Financial Markets - Investor Desk

Business Strategy & Outlook:

Evergy formed in June 2018 when Great Plains Energy and Westar Energy completed their merger after two years spent working through the regulatory approval process in Kansas and Missouri. With the integration complete and a new management team in place, Evergy is working to improve historically challenging regulation and invest in clean energy. Regulatory negotiations in Missouri during the second half of 2022 will test how much the state’s ratemaking framework has improved in recent years. Despite recent changes, still consider Missouri’s rate regulation less constructive than most other states. Evergy must secure constructive regulatory outcomes in Missouri and Kansas to support growth plans that include $11 billion of capital investment during the next five years, primarily to replace aging coal plants with renewable energy. New legislation in Missouri should allow Evergy to securitize the remaining book value of coal plants as they retire in the coming years, improving cash flow and reducing equity needs.

Kansas, which represents about half of Evergy’s total asset base, has a more constructive regulatory environment than Missouri. Kansas regulators have supported renewable energy investment for many years. Evergy also benefits from favorable federal regulation for its electric transmission assets, which could top 15% of its asset base in the coming years. Unlike other utilities that are pursuing investments outside their regulated-rate structure, Evergy management said it plans to direct all of Evergy’s growth capital to its regulated utilities at least through 2025. Senior leadership has extensive experience at companies with unregulated power businesses, and management wouldn’t be surprised if Evergy directs some capital investment outside of the utilities, perhaps with a partner. Evergy raised the dividend 6% during the two years following the merger and raised it 7% for 2022 to $2.29 per share annualized. Company expects the dividend to grow in line with earnings for the foreseeable future.

Financial Strengths:

Evergy had an equity-heavy balance sheet following the all-stock combination of Westar and Great Plains. However, the company repurchased over 45 million shares following the merger for about $2.6 billion and has issued nearly $3 billion of net new debt, bringing its leverage in line with peers’. Company expects Evergy will continue financing a large share of its capital investments with debt such that debt/total capital remains near 55%. Following the merger, the board raised the dividend 6.3% in late 2019, 5.9% in late 2020, and 7% in late 2021. Management’s payout ratio target is 60%-70% of operating earnings, in line with most other regulated utilities. It has forecasted 6% dividend increases for at least the next four years, in line with earnings growth.

Bulls Say:

The annual dividend increases to average 6% over the next four years, in line with earnings growth.
Evergy’s operating cost savings during the last few years are helping offset some of the customer bill increases related to its capital investments.
Recent legislation has improved the regulatory framework in Missouri, home to one third of Evergy’s rate base. This should reduce regulatory lag.

Company Description:

Evergy is a regulated electric utility serving eastern Kansas and western Missouri. Major operating subsidiaries include Evergy Metro, Evergy Kansas Central, Evergy Missouri West, and Evergy Transmission Co. The utility has a combined rate base of approximately $16 billion, about half in Kansas and the rest split between Missouri and federal jurisdiction. Evergy is one of the largest wind energy suppliers in the U.S.

(Source: Morningstar)

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