Q1 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Strong Demand Growth Driven by Major New Customers: Evergy is experiencing significant demand growth, extending their weather-normalized demand growth forecast of 2% to 3% through 2028, due to large new customers like Google, Panasonic, and Meta, which collectively represent approximately 750 megawatts of load.
- Favorable Legislative Support Enhancing Investment Returns: The passage of House Bill 2527 in Kansas provides a competitive and constructive regulatory framework, including provisions that mitigate regulatory lag between rate cases and support infrastructure investment, reinforcing Evergy's earnings growth expectations of 4% to 6% annually through 2026.
- Robust Infrastructure Investment Without New Equity: Evergy plans to invest $12.5 billion in infrastructure through 2026, supporting growth and reliability, and expects to achieve this investment and their earnings growth targets without the need for new equity issuances, thereby avoiding shareholder dilution.
- Uncertainty in Achieving Projected Retail Sales Growth: In the first quarter of 2024, Evergy experienced a 0.5% decline in weather-normalized retail sales, primarily driven by lower commercial and industrial demand. Despite projecting a 2% to 3% demand growth through 2028, this relies heavily on the recovery of industrial demand and the timely addition of large customers like Panasonic, Meta, and Google, whose ramp-up may face delays or timing issues. This raises concerns about the company's ability to meet its growth projections.
- Regulatory and Rate Base Growth Challenges Impacting Earnings: Evergy acknowledges that it has the lowest rate base growth, leading to a relatively lower earnings growth trajectory compared to peers. Despite plans for higher capital expenditures, the company is cautious about increasing its earnings growth targets, citing the need to maintain affordability and a competitive regulatory framework in Kansas. This may limit potential returns for investors.
- Potential Infrastructure Constraints and Increased Capital Expenditures: Serving the incremental load from large new customers may be challenged by grid, transmission, and capacity constraints, requiring significant capital investment to address. While Evergy plans to fund these investments without new equity through 2026, there are concerns about maintaining credit metrics and funding needs beyond that period. This could impact the company's financial flexibility and potentially lead to additional financing requirements.
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Potential CapEx Increase Q: Will CapEx increase, affecting rate base growth? A: Management plans to update the capital expenditure plan in the third quarter, incorporating higher generation additions from the updated IRP, economic development wins like Google, and grid modernization opportunities. While they won't get ahead of the specifics, these factors may create an upward bias in CapEx, potentially increasing the current 6% rate base CAGR, which is at the low end compared to peers.
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Impact of Kansas Legislation (HB 2527) Q: How will HB 2527 affect earnings? A: HB 2527 reduces regulatory lag, helping close the gap between authorized and realized returns. In the first year following a rate case, it adds approximately $0.03 to $0.04 per share, and in the second full year, about $0.10 per share. This improvement enhances the company's ability to earn its authorized return over time.
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EPA Regulations Impact Q: How will new EPA rules affect resource planning? A: The April IRP doesn't include the recent EPA rules but future IRPs will. Management doesn't anticipate changing plans to build new gas units needed for reliability. The EPA rules set capacity factor limits before requiring carbon capture and storage (CCS). Coal units operating beyond 2038 would need CCS, a technology not yet proven at scale. They acknowledge the rules are consequential and will analyze the impacts carefully with stakeholders.
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Credit Metrics and Equity Needs Q: Do you need new equity funding past 2026? A: No new equity is needed through 2026. The company expects to maintain credit metrics above Moody's 15% threshold, utilizing a surplus to fund capital investments without sacrificing credit ratios. Transmission investments and more efficient returns contribute to this surplus, supporting operating cash flow.
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Large New Customers and Load Growth Q: What is the impact of new large customers on load growth? A: The company is adding significant new customers like Panasonic, Meta, and Google, totaling approximately 750 megawatts of load, nearly a 5% to 10% increase in peak demand. Construction is underway for these projects, bolstering confidence in projected 2% to 3% retail sales growth despite a mild first quarter and flat growth last year.
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Constraints Serving Incremental Load Q: Any challenges in serving increased load? A: Adding large loads requires evaluating transmission, distribution, and capacity constraints. While grid and capacity issues exist, they're factored into resource planning. For new gas plants, existing gas and grid infrastructure are considered, and although permitting and interconnection take time, management believes they can work through these challenges.
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Earnings Growth Outlook Q: Could earnings growth guidance increase to 5%-7%? A: Management won't get ahead of the CapEx plan or earnings forecasts. They acknowledge that with the lowest rate base growth among peers, earnings growth is relatively lower. However, investing to seize economic opportunities and ensure reliability may lead to higher investments. They'll discuss potential impacts on earnings trajectory over time but currently focus on affordability, reliability, and sustainability.
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Missouri Legislation Prospects Q: Will Missouri legislation affecting gas investments pass soon? A: Despite broad-based support for PISA provisions relating to natural gas investments, it's unlikely to pass in the current session due to tight timelines and session dynamics. Management remains hopeful but realistic about the legislative process constraints.
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Offsetting Mild Weather Impact Q: How will you offset earnings impact from mild weather? A: The company views this as routine to manage, focusing on cost management. The new Kansas legislation provides benefits, and with a range of operational levers, they feel confident in mitigating the first quarter's mild weather impact, keeping an eye on the more significant second and third quarters.
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Confidence in Sales Growth Q: What supports confidence in 2%-3% sales growth? A: Confidence stems from robust residential and commercial demand, recovery in the industrial sector, and new large customers coming online. Last year's industrial demand decline was due to unique circumstances with a few customers, which are expected to normalize. Construction progress on major projects like the battery plant in DeSoto and the Meta data center reinforces this outlook.
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Decrease in Labor Capitalization Q: What caused the decrease in labor capitalization? A: A change in transformer labor capitalization approaches in the first quarter led to a $0.02 year-over-year decrease. This reflects a catch-up adjustment, and the ongoing effects will continue moving forward.
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Depreciation Considerations from EPA Rules Q: Will asset depreciation change due to EPA rules? A: Management recognizes that the new EPA rules might have significant impacts on asset depreciation schedules, especially for coal units requiring CCS technology, which isn't commercially proven at scale. They'll analyze affordability and reliability impacts carefully, working with regulators and stakeholders over time, without rushing into decisions.
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Details on Google Deal Q: Can you explain the Google deal's mechanics? A: While specific rates aren't disclosed, large new loads like Google's are typically eligible for economic development rates. Evergy will supply the megawatts to Google, which will be a customer. Google has signed a virtual PPA and will act as an economic offtaker, with the associated asset becoming part of the Southwest Power Pool's generation resources.
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Transmission Investment Needs Q: How much transmission investment is needed for large new loads? A: Investments vary by location, but for loads in the hundreds of megawatts, incremental transmission investments can range from $50 million to $150 million, similar to peers. Meta and Panasonic projects are already included in the current CapEx plan, while Google's project is not yet included. These investments help spread fixed costs but also require significant system enhancements.