Evergy Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 24, 2023

There are 11 speakers on the call.

Operator

Thank you for standing by, and welcome to Evergy's 4th 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. I would now like to hand the call over to Peter Flynn, Director, Investor Relations. Please go ahead.

Speaker 1

Thank you, Latif, and good morning, everyone. Welcome to Evergy's Q4 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.

Speaker 1

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, Kirk will cover our Q4 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.

Speaker 1

I will now turn the call over to David.

Speaker 2

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 57. For football fans who have never been to Arrowhead Stadium, definitely add it to your list. Chiefs' Kingdom is I'll begin on Slide 5, and I'll start by thanking our employees who work tirelessly throughout the year to advance our strategic objectives of affordability, reliability and sustainability. I'm proud and honored to lead the Evergy team.

Speaker 2

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 point and $0.43 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.

Speaker 2

Last year, we executed on our capital plan to Further improved reliability and resiliency, investing $2,200,000,000 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 and 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 5 year period.

Speaker 2

Slide 6 profiles a significant improvement that we've made in customer satisfaction as measured by JD Power's annual survey of utility Since 2018, we've climbed 10 spots in JD Power's Midwest Large Utilities category coming in At 5th 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 dark 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.

Speaker 2

We know the importance of consistent execution and we recognize that 2023 falls short at the midpoint relative to our long term targets, reflecting regulatory lag in our Kansas jurisdiction and our commitment to a 5 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 5 year capital plan on Slide 9, we have updated and extended our forecast through 2027. Our new 5 year investment plan totals $11,600,000,000 from 2023 to 2027, which represents a $900,000,000 increase relative to our 2022 to 2026 forecast of 9%. Nearly 60% of our planned investment is targeted toward transmission and distribution projects as we continue to modernize our grid to improve reliability and enhance resiliency for our customers.

Speaker 2

By replacing aging equipment and investing in smart grid technologies, We'll also enable further efficiency gains and serving our customers, which has been a hallmark of Evergy's strategy over the last 5 years. Slide 10 profiles our progress in driving cost savings. Despite historically high inflation in 2022, we held adjusted O and M flat relative to 2021, representing $232,000,000 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 and 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 Retirement and attrition resulted in an 8.5% reduction in the size of the organization by year end.

Speaker 2

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 timeframe. Advancing and improving regional rate competitiveness, our priorities in our long term plan and are front of mind for many of our stakeholders, and that's exactly what we've accomplished over the past 5 years. Moving to Slide 12, I'll provide an update on regulatory and legislative priorities, beginning with our rate case filings in Kansas.

Speaker 2

In mid April, we'll file our 1st 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 infrastructure investments over the past 5 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 opened dockets for the approval of an operating certificate of convenience and necessity for acquisition of Persimmon Creek Wind Farm as well as the securitization from winter storm Yuri costs incurred at Missouri West.

Speaker 2

Initial post hearing briefs are due on March 6 In the Persimmon Creek docket with an order requested by April 6th, 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 approval. Missouri Public Service Commission's approval of our request to securitize extraordinary costs from Winter Storm Uri With appeal 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 day. 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.

Speaker 2

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 Plant 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 The Southwest Power Pool into the annual update.

Speaker 2

We are excited to advance our integrated resource plans to deliver additional benefits to our customers. I'll conclude my remarks on 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 investment and financial and operational excellence. The right hand side 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 The sustained effort required to deliver against our high performance objectives.

Speaker 2

I will now turn the call over to Kirk.

Speaker 3

Thanks, David. Good morning, everyone. And I'll start with the results for the quarter on Slide 16. For the Q4 of 2022, Evergy delivered adjusted earnings of $68,600,000 or $0.30 per share compared to $32,900,000 or $0.14 per share in the Q4 of 2021. As shown on the slide, the year over year increase in 4th quarter EPS It was driven by the following: 1st, an increase in heating degree days, partially offset by lower demand, enhance our transmission infrastructure and higher volumes drove a $0.04 increase.

Speaker 3

A decrease in O and M versus the Q4 of 2021 drove an $0.08 increase in adjusted EPS for the quarter. These positive drivers were partially offset by $0.03 of higher D and 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. And finally, other items, both positive and negative, drove a net 0.2p 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.

Speaker 3

Warmer weather through the summer and into the fall drove our earned ROE at Kansas Metro above our current authorized 9.3 percent 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 $853,800,000 or $3.71 per share, which compares to 795,200,000 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.

Speaker 3

Relative to normal, weather drove an estimated $0.29 of favorability in 2022. Weather normalized demand was 1.1 percent higher than 2021, driving an $0.11 increase. Higher transmission margins from increased investments as well as higher volumes drove a $0.15 year over year increase and lower O and M drove adjusted EPS 0 point offset by $0.11 of D and 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 penny of favorability consisting primarily of $0.04 from the expiry of merger bill credits, dollars 0.02 from tax credits and a penny 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 Q4 remarks. Turning to Slide 18, I'll provide a brief update on our recent sales trends.

Speaker 3

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%.

Speaker 3

Overall, in 2020 We saw 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,

Speaker 2

which I'll

Speaker 3

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 EPS of $3.71 We expect an $0.11 decline from demand or just under 1% decrease in total demand. This $0.11 decrease is the net impact of removing That estimated $0.29 impact in 'twenty two 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 $60,000,000 reduction in pretax O and M 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.

Speaker 3

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 the 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 and A of $0.16 as we continue to invest in 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 Yuri 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.

Speaker 3

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 We also remain committed to returning capital to our shareholders and target dividend growth in line with earnings growth with that dividend payout ratio of 60% to 70%. Our updated 5 year CapEx plan from 2023 to 2027 totals $11,600,000,000 and implies rate base growth of approximately 6% from 2022 to 2027. We've included some additional disclosures in the appendix 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.

Speaker 3

I'll conclude by reviewing some specific 2023 objectives as Turn to Slide 21. Building on the positive momentum from our strong results over the past 2 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 1st Kansas Central and Metro rate cases since the merger in 2018. As a key factor in achieving our goal of affordability, We look forward to providing our Kansas customers with the benefits of significant O and M savings we've achieved over the last 5 years. Consistent with the 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.

Speaker 3

Finally, we've recently launched a new renewables RFP, focused on sourcing the balance of our 2024 renewables as well as our 2025, 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.

Operator

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

Speaker 4

Hey, everyone. Good morning.

Speaker 2

Good morning.

Speaker 4

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 maybe some of the drivers that get that back on track from 2023, the guidance you gave today?

Speaker 2

You bet. Thanks, Michael. So we I acknowledge, as I noted in my remarks, that the we had some headwinds in 2023 and we're short of the midpoint, but we are reaffirming our I believe we mean that back in that 6% to 8% range. And the main driver, I'd say 2 factors, but the biggest driver is We're in our peak regulatory lag year, which impacts Kansas Central in particular. As you know, there's some elements of lag in our Kansas jurisdiction, and it's been 5 years since our last So as we advance the rate case this year, rates go into effect at year end that will help address the under earning that we're Having on the many investments that we've made over the past 5 years and that's the biggest factor that helps get us back on track.

Speaker 2

We're sort of in the peak lag year this year. And we've been taking good steps to overcome that lag in 2021 2022. So We're pleased with the results. We were able to offset it. We had some interest rate headwinds and some impacts in Missouri that we didn't fully offset for this year, but we I've gone through our model of detail and we absolutely are reaffirming our commitment, 24 and 25.

Speaker 2

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 impacts of savings 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.

Speaker 4

Okay. That's very helpful. Maybe just on that, that you mentioned the regulatory lag. Just on the metro side, I think this as alluded to in the remarks, but the fact that you hit the sharing this year, I take it that was Mostly weather, like was that under earning too, maybe adjusted for weather or just give us a feel for where Metro is at into this refiling?

Speaker 2

Yes. It partly relates to the nature of the jurisdiction. Metro has Actually, it's higher prices, but it's got a level of investment. It's not it's a much more dense urban system. We've been doing a lot of systematic replacement across our much bigger and broader Kansas Central service territory.

Speaker 2

The biggest factor in metro is weather I mean, the impact in 2022 and obviously reflects the relative level of investments. 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 2 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 metric jurisdiction.

Speaker 4

Okay, great. And then just last one for me. Can you maybe just give us a sense of where things are at and where you expect them to go in terms of some of the bills pending at the Kansas legislature looking at things like appointed commissions and such. Sure.

Speaker 2

So there are multiple bills in flight in Kansas, pretty active session with respect to utility bills. The one that was passed out of committee, but it's been well, I don't want to get into too much process detail. So The expectation our expectation is that there'll be robust discussion around potential election of commissioners. We don't think that makes sense As a policy approach and that probably has less broad support, so we don't think that that's going to advance, but that we continue to be good discussion around that. There have been bills advanced relating to right of first refusal for Our transmission projects, which I think could really benefit customers in terms of predictability, regulatory oversight and consistency of approach and process.

Speaker 2

There's a bill that has been advanced related to our transmission delivery charge That is subject to ongoing discussion. It was passed out of committee, but it was the process term is called blessed by the speaker. So it Has not been voted on by the full House since, in discussions around that. And if it does end up going to the full House, then of course, it would go over to the Senate. So I think there'll be Ongoing discussions in Kansas, unclear if Tel Aviv will ultimately pass this year, but we're working closely with stakeholders and We think those discussions are going constructively.

Speaker 4

Great. Thanks for all the color.

Speaker 2

You bet. Thank you, Michael.

Operator

Thank you. Our next question comes from the line of Shahriar Pourreza of Guggenheim. Please go ahead, Shar.

Speaker 3

Hey, good morning, guys. Good morning, Shar.

Speaker 5

So just on the cases in Kansas, which I guess will be filed between now and your next update. So you've got the Kansas Central fuel balance to recover starting in April for 2 years. You've got, I guess, Some O and M give back since the last case and the merger. I guess, how should we think about the holistic targets here The rate increases with all these puts and takes at play?

Speaker 2

It's a great question, Shahriar, because there are a number of elements that will go through the rate case, a number of elements that will So for example, the you referenced the Yuri fuel cost recovery, that's about $125,000,000 that will recover over 2 years. Kent Central is well insulated from a year in cost relative to most jurisdictions in our region because it's not as gas heavy, A pretty modest amount in total, though still an amount to recover. That has already been approved through regulatory process that's not going to be addressed in the rate cases. So the rate cases will focus on the investments that we've made since our last And that will be distribution, generation, general plant, transmission, Kansas City was reviewed at FERC, so it will not be in the rate case. But of course, our O and M savings will be part of the rate case.

Speaker 2

And we put out estimates as part of our Various workshops with the commission what the rate impacts will be. Now our estimates of rate impacts were through 2024 and then in Our workshop in December were through 2026 because it was about a 5 year plan. But in general, we've always described that we're targeting rate increases that are in line with or below the annual rate of inflation. It's been 5 years since the last rate case. So it's going to be a cumulative increase, but we'll our stakeholders well understand that that will be reflecting our cumulative investments over that timeframe.

Speaker 2

And given the very high inflation in 2022, we're obviously optimistic we will be able to be under well under inflation given how high it was So we've been able to describe our investment plans as well as our cost reduction programs in a lot of detail. So it's not going to be a lot of surprises because we had those workshops about our capital plans in 2020 and then Through May of 2021 and again December of last year. So it will still be a lively case as they always are, the first one in 5 years, but we do think it's pretty straightforward focused on Reviewing our investments, the categories I mentioned and the cost savings that we've delivered. And there'll be the usual discussion around ROE, of course, and

Speaker 3

Elements like that. Got it.

Speaker 2

Hopefully that covers the question, Shar?

Speaker 5

No, it does. It does. That's helpful. Thank you for that. And then just I want to just Slightly tweak the prior caller's question here and it's good to see the CapEx roll to 27.

Speaker 5

But I'm just sort of thinking about Even directionally, the profile of the EPS growth beyond the 25% guide, right? So the latest CapEx Gets you to around 6% implied rate base growth. Is there more to squeeze On the O and M side or is more dependent on the Kansas case and the IRP update, I guess put differently, What are the drivers that would push you in and out of your current 6% to 8% guide as we look ahead?

Speaker 2

So It's a great question, Shahriar. And we're not introducing 2026 or beyond guidance today, as you know. So the but the drivers are, as you know, Over time, we're going to be fundamentally related to rate based growth, how we fund that, and we've got a strong balance sheet to support our investments and of course our ongoing cost savings. Now we are we've consistently really since the SDP was first introduced, have laid out cost targets consistent with what we've shown through 2025. We think that we've got a good system and our employees do a terrific job driving efficiency in our business.

Speaker 2

The kind of step function changes in costs that we have are not going to be sustainable over the long term, but annual productivity gains and seeking to Drive those are certainly going to be important. So, you noted it, it's going to be rate based growth, How we fund it and the O and M cost savings. We're going to update RRP this year. That's going to have some impacts on our plans with respect to renewables. As I mentioned, the Southwest Power Pool is getting tighter, both because of incremental demand, but also because of a change in how The reserve margins are calculated and an increase in the reserve margin requirements.

Speaker 2

So capacity needs are higher, and demand trends have been strong. We'll start seeing Impacts from electrification as well as we get to latter parts of the decade. So a lot of moving parts, but like other utilities, a lot of it comes down to fundamental drivers of Rate based growth, demand growth, how you fund it and then known them. So we feel good about those drivers in our service territory and we look forward to providing the update once we've gotten through The IRP update as well as our rate cases.

Speaker 5

So I guess just not to paraphrase what you're saying, but put all that together, you feel okay about Tightening up that delta between rate base growth and EPS growth in time.

Speaker 2

We like the drivers in our service territory and we know those We're more certainly confident in our range through 2025 to 6% to 8%. And the long term drivers, we like to set up in our territory and we look forward to going through 20 And beyond when we have those details to share.

Speaker 3

Okay, great. Thank you, guys. I appreciate it. Thanks. Thanks, Shar.

Operator

Thank you. Our next question comes from the line of Nicholas Campanella of Credit Suisse. Your question please, Nicholas.

Speaker 6

Hey, good morning, everyone. Thanks for taking my questions today. So I wanted to just follow-up on the IRP because Absolutely a focus here. When you kind of think about the opportunity set in front of you And the fact that you've kind of now you're now showing a rate base CAGR of 6% out to 27%. Does the IRP Extend that 6% or could potentially increase it?

Speaker 6

Just trying to understand the magnitude of what's to come. Thanks.

Speaker 2

I feel like I'm your parents telling you Nicholas. So Nick, that's a great question. The IRP update is in process. We include our expectations for new generation in our forward CapEx plans. We've been a slight shift in our Expectations regarding the mix of PPAs and Renewables.

Speaker 2

We've got a very heavy weighting towards PPAs right now in our renewables. I mean, we think it's beneficial for customers to have a balance. But in Kansas, we've shifted to a 2 thirds assumption of owned and 1 third assumption of PPAs. So that's That's something that will play out in terms of what happens in the actual RFPs that we run and what's going to be most competitive and what offers the most benefits for customers. That's sort of an element no matter what's in the IRP.

Speaker 2

I do think there are some factors, Nick, that could drive More attractive opportunities for customers in the IRP and those relate to we now have significant benefits from the IRA that we As modeled in the IRP last year. Those are not only sizable, but they're we know that they're going to be placed for a period of time. That clearly Aids the relative cost of new renewables, which are pretty cost effective in our region, and relative to energy provided From Fossil Resources, we've got a lot of coal and the traditional ability to have drive lower cost for customers by Replacing high variable cost, high fuel cost generation with renewables is going to I think the IRP will reflect that. Now, wildcard is going to be what are construction costs. My personal view is we may still be facing some bottlenecks that are driving higher costs for construction for renewables, but we've in the cycles over time, those constraints are lifted and generally the supply responds robustly and that helps drive down costs over time.

Speaker 2

So I think that there are going to be opportunities given the amount of energy we still produce at relatively high variable and high fuel costs and the tailwinds from the IRA that are going to benefit, we'll have incremental opportunities to for renewables. But we'll have to see how the math plays out And it may be the math is more compelling once we see construction costs, where they are and where they're trending. And the other piece is with capacity requirements We're going to have to make sure and solar is weighted more heavily towards capacity, gas peakers or Potentially, CTG's helping capacity with growth like what we're seeing in Panasonic, with Meta coming in, there's also going to be a growth dynamic that may help That drives some incremental resource needs to and that are weighted more towards capacity requirements. I know it's a long answer to your question, but hopefully that makes sense. Net net, I do think there could be some tailwinds in the IRP.

Speaker 6

Okay. Thanks for that. And then I guess just On the financing plan, I'm just trying to understand, is it your intention to not do any equity Past the 2025 timeframe, because now that you have this CapEx plan out to 27, just wondering how to fund that?

Speaker 3

Hey, Nick, it's Kirk. We certainly, as we've reiterated a number of times, through our 6% to 8% growth rate Through 2025, there is no new equity in that particular plan. As you'll see, we came out of 2022, as David said earlier, with a strong balance sheet. We're ahead of our targets. We've got strong, robust free cash flow.

Speaker 3

We're not a current taxpayer. So we translate net income very efficiently into Operating cash flow is what gives us a pretty good stable of equity to help supplement financing with debt, keep this balance sheets in line. Certainly expect that to be the case through 2025. That will continue because we don't expect to be a tax cash payer until towards the end of the decade. So we're going to look to balance those 2 objectives.

Speaker 3

We'll look at the IRP, obviously, and the impact on the capital expenditure plan. But our goal equity, while at the same time maintaining those balance sheet objectives. But fortunately, with the combination of those robust cash flows And the foundation we come out of 2022, we feel good about where those balance sheets are and we'll continue to focus on it. And as we get through the rate case in Kansas and update the IRP, We'll have more specifics about the financing plans long term. But again, the robust cash flow and our tax yield is a tailwind for us as we move forward even beyond 25.

Speaker 6

Appreciate that color. Thanks everyone. And I'll take Nick or Nicholas any day.

Speaker 2

Thanks Nick.

Operator

Thank you. Our next question comes from the line of Durgesh Chopra of Evercore. Please go ahead, Durgesh.

Speaker 7

Hey, good morning team. Thanks for taking my question. All other questions Good morning, David. You've answered all my other questions. Maybe just Hit on the PPA opportunity that you've discussed in the past and what is the sort of The opportunity set there for perhaps 2023 and then longer term?

Speaker 3

Yes, sir. Drew, this is Kirk. Continuing to focus on that as we talked about in 2022, I in particular, we were disappointed we weren't able to bring one of those over Despite a number of engagements with various counterparties that continues to be the case. As I'm sure you're well aware, there have been a number Renewable portfolios out of the marketplace, there continue to be. Those renewable portfolios often has been the case, continues to be the case going forward, Some of our PPA counterparties.

Speaker 3

So we are continuing to be involved in that process. And I think with the clarity that's provided by the IRA. That's given us a little bit better foundation for negotiating that. I don't expect that if we get one of those done and we're certainly focused I'm doing it, I think certainly possible in 2023. I don't expect that to be a major driver.

Speaker 3

As I said before, we probably get at least one done because going back The next question previously, we want to maintain the strength of our balance sheet as well as stay out of the equity market Long as we can to maintain that growth rate, but we do have the capacity to get one of those done and I think it would be additive. It's not in our capital expenditure plan, but certainly as a proof of concept of moving that forward, I think there's opportunities that are abundant and with a lot of the renewable sales out on the market right now, There are opportunities to participate and get that done. So more updates to come can't be more definitive than that. But certainly, we've got a growing backlog

Speaker 7

Got it. Thank you. And just to be clear, like the Excuse me, the recovery process or the return on that 4 gigawatts worth of opportunity, is that through

Speaker 3

Do you

Speaker 7

have to go through rate cases as you or get approvals as you buy out those PPA opportunities or how does that actually work?

Speaker 3

We would, yes. In certain cases, especially in Kansas, we could kind of pursue that through a predetermination type process. But yet, ultimately, we'd have to pursue both prudency and prosecuting that into a rate case. And obviously, in the case of a simple buy in, we'd look to do that To more or less replace the pass through of what is existing PPA with a rate base investment that's neutral, if not beneficial, to our rate payers.

Speaker 7

Got it. Thanks so much. I appreciate it, Kirk.

Speaker 3

You bet.

Operator

Thank you. Our next question comes from the line of Angie Storozynski of Seaport. Your question please Angie.

Speaker 8

Thank you. Just a really quick question. So, you have $0.21 of a drag in interest expense. And I'm just wondering, I'm assuming that some of it gets trued up in the upcoming Kansas rate cases. So if I look forward, roughly how much of it would persist beyond this rate case cycle?

Speaker 3

So that's obviously a year over year increase. And I think the better way to think about that 2022 going into 2023, I would say, 2022 was a little bit the tale of 2 rates for lack of a more elegant way of putting it. We saw Increasing rates more in the back half of the year and that's obviously a full year effect year over year. You're correct. We do have a number of Items in that interest rate sensitivity we showed you before that are at the utility.

Speaker 3

So we would expect some of that, especially some of those pollution control bonds that you see there. There's a portion of those at Kansas Central. There's at least half of those at Metro. And we'd also look at some of that interest rate exposure is obviously our short term interest rates. Now a lot of that gets taken up in our AFUDC mechanism.

Speaker 3

But as we look to move from our construction work in process to plant and service, We'll look at that short term rates, which are obviously higher given the backwardation of the curve and term some of that out. I would expect that we do that in 2023. We will do that time certainly in Kansas that will probably take place in the context of our rate case. So a lot of that will get trued up at the end of the day.

Speaker 8

Meaning the drag, for the year over year drag, I mean, there shouldn't be any, right? So that should be actually a benefit for a year over year math for 2024, right? Yes. Yes. Okay.

Speaker 3

I think you're right. The better way to think about that is we've just rolled from a partial year to a current year. So now we're kind of at current rates in that regard. So I would not we don't see a step function going forward into it yet another increase in rates over time and it's really just the increase in debt rather than increasing rate exposure at the end of the day. We're not thinking about moving from 2023 and forward.

Speaker 8

Awesome. That's all I have. Thank you.

Operator

Thank you. Our next question comes from the line of Paul Patterson of Glenrock Associates. Please go ahead, Paul.

Speaker 9

Good morning, guys.

Speaker 2

Good morning, Paul.

Speaker 9

So, on the IRA in Wolf Creek, I was wondering if you could give us a flavor for what the potential quantification could be. And if that immediately goes to ratepayers or if there might be some sort of positive rate lag or how should we think about that?

Speaker 2

So, Paul, it's going to be fascinating as the rules come out around it. The first thing I noticed is that the eligibility will start in 2024, But it is an impact that will flow directly to our customers. So it will not have an earnings impact. Now I think it Anything that helps with respect to customer costs is a good thing. Regional rate competitiveness and affordability are critically important for us.

Speaker 2

And So there's a tangible benefit that we're really excited about as well. In terms of the mechanism, it will be interesting to see how the rules operate, Presumably, since it's based on yearly realized prices, that may be assessed on a monthly basis, and maybe assessed in a backcast at the end of the year, maybe based on day ahead markets. That probably makes more sense rather than real time, But all that is yet to be seen. But the net net is, if you went back a couple of years, this wouldn't have been true in 2022 Given the high commodity prices, but if you look back at 'twenty one and 'twenty one and 'nineteen and 'eighteen, the realized prices at Wolf Creek were below the thresholds that are laid out in the IRA for eligibility for PTC. And it wouldn't be the full $15 per megawatt hour in all years, but Depending on what the go forward pricing is, could be up to $15 a megawatt hour for 1200 Megawatts nuclear unit.

Speaker 2

So it's a sizable potential benefit for customers. But the mechanism, we believe that's going to flow directly through the fuel clause, which is again very important, but not an earnings driver. But it will be interesting to see as the rules come out and it starts in 2024.

Speaker 9

Great. Then with respect to Persimmon, which you guys put a pretty strong argument for, staff does seem to be a it's a contested case as Is there any possibility for a settlement?

Speaker 2

Well, we had hearings this week, and obviously we've been in discussions with Staff in advance of the hearing. So I do think it's in the commission's hands at this point. We're always as I mentioned, we're always seeing the work constructively towards approval. We think it is clearly A great option. It's a well sized option that drives the best overall benefits for our customers in terms of cost in our view.

Speaker 2

And so we think we've got compelling arguments for adding it. So if we can't sell, it will be great, but it's in the commission hands given that And lastly, it's likely to be an issue of the commission results.

Speaker 9

Okay, great. And then, with respect to the ROFR bill, I'm sure you guys are familiar with this 5th Circuit ruling, I guess, dealing with the Texas law and next year. I'm wondering, is there anything different about this law versus that or how should we think About the 1st Circuit ruling and I guess I'm sure we appealed to the Supreme Court or whatever, but how should we think about how that law may or may not

Speaker 2

So it's a good question. I was actually In Texas at the time the Texas law was passed, so that's some unique elements reflecting the unique elements of the Texas market. There are ROFRs in place, Our right of first refusal is in place in dozens of jurisdictions around the U. S. And they've We stood the test time in those markets and been beneficial and made in place.

Speaker 2

Most of our neighbors have them. Most of the states in the SVP have them. So We'll track that maybe narrow to the Texas law, may not. There's not we don't have a roofer in place in Kansas and Missouri. So One step at a time, but I do think the ROFRs that are in place across multiple states, they've been resilient, but we'll obviously have to follow how those cases go.

Speaker 2

But some unique features as you know to the Texas market and that Texas law.

Speaker 9

Okay. And then just finally on transmission, There are a number of FERC proceedings. They seem rather small to me, but there are a number of them, I guess. So it's and they're very technical. Frankly over my head, to some degree in terms of the formulas and what have you.

Speaker 9

How should we think about just cumulatively Those proceedings and how you feel about any potential exposure there or not there, if you follow me?

Speaker 2

I do. And we've resolved a couple of proceedings and one was ruled on by the FERC Last year, so I think that we've our go forward guidance reflects our view of the impacts of the overall regulatory framework. That's probably the easiest way to frame it. And some of it is complicated, but probably the most complicated one that was pending because it related to a The formula that was in the tariff that was under review, and so we had to follow the tariff, but obviously, we need to get the formula related to the transmission Delivery charge and the transmission formula rates at the FERC level and that was resolved last year And our forward guidance that we've discussed reflects the impacts of that case. So there are a lot of technical ones.

Speaker 2

I guess the easiest way to describe it is that we Our view of their impact is reflected in our forward plan.

Speaker 9

Okay. Okay. Thanks so much and have a great one.

Speaker 2

Thank you. You too.

Operator

Thank you. Our next question comes from the line of Ashar Khan of Varetean. Please go ahead, Ashar.

Speaker 10

Hi, David. I think so all my questions have been answered. But if I can just I was just trying to sum up, if I may. So you said you're going to have another $100,000,000 of lower savings Between now 2025, if I see the chart. And if I'm right, That's nearly about $0.40 or $0.45 So half of them came this year, if I'm right, in 2020 Because you're showing an O and M decrease or benefit of $0.20 So is it fair that another $0.20, dollars 0.25 is left in the next 2 years.

Speaker 10

And the other bridge is going to be, of course, transmission earnings and then The Kansas case next year and shall we factor in another Missouri case that will have some impact for 2025?

Speaker 2

I'll ask Kirk to comment on the O and M piece, but in general, you can do that. We've got about 230,000,000 shares. So you can calculate how much O and M savings we've got in the next year. I think it's $50,000,000 to $6,000,000 range. So it would be the remainder that would come through 25,000,000 And Kirk can correct me.

Speaker 2

We do expect rate cases in the every other year time frame. So that would imply we haven't finalized our plans, so that would You're correct. That would mean a 2024 Missouri rate case. So I think you've got a good sense for the drivers. But Kirk, anything you'd add?

Speaker 3

On the O and M front, just to clarify that, you're right. If I incorporate the $60,000,000 and that's roughly what that $22,000,000 to $23,000,000 reduction in O and M equates to. I think I even mentioned that When I was going through the slides, that puts us I think we came out at $22,000,000 you can infer, you can go through our disclosures about 1,000,000,000 So that means with that $60,000,000 of savings, you're at $1,014,000,000 We've put a target out there. Our 25 target is $9.60 so that gives you about $54,000,000 between from 2023 to 2025 over that period of time. You're right.

Speaker 3

That rounds to about $0.20 prospectively once you get outside of $0.23 just to clarify that.

Speaker 10

Okay. Okay. And then if I can just end up and I don't I know I don't want to front run this because you have been meeting your objectives That's the thing. But when will you do a revise, right? Because right now the CAGR is based on 2020, it's Is that something which will happen a year from now or is that a 2025 exercise?

Speaker 2

Yes, it's likely to be a year from now, Shar. We were going to have the integrated resource plan update and we'll get to the Kansas rate case. So I think that that's To be most informative for investors, again, we think the cancer rate case is pretty straightforward, but it's a lot of eyes are going to be on that rate case. So I think the most likely time frame forward Q4 call about a year from now, but which I hope to open with a celebration of another Chase Super Bowl.

Speaker 10

Okay. That's correct. We're hoping for that. We're hoping for that too. Thank you so much.

Speaker 10

So kind of you. Have a nice weekend.

Speaker 3

Thanks, Ashar. Thank you, Ashar.

Operator

Thank you. I would now like to turn the conference back to David Campbell for closing remarks. Sir?

Speaker 2

All right. Thanks, Latif. For everyone on the call or reading later, thank you for your time this morning and thank you for your interest in Evergy. Have a great day.

Operator

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

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Earnings Conference Call
Evergy Q4 2022
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