Evergy Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 11 speakers on the call.

Operator

Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Pete Flynn, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, Brianna, and good morning, everyone. Welcome to Evergy's Q1 2024 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, Chairman and Chief Executive Officer and Kirk Andrews, Executive Vice President and Chief Financial Officer. David will cover 1st quarter highlights, our updated integrated resource plan and provide an update on our regulatory and legislative priorities. Kirk will cover in more detail our Q1 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

Thank you, Pete, and good morning, everyone. I'll begin on Slide 5. This morning, we reported Q1 adjusted earnings of $0.54 per share compared to $0.59 per share a year ago. Relative to last year, this quarter's results were driven by higher operations and maintenance expense, depreciation and amortization expense and interest expense, partially offset by new retail rates and transmission margin. Unseasonably warm weather was also a factor.

Speaker 2

Heating degree days were 11% below normal for the quarter, negatively impacting our results by an approximate $0.07 per share. Kirk will discuss these earnings drivers in more detail in his remarks. In terms of reliability, we've experienced a good start to the year. Through March, our average added duration and frequency measured by Sadie and Safie are trending favorably relative to our targets demonstrating the benefits of our continued grid modernization investment and the hard work of our transmission and distribution teams. I'm also pleased to report that we're nearing completion of the 26 Wolf Creek nuclear refueling outage consistent with our plans.

Speaker 2

Wolf Creek generates around 1200 megawatts of non carbon emitting energy enough to power more than 800,000 homes. The plant employs over 700 people and that number effectively doubles during outages. I'd like to thank everyone involved for their hard work and focus on sustaining the excellent operational performance of the plant. Our team's execution has enabled a solid start to the year despite the mild weather and we are reaffirming our 2024 adjusted EPS guidance range of $3.73 to $3.93 per share as well as our target long term annual adjusted EPS growth target of 4% to 6% from 2023 to 2026. Slide 6 highlights our triennial integrated resource plan or IRP, which was filed on April 1 in Missouri and will be filed on May 17 in Kansas.

Speaker 2

This year's IRP reflects the impacts of updating our long term expected load growth, including the addition of the recently announced Google data center in Missouri, as well as other important inputs such as resource adequacy requirements of the Southwest Power Pool, construction cost estimates and commodity price forecasts. I'd like to briefly touch on the new rules recently issued by the Environmental Protection Agency. Our IRP process includes consideration of environmental rule, SVP rules and other regulatory requirements. So the EPA's newly issued rules will play a role in our resource planning going forward. Our overarching goal in the IRP process is to identify the most cost effective and resilient plan that reliably serves our customers across uncertain future scenarios.

Speaker 2

We believe that renewable and natural gas additions as shown in our IRP are being planned in a manner that will allow Evergy to reduce carbon emissions, take advantage of best in class efficiency and support economic development in our service territory, while striving to minimize the impact on affordability and ensuring that we can provide reliable electric service. We are assessing the potential impact of the new EPA rules from an affordability and reliability perspective, as the rules would likely require significant incremental investment relative to what is currently in our IRP. For example, carbon capture and storage is an important element in the new greenhouse gas rule. At present, carbon capture and storage technology is not commercially demonstrated at scale on existing plants. Along with costly and as yet unproven retrofitted control equipment that require pipeline and storage infrastructure which are not in place in our region.

Speaker 2

The EPA rules are expected to face legal challenges and we will monitor those developments closely. As a reminder, in 2023, nearly half of the energy that we generated for retail customers came from carbon free resources, reflecting the contributions of our Wolf Creek Nuclear Plant and the 4,600 Megawatt portfolio of renewable resources that we either own or contract through long term power purchase agreements. Evergy has invested significantly to enable our fossil units to meet existing environmental standards, operate reliably and be available to support our customers when called upon. We continue to take a balanced forward view of generation needs as shown through our IRP, which includes significant new solar, wind and natural gas balanced against the pace retirements of our coal fleet. In aggregate, the 2024 preferred plan includes 5,800 megawatts of resource additions through 2,030 representing an increase of 1500 megawatts over the next 10 years when compared to the 2023 preferred plan.

Speaker 2

As our generation fleet evolves, we are focused on achieving a responsible balance between renewables, which are non emitting and have low or negative marginal costs, but are intermittent and both new and existing thermal resources, which have higher marginal costs fuel and O and M, but can be dispatched to meet customer demand when they are needed most. The ultimate goal of this balance is to ensure reliability and affordability for our customers as we advance a responsible transition of our generation fleet. This transition will require sustained investment over the coming years and will incorporate the most recent IRP and its higher levels of new generation when we provide an update to our capital plan in the Q3 earnings call later this year. On Slide 7, we highlight details about 3 customers, Google, Panasonic and Meta, which represent major economic development wins in 3 of our 4 jurisdictions. In aggregate, demand from these three customers represents approximately 7 50 megawatts of load and each will be the largest customer in their respective jurisdiction by a wide margin.

Speaker 2

The overall economic development pipeline continues to show promise in both Kansas and Missouri with more than $10,000,000,000 of projects considering locating in our service territories. We are very excited to work with these potential customers as they consider our region. As part of the exercise alongside the economic development rates that are in place in both Kansas and Missouri, we are looking at rate design elements to ensure that there is appropriate and adequate recovery associated with large new loads. More broadly, our strategic focus on affordability and regional rate competitiveness is an important contributor to this large pipeline and provides a foundation for our support of the tremendous economic potential in our states. As shown on Slide 8, when factoring in economic development in these large including the recently announced Google data center, we are extending our weather normalized demand growth forecast of 2% to 3% to 2028 off of the 2023 base, which previously ran through 2026.

Speaker 2

Moving to Slide 9, I'll provide an update on our regulatory and legislative priorities in both Kansas and Missouri. I'm very pleased to start by discussing House Bill 2,527 in Kansas, which becomes effective on July 1 this year. The passage of HB 2,527 signals the support of Kansas legislators, regulators and stakeholders for infrastructure investment in support of economic development and the importance of a competitive and constructive regulatory framework for that infrastructure investment. It is an exciting time in our region as reflected by the significantly higher sales growth forecast relative to recent history that the business has brought. In terms of financial impact, the PISA provisions in HB 2,527 serve to mitigate regulatory lag between rate cases very similar to how it works in Missouri.

Speaker 2

The construction work in progress provisions that apply to new natural gas units also demonstrate Kansas' support for our plans to invest in new Nick gas fired generation. For our current capital expenditure plan, many of you have asked to quantify the financial impact relative to not having HB 2,517 in place and how it helps to reduce the gap between allowed returns and actual realized returns. Under the provisions of the new law, in the 1st year following a rate case at our current investment levels, the impact is roughly $0.03 to $0.04 per share. If we go 2 full years between rate cases, the impact is roughly $0.10 in the 2nd year. And as we've described, we expect our cadence of rate cases going forward to be roughly every other year, though that won't be true for every jurisdiction.

Speaker 2

Of course, that estimated impact is a standalone view of a single item and does not factor in any other potential drivers such as changes in interest rates or changes to the capital plan just to cite 2 examples. Overall, the most important aspect of the passage of HB 2,527 is the alignment that it reflects in Kansas about a competitive framework for investment as we respond to historic economic development opportunities. I'd like to thank legislative leaders, Kansas Corporation Commission staff, representatives from CURB, industrial stakeholders, the Governor's office and many other stakeholders as well as the Evergy Public Affairs team for their participation and engagement in getting this legislation passed. I also want to highlight the passage of Senate Bill 410 which provides a 10 year property tax exemption for newly constructed natural gas units. The benefits of this exemption will be shared with our customers.

Speaker 2

This bill further reflects Kansas' support for our planned natural gas investments, which are a crucial aspect of our long term resource planning to meet the demands of our growing customer base and ensure reliability. On May 17, we will file our 2024 IRP with the Kansas Corporation Commission, provide our outlook for Kansas Central similar to what we provided in our Missouri IRP filing. Now pivoting to Missouri, we continue to work our way through our pending general rate case in Missouri West. On June 27, staff and other interveners will file their direct testimony and rebuttal testimony is due by August 6. During the subsequent weeks, parties will file true up and true rebuttal testimony followed by a settlement conference around September 23.

Speaker 2

Hearings will occur in late September through early October and revised rates in Missouri West will go into effect in January 2025. We look forward to working collaboratively with Missouri Public Service Commission staff and our stakeholders to achieve a constructive outcome for our Missouri West customers. Regarding Missouri legislative initiatives, language to amend the PISA statute has passed the House and awaits further action in the Senate. Key provisions would amend the PISA statute to include new natural gas units at a 90% deferral and extend the Peace of Sunset to 2,035. Discussions around the topic and the need for new gas generation have been positive reflecting broad support.

Speaker 2

However, given the schedule and overall session dynamics, it will be hard to get any new legislation passed in the short time remaining for the 2024 session. This initiative is no exception. I'll conclude my remarks on Slide 10 which highlights the core tenants of our strategy affordability, reliability and sustainability. Our efforts to enhance affordability have yielded significant progress in improving regional rate competitiveness over the past few years. Our strategic plan is designed to sustain this positive trajectory.

Speaker 2

By prioritizing affordability, we contribute the robust economic development pipeline ahead of us and support the substantial economic potential within our state. Ensuring reliability is also a core element of our strategy as reflected by Sadie Safety, Grid resiliency and public safety. This also includes a focus on metrics relating to customer service, the commercial availability of our fleet, safety in all elements of our operations, including infrastructure investments. With respect to sustainability, we continue to advance the cost effective transition of our generation fleet. Since 2005, we've reduced carbon emissions by 53% and reduced sulfur dioxide and NOx emissions by 98% and 90% respectively.

Speaker 2

We look forward to ongoing progress along this path. 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 as well as sustainability. I will now turn the call over to Kirk.

Speaker 3

Thanks, David, and good morning, everyone. Turning to Slide 12, I'll start with a review of our results for the quarter. For the Q1 of 2024, Evergy delivered adjusted earnings of $124,700,000 or $0.54 per share, compared to $136,100,000 or $0.59 per share in the Q1 of 2023. As shown on the slide from left to right, the year over year decrease in Q1 adjusted EPS was driven by the following. First, similar to the Q1 of 2023, we saw milder than normal weather, particularly in the months of February March this year.

Speaker 3

And while the year over year adjusted EPS impact was flat compared to normal, weather was an estimated $0.07 unfavorable. Next compared to the strong demand recovery we saw in the Q1 of 2023, weather normalized retail sales declined by 0.5% primarily driven by lower commercial and industrial demand, but remained neutral to EPS. New retail rates in Kansas contributed 0 point the quarter. Higher transmission margin resulting from our ongoing investments to enhance our transmission infrastructure drove a $0.04 increase and O and M drove a $0.06 negative variance for the quarter. This was driven by significantly lower O and M in the first quarter of 2023, which resulted from the implementation of an early retirement program as well as timing of expenditures in 2024.

Speaker 3

And overall, our O and M outlook is flat for the balance of the year versus 2023. Next, higher depreciation and amortization expense due to increased infrastructure investment drove a $0.04 decrease. Higher interest expense drove a $0.03 decrease and based on our expected capital investments and the current outlook for interest our expectation for interest expense for the full year remains on target. And finally, other items drove a $0.01 decrease. Turning next to Slide 13, I'll provide a brief update on our recent sales trends.

Speaker 3

On the left side of the screen, you'll see weather normalized retail sales decreased by 0.5% over the Q1 of 2023, driven primarily by decreases in both commercial and industrial usage. While we did see further recovery from our largest refining customers in industrial, we also continued to see lower demand for other industrial customers. This was driven in part by plant retooling and expansion projects being undertaken by our customers in the food processing and additive sector, which began in late 2023. As these events are expected to be temporary with demand from these customers recovering thereafter, we expect industrial demand to recover as we move through 2024. This will be further augmented by the expected uptick as large customers from our recent economic development wins begin to come online later this year.

Speaker 3

And we expect a more notable pickup from these new customers beyond 2024 as we expect Panasonic, Meta and Google will fully ramp their usage to full run rates in 2026, 2027 and 2028 respectively. As David noted in his remarks, in total, we are extending our weather normalized demand growth forecast of 2% to 3% now through 2028. Our demand projections continue to be supported by a strong local labor market as Kansas and Kansas City metro area unemployment rates remain below the national average. And finally on Slide 14, I'll wrap up with an overview of our long term financial expectations. We are reaffirming both our adjusted EPS guidance range for 2024 as well as 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.

Speaker 3

Our recently updated capital investment plan, which includes $12,500,000,000 in infrastructure investment does not yet reflect and incorporate the impact of changes that were reflected in our 20 24 IRP. And as David mentioned earlier, we will provide you an update on our capital plan on our Q3 earnings call. In addition to allowing us to achieve our financial targets, executing on our investment plan advances our key objectives of ensuring affordability, reliability and sustainability over the long term. And with that, happy to open the call for questions.

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from the line of Nicholas Campanella from Barclays. Your line is now open.

Speaker 4

Hey, good morning. Thanks for taking my question and

Speaker 5

for all the updates today.

Speaker 2

Good morning.

Speaker 4

I just wanted to morning, morning. I just wanted to clarify, it's great to see the load growth extended to 2028 and I know you have the IRP coming in Kansas. Just how should we kind of think about you're doing a 6% rate base CAGR right now? And does this extend your visibility to that CAGR? Or do you see that kind of pressuring higher in this new plan?

Speaker 2

So, Nick, it's a great question. We won't get ahead of the capital expenditure update that we're doing in the Q3, but I will describe that you're right, our current expectation rate base growth through 20.28 is 6%. So that was the capital expenditure plan we put out in our Q4 call. It is at the low end of all of our peers, significantly below the average of our peers. And part of why HB 2527 was so important was because we do see a historic economic development opportunity and pipeline in our territory and investing to take advantage of that opportunity is a lot more difficult when the returns you can offer capital are not competitive.

Speaker 2

HB2527 significantly improves on that. So we've noted that we do plan to update our capital expenditure plan and that's really to reflect several things. One is the updated IRP does have higher level of generation addition. So we'll incorporate the 2024 IRP. We'll also incorporate economic development activities and wins we've had.

Speaker 2

And for example, the approval announcement is subsequent to our capital expenditure plan. There's been a lot of other activity as well. And obviously, we're continuing to look at the other grid modernization and other opportunities that we have. So we will we do plan to give a capital expenditure update on the Q3. We won't get ahead of what's in it.

Speaker 2

But there are several factors that I think will do create an upward bias, but we're always we always take a balanced approach. We're excited to be able to invest and take advantage of the opportunities

Speaker 6

that we see for our region.

Speaker 4

That's really helpful. And then I guess as we're kind of toggling CapEx and thinking about what could be incremental to the plan, can you just remind us where you stand on your current credit metrics, where you're trending for 2024? And then where that is relative to your minimums and just how to think about equity needs past the timeframe you've guided?

Speaker 3

Sure, Nick. It's Kirk. I'll focus on the Moody's metric, which we updated on our Q4 call. Due to a few items, most notably, the changes in the we were still waiting obviously to securitize the Missouri West where storm Yuri costs, which we successfully did subsequent to the year end. Pro form a for that and some other items going into 2024, we're about 15%, which is that threshold.

Speaker 3

But as we move into 2024, some of the elements where we get a more current and efficient return both from an earnings and a cash perspective, most notably our transmission investments in Kansas and other items, help contribute to the fact that we continue to see a surplus relative to that 15% threshold for Moody's. We expect to utilize that surplus to help supplement our operating cash flow to fund those capital investments without the need for new equity through 2026. And we don't we won't sacrifice those credit ratios in the process. So we feel comfortable with that surplus and our ability to utilize it and sort of maintain our ratios at or above the threshold through 2026.

Speaker 4

Okay. I appreciate it. Thank you.

Speaker 2

Thank you.

Operator

Thank you. And one moment for our next question. Our next question comes from Shar Pourreza of Guggenheim Partners. Your line is now open.

Speaker 5

Hey guys, good morning. Good morning, Shar. Good morning. Obviously, you guys have mentioned economic development. It's obviously been a key part of the slide decks.

Speaker 5

Data centers have obviously been kind of front and center for a lot of calls this cycle. Do you sort of have maybe a rule of thumb at this point for the amount of maybe transmission investments you're making with these sites? We've heard some of your peers like in Pennsylvania talk about somewhere between $50,000,000 to $150,000,000 Is that kind

Speaker 7

of fair to you?

Speaker 2

Shar, it really does vary depending on where the location is. Typically, there are incremental investments for very large loads. There are system investments, so it's always a little difficult if you peg the last bit of investment, it's all tied to that single customer. But when you have loads in the 100 of megawatts, given the size of our system and as you think of the share or our transition base, there's certainly some loads that will have investments around that level if you get to significant size. So it does vary depending on where it is and where it locates.

Speaker 2

We typically have not don't have a lot of spare 100 of megawatts of capacity in our system. So if you add that much load, obviously that's going to help you spread your fixed cost more broadly, but there will be some incremental costs as well. So that's we even give them a rule of thumb, but when you're talking about 100 of megawatts, that's a you're going to have incremental investment in the system. And I think probably most of our utilities will see similar numbers in the similar range. And just to note, for our plan, both Meta and Panasonic have been advanced had been announced before we had put out our Q4 CapEx plan.

Speaker 2

So they're included in the plan that we published, but Google had not yet announced. So it has not yet been included in our CapEx plan.

Speaker 5

And then maybe just to hone in a little bit, just maybe if you could just provide a little bit of directional color on the mechanics and the margin on the Google deal. Because if we understand it, you're supplying the actual megawatts, but some of the press releases, including coming from the governor, were framing this as a self supply setup, 400 Megawatts from Ranger and D. E. Shaw. So just trying to understand your exposure and obligations here.

Speaker 5

Thanks.

Speaker 2

Yes. So the rates are subject to how to get your agreement. So I won't discuss specific rates. Generally, when you bring in large new loads, they're typically eligible for economic development rates. But as I described in my comments on the script, we're actively working on rate design elements to ensure that large new loads.

Speaker 2

We the incremental requirements are factored in as those are considered. There are a number of players who signed virtual PPAs. We'll still be the supplier to Google. So it will be a customer of ours and the megawatts they receive will be from us. They will their agreement will be in effect a virtual PPA with there'll be an offtaker, an economic offtaker, but that asset, where it's added will become another generation resource in the Southwest Power Pool.

Speaker 5

Okay, got it. And then just lastly on the EPA regs, I mean, obviously, this was a key part of your opening prepared, right? I mean, there's obviously been a lot of chatter this quarter on the regs and potential impacts to IRPs and gas generation plans. Does the April IRP just put out account for this thinking specifically for example on the gas additions you proposed which may not get credit for co firing hydrogen under the final rules, so CCUs only. I guess, how are you approaching planning around this?

Speaker 5

Thanks.

Speaker 2

Yes. Thanks, Charles. Great question. The IRP that we just issued in Missouri and it's an overall corporate IRP also, we'll find a Kansas one here in a couple of weeks. But that IRP does not include the EPA's recently issued rules.

Speaker 2

It just came out too late to be included in the process. There's a ton of analysis that goes into it. So the new rules will be factored into our IRPs going forward. I do not anticipate while there's still a lot of analysis to do, I don't anticipate it's going to change our plans to build new gas units. We're going to need new gas to ensure reliability.

Speaker 2

We'll need it for the capacity in the system as well. We will impact our analysis of what type of gas units are added, what makes the most sense and that will probably be an analysis that goes down the jurisdictional level is, as you know, the EPA rules set rates that new efficient gas turbines can achieve. There are just some limits on the capacity factors at which they can run. So for peaking units in effect, anything at a peaking unit level is a 20% capacity factor and then the intermediate units

Speaker 8

can run up to

Speaker 2

a 40% capacity factor before CCU, carbon capture and storage is required. Now we'll be looking at this and the requirements because it is going to it will impact our resource plans particularly with respect to the obligations for coal and the coal retirement timeline. And I won't go into all the details on this call, but basically in a nutshell as I mentioned in my remarks, for coal units that you're going to operate long term, carbon capture and sequestration is required. And that's just not technology that's been proven at scale in a retrofit context for existing units. So to operate a unit past 2,030 8, you have to have carbon capture storage and you have to have it in place by 2,032, I think it is.

Speaker 2

You can do gas co firing, if you get on that pass and operate to the mid to late 2030. So this rule is going to get the greenhouse gas rule will get a lot of scrutiny and attention as will the other rules that the EPA put out. We think we're in a pretty good position to comply with the other rules, but lots of analysis still to do. There'll be legal challenges and we'll monitor it closely. But our go forward IRPs will reflect the impact of the EPA.

Speaker 2

Okay. And then just But our go forward IRPs will reflect the impact of the EPs. Net net though, gas is going to be important part of the equation for us to ensure reliability and meet the new customer demand we're seeing and enable us to keep the lights on affordably.

Speaker 3

Perfect. Thank you, guys. Appreciate it.

Speaker 2

Thanks, Shar.

Operator

Thank you. And one moment for our next question. Our next question comes from Durgesh Chopra of Evercore ISI. Your line is now open.

Speaker 6

Hey, good morning team. Thanks for giving me time. Can I just ask for hey, good morning, David? Can I just ask for clarification on the upside, David, that you listed from 2527, Dallas Bill 2527? The $0.03 to 0 point 0 $4 is that really like a 20 like 1st year upside to 20.25 dollars So this year, because the bill is effective July, it's really 1 half of that $0.03 to $0.04 Am I thinking about that correctly?

Speaker 2

How I describe it, Rakesh, probably talk about it, really that what HB 2,527 does is it just helps to reduce the gap between the authorized return and your realized return. So it helps to mitigate regulatory lag, gives us a better opportunity to get approximate to get closer to earning our authorized return. The way I described it is in the 1st year filing a rate case, it's $0.03 to $0.04 We are in the 1st year following rate case, it's fair to think of it that way. And the 2nd full year following a rate case, it's roughly $0.10 So it's a standalone item without consideration of anything else. That's how to think about the impact in terms of reducing regulatory lag that would otherwise occur.

Speaker 6

Thank you. And then jump from $0.04 to $0.10 to $0.10 I'm sorry, this is not a great question, but that's just basically capital doubling, right, like your asset base doubling between the 2 Yes,

Speaker 2

so think about it is, yes, it's a lot of like how it works in Missouri. I mean, slightly different provision, it's a 90 percent deferral versus 85%. But for example, if you look at our realized returns in Kansas Central in 2021 to 2022 to 2023, you saw those realized returns got lower and lower, much lower than an authorized level because we were in a 5 year stay out. So the regulatory lag impacts as we continue to invest in our system got higher and higher. So that's why you see the further you go out from a rate case, the bigger the impact.

Speaker 2

Now if you have a more regular cadence of rate cases, you'll eliminate that, right? So we don't we're not in a 5 year stay out and we as we described, while it won't be true in every jurisdiction, the general cadence we expect is every other year for rate cases.

Speaker 6

Got it. That's very helpful. I understand it now. And then just quickly, can I ask you for your level of confidence in the retail sales? It was flat last year, 23 over 22.

Speaker 6

And then Q1 came in a 0.5% below the Q1 of 2024. And now obviously, you're projecting 2% to 3% at the end of the year. What gives you that level of confidence? I know you mentioned a certain significant amount of load coming online, but just maybe share a little bit more color there?

Speaker 2

Sure. I'll start and ask Kurt to weigh in. I think last year if you break down the demand trends, residential and commercial were up in 23.8% and 1% respectively. It was industrial that was down. The industrial margins tend to be lower as you know.

Speaker 2

And we can really trace the industrial demand being down in 2023 to a few customers that had unique circumstances. That I think is the basis for why we have the underlying confidence that we the robustness of the residential commercial sector last year and understand the industrial trends at kind of the customer by customer level. And Kirk talked about that at length of the Q1. We won't overreact too much to the Q1. There was still some pretty strong trajectory on the residential side.

Speaker 2

It was a very mild quarter. So we'll be tracking how that goes through the year. Now in terms of the large new customers coming online, there can always be timing issues otherwise. But if you drive out to DeSoto, Kansas, you will see a very, very large battery manufacturing plant facility well underway in terms of construction. So we feel good about that.

Speaker 2

The Meta Data Center is under construction. Google is down the road, so it's got the run further staff. But we feel good about the overall growth trajectory. Kirk, anything you'd add?

Speaker 3

Great. I mean our residential and commercial growth assumptions are roughly consistent with what we saw in the actuals in 2023. It's really just buoyed by that expectation of industrial recovery, both cycling through some of those temporary events that I talked about before and then supplemented by some of those, I think you talked about the new economic development customers coming out later this year on the industrial side. So agree with that.

Speaker 6

Thank you so much. I appreciate it, guys. Thank you.

Operator

Thank you. And one moment for our next question. Our next question is from Travis Miller of Morningstar Inc. Your line is now open.

Speaker 8

Thank you. Good morning, everyone. Good morning. Congrats on getting all the stuff done there in Kansas. Wondering as a follow on to that, what are you still working on?

Speaker 8

Is there a timeline? And what might be involved in getting more done in Kansas?

Speaker 2

Our work is never done. No, just we certainly are working with our stakeholders on a series of issues in both states, really just looking for I think the most important thing is how do we respond to the economic development opportunities that are before us and ensure the best frameworks are in place to take advantage of those. So the discussion in Kansas, look, we HB 2527, I can't emphasize enough that it's not only important in terms of provisions for reducing lag, but also important as a reflection of the broad based consensus and support for investments to take advantage of economic development opportunities and having a constructive framework for those investments. Ongoing things that we'll look at will continue to be what we plan to have a workshop later this year on capital structure and ROE. We agreed with the parties That wouldn't be included in legislative effort this spring, but we would talk about in a workshop this fall.

Speaker 2

So ensuring that Kansas has a competitive framework for kind of authorized returns, we think continues to be important. As I mentioned, our rate base growth is significantly lower than our peer jurisdictions and we hear a lot from investors about the relative competitiveness of returns offered in various states. So we look forward to that dialogue in Kansas. On the Missouri side, as I mentioned, there's been a broad based support for legislation relating to natural gas plants because we and other utilities in the Missouri side are planning to build gas. It's really going to be needed for reliability and to serve incremental load.

Speaker 2

So enhancing the provisions that are applicable to new dispatchable generation will be important step to take over time in Missouri. But we've had a constructive dialogue with stakeholders in both states, really pleased with that constructive dialogue and we look forward to working with our regulators, legislators, staff and other CURB and other interveners, OPC and Missouri to move forward.

Speaker 8

Okay, perfect. That workshop would be in the legislative sessions or regulatory?

Speaker 2

Regulatory, yes. And we expect to have that later this year. I admit schedule, but we're aligned with parties and we'll work with parties to find the right time to do it. I could expect it later this year, later this summer or fall. Sure.

Speaker 8

Okay. And then a higher level on the EPS growth. You've described obviously a lot of positive things going on. Your growth rate is at or higher than other utilities. You've got the CapEx, which you've suggested might be higher in the Q3.

Speaker 8

What pushes you at least to a 5% to 7% number, maybe not back to the 6% to 8%, but why not get to that 5% to 7% or perhaps should we anticipate that when you come out with a new CapEx plan?

Speaker 2

As I said earlier, we won't get ahead of the CapEx plan. We certainly won't get ahead of any earnings forecast. I think that when you look at our financial plan overall, we have the lowest rate base growth. And as a consequence of that, we have a relatively lower earnings growth trajectory. Those 2 are generally in sync.

Speaker 2

The rate base growth and the earnings growth targets typically the earnings growth target lags at some level, it was a little lower than the rate base growth target because of the drag from financing. So for us, what we're looking at fundamentally is how do we invest at the right level to ensure that we can take advantage of economic development opportunities, ensure reliability, make sure our system doesn't fall behind others. And in terms of performance, resilience, reliability and ability to meet new customer demand, I think that will lead to higher levels of investment and we'll see where it goes from there. But we certainly we start from the position of affordability, reliability, sustainability. How do we make sure that we are competitive and taking advantage of these great demand growth opportunities.

Speaker 2

I do think that will lead to more capital investment because I think that's going to be to the benefit of all of our customers and our strategic objectives. And we'll discuss over time what that means for the earnings trajectory. But we really start with affordability, reliability, sustainability, what is the capital investment plan that will best enable us to advance it.

Speaker 8

Okay. That's great. No, I appreciate it. And figured you wouldn't answer my question by saying, yes, 5 to 7. So I appreciate the details.

Speaker 8

Thanks so much.

Speaker 2

Thank you.

Operator

Thank you. And one moment for our next question. Our next question comes from Paul Patterson of Glenrock Associates. Your line is now open.

Speaker 6

Hey, good morning. Good morning, Paul.

Speaker 9

Just wanted to go over just a few quick things on the quarter. First of all, the decrease in labor capitalization. Can you elaborate a little bit more on what's driving that and how that's going to impact the rest of the year?

Speaker 3

It's Kirk. The decrease in labor capitalization is really a function of we had a little bit of a change in our transformer labor capitalization approaches in the Q1, a little bit of a catch up there. So now what you're seeing is just the ongoing effects of that as we move forward.

Speaker 2

Paul, you get the prize from both in-depth reading of materials. Yes, indeed.

Speaker 9

Okay. But what's how much was that, I guess?

Speaker 3

We'll have to get back to you offline on that, Paul, I'll be happy to do that. Okay. No problem. Then

Speaker 9

the sales growth numbers for the quarter, does that reflect leap year?

Speaker 2

Yes.

Speaker 3

Yes, it does.

Speaker 9

Okay. And then the PISA legislation, it sounds like you guys in Missouri, I'm talking about, it sounds like you don't see much opportunity for the House Bill. I think there's also a Senate bill. I mean, I know it's going to end soon, but is that pretty much how you feel? Did I hear you right, I guess?

Speaker 2

I think Paul, yes, you heard me right. We've had the PISA provisions, PISA language and changes to PISA relating to natural gas investments to 90% and extending the date. Past of the House There's very good discussion around it. There's broad based support. It's just hard to given this tight timeline in the session, overall session dynamics, it's going to be hard to get anything passed.

Speaker 2

So we think this is no different. When rule it out, we certainly think it will be beneficial, but it's the session dynamics and timeline of the real constraints, not support for the provision. We think there's broad based support.

Speaker 3

Paul, I'll follow-up for you. Sorry, Paul, that transformer labor, just to come back to you, is about $0.02

Speaker 2

year over year. Okay.

Speaker 9

And then thanks for that. And then just on the Missouri, if I'm correct, if it ends the session ends, the floor action ends tomorrow, is that right?

Speaker 2

17th, I think is when it formally ends, Paul.

Speaker 9

Okay. But I thought there was a floor action deadline or something. Okay, but okay. 17th, okay. Okay, thank you.

Speaker 9

Appreciate that. And then finally, Amit, you mentioned that your next IRP will reflect the impact of the EPA rules. Do you think that how do you think about depreciation with these EPA rules? And when I mean, you mentioned litigation and the when you guys might have to deal with that regulatory when you guys might have to deal with that regulatory or not? I mean, just how are you sort of big picture, how are you thinking about the issue of asset life depreciation and these rules and how those would figure out how those would sort of pencil out if you follow me?

Speaker 2

Yes. Well, Paul, it's a great question and one that is going to take a lot of work on our part and a lot of work with our stakeholders because the affordability and reliability impacts of the rules are ones that we're really going to all have to dig into. And there are some provisions in the rules that give some potential outs on those, they're relatively short term in nature. But to your point, we'll have to assess carbon capture and sequestration as required for any unit that's operating beyond 2,030 8, but does that imply if that technology is not commercially proven today? I do not want to get ahead in the analysis we're going to do and any discussions we have with our regulators around it.

Speaker 2

That provision in particular is around carbon capture and storage is no doubt going to be the focus of a lot of discussion by a lot of parties. But the affordability and reliability impacts are certainly going to be at the forefront and any change in depreciation schedules would along with any incremental investments that might be required would have impacts on the affordability side. So under the provisions of the rule, you can look at our RFP and it would imply absent CCS. It's going to have some impacts in the out years. But we've got some time to analyze it, got some time to work through with parties.

Speaker 2

But you're noting an important issue is these rules are consequential and the affordability and reliability impacts are real and significant and we'll be analyzing them over time. And we'll do that on a systematic basis because something that's important we won't rush into and we'll absolutely be working with our regulators and stakeholders in Kansas, Missouri as we do that analysis. And we'll be tracking the litigation closely.

Speaker 9

Awesome. Thanks so much guys.

Speaker 2

Thank you.

Operator

Thank you. And one moment for our next question. Our next question comes from Ryan Levine of Citi. Your line is now open.

Speaker 10

Good morning. Owen, the one slide you highlight over $10,000,000,000 worth of new development projects in Kansas and Missouri. Would you provide a little bit of color around what industries are most represented in that $10,000,000,000 number and in which service territories these are awaiting towards? And any color around the load opportunities that may enable?

Speaker 2

Sure. So the it's you won't be surprised here. It's data centers, but also advanced and large manufacturing. So that could range from semiconductor, auto, food products, food service industries are all pretty big presence in our space. So we like others, we've got a pretty big presence in data centers already with Meta and Google and there's a number of those are data centers, but there's also a lot of advanced manufacturing and we're excited about all of them.

Speaker 2

We even quantified, but the exact megawatts, the $10,000,000,000 obviously add up to a very material increase in potential load. But and it's across really I'd say it's across all of our jurisdictions. There are a number of those parties that are interested in the metro region and our Missouri West area. So Meta, for example, is in Missouri West, Google is in Metro and the Panasonic data plan is in Kansas Central. So I think you'll continue to see what broad based interest across those.

Speaker 2

I think I also left out aerospace. We've got a very large aerospace presence in the central part of Kansas and that's also an area of high interest. So it's an exciting time and we're glad with the big new customers we're going to be able to land. It's been a mix of data centers and large manufacturing. I think we continue to see that kind of mix across those and not exclusively data centers.

Speaker 2

I know there's tend to be a lot of the focus of the discussions recently, but we're big fans of advanced manufacturing in our territory too because they bring a lot of jobs and incremental benefits. Data centers are also big positive. They don't bring as much jobs of course, but it's an exciting time in terms of the pipeline.

Speaker 10

As you're working through your resource planning and with the favorable legislation passing in Kansas, are there any non financial constraints to be able to serve incremental load in your service territories, I. E, particular on the gas generation side that we should keep in mind that may constrain your growth?

Speaker 2

So, I mean, I think for all of us, all utilities and for us, when you look across our system, adding the 3 customers I mentioned today, we said approximately 7 50 megawatts of load. That's a nearly that's between 5% and 10% increase in our overall demand peak. So you add several 100 megawatts in any location, you're going to run into where the valuation is on transmission and distribution infrastructure. So what do you have adequate transmission, you have adequate substation infrastructure in place. And with Southwest Power Pool requirements getting tighter, there's certainly capacity issues as well.

Speaker 2

So it's when we're looking at sites and sites that are opportunities for our customers, a lot of them were being responsive to where they're interested. But to the extent they're flexible, then it's all about how do you work through the grid constraints, so transmission distribution and then capacity constraints. So it absolutely is factored into our overall resource planning. That's part of why you see more resources in our plan. Some of that is higher requirements in the Southwest Power Pool, but some of that is a reflection of higher demand.

Speaker 2

So there are grid constraints and capacity constraints you need to work through and it's an opportunity. I think we're not unique in that. I think it's a general phenomenon across the U. S. We're seeing a higher level demand than we've seen in decades.

Speaker 7

What I was trying

Speaker 10

to get at is, if you're building new gas plants, are there any pipeline constraints or anything else that may be more onerous to overcome or any permitting or any other challenges that

Speaker 6

we should keep in mind?

Speaker 2

Yes, I think that the I think the way the EPA rules are structured, the new efficient gas turbines can meet the requirements so that we capacity factor limitations. Our team's evaluation of new gas sites that we've not announced where the new gas sites are certainly taking into consideration existing gas and grid infrastructure. So we think we'll be able to work through those. There's always a permitting and interconnection process. So it takes years to get these things done and that's a reflection of why the gas plants are appearing in the years they appear that really reflects the lead time that we expect to be required to work through all those various issues.

Speaker 2

But we do think we'll be able to get it done.

Speaker 10

Thank you for taking my question.

Speaker 2

You bet. Thank you.

Operator

Thank you. And one moment for our next question. Our final question comes from Michael Sullivan of Wolfe. Your line is now open.

Speaker 7

Hey, good morning.

Speaker 6

Good morning, Mike.

Speaker 7

Yes. Hey, guys. Just wanted to ask on the mild weather to start the year and how you're thinking about levers to offset that.

Speaker 2

So it's welcome to 2024 same as 2023 as we had a mild start to 2023 as well. Like we look across various levels of our business, the important part of that obviously is cost management. We mentioned that the new legislation in Kansas in the 1st year filing a rate case provides a benefit. So obviously, we're in the 1st year following a rate case. So we've got relatively large enterprise.

Speaker 2

We got a range of levers that we typically work through. It's a it's not the Q1 is not our biggest quarter. So we'll be watching to see how second and third quarter go in particular. But I put it I view it as that's sort of in the routine category of things to manage. So we always prefer it to be normal weather, but we've got some levers that we can work on and some positives that we've seen also already manifested.

Speaker 2

Okay, great. And then when I just

Speaker 7

think about this upcoming CapEx refresh, I think you usually do that for 5 years and the IRP is kind of more like a 10 plus year outlook. And if I just I know you're talking about capacity upside over 10 years, but if I just look at like the next 5 plan over plan, I think we're in a similar spot, a different mix of generation, but just wanted to try to reconcile that as we think about CapEx plan refresh and what changed in this IRP?

Speaker 2

Yes. It's a good question, Mike. The you'll see that we've also got some incremental. If you look at I anticipate our CapEx refresh will be through 28%. We probably won't introduce 29 until February, but Curt and the planning team may decide that they I'll leave it to them on where we approach that.

Speaker 2

Because we've got a lot of gas that's coming in the 28th to 30th timeframe, that will lead to some earlier spend. A lot of the renewable spend, you can time a little more closely to when the online data is, but the gas plants will have an earlier spend trajectory. Part of why we're real very pleased with the construction work in progress provisions and legislation in HB 2527. So between that, between the evaluation that we're doing relating to economic development, between other grid modernization efforts we're going to look at. There are some factors that we think create an upward bias in the capital plan.

Speaker 2

But again, we'll lay those all out when we get to the Q3. But the IRP, just looking at it on a standalone basis, if you think about the amount of gas that we'll be bringing on 'nineteen and 'thirty, we do expect there'll be the IRP in and of itself will also be incremental investments, really reflecting the demand growth that we've seen in the generation we're adding to meet it.

Speaker 7

Okay, very helpful. Thank you. Thank you, Mike.

Operator

This now concludes the question and answer session. I would now like to turn it back to David Campbell for closing remarks.

Speaker 2

Thank you, Brie, and thank you everyone for your interest in Evergy. Be safe and have a great day. This now concludes our call.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Evergy Q1 2024
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