economic development. Frankly, that’s why Kansas is doing better than a lot of places.

So, part of my testimony was, for heaven’s sake, don’t compromise your electric business at the same time. So, that’s a shorter version of some of the interchange, but you are correct, I was on the stand for a couple of hours, and we had a good discussion with the Commission on it.

Andy Levi – Caris & Company

Great, Mark. Thank you.

Operator

Our next question comes from the line of Travis Miller with Morningstar. Please proceed.

Travis Miller – Morningstar

Good morning guys. Thanks.

Mark Ruelle

Hi Travis, good morning.

Travis Miller – Morningstar

I have follow-ups on both of those questions, Wolf Creek and the rate settlement. First on Wolf Creek, I can appreciate you guys won’t give out the O&M number. When we think about where that’s included in your 2012 key assumptions, would that be in O&M expense, the 4% excluding the SPP transmission.

Tony Somma

Essentially yes, Travis. This is Tony.

Travis Miller – Morningstar

Okay. And what is the additional capital or purchase power expense that is related to Wolf Creek and what’s the chance of regulatory recovery for all of the expenses, O&M versus power cutbacks?

Mark Ruelle

Well, it’s very little capital and it’s mostly in O&M outage. There might be a little equipment, but nothing of consequence in the scheme of multi-hundred million dollar construction budget.

As I said, if there is a silver lining in having your nuclear plant offline for a few weeks, power prices have been just extremely low, coupled with really mild weather. So, it’s pretty small. If you look at it on an annual field budget, it’s almost within the variance of what you typically we had year-to-year anyway.

Travis Miller – Morningstar

Okay. So, you don’t expect any trouble with the regulatory recovery for any of that?

Mark Ruelle

No, we don’t.

Travis Miller – Morningstar

Excellent. O&M, would you have to go in for special regulatory recovery?

Mark Ruelle

No, it’s not of that consequence.

Travis Miller – Morningstar

Okay. And then follow-up on the resettlement, could you detail apart from the ROE there because I appreciate that sensitivity there, apart from that what were the revenue or the revenue increase cuts and the earnings neutral element for some of that difference between the $91 million request in the $50 million settlement?

Mark Ruelle

Let me start on that, and then Tony will pick on a few things. For example, the compromise includes lower depreciation rates than what we had proposed, I think that’s $12 million. So, that doesn’t affect earnings pace, but obviously it affects revenue. There was some compromise on compensation expense, which I think pulled out – I don’t know, identified $4 million or $5 million or something. We had proposed a pro forma increase in tree trimming. As you know, tree trimming is, it sounds sort of mundane but it’s a key element in the reliability of your electrical infrastructure. And so, we wanted to do more of that. We did a very thoughtful pilot on that program and then once we proved up the merits of the pilot, we came and presented as part of our case a pro forma increase in that.

We proposed at, I think three or different levels. The settlement reflects the second highest level of that. So, that reflects increased spending, but some of that spending is over and above what we had in our test period. So, that’s a good thing in terms of reliability, but doesn’t reflect any problems with earnings.

Tony Somma

Amortization of the pension went to five years, we proposed three. And that again is another $5 million, but it’s kind of earnings neutral.

Mark Ruelle

Yes, the biggest difference clearly is we filed for a 10.6% return and nominally as I said, it’s silent on the ROE, but you can imagine, if it’s stated for accounting purposes, it’s probably not too far off of that. And so that would be the biggest adjustment.

Travis Miller – Morningstar

Okay, great. I appreciate all of the detail.

Mark Ruelle

You are welcome.

Operator

Our next question comes from the line of Mike Lapides with Goldman Sachs. Please proceed.

Mike Lapides – Goldman Sachs

Hi guys. Real quick on the rate case, I just want to make sure I understand what’s happening on the transmission side. This is outside of your Kansas rate case, but trying to think about the give and take on the transmission side. You are expecting a $25 million uplift transmission, but in the O&M guidance, you talk about a $35 million incremental increase in SPP-related transmission O&M costs. What am I missing? Like, there are some other components? It doesn’t strike me that you would have that much lag or a reduction in earnings if I were to just add and subtract there driven by transmission if anything it seems like it would be the other way around.

Tony Somma

Hi Michael, good morning. This is Tony, how are you doing?

Mike Lapides – Goldman Sachs

I am okay.

Tony Somma

Let me help put that in perspective, that $25 million is inclusive of the increase in the SPP cost. So, you should think it as maybe a $25 million net number increase over the prior year.

Mike Lapides – Goldman Sachs

So, just for kind of modeling purposes, safe to assume, add the $34 million to the $25 million, to the customer it’s $59 million. To your pretax line, it’s $25 million.

Tony Somma

Yes.

Mike Lapides – Goldman Sachs

Okay. One other thing, just on the rate case process, Mark, is there a precedent in Kansas for the Commissioner to overturn all or part of the settlement agreement?

Mark Ruelle

There is not much history in Kansas for settlements that don’t have a 100% participation. So, bringing a settlement to the Commission that had one holdout party is a little bit unusual. I couldn’t tell you what’s unprecedented or not, but certainly not something we have done recently. And so, the Commission has brought authority. It can approve the settlement, it can reject the settlement, and it can try to modify the settlement.

Obviously, if you look at it from a logical perspective, if there is merit in encouraging settlements where settlements can reasonably be reached, it would be highly discouraging a future settlement if after you bring a settlement and it gets tweaked with, you know, if they tweak it. Because effectively, what they have just said is you bid against yourself and you bring a settlement to us.

Mike Lapides – Goldman Sachs

Can the Commission make a unilateral change to a settlement agreement? You came in with – the settlement was $50 million and can the Commission outline its reasons and just say, well, we are actually only accepting, I will pick a number, $49 million or something like that.

Mark Ruelle

I will let Michael Lennen who is our VP of Regulatory address that, because it’s kind of a legal point, and he happens to be a lawyer even though he’s not acting as one in this current job. But I will tell you from a philosophical perspective, we don’t look at our regulatory relationships on a case-by-case basis. We recognize that the Commission and us have sort of some joint responsibilities take care of the infrastructure and the state. And if you have a situation where we craft a compromised settlement and come in and say, well, we are working into the settlement at 55% of our requests, and then the Commission were to say, gee, let me lower that. You can bet, we might fail that test once, but not twice, because who would ever bring another settlement if you are just bidding against yourself on it.

With regard to what the Commission can do with it, I will let Mike address that. The Commission has pretty broad authority.

Michael Lennen

The Commission standard with respect to other unanimous or a non-unanimous settlement is really the same and it has to make an independent judgment as to whether the Commission believes that the settlement is in the public interest and then with respect to rate setting, whether the rates are just and reasonable. So, scope of things that it might do include approving a settlement and Kansas law has been clear over time that it does favor settlements. Nothing precludes the Commission legally from making some tweaks except the stipulation agreement itself indicates that in the event that there are changes made and it’s not accepted as presented, then the parties really are in a position to accept or reject the outcome of the Commission’s decision.

Mark Ruelle

I will say there is a lot of history in Kansas of the Commission accepting settlements. I think they recognized when there is a settlement brought, there are some pretty diverse interest at the table. There is the company on one hand, industrial customers, commercial customers, school, districts, you got a lot of interest coming together to craft a settlement. So, they have generally not had a history of sort of substituting their judgment for the comprise that the various parties have created.

Michael Lennen

Just one additional point and that is even if approved in its entirety, the rates would be established as a result of the settlement for Westar would be lower than rates for other jurisdiction utilities in Kansas that the Commission has already deemed to be just and reasonable. I think that’s a factor that would go into the Commission’s consideration.

Mark Ruelle

As I said, a 3% increase still leaves our rates like, I don’t know, 18% below the national average or something. So, our view is that if you take a long view on this and you understand how important infrastructure is for the economy as a whole, we expect them to approve the settlement and we sure hope they do.

Mike Lapides – Goldman Sachs

Got it. Last item, just procedurally what happens now?

Michael Lennen

We are in the briefing stage. Our initial brief is to be filed on March 7th. Staff and the other parties will file a week later, and then we will file a required brief on March 21st. The date for the Commission to issue an order is April 23rd, and so, we would anticipate if Commission would have an open administrative meeting some few days, maybe only a couple of days prior to that to discuss and make decision in an open setting and give direction as to what should be included in the final order.

Mike Lapides – Goldman Sachs

And will CURB and other interveners file as well when staff does on the 14th?

Mark Ruelle

Yes, any party other than Westar who wants to file brief will do that on the 14th.

Mike Lapides – Goldman Sachs

Got it. Okay, thank you guys. Much appreciated.

Mark Ruelle

You are welcome.

Operator

Our next question comes from the line of Sarah Akers with Wells Fargo. Please proceed.

Sarah Akers – Wells Fargo

Good morning. Switching to transmission, I know, the SPP concluded their 10-year ITP, but they kind of pointed on the environmental and said they are going to do additional studies on the EPA impacts. Do you expect that those environmental rules will have a meaningful impact on Westar's transmission CapEx over the next few years?

Mark Ruelle

Let me try, Sarah, and if that doesn't work, I will ask maybe Greg Greenwood, who has more information on the environmental, but with the changes to CSAPR, as I indicated in my prepared comments, our concerns about grid reliability has largely been assuaged. One, the timing delay with regard to the stay of the rule helps us a lot because as we indicate, we have already got these projects under construction, cranes in the air installing those equipments. So, any delay in it is automatically very helpful, and then there have also been some pretty significant technical corrections that the EPA has been forthcoming with, and so that's helped a lot, too. So, these environmental rules they drive up cost for our customers, they hurt the economy, and so we still have concerns about that, but in terms of worrying about the lights to go off, I don't think we have a lot of concern about that anymore with these corrections. And my intuition is that that, that same logic holds for the SPP as a whole, but I don't know, I will ask Greg if he has any further view on that.

Greg Greenwood

Yes, I think if we step back and take a broader look at transmission and how it helps deal with these environmental rules, and you think about the timing that it takes to build transmission as the solution, transmission projects are going to take three, four, five, six years to build depending on what part of country you are in, maybe longer. These environmental rules don't give you that kind of timeframe for transmission to be a physical solution, but these reliability efforts are really about do we need to call the time out here and do something different as it relates to the timeline or the way we transition into these rules to maintain reliability. So, there may be some small projects out there that could be done in a short timeframe to help, but it's mainly just to make sure that we understand the reliability impacts of these rules before we put them in place under the proposed timelines.

Sarah Akers – Wells Fargo

Okay, thanks. And then also just quickly, can you remind us the timing of the abbreviated rate case for La Cygne?

Greg Greenwood

By rule, it has to be – if we are going to use our process and the settlement incorporates the permission to use that process, we would have to file the case within 12 months of the order in this case, so before April 20 something of next year.

Sarah Akers – Wells Fargo

Okay, thanks a lot.

Operator

Our next question comes from the line of Ashar Khan with Visium Asset Management. Please proceed.

Ashar Khan – Visium Asset Management

Hi, how are you doing? Since most of the questions have been asked, can I just ask – I might have missed this on the slides or anything, what is – in the guidance, what is the fully diluted share count?

Tony Somma

Good morning, Ashar. This is Tony. I would say we are probably looking at a range of 126 million, 127 million shares.

Ashar Khan – Visium Asset Management

127 million shares, okay. And COLI is still the same $0.10 in the guidance?

Tony Somma

COLI is about $0.11, and year-to-date results would suggest we have about two-thirds of that or $0.07.

Ashar Khan – Visium Asset Management

Okay. Thank you very much.

Operator

Our next question comes from the line of Shar Pourreza with Citigroup. Please proceed.

Shar Pourreza – Citigroup

Hi good morning guys. Just one question on La Cygne, can you maybe just chat a little bit on potential needs to issue equity as spending starts to ramp up in the next couple of years?

Tony Somma

This is Tony. As we said on the call, we are not going to really be issuing equity this year. There's no reason for it. Our equity ratio is at 52.5%, and interest rates are low. We will continue to look at our balance sheet in targeting 50% debt, 50% equity capital structure. So, I think, if you look at your model and build the numbers, you can see that we can stay away from equity, issuing equity for next year or two.

Shar Pourreza – Citigroup

Perfect, thank you very much.

Operator

Our next question comes from the line of David Paz with Bank of America. Please proceed.

Tony Somma

Hi David.

David Paz – Bank of America

Hi guys.

Tony Somma

Good morning.

David Paz – Bank of America

Good morning. Just to actually follow-up on that question on equity, particularly the capital structure. Your target is 50-50, but I just want to make sure that I understand on the years in between rate cases, you probably will deviate from that target. Is that fair to say?

Tony Somma

That’s going to be perfect. I mean, it's not like if we go to 51% debt, I think the issue is slug of equity and conversely the inverse something we just – it's going to be a little bit of lumpy, but that's our target is.

Mark Ruelle

50-50, plus or minus, but you shouldn't expect us to let it dip so far that we are worried about maintaining our credit ratings or take it higher than what other people would typically have built in the rate structure.

David Paz – Bank of America

Okay. But the last several years is probably a good indicator of future strategy though, right?

Mark Ruelle

It is. We like what we have done, and Tony has done a fine job with it and we don't see a reason to change it.

David Paz – Bank of America

Great. Forgive me, if you have talked about this earlier on the call, but did you say how much you benefited from weather in 2011?

Tony Somma

We did not, David. And as much as I want to shed the title of Chief Weather Officer, I guess that caused me to kind of give you an estimate and I will say it is an estimate. I think as we go back and look at '11, it was a hot summer obviously and we are probably looking at let's say a range, $0.22 to $0.23 versus norm.

David Paz – Bank of America

Okay. I think on Q3, can you remind me, wasn't that a little higher?

Tony Somma

We lost a little bit ground in the fourth quarter. We have a little bit more shares outstanding, etcetera.

David Paz – Bank of America

Got it, okay. All right. So, to get to your midpoint of guidance, we essentially need about $0.34 earnings pickup in '12 versus '11. Okay. My other question is on settlement and then how it impacts your depreciation expense. Your depreciation was about $285 million in full year '11, and I think in your guidance, you assumed that the depreciation was down about $10 million. Is that right?

Tony Somma

Correct.

David Paz – Bank of America

Okay. And that’s just what's in the settlement and effective I guess April or May?

Tony Somma

It's a combination of what's in the settlement and bringing new plants online etcetera,

David Paz – Bank of America

Got it, okay.

Tony Somma

And the settlement recall as pro rata effective in May.

David Paz – Bank of America

May, all right. Okay. And then on the $50 million of rate release through your environment rider, what ROE are you assuming?

Tony Somma

What’s in the stipulation settlement?

David Paz – Bank of America

Okay, all right. And then COLI, I know you were asked a couple of these questions already, but looking at it little differently, if I look at the surrender value of your corporate-owned life insurance policy, I think in the K, it's about $1.3 billion. How much of that is the KGE COLI?

Tony Somma

Most of it, almost all of it.

Mark Ruelle

Remember, that's all built into rates. That is an outside of the utility rate making.

David Paz – Bank of America

Right, great. And then I guess a last question, just your tax rate. I know you gave 29% to 31%. Is the 31% if – let me ask this way, if you didn't get any COLI proceeds, would your effective tax rate be closer to 31%, all else equal?

Tony Somma

I suppose that's a good way of looking at it, but there is a reason why we give out range, I mean.

David Paz – Bank of America

Okay. So, since you already had about $0.07 year-to-date, then what I guess I am getting at is, if you see COLI proceeds your effective tax rate declines all else equal?

Tony Somma

There is couple, there is more than just COLI that drives that effective tax rate. I mean, that's one of the drivers, and that's kind of why we are giving our range and the percent that we do get our actuarial COLI proceeds were probably going to be on the lower end of that range.

David Paz – Bank of America

Okay. Great. Thank you guys.

Tony Somma

You are welcome.

Operator

Our next question comes from the line of James Bellessa with D.A. Davidson. Please proceed.

Michael Bates – D.A. Davidson

Good morning, guys. This is Michael Bates here with Jim. I had a quick question, and then I wanted to follow up on. We have discussed the plans for equity financing, but I am wondering, are you willing to offer any color on how much new debt you might issue in the next 24 months?

Tony Somma

If you look at the CapEx table and you kind of contract – triangulate on our earnings guidance and add depreciation come up with a rough estimate of our cash flow and subtract out cash dividends, that would suggest for probably our cash flow after dividends is like around $400 million or so, and then we got a gap to get to our CapEx this year of about $400 million to $500 million. And so, you should see expect us to probably be fairly active in the debt markets the next couple of years to the tune of anywhere between $0.5 billion to $1 billion.

Michael Bates – D.A. Davidson

And that’s the next two years you said?

Tony Somma

Yes.

Michael Bates – D.A. Davidson

All right. Thank you very much.

Operator

(Operator instructions) Up next, we have Travis Miller with Morningstar. Please proceed.

Travis Miller – Morningstar

Thanks for the quick follow-up here. On that ECRR, that ROE does stick into the ECRR right, and you have embedded in the $50 million, is that how I understand what you said earlier?

Mark Ruelle

What we said is in the settlement, Travis, we actually don't state the ROE in the settlement per se, but we have to identify one for purposes of things like the ECRR and AFUDC calculation. So yes, it's our expectation that the ROE built into the settlement will apply to the ECRR.

Travis Miller – Morningstar

Okay. Do you have a range like you gave 100 bps $30 million revenue? What kind of range should we expect on that ECRR for every 100 bps or 50 bps?

Tony Somma

I can’t do that math.

Mark Ruelle

You have to think about the incremental rate.

Tony Somma

The ECRR is going to have a few hundred million dollars in it. Our general rate base –

Mark Ruelle

$3.4 billion –

Tony Somma

$3.5 billion. So –

Travis Miller – Morningstar

Or you can just calculate the rate base over the equity?

Mark Ruelle

Yes. I mean, the short answer is take the ECRR rate base, cut it in half, and apply the equity to that and do your sensitivity.

Travis Miller – Morningstar

Sure, great. Thanks a lot.

Operator

Our next question is a follow-up that comes from the line of Mike Lapides with Goldman Sachs. Please proceed.

Mike Lapides – Goldman Sachs

Thanks for taking the follow-up. Tony, quick question on cash flow, just following up on what you are talking about. Are there other source of cash flow you expect in either cash from ops, or cash from investing activities that are either inflows or outflows that are material outside of the normal net income depreciation CapEx, meaning bonus depreciation, deferred taxation, working cap, either recovery or payments? I am just trying to kind of think about gives and takes, what's in the guidance in terms of cash flows?

Tony Somma

Yes. I would say that the rough math that I use kind of incorporate a lot of that stuff. We are obviously going to have to make contributions to the pension plan. That's going to be I think around $65 million or so, plus or minus. Other than that, I can't think of any other big driver than what I have – we have already suggested in the call which would be our CapEx or internally-generated cash to get our dividends, and you are going to have a need to raise some funds and we can do that through basically debt or equity, and our equity ratio is where we like it right now. Interest rates are cheap, so it will probably hit the debt markets, and it all depends on how much we want to ramp up our commercial paper program, the timing of when we would go ahead and do a bond offering.

Mike Lapides – Goldman Sachs

Got it. And bonus depreciation, if I understand correctly, you are one of the only utilities that hasn't taken a lot of bonus depreciation, if I understand correctly, and I may have missed that or I may be mistaken on that, and therefore had the cash inflow benefit, but also have it be an offset to rate base.

Mark Ruelle

We take advantage of it to the extent we can, but remember the conditions it takes to do it is the projects that have to go in service, and some of ours are very long-term projects. So, we take full advantage of it, and to the extent it's usable, we use it, but it just – because of the nature of our construction expenditure, it hasn't been a big impact for us that it has been for others, plus we just weren't in the tax-paying position that others were.

Mike Lapides – Goldman Sachs

Got it. Okay, thanks guys. Much appreciated.

Mark Ruelle

Welcome.

Operator

Our next question is a follow-up as well, it comes from the line of David Paz with Bank of America/Merrill Lynch. Please proceed.

David Paz – Bank of America

Hi, thanks for the follow-up. I know in the past, you have given slides in terms of rate base. I think, the last one you had was through 15, kind of projecting some rate base growth, and you may have released it with all your disclosures. I may not have seen it, but just wondering if you had an update through 2016, whether it's a percentage rate base growth off of 2011, or however you want to frame it?

Mark Ruelle

We haven't updated that yet, David. We are in the process of doing that.

Tony Somma

But obviously we have given you a CapEx table, and you kind of know what the landscape looks like for depreciation.

David Paz – Bank of America

Okay, great. Thanks.

Operator

Ladies and gentlemen, that concludes the question-and-answer portion. I would now like to turn the presentation back over to Mr. Mark Ruelle for closing remarks.

Mark Ruelle

Thanks Jeff, and thank you guys for joining us this morning. If you have follow-up questions, you know how to contact Bruce, our Director of Investor Relations at 785-575-8227. Have a great day.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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