Empire District Electric seeks capital in tough market

Facing less-than-ideal market conditions, Empire District Electric Co. is among a cadre of investor-owned utilities actively looking to pay down construction-related short-term debt through an intricate balance of debt and equity financing.

In March, publicly traded Empire District (NYSE: EDE) announced the newest piece of its multifaceted financing strategy: the sale of $75 million in 7 percent first-mortgage bonds due April 1, 2024. The bond issue proceeds of $72.7 million went to repay short-term debt from the construction of two major coal-fired power plants: the Iatan 2 north of Kansas City and Plum Point in northeast Arkansas.

The Joplin-based utility company's ownership in Iatan 2 is about 12 percent, and the utility has a roughly 15 percent stake in the Plum Point plant, said Chief Financial Officer Greg Knapp. Those two projects combined - plus upgrades to the Iatan 1 plant, which also serves the Kansas City area - represent about $400 million worth of construction work over four years, Knapp said. Empire District, which provides electricity, natural gas and water services to about 215,000 customers in Missouri, Kansas, Oklahoma and Arkansas, is a little more than halfway through that four-year cycle, he added.

Also in March, Empire District increased its short-term debt capacity by extending its revolving line of credit through a seven-bank syndicate led by Kansas City-based UMB Bank to $200 million from $150 million.

The move came on the heels of Empire District's effort to solicit new investors through an equity distribution agreement with UBS Securities LLC. Through the agreement, which Knapp called a "dribble plan," the utility may incrementally issue up to $60 million in common stock at par value $1 per share. As of April 30, there were no takers, according to a recent Securities and Exchange Commission filing.

"The world has changed a lot in the last six or eight months," Knapp said. "We have a lot more people ask a lot more questions. It's just a tougher market out there all the way around."

That hasn't stopped investor-owned utilities from wading into an increasingly crowded marketplace. Empire District's larger Missouri-based peers, Ameren Corp. and Kansas City Power & Light Co., are likewise on the hunt for capital.

Earlier this month, Ameren (NYSE: AEE) offered $425 million in senior notes to retire a portion of its short-term debt, and KPC&L holding company Great Plains Energy Inc. (NYSE: GXP) announced a public offering of about $400 million in securities for the same purpose. KCP&L is majority owner of the Iatan plants.

Beyond Missouri, the competition is even more intense, Knapp said.

"There's a lot of utility construction going on, and therefore, there's a lot of money being raised in financial markets ... for utility construction," he said. "Consequently, we find ourselves sometimes competing for the attention of shareholders or potential bondholders with the big guys on the East Coast."

Bob Schallenberg, director of the utility services division of the Missouri Public Service Commission, said Missouri's investor-owned utilities have investment-grade ratings, which should ensure their continued access to capital.

"But in today's capital market, the risk premium is higher," he said, pointing to fewer government securities and downwardly revised corporate growth estimates.

Empire District has a low "BBB-" credit rating, which means the utility has adequate capacity to meet its financial commitments but it's susceptible to adverse economic conditions, and a "stable" ratings outlook from Standard & Poor's. In March, Fitch Ratings rated Empire District similarly, but downgraded the utility's outlook to "negative," suggesting its rating could drop in the next two years.

Knapp, though, doesn't expect that to happen. He said Empire District's balancing act seems to be working well so far.