The speaker, Peter Flynn, welcomes everyone to the Third Quarter 2023 Evergy Earnings Conference Call and introduces the presenters, David Campbell and Kirk Andrews. The conference will cover forward-looking information and the company's financial outlook. David reports that the company had a solid quarter with adjusted earnings of $1.88 per share, a decrease from the previous year due to milder weather and higher expenses, but partially offset by lower O&M expenses, higher COLI, and tax items.

The results for the quarter were affected by excess storm costs and higher interest expenses, but overall reliability metrics have improved. The company has narrowed its EPS guidance range and established a new long-term growth target. The company has been successful in reducing O&M costs and increasing investments, but has faced challenges with rate case outcomes and a higher interest rate environment.

The Kansas rate case settlement had a negative impact on Evergy's forward plan, reducing earnings by $0.15 per share. This was due to the focus on improving regional rate competitiveness and the need to ensure a competitive cost of capital and return on investment. In contrast, the Missouri rate case outcomes were more favorable, but challenges related to legacy issues and higher interest rates are still affecting the company's future plans. This includes the refinancing of $800 million in holding company debt and an additional $500 million term loan in 2025.

The revised long-term growth rate target of 4% to 6% reflects the cost savings achieved since the 2018 merger and is expected to continue through 2026. The growth rate will be driven by rate base growth and financing plans, with a current expected rate base growth of 6% annually. The company plans to pursue mechanisms that align with policy objectives in Kansas and will file rate cases every two years in both states. The company remains focused on operational and financial execution and has announced a 5% increase in quarterly dividends to align with the updated growth outlook and payout ratio target.

In summary, Evergy's combination of annual growth outlook and dividend yield positions the company to deliver a competitive total annual return of 9% to 11%. The company has reached a unanimous settlement in its pending Kansas rate cases, resulting in a net revenue increase of $41.1 million. This includes the addition of new wind farms and the resolution of rate discounts provided through the COLI program. The settlement does not specify a return on equity or capital structure, but does set a 9.4% return on equity for transmission delivery charges. If approved, new rates will be implemented by December 21. Overall, Evergy has been able to limit cumulative rate increases in Kansas to 1% since 2017, while rates in regional peer states increased by 12.7% over the same time period.

Evergy has been successful in delivering on its promise to improve regional rate competitiveness in Kansas since the 2018 merger. This has helped to attract economic development and investment to the state, with over $5.2 billion in capital investment and 6,000 new jobs in 2022 alone. The company's focus on affordability and cost savings has resulted in over $360 million in operating efficiencies and customer bill credits, while also achieving record safety results and reliability improvements. This has directly supported the state's priorities for economic growth.

The success of the grid in Kansas will require significant capital investment, which can only be achieved with a regulatory environment that enables the flow of competitively priced capital. This includes cost of capital parameters, regulatory capital structure, and timely recovery of investment. Without these elements, Evergy will struggle to compete for capital and put necessary infrastructure in place for economic development. To fully capitalize on the state's economic potential, constructive regulatory mechanisms for investment must be in place.

Evergy is committed to working with regulators and policymakers to ensure that Kansas is competitive with other states and takes advantage of opportunities. In Kansas, a final order on the settlement agreement for rate cases is expected by December 21, and a settlement for energy efficiency programs has been conditionally approved. In Missouri, the commission's decision to securitize extraordinary costs from Winter Storm Uri has been affirmed by the court of appeals, but there is a possibility of further appeal to the supreme court. Evergy plans to complete the securitization financing after the appeal is resolved.

In Kansas, we are working to engage with Missouri stakeholders to support timely recovery in new dispatchable generation investments. We are also planning for our Missouri West rate case in 2024. Our core strategy focuses on affordability, reliability, and sustainability. We have saved over $1 billion in operating costs and strive to keep rates affordable for our customers. We prioritize reliability and have a strong focus on metrics related to customer service, safety, and infrastructure investment. We are also committed to sustainability and have plans to add renewable resources and hydrogen gas generation to our fleet. Our goal is to lead the responsible energy transition in our region while keeping affordability and reliability in mind.

Kirkland Andrews, the speaker, reviews the company's results for the third quarter of 2023. Adjusted earnings were $432.3 million or $1.88 per share, a decrease from the third quarter of 2022. This decrease was mainly due to lower cooling degree days and weather-normalized demand, as well as higher depreciation and amortization and interest expense. However, the company saw a positive impact from cost efficiencies and higher COLI proceeds. For the year-to-date, adjusted earnings were $754.5 million or $3.27 per share, lower than the same period last year.

The year-over-year EPS drivers for 2023 include a decrease in cooling and heating degree days, favorable weather, demand growth, higher transmission margin, decreased O&M, higher depreciation expense, COLI proceeds, higher interest expense, and other items. These factors resulted in a net decrease of $0.23 in EPS compared to 2022. The increase in interest expense was driven by various factors, but the company has implemented cost management initiatives to offset this. Other income and income tax items also had a positive impact. These factors are expected to continue to impact the company's full year 2023 results.

Higher interest costs and lower AFUDC equity earnings have been the main factors contributing to the variance in the company's year-to-date results compared to their original plan. This is due to a number of reasons, including rising interest rates, delays in securitization, and higher than expected capital investments. These factors have also resulted in lower AFUDC equity earnings and higher AFUDC debt recovery. However, the company's long-term plan has already accounted for this shift and expects it to continue into 2023.

The company has successfully managed costs and offset the impact of higher interest costs through various measures, including higher-than-expected margins on a coal plant stake, higher COLI proceeds, and increased demand driven by a strong local labor market. The only remaining impact on earnings is a $0.05 reduction due to the Persimmon Creek Wind project, which will be limited to 2023. Demand has increased 0.7% year-to-date, driven by strong residential and commercial growth, but there was a decline of 0.8% in the third quarter due to lower industrial demand. The local labor market remains strong with low unemployment rates.

The company is expecting to see a recovery in industrial demand in 2024. They have revised their long-term financial expectations and are narrowing their adjusted EPS guidance range for 2023. They have also announced a 5% increase in their dividend and will provide an updated capital plan for 2024 through 2028 on their fourth quarter earnings call. The growth rate guide takes into account factors such as higher interest rates, regulatory outcomes, and expected rate base growth. The company will provide an updated adjusted EPS guidance for 2024 on their fourth quarter call. The company is focused on investing in new infrastructure to improve customer service and meet the evolving needs of their customers and communities. They will continue to prioritize regional rate competitiveness and transition their generation fleet. The call is now open for questions from investors.

David Campbell, in response to a question about the assumptions made for lag and other factors such as O&M, states that the revised growth rate target takes into account the current macro conditions, interest rates, regulatory mechanisms, and rate base outlook. The company is pleased with the cost savings achieved through an accelerated O&M reduction plan, but they are disappointed with the results of the Kansas rate case. However, they have a new plan in place that reflects these factors and they are open to working with regulators for ongoing changes to regulatory mechanisms.

The current capital plan does not anticipate a need for equity through 2026, but it may be updated on the year-end call. The company is working with regulators and policymakers in Kansas to establish a stable capital structure and competitive returns. They are also focused on the timing and recovery of capital investments.

The company plans to build natural gas generation in both states and will focus on mechanisms to support this build-out. They will shape their capital plan based on the policies in each state and will provide guidance for 2024 on their year-end call. The Kansas rate case will not impact 2024, but a rate case in Missouri West will impact rates in 2025, with a more active regulatory calendar in 2025 and 2026.

The company is aware of the lumpier outcomes related to rate case outcomes and is only going through one rate case next year. They emphasize the importance of stable execution within their growth rate range and will provide more details on their 2024 guide in the year-end call. They expect a 6% annual growth rate for rate base, but will evaluate additional investment opportunities based on policies and mechanisms in place in their states. They will shape their capital plan based on returns rather than following the trend of other utilities.

The company is working on reducing regulatory lag in Missouri to help them earn their realized return. They will also be evaluating their capital plan by year-end and considering feedback from stakeholders. The outlook assumes the unanimous settlement, but if it changes, they will adjust accordingly. They are confident in the settlement and its potential for approval. The company is focused on improving regional rate competitiveness in Kansas.

The company has a three-year outlook for their growth rate target and may discuss the capital structure in Kansas with regulators and other stakeholders. The rate case and testimony have set the stage for this discussion, emphasizing the importance of competitive equity returns and responsible levels of holdco leverage.

The speaker discusses the use of utility-only capital structures in regulated rate making and mentions that the company has a rate case planned for Missouri West next year. They also mention that they are not currently planning a rate case for Missouri Metro next year. The company's new plan assumes current interest rate curves and the Kansas rate case is expected to have a $0.15 difference from the prior plan, with the majority of the difference being due to interest rate changes.

Kirkland Andrews, from the company, confirms that the expected growth rate will impact the adjusted outlook on EPS. The company is managing their credit metrics to stay above the thresholds set by Moody's through 2026. The company plans to update their capital plan on the year-end call, but some processes may not be completed by then. The updated long-term growth rate outlook is based on the current rate base growth trajectory, and the company will add 2028 to the capital plan. The updated integrated resource plan will also be reflected in the allocation of capital across jurisdictions.

The speaker agrees that the overall growth rate and parameters will align with current trends, but with adjustments and without evaluating capital allocation. Incremental opportunities are on track, particularly in terms of economic development. The regulation in Missouri is more constructive, but the speaker is hopeful that Kansas will also engage in similar efforts. The groundwork for positive discussions has been laid due to the potential for economic development in Kansas.

The speaker discusses the importance of being prepared for potential economic opportunities in the state and the need to address the company's capital structure and ensure competitive returns. They believe that now is the right time to have these discussions and that there is potential for constructive dialogue. The topic of capital structure has been asked about multiple times.

Paul Patterson asks about discussions with the company regarding the utility's capital structure and the treatment of the holding company in other jurisdictions. David Campbell confirms this and Kirkland Andrews explains that the capitalization of certain portions of O&M is consistent with industry policy and reflects the company's investment program. There is not expected to be much deviation in this going forward.

The speakers, Kirkland Andrews and David Campbell, state that there will be no significant changes going forward, and that the reduction in O&M costs in the quarter and year-to-date is reflective of overall cost reductions. They thank participants and conclude the call.

This summary was generated with AI and may contain some inaccuracies.