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Executives

Bruce Burns – Director, Investor Relations

Tony Somma - Chief Financial Officer

Mark Ruelle - Chief Executive Officer

Analysts

Shahriar Pourezza - Citigroup

Sarah Acres - Wells Fargo

Travis Miller - Morningstar

Michael Lapides - Goldman Sachs

Westar Energy, Inc. (WR) Q1 2012 Earnings Conference Call May 10, 2012 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Westar Energy Earnings Conference Call. My name is Stacey, and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions)

As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, to Mr. Bruce Burns, Director of Investor Relations. Please proceed.

Bruce Burns – Director, Investor Relations

Good morning. I am Bruce Burns, Director of Investor Relations for Westar Energy. Welcome to our first 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 could be found under supplemental materials within the Investors section.

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

Commenting this morning will be Tony Somma, CFO; and Mark Ruelle, CEO. Other members of our senior management team are also available to respond to questions.

Tony will offer highlights on the quarter, comment on earnings guidance and provide an updated on major projects. Mark will then comment on regulatory activities, EPA regulations and a few other thoughts on our business.

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

Tony Somma – Chief Financial Officer

Thanks, Bruce. Good morning. The drivers for the quarter were pretty straight forward extremely mild winter weather, unplanned outage expenses and proceeds from COLI.

Earnings and earnings per share for the quarter were $27 million and $0.21 respectively compared with $31 million and $0.27 in 2011. Earnings for Q1 2011 included about $1 million or $0.01 per share one-time expenses related to settling a legal dispute last year.

EPS for the quarter also reflect additional shares issued to fund investment in utility infrastructure. Gross margin was down $7 million or 2%, signal such a lower retail sales largely from very mild weather as measured by heating degree days, weather for the quarter was the warmest in over 50 years.

On the expense side, O&M was about $11 million or 11% higher, excluding a $7 million increase in SPP transmission costs, most of which has a revenue offset. Principal reasons for the higher O&M were $9 million for increased maintenance at Wolf Creek from both the unplanned outage and higher amortization expenses for last spring’s refill and maintenance outage and a $2 million increase in property taxes, which has a revenue offset.

The combined O&M and SG&A, excluding SPP transmission costs and the one-time legal costs, were 8% higher for the quarter, but in line with full year plans and guidance. Depreciation expense increased $3 million in line with guidance and largely reflecting plant additions.

Other income increased by $11 million due primarily to the benefit of $9 million of COLI proceeds. As we've shared with you for some time, we've planned to satisfy external capital needs for the next year or so with debt.

In March, we issued $250 million of 30-year First Mortgage Bonds at 4-1/8%, the lowest rate for us in more than 50 years. The low cost of this issue allowed us to retire $70 million of higher cost loan term debt. We have also announced the plan call of $150 million, 6.1% series First Mortgage Bonds.

We plan to utilize our low cost commercial paper to initially fund the call, which is scheduled for next week. In addition to funding CapEx we will continue to evaluate refinancing where make sense consistent with our target long-term capitalization.

Speaking of CapEx, here is an update on some of our larger projects. Plant mostly completed the upgrade of air quality equivalent for the largest unit at Lawrence Energy Center. This portion of the project represents about two-thirds of the total $300 million project cost.

The upgrade for small unit remains on schedule for competition by year end. The installation of an SCR Jeffrey remains on schedule and on budget at $240 million. Our most significant single project underway LaCygne station, while still early in the project if remains on schedule and on budget.

Turning to transmission, we placed our Wichita to Oklahoma 345 kV line into service last month ahead of schedule and more than $20 million below budget. The balance of our transmission investment is progressing according to plan.

We will not include in our CapEx estimate, our Prairie Wind joint venture project is progressing nicely. We require almost half of the rights away and we will start clearly get this month. Line construction is scheduled to begin later this year with the planned completion on late 2014.

In a release last night, we affirmed 2012 earnings guidance of $1.85 to $2 per share. Guidance is conditioned on the typical factors including such things as weather, the economy, COLI proceeds and so far this year, we have received about two-thirds of the full-year estimate and other factors we can’t control all of which we detailed in our supplemental materials.

As a reminder, our guidance based on the rate settlement just finalized also took into account an estimate for the unplanned outage at Wolf Creek.

With that let me turn things over to Mark.

Mark Ruelle – Chief Executive Officer

Thanks Tony and good morning. As Tony mentioned about three week ago, the KCC approved the settlement in our case. The agreement was for $50 million increase to our base rates; it’s already been implemented.

A few of the key elements in the case include using a 10% stated return on equity for calculating our environmental rider and at AFDC, funding an additional $11 million annually for vegetation management and related reliability work. Rolling base rates amounts for air quality investments that in the interim, we were collecting through the environmental rider. This will reset and zero out the rider and then it will restart again in June with cost related to investments we made in calendar year ‘11.

The order also accommodates an abbreviated rate case next year to recover LaCygne air quality investment. The approved increase is 55% of what we filed for is adequate for us to run our business, but not business as usual, so our team is adjusting as necessary to sustain both financial success and continue to provide good service.

As per other regulatory activities this year, we filed to update the care for both transmission and environmental cost recovery riders. We filed in February a request to recover through the transmission rider an increase of $37 million for higher cost transmission for retail customers. We will still under review we have been allowed to implement the change effective April pending a final decision by the case you see which we expect later in the year.

In March, we filed to update the environmental rider to recover the cost related to calendar 2011 investments. The KCC staff completed its review and is recommended approval of our $19 million request to become effective June 1st, consistent with our plan. Even though, we just completed our 2011 rate review, I know many of you already look into the future and wondering about the timing of future cases outside of just updating the riders.

As I mentioned, as part of its recent order the KCC approved are used of an abbreviated rate review for LaCygne, that means we expect to file that abbreviated case no later than mid-April of next year and right now that is our plan.

Based on our LaCygne CapEx plan that timeframe would cover a little more than half of our $600 million share of this major air quality project. Recall that the abbreviated process limits the scope of what will be included and reviewed and those more efficient form of regulation it doesn’t mean a quicker decision, and April abbreviated filing next year likely means new rates some time in Q4 of next year. Beyond this abbreviated case, we haven’t set a timetable for another case.

As for environmental regulations, it has been little changed since our last call, the courts have heard the arguments on Casper and we are waiting the decision and many speculate might be issued as early as early summer. And even if reinstated in full, the courts delay coupled with other corrections and adjustments we have made a significantly alleviated our reliability concerns attributable to across state.

As you know, in March the EPA proposed its first ever limits on greenhouse gasses for fossil plants. EPA indicated the rule will impact only new plants, but as with all the EPA regs we will be watching it closely.

Turning to the economy, in Kansas the state issues goes with unemployment still significantly favorable to the nation. Things continue to improve, but at a measured pace. Through conversations many of our largest customers most are expressing guarded optimism and continued steady, but not rapid improvement.

Aerospace is mixed, sprit is going strong, but some of you might have seen the Hawker Beechcraft filed for chapter 11 as we have been expecting for some time. New home construction remained slow and by extension new meter connects. All told, like everyone else we would like to see faster improvement, but we are still comfortable with our forecast guidance.

As Tony mentioned, we have recently energized our Wichita to Oklahoma 345 line. We continue to see opportunities to improve the transmission grid in Kansas in the region. You might recall while back we shared with you some tentative long-term transmission plans for our region that we thought might unfold over the next decade or so.

Well, a couple of weeks ago, the SPP issued us a conditional notice to construct on one of those projects. It is a high-voltage line extending from the west end of our system. Right now, we expect to build about 30 miles of it. Over the next three years, we are projecting to invest about a $0.5 billion in total on transmission.

Before taking questions let me say a few words about our recent storm restoration after the Wichita tornado you might have heard about. So not wide spread it was in 10 storm and it also involve significant damage to high-voltage lines and service lines to major manufactures.

It took us a few days to get everything back in a year and a couple more for some of the aerospace manufactures to get their own equipment back in to production, but everyone seems to be pleased with the effort and the result. We project the cost of the storm to be about $6 million and most of that's capital.

We are now ready from questions from the financial community. Members of the media we invite you to contact Gina Penzig at 785-575-8089 for your questions.

Stacy, will you please open the lines?

Question-and-Answer Session

Operator

(Operator Instructions).

Your first question comes from the line of Shahriar Pourezza with Citigroup. Please proceed.

Shahriar Pourezza - Citigroup

Question, how much -- assuming normal weather, how much of weather impact you for the quarter?

Tony Somma

Hey Shahriar, good morning, this is Tony. Over norm we estimate the weather cost us about $0.04 to $0.05 a share. Recognizing this is an extreme weather situation, we’re basically looking at something that’s outside two standard deviation event, so.

Shahriar Pourezza - Citigroup

Okay, and then just shifting over on something separate. How closely you're monitoring what were seeing in New England with some of the ROEs that are coming under some pressure with some hearings happening? Do you see any kind of an indirect rethrough to the SPP region or anything?

Mark Ruelle

Well this is Mark, Shahriar, not directly but we're certainly aware of that. We're certainly apprised of the consequences of that, and frankly we're not shocked by any of it. I mean the incentives have done what they are supposed to do which is triggering more projects. We never did build our transmission business on any large incentives. To the extent there is some incentives you can add of course we'll include those, but we didn’t push the envelope on any of that stuff and we're not surprised that people are now pushing back a little bit on that.

Operator

Your next question comes from the line of Sarah Acres with Wells Fargo. Please proceed.

Sarah Acres - Wells Fargo

I know weather was drastic and that makes it difficult, but you have an estimate of what weather-adjusted sales growth was in the first quarter?

Tony Somma

It's probably somewhat flat, Sarah.

Sarah Acres - Wells Fargo

Okay, but you said your still comfortable with your roughly 1% weather adjusted.

Tony Somma

Yes.

Sarah Acres - Wells Fargo

And then second, I know you're still figuring out plans for timing of the next rate case but kind of what is the strategy on the cost side to maintain kind of earned ROEs in the interim?

Tony Somma

Well Sarah, as you know, we're pleased that the stipulation agreement was approved. What Mark has said and the executives are on the table support. It’s adequate, however, it doesn’t allow us to run business as usual. So, as an executive team we're looking at ways that we can do you things more efficiently and reduced some of our cost and come closer to earning that earned ROE.

Operator

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

Travis Miller - Morningstar

I wanted to go a little bit into this O&M. Looks like even if I back out some of those numbers that you’ve indicated $10 million or so, looks like core O&M was still up about 6%, and if we go back couple of quarters it seems like you’ve been in a high single digit type percent increase. Can you give some insight on what’s going on there outside of some of those one time unusual expenses in that core O&M?

Tony Somma

Well, Travis some of it has to do the nuclear facility. And as we said the cost, they’re not going down; they’re going in the opposite direction. Some of it also relates to timing as our other base load unit outages, those can be sometimes lumpy. And going into what I have said earlier it’s also we’re looking at some of those things as an executive team to see how we can do things a little bit more efficiently as evidenced. There’s 13 officers today in the company and nine months ago there were 16. And so, those are just some of the things that we are looking at reorganizing work, etc to see if we can reduce our cost into come closer to earning our earned ROE.

Travis Miller - Morningstar

What are you earning right now in the quarter? You have the number for earned ROE?

Tony Somma

No, we don’t. We don’t.

Travis Miller - Morningstar

What about guidance?

Tony Somma

I mean, obviously, Travis, this is a quarter right before we’re going to put new rates into effect, so it’s going to be depressing.

Travis Miller - Morningstar

Sure. On that O&M what do you expect as a target level that you’ll need to get to based on the settlement and earnings that allowed ROE?

Mark Ruelle

We haven’t issue one.

Travis Miller - Morningstar

Okay.

Tony Somma

We know that we filed a case for $91 million, we accepted 50, so we know that we have work to do to make sure that we can produce the returns you expect as well as take care of our customers. And our team is committed to doing that.

Operator

(Operator Instructions). Your next question comes from the line of James Bellessa. Please proceed.

Michael Lapides - Goldman Sachs

Good morning, guys. This is Michael Lapides with Jim. I have two questions for you. Just a follow on on the last line of questioning. In terms of your guidance you had expected about a 14% increase in SG&A. First quarter we were roughly flat when you consider the legal fees from a year ago. Are you still feeling comfortable with that previous statement of the 14% increase for the year?

Mark Ruelle

Yes, and the reason why is again this is the quarter but sure we put the raise into effect and when you raised on the effect or have done on the effect actually in the second quarter already you'll see an increase in our pension expense and that was part of the rate case.

Michael Lapides - Goldman Sachs

I was also curios with the decision to push the next refueling outage at Wolf Creek into first half of 2013. Do you gain any net benefit by having that asset online in the second half of 2012?

Mark Ruelle

What we do in that basically helps us offset the unplanned average cost that we just experienced.

Michael Lapides - Goldman Sachs

Sure, and then last question just kind of a nitpicky one. With investment earnings being sharply up in the quarter, is there any element at all in that you expect to be ongoing or does that just remain fairly unpredictable?

Tony Somma

Well, it's fairly unpredictable. The reason why the biggest portion of that was the COLI proceeds.

Michael Lapides - Goldman Sachs

All right. I was referring more to the investment earnings.

Tony Somma

Oh the investment earnings? Yeah we have an investment in a trust to fund some post retirement benefits and that just experienced a gain with the market.

Operator

Your next question comes from the line of John Ali. Please proceed.

John Ali - Decade Capital

Just a quick question what were COLI expectations for the year?

Tony Somma

Around $14 million.

John Ali - Decade Capital

Okay so, assuming you guys got 9 of it in the first quarter, press a little bit about that.

Tony Somma

Yeah, we're 9 and some change.

Operator

And at this time I would like to turn the presentation back over to Mark Ruelle for closing remarks.

Mark Ruelle

Thanks folks for joining us this morning. Of course if you have follow ups just get a hold of Bruce at 785-575-8227. Thanks. Have a great day.

Operator

We thank you for your participation in today's conference. That concludes your presentation. You may now disconnect and have a great day.

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