Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EVERGY, INC.

EXECUTIVE SUMMARY

Evergy, Inc. is a public utility holding company incorporated in 2017 and headquartered in Kansas City, Missouri. Evergy operates primarily through the following wholly-owned direct subsidiaries:

•Westar Energy is an integrated, regulated electric utility that provides electricity to customers in the state of Kansas. Westar Energy has one active wholly-owned subsidiary with significant operations, KGE.
•KCP&L is an integrated, regulated electric utility that provides electricity to customers in the states of Missouri and Kansas.
•GMO is an integrated, regulated electric utility that provides electricity to customers in the state of Missouri.
•GPETHC owns 13.5% of Transource with the remaining 86.5% owned by AEP Transmission Holding Company, LLC, a subsidiary of AEP. Transource is focused on the development of competitive electric transmission projects. GPETHC accounts for its investment in Transource under the equity method.

Westar Energy also owns a 50% interest in Prairie Wind, which is a joint venture between Westar Energy and affiliates of AEP and Berkshire Hathaway Energy Company. Prairie Wind owns a 108-mile, 345 kV double-circuit transmission line that provides transmission service in the SPP. Westar Energy accounts for its investment in Prairie Wind under the equity method.

Westar Energy and KGE conduct business in their respective service territories using the name Westar Energy. KCP&L and GMO conduct business in their respective service territories using the name KCP&L. Collectively, the Evergy Companies have approximately 14,500 MWs of owned generating capacity and renewable purchased power agreements and engage in the generation, transmission, distribution and sale of electricity to approximately 1.6 million customers in the states of Kansas and Missouri. The Evergy Companies assess financial performance and allocate resources on a consolidated basis (i.e., operate in one segment).

Great Plains Energy and Westar Energy Merger

Evergy was incorporated in 2017 as Monarch Energy, a wholly-owned subsidiary of Great Plains Energy. Prior to the closing of the merger transactions, Monarch Energy changed its name to Evergy and did not conduct any business activities other than those required for its formation and matters contemplated by the Amended Merger Agreement. On June 4, 2018, in accordance with the Amended Merger Agreement, Great Plains Energy merged into Evergy, with Evergy surviving the merger and King Energy merged into Westar Energy, with Westar Energy surviving the merger. These merger transactions resulted in Evergy becoming the parent entity of Westar Energy and the direct subsidiaries of Great Plains Energy, including KCP&L and GMO. As a result of the closing of the merger transactions, each outstanding share of Great Plains Energy common stock was converted into 0.5981 shares of Evergy common stock, resulting in the issuance of 128.9 million shares. Additionally, each outstanding share of Westar Energy common stock was converted into 1 share of Evergy common stock.

Westar Energy was determined to be the accounting acquirer and thus, the predecessor of Evergy. Therefore, Evergy's accompanying consolidated financial statements reflect the results of operations of Westar Energy for 2017 and 2016 and the financial position of Westar Energy as of December 31, 2017. Evergy had separate operations for the period beginning with the quarter ended June 30, 2018, and references to amounts for periods after the closing of the merger relate to Evergy. The results of Great Plains Energy's direct subsidiaries have been included in Evergy's results of operations from the date of the closing of the merger and thereafter.

KCP&L has elected not to apply "push-down accounting" related to the merger, whereby the adjustments of assets and liabilities to fair value and the resulting goodwill would be recorded on the financial statements of the acquired subsidiary. These adjustments for KCP&L, as well as those related to the acquired assets and liabilities of Great Plains Energy and its other direct subsidiaries, are only reflected on Evergy's consolidated financial statements.

See Note 2 to the consolidated financial statements for more information regarding the merger.

Common Stock Repurchase Program

In July 2018, the Evergy Board authorized the repurchase of up to 60 million shares of Evergy's common stock. Although this repurchase authorization has no expiration date, Evergy expects to repurchase approximately 60 million shares by mid-2020. Evergy plans to utilize various methods to effectuate the share repurchase program, including but not limited to, a series of transactions that may include ASRs, open market transactions or other means, subject to market conditions and applicable legal requirements. The repurchase program may be suspended, discontinued or resumed at any time. For 2018, Evergy had total repurchases of common stock of approximately $1,042 million and had repurchased 16.4 million shares under the repurchase program. These repurchase totals include shares repurchased under ASR agreements, one of which had not reached final settlement as of December 31, 2018, and are discussed further below.

In August 2018, Evergy entered into two ASR agreements with financial institutions to purchase $450.0 million of Evergy common stock. The ASR agreements reached final settlement in the fourth quarter of 2018 and resulted in the delivery of 7.9 million shares to Evergy based on the average daily volume weighted-average price of Evergy common stock during the term of the ASR agreements, less a negotiated discount.

In November 2018, Evergy entered into an ASR agreement with a financial institution to purchase $475.0 million of Evergy common stock. In December 2018, the financial institution delivered to Evergy 6.4 million shares of common stock, representing a partial settlement of the contract, based on then-current market prices and Evergy paid a total of $475.0 million. The final number of shares of Evergy common stock that Evergy may receive or be required to remit upon settlement of the ASR agreement will be based on the average daily volume weighted-average price of Evergy common stock during the term of the ASR agreement, less a negotiated discount. Final settlement of the ASR agreement will occur by March 2019, but may occur earlier at the option of the financial institution. Evergy expects that the final settlement of the ASR agreement will result in the delivery of additional shares of common stock to Evergy at no additional cost.

See Note 17 to the consolidated financial statements for more information regarding Evergy's common stock repurchase program.

Missouri Legislation

On June 1, 2018, Missouri Senate Bill (S.B.) 564 was signed into law by the Governor of Missouri. Most notably, S.B. 564 includes a PISA provision that can be elected by Missouri electric utilities to defer to a regulatory asset and recover 85% of depreciation expense and associated return on investment for qualifying electric plant rate base additions. Qualifying electric plant includes all rate base additions with the exception of new coal, nuclear or natural gas generating units or rate base additions that increase revenues by allowing service to new customer premises. The deferred depreciation and return recorded in the associated regulatory asset, except for any prudence disallowances, is required to be included in determining the utility's rate base during subsequent general rate proceedings subject to a 3% compound annual growth rate limitation on future electric rates compared with the utility's rates in effect prior to electing PISA. Utilities that elect the PISA provision can make qualifying deferrals of depreciation and return through December 2023, with a potential extension through December 2028 subject to MPSC approval. Except under certain circumstances, utilities that elect the PISA provision must keep base rates constant for three years following the utilities' last general rate case. KCP&L and GMO have elected the PISA provision of S.B. 564 effective as of January 1, 2019.

Regulatory Proceedings

See Note 5 to the consolidated financial statements for information regarding regulatory proceedings.

Plant Retirements

In 2017, Westar Energy announced plans to retire Unit 7 at Tecumseh Energy Center, Units 3 and 4 at Murray Gill Energy Center and Units 1 and 2 at Gordon Evans Energy Center, subject to the completion of the merger in 2018. In 2017, KCP&L and GMO also announced plans to retire KCP&L's Montrose Station and GMO's Sibley Station.

In the fourth quarter of 2018, Westar Energy, KCP&L and GMO retired these stations consistent with their previously announced plans.

Strategy

Evergy expects to continue operating its vertically integrated utilities within the currently existing regulatory frameworks. Evergy's objectives are to deliver value to shareholders through earnings and dividend growth; serve customers and communities with reliable service, clean energy and fewer and lower rate increases; and maintain a rewarding and challenging work environment for employees. Significant elements of Evergy's strategy to achieve these objectives include:

•the realization of a total of approximately $550 million of potential net savings from 2018 through 2022 resulting from synergies that are expected to be created as a result of the merger;
•the repurchase of approximately 60 million outstanding shares of Evergy common stock by mid-2020;
•anticipated rate base investment of approximately $6 billion from 2018 through 2022;
•the continued growth of Evergy's renewable energy portfolio as the Evergy Companies retire older and less efficient fossil fuel plants; and
•implementation of the rate orders received by the KCC and MPSC in 2018.

See "Cautionary Statements Regarding Certain Forward-Looking Information" and Part I, Item 1A, Risk Factors, for additional information.

Earnings Overview

The following table summarizes Evergy's net income and diluted earnings per common share (EPS).

20182017Change
(millions, except per share amounts)
Net income attributable to Evergy, Inc.$535.8$323.9$211.9
Earnings per common share, diluted2.502.270.23

Net income and diluted EPS increased in 2018 compared to 2017, primarily due to the inclusion of KCP&L's and GMO's earnings beginning in June 2018, higher Westar Energy retail sales driven by favorable weather and lower income tax expense, partially offset by merger-related costs and reductions of revenue for customer bill credits incurred following the close of the merger.

In addition, a higher number of diluted weighted average common shares outstanding due to the issuance of common shares to Great Plains Energy shareholders as a result of the merger diluted earnings per share $1.26 for 2018.

For additional information regarding the change in net income, refer to the Evergy Results of Operations section within this MD&A.

Impact of Recently Issued Accounting Standards

See Note 1 to the consolidated financial statements for information regarding the impact of recently issued accounting standards.

Wolf Creek Refueling Outage

Wolf Creek's most recent refueling outage began in March 2018 and the unit returned to service in May 2018. Wolf Creek's next refueling outage is planned to begin in the third quarter of 2019.

ENVIRONMENTAL MATTERS

See Note 14 to the consolidated financial statements for information regarding environmental matters.

RELATED PARTY TRANSACTIONS

See Note 16 to the consolidated financial statements for information regarding related party transactions.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates that could have been used could have a material impact on Evergy's results of operations and financial position. Management has identified the following accounting policies as critical to the understanding of Evergy's results of operations and financial position. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Evergy Board.

Pensions

Evergy incurs significant costs in providing non-contributory defined pension benefits. The costs are measured using actuarial valuations that are dependent upon numerous factors derived from actual plan experience and assumptions of future plan experience.

Pension costs are impacted by actual employee demographics (including age, life expectancies, compensation levels and employment periods), earnings on plan assets, the level of contributions made to the plan, and plan amendments. In addition, pension costs are also affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and pension costs.

The assumed rate of return on plan assets was developed based on the weighted-average of long-term returns forecast for the expected portfolio mix of investments held by the plan. The assumed discount rate was selected based on the prevailing market rate of fixed income debt instruments with maturities matching the expected timing of the benefit obligation. These assumptions, updated annually at the measurement date, are based on management's best estimates and judgment; however, material changes may occur if these assumptions differ from actual events. See Note 9 to the consolidated financial statements for information regarding the assumptions used to determine benefit obligations and net costs.

The following table reflects the sensitivities associated with a 0.5% increase or a 0.5% decrease in key actuarial assumptions for Evergy's qualified pension plans. Each sensitivity reflects the impact of the change based on a change in that assumption only.

Impact onImpact on
Projected2019
Change inBenefitPension
Actuarial assumptionAssumptionObligationExpense
(millions)
Discount rate0.5%increase$(173.9)$(19.0)
Rate of return on plan assets0.5%increase—(8.1)
Rate of compensation0.5%increase40.58.5
Discount rate0.5%decrease197.321.3
Rate of return on plan assets0.5%decrease—8.1
Rate of compensation0.5%decrease(36.4)(7.7)

Pension expense for Westar Energy, KCP&L and GMO is recorded in accordance with rate orders from the KCC and MPSC. The orders allow the difference between pension costs under GAAP and pension costs for ratemaking to be recorded as a regulatory asset or liability with future ratemaking recovery or refunds, as appropriate.

In 2018, Evergy's pension expense was $90.1 million under GAAP and $98.4 million for ratemaking. The impact on 2019 pension expense in the table above reflects the impact on GAAP pension costs. Under the Evergy Companies' rate agreements, any increase or decrease in GAAP pension expense would be deferred in a regulatory asset or liability for future ratemaking treatment. See Note 9 to the consolidated financial statements for additional information regarding the accounting for pensions.

Market conditions and interest rates significantly affect the future assets and liabilities of the plan. It is difficult to predict future pension costs, changes in pension liability and cash funding requirements due to the inherent uncertainty of market conditions.

Revenue Recognition

Evergy recognizes revenue on the sale of electricity to customers over time as the service is provided in the amount it has the right to invoice. Revenues recorded include electric services provided but not yet billed by Evergy. Unbilled revenues are recorded for kWh usage in the period following the customers' billing cycle to the end of the

month. This estimate is based on net system kWh usage less actual billed kWhs. Evergy's estimated unbilled kWhs are allocated and priced by regulatory jurisdiction across the rate classes based on actual billing rates. Evergy's unbilled revenue estimate is affected by factors including fluctuations in energy demand, weather, line losses and changes in the composition of customer classes. See Note 4 for the balance of unbilled receivables for Evergy as of December 31, 2018 and 2017.

Regulatory Assets and Liabilities

Evergy has recorded assets and liabilities on its consolidated balance sheets resulting from the effects of the ratemaking process, which would not otherwise be recorded under GAAP. Regulatory assets represent incurred costs that are probable of recovery from future revenues. Regulatory liabilities represent future reductions in revenues or refunds to customers.

Management regularly assesses whether regulatory assets and liabilities are probable of future recovery or refund by considering factors such as decisions by the MPSC, KCC or FERC in Evergy's rate case filings; decisions in other regulatory proceedings, including decisions related to other companies that establish precedent on matters applicable to Evergy; and changes in laws and regulations. If recovery or refund of regulatory assets or liabilities is not approved by regulators or is no longer deemed probable, these regulatory assets or liabilities are recognized in the current period results of operations. Evergy's continued ability to meet the criteria for recording regulatory assets and liabilities may be affected in the future by restructuring and deregulation in the electric industry or changes in accounting rules. In the event that the criteria no longer applied to all or a portion of Evergy's operations, the related regulatory assets and liabilities would be written off unless an appropriate regulatory recovery mechanism were provided. Additionally, these factors could result in an impairment on utility plant assets. See Note 5 to the consolidated financial statements for additional information.

Impairments of Assets and Goodwill

Long-lived assets are required to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable as prescribed under GAAP.

Accounting rules require goodwill to be tested for impairment annually and when an event occurs indicating the possibility that an impairment exists. The goodwill impairment test consists of comparing the fair value of a reporting unit to its carrying amount, including goodwill, to identify potential impairment. In the event that the carrying amount exceeds the fair value of the reporting unit, an impairment loss is recognized for the difference between the carrying amount of the reporting unit and its fair value. Evergy's consolidated operations are considered one reporting unit for assessment of impairment, as management assesses financial performance and allocates resources on a consolidated basis. Evergy's first impairment test for the $2,338.9 million of goodwill from the Great Plains Energy and Westar Energy merger will be conducted on May 1, 2019.

Evergy anticipates that the determination of fair value for the reporting unit will consist of two valuation techniques: an income approach consisting of a discounted cash flow analysis and a market approach consisting of a determination of reporting unit invested capital using market multiples derived from the historical revenue, earnings before interest, income taxes, depreciation and amortization, net utility asset values and market prices of stock of peer companies. The results of the two techniques will be evaluated and weighted to determine a point within the range that management considers representative of fair value for the reporting unit, which involves a significant amount of management judgment.

The discounted cash flow analysis is most significantly impacted by two assumptions: estimated future cash flows and the discount rate applied to those cash flows. Management will determine the appropriate discount rate to be based on the reporting unit's weighted average cost of capital (WACC). The WACC takes into account both the return on equity authorized by the KCC and MPSC and after-tax cost of debt. Estimated future cash flows are based on Evergy's internal business plan, which assumes the occurrence of certain events in the future, such as the outcome of future rate filings, future approved rates of return on equity, anticipated earnings/returns related to future capital investments, continued recovery of cost of service and the renewal of certain contracts. Management also makes assumptions regarding the run rate of operations, maintenance and general and administrative costs based on the expected outcome of the aforementioned events. Should the actual outcome of some or all of these assumptions

differ significantly from the current assumptions, revisions to current cash flow assumptions could cause the fair value of the Evergy reporting unit under the income approach to be significantly different in future periods and could result in a future impairment charge to goodwill.

The market approach analysis is most significantly impacted by management's selection of relevant peer companies as well as the determination of an appropriate control premium to be added to the calculated invested capital of the reporting unit, as control premiums associated with a controlling interest are not reflected in the quoted market price of a single share of stock. Management will determine an appropriate control premium by using an average of control premiums for recent acquisitions in the industry. Changes in results of peer companies, selection of different peer companies and future acquisitions with significantly different control premiums could result in a significantly different fair value of the Evergy reporting unit.

Income Taxes

Income taxes are accounted for using the asset/liability approach. Deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse. Deferred investment tax credits are amortized ratably over the life of the related property. Deferred tax assets are also recorded for net operating losses, capital losses and tax credit carryforwards. Evergy is required to estimate the amount of taxes payable or refundable for the current year and the deferred tax liabilities and assets for future tax consequences of events reflected in Evergy's consolidated financial statements or tax returns. Actual results could differ from these estimates for a variety of reasons including changes in income tax laws, enacted tax rates and results of audits by taxing authorities. This process also requires management to make assessments regarding the timing and probability of the ultimate tax impact from which actual results may differ. Evergy records valuation allowances on deferred tax assets if it is determined that it is more likely than not that the asset will not be realized. See Note 19 to the consolidated financial statements for additional information.

Asset Retirement Obligations

Evergy has recognized legal obligations associated with the disposal of long-lived assets that result from the acquisition, construction, development or normal operation of such assets. Concurrent with the recognition of the liability, the estimated cost of the ARO incurred at the time the related long-lived assets were either acquired, placed in service or when regulations establishing the obligation became effective. The recording of AROs for regulated operations has no income statement impact due to the deferral of the adjustments through the establishment of a regulatory asset or an offset to a regulatory liability.

Evergy initially recorded AROs at fair value for the estimated cost to decommission Wolf Creek (94% share), retire wind generating facilities, dispose of asbestos insulating material at its power plants, remediate ash disposal ponds and close ash landfills, among other items. ARO refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement may be conditional on a future event that may or may not be within the control of the entity. In determining Evergy's AROs, assumptions are made regarding probable future disposal costs and the timing of their occurrence. A change in these assumptions could have a significant impact on Evergy's AROs reflected on its consolidated balance sheets.

As of December 31, 2018 and 2017, Evergy had recorded AROs of $687.1 million and $405.1 million, respectively. See Note 6 to the consolidated financial statements for more information regarding Evergy's AROs.

EVERGY RESULTS OF OPERATIONS

Evergy's results of operations and financial position are affected by a variety of factors including rate regulation, fuel costs, weather, customer behavior and demand, the economy and competitive forces.

Substantially all of Evergy's revenues are subject to state or federal regulation. This regulation has a significant impact on the price the Evergy Companies charge for electric service. Evergy's results of operations and financial position are affected by its ability to align overall spending, both operating and capital, within the frameworks established by its regulators.

Wholesale revenues are impacted by, among other factors, demand, cost and availability of fuel and purchased power, price volatility, available generation capacity, transmission availability and weather.

The Evergy Companies primarily use coal and uranium for the generation of electricity for their customers and also purchase power on the open market. The prices for these commodities can fluctuate significantly due to a variety of factors including supply, demand, weather and the broader economic environment. Westar Energy, KCP&L and GMO have fuel recovery mechanisms in their Kansas and Missouri jurisdictions, as applicable, that allow them to defer and subsequently recover or refund, through customer rates, substantially all of the variance in net energy costs from the amount set in base rates without a general rate case proceeding.

Weather significantly affects the amount of electricity that Evergy's customers use as electricity sales are seasonal. As summer peaking utilities, the third quarter typically accounts for the greatest electricity sales by the Evergy Companies. Hot summer temperatures and cold winter temperatures prompt more demand, especially among residential and commercial customers, and to a lesser extent, industrial customers. Mild weather reduces customer demand.

Energy efficiency investments by customers and the Evergy Companies also can affect the demand for electric service. Through the Missouri Energy Efficiency Investment Act (MEEIA), KCP&L and GMO offer energy efficiency and demand side management programs to their Missouri retail customers and recover program costs, throughput disincentive, and as applicable, certain performance incentives in retail rates through a rider mechanism.

The following table summarizes Evergy's comparative results of operations.

2018Change2017Change2016
(millions)
Operating revenues$4,275.9$1,704.9$2,571.0$8.9$2,562.1
Fuel and purchased power1,078.7537.2541.532.0509.5
SPP network transmission costs259.912.0247.915.1232.8
Other operating expenses1,384.9653.8731.1(47.8)778.9
Depreciation and amortization618.8247.1371.733.2338.5
Income from operations933.6254.8678.8(23.6)702.4
Other income (expense), net(54.4)(27.6)(26.8)(25.3)(1.5)
Interest expense279.6108.6171.09.3161.7
Income tax expense59.0(92.2)151.2(33.3)184.5
Equity in earnings of equity method investees, net of income taxes5.4(1.3)6.70.26.5
Net income546.0209.5336.5(24.7)361.2
Less: Net income attributable to noncontrolling interests10.2(2.4)12.6(2.0)14.6
Net income attributable to Evergy, Inc.$535.8$211.9$323.9$(22.7)$346.6

Evergy Utility Gross Margin and MWh Sales

Utility gross margin is a financial measure that is not calculated in accordance with GAAP. Utility gross margin, as used by the Evergy Companies, is defined as operating revenues less fuel and purchased power costs and amounts billed by the SPP for network transmission costs. Expenses for fuel and purchased power costs, offset by wholesale sales margin, are subject to recovery through cost adjustment mechanisms. As a result, changes in fuel and purchased power costs are offset in operating revenues with minimal impact on net income. In addition, SPP network transmission costs fluctuate primarily due to investments by SPP members for upgrades to the transmission grid within the SPP RTO. As with fuel and purchased power costs, changes in SPP network transmission costs are mostly reflected in the prices charged to customers with minimal impact on net income. See Note 3 to the consolidated financial statements for additional information regarding the manner in which Evergy reflects SPP revenues and expenses.

Management believes that utility gross margin provides a meaningful basis for evaluating the Evergy Companies' operations across periods compared with operating revenues because utility gross margin excludes the revenue effect of fluctuations in these expenses. Utility gross margin is used internally to measure performance against budget and in reports for management and the Evergy Board. The Evergy Companies' definition of utility gross margin may differ from similar terms used by other companies.

The following tables summarize Evergy's utility gross margin and MWhs sold.

Utility Gross Margin2018Change2017Change2016
Retail revenues(millions)
Residential$1,578.8$777.5$801.3$(23.9)$825.2
Commercial1,356.4644.7711.7(16.9)728.6
Industrial527.8114.9412.97.1405.8
Other retail revenues30.67.822.80.822.0
Total electric retail3,493.61,544.91,948.7(32.9)1,981.6
Wholesale revenues404.473.2331.214.9316.3
Transmission revenues308.123.3284.826.1258.7
Other revenues69.863.56.30.85.5
Operating revenues4,275.91,704.92,571.08.92,562.1
Fuel and purchased power(1,078.7)(537.2)(541.5)(32.0)(509.5)
SPP network transmission costs(259.9)(12.0)(247.9)(15.1)(232.8)
Utility gross margin (a)$2,937.3$1,155.7$1,781.6$(38.2)$1,819.8
(a) Utility gross margin is a non-GAAP financial measure. See explanation of utility gross margin above.
MWh Sales2018Change2017Change2016
Retail MWh Sales(thousands)
Residential12,4786,3156,163(271)6,434
Commercial14,1296,7617,368(176)7,544
Industrial7,4261,7375,6891905,499
Other retail revenues1103773(4)77
Total electric retail34,14314,85019,293(261)19,554
Wholesale revenues13,8113,46510,3462,0478,299
Operating revenues47,95418,31529,6391,78627,853

Evergy's utility gross margin increased $1,155.7 million in 2018 compared to 2017 driven by:

•an $1,181.5 million increase due to the inclusion of KCP&L's and GMO's utility gross margin beginning in June 2018; and
•a $75.0 million increase primarily due to higher Westar Energy retail sales driven by warmer spring and summer weather and colder winter weather. For 2018 compared to 2017, cooling degree days increased 31% and heating degree days increased 23%; partially offset by
•a $69.8 million provision for rate refund recorded at Westar Energy for the change in the corporate income tax rate caused by the passage of the TCJA. See Note 19 to the consolidated financial statements for additional information; and
•a $31.0 million reduction in revenue recorded at Westar Energy for one-time and annual bill credits as a result of conditions in the KCC merger order. See Note 2 to the consolidated financial statements for additional information.

Evergy's utility gross margin decreased $38.2 million in 2017 compared to 2016 primarily due to lower Westar Energy retail sales driven by milder weather. For 2017 compared to 2016, cooling degree days decreased 13%.

Other Operating Expenses (including operating and maintenance expense and taxes other than income tax)

Evergy's other operating expenses increased $653.8 million in 2018 compared to 2017 primarily driven by:

•a $453.0 million increase in operating and maintenance expense due to the inclusion of KCP&L's and GMO's operating and maintenance expenses beginning in June 2018, excluding the deferral of merger transition costs discussed below;
•$69.5 million of merger-related costs incurred following the close of the merger in June 2018, consisting of:
◦$24.7 million of unconditional charitable contributions and community support recorded by Evergy in accordance with conditions in the KCC and MPSC merger orders;
◦$44.2 million of Westar Energy change in control payments, Westar Energy voluntary severance and the recording of unrecognized equity compensations costs and the incremental fair value associated with the vesting of outstanding Westar Energy equity compensation awards in accordance with the Amended Merger Agreement; and
◦$48.4 million of merger consulting fees and fees for other outside services incurred, primarily consisting of merger success fees; partially offset by
◦a $47.8 million decrease in operating and maintenance expense due to the deferral of merger transition costs to a regulatory asset in June 2018 for future recovery by Westar Energy, KCP&L and GMO in accordance with the KCC and MPSC merger orders;
•a $95.3 million increase in taxes other than income taxes due to the inclusion of KCP&L and GMO amounts beginning in June 2018;
•$12.3 million of obsolete inventory write-offs for Westar Energy's Unit 7 at Tecumseh Energy Center, Units 3 and 4 at Murray Gill Energy Center and Units 1 and 2 at Gordon Evans Energy Center, which were retired in the fourth quarter of 2018; and
•a $5.5 million increase due to Westar Energy's 47% share of voluntary severance expenses incurred related to the Wolf Creek voluntary exit program.

Evergy's other operating expenses decreased $47.8 million in 2017 compared to 2016 primarily driven by:

•a $24.2 million decrease in Westar Energy's property tax expense due to a decrease in amortization of the regulatory asset comprised of actual costs incurred for property taxes in the prior year in excess of amounts collected in prices in the prior year, which is mostly offset in retail revenues;
•an $8.6 million decrease in Westar Energy's transmission and distribution expense due to higher grid resiliency costs in 2016 and receiving credit for assisting other utilities with mutual aid during an active hurricane season, which offsets operating and maintenance expense;
•a $7.1 million decrease in Westar Energy's employee at-risk compensation that is payable only upon meeting pre-established operating and financial objectives;
•a $5.8 million decrease in Westar Energy's nuclear operating and maintenance costs primarily due to receiving a legal settlement related to Wolf Creek in 2017; and
•a $4.9 million decrease in Westar Energy's operating and maintenance expense at coal fired plants primarily due to a planned outage at Jeffrey Energy Center in 2016; partially offset by
•an $8.8 million increase in Westar Energy's operating and maintenance expense due to the start of operations at the Western Plains Wind Farm in March 2017.

Depreciation and Amortization

Evergy's depreciation and amortization increased $247.1 million in 2018 compared to 2017 primarily driven by a $227.9 million increase due to the inclusion of KCP&L's and GMO's depreciation expense beginning in June 2018.

Evergy's depreciation and amortization increased $33.2 million in 2017 compared to 2016 primarily driven by the start of operations at Westar Energy's Western Plains Wind Farm in March 2017.

Other Income (Expense), Net

Evergy's other expense, net increased $27.6 million in 2018 compared to 2017 primarily driven by:

•a $25.7 million increase due to the inclusion of KCP&L and GMO amounts beginning in June 2018; and
•a $4.6 million decrease in Westar Energy's investment earnings primarily due to a decrease in interest and dividend income.

Evergy's other expense, net increased $25.3 million in 2017 compared to 2016 primarily driven by:

•a $26.3 million decrease in Westar Energy's other income primarily consisting of:
◦a $19.5 million decrease due to recording higher corporate-owned life insurance (COLI) benefits in 2016; and
◦a $9.6 million decrease in equity allowance for funds used during construction (AFUDC); partially offset by
◦a $3.5 million increase related to the deconsolidation of the trust holding Westar Energy's 8% interest in Jeffrey Energy Center.

Interest Expense

Evergy's interest expense increased $108.6 million in 2018 compared to 2017 primarily driven by a $102.8 million increase due to the inclusion of KCP&L's and GMO's interest expense beginning in June 2018 and Evergy's assumption of Great Plains Energy's $350.0 million of 4.85% unsecured Senior Notes and $287.5 million of 5.292% unsecured Senior Notes upon the consummation of the merger.

Evergy's interest expense increased $9.3 million in 2017 compared to 2016 primarily driven by an increase in Westar Energy's interest expense on long-term debt of $4.9 million as a result of the issuance of first mortgage bonds (FMBs) in excess of retirements and a $4.4 million decrease in debt AFUDC.

Income Tax Expense

Evergy's income tax expense decreased $92.2 million in 2018 compared to 2017 primarily driven by:

•a $53.4 million decrease related to the revaluation of Westar Energy's deferred income tax assets and liabilities based on the Evergy composite tax rate as a result of the merger;
•a $58.4 million decrease due to lower Westar Energy pre-tax income; and
•a $44.3 million decrease in Westar Energy's income tax expense as a result of the decrease in the federal statutory income tax rate in 2018; partially offset by
•a $63.2 million increase as a result of the inclusion of income tax expense related to Evergy, Inc. and the subsidiaries of Great Plains Energy beginning in June 2018.

Evergy's income tax expense decreased $33.3 million in 2017 compared to 2016 primarily driven by:

•a $24.0 million decrease due to production tax credits, primarily due to the start of operations at Westar Energy's Western Plains Wind Farm in March 2017; and
•a $22.9 million decrease due to lower Westar Energy pre-tax income; partially offset by
•a $12.2 million increase related to the revaluation of Westar Energy's deferred income taxes not included in rate base as a result of the enactment of the TCJA in 2017.

EVERGY SIGNIFICANT BALANCE SHEET CHANGES

(December 31, 2018 compared to December 31, 2017)

The following table summarizes Evergy's significant balance sheet changes.

Total ChangeChange Due to MergerRemaining Change
Assets(in millions)
Cash and cash equivalents$156.9$1,154.2$(997.3)
Accounts receivable, net(97.0)155.6(252.6)
Accounts receivable pledged as collateral365.0180.0185.0
Fuel inventories and supplies217.4271.5(54.1)
Income taxes receivable68.00.567.5
Regulatory assets - current204.4207.8(3.4)
Prepaid expenses and other assets39.3182.1(142.8)
Property, plant and equipment, net9,228.79,179.749.0
Property, plant and equipment of variable interest entities, net(7.1)—(7.1)
Regulatory assets1,072.5829.1243.4
Nuclear decommissioning trust235.0261.3(26.3)
Goodwill2,338.92,338.9—
Other151.7145.56.2
Liabilities
Current maturities of long-term debt705.4415.3290.1
Current maturities of long-term debt of variable interest entities1.8—1.8
Notes payable and commercial paper462.9561.0(98.1)
Collateralized note payable365.0180.0185.0
Accounts payable247.3191.455.9
Accrued dividends(53.8)59.4(113.2)
Accrued taxes45.982.0(36.1)
Accrued interest38.248.0(9.8)
Regulatory liabilities - current98.617.780.9
Asset retirement obligations - current24.746.0(21.3)
Other current liabilities107.573.134.4
Long-term debt, net2,948.73,358.6(409.9)
Long-term debt of variable interest entities, net(30.3)—(30.3)
Deferred income taxes783.5669.6113.9
Unamortized investment tax credits116.1124.3(8.2)
Regulatory liabilities1,124.81,172.9(48.1)
Pension and post-retirement liability496.4477.319.1
Asset retirement obligations257.3366.1(108.8)
Other long-term liabilities103.483.120.3

Change Due to Merger as reflected in the table above represents the preliminary purchase price allocation to Great Plains Energy's assets and liabilities as of June 4, 2018. See Note 2 to the consolidated financial statements for additional information regarding changes in Evergy's balance sheet due to the merger.

The following are significant balance sheet changes in addition to those due to the Great Plains Energy and Westar Energy merger:

•Evergy's cash and cash equivalents decreased $997.3 million primarily due to the repurchase of common stock for a total cost of approximately $1,042 million in connection with Evergy's share repurchase program. See Note 17 to the consolidated financial statements for additional information on Evergy's share repurchase program.
•Evergy's receivables, net decreased $252.6 million primarily due to Westar Energy's entry into a receivable sale facility in December 2018 for an initial amount $185.0 million. This sale of the undivided percentage ownership interest in accounts receivable resulted in the reduction of receivables, net and an increase in accounts receivables pledged as collateral and collateralized note payable of $185.0 million. See Note 4 to the consolidated financial statements for additional information regarding Westar Energy's receivable sale facility.
•Evergy's receivables pledged as collateral and collateralized note payable increased $185.0 million due to Westar Energy's entry into a receivable sale facility in December 2018.
•Evergy's fuel inventories and supplies decreased $54.1 million primarily due to $31.0 million of obsolete inventory write-offs at Westar Energy's Unit 7 at Tecumseh Energy Center, Units 3 and 4 at Murray Gill Energy Center, Units 1 and 2 at Gordon Evans Energy Center, KCP&L's Montrose Station and GMO's Sibley Station, which were all retired in the fourth quarter of 2018.
•Evergy's income taxes receivable increased $67.5 million primarily due to refundable alternative minimum tax (AMT) credits that Evergy expects to receive in 2019.
•Evergy's prepaid expenses and other assets decreased $142.8 million primarily due to the $140.6 million settlement of deal contingent interest rate swaps entered into by Great Plains Energy that settled following the consummation of the merger in June 2018.
•Evergy's regulatory assets increased by $243.4 million primarily due to the reclassification of retired generating plant of $159.9 million related to GMO's Sibley No. 3 Unit from property, plant and equipment, net to a regulatory asset upon the retirement of the unit in 2018.
•Evergy's current maturities of long-term debt increased by $290.1 million primarily due to the reclassification of KGE's $300.0 million of 6.70% Series First Mortgage Bonds from long-term to current.
•Evergy's notes payable and commercial paper decreased $98.1 million primarily due to the repayment of commercial paper with funds from operations at KCP&L and GMO.
•Evergy's accounts payable increased $55.9 million primarily due to the timing of cash payments.
•Evergy's accrued dividends decreased $113.2 million due to Evergy's assumption and subsequent payment of Great Plains Energy's $59.4 million of accrued common stock dividends following the consummation of the merger and the timing of payment between Evergy's common stock dividend declared in November 2018, which was paid in December 2018, and its common stock dividend declared in November 2017, which was paid in January 2018 and was reflected as accrued dividends of $53.8 million as of December 31, 2017.
•Evergy's current regulatory liabilities increased $80.9 million primarily due to $71.2 million of refund obligations recorded by KCP&L and GMO consisting of $63.7 million related to the TCJA and $7.5 million related to one-time customer merger bill credits.
•Evergy's current asset retirement obligations decreased $21.3 million primarily due to lower expected cash flows in the next twelve months as of December 31, 2018, compared to December 31, 2017, related to closure costs for ponds containing coal combustion residuals (CCRs) at La Cygne Station and Iatan Station.
•Evergy's long-term debt decreased by $409.9 million primarily due to the reclassification of KGE's $300.0 million of 6.70% Series First Mortgage Bonds from long-term to current and the redemption of $104.0 million of GMO's Series A and B Senior Notes in 2018.
•Evergy's long-term debt of variable interest entities, net decreased $30.3 million primarily due to the VIE that holds the La Cygne Unit 2 leasehold interest having made principal payments totaling $28.5 million.
•Evergy's deferred income taxes increased $113.9 million primarily due to the reclassification of refundable AMT credits that Evergy expects to receive in 2019 to income taxes receivable.
•Evergy's asset retirement obligations decreased $108.8 million primarily due to a $127.0 million decrease in Evergy's and Westar Energy's AROs for a revision in estimate primarily related to Westar Energy's ARO to decommission its 47% ownership share of Wolf Creek. See Note 6 to the consolidated financial statements for additional information.

LIQUIDITY AND CAPITAL RESOURCES

Evergy relies primarily upon cash from operations, short-term borrowings, debt issuances and its existing cash and cash equivalents to fund its capital requirements. Evergy's capital requirements primarily consist of capital expenditures, payment of contractual obligations and other commitments, the payment of dividends to shareholders and the repurchase of common shares.

Capital Sources

Cash Flows from Operations

Evergy's cash flows from operations are driven by the regulated sale of electricity. These cash flows are relatively stable but the timing and level of these cash flows can vary based on weather and economic conditions, future regulatory proceedings, the timing of cash payments made for costs recoverable under regulatory mechanisms and the time such costs are recovered, and unanticipated expenses such as unplanned plant outages and/or storms.

Short-Term Borrowings

As of December 31, 2018, Evergy had $1.7 billion of available borrowing capacity from its master credit facility and receivable sale facilities. Westar Energy's, KCP&L's and GMO's borrowing capacity under the master credit facility also support their issuance of commercial paper. The available borrowing capacity consisted of $449.0 million from Evergy, Inc.'s master credit facility, $570.0 million from Westar Energy's credit facilities, $420.4 million from KCP&L's credit facilities and $297.9 million from GMO's credit facilities. See Notes 4 and 11 to the consolidated financial statements for more information regarding the receivable sale facilities and master credit facility, respectively. Along with cash flows from operations, Evergy generally uses these liquid resources to meet its day-to-day cash flow requirements.

Long-Term Debt and Equity Issuances

From time to time, Evergy issues long-term debt and/or equity to repay short-term debt, refinance maturing long-term debt and finance growth. As of December 31, 2018 and 2017, Evergy’s capital structure, excluding short-term debt, was as follows:

December 31
20182017
Common equity57%51%
Noncontrolling interests<0%<0%
Long-term debt, including VIEs43%49%

After the completion of its common stock repurchase program, Evergy anticipates targeting a common equity to total capitalization ratio of approximately 47%-50%. Following the utilization of its excess cash and cash equivalents discussed further below, Evergy anticipates issuing debt in 2019 in support of its common stock

repurchase program. See "Liquidity and Capital Resources - Capital Requirements - Common Stock Repurchase Program" for additional information.

Under stipulations with the MPSC and KCC, Evergy, Westar Energy and KCP&L are required to maintain common equity at not less than 35%, 40% and 40%, respectively, of total capitalization. The master credit facility and certain debt instruments of the Evergy Companies also contain restrictions that require the maintenance of certain capitalization and leverage ratios. As of December 31, 2018, the Evergy Companies were in compliance with these covenants.

Significant Debt Issuances

See Note 12 to the consolidated financial statements for information regarding significant debt issuances.

Credit Ratings

The ratings of the Evergy Companies' debt securities by the credit rating agencies impact their liquidity, including the cost of borrowings under their master credit facility and in the capital markets. The Evergy Companies view maintenance of strong credit ratings as vital to their access to and cost of debt financing and, to that end, maintain an active and ongoing dialogue with the agencies with respect to results of operations, financial position and future prospects. While a decrease in these credit ratings would not cause any acceleration of the Evergy Companies' debt, it could increase interest charges under the master credit facility. A decrease in credit ratings could also have, among other things, an adverse impact, which could be material, on the Evergy Companies' access to capital, the cost of funds, the ability to recover actual interest costs in state regulatory proceedings, the type and amounts of collateral required under supply agreements and Evergy's ability to provide credit support for its subsidiaries.

As of February 21, 2019, the major credit rating agencies rated the Evergy Companies' securities as detailed in the following table.

Moody'sS&P Global
Investors Service(a)Ratings(a)
Evergy
OutlookStableStable
Corporate Credit Rating--A-
Senior Unsecured DebtBaa2BBB+
Westar Energy
OutlookStableStable
Corporate Credit RatingBaa1A-
Senior Secured DebtA2A
Commercial PaperP-2A-2
KGE
OutlookStableStable
Corporate Credit RatingBaa1A-
Senior Secured DebtA2A
Short-Term RatingP-2A-2
KCP&L
OutlookStableStable
Corporate Credit RatingBaa1A-
Senior Secured DebtA2A
Senior Unsecured DebtBaa1A-
Commercial PaperP-2A-2
GMO
OutlookStableStable
Corporate Credit RatingBaa2A-
Senior Unsecured DebtBaa2A-
Commercial PaperP-2A-2

(a)A securities rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency.

Shelf Registration Statements and Regulatory Authorizations

Evergy

In November 2018, Evergy filed an automatic shelf registration statement providing for the sale of unlimited amounts of securities with the SEC, which expires in November 2021.

Westar Energy

In November 2018, Westar Energy filed an automatic shelf registration statement providing for the sale of unlimited amounts of unsecured debt securities and first mortgage bonds with the SEC, which expires in November 2021.

KCP&L

In November 2018, KCP&L filed an automatic shelf registration statement providing for the sale of unlimited amounts of unsecured notes and mortgage bonds with the SEC, which expires in November 2021.

The following table summarizes the regulatory short-term and long-term debt financing authorizations for Westar Energy, KGE, KCP&L and GMO and the remaining amount available under these authorizations as of December 31, 2018.

Type of AuthorizationCommissionExpiration DateAuthorization AmountAvailable Under Authorization
Westar Energy & KGE(in millions)
Short-Term DebtFERCDecember 2020$1,250.0$838.3
KCP&L
Short-Term DebtFERCDecember 2020$1,250.0$1,073.1
Long-Term DebtMPSCSeptember 2019$750.0$450.0
GMO
Short-Term DebtFERCDecember 2020$750.0$600.0
Long-Term DebtFERCDecember 2020$100.0$100.0

In addition to the above regulatory authorizations, the Westar Energy, KGE and KCP&L mortgages each contain provisions restricting the amount of FMBs that can be issued by each entity. Westar Energy, KGE and KCP&L must comply with these restrictions prior to the issuance of additional FMBs, general mortgage bonds or other secured indebtedness.

Under the Westar Energy mortgage, the issuance of bonds is subject to limitations based on the amount of bondable property additions. In addition, so long as any bonds issued prior to January 1, 1997, remain outstanding, the mortgage prohibits additional FMBs from being issued, except in connection with certain refundings, unless Westar Energy’s unconsolidated net earnings available for interest, depreciation and property retirement (which as defined, does not include earnings or losses attributable to the ownership of securities of subsidiaries), for a period of 12 consecutive months within 15 months preceding the issuance, are not less than the greater of twice the annual interest charges on or 10% of the principal amount of all FMBs outstanding after giving effect to the proposed issuance. As of December 31, 2018, $344.5 million principal amount of additional FMBs could be issued under the most restrictive provisions in the mortgage, except in connection with certain refundings.

Under the KGE mortgage, the amount of FMBs authorized is limited to a maximum of $3.5 billion and the issuance of bonds is subject to limitations based on the amount of bondable property additions. In addition, the mortgage prohibits additional FMBs from being issued, except in connection with certain refundings, unless KGE’s net earnings before income taxes and before provision for retirement and depreciation of property for a period of 12 consecutive months within 15 months preceding the issuance are not less than either two and one-half times the annual interest charges on or 10% of the principal amount of all KGE FMBs outstanding after giving effect to the proposed issuance. As of December 31, 2018, KGE had sufficient capacity under the most restrictive provisions in the mortgage to meet its near term financing and refinancing needs.

Under the KCP&L mortgage, additional KCP&L mortgage bonds may be issued on the basis of property additions or retired bonds. As of December 31, 2018, KCP&L had sufficient capacity under the most restrictive provisions in the mortgage to meet its near term financing and refinancing needs.

Cash and Cash Equivalents

At December 31, 2018, Evergy had approximately $160.3 million of cash and cash equivalents on hand. Under the Amended Merger Agreement, Great Plains Energy was required to have not less than $1.25 billion in cash and cash equivalents on its balance sheet at the closing of the merger with Westar Energy. In 2018, Evergy primarily utilized this excess cash to repurchase approximately $1,042 million of common stock. Evergy anticipates that its remaining excess cash will also be returned to shareholders through the repurchase of common stock.

Capital Requirements

Capital Expenditures

Evergy requires significant capital investments and expects to need cash primarily for utility construction programs designed to improve and expand facilities related to providing electric service, which include, but are not limited to, expenditures to develop new transmission lines and improvements to power plants, transmission and distribution lines and equipment. Evergy's capital expenditures were $1,069.7 million, $764.6 million and $1,087.0 million in 2018, 2017 and 2016, respectively.

Capital expenditures projected for the next five years, excluding AFUDC and including costs of removal, are detailed in the following table. This capital expenditure plan is subject to continual review and change.

20192020202120222023
(millions)
Generating facilities$458$497$383$306$425
Transmission and distribution facilities678714706712705
General facilities142127948966
Total utility capital expenditures$1,278$1,338$1,183$1,107$1,196

Contractual Obligations and Other Commitments

In the course of its business activities, the Evergy Companies enter into a variety of contracts and commercial commitments. Some of these result in direct obligations reflected on Evergy's consolidated balance sheets while others are commitments, some firm and some based on uncertainties, not reflected in Evergy's underlying consolidated financial statements.

The information in the following table is provided to summarize Evergy's cash obligations and commercial commitments.

Payment due by period20192020202120222023After 2023Total
Long-term debt(millions)
Principal$701.1$251.1$432.0$287.5$439.5$5,142.9$7,254.1
Interest306.3281.1256.9235.4222.13,262.64,564.4
Long-term debt of VIEs
Principal30.332.318.8———81.4
Interest1.60.80.2———2.6
Lease commitments
Operating leases24.220.718.415.212.495.0185.9
Capital leases6.42.25.34.74.048.671.2
Pension and other post-retirement plans (a)118.3118.3118.3118.3118.3(a)591.5
Purchase commitments
Fuel423.6364.495.382.987.5116.21,169.9
Power47.347.347.447.647.8366.8604.2
Other137.818.813.46.82.134.4213.3
Total contractual commitments (a)$1,796.9$1,137.0$1,006.0$798.4$933.7$9,066.5$14,738.5
(a)Evergy expects to make contributions to the pension and other post-retirement plans beyond 2023 but the amounts are not yet determined.

Long-term debt includes current maturities. Long-term debt principal excludes $57.2 million of unamortized net discounts and debt issuance costs and a $144.8 million fair value adjustment recorded in connection with purchase accounting for the Great Plains Energy and Westar Energy merger. Variable rate interest obligations are based on rates as of December 31, 2018.

Operating lease commitments include leases for office buildings, computer equipment, operating facilities, vehicles and rail cars to serve jointly-owned generating units where Westar Energy or KCP&L is the managing partner and is reimbursed by other joint-owners for its proportionate share of the cost. Capital lease commitments include obligations for both principal and interest.

Evergy expects to contribute $118.3 million to the pension and other post-retirement plans in 2019, of which the majority is expected to be paid by Westar Energy and KCP&L. Additional contributions to the plans are expected beyond 2023 in amounts at least sufficient to meet the greater of Employee Retirement Income Security Act of 1974, as amended (ERISA) or regulatory funding requirements; however, these amounts have not yet been determined. Amounts for years after 2019 are estimates based on information available in determining the amount for 2019. Actual amounts for years after 2019 could be significantly different than the estimated amounts in the table above.

Fuel commitments consist of commitments for nuclear fuel, coal and coal transportation costs. Power commitments consist of certain commitments for renewable energy under power purchase agreements. Other represents individual commitments entered into in the ordinary course of business.

Evergy has other insignificant long-term liabilities recorded on its consolidated balance sheet at December 31, 2018, which do not have a definitive cash payout date and are not included in the table above.

Common Stock Dividends

The amount and timing of dividends payable on Evergy's common stock are within the sole discretion of the Evergy Board. The amount and timing of dividends declared by the Evergy Board will be dependent on considerations such as Evergy's earnings, financial position, cash flows, capitalization ratios, regulation, reinvestment opportunities and debt covenants. Evergy targets a long-term dividend payout ratio of 60% to 70% of earnings. See Note 1 to the consolidated financial statements for information on the common stock dividend declared by the Evergy Board in February 2019.

The Evergy Companies also have certain restrictions stemming from statutory requirements, corporate organizational documents, covenants and other conditions that could affect dividend levels. See Note 17 to the consolidated financial statements for further discussion of restrictions on dividend payments.

Common Stock Repurchase Program

In July 2018, the Evergy Board authorized the repurchase of up to 60 million shares of Evergy's common stock. Although this repurchase authorization has no expiration date, Evergy expects to repurchase approximately 60 million shares by mid-2020. For 2018, Evergy had total repurchases of common stock of approximately $1,042 million and had repurchased 16.4 million shares under the repurchase program. These repurchase totals include shares repurchased under ASR agreements, one of which had not reached final settlement as of December 31, 2018, and are discussed further below.

In August 2018, Evergy entered into two ASR agreements with financial institutions to purchase $450.0 million of Evergy common stock. The ASR agreements reached final settlement in the fourth quarter of 2018 and resulted in the delivery of 7.9 million shares to Evergy and Evergy paid a total of $450.0 million.

In November 2018, Evergy entered into an ASR agreement with a financial institution to purchase $475.0 million of Evergy common stock. In December 2018, the financial institution delivered to Evergy 6.4 million shares of common stock, representing a partial settlement of the contract, based on then-current market prices and Evergy paid a total of $475.0 million. The ASR agreement is expected to reach final settlement by March 2019 or earlier.

See Note 17 to the consolidated financial statements for more information regarding Evergy's common stock repurchase program.

Impact of TCJA

The TCJA will result in lower operating cash flows for the Evergy Companies due to lower income tax expense recoveries in customer rates and the settlement of related deferred income tax regulatory liabilities, which are significant. These decreases in operating cash flows are expected to exceed the increase in operating cash flows for the Evergy Companies resulting from the lower corporate federal income tax rate primarily due to the utilization of the Evergy Companies' net operating losses and tax credits. These net regulatory liabilities will be refunded in future rates by amortizing amounts related to plant assets primarily over the remaining useful life of the assets and amortizing the amounts related to the other items over various periods as determined in the Evergy Companies' 2018 rate cases.

Off-Balance Sheet Arrangements

In the ordinary course of business, Evergy and certain of its subsidiaries enter into various agreements providing financial or performance assurance to third parties on behalf of certain subsidiaries. Such agreements include, for example, guarantees and letters of credit. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiary's intended business purposes. In connection with the closing of the merger, Evergy assumed the guarantees previously provided to GMO by Great Plains Energy. The majority of these agreements guarantee Evergy's own future performance, so a liability for the fair value of the obligation is not recorded.

At December 31, 2018, Evergy has provided $111.3 million of credit support for GMO as follows:

•Evergy direct guarantees to GMO counterparties totaling $17.0 million, which expire in 2020, and
•Evergy's guarantee of GMO long-term debt totaling $94.3 million, which includes debt with maturity dates ranging from 2019 to 2023.

Evergy has also guaranteed GMO's short-term debt, including its commercial paper program. At December 31, 2018, GMO had $150.0 million of commercial paper outstanding. None of the guaranteed obligations are subject to default or prepayment if GMO's credit ratings were downgraded.

The Evergy Companies also have off-balance sheet arrangements in the form of operating leases and letters of credit entered into in the ordinary course of business.

Cash Flows

The following table presents Evergy's cash flows from operating, investing and financing activities.

201820172016
(in millions)
Cash flows from operating activities$1,497.8$912.7$803.8
Cash flows from (used in) investing activities197.4(780.8)(994.1)
Cash flows from (used in) financing activities(1,538.4)(131.6)190.2

Cash Flows from Operating Activities

Evergy's $585.1 million increase in cash flows from operating activities in 2018 compared to 2017 was primarily driven by an $800.8 million increase due to the inclusion of KCP&L's and GMO's cash flows from operating activities beginning in June 2018; partially offset by an increase of $50.3 million in amounts paid by Westar Energy related to income taxes; $35.6 million of merger success fees paid by Evergy and Westar Energy upon the completion of the merger; an increase of $27.0 million in purchased power costs paid by Westar Energy; an increase of $15.3 million in Wolf Creek refueling outage costs paid by Westar Energy related to the outage that concluded in May 2018 and an $11.6 million increase in Westar Energy pension and post-retirement contributions.

The $108.9 million increase in cash flows from operating activities in 2017 compared to 2016 was primarily driven by a $43.9 million increase in Westar Energy wholesale power sales and transmission services; a $26.3

million decrease in amounts paid for Westar Energy coal and natural gas; a $26.0 million increase due to Westar Energy receiving a $13.0 million refund for income taxes in 2017 and Westar Energy paying $13.0 million in income taxes in 2016 and a $13.6 million increase from Westar Energy retail customers; partially offset by a $16.4 million increase in amounts paid for Westar Energy purchased power and transmission services and a $12.0 million increase in Westar Energy interest payments.

Cash Flows from (used in) Investing Activities

Evergy's cash flows from investing activities increased $978.2 million in 2018 compared to 2017 primarily due to the inclusion of $1,154.2 million of cash acquired from Great Plains Energy as of the merger date.

Evergy's cash flows used in investing activities decreased $213.3 million in 2017 compared to 2016 primarily driven by a $322.3 million decrease in additions to Westar Energy's property, plant and equipment primarily related to the construction of Western Plains Wind Farm in 2016; partially offset by receiving $110.5 million less proceeds from Westar Energy COLI investments than in 2016.

Cash Flows from (used in) Financing Activities

Evergy's cash flows used in financing activities increased $1,406.8 million in 2018 compared to 2017 primarily due to the repurchase of common stock of $1,042.3 million as a result of Evergy's share repurchase program in 2018; an increase in cash dividends paid of $251.9 million due to an increase in outstanding shares of common stock following the close of the merger and a $0.06 and $0.075 per share increase in the quarterly dividends paid in September 2018 and December 2018, respectively; an increase in retirements of long-term debt of $270.8 million; partially offset by an increase in collateralized short-term debt, net of $185.0 million due to Westar Energy's receivable sale facility that was entered into in December 2018.

Evergy's cash flows from financing activities decreased $321.8 million in 2017 compared to 2016 primarily due to Westar Energy issuing $207.5 million less in commercial paper; Westar Energy issuing $162.0 million less in long-term debt of VIEs; Westar Energy issuing $100.1 million less in long-term debt; Westar Energy's redemption of $75.0 million more in long-term debt and paying $18.8 million more in dividends; partially offset by Westar Energy redeeming $163.5 million less in long-term debt of VIEs and repaying $88.3 million less for borrowings against the cash surrender value of COLI.

WESTAR ENERGY, INC.

MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

The below results of operations and related discussion for Westar Energy is presented in a reduced disclosure format in accordance with General Instruction (I)(2)(a) to Form 10-K.

The following table summarizes Westar Energy's comparative results of operations.

2018Change2017
(millions)
Operating revenues$2,614.9$43.9$2,571.0
Fuel and purchased power599.257.7541.5
SPP network transmission costs259.912247.9
Other operating expenses814.483.3731.1
Depreciation and amortization390.919.2371.7
Income from operations550.5(128.3)678.8
Other income (expense), net(33.5)(6.7)(26.8)
Interest expense176.85.8171.0
Income tax expense (benefit)(4.3)(155.5)151.2
Equity in earnings of equity method investees, net of income taxes4.6(2.1)6.7
Net income349.112.6336.5
Less: Net income attributable to noncontrolling interests10.2(2.4)12.6
Net income attributable to Westar Energy, Inc.$338.9$15.0$323.9

Westar Energy Utility Gross Margin and MWh Sales

The following table summarizes Westar Energy's utility gross margin and MWhs sold.

Revenues and ExpensesMWhs Sold
2018Change20172018Change2017
Retail revenues(millions)(thousands)
Residential$846.4$45.1$801.36,7365736,163
Commercial702.8(8.9)711.77,4961287,368
Industrial396.4(16.5)412.95,642(47)5,689
Other retail revenues20.0(2.8)22.858(15)73
Total electric retail1,965.616.91,948.719,93263919,293
Wholesale revenues346.114.9331.210,169(177)10,346
Transmission revenues288.94.1284.8N/AN/AN/A
Other revenues14.38.06.3N/AN/AN/A
Operating revenues2,614.943.92,571.030,10146229,639
Fuel and purchased power(599.2)(57.7)(541.5)
SPP network transmission costs(259.9)(12.0)(247.9)
Utility gross margin (a)$1,755.8$(25.8)$1,781.6
(a)Utility gross margin is a non-GAAP financial measure. See explanation of utility gross margin under Evergy's Results of Operations.

Westar Energy's utility gross margin decreased $25.8 million in 2018 compared to 2017 driven by:

•a $69.8 million provision for rate refund for the change in the corporate income tax rate caused by the passage of the TCJA. See Note 19 to the consolidated financial statements for additional information; and
•a $31.0 million reduction in revenue for one-time and annual bill credits as a result of conditions in the KCC merger order. See Note 2 to the consolidated financial statements for additional information; partially offset by
•a $75.0 million increase primarily due to higher retail sales driven by warmer spring and summer weather and colder winter weather. For 2018 compared to 2017, cooling degree days increased 29% and heating degree days increased 22%.

Westar Energy Other Operating Expenses (including operating and maintenance expense and taxes other than income tax)

Westar Energy's other operating expenses increased $83.3 million in 2018 compared to 2017 primarily driven by:

•$51.9 million of merger-related costs incurred following the close of the merger in June 2018, consisting of:
◦$44.2 million of change in control payments, voluntary severance and the recording of unrecognized equity compensation costs and the incremental fair value associated with the vesting of outstanding Westar Energy equity compensation awards in accordance with the Amended Merger Agreement; and
◦$21.5 million of merger consulting fees and fees for other outside services incurred, primarily consisting of merger success fees; partially offset by
◦a $13.8 million decrease in operating and maintenance expense due to the net reallocation of incurred merger transition costs between Westar Energy, Evergy, KCP&L and GMO and the subsequent deferral of these transition costs to a regulatory asset in June 2018 for future recovery by Westar Energy in accordance with the KCC merger order;
•$12.3 million of obsolete inventory write-offs for Unit 7 at Tecumseh Energy Center, Units 3 and 4 at Murray Gill Energy Center and Units 1 and 2 at Gordon Evans Energy Center, which were retired in 2018; and
•a $5.5 million increase due to Westar Energy's 47% share of voluntary severance expenses incurred related to the Wolf Creek voluntary exit program.

Westar Energy Depreciation and Amortization

Westar Energy's depreciation and amortization expense increased $19.2 million in 2018 compared to 2017 primarily driven by capital additions.

Westar Energy Other Income (Expense), Net

Westar Energy's other expense, net increased $6.7 million in 2018 compared to 2017 primarily driven by:

•a $4.6 million decrease in investment earnings primarily due to a decrease in interest and dividend income; and
•a $3.5 million increase in pension non-service costs.

Westar Energy Income Tax Expense

Westar Energy's income tax expense decreased $155.5 million in 2018 compared to 2017 driven by:

•a $53.4 million decrease related to the revaluation of deferred income tax assets and liabilities based on the Evergy composite tax rate as a result of the merger;
•a $58.4 million decrease due to lower pre-tax income; and
•a $44.3 million decrease as a result of the decrease in the federal statutory income tax rate in 2018.

KANSAS CITY POWER & LIGHT COMPANY

MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

The below results of operations and related discussion for KCP&L is presented in a reduced disclosure format in accordance with General Instruction (I)(2)(a) to Form 10-K.

The following table summarizes KCP&L's comparative results of operations.

2018Change2017
(millions)
Operating revenues$1,823.1$(67.6)$1,890.7
Fuel and purchased power520.639.9480.7
Other operating expenses611.4(45.9)657.3
Depreciation and amortization281.315.0266.3
Income from operations409.8(76.6)486.4
Other income (expense), net(25.9)13.7(39.6)
Interest expense133.7(5.1)138.8
Income tax expense87.3(40.9)128.2
Net income$162.9$(16.9)$179.8

KCP&L Utility Gross Margin and MWh Sales

The following table summarizes KCP&L's utility gross margin and MWhs sold.

Revenues and ExpensesMWhs Sold
2018Change20172018Change2017
Retail revenues(millions)(thousands)
Residential$735.610.3$725.35,6865045,182
Commercial794.8(49.6)844.47,7823167,466
Industrial138.8(22.2)161.01,754(61)1,815
Other retail revenues10.4(0.8)11.276472
Total electric retail1,679.6(62.3)1,741.915,29876314,535
Wholesale revenues53.5(34.5)88.05,017(1,771)6,788
Transmission revenues14.5(1.5)16.0N/AN/AN/A
Other revenues75.530.744.8N/AN/AN/A
Operating revenues1,823.1(67.6)1,890.720,315(1,008)21,323
Fuel and purchased power(520.6)(39.9)(480.7)
Utility gross margin (a)$1,302.5$(107.5)$1,410.0
(a)Utility gross margin is a non-GAAP financial measure. See explanation of utility gross margin under Evergy's Results of Operations.

KCP&L's utility gross margin decreased $107.5 million in 2018 compared to 2017 driven by:

•a $72.4 million refund obligation for the change in the corporate income tax rate caused by the passage of the TCJA. See Note 19 to the consolidated financial statements for additional information;
•$72.9 million of sales taxes and franchise fees collected from KCP&L Missouri customers included in revenue in 2017, which as part of KCP&L's adoption of Accounting Standards Codification (ASC) 606, are now excluded from revenue in 2018; and
•a $25.0 million reduction in revenue for one-time and annual bill credits as a result of conditions in the MPSC and KCC merger orders. See Note 2 to the consolidated financial statements for additional information; partially offset by
•a $62.8 million increase primarily due to higher retail sales driven by warmer spring and summer weather and colder winter weather. For 2018 compared to 2017, cooling degree days increased 33% and heating degree days increased 23%.

KCP&L Other Operating Expenses (including operating and maintenance expense and taxes other than income tax)

KCP&L's other operating expenses decreased $45.9 million in 2018 compared to 2017 primarily driven by:

•$72.2 million decrease in taxes other than income tax due to sales taxes and franchise fees collected from KCP&L Missouri customers in 2017, which, as part of KCP&L's adoption of ASC 606, Revenue from Contracts with Customers, are now excluded from taxes other than income tax in 2018; and
•a $23.2 million decrease in operating and maintenance expense due to the net reallocation of incurred merger transition costs between KCP&L, Evergy, Westar Energy and GMO and the subsequent deferral of these transition costs to a regulatory asset in June 2018 for future recovery by KCP&L in accordance with the KCC and MPSC merger orders; partially offset by
•an $11.6 million increase due to voluntary severance expenses incurred related to KCP&L's 47% share of the Wolf Creek voluntary exit program as well as other KCP&L voluntary exit programs;
•$7.3 million of obsolete inventory write-offs for Montrose Station, which was retired in the fourth quarter of 2018;
•a $6.8 million increase in transmission and distribution operating and maintenance expense; and
•a $6.9 million increase in injuries and damages expense primarily due to an increase in estimated worker's compensation losses.

KCP&L Depreciation and Amortization

KCP&L's depreciation and amortization increased $15.0 million in 2018 compared to 2017 primarily driven by capital additions.

KCP&L Other Income (Expense), Net

KCP&L's other expense, net decreased $13.7 million in 2018 compared to 2017 driven by a $16.8 million decrease in pension non-service costs due to KCP&L's adoption of ASU 2017-07, Compensation-Retirement Benefits, which requires the non-service cost components to be reported separately from service costs and outside of a subtotal of income from operations. For retrospective application of the 2017 non-service cost components, KCP&L utilized the practical expedient that allows for the use of the amounts disclosed in a company's pension and other post-retirement benefit plan footnote as the estimation basis for retrospective presentation. The 2017 amounts disclosed in KCP&L's pension and other post-retirement benefit plan footnote are presented prior to the effects of capitalization and sharing with joint owners of power plants. See Note 1 and Note 9 to the consolidated financial statements for additional information.

KCP&L Income Tax Expense

KCP&L's income tax expense decreased $40.9 million in 2018 compared to 2017 primarily driven by:

•a $32.2 million decrease in income tax expense as a result of the decrease in the federal statutory income tax rate in 2018;
•a $22.5 million decrease due to lower pre-tax income;
•a $15.5 million decrease related to the revaluation of deferred income tax assets and liabilities as a result of the enactment of Missouri state income tax reform in June 2018; and
•an $8.3 million decrease in income tax expense due to an increase in flow-through items primarily consisting of amortization of regulatory liabilities for excess deferred income taxes generated as a result of the enactment of the TCJA in December 2017; partially offset by
•a $51.0 million increase related to the revaluation of deferred income tax assets and liabilities based on the Evergy composite tax rate as a result of the merger.

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