Evergy Inc. faces major power transformations – in its executive ranks and in how it will produce the electricity that more than 1.5 million customers in Kansas and Missouri count on.
The Kansas City-based utility must find a new CEO to succeed Terry Bassham, who announced his retirement in late August. Bassham drove the $14 billion merger that formed Evergy and before that spent six years as CEO of predecessor Great Plains Energy Inc.
In early August, the company rolled out a “Sustainability Transformation Plan.” It calls for $4.8 billion in upgrades to Evergy’s network and accelerating plans to replace coal-fired power plants with renewable energy sources during the next few years.
Such fundamental shifts would challenge any company. But Evergy’s degree of difficulty jumps because success will require outside parties to cooperate. A powerful activist investor looms over the selection of a CEO and any larger remake of Evergy’s executive team. And the pace of switching out coal for wind and solar hinges on lawmakers and regulators in two states buying in to big changes in how utilities finance power plants.
The outcome of these changes will ripple throughout the Kansas City metro area and beyond – buffeting a leading employer and factor in economic development, an important civic player, and a vital service for businesses and households alike.
Elliott’s long shadow
Evergy management received a jolt in October, when Elliott Management Corp. approached to discuss ways of maximizing value. When Elliott speaks, companies listen.
The New York-based activist investor’s targets have included such big names as AT&T, eBay, Twitter and former Sprint majority shareholder SoftBank. When Elliott made its involvement public in a January letter, it said it controlled the equivalent of 11.3 million shares of Evergy.
The scathing letter described underperformance by the company that called into question its management and basic strategy. Elliott suggested two paths forward: a sale or a new business plan.
Evergy and Elliott reached an agreement in late February that added two new board members and formed a special committee to explore the two paths.
Elliott’s criticism hit hard, Bassham said, but Evergy execs and directors decided to work with the investor, albeit after initially making changes in the company’s bylaws to make a takeover more difficult. Although Elliott suggested board candidates, Evergy’s board interviewed them and made the final selection, he said.
A member of the special committee, Bassham said he was pleased the group ultimately suggested that the utility remain a stand-alone company with a new strategic plan. Evergy’s board agreed, approving the suggestion unanimously.
The agreement did not end Elliott’s involvement. A release announcing Evergy’s new strategic plan noted that the investor could work with the board during a 90-day period to review and evaluate the best management team to execute the plan.
Bassham said his retirement was “absolutely, 100%” not part of a deal with Elliott to avert a sale of Evergy. The timing – with his 60th birthday just behind him and a new multiyear plan ahead – made it a good time to depart.
“The reason I’m doing this is I have motorcycles that have very few miles on them and musical instruments that aren’t used as much as I’d like. This is for family,” he said.
Change at the top
Reads vary on the job ahead of Evergy’s CEO search committee, based on whether you’re talking to someone inside or outside the company.
The search could produce a candidate within the month, said one outside source knowledgeable about the situation. Even as Elliott criticized Evergy management in its January letter, it held up a list of what it considers top performers: NextEra Energy Inc., the holding company for Florida Power & Light and Gulf Power; WEC Energy Group Inc. in Wisconsin; Minneapolis-based Xcel Energy Inc.; and Michigan-based CMS Energy Corp. The Evergy job wouldn’t lure a CEO from one of those companies, but it could attract a top executive from one of their units.
And Elliott has had a chance to see some of the talent available. One of its most recent utility investments, Houston’s CenterPoint Energy Inc., selected a new CEO at the end of June.
Chuck Caisley, Evergy’s chief customer officer, sees things differently. Identifying a new CEO by the end of the year is a more likely time frame, he said. And he reminds that the committee will look at internal and external candidates.
Bassham has seven direct reports, Caisley said (he’s one of them), all with at least a decade of utility management experience. Others in the group include COO Kevin Bryant, Chief Administrative Officer Greg Greenwood and CFO Tony Somma.
“The board feels there is a very strong internal team,” Caisley said, “but as an S&P 500 firm, it’s important to do a thorough industry search.”
The board will make the call, but Elliott will have a definite say, whether during the 90-day consulting period outlined in the strategic plan or – because of its significant holdings – beyond.
Plugging in the states
Elliott’s influence shows plainly in Evergy’s new strategic plan.
Like Elliott’s January letter, the new Evergy plan puts forth a strategy of pumping more money into the utility’s system, paid for by savings and taking advantage of a 2018 Missouri law that lets utilities recover more of their network investments in rates.
Both the letter and the plan emphasize boosting the rate base and relying more heavily on renewable energy.
However, carrying out the new strategy will require buy-in from regulators and lawmakers in Kansas and Missouri. That poses challenges because even though power generation from wind and solar is popular and the price has come down significantly, no one wants to be stuck with extra costs from moving away from coal.
“Ultimately, when you look at this, it boils down to how you transition,” said Josh Campbell, executive director of Missouri Energy Initiative. “While it’s true that wind and solar are cheaper than other products, we still have those other products.”
Campbell said states can help utilities make that transition in two ways. Accelerated depreciation of old plants protects utility shareholders – but probably means rate increases for customers. Securitization avoids raising rates – but can increase the risk of losses for shareholders.
In securitization, old plants essentially are refinanced with bonds secured by future payments from customers. The old plants are paid off, retired and replaced by renewable generation.
Because customer payments back the bonds, utilities can find significant interest savings. Elimination of fuel costs brings additional savings.
Twenty states have passed some form of securitization law, according to Energy News. Securitization bills have been introduced in Kansas and Missouri in recent years. But the legislation has yet to be fully developed in either state, Campbell and Caisley said.
The Kansas Legislature has been studying energy policy with an eye toward controlling high rates. Lawmakers received a study by London Economics International LLC in January that calls for study of securitization, among other steps.
Caisley said he expects a coalition of utilities and environmental groups to push for securitization in the coming session.
“The knowledge and the coalition exists for a path to securitization in the next couple of years,” he said.
Campbell reports interest in Missouri, too. The question is whether lawmakers will prioritize the issue when the Covid-19 pandemic has plopped a raft of other issues in their laps.
“Utilities are moving in that perspective,” he said. “It’s a matter of – from whichever way you look at it – is it moving fast enough?”
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