Evergy, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. This combined filing covers Evergy, Inc., Westar Energy, Inc. and Kansas City Power & Light Company (KCP&L). Evergy is a regulated electric utility serving about 1.6 million customers in Kansas and Missouri, with approximately 12,300 MW of generating capacity.
Business context and comparability
Evergy completed its merger with Great Plains Energy on June 4, 2018, bringing KCP&L and GMO into the consolidated group. Westar Energy is the accounting predecessor: Evergy’s 2017 comparative results reflect Westar alone, while 2018 includes the acquired businesses from the merger date. Reported year-over-year increases therefore are not directly comparable. The filing also presents illustrative pro forma results as if the merger had occurred on January 1, 2017.
Key financial results
| Evergy consolidated | Q3 2018 | Q3 2017 | YTD 2018 | YTD 2017 |
|---|---|---|---|---|
| Operating revenue | $1,582.5M | $794.3M | $3,076.1M | $1,976.2M |
| Operating income | $533.1M | $264.9M | $783.5M | $556.5M |
| Net income attributable to Evergy | $355.0M | $158.3M | $517.3M | $290.0M |
| Diluted EPS | $1.32 | $1.11 | $2.61 | $2.03 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $1,191.6M | $742.7M |
Q3 net income attributable to Evergy rose $196.7M; management cited the acquired businesses and stronger Westar retail sales in favorable summer weather. Higher weighted-average shares following the merger reduced EPS by an estimated $1.17 for Q3 and $1.02 YTD. Pro forma YTD revenue was $4,134.8M versus $4,086.7M in 2017, and pro forma attributable net income was $694.5M versus $543.3M; pro forma diluted EPS was $2.55 versus $2.00.
Margins and operations: Utility gross margin, a company-defined non-GAAP measure, was $1,140.4M in Q3 and $2,132.8M YTD, compared with $541.9M and $1,375.8M, respectively. The increases primarily reflect merger consolidation; weather also supported sales. In Westar’s standalone YTD results, utility gross margin declined $17.5M to $1,358.3M. KCP&L’s YTD utility gross margin declined $90.5M to $1,016.5M, including the effects of customer tax benefits, merger credits and the revenue presentation change under ASC 606.
Cash flow and investment: YTD investing cash flow was a net inflow of $574.8M, largely because Evergy acquired $1,154.2M of cash in the merger; capital expenditures were $698.3M. Financing cash outflow was $1,090.1M, including $486.1M of share repurchases and $350.4M of dividends paid. Ending cash was $679.7M.
Debt and liquidity: At September 30, Evergy reported $7,349.4M of long-term debt including current maturities, $675.9M of notes payable and commercial paper, and $195.0M of collateralized borrowings. It had $1.8B of available borrowing capacity under its master credit facility, plus receivables facilities. Capital structure, excluding short-term debt, was 59% common equity and 41% long-term debt, including VIE debt. The companies reported compliance with debt covenants. Evergy’s $2.5B master credit facility requires indebtedness to capitalization of no more than 0.65 to 1.00.
Material changes, outlook and notable items
- Merger costs and accounting: YTD merger-related costs, including customer bill-credit revenue reductions, totaled $134.3M at Evergy. The preliminary purchase-price allocation included $2,333.5M of goodwill; valuation estimates remain subject to adjustment. The acquired businesses contributed $239.0M to Evergy-attributable net income YTD from the merger date.
- Management targets: Evergy identified approximately $600M of potential net merger savings from 2018–2022, approximately $6B of anticipated rate-base investment over that period, and plans to repurchase up to 60 million shares by mid-2020. About 6.9 million shares had been repurchased for approximately $486M through September 30. These are forward-looking plans, not guaranteed outcomes.
- Dividends: In November, the board declared a quarterly dividend of $0.475 per share, payable December 20, 2018. Evergy stated a long-term target payout ratio of 60%–70% of earnings.
- Rates and customer obligations: Kansas and Missouri merger approvals require customer bill credits, including one-time credits, and contain other commitments. Kansas conditions include a five-year base-rate moratorium expected to run through December 2023 after the relevant rate case, plus an earnings-sharing plan for 2019–2022 that may require refunds of half of returns above authorized ROE. Certain transition costs were deferred as regulatory assets for recovery over ten years. Several 2018 rate-case settlements or orders reduce revenues and provide tax-related customer benefits.
- Tax and accounting: Federal tax reform lowered the statutory corporate rate to 21%; regulatory liabilities for customer refunds were recorded. Missouri tax reform also resulted in KCP&L recognizing a $15.5M income-tax benefit. Evergy planned to adopt the new lease standard on January 1, 2019, expecting higher reported assets and liabilities but minimal income-statement impact.
- Risks and contingencies: Results remain sensitive to weather, regulation and rate decisions, fuel and wholesale power prices, outages, interest rates, credit conditions, merger integration and realization of expected savings. Environmental rules concerning emissions, wastewater and coal ash could require material compliance spending; the filing also notes uncertainty over KCP&L’s Hawthorn Station water-discharge permit. Evergy’s credit support for GMO totaled $111.3M, in addition to a guarantee of GMO’s commercial-paper program.
- Other unusual items: The company recorded a $127.0M reduction in estimated asset-retirement obligations, primarily related to Westar’s Wolf Creek decommissioning estimate. Planned retirements of several Westar units occurred in October and November 2018, after the quarter.
Important facts for investors to verify
- Compare performance using the filing’s pro forma figures or standalone subsidiary results, not reported consolidated growth alone, because merger timing changes the reporting base.
- Track delivery and timing of the projected $600M merger savings, the $6B investment plan and share repurchases, including the final settlement of the remaining accelerated share-repurchase agreement.
- Review final rate-case outcomes, customer-credit amounts and the effects of the Kansas rate moratorium and earnings-sharing plan on future revenue and cash flow.
- Assess the company’s debt maturities, borrowing needs and credit ratings alongside planned capital spending, dividends and repurchases.
- Monitor environmental and regulatory developments, particularly coal-ash obligations and the Hawthorn water permit, which could change costs or operations.