Q4 2019 Earnings Call

Please be advised that today's conference is being recorded if you require any further assistance. Please press star Zero I would now like 10 the conference over to your Speaker today, Lori Wright, Vice President corporate planning Investor Relations and Treasurer. Please go ahead.

Thank you Catherine good morning, everyone welcome to energy fourth quarter call. Thank you.

Today's discussion will include forward looking information like too and then luxury not yet to see filings continued list from the factors that could cause future results.

Really from our expectation and include additional information on non-GAAP financial measures, we issued our fourth quarter earnings release in 2019 Kincaid earlier this morning.

These are available on today's webcast like supplemental financial information for the for on the main each of our website <unk> energy Inc. Uh huh.

The call today, we have carried that president and Chief Executive Officer, and tell me, some executive Vice President and Chief Financial Officer.

I don't remember management.

During the question and answer portion call.

On slide 330 will recap the or like a strategic business or something.

We will update you on the details of our latest financial results and 2020 driver.

Obviously the calls here.

Thanks, Laurie and good morning, everybody, let's start on slide five.

We reported full year GAAP earnings of $2 and seven non centsper share compared to $2.50 per share earned in 2018.

Adjusted earnings per share were to 89 into not 2019 compared to 254 per share a year ago.

<unk> results were driven by reducing operating expenses fewer shares outstanding and rate case outcomes.

Partially offset by higher depreciation and unfavorable weather.

Our ability to overcome headwinds and execute our merger plan, particularly through the disciplined cost management allowed us to deliver consistently throughout the year.

What do you 19 was successful on many fronts, let me touch on a few other highlights.

We exceeded our 2019 that merger savings target of 110 million ending the year at 150 million or 36% above target and drove our adjusted I want him down over 9% on a year over year basis.

We raised our dividend about 6.3% to an end indicated annual rate up to $2.02 per share.

We executed our capital allocation plan by investing 1.2, big and infrastructure to maintain customer liability as well as continued or share repurchase program that was announced as part of our merger plan.

We returned almost 2.1 billion in capital to our shareholders 1.6 billion coming through share repurchases.

And another 463 million in the form of dividends.

We elected when service accounting or pizza in Missouri, and initiated infrastructure spending that is incentivized by the legislation.

We rebranded our operating utilities to provide consistency across our service territory and now all customers across Kansas, and Missouri, no watched as ever.

We advanced our longstanding commitment to environmental stewardship, and announced a new carbon reduction commitments that will reduce C. O. Two emissions, 80% by point 50 from 2000 and Bob levels.

We maintained our strong customer reliability metrics and lastly, and importantly, we continue to build the average you culture, that's thing through our four core values of safety.

I agree ownership and adaptability.

I don't think our entire team for their continued focus and teamwork on these accomplishments.

Now looking at slide six.

As discussed in our third quarter earnings call in November we have been evaluating additional capital investment opportunities believed that there were significant additional infrastructure investment opportunities in Missouri.

With a four year, a post merger capital planning under our belt, we've used a rigorous.

Allocation process identified and prioritize project that enhance grid reliability.

While reducing operations and maintenance expense.

As a result of our work we are announcing 1.5 billion of incremental infrastructure spending opportunities through 2024.

And areas, including renewable generation and grid modernization.

Raises our five year Capex plan from 6.1 billion to 7.6 billion.

With Pisa enacted in Missouri, which is designed to encourage enhanced infrastructure investment majority of the incremental spend or approximately 1 billion will be directed towards peace of qualified project.

This update to our capital plan will increase our rate based growth of 3% to 4% over this period relative to our prior guidance of two degree.

This enabled us to undertake critical investments that will improve the service, we provide where customers. While also delivering what we believe is a more attractive and bounce broke profile for our shareholders.

With the increased capital investment we've elected to halt the remainder of our share repurchase program.

As of the end of 2019, we had completed 75% of a repurchase program repurchasing 45 million up to 60 million share authorization.

Halting the final 15 million shares is expected to be credit positive grades balance sheet capacity.

Infrastructure investment.

I want to reiterate that are overall objective.

Targeting compared to competitive shareholder returns maintaining reliability human customer rights competitive has not changed.

We believe our updated capital allocation strategy will drive greater benefits for our customers and community.

From enhanced reliability grid resiliency.

Aligning with Missouri's initiative, a building infrastructure and creating jobs.

This is a true when when across the board.

Moving on to slide seven.

I'll update you on our merger savings.

A large part of our merger thesis was built upon leveraging the synergies of neighboring service territories and creating value for all shareholders.

At the time of our merger both legacy companies had room for improvement from a cost perspective.

Our progress thus far has already surpassed our original benchmark.

As I mentioned earlier, we've exceeded our estimated 20 1900 10 million original net merger savings target about 36%.

And we'll continue to focus on over achieving these original target.

Which were established during our merger regulatory proceeding.

We've identified additional opportunities for performance improvement.

We've evaluated or benchmarking performance in 2018, and now have 2019 results. This is you'll with a positive trend and our cost performance as we've seen a significant decline in our calls, particularly when adjusting for call.

There were a result of the merger.

Maintain the momentum are positive costs trajectory will continue to focus on opportunities to streamline automate digitizing otherwise enhance our processes and performance execution.

Well the merger provided a platform for synergies.

Our intensity around cost management remains Paramount Paramount as evidenced by our expected Bob the 8% the land reduction in 2020.

We continue to execute when the opportunities that were identified in the merger and we'll continue to focus on future cost reduction opportunities.

Our team is engaged in ongoing continuous improvement to drive value for our stakeholders through aggressive cost man.

Now looking at slide eight.

Beyond our strong financial and operations results were continuing our focus on being good stewards of the environment.

We've already reduced carbon emissions about 45%.

On the 2005 level.

And as we announced on our third quarter call, we expect achieve at least 80% carbon reduction.

Natural retirements, however, we'll continue to evaluate and consider additional opportunities execute on these plans sooner.

Possible when appropriate.

As part of providing.

Energy to customers, we're continuously looking for new ways to make renewable energy available.

As you may have seen in a recent press release, we can contracted 660 megawatt wind.

A large commercial and industrial customer demand.

New special Green tariffs that we worked hard to put in place during our 2018 rate case.

Before announced wind farm, which were originally identified through the RFP process.

Inductor right. After our merger in late 18 will be added via purchase power agreement consistent with the tariffs in Missouri and Kansas.

Again, as evidenced by our carbon target, we will continuously decarbonize our generation mix.

Consistent with providing reliable and affordable service to our customers.

Currently have included 500 million a great based renewables in our five year plan.

Our next trial RP falling in both Kansas and Missouri is scheduled for 2021.

This will be a first blown filing as ever G as well as our first time falling in Kansas.

The green tariffs are important economic development tool that our team has been marketing in order to retain top customers and attract large customer that otherwise might not located.

And our service territory.

Before I turn it over to Tony I'd like to discuss the agreement we announced this morning with Elliott management.

As part of the agreement bulk Taglich, former Chief Executive Officer.

Energy future Holdings, and Kirk Andrews current executive Vice President and Chief Financial Officer of NRG energy.

Been appointed to the board as new independent directors.

The time of the 2020 annual meeting of shareholders in May.

As of the board will be reduced the 13 directors following the retirement of for current average you directors.

We will provide additional information regarding the 13 directors, who will stand for reelection at the 2020 annual meeting in our proxy in the coming wins.

Further we're forming a strategic review and operations Committee I.

I will be on the committee, along with Arts Dol, All Kegler Vic and Kirk Andrews.

Committee will explore ways to enhance shareholder value.

Committee plans to completes its review and make up any relevant recommendations to the average you board and the first half of 21.

Given the mandate of the strategic review and operations Committee, we will hold off on issuing current year and long term earnings guidance, while the committee conducted to review.

While we expect to provide comprehensive update guidance at the conclusion of the committees work will provide more detail today regarding some of our expected 2020 drivers, including the enhanced capital plan.

We welcome the new directors and the vast experience they bring in the utility and power industry to support the work we have underway and has long term shareholder value and serve our customers communities in employees.

<unk> recognizes our commitment to serve the best interest of all ever just like Hulu.

An exciting opportunity in front of us as we look to build upon the momentum we've written since the merger closed in June of 2018.

We look forward executing on the plan.

With that I'll now turn the call over to Tony.

Thanks, Terry and good morning, everyone else start results on slide 10 of the presentation.

This morning, we reported fourth quarter 2019, GAAP earnings of 28 cents per share.

Compared to seven cents per share in the fourth quarter of 2018 increased es is primarily due to lower or an M slower shares outstanding and tax benefits from higher amortization of accumulated deferred income taxes, which were partially offset by higher depreciation expense.

Adjusted non-GAAP earnings were 32 cents per share compared to 15 cents per share the same period a year ago.

As shown in the chart on Slide 11, adjusted EPS was driven primarily by fewer shares outstanding.

And lower I want them and was partially offset by unfavorable weather and higher depreciation expense.

For the quarter residential sales were down 3%, while commercial and industrial sales fell 1% and 1.8% respectively.

Lower sales in the quarter were primarily due to weather, which we estimate namely impacted earnings by four cents compared to last year and about a penny when compared to normal.

Moving on to slide 12, I'll touch on full year results.

For the year GAAP earnings were $670 million or to 79 per share compared to three arc $536 million or 250 per share last year 2019, GAAP results were driven by the full year impact of ever GE Metro and never do Missouri West results lower operating and maintenance expenses, partially also.

Set by higher depreciation expense.

And lower retail sales driven by unfavorable weather compared to 28 team.

Adjusted earnings were $694 million or to weaken nine per share compared to 2018 adjusted earnings of $681 million or 250 per share.

As detailed on the slide.

The increase in adjusted earnings when compared to last year was primarily driven by a reduction in known and about $120 million a decrease of more than 9%.

New retail rates and accretion from fewer shares outstanding.

Partially offsetting this increase was higher depreciation expense of around $84 million and lower sales due to less favorable weather.

The 2019 weather impact was was less favorable in 2018 and pro forma retail sales declined as a result.

Residential sales fell 4.3% in commercial sales were down 1.7%.

We estimate whether cost is 22 cents when compared to last year, but was a benefit of about 10 cents when compared to normal.

Pro forma industrial sales were down 8% compared to last year due primarily to large customers in the chemical oil sectors that saw decreased demand that their plans throughout the year.

If we remove the impact of these two large low margin customers industrial sales were up 20 basis points.

Overall growth in a number of customers continued making the ninth straight year of customer growth for our company.

Moving on to Slide 13, let me touch on our latest financing activities.

As Terry mentioned, we have ceased future share repurchases, given our identification of incremental capital projects that drive value for customers.

Initially in the program in August 2018, we have repurchased just over 45 million shares.

This program was put in place to rebalance consolidated capital structure and was a key driver EPS growth on the front end of our merger plan as we've been working through our rates the out period.

Looking forward to financing activities. This year averages central Kansas has $250 million, 5.1% first mortgage bonds maturing in July that we'll look to refinance we expect this will be the only long term debt financing activity in 2020.

Wrapping up on Slide 14, let me give some details on our 2020 drivers.

As Terry mentioned, we're not issuing 2020 EPS guidance today I'd like to provide you with a few drivers for the year.

Distant with 29 team are expecting weather normalized sales to be between platform 50 basis points of growth.

On the back of strong on him cost performance in 2019 were targeting an additional 5% to 8% reduction and adjusted to one M. and 20 Twond.

Our continued infrastructure spending will dive depreciation or amortization expense from the $20 million higher.

We're expecting coli proceeds to be approximately $20 million.

We're forecasting an effective income tax rate of 12% to 14%.

And lastly, our year end 2019 share count was 227 million shares.

We remain confident in the opportunities in front of US our team, we'll keep our eye on the ball is running the business, while the strategic review and operations Committee conducted devaluation.

With that ill turn the call back over to Terry.

Okay, we'll open up the line for questions.

Thank you as a reminder to ask a question you'll need to press star one on your telephone withdraw your question press the pound.

And our first question comes from Shar Pourreza with Guggenheim Partners. Your line is open.

Hey, good morning, guys.

Good morning.

So just a couple of questions here.

With the strategic core operational review results one each 2020 seems like a very quick turnaround any incremental Terry you can provide as far as what youre thinking.

Obviously, given this quick turnaround I have to assume you have some sort of a sense on where things are heading and just on the word strategic quote unquote could that mean that ever GE looks at further consolidation or is that kind of off the table.

I've a follow up.

Yeah No <unk>.

No not to not to pre determined what the what the committee would come up with I would say that the focus is on all things that could improve long term shareholder value. So those those can include a several things.

And we would expect to review those thank the idea was to do that quickly so to be efficient.

And to get those done in a way that makes sense for all parties. So looking forward to the work looking forward to working with our two new directors on it.

And we would be.

For to get started quickly.

Got it that's helpful. And then just on the Capex, It's a big increase with $1 billion from Missouri under Piza also you, obviously very big healthy own M. cut just curious why not have pulled more spending forward in Kansas I mean, just a rough math with 80 million dollar own m. reduction that should translate into like half a billion dollars an annual.

Capital opportunities without impacting retail rates, so why not spend more in Kansas would the own m. lovers and.

And then I didn't get a sense from the slides if the incremental capex what the profile of it is whether it's front end loaded or spread evenly.

Just maybe get a sense there.

Okay on the first question I, you know I would say, obviously that with the capacity from piece, which we've talked about as early as second quarter call and digging into third quarter call. Obviously that provides a focus or from the state of Missouri on infrastructure spend jobs those kinds of things. So it makes more sense to folks.

Just on the recovery mechanism there we have to continue to be cautious in Kansas, because there's a lag time between a spend any recovery.

That's not to say, we wouldn't spend additional in Kansas as well, but we obviously want to be more measured and the immediate focus would be on pizza in terms of what kind of projects I'll, let Kevin give you some color on what kind of things were looking at from that perspective, yes sure. So the so it's pretty bad mute the increases across all five years.

Obviously, we have to be mindful of the rate cases, we have in Missouri, and the 2021 timeframe, but the types of projects fairly evenly split on in the grid might area across distribution and transmission.

Got condition based asset replacement that we're focused on along with adding automation across our system. So it's a pretty balanced increase across the across our across our grid and we plan to manage that through the five year timeframe.

Got it and then just lastly on sort of the merger savings you guys or do you have almost hit your target. There is there any opportunities because you you untainted relatively quickly.

Yes, yes, I mean, I think we believe that our focus from you know executing on the very clear.

Process, we went through from a merger connotation to ongoing process improvement. So we've continued to look for opportunities there and we think there is additional opportunity that will help.

Not only drive the onem costs down, but create headroom for additional capex that we talked about today.

Got it thanks, and congrats on Kirk Andrews, that's a that's a great out to your team. Thank you much.

Thank you. Our next question comes from Julien.

The Moulin Smith with Bank of America. Your line is open.

Hey, good morning team congratulations on all the development.

Just to pick up where were charlotte's off.

If I can follow up he's on I'm Scott contemplated here, how do you think about your earned or are we.

I was curious and also how does this reconcile what earlier commitment to Kansas I imagine.

We will have transaction I imagine to large examples of rolled off but I just want to be very clear about stuff.

Yeah, Let me, let me take a shot at that and be sure I understood. Your question and we continue to expect to earn our allowed our Louise I think one of the things that we're trying to be clear about and proud of is that even though we had to regulatory orders that created a bit of a headwind last fall, we've been able to drive additional nm savings to overage overcome that.

We continue to believe will earn our allowed our ollie's.

Other utilities as we planned originally.

And then I kinda you kind of faded out in the back into your question is what was already at just about the Kansas commitments that you can just from the deal to the extensive which that there were certain in voluntary reduction coming at that time.

As you know Lukas this announcement that you.

You are still in compliance with that as well and the commitments are kind of the cost savings wherever they are to be found our independent from any other commitment.

Oh, Yeah, we obviously have commitments in both states around our mergers and everything we've discussed today is in the context of keeping our commitments to our customers.

Our regulators and our state no doubt about it.

And to the extent to what did you created a strategic effort here and obviously announced pocket have you that had this with the Kansas and Missouri in and whatever faster.

Well, obviously, we just made the announcement today, so we'll be obviously talking to all of our stakeholders going forward about what it means what the process isn't keeping them form we have very good regulatory relationships and we would continue to work with them to be sure we answer any of their questions.

Actually I am sorry last question here, if I can just as you think about the cadence of Capex involved here, how do you think about equity and balance sheet need, particularly given the share buyback cancellation, obviously, you had a certain projection.

Just wondering very clear about this about what's your equity needs for the full five year period are.

Good morning, Julien Sarah.

Good morning. This is Tony we don't anticipate issuing equity to fund the capital plan that we announced today.

Excellent perfect. Thank you for clarifying all that and I'll pass it off appreciate it.

Thank you.

Thank you and our next question comes from Steve Fleishman with Wolfe Your line is open.

Hey, good morning, excuse me.

So just on the on the Committee the Board Committee, that's been informed you know in the release it talks about.

Among options looking at strategic combinations like could you maybe give a little bit of color and like how that would work like are you actually.

Sounds like an invite for people to.

Present stuff are you going to go out were to people on that or how are you going to look at that aspect.

Well, we obviously the committee hasn't even met yet so from a process perspective, we were yet to work through that but obviously with our time period in place we will we'll be putting together a plan to.

Valuate both was the past that we've we've talked about so don't have a lot of details and wouldn't want to get ahead of the committee in terms of specific process.

Before they even had their first meeting.

Okay.

And then there is the committee is made up of to current board members into four New board members like what happens if theres a two two and they don't necessarily agree is there like a process for that.

There is there's a process that up to make sure that were very transparent about any disagreement among the committee and ultimately what the board decides ultimately recommendations would go to the board and the board would make decision but to the extent there was a disagreement we would want to be transparent about what the recommendations were and that's built into the agreement we have.

Okay.

And then just one technical question D. The Sibley.

Jason and the appeal of that is that could you give an update if there's any.

Timing or update on the simply case.

No. It it's a it's still early in that process. Unfortunately appeals from the commission has a very very slow deliberate process. So it wouldn't be in the near term. Okay. I actually have one other question sorry the.

At a high level, it and ignoring kind of 2020, but just long term is it fair to say that redirecting more money to capex relative to the buyback.

Is he is additive to your plan.

Yes, well long long short term, obviously not buying back the shared in the next six months would affect near term earnings per share long term. We believe this a better allocation of capital and would drive long term shareholder value no doubt.

Okay. Thank you.

You.

Thank you and our next question comes from Paul Patterson with Glenrock Associates. Your line is open.

Hey, good morning, guys good morning.

Just.

Sort of just bigger picture on the Capex improvement.

Obviously, you guys are where the the arbitrage the last question and sort of the benefits of capex versus supply back.

And I'm, just sort of trying to get a sense is too.

This substantial increase what.

What's driven the the revised outlook. If you follow me, what what was sort of the trigger that.

Got you guys to.

To come up with them so much of an increasing capex.

Well, obviously as we started through the buyback program coming out of the merger we had up over Equitize capital structure, and we had a plan for driving EPS growth in the near term through the buyback.

While not overspending are not spending additional capex that would drive a either live or increases in customers rates, but as we worked through the plan and again, we're about 75% through that original buyback process.

We looked at opportunities for long term growth and as Pisa kicked in and it became a lot more clear to us a p. so as a tool was.

Very helpful. We talked about again as early as our second quarter call about there being.

Up to maybe a billion dollars a capacity there that we were evaluating and we worked on specific project.

We could make as part of that and so we began to work on the transition from the buyback into additional capex spend that would be you know grid modernization and types of projects it would reduce though and them all focused on being more efficient and lower cost for our.

Customer.

It's kind of the that's up high level version that makes sense. Okay. Okay. So so so just in terms of the aluminum reduction that would be associated with the.

The improved drink Capex can you give us any.

Any sort of rough qualification as to what that might be like how much how much savings you know when them or resulting from the capex deployment.

Morning, Paul This is Tony so we've we've given up some drivers for near term for 2020, but we're not going to we're not going to go out farther than that until the committee kinda finishes. Its work in its review and obviously, we're focused on on a non cost management animal Condella continued to be a focus of this team.

Obviously in terms of Oh nm improvement, though there's some things that would naturally happen from that kind of investment I don't Kevin you got any.

Yes, so Paul Paul I mean embedded into 2020 drivers that 5% to 8% reduction that Tony reference to that order magnitude what we'd expect to see this next year moving forward.

Moving forward head count as a big piece of it we've talked about managing our head count down through attrition so doing it consistent with the merger commitments, we're getting more efficient in that regard, we're still seeing savings in our back office, we call the merger savings, but it's in the supply chain area and benefits insurance all those normal corporate overhead and we continue to look for efficiencies that will.

Great. So we got pretty strong confident we had a strong year in 2019.

We expect significant performance in 2020, and we'll keep looking for opportunities moving forward.

Yeah, absolutely I'm just wondering if on the on the kinda back side. If there was some sort of rule of thumb or some sort of sense.

Other words, I guess, what I'm, saying it. So you guys have obviously executing quite well on the the merger synergies and all the other things that you're looking at well I'm just trying to get a sense as to when you're looking at that kind of Capex. We're looking at the Capex how much of a reduction if you guys have it if you don't if it's too early that's okay, but if there was any sort of rule of thumb so to speak if we.

Putting as much capex in the suppose cost might be coming out kind of thing I know I'm sort of basis is there anything like that.

I don't have a great rule of thumb for you for your Paul I mean, a it all depends on where they were the capex is going our system.

Starting on it at a fairly reliable place. So we expect to see savings, but it's hard to hard to quantify.

Okay.

Fair enough and then just on the the strategic.

Review I mean is that pretty much all be above that mean everything's on the table kind of thing or.

I mean it these are sort of big terms, if you know [laughter] sort of trying to get like.

If you can you elaborate a little bit more on that or.

Well only to say that obviously everything would be on the table, but theres, obviously, a focus that's been discussed which given the timeframe there will be a focus to start off with if we began to working and see other opportunities I'm sure. The committee would want to look into that but there's clearly a focus.

As we start to committee work.

Okay. Thanks, so much guys.

<unk>.

Thank you and our next question comes from Charles Fishman with Morningstar Your line.

Thank you.

Jerry I just want to make sure I heard this correctly you will file rate cases in 2021 in all jurisdictions in Kansas and Missouri.

No no we're not filing rate cases until.

20 to 23 and the two jurisdictions.

The two being.

Sure in Kansas.

Oh, I'm, sorry, but the individual businesses the.

In Missouri, you got to.

You'll file both of those in 2022 right.

Okay, and then I'm glad I asked I Miss heard back Okay, and then I guess was a follow up to that.

Actually have pies and Missouri positive.

In Kansas you you just get treated unfairly I think in my opinion in Kansas late last year on Jeffery.

So the staff supportive of your.

Have a your position the commission went there on way what gives you the cost when it's going forward that especially with this a bump and capex that you'll get the treated little more fairly in Kansas.

Well again <unk>, how did we do have a good relationship both with the commission and with the staff, but the staff in particular as you said agreed with US on that particular ruling that was not a typical rate.

Capex investment inclusion in rate case, it was a unique situation, where we had a a lease that had been in place for a long time that was converting so it was a unique situation and we were disappointed that the commission didnt agree with us and the stuff, but I don't think anything about that suggests.

Just to us that our typical capex investment in.

Infrastructure that drives reliability and service to our customers would be viewed any differently in Kansas then it would in Missouri.

Historically in our rate cases, we've seen that result.

Okay. Thank you certainly made things interesting in Kansas, and Missouri branch.

Thank you.

Thank you I'm showing no further questions at this time.

Back to charity bus.

For any closing remarks.

Thank you very much for dialing in and obviously, a will oh well be talking to to everyone that on an ongoing basis, but we look forward to moving forward with our announcement today. So thank you have a good day.

Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

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