Aware Q2 2021 Earnings Call Transcript

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Provided by Quartr
August 5, 2021

There are 6 speakers on the call.

Operator

Thank you for standing by, and welcome to the Second Quarter 2021 Evergy, Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's call is being recorded. I would now like to hand the call over to Lori Wright, Vice President, Investor Relations and Treasurer.

Operator

Please go ahead.

Speaker 1

Thank you, Michelle. Good morning, everyone, and welcome to Evergy's 2nd 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.

Speaker 1

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 2nd quarter highlights, our latest regulatory and legislative priorities and preview our upcoming Investor Day. Kirk will cover in more detail The second quarter results, the latest on sales and customers, and our financial outlook for the remainder of the year.

Speaker 1

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.

Speaker 2

Thanks, Lori, and good morning, everyone. I'll begin on Slide 5. This morning, we reported 2nd quarter Adjusted earnings of $0.85 per share compared to $0.68 per share a year ago, equal to a 25% increase. On a period over period basis, these results were primarily driven by higher transmission margin, an increase in weather normalized demand, higher other income and income tax benefits. On our prior earnings call, I highlighted that our nuclear plant, Wolf Creek, had started its planned refueling outage.

Speaker 2

I'm pleased to report that the Wolf Creek team completed the outage under budget, continuing the excellent operational performance at the plant. Companywide, we've maintained a steady trend of strong cost management as we strengthen our continuous improvement culture. Our team's execution has enabled a solid start to the year and we are reaffirming our 2021 adjusted EPS guidance of $3.20 to $3.40 per share. We'll plan on giving an updated perspective on 2021 performance as part of our Investor Day next month. This morning, we're also reaffirming our target of compound annual EPS growth of 68% from 2019 through 2024.

Speaker 2

Moving on to Slide 6, I'll provide a summary of our regulatory and legislative priorities and recent activities. First, with respect to our sustainability transformation plan dockets, We completed the final STP workshops in Kansas and Missouri, wrapping up the items outlined in both procedural schedules. These dockets will remain open as we continue to file responsive follow-up information. As I've said before, this constructive process has been beneficial as it has allowed us to educate and inform our stakeholders on our strategic business plan, while also providing a channel for receiving constructive feedback from the parties. Another policy priority that we have identified is securitization legislation.

Speaker 2

While passage of this legislation was not critical to the near term elements of our plan, Through hard work with staff and other parties in both states, we are pleased that securitization was passed this year in both Kansas and Missouri. Kansas House Bill 2072 was signed into law in April, while Missouri House Bill 734 was signed by Governor Parson in early July becomes law at the end of this month. Given the filing deadlines for a long term resource plan in both states, Securitization financing was not considered in the analysis relating to our respective integrated resource plans. However, having the law in place in both states We'll factor into our ongoing analysis of the preferred plan for the future evolution of our generation portfolio and the approach that will optimize affordability, reliability and sustainability. Securitization is particularly helpful with respect to optimizing the affordability aspect of our ongoing generation fleet transition.

Speaker 2

Along with enabling the cost effective handling of extraordinary costs and undepreciated values, the securitization law in Kansas also includes Predetermination features. This will allow us to collaborate with regulators on the topic of removing coal from rate base and replacing it renewables in advance of implementing any actions. Within the next few months, we plan to file for predetermination of our latest plans for the retirement of coal at the Lawrence Energy Center and the upcoming solar edition in Kansas. The Missouri legislation shares many features in common, but there are distinguishing elements. For example, in Kansas, a predetermination is required before retiring coal with a securitization financing order.

Speaker 2

The Missouri decisional prudence process is similar to predetermination. Though in Missouri, it is optional rather than mandatory, And Missouri Approach contemplates an asset retirement plan that can be broader in nature. The Missouri law also refers explicitly to evaluating the retention of coal and rate base for liability purposes, even if capacity factors remain relatively low, For example, due to such factors as seasonal coal operations or low SPP energy prices as more renewables come online. In addition, the Missouri legislation provides for new investment in replacement assets, up to an amount equal to the securitized assets. In both states, these features will help to enable a well planned and predictable process as we advance our fleet transition.

Speaker 2

I'll turn now to winter storm Yuri costs. In Kansas, we've been granted authority to defer these costs, and we filed an application seeking a recovery and return of storm impacts through fuel adjustment mechanisms starting in April 2022. The net impact for Kansas Central would result in approximately $115,000,000 of costs recovered from customers over a 2 year period. At Kansas Metro, during winter storm Yuri, we experienced higher than normal off system sales. These sales exceeded the fuel and purchase power cost during the event.

Speaker 2

As a result, the increased margin will benefit Kansas Metro customers by an estimated $35,000,000 which we passed through the fuel clause over a 1 year period beginning in April 2022. In Missouri, we have requested similar AAO deferral treatment for the winter weather Commission order on this process later this year. Metro customers on the Missouri side will receive their allocated portion of the higher ops System sales margins, which we currently estimate is around $25,000,000 in customer benefit, which we have asked to deliver to the fuel adjustment mechanism over a 1 year period. Conversely, Missouri West customers were subject to higher fuel and purchase power costs during the winter weather event. Given the amount of these higher costs upon receipt of deferral authority, we intend to utilize the recently signed securitization legislation to request commission approval to securitize the excess costs and recover them over an extended period.

Speaker 2

Specifically, we expect to request Securitization of approximately $295,000,000 with recovery over a 15 year period, which would minimize and smooth the impact for our customers. Slide 7 highlights topics that we expect to cover during our upcoming Investor Day, which will be held virtually on September 21. At the event, we expect to focus on our strategic business objectives and overall priorities for the business, Along with an update on STP execution through 2024, we expect to comment on 2021 and provide a first look at the company's 2022 earnings outlook. We'll describe how Evergy is driving operational excellence across our business, Including reliability, customer service, generation availability and cost. We'll discuss our capital deployment and infrastructure investment plans.

Speaker 2

We'll also profile our ongoing focus on regional rate competitiveness, which is a key priority for our team as it is for our customers and our regulators. Our objective as a company is to become recognized for driving operational excellence and delivering excellent service to our customers at regionally competitive rates. We aspire to be clear in our objectives and consistent in our execution so that our regulators, investors and all of our stakeholders Know what to expect and know that we will deliver. We will also discuss our long term growth drivers and objectives, including those relating to our ESG profile and generation fleet transition. Investor Day will give Kirk and I, along with our colleagues, The chance to expand on the significant value potential we see at Evergy.

Speaker 2

Along these lines, Slide 8 summarizes Evergy's investment thesis. As an all electric Midwestern utility, well positioned geographically to capitalize on cost effective renewables options, We strive for consistency and performance and being known for execution and delivering results. Customers are at the forefront as affordable and reliable service are paramount objectives. Operational excellence is a critical enabler achieving these objectives, and we are committed to a continuous improvement path in reliability, customer service, transmission and distribution services and fleet operations. Stakeholder collaboration and constructive relationships with our regulators and other key partners in Kansas and Missouri are also foundational.

Speaker 2

The passage of securitization legislation in both states was a great example of that collaborative process and action, And we look forward to an open constructive dialogue with stakeholders throughout the years ahead. As we've described, infrastructure improvements are featured in our sustainability transformation plan. Investments in grid modernization and the ongoing transformation of our generation fleet will enable us to better leverage technology, improve resiliency and efficiency and help us to optimize across the objectives of affordability, reliability and sustainability. Disciplined cost management and rigorous performance benchmarking are necessary complements to our investment program in order to ensure that our service and rates remain cost competitive and affordable. The company has established a strong track record in cost management since the merger, and we see ongoing opportunities to maintain that trajectory.

Speaker 2

The final element of our investment thesis that I'll highlight is financial excellence, including a strong balance sheet and an attractive total shareholder return, driven by our targeted 6% to 8% annual EPS growth from 2019 through 2024 plus our dividend yield. In summary, we are very excited about the opportunities for our company during this period of change in our industry, And we are committed to the sustained effort that will be required to deliver against our high performance objectives. We look forward to discussing our strategy and investment thesis in greater depth next month. I will now turn the call over to Kirk.

Speaker 3

Thanks, David, and good morning, everyone. I'll start with results for the quarter on Slide 10. For the Q2 of 2021, Evergy delivered adjusted earnings of $195,000,000 or $0.85 per share compared to $154,000,000 or $0.68 per share in the Q2 of 2020. The 25% increase in 2nd quarter adjusted EPS was driven by the following items as shown on the chart from left to right. First, Although cooling degree days were relatively consistent versus the Q2 of 2020, we saw fewer heating degree days This weather variance was more than offset by the following: a 3.4% increase in weather normalized demand were approximately $0.03 per share.

Speaker 3

Higher transmission revenue drove about $0.05 per share, resulting from our ongoing investments in transmission. O and M expense was approximately $11,000,000 lower or $0.04 per share due to lower bad debt expense during the quarter as collections Aging of receivables improved. Other income increased $0.03 per share, driven by $4,000,000 increase in equity AFUDC, $5,000,000 of higher investment earnings resulting from unrealized gains on equity investments and $2,000,000 of higher COLI proceeds. Finally, we realized higher income tax benefits due to increased amortization of excess deferred income taxes or EBIT and the timing of tax credit recognition to maintain our projected annual effective tax rate. Adding to our Q1 results to these numbers.

Speaker 3

I'll turn next to year to date results, which you'll find on Slide 11. For the 6 months ended June 30, 2021, adjusted earnings were $320,000,000 or $1.40 per share compared to $248,000,000 or $1.09 per share for the same period last year. Again, moving from left to right, our year to date adjusted EPS drivers versus 2020 include the following. The colder winter weather during the Q1 more than offset fewer heating degree days in the 2nd quarter, leading to $0.05 per share favorable contribution from weather year to date versus 2020. As weather overall during the first half of twenty twenty was near normal, this $0.05 per share also represents the EPS contribution versus normal weather.

Speaker 3

Weather normalized demand increased just over 2% year to date, driving approximately $0.05 of EPS. As expected, higher transmission revenues helped drive a $0.06 increase versus 2020. Year to date, We've also realized approximately $0.08 of increased earnings from lower tax expense, driven by higher amortization of excess deferred income taxes, as well as accelerated timing within the year of tax credit recognition. As you may recall from our remarks during the Q1, This latter item primarily resulted from the increase in earnings during the Q1 as our recognition of benefits from tax credits is driven by the shape of pre tax earnings during the year. This item represents approximately $0.05 of positive EPS year to date and is merely the result of this intra year timing.

Speaker 3

Consequently, we do not expect this $0.05 per share to result in a variance to our full year results. Finally, dollars 0.07 of the year to date EPS increase was the result of higher equity AFUDC, higher unrealized gains on equity investment and higher COLI proceeds. Although COLI proceeds represent a year over year increase versus 2020, where the majority of our earnings from this item came late in the year, Our year to date contribution from COLI in 2021 is nonetheless modestly below expectations. Turning to Slide 12, I'll provide a brief update on recent sales and customer trends. Weather normalized retail sales increased 3.4% during the Q2 as compared to last year.

Speaker 3

This was primarily driven by the partial recovery of the commercial industrial sector from the initial from COVID-nineteen in 2020. Residential sales decreased compared to last year when extensive lockdowns kept individuals at home. While these shifts indicate a continued trend toward more normal demand mix, commercial and industrial recovery has been slower than expected, while residential demand remains above expectations. Year to date weather normalized demand increased 2.2%. When combined with favorable weather year to date, overall sales were in line with our expectations.

Speaker 3

Turning finally to Slide 13, based on our year to date results and outlook for the balance of the year, we are reaffirming our adjusted EPS guidance of $3.20 to 3 point $0.40 per share. And as we continue to execute our cost management and rate base investment objectives as part of the STP, We are also reaffirming our long term compounded annual EPS growth target of 6% to 8% from 2019 through 2024. We've had a solid start to the year, but with about half of our annual earnings typically showing up in the Q3, we will remain focused on execution through the summer, And I look forward to speaking with all of you again during our Investor Day on September 21. And with that, I'll turn it back over to David.

Speaker 2

Why don't we go ahead and shift to questions? I don't know if that's Q and A.

Operator

Our first question comes from Michael Lapides with Goldman Sachs. Your line is open.

Speaker 4

Hey, guys. Thank you for taking my questions. I have 2 totally unrelated to each other. First, on thinking about the long term generation plan, I want to make sure I heard you That your original plan, your STP did not incorporate securitization. How does securitization potentially Impact the plan?

Speaker 4

And how do you think about the reliability needs of having solid fuel assets on the system, given just what Your region and a large swath of the country over the last 6 months have experienced.

Speaker 2

Good morning, Michael. So and thank you for your question. That'll give me opportunity to clarify. So the securitization legislation didn't impact our financial plan outlook in 2021 to 2024. So the passage of the law Didn't impact the growth rate that we teed up in our objectives during that time period.

Speaker 2

It has been a long term objective and we view it as a pretty important enabler Beyond that forecast period. So passage of law in both states, we think is going to be a helpful enabler as we Work the plan over the coming decades. Now we've published our integrated resource plan. And in that, you'll see that the phasing and pacing of coal retirements Is one that is relatively it's done on a relatively steady basis as opposed to accelerated over a near term timeframe. We do think that the utilization of coal will increase over time, but part of the factor impacting the phasing of retirement of coal and solid fuel reflects the factors that you identified, which is making sure that we can ensure reliability.

Speaker 2

The extreme weather that we saw in February and the first rolling outages in SPP and then the extreme heat in parts of the country that we've seen, we haven't seen extreme heat In our part of the country, we have seen a couple of resource alerts in SPP so far this summer. And obviously, in other parts of the country, it has been extreme and has led to Some strains on the grid. All reinforce that making sure that you have an eye on reliability is Very important as you work on the as you think about the fleet transition, and we think securitization will help. All that said, we updated our emissions reduction targets part of our last quarter call, as you saw, we've got a 70% reduction by 2,030 objective and a net zero target by 2,045. So we think we're Striving to strike the right balance, and we'll constantly be looking at that to make sure that we're balancing across affordability, reliability and sustainability.

Speaker 2

Hopefully, that gets to your question.

Speaker 4

No, that helps. That helps a ton. Follow-up, O and M has averaged about year over year down about $12,000,000 $13,000,000 So quarter, Kurt, should we assume a similar run rate when we think about the second half of the year? And then the pace of O and M reductions As you enter 2022, do you still see a pretty sizable cost savings opportunity for 2022 and beyond?

Speaker 3

Thanks, Michael. We do. Just as a reminder, when you think about the year to date results or year over year differences, As I noted, one of those contributing factors at least this year, we saw some favorability on bad debt expense, which is certainly a positive. Overall, our outlook for the year remains unchanged from the indications I gave on the Q4 call when we first introduced guidance. One of the key success factors that having joined the company in 2021 as the CFO, I can take little credit for, But the management team, as you'll recall, was able to deliver a cadence of O and M in 2020, which actually was in line with our 2021 objective.

Speaker 3

So we if you think about it that way, we got a year ahead on our savings pace. So therefore, our expectation is a reminder, as I indicated when we provided guidance initially was Our year over year 2020 to 2021 O and M, total O and M, we expect to be relatively flat and we're on pace to deliver that, a little bit of intra year timing is largely the contribution of what we're seeing year to date. But we do expect a good continued cadence of O and M reductions as we move forward into 2021, 2023 going toward that target to be Well comfortably below $1,000,000,000 a year by the time we get to 2024.

Speaker 4

Okay, Kirk. So I want to make sure I follow just for the second half of twenty twenty one. You don't expect to see Similar savings that you've seen year over year relative to the first half of twenty twenty

Speaker 3

one? No. And that would align with Our expectation, which continues to be relatively flat year over year overall in O and M.

Speaker 4

Got it. Thanks, Herb.

Speaker 3

You bet.

Operator

Our next question comes from Julien Dumoulin Smith of Bank of America. Your line is open.

Speaker 5

Hey, good morning. This is Darius on for Julian. Just wanted to ask about the retail customer count that you guys highlight on one of your Slide, it's pretty impressive that over 1% year to date. Just curious if you could talk a little bit about the composition of that and Perhaps how it compares against your expectations for the year and perhaps how that might look on a prospective basis as well?

Speaker 3

So sure, it's Kirk. Our customer growth, while it's certainly a good indicator Year over year, the mix, I can't quote you that off the top of the head, but largely in line with our expectations. However, as I also indicated, despite the fact we've got an increase in customer count, our overall utilization per customer is down year over year. That's in line with our expectations Because we expected the impact of stay from home, which was most acute in the Q2 of last year to abate as people kind of return to work that level of abatement has been A slower pace, right. So the stay at home effect on a utilization perspective, not withstanding fact we did see that nice year over year increase in customers, Has been elevated relative to our expectations.

Speaker 3

And that's certainly understand we expect that to continue a little longer now that we've got the impact of the Delta variant on the stay at home. But overall, despite the fact that we're certainly pleased with the overall increase in customer count, as we expected the utilization rates per customer comparable year over year Is down, again, due to that COVID effect.

Speaker 5

Great. And one more, if I can. On your 25 CapEx, you've had the potential for $250,000,000 increase in your last couple of Slide deck. Just curious if you could maybe discuss the puts and takes as far as what is driving or what will drive the decision as far as when to Formally include that in the plan.

Speaker 2

So thanks for the question, and we look we're glad to clarify that. So we plan to lay that out as part of our Just to be more specific around it. So we work through our annual planning process with our operating team. We also consider, of course, the renewables plans that we have, and we're are going to plan on giving you a giving The Street a more firm view of that as part of our Investor Day, just rolling forward into the next year.

Speaker 5

Okay, great. I'll leave it there. Thank you very much.

Speaker 2

Thank you.

Operator

There are no further questions. I'd like to turn the call back over to David Campbell for any closing remarks.

Speaker 2

Okay, great. So So I'll close with a comment on 2021 and sort of implicit in some of the questions we received, just so I'll go ahead and hit it. As I mentioned, as Kirk noted, we're maintaining our guidance range. There are some items in the first half. And as a general matter, Q3 is our biggest quarter.

Speaker 2

There's some timing under the first half. Q3 is our biggest quarter. COLI had some uncertainty. We'll, of course, continue to model the impact of the pandemic. But all that said, Given where we are now, we would be disappointed if our results in 2021 don't end up in the top half of the full year.

Speaker 2

We'll plan to provide an update on 2021 as part of our Analyst Day in September, but we're pleased with a solid start. And we appreciate your time with us today, and we wish you a good day. Thank you.

Operator

This does conclude the program. You may all disconnect. Everyone, have a great day.

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