Q3 2020 Evergy Inc Earnings Call
<unk> financial measures. The release 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 Dot energy dotcom.
On the call today, we have Jerry Bassam, Energy's, President and Chief Executive Officer, and Tony Soma Executive Vice President and Chief Financial Officer. 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 Gerry.
Thanks, Marty and good morning, everybody I'll I'll begin my comments on slide five.
So today, we reported third quarter GAAP earnings of $1.60 per share compared to $1.56 per share earned in the third quarter of 2019.
Adjusted earnings per share were $1.73 in the third quarter 2020 compared to $1.57 in the same period a year ago third.
Third quarter results were driven by significant cost reductions an increase in weather normalized demand and fewer shares outstanding partially offset by unfavorable weather.
Year to date GAAP earnings per share were $2.49 in line with $2.49 in the same period last year. Adjusted EPS were to 82, this year compared to $2 and 50000 a year ago.
Throughout the year, we've managed costs to withstand a number of headwinds, including the impacts of the global pandemic unfavorable weather and less than planned coli proceeds.
Our solid execution has resulted in our ability to deliver a great quarter and gives us confidence in the outlook for the year.
Our customers employees and communities and continuing to advance our progress as a forward thinking sustainable energy company.
Consistent with these objectives our team has already begun execution on these priorities set out in the STP.
Operations planning team has a clear line of sight into our incremental 2021 grid monetization plans.
Which include new projects that will develop a more flexible grid to enhance customer reliability.
Our increased focus on substation and grid communication upgrades will overhaul aged equipment with modern technology and controls that will benefit our customers and communities for years to come.
From engaging with interested parties on potential legislation.
Through this dialogue our confidence has grown in the clear desire across a diverse stakeholder base Tonight long term energy policies that will move Kansas and Missouri forward.
While there are many solutions to deal with remaining net investment in.
In fossil plants being considered for retirement securitization is one that can be more economical for customers.
Information on and review our SDP.
And ensure our continued resolve in meeting previous merger commitments.
While providing a forum and repository for stakeholder feedback.
Lastly, let me touch on our COVID-19, accounting authority order request in Kansas. The Commission approved a request track expenses and lost revenue associated with COVID-19.
In Missouri reached a non unanimous settlement with the M. P. S C staff and many other intervenors last month, which request the commission issue an order that authorizes us to tracking differ incremental costs caused by the pandemic.
Hearings on the matter of scheduled for mid November and we expect a commission order in January.
We realize this has been a hard time for our customers and communities.
Last month, we wrapped up our hometown economic recovery program, which awarded grants totaling 800000 to nonprofit agencies.
The goal of this problem program is to help our communities build back their local economies by retaining and attracting new business developing workforces and supporting small businesses.
The attractive wind and solar potential.
Is uniquely positioned to execute a D carbonization strategy that would create significant cost savings for customers.
We have an exciting opportunity in front of us.
That is a true win win scenario to keep rates competitive.
While growing sustainable rate base that we value enhancing for our customers communities and shareholders.
Our execution has produced another strong quarter and great results here today.
We're very excited about the whole minimum of our plan and the long term prospects to deliver significant value to customers attractive returns for our shareholders.
I will now turn the call over to Tony.
Thanks, Terry and good morning, everyone I'll start with slide 10.
We reported third quarter of 2020, GAAP earnings of $1 60 per share compared to $1.56 per share in the third quarter of 2019.
Adjusted non-GAAP earnings increased 16 to $1 73 per share compared to $1.57 per share in the same period a year ago.
As shown in the chart on Slide 10, EPS was driven heimer higher primarily due to lower O&M expense and fewer shares outstanding partially offset by lower gross margin driven by unfavourable weather for.
For the 10th sense of other art other margin, we estimate about half of that is due to increase in weather normalized demand with positive residential demand being partially offset by lower commercial and industrial demand.
Additionally, there's another <unk> from our energy efficiency programs for sense of other for the quarter is primarily due to the timing of one income tax benefits for tax credits and other tax items are recognized.
Turning to weather compared to last year normal we estimate whether reduced earnings by 17 and <unk> respectively.
Now on slide 11, I will touch on year to date results.
Your date Cat earnings were $567 million or $2.49 per share compared to $606 million or $2.49 per share for the same period last year adjusted earnings are $642 million for $2.82 per share compared to a year to date 2019 adjusted earnings of <unk>.
$621 million or $2.55 per share.
Primary drivers compared to last year include are significant cost reduction efforts and fewer shares outstanding partially offset by lower sales preliminary due to unfavorable weather higher depreciation expense and an increase in interest expense.
I continue to see a slow and steady recovery through the end of the year.
As I mentioned previously we expect to serve incur some of the costs that were deferred from earlier this year and with that in mind, we expect cost savings to be less of a driver for the fourth quarter and we've narrowed our annual adjusted on him target to 8% to 10% lower than 2019.
Our guidance includes 20 million coli proceeds and it's worth pointing out that we had only received 4 million through the end of October.
Our forecasted annual effective tax rate remains at 13% to 15% I will note that our effective tax rate in the fourth quarter of 2019.
It was extremely low due to the amortization of excess deferred income taxes and a return to array closer to our 2020 guidance range is something to consider for this year.
Obviously is expected to the larger capital plan in 2021, we expect to see higher depreciation expense of around 30% to $35 million, even when considering the fabled depreciation treatment for pizza qualify projects in Missouri.
Ah Koi programs are difficult to predict we expect included place hold over 2021 that is line with our current 2020 guidance.
Lastly, we're forecasting and effective tax rate and 11% to 13% range. The effective tax rate will be driven from lower from the lower state income tax exemption for electric utilities in Kansas Star.
Starting in 2021, which will be offset with lower retail revenues as the savings is pass through to customers.
We remain confident in our target a long term, 6% to 8% EPS CAGR and as we've mentioned previously in the early years, including 2021 earnings are expected to be towards the bottom end of our range. We're very confident our ability to deploy capital finance that capital and stay on track for the long term cost reduction targets the pandemic does Kris.
Some lingering uncertainty with sales. So we'll continue to monitor trends and plan to issue formal EPS guidance and updated drivers on a year and call in February I will now turn the call back to Terry.
Alright, Thank you, Tony and with that I'll turn it over to Jessie we're ready to take questions.
90 speakers participants we will now begin to question and answer session.
To ask a question over the phone. Please press star one from your telephone keypads.
<unk>. Please press the pound key to withdraw your request.
First question is from the line of sharp Rosa your lines now open.
Good morning, guys.
On January morning.
Oh, not too bad not too bad. So just just two quick questions here just on the timing of the I R P and sort of the STP dockets.
Curiously, how do you sort of formulate these <unk> mid next year if D. S. T. P. Dockets are continuing into next year. So.
Oh, you're going to have enough feedback there to file these I R. PS. So how do you sort of bridge the timing between the S. D P conclusions and and the <unk> have to imagine what you're fine from the S. D. P process will will provide a guidepost for the <unk>. So just curious how do we bridge the timing gaps there.
Well actually I would kind of think about it the other way around the the STP as an overlay.
And will include the RFP findings and so the RFP is a very specific process.
With intervenors, who.
Participating in depth and those will help us to add to if you will the long term future of our generation profile.
D P. As you know is.
Highly focused on the front end of those of the plan with T&D and other investment, which is very traditional and not as involved in the process.
That makes sense.
Cigars.
Is R P as in general a longterm generation planning goals.
Got it and I'm sorry, what was the timing on the Missouri Uhm outcome for the for the process for B R. S. T P.
It's filed in April.
April one next year and Kansas in July.
Got it and then just lastly, any updates on sort of the Elliot information sharing agreement has that lapsed, whereas that sort of that.
Yeah, the agreement terminated by its own terms.
Earlier this week.
And we're no longer any under any agreements.
With Elliot since it's termination.
Is there anything you can update us that came about from that agreement or or or because you are still searching for the CEO right, whether it's internal or external so what actually came out of that agreement.
Well, obviously the agreement as a whole was the basis for our entire process that created the STP the kind of the back end extinction. If you will was far the opportunity to participate under the information sharing part of that.
During that time period.
Again.
Two period is run the agreement is run and I'm. So.
Some place.
Excellent alright, well. Thanks, so much guys have a good morning. Thank.
Thank you you too.
Next questions from the line of Julian Demoing Smith your lines now open.
Hey, good morning at various log me on for Julian here, just wanted to ask briefly about O&M reduction you guys. As you mentioned in your remarks to reduce the high end of 2020 cuts from 11% to 10%.
How should we think about that in the context of 2021, obviously, you've got the longer range.
Reduction basically in there through 2024, but should we think of maybe the the longer range target is more front end loaded given that presumably there may be some savings from 20 that that go into 21.
Well good morning. This is Toni we're still going through the the the finish up our planning process for 2021, which is why we didn't really get specific driver on on them just yet I think what we've we've shown in 2020 in prior years assist the table quite well for 2021 in years.
Beyond for our ability to to push towards.
That number of $210 million lower not fuel O&M starting from from 2019.
We did discuss a little bit I think about the overlap between what was traditionally are originally.
Merger savings and which now the STP provides us with additional O&M savings that we're just starting to charter and wrap up so there's kind of an overlap of that process and 21 happened as well.
Great. Thank you and just one more if I may and shifting gears, a little bit to the the prospect of securitization, which you also mentioned in your remarks is there anything in either Kansas or Missouri that we should be looking out for as far as milestones in a lame duck session potentially in calendar 20 or.
Or is that entirely of 21 item.
No well I I would say in terms of seeing or hearing things that would be a 21 item a lot of works going on a lot of conversations are going on there'll be a lot of things that are happening between the interested parties, leading up to the beginning of the year, but they wouldn't be that visible it'll basically would be a 21 item from.
I.
I think what you're talking about perspective.
Okay. Thank you very much.
Thank you.
Next questions from the line of Paul Patterson Your lines now open.
Hey, good morning.
Morning, Paul how are you I'm managing.
So so first of all let me S. T. P. I know you guys are having discussions and stuff. What would you say are the the biggest concerns or topics that are sort of.
That are front et cetera, People's minds that sure.
That you're encountering with respect to the to the S. T P.
I think the top concern is always going to be the effect on right. The effect on customers. So we believe the STP balance is that provides for the ability to use traditional investment to improve reliability and bringing technology without large increases to right.
But certainly that will always be there focus is can we execute and will it ultimately have an impact on cost, which we think we're able to show.
Has been considered upfront and Todd and quietness.
Okay, and then with respect to the.
With respect to the cost could you remind me what the what the expected.
Right trajectory that you guys have.
With respect to just read some general that you have in Kansas and Missouri what is the.
We call it was kind of.
2% or something am I correct.
Yeah cater a about 2% that's right.
Okay.
And then I guess the the second one is sort of a procedural question or sort of a sort of an unusual thing going on in Kansas with D. S. T. P. In this.
To get Elliot as a required party by the industrial customers I guess, some other people sort of agree with that and I understand where you guys are completely coming from procedurally I I understand sort of the arguments I've read and.
And I could completely understand why you guys don't think that's a great idea the presidential issue et cetera, where I'm a little bit confused would be cause. This is kind of new I've never I at least I can't recall, the sort of coming up before ever.
What would be the practical or would there be a practical.
Packed or or something in other words. If this were if if if the kick.
It hasn't been ruled on yet I at least I haven't seen anything I guess my question is if if in fact, the the kick proposal where motion was accepted.
What was practically mean on the ground, we're just be sort of a procedural headache or would it be or is there anything more that we should think about with respect to its potential ramifications.
Yeah, Yeah, I would say first.
Yeah, you you read Arberry you understand this is not appropriate.
And don't don't believe it it should be approved.
Practically if it were and I couldn't I couldn't tell you everything that might come from it but practically what I would tell you. It shouldn't have a large effect either if you've read our brief you would understand that you know we came to an agreement with a shareholder around how to evaluate issues, but in the end the fiduciary duties.
And the work around the STP and the final decisions were all ours and we made those we were happy to.
When we announced the STP that Elliot was supportive but to suggest that they've somehow taken some.
Level of responsibility for our fiduciary duty, which seems to be the argument is just simply not true and if they granted some kind of ability.
The ability to evaluate that that's exactly what they'll find so it's not appropriate but even if they rule they wouldn't find anything other than what we've been sandwiches, we worked with a shareholder to evaluate opportunities, but the board and management of this company made the decisions around how to move forward and we're confident in their outcomes and.
That was our job and we've done it and done it well I believe.
Okay, great. Thanks, so much.
You bet.
Again participants it's star one to ask a question or the pound key to withdraw your request.
Next questions from Michael weapons your lines now open.
He'd for taking my question and congrats on a great quarter, and and a lot of progress and change under way that here.
Alright, just to tell me some thinking of bell.
Legislative requests for some of the things you're gonna seek I mean, obviously you guys talk a lot about securitization, but how should we think about other potential as and that could influence or or buys I guess the rate, making process and either Kansas warm, Missouri to help reduce.
Flag.
You know I've got check kv, who is our chief customer officer and leaves I'd ever. It why don't why don't I have him talk a few minute about those those options.
Okay.
So what I would say is you know obviously securitization helps US you know look at retiring the for fossil assets that we have but as important to securitization I think is making sure that anything we do does minimise any lag that might be created and so specifically we're looking.
At at aspects that would our our provisions within the legislation that would allow us to have some certainty around the reinvestment of the proceeds as well as smoothing the timing of gaining you know the proceeds from the securitize assets as well as the reinvestment so it wouldn't be subject to.
You know a situation where you you take something out of break base, but then it's a year or two until you're able to realize the benefit of the reinvestment and then finally I think it's just important to remember than a misery, we have to maintain and and be able to maintain our plantain service accounting our pizza authorization.
Got it but is there anything you can do.
To help.
You can think about both jurisdictions both jurisdictions till at this tour called past years Pizza helps but pizza has Capcom pizza is not cash is there anything you can do that's more or it's limited in the amount of cash rate increases.
Is there anything you can do legislatively and seek to move from a largely historical test your format for generation and distribution investment in both states just something that's more either has trackers or has a full bulkier forward looking component to it.
Yeah, I mean, I think there are there are multiple potential possibilities as you suggest there I I think the the real trick will be to find the right combination that that is passable.
You know in in both legislatures I'm going with respect the securitization. Those issues are are known fairly well understood and have have significant coalitions built around them I think when you start talking about what what some parties may consider fundamentally altering the historical structure.
Of the regulatory process, you could get into some more pushed back and and and we're really interested in moving this this legislation legislative package forward, but again there there are multiple things that have been discussed in the past from performance based right to decoupling and and things like that that.
You know and then various writers and trackers that can be looked at.
Okay got it and then one last 2020 kind of guidance question and that's probably for Tony you.
You recognize very little coldly, so far but you maintain the $20 million Coley in your 2020 guidance, where it's wet November 5th right. Now is there something that in this little difficult task I guess, there's something you've seen that gives you conviction in that 20 million being realized or is that.
Just kind of give them normal annual placeholder for that.
Michael I think this is kind of a normal annual placeholder and there's obviously a couple of things we looked at when we.
Looked at our guidance this year and particularly of having three really good quarters behind us and looking at what we've been able to achieve on our cost savings and we were just pointed that out as that could be a potential headwind, but we have you know levers, obviously that we feel comfortable with to to narrow the range.
Now at 295 to 310.
Got it. Thank you Tony Thanks, guys much appreciate it.
Thanks, Michael Thank you.
Next question is from your dish Chopra your lines now open.
Hey, good morning team. Thank you for taking my question just going back to the good morning, just just going back to the S. T. P. So as I understand it right and I think you said this in your prepared remarks, no sort of official approval from the two states.
So so how should we like what should we be watching for in terms of milestones you're 30 intoning between now and you're right pieces and sort of towards the latter of your five year plan to keep track of things and and.
No to do sort of ensure that that things are moving along uhm from around three perspective.
Well, Okay, you said regulatory expected perspective at the end. So again, we will be talking to you about our process and execution on the STP because again remember these dockets or for information there's no request for approvals, there's no large project that required approvals.
So we'll be updating you own our execution on the capital and the O&M et cetera from a regulatory perspective, I think the big ones are that obviously, we'll have an hour P. In the spring.
That April Missouri, it'll be the first.
<unk> the STP, you'll be working over the top of that there is I think of January late January date, now for the Missouri staff to file a report so that's that'll be worth watching but again the report out should be commentary, if you will or you know.
Views of the STP, but not a ruling you know for anything or against anything. So again as we said before this is not typical maybe but it does give us the ability.
Parties and have some insight into our plan into the work. We're doing so we think gives us a lot of opportunity to.
Do some.
Groundwork ahead of time, so that regulators see exactly what we're doing and get banned from that perspective, and if there are some concerns will hear that but again I think we feel good about the process has been discussed in the integration between that and an RFP I think will work were enough.
Got it so it's it's mid to late next year is when we would hear what room you would see some commentary from from the Tuesday commissions.
Probably probably more like mid year, yeah, probably late summer after the RFP in both states of info.
Excellent and then just quick follow up on the securitization just can you confirm that you know in your current five year plan right. Obviously that is a that is a huge long term opportunity, but at the current five year plan, there's like maybe one or two projects that sort of you would require securitization four and one.
What are those <unk> those plants that you would require securitization for.
<unk>. This is this is Kevin so within the FTP, we had we've assumed one generic plant retirement of about 500 megawatts.
Compare that to some of the size of the plants within our current mix.
Okay, but again, it's in it's in the out years of the plan. It's generic we want to make sure. We keep it claims. So we can go through our ERP process and and again it would be one of our smaller units. So the impact from a securitization perspective is pretty modest we really think about securitization has the potential to accelerated more retirement into the into the fire.
Windows, so pretty modest impact on me.
It doesn't doesn't decrease or intensity of pursuing the enabling policy changes judgment.
And remember we've talked about that our work on even a longer term T&D perspective, if if that got delayed a year or was something that wasn't.
As timely we've got the ability to backfill the that Capex plan with additional work that we already have.
A vision toward so it should keep us in a position of having a consistent growth rate that we've talked about three to four or five years.
Understood I appreciate that color guys. Thanks, so much and and it really really strong quarter. Good job. Thank you.
Thank you.
Next questions from the line of speed Fleshman your lines now open.
Hey, good morning.
Good morning, or <unk>, Hey, Terry.
So just I guess first question is just from with with legislation and focus <unk> I'm curious if there were any changes.
That occurred politically with the elections in your states. This week just to kind of give a framework.
For for that or everything pretty much.
The same.
Yeah, not nothing material that would affect our discussions.
Governor in Missouri was reelected or elected I guess for the first time I've ever Parsons and remember the governor in Kansas was not up for reelection other other other.
Other elections went consistent with what we would expect and nothing nothing really surprising.
Okay.
And then going back to the question on the Elliot agreeing standstill agreement ending have they indicated at all what their intentions are from here in terms of.
You know just ownership of the soccer.
Or any any strategic stuff.
Not only we talk we talk with shareholders. All the time and we will continue to be in communication with with Elliott from time to time I'm sure, but nothing specific.
Okay.
You.
Thank you Steve I appreciate it.
Next questions from the line of Kevin Salwen Your lines now open.
Good morning, I just wanted to follow on on the on the S. T. P that that is effectively the process here that that there there is no formal approval or anything like that at the end. It just kind of like foreshadowing and how the the future rate cases are gonna go or is it a potential to maybe settle something or or get some.
A higher level of like prudency determined.
So yeah, I mean, if we had not been in a very public discussion around the the Elliott agreement then I would suspect just like back in.
February year and call when we announced a shift in additional capital at the conclusion of our stock buyback program.
We didn't have a docket, we didn't have a process and our announcement didn't require approvals. That's that's no different here, but obviously as a result of all that we sit in a a process where we have the ability both of the RFP, an STP to get input and an hour <unk>.
Squires filing to your point, there won't be a prudency.
<unk> R. A prudency finding in the STP, we don't have any large projects that require that kind of preapproval. What we do think though to your point is that we will be able to see people's views of the plan as a whole and kind of how that works in the context again cost to our customers and we think that's a benefit.
But we wouldn't see we don't believe any kind of preapproval are prudency determination on the plan given the way it's structure.
That's that's very helpful and and just just a clarification.
The the review process that the board under under when as part of the Elliott process earlier does that mean that you guys have formerly ruled out M&A as a as a a future path to to pursue and at the strategic or the F. T. P. As the the not just the preferred it is the way that you're going to.
Go forward and and M&A is off the table or is it less definitive than that.
Well, our our board of directors in our company will always do our fiduciary duty with regard to any.
Proposal or any process that would provide shareholder value greater than our current plan.
And said that we went through a very deliberate very exhaustive process back in the summer. It's just a few months old and we were very much committed to our SDP and we're working to execute on that as we speak.
Oh, Okay. That's that's very clear and then just just last some kind of a an accounting question. It looked like there was a big step up in other revenues in the quarter, which I just wasn't sure what drove that.
This is toni some of that was due to the.
The.
Energy efficiency.
Initiatives that we get compensated for.
And then as well as we've had some.
Increased weather normalized demand I think talked about in the script.
Oh, Okay yeah.
Yeah. It's me me as the promos the acronym.
Acronym in Missouri, and there's some offset to that in in the in the O N M line or is that all just margin to the bottom line.
On me on me a there is all set on the on the O&M, but there are some performance incentives and throughput incentives that that do.
I do not have a cost associated with them.
Okay. Okay. Thank you very much I appreciate it.
Thank you one of them.
Again participants it's star one to ask a question.
Or the pound key to withdraw your request.
No further questions on queue. Mr. Bathroom, you May proceed.
Thank you well. Thank you everybody and obviously look forward to talking to many of you next week.
The natural.
Even though not in person look forward the conversation. So thank you much to me I would be next week.
And that concludes today's conference.
Thank you all for participating.
You may now disconnect.
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