In Q3, Westar Energy Spends More, Saves More and Increases Customer Count

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Researched by Industrial Info Resources (Sugar Land, Texas)--On Friday, November 9, 2012, Mark Ruelle, CEO of investor-owned electric utility Westar Energy Incorporated (NYSE:WR) (Topeka, Kansas), discussed a few observations about operations, regulatory activities and business trends, and the company's Senior Vice President, CFO and Treasurer, Tony Somma, provided highlights on the financial performance of the third quarter as well as information about some major projects that Westar is involved in. Overall, the executives were "generally pleased" with Westar's financial performance; however, they still would like to take measures to control costs and increase growth.

Somma got right to business by saying that Westar Energy's gross margin increased $31 million or 7%. He contributed this gain to higher prices, and then mentioned that retail sales volumes, on the other hand, decreased 3% in the third quarter because of cooler weather. Apparently, the weather somewhat dictates the company's financial performance in some areas. "As measured by cooling degree days weather this year was about 9% cooler than last year, which we estimate lowered EPS [earnings per share] by about $0.05 a share." Somma explained. "In addition, while we still had some record hot days, weather wasn't as humid as it was last year. Decline in industrial sales was concentrated mostly to just chemicals, biofuels, and aerospace." He said.

Expenses and Projects

Somma also noted that on the expense side, combined operations and maintenance and selling, general and administrative expenses rose 9% to $16 million in the third quarter. He contributed this increase to: a $9-million transmission expense, property taxes, higher pensions and employee benefit costs.

The CFO mentioned that there were "no surprises" in capital expenditures. He then added that "Air quality equipment for Unit 4 at our Lawrence Energy Center is wrapping up ahead of schedule and under budget." The company expects to bring the plant back online in a few days. Somma also said that the big air-quality projects at La Cygne and Jeffrey remain on budget and on schedule. The CEO said that this project was part of a consent decree with the U.S. Environmental Protection Agency (EPA) that closed out a New Source Review. He said that the project "required the installation of at least one SCR [selective catalytic reduction] among the three units at the station, and it also set a reduced site-wide NOx [nitrogen oxides] rate." The company is now able to meet the lower site-wide NOx limit with just the one SCR and cheaper equipment. "We are delighted with these results as they allow us to meet the environmental mark and yet avoid spending hundreds of millions of dollars, which would otherwise just serve to raise prices for our customers." Ruelle Said.

Westar Energy also has projects that do not fall into the capital expenditures' budget. Two projects that fall under this category are the Post Rock and Ironwood wind farms, which reached commercial operations this year. They will provide "an additional 370 megawatts (MW) of renewable energy under long-term fixed price purchase power agreements." Somma explained. According to Somma, renewable resources represent 670 MW (9%) of Westar's installed generating resources, and this amount is "more than sufficient" to meet Kansas's renewable portfolio standards. Somma added that the incremental cost of renewable energy in Kansas is "relatively modest" unlike other parts of the country.

The company's Prairie Wind Transmission joint venture started construction on a double-circuit 345 kilovolt line, which is expected to be completed in 2014.

Industrial Info is tracking several projects in the United States that Westar Energy is involved in, such as a coal-fired unit in Kansas. For this project, Westar is working with Burns & McDonnell (Kansas City, Missouri) to continue site preparation for a 720-MW unit. This project is expected to be completed in November 2014, and has a total investment value of $200 million. Industrial Info is also tracking a project that is worth $30 million that Westar is involved in. For this project, Westar is conducting energy analysis for a coal-fired 49 MW unit in Lawrence, Kansas. It should be completed in 2015. In addition to those two projects, Industrial Info is tracking the progress of the 232 MW coal-fired unit in Techumseh, Kansas, which Westar owns. It's worth $20 million, and according to experts at Industrial Info, Westar Energy has developed the project scope for a mercury control addition.

Savings and Sectors

Westar has identified about $16 million of annualized savings. This amount is about 3% of the company's combined operations and maintenance and selling, general and administrative expenses.

The company's service territory improved. For the year so far, the company added approximately 2,500 customers, which was about 1,000 more customers that the company had the same time in 2011.

There were times of growth in Westar's sectors and times of declines. For example, the company's agricultural, food processing and miscellaneous manufacturing experienced gains while the biofuels and chemicals segments did not see growth. The biofuels segment suffered because of the drought that occurred in 2012, and the CEO believes that chemicals segment was down because of the "soft construction" market. Demand for private aircraft has remained soft, while commercial aviation has been stable, he said. Currently, airlines are looking to replace aging commercial fleet, and this helps Westar's business.

Ruelle briefly spoke about Hurricane Sandy during the conference call. "Of course, we're all aware of the devastation caused by Sandy." He said. "We're mindful of those impacted by the storm and those still waiting for housing repairs and electricity, but pleased we could help with the monumental task of restoring power to millions of homes and businesses who were in the dark." He mentioned that "it was an easy decision" for Westar to help out for humanitarian reasons and because the company's operations have been in good shape.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.