Otter Tail Corp (OTTR) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Otter Tail Corporation's 4th quarter 2013 earnings conference call. (Operator Instructions)I would like to introduce your host for today's conference, Mr. Loren Hanson. Please go ahead, sir.

Good morning everyone and welcome to our call. My name is Loren Hanson and I manage the Investor Relations area at Otter Tail. Last night we announced our 2013 results and also issued 2014 earnings guidance. Our complete earnings release and slides accompanying this earnings call are available on our website at www. Otter Tail.com. A replay of the call will be available on our website later today. With me on the call today is Jim McIntyre, Otter Tail Corporation's President and CEO, Kevin Moug, Otter Tail Corporation's Senior Vice President, and Chief Financial Officer, and Chuck McFarland, President and CEO of Otter Tail Power Company.

Before we begin, I would like that remind you that during the course of this call, we will be making forward-looking statements. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform act of 1995 and includes statements regarding Otter Tail Corporation's future financial and operating results or other statements that are not historical facts. Please be advised that actual results could differ materially from those stated or implied by our forward looking statements due to certain risks and uncertainties including those described in our most recent form 10-K and subsequent quarterly reports on form 10-Q. Otter Tail Corporation disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise.

For opening remarks I would now like to turn the call over to Otter Tail Corporation's President and CEO, Mr. Jim McIntyre. Jim?

Thank you, Loren and good morning, everyone. Thanks for joining us our call today. It is an especially gratifying call for me today because we have so many positive topics to discuss. Persistence in executing our strategy produced excellent results in 2013. Both at Otter Tail Power Company and at the manufacturing and infrastructure companies under Veristar. In addition to making earnings per share of $1.54, on a non-GAAP basis in 2013 our Company successfully executed actions related to our strategic plans and position us well for further earnings improvement in 2014.

Allow me to discuss the utility first. Otter Tail Power Company continued to execute its strategy to grow through environmental upgrades at its power plants and through strategic transmission investment. I would like to provide a quick update on several of these large projects. Construction is going well at Big Stone plant on the air quality control system. This project is required to meet Environmental Protection Agency regional haze and mercury regulations. It's more than 25% complete with no OSHA recordable injuries.

We expect this project to be completed within its current budget of $405 million. Otter Tail Power Company's portion is 54% which is approximately $218 million. Environmental cost -- cost's recovery riders were approved in Minnesota and North Dakota during the fourth quarter of two thirteen (sic) allow for recovery and return on investments during construction. This saves customers accrued interest and more gradually introduces bill increases. This projects will remain in place throughout the project until they are completed in 2016.

The transmission projects also are progressing. The $365 million Big Stone South to Ellendale 345 kV project has identified a preferred route and has submitted permit applications in North Dakota and South Dakota. This project is a mid-continent, independent system operator or MISO multi-value project that's due to be in service in 2019. Otter Tail Power Company is a 50% owner with Montana-Dakota Utilities Company. The $218 million Big Stone South to Brookings 345kV line, another MISO MVP project, remains on schedule to be in service by 2017. Otter Tail Power Company is a 50% owner with Xcel Energy

Cost recovery from these two MISO MVP projects will come from all customers within the MISO footprint. Otter Tail Power Company also is investing $26.5 million in Bookings County to Hampton and $84.4 million in Fargo to St. Cloud, two CapEx 2020 transmission projects still under construction. They are on budget and on schedule to be in service in 2015.

Cost recovery for these projects will come through transmission cost recovery riders in the states Otter Tail Power Company serves. Otter Tail Power Company adds value to these large projects through risk management a discipline we emphasize. It is important because the utility will see capital expenditures of $657 million between 2014 and 2018. Risk identification and risk management are areas in which we have improved throughout the corporation. We saw proof of daily operational excellence in 2013 when Otter Tail Power Company achieved the smallest number of OSHA recordable injuries ever, and again achieved higher residential customer satisfaction ratings than the other investor owned utilities, measured by the American Customer Satisfaction Index. Excellent safety records and high customer satisfaction scores are strong indicators that the Company is well managed.

We expect the utility earnings to be considerably higher in 2014 than in 2013 because the capital expenditures and accompanying cost recovery for the projects I just discussed will continue into 2014. Kevin will talk more about this during this 2014 guidance discussion in a few minutes. But first, I would like to turn our attention to the manufacturing and infrastructure companies under Varistar.

They had quite a year. All six were profitable. Fully restored its profitability through improved estimating, stronger project management and selection of projects that better fit its skill sets. Aevenia delivered results in the second half of the year that offset the impacts of adverse weather and project challenges from the first half. Both PVC pipe companies , Northern Pipe Products in Fargo, and VinylTech in Phoenix, had a stronger than expected year as a result of increased demand, growing market share and excellent execution. Efficient plants, low operating costs and good customer relations served these two companies well.

And finally, the two manufacturing companies , BTD Manufacturing and T. O. Plastics more than held their own in a still challenging market. In summary, I would say our change in the business model for our manufacturing and infrastructure companies under Varistar has been successful. We have reduced the number of platforms in companies, added select resources, and become more hands on in our management oversight. This has improved the performance and on going operational excellence within all of our remaining companies.

Last week , we had the privilege of announcing that Chuck McFarland, current President and CEO of Otter Tail Power Company and leader of our electric platform has been appointed to the position of President and Chief Operating Officer of Otter Tail Corporation effective April 14. We also announced my intent to retire at the time of our annual meeting in April of 2015 and that Chuck is expected to be named my successor at that time. Chuck is ideally qualified for this new leadership challenge and the internal reaction to this news has been very positive. His appointment to President gives the two of us a chance to closely work together for a year before I retire. Before Kevin takes us through a run down of the quarter in year-end financials I will ask Chuck to share some brief perspective. Chuck?

Thank you, Jim. It is both an honor and a challenge to step into this new role. Improving our overall operational effectiveness across both platforms has been a persistent focus for several years now and I appreciate the opportunity to work to make further progress.

I have had the pleasure of working with Jim as part of the executive team and shaping the Corporation's strategic planning function for more than two years, and I believe we've made much progress on multiple fronts. Varistar continues to be an important contributor to the Corporation's earnings potential. We narrowed our focus and significantly optimized our mix of businesses and competencies where we have a greater potential for success. We have improved the ways we share best practices.

In terms of our electric platform, we continue to successfully execute on our rate-based growth strategy and I am pleased with Otter Tail Power Company's momentum as I move to the Corporation. We have a tremendous leadership team at Otter Tail Power and part of my focus in the weeks ahead will be working to name my successor. We plan to make that announcement within the next couple of months. I am looking forward to the chance to support the solid strategies Jim and the rest of the management team have put in place. I met many of you over the years and look forward to further building our relationships with our investors and analysts. Jim?

Chuck alluded to the rest of the management team and I want to emphasize the contributions of the entire team as well as Chuck's evolving role within it. It takes a strong management team working together to create the successes we have to date. I couldn't be more pleased with the expertise and collaboration within this group. Now I will turn it over to Kevin.

Good morning. Please refer to slide 4 as I discuss with you our 2013 results and other significant events that have shaped Otter Tail Corporation moving forward. 2013 represented a year of execution. Our portfolio realignment was substantially completed by the end of 2012. 2013 was the year for us to demonstrate the earnings capability of our remaining operating companies.

We earned $1.54 per share from continuing operations before debt retirement costs in 2013. This represents an 18% increase in earnings per share over the $1.31 from continuing operations before debt retirement costs in 2012. We further strengthened our balance sheet and future earnings power of the Corporation by retiring an additional $48 million of our 9%, $100 million unsecured notes.

This transaction reduces future interest expense by $4.3 million for 2014 , 2015 and $4.1 million in 2016. The portfolio realignment and the strengthening of the balance sheet and the future earnings power of the Corporation with the early debt retirements resulted in Moody's recently announcing an upgrade to the senior unsecured credit rating of Otter Tail Corporation to Baa2 from Baa3 with a stable outlook. This is in addition to the S&P upgrade earlier in 2013.

All of these events along with the expected growth in earnings per share for 2014 support the increase in our annual indicated common dividend to $1.21 per share from the previous $1.19 per share.

Please refer to slide seven as I provide additional comments on how our segments performed against the guidance we provided during the fourth quarter. The electric segment finished 2013 strong. The additional earnings over the guidance range were mainly due to stronger retail electric sales driven by extremely cold weather during the fourth quarter of 2013. The manufacturing segment performed in line with our expectations by earning $0.32 per share compared with the guidance of $0.30 to $0.33 per share.

BTD's revenues decreased due to lower sales volumes and end markets serving the construction and energy industries offset by increased sales to end markets serving recreational vehicle and agricultural industries. BTD's net income increased mainly due to lower income taxes from the recognition of approximately $1 million in research and development tax credits. This was in conjunction with the filing of the Corporation's 2012 federal tax return and recording an additional $500,000 credit for 2013. The research and development tax credit expired at the end of 2011 and had not been extended as of December 31st, 2012. The American Taxpayer Relief Act of 2012, signed into law in January of 2013, extended the credits retroactively through the end of 2013.

T. O. Plastics revenues decreased in 2013 mainly as a result of reduced sales of packaging products. Net income however was up slightly over the same time period due to lower raw material costs and productivity improvements. The plastic segment performed well again in 2013 earnings $0.38 per share and exceeding the guidance range of $0.35 to $0.37per share.

The additional earnings over the guidance range was due to stronger than expected markets during the fourth quarter compared to what was forecasted. Our construction segment reported earnings per share of $0.04 in 2013 which was within our guidance range of $0.03 to $0.05 per share.

A year ago this segment reported a loss of $0.21 per share. Foley was the primary reason for this improvement withnet income increasing $10.4 million over 2012 due to improved profitability. This is a result of strong performance on current year projects.

Aevenia's net income decreased $1.4 million from last year. This was mainly due to a planned reduction in the volume of telecommunications jobs pursued in 2013. In addition Aevenia experienced a delay in securing and initiating new substation construction projects due to more adverse weather conditions in 2013 than in 2012. Aevenia's 2012 results also included revenues and net income from Moorehead Electric, one of Aevenia's subsidiaries which was sold in October of 2012.

Corporate costs were $0.25 per share compared with the guidance of $0.29 to $0.32 per share. The improvement from the guidance was due to lower than expected tax costs due to reductions in effective federal and state tax rates, better than expected performance in the Corporation's self- insured health plan during the fourth quarter, and interest savings from the early debt retirement that occurred in the fourth quarter.

Slide nine details are available liquidity under the $320 million aggregate credit facilities. Otter Tail Corporation and Otter Tail Power Company had a combined $266 million available under credit facilities to provide for future growth and working capital at December 31, 2013. Otter Tail Power Company used their line of credit in the second half of 2013 to fund our planned rate base investments.

In August of 2013 we closed on the delayed drop private placement of $150 million in long-term debt with two traunches. The $60 million traunch bears interest at 4.68% for 15 years . The $90 million traunch bears interest at 5.47% for 30 years. The proceeds from the issuance which are scheduled to be funded this month will be used to retire the $40.9 million term loan due January 15, 2015 as well as to pay down Otter Tail Power Company's line of credit and for additional planned expenditures for the utilities construction program.

For our 2014 business outlook , please refer to slide 10 . This shows that our 2014 earnings guidance is expected to be in the range of $1.55 to $1.75 ofearnings per share. The guidance reflects the current mix of businesses owned by the Corporation. The guidance also considers a cyclical nature of some of the operating companies and reflects plans and strategies for improving future results.

The electric segment earnings per share is expected to increase significantly in 2014 compared with 2013 based on the following items Rider recovery increases including environmental riders in Minnesota and North Dakota related to the Big Stone AQCS environmental upgrades, lower pension benefit costs of approximately $2 million as a result of an increase in the discount rate from 4.5% to 5.3% These items are offset by an increase in interest cost as a result of $150 million of fixed rate long-term debt being put in place in the first quarter of this year to finance the electric segment's construction projects and an increase in operating and maintenance costs primarily for increased labor and a planned outage at the Hoot Lake plant. We expect earnings from the manufacturing segment to be flat year-over-year.

There is an increase in sales in earnings as a result of expanded customer relationships and residential vehicle, lawn and garden, industrial and commercial end markets that BTD serves. The 2014 earnings for BTD do not reflect any R&D credits being earned. These credits expired on December 31st, 2013. The increase in BTD's earnings is offset by a decrease in earnings from T.O. Plastics due to a reduction in packaging revenues.

The backlog for the manufacturing companies is approximately $136 million for 2014 compared to $124 million one year ago. The plastic segment experienced its fourth best year earnings in 2013 due in part to favorable market conditions. They are not expected to be repeated in 2014. Accordingly we expect earnings per share to return to more normal levels in 2014. We do expect higher earnings per share from the construction segment in 2014 as a result of improved cost controls and more selective bidding on projects with the potential for higher profit margins.

The backlog in place for the construction business is $77 million for 2014 compared with the $151 million a year ago. The construction backlog has continued to strengthen in the first quarter of 2014 by approximately $30 million. Corporate costs are expected to decrease in 2014 mainly due to lower interest costs from the retiring of the $48 million of the 9% long-term notes in the fourth quarter of 2013, offset by general inflationary increases and labor benefits and other general and administrative costs.

We expect capital expenditures for 2014 to be $195 million compared with $164 million last year. The major project contributing to the increase is the planned expenditures at the Big Stone AQCS facility. We continue as well to invest in various transmission projects. The investments in these environmental and transmission project will positively impact the Corporation's earnings and returns on capital.

The five year capital expenditure plan contains $657 million for utility projects. This plan also includes $112 million of replacement capital for the manufacturing and infrastructure businesses. Our 2013 results reflect our efforts to improve our risk profile, credit metrics, and generate sources of cash to support the future capital expenditures of our electric segment. These actions have resulted in a portfolio of companies that is easier to understand . We believe our 2014 guidance further positions us to achieve a 4% to 7% compounded growth rate in earnings per share using 2012 as the base year. This is driven largely by the expected rate base investment at the utility and existing capacity available in our manufacturing and infrastructure companies.

As we enter 2014 we will continue executing our strategy with the ultimate goal of delivering shareholder value. We are now ready to take your questions, and after the Q&A Jim will return with a few closing remarks.

Thank you. (Operator Instructions)Our first question comes from Matt Tucker with KeyBanc Capital Markets. Your line is open.

Hi, guys, good morning and congrats on a nice year.

Thank you, Matt.

Some questions on the guidance and I guess I will start with construction. The guidance implies pretty strong earnings growth in 2014. At the same time your backlog entering the year is quite a bit lower than last year. Could you just give us a sense of some of the underlying assumptions there, and are you assuming you will book a lot of work during the year? If so what type of work are you seeing? Or is it primarily the stronger margins that are driving the earnings?

Thanks, Matt for the question. This is Kevin. I will respond. In my comments I did note that we have had an additional $30 million of backlog here in the first quarter of 2014.

So that's been added. We are seeing a mix of work change from water -- waste water to more (inaudible) industrial commercial-type projects and we are expecting to see higher margins from that type of construction work as compared to some of the water -- waste water projects we have had in the past. We also expect that there will be -- we are seeing additional bidding activity as we go through the year as well. And so our are confident in terms of -- Wow, the backlog as we start out the year is down over the same time a year ago based on the backlog that has been added here so far in the first quarter, and additional bidding opportunities we are seeing here as we go through the year, and we feel good about as we start the year out with the guidance we have given.

Thanks. That's very helpful. And then on the plastics segment, entering 2013, your -- well you out-performed your initial guidance in 2013 by quite a bit. What makes you think that you're going to see this change in market conditions in 2014? Is it something you are already seeing, or is it more based on historical cycles and the assumption that things have to normalize at some point?

A couple things, Matt. One, we are -- we have been pretty clear I think that we are going to guide -- when we start the years out we are going to guide what we think a normal range of earnings are. Because our experience over the years is if some of these cycles don't always consistently repeat year after year. We have had three very strong years here. This year we are clearly bringing the guidance up in 2014 stronger than what we originally guided in 2013. That's due in part to -- we do think there are some factors that occurred here over the last couple years that would say our range of normal earnings has moved up. It is not what it used to be.

We are seeing a strengthening in the business in terms of where we think normal earnings are because of some capacity that has come out of the market over the last few years. We have seen a strengthening from competition in terms of keeping sales prices somewhat higher and we are aren't seeing as much movement from the commodity standpoint of the pipe. But we feel taht as we head into the year based on the conditions to guide to a more normal range, and this range we have put out here is what we would consider a more normal range for us now going forward.

Matt this is Jim McIntyre. Let me add a little bit, and that is this, the range we have given in no way reflects any lack of confidence in our ability to execute. We have low cost facilities.

We have low variable costs to production, and we are very confident that if the opportunities present themselves our team will execute as they have over the last two years and take advantage of all of the market opportunities that are there. As we work our way through the year, we will see where things go. We have more and more transparency as to the markets quarter by quarter and that is also very much consistent with Kevin's thoughts that this is the new normal, if you will, and we will continue to review as we go forward.

Thanks, guys. And just one more if I could before I jump in the queue, the 4% to 7% average long-term earnings growth target, is there a base year that we should be thinking about with respect to that?

That is off of 2012 $1.31, Matt.

Got it, thanks. I will jump back in the queue.

(Operator Instructions)Our next question comes from Matt Tucker with KeyBanc Capital Markets. Your line is open.

All right, I will keep going here. On the electric guidance, can you quantify at all how much more rider recovery revenue you expect to recognize in 2014 versus 2013?

Yes, Matt, this is Kevin. In terms of the impact of that piece, we are looking at a probably about a $10.7 million after tax type amount from the rider revenue growth that we are seeing.

After tax, okay. And any sense you can give us for your underling sales growth and O&M growth assumptions?

Well in terms of our base margin growth we are slightly above a year ago . In terms of O&M growth, we mentioned the labor, the inflation that (inaudible) That is a little over a $5 million impact on the year-over-year guidance. And then on the interest expense piece that we mentioned as well, that is a little over a $3 million impact.

Thank you. That's very helpful. And then what consolidated tax rate should we be assuming for 2013?

I think our effective rate in our 2014 guidance is somewhere in the 28% to 30% range.

And last question bigger picture, could you just update us on your thoughts on the overall business model and specifically do you consider all of your non-utility businesses as core businesses at this point going forward?

This is Jim. We said in the past and we still will always review our portfolio criteria against all of our companies and we will do that on an on going basis. Clearly we like the direction of all of our businesses in 2013. The execution that was carried out is pleasing to us. There is still room to grow or to go if you will in all of our businesses, so we will continue to execute well into 2014 as well. We have plans to do that. And we will assess all of our businesses internally throughout the year.

Great, thank you, That's all I had.

(Operator Instructions)And I'm currently showing no further questions. At this time I will now turn the call back over to the President and CEO, Jim McIntyre.

Well, thank you. I am pleased with our 2013 results . We are achieving excellent performance from both parts of our Company. We have a high performing electric utility, solid management in place and rate-based growth opportunities through at least the next five years, coupled with supportive regulatory treatment.

We have a well managed focused set of manufacturing and infrastructure companies under Varistar that will provide a premium return and supplement growth and earnings at times when utility growth is less. We are well positioned for 2014 and beyond and are committed to executing strategic plans that will deliver shareholder value. Thank you for joining our call today and for your interest in Otter Tail Corporation. We look forward to speaking with you next quarter.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and have a wonderful day.