Great Plains Energy, Inc. Q4 2007 Earnings Call Transcript

Great Plains Energy Incorporated (GXP)

Q4 FY07 Earnings Call

February 7, 2008, 9:00 AM ET

Executives

Michael Cline - Treasurer and Chief Risk Officer

Michael J. Chesser - Chairman and CEO

Terry Bassham - EVP, Finance and Strategic Development, and CFO

William Downey - President and COO, Great Plains Energy Inc. and Kansas City Power & Light

Shahid Malik - President and CEO, Strategic Energy

Analysts

Steve Gambuzza - Longbow Capital

Douglas Fischer - Wachovia

Kathleen Vuchetich - W.H. Reaves

Michael Lapides - Goldman Sachs

Paul Patterson - Glenrock Associates

Jonathan Arnold - Merrill Lynch

Paul Ridzon - KeyBanc

Presentation

Operator

Ladies and gentlemen, thank you very much for standing by, and welcome to the Great Plains Energy Fourth Quarter Year End 2008 Results Conference Call. During today's presentation all parties will be in a listen-only mode and following the presentation the conference will be open for question and answers. As a reminder this conference call is being recorded, Thursday, February 7, 2008.

I would now like to turn the conference over to Michael Cline, Vice President of Treasury and Investor Relations. Please go ahead sir.

Michael Cline - Treasurer and Chief Risk Officer

Thank you operator and good morning. Welcome to Great Plains Energy's fourth quarter and full year 2007 earnings conference call.

Joining me on the call today are Mike Chesser, Chairman and CEO of Great Plains Energy, who will provide a strategic overview and highlights of 2007 operating results; Bill Downey, President and COO of Great Plains Energy and CEO of Kansas City Power & Light who will discuss operating results of KCP&L as well as update you on the progress of our comprehensive energy plan; Shahid Malik, Executive Vice President of Great Plains Energy and CEO of our competitive supply subsidiary Strategic Energy who will discuss the operations of that business; and Terry Bassham, Executive Vice President and Chief Financial Officer of Great Plains Energy who will provide details on Great Plains Energy's fourth quarter and full year 2007 financial results.

Since some of our remarks will be forward-looking, I must remind you of the uncertainties inherent in such comments. The second slide, included in this webcast, as well as, the disclosure in our SEC filings, contain a list of some of the factors that could cause future results to differ from our expectations.

I'd now like to turn the call over to Mike Chesser, Chairman and CEO of Great Plains Energy.

Michael J. Chesser - Chairman and Chief Executive Officer

Thanks Michael, and good morning everyone. Thank you for joining us today. As we discussed in our press release 2007 was a challenging year for Great Plains Energy. As this chart indicates, on a reported basis our 2007 earnings were higher than $157 million or $1.85 per share, compared to full year 2006 earnings of $126 million or $1.61 per share. However our core earnings, which is a non-GAAP measure we believe to be more representative of our financial performance, we are down year-over-year. We announced core earnings of $133 million or $1.57 per share in 2007, versus $150 million or $1.93 per share in 2006.

Terry will cover the financials in detail in his section, so I won't get into all of the specifics but a key point I would like to make is that the full year 2007 financial results can really be looked at as two very different halves. In the first half of the year, we experienced a number of operational issues, including planned outages at KCP&L and bad debt expense, small business customer attrition, and increased power purchase cost and Strategic Energy.

As the chart indicates, core earnings for the first half of 2007 were roughly 60% lower than the first half of 2006. However the second half of the year both KCP&L and Strategic Energy performed better. KCP&L benefited from favorable weather, increased wholesale revenue, and new retail rates and Strategic Energy had stronger delivered volumes and higher margins. This resulted in core earnings for the second half of 2007, that were actually 30% higher than last year.

Though the company performed well operationally, fourth quarter results were below expectations embedded in our revised 2007 guidance, provided in November. As a number of other utilities have recently noted, the difficulties in the broader economy may impact customer growth. Over 70% of KCP&L's annual revenues are derived from the residential and commercial segments. While this has traditionally provided much more stability than a heavy industrial customer makeup, the current economic trends are more focused on housing and overall economic development. This occurrence effected the fourth quarter and is a trend we will be evaluating closely as we develop our earnings guidance for 2008.

On the topic of earnings guidance, as we mentioned in our press release we are postponing issuing guidance. We believe that resolution of the Aquila merger and completion of our strategic alternative review of strategic energy are necessary to provide meaningful earnings guidance and expect to have clarity on both of these in late first quarter or early second quarter. Terry will talk more about that in a few minutes.

Finally as Bill will discuss, an updated assessment of cost and schedule is underway on the environmental project at our Iatan 1 plant and the construction of our new Iatan 2 plant. The timing of this update has two key drivers; first, the recent addition of Kiewit Industrial as our balance of plant contractor at Iatan 2 and second, our attainment of a key milestone of having 70% of engineering completed at Iatan 2. Naturally as progress is made on design maturity we are able to better understand and project the final cost for the completion of the project. We expect to complete the updated assessment in the second quarter. You will hear from Bill later in the call the construction environment as we enter 2008 is challenging.

2007 was a landmark year in many ways for KCP&L. This slide highlights a recognition where you see during the year from a wide variety of regional and national organizations, for leadership, collaborative spirit, customer service, and very importantly operational excellence.

Particularly noteworthy was our receiving the Edison Award from the Edison Electric Institute in June. This award is given annually by EEI. The award honors U.S. shareholder owned utilities for outstanding contributions to and advancement of the Electric Power industry. So clearly we take pride in these honors but more importantly we believe they recognize the focus and the strength of our company. We are building a platform that will enable us to achieve our growth objectives and provide significant benefits for all of our shareholders, customers and employees.

Now I would like to spend a few minutes discussing our progress in that regard. In 2005, we launched a plan that is focused on positioning the company to continue to demonstrate leadership in supplying and delivering electricity and energy solutions to meet the needs of our customers, and in the process deliver solid long-term earnings growth and dividend increases for our shareholders.

We think about this plan in two phases. Over the past three years and continuing into 2008, we have been building a strong foundation. We spearheaded a landmark stakeholder collaboration effort that resulted in our Comprehensive Energy Plan, or CEP. In 2007, we continued to demonstrate this collaborative spirit by reaching an agreement with the Sierra Club to provide long-term environmental benefits to residents of the Kansas City area, and enables us to execute on the Comprehensive Energy Plan.

We have successfully delivered on the CEP to-date. In 2006 we added 100 megawatts of wind generation on time and on budget, and that includes the investment in our 2006 rate case. In 2007 we completed the SCR at our LaCygne 1 unit on time and on budget. That project was included in rate base and KCP&L's rate cases last year. We are making good progress on environmental retrofits at our Iatan 1 unit which we expect to complete in 2008, construction at Iatan 2 plant and rollout of our energy efficiency and demand response programs which we expect will continue to grow. The outcome of our 2006 and 2007 rate cases in both Kansas and Missouri are reflective of our customer value, and the positive regulatory relationships that we built.

Also in 2007, we took two transformational steps. First, the announcement of the Aquila acquisition which when completed will position us as a strong regional utility, and second, our announcement in November that we would be evaluating strategic alternatives for Strategic Energy. We will be following these initiatives through to completion in 2008.

The second phase of our growth plan ramps up as we enter 2009. We will move beyond the foundational stage and focus on creating long term shareholder value through our execution. We will grow our rate base significantly by adding the environmental work at Iatan 1 unit in the rate base and by bringing Iatan 2 online and also in the rate base. We will integrate Aquila and deliver on the synergies we promised, and we will address future generation and environmental requirements and establish our leadership position in energy efficiency over a five to ten year planning horizon. Our accomplishments will set the stage for annual earnings growth that will ultimately support dividend growth in line with traditional payout ratios in our industry.

Turning now to the Aquila transaction, a great deal has transpired since our conference call in November. Missouri Public Service Commission hearings began in early December. It became evident however that after a few days of testimony, there were elements for our proposed regulatory plan, for the transaction that raised concerns. Accordingly, we decided at that time to postpone the hearings and committed to work with the parties to the case on a revised regulatory proposal, that would seek to address the concerns that have been expressed, while at the same time maintaining credit quality and financing flexibility at Great Plains Energy and KCP&L and preserving the value of the transaction for the Great Plains Energy shareholders.

We work diligently to develop a revised proposal and deliver it to the parties on January 10th. We started settlement discussions shortly thereafter and they are still in progress. Last Thursday, we filed a proposed procedural schedule to contemplate hearings in Missouri in late March, as the current settlement talks are unsuccessful. Again this is not a reflection of the talks themselves, but simply a means to ensure that we had a place-over on the Commissions calendar if we needed it. And Kansas like Missouri we are in the midst of settlement talks. Hearings are scheduled for later this month in the event those talks are not successful.

If our negotiations in both states ultimately resolved in a settlement we would still be on track to close the transaction by the end of the first quarter. If hearings are necessary then timing will slip until early the second quarter.

Finally I would like to give you a brief update on Strategic Energy. At the EEI Finance Conference in November, we announced our intention to review strategic alternatives for Strategic Energy. That review includes a continuation of Strategic Energy in its current state, joint ventures, or sales of all or part of the company. At EEI, we expressed our intent to have something to announce publicly by the end of the first quarter 2008. We are well underway with this process and are still on track to announce our conclusions by the end of the current quarter.

Now I would like to turn the call over to our Chief Financial Officer, Terry Bassham to cover our fourth quarter and full year 2007 financials in more detail.

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Thanks, Mike and good morning everyone. I am going to focus the majority of my remarks today on core earnings for the fourth quarter and year end. As Mike mentioned we believe core earnings to be a more representative measure of our performance. However, since core earnings are a non-GAAP measure I want to start by providing you with a breakdown by segment of both our reported and core earnings per share, as shown in this slide.

In the Appendix to our press release and this webcast, we have a reconciliation of GAAP earnings to non-GAAP core earnings. There are number of items in this reconciliation but the largest is the mark-to market impact from energy contracts as Strategic Energy. Core earnings which exclude net mark-to-market gains and losses on energy contracts and other items were $133.4 million or $1.57 per share for the full year 2007, compared to $150.9 million or $1.93 per share in 2006. Compared to 2006, full year 2007 core earnings were favorably impacted by weather, increased wholesale revenue, new retail sale, new retail rates and increased usage at Kansas City Power & Light, as well as higher delivered volumes at Strategic Energy.

These positive drivers were more than offset by the impact of plant outages during the first and second quarter at KCP&L, higher consolidated operating and interest expense, and lower gross margin per megawatt hour, increased bad debt expense, and a resettlement charge at Strategic Energy.

Also impacting 2007 core EPS was $0.14 per share additional dilution from the full year impact of the May 2006 issuance of 5.2 million shares of common stock and the FELINE PRIDES related issuance of 5.2 million shares in February 2007. For the fourth quarter of 2007 revenue increased 23% year-on-year to $806.2 million. Core earnings were $31.2 million or $0.36 per share compared to $25.5 million or $0.31 per share in the fourth quarter of 2006.

Retail and wholesale revenues at KCP&L were the primary drivers of the improvement partially offset by higher purchase power expense and increase in holding company cost. The core EPS for the quarter was higher than last year, the level of $0.36 per share was below the expectations embedded in our revised 2007 guidance provided in November. This is due primarily to warmer November than we anticipated, lower retail revenues brought about by customer growth that was below expectations, lower wholesale revenue resulting from lower prices, and higher transmission expense to KCP&L. In addition, we had a decline in available tax credits from global housing investments and higher holding company cost in the other segment.

Now going to more detail by segment to give you a better feel for the drivers for both the quarter and the year. For full year 2007 at KCP&L, core earnings were $146.4 million or $1.72 per share compared to $141 million or $1.80 per share in 2006. Revenues for the full year of 2007 increased to $1.29 billion, a 13% increase over 2006.

Retail revenues rose to $1.04 billion in 2007, compared to $935.5 million in 2006, due primarily to new retail rates with favorable weather and load growth also contributing. Wholesale revenues rose $234 million, a 23% increase from the 200... 2006 level of $119.4 million.

The increase in wholesale revenues was attributable mainly to volume growth. Partially offsetting the retail wholesale revenue growth in 2007 were the following, a three-fold increase in purchase power expense compared to 2006, due to increased in purchase power volumes primarily from plant outages in the first and second quarter of 2007, higher operating expenses due to increased depreciation and amortization expense, and higher pension cost, and higher interest expense incurred by comprehensive energy plan projects.

KCP&L's fourth quarter revenues were up $301.9 million compared to $249.8 million in the fourth quarter of 2006. Fourth quarter core earnings of $34.7 million or $0.40 per share were 37% higher than 2006 levels, up $25.4 million or $0.31 per share. Improvement in core earnings from the same quarter a year ago was driven primarily by 12% increase in retail revenues from $193.1 million in 2006 to $215.9 million in 2007 as well as a 54% increase in wholesale revenues from $53 million in the fourth quarter of 2006 to $82 million in the same quarter 2007.

The improved wholesale results for 2007 fourth quarter is attributable to both higher volumes and higher average prices than 2006. These positive impacts were tempered somewhat by higher purchase power volume compared to the fourth quarter of 2006. The fourth quarter results of KCP&L were better than the same quarter year ago, however, the quarter was below the expectations embedded in our revised 2007 guidance provided in November. As I mentioned earlier the primary factors that caused us to miss the range were a warmer November than we anticipated, lower retail and wholesale revenue, and a higher transmission cost.

Throughout 2007, but particularly in the last few months the difficulties in the broader economy impacted the housing market and our service territories. As Mike mentioned earlier approximately 70% of KCP&L's annual retail revenues were derived from the residential and commercial segments. We saw an impact in the fourth quarter and we'll be evaluating this trend closely as we develop our earnings guidance for 2008.

Weather is an important factor to KCP&L and as this chart indicates, weather was a positive contributor to our results compared to 2006. The combination of favorable weather and implementation of new customer rates, served the increased retail revenue by 11% for full year of 2007 compared to 2006. On a weather normalized basis customer megawatt hour growth both year-on-year was approximately 2% annually.

Turning now to Strategic Energy, Strategic's full year 2007 core earnings were $7.6 million or $0.09 per share, compared to $23.5 million or $0.30 per share in 2006. Mark-to-market impacts for the full year 2007 resulted in reporting earnings gain of $31.3 million due to generally higher power prices during the year, compared to a loss of $33.4 million in 2006. Strategic Energy's full year 2007 revenue was $1.97 billion up 29% compared to 2006. The revenues were boosted about 22% rise in delivered volumes in 2007. The favorable impact was more than offset by higher power prices, a first quarter resettlement charge, customer attrition in the small customer segment, and a higher bad debt expense.

For the fourth quarter Strategic Energy had core earnings of $3.7 million or $0.04 per share compared to $3.1 million or $0.04 per share in last years fourth quarter. Slightly higher core earnings in the fourth quarter compared to last year was driven by higher delivered volume partially offset by lower average retail gross margin per megawatt hour, excluding unrealized net mark-to-market impacts, and higher bad debt expense.

In our other segment, which mainly includes our investments in affordable housing and unallocated corporate charges, core results for the full year 2007 were loss of $20.6 million, or $0.24 loss per share in 2007, compared to a loss of 13.6 million or $0.17 loss per share in 2006. For the fourth quarter, the segment posted a loss of $7.2 million, or $0.08 per share compared to a loss of $3 million, or $0.04 last year. The lower core results for both the fourth quarter and full year are primarily attributable to a decline in the available tax credits from affordable housing investments and overall higher expenses at the holding company. These expenses included labor related cost associated with Aquila, transaction and that would otherwise have been reflected in the KCP&L segment. These amounts were $1.8 million for the quarter and $4.7 million for the full year.

I would like to make a couple of comments about the impacts of the turbulent financial markets over the past several months on KCP&L and Great Plains Energy. Last year we told investors that we hoped to complete a hybrid debt offering at GPE in 2007. Initially we targeted the third quarter, and then as market conditions worsened, slipped the timing into the fourth quarter. As most of you know, except for a brief window late in the third quarter, that market has essentially been shutdown for non-financial issuers since July.

While we may still issue hybrids at GPE in the future, that the market recovers with an aggressive capital expenditure program under way. KCP&L we plan to fill the gap left by the inability to do the hybrids through increased amounts of equity and debt beyond our original plans for 2008.

We previously told the market that we expect to issue equity and debt this year which is the biggest year for the CP related capital requirements. While we don't disclose the size of these potential offerings, I can tell you that we develop our financial plans with a focus on credit quality and financial flexibility in mind, with a view of capital structure that is broadly consistent with KCP&L's past couple of rate cases.

As I'll discuss more in a moment, the timing of the offerings is yet to be determined, and it will be driven by market conditions which have been difficult and highly volatile. In the meantime as the slide shows, we continue to have strong available liquidity to meet our near-term requirements.

Finally, I have a couple of comments on earnings guidance. You all know we have typically given guidance at our year-end call. As Mike mentioned earlier at this time we do not feel it prudent to give or confirm guidance. This slide lists two key drivers that will impact our view of 2008 and beyond. Given where we are on the Aquila transaction and on the Strategic Energy assessment, we cannot put a meaningful guidance range at this point.

In addition, there are other considerations that on their own would have not caused us to delay issuing guidance, but that we will be considering as we prepare our guidance for 2008. These factors include the timing of the cost and schedule update on the I-10 projects, that Bill will discuss in a moment, the effects of the economic downturn we have discussed, as well as the continued difficulties in the financial markets. With clarity on the resolution of Aquila and Strategic Energy plus additional plan to see how the other considerations develop, we will be able to put forth a reasonable guidance range for 2008 as well as revisit the future earnings growth targets we have provided to the market last year.

As Mike mentioned earlier we are hoping to have resolution of Aquila and Strategy Energy in the first quarter and we are on similar track with other items. Under these assumptions, we will plan to discuss guidance on our first quarter earnings call in early May.

That concludes my comments. I would now like to introduce Bill Downey to discuss 2007 operations at KCP&L.

William Downey - President and Chief Operating Officer, Great Plains Energy Inc. and Kansas City Power & Light

Thank you, Terry and good morning everyone. It has been an eventful and busy year for our Kansas City Power & Light. Earlier in the year we were presented with several challenges, but we also made significant progress on a number of fronts.

Today I will brief you on some of our key operational steps completed in 2007, including a regulatory update performance metrics for the year and then provide an update as to progress we have made with the Comprehensive Energy Plan.

The company set a new record for total system net generation in 2007. This was due in large part to virtually 100% availability at our Wolf Creek nuclear unit and a full year of generation at our Spearville Wind facility. Both of the units at our LaCygne coal plant, however, also set all time high marks for net generation.

The liability has remained excellent with strong customer service outage duration metrics that earned us the Reliability One award referenced in one of Mike's earlier slides. Both residential and business JD Power customer satisfaction ratings have remained strong for the company, despite the rate increases that we have already implemented, and the future anticipated increases as we continue to increase our rate base.

Safety has and will continue to be a key area of focus for the company. We have shown improvements in our OSHA incident rates over the past few years, and we continue to work with DuPont to evaluate our safety management systems, and identify and recommend opportunities for improvement. Safety at our construction site also is of primary importance.

Our team at KCP&L are leaders in our industry, and in our communities as evidenced by the list of awards Mike referenced earlier in the presentation. We continue to advance energy efficiency programs and offerings with our customers. Innovative approaches to these programs offer additional value to our customers, and we are gaining acceptance in our service area.

Turning now to the regulatory, in February 2007 KCP&L filed their request with the Missouri Public Service Commission for an annual rate increase of $45 million or 8.3%. The request was based on a return on equity of 11.25% and an equity ratio of about 53%. We received the Missouri rate order this past December. The order approved an approximate $35.3 million increase in annual revenues, reflecting an authorized return on equity of 10.75%.

Approximately $10.7 million of the rate increase results from additional amortization to help maintain cash flow levels. The Missouri order also continues the mechanism established in the last case for the refund of wholesale margins in excess of an amount embedded in the calculation of the retail rates. I'll discuss this further on the next slide.

In March 2007, our company filed a request with the Kansas Corporation Commission for an annual rate increase of $47 million in annual revenues. We reached a negotiated settlement of our request in September 2007. The agreement stipulates a $28 million increase in annual revenue that became effective January 1 of this year. $11 million of this amount is treated for accounting purposes as an increase to the depreciation reserve. The agreement in Kansas also has an energy cost adjustment clause that I also will address on the next slide.

KCP&L will be filing rate cases in both Missouri and Kansas in 2008 to incorporate our environmental upgrades on Iatan 1 in our rates for 2009. Wholesale revenues increased to $234 million during 2007 compared to $190.4 million last year, attributable mainly to volume that was up 21%. This higher volume of wholesale sales also contributed to the net generation record that I mentioned. For the most part whenever the base load units have been available we have been successfully able to sell the power. This is illustrated by the narrow gap between the capacity and availability lines on the graph in the next slide.

As we think about this market going forward it is important to note how wholesale revenues are treated in Kansas as well as to remind you of the regulatory treatment of wholesale margins in Missouri. In the Kansas rates that took effect on January 1, 2008, we now have an energy cost adjustment clause or ECA tariff. The ECA tariff will reflect the projected annual amount of fuel and purchase power and emissions allowances, transmission costs, and asset-based off-system sales margin. Any difference between the energy cost adjustment revenue collected which includes the wholesale and the actual ECA amounts for a given year will be recovered from or refunded to customers over the 12 months beginning April 1 of the following year.

In Missouri retail rates that went into effect on January 1, 2008, there is an embedded annual offset of approximately $51 million, $29 million of which is attributable to Missouri, related to non-firm wholesale electric sales margin. If the actual margin amount exceeds this level the difference will be recorded as a regulatory liability and will be returned with interest to Missouri customers and a future rate case. The combined effect of these provisions is that contribution from wholesale will be limited as we move forward, but the downside risk from wholesale sales also will be limited.

This next graph shows our coal fleets availability and capacity package. Availability simply reflects what percent of the time the plans are up and running while capacity reflects how much of our coal-fire generation that is available is actually either utilized to meet retail demand or sold wholesale. The impact of plant outages in the first quarter can be seen in our availability and capacity factors. Coal plant availability during the first quarter 2007 decreased to 70% compared to 80% in the first quarter of 2006.

The capacity factors for KCP&L's coal fleet also declined to 65% in the first quarter, down from 70% last year. Levels improved somewhat in the second quarter, but were still dampened by the 18 day Iatan outage in May. In keeping with the theme Mike talked about earlier of two distinctly different halves to the year you can see that we recovered well in the third quarter and the fourth quarters. For the year we had availability of 80% and a capacity factor of 76% which compared to availability of 83% and a capacity factor of 77% in 2006.

2007 was the fifth best year for coal-fire generation in KCP&L's history in terms of net megawatt hours generated even with the significantly higher megawatt hours of planned outages and unplanned outages in the first half of '07. We believe we have addressed the plant operations issue that arose in 2007. Particularly with an aging fleet, we must continue to focus our capital dollars on the areas of greatest potential risk, so as to achieve the availability and capacity factors that we target.

Next I would like to update you on the ongoing portions of the Comprehensive Energy Plan construction program. As I discussed in our third quarter call, our LaCygne 1 SCR project was completed in the second quarter on-time and slightly under budget. Given the escalating costs of environmental equipment and the difficulty in scheduling these projects we were pleased with this outcome. The SCR was included on our rate base for the September true-up in our 2007 rate cases in Kansas and Missouri, and therefore captured in the new rates, that took effect in both states in January 2008.

Progress continues on the Iatan 1 environmental project, and the construction of the new Iatan 2 plant. During the fourth quarter, we signed the contract with Kiewit Industrial Corporation, for the balance of the plant work on Iatan 2, and we are very pleased to have them involved in the project.

As Mike mentioned earlier, now that we have Kiewit onboard for the balance of the plant work, and are approximately 70% to 75% engineered for the Iatan 2 unit, we have initiated a thorough reassessment of the project cost and schedule. As Mike and Terry mentioned earlier, the results of this assessment are expected to be available in the second quarter of 2008. We continue to make good progress on the Iatan 1 and 2 work. However, the construction environment as we enter 2008 is challenging and particular market conditions for skilled labor are tight, and we are seeing escalating costs and longer lead times for deliveries of materials, especially from foreign sources.

Finally, we are also moving forward with the next phase of the Comprehensive Energy Plan, that includes developing a long range resource plan and filing an integrated resource plan in Missouri in 2008. As we did with our current Comprehensive Energy Plan, we are engaging and will continue to engage our key stakeholders in a collaborative process as we develop energy efficiency, demand response, and new generation alternatives.

I would now like to turn the call over to Shahid Malik who will update you on Strategic Energy.

Shahid Malik - President and Chief Executive Officer, Strategic Energy

Thank you, Bill and good morning everyone. 2007 was a busy year at Strategic Energy. I will follow Mike and Bill's example, and characterize our year as a challenging first half but stronger second half exemplified by continued increase in market share over the year.

And as you can see from this next slide, we were proud to be recognized by industry sources as one of the fastest-growing companies in this sector, and our market share continued to climb in 2007. We look forward to building on this during 2008, and continue to increase our scalability in the energy commodity, as well as in renewable energy offerings.

Turning now to new sales and deliveries. Sales for the full year were 26.3 million megawatt hours down from the 33.2 million megawatt hour figure last year but still a good year for sale. This level exceeded our delivered volumes and increased our backlog, as you will see in a moment.

Total sales for the year were lower, due partly to the fact that the average contract duration for new and reassigned contracts during the year were 16 months compared to the 18 months in 2006, which reflected higher power prices, and a reluctance on the part of our larger customers, to extend their contracts much beyond a year. But as energy prices ebb and flow, we will see contract lengths moving in tandem, and see the seasonal fall in prices during spring and early summer as a good opportunity to capture increased business.

This next slide shows the impact of our strong sales performance on our backlog, which continue to rise despite the high level of deliveries. During the fourth quarter, Strategic Energy's deliveries continued to be strong and we delivered 5.2 million megawatt hours up from 4.2 million megawatt hours in the fourth quarter of 2006, which was a 23% increase for the quarter.

Total backlog on the year is higher, up 12% at 36.6 million megawatt hours compared to 32.8 million megawatt hours at this point last year, reflecting strong sales during '07. And this robust backlog positions us well for future growth in megawatt hours delivered to customers, and therefore, for earnings in future periods.

Our retention rate of customers eligible to be resigned including month-to-month customers in 2007 were 68%, down slightly from 71% last year. We deliberately reduced sales in certain markets and customer segments during the year and consequently saw lower retention rate than we would normally see.

And turning now to margins. The average retail gross margin per megawatt in 2007 was $6.99 compared to $2.52 in 2006. Exclude unrealized net mark-to-market impact, the average retail gross margin per megawatt hour in 2007 was $4.39 compared to $5.93 in the previous year. Gross margin as previously stated was negatively impacted during the first half of the year, by small customer attrition and a resettlement charge in one of our markets, but picked up during the second half of the year.

And we expect that gross margins per megawatt hour on delivered volumes in 2008, excluding net mark-to-market impact will be in a range of $3.50 to $4.50 per megawatt hour, down slightly from the range of $4 to $5 per megawatt hour in 2007. We also expect and continue to expect the market to grow in the 4% to 6% range during 2008 as customers continue to switch away from utilities in the more progressive markets of Illinois, Mid-Atlantic, and the New England states. And we do expect Strategic Energy to more than continue to keep pace with this market growth.

With that, thank you for your attention and let me pass the call back to Mike Chesser.

Michael J. Chesser - Chairman and Chief Executive Officer

Thanks Shahid. We had some operational difficulties during the first half of 2007, it impacted our overall performance for the year. We believe they were isolated incidents and we've addressed the re-causes and they will not impact our core performance going forward. In the second half we performed well, but particularly late in the year we started to see the effects with a broader economic slowdown in our retail business. We'll be keeping a close eye on this as we progress in 2008.

So in conclusion, I'd like to come back to the slide that I started earlier, that I showed earlier, and emphasize how pleased we are, both with the progress we've made over the past few years and the path that lies ahead. I firmly believe that the foundation we've built combined with our focus on execution and planning over the next few years will position Great Plains Energy as a strong regional electric utility with excellent earnings and dividends growth.

We appreciate your support and we will continue to keep you informed as we progress towards that objective. Thanks for your time this morning, and we'd be happy at this point to take any questions.

Question And Answer

Operator

Thank you, sir. [Operator Instructions]. The first question comes from the line of Steve Gambuzza with Longbow Capital. Please go ahead.

Steve Gambuzza - Longbow Capital

Good morning.

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Good morning.

Steve Gambuzza - Longbow Capital

I was wondering if you could just elaborate on the drivers of kind of the decreased performance, relative to guidance in Q4 that you cited at KCP&L. I think you said normal weather in November, lower retail revenues resulting in slower customer growth, lower wholesale prices, and higher transmission expenses, can you just maybe quantify some of the impacts of these drivers?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Sure. Really, Steve, if you take kind of the weather and just a general slowdown late in the quarter, along with some transmission expense related with deliveries, it's about a nickel. Those two things combined.

Steve Gambuzza - Longbow Capital

So weather, load growth, and transmission is about a nickel?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

About a nickel to all total.

Steve Gambuzza - Longbow Capital

Okay. And then it was about total miss versus expectations was about $0.08?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Well, we have talked about being on the lower end of our range of 160 to 170 and we turned in 157.

Steve Gambuzza - Longbow Capital

Okay. The transmission expenses will they -- are those costs kind of captured and those elevated costs captured in the new rate relief -- do you feel like the rate relief that you are getting in '08 is going to capture those costs?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Yes. Absolutely.

Steve Gambuzza - Longbow Capital

I was wondering if you could also explain the fuel recovery in Missouri in 2008. You mentioned $51 million credit embedded in rates for wholesale margin?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Well, we have two different mechanisms; the one in Missouri, what is included in base rates is the Missouri portion of expected sales at a level established to be very achievable, that number we mentioned was 51, they allocated share to Missouri is 29 million. So what would happen is up to that number for example in 2007 that number was 69 million on a total company total case in our basis again about half of it would have been allocated to Missouri, so up to that point that's what's assumed in base rates.

Steve Gambuzza - Longbow Capital

Okay.

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

And again that is set at a level which we would and the commission I think is comfortable, achievable even as you could see in the year like 2007 where we had some outages and sales were maybe down little bit. But as we achieved more than that or if we achieved more than that then those dollars would essentially go into a regulatory account to be flowed back to rate payers as an offset in future cases.

Steve Gambuzza - Longbow Capital

Okay and if you achieve less than that is it just detriment to earnings?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

That's correct, but again the level is set at an level that as you can see '07 is conservative. Its intended to capture an amount which we believe achievable in almost any situation. You can't ever say always but it's a level that's intended to set where we would have the clear ability to meet that even on a tough year and then those dollars over there would go into a regulatory account to offset future increases.

Steve Gambuzza - Longbow Capital

How much of your fuel purchase power and transportation costs are effectively locked in for 2008 at present?

Michael J. Chesser - Chairman and Chief Executive Officer

In terms of fuel, we have our fuel locked down for the most part. As we have talked about before we probably have I don't know 90% of our coal locked down for the year, our transportation is locked down to the extend it can't be... we do have some tariff charges that we follow. But in general fuel is pretty solid. Now obviously if we had an outage unexpected you might have some gas exposure there as we showed in 2007. So from that perspective the fuel end is fairly stable if you will, given our heavy coal base generation. From a sales perspective we tend to be opportunistic early in the year, and then as we move through the year, if we think we need to do things to lock down sales later in the year to meet our requirements we will do that. We did a little of that in '07 as we saw some weakness in the first half of the year, given the outages we made some sales in the fourth quarter, to ensure we met our goals for the year end.

Steve Gambuzza - Longbow Capital

Is it fair to say that absent any unexpected outages, you would expect to be fully recovered on fuel and purchase power in Missouri this coming year?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Absolutely.

Steve Gambuzza - Longbow Capital

Okay, and then finally...

Michael J. Chesser - Chairman and Chief Executive Officer

Steve, this is Mike. If you have one more question, it would be great. We have got quite a few questioners in the queue. I am little conscious of making sure everybody has a chance to get in.

Steve Gambuzza - Longbow Capital

I will leave it at that. Thank you very much.

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Okay, thank you.

Michael J. Chesser - Chairman and Chief Executive Officer

Thanks, Steve.

Operator

Thank you, sir. Next question comes from the line of Doug Fischer of Wachovia. Please go ahead.

Douglas Fischer - Wachovia

Good morning.

Michael J. Chesser - Chairman and Chief Executive Officer

Good morning, Doug.

Douglas Fischer - Wachovia

Good morning, Mike. Could you talk about the Aquila acquisition, at least around that issue? Are you willing to accept EPS dilution or balance sheet weakening, in order to complete the deal? That is one of our concerns is that given the concern over the interest, high coupon issue at Aquila that is giving that up, we could suffer some dilution in '09 and beyond? Could you talk to us about your discipline there?

Michael J. Chesser - Chairman and Chief Executive Officer

Sure. We haven't changed our discipline or our target since we announced the deal. There are two things that are critical to us. First, we want to maintain credit quality and financial flexibility as we go forward with our comprehensive energy plan, and second, we want to maintain near term and long-term value opportunities for the shareholder, that would include accretion in the reasonably near-term, and obviously significant opportunities for EPS growth in the long-term. We are using as we engage in the discussions, we are trying to balance that against also what we see as significant opportunities for customer savings.

Douglas Fischer - Wachovia

And then talk to me a little bit about adding Kiewit, why adding Kiewit now, were there some problems?

Michael J. Chesser - Chairman and Chief Executive Officer

Sure, first of all it's just the offset. Kiewit was added to prevent problems as I guess the balance of plan as you know can be a very complex construction process with several different contractors. Kiewit has world class experience in that and that was in our core confidence. So they were added to prevent problems as opposed to being a result of problems. Bill, do you want to add anything to that.

William Downey - President and Chief Operating Officer, Great Plains Energy Inc. and Kansas City Power & Light

Yes Doug, we had yet to contract out the balance of the plant, and we were looking at a couple of different strategies for doing that. When we realized that Kiewit had a strong team that had become available because of other cancellations, we thought it was very opportunistic to bring a world class constructor in, and award them the balance of plant, as opposed to having multiple contracts. So, we are now with that contract, we are now basically fully contracted out for the plant, and that of course is what now that we have got that out, we have just been working with them closely on the integration of the balance of plant schedule, into the overall project schedule, and with that now we are working towards the clearer picture. That plus being about 70% to 75% engineered on the plant, we are in that process of the reforecast, with all of these facts now coming on to the table.

Douglas Fischer - Wachovia

Okay, I'll leave it there for now.

Michael J. Chesser - Chairman and Chief Executive Officer

Okay. Thanks.

Operator

Thank you, sir. The next question comes from the line of Kathleen Vuchetich with W.H. Reaves. Please go ahead.

Kathleen Vuchetich - W.H. Reaves

Good morning.

Michael J. Chesser - Chairman and Chief Executive Officer

Good morning.

Kathleen Vuchetich - W.H. Reaves

I was wondering if you could talk to us a little bit about what's the difference in the revised filings versus the original filing on Aquila. What if you changed in the regulatory filings to make it more palatable to the states?

Michael J. Chesser - Chairman and Chief Executive Officer

Hey Kathleen, obviously, that at this stage is confidential because we are in settlement discussions. If we get to the point where we need to go to hearings then we will be very transparent with you and share with you what's in it, but again the best thing I can say at this point is we are maintaining discipline around shareholder value and financing flexibility, but we also believe that while maintaining that dividend we can also offer significant benefits to the customer. And that's sort of the basis for the discussion.

Kathleen Vuchetich - W.H. Reaves

I see. Mike can you tell me who you are negotiating with, is it the staff of the Commission, is that -- who the other party is on the negotiations?

Michael J. Chesser - Chairman and Chief Executive Officer

It's actually all of the parties to the case, so it would be the staff, it would be the people's counsel, it would be a representative for the industrial customers, and some of the other smaller parties. And it is very similar process we went through with our Comprehensive Energy Plan and a stipulation we developed around that.

Kathleen Vuchetich - W.H. Reaves

Okay, alright. Thanks.

Michael J. Chesser - Chairman and Chief Executive Officer

Sure.

Operator

Thank you very much. The next question comes from the line of Michael Lapides with Goldman Sachs. Please go ahead.

Michael Lapides - Goldman Sachs

Hey guys couple of questions. First of all, when you -- on Iatan 2, and really on the original CEP overall, it sounds like you are going to come in with potentially higher cost for Iatan 2, so this will be the second time since you have originally signed the stipulation that you come in and rate cost. Are you concerned about prudency reviews when you have to file the rate case, with Iatan 2 included?

Michael J. Chesser - Chairman and Chief Executive Officer

Michael, that's the key point. We believe that whatever the new cost is, that we come up with as a result of 70% engineering estimate that it will be very competitive with other plants that are being built within the region. And we also believe that everything that we are investing in will be able to demonstrate as prudent, both from a need and a cost standpoint. So, at this point we feel pretty good about that, but we are experiencing upward cost pressures.

Michael Lapides - Goldman Sachs

Okay, in terms of the -- you mentioned a little bit about financing plans, Terry, when we think about the capital structure at the parent versus at the subsidiaries, what's your plan in terms of whether having them the same in terms of the debt to cap, having them differ at all, can you kind of go into that a little bit?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

They are effectively the same. Because of the regulatory process over the last couple of years, basically the commissions make it clear that they would look through to the holding companies. So, we have... basically our plan would be to maintain that 55ish range for equity given the CEP stipulation.

Michael Lapides - Goldman Sachs

Got it. Last question. In the state capital, we are seeing some interesting debate going on right now regarding coal plant development, it initially started after the KEH canceled the or denied a permit for the Sunflower plants. Can you talk about that legislation that's kind of making its ways to the state house and can you talk about whether coal plant development is essentially DOA in Kansas right now?

Michael J. Chesser - Chairman and Chief Executive Officer

Sure. First of the all, the unique circumstances around the Sunflower proposed plants really don't directly affect us. But we have taken heart, in the fact that the Governor has offered a compromise that recognizes potential need for base load coal plants in Kansas. So... but she also recognizes that if something like that were to be done it should be, an effort should be made to offset the carbon impacts with energy efficiency and renewables and others, almost identical to our comprehensive energy plan. So at this point we don't think it's a shutdown for base load coal by any means. But we do think here as well as around the country utilities coming forward something like that are going to have a comprehensive environmental plan around it.

Michael Lapides - Goldman Sachs

Okay. Actually one final piece, when we think about the cash flow that comes out of Strategic Energy, is the best way to think about it Terry just to take the core earnings and add back depreciation. I'm just trying to get to rough numbers on an annualized basis?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Yeah. That's fair.

Michael Lapides - Goldman Sachs

Okay. Thank you.

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Thank you.

Operator

Thank you sir. Next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead.

Paul Patterson - Glenrock Associates

Hi, how are you doing?

Michael J. Chesser - Chairman and Chief Executive Officer

Hi, Paul.

Paul Patterson - Glenrock Associates

Just want to follow-up on Iatan 2. On the slide you said that 95% of the direct cost is was committed. Could you elaborate a little bit on that? And just how much of cost I guess is subject to these increases that you are seeing and what have you?

Michael J. Chesser - Chairman and Chief Executive Officer

Okay. There are two things, the turbine costs and the boiler costs are fixed price EPC contracts. However, the balance of plant cost is not in EPC, so there is obviously exposure there to labor and quantity costs. And then of course, if you run into a labor availability problem, it can impact the whole project, including the fixed cost pieces, so that is what we are looking at this point. I don't know, Bill, if you want to add anything.

William Downey - President and Chief Operating Officer, Great Plains Energy Inc. and Kansas City Power & Light

The Air Quality Control part is also part of the fixed price, but it's the things that Mike alluded to labor productivity, labor availability, and then the impact that, that might have and then the balance of the plant as we integrate all of that into the work. We are making good progress.

Last year we had to get all of the foundations in place and turned over to the key contractors, we did that. The boiler steel work is well underway and should be completed this first quarter. The turbine generators steel and then the floor slabbing also targeted for this year, and we are working very hard with those contractors to make sure that we understand that. A large part of the risk really is in the balance of the plant, and how that integrates with the other key contractors on the fixed price components.

Paul Patterson - Glenrock Associates

So, when we look at the total projects, what percentage of it I guess is subject -- what part of its fixed pretty much and what part of it is -- I guess you see what I'm saying, that's what I'm trying to figure out.

William Downey - President and Chief Operating Officer, Great Plains Energy Inc. and Kansas City Power & Light

As I've said, the balance of plant... the contract really awarded on the boilers is about $0.75 billion, the turbine generator is about $200 million. The balance of plant is about $0.5 billion.

Paul Patterson - Glenrock Associates

Okay. And then just finally, the hybrid debt, what kind of equity value -- I mean, could you just remind me what the level of that was, and what the equity value, I guess you would have been granted from a rating agency perspective would have been.

William Downey - President and Chief Operating Officer, Great Plains Energy Inc. and Kansas City Power & Light

We hadn't finalized our plans but we were targeting, I think it's the B basket, they call it. We were targeting a 50% equity credit number C basket, I guess. But we hadn't finalized all that, but that was kind of, I think what was a market norm, and what we were looking at.

Paul Patterson - Glenrock Associates

Okay. And then, what was the -- and that top of the total amount of how much again?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

We didn't really disclose how much. Again, if you look at how much we are trying to manage to our equity capital structure, and you can look at how much credit we might have gotten from that kind of issuance, you can see kind of what's your anticipated reduction would have been from an equity need perspective.

Paul Patterson - Glenrock Associates

How long do you think you can monitor the market for the hybrid debt product?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Paul again, what we said is we are obviously monitoring the market, but I think given what we have going on this year, and given what the market looks like, our expectation is to move forward this year without hybrid. Obviously if the market came back, or if the market comes back next year, and we are able to utilize hybrid to help offset some of the equity need at a reasonable price, we think that's a good tool. Remember one of the benefits of the hybrid it is that it helps our credit metrics FFO numbers, and as a result at reasonable pricing makes a lot of sense for customers and for the company. So we will keep monitoring it. For now though we won't be waiting on the hybrid market to return to continue our equity market participation.

Paul Patterson - Glenrock Associates

Fair enough, appreciate.

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Thank you.

Operator

Thank you, sir. Next question comes from the line Jonathan Arnold with Merrill Lynch. Please go ahead.

Jonathan Arnold - Merrill Lynch

Good morning.

Michael J. Chesser - Chairman and Chief Executive Officer

Good morning.

Jonathan Arnold - Merrill Lynch

Just wanted to just talk a little about, you previously said on guidance I think recently as EEI you were talking about still being on track for 2% to 4% growth off the '05 base into 2010. Clearly including Strategic and the Aquila would be accretive to that path, I understand that there is uncertainty about how the acquisition ends, and you are assessing alternatives for Strategic, but are we saying that that statement on a current business basis no longer holds, or are you just focusing more on the near term elements of guidance, when you are saying you are not giving guidance?

Michael J. Chesser - Chairman and Chief Executive Officer

Yeah, I think it is more in the near term. Clearly there are two structural impacts. One is the bringing Aquila in which we think will be accretive, and the other would be the sale, potential sale of all or part of Strategic Energy. And, so we would have to factor that in. The real driver which is adding rate base overtime near the I-10 environmental controller equipment next year and then on the heels of that the following year that the new plant is what is going to drive significant earnings growth and that's not going to change. So in the end of the first quarter, we hope to combine all of that, and I think you will see the same long-term trajectory, and we will be able to give you more clarity on 2008.

Jonathan Arnold - Merrill Lynch

Okay, thank you.

Operator

Next question comes from the line of Paul Ridzon with KeyBanc. Please go ahead.

Paul Ridzon - KeyBanc

Just in the fourth quarter how much of the other losses, to lower other or the higher other losses were related to affordable housing declines, and how much were related to other cost pressures?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Affordable housing for the quarter was little over $3 million. We have to evaluate it at the end of the year.

Paul Ridzon - KeyBanc

And that's in the first quarter of '07.

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

I am sorry. Say it again.

Paul Ridzon - KeyBanc

What was the year-over-year decline, was that 3 million?

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Yes. Well, I think the total number was more like 4 year-over-year. It will continue to drop, it should be almost completely gone by 2010.

Paul Ridzon - KeyBanc

And if the Kansas Energy cost mechanism were in place in '07, how would have that impacted earnings?

Michael J. Chesser - Chairman and Chief Executive Officer

If the Kansas fuel mechanism was in place in '07, actually it would have been about the same, because we hit our target. So oddly enough, we would likely recovered our cost. And so it worked out about the same in '07, because...

William Downey - President and Chief Operating Officer, Great Plains Energy Inc. and Kansas City Power & Light

No it's a fuel charge recovery, we would have recovered more of that -- new plans were down.

Terry Bassham - Executive Vice President, Finance and Strategic Development, and Chief Financial Officer

Well let me break it up in two pieces. Number one, maybe I misunderstood your question, on the wholesales sales piece it would have been basically the same, because we hit our targets, to the extent that we had incurred Mike still had a point, to the extent we had incurred extra cost because the outages that was not in rates, we would have recovered that rather than expensed it. So, maybe I was looking at it from half the angle. Does that answer your question?

Paul Ridzon - KeyBanc

I think so. Thank you.

Operator

Thank you. At this time I would like to turn the call back over to management. Please go ahead.

Michael J. Chesser - Chairman and Chief Executive Officer

Okay well again, thank you all very much. We obviously have a lot going on a lot going positive late at this point. We feel very good about, how the business has been executed, how the Comprehensive Energy Plan projects are going in the right base. How the merger has been planned forward, it's one thing we didn't talk about is we have laid down the line, the organization is set for the new company, people are assigned, goals and objectives are established around potential synergy savings. We are ready to go as soon as we can get the rate agreements in place. So we have a lot of things going in the positive direction and we will look forward to having the first quarter call when we can share with you more insight into how these initiatives are wrapping up, and what the impact will be on earnings. Feel free to keep in touch with us in the interim, and I look forward to talking to you again soon. Thanks.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude the Great Plains Energy fourth quarter year end 2007 results conference call. You may now disconnect and thank you for using AT&T teleconference.

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