Evergy Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 29, 2024

There are 9 speakers on the call.

Operator

Thank you for standing by and welcome to the Q4 2023 Evergy, Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentations, there will be a question and answer session. Please be advised that today's call is being recorded.

Operator

I would now like to turn the conference over to your host, Mr. Peter Flynn, Director, Investor Relations. Please go ahead.

Speaker 1

Thank you, Valerie, and good morning, everyone. Welcome to Evergy's 4th quarter 20 23 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 2023 highlights, discuss the economic development outlook and provide an update on our regulatory and legislative agendas. Kirk will cover Q4 and full year results, retail sales trends and our financial outlook for 2024.

Speaker 1

Other members of management are with us and will be available during the Q and A portion of the call. I'll now turn the call over to David.

Speaker 2

Thanks, Pete, and good morning, everyone. Before we begin, we'd like to extend our deepest sympathies to the family of Lisa Lopez Galvan and all those who were impacted by the tragic events during the Chiefs Super Bowl parade. Kansas City and Chiefs Kingdom are grieving, but if there is one thing that I've learned during my time here, it's that both are very strong and very resilient. Moving to Slide 5, I'll open by describing the drivers for our 4th quarter earnings falling below our guidance. While we plan for normal weather, we know the importance of consistent financial execution and we are disappointed by these results.

Speaker 2

As you know, on the Q3 call, we narrowed our guidance range to $3.55 per share to $3.65 per share from our initial range of $3.55 to $3.75 due primarily to the timing of the Persimmon Creek Wind Farm shifting back a year. As shown on Slide 5, results for the year were $3.54 per share. Weather at the end of the year was a driver of the shortfall. For both November December and December in particular with a 23% decrease in heating degree days relative to last year, Weather was warmer than normal resulting in a variance of $0.06 in these 2 months alone. As Kirk will describe, weather adjusted demand was also soft in the 4th quarter relative to expectations, but we were able to offset those impacts leaving milder than normal weather as a driver.

Speaker 2

Our full year results reflect strong cost management with savings well beyond what was in our financial plan, which enabled us to offset the negative drag created by higher interest rates and lower than expected industrial load. In 2023, we reduced our O and M expenses by $129,000,000 equal to a year over year reduction of 12%. These efficiency gains reflect the hard work of the entire Evergy team who worked tirelessly throughout the year to advance our plan and our strategic objectives. In 2023, we also executed on our capital investment plan to improve reliability and resiliency, investing $2,300,000,000 in infrastructure to modernize our grid, replace aging equipment and advance our sustainability and affordability goals with the addition of the low cost Persimmon Creek Wind Farm. In early December, we completed a $1,400,000,000 convertible note financing to mitigate interest rate and refinancing risk at the holding company.

Speaker 2

Of note, this financing was contemplated in and supportive of our updated growth outlook that we announced on our Q3 earnings call. Last year, we made strong progress on reliability as well as is shown on Page 6. Relative to 2022, average outage duration and frequency as measured by Stadia and Safety improved by 10% and 9% respectively. I'd like to commend the outstanding work from our distribution and transmission teams and keeping the lights on for our customers and communities as the reliability gains reflect improvements to our outage management processes and the impact of our ongoing grid investments. Slide 6 also highlights the nearly 30% reduction in total costs that we have achieved since 2018.

Speaker 2

These cost savings involve a comprehensive multiyear program that touched every aspect of our business. Change is hard and involves tough decisions and efficiency gains of this magnitude necessarily involved major changes across Evergy over the past 5 years. The result of this hard work was affordability gains that we delivered to our customers. I'm proud and honored to lead the Evergy team that made this happen. On Slide 7, we introduce our 2024 GAAP and adjusted EPS guidance of $3.73 per share to $3.93 per share.

Speaker 2

The midpoint represents a 5% increase over the original 3.65 midpoint of our 2023 baseline year. We remain confident in our ability to deliver annual 4% to 6% adjusted EPS growth through 2026 and we are reaffirming that target today. Evergy's cost savings were the major enabler of the improvements in regional rate competitiveness that are shown on Slide 8. When factoring in the 2023 rate case settlements, Evergy has been able to limit cumulative rate increases in both Kansas and Missouri to 1% since 2017. That compares to an average increase in rates across our region of more than 11% and cumulative inflation of nearly 23%.

Speaker 2

Without question, the merger has delivered affordability gains and significant benefits to our customers and the communities we serve. On Slide 9, we highlight the outlook for economic development and demand growth in Kansas and Missouri, which is robust as it has been in decades. Our focus on affordability and regional rate competitiveness is an important contributor to this large pipeline and provides a foundation for our ongoing support of the tremendous opportunity in our states. There are currently $12,000,000 of active development projects evaluating our service territories representing 1.3 gigawatts of potential additional demand. The largest additions announced and under construction so far are the Panasonic electric vehicle battery manufacturing plant in Kansas and the Meta Data Center in Missouri.

Speaker 2

The Panasonic plant for its construction is already well underway is expected to be the largest EV battery plant in the world. As I will describe further for these successes to continue, the grid will require competitive access to capital and significant investment. In turn, ongoing successes will drive economic growth, which benefits all of our customers and helps to cover the fixed costs of our system more efficiently. Based on Panasonic Meta and projects announced to date, we expect 2% to 3% weather normalized annual demand growth through 2026 off of the 2023 base above our traditional base planning assumption of 0.5% to 1% annually. This includes incremental load from Panasonic and Meta starting in 2024 and continue to expand to an expected full run rate in 2026.

Speaker 2

Slide 10 lays out our updated capital expenditure forecast which has been extended through 2028. Our latest 5 year investment plan totals approximately $12,500,000,000 which represents a nearly $900,000,000 increase relative to our prior 5 year forecast through 2027. The program is expected to result in 6% annual rate base growth. The revised capital forecast incorporates the integrated resource plan filed in June of last year, which reflect a balanced approach that enables fuel diversification and a responsible portfolio transition. Nearly 55% of our planned investment is targeted towards transmission and distribution projects as we continue to modernize our grid to improve reliability and enhance resiliency.

Speaker 2

By replacing aging equipment and investing in smart grid technologies, we'll also enable further efficiency gains in serving our customers, which has been a hallmark of Everdew's strategy since our formation in 2018. Moving to Slide 11, I'll provide an update on our regulatory and legislative priorities at both Kansas and Missouri. As I discussed in our call last quarter, we have been working with stakeholders to position Kansas to take advantage of an unprecedented growth environment. Evergy is a key participant and we are doing our part to ensure that the state has affordable competitive rates. In Kansas alone, we have delivered over $360,000,000 in operating efficiencies and customer bill credits.

Speaker 2

For this success to continue, the state's infrastructure will require significant capital investment to ensure sufficient capacity, competitive levels of reliability and resiliency and a modern grid that delivers the flexibility and benefits that customers demand. In our discussions with stakeholders the past few months, we have emphasized that attracting the necessary investment cannot be done without a regulatory environment that enables the flow of competitively priced capital. Investors have a choice where they direct capital. And for Evergy and Kansas to compete, investors require debt and equity returns commensurate with current market conditions and competitive with peers, a clear and stable framework around regulatory capital structure to guide how we capitalize our utilities, an opportunity to earn the returns we are authorized and timely recovery invested capital, both now and in the future. Without these elements, our investment proposition loses attractiveness relative to our peer utilities to benefit from more robust capital programs, more attractive realized returns and more predictable and stable regulatory mechanisms.

Speaker 2

An imbalanced investment proposition challenges our ability to have the infrastructure in place to compete for economic development and by extension challenges the shared goal of Kansas stakeholders to attract new businesses and their jobs and investment. The best way to ensure competitive rates over the long term is economic growth. To further that goal, Evergy and a coalition of economic development organizations, business interests and customers introduced House Bill 2,527 in Kansas earlier this year. The bill incorporated multiple elements to establish a fair and competitive framework for electric infrastructure investment, including provisions allowing for the use of plant and service accounting or PISA, construction work in progress for large power plant investments, and enhanced large customer economic development rates among other features. Discussions relating to HB2527 are ongoing and we are working with parties toward achieving a constructive compromise that supports our shared goal of advancing economic development and growth in Kansas.

Speaker 2

We would like to thank the legislative leaders involved in these discussions, Kansas Corporation Commission staff, representatives from CURB, industrial stakeholders, the Governor's office and many other stakeholders for their participation and engagement. I know that many of our investors and analysts follow the legislative proceedings closely. So please stay on the lookout as the process advances in the coming weeks. And of course, we will provide a further update on next quarter's call. By May, we also expect to file our triennial integrated resource plan in both states.

Speaker 2

The planning process is well underway and given the significant changes we factored into our 2023 IRP, including IRA tailwinds, updated construction costs and higher capacity requirements in the Southwest Power Pool, we anticipate a filing similar to last year's, but with some adjustments to reflect ongoing changes in marketing conditions and economic development prospects. Pivoting to Missouri, we filed the Missouri West rate case on February 2. The procedural schedule was jointly filed by the parties earlier this week. Subject to approval of the schedule, we anticipate intervener direct testimony in June, followed by rebuttal testimony in August, the settlement conference in the second half of September and potential hearings in late September October. We look forward to working collaboratively with the Missouri Public Service Commission staff and our stakeholders to achieve a constructive outcome for our Missouri West customers.

Speaker 2

An element of our rate request is our potential investment in the Dogwood Energy Facility, an operating combined cycle gas plant identified in our 2023 IRP. Last November, we entered into an agreement to purchase a 22% share of the plant or 143 megawatts of summer capacity and we subsequently filed a request for an operating CCM. Earlier this week on February 26, a stipulation and agreement with no parties opposed was filed requesting that the Missouri Public Service Commission grant the operating CCM. Dogwood is a low cost generation resource with a solid operating history to support our Missouri West customers. The transaction is expected to close in the Q2 subject to commission approval.

Speaker 2

On February 23, we closed the financing to securitize extraordinary costs from winter storm Yuri being carried at Missouri West providing $323,000,000 in net proceeds. As a result, the costs incurred from the storm will be spread over 15 years to better manage the impact on customer bills. This was a lengthy process and we appreciate the hard work of our treasury team, PSC staff and other parties in getting it over the finish line. Bills have been proposed in Missouri House and Senate that would extend PISA to 2,040 and modify provision of the statute to cover new natural gas generation. House Bill 2,541 passed out of committee and Senate Bill 1422 awaits further action.

Speaker 2

Similar to our efforts in Kansas, we'll continue to engage with our Missouri stakeholders regarding constructive mechanisms that support natural gas investments as these are important resources identified in our integrated resource plan. I'll conclude my remarks with Slide 12 which highlights the core tenants of our strategy, affordability, reliability and sustainability. Keeping rates affordable for our customers remains at the forefront. We advanced affordability in 2023 with our Kansas rate case settlement, maintaining the momentum of the past 5 years. We have saved more than $1,000,000,000 in operating costs since the merger, enabling Evergy to offset steep inflationary pressures, while at the same time ramping up investment and reliability and helping to bolster economic development.

Speaker 2

We're pleased by our progress in improving regional rate competitiveness and keeping our rate trajectory well below the rate of inflation. As our capital plan outlines, we continue to invest in grid modernization, ensure reliability and strong customer service, building on the momentum reflected in our significant improvements in Sadie and Safie in 2023. Our overriding sustainability goal is to lead a responsible, cost effective energy transition. In 2023, we added Persimmon Creek, a low cost emissions free resource to serve our Kansas Central customers. We remain committed to a long term strategy to reduce CO2 emissions in a cost effective and reliable manner.

Speaker 2

Our goal is to achieve net zero emissions, carbon emissions by 2,045 with an interim target of 70% reduction, both relative to 2,005 baseline. Achieving our targets will no doubt be dependent on external factors such as new policies and regulations and the advancement of new technologies. Our mission is to empower a better future and our vision is to lead the responsible energy transition in our region always with an eye on affordability and reliability along with sustainability. I will now turn the call over to Kirk.

Speaker 3

Thanks, David, and good morning, everyone. Turning to Slide 14, I'll start with a review of our results for the Q4. For the Q4 of 2023, Evergy delivered adjusted earnings of $61,100,000 or $0.27 per share and that's compared to $68,600,000 or $0.30 per share in the Q4 of 2022. As shown on the slide from left to right, the year over year decrease in 4th quarter earnings was driven by the following. First, a 14% decrease in heating degree days led to a $0.05 decrease in EPS for the quarter.

Speaker 3

This impact was driven by warmer than normal weather over the final 2 months of 2020 3, which drove a $0.06 variance to our plan. December weather was particularly mild, which led to a 23% reduction in heating days in that month alone. Weather normalized demand declined by 2.4%, primarily driven by lower residential and industrial demand, contributing to a $0.06 decrease in EPS. A $29,500,000 decrease in adjusted O and M reflecting continued execution on driving cost efficiencies drove a $0.10 increase. The net impact of higher depreciation and amortization was 0.07 dollars for the quarter, which includes the partially offsetting impact of new retail rates.

Speaker 3

Higher interest expense drove a $0.07 decrease. The Q4 2022 charge associated with the Kansas Earnings Review and Sharing Program or ERSP, which is no longer in effect drove a $0.06 positive variance. And finally, the net impact of tax items drove a $0.06 increase. I'll turn next to full year results, which you'll find on Slide 15. For the full year 20 2023, adjusted earnings were 800 and $15,600,000 or $3.54 per share and that's compared to $853,800,000 or $3.71 per share for the same period last year.

Speaker 3

Again, moving from left to right, our full year EPS drivers compared to 2022 include the following. Our 2023 results reflect a 6% year over year decrease in cooling degree days and a 13% decrease in heating degree days, which drove a $0.28 decrease in EPS versus 2022. When compared to normal, weather drove an estimated $0.02 favorable impact in 2023. Weather normalized demand contributed $0.02 year over year primarily driven by a 0.8% and 1% increase in residential and commercial demand respectively, which were partially offset by 3.6% decline in industrial demand. I'll provide more context around demand later in the presentation.

Speaker 3

Higher transmission margin resulting from our ongoing investments to enhance our transmission infrastructure drove a $0.04 increase And to help offset challenges from higher interest expense, regulatory lag, weather and demand, we accelerated cost management initiatives, which drove a positive $0.41 variance year over year. A $0.26 decrease from higher depreciation expense and then higher interest expense of $0.41 and a $0.05 decline in AFUDC drove a $0.46 decrease, dollars 0.10 of higher year over year proceeds from company owned life insurance, a $0.09 positive variance related to the non recurring ERSP charge in 2022, which was subsequently reduced in 2023 based on the final refund amount. And finally, tax items drove us increase of $0.17 Turning to Slide 16, I'll provide a brief update on our recent sales trends. Overall, 2023 weather normalized demand growth was flat relative to last year. Despite some fall off in the 4th quarter, which may in part reflect the art form of weather normalization, residential and commercial growth were both solid for the year with 0.8 and 1% positive annual growth respectively on a weather normalized basis.

Speaker 3

In contrast, industrial demand was down 3.6% for the year. Through the 1st three quarters, this decline was driven by lower usage at 2 of our largest refining customers, one of which was offline in early 2023 for a planned outage, while the rest of our industrial customer base usage was generally in line with expectations. This dynamic reversed in the Q4. While demand from refining customers began to recover, we saw a contraction in demand from other industrial customers during the Q4. That was driven in part by plant retooling and expansion projects being undertaken by a number of our industrial customers in the food processing and additive sector.

Speaker 3

Given that several of these events are expected to be temporary, we expect industrial demand to partially recover as we move into 20 24, though not all the way back to 2022 levels. Net next year, we project approximately 1.1% growth in industrial load on a same store basis. We also expect to see an uptick from new large customers beginning in 2024, with a more notable pickup in 2025 and 2026 as Panasonic, Meta and others come fully online. As David outlined earlier, in total, we're forecasting 2% to 3% annualized weather normalized growth in demand from 2023 to 2026, reflecting the impact of those large new customers on top of base demand growth of 0.5% to 1%. Our demand projections continue to be supported by strong local label market as Kansas and Kansas City metro area unemployment rates remain below the national average of 3.7 percent.

Speaker 3

Moving to Slide 17, I'll review the expected year over year drivers which lead to the midpoint of our 2024 EPS guidance range which is $3.73 to $3.93 per share. Starting on the left of the slide and beginning with 2023 adjusted EPS of $3.54 we expect a $0.15 increase from demand in 2023, which includes the impact of demand growth, net of the EPS contribution from weather in 2022. We expect a 1.8% increase in total weather normalized demand, which includes the contribution from new industrial load as customers like Meta and Panasonic begin to come online. Excluding the load from these new customers, we expect same store demand growth of approximately 1.2%. $0.25 of EPS from new retail rates, which reflects both a net revenue increase of $41,000,000 in Kansas, as well as the impact of the amortization of the company owned life insurance regulatory liability.

Speaker 3

Higher transmission margins are expected to deliver $0.12 in 2024 as we continue to make investments to improve our transmission infrastructure. We expect a year over year increase in O and M of less than $20,000,000 driving a $0.06 of lower EPS primarily due to one time items in 2023 driven by changes in capitalization. Net of these items, we retain the benefit of over 100,000,000 dollars in incremental O and M savings achieved last year as we move into 2024. The remaining drivers consist of increased D and A, small increase in interest expense and a $0.03 net decrease from other items. And finally, on Slide 19, I'll wrap up with an overview of our long term financial expectations.

Speaker 3

We're reaffirming our long term adjusted EPS growth target of 4% to 6% through 2026 based on the original 2023 adjusted EPS guidance midpoint of $3.65 and continue to expect to achieve this growth without the need for new equity. Our updated 5 year capital plan for 2024 through 2028 totals $12,500,000,000 and implies rate base growth of approximately 6% from 23 to 28. We've included some additional disclosures in the appendix of today's presentation, including a breakdown of planned expenditures by category and by utility, which we hope you'll find helpful. We remain focused on and committed to executing on our operational financial targets, continuing to enhance reliability and regional rate competitiveness, while advancing constructive regulatory policies to support competitiveness and economic development. And with that, we're happy to open the call for questions.

Speaker 4

Thank you.

Operator

Our first question comes from the line of Nicholas Campanella from Barclays. Your line is open.

Speaker 5

Hey, good morning everyone. Thanks for all the details today.

Speaker 2

Good morning, Nick.

Speaker 5

Good morning. Hey, so appreciate the update on Kansas. I guess, you noted discussions are ongoing. Could you help just give us any kind of color on what that includes versus, I guess, the initial proposals? I'm just kind of thinking depreciation deferrals, equity layer ROE, just how to think about the components if you have any color?

Speaker 5

Thank you.

Speaker 2

So thanks Nick for the question. We won't get ahead of the process in terms of describing the details. I just emphasize that we're working hard with parties toward achieving a constructive compromise. And I really can't thank the parties enough. This is hard work.

Speaker 2

It's hard work going through the legislation we added several weeks. So that's legislators, KCC staff, curb, industrial stakeholders, governor's office, others. So we're working with those parties. And what I'll describe is, this is a very transparent process as you know. So continue to watch developments in the latest legislative process that we're able to reach a constructive compromise because there's a lot of shared alignment on the goals of economic development growth.

Speaker 2

Then you'll see the next steps would involve going to the House Committee and from that to the full House and hopefully on to the Senate. So keep an eye on what's going on and let us sit at process, that's the best way to get a sense for where the discussions are going and what they include. But again, we want to really thank the parties as we continue to work with.

Speaker 5

Absolutely. Appreciate that. And then I guess just quickly on I guess the credit side, you're at 15% of photo debt. I think you're targeting greater than 15%. So can you just help us understand where you are in this new plan?

Speaker 5

How you're trending? And then I know you've reaffirmed no equity needs, I think, through 26%. How do we think about any potential equity needs beyond that? Thanks.

Speaker 3

Sure. Hey, Nick, it's Kirk. So building on top of that, roughly 15% pro form a, which includes adjusting for the impact of the successful securitization and obviously the impact of new rates, which we know moving into Kansas. If you look at some of the components as we move into 2024, for example, there are other items that are additive to numerator, for example. Most notably, the ongoing impact with minimal basically no lag from our transmission investments, so that increases numerator.

Speaker 3

So we expect a surplus over that threshold as we move into 2024 And we expect to utilize that surplus as we move forward into 2025 and 2026 augmented by continued robust generation of operating cash flow because as you know we're not a current taxpayer. So those two components continue to give us confidence that we can use that surplus that we're blagging into 24 on those ratios to fund that capital investment program without that need for new equity. Beyond 2026, we haven't actually said, at some point, we will pivot to equity needs. We want to do that prudently. We want to do that on a measured pace, both from a standpoint of keeping a reasonable trajectory on EPS, but also with equal importance maintaining those credit ratios, which obviously allow us to maintain those ratings, which is important from an affordability standpoint for our customers.

Speaker 5

All right. Hey, I appreciate it. Thank you.

Operator

Thank you. One moment please. Our next question comes from the line of Michael Sullivan of Wolfe. Your line is open.

Speaker 6

Hey, good morning. Thanks for the update.

Speaker 2

Good morning. Wanted

Speaker 6

to ask just on the CapEx update when we kind of break it out by jurisdiction and how much thought you gave to potentially shifting amongst your jurisdictions based on some of the outcomes that we got. It looks like Kansas Central was still up, I think, plan over plan. Yes, just how do you think about that in light of the outcome you got last year? I know a bunch of your peers have maybe taken more aggressive approaches in terms of shifting between jurisdictions based on outcomes?

Speaker 2

Yes. Mike, I think it's a good question. I think that we and as you've seen a lot of our peer utilities, their pace of rate base investment was already higher than ours in terms of their annual rate base growth and many of them have increased them significantly recently. So the gap is widened. So if you look at our break it down by jurisdiction, you look at Kansas Central and Kansas Metro, the biggest source of increases in generation, particularly in the out years and that relates to a need for new dispatchable generation resources.

Speaker 2

If you look at the earlier years in the categories of kind of traditional T and D grid and other categories, there's a modest decline. And that's in the context of an inflationary environment for equipment and otherwise. So we're making the investments we need to ensure reliability and serve the new customers that are identified. But we do believe and this is a discussion we've had with stakeholders that to really take advantage of the opportunities in Kansas, There's an intersection with the regulatory mechanisms that are in place. So when you drill down to it, you'll see that the modest upticks in cans are really driven by the need for the new generation in the out years, particularly new dispatchable generation.

Speaker 6

Okay. And kind of just along that, how influenced can these plans be to the outcomes you get in the legislative session this year? Could we see further shifting to the extent that you do or don't have success?

Speaker 2

Mike, I think that's a great question. If we part of the dialogue with our stakeholders in Kansas is around the need for incremental investment. If we're able to reach a constructive compromise that reflects shared belief in the infrastructure investment needed, that's really what's underlying the push here. I do think you'll see us evaluate our capital plan for incremental opportunities and pursue those. Now we'll do that in a systematic process, of course, and make sure that that's a process where there's full transparency to both our of course our stakeholders in Kansas and the market.

Speaker 2

But I think you will see these factors do go hand in hand. And underlying reflection of support for that kind of infrastructure investment will be matched by an increase in that kind of investment, which we think will be really beneficial as Kansas pursues the growth and development opportunities.

Speaker 6

Okay, great. And then my last one, just on the Missouri West case, looks like you got a settlement on the Dogwood plant. Beyond that, any particular areas where you're expecting the most pushback?

Speaker 2

Mike, it's a pretty straightforward rate case. It's largely we had a rate case 2 years ago. So our 2022 and 2023 rate cases were after long stayouts, first since the merger. So this one's a little more straightforward in that regard. So the biggest elements, I think you'd see it reflected in the charts we've been posted on there are incorporating capital additions and incorporating the impacts of higher cost of capital environment.

Speaker 2

There is some transmission expense related to a generation plant that's part of it, that's relatively modest. But for the most part, it's a pretty straightforward rate case. A lot of the complicated issues that I know we discussed at length with you going in the last one, thankfully, were resolved in that one. So it's generally a pretty straightforward rate case centered on the investments we've made since then and the authorized returns related to it.

Speaker 6

Good to hear. Thank you.

Speaker 2

Thank you.

Operator

Thank you. One moment please. Our next question comes from the line of Paul Zimbardo of Bank of America. Your line is open.

Speaker 7

Hi, good morning team. Thanks a lot. Good morning. I promise I will not ask about the legislation. The first one I had was

Speaker 2

I believe it when I hear it.

Speaker 7

You'll hear it. Just in terms of the base demand, the kind of the new incremental load customers, the 2% to 3% versus the base of 50 basis points to 1%. Is there a good way to think about like an earnings sensitivity or just what the contribution of that is through the plan?

Speaker 3

In terms of earning sensitivity, I wouldn't call it linear from that perspective. These are obviously large industrial customers, which come with rate incentives there. It is certainly additive from a tailwind perspective, but difficult to give you specifics beyond that because it literally to do with obviously the individualized contract that those customers negotiate going forward. And it is a ramp up period, right, that 2% to 3% on top of that 0.5 percent to 1% really builds over time. We start to see a modest contribution in 'twenty four, but it really kind of reaches its pace as we move into 2026.

Speaker 2

I would just echo Kirk's comment though on this is David that these are industrial customers, which as you know, the profile of those are helpful, important for covering fixed costs, but generally less impact than equivalent load growth in commercial or residential.

Speaker 7

Okay. Yes, understood. And then the second I had and not to get too technical, but

Operator

I know this is a

Speaker 7

pretty big increase in CapEx for 2028 on the generation side and you give year end rate base in your guidance for 2028. Is there a large CWIP balance or just anything we should think of like I could there be faster growth in that period with CWIP on top of rate base growth versus the 6% if that makes sense?

Speaker 3

That is certainly a possibility. I mean, certainly that's natural gas plants aren't a you write a check at the end right before the DoD. So we're going to be building that that informs capital investment over time. And that obviously entails a building balance in CWIP. Certainly getting timely recovery on CWIP is one of our objectives as we look for kind of reforming of the type regulatory mechanisms that are designed to incent that.

Speaker 3

So as we move forward on some of the legislation, which we won't like that like the natural gas plants sort of the back end of the plant.

Speaker 2

I think the 6% rate base growth is indicative of the overall capital planning trajectory is what I described and you can follow-up on some of the details. What I'm emphasizing also is that we're pursuing a pretty balanced portfolio as you'll see and I actually think you've seen that from a number of our peer utilities as well with the growth that we're seeing. Adding new dispatchable resources is also an important part of the mix and that generally has pretty wide support in our jurisdictions And it's an important part of the investment program. So adding gas while we're adding wind and adding solar, leading that responsible energy transition, but with a balanced portfolio is an important part of the mix. And I think we've got alignment with our stakeholders in our states around the importance of doing that.

Speaker 7

Absolutely. Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. One moment, please. Our next question comes from the line of Paul Fremont of Laden Thalmann and Company. Your line is open.

Speaker 8

Thanks. It looks like you've got a lot of legislative and regulatory initiatives. Can you maybe just prioritize for us in your mind which are the ones that are most important from your perspective?

Speaker 2

Sure. So I think as volume reflected by the number of minutes devoted to the topic, our legislative initiative in Kansas, really the broader effort to work with policymakers and stakeholders in Kansas to support electric infrastructure investment, to support economic development and growth. That I'd list as our top priority. There are other mechanisms that we were talking about the same parties who we'd work within the regulatory front and otherwise. So I think the importance of having constructive dialogue, alignment around those shared objectives is key.

Speaker 2

But that's our I would characterize that as our number one legislative priority. We have some activities underway in Missouri as well, and those are important. They're also reflective of important priorities. But it's fair to say that the prospects in Missouri legislature this year in general for legislation are more challenged. I think there's nearly double digit number of state legislators running for statewide office.

Speaker 2

It's an election year. So the overall dynamics in Missouri are less likely to lead to legislation. But I'd also say that there's maybe a lower priority there. Very constructive legislative actions taken in Missouri the last couple of years with extension of PISA, some other changes to PISA, the addition of property tax rider. So item signs that are relative priorities on the Kansas side and the mechanisms that we've talked about there.

Speaker 8

Sort of second question, would a slower level rate of dividend increase sort of improve your ability to deliver on sort of the EPS growth target that you have?

Speaker 3

I would say marginally from that standpoint. Obviously, we had a little bit of a lower increase, obviously commensurate with our change in the growth rate. But it's very important for us to have a good blend of obviously capital appreciation and current returns. So we want to be mindful of that delivering the right mix for our investors. As we pivot to maybe potentially a little bit lower or commensurate with our growth rate, The reduction in the dividend really I'd say sort of contributes to our ability relative to higher levels of dividend growth to fund that capital expenditures, right.

Speaker 3

It helps us maintain those all important credit ratios that I talked about before.

Speaker 2

And just to clarify, Kirk was referring to a reduction in the rate of dividend growth, not a reduction in the dividend, of course. So we had a 5% we raised our dividend growth 5% last quarter consistent with the midpoint of our earnings growth rate range. I think you raised a good question just stepping back around the mix of what's your dividend payout ratio as you think about the overall funding for your capital plan. We've described that we don't see any issue equity through 2026. So I think that in particular becomes a factor that our peer companies who are issuing equity seek to balance of what's the right payout ratio or otherwise.

Speaker 2

We've described a target payout ratio of 60% to 70%. That remains our payout ratio, but being thoughtful about our the growth rate in our dividend as our earnings grow and keeping those in tandem and thinking about that payout range is probably how we're considering.

Speaker 8

And then last question for me. It sounds like you could still raise capital spending levels without issuing equity. Is there sort of a limit to that increase where or what would be the threshold where you would have to issue equity?

Speaker 2

So we won't give you the exact number. Obviously, those things go in tandem. You can't if we raised our capital plan very significant amount, you have to think about the funding approach to that. And the governor is really what Kirk described earlier. We look at our credit ratios and maintaining the ratios we look at in the Moody's threshold.

Speaker 2

So as we consider changes to our capital plan, there's always room in that capital plan. It's just a matter of how significant the changes would be. But in general, we've described with the capital plan we have, even with the changes we've implemented that we're reaffirming that we don't expect the issue we have to be through 2026. We made major changes to the capital plan. We'd be looking at the funding approach at the same time.

Speaker 8

Okay. And then I guess if you were to sort of go to incremental level, what percent of would you see as being funded with equity?

Speaker 2

Well, again, I would describe we don't see in our capital plan a need to issue equity through 2026. So I think you're probably getting ahead of the aim a little bit with that question. I think what we would relates to the question of it's not formulaic, but the discussions we're having in Kansas, in particular, about how do we fund electric infrastructure investment to support economic development and growth. A lot of that comes down to T and D investment and having that in place and where you put that and how you put that in place. So it will be much more tactical around the timing and the positioning of where we make some of those investments to support the growth.

Speaker 2

So it's not equivalent to adding a huge new solar farm or a big new gas plant where you got orders of magnitude that drive the kind of changes you may be discussing. So we'll look at that on an integrated basis, but we're pretty thoughtful about how we approach our financing plan and how we think about the timetable for when we issue equity. So I think your question is signaling some kind of major change. I wouldn't think about it that way. I'd really think about how we're going to be funding and where we're going to be opportunities to fund this, particularly T and D and some grid work to support economic development and growth in Kansas.

Speaker 2

That's what we're working towards with our stakeholders.

Speaker 8

Great. Thank you very much.

Operator

Thank you. One moment please. Our next question comes from the line of Paul Patterson of Glenrock Associates. Your line is open.

Speaker 4

Good morning. How are you? Good morning, Paul. Very just one sort of quick sort of follow-up question from Paul Zimbardo's on the Slide 9. Just as opposed to the earnings impact associated with these industrial customers, you mentioned that is an impact from spending more fixed costs over greater megawatt hours, I guess.

Speaker 4

Could you give us a flavor as to what that is? I mean, if you don't have it, that's cool. But I'm just wondering if what is kind of the rate impact of these industrial development initiatives, I guess?

Speaker 2

Well, it always depends on what rates negotiated, of course. A lot of the very large loads get special contracts. I think the best way to describe it, we actually have a waterfall that goes through 2023 to 2024. So we show what the overall impact of weather and demand is. In that, it's part of the improvement that we see in the trajectory from 23 to 24.

Speaker 2

But in general, the industrial load, while it does help and drives incremental cost savings and opportunities, it doesn't have the same level of impact as residential or commercial because of the rate structure. But I think you get a good flavor of how that translates because we give the growth rate estimate and the impact on EPS and that I think it's our waterfall slide in the back of the document. So we can walk through that with you offline just to see how they translate. But it's a any savings that are generated, of course, through rate cases are going to be a share. So if you one of the best thing is I described in my note, the best way to keep rates affordable is through growth.

Speaker 2

And that affordability gain in the near term, it can have some EPS impact. But we're going to have a regular cadence of rate cases now. That's the great benefit of it is that's what's going to keep rates affordable for customers because of course that gets shared.

Speaker 4

Okay. Thanks so much.

Speaker 1

Thank you.

Operator

Thank you. And that's our time for the Q and A today. I'd like to turn the call back to David Campbell for any closing remarks.

Speaker 2

Thank you, Valerie, and thanks everyone for your interest and time this morning. That concludes the call today. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.

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Key Takeaways

  • Evergy’s Q4 and full-year 2023 earnings fell below guidance largely due to warm winter weather (23% fewer heating degree days in December) and softer weather-adjusted demand, creating a combined $0.06 EPS drag in Nov/Dec.
  • The company delivered $129 million (12%) in O&M savings in 2023 and invested $2.3 billion in grid modernization, driving a 10% improvement in average outage duration and a 9% reduction in outage frequency.
  • 2024 GAAP and adjusted EPS guidance of $3.73–3.93 per share represents a 5% midpoint increase over 2023, and Evergy reaffirms its target of 4–6% annual adjusted EPS growth through 2026 without new equity issuance.
  • A robust $12 billion economic development pipeline (1.3 GW potential), including the Panasonic EV battery plant and Meta data center, underpins an expected 2–3% annualized demand growth through 2026.
  • Key regulatory priorities include advancing House Bill 2527 in Kansas to enable competitive capital recovery and rate stability, plus rate case and PISA extension efforts in Missouri to support investments in natural gas generation and grid resilience.
AI Generated. May Contain Errors.
Earnings Conference Call
Evergy Q4 2023
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