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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2001 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 X No ___
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Common stock outstanding as of August 1, 2001: 17,677,185 shares.
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THE EMPIRE DISTRICT ELECTRIC COMPANY
INDEX
Page Number
-----------
Part I - Financial Information:
Item 1. Consolidated Financial Statements:
a. Consolidated Statement of Income........................................ 3
b. Consolidated Statement of Comprehensive Income.......................... 6
c. Consolidated Balance Sheet.............................................. 7
d. Consolidated Statement of Cash Flows.................................... 8
e. Notes to Consolidated Financial Statements.............................. 9
Forward Looking Statements............................................................. 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 12
Results of Operations....................................................... 12
Liquidity and Capital Resources............................................. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 17
Part II - Other Information: 18
Item 1. Legal Proceedings - (none)
Item 2. Changes in Securities and Use of Proceeds - (none)
Item 3. Defaults Upon Senior Securities - (none)
Item 4. Submission of Matters to a Vote of Security Holders......................... 18
Item 5. Other Information........................................................... 18
Item 6. Exhibits and Reports on Form 8-K............................................ 18
Signatures............................................................................. 19
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
---------------------------------
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended
June 30,
----------------------------------
2001 2000
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Operating revenues:
Electric $58,133,591 $57,153,064
Water 269,695 274,630
----------- -----------
58,403,286 57,427,694
Operating revenue deductions:
Operating expenses:
Fuel 12,391,276 8,995,176
Purchased power 14,313,072 15,074,874
Other 9,118,400 7,571,237
Merger Related Expenses (27,832) 99,050
----------- -----------
Total operating expenses 35,794,916 31,740,337
Maintenance and repairs 4,304,151 4,554,897
Depreciation and amortization 7,243,766 6,906,991
Provision for income taxes 243,942 1,698,320
Other taxes 3,238,820 3,213,035
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50,825,595 48,113,580
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Operating income 7,577,691 9,314,114
Other income and deductions:
Allowance for equity funds used during construction 241,444 472,125
Interest income 50,152 114,544
Other - net (501,790) (145,303)
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(210,194) 441,366
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Income before interest charges 7,367,497 9,755,480
Interest charges:
Long-term debt 6,606,627 6,589,988
Trust preferred distributions by subsidiary
holding solely parent debentures 1,062,500 -
Commercial paper 616,681 100,455
Allowance for borrowed funds used during construction (1,763,572) (651,325)
Other 104,400 132,908
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6,626,636 6,172,026
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Net income applicable to common stock $ 740,861 $ 3,583,454
=========== ===========
Weighted average number of common shares outstanding 17,634,603 17,470,290
=========== ===========
Basic and diluted earnings per weighted average share of common
stock $ 0.04 $ 0.21
=========== ===========
Dividends per share of common stock $ 0.32 $ 0.32
=========== ===========
See accompanying Notes to Financial Statements.
3
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Six Months Ended
June 30,
-----------------------------------
2001 2000
------------ ------------
Operating revenues:
Electric $118,428,066 $110,953,601
Water 527,157 504,484
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118,955,223 111,458,085
Operating revenue deductions:
Operating expenses:
Fuel 21,589,655 18,826,764
Purchased power 35,797,007 28,889,140
Other 17,986,196 15,671,174
Merger Related Expenses 1,236,754 121,865
------------ ------------
Total operating expenses 76,609,612 63,508,943
Maintenance and repairs 7,440,368 7,785,200
Depreciation and amortization 14,438,736 13,731,597
Provision for income taxes 199,466 2,589,014
Merger-related income tax benefit (2,323,982) -
Other taxes 6,695,785 6,466,782
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103,059,985 94,081,536
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Operating income 15,895,238 17,376,549
Other income and deductions:
Allowance for equity funds used during construction 465,857 832,706
Interest income 134,993 362,611
Other - net (510,563) (253,244)
------------ ------------
90,287 942,073
------------ ------------
Income before interest charges 15,985,525 18,318,622
Interest charges:
Long-term debt 13,192,283 13,180,237
Trust preferred distributions by subsidiary
holding solely parent debentures 1,416,667 -
Commercial paper 1,474,251 100,455
Allowance for borrowed funds used during construction (3,403,046) (1,148,762)
Other 357,308 231,950
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13,037,463 12,363,880
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Net income applicable to common stock $ 2,948,062 $ 5,954,742
============ ============
Weighted average number of common shares outstanding 17,621,228 17,431,072
============ ============
Basic and diluted earnings per weighted average share of common
stock $ 0.17 $ 0.34
============ ============
Dividends per share of common stock $ 0.64 $ 0.64
============ ============
See accompanying Notes to Financial Statements.
4
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Twelve Months Ended
June 30,
-----------------------------------
2001 2000
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Operating revenues:
Electric $266,411,793 $244,482,412
Water 1,088,803 1,085,916
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267,500,596 245,568,328
Operating revenue deductions:
Operating expenses:
Fuel 51,662,467 44,467,809
Purchased power 72,145,963 50,958,456
Other 34,731,005 31,700,192
Merger Related Expenses 1,596,798 2,832,503
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Total operating expenses 160,136,233 129,958,960
Maintenance and repairs 14,450,379 16,025,178
Depreciation and amortization 28,490,713 27,143,717
Provision for income taxes 8,985,452 13,665,603
Merger-related income tax benefit (2,323,982) -
Other taxes 13,341,098 13,848,188
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223,079,893 200,641,646
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Operating income 44,420,703 44,926,682
Other income and deductions:
Allowance for equity funds used during construction 2,006,861 832,705
Interest income 413,983 771,297
Other - net (917,603) (800,945)
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1,503,241 803,057
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Income before interest charges 45,923,944 45,729,739
Interest charges:
Long-term debt 26,367,947 23,345,743
Trust preferred distributions by subsidiary
holding solely parent debentures 1,416,667 -
Commercial paper 2,621,486 1,274,399
Allowance for borrowed funds used during construction (5,655,609) (1,880,643)
Other 562,979 405,599
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25,313,470 23,145,098
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Net income 20,610,474 22,584,641
Preferred stock dividend requirements - 206,512
Redemption of preferred stock - 1,304,504
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Net income applicable to common stock $ 20,610,474 $ 21,073,625
============ ============
Weighted average number of common shares outstanding 17,598,161 17,369,160
============ ============
Basic and diluted earnings per weighted average share of
common stock $ 1.17 $ 1.21
============ ============
Dividends per share of common stock $ 1.28 $ 1.28
============ ============
See accompanying Notes to Financial Statements.
5
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
June, 2001
CURRENT YEAR TO 12 MONTHS
MONTH DATE ENDED
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Net Income $ 1,360,672 $ 2,948,062 $ 20,610,474
Net Change in unrealized gain/(loss)
on derivative instruments: (713,000) (713,000) (713,000)
------------ ------------ ------------
Comprehensive Income $ 647,672 $ 2,235,062 $ 19,897,474
============ ============ ============
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CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (UNAUDITED)
June 30, 2001 Dec. 31, 2000 June 30, 2000
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Common Stock - $1 Par Value $ 17,610,475 $ 17,547,742 $ 17,492,777
Common Stock Equity Rights 54,044 48,788 47,669
Common Stock - Subsidiary Companies - - -
Capital in Excess of Par Value 169,165,360 167,908,882 166,556,317
Accumulated Other Comprehensive Income (713,000) - -
Installments Received on Common Stock 64,046 530,208 75,002
Retained Earnings 45,779,469 54,117,291 47,701,266
------------ ------------ ------------
Total Common Shareholders' Equity $231,960,394 $240,152,911 $231,873,031
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See accompanying Notes to Financial Statements
6
CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, December 31,
2001 2000
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ASSETS
Utility plant, at original cost:
Electric $1,044,477,391 $ 921,033,228
Water 7,664,371 7,528,233
Construction work in progress 19,036,734 120,126,571
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1,071,178,496 1,048,688,032
Accumulated depreciation 336,955,840 328,370,253
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734,222,656 720,317,779
Current assets:
Cash and cash equivalents 3,054,958 2,490,580
Accounts receivable - trade, net 19,841,075 19,960,839
Accrued unbilled revenues 9,488,817 11,824,546
Accounts receivable - other 6,902,586 3,631,654
Fuel, materials and supplies 18,979,895 14,589,253
Prepaid expenses 1,506,097 3,034,716
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59,773,428 55,531,588
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Deferred charges:
Regulatory assets 36,327,848 36,590,292
Unamortized debt issuance costs 5,422,865 3,769,628
Other 16,033,626 13,530,017
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57,784,339 53,889,937
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Total Assets $ 851,780,423 $ 829,739,304
============== ==============
CAPITALIZATION AND LIABILITIES:
Common stock, $1 par value, 17,664,519 and
17,596,530 shares issued and outstanding,
respectively $ 17,664,519 $ 17,596,530
Capital in excess of par value 169,229,406 168,439,089
Retained earnings (Note 2) 45,779,469 54,117,292
Accumulated Other Comprehensive Income (loss)(net) (713,000) -
-------------- --------------
Total common stockholders' equity 231,960,394 240,152,911
Company obligated manditorily redeemable trust preferred
securities of subsidiary holding solely parent debentures 50,000,000 -
Long-term debt 325,565,565 325,643,766
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607,525,959 565,796,677
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Current liabilities:
Accounts payable and accrued liabilities 31,344,203 35,782,456
Commercial paper 63,000,000 69,500,000
Customer deposits 3,987,555 3,789,583
Interest accrued 5,682,824 5,402,131
Taxes accrued, including income taxes 4,189,258 1,823,513
Fair value of derivatives 1,085,100 -
Current maturities - mortgage bonds 20,000,000 20,000,000
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129,288,940 136,297,683
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Noncurrent liabilities and deferred credits:
Regulatory liability 13,556,267 14,170,175
Deferred income taxes 85,014,052 83,581,349
Unamortized investment tax credits 7,186,331 7,231,000
Postretirement benefits other than pensions 4,848,203 4,835,897
State Line advance payments - 14,399,757
Other 4,360,671 3,426,766
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114,965,524 127,644,944
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Total Capitalization and Liabilities $ 851,780,423 $ 829,739,304
============== ==============
See accompanying Notes to Financial Statements.
7
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
------------------------------------
2001 2000
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Operating activities:
Net income $ 2,948,062 $ 5,954,742
Adjustments to reconcile net income to cash flows:
Depreciation and amortization 16,095,421 15,519,686
Pension income (1,881,500) (3,488,502)
Deferred income taxes, net 152,489 568,389
Investment tax credit, net (44,669) (123,401)
Allowance for equity funds used during construction (465,857) (832,706)
Issuance of common stock for 401(k) plan 373,317 390,090
Issuance of common stock units for director retirement plan 84,000 84,000
Cash flows impacted by changes in:
Accounts receivable and accrued unbilled revenues (815,440) 365,153
Fuel, materials and supplies (1,441,168) (53,056)
Prepaid expenses and deferred charges 1,286,097 (217,148)
Accounts payable and accrued liabilities (4,438,253) (487,504)
Customer deposits, interest and taxes accrued 2,844,410 5,541,400
Other liabilities and other deferred credits 946,211 1,486,130
Loss in fair value of derivatives 372,100 -
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Net cash provided by operating activities 16,015,220 24,707,273
Investing activities:
Additions to property, plant and equipment (46,678,898) (58,684,254)
Allowance for equity funds used during construction 465,857 832,706
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Net cash used in investing activities (46,213,041) (57,851,548)
Financing activities:
Proceeds from issuance of common stock 400,989 2,418,088
Proceeds from issuance of trust preferred securities 50,000,000 -
Preferred securities issuance costs (1,768,906) -
Net proceeds (repayments) from short-term borrowings (6,500,000) 21,500,000
Payment of debt issue costs 34,000 (15,805)
Dividends (11,285,884) (11,161,907)
Repayment of first mortgage bonds (118,000) (121,000)
State Line advance payments - 4,336,344
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Net cash provided by financing activities 30,762,199 16,955,720
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Net (decrease) increase in cash and cash equivalents 564,378 (16,188,555)
Cash and cash equivalents at beginning of period 2,490,580 20,778,856
------------ ------------
Cash and cash equivalents at end of period $ 3,054,958 $ 4,590,301
============ ============
See accompanying Notes to Financial Statements.
8
NOTES TO CONSOLIDATED 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
our Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
The information furnished reflects all adjustments, consisting only of
normal recurring adjustments, which are in our opinion necessary to present
fairly the results for the interim periods presented. Certain reclassifications
have been made to prior year information to conform with current year
presentation.
Note 2 - Retained Earnings
- --------------------------
Balance at January 1, 2001 $54,117,292
Changes January 1 through March 31:
Net Income 2,207,201
Quarterly cash dividends on common stock:
- $0.32 per share (5,634,710)
Total changes January 1 through March 31 (3,427,509)
-----------
Balance April 1, 2001 50,689,783
Changes April 1 through June 30:
Net Income 740,861
Quarterly cash dividends on common stock:
- $0.32 per share (5,651,175)
Total changes April 1 through June 30 (4,910,314)
-----------
Balance June 30, 2001 $45,779,469
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Note 3 - Income Taxes
- ---------------------
As a result of the termination in January 2001 of our proposed merger with
UtiliCorp, approximately $6.1 million in merger related expenses that were not
tax deductible when incurred by us became deductible. This deduction was taken
in January 2001, decreasing income tax expense for the first quarter of 2001 by
approximately $2.3 million.
Note 4 - Trust Preferred Securities
- -----------------------------------
On March 1, 2001, Empire District Electric Trust I, issued 2,000,000 8.5%
Trust Preferred Securities (liquidation amount $25 per preferred security) in a
public underwritten offering. This issuance generated proceeds of $50.0 million
and issuance costs of $1.8 million. Holders of the trust
9
preferred securities are entitled to receive distributions at an annual rate of
8.5% of the $25 liquidation amount. Quarterly payments of dividends by the
trust, as well as payments of principal, are made from cash received from
corresponding payments made by us on the $50.0 million aggregate principal
amount of 8.5% Junior Subordinated Debentures due March 1, 2031, issued by us to
the trust, and held by the trust, as assets. Our interest payments on the
debentures are tax deductible by us. We have effectively guaranteed the payments
due on the outstanding trust preferred securities. The net proceeds of this
offering were added to our general funds and were used to repay short-term
indebtedness.
Note 5 - Recently Issued Accounting Standards
- ---------------------------------------------
On January 1, 2001, we adopted the provision of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133) and Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities An
Amendment of SFAS 133" (SFAS 138). SFAS 133 requires recognition of all
derivatives as either assets or liabilities on the balance sheet measured at
fair value. Adoption of these accounting rules in January 2001 had no immediate
impact on us. However, during the second quarter of 2001, we began utilizing
derivatives to manage our gas commodity market risk to help manage our exposure
resulting from purchasing most of our natural gas on the volatile spot market.
A derivative is a contract whose value is dependent on, or derived from,
the value of some underlying asset. By using derivative financial instruments,
we are exposed to credit risk and market risk. Credit risk is the risk that the
counterparty might fail to fulfill its performance obligations under contractual
terms. At June 30, 2001 there was no credit risk from counterparties. Market
risk is the exposure to a change in the value of commodities caused by
fluctuations in market variables, such as price.
As of June 30, 2001, we have recorded liabilities of $1.1 million equal to
the fair value of derivative financial instruments held as of that date in
Current Liabilities on the balance sheet. As of June 30, 2001, we had one swap
contract in place that was designated as a cash-flow hedging instrument. A
$713,000 unrealized loss representing the fair market value of this contract is
recognized as Accumulated Other Comprehensive Income (loss) (net) in the
capitalization section of the balance sheet. This amount is also included in the
$1.1 million Current Liabilities balance on the balance sheet. This amount will
be adjusted cumulatively on a monthly basis until the determination periods,
beginning November 1, 2001 and ending March 31, 2002. At the end of each
determination period any gain or loss for that period related to the contract
will be reclassified to earnings. There was no gain or loss reported for the
period ending June 30, 2001 as a result of loss on hedging transactions. As of
June 30, 2001 we also held two derivative contracts which did not qualify for
hedge accounting treatment. A $248,350 unrealized loss representing the fair
market value of these contracts is recognized within other income and deductions
in the accompanying statement of income. We have also entered into fixed-price
forward contracts for the purchase of coal and purchased power. While these
contracts meet the definition of a derivative under SFAS 133, we record these
transactions as normal purchases and normal sales because the contracts result
in physical delivery.
Cash Flow Hedges - Hedging is compensating for a risk in a transaction by
undertaking a further transaction. If the first transaction suffers a loss, the
hedge will have a compensatory gain. Examples of cash flow hedges would be
hedging the forecasted issuance of fixed rate debt, hedging the forecasted
sale/purchase of power or hedging the forecasted purchase of coal or natural
gas. SFAS 133 dictates that the effective portion of a gain or loss on cash flow
hedges must be recorded as comprehensive income. This is adjusted when the gain
or loss is recorded monthly as the value of
10
the derivatives is calculated based on current market prices. For a qualifying
cash flow hedge, the derivative's gain or loss, to the extent that it is offset
by the losses or gains on (1) the forecasted transaction or (2) the cash flows
of the asset or liability being hedged, is deferred and reported as a component
of other comprehensive income. The gains and losses accumulated in other
comprehensive income are then reclassified to earnings in the same period or
periods in which the hedged forecasted transaction or cash flows affect
earnings. Comprehensive income does not affect earnings per share, as it is a
balance sheet item.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". These statements eliminate the amortization of purchased goodwill and
instead require an annual review of goodwill and intangibles for impairment or
when a change or event occurs that indicates goodwill may be impaired. SFAS No.
142 is required to be adopted no later than the first quarter of fiscal 2002.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 and establishes specific
criteria for recognition of intangible assets separately from goodwill. We had
no recorded goodwill as of June 30, 2001 but will continue to evaluate the total
impact of the adoption of these Statements on our financial statements and
financial reporting.
----------------------
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, earnings, competition, litigation,
environmental compliance, rate and other regulatory matters, liquidity and
capital resources, 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
(including the continuation of significantly increased natural gas prices and
our efforts to manage these price increases); delays in or increased costs of
construction; electric utility restructuring, including ongoing state and
federal activities; weather, business and economic conditions; legislation;
changes in accounting requirements; regulation and rate relief (including the
outcome of the pending rate case seeking recovery of increased fuel and other
costs and the inclusion of the State Line Combined Cycle Unit in the rate base)
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. Forward-looking statements
speak only as of the time they were made and we do not undertake any obligation
to update any forward-looking statement to reflect events or circumstances after
such time.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
The following discussion analyzes significant changes in the results of
operations for the three-month, six-month and twelve-month periods ended June
30, 2001, compared to the same periods ended June 30, 2000.
Terminated Merger With UtiliCorp
As a result of the termination in January 2001 of our proposed merger with
UtiliCorp, approximately $6.1 million in merger related expenses that were not
tax deductible when incurred by us became deductible. This deduction was taken
in January 2001, decreasing income tax expense and increasing operating income
for the first quarter of 2001 by approximately $2.3 million. In addition, Empire
expensed $1.2 million of additional costs related to the proposed merger in the
first quarter of 2001.
On-System Transactions
Of our total electric operating revenues during the second quarter of 2001,
approximately 38% were from residential customers, 33% from commercial
customers, 19% from industrial customers, 5% from wholesale on-system customers
and 2% 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 operating revenues by major customer
class were as follows:
Operating
Kwh Sales Revenues
-----------------------------------------------------------------------------------------
Six Twelve Six Twelve
Second Months Months Second Months Months
Quarter Ended Ended Quarter Ended Ended
-----------------------------------------------------------------------------------------
Residential 3.1% 14.6% 16.5% 0.3% 7.8% 12.1%
Commercial 10.2 10.5 10.2 8.7 8.9 7.6
Industrial 1.7 1.2 3.1 2.6 2.4 4.2
Wholesale On-System 3.4 8.4 6.4 (5.3) 11.0 9.9
Total On-System 5.0 9.6 10.4 3.2 7.4 9.0
Residential and commercial Kwh sales and revenues were up during the second
quarter of 2001 due mainly to warmer temperatures as compared to the milder
temperatures during the same period of 2000. Higher temperatures during the air-
conditioning season and lower temperatures during the heating season generally
result in increased Kwh sales.
During the second quarter of 2001, industrial Kwh sales and related revenue
grew due to continuing increases in business activity throughout our service
territory.
On-system wholesale Kwh sales increased during the second quarter of 2001
reflecting the warmer temperatures and continuing increases in business
activity. Revenues associated with these sales decreased as a result of the
operation of the fuel adjustment clause applicable to these FERC
12
regulated sales. This clause permits the pass through to customers of changes in
fuel and purchased power costs.
For the six months ended June 30, 2001, Kwh sales to and revenue from our
residential and commercial customers increased, reflecting the warmer
temperatures during the second quarter of 2001 as well as the unusually cold
temperatures during the first quarter of 2001 compared with the same periods in
2000. Industrial Kwh sales and related revenues, which are not particularly
weather-sensitive, increased due to continuing increases in business activity
throughout our service territory. On-system wholesale Kwh sales increased
reflecting the favorable temperatures and continuing increases in business
activity described above. Revenues associated with these sales increased more
than the corresponding Kwh sales as a result of the operation of the fuel
adjustment clause.
For the twelve months ended June 30, 2001, residential and commercial Kwh
sales increased as a result of above-average temperatures in August and
September of 2000 and unseasonably cold temperatures in November and December
2000 as well as the other reasons discussed above. Industrial sales and revenue
continued to grow due to strong business activity in our service territory. On-
system wholesale Kwh sales and related revenue increased during the twelve-month
period reflecting the weather conditions and continuing increases in business
activity discussed above.
On November 3, 2000, we filed a request with the Missouri Public Service
Commission for a general annual increase in rates for our Missouri electric
customers in the amount of $41,467,926, or 19.36%. This request seeks recovery
of expenses resulting from significantly higher natural gas prices than the
levels contemplated by our existing rates as well as our investment in the
Combined Cycle Unit recently constructed at the State Line Power Plant and other
plant additions which have occurred since our last rate increase in September
1997. We also filed a request for interim rate relief in February 2001 which was
denied in March. The Missouri Commission held an evidentiary hearing May 29,
2001 through June 8, 2001. A true-up hearing is scheduled for August 23 through
24 with an order expected in September 2001. We cannot predict the amount of any
increase which might be granted as a result of this filing.
Off-System Transactions
In addition to sales to our own customers, we also sell power to other
utilities as available and also provide transmission service through our system
for transactions between other energy suppliers. During the second quarter of
2001, revenues from such off-system transactions were approximately $1.7 million
as compared to approximately $2.5 million in the second quarter of 2000. Off-
system revenues were approximately $3.7 million for the six-month period ended
June 30, 2001 as compared to approximately $4.1 million in the second quarter of
2000. For the twelve months ended June 30, 2001, revenues from such off-system
transactions were approximately $10.0 million as compared to $9.6 million for
the twelve months ended June 30, 2000. The decrease in revenues during the
second quarter and the six-months ended June 30, 2001 resulted primarily from
our peak hour market-based power rates being substantially lower this summer
than in 2000. Pursuant to orders issued by the FERC and subsequent tariffs filed
by us and the Southwest Power Pool ("SPP"), these off-system sales have been
opened up to competition.
We are a member of the SPP, a regional division of the North American
Electric Reliability Council, and are participating with other utility members
in an effort to restructure the SPP to make it a regional transmission
organization ("RTO"). However on July 12, 2001,the FERC stated that the SPP was
not large enough to form its own RTO. The FERC, moving toward its goal of
dividing the nation's grid into four regional RTOs, ordered the SPP to hold
talks with others to consider forming a single Southeast RTO but also
acknowledged that SPP may want to have discussions with the Midwest ISO. We
expect to become part of either the Midwest ISO or the Southeast RTO.
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Reference is made to our Annual Report on Form 10-K for the year ended December
31, 2000 under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Competition".
Operating Revenue Deductions
During the second quarter of 2001, total operating expenses increased
approximately $4.1 million (12.8%) compared with the same period last year.
Total fuel costs increased approximately $3.4 million (37.8%) during the
second quarter of 2001 as compared to the same period in 2000 while purchased
power costs decreased approximately $0.8 million (5.1%) during the period
primarily due to increased availability of our coal-fired generating units. The
increase in fuel costs reflects significantly higher natural gas prices for our
gas-fired generating units.
Other operating expenses increased $1.5 million (20.4%) during the period
mainly due to decreased income from the pension fund caused by a decline in the
value of invested funds and an increase in injuries and damages expense.
Maintenance and repair expense decreased approximately $0.3 million (5.5%)
during the quarter, primarily due to the timing of the Asbury spring outage as
well as a decrease in maintenance expenses at the Iatan plant.
Depreciation and amortization expenses increased approximately $0.3 million
(4.9%) during the quarter due to increased levels of plant and equipment placed
in service. Total income taxes decreased $1.5 million (85.6%) during the second
quarter of 2001 due to a decrease in taxable income. Depreciation and
amortization, as well as maintenance expense will increase starting in the third
quarter reflecting the commencement of commercial operation of the State Line
Combined Cycle Unit in June 2001. We signed a long-term maintenance agreement
with Siemens Westinghouse in July 2001 for scheduled maintenance associated with
the two combustion turbines utilized in the Combined Cycle Unit. We also signed
a long-term maintenance agreement with Siemens Westinghouse for scheduled
maintenance associated with the two simple cycle combustion turbines at the
Energy Center and the one simple cycle combustion turbine located at the State
Line Power Plant.
For the six months ended June 30, 2001, total operating expenses were up
approximately $13.1 million (20.6%). Merger related expenses, which were $1.2
million in the first quarter, primarily related to severance benefits. Purchased
power costs increased $6.9 million (23.9%) due mainly to increased demand
resulting from unusually cold temperatures in the first quarter of 2001 and
increased costs for this purchased power. Additional purchases of replacement
energy were necessary to meet this demand because the Asbury Plant was on an
early five-day scheduled spring outage during this period. Total fuel costs
increased $2.8 million (14.7%) for the six-month period ending June 30, 2001 due
primarily to significantly increased natural gas prices as well as increased
generation from our coal-fired units. Other operating expenses increased $2.3
million (14.8%) mainly due to an actuarially determined adjustment to our
pension benefit obligation during the first quarter of 2001, decreased income
from the pension fund in both quarters and the increase in injuries and damages
expense during the second quarter of 2001.
Maintenance and repair expense decreased $0.3 million (4.4%) for the six
months ended June 30, 2001 compared to the same period in 2000 primarily due to
decreased levels of maintenance at the Iatan plant. Total provisions for income
taxes decreased $4.7 million (182.1%) due to a decrease in taxable income and to
the benefit created by the deductibility of approximately $6.1 million in merger
related expenses in the first quarter of 2001 as discussed above.
During the twelve months ended June 30, 2001, total operating expenses
increased approximately $30.2 million (23.2%) compared to the year ago period.
Total purchased power costs increased by approximately $21.2 million (41.6%)
reflecting the increased demand in the third and
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fourth quarters of 2000 and the first quarter of 2001 and the expiration of two
favorable purchased power contracts. Total fuel costs increased approximately
$7.2 million (16.2%) during the twelve-month period primarily reflecting
significantly higher natural gas prices as well as increased generation from our
coal-fired units. Merger related expenses decreased $1.2 million (43.6%) due to
the termination of the merger in January 2001.
Other operating expenses increased approximately $3.0 million (9.6%) during
the twelve months ended June 30, 2001, compared to the same period last year due
to the decreased pension fund income caused by a decline in the value of
invested funds and increased injuries and damages expense.
Maintenance and repair expenses decreased approximately $1.6 million (9.8%)
during the twelve months ended June 30, 2001 compared to the prior period mainly
due to decreased levels of scheduled maintenance costs for the gas-fired
combustion turbines at the Energy Center. Depreciation and amortization expense
increased approximately $1.3 million (5.0%) due to increased levels of plant and
equipment placed in service. Total provision for income taxes decreased $7.0
million (51.3%) due to lower taxable income during the current period and by the
deductibility of approximately $6.1 million in merger related expenses discussed
above.
Nonoperating Items
Total allowance for funds used during construction (AFUDC) increased
significantly during each of the periods presented, reflecting the construction
of the State Line Combined Cycle Unit. There will be a substantial decrease in
AFUDC because of the unit being placed into commercial operation in June 2001.
Other-net deductions increased during each of the periods presented due
primarily to a loss in the second quarter of 2001 caused by the marking to
market, required by SFAS 133, of option contracts entered into in connection
with our hedging activities. Interest income decreased for all periods presented
reflecting lower balances of cash available for investment.
Interest charges on long-term debt were virtually the same for the second
quarter of 2001 and for the six months ended June 30, 2001 when compared to the
same periods last year. Interest charges on long-term debt increased $3.0
million (13.0%) for the twelve months ended period when compared to the same
period last year due to the issuance of $100 million of our unsecured Senior
Notes in November 1999. Commercial paper interest increased $0.5 million during
the second quarter, $1.4 million for the six months ended June 30, 2001 and $1.3
million for the twelve months ended June 30, 2001, as compared to the same
periods ended in 2000. These increases in commercial paper interest were caused
by the increased usage of short-term debt for financing our ongoing construction
program. Interest related to our Trust Preferred Securities issued March 1, 2001
added $1.1 million to interest charges in the second quarter and $1.4 million to
interest charges in both the six month and twelve-month ended periods ended in
2001.
Earnings
For the second quarter of 2001, earnings per share of common stock were
$0.04 compared to $0.21 during the second quarter of 2000. Earnings per share
were down primarily as a result of significantly increased natural gas prices in
the second quarter of 2001 as compared to the same period in 2000, offset by
significantly higher AFUDC.
Earnings per share for the six months ended June 30, 2001, were $0.17
compared to $0.34 for the six months ended a year earlier. Excluding $1.2
million in merger costs for the first six months of 2001 and $0.1 million for
the first six months of 2000 and $2.3 million in tax benefits from previously
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incurred merger-related costs that became deductible for income tax purposes in
the first quarter of 2001, earnings per share would have been $0.11 for the six
months ended June 30, 2001 and $0.35 for the six months ended June 30, 2000.
Excluding merger costs, earnings per share decreased for the six months ended
June 30, 2001 primarily due to significantly increased natural gas prices and
purchased power costs, offset by significantly higher AFUDC.
For the twelve months ended June 30, 2001, earnings per share of common
stock were $1.17 compared to $1.21 for the twelve months ended a year earlier.
Excluding $1.6 million in merger costs for the twelve months ended June 2001 and
$2.8 million in merger costs for the twelve months ended June 2000 and the $2.3
million in tax benefits in the first quarter of 2001, earnings per share would
have been $1.13 and $1.38 respectively. Earnings for the twelve months ended
June 2001 were negatively impacted by significantly increased natural gas prices
and purchased power costs and positively impacted by significantly higher AFUDC.
We believe our earnings will continue to decline until we receive rate
relief adequate to recover increased fuel, purchased power and other costs,
including costs associated with the State Line Combined Cycle Unit which
commenced commercial operations in June. We believe an order will be issued in
our pending rate case in September 2001 as discussed above, however, we can make
no prediction as to the amount of rate relief we will receive.
Environmental
In July 2000, we received a request for information from the EPA regarding
the State Line Power Plant. The information request indicated that the State
Line Power Plant units should have an Acid Rain Permit under Title IV of the
1990 Amendments to the Clean Air Act in addition to the construction and
operating permits previously issued to us by the Missouri Department of Natural
Resources. In response, in August 2000, we applied for the required Acid Rain
Permit with the Missouri Department of Natural Resources and subsequently
received the required permit. The EPA notified us in June 2001 that we were
subject to being fined approximately $173,000 because of the lack of the permit
but had the right to request a hearing or a settlement conference. We had a
settlement conference with the EPA in July. The EPA offered to settle if we
agreed to a $35,000 fine and to undertake a supplemental environmental project
with a cost approximating $128,500. We have preliminary consensus with the EPA
and expect to conclude this matter during the third quarter of 2001.
Competition
The Oklahoma Legislature overwhelmingly approved legislation in June 2001
that indefinitely delays electric restructuring in the state. This legislation
was signed by the Governor and calls for further study on the subject.
Deregulation had been scheduled to be implemented in July 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our construction-related expenditures totaled $23.0 million during the
second quarter of 2001 compared to $32.5 million for the same period in 2000.
For the six months ended June 30, 2001, construction-related expenditures
totaled $46.7 million compared to $58.7 million for the same period in 2000.
Approximately $10.9 million of the construction expenditures during the second
quarter of 2001 and $23.2 million during the first six months of 2001 were
related to the State Line Combined Cycle Unit. Approximately $9.9 million during
the second quarter of 2001 and $20.1 million during the first six months of 2001
were related to additions to our transmission and distribution systems to
16
meet projected increases in customer demand. During the first six months of
2000, approximately 4% of construction expenditures were satisfied with
internally generated funds.
Construction of the 500-megawatt State Line Combined Cycle Unit was
substantially completed and the plant was placed into commercial operations on
June 25, 2001. The total cost of this unit was approximately $204 million. Our
60% share of this amount was approximately $122 million before considering our
contribution of 40% of existing property. After the transfer to Westar
Generating on June 15, 2001 of an undivided 40% joint ownership interest in the
existing State Line Unit No.2 and certain other property at book value, our net
cash requirement was approximately $108 million, excluding AFUDC. We are
responsible for the operation and maintenance of the State Line Combined Cycle
Unit with the costs shared in the same 60/40 split.
Our construction expenditures are currently expected to total approximately
$63.3 million in 2001, including approximately $25.0 million for the Combined
Cycle Unit and $20.8 million for additions to our distribution system.
We currently estimate that internally generated funds will provide 100% of
the funds required for the remainder of our 2001 construction expenditures.
However, if additional funds are needed, we intend to utilize short-term debt to
finance our needs and repay such borrowings with the proceeds of sales of public
offerings of long-term debt or equity securities, (including the sale of our
common stock pursuant to our Employee Stock Purchase Plan) and with internally-
generated funds. In early 2001, our Board of Directors authorized a Dividend
Reinvestment and Stock Purchase Plan. We received necessary approval from the
Kansas Corporation Commission on June 29, 2001 and the plan is now in effect. We
currently have lines of credit aggregating $75 million.
In February 2001, the SEC declared effective our $80 million shelf
registration statement covering our unsecured debt securities and preferred
securities of two newly created trusts of which $30 million remains available
for issuance. We also have an effective shelf registration statement on file
with the SEC under which up to an aggregate of $50 million of our common stock,
first mortgage bonds and unsecured debt securities remain available for
issuance.
Following announcement of the merger with UtiliCorp, the ratings for our
first mortgage bonds (other than the pollution control bonds) were placed on
credit watch with downward implications by Moody's Investors Service and
Standard & Poor's. Standard & Poor's removed the credit watch but kept the
downward implication in January 2001 after the merger was terminated. On May 3,
2001, Moody's Investors Service lowered the debt ratings of our first mortgage
bonds (other than the pollution control bonds) to Baa1 from A2, and on our
senior unsecured debt to Baa2 from A3. This downgrade was primarily due to the
risk to our credit profile associated with our ability to obtain necessary rate
relief from the Missouri Public Service Commission to recover our capital
expenditures associated with the State Line construction and our increased
operating expenses primarily caused by escalating natural gas prices.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Market risk is the exposure to a change in the value of a physical asset or
financial instrument, derivative or non-derivative, caused by fluctuations in
market variables such as interest rates or commodity prices. We handle market
risk in accordance with established policies, which may include entering into
various derivative transactions. See Note 5 of "Notes to Consolidated Financial
Statements" for further information.
Interest Rate Risk. We are exposed to changes in interest rates as a result
of significant financing through our issuance of commercial paper. We manage our
interest rate exposure by limiting our variable-rate exposure to a certain
percentage of total capitalization, as set by policy, and
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by monitoring the effects of market changes in interest rates. If market
interest rates average 1% more in 2001 than in 2000, our interest expense would
increase, and income before taxes would decrease by approximately $700,000. This
amount has been determined by considering the impact of the hypothetical
interest rates on our commercial paper balances as of December 31, 2000. These
analyses do not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. In the event of a significant
change in interest rates, management would likely take actions to further
mitigate its exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, the sensitivity
analysis assumes no changes in our financial structure.
Commodity Price Risk. We are exposed to the impact of market fluctuations
in the price and transportation costs of coal, natural gas, and electricity and
employ established policies and procedures to manage the risks associated with
these market fluctuations.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
(a) The annual meeting of Common Stockholders was held on April 25, 2001.
(b) The following persons were re-elected Directors of Empire to serve until
the 2004 Annual Meeting of Stockholders:
R. C. Hartley (13,518,045 votes for; 352,644 withheld authority).
F. E. Jefferies (13,526,248 votes for; 344,441 withheld authority).
The following person was elected Director of Empire to serve until the 2004
Annual Meeting of Stockholders:
J. S. Leon (13,406,918 votes for; 409,771 withheld authority).
The term of office as a Director of the following persons continued after
the meeting: M. F. Chubb, R. L. Lamb, R. E. Mayes, R. D. Hammons, J. R.
Herschend, M. W. McKinney and M. M. Posner.
Item 5. Other Information.
------------------
At June 30, 2001, the Company's ratio of earnings to fixed charges was
1.88x. See Exhibit (12) hereto.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
(12) Computation of Ratios of Earnings to Fixed Charges.
(b) No reports on Form 8-K were filed during the second quarter of 2001.
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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/ D. W. Gibson
----------------------------------
D. W. Gibson
Vice President - Finance
By /s/ D. L. Coit
----------------------------------
D. L. Coit
Controller, Assistant Treasurer
and Assistant Secretary
August 14, 2001
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