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EDE > SEC Filings for EDE > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for EMPIRE DISTRICT ELECTRIC CO

Form 10-Q for EMPIRE DISTRICT ELECTRIC CO


8-Nov-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 September 30, 2013, our gross operating revenues were derived as follows:

Electric segment sales*   90.6 %
Gas segment sales          8.1
Other segment sales        1.3


*Sales from our electric segment include 0.4% 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 September 30 (in
dollars):



                             Three Months Ended         Nine Months Ended         Twelve Months Ended
                             2013          2012         2013          2012         2013          2012
Basic and diluted
earnings per weighted
average share of common
stock                     $     0.56    $     0.60   $     1.13    $     1.09   $     1.36    $     1.30


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

Increases in electric customer rates resulting from the April 1, 2013 Missouri rate increase (see "Recent Activities - Regulatory Matters" below) and higher period over period customer counts drove increases in revenue and margin in each of the periods presented. AFUDC also increased during each of the periods due to higher levels of construction activity, positively impacting results.

Weather was a negative driver in each period. Weather that was cooler than normal and significantly cooler than the 2012 quarter offset the impact of increased customer rates during the 2013 quarter. The impact of favorable weather during the 2012-2013 winter cooling season was offset by the cooler third quarter 2013 weather discussed above. As a result, revenue and gross margin were negatively affected during the nine and twelve month periods. A change in our unbilled revenue estimate made in the third quarter of 2012 negatively impacted revenue and margin in all three periods ended September 30, 2013.

Increased regulatory operating expenses and depreciation and amortization expenses negatively impacted results in each period presented. In addition, a regulatory write off of approximately $3.6 million (see "Recent Activities - Regulatory Matters" below) negatively impacted nine and twelve month results.

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


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                                                Three Months      Nine Months      Twelve Months
                                                    Ended            Ended             Ended
Earnings Per Share - 2012                       $        0.60    $        1.09    $          1.30

Revenues
Electric segment                                $       (0.04 )  $        0.14    $          0.09
Gas segment                                              0.00             0.10               0.10
Other segment                                            0.01             0.01               0.01
Total Revenue                                           (0.03 )           0.25               0.20
Electric fuel and purchased power                        0.05             0.10               0.16
Cost of natural gas sold and transported                 0.00            (0.07 )            (0.07 )
Margin                                                   0.02             0.28               0.29

Operating - electric segment                            (0.03 )          (0.15 )            (0.16 )
Operating -gas segment                                   0.00             0.01               0.00
Operating -other segment                                 0.00            (0.01 )             0.00
Maintenance and repairs                                  0.00             0.02               0.04
Depreciation and amortization                           (0.04 )          (0.10 )            (0.10 )
Loss on plant disallowance                               0.00            (0.03 )            (0.03 )
Other taxes                                             (0.01 )          (0.03 )            (0.04 )
Interest charges                                         0.00             0.00               0.01
AFUDC                                                    0.02             0.04               0.06
Change in effective income tax rates                     0.01             0.02               0.03
Other income and deductions                              0.00             0.00              (0.02 )
Dilutive effect of additional shares issued             (0.01 )          (0.01 )            (0.02 )
Earnings Per Share - 2013                       $        0.56    $        1.13    $          1.36

Recent Activities

Regulatory Matters

On September 17, 2013, we advised the Arkansas Public Service Commission of the intention to file an application for a general change or modification in our rates, charges and tariffs no sooner than 60 days and no later than 90 days from the date of notice.

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


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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.

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)".

As part of our IRP, we agreed to introduce additional demand-side management programs to help our customers use energy more efficiently. On October 30, 2013 we filed a request with the MPSC to implement a portfolio of demand-side management programs under the Missouri Energy Efficiency Investment Act (MEEIA). The request, subject to regulatory approval, would implement new energy efficiency programs for customers in 2014. The request also includes a Demand-Side Program Investment Mechanism (DSIM) that would be added to monthly customer bills if approved by the MPSC. The DSIM charge is designed to offset the financial costs associated with the programs.

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 were used for general corporate purposes.

Union Contracts

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.

The EDE contract with Local 1474 of the IBEW expired on October 31, 2013. Neither party chose to terminate the agreement, and, under its terms, the agreement has been automatically extended until October 31, 2014. At December 31, 2012, 331 EDE employees were members of Local 1474 of the IBEW.

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, 2013, compared to the same periods ended September 30, 2012.

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
               2013      2012       2013        2012        2013          2012

Electric     $   23.7   $ 25.7   $     45.4    $  44.6   $     53.4    $     51.9
Gas              (0.6 )   (0.4 )        1.1        0.3          2.1           1.2
Other             0.9      0.2          1.8        1.2          2.4           1.6
Net income   $   24.0   $ 25.5   $     48.3    $  46.1   $     57.9    $     54.7


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Electric Segment

Gross Margin

As shown in the table below, electric segment gross margin increased approximately $0.8 million, $16.3 million and $16.8 million for the quarter, nine months ended and twelve months ended September 30, 2013 periods, respectively, as compared to the corresponding periods in 2012. Increased electric rates for our Missouri customers and an increase in average customer counts positively impacted revenues and gross margin for all periods presented. These increases were offset in the third quarter of 2013 and partially offset in the nine months ended and twelve months ended September 30, 2013 periods by weather impacts. A change in our estimate for unbilled revenues made during the third quarter of 2012 also negatively impacted margin in all three periods.

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
                            2013         2012         2013         2012        2013          2012

Electric segment
revenues                 $    150.4    $   152.7   $    406.2    $  396.5   $     520.3    $   514.5
Fuel and purchased
power                          44.9         48.0        132.2       138.8         172.3        183.3
Electric segment gross
margins                  $    105.5    $   104.7   $    274.0    $  257.7   $     348.0    $   331.2
Margin as % of total
electric segment
revenues                       70.2 %       68.5 %       67.5 %      65.0 %        66.9 %       64.4 %

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 95.5% of our total operating revenues during the third 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 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            2013       2012     Change(1)       2013       2012     Change(1)     2013        2012      Change(1)
Residential                495.2      573.3       (13.6 )%   1,453.5    1,438.9         1.0 %   1,865.4     1,852.0         0.7 %
Commercial                 414.1      447.3        (7.4 )    1,150.8    1,184.5        (2.8 )   1,524.5     1,558.0        (2.1 )
Industrial                 270.0      274.2        (1.5 )      775.0      785.5        (1.3 )   1,018.0     1,030.8        (1.2 )
Wholesale on-system         93.9       98.6        (4.7 )      262.3      272.1        (3.6 )     343.3       355.1        (3.3 )
Other(2)                    33.6       33.6        (0.1 )       98.1       93.9         4.5       128.4       124.3         3.3
Total on-system sales    1,306.8    1,427.0        (8.4 )    3,739.7    3,774.9        (0.9 )   4,879.6     4,920.2        (0.8 )
Off-system                 144.4      217.6       (33.7 )      479.7      525.8        (8.8 )     657.9       679.9        (3.2 )
Total KWh Sales          1,451.2    1,644.6       (11.8 )    4,219.4    4,300.7        (1.9 )   5,537.5     5,600.1        (1.1 )



(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 8.4% during the quarter ended September 30, 2013, mainly due to milder weather as compared to the third quarter of 2012. 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 2013 were 15.5% less than the same period last year and 1.9% less than the 30-year average. KWh sales for our residential and commercial customers


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decreased during the third quarter of 2013 as compared to the third quarter of 2012 primarily due to the milder weather during the third quarter of 2013.

KWh sales for our on-system customers decreased slightly (0.9%) during the nine months ended September 30, 2013, as compared to the same period in 2012, reflecting the milder weather in the third quarter of 2013 and slightly more temperate than normal temperatures during the second quarter of 2013, partially offset by favorable first quarter weather. KWh sales for our residential customers, however, increased 1.0% during the nine months ended September 30, 2013, mainly due to an increase in the average residential customer count. Commercial kWh sales decreased 2.8% reflecting the milder weather described above.

KWh sales for our on-system customers decreased slightly (0.8%) during the twelve months ended September 30, 2013, as compared to the same period in 2012, mainly due to the milder weather described above, partially offset by favorable first quarter weather. Residential kWh sales increased slightly (0.7%) primarily due to the increase in the average residential customer count while commercial kWh sales decreased 2.1% reflecting the milder weather described above.

Industrial sales decreased 1.5%, 1.3% and 1.2% during the quarter, nine month and twelve month periods ended September 30, 2013, respectively, due to operating reductions by several large industrial customers.

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              2013         2012      Change(1)        2013         2012      Change(1)      2013          2012       Change(1)
Residential              $     62.9   $     66.9        (6.0 )%  $    172.1   $    168.4         2.2 % $     218.2   $     215.8         1.1 %
Commercial                     46.5         46.5         0.1          122.3        122.3         0.1         158.9         160.0        (0.7 )
Industrial                     24.0         22.6         5.9           62.2         61.5         1.2          79.5          79.9        (0.4 )
Wholesale on-system             5.7          5.7        (0.5 )         15.3         14.3         6.7          19.5          18.5         5.3
Other(2)                        4.1          3.8         7.7           11.4         10.7         6.3          14.7          14.0         4.5
Total on-system
revenues                 $    143.2   $    145.5        (1.6 )   $    383.3   $    377.2         1.6   $     490.8   $     488.2         0.5
Off-system                      3.2          4.8       (33.8 )         11.1         11.6        (4.0 )        15.2          16.2        (5.8 )
Total revenues from
kWh sales                     146.4        150.3        (2.6 )        394.4        388.8         1.5         506.0         504.4         0.3
Miscellaneous
revenues(3)                     3.4          1.9        79.2           10.2          6.4        57.4          12.2           8.3        45.6
Total electric
operating revenues       $    149.8   $    152.2        (1.6 )   $    404.6   $    395.2         2.4   $     518.2   $     512.7         1.1
Water revenues                  0.6          0.5        15.7            1.6          1.3        19.2           2.1           1.8        15.5
Total electric segment
operating revenues       $    150.4   $    152.7        (1.5 )   $    406.2   $    396.5         2.4   $     520.3   $     514.5         1.1



(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 $2.3 million during the third quarter of 2013 as compared to the third quarter of 2012. Rate changes from the April 2013 Missouri rate increase increased revenues an estimated $9.9 million. Improved customer counts increased revenues an estimated $1.1 million. An increase in fuel recovery revenue (and corresponding reduction in fuel expenses, resulting in no net effect on gross margin) from Missouri customers during the third quarter of 2013 increased revenues $1.1 million compared to the prior year quarter. The impact of weather and other related factors decreased revenues an estimated $11.0 million. Additionally, a change in our unbilled revenue estimate in the third quarter of 2012 (which added $3.4 million to revenues in 2012) decreased revenues $3.4 million in the third quarter of 2013.

Revenues for our on-system customers increased $6.1 million for the nine months ended September 30, 2013 as compared to the same period in 2012. Rate changes from the April 2013 Missouri rate increase contributed an estimated $18.8 million to revenues. Improved customer counts increased revenues an estimated $3.6 million. These revenue increases were partially offset by a $6.8 million decrease in fuel recovery revenue (and corresponding reduction in fuel expenses, resulting in


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no net effect on gross margin) from Missouri customers during the nine months ended September 30, 2013 compared to the same period in 2012. Weather and other related factors decreased revenues an estimated $6.1 million during the nine months ended September 30, 2013. The change in our unbilled revenue estimate in the third quarter of 2012 decreased revenues $3.4 million during the nine months ended September 30, 2013. The cumulative effect of the revenue changes mentioned above had a favorable impact in gross margin for the nine months ended 2013 period.

Revenues for our on-system customers increased $2.6 million for the twelve months ended September 30, 2013 as compared to the same period in 2012. Rate changes, primarily the April 2013 Missouri rate increase and the January 2012 Kansas rate increase, contributed an estimated $18.4 million to revenues. Improved customer counts increased revenues an estimated $5.4 million. These revenue increases were partially offset by a $9.4 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 September 30, 2013 compared to the same period in 2012. Weather and other related factors decreased revenues an estimated $8.4 million. The change in our unbilled revenue estimate in the third quarter of 2012 decreased revenues $3.4 million during the twelve months ended September 30, 2013. 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 $1.5 million, $3.7 million and $3.8 million during the quarter, nine month and twelve month periods ended September 30, 2013, respectively, primarily due to increased Southwest Power Pool (SPP) 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 September 30, 2013 and 2012.

. . .

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