Westar Energy Inc. ( WR)

Q2 2011 Earnings Call

August 5, 2011 10:00 am ET


Bruce Burns - Director, IR

Tony Somma - CFO

Mark Ruelle - CEO

Doug Sterbenz - COO

Mike Lennen - VP, Regulatory Affairs


Michael Lapides - Goldman Sachs

Andrew Levi - Caris

Sarah Akers - Wells Fargo



Good day, ladies and gentlemen, and welcome to the second quarter Westar Energy Incorporated earnings conference call. (Operator Instructions)

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

Bruce Burns

Good morning. I am Bruce Burns, Director of Investor Relations for Westar Energy. Welcome to our second 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 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 in the supplemental release.

Making the 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.

Tony will offer some highlights on the quarter, comment on guidance and major projects. Then Mark will update you on regulatory activities and comment about EPA regulations that have been so much in the news recently. He'll also share some perspective on the Kansas economy and comment on a few organizational changes.

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

Tony Somma

Thanks, Bruce. Good morning, everyone. Earnings per share for the quarter were $0.38 compared with $0.47 last year. For the quarter, gross margin increased $10 million or 3% due mostly to higher prices. Weather in the quarter, as measured by cooling degree days, was almost the same as last year.

Turning to the expense side, O&M for the quarter increased about $12 million or 13% excluding a $4 million increase in SPP transmission cost, most of which had a favorable revenue offset. It should be noted, last year we reversed a liability associated with assets we sold in the 1990s, thus reducing 2010 O&M by $5 million.

Current year increases include the following: $4 million of Wolf Creek, half of which was for regulatory compliance and the balance due to increased expenses for this year's refueling and maintenance outage; $2 million on our distribution system for tree-trimming where we're seeing value and a more sophisticated approach to optimize electrical reliability with more targeted expenditures, this program will be a component of our upcoming rate case as we like to expand it; and $2 million increase on property taxes which was also offset with higher revenues.

Partially offsetting the increases were the $2 million reduction in storm amortization expense, something that will continue through the remainder of the year.

SG&A expenses increased $8 million due primarily to higher legal fees related to the arbitration of two former executives and the amortization of deferred energy efficiency program cost with the latter also having a corresponding revenue offset. Last, depreciation expense increased $4 million due largely to planned additions for environmental and transmission projects completed last year.

Now, turning to our financing plans for the year, through June we settled 3.1 million shares priced last year on a forward contract, receiving about $66 million. We still have 9.7 million shares priced last year, reflecting about $226 million of available equity that we plan on selling this quarter or early next. Beyond this, we don't have plans to sell additional equity this year.

The available forward equity combined with $0.5 billion available under our credit lines gives us $0.75 billion of liquidity before including internally-generated cash. With respect to our credit lines, we will likely renegotiate our larger credit facility which comes due in March 2012 later this year.

While summer temps have been strong so far, as evidenced by a record peak demand last week, summer is not over. We're pleased with year-to-date results and happy to affirm earnings guidance for 2011 of $1.65 to $1.80 per share, which excludes an additional $0.11 per share will record as a result of settling arbitration of the two former executives and reversing related reserves.

Guidance is conditioned on typical factors, including such things as weather, the economy, COLI proceeds, which none have been received so far this year, and other factors we can't control, all of which we detailed on our supplemental materials.

Now, before turning the call over to Mark, here is a quick update on our major construction projects, all of which are going well. Our $100 million multiyear 345 kV line from Wichita to Oklahoma is trending favorable with respect to both budget and schedule. Right now, it's trending about 10% favorable on cost and a couple of months ahead of schedule.

The 20 or so smaller transmission projects totaling about $125 million, this year are progressing according to plan with respect to both schedule and budget.

As planned, the KCC approved the route for Prairie Wind, a 345 kV joint venture line running west from Wichita. Now that we have the route, we're gearing up to acquire right of way and start detailed engineering.

We anticipate construction in the field to begin by the middle of next year with a target completion by late 2014. Prior to detailed design, we've estimated the project cost to be about $225 million with Westar's investment to be out $50 million to $60 million. Even though construction has yet to begin, the FERC has already approved Prairie Winds transmission formula rate. This allows us to begin recovering this quarter deferred startup cost.

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