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EDE > SEC Filings for EDE > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for EMPIRE DISTRICT ELECTRIC CO

Form 10-Q for EMPIRE DISTRICT ELECTRIC CO


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE SUMMARY

We operate our businesses as three segments: electric, gas and other. The Empire District Electric Company (EDE) is an operating public utility engaged in the generation, purchase, transmission, distribution and sale of electricity in parts of Missouri, Kansas, Oklahoma and Arkansas. As part of our electric segment, we also provide water service to three towns in Missouri. The Empire District Gas Company (EDG) is our wholly owned subsidiary which provides natural gas distribution to customers in 45 communities in northwest, north central and west central Missouri. Our other segment consists of our fiber optics business.

During the twelve months ended September 30, 2012, our gross operating revenues were derived as follows:

Electric segment sales*   91.7 %
Gas segment sales          7.1
Other segment sales        1.2


*Sales from our electric segment include 0.3% from the sale of water.

Earnings

During the third quarter of 2012, basic and diluted earnings per weighted average share of common stock were $0.60 as compared to $0.60 in the third quarter of 2011. For the nine months ended September 30, 2012, basic and diluted earnings per weighted average share of common stock were $1.09 as compared to $1.11 for the nine months ended September 30, 2011. For the twelve


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months ended September 30, 2012, basic and diluted earnings per weighted average share of common stock were $1.30 as compared to $1.31 for the twelve months ended September 30, 2011.

Increased electric gross margins (defined as electric revenues less fuel and purchased power costs) positively impacted net income for the three month, nine month and twelve month ended September 30, 2012 periods as compared to the same periods in 2011. A change in our unbilled revenue estimate positively impacted revenues and margin in all three periods. Unbilled revenue represents an estimate of electricity provided to customers that has not been billed at the end of the period. Assumptions such as electrical load requirements, customer billing rates, and line loss factors are used in the estimation process and are evaluated periodically. Changes to certain assumptions during the evaluation process led to the change in the estimate. Improved customer counts also increased revenues and margin for the three month and nine month periods. Decreased depreciation positively impacted net income for the nine months ended and twelve months ended periods. Other operating and maintenance expenses increased during the three periods presented, negatively impacting net income

The table below sets forth a reconciliation of basic and diluted earnings per share between the three months, nine months and twelve months ended September 30, 2011 and September 30, 2012, which is a non-GAAP presentation. The economic substance behind our non-GAAP earnings per share (EPS) measure is to present the after tax impact of significant items and components of the statement of income on a per share basis before the impact of additional stock issuances.

We believe this presentation is useful to investors because the statement of income does not readily show the EPS impact of the various components, including the effect of new stock issuances. This could limit the readers' understanding of the reasons for the EPS change from the previous year's EPS. This information is useful to management, and we believe this information is useful to investors, to better understand the reasons for the fluctuation in EPS between the prior and current years on a per share basis.

This reconciliation may not be comparable to other companies or more useful than the GAAP presentation included in the statement of income. We also note that this presentation does not purport to be an alternative to earnings per share determined in accordance with GAAP as a measure of operating performance or any other measure of financial performance presented in accordance with GAAP. Management compensates for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. The dilutive effect of additional shares issued included in the table reflects the estimated impact of all shares issued during the periods ended September 30.


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                                                Three Months      Nine Months      Twelve Months
                                                    Ended            Ended             Ended
Earnings Per Share - 2011                       $        0.60    $        1.11    $          1.31

Revenues
Electric segment                                $       (0.07 )  $       (0.15 )  $         (0.13 )
Gas segment                                              0.00            (0.10 )            (0.12 )
Other segment                                            0.00             0.01               0.01
Total Revenue                                           (0.07 )          (0.24 )            (0.24 )
Electric fuel and purchased power                        0.09             0.25               0.29
Cost of natural gas sold and transported                 0.00             0.06               0.08
Margin                                                   0.02             0.07               0.13

Operating - electric segment                            (0.01 )          (0.12 )            (0.16 )
Operating -gas segment                                   0.00             0.00               0.00
Operating -other segment                                 0.00            (0.01 )            (0.01 )
Maintenance and repairs                                 (0.02 )          (0.02 )            (0.03 )
Depreciation and amortization                           (0.01 )           0.06               0.10
Other taxes                                              0.00             0.00              (0.01 )
Interest charges                                         0.01             0.01              (0.03 )
AFUDC                                                    0.00            (0.01 )             0.01
Change in effective income tax rates                     0.01             0.00              (0.02 )
Other income and deductions                              0.01             0.01               0.02
Dilutive effect of additional shares issued             (0.01 )          (0.01 )            (0.01 )
Earnings Per Share - 2012                       $        0.60    $        1.09    $          1.30

Recent Activities

Financings

On October 30, 2012, we entered into a Bond Purchase Agreement for a private placement of $30.0 million of 3.73% First Mortgage Bonds due 2033 and $120.0 million of 4.32% First Mortgage Bonds due 2043. The delayed settlement is anticipated to occur on or about May 30, 2013, subject to customary closing conditions. We expect to use the proceeds from the sale of the bonds to redeem all $98 million aggregate principal amount of our Senior Notes, 4.50% Series due June 15, 2013 with the remaining proceeds to be used for general corporate purposes. The bonds will be issued under the EDE Mortgage.

On April 1, 2012, we redeemed all $74.8 million aggregate principal amount of our First Mortgage Bonds, 7.00% Series due 2024. All $5.2 million of our First Mortgage Bonds, 5.20% Pollution Control Series due 2013, and all $8.0 million of our First Mortgage Bonds, 5.30% Pollution Control Series due 2013 were also redeemed with payment made to the trustee prior to March 31, 2012. To replace this financing, on April 2, 2012, we entered into a Bond Purchase Agreement for a private placement of $88 million aggregate principal amount of 3.58% First Mortgage Bonds due April 2, 2027. The first settlement of $38 million occurred on April 2, 2012 and the second settlement of $50 million occurred on June 1, 2012. All bonds of this new series will mature on April 2, 2027.

Compliance Plan

Our environmental Compliance Plan, discussed in Note 7, continues on schedule. Construction is proceeding on the installation of a scrubber, fabric filter, and powder activated carbon injection system at our Asbury plant. Initial construction costs through September 30, 2012 were $24.2 million for 2012 and $25.4 million for the project to date, excluding AFUDC. This project is expected to be completed in early 2015 at a cost ranging from $112 million to $130 million, excluding AFUDC. The addition of this air quality control equipment will require the retirement of Asbury Unit 2, an 18 megawatt steam turbine that is currently used for peaking purposes.

In September 2012, as part of the Compliance Plan, we completed the transition of our Riverton Units 7 and 8 from operation on coal to full operation on natural gas. These units, along with


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Riverton Unit 9, will be retired upon conversion of Riverton Unit 12, a simple cycle combustion turbine, to a combined cycle unit, with scheduled completion in 2016.

Regulatory Matters

On July 6, 2012, we filed a rate increase with the Missouri Public Service Commission (MPSC) for changes in rates for our Missouri electric customers. We are seeking an annual increase in base rate revenues of approximately $30.7 million, or 7.56%.

On May 21, 2012, we filed a rate increase request with the MPSC for an annual increase in revenues for our Missouri water customers in the amount of approximately $516,400, or 29.6%. On October 18, 2012, we, the MPSC staff and the Office of the Public Counsel filed a unanimous agreement with the MPSC for an increase of $450,000. The MPSC issued an order approving the agreement on October 31, 2012, with rates effective November 23, 2012.

On May 18, 2012, we filed with the Federal Energy Regulatory Commission (FERC) proposed revisions to our Open Access Transmission Tariff to implement a cost-based transmission formula rate to be effective August 1, 2012. On July 31, 2012, the FERC suspended the rate for five months and set the filing for hearing and settlement procedures.

For additional information on all these cases, see "Rate Matters" below.

Tornado Recovery and Activity

Joplin, Missouri continues to recover from the May 22, 2011 tornado. The city of Joplin recently approved an $800 million Master Development Plan, which includes 1,400 new homes in the tornado impacted area. All our transmission lines and structures damaged in the storm have been repaired and the distribution system has been rebuilt to all customers able to receive power. We continue to extend services to customers as they rebuild. Our substation destroyed in the tornado has been rebuilt and is again providing service to our customers. We anticipate insurance proceeds will cover most of the cost of the substation rebuild. As of September 30, 2012, our system-wide customer count was down by approximately 1,200 as compared to the customer count levels prior to the May 2011 tornado. Storm restoration costs were approximately $26.5 million as of September 30, 2012. The majority of these costs have been capitalized. We expect the loss of electric load and corresponding revenues to abate as customers rebuild. As we continue to add customers back to our system, our customer growth expectations range from approximately 0.9% to 1.2% annually over the next several years.

RESULTS OF OPERATIONS

The following discussion analyzes significant changes in the results of operations for the three-month, nine-month and twelve-month periods ended September 30, 2012, compared to the same periods ended September 30, 2011.

The following table represents our results of operations by operating segment for the applicable periods ended September 30 (in millions):

               Quarter Ended       Nine Months Ended       Twelve Months Ended
               2012      2011       2012        2011        2012          2011

Electric     $   25.7   $ 25.3   $     44.6    $  43.4   $     51.9    $     50.3
Gas              (0.4 )   (0.4 )        0.3        1.8          1.2           2.8
Other             0.2      0.3          1.2        1.1          1.6           1.6
Net income   $   25.5   $ 25.2   $     46.1    $  46.3   $     54.7    $     54.7

Electric Segment

Gross Margin

As shown in the table below, electric segment gross margin increased approximately $1.4 million during the third quarter of 2012 as compared to the third quarter of 2011. Improved customer


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counts and a change in our unbilled revenue estimate more than offset the negative effect of less favorable weather.

The electric gross margin increased approximately $7.2 million for the nine months ended September 30, 2012 and approximately $10.9 million for the twelve months ended September 30, 2012 as compared to the respective periods in 2011. The change in our unbilled revenue estimate positively impacted revenues and margins while decreased demand, resulting from mild winter weather in the first quarter of 2012 and less favorable weather in the third quarter of 2012 as compared to the same period last year, negatively impacted revenues and margins.

The table below represents our electric gross margins for the applicable periods ended September 30 (dollars in millions):

                                  Three Months Ended       Nine Months Ended       Twelve Months Ended
                                   2012         2011        2012        2011        2012          2011

Electric segment revenues       $    152.7    $  157.6   $    396.5    $ 406.3   $     514.5    $  523.2
Fuel and purchased power              48.0        54.3        138.8      155.8         183.3       202.8
Electric segment gross
margins                         $    104.7    $  103.3   $    257.7    $ 250.5   $     331.2    $  320.4
Margin as % of total electric
segment revenues                      68.5 %      65.5 %       65.0 %     61.7 %        64.4 %      61.2 %

Although a non-GAAP presentation, we believe the presentation of gross margin is useful to investors and others in understanding and analyzing changes in our electric operating performance from one period to the next, and have included the analysis as a complement to the financial information we provide in accordance with GAAP. However, these margins may not be comparable to other companies' presentations or more useful than the GAAP information we provide elsewhere in this report.

Sales and Revenues

Electric operating revenues comprised approximately 95.6% of our total operating revenues during the third quarter of 2012.

The amounts and percentage changes from the prior periods in kilowatt-hour ("kWh") sales and operating revenues by major customer class for on-system sales and for off-system sales for the applicable periods ended September 30, were as follows:

                                                                        kWh Sales
                                                                      (in millions)
                        3 Months   3 Months                 9 Months   9 Months                 12 Months   12 Months
                         Ended      Ended         %          Ended      Ended         %           Ended       Ended         %
Customer Class            2012       2011     Change(1)       2012       2011     Change(1)       2012        2011      Change(1)
Residential                573.3      578.8        (0.9 )%   1,438.9    1,569.6        (8.3 )%    1,852.0     2,008.1        (7.8 )%
Commercial                 447.3      442.7         1.0      1,184.5    1,202.9        (1.5 )     1,558.0     1,594.9        (2.3 )
Industrial                 274.2      277.7        (1.3 )      785.5      777.4         1.0       1,030.8     1,021.7         0.9
Wholesale on-system         98.6      105.5        (6.6 )      272.1      281.8        (3.5 )       355.1       364.4        (2.6 )
Other(2)                    33.6       34.3        (2.0 )       93.9       98.3        (4.5 )       124.3       127.6        (2.7 )
Total on-system sales    1,427.0    1,439.0        (0.8 )    3,774.9    3,930.0        (3.9 )     4,920.2     5,116.7        (3.8 )
Off-system                 217.6      132.9        63.8        525.8      585.9       (10.3 )       679.9       830.0       (18.1 )
Total KWh Sales          1,644.6    1,571.9         4.6      4,300.7    4,515.9        (4.8 )     5,600.1     5,946.7        (5.8 )



(1) Percentage changes are based on actual kWh sales and may not agree to the rounded amounts shown above.

(2) Other kWh sales include street lighting, other public authorities and interdepartmental usage.

KWh sales for our on-system customers decreased slightly (0.8%) during the quarter ended September 30, 2012, mainly due to milder weather as compared to the third quarter of 2011. Total cooling degree days (the cumulative number of degrees that the daily average temperature for each day during that period was above 65 F) for the third quarter of 2012 were 7.5% less than the same period last year, but 17.1% more than the 30-year average. KWh sales for our residential customers decreased slightly during the third quarter of 2012 as compared to the third quarter of 2011. This was primarily due to the milder weather in July and August of 2012 as compared to 2011. Commercial kWh sales increased 1.0% during the third quarter of 2012 as compared to the third quarter of 2011


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primarily due to the rebuilding of businesses destroyed in the May 2011 tornado. Industrial sales decreased 1.3%.

KWh sales for our on-system customers decreased 3.9% during the nine months ended September 30, 2012, as compared to the same period in 2011, primarily due to decreased demand resulting from milder weather in the first and third quarters of 2012. The decrease in residential kWh sales was also attributable to the loss of residences in the May 2011 tornado and the decrease in commercial kWh sales was mainly due to the loss of businesses in the May 2011 tornado. Industrial sales increased 1.0% during the nine months ended September 30, 2012 as compared to the same period last year.

KWh sales for our on-system customers decreased 3.8% during the twelve months ended September 30, 2012, as compared to the same period in 2011, mainly due to decreased demand as unseasonably hot weather experienced during the summer months of 2011 was more than offset by the effects of milder weather in the third quarter of 2012 and record mild winter weather during the first quarter heating season of 2012 and the fourth quarter of 2011. Residential and commercial kWh sales decreased primarily due to these weather impacts and the loss of residences and businesses in the May 2011 tornado. Industrial sales increased 0.9% during the twelve months ended September 30, 2012 as compared to the same period last year.

The amounts and percentage changes from the prior periods in electric segment operating revenues by major customer class for on-system and off-system sales for the applicable periods ended September 30, were as follows:

                                                               Electric Segment Operating Revenues
                                                                         ($ in millions)
                        3 Months     3 Months                  9 Months     9 Months                  12 Months     12 Months
                         Ended        Ended          %          Ended        Ended          %           Ended         Ended          %
Customer Class            2012         2011      Change(1)       2012         2011      Change(1)       2012          2011       Change(1)
Residential            $     66.9   $     68.8        (2.7 )% $    168.4   $    174.4        (3.4 )% $     215.8   $     221.4        (2.6 )%
Commercial                   46.5         47.3        (1.8 )       122.3        119.6         2.2          160.0         156.2         2.5
Industrial                   22.6         24.0        (5.8 )        61.5         60.5         1.5           79.9          77.9         2.5
Wholesale on-system           5.7          6.2        (7.6 )        14.3         14.9        (4.1 )         18.5          18.7        (1.2 )
Other(2)                      3.8          3.9        (2.8 )        10.7         10.6         1.4           14.0          13.6         3.2
Total on-system
revenues               $    145.5   $    150.2        (3.1 )  $    377.2   $    380.0        (0.8 )  $     488.2   $     487.8         0.1
Off-system                    4.8          4.7         0.6          11.6         18.7       (38.0 )         16.2          25.3       (36.1 )
Total revenues from
kWh sales                   150.3        154.9        (3.0 )       388.8        398.7        (2.5 )        504.4         513.1        (1.7 )
Miscellaneous
revenues(3)                   1.9          2.2       (11.4 )         6.4          6.3         3.1            8.3           8.3         1.2
Total electric
operating revenues     $    152.2   $    157.1        (3.1 )  $    395.2   $    405.0        (2.4 )  $     512.7   $     521.4        (1.7 )
Water revenues                0.5          0.5         2.1           1.3          1.3         0.5            1.8           1.8        (0.3 )
Total electric
segment operating
revenues               $    152.7   $    157.6        (3.1 )  $    396.5   $    406.3        (2.4 )  $     514.5   $     523.2        (1.7 )



(1) Percentage changes are based on actual revenues and may not agree to the rounded amounts shown above.

(2) Other operating revenues include street lighting, other public authorities and interdepartmental usage.

(3 ) Miscellaneous revenues include transmission service revenue, late payment fees, renewable energy credit sales, rent, etc.

Revenues for our on-system customers decreased $4.7 million during the third quarter of 2012 as compared to the third quarter of 2011. The impact of weather and other related factors decreased revenues an estimated $7.8 million. Lower fuel costs recovered from customers this quarter decreased revenues an estimated $3.6 million. Improved customer counts increased revenues an estimated $3.7 million. Additionally, a change in our estimate of unbilled revenues contributed $3.0 million to revenues this quarter.

Revenues for our on-system customers decreased $2.9 million for the nine months ended September 30, 2012 as compared to the same period in 2011. Weather and other related factors decreased revenues an estimated $22.5 million during the nine months ended September 30, 2012, due to the reasons previously discussed. Rate changes, primarily the June 2011 Missouri rate increase, the March 2011 Oklahoma rate increase, the January 2012 Kansas rate increase and the April 2011 Arkansas rate increase, contributed an estimated $14.2 million to revenues. Improved customer counts increased revenues an estimated $2.4 million. Additionally, the previously mentioned


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change in our estimate of unbilled revenues contributed $3.0 million to revenues this period.

Revenues for our on-system customers increased $0.4 million for the twelve months ended September 30, 2012 as compared to the same period in 2011. Rate changes, primarily the June 2011 Missouri rate increase, the March 2011 Oklahoma rate increase, the January 2012 Kansas rate increase and the April 2011 Arkansas rate increase, contributed an estimated $20.3 million to revenues. Additionally, the previously mentioned change in our estimate of unbilled revenues contributed $3.0 million to revenues this period. Weather and other related factors decreased revenues an estimated $22.8 million due to the reasons previously discussed. Decreased customer counts, resulting from the May 2011 tornado, reduced revenues an estimated $0.1 million.

Off-System Electric Transactions.

In addition to sales to our own customers, we also sell power to other utilities as available, including through the Southwest Power Pool (SPP) Energy Imbalance Services (EIS) market. See "- Competition" below. The majority of our off-system sales margins are included as a component of the fuel adjustment clause in our Missouri, Kansas and Oklahoma jurisdictions and our transmission rider in our Arkansas jurisdiction and generally adjust the fuel and purchased power expense. As a result, nearly all of the off-system sales margin flows back to the customer and has little effect on margin or net income.

Operating Revenue Deductions - Fuel and Purchased Power

The table below is a reconciliation of our actual fuel and purchased power expenditures (netted with the regulatory adjustments) to the fuel and purchased power expense shown on our statements of income for the applicable periods ended September 30, 2012 and 2011. As shown below, fuel and purchased power costs decreased in all periods mainly due to lower gas and purchased power costs and the Southwest Power Administration (SWPA) amortization, as well as lower volumes during the nine months ended and twelve months ended periods.

                                     Three Months         Nine Months        Twelve Months
                                        Ended                Ended               Ended
(in millions)                       2012      2011      2012      2011      2012      2011
Actual fuel and purchased power
expenditures                      $   51.3   $  59.9   $ 131.9   $ 155.9   $ 172.5   $ 198.3
Missouri fuel adjustment
recovery (1)                          (2.2 )     1.1       4.8       6.0       6.1       7.6
Missouri fuel adjustment
deferral(2)                           (0.3 )    (5.6 )     4.7      (5.0 )     6.9      (2.2 )
Kansas and Oklahoma regulatory
adjustments(2)                         0.4      (0.7 )     1.2      (0.8 )     1.4      (0.6 )
SWPA amortization(3)                  (0.8 )    (0.7 )    (2.1 )    (0.8 )    (2.8 )    (0.8 )
Unrealized (gain)/loss on
derivatives                           (0.4 )     0.3      (1.7 )     0.5      (0.8 )     0.5
Total fuel and purchased power
expense per income statement      $   48.0   $  54.3   $ 138.8   $ 155.8   $ 183.3   $ 202.8



(1) Recovered from customers from prior deferral period.

(2) A negative amount indicates costs have been under recovered from customers and a positive amount indicates costs have been over recovered from customers. Missouri amount includes the deferral of additional costs due to construction accounting, which terminated as of June 15, 2011, the effective date of rates for our 2010 Missouri rate case.

. . .

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