Earnings Call Transcript - EVRG Q4 2022

Operator, Operator

Thank you for standing by, and welcome to Evergy’s fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you will need to press star-one-one on your telephone. I would now like to hand the call over to Peter Flynn, Director of Investor Relations. Please go ahead.

Peter Flynn, Director of Investor Relations

Thank you, and good morning everyone. Welcome to Evergy’s fourth quarter 2022 earnings conference call. Our webcast slides and supplemental financial information are available on our Investor Relations website at investors.evergy.com. Today’s discussion will include forward-looking information. Slide 2 and the disclosures in our SEC filings contain a list of some of the factors that could cause future results to differ materially from our expectations. They also include additional information on our non-GAAP financial measures. Joining us on today's call are David Campbell, President and Chief Executive Officer, and Kirk Andrews, Executive Vice President and Chief Financial Officer. David will cover 2022 highlights, provide upcoming regulatory and legislative updates, and discuss our upcoming integrated resource plan. Kirk will cover our fourth quarter and full year results, retail sales trends, as well as our financial outlook for 2023. Other members of management are with us and will be available during the question and answer portion of the call. I will now turn the call over to David.

David Campbell, President and CEO

Thanks, Pete, and good morning everyone. I’d be remiss if I did not start with the recognition of the Kansas City Chiefs and their victory in Super Bowl LVII. For football fans who have never been to Arrowhead Stadium, definitely add it to your list. Chiefs Kingdom is quite something to behold. I’ll begin on Slide 5, and I’ll start by thanking our employees who worked tirelessly throughout the year to advance our strategic objectives of affordability, reliability, and sustainability. I’m proud and honored to lead the Evergy team. With respect to 2022 results, I am pleased to report that we had another solid year. We delivered adjusted earnings of $3.71 per share compared to $3.46 per share in 2021. These results reflect another year of strong execution relative to our objectives. We enter 2022 with a guidance range of $3.43 per share to $3.63 per share, and our results came in $0.08 higher than the top end of the range. Kirk will discuss the drivers of our 2022 results in more detail. Last year, we executed on our capital plan to further improve reliability and resiliency, investing $2.2 billion in infrastructure to modernize our grid and replace aging equipment. I’d like to recognize the hard work of our regulatory staff as we completed our first two Missouri rate cases since the merger in 2018. We reached partial settlements on key economic issues at both Metro and Missouri West, delivering significant O&M savings back to our customers. These rate cases underscore our continued progress in maintaining affordability for our customers and increasing our regional rate competitiveness. Through November 2022, we’ve limited cumulative rate increases to 2.7% since 2017, well below the rate of increase for our regional peers and the prevailing rate of inflation over the five-year period. Slide 6 profiles the significant improvement that we’ve made in customer satisfaction, as measured by JD Power’s annual survey of utility customers. Since 2018, we’ve climbed 10 spots in JD Power’s Midwest large utilities category, coming in at fifth out of 15 companies in 2022. Customer satisfaction remains at the forefront of our strategy. Safety tops our list of core values, and Slide 7 highlights the considerable progress we’ve made in limiting safety-related events. Both OSHA recordables and DART cases have declined by over 50% since 2018. Promoting a culture of safety and focusing on every employee going home safely every day are paramount to our success as a company. On Slide 8, we introduce our 2023 GAAP and adjusted EPS guidance of $3.55 per share to $3.75 per share. We know the importance of consistent execution and we recognize that 2023 falls short of the midpoint relative to our long-term targets, reflecting regulatory lag in our Kansas jurisdiction and our commitment to a five-year rate case stay out as part of the merger, but we remain confident in our ability to deliver annual 6% to 8% adjusted EPS growth through 2025 off of the 2021 baseline, and we are reaffirming that target today. Moving to our five-year capital plan on Slide 9, we have updated and extended our forecast through 2027. Our new five-year investment plan totals $11.6 billion from 2023 to 2027, which represents a $900 million increase relative to our 2022 to 2026 forecast, or 9%. Nearly 60% of our planned investment is targeted towards transmission and distribution projects as we continue to modernize our grid to improve reliability and enhance resiliency for our customers. By replacing aging equipment and investing in smart grid technologies, we’ll also enable further efficiency gains in serving our customers, which has been a hallmark of Evergy’s strategy over the last five years. Slide 10 profiles our progress in driving cost savings. Despite historically high inflation in 2022, we held adjusted O&M flat relative to 2021, representing $232 million in cumulative savings since 2018, or 18%. The work is not done yet and we remain laser-focused on our target of an additional 11% reduction in adjusted O&M through 2025. As part of this effort, the company implemented a voluntary retirement program in the fall of 2022 which, combined with ordinary course retirements and attrition, resulted in an 8.5% reduction in the size of the organization by year-end. I can’t say enough about the hard work of the Evergy team in delivering against and exceeding the savings for customers that were promised as part of the merger that formed our company. As shown on Slide 11, Evergy has been able to limit cumulative rate increases to 2.7% since 2017 based on the latest available data from the EIA which runs through November 2022. This compares favorably to our regional peer states and the prevailing rate of inflation over the same time frame. Advancing and improving regional rate competitiveness are priorities in our long-term plan and are front of mind for many of our stakeholders, and that’s exactly what we have accomplished over the past five years. Moving to Slide 12, I’ll provide an update on regulatory and legislative priorities, beginning with our rate case filings in Kansas. In mid-April, we’ll file our first rate cases at Kansas Central and Kansas Metro since completion of the Evergy merger in 2018. We believe these rate reviews will be relatively straightforward, requesting recovery and return on our grid modernization and infrastructure investments over the past five years and passing on the benefits of the cost savings we’ve achieved to our customers. We look forward to working with our regulators and stakeholders to achieve a constructive outcome for our Kansas customers and communities. In Missouri this year, we anticipate a quieter legislative session relative to last year, which saw the extension and amendment of PISA, further supporting the constructive regulatory environment in the state. On the regulatory front, we have open dockets for the approval of an operating certificate of convenience and necessity for our acquisition of Persimmon Creek Wind Farm, as well as securitization of Winter Storm Uri costs incurred at Missouri West. Initial post-hearing briefs are due on March 6 in the Persimmon Creek docket with an order requested by April 6. We firmly believe Persimmon Creek is the lowest cost solution to serve Missouri West customers consistent with the IRP preferred plan, and we’ll continue to work collaboratively with our regulators to secure the necessary approvals. The Missouri Public Service Commission’s approval of our request to securitize extraordinary costs from Winter Storm Uri was appealed to the Missouri Court of Appeals by the Office of Public Counsel in early January. OPC’s initial briefs are due by early April, 90 days following the appeal date. We believe the Commission’s decision to approve our request is well supported by the record. While we cannot complete our securitization financing until the appeal plays out, incremental carrying costs incurred prior to approval will ultimately be recovered when we issue the debt. The last item on the regulatory agenda that I’ll reference is the expected June filing of our annual integrated resource plan updates in both Kansas and Missouri, which I’ll cover more as you turn to Slide 13. The planning process for our IRP filings is well underway as we continue to assess the beneficial impacts of the Inflation Reduction Act on our generation resource planning. The longer-term certainty the IRA provides around renewable energy tax credits will enhance our ability to tap the abundant renewables potential in our region and deliver savings to our customers by replacing higher-cost energy. We expect our Wolf Creek nuclear plan to be eligible for the IRA’s nuclear production tax credit, the benefits of which will accrue to our customers in years with low realized prices for Wolf Creek. In addition to these IRA tailwinds, we’ll be incorporating updated commodity projections, construction costs, and higher capacity requirements in the southwest power pool into the annual update. We are excited to advance our integrated resource plans to deliver additional benefits to our customers. I’ll conclude my remarks with Slide 14, which summarizes the Evergy value proposition. The left side of the page covers the core tenets of our strategy to advance affordability, reliability, and sustainability through a relentless focus on our customers, supported by stakeholder collaboration, sustainable investments, and financial and operational excellence. The right-hand features what we believe are particularly attractive and distinctive features for Evergy, given our business mix and geographic location. We are excited about the opportunities for our company and we are committed to the sustained effort required to deliver against our high-performance objectives. I’ll now turn the call over to Kirk.

Kirk Andrews, Executive Vice President and CFO

Thanks, David, good morning everyone. I’ll start with the results for the quarter on Slide 16. For the fourth quarter of 2022, Evergy delivered adjusted earnings of $68.6 million or $0.30 per share, compared to $32.9 million or $0.14 per share in the fourth quarter of 2021. As shown on this slide, the year-over-year increase in fourth quarter EPS was driven by the following: first, an increase in heating degree days partially offset by lower demand drove a net $0.08 increase in EPS compared to the fourth quarter of 2021; higher transmission margins resulting from both our ongoing investments to enhance our transmission infrastructure and higher volumes drove a $0.04 increase; and a decrease in O&M versus the fourth quarter of 2021 drove an $0.08 in adjusted EPS for the quarter. These positive drivers were partially offset by $0.03 of higher D&A expense and $0.09 from the combination of higher interest expense and lower AFUDC equity. Income tax-related items, including increased wind and other tax credits, and the timing of the use of tax credits compared to the prior year drove $0.06 of higher EPS in the quarter. Finally, other items, both positive and negative, drove a net $0.02 of year-over-year increase. These items consist of higher COLI proceeds and other margin which were partially offset by $0.06 from the Kansas earnings sharing program, which was one of our merger commitments which expired in 2022. Warmer weather through the summer and into the fall drove our earned ROE at Kansas Metro above our current authorized 9.3%, requiring us to refund half of that excess back to customers. I’ll turn next to year-to-date results, which you’ll find on Slide 17. For the full year 2022, adjusted earnings were $853.8 million or $3.71 per share, which compares to $795.2 million or $3.46 per share in 2021. Again moving from left to right, our full year EPS drivers versus ’21 include the following: weather contributed $0.21 versus 2021. Relative to normal, weather drove an estimated $0.29 of favorability in 2022. Weather-normalized demand was 1.1% higher than 2021, driving an $0.11 increase. Higher transmission margins from increased investment as well as higher volumes drove a $0.15 year-over-year increase, and lower O&M drove adjusted EPS $0.02 higher versus 2021. These positive drivers were partially offset by $0.11 of D&A and $0.14 of increased interest expense and lower AFUDC equity, with higher interest expense accounting for $0.11 of the $0.14 decrease in adjusted EPS. Finally, other items drove a net $0.01 of favorability, consisting primarily of $0.04 from the expiry of merger bill credits, $0.02 from tax credits, and $0.01 of other items which were partially offset by $0.06 from the earnings sharing program, or ERSP at Kansas Metro, which I mentioned earlier in my fourth quarter remarks. Turning to Slide 18, I’ll provide a brief update on our recent sales trends. On the left-hand side of the slide, you’ll see that total retail sales increased 3.5% in 2022, driven primarily by a strong increase in residential usage and supported by healthy commercial and industrial growth. Looking to the right-hand side of the slide, after adjusting for the estimated impact of weather, retail sales increased 1.1% for the full year. These results were bolstered by strong industrial demand from the oil and chemical refining sectors. The 1.7% increase in weather-normalized commercial demand was driven by customer growth and a continued return to normal post-COVID. Underlying the continued growth in residential and commercial customers is a strong labor market, highlighted by Kansas and the Kansas City Metro area unemployment rates of 2.9% and 2.4% respectively as of year-end. These remain below the national average of 3.4%. Overall in 2022, we saw a continued recovery following the pandemic and our economy is well positioned to extend that positive trend. As a result, adjusting for 30-year weather, we expect an approximate 1.6% increase in weather-normalized demand in 2023, which I’ll discuss as part of our 2023 EPS guidance which you’ll find on Slide 19. Starting on the left side of that slide and beginning with 2022 adjusted of $3.71, we expect an $0.11 decline from demand, or just under a 1% decrease in total demand. This $0.11 decrease is the net impact of removing that estimated $0.29 impact in ’22 from weather, partially offset by an $0.18 increase in weather-normalized demand. Removing the largely weather-driven impact of the earnings sharing program, or ERSP at Kansas Metro in 2022 results in a $0.06 increase. We expect an approximate $60 million reduction in pre-tax O&M to deliver a $0.20 EPS increase as we continue to execute on our cost savings programs as part of our focus on and commitment to affordability and operational excellence. Higher transmission margins are expected to add $0.13 in 2023 as we continue to make investments to improve our transmission infrastructure. The pending acquisition of Persimmon Creek Wind Farm is expected to drive $0.05 of EPS. These positive drivers are expected to be partially offset by the following: increased D&A of $0.16 as we continue to invest in infrastructure and execute our capital plan, increased interest expense of $0.21 due to higher debt balances at higher rates, and $0.02 of other items, primarily driven by lower year-over-year earnings from a combination of the expiry of a wholesale contract in Kansas and the one-time true-up of Uri carrying costs in 2022 which were partially offset by higher expected COLI proceeds. Turning next to Slide 20, our strong results in 2022 reflect our ongoing focus on and continuing to build a track record of consistent execution. As David mentioned earlier, we’re reaffirming our long-term compound annual EPS growth rate target of 6% to 8% from 2021 to 2025, as we remain confident in achieving that trajectory, and as we continue to progress on that path, we also remain committed to returning capital to our shareholders and target dividend growth in line with earnings growth, with that dividend payout ratio at 60% to 70%. Our updated five-year capex plan from 2023 to 2027 totals $11.6 billion and implies rate-based growth of approximately 6% from 2022 to 2027. We’ve included some additional disclosures in the appendix of today’s presentation, including a breakdown of planned expenditures by category and by utility which we hope you will find helpful. In addition to allowing us to achieve these financial targets, executing on this investment plan also advances our key objective to advance affordability, reliability, and sustainability over the long term. I’ll conclude by reviewing some specific 2023 objectives as you turn to Slide 21. Building on the positive momentum from our strong results over the past two years, we remain focused on meeting or exceeding our financial targets in 2023. This year we’ll be working collaboratively with our Kansas regulators and stakeholders to achieve a constructive outcome in our first Kansas Central and Metro rate cases since the merger in 2018. As a key factor of achieving our goal of affordability, we look forward to providing our Kansas customers with the benefits of significant O&M savings we’ve achieved over the last five years. Consistent with needs identified in our integrated resource plan, we are focused on closing the acquisition of the 200 megawatt Persimmon Creek Wind Farm this year, which is PISA-eligible and will serve our Missouri West customers with clean, low-cost energy. Finally, we have recently launched a new renewables RFP focused on sourcing the balance of our 2024 renewables as well as our 2025 and 2026 investment objectives, and we will look to complete this process later this year to begin executing agreements to achieve those objectives. We will also update our integrated resource plans in both states in June, which will for the first time incorporate the benefits of the Inflation Reduction Act. With that, we’ll be happy to take your questions.

Operator, Operator

Our first question comes from Michael Sullivan of Wolfe Research. Please go ahead, Michael.

Michael Sullivan, Analyst

Hey everyone, good morning.

David Campbell, President and CEO

Good morning.

Michael Sullivan, Analyst

Hey David. Maybe just wanted to start with the reaffirmation of the 6% to 8% CAGR through 2025. Can you maybe just at a high level talk to some of the drivers that get that back on track from 2023, the guidance you gave today?

David Campbell, President and CEO

Thank you, Michael. We recognize, as I mentioned earlier, that we faced some challenges in 2023 and fell short of our midpoint, but we are reaffirming our confidence in returning to the 6% to 8% growth range. The primary reason for this is that we are experiencing a peak regulatory lag year, especially impacting Kansas Central. As you're aware, there are aspects of lag in our Kansas operations, and it's been five years since our last rate case. By moving forward with the rate case this year and implementing the new rates by year-end, we aim to address the under-earning we've encountered on numerous investments made over the past five years, which is crucial for getting us back on track. This year marks our peak lag year, but we've taken effective steps to mitigate it in 2021 and 2022, and we’re satisfied with our results in that regard. Although we faced interest rate challenges and some effects from Missouri that we couldn't fully counterbalance this year, we've thoroughly examined our model and are reaffirming our commitment to 2024 and 2025. The second factor, which is well recognized, involves our ongoing efforts to achieve cost savings. We expect to present significant cost savings in this rate case, reflecting the cumulative savings since 2018, with more opportunities ahead. These two primary factors are how we intend to maintain our trajectory towards achieving the 6% to 8% annual earnings growth.

Michael Sullivan, Analyst

Okay, that’s very helpful. Maybe just on that, you mentioned the regulatory lag. On the Metro side, I think this was alluded to in the remarks, but the fact that you hit the sharing this year, I take it that was mostly weather? Was that under-earning too maybe adjusted for weather, or just give us a feel for where Metro is at into this rate filing?

David Campbell, President and CEO

Yes, it partly relates to the nature of the jurisdiction. Metro has actually has higher prices but it’s got a level of investment, it’s a much more dense urban system and we’ve been doing a lot of systematic replacement across our much bigger and broader Kansas Central service territory. The biggest factor in Metro is weather and the impacts in 2022, and obviously reflects the relative level investment. Even in normalized weather, we’re close to earning our authorized return in Metro, but we’re well short of it in Central, so it’s just different characteristics of those two jurisdictions. Central is also a lot bigger overall, so a bigger impact on results, but the earnings sharing was a reflection of weather impacts in particular in 2022 on the Metro jurisdiction.

Michael Sullivan, Analyst

Okay, great. Then just last one from me, can you maybe just give us a sense of where things are at and where you expect them to go in terms of some of the bills pending at the Kansas legislature, looking at things like appointed commissions and such?

David Campbell, President and CEO

Sure, there are several utility bills currently under consideration in Kansas, with an active legislative session. One bill that passed out of committee is expected to spark significant discussion regarding the election of commissioners. However, we believe this approach may not be the best policy and likely lacks broad support, so we don’t anticipate it advancing. Still, discussions on this matter will continue. Additionally, there are bills concerning the right of first refusal for transmission projects, which could enhance predictability, regulatory oversight, and consistency for customers. Another bill related to our transmission delivery charge is still being discussed. It has passed out of committee but has yet to be voted on by the full house. If it does reach the full house, it will then move to the senate. Ongoing discussions are anticipated in Kansas, but it remains uncertain if any bills will ultimately pass this year. We are engaging closely with stakeholders and believe the discussions are progressing positively.

Michael Sullivan, Analyst

Great, thanks for all the color.

David Campbell, President and CEO

You bet, thank you Michael.

Operator, Operator

Thank you. Our next question comes from the line of Shahriar Pourreza of Guggenheim. Please go ahead, Shahriar.

Shahriar Pourreza, Analyst

Hey, good morning guys.

David Campbell, President and CEO

Morning Shahriar.

Shahriar Pourreza, Analyst

Just on the cases in Kansas, which I guess will be filed between now and your next update, you’ve got the Kansas Central fuel balance to recover starting in April for two years, you’ve got, I guess, some O&M give-back since the last case and the merger. How should we think about the holistic targets here for rate increases with all these puts and takes at play?

David Campbell, President and CEO

It's a great question, Shahriar, because there are several elements that will be considered in the rate case and some that will not. For example, the Uri fuel cost recovery is about $125 million that we will recover over two years. Kansas Central was relatively insulated from Uri costs compared to most areas in our region since it relies less on gas, so the total amount is modest but still requires recovery. This has already been approved through the regulatory process and won't be addressed in the rate cases. The focus of the rate cases will be on the investments we've made since our last case, which will include distribution, generation, general plant, and transmission. Kansas Central has already been reviewed by FERC, so it will not be included in the rate case, but our O&M savings will be part of it. We provided estimates during our various workshops with the commission regarding the rate impacts. Our rate impact estimates were through 2024 and then, in December, we extended them to 2026 as it is a five-year plan. Generally, we've indicated that we aim for rate increases to be in line with or below the annual rate of inflation. Since it has been five years since the last rate case, we anticipate a cumulative increase. However, our stakeholders understand that this will reflect our cumulative investments during that period. Given the very high inflation in 2022, we are optimistic that we will be able to stay well under inflation considering how elevated it was broadly. We have detailed our investment plans and cost reduction programs, so there shouldn't be many surprises. We had workshops discussing our capital plans in 2020 and through May of '21, and again in December of last year. The cases will be engaging as they always are, being the first one in five years, but we believe it will be straightforward, focusing on reviewing our investments and the cost savings we have achieved, along with the usual discussions around ROE and similar topics. Hopefully that addresses your question, Shahriar.

Shahriar Pourreza, Analyst

No, it does, it does. That’s helpful, thank you for that. I want to just slightly tweak the prior caller’s question here. It’s good to see the capex roll to ’27, but I’m just thinking about even directionally, the profile of the EPS growth beyond the ’25 guide. The latest capex gets you to around 6% implied rate base growth. Is there more to squeeze on the O&M side or is more dependent on the Kansas case and the IRP update? I guess put differently, what are the drivers that would push you in and out of your current 6% to 8% guide as we look ahead?

David Campbell, President and CEO

It’s a great question, Shahriar, and we’re not introducing 2026 or beyond guidance today, as you know, but the drivers are, as you know, over time we’re going to be really related to rate based growth, how we fund that, and we’ve got a strong balance sheet to support our investments, and of course our ongoing cost savings. Now we’ve consistently, really since the STP was first introduced, have laid out cost targets consistent with what we’ve shown through 2025. We think that we’ve got a good system and our employees do a terrific job driving efficiency in our business. The kind of step function changes in costs that we have are not going to be sustainable over the long term, but annual productivity gains and seeking to drive those are certainly going to be important. As you noted, it’s going to be rate base growth, how we fund it and the O&M cost savings. We’re going to update our IRP this year, that’s going to have some impacts on our plans with respect to renewables. As I mentioned, the southwest power pool is getting tighter both because of incremental demand but also because of a change in how reserve margins are calculated and an increase in reserve margin requirements, so capacity needs are higher. Demand trends have been strong, we’ll start seeing impacts from electrification as well as we get to the latter part of the decade, so a lot of moving parts but, like other utilities, a lot of it comes down the fundamental drivers of rate base growth, demand growth, how you fund it, and O&M. We feel good about those drivers in our service territory and we look forward to providing the update once we’ve gotten through the IRP update, as well as our rate cases.

Shahriar Pourreza, Analyst

You feel comfortable with narrowing the gap between rate base growth and EPS growth over time?

David Campbell, President and CEO

We are confident in the drivers in our service territory and in our range of 6% to 8% through 2025. We appreciate the set-up in our territory and look forward to sharing more details as we approach 2026 and beyond.

Shahriar Pourreza, Analyst

Okay, great. Thank you guys, I appreciate it. Thanks.

David Campbell, President and CEO

Thanks Shahriar.

Operator, Operator

Thank you. Our next question comes from the line of Nicholas Campanella of Credit Suisse. Your question please, Nicholas.

Nicholas Campanella, Analyst

Hey, good morning everyone. Thanks for taking my questions today. I wanted to just follow up on the IRP because absolutely a focus here. When you think about the opportunity set in front of you and the fact that you’re now showing a rate base CAGR of 6% out to ’27, does the IRP extend that 6% or could it potentially increase it? Just trying to understand the magnitude of what’s to come, thanks.

David Campbell, President and CEO

I feel like a parent calling you Nicholas. Nick, that’s a great question. The IRP update is currently in progress. We have incorporated our expectations for new generation into our future capital expenditures. There has been a slight change in our outlook regarding the mix of Power Purchase Agreements in renewables. Currently, we have a significant emphasis on PPAs and we believe it’s beneficial for customers to have a balanced approach. However, in Kansas, we have adjusted to two-thirds owned generation and one-third from PPAs. This will influence the outcomes of the actual RFPs we conduct and what will be the most competitive and beneficial for customers. That’s an aspect regardless of what is included in the IRP. Nick, I think there are certain factors that could lead to more attractive opportunities for customers in the IRP, particularly the significant benefits from the Inflation Reduction Act that were not modeled in last year’s IRP. These benefits are substantial and will be available for a considerable time, enhancing the relative cost of new renewables, which are fairly cost-effective in our region compared to energy from fossil resources. We have a considerable amount of coal, and the traditional ability to reduce costs for customers by substituting high variable costs and high fuel cost generation with renewables is something I believe the IRP will reflect. The unpredictable factor will be construction costs. Personally, I think we may still encounter some bottlenecks that could keep construction costs for renewables elevated, but historically these constraints have been lifted, and supply typically responds strongly, which helps lower costs over time. Given the energy we still generate at high variable and fuel costs, along with the favorable impacts from the IRA, we will likely see additional opportunities for renewables, but we need to wait and see how the calculations unfold. It’s possible that the math will appear more favorable once we assess where construction costs stand and their trends. Furthermore, with tighter capacity requirements and solar being more focused on capacity, there’s also the potential for additional capacity needs driven by growth from entities like Panasonic and Meta, which could also create resource needs skewed towards capacity requirements. That’s a long response to your question, but I hope that clarifies things. Overall, I believe there could be some positive influences in the IRP.

Nicholas Campanella, Analyst

Okay, thanks for that. I guess just on the financing plan, I’m just trying to understand, is it your intention to not do any equity past the ’25 time frame, but now that you have this capex plan out to ’27, just wondering how to fund that.

Kirk Andrews, Executive Vice President and CFO

Hey Nick, it’s Kirk. Certainly as we’ve reiterated a number of times through our 6% to 8% growth rate through 2025, there is no new equity in that particular plan. As you’ll see, we came out of 2022, as David said earlier, with a strong balance sheet. We’re ahead of our targets, we’ve got strong robust free cash flow, we’re not a current taxpayer so we translate net income very efficiently into operating cash flows, which gives us a pretty good stable of equity to help supplement financing with debt, keep the balance sheet in line. Certainly expect that to be the case through 2025. That will continue because we don’t expect to be a cash taxpayer until towards the end of the decade, so we’re going to look to balance those two objectives. We’ll look at the IRP obviously and the impact on the capital expenditure plan, but our goal is to successfully balance our objective to maintain that long-term growth rate as robustly as we can, and that obviously means being prudent about issuing equity while at the same time maintaining those balance sheet objectives. But fortunately with the combination of those robust cash flows and the foundation we’ve come out of 2022, we feel good about where those balance sheets are and we’ll continue to focus on it. As we get through the rate case in Kansas and update the IRP, we’ll have more specifics about the financing plans long term, but again robust cash flow and our tax shield is a tailwind for us as we move forward, even beyond ’25.

Nicholas Campanella, Analyst

Appreciate that color, thanks everyone. I’ll take Nick or Nicholas any day.

David Campbell, President and CEO

Thanks, Nick.

Operator, Operator

Thank you. Our next question comes from the line of Durgesh Chopra of Evercore. Please go ahead, Durgesh.

Durgesh Chopra, Analyst

Hey, good morning team. Thanks for taking my questions.

David Campbell, President and CEO

Morning.

Durgesh Chopra, Analyst

Good morning David. You’ve answered all of my other questions. Maybe just hit on the PPA opportunity that you’ve discussed in the past and what is the opportunity set there for perhaps 2023 and then longer term.

Kirk Andrews, Executive Vice President and CFO

Yes, sure Durgesh, it’s Kirk. Continuing to focus on that, as we talked about in 2022. I and particularly we were disappointed we weren’t able to bring one of those over the finish line despite a number of engagements with various counterparties. That continues to be the case. As I’m sure you’re well aware, there have been a number of renewable portfolios out in the marketplace, there continue to be. Those renewable portfolios, as often has been the case, continues to be the case going forward, include some of our PPA counterparties, so we are continuing to be involved in that process, and I think with the clarity that’s provided by the IRA, that’s given us a little bit better foundation for negotiating that. I don’t expect that if we get one of those done, and we’re certainly focused on doing it, I think it’s certainly possible in 2023. I don’t expect that to be a major driver - as I said before, we’d probably get at least one done because, going back to Nick’s question previously, we want to maintain the strength of our balance sheet as well as stay out of the equity markets as long as we can to maintain that growth rate, but we do have the capacity to get one of those done and I think it would be additive. It’s not in our capital expenditure plan, but certainly as a proof of concept of moving that forward, I think the opportunities are abundant and with a lot of the renewable sales out in the market right now, there are opportunities to participate and get that done. More updates to come, can’t be more definitive than that, but certainly we’ve got a growing backlog and an opportunity set to look at with that 3,800 megawatts of PPA.

Durgesh Chopra, Analyst

Thank you for the clarification. I want to understand the recovery process for the 4 gigawatts of opportunity. Will it require going through rate cases or obtaining approvals when acquiring those PPA opportunities, or can you explain how that process works?

Kirk Andrews, Executive Vice President and CFO

We would, yes, in certain cases. Especially in Kansas, we can pursue that through a predetermination-type process, but yes, ultimately we’d have to pursue both prudency and prosecuting that into a rate case, and obviously in the case of a simple buy-in, we’d look to do that to more or less replace the pass-through of what is existing PPA with a rate base investment that’s neutral, if not beneficial to our rate base.

Durgesh Chopra, Analyst

Got it. Thanks so much, I appreciate it, Kirk.

Kirk Andrews, Executive Vice President and CFO

You bet.

Operator, Operator

Thank you. Our next question comes from the line of Angie Storozynski of Seaport. Your question please, Angie.

Angie Storozynski, Analyst

Thank you. I have a quick question. You mentioned a $0.21 impact from interest expense, and I’m curious if some of this will be adjusted in the upcoming Kansas rate cases. Looking ahead, how much of this impact do you expect to continue beyond this rate case cycle?

Kirk Andrews, Executive Vice President and CFO

That represents a year-over-year increase, and it's important to consider that the transition from 2022 to 2023 was marked by varying interest rates, particularly with higher rates evident in the latter part of 2022. This impact reflects a full-year effect. We acknowledge that there are several factors influencing our interest rate sensitivity, particularly in the utility sector. We anticipate that certain pollution control bonds will play a significant role, especially those linked to Kansas Central and Metro. Additionally, we must address our short-term interest rate exposure. Much of this is accounted for in our AFUDC mechanism, but as we transition our construction work in process to plant and service, we will focus on short-term rates, which are elevated due to the current market conditions, and we will consider extending some of those rates. If we proceed with that in 2023, it will likely coincide with our rate case in Kansas, allowing for adjustments to be made at that time.

Angie Storozynski, Analyst

Meaning the year-over-year drag shouldn't exist, so it should actually benefit the year-over-year calculations for 2024.

Kirk Andrews, Executive Vice President and CFO

Yes.

Angie Storozynski, Analyst

Okay.

Kirk Andrews, Executive Vice President and CFO

I think the better way to approach this is that we’ve transitioned from a partial year to the current year, so we’re now reflecting current rates. We don’t anticipate a significant jump in rates moving forward; rather, it's more about the increasing debt than an increase in rate exposure as we look from 2023 onward.

Angie Storozynski, Analyst

Awesome, that’s all I have. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Paul Patterson of Glenrock Associates. Please go ahead, Paul.

Paul Patterson, Analyst

Good morning guys.

David Campbell, President and CEO

Morning Paul.

Paul Patterson, Analyst

On the IRA and Wolf Creek, I was wondering if you could give us a flavor for what the potential quantification could be and if that immediately goes to ratepayers or if there might be some sort of positive rate lag. How should we think about that?

David Campbell, President and CEO

Paul, it’s going to be fascinating as the rules come out around it. The first thing to note is that the eligibility will start in 2024, but it is an impact that will flow directly to our customers so it will not have an earnings impact. Now, I think anything that helps with respect to customer cost is a good thing. Regional rate competitiveness and affordability are critically important for us, so there’s a tangible benefit that we’re really excited about as well. In terms of the mechanism, it will be interesting to see how the rules operate. Presumably since it’s based on yearly realized prices, that may be assessed on a monthly basis, it may be assessed in a back cast at the end of the year, it may be based on day-ahead markets - that probably makes more sense rather than real time, but all that is yet to be seen. But the net-net is if you went back a couple years, this wouldn’t have been true in ’22 given the high commodity prices, but if you look back at ’21 and ’20 and ’19 and ’18, the realized prices at Wolf Creek were below the thresholds that are laid out in the IRA for eligibility for a PTC, and it wouldn’t be the full $15 a megawatt hour in all years but, depending on what the go-forward pricing is, it could be up to $15 a megawatt hour for a 1,200 megawatt nuclear unit, so it’s a sizeable potential benefit for customers. But the mechanism, we believe that’s going to flow directly through the fuel clause, which is again very important but not an earnings driver. But it will be interesting to see as the rules come out and it starts in ’24.

Paul Patterson, Analyst

Great, regarding Persimmon, which you made a strong case for, the situation does appear to be contentious. Is there any chance for a settlement?

David Campbell, President and CEO

We had hearings this week and have been in discussions with staff in advance, so I believe it’s now in the commission’s hands. As I mentioned, we are always working constructively towards approval, and we believe this is a great option that provides significant benefits for our customers in terms of costs. We feel we have strong arguments for adding it. If we can reach a settlement, that would be excellent, but ultimately it’s up to the commission to resolve this issue.

Paul Patterson, Analyst

Okay, great. Then with respect to the ROFR bill, I’m sure you guys are familiar with the Fifth Circuit ruling, I guess dealing with the Texas law and NextEra. I’m wondering, is there anything different about this law versus that, or how should we think about the Fifth Circuit ruling, and I’m sure it will be appealed to the Supreme Court or whatever, but how should we think about how that law may or may not interact with that court ruling?

David Campbell, President and CEO

It’s a good question. I was actually in Texas at the time the Texas law was passed, so it has some unique elements reflecting the unique elements of the Texas market. There are ROFRs in place - right of first refusals in place in dozens of jurisdictions around the U.S., and they’ve stood the test of time in those markets and been beneficial and remain in place. Most of our neighbors have them, most of the states in the SPP have them, so we’ll track, it may be narrow to the Texas law, it may not. We don’t have ROFR in place in Kansas and Missouri, so one step at a time, but I do think the ROFRs that are in place across multiple states, they’ve been resilient. We’ll obviously have to follow how those cases go, but some unique features, as you know, in that Texas law.

Paul Patterson, Analyst

Okay. Then just finally on transmission, there are a number of FERC proceedings, they seem rather small to me but there are a number of them, I guess, and they’re very technical - frankly, over my head to some degree in terms of the formulas and what have you. How should we think about just cumulatively those proceedings and how you feel about any potential exposure there, or not there, if you follow me?

David Campbell, President and CEO

I do, and we’ve resolved a couple of proceedings, one of which was ruled on by the FERC last year. Our guidance moving forward reflects our view of the impact of the overall regulatory framework. Some aspects are complicated, but the most intricate issue that was pending involved a formula in the tariff that was under review. We had to adhere to the tariff, but when it comes to a formula related to the transmission delivery charge and the transmission formula rates at the FERC level, that was resolved last year. Our forward guidance reflects the impacts of that case. There are many technical issues involved, but our perspective on their impact is incorporated in our forward plan.

Paul Patterson, Analyst

Okay, thanks so much and have a great one.

David Campbell, President and CEO

Thank you, you too.

Operator, Operator

Thank you. Our next question comes from the line of Ashar Khan of Verition. Please go ahead, Ashar.

Ashar Khan, Analyst

Hi David. I think all my questions have been answered, but if I may sum up, you mentioned there will be an additional $100 million in lower savings between now and 2025. According to the chart, that amounts to about $0.40 or $0.45, and if I'm correct, half of that was achieved this year in 2023, as you indicated a decrease or benefit in O&M of $0.20. Would it be accurate to say that there is another $0.20 or $0.25 expected over the next two years? Also, I'm assuming the other contributing factors will be transmission earnings and the Kansas case next year, and should we also consider another Missouri case that could influence 2025?

David Campbell, President and CEO

I’ll ask Kirk to comment on the O&M aspect, but generally speaking, with about 230 million shares, you can calculate our expected O&M savings for the next year, which I believe will be in the range of $50 million to $60 million. The remainder will carry into 2025, and Kirk can clarify that. We anticipate rate cases on an every-other-year schedule, which suggests a Missouri rate case in 2024, so you have a solid understanding of the key factors. Kirk, do you have anything to add?

Kirk Andrews, Executive Vice President and CFO

On the O&M front, to clarify, if I include the $60 million reduction, which reflects the decline in O&M from 2022 to 2023, I mentioned earlier that coming out of 2022, our non-fuel O&M was approximately $1.74 billion. This means, with the $60 million savings, we're looking at $1.14 billion. We have set a target of $960 million for 2025, indicating a reduction of about $54 million from 2023 to 2025. So, this rounds to about $0.20 in savings per share when looking beyond 2023, just to clarify that.

Ashar Khan, Analyst

Okay. Then if I can just end up, and I know I don’t want to front run this because you have been meeting your objectives, but when will you do a revise, right, because right now the CAGR is based on 2020 time. Is that something which will happen a year from now or is that a 2025 exercise?

David Campbell, President and CEO

Yes, it’s likely to be a year from now, Ashar. We’re going to have the integrated resource plan update and we’ll get to the Kansas rate case, so I think that that’s going to be most informative for investors. Again, we think the Kansas rate case is pretty straightforward, but a lot of eyes are going to be on that rate case, so I think the most likely time frame forward is going to be in the Q4 call about a year from now, which I hope to open with a celebration of another Chiefs Super Bowl.

Ashar Khan, Analyst

Okay, that’s correct, we’re hoping for that too. Thank you so much, so kind of you. Have a nice weekend.

David Campbell, President and CEO

Thanks, Ashar.

Operator, Operator

All right, thanks Latif. For everyone on the call or reading later, thank you for your time this morning and thank you for your interest in Evergy. Have a great day. This concludes today’s conference call. Thank you for participating. You may now disconnect.