Evergy, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter 2020 Evergy Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's call is being recorded. If you require additional assistance, you may press star then 0 to reach an operator. I would now like to hand the call over to Lori Wright. Please go ahead.

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 two and 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 David Campbell, Evergy's President and Chief Executive Officer, and Kirk Andrews, 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 David.

Thanks, Lori, and good morning, everyone. It is my pleasure to join you on my first earnings call as Evergy 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 accompany 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 4th, just under two 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 I've 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 the 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 and highest performing all-electric utility. 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 fuels 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. I've had the opportunity to make my first hire. Kirk Andrews joined us on Monday of this week as our Executive Vice President and Chief Financial Officer. You'll hear from Kirk for the first time in a bit. His track record of leadership and execution as a CFO, his relationships and credibility with the capital markets, and his wealth of knowledge and experience will be of tremendous value for our team. Kirk has been on the Evergy board for the past year and played an integral part in the formation of our STP. I'm thrilled to have him as a member of the executive team. Today, we're also announcing further support for our company as a result of agreements with Bluescape Energy Partners and Elliott Management. John Wilder, who has an outstanding reputation for impact and driving value, will join our board as the chair of the Finance Committee. In addition, Senator Mary Landrieu, former three-term U.S. Senator for Louisiana and chair of the Senate Energy Committee, will join our board and bring a distinctive knowledge and experience in energy and national policy issues. Both will help us to execute the STP and enhance our ability to drive industry-leading performance across our business. Luscape and Elliott have also committed to standstill and other customary provisions. I'll circle back to those agreements that we signed today and to our new board members at the conclusion of my remarks. Turning now to slide five. This morning we reported full year gap earnings of $2.72 per share compared to $2.79 per share earned in 2019. Adjusted earnings per share were $3.10 in 2020 compared to $2.89 per share in the prior year. The ability to overcome the unprecedented challenges of 2020 and deliver at the top end of our adjusted EPS guidance range of 295 to 310 per share is a testament to the discipline execution of our team. Overall, 2020 was a strong year. We achieved 7% year-over-year adjusted EPS growth. We reduced adjusted O&M by over 120 million, or 10%, in 2020 compared to 2019. So for the two full calendar years since creating Avergy, we have reduced adjusted O&M over $250 million, nearly 20 percent, delivering the cost reduction opportunity that our team envisioned and well ahead of our merger commitments. Consistent with our guidance, we raised our dividend 6 percent to an indicated annual rate of $2.14 per share. We invested more than $1.5 billion to enhance reliability, customer service, create jobs, and invest in our communities. We implemented pandemic response plans, resulting in over 2,000 employees working from home, while those in critical operations functions changed their way of doing business, and added extra preventative measures to ensure the continued delivery of safe and reliable power. We waived customer late fees and added payment options to help customers relieve some of the strain caused by the pandemic. We launched our Hometown Economic Recovery Program, which donated over $2 million from our foundation to help local nonprofits, customers, and communities respond to and recover from the COVID-19 pandemic. Turning to slide six, as you all know, we recently experienced an extreme sustained cold weather event, the worst our region has seen in decades. As a result, our regional transmission organization, the Southwest Power Pool, had to take the unprecedented step of instituting a level three energy emergency alert. This required SPP participants to execute emergency load shedding power interruptions, which impacted some of our customers. Fortunately, most of these customers weren't without power for more than a few hours at the longest. We greatly appreciate our customers' patience as we work through these horrendous conditions to coordinate these interruptions in order to prevent a larger or widespread event. As you can see in the pictures on the slides, our employees experienced those conditions firsthand and worked tirelessly to keep the plants and the grid up and running. I can't thank my colleagues enough for their dedication and commitment in braving the elements to keep the lights on for our customers. With respect to the financial impacts of the extreme weather event from roughly February 13th to February 19th, that evaluation is still ongoing. Overall, we were pleased with the performance of our generation fleet. Natural gas availability in particular was a challenge, and prices reached historic highs. Purchase power costs are expected to be higher as well based on initial settlement information from SVP received this week. In aggregate, across our jurisdictions, we estimate that our cost to procure natural gas and purchase power through the event were approximately $300 million. The purchase power portion of this number is expected to rise. It does not yet include Friday, February 19th. More broadly, the purchase power costs will also be subject to ongoing review as part of the settlement process at SPP over the next 30 to 45 days. As a general matter, we expect to be able to recover the excess costs associated with the event. The recovery is likely to occur over time to smooth the impact to customers. Kansas has already passed an order authorizing the creation of a regulatory asset for incremental costs that we and other utilities incurred during the extreme weather event. With respect to unregulated activities, we have a small power marketing business that historically has earned between 15 and 30 million annually, or less than 1% of our gross margin in a given year. After cost, this typically equates from approximately 3 cents to up to 7 cents of earnings per share. Activities typically include energy management services, optimizing transmission positions, and small trading positions in a book with a closely monitored and limited bar. The expertise and knowledge developed by the group adds value to our asset management activities in SPP. During the extreme weather event, purchases of firm transmission and a long position in ERCOT were the primary drivers of what is expected to be unusually high gross margins from this group. Given that settlements are still underway, financial analysis is ongoing. Overall, the potential impacts are expected to be positive and generate significantly higher results, potentially in the range of three times higher relative to the high end of what we earn from power marketing in a typical year. We'll report on this matter as part of our Q1 call. Slide seven highlights key elements of our investment thesis. This morning, we initiated our 2021 earnings guidance with GAAP EPS at $3.14 to $3.34 per share, and our adjusted EPS guidance at $3.20 per share to $3.40 per share. This range does not include the expected positive impacts from power marketing activities during the week of extreme weather. The $3.30 midpoint for our adjusted guidance implies a 7% compound annual growth rate from our 2019 adjusted EPS of $2.89. This is in line with the long-term EPS growth target of 68% from 2019 through 2024 that we reaffirmed this morning, reflecting the consistent progress that we've made in the initial implementation phase of the SDP. Our EPS growth target plus current dividend yield of approximately 4% result in a compelling total shareholder return profile of 10% to 12%, competitive with other top-performing utilities. For the SDP to be successful, we need to deliver benefits all of our key stakeholders. The plan was formulated with precisely that objective in mind as summarized on slide eight. Our cost reduction efforts to date have meaningfully benefited customers. Electric rates across Kansas and Missouri have declined since 2018, while most of our neighboring states have experienced increases over the same time period. The plan adds to this momentum through targeted capital investments that enable long-term and sustainable cost reductions as well as substantial fuel and purchase power savings. These lower operating costs will be reflected in our upcoming rate cases. The infrastructure investment will also enhance customer experience through better customer tools and systems while improving reliability by focusing on grid automation, digital communication, and data analytics capabilities that we don't have today. It will also contribute to local economic development efforts by creating jobs to implement grid and renewable generation projects. More broadly, a stronger, smarter grid and greener energy will help the overall competitiveness of our region. Slide nine lays out the capital expenditure plan from 2020 through 2025, including adjustments made as part of this year's planning process. The total amount of projected spend from 2021 to 2024 is unchanged, though there have been some relatively minor phasing and other changes. For example, the total renewable spend remains at roughly $700 million, that we are phasing the spend to match up with the publication of the IRPs and our renewable strategy work this year. In aggregate, these changes have no impact on our view of the company's 2024 earnings power. Lastly, we added our estimates for 2025 in a range of $1.85 to $2.1 billion, reflecting the robust pipeline of projects that we see for the balance of the decade through 2030. We plan to discuss 2025 in greater depth as part of our investor day later this year. Slide 10 profiles what is an increasing area of focus for our company, advancing a continuous improvement culture and achieving high performance for key metrics across our business. As mentioned earlier, we significantly reduced our non-fuel operating and maintenance expenses from 2018 to 2020, and we're targeting another 8% reduction by 2024, resulting in an overall reduction of 25% relative to the 2018 baseline. Our reliability performance is measured by safety and safety, also improved in 2020, in each case by around 5%. I'm pleased to report that our safety performance in 2020 was some of the best in our company's history, for example, achieving a 50% improvement in the OSHA incident rate relative to 2019. These results are a testament to the continued dedication and commitment of our employees, even in the face of the harsh pandemic conditions. We're proud of this strong performance, but we know that we have ongoing room to improve. We'll stay laser-focused on safety, execution, and the fundamentals of business performance. Slide 11 lays out the significant progress we've made on our carbon reduction efforts. We've achieved a 51% reduction from 2005 levels, which is far ahead of many of our peer utilities. That statistic is often overlooked, as is the fact that approximately 55% of the energy that we deliver to our customers is carbon-free, which also compares favorably to peers. The SDP includes steps to enable the ongoing transition of our generation fleet and progress toward the long-term CO2 emissions reduction target. We expect to have attractive investment opportunities in new renewables generation that diversifies our portfolio and does so cost effectively, taking advantage of the ongoing efficiency gains and the cost of building new solar, wind, and storage projects. Along with investment in economic new renewables, we will also pursue constructive legislation that could facilitate our longer-term fleet transformation. To that end, we've heard some questions around the role that legislation plays in our plan. The securitization bills that we introduce in Kansas and Missouri this year are not necessary to achieve the plan, nor are they critical to pass this year. Our five-year financial forecast does not hinge on the passage of securitization. While the numbers that we present assume the retirement of a coal plant by 2024, that actually contributes to a reduction in rate rates of roughly $350 million. Stepping back, securitization is a potential tool that could provide value for customers and the company over time, but is much more meaningful for our longer-term fleet transformation prospects, which are more likely in the second half of this decade and beyond. That said, it can take time for legislative solutions to be passed, so now is the time to move the conversation forward. In parallel, our current integrated resource plans, or IRPs, are well underway with current filing dates of April 1st in Missouri and by July 1st in Kansas. we are likely to seek a short referral in Missouri in light of the extreme weather event of this month. We've executed the stakeholder engagement process of our IRPs in both states and appreciate the input received from all of our constituents. While the IRP reflects a 20-year plan, really a set of potential 20-year scenarios, we expect it will provide a helpful roadmap for our future fleet transition, advancing the goals of reliability, affordability, and sustainability. Later this year, we also expect to update our interim and long-term carbon reduction targets, either in conjunction with the IRP filings or as part of our investor day. We're going to stay current with the dynamics in Washington and how they might impact our generation transition plans. The extension of the renewable tax credits in December, enhancing the competitiveness of wind relative to when we did our initial work in the SDP, is a good example. These elements will be important as we advance forward with the renewables development strategy in the SDP. We believe that we will be able to frame a compelling proposition for participating directly in the build-out and ownership of renewables. Kirk's responsibilities include the leadership of our renewables development efforts, and he will play a central role in ensuring that we are well-positioned to do this competitively, as will Chief Operating Officer Kevin Bryant and the broader team. Before I turn over to Kirk, I'll cover slide 12 and discuss the agreements we announced this morning with Bluescape and Elliott. As I mentioned, when I joined Evergy in January, I did so with a firm belief that the SDP is the right path forward for our company and our stakeholders. Considerable analysis went into developing this plan and meaningful progress is being made on it. We have a strong team across the organization to help ensure we capture the many benefits this plan creates. The addition of John Wilder and Senator Mary Landry to the board brings valuable experience to help the board to oversee the SDP and enhance our ability to achieve top quartile and industry-leading performance across the company. John is a proven leader. His track record speaks for itself, while Mary brings a wealth of public policy knowledge in areas of critical importance to our company. I look forward to working with the Board to implement the plan and ensure that we deliver on its objectives. As you've seen, Bluescape will also be investing approximately $115 million in Evergy and will have the option to purchase additional shares over the next three years. This investment represents a clear vote of confidence in Evergy, our team, and the value we can achieve through the STP. In closing, our plan is focused on driving value and benefits for all of our stakeholders. The 2020 results and 2021 guidance that we announced today show strong initial momentum, and we are reaffirming the 6 to 8 percent annual growth trajectory through 2024. Over the longer term, we see equally promising opportunities to invest in infrastructure and transform our generation fleet, harnessing the renewables potential in our region. Our all-electric utility franchise will also benefit from the tailwinds of electrification across the economy. We look forward to spending more time with you on our investment thesis and strategy at our investor day in the third quarter. 2020 was an unprecedented year with unprecedented challenges, and our team kept our eye on the ball to deliver strong results. We look forward to building on that track record through relentless execution of the STP in the years ahead. I will now turn the call over to Kirk.