Evergy, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2021 Evergy, Inc. 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 1 in your telephone keypad. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Ms. Laurie Wright, Vice President, Corporate Planning, Investor Relations, and Treasurer. Ma'am, the floor is yours.

Laurie Wright Thank you, Lorenz. Good morning, everyone, and welcome to Evergy's first 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 filings containing lists 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. David will cover our first quarter highlights, our latest regulatory and legislative priorities, and our enhanced ESG profile. Kirk will cover in more detail the first quarter results, the latest on sales and customers, and our financial outlook. 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.

Thank you, Lori, and good morning, everyone. I'll begin on slide five. Evergy delivered strong first quarter results and remains well positioned to meet our objectives for the year. Adjusted earnings per share for the quarter were 55 cents compared to 41 cents a year ago. As Kirk will describe in his remarks, the increase in adjusted earnings was driven by favorable weather, income tax benefits, and higher other income. With a solid start to the year, we are affirming our 2021 adjusted EPS guidance of $3.20 to $3.40 per share. We are also reaffirming our targeted long-term annual EPS growth of 68 percent from 2019 through 2024. As we discussed during last quarter's call, in February, our region and the Southwest Power Pool experienced the most intense and sustained extreme weather event that we've seen in decades. The February extreme weather event resulted in significantly higher natural gas and purchase power costs, net of wholesale revenues, which totaled approximately $340 million. We provide a breakdown of this total amount by utility jurisdiction in our 10Q. Of note, this number remains subject to resettlement activity and further review by SPP. We expect to be able to recover substantially all of these costs through multiple potential regulatory mechanisms. In selecting the path forward, we will work with regulators to implement solutions that smooth the impact for our customers. In Kansas, the KCC already issued an Accounting Authority Order, or AAO, which allows for the creation of a regulatory asset to track these incremental costs associated with the weather event. We expect to have resolution to the path and timeline for recovery later this year. In Missouri, we have filed a notice that we intend to seek AAO treatment for the net fuel and purchase power costs incurred during the extreme weather event at Missouri West. We expect to make this AAO filing by mid-year. Securitization legislation is under active review in Missouri and, if passed, will provide another potentially beneficial cost recovery approach that will enable both reducing and smoothing the impact of these costs for our customers. As in Kansas, we expect to have a clearer sense for the recovery path in Missouri later this year. As I mentioned during last quarter's call, we have a small power marketing business that historically has earned between $15 and $30 million in gross margin annually. I also described how this group achieved unusually high gross margins during February's extreme weather event, driven by purchases of firm transmission to ERCOT and a relatively small long position in ERCOT. In total, the pre-tax contribution net of costs from power marketing activity during the extreme weather event is approximately 41 cents per share this quarter. Given the non-recurring nature of these results, we have removed this amount out of tax from our adjusted EPS. The margin contributions from the business for the periods outside of this weather event will remain in the adjusted numbers consistent with our past practice in our original 2021 plan. As is also noted on slide five, our nuclear station, Wolf Creek, is in the midst of its planned refueling outage The plant has performed very well in recent years and has now completed its third consecutive breaker-to-breaker run between refuelings. A special thanks to the employees of Wolf Creek for their diligence and consistency in providing such reliable service to our customers. Slide 6 provides an update on some of our key regulatory and legislative initiatives. While we don't have general rate case proceedings on the calendar in 2021, we have had an active start to the year in both areas. I'll start first on the regulatory front. After months of working with stakeholders, we filed our Missouri Integrated Resource Plan, or IRP, last Friday. The IRP benefited from a collaborative stakeholder process as we evaluated scenarios leading up to this filing. I'll go through some of the high points of the IRP on the next slide. Our Kansas IRP filing is due by July 1st, although it is likely that we'll file a bit earlier. In parallel with the development of the IRPs, Informational dockets have been underway in both Kansas and Missouri relating to our Sustainability Transformation Plan, or STP. After conducting multiple workshops over the last six months to educate and inform our stakeholders about our strategic plan, these dockets are nearing their conclusion. We appreciate the commissions in both states setting up these new and innovative processes to allow for feedback on our strategic plans. As we've consistently said since announcing the SDP last year, the plan is designed to deliver significant cost savings, invest in infrastructure, and advance the interests of all key stakeholders with an overall focus on ensuring reliability, affordability, and sustainability. We're pleased the overall intervener feedback is consistent with how we've described the goals and objectives of our balanced strategic plan. The expected final step in the Missouri procedural schedule is a workshop in early June. In addition, we'll file quarterly reports with the Commission if there are any material changes to the STP. The first such filing would be due on June 1st. In Kansas, the STP workshop scheduled for May 24th is the main remaining step in the schedule. In advance of the workshop, we'll file our response to comments filed in the Kansas STP docket. I'll now switch over to our legislative priorities, which have primarily focused on securitization. As it represents a cost-effective option to handle the retirement of assets that are not fully depreciated, securitization is a potential tool that could provide value for customers and the company as we advance our generation fleet transition. As we've noted, the passage of securitization in Kansas and Missouri is not necessary to enable the execution of our five-year plans. However, we have been very pleased with the constructive dialogue that has taken place regarding securitization in this year's legislative sessions in both states. We greatly appreciate the collaboration from our key stakeholders. On the Kansas side, House Bill 2072 was passed and became law on April 9th, following Governor Kelly's signature. The bill generally has three parts. The first allows for extraordinary costs and for generation assets that are being retired, any remaining undepreciated asset values to be considered for securitization. The second part allows the utility to use the proceeds from the securitized bonds to reinvest into areas such as generation, transmission, and distribution, or customer programs that enhance the customer experience. Lastly, the Kansas bill provides a predetermination process for taking generation assets out of service, similar to the process that has been in place in Kansas for building new generating assets. In Missouri, consideration of the securitization bill is ongoing. Draft bills have passed with strong support in both the Missouri House and Senate, and we are now in the final phases of the reconciliation process. We are grateful for the engagement and support of legislators and key stakeholders in Missouri. While there are many factors that impact the timing and ability to transition from coal generation, not the least of which is grid reliability, obviously one of the most important questions is affordability. Securitization is a potentially significant enabling tool to the cost-effective handling of extraordinary costs and undepreciated values. Retirement also allows for cost savings for customers due to reduced operating and fuel costs resulting from the shift from coal to renewables. As structured, securitization also provides a mechanism to collaborate with our regulators on the process of removing coal from rate base and replacing that rate base with renewables. While there are certainly procedural mechanics to work through, over time we expect to fully utilize these tools to further advance our goal of keeping rates competitive. The first step will likely take place later this year with the potential use of the predetermination process for the planned retirement of the Lawrence Energy Center and solar additions in Kansas in 2023. Slide 7 lays out the highlights of our recent Missouri IRP filings. You've heard us talk about the balanced approach to the SDP. Our strategic approach to the IRP reflects a similar balance. Our integrated resource plan is focused on reliability, affordability, and sustainability, delivering the power customers need at a competitive price and with a dramatically improved environmental profile. The IRP process involved the evaluation of more than 50 distinct resource plans through a multifaceted review process and extensive stakeholder feedback resulting in the identification of a preferred plan. Evaluation criteria included the ongoing cost of existing generation, commodity price scenarios, the potential costs of environmental compliance and CO2 regulation, and the cost of alternative resources, among other factors. The IRP review also took into consideration the evolving mission of our fossil generation plants. Due to market conditions and ongoing growth of renewables, plants that once provided base load capacity are increasingly required to act more as a backup for wind and solar resources. Just to cite a recent example, last week the Southwest Power Pool set a new record by providing 85 percent of the total energy needs across the entire 17 state region for renewable resources, primarily wind. And this record won't last long as more than 78 gigawatts of new renewable energy are in the SPP generation queue. Between now and our next IRP triennial filing in 2024, Evergy plans to retire the last two units at our Lawrence Energy Center, nearly 500 megawatt coal facility, in late 2023. We also expect to add 700 megawatts of utility-scale solar, all of which is consistent with our STP. As a result of this retirement and these additions, ongoing depreciation of coal and In reinvestment in our transmission and distribution system, we expect that coal, as a share of rate base, will drop to the low 20s by 2024. Looking further out, we plan to add a total of 4,200 megawatts of renewables by 2032, including 500 megawatts of wind both in 2025 and 2026. Those renewable investments are expected to enable a retirement of coal units at the Jeffrey Energy Center and our Lecine plant, as shown on slide seven. As market conditions evolve, the mission of fossil plants will continue to change. In future years, our coal plants will run for fewer hours, as their energy is increasingly displaced by lower-cost renewable resources. At the same time, the reliability challenges caused by the extreme weather of February 2021 demonstrated the value of keeping dispatchable generation with fuel on the ground as part of our plan, as opposed to retiring them on a rapid timeline. The phase transition approach in the IRP provides Evergy with the ability to adjust planned additions and retirements based on evolving market technology and policy dynamics. Particularly for the period following the initial three years of the IRP, there's no doubt that the plan will continue to change and evolve as we monitor the key inputs that impact alternative resource plans. In summary, the fleet transition outlined in the IRP is a win-win-win from a reliability, affordability, and sustainability perspective. given the phased retirements to maintain reliability, the favorable economics and sustainable options for our customers from the addition of renewables, and the far-reaching environmental benefits of swapping fossil fuels for green resources. Slide eight lays out the long-term fleet transition plan and related emissions reduction trajectory. As a reminder, as of 2020, we reduced our carbon emissions by 51 percent from 2005 levels and one-third of the power used by retail customers was generated from renewable resources. Factoring in our nuclear generation, our customers received more than half their energy from carbon-free resources last year. By 2030, we expect to reduce our carbon emissions by 70 percent relative to 2005 levels. We're also pleased to announce our goal to achieve net zero carbon emissions by 2045, which is dependent on enabling technology developments in support of energy policies and regulations. These updated CO2 emissions reduction targets align with the goals set forth in our STP and advance our focus on delivering a sustainable energy future for our customers while maintaining reliability and affordability. As reflected on the left-hand side of slide eight, our fleet profile will dramatically change over the next two decades, significantly reducing our reliance on coal generation while increasing the share of emissions-free resources in equal proportion. Our favorable geographic location with ample wind and solar resources will allow us to do this cost-effectively, further supported by the ongoing efficiency gains that are expected for the cost of building new renewables and storage. Before I turn it over to Kirk, I'll wrap up on slide nine. To summarize our investment thesis, our balanced strategic plan is focused on driving value and benefits for our customers, shareholders, and the environment. We've had a strong start in 2021 and remain focused on executing our business plan across each of our utilities. We expect this continued execution will drive our targeted 6% to 8% compound annual EPS growth from 2019 through 2024. Over the longer term, we anticipate that infrastructure investment requirements in transmission and distribution in tandem with our generation fleet transition will enable ongoing growth and deliver sustained benefits for our customers. The dedicated and experienced team we have in place, paired with our diverse, qualified board, gives us high confidence in our ability to execute and deliver against our high-performing targets. We look forward to discussing our forward plan and strategy in greater depth during our investor day in September.