Westar Energy's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Westar Energy, Inc. (WR)

Q2 2012 Earnings Call

August 8, 2012 9:00 a.m. ET


Bruce Burns – Director, IR

Tony Somma - CFO

Mark Ruelle – CEO

Doug Sterbenz - EVP and COO


Sarah Acres - Wells Fargo

Shahriar Pourezza - Citigroup

Andy Levy – Avon Capital

Travis Miller - Morningstar

Mike Bates – D.A. Davidson



Good day, ladies and gentlemen, and welcome to the Westar Energy second quarter earnings conference call. My name is Pam, and I will be your operator for today. At this time, all participants are in listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Bruce Burns

Good morning. And welcome to our second quarter conference call. Last night, we filed our 10-Q, it’s on our website westarenergy.com along with the earnings release and supplemental materials under the Investors section.

Some of our remarks will be forward-looking, so I will remind you of uncertainties inherent in our comments or that we may have included in materials that supplement the release. Commenting this morning will be Tony Somma, CFO; and Mark Ruelle, CEO. Other members of our senior management team are available to answer your questions.

Tony will offer highlights on the quarter, provide an updated on major projects and comment on financing activities and earnings guidance. Mark will comment on regulatory activities, and share a few observations on our operations and business trends.

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

Tony Somma

Thanks Bruce. Good morning. We had a very good second-quarter with the growth in earnings resulting largely from recent price adjustments, warm weather and COLI income. Net income was $61 million compared to $44 million last year. EPS were $0.48, up $0.10 from last year.

Keep in mind when comparing the two periods that last year included about $0.03, a one-time legal expenses while this quarter reflects about 10% more shares outstanding to fund utility plants. Gross margin was up $37 million or 11% due largely to higher prices and a 3% increase in retail sales.

As measured by cooling degree days, weather for the quarter was significantly warmer than normal and about 20% warmer than last year although a good portion of that was in April and May which doesn’t have the same effect on sales as hot summer weather does. .

On the expense side, combined O&M and SG&A was up about $22 million or 14%, excluding a $10 million increase in SPP transmission cost, most of which has a revenue offset. Also excluded from this increase was $6 million of one-time legal expenses incurred last year.

Principal reasons for higher expenses most of which are already reflected in the recently authorized revenue requirement price adjustments were: $11 million more for pension employee benefit costs, $3 million for increased tree trimming and related line maintenance, a $3 million increase in property taxes, which has a revenue offset and $2 million for increased maintenance at our coastal plant.

Depreciation was $5 million lower than last year due primarily to the adaption of lower depreciation rates as part of the recent rate order. We recorded $3 million of COLI income which was the primary driver of the increase in other income.

During the quarter, we priced 1.1 million common shares which we intend to settle late next year. Our 2012 plans for equity haven't changed. We don't intend to increase our shares outstanding this year other than a few from our dividend reinvestment plan.

In May, we issued an additional $300 million of 30-year first mortgage bonds at a rate of just over 4%. We accomplished this through a reopen of the bonds we issued in March. Some of those proceeds were used to redeem $150 million of higher cost first mortgage bonds. All total to the second quarter we've issued $550 million of first mortgage bonds and redeemed $220 million of higher cost debt. We also recently redeemed our outstanding preferred stock. This refinancing activity should provide about $3.5 million of annual savings.

Turning to CapEx, I am pleased to report that all of our large projects remain on schedule and on or better than budget. Here's a quick summary. Air quality equipment for our unit four at Lawrence Energy Center remains on schedule for completion in the four quarter. We completed the large unit five project earlier this spring. The entire Lawrence project has come in well below original budget as we shared with you earlier.

Our major environmental projects at the Jeffrey and LaCygne energy centers remain both on schedule and on budget. While not included in Westar’s CapEx table are Prairie Wind joint-venture is coming along nicely. We’ve acquired the majority of the rights away clearing the start of the couple of months ago.

Final engineering on the line is complete and the project targeted completion late 2014 is now coming in at a much lower cost than SPP’s planning estimate about $180 million, down from the earlier $225 million. The two wind projects being developed to meet our state’s RPS are also coming along accordingly to plan. I wish we should be fully operational by the end of this month and Post Rock is targeted for completion in the fourth quarter.

Recall these projects aren't in our CapEx plans as it will take 100% of the output under long-term fixed-price power purchase agreements. In our release last night we affirmed 2012 earnings guidance of $1.85 to $2 per share with a bias toward the upper end of the range. In affirming guidance we’ve also adjusted our outlook for weather adjusted retail sales to flat, down from an earlier estimate of 1% growth for the year.

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