Evergy

Evergy was formed in 2018 when regional utilities Westar Energy and Kansas City Power and Light merged. These businesses have a storied history, having provided electricity to customers in Kansas and Missouri for over 100 years. This long history has resulted in a steady stream of predominantly regulated earnings.

Management has done a commendable job overseeing the merged entity, saving more than $1 billion in operating costs within the first five years post-merger. This impressive cost-saving achievement has allowed Evergy to mitigate inflationary pressures and grow earnings while keeping customer rates stable.

In 2023, Evergy's Kansas utilities, which account for around 60% of the company's assets, filed a rate case with the state commission that determines utility charges. However, the regulators approved a much smaller rate increase than anticipated. Consequently, Evergy had to reduce its long-term earnings growth target by one point to 4% to 6%, and S&P downgraded Evergy's credit rating to BBB+.

Investors typically prefer utilities operating in states with favorable regulatory environments, so the unexpected outcome of the rate case in Kansas has caused Evergy's stock to trade at nearly a 20% discount compared to the utility sector's average P/E ratio. This situation, however, might offer a golden opportunity for long-term investors. The Kansas City area benefits from below-average unemployment rates and a higher-than-normal demand for electricity, driven partly by Google's new data center and Panasonic's electric vehicle battery plant.

Meeting this increased demand and transitioning away from fossil fuels like coal to cleaner energy sources will require substantial investment. Kansas and Missouri regulators should encourage this investment to support growth. A more shareholder-friendly stance could potentially reduce Evergy's cost of issuing equity, making it easier to finance these projects.

Additionally, it's important to note that the composition of state commission boards can change over time. In Kansas, for instance, the commission includes three governor-appointed officials with staggered terms expiring in March 2026, 2027, and 2028. Leadership changes might open doors for Evergy to negotiate better terms in the future.

Even if the regulatory environment doesn't improve to boost Evergy's outlook, the utility still offers an attractive yield of over 4%, which is likely to continue growing at a mid-single-digit pace annually.