Westar Energy Inc WR
Q4 2012 Earnings Call Transcript
Transcript Call Date 03/01/2013

Operator: Good day, ladies and gentlemen, and welcome to the Q4 2012 Westar Energy Earnings Conference Call. My name is Andrew and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. As a reminder this call is being recorded for replay purposes.

I would to turn the call over to Mr. Bruce Burns, Director of Investor Relations. Please proceed, sir.

Bruce Burns - Director IR: Thank you. Good morning and welcome to our fourth quarter and year-end 2012 conference call. Last night, we filed our 10-K; 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 including in materials that supplement the release. We encourage you to read the full disclosure and GAAP Reconciliations on our website and in our investor materials.

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

Tony will offer highlights on the quarter introduce three year CapEx, comment on 2013 financing potential and our earnings guidance. Mark will address planned regulatory activities, share few observations on our operations and address the dividend.

With that I will turn the call over to Tony.

Tony Somma - SVP, CFO, Treasurer: Thanks Bruce. Good morning everyone. We had a strong fourth quarter with earnings of $46 million or $0.36 per share, well above the $0.16 per share reported in 2011. Our gross margin increased $36 million or 11%, largely from price adjustments to improve reliability and infrastructure. Retail sales volumes for the quarter were up 1% due to higher industrial sales. Whether well not a big driver this time of year was mild in both fourth quarter 2011 and normal and was a principal reason for the decline in residential and commercial sales compared with 2011.

Stronger industrial sales results from oil refining, general manufacturing and aerospace. On the expense side operating expenses, excluding fuel and purchase power were up $9 million or 3% principal reasons for the increase include $9 million for SPP transmission expense, which has a revenue offset $6 million for higher pension and employee benefit costs pursuant to the April rate order and $3.5 million for contribution to our charitable foundation, the first contribution in several years. Partially offsetting those items were $3 million decrease at Wolf Creek and $6 million decrease in depreciation expenses reflecting lower depreciation rates which were also part of the rate order. Further income increased $4 million reflecting higher COLI proceeds, total COLI proceeds in 2012 were more than $17 million, $3 million more than what we had in our guidance.

Interest expense was $3 million higher for the quarter, as a result of our having issued $550 million of long term debt last year at very favorable rates. Like many of you I never thought we'd see a low full handle on (30 year) money. We obviously took full advantage of it and refinanced almost $0.25 billion a higher coupon debt and preferred stock.

Now turning to CapEx our three year CapEx plan represents an investment of $2.3 billion which is still over half of it from environmental and transmission projects. The major portion of the environmental investments we'll be finishing big air-quality projects at Jeffrey and La Cygne. Both products remain on schedule and on budget Jeffrey should be complete by the end of next year and LaCygne about six months later by mid-2015.

There has been no change as far as our plans for transmission. Though substantial at over $200 million none of these are controversial complex projects. They represent a number of small projects to improve reliability enable firm transmission within the SPP and to serve new customers like Mars Chocolate and expansions for current customers like Ebridge Pipeline.

We project our transmission assets will contribute almost 25% to 2013 earnings up from 15%, five years ago. A major transmission project that is not included in our CapEx is $180 million 345 KV joint venture. As a joint venture the investment is included in our rate base and the return will be recorded in investment earnings rather than our revenues.

Westar is in charge of the construction and financing on behalf of our partner. In that role, just last December, we completed a favorable agreement for $125 million of project financings. Wester's net direct investment into JV will only be about $35 million. The project remains on track to being completed late next year and we expect Prairie Wind to contribute about $0.03 per share this year, as we have SEWIP authority for the project. With 2013 CapEx of almost $900 million, we'll need to access the capital markets. The majority of the funding will be with debt and a small amount of equity via the 2 million or so shares we've already apprised before the sale agreements that we plan to settle late this year.

In our release last night, we issued 2013 earnings guidance of $2 to $2.15 per share. Guidance is conditioned on a typical factors including such things as weather, the economy, COLI proceeds and other factors we can't control, all of which we detailed on our supplemental materials. About $0.11 of COLI proceeds is included in our guidance. Also reflected in guidance, is a contribution from the cost saving initiatives we announced on our third quarter call.

With that let me turn things over to Mark.

Mark A. Ruelle - President and CEO: Thanks, Tony and good morning. Let me begin with our regulatory plans. We'll update our transmission, environmental, property tax and energy efficiency tariffs to reflect recent investments and higher related cost. We've already filed the transmission rider to pick up an additional $9 million of annual revenue. We expect a decision in time to update retail prices in April.

We'll file the environmental rider this month still finalizing the update, but the current estimate is about $31 million reflecting an additional $200 million of 2012 investment in air-quality controls.

This year's update will also fully reflect our nearly $290 million Lawrence Energy Center project, and since it's now in service, the adjustment will pick up depreciation as well. We anticipate a June effective date on the rider.

In addition to these regular tariff updates, we are preparing to file by mid-April an abbreviated rate case to recover CapEx for the La Cygne air quality retrofit. We will seek to begin reflecting about $350 million or a little more than half our share of the upgrades at the plant.

As a reminder, this case will have a limited scope with revenue requirement items limited to just the CapEx for La Cygne and terminating an ice storm amortization that will be fully recovered.

In the abbreviated filing, capital structure, ROE and other items are already established based on the levels approved in the general rate case last year. We expect we'll file a follow-on general rate case for the balance of La Cygne sometime in 2014. As part of the abbreviated case, we'll adjust rate design to move our rates more in line with economic development and growth. You might have seen last month how Kansas was featured among states on the leading-edge of creating a more business friendly climate and we are pleased to be a part of that.

Early last month, Wolf Creek began its planned refuel and maintenance outage closing out a solid continuous run since last March when it returned to service after an unplanned outage. The scope of this outage is one of the largest in plant history. It's scheduled for about eight weeks to implement several major modifications including an additional diesel generator, a fourth auxiliary feedwater pump and new reactor coolant pump seals. We will also do quite a bit pipe replacement as we prepare the plant to operate for another three decades given our already extended license.

As far as the long-term operations of the plant, you might recall we are considering whether to align with a fleet operator. We are in the middle of reviewing proposals, to nothing yet to report other than that the process continues. There's no deadline but we are thinking the owners will reach a decision whether or not to go this route by mid-year.

Regarding our long-term power supply, we continue to believe in all of the above approach and we mean it. We are certainly taking advantage of lower gas prices, but not so much that we forget commodity ebbs and flows and we are in this for a long-term with long lived assets. Though, everything we brought online in the last 25 years has been gas or renewable, our customer still benefit from our baseload generation.

Our delivered cost of low sulfur coal is still half the price of gas and we don't expect new rail agreements this year to change that. And almost all of it goes through scrub units with NOx controls. In our materials you can see just how much we have done to reduce emissions and yet not take away diversity out of our long-term supply plan; so many others have or are contemplating doing.

Last year we brought on more renewables as well which puts us a little ahead of statutory mandates. The cost of these was just a little over $0.03 per kilowatt hour under long-term fixed-price agreements. As I mentioned earlier Kansas is expressing great resolve about making our state an even better place to do business. We are seeing that in our state income taxes with top individual rates down significantly and the elimination of income taxes on almost all small businesses.

The Kansas economy was improving even before the effects of these recent implemented ta changes. Unemployment is just 5.4% a four point better than a year ago and further pulling away from the national average which is two points worse.

Utility costs are part of the economic solution. We have a significant rate advantage of almost 20% compared to the nation as a whole but not quite as favorable comparison with our large business customers. We are jealously protective of what affordable energy means for the Kansas economy. So as I mentioned we hope to improve that even further with some rate design changes which should make Kansas even more jobs friendly.

We are using other ways to help our smaller customers manage their energy costs. Our smart meter customers for example now have more tools to work with and those same tools help us with our operating costs as well by not having to rule so many trusted things like basic service cost. This is a real plus around the KU campus migration each May and August.

Pickup about any industry publication these days and you'll find an article about slumping or stagnant electricity sales.

Some hope that, that’s just a flat trend and a symptom of a still tepid economy and it will bounce back with the recovery just as it has after past recessions. Others speculate that flattening electricity sales is a new normal and a way of life. Most of you know that we don’t claim to be fortune tellers and instead focus on what we need to do no matter what the future brings. As a result we disciplined O&M spending last year through a combination of workforce reductions and productivity gains.

Our yearend staffing was down about 5% our demographics help in the next few years about half of our workforce will be eligible to retire. So this means our early to mid-career employees have great development opportunities and our late career employees have a chance to leave a legacy, a company even better than they founded.

Before taking your questions. I'd like to comment on the recent winter storms, our safety and our dividend.

We got slammed this past week, two back-to-back winter storms that dumped as much as two feet of wet sticky snow with some high winds to boot.

While we remain humbled, by what Mother Nature could send our way we were gratified with this latest set of challenges, we had no impact for about 95% of our customers and with all but a couple of dozen of those affected back on within 36 hours.

Thanks to our proactive reliability and tree-trimming program approved by the KCC last year. Our system held up pretty well and our preparedness paid off.

With regard to safety we had our best year ever. With the 600 or so people operating out power plants avoiding even a single injury. If you've ever visited a large baseload plant you'll appreciate just how remarkable that accomplishment is. Our entire workforce experienced just 13 injuries, still too many in our view, but few enough to put us in the top of industry performers. This kind of focus and attention not only keeps our people safe, but it keeps them sharper in all aspects of their jobs.

Finally, I'm happy to report that last night we announced 3% increase in our dividend. This resulted an indicated annual rate of $1.36 per share and consistent with our long standing policy of paying out 60% to 75% of earnings. Our Board recognizes that the Westar shareholders continue to value dividends as part of the total value proposition we offer.

We're now ready for questions from the financial community. Members of the media, we invite you to contact Erin Larow at 785-575-6060 if you have questions. Andrew, would you please open the line for questions?

Transcript Call Date 03/01/2013

Operator: Greg Gordon, ISI Group.

Greg Gordon - ISI Group: Thank you for the very concise disclosure on drivers for 2013 earnings, we appreciate that and good work getting back from the storm so quickly. I don't know if I mentioned this last time you had the call, but I did see a Westar Energy truck here in New York during our storm and we much appreciate your help there as well.

Mark A. Ruelle - President and CEO: We are happy to do it.

Greg Gordon - ISI Group: A couple questions. I just wanted to be clear, if we're trying to model unrecoverable O&M escalations, I think you've made it very clear, the third bullet in your planning assumptions is, all things equal net of riders. Overall O&M should be down 1%?

Tony Somma - SVP, CFO, Treasurer: That's correct, Greg.

Greg Gordon - ISI Group: If we think about the opportunity for you to go with a fleet operator for Wolf Creek, so what are the key sort of underlying metrics you are looking at in that decision? Should one of them we think about the ability to continue to hold the line on O&M costs, still, say moving up in the rankings in terms of operating performance and safety?

Mark A. Ruelle - President and CEO: I won't comment on the process because of course we are in the middle of that. But yeah, our objective is not a short-term look at that, it's recognizing that we got a good asset and it's got 33 years more of operating license. There seem to be advantages in terms of the long-term structural cost trends whether you are maybe aligned with a fleet or not. So we are taking a hard look at that.

Greg Gordon - ISI Group: One of the things I often hear when I talk to investors about Westar is, there's a lack of familiarity about the underlying economy in Kansas and there is a sense that the – that somehow the Kansas economic picture is sort of below average relative to national trends and people often focus on your exposure to aerospace. Can you talk a little bit more about what you're seeing in Topeka and Wichita in terms of underlying economic development job growth, job loss et cetera?

Mark A. Ruelle - President and CEO: Sure, sure. They need to come visit because it's not like Detroit in autos of the 1980s. Aerospace is actually – commercial aerospace which is largely related to Spirit is doing quite well. Now it is true that the small private aircraft and the small jets are not doing well and they haven't done well since the crash back in '08, and that's not a big part of our business. In fact if you look at aerospace overall, I can't remember the right percentage. Bruce, do you remember how much aerospace is, even as a percent of our revenues?

Bruce Burns - Director IR: Not as percent of revenues, but it's roughly 16% to 17% of industrial revenue, of just the industrial component.

Mark A. Ruelle - President and CEO: Yeah, so it's single-digit on our revenues. The Kansas economy is actually pretty diverse. The best – one of the best performing sectors we just had was general manufacturing. So, car batteries, prepared foods, frozen pizzas, dog food, light bulbs. We just have – we are in the process of building a very large chocolate factory in Topeka that will come on line next year, actually maybe in later this year. I can't remember the schedule. They are going to make M&M's and Snickers bars for example. More pipeline loading. Then of course we still have a pretty large military presence here and we serve all the major universities. So we are not tied to any particular sector. In fact that's one of the nice things about our economy in our view.

Greg Gordon - ISI Group: Looking at – I don’t see, I don’t think you put out a fully updated slide deck for the call but should we still assume that your CapEx plan is consistent with the CapEx guidance that you laid out at EI with rate base going from $5.5 billion at year-end '12 to close to $7 billion by '16. Is that still accurate?

Bruce Burns - Director IR: Greg, there is on the back of our earnings package, the last page does show our updated CapEx plans for the year, and as – 2013 is still in line with what we were planning for the last year, for '13.

Operator: Travis Miller, Morningstar Securities.

Travis Miller - Morningstar Securities: I wonder if you could detail what happened between November when you had last reaffirmed your guidance for the year and what you guys ended up at. I think if I am correct, there was about a $0.10 change, if you look at high ends, $2.05 to the $2.15.

Tony Somma - SVP, CFO, Treasurer: Yeah, Travis, this is Tony. We had some COLI proceeds come in, of about almost $5 million in the quarter. We also had some gains on a rabbi trust. So those two items gave us let's say, $0.05 to $0.06 and then the balance came from kind of lower O&M throughout the organization and throughout our co-owned units as well.

Mark A. Ruelle - President and CEO: Including at Wolf Creek.

Tony Somma - SVP, CFO, Treasurer: Yeah.

Travis Miller - Morningstar Securities: Is that sustainable, lower O&M or just one-off?

Tony Somma - SVP, CFO, Treasurer: What is sustainable is in our guidance for 2013, in the range that we gave for $2.0 and $2.15 a share.

Travis Miller - Morningstar Securities: Then one other question on the CapEx, when we look out to 2015, what you guys announced here, is that more of a run rate number, if we take off some of that environmental expense, is $600 million roughly where you're ending up on a run rate or there are one-time projects in there?

Tony Somma - SVP, CFO, Treasurer: They are likely to get lower if we go on beyond 2015. As we said, as the environmental projects unwind our CapEx will ramp down when you stay in that 2015 and then if you want to lookout beyond that, I would suggest that you will still see a pretty good spend on transmission in that $200 million year range. The other CapEx for the business units were probably where they were historically.

Operator: Brian Russo, Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann: Just you mentioned the $200 million run rate on transmission kind of post 2015, any specific projects that you can discuss?

Mark A. Ruelle - President and CEO: Let me introduce Kelly Harrison. He's our Vice President of Transmission and he can give a little more color on that.

Kelly B. Harrison - Vice President of Transmission: Brian, we did have a couple of specific projects at (Pass) 15. One, that we're working on a routing for – right now it's a 345 KV line, it's about some $60 million our share. There will be a couple of more projects after that, so we think we've got a pretty good pipeline out of the SPP for couple of 345 KV projects. There's a standard clear amount of aging infrastructure and projects reliability improvement.

Brian Russo - Ladenburg Thalmann: What's your projection for the Wolf Creek operating expenses in '13? You mentioned that it was down slightly in the fourth quarter, just curious.

Tony Somma - SVP, CFO, Treasurer: We haven't broken that out separately Brian. It's kind of baked into our guidance of $2 to $2.15 a share.

Brian Russo - Ladenburg Thalmann: Just on the capital market strategy, you mentioned $2 million forward sale shares of equity likely towards the end of the year. Should we kind of assume that you looked to kind of recalibrate your cap structure in that mid-2015 time period when you file your next full GRC?

Tony Somma - SVP, CFO, Treasurer: Yeah, we'll be in the process of issuing some more equity in the next couple of years as our capital structure gets little thin.

Operator: Sarah Akers, Wells Fargo.

Sarah Akers - Wells Fargo: As a follow-up to the question on transmission, it sounds like I think I heard that a lot of the post '15 opportunity is just related to aging infrastructure. So how much of that $200 million run rate depends on continued support and development of renewables in Kansas or does that just represent upside to that run rate?

Mark A. Ruelle - President and CEO: Most of that $200 million is just singles and doubles, Sarah. It's not big greenfield stuff that's got one driver on it. That's frankly why we like most the way we're approaching it. Now, as you know from our investor materials, there are a host of bigger projects that are sort of on the drawing board at the Southwest Power Pool over the next decade; one of those Kelly just mentioned, but they're not what we're assuming in our next forecast. What we are assuming in our next forecast is just a bunch of little stuff that has to get done.

Sarah Akers - Wells Fargo: Then one of the things that you talked about at EI was some of the real estate development in your territory. So this is a follow-up to Greg's question on the economy, what trends are you seeing in the commercial and residential real estate market?

Mark A. Ruelle - President and CEO: I'll ask Jim Ludwig, our Executive Vice President of Public Affairs and Consumer Services to talk about that.

James Ludwig - Executive Vice President, Public Affairs and Consumer Services: We are seeing a pickup in housing starts. Year-over-year we saw about an 11% increase, 2012 over 2011. Admittedly, that's not back to the levels we had pre-recession. In the first few months of 2013, our builders and developers are cautiously optimistic that it is picking up. I think what's even more important perhaps is that the oversupply of housing, the existing stock is improving, the sales are increasing and the market value is increasing somewhat. Another area where in this coming year we expect a maybe a little bit more robust growth is in apartments multi-housing and also some commercial building. So, we are seeing a little bit more activity in those areas and seeing some economic improvement.

Mark A. Ruelle - President and CEO: Sarah, one of the things that sets our place apart is Kansas, right, it's just not that exciting one way or the other in terms of booms and bust. So, when we have the downturn we did not have empty houses, we did not have half built homes like so much of the country did. Now, we saw some contraction in pricing, but there was not the free fall and there hasn't been the rapid bounce-back either as those empty houses get filled. We didn't have dead meters the way so many other people did.

Operator: And I would now like to turn the call over to Mark Ruelle for closing remarks.

Mark A. Ruelle - President and CEO: Well thank you for joining us this morning. If you have follow-up questions, of course you can contact Bruce Burns, Director of Investor Relations and Bruce’s number is 785-575-8227. Thanks and have a good day.

Operator: Thank you for joining today’s conference. This concludes the presentation. You may now disconnect, have a good day.