Evergy, Inc.
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2020 Evergy, Inc. Earnings Conference Call. . I would now like to hand the call over to Lori Wright. Please go ahead.

[Lori Wright:]

Thank you, Michelle. Good morning, everyone, and welcome to Evergy's fourth quarter call. Thank you for joining us this morning. Today's discussion will include forward-looking information. Slide 2 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 include additional information on non-GAAP financial measures. The release was issued this morning, along with today's webcast slides and supplemental financial information for the quarter, are available on the main page of our website at investors.evergy.com.

[David Campbell:]

Thanks, Lori, and good morning, everyone. It is my pleasure to join you on my first earnings call as Evergy's CEO. This is an exciting time for our company. We delivered strong financial performance in 2020 and have a tremendous opportunity to maintain our momentum and the company's Sustainability Transformation Plan, or STP. Before I jump into our results, let me touch on some observations in my new role. As you know, I joined on January 4, just under 2 months ago. Acclimating to a new company is quite different in this COVID environment. Even though I am not able to meet as many people in person as I would like, I've still enjoyed engaging with the teams remotely to get up to speed and have enjoyed hosting various introductory meetings with important stakeholders, including our regulators in Kansas and Missouri, and many of you listening in today. I look forward to building deeper relationships as we move forward. When I first began discussions with the Board about joining the company, I spent time examining the STP and the objectives it aims to achieve. I was attracted by these many value-creating opportunities and a strong fit with my skills and industry experience. As CEO, I've been able to gain more visibility into the plan, and I believe these value opportunities for both our customers and our shareholders are just beginning to be appreciated by the street. Ultimately, my role is to optimize the plan and accelerate the pace of execution as possible and appropriate. As we advance down the path, I'm confident that Evergy can become one of the best, highest-performing all-electric utilities. An important part of our journey will be our fleet transformation opportunities. Customers and communities want reliable, affordable and sustainable energy. Our geographic footprint is ideally suited for wind and well positioned for solar, which allow for a path to transform relatively high-cost fossil fuel into modern, low-cost renewables, all while ensuring reliability. We view this position as a competitive advantage, one that provides a true win-win-win as we think about shareholders, customers and the environment. Our current plan, which is comprised mainly of straightforward, highly executable efficiency improvements and utility investment lays the foundation by preparing the grid and enabling this compelling fleet transformation thesis over the next decade and beyond.

[Kirkland Andrews:]

Thanks, David, and good morning, everyone. Having just begun my new role here as Evergy's CFO a few days ago, I'm pleased to have the opportunity to speak with all of you so soon into my tenure. Having served on the company's Board as well as on the committee which oversaw the creation of our Sustainability Transformation Plan, I was already well aware of the compelling value-creating opportunity the STP represents for Evergy and its stakeholders. As I've known and respected David for many years, I was even more compelled by the company's potential under his leadership. So when he and I began our conversations about my potentially coming in as CFO, the opportunity represented an extremely compelling and natural next step for me. I'm very excited to be a part of Evergy's bright future in my new role, and I'm really looking forward to being part of the outstanding team here that will help our company realize its great potential. On that note, I'm very pleased to share more details about our strong outlook for 2021. But before I do, let me begin the financial review on Slide 14 with a review of the fourth quarter results. This morning, we reported fourth quarter 2020 GAAP earnings of $0.22 per share compared to $0.28 per share in the fourth quarter of 2019. Adjusted non-GAAP earnings were $0.28 per share compared to $0.32 per share in the same period a year ago. As shown in the chart, EPS was driven lower due to reduced gross margin as a result of 2 factors

[David Campbell:]

We'll now welcome questions.

[Operator:]

. Our first question comes from Shar Pourreza with Guggenheim Partners.

[Shahriar Pourreza:]

So just a couple of questions here. First, just on the Board appointments and Bluescape, Elliott agreement. I know John mentioned in the press release, just to quote, "refine and implement the STP for the benefit of all Evergy stakeholders." Can you just elaborate on what was meant by refine? Does that - David, kind of relate to your prepared remarks around potentially accelerating the pace of execution, where appropriate?

[David Campbell:]

So Shar, I'm glad you asked the question. The STP is our plan. We think the Board appointments today will really just help us to execute that plan and implement the program. I think, with any 5-year plan, you're always looking for opportunities to enhance and drive performance. But if the STP is our plan, they're really joining to help us execute the plan. Kirk, K.B. and I - Kevin, Brian and I and the whole team will be looking for ways to shape and implement that plan over time. And we've had discussions in some of our meetings on - are there going to be opportunities for further cost savings or driving that over time. I think the company has done a tremendous job as shown in 2020 before our arrival of being on a great trajectory of cost reductions. I'm sure we'll continue to focus on that, but we'd just emphasize that the Board appointments are to help us to implement and execute the STP, which is our plan. And we're very excited about that plan.

[Shahriar Pourreza:]

Got it. And then just the exercise option for additional share purchases by Bluescape over the next 3 years, is there any constraints or limits on how much can be purchased over that time frame at sort of that agreed upon price, which I guess is 20% higher than the current valuation levels?

[David Campbell:]

Yes. The total size of the warrant grant is just under $4 million, so it could be up to that amount. They're not transferable for exercise, and it's just under $65 a share, a 3-year term. And so that's the overall setup for it.

[Kirkland Andrews:]

Yes. And the mechanism - Shar, it's Kurt - allows to net settle that on the basis of the intrinsic value implied by the option at that time. So it's not - from a dilution stand, because I know you always focus on that, it's not the full $3.95 million. So we've got that mechanism in our disposal.

[Shahriar Pourreza:]

Okay. Perfect. That's what I was trying to get at. And then just lastly for me, David, is the current sort of these winter storm fallouts change the conversations around securitization in Missouri? And do you think it's going to sort of impact your ability to get legislation done this year? I mean, it seems like some of the legislators were focused on it in hearings last week, but it also sounds like, from your prepared remarks, you may be backing away from prior language of needing the securitization by '22 to keep the plant on pace.

[David Campbell:]

No. I think we think securitization is an important tool. We think that this extreme weather event is something they're all going to - the whole industry is going to need to step back and think about what it means. But we still think this is an important tool. It may reflect that for some of our units. Is a seasonal operation option or a more limited option going to be important, especially as we think about winter peaks and the winter season? We even think about how might that even fold into some of our legislative efforts over time. So I actually think that this event, if anything, helps to spur interest in the overall topic. So we found good engagement on securitization and the different pros and cons of it as part of the greater awareness of the whole issue as a result of the event. So I don't mean to imply at all that we're backing away from securitization efforts. We think it's an important legislative effort. We're just trying to highlight that, as with - we don't develop a plan that's dependent on new legislation. It's a tool that can help. And we actually think the dialogue is even more constructive as a result of the difficult events that we've seen this month.

[Shahriar Pourreza:]

Got it. And then David, congratulations on these appointments. And I'm sure you guys aren't going to miss answering any more questions in Texas. So congrats, guys.

[David Campbell:]

Thanks, Shar.

[Kirkland Andrews:]

Thanks, Shar.

[Operator:]

Our next question comes from Julien Dumoulin-Smith with Bank of America.

[Dariusz Lozny:]

It's Dariusz Lozny on for Julien here. Just wanted to ask about your 6% to 8% long-term EPS guidance target. I see you guys are delivering on that in 2021. I was just wondering, now that you've given a look in terms of your 2025 CapEx, how should we think about that 6% to 8% going forward, perhaps moving beyond the 2024 time frame?

[David Campbell:]

So we affirm the growth rate range target for 2019 to 2024. So we - and there are some questions that I first started around the management team coming in and trying to reset or rebase the plan. No. The management team is here to help execute the plan. And we benefit in first case that he was around on the Board to help develop the plan, too. So we do - we are reaffirming the 6% to 8% through 2024. We introduced 2025 CapEx, but we're not yet speaking to the longer-term range. We're planning to cover that at the Investor Day. We expect to do that in the third quarter following our IRP filing. So expect to hear more about 2025 and going out another year at that time. But right now, we just want to make sure that everyone hears it clearly from us that we're reaffirming that 6% to 8% target through '24, and we look forward to having an in-depth conversation with everyone at our Investor Day in the third quarter.

[Dariusz Lozny:]

Okay. Great. One more, if I can, and this is on Slide 9 of your presentation. And apologies if I missed this, but your 2025 CapEx, it looks like there's some latitude to go beyond the $1.85 billion to $2.1 billion. Can you just confirm what that delta represents, please?

[David Campbell:]

Sure. And so 5 years out, and we've talked about this, I think, in some of our discussions last quarter. We have a very robust pipeline of projects through the balance of the decade. And that's really to signify that, as we get closer to '25, if it makes sense, of course, we'll firm up that number over time. We've got a strong backlog, so we could see that number being higher. But of course, we'll look at that in the overall balance of considerations. But we could certainly see that CapEx number trending towards the high end or the midpoint of that range. And it just reflects we've got that strong pipeline. And it's also shown - this is something again that we'll be going through in our Investor Day. But what I've been pleased to see is that we've got a great set of projects ahead of us in the next 4 years. But then the balance of the decade, we've got a very robust pipeline as well.

[Dariusz Lozny:]

Okay. Great. That's all for me.

[Operator:]

Our next question comes from Michael Lapides with Goldman Sachs.

[Michael Lapides:]

Congratulations to both of you. Welcome to the new role in an exciting time. I have a little bit of a policy question, public policy question. And David, I'm curious. I know you're in your first rounds of meeting all the key stakeholders in both states. But just curious, given what's happened in the events over the last 2 weeks. Do you think there will be incremental concern about shifting even more and more away from solid fuel-type generation sources to more intermittent sources, for reliability purposes, I know environmental purposes and, clearly, costs are key - and clearly, coal is on the wrong side of the ledger on both environmental and cost. But I just wonder if we're in for somewhat of a paradigm shift. Does it mean fewer coal retirements? Does it mean more batteries, a bigger mix of gas? How do you think from a policy perspective folks in Kansas and Missouri are going to look at what's happened both there, but also south of them and think about kind of what the system should look like long term for reliability?

[David Campbell:]

So Michael, that's a great question. Obviously, I'm new to Kansas and Missouri, so I look forward to engaging that dialogue with our key stakeholders here. I think we're all going to learn from the event and, in particular, what the overall planning for reliability needs to look like for winter because the renewables profile matches up extremely well with summer peaks. High correlation with solar generally with the on-peak times, good ability to charge batteries. Wind tends to run at night or other times. The winter can be more of a challenge as we think about it. So as I think about that question, and it's going to be a dialogue again with our stakeholders, I know for me I thought about, well, a big chunk of what you described is, can we replace energy production from fossil and from coal, which is higher cost and higher emissions, and replace a fair bit of that energy with ongoing renewables? But are we going to maybe need to think about seasonal operations or other factors, especially in peak months, where you're still reducing the energy production from fossil and from coal pretty significantly, so you're still getting a displacement, but you're not losing the reliability benefit? Now those plants were not designed to be peakers, so they're not peakers. But at the same time, all coal units across the country have significantly increased their flexibility. I think, certainly, seen that in my past experience. And having those kind of units available for peak months, winter and summer, may be a more prominent part of the mix. So you may see - again, this is - we're all going to have to have this dialogue and evaluate over time. We shouldn't react in a long-term business like ours to 1 week. But I think we may well see where there's maybe less emphasis on retirement and more emphasis on variabilizing cost and keeping existing units that provide very critical support at critical times in the system. So that's where I think the discussion might go. But what's going to be important for us is that we participate in that dialogue, we listen. And I look forward to engaging with our key stakeholders in Kansas and Missouri on that. Because I think we all saw that, when you have sustained outages in the winter, and we're very lucky that our outage is while unprecedented were relatively brief. It's not much harder than the summer when you have those outages because it's so cold. That's very detrimental to health. And it's that much harder to restart things when they're off-line when it's that cold. So much to learn.

[Michael Lapides:]

I have one follow-on on that. When you look around at the coal fleet, meaning your coal fleet, and you look at facilities where given access to gas or existing or potential, are there coal units that instead of retiring you might consider just converting into a higher heat rate peaker? We've seen a bunch of that in other parts of the country. I just didn't know if that was a low-cost alternative that also might provide emissions benefits.

[David Campbell:]

That's an insightful question, Mike. We have looked at that, and we'll continue to. There are a couple of facilities where that could be an option, and then there are probably the balance majority where the pipeline infrastructure is simply not there, so it requires a fair bit more than just converting, but I think that will need to be part of the discussion. Now as we all know, with the wind and weather event, what happened is having that inventory in a fuel pile, a coal pile was pretty helpful and gas can be pretty hard to come by, so the - that I think is going to need conversion to a more of a gas peaking kind of unit where possible. I think it should be part of the mix. But I think we'll also want to think about - because it is generally the case, and the winter peaks, in particular, the gas availability can become challenged or more expensive. But we have looked at that. That's an option in a couple of spots. But for many of our places, you need more extensive infrastructure build-out. It might preclude it being possible.

[Operator:]

Our next question comes from Paul Patterson with Glenrock Associates.

[Paul Patterson:]

On the power marketing, I know you guys aren't putting it as part of your guidance, but it sounds like it was a positive. And I was wondering if you could maybe give a flavor as to what you're seeing there and why you're excluding it?

[David Campbell:]

Sure. So as I mentioned, that's a real small part of our business. It's been in the business for a long time as part of the legacy Westar company. And we found it would be helpful to have because the regulated utility we still operate in a market. So having a group with commercial functions and insight in the market does help and add value to our asset management activities that are part of our core business, but it's historically been pretty small. And it generally takes long positions and transmission positions and relatively limited trading positions. What was unusual about this event is that they had - they still only have a relatively small number of positions and transition based, but they were long in ERCOT. So with prices being so high for so long in ERCOT is why even a quite small business with only a couple few small positions generated margins in excess of what's typical. The reason why we've excluded the - kind of the excess performance during the week is that we don't expect it to recur at that size. This is going to continue, we think, to be a very small part of our business. So we're not going to - it'll be reflected technically in our adjusted EPS, but we're going to describe what it is, make it very clear. And our guidance of $3.30 that we put out was - did not include the expected positive impacts from the week's event. So it's a positive, but it's not something that this business we expect will continue to be quite modest size. So it's - it did happen, and it's a reflection of the sustained event that occurred in Texas.

[Paul Patterson:]

Okay. And I don't think if it is a big driver, but it's historically - but just so curious as to - and I apologize. I got just a little bit late. How big it might have been if you guys...

[David Campbell:]

Well, typically, the business is - so typically, the business is about $15 million to $30 million of gross margin annually. So after costs, it's been anywhere from approximately $0.03 to up to $0.07 a share, so small.

[Paul Patterson:]

And this quarter, what was it? I mean, it's not this quarter, but for 2020 for the...

[David Campbell:]

Yes. So we haven't quantified it yet because the settlement process is still ongoing. What we estimate is that the results could be up to 3x higher than the high end of what we might earn in a typical year.

[Paul Patterson:]

Okay. Awesome. Okay. Well, that's good news. And everything else was answered.

[Operator:]

Our next question comes from Charles Fishman with Morningstar.

[Charles Fishman:]

I'm specifically looking at Slide 21, transmission investment over the next 5 years, '21 to '25 It's going a little over $3 billion. And then I'm going back on - in the investor slide back in January. The previous 5-year, '20 to '24, was $1.9 billion. Am I comparing apples to apples? In other words, on '21, is that all FERC jurisdiction transmission investment that's we're building?

[David Campbell:]

No. It's not all FERC jurisdictional. That's our total transmission. I think you might be doing apples and oranges.

[Charles Fishman:]

Okay. That's what I thought because it's really jumping, $1.9 billion to $3 billion, and I thought - I mean, I know that's been strong, but that looks like a little too much.

[David Campbell:]

Yes. And we've added '25. But obviously, that - the difference between '20 and '25 million is not accounting for the difference in year 2. So well, maybe - if you've got us to the slide that you're comparing to, with a bunch of follow-ups with our team, and we can cover that because I'm not sure which slide, you're looking at, but we can definitely work that with you off-line because the plan has had some phasing shifts and some recategorization. But in general, '20 to '24, there weren't major changes, some phasing on renewables in particular, and then we just added '25. But we have to go through that with you off-line.

[Charles Fishman:]

Look, the fact that rate base and look at the right side of Slide 21, for rate base going from 12% to 17%. Still, that's a big focus of your investment over the next 5 years.

[David Campbell:]

Yes. And that is - that was the case. That has been the case in the STP and will continue.

[Charles Fishman:]

Okay. Great. And on that - let me just - that transmission. Is there a specific project you're depending on? Or is it just a lot of little stuff? And certainly, I would think the events over the last couple of weeks are going to make that - the hurdle of getting - any that requires approval a little bit easier.

[David Campbell:]

So our plan is not dependent on any single or even several large projects. It's the sum total of a lot of different projects, which I think is good in terms of diversification. I do think that the importance of transmission was clarified and magnified by the events of last week because you can have localized issues. You can have plants go down. You can have wind not blowing in some places and maybe blowing in others. The resilience of the transmission system and the importance of the transmission system, I think, was absolutely reflected in the events of this past month. But we're not - our plan is not dependent on any big, large projects that are a significant percentage of the overall total.

[Charles Fishman:]

Okay. You're certainly making the STP look more compelling, and it's good presentation.

[Operator:]

There are no further questions. I'd like to turn the call back over to David Campbell for any closing remarks.

[David Campbell:]

So again, my first call as CEO, I'm very excited to be part of the team here, very strong team. I want to complement their efforts during the extreme weather and their efforts to serve our customers and keep the lights on. And thank you all for your interest in Evergy, and have a great day. Stay safe. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone, have a great day.