Evergy's Subpar Regulatory Oversight Drags Down Valuation

Evergy Inc is a Midwest regulated electric utility with a respectable customer base and a mix of power generation fuels. However, it has sub-par regulatory oversight. The stock valuation is below peers, but not sufficiently low.

Title: Evergy Inc: A Midwest Utility with Mixed Signals

Evergy Inc (NASDAQ:EVRG), a Midwest regulated electric utility, has a strong customer base and a diverse mix of power generation fuels. However, its regulatory oversight is considered sub-par, which may affect its attractiveness to investors. While the stock valuation is below that of its peers, it is not sufficiently low to warrant a buy recommendation.

Business Overview

Evergy Inc was formed from the 2018 merger of Great Plains Energy and Westar Energy. The company represents the assets of companies previously known as Kansas City Power & Light, Kansas Gas and Electric, and Aquila (formerly UtiliCorp). Evergy is the largest electric company in Kansas and the second-largest in Missouri, serving approximately 1.7 million residential, commercial, and industrial customers [1].

Power Generation Mix

Evergy operates over 40 power plants with a combined generating capacity of 16,000 megawatts. Its power generation mix includes coal (37%), wind (29%), natural gas (27%), and nuclear (7%). Notably, Evergy has a 94% interest in the 1200 MW Wolf Creek nuclear plant, which has 20 years remaining on its current operating license [1].

Regulatory Oversight

Evergy's service areas are regulated by the Kansas Corporation Commission and the Missouri Public Service Commission. The company's nuclear power plant is regulated by the NRC, and its interstate assets by the FERC. Kansas regulators are rated as Below Average – Above Average (3-1), while Missouri regulators are rated Average – Below Average (2-3) [1].

Financial Performance and Stock Valuation

Evergy has an S&P Corporate credit rating of BBB+ with a stable outlook. Its operating subsidiaries secure debt has a rating of A with a stable outlook. CFRA rates Evergy's Quality Rating as A-, placing it in the top 20% of electric utilities for quality [1].

Evergy forecasts mid-range earnings per share of $4.02 for 2025, with a projected 4% to 6% EPS growth rate over the next four years. The company offers a current dividend of $2.67, for a yield of 3.68% and a 71% payout ratio [1].

Valuation and Recommendation

Evergy's EV/EBITDA ratio is 11.8, and its forward PE is 17.8x, which is not particularly value priced compared to its peers. The average EV/EBITDA ratio for the 25 electric utilities in the S&P 500 Utility ETF (XLK) is 12.8x, with a range of 9.8x to 17.8x [1].

Given Evergy's current yield, average dividend growth, average forward earnings growth guidance, average EV/EBITDA ratio, and unattractive regulatory oversight, a hold recommendation for current owners is appropriate. Investors looking to expand their positions may want to consider utilities with more attractive regulatory oversight, acceptable yields, and lower EV/EBITDA merger valuations [1].

Risks

The major risks to Evergy stock investment include regulatory exposure and higher electricity rates. The uncertainty surrounding "black box" rate settlements in Missouri makes it difficult for investors to evaluate the utility's profitability. Additionally, the national move to more wind and solar power generation is expected to increase power costs over time [1].

Conclusion

Evergy Inc is a well-established Midwest utility with a strong customer base and a diverse power generation mix. However, its sub-par regulatory oversight and average stock valuation make it a less attractive investment compared to its peers. Investors should carefully consider these factors before making any investment decisions.

References

[1] https://seekingalpha.com/article/4814007-evergy-nothing-to-get-excited-about