Activist Hedge Fund Targets Kansas-Missouri Utility

By Michael Hooper

An activist New York hedge fund led by Paul Singer sees an opportunity for creating shareholder value in Evergy, a publicly-traded electric utility in Kansas and Missouri.

Elliott Management, founded by Singer, had offered the Evergy board of directors a plan for creating shareholder value, but the board chose not to engage with the hedge fund, Elliott said.

Evergy (EVRG) stock was up 2% at $68.67 per share Tuesday on the news of Elliott Management's interest in Evergy.

Elliott's plan includes the addition of new Evergy board members and changing the way the company handles capital investments and operations; and possible sale or merger with another company.

Evergy was created with the 2018 merger of Westar Energy and Great Plains Energy.

At 2:40 p.m. today Tuesday, Evergy issued a statement saying, "In October 2019, we were approached by Elliott, which proposed two alternative paths for the Company to consider:

1. Evergy should immediately initiate a process to explore the sale of the Company or some other business combination;  

2. Evergy should significantly increase its capex over the Company’s current plan, cut investments in operations and maintenance (O&M) to help offset this increase, and halt its existing share repurchase program.

"Since October, we have engaged in good faith with Elliott to fully understand and evaluate their proposals.  As a part of this process, we have engaged Morgan Stanley as financial advisor and Morgan, Lewis & Bockius LLP as legal counsel to assist management and the Board with an evaluation of Elliott’s proposals and our strategic plan."

Evergy said, "We are open to evaluating opportunities that may create greater value and recognize that Elliott has different views regarding our strategic plan. At the same time, there are various considerations that we believe are important when evaluating the conclusions that Elliott has asserted in its letter. As expressed to Elliott, we are confident in our ability to deliver long-term growth and shareholder value creation through the execution of our strategic plan. This plan includes maximizing operational savings from our 2018 merger, the share repurchase program we committed to when this merger was completed, paying a competitive dividend and making capital investment that will drive value."

Elliott Management Corporation, a hedge fund and money manager, said it owns 11.3 million shares in Evergy, or about $760 million in market value. That is about 5% of the company. Elliott released a letter to Evergy's Board outlining steps which should result in "high-certainty, line-of-sight equity value creation of up to $5 billion, with opportunities for significant additional value creation over time."

According to the letter, Elliott sees an opportunity to achieve a significant increase in shareholder value while providing tangible benefits to all of Evergy's key stakeholders, including customers, employees and the broader communities its utilities serve. The letter asserts that a renewed focus on improving core utility operations and investing in Evergy's critical system infrastructure can rectify its prolonged underperformance, discounted valuation and associated increased cost of capital.

In the letter, Elliott stated that increased system investment would not only provide meaningfully more value to shareholders than the current strategy to repurchase shares, but would also provide clearly superior benefits to Evergy's other stakeholders, help facilitate the Company's deployment of renewables and reduce its carbon footprint. Elliott urged Evergy to immediately explore both of the following alternative paths:

Standalone Path: Implement High-Performance Plan with Enhanced Oversight – Develop and implement a high-performance plan with the direct input of certain new highly-credentialed Board- and management-level leadership, to increase critical infrastructure investment and optimize operating costs, leading to annual rate-base growth of up to 10% with no expected overall rate impact on customer bills. 

Combination Path: Pursue Strategic Premium Merger Transaction – Explore a strategic combination via a premium stock-for-stock merger, following which Evergy's new partner would oversee the implementation of a high-performance plan, leading to value creation in which Evergy's current shareholders would be able to participate by receiving stock in the combined entity.

Elliott believes either path, if executed properly, should result in high-certainty, line-of-sight equity value creation of up to $5 billion, with opportunities for significant additional value creation over time.

Elliott Management Corporation manages approximately $40.2 billion of assets. Its flagship fund, Elliott Associates, L.P., was founded in 1977, making it one of the oldest funds under continuous management. The Elliott funds' investors include pension plans, sovereign wealth funds, endowments, foundations, funds-of-funds, high net worth individuals and families, and employees of the firm.

You may read Ellott's letter to the Evergy board here at https://energizeevergy.com/

In a November 2019 investor presentation, Evergy said it is creating shareholder value through: 

--Earnings growth driven by merger savings, cost management, infrastructure investment and share repurchases; not predicated on raising customer prices. 

--Stable base rates allow for on-going, constructive dialogue with customers, regulators, policy makers and is good for economic development.

--Strong balance sheet combined with expected earnings and dividend growth provides an attractive total shareholder return profile.

The board of directors at Evergy is led by Mark Ruelle, chairman. He is former president and CEO of Westar Energy. Terry Bassham, current president and CEO of Evergy, is also on the board of directors, he was previously chairman, president and CEO of Great Plains Energy.

Evergy said it is creating shareholder value by:

• We are executing on our operating plan and are achieving substantial cost savings. We are on track to exceed the $550 million of cumulative net cost savings targeted through 2023 in connection with the merger.  These savings include $110 million of savings in 2019 alone – $80 million above our 2018 target.  Notably, these savings are being achieved while protecting jobs; there have been no involuntary layoffs at the Company.
• Merger savings, share repurchases, dividends and infrastructure investments are contributing to sustainable earnings growth and competitive shareholder returns.  At this time, given the regulatory considerations in Missouri and Kansas, we believe the greatest return opportunities for Evergy’s capital beyond our current investment plan are share repurchases and growing the Company’s dividend. Together with the Company’s merger savings and incremental infrastructure investments utilizing plant in-service accounting in Missouri, we expect to deliver compounded annual earnings growth of 5% to 7% through 2023.
• Evergy’s third quarter results demonstrate the strength of the Company and the value opportunity we offer to Evergy shareholders. We delivered another solid quarter, despite regulatory headwinds. Our confidence in the business and our financial strength is reflected in the confirmation of our 2019 adjusted EPS guidance of $2.80 to $3.00 and the 6.3% increase to our dividend, also consistent with our long-term guidance.

Evergy said, "We remain open to continuing our dialogue with Elliott. As we consider any opportunity, we are resolute in our commitment to serving the best interests of all Evergy stakeholders, including our shareholders, employees, customers and the communities we serve. The support of our regulators is very important, and we will maintain an open, collaborative dialogue with them as we – and they – consider Elliott’s views. Morgan Stanley is acting as financial advisor and Morgan, Lewis & Bockius LLP is acting as legal advisor to the Company."

Evergy provides energy to 1.6 million customers in Kansas and Missouri.

Editor's note: The author Michael Hooper owns shares of Evergy (EVRG).