Back in mid-August, I wrote that Evergy (EVRG) was a “plain vanilla” electric utility with operations in Kansas and Missouri. Nothing fancy, it generates, transmits, and distributes electricity to approximately 1.6 million customers.
Looking ahead, the future for that type of regulated utility looks even brighter. Unlike many diversified utilities, Evergy is a pure electricity play with no natural gas distribution.
Most recently, Evergy and NextEra Energy (NEE) announced that as part of Evergy’s energy transformation, two wind farms – Soldier Creek Wind Energy Center and Ponderosa Wind Energy Center – will begin service in November.
“Kansas is a leader in wind energy. The expansion of wind energy in our area brings economic investment and jobs to communities near wind farms and affordable, clean energy to our customers,” said Terry Bassham, Evergy president and chief executive officer.
“We are pleased to partner with Evergy to help bring low-cost, renewable energy to its customers,” said John Ketchum, president and chief executive officer of NextEra Energy Resources. “The Soldier Creek and Ponderosa Wind projects are expected to provide millions of dollars in additional revenue for landowners and local communities while generating clean, homegrown energy for years to come.”
Source: T&DWorld
Evergy’s Territory
Like other utilities, Evergy has been hit with a downturn in commercial and industrial usage even as residential usage increased. Because Evergy is concentrated in Kansas and Missouri, it is heavily affected by economic conditions in those two states.
Source: Evergy Investor Presentation
Major exports for Kansas are civilian aircraft, engines, and parts followed by beef and agricultural products (Source: 2019 Kansas Economic Report).
For Missouri, industry was concentrated in animal food manufacturing and HVAC and commercial refrigeration equipment (Source: Missouri Economic Research and Information Center).
Both states have recorded large drops in their state gross domestic product between the 1st and 2nd quarters of 2020. (Source: BEA.gov)
In the 2nd quarter, Kansas saw a drop of 4.42% in its durable manufacturing contribution to the state’s GDP while Missouri saw a drop of 3.26%. This compares to a national average decline of 2.84%.
Downturns in these industries related to the pandemic have impacted the amount of electricity used by industry in those two states.
As business recovers in the 2nd and 3rd quarters of 2021, commercial and industrial usage should rise, as seen in the change from the 2nd to the 3rd quarter of 2020.
Source: Evergy Investor Presentation
If the Biden administration is serious about its “buy American” strategy, as midwestern states with lots of manufacturing and farming activity, both Kansas and Missouri will benefit and the resulting need of businesses for more electricity will benefit Evergy as well.
Financials
Since the publication of my article, Evergy’s stock price has performed relatively in line with the utility sector, as measured by the Utilities Select Sector SPDR ETF (XLU) over the past three months.
Source: finance.yahoo.com
At the same time, the stock continues to provide a dividend yield of 3.7% compared to XLU’s yield of 3.05%.
This year’s earnings for the utility are expected in the range of $2.58-$2.73 per share with no anticipated needs for more equity.
Source: Evergy Investor Presentation
Coal as an energy source
One area where Evergy has more work to do is with its use of coal as an energy source.
Source: Evergy Investor Presentation
As long as coal remains a significant part of the company’s energy mix, it will discourage some ESG investors from buying the company’s stock.
At the same time, transforming the company’s energy sources towards more renewables offers a potential boost to the stock price, especially as renewables drop in price to create more affordable energy.
Source: Evergy Investor Presentation
No unregulated components
While many utilities have pursued unregulated activities, Evergy derives all of its income from regulated utilities.
The pursuit of business in unregulated competitive markets has been very profitable for a number of companies, most notably NextEra Energy. At the same time, as these markets have become more competitive, there is a marked change in companies shifting their investments back into the regulated environment.
NextEra’s purchase of Gulf Power from Southern Company (SO), and NextEra’s continued interest in Duke Energy demonstrate that regulated utilities have value.
Buyout rumors
Earlier in November, there were reports that NextEra Energy was interested in a buyout of Evergy. That caused a small spike in the stock, which quickly fell back when those rumors were denied and prompted Evergy’s board to put out a press release that said in part:.
Evergy’s Board and management are committed to serving the best interests of ALL Evergy shareholders and stakeholders. Our focus is on the execution of the Company’s Sustainability Transformation Plan (“STP”), which the Board unanimously determined is the option that creates the highest, most certain value for shareholders and benefits for our stakeholders. Since announcing the STP, there has been no change in circumstance that alters the basis for this decision, and there is currently no offer or bid from any third party for a potential transaction.
Elliott Management still has an economic interest in Evergy, and it is unlikely that any buyout can occur without its concurrence. Whether Elliott Management decides to make a run at the company itself remains to be seen, but at current prices the stock needs to be considered without any speculative scenarios.
Conclusion
The combination of Evergy’s own energy transformation plan along with a recovery of the midwestern economies of Kansas and Missouri bodes well for the company’s 2021–2022 earnings.
Even without the possibility of a buyout, shareholders are being rewarded in the short term with a good dividend yield and in the longer term, they will benefit from growth in line with a sustained recovery of the economy.
Disclosure: I am/we are long EVRG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.