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EDE > SEC Filings for EDE > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for EMPIRE DISTRICT ELECTRIC CO


7-Aug-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, including the sale of wholesale energy to four towns in Missouri and Kansas. 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 48 communities in northwest, north central and west central Missouri. Our other segment consists of our fiber optics business.

During the twelve months ended June 30, 2013, our gross operating revenues were derived as follows:

Electric segment sales*   90.7 %
Gas segment sales          8.1
Other segment sales        1.2


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

Earnings



The following table represents our basic and diluted earnings per weighted
average share of common stock for the applicable periods ended June 30 (in
dollars):



                            Three Months Ended            Six Months Ended           Twelve Months Ended
                           2013           2012          2013           2012          2013           2012
Basic and diluted
earnings per weighted
average share of
common stock            $      0.27    $      0.25   $      0.57    $      0.49   $      1.40    $      1.29

Increased electric and gas gross margins positively impacted net income for all three periods presented as of June 30, 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.

Increased electric customer rates resulting from our recently settled Missouri rate case (see "Recent Activities - Regulatory Matters" below) drove increases in revenue and electric gross margin during the quarter ended June 30, 2013. Average customer counts increased quarter over quarter,


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but were tempered slightly by an increase in seasonal disconnect activity compared to the 2012 quarter.

The increases in revenue and electric gross margin were partially offset by weather that was slightly more temperate than normal. June 2013 was considerably cooler than the very hot June 2012, resulting in a delay in the transition from heating to cooling season. Increases in regulated operating expense and depreciation and amortization expense also negatively impacted quarter over quarter results.

Increased revenues, due to the April 1, 2013 Missouri rate increase, and weather were positive drivers for the six months ended June 30, 2013. The first quarter of 2013 was considerably colder than the first quarter of 2012, when the warmest temperatures on record were recorded. Decreased maintenance and repairs expense and increased AFUDC also positively impacted net income for the six months ended June 30, 2013

Negative drivers for the six months ended June 30, 2013 as compared to the same period last year included increased regulated operating expense, increased depreciation and amortization expense and the regulatory write off of approximately $3.6 million (see "Recent Activities - Regulatory Matters" below).

Revenue and electric gross margin during the twelve months ended June 30, 2013 were positively impacted by the increased Missouri customer electric rates discussed above, improving customer counts and a change in our unbilled revenue estimate in the third quarter of 2012. A return to more normal summer and winter weather during the 2013 period negatively impacted gross margin compared to the 2012 period.

Increased regulated operating expense, increased depreciation and amortization expense and the previously mentioned regulatory write off also negatively impacted year over year results.

Factors impacting gross margin and net income for the quarter, six months and twelve months ended June 30, 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, six months and twelve months ended June 30, 2012 and June 30, 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. 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 June 30.


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                                                Three Months      Six Months      Twelve Months
                                                   Ended            Ended             Ended
Earnings Per Share - 2012                      $         0.25    $       0.49    $          1.29

Revenues
Electric segment                               $         0.04    $       0.17    $          0.04
Gas segment                                              0.03            0.10               0.10
Other segment                                            0.00            0.00               0.00
Total Revenue                                            0.07            0.27               0.14
Electric fuel and purchased power                        0.05            0.05               0.21
Cost of natural gas sold and transported                (0.02 )         (0.07 )            (0.07 )
Margin                                                   0.10            0.25               0.28

Operating - electric segment                            (0.06 )         (0.11 )            (0.14 )
Operating -gas segment                                   0.00            0.00               0.01
Operating -other segment                                 0.00            0.00              (0.01 )
Maintenance and repairs                                  0.01            0.01               0.02
Depreciation and amortization                           (0.04 )         (0.05 )            (0.07 )
Loss on plant disallowance                               0.00           (0.03 )            (0.03 )
Other taxes                                             (0.01 )         (0.02 )            (0.03 )
Interest charges                                        (0.01 )          0.00               0.02
AFUDC                                                    0.02            0.03               0.05
Change in effective income tax rates                     0.01            0.01               0.03
Dilutive effect of additional shares issued              0.00           (0.01 )            (0.02 )
Earnings Per Share - 2013                      $         0.27    $       0.57    $          1.40

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 provided 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 included 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 included 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.

On May 18, 2012, we filed a request with the Federal Energy Regulatory Commission (FERC) to implement a cost-based transmission formula rate (TFR) to be effective August 1, 2012. On July 31, 2012, the FERC suspended the TFR for five months and set the filing for hearing and settlement procedures. On June 13, 2013, we, the Kansas Corporation Commission and the cities of Monett, Mt. Vernon and Lockwood, Missouri and Chetopa, Kansas, filed a unanimous Settlement Agreement (Agreement) with the FERC. The Agreement includes a TFR that establishes an ROE of 10.0%. The Agreement calls for the TFR to be updated annually with the new updated TFR rates effective on July 1 of each year. FERC action on the Agreement is pending.

For additional information, see "Rate Matters" below.


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Integrated Resource Plan

We filed our Integrated Resource Plan (IRP) with the MPSC on July 1, 2013. The IRP analysis of future loads and resources is normally conducted once every three years. Our IRP supports our Compliance Plan discussed in Note 7 of "Notes to Consolidated Financial Statements (Unaudited)".

Financings

As described in Note 6, 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 May 30, 2033 and $120.0 million of 4.32% First Mortgage Bonds due May 30, 2043. The delayed settlement of both series of bonds occurred on May 30, 2013. Interest is payable semi-annually on the bonds on each May 30 and November 30, commencing November 30, 2013.

A portion of the proceeds from the above sale of bonds was used to redeem all $98.0 million aggregate principal amount of our Senior Notes, 4.50% Series due June 15, 2013. The remaining proceeds will be used for general corporate purposes.

Union Contract

In May 2013, Local 1464 of the International Brotherhood of Electrical Workers (IBEW) ratified a four-year agreement with EDG, effective June 1, 2013. At December 31, 2012, 34 EDG employees were members of Local 1464 of the IBEW.

RESULTS OF OPERATIONS

The following discussion analyzes significant changes in the results of operations for the three month, six month and twelve month periods ended June 30, 2013, compared to the same periods ended June 30, 2012.

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

                Three Months Ended        Six Months Ended       Twelve Months Ended
                2013          2012        2013        2012        2013          2012

Electric     $     11.5    $     10.7   $    21.7    $  18.9   $     55.5    $     51.5
Gas                (0.2 )        (0.4 )       1.8        0.7          2.3           1.2
Other               0.4           0.4         0.8        0.9          1.7           1.7
Net income   $     11.7    $     10.7   $    24.3    $  20.5   $     59.5    $     54.4

Electric Segment

Gross Margin

As shown in the table below, electric segment gross margin increased approximately $6.4 million during the second quarter of 2013 as compared to the second quarter of 2012, mainly due to increased revenues as a result of the Missouri rate increase that became effective April 1, 2013.

The electric gross margin increased approximately $15.5 million for the six months ended June 30, 2013 as compared to the same period in 2012, mainly due to increased demand resulting from favorable weather in the first quarter of 2013 and increased revenues due to the Missouri rate increase.

These factors likewise impacted the twelve months ended June 30, 2013 period. Electric gross margin increased approximately $17.4 million as compared to the same period in 2012. A change in our unbilled revenue estimate in the third quarter of 2012 and improved customer counts also favorably impacted the twelve month period over period results.

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


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                        Three Months Ended         Six Months Ended         Twelve Months Ended
                        2013          2012         2013        2012         2013           2012

Electric segment
revenues             $    127.0    $    124.1   $    255.8   $   243.8   $     522.6    $    519.4
Fuel and purchased
power                      42.0          45.5         87.3        90.8         175.4         189.6
Electric segment
gross margins        $     85.0    $     78.6   $    168.5   $   153.0   $     347.2    $    329.8
Margin as % of
total electric
segment revenues           66.9 %        63.3 %       65.9 %      62.8 %        66.4 %        63.5 %

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 93.0% of our total operating revenues during the second quarter of 2013.

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

                                                                     kWh Sales
                                                                   (in millions)
                        Second    Second                 6 Months   6 Months               12 Months   12 Months
                        Quarter   Quarter       %         Ended      Ended         %         Ended       Ended         %
Customer Class           2013      2012     Change(1)      2013       2012     Change(1)     2013        2012      Change(1)
Residential               387.3     389.1        (0.5 )%    958.3      865.6        10.7 %   1,943.5     1,857.5         4.6 %
Commercial                377.0     399.5        (5.6 )     736.7      737.3        (0.1 )   1,557.7     1,553.4         0.3
Industrial                264.4     269.6        (1.9 )     505.0      511.3        (1.2 )   1,022.1     1,034.4        (1.2 )
Wholesale on-system        83.9      89.0        (5.8 )     168.4      173.5        (3.0 )     348.0       362.0        (3.9 )
Other(2)                   31.5      29.1         8.5        64.5       60.3         7.0       128.4       125.0         2.8
Total on-system sales   1,144.1   1,176.3        (2.7 )   2,432.9    2,348.0         3.6     4,999.7     4,932.3         1.4
Off-system                183.0     171.4         6.8       335.3      308.1         8.8       731.2       595.1        22.9
Total KWh Sales         1,327.1   1,347.7        (1.5 )   2,768.2    2,656.1         4.2     5,730.9     5,527.4         3.7



(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 2.7% during the quarter ended June 30, 2013, as compared to the same period in 2012, mainly due to slightly more temperate than normal temperatures during the second quarter of 2013. 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 second quarter of 2013 were 27.7% less than the same period last year and 9.9% more than the 30-year average. Although the second quarter weather is usually measured in total cooling degree days, the slightly more temperate than normal temperatures in the second quarter of 2013 led to 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) outnumbering the cooling degree days, and correspondingly, a delay in the transition from heating to cooling season. Total heating degree days for the second quarter of 2013 were 110.7% more than the same period last year and 22.0% more than the 30-year average. KWh sales for our residential and commercial customers decreased during the second quarter of 2013 as compared to the second quarter of 2012 primarily due to the slightly more temperate than normal temperatures and the corresponding delay in the transition from heating to cooling season. The weather related decrease in residential sales was offset by an increase in the average residential customer count.

KWh sales for our on-system customers increased 3.6% during the six months ended June 30, 2013, as compared to the same period in 2012, primarily due to increased demand resulting from colder weather in the first quarter of 2013 as compared to the first quarter of 2012.


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KWh sales for our on-system customers increased 1.4% during the twelve months ended June 30, 2013, as compared to the same period in 2012, mainly due to improved customer counts. Residential and commercial kWh sales increased primarily due to the improved customer count.

Industrial sales decreased 1.9%, 1.2% and 1.2% during the quarter, six month and twelve month periods ended June 30, 2013, respectively, due to reductions by several large industrial customers.

We are not modifying our near and longer-term growth estimates disclosed in our 2012 10-K, although, on a weather-normalized basis, kWh sales were relatively flat in the first six months of 2013.

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 June 30, were as follows:

                      Electric Segment Operating Revenues



                                                                           ($ in millions)
                           3 Months     3 Months                 6 Months     6 Months                 12 Months     12 Months
                            Ended        Ended          %         Ended        Ended          %          Ended         Ended          %
Customer Class               2013         2012      Change(1)      2013         2012      Change(1)      2013          2012       Change(1)
Residential               $     47.9   $     47.3         1.4 % $    109.2   $    101.5         7.6 % $     222.2   $     217.7         2.1 %
Commercial                      41.0         41.4        (0.9 )       75.8         75.8         0.0         158.8         160.9        (1.3 )
Industrial                      21.1         20.8         1.5         38.2         38.8        (1.5 )        78.2          81.2        (3.8 )
Wholesale on-system              4.9          4.7         4.1          9.6          8.6        11.5          19.6          19.0         2.9
Other(2)                         3.7          3.4         9.0          7.3          6.9         5.6          14.3          14.1         1.6
Total on-system
revenues                  $    118.6   $    117.6         0.9   $    240.1   $    231.6         3.7   $     493.1   $     492.9         0.1
Off-system                       4.3          3.6        19.0          8.0          6.8        16.7          16.8          16.1         4.3
Total revenues from kWh
sales                          122.9        121.2         1.5        248.1        238.4         4.0         509.9         509.0         0.2
Miscellaneous
revenues(3)                      3.6          2.5        43.1          6.7          4.6        48.2          10.7           8.6        24.0
Total electric
operating revenues        $    126.5   $    123.7         2.3   $    254.8   $    243.0         4.9   $     520.6   $     517.6         0.6
Water revenues                   0.5          0.4        18.1          1.0          0.8        21.3           2.0           1.8        11.6
Total electric segment
operating revenues        $    127.0   $    124.1         2.4   $    255.8   $    243.8         4.9   $     522.6   $     519.4         0.6



(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 $1.1 million during the second quarter of 2013 as compared to the second quarter of 2012. Rate changes from the April 2013 Missouri rate increase, increased revenues an estimated $7.8 million. Improved customer counts increased revenues an estimated $1.1 million. These revenue increases were partially offset by a $3.2 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 second quarter of 2013 compared to the prior year quarter. The impact of weather and other related factors decreased revenues an estimated $4.6 million. The cumulative effect of these revenue changes had a favorable impact on gross margin quarter over quarter.

Revenues for our on-system customers increased $8.5 million for the six months ended June 30, 2013 as compared to the same period in 2012. Rate changes from the April 2013 Missouri rate increase, contributed an estimated $8.8 million to revenues. Weather and other related factors increased revenues an estimated $5.0 million during the six months ended June 30, 2013. Improved customer counts increased revenues an estimated $2.5 million. These revenue increases were partially offset by a $7.8 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 six months ended June 30, 2013 compared to the same period in 2012. The cumulative effect of the revenue changes mentioned above had a favorable impact on gross margin for the six months ended 2013 period.

Revenues for our on-system customers increased $0.2 million for the twelve months ended June 30, 2013 as compared to the same period in 2012. Rate changes, primarily the April 2013


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Missouri rate increase and the January 2012 Kansas rate increase, contributed an estimated $8.2 million to revenues. Improved customer counts increased revenues an estimated $7.4 million. Additionally, a change in our unbilled revenue estimate in the third quarter of 2012 added $3.4 million to revenues. These revenue increases were offset by a $13.7 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 twelve months ended June 30, 2013 compared to the same period in 2012. Weather and other related factors decreased revenues an estimated $5.1 million. The cumulative year over year revenue changes mentioned above impacted gross margin positively.

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 increased approximately $1.1 million, $2.1 million and $2.1 million during the quarter, six month and twelve month periods ended June 30, 2013, respectively, primarily due to increased transmission revenues. These miscellaneous 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 June 30, 2013 and 2012.

                            Three Months           Six Months           Twelve Months
                               Ended                  Ended                 Ended
(in millions)             2013        2012       2013       2012       2013       2012
Actual fuel and
purchased power
expenditures            $    43.7   $   39.9   $   91.5   $   80.6   $  184.5   $  181.1
Missouri fuel
. . .
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