Westar Energy, Inc (NYSE:WR)
Q2 2016 Earnings Conference Call
August 03, 2016 10:00 AM ET
Cody VandeVelde - IR
Tony Somma - CFO
Mark Ruelle - President & CEO
Greg Orrill - Barclays
Good day ladies and gentlemen and welcome to the Westar Energy Second Quarter 2016 Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded.
I would now like to introduce your host for today's conference, Mr. Cody VandeVelde, Director of Investor Relations. Mr. VandeVelde, you may begin.
Thank you, Danielle. Good morning and welcome to our second quarter call. Last night, we filed our 10-Q along with the earnings release and supplemental materials that can be found under the Investors section of our Web site at westarenergy.com. Some of our remarks will be forward looking. So, I remind you of uncertainties inherent in our comments 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 those listed in our 10-K under Risk Factors.
We encourage you to read the full disclosure in the 10-Q and in the earnings materials as well of the 10-K, all of which are available on our 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 do have other members of our team available to respond to questions. Tony will offer highlights on the quarter and comment on 2016 plans, including earnings guidance and financing. Mark will discuss the regulatory matters and share observations about our business, including our pending transaction with Great Plains Energy.
With that, I'll turn the call over to Tony.
Thanks Cody. Good morning everyone. I'll start with the quarter and then go through year-to-date results. Second quarter earnings were up nicely and in accordance with plan. We reported $0.51 a share which included merger related expenses of $0.04. This compares to $0.47 last year. Gross margin was up $55 million due to higher retail prices and a 3% increase in retail electricity sales. Residential and commercial sales increased due primarily to favorable weather, more specifically the heat showing up in June after a cool May which we estimate helped about $0.02 compared to last year. Other positives include the benefit of refinancing long term debt which reduced interest expense by almost $6 million, plus higher equity AFUDC of around $3 million.
A few items offsetting the gains were an increase in O&M and SG&A around $50 million due largely to the merger related expenses I mentioned of approximately $8 million along with the cost for planned spring outages in our power plants. Also, other income was lower mainly as a result of no COLI benefits in the quarter compared with $14 million last year.
Additionally depreciation expenses were $7 million higher, due mostly to additions in our power plant. Now, for the year, gross margin was up $85 million due primarily to higher retail prices offset by lower retail sales volumes which were down just over a point due largely to mild winter weather.
Year-to-date we've seen lower industrial sales led by some of the familiar accounts namely our larger lower margin customers still dependant on oil and gas market. The main impacts were with oil and pipeline and a very large customer that produces chemicals used in fracking. Absent those effects, for the balance of our industrial customers, sales were essentially flat year-to-date. Overall year-to-date we estimate weather hurt us $0.03 compared to normal and $0.04 compared to last year.
O&M was down $4 million in part because we're investing more labor in capital improvements for long term reliability. Interest expense was down almost $10 million due primarily to favorable refinancing. For the year depreciation expense increased by about $17 million, due to investments at our power plant including last remnants of air quality controls at the scene. Lastly, COLI benefits for the year with $7 million lower partly offset by higher equity AFUDC at $3 million.
With these results we're comfortable affirming earnings guidance of $2.38 to $2.53 per share. As I mentioned we did some very effective financing in the quarter. In June we issued $350 million of first mortgage green bonds at a cost of just 2.55%. We'll use the proceeds to fund our Western Plains Wind Farm here in Kansas that's already under construction. Right now we have no plans for additional financing this year.
Last month, the first of the 122 Siemens, 2.3 megawatts turbines was delivered to Western Plains which will total 280 megawatts. We also broke ground at the Kingman Wind Farm for a PPA using 1.8 megawatt GE turbines which will add 200 megawatts. We continue to enjoy good local, economic and political support for these projects. We expect both to be completed by the end of the year bringing our total renewables over 1,700 megawatts. To put that into perspective our renewables will produce energy equal to about one third of our total retail sales. Combined with nuclear that will take our emission free production to over 50% of retail sales.
With that let me turn things over to Mark.
Thanks, Tony. Good morning everybody. I'll start with a regulatory update. The FERC approved our 206 settlement earlier this year with all the necessary paperwork now complete, refunds are in customer's bills to reflect an all in transmission ROE of 10.3%. Our attention now is on our abbreviated rate case in the DG docket that we've been talking about. We expect to file the abbreviated case in October to reflect the $120 million of new investment which should result in above $15 million of annual income.
The highlight of the case we'll be showing the benefits of our $50 million distribution grid resiliency demonstration project which includes among other things replacing hundreds of poles, major substation improvements, and replacing other out-of-date equipment to improve customer reliability. The DG rate design docket we agreed to as part of the rate settlement last year is finally getting underway.
Last month, the KCC opened a 45 day comment period and they're asking for thoughts on the scope of the docket with the goal of keeping things focused and efficient. Much more to come on this later. But we're excited for our future being part of Great Plains Energy and in the interim we continue to have resolute focus on a good business plan.
Our power plant performance has been great. Year-to-date we've produced below target outage levels which puts our power plants reliability in the first quartile. The work we've been doing in the past few years to keep our lines free from trees and vegetation is also paying off as we've been experiencing typical Kansas summer thunderstorms with very few outages.
All of our transmission projects remain on or ahead of schedule with total expected transmission investment this year of about $225 million. Our two largest transmission projects are both running ahead of schedule and under budget. As we prepare for the future transition teams are already busy working to build a great company pending regulatory approvals for the transaction.
Regarding the KCC procedural schedule we along with the KCC staff and the consumer advocate reached agreement that is now before the commission. The candidate schedule calls for a decision in late April. We're still awaiting word from the Missouri Commission about its formal interest in reviewing the transaction there in response to Missouri staff recommendation that it should.
Lastly, we've heard that the SEC has chosen not to review our joint proxy and Great Plains S-4, which should accommodate shareholder meetings a little earlier than originally expected. Now you should think late September. Last month we filed with the FERC and consistent with their process we anticipate resolution by year end. Also last month we requested from the Nuclear Regulatory Commission a transfer of Wolf Creek's license which should allow Great Plains to double its interest in the plant from 47% to 94%.
As we noted in our Q, the Department of Justice initiated an antitrust investigation into the merger, something having become a little more common for deals of this size. With regard to Hart-Scott we plan to file the notification forms under the HSR act at the appropriate time a little later down the road. We continue to be pleased with the agreement. It fulfills everything we've been saying about the subject of M&A and Westar. That is, that consolidation will continue as the means of keeping costs under control and customer's prices affordable, that eventually size will matter and in considering whether to be a consolidator or among those consolidated, the company has got to pick a line and then commit to it.
Our is as I said earlier would be more likely that of a seller, than a buyer. Our Board was looking for good value and certainty of value for our shareholders and assurances to our customers, our communities, our state and our employees. Great Plains met everyone one of those criteria. Essentially this is an old fashioned side-by-side utility M&A deal combining two large electric utilities in the region to provide exceptional value for our shareholders and tremendous savings and efficiencies for our customers.
So, far I'm delighted with the tone and the process of our joint planning together. And each company has all the right incentives to get this agreement to the finish line as efficiently as possible. That said we're not losing focus on our own business as the results of this quarter demonstrates.
With that we're ready for questions. Members of the media we invite you to contact Gina Penzig. Gina's number is 785-575-8089. If you have questions -- now Danielle will open up the lines for us.
Thank you. [Operator Instructions] And our first question comes from Greg Orrill from Barclays. Your line is open.
So the merger expenses in your resolve about $0.04. You maintained guidance. What are the offsets? What do you expect to see going forward from the expenses?
Well, we're looking really hard at filling in the open positions. We're trying to position the company going forward to reduce staffing and we have an actually a 4%, 5% attrition rate. So, that's one thing we're looking at. Refinancing debt as I said in the script comments, so interest expense will probably be a little bit lower than what we anticipated this year. So, those are just a couple of items that we're looking to offset for merger related expenses.
Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Mark Ruelle for closing remarks.
Short and sweet. Thanks, everybody for joining us. If you have follow-up questions, of course just give Cody a call. Cody's number, 785-575-8227. Thanks and have a good day.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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