Evergy, Inc. — Q3 2020 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2020; filed November 4, 2020. Evergy is a regulated electric utility holding company serving approximately 1.6 million customers in Kansas and Missouri, with about 14,700 MW of owned generation capacity and renewable power agreements. This combined filing also reports Evergy Kansas Central and Evergy Metro.
Financial performance
| Evergy consolidated | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Operating revenue | $1,517.6M | $1,577.6M | $3,819.0M | $4,016.2M |
| Income from operations | $521.7M | $538.7M | $990.9M | $1,020.0M |
| Net income attributable to Evergy | $364.5M | $366.8M | $567.3M | $606.0M |
| Diluted EPS | $1.60 | $1.56 | $2.49 | $2.49 |
| Utility gross margin, non-GAAP | $1,135.3M | $1,157.9M | $2,788.7M | $2,848.6M |
Year-to-date operating cash flow was $1,421.7M, versus $1,447.3M a year earlier. Capital additions to property, plant and equipment were $1,058.1M, compared with $849.1M. Cash and cash equivalents at quarter-end were $361.6M, up from $23.2M at year-end 2019.
At September 30, long-term debt, including current maturities, was approximately $9.63B; debt of variable interest entities was $18.8M. Notes payable and commercial paper were $200.0M, and collateralized notes payable were $395.0M. Evergy reported $2.3B of available master-credit-facility capacity and compliance with its debt covenants. Total assets were $26.88B and total equity was $8.78B.
Material changes versus the prior comparable period
- YTD revenue declined $197.2M and utility gross margin fell $59.9M. Management cited unfavorable weather and lower commercial and industrial demand, including temporary COVID-19 business closures; residential demand partly offset the decline.
- YTD net income attributable to Evergy decreased $38.7M, while diluted EPS was unchanged at $2.49. Fewer weighted-average shares supported EPS; lower sales, higher depreciation and higher interest expense weighed on earnings.
- YTD operating and maintenance expense fell $41.6M, but included $55.3M of voluntary severance costs and $26.1M of strategic-planning advisor expenses. Adjusted earnings, a non-GAAP measure, were $641.7M, or $2.82 per share, versus $621.2M, or $2.55, in 2019.
- Evergy increased capital spending: YTD PP&E additions rose $209.0M year over year. Cash used in investing activities increased to $1,029.9M from $772.1M.
Outlook, management commentary, risks and unusual items
- Evergy’s five-year Sustainability Transformation Plan targets approximately $330M of O&M reductions by 2024 versus 2018 adjusted expense, a $145M reduction in fuel and purchased-power expense between 2019 and 2024, and approximately $8.9B of base capital investments through 2024. Projected capital expenditures are $1.586B in 2020 and $1.726B in 2021; the plan is subject to change.
- The plan includes a goal to reduce CO2 emissions 80% from 2005 levels by 2050; management said the plan could enable an 85% reduction by 2030. The pace depends on stakeholder collaboration and regulatory recovery mechanisms.
- COVID-19 affected demand mix, collections and operations. Kansas regulators authorized Evergy Kansas Central and Evergy Metro to defer qualifying net incremental pandemic costs for consideration in future rate cases. A Missouri stipulation covering Evergy Metro and Evergy Missouri West was pending MPSC action, expected in January 2021. Recovery of costs or lost revenues is not assured.
- A Kansas corporate income-tax exemption effective in 2021 led to deferred-tax revaluations. Evergy recorded $13.8M of related tax expense not expected to be recovered from customers, included as an adjustment in its non-GAAP reconciliation. Evergy Kansas Central’s YTD tax expense also included a $109.0M net increase related to the revaluation.
- A revised Wolf Creek decommissioning study increased Evergy’s ARO by $259.1M in Q3; total ARO liabilities were $948.8M at September 30. Goodwill of $2.34B passed the May 2020 impairment test, with no impairment recorded.
- Regulatory and environmental uncertainties include possible Sibley Station customer refunds: Evergy recorded an $18.3M regulatory liability and disclosed potential additional exposure of up to approximately $12M per year until new rates take effect. Environmental compliance costs, including coal-ash and wastewater requirements, could be material. The filing does not quantify a clear aggregate exposure.
- In November 2020, Evergy declared a quarterly common dividend of $0.535 per share, payable December 21, 2020.
Important facts for investors to verify
- Whether lower commercial and industrial demand, customer collections and credit losses persist, and how much qualifying COVID-19 costs or lost revenues regulators ultimately permit Evergy to recover.
- Execution, regulatory treatment and funding of the $8.9B capital plan, including projected transmission and generation spending.
- Final outcomes and potential customer-rate effects from Kansas tax-rate changes, the Missouri Sibley proceeding, and the 2020 earnings-sharing plan.
- Updated Wolf Creek decommissioning estimates and future environmental compliance costs, including coal-combustion-residual and wastewater requirements.
- Debt, liquidity and dividend capacity relative to investment needs; the filing reports substantial facility availability, but also significant planned capital spending.