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The Empire District Electric Company (NYSE:EDE)

Q1 2014 Results Earnings Conference Call

May 02, 2014 01:00 PM ET

Executives

Jan Watson - Secretary and Treasurer

Brad Beecher - President and CEO

Laurie Delano - VP of Finance and CFO

Analysts

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to The Empire District Electric First Quarter 2014 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions).

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

Jan Watson

Thank you. Good afternoon, and thank you for joining us for our earnings call to review the financial results for the quarter and 12 months ended March 31, 2014. Brad Beecher, President and Chief Executive Officer and Laurie Delano, Vice President of Finance and Chief Financial Officer, will discuss our first quarter and 12 months ended results and provide highlights on other key points. We also have other members of management due may answering questions following the prepared remarks.

Our press release announcing first quarter earnings was issued yesterday morning. The press release and a live webcast of this call are available on the 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 the slide deck presents the Safe Harbor statement which accompanies our presentation materials. You should also refer to the information in our 2013 Annual Report on Form 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 would direct you to the first quarter earnings press release issued yesterday morning for further information on why we feel the non-GAAP presentation is beneficial for investors in understanding our financial results.

And with that, I'll turn the call over to Brad Beecher.

Brad Beecher

Thank you, Jan. Good afternoon, everyone, and welcome.

Today, we will discuss matters from yesterday's Board of Directors and Annual Shareholders Meeting as well as our financial results for the first quarter and 12 months ended March 31, 2014. We also will update you on other recent activities within the company.

During our Annual Meeting of shareholders held yesterday's Board Directors were re-elected to serve three years terms Kenneth Allen, William Gipson, Thomas Ohlmacher and myself.

In other businesses, shareholders ratified the appointment of PricewaterhouseCoopers as Empire's independent registered public accounting firm for the fiscal year ending December 31, 2014.

Shareholders also approved a non-binding advisory proposal regarding compensation of our named executive officers, approved and amended and restated employee stock purchase plan, approved the 2015 stock purchase plan and approved and amended and restated stock unit plan for Directors.

During the meeting yesterday, the Board declared a quarterly dividend of $0.255 per share payable June 16, for shareholders of record as of June 2, 2014. This represents a 4.2% annual yield at yesterday's closing price of $24.31.

On slide 3 of our slide presentation we’ve provided some of the highlights of the quarter and 12 month ended periods, we’ll discuss these more throughout the call.

In summary, great weather makes for great results, we reported first quarter 2014 earnings of $20.9 million, or $0.48 per share. This compares to the same period in 2013 when earnings were $12.6 million or $0.30 per share. For the 12 month ended period March 31, 2014 earnings were $71.7 million or a $1.67 per share compared to March 31, 2013 12 month earnings of $58.5 million or a $1.38 per share for the same period last year.

Temperatures were considerably colder than the normal in the comparable 2013 quarter. In fact first quarter 2014 temperatures across our service territory were the coldest in over 30 years. This cold weather had a significant impact on first quarter results driving a 7.6% increase in kilowatt hour sales.

As scheduled on March 1, the Southwest Power Pool and its market participant implemented the integrated marketplace. The marketplace functions as a centralized dispatcher matching offers to sale and bids to purchase power. 90% to 95% of all next day generation needed throughout the Southwest Power Pool territory is being cleared through the marketplace. The marketplace showed positive benefits for our customers immediately. The net financial impact of these transactions will be processed through our fuel adjustment mechanisms.

In the past 10 years, we have weathered 9 major storms including the two ice storms in 2007, the May 2009 the Derecho that interrupted service for over half of our customers and the massive Japan Tornado in May 2011. With each and every storm Empire employees stepped up followed our restoration plan and return customer to service as quickly as they safely could.

So when a Tornado hit the Kansas and Quapaw, Oklahoma communities last Sunday evening, we were well rehearsed to respond and our customers were ready to show the resilient as they dealt with aid their neighbors. At the height of the storm, we had approximately 6,000 customers without service. We lost approximately 29 transmission structures and 200 distribution poles.

We called on crews from other areas of the company and brought in 25 contract linemen to help with transmission line repairs. As a result, we had approximately 135 linemen working on restoration activities by Monday morning.

By the end of the day, our outage number had been reduced to about 1,000 customers. The crews made great progress on Tuesday, and by days in Wednesday, we were able to restore service to all customers who were ready to receive power although devastating to these two communities, the cost of this storm restoration is not financially material.

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

Laurie Delano

Thank you, Brad, and good afternoon to everyone. We are extremely pleased with our first quarter and 12 month ending results. As we review our first quarter 2014 earnings per share results compared to our 2013 results, I'll continue to refer to our webcast presentation slides to talk about the various impacts to the quarter.

As usual, the slides provide a consolidated non-GAAP basic earnings per share reconciliation for the quarter and 12 month ended period. This information augments the earnings per share reconciliation we provided in our press release. The earnings per share numbers throughout the call are provided on an after tax estimated basis

As Brad mentioned, weather was the big driver in the first quarter of 2014. From a heating degree day perspective, the weather was nearly 15% colder than normal in the 2013 quarter. We estimate the cold weather added about $0.09 to $0.10 per share to quarterly earnings on the electric side of the business when compared to normal weather. We also estimate the cold weather in our gas service territory added about $0.02 per share when compared to normal weather.

Slide four provides a roll forward of the 2013 first quarter earnings per share of $0.30 to the 2014 quarter results of $0.48 per share. When we look at the first quarter compared to last y ear, an electric revenue increase of approximately $24.3 million, netted with an increase in electric fuel and purchase power expense of $10.3 million, resulted in an increase in our electric gross margin of approximately $14 million or about $0.22 per share.

The margin callout box on slide four provides a breakdown of our estimates of the various components of this earnings per share impact. We estimate the impact of colder weather and other related factors increased revenue by about $9.2 million compared to last year. This increased electric margin by about $0.09 per share. Increased Missouri customer rates added approximately $7.6 million to revenues, increasing margin about $0.11 per share. Other miscellaneous revenues were up slightly adding another $0.01 per share to margin.

Rounding out the increase in electric revenues are changes in our off system sales compared to last year and sales revenues resulting from market activity in SPP's Day-Ahead Market that Brad mentioned earlier. This combined change totaled approximately $5.6 million. This period-over-period revenue change is offset by a similar change in fuel expanse resulting in a negligible impact on gross margins therefore we have not included this revenue component in our callout box.

Our gas segment also benefited from the colder weather. Gas sales increased nearly 14% quarter-over-quarter resulting in an increase in revenues of approximately $4.1 million adding about a penny per share to margin.

Also shown on slide 4 is the non-recurring, non-cash adjustment, we recorded in the first quarter of 2013, this has the effect of improving earnings per share of about $0.03 in the 2014 quarter. As you recall this adjustment was a result of the March 2013 rate case settlement agreement we reached with the Missouri Public Service Commission, which included the $2.4 million write-off of the small portion of exception cost at our Iatan 2 plant.

In addition, the settlement included $1.2 million non-recurring charge representing a regulatory reversal of a prior period gain on the sale of the unit train. This charge also recorded in the first quarter of 2013 is included in operating and maintenance expense.

The O&M callout box on slide 4 gives the detailed breakdown of the earnings per share impact of the operating and maintenance expense items that drove the decrease of about $0.03 per share quarter-over-quarter. Operating and maintenance expense increased approximately $1.8 million. This increase includes the positive effect of 1.2 million prior period regulatory reversal I mentioned earlier which improved earnings per share about $0.02. Increased transmission operating expenses reduced earnings about $0.02 per share. Production plan maintenance was lower quarter-over-quarter adding a penny to earnings per share. Higher distribution operating and maintenance expenses, production operating expenses and labor expenses combined to reduced earnings per share another $0.04.

Most of these operating expenses I just mentioned are offsetting the positive margin effect from our increased rate. An increase in depreciation and amortization expense of approximately $1.8 million is reflective of higher levels of plant in service and increased depreciation rates resulting from our April 1 2013 Missouri rate case. This reduced earnings per share another $0.03.

Property and other taxes increased approximately $1.5 million reducing earnings per share about $0.02. Higher Allowance For Funds Used During Construction or AFUDC added about $0.02 per share.

I'll now turn to our 12 months ended results, as Brad mentioned earlier our net income increased $13.2 million or $0.29 per share. Slide 5 provides a breakdown of the various components that resulted in this year-over-year earnings per share increase. An increase in revenue of approximately $51.7 million drove an estimated $38.1 million increase in consolidated gross margin adding $0.56 per share to earnings.

The callout box on slide 5 provides the estimated components of this increase. The increase in customer rates from our 2013 Missouri rate case effective April 1st of last year was the primary positive margin driver in this 2014 12 month ended period. We estimate the full year impact of these new rates added $31.2 million to revenues or about $0.47 per share to margins.

The quarter's cold weather contributed to a winter heating season during the 2014 12 months period that was the second coldest heating season in the past 30 years. This cold winter heating season which generally span the months from November 2013 through March 2014 offset the effects of a mild 2013 summer cooling season when compared to the 2012 cooling season. When comparing the two 12 month periods we estimate that the weather and other related impacts added about $2.2 million to electric revenue or an estimated $0.02 per share to gross margin. Increased customer accounts added an estimated $2.1 million year-over-year increasing margin another $0.02 per share.

As we previously discussed the $3.4 million non-recurring upward adjustment we made in our estimate for unbilled revenue in the third quarter of 2012 had the effect of reducing revenues when comparing the 2 years, lessening margin by about $0.05 per share. Changes in miscellaneous revenues primarily related to SPP transmission added approximately $4.4 million or $0.06 per share to margin.

As in the quarter results a change in our off-system sales compared to last year combined with SPP market activity sales revenues added approximately $4.9 million to revenue but again these revenue components are matched by similar changes and fuel expense with very little impact on margin.

Gas segment retail sales increased just over 21% during the 2014 period compared to 2013, reflecting the colder weather during this winter season. We estimate this cold weather added about $2.5 million to the gas segment margin or about $0.04 per share to earnings.

Consolidated operating and maintenance expense increases of approximately $9.7 million, drove a year-over-year earnings per share decrease of about $0.14 per share. This increase was net of the $1.2 million prior year period regulatory gain reversal I discussed earlier. The call-out box on slide 6 provides a breakdown of this earnings per share impact.

Once again the largest individual increase was in transmission operating expenses largely related to increased SPP charges for transmission network upgrade in the SPP footprint. This added expense reduced earnings about $0.07 per share. Distribution maintenance expenses increased period over period reducing earnings about $0.05. The increase reflects higher vegetation management cost allowed us result of our Missouri 2013 rate case settlement. Changes in production operating and maintenance cost were offsetting.

Changes in healthcare, labor and other costs netted together to reduced earnings another $0.04 per share. Again most of these operating costs I just mentioned offsetting the positive margin effect from our increased rates. Continuing on with the remaining earnings impact illustrated on slide six, again the non-recurring, non-cash construction this allowance adjusted that I mentioned earlier added about $0.03 per share to earnings.

Electric depreciation and amortization increased approximately $9.1 million again due to higher levels of plant in service and increased depreciation rates this had the impact of reducing earnings per share around $0.14. Property and other taxes increased about $4.1 million, bringing earnings down another $0.05 per share.

Increased AFUDC added about $0.07 per share to earnings, again reflecting the ongoing construction at our Asbury plant in the beginning phases of construction at our Riverton Unit 12 combined cycle project. Higher interest costs and other income and deductions reduced earnings about $0.02 per share, and the dilutive effect of common stock issuances to our dividend reinvestment and stock purchase plan also reduced earnings about $0.02 per share.

As we discussed in our last call, we experienced regulatory lag in the areas of transmission expense, labor expense and property taxes as well as depreciation expense recorded for new property. As we indicated in the last call, we estimate the 2014 impact of transmission costs as approximately $3 million to $4 million or a negative impact of about $0.04 to $0.06 per share. Also, as we indicated, we expect our property taxes to increase about $1.5 million in 2014, which is about a $0.02 per share impact. Our best estimate of labor cost increases is the estimated impact to earnings per share of about $0.03.

Based on our capital expenditures going into service this year and our average depreciation rate, we estimate the depreciation impact to be around $0.05 per share of additional earnings lag over last year. These cost estimates are all diligent to our weather normal earnings per share guidance. We experience slight positive customer growth in the first quarter of 2014 however our usage for customer growth rate continues to decline slightly keeping our sales relatively flat.

Our full year 2014 earnings guidance range of $1.38 to $1.50 per share that we provided in February of this year is based on normal weather and therefore remains unchanged.

I will take just a moment to update you on a couple of balance sheet items. At March 31st, our retained earnings is $77.5 million. We had about $4.5 million of short term debt outstanding out of our $150 million in capacity. Today we have about $7 million of short-term debt outstanding.

We have no major changes to our financing projections. We still expect to issue debt financing in the range of $50 million in the latter half of 2014. This amount could be subject to change based on expenditure timing and other factors. We likely will need some additional financing during 2015. Given our target 50-50 debt equity capital structure, this financing will likely also be in the form of debt.

I will now turn the discussion back to Brad.

Brad Beecher

Thank you, Laurie. Work on our two large capital investments projects: the Asbury Power Plant air quality control system and the Riverton plant project to convert Unit 12 to combined cycle configuration is progressing.

At Asbury, the distributor control system for the air quality system is running. This allows the commissioning team to began their task, including checking the functionality of equipment. The overall project is 84% complete with several subcontracts 100% complete. We still expect this project to come in between $112 million and $130 million, and be completed in early 2015.

Assuming all other factors affecting rates remain constant, adding the value of the Asbury environmental project to current rate base could increase retail rates from 3% to 5% above current levels. Any such increase would have to first be reviewed and approved as part of a rate case filing with our respective state commissions.

The Riverton Unit 12 conversion to combined cycle continues to be on schedule. Pre-construction and site preparation activities are complete and major construction is scheduled to begin this month. Current efforts are focused on detailed engineering and design and major equipment procurement. This project is scheduled to go online in mid-2016 and is still expected to cost between $165 million and $17 5 million.

We continue to make improvements to serve our customers. Our new voice over Internet Protocol system gives us the ability to bring customer service representatives from around the company on to the phones when call volumes are high. We are also staffing with more part-time reps to enable staffing according to expected call volume. Changes made in the last several y ears have allowed us to improve our contact center stats.

In 2012, we answered 7 0% of our calls in 30 seconds or less with an average speed o f answer of 1 minute 47 seconds. In 2013, we improved to answering 80% of our calls in 30 seconds with an average speed of 31 seconds. In another step to improve service, we have completed construction on our Kodiak Service Center and have begun the process of moving. The new facility will increase our operating efficiency and functionality and improve security.

The Kodiak facility will replace our current Joplin Service Center that we have utilized for nearly 100 years and this center will house our Joplin and Webb City line operations, engineering, contact center and numerous other support operations. Currently, these operations are spread among 10 locations and 14 different buildings.

On the regulatory front, the Missouri Public Service Commission has agreed our Integrated Resource Plan is substantially complete. The case was closed on March 23, 2014. As you will recall, as part of our IRP, we agreed to introduce additional demand-side management programs to help our customers use energy more efficiently. On October 30, 2013, we filed a request with the Missouri Public Service Commission to implement a portfolio of demand side management programs under the Missouri Energy Efficiency Investment Act or MEEIA.

The request subject to regulatory approval would implement new energy efficiency programs for customers in 2014. The request also includes a demand-side program investment mechanism that would be added monthly to customer bills. This charge is designed to offset the financial cost associated with the programs.

On January 14, 2014, the Commission granted a motion to suspend the procedural schedule to allow the parties to the case more time to hold additional technical conferences and perform additional financial analysis on our proposed demand-side management portfolio.

On March 7th, the Federal Energy Regulatory Commission directed the North American Electric Reliability Corporation or NAERC to develop reliability standards requiring owners of both power systems to take steps to address physical security risk. The standards would require owners to identify facilities being critical to the reliable operation of the system and develop, validate, and implement security plans to protect those facilities against physical attacks. NAERC is to submit proposed rules by the 1st of June.

As you will recall, we filed for a general increase of $2.2 million in our Arkansas jurisdiction on December 3, 2013. This request represents an increase of around 18% and included an overall rate of return of 6.35% and a return on equity of 10.5%. On April 15th, the staff of the Arkansas Public Service Commission and the Arkansas Attorney General submitted their recommendations.

The current Arkansas scheduled calls for the filing of rebuttal testimony on May 13th, a July 22nd technical hearing and a July 24 local public hearing in Gentry, Arkansas.

Moving on, on Tuesday of this week, the United States Supreme Court gave new life to the Cross State Air Pollution Rule, which was first proposed in 2010 as a replacement for the Clean Air Interstate Rule. As you may recall, the Cross State Air Pollution Rule was vacated in 2012 by the U.S. Court of Appeals for the District of Columbia. In a 6-2 ruling the U.S. Supreme Court has disagreed with this lower court ruling.

By making this ruling, it appears the Environmental Protection Agency can reinstate stricter SO2 and nitrogen oxide limits on existing power plants as originally proposed in the Cross State Air Pollution Rule. Once our current AQCS project or air quality control project at Asbury and our combined cycle conversion project at Riverton are completed our generating fleet aggregate emissions will be in compliance with Cross State Air Pollution Rule's emission limits as originally proposed. We will remain vigilant as this court decision plays out. As a reminder, the EPA is also set to release draft rules for cutting greenhouse gas emissions from existing power plants by June 1.

On April 2, our employees reached 1.5 million man hours worked without a disabling injury. It is only the second time in the history of our company that this milestone has been eclipsed. We are very proud of this accomplishment. Finally, before I turn the call back to the operator, let me provide you a quick update on the legislative front.

In Missouri, we continue to support solutions to help us reduce the impacts of regulatory lag. Senate Bill 7 02 and House Bill 2078 would allow us to defer the cost associated with Power Pool-assessed transmission projects, and Missouri property taxes for recovering in future rate cases.

Customers will not be charged with these costs until plant is in service and costs are approved by the Missouri Public Service Commission in a general rate case proceeding. Both bills have been passed out of their respective committees, but still await floor debate. While it is late in the session for a bill to be debated and perfected in its house of origin, it is still not impossible.

Senate Bill 909 and House Bill 2204, which would allow electrical corporations to recover depreciation expenses for plant in service, also await committee hearings. While not impossible for these two bills to move, given the limited time remaining, we do not expect this legislation to move forward in 2014.

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

Operator

Thank you. (Operator Instructions) And I am showing we have no questions in the queue at this time.

Brad Beecher

Thank you very much. I'll take the sign that we have no questions and that we had a great quarter. So 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.

We plan to continue our low-risk growth strategy by building our core business with rate base infrastructure, while maintaining a commitment to renewable energy initiatives and to reducing emissions. Our plan includes maintaining strong financial metrics with a target of 50/50 debt and equity. We will maintain our investment grade credit ratings.

Finally, Laurie, Jan, and I will be at the AGA Financial Forum in May. Thank you much for joining us today and have a great weekend.

Operator

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation. And you may now disconnect.

Question-and-Answer Session

[No Q&A session in this call]

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