Yahoo Finance Evergy, Inc. (NASDAQ:EVRG) Q4 2023 Earnings Call Transcript
Evergy, Inc. (NASDAQ:EVRG) Q4 2023 Earnings Call Transcript February 29, 2024
Evergy, Inc. misses on earnings expectations. Reported EPS is $0.27 EPS, expectations were $0.3. Evergy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by and welcome to the Q4 2023 Evergy, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today’s call is being recorded. I would now like to turn the conference over to your host, Mr. Peter Flynn, Director of Investor Relations. Please go ahead.
Peter Flynn: Thank you, Valerie and good morning everyone. Welcome to Evergy’s fourth quarter 2023 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. 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 fourth quarter and full year results, retail sales trends and our financial outlook for 2024. Other members of management are with us and will be available during the Q&A portion of the call. I’ll now turn the call over to David.
David Campbell: 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 Chief 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 fourth quarter earnings falling below our guidance. While we plan for normal weather, we know the importance of consistent financial execution we are disappointed by these results. As you know, on the third quarter 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 the driver of the shortfall. For both November and 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 fourth quarter relative to expectations, but we were able to offset those impacts leaving milder-than-normal weather as a driver. 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&M expenses by $129 million, 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 $2.3 billion 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 $1.4 billion convertible note financing to mitigate interest rate and refinancing risk at the holding company. Of note, this financing was contemplated in and supportive of our updated growth outlook that we announced on our third quarter 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 SAIDI and SAIFI 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. These cost savings involved 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 am proud and honored to lead the Evergy team that made this happen. On Slide 7, we introduced our 2024 GAAP and adjusted EPS guidance of $3.73 per share to $3.93 per share. 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%. 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 million of active development projects evaluating our service territories, representing 1.3 gigawatts of potential additional demand.
The largest additions announced under construction so far are the Panasonic electric vehicle battery manufacturing plant in Kansas and the Meta data center in Missouri. 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 cost 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. Slide 10 lays out our updated capital expenditure forecast, which has been extended through 2028. Our latest 5-year investment plan totals approximately $12.5 billion, which represents a nearly $900 million 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.
By replacing aging equipment, investing in smart grid technologies will also enable further efficiency gains in serving our customers, which has been a hallmark of Evergy’s strategy since our formation in 2018. Moving to Slide 11, I’ll provide an update on our regulatory and legislative priorities in 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 million in operating efficiencies and customer bill credits. 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 to customers’ demand.
In our discussions with stakeholders in 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 in 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 who benefit from more robust capital programs, more attractive realized returns, and more predictable and stable regulatory mechanisms.
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 2527 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-in-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 HB 2527 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. 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.
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, though 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 intervenor direct testimony in June followed by rebuttal testimony in August, a settlement conference in the second half of September, and potential hearings in late September and October.
We look forward to working collaboratively with the Missouri Public Service Commission staff and our stakeholders to achieve a constructive outcome from Reserve West customers. An element of our rate request is our potential investment in the Dogwood Energy facility and 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 second quarter, subject to commission approval. On February 23, we closed a financing to securitize extraordinary costs from Winter Storm Uri being carried at Missouri West, providing $323 million in net proceeds. As a result, the costs incurred from the storm will be spent 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 and getting it over the finish line. Bills have been proposed in Missouri House and Senate that would extend PISA to 2040 and modify a provision of the statute to cover new natural gas generation. House Bill 2541 passed out of committee and Senate Bill 1422 awaits further action.
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 tenets 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 billion 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.
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 to ensure reliability and strong customer service, building on the momentum reflected in our significant improvements in SAIDI and SAIFI in 2023. Our overriding sustainability goal is to lead a responsible, cost-effective energy transition. In 2023, we added for 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. Our goal is to achieve net-zero emissions – carbon emissions by 2045, with an interim target of a 70% reduction both relative to 2005 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 their 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.
Kirk Andrews: Thanks David and good morning, everyone. Turning to Slide 14, I’ll start with a review of our results for the fourth quarter. For the fourth quarter of 2023, Evergy delivered adjusted earnings of $61.1 million or $0.27 per share, and that’s compared to $68.6 million or $0.30 per share in the fourth quarter of 2022. As shown on the slide from left to right, the year-over-year decrease in fourth 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. This impact was driven by warmer-than-normal weather over the final 2 months of 2023, which drove a $0.06 variance to our plan. December weather was particularly mild, which led to a 23% reduction in heating degree 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 $29.5 million decrease in adjusted O&M reflecting continued execution on driving cost efficiencies, drove a $0.10 increase. The net impact of higher depreciation and amortization was $0.07 for the quarter, which includes the partially offsetting impact of new retail rates. Higher interest expense drove a $0.07 decrease. The fourth quarter 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 increased. I’ll turn next to full year results, which you’ll find on Slide 15.
For the full year 2023, adjusted earnings were $815.6 million or $3.54 per share that’s compared to $853.8 million or $3.71 per share for the same period last year. 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 ‘23. 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 a 3.6% decline in industrial demand. I’ll provide more context around demand later in the presentation.
Higher transmission margins 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. $0.10 of higher year-over-year proceeds from company-owned life insurance, a $0.09 positive variance related to the nonrecurring ERS charge in 2022, and which was subsequently reduced in 2023 based on the final refund amount. And finally, tax items drove an 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 falloff in the fourth 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. In contrast, industrial demand was down 3.6% for the year. Through the first three quarters, this decline was driven by lower usage at two of our largest refining customers. One of which was off-line in early 2023 for a planned outage, while the rest of our industrial customer base’s usage was generally in-line with expectations. This dynamic reversed in the fourth quarter. While demand from refining customers began to recover, we saw a contraction in demand from other industrial customers during the fourth quarter.
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. Given that several of these events are expected to be temporary, we expect industrial demand to partially recover as we move into 2024, 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 ‘25 and ‘26 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 a strong local label market as Kansas and Kansas City metro area unemployment rates remained below the national average of 3.7%. 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, and 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 and 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%. The $0.25 of EPS from new retail rates, which reflects both a net revenue increase of $41 million in Kansas as well as the impact of the amortization of the company-owned life insurance regulatory liability. 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&M of less than $20 million 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 million in incremental O&M savings achieved last year as we move into 2024.
The remaining drivers consist of increased D&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. 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 $12.5 billion 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, continue 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.
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