future has attractive potential; timing not optimal kansas city cfa research challenge february 26,...

Great Plains Energy(NYSE: GXP)

Future Has Attractive Potential; Timing Not Optimal

Kansas City CFA Research ChallengeFebruary 26, 2011

2


Comparables: Empire District (EDE), Westar Energy (WR), Alliant Energy (LNT), & Pinnacle West (PNW)

Mar. Jun. Sept. Dec. Year P/E Ratio

2008A $0.55 ($0.06) $0.92 $0.06 $1.51 13x2009A 0.18 0.26 0.58 0.11 1.14 16x2010A/E 0.15 0.47 0.96 (0.01) 1.59 12x2011E 0.06 0.30 0.93 0.07 1.37 14x

Great Plains Summary Statistics

GXP(9.0%)

NYSE 500+3.0%

Summary Statistics: GXP

Comp Median

52 Week Price Range $16.63-$20.14Price (Feb. 23) $19.59Market Cap ($MM) 2,682 3,586Enterprise Value ($MM) 6,477 6,490Dil. Shares Outstanding (MM) 137 110Book Value/Share $21.29 $23.77Debt/Total Capital % 58.0 51.0ROE % (ttm) 7.2 8.6Dividend Yield % 4.2 4.9P/B (ttm) 0.9x 1.3xFY12 P/E 11.2x 13.xFY12 TEV/EBITDA 7.x 6.9x

GXP vs. NYSE 500

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Investment ThesisPending Rate Cases Cause Regulatory Lag

and ConcernFuture Capital Spending May be Slowed by

Inadequate ReturnsGXP Faces Difficulty Standing up to

ComparablesTrading at 3% premium to comparable medium

FY12 TEV/EBITDALower yield (4.2% vs. 4.9%) makes

comparables more attractive

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Company Overview GXP is a holding company for Kansas City

Power & Light (KCP&L) and KCP&L Greater Missouri Operations (GMO)

Fully regulated utility operating in the Midwest

Engages in generation, transmission, distribution, & sale of electricity to over 820,000 customers

GMO Acquisition

GXP MWh Capacity by Customer

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Industry OverviewState commissions

oversee regulated utilitiesDetermine retail rates

utilities can charge customers via rate cases

38% of US generating capacity & 71% of final consumers are owned by 210 investor-owned utilities

KCP&L Missouri & GMO regulated by the MPSC, while KCP&L Kansas is regulated by the KCC

GDP growth will drive electricity demand

Regulated status means no competition in GXP’s service territories

Annual GDP Growth


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Pending Rate Case Cause for Concern

GXP has outstanding requests with the MPSC for $190MM in revenue increases for its Iatan 1 & 2 projects

We estimate the MPSC will only authorize ~65-70% of the $190MM of revenue increases due to cost overruns

KCP&L only received 39.6% of requested revenue increases by KCC for its Iatan 1 & Iatan 2 projects

Rate Case Capital Spending Comparables Financial Analysis

Rate Jurisdiction Amount Requested Requested ROE Rate Base Effective Date

KCP&L - Missouri 92.1 11.0% 2,122.8 5/4/2011GMO - Missouri 75.8 11.0% 1,468.7 6/4/2011GMO - Missouri 22.1 11.0% 422.0 6/4/2011

190.0 4,013.5

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Staff’s Feedback NegativeStaff proposed a $7M

annual increase compared to requested amount of $92M for KCP&L Missouri

Staff proposed a $36M annual increase compared to $98M for GMO

Staff recommended Iatan 1 & 2 cost disallowances of $102MM for GXP


Staff Recommended Disallowances

Over (Under) Budget

KCP&L Missouri GMO

Total GXP Share

Iatan 1 130.0 39.1 23.4 62.5Iatan 2 69.7 26.8 12.5 39.3Total 199.7 65.9 35.9 101.8

Amount Currently Allocated

Staff Recommended Disallowances

Current Cost Estimate at Completion

Control Budget Estimate

Over (Under) Budget

Iatan 1 1,988.2 1,685.0 303.2Iatan 2 484.1 376.8 107.3Total 2,472.3 2,061.8 410.5

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Downside Risk Exists, Not ProbableCommission not likely to

be as harsh as StaffOnly 46% of requested

increase is made up of costs from Iatan 1 & 2

Commission likely to grant revenue increases within our forecasted range

Revenue Increases by Request


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CEP Rate Case

39.6% 22.6% 70%

39.6% 22.6% 65-70%

CEP Rate Case Outcomes

$50.9M

$190M $190M

$43M

$133M

$21.8M


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Future Capital Spending Slowed by Inadequate ReturnsRate Base Growth Dependent Upon Capital

ExpendituresSustainable Resource Strategy

Environmental RetrofitsGMO 345kV Transmission line (Cost of $380MM)KCP&L 345kV Transmission line ($54MM)

GXP trading at 0.9x book value with no near-term catalysts to cause price appreciation

GXP will have to take on more debt (~$1Bn credit facility) or participate in a dilutive offeringResults in lower returns on capital expenditures due to

lower debt/equity ratioRate Base Capital Spending Comparables Financial Analysis

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GXP Faces Difficulty Standing up to Comparables

Rate Base Capital Spending Comparables Financial Analysis

Great Plains Energy (GXP)

Comparable Median

Westar Energy (WR)

Empire District (EDE)

Alliant Energy (LNT)

Pinnacle West (PNW)

Market Cap (2/23/11) 2,681.9 3,585.4 2,886.2 898.3 4,284.5 4,542.0 Leverage (Debt/Assets) 42.8 33.9 37.8 37.9 30.0 29.8 Coverage Ratio (EBIT/Interest Exp) 2.6x 2.9x 2.8x 2.3x 3.0x 3.0x2011 EPS Growth (%) (13.6) 2.8 (5.9) 15.9 4.0 1.7 Operating Margin (%) 21.1 20.3 23.8 20.4 15.7 20.3 Profit Margin (%) 9.3 9.1 10.3 8.9 8.5 9.3 ROE (%) 9.1 8.6 8.8 7.1 10.2 8.4 ttm P/E 12.6x 14.3x 13.9x 18.1x 14.5x 14.1xP/E (2011) 14.3x 14.2x 14.9x 14.8x 13.6x 13.6xP/E (2012) 11.2x 13.0x 13.1x 14.2x 12.8x 12.4xttm TEV/EBITDA 8.0x 7.8x 7.6x 9.5x 8.1x 7.2xTEV/EBITDA (2011) 7.6x 7.6x 7.5x 8.4x 7.7x 6.9xTEV/EBITDA (2012) 7.0x 6.8x 6.6x 8.3x 7.3x 6.4xPrice/Book 0.9x 1.3x 1.2x 1.4x 1.5x 1.2xDividend Yield (%) 4.2 4.9 4.7 5.9 4.0 5.0

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Great Plains Energy (GXP)

Comparable Median

Westar Energy (WR)

Market Cap (2/23/11) 2,681.9 3,585.4 2,886.2 Leverage (Debt/Assets) 42.8 33.9 37.8 Coverage Ratio (EBIT/Interest Exp) 2.6x 2.9x 2.8x2011 EPS Growth (%) (13.6) 2.8 (5.9)Operating Margin (%) 21.1 20.3 23.8 Profit Margin (%) 9.3 9.1 10.3 ROE (%) 9.1 8.6 8.8 ttm P/E 12.6x 14.3x 13.9xP/E (2011) 14.3x 14.2x 14.9xP/E (2012) 11.2x 13.0x 13.1xttm TEV/EBITDA 8.0x 7.8x 7.6xTEV/EBITDA (2011) 7.6x 7.6x 7.5xTEV/EBITDA (2012) 7.0x 6.8x 6.6xPrice/Book 0.9x 1.3x 1.2xDividend Yield (%) 4.2 4.9 4.7

GXP Faces Difficulty Standing up to Comparables


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Westar (WR) Looks BetterWR is best comparable

given similar geographic region (KS) and regulation (KCC)

WR currently operates with an environmental rider, and a Fuel Adjustment Clause (FAC) in all of its operating territories

WR currently has better operating and profit margins, as well as a higher dividend yieldGXP vs. WR


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Financial Analysis


Annual Forecast

Tough 2011Favorable ’10

weather and Missouri lag

Rebounding 20121st full year of

CEP in rate base

In Millions FY08 FY09 FY10E FY11E FY12E FY13E FY14E FY15E

Total Revenue $1,670 $1,965 $2,268 $2,402 $2,485 $2,627 $2,746 $2,870 Revenue Growth (%) 29.2 17.7 15.4 5.9 3.5 5.7 4.5 4.5Operating Income 275 320 474 495 549 591 659 703 Operating Margin (%) 16.5 16.3 20.9 20.6 22.1 22.5 24.0 24.5EBITDA 513 622 804 848 914 976 1,054 1,108 EBITDA Margin (%) 30.7 31.7 35.4 35.3 36.8 37.2 38.4 38.6Net Income 149 214 187 187 238 274 317 339 Net Margin (%) 8.9 10.9 8.2 7.8 9.6 10.4 11.5 11.8EPS (Diluted) $1.51 $1.15 $1.59 $1.37 $1.74 $2.00 $2.30 $2.45EPS Growth (%) (18.5) (24.1) 38.1 (13.6) 27.2 14.6 15.2 6.4

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Environmental RetrofitsAssuming GXP

initiates another round of capital expenditures in FY12 as part of its SRSAttempt to get in

rate base by 2013Montrose, Sibley, &

Lake Road are prime candidates for environmental retrofits

In Millions 2010 2011 2012

Generating Facilities (excluding Iatan No. 2) 152.0 152.8 138.3Distribution and Transmission facilities 192.8 238.0 275.7General facilities 15.6 23.7 48.9Nuclear fuel 30.9 21.5 19.8Environmental 16.4 189.1 189.9Iatan No. 2 243.9 54.1 0.0 Total Utility Capex 651.6 679.2 672.6* Company Estimates - 8-K


Potential Retrofits: MW Capacity Avg. Age

Montrose No. 1, 2, & 3 510 1961Sibley No. 1, 2, & 3 466 1964Lake Road No. 1 & 3 22 1957Total 998 1960

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Unattractive Current Dividend ProspectsAfter 10 years of flat

dividend, dividend cut in half in 2009 to $0.83

SRS and transmission

construction projects hamper near term dividend increase prospects till 2014Current dividend yield

lagging behind comparables

Dividend Yield

Median = 4.9%


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Valuation$20 price objective

based on 6.8x our FY12 EBITDA of $914MPrice objective

supported by DCF and DDMIn Millions FY 2008 FY 2009 FY 2010E FY 2011E FY 2012E FY 2013E FY 2014E FY 2015E

Operating Profit $275 $320 $474 $495 $549 $591 $659 $703+ D&A 238 302 330 353 364 385 395 405EBITDA 513 622 804 848 914 976 1,054 1,108

- NWC (146) 168 140 97 83 99 103 111- Capex 1,024 841 652 679 673 697 672 646- Cash Taxes 27 5 0 21 36 49 67 83FCF (392) (392) 12 51 122 132 213 269

PV of FCF 0 0 0 48 110 111 170 203

Valuation MethodPrice

Target

Premium (Discount) To Current Price

Relative Valuation $20.30 3.6%DCF Model $19.73 0.7%DDM $19.01 (2.9%)

Price Objective: $20.00 2.1%

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Risks to Investment ThesisPending rate case resolution

GXP could receive greater than 65-70% in MO rate case

Stock price appreciates above book valueCould issue equity in non-dilutive manner

Increases in rate base allows for increased dividendGXP could raise dividend back to $1.66

Higher government bond yields Results in fund flows out of utilities

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ConclusionPending Rate Cases Cause Regulatory Lag

and ConcernFuture Capital Spending May be Slowed by

Inadequate ReturnsGXP Faces Difficulty Standing up to

ComparablesTrading at 3% premium to comparable medium

FY12 TEV/EBITDALower yield (4.2% vs. 4.9%) makes

comparables more attractive

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AppendixBalance SheetStatement of Cash FlowRevenue BuildDCF ValuationComparable Justification

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Balance SheetAsset Growth to correlate with rate base

expansionTotal Debt/Equity to remain constant

Appendix

In Millions FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Total Current Assets 604 613 609 706 748 853 884 939 Total Utility Plant, at Original Cost 6,081 6,651 7,772 9,070 9,384 10,483 10,957 11,453 Total Investments and Other Assets 1,184 1,219 1,482 1,662 1,701 1,800 1,890 1,960 Total Assets 7,869 8,483 9,862 11,438 11,834 13,137 13,730 14,352

Total Current Liabilities 1,337 958 1,102 1,278 1,476 1,664 1,753 1,847 Total Deferred Credits and Other Liabilities 1,386 1,479 1,696 1,967 2,035 2,259 2,362 2,469 Total Liabilities & Capitalization 7,869 8,483 9,862 11,438 11,834 13,137 13,730 14,352

Assumptions:Sales/TA (%) 21.2 23.2 23.0 21.0 21.0 20.0 20.0 20.0TA/Equity 3.09x 3.04x 3.06x 3.06x 3.06x 3.06x 3.06x 3.06xTotal Debt/Equity 1.26x 1.31x 1.34x 1.34x 1.33x 1.33x 1.33x 1.33xUtility Plant at Original Cost/TA (%) 77.3 78.4 78.8 79.3 79.3 79.8 79.8 79.8ROE (%) 6.0 5.3 6.7 5.0 6.2 6.4 7.1 7.2Asset Growth (%) 63.0 7.8 16.3 16.0 3.5 11.0 4.5 4.5

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Statement of Cash FlowRefinance Debt in 2011Diluted equity offering in FY12

Appendix

Statement of Cash Flows (in Millions) FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Cash Flow From Operating Activities 437.9 335.4 550.1 551.5 598.9 649.2 699.6 722.0 Cash Flow from Investing Activities (579.1) (897.6) (600.2) (611.9) (594.0) (605.1) (559.1) (588.3) Cash Flow from Financing Activities 135.2 567.0 21.2 66.0 14.5 (14.8) (144.6) (114.0) Net Change in Cash and Cash Equivalents (6.0) 4.8 (28.9) 5.6 19.4 29.3 (4.1) 19.7

Cash and Cash Equivalents at Beginning of Year 67.1 61.1 65.9 37.0 42.6 62.0 91.3 87.2 Cash and Cash Equivalents at End of Period 61.1 65.9 37.0 42.6 62.0 91.3 87.2 107.0

In Millions Year Due Dec. 31, 2009

KCP&L Senior Notes (6.50%) Series 2011 150.0

GMO Senior Notes (7.625%) Series 2011 137.3

GMO Senior Notes (7.95%) Series 2011 197.0

Total Notes Due 2011 484.3

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Revenue Build

Appendix

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Revenue: Residential 606 773 931 989 1039 1124 1192 1263 Commercial 621 753 836 872 885 917 938 959 Industrial 142 172 191 205 214 224 235 246 Other retail revenues 13 17 18 19 19 20 20 20 Fuel recovery mechanism under recovery 31 33 45 47 49 52 54 57 Total Retail 1410 1747 2017 2133 2207 2336 2438 2545 Wholesale revenues 230 175 205 220 227 237 251 266 Other revenues 31 43 47 49 51 54 57 59 Total Revenues 1670 1965 2268 2402 2485 2627 2746 2870

Retail MWh sales (thousands)

Residential 7,047 8,647 9,558 9,995 10,495 11,019 11,570 12,149 Commercial 9,227 10,637 10,910 11,098 11,209 11,321 11,434 11,548 Industrial 2,721 3,143 3,244 3,411 3,513 3,619 3,727 3,839 Other retail MWh sales 94 122 124 127 128 129 130 132 Total Retail 19,089 22,549 23,836 24,630 25,344 26,088 26,862 27,668 Wholesale MWh sales 5,237 5,626 6,372 6,571 6,768 6,971 7,180 7,396 Total MWh sales 24,326 28,175 30,208 31,201 32,113 33,059 34,042 35,064

ASP (Electric Utility):

Residential 85.9 89.3 97.4 99.0 99.0 102.0 103.0 104.0 Commercial 67.3 70.7 76.6 78.6 79.0 81.0 82.0 83.0 Industrial 52.3 54.7 58.8 60.2 61.0 62.0 63.0 64.0 Other retail MWh sales 141.5 141.0 147.6 150.0 150.0 151.0 152.0 153.0 Total Retail 73.8 77.5 84.6 86.6 87.1 89.6 90.8 92.0Wholesale MWh sales 43.9 31.0 32.1 33.5 33.5 34.0 35.0 36.0Total MWh sales 68.7 69.7 75.1 77.0 77.4 79.5 80.7 81.9

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DCF Valuation

Appendix

Terminal Growth Rate 3.0% 2.5% 2.0%

Implied Enterprise Value 7,664.7 6,580.7 5,846.6

- Total Debt 3,763.5 3,763.5 3,763.5 + Cash & Marketable Securities 7.6 7.6 7.6- Preferred Equity 39.0 39.0 39.0

- Minority Interest 1.2 1.2 1.2 = Implied Equity Value 3,868.6 2,784.6 2,050.5Shares Outstanding 136.9 136.9 136.9P* (Intrinsic Value/Share) $28.26 $19.73 $14.98

Current Price $19.59 $19.59 $19.59% Over/(Undervalued) -30.7% -0.7% 30.8%Book Value/Share $21.29 $21.29 $21.29Current Price - Discount to BV/Sh 92.0% 92.0% 92.0%

Price Target - Discount to BV/Sh 132.8% 92.7% 70.4%

GDP Growth 3.3%Discount to GDP 75.0%Terminal Growth 2.5%

Terminal Growth Justification

Risk-Free Rate (10yr Treasury) 3.4%Credit Rating BBBSpread over Risk Free Rate 1.9%Pre-tax Cost of Debt 5.3%Implied Tax Rate 34.8%After-tax Cost of Debt 3.5%

Cost of Debt

Risk-free Rate (10yr Treasury) 3.4%Beta 0.95Market Risk Premium 6.5%Cost of Equity 9.5%

Cost of Equity:

WA Equity 41.4%Cost of Equity 9.5%WA Debt 58.6%Cost of Debt 3.5%WACC 6.0%

WACC:

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Comparable JustificationSimilar Geographic Areas, Generation Mix, &

Electric Revenues by Customer

Appendix

Great Plains Energy (GXP) Empire District (EDE) Westar Energy (WR) Alliant Energy (LNT) Pinnacle West (PNW)Geographic Location KS, MO KS, MO, OK, AR Eastern Kansas IA, WI, MN Arizona

Market Cap as of 2-24-11 2,681.9 898.3 2,886.2 4,284.5 4,542.0

2009 Generation Fuel Mix:Coal 80.0% 56.8% 76.0% 49.1% 46.0%Gas & Oil 2.0% 16.2% 7.0% 2.1% 22.0%Nuclear 17.0% 0.0% 14.0% 17.4% 32.0%Wind 1.0% 13.9% 3.0% 3.8% 0.0%Hydro 0.0% 1.3% 0.0% 0.0% 0.0%Purchased Power 0.0% 11.8% 0.0% 27.5% 0.0%

2009 Electric Revenues by Customer:Residential 45.0% 41.6% 35.0% 35.1% 50.0%Commercial 44.0% 31.4% 38.0% 22.5% 43.0%Industrial 10.0% 15.2% 27.0% 28.7% 6.0%Other 1.0% 11.8% 0.0% 13.7% 1.0%

future has attractive potential; timing not optimal kansas city cfa research challenge february 26,...

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