Evergy, Inc.

2022 were more constructive with respect to the key economic terms. The main challenges in the rate cases related to legacy issues that have now been resolved and put behind us, most notably relating to the 2018 Sibley plan retirement. Higher interest rates are also dragging the forward plan. Most significantly, they impact the refinancing that will occur in 2024 for $800 million of holding company debt. In addition, our plan includes some additional holding company debt by 2025, for which we are expecting to refinance our $500 million term loan. The revised long-term growth rate target of 4% to 6% extends through 2026 and reflects our trajectory after the wave step function cost savings that we have delivered since the 2018 merger. Over the long term, our growth rate will reflect our rate-based growth and the related financing plans. Our current rate-based growth level is expected to be 6% annually. In addition to the projects currently included in our capital plan, we see a significant backlog of additional projects that will benefit customers across the T&D system and in the ongoing transition of our generation fleet. However, in Kansas in particular, we will shape our capital plan to reflect the policy objectives of our key decision makers and stakeholders. We will be actively pursuing mechanisms that we think align with those objectives and that will enhance our ability to partner in support of state priorities and earn a competitive return with timely recovery. While our long-term target has changed, our culture will not. We remain laser-focused on operational and financial execution for the items within our control and achieving constructive regulatory outcomes in a more regular cadence of rate cases after the long stay-outs that were agreed to as part of the 2018 merger. In both of our states, we expect to file rate cases roughly every two years, similar to the cadence of our peer utilities. We know the importance of consistent execution and we recognize that today's update falls short of that. However, we are confident in our ability to execute our strategic plan going forward at the revised target. In addition, we see opportunities to work with our stakeholders to advance constructive regulation in both states. As part of today's update, we also announced a 5% increase in our quarterly dividend to 64.25 cents per share, or $2.57 per share on an annualized basis. This increase is consistent with our updated growth outlook, as well as our 60 to 70% payout ratio target. Combination of our annual growth outlook and our dividend yield positions to deliver a competitive total annual return of 9 to 11%. Moving to slide six, as I mentioned, we reach a unanimous settlement in the pending Kansas rate cases. If approved, the resulting rate increases are far below those of regional peers in inflation. The settlement calls for a net revenue increase of $41.1 million across our Kansas jurisdictions, reflecting a $74 million increase at Kansas Central and a $32.9 million decrease at Kansas Metro. The settlement includes the addition of the Persimmon Creek Wind Farm, and our 8% interest in Jeffery Energy Center into Kansas Central's rate base. These additions provide low-cost generation solutions to meet our customers' growing demand and energy needs. The settlement also provides final resolution to the rate discounts that were provided to customers through the Coley Program, which was first put in place nearly 40 years ago when the Wolf Creek Nuclear Plant came online. The settlement sets a $96.5 million rate credit to be amortized over three years, after which the program is removed entirely from the regulatory construct. With this settlement, our COLE program has provided tremendous savings for customers, $750 million in total since the mid-1980s. While the settlement is silent on return on equity and capital structure, it specifies a 9.4% return on equity to be utilized for purposes of the transmission delivery charge filings required by legislation passed last year. We've included more details on this in the appendix. If the settlement is approved, we expect the Kansas Corporation Commission will issue an order implementing new rates by December 21st. As shown on slide seven, when factoring in the rate case settlements, Evergy has been able to limit cumulative rate increases in Kansas to 1% since 2017. In contrast, rates increased in our regional peer states by 12.7% over the same time period. Many of our peer utilities have rate cases pending or planned, which will further widen the gap. Our rate increase is even further below the rate of inflation since the merger. Advancing and improving regional rate competitiveness has been top of mind for many of our stakeholders in Kansas and were primary drivers for the 2018 merger. And that's exactly what we've delivered. On slide eight, we highlight the outlook for economic development in Kansas, which is as promising as it has been in decades. As the largest utility in Kansas, Evergy plays a vital role in enabling growth. Over the past five years, the state's economic development pipeline has grown to previously unseen levels. In 2022, the best year for economic development in Kansas in Evergy's history, we helped to land 13 major projects representing more than $5.2 billion in capital investment, 6,000 new jobs, with the Panasonic electric vehicle battery plant a leading example. The future looks even brighter, with more than $10 billion of active economic development projects evaluating our Kansas service territories, representing 650 megawatts of potential additional demand. The state's recent track record and large economic development pipeline in part reflect the success of our focus on ensuring affordability and regional rate competitiveness. Through a highly successful cost savings program following the merger, we have delivered over $360 million in operating efficiencies and customer bill credits in Kansas. I would like to thank the dedication and focus of the entire Evergy team in making this happen. It has taken a tremendous amount of sustained effort. At the same time, the team achieved record safety results last year, along with strong generation commercial fleet availability and ongoing reliability improvements in 2023. The results the team has achieved have directly supported and advanced state priorities. For this success to continue, the grid will require significant capital investment to ensure sufficient capacity, competitive levels of reliability and resiliency, and a modern grid that delivers the flexibility and benefits that customers increasingly demand. This cannot be done without a regulatory environment that enables the flow of competitively priced capital in Kansas. Cost of capital parameters, regulatory capital structure, and timely recovery investment are of crucial importance when utility investors make capital allocation decisions. Investors have a choice where they direct capital, and for Evergy in Kansas to compete for that capital, investors require debt and equity returns commensurate with current market conditions and competitive with peers, a clear and stable framework around regulatory capital structure to guide how we capitalize our utilities, an opportunity to earn the returns we are authorized, and timely recovery of invested capital, both now and in the future. Without these elements, our investment proposition loses attractiveness relative to our peer utilities, who benefit from more robust capital programs, more attractive authorized and realized returns, as well as more predictable and balanced regulatory mechanisms. An imbalanced investment proposition challenges our ability to put the infrastructure in place to effectively partner and compete for economic development and by extension challenges the shared goal of Kansas stakeholders to attract new businesses and their jobs and investment. We see a bright future for Kansas, and we are honored by the privilege to play a key role in that future. To capitalize on the state's economic development potential, we believe that the focus must include constructive regulatory mechanisms for the investment necessary to enable that growth. This is a priority for Evergy, and going forward, we will work with regulators and policymakers to ensure that Kansas is competitive with peer states and seizes on the unprecedented opportunities that are before us. Moving to slide nine, I'll provide an update on regulatory and legislative priorities in both Kansas and Missouri. As I mentioned, we expect a final order on the settlement agreement filed in our Kansas rate cases by December 21st. On September 1st, the Commission conditionally approved a settlement in our Energy Efficiency Docu, otherwise known as KIA. Kia was established to support the state's goal of promoting the implementation of cost-effective demand-side programs, such as home energy assessments and rebates for energy-saving appliances. We expect the first Kia programs will begin in 2024. On the policy front, our efforts will focus on cost of capital and capital structure, as well as recovery mechanisms supporting our grid and generation investments. One area of focus will be provisions applying to new dispatchable generations. Fitting to Missouri, the commission order approving our request to securitize extraordinary costs from Winter Storm URI was affirmed in the Missouri Court of Appeals in late September. The Missouri Office of Public Counsel, OPC, filed a motion for rehearing, which was denied on October 24th. It is possible that OPC will further appeal to the Missouri Supreme Court. Consistent with the appellate court's decision, we believe the Missouri Commission's decision in support of securitization is well supported by the record and we anticipate resolution by the end of the year. As a reminder, we will complete the securitization financing after the appeal plays out, but incremental carrying costs incurred prior to approval will ultimately be recovered when we issue the debt. Similar efforts in Kansas will to engage with our Missouri stakeholders regarding constructive regulatory mechanisms to support timely recovery and new dispatchable generation investments, as these have been identified as important new resources in our integrated resource plan. Last, we've begun the planning process for Missouri West Raid Case, which we expect to file in February 2024. I'll conclude my remarks with slide 10, which highlights the core tenets of our strategy, affordability, reliability, and sustainability. Keeping rates affordable for our customers has been and will continue to be at the forefront of our thinking. Enabled by the merger, Evergy has now saved more than $1 billion in operating costs over the past five years. These savings allow the company to offset steep inflationary pressures while also helping to attract and bolster economic development in our region. We're pleased by our progress in improving regional rate competitiveness and keeping our rate trajectory well below the rate of inflation. Affordability is and will always be an area of focus. Ensuring reliability is also a core element of our strategy, along with safety, grid resiliency, and public safety. This includes a focus on metrics relating to customer service, the commercial availability of our fleet, safety, and all elements of our operations, including infrastructure investment. With respect to sustainability, we continue to advance the responsible transition of our generation fleet with investments such as the Persimmon Creek Wind Farm. We expect to add over 3 gigawatts of renewable resources through 2032 and 1.5 gigawatts of new hydrogen-capable gas generation, advancing our decarbonization goals while ensuring day-to-day grid demands and customer needs are met. Our mission is to empower a better future, and our vision is to lead the responsible energy transition in our region, always with an eye on affordability and reliability, as well as sustainability. I will now turn the call over to Kirk.

Thanks, David, and good morning, everyone. Turning to slide 12, I'll start with a review of our results for the quarter. For the third quarter of 2023, Average Heat delivered adjusted earnings of $432.3 million, or $1.88 per share, compared to $460.8 million, or $2 per share, in the third quarter of 2022. As shown on the slide from left to right, the year-over-year decrease in third quarter earnings was driven by the following. First, a 5% decrease in cooling degree days, as compared to last year, drove a 7-cent decrease in EPS. Compared to normal, weather for the third quarter was favorable by approximately $0.08 per share. Weather normalized demand declined by 0.8%, driven by lower industrial demand, contributing to a $0.01 per share negative variance. An $11 million increase in adjusted O&M, or decrease rather, excuse me, in adjusted O&M, reflecting continued execution on driving cost efficiencies, drove a positive $0.02 variance year over year. The net impact of higher depreciation and amortization was $0.07 for the quarter, which includes the offsetting impact of new retail rates. The combination of higher interest expense and lower AFUDC drove a $0.14 decrease, with higher interest expense representing $0.12 of the variance. Higher COLE proceeds drove a positive $0.07 variance year over year. And finally, other items, both positive and negative, drove a net increase of $0.08, primarily driven by tax items. I'll turn next to year-to-date results, which you'll find on slide 13. Through the nine months ended September 30, adjusted earnings were $754.5 million, or $3.27 per share, compared to $785.2 million, or $3.41 per share, for the same period last year. Again, moving from left to right, our year-over-year year-to-date EPS drivers versus 2022 include the following. When combined with mild weather in the first half of this year, our year-to-date results reflect an approximate 7% decrease in cooling degree days and a 13% decrease in heating degree days, driving a 23-cent decrease in EPS versus 2022. When compared to normal, weather was approximately $0.04 favorable through the third quarter. Weather normalized demand growth of 0.7% driven by the residential and commercial sectors contributed $0.08 per share. Higher transmission margin resulting from our ongoing investments to enhance our transmission infrastructure drove a $0.04 increase. Decreased O&M drove a positive $0.31 variance year-over-year driven by continued execution on achieving cost efficiencies, which we have further accelerated in 2023. A $0.19 decrease from higher depreciation expense due to increased infrastructure investment, which is net of the offsetting impact of new retail rates. $0.11 of year-to-date proceeds from company-owned life insurance, or COLI. Higher interest expense and lower AFEDC equity drove a 39-cent decrease, with interest expense representing 34 cents of that variance. The increase in interest expense was driven by a number of factors, including rising rates, the shift in Persimmon Creek to Kansas, a delay in securitization proceeds, and higher capital investment. We have accelerated our cost management initiatives, as reflected in the year-to-date uplift in O&M savings. combined with other actions to help offset the higher interest costs and associated lower AFUDC equity earnings. I'll discuss all of these items in further detail shortly. Finally, other items with positive and negative driven that increase of 13 cents and was primarily driven by other income and income tax items. Turning to slide 14, I'll provide some further detail on the headwinds and tailwinds driving our year to date and expected full year 2023 results. On the left side of the slide, as I mentioned previously, higher interest costs combined with lower AFUDC equity earnings is a primary driver of our year-to-date variance to plan. Through the third quarter, we've seen a 39-cent impact from higher interest costs and lower AFUDC equity earnings versus 2022, and that's compared to a 21-cent increase in these costs for the full year reflected in our original guidance. This higher than expected variance is driven by a number of items. First, rising rates impacted the cost of our short-term borrowings, as well as our long-term debt issuances to date. Short-term borrowings were only partially offset by AFUDC due to the regulatory timing lag in short-term interest cost recovery, which was exacerbated by the sharp increase in realized short-term rates. Second, due to the delay in the securitization of 2021 storm cost at Missouri West, we continue to carry $300 million in additional short-term debt through all of 2023. Third, the decision to shift the Persimmon Creek Wind Farm from Missouri to Kansas required us to forego the offsetting benefits of PISA interest deferral available in Missouri and reflected in our original plan for 2023. This also resulted in lower than forecasted AFUDC rates applied to our other Kansas Central investments as we funded Persimmon Creek with short-term debt while it was pending review during the Kansas rate case. Finally, we expect to exceed our original capital investment plan for 2023 by approximately $200 million, leading to higher borrowing costs prior to recovery in our Missouri rate case planned for 2024. All of these factors also led to bouncy changes versus plan, which drove lower AFUDC equity earnings. Our plan beyond 2023 has consistently anticipated this shift to lower AFUDC equity earnings and higher AFUDC debt recovery, which manifested earlier than expected into 2023. To offset this impact this year, as shown on the right side of the slide, we've successfully accelerated our cost management efforts across the business, leading to a $0.31 EPS benefit year-to-date as compared to our original expectation of $0.20 full-year improvement in the original plan. In addition, we've supplemented the impact of these O&M savings by capturing higher-than-expected margins on our 8% stake in the Jeffrey Energy Center coal plant, driven by a proactive hedging program put in place to optimize financial performance prior to transitioning this 8% stake in Jeffrey to rate-based, beginning in 2024 as a result of the unanimous settlement in Kansas. Finally, we've realized approximately 2 cents of higher coal proceeds year-to-date versus our full plan for 2023. Overall, while we expect to offset higher interest costs with higher O&M savings, improved performance at Jeffery, and higher COLE proceeds, the one-time item which remains, and this is a net driver of the 5-cent reduction in our midpoint 2023 guidance, is the Persimmon Creek Wind Project. Our original plan reflected the benefits of PISA in Missouri, and shifting this asset to Kansas drove a 5-cent reduction in earnings versus planned this year. However, as a result of the unanimous settlement, Persimmon Creek will be part of the Kansas Central rates beginning in 2024, and the $0.05 impact to plan is limited to 2023. Turning to slide 15, I'll provide a brief update on our recent sales trends. Weather normalized demand increased 0.7% year to date as compared to last year, driven by strong residential and commercial growth. For the third quarter, we experienced a decline of 0.8%, primarily due to lower industrial demand driven by two refining customers. Demand growth continues to be supported by a strong local labor market with Kansas and Kansas City metro area unemployment rates of 2.8%, which continue to remain below the national average of 3.8%. And we expect to see industrial demand recovery as we move into 2024. Finally, on slide 16, I'll wrap up with an overview of our long-term financial expectations. For 2023, we're narrowing our adjusted EPS guidance range to 355 to 365, as although we are delivering additional O&M savings beyond our initial guidance, we do not expect to fully offset the headwinds of higher interest and the impact of Persimmon Creek's shift from Missouri to Kansas. As David mentioned earlier, we've revised our new long-term adjusted EPS growth target of 4% to 6% through 2026, using a baseline of the original 2023 adjusted EPS guidance midpoint of $3.65, reflecting the impacts of higher interest rate environment regulatory outcomes and our expected rate-based growth of 6%. We'll provide a 2024 adjusted EPS guidance on our fourth quarter call. Today, we've also announced a 5% increase in our dividend, consistent with the midpoint of our revised growth update and in line with our target 60% to 70% dividend payout ratio. We also expect to provide an updated capital plan for 2024 through to 2028 on our fourth quarter earnings call, which will continue to be driven by new infrastructure investment, improved customer service, and enhanced reliability and resiliency as we transition our generation fleet while continuing to advance regional rate competitiveness and meet the evolving needs of our customers and our communities. And with that, we'll open the call up for questions.

Thank you. As a reminder to ask a question at this time, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile our Q&A roster. And our first question is going to come from the line of Shar Pouriza with Guggenheim Partners. Your line is open. Please go ahead.