Evergy - Earnings Call - Q1 2019
May 9, 2019
Transcript
Speaker 0
Ladies and gentlemen, this is your conference operator. At this time, I would like to welcome everyone to the Q1 twenty nineteen Evergy Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I would now like to turn the call over to Lori Wright. You may begin your conference.
Speaker 1
Thank you, Lori. Good morning, everyone, and welcome to Evergy's first quarter call. Thank you for joining us this morning. Today's discussion will include forward looking information. Slide two and the disclosure in our SEC filings contain a list of some of the factors that could cause future results to differ materially from our expectations and includes additional information on non GAAP financial measures.
We issued our first quarter twenty nineteen earnings release and 10 Q after market closed yesterday. These items are available along with today's webcast slides and supplemental financial information for the quarter on the main page of our website at evergyinc.com. On the call today, we have Terry Bassil, President and Chief Executive Officer and Tony Soma, Executive Vice President and Chief Financial Officer. Other members of management are with us and will be available during the question and answer portion of the call. As summarized on Slide three, Terry will recap the quarter and provide a business update.
Tony will update you on the details of our latest financial results. With that, I'll hand the call to Terry.
Speaker 2
Thanks, Lori, and good morning, everybody. I'll begin on Slide five. 2019 is an important year for our company. We're targeting strong year over year earnings growth as we capture the benefits of the merger. Last night, we reported first quarter GAAP earnings of $0.39 per share compared to $0.42 per share earned in the first quarter of twenty eighteen.
Adjusted earnings were $0.44 per share in the first quarter twenty nineteen compared to $0.34 in the same period a year ago. The year over year increase in earnings was primarily driven by cost reduction efforts and higher retail sales due to colder weather. I'm pleased with the execution of our team and the solid first quarter delivered, which keeps us on pace to achieve our 2019 targets. As we focused on our plan, cost reductions and share repurchases, Mother Nature presented us with a few challenges during the quarter. As we previously stated, our team banded together to restore power during a major storm that hit Kansas City in January, which was a once in a couple of decades kind of storm.
At its peak, we had about 200,000 customers out of service. Through the dedicated work ethic of our team, we fully restored customers within five days of the event. Separate from the January storm, we also had flooding that impacted our service territory in March. The I-ten Generation station near West Missouri was our most at risk piece of infrastructure. If you recall, in 2011, we experienced flooding in the same region.
One silver lining of dealing with the 2011 event is being more prepared for conditions as they develop this year. Emergency plans and infrastructure build eight years ago allowed us to withstand the floodwaters without a significant impact. We did alter our day to day operations for about a week and a half, but we're able to resume normal operations by the March. I'd like to give a special praise to our folks in the field that worked in less than ideal situations as you might imagine to ensure the protection of our assets and keep customers' power interruptions to a minimum during these events. Before I move on, let me update you on our efforts towards renewable energy, namely affordable wind.
Kansas now ranks number one with respect to wind resources as a percentage of megawatt hours produced. Our company recently reached a milestone by producing over 50,000,000 megawatt hours of wind. To put in that perspective, that's enough power to light up Times Square for more than three decades. Locally, we have been working with the City Of Kansas City, Missouri to achieve their goal of offsetting 100% of their municipal electric energy usage with energy produced from carbon free sources by 2020. We continue to see more and more demand from our existing customers and potential new customers to be supplied with the abundant renewable resources found within the states we serve.
Now moving on to Slide six, I'll give you the latest on our regulatory and legislative proceedings. As you may recall, we agreed to produce a Kansas rate study as part of our merger agreement last year. We completed the study and presented the results to the House and Senate early in Kansas legislative session this year. The KCC staff also completed a similar, but yet separate study of Kansas rates and presented their findings to the legislature as well. Throughout the session, Kansas rates continue to be a topic of discussion.
Ultimately, Senate Bill 69 was passed, signed into law by Governor Kelly in April and authorized an independent retail rate study of Kansas Electric Public Utilities. The study will provide information that may assist future efforts of developing electric policy aimed at delivering regional competitive rates and reliable electric service. The process is expected to take place throughout the remainder of this year with findings to be delivered starting in January. Let me be clear, we believe the merger with its upfront and ongoing bill credits and significant cost efficiencies has tremendous benefits for our customers' prices for years to come and goes a long way toward addressing these concerns. In March, Governor Laura Kelly appointed Susan Duffy to the Kansas Corporation Commission.
Commissioner Duffy previously served as Executive Director of KCC staff and most recently as the General Manager of Topeka Metro responsible for the management and operation of the Topeka transit system. We look forward to working with her as she transitions into her new role in the KCC. Now moving to the latest proceedings in Missouri. In March, the Missouri Public Service Commission set a procedural schedule scheduled to hear complaint regarding GMO's Sibley plant, which we retired in the fourth quarter of last year. The complaint asked the commission to issue an accounting authority order to defer all costs we avoid that are currently reflected in retail rates, except for depreciation that is associated with the retired generation unit.
Direct testimony was filed in April by the complainant's office of public counsel and an industrial customer group. And we'll file our rebuttal testimony later this month. Hearings are set for mid July and we expect a commission order by early September. Missouri legislative session has been mainly focused on education, workforce development and infrastructure funding. We don't expect any of the energy related bills to receive the traction needed to move forward this session.
Now turning to Slide seven, let me update you on the latest regarding our merger plan. Upon launching our merger, we laid out three specific priorities we remain keenly focused on. Leaving target merger savings, rebalancing the holding company capital structure by repurchasing shares, an attractive EPS and dividend growth with reduced risk given our regulatory stayouts. We've moved the ball in the right direction on each of these objectives. First, we exceeded our 2018 gross merger savings target.
We feel confident in achieving the $110,000,000 target that we set for this year. Next, we laid out our share repurchase strategy with the intent to dollar cost average over time, while taking a programmatic and opportunistic approach. We stuck to that plan, while utilizing accelerated share purchases and open market repurchases being optimistic when it made sense. The activity in the quarter kept us on track to complete our targeted share repurchases by mid next year. Lastly, on earnings and dividend growth, our original EPS guidance based on 2016 set the foundation for implied range through 2021.
Our 2019 adjusted EPS guidance and our expectations for EPS growth over the next couple of years are consistent with that original implied 2021 range, albeit at the middle to lower end. Our currently indicated annualized dividend of 1.9 per share lands us in the middle of our targeted long term dividend payout ratio of 60% to 70% when applied to the $2.9 midpoint of our 2019 adjusted EPS guidance. Nothing has fundamentally changed since we laid out the original merger plan. We are executing and continue to have confidence in our ability to deliver. In fact, between dividends and share repurchases, we committed to distribute $700,000,000 of capital to shareholders in just the first quarter alone.
Now moving to Slide eight, I'll update you on our investment outlook before I turn things over to Tony. With solid first quarter results, we're affirming our 2019 adjusted earnings guidance range of 2.8 to $3 per share. The $2.9 midpoint is the base from which we target our long term EPS CAGR of 5% through 2023, which we've indicated is currently forecasted to be non linear and front end loaded. Many of you have asked about growth post 2021. So let me describe how we're approaching the future.
As we've said many times over the last couple of years, one of the largest benefits to our plan is the opportunity to keep customer bills low, deliver a safe, reliable product and target competitive shareholder returns. Our unique plan positions us well to achieve these objectives. Minimizing the impacts to customer bills and competitively positioning customer rates is the foundation of our five year capital plan. Our rate based growth projections are by design and set at a forward level to maintain reliability for our customers, build adequate regional transmission infrastructure and include line of sight projects with no placeholders. Our lower projected CapEx compared to many of our peer positions us uniquely from a cash flow perspective.
Again, this is by design and results in projected free cash flow post 2021 even after paying a dividend. This protects against the downside of rate pressure and positions us with flexibility. We expect several levers to be available to us in the latter half of our five year plan that will allow us to keep customer bills low and provide opportunity for attractive shareholder returns. Some of those levers include infrastructure projects that aren't currently in our plan, but may be a benefit for customers in the future. This could include incremental spend, reallocation of our current five year plan, dollars 6,000,000,000 CapEx or some combination of the two.
We intend to deploy capital investment where it's wanted and rewarded as evidenced by the regulatory construct, while balancing the needs of our customers and reliability metrics in their respective jurisdictions. To that end, we continue to look for opportunities that allow us to further utilize PISA legislation in Missouri. Or we could look at deleveraging the holding company once we've completed the share repurchases. This isn't an exhaustive list, but does include some of the strategies available as we look out over the next five years. We'll continue to focus on remaining flexible as we move forward through this transition period.
The key to preserving the future optionality hinges on our ability to deliver the value of the merger thesis, and we are on track to deliver on our commitments. So with that, I'll turn the call over to Tony.
Speaker 3
Thanks, Terry, and good morning, everyone. I'll start with results on Slide 10 of the presentation. Last night, we reported first quarter GAAP earnings of $100,000,000 or $0.39 per share compared to $61,000,000 or $0.42 per share in the first quarter of twenty eighteen. The increase in earnings is primarily due to the inclusion of KCPLs and GMO's results in the first quarter of twenty nineteen, which aren't included in Evergy's first quarter twenty eighteen results. GAAP EPS was $03 lower primarily due to the dilution of shares issued to Great Plains Energy shareholders upon closing of the merger.
Adjusted non GAAP earnings were $111,000,000 or
Speaker 2
$0.44 per share
Speaker 3
compared to $92,000,000 or $0.34 per share in the same period a year ago. As detailed on the slide, adjusted EPS was up $0.10 primarily driven by cost reduction efforts, fewer shares outstanding and colder than normal weather. Some additional drivers for the quarter include gross margin being up $22,000,000 primarily due to new retail rates, net of the 2018 provision for rate refund for the lower corporate tax rate and favorable weather which we estimate contributed about $05 compared to first quarter twenty eighteen. O and M was down $30,000,000 primarily driven by cost reduction efforts associated with merger enabled efficiencies and plant retirements in Missouri. Depreciation and amortization was $30,000,000 higher primarily from new depreciation rates that are reflected in our retail prices.
And lastly, accretion resulting from our share repurchase activity which added about $03 a share. For the quarter, pro form a residential sales were up 4.5% and commercial sales were up 1.7%, primarily due to the colder weather, which we estimate helped about $06 when compared to normal. Pro form a industrial sales were about 3.5% lower than the same period last year. Most of this decrease comes from a large customer in the chemical sector that saw decreased demand at their plant in our service territory. From an economic standpoint, things have stayed steady in our territories.
Unemployment rates continue to hover in the low to mid 3% range, remaining below the national average. We saw a nice pickup in multifamily home construction marking the highest quarterly numbers in this area in the last couple of years. Steady growth remains present in the business services, healthcare and pet sectors. A tech technology company recently announced the relocation of their headquarters Silicon Valley to Kansas City. This should bring a few 100 jobs and add to the established animal science corridor that is present within our territory.
Now moving on to Slide 11, let me touch on our latest financing activities. In March, we issued $400,000,000 of CasePL bonds at 48%, replacing bonds with a coupon of 7.15%. As far as upcoming maturities, KG and E has $300,000,000 of first mortgage bonds coming due in June that we'll look to replace. Moving on to the holding company. In March, we entered a $1,000,000,000 term loan that will expire in September.
This allows us to continue our share repurchases between now and later this year, where we project to issue about $1,500,000,000 of long term holding company debt. While repurchasing 60,000,000 shares by the next year is continuing to be our target, the ultimate amount of holding company debt needed will vary based on share price timing and total number of shares repurchases, all of which are subject to market factors and the financial outlook of the company. Throughout the first quarter, we repurchased over 10,000,000 shares through the combination of ASRs and open market purchases. As of the April, we've now purchased around 46% of the total 60,000,000 shares share target and we'll still have outstanding an ASR that has not closed. Wrapping up on Slide 12.
As Terry mentioned, our first quarter results start the year in the right direction and we are reaffirming our 2019 adjusted EPS guidance range of $2.8 to $3 per share. We remain focused on delivering significant cost reductions while executing our investment plan that minimizes lag during our regulatory stay out period over the next four to five years. Again to echo what Terry said, we're being very intentional with our capital allocation giving preference to earning certainty, zero down earning our allowed returns and maintaining flexibility for the future and returning capital to you our shareholders. We remain confident in the plan that we've laid out and continue to believe our thesis offers a competitive attractive risk adjusted total shareholder return profile while focused on keeping customer rates competitive. With that, I'll turn the call back over to Terry.
Speaker 2
All right. Thank you for joining us. We'll take questions now.
Speaker 0
Your first question comes from the line of Greg Gordon from Evercore ISI. Please ask your question.
Speaker 4
Thanks. Good morning. Good morning, Greg. A couple of questions. First, am I right that when you called out that the storm costs, all things equal, had a $13,000,000 impact in the quarter?
So despite that, which like almost a $05 headwind, you still were able to get to the $0.44 number?
Speaker 3
That's correct.
Speaker 4
Okay. Thank you. And that when you look at what average annual storm costs look like in a normal year, would you expect that that would be something that might recur normally year over year, but just happen over the course of time? Or do you see that as an exceptional event?
Speaker 2
No, that was an exceptional event. That's why I mentioned it's a I guess we said a lot now, couple in the decades event. But no, we normally don't have that many customers out five days. And so not only do you have extra expense, but you got lost revenue. So that is not normal.
And having in fact, I've been here almost fifteen years and it's the worst storm we've seen since I've been here.
Speaker 4
Well, congratulations on getting your customers back so quickly. My second question goes to your capital allocation commentary. And I know that customer affordability is a huge issue for you and you're rightfully primarily focused on it and one of the reasons for the merger. And so you're being very careful about not trying to send the wrong message to your customers about capital spending. But at the same time, I'm hearing you talk about an increased desire for renewable energy from your customers.
One of the things that I'm also seeing industry wide is the ability to deploy new technologies that while they do increase capital spend also improve the customer experience and potentially lower bills. So as you think about the back end of that CapEx program in '22 and 2023? Not to put words in your mouth and disguise a question as a statement, but are those the type of things that are not yet in the plan that you're thinking about? And can you elaborate perhaps on that?
Speaker 2
Yes, you're exactly right. Obviously, focused on, as you said, the near term stability after each company spent ten years on both reliability, generation and environmental spend, this period post merger with the synergy savings provided an opportunity for growth is critical. But as you described also, we have ever changing needs for what customers want and we are very fortunate to have the opportunity to be near one of the best wind resources in the country. We see that as not only an ability to serve our current customers, we see that as an ability to attract economic development from new customers. And we are part of our teams in each of our states and each of our cities.
When we talk to folks considering moving to our region about that opportunity, what used to be a green opportunity is now also a green and a low cost opportunity given the technologies around that. In addition to that, you're exactly right, we also have both reliability and customer desire technologies that we're dealing with every single day like everybody is. And that's an area where PISA in particular provides us with a great opportunity to ramp up spend in a way that's structured and approved in Missouri and almost expected. And so we're looking at the timing and the ability to do those as well. So each one of those gives us the ability not only to be stable in the short term, but provide for that additional growth in the long term and we look forward to updating shareholders along the way as we finalize some of those plans.
Speaker 4
Thank you, guys. Congratulations on a good quarter.
Speaker 3
Thank you very much.
Speaker 0
Your next question comes from the line of Ali Agha from SunTrust. Please ask your question.
Speaker 5
Thank you. Good morning.
Speaker 4
Good morning. Good morning.
Speaker 5
First question, Terry, so the Kansas rate review that would finish up in early twenty twenty, To the extent that they find the rates are too high for whatever reason, how would that actually impact you guys given that you have a rate freeze as part of your merger agreement? I'm just thinking about the logistics here if there is some negative ruling that comes out there.
Speaker 2
Yes. I mean, don't know for sure. What I would tell you is that we're very confident that this is the legislature, which would look at opportunities maybe to send to the commission further work to be done potentially. But we certainly see that the ultimate outcome of the study should reflect not only the current benchmarking, if you will, of our rates, but the historical development of our cost and rates and what we see in the future, which again is consistent with what we just talked with Greg about and that's why our current merger opportunity provides us with assurances to those legislators that we see the same issue and have addressed it. And our merger does just that.
Process wise, we saw some legislation this time that we didn't think really was appropriate. And obviously, the legislature agreed that we ought to be talking about a study before we look into those kind of things. But certainly, if they have particular concerns, we're confident that we'll be able to work with our legislators and our local customers about options that may help solve those problems in a way that makes sense both to them and to our shareholders.
Speaker 5
And generally speaking, are you and the staff on the same page on this? Or is staff in their study thinking differently?
Speaker 2
No. We actually presented our own study side by side, our witness and their witness and answered the same questions and we are lockstep. I would say that our relationship through the Pesley merger too, where we work through the final merger settlement and the process for the structure of that stay out and overview puts us in a position of absolutely being consistent in our voice to our legislators.
Speaker 5
Okay. Second question, just clarifying your comments from earlier. So as you mentioned, you're fairly confident in the earnings growth rate that you've laid out for us through 2023, which by definition implies that the growth in that 2021 through 2023 period of roughly 5% or so is exceeding what your current rate base growth would be from the current CapEx plan, which is in the 2% to 3% range. So it appears that you run the math and you've identified potentially the levers already that would keep you in that growth trajectory. A, is that right in terms of potentially the CapEx that you could incrementally spend?
And B, when would you convey that to us and the investment community in terms of what kind of opportunities you see for potentially increasing CapEx in those outer years?
Speaker 3
Morning, Aleth. This is Tony. So there's various obviously levers that come up with our guidance range, especially particularly when you're going out that far to 2023. Some of them we mentioned in the script, which is we could potentially delever the holding company. We could look at increasing our spend if it's right for our customers and for us, for shareholders where we don't have a lot of regulatory lag.
And so as we look at things going out and it will gain more certainty throughout the planning year this year and we would hope to maybe to the extent stuff changes, would let folks know either foreshadow that at EEI and have maybe more clarity with some of the numbers when we do our year end 2019 call.
Speaker 5
I see. And last question, just clarifying the 46% roughly of the share buyback total buyback that you completed, does that include the ASR that was announced but not completed? Or is that not that factored into this?
Speaker 3
It includes the initial delivery of some shares, but the ASR is not closed. And so the parties will give us the remaining shares when the contract terminates.
Speaker 5
So putting all of that, how much is bought back?
Speaker 3
Well, as of the April, it's roughly 46%, almost 27,000,000 shares.
Speaker 5
I got you. Thank you.
Speaker 2
You're welcome. Thank you.
Speaker 0
And we have a question from the line of Michael Sullivan from Wolfe Research. Your line is now open.
Speaker 6
Yes. Hey, guys. Good morning.
Speaker 4
Good morning, Michael.
Speaker 6
Just I first wanted to just touch on Kansas. Now that we've sort of gotten through this legislative session and seen the bill that ultimately got passed, some of the other things that were discussed, could you guys just give us a sense or are you feeling better or worse about the whole political dynamic there as we go into next year and we get the rates study results and you have a new legislative session. Just your thoughts there.
Speaker 2
Yes, we're feeling better actually. Certainly when the initial bill got passed or filed or initial bills got entered, we became a topic of conversation. And so other folks who had concerns, some of them related to, for example, demand on renewals on a solar installation. Some things that were kind of out there, but just we became part of a discussion. I would say that through that, we've talked to folks and solved many problems that were kind of one offs or specific issues, I'd say.
And the study to be conducted now with everybody in the room together gives us the ability to have those conversations along the way and not necessarily have as much debate at the very end after So I think our ability to continue to talk to people over the next twelve months, our ability to work with an independent consultant and our customers to evaluate all the concerns and issues is actually a positive from an outcome starting in January year.
Speaker 3
And I'll add, we're continuing to give back merger credits to the tune of $11,500,000 a year in Kansas. Yes, it's a
Speaker 2
good point. Remember, we gave our first credit back in the first year after all that was going on. By the time we get to the end of the year, they'll not only have seen that, but know what's in front of them as well. So it will affect those acknowledgments of what the merger means to our customers.
Speaker 6
Great, thanks. And then just, Terry, your comments on Slide eight on the whole capital plan and what that looks like further out in time. Could you just be a little more specific on reallocation versus incremental and what is going to drive that and when we'll have a better sense of
Speaker 2
sort
Speaker 6
of how that plays out?
Speaker 2
Yes. Tony kind of covered it, but what I would say is, if you just looked at percentage allocations by state, remember that it's in part an allocation based on the number of customers in that state. So it may look like it's a little heavier one direction or another, but that's based on population. But more importantly, the commitment around the merger, in particular in Kansas, provides stability, but also provides consistency, whereas the Pisa bill in Missouri is specifically geared toward additional spending around infrastructure. We've seen Ameren go out with a plan and seen what they're doing and have gotten very good responses from the commission.
So we see an opportunity there to be able to potentially allocate more of that direction under the PISA structure, which doesn't exist in Kansas. And then as you go along, you'll continue to see projects that are very specific. We've talked about the fact we didn't put kind of general buckets out there. But as we develop projects, there may be more projects related to one need or another in a state that's very specific. So as we work through those allocations and budget plans, especially in that back end period, you could see a focus jurisdiction versus another.
I'll remind you that Missouri is still in a position where we have some lag there if we overspend absent PISA, but they are also looking at shortening the time period for rate cases over there. So if that were to continue to develop, that might give us additional opportunity without creating lag before we got to the end of the period.
Speaker 6
Okay, great. Thanks. And then just one last one on 2019, I just wanted to clarify. I think when you gave guidance for the year on the last call that already baked in those storm costs, but then weather was actually $06 better than normal, I think Tony said. Was that baked in as well?
Or would that be favorable to what you guys were seeing at the time?
Speaker 3
So this is Tony. We when we come out with our came out with our guidance and our drivers to get to the $2.8 to $3 a share, we were assuming normal weather.
Speaker 6
Okay. Thank you.
Speaker 0
Your next question comes from the line of Charles Fishman from Morningstar Research. Please ask your question.
Speaker 7
Good morning. I just want to make sure I got this right. Okay, you're reaffirming the 5% to 7% with the base of $2.9 for this year. But did I hear that the EPS growth will be a little above maybe the higher end of that range in the early years and lag in the later years unless some potential CapEx comes along? Or were you just referring to the merger savings being front end loaded, which are obvious from the information you provided.
If you could just clarify that for me, I'd appreciate it.
Speaker 2
Yes. Well, they're both correct. I mean, the front end, as we ramp up the savings, there is an early lumpiness, if you will, trending on the front end that drives in part the EPS pathway as well. And again, as it does that, the back end is a little softer. We're talking about what we're doing to look at opportunities and needs for additional spending on the back end from that perspective.
Speaker 7
Okay. So Terry, it sounds like I did get it right. Thank you. That's really all I had.
Speaker 2
Thank you, Charles.
Speaker 0
And there are no further questions at this time. I'll turn the call back to Terry.
Speaker 2
Thank you, Laurie, and thank you everybody for calling in morning. Off to a good start and look forward to talking to you throughout the year. Thank you very much.
Speaker 3
Have a good day.
Speaker 0
This concludes today's conference call. Thank you everyone for your participation. You may now disconnect.