The Empire District Electric Company (EDE) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.26.13 | About: Empire District (EDE)

The Empire District Electric Company (NYSE:EDE)

Q2 2013 Earnings Call

July 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

Michael Goldenberg - Luminus Management, LLC

Andrew Levi

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

John Hanson

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Empire District Electric Second Quarter 2013 Earnings Conference Call. [Operator Instructions] The conference is being recorded today, July 26, 2013.

I would now like to turn the conference over to Ms. Jan Watson. Please go ahead, ma'am.

Janet S. Watson

Thank you. Good afternoon. 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 -- or second quarter and 12 months ended June 30, 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 second quarter earnings was issued yesterday afternoon. A replay of the call will be available for 2 weeks at (800) 406-7325, passcode 4630133#.

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 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 for this call, which is available on our website and to our most recent Form 10-K and 10-Q 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 the financial results from the second quarter and 12 months ended June 30, 2013 period and other recent company activities.

During their meeting yesterday, the board declared a quarterly dividend of $0.25 per share payable September 16, 2013, for shareholders of record as of September 3. This represents a 4.2% annual yield at yesterday's closing price of $23.93.

As shown on Slide 3, we reported consolidated second quarter 2013 earnings of $11.7 million or $0.27 per share. This compares to the same period in 2012 when earnings were $10.7 million or $0.25 per share. The primary drivers for the quarter were one full quarter of increased Missouri electric rates, offset by cool weather during early June that delayed the start of cooling season and higher electric operating depreciation and amortization expenses. For the 12-month period ending June 30, 2013, earnings were $59.5 million or $1.40 per share compared to $54.4 million or $1.29 per share for the same period last year.

On July 15, we topped the $1 billion market capitalization level for the first time in our history. At yesterday's market close, our market cap stood around $1.02 billion. As communicated in February of this year, our full year earnings guidance range is $1.26 to $1.43 per share.

I will now turn the call over to Laurie for a discussion of the financial details.

Laurie A. Delano

Thank you, Brad, and good afternoon, everybody. As we review our second quarter 2013 earnings per share results of $0.27 compared to our 2012 results of $0.25, 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 consolidated non-GAAP basic earnings per share reconciliation. For those of you who have our press release in front of you, that will be the earnings per share reconciliation I'll follow. And for those of you looking at our slides, the earnings per share illustration begins on Slide 4. As indicated earlier, these earnings per share figures throughout the call are provided on an after-tax estimated basis.

As Slide 4 illustrates, our total gross margin, which we define as revenues less fuel and purchase power costs, increased an estimated $0.10 per share during the quarter. Increases in operating and maintenance expenses of approximately $2.9 million reduced earnings per share about $0.05. Depreciation and amortization expense increased approximately $2.4 million due to higher levels of plant in service and increased depreciation rates resulting from our recently settled Missouri rate case. That all decreased earnings per share another $0.04.

Increased interest expense from incremental debt reduced earnings per share another $0.01, as we redeemed $98 million of higher interest debt and issued $150 million of new debt. Increased allowance for funds used during construction, or AFUDC, added about $0.02 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 4 provides a breakdown of the $0.10 earnings per share impact of our consolidated gross margin components.

Total electric segment margin increased $6.4 million on increased revenues of $2 million quarter-over-quarter. Increased Missouri customer rates was the primary margin driver in the 2013 period, adding an estimated $7.8 million to revenue or about $0.12 per share to margin. As we discussed on our last call, new Missouri customer rates were put in place on April 1, as a result of our rate case settlement. As a reminder, the new rates allow us an annual increase in base revenues of about $27.5 million.

As we look at our volumetric components of gross margin, total on-system sales were 2.7% lower quarter-over-quarter. The primary driver of the sales decrease was our weather-sensitive commercial area, where sales were down 5.6%. Residential sales were relatively unchanged given that the weather impact was offset by increased customer counts quarter-over-quarter.

As we look at the impact of weather on sales, we estimate the impact of second quarter 2013 weather decreased revenue approximately $4.6 million and margin an estimated $0.05 per share. June 2013 was slightly warmer than normal on a degree day basis, considerably cooler than the very hot June of 2012. Prolonged cooling period during the early part of the month delayed the transition from heating to cooling season. The increase in customer counts added an estimated $1.1 million quarter-over-quarter, increasing margin about $0.01 per share.

Electric fuel-related revenues were lower by about $3.2 million compared to the second quarter of 2012. However, this item is not indicated in the callout box, given that there is no margin impact. These decreased revenues are offset by a corresponding reduction in fuel expense.

Changes in our off-system water and miscellaneous revenues, primarily transmission related, rounded out the remaining increase in electric segment revenues, adding an estimated $0.01 per share to margin.

Cooler weather in April and May of the second quarter 2013 had a favorable impact on our gas segment margin. Gas segment retail sales increased nearly 78% quarter-over-quarter, leading to increased revenues of approximately $2 million during the 2013 quarter and increasing margin about $0.7 million or $0.01 per share.

The callout box on Slide 5 provides a breakdown of the earnings per share impact of the expense items that drove a decrease of about $0.05 per share quarter-over-quarter. The largest individual increase was in transmission operating expenses related to increased Southwest Power Pool charges. This expense increase reduced earnings per share about $0.02 per share.

Total production operations and maintenance expenses were lower, increasing earnings per share by around $0.01. As you can see, we experienced relatively small cost increases across several other areas, the majority of which were included in our recent rates increase.

Moving on to Slide 6, I'll briefly go over the 12-month after-tax earnings per share reconciliation. Again if you don't have the slides, this information is in our press list. As Brad mentioned, earnings for the 12-month period ending June 30, 2013, were $1.40 per share. Beginning with our 12-month results ending June 30, 2012, of $1.29, we saw an increase in total gross margin of $0.28 per share during the 12-month period. Increased operating and maintenance expenses reduced earnings per share about $0.12.

As we discussed on our last call, we recorded a loss for our regulatory disallowance related to construction prudency for our share of ownership of the Iatan plant in our recent rate case settlement. This reduced earnings another $0.03 per share. Increased depreciation and amortization, again due to higher levels of plant in service and the increase in our depreciation rates, reduced earnings about $0.07.

A $1.6 million decrease in interest expense increased earnings about $0.02 per share. Refinancing at lower interest rate levels offset the impact of increased debt.

Increased AFUDC brought earnings per share up another $0.05. This reflects the construction activity on our environmental retrofit project at our Asbury plant. And the dilutive effect of common stock issued during the period, primarily through our dividend reinvestment plans, brought earnings per share down about $0.02.

On Slide 6, we also break out the factors that drove the change in gross margin. Total electric segment revenues increased $3.2 million period-over-period, but margin increased $17.4 million. As you can see in the callout box, the positive effect of the Missouri rate increase was the primary margin driver, adding approximately $8.2 million to revenue and an estimated $0.12 per share to margin. The return to more normal summer and winter weather in the 2013 12-month period reduced revenues an estimated $5.1 million or about $0.05 per share to margin.

The increase in our year-over-year customer counts during these 2 12-month periods resulting from the Joplin area rebuilding from the May 2011 tornado added about $7.4 million in revenues, impacting margin an estimated $0.08 per share. A nonrecurring upward adjustment to our estimate of unbilled revenues, $3.4 million, which we made in the third quarter of 2012, increased margin $0.05 per share.

Electric fuel-related revenues decreased about $13.7 million year-over-year. Again these decreased revenues are offset by a corresponding reduction in fuel expense so there is no effect on gross margin.

Miscellaneous revenue increases, primarily transmission related, were the primary driver of a $0.04 margin increase but also include the effects of changes in our water and electric off-system revenues. And other non-volume fuel-related items added about $0.01 to margin.

The gas segment was positively impacted by a colder first half of 2013 compared to the same 2012 period. Margin increased an estimated $0.03 per share during that period compared to the 2012 period on increased revenue of approximately $7 million.

In the callout box on Slide 7, we've broken out the operating and maintenance expenses that reduced earnings per share $0.12 during the 2013 12-month period. The regulatory reversal of a gain on the sale of assets we made as part of our rate case settlement reduced earnings per share about $0.02. As in the quarter, transmission operation expense was the largest individual increase, as we incurred higher levels of SPP charges. This reduced earnings per share by $0.04.

Changes in distribution and transmission maintenance expenses added a combined $0.02 per share to earnings. Health care expenses reduced earnings by about $0.03. And as you can see, other cost areas experienced slightly lower increases, most -- again, most of which were included in our recent rate case.

As you can see on Slide 8, on May 30, we settled on our commitments of $30 million of 3.73% Series First Mortgage Bonds due 2033, $120 million of 4.32% Series First Mortgage Bonds due 2043. We used a portion of the $150 million proceeds from these issuances to redeem all $98 million aggregate principal amount of our 4.5% Series Senior Notes, which were due June 15, 2013. We'll use the balance of the proceeds for general corporate purposes.

As of June 30, we have no short-term debt outstanding. And we have not made any changes to our financing plan since our last call. Under our current projections, we do not anticipate for any additional equity or debt financing until the latter half of 2014.

Our retained earnings balance as of June 30 is $50.1 million.

Before I conclude my remarks, I'd like to spend a little more time talking through what we have seen with regard to customer count and sales. Slide 9 gives you a current picture of where our electric customer count stands. As mentioned in our earnings discussion, our customer counts have increased in both the quarter and 12-month ended 2013 period compared to the comparable previous periods. On our last call, we reported our systemwide customer count was within about 100 of our pre-tornado levels as of March 31. The current counts on Slide 9 reflect that we are currently down about 350 customers from our pre-tornado level as of July 15. These counts have been impacted by a seasonal disconnect activity that occurred later in the period than usual. All in all, we believe these numbers indicate relatively flat customer count in the first 6 months of this year.

The year-to-date sales totals are about on target. As you can see from the slide, year-to-date weather has been favorable on a degree day basis. Therefore, these sales have been positively impacted by weather. Given our level of year-to-date sales and our relatively flat customer count, on a year-to-date basis, our sales numbers are relatively flat. However, we remain optimistic, as there are many projects going on in the Joplin area.

As another point of reference, during the 12-month period ending June of this year, weather has been near normal from a degree-day perspective. We estimate that our 12-month ended sales level of just under 5 million megawatt hours is a good proxy for a weather-normal annual sales number.

I will now turn the presentation back to Brad for a discussion of projects in the Joplin area, as well as other recent events.

Bradley P. Beecher

Thank you, Laurie. We are still seeing construction in Joplin, as work continues to progress on many fronts. Mercy Hospital is on track to open in early 2015. Joplin School administration reports that 2 elementary schools and East Middle School will be ready for students in December of this year. The high school and Franklin Technology Center will be ready by the start of the 2014 school year.

The preliminary architectural and design work has begun for the new Joplin Public Library and movie theater complex at 20th and Connecticut. In May, the federal Economic Development Administration announced a $20 million grant for the redevelopment of 20th Street, in particular the building of the library, theater complex.

The city of Joplin has received 2 community block grants from the Department of Housing and Urban Development, one for $45 million and the second for $113 million. These funds will be used for redevelopment in Joplin.

The city of Joplin has also implemented a tax increment financing district within the tornado zone to assist with economic development.

In construction outside of the tornado recovery area, Blue Buffalo pet food is underway on their new $85 million facility in the Crossroads Industrial Park. This addition will bring employment of about 150 workers when the plant opens in early 2015.

We are moving ahead with our new construction project at the Riverton plant. On July 9, 2013, we signed a contract with Burns & McDonnell for engineering, procurement and construction activities needed to convert our natural gas-fired Riverton unit 12 from a simple cycle combustion turbine to a combined cycle unit. The conversion will include the installation of a heat recovery steam generator, steam turbine generator, auxiliary boiler, fueling tower and other auxiliary equipment. This project is scheduled to be complete in the first half of 2016 at a cost estimated to range from $165 million to $175 million. This estimate is about $35 million higher than the cost included in our 5-year capital expenditure plan disclosed in our 2012 10-K. As is our normal practice, we will update our full year plan in the third quarter. The air emission source construction permit necessary for this project has been issued by the Kansas Department of Health and Environment.

In addition, work on the air quality control system, or AQCS, at our Asbury plant is continuing on schedule. Both the baghouse and scrubber are progressing. The concrete and liner portions of the chimney are complete and crews are working on the installation of the chimney electrical equipment. Work is expected to be complete in mid-August on the chimney. The entire AQCS project is scheduled to be in service in early 2015.

Other key initiatives, construction -- excuse me, on other key initiatives, construction continues to run slightly ahead of schedule on our new Joplin service center. We expect construction to be finished by the 1st of the year.

In regard to legislative activity, in Missouri, the 2013 session ended in May with the electric ISRS bill, SB 207, failing to emerge from debate on the Senate floor. Also Senate Bill 240 that provided enhancements to the gas ISRS was passed, but subsequently vetoed by Governor Nixon. This measure would not have made any changes to the type of cost recovery through the regulatory mechanism or to the current level of regulatory oversight.

In early July, we filed our 2013 Integrated Resource Plan with the Missouri Public Service Commission. This replaces our plan filed in 2010. The IRP sets forth the company's preferred resource plan, contingency plans and other plans required by the commission's IRP rule. The plan considers demand side, supply side and renewable resources with minimizing costs as the primary criterion, while also considering other factors such as risks and rate impacts. I'll point out that this new plan does not contain any significant changes from our previous filing.

In conjunction with the IRP, we will be making a Missouri Energy Efficiency Investment Act, or MEEIA filing, this fall, with the demand side resources identified in the IRP as an important precursor to the MEEIA filing.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Michael Goldenberg with Luminus.

Michael Goldenberg - Luminus Management, LLC

I wanted to get a better understanding of customer sales. So weather cost you about $0.05 or maybe $0.06, I'm getting, in terms of EPS. Am I correct in understanding that weather primarily impacts residential sales?

Laurie A. Delano

Residential and commercial sales.

Michael Goldenberg - Luminus Management, LLC

Okay. Do you know what the weather adjusted was for residential and commercial in terms of percent growth?

Laurie A. Delano

No, we really -- we don't have that quantified. I'm just trying to think if I could give you any other suggestions on how to look at that. I guess, we kind of laid out the 12-month ending level that we think is about a normal level, and that will be spelled out in our 10-Q, and actually I can give you the breakdown on that. So we've got about 5 million of weather-normal megawatt hours. The residential class makes up somewhere in the neighborhood of 1,943,000 of that and the commercial is 1,558,000. I mean, that's what you'll see in our 10-Q when we file it for that 12-month ending period.

Michael Goldenberg - Luminus Management, LLC

Okay. But I guess, to summarize, there was about a 6% difference between year-over-year change in residential and change in commercial. Let's say weather impact is approximately equal for both, so the spread is the same. That's a rather -- I'm sorry?

Bradley P. Beecher

A lot of what happened, Michael, is the commercial businesses in Joplin recovered very quickly relative to the residential. And so most of our...

Michael Goldenberg - Luminus Management, LLC

You mean a year ago?

Bradley P. Beecher

A year ago. So the commercial was already back a year ago. And we've -- so all the customer growth that we've seen over the last year has mostly been residential. And so they both -- both the residential and commercial class had negative impacts from the weather. But the residential class was covered up, if you will, by increased customer growth.

Michael Goldenberg - Luminus Management, LLC

Okay, but if commercial was down about 6%, would weather explain all of it?

Bradley P. Beecher

Weather never explains everything. But it has to explain a large portion of it.

Laurie A. Delano

Last year, we had a really, really hot June here. And this year has been more normal -- a more normal-weather June.

Bradley P. Beecher

And even though we say it was normal, it was really, really cold here until about June 15. And then it turned and got pretty hot the last 15 days. And so there's -- even a normal month is never the same as a normal month.

Michael Goldenberg - Luminus Management, LLC

I understand. And how much was -- can you please -- industrial was how much quarter-over-quarter -- or year-over-year? I'm sorry, year-over-year.

Laurie A. Delano

For the 12-month ending?

Michael Goldenberg - Luminus Management, LLC

No, for 3 months ending.

Laurie A. Delano

On a quarter basis, quarter-to-quarter basis, industrial was down about 1.9%.

Michael Goldenberg - Luminus Management, LLC

And that's not weather for the most part?

Bradley P. Beecher

That's true.

Laurie A. Delano

Correct.

Michael Goldenberg - Luminus Management, LLC

Gut feel, commercial weather adjusted, do you think it's better than that 1.9% or worse than 1.9%?

Laurie A. Delano

I don't know that we have anything in front of us that tells us that.

Operator

The next question is from the line of Andy Levi with Avon Capital.

Andrew Levi

I thought you had said -- again, we're back to sales again, just to torture you some more. But on a weather-normalized basis, sales was -- were flat? Or was that the 12-month number?

Laurie A. Delano

The 12-month. We were giving you some direction that our 12-month sales level number is what we would consider about a weather-normal year or a 12-month period. That would be without any growth in it. If you just put looked at that level.

Andrew Levi

Right. So weather-normalized last 12 months is 0%, right? But we don't know for the quarter, retail sales, what that weather-normal level is, right? Is that correct? You weather normalized your weather for the quarter...

Laurie A. Delano

No, we didn't give that.

Andrew Levi

Okay. And what is your forecast for the year for sales, retail sales?

Laurie A. Delano

Our forecast has been that in the near term, we expected growth to be about 1.5%. We didn't really identify specifically what that near term was. And again, that reflected what's going on in the Joplin area with growth and development and so forth. And as we -- go ahead.

Andrew Levi

Go ahead. No, you go ahead, I'm sorry. I don't mean to interrupt.

Laurie A. Delano

Well, and as we were saying there in the first -- we really haven't seen that start yet in the first 6 months of the year.

Andrew Levi

You have not?

Laurie A. Delano

Right. We've -- on the first 6 months of the year, if you look from where we've been January 1 to now, that's been pretty flat for us.

Andrew Levi

Okay. On a weather normalized?

Laurie A. Delano

Yes, right. Right.

Bradley P. Beecher

We still see a lot of activity in Joplin. It's just not showing up on the meters yet.

Andrew Levi

Okay. And then just in general, I know you don't have these numbers, but again, like your thoughts kind of like you just gave today -- just a second ago, if you had to kind of back out kind of the recovery sales versus kind of just normal growth, do you think -- any guess what kind of that number would be on a normalized basis? Or you have your growth from customers coming back and people coming back to the town for -- because of the tornado. Just kind of that underlying kind of economic-type growth, any idea or any guess?

Bradley P. Beecher

No. I think what we've -- we've been seeing enough growth in Joplin up until this quarter to offset energy efficiency impacts going on in the rest of our business. And I think longer term, we're just -- we're pretty flat with growth systemwide offsetting those efficiency trends.

Andrew Levi

Do you think that's indicative of the state in general? Or just kind of where your service territory is?

Bradley P. Beecher

Missouri is so different when you look at St. Louis and Kansas City from Joplin. So I can't -- I don't really want to talk beyond my service territory. But in my service territory, I think we are just in a pretty flat -- I don't want to say flat growth, just a flat region. We're not growing, we're not really falling.

Operator

[Operator Instructions] The next question is from the line of Julien Dumoulin-Smith.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

So first question here, perhaps following up on the last couple. Just in terms of sales trends, you guys are discussing a fairly flat kind of historic look. But you also talk about some of the growth in '14 and '15 just given some pretty discrete projects that presumably should hit the meters. So when you say 1.5% sales growth, I suppose you were probably alluding to 2013. How do you feel about '14 and '15 given those discrete projects and what those might kind of add up to, if you will?

Bradley P. Beecher

Julien, we've said 1.5% in the near term. And that larger growth and flat was clearly predicated on all this recovery going on in Joplin. So I don't know that you can separate that into 2013 and beyond. But clearly, the growth that we see coming is those discrete projects and the development around those discrete projects that we talked about today.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

So maybe stated differently, you still feel good about the 1.5% going forward given those projects?

Laurie A. Delano

Yes. We're not changing that at this point in time. So we're still looking ahead to all the things that Brad mentioned that are going on and, again, the development that could surround those.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. And then the CapEx shift, I'd just be curious, what year is that in, just to kind of get a sense? And maybe the -- what are the ramifications from a financing perspective? Does that change anything? I didn't take it to be the case, but could you just confirm that?

Bradley P. Beecher

Julien, we -- what we disclosed today was the combined cycle projects are going to cost between $165 million and $175 million, which wasn't out there until today. And then it increased $35 million above what was in the prior plan. We are still working on the annual cash flows to get that penned down. Over -- and it will be spread out between now and 2016 when that unit comes on. So relative to the total size of our capital budget, this $35 million doesn't move the needle very much. But clearly, it will have to be financed with some sort of debt and equity mix, ultimately, to put it in permanent financing.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. And then the last question, I know we've talked about this. But just with regards to Plum Point, I'd be curious, so IRP seems to indicate perhaps not moving forward on acquiring the PPA stake. I'd be curious are there any puts and takes there to think about in the longer term eventually acquiring that? Or any thoughts on -- or if there are any pending negotiations?

Bradley P. Beecher

To be clear, our IRP does not include us going forward with the purchase of our share of Plum Point and utilizing the option. It would be nice to say it's not a complicated issue but it's a very complicated issue, including price from the formula, our other CapEx things going on and clearly the risks that are different between ownership and a PPA. And so today, we have a very discrete window when that option is available to us. We clearly are talking with the owners of PPEA LLC, which is the folks who own the piece of Plum Point we're talking about and trying to explore if there are any other alternatives for us over time.

Operator

Our next question is a follow-up from the line of Michael Goldenberg.

Michael Goldenberg - Luminus Management, LLC

Two more follow-ups. On the industrial, maybe I missed it, is it -- the kilowatt hour sales is down. Is that across the board? Or is that discrete plan, the industrial plan that was the culprit?

Bradley P. Beecher

When we look at our industrial segment in total, you see ups and downs every place. But probably the biggest thing that happened in the quarter is the Mars pet food plant in Joplin announced that it was closing and has started to scale back. Of course, that's going to be offset by the new Blue Buffalo pet food plant that doesn't come on until early 2015.

Michael Goldenberg - Luminus Management, LLC

So this Mars plant, did it scale -- I'm trying to -- if it scales down, when is it going to become a 0? And how much of that is going to be impact in the upcoming quarters?

Bradley P. Beecher

Mars pet food announced that they were going to be completely shutdown by September or October of this year. And I don't have it in front of me, their specific kilowatt hour sales.

Michael Goldenberg - Luminus Management, LLC

Okay. And then just following up on Julien's question. You've added CapEx. It's a nice story. You're adding a lot to rate base. Do you have a view yet how much that will increase customer rates, all these additional capital investments?

Bradley P. Beecher

You can't draw a straight line, but $35 million at 8% return on rate base, you can come to some idea. And an 8% return rate base is based on some predicated return on equity and some level of debt. But it doesn't move the needle very much on customer rates by itself.

Michael Goldenberg - Luminus Management, LLC

Okay. But would it make sense to say, okay, you increase in depreciation CapEx and with depreciation of $100 million, you need some sort of return and then some on a -- for a CCG change so on and that would give you an increase in customer rates? Or are there offsetting factors?

Bradley P. Beecher

Are you talking for the whole combined cycle unit?

Michael Goldenberg - Luminus Management, LLC

Yes, for the whole kind of company, your next 3-year plan where it's very solid, very intriguing rate base growth.

Bradley P. Beecher

Well, we've got -- there's a lot of things going on in our business. We've got the entire CapEx growth, which is about 4% on a compound annual growth rate over the next 5 years. We've got changes at Riverton. We will be retiring the Riverton power plant when Riverton 12 combined cycle comes on. So we'll have changes in O&M associated with those steam units that we are shutting down, so there are some offsetting factors.

Operator

[Operator Instructions] Our next question is from the line of John Hanson with Praesidis Advisors.

John Hanson

I think I finally am straight on sales after we've gotten all the questions here in the last few minutes. So I had that one, but I think I've got it figured out now. But the other question I had was just one minor. You mentioned about the SPP costs kind of falling through and creating a bit of a drag. Do we have to go in for a general rate case in order to start recovering those costs? Or how do we match that up?

Laurie A. Delano

Yes, we would. In our last case, that went into effect April 1, we did have some -- an increase in there. I think it was in the $4 million to $5 million area to cover kind of historically what we'd been seeing. But on a year-over-year basis, we don't have any sort of tracking mechanism or anything that mitigates those costs. So those would need to be considered in a rate case.

John Hanson

And how far away from that are we about now, just in general? Or we haven't talked about that?

Laurie A. Delano

Generally, our plan is to time our rate cases with the completion of our major capital projects and our -- the Asbury project that we're working on now will be completed in early 2015. So -- and our last rate case prevented us from having rates in effect prior to October of '14, which is -- which was an agreement in the rate case. So the next time period we'd be looking at it as when that Asbury project gets completed.

Operator

I'm showing no further questions at this time. I'd now like to turn the call back over to management for closing remarks.

Bradley P. Beecher

Thank you. We remain focused on performing as a high-quality, pure play, regulated electric and gas utility. We continue our low-risk growth plan, work to maintain strong financial metrics, focus on our total return prospects, maintain an experienced management team and work hard on constructive regulatory relationships.

Before we conclude the call, I have a couple of meeting announcements. Laurie and Jan will attend the AGA Mini-Forum in New York in September. And Laurie, Jan and I will be at the EEI Financial Conference in Florida in November.

Our vision remains the same: making lives better every day 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 Second Quarter 2013 Earnings Conference Call. If you'd like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030, with the access code of 4631033. ECT would like to thank you for your participation. You may now disconnect.

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