Empire District Electric Co. (NYSE:EDE) Q1 2016 Earnings Conference Call April 29, 2016 1:00 PM ET
Dale Harrington - Secretary & Director, IR
Brad Beecher - President & CEO
Laurie Delano - VP, Finance & CFO
Paul Ridzon - KeyBanc
Brian Russo - Ladenburg Thalmann
Michael Goldenberg - Luminus Management
Good day and welcome to the Empire District Electric Company First Quarter 2016 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.
I would now like to turn the conference over to Mr. Dale Harrington, Secretary and Director of Investor Relations. Please go ahead.
Thank you, Emily, and good afternoon everyone and welcome to the Empire District Electric Company's first quarter 2016 earnings conference call. Our Press Release announcing first quarter and 12-months ended March 31, 2016 results was issued yesterday morning. The Press Release and a live webcast of this call, including our accompanying slide presentation are available on our website at www.empiredistrict.com. And a replay of the call will be available on our website through July 29 of 2016.
Joining me today are Brad Beecher, President and Chief Executive Officer and Laurie Delano, Vice President, Finance and Chief Financial Officer. In a few moments, Brad and Laurie will be providing an overview of our first quarter and 12-month ended results as well as some highlights on other key matters.
But before we begin, I’ll remind you that our discussion today includes forward-looking statements and the use of non-GAAP financial measures. Slide 2 of our slide deck and the disclosure in our SEC filings present a list of some of the risks and other factors that could cause further results to differ materially from our expectations.
So let me caution you though that these lists are not exhaustive and the statements made in our discussion today are subject to risks and uncertainties that are difficult to predict. Our SEC filings are available upon request or may be obtained from our website or from the SEC.
I would also direct you to our earnings Press Release for further information on why we believe the presentation of estimated earnings per share impact of individual items and the presentation of gross margin, each of which are non-GAAP presentations, is beneficial for investors in understanding our financial results.
And with that, I'll now turn the call over to our CEO, Brad Beecher.
Thank you, Dale. Good afternoon, everyone and thank you for joining us. Today we will discuss matters from the Board of Directors and Annual Shareholders Meetings, as well as our financial results for the first quarter and 12-months ended period March 31, 2016. We will also provide an update on the proposed merger and other recent company activities.
During our annual meeting of shareholders held yesterday, three directors were reelected to serve three-year terms, Ross Hartley, Herb Schmidt, and Jim Sullivan. And other business shareholders ratified the appointment of PricewaterhouseCoopers LLP as Empire’s independent registered public accounting firm for the fiscal year ending December 31, 2016. Shareholders also approved a non-binding advisor proposal regarding compensation of our named executive officers.
During the meeting yesterday, the board declared a quarterly dividend of $0.26 per share payable June 15, 2016, for shareholders of record as of June 1.
On Slide 3, of our presentation, we provided some highlights of the quarter and 12-months ended period; we will discuss these more throughout the call. Yesterday we reported first quarter 2016 earnings of $14 million or $0.32 per share inclusive of merger-related costs. This compares to the same period in 2015 when the earnings were $14.6 million or $0.34 per share. For the 12-month ending period March 31, 2016, earnings were $56 million or $1.28 per share inclusive of merger costs. This compares to 12-months earnings of $60.8 million or $1.40 per share for the same period last year.
As you can see from the slide it’s been a mild quarter for weather. In terms of heating degree days the 2015/2016 winter season was the warmest in the past 30 years, the first quarter ranks as the sixth warmest in the last 30 years, it was a great, it was great weather for enjoying the outdoors but not great for energy sales.
During the quarter, we announced Empire had reached an agreement and planed a merger with Liberty Utilities, the U.S. subsidiary of Algonquin Power and Utilities Corporation. Algonquin Power and Utilities is a North American diversified generation transmission and distribution utility company, they are based in Oakville, Ontario, and their stock is traded on the Toronto Stock Exchange. Liberty Utilities is a growing utility operator that has been in business in the U.S. for over 15 years. They operate electric, natural gas, water, and waste water utilities across the broad geographic areas stretching from California to New Hampshire.
Empire will be delivering Central’s region with Jolpin serving as the corporate headquarters. The Central region will include 340,000 customers in Missouri, Kansas, Arkansas, Oklahoma, Iowa, Illinois, and Texas. The transaction will provide greater scale, geographic diversity, and growth opportunities for both organizations. As a reminder, Empire shareholders will receive $34 for each share of stock owned at the close of the transaction. This represents a 50% premium over the unaffected price of $22.65 on December 10, 2015.
On Slide 4, we provided a tentative timeline of the approval process and transaction closing. Merger applications were filed with state and federal regulatory agencies on March 16. We expect to receive an order from FERC approving the merger any day. In Oklahoma, the hearing was held on April 27 and Oklahoma Administrative Law Judge has recommended approval and order is expected within 60 days.
Procedural schedules are being established in Missouri, Kansas, and Arkansas. We anticipate approvals in place for transaction close in the first quarter of 2017.
Shareholder approval is also required for the transaction. We have set May 2, 2016, as the record date for determining eligibility to vote on their agreement and planned merger. We expect to hold a Special Shareholders Meeting on June 16, 2016, to conduct the vote. A final proxy and voting instructions will be mailed to shareholders next week.
Last week, we began joint meetings at the senior management level to initiate the transition and integration planning process. As we work to fulfill the conditions to close the merger we remain focused on business as usual at Empire.
Moving onto Slide 5, Riverton combined cycle is nearing completion of in-service testing. The project is on schedule and on budget. As of March 31, approximately $163.3 million has been spent on the project against a total budget of $165 million to $175 million. The Riverton project is the first large frame combined cycle generating unit in the State of Kansas and will be among the most efficient natural gas units in the country. This projects completes our multiyear compliance plan for the Mercury and air toxic standard. We continue to prosecute the Missouri rate case which is primarily related to the cost recovery of the Riverton project.
Slide 6, is a reminder of the key aspects of this case filed October 16, 2015. The case seeks an increase in annual revenues of $33.4 million or about 7.3%. The procedural schedule provides for a true up of expenditures incurred through March 31, 2016, assuming a Riverton 12 combined cycle end service date of June 1, 2016. Evidentiary hearings are slated for May 31 in Jefferson City.
As you can see from the projected timeline on Slide 7, we will experience a period of lag between the in-service state of the Riverton project and the time new customer rates are effective which we expect to be late September of this year.
A corresponding rate filing has been made in our Oklahoma jurisdiction; we expect to file rate cases in Kansas by the end of the third quarter, and in Arkansas, no later than the end of the year.
For 2016, we expect earnings to be within a weather-normalized range of a $1.26 to $1.44 including estimated merger transaction fees. We estimate total fees of $15 million to $17 million with approximately 50% of the fees payable in 2016 and included in the guidance range.
As of April 1, 2016, we have received the applications for just over $10 million in rebates for private solar installations. As of the end of the quarter, we had processed 467 solar rebate applications and have recorded a regulatory asset of approximately $6.2 million on our books. These rebate costs will be collected from other Missouri electric customers and future charges.
On the legislative front, we continue to support legislation in Missouri to update our century old regulatory framework. Senate Bill 1028 allows timely recovery of utilities prudently incurred operating cost while offering important consumer protection such as earnings caps, revenue caps, and performance standards. We believe that Senate Bill 1028 offers a balance long-term solution that will benefit both Empire customers and shareholders all while retaining the strong oversight of the Missouri Public Service Commission. We will continue to work to move this important legislation forward in the final two weeks of the Missouri legislative session.
I will now turn the call to Laurie to provide additional details of our financials.
Thank you, Brad, and good afternoon everyone. As we review our first quarter 2016 earnings per share results, the financial affirmation I will discuss will supplement our press release that we issued yesterday, and as always our earnings per share numbers referenced throughout the call are provided on an after-tax estimated basis.
As we noted in our press release yesterday the Missouri customer rate increase that went into effect in July 2015 was the primary driver of increased margin compared to the prior year quarter. The mild fourth quarter 2015 weather continued to spill over into the first quarter of 2016 driving the 7.5% decrease in our electric segment sales. This mild winter weather largely offset the impact of higher customer rates from an earnings per share standpoint. And as we also noted on our press release in the first quarter we paid approximately $4.2 million in merger-related costs which reduced earnings an estimated $0.06 per share minus the mild weather and the merger cost impacts, results were pretty much on track with our expectations.
Slide 8, shows the detail of changes that impacted earnings per share quarter-over-quarter. Consolidated gross margin increased $1.8 million lifting earnings by $0.03 per share. Increased electric customer rates of about $7.7 million net of an estimated $1.9 million decrease in Missouri-based fuel recovery, increased revenue $5.8 million quarter-over-quarter this added an estimated $0.11 per share to margin. As mentioned previously, this increase was almost entirely offset by the impact of the mild winter weather and other volumetric factors which decreased revenue by about $10.5 million negatively impacting margin by about $0.10 per share when compared to the first quarter last year. Positive customer growth contributed about a penny to earnings per share and other items including the content and timing of our fuel deferral and recovery mechanisms combined to add another estimated $0.02 per share to margin when compared to the first quarter of 2015.
Mild weather also impacted our gas segment retail sales quarter-over-quarter resulting in a decrease in gas segment margin of about a penny per share. We estimate the net impact of the mild winter weather reduced margin about $0.06 to $0.08 per share for the quarter when compared to normal weather.
Continuing on with Slide 8, consolidated operating and maintenance expenses remained relatively flat compared to the 2015 quarter combining to raise earnings per share about a penny. And as mentioned previously, the most significant expense item during the period was the previously mentioned $4.2 million in merger cost which reduced earnings per share about $0.06. Exclusive of the $0.06 per share negative impact resulting from the merger cost, our first quarter earnings would have been $0.38 per share.
Moving on to our 12-months ended results, Slide 9 provides a roll forward to our $1.28 per share earnings for the period ended March 2016. As Brad mentioned earlier, our net income decreased about $4.8 million or $0.12 per share compared to the year ago period. Slide 9 details the breakdown of the various components.
Consolidated margin increased about $12.7 million or an estimated $0.18 per share when comparing the two periods. Electric rates were again the most significant positive margin driver during the period adding an estimated $0.26 per share. The impact of mild weather and other volumetric factors combined to reduce electric on-system sales about 2.7% decreasing margin an estimated $0.15 per share. Increases in customer growth added about $0.02 per share. Other items again including the content and timing of our various fuel deferral and recovery mechanism combined to add an estimated $0.08 per share to margin when compared to the 2015 period.
The mild weather also continued to impact our gas segment reducing margin an estimated $0.03 per share period over period.
Our total on-system electric sales for the 12-months ended March 2016 were 4.84 million megawatt hours versus 4.97 million megawatt hours in the 12-months period ending March 2015. This is near our weather-normalized annual expected sales level of approximately 5 million megawatt hours.
Slide 9 also details the -- shows the details of increases in operating and maintenance expense items which combined to decrease earnings per share by $0.05. A planned maintenance outage of our state line combined cycle plan, increases in production maintenance expense at a number of our other generation plants, and our previously discussed Riverton 12 maintenance contract which became effective January 1 of 2015, combined to decrease earnings around $0.05 per share.
As you may recall, we did not begin recovering that Riverton maintenance contract and customer rates until our rate increase effective last year in July. Increased labor cost driven by increased executive stock-compensation valuations reduced earnings about $0.04 per share. Other smaller cost increases and decreases combined to add another $0.04 per share to earnings bringing the total O&M impact to the $0.05 per share reduction.
Again the merger cost of approximately $4.5 million in that 12-month ending period reduced period over period earnings at an estimated $0.06.
Increased depreciation and other taxes reduced earnings an estimated $0.08 and $0.03 per share respectively. Interest expense reduced earnings per share about $0.05 period over period due primarily to the $60 million privately placed first mortgage on financing that we did in August 2015.
As Brad mentioned earlier, and as Slide 10 illustrates, our full-year 2016 weather-normalized earnings guidance range which we revised on February 2016 of this year remains unchanged at $1.26 to $1.44 per share. As a reminder, at the time we revised our guidance range we advised that we estimated full-year earnings to be $0.10 to $0.12 per share lower than our original full-year guidance range of $1.38 to $1.54 that we provided on February 4.
We continue to expect to incur total merger costs of approximately $15 million to $17 million, half of which would be payable in ’16, with the other half in 2017, assuming a 2017 closing date. Now as I mentioned earlier we have already paid $4.2 million of those costs in 2016.
On our balance sheet, we have $104 million in retained earnings and we had $19 million of short-term debt outstanding at the end of March.
On Slide 11, we have updated our trailing 12-months return on equity charge. As you can see on the slide at the end of March our return on equity was approximately 6.9%.
With that, I will now turn the call back over to Brad.
Thank you, Laurie. At Empire, we strive for continuous improvement and innovation, I’m proud to report our efforts were recently recognized by the Edison Electric Institute when they announced that we were among a small group of utilities chosen as the finalist for the Edison award. The award recognizes our work in developing an innovative modular transmission, structured design, and construction process. The design speeds construction, lowers cost, and reduces outage sign during coal replacement projects.
With that, I will now turn the call back to the operator for your questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions].
Our first question is from Paul Ridzon of KeyBanc. Please go ahead.
Good afternoon. How are you?
We’re fine Paul, thank you. How are you?
Fine, thank you. Just hoping to get an update on where the proposed I think its Senate Bill 1028 stands?
Well that’s going to be the question of this day, Paul. There is only two weeks left in the session, but so we’ve got a lot of work to do and a short amount of time to do it. Senate Bill 1028 is currently on the informal Senate calendar which means it can be called up at any time. That said it’s going to be difficult for 1028 to move through the remaining process and house process in two weeks. So if Senate Bill 1028 is going to move forward or you will likely see it attach to another House Bill that might be moving through the Senate.
As you probably heard we have had the third filibuster in the Senate here this week on voter ID and so it’s just going to be -- so we are still working hard and we still think it’s got to shot but it’s going to be a difficult process.
Thank you for that update. And Laurie, I had a question, when you talked about gross margin there was new rates net $5.8 million and then weather was $10.5 million headwind but net-net there was gross margin actually went up and you referenced in the release some fuel deferrals, is that where the delta is and is that a timing issue?
That’s where the delta is. So if you will recall in our last rate case fuel was rebased pretty significantly as part of the rate reduction and rates that were set. And so the way we think about that is our revenue reduction is net of that fuel rebate, but that fuel rebate doesn’t impact margin.
So let me get to my notes here. So when we say that we had increased electric customer rates of $7.7 million for the quarter, net of the estimated $1.9 million decrease in Missouri-based fuel recovery that $1.9 million in Missouri-based fuel recovery is a loss to margin. So in our estimation the $7.7 million is really the impact of margins.
Does that make sense?
So as we go through the year are there a few deferrals going to kind of reverse and may be make another quarter weaker?
No it’s a dollar for dollar increase in revenue and increase in fuel. So as we compare the two periods, period over period we’re identifying the new rates that came in at the gross amount which would be the $7.7 million and then we’re identifying how much of that fuel base recovery brought revenues and fuel both down together to get to our net revenue change.
Of $5.8 million?
Yes, so again the $5.8 million reflects the increased cost less the fuel decrease. But that fuel decrease is not only decreasing revenues, it’s also decreasing fuel cost.
Okay. Thank you very much.
Hope that made sense.
Our next question is from Brian Russo of Ladenburg Thalmann. Please go ahead.
You mentioned the Missouri Legislature ends in two weeks, what’s the exact date that it concludes?
It’s Friday, May 13, I believe.
Okay. And when does the legislature resume again I guess in 2017?
I don’t know that exact date but it’s again -- it’s in 2017.
Okay. And is there any sort of some statutory deadline in which Missouri would have to rule on the merger once procedural schedule is set?
We went through this a little bit Brian on our merger call. But the way it stands in Oklahoma once they have the hearing which they have, they have 60 days in order to issue an order, in Kansas they have 300 days from the time the merger application was filed, so 300 days from March 16, in Arkansas and Missouri, there is no prescribed statutory timeframe that they have to act.
Okay, got it. And you mentioned that SB 1028 is on the informal calendar and it could be heard anytime. So if there is not, it’s not when it was put on the calendar prior along with a lot of other proposed legislation, so there is no particular order in which it will be heard, it can be heard at anytime?
As we said, right now, it can be heard at anytime. They have rolled -- they have used the term roll to the calendar and anyway Senate Bill 1028 is on the informal calendar and either it or an energy-related House Bill could be that it’s passed through the House could be called up at anytime.
Okay. And then I’m just curious the Riverton lag seems like it’s related to depreciation. Are there any O&M savings for the gas conversion that you guys will retain until you should include this rate case and new rates going to affect?
Nothing significant, Brian.
If we shift the coal units down really in ‘14 and ‘15 and so any reductions in O&M have already been in the rearview mirror.
Our next question is from Michael Goldenberg of Luminus Management. Please go ahead.
Hi I wanted to continue the discussion about the merger approvals. So as it stands right now which one do you think will be the most complicated or complex, which of the state will be the most involved?
As we said right now Missouri, Arkansas, and Kansas, are kind of all at the same stage we’re getting data request in all the states now, they all take you through a full process. So we have a few more interveners in Missouri than we do in the other states. If you think that’s going to add complexity but generally speaking all three of them are going to through the same type of process.
So you said Missouri, Kansas and I’m sorry.
Arkansas were those three.
Arkansas, okay. Now in terms of in Kansas is the one with 300 days and Missouri has no statutory deadline right?
That is correct.
Do both Kansas and Missouri have a specific schedule of events posted somewhere?
So in Missouri we have field a proposed procedural schedule and Laurie can range you the dates here but the commission is not rolled on it.
So what the proposed schedule says is for technical conferences on May 16 and 17 and then June 1, with rebuttal testimony on July 6, serve rebuttal on July 22, and order witnesses, order cross examination on July 28, physician statements August 4, with the hearing occurring on August 15 to 17 and again that is just proposed that has not been approved yet.
But basically July, August will be the hard and heavy times of this, so to speak?
Right and I think that’s the way you need to think about Arkansas, Kansas and Missouri as we said here today it is the summer especially late summer is going to be full of hearings. And then hopefully that will give commissions about 90 days to make decisions and hopefully get us orders by December so that we can close in the first quarter.
When you think about interveners, is it the usual cash [indiscernible] consumer advocates comes out of that, oh, I want money, I want fixed rates stuff like that. Is it that kind of a millet that we see in every merger proceeding or is that something that we need?
So in Kansas and Arkansas the interveners are the typical AG consumer advocate or staff, in Missouri in addition to that we have some of our industrial consumers in the City of Jolpin which are typical interveners in our rate case and then we have a couple other folks that have groups that have intervened one of them being Empire’s retirees who have interest in retiree healthcare.
Okay. Is it too early to discuss strategy and kind of what you learned from recent merger proceedings?
We filed direct testimony, so a lot of the strategy is laid in that direct testimony. We filed joint testimony with Common Council with Liberty. And I think reflecting to 99 on why we didn’t get approval on 99 the big ticket items that have kind of been taken off the table as Algonquin is not asking for premium recovery, they are not asking for recovery of transition cost and they are not proposing any staff reductions and those are the big ticket items that have caused a lot of things in the past and so Algonquin took all of those off the table in their initial filings.
Showing no additional questions, this concludes our question-and-answer session. I would like to turn the conference back over to Brad Beecher for any closing remarks.
Thank you. Before we close, I will remind you that as we work diligently to achieve the conditions necessary to successfully close the merger with Liberty Utilities, our mantra will be business as usual. Rest assured we will continue to stay focused on the business at hand providing safe, reliable energy for our customers and attractive return for our shareholders and a rewarding environment for our employees.
One last note, Laurie, Dale, and I will be at the AGA Financial Conference May 16 and 17 in Florida. We hope to see many of you there. Thank you for joining us today and have a great weekend.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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