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Executives

BillMoore - President & Chief Executive Officer

MarkRuelle - Executive Vice President & Chief Financial Officer

DougSterbenz - Chief Operating Officer

TonySomma - Treasurer

Analysts

Scott Engstrom - Blenom Capital Management

DarinConti - Wachovia Securities

BillAppacelli - Citi Investment Research

TedHine - Catapult Capital

Westar Energy, Inc. (WS) Q3 2007 Earnings Call November 2, 2007 11:00 AM ET

Operator

Good day ladies and gentlemen. And welcome to the third quarter 2007 WestarEnergy earnings conference call. I would now like to turn the call over to Mr.Tony Somma, Treasurer of Westar Energy. Please proceed sir.

Tony Somma

Good morning. I'm Tony Somma, Treasurer of Westar Energy. Welcome to ourthird quarter 2007 earnings conference call. Before getting started, I'lldirect you to the Safe Harbordisclosures regarding forward-looking statements that we may make during thiscall or that may be contained in our earnings release and materials thatsupplement the release. We posted the earnings release and the company'ssupplemental reporting materials on our website this morning atwww.westarenergy.com.

The supplemental materials include information intended to assist investorsin their analyst of Westar's financial release. It can be found under theinvestor presentations within the investor relations section of our website.The applicable Safe Harbordisclosures are presented at the end of the release.We filed our third quarter2007 Form 10-Q this morning.

With that, I'll introduce Mark Ruelle, our Executive Vice President andChief Financial Officer.

Mark Ruelle

Thank you for joining us this morning. On the call with me today in additionto Tony are Bill Moore, our President and Chief Executive Officer, DougSterbenz, our Chief Operating Officer, and other members of our seniormanagement team. In addition to commenting on third quarter results, I'llprovide updates on our regulatory matters and refresh 2007 earnings guidance.Then Bill will provide an update regarding our major construction projects andplanning initiatives. After that, we'll be pleased to take your questions.

Today, we reported third quarter 2007 earnings of $91.5 million compared tothe $89.8 million for the third quarter 2006. We experienced a nice increase inoperating income but on our earnings per share basis, we saw slight decrease asa result of lower other income, higher interest expense and additional sharesoutstanding.

First, I'll address factors that served the increase earnings. Weather waswarmer than last year and also above the 20-year average. We saw an increase intariff-based wholesale sales due primarily to a long-term agreement we enteredinto with Mid-Kansas Electric Company in April.

And lastly, we experienced very strong wholesale results as a consequenceboth of excellent plant performance and a marketing team that was able to takeadvantage of favorable market conditions. This contributed to higher margins inboth market-based sales and energy marketing.

Serving to reduce earnings, were higher maintenance expense, increased laborand employee benefits costs, less income from corporate-owned life insurance andhigher interest expense. Tony will provide more detail on the items later inthe call.

Now, let me turn to regulatory matters. As many of you are aware, we returnto our customers as a credit to the retail cost of fuel, the margins we make onopportunistic or market-base wholesale sales made from power produced in ourplants. The amount of credit is based on a three-year average. Starting inApril of this year, we began to get credit about $40 million annually based onan average for the three years ending June 2006.

Due to our not having to conserve coal this year, favorable wholesomemarketing and good plant performance, we have performed very well with respectto this market-based sales. That improves this year's earnings but also meansthat beginning in April of 2008, the amount of the credit in the fueladjustment charge will be about $52 million, which raises the bar for nextyear.

The current methodology for returning to customer the margins we generatefrom such sales, creates the problem of either raising the bar every year orreturning to customers more margins than we are actually able to produce. Forthat reason, we sought and the provision of a recent KCC's settlement callsfor, a simpler means of calculating and making such credits. We intend tooutline the precise mechanics that we will propose in a general rate filing weplan to make next spring. Meanwhile, we will explore various options with theKCC staff.

On October 1st, we announced tentative agreements relating to wind projectsthat will almost double the state's present wind resources. We expect to add about300 megawatts through these agreements, half of which we propose to own andhalf of which we intend to purchase through supplied agreements. Under the sameKansas statute we used prior tobeginning construction of imported energy standard, we have filed with the KCCa request for predetermination of the rate making principles associated withthese agreements.

We have asked the KCC to issue its decision before year-end so we can proceedwith our plans to get the wind energy online before the end of 2008. The KCCset a procedural schedule that calls for hearings the first week of December.

The continue to tie up loose ends following the remand of our last rateorder, which the KCC issued in December of 2005. Following a challenge to thatorder, the Court of Appeals remanded matters back to the KCC for resolution. OnJuly 31st, the KCC issued its order on the remand. It quantified our refundobligation related to amounts previously collected from customers, establishedthe amounts of transmission cost to be included in the retail ratesperspectively and established a process by which we intend to implement aseparate transmission delivery charge. The final step to complete theunbundling of transmission cost as permitted by Kansasstatute.

This statute allowed us to establish a separate transmission delivery chargebased on FERC-approved rate. We plan to file in the near future for themechanism to permit annual adjustments to retail rates that correspond tochanges in our FERC formula transmission rates.

We wish this matter were finally close with the same parties who appealed toKCC's original rate order have again appealed to KCC's remand decision to theCourt of Appeals. That matter is set for hearing in January.

With regard to our FERC formula rate, we intend to in the near future tofile with the FERC requests for inclusion of Order 679 incentives related toour major transmission projects. Among allowed incentives are recovery of [seawep]and rate base, higher allowed return on equity and accelerated depreciation.

Now, let me comment on 2007 earnings. As stated in our press release, weaffirmed our 2007 guidance of $1.63 to $1.78 per share. Were we to receive COLIincome and if we were to realize additional value from tax assets, we wouldlikely be toward the upper end of our stated earnings range. Recall that lastyear, we received COLI income of $16.4 million for the full year, which is wellabove the budgeted amount. This year, our guidance included about $10 millionfor COLI, but to date, we have only received about $700,000. Our ability toachieve earnings in accordance with guidance is dependent on a number ofvariables other than COLI, including weather, operation of our generatingplants, prices in fuel and wholesale power markets and the funding of ourplanned capital program, among other factors.

Now I'll let Tony discuss in greater detail our second quarter results andour capitalization.

Tony Somma

Thanks Mark. Assuming everyone has access to our release and earningspacket, let me just touch on a few highlights rather than recite what is in therelease and the other materials.

Retail revenues increased by $7.7 million, due largely to warmer weatherthan last year. Tariff-based wholesale sales increased $12 million, primarilyresulting from the long-term wholesale agreement we entered into withMid-Kansas Electric Company. This agreement relates to additional 8% leaseholdinterest in the Jeffrey Energy Center we acquired in from Aquilain April. Energy marketing benefited from favorable pricing in the wholesalemarkets and increased sales volumes compared with last year.

Third quarter 2007 operating expenses increased $21.6 million, excludingfuel and purchase power expense which largely recovered through the fuelclause, operating expenses increased $7.9 million. The increase is dueprimarily to higher maintenance costs at our power plants and across ourdistribution system, higher labor and employee benefits cost and increasedsouthwest powerful transmission costs, which are largely offset by additionaltransmission revenues.

The cost of fuel and purchase power to serve our customers increased by $30million but this cost was partially offset by a $16.3 million deferral for futurerecoveries through the fuel adjustment clause. Depreciation and amortizationexpense was $2.5 million lower than last year. As a result of our havingexcluded from depreciation expense this year $4.8 million, related to terminal andsalvage value partially offset by an increase of $2.3 million related to plantadditions.

Other income and expense decreased $3.5 million compared with 2006,primarily from lower income from corporate-owned life insurance this year. Interestexpense increased $3.1 million compared with 2006, increase is due primarily to$1.3 million attributable to the reclassification this year of interest expenseof accrued interest on tax liabilities, which we previously recorded as part ofincome tax expense. And $1.8 million for interest on the capital leaseassociated with 8% leasehold interest in Jeffrey Energy Centerwe acquired this spring. Finally income tax expense for the quarter was $2.7million higher due primarily to higher taxable income.

The amounts for all these items are delineated on page five of thesupplemental earnings packet located within the investor presentation on ourwebsite.

As we have shared with investors our construction program for this year andthe foreseeable future is very large relative to our size. This means we willbe accessing the capital markets periodically for both debt and equity. OnOctober 15th we completed the sale of $175 million of KGE 30-year firstmortgage bonds with a coupon of 6.5%.

With respect to equity in late August, we entered into a new agreement thatallows us to periodically sell up to $200 million of common stock. Under thisagreement through late October, we sold about 784,000 shares, raising $20million on an average price of $25.52 per share excluding a 1% commission. Wemay use this for other means of raising equity in the future. Our long-termtarget capitalization remains about 50% debt and 50% equity.

Now let me introduce Bill Moore, our President and CEO.

Bill Moore

Thanks, Tony and thank all of you for joining us this morning. Before we goto your questions, let me update you on several of our major constructionprojects and then discuss the basis for our planning initiatives.

We are making good progress on the scrubber project at the Jeffrey Energy Center.All significant contracts have been executed and the project is on schedule,albeit a very tight schedule, for the first unit scrubber system to beoperational the spring of 2008.

The second system should follow in the fall of 2008, with the last of thethree units planned for operation in the spring of 2009. The estimated cost ofretrofitting all three units at Jeffrey remains at about $360 million.

Progress also continues on our [Emporia]energy center, a 600-megawatt gas fired peaking plant. About half of theturbine generators for Phase I have been delivered, the project remains withinbudget and on schedule for the first phase of 300-megawatts to begin commercialoperations about May 2008. The remaining 300 megawatts in Phase II arescheduled for commercial operations one year later, about May 2009.

With respect to transmission projects, the engineering design phase for ournew 345 KV transmission line from near Wichitato Salina is nearly complete. Inaddition, we have nearly completed the acquisition of rights of way for thefirst leg of about 43 miles between northwest Wichitaand Hutchison and the projected end service date for this leg may be as earlyas late 2008. We expect to energize the second leg of about 54 miles from nearHutchison to Salina by late 2009.

When we consider the final route selected by the KCC, the rebuilding ofexisting 138 and 115 KV underbill and the design that makes the structures easierfor landowners to accept, we anticipate the cost to be a bit above $150 millionfor the entire Wichita to Salinaroute.

While the estimate for this signal, single project is higher than previouslydiscussed, when one considers the overall size of our construction program, wedid not feel it was necessary to update our projected capital expendituretable, as a result of this single change.

Over the period 2007 through 2009, we will no doubt experience otheradjustments as well to the total spend. We have also begun planning for a 345 KVtransmission line running from near Wichita,south to connect with OG&E at the Oklahomaborder. We expect to file a siting request for this line shortly. We continueto evaluate other transmission projects in Kansasas well, particularly in light of our plans for more wind resources.

As Mark mentioned, we have entered into tentative agreements to develop 300 megawattsof wind generation. These agreements are contingent on the KCC's approval ofour request for predetermination. Our target is to have 500 megawatts of windby end of 2010. Expect us to begin the process to add another 200 megawatts ofrenewable resources sometime next year, as we strive for that target. Ourability to take on this much wind and integrate it into our system is somethingenabled by our strong high quality base load resources. We are excited to beable to do this and to be a large part of making Kansasone of the highest per capita renewable energy states in the nation.

All of this means, that 2008 will be a watershed year with respect to ourgrowth plan, but an unremarkable year for earnings.

Most of the street estimates indicate softness in our earnings next year.Recognizing that we have made many of the outlays for our growth plan, issuingshares in new debt and incurring depreciation expense without yet having thesenew investments reflected in rates. We expect our investment in new sources ofpower generation to be reflected in our rates in early 2009, after the KCCissues an order in next year's planned rate case.

Meanwhile, we will recover significant expenditures for environmentalcompliance and new transmission investment, plus fuel costs, throughKCC-approved riders. Our typical practice is to issue annual guidance once ourbudget planning is complete, which means sometime early next year. You canexpect us to say more about the expected level of 2008 earnings per share.

If I might switch gears for a moment, I would like to share with you ourapproach to planning and what we consider to be uncertain times. Many, if notmost utilities, have large growth plans. There are two things I think that setWestar apart from our peers.

The first is that our growth plan does not put all of our eggs in onebasket; rather, we are taking a diversified approach. In our immediate plans,you see a large commitment to renewables and energy efficiency programs. Expansionof our transmission system, retrofits to our existing base-load plants andbecause we currently use natural gas so sparingly, a larger commitment togas-peaking generation. This same plan might not work for others, but after acareful inventory of our situation and circumstances, we concluded this is thebest approach for our customers and our investors.

Secondly, we have developed this plan in close cooperation and collaborationwith regulators and policy makers. Before we could make these kinds of commitmentsto serve our customers into the future, it was imperative that we had a moreclear, more constructive path to recovery and rates.

If you were unfamiliar with what our regulators, legislators and we, haveaccomplished to accommodate this type of planning, I invite you to look at oneof our recent investor presentations that are on our website.

Many on our team have been around long enough to remember the good and thebad from the last round of construction of this size and scope. I am confidentthat we have taken lessons from the 1980s construction programs to heart andI'm excited about our prospects for the future.

We are now ready for questions from the financial community.

Question-and-Answer Session

Operator

Your first question comes from the line of Mr. Scott Engstrom of BlenomCapital Management. Please proceed.

Scott Engstrom - Blenom Capital Management

Good morning, guys.

Mark Ruelle

Good morning, Scott.

Scott Engstrom - Blenom Capital Management

Just a quick question on your, I guess, you're talking about the rest of theyear, fourth quarter. The fourth quarter of last year, COLI, was that about ahalf million dollars?

Mark Ruelle

We want stick that up. We had total COLI of $16.4 million last year.Year-to-date this year, were at only $700. Year-to-date was $15.5 million,lands to three quarters last year, so it’s about $900K.

Scott Engstrom - Blenom Capital Management

Okay. And you had $0.15 was the total earnings for last year's fourthquarter.

Mark Ruelle

I think it was for the full year, Scott.

Scott Engstrom - Blenom Capital Management

No, I'm sorry, $0.15 was the consolidated earnings number for the lastyear's fourth quarter.

Mark Ruelle

Yeah, that's correct.

Scott Engstrom - Blenom Capital Management

Yeah. And it included roughly a million dollars of COLI.

Mark Ruelle

Right. If I recall, it also included a pretty sizable mark-to-market gainthat hit like on the last day of the year, a million dollar of pre-tax.

Scott Engstrom - Blenom Capital Management

I want just kind of my other question. Looking, I mean, I know you mentionedCOLI as a big factor for the year. But just thinking about the quarter, you'realready at $1.71 for the year in 2007 which is, I think, the midpoint togetting into the high end of your range.

Just wondering if there are other factors that are going to keep fourthquarter earnings this year down relative to last year?

Bill Moore

Scott, you know, typically the fourth quarter is not a very strong quarterfor Westar. We obviously are a summer electric utility and third quarter is ourbig quarter. Factors that go into our fourth quarter, other than COLI, as youmentioned, would be market based sales and we run models on our market basedwholesale sales and given where the price tag was when we ran our numbers for ourlast outlook for our year to go, prices were relatively soft and that could bea swing.

If prices go softer, it's going to be a little leaner quarter. If prices areup, then it will be a little bit better quarter than we had, then we'reanticipating, which is why we have the language we're going to be toward theupper end of the range. Which means we could be at it or slightly above it,depending on other variables.

Scott Engstrom - Blenom Capital Management

Okay, so it's not a planned outage, there aren't some outages, its moremarket based that's really going to be the driving factor in the quarter.

Bill Moore

That and, you know, spending on O&M.

Scott Engstrom - Blenom Capital Management

Okay. Great. Thanks, guys. See you in Florida.

Bill Moore

Look forward to it.

Operator

Our next question comes from the line of Mr. Darin Conti of WachoviaSecurities. Please proceed.

Darin Conti - Wachovia Securities

Good morning.

Bill Moore

Good morning.

Darin Conti - Wachovia Securities

I just wanted to follow-up on the last question. I was a little bit puzzledby the, I guess, the Q4 guidance as well. I think I understand a little bitbetter based on the answers you just gave, but just wanted to follow up on acouple of things. What do you expect for the tax rate in Q4 and then what kindof additional share issuance are you planning or what's your target for '07 asfar as issuance goes?

Mark Ruelle

Darin, this is Mark. I'll let Tony talk about tax. But I'll talk a littlebit about our equity issuance. We’ve told people that our long-termcapitalization targets are 50/50. And that means we intend to finance thebusiness with a combination on the equity side of retained earnings and newequity issuance and on the liability side with the issuance of long-term debt. So,we haven't changed any of those plans. Obviously, it's important that you getyour company capitalized at the appropriate level about the time that you resetrates. So we have shared with people that they should expect us from time totime to be in the market and issue equity.

But we've also said that our approach to issuing equity is one that isopportunistic. In that we will look at various means of doing so, whether it bea secondary offering, whether it be something we do with a primary forwardoffering or whether we would do something with a continuous equity offering.

And as Tony indicated in August, we actually filed for up to $200 millionprogram for a continuous equity offering of which we have only taken down 20million. We obviously haven't said exactly when we'll issue that, but we triedto be as candid as possible about our need for equity to finance ourconstruction program.

Darin Conti - Wachovia Securities

Okay and the tax rate?

Tony Somma

Darin, this is Tony. On the tax rate, it's not an absolute calculation.There’s many variable that is going through it. One of the things we talkedabout was COLI. A couple other items that you know, early this year we soldsome emission allowances and that capital gain is offset by prior periodcapital losses. And so that drives our tax rate down as well. We have no planto sell emission allowances, it was more opportunistic. And I would say ouryear-to-date tax rate of about 24% compares roughly with what we had last year,maybe a little bit higher of 23%. And it's difficult to predict the quarter,depending on if we sell emission allowances or if COLI proceeds come in.

Darin Conti - Wachovia Securities

Okay. So it sounds like that's a big variable, maybe that's why you'releaving the range as wide as it is for '07.

Mark Ruelle

That's why we stated is. Which is, you know, the things that can causeearnings to be unexpectedly higher or not are many things, but the twoprinciple ones are things we don't control particularly, which is COLI, whichas Tony indicated not only produces income, but affects our effective tax rate.

And then also the possibility that we’re able to realize additional valuefrom a more sizable tax assets. We're not trying to be coy, it's just thatthose are harder things to predict. And in fact, those of you that followed uslast year, know that we didn't do a very good job of predicting our fourthquarter. But you know what we know. It's just a matter of having someunpredictability in some of the elements.

Darin Conti - Wachovia Securities

Okay. Fair enough, one other question. I apologize if you talked about thisalready. I got on the call a bit late. I wanted to see, I guess, if the youcould maybe talk about your potential interest in this new V transmissionproject in Kansas, I think it's180-mile line proposed by ITC, could you just talk about …

Mark Ruelle

Sure, this is Mark. I'll turn it over to Kelly Harrison who is our VicePresident of transmission environmental and Kelly can talk generally about ourtransmission plans, the products we have under way, as well as some of ourinterests in the region.

Kelly Harrison

Yeah, as far as this announcement it came out this last week with theSouthwest power pool. In fact, what they did was basically say that these twoprojects out in Western Kansas do not have any negativeconsequences to the system and we feel that is a positive step and it'sconsistent with what our interests are.

We've talked about, I don't know if you got on the phone call to hear aboutwhat the update is for our current projects, but the Wichitato Hutchison to Salina line arecoming along quite well. The first leg, we've got almost all of theright-of-way purchased without condemnation and as far as the Wichitato Ojini to the Oklahomaborderline, we are getting ready to file our siting application here soon.

Darin Conti - Wachovia Securities

Okay. And so with this new potential project, do you have to get to thecommission for approval or what would be the kind of time line or steps forthat?

Kelly Harrison

Any 345 KV project in Kansaswe are required to go to the KCC for siting authority. Once we file the sitingapplication, the commission has 120 days to respond. That's kind of theregulatory standpoint.

Darin Conti - Wachovia Securities

Okay. You haven't indicated any sort of time line when you might go to themfor an update on transmission investment?

Kelly Harrison

You say an update on transmission investment, I'm not sure I follow.

Darin Conti - Wachovia Securities

I mean, have you talked about when you might approach this, the KCC for thisproject?

Kelly Harrison

Which project are you talking about?

Darin Conti - Wachovia Securities

The 180-mile V.

Kelly Harrison

No, we have not.

Darin Conti - Wachovia Securities

Okay. Okay. That's what I wanted to know. Thank you.

Operator

And your next question comes from the line of Mr. Bill Appacelli of CitiInvestment Research. Please proceed.

Bill Appacelli - Citi Investment Research

Good morning.

Bill Moore

Good morning.

Bill Appacelli - Citi Investment Research

I just wondered if you guys could comment quickly on the terms of the windagreements that you signed into in regards to the timing of thepredetermination, so should the KCC may be take a little longer, you know, notresolve the issue until January or something like that, is there any issue interms of the timing and when build can start or the cost?

Bill Moore

Sure. We'll let Doug Sterbenz, our COO and Mike Lennen our VP of regulatoryaddress that.

Doug Sterbenz

In essence, this is Doug Sterbenz, in essence, we have all the agreementssigned for the 300 megawatts that we spoke about which can be on line beforethe end of 2008. It is important that the KCC operate within the request thatwe have and that is currently set to have a decision by the end of this year.

Any delay to that could put jeopardy on these projects actually beinginstalled by the end of 2008. And the biggest risk factor with that, and whatis also contingent upon, is the production tax credit. Of course which are setto expire on projects that are not installed by the end of 2008.

So that really is the reason we're asking for a preapproval on anaccelerated schedule if you will for the KCC. The KCC has put a schedule inplace that is conducive to reaching a decision by the end of 2008 and we expectthat that will happen.

Bill Appacelli - Citi Investment Research

Okay. You mean a decision by the end of 2007 right?

Doug Sterbenz

Yes, I'm sorry, by the end of 2007, yes. So the projects can indeed beinstalled by the end of 2008.

Bill Moore

Bill Moore, more generally the predetermination statute is a six-monthclock. And we, because of the circumstances Bill mentioned, we have asked thecommission for expedited treatment. We were pleased that they set it forschedule as quickly as they have because we think it does allow for a gooddecision and a timely decision rather that accommodates the '08 in service.

Bill Appacelli - Citi Investment Research

Okay. They're aware of this whole issue.

Bill Moore

Certainly. Certainly. We asked them for expedited treatment. That puts a lotof work on their side of the table. But we're pleased that they set it forhearing and appear to be understanding of that schedule.

Bill Appacelli - Citi Investment Research

Okay. And then just additionally on that, about filing in the next rate caseto pull in the winds, does the wind actually needs to be -- can you just reviewthat for me again about whether or not it needs to be in full operation for itto be, is it qualify as the rate base. I know you get some kind offorward-looking pull-in?

Mike Lennen

This is Mike Lennen. I would comment on it this way. In the predeterminationapplication, one of the factors that we ask the commission to address was thetiming of the recovery of wind generation investment and we asked that amountsthat had been invested up to four months before the decision date for thecommission and that would be dependent a little bit as to when we actually filethe rate case, that the amount of that investment would be included forrecovery.

So we should know, as a result of the commission's predeterminationdecision, whether they are receptive to that. Just to be, I’ll give you aconcrete illustration of that, Bill, if we were to file the case, say, in Mayby statutory clock, the commission would issue its order in December and sowhat we have asked for in the wind case is that we could update the rate basefor the wind through August, if assuming those starting and end date.

Bill Appacelli - Citi Investment Research

Okay. Great. Thank you.

Operator

And your next question comes from the line of Mr. Ted Hine of CatapultCapital. Please proceed.

Ted Hine - Catapult Capital

Good morning.

Bill Moore

Good morning.

Ted Hine - Catapult Capital

Just a quick follow-up on Bill's question about the wind, if you use thattime frame that you were just using, Mark, about getting all the wind ratebased that was put into service in August in your filing, how much of the -- ifyou kind of look at your current schedule, how much of the spend of the300-megawatts do you think you will have spent by August?

Mark Ruelle

That's a good question. We don't know, Ted. We've been working prettyclosely with the developers to try and get an understanding of that too. And ofcourse, those kind of conversation quickly, start discussing well, it dependson how much rain we get, when we get our supplies and everything.

But they understand that '08 is the in-service date. Once you start buildingthese things, they go pretty quickly. But we don't have a good answer for youas to how much is done, say, by August in the illustration I gave.

Ted Hine - Catapult Capital

Okay. Fair enough. Thank you.

Operator

At this time, there are no further questions in the queue. I would like toturn the call back over to Mr. Bill Moore. Please proceed, sir.

Bill Moore

Well, we look forward to seeing you all at the Edison Electric InstituteConference here in Florida nextweek. We hope you'll see us and visit with us and ask your questions there. Wethank you for joining us this morning.

And if you have follow-up questions, please contact Bruce Burns, ourDirector of Investor Relations, at 785-575-8227. Thank you for being with usthis morning.

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