Evergy(EVRG) - 2021 Q4 - Annual Report

PART I Item 1. Business Evergy, Inc. is a public utility holding company serving approximately 1.6 million customers in Kansas and Missouri, focused on affordability, reliability, and sustainability, with a net-zero CO2 emissions goal by 2045 Evergy, Inc. - General Evergy, Inc. is a public utility holding company serving approximately 1.64 million customers across Kansas and Missouri, with a strategy built on affordability, reliability, and sustainability - Evergy is a public utility holding company operating through its wholly-owned subsidiaries: Evergy Kansas Central, Evergy Metro, and Evergy Missouri West[33][34] - The company serves approximately 1,640,800 customers in Kansas and Missouri, comprising 1,433,500 residences, 199,400 commercial firms, and 7,900 industrial and other clients[37] - Evergy's core strategic tenets are affordability (keeping rates competitive), reliability (targeting top-tier performance), and sustainability (reducing CO2 emissions and transitioning its generation fleet)[38] Revenue Percentage by Customer Classification (2019-2021) | Customer Class | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Residential | 34% | 39% | 37% | | Commercial | 30% | 33% | 35% | | Industrial | 11% | 12% | 12% | | Wholesale | 13% | 5% | 7% | | Transmission | 6% | 6% | 6% | | Other | 6% | 5% | 3% | Regulation Evergy's utility operations are primarily regulated by the KCC and MPSC for retail rates, FERC for transmission and wholesale rates, and NRC for the Wolf Creek Generating Station Retail Rate Orders in Effect | Jurisdiction | Regulator | Allowed Return on Equity | Rate-Making Equity Ratio | Effective Date | | :--- | :--- | :--- | :--- | :--- | | Evergy Kansas Central | KCC | 9.3% | 51.46% | September 2018 | | Evergy Metro - Kansas | KCC | 9.3% | 49.09% | December 2018 | | Evergy Metro - Missouri | MPSC | Not Specified | Not Specified | December 2018 | | Evergy Missouri West | MPSC | Not Specified | Not Specified | December 2018 | - For 2022, Evergy anticipates approximately 60% of its retail revenues will come from its Kansas jurisdiction and 40% from its Missouri jurisdiction[45] Power Supply Evergy controls approximately 15,400 MW of generating capacity, with a mix led by coal (38%) and wind (28%), and maintains a 12% reserve margin as an SPP member Total Capacity by Fuel Type (Estimated 2022) | Fuel Type | MW Capacity | Percent of Total Capacity | | :--- | :--- | :--- | | Coal | 5,913 | 38% | | Wind | 4,326 | 28% | | Natural gas and oil | 3,971 | 26% | | Uranium | 1,108 | 7% | | Solar, landfill gas and hydroelectric | 78 | 1% | | Total capacity | 15,396 | 100% | - Evergy's projected peak summer demand for 2022 is approximately 10,200 MW[52] - As members of the Southwest Power Pool (SPP), Evergy's utilities are required to maintain a minimum reserve margin of 12% to support regional electric supply reliability[55] Environmental Matters and Generation Fleet Transition Evergy aims for net-zero CO2 emissions by 2045, with a 70% reduction by 2030, achieved by retiring fossil fuel plants and adding renewable generation - Evergy has a goal to achieve net-zero CO2 emissions by 2045, with an interim goal of a 70% reduction from 2005 levels by 2030[57] - Since 2005, the company has added over 4,400 MW of renewable generation while retiring more than 2,400 MW of fossil fuel generation[60] - Strategies to reduce emissions include retiring fossil fuel generation, developing renewable energy facilities, collaborating with regulators on renewable energy programs, and investing in customer energy efficiency[59] Fuel In 2021, coal was 50% of Evergy's fuel mix, followed by renewables at 30%, with 85% of 2022 coal requirements secured by contract 2021 Fuel Mix and Cost | Fuel | Fuel Mix (Actual 2021) | Fuel cost (cents per net kWh delivered) | | :--- | :--- | :--- | | Coal | 50% | 1.94¢ | | Wind, hydroelectric, landfill gas and solar | 30% | 2.06¢ | | Uranium | 16% | 0.64¢ | | Natural gas and oil | 4% | 11.72¢ | - For 2022, Evergy has contracted approximately 85% of its projected 19 million tons of coal requirements[64] - The owners of Wolf Creek have secured all uranium, enrichment, and conversion services needed through Q1 2030 and all fabrication services through 2045[67] Human Capital Resources As of December 31, 2021, Evergy employed 4,930 people, with 2,632 union-represented, emphasizing safety, integrity, and competitive compensation - At year-end 2021, the company had 4,930 employees, of which 2,632 were represented by unions[73] - As of December 31, 2021, the workforce was 77% male and 23% female, with an ethnicity breakdown of 85% White, 5% Black, 4% Hispanic, and 6% other[77] Item 1A. Risk Factors Evergy faces risks from regulatory challenges, environmental compliance costs, financial market disruptions, operational failures, and the ongoing impacts of the COVID-19 pandemic - Utility Regulatory Risks: Prices established by regulators may not be sufficient to recover costs or provide an adequate return on investment, exacerbated by regulatory lag and rate moratoriums in Kansas and Missouri[96][97][98] - Environmental Risks: Compliance with evolving federal and state environmental laws regarding air, water, and coal combustion residuals (CCRs) requires significant capital and carries the risk of substantial fines and sanctions[103][104] - Financial Risks: The company is exposed to risks from financial market disruptions, credit rating downgrades (a ratings agency assigned a negative outlook in 2021), and its holding company structure, which relies on dividends from subsidiaries[110][111][112] - Operational Risks: The business faces risks from aging infrastructure, equipment failure, physical and cybersecurity breaches, and potential cost overruns or delays in its significant capital projects[137][140][147] - COVID-19 Risks: The pandemic could continue to negatively affect operations through altered electricity usage patterns, increased credit loss expense, supply chain disruptions for capital projects, and increased cybersecurity vulnerabilities from remote work[165][166][172] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[178] Item 2. Properties Evergy's properties include 15,396 MW of generation capacity, 10,200 circuit miles of transmission, and 60,400 circuit miles of distribution lines, all subject to mortgage indentures Total Generation and Renewable Purchased Power by Type (MW) | Generation Type | Total Company Generation (Owned) | Renewable Purchased Power | Total | | :--- | :--- | :--- | :--- | | Renewable | 584 | 3,820 | 4,404 | | Nuclear | 1,108 | — | 1,108 | | Coal | 5,913 | — | 5,913 | | Gas and Oil | 3,971 | — | 3,971 | | Total | 11,576 | 3,820 | 15,396 | - Evergy's electric transmission system consists of approximately 10,200 circuit miles of lines[188] - The distribution system includes approximately 44,900 circuit miles of overhead lines and 15,500 circuit miles of underground lines[188] Item 3. Legal Proceedings The company is party to various lawsuits and regulatory proceedings in the ordinary course of business, with details in Notes 4 and 14 - Information regarding material lawsuits and proceedings is incorporated by reference from Notes 4 and 14 to the consolidated financial statements[191] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[192] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Evergy's common stock trades on the NYSE under "EVRG," with 18,297 shareholders of record as of February 18, 2022, and minor share repurchases in Q4 2021 - Evergy's common stock is listed on the NYSE under the symbol "EVRG" On February 18, 2022, there were 18,297 shareholders of record[194] Issuer Purchases of Equity Securities (Q4 2021) | Month | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | October 1 - 31 | — | — | | November 1 - 30 | 680 | $64.92 | | December 1 - 31 | 8,495 | $68.56 | | Total | 9,175 | $68.29 | Item 6. Selected Financial Data This item is not applicable - Not applicable[200] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Evergy's 2021 financial performance, covering strategy, regulatory impacts, the February 2021 winter weather event, earnings, critical accounting policies, and liquidity Executive Summary Evergy's 2021 net income increased to $879.7 million, driven by winter weather event margins, higher retail sales, and lower O&M, with strategic goals for emissions reduction and capital investments - Strategic objectives include targeting a $345 million reduction in operating and maintenance expense by 2025, investing approximately $10.7 billion in base capital through 2026, and achieving a 70% reduction in CO2 emissions by 2030 (from 2005 levels) en route to net-zero by 2045[209] - The February 2021 winter weather event resulted in Evergy incurring $365.5 million in net natural gas and purchased power costs, which have been substantially deferred to a regulatory asset for future recovery[217][220] Earnings Overview (2021 vs. 2020) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Net income attributable to Evergy, Inc. | $879.7M | $618.3M | $261.4M | | Diluted EPS | $3.83 | $2.72 | $1.11 | Reconciliation of GAAP to Adjusted Earnings (non-GAAP) | (in millions, except per share) | 2021 Earnings | 2021 EPS | 2020 Earnings | 2020 EPS | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to Evergy, Inc. | $879.7 | $3.83 | $618.3 | $2.72 | | Non-GAAP reconciling items (net) | (67.1) | (0.29) | 87.2 | 0.38 | | Adjusted earnings (non-GAAP) | $812.6 | $3.54 | $705.5 | $3.10 | Critical Accounting Policies and Estimates Critical accounting policies involve significant management estimates for pensions, revenue recognition, regulatory assets and liabilities, asset and goodwill impairments, and asset retirement obligations - Key critical accounting policies involve significant management estimates for pensions, revenue recognition, regulatory assets and liabilities, asset and goodwill impairments, income taxes, and asset retirement obligations (AROs)[242] Sensitivity of Pension Assumptions | Actuarial Assumption | Change in Assumption | Impact on Projected Benefit Obligation (millions) | Impact on 2022 Pension Expense (millions) | | :--- | :--- | :--- | :--- | | Discount rate | 0.5% increase | $(193.6) | $(18.5) | | Rate of return on plan assets | 0.5% increase | — | $(7.9) | | Discount rate | 0.5% decrease | $219.6 | $20.7 | | Rate of return on plan assets | 0.5% decrease | — | $7.9 | - Goodwill of $2.34 billion was tested for impairment as of May 1, 2021, with no impairment found as the fair value of the reporting unit substantially exceeded its carrying amount[254] Evergy Results of Operations Evergy's 2021 income from operations increased by $211.0 million to $1,354.9 million, driven by higher utility gross margin and lower O&M, partially offset by increased depreciation and property taxes Comparative Results of Operations (in millions) | | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Operating revenues | $5,586.7 | $4,913.4 | $673.3 | | Income from operations | $1,354.9 | $1,143.9 | $211.0 | | Net income attributable to Evergy, Inc. | $879.7 | $618.3 | $261.4 | - Utility gross margin (a non-GAAP measure) increased by $188.1 million in 2021, primarily due to $94.5 million in non-regulated energy marketing margins from the February 2021 winter weather event and an $84.1 million increase from higher retail sales driven by weather and demand[279] - Operating and maintenance expense decreased by $55.5 million, largely due to a $63.5 million decrease in voluntary severance expenses compared to 2020[283] - Other income increased by $54.9 million, mainly driven by $49.1 million in higher investment earnings, which included a $27.7 million unrealized gain on an equity investment[285] Liquidity and Capital Resources Evergy funds capital through operations, borrowings, and debt/equity, with $1.3 billion available credit, a 49% common equity structure, and $10.7 billion projected capital expenditures through 2026 - As of December 31, 2021, Evergy had $1.3 billion of available borrowing capacity under its master credit facility[303] Capital Structure (excluding short-term debt) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Common equity | 49% | 47% | | Long-term debt | 51% | 53% | Projected Capital Expenditures (2022-2026, in millions) | Category | 2022 | 2023 | 2024 | 2025 | 2026 | | :--- | :--- | :--- | :--- | :--- | :--- | | New renewable generation | $0 | $258.0 | $450.0 | $750.0 | $500.0 | | Other generating facilities | $331.0 | $337.0 | $223.0 | $250.0 | $216.0 | | Transmission facilities | $626.0 | $600.0 | $591.0 | $592.0 | $679.0 | | Distribution facilities | $655.0 | $652.0 | $549.0 | $595.0 | $632.0 | | General facilities | $364.0 | $270.0 | $194.0 | $182.0 | $173.0 | | Total | $1,976.0 | $2,117.0 | $2,007.0 | $2,369.0 | $2,200.0 | - Cash flows from operating activities decreased by $402.1 million in 2021, primarily due to $365.5 million in cash payments for net fuel and purchased power costs during the February 2021 winter weather event[340] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Evergy manages market risks including commodity prices, interest rates, credit, and security prices using derivatives, with commodity price risk largely mitigated by fuel recovery mechanisms - The company is exposed to commodity price, interest rate, credit, and security price risks[370] - As of December 31, 2021, a 100-basis-point change in interest rates on its $1,815.3 million of variable rate and short-term debt would impact annual income before taxes by approximately $16.1 million[375][376] - Investment risk is present in the nuclear decommissioning and pension trust funds; a significant decline in pension asset value could require increased future funding[378][379] - Evergy holds a $31.4 million investment in an early-stage energy solutions company, which is subject to significant equity price risk; a 50% decline in its stock price would impact pre-tax income by approximately $14 million[381] Item 8. Financial Statements and Supplementary Data This section presents consolidated financial statements for Evergy, Inc. and its subsidiaries, including the Independent Registered Public Accounting Firm's Report and comprehensive notes detailing financial policies and figures Consolidated Financial Statements The consolidated financial statements for Evergy, Inc. and its subsidiaries show 2021 operating revenues of $5.59 billion and net income of $879.7 million, with total assets of $28.52 billion Evergy, Inc. Consolidated Financial Highlights (Year Ended Dec 31, 2021) | Metric | Amount (millions) | | :--- | :--- | | Income Statement | | | Operating Revenues | $5,586.7 | | Income from Operations | $1,354.9 | | Net Income Attributable to Evergy, Inc. | $879.7 | | Balance Sheet | | | Total Assets | $28,520.5 | | Total Liabilities | $19,278.8 | | Total Equity | $9,241.7 | Notes to Consolidated Financial Statements The notes detail accounting policies and financial figures, including the $365.5 million impact of the February 2021 winter weather event, ongoing regulatory proceedings, $9.7 billion in long-term debt, and an $847.0 million underfunded pension status - Note 1: The February 2021 winter weather event resulted in $365.5 million of net fuel and purchased power costs, which have been largely deferred for future recovery; the company also recorded $94.5 million in non-regulated energy marketing margins from the event[564][567] - Note 4: Details ongoing rate cases in Missouri filed in January 2022 and regulatory proceedings in Kansas concerning the recovery of costs from the winter weather event and potential securitization for the retirement of Lawrence Energy Center Unit 4[604][607][609] - Note 9: The company's defined benefit pension plans had a total projected benefit obligation of $2.56 billion against plan assets of $1.71 billion, resulting in an underfunded status of $847.0 million as of December 31, 2021[684] - Note 12 & 14: As of December 31, 2021, Evergy had $9.7 billion in long-term debt principal and significant future commitments for fuel ($1.1 billion) and power ($0.6 billion)[755][815] - Note 19: The state of Kansas exempted certain public utilities from state corporate income tax beginning in 2021, leading to a revaluation of deferred tax assets and liabilities and a reduction in retail rates[868][874] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[892] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes during Q4 2021 - Management for Evergy, Evergy Kansas Central, and Evergy Metro concluded that disclosure controls and procedures were effective as of December 31, 2021[893][907][912] - There were no material changes in internal control over financial reporting during the fourth quarter of 2021[894][908][913] - Management concluded that Evergy's internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework; this assessment was audited by Deloitte & Touche LLP, which issued an unqualified opinion[898][901] PART III Items 10-14 Information for Items 10 through 14, covering governance, compensation, and security ownership, is incorporated by reference from Evergy's 2022 definitive proxy statement - Information for Part III (Items 10-14) will be incorporated by reference from Evergy's 2022 definitive proxy statement[922] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report, including consolidated financial statements and various legal documents - This section contains the list of all financial statements, schedules, and exhibits filed with the annual report[946]