UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

(Mark One)

 

 

Commission file number: 1-3368

 

THE EMPIRE DISTRICT ELECTRIC COMPANY

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number: (417) 625-5100

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

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 ý  No o

 

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. [   ]

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   Yes  ý  No o

 

The aggregate market value of the registrant’s voting common stock held by nonaffiliates of the registrant, based on the closing price on the New York Stock Exchange on June 28, 2002, was approximately $459,862,868.

 

As of January 31, 2003, 22,595,071 shares of common stock were outstanding.

 

The following documents have been incorporated by reference into the parts of the Form 10-K as indicated:

 

	The Company’s proxy statement, filed pursuant		Part of Item 10 of Part III
	to Regulation 14A under the Securities Exchange		All of Item 11 of Part III
	Act of 1934, for its 2002 Annual Meeting of		Part of Item 12 of Part III
	Stockholders to be held on April 24, 2003.		All of Item 13 of Part III

 

 

TABLE OF CONTENTS

 

	Forward Looking Statements
PART I
ITEM 1.	BUSINESS
	General
	Electric Generating Facilities and Capacity
	Construction Program
	Fuel
	Employees
	Electric Operating Statistics
	Executive Officers and Other Officers of Empire
	Regulation
	Environmental Matters
	Conditions Respecting Financing
	Our Website
ITEM 2.	PROPERTIES
	Electric Facilities
	Water Facilities
	Other
ITEM 3.	LEGAL PROCEEDINGS
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6.	SELECTED FINANCIAL DATA
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Results of Operations
	Liquidity and Capital Resources
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURE
PART III
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.	EXECUTIVE COMPENSATION
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14.	CONTROLS AND PROCEDURES
PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS

 

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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 or may address future plans, objectives, expectations and events or conditions concerning various matters such as capital expenditures, earnings, competition, litigation, our construction program, our financing plans, rate and other regulatory matters, liquidity and capital resources and accounting matters. Forward-looking statements may contain words like “anticipate,” “believe,” “expect,” “project,” “objective” or similar expressions to identify them as forward-looking statements. Factors that could cause actual results to differ materially from those currently anticipated in such statements include: the amount and timing of rate relief we are currently seeking and related matters; the cost and availability of purchased power and fuel, and the results of our activities (such as hedging) to reduce the volatility of such costs; electric utility restructuring, including ongoing state and federal activities; weather, business and economic conditions; other factors which may impact customer growth; operation of our generation facilities; legislation; regulation, including environmental regulation (such as NOx regulation); competition; the impact of deregulation on off-system sales and our becoming a participant in a Regional Transmission Organization; changes in accounting requirements; other circumstances affecting anticipated rates, revenues and costs, including our cost of funds; the revision of our construction plans and cost estimates; the performance of projects undertaken by our non-regulated businesses; the success of efforts to invest in and develop new opportunities; and costs and effect of legal and administrative proceedings, settlements, investigations and claims. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond our control. New factors emerge from time to time and it is not possible for management to predict all such factors or to assess the impact of each such factor on us. Any forward-looking statement speaks only as of the date on which such statement is made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

 

PART I

 

ITEM 1. BUSINESS

 

General

The Empire District Electric 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. We also provide water service to three towns in Missouri and have investments in several non-regulated businesses. In 2002, 96.3% of our gross operating revenues were provided from the sale of electricity, 0.3% from the sale of water and 3.4% came from our non-regulated businesses.

 

The territory served by our electric operations embraces an area of about 10,000 square miles with a population of over 450,000. 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 light industry, agriculture and tourism. Of our total 2002 retail electric revenues, approximately 88% came from Missouri customers, 6% from Kansas customers, 3% from Oklahoma customers and 3% from Arkansas customers.

 

We supply 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 we serve is the city of Joplin, Missouri, and its immediate vicinity, with a population of approximately 157,000. We operate under franchises having original terms of twenty years or longer in virtually all of the incorporated communities. Approximately 49% of our electric operating revenues in 2002 were derived from incorporated communities with franchises having at least ten years remaining and approximately 21% were derived from incorporated communities in which our franchises have remaining terms of ten years or less. Although our franchises contain no renewal provisions, in recent years we have obtained renewals of all of our expiring electric franchises prior to the expiration dates.

 

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Our electric operating revenues in 2002 were derived as follows: residential 41%, commercial 29%, industrial 16%, wholesale on-system 4%, wholesale off-system 5.5% and other 4.5%. Our largest single on-system wholesale customer is the city of Monett, Missouri, which in 2002 accounted for approximately 3% of electric revenues. No single retail customer accounted for more than 1% of electric revenues in 2002.

 

We made an investment of approximately $2.0 million in 2002 and $0.8 million in 2001 in fiber optics cable and equipment which we are using in our own operations and leasing to other entities. We also offer Internet access, utility training, close-tolerance custom manufacturing, surge suppressors and other energy services. We created a wholly owned subsidiary in 2001, EDE Holdings, Inc., to hold our non-regulated companies. EDE Holdings is a holding company which currently owns: a 100% interest in Empire District Industries, Inc., a subsidiary for our fiber optics business; a 100% interest in Conversant, Inc., a software company that markets the Internet-based customer information system software formerly named Centurion that was developed by Empire employees; a 100% interest in Southwest Energy Training that offers technical training to the utility industry; a 100% interest in Transaeris, a wireless Internet provider and a controlling 50.01% interest in Mid-America Precision Products, a company that specializes in close-tolerance custom manufacturing for the aerospace, electronics, telecommunications and machinery industries, including components for specialized batteries for Eagle Picher Technologies. On February 1, 2003 we purchased Joplin.com, a leading Internet service provider in the Joplin, Missouri area. The purchase was made through Transaeris. We are merging Transaeris and Joplin.com into one company named Fast Freedom, Inc. We sold our monitored security business, E-Watch, to Federal Protection, Inc. of Springfield, Missouri in December 2002 after it did not meet our earnings expectations.

 

Electric Generating Facilities and Capacity

 

At December 31, 2002, our generating plants consisted of:

 

Plant		Capacity (megawatts)			Primary Fuel
Asbury		213			Coal
Riverton		136			Coal
Iatan (12% ownership)		80			Coal
State Line Combined Cycle (60% ownership)		300			Natural Gas
Empire Energy Center		169			Natural Gas
State Line Unit No. 1		90			Natural Gas
Ozark Beach		16			Hydro
Total		1,004

 

On October 25, 2001, we entered into an agreement with P2 Energy to purchase two FT8 peaking units to be installed at the Empire Energy Center with generating capacity of 50 megawatts each. Both units have been delivered and are scheduled to be operational in the second quarter of 2003. See Item 2, “Properties - Electric Facilities” for further information about these plants.

 

We are a member of the Southwest Power Pool (SPP), a regional division of the North American Electric Reliability Council. Effective September 1, 2002, we began taking Network Integration Transmission Service under the SPP’s Open Access Transmission Tariff. We have been participating with other utility members in an effort to restructure the SPP to make it a regional transmission organization (RTO). On October 19, 2001, the SPP and Midwest Independent Transmission System Operator, Inc. (MISO) announced an agreement for the consolidation of the two organizations. In December 2001, the Federal Energy Regulatory Commission (FERC) approved this newly formed MISO as the first RTO. The agreement to consolidate was completed in February 2002. MISO filed the necessary documents with the FERC on March 29, 2002 and the consolidation is still in progress. On November 1, 2002, MISO and SPP filed a combined tariff for the new resulting company as directed by the FERC. The FERC conditionally accepted the filing on December 19, 2002. We have filed with the FERC and the utility commissions in the four states in which we operate to transfer control over the operation of our transmission facilities to MISO. The Kansas Corporation Commission and the FERC have approved our requests while the filings in Missouri and Arkansas are still pending. Although we were not required to file in Oklahoma, we did a courtesy filing for informational purposes. If the consolidation does not occur, we may operate our transmission separately while evaluating

 

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which RTO to join. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Competition.”

 

We currently supplement our on-system generating capacity with purchases of capacity and energy from other utilities in order to meet the demands of our customers and the capacity margins applicable to us under current pooling agreements and National Electric Reliability Council rules. We have contracted with Westar Energy for the purchase of capacity and energy through May 31, 2010. We also have a short-term contract for the purchase of firm energy with American Electric Power (AEP) from January 2003 through March 31, 2003. In 2002, we had similar short-term contracts with AEP that ran from January 2002 through December 2002. The amount of capacity purchased under these contracts supplements our on-system capacity and contributes to meeting our current expectations of future power needs. To the extent we do not need such capacity to meet our customers’ needs, we can sell it in the wholesale market. The following chart sets forth our purchase commitments and our anticipated owned capacity (in megawatts) during the indicated contract years (which run from June 1 to May 31 of the following year). We currently expect to purchase additional capacity to meet reserve margins in 2007 of 10 to 50 megawatts based on the current forecast of load.

 

 

*Does not include AEP contracts.

**Includes capacity from the two FT8 peaking units scheduled for completion in the second quarter of 2003.

 

The charges for capacity purchases under the Westar contract referred to above during calendar year 2002 amounted to approximately $16.2 million. Minimum charges for capacity purchases under the Westar contract total approximately $80.9 million for the period June 1, 2002, through May 31, 2007.

 

The maximum hourly demand on our system reached a record high of 1001 megawatts on August 9, 2001. Our previous record peak of 993 megawatts was established in August 2000. A new maximum hourly winter demand of 987 megawatts was set on January 23, 2003. Our previous winter peak of 941 megawatts was established on December 19, 2000.

 

Construction Program

Total gross property additions (including construction work in progress) for the three years ended December 31, 2002, amounted to $277.4 million and retirements during the same period amounted to $32.5 million. Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for more information.

 

Our total construction-related expenditures, including allowance for funds used during construction (AFUDC) were $73.7 million in 2002 and for the next three years are estimated for planning purposes (including AFUDC) to be as follows:

 

 

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Our projected construction expenditures for new generating facilities include the two FT8 peaking units to be installed at the Empire Energy Center with generating capacity of 50 megawatts each. Both units have been delivered and are scheduled to be operational in the second quarter of 2003. The cost for the purchase, construction and installation of these units was approximately $31.7 million (including AFUDC) in 2002 and is estimated to be approximately $22.0 million (including AFUDC) in 2003. An initial payment of $3.4 million was made in 2001 when we entered into the purchase agreement for the units. Additions to our 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.

 

We had originally estimated that our construction expenditures (including AFUDC) would total approximately $71 million in 2003, $67 million in 2004 and $76 million in 2005. These estimates were reduced based on the following factors: (1) a Missouri Commission approved change in policy relating to charging developers for new line construction, which will reduce our costs, (2) an expected change in Missouri’s EPA approved plan for nitrogen oxide (NOx) reduction, which will allow us to delay additional environmentally related construction and (3) a revision of our annual customer growth projections from 1.6% to 1.4% (based on updated historical growth reflecting lowered economic activity) over the next several years, which will allow us to delay construction of additional generation capacity. We had initially projected additions to existing generating facilities to include $6.4 million in 2003 and $10.3 million in 2004 for the installation of a selective catalytic reduction system at the Asbury Plant to comply with nitrogen oxide (NOx) emission standards set by the Missouri Department of Natural Resources. However, the anticipated change in Missouri’s EPA approved plan for NOx reduction has allowed us to delay this construction. See “- Environmental Matters” below for more information.

 

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 the estimates due to a number of factors including changes in equipment delivery schedules, changes in customer requirements, construction delays, ability to raise capital, environmental matters, the extent to which we receive 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 - Results of Operations - Competition.”

 

Fuel

Coal supplied approximately 74.5% of our total fuel requirements in 2002 based on kilowatt-hours generated. The remainder was supplied by natural gas (25.1%) with oil generation and tire-derived fuel (TDF), which is produced from discarded passenger car tires, providing less than 1%. We expect that the amount and percentage of electricity generated by natural gas will increase due to the combined cycle unit at the State Line Power Plant that was placed into commercial operation in June 2001 and the addition of the two 50 megawatt FT8 peaking units currently being installed at the Empire Energy Center and scheduled to be operational by the second quarter of 2003.

 

Our Asbury Plant is fueled primarily by coal with oil being used as start-up fuel and TDF being used as a supplement fuel. Asbury is currently burning a coal blend consisting of approximately 92% Western coal (Powder River Basin) and 8% blend coal on a tonnage basis. Our average coal inventory target at Asbury is approximately 60 days. As of December 31, 2002, we had sufficient coal on hand to supply anticipated requirements at Asbury for 100 days. This extra inventory was due to coal contract commitments to purchase a minimum tonnage for the year.

 

Our Riverton Plant fuel requirements are primarily met by coal with the remainder supplied by natural gas and oil. Riverton is currently burning 100% Western coal (Powder River Basin) on Unit No. 8 and a blend consisting of approximately 78% Western coal (Powder River Basin) and 22% blend coal on Unit No. 7 on a tonnage basis. Our average coal inventory target at Riverton is approximately 60 days. As of December 31, 2002, we had coal supplies on hand to meet anticipated requirements at the Riverton Plant for 65 days.

 

We have a long-term contract, expiring in December 2004, with a subsidiary of Peabody Holding Company, Inc. for the supply of low sulfur Western coal (Powder River Basin) at the Asbury and Riverton Plants during the term of the contract. This Peabody coal is supplied from the Rochelle/North Antelope mines located in Campbell County, Wyoming, and is shipped to the Asbury Plant by rail, a distance of

 

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approximately 800 miles. The coal is delivered under a transportation contract with Union Pacific Railroad Company and The Kansas City Southern Railway Company. We are currently leasing one 125-car aluminum unit train, which delivers Peabody coal to the Asbury Plant. The Peabody coal is transported from Asbury to Riverton via truck. Asbury blend coal was supplied during 2002 under a short-term contract, which expired December 31, 2002, with GENWAL Resources, Inc. Beginning in September 2003, this coal will be supplied by Phoenix Coal Sales, Inc. under a five-year contract expiring December 31, 2007 and will be transported by truck. Asbury currently has enough blend coal supplied under the previous contract with GENWAL to supply its needs until the new mine begins delivering coal. The Riverton Plant blend coal is currently being supplied under the same contract with Phoenix Coal Sales, Inc. The Phoenix coal is transported to Riverton via truck.

 

Unit No. 1 at the Iatan Plant is a coal-fired generating unit which is jointly-owned by Kansas City Power & Light (70%), Aquila (18%) and us (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. Kansas City Power & Light is the operator of this plant and is responsible for arranging its fuel supply. The coal is transported by rail under a contract expiring on December 31, 2010, with the Burlington Northern and Santa Fe Railway Company and The Kansas City Southern Railway Company.

 

Since 1995, our Energy Center and State Line combustion turbine facilities have been fueled primarily by natural gas with oil being used as a backup fuel. During 2002, the heat input at the Energy Center was 99% natural gas with less than 1% being oil. The State Line heat input during 2002 was 100% natural gas. Our targeted oil inventory at the Energy Center facility permits eight days of full load operation. We currently have oil inventories sufficient for approximately nine days of full load operation for the Energy Center and eight days of full load operation for State Line Unit No. 1.

 

We have a firm agreement with Southern Star Central Pipeline, Inc. expiring July 31, 2016, for the transportation of natural gas to the State Line Power Plant for State Line Unit No. 1 and the jointly-owned Combined Cycle Unit. This transportation agreement can also supply natural gas to the Energy Center or the Riverton Plant, as elected by us on a secondary basis. Our transportation agreement was originally with Williams Natural Gas Company (Williams). In 2002, we signed a precedent agreement with Williams, which upon completion of necessary upgrades to the natural gas pipeline system (expected to be in June 2003) will grant us additional transportation capability through May 31, 2017. In 2002, Williams sold their Central Pipeline assets (including our natural gas transportation agreements) to Southern Star Central Pipeline, Inc. We expect that our remaining gas transportation requirements, as well as the majority of our natural gas supply requirements, will be met by short-term forward contracts and 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 our facilities: