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The Empire District Electric (NYSE:EDE)

Q3 2013 Earnings Call

November 01, 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

Kelly S. Walters - Chief Operating Officer of Electric and Vice President

Analysts

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Empire District Electric Third Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jan Watson. Please go ahead.

Janet S. Watson

Thank you. Good afternoon, and thank you for joining us for Empire's third quarter 2013 earnings conference call. Brad Beecher, President and Chief Executive Officer; and Laurie Delano, Vice President and Chief Financial Officer will discuss our third quarter and 12 months ended results and provide highlights on other key points. We also have other members of management who may assist in answering questions following the prepared remarks.

Our press release announcing third quarter earnings was issued yesterday evening. The press release and a live webcast of this call is available on Empire website at empiredistrict.com. The replay of the call will be available on the Empire website for 1 year.

Today's discussion will include forward-looking information and the use of non-GAAP financial measures. Slide 2 of slide deck presents the Safe Harbor statement which accompanies our presentation material. You should also refer to the information in our 2012 10-K and other SEC filings concerning factors that could cause future results to differ from this forward-looking information.

Also, the estimated earnings per share impact of individual items and the presentation of gross margins are non-GAAP presentations, and we will direct you to the third quarter earnings press release, for further information on why we feel the non-GAAP presentation is beneficial for investors in understanding our financial results.

And with that, I will 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 third quarter and 12 months ended September 30, 2013 period and other recent company activities.

As we reported in our press release yesterday, we are pleased to announce that during their meeting yesterday, the Board declared a quarterly dividend of $0.255 per share, reflecting a 2% increase over the previous quarter's dividend.

The dividend is payable December 16, 2013, for shareholders of record as of December 2.

This represents a 4.5% annual yield at yesterday's closing price of $22.49.

The dividend increase comes as a result of improved financial metrics on both our income statement and balance sheet over the last 2 years.

It also reflects the future earnings growth we expect to see as we continue to execute our business strategy and complete our investment in our Asbury environmental and Riverton combined cycle projects.

Since the dividend was reinstated in February 2012, we have improved the absolute level of our earnings, had a successful rate case outcome and rebuilt our retained earnings. All of these were supported by continued successful recovery from the 2011 Joplin tornado.

As shown on Slide 3, we reported third quarter 2013 earnings of $24 million or $0.56 per share. This comes to the same period in 2012 when earnings were $25.5 million or $0.60 per share.

Earnings for the 12 months ended September 30, 2013, were $57.9 million or $1.36 per share, compared to same earnings of $54.7 million or $1.30 per share for the 12-month period.

The primary positive earnings driver for the quarter was increased Missouri electric rates, which became effective April 1 this year. However, this positive impact was offset by cooler weather when compared to the 2012 quarter.

We also saw an increase in the average customer count quarter-over-quarter. We are about 470 customers below pre-tornado levels.

The Midwest saw a near normal summer on a Cooling Degree basis with the Springfield Missouri weather station reporting only 2% fewer Cooling Degree Days during the quarter than the 30-year normal.

Yet the summer was filled with abnormal weather. The weather channel reported that Sunday afternoon, July 28, in Concordia, Kansas, was unlike any other July day in the history books. The daytime high was only 62 degrees, topping the previous record coolest July daily high of 63 degrees on July 1, 1988 and July 6, 1979.

Our service territory was impacted in the similar fashion. Cooling Degree Days for the month of July were 39% lower than last year and 9% lower than the 30-year average.

August began with an extended and uncharacteristic rainy spell and finished with 10% less Cooling Degree Days than normal.

Fortunately, in September, our fortunes reversed and we experienced 33% more Cooling Degree Days than normal.

On a quarter-over-quarter basis, Cooling Degree Days were 15% lower than last year, resulting in Cooling Degree Days that were 2% lower than the 30-year average.

Higher electric operating depreciation and amortization expenses also impacted results negatively for the quarter.

On September 17, 2013, we filed a Notice of Intent to file for new electric rates for our Arkansas customers. We anticipate filing new rates around the middle of November.

As we communicated in our press release yesterday, we expect full year 2013 earnings to be in the mid to upper end of our guidance range of $1.26 to $1.43 per share, which was communicated in February of 2013.

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

Laurie A. Delano

Thank you, Brad, and good afternoon to everyone. As we review our third quarter 2013 earnings per share results of $0.56 compared to our 2012 results of $0.60, 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 the quarter. 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, total gross margin, which we define as revenues less fuel and purchase power costs, increased an estimated $0.02 per share during the quarter.

The callout box on Slide 4 provides a breakdown of the various components that resulted in the $0.02 earnings impact on our consolidated gross margin.

In total, electric segment margin was relatively flat, increasing $0.8 million on decreased revenues of $2.3 million quarter-over-quarter.

Increased Missouri customer rates was the primary positive margin driver in the 2013 quarter, adding an estimated $9.9 million to revenue or about $0.16 per share to margin.

As Brad mentioned, cooler weather during our primary third quarter cooling season months offset the positive effect of increased Missouri rates. The Joplin area experienced a hot summer in 2012. And as Brad mentioned earlier, Cooling Degree Days were 15% lower than last year.

Sales for our weather sensitive residential and commercial areas were down 13.6% and 7.4%, respectively, resulting in an overall decrease in on system sales of about 8.4%.

We estimate quarter-over-quarter weather impacts decreased revenue approximately $10.3 million and reduced margin an estimated $0.12 per share.

Increased customer counts added an estimated $1.1 million quarter-over-quarter, increasing margin about $0.01 per share.

A $3.4 million nonrecurring upward adjustment we made in our estimate for unbilled revenues in the third quarter of 2012 negatively impacted revenues quarter-over-quarter, reducing margin by about $0.05 per share.

Electric fuel-related revenues were higher by about $1.1 million compared to the third quarter of 2012. However, this item is not indicated in the callout box as there is no impact on margin. These increased revenues are offset by a corresponding increase in fuel expense. Changes in our off-system water miscellaneous revenues, which are primarily related to our Southwest Power Pool transmission revenues and non-volume fuel-related items rounded out the remaining increase in electric segment revenues and margin, adding a combined $0.02 per share.

Gas segment retail sales decreased about 5.8% during the third quarter 2013 compared to the 2012 quarter, however, gas segment margin was relatively unchanged.

As Brad indicated earlier, this quarter's Cooling Degree Days were about 2% below normal. We estimate normal weather would have added between $0.02 and $0.03 per share to earnings for the quarter.

The callout box on Slide 5 provides the breakdown of the earnings per share impact of the expense items that drove a decrease of about $0.03 per share quarter-over-quarter.

Total operating and maintenance expenses increased $1.8 million. Our electric segment saw increased operating expenses of about $2.3 million. The largest individual increase was in our transmission operating expenses related to increased Southwest Power Pool charges. This increased expense reduced earnings about $0.02 per share.

Total production maintenance expenses were lower, increasing earnings per share around $0.02.

We experienced relatively small cost increases across several other areas, the majority of which were included in our recent rate increase. These cost increases combine to reduce earnings per share, another $0.03.

Depreciation and amortization expense increased approximately $2.6 million due to higher levels of plant in service and increased depreciation rates resulting from our April 1 Missouri rate case. This, decreased earnings per share another $0.04.

Increased allowance for fund use during construction, AFUDC, added about $0.02 to earnings per share and we had a little bit of a dilutive effect primarily from our dividend reinvestment plans which reduced earnings per share about $0.01.

Moving on to Slide 6. 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 September 30 were $1.36 per share when we compare this with the 12 months ending September 30, 2012, earnings per share of $1.30, we see growth margin added an estimated $0.29 per share during the 12-month period.

The callout box on Slide 6 provides a breakdown of the various components of our increased consolidated 12-month ended gross margins.

Total electric segment revenues increased $5.8 million period-over-period, but margin increased $16.8 million. The positive effect of the April 1 Missouri rate increase was the primary driver, adding approximately $18.4 million to revenue and an estimated $0.27 per share.

As I mentioned previously, the weather during the third quarter of 2013 was significantly cooler than the corresponding 2012 quarter. The year-over-year impact of this cooler weather during what is normally our primary cooling season, offset the impact of favorable weather during the 2012-2013 winter seeding season. We estimate the impact of weather reduced revenue by about $7.5 million during the 2013 12-month period, negatively impacting margin by about $0.07 per share.

An increase in year-over-year customer count as the Joplin area continues to rebuild from the May 2011 tornado added about $5.4 million in revenues, impacting margin an estimated $0.06 per share.

The nonrecurring adjustment to our estimated unbilled revenues of $3.4 million, I mentioned earlier, decreased margin $0.05 per share.

Electric fuel related revenues decreased about $9.4 million. Again, these decreased revenues are offset by a corresponding reduction in fuel expense, so there is no effect on gross margin.

We had some non-volume fuel-related items, which increased margin about $0.01 per share and other revenue items, primarily our SPP transmission revenues, increased margin an additional estimated $0.06 per share.

Our Gas segment was positively impacted by favorable weather during the 2012-2013 heating season when compared to the prior period.

Margin increased an estimated $0.03 per share during the 2013 12-month period compared to the 2012 period.

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.

As we've discussed previously, the regulatory reversal of a gain on the sales of assets we made as part of our rate case settlement reduced earnings 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 $0.05.

Increased operating expenses at our production facilities reduced earnings another $0.02, Changes in distribution and transmission maintenance were offsetting during the period. Production facility maintenance expenses were lower, adding about $0.04 to earnings per share. Higher health care expenses reduced earnings per share another $0.02.

Increased labor costs brought earnings down about $0.03. Several other areas experienced slightly higher costs, combining to reduce earnings per share an additional $0.02.

Except for the health care expenses, most of these increased expenses were included in our recent rate case.

Other items impacting the 12-month ending period include the loss for regulatory disallowance related to construction prudency for our share of ownership of the Iatan plant, which reduced earnings another $0.03 per share.

Increased depreciation and amortization due to the higher levels of plant in service and the increase in depreciation rates mentioned earlier reduced earnings about $0.10.

Increased property taxes due to additions to plant and service was offset by a reduction in interest expense. Increased AFUDC brought earnings per share up another $0.06. This reflects the construction activity on our environmental upgrade project at our Asbury plant.

Other income and deductions and the dilutive effect of common stock issued during the period, again primarily through our dividend reinvestment plans, brought earnings per share down a combined $0.04.

I'll take just a moment to update you on a couple of balance sheet items. Our retained earnings balance at September 30 is $63.4 million. As of September 30, we have no short-term debt outstanding, and we have not made any changes to our financing plans since our last call. Under our current projections we do not anticipate the need for any additional equity or debt financing until the latter half of 2014.

On Slide 8, we have updated the presentation of our capital expenditure and net plant projections for the next 5 years. As you can see on the slide, our projections by year, excluding AFUDC are as follows: 2014, $213.7 million; 2015, $175.9 million; 2016, $110.1 million; 2017, $99.2 million; and 2018, $95.8 million.

The 2014 and 2015 expenditures reflect our ongoing expenditures for the Asbury environmental upgrade. We continue to expect the Asbury upgrade to be in the range of $112 million to $130 million, with completion in early 2015.

To-date, we have spent $73.5 million on the project. Also included in the 2014 through 2016 expenditures is the conversion of Riverton Unit 12 to a combined cycle unit. We expect costs associated with this conversion to be in the range of $165 million to $175 million with completion in mid-2016.

We have spent $5.9 million to-date on the Riverton 12 conversion, primary on pre-engineering and site preparation.

The net plant in service numbers reflect our estimates of plant in service at the end of the year. The numbers have been updated to reflect this updated capital expenditure plan I just revealed. These net plant in service numbers include AFUDC, exclude construction work in progress, or CWIP, and are net of depreciation.

And I want to reemphasize that the completion of the Asbury project is not reflected in the 2014 year-end plant in service number. Given that we are estimating an in-service date of early 2015, the $112 million to $130 million Asbury project is included in the 2015 year-end number.

Our rate case strategy remains unchanged, however, as our next case will include the Asbury environmental upgrade.

In addition, as I mentioned on our previous call, it is not currently our intention to exercise the Plum Point option to purchase our 50 megawatts of purchase power. Therefore, no expenditures are included for this project in our capital projection.

As we have indicated in the past, there are several factors that enter into this decision. These include: the pricing formula, risks of ownership versus the purchase power agreement and our current level of planned capital expenditures.

While we have not disclosed the price of this option, we have indicated that the price of new coal plants built in the same timeframe range from $2,000 to $3,000 per kw.

Before I turn the discussion back to Brad, I'd like to give a brief update on our customer count. While our customer counts have increased over the prior periods, they have remained relatively flat all year.

As Brad stated in his in earlier comments, the systemwide customer count is about 470 customers below the pre-tornado number. This is about the same as our December 2012 number.

We also estimate that our weather-normal sales for 2013 continue to be relatively flat. We continue to expect increased growth for the Joplin area, with major projects scheduled to be finished later this year and into early 2015.

I'll now turn the discussion back to Brad.

Bradley P. Beecher

Thank you, Laurie. The next several slides provide you with a glimpse of some of the construction projects going on in the company, as well as some of the activity around Joplin as the city continues to rebuild.

We continue to prepare for new load that will be coming in the next year or so. As shown on Slide 9, this includes the construction of 2 new distribution substations in the Joplin area.

Our Kodiak substation is scheduled to be complete late this year and will serve the growing needs in the Crossroads Industrial Park. This includes the new Blue Buffalo plant and our new service center.

The Kodiak sub is on schedule.

Our Silver Creek substation will provide service to Southern Joplin and the new Mercy Hospital facility. To be ready, as Mercy begins the final push of their construction and the systems testing phase, our goal is to have the substation ready in the first quarter of 2014. We are also on schedule with the Silver Creek substation.

As shown on Slide 10, on October 23 we broke ground at our Riverton, Kansas power plant, where we are expanding Riverton Unit 12 to a combined cycle configuration.

Originally completed in 2007, Unit 12 is currently a simple cycle natural gas-fired combustion turbine with a capacity of 143 megawatts.

The conversion to combined cycle operation will include the installation of a heat recovery steam generator, steam turbine generator, auxiliary boiler and cooling tower. This highly efficient configuration will allow for the recapture of excess heat from the existing unit to produce approximately 100 megawatts of additional power generation.

Upon completion of the combined cycle in 2016, the 3 most senior generators at Riverton, Units 7, 8 and 9 will be retired.

Units 7 and 8 historically operated utilizing coal fuel, but were transitioned to natural gas operation in 2012.

After more than 100 years, this transition brought to a close the coal generation era at Riverton.

The new plant configuration at Riverton ensures we will continue to provide safe, reliable energy to our customers with least cost resources, while significantly lowering emissions when compared to coal-fire generation.

At the Asbury power plant, work on the air quality control system, or AQCS, continues. The back half compartments were completed in August and the stack elevator has been installed. The work remains on schedule for completion of this upgrade in early 2015.

In Joplin, the city has received a $20 million transportation investment, generating economic recovery, or TIGER grant, to construct a new railroad overpass over 20th Street, which is a major east-west thoroughfare.

The city also has announced a $34 million senior transitional housing project that is moving forward. With funding in place from both public and private sources, land is being acquired this year and construction is scheduled to begin in March of 2014, with a completed project in about 18 months.

This project will include 40 2-bedroom patio homes, 50 1-bedroom apartments for independent living, 40 studio and 1-bedroom assisted-living apartments and 24 studios units for people in need of memory care in a secure environment.

Three new Joplin Schools, Irving Elementary, Soaring Heights elementary and East Middle School are nearing completion. Classes are scheduled to begin at the new schools after the Christmas break.

Work continues on several other sizable projects with more to come in 2014.

On Wednesday this week, as required by the Missouri Energy Efficiency Investment Act of 2009, we filed a request with the Missouri Public Service Commission to implement a portfolio of demand side management programs. Our request also includes the demand-side program investment mechanism that will be added to monthly customer bills if the programs are approved for reimplementation.

If approved, the demand-side program investment mechanism will allow us to recover the costs associated with the new programs and establish a benefit sharing mechanism enabling our customers and the company to benefit from the demand-side programs.

Under our proposal, the demand-side program investment mechanism will be reviewed and adjusted annually by the Missouri Public Service Commission to account for changes in the actual cost of the program.

With regard to the Missouri Public Service Commission, Daniel Hall was appointed to the Missouri Public Service Commission on September 27, 2013, by Governor Jay Nixon. This appointment awaits confirmation.

He fills 1 of 2 vacancies on the Commission and brings the Missouri Commission to 4 members. Commissioner Hall previously served as the Legislative Director to Governor Nixon, overseeing efforts to advance the Nixon administration's legislative agenda and serving as the lead liaison between the governor and members of the Missouri General Assembly. 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

So first quick question, here. Do you mind just walking through a little bit the change in the '14 CapEx, just a little bit more? I understand there's some changes with Riverton, but just really kind of breaking it apart a little bit more clearly?

Laurie A. Delano

The major change that we have with the CapEx program was the increase of about $35 million on the Riverton project. Over and above that, we really didn't have any major changes in the total expenditures that we're expecting to spend. What the new slide represents is a better representation of when those items are going to go into service and the timing of when Asbury is going into service. The Asbury project and then the Riverton project.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Got you. But it seems like a little -- like $10 million higher though for '14 even if you add back, right? So the 166 versus the 214?

Laurie A. Delano

Yes, we did -- absent the $35 million, I think there was another $7 million, I'm thinking about $7 million that we added that just covered some miscellaneous projects. Some of them related to note [ph] reliability on our transmission and distribution system, so that was another smaller adjustment.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

And just to be clear, it doesn't impact the timing of future equity, just to be very clear?

Laurie A. Delano

That's true.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Okay, got you. And then on the efficiency side, following the filing of late, just could -- if you could talk about how that impacts your projections or if you already had that incorporated into your initial projections and perhaps just kind of delineating without these efficiency filings, what you would have seen? Just to kind of get a sense of what it's doing.

Laurie A. Delano

We in our gross numbers that we provided last year in our 10-K, that would not have been included in that. But we estimate it would be about a little -- around a 1% impact if those programs are approved and implemented.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

And just to dig down a little bit more within that. I mean, which resident -- which customer classes are impacted mostly? Is it mostly residential in terms of the composition of that 1% impact? Just thinking about the...

Kelly S. Walters

Sorry, this is Kelly Walters. Yes, the impacts and the programs are mainly designed around our residential customers. There are some programs that assist commercial as well.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Excellent. So what is it, just sort of the punch line, if you will, what is the near-term and long-term growth rate net of the efficiency bonds, if you will?

Laurie A. Delano

Julien, we've not updated our detailed customer growth numbers or customer increase numbers at this point in time. But what we -- we're still expecting an uptick in the near-term consistent with what we've said before over where we are with kind of weather-normal sales for this year to reflect the Joplin projects, and that would -- I think that number would pretty much incorporate the effects from EMEA filing.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Got you. And then the long term, I suppose, that would be somewhat -- that would also be impacted but you haven't really provided much of a sense there anyway?

Laurie A. Delano

We had provided the downward trend that we would be seeing after this initial uptick, and that trend has not changed.

Operator

[Operator Instructions] I'm not showing any additional questions at this time. Please continue with any closing remarks.

Bradley P. Beecher

Thank you. Empire remains a high quality, pure play regulator electric and natural gas utility. Yesterday's dividend increase signifies our belief in the success of our business plan. We manage a favorable energy supply portfolio consisting of reliable, diverse, low-cost regulated assets. Our experienced management team also works to ensure constructive regulatory relationships with regulators at both the state and federal level. Our low risk rate base growth plan provides an opportunity for future earnings and dividend growth. Before we close, I'd like to remind you that Laurie, Jan and I will be at the EEI Financial Conference November 10 through 12, and Laurie and Jan will be attending the 12th Annual Wells Fargo Securities Energy Symposium in New York in December.

Thank you for joining us today, and enjoy the weekend.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.

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