Evergy, Inc. — Q2 2019 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019; filed August 7, 2019. The combined filing covers Evergy, Westar Energy 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 14,500 MW of owned generation capacity and renewable power purchase agreements.
Financial performance
| Evergy consolidated | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Operating revenues | $1,221.7 million | $893.4 million | $2,438.6 million | $1,493.6 million |
| Income from operations | $271.7 million | $126.9 million | $481.3 million | $250.4 million |
| Net income attributable to Evergy | $139.7 million | $101.8 million | $239.2 million | $162.3 million |
| Diluted EPS | $0.57 | $0.56 | $0.96 | $1.00 |
| Operating margin | 22.2% | 14.2% | 19.7% | 16.8% |
| Utility gross margin (non-GAAP) | $867.3 million | $595.3 million | $1,690.7 million | $992.4 million |
Management also reported adjusted earnings, a non-GAAP measure, of $140.3 million, or $0.58 per share, for Q2 and $251.4 million, or $1.01 per share, year to date. Comparable 2018 adjusted figures were $179.1 million, or $0.67 per share, and $271.0 million, or $1.00 per share, respectively.
- Cash flow, first half: Operating cash flow was $633.7 million; capital spending was $572.4 million; investing cash flow was a use of $529.5 million; financing cash flow was a use of $157.5 million. Cash declined $53.3 million to $107.0 million.
- Debt and liquidity at June 30: Long-term debt, net, was $7.123 billion, excluding $51.1 million of VIE debt. Notes payable and commercial paper were $2.239 billion, with a further $312.0 million collateralized note payable. The company had $1.228 billion available under its $2.5 billion master credit facility; a separate $1.0 billion term loan was fully drawn. Current assets were $1.539 billion and current liabilities were $3.483 billion.
- Capital returns: Evergy repurchased $1.129 billion of stock, or 20.0 million shares, in the first half and paid $235.6 million in dividends. The board declared a $0.475-per-share quarterly dividend in August.
Changes versus the prior comparable period
Reported revenue and earnings comparisons are affected substantially by the June 4, 2018 merger: KCP&L and GMO results were included in Evergy only from the merger date in 2018, whereas 2019 includes them throughout the periods. Management attributed higher first-half net income mainly to including those businesses for the first five months of 2019 and to merger-related costs and customer bill credits recorded in June 2018. Higher share count following the merger offset earnings growth: diluted EPS was down year to date despite higher net income.
Management cited cooler weather as a headwind to retail sales; cooling degree days were down 45% year over year in the second quarter. Evergy’s first-half utility gross margin rose $698.3 million, largely reflecting the additional months of KCP&L and GMO results and the absence of one-time merger-related customer bill credits in 2018. This makes reported year-over-year growth a poor standalone indicator of underlying performance.
Outlook, risks and unusual items
- Evergy expected to complete repurchases of up to 60 million shares by mid-2020; 36.3 million had been repurchased since program inception by June 30. The company expected to repay the $1.0 billion term loan with proceeds from a long-term debt issuance planned for Q3 2019.
- Management estimated no 2019 refund under the Kansas earnings review and sharing plan. For 2019–2022, Westar Energy and KCP&L’s Kansas jurisdiction may have to refund customers 50% of annual earnings above a 9.3% authorized ROE, subject to the plan’s thresholds and merger bill credits.
- Transmission rate updates are expected to reduce annual retail revenues by $7.7 million for Westar Energy and $8.3 million for KCP&L. Related FERC transmission formula rates were also expected to reduce annual transmission revenues versus 2018 by $11.2 million and $2.8 million, respectively.
- Environmental and regulatory uncertainties include potential costs from the EPA’s Affordable Clean Energy rule and coal-ash requirements, and the unresolved Hawthorn Station water-discharge permit issue, which could require reduced generation or cooling upgrades. The filing says some resulting costs could be material but cannot be estimated clearly.
- OPC and MECG sought an accounting order concerning costs collected after GMO retired Sibley Station; a hearing was scheduled for August 2019, with an order expected before year-end.
- Goodwill of $2.337 billion passed the May 2019 impairment test; no impairment was recorded. The $500 million June accelerated share repurchase remained unsettled at quarter-end. Evergy recorded a $40.4 million fair-value liability on an interest-rate swap hedging forecast debt issuance.
The filing provides no specific full-year earnings or revenue guidance. Management identified risks including weather, regulatory and rate decisions, environmental compliance, generation outages and project costs, financial-market conditions, and realizing merger benefits. It reported that the registrants were in compliance with debt covenants and that disclosure controls were effective.
Key facts for investors to verify
- Separate acquisition and organic performance when assessing revenue, earnings and margins, given the 2018 merger accounting and consolidation dates.
- Confirm completion, final share count and average price for the June $500 million accelerated repurchase, and progress toward the 60-million-share authorization.
- Track the expected Q3 long-term debt issuance, repayment of the term loan, and changes in short-term borrowings and available credit.
- Monitor regulatory outcomes affecting transmission rates, the Kansas earnings-sharing plan, the Sibley proceeding and the Hawthorn water permit.
- Assess potential environmental compliance and coal-ash costs, which the filing identifies as potentially material but does not quantify clearly.