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EDE > SEC Filings for EDE > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for EMPIRE DISTRICT ELECTRIC CO

Form 10-Q for EMPIRE DISTRICT ELECTRIC CO


8-Aug-2014

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, 2014, our gross operating revenues were derived as follows:

Electric segment sales*   90.3 %
Gas segment sales          8.4
Other segment sales        1.3


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


Table of Contents

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
                                      2014          2013        2014        2013        2014          2013

Basic earnings per weighted
average share of common stock      $     0.26    $     0.27   $    0.74    $  0.57   $     1.66    $     1.40
Diluted earnings per weighted
average share of common stock      $     0.26    $     0.27   $    0.74    $  0.57   $     1.65    $     1.40

Rate changes, primarily the June 2013 and June 2014 rate increases for our wholesale on-system customers, increased revenues during the second quarter of 2014 as compared to the second quarter of 2013. Increases in electric customer rates resulting from the April 1, 2013 Missouri rate increase positively impacted electric results for the six months ended and twelve months ended periods ended June 30, 2014 as compared to the same periods in 2013. However, increased regulatory operating expenses, depreciation and amortization expenses and property and other tax expenses, offset the impact of increased customer rates in all periods. Increased AFUDC due to higher levels of construction activity positively impacted results during each period presented.

The six months ended and twelve months ended June 30, 2014 periods were also positively impacted by favorable weather as compared to the same periods in 2013.

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, 2013 and June 30, 2014, 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. 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.

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.

In addition, although a non-GAAP presentation, we believe the presentation of gross margin (in the table below and elsewhere in this report) 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. 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. This reconciliation and margin information may not be comparable to other companies' presentations 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.


Table of Contents

                                                 Three Months     Six Months      Twelve Months
                                                    Ended            Ended            Ended
Earnings Per Share - 2013                       $         0.27    $      0.57    $          1.40

Revenues
Electric segment                                $         0.20    $      0.56    $          0.76
Gas segment                                              (0.01 )         0.05               0.10
Other segment                                             0.00           0.00               0.02
Total Revenue                                             0.19           0.61               0.88
Electric fuel and purchased power                        (0.18 )        (0.33 )            (0.33 )
Cost of natural gas sold and transported                  0.01          (0.04 )            (0.08 )
Gross Margin                                              0.02           0.24               0.47

Operating - electric segment                             (0.01 )        (0.02 )            (0.06 )
Operating -gas segment                                    0.00           0.00              (0.01 )
Maintenance and repairs                                  (0.02 )        (0.04 )            (0.06 )
Depreciation and amortization                            (0.01 )        (0.03 )            (0.11 )
Loss on plant disallowance                                0.00           0.03               0.03
Other taxes                                              (0.01 )        (0.03 )            (0.06 )
AFUDC                                                     0.02           0.03               0.06
Change in effective income tax rates                      0.00           0.01               0.02
Other income and deductions                               0.00          (0.01 )             0.00
Dilutive effect of additional shares issued               0.00          (0.01 )            (0.02 )
Earnings Per Share - 2014                       $         0.26    $      0.74    $          1.66

Recent Activities

Regulatory Matters

On May 28, 2014, we filed a Notice of Intended Case Filing with the Missouri Public Service Commission (MPSC) of our intentions to file an electric rate case in Missouri as early as August 1, 2014.

On December 3, 2013, we filed a request with the Arkansas Public Service Commission (APSC) for changes in rates for our Arkansas electric customers. We were seeking an annual increase in total revenue of approximately $2.2 million, or approximately 18%. The rate increase was requested to recover costs incurred to ensure continued reliable service for our customers, including capital investments, operating systems replacement costs and ongoing increases in other operation and maintenance expenses and capital costs. We reached an agreement with the parties in the case for an increase of $1.375 million, or approximately 11%. On May 20, 2014, we filed a settlement agreement with the APSC. The APSC held a hearing on the settlement agreement on July 22, 2014.

For additional information, see "Rate Matters" below.

Day-Ahead Market

The Southwest Power Pool (SPP) regional transmission organization (RTO) implemented a Day-Ahead Market, or Integrated Marketplace, on March 1, 2014 in which market participants buy and sell wholesale energy and reserves in both day-ahead and real-time markets through the operation of a single, consolidated SPP balancing authority. Through the Integrated Marketplace, the SPP is able to coordinate next-day generation across the region and provide participants, including Empire, with greater access to reserve energy. See "- Markets and Transmission" below for more information.

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" under Item 1. On March 12, 2014, the MPSC issued an order approving our IRP, effective March 12, 2014.


Table of Contents

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, 2014, compared to the same periods ended June 30, 2013.

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
                2014          2013        2014        2013        2014          2013

Electric     $     10.8    $     11.5   $    28.7    $  21.7   $     65.6    $     55.5
Gas                (0.3 )        (0.2 )       2.0        1.8          2.7           2.3
Other               0.7           0.4         1.4        0.8          3.0           1.7
Net income   $     11.2    $     11.7   $    32.1    $  24.3   $     71.3    $     59.5

Electric Segment



Gross Margin



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



                                   Three Months Ended       Six Months Ended       Twelve Months Ended
                                    2014         2013        2014       2013        2014          2013

Electric segment revenues        $    140.8    $  127.0   $    293.8   $ 255.8   $     574.5    $  522.6
Fuel and purchased power               54.4        42.0        109.9      87.3         198.0       175.4
Electric segment gross margins   $     86.4    $   85.0   $    183.9   $ 168.5   $     376.5    $  347.2

As shown in the table above, electric segment gross margin increased approximately $1.4 million during the second quarter of 2014 as compared to the second quarter of 2013, mainly due to increased rates for our wholesale electric customers.

The electric gross margin increased approximately $15.4 million for the six months ended June 30, 2014 as compared to the same period in 2013, mainly due to increased demand resulting from colder weather in the first quarter of 2014 as compared to the same period in 2013 and to increased rates for our Missouri electric customers.

The electric gross margin increased approximately $29.3 million for the twelve months ended June 30, 2014 as compared to the same period in 2013, due to a full twelve months of increased Missouri electric rates that were effective April 1, 2013, increased demand resulting from the favorable 2013-2014 heating season and an increase in average electric customer counts.

Sales and Revenues

Electric operating revenues comprised approximately 94.0% of our total operating revenues during the second quarter of 2014.

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

                                                                     kWh Sales
                        Second    Second                 6 Months   6 Months               12 Months   12 Months
                        Quarter   Quarter       %         Ended      Ended         %         Ended       Ended         %
Customer Class           2014      2013     Change(1)      2014       2013     Change(1)     2014        2013      Change(1)
Residential               369.8     387.3        (4.5 )%  1,011.3      958.3         5.5 %   1,989.6     1,943.5         2.4 %
Commercial                381.9     377.0         1.3       770.5      736.7         4.6     1,575.5     1,557.7         1.1
Industrial                261.7     264.4        (1.0 )     498.8      505.0        (1.2 )   1,009.3     1,022.1        (1.3 )
Wholesale on-system        80.6      83.9        (4.0 )     164.7      168.4        (2.2 )     339.4       348.0        (2.5 )
Other(2)                   30.0      31.5        (4.7 )      65.2       64.5         1.1       130.1       128.4         1.3
Total on-system sales   1,124.0   1,144.1        (1.8 )   2,510.5    2,432.9         3.2     5,043.9     4,999.7         0.9



(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 decreased 1.8% during the quarter ended June 30, 2014, as compared to the same period in 2013, despite more temperate weather in the second quarter of 2014. Contributing to the decreased sales were volumetric changes related to weather variability as we transition from heating to cooling season, customer usage and other related factors. KWh sales for our residential customers, which are more weather sensitive, decreased 4.5%. Commercial sales increased 1.3%.

KWh sales for our on-system customers increased 3.2% during the six months ended June 30, 2014, as compared to the same period in 2013, primarily due to increased demand resulting from colder weather in the first quarter of 2014. Residential and commercial kWh sales increased primarily due to the colder weather in the first quarter of 2014.

KWh sales for our on-system customers increased 0.9% during the twelve months ended June 30, 2014, as compared to the same period in 2013, due to increased customer counts and increased demand resulting from the favorable 2013-2014 heating season, partially offset by the milder 2013 third quarter weather. Residential and commercial kWh sales increased primarily due to the colder weather in the first quarter of 2014 and increased customer counts.

Industrial sales decreased 1.0%, 1.2% and 1.3% during the quarter, six month and twelve month periods ended June 30, 2014, respectively, due to reduced usage 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 June 30 were as follows (dollars in millions):

                                                                 Electric Segment Operating Revenues
                         Second       Second                   6 Months      6 Months                   12 Months      12 Months
                         Quarter     Quarter         %          Ended         Ended           %           Ended          Ended           %
Customer Class            2014         2013      Change(1)       2014          2013       Change(1)       2014           2013        Change(1)
Residential             $    47.0    $   47.9         (1.9 )% $    119.2    $    109.2          9.2 %  $     237.7    $     222.2          7.0 %
Commercial                   42.1        41.0          2.7          82.2          75.8          8.4          168.8          158.8          6.3
Industrial                   21.4        21.1          1.4          39.4          38.2          3.1           81.7           78.2          4.5
Wholesale on-system           5.7         4.9         17.8          10.9           9.6         12.7           21.3           19.6          8.7
Other(2)                      3.7         3.7         (1.4 )         7.5           7.3          4.8           15.3           14.3          6.6
Total on-system
revenues                $   119.9    $  118.6          1.1    $    259.2    $    240.1          8.0    $     524.8    $     493.1          6.4
Off-system and SPP
Integrated Market
activity(3)                  16.6         4.3        285.8          25.9           8.0        224.4           33.4           16.8         98.5
Total revenues from
kWh Sales                   136.5       122.9         11.0         285.1         248.1         15.0          558.2          509.9          9.5
Miscellaneous
revenues(4)                   3.8         3.6          5.3           7.7           6.7         14.5           14.2           10.7         32.6
Total electric
operating revenues      $   140.3    $  126.5         10.9    $    292.8    $    254.8         14.9    $     572.4    $     520.6          9.9
Water revenues                0.5         0.5         (2.3 )         1.0           1.0         (1.1 )          2.1            2.0          7.6
Total electric
segment operating
revenues                $   140.8    $  127.0         10.8    $    293.8    $    255.8         14.9    $     574.5    $     522.6          9.9



(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) As of March 1, 2014, off-system revenues were effectively replaced by SPP Integrated Market activity. SPP integrated market net sales were $16.5 million, $22.8 million and $22.8 million for the three months, six months and twelve months ended, June 30, 2014, periods respectively. See "- Markets and Transmission" below for more information.

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

Revenues for our on-system customers increased $1.3 million during the second quarter of 2014 as compared to the second quarter of 2013. Rate changes, primarily the June 2013 and June 2014 rate increases for our wholesale on-system customers, increased revenues an estimated $2.6 million. An increase in fuel recovery revenue (and corresponding increase in fuel expenses, resulting in no net effect on gross margin) from Missouri customers during the second quarter of 2014 compared to the prior year quarter increased revenues by $0.9 million. Improved customer counts increased revenues an estimated $0.2 million. The impact of other volumetric factors inclusive of weather decreased revenues an estimated $2.4 million.


Table of Contents

Revenues for our on-system customers increased $19.2 million for the six months ended June 30, 2014 as compared to the same period in 2013. Rate changes, primarily the April 2013 Missouri retail on-system customer rate increase and the June 2013 increase for our wholesale on-system customers, contributed an estimated $10.2 million to revenues. Weather and other related factors increased revenues an estimated $6.8 million during the six months ended June 30, 2014. A $1.6 million increase 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, 2014 compared to the same period in 2013 positively impacted revenues. Improved customer counts increased revenues an estimated $0.6 million.

Revenues for our on-system customers increased $31.6 million for the twelve months ended June 30, 2014 as compared to the same period in 2013. Rate changes, primarily the April 2013 Missouri retail on-system customer rate increase and the June 2013 increase for our wholesale on-system customers, contributed an estimated $26.0 million to revenues. Weather and other related factors increased revenues an estimated $4.0 million during the twelve months ended June 30, 2014. A $3.3 million increase 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, 2014 compared to the same period in 2013 positively impacted revenues. Improved customer counts increased revenues an estimated $1.7 million. A change to our estimate of unbilled revenues in the third quarter of 2012 increased revenues $3.4 million in the 2013 twelve-month period. The 2014 twelve-month ended period does not include a corresponding adjustment.

Off-System Electric Transactions.

In the past, in addition to sales to our own customers, we also sold power to other utilities as available, including (since 2007) through the SPP Energy Imbalance Services (EIS) market. However, on March 1, 2014, the SPP RTO implemented a Day-Ahead Market, or Integrated Marketplace, which replaces the real-time EIS market. SPP integrated market activity is settled for each market participant in various time increments. When we sell more generation to the market than we purchase, based on the prescribed time increments, the net sale is included as part of electric revenues. When we purchase more generation from the market than we sell, based on the prescribed time increments, the net purchase is recorded as a component of fuel and purchased power on the financial statements. See "- Markets and Transmission" below. The majority of our market activity sales margin is included as a component of the fuel adjustment clause in our Missouri, Kansas and Oklahoma jurisdictions and our transmission rider in our Arkansas jurisdiction. As a result, nearly all of the market activity sales margin flows back to the customer and has little effect on margin or net income.

Miscellaneous Revenues

Our miscellaneous revenues are comprised mainly of transmission revenues, reflecting our position as an SPP transmission owner, late payment fees and renewable energy credit sales.

The following table represents our miscellaneous revenues for our electric segment for the applicable periods ended June 30 (in millions):

Three Months Ended Six Months Ended Twelve Months Ended 2014 2013 2014 2013 2014 2013

Miscellaneous revenues $ 3.8 $ 3.6 $ 7.7 $ 6.7 $ 14.2 $ 10.7

Our miscellaneous revenues increased for the three months ended June 30, 2014 period as compared to the same period in 2013, mainly due to increased renewable energy credit sales.

Our miscellaneous revenues increased for the six months ended and the twelve months ended June 30, 2014 periods as compared to the same periods in 2013, mainly due to increased transmission revenues and renewable energy credit sales.


Table of Contents

Operating Revenue Deductions - Fuel and Purchased Power

Included in our fuel and purchased power expenditures are our generation costs and net purchases from the SPP Integrated Marketplace. Net SPP integrated market activity is settled for each market participant in various time increments. As described above, when we purchase more generation from the market than we sell, based on the prescribed time increments, the net purchase is recorded as a component of fuel and purchased power on the financial statements. 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, 2014 and 2013 (in millions):

                                Three Months Ended         Six Months Ended        Twelve Months Ended
                                2014          2013         2014         2013        2014          2013
Actual fuel and purchased
power expenditures(1)        $     55.8    $     43.7   $    117.0    $   91.5   $     207.6    $   184.5
Missouri fuel adjustment
recovery (2)                        0.4          (0.4 )        0.7        (0.9 )        (1.1 )       (4.4 )
Missouri fuel adjustment
deferral(3)                        (0.8 )        (0.7 )       (5.4 )      (1.9 )        (4.1 )       (1.6 )
Kansas and Oklahoma
regulatory adjustments(3)          (0.1 )        (0.1 )       (0.6 )         -          (0.9 )        0.1
SWPA amortization(4)               (0.6 )        (0.7 )       (1.4 )      (1.4 )        (2.8 )       (2.9 )
Unrealized (gain)/loss on
derivatives                        (0.3 )         0.2         (0.4 )         -          (0.7 )       (0.3 )
Total fuel and purchased
power expense per income
statement                    $     54.4    $     42.0   $    109.9    $   87.3   $     198.0    $   175.4



(1) The periods ended June 30, 2014 include SPP integrated market net purchases of $19.6 million, $26.0 million and $26.0 million for the three months, six months and twelve months ended, June 30, 2014 periods, respectively.

(2) 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.

(3)A negative amount indicates costs have been under recovered from customers and a positive amount indicates costs have been over recovered from customers.

(4) Missouri ten year amortization of the $26.6 million payment received from the SWPA in September, 2010, of which $14.1 million of the Missouri portion remains to be amortized as of June 30, 2014.

Operating Revenue Deductions - Other Than Fuel and Purchased Power



The table below shows regulated operating expense increases/(decreases) for the
applicable periods ended June 30, 2014 as compared to the same periods in 2013
(in millions):



                                           Three Months Ended     Six Months Ended      Twelve Months Ended
                                             2014 vs. 2013          2014 vs. 2013          2014 vs. 2013
Regulated operating expense:
Transmission and distribution
. . .
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