Evergy, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Evergy is a regulated electric utility holding company serving approximately 1.6 million customers in Kansas and Missouri, with about 13,100 MW of owned generation capacity.
Business context and reporting comparability
On June 4, 2018, Great Plains Energy merged into Evergy, and its utility subsidiaries, including KCP&L and GMO, became part of Evergy. Westar Energy was the accounting acquirer and predecessor. Accordingly, 2017 Evergy comparative results reflect Westar Energy alone, while 2018 results include the acquired subsidiaries only from the merger date. Reported year-over-year consolidated changes are therefore not directly comparable; management also provides illustrative pro forma results assuming the merger occurred January 1, 2017.
Key financial metrics
| Evergy consolidated | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenues | $893.4 million | $609.3 million | $1,493.6 million | $1,181.9 million |
| Income from operations | $126.9 million | $160.2 million | $250.4 million | $291.6 million |
| Net income attributable to Evergy | $101.8 million | $72.1 million | $162.3 million | $131.7 million |
| Diluted EPS | $0.56 | $0.50 | $1.00 | $0.92 |
| Cash from operating activities | — | $397.2 million | $363.7 million |
- Q2 utility gross margin, a non-GAAP measure defined as revenue less fuel and purchased power and SPP transmission costs, was $595.3 million versus $435.7 million. The comparison includes acquired KCP&L and GMO margin only from June 4, 2018.
- Operating cash flow increased $33.5 million year to date. Investing cash flow was positive $846.9 million, largely because Evergy acquired $1,154.2 million of cash in the merger; capital expenditures were $435.2 million. Financing cash flow was positive $32.6 million.
- At June 30, cash and cash equivalents were $1,280.1 million. Long-term debt, including current maturities, had a reported book value of $7,460.4 million; notes payable and commercial paper were $1,079.3 million, and collateralized note payable was $195.0 million.
- Unused borrowing capacity under credit facilities was approximately $1.126 billion. Capital structure excluding short-term debt was 59% common equity and 41% long-term debt, including VIE debt. The companies reported compliance with applicable debt covenants.
- Evergy declared $0.80 per common share in dividends during the first half. In August, the board declared a quarterly dividend of $0.46 per share.
Material changes and unusual items
- Q2 revenue rose $284.1 million, but operating income fell $33.3 million; for the first half, revenue rose $311.7 million while operating income fell $41.2 million. The newly consolidated operations, higher fuel and operating costs, merger-related items, and weather all affect these comparisons.
- Evergy’s first-half net income attributable to shareholders increased $30.6 million and diluted EPS increased $0.08. Management cited acquired subsidiary earnings, favorable weather and lower income tax expense, partly offset by merger costs and customer bill-credit obligations. Additional shares issued in the merger reduced EPS by approximately $0.14 for the first half.
- Evergy recorded a $45.0 million income tax benefit in Q2 and a $35.8 million benefit for the first half, substantially reflecting deferred-tax revaluation associated with the merger and state tax changes. These benefits materially affect reported earnings and are not a direct measure of recurring operating performance.
- Merger-related accounting in June included $64.5 million of reductions to operating revenues and $57.5 million of net operating and maintenance expense for Evergy. Items included customer credits, community commitments, severance and accelerated equity compensation, transaction costs, and deferral of certain transition costs for future regulatory recovery.
- The preliminary purchase-price allocation recorded $2.334 billion of goodwill. Valuations of certain acquired debt, retirement obligations, pension and other balances remained preliminary.
Outlook, regulation and risks
- Management’s strategic targets include approximately $600 million of potential net merger savings from 2018–2022, repurchase of up to 60 million shares by mid-2020, and approximately $6 billion of rate-base investment from 2018–2022. These are forward-looking plans, not guaranteed outcomes. The board authorized the repurchase in July; execution depends on market conditions and financing availability.
- Kansas merger commitments include one-time customer credits, annual credits through 2022, a five-year base-rate moratorium subject to stated exceptions, and an earnings review plan that may require refunds of a portion of returns above authorized levels. Missouri merger commitments include customer credits and community support. Certain merger transition costs were recorded as regulatory assets for anticipated recovery.
- Rate cases in Kansas and Missouri remained pending at the filing date. Westar Energy had a non-unanimous Kansas settlement proposal subject to regulatory approval; KCP&L and GMO Missouri rate-case outcomes were uncertain. Evergy recorded $93.5 million in regulatory liabilities for anticipated customer refunds related to tax reform; final regulatory treatment and refund amounts could differ.
- Key risks include realizing merger savings and integrating operations, rate-case and other regulatory decisions, weather and electricity demand, fuel and wholesale-market prices, plant availability, financing costs and credit ratings, and environmental requirements. The filing notes that compliance costs for certain potential emissions and water rules could be material; the outcome and impact of the Hawthorn Station water-discharge permit issue also remained uncertain.
- Wolf Creek returned to service in May after a refueling outage that began in March; the next outage was planned for Q3 2019. Evergy recorded a $127.0 million reduction in estimated asset-retirement obligations, primarily related to Westar Energy’s share of Wolf Creek decommissioning.
Important facts for investors to verify
- How much of earnings growth and utility gross-margin growth is attributable to the merger, weather, tax revaluation, and recurring operations; use pro forma information cautiously because it is illustrative.
- Whether regulators approve the pending rate-case proposals and determine customer refunds, bill credits, and recovery of merger transition costs as anticipated.
- Whether management achieves the targeted merger savings and share repurchases without weakening liquidity, credit ratings, or dividend capacity.
- How the preliminary purchase-price allocation, debt maturities and post-merger leverage develop as acquisition accounting is finalized.
- Whether environmental and operating contingencies—including coal-ash closure obligations, water permits, and nuclear decommissioning—lead to material costs or changes in generation plans.