Evergy, Inc. (NYSE:EVRG) Q4 2022 Earnings Call Transcript

Evergy, Inc. (NYSE:EVRG) Q4 2022 Earnings Call Transcript February 24, 2023

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: Thank you Latif, 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: 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 doing 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: 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 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.

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Q&A Session

Operator: Our first question comes from the line of Michael Sullivan of Wolfe Research. Your question please, Michael.

Michael Sullivan: Hey everyone, good morning.

David Campbell: Good morning.

Michael Sullivan: 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: You bet, thanks Michael. We acknowledge, as I noted in my remarks, that we had some headwinds in 2023 and were short of the midpoint, but we’re reaffirming our belief we can be back in that 6% to 8% range, and the main driver–I’d cite two factors, but the biggest driver is we’re in a peak regulatory lag year, which impacts Kansas Central in particular. As you know, there are some elements of lag in our Kansas jurisdiction and it’s been five years since our last rate case, so as we advance the rate case this year and rates go into effect at year end, that will help address the under-earning that we’re having on many investments that we’ve made over the past five years, and that’s the biggest factor that helps get us back on track.

We’re sort of in the peak lag year this year, and we’ve been taking good steps to overcome that lag in ’21 and ’22, so we’re pleased with the results, we were able to offset it. We had some interest rate headwinds and some impacts from Missouri that we didn’t fully offset for this year, but we have gone through our model in detail and we absolutely are reaffirming our commitment to ’24 and ’25. The second factor is well known, and that’s the ongoing advancement of cost savings. We’re going to be delivering significant cost savings in this rate case, the cumulative impact of savings since 2018, but we have ongoing opportunities ahead of us and between those two levers primarily is how we’re going to stay on track with respect to our 6% to 8% annual earnings growth.

Michael Sullivan: 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: 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 a 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.