Evergy, Inc.

Good morning, ladies and gentlemen, and welcome to the Q2 2020 Evergy Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to hand the conference over to your host, Ms. Lori Wright.

Thank you. Good morning, everyone, and welcome to Evergy's second quarter call. Thank you for joining us this morning. Today's discussion will include forward-looking information. Slide two in the disclosure in our SEC filing 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 releases 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. On the call today, we have Terry Bassam, Evergy's 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. I will now turn the call over to Terry.

Thanks, Lori, and good morning, everybody. We've got a lot of positive news to discuss today, including our new sustainability transformation plan and solid second quarter results. So our new plan sets the stage for significant value creation and a strong future for Evergy and our stakeholders. We'll begin today's call with a deeper dive into the STP and its benefits, then move to the quarter and your questions. Turning first to slide four. As you know, earlier this year, the Board established a new Strategic Review and Operations Committee to evaluate and recommend ways to enhance value for our shareholders and all the company stakeholders. Among the options considered were a potential strategic combination and a modified, improved, stand-alone operating plan and strategies. Both the committee and the board as a whole were well advised in these efforts, with each retaining independent financial advisors and consultants to assist in the review. The work over the past four months has been extensive. The committee and our financial advisors engaged with a number of third parties who may have been interested in a combination. We also took a fresh look at each element of our operating plan, including our investment priorities, our opportunities for cost savings, and operating efficiencies, and how and where we allocate capital. Throughout the review, we were focused on three core objectives, maximizing long-term value for our shareholders, serving the best interests of all Evergy stakeholders, including our customers, employees, and communities, and continuing to advance our work to successfully create a forward-thinking, sustainable energy company. The plan we are announcing today delivers on all of these objectives. Accordingly, The committee unanimously recommended and the board unanimously approved pursuing our sustainability transformation plan that we are excited to announce today. Turning to slide five, our plan creates a compelling value proposition for shareholders. Under our plan, we will meaningfully increase our earnings growth to 6% to 8% through 2024 compared to our previous guidance of 5% to 7%. This increased growth rate places Evergy in the top quartile of all U.S. electric companies. Together with our growing dividend, Evergy will have a compelling shareholder return profile. This growth will be enabled by increased capital investment as well as continued operational cost efficiencies to minimize the impact on customer rates. Under our new plan, we expect approximately $8.9 billion of capital investments through 2024 in infrastructure upgrades, grid modernization technology, and clean energy initiatives across Kansas and Missouri. The incremental $1.4 billion in capital investments compared to our prior plan, which we announced in March of this year, is expected to support an estimated 5% to 6% compound annual rate-based growth through 2024. I want to point out that there are additional opportunities related to decarbonization and renewables deployment that are not included in our STP, which could support further investment depending on outcomes from our stakeholder engagement process. This process is underway as we update our long-term energy plan. We believe these potential incremental investment opportunities are realistic and achievable given the support for clean energy at the state and local level in Kansas and Missouri and from our customers. As you know, through the realization of the benefits associated with our prior merger, we have enhanced our planning processes that support system investment. We've also demonstrated our ability to execute on our identified cost management initiatives with the quantity and timing of merger savings well ahead of our initial targets. This execution drives our confidence in achieving continued cost reductions and the growth outlined here under a range of scenarios. Slide 6 highlights the growth opportunity in our earnings and rate base that I just discussed and shows the 25% reduction in O&M expenses we expect to achieve through 2024. Let me discuss each of these in greater detail, starting on slide seven. Since completing our merger, we have regularly reviewed our capital investment plans to ensure that we are investing at levels and in areas that drive the greatest benefits for our customers and the greatest value for our shareholders. Over time, we have adjusted our investment planning accordingly. The work conducted by the Strategic Review and Operations Committee helps identify additional investment opportunities across our transmission, distribution, and generation infrastructure, as well as our customer-focused investments. The STP's incremental $1.4 billion of CapEx to bring the five-year total to approximately $8.9 billion results in an estimated 5% to 6% annual rate-based growth. Looking to slide eight, our capital plan is focused on additional investments to accelerate decarbonization and grid modernization while continuing to be cost-conscious, financially strong, and people-first culture fundamentals that are core to Evergy's foundation. The result is greener, more reliable, affordable energy for our customers, and line of sight to continued earnings growth and value creation for Evergy's shareholders. Over the next five years, we expect to invest $4.8 billion in upgrades to transmission and distribution infrastructure and customer-facing platforms to improve reliability, provide further access to renewable energy, and enhance the customer experience. Our new plan also contemplates approximately $500 million of asset hardening, grid automation, and technology investments through 2024 to create the grid of the future. This includes expediting the evolution to a smarter, more reliable, and more efficient grid. Increasing our renewable footprint is a priority that we have discussed and that we have acted on. Since 2005, Evergy has retired more than 2,400 megawatts of fossil generation and added or contracted for over 4,600 megawatts of renewables, making Kansas number two in the nation for wind generation as a percentage of total generation. Our new plan has the potential to expedite CO2 emission reductions by pursuing constructive regulatory mechanisms to economically retire coal-fired generation and expand Evergy's wind and solar footprint. Through these actions, we can drive lower fuel and purchase power costs, as well as O&M savings, which help keep our customers' bills competitive in the region. While we're still targeting 80% reduction in CO2 emissions by 2050, compared to 2005 levels, under this plan, we have the potential to reduce CO2 emissions as much as 85% by 2030, a material improvement in our CO2 footprint over the next 10 years. The pace of this reduction will ultimately be defined in collaboration with stakeholders as we seek to find the most beneficial economic path forward for our customers. We are excited about the opportunities ahead, and we are already well on our way to meet our goals. Nearly half the power to homes and businesses we serve comes from emission-free resources. And our clean charge network includes over 1,000 EV charging stations and continues to expand. Slide 9. Maintaining a solid financial foundation has always been front and center for us. As reviewed on slide 9, our plan requires no equity issuances, and Evergy will continue to have a strong credit profile. Tony will review our liquidity and financial activities in greater detail in his remarks. When we announced our review, we affirmed our commitment to serving the best interests of all Evergy stakeholders, including Evergy's employees, customers, and communities. This commitment is unwavering, and our plan delivers on it. Slide 11 reviews our new growth plan as contrasted against our prior expectations, including growth in our capital investments, rate base and earnings, as well as continued growth in Evergy's dividends. The result is an attractive investment outlook and meaningful shareholder value creation. To sum up on slide 12, we are confident in this plan and the opportunities it creates to drive significant value for our shareholders and stakeholders alike. It allows us to target top quartile shareholder returns, deliver on regulatory and merger commitments, invest in critical infrastructure, and accelerate our transition to providing more affordable and cleaner energy and project jobs while enhancing economic development opportunities. We look forward to continuing to engage with our regulators as we execute on this plan. Now let's turn to the quarter where we delivered solid results in our outlook for the year. We reported second quarter gap earnings of 59 cents per share compared to 57 cents a share earned in the second quarter of 2019. Adjusted earnings per share were 68 in the second quarter of 2020 compared to adjusted 58 cents per share in the same period a year ago. On a period-over-period basis, these results were driven by favorable weather, cost reduction efforts, and lower shares outstanding. partially offset by the negative sales impact of COVID-19 and a non-cash income tax adjustment due to a new Kansas law that will eliminate state income taxes for electric utilities. Also, we initiated our 2020 EPS guidance, which on a gap basis is $2.66 to $2.86, and on an adjusted non-gap basis, $2.90 to $3.10. I'll let Tony give you more details on the outlook and drivers of this guy. I am very proud of how our team has executed during these trying times. Delivering solid results during extenuating circumstances underscores our team's continued focus on safety, customer service, and operational performance. As a response to the pandemic has evolved, we are seeing the economy starting to open up back over time, While some of our larger manufacturing companies may be working at slightly reduced outputterships, by and large they're operating at a much higher level than in April and May. Our electric sales are down year over year, but we saw an increase in demand towards the end of the quarter. I'll let Tony give you more specifics on sales. While pandemic precautions altered the legislative sessions in our states, There are two components of the recently passed Kansas House Bill 2585 relevant to averages. The first provides for special economic development rates in Kansas, similar to what is allowed in Missouri. The provision gives the KCC authority to approve rate contracts outside of the general proceedings that are based on a utility's incremental cost of service for customers that meet certain criteria. It allows for rate incentives that could attract businesses to Kansas, or encourage expansion of existing customers that otherwise may not be possible. The second portion of the bill eliminates the Kansas state income tax for public electric utilities. This becomes effective on January 1, 2021. Both of these are very positive for our customers and our communities. In July, and in line with expectations, part two of the Kansas rate study was filed. Like part one, which was filed in January, The study provided thoughtful analysis of multiple issues impacting Kansas' electric rates and how they compare to regional states. Much of the focus on the second Kansas rate study is on the competitiveness of rates, which is very much in line with the thesis underpinning our merger. The study demonstrates our strategy is working, and since closing the merger in 2018, our rates have declined at a faster pace than our neighboring states. Additionally, the study supports our investment in modernizing and expanding the transmission grid that serves Kansas, which improves electrical liability and increases access to electricity generated from Kansas wind farms. Now moving to the regulatory front, we've continued to work closely and collaboratively with our regulators to ensure we are representing all stakeholders as we adapt to dealing with the impacts of COVID-19. We suspended disconnects through mid-July and will continue to waive late fees for our customers in both Kansas and Missouri. Additionally, with Commission approval, we have introduced additional payment plans to allow businesses additional payment flexibility and to provide residential customers with extended payment plan options. Kansas Corporation Commission approved our request for an accounting authority order that allows us to track expenses, lost revenue, and any cost offsets associated with COVID-19 to be considered for recovery in our next rate cases. We have a similar request for an accounting authority order pending in Missouri. The NPSC has set a procedural schedule, and we expect a ruling by the end of the year. In June, the KCC approved an order to review our Strategic Review and Operations Committee. They also approved a joint motion filed by the company along with the KCC staff, which aimed to provide detail around certain timing and confidentiality concerns. Now that our board has made a final determination in our process, we're working to submit a report back to the KCC in line with the requirements of the order.