Evergy, Inc. — Q3 2019 Form 10-Q
Business context and period: Unaudited quarter and nine months ended September 30, 2019; filed November 6, 2019. Evergy is a regulated electric utility holding company serving about 1.6 million customers in Kansas and Missouri, with approximately 14,700 MW of owned generation and renewable power agreements. This combined filing also reports Evergy Kansas Central and Evergy Metro. In September 2019, the utilities rebranded under the Evergy name.
Financial performance
Amounts are in millions, except per-share data. Evergy’s 2018 year-to-date comparison is affected by the June 2018 merger: results of Great Plains Energy subsidiaries, including Metro, are included only from the merger closing date in 2018. Therefore, year-to-date revenue and cash-flow comparisons are not fully like-for-like.
| Evergy consolidated | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Operating revenue | $1,577.6 | $1,582.5 | $4,016.2 | $3,076.1 |
| Income from operations | $538.7 | $533.1 | $1,020.0 | $783.5 |
| Net income attributable to Evergy | $366.8 | $355.0 | $606.0 | $517.3 |
| Diluted EPS | $1.56 | $1.32 | $2.49 | $2.61 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $1,447.3 | $1,191.6 |
- Q3 utility gross margin, a non-GAAP measure, was $1,157.9, up $17.5 year over year. Management attributed the increase principally to new rates and higher retail sales, partly offset by transmission-cost riders. Q3 operating revenue declined $4.9.
- Q3 net income attributable to Evergy rose $11.8; diluted EPS increased $0.24, helped by lower average shares following repurchases. For the first nine months, net income attributable rose $88.7, while diluted EPS fell $0.12, mainly because the comparative periods had different share counts and merger-period composition.
- Operating margin information is not separately presented as a defined measure in the filing. Income from operations was $538.7 for Q3 and $1,020.0 year to date.
- Year-to-date cash flow: operating activities provided $1,447.3; investing activities used $772.1, including $849.1 of capital additions; financing activities used $785.4. Cash and cash equivalents were $50.1 at September 30, down from $160.3 at year-end 2018.
Debt, liquidity and capital allocation
- At September 30, total long-term debt book value was approximately $9.0 billion, including current maturities; debt of variable-interest entities was $51.1. Notes payable and commercial paper were $360.6, and collateralized borrowings were $395.0.
- Evergy had $2.127 billion available under its $2.5 billion master credit facility. The companies were in compliance with the facility’s leverage covenant, which caps indebtedness to capitalization at 0.65 to 1.00.
- In September, Evergy issued $800 million of 2.45% senior notes due 2024 and $800 million of 2.90% senior notes due 2029, using proceeds in part to repay a $1.0 billion term loan. Evergy Kansas Central issued $300 million of 3.25% mortgage bonds due 2049; Metro issued $400 million of 4.125% mortgage bonds due 2049.
- Evergy repurchased $1.629 billion of shares during the first nine months and had repurchased 43.9 million shares cumulatively under its 60-million-share authorization. It expected to complete the program by mid-2020. Cash dividends paid year to date were $347.5.
Material changes, outlook and risks
- Regulatory items: Kansas regulators disallowed recovery from customers of costs associated with Kansas Central’s extension and purchase of an 8% Jeffrey Energy Center interest. Evergy recorded an $8.4 million pre-tax charge. Kansas Central and Metro estimated no 2019 earnings-sharing refund, subject to final regulatory review.
- Missouri regulators required Evergy Missouri West to record a liability for Sibley Station revenues collected after its retirement. Evergy accrued $6.5 million; the filing describes potential additional exposure of up to approximately $15 million per year until new rates take effect, depending on future proceedings.
- Updated transmission rates reduced expected annual revenues: 2019 retail transmission charges were expected to reduce Kansas Central revenue by $7.7 million and Metro revenue by $8.3 million. Further 2020 transmission-rate changes were expected to reduce annual transmission revenues by $13.6 million for Kansas Central and $1.7 million for Metro versus 2019.
- Environmental and operating risks: Potential costs from emissions, wastewater, coal ash and water-permit requirements could be material, but the company could not determine impacts. The Hawthorn Station water-discharge permit matter could require reduced generation or cooling investments. Regulatory developments and litigation remain uncertain.
- Wolf Creek’s refueling outage began in September 2019; the unit was expected to return to service in November. Pension funding also remains a cash requirement: Evergy expected an additional $73.7 million of pension contributions in 2019.
- Management provided no explicit earnings guidance in the supplied filing text. It described the share-repurchase program and expected timing, but stated it could be suspended, discontinued or resumed. Forward-looking results are subject to weather, regulation, fuel and power markets, capital costs, environmental rules, outages, financing conditions and merger-integration risks.
- Other notable items: Evergy recorded derivative-hedging losses in other comprehensive income following settlement of a $500 million interest-rate swap, with losses to be amortized to interest expense over the related debt term. The 2019 adoption of lease accounting added approximately $110 million of assets and liabilities at Evergy, without a material income-statement impact. Goodwill testing found no impairment.
Important facts for investors to verify
- Assess year-over-year performance using comparable periods, given the merger-related change in the 2018 consolidation scope and the share-count effect on EPS.
- Monitor the final settlement of the September 2019 accelerated share repurchase and progress toward the 60-million-share authorization, alongside dividends and funding needs.
- Track the outcome of the Sibley revenue-refund proceeding and any additional regulatory exposure beyond the $6.5 million accrued.
- Review the implications of the Jeffrey Energy Center disallowance, transmission-rate updates and the Kansas earnings-sharing plan.
- Evaluate environmental compliance costs and the status of coal-ash, wastewater and Hawthorn Station permit matters; the filing says potential impacts may be material but does not provide clear total cost estimates.
- Confirm subsequent debt, liquidity, capital-expenditure and pension-funding developments, including whether management issues updated earnings or capital guidance.