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Empire District Electric (NYSE:EDE)

Q1 2013 Earnings Call

April 26, 2013 1:00 pm ET

Executives

Janet S. Watson - Secretary and Treasurer

Bradley P. Beecher - Chief Executive Officer, President and Director

Laurie A. Delano - Chief Financial Officer and Vice President of Finance

Analysts

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Neil Kalton - Wells Fargo Securities, LLC, Research Division

Timothy M. Winter - Gabelli & Company, Inc.

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Empire District Electric First Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn conference over to our host, Ms. Jan Watson. Please go ahead.

Janet S. Watson

Good afternoon, Michael. Thank you for joining us for the Empire District Electric Company's teleconference to discuss the company's operations and to review the financial results for the first quarter and 12 months ended March 31, 2013.

A live webcast of this call is available on the Empire website at empiredistrict.com. With me today are Brad Beecher, President and Chief Executive Officer; and Laurie Delano, Vice President and Chief Financial Officer.

Our press release announcing first quarter earnings was issued yesterday morning. A replay of the call will be available for 2 weeks at (800) 406-7325 passcode 4614060#.

Before I turn the call over to Brad, I need to remind you that during the course of the call, some of the comments we may make may contain forward-looking statements as defined by the Securities and Exchange Commission, and there are a number of uncertainties inherent in such comments. Although we believe that our expectations and beliefs are based on reasonable assumptions, actual results may differ materially.

We direct you to Slide 2 of the slide deck of this call, which is available on our website and also to our most recent Form 10-K filed with the Securities and Exchange Commission for a list of some of the factors that could cause future results to differ materially from our expectations.

Also, for further clarification, the earnings per share impact of revenue and expense are discussed on an after-tax basis, and the estimated earnings per share impact of individual items and the presentation of gross margin are non-GAAP presentations. We believe these to be useful to investors, showing the impact of the various components on earnings per share and analyzing changes in performance from one period to the next. These may not be comparable to other companies or more useful than the GAAP presentation included in the income statement and is not intended to be an alternative to GAAP earnings per share as a measure of operating performance or any other measure of financial performance presented in accordance with GAAP.

I now turn the call over to Brad Beecher.

Bradley P. Beecher

Thank you, Jan. Good afternoon, everyone, and welcome. Today, we will discuss matters from the board and annual shareholders' meetings conducted yesterday, as well as our financial results for the first quarter and 12 months ending March 31, 2013. We will also update you on other recent company activities.

During their meeting yesterday, the board declared a quarterly dividend of $0.25 per share, payable June 17, for shareholders of record as of June 3. This represents a 4.3% annual yield at yesterday's closing price of $23.20.

As shown on Slide 3, we reported first quarter 2013 earnings of $12.6 million or $0.30 per share. This compares to the same period in 2012 when earnings were $9.8 million or $0.23 per share. The primary driver of the increase was the return of near-normal weather, resulting in a 10% increase in kilowatt hour sales compared to last year. We also continue to see a favorable increase in electrical -- electric customer counts. The customer count in the Joplin area increased by about 800 customers year-over-year and our systemwide electric system count is now less than 100 customers below the pre-May 2011 tornado levels. The positive impact of weather and customer counts was somewhat offset by a regulatory pretax write-off of $3.6 million resulting from our Missouri rate case stipulation. Laurie will give you more details on the write-off in her financial overview. We also experienced higher O&M expenses during the quarter.

For the 12-month period ending March 31, 2013, earnings were $58.5 million or $1.38 per share compared to March 31, 2012, 12-month earnings of $52.9 million or $1.26 per share for the same period last year.

In other news from yesterday's annual meeting, shareholders reelected board members Ross Hartley, Herbert Smith -- Schmidt and James Sullivan to 3-year terms. They also ratified the appointment of PricewaterhouseCoopers LLP as Empire's independent registered public accounting firm for the fiscal year ending December 31, 2013, and passed the non-binding advisory proposal approving the compensation of Empire's named executive officers as disclosed in the proxy statement.

The shareholder proposal for a report on actions the company is taking or could take to reduce risk through its energy portfolio by presenting all cost-effective energy efficiency resources was soundly rejected by an 86% to 14% margin.

During our call with you in February, we reported we had filed a unanimous stipulation and agreement with the Missouri Public Service Commission for changes in rates for our electric customers.

Turning to Slide 4. This agreement was approved by the Missouri Public Service Commission and new rates were put in place on April 1. The rates will allow us an annual increase in base revenues of about $27.5 million. You will recall our request had been for $30.7 million. Our total company rate base as of 12/31/12 was approximately $1.3 billion.

In early March, we received further good news as Standard & Poor's upgraded our corporate credit rating to BBB from BBB-, senior secured debt to A- from BBB+, senior unsecured debt to BBB from BBB- and our short-term paper rating to A2 from A3. S&P's outlook for Empire is stable.

I will now turn the call over to Laurie for details of our financials.

Laurie A. Delano

Thank you, Brad, and good afternoon to everyone. To just expand on Brad's comments a moment, again, we are very pleased with S&P's recent credit rating upgrade. We believe this comes as a positive result of our continued focus on and execution of our operational and financial plan. We will continue this focus through cost-conscious management of our O&M costs and our capital expenditure plan.

As we review our first quarter 2013 earnings per share results of $0.30 compared to 2012 results of $0.23, I'll continue to refer to our webcast presentation slides to talk about the various impacts to the quarter. As usual, I'll provide a non-GAAP basic earnings per share reconciliation for the quarter on a consolidated basis. For those of you who have our press release in front of you, that will be the earnings per share reconciliation I'll follow. For those of you looking at our slides, the earnings per share illustration begins on Slide 5.

As indicated earlier, these earnings per share figures throughout the call are provided on an after-tax estimated basis. As Slide 5 illustrates, total gross margin, which we define as revenues less fuel and purchased power cost, increased an estimated $0.15 per share during the quarter. This more than offset our increases in operating and maintenance expense and the disallowance Brad mentioned in his opening remarks.

I'll take just a moment and expand on the disallowance. This nonrecurring, onetime noncash adjustment resulted from the March 6 order from the Missouri Public Service Commission, which approved the settlement agreement related to our request filed back in July of 2012 to increase electric rates for Missouri customers. Of the total disallowance, $1.2 million is included in operating and maintenance expense in our financial statements. It represents a regulatory reversal of a prior period gain on the sale of a unit train. The remaining $2.4 million reflects a construction prudency disallowance for a small portion of the cost of the Iatan 2 project. The Iatan 2 disallowance decreased earnings per share by about $0.03. An increase in depreciation and amortization expense of approximately $1.1 million decreased earnings per share $0.02. Decreased interest expense resulting from refinancing, increased allowance for funds used during construction and other income and deductions added about $0.03 in total to earnings per share.

Now I'll give you a little more detail on some of the margin and O&M expense components that impacted earnings for the quarter. The callout box on Slide 5 provides the breakdown of the $0.15 earnings per share impact of the gross margin components.

Total Electric segment revenues increased $9 million quarter-over-quarter. Weather was the big driver, as Brad mentioned earlier. The 2013 quarter saw a return to near-normal weather and colder temperatures compared to the mild 2012 quarter. During the 2013 quarter, we saw an increase of over 33% in Heating Degree Days compared to the record warm 2012 quarter.

Weather impacts increased revenue an estimated $9.3 million, adding an estimated $0.09 per share to margin. Increased customer counts compared to the 2012 quarter added an estimated $1.6 million to first quarter 2013 revenues, increasing margin about $0.02 per share.

I also should mention that electric fuel-related revenues were lower by about $4.7 million quarter-over-quarter due primarily to a return of overrecovered fuel costs to our customers through electric rates as prescribed in our fuel adjustment mechanisms. However, these decreased revenues were offset by a corresponding reduction in fuel expense resulting in no net effect on gross margin.

Changes in off-system, water and miscellaneous revenues round out the remaining increase in Electric segment revenues and added an estimated $0.02 per share to margin. The colder first quarter 2013 weather also had a favorable impact on our Gas segment margin. Gas operating revenues increased approximately $4.8 million during the 2013 quarter, increasing margin about $1.5 million or $0.02 per share.

Turning back to the other earnings per share impacts, I'll now focus on our operating and maintenance costs. Slide 6 contains a callout box that provides the breakdown of the earnings per share impact of these items that drove a decrease of about $0.06 per share quarter-over-quarter. Our Electric segment saw increased operating expenses of about $3.8 million, including the onetime $1.2 million regulatory gain reversal mentioned earlier. This reversal reduced earnings per share about $0.02 during the quarter. Increased transmission expenses reduced earnings another $0.01 per share. Decreased distribution expenses, primarily reflecting the end of amortizing the expense related to our 2007 ice storms, added $0.02 to earnings quarter-over-quarter. Higher production maintenance expense, employee health care expense and labor expense combined to reduce earnings an additional $0.04 per share.

Moving on to Slide 7, I'll briefly go over the 12-month after-tax earnings per share reconciliation. Again, for those of you who don't have the slide, this information is also in our press release. As Brad mentioned, earnings for the 12-month period ending March 31, 2013, were $1.38 per share. Beginning with the 12-month result ending March 31, 2012, earnings of $1.26, we saw an increase in total gross margin of $0.25 per share during the 12-month period. Increased operating and maintenance expenses reduced earnings per share about $0.14. The loss on the plant disallowance reduced earnings another $0.03 per share, and increased depreciation and amortization reduced earnings about $0.01. Lower interest expense increased earnings $0.03 per share as we were able to reduce long-term debt interest expense by $3.1 million during the period through refinancing debt at a more favorable interest rate. However, this reduction in interest expense was partially offset by the effect of ending the recognition of Iatan 2 carrying charges in June 2011.

The change in AFUDC increased earnings per share another $0.03, reflecting the environmental retrofit project at our Asbury plant. The dilutive effect of common stock issued during the period primarily through our dividend reinvestment plans brought earnings per share down about $0.01.

On Slide 7, we also break out the factors that drove the change in gross margin. Total Electric segment revenues increased $4.1 million period-over-period. As you can see in the callout box, the positive effect of a full 12 months of the Missouri rate increase effective in June 2011 added revenues of $5 million or an estimated margin impact of $0.08 per share. Weather added an estimated $1.7 million to revenue or about $0.02 per share to margin. Both of these 12-month periods were favorably impacted by above-average warm temperatures during the summer cooling months. However, the colder 2013 first quarter weather did result in a -- in the favorable margin impact. An 8% increase in year-over-year customer counts reflecting the tornado recovery added about $4.9 million in revenues, impacting margin an estimated $0.05 per share. A change to our estimate of unbilled revenues of $3 million, which we made in the third quarter of 2012, increased margin $0.04 per share.

Again, I'll mention that electric fuel-related revenues decreased about $9.9 million year-over-year as we returned overrecovered fuel costs to our customers through our electric rates. Again, these decreased revenues were offset by a corresponding reduction in fuel expense with no net effect on gross margin.

Off-system, water and miscellaneous revenue changes round out the remaining changes in Electric segment revenue, adding about $0.05 per share to margin. Other non-volume, fuel-related items added another $0.02 to margin. Our Gas segment margin increased an estimated $0.01 per share over the -- period-over-period, as gas revenues increased approximately $3.5 million.

In the callout box on Slide 8, we've broken out the operating and maintenance expenses that reduced earnings per share $0.14 during the 2013 12-month period. The regulatory reversal that I mentioned previously, again, reduced earnings about $0.02. Increased transmission operations expense reduced earnings per share by $0.03. Distribution maintenance expense decreased, again, primarily reflecting the end of the ice storm expense amortization, adding about $0.04 per share to earnings. Operating expenses at our Iatan 2 and Plum Point generating facilities were higher, reducing earnings per share around $0.03. Production maintenance expenses at our generating facilities increased, reducing earnings about $0.04 per share. Health care expenses, labor costs and professional service fees all increased period-over-period, reducing earnings a combined $0.07 per share.

I'll take just a moment to update you on a couple of balance sheet items. Our retained earnings balance at March 31 is $49.1 million. As to our liquidity position at March 31, we had $23 million outstanding related to short-term debt borrowings out of the $150 million in capacity and we're at that same level today.

We are on track to settle on our commitments of $30 million of the 3.73% series first mortgage bonds due 2033 and $120 million of the 4.32% series first mortgage bonds due 2043. These will be settled on or about May 30, 2013.

And as I mentioned on our last call, under our current projections, we did not anticipate the need for any additional equity or debt financing until the latter half of 2014. Finally, our full year 2013 earnings guidance range of $1.26 to $1.43 per share that we provided in February of this year remains unchanged.

I'll now turn the presentation back to Brad.

Bradley P. Beecher

Thank you, Laurie. We continue our long-term strategy to remain a high-quality, pure play regulated electric and gas utility. We manage a favorable energy supply portfolio consisting of reliable, diverse, low-cost regulated generating assets with an experienced management team and a focus on constructive regulatory relationships. This includes managing our rate cases to reduce regulatory lag.

In Missouri, we also utilize trackers for pension, retiree health care, vegetation management, as well as Iatan 2, Iatan Common and Plum Point O&M costs.

As I mentioned earlier, we received very favorable treatment in our recent Missouri rate case, receiving $27.5 million of our $30.7 million request. We plan to continue our low-risk growth strategy by building our core business with rate base infrastructure to serve our regulated customer base. Our plan includes maintaining strong financial metrics with a target of 50-50 debt and equity. We will strive to maintain investment-grade credit ratings.

Before I turn the call back to the operator, let me update you quickly on Senate Bill -- Missouri Senate Bill 207, commonly known as ISRS legislation. As of today, Senate Bill 207 still has not been on the floor for Senate debate. Given the procedural process required to pass the bill between the House and the Senate, the continued steadfast opposition to the bill, combined with only a short 3 weeks remaining in this year's legislative session, it is clear that time is quickly running out on this piece of legislation.

I will now turn the call back to the operator for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Julien Dumoulin-Smith with UBS.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

First quick question. As you think about your loan growth here in the first quarter and as it relates to your expectations vis-a-vis guidance, et cetera, how do you feel and where is it trending and if you can kind of just provide a little bit of sense by customer class, if you don't mind?

Bradley P. Beecher

Well, the recovery continues in Joplin and it's continuing at really close to the pace we expected. And as we said in previous calls, our loan growth is relatively flat throughout our service territory. There are efficiency trends going on, but those are completely being offset by what's going on in Joplin with all the growth right now.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. Excellent. Then second, I've been curious, I mean, you guys are always so close to the subject. How does the coal ash updates, if you will, and EPA kind of change any thought process? I know it's long term but given your portfolio, does it impact it at all? Any kind of potential impact?

Bradley P. Beecher

Great question, Julian. Of course, we are involved in that 5 coal-fired power plants: Iatan 1, Iatan 2, Plum Point, Asbury and Riverton. The 3 coal plants, Iatan 1, Iatan 2 and Plum Point are already -- use dry ash handling and have dry ash landfills, so I wouldn't expect many impacts at those sites. Riverton, we've burned our last coal at Riverton. We're in the process -- we have converted those to natural gas and are in the process of -- well, we transitioned them to natural gas and will be retiring them around 2016, which leaves our Asbury facility. As you know, we are currently building a scrubber and baghouse at Asbury. Along with that, in our capital projections that we've provided, we have already included a dry ash landfill in that thought process, and as a matter of fact, have already begun our permitting process for dry ash landfill there.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. And if effectively, what would be required?

Bradley P. Beecher

That's what we believe will be required. EPA is coming after water effluent guidelines in order to get the coal ash, but certainly we think we'll be in -- we have a good strategy of where we're going.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Excellent. And then maybe just a last quick question, just thinking sort of longer term here. How do you think about the dividend ultimately just from a growth perspective, just to throw it out there?

Bradley P. Beecher

Thank you so much for that question, Julian. I got that at the shareholders' meeting yesterday. The pieces of guidance that we've given in the past is, we wanted to reestablish the dividend at a rate more commensurate with our peer group. And certainly, at $1 per share, we're more commensurate than when we were over 100% payout ratio a couple of years ago. The board analyzes that every quarter. And certainly, our financial results are improving and the board's going to continue to evaluate that each quarter as we go forward.

Operator

[Operator Instructions] And our next question comes from the line of Neil Kalton with Wells Fargo Securities.

Neil Kalton - Wells Fargo Securities, LLC, Research Division

Just a question on Senate Bill 207. First, I guess, twofold. First, it is my understanding that, depending upon the outcome, wasn't necessarily going to change your investment plans one way or the other. That's the first part of the question. The second part, it seems like it's unlikely you're going to -- it's going to happen in this session. Is this something that could resurface in future sessions? Any sort of thoughts on that would be appreciated.

Bradley P. Beecher

Well, you're correct in your assessment that for Empire, Senate Bill 207 wasn't going to change our capital plans. We made the choice to put in the reliability upgrades into our capital budget, and they were in our capital budget whether Senate Bill 207 gets passed or not. A couple, or at least Ameren, have said they were going to invest more if Senate Bill 207 was happening. There is a difference between utilities in the state. And there are still some avenues that SB 207 could get passed, but time is tough to get all those done right now. And like any other piece of legislation, it could be back. But it all depends on -- next year's an election year, so things are less likely to surface and come back in election year is my opinion.

Operator

And our next question comes from the line of Tim Winter with Gabelli & Company.

Timothy M. Winter - Gabelli & Company, Inc.

I was wondering -- I realize the Senate Bill would help a long way in trying to earn the allowed ROE. But you've got a number of, it seems like, positive smaller developments over the last few years with these trackers and what have you. How close are you, at least just subjectively, to having some rate principles in place to get you to the allowed ROE?

Laurie A. Delano

Well, Tim, this is Laurie. As you mentioned, a good portion of our O&M expense is covered by trackers. I mean, we continue to have the challenge of as we add capital expenditures, you just have that time period between when they're added and then when we go in for rates. And as you know, in the past, we've certainly tried to manage our regulatory plan to minimize that so that's certainly what the ISRS legislation would address. Right now, when we certainly don't have any other tracking mechanisms on the table, that the Southwest Power Pool expenses are something that we added in our rates this time. And that's included in our cost structure, but we certainly don't have a tracking mechanism for them.

Bradley P. Beecher

And clearly, Tim, we're hovering around this 8% ROE level. We've been improving on that slightly and what's generally been considered about a 10% ROE market. And we're striving every day to figure out how to reduce regulatory lag. But as you hear from all 3 of the electric utilities in Missouri, we are struggling with regulatory lag. And it's generally surrounded by this flat customer growth, flat energy usage period that we seem to be in.

Laurie A. Delano

And just as a follow-up to that, we're certainly focusing on the portion of our expenses that are not covered by trackers to keep those as flat as we can.

Operator

And our next question comes from the line of Julien Dumoulin-Smith with UBS.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Sorry, guys. One more follow-up here. On the integrated resource plan, what should we be looking for there? Anything new?

Bradley P. Beecher

We'll be filing that this summer. And we have continued to work with the Missouri staff and the other parties since we filed our last integrated resource plan in 2010. And the main pillars of that plan, if you will, which is the Asbury scrubber and baghouse, the Riverton, the combined cycle in 2016 and the retirement of Riverton 7 and 8, the main pillars of that have not changed. Longer term, our load growth is down today from what it was when we filed in 2010. So that next resource addition may be a little bit further out.

Operator

And there are no further questions at this time.

Bradley P. Beecher

Okay. As we move forward, we remain focused on our vision, making life better everyday with reliable energy and service. Thank you for joining us this afternoon, and have a great weekend.

Operator

Ladies and gentlemen, this concludes the Empire District Electric First Quarter 2013 Earnings Conference Call. You may now disconnect. Thank you for using ACT Conferencing.

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