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EDE > SEC Filings for EDE > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for EMPIRE DISTRICT ELECTRIC CO


9-May-2013

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. It provides natural gas distribution to customers in 48 communities in northwest, north central and west central Missouri. Our other segment consists of our fiber optics business.

During the twelve months ended March 31, 2013, our gross operating revenues were derived as follows:

Electric segment sales*   91.0 %
Gas segment sales          7.8
Other segment sales        1.2


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


Table of Contents

Earnings

During the first quarter of 2013, basic and diluted earnings per weighted average share of common stock were $0.30 on net income of $12.6 million, as compared to $0.23 on net income of $9.8 million in the first quarter of 2012. For the twelve months ended March 31, 2013, basic and diluted earnings per weighted average share of common stock were $1.38 on net income of $58.5 million, as compared to $1.26 on net income of $52.9 million for the twelve months ended March 31, 2012.

Weather was the primary positive driver for the quarter, with the first quarter of 2013 being considerably colder than the first quarter of 2012, when the warmest temperatures on record were recorded. This positively impacted both electric and gas gross margins for the three months ended March 31, 2013. We define electric gross margins as electric revenues less fuel and purchased power costs. We define gas gross margins as gas operating revenues less cost of gas in rates.

Negative drivers for the first quarter of 2013 included increased regulated operating expense, depreciation and amortization expense and a regulatory write off of approximately $3.6 million discussed below.

Although the twelve month ended 2013 and 2012 periods were both impacted favorably by above average warm weather during the summer cooling months, the colder 2013 first quarter weather resulted in a small favorable margin impact in the 2013 period. Improving customer counts in the twelve month ended 2013 period also had a positive impact on electric gross margin, as did the effect of a full twelve months of increased Missouri electric rates that were effective June 2011 and a change in our unbilled revenue estimate in the third quarter of 2012.

Negative drivers for the twelve months ended 2013 period included increased regulated operating expense, depreciation and amortization expense and the regulatory write off of approximately $3.6 million discussed below.

Factors impacting gross margin and net income for the quarter and twelve months ending March 31, 2013, are presented on a segment basis under Results of Operations below.

The table below sets forth a reconciliation of basic and diluted earnings per share between the three months and twelve months ended March 31, 2012 and March 31, 2013, 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 March 31.


Table of Contents

                                                     Three Months Ended      Twelve Months Ended
Earnings Per Share - 2012                           $               0.23    $                1.26

Revenues
Electric segment                                    $               0.13    $                0.06
Gas segment                                                         0.07                     0.05
Other segment                                                       0.00                     0.00
Total Revenue                                                       0.20                     0.11
Electric fuel and purchased power                                   0.00                     0.18
Cost of natural gas sold and transported                           (0.05 )                  (0.04 )
Margin                                                              0.15                     0.25

Operating - electric segment                                       (0.06 )                  (0.14 )
Operating - gas segment                                             0.00                     0.00
Operating - other segment                                           0.00                    (0.01 )
Maintenance and repairs                                             0.00                     0.01
Depreciation and amortization                                      (0.02 )                  (0.01 )
Loss on plant disallowance                                         (0.03 )                  (0.03 )
Other taxes                                                        (0.01 )                  (0.02 )
Interest charges                                                    0.01                     0.03
AFUDC                                                               0.01                     0.03
Change in effective income tax rates                                0.01                     0.02
Other income and deductions                                         0.01                     0.00
Dilutive effect of additional shares issued                         0.00                    (0.01 )
Earnings Per Share - 2013                           $               0.30    $                1.38

Recent Activities

Regulatory Matters

On February 22, 2013, we filed a Nonunanimous Stipulation and Agreement (Agreement) with the Missouri Public Service Commission (MPSC) which issued an order approving the Agreement on February 27, 2013, effective March 6, 2013. The Agreement provides for an annual increase in base revenues for our Missouri electric customers in the amount of approximately $27.5 million, effective April 1, 2013, and the continuation of the current fuel adjustment mechanism. The Agreement also includes an increase in depreciation rates, recovery of deferred tornado costs over the next ten years and the continuation of tracking mechanisms for expenses related to employee pension, retiree health care, vegetation management, and Iatan 2, Iatan Common and Plum Point operating and maintenance costs. In addition, the Agreement includes a write-off of approximately $3.6 million, consisting of a $2.4 million disallowance for the prudency of certain construction expenditures for Iatan 2 and a $1.2 million regulatory reversal of a prior period gain on sale of our Asbury unit train, which is included in regulated operating expenses. We also agreed not to implement a Missouri general rate increase prior to October 1, 2014. As initially filed on July 6, 2012, we had requested an annual increase in base rates for our Missouri electric customers in the amount of $30.7 million, or 7.56%, the continuation of the fuel adjustment clause, new depreciation rates and the recovery of various expenses. For additional information, see "Rate Matters" below.

RESULTS OF OPERATIONS

The following discussion analyzes significant changes in the results of operations for the three-month and twelve-month periods ended March 31, 2013, compared to the same periods ended March 31, 2012.

The following table represents our results of operations by operating segment for the applicable periods ended March 31 (in millions):


Table of Contents

                Three Months Ended        Twelve Months Ended
                2013          2012         2013          2012

Electric     $      10.2    $     8.2   $     54.7    $     49.6
Gas                  1.9          1.1          2.1           1.6
Other                0.5          0.5          1.7           1.7
Net income   $      12.6    $     9.8   $     58.5    $     52.9

Electric Segment

Gross Margin

As shown in the table below, electric segment gross margin increased approximately $9.0 million during the first quarter of 2013 as compared to the first quarter of 2012 mainly due to increased demand resulting from favorable weather in the first quarter of 2013.

The electric gross margin increased approximately $16.4 million for the twelve months ended March 31, 2013 as compared to the same period in 2012, due to a full twelve months of increased Missouri electric rates that were effective June 2011, improved customer counts, a change in our unbilled revenue estimate in the third quarter of 2012 and a small favorable margin impact due to the colder weather in the first quarter of 2013.

The table below represents our electric gross margins for the applicable periods ended March 31 (dollars in millions):

                                               Quarter Ended          Twelve Months Ended
                                              2013        2012         2013          2012

Electric segment revenues                   $  128.8    $  119.7    $     519.7    $   515.6
Fuel and purchased power                        45.3        45.2          179.0        191.3
Electric segment gross margins              $   83.5    $   74.5    $     340.7    $   324.3
Margin as % of total electric segment
revenues                                        64.8 %      62.2 %         65.6 %       62.9 %

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 84.9% of our total operating revenues during the first quarter of 2013.

The amounts and percentage changes from the prior periods in kilowatt-hour (kWh) sales by major customer class for on-system and off-system sales for the applicable periods ended March 31, were as follows:

                                                    kWh Sales
                                                  (in millions)
                         First     First                12 Months   12 Months
                        Quarter   Quarter       %         Ended       Ended         %
Customer Class           2013      2012     Change(1)     2013        2012      Change(1)
Residential               571.1     476.5        19.8 %   1,945.4     1,867.8         4.2 %
Commercial                359.7     337.8         6.5     1,580.1     1,538.5         2.7
Industrial                240.6     241.7        (0.4 )   1,027.3     1,027.4         0.0
Wholesale on-system        84.4      84.5         0.0       353.1       361.7        (2.4 )
Other(2)                   33.0      31.2         5.6       125.9       126.7        (0.6 )
Total on-system sales   1,288.8   1,171.7        10.0     5,031.8     4,922.1         2.2
Off-system                152.3     136.8        11.4       719.6       618.8        16.3
Total kWh Sales         1,441.1   1,308.5        10.1     5,751.4     5,540.9         3.8



(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.


Table of Contents

KWh sales for our on-system customers increased 10.0% during the first quarter of 2013 as compared to the first quarter of 2012, primarily due to increased demand resulting from colder weather in the first quarter of 2013. The increase in residential and commercial kWh sales was mainly due to the colder weather. Total heating degree days (the sum of the number of degrees that the daily average temperature for each day during that period was below 65 F) for the first quarter of 2013 were near normal, at only 0.2% more than the 30-year average, although they were 33.9% more than the same period last year when the warmest temperatures on record were recorded. Industrial sales decreased 0.4%.

KWh sales for our on-system customers increased 2.2% during the twelve months ended March 31, 2013, as compared to the same period in 2012, due to improved customer counts and increased demand resulting from colder weather in the first quarter of 2013. Residential and commercial kWh sales increased primarily due to the improved customer counts and favorable weather. Industrial sales decreased slightly.

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 March 31, were as follows:

                                        Electric Segment Operating Revenues
                                                   (in millions)
                                                               12         12
                          First       First                  Months     Months
                         Quarter     Quarter        %        Ended      Ended         %
Customer Class            2013        2012      Change(1)     2013       2012     Change(1)
Residential             $    61.2   $    54.2        13.0 % $  221.5   $  216.5         2.3 %
Commercial                   34.8        34.4         1.1      159.2      157.5         1.1
Industrial                   17.1        18.0        (5.0 )     77.9       80.3        (3.0 )
Wholesale on-system           4.8         4.0        20.2       19.4       18.9         2.7
Other(2)                      3.5         3.4         2.2       14.0       14.0         0.2
Total on-system
revenues                $   121.4   $   114.0         6.5   $  492.0   $  487.2         1.0
Off-system                    3.7         3.2        14.2       16.2       18.6       (12.9 )
Total Revenues from
kWh Sales                   125.1       117.2         6.7      508.2      505.8         0.5
Miscellaneous
Revenues(3)                   3.2         2.1        54.5        9.6        8.1        18.5
Total Electric
Operating Revenues      $   128.3   $   119.3         7.5   $  517.8   $  513.9         0.8
Water Revenues                0.5         0.4        24.8        1.9        1.7         8.1
Total Electric
Segment Operating
Revenues                $   128.8   $   119.7         7.5   $  519.7   $  515.6         0.8



(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 increased $7.4 million during the first quarter of 2013 primarily due to colder weather as compared to record mild weather in the first quarter of 2012. The impact of weather and other related factors increased revenues an estimated $9.3 million. Improved customer counts increased revenues an estimated $1.6 million. Rate changes increased revenues an estimated $1.2 million. These revenue increases were partially offset by a $4.7 million decrease in fuel recovery revenue (and corresponding reduction in fuel expenses, resulting in no net effect on gross margin) from Missouri customers during the first quarter of 2013 compared to the prior year quarter.

Revenues for our on-system customers increased $4.8 million for the twelve months ended March 31, 2013. Rate changes, primarily the June 2011 Missouri rate increase and the January 2012 Kansas rate increase, contributed an estimated $5.0 million to revenues. Improved customer counts increased revenues an estimated $4.9 million. Weather and other related factors increased revenues an estimated $1.7 million. Additionally, a change in our unbilled revenue estimate in the third quarter of 2012 added $3.1 million to revenues. These revenue increases were offset by a $9.9 million decrease in fuel recovery revenue (and corresponding reduction in fuel expenses, resulting in no net effect on gross margin) from Missouri customers during the twelve months ended March 31, 2013 compared to the same period in 2012.


Table of Contents

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 and Markets" 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.

Miscellaneous Revenues

Our miscellaneous revenues were $3.2 million for the first quarter of 2013 as compared to $2.0 million for the first quarter of 2012, mainly due to increased transmission revenues.

Our miscellaneous revenues were $9.6 million for the twelve months ended March 31, 2013 as compared to $8.1 million for the same period in 2012, mainly due to increased transmission revenues. These revenues are comprised mainly of transmission revenues, late payment fees and renewable energy credit sales.

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 March 31, 2013 and 2012.

                                        Three Months Ended           Twelve Months Ended
(in millions)                          2013           2012           2013           2012
Actual fuel and purchased power
expenditures                        $      47.7    $      40.7    $     180.6    $     186.8
Missouri fuel adjustment
recovery (1)                               (0.4 )          4.3           (1.2 )          8.6
Missouri fuel adjustment
deferral(2)                                (1.1 )          1.8            2.4           (2.0 )
Kansas and Oklahoma regulatory
adjustments(2)                              0.1            0.3            0.7           (0.3 )
SWPA amortization(3)                       (0.8 )         (0.7 )         (2.9 )         (2.1 )
Unrealized (gain)/loss on
derivatives                                (0.2 )         (1.2 )         (0.6 )          0.3
Total fuel and purchased power
expense per income statement        $      45.3    $      45.2    $     179.0    $     191.3



(1) A positive amount indicates costs recovered from customers from under recovery in prior deferral periods. A negative amount indicates costs refunded to customers from over recovery in prior deferral periods.

(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.

(3) Missouri ten year amortization of the $26.6 million payment received from the SWPA in September, 2010.

Operating Expenses - Other Than Fuel and Purchased Power

The table below shows regulated operating expense increases/(decreases) during the first quarter of 2013 and the twelve months ended March 31, 2013 as compared to the same periods in 2012.


Table of Contents

                                                   Three Months Ended      Twelve Months Ended
(in millions)                                        2013 vs. 2012            2013 vs. 2012
Transmission and distribution expense             $                0.9    $                 2.4
Employee health care expense                                       0.5                      2.3
General labor costs                                                0.7                      1.3
Employee pension expense                                           0.1                      0.8
Regulatory reversal of gain on prior period
sale of assets                                                     1.2                      1.2
Professional services(1)                                          (0.2 )                    1.6
Steam power other operating expense(2)                            (0.1 )                    0.8
Other power operation expense                                      0.1                      0.3
Uncollectible accounts                                             0.1                     (0.7 )
Regulatory commission expense                                        -                     (0.6 )
Property insurance                                                 0.2                      0.6
Injuries and damages expense                                       0.3                     (0.2 )
Banking fees                                                      (0.3 )                   (1.0 )
Other miscellaneous accounts (netted)                              0.3                      0.3
TOTAL                                             $                3.8    $                 9.1



(1) The twelve month comparison reflects the transfer of $0.9 million of expenses from Professional Services in July 2011 to regulatory and capital assets per our 2010 Missouri rate case.

(2) The twelve month comparison reflects recognition of expenses of new plants (Iatan and Plum Point) after deferral ended June 15, 2011, the effective date of rates for our 2010 Missouri rate case.

The table below shows maintenance and repairs expense increases/(decreases) during the first quarter of 2013 and the twelve months ended March 31, 2013 compared to the same periods in 2012.

                                                    Three Months Ended     Twelve Months Ended
(in millions)                                         2013 vs. 2012           2013 vs. 2012
Distribution and transmission maintenance costs    $               (1.1 ) $                (2.6 )
Maintenance and repairs expense at the Asbury
plant                                                               0.6                     1.5
Maintenance and repairs expense at the SLCC(1)                      0.7                     1.6
Maintenance and repairs expense at the Iatan
plant, Energy Center, Plum Point plant and
Riverton plant                                                      0.0                    (0.7 )
Other miscellaneous accounts (netted)                              (0.2 )                  (0.2 )
TOTAL                                              $                0.0   $                (0.4 )



(1) The twelve month comparison reflects a transformer failure in December 2011.

Depreciation and amortization expense increased approximately $1.1 million (8.2%) during the three months ended March 31, 2013 due to increased plant in service. Depreciation and amortization expense increased approximately $0.6 million (1.2%) during the twelve months ended March 31, 2013. This reflects a decrease in regulatory amortization expense of $2.1 million due to the termination of construction accounting as of June 15, 2011, the effective date of rates for our 2010 Missouri rate case, offset by increased plant in service.

Other taxes increased approximately $0.4 million and $1.3 million during the quarter and twelve month periods ended March 31, 2013, respectively, due to increased property tax reflecting our additions to plant in service and increased municipal franchise taxes.


Table of Contents

Gas Segment

Gas Operating Revenues and Sales

The following table details our natural gas sales for the periods ended March 31:

                        Total Gas Delivered to Customers



                              Three Months Ended       Twelve Months Ended
(bcf sales)                 2013   2012   % change   2013    2012   % change
Residential                 1.34   0.96       38.8 %  2.38   2.13       12.3 %
. . .
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