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Great Plains Energy Incorporated (NYSE:GXP)

Q2 2012 Earnings Call

August 09, 2012 9:00 am ET

Executives

Kevin E. Bryant - Vice President of Investor Relations and Treasurer

Terry Bassham - Chief Executive Officer, President, Chief Operating Officer of KCP&L, Chief Operating Officer, President of KCP&L and Director

James C. Shay - Chief Financial Officer and Senior Vice President of Finance & Strategic Development

Analysts

Shahriar Pourreza - Citigroup Inc, Research Division

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

James L. Dobson - Wunderlich Securities Inc., Research Division

Charles J. Fishman - Morningstar Inc., Research Division

David A. Paz - BofA Merrill Lynch, Research Division

John Ali

Operator

Good morning. My name is Therese, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2012 earnings webcast. [Operator Instructions] Thank you. I would now turn the call over to Kevin Bryant, Vice President of Investor Relations and Treasurer.

Kevin E. Bryant

Thank you, Therese, and good morning, everyone. Welcome to Great Plains Energy's Second Quarter 2012 Earnings Conference Call. Joining me this morning to discuss our second quarter earnings and operating results are Terry Bassham, President and Chief Executive Officer; and Jim Shay, Senior Vice President and Chief Financial Officer.

Before we begin, I must remind you of the inherent uncertainties in any forward-looking statements in our discussion this morning. Slide 2 and the disclosure on our SEC filings contain a list of some of the factors that could cause future results to differ materially from our expectations.

I also want to remind everyone that we issued our earnings release and second quarter 2012 10-Q after the market closed yesterday. These items are available along with today's webcast slides and supplemental financial information regarding the quarter on the main page of our website at www.greatplainsenergy.com. With that, I'll now hand the call to Terry.

Terry Bassham

Thanks, Kevin, and good morning everyone. Thank you for joining us on the call. I'd like to begin by introducing Scott Heidtbrink, KCP&L's new Executive Vice President and Chief Operating Officer. Scott began his career in Aquila in 1987 as a field engineer and held gas and electric distribution positions in operations, engineering, field and customer operations. He joined KCP&L in 2008 as a result of the acquisition of Aquila. Before assuming his new role, Scott was our Senior Vice President of Supply, where he led our efforts to bring [indiscernible] into service and had oversight of our generation fleet. Scott's 25 years in the energy industry, vision and day-to-day leadership of our operations will help the company maintain its strong and reliable system. Scott will be available during the question and answer session on this morning's call.

I'd also like to take this opportunity to thank our employees who have done an outstanding job in maintaining our transmission and distribution systems and our generation fleet during this incredibly hot summer. Their day-to-day execution ensures we're able to provide our customers with safe, reliable electricity they expect. Yesterday, we announced second quarter 2012 earnings of $57.7 million or $0.41 per share compared with earnings of $43 million or $0.31 per share for the same quarter last year. The headline to our story for the second quarter, of course, is hot weather, which helped to offset much of the negative year-to-date earnings impact associated with unseasonably warm weather in the winter. In addition, we continued to execute on our cost-containment programs, including the ongoing benefits from the 2011 organizational realignment and voluntary separation program will reduce the size of our workforce. Based on our results today, we are reaffirming our earnings guidance for the year of $1.20 to $1.40 per share, and Jim will provide more detail on the quarter in his comments.

Turning to Slide 4. Let me first provide an update on our general rate cases. Last week, Missouri Public Service Commission staff and interveners filed direct testimony in our KCP&L Missouri rate case. The Missouri staff identified a revenue increase range of $16.5 million to $33.7 million based on return of equity range of 8% to 9%. The staff further recommended the commission authorize a return on equity of 9% to the high end of that range. Although we disagree with many of the staff's positions, we remain confident that the result of these proceedings will be fair when we completed them. Staff and intervener testimony in GMO's rate case is due today and evidentiary hearings in Missouri for KCP&L and GMO are scheduled to begin October 17. We anticipate orders to be filed next January with new rates effective later that month. In Kansas, the Kansas Corporation Commission staff and intervener direct testimony is scheduled to be filed by August 22 with an evidentiary hearing scheduled to begin October 1. And orders due from the KCC by December 17 with new rates anticipated to be effective January 1 of next year.

Next I'll turn to operations. As depicted on Slide 5, our combined fleet equivalent availability factor, or EAF, for the second quarter was 83% compared to 70% for the same period last year. The primary driver of the increase was due to our Wolf Creek nuclear unit that was down for virtually entire second quarter last year for an extended refueling outage. Although Wolf Creek had a strong second quarter this year, running at 100% EAF and capacity factor, we do expect to increase in our [indiscernible] staff and are planning to spend additional dollars on the unit. With the extended refueling outage last year and the unplanned outage earlier this year, the unit's performance metrics have suffered. Although we've not been satisfied with Wolf Creek's performance for the past few years, the unit has provided clean energy since 1985 and we, along with our co-owners, are focused on returning the unit to high levels of reliable operations.

On the coal side of the business, our units have performed well this year, especially during the very hot summer. You may have seen or heard yesterday there was an explosion in a coal bunker at our Iatan 1 unit located in Western Missouri. No one was injured, the damage was minimal and the unit was never taken off-line.

Moving to Slide 6. I'll conclude my initial remarks with section of the discussion of the La Cygne environmental upgrade. In May, we successfully completed the approximately 580-foot tall chimney shell, one of the first steps towards installing air quality control equipment at our La Cygne units. The project remains on schedule for completion during the second quarter of 2015, and upon completion, we expect that 72% of our coal fleet will have emission reducing scrubbers installed.

With that, I'll now turn the call over to Jim.

James C. Shay

Thank you, Terry, and good morning, everyone. I'll begin with Slide 8, which provides a current year earnings per share reconciliation to the prior year. For the second quarter 2012, Great Plains Energy's consolidated earnings were $0.41 per share compared to $0.31 in 2011. The contributing factors to the $0.10 per share increase were: first, an estimated $0.08 per share impact from favorable weather; second, approximately $0.06 per share from new retail rates in Missouri that became effective in May and June 2011 for KCP&L and GMO, respectively; and third, special factors in 2011, up $0.06 success per share related to the extended refueling outage at Wolf Creek and costs associated with our organizational realignment of voluntary separation program. These factors were partially offset by an estimated $0.03 per share for operating and maintenance expense at Wolf Creek, resulting from an increase in amortization from the 2011 extended refueling outage and other increased operating and maintenance expenses. Next, approximately $0.03 per share of increased interest expense primarily due to the absence of Iatan 2 carrying cost. And finally, other costs estimated at $0.04 per share, including dilution and a tax benefit in 2011 from a settlement of a 2006 to 2008 tax audit. For the first 6 months of 2012, earnings per share were $0.34 compared to $0.32 in 2011. The primary drivers impacting the $0.02 per share increase include an estimated $0.18 per share resulting from new retail rates in Missouri that I previously mentioned and special factors in 2011 of $0.13 per share relating the organizational realignment and voluntary separation program, the extended refueling outage at Wolf Creek and a loss representing KCP&L and GMO's combined share of the impact of disallowed construction costs for the Iatan 1 environmental retrofit and Iatan 2 projects and other costs as a result of rate orders in 2011 by the Missouri Public Service Commission. The primary drivers I just mentioned were offset mostly by: first, approximately $0.12 per share of interest expense due to the absence of Iatan 2 carrying cost; second, an estimated effective $0.09 per share at Wolf Creek resulting from the unplanned outage during the first quarter 2012, and an increase in amortization relating to the 2011 extended refueling outage and other operating and maintenance expenses; third, an approximate impact of $0.03 per share resulting from less favorable weather year-to-date due to a decrease in heating degree days during the first quarter of 2012 that more than offset the impact of an increase in cooling degrees during the second quarter of 2012. In addition, approximately $0.01 per share due to customer mix within weather-normalized demand. And finally, an estimated $0.04 per share from a variety of other factors, including a tax benefit from a valuation allowance reversal in 2011, a benefit in 2011 from a settlement of the 2006 to 2008 tax audit and a loss on the sale of real estate during 2012. Second quarter 2012 and year-to-date earnings for the electric utility segment can be found in the Appendix and in the earnings release we issued yesterday.

Next, turning to Slide 9. I'll provide a few comments on our retail customer consumption. For the quarter, total retail megawatt hour sales increased 4.6%, while estimated weather-normalized sales increased by 0.1%. Cooling degree days for the quarter were 56% above normal and about 30% above the comparable 2012 period. Compared to normal weather, the second quarter gross margin was favorable by approximately $31 million or about $0.13 per share. Year-to-date, total retail megawatt hour sales decreased 2.2%, while estimated weather-normalized sales increased by 0.2%. Compared to normal weather, the positive gross margin impact of weather was about $17 million or about $0.07 per share, respectively. While our residential sales have declined, we continue to see signs of an improving local economy. Year-to-date through May, nonresidential construction was up 55%, and residential construction was up 36%. Home sales in the Kansas City area climbed 9% in May compared to the same period last year. Additionally, the unemployment rate for metropolitan Kansas City fell to 6.8% in June, which is 1.5% lower than June 2011. Typically, improvement in construction, home sales and unemployment are leading long-term indicators of where the local economy is headed with the positive impact to residential demand to lagging indicator. Overall, we are maintaining our expectations of 0.5% of weather-normalized demand growth in 2012. As I will discuss later, to the extent this growth is not achieved, it may be offset by the positive impacts from weather.

Turning to Slide 10. In June, we issued approximately 17.1 million shares of common stock to settle our obligation under the equity units. You may recall we successfully completed the early remarketing of the debt component of the equity units in March. Proceeds from the June conversion were used to refinance a portion of GMO's $500 million, 11.875% senior notes that matured in July. Given our 2012 and 2013 maturity schedule, we continue to evaluate a number of refinancing alternatives, but expect to refinance the remaining portion of this maturity with an issuance of long-term debt by early 2013. If we receive fair and constructive outcomes in our rate case, we do not expect to issue additional equity for at least the end of 2013. Beyond 2013, if we have a need to issue equity that would support our credit rating and true up to our cap structure, we would likely try to target the issuance to be included in the true updates and the general rate cases to bring the La Cygne environmental expenditures into rate base.

During the second quarter, we enhanced our liquidity profile when GMO put in place a new accounts receivable facility that has $80 million of additional capacity during the summer months and $65 million the rest of the year.

I'll wrap up my comments on Slide 11. As Terry indicated earlier, we are reaffirming our 2012 guidance range of $1.20 to $1.40 per share. With the majority of our earnings typically generated during the third quarter, we do not believe it is appropriate to change the guidance range at this time. However, July weather has been warmer than normal and we believe that it -- unlikely that our earnings for the year will be at the lower end of our guidance range. We are also reaffirming our 2013 target of 50 basis points of normalized regulatory lag in our regulated operations. The Missouri and Kansas rate case outcomes will be key drivers in the ability to reach our target. We are hopeful that successful outcomes in these rate cases will enable us to avoid filing rate cases until we bring the La Cygne environmental expenditures into rate base. Beyond 2013, our regulatory lag targets will largely depend on the outcome of our current rate cases, including mechanisms allowed, along with overall growth in the economy, service territory and customer consumption patterns. We will continue to manage the business tightly so we can deliver reliable and low-cost service to our customers. That concludes my comments. Thank you for your participation, and I will now turn the call back to Terry.

Terry Bassham

Thanks, Jim. Our plan is to execute on a strategy of providing exceptional operational excellence in tightly managing costs while achieving successful outcomes in the Missouri and Kansas general rate cases. This will provide the framework for delivering strong shareholder returns. We'll also continue working on completing our La Cygne environmental upgrades on time and on budget. While partnering with AEP to form Transource Energy earlier this year. We are also well-positioned to compete in the emerging competitive transmission market. Transource provides an opportunity for long-term growth while further diversifying our earnings and footprint. In conclusion, we remain focused on the simple vision of being a reliable regional utility for our employees, customers and shareholders, which we believe will create competitive long-term total shareholder returns for shareholders in the years ahead. Thank you for your attention this morning. Jim, Scott, and I would now be happy to take any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Shahr Pourreza with Citigroup.

Shahriar Pourreza - Citigroup Inc, Research Division

If we -- when you think about your guidance for 2012, we assume normal weather the rest of the year and weather-normalized sales coming in around 0.5%, could your earnings come in at top end of the guidance range? We've seen some of your peers tied to the top end.

James C. Shay

Yes, with the benefit of $0.13 of weather in the second quarter and July coming in strong potentially with just based on the weather patterns. There's a potential to perform well within the range, reaffirming our 0.5% growth for the total year based on our first 6 months. We'll require some growth, so it might have some of a balanced case to protect it on the downside if we don't achieve that growth. Hopefully, that helps provide some insight.

Shahriar Pourreza - Citigroup Inc, Research Division

Yes. On the residential side, weather-normalized, what's causing the drop that we're seeing on the sales end of it? Is it energy efficiency? Is it customers, is it general housing market? What's causing that drop?

James C. Shay

Well, you can see that the use per consumption has dropped, and it might be due to maybe some of the weather patterns could be driving some customer behavior. They indicated -- based on the economic data, we think the long-term trends are positive, but there may be some impacts of energy efficiency and customer reactions to some of the hot weather that could be driving some near-term consumption issues. But it's kind of challenging to see through, and I think many utilities are trying to understand the same drivers.

Shahriar Pourreza - Citigroup Inc, Research Division

Got it. Got it. And then just last question on the transmission front. Can you just maybe elaborate a little bit on the transmission line you announced recently with Omaha Public Power, and why wasn't that in the Transco? Or is this something that's kind of early stages or something you can build into your outlook?

Terry Bassham

This is Terry. The one that was just announced was actually the second of the 2 projects that have been approved by the SPP in which we had announced was contributed to the Transource partnership. So it's not as much a new line as it is publicly announcing the process to hit the market, if you will, to find the path. So, yes, it's part of the Transource process. I think we've talked about the size of the project being around $400 million dollars and would provide start-up, if you will, to Transource once we finish all the regulatory approvals for that.

Shahriar Pourreza - Citigroup Inc, Research Division

Got it, got it. And then, is there any updates as far as the Transco with AEP as far as projects, or how are we doing there?

Terry Bassham

What -- the process has continued and the AEP, and we, as a group, are working on projects that are available to be bid on. But we really don't have anything today in terms of firm announcements around projects, which we can see the end date to.

Operator

Your next question comes from Paul Ridzon with KeyBanc.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

I'm just looking at weather for the third quarter so far. It looks like July alone had as many heating degree days above normal as the entire second quarter. And can we translate that to something in the order of $0.10 to $0.13?

Terry Bassham

I'll be hesitant to convert July weather at this point. But we haven't worked through our closing process. I'd be hesitant to convert that at this time, but clearly, July weather has potential to help us perform well within the range.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

And just a clarification on your comments on guidance, did you say you didn't foresee being at the lower end of range or lower half of the range?

Terry Bassham

The lower end of the range.

Operator

Your next question comes from Brian Russo with Ladenburg Thalmann.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

You mentioned earlier escalating costs or operating and maintenance costs at Wolf Creek. I was just curious if you could elaborate on that and how comfortable are you with the cost trends to match that of the sales growth?

Terry Bassham

Yes, I mean, certainly, we've indicated that given past performance, we expect there to be some additional oversight in expense. We're spending dollars to improve performance. So that is the trend we've talked about. We believe, though, that's manageable within our current guidance and within our expectations. And so as an entity, we expect to live within our means and don't expect that to have a negative impact overall.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And can you just update us on the status of the fuel audit?

Terry Bassham

Yes, the fuel audit is -- we're expecting to get an order on that this month. We did have a preliminary hearing or preliminary discussion about that by the commission a week or so ago. And we had at least 1 commissioner who wanted some additional time. But the commentary around in the open meeting, commentary around that was positive, so we continue to feel very good about that outcome.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And then lastly, staff testimony in the KCP&L M.O. case, was there any mention of the cap structure or the equity ratio?

Terry Bassham

No. No mention of equity at all. The mention of cap structure had a few adjustments, but nothing that's not typical for us to see and deal with.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And then lastly on the staff testimony. It was a little unclear as to what their position was on the system sales or the sales outside the service territorials. I was wondering if you could just maybe elaborate on what their position is?

Terry Bassham

Yes, in general, they opposed our request for an, I guess, what I would call an improvement to the current methodology, which is 40th percentile estimate of success on sales included as an offset to base rates. We'd asked for an additional opportunity to capture some sales that might occur above that and some protection below that. They opposed that improvement, if you will, but they basically continued the same methodology we had over the last several years using our estimates of the expected cost or expected result.

Operator

Your next question comes from Michael Lapides with Goldman Sachs.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Just a couple of kind of model-oriented questions and then one strategic one. On the model-oriented side, what are you embedding for O&M growth rate for 2012, like what's in your guidance for 2012 O&M growth?

Terry Bassham

In terms of a run rate, we have not gotten that granular within our guidance band, but I mean, we do have a real sharp focus on cost control and other than some incremental expenditures for Wolf Creek. That's kind of a relative to our previous guidance. That's kind of really the only area of potential cost growth for the balance of the year. So we remain very vigilant and focused on cost control, and I think you can see some of that in some of the year-over-year O&M comparisons.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Okay. And when we think about the rate increases you've taken to date, what's left for the remainder of 2012? Meaning, what have you not taken that you will take in the third or fourth quarter of '12?

Terry Bassham

When you say rate increases we've taken...

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

You mentioned first that you've already received from your last round of cases that went into effect a number of months ago, you had some benefit from in the first quarter. You had incremental benefit from the second quarter. I'm just trying to think about the dollar millions that you will receive in the third and potentially beyond that in terms of what's left from the last rate increases allowed by the various commissions.

Terry Bassham

Well, without knowing usage patterns and the actual dollar amount, this will be a full year of increase reflected from the last increase. So we'll have a full year's effect of increase that went into effect last summer. The actual dollar impact of that will be based on usage and those kinds of things.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Did those increases go into effect at the third quarter of last summer or…

Terry Bassham

Second quarter.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Second quarter. So in other words, there's nothing incremental to take in the third quarter of '12 if you haven't likely already taken?

Terry Bassham

On a year-over-year basis, no.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Okay. Just checking. Last thing, Wolf Creek. With you, Westar and the meetings that are on the small size of Wolf Creek, you face some operating issues, you've had some cost pressure. Is there any rethinking by the joint owners about whether you all are the logical owners given a little bit of a lack of economies of scale, given a little bit of a lack of recent operating performance issues and cost pressure?

James C. Shay

I would say, first of all, we are very confident that we are -- we will be able to operate effectively as we currently stand. So our 3 owners are committed to good operations. We have in the past operated well. The unit is aged a little bit and we need to spend some money and focus on performance. So we are confident of that and committed to that. I would also say that we are always looking for opportunities to get better. So we'll continue to look at opportunities. We have a program where we share information and work together with our other single-unit, smaller sites to try to gain some economies of scale that way and share knowledge. So we're always looking at how to get better and we'll continue to do that as we go.

Operator

Your next question comes from Jay Dobson with Wunderlich Securities.

James L. Dobson - Wunderlich Securities Inc., Research Division

Just a couple of questions. First, just to clarify, the Wolf Creek refueling outage, that's still scheduled for first quarter of '13?

Terry Bassham

Yes, that's correct.

James L. Dobson - Wunderlich Securities Inc., Research Division

Okay. And we should, Jim, expect that to impact earnings by about $0.06? I think you'd said on the first quarter that sort of delaying that offset the $0.06 negative of the unplanned outages? Is that still the way to think about it?

Terry Bassham

No, I mean what we broke down in the first quarter was that the $0.06 was the impact to the first quarter related to higher fuel expense and O&M that we experienced during that period and then we were impacted year-over-year by another $0.01, which was the impact of the prior higher amortization this year from the prior refueling outage. You can see in our current quarter, we had another $0.02 of that kind of carryover that higher amortization. But as we look forward, obviously, the full RF-18 cost amortization will be -- will roll through this year except for maybe a month. And then we'll start the RF-19 amortization in '13. But I don't believe, Jay, we've put a number to that. But we indicated earlier that we kind of had -- we thought that we would be able to cover this year the -- that this would be P&L neutral relative to our preliminary forecast. Now in our current update, we're noting that we do have some higher expenses for the last 6 months of this year than what we earlier thought. But hopefully, that helps you work through your modeling issues.

James L. Dobson - Wunderlich Securities Inc., Research Division

No, that helps a lot. And maybe on to operating costs and then I'm thinking operating costs sort of x Wolf Creek when I look at the income statement, it does sort of highlighting, Terry, your comments early on, I think the operating costs were lower. As we look at over the balance of the year and again, excluding sort of what we're seeing at Wolf Creek, which is likely some continued growth there, what's the underlying trend of operating costs?

Terry Bassham

Well our goal is to keep things flat. Obviously, we've got some increases that drive our rate case need or ask, but we said that once these cases are over, we don't expect to file and that's because we expect to maintain our overall cost structure at flat at least under the extent that we can continue to drop off this improvement and opportunistically find places we would hope to flat to down.

James C. Shay

Yes, I mean one of the variables that we don't have as much control over is some of the transmission allocations that we get from SPP, but we're trying to address those at the current series of rate cases through sort of a combination of riders and trackers to minimize lag moving forward.

James L. Dobson - Wunderlich Securities Inc., Research Division

Got you. No, that's helpful. And then, Terry, I heard you reiterate your sort of forecast of 50 basis points of the lag and then just sort of wanted to get a little bit more behind that. Is there something -- anything new in there or is it just some sort of an ongoing commitment and I guess sort of following on to that, if you did end up -- and I'm sure you're hoping you'll be better than where the staff is in Missouri, but if you ended up with something like a low ROE, would that 50 basis points still hold, just at a lower earned level or should we think of that as being sort of disappointing to the commitment?

Terry Bassham

No, no. I think what you're hearing from us is a continued commitment to that goal. And we said all along that we would expect to do that through managing our business. We believe we'll get a fair and reasonable outcome from our rate cases. But to the extent that we have something a bit different than that, we're going to manage that. And we are committed to delivering on that once we get through '13 and look at what happened in the rate cases and see what cost happened, we'll probably be able to give some guidance around '14 estimates, but for '13, our commitment is to deliver on our '12 and '13 commitment.

James L. Dobson - Wunderlich Securities Inc., Research Division

No, that's great. Then last question, Jim and Terry, I guess, the guidance, I hear you that you're sort of saying that will be the low end of that guidance. The July weather, pretty good, and you've got sort of the Wolf Creek still moving around. If we exclude Wolf Creek and sort of allow that to explain why you wouldn't say it's the upper half of that range. Anything else that you're worried about that prevents you from getting some more optimistic even within that range?

Terry Bassham

I would say with all those assumptions, you're exactly right. I would say what we've seen in the past -- we saw just last year from December weather. And we're also maintaining our guidance in the context of the rate case outcome, which on occasion, there are issues in the rate case that involve one-time adjustments to the books that could affect it. And again, we're committed to delivering on our promise there, regardless. So I'd say, outcome of the rate case and what we saw last year was some very mild weather in the early winter that could affect that to a degree, but otherwise, that affects us within that range, not outside the range.

Operator

Your next question comes from Charles Fishman with MorningStar.

Charles J. Fishman - Morningstar Inc., Research Division

If I could follow up on a previous question or your answer to a previous question, the Missouri staff testimony in the KCP&L case, the bulk of the difference is the off-system sales. Is there something else that's material in the differential? It looks like it's about what, $70 million, $80 million revenue difference?

Terry Bassham

You might have misunderstood me there. But actually, the off-system sales is not really a material difference at all. They had -- the request we had made to improve on that mechanism would have given us the ability again to protect the downside and share some of the benefit on the upside if occurred then have a dramatic impact on the acts itself. Looking at the delta between our filing in the higher end of their recommended range, probably -- well not probably, the most prominent difference is ROE. If you look at a 10% for ROE for us and a 9% for them, that's by far the largest single input to that difference. And there were some rate base adjustments jurisdictional allocations and cost of debt adjustments that they may disagree with that would probably drive a large part of the delta between the 2, not necessarily though the offset of sales.

Charles J. Fishman - Morningstar Inc., Research Division

Okay. And then just another question on -- regulatory question. So the way I understand it is, the next round would be you would wait until the La Cygne environmental upgrades are done. And if I look at Slide 6, that looks like early 2015 get that in rate base and then you would consider the next round of rate cases, did I understand that correctly?

Terry Bassham

Well our goal is to do exactly that. Our goal would be to finalize this case and not have another general rate case until La Cygne is completed. We are looking at the opportunity for -- if you call an abbreviated case in Kansas only, related to the construction work in process opportunity in Kansas, which would be an abbreviated filing done during likely 2013 to bring up to speed our CWIP balances. But again, that's an abbreviated case focused on that issue. Otherwise, our goal is to maintain cost, live within our means and not have another case in the interim.

Operator

Your next question comes from Shahr Pourreza with Citigroup.

Shahriar Pourreza - Citigroup Inc, Research Division

On the OSS margin thresholds for KCP&L Missouri, I think last time you estimated that the 40th percentile equated to about $27 million in margin. Since then, I think the asked prices have come off. Do you guys have a little bit more of a best guess of where the OSS margins could be at the 40th percentile?

Terry Bassham

Looking to see. I think actual filing was around $23 million. And honestly, since that filing, prices have dropped some. And so it was probably -- I'd guess, we haven't done the true-up yet, but I'd guess it's going to be closer to $20 million when it's all said and done. We'll file a true-up when it's all said and done. At that point, we'll be able to show you the exact number.

Operator

We have a follow-up question or a comment from Paul Ridzon with KeyBanc.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Back on the wholesale, what did you ask for that was different than the previous construct?

James C. Shay

We had asked for an opportunity. If we were over our target by a particular percentage, then we propose sharing the overage between us and the customers. It'd be an opportunity for us to -- incent us to have an opportunity to gain a few dollars if we had a good year. And in return, I mean on another side, we'd also suggested that below a certain percentage of the lower end that something dramatic happen, which has happened to us here couple of times, we have some protection on the lower end, and so, the staff did not adopt that; instead, preferred the current methodology as it stands.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

When's your -- what's the time frame when you can get a fuel -- a full fuel pass-through?

Terry Bassham

In the 2015 case.

Operator

We have a follow-up question or comment from Michael Lapides with Goldman Sachs.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Guys, just thinking about the ARC in Kansas, the abbreviated rate case. If you filed it next year, are you using a year-end 2012 kind of allocated CWIP balance for La Cygne when you file?

Terry Bassham

No, it should be updating through 2013. The idea would be, again, it's abbreviated, but -- and since it addresses, in particular, this issue, but it should carry through the better part of 2013.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Meaning it'll have like a known and measurable component or have like a forward look to it?

Terry Bassham

Yes, we'll get -- we'll file it and get an update 3 months after we file to give us the most current dollar amount at that time, which puts us through -- should put us through to 2013.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Got it. And Jim, when you look at the cap structure, you made a comment in your prepared remarks regarding potential refinancing opportunities. Can you talk about which tranches and include things like the impact of make-holes you think are most viable for potential refinancing alternatives?

James C. Shay

We are -- as we indicated earlier, I mean, we would be -- we're planning on combining a couple of financings and doing -- we would think about doing a couple of longer-term financings early next year. It could be in the first half of next year. It could be 1 or 2 financings. We've got both $250 million of KCP&L notes that are due, so we would package those plus as part of a larger refinancing next year.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

But are there any ones that are not coming maturities, meaning, next 12 to 24 months? But where you look at the tranche and you say, "wow," given where interest rates are in the markets and where companies with your credit rating are doing financings right now, I could save the significant amount by taking it out early?

Terry Bassham

No, we're not saying anything like that.

Operator

Your next question comes from David Paz with Bank of America.

David A. Paz - BofA Merrill Lynch, Research Division

I had this question -- you may have addressed this, but can you just remind me what items are trued up in your rate case in Missouri?

James C. Shay

Yes, I mean the main thing would be a plant. We'd also have some other smaller adjustments for our employees and sales. But in general, the biggest one that has the major impact is plant service and wholesale sales. Remember, we talked about updating the wholesale sales number?

David A. Paz - BofA Merrill Lynch, Research Division

And that's at the end of this month, correct?

James C. Shay

Yes, end of August.

David A. Paz - BofA Merrill Lynch, Research Division

And I guess generally, is that -- let me ask you this, just generally how many months after a filing a rate case do you true up both in Kansas and Missouri?

Terry Bassham

In Kansas, it's 7. I'm being told it's a little shorter than that. It's 3 in Kansas and 5 in Missouri, I'm sorry.

David A. Paz - BofA Merrill Lynch, Research Division

Okay. So if we look into next round of rate cases, I believe, Jim, you mentioned that, I mean, of any equity needs would be tied to that next rate -- round of rate cases. Should we kind of think about it as timing to the true-up date?

James C. Shay

Yes, I mean in my comments, we talked about if we have a need for equity based on cap structure, obviously, timing it in connection with future rate -- or with the true up would make sense. But really, it's largely driven by -- are there any equity needs to support the current rating, but we try to time it in connection with the true up.

David A. Paz - BofA Merrill Lynch, Research Division

Is there a certain equity -- the target equity ratio that you look for when you go into round of rate cases?

James C. Shay

We'd want to be at least 50-50.

Operator

Your next question comes from Jay Dobson with Wunderlich Securities.

James L. Dobson - Wunderlich Securities Inc., Research Division

Terry, I just want to follow up on a little bit of a higher level. So, a belated congratulations, you have a CEO title since the last call. You're, what, 64 or 68 days into the new title. As you look forward, I know you've got a lot on your plate from a regulatory perspective immediately. How do you envision changing with investors and folks on this call now see as Great Plains Energy?

Terry Bassham

Yes, we have -- I think we have had a history of operational excellence and community employee excellence, and we've built a lot of great assets over the last several years. In those years, I was the CFO, awesome. I think what we have tried to say since Investor Day a year ago is that we are committed to total shareholder return excellence. And we want to be what we're talking to our employees about, what we're talking to shareholders, what we're to the community about, is we will be known as reliable utility on each of those fronts. So we want to be that utility that performs on a regular basis, and we certainly had a lot of between the merger and the sale of strategic and the things that'll happen in our economy and usage, like most utilities, we've had some difficult times and maybe being as reliable in those discussions as we would like. But going forward, our commitment is to perform on the day-to-day operational basis, top-tier, and to be able to be very reliable in terms of our returns. So we expect to really focus on costs and in our current regulatory and economic environment. I think that we owe that to our customers. And we are working very hard to be sure that we can deliver on our expectations and be a very competitive regulated utility return.

Operator

[Operator Instructions] Your next question comes from John Ali with Decade Capital.

John Ali

Just wanted to ask you pretty good history of settling in Kansas and historically one of these [indiscernible]. I know staff is going kind of middle of this month, et cetera.

James C. Shay

Yes, you're a little light. If I heard you though, the question was whether or not we saw an opportunity possibly to settle in Kansas?

John Ali

Yes. And then historically like timing-wise, when is that happening?

Terry Bassham

Yes. I mean I think we're always looking for an opportunity to settle in both jurisdictions. And, yes, traditionally, we've had a little more success with that in Kansas. Traditionally, discussions around settlement would occur after their testimonies filed. So as we get the testimony filed in Kansas as we have now in Missouri, positions are known and you have the ability then to start discussing settlements and that can really continue until the commission's order occurs, but more likely from the time that they filed their testimony to the start of hearings tends to be the best time to do that. Once you've done the work around hearings and gone through that, you're working on brief, the time allowed to talk about settlement gets a little tougher to do. So I would say between August, start of September and the beginning of hearings in October is probably the prime time for that opportunity. I'd also say that, in particular, Missouri, but in both jurisdictions, we're also able to settle issues, but sometimes when we have a hearing, it may not be so clear to see that even though we had a hearing, we settled a large number of the issues before going into hearing to minimize what really turns out to be in front of the commission for decision, which is an important element, too, especially in Missouri. But we do hope to be able to talk to both parties about something that makes sense to avoid the cost that goes with litigation.

Operator

We have a follow-up question or comment from Paul Ridzon with KeyBanc.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

You last rated the dividend in November. How should we think about that trajectory going forward? Should we look like that as an anniversary date?

Terry Bassham

We haven't announced that. What we have said, though, is that part of our investment thesis is to be a growing utility both in our shareholder value, which includes a growth in dividend. So with given metrics around the payout ratio and given out our expectations to maintain that ratio and so as we look at opportunities to deliver on that investment thesis, you'll see that. Other than that, we haven't committed to a particular quarter to make that kind of announcement.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

If the ongoing rate cases in 2 jurisdictions that won't be resolved by year-end, is that maybe going to give you the onus to do anything?

Terry Bassham

No. I mean I think both our commissions realize that a healthy dividend payout for a healthy utility is important, and our ongoing shareholder returns are part of the process and I don't think that the fact we have a rate case pending will have an impact on that at all.

Operator

And there are no further questions. I will now turn the call back over to Terry for any closing remarks.

Terry Bassham

Great. Thank you, everybody, for calling in this morning. I hope the answers to the questions have been helpful to our materials. Look forward to seeing many of you at our opportunities to get out of the office and visit with shareholders. And if at any time you have additional information, feel free to call our Investor Relations team. Thank you very much for dialing in today.

Operator

Ladies and gentlemen, thank you for joining today's conference. Thank you for your participation. You may now disconnect.

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