Earnings Call Transcript - EVRG Q2 2023

Pete Flynn, Director of Investor Relations

Good day, and thank you for standing by. Welcome to the Q2 2023 Evergy, Inc. Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Pete Flynn, Director of Investor Relations. Please go ahead.

Peter Flynn, Director of Investor Relations

Thank you, and good morning, everyone. Welcome to Evergy's Second Quarter 2023 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, in 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 our second quarter highlights, our integrated resource plan and regulatory and legislative priorities. Kirk will cover in more detail the second quarter results, retail sales trends and our financial outlook for the year. 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 will begin on Slide 5, and I'm pleased to report that Evergy had a solid second quarter as we delivered adjusted earnings of $0.81 per share compared to $0.84 per share a year ago. The decrease was driven by less favorable weather as well as higher depreciation and amortization interest expense partially offset by growth in weather normalized sales, transmission margin and lower O&M expenses. Kirk will discuss these earnings drivers in more detail in his remarks. Our reliability metrics were strong for the year through June as average duration and frequency, otherwise known as SAIDI and SAIFI, were favorable relative to our target. I'd like to call out the work of our distribution and transmission teams for the improvements in system resiliency that we're seeing. Weather has been less cooperative to start the third quarter and on July 14, our service territory experienced a severe storm. The storm produced 80 to 100-mile per hour winds resulting in our most impactful storm in recent history. At the storm's peak, nearly 200,000 Evergy customers were without power, as high winds down countless trees and damaged or destroyed nearly 500 power poles. We estimate total O&M costs of $6.5 million for the storm recovery efforts. I'd like to thank the nearly 3,500 Evergy employees, contractors and personnel from neighboring utilities that assisted in making repairs, working with customers and restoring power. Our crews worked 16-hour shifts through hot and humid conditions as well as follow-on storms that disrupted the restoration efforts, and our customer teams also worked overtime to field calls and support our customers. Our front-line workers are the bedrock of safely delivering affordable and reliable power to our customers and communities. We're extremely proud of and grateful for their contributions to these challenging conditions. Our team's consistent execution has resulted in a solid start to the year, and we are reaffirming our 2023 adjusted EPS guidance range of $3.55 to $3.75 per share as well as our target long-term annual adjusted EPS growth of 6% to 8% from 2021 to 2025. Slide 6 highlights our annual integrated resource plan updates, which were filed on June 15 in both Kansas and Missouri. This year's updates reflect the impacts of the renewable support provided by the Inflation Reduction Act, revised load forecast, increased Southwest Power Pool capacity margin requirements, potential changes to environmental regulations and updated commodity price forecasts. As a reminder, in 2022, nearly half of the energy that we generated for our retail customers came from carbon-free resources. Reflecting the contributions of our Wolf Creek nuclear plant and the 4,400 megawatt portfolio of renewable resources that we own or contract with long-term power purchase agreements. Over the next 10 years, taking advantage of the ample resource potential of our region as well as substantial federal subsidies, we plan to add more than 3,000 megawatts of new wind and solar resources. The timing of these additions reflects the outputs of our recent all resource request for proposal, which was undoubtedly affected by the global supply chain challenges impacting solar, wind and battery project availability and costs. Tightening capacity conditions in the Southwest Power Pool and higher demand also factored into the annual IRP update, reflecting higher capacity needs. This year's preferred plan includes the introduction of hydrogen-capable combined cycle gas turbines in the latter half of the decade. We now expect to cease all coal operations at Lawrence Units 4 and 5 and convert Lawrence Unit 5 to natural gas in 2028. In aggregate, the 2023 preferred plan includes 4,800 megawatts of new resource additions through 2032, an increase of 1,200 megawatts when compared to the 2022 Integrated Resource Plan update. As our generation fleet evolves, we are focused on achieving a responsible balance between non-carbon emitting, intermediate resources, typically with low or negative marginal costs and older firm dispatchable generation with higher marginal costs, all while ensuring reliability and affordability for our customers and communities. We're excited about the potential investment opportunities ahead of us as we continue to transition our portfolio over the coming years. Moving to Slide 7, I'll provide an update on our regulatory and legislative priorities. In Kansas, we're awaiting intervenor testimony, which is due to be filed by August 29 and our pending Kansas Central and Kansas Metro rate cases. Activity in September picks up with rebuttal testimony due September 18 and the settlement conference scheduled for September 21. Should an agreement be reached, we'd be required to file it by September 29. Otherwise, hearings would run from October 9 through the 13. We look forward to working with all parties to achieve a constructive outcome and advance regionally competitive rates for our Kansas customers and communities. Shifting to Missouri, the order approving our request to securitize extraordinary costs from Winter Storm Uri remains in the state of appeal process with oral arguments to be held September 7. We believe the Missouri Commission's decision and support of securitization is well supported by the record. As a reminder, we will complete the securitization financing after the appeal plays out, but incremental carrying costs incurred prior to approval will ultimately be recovered when we issue the debt. We anticipate resolution later this year. I'll conclude my remarks with Slide 8, which highlights the core tenets of our strategy: affordability, reliability and sustainability. On the affordability front, advancing regional rate competitiveness is one of our primary objectives. Our focus on delivering benefits to our customers since the 2018 merger is reflected and demonstrated in the EIA data on rate trends across states in the Central United States over the past 5 years. In addition, direct market evidence is provided by ongoing wins in economic development in our territory. We're pleased by our progress in improving regional rate competitiveness and keeping our rate trajectory well below the rate of inflation. Affordability is and will always be an area of focus. Ensuring reliability is also a core element of our strategy. And along with SAIDI and SAIFI, 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 summer has brought resiliency and reliability to the forefront as storm activity in our service territory has been more prevalent than normal, including the July 14 storms of straight-line winds in excess of 80 miles per hour. These types of conditions reinforce the importance of our ongoing transmission and distribution investments. With respect to sustainability, we continue to advance the transition of our generation fleet as detailed in our 2023 IRP update, continuing the progress of the last two decades. Since 2005, we have significantly and cost-effectively transformed our generation fleet, reducing carbon emissions by nearly half, and reducing sulfur dioxide and NOx emissions by 98% and 88%, respectively. We look forward to the ongoing portfolio transition. Our mission is to empower a better future, and our vision is to lead the responsible energy transition in our region, always with an eye on affordability, reliability, and sustainability. With that, I will now turn the call over to Kirk.

Kirkland Andrews, Executive Vice President and CFO

Thanks, David, and good morning, everyone. Turning to Slide 10, I'll start with a review of our results for the quarter. For the second quarter of 2023, Evergy delivered adjusted earnings of $186.1 million or $0.81 per share, and that's compared to $194.5 million or $0.84 per share in the second quarter of 2022. As shown on the slide from left to right, the year-over-year increase in the second quarter adjusted EPS was driven by the following: first, a 13% decrease in cooling degree days compared to last year, which drove an $0.08 decrease in EPS. Compared to normal, weather for the second quarter was favorable by approximately $0.03 per share. Weather-normalized demand growth of 1.1%, driven by the residential and commercial sectors contributed $0.04 per share. Higher transmission margins resulting from our ongoing investments to enhance our transmission infrastructure drove a $0.02 increase. A $53 million decrease in adjusted O&M drove a positive $0.17 variance year-over-year. This was partially due to the continued execution of operational efficiencies and partially the result of the timing of O&M expenditures within 2023. The net impact of higher depreciation and amortization was $0.07 for the quarter, which includes the offsetting impact of new retail rates. The combination of higher interest expense and lower AFUDC drove a $0.13 decrease with interest expense representing about $0.12 of that variance. The increase in interest expense also reflects the lower rate environment comparatively in early 2022. Finally, other items, both positive and negative, drove a net increase of $0.02. I'll turn next to the year-to-date results, which you'll find on Slide 11. Through the first 6 months of 2023, adjusted earnings were $322 million or $1.40 per share compared to $324 million or $1.41 per share for the same period last year. Again, moving from left to right, our year-to-date EPS first drivers include the following: when combined with the mild winter weather in the first quarter of this year, our year-to-date results reflect an approximate 13% decrease in heating degree days and in cooling degree days, driving a $0.16 decrease in EPS versus the first half of 2022. As compared to normal, weather was approximately $0.04 unfavorable through the first half of 2023. Solid weather-normalized demand growth of 1.6% year-to-date, in line with our annual estimate, driven by the residential and commercial sectors contributed $0.09 per share. Higher transmission margins resulting from our ongoing investments drove a $0.04 increase. Decreased O&M drove a positive $0.29 variance year-over-year. The decrease is partially a result of the timing of O&M expenditures within 2023, with a $0.13 decrease from higher depreciation expense due to increased infrastructure investment, which again is net of the offsetting impact of new retail rates. $0.04 of year-to-date proceeds from company-owned life insurance and higher interest expense and lower AFUDC, which drove a $0.26 decrease with interest expense representing $0.22 of that variance. The increase in interest expense again reflects both a higher carrying balance and the lower rate environment in the first half of 2022. We expect rate-driven variances to decrease in magnitude as we move through the year, consistent with the original assumptions of our guidance. Finally, other items, both positive and negative, drove a net increase of $0.08, which was primarily driven by other income and income tax items. Turning to Slide 12, I'll provide a brief update on the recent sales trends. Weather-normalized retail sales increased 1.1% in the second quarter compared to last year. This was primarily driven by increases in both residential and commercial usage. While year-to-date weather-normalized demand is up by approximately 1.6%. The lower industrial demand continues to be driven primarily by two refining customers. Excluding these two customers, remaining industrial weather-normalized demand would have increased during the first half of this year. Demand growth continues to be supported by a strong local labor market with Kansas and Kansas City Metro area unemployment rates of 2.8% each, which continue to remain below the national average of 3.6%. Finally, on Slide 13, I'll wrap up with an overview of our long-term financial expectations. With a solid start to the year, we are reaffirming our adjusted EPS guidance range of $3.55 to $3.75 for 2023. We are also reaffirming our long-term compounded annual EPS growth rate target of 6% to 8% from 2021 to 2025. We expect to address our outlook for earnings growth beyond 2025 on our year-end call in February. Our $11.6 billion 5-year capital plan through 2027 is focused on new infrastructure investment to improve customer service, enhance reliability, and resiliency as we transition our generation fleet while continuing to advance regional rate competitiveness and meet the evolving needs of our customers and our communities.

Operator, Operator

Our first question comes from Durgesh Chopra from Evercore ISI.

Durgesh Chopra, Analyst

I have two questions. I appreciate the fact that with the IRP moves, you guys kind of reaffirmed your CapEx and rate base outlook. Maybe could you just get a little bit more granular and quantify how much CapEx was there associated with renewables in the current plan? And then what are the opportunities on the grid mod side or other opportunities that you think that, as a result of those moves, that CapEx and rate base growth profile is still intact? Any color there?

David Campbell, President and CEO

Thank you for the question. It's a good one. When we released our integrated resource plan, we also shared a slide indicating that our overall capital investment plan for 2023 to 2027 aligns with our updates from the last quarter. There is a mix shift, and we haven't published that overall change yet as we're currently in the process, which we usually do throughout the year. The Integrated Resource Plan indicates a higher total level of resource additions, but there are some phasing shifts in the near term, particularly a decrease that mainly reflects supply chain constraints and the impact on product availability and costs. We reaffirmed our overall capital plans for the reasons you highlighted. We have a range of beneficial infrastructure investments, especially in grid modernization and resiliency, which we expect will support a consistent overall capital plan. Over the 10-year time frame, we anticipate a substantial addition of new resources, leading to an increase in capital expenditures. Although we only provide a five-year plan update, you will see some elements of that as we approach year-end when we add 2028 to our public disclosures, including some of the resource additions I mentioned, particularly related to hydrogen-capable new natural gas units. A significant portion of that capital expenditure will appear in the later part of our capital plan.

Durgesh Chopra, Analyst

Got it. Okay. So you remain confident in your CapEx and rate base outlook and we'll look for more color on the Q4 call. That's the key takeaway there. Okay. Just then on the Kansas rate cases, just can you give us any incremental data points? What's the feedback from various stakeholders and the potential for a settlement? I know you put out some dates there, but just looking for any additional color that you can share?

David Campbell, President and CEO

We don't have much to share at this point. We're currently engaged in a detailed discussion process, receiving numerous inquiries related to capital, as is typical in all rate cases. We will gain more insight once the first round of testimonies is submitted, which will happen on August 29. That day will involve a significant amount of reading on our part, as we will see staff and intervenor testimony. As we move into August and September, we'll have a clearer picture. We are eager to work collaboratively with all parties toward a settlement. It has been five years since our last rate case. Overall, this rate case is relatively straightforward, focusing mainly on the infrastructure investments made during that time and the cost savings from the merger, with several clearly outlined elements. It's less complex than some aspects of our previous Missouri West case. We anticipate a constructive engagement with all parties, and more details will be available later this month and especially as we approach September and October.

Operator, Operator

One moment to our next question. Our next question comes from the line of Shar Pourreza from Guggenheim Partners.

Shar Pourreza, Analyst

I just want to be crystal clear on the response that you gave to Durgesh because, I mean, obviously, this was a very deep IRP update a few weeks ago. So is the messaging that it is status quo from just a capital perspective to the current trajectory, but there could be some step function increases as we shift forward? I just want to get a bit of a sense there.

David Campbell, President and CEO

To clarify my response, I'll ask Kirk to go first. Kirk, please proceed.

Kirkland Andrews, Executive Vice President and CFO

I believe Durgesh also raised this question. Our total amount for new generation renewables in the fourth quarter was just over $2.1 billion, which contributes to the overall total of $11.6 billion. Our capital expenditures align with expectations, and we anticipate that spending on new generation and renewables will also be consistent. We may see some timing shifts, but we expect the annual capital expenditures to reach that $11.6 billion consistently. There might be some variations in the capital expenditures for renewables and new generation year-over-year, influenced by the integrated resource plan, which could lead to some differences in allocation over time. Overall, we have many essential grid modernization projects, so there could be slight shifts between these categories from year to year. However, the total amounts and annual figures will remain aligned.

Shar Pourreza, Analyst

Yes, it does.

David Campbell, President and CEO

And I'll add. So Kirk, thank you for the clarity. I'll add an additional point is we're very focused on affordability and as we think about our capital planning. We have and we were able to have the opportunity to go through this with our Kansas commissioners, and we have a similar dialogue. Of course, Missouri, we've been able to go through, we've got an old system. We've got a lot of very wide range of beneficial projects that are available to us. We calibrate our level of expenditure with an eye towards affordability. There's no doubt around that. So we'll continue to shape that, but we've got a really robust capital plan informed by parts of our system that are still very old. So we've got a backlog of beneficial projects. So we're always going to keep an eye on affordability as well.

Shar Pourreza, Analyst

Got it. And David, can you just speak a little bit more broadly to sort of the transmission expansion backdrop in SPP and MISO? Now looking at tranches 2 and 3, they're spending billions on moving power through your neighboring systems. Do you see the RTO picking up the pace here in the years ahead? Just any color on the backdrop, especially as you guys continue to evaluate on the generation side?

David Campbell, President and CEO

That's a great question, Shar. It's fair to say that the Southwest Power Pool has the future grid and long-term transmission plan as part of their strategic plan. However, it's important to note that they are not at the same point as MISO regarding these plans; it will still take some time. As a major player in the Southwest Power Pool, we strongly support the process. This is crucial as we look at our integrated resource plan, especially for the latter part of this decade and into the 2030s. All players in our sector will be influenced by evolving federal EPA rules. Significant changes in our resource plan are on the horizon, and the transmission grid will need to be prepared for that. We will continue to advocate for progress within SPP. While MISO has made advancements with tranches 1, 2, and 3, SPP has not yet reached that stage, but it is on their strategic agenda, and we will be collaborating with them to drive this forward, as evolving the transmission grid is essential for our region to maintain affordable rates as we transition our fleet.

Shar Pourreza, Analyst

I think that is fantastic. You guys covered everything. I appreciate it.

Operator, Operator

One moment for our next question. Our next question comes from the line of Julien Dumoulin-Smith from Bank of America.

Julien Dumoulin-Smith, Analyst

Can you guys hear me? Excellent. Look, just following up with the last question. Let me just jump to this. Obviously, the updated IRP had a fairly modest, if not flattish outlook on load a lot of the commentary that you're making here would suggest that, that certainly has an upside bias to it. We've seen that in other jurisdictions. How do you think about the evolution of your load forecast itself? What's in that plan? What's not in that plan? Again, obviously, you just filed this. So there's a certain element of it being still relevant. But maybe you could talk about some of the pivots in it as you think about this IRP, just at the outside.

David Campbell, President and CEO

It's a great question, Julien, as I believe it's an upside factor for our sector and region. We have considered low, medium, and high demand scenarios in our integrated resource plan. In our long-term planning, we typically expect mid-range growth at about 0.5%. We anticipated higher growth for 2023, and so far, our results in the first half of the year align with that expectation. Over the long term, there are structural factors that could push us toward the higher end of growth rather than just 0.5% annually, influenced by electrification and the large new loads associated with reshoring efforts in the United States. Additionally, the transformation of electricity demand, driven by AI and the increasing requirement for data centers, could also add to growth. I believe these factors—electrification, onshoring, and the proliferation of data centers—could lead to a more positive outlook for our long-term plans. Much of this growth is likely to come to fruition in the latter part of this decade and into the 2030s. Overall, the long-term fundamentals are solid and suggest a tendency toward stronger growth in our integrated resource plan, especially in the high case scenario. In our region, it's important to note that a significant portion of our portfolio transition will occur in the 2030s. Our generation portfolio currently consists of roughly half emissions-free and half fossil-based, with a notable share of coal. Other utilities share similar characteristics. The transition will largely unfold in the 2030s, and from both resource and demand planning perspectives, the long-term outlook is robust. When demand grows, it aids affordability by distributing costs over a larger base. This leads me to a positive long-term forecast.

Julien Dumoulin-Smith, Analyst

Just pivoting here to the guidance and just year-to-date results, if you will. I know you guys have a cost legacy and kudos on that front. $0.29 is pretty impressive as a headline number here on O&M. Can you talk a little bit about what those items are, the sustainability of them into '24? Maybe some of the puts and takes within guidance that you contemplated at the start of the year, i.e., how are you tracking against those guidance items? Because it would seem as if with weather still fairly modest as a headwind, $0.29. I know you offset the persimmons here, but like it's certainly a nice showing on the cost front in a year-to-date sense.

David Campbell, President and CEO

Julien, there’s a lot to discuss. I’ll invite Kirk to add to this. We aim to manage our business holistically, focusing on controllable factors while addressing external influences. This year, weather has posed challenges, particularly in July, which was milder in our region compared to the variable conditions across the U.S. I’m proud of our team's efforts in cost management. You inquired about specific elements; we rigorously review all aspects of our operations, from generation to distribution and customer service, as well as at the corporate level. As Kirk mentioned, some of this is about timing and phasing, but we will continue to manage our business actively, similar to our peer utilities, as we maintain our annual guidance for this year. We remain focused on controlling what we can to counteract external challenges. I commend the team for their cost management strategies outlined, as there are ongoing cost savings in our plan that we expect to continue through 2025. This reflects the hard work of our team in promoting affordability and benefits for our customers while ensuring we meet our objectives and deliver results.

Julien Dumoulin-Smith, Analyst

Got it. So it sounds like there could be some items here, but you're not ready necessarily to say the...

David Campbell, President and CEO

Yes, we are maintaining our guidance for the year, Julien, and we will manage the business dynamically as we have done in the first part of the year and the previous year.

Kirkland Andrews, Executive Vice President and CFO

Yes. And without quantification, Julien, just to add on to that. I mean, you're correct. I mean, you're the keen observer, right? You got that large number year-to-date. I even said in my remarks it was partially due to inter-year timing, but that doesn't mean all of it. And that's our job through the year, right? Making sure that we stay vigilant around our costs so we've got that cushion to be able to offset some of the unknown variables, right? We can't control the weather. David mentioned we had a little bit of storm cost past the first half of the year, that storm-related cost, which gives us a cushion to absorb that. And obviously, the variability that we're all experiencing on interest rates. So staying ahead of the game and being vigilant around those costs away from that intra-year timing. Some of it can't really extrapolate that over the balance of the year. But having that in our pocket to look towards the back half of the year allows us to maintain our commitment because as we've said, one of the things that we are very focused on here is making sure we deliver on those commitments, right? The means by which we do that is dynamic during the year, because there's anything but a static environment because of some of the elements I've addressed.

Julien Dumoulin-Smith, Analyst

Got it. All right. I got more I'll leave them offline. Thank you very much. Have a great day.

Operator, Operator

One moment for our next question. Our next question comes from the line of Michael Sullivan from Wolfe.

Michael Sullivan, Analyst

Just wanted to put a finer point on that last line of questioning. So the mild July weather and then that storm impact are both of those factored into the '23 guide reaffirmation?

David Campbell, President and CEO

So Michael, we don't have our complete results for July yet. We can quantify the storm costs and include that in the script. However, we are affirming our annual guidance range today. To answer your question, yes, based on the information we have now, we are affirming our guidance for the year. As Kirk mentioned, it’s crucial for us to remain focused and continue working on the aspects we can control to help offset the day-to-day factors that are beyond our influence. But yes, we are affirming our guidance for 2023 today.

Michael Sullivan, Analyst

Okay. Great. That's helpful. And then a lot of what you updated in the IRP, I think you mentioned, was formed by the recent RFP process? When will we see the results or more detail on that RFP?

Kirkland Andrews, Executive Vice President and CFO

Hey Mike, it's Kirk. I think you'll expect to see that from us later, and you can't discount the possibility we may have some more information once we get to the third quarter call in November. But as we move through the back half of the year, we'll certainly have some more information about that.

David Campbell, President and CEO

Part of the situation, Michael, relates to ongoing negotiations that are currently taking place, which is the main reason you aren't hearing more.

Operator, Operator

One moment for our next question. Our next question comes from the line of Paul Patterson from Glenrock Associates.

Paul Patterson, Analyst

I have one question at this point regarding the upcoming rate design change with time of use in Missouri. I'm curious if there's a risk that some customers might be caught off guard by this change, even though it's related to the rate design. People may not be fully aware of what's happening, particularly with the time of use aspect, and they might not be prepared for it. In some regions, we've seen customers become quite upset about similar changes.

David Campbell, President and CEO

Paul, it's a good question again. You're correct. It's from Missouri jurisdictions only and as a result of the last rate cases, there is a Missouri Commission. I feel strongly about this topic and included in their order a move towards time use rates for all customers in Missouri. Fortunately, partially as a result of a revision that was made for the order that's being implemented in the fall. So it is being implemented later this year when we're out of the hot weather season. We've had time and we've put out a lot of communications around the Tommy use transition, and we'll continue to have a lot of communications. There are several different options, one of which is a relatively modest change relative to the historical rate plans. So we think with the level of communication tools we now have, the number of folks who have online accounts, that the level of information will be high. A big part of what we'll need to do and adhere to the commission's order on this is just having a high level of communication. Fortunately, again, with it being implemented in the fall, in a milder weather time, I think that it will be a little more explainable to customers. It primarily relates to the hours of 4 to 8 p.m. weekdays, so it's a concentrated approach. Even though it is, as you know, rate design is not intuitive to many customers, I think our team has done a nice job laying out what it entails, what it means and how customers can work with it. So we're working to be commissions order, and we think we'll be able to communicate with our customers, make sure we work with them as they go through the transition and select the plan that's best for them. Great. Thank you. I'd like to thank everyone for your interest in Evergy this morning, and hope you have a great day. That concludes the call.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.