The Empire District Electric Company's (EDE) CEO Bradley Beeche on Q2 2014 Results - Earnings Call Transcript

| About: Empire District (EDE)

The Empire District Electric Company (NYSE:EDE)

Q2 2014 Earnings Conference Call

August 1, 2014 01:00 PM ET

Executives

Bradley P. Beecher – President and Chief Executive Officer

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

Analysts

Julien Dumoulin-Smith – UBS Investment Bank

Operator

Good day everyone and welcome to The Empire District Electric Company Second Quarter 2014 Earnings Call. At this time, I'd like to turn the conference over to Jan Watson. Please go ahead ma’am.

Janet S. Watson

Thank you. Good afternoon and thank you for joining us for our earnings call to review the financial results for the second quarter and 12-months ended June 30, 2014. Brad Beecher, President and CEO, and Laurie Delano, Vice President of Finance and CFO, will discuss our financial 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 second quarter earnings was issued yesterday afternoon. 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 one 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, the first quarter 10-Q 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. Please see the second quarter earnings press release for further information on why we feel the non-GAAP presentation is beneficial for investors in understanding our financial results.

I’ll now turn the call over to Brad Beecher.

Bradley P. Beecher

Thank you, Jan. Good afternoon everyone, and thank you for joining us. Today, we will discuss our financial results for the second quarter year-to-date and 12-months ended June 30, 2014 period. We will also update you on other recent company activities.

During our meeting yesterday, the Board of Directors declared a quarterly dividend of $0.255 per share payable September 15, 2014 for shareholders of record as of September 02. This dividend represents a 4.2% annual yield at yesterday’s closing price of $24.51 per share.

During the second quarter, the favorable weather that drove higher earnings in the first quarter retreated. We transitioned into a beautiful and weather normal hazard spring. As a result, second quarter results were pretty much on track with expectations. We reported second quarter 2014 earnings of $11.2 million or $0.26 per share. This compares to the same period in 2013 when earnings were $11.7 million or $0.27 per share.

For the 12 month period ending June 30, earnings were $71.3 million or $1.66 per share compared to the June 30, 2013 period 12 month earnings of $59.5 million or $1.40 per share. Laurie will provide more details on our financial results in her discussion.

On May 28, 2014, we filed a notice of intended case filing with the Missouri Public Service Commission stating our intention in the file for new electric rates some time after August 01. Our investment in the Asbury power plant is driving this case, the filing of which follows the path we laid out in our ongoing environmental complaint plan. We will time the filing to capture our Asbury construction cost in the true up period of the case. I’ll talk more about Asbury construction progress in a few minutes.

In Arkansas on December 03, 2013, we filed for a general increase of $2.2 million or 18%. We have reached an agreement with the parties in this case for an increase of $1.375 million or about 11%. The increase is based on a 9.3% return on equity and includes recovery of transmission expenses including those related to Plum Point through the transmission rider. A hearing on the settlement agreement was held July 22, 2014, this case is currently pending before the commission.

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

Laurie A. Delano

Thanks, Brad, and good afternoon everybody. As we review our second quarter 2014 earnings per share results of $0.26 per share compared to 2013 results of $0.27, I’ll refer to our webcast presentation slide 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, year-to-date and 12 month ended periods. 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, second quarter results were relatively flat compared to the 2013 quarter. However, our year-to-date and 12-month ended results continue to be positively impacted by higher customer electric grades and cold weather during the 2014 heating season.

Slide 4 provides a roll forward of the 2013 second quarter earnings per share of $0.27 million to the 2014 quarter results of $0.26 per share. When we look at the second quarter compared to last year, an electric revenue increase of approximately $13.8 million, netted with an increase in electric fuel and purchase power expense of $12.4 million resulted in an increase in electric gross margin of approximately $1.4 million are about $0.02 million per share. The margin callout box on Slide 4 provides a breakdown of our estimates of the various components of this earnings per share impact on gross margin.

Increased wholesale on system rates were the primary driver of an estimated $2.6 million increase to revenues, increasing margin by about $0.03 million per share. While the second quarter is not a weather driven period, volumetric changes inclusive of weather variability, customer usage, and other factors that accounted for about of $2.4 million reduction in revenues or about a $0.02 million per share margin reduction largely offsetting the positive rate impact.

Miscellaneous other revenue change is combined to add about $0.02 per share to margin. Rounding out the increase in electric revenues with an increased of approximately $12.3 million primarily related to revenues resulting from market activity in the Southwest Power Pool or SPP, Day-Ahead Market or integrated marketplace along with fuel recovery related revenues.

These revenues are offset by a corresponding change in fuel expense, so there is only a negligible impact on electric gross margin. Therefore, this revenue component does not included in our callout box. And as you’ll recall the SPP integrated marketplace was implemented on March 1of this year. Our gas segment retail sales declined quarter-over-quarter resulting in decreased rate retail revenues of approximately $1.9 million, reducing margin about a penny per share.

The O&M callout box also on Slide 4 gives the detailed breakdown of the estimated earnings per share impact of the operating and maintenance expense items that drove a total decrease of about $0.03 per share quarter-over-quarter. These increased expenses of approximately $2.8 million include higher transmission operating expenses largely related to SPP cost, this reduced earnings about $0.01 million per share. Production plan maintenance was also higher quarter-over-quarter reducing earnings another $0.01 per share.

Other operating and maintenance expense is combined to reduce earnings per share another $0.01. An increase in depreciation and amortization expense of approximately $0.6 million reflective of higher levels of plant in service reduced earnings per share about $0.01.

Property taxes increased approximately $0.4 million quarter-over-quarter, and this change when combined with some offsetting reductions and other taxes reduced earnings per share another $0.01. Higher Allowance For Funds Used During Construction or AFUDC added a little over $0.02 to earnings per share.

Before I talk about the 12 month period, I want to briefly touch on our year-to-date results. For the year-to-date, our earnings are $0.74 per share. We estimate the effects of the cold winter have positively impacted this number by around $0.13 per share when compared to normal weather.

Slide 5 shows the changes year-over-year for the period. Increased electric rates, weather and other impacts were the significant drivers of the $0.24 per share margin increase on a year-over-year, year-to-date basis.

Transmission operating expenses primarily related to increased SPP expense were transmission network upgrades and increases in production operations, labor and property insurance drove an increase in O&M expenses, but lowered earnings per share approximately $0.06 during the period. Other costs were largely offsetting resulting in a total increase of $0.17 in earnings per share period-over-period.

Turning now to our 12 months ended results, our net income increased to $11.8 million or $0.26 per share. Slide six provides a breakdown of the various components that resulted in this year-over-year change. And electric revenue increase of approximately $51.9 million netted with an increase in electric fuel and purchase power expense of $22.6 million resulted in an increase in electric gross margin of approximately $29.3 million or about $0.43 per share.

Again, the call out box on slide six provides the estimated components that impacted this consolidated gross margin during the period. The increase in customer rates from our 2013 Missouri rate case settlement effective April 01 of last year was the primary positive margin driver in this 12 months ended period. We estimate the impact of the increased Missouri retail customer rates along with some changes in our wholesale some customer rates added $26 million to revenue or about $0.38 per share to margin.

As we discussed last quarter, cold weather during the first quarter of 2014 contributed to the second coldest heating season in the past 30 years. As is often typical in our service territory, weather during the 12 months period tends to average back towards normal. The cold 2014 winter heating season offset the effects of mild summer cooling months during the 2013 summer period when comparing the two 12 months periods, we estimate that the weather and other related factors during this 2014 12 month period added around $4 million to electric revenue for an estimated $0.04 per share to gross margin.

Increased customer counts added an estimated $1.7 million year-over-year increasing margin and another $0.02 per share. As I’ve discussed on previous calls, a $3.4 million non-recurring upward adjustments we made in our estimate for unbilled revenue in the third quarter of 2012 reduced revenues when comparing these two 12 month periods, lessening margin by about $0.05 per share. Changes in miscellaneous revenue is primarily related to our SPP transmission revenues, added approximately $3.5 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 the SPP market activity revenues and other fuel recovery revenues added about $19.9 million to revenue. Again, these revenue components are matched by similar changes in fuel expense with very little impact on margin, and therefore we don’t include this component of revenue in our call-out box.

Gas segment retail sales benefitted from the cold weather during the 2014 winter season, we estimate these higher sales added about few cents per share to earnings, when compared to the previous period. When combined, these changes resulted in an estimated increase in consolidated gross margin of approximately $0.47 per share.

Consolidated operating and maintenance expense increases of approximately $10.2 million drove a year-over-year earnings per share decrease of about $0.13 per share. The call-out box on Slide 7 provides a breakdown of this earnings per share impact.

Transmission operation expense, again, primarily related to increased SPP charges reduced earnings about $0.06 per share. Distribution maintenance expense increased period-over-period reducing earnings per share about $0.06. This increase reflects higher vegetation management costs allowed as a result of our 2013 rate case settlement. Changes in production, operating and maintenance costs were offsetting.

Higher labor costs reduced earnings per share about $0.03. Changes in production operations and maintenance expenses, healthcare and various other categories were largely offsetting. Most of these operating costs I just mentioned are offsetting the positive margin effect from our increased rates.

And as I have discussed in previous calls, the $1.2 million non-recurring, non-cash charge representing the regulatory reversal of a prior-period gain on the sale of unit train, which resulted from our 2013 rate case settlement, had the effect of improving earnings about $0.02 per share period-over-period.

Continuing on with the remaining earnings impact illustrated Slide 7, a $2.4 million non-recurring, non-cash adjustment for a plant disallowance also resulted from a rate case settlement agreement and it added about $0.03 million per share to earnings.

Electric depreciation and amortization expense increased approximately $7.3 million due to higher levels of plant and service and increased depreciation rates effective with our April 01, 2013 case. This decreased earnings about a $0.11 per share. Property taxes increased about $3 million which when combined with changes in other taxes brought earnings down another $0.04 per share.

Increased AFUDC added $0.06 per share is our earnings reflecting the ongoing construction of the air quality control system at our Asbury plant and the beginning phases of construction at our Riverton Unit 12 combined cycle project. And finally, the dilutive effect of common stock issuances through our dividend reinvestment stock purchase plan reduced earnings per share another $0.02.

Our full year 2014 weather normal earnings guidance range of $1.38 to $1.50 per share remains unchanged. I’ll take just a moment to update you on a couple of balance sheet items. At June 30, our retained earnings balance was $77.6 million. As to our liquidity position, we had $52.5 million of short-term debt outstanding out of our $150 million in capacity. This balance primarily reflects the timing of tax payments, dividend payouts and semiannual debt interest payments. Today, we have $48.5 million of short-term debt outstanding.

On slide eight, we have once again provided a historical and projected net plant in service numbers that reflect our current capital expenditure plan which remains unchanged from previous disclosures. The 2014 and 2015 expenditures depicted on this slide reflect our ongoing Asbury environmental upgrade and the conversion of Riverton Unit 12 to a combined cycle. We have also presented our net plant levels less deferred taxes to approximate our rate base level. As we have seen historically, this net plant increase realized from building rate based infrastructure will drive earnings growth.

To finance these projects, we plan to issue private placement debt with a delayed settlement option in the near term. We expect this financing to be in the $60 million range. This financing combined with the addition of internal equity from our dividend reinvestment stock purchase plans and our continued build of retained earnings will keep us at our target 50-50 debt equity capital structure.

As we indicated last quarter, we will likely need some additional financing during 2015 and as discussed previously given our 50-50 debt equity target, the financing will likely also be in the form of debt.

I’ll now turn the discussion back over to Brad.

Bradley P. Beecher

Thank you, Laurie. We continue to execute our compliance plan which is reflected in Slide 8. Our Asbury Power Plant Air Quality Control System project continues to advance. We are working on the final construction and commissioning phases. Currently, approximately 90% of the construction project is complete. Project costs through June 2014 were approximately $97.4 million excluding AFUDC.

The project is divided into 47 systems, with 10 of the systems already commissioned, including the chimney, the electrical gear, the distributive control system and the compressed air system. We still expect this project to be complete in early 2015 at a total cost between $112 million and $113 million. We anticipate this project will reduce submissions up to 95% for sulfur dioxide, 85% from mercury and 99% for particular matter from current levels.

The Riverton Unit 12 conversion to combined cycle project continues to be on schedule, with engineering and equipment procurement moving ahead. The subsurface utility and foundation contractor has mobilized undergoing construction. As of June 30, 2014 we have spend approximately $42.4 million on the project, excluding AFUDC. This project is scheduled to go online in mid-2016 and is still expected to cost between $165 million and $175 million.

We also retired our Riverton Unit 7, coal-fired unit in July ahead of our planned retirement which was scheduled for mid-2016. We retired the unit early due to problems with the transformer bank associated with this unit. Because of the unit aged, planned retirement and the cost of repairs, it was not prudent to repair the unit and put it back in service.

Last quarter we reported the Southwest Power Pool integrated marketplace had gone live and had shown positive benefits for our customers. And marketplace continues to show benefits related to lower fuel costs for our customers. The net financial effect of these transactions will be processed through our fuel adjustment mechanisms.

On June 2 EPA and President Obama and the elder Clean Power Plan, proposing CO2 emissions standards for existing electric generating units. The EPA has proposed state specific emission rates that must be achieved by 2030. These rates result in CO2 emission reductions of 30% from 2005 levels with compliance proposed to come in the form of best system of emission reduction or building blocks.

These four building blocks are improved efficiencies at electric generating units, this past prioritization of lower emitting generating units really fuel switching from coal to natural gas combined cycle units. Third, additional renewables and fourth end use energy efficiency.

As proposed, states can use any of these measures in anyway they choose, as long as they meet their state’s specific goal. States will be required to develop their respective compliance plans and the EPA at least that open for states to cooperate with other states to collectively meet their emission rate requirements.

The development of a multi-state plan will be important for Empire as our generating units and wins EPAs are located in three different states Missouri, Kansas and Arkansas. Our customers are in four different states, the previous three plus Oklahoma, each of the four with its own unique emission rate standard. The world is scheduled to be finalized in June 2015, once finalized states will have one year to submit compliance plans with options for one or even two year extension if a multi-state approach is utilized. Each state will be required to demonstrate progress towards their goal by 2020.

Kick-off meetings to discuss the proposal have been held and we are engaged in this process. Our focus in the coming months will be to formulate our comments and collaborate with respective state agencies as well as our neighboring utilities to encourage ETA to promulgate a final rule and incorporates regional or multi-state compliance.

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

Question-and-Answer Session

Operator

Yes sir, thank you. (Operator Instructions) We will take our first question from Julien Dumoulin-Smith of UBS.

Julien Dumoulin-Smith – UBS Investment Bank

Hi, good afternoon.

Bradley P. Beecher

Hi Julien, how are you?

Laurie A. Delano

Hi, Julien.

Julien Dumoulin-Smith – UBS Investment Bank

Hey, so first, quick question. Is this is kind of a higher level one, as you think about strategically the company, I imagine you guys have had conversation et cetera. How are you speaking about positioning for growth in future, I mean, just looking at the net PPD growth beyond 2015, 2016. How do you address that? It’s perhaps the first question.

Bradley P. Beecher

Couple of things as we’ve told you before, we are pretty laser focused on getting these two constructions projects completed Asbury and Riverton 12 Combined Cycle and getting the rates in place, and so that's taking most of our focus today. As we think about beyond that, we layout our five year forecast on one of the slides in the slide deck here, we’ve got pretty good compound annual growth rate, our customers are here to kind of recover from the rate case is that we have in front of us. So we’ve got – we think a pretty good plan laid out for the next five years.

Julien Dumoulin-Smith – UBS Investment Bank

All right. Excellent, and then with regards to take the in and out early that you talked about, what impact does that have? Could you just walk through the financial impact if you will, or how to think about that?

Bradley P. Beecher

So, I’ll do operational impact, and then Laurie will take financial impact. We transitioned this small coal-fired unit, which was about 38 megawatts in capacity, and was built in 1949. We transitioned it to natural gas a couple of years ago, and it hasn’t run since. So from an operational standpoint, it will have no impact on our business. And I’ll let Laurie talk about the financial.

Laurie A. Delano

Julian, the way we look at this retirement is just really moving that, the original cost of that plant from plant and service to our reserve account, so rate base is not impacted. What we’ll do is, when we get to the end of Riverton project, and we look at retiring the rest of the coal units on that, we would take a look at the net book value at that point in time. But we have, a couple of rate cases to go. We got a stipulation in that case, but if there were any write-offs related to retirements and so forth, that in accounting authority or that would be considered, but we don’t think that, that’s a likely prospect. So bought online, we’re not expecting any earnings impact to the retirement.

Julien Dumoulin-Smith – UBS Investment Bank

Great. And then, moving on to the energy efficiency, I mean, obviously we’ve talked about this in the past few quarters. What do you seeing of late, how are you thinking about that in the context of your filing et cetera? I mean what is the latest if you will?

How would you, or perhaps little differently or more concretely, what is the impact in your view of energy efficiency on your sales by customer class, if you can kind of give us a little bit more granularity?

Bradley P. Beecher

As we’ve been talking about really for the last two years, we’re having enough growth and job right now to more or less offset the impact of energy efficiency across the rest of our system. We continue to see what we believe is very flat energy usage across our system. You’re probably referring to EMEA filing, when asking what our status is, and we had filed that case, we at the request of the other parties, if delayed and so whatever impacts from EMEA will be taken into account in this next Missouri rate case filing, that we would file whenever we get notice for it.

Julien Dumoulin-Smith – UBS Investment Bank

Thank you.

Bradley P. Beecher

Thanks. Thank you.

Laurie A. Delano

Thank you.

Operator

(Operator Instructions) And it looks like we have no further questions at this time. So, I’d like to turn it back over to Mr. Brad Beecher for any additional or closing remarks.

Bradley P. Beecher

Thank you very much. During the past several weeks, we presented information to our customers and communities regarding our upgrades to meet current environmental mandates including the Air Quality Control System upgrade at Asbury and the combined cycle and conversion at Riverton.

Since these improvements coming across, we believe it’s important to share our story prior to the filing of new rates. Our management team remains dedicated to our long-term strategy as a high quality pure play regulated electric and gas utility, pursuing a low risk rate base growth plan managing a diverse environmentally complaint energy supply portfolio, and maintaining constructive regulatory relationships in each of our jurisdictions.

We are committed to meeting today’s energy challenges with least cost resources while ensuring reliable and responsible energy for our customers and an attractive return for our shareholders. One last item on September 11, Laurie and Jan will be at the AGA Mini-Forum in New York. As always we appreciate you sharing your time with us, and we wish you – hope you had a weekend. Thank you very much for attending.

Operator

And that does conclude today’s call. We thank everyone again for their participation.

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