Evergy: Kansas Rate Settlement Reduces Regulatory Risk

We are reaffirming our $65 fair value estimate for Evergy EVRG after the company announced it reached a settlement that will raise customer rates in Kansas next year. We expect regulators to approve the settlement later this year. Also, we are reaffirming our narrow moat rating.

The settlement reduces regulatory uncertainty, but puts pressure on management to contain costs to achieve its 6%-8% average annual earnings growth target. The $126.8 million base rate increase before certain adjustments is in line with our estimate and proposals from other ratepayer groups. Evergy hoped to raise its allowed return on equity to 10.25% with its $304 million base rate increase request, but the settlement incorporates an allowed ROE near 9.4%, up from its previous 9.3% but still one of the lowest in the sector.

Evergy stock is down 10% since Sept. 20, in line with the Morningstar US Utilities Index. We think the stock is 26% undervalued, a big flip from when it peaked at 14% overvalued in August 2022. Its 5% dividend yield is one of the highest in the sector, and we expect the board to raise the dividend next month.

A key positive in the settlement is Evergy’s ability to incorporate in customer rates renewable energy projects tied to its 2024-25 integrated resource plan without litigating a full rate case. Regulatory support for Evergy’s renewable energy development plans is critical for management to reach the high end of their long-term growth outlook.

We continue to forecast 6% annual earnings growth through 2025 based on $11.6 billion of capital investment and modest demand growth. This is at the low end of management’s 6%-8% annual earnings growth target.

Evergy faced unfavorable weather during the first half of the year that has been a $0.16-per-share drag from 2022 earnings. On a weather-normalized basis, earnings would be up significantly because of strong demand growth and cost savings. Our full-year EPS estimate remains in line with management’s $3.55-$3.75 guidance.