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Westar Energy, Inc. (NYSE:WR)

Q3 2013 Earnings Conference Call

November 8, 2013 10:00 ET

Executives

Bruce Burns - Director, Investor Relations

Tony Somma - Chief Financial Officer

Mark Ruelle - President and Chief Executive Officer

Analysts

Greg Gordon - ISI Group

Julien Dumoulin-Smith – UBS

Michael Lapides – Goldman Sachs

Travis Miller - Morningstar

Brian Russo - Ladenburg Thalmann

Sarah Akers – Wells Fargo

Operator

Good day, ladies and gentlemen and welcome to the 2013 Third Quarter Westar Energy Earnings Conference Call. My name is Derrick and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Bruce Burns, Director of Investor Relations. Please proceed.

Bruce Burns - Director, Investor Relations

Thank you, Derrick. Good morning and welcome to our third quarter call. Last night, we filed our 10-Q along with the earnings release and supplemental materials which can be found under the Investors section on our website at westarenergy.com. Some of our remarks will be forward-looking. So I will remind you of uncertainties inherent in our comments this morning and in some of the statements found in the earnings release and the accompanying materials. Factors that could cause our future results to differ from what we discuss today include those listed in the 10-Q under forward-looking statements and under risk factors. We encourage you to read the full disclosure in the 10-Q and in the earnings materials, both of which are available on our website. The earnings materials also reflect how we reconcile our gross margin presentation to GAAP earnings.

Commenting this morning will be our CFO, Tony Somma and our President and CEO Mark Ruelle. We have other members of our team with us, should you have questions for them. Tony will offer highlights on the quarter and address guidance and will also discuss some recent financing activity. Mark will provide an update on regulatory activities and some observations about our business.

With that, I’ll introduce Tony.

Tony Somma - Chief Financial Officer

Thanks, Bruce. Good morning everyone. With a strong quarter and EEI coming up next week, where we get to see many of you, we will keep our remarks this morning brief. Despite much cooler weather in last year, EPS for the quarter were $1.04.

Before I shed light on the quarter, I’d like to talk about earnings guidance. As you look at strong year-to-date results and considered the contribution from higher residential and commercial sales, benefits from cost containment initiatives, financing activities and lower tax rate, we are pleased to boost guidance up $0.15 to a range of $2.20 to $2.30. Of course, guidance continues to be conditioned on the typical factors we don’t control such as the weather. We look forward to carrying this momentum into next year, in particular, contributions from a growing transmission investment.

I will comment on 2014 drivers in a moment. Let me take you to some pluses and minuses for the quarter. Gross margin decreased 1% due to weather and industrial sales, which I will say more about in a minute helping our favorable price adjustments related to investments we have made in air quality and transmission. As for retail sales, I will give you comparison to both normal and last year. Weather was slightly milder than normal costing it’s about $0.02. For year-over-year comparisons, weather was more significant and we estimated cost just about $0.11 to $0.12 as last year was unusually hot.

As we have discussed all year, industrial sales are soft, but heavily influenced by just a handful of large low margin customers. For the quarter, two refinery customers account for all the year-over-year change and then some. One of these which accounts for most of the change had an unplanned outage it’s now completed and has returned our operating about even last year’s levels. Adjusting for these two, industrial sales would have largely unchanged from last year. It’s worth noting that even though sales volumes are large, those two customers only achieved about $0.05 of EPS.

We are seeing growth of 50 to 100 basis points in our higher margin residential and commercial customers. All told, we are still comfortable with our projection of flat retail sales for the year assuming normal weather. We continue managing cost. Staffing is down a couple of percent from last year on top of the 4% reduction from the year before. Our cost measure plans remain on track though the income statement as there is a little explanation to see it first as the summer peaking utility operating cost vary quite a bit quarter-to-quarter. Second, the headline increase in O&M prices really going on. Around $9 million of the increase has revenue offsets and here are some of the details. $3 million of higher transmission expense that comes back to us as return on our growing transmission investment, higher property taxes of $4 million that we reflect through a tracker are driven by those same capital investments. And a couple of million dollars of higher tree trimming and reliability expenses reflecting the forward-looking revenue adjustment approved on the last general rate case.

The balance of the O&M increase comes from about $6 million more for unplanned outages at our fossil plants because last year we had record plant reliability and experienced very few unplanned outages. Last around $4 million to amortize the last refueling outage as well as some higher expenses at Wolf Creek. We also recorded $4 million more in depreciation expense. All-in-all, we are still on track for 1% or better decrease in spending for those items without revenue offsets. $7 million of COLI proceeds increased other income. We budgeted about $40 million for the year and to-date have already received more than $17 million.

Now let me say a few words about our financing activities this year. In August we issued $250 million of first-mortgage bonds at just over 4.6%. We have taken advantage of the attractive debt markets this year increasing long-term debt by $400 million while driving down our – we had a cost of debt 100 basis points below what’s presently built into rates which of course helps us to offset regulator lag. As far as equity we sold all the equity that we will need for the next few years.

Through August we priced 4.2 million shares through a durable program. In late September we sold 8.9 million shares in the marketed for transaction. We actually traded up, filed the offer. Debt equity will rebalance our cash structure and appropriate equity level for the next general rate case, planned 2015 case to recover the remaining LaCygne retrofit. We will settle that block of 8 million plus shares right about the time of that filing. While not the case for everyone in the industry, we still have a lot of opportunities for good traditional utility investments and a great history of project management to go with it.

We consider project management core competency. Current CapEx remains on track with all of our projects on-time and on-budget or better. In fact one major project Prairie Wind is now running $10 million favorable to a budget that we already revised down earlier, now it’s $170 million. Before I turn the call over to Mark let me comment briefly on earnings drivers we posted last night. We project a modest increase in retail sales 50 basis points to 75 basis points. Drivers include updated tracker revenues most notably a $15 million increase in the transmission tracker. You should expect us to continue keeping a tight rein on all expenses. Some of these items will be tweaked between now and when we issue 2014 guidance on our year end call in February. But this should get you on the right track.

With that let me turn things over to Mark.

Mark Ruelle - President and Chief Executive Officer

Thanks Tony. Strong earnings this year are good news and should bode well for next year too. Continuing the run of Westar meeting or exceeding earnings targets for the last several years coupled with good dividend growth. With higher revenues and controlling costs we have more than made up for soft industrial sales from a couple of big customers. As Tony said we had a great reception for our last equity offering and were glad to have the overhang behind us with no more on the horizon.

Also in September we settled our abbreviated case for $31 million right in line with plan because the parties agreed on the amount of the revenue increase we expect the KCC to approve it in a few weeks. We also made progress on rate design by getting our revenues less dependent on energy volumes and more revenue recovered through fixed charges. We continued to use rate writers to minimize the frequency and size of general rate cases. This is constructive regulation and it benefits both customers and shareholders.

The Kansas economy continues on a pretty steady path no boom, no bust. Unemployment remains well below the national average favorable by over 100 basis points or so. We are seeing some positive signs for sales building permits were up and industrial sales outlook for 2014 and beyond is looking stronger. Next year Mars Chocolate will using about 7 megawatts the pop out new M&Ms here, a major salt mining customer recently completed 5 megawatt expansion more than doubling its load. New and expanding pipelines crisscross Kansas. A couple of those Tallgrass Express and Enbridge are under construction supporting our outlook for pipeline growth of 5% or better for the next couple of years.

A little noted to story is commercial aerospace in Wichita is growing. Spirit Aerosystems in designing and building the fuselage and other components for Boeing’s updated 737 in addition to several components on the new 787. There are other bright spots as well, many among plastics, pet food and food processing. In fact just this morning, they announced a new pet food manufacturer coming to Topeka. While some in the industry are struggling with the cost of meeting of renewables mandates, that’s not the case here. We just signed up another 200 megawatts of wind energy and at a cost competitive with our overall marginal cost of energy, which as many of you know is very low. Moreover, it’s at a flat fixed rate for 20 years. Not to mention that, wind gives us more flexibility to be able to come in carbon regs.

We are more than meeting our renewable mandate a difference is that we have done it without meaningfully increasing prices to our customers or driving them to subsidized rooftop competitors which drive up cost for everybody. We are in the process of developing some solar projects here, but they will be good for all of our customers. Transmission continues to grow now representing about a quarter of our business. Individually, most of the projects are small, yet they comprised about $200 million a year of investment for about as far into the future as we care to look. These aren’t high-profile or low probability Greenfield projects, but projects simply to enhance reliability right here in our footprint meaning they are not contested. The regulatory rules for transmission remain good for both customers and investors are showing that the right thing is to get built and on a timely basis.

In closing, let me remind you what Westar is all about. You won’t see us going all-in on any particular technology or the latest trend or fad. We don’t tell our story through press releases. We go about quietly serving our customers and shareholders and making the right long-term decisions for both. This includes growing our investment base, improving our reliability and using technology to take cost out of the business. It doesn’t attract a lot of headlines, in fact, we tend to avoid them, but we have produced consistent shareholder value both through meeting or beating earnings targets and with good dividend growth. In fact, since 2010 we have grown EPS about 8% a year. At $4 million, no large cap, but for those out there still seeking a traditional regulated utility investment and all that has to offer in terms of low risk, predictability and yield that investment opportunity still exists and it exists with Westar.

Derrick, we are now ready for questions from the financial community. Members of the media, we invite you to contact Gina Penzig. Gina’s number is 785-575-8089 if you have questions. Derrick, go ahead and open the lines please?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the line of Greg Gordon, ISI Group.

Greg Gordon - ISI Group

Thanks. Good morning guys. Great quarter.

Mark Ruelle

Good morning Greg.

Greg Gordon - ISI Group

Couple of questions. Tony, if you hypothetically were to come in right at the midpoint of your updated guidance of $2.25 a share?

Tony Somma

Yes.

Greg Gordon - ISI Group

What’s your estimate of what’s your regulated earned return on equity would be for the fiscal year?

Tony Somma

High 9s.

Greg Gordon - ISI Group

High 9s, so pretty close to your authorized?

Tony Somma

Yes.

Greg Gordon - ISI Group

That’s good. And when – approximately when in 2015 would you expect to make the rate filing, first, second, third or fourth quarter?

Mark Ruelle

Certainly, pretty early. Yes, we are thinking the testers probably Q4 to Q3.

Greg Gordon - ISI Group

Okay. So you are saying you are probably filing the first quarter of ‘15?

Mark Ruelle

Yes, that’s the best guess we have right now.

Greg Gordon - ISI Group

Okay. So you would pull the shares down sort of coincident with the filing?

Mark Ruelle

Within plus or minus a month or two on the filing.

Greg Gordon - ISI Group

Yes.

Mark Ruelle

Probably we are right after.

Greg Gordon - ISI Group

Got it.

Mark Ruelle

Yes. So if we file – hypothetically say we filed the case in April we maybe pull down the shares in May or June.

Greg Gordon - ISI Group

Got you. And then could you tell us what happened during the quarter to drive your effective tax rate guidance down to 29 to 30 and why you expected to trend back up to, let’s say, 32 next year?

Tony Somma

Sure. The IRS came up with some regs on removal cost and that gave us – I will take that of a couple of cents this year and that will carry into next year. We also I think took advantage like $0.01 or $0.02 on a capital loss carry-forward. That would not carry in the next year. Our COLI proceeds are about $3.5 million higher than the budget. So that drives down our effective tax rate. And next year, we are based on obviously our tax rate on what’s going to be in the budget for 2014 on the COLI proceeds. So those are some of the bigger items. And I think we also had a minor true-up on our file tax return this year that gave us may be a penny.

Greg Gordon – ISI Group

Okay. Is 31 to 33 sort of the tax rate that we should – we’d expect all things being equal at a normal level of COLI?

Tony Somna

Yes.

Greg Gordon – ISI Group

Okay, the final question, the $250 million you expect to refinance next year I think that’s 6% of debt.

Tony Somna

That’s correct.

Greg Gordon – ISI Group

Should we assume that you will save 100 to 150 basis points of prevailing interest rates? Is that about right?

Tony Somna

If you guarantee me interest rates to stay this well yeah, we’ll say – we’ll definitely save, if they stay at this ZIP code.

Greg Gordon – ISI Group

Issue it now, Tony. Lock it in. Thanks, guys. Take care.

Tony Somna

Thanks.

Operator

Your next question will be from the line of Julien Dumoulin-Smith, UBS.

Julien Dumoulin-Smith – UBS

Hey, good morning.

Mark Ruelle

Good morning, Julien.

Tony Somna

Good morning.

Julien Dumoulin-Smith – UBS

So if you don’t mind just taking a little bit more into the drivers on the cost increased next year if we don’t mind.

Mark Ruelle

Sure, I can take a stab at that, Julian, next year recall we’re going to have a outage of Wolf Creek that is in between the refueling outages and that outage will not be amortized – like the refilling outages are amortized over 18 months, to my recollection. This will be a period of expense so that will be something that hits us next year that you normally would not see. And then I think there is also some major equipment work delegate done at our base build units and it’s just kind of the cycling of the planned outages that takes place.

Julien Dumoulin-Smith – UBS

And may be perhaps more broadly, I mean what’s the trajectory of your O&M I mean you’re thinking of as you look even beyond ’14 and specifically here I’m just trying to get out the trend in the third quarter here seems to be some pretty healthy growth in the O&M despite some of the other assets just I talked about low growth coming back a little bit I mean how is that driving O&M?

Mark Ruelle

Yeah, first of all it’s a good question Julien, but there is a couple of things we need to point out what we call O&M based on how the Southwest Power Pool structure look. So for example we love in to O&M a lot of things while for example our property taxes are growing with our investment plan but they are the revenue tracker and we see transmission expenses growing that reflects most of the reflects our own revenue coming back so when you see transmission go – expenses going up you should note that means that we are getting a greater return on our transmission investment is just a funky counting of it, the way the Southwest Power Pool bids and receives transmission cost. So, what we tend to separate those things between that which has revenue offsets and that which doesn’t so, because the revenue offsets are basically related growing our business and growing our return on investment. So, tony with that context once talk about the trend on the things that don’t have revenue offsets, because that is what affects earnings.

Tony Somna

And don’t have revenue offsets as we said early in all year, this year you will see a 1% of decrease on those items and don’t have revenue offset and next year that will go up to probably around inflation, part of the major reason being Wolf Creek and just the cycle of the outages at our base load units. The long-term as a management team we were committed to keeping those cost below inflation, in particular and an environment where sales are just going modestly.

Julien Dumoulin-Smith – UBS

Got it and then how much as Wolf Creek contributing to that overall inflationary trend, I’m just curious given some of the struggles earlier this year.

Tony Somna

It would be I think our shares. It’s around 19 million bucks.

Julien Dumoulin-Smith – UBS

Got it. And then perhaps just a little bit different here we think about when contracting you’ve kind of upsize your procurements couple of times here, how much do you have left if you will as if you look at the balance of the decade.

Tony Somna

Well, we’re actually ahead of our mandate right now at the level required in Kansas. This 200 megawatts we just signed up, we’ll take us ahead of our 2016 mandate by a little bit and we won’t have any required step-up until 2020 or beyond.

Julien Dumoulin-Smith – UBS

2020 is next yeah.

Tony Somna

So this isn’t sort of us being reluctant to every time here is just we can’t believe these prices in the people walk in for 20 years.

Julien Dumoulin-Smith – UBS

Got it. Thank you very much.

Tony Somna

You’re welcome.

Operator

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

Michael Lapides – Goldman Sachs

Hi guys, thank you for taking my question. I just want to follow-up on the O&M and SG&A discussion a little bit. If I understand and Bruce was super helpful, trying to get my arms around this over the last four, five months, your gap O&M in SG&A combination that’s in your forecast for 2013 kind of $825 million, $835 million or so it’s – it seems O&M if I just used the growth rate from last year the 1% minus the things that have revenue offsets or I mean adding back the things that have revenue offsets. It almost strikes me that the rate increases you are talking about for ‘14 almost get entirely offset by O&M and SG&A increases. Am I thinking about that the right way?

Tony Somma

No. Michael the big thing is you’re talking about some of those with incremental increases especially the one for transmission that already has factored into or takes in or offsets any transmission expense increase, so those two offset right there. Some of the others that aren’t explicitly spelled out as far as some of the potential revenue changes as Mark pointed out earlier the property tax that will be part of that top line 10%. But again its offset, so it doesn’t get back to bottom line. And at this point we don’t have any more specificity around that. And we will do our best to try to clarify that when we do full year guidance in February.

Michael Lapides - Goldman Sachs

Okay, but if I am – if I am just thinking about it Tony from a GAAP perspective here. And I know I have done the math and it’s been super helpful to walk through it. It almost seems $80 million, $81 million of revenue hike plus whatever you get from demand growth with 50 to 75 bps worth. And then 10% cost increase in total off of an $830 million or so base, the revenue line, the cost line change almost identical there. What am I missing or is the cost increase just 10% on top of the controllable items the non-pass-through items?

Tony Somma

The controllable item increase really you should think about of 3%. Top line O&M, yes we grow by 10% but that 3% growth is as far as the controllable expense that’s the portion that will impact future I am going to say earnings trajectory.

Michael Lapides - Goldman Sachs

Got it, the Wolf Creek spend next year kind of having the unusual outage, it’s not part of the amortization schedule, the refueling amortization schedule do we then assume that that doesn’t recur in ‘15 and beyond or is this kind of a new normal?

Tony Somma

No, no, it’s a one-off. It has to do with tying in some mid-life replacement equipment. And it’s best done outside of refueling cycle.

Michael Lapides - Goldman Sachs

Okay and then finally we are watching the ISO New England docket on FERC transmission ROEs meaning requests by various interveners to have a lower ROEs for the lower base ROEs pre-incentives for FERC transmission, just curious when you talk to customer groups in the Southwest power pool what kind of feedback are you getting like are those guys paying attention of this docket. The Southwest power pool ROE I think it’s right around 12.1%, 12 2% that’s with incentives it I think with that it’s a little bit lower number obviously just kind of curious whether this is – the New England docket is one-off or is at the beginning of a national trend.

Tony Somma

Well, I mean obviously there is a trend going on. Everybody knows about that and our customers are well aware of that too. I think our base in our tariff is 10.8% and we get 50 basis points added for being the SPP.

Mark Ruelle

Right. And then there is a little bit of matter for being in the SPP and then depending on a project you may or may not have incentives on top of that but our base 10.8% frankly it’s not too far out of line with sort of the bandwidth, if you can update the FERC generic method not for all of that. Now if you look at it a year ago when people were sweating this, there were some people that were real outliers for two reasons. The first generic bandwidth put at real low. And second they had pretty high base ROEs. When we said about building our transmission growth plan we purposely did not push the envelope on that because as I said in my remarks, we view this business as a long-term good business not a short-term fabulist business that then goes way. So our view is building an ROE that we think is more sustainable over long-term and hopefully you’ll have less wrangling about that, so far we haven't had any rate complaints on it.

Michael Lapides - Goldman Sachs

Got it. And last item just wanted to check and Mark thank you for the clarity on that and I kind of completely agree with you on the SPP base ROE level versus national trends. Environmental CapEx after listening how are you king of thinking about what’s left and when you have to make the decisions on anything that comes after with it?

Mark Ruelle

We got started on with pretty early like we do a lot of work that others are going have to do to comply with math we did it earlier under regional haze and under a consent degree. So fortunately we are going to have most of that based on the rules as we understand them today behind us with the LaCygne retrofit. For example, to meet the MATS requirements, I think that’s I don’t know few million bucks. I think it’s under 20 million bucks to meet the MATS requirements, but it’s not because we are a specialist, it’s just because we did that work earlier. So we are looking forward to having that transmission or I am sorry, the air quality stuff falloff, one, it has some regulatory lag associated with it and it doesn’t produce incremental value for our customers and so that we can invest in things that have more value for our customers. So we are looking forward to the day after having spent a couple of billion dollars on this to see transmission pull down, cash flows go up and earnings go up when we could back off some of that construction.

Michael Lapides - Goldman Sachs

Got it. Thank you guys. Much appreciated. Very helpful.

Mark Ruelle

You’re welcome.

Operator

Your next question is from the line of Travis Miller, Morningstar.

Travis Miller - Morningstar

Good morning guys. Thank you. Wanted to deconstruct demand here a little bit, is it just looking into numbers here, 3Q and year-to-date the residential side down almost 9% 3Q and 4.5% year-to-date. How does that square, obviously, weather was a big deal especially in the third quarter. How does that square with that flat or that 50 to 100 bps growth?

Tony Somma

Travis, this is Tony. It’s all weather.

Travis Miller - Morningstar

All weather, okay so absent the weather you would flat on both of those?

Tony Somma

Commercial would actually be up.

Travis Miller - Morningstar

Okay, that’s the 50 bps to 100 bps?

Tony Somma

50 to 10, yes.

Travis Miller - Morningstar

Okay. And then going forward 50 bps to 75 bps demand growth, is that a level that would allow you given maybe your maintenance spend or even a little bit of growth spends on a normalized basis. Is that 50 bps to 75 bps of growth rate that can keep you out of substantial rate cases going forward or are we looking at a two, three-year cycle as you have been through recently?

Mark Ruelle

That’s kind of hard to say. So much of our revenue is tracked, so it’s kind of outside of that. I think where you have to see it, I don’t think that we assume that next year’s drivers on sales are necessarily perpetual, we are just saying next year. But obviously, we are and we have adjusted our business to a lower growth environment and sales and anybody that isn’t is going to see their business get away from them. And so we are putting in a lot of technology in everything else. We took out another 2% of our staffing in this year. That was on top of taking out 4% last year. That’s just the new reality based on sales. If sales go up, it gives us a little more room. Sales go down you got to manage a little tighter?

Travis Miller - Morningstar

Okay. Any desire to go to a decoupled or at least propose that in a 2015 phase?

Mark Ruelle

I mean, as I indicated we made some progress on rate design that do elements of that. Full decoupling is not really a front burner issue in Kansas, but there is a growing awareness of those things. And in some respects, we accomplished some of that. For example, we increased our residential customer charge significantly is up how much percent?

Tony Somma

33%.

Mark Ruelle

Yes. We increased the customer charge by a third and we backed off one of the tail block rates, which all that stuff helps us in terms of making us less dependent on volume, say sales volumes and more isolated from weather and that.

Travis Miller - Morningstar

Okay, great. Thank you very much.

Mark Ruelle

Yes. You should assume that’s kind of incremental in Kansas as opposed to a big generic docket that’s going to change the whole world for everybody at once.

Travis Miller - Morningstar

Got it. Okay, thank you.

Mark Ruelle

You’re welcome.

Operator

Your next question is from the line of Brian Russo, Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann

Hi, good morning.

Mark Ruelle

Good morning, Brian.

Brian Russo - Ladenburg Thalmann

Just on the $0.15 increase in the guidance, can you kind of brief that down into what is kind of non-recurring or one-time tax related gains versus what might be kind of ongoing from an operational perspective?

Tony Somma

Sure. When we – Brian, when we say guidance on our last quarter call in the first week of August, it’s pretty chilly out here, it was a meat locker. A cold July and first weeks of August looked pretty cool. As we looked out, we got quite a good pickup in September sales. Some of that was weather and some of that was just realization that our residential commercial sales are coming in a little bit stronger, but we had anticipated so sale gave us about a nickel, I don’t consider that one-time. Our O&M as we took a hard to look at that we were able to say call it $0.03 on O&M just looking at some of the things we can manage, interest expense was about a penny so that is ongoing. The tax pickup was about call it $0.05 or $0.06, half of that was due to the removal length and the removal clarify that we’ve got from the IRS and that will carry over the next year. The other $0.03 or $0.04 on the tax may be I’ll consider those a little more one-time, the capital loss carry forward label takes advantage and then of course little bit higher COLI income reduces our effective tax rate. Does that help you?

Brian Russo - Ladenburg Thalmann

Yes, it does, thank you and could you quantify the Wolf Creek planned outage cost for next year?

Mark Ruelle

In aggregate, I believe our shares about 9 million or 10 million bucks.

Brian Russo - Ladenburg Thalmann

Okay so that’s the cost for the repair that you will expense.

Mark Ruelle

Yes.

Brian Russo - Ladenburg Thalmann

Okay. And then lastly just you mentioned the quarter of the earnings you derived from transmission investments and I’m just curious can you remind us of the rate base on transmission and then just clarify is that all FERC jurisdictional or is there a piece of that rate base that you are on a KCC jurisdictional return?

Mark Ruelle

All FERC jurisdictional I would say that the rate base would be little less than a quarter and the earnings would be a little better than. So, we are in a little – we are in a disproportionate upon the transmission so I don’t know may be the earnings are in the 20 to 25 and the rate base more than 20.

Brian Russo - Ladenburg Thalmann

And then we are getting a pickup from Prairie Wind, we’re getting an income from Prairie Wind as well.

Mark Ruelle

Yes what I say is about 25% of the business and it’s going to be little bit different on a rate base and little then it is on earnings for as you are aware and as because we are in a little better on transmission.

Brian Russo - Ladenburg Thalmann

End of this year I think our rate base for transmission will be around a billion dollars and if you look over – look at out of the next couple of years it’s going to grow, I think, to $1.8 billion by 2017.

Mark Ruelle

Yes, it’s clearly the part of our business that we is most investor friendly and results in additional value to our customers in terms of reliability and access to power as suppose to your quality, which is just takes power away from your plans and drives the price up.

Brian Russo - Ladenburg Thalmann

Okay, great, thank you.

Operator

Your next question is from the line of Sarah Akers, Wells Fargo.

Sarah Akers – Wells Fargo

Hey, good morning.

Mark Ruelle

Hi, Sarah.

Sarah Akers – Wells Fargo

Can you give an update on transmission opportunities beyond the $200 million of ongoing spend?

Mark Ruelle

Yes, if you look in our slide deck, Sarah, we’ve had it in there for a while, we have kind of the long-term view of the things in our region that the Southwest Power Pool house in the drawing board. I think we introduced those like couple of years ago, one of those that come to fruition, we’ve already got deciding we’re starting to build that – that would be the one of it’s kind of the northwest corner where system that’s a 345 project. There is one of them that may be a little near to the front burner we’re not quite in the front burn in Southeast Kansas. Other than that we’ll just have to wait for the Southwest Power Pool to run its machinations and take it 10 year plans, 3 year plans and a 3 year plans to notices to construct. But if one of the things that as you look at the transmission business, people are going to have to get little bit keenly aware of it, things beyond the certain size they end up being contested competitively and so and that’s going to be case that’s not Westar that’s the case generally under Order 1000. What’s nice about our transmission investment is tough it’s not contestable. Doing these small projects that are not Greenfield – they are not contestable into the rules so, those are much more likely to produce solid value or you are going to have to put a discount factor on anybody’s transmission plans whether they are saying I’m going to build this particular Greenfield project in a subject to competition.

Sarah Akers – Wells Fargo

Great, that’s helpful and then just quickly which quarter should that $9 million or $10 million of Wolf Creek expense hit next year.

Mark Ruelle

Q1.

Sarah Akers – Wells Fargo

Q1, perfect, thanks a lot.

Mark Ruelle

You’re welcome.

Operator

(Operator Instructions) We have a follow-up question from the line of Julien Dumoulin-Smith, UBS.

Julien Dumoulin-Smith – UBS

Yes, just following up the last question I asked you, very quickly, if you think about your transmission CapEx budget for the near-term and particularly for the long-term, how do you think about the FERC 1000 process needing to run some of your projects now through that process and subject to some level of competition? And how comfortable do you feel about that given what we have seen in the past, what’s outside is coming into your territory?

Mark Ruelle

Yes. For the stuff that we characterize, there is couple of $100 million a year, but as far as we can see, it’s agnostic to it, is not affected by it.

Julien Dumoulin-Smith – UBS

Even in the long-term beyond the ‘15?

Mark Ruelle

Yes. It’s rebuilding our own stuff. Nobody else gets to do that.

Julien Dumoulin-Smith – UBS

Got you. And then so perhaps let me phrase it a little bit differently, is there an opportunity beyond the couple of $100 million to engage in participation in some of these processes that we should I suppose see out of SPP in the not too distant future, right?

Mark Ruelle

Absolutely. And we are keenly interested in it, but as I indicated we sort of don’t – we don’t operate on headlines and all those will be subject to competitions we will have to win those.

Julien Dumoulin-Smith – UBS

Got you. Alright, thanks for clarifying.

Mark Ruelle

Sure.

Operator

We have a follow-up question from the line of Michael Lapides, Goldman Sachs.

Michael Lapides - Goldman Sachs

Hi, Mark. I know this will come up a little bit over EEI, but just curious when you think out longer term, what strategic shifts or what structural changes if any and the answer maybe none? Do you anticipate what likely occur or what changes in kind of how you look at the potential risk could occur over the next three to five years when you just think about the broader direction, not just of the company, but companies like yours as well?

Mark Ruelle

Well, I think it’s going to be vulcanized based on people’s individual circumstances. So for example, those that are bleeding under really aggressive rooftop solar net metering, they have got to get that probably fixed. We don’t have that issue in Kansas. And we don’t want that issue in Kansas. So we are pursuing a different path to keep that up. Obviously, carbon regs are coming down the pike. We will have to deal with those. It’s part of the reason we like having 900 megawatts of wind and the low cost wind. That will help us take care some of that. And order 1000, we just had a conversation about with a couple of callers and that’s something that everybody is going to have to deal with, but Michael you know us well enough that we do not claim to be prognosticators of future. Our view is much more pragmatic than that. Most of us have, the folks around this table, the executive team have spent most of their careers, if not all their careers in this business. We have seen things come and go. And we operate the company with a lot of flexibility and room to maneuver so that we can succeed in any environment as opposed to putting our sales out there as the people that can guess the future right. Every once in a while, people get lucky doing that and they look like geniuses or heroes, but you never hear really about those that tried it and just kind of got by. Every once in a while you have seen big failures too and we are just not that kind of company. Our point is, for example, we still maintain a diversified portfolio of power. As I said, we don’t go all in on the latest things. We are going to keep room to maneuver, keep this company hitting on first base and occasional doubles, but we don’t swing for the fences here. We don’t think that’s what our investors are looking for. When they invest in Westar Energy, they get a very traditional, vertically integrated regulated company that has an intense focus on taking risks out of the business delivering utility levels of rates of return and constructive and cooperative regulatory relationship.

Michael Lapides - Goldman Sachs

Got it. Thank you, Mark. Much appreciated. See you next week.

Mark Ruelle

Yes, look forward to.

Operator

And at this time, I am showing no further questions in the queue. I would like to turn the call back over to Mr. Mark Ruelle for any closing remarks.

Mark Ruelle - President and Chief Executive Officer

Well, thank you again folks for joining us this morning. We look forward to seeing a lot of you next week. In the interim, if you have got follow-up questions, just give Bruce a call. Just as a refresher, Bruce Burns, Director of Investor Relations. His phone is 785-575-8227. Thank you and have a great day.

Operator

Ladies and gentlemen that concludes today’s conference. We thank you for your participation. You may now disconnect. Have a great weekend.

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