Great Plains Energy, Inc. Q1 2008 Earnings Call Transcript

Great Plains Energy Inc. (GXP)

Q1 FY08 Earnings Call

May 08, 2008, 9:00 AM ET

Executives

Michael Cline - Treasurer and Chief Risk Officer

Michael J. Chesser - Chairman and CEO

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

Shahid Malik - President and CEO, Strategic Energy

Terry Bassham - EVP, Finance and Strategic Development & CFO

Analysts

Douglas Fischer - Wachovia Securities

Steven Gambuzza - Longbow Capital

Michael Lapides - Goldman Sachs

Scott Engstrom - Blenom Capital Management

Chris Shelton - Millennium Partners

Presentation

Operator

Welcome to the Great Plains Energy's First Quarter 2008 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions]. This conference call is being recorded today, Thursday, May 8th of 2008.

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

Michael Cline - Treasurer and Chief Risk Officer

Thank you, operator, and good morning everyone. Welcome to Great Plains Energy's first quarter 2008 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 first quarter 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, the recently completed cost and scheduled update for the Iatan projects, and also provide an update 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 CFO of Great Plains Energy, who will provide details on Great Plains Energy's first quarter financial results and earnings drivers to consider.

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 materially from our expectations.

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

Michael J. Chesser - Chairman and Chief Executive Officer

Thanks, Michael, and good morning everyone and thanks for joining us today. I'd like to start with just a couple of comments on the quarter, Terry will take you through the financial results in detail a bit later, but suffice to say that we are pleased that this quarter represented a marked improvement over last year. However, as we mentioned in our earnings release, we had a higher unplanned outage rate in our generation fleet during the quarter that acted as a drag on results. Our management is giving this matter a good deal of attention and Bill will talk about this issue in more detail in his comments.

Also we're pleased to have completed the cost and schedule update for the Iatan projects. Again, Bill will review this in greater detail. But, let me say that this was a detailed thorough effort involving a significant number of people from our project team, our key contractors, our owners engineer, and outside consultants and we have a high degree of confidence in the end product. Before I ask Bill to cover those items, I'd like to take a few minutes to update you on the progress we made during the quarter on a couple of our strategic initiatives.

First, with regard to Strategic Energy. As most of you are aware, last year, we announced a strategic alternative review for Strategic Energy. That review included consideration of a number of alternatives, including a continuation of Strategic Energy in its current state, joint ventures, or sales that are part of the company. We also expressed our intent to have something to announce publicly by the end of the first quarter or early second quarter of 2008.

Demonstrating again our focus on execution and following through on our commitments, we announced early April that we have reached an agreement with Direct Energy Services, a subsidiary of Centrica out of Great Britain, under which Direct Energy will acquire from Great Plains Energy all the outstanding ownership interest in Strategic Energy for $300 million in cash, subject to closing adjustments. This is an outstanding transaction for the companies involved. Strategic Energy, Direct Energy is acquiring a market leader in the competitive C&I business, an outstanding management team and a group of customer-focused dedicated employees. Great Plains Energy in turn will receive cash that will help us reduce our 2008 financing needs and be able to focus our balance sheet and our senior management team solely on growing and achieving excellent results in our regulated operations. We have filed for all the necessary approvals and still anticipate the transaction will close in the second quarter of the year.

As indicated on slide four, we're nearing the final outcome of our pending acquisition of Aquila's regulated electric operations in Missouri. During the quarter, Black Hills received the regulatory approval in Colorado on both Black Hills and we received approvals in Kansas. That leaves Missouri as the only remaining approval required to proceed with the transaction. I'm sure many of you have been following our hearings with the Missouri Public Service Commission that started on April 21st and ended late last week. This was an opportunity to present a revised regulatory proposal we developed in early 2008 to the commission. We put a strong and thorough case before the commission and feel positive about the prospects for approval and closing in the June, July timeframe. In the interim, integration teams across both companies continue to work diligently to ensure seamless day one operations for the combined company. Thanks to the tremendous efforts of these employees, we will be ready for day one.

We are obviously very focused on the details of completing these transactions, but it is important to view them in a broader strategic context. We are continuing down the path we started in 2005, when we launched a plan to position the company as a leader in supplying and delivering electricity and energy solutions, while in the process delivering solid, long-term earnings and dividend growth for our shareholders.

Over the past three years and continuing into 2008, we've been building a strong foundation. As you can see from the slide, we're making significant progress on transforming the company with considerable progress being made in our Comprehensive Energy Plan, sharpening our focus with the announced sale of Strategic Energy, and hopefully soon expanding our utility footprint in Missouri with the successful conclusion of the Aquila transaction.

As we look to 2009 and beyond, we will move past the foundational stage and focus on creating long-term shareholder value through execution and planning. We are investing in a number of significant projects, including the air quality control system at our Iatan 1 unit and the new Iatan 2 coal plant. We are also planning to evaluate the addition of 400 megawatts of wind into our portfolio, complete the Comprehensive Energy Plan environmental project at LaCygne Unit 1 and evaluate environmental retrofits at LaCygne Unit 2.

In addition to investing for future growth and the environmental requirements, we will be working to integrate Aquila and deliver on the synergies that we promised. While still in the execution phase of our Comprehensive Energy Plan, we can't be complacent about the future either. We must look to and plan for the future energy needs of our region, ensure that we will be able to continue to meet the growing requirements of our customers.

In this effort, which we call our sustainable resource strategy, we will be following the model that we established with KCP&L's Comprehensive Energy Plan by seeking collaborative stakeholder involvement to assess alternatives and to identify optimal solutions. As part of this strategy, we will address future generation and environmental requirements and establish our leadership position in energy efficiency over a 5 to 10 year planning horizon. We will also review our current generation fleet and identify alternatives to improve availability and output. The bottom line is that we believe our accomplishments will set the stage for annual earnings growth that will ultimately support dividend growth.

Now, I'd like to ask Bill to provide more detail on first quarter results of KCP&L and the recently completed cost and schedule update at our Iatan projects.

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

Thank you, Mike and good morning everyone. It has been an eventful and busy quarter at KCP&L. We had a strong comparative financial performance to the first quarter of 2007, as Terry will talk more about in his discussion of the financials. We have made significant progress on our Comprehensive Energy Plan, including completion of the updated cost and schedule assessment at Iatan. I know everyone is interested in hearing more about the outcome of that work and I'll turn to that in just a moment.

As Mike mentioned, we had some challenges with plant performance during the quarter and I'd like to spend the next few minutes discussing what happened and the short and long-term steps we are taking to address the issue. The impact of plant outages in the first quarter of 2007 and again in 2008 can be seen in our availability and capacity factors in this chart. Availability simply reflects what percent of the time the plants are up and running, while capacity reflects how much of our coal-fired generation that is available is actually either utilized to meet retail demand or sold wholesale.

Coal plant availability during the first quarter 2008 decreased to 72%, which is still slightly above the first quarter of 2007 availability of 70%, but below our expectation. The capacity factor for KCPL's coal fleet also declined overall to 68% in the first quarter, which again was slightly up from 65% last year. Some level of unplanned outages is part of running generation units.

However, in the first quarter of 2008, we lost approximately 300,000-megawatt hours of coal generation, beyond what we would consider a normal level. This can't be a attributed to any single cost, but to several different factors, including boiler issues, a turbine related issue, and the introduction of new environmental equipment and its effect on the existing plants. Also they are not reflected on this chart because it shows only coal plant availability.

Wolf Creek had an unplanned outage in early January that also contributed to the increased need for purchased power during the quarter. Also as most of you're aware, Wolf Creek has been down for its planned refueling outage, which began in mid-March and is projected to end on Saturday, May 10. The primary contributors to the delay were several increases in scope after the plant was shut down.

Unplanned outages at our coal and nuclear fleet have an impact on the company. Current rates incorporate the value of off-system sales via a pass-through, so the natural hedge we had in the past against planned an unplanned outages no longer exists. That said, running our feet well is very important to us and to our customers. We've been making strategic investments over the last five years to improve the operation of our plants. However, ageing components and the effect of incorporating the new environmental equipment additions have impacted historical levels of plant performance.

We formed a cross functional team to develop both a near-term and a five-year plan to ensure we are investing both capital and O&M dollars in the right areas to ensure a solid consistent plant performance. In the near-term, we are increasing the maintenance dollars to perform preemptive boiler repairs. Some of these dollars have already been spent in the first quarter and the rest will be spent in the second and fourth quarters. We are also developing a five-year plan to address larger capital investment and future O&M investment needs to reduce the probability and the impact of higher than expected forced outages.

One other note to keep in mind is that similar to what we've seen on our Iatan 1 environmental work and Iatan 2 construction, inflation is impacting us in terms of both capital and maintenance. Material and labor costs in particular are rising, because rates are set using historical costs, in a rising cost environment we are subject to an earning pressure from regulatory lag until the increased costs can be recovered in rates.

Next I'd like to turn to the cost and schedule update for the Iatan projects. This process has been an extensive effort involving our project team, key contractors, owners engineer, key vendors, and others. It was an appropriate and an important time to do this, given the level of engineering we had completed on the projects, the need to integrate quantity and schedule estimates from Kiewit, our balance of plant contractor into the master schedule and forecast, and a number of overall construction market trends that are impacting the Iatan projects as well.

Slide 10 reflects the results of this effort for KCP&L share of the overall projects. For Iatan 2, compared to our December 2006 estimate, KCPL’s share has increased about 15% based on the high-end of our range. We are currently anticipating no change in the Iatan 2 in-service date and the plant is still scheduled to come online in the summer of 2010. We did not separately disclose an estimate for Iatan 1 in December 2006, instead it was included as a component of a bundle projection for total environmental retrofits for the Comprehensive Energy Plan.

As the chart reflects, compared to the Iatan 1 portion included in the total amount, the current estimate for KCPL's share of Iatan 1 has increased by 33% based on the high-end of the range. For Iatan 1, we have adjusted the schedule slightly. The fall outage will begin about a month later and run about 17 days longer than originally planned. We expect to complete the outage by year-end 2008 and have the AQCS deemed in service from a regulatory perspective in February 2009. It's important to note that the overall changes I just outlined include both changes in our base estimates and also a re-evaluation of our level of contingency.

Slide 11 graphically depicts some of the key drivers of base estimate increases. The pie chart on the left captures the Iatan 1 drivers. The biggest pieces here are those related to what we call design maturation. As the project evolves, the detailed engineering design changes. This effects the scope and schedule of the project. A specific example of this project relates to the existing economizer, which required a modification as a direct result of changes in the design of the selective catalytic reduction system being installed. The pie chart on the right is for Iatan 2. As you can see, the biggest impact here is pricing, which includes among other things, the integration of Kiewit’s contract. The selection of Kiewit reflected our growing concern about executing this large construction effort in the face of the challenging industry environment and reflects cost increases emerging from those challenges.

Another key driver for Iatan 2 was what we call operations and construction optimization. These are changes instituted to better manage the construction process. Project team staffing and senior management, audit, and consultant oversight are examples of what's included here. Though we are seeing cost increases, so is the rest of the industry. As we've been saying, we believe strongly that Iatan 2 is and will be competitive on a cost per kilowatt basis with other plants under construction during this period of time.

As you can see on slide 12, after deducting items not typically included in plant construction cost calculations, our revised estimate puts Iatan 2 at a cost per KW of between $2,082 and $2,200 per KW. We've included public disclosures from a few other projects at various stages in completion as an indication of how Iatan compares. We expect to initiate another reforecast for Iatan 2 in late 2008 as we conclude Iatan 1 construction and the engineering design of Unit 2 is essentially final, and we will keep you posted on our progress.

I'd also like to mention that we continue to meet regularly with regulators and the parties to our regulatory plan to update them on the status of our projects. This ongoing communication helps to ensure that the investments made as part of the CEP continue to be in the best interest of customers.

In summary, our reforecast represents the result of an intensive vigorous process. We've leveraged our experience to date and our understanding of our overall market trends to adjust both our base estimates and contingency levels to reflect our very best current view of the total cost of these projects. We are experiencing cost increases, but believe them to be both in line with the typical evolution of a construction project and representative of the industry as a whole. The results of the reforecast reflect our intent to prudently manage costs, while at the same time inferring [ph] as closely as possible to the original schedule. We have a high degree of confidence in the outcome.

Turning to slide 13. I'd like to comment briefly on Phase 2 of the environmental retrofits at our LaCygne 1 unit, which other than the Iatan projects is the remaining construction component of the Comprehensive Energy Plan. Recall that Phase 1 of the LaCygne work consisted of an SCR, which was completed ahead of schedule and under budget in the second quarter of 2007.

Phase II at LaCygne 1, consisting primarily of a scrubber and baghouse, was targeted originally to be completed in 2009. We have now assumed a later in-service date for this unit for a couple of reasons. Lead times for equipment procurement are significantly longer than when the CEP was established. We're also evaluating combining the installation of our required emission-control technologies at LaCygne 2 to see if it would be more economical to combine much of the work for simultaneous upgrades for both plants. The projected capital budget that Terry will outline later assumes a later in-service date for LaCygne 1.

Finally, we are looking beyond the CEP and are moving forward with what we call our sustainable resource strategy. A key piece of this is the development of a long-range resource plan and the filing of an integrated resource plan in Missouri in 2008. As we did with our current CEP, we are engaging and will engage other key stakeholders in a collaborative process as we develop energy efficiency, demand response, and environmental and new generation alternatives. We are starting to see elements of this strategy work their way on a preliminary basis into our long-term capital plans.

In addition to consideration of environmental spending for LaCygne 2 and Montrose, we are evaluating 400 megawatts of wind generation in the 2009 to 2012 timeframe. We will also be evaluating additional investment longer term in energy efficiency and demand response programs. Terry will talk more about the capital plan in his section on the financials.

This concludes my remarks and I'd like to now hand over the call to Shahid Malik.

Shahid Malik - President and Chief Executive Officer, Strategic Energy

Thank you, Bill. Good morning everyone. 2008 is shaping up to be an exciting year for Strategic Energy. Great Plains in completing its review of alternatives was pleased that both [inaudible] growth and the proven business model employed here at Strategic Energy were recognized in the marketplace, and especially by Direct Energy Services.

Our first quarter results strongly affirmed our value and earnings power, and Terry will walk you through those results in just a few minutes. Great Plains now will be able to take the considerable cash proceeds from the sale of Strategic Energy to focus on the investment requirements of the Comprehensive Energy Plan and on its regulated business at KCP&L. And I'm pleased to review for a final time as part of Great Plains Energy, the strong result of Strategy Energy.

Turning first to new sales on slide 16. Sales for the first quarter were 6 million megawatt hours, which was down a little bit from the 7.5 million megawatt hour figure in last year's first quarter, but still a strong performance given the very high energy prices seen during this first quarter and higher than our first quarter plans. The good news is that much of this additional sales volume was based on an excellent renewal rate of well over 90%, especially among large customers, demonstrating that Strategic Energy continues to have the right mix of products and services to secure its loyal base of customers.

Deliveries in the quarter were also strong at approximately 5.3 million megawatt hours, which is up over 20% from last year's first quarter. Yet despite these high deliveries, a good sales performance over the last three months continues to replenish our backlog and total backlog at about 36 million megawatt hours is up from approximately 34 million megawatt hours a year ago.

We look now at margins. The average retail gross margin per megawatt hour in the first quarter was $20.65 compared to $15.79 in 2007's first quarter. Those amounts however include significant unrealized mark-to-market gains. And if you exclude those unrealized mark-to-market gains, which is our usual practice, the average retail gross margin per megawatt hour in the first quarter of '08 was $5.08 compared to $2.16 in the previous year's comparable quarter.

Last year, our first-quarter, excluding mark-to-market gains, was impacted negatively by customer attrition and a resettlement charge in one of our markets and therefore was unusually low. But $5 per megawatt hour delivered margin has proven to be a steady delivered margin for us over the years, and the first quarter reconfirmed that range. Our slow [ph] start to 2008 has been built on higher delivered volume and improved operational execution, leading to strong cash flow and lower costs per unit.

For 2008, as a whole, we expect that gross margins per megawatt hour on delivered volumes, excluding net mark-to-market impact will fluctuate somewhat by quarter, but by year-end, will be in a range $3.5 to $5 per megawatt hour for the year as a whole. 2008 is shaping up then to be a strong year with deliveries likely to be at least 20% higher than in 2007, in a range of 21 million to 25 million megawatt hours on a stand-alone basis. And with market growth in the 4% to 6% range during 2008, the combined Direct Energy, Strategic Energy business is pretty well positioned for success, and Great Plains has chosen an opportune time to monetize its investment in this market segment.

As we anticipate the closing of the sales to Direct Energy, we at Strategic Energy have the satisfaction of knowing that we are well positioned to be a valuable contributor in the retail electric market in the future and that Great Plains Energy stakeholders will have the benefit of the value we've created to reinvest in GPE's regulated businesses.

With that, I want to thank you for your attention, and let me pass the call over now to Terry Bassham.

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

Thanks Shahid, and good morning everyone. I am going to focus the majority of my remarks today on core earnings for the first quarter. 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 break down by segment of both our reported and core earnings per share as shown on 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 a number of items in this reconciliation, but the largest is the mark-to-market impact from energy contracts to Strategic Energy.

For the first quarter 2008, consolidated revenue at Great Plains Energy increased 24% year-over-year to $825.4 million. Core earnings were $13.0 million or $0.15 per share, compared to a loss of $11 million or $0.13 per share in the first quarter of 2007.

Now going to more detail by segment to give you a better feel for the drivers for the quarter. KCP&L's first quarter revenues were $297.6 million, compared to $255.7 million in the first quarter of 2007. First quarter core earnings of $15.1 million or $0.18 per share were significantly higher than 2007's first quarter of $2.1 million or $0.02 per share. The improvement in core earnings from the same quarter a year ago was driven primarily by 15% increase in retail revenues from $216.9 million in the first quarter 2007 to $248.7 million in the first quarter 2008. This increase was primarily driven by new rates effective January 1, 2008 and favorable weather.

The quarter was also impacted by 26% increase in wholesale revenues from $34.2 million in the first quarter of 2007 to $43.1 million in the first quarter of 2008. The improved wholesale results for the first quarter were attributable to both higher average prices and volumes than first quarter 2007. These positive impacts were somewhat negated by higher purchase power volumes driven by plant outages, as well as increased depreciation and amortization, resulting primarily from regulatory amortization authorized in our 2007 rate cases in Kansas and Missouri.

As I mentioned, weather was a contributor to our improved earnings in the first quarter. Heating degree days for the first quarter of 2008, 9% more than normal and 16% higher than the same period last year. While total retail revenue increased 15% compared to last year, on a weather normalized basis, the increase was only about 0.6%. This reflects a concern we discussed in our fourth quarter earnings call around economic conditions in our service territory, which I will discuss in more detail in a couple of minutes.

For the first quarter, Strategic Energy had core earnings of $5.2 million or $0.06 per share compared to a loss of $6.9 million or $0.08 per share in last year's first quarter. Higher core earnings in the quarter compared to last year were driven by higher average retail gross margin per megawatt hour, excluding unrealized net mark-to-market impacts and higher delivered volumes. Just as a reminder, margins at Strategic in the first quarter of 2007 were negatively impacted by customer attrition and a resettlement charge.

In our Other segment, which mainly includes unallocated corporate charges and labor associated with the Aquila transaction, core results for the first quarter of 2008 were a loss of $7.3 million or $0.09 per share, compared to a loss of $6.2 million or $0.07 per share in Q1 2007. The lower core results for the first quarter are primarily attributable to labor related costs associated with Aquila transaction that would otherwise have been reflected in the KCP&L segment. This amount was $2.5 million for the quarter. The impact from affordable housing continues to lessen each year, and this quarter had a negligible impact and we expect that to be the case going forward.

As you know, we have an aggressive capital spending plan underway at Kansas City Power & Light, and 2008 is the biggest year for Comprehensive Energy Plan related expenditures. The company's financing plans are always made with a focus on credit quality and with a view of capital structure that's broadly consistent with our last couple of rate cases at KCP&L. Consistent with this approach, we have previously told the market that we expected to issue equity and debt in 2008. In the face of extremely difficult general credit market conditions, KCP&L did successfully complete a new $350 million 10-year bond issue in early March and used the proceeds to repay short-term debt. Other than a small tax-exempt issue at KCP&L, we do not expect additional long-term debt issuance at either KCP&L or Great Plains Energy in 2008.

We are evaluating the need to issue equity in 2008, though the approximately $270 million in cash we expect to receive from the sale of Strategic Energy will enable us do that later in the year that might have been otherwise expected. We will also utilize short-term debt to meet cash requirements between our cap to markets activities. And as the chart here indicates, we've a very strong available liquidity for this purpose. The auction rate securities market was very adversely impacted by the credit downgrades of a number of the bond issuance companies in the first quarter of 2008. You may have read about this extensively in your review of other companies in the sector. KCP&L dealt with this issue proactively. I'm pleased to report that our entire tax-exempt auction rate security portfolio, which was $257 million at the end of year-end 2007, has been converted to fixed break debt at this point.

With respect to earnings guidance, as you know we did not provide guidance at our year-end earnings call due to the review under way at Strategic Energy and the status of Aquila. In addition, there were other considerations that on their own would not have caused us delay issuing guidance, but that we would be considering as we prepare our guidance.

These factors include the timing, cost, and schedule update of the Iatan projects, the effects of the economic downturn we've discussed, as well as the continued difficulties in the financial markets. With the announcement of the sale of Strategic Energy, the completion of the Iatan assessment, and a degree of stability beginning to return to the financial markets, we’ve started to get clarity around key pieces of our outlook. However, we do not at this time anticipate issuing 2008 earnings guidance and will instead focus on issuing Great Plains Energy 2009 earnings guidance in our third-quarter earnings call.

That said, I will spend the next couple of minutes covering a few factors that may be helpful in thinking about the forward-looking earnings profile for Great Plains Energy during this interim period. First factor is Strategy Energy. I talked earlier about the cash we expect to receive from the sale and that will help delay the need to issue equity into later in the year. Although Strategy Energy suffered a downturn last year, as shown by first quarter 2008 results, we would have expected a return to Strategic Energy to a more normalized level of earnings for the full-year 2008. As Mike mentioned, we are planning to close the Strategic sale before the end of the second quarter.

Capital expenditures are another factor. With the Iatan update not complete, it's an opportunity time to revive you with our current CapEx view over the next few years. In addition to base CapEx and expected CapEx for the CEP projects, we also have placeholders in our current forecast from environmental retrofits at our LaCygne 2 and Montrose units. These are preliminary estimates, the amount and timing of our environmental expenditures will develop in a much more robust way as part of our sustainable resource strategy, which is just getting underway.

It’s also important to note that the table does not have any capital expenditures for additional wind generation. Recall that our collaborative agreement with the Sierra Club calls for the addition of 100 megawatts of wind generation by 2010, and another 300 megawatts by 2012, all subject to regulatory approval. We will update our capital plans once we have a clear sense of the timing and manner in which we plan to meet our obligations under the agreement.

A final comment here is that we will continue to work to incorporate capital projects into rate base as quickly as possible following the in-service date. KCP&L will file its next rate case this summer to capture the Iatan 1 work and rates effective in mid-2009. Following that, we expect to file another case in the summer of 2009 to capture Iatan 2 in-rates in late 2010.

Side 29 lists a few other considerations related to our earnings 2008. As we mentioned on our year-end call in the last few months of 2007, the difficulties in the broader economy impacted the housing market in our service territory. Approximately 70% of KCP&L’s annual retail revenues are derived from the residential and commercial segments. We saw an impact in the fourth quarter and we again saw an impact in the first quarter. In 2006, on the weather normalize basis, our net system input, which is a combined measure of our customer growth and usage, grew 3.8% over the prior-year's first quarter. In 2007 first quarter NSI grew 1.9% over 2006 NSI. As we mentioned before in the first quarter of 2008, NSI only grew 0.6%. We still had positive growth, but it has dropped off as these figures indicate. We are continuing to evaluate the trend closely.

Regulatory lag is a factor for any utility operating in a raising cost environment, even if the company is filing rate cases on a regular basis, as we expect to over the next few years.

Finally, as Bill discussed, refueling outage at Wolf Creek is projected to end on Saturday, May 10. The primary contributors to the long outage were several increases in [inaudible] plant were shut down.

I'd like to hand the call back over to Mike now for his concluding remarks.

Michael J. Chesser - Chairman and Chief Executive Officer

Thanks, Terry. And before I conclude, I'd like to take a minute to thank Shahid Malik and all the employees of Strategic Energy for their years of dedicated service and outstanding contribution to Great Plains Energy. Strategic Energy is a strong competitive retail electricity supplier with talented people, solid performance, and great prospects, and we wish them all the best.

In conclusion, I'd like to come back to a slide that I've showed earlier and emphasize how pleased we are both with the progress we're making in 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 dividend growth.

We appreciate your support as we continue towards that objective and thank you again for your time this morning. We'd be happy at this point to answer any questions.

Question and Answer

Operator

Thank you sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Doug Fischer with Wachovia Markets. Please go ahead.

Douglas Fischer - Wachovia Securities

Good morning all.

Michael J. Chesser - Chairman and Chief Executive Officer

Good morning.

Douglas Fischer - Wachovia Securities

Good morning. Just a question about the rate cases you're expecting to file in Missouri and Kansas mid-year. What's your degree of confidence that you can get the Iatan 1 CapEx included in rates therein? Sort to talk to us a little bit about the test year and how much you can... how much you can update that in your rate filing.

Michael J. Chesser - Chairman and Chief Executive Officer

Let me just.. at a high-level, Doug… and by the way, Doug, good morning. I didn’t recognize that was you. At the high level, the whole purpose of this filing is to bring Iatan 1 into the rates. The re-forecasting that we've just done gives us the confidence that we will be able to complete Iatan 1 on a time frame that will allow us to do that. So, we do expect that to be in rates. I'll Terry talk a little bit to the test year question.

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

Doug, we control obviously the date of filing and so knowing under our CEP agreements in both Kansas and Missouri, the update timeline that we're allowed in those cases will control the date of filing to be sure that we can include Iatan 1 in. Our current reforecast, we think it's very solid, we think we'll be comfortable with start-up by February, as we said. But, we'll obviously be cautious with the filing to be sure that they match up and we don't really have a lot of concern about being able to do that.

Douglas Fischer - Wachovia Securities

As you look over the balance of the year, do you expect further difficulties with regard to plant operations or is that just an unknown at this point?

Michael J. Chesser - Chairman and Chief Executive Officer

Doug, one of the things that I think Bill mentioned in his comments is that we are doing some proactive maintenance that we believe is going to pay dividends for us as years go on, there is obviously no guarantees. But, we've had a traditional history of plant availability somewhere in the 80% range, and at this point, we don't see anything that is going to lead us to believe that over time it's going to be different than that. But, we are reacting to these events that we've seen and making sure that we do all the maintenance that we possibly can. Bill, you want to talk…

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

Doug, we all saw the first quarter, [inaudible] places we do a lot of work to getting ready for the summer to minimize any outage impact during the big demand months. So, if we do lose a unit, it tends to be more challenging. We have also picked up a lot more winter load due to heating, so that tends to have an impact. It's something we're watching as this evolves and changes looking at our strategies on these outages. But, we really are… have done a lot of work to be ready for the summer and we do not expect this to carry over.

Douglas Fischer - Wachovia Securities

Any comments on how you would characterize how the hearings went for the Aquila acquisition?

Michael J. Chesser - Chairman and Chief Executive Officer

As I said in my comments, we think we’ve put together a very strong case. We were able to demonstrate there are significant synergies there that will have benefits for the customers. We were able to demonstrate that we believe that we will be able to maintain both credit rating and financial flexibility. So, we feel good about the case we put on, that’s probably about the best I can do to characterize that.

Douglas Fischer - Wachovia Securities

Okay. Thank you.

Operator

Thank you. Your next question comes from the line of Steven Gambuzza with Longbow Capital. Please go ahead.

Steven Gambuzza - Longbow Capital

Good morning.

Michael J. Chesser - Chairman and Chief Executive Officer

Good morning.

Steven Gambuzza - Longbow Capital

Could you remind us what the scope of the Iatan 1 environmental project is? Is it scrubber, SCR, and baghouse?

Michael J. Chesser - Chairman and Chief Executive Officer

It's all three of those.

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

That's correct.

Steven Gambuzza - Longbow Capital

Is there anything else or is that it?

Michael J. Chesser - Chairman and Chief Executive Officer

There is common equipment. Remember we are building the back-end, the air quality control systems for both Unit 1 and Unit 2 at the same time or roughly together. They are components at the common facilities that are part of all that as well.

Steven Gambuzza - Longbow Capital

Would it be possible to just give some kind of rough approximation of what these four components make up over the cost or at a minimum, how much the common equipment is?

Michael J. Chesser - Chairman and Chief Executive Officer

I believe the amount attributable to Iatan, our share is in the slide.

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

You are asking for a breakdown between the baghouse and SCR and so forth?

Steven Gambuzza - Longbow Capital

The 330 to 350, just kind of approximately how to allocate?

Michael J. Chesser - Chairman and Chief Executive Officer

Maybe we can get back with you on that. I don't have specific numbers in my head. We'll be happy to work with that.

Steven Gambuzza - Longbow Capital

Okay. I will follow-up offline. And then I guess just as a follow up. When you think about February '09 in-service for these environmental controls, will you time the general rate case so that you have new rates effective just after this equipment goes in service?

Michael J. Chesser - Chairman and Chief Executive Officer

The way it would work Steve is you’d set the true update right after this equipment goes into service, and then when…. that way you get to bring that into rates, it then takes about a quarter or about three months to finish the case and get the tariffs out. So, this would result in… I think I'd say mid-year '09 for actual rate effective.

Steven Gambuzza - Longbow Capital

So, effectively. So. we're going to be dealing with the current rates that are in effect would be in effect really through the first half of next year?

Michael J. Chesser - Chairman and Chief Executive Officer

Yes.

Steven Gambuzza - Longbow Capital

Okay. And then, with respect to the fuel and purchase power in light of some of the plant availability challenges, my recollection is that in Kansas you have a complete deferral, is that correct?

Michael J. Chesser - Chairman and Chief Executive Officer

I'm not sure what you mean by fleet deferral, but we do have a fuel factor, which allows for us to, yes, recover cost through a deferral mechanism.

Steven Gambuzza - Longbow Capital

I was surprised to see that that margin would be... at least as it relates to the Kansas jurisdictional piece to the extent you had an unplanned outage or reduced availability, is there lost margin in Kansas as a result of such an issue?

Michael J. Chesser - Chairman and Chief Executive Officer

No. No, it should be all recovered.

Steven Gambuzza - Longbow Capital

So, was the issue that you had in the first quarter then just attributable to the Missouri jurisdictional piece or you have kind of a certain level of wholesale margin that is embedded in rates that you didn't quite hit?

Michael J. Chesser - Chairman and Chief Executive Officer

Yes and fuel costs that you can't recover.

Steven Gambuzza - Longbow Capital

Okay. So, basically it's all a Missouri issue and not a Kansas issue.

Michael J. Chesser - Chairman and Chief Executive Officer

That's exactly right.

Steven Gambuzza - Longbow Capital

Okay. Thank you very much.

Michael J. Chesser - Chairman and Chief Executive Officer

Thank you, Steve.

Operator

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

Michael Lapides - Goldman Sachs

Actually Steve stole a little bit of my question, can you talk about the progress in Missouri in general across the state about implementing full fuel costs? We've seen kind of partial ones implemented for Aquila, it's 90%, 95% roughly, we've seen other treatment for Ameren, Union Electric, would just love your insight on that.

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

As you described, obviously Aquila has benefited pretty dramatically from being able to get their fuel cost put in place, based upon a law that was passed, I guess, now a couple of years ago. Recall for us specifically though that in the CEP we were finalizing that agreement as legislation was being considered but not yet passed. So, we agreed as part of our deal to have a static, if you will, situation. So, we've agreed not to use the state improved or state approved fuel factor mechanism. Across the state, it continues to develop though and we think that ultimately we'll be able to utilize in the long run, but currently we don't have that access.

Michael Lapides - Goldman Sachs

Okay. But your CEP will expire in kind of 2.5 years, 3 years, just carry us beyond that. Do you expect treatment, Terry, that's kind of similar to what happened… more similar to Union Electric or more similar to [inaudible]?

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

Our agreement actually says that we won't access that mechanism till 2015. But we do have another kind of mechanism that’s called IEC that allows us to recover cost for some period that we haven't requested yet and we could during that period. But, in general, we’ve kind of got our current state through 2010 and we have some options for a mechanism that’s not as complete as a complete fuel factor. I think we have that access in 2015.

Michael Lapides - Goldman Sachs

Got it. Thank you Terry.

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

You bet. Thank you.

Operator

Thank you. [Operator Instructions]. Our next question comes from the line of Scott Engstrom with Blenom Capital Management. Please go ahead.

Scott Engstrom - Blenom Capital Management

Good morning.

Michael J. Chesser - Chairman and Chief Executive Officer

Good morning.

Scott Engstrom - Blenom Capital Management

Just kind of a technical modeling question, Strategic Energy for the quarter was in core earnings. Next quarter, when that goes to discontinued, will the first quarter number come out of core earnings for the year then or are you going to keep that first quarter and for the year when I think about core earnings?

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

From a GAAP accounting perspective, it will show up in discontinued ops. We will probably talk about core earnings as it still in core for that period, but from a GAAP perspective, you are correct, it would go to discontinued.

Scott Engstrom - Blenom Capital Management

Okay.

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

That makes sense.

Scott Engstrom - Blenom Capital Management

I'm not sure. Let's say we roll forward to next year first quarter, when you compare quarter earnings next year to this year's core earnings, will the amount from Strategic be in there for comparison purposes?

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

No. Obviously, we would take Strategic out, but we have to then consider what Aquila might have done in the first quarter to make sure it's comparable. We haven't really talked through exactly a presentation for next year's first quarter, but obviously we wouldn't be able to suggest, that would be an ongoing. But, it's an ongoing core piece of our operations for the first half of the year. But, certainly wouldn't be a comparable piece next year and we’ll have to work through how to present that in a clear and transparent way.

Scott Engstrom - Blenom Capital Management

Okay. And then on the... you’ve mentioned in the text, the press release, some litigation settlement proceeds, and I see in the reconciliation table there is a release of legal reserve. Are those two items the same thing or is that different?

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

No, we actually had two different legal settlements. We had one that's Encore and it was a settlement of a dispute over a transformer and a lot of what we recovered was past expensed legal expenses and so that was expense that it actually flowed to core earnings in the past. So, the settlement was core positive effect as well. We had a second though adjustment for a long-standing lawsuit related to non-regulated activities from years back that ultimately we settled and that's always been out of core and so we took that out core here as well. So, they are two different things, one was the utility operations, one was not.

Scott Engstrom - Blenom Capital Management

Is that a utility at the KCP&L, how much was that?

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

If you look at the schedule to the press release on page 9, you'll see that the release of the reserve is $0.034.

Scott Engstrom - Blenom Capital Management

Okay. And that's the non-core part, what was the part in core?

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

$4.1 million was the core part for the other litigation.

Scott Engstrom - Blenom Capital Management

$4.1 million net, right?

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

Yes.

Scott Engstrom - Blenom Capital Management

Okay. And then just lastly on the... in terms of.... [inaudible] future years guidance. Just trying to get a sense of the uncertainties there. When you initially gave it, I assume this refers to the 2010 range of 238 to 263. You guys have highlighted a number of uncertainties out there, I suspect when you initially gave the guidance, there was uncertainties as well. My question is, are there new uncertainties that you are considering or have the magnitude of those uncertainties that existed at the time you gave that, kind of, long-range forecast magnified? Just wondering if you could kind of give a sense of where the lack of confidence in sticking with that long-range guidance is?

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

The key issues there are less about levels in rates of uncertainties as it is the nature of who we are. Remember that in 2005, when we gave that guidance, it was based upon our CEP. We didn't have Aquila, we did have Strategic Energy, there were assumptions about both of those. Certainly, there have been things happening in the marketplace. Our update of Iatan 1 and 2 shows some of the uncertainties that can affect these kinds of projects. But, more importantly, what we've said is that we are going to be a different company going forward. And that's going to be a company that doesn't have Strategic Energy and now has a sister utility. So, we will be looking at what we look like in that context and then being able to give that kind of update. Once we have those kind of things wrapped up, we hope to be able to do that in the third quarter of the year.

Scott Engstrom - Blenom Capital Management

Okay. Because I think you had kind of given that guidance at EEI as well as recently as last November.

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

Yes. I mean, again, we suspended our long-term view first of the year once we got further into the strategic energy evaluation and we got to where we thought Aquila was in a position to close mid-year and a combination of those two caused us to feel like we needed to step back and provide some updated guidance once we got those things wrapped up.

Scott Engstrom - Blenom Capital Management

Okay. Great. Thanks a lot guys.

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

Thank you.

Operator

Thank you. Your next question comes from the line of Chris Shelton with Millennium Partners. Please go ahead.

Chris Shelton - Millennium Partners

Good morning.

Michael J. Chesser - Chairman and Chief Executive Officer

Good morning.

Chris Shelton - Millennium Partners

Terry, can you mentioned again how much you said you're expecting in from Strategic, I think, it was like $270 million something?

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

I think we talked about that a little bit. But, yes, we got about $270 million, we expect after-tax.

Chris Shelton - Millennium Partners

And does that also assume the working capital? I know there is a fair amount of working capital involved in that transaction. I am just trying to get a number that you'll actually be able to put for corporate and obviously the utility purpose.

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

I think if you look at the slide in our presentation, slide 27, that's the number we talked a little bit about. That's a good number to use. We do have a working capital adjustment in the closing that we think will probably be positive, given the good performance by Strategic in the first quarter. But, it could go up... it can go either way. So, that's probably a fair number.

Chris Shelton - Millennium Partners

Okay. Thank you. I guess the other thing, should we call... I wanted to also get the break out that Scott was talking about of the environmental equipment, should we just call Allen for that?

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

Yes. We'll get the detail around what is related to that and what's related to common for you absolutely.

Chris Shelton - Millennium Partners

Terrific. Thank you very much guys.

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

Thank you.

Michael J. Chesser - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. There are no further questions at this time. I'll turn the call back over to Mr. Chesser for concluding comments. Please go ahead, sir.

Michael J. Chesser - Chairman and Chief Executive Officer

Again, thank you all very much. Next week we're going to be at the Goldman Conference and we look forward to seeing many of you there. If you have any further questions, we'll be looking forward to continuing the dialog. Thanks a lot and have a good day.

Operator

Thank you. Ladies and gentlemen that will conclude the Great Plains Energy first quarter 2008 earnings conference call. We thank you again for your participation today. At this time you may disconnect.

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