Evergy, Inc. (EVRG)

Executive Summary / Key Takeaways

• A Generational Infrastructure Opportunity: Evergy sits atop a 15+ gigawatt economic development pipeline—one of the largest per-customer backlogs in the utility sector—driven by AI data centers, EV manufacturing, and reshoring. This represents a potential 4-5% annual load growth through 2029, nearly triple the industry average, transforming the company from a slow-growth utility into a structural growth story.

• Regulatory Framework Finally Aligns: After years of post-merger cost discipline, Kansas and Missouri have enacted constructive legislation (PISA, CWIP, and innovative Large Load Power Service tariffs) that enables timely cost recovery and protects existing ratepayers. This matters because it removes the primary obstacle that has historically prevented utilities from profitably serving massive new loads.

• Financial Inflection Underway: Year-to-date 2025 results show the transition—retail revenues are soft due to weather and industrial outages, but transmission revenue is up 8.4% and new Missouri West rates added $33.9 million in quarterly gross margin. The company is absorbing $37.6 million in higher interest costs while maintaining guidance, demonstrating operational leverage that will amplify as data center load ramps.

• Execution at Scale Is the Critical Variable: The $17.5 billion capital plan through 2029 (8.5% rate base growth) is massive for a company with a $17.9 billion market cap. Success hinges on converting pipeline to signed contracts, managing construction costs, and maintaining the regulatory compact. The LLPS tariff structure—with 12-17 year terms, 80% minimum bills, and exit fees—provides downside protection, but any slippage in data center timing or regulatory support would pressure the 4-6% EPS growth target.

Setting the Scene: The Heartland's Accidental AI Infrastructure Play

Evergy, incorporated in 2017 and headquartered in Kansas City, Missouri, operates as a classic regulated electric utility serving 1.7 million customers across Kansas and Missouri. The company generates, transmits, and distributes electricity through three integrated utilities—Kansas Central, Metro, and Missouri West—plus transmission interests in the Southwest Power Pool. This is a business model defined by regulatory compacts: invest capital in infrastructure, earn a state-approved return on equity, and recover costs through rates.

What makes Evergy different today is a geographic accident of history. Its service territory sits at the confluence of three powerful trends: the AI-driven data center boom, the reshoring of advanced manufacturing, and the electrification of transportation. While coastal utilities grab headlines, Evergy quietly built what management calls "one of the most robust economic development backlogs in the country relative to our size"—exceeding 15 gigawatts of potential new load. To put this in perspective, Evergy's current peak summer demand is approximately 10.6 gigawatts. The pipeline represents a potential 140% increase in system load.

This matters because regulated utilities are fundamentally leverage plays on load growth. Every new megawatt added spreads fixed costs across a larger base, improving affordability for existing customers while creating new rate base for shareholders. The challenge has always been timing: utilities must spend billions on generation and transmission years before new customers begin paying. Regulatory lag—the delay between spending and recovery—can destroy value. Evergy's story is about solving this timing problem through innovative tariffs and supportive regulation, creating a rare utility that can grow earnings while keeping rates competitive.

History with Purpose: From Merger Synergies to Growth Platform

The 2018 merger that created Evergy left $2.3 billion in goodwill on the balance sheet, a reminder of the premium paid to combine Kansas City Power & Light with Westar Energy. More important than the accounting entry was the strategic reset that followed. Management embarked on a deliberate campaign to enhance affordability and regional rate competitiveness through "significant reductions to our cost structure and investing at a slower pace than peer utilities." This post-merger discipline wasn't about empire-building; it was about earning regulatory trust and customer goodwill.

Why does this history matter today? Because that trust is the foundation for the current growth phase. Regulators in both Kansas and Missouri now support Evergy's $17.5 billion capital plan because the company has demonstrated it can manage costs. The 1.8% O&M increase in 2024, while peers saw much higher inflation, proved the point. This credibility allowed Evergy to file for and receive approval for innovative Large Load Power Service (LLPS) tariffs that protect existing customers while attracting new ones. Without the post-merger discipline, regulators would have rejected these proposals as anti-consumer.

The planned divestiture of Evergy Ventures, initiated in Q2 2025, further sharpens the focus. The $100 million book value of early-stage clean energy investments generated $0.08 per share in losses in Q2, a distraction from the core utility business. Exiting these non-regulated bets signals management's commitment to the pure-play regulated utility model—the right call when the core business offers 15 gigawatts of opportunity.

Strategic Differentiation: The LLPS Tariff as Competitive Moat

Evergy's most important innovation isn't technological; it's regulatory. The Large Load Power Service tariffs filed in Kansas and Missouri represent a structural solution to the utility industry's core dilemma: how to serve massive new loads without burdening existing residential and commercial customers. Under these tariffs, new data centers and manufacturing facilities pay a higher rate than existing large customers, with 12-17 year contract terms, 80% minimum monthly bills, exit fees, and collateral posting.

What does this imply? First, it directly mitigates rate increases for existing customers by spreading fixed system costs over more megawatt-hours. This political cover is essential for regulatory approval of new infrastructure. Second, it provides revenue certainty for Evergy, reducing the risk of building capacity for customers who might later depart. Third, it creates a competitive moat: once a data center signs with Evergy, the exit fees and contract terms make switching to another utility prohibitively expensive.

The regulatory framework extends beyond LLPS. Missouri Senate Bill 4, signed in April 2025, allows CWIP (Construction Work in Progress) in rate base for new natural gas plants and extends PISA (Plant-in-Service Accounting) through 2035. Kansas House Bill 2527 supports infrastructure investment, while House Bill 2107 limits wildfire liability. These mechanisms reduce regulatory lag—the period between spending and recovery—from years to months. For a $17.5 billion capital program, this timing difference is worth hundreds of millions in present value.

Financial Performance: The Transition Is Visible in the Mix

Year-to-date September 2025 results show Evergy in transition. Consolidated operating revenues rose modestly to $4.62 billion, but the composition tells the real story. Total electric retail revenue declined $79.3 million, driven by a cooler summer (26% fewer cooling degree days in Q2) and industrial weakness from a major refinery outage. Residential and commercial sales were soft, reflecting weather and economic headwinds.

Transmission revenue's increase is significant because transmission is the backbone for serving large new loads. Data centers require massive interconnections and high reliability; every new megawatt of transmission revenue signals progress toward the pipeline's realization. The Missouri West rate case, effective January 2025, added $33.9 million to quarterly gross margin, demonstrating how new rates flow directly to the bottom line once approved.

Operating and maintenance expense increased $19.1 million year-to-date, primarily from higher labor and medical claims. This is manageable—management notes O&M is "on plan and expected to be under budget for the full year." The discipline is evident: despite inflation, O&M growth remains below revenue growth from new rates.

Interest expense rose $37.6 million. This increase was influenced by $57.3 million from new long-term debt issuances, though $14.6 million of the overall increase was offset by PISA carrying costs deferred to a regulatory asset. Without this regulatory mechanism, the earnings hit would have been severe. The implication: regulatory support is already protecting earnings during the heavy investment phase.

Other expense swung $23.1 million negative, primarily from $29 million in losses on Evergy Ventures investments and lower COLI (corporate-owned life insurance) benefits. These are non-core items that management correctly excludes from adjusted earnings. The Ventures losses will disappear post-divestiture, cleaning up the earnings picture.

Outlook and Guidance: The Data Center Timing Game

Evergy narrowed 2025 adjusted EPS guidance to $3.92-$4.02 from $3.92-$4.12, citing $0.13 of weather headwinds from the cool summer. The company still expects to hit the midpoint with normal weather in Q4. This is credible: Q2 results exceeded internal budget by $0.09 despite weather, and O&M is tracking under plan.

The long-term outlook is where the story gets interesting. Management maintains a 4-6% EPS growth target through 2029 but explicitly states they expect to be in the "top half" of this range. The base case assumes 2-3% annual load growth, supported by Panasonic (PCRFY), Meta (META), and Google (GOOGL) (800 MW combined). But two data centers in "finalizing agreements" could add 600 MW by 2029, raising load growth to 4-5% CAGR. Advanced discussions for another 2-3 GW are not even in this forecast.

What does this imply? The 4-6% EPS guidance is conservative. If the "finalizing agreements" convert—and management added a third data center to this category in Q3—the earnings power could be materially higher. The $17.5 billion capital plan, supporting 8.5% rate base growth, was built before these latest additions. More load means more infrastructure spending, but also more cash flow to fund it, potentially reducing the $2.8 billion equity need planned for 2026-2029.

The Lambda announcement in November 2025 exemplifies the opportunity. Transforming an existing data center into an AI factory with 24 MW initially, scaling to 100+ MW, leverages existing infrastructure for rapid ramp. This is the template: fill existing capacity, then build new. The 1.2 GW peak demand expected from actively building customers by 2029, with over 500 MW online by 2029, provides near-term visibility while the pipeline offers long-term optionality.

Risks: What Can Break the Thesis

Regulatory Reversal: The constructive framework in Kansas and Missouri is the linchpin. While current legislation supports investment, regulatory commissions can change composition. If data center growth strains grid reliability or raises rates for small customers, political pressure could mount. The LLPS tariffs are designed to prevent this, but they require ongoing regulatory approval and could be modified. The two-year statute of limitations for wildfire claims in Kansas House Bill 2107 shows how quickly the regulatory environment can shift—positive today, but not guaranteed tomorrow.

Execution at Scale: Evergy hasn't built a combined-cycle gas plant in over a decade. The $17.5 billion plan includes two 705 MW gas plants in Kansas (2029-2030) and a 440 MW plant in Missouri (2030), plus three solar farms totaling over 2,100 MW. Construction risks—labor availability, material costs, schedule overruns—are real. Management acknowledges "challenges like changes in labor costs, availability and productivity, vendor management, and material shortages." For a company with $5.8 billion in annual revenue, a $17.5 billion capex plan is a bet-the-company proposition.

Interest Rate Sensitivity: The $37.6 million increase in interest expense year-to-date is just the beginning. With $2.8 billion in planned equity issuance and additional debt needed for the capital plan, every 100 basis points in rates adds millions to annual interest costs. PISA helps defer some costs, but the company targets a 15% FFO-to-debt ratio. If rates stay higher for longer, either equity issuance increases (diluting shareholders) or rate base growth slows (reducing earnings growth).

Data Center Pipeline Conversion: The 15 GW pipeline includes preliminary conversations for 6 GW. Not all will convert. Management is candid: "the environment for new economic development projects is competitive and we do not expect to win all projects in the queue." If hyperscalers choose other markets or delay builds, the 4-5% load growth scenario evaporates. The LLPS tariffs help, but they can't create demand that doesn't exist.

Environmental Liabilities: Three class action lawsuits over coal ash at Montrose Station and a Sherman Act complaint against Wolf Creek nuclear facility create overhang. While management believes claims are "without merit," legal defense costs and potential settlements could pressure cash flow. The EPA's ongoing rulemaking on ozone, particulate matter, and coal combustion residuals adds regulatory uncertainty that could require unplanned environmental capex.

Competitive Context: Regional Focus vs. Scale

Evergy's direct peers—Ameren (AEE), Xcel Energy (XEL), and Alliant Energy (LNT)—are larger and more diversified. Ameren's $8.6 billion in revenue and 11.39% ROE exceed Evergy's $5.8 billion and 8.45% ROE. Xcel's $14.2 billion revenue provides scale advantages in procurement and financing. Alliant's 19.14% profit margin dwarfs Evergy's 14.45%.

This implies Evergy, unable to compete on scale, differentiates itself through focus. The concentrated Kansas/Missouri footprint allows deeper regulatory relationships and faster response to economic development opportunities. While Xcel serves eight states, Evergy's two-state presence means a single legislative win (like Missouri SB 4) impacts the entire business. The LLPS tariff innovation is possible because Evergy can tailor rates to specific large customers without navigating a multi-state regulatory mosaic.

Transmission network density provides another edge. Evergy's 10,100 transmission circuit miles and 52,800 distribution miles relative to 1.7 million customers create a dense, reliable grid that attracts data centers. This infrastructure is a sunk cost that new entrants can't replicate. While peers have larger networks, Evergy's ratio of infrastructure to customers is favorable for serving concentrated large loads.

Financially, Evergy trades at a discount to peers: EV/EBITDA of 12.02x vs. 13.78x for AEE, 14.59x for XEL, and 15.56x for LNT. The forward P/E of 19.22x is below peers' 21x+ range. This valuation gap reflects skepticism about execution and scale. If Evergy converts pipeline to signed contracts and demonstrates it can manage the capital program, the multiple should re-rate toward peer levels, providing additional upside beyond earnings growth.

Valuation Context: Pricing in the Transformation

At $77.65 per share, Evergy trades at 21.27x trailing earnings and 19.22x forward earnings, a modest discount to utility peers. The 3.58% dividend yield is attractive, though the 73.15% payout ratio is at the high end of the 60-70% target range. The company is working toward the midpoint, implying future dividend growth will track earnings growth rather than exceed it.

The EV/Revenue multiple of 5.54x is in line with peers (5.45x-6.79x range), but the EV/EBITDA of 12.02x suggests the market isn't fully pricing the rate base growth acceleration. The $17.5 billion capital plan should drive EBITDA higher as new assets enter rate base, making the current multiple appear conservative if execution proceeds as planned.

Debt-to-equity of 1.42x is manageable for a utility, though interest coverage will tighten as more debt funds the capital plan. The 0.64 beta reflects the defensive utility characteristics, but this could rise as the company takes on more project execution risk. The price-to-operating cash flow of 8.48x is attractive relative to the 8.5% rate base growth forecast, suggesting cash generation will support the investment program.

The key valuation question: Is the market pricing the 4-6% EPS growth target or the potential 4-5% load growth scenario? The current multiple suggests skepticism. If management converts the "finalizing agreements" data centers and begins to incorporate advanced discussions into guidance, the stock should re-rate toward peer multiples, providing 10-15% valuation upside on top of earnings growth.

Conclusion: A Utility at an Inflection Point

Evergy is transitioning from a post-merger cost-cutting story to a structural growth play powered by America's AI infrastructure buildout. The 15+ gigawatt pipeline isn't just a number—it's a potential doubling of system load that would transform the company's earnings power and regional economic importance. What makes this investable today is the alignment of three factors: a constructive regulatory framework that enables timely cost recovery, innovative LLPS tariffs that protect existing customers while attracting new ones, and demonstrated operational discipline that builds confidence in execution.

The central thesis hinges on conversion of pipeline to signed contracts. The actively building category (Panasonic, Meta, Lambda) provides near-term visibility, but the real upside lies in the "finalizing agreements" data centers that could raise load growth to 4-5% annually. Management's guidance appears conservative, providing room for positive surprises as these negotiations conclude.

The primary risk is execution at scale. A $17.5 billion capital program for a $5.8 billion revenue company is ambitious. Any misstep in construction, regulatory support, or data center timing would pressure the 4-6% EPS growth target and the stock's valuation premium. Interest rate sensitivity adds another layer of risk that management can only partially mitigate through hedging and PISA.

For investors, Evergy offers a unique combination: utility-like downside protection from regulated returns and dividend yield, with call optionality on the AI data center boom. The stock trades at a discount to peers despite superior growth prospects, reflecting execution uncertainty. If management delivers on even half the pipeline, the re-rating opportunity is substantial. The next 12-18 months will be critical: watch for finalization of the data center agreements, successful completion of the Kansas Central rate case, and progress on gas plant construction. These milestones will determine whether Evergy becomes the heartland's essential AI infrastructure provider or just another utility that missed its moment.