The Empire District Electric Company Inc. Q4 2007 Earnings Call Transcript

Feb. 1.08 | About: Empire District (EDE)

The Empire District Electric Company Inc. (NYSE:EDE)

Q407 Earnings Call

February 1, 2008 13:00 pm ET

Executives

Jan Watson - Secretary and Treasurer.

Bill Gipson – President and CEO.

Greg Knapp – VP and CFO

Analysts

Anthony Crowdell - Jefferies and Co.

Nancy Doyle - MetLife

Doug Fischer – Wachovia Securities

John Hulihan -Empire District Electric Company

Operator

Good morning, good afternoon ladies and gentlemen, thank you for standing by and welcome to the Empire District Electric Fourth Quarter Earnings Call. During todays presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instruction). This conference call is being recorded today Friday, February 1, 2008.

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

Jan Watson Secretary and Treasurer

Hello everyone. 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 fourth quarter and 12 months ended December 31st, 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 sent 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 11107620, pound. The Webcast will also 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.

Now I would like to turn it over to Bill Gipson to begin our presentation.

Bill Gipson – President and CEO

Thanks, Jan and welcome everyone. As Jan said, we are going to discuss the results for fourth quarter and 12 months ended December 31, as well as some other activities impacting the company during the quarter.

As you all probably know yesterday we reported consolidated earnings for the 12 months ended December 31 a 33.2 million or $1.09 per share compared to 2006 earnings of 39.3 million or $1.39 per share. December 31 fourth quarter results was a loss of 0.4 million or about a finish year, and compares to earnings last year of 8.2 million or $0.27 per share.

At the board meeting yesterday the board declared a quarterly dividend of $0.32 per share payable March 15, 2008 for shareholders of record as of March 1. This represents a 5.8 percent annual yield at yesterday’s closing price of $22 and $0.9. Also in yesterdays meeting the board elected Randy Laney to serve as Vice Chairman of the Board effective May 1 of this year. Our current Chairman of the Board Myron McKinney is chosen not to speak reelection in of April 2009 and this will allow for a seamless transition upon Myron’s retirement. Randy is Vice Chairman of the Investment Group and he was Co-Founder and Chairman of Mercari Technologies of Fayetteville Arkansas, a merchandising optimization firm and was Co-Founder and partner in Bentonville Associates specializing in consumer service in consulting and private investment. Randy is an attorney, he formerly served as Vice President in Finance and Treasure of Walmart Stores in Bentonville Arkansas. Randy served as a Director on our Board since 2003.

During the quarter we experienced two significant events. First was a record setting eyes storm, the second to hit our service territory in 2007. Freezing rain begin during the night on December 8, and by the next morning we had about 40,000 without service. By the time the multiple ways of this storm had impacted our area, we had about 65,000 customers without service. The storm severity is equipped only by the storm we suffered earlier in 2007 during January. As they did in January our employees and the additional 1153 trimming a line through personnel we brought into help tackle the task of restoration.

Also in December during the reassembly of the Asbury power plant generator which had been down for routine maintenance, the unit sales has inspection causing a delay in the plant returning to service. On December 10, after an evaluation of the unit, consultation with contractor and the representative of the manufacture, we announced the corrective action would be necessary and the plant would be out of service for an additional 60 days. We estimate that as variable returns severance between February 7 and 8, apart probably between 7 and 9 next week.

During this time we are replacing energy that would have been generated Asbury, with higher cost energy generated by our gas plants and purchase stock. I will now turn the call over to Greg to cover the financial details.

Greg Knapp – VP and CFO

Thanks, Bill. As Bill stated for 2007 annual results, we reported earnings of $33.2 million or $1.09 per share basic and fully diluted as compared to earnings of $39.3 million or $1.39 per share for 2006. These results were primarily driven by an increase in our Missouri electric rates, but offset by fuel increase to severe ice storms and the effect of the five year maintenance at our Asbury plants. I guess the details in the moment, but I would first would like to begin by providing a non-GAAP reconciliation which detailed the 2007 activities compared to 2006, on a consolidated estimated earnings per share basis.

For those of you that have read our press release or having in front of you that will be the earnings per share reconciliation I will follow. I should remind you again these earnings per share figures throughout the call represented net of the tax and that’s an estimated basis.

Beginning with the earnings per share December 31, 2006 of a $1.39 and kind of stepping forward in the general order of an income statement, the first item would be electric revenues and that added to the dollars for the year on an earnings per share basis of 0.96 or $0.96. Gas revenues for the full year would have added $0.78; on our non-regulatory we’ve added $0.2.

On the expense side, the impacts again on going forward from last year to this year, electric fuel would have taken away a bid negative of $0.44, purchase power also negative of $0.26, cost of natural gas sold a negative of $0.50, operating electric expenses $0.16 negative and the gas operating expenses a negative $0.10, non-reg operating expenses a negative $0.1, maintenance and repairs a negative $0.20, depreciation and amortization negative $0.32, and the loss on plant disallowance we had in 2006 would have actually added to the comparison in a way it works by $0.2, a gain on the sale of assets and I will talk about that in a moment added $0.3 to the year. A change or lowering of our effective income tax rate in 2007 would have been a positive $0.8. The effects of other tax increases would have been a negative or takeaway of $0.9. Other income expenses would have been negative impact of $0.2. Increased interest charges during the periods would be a negative $0.13; increased AFUDC which goes to be in the direction of this income statement format would have been a positive $0.8. In ’06 we had discontinued operations, that miscalculation would have been a matter of $0.3, and then the dilutive affect of additional shares from 2006 would have been a negative $0.7, and if you go through all the pluses and minuses that moves you from a $1.39 in 2006 to the $1.09 that we earned this year.

Now I will review the results by category in more detail starting with electric revenue, fuel and operating expenses. 2007 electric revenues increased about $42.5 million compared to 2006, which is about an 11.1% increase for the quarter. Increase in Missouri electric rates was put in place, January 1st, 2007 and contributed an estimated 29.8 million for 2007 over 2006. We estimate that about 8 million dollars of our revenue increase came from customer growth in 2007, which points to an approximate 1.5% growth factor for 2007. Our estimate of the impact of weather and other electric revenues collectively added approximately 3.2 million for 2007 compared to 2006.

Our system sales increased approximately 7.4 million over 2006. The only significant factor which reduced 2007 revenues in a year-to-year comparison is that we recorded an unbilled revenue adjustment of 5.9 million in 2006 for a change to our total electric load loss factor. We did not have a similar revision this year. Overall the increase in electric revenues has contributed $0.96 per share in 2007 compared to 2006.

Total fuel and purchase power cost for electric generation for 2007 were up 30.9 million in total or about 19.3% over 2006 and that reduces earnings by approximately $0.70. Let me put some detail around this.

First of all fluctuations based on prices for natural gas, coal, and our purchase power increased only 2.4 million in total compared to 2006. However, as you would expect our cost related to volumes in these categories have changed significantly because of the outages we experienced in 2007. Our coal related fuel cost based on the volume comparison were down approximately 7.3 million from 2006. But this was offset by 28.7 million of increased volume cost for natural gas and 5.9 million of volume cost for purchase power. So the net change in fuel and purchase power cost related to volume was about $27.3 million. Some of the significant events over the past year that affect a bad volume mix were of course the Asbury outage, which could be estimated to have an incremental increase to fuel cost of about $12.2 million, the (inaudible) average during the second quarter, and also the fact that we increased on and off system sales.

The increase in off system sales added about 5.2 million of incremental fuel cost compared to 2006 as we are able to sell power generated by our units into the southwest power pool energy and balance services market. Availability of Riverton 12 starting last spring supported the change in generation mix. The total change of 30.9 million, I mentioned earlier includes 1.2 million related to variances in our tire, hydro and other fuel resource cost mix.

With the Asbury outage having such a significant impact on our generation this year, I will provide more details on that. Planned portion of the outage began in late September for our regular five year maintenance outage and lasted through first week of December. The incremental increase to our expenses related to the planned outage was approximately 8.7 million which is within the range that we had originally estimated.

As Bill mentioned, a failed inspection has kept the unit on outage while corrective action is being taken. As we noted in yesterday's press release, we estimate that this has added an additional $3.5 million of expense during the last few weeks of December.

Moving to our another electric operating expenses which increased approximately $7 million over 2006 reducing earnings per share by approximately $0.16. We only experienced a couple of items which had significant increases to our operating expenses. We recorded approximately 2.1 million of additional pension expense this year which is mostly based on a regulatory track or mechanism in place.

We also had increased customer count and the systems expenses of 1.7 million which is most attributable to electric customer write-offs, customer service write off in which we’re 1.3 million higher than last year. Remaining increase is due to several other areas with smaller fluctuations.

Our maintenance expenses increased for 2007 by approximately 8.5 million or $0.19 per share over 2006, of which 5.4 million is related to expenses for both January and December ice storms combined. As we mentioned in yesterday's press release, the December storm had a total incremental cost of $18.6 million, which is approximately $9.2 million capitalized. We recorded $1.5 million of maintenance costs in December related to this most recent storm and deferred 7.9 million for regulatory treatment. Other items within the maintenance expense experienced smaller variations and were mostly attributable to increased efforts in our tree trimming and maintenance incurred related to distribution work throughout the year.

Other items to note include depreciation and amortization increasing about $13.2 million over 2006 or about $0.30 a share, of which $10.5 million is for the regulatory amortization authorized in the Missouri case which went into affect January 1st of '07. Other taxes such as property and franchise taxes increased in 2007 by approximately $1.5 million or about $0.03 a share. A significant portion of this increase relates to certain franchise taxes which will increase our revenues increase.

We also have two other items that affected the year-to-year comparison. We recently sold one of unit train that was no longer used in our operation and recorded a gain of $1.2 million for that transaction. And secondly, 2006 earnings reflected a $0.8 million loss related to a plant disallowance reported by the Missouri Public Service Commission.

Moving to the 2007 gas segment revenues and operating expense discussion, it's still not practical to compare annual fluctuations for the gas operations as 2006 included only seven months. But I'll provide some categoric totals that weren't broken down in the press release.

Revenues totaled $59.9 million while cost of natural gas totaled $36.6 million in 2007. The gas operating expenses were approximately $10.2 million while the maintenance and repairs expense came in just under $1.5 million. We recorded depreciation of $1.9 million and other taxes of $3.5 million for the year.

Our other segment is almost entirely related to our fiber optic business now as we sold Fast Freedom Internet and Website Hosting Services Company at the end of the third quarter of 2007. The continuing operations of this segment added $0.4 million for 2007, which is $0.3 million higher than 2006. And this continued operations had no impact on 2007 results. Although due to losses of other businesses which we divested in 2006, this is an improvement over the last year's earnings of $0.8 million.

Our effective income tax rate for continuing operations for 2007 was 30.3% which is much lower than our rate of 2006 at 35.4%. Increased equity AFUDC related to our ongoing construction program was the primary driver of the change to the effective tax rate as a significant portion of this book income is non-taxable.

Other increases to our cost of removal and Medicare Tax Part B subsidy associated with our retiree healthcare plan also provided tax benefits which automatically lowered our effective tax rate.

Total company interest expense for 2007 increased approximately $4 million over 2006, reducing earnings by about $0.09 a share. Interest expense on our debt actually increased approximately $5.9 million but was partially offset by an increased debt component of AFUDC in the amount of $1.9 million. You'll remember we had issued some personal mortgage bonds in the earlier part of 2007 and that contributed to that increase in our interest expense. The other component of AFUDC, the equity piece, provided an additional $1.5 million of other income compared to 2006 and was the primary reason for an increase in our income and expense portion of our income statement.

In summary, the electric segment contributed about $1.04 per share for 2007 compared to $1.45 in 2006. Gas operations contributed $0.3.5 to the consolidated earnings per share compared to the $0.03 loss for 2006. And our other segment contributed about $1.5 per share for '07 compared to a loss of $0.03 for 2006, when you combine the continued and discontinued portions of that segment.

Turning to the fourth quarter information as Bill mentioned, we experienced $400,000 loss or $0.4 million loss or that's about a penny of share loss compared to the 2006 fourth quarter earnings of $8.2 million or $0.27 a share. I'll go ahead and break that down by segment. Electric segment was loss of $1.6 million or about $0.05 a share compared to 2006 fourth quarter of $7.7 million income or about $0.25 a share income.

Quarterly gas earnings were $0.9 million at $0.03 a share compared to $0.5 million or $0.02 a share in 2006. Our other segment added earnings of just under $0.3 million for the 2007 fourth quarter, about a penny a share, whereas 2006 period was a break-even when considering both continued and discontinued operations.

I'll quickly breakdown these quarterly results. Electric revenue increased about $8.8 million, almost $0.19 a share which was almost entirely from the Missouri rate increase. Customer growth combined with off system and other increases to revenue were pretty much offset with the decline in revenues from our estimated impact of the weather.

Total electric fuel and purchase power costs increased $17.5 million for the 2007 fourth quarter, reducing earnings per share by about $0.37. A similar explanation for the annual results apply to the quarter as well, the price component of our fuel cost increased $0.9 million for combining coal, natural gas and purchase power. The impact on our total fuel cost substantially came from our exit volumes, as natural gas was up $21.5 million; purchase power was up $2.2 million, and with a decrease in coal volumes of about $5.3 million.

Obviously, the Asbury outage was the primary driver behind these results. Other operating and maintenance expenses increased $3 million or about $6.5 per share of which $1.5 million is December ice storm expense. Several other costs in this area experienced small increases or decreases when compared to the 2007 quarter, comparing the 2007 quarter to the 2006 fourth quarter, but no others were overly significant.

Depreciation and amortization increased $3.4 million for the quarter as a result of the regulatory amortization and increased plant service compared to 2006. This reduced earnings per share are approximately $0.07. As noted in the annual results, the gain from the sale of the unit train and the fact that we recorded plant disallowance in 2006 comparable quarter after quarter-to-quarter comparison by about $2.1 million.

Switching over to the gas operations for the quarter, revenues decreased $0.4 million for the 2007 fourth quarter compared to the same period in 2006. And the cost of natural gas sold also decreased to $0.8 million. The change in revenue and natural gas sold netted to a $0.01 per share improvement for the last year's fourth quarter.

Other operating and maintenance expenses decreased to $0.3 million when comparing the quarterly information. On a consolidated basis, our interest expense for the 2007 fourth quarter compared to the 2006 period increased $0.9 million, and income in our other income and expense section of our income statement was lower by about $0.9 million as well. These items combined to reduce quarterly earnings per share by about $3.5.

That concludes the earnings information I want to provide. But I would like to update you on our current hedge position with data as of January 25th. For the remainder of 2008, we've hedged approximately 88% or $6.8 million decatherms of our need at an average price of about $6.81. For 2009, our hedged position is about 55% or $4.7 million decatherms of our need hedged at about $6.6.

For 2010 and 2011, its roughly 40% of each year hedge at about $3.7 million decatherms each year hedge and the price each year is about $5.42. And then for the periods 2012 and 2013, we have small-position hedged of about 13% each year which is about $1.2 million decatherms at a price of $7.30.

And for our gas operations, while we have currently all of our gas needs secured, we have priced protected 91% or hedged about 91% or 10 million decatherms of our remaining winter season needs. We have about 9% that we still purchased at index prices.

And as you know in December we sold 3 million shares of our common stock at $23 per share, proceeds were used to pay down our short-term debt. Lastly on January 25th, 2007 this ratings affirmed our ratings that changed our outlook is stable (Inaudible). I'll now turn the presentation back over to Bill.

Bill Gipson – President and CEO

Thanks Greg. Just a couple of items before we get to the Q&A part. As you recall on March 19th of last year, the Missouri office of Public Counsel filed a petition with Missouri Supreme Court seeking an order to require the Missouri Commission to vacate and rescind its December 29th 2006 quarter approving our tariffs. These were the tariffs out of our most recent case in Missouri. The petition also asked the commission be directed to provide an effective date for any subsequent tariff approval order that allows at least 10 days to prepare and file an application for re-hearing.

On October 30th of 2007, the Supreme Court issued an opinion directing the commission to vacate its December 29 order and allow the OPC reasonable time to prepare and file an application for rehearing. The court did not examine the lawfulness or reasonableness of the substance of the commissions order and considered only the timing of the issuance of the order. And the court also did not consider the underlying rates.

On December 4, 2007 and effective December 14th, 2007, the commission issued an order vacating the December 29th, 2006 order reapproving the tariffs and the same resulting increase in rates. The OPC and interveners Praxair Incorporated and Explorer Pipeline Company have filed for rehearing on December 4th, 2007 order and those applications remain pending before the commission.

Actually on January 9th, Empire was honored with the Edison Electric Institutes Emergency Recovery Award. This is an international award presented annually to showcase efforts made by electric utilities to restore service that have been breached by severe weather conditions or other natural events. And they are selected by a panel of former executives of investor owned utilities throughout the US.

Empire received recognition for their rapid response and restoration efforts made during the series of three ice storms that began on January 12th, 2007 and lasted through the following two days. During that storm approximately 85,000 or 52% of our electric customers were without service due to the storm damage.

I'll now turn the conference back over to the operator, so we can facilitate your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from the line of Anthony Crowdell with Jefferies and Co. Please go ahead.

Anthony Crowdell

Two questions guys. The first question regard to I guess the covenants where if you have negative retains earnings you can pay a dividend. I want to know if you had approached those bond holders to ask them if they would let you still pay a dividend with negative retained earning. And the second question is regard to the outage of Asbury. Have you guys done any generating testing at our high pot or where are you with getting that units back on line?

Greg Knapp

Yeah, I can -- I'll answer the first or the last question first. And the answer is that we have the unit back. Reassembly has begun yesterday. Harold Colgin, our VP of Energy Supply reported this morning that all is going well. We've been passing all of the tests and look forward to getting that unit back in service next week.

As to your first question, we've been examining a lot of things over the past few weeks of this outage was extended. Certainly you exactly correct our bond indenture requires positive retain earnings. And that’s one of the options that were kind of boiling in the kettle as we look at our plans for 2008.

Anthony Crowdell

Great. Thank you.

Operator

Thank you. And our next question comes from the Doug Fischer with Wachovia Securities. Please go ahead.

Doug Fischer

Thank you and good afternoon. Can you hear me?

Bill Gipson

We can hear you fine, Dough.

Doug Fischer

Okay thanks, Bob. Just a couple of questions. Regarding the ice storm expenses there were – well backup, can you share with us what the retained earnings balance was either at the end of December or the unrestricted retained earnings balance at the end of December or the end of January?

Bill Gipson

The end of December was about 1$7.2 million.

Doug Fischer

Can you do, before you do declare the dividend, do you look at the total at the month close. Is that how that works?

Greg Knapp

We look at a lot of things before we declare the dividend, Doug. But our anticipation of performance in the current month in which the dividend is declared as well as the forward looking information we have with respect to performance with the different business units.

Doug Fischer

Let me rephrase that. Is the requirement that you look at the December 31st when you're declaring the dividend or do you look at the month close retained earnings? What retained earnings number do you have to look at for the bond covenant?

Bill Gipson

In general we take a look at it in that month.

Doug Fischer

Okay.

Bill Gipson

As we've reported in our K.

Doug Fischer

And then the ice storm expense is I believe for the year the amount that was actually expense was $5.4 million. I guess the January ice storm we thought the number was 4.6. So if you subtract that you're at 100,000, but you're saying it was $1.5 million in the December. Was there some adjustment there? Is our math correct?

Greg Knapp

Doug, this is Greg. And you're math is correct and there was an adjustment in the fourth quarter. We trued up that January ice storm number a bit to reflect that the actual timing of the rate case that will come along in 2008, the conclusion of that. So there was an adjustment that dropped that down a little bit.

Doug Fischer

Okay. And then are the expenses for the Ausbry outage still in that 8 to 10 million range? And is there is any color on which end of that range you're going to be at?

Bill Gipson

Dough, the December part of it ended up being a little bit better from a replacement power standpoint then we thought. But as the spot gas prices have inched up a little bit in January it kind of took away that advantage that we had in December. So really you're looking at maybe $5million to $5.5 million impact before the unit goes back in the service at the end of next week which still keeps us within that range, but the upper end of that range that we reported in that press release 60 days ago.

Doug Fischer

Okay. Alright. And, can you give us I am trying to -- maybe this was in the release, but the average shares for the fourth quarter and for the year the actual number I know you could back, sort back into it?

Greg Knapp

The fourth quarter would have been about $31.175 million.

Doug Fischer

175, is that both same number base and diluted?

Greg Knapp

Hold on a second I'm getting a better look in to the. Let me start over and make sure we are clear here for the quarter, the number of shares…

Doug Fischer

We're talking weighted average here?

Greg Knapp

Yeah, this is basic and diluted its $31,175,000 million for the quarter. And for the year its basic is $30.587, 000 million and diluted is $30, 610,000 million.

Doug Fischer

Okay. Could you just give me the quarter again? I'm sorry.

Greg Knapp

Both basic and diluted to be $31.175 million.

Doug Fischer

Okay. Thanks Greg. And any color on the expected tax rate for 2008, effective tax rate?

Bill Gipson

Really not at this point, Doug. You know that with the AFUDC equity is obliviously a tease, it’s going to continue and now – so that will put downward pressure on that rate. But some of the tax treatment for the ice storm expenses, that’s kind of a one time thing.

Doug Fischer

Okay thanks. That’s it for now.

Operator

Thank you. (Operator Instructions) And our next question comes from Nancy Doyle with MetLife. Please go ahead.

Nancy Doyle

Yes thank you. Could you remind me of how and when you will be recovering the ice storm and the plant outage costs?

Bill Gipson

Yeah the plant outage cost the, our fuel and purchase power in Mussouri is rates. And so, to the extent that we exceed that portion, that’s in our base rate, but that’s kind of water under the bridge and not recoverable. We ended the year at about $32 and $0.31 per megawatt hour for total fuel and purchase power, and we have about $30.95 reflected in rates. So the delta between the two for our Missouri property is not something that we’ll be able to recover.

Nancy Doyle

And how much is that in total?

Greg Knapp

That worked out to be about – what is that?

Bill Gipson

It’s basically the Asbury pieces. Let us ponder on that a minute, if I answer the first question or your other question which was the ice storm expense. We deferred the piece of the ice storm until the rates that we filed on October 1 would become effective and on September 1 of this next year. Does that make sense to you?

Nancy Doyle

And so, how much have you deferred then?

Greg Knapp

This is Greg. Let met take you Calf to that piece and it would be a probably good kind of reminder for everyone and we’re handling this two ice storms exactly the same win, its basically we first half accumulated the total amount of the cost and we’ve determined how much of that was really capital expense that would be handled in normal fashion and the other capital expense would be handled, and mainly for that reminder we looked at what kind of historically has been the rate recovery process and our jurisdictions in which we operate and have try to match our accounting to how we think is likely that, that rate recovery is going to be 11, for us we think in general terms recovery would be basically a five year amortization of the cost. And so, since we’re – that amortization again in our service area, contingency has been for that to begin by commission order, to win the outage with the ice storm is actually happened, not win the rates to pay for that are actually in place.

So, we’ve got this time period of a little less than a year from when the ice storm happen until when for this most recent one, until rates have been affected Missouri in the fall of this year. So for that piece that we don’t feel we – there is a chance for malignant recovery that we’ve gone ahead and expense that in the current period, and we’ve deferred the line share of it, of the dollars to be handled in this rate case that is currently underway. So it’s a little bit complex to follow it through, but in the end we have followed what we think would be the likely scenario for rate recovery.

Nancy Doyle

So you will be actually the cash for this de-motive capitalize over five years starting at the time of the rate case?

Greg Knapp

For the amount of maintenance cost that we have deferred, for the amount that we have capitalize and count the conventional sense as far as being new poles and wires and things like that the physical assets that are replaced, that cash comes back to us in the conventional sense through a return on that investment and through the recover of deprecation. Just like any other asset would.

Nancy Doyle

Right, okay thank you.

Bill Gipson

Okay, thank you.

Operator

And your next question comes from Doug Fischer with Wachovia Securities. Please go ahead.

Doug Fischer

Yes, remind us of the schedule for the rate case we know when the decision is due, but any other important milestones there and, when might there will be prospects for settlement talks?

Bill Gipson

Doug, I will be honest with your with our request for a fuel adjustment mechanism, and sort of the known position of some of the parties in the case. I don’t – I wouldn’t see that on overall settlement is the doable thing. We may be able to come to some settlement on some various issues that all the parties will agree to not drive before the commission, but that’s still going to be an issue that we’re going to have to try before the commission in my view. In terms of the timing, the evidentiary hearing I believe were scheduled for the last two weeks in May, we would anticipate to see the parties response to our case, and see that at the end of this month or early next month, and I just don’t have the procedure scheduled in front of me.

Doug Fischer

Okay, thank you.

Operator

Thank you. [Operator Instruction]. And gentleman at this time, I will turn it back to you for closing comments.

Bill Gipson

We see on our screen that there may be a question from Mr. Hulihan?

Operator

John Hulihan-Empire District Electric Company, please go ahead.

John Hulihan

Bill.

Bill Gipson

Yes John.

John Hulihan

How are you doing today?

Bill Gipson

Good.

John Hulihan

You did a very good presentation. I got a couple of quick questions.

Bill Gipson

We have to point that you are not a part of the Empire District Electric Company, you are just a very interested shareholder.

John Hulihan

Very interested. Love that dividend. In the 10-Q, I read it very thoroughly and it said we paid city utilities of Springfield a certain amount of money every month and I just wondered, what that was for?

Bill Gipson

Hang on just a second. Oh I see, the line I was just clearing that up, where its related to a transmission agreement.

John Hulihan

Oh okay. And, are we doing any construction of any new high voltage lines currently?

Bill Gipson

We do have a project at South Springfield, Ozark area that is under construction or in process right now

John Hulihan

Where does it go? From Ozark to where?

Bill Gipson

Ozark to Nixon.

John Hulihan

Okay.

Bill Gipson

Ozark to Riverdale

John Hulihan

Riverdale, okay. And I guess that's all I have got for the day and again you had a very good presentation. Hope to see you in April down at the meeting.

Bill Gipson

Thank you. John.

John Hulihan

Okay. Bye.

Operator

Thank you. And Gentlemen, there are no further questions, we will turn back it to you for closing comments.

Bill Gipson

Thank you. Again we appreciate the opportunity to review our earnings and chance of bringing up with the events relative and important to the company, just wish you great afternoon.

Operator

Thank you. Ladies and gentlemen, this will conclude today's teleconference. If you would like to listen to replay today's conference, please dial into 303-590-3000 or 1800-405-2236 and enter the access code of 11107620 follow up with the pound sign. We thank you for your participation. And at this time, you may disconnect.

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