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Future Has Attractive Potential; Timing Not Optimal Kansas City CFA Research Challenge February 26, 2011.

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Presentation on theme: "Future Has Attractive Potential; Timing Not Optimal Kansas City CFA Research Challenge February 26, 2011."— Presentation transcript:

1 Future Has Attractive Potential; Timing Not Optimal Kansas City CFA Research Challenge February 26, 2011

2 Kansas City CFA Research Challenge February 26, 2011 Comparables: Empire District (EDE), Westar Energy (WR), Alliant Energy (LNT), & Pinnacle West (PNW) Great Plains Summary Statistics GXP (9.0%) NYSE 500 +3.0% GXP vs. NYSE 500 2

3 Kansas City CFA Research Challenge February 26, 2011 Investment Thesis Pending Rate Cases Cause Regulatory Lag and Concern Future Capital Spending May be Slowed by Inadequate Returns GXP Faces Difficulty Standing up to Comparables Trading at 3% premium to comparable medium FY12 TEV/EBITDA Lower yield (4.2% vs. 4.9%) makes comparables more attractive 3

4 Kansas City CFA Research Challenge February 26, 2011 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 4

5 Industry Overview State commissions oversee regulated utilities Determine 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 Kansas City CFA Research Challenge February 26, 2011 5

6 Kansas City CFA Research Challenge February 26, 2011 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 6

7 Kansas City CFA Research Challenge February 26, 2011 Staff’s Feedback Negative Staff 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 7

8 Kansas City CFA Research Challenge February 26, 2011 Downside Risk Exists, Not Probable Commission not likely to be as harsh as Staff Only 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 8

9 Kansas City CFA Research Challenge February 26, 2011 CEP Rate Case 39.6% 22.6% 70% 39.6% 22.6% 65-70% CEP Rate Case Outcomes $50.9M $190M $43M $133M $21.8M 9

10 Kansas City CFA Research Challenge February 26, 2011 Future Capital Spending Slowed by Inadequate Returns Rate Base Growth Dependent Upon Capital Expenditures Sustainable Resource Strategy Environmental Retrofits GMO 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 offering Results in lower returns on capital expenditures due to lower debt/equity ratio 10

11 Kansas City CFA Research Challenge February 26, 2011 GXP Faces Difficulty Standing up to Comparables 11

12 Kansas City CFA Research Challenge February 26, 2011 GXP Faces Difficulty Standing up to Comparables 12

13 Kansas City CFA Research Challenge February 26, 2011 Westar (WR) Looks Better WR 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 yield GXP vs. WR 13

14 Kansas City CFA Research Challenge February 26, 2011 Financial Analysis Annual Forecast Tough 2011 Favorable ’10 weather and Missouri lag Rebounding 2012 1 st full year of CEP in rate base 14

15 Kansas City CFA Research Challenge February 26, 2011 Environmental Retrofits Assuming GXP initiates another round of capital expenditures in FY12 as part of its SRS Attempt to get in rate base by 2013 Montrose, Sibley, & Lake Road are prime candidates for environmental retrofits 15

16 Kansas City CFA Research Challenge February 26, 2011 Unattractive Current Dividend Prospects After 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 2014 Current dividend yield lagging behind comparables Dividend Yield Median = 4.9% 16

17 Kansas City CFA Research Challenge February 26, 2011 Valuation $20 price objective based on 6.8x our FY12 EBITDA of $914M Price objective supported by DCF and DDM 17

18 Kansas City CFA Research Challenge February 26, 2011 Risks to Investment Thesis Pending rate case resolution GXP could receive greater than 65-70% in MO rate case Stock price appreciates above book value Could issue equity in non-dilutive manner Increases in rate base allows for increased dividend GXP could raise dividend back to $1.66 Higher government bond yields Results in fund flows out of utilities 18

19 Kansas City CFA Research Challenge February 26, 2011 Conclusion Pending Rate Cases Cause Regulatory Lag and Concern Future Capital Spending May be Slowed by Inadequate Returns GXP Faces Difficulty Standing up to Comparables Trading at 3% premium to comparable medium FY12 TEV/EBITDA Lower yield (4.2% vs. 4.9%) makes comparables more attractive 19

20 Kansas City CFA Research Challenge February 26, 2011 Appendix Balance Sheet Statement of Cash Flow Revenue Build DCF Valuation Comparable Justification 20

21 Kansas City CFA Research Challenge February 26, 2011 Balance Sheet Asset Growth to correlate with rate base expansion Total Debt/Equity to remain constant Appendix 21

22 Kansas City CFA Research Challenge February 26, 2011 Statement of Cash Flow Refinance Debt in 2011 Diluted equity offering in FY12 Appendix 22

23 Kansas City CFA Research Challenge February 26, 2011 Revenue Build Appendix 23

24 Kansas City CFA Research Challenge February 26, 2011 DCF Valuation Appendix 24

25 Kansas City CFA Research Challenge February 26, 2011 Comparable Justification Similar Geographic Areas, Generation Mix, & Electric Revenues by Customer Appendix 25


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