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The Empire District Electric Company (NYSE:EDE)

Q3 2007 Earnings Call

October 26, 2007 1:00 am ET

Executives

Jan Watson - Secretary and Treasurer

Bill Gipson - President and CEO

Greg Knapp - VP and CFO

Analysts

Anthony Crudel - Jefferies

Selman Akyol - Stifel Nicolaus

Operator

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

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

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

Jan Watson

Good afternoon. Thank you for joining us for the Empire District Electric Company's teleconference to discuss the company's operations and to review the financial results for the third quarter and 12 months ended September 30th, 2007. A live webcast of this call is available on the Empire Website at www.empiredistrict.com.

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

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

Let me remind you that certain matters discussed in this call are forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Such statements address future plans, objectives, expectations and events or conditions concerning various matters. Actual results in each case can differ materially from those currently anticipated in such statements by reason of the factors noted in our filings with the SEC, including our most recent Form 10-K and Form 10-Q. The earnings per share impact of revenue and expense items are all discussed on an after-tax basis, and compare the period referred to with the same period of the prior year. The estimated earnings per share impact of individual items is a non-GAAP presentation however, we believe this information is useful in understanding the change in the company’s earnings between 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 the financial results for the quarter and 12 months ended September 30th and give you an update on some other things that have been going on with the organization.

Yesterday, we reported third quarter 2007 earnings of $23.3 million $0.76 per share and that 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 a share and that compares to earnings of $32.3 million or $1.19 per share for the 12 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 ice storm, which reduced earnings by about $0.10 a share for the 12 months ended.

At the Board meeting yesterday, the directors declared a quarterly dividend of $0.32 per share payable December 15th for shareholders of record, as of December 1 that’s represents a 5.5% annual yield against our closing price from yesterday of $23.18.

I will now turn 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 $23.3 million 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 quarterly results were primarily driven by an increase in our Missouri electric rates partially offset by an increase in electric fuel and purchased power. I will get to the details in a moment.

But first, I would like to begin by providing a non-GAAP reconciliation, which details the third 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 that will be the earnings per share reconciliation, I will follow. I should remind you again that these earnings per share figures throughout the call are presented net of tax and that’s an estimated basis.

So, to go through 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 share September 30, 2006 that was $0.74 then when we look at revenues, electric revenues increased during the period would add about $0.23 per share to the total. Gas revenues would add about $0.02 per share to the total.

On the expense side, electric fuel expenses were up and would take away about $0.07 purchase power would be negative or take away about a penny. Cost of natural gas also about a penny. Electric operating expenses were up would be a reduction of about $0.05 a share. Gas operating expenses actually decreased slightly 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.

Depreciation and 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 rate was positive player in the comparison, so you would add that back of $0.03 to the total. Interest charges would take away from the total by $0.03 and AFUDC was a positive in here of $0.02. So, you can get all those positive and negatives correctly on there that would move you from the $0.74 last year to the $0.76 this year.

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

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

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

Coal and alternative fuels were down by $0.7million as both the prices and volumes decreased in this area. The combination of changes in natural gas and coal cost totaled $3.2 million or about $0.7 per share. Purchase power cost increased about $0.7 million or about $0.1 per share due to slight increase for both price and volume.

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

Maintenance cost increased approximately $0.9 million or $0.2 a share, which is mostly due to additional [pre-trending] of our distribution system compared to the third quarter of 2006.

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

Other operating and maintenance deduction were $0.3 million lower for the third quarter in total increasing earnings per share by $0.1. Our outside services costs decreased by $0.8 million, because last year we were paying transitional service cost to equal after the purchase of the gas operations. This was offset with another small increases and operating expenses of $0.5 million.

Depreciation and amortization cost for the total company increased about $3.5 million or approximately $0.8 per share. This was mostly due to regulatory amortization provided for in the last Missouri case, which was $2.6 million of the quarterly increase. Other taxes increased $0.8 million due to increased property taxes and fees, decreasing earnings by about $0.02 per share.

Our effective tax rate for the 2007 quarter, was lower than our rate the same period in 2006 improving our after tax earnings per share approximately $0.03. Increased equity AFUDC related to our ongoing construction program was the primary driver.

Total company interest expense for the quarter increased $1.3 million over 2006 decreasing 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 we continue to build our construction program.

Interest expense actually increased approximately $1.5 million that was partially offset by 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 $0.7 million of other income compared to the third quarter of 2006 adding $0.02 to earnings per share.

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

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

Rate increases in our Missouri jurisdiction 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 electric and water revenues contributed about $8 million. The unbilled revenue adjustment of $5.9 million mentioned earlier was the only significant factor, which decreased revenue for the 12 month period.

Total electric fuel and purchased power costs increased $2.5 million for the 12 month period reducing earning per share by about $0.6. An increase of $7.2 million in purchase power and $0.5 million of coal and other electric fuels were partially offset by a reduction in natural gas cost of $5.2 million.

Oil prices over the 12 month period drove the reduction in natural gas costs. Other operating 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 costs and $1.6 million of customer accounts or customer assistance type program expenses.

Our outside services category also increased $0.6 million to the higher external audit cost and consulting fees related to the development of our Integrated Resource Plan filed with Missouri Commission. Several other operating cost experienced small increases for the 12 month period totaling the remaining $2.5 million.

Electric maintenance costs increased $7.5 million over 2006, which reduced earning per share for the 12 month period by $0.18. The ice storm from January of this year accounts for $4.6 million of the change, when you considered the incremental cost of the storm.

Distribution cost also increased another $1.8 million as well, which is mostly due to our increased returning effort. Depreciation and amortization increased $10.1 million negatively affecting earning per share by approximately $0.24. The regulatory amortization granted in the recent Missouri electric case was $7.9 million of that total.

In summary electric earnings per share for the 12 months period was $1.36 basic and diluted compared to $1.27 for the 2006 period.

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

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

On October 3rd, we announced the sale of Fast Freedom, our internet services company that supplied wireless broadband, DSL, and dial-up Internet service in addition to Web site hosting. Sale not having real effect on our earnings cash flows, results from operations for the quarter. Fast Freedom is now being reported is a discontinued operation along with MAPP and Conversant, which was sold in 2006.

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

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

88% of our anticipated volume of natural gas usage for our electric operations for the reminder of 2007 is hedged and average price of $7.4. For next year 2008, we have 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 for 2011 as 10. And then for the years 2012 and 13 for each year were about 13% hedge with $2.4 million decatherms hedge each year at $7.30.

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

I will turn the presentation back now to Bill.

Bill Gipson

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

We are also asking that fuel adjustment mechanisms be implemented of course we believe that employing a fuel adjustment class achieves an equitable balance ensuring financial stability for our shareholders, who are providing more timely savings to our customers and the event of fuel and purchase power cost decrease.

Now the commission granted a fuel adjustment costs in the Aquila case that was finalized on May 31 and we requested a similar type of instrument. Also with this filing, we are seeking to recover our costs for capital projects that include a 150-megawatt addition at the Riverton Power Plant, what we referred to as Riverton 12, the selective catalytic reduction system at Asbury, and of course the significant reconstruction work that was necessary following the catastrophic ice storm in January of this year.

On August 15th, we have set an all time peak at 1173-megawatt surpassing last year‘s peak by about 1.1% during the hot weather, Asbury, Jeffrey and Riverton. Coal units all performed very well. Iatan’s performance was a little bit less favorable due to an outage to repair a turbine bearing failure.

On September 22, just a few weeks ago our Asbury Power station began its scheduled full outage in addition to the plants, routine five year turbine generator maintenance we have incorporated the tie-in, installation of the selective catalytic reduction system that will provide reductions in our nitrogen oxide emission.

We anticipate that the new [FCR] will reduce our nitrous oxide emissions by about 85%. We are completing the FCR additional well ahead of the Clean Air Interstate Rule, which goes into effect in 2009 and that was our hard decision. We choose to complete the project early to ensure labor and material availabilities and to give us time to fine tune the system. We currently expect Asbury to return to service, November 26th. Now compared to the fourth quarter of 2006, Asbury was not on outage, I expect the replacement power to impact earnings about $0.15 per share.

Construction continues on Plum Point and Iatan 2 just as a remainder Plum Point was an EPC contract and our ownership position is about $87 million. Both projects appeared to be pretty much on schedule. This past Wednesday, we filed our winter 2007 through 2008 purchased GAAP adjustments for the three gas systems with the Missouri Public Service Commission. We request that the new PGAs become effective on November 3.

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

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

The new home low income program while we are working with community housing project such as Habitat for Humanity to ensure newly build houses are energy efficient as possible. Our new high efficiency air conditioners rebate program to assist customers in purchasing air conditioners or heat pumps with seasonal energy efficiency ratings of 15 or higher.

They change your life; change the world program offering instant rebates on compact fluorescent light and a new residential financing program for natural gas customers to help with the installation and heating, water heating and major appliances. Of course this program is designed to empower our customers to control their energy usage and thereby controlling their energy cost. We believe the programs also help reduce the demand for energy and help us to mitigate the need for new infrastructure in the future.

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

Question-and-Answer Session

Operator

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

And our first question comes from the line of [Anthony Crudel] from Jefferies. Please go ahead.

Anthony Crudel - Jefferies

Good afternoon. My question in 2010 I think the Plum Point and Iatan 2 project are completed and those units were expected to be online. Could you identify any large project that the company may undertake, once these generation projects are completed maybe in 2011 or 2012 or beyond that?

Bill Gipson

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

Anthony Crudel - Jefferies

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

Bill Gipson

Yes, that’s right.

Anthony Crudel - Jefferies

And that’s 2011.

Bill Gipson

2011.

Anthony Crudel - Jefferies

Okay. Thank you.

Operator

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 regulatory process, how long that going to take you to get through next?

Bill Gipson

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

Selman Akyol - Stifel Nicolaus

Got it, thanks.

Bill Gipson

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

Selman Akyol - Stifel Nicolaus

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

Greg Knapp

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

Selman Akyol - Stifel Nicolaus

Okay. And then Watson, can you give where you debt bounces was either a ratio or just the dollars?

Jan Watson

No, hang on just, Sel as I can I’ve got, let see at the end of September sum in our long-term debt, we issued that $80 million back in March and so, really you look at our June financials and have most everything except our short-term debt balances was about $68 million at the end of September that will be the only real significant change.

Selman Akyol - Stifel Nicolaus

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

Greg Knapp

Well, AFUDC equity 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 that rate 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 those are of the nature that once we go through get to the AFUDC equity piece that pops 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.

Operator

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 quick question, what's the effective tax rate this quarter versus 3Q’06?

Greg Knapp

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

Anthony Crudel - Jefferies

Percentage.

Greg Knapp

Percentage.

Anthony Crudel - Jefferies

If you don’t have it, I’m going to hit you offline within it?

Greg Knapp

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

Anthony Crudel - Jefferies

Great. Thank you very much.

Greg Knapp

Thank you.

Operator

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

Bill Gipson

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

Operator

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

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