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ED

EMPIRE DISTRICT ELECTRIC CO (EDE)·Q1 2016 Earnings Summary

Executive Summary

  • Q1 2016 GAAP EPS was $0.32 and net income was $14.0M; excluding merger-related costs ($4.2M pre-tax, $2.6M after tax), EPS was $0.38 and net income $16.6M, reflecting underlying strength despite mild weather headwinds .
  • Electric segment gross margin rose 3.1% YoY to $96.5M on higher customer rates and counts, partially offset by weather and volumetric declines; Gas margin fell 10.0% YoY to $7.6M on 16% fewer heating degree days .
  • 2016 EPS guidance of $1.26–$1.44 (lowered on Feb 26 for merger transaction costs of $15–$17M, ~50% payable in 2016) was reiterated; dividend of $0.26 declared, payable June 15, 2016 .
  • Catalyst: shareholder vote set for June 16, 2016 on the Algonquin/Liberty Utilities merger; record date May 2, 2016 .

What Went Well and What Went Wrong

What Went Well

  • Electric gross margin +$2.8M YoY driven by net rate increases (+$5.8M) and customer growth (+$0.7M), with fuel/consumable cost timing also helping margins .
  • Cost discipline: operating costs down $0.6M QoQ YoY and AFUDC up $1.2M, supporting earnings despite weather .
  • Management tone: “Overall, costs were well controlled and our results, adjusted for weather and the merger-related costs incurred during the period, met our expectations” — Brad Beecher, President & CEO .

What Went Wrong

  • Weather: electric on‑system sales fell 7.5% YoY; Gas margin down 10.0% YoY with heating degree days 16% lower, compressing volumetric revenue .
  • Merger-related costs: ~$4.2M in Q1 depressed GAAP EPS by $0.06; interest expense up ~$0.6M and D&A up ~$0.4M further pressured results .
  • Taxes and regulatory lag continue to weigh until Missouri rate case and Riverton combined cycle cost recovery timing aligns with assumptions (Oct 1, 2016 at $33.4M filed amount) .

Financial Results

Metric ($USD Millions, EPS $)Q2 2015Q3 2015Q4 2015Q1 2016
Electric Margin87.1 116.6 87.8 96.5
Gas Margin4.2 3.8 5.8 7.6
Other Revenues2.0 2.2 2.5 1.8
Gross Margin93.3 122.6 96.1 105.9
Operating & Maintenance44.0 40.8 40.9 39.1
Depreciation & Amortization20.1 20.1 20.3 20.4
Taxes13.1 25.9 15.1 19.0
Operating Income16.1 35.8 19.8 23.2
Interest Expense & Other, net9.3 10.5 9.9 9.2
Net Income6.8 25.3 9.9 14.0
EPS (Basic)$0.16 $0.58 $0.23 $0.32
EPS ex. merger costs———$0.38
Electric On-System kWh Sales (Millions)Q1 2015Q1 2016
Residential590 508
Commercial377 360
Industrial246 248
Other116 113
Total1,329 1,229
Retail Gas Sales (Bcf)Q1 2015Q1 2016
Residential1.27 1.11
Commercial/Industrial0.56 0.48
Other0.02 0.02
Total1.85 1.61

KPIs and notable items (Q1 2016):

  • Weather impact: electric sales -7.5% YoY; gas heating degree days -16%; retail gas sales -12.9% YoY .
  • Rate actions: net rate increase effect +$5.8M; customer growth +$0.7M .
  • Merger-related costs: $4.2M pre-tax (~$2.6M after tax), EPS impact -$0.06 .
  • AFUDC: +$1.2M benefit YoY .
  • Operating costs: -$0.6M YoY .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Weather-normalized EPSFY2016$1.38–$1.54 per share (Feb 4, 2016) $1.26–$1.44 per share (Feb 26 update; reiterated Apr 28) Lowered (due to merger transaction costs of $15–$17M; ~50% in 2016; ~$4.5M in Q1)
Missouri rate case assumptionEffective Oct 1, 2016$33.4M filed amount $33.4M filed amount (unchanged assumption) Maintained
Weather assumptionFY201630-year average weather 30-year average weather (unchanged) Maintained
System energy growthFY2016<1% <1% (unchanged) Maintained
Riverton combined cycle costsFY2016Increased OpEx assumed Increased OpEx assumed (unchanged) Maintained
DividendQ2 2016$0.26 declared Feb 4 (pay Mar 15) $0.26 declared Apr 28 (pay Jun 15; record Jun 1) Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2015, Q3 2015)Current Period (Q1 2016)Trend
Regulatory lag and rate recoveryQ2: Missouri rate case effective July 26, 2015; recovery for Asbury AQCS; lag from Riverton maintenance and higher D&A Guidance assumes Oct 1, 2016 effective date at $33.4M and increased operating costs from Riverton combined cycle Continued focus on rate recovery timing; assumptions reiterated
Weather impacts on volumesQ2: Milder weather reduced sales; Q3: warmer weather boosted cooling sales; Q4: mildest Q4 in 30 years hurt EPS Electric sales -7.5% YoY; gas degree days -16% vs prior year Ongoing weather volatility drives volumetric swings
Cost structure and AFUDCQ2: maintenance spike (SLCC outage, Riverton contract), D&A up on Asbury AQCS; AFUDC -$0.4M QoQ Operating costs -$0.6M; AFUDC +$1.2M QoQ YoY; D&A +$0.4M Cost discipline evident; mixed headwinds from D&A/interest
SPP Integrated Market/fuelQ2/Q3: lower fuel costs reflected in rates; changes in other electric revenue offset by fuel Fuel expense changes (non-MO fuel/consumables timing) supported gross margin Neutral-to-positive margin effect from fuel mechanisms
Strategic/merger updateExploration of alternatives (Dec 2015), merger announced Feb 9, 2016 Record date May 2; shareholder vote June 16; guidance unchanged including transaction costs Transaction execution milestones proceeding

Management Commentary

  • “February 9, 2016 marked a significant day... an Agreement and Plan of Merger was announced... we expect to hold a special Shareholder’s Meeting on June 16, 2016... I am pleased with our earnings performance for the first quarter 2016... results, adjusted for weather and the merger-related costs... met our expectations.” — Brad Beecher, President & CEO .
  • Q4 perspective: “We continued to consistently execute... even though confronted by exceptionally mild weather... With regard to the exploration of strategic alternatives... we have no update.” — Brad Beecher (Feb 4 press release) .
  • Q3 tone: Results “on target with our 2015 earnings guidance... with recovery of the cost of our Asbury environmental upgrade now included in our Missouri rates” .

Q&A Highlights

  • An earnings call was scheduled for Apr 29, 2016 with webcast replay available; however, a transcript was not available in our document set, so Q&A specifics and any on-call guidance clarifications cannot be provided .

Estimates Context

  • Wall Street consensus EPS and revenue estimates from S&P Global were unavailable for EDE for Q1 2016 within our data access; therefore, we cannot quantify beat/miss versus consensus at this time [SpgiEstimatesError for EDE]*.
  • Implication: In absence of consensus, investors should anchor on non-GAAP EPS ex-merger costs ($0.38) and underlying gross margin trends to assess trajectory and potential guidance risk .

Values retrieved from S&P Global (where available).*

Key Takeaways for Investors

  • Underlying earnings power improved: EPS ex-merger costs up to $0.38 (+$0.04 YoY) despite significant weather headwinds, signaling rate support and cost control; watch D&A and interest creep as Riverton project rolls through .
  • Weather remains the principal swing factor; volume declines drove electric (-7.5% YoY) and gas (-12.9% YoY) softness—near-term trading should be mindful of degree-day trends and seasonal setups .
  • 2016 guidance reaffirmed at $1.26–$1.44, incorporating transaction costs; monitor the Oct 1 Missouri rate case outcome and Riverton combined cycle OpEx for guidance credibility into 2H .
  • Merger timeline is a key catalyst: record date May 2, shareholder vote June 16; merger-related costs depressed Q1 GAAP EPS by $0.06—deal closure path and regulatory approvals will drive sentiment .
  • Electric margin expansion (+$2.8M YoY) underscores successful rate actions; continued customer count growth supports medium-term margin stability .
  • AFUDC tailwind (+$1.2M) and O&M reductions (-$0.6M) provided offset to elevated D&A and interest; sustainability of cost discipline warrants attention through the Riverton ramp .
  • Dividend stability maintained at $0.26/share; income-oriented holders can expect continuity pending merger completion .