Evergy, Inc. — Q1 2020 Form 10-Q
Business context and period. This combined, unaudited filing covers the three months ended March 31, 2020, and includes Evergy, Inc. and regulated utility subsidiaries Evergy Kansas Central and Evergy Metro. Evergy serves approximately 1.6 million customers in Kansas and Missouri and reports one operating segment. Comparisons below are with Q1 2019 unless otherwise noted.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenue | $1,116.7 million | $1,216.9 million |
| Utility gross margin (non-GAAP) | $796.5 million | $823.4 million |
| Income from operations | $197.5 million | $209.6 million |
| Net income attributable to Evergy | $69.4 million | $99.5 million |
| Diluted EPS | $0.31 | $0.39 |
| Adjusted earnings / adjusted diluted EPS (non-GAAP) | $94.2 million / $0.41 | $111.1 million / $0.44 |
| Cash from operating activities | $320.6 million | $362.1 million |
| Capital expenditures | $354.4 million | $309.0 million |
Operating cash flow was below reported capital expenditures by approximately $33.8 million. Cash and cash equivalents at quarter-end were $304.4 million, versus $23.2 million at year-end 2019. The cash increase was supported by higher short-term borrowings.
At March 31, Evergy reported $8.995 billion of long-term debt (including current maturities), $1.055 billion of notes payable and commercial paper, and $322.0 million of collateralized receivable-sale borrowings. The $2.5 billion master credit facility had $1.418 billion of available capacity; Evergy was in compliance with its debt covenants. Current and long-term liabilities totaled $17.679 billion.
Material changes and drivers
- Revenue fell $100.2 million and utility gross margin declined $26.9 million. Total electricity sales were 12.690 million MWh, down 1.774 million MWh. Management attributed lower retail sales mainly to warmer winter weather; heating degree days declined 19%.
- Net income attributable to Evergy decreased $30.1 million. Management cited weaker retail sales and lower corporate-owned life insurance benefits, partly offset by lower operating and maintenance costs. Lower diluted share count added approximately $0.04 to Q1 2020 EPS.
- Operating and maintenance expense declined $18.7 million, largely reflecting the absence of prior-year storm costs and lower headcount, partly offset by $27.0 million of voluntary severance costs and $6.6 million of strategic-planning advisor expenses. These items contribute to the difference between GAAP and adjusted earnings; adjusted measures are non-GAAP and may not be comparable with other companies’ measures.
- Interest expense increased $5.1 million, principally reflecting debt issued in 2019, partly offset by maturities and repayments. Investing cash outflow increased to $333.4 million from $271.4 million, primarily because of higher capital spending.
Outlook, risks and notable items
- Management said COVID-19 did not significantly affect Q1 results, but anticipated subsequent lower overall demand and a shift from commercial and industrial usage toward residential usage. Management estimated that a 1% demand change would affect 2020 earnings by approximately $10 million for residential customers, $8 million for commercial customers and $2 million for industrial customers. These are sensitivities, not earnings guidance.
- COVID-19-related customer assistance measures could increase credit losses and reduce or delay cash collections. The companies filed requests for regulatory accounting orders in May to seek consideration of extraordinary pandemic costs and financial impacts in future rate cases; decisions were expected in the second half of 2020. The filing does not provide a clear quantified estimate of the pandemic’s eventual financial impact.
- Evergy reported a strategy of approximately $7.6 billion in anticipated rate-base investment from 2020 through 2024 and approximately $595 million of potential net merger savings over the first five years of the combined company’s operation. It also targets an 80% reduction in carbon emissions by 2050 from 2005 levels.
- In March, the board formed a Strategic Review & Operations Committee to consider a potential strategic combination or an enhanced standalone plan. Management expected a recommendation by July 2020. Evergy said it did not anticipate additional share repurchases while the review was underway.
- Evergy Kansas Central’s April 2020 issuance of $500 million of 3.45% first mortgage bonds, due 2050, was intended in part to redeem $250 million of 5.10% bonds in May. As of April 30, Evergy reported approximately $400 million of cash and cash equivalents, approximately $250 million of restricted cash for that redemption, and $1.6 billion of available credit capacity. Commercial paper markets had also resumed as a short-term funding source.
- Regulatory and environmental uncertainties include an estimated $12.9 million regulatory liability for certain Sibley Station revenues, with potential additional exposure of up to approximately $12 million per year until new rates take effect; the ultimate treatment remains uncertain. Environmental compliance matters and a disputed Hawthorn Station water-discharge permit could also affect costs or generation, potentially materially.
Important facts for investors to verify
- How COVID-19 affected customer demand, collections, credit losses, liquidity and operating costs after quarter-end, and whether regulators allow recovery of extraordinary costs.
- Progress and outcome of the strategic review, including any effects on the standalone plan, capital allocation and paused repurchases.
- Actual capital spending, operating cash flow and funding needs versus the stated 2020–2024 investment plan and available credit capacity.
- Resolution of the Sibley Station revenue issue, pandemic-related regulatory requests, rate adjustments and other proceedings.
- Developments in environmental compliance and the Hawthorn water permit, including any required investment or generation restrictions.