UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999 or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________ to
____________.
Commission file number: 1-3368
THE EMPIRE DISTRICT ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Kansas 44-0236370
(State of Incorporation) (I.R.S. Employer
Identification No.)
602 Joplin Street, Joplin, Missouri 64801
(Address of principal executive offices) (zip code)
Registrant's telephone number: (417) 625-5100
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes No ___
Common stock outstanding as of November 1, 1999: 17,283,235
shares.
THE EMPIRE DISTRICT ELECTRIC COMPANY
INDEX
Page Number
Part I - Financial Information:
Item 1. Financial Statements:
a. Statement of Income 3
b. Balance Sheet 6
c. Statement of Cash Flows 7
d. Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Recent Developments 10
Results of Operations 10
Liquidity and Capital Resources 14
Year 2000 16
Forward Looking Statements 19
Item 3. Quantitative and Qualitative Disclosures About 19
Market Risk
Part II -Other Information:
Item 1. Legal Proceedings - (none)
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities - (none)
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENT OF INCOME (UNAUDITED)
Three Months Ended
September 30,
1999 1998
Operating revenues:
Electric $ 81,147,809 $ 77,563,240
Water 311,958 296,532
81,459,767 77,859,772
Operating revenue deductions:
Operating expenses:
Fuel 17,812,421 16,878,973
Purchased power 10,774,241 12,448,247
Other 8,476,064 7,922,086
Merger Related Expenses 2,582,658 -
Total operating expenses 39,645,384 37,249,306
Maintenance and repairs 4,788,785 3,646,052
Depreciation and amortization 6,561,016 6,272,011
Provision for income taxes 8,852,730 7,978,800
Other taxes 3,617,304 3,689,937
63,465,219 58,836,106
Operating income 17,994,548 19,023,666
Other income and deductions:
Allowance for equity funds used - -
during construction
Interest income 75,225 65,314
Other - net (88,719) (324,968)
(13,494) (259,654)
Income before interest charges 17,981,054 18,764,012
Interest charges:
First mortgage bonds 4,618,614 4,618,450
Commercial paper 728,705 47,669
Allowance for borrowed funds used (455,823) (89,277)
during construction
Other 85,953 82,490
4,977,449 4,659,332
Net income 13,003,605 14,104,680
Preferred stock dividend requirements 206,511 604,085
Excess consideration paid on 1,304,504 -
redemption of preferred stock
Net income applicable to common stock $ 11,492,590 $ 13,500,595
Weighted average number of common 17,282,936 16,969,760
shares outstanding
Basic and diluted earnings per
weighted average share of common stock $ 0.66 $ 0.80
Dividends per share of common stock $ 0.32 $ 0.32
See accompanying Notes to Financial Statements.
STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended
September 30,
1999 1998
Operating revenues:
Electric $188,684,200 $184,720,788
Water 826,864 796,374
189,511,064 185,517,162
Operating revenue deductions:
Operating expenses:
Fuel 37,422,804 33,173,021
Purchased power 33,401,716 37,972,352
Other 24,280,178 22,987,532
Merger Related Expenses 5,644,312 -
Total operating expenses 100,749,010 94,132,905
Maintenance and repairs 12,894,076 11,285,244
Depreciation and amortization 19,515,590 18,658,543
Provision for income taxes 13,638,570 13,576,690
Other taxes 9,693,680 9,748,281
156,490,926 147,401,663
Operating income 33,020,138 38,115,499
Other income and deductions:
Allowance for equity funds used 56,845 -
during construction
Interest income 169,895 116,697
Other - net (203,136) (673,920)
23,604 (557,223)
Income before interest charges 33,043,742 37,558,276
Interest charges:
Long-term debt 13,855,842 13,255,306
Commercial paper 1,227,837 634,789
Allowance for borrowed funds used (859,718) (251,327)
during construction
Other 275,936 263,114
14,499,897 13,901,982
Net income 18,543,845 23,656,294
Preferred stock dividend requirements 1,403,025 1,812,255
Excess consideration paid on 1,304,504 -
redemption of preferred stock
Net income applicable to common stock $ 15,836,316 $ 21,844,039
Weighted average number of common 17,205,757 16,879,863
shares outstanding
Basic and diluted earnings per
weighted average share of common stock $ 0.92 $ 1.29
Dividends per share of common stock $ 0.96 $ 0.96
See accompanying Notes to Financial Statements.
STATEMENT OF INCOME (UNAUDITED)
Twelve Months Ended
September 30,
1999 1998
Operating revenues:
Electric $242,764,243 $237,895,177
Water 1,087,951 1,012,249
243,852,194 238,907,426
Operating revenue deductions:
Operating expenses:
Fuel 46,125,847 41,268,184
Purchased power 43,001,904 51,248,646
Other 33,264,728 30,671,450
Merger Related Expenses 5,644,312 -
Total operating expenses 128,036,791 123,188,280
Maintenance and repairs 19,131,703 14,470,677
Depreciation and amortization 25,837,684 24,771,745
Provision for income taxes 16,251,880 16,436,330
Other taxes 12,317,720 12,103,097
201,575,778 190,970,129
Operating income 42,276,416 47,937,297
Other income and deductions:
Allowance for equity funds used 65,783 150,524
during construction
Interest income 316,999 155,084
Other - net (369,773) (833,049)
13,009 (527,441)
Income before interest charges 42,289,425 47,409,856
Interest charges:
First mortgage bonds 18,474,369 17,401,104
Commercial paper 1,252,790 965,731
Allowance for borrowed funds used (1,008,435) (279,443)
during construction
Other 359,812 339,355
19,078,536 18,426,747
Net income 23,210,889 28,983,109
Preferred stock dividend requirements 2,002,553 2,416,340
Excess consideration paid on 1,304,504 -
redemption of preferred stock
Net income applicable to common stock $ 19,903,832 $ 26,566,769
Weighted average number of common 17,170,531 16,841,908
shares outstanding
Basic and diluted earnings per
weighted average share of
common stock $ 1.16 $ 1.58
Dividends per share of common stock $ 1.28 $ 1.28
See accompanying Notes to Financial Statements.
BALANCE SHEET
September 30, December 31,
1999 1998
(Unaudited)
ASSETS
Utility plant, at original cost:
Electric $ 858,933,483 $ 832,484,754
Water 6,609,961 6,398,086
Construction work in progress 38,665,335 16,701,068
904,208,779 855,583,908
Accumulated depreciation 302,677,836 283,337,538
601,530,943 572,246,370
Current assets:
Cash and cash equivalents 871,093 2,492,716
Accounts receivable - trade, net 19,426,353 13,645,641
Accrued unbilled revenues 6,432,537 6,218,889
Accounts receivable - other 2,660,784 1,590,536
Fuel, materials and supplies 16,397,438 15,704,678
Prepaid expenses 793,051 929,447
46,581,256 40,581,907
Deferred charges:
Regulatory assets (Note 2) 37,724,948 35,999,139
Unamortized debt issuance costs 3,466,815 3,660,800
Other 4,503,645 805,568
45,695,408 40,465,507
Total Assets $ 693,807,607 $ 653,293,784
CAPITALIZATION AND LIABILITIES:
Common stock, $1 par value,
17,317,808 and 17,108,799 shares
issued and outstanding, respectively $ 17,317,808 $ 17,108,799
Capital in excess of par value 162,520,586 156,975,596
Retained earnings (Note 3) 54,826,211 55,706,779
Total common stockholders' equity 234,664,605 229,791,174
Preferred stock (Note 4) - 32,901,800
Reacquired capital stock - (267,537)
Long-term debt 246,125,303 246,092,905
480,789,908 508,518,342
Current liabilities:
Accounts payable and accrued 16,532,593 17,096,272
liabilities
Commercial paper 59,000,000 14,500,000
Customer deposits 3,551,609 3,438,987
Interest accrued 7,057,220 4,113,300
Taxes accrued, including income 12,358,036 -
taxes
98,499,458 39,148,559
Noncurrent liabilities and deferred
credits:
Regulatory liability 15,565,471 16,400,125
Deferred income taxes 76,437,617 73,760,362
Unamortized investment tax credits 7,886,090 8,391,000
Postretirement benefits other than 6,131,055 4,463,883
pensions
Other 8,498,008 2,611,513
114,518,241 105,626,883
Total Capitalization and $ 693,807,607 $ 653,293,784
Liabilities
See accompanying Notes to Financial Statements.
STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
1999 1998
Operating activities:
Net income $ 18,543,845 $ 23,656,294
Adjustments to reconcile net income
to cash flows:
Depreciation and amortization 21,964,069 21,149,731
Pension income (3,293,110) (1,679,891)
Deferred income taxes, net 2,008,951 1,357,752
Investment tax credit, net (504,910) (478,000)
Allowance for equity funds used (56,845) -
during construction
Excess consideration paid on redemption (1,304,504) -
of preferred stock
Issuance of common stock for 401(k) 578,805 532,472
plan
Other - 66,958
Cash flows impacted by changes in:
Accounts receivable and accrued (7,064,608) (7,927,828)
unbilled revenues
Fuel, materials and supplies (692,760) (1,708,325)
Prepaid expenses and deferred (6,357,627) 22,743
charges
Accounts payable and accrued (563,679) 1,073,592
liabilities
Customer deposits, interest and 15,414,578 14,354,828
taxes accrued
Other liabilities and other 10,846,777 492,881
deferred credits
Net cash provided by operating 49,518,982 50,913,207
activities
Investing activities:
Construction expenditures (50,118,472) (29,029,008)
Allowance for equity funds used 56,845 -
during construction
Net cash used in investing activities (50,061,627) (29,029,008)
Financing activities:
Proceeds from issuance of first - 49,672,000
mortgage bonds
Proceeds from issuance of common 5,175,194 3,790,414
stock
Redemption of preferred stock (32,901,800) -
Reacquired capital stock 267,537 -
Dividends (18,119,909) (18,019,472)
Repayment of first mortgage bonds - (23,000,000)
Payment of debt issue costs - (544,308)
Net issuances (repayments) from 44,500,000 (28,000,000)
short-term borrowings
Net cash provided by (used in) (1,078,978) (16,101,366)
financing activities
Net increase (decrease) in cash and (1,621,623) 5,782,833
cash equivalents
Cash and cash equivalents at beginning 2,492,716 2,545,282
of period
Cash and cash equivalents at end of $ 871,093 $ 8,328,115
period
See accompanying Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Summary of Significant Accounting Policies
The accompanying interim financial statements do not include
all disclosures included in the annual financial statements and
therefore should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
The information furnished reflects all adjustments, consisting
only of normal recurring adjustments, which are in the opinion of
the Company necessary to present fairly the results for the interim
periods presented.
Note 2 - Regulatory Assets
Certain expenses and credits, normally reflected in income as
incurred, are accounted for as assets when included in rates and
recovered from or refunded to customers in accordance with
Statement of Financial Accounting Standards No. 71. In the second
quarter of 1999, the Company established additional regulatory
assets in the aggregate amount of $3.0 million, a significant
portion of which are fuel contract settlement costs resulting from
the Iatan coal contract that was renegotiated on April 1, 1999.
Note 3 - Retained Earnings
Balance at January 1, 1999 $ 55,706,779
Changes January 1 through June 30:
Net Income 5,540,239
Quarterly cash dividends on common stock:
- $0.64 per share (10,991,297)
Quarterly cash dividends on preferred stock:
8-1/8% cumulative - $0.40625 per share (1,007,905)
5% cumulative - $0.250 per share (93,570)
4-3/4% cumulative - $0.2375 per share (94,344)
Total changes January 1 through June 30 (6,646,877)
Balance at July 1, 1999 49,059,902
Changes July 1 through September 30:
Net Income 13,003,605
Quarterly cash dividends on common stock:
- $0.32 per share (5,528,401)
Quarterly cash dividends on preferred stock:
(paid through August 2, 1999, the redemption
date)
8-1/8% cumulative - $0.203125 per share (341,569)
5% cumulative - $0.125 per share (31,072)
4-3/4% cumulative - $0.11875 per share (31,750)
Preferred stock redeemed:
8-1/8% cumulative (921,879)
5% cumulative (174,261)
4-3/4% cumulative (208,364)
Total changes July 1 through September 30 5,766,309
Balance at September 30, 1999 $ 54,826,211
Note 4 - Preferred Stock
The Company redeemed all of its outstanding preferred stock on
August 2, 1999. This redemption was financed with approximately
$33.1 million in commercial paper.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RECENT DEVELOPMENTS
The Company and UtiliCorp United Inc., a Delaware corporation
("UtiliCorp"), have entered into an Agreement and Plan of Merger,
dated as of May 10, 1999 (the "Merger Agreement"), which provides
for a merger of the Company with and into UtiliCorp, with UtiliCorp
being the surviving corporation (the "Merger"). Under the terms of
the Merger Agreement, UtiliCorp will pay $29.50 for each share of
Common Stock of the Company, payable in UtiliCorp common stock or
cash. The Merger Agreement contains a collar provision under which
the value of the merger consideration per share will decrease if
UtiliCorp's common stock is below $22 per share preceding the
closing and will increase if UtiliCorp's common stock is above $26
per share preceding the closing. Stockholders of the Company may
elect to take cash or stock, but total cash paid to stockholders
will be limited to no more than 50% of the total Merger
consideration, and the UtiliCorp common stock that may be issued in
the Merger is limited to 19.9% of the then outstanding common stock
of UtiliCorp. UtiliCorp also will become liable for all of the
Company's existing debt, including its first mortgage bonds.
The Merger, which was unanimously approved by the Boards of
Directors of the constituent companies, is expected to close after
all of the conditions to the consummation of the Merger are met or
waived. The Merger is conditioned, among other things, upon
approvals of federal regulatory agencies and approvals of state
regulatory authorities in states where the combined company will
operate. At a special meeting of stockholders held on September 3,
1999, the merger was approved with 76.3% of the Company's
outstanding shares voting in favor of the proposal. UtiliCorp is
not required to obtain its stockholders' approval of the merger.
UtiliCorp is a multinational energy and energy services
company headquartered in Kansas City, Missouri. It has regulated
utility operations in eight states and energy operations in New
Zealand, Australia, the United Kingdom and Canada. It also owns
non-utility subsidiaries involved in energy trading; natural gas
gathering, processing and transportation; energy efficiency
services and various other energy-related businesses.
The Company and Missouri-American Water Company have
terminated their negotiations with respect to the proposed sale by
the Company of its water system.
A three-year agreement between the Company and The
International Brotherhood of Electrical Workers ("IBEW") was
scheduled to expire on October 31, 1999. Negotiations between the
Company and the IBEW did not result in a new agreement prior to
this date, however, pursuant to its terms, the contract was
automatically renewed for an additional year. Each of the Company
and the IBEW has the right to submit their requested amendments to
arbitration.
RESULTS OF OPERATIONS
The following discussion analyzes significant changes in the
results of operations for the three-month, nine-month and twelve-
month periods ended September 30, 1999, compared to the same
periods ended September 30, 1998.
Operating Revenues and Kilowatt-Hour Sales
Of the Company's total electric operating revenues during the
third quarter of 1999, approximately 43% were from residential
customers, 31% from commercial customers, 16% from industrial
customers, 4% from wholesale on-system customers and 4% from
wholesale off-system transactions. The remainder of such revenues
were derived from miscellaneous sources. The percentage changes
from the prior year in kilowatt-hour ("Kwh") sales and revenue by
major customer class were as follows:
Operating
Kwh Sales Revenues
Nine Twelve Nine Twelve
Third Months Months Third Months Months
Quarter Ended Ended Quarter Ended Ended
Residential (0.1)% (1.3)% (1.9)% 1.0% (0.2)% (0.1)%
Commercial 4.1 2.4 2.5 6.2 2.8 2.9
Industrial 3.9 4.8 3.9 4.4 4.5 4.1
Wholesale On- (0.6) (1.3) (0.6) (0.7) (2.2) (1.8)
System
Total System 1.9 1.2 0.8 3.1 1.5 1.5
Residential Kwh sales were down slightly during the third
quarter of 1999 compared to the third quarter of 1998 while the
corresponding revenues were up slightly. Although July and August
temperatures were above last year's temperatures and the 20-year
average, September's unusually mild weather had an adverse impact
on residential sales. Commercial Kwh sales and revenues, which are
slower to react to temperature extremes, both increased during the
same period mainly due to the above-average temperatures in July
and August, when a new peak demand of 979 Mw was set. Revenues for
both classes were positively impacted by the annual rate increase
of $358,848 (6.6%) granted by the Arkansas Public Service
Commission ("Arkansas Commission") effective August 24, 1998.
Industrial Kwh sales and related revenues, which are not
particularly weather-sensitive, were positively affected during the
third quarter of 1999 by continuing increases in business activity
throughout the Company's service territory as well as the 1998
Arkansas rate increase.
On-system wholesale Kwh sales and revenues decreased slightly
during the third quarter of 1999 reflecting the weather conditions
discussed above.
For the nine months ended September 30, 1999, Kwh sales to and
revenue from the Company's residential and on-system wholesale
customers decreased, reflecting the unusually mild temperatures
experienced during May, June and September of 1999 as compared to
above-average temperatures during those months in 1998. Commercial
Kwh sales and revenues increased during the same period primarily
reflecting the third quarter increase discussed above. Industrial
Kwh sales and related revenues increased due to continuing
increases in business activity throughout the Company's service
territory. Residential, commercial and industrial revenues for the
nine months ended September 30, 1999 were positively impacted by
the 1998 Arkansas rate increase.
For the twelve months ended September 30, 1999, Kwh sales to
and revenue from the Company's residential and on-system wholesale
customers decreased, reflecting the weather conditions discussed
above. Commercial sales and revenue increased for the twelve-month
period, mainly due to the above-average temperatures in July and
August of 1999. Industrial sales and revenue continued to grow due
to strong business activity in the Company's service territory.
Residential, commercial and industrial revenues for the twelve
months ended September 30, 1999 were also positively impacted by
the 1998 Arkansas rate increase discussed above.
Off-System Transactions
In addition to sales to its own customers, the Company also
sells power to other utilities as available and also provides
transmission service through its system for transactions between
other energy suppliers. During the third quarter of 1999, revenues
from such off-system transactions were approximately $3.8 million,
compared with approximately $2.6 million during the third quarter
of 1998. Off-system revenues were approximately $7.9 million for
the nine-month period ended September 30, 1999 as compared to $6.7
million for the same period in 1998. For the twelve months ended
September 30, 1999, revenues from such off-system transactions were
approximately $9.5 million as compared to $8.8 million for the
twelve months ended September 30, 1998. The increase in revenues
during these periods was primarily the result of an increase in
sales and the ability to sell power at market-based rates during
the summer months instead of being restrained by the rate caps
described below.
On February 8, 1999, the Company filed a petition with the
FERC seeking approval to sell power at market-based rates. In this
filing, the Company also requested approval for a rate schedule
that would allow the Company to sell, assign or otherwise transfer
transmission capacity that it holds on other systems or on its own
system. This petition was approved by the FERC on April 9, 1999.
The primary benefit of the market-based power tariff is that
it removes the rate cap on power that is sold under any of the
schedules of the Western Systems Power Pool, of which the Company
is a member, that previously restricted the Company to a margin of
$22 per Mwh above cost. This tariff applies to off-system sales by
the Company to other utilities and power brokers. This change
resulted in an increase in revenue during the third quarter of 1999
when power was selling at higher prices. The magnitude of any
future increases will be affected by the availability of purchased
power in the bulk power market, generation fuel costs and the
requirements of other electric systems during this season.
Operating Revenue Deductions
During the third quarter of 1999, total operating expenses
increased approximately $2.4 million (6.4%) compared with the same
period last year. Merger related expenses, which are not tax
deductible, contributed $2.6 million to this increase. A
significant portion of these expenses include a payment to the
Company's financial advisors for the second part of the agreed upon
transaction fee for their financial services in connection with the
merger. This agreement calls for payment of 25% of the transaction
fee upon execution of the merger agreement, 25% upon stockholder
approval of the merger and the remaining 50% upon the consummation
of the merger, payable upon closing. Including the final payment
to be made under this agreement, remaining merger costs are
expected to total approximately $11 million.
Purchased power costs decreased approximately $1.7 million
(13.5%) during the period, primarily due to increased availability
of the Company's generating units.
Total fuel costs increased approximately $0.9 million (5.5%)
during the third quarter of 1999 as compared to the same period in
1998 primarily reflecting the increased generation from the higher-
cost gas turbines at the State Line Power Plant. The extremely hot
temperatures in July and August resulted in a significant increase
in the price of purchased power, making it more economical for the
Company to run its gas turbines.
Other operating expenses increased $0.6 million (7.0%) during
the period mainly due to the net change in post-retirement benefits
cost and pension income. Maintenance and repair expense increased
approximately $1.1 million (31.3%) during the quarter, primarily
due to expenses associated with scheduled maintenance on the
combustion turbines at Energy Center earlier in the year.
Depreciation and amortization expenses increased approximately
$0.3 million (4.6%) during the quarter due to increased levels of
plant and equipment placed in service. Total income taxes
increased $0.9 million (11.0%) during the third quarter of 1999 due
primarily to an increase in taxable income. Other taxes decreased
slightly during the quarter.
For the nine months ended September 30, 1999, total operating
expenses were up approximately $6.6 million (7.0%). Merger related
expenses accounted for $5.6 million of this increase. Total fuel
costs increased $4.3 million (12.8%) while purchased power costs
decreased $4.6 million (12.0%), a net decrease of $0.3 million
(0.4%). These differences were mainly due to an increased
utilization of the Company's own generating facilities resulting in
less need for purchased power. Other operating expenses increased
$1.3 million (5.6%) due mainly to an increase in general and
administrative costs, including the net change in post-retirement
benefits cost and pension income.
Maintenance and repairs expense increased $1.6 million (14.3%)
for the nine months ended September 30, 1999 compared to the same
period in 1998 primarily due to maintenance expense on the
Company's combustion turbines. Total provisions for income taxes
increased slightly while other taxes decreased slightly during the
period.
During the twelve months ended September 30, 1999, total
operating expenses increased approximately $4.8 million (3.9%)
compared to the year ago period. Merger related expenses
contributed $5.6 million to this increase. Total purchased power
costs were down approximately $8.2 million (16.1%) while total fuel
costs were up approximately $4.9 million (11.8%) during the twelve-
month period for the reasons discussed above.
Other operating expenses increased approximately $2.6 million
(8.5%) during the twelve months ended September 30, 1999, compared
to the same period last year primarily due to higher general and
administrative expense. Increased employee health care costs,
including the increase in post-retirement benefits cost, accounted
for $1.4 million of this increase while approximately $0.7 million
of this increase was a one-time charge during the fourth quarter of
1998 due to the initiation of the Directors Stock Unit Plan, a
stock-based retirement compensation program for the Company's
Directors. The remainder of the increase resulted primarily from
an increase in distribution operation expenses
Maintenance and repair expenses increased approximately $4.7
million (32.2%) during the twelve months ended September 30, 1999,
compared to the prior period. This increase was primarily due to
the scheduled maintenance on the gas-fired combustion turbines at
the Energy Center and the State Line Power Plant during the fourth
quarter of 1998 and increased levels of distribution maintenance.
Depreciation and amortization expense increased approximately $1.1
million (4.3%) due to increased levels of plant and equipment
placed in service. Total provision for income taxes decreased $0.2
million (1.1%) due to lower taxable income during the current
period. Other taxes increased $0.2 million (1.8%).
Nonoperating Items
Total allowance for funds used during construction ("AFUDC")
increased during each of the periods presented compared to prior
year levels, reflecting the new construction beginning at the State
Line Power Plant.
Other-net deductions decreased during each of the periods
presented compared to prior year levels, reflecting increasing
profit margins for the Company's non-regulated fiber optics leasing
venture. Interest income increased slightly for all periods
presented.
Interest charges on first mortgage bonds during the third
quarter of 1999 were virtually the same as those in the same period
of 1998, while interest charges increased $0.6 million (4.5%) for
the nine months ended September 30, 1999 and $1.1 million (6.2%)
for the twelve months ended period when compared to the same
periods last year due to the issuance of $50 million of the
Company's First Mortgage Bonds in April 1998. These proceeds were
used to repay $23 million of the Company's First Mortgage Bonds due
May 1, 1998 and to repay short-term indebtedness, including that
incurred in connection with the Company's construction program.
Commercial paper interest increased $0.7 million (1428.7%) during
the third quarter of 1999 as compared to the same period in 1998,
and $0.6 million (93.4%) for the nine months ended September 30,
1999 and $0.3 million (29.7%) for the twelve months ended period as
a result of increased usage of short-term debt due to the Company's
ongoing construction program and to the redemption of all of the
Company's preferred stock.
Earnings
For the third quarter of 1999, earnings per share of common
stock were $0.66 compared to $0.80 during the third quarter of
1998. Earnings per share were down primarily due to the $2.6
million in merger costs incurred during the third quarter of 1999,
as well as the $1.3 million in excess consideration paid on
redemption of the Company's preferred stock. Earnings per share
were positively impacted by the summer's warm temperatures as well
as the 1998 Arkansas rate increase. Excluding the merger charges,
earnings per share would have been $0.81 for the third quarter of
1999.
Earnings per share for the nine months ended September 30,
1999, were $0.92 compared to $1.29 for the nine months ended a year
earlier. For the twelve months ending September 30, 1999, earnings
per share were $1.16 compared to $1.58 for the year earlier period.
Earnings per share were down during these periods primarily due to
the $5.6 million in merger costs incurred during the second and
third quarters and $1.3 million in excess consideration paid on
redemption of the Company's preferred stock in the third quarter of
1999. Earnings per share were positively impacted by the above-
average temperatures in July and August of 1999 as well as the 1998
Arkansas rate increase. Excluding the $5.6 million in merger
costs, earnings per share would have been $1.25 for the nine months
ended September 30, 1999 and $1.49 for the twelve months ended
September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's construction-related expenditures totaled $20.6
million during the third quarter of 1999, compared to $9.0 million
for the same period in 1998. For the nine months ended September
30, 1999, construction-related expenditures totaled $50.1 million
compared to $29.0 million for the same period in 1998.
Approximately $6.9 million of these expenditures during the third
quarter of 1999 and approximately $18.5 million of construction
expenditures during the first nine months of 1999 were related to
additions to the Company's transmission and distribution systems to
meet projected increases in customer demand. Approximately $1.3
million of the third quarter's construction expenditures and
approximately $5.3 million during the first nine months of 1999
were related to improvements and upgrades to the gas-fired
combustion turbines at the Energy Center and State Line Power
Plant. Approximately $9.2 million during the third quarter of 1999
and $15.3 million during the first nine months of 1999 were related
to the expansion project at the State Line Power Plant described
below. Approximately $1.2 million of these third quarter
expenditures and $4.6 million for the first nine months of 1999
were related to additions and replacements at the Asbury and
Riverton Power Plants. Approximately $0.6 million of the third
quarter's construction expenditures and $1.8 million of the
expenditures for the first nine months of 1999 were for capitalized
costs related to financial software and the development of the
Company's Centurion software. During the first nine months of
1999, approximately 63% of construction expenditures were satisfied
with internally generated funds.
On July 26, 1999, the Company and Westar Generating, Inc.
("WGI"), a subsidiary of Western Resources, Inc., entered into
definitive agreements for the construction, ownership and operation
of a 350-megawatt addition to the State Line Power Plant (the
"State Line Project"). This State Line Project will consist of
adding an additional combustion turbine, two heat recovery steam
generators and a steam turbine and auxiliary equipment to an
already existing combustion turbine. Work has begun and the State
Line Project is projected to be operational by June 2001. The
Company owns an undivided 60% interest in the State Line Project
with WGI owning the remainder. The Company is entitled to 60% of
the capacity of the State Line Project. The Company will
contribute its existing 152-megawatt State Line Unit No. 2
combustion turbine to the State Line Project, and as a result, upon
commercial operation, the State Line Project will provide the
Company with 150 megawatts of additional capacity. The total cost
of the State Line Project is estimated to be $185 million. The
Company's share of this amount, after the transfer to WGI of an
undivided 40% joint ownership interest in the existing State Line
Unit No. 2 and certain other property at book value as described
below, is expected to be approximately $100 million.
WGI has and will reimburse the Company for 40% of expenditures
made or to be made by the Company in connection with the State Line
Project. In addition, WGI will make monthly prepayments to the
Company for the future transfer of its 40% joint ownership interest
in the existing State Line Unit No. 2, as well as an interest in
certain underlying and surrounding land and other property and
equipment now owned by the Company. These prepayments are
reflected in other deferred credits on the balance sheet. See Item
1, "Financial Statements."
The Company's construction expenditures are expected to total
approximately $80.3 million in 1999, including approximately $32.5
million for its share of new generating facilities at the State
Line Project and $18.0 million for additions to the Company's
distribution system to meet projected increases in customer demand.
The Company currently estimates that internally generated
funds will provide at least 40% of the funds required for the
remainder of its 1999 construction expenditures. As in the past, in
order to finance the additional amounts needed for such
construction, the Company intends to utilize short-term debt and
sales of public offerings of long-term debt or equity securities,
including the sale of the Company's common stock pursuant to its
Dividend Reinvestment Plan and Employee Stock Purchase Plan as well
as internally-generated funds. The Company will continue to
utilize short-term debt as needed to support normal operations or
other temporary requirements and has a $100 million line of credit.
The Company financed its preferred stock redemption on August 2,
1999 with approximately $33.1 million in commercial paper. This
increased the Company's short-term debt to $59.0 million as of
September 30, 1999. After redeeming all of its preferred stock,
the Company is no longer restricted by its Articles as to the
amount of unsecured indebtedness that it may have outstanding at
any one time. See Part II - Item 2 "Changes in Securities and Use
of Proceeds" for more information. The Company filed a shelf
registration statement with the SEC, which became effective on
September 30, 1999, registering up to an aggregate of $150 million
of its common stock, first mortgage bonds and unsecured debt
securities. The Company intends, subject to market conditions, to
issue and sell $100 million of unsecured indebtedness in an
underwritten public offering in the fourth quarter of 1999 or the
first quarter of 2000.
Following announcement of the Merger, the ratings for the
Company's first mortgage bonds (other than the 5.20% Pollution
Control Series due 2013 and the 5.30% Pollution Control Series due
2013) were placed on credit watch with downward implication by each
of Moody's Investors Service, Standard & Poor's and Duff & Phelps
Credit Rating Company.
YEAR 2000
Year 2000 Background
Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed
and developed without considering the impact of the upcoming
century change. As a result, computer systems may fail completely
or produce erroneous results unless corrective measures are taken.
The Company is engaged in an on-going project to identify, evaluate
and implement changes to both information technology ("IT") and non-
IT systems in order to achieve Year 2000 readiness. The Company
has also become a member of the Edison Electric Institute's Year
2000 Committee and the Electric Power Research Institute's Y2K
Embedded Systems Program in order to assist in the implementation
of its Year 2000 Readiness Plan. In addition, the Company is
participating in the North American Electric Reliability Council's
("NERC") efforts to prepare mission critical systems for Year 2000
readiness. The Company has been working within NERC's framework
and participated in an industry-wide Year 2000 drill on April 9,
1999 with successful results. Essential sites and facilities
included in the drill were the control area (dispatching), power
generation sites, interconnect transmission substations, and
transmission lines. The Company participated in a second
industry-wide drill on September 8 and 9, 1999. About 15,000 North
American system operation, substation and power plant personnel
tested operating, communications, administrative and contingency
plans. The drills simulated as realistically as possible the
actual rollover on December 31, 1999. No failures or problems were
reported.
The Company is using a multi-step approach in achieving its
Year 2000 Readiness Plan. These steps include creating awareness
of the Year 2000 problem, forming a Year 2000 task force,
developing procedures for documenting Year 2000 readiness,
developing a methodology for the Year 2000 Readiness Plan and
testing and remediation of Year 2000 affected items pursuant to the
Year 2000 Readiness Plan. Developing the methodology for the Year
2000 Readiness Plan includes creating and implementing an ongoing
communication program with both internal and external parties,
performing an inventory of possible Year 2000 affected items,
assessing and prioritizing each such inventory item as to level of
criticality, scheduling testing and remediation of such items in
order of criticality, and developing contingency planning. The
management consulting firm of Sargent & Lundy has reviewed the
process involving the implementation of the Year 2000 Readiness
Plan as well as the plan itself. Recommendations based on their
independent findings have been implemented as a step of the Year
2000 Readiness Plan.
The Company has purchased a new financial management software
package from PeopleSoft that is Year 2000 ready. The package
includes financial accounting systems for general ledger, accounts
payable and asset management; purchasing and inventory; human
resource systems for benefits, time and labor, and payroll; as well
as systems for budgeting and project tracking. All of the systems
are now being utilized. In addition, a new customer information
system, Centurion, is being developed internally which will be Year
2000 ready. Final installation of this system is expected to be
complete by mid to late November 1999. The system is currently in
the testing and conversion phases. The installation of these
systems is anticipated to substantially mitigate the Company's Year
2000 exposure.
State of Readiness
A task force has been appointed and charged with documenting
and testing areas of the Company which may be affected by the Year
2000. The targeted areas include general preparation, power
generation, energy management systems, telecommunications,
substation controls and system protection and business information
systems. Within each of these areas, the task force examined the
status of IT systems, non-IT systems and third parties such as
vendors, customers and others with whom the Company does business.
The inventory of Year 2000 items was completed in September 1998.
Assessing and prioritizing each item within the Year 2000 inventory
as to the level of criticality was also completed in September
1998. The testing and remediation of the highest level of critical
items was completed in June 1999. The Year 2000 task force has
developed contingency plans in the event that unanticipated
problems are encountered. The Company has substantially completed
its Year 2000 testing and compliance projects with the few
exceptions noted below.
The status of each of the targeted areas undergoing testing is as
follows:
General Preparation. Scheduled upgrades to the telephone switch
are complete. The testing of other items was completed by June 30,
1999.
Power Generation. Assessment, inventory, testing and remediation
are complete at all plants.
Energy Management Systems. The Company has installed major
upgrades to its Energy Management System hardware and software as a
result of Year 2000 related problems observed during preliminary
system testing. Testing of the upgrades has been completed. The
Company has obtained readiness certifications for most of the other
related components and has completed testing on components critical
to the operations of the Energy Management System and other related
systems.
Telecommunications. The Company has worked with suppliers and
manufacturers to obtain readiness certifications for its various
telecommunications systems and components. The Company has
completed the testing of critical systems and components with no
Year 2000 issues discovered. Backup and alternate communications
systems were exercised successfully during the April and September
NERC drills.
Substation Controls and System Protection. Testing of transmission
and distribution equipment uncovered a minor amount of equipment
that required Year 2000 remediation. That equipment has been
replaced.
Business Information Systems. As previously stated, the new
financial management software package from PeopleSoft is Year 2000
ready and the new Centurion customer information system, when
completed, is expected to be Year 2000 ready. As a result of the
implementation of the new software packages, several hardware
changes have been required throughout the Company. The testing of
these hardware systems is complete with remediation still in
progress for a few critical items of network equipment. This
hardware remediation is scheduled to be resolved by the end of
November.
Third Parties. The Company has requested readiness certifications
from third party vendors for all of its core applications and
operating systems. Whenever possible, however, all critical
applications are being tested regardless of whether a certification
of readiness has been obtained. In addition, the Company is
contacting other third parties with whom the Company does business
(such as major customers, power pools, power and fuel suppliers,
transmission providers and telecommunications providers) in order
to assess their states of readiness. This initial contact phase
was completed at the end of 1998. The Company will continue to
monitor the progress of these third parties throughout the
remainder of 1999. The Company is conducting face to face meetings
with its most critical suppliers and its largest customers and is
corresponding in writing with its other suppliers and customers.
Year 2000 Costs
The Company currently estimates that total costs (which
include the costs of the new financial management software package,
the new customer information system and the hardware required to
accommodate the new software packages) to update all systems for
Year 2000 readiness will be approximately $5.5 million, of which
approximately $4.4 million have been incurred and capitalized as of
September 30, 1999 and $0.6 million have been incurred and
expensed. Of these capitalized costs, $0.5 million were included
in the 1998 capital budget and $1.5 million are included in the
1999 capital budget. Costs for specific Year 2000 remediation
projects will be charged to expense while costs to replace software
for business purposes other than addressing Year 2000 issues will
be capitalized.
Risk Assessment and Contingency Plans
At this time, the Company believes the most reasonably likely
worst case scenario would result from fuel constraints due to
supply failure(s), specifically natural gas, oil, water or other,
with the most likely being natural gas. The Company has assessed
the risk of this scenario and has formulated contingency plans to
mitigate the potential impact. As a part of these plans, the
Company is increasing its supply of coal at the Asbury and Riverton
Power Plants. Under normal conditions, the Company's targeted coal
inventory supply at both plants is approximately 45 days. As of
September 30, 1999, the supply of Western coal at the Asbury Plant
was approximately 97 days and the supply of blend coal was
approximately 54 days, while the supply of Western coal at the
Riverton Plant was approximately 61 days and the supply of blend
coal was approximately 51 days. In addition, the Company has the
ability to switch the fuel used by the combustion turbines at the
Energy Center and State Line Power Plants from natural gas to
diesel fuel should a disruption in natural gas delivery occur. The
Company could operate these plants for two to five days with its
current supply of diesel fuel. The Company's Year 2000 task force
formed a contingency planning team which followed guidelines
established by the NERC to formalize a plan with respect to the
above worst case scenario and other contingencies which may
develop. This plan was filed with the NERC on June 30, 1999.
The Company's Readiness Plan is designed to provide corrective
action with respect to Year 2000 risks. If the Plan is not
successfully carried out in a timely manner, or if unforeseen
events occur, Year 2000 problems could have a material adverse
impact on the Company. Management does not expect such problems to
have such an effect on its financial position or results of
operations.
FORWARD LOOKING STATEMENTS
Certain matters discussed in this quarterly report 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 such as capital expenditures (including those
planned in connection with the State Line Project), earnings,
competition, litigation, rate and other regulatory matters,
liquidity and capital resources, Year 2000 readiness (including
estimated costs, completion dates, risks and contingency plans) and
accounting matters. Actual results in each case could differ
materially from those currently anticipated in such statements, by
reason of factors such as the cost and availability of purchased
power and fuel; a significant delay in the expected completion of,
and unexpected consequences resulting from the merger with
UtiliCorp; electric utility restructuring, including ongoing state
and federal activities; weather, business and economic conditions;
legislation; regulation, including rate relief and environmental
regulation (such as NOx regulation); competition; including the
impact of deregulation on off-system sales; and other circumstances
affecting anticipated rates, revenues and costs.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in these risks from those
disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
The Company's Restated Articles of Incorporation (the
"Articles") provide that, for so long as any of the Company's
cumulative preferred stock is outstanding, the amount of unsecured
indebtedness of the Company may not exceed 20% of the sum of the
outstanding secured indebtedness plus the capital and surplus of
the Company. Commencing on August 2, 1999, the date the Company
redeemed all of its outstanding preferred stock, and continuing for
so long as the Company does not issue any more preferred stock, the
Articles will not restrict the amount of unsecured indebtedness
that the Company may have outstanding at any one time.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) A special meeting of Common Stockholders was held on September
3, 1999 to consider and vote upon a proposal to adopt the merger
agreement dated as of May 10, 1999 between Empire and UtiliCorp and
to approve the merger of Empire and UtiliCorp.
(b) The merger agreement was adopted and the merger approved by
the following vote of stockholders:
Votes For Votes Against Abstentions Broker Non-votes
13,154,539 808,886 111,920 3,159,435
(76.3%) (4.7%) (0.7%) (18.3%)
Item 5. Other Information.
At September 30, 1999, the Company's ratio of earnings to
fixed charges, and ratio of earnings to fixed charges and preferred
stock dividend requirements, were 2.95x and 2.49x, respectively.
See Exhibit (12) hereto.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(12) Computation of Ratios of Earnings to Fixed Charges and
Earnings to Combined Fixed Charges and Preferred Stock
Dividend Requirements.
(27) Financial Data Schedule for September 30, 1999.
(b) No reports on Form 8-K were filed during the third quarter of
1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE EMPIRE DISTRICT ELECTRIC COMPANY
Registrant
By /s/ R. B. Fancher
R. B. Fancher
Vice President - Finance
By /s/ G. A. Knapp
G. A. Knapp
Controller and Assistant Treasurer
November 8, 1999
EXHIBIT (12)
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND
REQUIREMENTS
Twelve
Months Ended
September 30,
1999
Income before provision for income taxes and $ 59,709,232
fixed charges (Note A)
Fixed charges:
Interest on first mortgage bonds $ 17,626,362
Amortization of debt discount and expense less 848,007
premium
Interest on short-term debt 1,252,790
Other interest 359,812
Rental expense representative of an interest 162,542
factor (Note B)
Total fixed charges 20,249,513
Preferred stock dividend requirements:
Preferred stock dividend requirements not 2,200,436
deductible for tax purposes
Ratio of income before provision for incomes 1.700
taxes to net income
Nondeductible dividend requirements 3,740,741
Deductible dividends 0
Total preferred stock dividend requirements 3,740,741
Total combined fixed charges and preferred stock $ 23,990,254
dividend requirements
Ratio of earnings to fixed charges 2.95x
Ratio of earnings to combined fixed charges and
preferred stock
dividend requirements 2.49x
NOTE A:For the purpose of determining earnings in the calculation of the ratio, net income has been inc
reased by the provision for income taxes, non-operating
income taxes and by the sum of fixed charges as shown
above.
NOTE B: One-third of rental expense (which approximates the interest factor).