Q2 2022 Evergy Inc Earnings Call
Good day and thank you for standing by welcome to the Q2 2022 <unk> incorporated earnings conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question. During this session you will need to press star one one on your telephone please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Lori Wright Vice President.
Relations and Treasurer. Please go ahead.
Thank you Michele good morning, everyone and welcome to <unk> second quarter call. Thank you for joining us this morning.
The discussion will include forward looking information slide two and the disclosure in our SEC filings contain a list of some of the factors that could cause future results to differ materially from our expectations and include additional information on non-GAAP financial measures. The releases issued this morning along.
With today's webcast slides and supplemental financial information for the quarter are available on the main page of our website at investors don't ever T Dot com.
On the call today, we have David Campbell, Evergreens, President and Chief Executive Officer, and Kirk Andrews, Executive Vice President and Chief Financial Officer.
David will cover our second quarter highlights our integrated resource plan, and our regulatory and legislative priority Kirk will cover in more detail the second quarter results and discuss the latest on sales and economic trends.
Other members of management are with us and will be available during the question and answer portion of the call I will now turn the call over to David.
Thanks, Lori and good morning, everyone. Thanks for joining us today.
On slide five I'm pleased to report that we had a solid second quarter as we delivered adjusted earnings per share of <unk> 86 cents compared to 85 and 2021.
The increase in adjusted earnings over last year was driven primarily by favorable weather an increase in weather normalized demand and higher transmission margins, partially offset by higher planned operations and maintenance expense.
And lower other income net of expense Kirk will discuss the second quarter drivers in more detail.
On our first quarter earnings call I highlighted that we had just participated in a safety roadshow and that our focus on safety contributed a strong safety performance in the first quarter.
Our employees continue this positive trend through mid year, reducing work related injuries, including recordable and restricted events by 60% compared to the same period last year.
Our customer reliability has been solid despite challenging weather, reflecting the beneficial impact of our ongoing grid investments.
Compared to the five year trend in our service territory. So far this year the number of days with sustained wins over 25 miles per hour increased 89% to 65 days.
And days with wind gusts over 40 miles per hour.
Nearly 50% to 78 days.
2021 was in line with its five year average for both measures. So 2022 has been a clear outlier.
In contrast relative to the five year trend average daily outage event.
<unk> decreased by 14% in the first six months of 2022, notwithstanding the more extreme weather, indicating improved system resiliency.
I would like to thank all evergreen employees for their focus on safety and their dedication to providing safe reliable and affordable power to our customers.
I would also like to highlight a recent generation milestone.
As you know we have been expanding our wind portfolio for over a decade with about 4400 megawatts of owned and contracted wind generation. Our portfolio recently marked 100 million megawatt hours of cumulative wind energy production.
And in 2021 factoring into production from our Wolf Creek nuclear plant.
Our emission free generation was equivalent to 56% of our total retail customers usage.
Our teams consistent execution has resulted in a solid start to the year and we are reaffirming our 2022 adjusted EPS guidance of $3 43 per share to $3 63 per share.
As well as our target long term annual EPS growth rate of 6% to 8% from 2021 to 2025.
Slide six highlights our annual integrated resource plan update which was filed in June for both Kansas and Missouri.
Our preferred plan for the next decade is consistent with the resource plan laid out in last year's Triennial IRB filings.
And the renewables development plan Kirk discussed during our Investor Day last September .
The minor tweaks in the plan reflect updates to the sequencing of our near term investments.
Specifically, we shifted to a 100 and 190 megawatt solar edition and the Lawrence coal retirements to 2024, primarily due to the dynamic market conditions facing the solar supply chain and the benefits to customers are keeping Lawrence online with current high natural gas prices.
In 2026, we shifted our planned solar project to wind and increase the capacity of assumption for the project by 100 megawatts.
Beyond 2026, we slightly reduced megawatt assumptions for our solar projects, which on a net basis offset some upward pressures on pricing.
Overall by the end of 2032, our preferred plan now includes 3500 megawatts of renewables additions, while also responsibly retiring nearly 2000 megawatts of coal.
<unk>, both affordability and reliability as we advance our fleet transition and advance toward achieving our sustainability and emissions reduction goals.
Moving on to slide seven I'll provide a summary of key regulatory and legislative milestones and ongoing constructive developments in both Kansas and Missouri.
In Missouri, we continue to work our way to the pending general rate case.
In early June staff, and other intervenors filed our direct testimony.
In mid July all parties filed rebuttal testimony.
In the next few weeks parties will file true up and cira bottle testimony with a settlement conference to follow around August 22nd.
And hearings later this month through early September .
<unk> rates in Missouri will go effective on December 6th.
We look forward to working with the parties to constructively resolve the case.
<unk> West we have also been advancing the securitization process to recover the roughly $300 million of winter storm Yuri costs.
Earlier this week, we filed a non unanimous settlement that resolved all key issues with the Missouri Commission staff.
In terms of timing hearings are wrapping up this week and we expect to commission financing order in mid October .
On the Legislative front of Missouri Senate, Bill 745, which modifies plant in service accounting or Pizza was signed by the Governor and became law in late June .
The modifications reduced the revenue requirement cap to a two 5% annual compounded growth rate.
And narrow the calculation to consider Pisa deferrals only.
Importantly, this bill also puts into law a property tax tracker effective later this month, which will eliminate historical source of lag in our Missouri jurisdictions.
The piece of extension marks the second consecutive year of passing new legislation in Missouri that will benefit customers and stakeholders in 2021, HB 734 was signed into law.
Authorizing the securitization of extraordinary costs in the Unrecovered book value of our retire generation plants.
Moving to Kansas I Am pleased to report that in June The Kansas Corporation Commission approved the non unanimous stipulation and agreement for winter Storm Yuri costs.
The order allows us to recover roughly $120 million of deferred extraordinary fuel purchase power and non fuel cost at Kansas Central over a two year period beginning in April 2023.
Similarly, the $37 million of net benefits at Kansas Metro will be returned to customers over one year period also beginning in April of next year.
Preparations are underway for our Kansas Central in Kansas Metro rate cases, which we will file in April 2023.
We expect the test year, ending September 32022, and a true update around June 32023, with new rates, becoming effective in December of next year.
Other important milestones in Kansas include the passage and signing a securitization legislation in mid 2021 as well as the completion last November of.
The docket before the Kansas Corporation Commission relating to the sustainability transformation plan.
In both Kansas and Missouri, the Triennial integrated resource plans have completed their review process.
The Missouri Public Service Commission approved the RFP in March of this year.
The Kansas Corporation Commission accepted the ERP in May.
We will continue to work collaboratively with regulators and intervenors in both states to achieve constructive outcomes that advance our core objectives of delivering affordable reliable and sustainable power to the customers and the communities that we serve.
Overall, we are pleased with the strong start to the year the progress that we've achieved and working closely with regulators and stakeholders to enhance our service to our customers.
The ongoing consistent execution of our business plan.
I will now turn the call over to Kirk.
Thanks, David and good morning, everyone.
I'll start with the results for the quarter on slide nine.
For the second quarter of 2022 average delivered adjusted earnings of 198 million or <unk> 86 per share compared to 195 million or <unk> 85 per share in the second quarter of 2021.
The year over year increase in second quarter EPS was driven by the following <unk>.
First a 16% increase in cooling degree days drove a 6% increase in EPS compared to second quarter 2021.
Adjusting for the warmer than normal weather experienced in the second quarter of 'twenty. One however, the second quarter of this year saw an 11% increase in EPS versus normal weather assumed in our original plan.
We also saw a 4% increase in weather normalized demand this past quarter, which drove <unk> <unk> per share.
Higher revenues driven by our transmission investments combined with an increase in PDC revenues due to higher than expected volumes drove a 6% increase.
These positive drivers were partially offset during the quarter by O&M expense, which was approximately $29 million higher or <unk> <unk> per share driven primarily by planned generation maintenance outages and higher transmission and distribution contractor expense.
<unk> <unk> of higher depreciation and amortization expense due to increased infrastructure investment.
<unk> <unk> of higher interest expense due to increased debt outstanding at higher interest rates.
And finally, we had seven of lower other income net of expense due primarily to lower coli proceeds year over year as well as lower AFDC equity.
I'll turn next to year to date results, which you'll find on slide 10.
For the six months ended June 32022, adjusted earnings were $332 million or $1 44 per share compared to $320 million or $1 40 per share for the same period last year.
Again, moving left to right on the slide our year to date EPS drivers include versus 2021 rather include the following.
When combined with relatively normal weather in the first quarter of this year.
Our year to date results reflect the <unk> impact from weather during the second quarter.
Weather normalized demand year to date increased about 2% driving approximately 10 cents of EPS.
Higher transmission revenues driven by ongoing investments combined with an increase in PDC revenues due to higher volumes.
Led to an 11% year to date increase versus 2021.
Year to date. These items were partially offset by the following O&M expense due to higher planned generation maintenance outages and increased T&D contractor expenses incurred during the second quarter drove approximately <unk> <unk> per share.
<unk> <unk> of higher depreciation expense due to increased infrastructure investment.
<unk> of lower other income net of expense driven by coli proceeds in <unk> equity and.
And finally, we had <unk> <unk> of higher income tax expense and that was primarily due to tax smoothing, which reflects a shift in intra year timing of the recognition of certain tax items in order to maintain our projected effective tax rate for the year and this is not expected to result in a variance in our full year results.
Turning to slide 11, I'll review, a bit more detail behind the weather normalized demand growth for the quarter and year to date as well as an update on economic trends and developments.
For the second quarter as I mentioned previously total weather normalized retail demand increased by approximately 4% led by a robust year over year increase in industrial demand driven in particular by the chemical and oil and gas sectors.
Year to date weather normalized demand increased approximately 2%.
Over the balance of the year, we expect a more moderated increase in year over year weather normalized demand given the second half of 2021, largely reflected post pandemic working conditions.
Overall total retail demand is now above pre pandemic levels.
On the economic development front in July Panasonic announced plans to build a new electric vehicle battery manufacturing facility in Desoto, Kansas is just outside the Kansas City Metro area.
This facility, which will be one of the largest of its kind in the U S represents an estimated investment of approximately $4 billion.
And is expected to create up to 4000 new jobs.
The facility will be located in the average, Kansas central jurisdiction and when fully constructed and operational is expected to be one of our largest customers.
And finally on slide 12, I'll wrap up with an overview of our long term financial expectations.
With our strong start to the year, we are reaffirming our adjusted 2022 EPS guidance of $3 43 to $3 63.
We plan on giving our 2023 annual guidance on our typical timeline as part of the year end call early next year.
As David noted earlier, we are also reaffirming our long term compound annual EPS growth rate target of 6% to 8% from 2021 to 2025 based on the midpoint of last year's original adjusted EPS guidance of $3 30.
We continue to expect growing the dividend in line with our long term earnings.
Target, a 60% to 70% dividend payout ratio.
Our $10 7 billion five year capital plan through 2026 is focused on new infrastructure investment to improve customer service enhance reliability and resiliency and transition our generation fleet, while at the same time continuing to advance regional rate competitiveness and meet the evolving needs of our customers and communities.
With that ill hand, the call back over to David.
Thank you Kirk we appreciate your time with US today, and we now be happy to take your questions.
Just as a reminder to ask a question. Please press star one one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from Michael Sullivan with Wolfe Research. Your line is now open.
Hey, good morning.
Good morning.
Hey, Dave I wanted to just start with.
Pretty pretty strong quarter in terms of just the sales growth weather normal and then also the weather benefit.
Maybe if we could just get a little color on how.
The weather normal compared to plan and just given the strength of why or why not.
Raise the guidance at this point in the year.
So Michael good questions we.
Obviously, we're pleased to see the demand growth.
Weather normalized that we saw in the first half of the year, we had some expectations for reasonably strong demand growth and that was front end loaded.
We had a relatively softer recoveries in the pandemic in a couple of sectors of first half of last year. So we did expect to see that demand growth, particularly in the first half of this year or a little bit ahead of plan, but.
Only a little bit with that sustained thats obviously.
It would be a nice tailwind havent, yet seen recessionary pressures would of course will be on a close lookout for that now in terms of our performance overall it has been a solid start to the year third quarter is our biggest quarter.
And July was relatively robust weather, but our approach to guidance is typically we will make that assessment and give an updated view after the third quarter since it's our largest quarter, but we are pleased with the start to the year.
Okay, great. Thanks, and then just wanted to shift to the rate case, and maybe if you could just talk about.
Where there may be outstanding sticking points and.
Potential for settlement.
And then also I think one of them is obviously the sibley issue if that were not to go.
Your way is that something that you see as manageable sorry, a couple of questions there.
Yes, so the Missouri rate case, which youre asking about.
We're certainly in the us.
Mike first general rate case in Missouri, and it's an interesting process in the state.
There is a tremendous wave of activity towards the end of the process and while we filed in.
Back in cash in the first quarter. This month, we will see our final true up filings. We'll also see Surrebuttal testimony. We've got the settlement conference scheduled and then hearings will begin at the end of the month scheduled for early September . So there's a lot of action that will happen that.
You I know <unk> been tracking the filings closely the gap.
Particularly when you've seen some adjustments and staff's filings in there.
They are filing on revenue requirement.
The gaps are relatively reasonable and the issues are pretty well understood. So we look forward to engaging constructively and discussions just as we did in the winter storm Yuri securitization proceeding, where we were able to file a non unanimous unanimous settlement resolving all issues with staff earlier. This week. So it's a pretty typical rate case.
We'll be looking to finalize.
No.
Some items related depreciation and some other factors tax items.
As you noted sibley.
As we expected a matter that generated a lot of ink.
A lot of I.
I guess digital ink I'm using my old the old metaphor, but.
Simply will be an active discussion we do think it's manageable and I think we've gone through this before in the past Kirk is related to others and three main components one is the.
O&M recovery that we have actually been setting aside greater regulatory liability for the disc.
A discussion on that is really the time period for returning it.
And there is a return.
<unk> component.
The last rate case cumulatively is.
Roughly about it.
So we're going to be $40 million to $50 million range.
Depending on what the decision is on that that's a onetime item not a not an ongoing.
Issue. So the the last issue is one that could have some impact on our performance and that's a residual rate base and Sibley, we think it makes sense and <unk>.
Consistent with the initial settlement was filed.
Four years ago that will be retired in the normal course like other assets.
But there'll be discussion around that it's a relatively modest amount.
So it's we think it can be managed but those will be discussion items and the final piece, we would appreciate it.
The dialogue and we look forward to advancing those discussions as we go through all the testimony.
And the proceedings over the next few weeks, so it'll be a busy time, but thats. The crescendo that is typically the case in the Missouri context as you know.
Great. Thanks, Thanks for that and just last one if I could throw it in just initial thoughts on the inflation reduction Act and what it means for your company.
So we're obviously going to continue to track that closely.
We think that the provisions relating to renewables.
Have the beneficial impact of further reducing the cost of our expected additions for our customers.
I'd also appears to make.
Sort of the transferability and ability to take advantage of the PTC and ITC simpler so it simplifies.
Tax equity or other approaches so it not only lowers the cost but increases the efficiency of some of those mechanisms. So on balance we think its a helpful. Enabler that will further reduce costs for customers as we move forward and there is some other provisions in there will track where the nuclear pieces, it's eligible for both merchant and regulated assets.
That's on an earnings driver for us, but could be beneficial.
For our customers in terms of reducing costs because there are times when our Wolf Creek plant does receive low prices because of the wind resources, particularly in the spring.
And default so the.
End up being eligible for some recovery there too so we think that it's.
Beneficial set of provisions, we'll obviously watch closely that weaves its way through in Washington, and monitor closely any amendments and the ultimate hopefully the ultimate passage that we see.
Great. Thanks, Thanks, David appreciate it.
Please standby for the next question.
The next question comes from <unk> Chopra with Evercore. Your line is now open.
Hey, good morning team. Thank you for giving me time here just a quick clarification on the Missouri rate case.
The residual amount David on Sibley, that's about $100 million correct. So it's relatively small the residual rate base amount.
Yes, okay.
Okay, perfect that residual rate basis.
Some parties, who may already have a different number but thats the residual rate basin Sibley at this time.
So a pretty modest number as you described.
Got it and then just I think this might be incurred but the <unk> doesn't really.
Apply to you because you sort of below the 1 billion pretax market right at least through 2020 this year of the plan.
That's correct add to that on that 15% minimum tax.
Part of it is aided by our inventory of tax credits as we move forward. You are correct, we expect to be below that threshold. So I would think about that something that we potentially if we rise to that level. It would be on the beyond or coincident with the very least our expected cash taxpayer year.
Which is beyond the middle of this decade.
Okay. So no basically no impact from the empty over the next few years second half of the decade is when we should we could potentially see if something is passed on this front.
That's correct and again that that will also be somewhat dependent on the ongoing generation of tax credits as we move forward to some extent from as we progress around our renewables plans, but you're right directionally in terms of all things being equal that time frame and that inflection points correct.
Got it and then just one final one just anything on the PPA buyout opportunities.
Looking like more likely to happen this year or your chances of increase given the extension of these tax credits or anything you can share there. Thank you.
So I would say that the intention is the extension of the tax credits first of all if past and certainly we are hopeful and optimistic that that takes place gives us greater flexibility on the repowering side of that equation. So that's a that's a benefit, especially as we focus on earnings and certainly affordability for our customers.
We're continuing to hold that objective will continue to advance our discussions with counterparties and maintaining that target to announce at least one of those.
This year.
It may be a buy in or it may be a buy and combined with our repowering. What we continue to be focused on that at the same time, we had a robust responses to our RFP that we launch toward our renewables objectives. In particular, the 300 megawatts of wind in 24, followed by 525. So we've had good results from that as well and we are.
Expecting to have some news on that front as we progress through the balance of the year as well.
Thanks, guys I appreciate the time.
You bet. Thank you.
Please standby for the next question.
Our next question comes from Paul Patterson with Glen Ross Your line is now.
Sure.
Good morning.
Paul.
So can you hear me.
Yep Okay.
Good sorry.
I wanted to Goodnight.
And I apologize, but you guys made some comments about.
Wind production at the beginning of the call.
And I was wondering if you could.
If possible served to summarize what youre seeing in terms of of wind production.
I apologize I, just wasn't able to completely comprehended.
Comprehended on land sorry.
Sure.
So we.
I referred to Paul is that we achieved a milestone.
Now this past quarter, we surpassed 100 million megawatt hours of cumulative wind generation.
Our portfolio since the company start so obviously, that's a significant milestone in terms of our cumulative.
Wind production to calibrate in terms of our total fleet about one third of our total production last year generation terms was from wind.
And if you include our nuclear generation.
Generation from Wolf Creek, nearly half of our total generation was for emission free emissions resources. So wind generation as a share of our total portfolio is and where higher than virtually every other utility at a third of our total generation. So that's what I was citing without cumulative.
Milestone passing 100 million megawatt hours, Okay got it I think you also or maybe I misunderstood you guys were talking about the performance of wind and I was just wondering has there been any issue in terms of.
Production year over year.
As I recall, there might be a decrease.
I was wondering what how is wind been performing so far.
Same store.
Kind of how.
How is production going and also I was just wondering we've seen around the country sort of some curtailments in different areas.
Do transmission constraints and what have you have you seen any in Europe , not just with you guys, but with any.
Neighbouring because you guys have a significant sort of area in terms of wind have you seen any.
Projects that would have you in your neighborhood so to speak.
Experiencing any curtailments due to.
Transmission constraint.
Got it.
It is a complicated great question, but stepping back to the different elements of your question I think overall the wind portfolio continues to perform well.
So our generation capacity factors and we've got a very large number of sites, but in general.
The capacity factors and Kansas are as high as virtually any region a lot of our sites over 50%.
<unk> factors and they continue to perform well.
The broader issue of curtailments.
Varies across the geography in Kansas.
And where the bulk of our generation sits obviously the vast majority there are pockets in central and Western Kansas, where there is congestion.
And there is some curtailment that occurs it's not an earnings driver for us because it flows through the fuel clause, but it is a factor that impacts customer right. So obviously, we're very attentive and attuned to it and we advocate at the southwest power pool for projects that can beneficially.
Reduce congestion costs for customers. So it's.
It is a factor with higher natural gas prices, where the price differentials can be higher so congestion costs across the southwest power pool and really across the country are higher because prevailing prices. If you had a price differential between the generation resource like renewables that is.
No costs and effectively a negative cost because you get a PTC for many of them.
The difference between those resources in a natural gas resource for example has been magnified and higher natural gas prices. So it's something that we are working.
The southwest power pool, and other constituents to seek to address a lot of that takes transmission solutions, which takes time.
But overall the wind profile across our territory as outstanding we've got one of the best wind corridors.
In the U S and the world. So it's going to continue to be a great resource for us, but transmission adds to keep up and thats the perennial.
Issue to manage with renewables.
Awesome. Thanks, so much for the clarity.
Of course, you bet.
Please standby for our next question Ken.
The next question comes from Nick Campanella with Credit Suisse. Your line is now open.
Hey, guys. Thanks for thanks for taking my question.
A lot of questions have been answered so far but I guess just on resource planning in general I think that does.
STP reserve margin, increasing and I'm, just curious about how youre thinking about that and the overall.
Effect on your resource planning and if you went there I know that youre already somewhat long capacity across the portfolio, but just wanted to check in on that.
So you are tracking things well and closely SPP SVP did recently increase their reserve margin to 15% from 12% and that will go effect in effect next year. You are correct in that it's not going to have a near term impact on our.
Capacity to requirement, so we will be able to meet that.
But it is going to be a factor in our longer term planning and so as we think about our coal retirements.
And that overall transmission of our portfolio, obviously will be.
Factoring that in and making sure that we can meet it.
I think as SPP continues to look at different seasonable seasonal reserve margin. So for example, a winter reserve margin that will be very interesting as well.
But the short answer is we can accommodate that change in reserve margin with our portfolio, we will factor in into our ongoing plans on balance obviously, it'll it'll have some impacts.
To the longer term plans, but relatively modest but it will we will be factoring that in as we consider our resource transition and we will be working closely with stakeholders as we think about that winter.
Reserve margin requirement as well obviously the winter peaks are lower but as you look at the average capacity factors across the fleet as you add more renewables on the winners can be important thing to consider as well.
Alright, great.
And then just one small one on the numbers I know that coli in AFDC was 7% drag.
Can you just remind us like what quality at year to date.
In isolation and what's contemplated in your 'twenty two guidance from a quality perspective.
Sure.
To address that so call. The overall I think we've said in the past, we generally expect about $20 million of coli impact that is both a pre tax and after tax that coli is not tax effected at the end of the day.
Year to date relative to our expectations, we're probably <unk> lower than we would've expected basically half of the year on that colleague because we've effectively had very little proceeds from Covid and that's absolutely just a function of the performance of the <unk>.
There are folks that are insured buyback.
So year to date thing about that is about <unk>.
<unk> short of what would normally be our ratable expectations for the year.
Alright, I will leave it there thanks a lot.
Thank you.
At this time there are no other questions I would now like to turn the conference back to David Campbell, President and CEO for closing remarks.
Thank you. We appreciate all of you joining this morning. Thank you for your interest in <unk> and have a great day that concludes the call.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise Johan during Q&A you can dial one one.
[music].
Yeah.