Business context and reporting period
Evergy, Inc. filed this combined Form 10-K for the fiscal year ended December 31, 2018. Evergy is a regulated electric utility holding company serving about 1.6 million customers in Kansas and Missouri through Westar Energy, KCP&L and GMO. The Great Plains Energy–Westar merger closed June 4, 2018. Westar was the accounting acquirer, so 2017 and 2016 Evergy results largely reflect Westar alone; KCP&L and GMO are consolidated only from the merger date in 2018. Annual comparisons therefore are not like-for-like.
Financial results and key metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Operating revenue | $4,275.9 million | $2,571.0 million |
| Operating income | $933.6 million | $678.8 million |
| Net income attributable to Evergy | $535.8 million | $323.9 million |
| Diluted EPS | $2.50 | $2.27 |
| Operating cash flow | $1,497.8 million | $912.7 million |
| Capital expenditures | $1,069.7 million | $764.6 million |
- Reported operating margin was approximately 21.8% and net margin approximately 12.5% in 2018; these ratios reflect the merger-period consolidation.
- Management’s non-GAAP utility gross margin was $2,937.3 million, up $1,155.7 million from 2017, including $1,181.5 million from adding KCP&L and GMO. Westar weather-driven margin gains were partly offset by tax-related refunds and merger customer credits.
- At year-end, Evergy reported $160.3 million cash, $25.6 billion total assets and $9.99 billion equity. Long-term debt was $6.64 billion, with $705.4 million of current maturities; debt of variable-interest entities added $81.4 million including current maturities. Total long-term obligations were reported as $7.47 billion.
- Available borrowing capacity under credit and receivable-sale facilities was approximately $1.7 billion. Evergy reported compliance with its debt covenants.
- Fourth-quarter 2018 revenue was $1,199.8 million and net income attributable to Evergy was $18.5 million, or $0.07 per diluted share. The company’s results are seasonal, with peak demand typically in the third quarter.
Material changes versus the prior comparable period
- Revenue and earnings rose substantially, but chiefly because the merger added KCP&L and GMO for about seven months. Management also cited favorable weather and lower income tax expense; merger costs and customer bill credits offset some gains.
- Evergy’s operating cash flow increased, but merger-related cash acquired contributed to investing cash flow: investing activities provided $197.4 million in 2018, including $1,154.2 million of acquired cash. Financing activities used $1,538.4 million, including $1,042.3 million of share repurchases and $475.0 million of dividends paid.
- Evergy repurchased 16.4 million shares for approximately $1.04 billion in 2018. The board authorized repurchases of up to 60 million shares, which Evergy expected to complete by mid-2020.
- KCP&L and GMO revenue and margin were affected by Missouri tax-rate reform and the adoption of ASC 606, which excluded sales taxes and franchise fees from revenue. Rate settlements and merger orders also included customer credits and rate reductions.
Outlook, management commentary, risks and unusual items
- Management outlined approximately $550 million of potential net merger savings from 2018 through 2022, about $6 billion of anticipated rate-base investment over that period, and continued renewable development and plant retirements. These are expectations, not guarantees.
- Planned utility capital expenditures are approximately $1.28 billion in 2019, $1.34 billion in 2020 and $1.18 billion in 2021. Evergy expects a 2019 summer peak demand of about 10,350 MW.
- Westar Energy and KCP&L agreed to a five-year Kansas base-rate moratorium beginning in December 2018; KCP&L and GMO elected Missouri plant-in-service accounting effective January 1, 2019, with related limits on rate changes. These arrangements may constrain timely cost recovery.
- The federal tax-law change lowered the corporate tax rate and required customer refunds, reducing tax expense but also lowering tax collections embedded in rates and expected operating cash flows. Merger-related customer credits, transition costs, severance and equity-compensation charges were notable 2018 items.
- Evergy recorded $2.34 billion of merger goodwill and planned its first impairment test for May 1, 2019. The purchase-price allocation remained preliminary for certain acquired balances.
- Principal risks include regulatory decisions and cost-recovery lag; merger integration and realization of synergies; environmental rules and coal ash closure costs; extreme weather, fuel and power-market conditions; aging infrastructure and capital-project execution; cybersecurity; and Wolf Creek nuclear operating, outage, insurance and decommissioning risks. Pension and post-retirement obligations are substantial and sensitive to asset returns and actuarial assumptions.
- Evergy’s 94% share of Wolf Creek returned to service in May 2018 after a refueling outage; another outage was planned for the third quarter of 2019. The filing describes environmental and other proceedings but does not provide a clear aggregate estimate of potential losses.
Most important facts for investors to verify
- Use merger-adjusted or pro forma figures when assessing growth: reported 2018 versus 2017 is not a full-year, like-for-like comparison.
- Track delivery and timing of the projected $550 million merger savings, and distinguish realized savings from management estimates.
- Confirm the final share count and settlement of the $475 million accelerated repurchase agreement, and the pace and funding of the remaining repurchase authorization.
- Monitor refinancing of 2019 maturities, liquidity after repurchases, debt and credit metrics, and the effect of planned capital spending on financing needs.
- Review regulatory outcomes, customer refund obligations, recovery of retired-plant and merger-transition costs, goodwill impairment testing, and updates to environmental and Wolf Creek contingencies.