EUR 850.00 For Business Accounts Only

Morningstar | Management Meeting: Increased Confidence Evergy Will Achieve Merger Savings Targets

We are increasing our fair value estimate to $58 from $55 per share after Evergy reported strong pro forma 2018 third-quarter earnings, increased its dividend, and reaffirmed its 6%-8% EPS growth guidance through 2021. Following the earnings release, we had the opportunity to meet with Evergy’s CEO Terry Bassham and CFO Tony Somma at the Edison Electric Financial Conference in San Francisco.

Discussion at the EEI meeting gave us additional confidence the recently completed merger would achieve the cost savings management has been touting. We learned merger savings, originally estimated to total $160 million by 2022, does not include roughly $200 million of additional savings from recently announced coal plant retirements.

The increase in our fair value estimate was driven by increasing our assumption for the return on new invested capital in the second stage of our discounted cash flow model to 7% from 6.5%. We believe the 4- and 5-year stay-out periods in Missouri and Kansas, respectively, will allow Evergy management time to argue for improvements in the regulatory frameworks in both states. This would further reduce regulatory lag, increasing returns on invested capital.

Our 2021 EPS estimate of $3.40, near the midpoint of Evergy’s $3.25-$3.57 guidance range, is unchanged. Pro forma 2018 third-quarter EPS were $1.34 versus $1.19 in the same period last year. Warm weather was responsible for about $0.11 per share of the year-over-year improvement.

We were somewhat disappointed that Evergy increased its dividend by only 3.3%, to an annual rate of $1.90 per share. We had projected an increase of 7% and the yield remains below the sector average of about 3.5%. We suspect Evergy’s board was influenced by the 15% increase the former Westar Energy shareholders had received following the closing of the merger earlier this year. Our annual dividend increase estimate through 2022 equals 7%, in line with management’s 6%-8% growth target through 2021.