-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NQrP/AEuGXLsZKkqWdg1cz+hum2t5LXpJ9dVkBUYd4/rQboW/sJnJ6637ZN6zEVB D2OEhU83ucqAGPtX9aioxg== 0000032689-99-000004.txt : 19990310 0000032689-99-000004.hdr.sgml : 19990310 ACCESSION NUMBER: 0000032689-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMPIRE DISTRICT ELECTRIC CO CENTRAL INDEX KEY: 0000032689 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 440236370 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03368 FILM NUMBER: 99560564 BUSINESS ADDRESS: STREET 1: 602 JOPLIN ST CITY: JOPLIN STATE: MO ZIP: 64801 BUSINESS PHONE: 4176255100 MAIL ADDRESS: STREET 1: P.O. BOX 127 CITY: JOPLIN STATE: MO ZIP: 64802 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 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 Securities registered pursuant to Section 12(b) of the Act: Name of each Title of each class exchange on which registered Common Stock ($1 par value) New York Stock Exchange 5% Cumulative Preferred Stock ($10 New York Stock par value) Exchange 4-3/4% Cumulative Preferred Stock New York Stock ($10 par value) Exchange 8-1/8% Cumulative Preferred Stock New York Stock ($10 par value) Exchange Preference Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] As of March 1, 1999, 17,081,019 shares of common stock were outstanding. Based upon the closing price on the New York Stock Exchange on March 1, 1999, the aggregate market value of the common stock of the Company held by nonaffiliates was approximately $392,863,437. The following documents have been incorporated by reference into the parts of the Form 10-K as indicated: The Company's proxy Part of Item 10 of Part statement, filed pursuant III To Regulation 14A under the All of Item 11 of Part Securities Exchange III Act of 1934, for its 1998 Part of Item 12 of Part Annual Meeting of III Stockholders to be held on All of Item 13 of Part April 22, 1999. III TABLE OF CONTENTS Pag e PART I ITEM BUSINESS 3 1. General 3 Electric Generating Facilities and Capacity 3 Construction Program 4 Fuel 5 Employees 6 Electric Operating Statistics 7 Executive Officers and Other Officers of the Registrant 8 Regulation 8 Environmental Matters 9 Conditions Respecting Financing 10 ITEM PROPERTIES 11 2. Electric 11 Facilities...................................................... ................................................................ ...................................... Water 12 Facilities...................................................... ................................................................ ......................................... ITEM LEGAL PROCEEDINGS 12 3. ITEM SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12 4. PART II ITEM MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED 13 5. STOCKHOLDER MATTERS ITEM SELECTED FINANCIAL DATA 15 6. ITEM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 7. RESULTS OF 16 OPERATIONS Results of 16 Operations...................................................... ................................................................ ................................ Liquidity and Capital 20 Resources....................................................... ................................................................ .............. Year 21 2000............................................................ ................................................................ ............................................ Forward Looking 23 Statements...................................................... ................................................................ .................... ITEM QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23 7A ITEM FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25 8. ITEM CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 9. FINANCIAL 45 DISCLOSURE PART III ITEM DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 45 10. ITEM EXECUTIVE COMPENSATION 45 11. ITEM SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 45 12. ITEM CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 45 13. PART IV ITEM EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 46 14. SIGNATURES 49 PART I ITEM 1. BUSINESS General The Empire District Electric Company (the "Company"), a Kansas corporation organized in 1909, is an operating public utility engaged in the generation, purchase, transmission, distribution and sale of electricity in parts of Missouri, Kansas, Oklahoma and Arkansas. The Company also provides water service to three towns in Missouri. In 1998, 99.6% of the Company's gross operating revenues were provided from the sale of electricity and 0.4% from the sale of water. The territory served by the Company's electric operations embraces an area of about 10,000 square miles with a population of over 330,000. The service territory is located principally in Southwestern Missouri and also includes smaller areas in Southeastern Kansas, Northeastern Oklahoma and Northwestern Arkansas. The principal activities of these areas are industry, agriculture and tourism. Of the Company's total 1998 retail electric revenues, approximately 88% came from Missouri customers, 6% from Kansas customers, 3% from Oklahoma customers and 3% from Arkansas customers. The Company supplies electric service at retail to 119 incorporated communities and to various unincorporated areas and at wholesale to four municipally-owned distribution systems and two rural electric cooperatives. The largest urban area served by the Company is the city of Joplin, Missouri, and its immediate vicinity, with a population of approximately 135,000. The Company operates under franchises having original terms of twenty years or longer in virtually all of the incorporated communities. Approximately 43% of the Company's electric operating revenues in 1998 were derived from incorporated communities with franchises having at least ten years remaining and approximately 23% were derived from incorporated communities in which the Company's franchises have remaining terms of ten years or less. Although the Company's franchises contain no renewal provisions, in recent years the Company has obtained renewals of all of its expiring electric franchises prior to the expiration dates. The Company's electric operating revenues in 1998 were derived as follows: residential 42%, commercial 30%, industrial 17%, wholesale 7% and other 4%. Producers of food and kindred products accounted for approximately 7% of electric revenues in 1998. The Company's largest single on-system wholesale customer is the city of Monett, Missouri, which in 1998 accounted for approximately 3% of electric revenues. No single retail customer accounted for more than 1% of electric revenues in 1998. The Company made an investment of approximately $3.5 million in 1998 and $1.8 million in 1997 in fiber optics cable and equipment which the Company is using in its own operations and leasing to other entities. The Company also offers electronic monitored security services. Electric Generating Facilities and Capacity At December 31, 1998, the Company's generating plants consisted of the Asbury Plant (aggregate generating capacity of 213 megawatts), the Riverton Plant (aggregate generating capacity of 136 megawatts), the Empire Energy Center (aggregate generating capacity of 180 megawatts), the State Line Power Plant (aggregate generating capacity of 253 megawatts) and the Ozark Beach Hydroelectric Plant (aggregate generating capacity of 16 megawatts). The Company also has a 12% ownership interest (80 megawatt capacity) in Unit No. 1 at the Iatan Generating Station. See Item 2, "Properties - Electric Facilities" for further information about these plants. In order to reduce reliance on purchased power to meet its future demands, the Company, in cooperation with Western Resources, is currently planning to construct a 350-megawatt expansion at the State Line Power Plant. This expansion will consist of a 150-megawatt Westinghouse 501F combustion turbine that will operate alongside the existing State Line Unit II 152-megawatt combustion turbine. Exhaust heat from these two units will be used to power a 200-megawatt steam turbine. Combined output of all three units will be a nominal 500 megawatts. The Company expects to be entitled to generating capacity of 300 megawatts from this expansion, replacing the 152 megawatts currently available from State Line Unit II. Construction is expected to begin in late 1999 with commercial operation scheduled for June 2001. See "-Construction Program" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for further information about this expansion. The Company, formerly a member of the MOKAN Power Pool which disbanded as of January 15, 1999, is currently a member of the Southwest Power Pool ("SPP"), a regional division of the North American Electric Reliability Council ("NERC"). The SPP requires its members, including the Company, to maintain a 12% capacity reserve margin effective October 1, 1998, and provides for contingency reserve sharing, regional near real-time security assessment 24 hours per day and many other functions. The Company is also a member of the Western Systems Power Pool, a marketing pool that provides agreements that facilitate the purchase and sale of wholesale power among members. Most of the United States electric utilities are now parties to this agreement. The Company currently supplements its on-system generating capacity with purchases of capacity and energy from neighboring utilities in order to meet the demands of its customers and the capacity margins applicable to it under current pooling agreements and NERC rules. The Company has entered into agreements for such purchases with Associated Electric Cooperative, Inc. ("AECI"), Kansas Gas & Electric ("KG&E - a subsidiary of Western Resources) and Southwestern Public Service Company ("SPS" - a subsidiary of New Centuries Energies) for periods through the contract year 2000 which ends May 31, 2001. In addition, the Company has contracted with Western Resources, Inc. ("Western Resources") for the purchase of capacity and energy through May 31, 2010. The amount of capacity purchased under these contracts supplements the Company's on-system capacity and contributes to meeting its current expectations of future power needs. The following chart sets forth the Company's purchase commitments and anticipated owned capacity (in megawatts) during the indicated contract years (which run from June 1 to May 31 of the following year). The reduction in purchased power commitments in 2001 is the result of the expiration of the long- term AECI purchase contract on May 31, 2001 and the installation of the Company's share of the additional State Line generation that is scheduled to be available by the summer of 2001.
Purchased Anticipated Contract Power Owned Year Commitment Capacity Total 1996 290 724 1014 1997 210 878 1088 1998 230 878 1108 1999 255 878 1133 2000 287 878 1165 2001 162 1026 1188 2002 162 1026 1188 2003 162 1026 1188
The charges for capacity purchases under the contracts referred to above during calendar year 1998 amounted to approximately $14.1 million. Minimum charges for capacity purchases under such contracts total approximately $91.6 million for the period June 1, 1999, through May 31, 2004. The maximum hourly demand on the Company's system reached a new record high of 916 megawatts on August 26, 1998. The Company's previous record peak of 876 megawatts was established in July 1997. The Company's maximum hourly winter demand of 841 megawatts occurred on January 13, 1997. Construction Program Total gross property additions (including construction work in progress) for the three years ended December 31, 1998, amounted to $168.1 million, and retirements during the same period amounted to $11.5 million. The Company's total construction-related expenditures, including allowance for funds used during construction ("AFUDC"), were $50.9 million in 1998 and for the next three years are estimated for planning purposes to be as follows:
Estimated Construction Expenditures (amounts in millions) 1999 2000 2001 Total New generating facilities 25.7 41.9 21.6 89.2 Additions to existing 11.7 17.5 12.5 41.7 generating facilities Transmission facilities 5.3 15.0 8.0 28.3 Distribution system additions 18.0 22.1 22.6 62.7 General and other additions 3.9 2.3 1.8 8.0 Total $ 64.6 $ 98.8 $ 66.5 $229.9
The Company's projected construction plans include expenditures for the 350-megawatt expansion project at the State Line Power Plant to be completed in 2001 (the "State Line Project") at an estimated cost of $185 million (of which $100 million is expected to be the Company's share). The Company has entered into a Memorandum of Understanding with Western Resources with respect to the construction and operation of the State Line Project. This expansion would consist of adding an additional Westinghouse 501F combustion turbine, two heat recovery steam generators and a steam turbine and auxiliary equipment to an already existing 501F combustion turbine, which would create a nominal 500-megawatt combined cycle unit. The Company would operate the State Line Project and would have an undivided 60% joint ownership interest. Western Resources would have the remaining undivided 40% joint ownership interest. In addition to the expenditures set forth above, the Company would transfer to Western Resources at book value an undivided 40% joint ownership interest in its existing State Line 501F combustion turbine and the land needed for the State Line Project. Additions to the Company's transmission and distribution systems to meet projected increases in customer demand constitute the majority of the remainder of the projected construction expenditures for the three-year period listed above. See "- Electric Generating Facilities and Capacity" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for further information about the State Line Project. Estimated construction expenditures are reviewed and adjusted for, among other things, revised estimates of future capacity needs, the cost of funds necessary for construction and the availability and cost of alternative power. Actual construction expenditures may vary significantly from estimates due to a number of factors including changes in equipment delivery schedules, changes in plans with respect to the State Line Project, changes in customer requirements, construction delays, ability to raise capital, environmental matters, the extent to which the Company receives timely and adequate rate increases, the extent of competition from independent power producers and co-generators, other changes in business conditions and changes in legislation and regulation, including those relating to the energy industry. See "Regulation" below and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Competition." Fuel Coal supplied approximately 83.3% of the Company's total fuel requirements in 1998 based on kilowatt-hours generated. The remainder was supplied by natural gas (16.5%) with oil generation being insignificant. In 1997 coal and natural gas supplied approximately 92.0% and 8.0% respectively. The increased gas usage is a trend that the Company expects to continue. The Company's Asbury Plant is fueled primarily by coal with oil being used as startup fuel. The Plant is currently burning a coal blend consisting of approximately 90% Western coal and 10% local coal on a tonnage basis. Under normal conditions, the Company's targeted coal inventory supply at Asbury is approximately 45 days. As of December 31, 1998, the Company had sufficient coal on hand to supply anticipated requirements at Asbury for 68 days due to seven additional train loads of coal the Company had delivered by an alternative carrier in anticipation of winter coal needs. The Company's Riverton Plant fuel requirements are primarily met by coal with the remainder supplied by natural gas and oil. The Riverton Plant is currently burning a coal blend consisting of approximately 80% Western coal and 20% local coal on a tonnage basis. Under normal conditions, the Company's targeted coal inventory supply at Riverton is 45 days. As of December 31, 1998, the Company had coal supplies on hand to meet anticipated requirements at the Riverton Plant for 36 days. The Company has a long-term contract, expiring in 2004, with a subsidiary of Peabody Holding Company, Inc. for the supply of low sulfur Western coal to meet its requirements for such coal at the Asbury and Riverton Plants during the term of the contract. This Peabody coal is supplied from the Rochelle and North Antelope mines located in Campbell County, Wyoming, and is shipped from there to the Asbury Plant by rail, a distance of approximately 800 miles. The coal is delivered under a transportation contract with Western Railroad Properties, Inc., Union Pacific Railroad Company and The Kansas City Southern Railway Company. The Company owns one 125-car unit train, which delivers Peabody coal to the Asbury Plant, and leases additional railcars on an as-needed basis. The Peabody coal is transported from Asbury to Riverton via truck. Anticipated requirements for local coal at both Plants are supplied under a coal supply agreement with the Mackie-Clemens Fuel Company which expires on December 31, 1999. The Company filed suit against Union Pacific and Kansas City Southern Railway on August 22, 1997 seeking to void the existing contract and receive restitution for damages due to nonperformance. This suit was a result of the coal delivery problems plaguing the industry in past years that caused the Company's Western coal inventory to fall to a 20-day supply by the end of 1997. The action is pending. The Company's Energy Center and State Line combustion turbine facilities are fueled primarily by natural gas with oil being used as a backup fuel. The Company's policy is to maintain a supply of oil at these facilities which would support full load operation for approximately three days. Based on current and projected fuel prices, it is expected that these facilities will continue to be operated primarily on natural gas. The Company has a firm agreement with Williams Natural Gas Company, expiring December 31, 2011, for the transportation of natural gas to the Empire Energy Center, the State Line Power Plant or the Riverton Plant, as elected by the Company. The Company expects that its remaining gas transportation requirements, as well as the majority of its gas supply requirements, will be met by spot purchases. The Company historically has purchased natural gas on a short-term basis. Unit No. 1 at the Iatan Plant is a coal-fired generating unit which is jointly-owned by Kansas City Power & Light ("KCPL") (70%), St. Joseph Light & Power Company ("SJLP") (18%) and the Company (12%). Low sulfur Western coal in quantities sufficient to meet substantially all of Iatan's requirements is supplied under a long-term contract expiring on December 31, 2003, between the joint owners and the Thunder Basin Coal Company. The coal is transported by rail under a contract expiring on December 31, 2000, with Burlington Northern, Kansas City Southern Railway Company and the MO-KAN-TEX railroads. The remainder of Iatan Unit No. 1's requirements for coal are met with spot purchases. The following table sets forth a comparison of the costs, including transportation costs, per million btu of various types of fuels used in the Company's facilities:
1998 1997 1996 Coal - Iatan $0.857 $0.871 $0.847 Coal - Asbury 1.100 1.088 1.116 Coal - Riverton 1.214 1.235 1.250 Natural Gas 2.495 2.665 2.365 Oil 4.386 4.137 4.437
The Company's weighted cost of fuel burned per kilowatt-hour generated was 1.570 cents in 1998, 1.397 cents in 1997 and 1.403 cents in 1996. The increase in the Company's weighted fuel cost reflects increased natural gas usage in 1998. Employees At December 31, 1998, the Company had 626 full-time employees, of whom 330 were members of Local 1474 of The International Brotherhood of Electrical Workers ("IBEW"). On November 8, 1996, the Company signed a three-year agreement with the IBEW expiring on October 31, 1999. The agreement provides, among other things, for a 3.0% increase in wages commencing on November 1, 1996, with additional minimum increases of 2.75% at November 1, 1997 and November 1, 1998. The Company expects to begin negotiations for a new union contract in late summer of 1999.
ELECTRIC OPERATING STATISTICS (1) 1998 1997 1996 1995 1994 Electric Operating Revenues (000s): Residential $100,567 $ 88,636 $ 86,014 $ 81,331 $ 71,977 Commercial 71,810 64,940 61,811 58,430 54,052 Industrial 39,805 37,192 35,213 32,637 31,317 Public authorities 5,559 4,995 4,180 3,745 3,509 Wholesale on-system 10,928 9,730 9,482 8,360 8,173 Miscellaneous 4,006 3,341 3,639 3,345 2,393 Total system 232,675 208,834 200,339 187,848 171,421 Wholesale off-system 6,126 5,473 4,595 4,000 5,391 Total electric operating $ 238,801 $ 214,307 $ 204,934 $ 191,848 $ 176,812 revenues Electricity generated and purchased (000s of Kwh): Steam 2,228,103 2,372,914 2,231,062 2,374,021 2,495,055 Hydro 70,631 77,578 62,860 71,302 83,556 Combustion turbine 439,517 211,872 162,679 170,479 51,358 Total generated 2,738,251 2,662,364 2,456,601 2,615,802 2,629,969 Purchased 1,970,348 1,839,833 1,968,898 1,540,816 1,394,470 Total generated and 4,708,599 4,502,197 4,425,499 4,156,618 4,024,439 purchased Interchange (net) (1,894) 1,018 (1,087) (5,851) 630 Total system input 4,706,705 4,503,215 4,424,412 4,150,767 4,025,069 Maximum hourly system 916,000 876,000 842,000 815,000 741,000 demand (Kw) Owned capacity (end of 878,000 878,000 724,000 737,000 656,500 period) (Kw) Annual load factor (%) 55.72 55.38 56.85 55.15 57.32 Electric sales (000s of Kwh): Residential 1,548,630 1,429,787 1,440,512 1,350,340 1,264,721 Commercial 1,246,323 1,171,848 1,154,879 1,086,894 1,018,052 Industrial 960,783 943,287 923,730 859,017 827,067 Public authorities 98,675 101,122 95,652 90,543 86,463 Wholesale on-system 299,256 273,035 262,330 243,869 234,228 Total system 4,153,667 3,919,079 3,877,103 3,630,663 3,430,531 Wholesale off-system 235,391 253,060 219,814 213,590 304,554 Total electric sales 4,389,058 4,172,139 4,096,917 3,844,253 3,735,085 Company use (000s of Kwh) 8,940 9,688 9,584 9,559 9,260 Lost and unaccounted for 308,707 321,38 8 317,911 296,955 280,724 (000s of Kwh) Total system input 4,706,705 4,503,215 4,424,412 4,150,767 4,025,069 Customers (average number of monthly bills rendered): Residential 119,265 117,271 115,116 112,605 109,032 Commercial 21,774 21,323 20,758 20,098 19,175 Industrial 354 346 346 339 318 Public authorities 1,739 1,720 1,696 1,637 1,558 Wholesale on-system 7 7 7 7 7 Total system 143,139 140,667 137,923 134,686 130,090 Wholesale off-system 6 7 9 6 6 Total 143,145 140,674 137,932 134,692 130,096 Average annual sales per 12,985 12,192 12,514 11,992 11,600 residential customer (Kwh) Average annual revenue per $843.22 $755.82 $747.19 $722.27 $660.14 residential customer Average residential revenue 6.49c 6.20c 5.97c 6.02c 5.69c per Kwh Average commercial revenue 5.76c 5.54c 5.35c 5.38c 5.31c per Kwh Average industrial revenue 4.14c 3.94c 3.81c 3.80c 3.79c per Kwh
(1) See Item 8 - Financial Statements and Supplementary Data for additional financial information regarding the Company. Executive Officers and Other Officers of the Registrant The names of the officers of the Company, their ages and years of service with the Company as of December 31, 1998, positions held and effective date of such positions are presented below. Each of the executive officers of the Company has held executive officer or management positions within the Company for at least the last five years. Age at With the Officer Name 12/31/98 Positions with the Company Company since since M.W.McKinney 54 President and Chief Executive Officer 1967 1982 (1997), Executive Vice President - Commercial Operations (1995), Executive Vice President (1994), Vice President - Customer Services (1982), Director (1991) V.E. Brill 57 Vice President - Energy Supply (1995) 1962 1975 Vice President - Finance (1983), Director (1989) R.B. Fancher 58 Vice President - Finance (1995), Vice 1972 1984 President - Corporate Services (1984) C.A. Stark 54 Vice President - General Services (1995) 1980 1995 Director of Corporate Planning (1988) W.L. Gipson 41 Vice President - Commercial Operations 1981 1997 (1997), General Manager (1997), Director of Commercial Operations (1995), Economic Development Manager (1987) D.W. Gibson 52 Director of Financial Services and 1979 1991 Assistant Secretary (1991) G.A. Knapp 47 Controller and Assistant Treasurer 1978 1983 (1983) J.S. Watson 46 Secretary-Treasurer (1995), 1994 1995 Accounting Staff Specialist (1994) Regulation General. The Company, as a public utility, is subject to the jurisdiction of the Missouri Public Service Commission ("Missouri Commission"), the State Corporation Commission of the State of Kansas ("Kansas Commission"), the Corporation Commission of Oklahoma ("Oklahoma Commission") and the Arkansas Public Service Commission ("Arkansas Commission") with respect to services and facilities, rates and charges, accounting, valuation of property, depreciation and various other matters. Each such Commission has jurisdiction over the creation of liens on property located in its state to secure bonds or other securities. The Kansas Commission also has jurisdiction over the issuance of securities. The Company's transmission and sale at wholesale of electric energy in interstate commerce and its facilities are also subject to the jurisdiction of the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act. FERC jurisdiction extends to, among other things, rates and charges in connection with such transmission and sale; the sale, lease or other disposition of such facilities and accounting matters. See discussion of FERC Orders 888 and 889 in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Competition." The Company's Ozark Beach Hydroelectric Plant is operated under a license from FERC. See Item 2, "Properties - Electric Facilities." The Company is disputing a Headwater Benefits Determination Report it received from FERC on September 9, 1991. The report calculates an assessment to the Company for headwater benefits received at the Ozark Beach Hydroelectric Plant for the period 1973 through 1990 in the amount of $705,724, and calculates an annual assessment thereafter of $42,914 for the years 1991 through 2011. The Company believes that the methodology used in making the assessment was incorrect and is contesting the determination. As of December 31, 1998, FERC had not responded to the comments filed by the Company on July 31, 1992. The Company is currently accruing an amount monthly equal to what it believes the correct assessment to be. During 1998, approximately 93% of the Company's electric operating revenues were received from retail customers. Approximately 88%, 6%, 3% and 3% of such retail revenues were derived from sales in Missouri, Kansas, Oklahoma and Arkansas, respectively. Sales subject to FERC jurisdiction represented approximately 7% of the Company's electric operating revenues during 1998. Rates. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Operating Revenues and Kilowatt-Hour Sales" for information concerning recent electric rate proceedings. Fuel Adjustment Clauses. Fuel adjustment clauses permit changes in fuel costs to be passed along to customers without the need for a rate proceeding. Fuel adjustment clauses are not permitted under Missouri law. Pursuant to an agreement with the Kansas Commission, entered into in connection with a 1989 rate proceeding, a fuel adjustment clause is not applicable to the Company's retail electric sales in Kansas. Automatic fuel adjustment clauses are presently applicable to retail electric sales in Oklahoma and system wholesale kilowatt-hour sales under FERC jurisdiction. Arkansas has implemented an Energy Cost Recovery Rider that replaces the previous fuel adjustment clause. This rider is adjusted for changing fuel and purchased power costs on an annual basis rather than the monthly adjustment used by the previous fuel adjustment clause. Any increases in fuel costs may be recovered in Missouri and Kansas only through rate filings made with the appropriate Commissions. Environmental Matters The Company is subject to various federal, state, and local laws and regulations with respect to air and water quality as well as other environmental matters. The Company believes that its operations are in compliance with present laws and regulations. Air. The 1990 Amendments to the Clean Air Act ("1990 Amendments") affect the Asbury, Riverton, and Iatan Power Plants. Under the 1990 Amendments, each of these plants was designated as either a Phase I or Phase II facility, dictating when each such plant would become an "affected unit" for purposes of sulfur dioxide ("SO2") and nitrogen oxide ("NOx"). The Company, however, has the option to elect to make a particular plant an affected unit for either SO2 or NOx at an earlier date. When a plant becomes an affected unit for a particular emission, it locks in the then current emission standards. The Asbury Plant is a Phase I facility that became an affected unit for SO2 under the 1990 Amendments on January 1, 1995. The Asbury Power Plant will become an affected unit for NOx on January 1, 2000. The Riverton Plant is classified as a Phase II facility, meaning it would not become an affected unit for SO2 or NOx until January 1, 2000. However, the Company elected to make Riverton an affected unit for NOx in November 1996, locking in the then current NOx emission standards of .50 and .45 parts per million btu's burned for the respective units. The Riverton Plant will become an affected unit for SO2 on January 1, 2000. The Iatan Plant is classified as a Phase II facility, which will become an affected unit for both SO2 and NOx on January 1, 2000. SO2 Emissions. Under the 1990 Amendments, the amount of SO2 an affected unit can emit is regulated. Each affected unit has been awarded a specific number of emission allowances, each of which allows the holder to emit one ton of SO2. Utilities covered by the 1990 Amendments must have emission allowances equal to the number of tons of SO2 emitted during a given year by each of their affected units. Allowances may be traded between plants, utilities or "banked" for future use. A market for the trading of emission allowances exists on the Chicago Board of Trade. The Environmental Protection Agency (the "EPA"), withholds annually a percentage of the emission allowances awarded to each affected unit and sells those emission allowances through a direct auction. The Company receives compensation from the EPA for the sale of these allowances. In 1998, the Asbury Plant used approximately 52% of its available SO2 emission allowances. In the year 2000, the number of SO2 emission allowances that the Asbury Plant will receive each year is expected to decline by approximately one-half (before EPA withholding) and the Company anticipates (based on current operations) that the Plant will use slightly more allowances than the number available to it, in which case allowances would have to be supplied by the Company or purchased on the open-market. When the Iatan Unit becomes an affected unit with respect to SO2 in 2000, it is expected to be deficient in allowances by a margin of approximately 25% based on current operating conditions. Any needed allowances will be supplied by the respective owners from present inventories or by open-market purchases. The Riverton Plant's level of emissions will require significantly more allowances than the number awarded to the Plant when the facility becomes an affected unit for SO2 in 2000. The Company is evaluating various methods to achieve compliance with these requirements including using any available allowances from the Asbury plant, purchasing allowances from other sources, modifying certain equipment to permit the use of greater percentages of low sulfur coal, increasing the use of natural gas as a fuel at the Plant and purchasing additional power. NOx Emissions. The EPA has established the NOx emission limit for cyclone boilers, like the Asbury Power Plant, at 0.86 lbs/MMBTU effective on January 1, 2000. The Company is currently installing NOx control modifications that will reduce NOx emissions to meet these new requirements. The Company estimates the cost of such compliance to be approximately $0.85 million. The Iatan Plant and the Riverton Plant as currently operated are each in compliance with the NOx limits applicable to them under the 1990 Amendments. In September 1998, the EPA issued a final NOx State Implementation Plan call ("the SIP Call") to address the regional transport of ground-level ozone, the main component of smog. When emitted, NOx reacts with volatile organic chemicals in the presence of sunlight to form ground level ozone. The rule requires the District of Columbia and 22 Midwestern and Eastern states, including the entire state of Missouri (but excluding Kansas, Arkansas and Oklahoma), to reduce NOx emissions up to 85% below the levels established by the 1990 Amendments. State Implementation Plans ("SIPs") for the reduction of smog-causing emissions of NOx must be submitted by the States to the EPA in September 1999. The Missouri Department of Natural Resources ("MDNR") is developing its SIP for review by the EPA. The Asbury, State Line, Energy Center and Iatan Power Plants are affected by this SIP Call. If unchanged, this SIP Call would require installation of additional NOx control equipment at the Asbury and Iatan Power Plants by April 1, 2003 and the possible purchase of NOx credits for the Energy Center and State Line Power Plants. The Company is proceeding with the development of compliance plans, including cost determination. The EPA SIP Call also establishes a Federal NOx Trading Program similar to the SO2 allowance trading system described above. Allowance needs for the Asbury, State Line and Energy Center Plants cannot be determined until the MDNR SIP is developed and approved by the EPA. The Company has joined two litigations running concurrently in the Washington D.C. Circuit Court against the EPA SIP Call. One suit has been filed by the Midwest Ozone Group and another by an alliance of western Missouri utilities. A request for an expedited review of the cases has been granted. However, the Company does not expect to have a decision before April 2000. If the litigation is unsuccessful, the Company will be required to install additional NOx control equipment at the Asbury Power Plant at an estimated capital cost of approximately $16 million and which will take approximately three years to complete. This equipment would result in additional operating costs of approximately $2.5 - $5 million annually. Such estimated capital cost is not currently included in the Company's construction budget. Water. The Company operates under the Kansas and Missouri Water Pollution Plans that were implemented in response to the Federal Water Pollution Control Act Amendments of 1972. The Asbury, Iatan, Riverton, Energy Center and State Line facilities are in compliance with applicable regulations and have received discharge permits and subsequent renewals as required. The Asbury permit is under review at the present time and should be issued in Spring 1999. Other. Under Title 5 of the 1990 Amendments, the Company must obtain site operating permits for each of its plants from the authorities in the state in which the plant is located. These permits, which are valid for five years, regulate the plant site's total emissions; including emissions from stacks, individual pieces of equipment, road dust, coal dust and steam leaks. The Company submitted applications for these permits in 1997 in accordance with the 1990 Amendments and have received final permits for the Energy Center and State Line Power Plants. The Company has received the draft permit for Asbury and expects the final permit to be issued by mid-1999. The Riverton Permit application is under review by the Kansas Department of Health and Environment. Conditions Respecting Financing The Company's Indenture of Mortgage and Deed of Trust, dated as of September 1, 1944, as amended and supplemented (the "Mortgage"), and its Restated Articles of Incorporation (the "Restated Articles"), specify earnings coverage and other conditions which must be complied with in connection with the issuance of additional first mortgage bonds or cumulative preferred stock, or the incurrence of unsecured indebtedness. The Mortgage generally permits the issuance of additional bonds only if net earnings (as defined) for a specified twelve-month period are at least twice the annual interest requirements on all bonds at the time outstanding, including the additional issue and all indebtedness of prior rank. Under this test, on December 31, 1998, the Company could have issued under the Mortgage approximately $205.5 million principal amount of additional bonds (at an assumed interest rate of 6.50%). In addition to the interest coverage requirement, the Mortgage provides that new bonds must be issued against, among other things, retired bonds or 60% of net property additions. At December 31, 1998, the Company had retired bonds and net property additions which would enable the issuance of at least $112.5 million principal amount of bonds. Under the Restated Articles, (a) additional cumulative preferred stock may be issued only if net income of the Company available for interest and dividends (as defined) for a specified twelve-month period is at least 1-1/2 times the sum of the annual interest requirements on all indebtedness and the annual dividend requirements on all cumulative preferred stock, to be outstanding immediately after the issuance of such additional shares, and (b) the amount of unsecured indebtedness outstanding may not exceed 20% of the sum of the outstanding secured indebtedness plus the capital and surplus of the Company. Under these restrictions, based on the twelve months ended December 31, 1998, the Company could issue shares of cumulative preferred stock with an aggregate par value of approximately $136.0 million (8-1/8% dividend rate assumed) and at December 31, 1998, the Company could incur maximum unsecured indebtedness of approximately $101.5 million. ITEM 2. PROPERTIES Electric Facilities At December 31, 1998, the Company owned generating facilities (including its interest in Iatan Unit No. 1) with an aggregate generating capacity of 878 megawatts. The principal electric generating plant of the Company is the Asbury Plant with 213 megawatts of generating capacity. The Plant, located near Asbury, Missouri, is a coal-fired generating station with two steam turbine generating units. The Plant presently accounts for approximately 24% of the Company's owned generating capacity and in 1998 accounted for approximately 43% of the energy generated by the Company and 25% of the total energy sold by the Company. Routine plant maintenance, during which the entire Plant is taken out of service, is scheduled once each year, normally for approximately four weeks in the spring. Every fifth year the spring outage is scheduled to be extended to a total of six weeks to permit inspection of the Unit No. 1 turbine. The last such outage was in 1996 and the next such extended outage will occur in 2001. See Item 7 for additional information concerning the maintenance outage. The Unit No. 2 turbine is inspected approximately every 35,000 hours of operations. The unit can be overhauled without Unit No. 1 having to come off-line. When the Asbury Plant is out of service, the Company typically experiences increased purchased power and fuel costs associated with replacement energy. See Item 1 "Business - Regulation - Fuel Adjustment Clauses," for additional information concerning increased purchased power and fuel costs. The Company's generating plant located at Riverton, Kansas, has two steam-electric generating units with an aggregate generating capacity of 92 megawatts and three gas-fired combustion turbine units with an aggregate generating capacity of 44 megawatts. The steam-electric generating units burn coal as a primary fuel and have the capability of burning natural gas. The five-year scheduled maintenance outage for the Riverton Plant occurred during the second quarter of 1998. The Company owns a 12% undivided interest in the 670-megawatt coal-fired Unit No. 1 at the Iatan Generating Station located 35 miles northwest of Kansas City, Missouri, as well as a 3% interest in the site and a 12% interest in certain common facilities. The Company is entitled to 12% of the unit's available capacity and is obligated to pay for that percentage of the operating costs of the Unit. KCPL and SJLP own 70% and 18%, respectively, of the Unit. KCPL operates the unit for the joint owners. See Note 9 of "Notes to Financial Statements" under Item 8. The Company also has two combustion turbine peaking units at the Empire Energy Center in Jasper County, Missouri, with an aggregate generating capacity of 180 megawatts. These peaking units operate on natural gas as well as oil. The Company's State Line Power Plant, which is located west of Joplin, Missouri, consists of two combustion turbine units with an aggregate generating capacity of 253 megawatts. These units burn natural gas as a primary fuel and have the capability of burning oil. Unit No. 1 was placed in service in mid-1995 and Unit No. 2 was placed in service in mid-1997. Reference is made to Item 1 "Business - Electric Generating Facilities and Capacity" and Item 1 "Business - Construction Program" for information with respect to the plans for expansion of the generating capacity at the State Line Power Plant. Upon commercial operation of the State Line Project, the Company would have generating capacity of 101 megawatts from State Line Unit No. 1 and 300 megawatts (60% of 500) from the combined cycle unit, resulting in an aggregate capacity of 401 megawatts. The Company's hydroelectric generating plant, located on the White River at Ozark Beach, Missouri, has a generating capacity of 16 megawatts, subject to river flow. The Company has a long-term license from FERC to operate this plant which forms Lake Taneycomo in Southwestern Missouri. At December 31, 1998, the Company's transmission system consisted of approximately 22 miles of 345 kV lines, 412 miles of 161 kV lines, 756 miles of 69 kV lines and 81 miles of 34.5 kV lines. Its distribution system consisted of approximately 6,104 miles of line. The electric generation stations owned by the Company are located on land owned in fee. The Company owns a 3% undivided interest as tenant in common with KCPL and SJLP in the land for the Iatan Generating Station. Substantially all the electric transmission and distribution facilities of the Company are located either (1) on property leased or owned in fee; (2) over streets, alleys, highways and other public places, under franchises or other rights; or (3) over private property by virtue of easements obtained from the record holders of title. Substantially all property, plant and equipment of the Company are subject to the Mortgage. Water Facilities The Company also owns and operates water pumping facilities and distribution systems consisting of a total of approximately 78 miles of water mains in three communities in Missouri. ITEM 3. LEGAL PROCEEDINGS No legal proceedings required to be disclosed by this Item are pending. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York Stock Exchange. On March 1, 1999, there were 9,040 record holders of its common stock. The high and low sale prices for its common stock reported in The Wall Street Journal as New York Stock Exchange composite transactions, and the amount per share of quarterly dividends declared and paid on the common stock for each quarter of 1998 and 1997 were as follows:
Price of Common Stock Dividends Paid 1998 1997 Per Share High Low High Low 1998 1997 First Quarter $22.500 $18.375 $19.250 $17.750 $0.32 $0.32 Second Quarter 22.500 20.000 18.375 16.000 0.32 0.32 Third Quarter 23.375 19.313 18.250 16.250 0.32 0.32 Fourth Quarter 26.125 20.875 19.938 17.313 0.32 0.32
Holders of the Company's common stock are entitled to dividends if, as, and when declared by the Board of Directors of the Company, out of funds legally available therefor, subject to the prior rights of holders of the Company's outstanding cumulative preferred stock and any preference stock. The Mortgage and the Restated Articles contain certain dividend restrictions. The most restrictive of these is contained in the Mortgage, which provides that the Company may not declare or pay any dividends (other than dividends payable in shares of its common stock) or make any other distribution on, or purchase (other than with the proceeds of additional common stock financing) any shares of, its common stock if the cumulative aggregate amount thereof after August 31, 1944, (exclusive of the first quarterly dividend of $98,000 paid after said date) would exceed the earned surplus (as defined) accumulated subsequent to August 31, 1944, or the date of succession in the event that another corporation succeeds to the rights and liabilities of the Company by a merger or consolidation. As of December 31, 1998, said dividend restriction did not affect any of the retained earnings of the Company. The Company's Dividend Reinvestment and Stock Purchase Plan (the "Reinvestment Plan") allows common and preferred stockholders to reinvest dividends of the Company into newly issued shares of the Company's common stock at 95% of a market price average calculated pursuant to the Reinvestment Plan. Stockholders may also purchase, for cash and within specified limits, additional stock at 100% of such market price average. The Company may elect to make shares purchased in the open market rather than newly issued shares available for purchase under the Reinvestment Plan. If the Company so elects, the purchase price to be paid by Reinvestment Plan participants will be 100% of the cost to the Company of such shares. Participants in the Reinvestment Plan do not pay commissions or service charges in connection with purchases under the Reinvestment Plan. On August 1, 1998 the Company implemented a new Stock Unit Plan for Directors. See Note 3 of "Notes to Financial Statements" under Item 8 for additional information regarding this plan. During 1998, 34,214 units were granted upon conversion of previously earned retirement benefits, 1,681 units were granted for services provided in 1998 and 1,068 units were granted pursuant to the Reinvestment Plan. Securities issued under the Stock Unit Plan for Directors will not be registered under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. The Company has a shareholders rights plan which expires July 25, 2000, under which each of its common stockholders has one-half a Preference Stock Purchase Right ("Right") for each share of common stock owned. One Right enables the holder to acquire one one- hundredth of a share of Series A Participating Preference Stock (or, under certain circumstances, other securities) at a price of $75 per one-hundredth of a share, subject to adjustment. The rights (other than those held by an acquiring person or group ("Acquiring Person")) will be exercisable only if an Acquiring Person acquires 10% or more of the Company's common stock or if certain other events occur. See Note 4 of "Notes to Financial Statements" under Item 8 for further information. The By-laws of the Company provide that K.S.A. Sections 17- 1286 through 17-1298, the Kansas Control Share Acquisitions Act, will not apply to control share acquisitions of the Company's capital stock. See Note 3 of "Notes to Financial Statements" under Item 8 for additional information regarding the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share amounts) 1998 1997 1996 1995 1994 Operating revenues $ 239,858 $ 215,311 $ 205,984 $ 192,838 $ 177,757 Operating income $ 47,372 $ 40,962 $ 36,652 $ 33,151 $ 32,005 Total allowance for funds $ 409 $ 1,226 $ 1,420 $ 2,239 $ 1,715 used during construction Net income $ 28,323 $ 23,793 $ 22,049 $ 19,798 $ 19,683 (1) Earnings applicable to $ 25,912 $ 21,377 $ 19,633 $ 17,381 $ 18,120 common stock (1) Weighted average number of common shares 16,932,704 16,599,269 16,015,858 14,730,902 13,734,231 outstanding Basic and diluted earnings per weighted average shares outstanding $ 1.53 $ 1.29 $ 1.23 $ 1.18(1$ 1.32 Cash dividends per common $ 1.28 $ 1.28 $ 1.28 $ 1.28 $ 1.28 share Common dividends paid as a percentage of earnings applicable to common stock 83.7% 99.4% 104.5% 108.9% 97.0% common stock Allowance for funds used during construction as a percentage of earnings applicable to common stock 1.6% 5.7% 7.2% 12.9% 9.5% Book value per common share outstanding at end of year $ 13.40 $ 13.03 $ 12.93 $ 12.67 $ 12.42 Capitalization: Common equity $ 229,791 $ 219,034 $ 213,091 $ 193,137 $ 173,780 Preferred stock without mandatory redemption provisions $ 32,634 $ 32,902 $ 32,902 $ 32,902 $ 32,902 First mortgage bonds $ 246,093 $ 196,385 $ 219,533 $ 194,705 $ 184,977 Ratio of earnings to fixed charges 3.32 3.01 3.11 2.90 3.16 Ratio of earnings to combined fixed charges and preferred stock dividend requirements 2.78 2.50 2.53 2.36 2.70 Total assets $ 653,294 $ 626,465 $ 596,980 $ 557,368 $ 520,213 Utility plant in service at original cost $ 831,496 $ 797,839 $ 717,890 $ 682,609 $ 611,360 Utility plant expenditures during the year $ 47,366 $ 53,280 $ 59,373 $ 49,217 $ 71,649
(1) Reflects a pre-tax charge of $4,583,000 for certain one-time costs associated with the Company's voluntary early retirement program. ITEM 7. 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 year ended December 31, 1998, compared to the year ended December 31, 1997, and for the year ended December 31, 1997, compared to the year ended December 31, 1996. Operating Revenues and Kilowatt-Hour Sales Of the Company's total electric operating revenues during 1998, approximately 42% were from residential customers, 30% from commercial customers, 17% from industrial customers, 5% from wholesale on-system customers and 3% 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:
Kwh Sales Revenues 1998 1997 1998 1997 Residential 8.3% (0.7)% 13.5% 3.1% Commercial 6.4 1.5 10.6 5.1 Industrial 1.9 2.1 7.0 5.6 Wholesale On- 9.6 4.1 12.3 2.6 System Total System 6.0 1.1 11.3 4.5
Kwh sales for the Company's on-system customers increased during 1998 primarily due to above-average temperatures during the second and third quarters. Revenues increased more than the corresponding increase in Kwh sales primarily due to increased rates in Missouri and Arkansas as reflected in the table below and the winter/summer differential in rates. This differential results from summer rates being higher than winter rates, so warm summer temperatures that increase summer Kwh usage cause the corresponding annual revenues to increase at a greater rate. Customer growth increased slightly to 1.79% in 1998 as compared to 1.68% in 1997. Residential Kwh sales increased 8.3% while commercial Kwh sales increased 6.4% as compared to 1997, primarily due to the above- average temperatures. Industrial classes, although not particularly weather-sensitive, also showed an increase in Kwh sales and revenues due to continued increases in business activity throughout the Company's service territory as well as the Missouri and Arkansas rate increases. On-system wholesale Kwh sales were up significantly in 1998, reflecting the warm summer temperatures and the continued increases in business activity. Revenues associated with these sales increased more than the corresponding Kwh sales as a result of the operation of the fuel adjustment clause applicable to such FERC regulated sales. This clause permits changes in fuel and purchased power costs to be passed along to customers without the need for a rate proceeding. Kwh sales for the Company's on-system customers increased only slightly during 1997 due to cool summer weather, while revenues increased more than the corresponding increase in Kwhs primarily due to increased rates in Missouri as reflected in the table below. Customer growth slowed from 2.33% in 1996 to 1.68% in 1997. Residential Kwh sales decreased slightly compared to 1996 due to a milder first half of 1997 while revenues for the period increased because of increases in Missouri rates during the last half of 1997. Commercial and industrial classes showed an increase in Kwh sales and revenues in 1997 because their sales are not as impacted by weather. Revenues from the on-system wholesale customers increased more than the Kwh sales for that class due to the operation of the fuel adjustment clause. The following table sets forth information regarding electric rate increases affecting the revenue comparisons discussed above:
Percent Date Increase Increase Increase Date Jurisdiction Requested Requested Granted Granted Effective Arkansas 02-19-98 $ 618,497 $ 358,848 6.60% 08-24-98 Missouri 08-30-96 23,438,000 13,589,364 8.25% *
* An increase of $10,589,364 was granted effective 07-28-97. An additional $3,000,000 increase became effective 09-19-97. The Company's future revenues from the sale of electricity will continue to be affected by economic conditions, business activities, competition, deregulation of the energy industry, weather, regulation, changes in electric rate levels and changing patterns of electric energy use by customers. Inflation affects the Company's operations in that historical costs rather than current replacement costs are recovered in the Company's rates. Off-System Transactions In addition to sales to its own customers, the Company sells power to other utilities to the extent it is available and provides transmission service through its system for transactions between other energy suppliers. During 1998 revenues from such off-system transactions were approximately $8.3 million as compared to approximately $7.6 million during 1997 and approximately $6.3 during 1996. The margin on such off-system sales is lower than on sales to the Company's on-system customers. In addition, pursuant to an order issued by the FERC and subsequent tariffs filed by the Company and SPP, these off-system sales have been opened up to competition. The Company cannot predict, however, the effect such competition will have on its future operations or financial results. See "- Competition" below for more information on these open-access tariffs. Operating Revenue Deductions During 1998, total operating expenses increased approximately $7.5 million (6.6%) compared to the prior year. Total fuel costs were up approximately $5.8 million (16.0%) due primarily to the increased generation from higher-cost gas-fired combustion turbine units at both State Line and the Energy Center. This increased generation was due to increased customer demand in the second and third quarters of 1998 resulting from the warmer temperatures. Increased gas usage is a trend the Company expects to continue, especially when the State Line Project begins commercial operation. Natural gas prices were lower by 3.0% during 1998 as compared to 1997, helping to offset some of the increased fuel expense. Total purchased power costs increased slightly by approximately $0.4 million (0.9%) during 1998. Other operating expenses increased approximately $1.3 million (4.3%) during 1998, compared to 1997, due primarily to increases in customer accounts expense and administrative and general expense. Approximately $0.7 million of this increase was a one-time charge due to the initiation of the Directors Stock Unit Plan, a stock- based retirement compensation program for the Company's Directors. Maintenance and repairs expense increased approximately $4.7 million (36.4%) during 1998. Scheduled maintenance resulting from increased usage of the gas-fired combustion turbines at the Energy Center and the State Line Power Plant accounted for approximately $2.8 million of this increase while approximately $1.1 million resulted from the first quarter spring maintenance outage at the Asbury Plant and the second quarter five-year scheduled maintenance outage at the Riverton Plant. Transmission and distribution system maintenance contributed $0.8 million to the increase. Maintenance and repair expense is expected to increase significantly in the first quarter of 1999 as a result of a New Year's Day ice storm that interrupted service to approximately 35,000 of the Company's Missouri and Kansas customers over a three day period. Depreciation and amortization expense increased approximately $1.6 million (6.8%) during 1998, compared to 1997, due to increased levels of plant and equipment placed in service. Total income taxes increased approximately $3.2 million (24.5%) during 1998 due primarily to higher taxable income during the current year. See Note 8 of "Notes to Financial Statements" for additional information regarding income taxes. Other taxes were up approximately $1.2 million (10.3%) during the year largely as a result of increased property taxes and city franchise taxes. During 1997, total operating expenses increased approximately $2.9 million (2.6%) compared to the prior year. Total fuel costs were up approximately $2.5 million (7.6%) during 1997, due primarily to increased generation from higher-cost gas-fired combustion turbine units at both State Line and the Energy Center. This increased generation was due to increased customer demand in the third and fourth quarters of 1997, as well as decreased energy availability in the SPP during the month of October. Natural gas prices were also higher by 7.8% during 1997 than in 1996. Total purchased power costs decreased slightly during 1997, due primarily to increased usage of the Company's own generation facilities. Unit No. 2 at the State Line Power Plant was placed in commercial operation on June 18, 1997, and added 152 megawatts of capability. Although Asbury underwent an extended five-week spring outage in 1997, the plant was back on line ahead of schedule and went on to record a new continuous run record of 170 days and a record availability rate of 88.5 %. Other operating expenses increased during 1997, compared to 1996, due primarily to an increase in production expenses related to the extended Asbury Plant outage in the spring of 1997. Maintenance and repairs expense decreased during 1997 as a result of decreased levels of distribution system maintenance. Depreciation and amortization expense increased due to increased levels of plant and equipment placed in service during 1997, particularly Unit No. 2 at the State Line Power Plant. Total income taxes increased due to higher taxable income. Other taxes decreased slightly during the year. Nonoperating Items Total allowance for funds used during construction ("AFUDC") amounted to approximately 1.6% of earnings applicable to common stock during 1998, 5.7% during 1997, and 7.2% during 1996. AFUDC decreased significantly during 1998 as well as 1997, reflecting lower levels of construction work in progress, particularly due to the completion of State Line Unit No. 2. Interest charges on first mortgage bonds increased $1.3 million (7.7%) compared to the prior 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. As a result, commercial paper interest decreased $0.5 million (42.3%) during the year due to decreased usage of short-term debt for financing purposes, while interest income increased, reflecting the higher balances of cash available for investment. Other-net deductions increased approximately $0.4 million during 1998, compared to 1997, due primarily to one-time startup costs for the Company's non-regulated ventures, such as home security and fiber optics leasing. Earnings Basic and diluted earnings per weighted average share of common stock were $1.53 during 1998 compared to $1.29 in 1997. Increased revenue resulted mainly from the unusually warm second and third quarters of 1998. The 1998 Arkansas rate increase and the 1997 Missouri rate increases also favorably impacted the Company's operating results in 1998, as the Missouri jurisdiction accounts for approximately 90% of the on-system retail sales of the Company. Earnings per share of Common stock were $1.29 during 1997 compared to $1.23 in 1996. Increased revenue, resulting mainly from the increase in Missouri rates in 1997, was partially offset by a cool summer and fairly mild winter as well as increases in fuel costs and decreased levels of AFUDC. Competition Federal regulation, such as The National Energy Policy Act of 1992 (the "Energy Act") has promoted and is expected to continue to promote competition in the electric utility industry. The Energy Act, among other things, eases restrictions on independent power producers, delegates authority to the FERC to order wholesale wheeling and grants individual states the power to order retail wheeling. At this time, Oklahoma is the only state in which the Company operates that has taken any such action. In Missouri, the Joint Committee of the Missouri legislature received testimony during 1997 and 1998 but there was no legislative action taken. In Kansas, although different bills were introduced into the House and Senate during 1997, no legislative action was taken in 1997 or in 1998. Discussions regarding deregulation, however, are expected to continue in Missouri and Kansas throughout 1999. In Oklahoma, the Electric Restructuring Act of 1997 was passed by the Legislature and signed into law by the Governor. The bill, with a target date of July 1, 2002, was designed to provide for the orderly restructuring of the electric utility industry in the state and move the state toward open competition for electric generation. In Arkansas, the House and Senate passed a concurrent resolution in 1997 requesting a study of the impact of competition on the electric utility industry. Legislation has been introduced in Arkansas with a target date of 2002. In April 1996, the FERC issued Order No. 888 (the "Order") which requires all electric utilities that own, operate, or control interstate transmission facilities to file open access tariffs that offer all wholesale buyers and sellers of electricity the same transmission services that they provide themselves. The utility would have to take service under those tariffs for its own wholesale power transactions. The Order requires a functional unbundling of transmission and power marketing services. The Order also provides stranded cost recovery mechanisms for utilities to recover costs that were incurred to serve wholesale customers that would no longer be recoverable as a result of the customer departing the system and obtaining electric service from another supplier. In accordance with the Order, on July 9, 1996, the Company filed its open access transmission tariff (the "Company Tariff") with the FERC. Following an extensive audit and discussions, the Company, the FERC and intervenors reached a settlement on August 1, 1997. The rates submitted with the settlement, applicable to customers who did not have service agreements in effect, were made effective as of July 9, 1996. For customers with service agreements in effect, the Company Tariff will not be applicable until a rate increase has been filed, which may not be made prior to June 1999. On December 19, 1997, the SPP filed its own open access transmission tariff (the "Regional Tariff") on behalf of its members to provide pool-wide, short-term transmission services using pricing which is based on distance. As of June 1, 1998, the date the FERC declared the Regional Tariff effective, the SPP began providing short-term firm and non-firm point-to-point transmission services for periods of less than one year under this tariff. The SPP, on December 1, 1998, filed proposed revisions to the Regional Tariff that included the addition of long-term point-to-point transmission service as a service offered under the Regional Tariff (along with a few other minor changes). The FERC accepted the amended tariff, making it effective January 30, 1999 as to minor changes and effective April 1, 1999 as to the inclusion of the long- term transmission services. A transmission customer taking long- term firm point-to-point transmission service through or out of the SPP, will pay one charge for service. That rate, if the load originates outside the SPP, will be a single system-wide rate based on the weighted average rate of each SPP member's zone through which the load passes. The rate for each zone is based on such member's rate for long-term firm service under its individual open access tariffs. In addition, if the load originates in a particular member's zone, then the system-wide rate will be based solely on such member's rate under its own tariff. Rates for short- term transmission services are computed much the same way as for long-term transmission services, except that the rates may be discounted by the SPP or a particular member, as appropriate. The Regional Tariff, as amended, applies to many of the transmission services for which the Company Tariff was designed. Where that is the case, the Company will have to share revenues received from such transmission services with other members of the SPP based on a megawatt mile method of calculating transmission service charges. However, the Company Tariff will apply instead of the Regional Tariff to, and the Company will receive 100% of the revenues from, (1) all transmission services for which the load originates within the Company's zone and does not pass through the zone of any other member of the SPP and (2) all long-term firm point-to-point transmission services provided by the Company pursuant to contracts entered into prior to April 1, 1999. The availability of purchased power in the bulk power market, generation fuel costs and the requirements of other electric systems are all factors that affect the amount of power purchased and wheeled through the Company's and the SPP's transmission system each year. As a result, the Company cannot predict the effect of these tariffs on its future operations or financial results due to its inability to predict these factors. Several factors exist which may enhance the Company's ability to compete as deregulation occurs. The Company is able to generate and purchase power relatively inexpensively; during 1998, the Company's retail rates were approximately 30% less than the electric industry average. In addition, less than 5% of the Company's electric operating revenues are derived from sales to on- system wholesale customers, the type of customer for which the FERC is already requiring open access. At the same time, the Company could face increased competitive pressure as a result of its reliance on relatively large amounts of purchased power and its extensive interconnections with neighboring utilities. The Company cannot predict, however, the ultimate effect competition or regulatory change will have on its future operations or financial results, but such effects may be material. LIQUIDITY AND CAPITAL RESOURCES The Company's construction-related expenditures totaled approximately $51.9 million, $56.7 million, and $62.3 million in 1998, 1997 and 1996, respectively. Approximately $10.8 million of construction expenditures during 1998 were related to the State Line Power Plant including advance payments on the new construction planned in connection with the State Line Project and remaining payments related to the construction of Unit No. 2 at the State Line Power Plant, which was placed in service in mid-1997. Additions to the Company's transmission and distribution systems to accommodate customer growth represented approximately $25.5 million of construction expenditures during 1998. Approximately $3.5 million of the above-mentioned construction expenditures for 1998 is related to the Company's investment in fiber optics cable and equipment which the Company plans to utilize and to lease to other entities. Approximately 65% of construction expenditures and other funds requirements for 1998 were satisfied internally from operations. The Company estimates that its construction expenditures will total approximately $64.6 million in 1999, $98.8 million in 2000 and $66.5 million in 2001. Of these amounts, the Company anticipates that it will spend $18.0 million, $22.1 million and $22.6 million in 1999, 2000 and 2001, respectively, for additions to the Company's distribution system to meet projected increases in customer demand. These construction expenditure estimates also include approximately $25.7 million, $41.9 million and $21.6 million in 1999, 2000 and 2001 respectively, for the construction of new generating facilities as part of the State Line Project discussed in the following paragraph. The Company announced on October 2, 1998 its plans for the construction of a 350-megawatt addition to the State Line Power Plant. This State Line Project would consist of an additional combustion turbine, two heat recovery steam generators and a steam turbine and auxiliary equipment. It is estimated that construction would begin in the fall of 1999 and that the State Line Project would be operational by June 2001. The Company announced on February 4, 1999 that it had entered into a Memorandum of Understanding which contemplates entering into a joint ownership agreement under which the Company would own an undivided 60% interest in the State Line Project with Western Resources owning the remainder. The Company would also be entitled to 60% of the capacity of the State Line Project. The Company would 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 would provide the Company with 150 megawatts of additional capacity. The total cost of the State Line Project is estimated to be $185 million (of which $100 million is expected to be the Company's share). The Company estimates that internally generated funds will provide approximately 40% of the funds required between 1999 and 2001 for estimated 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. See Note 5 of "Notes to Financial Statements" regarding the Company's line of credit. On April 28, 1998, the Company sold to the public in an underwritten offering $50 million aggregate principal amount of its First Mortgage Bonds, 6 1/2% Series due 2010. The net proceeds from this sale were added to the Company's general funds and were used to repay $23 million of the Company's First Mortgage Bonds, 5.70% Series due May 1, 1998 and to repay short-term indebtedness, including indebtedness incurred in connection with the Company's construction program. As of December 31, 1998, the Company's ratings for its first mortgage bonds, preferred stock and commercial paper were as follows:
Duff & Phelps Moody's Standard & Poor's First Mortgage Bonds A+ A2 A- Preferred Stock A a3 BBB Commercial Paper D-1 P-1 A-2
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. NERC's target is to have all mission critical electric power production, transmission, and delivery systems Year 2000 ready by June 30, 1999. The Company is working within that framework and plans to participate in two industry-wide Year 2000 drills on April 9,1999 and September 9, 1999. 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 will be 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 systems for general ledger, accounts payable and asset management; purchasing and inventory; human resources, benefits, time and labor, and payroll; as well as budgeting and project tracking. In addition, a new customer information system, Centurion, is being developed internally which will be Year 2000 ready. Installation of these systems, which are anticipated to substantially mitigate the Company's Year 2000 exposure, is expected to be completed during the first half of 1999. State of Readiness A task force has been appointed and is 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 is examining 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 ongoing testing and remediation of the highest level of critical items is scheduled to be completed by the end of the second quarter of 1999. The Year 2000 task force will also develop contingency plans in the event that unanticipated problems are encountered. These plans are also scheduled to be completed during the second quarter of 1999. The Company currently plans to substantially complete its Year 2000 testing and compliance projects by the end of the second quarter of 1999. The status of each of the targeted areas undergoing testing is as follows: General Preparation. Scheduled upgrades to the telephone switch are 50% complete with the final upgrades scheduled to be completed early in the second quarter of 1999. The testing of other items is scheduled to be completed by the end of the first quarter of 1999. Power Generation. The Ozark Beach Plant has completed 100% of the testing of affected equipment. The testing of affected equipment at the Riverton Plant is approximately 50% complete and at the Energy Center Plant is 90% complete. Assessment and inventory are complete at all plants. Testing for the Asbury and State Line Plants is underway. All plants intend to have testing of critical items complete by the end of the first quarter of 1999 except for items which can only be tested during scheduled plant shutdowns. All critical items are anticipated to be tested for Year 2000 readiness by the end of the second quarter of 1999. Energy Management Systems. The Company is in the process of installing major upgrades to its Energy Management System hardware and software as a result of Year 2000 related problems observed during preliminary system testing. These upgrades are anticipated to be completed by the end of the first quarter of 1999. The Company has obtained readiness certifications for most of the other related components and will conduct its own test on components critical to the operations of the Energy Management System and other related systems. Year 2000 related testing of these components is expected to be completed by the end of the second quarter of 1999. Telecommunications. The Company has worked with suppliers and manufacturers to obtain readiness certifications for its various telecommunications systems and components. The Company plans to complete the testing of critical systems and components by the end of the second quarter of 1999. Substation Controls and System Protection. Testing of transmission and distribution equipment to date has identified a minor amount of equipment that will require Year 2000 remediation. That equipment will be replaced by the end of the second quarter of 1999. 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 are being required throughout the Company, delaying testing of the remaining systems. Currently, the testing of these systems is 10% complete with the target date for the completion of testing being mid-1999. Third Parties. The Company is currently in the process of o btaining readiness certifications from third party vendors for all of its core applications and operating systems. The Company expects to complete this process by the end of the first quarter of 1999. All critical applications will be tested, however, regardless of whether a certification of readiness has been obtained. In addition, the Company has begun to contact other third parties with whom the Company does business (such as major customers, power pools, power 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 is continuing to monitor the progress of these third parties. 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 and the new customer information system) to update all systems for Year 2000 readiness will be approximately $3.7 million, of which approximately $2.8 million have been incurred and capitalized as of December 31, 1998 and $0.3 million have been incurred and expensed. Of these capitalized costs, $0.5 million were included in the 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 is that key customers could experience significant reductions in their power needs due to their own Year 2000 issues, and there could be a temporary disruption of service to some customers due to cascading disruptions caused by other entities whose systems are connected to the Company's. The Company is assessing the risk of this scenario and will be formulating contingency plans, currently scheduled to be completed during the second quarter of 1999, to mitigate the potential impact. The Company's Year 2000 task force has formed a contingency planning team which will follow guidelines established by the NERC to formalize a plan with respect to the above worst case scenario and other contingencies which may develop by the end of the second quarter of 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 annual 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; 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk. The Company is exposed to changes in interest rates as a result of significant financing through its issuance of fixed-rate debt, commercial paper and preferred stock. The Company manages its interest rate exposure by limiting its variable-rate exposure to a certain percentage of total capitalization, as set by policy, and by monitoring the effects of market changes in interest rates. See Notes 4, 5 and 6 of "Notes to Financial Statements" under Item 8 for further information. If market interest rates average 1% more in 1999 than in 1998, the Company's interest expense would increase, and income before taxes would decrease, by approximately $150,000. This amount has been determined by considering the impact of the hypothetical interest rates on the Company's commercial paper balances as of December 31, 1998. 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 the Company's financial structure. Commodity Price Risk. The Company is exposed to the impact of market fluctuations in the price and transportation costs of coal, natural gas, and electricity and employs established policies and procedures to manage its risks associated with these market fluctuations. At this time none of the Company's commodity purchase or sale contracts meet the definition of financial instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Accountants January 26, 1999 To the Board of Directors and Stockholders of The Empire District Electric Company In our opinion, the financial statements listed in the index appearing under Item 14 on page 46 present fairly, in all material respects, the financial position of The Empire District Electric Company at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP St. Louis, Missouri January 26, 1999
Balance Sheet December 31, 1998 1997 Assets Utility plant, at original cost: Electric $ 832,484,754 $ 795,880,240 Water 6,398,086 5,824,165 Construction work in progress 16,701,068 8,114,680 855,583,908 809,819,085 Accumulated depreciation 283,337,538 262,834,707 572,246,370 546,984,378 Current assets: Cash and cash equivalents 2,492,716 2,545,282 Accounts receivable - trade, net 13,645,641 13,270,329 Accrued unbilled revenues 6,218,889 6,047,739 Accounts receivable - other 1,590,536 1,552,998 Fuel, materials and supplies 15,704,678 13,215,068 Prepaid expenses 929,447 1,001,468 40,581,907 37,632,884 Deferred charges: Regulatory assets 35,999,139 37,472,225 Unamortized debt issuance costs 3,660,800 3,374,780 Other 805,568 1,000,700 40,465,507 41,847,705 Total Assets $ 653,293,784 $ 626,464,967 Capitalization and Liabilities Common stock, $1 par value, 20,000,000 shares authorized, 17,108,799 and 16,776,654 shares issued and outstanding, respectively $ 17,108,799 $ 16,776,654 Capital in excess of par value 156,975,596 150,784,239 Retained earnings 55,706,779 51,472,897 Total common stockholders' equity 229,791,174 219,033,790 Preferred stock 32,634,263 32,901,800 Long-term debt 246,092,905 196,384,541 508,518,342 448,320,131 Current liabilities: Accounts payable and accrued liabilities 17,096,272 14,862,581 Commercial paper 14,500,000 28,000,000 Customer deposits 3,438,987 3,140,621 Interest accrued 4,113,300 3,509,680 Taxes accrued, including income taxes - 817,045 Current maturities of long-term debt - 23,000,000 39,148,559 73,329,927 Commitments and Contingencies (Note 10) Noncurrent liabilities and deferred credits: Regulatory liability 16,400,125 17,540,757 Deferred income taxes 73,760,362 69,344,653 Unamortized investment tax credits 8,391,000 8,971,000 Postretirement benefits other than pensions 4,463,883 4,463,488 Other 2,611,513 4,495,011 105,626,883 104,814,909 Total Capitalization and Liabilities $ 653,293,784 $ 626,464,967
The accompanying notes are an integral part of these financial statements.
Statement of Income Year ended December 31 1998 1997 1996 Operating revenues: Electric $ 238,800,831 $ 214,306,599 $ 204,933,622 Water 1,057,460 1,004,245 1,050,337 239,858,291 215,310,844 205,983,959 Operating revenue deductions: Operating expenses: Fuel 41,876,064 36,110,575 33,574,335 Purchased power 47,572,541 47,132,885 47,393,029 Other 31,972,081 30,646,485 30,046,147 121,420,686 113,889,945 111,013,511 Maintenance and repairs 17,522,871 12,843,508 13,672,084 Depreciation and amortization 24,980,637 23,395,291 21,589,511 Provision for income taxes 16,190,000 13,000,000 11,800,000 Other taxes 12,372,321 11,219,730 11,256,486 192,486,515 174,348,474 169,331,592 Operating income 47,371,776 40,962,370 36,652,367 Other income and deductions: Allowance for equity funds used during construction 8,938 150,524 538,844 Interest income 263,801 130,685 158,369 Other - net (840,557) (453,127) (344,525) (567,818) (171,918) 352,688 Income before interest charges 46,803,958 40,790,452 37,005,055 Interest charges: Long-term debt 17,873,833 16,593,042 14,881,564 Allowance for borrowed fundsd usedduring construction (400,044) (1,075,465) (881,485) Other 1,006,831 1,479,896 955,769 18,480,620 16,997,473 14,955,848 Net income 28,323,338 23,792,979 22,049,207 Preferred stock dividend 2,411,784 2,416,340 2,416,340 requirements Net income applicable to $ 25,911,554 $ 21,376,639 $ 19,632,867 common stock Weighted average number of common shares outstanding 16,932,704 16,599,269 16,015,858 Basic and diluted earnings per weighted weighted average share of $ 1.53 $ 1.29 $ 1.23 common stock Dividends per share of common stock $ 1.28 $ 1.28 $ 1.28
The accompanying notes are an integral part of these financial statements.
Statement of Common Stockholder's Equity Year ended December 31, 1998 1997 1996 Common stock, $1 par value: Balance, beginning of year $ 16,776,654 $ 16,436,559 $ 15,215,933 Stock/stock units issued through: Public offering - - 880,000 Dividend reinvestment and stock purchase plan 259,267 299,134 301,500 Employee benefit plans 35,915 40,961 39,126 Director retirement plan 36,963 - - Balance, end of year $ 17,108,799 $ 16,776,654 $ 16,436,559 Capital in excess of par value: Balance, beginning of year $ 150,784,239 $ 145,313,610 $ 125,690,842 Excess of net proceeds over par value of stock issued: Public offering - - 14,850,000 Stock plans 6,188,030 5,470,404 5,494,007 Expenses related to common stock issuance - - (787,580) Installments received on common stock/stock purchase, net 3,327 225 66,341 Balance, end of year $ 156,975,596 150,784,239 $ 145,313,610 Retained earnings: Balance, beginning of year $ 51,472,897 $ 51,340,554 $ 52,230,584 Net income 28,323,338 23,792,979 22,049,207 79,796,235 75,133,533 74,279,791 Less dividends paid: 8 1/8% preferred stock 2,027,390 2,031,250 2,031,250 5% preferred stock 195,090 195,090 195,090 4 3/4% preferred stock 190,000 190,000 190,000 Common stock 21,676,976 21,244,296 20,522,897 24,089,456 23,660,636 22,939,237 Balance, end of year $ 55,706,779 $ 51,472,897 $ 51,340,554
The accompanying notes are an integral part of these financial statements.
Statement of Cash Flows Year ended December 31, 1998 1997 1996 Operating activities Net income $ 28,323,338 $ 23,792,979 $ 22,049,207 Adjustments to reconcile net income to cash flows: Depreciation and amortization 28,323,595 26,510,851 24,314,157 Pension income (2,239,850) (725,198) (1,074,130) Deferred income taxes, net 3,390,000 2,800,000 3,760,000 Investment tax credit, net (580,000) (590,000) (580,000) Allowance for equity funds used during construction (8,938) (150,524) (538,844) Issuance of common stock for 702,801 660,162 648,535 401 (k) plan Issuance of common stock units for director retirement plan 711,000 Other 66,955 129,259 141,882 Cash flows impacted by changes in: Accounts receivable and accrued unbilled revenues (584,001) 1,132,283 (1,164,692) Fuel, materials and supplies (2,489,610) 1,220,673 76,157 Prepaid expenses and deferred 191,956 (1,049,440) (2,077,625) charges Accounts payable and accrued 2,233,691 255,402 298,682 liabilities Customer deposits, interest and 84,941 741,425 (631,954) taxes accrued Other liabilities and other 356,750 265,966 (149,401) deferred credits Net cash provided by 58,482,628 54,993,838 45,071,974 operating activities Investing activities Construction expenditures (51,917,153) (56,673,275) (62,277,486) Allowance for equity funds used during construction 8,938 150,524 538,844 Net cash used in (51,908,215) (56,522,751) (61,738,642) investing activities Financing activities Proceeds from issuance of $ 49,672,000 $ - $ 25,000,000 first mortgage bonds Proceeds from issuance of 5,109,701 5,150,561 20,194,860 common stock Reacquired preferred stock (267,537) Dividends (24,089,456) (23,660,636) (22,939,237) Repayment of first mortgage (23,000,000) (165,000) (187,000) bonds Net proceeds (repayments) from short-term borrowings (13,500,000) 20,500,000 (6,500,000) Payment of debt issue costs (551,687) 3,134 (472,595) Net cash (used in)/provided by financing activities (6,626,979) 1,828,059 15,096,028 Net increase (decrease) in (52,566) 299,146 (1,570,640) cash and cash equivalents Cash and cash equivalents, 2,545,282 2,246,136 3,816,776 beginning of year Cash and cash equivalents, $ 2,492,716 $ 2,545,282 $ 2,246,136 end of year
Cash and cash equivalents include cash on hand and temporary investments purchased with an initial maturity of three months or less. Interest paid was $17,439,000, $17,123,000, $14,786,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Income taxes paid were $14,088,000, $10,250,000 and $9,479,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The accompanying notes are an integral part of these financial statements. Notes to Financial Statements 1. Summary of Accounting Policies The Company is subject to regulation by the Missouri Public Service Commission (MoPSC), the State Corporation Commission of the State of Kansas (KCC), the Corporation Commission of Oklahoma (OCC), the Arkansas Public Service Commision (APSC) and the Federal Energy Regulatory Commission (FERC). The accounting policies of the Company are in accordance with the rate-making practices of the regulatory authorities and, as such, conform to generally accepted accounting principles as applied to regulated public utilities. The Company's electric revenues in 1998 were derived as follows: residential 42%, commercial 30%, industrial 17%, wholesale 7% and other 4%. Following is a description of the Company's significant accounting policies: Property and plant The costs of additions to property and plant and replacements for retired property units are capitalized. Costs include labor, material and an allocation of general and administrative costs plus an allowance for funds used during construction. Maintenance expenditures and the renewal of items not considered units of property are charged to income as incurred. The cost of units retired is charged to accumulated depreciation, which is credited with salvage and charged with removal costs. Depreciation Provisions for depreciation are computed at straight-line rates as approved by regulatory authorities. Such provisions approximated 3.2%, 3.1% and 3.2% of depreciable property for 1998, 1997 and 1996, respectively. Computations of earnings per share Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding plus the incremental shares that would have been outstanding under the assumed exercise of dilutive stock options and their equivalents. The weighted average number of common shares outstanding used to compute basic earnings per share for the 1998, 1997 and 1996 periods was 16,932,704, 16,599,269 and 16,015,858, respectively. Dilutive stock options for the 1998, 1997 and 1996 periods were 7,775, 9,844 and 7,917, respectively. Allowance for funds used during construction As provided in the regulatory Uniform System of Accounts, utility plant is recorded at original cost, including an allowance for funds used during construction (AFUDC) when first placed in service. The AFUDC is a utility industry accounting practice whereby the cost of borrowed funds and the cost of equity funds (preferred and common stockholders' equity) applicable to the Company's construction program are capitalized as a cost of construction. This accounting practice offsets the effect on earnings of the cost of financing current construction, and treats such financing costs in the same manner as construction charges for labor and materials. AFUDC does not represent current cash income. Recognition of this item as a cost of utility plant is in accordance with regulatory rate practice under which such plant costs are permitted as a component of rate base and the provision for depreciation. In accordance with the methodology prescribed by FERC, the Company utilized aggregate rates of 5.9% for 1998, 6.4% for 1997 and 7.5% for 1996 (on a before-tax basis) compounded semiannually. Notes to Financial Statements Income taxes Deferred tax assets and liabilities are recognized for the tax consequences of transactions that have been treated differently for financial reporting and tax return purposes, measured using statutory tax rates. Investment tax credits utilized in prior years were deferred and are being amortized over the useful lives of the properties to which they relate. Unamortized debt discount, premium and expense Discount, premium and expense associated with long-term debt are amortized over the lives of the related issues. Costs, including gains and losses, related to refunded long-term debt are amortized over the lives of the related new debt issues. Accrued unbilled revenue The Company accrues on its books estimated, but unbilled, revenue and also a liability for the related taxes. Accumulated provision for uncollectible accounts The accumulated provision for uncollectible accounts was $276,000 at December 31, 1998 and $279,000 at December 31, 1997. Franchise taxes Franchise taxes are collected for and remitted to their respective cities. Operating revenues include franchise taxes of $4,400,000, $3,900,000 and $3,800,000 for each of the years ended December 31, 1998, 1997 and 1996, respectively. Liability insurance The Company carries excess liability insurance for workers' compensation and public liability claims. In order to provide for the cost of losses not covered by insurance, an allowance for injuries and damages is maintained based on loss experience of the Company. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the report period. Actual amounts could differ from those estimates. Reclassification Certain prior year amounts have been reclassified to conform with current year presentation. These reclassifications have no effect on previously reported net income or stockholders' equity. 2. Regulatory Matters During the three years ending December 31, 1998, the following rate changes were requested or in effect: Notes to Financial Statements Arkansas On February 19, 1998, the Company filed a request with the Arkansas Public Service Commission to increase rates in Arkansas by $618,000 annually. An agreement was reached to stipulate an increase of $359,000 on June 16, and the Company received an order from the Arkansas Commission on July 21, approving the stipulated rate increase. Missouri On August 30, 1996, the Company filed a request with the Missouri Public Service Commission for a general annual increase in rates for its Missouri electric customers of approximately $23,400,000, or 13.8%. A stipulated agreement was filed by the parties for approximately $13,950,000, and on July 17, 1997, the Missouri Commission issued an order approving an annual increase in rates in the amount of approximately $10,600,000, or 6.43% effective July 28, 1997. The amount did not include the Company's investment in Unit No. 2 at the Company's State Line Plant because the Commission deemed that Unit No. 2 did not meet all the specified in-service criteria. On July 25, 1997, the Company filed an Application for Rehearing regarding the status of Unit No. 2, seeking to recover the remaining $3,350,000 of the stipulated agreement. On September 11, 1997, the Missouri Commission issued an order approving an additional annual increase in rates in the amount of $3,000,000, or 1.7% effective September 19, 1997, making the total increase in annual revenue from this proceeding approximately $13,600,000, or 8.25%. FERC In July 1996, the Company filed with the FERC an open access non- discriminatory transmission tariff (the Company Tariff) in compliance with FERC Order 888 issued in April 1996. In January 1997, the FERC staff and intervenors reached a settlement in principal to base rates on traditional cost of service methodology. After extensive review by the FERC and discussion with all parties involved, an agreement was reached and approved by the FERC on August 1, 1997 with rates made effective July 9, 1996. For customers with service agreements in effect, the Company Tariff will not be applicable until a rate increase has been filed which may not be made prior to June 1999. On December 19, 1997, the Southwest Power Pool (SPP), a power pool with whom the Company is a member, filed an open access transmission tariff (the Regional Tariff) on behalf of its members to provide pool-wide, short term transmission services using pricing which is based on distance. As of June 1, 1998 the date the FERC declared the Regional Tariff effective, the SPP began providing short-term firm and non-firm point-to-point transmission service for periods of less than one year under this tariff. The SPP filed an amended open access tariff on December 1, 1998 to include long-term firm point-to-point transmission service. The FERC accepted the amended tariff making it effective April 1, 1999. The rate charged will be a single system- wide rate based on the weighted average cost of each SPP member's zone through which the load passes. The rates for each zone are based on such member's rates for long-term firm service based on its individual open access tariff. In addition, if the load originates in a particular member's zone, then the system-wide rate will be based solely on such member's rate under its own tariff. The Regional Tariff as amended will apply to many of the transmission services for which the Company Tariff was designed. However, the Company Tariff would still apply instead of the Regional Tariff for (1) all transmission services for which the load originates within the Company's zone and does not pass through the zone of any members of the SPP and (2) for all long-term firm point-to-point transmission services provided by the Company pursuant to contracts entered into prior to April 1, 1999. The availability of purchased power in the bulk power market, generation fuel costs and the requirements of other electric systems are all factors that affect the amount Notes to Financial Statements of power purchased and wheeled through the Company's and the SPP's transmission system each year. As a result the Company cannot predict the effect of these tariffs on its future operation or financial result due to its inability to predict these factors. Effects of Regulation In accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), the Company's financial statements reflect ratemaking policies prescribed by the regulatory commissions having jurisdiction over the Company (the MoPSC, the KCC, the OCC, the APSC and the FERC). Certain expenses and credits, normally reflected in income as incurred, are recognized when included in rates and recovered from or refunded to customers. As such, the Company has recorded the following regulatory assets which are expected to result in future revenues as these costs are recovered through the ratemaking process. Historically, all costs of this nature which are determined by the Company's regulators to have been prudently incurred have been recoverable through rates in the course of normal ratemaking procedures and the Company believes that the items detailed below will be afforded similar treatment. The Company recorded the following regulatory assets and regulatory liability:
December 31, 1998 1997 Regulatory Assets Income taxes $ 24,666,959 $ 24,781,882 Unamortized loss on reacquired debt 9,352,691 9,912,255 Asbury five year maintenance 1,526,029 2,157,493 Other postretirement benefits 453,460 467,062 Deferred 1993 flood losses - 74,837 Incremental purchased power - 1993 flood - 78,696 Total Regulatory Assets $ 35,999,139 $ 37,472,225 Regulatory Liability Income taxes $ 16,400,125 $ 17,540,757
The Company continually assesses the recoverability of its regulatory assets. Under current accounting standards, regulatory assets and liabilities are eliminated through a charge or credit, respectively, to earnings if and when it is no longer probable that such amounts will be recovered through future revenues. On May 23, 1997, the Missouri Public Service Commission appointed a Retail Electric Competition Task Force (the Task Force) to prepare reports making recommendations as to how Missouri should implement retail electric competition in the event that legislation is enacted that authorizes it. The task force filed a report May 1, 1998 and the Joint Committee of the State Legislature conducted hearings during 1998. No final conclusions have been reached as to the timing or content of the legislative action. There can be no assurance that legislation deregulating the retail electric industry in Missouri and/or other states in which the Company operates will not be passed in the future. In the event such legislation is passed, the Company may determine that it no longer meets the criteria set forth in SFAS 71 with respect to some or all of the regulatory assets and liabilities. Any regulatory changes that would require the Company to discontinue SFAS 71 Notes to Financial Statements based upon competitive or other events may impact the valuation of the Company's regulatory assets and certain utility plant investments and require write-offs which could have a material adverse effect on the Company's financial condition and results of operations, depending on how the treatment of regulatory and plant assets and liabilities are considered for recovery by the regulators. 3. Common Stock On April 9, 1996, the Company issued and sold 880,000 shares of its common stock to the public with aggregate proceeds, net of expenses and fees, of $15,044,000. The proceeds from the offering were used to repay short-term indebtedness or for expenses incurred in connection with the Company's construction program. On August 1, 1998, the Company implemented a new stock unit plan for directors (the Director Retirement Plan) to provide directors the opportunity to accumulate retirement benefits in the form of common stock units in lieu of cash which was how benefits accumulated under the previous cash retirement plan for directors. The new Director Retirement Plan also provided directors the opportunity to convert previously earned cash retirement benefits to common stock units. 100,000 shares are authorized under this new plan. Each common stock unit earns dividends in the form of common stock units and can be redeemed for one share of common stock upon retirement by the director. The number of units granted annually is computed by dividing the director's retainer fee by the fair market value of the Company's common stock on January 1 of the year the units are granted. Common stock unit dividends are computed based on the fair market value of the Company's stock on the dividend's record date. During 1998, 34,214 units were granted upon conversion of previously earned retirement benefits, 1,681 units were granted for services provided in 1998 and 1,068 units were granted pursuant to the reinvestment plan described below. The Company's Dividend Reinvestment and Stock Purchase Plan (the Reinvestment Plan) allows common and preferred stockholders to reinvest dividends paid by the Company into newly issued shares of the Company's common stock at 95% of the market price average. Stockholders may also purchase, for cash and within specified limits, additional stock at 100% of the market price average. The Company may elect to make shares purchased in the open market rather than newly issued shares available for purchase under the Reinvestment Plan. If the Company so elects, the purchase price to be paid by Reinvestment Plan participants will be 100% of the cost to the Company of such shares. Participants in the Reinvestment Plan do not pay commissions or service charges in connection with purchases under the Reinvestment Plan. The Company's Employee Stock Purchase Plan, which terminates on May 31, 2000, permits the grant to eligible employees of options to purchase common stock at 90% of the lower of market value at date of grant or at date of exercise. Contingent employee stock purchase subscriptions outstanding and the maximum prices per share were 50,268 shares at $18.34, 58,972 shares at $15.53 and 54,706 shares at $16.31 on December 31, 1998, 1997 and 1996, respectively. Shares were issued at $15.53 per share in 1998, $15.64 per share in 1997 and $15.42 per share in 1996. The Company's 1996 Incentive Plan (the Stock Incentive Plan) provides for the grant of up to 650,000 shares of common stock through January 2006. The terms and conditions of any option or stock grant are determined by the Board of Directors' Compensation Committee, within the provisions of the Stock Incentive Plan. The Stock Incentive Plan permits grants of stock options and restricted stock to qualified employees and permits Directors to receive common stock in lieu of cash compensation for service as a Director. During January 1998, 1997 and 1996, grants for 1,535, 1,414 and 2,289, respectively, of restricted stock were made to qualified employees under the Stock Incentive Plan. For grants made to date, the restrictions typically lapse and the shares are issuable to employees who continue service with the Company three years from the date of grant. For employees whose service is terminated by death, retirement, disability, or under certain circumstances following a change in control of the Company prior to the restrictions lapsing, the shares are issuable immediately. For other terminations, the grant is forfeited. During 1998, 1997 and 1996, 2,641, 3,983 and 3,033 shares, respectively, were issued under the Stock Incentive Plan. No options Notes to Financial Statements have been granted under the Stock Incentive Plan. In 1996, the Company adopted the disclosure-only method under SFAS 123, "Accounting for Stock-Based Compensation." If the fair value based accounting method under this statement had been used to account for stock-based compensation costs, the effect on 1998 and 1997 net income and earnings per share would have been immaterial. The Company's Employee 401(k) Retirement Plan (the 401(k) Plan) allows participating employees to defer up to 15% of their annual compensation up to a specified limit. The Company matches 50% of each employee's deferrals by contributing shares of the Company's common stock, such matching contributions not to exceed 3% of the employee's annual compensation. The Company contributed 33,274, 36,978 and 36,093 shares of common stock in 1998, 1997 and 1996, respectively, valued at market prices on the dates of contributions. The stock issuances to effect the contributions were not cash transactions and are not reflected as a source of cash in the Statement of Cash Flows. At December 31, 1998, 1,549,552 shares remain available for issuance under the foregoing plans. 4. Preferred Stock The Company has 5,000,000 shares of $10.00 par value cumulative preferred stock authorized. At December 31, 1998 and 1997, these shares were designated as follows:
Shares 1998 1997 Series without mandatory redemption provisions 3,300,000 3,300,000 Undesignated 1,700,000 1,700,000
In the event of involuntary liquidation, holders of all outstanding series of preferred stock will be entitled to be paid the $10.00 par value of their shares plus accumulated and unpaid dividends before any distribution of assets to holders of common stock. The Company also has 2,500,000 shares of preference stock authorized, including 500,000 shares of Series A Participating Preference Stock, none of which have been issued. Preferred stock without mandatory redemption provisions Preferred stock without mandatory redemption provisions issued and outstanding at December~31, 1998 and 1997 is as follows:
Shares 1998 1997 5% cumulative (400,000 shares authorized) 381,820 390,180 4 3/4% cumulative (400,000 shares authorized) 400,000 400,000 8 1/8% cumulative (2,500,000 shares authorized) 2,480,998 2,500,000 3,262,818 3,290,180
Notes to Financial Statements In the event of voluntary liquidation or redemption of the 5%, 4 3/4%, and 8 1/8% series of cumulative preferred stock, holders will be entitled to the following amounts per share plus accumulated and unpaid dividends: 5% cumulative - $10.50 (aggregate amount $4,009,110); 4 3/4% cumulative - $10.20 (aggregate amount $4,080,000); and 8 1/8% cumulative - $10 (aggregate amount $24,809,980). The 8 1/8% series of cumulative preferred stock is not redeemable, however, until on or after June 2, 1999. On October 15, 1998 and November 16, 1998, the Company repurchased 19,002 shares of 8 1/8% cumulative preferred stock and 8,360 shares of 5% cumulative preferred stock at a price of $10.38 and $8.42 per share, respectively. These shares are carried at cost and are classified as treasury stock. Preference Stock Purchase Rights The Company had 8,535,918 and 8,388,327 Preference Stock Purchase Rights (Rights) outstanding at December 31, 1998 and 1997, respectively. Each Right enables the holder to acquire one one-hundredth of a share of Series A Participating Preference Stock (or, under certain circumstances, other securities) at a price of $75 per one one-hundredth share, subject to adjustment. Each share of common stock currently has one-half of one Right. The Rights (other than those held by an acquiring person or group (Acquiring Person)), which expire July 25, 2000, will be exercisable only if an Acquiring Person acquires 10% or more of the Company's common stock or announces an intention to make a tender offer or exchange offer which would result in the Acquiring Person owning 10% or more of the common stock. The Rights may be redeemed by the Company in whole, but not in part, for $0.01 per Right, prior to 10 days after the first public announcement of the acquisition of 10% or more of the Company's common stock by an Acquiring Person. In addition, upon the occurrence of a merger or other business combination, or an event of the type described in the preceding paragraph, holders of the Rights, other than an Acquiring Person, will be entitled, upon exercise of a Right, to receive either common stock of the Company or common stock of the Acquiring Person having a value equal to two times the exercise price of the Right. Any time after an Acquiring Person acquires 10% or more (but less than 50%) of the Company's outstanding common stock, the Board of Directors may, at its option, exchange part or all of the Rights (other than Rights held by the Acquiring Person) for common stock of the Company on a one-for-two basis. Notes to Financial Statements 5. Long-term Debt The principal amount of all series of first mortgage bonds outstanding at any one time is limited by terms of the mortgage to $1,000,000,000. Substantially all property, plant and equipment is subject to the lien of the mortgage. At December 31 the long-term debt outstanding was as follows:
1998 1997 First mortgage bonds: 5.70% Series due 1998 $ - $ 23,000,000 7 1/2% Series due 2002 37,500,000 37,500,000 7.60% Series due 2005 10,000,000 10,000,000 8 1/8% Series due 2009 (1) 20,000,000 20,000,000 6 1/2 Series due 2010 50,000,000 - 7.20% Series due 2016 25,000,000 25,000,000 9 3/4% Series due 2020 2,250,000 2,250,000 7% Series due 2023 45,000,000 45,000,000 7 3/4% Series due 2025 30,000,000 30,000,000 7 1/4% Series due 2028 13,726,000 13,726,000 5.3% Pollution Control Series due 2013 8,000,000 8,000,000 5.2% Pollution Control Series due 2013 5,200,000 5,200,000 246,676,000 219,676,000 Less current maturities - (23,000,000) Less unamortized net discount (583,095) (291,459) $ 246,092,905 $ 196,384,541
(1) Holders of this series have the right to require the Company to repurchase all or any portion of the bonds at a price of 100% of the principal amount plus accrued interest, if any, on November 1, 2001. The carrying amount of the Company's long-term debt was $246,676,000 and $219,676,000 at December 31, 1998 and 1997, respectively, and its fair market value was estimated to be approximately $252,155,000 and $226,115,000, respectively. This estimate was based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturation. The estimated fair market value may not represent the actual value that could have been realized as of year-end or that will be realizable in the future. At December 31, 1998, the Company had a $15,000,000 unsecured line of credit. Borrowings are at the bank's prime commercial rate and are due 370 days from the date of each loan. In connection with the Company's line of credit, there is an informal compensating balance arrangement under which the Company maintains deposits averaging 5% of the line of credit. This arrangement does not serve to legally restrict the use of the Company's cash. The line of credit is also utilized to support the Company's issuance of commercial paper although it is not assigned specifically to such support. There were no outstanding borrowings under this agreement at December 31, 1998 or 1997. On April 28, 1998, the Company sold to the public in an underwritten offering $50 million aggregate principal amount of its First Mortgage Bonds, 6.50% Series due 2010. The net proceeds from this sale were added to the Company's general funds and were used to repay $23 million of the Company's First Mortgage Bonds, 5.70% Series due May 1, 1998 and to repay short-term indebtedness, including indebtedness incurred in connection with the Company's construction program. Notes to Financial Statements On December 10, 1996, the Company sold to the public in an underwritten offering $25,000,000 aggregate principal amount of its First Mortgage Bonds, 7.20% Series due 2016, the proceeds of which were added to the Company's general funds and used to repay short-term indebtedness or for expenses incurred in connection with the Company's construction program. 6. Short-term Borrowings Short-term commercial paper outstanding and notes payable averaged $11,274,000 and $19,556,000 daily during 1998 and 1997, respectively, with the highest month-end balances being $28,500,000 and $34,000,000, respectively. The weighted daily average interest rates during 1998, 1997 and 1996 were 5.9%, 5.9% and 5.6%, respectively. The weighted average interest rates of borrowings outstanding at December 31, 1998, 1997 and 1996 were 6.2%, 6.1% and 5.8%, respectively. 7. Retirement Benefits Pensions The Company's noncontributory defined benefit pension plan includes all employees meeting minimum age and service requirements. The benefits are based on years of service and the employee's average annual basic earnings. Annual contributions to the plan are at least equal to the minimum funding requirements of ERISA. Plan assets consist of common stocks, United States government obligations, federal agency bonds, corporate bonds and commingled trust funds. The following table sets forth the plan's projected benefit obligation, the fair value of the plan's assets and its funded status:
1998 1997 1996 Benefit obligation at beginning of $ 78,360,097 $ 66,805,630 $ 67,083,122 year Service cost 2,400,303 2,095,442 1,987,057 Interest cost 5,046,012 4,956,356 4,695,105 Amendments (277,808) Actuarial (gain)/loss (4,065,095) 9,251,195 (2,494,118) Benefits paid (4,455,719) (4,470,718) (4,465,536) Benefit obligation at end of year $ 77,285,598 $ 78,360,097 $ 66,805,630 Fair value of plan assets at beginning of year $ 82,106,242 $ 70,970,880 $ 69,225,616 Actual return on plan assets 15,503,378 15,606,080 6,210,800 Benefits paid (4,455,719) (4,470,718) (4,465,536) Fair value of plan assets at end of year $ 93,153,901 $ 82,106,242 $ 70,970,880 Funded status 15,868,303 3,746,145 4,165,250 Unrecognized net assets at January 1, 1986 being amortized over 17 years (1,964,623) (2,455,778) (2,946,933) Unrecognized prior service cost 3,560,847 3,964,146 4,645,253 Unrecognized net gain (18,028,407) (8,058,243) (9,392,499) Accrued pension cost $ (563,880) $ (2,803,730) $(3,528,929)
Notes to Financial Statements Assumptions used in calculating the projected benefit obligation for 1998 and 1997 include the following:
1998 1997 1996 Weighted average discount rate 7.00% 6.75% 7.50% Rate of increase in compensation levels 5.50% 5.50% 5.50% Expected long-term rate of return on plan assets 9.00% 9.00% 9.00%
Net pension benefit for 1998, 1997 and 1996 is comprised of the following components:
1998 1997 1996 Service cost - benefits earned during the period $ 2,400,303 $ 2,095,442 $ 1,987,057 Interest cost on projected benefit obligation 5,046,012 4,956,356 4,695,105 Expected return on plan assets (7,173,641) (6,169,097) (6,009,653) Net amortization and deferral (2,512,524) (1,607,900) (1,746,639) Net pension benefit $ (2,239,850) $ (725,199) $ (1,074,130)
Other Postretirement Benefits The Company provides certain healthcare and life insurance benefits to eligible retired employees, their dependents and survivors. Participants generally become eligible for retiree healthcare benefits after reaching age 55 with 5 years of service. Effective January 1, 1993, the Company adopted SFAS 106, which requires recognition of these benefits on an accrual basis during the active service period of the employees. The Company elected to amortize its transition obligation (approximately $21.7 million) related to SFAS 106 over a twenty year period. Prior to adoption of SFAS 106, the Company recognized the cost of such postretirement benefits on a pay-as-you-go (i.e., cash) basis. The states of Missouri, Kansas, Oklahoma, and Arkansas authorize the recovery of SFAS 106 costs through rates. In accordance with the above rate orders, the Company established two separate trusts in 1994, one for those retirees who were subject to a collectively bargained agreement and the other for all other retirees, to fund retiree healthcare and life insurance benefits. The Company's funding policy is to contribute annually an amount at least equal to the revenues collected for the amount of postretirement benefits costs allowed in rates. Assets in these trusts amounted to approximately $6,800,000 at December 31, 1998 and $5,700,000 at December 31, 1997. Notes to Financial Statements Postretirement benefits, a portion of which have been capitalized and/or deferred, for 1998, 1997 and 1996 included the following components:
1998 1997 1996 Service cost on benefits earned during the year $ 558,983 $ 434,397 $ 472,943 Interest cost on projected benefit obligation 1,593,181 1,559,110 1,679,461 Return on assets (375,581) (290,079) (142,462) Amortization of unrecognized transition obligation 1,084,017 1,084,017 1,084,017 Unrecognized net (gain)/loss (720,744) (1,111,795) (486,691) Other - (92,890) - Net periodic postretirement benefit cost $ 2,139,856 $ 1,582,760 $ 2,607,268
The estimated funded status of the Company's obligations under SFAS 106 at December 31, 1998, 1997 and 1996 using a weighted average discount rate of 7.0%, 6.75% and 7.5%, respectively, is as follows:
1998 1997 1996 Benefit obligation at beginning of year $ 23,978,240 $ 20,850,702 $ 23,215,798 Service cost 558,983 434,397 472,943 Interest cost 1,593,181 1,559,110 1,679,461 Actuarial (gain)/loss (353,055) 2,080,611 (3,939,393) Benefits paid (1,196,552) (946,580) (578,107) Benefit obligation at end of year $ 24,580,797 $ 23,978,240 $ 20,850,702 Fair value of plan assets at beginning of year $ 5,691,142 $ 4,829,610 $ 2,963,556 Employer contributions 2,102,087 1,518,033 2,231,009 Actual return on plan assets 206,625 290,079 213,152 Benefits paid (1,196,552) (946,580) (578,107) Fair value of plan assets at end of year $ 6,803,302 $ 5,691,142 $ 4,829,610 Funded Status $(17,777,495) $(18,287,098) $(16,021,092) Unrecognized transition obligation 15,176,225 16,260,242 17,344,259 Unrecognized net gain (1,787,030) (2,323,675) (5,649,391) Accrued postretirement benefit cost $ (4,388,300) $ (4,350,531) $ (4,326,224)
The assumed 1999 cost trend rate used to measure the expected cost of healthcare benefits is 7.5%. The trend rate decreases through 2026 to an ultimate rate of 6% for 2027 and subsequent years. The effect of a 1% increase in each future year's assumed healthcare cost trend rate would increase the current service and interest cost from $2.2 million to $2.8 million and the accumulated postretirement benefit obligation from $24.6 million to $30.5 million. Notes to Financial Statements 8. Income Taxes The provision for income taxes is different from the amount of income tax determined by applying the statutory income tax rate to income before income taxes as a result of the following differences:
1998 1997 1996 Computed "expected" federal provision $ 15,480,000 $ 12,825,000 $ 11,810,000 State taxes, net of federal effect 1,370,000 930,000 1,100,000 Adjustment to taxes resulting from: Investment tax credit amortization (580,000) (590,000) (580,000) Other (370,000) (315,000) (630,000) Actual provision $ 15,900,000 $ 12,850,000 $ 11,700,000
Income tax expense components for the years shown are as follows:
1998 1997 1996 Taxes currently payable Included in operating revenue deductions: Federal $ 12,110,000 $ 9,830,000 $ 7,500,000 State 1,430,000 960,000 1,120,000 Included in "other - net" (450,000) (150,000) (100,000) 13,090,000 10,640,000 8,520,000 Deferred taxes Depreciation and amortization differences 3,237,000 3,210,000 3,283,000 Loss on reacquired debt (213,000) (227,000) (249,000) Postretirement benefits 528,000 159,000 251,000 Other 79,000 (542,000) (344,000) Asbury five year maintenance (241,000) 200,000 819,000 Deferred investment tax credits, net (580,000) (590,000) (580,000) Total income tax expense $ 15,900,000 $ 12,850,000 $ 11,700,000
Notes to Financial Statements Under SFAS 109, temporary differences gave rise to deferred tax assets and deferred tax liabilities at year end 1998 and 1997 as follows:
Balances as of December 31, 1998 1997 Deferred Tax Deferred Tax Deferred Tax Deferred Tax Assets Liabilities Assets Liabilities Noncurrent Depreciation and other property related $ 11,296,127 $ 88,422,060 $ 11,877,844 $ 85,111,843 Unamortized investment tax credits 5,275,124 - 5,639,749 - Miscellaneous book/tax recognition differences 4,471,137 6,380,690 4,557,129 6,307,532 Total deferred taxes $ 21,042,388 $ 94,802,750 $ 22,074,722 $ 91,419,375
9. Iatan Plant The Company owns a 12% undivided interest in a coal-fired 670 megawatt generating unit near Weston, Missouri. The Company is entitled to 12% of the available capacity and is obligated for that percentage of costs which are included in corresponding operating expense classifications in the Statement of Income. At December 31, 1998 and 1997, the Company's property, plant and equipment accounts include the cost of its ownership interest in the unit of $44,628,000 and $44,489,000, respectively, and accumulated depreciation of $27,045,000 and $25,418,000, respectively. 10. Commitments and Contingencies The Company's 1999 construction budget is $64,600,000. The Company's three-year construction program for 1999 through 2001 is estimated to be approximately $229,900,000. The Company has announced plans to build a 350 megawatt addition to the State Line Power Plant which, when combined with the existing State Line Unit No. 2 combustion turbine, will result in a nominal 500 megawatt combined cycle unit. On February 4, 1999, the Company announced that it entered into a Memorandum of Understanding with another utility and expects to enter a joint ownership agreement resulting in the Company owning a 60% undivided interest in the plant. Expenditures relating to the combined cycle unit totaling approximately $100,000,000 are included in the 1999 through 2001 estimated construction budget. The construction budget does not include approximately $16,000,000 for nitrogen oxide control equipment expenditures potentially required as a result of a September 1998 Environmental Protection Agency ruling. The Company has entered into long-term agreements to purchase capacity and energy, to obtain supplies of coal and to provide natural gas transportation. Under such contracts, the Company incurred purchased power and fuel costs of approximately $64,000,000, $55,000,000 and $52,000,000 in 1998, 1997 and 1996, respectively. Certain of these contracts provide for minimum and maximum annual amounts to be purchased and further provide, in part, for cash settlements to be made when minimum amounts are not purchased. In the event that no purchases of coal, energy and transportation services are made, an event considered unlikely by management, minimum annual cash settlements would approximate $31,000,000 in 1999, $33,000,000 in 2000, $31,000,000 in 2001 and $27,000,000 in 2002 and reducing to lesser amounts thereafter through 2012. Notes to Financial Statements 11. Selected Quarterly Information (Unaudited) A summary of operations for the quarterly periods of 1998 and 1997 is as follows:
Quarters First Second Third Fourth (dollars in thousands except per share amounts) 1998: Operating revenues $ 51,388 $ 56,269 $ 77,860 $ 54,341 Operating income 8,060 11,032 19,024 9,256 Net income 3,340 6,211 14,105 4,667 Net income applicable to common stock 2,736 5,607 13,501 4,068 Basic and diluted earnings per average share of common stock $ .16 $ .33 $ .80 $ .24
Quarters First Second Third Fourth (dollars in thousands except per share amounts) 1997: Operating revenues $ 47,305 $ 45,980 $ 68,636 $ 53,390 Operating income 7,073 6,692 17,375 9,822 Net income 3,125 2,649 12,692 5,327 Net income applicable to common stock 2,521 2,045 12,088 4,723 Basic and diluted earnings per average share of common stock $ .15 $ .12 $ .73 $ .28
The sum of the quarterly earnings per average share of common stock may not equal the earnings per average share of common stock as computed on an annual basis due to rounding. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item with respect to directors and directorships and with respect to Section 16(a) Beneficial Ownership Reporting Compliance may be found in the Company's proxy statement for its Annual Meeting of Stockholders to be held April 22, 1999, which is incorporated herein by reference. Pursuant to instruction 3 of paragraph (b) of Item 401 of Regulation S-K, the information required by this Item with respect to executive officers is set forth in Item 1 of Part I of this Form 10-K under "Executive Officers and Other Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation may be found in the Company's proxy statement for its Annual Meeting of Stockholders to be held April 22, 1999, which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding the number of shares of the Company's equity securities beneficially owned by the directors and certain executive officers of the Company and by the directors and executive officers as a group may be found in the Company's proxy statement for its Annual Meeting of Stockholders to be held April 22, 1999, which is incorporated herein by reference. To the knowledge of the Company, no person is the beneficial owner of 5% or more of any class of the Company's voting securities, and there are no arrangements the operation of which may at a subsequent date result in a change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item with respect to certain relationships and related transactions may be found in the Company's proxy statement for its Annual Meeting of Stockholders to be held April 22, 1999, which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Index to Financial Statements and Financial Statement Schedule Covered by Report of Independent Auditors Balance sheets at December 31, 1998 and 1997............................. 26 Statements of income for each of the three years in the period ended December 31, 1998................................................................ 27 Statements of common stockholders' equity for each of the three years in the period ended December 31, 1998.......................................... 28 Statements of cash flows for each of the three years in the period ended December 31, 1998........................................................ 29 Notes to financial statements............................................ 30 Schedule for the years ended December 31, 1998, 1997 and 1996: Schedule II - Valuation and qualifying accounts......................... 48 All other schedules are omitted as the required information is either not present, is not present in sufficient amounts, or the information required therein is included in the financial statements or notes thereto. List of Exhibits (3) (a) - The Restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 4(a) to Form S-3, File No. 33-54539). (b) - By-laws of Company as amended January 23, 1992 (Incorporated by reference to Exhibit 3(f) to Annual Report Form 10-K for year ended December 31, 1991, File No. 1-3368). (4) (a) - Indenture of Mortgage and Deed of Trust dated as of September 1, 1944 and First Supplemental Indenture thereto (Incorporated by reference to Exhibits B(1) and B(2) to Form 10, File No. 1-3368). (b) - Third Supplemental Indenture to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 2(c) to Form S-7, File No. 2-59924). (c) - Sixth through Eighth Supplemental Indentures to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 2(c) to Form S-7, File No. 2-59924). (d) - Fourteenth Supplemental Indenture to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4(f) to Form S-3, File No. 33-56635). (e) - Seventeenth Supplemental Indenture dated as of December 1, 1990 to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4(j) to Annual Report on Form 10-K for year ended December 31, 1990, File No. 1-3368). (f) - Eighteenth Supplemental Indenture dated as of July 1, 1992 to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4 to Form 10-Q for quarter ended June 30, 1992, File No. 1-3368). (g) - Twentieth Supplemental Indenture dated as of June 1, 1993 to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4(m) to Form S-3, File No. 33-66748). (h) - Twenty-First Supplemental Indenture dated as of October 1, 1993 to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4 to Form 10-Q for quarter ended September 30, 1993, File No. 1-3368). (i) - Twenty-Second Supplemental Indenture dated as of November 1, 1993 to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4(k) to Annual Report on Form 10-K for year ended December 31, 1993, File No. 1-3368). (j) - Twenty-Third Supplemental Indenture dated as of November 1, 1993 to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4(l) to Annual Report on Form 10-K for year ended December 31, 1993, File No. 1-3368). (k) - Twenty-Fourth Supplemental Indenture dated as of March 1, 1994 to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4(m) to Annual Report on Form 10-K for year ended December 31, 1993, File No. 1-3368). (l) - Twenty-Fifth Supplemental Indenture dated as of November 1, 1994 to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4(p) to Form S-3, File No. 33-56635). (m) - Twenty-Sixth Supplemental Indenture dated as of April 1, 1995 to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4 to Form 10-Q for quarter ended March 31, 1995, File No. 1-3368). (n) - Twenty-Seventh Supplemental Indenture dated as of June 1, 1995 to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4 to Form 10-Q for quarter ended June 30, 1995, File No. 1-3368). (o) - Twenty-Eighth Supplemental Indenture dated as of December 1, 1996 to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4 to Annual Report on Form 10-K for year ended December 31, 1996, File No. 1-3368). (p) - Twenty-Ninth Supplemental Indenture dated as of April 1, 1998 to Indenture of Mortgage and Deed of Trust (Incorporated by reference to Exhibit 4 to Form 10-Q for quarter ended March 31, 1998, File No. 1-3368). (q) - Rights Agreement dated July 26, 1990 (Incorporated by reference to Exhibit 4(a) to Form 8-K, dated July 26, 1990, File No. 1-3368). (r) - Amendment to Rights Agreement dated July 26, 1990 between the Company and Chemical Bank (successor to Manufacturers Hanover Trust Company), as Rights Agent (Incorporated by reference to Exhibit 4 to Form 10-Q for quarter ended September 30, 1991, File No. 1-3368). (10)(a) - 1986 Stock Incentive Plan as amended July 23, 1992 (Incorporated by reference to Exhibit 10 to Form 10-Q for quarter ended June 30, 1992, File No. 1-3368).** (b) - 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 4.1 to Form S-8, File No. 33-64639).** (c) - Management Incentive Plan (A description of this Plan is incorporated by reference to page 5 of the Company's Proxy Statement for its Annual Meeting of Stockholders held April 27, 1989). ** (d) - Deferred Compensation Plan for Directors (Incorporated by reference to Exhibit 10(d) to Annual Report on Form 10-K for year ended December 31, 1990, File No. 1-3368). ** (e) - The Empire District Electric Company Change in Control Severance Pay Plan and Forms of Agreement (Incorporated by reference to Exhibit 10 to Form 10-Q for quarter ended September 30, 1991, File No. 1-3368). ** (f) - Amendment to The Empire District Electric Company Change in Control Severance Pay Plan and revised Forms of Agreement (Incorporated by reference to Exhibit 10 to Form 10-Q for quarter ended June 30, 1996, File No. 1-3368). ** (g) - The Empire District Electric Company Supplemental Executive Retirement Plan. (Incorporated by reference to Exhibit 10(e) to Annual Report on Form 10-K for year ended December 31, 1994, File No. 1-3368). ** (h) - Retirement Plan for Directors as amended August 1, 1998 (Incorporated by reference to Exhibit 10(a) to Form Q for quarter ended September 30, 1998, File No. 1-3368). ** (i) - Stock Unit Plan for Directors (Incorporated by reference to Exhibit 10(b) to Form Q for quarter ended September 30, 1998, File No. 1-3368). ** (12) - Computation of Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements.* (23) - Consent of Price Waterhouse.* (24) - Powers of Attorney.* (27) - Financial Data Schedule for December 31, 1998. ** This exhibit is a compensatory plan or arrangement as contemplated by Item 14(a)(3) of Form 10-K. * Filed herewith Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 1998. SCHEDULE II Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996 Balance Additions Deductions from reserve Balance At Charged to Other Accounts at Beginning Charged Description Amount Description Amount close of of period to income period Year ended December 31, 1998: Reserve deducted from assets: Recovery of Accumulated provision for amounts previously Accounts Uncollectible accounts $ 278,741 $ 586,000 written off $ 448,718 written off $ 1,037,583 $ 275,876 Reserve not shown separately Property, plant & in balance sheet: equipment and Injuries and damages clearing accounts Claims and Reserve (Note A) $1,311,995 $ 580,832 $ 530,011 expenses $ 1,108,377 $ 1,314,461 Year ended December 31, 1997: Reserve deducted from assets: Recovery of Accumulated provision for amounts previously Accounts Uncollectible accounts $ 265,390 $ 486,000 written off $ 332,632 written off $ 805,281 $ 278,741 Reserve not shown separately in balance sheet: Property, plant & Injuries and damages equipment and Claims and reserve (Note A) $1,300,917 $ 484,541 clearing accounts $ 472,107 expenses $ 945,570 $ 1,311,995 Year ended December 31, 1996: Reserve deducted from assets: Recovery of Accumulated provision for amounts previously Accounts Uncollectible accounts $ 257,861 $ 558,458 written off $ 459,159 written off $ 1,010,088 $ 265,390 Reserve not shown separately in balance sheet: Property, plant & Injuries and damages equipment and Claims and Reserve (Note A) $1,263,050 $ 508,280 clearing accounts $ 446,212 expenses $ 916,625 $ 1,300,917
NOTE A: This reserve is provided for workers' compensation, certain postemployment benefits and public liability damages. The Company at December 31, 1998 carried insurance for workers' compensation claims in excess of $250,000 and for public liability claims in excess of $300,000. The injuries and damages reserve is included on the Balance Sheet in the section "Noncurrent liabilities and deferred credits" in the category "Other". SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By M. W. MCKINNEY ---------------------------- Date: March 9, 1999 M. W. McKinney, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Date M. W. MCKINNEY ---------------------------------------------- M. W. McKinney, President and Director (Principal Executive Officer) R. B. FANCHER ---------------------------------------------- R. B. Fancher, Vice President-Finance (Principal Financial Officer) G. A. KNAPP ---------------------------------------------- G. A. Knapp, Controller and Assistant Treasurer (Principal Accounting Officer) V. E. BRILL* ----------------------------------------------- V. E. Brill, Vice President-Energy Supply and Director M. F. CHUBB, JR.* ---------------------------------------------- M. F. Chubb, Jr., Director R. D. HAMMONS* ---------------------------------------------- R. D. Hammons, Director March 9, 1999 R. C. HARTLEY* ---------------------------------------------- R. C. Hartley, Director J. R. HERSCHEND* ---------------------------------------------- J. R. Herschend, Director F. E. JEFFRIES* --------------------------------------------- F. E. Jeffries, Director R. E. MAYES* --------------------------------------------- R. E. Mayes, Director R. L. LAMB* --------------------------------------------- R. L. Lamb, Director M. M. POSNER* --------------------------------------------- M. M. Posner, Director R. B. FANCHER *By------------------------------------------ (R. B. Fancher, As attorney in fact for each of the persons indicated) EX-12 2 EXHIBIT (12)
Computation of Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements Year ended December 31, 1998 1998 1997 1996 1995 1994 Income before provision for income taxes And fixed charges $63,261,581 $54,880,632 $49,713,981 $45,769,091 $44,293,156 (Note A) Fixed charges: Interest on first mortgage bonds $17,012,160 $15,704,380 $14,014,643 $14,026,176 $12,190,405 Amortization of debt discount and Expense less premium 861,673 888,662 866,921 832,488 766,238 Interest on short-term 968,954 1,421,824 678,890 502,723 710,910 debt Other interest 37,877 58,072 276,880 280,497 239,916 Rental expense representative of an Interest factor 157,579 164,715 127,440 119,380 118,587 (Note B) Total fixed charges $19,038,243 $18,237,653 $15,964,774 $15,761,264 $14,026,056 Preferred stock dividend requirements: Preferred stock dividend requirements Not deductible for tax purposes $ 2,334,444 $ 2,338,304 $ 2,338,304 $ 2,338,304 $ 1,484,992 Ratio of income before provision for Income taxes to net income 1.561 1.540 1.531 1.516 1.538 income Nondeductible dividend 3,644,067 3,600,988 3,579,943 3,544,869 2,283,918 requirements Deductible dividends 78,036 78,036 78,036 78,036 78,036 Total preferred stock Dividend requirements $ 3,722,103 $ 3,679,024 $ 3,657,979 $ 3,622,905 $ 2,361,954 Total combined fixed charges and Preferred stock dividend requirements $22,760,346 $21,916,677 $19,622,753 $19,384,169 $16,388,010 Ratio of earnings to 3.32 3.01 3.11 2.90 3.16 fixed charges Ratio of earnings to combined fixed charges And preferred stock 2.78 2.50 2.53 2.36 2.70 dividend requirements
NOTE A: For the purpose of determining earnings in the calculation of the ratio, net income has been increased 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). EX-24 3 EXHIBIT (24) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of THE EMPIRE DISTRICT ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of Kansas, does hereby constitute and appoint M.W. MCKINNEY and R.B. FANCHER, and each of them, the true and lawful attorney-in-fact of the undersigned, in the name, place and stead of the undersigned, to sign the name of the undersigned to the Company's Annual Report Form 10-K for the fiscal year ended December 31, 1998, File Number 1-3368, to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, and to any amendment thereto, and to cause the same to be filed with the Securities and Exchange Commission, it being intended to give and hereby giving and granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any act and thing necessary and proper to be done in the premises as fully and to all intents and purposes as the undersigned could do if personally present; and the undersigned hereby ratifies and confirms all that said attorneys-in-fact, or any one of them, shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 4th day of February 1999. VIRGIL E. BRILL --------------------- VIRGIL E. BRILL EXHIBIT (24) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of THE EMPIRE DISTRICT ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of Kansas, does hereby constitute and appoint M.W. MCKINNEY and R.B. FANCHER, and each of them, the true and lawful attorney-in-fact of the undersigned, in the name, place and stead of the undersigned, to sign the name of the undersigned to the Company's Annual Report Form 10-K for the fiscal year ended December 31, 1998, File Number 1-3368, to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, and to any amendment thereto, and to cause the same to be filed with the Securities and Exchange Commission, it being intended to give and hereby giving and granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any act and thing necessary and proper to be done in the premises as fully and to all intents and purposes as the undersigned could do if personally present; and the undersigned hereby ratifies and confirms all that said attorneys-in-fact, or any one of them, shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 4th day of February 1999. JACK R. HERSCHEND ----------------------- JACK R. HERSCHEND EXHIBIT (24) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of THE EMPIRE DISTRICT ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of Kansas, does hereby constitute and appoint M.W. MCKINNEY and R.B. FANCHER, and each of them, the true and lawful attorney-in-fact of the undersigned, in the name, place and stead of the undersigned, to sign the name of the undersigned to the Company's Annual Report Form 10-K for the fiscal year ended December 31, 1998, File Number 1-3368, to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, and to any amendment thereto, and to cause the same to be filed with the Securities and Exchange Commission, it being intended to give and hereby giving and granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any act and thing necessary and proper to be done in the premises as fully and to all intents and purposes as the undersigned could do if personally present; and the undersigned hereby ratifies and confirms all that said attorneys-in-fact, or any one of them, shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 4th day of February 1999. FRANCIS E. JEFFRIES ---------------------- FRANCIS E. JEFFRIES EXHIBIT (24) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of THE EMPIRE DISTRICT ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of Kansas, does hereby constitute and appoint M.W. MCKINNEY and R.B. FANCHER, and each of them, the true and lawful attorney-in-fact of the undersigned, in the name, place and stead of the undersigned, to sign the name of the undersigned to the Company's Annual Report Form 10-K for the fiscal year ended December 31, 1998, File Number 1-3368, to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, and to any amendment thereto, and to cause the same to be filed with the Securities and Exchange Commission, it being intended to give and hereby giving and granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any act and thing necessary and proper to be done in the premises as fully and to all intents and purposes as the undersigned could do if personally present; and the undersigned hereby ratifies and confirms all that said attorneys-in-fact, or any one of them, shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 4th day of February 1999. MARY McCLEARY POSNER ------------------------ MARY McCLEARY POSNER EXHIBIT (24) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of THE EMPIRE DISTRICT ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of Kansas, does hereby constitute and appoint M.W. MCKINNEY and R.B. FANCHER, and each of them, the true and lawful attorney-in-fact of the undersigned, in the name, place and stead of the undersigned, to sign the name of the undersigned to the Company's Annual Report Form 10-K for the fiscal year ended December 31, 1998, File Number 1-3368, to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, and to any amendment thereto, and to cause the same to be filed with the Securities and Exchange Commission, it being intended to give and hereby giving and granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any act and thing necessary and proper to be done in the premises as fully and to all intents and purposes as the undersigned could do if personally present; and the undersigned hereby ratifies and confirms all that said attorneys-in-fact, or any one of them, shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 4th day of February 1999. ROBERT L. LAMB ------------------------ ROBERT L. LAMB EXHIBIT (24) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of THE EMPIRE DISTRICT ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of Kansas, does hereby constitute and appoint M.W. MCKINNEY and R.B. FANCHER, and each of them, the true and lawful attorney-in-fact of the undersigned, in the name, place and stead of the undersigned, to sign the name of the undersigned to the Company's Annual Report Form 10-K for the fiscal year ended December 31, 1998, File Number 1-3368, to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, and to any amendment thereto, and to cause the same to be filed with the Securities and Exchange Commission, it being intended to give and hereby giving and granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any act and thing necessary and proper to be done in the premises as fully and to all intents and purposes as the undersigned could do if personally present; and the undersigned hereby ratifies and confirms all that said attorneys-in-fact, or any one of them, shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 4th day of February 1999. ROSS C. HARTLEY ------------------------ ROSS C. HARTLEY EXHIBIT (24) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of THE EMPIRE DISTRICT ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of Kansas, does hereby constitute and appoint M.W. MCKINNEY and R.B. FANCHER, and each of them, the true and lawful attorney-in-fact of the undersigned, in the name, place and stead of the undersigned, to sign the name of the undersigned to the Company's Annual Report Form 10-K for the fiscal year ended December 31, 1998, File Number 1-3368, to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, and to any amendment thereto, and to cause the same to be filed with the Securities and Exchange Commission, it being intended to give and hereby giving and granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any act and thing necessary and proper to be done in the premises as fully and to all intents and purposes as the undersigned could do if personally present; and the undersigned hereby ratifies and confirms all that said attorneys-in-fact, or any one of them, shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 4th day of February 1999. ROY E. MAYES --------------------- ROY E. MAYES EXHIBIT (24) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of THE EMPIRE DISTRICT ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of Kansas, does hereby constitute and appoint M.W. MCKINNEY and R.B. FANCHER, and each of them, the true and lawful attorney-in-fact of the undersigned, in the name, place and stead of the undersigned, to sign the name of the undersigned to the Company's Annual Report Form 10-K for the fiscal year ended December 31, 1998, File Number 1-3368, to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, and to any amendment thereto, and to cause the same to be filed with the Securities and Exchange Commission, it being intended to give and hereby giving and granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any act and thing necessary and proper to be done in the premises as fully and to all intents and purposes as the undersigned could do if personally present; and the undersigned hereby ratifies and confirms all that said attorneys-in-fact, or any one of them, shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 4th day of February 1999. R. DWAIN HAMMONS ------------------------ R. DWAIN HAMMONS EXHIBIT (24) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of THE EMPIRE DISTRICT ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of Kansas, does hereby constitute and appoint M.W. MCKINNEY and R.B. FANCHER, and each of them, the true and lawful attorney-in-fact of the undersigned, in the name, place and stead of the undersigned, to sign the name of the undersigned to the Company's Annual Report Form 10-K for the fiscal year ended December 31, 1998, File Number 1-3368, to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, and to any amendment thereto, and to cause the same to be filed with the Securities and Exchange Commission, it being intended to give and hereby giving and granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any act and thing necessary and proper to be done in the premises as fully and to all intents and purposes as the undersigned could do if personally present; and the undersigned hereby ratifies and confirms all that said attorneys-in-fact, or any one of them, shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 4th day of February 1999. MELVIN F. CHUBB, JR. ------------------------ MELVIN F. CHUBB, JR. EX-27 4
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AT DECEMBER 31, 1998 AND THE STATEMENT OF INCOME AND THE STATEMENT OF CASH FLOWS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1998 DEC-31-1998 PER-BOOK 572,246,370 0 40,581,907 40,465,507 0 653,293,784 17,108,799 156,975,596 55,706,779 229,791,174 0 32,634,263 246,092,905 0 0 14,500,000 0 0 0 0 130,275,442 653,293,784 239,858,291 16,190,000 176,296,515 192,486,515 47,371,776 (567,818) 46,803,958 18,480,620 28,323,338 2,411,784 25,911,554 21,676,976 17,873,833 58,482,628 1.53 1.53
EX-23 5 EXHIBIT (23) Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-9238, 2-64667, 33-64639 and 33-34807 which also serves as a Post-Effective Amendment to Form S-8 No. 2-67598) and in the Prospectus constituting part of the Registration Statements on Form S-3 (Nos. 333-35129, 33-52713, 33-56635 and 33-54539 which also serves as a Post-Effective Amendment to Form S-3 No. 33- 35308) of The Empire District Electric Company of our report dated January 26, 1999 appearing on page 25 of this Form 10- K. PricewaterhouseCoopers LLP St. Louis, Missouri March 9, 1999 -----END PRIVACY-ENHANCED MESSAGE-----