Earnings Call Transcript - EVRG Q2 2022

Lori Wright, Vice President, Investor Relations and Treasurer

Thank you, Michelle. Good morning, everyone, and welcome to Evergy's second 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 contain 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 second quarter highlights, our integrated resource plan and our regulatory and legislative priorities. Kirk will cover in more detail the second quarter results and discuss the latest on sales and economic trends. 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 Chief Executive Officer

Thanks, Lori. And good morning, everyone. Thanks for joining us today. I'll begin on Slide 5. I'm pleased to report that we had a solid second quarter as we delivered adjusted earnings per share of $0.86 compared to $0.85 in 2021. The increase in adjusted earnings over last year was driven primarily by favorable weather, an increase in weather-normalized demand and higher transmission margin, partially offset by higher planned operations and maintenance expense and lower other income net of expense. Kirk will discuss the second quarter drivers in more detail. On our first quarter earnings call, I highlighted that we had just participated in a safety roadshow and that our focus on safety contributed to strong safety performance in the first quarter. Our employees continued this positive trend through midyear reducing work-related injuries, including recordable and restricted events by 60% compared to the same period last year. And our customer reliability has been solid despite challenging weather, reflecting the beneficial impacts of our ongoing grid investments. Compared to the 5-year trend in our service territory, so far this year, the number of days with sustained winds over 25 miles per hour increased 89% to 65 days, and days with wind gusts over 40 miles per hour increased nearly 50% to 78 days. 2021 was in line with this 5-year average for both measures, so 2022 has been a clear outlier. In contrast, relative to the 5-year trend, average daily outage events have decreased by 14% in the first 6 months of 2022, notwithstanding the more extreme weather, indicating improved system resiliency. 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 highlight a recent generation milestone. As you know, we have been expanding our wind portfolio for over a decade. With about 4,400 megawatts of owned and contracted wind generation, our portfolio recently marked 100 million megawatt hours of cumulative wind energy production. And in 2021, factoring in the production from our Wolf Creek nuclear plant, our emission-free generation was equivalent to 56% of our total retail customers' usage. Our team's consistent execution has resulted in a solid start to the year, and we are reaffirming our 2022 adjusted EPS guidance of $3.43 per share 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 our annual Integrated Resource Plan update, which was filed in June for both Kansas and Missouri. Our preferred plan for the next decade is consistent with the resource plan laid out in last year's Triennial IRP filing and the renewables development plan Kirk discussed during our Investor Day last September. The minor tweaks in the plan reflect updates to the sequencing of our near-term investments. Specifically, we shifted the 190-megawatt solar addition and the Lawrence coal retirements to 2024, primarily due to the dynamic market conditions facing the solar supply chain and the benefits to customers of keeping Lawrence online with current high natural gas prices. In 2026, we shifted a planned solar project to wind and increased the capacity assumption for the project by 100 megawatts. Beyond 2026, we slightly reduced megawatt assumptions for our solar projects, which on a net basis offsets some upward pressures on pricing. Overall, by the end of 2032, our preferred plan now includes 3,500 megawatts of renewable additions while also responsibly retiring nearly 2,000 megawatts of coal, balancing both affordability and reliability as we advance our fleet transition and advance toward achieving our sustainability and emissions reduction goals. Moving on to Slide 7, I'll provide a summary of key regulatory and legislative milestones and ongoing constructive developments in both Kansas and Missouri. In Missouri, we continue to work our way to the pending general rate case. In early June, staff and other interveners filed their direct testimony. And mid-July, all parties filed rebuttal testimony. In the next few weeks, parties will file true-up and surrebuttal testimony with a settlement conference to follow around August 22 and hearings later this month through early September. Revised rates in Missouri will go effective on December 6. We look forward to working with the parties to constructively resolve the case. At Missouri West, we have also been advancing the securitization process to recover the roughly $300 million of winter storm Uri costs. Earlier this week, we filed a nonunanimous settlement that resolves all key issues with the Missouri Commission staff. In terms of timing, hearings are wrapping up this week, and we expect a commission financing order in mid-October. On the legislative front of Missouri, Senate Bill 745, which modifies Plant In Service Accounting, or PISA, was signed by the governor and became law in late June. The modifications reduced the revenue requirement cap to a 2.5% annual compounded growth rate and narrow the calculation to consider PISA deferrals only. Importantly, this bill also puts into law a property tax tracker effective later this month, which will eliminate a historical source of lag in our Missouri jurisdictions. The PISA extension marks the second consecutive year of passing new legislation in Missouri that will benefit customers and stakeholders. In 2021, HB 734 was signed into law, authorizing the securitization of extraordinary costs and the unrecovered book value of our retired generation plants. Moving to Kansas. I'm pleased to report that in June, the Kansas Corporation Commission approved the nonunanimous stipulation agreement for winter storm Uri costs. The order allows us to recover roughly $120 million of deferred extraordinary fuel purchase power and nonfuel costs at Kansas Central over a 2-year period beginning in April 2023. Similarly, the $37 million of net benefits at Kansas Metro will be returned to customers over a 1-year period, also beginning in April next year. Preparations are underway for our Kansas Central and Kansas Metro rate cases, which we will file in April 2023. We expect the test year ending September 30, 2022 and the true-up date around June 30, 2023, with new rates becoming effective in December of next year. Other important milestones in Kansas include the passage and signing of securitization legislation in mid-2021 as well as the completion last November of the docket before the Kansas Corporation Commission relating to the Sustainability Transformation Plan. In both Kansas and Missouri, the Triennial Integrated Resource Plans have completed their review process. The Missouri Public Service Commission approved the IRP in March of this year and the Kansas Corporation Commission accepted the IRP in May. We will continue to work collaboratively with regulators and interveners in both states to achieve constructive outcomes that advance our core objectives of delivering affordable, reliable and sustainable power to the customers and the communities that we serve. Overall, we are pleased with the strong start to the year, the progress that we have achieved in working closely with regulators and stakeholders to enhance our service to our customers and the ongoing consistent execution of our business plan. I will now turn the call over to Kirk.

Kirk Andrews, Executive Vice President and Chief Financial Officer

Thanks, David. Good morning, everyone. I'll begin with the quarterly results. In the second quarter of 2022, Evergy reported adjusted earnings of $198 million, or $0.86 per share, compared to $195 million, or $0.85 per share, in the same quarter of 2021. The increase in year-over-year earnings per share was influenced by several factors. First, a 16% rise in cooling degree days contributed an additional $0.06 per share compared to the second quarter of 2021. When accounting for the unusually warm weather in the second quarter of 2021, this year’s second quarter showed an $0.11 increase in earnings per share versus our original weather assumptions. We also experienced a 4% growth in weather-normalized demand during the past quarter, adding $0.10 per share. Increased revenues from our transmission investments and a rise in TDC revenues due to greater-than-expected volumes added $0.06. However, this growth was partially offset by an increase in O&M expenses, which were about $29 million higher, translating to $0.10 per share, primarily due to planned maintenance outages and elevated transmission and distribution contractor costs. We also noted a $0.02 increase in depreciation and amortization expenses from higher infrastructure investments, a $0.02 rise in interest expenses linked to greater debt at higher interest rates, and a $0.07 decrease in other income, net of expenses, mostly due to lower COLI proceeds year-over-year and reduced AFUDC equity. Now turning to year-to-date results. For the six months ending June 30, 2022, adjusted earnings stood at $332 million, or $1.44 per share, compared to $320 million, or $1.40 per share, from the same period last year. Looking at the year-to-date drivers of earnings per share compared to 2021, together with generally normal weather in the first quarter, our results reflect a $0.06 impact from the weather in the second quarter. Weather-normalized demand has increased about 2% year-to-date, contributing roughly $0.10 to earnings per share. Rising transmission revenues from ongoing investments, coupled with a boost in TDC revenues due to higher volumes, led to an $0.11 increase compared to the previous year. Year-to-date, these positive impacts were somewhat offset by O&M expenses arising from higher planned maintenance and increased contractor costs incurred in the second quarter, which accounted for about $0.05 per share; $0.06 of higher depreciation expense related to infrastructure investments; a $0.09 decline in other income, net of expenses, driven by COLI proceeds and AFUDC equity; and a $0.03 rise in income tax expenses primarily due to tax smoothing strategies to align tax item recognition with our projected effective rate, which won’t affect our full-year results. Now, let’s cover Slide 11, where I’ll go into more detail about the growth in weather-normalized demand for both the quarter and year-to-date, as well as provide updates on economic trends. For the second quarter, total weather-normalized retail demand rose by about 4%, driven largely by a significant increase in industrial demand, particularly in the chemical and oil and gas sectors. Year-to-date, weather-normalized demand has seen an approximate increase of 2%. Looking ahead, we anticipate a more moderated rise in year-over-year weather-normalized demand, reflecting post-pandemic conditions in the second half of 2021. Overall, total retail demand is currently above pre-pandemic levels. On the economic development side, in July, Panasonic announced intentions to build a new electric vehicle battery manufacturing facility in De Soto, Kansas, just outside the Kansas City metro area. This facility, expected to be one of the largest of its kind in the U.S., represents an estimated investment of around $4 billion and has the potential to create up to 4,000 new jobs. This facility will be situated in the Evergy Kansas Central jurisdiction, and when fully operational, it is anticipated to be one of our largest customers. Finally, on Slide 12, I’ll conclude with a summary of our long-term financial expectations. With the strong start we’ve had this year, we are reaffirming our adjusted 2022 earnings per share guidance of $3.43 to $3.63. We will provide our 2023 annual guidance on our regular schedule as part of the year-end call early next year. As David mentioned earlier, we are also reaffirming our long-term compound annual earnings per share growth rate target of 6% to 8% from 2021 to 2025, based on the midpoint of last year's original adjusted earnings per share guidance of $3.30. We expect to continue increasing the dividend in line with our long-term earnings, targeting a 60% to 70% dividend payout ratio. Our $10.7 billion five-year capital plan through 2026 focuses on new infrastructure investments to enhance customer service, improve reliability and resilience, transition our generation fleet, and address the evolving needs of our customers and communities while remaining regionally competitive. With that, I’ll hand the call back to David.

David Campbell, President and Chief Executive Officer

Thank you, Kirk. We appreciate your time with us today, and we now would be happy to take your questions.

Operator, Operator

Our first question comes from Michael Sullivan with Wolfe Research.

Michael Sullivan, Analyst

David, I wanted to just start with pretty strong quarter in terms of just the sales growth, weather normal and then also the weather benefit. Maybe if we could just get a little color on how the weather normal compared to plan. And just given the strength, why not raise the guidance at this point in the year?

David Campbell, President and Chief Executive Officer

So Michael, you raised some good questions. We're pleased to see the demand growth normalized for weather that we experienced in the first half of the year. We had anticipated reasonably strong demand growth that was more robust at the beginning. Last year, a few sectors had a softer recovery during the pandemic in the first half, so we expected to see improved demand growth, especially in the first half of this year. We're slightly ahead of our plan, which is encouraging. So far, we haven't seen any recessionary pressures, but we will continue to monitor the situation. In terms of our overall performance, it's been a solid start to the year. The third quarter is our largest, and July had fairly favorable weather. We usually reassess and update our guidance after the third quarter since it's our peak period. However, we are happy with how the year has started.

Michael Sullivan, Analyst

Okay. Great. And then I just wanted to shift to the rate case and maybe if you could just talk about where there may be outstanding sticking points and potential for settlement. And then also, I think one of them is obviously the Sibley issue if that were not to go your way. Is that something that you see as manageable? There are a couple of questions there.

David Campbell, President and Chief Executive Officer

Yes, regarding the Missouri rate case you're inquiring about, this is my first general rate case in Missouri, and it's quite an interesting process. There's a significant increase in activity towards the end of the process. We filed back in the first quarter, and this month we will be seeing our final true-up filings and surrebuttal testimony. A settlement conference is scheduled, and hearings will commence at the end of this month and go into early September. There's a lot happening in this timeframe. I know you've been closely monitoring the filings and the adjustments in staff filings concerning revenue requirements. The discrepancies seem reasonable, and the issues are largely understood. We look forward to engaging constructively in discussions as we did during the winter storm Uri securitization proceeding, where we recently filed a nonunanimous settlement that addressed our issues with staff. This is a fairly typical rate case, and we aim to finalize the return on equity, depreciation matters, and various tax issues. As you've noted, the Sibley issue has generated considerable attention, and we expect it will be a topic of active discussion, though we believe it's manageable. We've dealt with similar situations before. There are three main components to consider. The first involves O&M recovery, for which we've set aside a regulatory liability, focusing on the timing of the return. The second involves a return on component since the last rate case, amounting to approximately $40 million to $50 million. Depending on the outcome, this could be a one-time issue rather than a recurring problem. Lastly, there's the residual rate base in Sibley, which we believe makes sense to retire in the normal course like other assets, and while it will be discussed, it represents a modest amount we feel can be managed. These items will be part of our discussions in the final proceedings. We value the ongoing dialogue and look forward to progressing these discussions as we work through the testimonies and proceedings in the coming weeks. It will be a busy time, typical of the Missouri context, as you are aware.

Michael Sullivan, Analyst

Great. And just last one if I could throw it in, just initial thoughts on the Inflation Reduction Act and what it means for your company.

David Campbell, President and Chief Executive Officer

We will definitely continue to monitor that closely. We believe that the provisions related to renewables should positively impact the reduction of costs for our customers' expected additions. Additionally, it seems to streamline the transferability and utilization of the PTCs and ITCs, making tax equity and other approaches easier to navigate. This not only reduces costs but also enhances the efficiency of those mechanisms. Overall, we see it as a useful enabler that will further cut costs for customers as we progress. There are also other provisions to consider, and we will watch the status of the nuclear element. It's applicable for both merchant and regulated assets. While it’s not a significant earnings driver for us, it could still benefit our customers by lowering costs during instances when our Wolf Creek plant experiences low prices due to wind resources, especially in spring and fall. It may also qualify for recovery opportunities. We consider these provisions advantageous and will keep a close eye on their developments in Washington, particularly concerning the amendments and the potential passage of the final legislation.

Operator, Operator

The next question comes from Durgesh Chopra with Evercore. We believe that the provisions will be advantageous for our customers in terms of cost reduction since our Wolf Creek plant occasionally benefits from low prices due to wind resources, especially during the spring and fall. It might also qualify for some recovery. We plan to closely observe its progress in Washington, including any amendments, and hope for a favorable outcome.

Durgesh Chopra, Analyst

Just a quick clarification on the Missouri rate case. The residual amount, David, on Sibley, is about $100 million. Correct? So it's relatively small, the residual rate base amount?

David Campbell, President and Chief Executive Officer

Yes, the residual rate base is about $100 million, which some may dispute, but that is the figure. It's a relatively modest number, as you mentioned.

Durgesh Chopra, Analyst

Got it. I think the AMT doesn't really apply to you because you're below the $1 billion pretax marker, at least through 2020, with the current plan.

Kirk Andrews, Executive Vice President and Chief Financial Officer

That's correct. I want to add that the 15% minimum tax is supported by our inventory of tax credits as we proceed. We expect to remain below that threshold. If we were to reach that level, it would likely occur along with our expected cash taxpayer year, which is anticipated to be after the middle of this decade.

Durgesh Chopra, Analyst

So basically, there will be no impact from the AMT over the next few years? We might only see effects if something is passed in the second half of the decade.

Kirk Andrews, Executive Vice President and Chief Financial Officer

That's correct. That will also depend somewhat on the ongoing generation of tax credits as we advance with our renewables plans. However, you're right in that all things being equal, that time frame at the inflection point is accurate.

Durgesh Chopra, Analyst

Got it. And just one final one. Just anything on the PPA buyout opportunities? Looking like more likely to happen this year or your chances have increased given the extension of these tax credits. Anything you can share there?

Kirk Andrews, Executive Vice President and Chief Financial Officer

So I would say that the extension of the tax credits, first of all, is passed. And certainly, we're hopeful and optimistic that, that takes place. Gives us greater flexibility on the repowering side of that equation. So that's a benefit, especially as we focus on earnings and, certainly, affordability for our customers. We're continuing to hold that objective. We're continuing to advance our discussions with counterparties, and I'm maintaining that target to announce at least one of those this year. It may be a buy-in or it may be a buy-in combined with a repowering, but we continue to be focused on that. And at the same time, we had robust responses to our RFP that we launched toward our renewables objectives, in particular the 300 megawatts of wind and 24 followed by 525. So we've had good results from that as well, and we're expecting to have some news on that front as we progress through the balance of the year as well.

Operator, Operator

Our next question comes from Paul Patterson with Glenrock.

Paul Patterson, Analyst

So can you hear me?

David Campbell, President and Chief Executive Officer

Yes.

Paul Patterson, Analyst

I wanted to follow up on the comments made earlier regarding wind production. Could you summarize what you're currently observing in that area? I apologize for not fully understanding it.

David Campbell, President and Chief Executive Officer

Sure. What I mentioned, Paul, is that we achieved a milestone this past quarter. We exceeded 100 million megawatt hours of cumulative wind generation across our portfolio since the company's inception. This is a significant milestone regarding our cumulative wind production. To put it into perspective, about one-third of our total production last year was from wind generation. If we include our nuclear generation from Wolf Creek, nearly half of our total generation came from low-emissions resources. Wind generation represents a substantial share of our total portfolio, and we are ahead of nearly every other utility with one-third of our total generation coming from wind. So, I was highlighting that cumulative milestone of surpassing 100 million megawatt hours.

Paul Patterson, Analyst

I understand. I think I may have misunderstood when you were discussing the performance of wind. I was curious if there have been any production issues year-over-year. If I remember correctly, there may have been a decrease. I'm interested in how wind has been performing on a same-store basis regarding production. Additionally, I've noticed that various regions across the country have experienced some curtailments due to transmission constraints. Have you observed any similar issues, not only with your operations but also with neighboring projects, considering your substantial wind area? Have any projects nearby faced curtailments because of these transmission constraints?

David Campbell, President and Chief Executive Officer

Got it. It's a complex but important question. Overall, our wind portfolio continues to perform well, with high generation capacity factors. In Kansas, many of our sites exceed 50% capacity factors. However, there are areas in Central and Western Kansas that experience congestion and some curtailments. While this doesn't directly affect our earnings since it goes through the fuel clause, it does impact customer rates. We are actively engaged in advocating for projects at the Southwest Power Pool that can help mitigate congestion costs for our customers. With natural gas prices rising, congestion costs are also increasing. The price differential between low-cost renewable resources and natural gas has become more pronounced. We are collaborating with the Southwest Power Pool and other stakeholders to address these challenges, although achieving solutions will take time due to the need for transmission improvements. Nonetheless, our wind profile is excellent, and we have one of the best wind corridors in the U.S. and the world, which will continue to be a vital resource for us. However, the development of transmission infrastructure is essential and remains a continual challenge with renewables.

Operator, Operator

Our next question comes from Nick Campanella with Credit Suisse.

Nicholas Campanella, Analyst

A lot of questions have been answered so far. But I guess just on resource planning in general, I think there's some discussions about STP reserve margin increasing, and I'm just curious about how you're thinking about that and the overall stack on your resource planning if you went there. I know that you're already somewhat long capacity across the portfolio, but just wanted to check in on that.

David Campbell, President and Chief Executive Officer

You are monitoring things carefully. SPP recently raised their reserve margin to 15% from 12%, which will take effect next year. You're right that it won't affect our capacity requirements in the short term, allowing us to manage it. However, it will influence our long-term planning. As we consider coal retirements and the overall transmission of our portfolio, we will incorporate this change to ensure we can meet the requirements. SPP’s evaluation of different seasonal reserve margins, especially for winter, will also be significant. In short, we can adjust our portfolio to accommodate this reserve margin change, and we will include it in our ongoing planning. While it will have some effects on our long-term strategies, they will be relatively modest, and we will take this into account as we transition our resources, working closely with stakeholders regarding winter reserve margin requirements. Winter peaks are lower, but as we increase renewables, winter considerations will be crucial.

Nicholas Campanella, Analyst

All right. Great. That's helpful. And then just one small one on the numbers. I know that COLI and AFUDC was a $0.07 drag. Can you just remind us like what COLI is year-to-date in isolation? And what's contemplated in your '22 guidance from a COLI perspective?

Kirk Andrews, Executive Vice President and Chief Financial Officer

Sure. Happy to address that. So COLI, overall, I think we said this in the past, we generally expect about $20 million of COLI impact. That is both a pretax and after tax. COLI is not tax-affected at the end of the day. So year-to-date relative to our expectations, we're probably $0.04 lower than we would have expected, basically half the year on that COLI because we've effectively had very little proceeds from COLI, and that's actually just a function of the performance of the underlying folks that are insured by that. So year-to-date, I think about that is about $0.04 short of what would normally be our ratable expectations for the year.

Operator, Operator

At this time, there are no other questions. I would now like to turn the conference back to David Campbell, President and CEO, for closing remarks.

David Campbell, President and Chief Executive Officer

Thank you. We appreciate all of you joining this morning. Thank you for your interest in Evergy, and have a great day. That concludes the call.

Operator, Operator

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