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Evergy Inc
NASDAQ:EVRG

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Earnings Call Transcript

Earnings Call Transcript
2018-Q1

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Operator

Good day, ladies and gentlemen, and welcome to the Westar Energy First Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Cody VandeVelde, Director of Investor Relations. You may begin.

C
Cody VandeVelde
executive

Good morning, and welcome to our first quarter call. Last night, we filed our 10-Q along with earnings release and supplemental materials, which can be found under the Investors section of our website at westarenergy.com.

Some of our remarks will be forward-looking, so I remind you of uncertainties inherent in our comments this morning and in some of the statements found in the earnings release and accompanying materials. Factors that could cause our future results to differ from what we discuss today include those listed in the 10-Q and 10-K under forward-looking statements and risk factors. We encourage you to read the full disclosure in the 10-Q and in the earnings materials as well as the 10-K, all of which are available on our website. The earnings materials also reflect how we reconcile our gross margin presentation with GAAP earnings.

Commenting this morning will be our President and CEO, Mark Ruelle; and our CFO, Tony Somma. We have other members of our team available to respond to questions. Mark will share observations about our business and discuss our latest regulatory proceedings, including the transaction. Tony will offer highlights on the quarter results and shed some light on updated merger and tax reform outlook.

With that, I'll turn the call over to Mark.

M
Mark Ruelle
executive

Thanks, Cody, and good morning, everyone.

Last night, we announced first quarter earnings of $0.42 per share, solid results and flat to a year ago in part due to the new tax law. Tony will give you a full download on the quarter in just a bit.

We've got a busy and effective start to the year on the regulatory front as we also keep our eye on financial and operating results alongside focusing on the future with the merger.

Let me give you a quick update on our business before I touch on regulatory and merger matters. Operations started the year strong carrying forward the momentum from record-setting reliability last year. Year-to-date, we operated our power plants with first quartile reliability, even as we work our way through typical planned spring maintenance.

Wolf Creek came off-line in late March for its regular 18-month refueling. This was after almost 500 days of run since the last refueling in the fall of '16, no downtime. We expect the plant to be back from refueling in just a few days.

First quarter capacity factor of our wind portfolio was just a few basis points shy of 50% and remarkably only a couple of percentage points lower than our base-load coal plants, which we've now adapted to flex and cycle with market opportunities.

In the last decade, we've grown our wind portfolio to more than 1,700 megawatt. That puts us on pace to reach an impressive milestone. By midyear, we'll have produced over 25 million renewable megawatt hours, that's equivalent of about a 500-megawatt base-load coal plant operating for the same span or a carbon reduction equivalent of over 28 million tons.

The combination of our renewable and nuclear generation supplied enough emission-free energy to meet 2/3 of our retail customers' needs for the quarter. Renewables alone can meet 1/3 of those needs annually and has allowed us to reduce carbon emissions by around 40% from our '05 levels.

Before turning to the merger, let me give you a rate update. In January, we filed our annual FERC transmission formula rate update. In February, we filed the companion retail update, which took effect April 1. For the year, rate updates increased transmission margin by about $4 million. Also, in February, we filed with the KCC for a general rate review. The commission set a procedural schedule that calls for a settlement conference on July 9, evidentiary hearings the week of July 23 and a commission order by September 27.

Given timing, there is subject-matter overlap of the rate filing with the merger proceedings. While the merger doesn't address all the rate case items, it does address principle drivers, like ROE, merger savings and the roll off of wholesale contracts and production tax credits. A couple of items that stand on their own and that will have to be addressed as part of the rate case alone and not part of the merger settlement are putting the Western Plains Wind Farm in rates and implementing new depreciation rates.

When the tax law passed, we committed to passing the full benefit to customers, and in January, we began booking that liability. In FERC rates too, we're taking the same approach and made the commitment to pass tax benefits to customers sooner than would occur if we just simply operated the annual cost true-ups.

Together, we expect to reflect in rates about $95 million of annual tax benefits, about $74 million of that is retail rates and $21 million of that is FERC formula rates.

As to merger matters, it's been a busy start to the year, and we're glad we've checked off a few more of the merger to-do items. In February, we received FERC approval as filed. In March, the NRC and FCC filed suit, leaving just the KCC and the Missouri PSC.

Constructive conversations led to common ground in March when we reached settlements with staff, consumer advocates and many other important interveners in both states. The settlements provide straightforward mechanics to pass merger savings to customers in all jurisdictions. Not everyone settled, but the settling parties are broad and reflect diverse interests. Those electing not to settle include a handful of Kansas industrials, a couple of wholesale players and some environmental advocates.

In Kansas, the settlement calls for upfront bill credits of $30 million right after close, plus $45 million more in total to be paid ratably over the next 4 years, 2019 through '22, at about $11 million per year.

Also included for that same period is an earnings sharing -- earnings review and sharing program. It allows for sharing incremental merger benefits if earned returns exceed authorized returns, but also presents us the opportunity to earn back annual bill credits just mentioned before any sharing kicks in. We'll calculate this annually based on a 9.3% ROE and about a 50% equity ratio.

The bill credits just mentioned were combined company commitments for both companies in Kansas. The slides we posted last night detail the specific Westar customer benefits.

As I mentioned, given timing, there is plenty of cross-reference between the Kansas merger settlement and the rate review. This nexus provides some clarity to both customers and shareholders. For example, in the Westar rate review, we have a couple of large items that need to be reflected in rates. After years of providing value to our customers in the form of retail rate offsets, a large wholesale contract and our initial wind tax credits both come to an end early next year and need to be reflected in the rates.

Additionally, to enable the merger rate moratorium, we needed some assurance regarding ROE. The parties to the settlement agreed to support the recovery of revenue related to both the expiring wholesale contracts and the expiring production tax credits as well as supporting a 9.3% ROE in the upcoming rate review.

Annually, the Kansas settlement also allows the utilities to recover $30 million in transition cost over the 10-year period.

Going the other direction, we'll impute $30 million annually of merger savings back into Kansas rates. That's $23 million for Westar and $7 million for Kansas KCP&L. These locked-in customer benefits demonstrate our confidence in the merger savings and the unequivocal value of the merger in keeping Kansas energy costs competitive.

We'll implement rates in 2 stages. As filed -- and I'm only talking about the rate case this first part. As filed, the first stage will be a $2 million decrease in September. The second stage was filed to be a $54 million step-up in about February of next year. So all told, as filed, it's a net $52 million or 2.6% increase. But that's before the additional merger savings credit that I just mentioned. If the commission adopts the merger settlement, including the cross-references to the rate review mentioned earlier, the revenue requirement would be reduced by $35 million, taking the net increase from $52 million to just about $17 million or so.

We expect the KCC to issue its merger order no later than June 5, and we've asked them to consider May 29, which would allow for a much easier month-end accounting.

Moving to Missouri. In January, we resettlement with 3 interveners, including the MPSC staff. In March, we expanded this settlement to include the Office of Public Council and another party. Similar to Kansas, the Missouri settlement will include upfront bill credits, imputed merger savings in the initial KCPL Missouri rate reviews and allow recovery of $17 million of transition costs over a 10-year period.

Last month, all 4 Missouri commissioners that were present for an open meeting indicated their informal support for the merger settlement. While the timing of an order is still unknown, we believe Missouri will accept the stipulation of the settlement and approve the merger close to the timing in Kansas.

In neither state have we been debating whether we meet the merger standards. I just ran through some of the numbers. It's overwhelmingly beneficial to our customers. Virtually all parties agreed that bringing these 2 companies together unlocks a lot of value. So naturally, discussions are more focused on who gets what, when and doing so in a fair manner that reflects rate-making difference and timing differences between the 2 states. These settlements among diverse parties do just that, effectively locking in a plan to keep our rates competitive.

To produce these savings, of course, the settlements still require formal approval from both state commissions. Right after that, Terry and the management team are eager and ready to execute to get them.

And with that, I'll turn things over to Tony.

T
Tony Somma
executive

Thanks, Mark. Good morning.

Last night, we announced first quarter EPS of $0.42, in line with a year ago. Gross margin decreased slightly from the same period last year. Retail sales were up nicely, about 5%, and those effects are offset by our commitment to give tax benefits back to our customers. This amount, the $19 million regulatory liability, is mostly offset by lower tax expense, but due to a timing difference in the refund calculation, there is a slight impact to the bottom line. This caused a $0.02 drag to EPS this quarter, and by year-end, we expect the bottom line impact to be generally neutral, but ultimately determined by actual results.

With the return to normal temperatures this quarter, residential and commercial sales are up about 9% and 5%, respectively. We estimate weather helped us to the tune of $0.01 compared to normal and $0.06 compared to last year.

The higher sales were offset by increased O&M of $4.5 million and higher interest expense of approximately $3 million, resulting from having issued $300 million of long-term debt at 3.1% in March of last year.

In that same month last year, Western Plains went into service, which means we saw the full effect of the new wind farm that is yet not reflected in rates. O&M and depreciation expense were higher as a result, but higher costs were mostly offset by lower income tax expense from the production tax credits. And of course, there was also a nice fuel cost offset for our customers.

We received no COLI income for this quarter, which is no different than first quarter last year. As a reminder, we have $20 million of COLI benefit in our 2018 plan. If you were to spread that evenly throughout the year, receiving 0 COLI this quarter cost us $0.03 when compared to planned.

On to a broader economic update. As we said many times, Kansas doesn't typically boom or bust, but we continue to see steady growth as evidenced by the uptake in industrial sales throughout our service territory the past few years. After increasing 3.5% last year, they again were up 2% quarter-over-quarter.

Unemployment is hovering just shy of 3.5%, and as we are accustomed to, below the national average.

Let me finish with a few words on the combined company's outlook. Many of you have asked about our financial projections and how they stack up with settlements in both states. We still plan to repurchase approximately 60 million shares over the 2 years or so after merger close. This puts us in a favorable position compared to many of our peers that are issuing shares because of tax reform. We are still targeting an EPS CAGR of 6% to 8% based on Westar's 2016 EPS of $2.43. Our plan allows for dividend growth alongside earnings while targeting a 60% to 70% payout ratio.

Our ability to deliver this value is enabled by a strong balance sheet and solid investment grade credit profile. Tax reform hasn't changed our plans, but it does maybe take away a credit positive that otherwise could have occurred.

Cash flow, credit metrics and earnings will be greatly enhanced due to the hundreds of millions of dollars in efficiencies created by combining these 2 companies.

In summary, our investment thesis is simple. Due to benefits of the merger, we'll be buying back shares instead of issuing like many others, and we plan to deliver top quartile EPS and dividend growth without leaning on the backs of our customers to do so.

With that, we look forward to your question. Members of the media, we invite you to contact Gina Penzig at (785) 575-8089, if you have questions.

Operator, would you please open the lines?

Operator

[Operator Instructions] And speakers, I'm not showing any further questions at this time. I would now like to turn the call back over to Mark Ruelle for any remarks.

M
Mark Ruelle
executive

Pretty well. Thanks, everyone, for joining us. As we said, it's a pretty straightforward quarter. And of course, the big news is looking forward to the orders from the 2 state commissions. As always, if you have follow-up questions, please give Cody a call. Cody, again, is our Director of Our Investor Relations. His number is (785) 575-8227. Thanks a lot. Have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a nice day.