The Empire District Electric Company Q3 2007 Earnings Call Transcript

| About: Empire District (EDE)

The EmpireDistrict Electric Company (NYSE:EDE)

Q3 2007 EarningsCall

October 26,2007 1:00 am ET


Jan Watson -Secretary and Treasurer

Bill Gipson- President and CEO

Greg Knapp -VP and CFO


Anthony Crudel- Jefferies

Selman Akyol- Stifel Nicolaus


Ladies andgentlemen, thank you for standing by and welcome to the Empire DistrictElectric Third Quarter Earnings Call. At this time all participants are in alisten-only mode. Later we will conduct a question-and-answer session andinstructions will be given at that time.

(OperatorInstruction). As a reminder, this call is being recorded today Friday, October 26th,2007.

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

Jan Watson

Goodafternoon. Thank you for joining us for the Empire District Electric Company'steleconference to discuss the company's operations and to review the financialresults for the third quarter and 12 months ended September 30th, 2007. A livewebcast of this call is available on the Empire Website at

Bill Gipson,President and CEO of the Empire District Electric Company, and Greg Knapp, VicePresident and CFO, he will be giving our presentation this afternoon and willbe available to answer questions following the presentation.

Our pressrelease announcing third quarter earnings was issued yesterday evening. Thepress release may be accessed on our website, or if you would like a copymailed or faxed to you please call Marilyn Ponder at 417-625-6142. A telephonicreplay of the call will be available for two weeks by dialing 800-405-2236 andentering pass code 11099495, pound. The Webcast will be available for replay onour website.

Let meremind you that certain matters discussed in this call are forward-lookingstatements intended to qualify for the Safe Harborfrom liability established by the Private Securities Litigation Reform Act of1995. Such statements address future plans, objectives, expectations and eventsor conditions concerning various matters. Actual results in each case candiffer materially from those currently anticipated in such statements by reasonof the factors noted in our filings with the SEC, including our most recentForm 10-K and Form 10-Q. The earnings per share impact of revenue and expenseitems are all discussed on an after-tax basis, and compare the period referredto with the same period of the prior year. The estimated earnings per shareimpact of individual items is a non-GAAP presentation however, we believe thisinformation is useful in understanding the change in the company’s earningsbetween periods.

And now,Bill Gipson will begin our presentation.

Bill Gipson

Thanks, Jan.And good afternoon, welcome. As Jan said today, we are going to discuss thefinancial results for the quarter and 12 months ended September 30th and giveyou an update on some other things that have been going on with theorganization.

Yesterday,we reported third quarter 2007 earnings of $23.3 million $0.76 per share andthat compares to earnings same quarter last year of $22.4 or $0.74 per share.Earnings for the 12 months ended September 30 were $41.8 million or $1.38 ashare and that compares to earnings of $32.3 million or $1.19 per share for the12 months ended September 30 last year. Of course, I want to remind you,earnings on the 12 months basis were impacted negatively by the January icestorm, which reduced earnings by about $0.10 a share for the 12 months ended.

At the Boardmeeting yesterday, the directors declared a quarterly dividend of $0.32 pershare payable December 15th for shareholders of record, as of December 1 that’srepresents a 5.5% annual yield against our closing price from yesterday of$23.18.

I will nowturn it over to Greg, who will cover the financial details.

Greg Knapp

Thanks,Bill. As Bill stated for the third quarter, we reported earnings of $23.3million or $0.76 per share basic and fully diluted as compared to earnings of$22.4 million or $0.74 a share in the same quarter of ‘06. The quarterlyresults were primarily driven by an increase in our Missouri electric rates partially offset byan increase in electric fuel and purchased power. I will get to the details ina moment.

But first, Iwould like to begin by providing a non-GAAP reconciliation, which details thethird quarter 2007 activities compared to 2006 on an earnings per share basis.Those of you that have read our press release or have it in front of you thatwill be the earnings per share reconciliation, I will follow. I should remindyou again that these earnings per share figures throughout the call arepresented net of tax and that’s an estimated basis.

So, to gothrough this table again, if you have it in front of you that would be helpful,if not I will try to read through this. Starting off with earnings per shareSeptember 30, 2006 that was $0.74 then when we look at revenues, electricrevenues increased during the period would add about $0.23 per share to thetotal. Gas revenues would add about $0.02 per share to the total.

On theexpense side, electric fuel expenses were up and would take away about $0.07purchase power would be negative or take away about a penny. Cost of naturalgas also about a penny. Electric operating expenses were up would be areduction of about $0.05 a share. Gas operating expenses actually decreasedslightly and so that would add back to the total of about a penny a share.Maintenance and repair costs would be up $0.02 or take away about $0.02.

Depreciationand amortization costs were up. So, I would reduce from the total by $0.08.Other taxes would reduce from the total by $0.02. Our effective income tax ratewas positive player in the comparison, so you would add that back of $0.03 tothe total. Interest charges would take away from the total by $0.03 and AFUDCwas a positive in here of $0.02. So, you can get all those positive andnegatives correctly on there that would move you from the $0.74 last year tothe $0.76 this year.

Now, I willreview the results by category in more details starting with electric, revenue,fuel and operating expenses. Total electric revenues increased about $10.7million compare to 2006, which is about an 8.5% increase for the quarter.Increase in the Missouri electric rates put in placeJanuary first of this year contributed about $9.9 million for the thirdquarter, while our system sales added approximately $4.3 million.

Continuedcustomer growth and other electric revenues added approximately $2.4 millionfor the quarter by the estimated effect of weather differences between theperiods had a negligible impact. Revenue decreased to our 2007 quarterlyrevenues compared to 2006 was the last year’s third quarter, included a $5.9million revision to our unbilled revenue for a change to our total electricload loss factory. We do not have a similar revision this year. All these itemstogether added $0.23 per share on after tax basis.

Total fueland purchase power costs for electric generation for the quarter were up $3.9million in total or 8%. Prices for natural gas burn were lower but we increasedour usage compared to last year’s quarter, which ultimately caused the gas costto be higher in total by $3.9 million. This is partly due to the availabilityof Riverton 12, which went to service this past spring and the fact we wereable to sell power generated by our units into the Southwest Power Pool energyimbalance services market.

Coal andalternative fuels were down by $0.7million as both the prices and volumesdecreased in this area. The combination of changes in natural gas and coal costtotaled $3.2 million or about $0.7 per share. Purchase power cost increasedabout $0.7 million or about $0.1 per share due to slight increase for bothprice and volume.

Otherelectric operating expenses increased approximately $2.1 million or about $0.5per share. The most significant increase is to other operating expenses werepension and outside services, which increased about $0.8 million collectivelycompared to 2006. We also experienced relatively minor increases of $100,000 to$200,000 in the fuel operating categories.

Maintenancecost increased approximately $0.9 million or $0.2 a share, which is mostly dueto additional [pre-trending] of our distribution system compared to the thirdquarter of 2006.

Moving tothe quarterly gas revenue and operating expense discussion. Due to theseasonality of gas operations, our volumes have return back to the lower summertime levels. Revenues increased $0.7 million or about $0.2 a share, our naturalgas cost also increased $0.4 million compared to 2006 decreasing earnings pershare by $0.1.

Otheroperating and maintenance deduction were $0.3 million lower for the thirdquarter in total increasing earnings per share by $0.1. Our outside servicescosts decreased by $0.8 million, because last year we were paying transitionalservice cost to equal after the purchase of the gas operations. This was offsetwith another small increases and operating expenses of $0.5 million.

Depreciationand amortization cost for the total company increased about $3.5 million orapproximately $0.8 per share. This was mostly due to regulatory amortizationprovided for in the last Missouricase, which was $2.6 million of the quarterly increase. Other taxes increased$0.8 million due to increased property taxes and fees, decreasing earnings byabout $0.02 per share.

Oureffective tax rate for the 2007 quarter, was lower than our rate the sameperiod in 2006 improving our after tax earnings per share approximately $0.03.Increased equity AFUDC related to our ongoing construction program was theprimary driver.

Totalcompany interest expense for the quarter increased $1.3 million over 2006decreasing earnings per share by approximately $0.03. As most of you know, we issued$80 million of bond this past March to pay down our short-term debt, while wecontinue to build our construction program.

Interestexpense actually increased approximately $1.5 million that was partially offsetby an increase in the debt component of AFUDC in the amount of $0.2 million.The other component of AFUDC the equity piece also provided an additional $0.7million of other income compared to the third quarter of 2006 adding $0.02 toearnings per share.

In summary,on an earnings per share basis, the electric segment contributed about $0.79per share during the third quarter compared to $0.78 for the 2006 thirdquarter. The Gas operations reduce consolidated earnings per share byapproximately $0.03 compared to $0.04 loss for the third quarter of 2006.

Turning tothe 12 month ended information. We don’t mention our 12 month earnings as ofSeptember 30th were $41.8 million or $1.38 per share compared to the 2006, 12months earnings level of $32.3 million or $1.19 per share. Several factors contributedto the electric segment 12 month ending revenue increasing by $34.8 million orabout $0.82 a share compared to 2006.

Rateincreases in our Missourijurisdiction added $22.6 million and customer growth of 1.8% grew revenues by$10.1 million. The estimated effect of weather, off-system and other electricand water revenues contributed about $8 million. The unbilled revenueadjustment of $5.9 million mentioned earlier was the only significant factor,which decreased revenue for the 12 month period.

Totalelectric fuel and purchased power costs increased $2.5 million for the 12 monthperiod reducing earning per share by about $0.6. An increase of $7.2 million inpurchase power and $0.5 million of coal and other electric fuels were partiallyoffset by a reduction in natural gas cost of $5.2 million.

Oil pricesover the 12 month period drove the reduction in natural gas costs. Otheroperating expenses in our electric segment increased $7.1 million or about$0.17 per share of which $2.4 million related to the increase in pension costsand $1.6 million of customer accounts or customer assistance type programexpenses.

Our outsideservices category also increased $0.6 million to the higher external audit costand consulting fees related to the development of our Integrated Resource Planfiled with Missouri Commission. Several other operating cost experienced smallincreases for the 12 month period totaling the remaining $2.5 million.

Electricmaintenance costs increased $7.5 million over 2006, which reduced earning pershare for the 12 month period by $0.18. The ice storm from January of this yearaccounts for $4.6 million of the change, when you considered the incrementalcost of the storm.

Distributioncost also increased another $1.8 million as well, which is mostly due to ourincreased returning effort. Depreciation and amortization increased $10.1million negatively affecting earning per share by approximately $0.24. Theregulatory amortization granted in the recent Missouri electric case was $7.9 million ofthat total.

In summaryelectric earnings per share for the 12 months period was $1.36 basic anddiluted compared to $1.27 for the 2006 period.

Switch overto the gas operations, again revenues totaled $60.3 million for the 12 monthsended September 30, 2007, while the cost of natural gas sold was $38.4 million.Other operating deductions totaled $17.7 million and include general operatingexpenses of $10.3 million, maintenance and repairs of $1.7 million,depreciation of $1.9 million and income and other taxes combined of $3.9million.

In power gasoperating income for the 12 month period was $4.1 million. After applicableinterest and other below line items with $3.6 million, the gas operations werereporting a net income of $0.5 million for the 12 months period approximately$0.2 per share.

On October3rd, we announced the sale of Fast Freedom, our internet services company thatsupplied wireless broadband, DSL, and dial-up Internet service in addition toWeb site hosting. Salenot having real effect on our earnings cash flows, results from operations forthe quarter. Fast Freedom is now being reported is a discontinued operationalong with MAPP and Conversant, which was sold in 2006.

Our othersegment is almost entirely related to fiber optic business now and results forthe 12 month period for continuing operations in our other segment is aboutbreakeven. Earnings related to discontinued operations for the 12 month periodwere $0.2 million for 2007 compared to a 2006 loss of $0.9 million. This addedabout $0.4 per share to earnings over the 2006 12-month period.

Thecalculation of earnings per share for the 2007 12-month period compared to 2006is also impacted by dilutive effect of $3.8 million shares of common stock weissued in June of 2006. This had an estimated negative impact of $0.14 pershare for the 12-month period. That concludes the earning information I want toprovide everyone, but I would like to update you on our current hedge position.

88% of ouranticipated volume of natural gas usage for our electric operations for thereminder of 2007 is hedged and average price of $7.4. For next year 2008, wehave about 89% or $7.7 million, decatherms hedge $6.85, 2009 54% $4.7 million decatherms hedge $6.6 2010, 40% or $3.7 million decatherms hedge $5.42 about the same numbers for2011 as 10. And then for the years 2012 and 13 for each year were about 13%hedge with $2.4 million decatherms hedgeeach year at $7.30.

For our gasoperations, we currently have hedged about 90% or $3.4 million decatherms of our expected upcoming '07, '08winter season needs. Our target is to have 90% to 95% of our storage capacityfall by November 1.

I will turnthe presentation back now to Bill.

Bill Gipson

Thanks,Greg. On October 1, we follow the new rates with the Missouri Public ServiceCommission for our Missouri electric customers we are seeking a annual increasejust short of $35 million or about 10%.

We are alsoasking that fuel adjustment mechanisms be implemented of course we believe thatemploying a fuel adjustment class achieves an equitable balance ensuringfinancial stability for our shareholders, who are providing more timely savingsto our customers and the event of fuel and purchase power cost decrease.

Now thecommission granted a fuel adjustment costs in the Aquilacase that was finalized on May 31 and we requested a similar type ofinstrument. Also with this filing, we are seeking to recover our costs forcapital projects that include a 150-megawatt addition at the Riverton PowerPlant, what we referred to as Riverton 12, the selective catalytic reductionsystem at Asbury, and of course the significant reconstruction work that wasnecessary following the catastrophic ice storm in January of this year.

On August15th, we have set an all time peak at 1173-megawatt surpassing last year‘s peakby about 1.1% during the hot weather, Asbury, Jeffrey and Riverton. Coal unitsall performed very well. Iatan’s performance was a little bit less favorabledue to an outage to repair a turbine bearing failure.

On September22, just a few weeks ago our Asbury Power station began its scheduled fulloutage in addition to the plants, routine five year turbine generatormaintenance we have incorporated the tie-in, installation of the selectivecatalytic reduction system that will provide reductions in our nitrogen oxideemission.

Weanticipate that the new [FCR] will reduce our nitrous oxide emissions by about85%. We are completing the FCR additional well ahead of the Clean Air InterstateRule, which goes into effect in 2009 and that was our hard decision. We chooseto complete the project early to ensure labor and material availabilities andto give us time to fine tune the system. We currently expect Asbury to returnto service, November 26th. Now compared to the fourth quarter of 2006, Asburywas not on outage, I expect the replacement power to impact earnings about$0.15 per share.

Constructioncontinues on Plum Point and Iatan 2 just as a remainder Plum Point was an EPCcontract and our ownership position is about $87 million. Both projectsappeared to be pretty much on schedule. This past Wednesday, we filed ourwinter 2007 through 2008 purchased GAAP adjustments for the three gas systemswith the Missouri Public Service Commission. We request that the new PGAsbecome effective on November 3.

Our gasfolks have worked hard to diversify our suppliers and that’s combined withoverall lower gas prices, has enabled us to ask for reductions in the PGA forall three systems. These range from about 7% to 20% depending on the pipe andour in relationship to the current PGA that have been in placed since lastNovember.

And finally,as we head into the winter season, we are continuing our efficiency initiativesand introducing additional programs to enable them to control their energyusage. For example in Missouri,we have several programs in place for our residential customers including alow-income weatherization program, whereby electric and gas customers mayqualify for weatherization improvements to their homes.

The new homelow income program while we are working with community housing project such asHabitat for Humanity to ensure newly build houses are energy efficient aspossible. Our new high efficiency air conditioners rebate program to assistcustomers in purchasing air conditioners or heat pumps with seasonal energyefficiency ratings of 15 or higher.

They changeyour life; change the world program offering instant rebates on compactfluorescent light and a new residential financing program for natural gascustomers to help with the installation and heating, water heating and majorappliances. Of course this program is designed to empower our customers tocontrol their energy usage and thereby controlling their energy cost. Webelieve the programs also help reduce the demand for energy and help us tomitigate the need for new infrastructure in the future.

I will nowturn the conference back over to the operator, so we can answer your questions.

Question-and-Answer Session


Thank you.Ladies and gentlemen at this time, we will conduct a question-and-answersession. (Operator Instructions).

And ourfirst question comes from the line of [Anthony Crudel] from Jefferies. Pleasego ahead.

Anthony Crudel - Jefferies

Goodafternoon. My question in 2010 I think the Plum Point and Iatan 2 project arecompleted and those units were expected to be online. Could you identify anylarge project that the company may undertake, once these generation projectsare completed maybe in 2011 or 2012 or beyond that?

Bill Gipson

Sure, I willAnthony. As we announced Asbury with that, in the spring we’ve announced thatHorizon Wind Energy project. We would be taking all of the outputs fromHorizon, which is about a 100 megawatts [main play] capacity. And with that, wewill also be adding a 50 megawatts combustion turbine, so that we can respondto the variabilities of wind generation with that [CQ] and I suspect that’sprobably that comes on in 11, Anthony.

Anthony Crudel - Jefferies

So, theHorizon Wind Project seems I guess that’s more of an uptake agreement, but thenyou guys already contract 50 megawatts gas Combined Cycle Units?

Bill Gipson

Yes, that’sright.

Anthony Crudel - Jefferies

And that’s2011.

Bill Gipson


Anthony Crudel - Jefferies

Okay. Thankyou.


Thank you.And our next question comes from line of Selman Akyol from Stifel Nicolaus.Please go ahead.

Selman Akyol - Stifel Nicolaus

Thank you.Couple of quick questions, first of all in terms go into the regulatoryprocess, how long that going to take you to get through next?

Bill Gipson

Well, it'smandatory or not mandatory, but it is an operational law date 11 months and ifyou take the filing on October 1 that would illustrates basically September 1of next year.

Selman Akyol - Stifel Nicolaus

Got it,thanks.

Bill Gipson

And that’swe are able to settle all the things earlier.

Selman Akyol - Stifel Nicolaus

Okay. Andthen on the $0.3 million improvement in gas operations due to the equal ofpayments, you also lapping that going into Q4, Q1 and Q2 as well.

Greg Knapp

There isjust a very small amount of that would be in Q4 of '06 that will go away; verysmall that was most of it was done by the end of the third quarter of '06.

Selman Akyol - Stifel Nicolaus

Okay. Andthen Watson, can you give where you debt bounces was either a ratio or just thedollars?

Jan Watson

No, hang onjust, Sel as I can I’ve got, let see at the end of September sum in ourlong-term debt, we issued that $80 million back in March and so, really youlook at our June financials and have most everything except our short-term debtbalances was about $68 million at the end of September that will be the onlyreal significant change.

Selman Akyol - Stifel Nicolaus

Okay. Andthen one last question, you mentioned the 2007 tax rate is improved. Can youjust give a little bit more color, as to I guess, why and then what do youexpect on a go forward basis?

Greg Knapp

Well, AFUDCequity is basically a non-taxable item and so to the extent that begins to build,as we go through this construction program that has the effect of reducing thatrate as the main driver in there. There is causality loss from our ice storm;there are some other things like that that tend to reduce it. But that’s thoseare of the nature that once we go through get to the AFUDC equity piece thatpops back up obviously. This is just particular to the current period.

Selman Akyol - Stifel Nicolaus

All right.Thank you very much.

Greg Knapp

Thank you.


Thank you.(Operator Instructions). And we do have a follow-up question from the line of[Anthony Crudel] from Jefferies. Please go ahead.

Anthony Crudel - Jefferies

Just a quickquestion, what's the effective tax rate this quarter versus 3Q’06?

Greg Knapp

Hold on asecond. Anthony, are you asking about the percentage or its impact on earnings?

Anthony Crudel - Jefferies


Greg Knapp


Anthony Crudel - Jefferies

If you don’thave it, I’m going to hit you offline within it?

Greg Knapp

Just give usa split second here. Okay, last year, would have been about 35.7% this year,it’s about 33%.

Anthony Crudel - Jefferies

Great. Thankyou very much.

Greg Knapp

Thank you.


Thank you.(Operator Instructions) And I’m showing that we have no further questions atthis time, please continue.

Bill Gipson

Thank you.And again, we appreciate the opportunity to review our earnings. We are workinghard on our long range plan to provide reliable service for our customers at acompetitive price and attractive returns for investors. I just want to wish youa great day and a great weekend. Thank you.


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

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