Jan Watson - Secretary-Treasurer
Brad Beecher - President & CEO
Laurie Delano - Vice President, Finance & CFO
The Empire District Electric Company (EDE) Q3 2012 Earnings Call October 26, 2012 1:00 PM ET
Good afternoon ladies and gentlemen and thank you for standing by. Welcome to The Empire District Electric Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today the 26 October, 2012.
I will now turn the conference over to Ms. Jan Watson. Please go ahead.
Good afternoon and 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 30, 2012. A live webcast of this call is available on the Empire website at www.empiredistrict.com. Giving our presentation this afternoon will be Brad Beecher, President and CEO, and Laurie Delano, Vice President of Finance and CFO. A Q&A session will follow the presentation.
Our press release announcing third quarter earnings was issued yesterday afternoon. The press release maybe accessed on our website. Presentation slides for this call and webcast are available on our website at empiredistrict.com. There are links to the webcast located on the lower right side of the home page and in the Investors Section under presentation.
To participate in the Q&A portion of the webcast however you will need to submit your questions through the call in number for the conference. To change slides as we go along please press the arrows located on the lower right side of the slide. The replay of the call will be available for two weeks by dialing 800-406-7325 and entering pass code 4569694# and the webcast will be available on our website also.
Before we begin, I must remind you of the inherent uncertainties in any forward-looking statements in our discussion this afternoon. Slide two and the disclosure in our SEC filings contain a list of some of the factors that could cause future results to differ materially from our expectations.
Also for further clarification, the earnings per share impact of revenue expense are discussed on an after-tax basis comparing the period referred to with the same period of the prior year. The estimated earnings per share impact of the individual items and the presentation of gross margins are non GAAP presentations which we believe to be useful to investors showing the earnings per share impact of the various components and analyzing changes in our operating performance from one period to the next.
This may not be comparable to other companies or more useful than the GAAP presentation included in the statements of income and does not support to be an alternative to earnings per share determined in accordance with GAAP as a measure of operating performance or any other measure of financial performance presented in accordance with GAAP.
I would now like to introduce Brad Beecher, President and CEO.
Thank you, Jan. Good afternoon everyone and welcome. Today, we will discuss matters from the Board of Directors Meeting conducted yesterday as well as our financial results for the third quarter and 12 months ended September 30th. We will also update you on company activities and progress in the Joplin area.
During the meeting yesterday, the Board declared a quarterly dividend of $0.25 per share payable December 17, 2012 for shareholders of record as of December 3rd. This represents a 4.6% annual yield at yesterday closing price of $21.79.
Yesterday, we reported consolidated third quarter 2012 earnings of $25.5 million or $0.60 per share driven in part by Cooling Degree Days 17% greater than the 30 year normal. This compares to the same period in 2011 when earnings driven by Cooling Degree Days 27% higher than normal were $25.2 million or $0.60 per share. For the 12 month period ending September 30, 2012, earnings were $54.7 million or $1.30 per share compared to September 30, 2011, 12 month earnings of $54.7 million for a $1.31 per share.
I will now turn the call over to Laurie for details of our financials.
Thank you, Brad and good afternoon to everyone. As Brad stated, our third quarter earnings of $25.5 million or $0.60 per share were relatively unchanged when compared to 2011 third quarter earnings. If you are following our webcast presentation, I will be referring to our slides to talk about the various impacts to the quarter.
As usual, I would like to begin by providing a non-GAAP basic earnings per share reconciliation for the quarter on a consolidated basis. For those of you that are following with our press release that will be the earnings per share reconciliation I’ll follow. For those of you looking at our slides, our analysis begins on slide four and as Jan indicated earlier, these earnings per share figures throughout the call are provided on an after-tax estimated basis.
Slide four illustrates the reconciliation and differences between the results of the two quarters. Total gross margins which we define as revenues less fuel and purchase power costs increased an estimated $0.02 per share during the quarter. Consolidating operating and maintenance expense reduced earnings per share by about $0.03. Depreciation and amortization decreased earnings per share another penny. Taxes, interest and other income and deductions added about $0.03 to earnings per share while the dilutive effect of common stock issuances through our dividend reinvestment plan reduced earnings about $0.01 per share. These increases and decreases net to a zero impact quarter-over-quarter.
Now I will give you a little more detail on some of the components impacting the earnings per share for the quarter. If you go to slide five, it contains a puff-out table which provides a further breakdown of the earnings per share impact of our consolidated gross margin components. Increased customer counts compared to the 2011 third quarter added an estimated $3.7 million to revenues or an increase in margin of about $0.04 per share. We are still about 1,200 customers below our system-wide level just prior to the May 2011 tornado, but if you will recall at the end of the third quarter of 2011 our customer counts were down about 3,900 customers in the storm damaged area.
In addition to the positive impact from customer counts, a change we made in our estimates for unbilled revenues added approximately $3 million to revenues during the third quarter or an increase in margin of about $0.04 per share. The unbilled revenue represents an estimate of electricity provided to customers that has not been build at the end of the period, assumptions such as electrical load requirements, customer billing rates and line loss factors are used in the estimation process, and are evaluated periodically. Changes to certain assumptions during the evaluation process led to a change in estimates.
Weather impact decreased revenue an estimated $7.8 million reducing margins approximately $0.07 during the 2012 quarter when compared to the 2011 quarter. As Brad mentioned, on a Cooling Degree basis, the 2012 quarter far warmer than normal was milder than the 2011 quarter. During the time, we experienced near record one temperatures in our service territory.
Fuel related revenues were lower by $3.6 million during the third quarter of 2012, primarily due to declining fuel prices and the resulting return of over recovered fuel cost to our customers through electric rates as prescribed in our fuel adjustment mechanism. However, these decreased revenues were offset by a corresponding reduction in fuel expense resulting at no net effects on gross margin. Our offs-system sales were lower this quarter, but had little impact on margin as they roll through our fuel adjustment mechanism.
Electric fuel and purchase power expense, the effect of which are reflected in our margin calculations decreased in totaled during the quarter by about $6.3 million primarily due to the mild weather and the lower fuel cost collected from customers I discussed earlier. Gas volumes increased, while coal volumes declined as we continue to increase usage of our gas power generating units to take advantage of lower natural gas prices thus lowering cost for our customers. At our gas segment, gas operating revenues declined slightly during the 2012 quarter with relatively no impact on gross margin when compared to the previous 2011 quarter.
Turning back to the other earnings per share impacts, I will now focus on our operating and maintenance costs which decreased earnings per share by about $0.03 quarter-over-quarter. Our electric segment operating expenses increased operating costs of about $900,000, due to increases in healthcare expenses, professional service fees and transmission expenses. Our electric segment maintenance expenses also increased approximately $1.1 million, compared to the 2011 third quarter, due primarily to increased maintenance expenses at our Asbury generating station related to the timing of our outage and increased costs of our state line combined cycle generating station. These increases were offset in part by decreased transmission and distribution maintenance expenses and through decreased expenses at our Iatan generating station.
On the gas side of our business operating and maintenance costs decreased slightly with very low impact on earnings per share. Moving on to depreciation and amortization, overall changes decreased earnings per share about $0.01 during the quarter. Our electric segment depreciation and amortization increased $300,000 due to additional electric segment plans and service, gas segment depreciation was relatively unchanged. On a company wide basis, tax was added about a penny to earnings per share, reflecting a reduced effective tax rate, interest expense increased earnings per share about $0.01 as we reduced our long term debt interest expense by about $700,000 due to refinancing of debt at a more favorable interest rate. Increased earnings from other income and deductions was offset by the dilutive effect of common stock issuances again through our dividend reinvestment plan.
Moving on to slide 6 I will briefly go over the 12 month after-tax earnings per share reconciliation. Again this information is in our press release, if you don't have the slides in front of you. As Brad mentioned our earnings for the 12-months period ending September 30 were $1.30 per share compared with a $1.31 per share for the previous 12 months period. Beginning with the September 30, 2011 earnings per share of $1.31, we saw an increase in total gross margin of $0.13 per share during the 12-months period. Increased operating and maintenance expenses reduced earnings per share about $0.20, reduced depreciation and amortization primarily due to the ending of our regulatory amortization added about $0.10 to earnings.
Taxes reduced earnings approximately $0.03, primarily due to a higher effective tax rate, and we also had increases in our property and municipal franchise taxes. Interest expense reduced earnings another $0.03, although we reduced long term debt interest expense by $1.7 million during the period through refinancing of debt at a more favorable interest rates overall interest expense actually increased due to the ending of Iatan II carrying charges in June 2011. The change in (inaudible) increased earnings per share another $0.01, another income in deductions added approximately $0.02 to earnings while again we had a dilutive effect of about $0.01 due to our increase in shares.
Our slide 7, we break out the factors that drove the change in gross margin, and as you can see from the slide the positive effects of rate increases drove the increase in margins, adding revenues of $20.3 million or an estimated margin impact of $0.32 per share. The change to our estimate of unbilled revenues of $3 million which I mentioned earlier again increased margin about $0.04. Weather impacts reflecting the mild winter weather of the 2012 12-months period decreased revenues an estimated $22.8 million or $0.24 on the margin impact per share. Changes in our customer accounts period over period had little impacts on revenue or margin, as the immediate impact of the May 2011 tornado and the subsequent recovery in the Joplin area resulted in an average monthly customer account that were virtually unchanged year-over-year.
Miscellaneous items added about $0.05 per share of margin. Total electric fuel and purchase power expenses again reflected in the margin impacts just discussed, were down approximately 19.6 million. So overall, our electric margin increase for the 12 months period of 2012 by approximately $10.8 million or $0.13 per share. Our GAAP segment margin declined and estimated $0.04 per share during the 2012 period. GAAP revenues were also negatively impacted by the mild winter weather, during the fourth quarter of 2011 and the first quarter of 2012 and decreased approximately $8.2 million period over period.
Slide 8 shows the breakout of operating and maintenance expenses that reduced our earnings per share of $0.20 during the 2012 12-month period. Healthcare, pension and outside service fees each increased over the period reducing earnings for combined $0.09 per share. Operating expenses at our Iatan 2 and Plum Point generating facilities increased, reducing earnings per share around $0.04 and increased maintenance and repairs that are generating facilities, other generating facilities, reduced earnings about $0.05 per share. Other operating and maintenance expenses reduced earnings per share around $0.02.
As a reminder, increased retiree healthcare pension and other post employee benefit, and our Iatan 2 and Plum Point costs were included in our customer rates that became effective in June 2011. I will take just a moment to update you on a couple of balance sheet items, our retained earnings balance at September 30 is $48.1 million. As to our liquidity position at June 30, we had just $2 million in short-term commercial paper outstanding that relates to our $150 million in short-term capacity that we have, and today we actually have no outstanding short-term borrowing.
We have updated our capital expenditure projections for the next five years, our projections by year excluding (inaudible) are as follows. For 2013, we are projecting 163.4 million, for 2014 165.6 million, for 2015 178.1 million, for 2016 107 million and for 2017 108.2 million. The 2013 and 2014 expenditures reflect our continued expenditures for the Asbury environmental upgrades. We still expect the cost to be in the range of $112 million to $130 million, with completion in early 2015.
To date we have spent $24.2 million on the project. We expect costs associated with the conversion of our Riverton unit 12 to a combined cycle unit to being in late 2013 with completion in the first half of 2016. In addition, it is not currently our intention to exercise the Plump Point to (inaudible) our 50 megawatt to purchase power, therefore no expenditures are included for this project in the 2015 time period. We will continue to analyze these options during our 2013 IRP process. We expect internally generated [balance] and commercial paper borrowings supported by our credit facility to be sufficient to meet our construction financing needs through the remainder of this year. Our future needs for our capital projects will be met with debt and equity to maintain an approximate 50-50 mix.
We recently begin a portion of this financing process, when we received commitments on September 28 in connection with $150 million in the private placement financing. These commitments include $30 million at 3.73% series first mortgage bonds to 2023, and a $120 million of 4.32% series is first mortgage bonds due 2043.
We expect to enter into definitive agreements by October 30. We anticipate the settlement to occur on or about May 30th of next year subject to customer closing conditions. We will use the proceeds from the sale to redeem all $98 million aggregate principal amount of our senior notes 4.5% series which are due June 15 of 2013. The remaining proceeds will be used for our general corporate purposes including the construction activities just outlined. Given our 50-50 target mix, our addition is approximately $7.5 million of internal equity per year from our dividend reinvestment plan and our continued billed to retained earning.
We do not anticipate the need for any equity financing before mid-2014, and finally we are revising our full year 2012 earnings guidance range of a $13 to a $27 per share to $18 to $27 per share. Our revision is based primarily on the favorable summer weather that we experienced. Our range [update] continues to assume our service territory 30 year average weather and relatively flat overall customer growth outside to tornado area through the remainder of the year. In addition other factors that may impact earnings include the speedy recovery in the tornado impacted area of Joplin, Missouri and then anticipated or unplanned events that may impact operating and maintenance costs.
That concludes my financial presentation and I will now turn the presentation back to Brad.
Thank you Laurie. The Missouri electric rate case that we filed in July for $30.7 million or 7.56% remains pending. As part of this case, we are seeking interim rates to cover the tornado impact of $6.2 million. Hearings on the interim request were held on September 10. We are waiting on an order for this interim request from the commission.
Regardless of the outcome of the interim case, the entire $30.7 million amount will be considered with the primary case. Local public hearings will be held in Joplin and Reeds Spring on January 3 and January 4. The evidentiary hearings are scheduled for February 25 through March 8, 2013 and will be held in Jefferson City, Missouri.
We expect new rates in this case no later than June 6, 2013. As a reminder, our case was premised on a request of 10.6% return on common equity, each 100 basis points of the request equates to about $8 million in revenue requirement. On October 18, we reached the unanimous settlement agreement in our water rate case which we filed in May.
As outlined in the agreement, the new rates will increased annual revenues by approximately $450,000 and will become effective in November 23. We await an order from the Missouri Public Service Commission approving this settlement. We continue to work on implementation of our most recent integrated resource plan that will already our generation facilities to comply with upcoming environmental regulations and will allow us to meet the Mercury and air toxic standards that became effective on April 16, 2012 and requires compliance by April 2015.
At our Riverton Power Plant, we have now fully transitioned unit seven and unit eight from coal to natural gas. Our current IRP calls for these units to be retired on the conversion of Riverton Unit 12 a simple cycle combustion turbine to combine cycle unit. As Laurie mentioned, this conversion is currently scheduled to be complete in 2016.
At our Asbury Power Plant work on the air quality control system project is progressing as anticipated. The chimney concrete work started on August 20 and it’s increasing in height at a rate of about 7.5 feet per working day. The finished height of the chimney is approximately 465 feet and it is currently at 202 feet or 43% of its finished height. The concrete portion of the chimney is scheduled to be complete in mid December. The foundations for the backhouse (inaudible) are about 90% complete and are expected to be finished by mid November.
The addition of the Asbury air quality control equipment is on schedule and is still expected to be finished by early 2015. Our Enterprise Resource Plan or ERP saw implementation of the Peoplesoft and resources segment on July 23 and on October 1 PeopleSoft Financials, Maximo and power plant software applications were implemented company wide. This has been a major project and we are confident this implementation will provide more timely information and improve our overall efficiency.
Work continues to progress on recovery from the 2011 tornado. We completed the rebuild of our substation 59 located at 26th & Moffet in Joplin in early October. As you will recall, this substation was totally destroyed. We have taken this opportunity to expand and modernize the substation. The original substation at this location was completed in 1927.
We have also begun work on a new substation to serve Southern Joplin and the New Mercy Hospital facilities. Mercy is expected to open in early 2015 and our plan calls for this substation which will provide the primary source of power to be available in late 2014.
On October 16, a pet food manufacturer Blue Buffalo company of Wilton, Connecticut program on a new 425,000 square foot, $85 million manufacturing and distribution center in the Crossroads Industrial Park. The plant is expected to create up to a 150 new jobs and it will produce 30 million pounds of pet food per month in full production.
After evaluating a number of communities, Blue Buffalo’s [selected] job impart because of its attitude following the 2011 tornado. According to Blue Buffalo’s Bill Bishop and I quote, “There was no whining, it was let’s get back to work. You're the kind of people we want to work with”.
On that same day, AT&T announced, they would be adding 48 new jobs at their Joplin call center. Earlier, [Dimas] packaging manufacturer located in the Joplin Webb City Industrial Park announced the addition of 66 new workers. Coca Cola also announced the addition of 45 new jobs at their distribution center that is under construction at our Crossroads Industrial Park.
Another manufacturer in town, (inaudible) Manufacturing, recently added 25 new physicians and anticipates more additions. These jobs are in the manufacturing of parts for agricultural, construction and passenger trains. Other new jobs within the last year include a 125 new physicians at Freeman Hospital, [200 & NCO] a telemarketing enterprise and that touches customized cleaning service.
Finally, yesterday, another big announcement. Don's Cold Storage & Logistics program on a $14 million, 115 square foot facility in the Joplin, Webb Industrial Park. Don’s provide blast freezing, cold storage, dry storage and transportation to several industries and has similar facilities in Rogers, Arkansas. The Joplin facility is scheduled to open next summer with about 50 employees. According to the September 2012 report from the Joplin area Chamber Of Commerce in June of this year, employment in the metro reached 83,400, the highest total employment ever in the metro area.
However, the labor force also grew to nearly 89,000 resulting in an unemployment rate of 6.1%. This rate is roughly one percentage point below the Missouri State rate and approximately two percentage points below the national rate. In July of this year, metro area employment went over 84,000 while this nearly 5% increase in employment can be in impart related to storm rebuilding and recovery, even sectors that were relatively untouched by the tornado have increased in the 12 month ending period of July. For example, manufacturing employment increased 2.4% according to the US Bureau OF Labor & Statistics.
In addition, as a result of recommendations from the Citizens Advisory Recovery Team formed following the tornado, the City of Joplin has signed a contract with Wallace Bajjali Development Partners. The firm is pursuing an $800 million, 10 year plan for redevelopment of the city. Joplin’s city manager announced yesterday that 79% of the houses damaged or destroyed by the tornado have been repaired, rebuilt or are undergoing repairs or rebuilding.
The city manager also reported he believes at least a certain percentage of people are waiting to see the results from the master developer. The statement is consistent with the fact that our Joplin area customer count relatively flat between the second and third quarters at about 1,200 less than pre-tornado levels.
In short, the Joplin area continues a strong recovery and is beginning to be bolstered with many industrial projects not related to the tornado. I will now turn the call back to the operator for your questions.
(Operator Instructions) Your first question comes from the line of Jim von Riesemann at UBS. Please go ahead.
This is actually (inaudible) for Jim. Just a quick question. I am wondering if you could provide some more detail on your customer loss at Joplin through the summer, I guess compared with the June, its kind of flat to slightly up versus sequential declines over the past five quarters. Just kind of wondering if you could provide some more detail on that?
Your question relates to where we are right now with the 1,200 customers being down prior to the tornado. So where we were last quarter is that is always breaking up on the line is a little difficult to hear you.
Okay, sorry about that, but yes, that’s the question?
So we are back, we were up. We were 1,100 at the end of quarter. We are up increased that by 1,200 this quarter. I think that mainly have to deal with some probably turn off that we did, we can't turn off people for non-pay during the half summer period and I think it’s just the little bit abnormal variation there resulting from the summer period.
And really, I think where at the pretty flat period right now. As I said towards the end of my remarks, a lot of folks that are left or waiting on the master developer to see what other development happens if [building] changes from commercial to residential. I think a lot of folks also have waited to try their time, they rebuild with when Mercy gets finished and when the schools get finished which is mostly in 2014 and 2015. We've kind of hit a low here, lots of construction still going on but we've hit a low in new housing starts particularly.
Okay, great and just kind of looking at that on a normalized [low] level where is Joplin versus kind of pre-tornado levels? Are you still there?
I think our estimates are still consistent with what we've said before a little less than 1%, that hasn't changed.
And switching to CapEx, it looks like in 2015 its around $100 million delta between your current and previous CapEx estimates, is that all Plum Point or is there anything not happening there?
Well, we've been a little bit of moving around and rescheduling. So I don't think you could pin point that that's exactly all related to Plum Point.
But the largest change was obviously Plum Point.
So your depreciation kind of forecasts are still intact?
The depreciation forecast?
Right, I'm looking at around $80 million in 2015.
Well, we haven't given that out specifically for forecast. I mean, if you look back historically, we are in that $70 million range. So then when you've got it [varied] that's coming on at the price range that we've disclosed. So I think you could kind of work forward from there.
Okay and just kind of, if you could provide kind of additional perspective on why you decided not to include Plum Point in your CapEx estimates now kind of your any additional data points that help you kind of make this decision now versus kind of for like in 2013?
As Laurie said, we are going to continue to analyze this in our 2013 IRP. But there are some formula conditions in the PPA that we continue to analyze. The other part is the continued low forecast for natural gas as we look forward.
(Operator Instructions) Mr. Beecher, there are no further questions at this time. Please continue.
Thank you all for your time today. We appreciate the opportunity to present our information and answer your questions. Have a great weekend.
Ladies and gentlemen this concludes the conference call for today. Thank you for participating. Please disconnect your line.