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Evergy, Inc. (EVRG -0.02%)
Q1Â 2019 Earnings Call
May. 9, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, this is your conference operator. At this time, I would like to Welcome everyone to the Q1 2019 Evergy Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.
(Operator Instructions)
I would now like to turn the call over to Lori Wright, you may begin your conference.
Lori A. Wright -- Vice President of Investor Relations and Treasurer
Thank you, Laurie. 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 2, and a disclosure in our SEC filings containing list of some of the factors that could cause future results to differ materially from our expectations and includes additional information on non-GAAP financial measures.
We issued our first quarter 2019 earnings release and 10-Q after market closed yesterday. These items are available along with today's webcast slides and supplemental financial information for the quarter on the main page of our website at evergyinc.com.
On the call today, we have Terry Bassham, President and Chief Executive Officer; and Tony Somma, Executive Vice President and Chief Financial Officer. Other members of the Management are with us and will be available during the question-answer portion of the call.
As summarized on Slide 3, Terry will recap the quarter and provide the business update. Tony will update you on the details of our latest financial result. With that, I'll hand the call to Terry.
Terry D. Bassham -- President, CEO & Director
Thanks, Lori and good morning everybody. I'll begin on Slide 5.
2019 is an important year for our company. We're targeting strong year-over-year earnings growth as we capture the benefits of the merger. Last night we reported first quarter GAAP earnings of $0.39 per share, compared to $0.42 per share earned in the first quarter of 2018. Adjusted earnings were $0.44 per share in first quarter 2019 compared to $0.34 in the same period a year ago.
Year-over-year increase in earnings was primarily driven by cost reduction efforts and higher retail sales due to colder weather. I'm pleased with the execution of our team and the solid first quarter delivered just on pace to achieve our 2019 targets. As we focused on our plans, cost reductions and share repurchases, mother nature presented us with a few challenges during the quarter. As we previously stated, our team banded together to restore power during a major storm that hit Kansas City in January, which was a once-in-a-couple of decades kind of storm.
At its peak, we had about 200,000 customers out of service. Through the dedicated work ethic of our team we fully restored customers within five days of the event. Separate from the January storm, we also had flooding that impacted our service territory in March.
The Iatan Generation Station West in Missouri was our most at-risk piece of infrastructure. If you recall in 2011 we experienced flooding in the same region. One silver lining of dealing with the 2011 event is being more prepared for conditions as they developed this year. Emergency plans and infrastructure built eight years ago, allowed us to withstand flood waters without a significant impact.
We did alter our day-to-day operations for about a week and-a-half, but we're able to resume normal operations by the end of March. I'd like to give a special praise to our folks in the field that worked in less than ideal situation as you might imagine to ensure the protection of our assets and keep customers power interruptions to a minimum during these events.
Before I move on, let me update you on our efforts toward renewable energy, namely affordable wind. Kansas now ranks number one with respect to wind resources as a percentage of megawatt hours produced, our company recently reached a milestone by producing over 50 million megawatt hours of wind.
To put in that perspective, that's enough power to light up Time Square for more than three decades. Locally, we have been working with the Kansas City Missouri to achieve their goal of offsetting 100% of their municipal electric energy usage with energy produced from carbon-free sources by 2020. We continue to see more and more demand from our existing customers and potential new customers to be supplied with the abundant renewable resources found within the states we serve.
Now, moving onto Slide 6. I'll give you the latest on our regulatory and legislative proceedings. As you may recall we agreed to produce a Kansas rate study is part of our merger agreement last year. We completed the study and present the results to the House of Senate early in the Kansas legislative session this year.
The KCC staff also completed a similar but yet separate study of Kansas rates and presented their findings to the legislature as well. Throughout the session, Kansas rates continue to be a topic of discussion. Ultimately Senate Bill 69 was passed. Signed into law by Governor Kelly in April and authorized an independent retail rate study of Kansas electric public utilities.
The study will provide information that may assist future efforts of developing electric policy aimed at delivering regional competitive rates and reliable electric service. The process is expected to take place throughout the remainder of this year with findings to be delivered starting January of next year. Let me be clear: we believe the merger with its upfront and ongoing bill credits and significant cost efficiencies has tremendous benefits for our customers' prices for years to come and goes a long way toward addressing these concerns.
In March, Governor Laura Kelly points Susan Duffy to the Kansas Corporation Commission. Commissioner Duffy previously served as Executive Director of KCC staff and most recently as the General Manager of Topeka Metro, responsible for the management and operation of the Topeka transit system.
We look forward to working with her and see trends of transitions into her new role in the KCC. Now moving to the latest proceedings in Missouri. In March, the Missouri Public Service Commission set a procedural scheduled to hear complaints regarding GMO sibley plan which we retired in the fourth quarter of last year.
The complaint asked the Commission to issue an Accounting Authority Order to defer all costs we avoid that are currently reflected in retail rates except for depreciation that is associated with the retired generation unit. Direct testimony was filed in April by the complainant, Office of Public Counsel and industrial customer group and we'll file our rebuttal testimony later this month.
Hearings are set for mid-July and we expect a Commission order by early September. Missouri legislative session has been mainly focused on education, workforce development and infrastructure funding. We don't expect any of the energy-related bills to receive the traction needed to move forward this session.
Now, turning to Slide 7, let me update you on the latest regarding our merger plan. Upon launching our merger, we laid out three specific priorities we remain keenly focused on. Leaving target merger savings, rebalancing the holding company capital structure by repurchasing shares, attractive EPS and dividend growth, with reduced risk in our regulatory stay outs.
We moved the ball in the right direction on each of these objectives. First we exceeded our 2018 gross merger savings target and we feel confident in achieving the $110 million target that we've set for this year. Next we laid out our share repurchase strategy with the intent to dollar-cost average over time, while taking a programmatic and opportunistic approach.
We stuck to that plan while utilizing accelerated share purchases and open market repurchases being optimistic when it makes sense. The activity in the quarter kept us on track to complete our target share repurchases up mid next year. Lastly on earnings and dividend growth. Our original EPS guidance based on 2016 set the foundation for our implied range through 2021.
Our 2019 adjusted EPS guidance in our expectations for EPS growth over the next couple of years are consistent with that original implied 2021 range, albeit at the middle to lower end. Our currently indicated annualized dividend of $1.90 per share lands us in the middle of our targeted long-term dividend payout ratio of 60% to 70% when applied to the 290 mid-point of our 2019 adjusted EPS guidance.
Nothing has fundamentally changed since we've laid out the original merger plan. We are executing and continue to have confidence in our ability to deliver. In fact, between dividends and share repurchases, we committed to distribute $700 million of capital to shareholders just the first quarter alone.
Moving to Slide 8. I will update you on our investment outlook before I turn things over to Tony. With the solid first quarter results, we are affirming our 2019 adjusted earnings guidance range of $2.80 to $3 per share. The $2.90 midpoint is the base from which we target our long-term EPS CAGR of 5% to 7% through 2023.
We've indicated this is currently forecasted to be nonlinear and front-end loaded. Many of you have asked about growth post 2021. So let me describe how we're approaching the future. As we've said many times over the last couple of years. One of the largest benefits to our plan is the opportunity to keep customer bills low and target competitive shareholder returns.
Our unique plan positions us well to achieve these objectives. Minimizing the impacts that customer build and competitively positioning in customer rates is the foundation of our five-year capital plan. Our rate base growth projections are by-design and set at a board level to maintain reliability for our customers, build adequate regional transmission infrastructure and include line of sight projects with no placeholders.
Our lower projected CapEx compared to many of our peer positions as uniquely from a cashflow perspective. Again this is by-design and results in projected free cashflow post 2021 even after paying the dividend. This protects against the down-sided rate pressure and positions us with flexibility. We expect several levers to be available to us in the latter half of our five-year plan that will allow us to keep customer bills low and provide opportunity for attractive shareholder returns.
And those levers include infrastructure projects that aren't currently in our plan, but may be a benefit for customers in the future. This could include incremental spend, reallocation of our current five-year plan, $6 billion CapEx or some combination of the two.
We intend to deploy capital investment where it's wanted and rewarded as evidenced by the regulatory construct are balancing the needs of our customers and reliability metrics and their respective jurisdictions. To that end, we continue to look for opportunities that allow us to further utilize piece of legislation in Missouri. Or we could look at deleveraging the holding company once we've completed the share repurchases.
This is an exhaustive list, but does include some of the strategies available as we look out over the next 5 years. We'll continue to focus on remaining flexible as we move forward through this transition period. The key to preserving the future optionality hinges on our ability to deliver the value of the merger basis we are on track to deliver on our commitments.
So with that, I'll turn the call over to Tony.
Anthony D. Somma -- Executive Vice President and Chief Financial Officer
Thanks, Terry. Good morning, everyone. I'll start with the results on Slide 10 of the presentation.
Last night we reported first quarter GAAP earnings of $100 million or $0.39 per share compared to $61 million or $0.42 per share in the first quarter of '18. The increase in earnings is primarily due to the inclusion of KCP&L's in GMOs results in the first quarter of 2019 which are included in Evergy's First Quarter 2018 Results.
GAAP EPS was $0.03 lower, primarily due to dilution of shares issued to Great Plains Energy shareholders upon closing of the merger. Adjusted non-GAAP earnings were $111 million or $0.44 per share compared to $92 million or $0.34 per share in the same period a year ago. As detailed on the slide, adjusted EPS was up $0.10 primarily driven by cost reduction efforts, fewer shares outstanding and colder than normal weather.
Some additional drivers for the quarter include gross margin being up $22 million primarily due to new retail rates, net of the 2018 provision for rate refund for the lower corporate tax rate and favorable weather, which we estimate contributed about $0.05 compared to first quarter 2018. O&M was down $30 million primarily driven by cost reduction efforts associated with merger enabled efficiencies and plant retirements in Missouri.
Depreciation and amortization was $30 million higher, primarily from new depreciation rates that are reflected in our retail prices. And lastly, accretion, resulting from our share repurchase activity, which added about $0.03 a share. For the quarter, pro forma residential sales were up 4.5% and commercial sales were up 1.7% primarily due to the colder weather, which we estimate helped about $0.06 when compared to normal.
Pro forma industrial sales were about 3.5% lower than the same period last year. Most of this decrease comes from a large customer in the chemical sector that saw decreased demand at their plant in our service territory. From an economic standpoint, things have stayed steady in our territories and our plant rates continue to hover in the lower to mid-3% range weighing below the national average.
We saw a nice pickup in multi-family home construction, marking the highest quarterly numbers in this area in the last couple of years. Steady growth remains present in the Business Services, Healthcare and Pet sectors. A tech technology company recently announced the relocation of their headquarters from Silicon Valley to Kansas City. This should bring a few hundred jobs and add to the established Animal Science Corridor that is present within our territory. Now moving on to Slide 11, let me touch on our latest financing activities. In March, we issued $400 million of KCP&L bonds at 4% and 8% replacing bonds of the coupon of 7.15%. As far as upcoming maturities KG&E has $300 million. Our first mortgage bonds coming due in June that will look to replace.
Moving on to the holding company, in March, we entered a $1 billion term loan that will expire in September. This allows us to continue our share repurchases between now and later this year when we project issue about $1.5 billion of long-term holding company debt. While repurchasing 60 million shares by the next years, continue to be our target the ultimate amount of holding company debt needed will vary based on share priced timing and total number of shares repurchases.
All of which are subject to market factors and the financial outlook of the company. Throughout the first quarter, we repurchased over $10 million shares to the combination of ASRs in open market purchases. As of the end of April, we've now purchased about 46% of the total 60 million shares, share target will still have outstanding store that has not closed.
Wrapping up on Slide 12. As Terry mentioned, our first quarter results start the year in the right direction and we are reaffirming our 2019 adjusted EPS guidance range of $2.80 to $3 per share. We remain focused on delivering significant cost reductions, while executing our investment plan that minimizes lag during our regulatory stay-up (ph) period over the next four to five years. Again, to echo what Terry said, we're being very intentional with our capital allocation giving preference to earnings certainty, zero down earning our lab returns, and maintaining flexibility for the future and returning capital to you, our shareholders. We remain confident in the plan that we've laid out and continue to believe our thesis offers a competitive attractive risk-adjusted total shareholder return profile, while focused on keeping customer rates competitive.
With that, I'll turn the call back over to Terry.
Terry D. Bassham -- President, CEO & Director
All right, thank you for joining us. We'll take questions now.
Questions And Answers
Operator -- President, CEO & Director
(Operator Instructions) Your first question comes from the line of Greg Gordon from Evercore ISI. Please ask your question.
Gregory Harmon Gordon -- Analyst
Thanks, good morning. A couple of questions, first, am I right that you called out that the storm costs, all things equal had a $13 million impact in the quarter? So, despite that would like almost a $0.05 headwind you still were able to get to the $0.44 number?
Terry D. Bassham -- President, CEO & Director
That's correct.
Gregory Harmon Gordon -- Analyst
Okay, thank you. And that when you look at what average annual storm costs look like in a normal year, would you expect that would be something that might recur normally year-over-year, but just happened over the course of time or do you see that as an exceptional event.
Terry D. Bassham -- President, CEO & Director
No, that was an exceptional event. That's why I mentioned it, I guess we say it a lot now, a couple in the decades of events. But no, we normally don't have that many customers out five days. And so not only do you have extra expense, but you got lost revenue. That is not normal and having to back -- I've been here almost 15 years and it's the worst storm we've seen since I've been here.
Gregory Harmon Gordon -- Analyst
Well, congratulations on getting your customers back so quickly. My second question goes to your capital allocation commentary and I know that customer affordability is a huge issue for you and you're rightfully primarily focused on it and one of the reasons for the merger. So you're being very careful about not trying to send the wrong message to your customers about capital spending, but at the same time I'm hearing you talk about that increased desire for renewable energy from your customers. One of the things that I'm also seeing industrywide is the ability to deploy new technologies that while they do increase capital spend, also improve the customer experience and potentially lower bills? So as you think about the back-end of that CapEx program in 2022 and 2023 -- not to put words in your mouth and disguise that question as a statement, but are those the type of things that are not yet in the plan that you're thinking about? And can you elaborate perhaps on that?
Terry D. Bassham -- President, CEO & Director
Yes, you're exactly right. Obviously, focused on as you said the near-term stability after each company spent 10 years on both reliability, generation and environmental spend. This period post-merger with the synergy savings providing an opportunity for growth is critical. But as you described also, we have ever-changing needs to what customers want and we are very fortunate to have the opportunity to be near one of the best wind resources in the country. We see that as not only an ability to serve our current customers, we see that as an ability to attract economic development from new customers and we are part of our teams in each of our states and each of our cities. We talk to folks considering moving to our region about that opportunity. What used to be a green opportunity is now also of green in a low-cost opportunity given the technologies around that. In addition to that, your exactly right. We also have both reliability and customer desire technologies that we're dealing with every single day like everybody is and that's an area where we sound (ph) particular, provides us with a great opportunity to ramp up spend in a way that's a structured and approved in Missouri and almost expected. So we're looking at the timing and the ability to do those as well.
So each one of those gives us the ability not only to be stable in the short term but provide for that additional growth in the long-term and we look forward to updating shareholders along the way as we finalize some of those plans.
Gregory Harmon Gordon -- Analyst
Thank you, guys. Congratulations on a good quarter.
Operator -- Analyst
Your next question comes from the line of Ali Agha from SunTrust. Please ask your question.
Ali Agha -- Analyst
Thank you. Good morning. My first question, Terry. So the Kansas rate review that would finish up in early 2020. To the extent that define the rates are too high for whatever reason, how would that actually impact you guys given that you have a rate freeze as part of your budget agreement? I'm just thinking about the logistics here if there is some negative ruling that comes out there.
Terry D. Bassham -- President, CEO & Director
Yes. I don't know for sure. What I would tell you is that we are very confident that this is the legislature which would look at opportunities, maybe to send to the Commission further work to be done potentially. But we certainly see that the ultimate outcome of the study should reflect not only the current benchmarking, if you will, of our rates, but the historical development of our cost and rates and what we see in the future which again is consistent with what we just talked with Greg about. That's why our current merger opportunity provides us with assurances to those legislators that we see the same issue and have addressed and our merger does just that. Process-wise, we saw some legislation this time that we didn't think really wasn't appropriate and obviously the legislature agreed that we ought to be talking about a study before we look into those kind of things. But certainly if they have particular concerns. We're confident that we'll be able to work with our legislators and our local customers about options that may help solve problems in a way that makes sense both to them and to our shareholders.
Ali Agha -- Analyst
And generally speaking, are you and the staff on the same page on this or is staff in their study thinking differently?
Terry D. Bassham -- President, CEO & Director
No. We actually presented our own study side-by-side, our witness and their witness and answer the same questions and we are locked up (ph). I would say that our relationship through specially merger too, where we work through the final merger settlement in the process for the structure of that stay out an overview, puts us in a position of absolutely being consistent in our voice, to our legislators.
Ali Agha -- Analyst
Okay. Second question, just clarifying your comments from earlier. So as you mentioned you're fairly confident in the earnings growth that you've laid out for us through to 2023, which by definition implies that the growth in that 2021 through 2023 period of roughly 5% or so is exceeding. What's your current rate base growth would be from the current CapEx plan, which is in the 2% to 3% range? So it appears that you run the math and you've identified potentially the levers already that would keep you in that growth trajectory. Is that right? In terms of potentially the CapEx that you could incrementally spend and B, when would you can weight that to us and the investment community in terms of what kind of opportunities you see for potential increase in CapEx in those outer years?
Anthony D. Somma -- Executive Vice President and Chief Financial Officer
Good morning, Ali. This is Tony. So there is near various obviously levers that come up with our guidance range especially particularly when you going out that forward to 2023. Some of them we mentioned in the script, which as you know, we could potentially delever the holding company. We could look at increasing our spend if it's right for our customers and for us, our shareholders, where we don't have a lot of regulatory lag. So as we look at things going out, we'll gain more certainty throughout the planning year this year and we would hope to maybe to the extent stuff changes we would let folks know either foreshadow that at EEI and maybe more clarity with some of the numbers when we do our year-end 2019 call.
Ali Agha -- Analyst
I see. And last question just clarifying the 46% roughly of the share buyback, total buyback that you completed, does that include the ASR that was announced, but not completed? Or is that not factored into this?
Anthony D. Somma -- Executive Vice President and Chief Financial Officer
It includes the initial delivery of some shares but the ASR is not closed. And so the parties will give us the remaining shares when the contract terminates.
Ali Agha -- Analyst
So putting all of that, how much is bought back?
Terry D. Bassham -- President, CEO & Director
Well as of the in April it's roughly 46%, almost 27 million shares.
Ali Agha -- Analyst
I got you. Thank you.
Operator -- Analyst
And we have a question from the line of Michael Sullivan from Wolfe Research. Your line is now open.
Michael Sullivan -- Analyst
Good morning. I just -- I first wanted to just touch on Kansas. Now that we've sort of gotten through this legislative session and seen the bill that ultimately got passed, but some of the other things that were discussed, could you guys just give us a sense or are you feeling better or worse about the whole political dynamic there as we go into next year and we get the rate study results, and you have a new legislative session? Just your thoughts there.
Terry D. Bassham -- President, CEO & Director
Yes, we're feeling better, actually. Certainly when the initial bill got passed or our initial bills guys entered, we became a topic of conversation and so other folks who had concerns. Some of them related for example, demand on renewals on solar installations. Some things that were kind of out there, but we became part of the discussion. I would say that through that, we've talked to folks and solved many problems that were kind of one-offs or specific issues. I'd say and the study to be conducted now with everybody in the room together gives us stability to have those conversations along the way and not necessarily have as much debate at the very end after we completed. But I think our ability to continue to talk to people over the next 12 months, our ability to work with an independent consultant and our customers that evaluate all the concerns and issues is actually a positive from an outcome starting in January next year.
Anthony D. Somma -- Executive Vice President and Chief Financial Officer
And I'll add, we're continuing give back merger credits to the $211.5 million a year in Kansas.
Terry D. Bassham -- President, CEO & Director
Yes, it's a good point. We remember we gave our first credit back at the first year after all that was going on. By the time we get to that in the year, they'll now have seen that, but know what was promised as well. So it will affect those acknowledgments of what the merger means to our customers.
Michael Sullivan -- Analyst
Great, thanks. And then just carry on your comments on Slide 8 on the whole capital plan and what that looks like further out in time. Could you just be a little more specific on reallocation versus incremental and what is going to drive that and when we'll have a better sense of sort of how that plays out?
Terry D. Bassham -- President, CEO & Director
Yes, Tony kind of covered it. But what I would say is, if you just looked at percentage allocations by state, remember that it's in part on allocation, based on the number of customers in that state. So it may look like it's a little heavier on one direction or another, but that's based on population. But more importantly, the commitment around the merger and particular in Kansas provides stability, but also provides consistency, whereas the Pizzaville in Missouri is specifically geared toward additional spending around structures. We've seen Amaron (ph) go out with a plan and seen what they're doing and have gotten very good responses from the commission. So, we see an opportunity there to be able to potentially allocate more that direction under the Pisa (ph) structure which doesn't exist in Kansas. And then as you go along you'll continue to see projects that are very specific we talked about the fact we didn't put kind of general buckets out there, but as we develop projects, there may be more projects related to one need or another in a state that's very specific.
So as we work through those allocations and budget plans, especially in that back end period you could see a focus on one jurisdiction versus another. I'll remind you that Missouri is still in a position where we have some lag there. We overspend absent fees, but they are also looking to shortening the time period for rate cases over there. So if that were to continue to develop, that might give us additional opportunity without creating lag before we got to the end of the period.
Michael Sullivan -- Analyst
Okay, great, thanks. And then just one last one on 2019. I just wanted to clarify I think when you gave guidance for the year on the last call that already baked in those storm costs, but then weather it was actually $0.06 better than normal, I think Tony said -- was that baked in as well or would that be favorable to what you guys were seeing at the time?
Anthony D. Somma -- Executive Vice President and Chief Financial Officer
This is Tony. When we come out with our guidance and our drivers to get to the $2.80 to $3 a share, we were assuming normal weather.
Michael Sullivan -- Analyst
Okay, thank you.
Operator -- Analyst
Your next question comes from the line of Charles Fishman from Morningstar Research. Please ask your question.
Charles J. Fishman -- Analyst
Good morning. I just want to make sure I got this right. You're reaffirming the 5% to 7% with the base of $2.90 it for this year, but did I hear that the EPS growth will be a little above maybe the higher end of that range in the early years and the lag in the later years unless some potential CapEx comes along or were you just referring to the merger savings being front-end loaded, which are obvious from the information you provided? If you could just clarify that for me, I'd appreciate it.
Terry D. Bassham -- President, CEO & Director
Yes, they're both correct. Obviously on the front-end, as we wrap up the savings there is an early lumpiness, if you will, trending on the front end that drives in part the EPS pathway as well and again as it does that in the back-end is a little softer we're talking about what we're doing to look at opportunities and needs for additional spending on the back end from that perspective.
Charles J. Fishman -- Analyst
Okay. So, Terry, it sounds like I did get it right. Thank you. That's really all I have.
Operator -- Analyst
There are no further questions at this time, I'll turn the call back to Terry.
Terry D. Bassham -- President, CEO & Director
Thank you, Laurie and thank you everybody for calling in this morning. Off to a good start and look forward to talking to you throughout the year. Thank you very much. Have a good day.
Operator -- President, CEO & Director
This concludes today's conference call. Thank you everyone for your participation, you may now disconnect.
Questions and Answers:
Duration: 35 minutes
Call participants:
Lori A. Wright -- Vice President of Investor Relations and Treasurer
Terry D. Bassham -- President, CEO & Director
Anthony D. Somma -- Executive Vice President and Chief Financial Officer
Gregory Harmon Gordon -- Evercore ISI Institutional Equities -- Analyst
Ali Agha -- SunTrust. -- Analyst
Michael Sullivan -- Wolfe Research. -- Analyst
Charles J. Fishman -- Morningstar Inc -- Analyst
