Evergy

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Evergy is an integrated, regulated electric utility primarily serving customers in Kansas and Missouri, with a focus on generating, transmitting, and distributing electricity.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Evergy, headquartered in Kansas City, Missouri, is a public utility company formed in 2017 through the merger of Westar Energy and Great Plains Energy. This merger brought together two significant players in the Midwestern utility landscape, creating a larger entity focused on serving customers across Kansas and Missouri.

Business Overview

Evergy’s revenue streams can be broken down into three primary areas: Residential (generating 38% in 2023), Commercial (generating 40.9% in 2023), and Industrial (generating 21.1% in 2023). The company operates within a regulated framework where prices are determined and approved by regulatory commissions, which dictates how it can generate profit.

Industry Trends: The utility industry is currently undergoing significant changes, driven by factors including:

Renewable Energy Transition: There’s a strong emphasis on moving away from fossil fuels toward renewable sources like wind and solar, leading to significant investment in grid modernization. Evergy itself has invested heavily in renewable energy infrastructure.
Grid Modernization: To accommodate the integration of renewables and smart technologies, significant upgrades to existing infrastructure are required. These investments include modernizing power lines and developing smart grid technologies.
Regulatory Scrutiny: Utilities are subject to various state and federal regulations. Compliance with these regulations, which can relate to environmental impact or rate of return, will impact the company’s profitability.
Focus on Sustainability: There’s a broad push from stakeholders, including investors, for utilities to have a clear sustainability strategy, which include climate-conscious decisions such as reducing reliance on fossil fuels.

Competitive Landscape: Evergy operates in a regional marketplace in which it competes primarily with other large investor-owned utilities and co-ops. It faces competition in several key areas:

Price Competition: Regulated utilities face the possibility of regulators setting allowed profits (and therefore rates) at a level that does not enable a fair profit.
Energy Efficiency Programs: Utilities are being compelled to offer their customers incentives to reduce their demand for electricity, thus potentially reducing revenues.
Renewable Energy Generation: Competition to source green power has increased as pressure from the public to lower carbon output has increased.
Consolidation: Other regional players are acquiring smaller firms.

Key competitive dynamics:

Brand loyalty is important when it comes to residential customers.
Reliability is highly important for both commercial and industrial customers.
Pricing is tightly controlled by regulatory agencies.

What makes Evergy different? Evergy differentiates itself primarily via:

Size and Scale: Evergy is a large utility company that can take advantage of scale economies in the generation and delivery of power.
Regional Focus: Their operations are focused within the regulated markets of Kansas and Missouri, which provides a consistent customer base and operating model.
Commitment to Sustainability: The company has a stated goal of reducing emissions by 70% by 2030 and 85% by 2035, which demonstrates their commitment to renewables.

Financial Analysis

Evergy’s financial picture can be analyzed based on recent reports, particularly its 10-Q filings:

Revenue Trends: Revenues have been relatively stable, but in 2023 they have been affected by the timing of new regulatory rate changes.
Margins: Overall profitability is quite consistent, in recent times it has increased due to reduced fuel prices.
Earnings: Net income attributable to Evergy, Inc. for the three months ended September 30, 2023, was $242.2 million or $1.15 per share, while the net income attributable to Evergy for the three months ended September 30, 2022, was $125.2 million or $0.58 per share. Earnings per share have increased due to both the reasons given above and also shares repurchased.
ROIC: Overall the company has struggled to achieve solid return on capital, it hovers around 4-5%.
Debt and Capital Structure: The company relies on both debt and equity to finance its operations. It had $11.6 billion in debt at the end of September 2023, which is very substantial, but it is very typical in the utility space.
A note is their significant amount of long-term debt, which could pose risk in a high interest rate environment.
Cash Flow: Evergy’s cash flow from operations has been affected negatively due to rate case timing, and has increased from $681 million to $825 million.

Recent Controversies and Concerns:

Rate cases: The timing of regulatory cases can affect profits.
Severe winter weather: In 2021 and 2023, the company suffered from severe winter weather events that increased costs and reduced revenue, but management is working to recover these costs through the rate process.

Management commentary from latest earnings calls suggests that these problems are not new issues and management is taking active steps to remediate them.

Moat Analysis

Based on the information and analysis presented above, Evergy receives a moat rating of 2 out of 5.

Sources of the Moat:

Regulatory Approval: As a regulated utility, Evergy enjoys a near-monopoly in its service area. The company is protected from direct competition, thanks to the regulatory licenses granted by state and federal commissions.
Large Geographic Reach: The large regional focus provides a benefit of a captive audience.

Reasons for a Low Moat Rating:

Technological Obsolescence: The move towards renewables is a potential risk because a company like Evergy could be slow to adopt change, leading to its competitors potentially having a better position in the industry.
Pricing Pressure: They do not have the ability to raise prices without regulatory approval. This places significant restrictions on how much value they can create.
Limited Ability to Innovate: They have limited innovation flexibility due to regulatory oversight.
Government Regulations: Regulations could change, affecting its profit potential.
Low Switching Costs: In general it is quite easy to switch utilities providers, especially if offered a discount, hence its customers are not loyal.

Understandability Rating

A rating of 3 / 5 has been assigned for the understandability of Evergy’s business.

Moderate Complexity: While the basic operations of a utility—generating and delivering electricity—are straightforward, understanding the nuances of regulation and financial metrics is more complex.
Regulated Industry: The company’s business model is heavily dependent on regulation, creating a more obscure relationship between cost, pricing, and profit.

Balance Sheet Health Rating

Evergy’s balance sheet receives a rating of 4 / 5.

Consistent Returns: The company has demonstrated a relatively consistent earnings track record, and generally stable cash flows, owing to the nature of the electricity business.
Solid Asset Base: They possess substantial and very valuable assets in transmission and distribution.
Manageable Debt: While they have a large debt load, it is within the industry standard, and debt is generally well-managed.
Negative Free Cash Flow: A drawback is that the company’s current free cash flow is negative. This requires the company to borrow, or issue stock, to finance operations. This is a trend they must address.