Westar Energy's (WR) CEO Mark Ruelle on Q2 2014 Results - Earnings Call Transcript

| About: Westar Energy, (WR)

Westar Energy, Inc. (NYSE:WR)

Q2 2014 Earnings Conference Call

August 7, 2014 10:00 AM ET

Executives

Bruce R. Burns – Director-Investor Relations

Anthony D. Somma – Chief Financial Officer, Senior VP and Treasurer

Mark A. Ruelle – President and Chief Executive Officer

John Bridson – Vice President, Generation

Analyst

Brian Russo – Ladenburg Thalmann

Travis Miller – Morningstar, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Westar Energy Earnings Conference Call. My name is Kim, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instruction) As a reminder, this conference is being recorded for replay purposes.

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

Bruce R. Burns

Thank you, Kim. Good morning, and welcome to our second quarter call. Last night we filed our 10-Q along with the earnings release and supplemental materials, which can be found under the investor section of our website at westarenergy.com.

Some of our remarks will be forward looking, so I’ll remind you of uncertainties inherent in our comments that this morning and in some of the statements found in the earnings release and 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 in the 10-K.

We encourage you to read the full disclosure in the 10-Q and the earnings materials, both of which are available on the website. The earnings materials also reflect how we reconcile our gross margin presentation with 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. Today, we will highlights on the quarter, comment on our financing plans and – excuse me, Tony will offer highlights on the quarter, comment on our financing plans and address guidance. He’ll also address our earnings outlook and growth estimates. Mark will refresh you on our regulatory plans and make some observations about our business.

With that, I’ll turn the call over to Tony.

Anthony D. Somma

Thanks, Bruce. Good morning. We’re pleased with the results through June, led by our rebound in industrial sales. Even more encouraging is that weather normalized residential and commercial sales are pushing us towards the top end of our sales guidance. Consistent with expectations before considering COLI, EPS for the quarter was $0.41 this year versus $0.45 last year.

Recall last year, we had about $10 million or $0.08 of COLI in the quarter. Through June this year, we’ve had none but we already know that we will book about $6.5 million of COLI in Q3. The remaining delta I’ll explain in a moment.

Gross margin increased 5% due to higher industrial sales and price increases. Industrial sales in fact were up 10% over last year which is the higher sales in every sector led by chemicals and oil, food processing and mill fabrication.

Based on what we see today we believe retail sales growth will reach or possibly go through the upper end of sales guidance. In line with our plans combined O&M and SG&A was above last year elevated level of spending for lability projects. This year’s spend is heavily front end loaded reflecting a timing of major maintenance projects that Wolf Creek and Jeffrey Energy center.

Major changes for the quarter were $9 million for plant maintenance projects on the fault fleet with the last year at Jeffrey $5 million of higher benefit costs, partially due to last year’s lower than normal expenses as we restructured insurance contracts that fund these benefits and $4 million for the plant Wolf Creek is last spring. As we’ve grown our investment base, depreciation and interest expense have also increased about $5 million. As already mentioned, the other major item was the COLI proceed this year, though as I said we know we’ll book at least $6.5 million in Q3 above half the actuarial budget for the year.

Major capital project continue on budget and schedule, we expect to energize rest of the Prairie Wind line ahead of schedule possibly by the end of the quarter. A significant portion almost 70% was energized in May. We also expect to complete the Jeffrey SCR by the end of the year on plan and was in budget of course. While the senior COLI retrofit continues on or a little better than budget and schedule is planned completion next year into the key driver of our general rate case.

We completed $430 million of refinancing this year with two 30-year first mortgage bond offerings with a blended rate of just 4.2%. The first was $180 million used to call higher coupon bonds in May, that carried a rate of 5.2%. And then in early July, we refinanced 6% of $250 million bonds. With that, more than 50% of our $3.2 billion of long term debt carries the coupon with a four handle or lower, that’s moved our average cost of debt about 100 basis points below the level on our last rate decision, which of course will benefit our customers?

In closing, last night we reaffirmed 2014 EPS guidance of $2.30 to $2.45 consistent with the drivers and assumptions posted out website. Mark?

Mark A. Ruelle

Good morning, and thank you joining us. I’m pleased to say that we’re ahead of last year, even taking into account the front-end loading for plant maintenance and the absence of COLI through Q2. Year-to-date retail sales were up 3.5%, led by a broad base of industrial customers.

As Tony said, commercial and residential sales too are ahead of plan and look as though they might push us to the top or maybe even through our sales guidance.

Unemployment in Kansas remains low in the high 4s and well better than the nation, we feel good about the business environment. Kansas has ranked the fifth best pro business state by a leading real estate brokerage consultant, and site selection magazine places Kansas in the top 10% of states for economic development projects per capita.

New business formation in Kansas increased again in 2013, which took us to a new record. Overall, things are moving in the right direction. The increase from industrial sales that Tony mentioned comes from the broad range of customers and industries, not just the rebound of the handful of customers we’ve been talking about this past year. This includes expansions by battery and plastics manufacturers, increased production of agricultural equipment and strong food processing; milling, frozen foods and treats. Pleased as we are with these increases, the diversity of the trend is nice to see too.

On the regulatory front, all tracking adjustments have been approved as planned. In anticipation of next year’s rate filing, we GXP who co-owns La Cygne with us along with the KCC staff and the consumer advocate filed a joint application for a construction accounting order for the La Cygne retrofit rate case. If approved, we’ll differ the depreciation expense and continue recording a carrying charge on La Cygne until new rates go into effect. It includes a procedural schedule that takes into account the regulatory workload by shifting the filing schedules of the two companies a little bit. We expect a decision on that procedural schedule by the end of next month.

There has been a lot of activity, most of it behind the scenes around order 1,000 and the transmission projects to be considered by the Southwest Power Pool. At this point, Westar and Canstar, our recently formed transmission subsidiary, has submitted 300 project proposals, which is about a quarter of the total for the nine state RTO.

SPP staff is evaluating the proposals and developing recommendations for the SPP Board. We expect it will be about this time next year before the SPP awards the first projects, and we plan to be among them. Remember that, any projects we pick up in this process will be additive to the billion dollars of solar transmission investment already in our CapEx forecast. The projects in our forecast already aren’t subject to these same new protocols.

Turning to the environmental front, like others we’re focused on the EPA’s carbon rule. We’re far more interested in shaping the final rule, one with adequate flexibility than focusing on this first draft. We already have plans to get to everyone who wants us to go without hurting jobs and obsolescing plans. It’s the interim levels in the draft rule that we find most inflexible. We’re continuing our discussions with EPA and engaging with other utilities to make sure our concerns are addressed towards a solution that works for everybody.

To close on a cheerio note, I’d like to share with you a recent development. When we take on largest projects that might affect our customers and the communities we serve, we always look for opportunities to engage and collaborate on good solutions. That’s exactly how we approach the recent project required to handle the water discharge from the upgraded scrubbers at Jeffrey.

By working with the Kansas environmental officials, river keepers and other environmental advocates, we developed an innovative green solution to treat the discharge using a constructed wetland. One is more environmentally friendly and saves our customers millions compared to the alternatives. For our efforts, our folks this year won the EEI Edison Award, the power industry’s most prestigious honor.

I am pleased with our progress, stronger sales, constructive regulatory developments, good growth opportunities and close management of our operations have kept things on track. We always aim to make Westar an investment over which you never have to loosely.

Now, we look forward to your questions. Members of the media, we invite you to contact Gina Penzig, Gina’s number is 785-575-8089 if you have questions. Kim, would you open the lines please?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Brian Russo from Ladenburg Thalmann. Please proceed.

Brian Russo – Ladenburg Thalmann

Hi, good morning.

Mark A. Ruelle

Good morning.

Brian Russo – Ladenburg Thalmann

Just can you talk a little bit more about the construction accounting, filing, more specifically what are – what is the depreciation expense that would be deferred and so the new rates go into effect as well as any other operating expenses?

Anthony D. Somma

I think – Brian, this is mark. I think the depreciation grow $15 million and maybe the carrying cost with a couple of cents

Anthony D. Somma

Yeah.

Brian Russo – Ladenburg Thalmann

Okay, great. And then can you talk a little bit about your earned ROE trends, you’re experiencing some lag now obviously given the swell in the capital budget. But as the CapEx winds down a little bit, how should we look at kind of the earned ROE versus your allowed? Should we assume that with new rates in effect in ’16, you can earn close to a loud.

Anthony D. Somma

So I’ll answer that first part, yes. And then with respect to kind of where we are today, as you mentioned, we are expensing some lag. The trailing 12 months ROE is about company-wide ’98, high 90s and then if you back out deferred regulated assets we’ve shown up a little more ROE than the state, we are looking at about 9.5% on the state assets.

Brian Russo – Ladenburg Thalmann

Okay. And is that, is that an overall GAAP type shareholder ROE or is that kind of the rate base equity ROE?

Mark A. Ruelle

It’s kind of a back-of-the-envelope rate base ROE, driven largely by GAAP numbers.

Anthony D. Somma

There’s not much difference for us, Brian.

Brian Russo – Ladenburg Thalmann

Okay. And just remind us what the weather normalized sales guidance is?

Mark A. Ruelle

So the weather normalized sales going into the year was 50 basis points to 100 basis points total retail, and what we’re seeing today, it looks like we’ll be at the top end or possibly through that range.

Brian Russo – Ladenburg Thalmann

Okay, great. And so, does that kind of imply that you might be at the top end of – or it is a bias towards the higher end of your 2014 guidance range?

Mark A. Ruelle

No, not necessarily. We need to get to the summer, and see what summer weather looks like in the balance of the year for COLI.

Brian Russo – Ladenburg Thalmann

Okay, great. Thank you very much.

Mark A. Ruelle

You’re welcome.

Operator

(Operator Instructions) Your next question comes from the line of Travis Miller from Morningstar. Please proceed.

Travis Miller – Morningstar, Inc.

Good morning. Thanks.

Anthony D. Somma

Good morning.

Mark A. Ruelle

Good morning.

Travis Miller – Morningstar, Inc.

Just want to apologize if you already covered this, busy morning here. But could you characterize the coal plant – plant outage expenses, what’s going on there, are these one-time things, and what’s the reoccurrence potential for some of those expenses?

Anthony D. Somma

Travis, this is Tony, we have John Bridson our Vice President of Generation here, and I’ll go ahead and turn the mike over to John.

John Bridson

Yeah, I would say they’re not one-time things, this is just regular maintenance that goes on at our plant. So it just so happens at the way these long or an advanced scheduled outages fell this year or fell in the first three quarters, then what will typically fall in the last quarter.

Travis Miller – Morningstar, Inc.

Okay. So, you should see that made up on a relative basis or year-over-year basis then to some extent then the third and fourth quarters?

Anthony D. Somma

Travis, this is Tony. Yeah, we’re still standing by our overall O&M and SG&A guidance increase that we issued now earlier this year.

Travis Miller – Morningstar, Inc.

Okay. And something near term potentially, how much of the business would you be comfortable in with that Transco type of structure. Is it something that you could grow to 30%, 40% plus where you could put couple of billion or more dollars of equity in, how do you see long term that mix where investments in Transco versus investments in core utility.

Anthony D. Somma

It’s a great question Travis. As you know, these SPP protocols are new, these will be – these incremental projects will be competitive projects and we are just as curious and even more interested than you as to how that will all unfold.

Now, clearly there are going to be a lot of projects built in the SPP and we won’t win all of them. And frankly, I indicated, we submitted 300 projects. Some of those are the same ones that others have submitted, and some of those are somewhat duplicative in that. There’s more than one way to skin a cat electrically.

So it’s hard to say whether that will end up being hundreds of millions or much bigger, and whether it will end up being a nice adder to our existing business or whether it will be a separate business that’s got a lot of substance on its own.

Travis Miller – Morningstar, Inc.

Okay. Very good. Appreciate the help. Thanks.

Mark A. Ruelle

Yeah, certainly the prospects are good, and we’re excited to have some additional opportunity, which we already see.

Travis Miller – Morningstar, Inc.

Yeah, indeed. Okay, thanks a lot.

Mark A. Ruelle

Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I would now turn the call back to Mark Ruelle for closing remarks.

Mark A. Ruelle

Well, thank you again for joining us. We know that there is some other calls going on too. So if you or your staffs have follow-up questions, please go ahead and contact Bruce Burns our Director of Investor Relations. Bruce’s number again is 785-575-8227. Thanks and have a good day.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.

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