Evergy, Inc. — 2021 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Evergy is a regulated electric utility holding company serving approximately 1.6 million customers in Kansas and Missouri. The combined filing also includes Evergy Kansas Central and Evergy Metro.
Financial performance and position
| Evergy consolidated | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Operating revenue | $1,616.5 million | $1,517.6 million | $4,464.6 million | $3,819.0 million |
| Income from operations | $600.7 million | $521.7 million | $1,213.7 million | $990.9 million |
| Net income attributable to Evergy | $449.4 million | $364.5 million | $826.3 million | $567.3 million |
| Diluted EPS | $1.95 | $1.60 | $3.60 | $2.49 |
| Utility gross margin (non-GAAP) | $1,187.1 million | $1,135.3 million | $2,972.8 million | $2,788.7 million |
Management also reported adjusted earnings, a non-GAAP measure, of $454.8 million ($1.98 per share) for Q3 and $775.3 million ($3.38 per share) year to date, versus $393.3 million ($1.73) and $641.7 million ($2.82), respectively, in 2020. The adjustments exclude specified items, including winter-weather energy marketing results and certain transition, severance, advisory and tax items.
- Cash flow, YTD: Operating cash flow was $1,036.0 million, down from $1,421.7 million. Investing activities used $1,349.1 million, including $1,394.7 million of property, plant and equipment additions. Financing activities provided $193.5 million. Cash and cash equivalents were $25.3 million at September 30, compared with $144.9 million at year-end 2020.
- Debt and liquidity: Long-term debt, including current maturities, had a book value of $9,768.7 million. Notes payable and commercial paper were $620.5 million; collateralized short-term borrowings were $395.0 million. Evergy reported $1.9 billion of available capacity under its $2.5 billion master credit facility and compliance with its debt covenants.
- Balance sheet: Total assets were $28,182.1 million and total equity was $9,312.0 million at September 30, 2021.
- Capital spending outlook: The filing projects capital expenditures of $1.953 billion in 2021, $2.016 billion in 2022, $1.993 billion in 2023, $2.055 billion in 2024 and $2.417 billion in 2025. The plan is subject to review and change.
Material changes versus prior periods
- Q3 revenue rose $98.9 million and net income attributable to Evergy rose $84.9 million year over year. Management cited higher retail sales associated with warmer weather, lower operating and maintenance expense, and higher investment earnings, partly offset by higher depreciation, property taxes and income tax expense.
- YTD revenue increased $645.6 million and net income attributable to Evergy increased $259.0 million. Drivers included $95.0 million of non-regulated energy marketing margins from the February 2021 winter weather event, favorable weather-related retail sales, lower operating and maintenance expense, higher AFUDC and investment earnings, and lower interest expense. Higher fuel and purchased-power expense, property taxes, depreciation and income taxes partly offset these factors.
- YTD operating cash flow declined $385.7 million, principally reflecting cash payments for winter-event fuel and purchased power, payment timing for taxes and suppliers, and Wolf Creek outage costs. Capital additions also increased versus 2020.
- Evergy issued $112.5 million of common stock, net of issuance costs, to a Bluescape affiliate in April 2021, along with a warrant for up to 3.95 million additional shares. In April, Evergy redeemed $350 million of 4.85% senior notes. Evergy Missouri West issued $500 million of senior notes in April.
Outlook, commentary and key risks
- February winter weather event: Evergy incurred $349.7 million of net natural-gas and purchased-power costs, substantially all of which had been deferred to regulatory assets or liabilities by September 30. The company expects substantially all increased costs to be recovered from customers, but recovery timing and customer-bill impacts remain subject to regulatory decisions. SPP resettlements could materially change final costs. The company also recorded $95.0 million in energy marketing margins related to the event; those amounts may change due to resettlements or Texas legislative action.
- Generation transition and emissions: Evergy set a goal of net-zero carbon emissions by 2045, with a 70% reduction from 2005 levels by 2030. Management says progress depends on enabling technology, grid reliability, and supportive policy and regulation. Evergy Kansas Central sought regulatory approval for approximately 190 MW of solar generation and planned retirement of Lawrence Energy Center Unit 4 and related coal-handling facilities, expected between December 2023 and the first half of 2024. The filing anticipated a KCC decision in the first or second quarter of 2022; any securitization financing would require further regulatory approval.
- Other regulatory matters: Kansas and Missouri proceedings will determine treatment and timing of winter-event cost recovery or revenue refunds. Evergy Missouri West also faces a potential Sibley Station refund; the filing records a $26.5 million regulatory liability and identifies possible additional losses of up to approximately $12 million per year above the accrual until new rates take effect.
- Unusual subsequent-period item: An energy-company investment converted into shares of a newly public company in October 2021. Evergy expected to record a fourth-quarter unrealized gain, potentially significant relative to historical Q4 results, but the amount was not estimable and was subject to market volatility and a sale restriction of up to 180 days.
- Risks: Key uncertainties include regulatory outcomes, fuel and wholesale power prices, weather, environmental rules and compliance costs, generation availability, project execution, interest rates and capital access, cybersecurity, COVID-19-related impacts, and labor availability. The filing notes that collective bargaining agreements with five IBEW locals expired in 2021 and were under renegotiation; failure to reach agreements could disrupt operations. Environmental rule changes could also require material costs.
Important facts for investors to verify
- Track SPP resettlements and Kansas and Missouri regulatory decisions on recovery or refund of winter-event costs, including the timing and customer-bill impact.
- Assess how much of reported YTD earnings growth came from the $95.0 million winter-event energy marketing margin and other non-recurring adjustments; compare GAAP and non-GAAP results.
- Monitor operating cash flow, short-term borrowings, available credit capacity, and the funding of the capital expenditure plan and dividends.
- Follow KCC decisions on the Lawrence Energy Center Unit 4 retirement, solar investment and potential securitization, as well as the Missouri Sibley Station matter.
- Evaluate whether emissions targets, environmental requirements, labor negotiations and planned investment can be met without material cost or reliability impacts.