Earnings Call Transcript - EVRG Q1 2022

Operator, Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2022 Evergy Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Lori Wright, Vice President Investor Relations and Treasurer. Thank you. Please go ahead.

Lori Wright, Vice President Investor Relations and Treasurer

Thank you, Blue. Good morning, everyone, and welcome to Evergy's first quarter call. Thank you for joining us this morning. Today's discussion will include forward-looking information, slide 2 and the disclosure in our SEC filings containing a list of some of the factors that could cause future results to differ materially from our expectations, and include additional information on non-GAAP financial measures. The releases issued this morning, along with today's webcast slides and supplemental financial information for the quarter, are available on the main page of our website at investors.evergy.com. On the call today, we have David Campbell, Evergy's President and Chief Executive Officer and Kirk Andrews, Executive Vice President and Chief Financial Officer. David will cover our first quarter highlights, our regulatory and legislative priorities, and our enhanced ESG profile. Kirk will cover in more detail the first quarter results, the latest on sales and customers, and our financial outlook. 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 A. Campbell, President and CEO

Thanks, Lori, and good morning, everyone. I'll begin on Slide 5. I'm pleased to report that we had a solid first quarter as we delivered adjusted earnings per share of $0.58 compared to $0.55 in 2021. The increase in adjusted earnings over last year was driven primarily by higher transmission margin and lower operating expenses, partially offset by an increase in depreciation and amortization and higher income tax expense. Kirk will discuss these first-quarter drivers in more detail. One of our objectives is to become widely recognized for operational excellence, which includes safety. Our strong safety culture drives both discipline and consistency of performance as well as cost management. During the first quarter, our employees participated in a safety roadshow that included presentations at 70 sessions throughout our service territory. This continued focus on safety has contributed to a 68% reduction in OSHA recordable safety events relative to the first quarter of 2021. I would like to thank all Evergy employees for their focus on safety and their dedication to providing safe, reliable, and affordable power to our customers. I would also like to congratulate our Wolf Creek nuclear plant for completing a project to store spent fuel in a concrete bunker adjacent to the plant. This is Wolf Creek's first dry cask fuel storage campaign and the team did an excellent job managing the project. With a solid start to the year, we are reaffirming our 2022 adjusted EPS guidance of $3.43 to $3.63 per share, as well as our target long-term annual EPS growth rate of 6% to 8% from 2021 to 2025. Slide 6 highlights the core tenets of our strategy, affordability, reliability, and sustainability. Keeping rates affordable is at the forefront of our thinking given its importance to our customers, especially given current economic conditions. We've made clear progress in advancing the competitiveness of our regional rates over the last few years, and our plan is constructed to continue this trajectory. We are closely monitoring and managing inflation in all aspects of our business. And regarding fuel cost inflation in particular, we are well-positioned relative to many other utilities given our relatively lower level of natural gas exposure, as natural gas comprises typically 5% or less of our generation fuel mix annually. Like many of our peers, we have revisited our commodity procurement and hedging practices in light of the increased volatility which are at levels not seen for more than a decade. Ensuring reliability is also a core element of our strategy, along with improvement and safety. This includes a focus on metrics relating to customer service, the commercial availability of our fleet, safety, and all elements of our operations, including infrastructure investment. This spring has brought resiliency to the forefront as high winds in our service territory have been significantly more prevalent than normal, including several days in recent weeks with wind gusts in the 50 to 60 miles per hour range. These types of conditions reinforce the importance of our ongoing transmission and distribution investments.

Kirkland Andrews, Executive Vice President and CFO

With respect to sustainability, our track record includes reducing our carbon emissions by nearly 50% versus 2005 levels, and providing nearly half of our energy from carbon-free sources. In January, we announced plans to build a 10-megawatt solar rate at our Hawthorne plant, pending regulatory approval. In February, Evergy's cumulative wind power generation passed the 90 million megawatt hour milestone. That's enough wind power to fuel more than 300 billion miles of electric vehicle travel. We will continue our generation transition towards cleaner energy, always balancing affordability and reliability. On Slide 7, I'll profile another element of our corporate strategy relating to environmental, social, and governance measures. Since forming Evergy in 2018, we've enhanced our ESG practice in disclosures, which have yielded significant progress in our third-party ESG scores as reflected on the slide. For example, last year, we introduced our 2045 net zero carbon target, with an interim goal of 70% reduction by 2030, building on our track record and trajectory of historical emissions reductions. Beyond environmental policy, we've also taken a comprehensive approach to reviewing and updating our social and governance policies and related disclosures. Examples included corporate human rights policy, improved forward governance by-laws, expanded shareholder rights, and a formalized water policy, among many others. In addition, our board has linked executive compensation to the successful execution of both environmental and diversity, equity and inclusion aspects of our business.

David A. Campbell, President and CEO

We're proud of the advancements we've made to further demonstrate our commitment to leading ESG practices. We are focused on maintaining this momentum as we execute our plan and deliver sustainable results in the years ahead. Now, before handing over to Kirk, I'll conclude by discussing some of our key regulatory and legislative priorities on Slide 8. In Kansas, we recently reached a non-unanimous stipulation agreement with key interveners for the Winter Storm Uri costs from February 2021. The settlement calls for roughly $120 million of deferred extraordinarily fuel, purchase power, and non-fuel costs at Kansas Central to be recovered through our fuel clause over a two-year period beginning in April of next year. Similarly, the $37 million of net benefits of Kansas Metro will be returned to customers by the same method over a one-year period, also beginning in April 2023. We remain on track to file this summer the annual update to our Kansas and Missouri integrated resource plan. We expect that the annual filing will be consistent with the resource plan we laid out in last year's triennial IRP filing and the renewable development plan that Kirk discussed during our Investor Day last September. In Missouri, we initiated the securitization process to recover the approximately $300 million of Winter Storm Uri costs in Missouri West. If approved, securitization will extend the recovery period for these costs over 15 years, and thereby significantly moderate the impacts on customers. In terms of timing, we expect an order in the securitization proceeding in the fall of this year. And last month, we began flowing the approximately $25 million of net benefits from Uri back to Missouri Metro customers over a one-year period. I'll wrap up this slide with an update on our legislative efforts to enhance and extend the plant and service accounting law known as PISA in Missouri. The bill under consideration sets an annual revenue requirement cap at 2.5%, applicable only to PISA-related deferrals. The bill also includes a property tax tracker and extends the law through 2028 with the opportunity for extension through 2033, with commission approval. We are encouraged by the support the bill has received in both the Senate and House, and we'll continue to work with legislators and parties to secure passage over the next 10 days. With respect to the pending Missouri rate case, we expect to receive intervenor direct testimony on June 8th related to revenue requirements, and on June 22nd relating to rate design aspects, with rebuttal testimony due mid-July and serve rebuttal testimony due mid-August. Our settlement conference is scheduled for August 22nd, with hearings later that month through early September, which provides rates and Missouri will go effective on December 2nd. We look forward to working with parties to constructively resolve the case. I will now turn the call over to Kirk.

Kirkland Andrews, Executive Vice President and CFO

Thanks, David. And good morning, everyone. I'll start with the results for the quarter on Slide 10. For the first quarter of 2022, Evergy delivered adjusted earnings of $134 million or $0.58 per share, that's compared to $125 million or $0.55 per share in the first quarter of 2021. First quarter adjusted EPS was driven by the following items as shown on the chart from left to right. As expected, higher margin driven by our transmission investments drove a $0.05 increase. Adjusted O and M expense was approximately $13 million lower or $0.04 per share due to reduced credit loss expense, lower transmission, and distribution expense as well. $0.03 of higher depreciation and amortization expense due to increased infrastructure investment. And finally, we had a $0.03 of unfavorable income tax expense, which was an entry year timing impact related to income tax smoothing, which will reverse throughout the year. I will also note our first-quarter adjusted EPS excludes a $0.05 loss on one of our average ventures investments, which went public via SPAC in the fourth quarter of 2021. As you may recall, our fourth quarter 2021 EPS similarly excluded a larger mark-to-market gain associated with this same investment. On an accumulative basis, relative to our original investment, this results in a net gain of approximately $0.04. Finally, as David mentioned, given the solid first quarter results, combined with our outlook over the balance of this year, we're reaffirming our adjusted EPS guidance range of $3.43 to $3.63 per share for 2022. And consistent with historical patterns, we expect our second quarter adjusted earnings to contribute approximately 20% of our total adjusted EPS for the full year. Turning to Slide 11, I'll provide a brief update on recent sales and customer trends. On the left-hand side of this slide, you will see the overall, our weather-normalized retail sales for the quarter were up about 40 basis points, which drove a small positive variance in earnings, largely in line with our expectations. Demand by subcategory as expected continues to reflect the reversal of the impact of COVID in the prior year, as we return to more normal conditions with lower residential demand as fewer customers are working from home, while commercial and especially industrial demand trends higher. As summarized on the lower right for the slide on the economic development front, Meta, formerly known as Facebook, chose the Kansas City region for a new $800 million data center, which is expected to bring over 1,400 construction jobs to the area. Additionally, Northeast Kansas was selected as the site for a new $650 million biomanufacturing facility, which is expected to add 500 jobs to our service territory. And finally, last month, Bombardier announced that Wichita, Kansas, the Air capital of the world, will be the new home of its U.S. headquarters and will bring along hundreds of new jobs to that region. And finally on slide 12, our focus remains on continuing to demonstrate a strong track record of execution. We've reaffirmed our adjusted EPS guidance for 2022, as well as our long-term compounded annual EPS growth rate of 6% to 8% from 2021 to 2025 based on the midpoint of last year's original EPS guidance of $3.30. And we expect to return a meaningful portion of our earnings growth to our shareholders by maintaining our dividend payout ratio to keep that dividend growth in line with earnings. We continue to invest in our infrastructure to improve affordability, enhance reliability and customer service, while advancing our sustainability and transitioning our generation fleet as reflected in our $10.7 billion five-year CapEx plans through 2026, which is consistent with the targeted rate base growth of 5% to 6% from 2021 to 2026. With that, I'll hand the call back to David.

David A. Campbell, President and CEO

We now welcome your questions.

Operator, Operator

Please stand by while we compile the Q&A roster. Your first question comes from the line of Michael Sullivan from Wolfe Research. Your line is now open.

Michael Sullivan, Analyst

Hey, everyone. Good morning.

David A. Campbell, President and CEO

Good morning.

Michael Sullivan, Analyst

Wanted to start with the pending Missouri legislation there, and maybe if you could just give us a little more color on the process, is it really just a matter of working through things here or do you sense there is some level of opposition that could waylay things at the last moment? And if it does get done, does that change the way you think about how you invest or frequency of rate case filings and things like that?

David A. Campbell, President and CEO

Thanks, Michael. It's a great question. We have broad-based support for the extension; the bill's reflected diversions passing through both the Senate and the House. So the main issue at this point is just working through with the end of the session a week from tomorrow. It's just working through, can we get things through the session? As with every bill that's pending, typically a bit of a race, both the marathon through the night and rates to get things through the session, so that's really the main issue to work through. In terms of our plan, I think what the piece of reflecting the support for the bill reflects is the support that's in Missouri for the ongoing investment in both the resiliency and reliability of the system, as well as the transition towards renewable resources done with a focus on affordability and reliability. So I don't know that it changes the plan; it just reinforces and accents the themes of the plan, and allows us to do so in an orderly basis. In terms of the rate case scheduled, we don't have a fixed timetable or mandate to file, and this bill does not require one. So I think it won't change our plans in terms of timing; that'll really be driven by the level of investment when we want to get things to the usual factors that balance when you file a case. Hopefully that makes sense.

Michael Sullivan, Analyst

Yes, it does. And then also wanted to circle back to just the near-term resource planning. I think on the last call, you provided an update around the 190-megawatt solar project that it sounded like was slipping a little bit and then I think in conjunction with that, had the Lawrence coal plant retirement. Can you just update us on where that stands?

David A. Campbell, President and CEO

Sure. And I'll hand it to Kirk, so I'll just briefly say, the solar farm, the 190-megawatt solar farm that we call Pixley. We are still actively considering it, but we have pulled a predetermination process for that, we mentioned that on the last call. We also noted that it was not a material earnings driver in our forecast period because of the nature of the market-based rate structure we had for that; it was not a traditional rate base addition. So there's a timing question on Pixley, which does not have any kind of material earnings impact. The Lawrence plant, as you noted, we described in the last call our plans. It's a two-unit coal plant outside Lawrence, Kansas that we were linking the retirement timeline to the addition of the solar farm. I think we're still thinking along those lines. But we're no longer planning to retire all 500 megawatts; we will convert 350 megawatts, which is unit five to gas, so we can keep the reliability asset online. So that's still the plan, and again, I think it's very consistent with the earnings trajectory and growth rate that we've laid out in a firm. Kirk?

Kirkland Andrews, Executive Vice President and CFO

On the solar side, just obviously focused on consistency and certainty of costs there. And with some of the headwinds we've seen with the recent Department of Commerce investigation around anti-dumping and countervailing duties, I think that's going to be a little bit of a pacing item as we look to work constructively with our counterparty on that project. But overall, if at the very least it results in a delay, as David said, I think I've talked to a lot of you about this, not a meaningful driver of earnings in the early years of our plans. So if anything, it's just shifts us closer to the point at which it would deliver more consistent earnings strength. But it's a relatively small project, and we're going to continue to manage the process as we move forward with our counterpart here.

David A. Campbell, President and CEO

And Michael, as you know, our Integrated Resource Plan has been a significant focus in recent calls. We have less solar in the near term, so in 2024 and 2025 we are adding wind, meaning the next phase of solar is not expected to come online until 2026. We included 350 megawatts of solar in our plan for 2026, which means we are less vulnerable to the current supply chain issues and tariff proceedings.

Michael Sullivan, Analyst

Super helpful. Thanks for all the insights.

David A. Campbell, President and CEO

Thank you.

Operator, Operator

Your next question comes from the line of Michael Lapides from Goldman Sachs. Your line is now open.

Michael Lapides, Analyst

Hey, guys. Just one thing. Can you remind us on pension status, which is our funded status as in given the moving rates, given the move in the market, how you're thinking about what that does to both pension liability and maybe more importantly, pension expense that flows through O&M?

David A. Campbell, President and CEO

It's a predominance of the Michaels this morning. Good morning, Michael. So for us, it's not that we don't have an earnings exposure. We're only giving our regulatory mechanisms in the two states. Our funding status is relatively lower than some other plans, and that's again related to how our regulatory funding mechanisms work. So I think we'll continue to show that funding level. We don't expect the change in this trend is going to have a material impact on the cost that flows through the rates to customers. So for us, relative to others, this is not the thing in our earnings struggle. It's a pretty arcane setup and maybe simplest to go through offline, but I got a headlines summary that you can go with.

Michael Lapides, Analyst

Got it. Yeah, I knew Missouri had the tracker; I wouldn't where Kansas did as well. That's super helpful, much appreciated. One other question, just any update on the discussions about buy-in of wind PPAs?

David A. Campbell, President and CEO

Sure, Michael. As I mentioned during the fourth quarter call, we are confident in the progress we've made with a select group of counterparties and are aiming to secure at least one buy-in and possibly repower this year. We continue to have active discussions with these counterparties and are making headway. I want to emphasize that we are still targeting this goal and will keep you updated as we advance in this process.

Michael Lapides, Analyst

Got it. Thanks, much appreciated. And that's not in your CapEx guidance, so that would all be incremental?

David A. Campbell, President and CEO

It is not. That would be incremental, yes. Direct.

Michael Lapides, Analyst

Got it. Thanks, guys. Much appreciated.

David A. Campbell, President and CEO

Thank you, Michael.

Operator, Operator

Your next question comes from the line of Julien Dominion from Bank of America. Your line is now open.

Darius Anderson, Analyst

Hey, good morning, guys. This is Darius for Julien. Thanks for the time this morning. Just wanted to maybe come back to the Lawrence gas converging discussion. Can you maybe just kind of talk through the puts and takes, relative to the 190 megawatts of solar that appears to be on hold at the moment, from a capital perspective, how one compares to the other?

David A. Campbell, President and CEO

Good morning, Darius, and thank you for the question. We are connecting the energy replacement efforts, which streamlines the regulatory process through the linked predetermination approach. This is the primary reason we chose to link the two, though we can separate them if necessary and will consider that over time. The Pixley solar project is quite unique, as it has not significantly impacted earnings beyond our forecast period. The Lawrence project also has a relatively minor effect since we are maintaining most of the plant's operations. There will be some rate base implications from converting the coal to gas, but these are minimal. We intend to securitize this but will keep the large unit operational. Thus, while linking the two is convenient from both regulatory and energy management standpoints, it is not essential. We will assess this as we continually evaluate the solar costs. From the perspective of integrated resource planning, we can manage the retirement of Lawrence. Your next inquiry may involve our overall commodity price environment, which we are monitoring, particularly regarding the timelines for '23 and '24. We will track the duration of the natural gas cycles, and while they are currently linked, we will evaluate them dynamically as we move forward.

Darius Anderson, Analyst

Thank you for that information. I have another question related to the objectives you outlined in the Q4 call. We are in an inflationary environment that has been a topic of discussion, particularly regarding wind. You mentioned plans to execute build transfer agreements for wind, aimed for delivery around the middle of the decade. Can you provide an update on how those discussions are evolving?

Kirkland Andrews, Executive Vice President and CFO

Hey, Darius, it's Kirk. Just a reminder, we have 800 megawatts of wind planned for 2024 and 2025, with 324 and 525 megawatts respectively. As we mentioned last year and again in the fourth quarter, we initiated a request for proposals, and the responses have been strong. We have shortlisted counterparties and are experiencing good interest beyond our expectations. We're making progress in our discussions, and we've received encouraging feedback. We'll continue to keep you updated as we advance. Our goal is to complete the first phase of the build transfer in time to bring 300 megawatts online in 2024 and 2025. Based on our current engagement level with the counterparties, we remain on track, particularly for that first batch of 324 megawatts.

Darius Anderson, Analyst

Okay, I appreciate the color. I'll turn it back here. Thank you.

David A. Campbell, President and CEO

Thanks, Darius.

Operator, Operator

There are no further questions at this time. I would now like to turn the conference back to David Campbell, President and CEO.

David A. Campbell, President and CEO

Great. Thank you, Blue. Thanks everyone for your interest in Evergy. Have a great day. We'll conclude with that.

Operator, Operator

This concludes today's conference call. Thank you for participating and have a wonderful day. You may now disconnect.