Westar Energy Earnings Call Insights: Unrecoverable O&M Escalations and Kansas Economy

Westar Energy, Inc. (NYSE:WR) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Unrecoverable O&M Escalations

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%?

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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.

Kansas Economy

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?

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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: 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.

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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?

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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.

A Closer Look: Westar Energy Earnings Cheat Sheet>>