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Executives

Bruce Burns - Director, IR

Tony Somma - SVP, CFO/Treasurer

Mark Ruelle - President & CEO

Analysts

Travis Miller - Morningstar

Michael Bates - D.A. Davidson

Andy Levi - Caris

Westar Energy, Inc. (WR) Q3 2011 Earnings Call November 4, 2011 8:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Westar Energy earnings conference call. My name is Kim and I will be your coordinator for today. At this time all participants are in a listen-only mode. (Operator Instructions)

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

Bruce Burns

Good morning. I am Bruce Burns, Director of Investor Relations for Westar Energy. Welcome to our third quarter conference call.

Last night, we filed our 10-Q and posted it along with the earnings release and supplemental materials on our website at westarenergy.com. They can be found under Supplemental Materials within in the Investors Section.

Some of our remarks will be forward looking. So I remind you of uncertainties inherent in our comments during this call or that we may have included in materials that supplement release.

Making remarks this morning are Tony Somma, CFO; and Mark Ruelle, CEO. We also have a number of our senior management team with us to answer questions. We appreciate that today’s calendar is full and we’ll have the opportunity to visit with many of you next week. So we’ll keep our comments brief.

Tony will offer highlights on the quarter, comment on guidance and update you on major projects. Mark will then comment on regulatory activities, EPA regulations that have been so much in the news recently and offer a few thoughts on the Kansas economy.

With that, I'll turn the call to Tony.

Tony Somma

Thanks, Bruce. Good morning, everyone. Earnings per share for the quarter were $1.15 compared with $1.2 last year. After adjusting for $0.17 of one-time items ongoing earnings per share for the quarter were $0.98, down a bit from last year. We reversed an accrual for legal claims for a $0.11 benefit, plus we picked up $0.06 from the sale of a non-utility investment that have been written off.

Our earnings release reconciles GAAP EPS to ongoing EPS. Earnings of a $100 million for the quarter after adjusting for those benefits were essentially flat compared to last year. EPS for the quarter reflects additional share issued to fund capital investments. For the quarter, gross margin increased $19 million or 4% due mostly to higher prices.

As measured by cooling degree days, weather in the quarter was warmer than last year. We estimate weather added about $0.07 a share. On the expense side, O&M for the quarter increased about $8 million or 8% excluding a $3 million increase in SPP transmission cost, most of which is covered by a revenue offset.

Major drivers for the O&N increases include $3 million at Wolf Creek due primarily to the increased amortization of this year’s refueling and maintenance outage cost, $3 million for higher maintenance at our other power plants, $2 million on our distribution system for tree trimming and other reliability activities and $2 million in property taxes which like transmission has a revenue offset.

Partially offsetting the increases was $2 million, a reduction in storm amortization expense, an item that will continue through the remainder of the year. SG&A expenses increased $23 million, due primarily to a reverse in a legal accrual. In combination O&N and SG&A excluding SPP transmission cost and the legal settlements are 4% and 8% higher than last year for the quarter and year-to-date respectively.

We haven’t changed our view that full-year guidance for these expenses should increase in the 2% range. This just reflects a change in the spending pattern between the two years, for this year has been fairly consistent across the quarters compared to last year when a significant amount of expense came in the fourth quarter.

Depreciation expense increased $4 million inline with our guidance and also reflecting plant additions completed last year. During the quarter, we issued an additional 1.2 million shares receiving about $26 million from shares reprised last year under a forward contract. We have 8.5 million forward shares remaining which we plan to sell later this month for about $200 million. This will raise our equity ratio to 52% consistent with our rate filing.

On the debt side, we renegotiated our $730 million credit facility in September, replacing it with another five-year facility that expires in 2016. In combination with our smaller facility, we have access to $1 billion of liquidity before including internally generated cash.

In our release last night, we affirmed ongoing earnings guidance for this year of a $1.75 to $1.90 per share which excludes the one-time benefits I mentioned. Guidance is condition on the typical factors including such things as weather, economy, COLI proceeds of which we received none so far this year and other factors we can’t control all of which we detailed on our supplemental materials.

Now let’s turn our attention to our major construction projects. All our projects are progressing well, so only I’ll comment on those larger projects for something notable has changed. Our 345 KV line from Wichita to Oklahoma is trending favorable with respect to both budget and schedule. We now estimate the cost to be only about $80 million and also expecting completing it a couple of months early in April 2012.

Our largest area of capital investment for the next several years will continue to be for air quality controls. The project at Lawrence Energy Center continues on schedule for completion in late 2012 and well ahead our budget. We are further lowering the estimated cost of this project to just under $300 million.

Our largest environmental project underway is the jointly-owned La Cygne Station managed by Great Plains Energy. The Kansas Corporation Commission determined the project to be prudent, but we are disappointed they didn’t allow us to use our environmental rider for it, particularly since they earlier found the rider reduces overall cost to customers which in our opinion would have been a win-win. Instead we’ll now have to use more frequent general rate adjustments and abbreviated filings. Our share of the project is estimated to be just over $600 million.

With that, let me turn things over to Mark.

Mark Ruelle

Thanks Tony. We’ve completed a number of regulatory dockets this year, but I’ll only comment on two we just recently concluded and on our rate filing. In late October, the Commission acted on our request to update the energy efficiency rider which we implemented this week to recover $11 million of deferred expenses. Also in October, we received accounting authority to defer a couple of million dollars of non-labor expenses related to our smart grid project.

At the end of August, we filed a $91 million rate application to update our base prices, an increase of just under 6%. Principal for the drivers for the case are straight forward, lower kilowatt hour sales and higher costs, principally for reliability enhancements including increased tree trimming and higher costs at Wolf Creek as well as higher employee costs.

Our filing includes a request to again use the abbreviated process for our share of the La Cygne project. Such subsequent filing would be made within 12 months of a final order in this case. We've requested an ROE of 10.6% based on an equity ratio of 52% and a rate base of $3.4 billion.

With regard to the procedural schedule, staff and intervene our testimony is due January 5th. A settlement conference is scheduled for late January with technical hearing scheduled for mid-February. The order is due late April with [Technical Difficulty] in May.

The Cross-State Air Pollution Rule has come into a lot of attention since it was issued in the fire storm of activity. While the rule has been discussed for several years under various iterations, this is the first time Kansas has been included in the rule. Adding to that surprise was at the level of allowances were substantially lower than what had been proposed in several previous drafts.

We've formed a consortium of other Kansas utilities in requesting the EPA reconsider and stay the rule and we made a similar filing now pending before the DC Court of Appeals. In addition, we’re working closely with the Kansas Attorney General in his similar efforts. We continue to consider how best to comply with the new rules which takes effect January 1st. This could include accelerating some equipment installations, tuning existing equipment, re-dispatching units outside of the economic optimum, purchasing allowances and possibly purchasing power from others, all of which unfortunately will increase cost to our customers.

Even with these efforts and as we’re pleading state it will difficult to meet both expected service obligation and comply with new rule. In fact, a study by Southwest Power Pool indicates that utilities can’t comply with the new rule and meet NERC reliability standards without comprising the regional grid and we concur.

The issue with the Cross-State Rule is not so much to required levels, but rather what the unrealistic timeframe in which to achieve them. In our materials, you can see that we have already a have solid plan to get to the lower levels, but that plan requires a realistic completion window from major construction projects already underway. We maintain our view that more balanced approach to compliance and one that shows greater regard for customers energy cost in our still weak U.S. economy is in order.

Turning to the economy in Kansas, it continues to have steady pace with unemployment still significantly favorable to the nation. Most of Kansas’ industry continues to improve with manufacturing and chemical and oil production leading the way. Agriculture and pet food too are solid. For the quarter, aerospace showed improvement, but results for the sector remain mixed, with military and commercial continuing on a favorable trend, but private aircraft still lagging.

We continue to see significant bright spots with examples being Mars Chocolate announcing its new facility in Topeka. Siemens is manufacturing its latest wind turbines at its new Kansas facility and the relocation of The National Bio and Agro-Defense Facility from New York to Kansas State University.

Our state government is very focused on smart economic development and doing in close corporation with industry. Affordable reliable power is obviously part of that equation, and these bright spots help affirm our value proposition in the stake.

Before we take your questions, let me say a few words about newest director, Rick Hawley and our colleague Mike Lennen. I know many of you know Rick already and I hope you agree that he’ll bring some great insight and the industry experience to our Board.

Rick will also serve on our Audit and Compensation Committees. Mike Lennen, our Vice President of Regulatory Affairs announced earlier this week his plans to retire next spring. Mike has served the company for more than 20 years, initially as a lead outside the Regulatory Council and more recently as an officer and colleague. We’ll miss Mike’s contributions and insights and appreciate his thoughtful approach to planning his retirement in a way that allows for smooth transition around our regulatory calendar.

We’re now ready for questions from the financial community, members of the media; we invite you to contact Gina Penzig at 785-575-8089 if you have questions. [Parma], would you please open the lines?

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from the line of (inaudible) from Citigroup. Please proceed.

Unidentified Analyst

Good morning, what’s the, I guess what’s the general status on the Attorney General’s appeal for Cross-State rule, and then the second is assuming the rules put in place in 2012, how would you account for the potential penalties that maybe assessed by the EPA for not meeting the standards? Thanks.

Mark Ruelle

I’ll turn that over to our General Counsel, Larry Irick. I can answer the second part of that, which is if there are penalties established that’s -- you know, and they are unavoidable that’s part of cost of service. That’s just the reality, but Larry I’ll let you talk about the collections.

Larry Irick

Yeah, Mark, I can briefly address the timing for the filings that’s been front of the DC Circuit Court of Appeals. Those are really pending in front of the court. There is not a set timeframe for the court to address the petitions for a stay. We know that the court is aware of the issues and the deadlines and we would hope that would motivate the court to address these issues properly, but we can give no assurance that they will do that before the January 1 deadline.

Operator

And the next question comes from the line of Travis Miller from Morningstar. Please proceed.

Travis Miller - Morningstar

Good morning, guys. Looking at the year-to-date waterfall charge-in from the 2010 EPS and earnings down through the 2011 -- what do you know with the core O&M expenses. Could you go through which of those are essentially one-time increases for this year? Thus would possibly decline or go away next year and which are the ongoing increases that we would expect to hold in place for next year?

Tony Somma

I would at first point out that there was a reversal that we had last year for environmental liability of $5 million and that is clearly a one-time negative variance for this year. And what we said in total for O&M and SG&A, we would expect those costs in combination to be about 2% higher than they were last year.

Travis Miller - Morningstar

And does that include some items that then would potentially drop off -- I guess I am most interested in Wolf Creek -- and those were just ongoing type of increases that we would consider to?

Tony Somma

Recall that last year we mentioned that cost at Wolf Creek will be going up and that’s you are seeing in the numbers, particularly the refuel outage last when we had was long and lengthy. They did a lot of work and a good portion of those costs are related to refuel outage and another is just due to plant activities associated with nuclear power plant.

Travis Miller - Morningstar

Okay. And how long do you amortize that previous Wolf Creek refueling?

Tony Somma

18 months.

Operator

And the next question comes from the line of James Bellessa from D.A. Davidson. Please proceed.

Michael Bates - D.A. Davidson

This is actually Michael Bates here with Jim. I had a couple of questions. Can you give any information about the status of your negotiations to renew the expired Union contract?

Tony Somma

Sure. We have a contract that was a two-year or three-year contract, and its natural term expired at the end of June. Neither party gave notice to terminate and therefore that contract remains in place on year-to-year basis. So we are under a contract at least through next June. We are presently in negotiations into ongoing process and let’s – but all we have to say about it’s – you know everybody is on the job working and we are focused on getting to a contract. It’s not terribly unusual for us to continue working beyond the initial term and then on the extended term. I think that’s happened in the last two or three times.

Michael Bates - D.A. Davidson

In those last two or three times, what was the time period between expiration and renewal?

Tony Somma

Probably very. This would probably be the longer end of that, but it’s -- there is a lot of times, I think it’s expired in June. We have gone into sort of September, October, -- okay or even January, I guess.

Michael Bates - D.A. Davidson

Okay. Great. And is there anything you can say about the factors that led to the loss in investment earnings, when you exclude the gain on the asset sale?

Tony Somma

There were two items. The biggest would have been there was a trust that we found for some retirement benefits, and since the market downturn at the end of September, we had several hundreds of dollars of losses on that.

Mark Ruelle

The general market trends, if you look that in comparative, that’s what we experienced on it. It’s just a diversified investment.

Michael Bates - D.A. Davidson

Alright. So, the decline was tied primarily to lower equity evaluations or where there other types of assets that went down?

Mark Ruelle

It’s the balance portfolio and it’s primarily just the downturn in the equity markets.

Michael Bates - D.A. Davidson

Sure. Okay, and then last question, can you quantify what the weather impact was in the quarter compared to normal?

Mark Ruelle

Compared to normal, it would have been about -- compared to last year was $0.07 or so, compared to normal would have been about $0.17 or $0.18.

Operator

(Operator Instructions) We have a question coming from the line of Andy Levi from Caris. Please proceed.

Andy Levi - Caris

Just on the year-to-date weather number, was that $0.17 debt number or was it for the quarter?

Tony Somma

The quarterly number versus normal would have been around that $0.18 range. The quarterly number versus last year was around $0.07.

Andy Levi - Caris

And year-to-date, what's the weather number.

Tony Somma

Year-to-date is closer to around $0.25.

Andy Levi - Caris

$0.25 and that's again versus normal.

Tony Somma

Yes.

Operator

And there's no further questions at this time.

Tony Somma

Well, thank you for joining us this morning. We look forward to visiting as many of you next week. In the interim if you have follow-up questions please contact Bruce in Investor Relations at 785-575-8227. Thank you.

Operator

This concludes the presentation for today. Ladies and gentlemen you may now disconnect. Have a wonderful day.

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