Otter Tail Corp (OTTR) 2015 Q1 法說會逐字稿

Good morning and welcome to Otter Tail Corporation's First Quarter 2015 Earnings Conference Call. Today's call is being recorded and there will be a question and answer session after the prepared remarks.

I would now like to introduce Loren Hanson.

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 first quarter 2015 results. Our complete earnings release and slides accompanying this earnings call are available on our website at www.ottertail.com. A replay of the call will be available on our website later today.

With me on the call today is Chuck MacFarlane, Otter Tail Corporation's President and CEO; Kevin Moug, Otter Tail Corporation's Senior Vice President and Chief Financial Officer.

Before we begin I'd like to 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 include 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. Chuck MacFarlane. Chuck?

Thanks, Loren. Good morning and thank you for joining our call. First, I want to say thanks to again to Jim McIntyre, who retired as CEO in April. He's been an excellent leader. During his three years as CEO he helped us reduce risk and improve alignment. So, Jim, if you're listening and I'm reasonably sure you are, again, thank you for your many contributions.

I also want to say I'm honored to step in the role of Chief Executive for the corporation. As President and Chief Operating Officer this past year, I gained additional perspective on each company's unique opportunities and challenges. I look forward to continuing to work each of the companies, the Board and the Management Team to provide solid returns for our shareholders.

Before I turn my attention to first quarter performance, allow me to comment briefly on the sale of our construction companies. At the time of our last call both sales were pending.

We completed the sale of assets of our former electric construction contractor, Aevenia to Texas based Primoris recording a gain. And we sold the shares of our former water, waste water and industrial construction contractor, Foley, last week to Cincinnati based [Interfab Incorporated]. This is the last step toward creating just two Otter Tail Corporation platforms, Electric and Manufacturing.

As I said in our earnings release, we intend to focus on operational excellence with this narrowed set of operating companies. We will concentrate on organic growth and acquisitions within both platforms.

Now regarding the first quarter results, clearly we face some challenges but I am confident in our organizational role and expect improvement in performance during the remaining quarters of this year.

Let me discuss the utility first. Utility revenues were down compared with first quarter last year primarily because of weather. First quarter of 2014 was exceptionally cold and the first quarter of 2015 was mild. Overall there was an 18% reduction in heating degree days quarter-over-quarter.

Utility expenses were up primarily because we incurred maintenance expenses for the planned major outage at Big Stone Plant. We did not have similar expenses in the first quarter of last year and additionally we also incurred some of the expenses budgeted for the second quarter this year in the first quarter. We expect that the project will be on budget overall.

The utility is also facing higher than expected employee benefit costs, depreciation and property taxes. In addition, the utility filed with the Minnesota PUC to recover new environmental costs associated in our existing fuel clause. If approved recovery would have begun this year for cost of reagents such as activated carbon, which we use to capture mercury at our coal plants. Recovery would also have also begun for the cost of purchase SO2 allowances to comply with CSAPR Prostate Air Pollution Rule.

Both the North Dakota and South Dakota Commissions had approved similar requests but the Minnesota Commission believed it more appropriate for consideration in a general rate case. We expect to recover the cost in our next rate case but we've not yet confirmed the timing of our next filing.

Tim Rogelstad and his Management Team at the utility are taking actions to return annual earnings close to budget but we found it prudent to reduce utility guidance slight which Kevin will address in his remarks.

Utility net income continues to benefit from cost recovery riders for the environmental upgrade at Big Stone and major transmission projects.

Just a quick update on the environmental project at Big Stone plant; it is 97% complete and workers continue without a single loss work-day injury. In February we began the four-month process of putting the new controls into service. That should be complete in June with commercial operations targeted for October.

You'll recall that we expect the project to cost $384 million, which is 22% less than the original estimate used in our advanced determination of Prudence Proceeding. Our share is $207 million.

As discussed on the last two earnings calls, we are concerned about the effect on Big Stone plant if the EPA's proposed CO2 reduction rule for existing power plants is not amended.

The utility team continues to provide input to the EPA and state environmental agencies where appropriate. We are confident that the agencies understand South Dakota's and Big Stone's unique situation. We expect the EPA to publish the final clean power-plan rule in August or September.

And a quick update on our transmission projects; two CapEx 2020 projects that we were involved with were energized this spring. In fact, the organization held a media event yesterday on each project.

We have a 13% ownership in the Fargo to Monticello Line, or $86 million, and we have a $27 million investment in the Brookings to Twin Cities' line. These projects were more than a decade in the making and provide improvement to overall grid reliability and efficient energy dispatch.

We're also investing in two 345-kv transmission lines that the Mid-Continent independent system operator has deemed as multi-value projects. They are within with in Otter Tail power service area. One line will run from a new substation south of the Big Stone plant, northwest to Ellendale, North Dakota. It is a $365 million project scheduled to be in service in 2019. Otter Tail Power manages the project and is a 50% owner with MDU.

The other MISO project, Big Stone South to Brookings, is on schedule to be in service in 2017. We are 50% owner in this $228 million project with Xcel energy. Xcel manages the project and expects to start construction later this year.

Slide five shows all of current rate-based projects and the percent of completion. Slide six shows the various cost recovery mechanisms we have for them in each of the states we serve.

And slide seven, similar to the prior earnings calls, indicates the utilities' strong future rate-based grow. The $665 million in forecast capital expenditures between 2015 and 2019 results in an approximate 6% compound annual growth rate in rate base over that time frame.

Now, regarding first quarter performance of the four companies in our manufacturing platform, three performed as anticipated. The story is really is BTD, our metal fabricating Company. BTD has operations in Minnesota and Illinois. Like many contract manufactures across the nation, we've seen a significant demand reduction from the oil and gas and wind energy equipment segments at our Illinois plant.

A demand reduction from agriculture equipment segment at our Minnesota and Illinois plants due to lower agricultural commodity prices and scrap metal sales prices that are slightly only more than half of what we expected and experienced last year.

This is only partially offset by a demand increase in lawn and garden and recreational vehicle sales at our Minnesota plants.

Consequently we've reduced BTD's overall year-end revenue forecast to 2014 levels. And regrettably we've reduced the number of employees at the Illinois and Detroit Lakes facilities.

BTD continues to execute on its Minnesota optimization plan which includes adding the state-of-the-art paint facility, expanding and streamlining the Detroit Lakes and Lakeville production facilities and exiting the Otsego warehouse facility.

All of these actions will reduce logistics cost and improve productivity. As an update on that plan, in Detroit Lakes the pre-cast concrete panels are erected, roof materials are installed and the concrete is poured.

In Lakeville construction of the new building is ahead of scheduled thanks to a mild winter. The paint line components have arrived and are in the process of being installed.

The PVC Companies, Vinyl Tec and Northern Pipe Products are in good positons and we expect strong financial results from both companies for the year.

Additionally, both companies have continued strong safety performance. Vinyl Tec, for example, has had no lost time injuries during the past five years. This reflects strong employee focus and is a bellwether of good overall operational performance.

During our last call I introduced John Abbott, our new Veristar President. He and his team are working closely with the companies to improve operations with primary focus on BTD at this time.

Now I'll turn it over to Kevin for the financial perspectives.

Thanks, Chuck, and good morning, everybody. Please refer to slide eight that explains the quarterly variances on our earnings per share basis. The main reasons for decline in the net earnings for the electric segments on a quarter-over-quarter basis were one, mile weather in the first quarter of 2015 compared to the first quarter last year with heating degree days down by 18%, maintenance costs at our Big Stone plant in conjunction with tying into the new AQCS project, higher property tax expenses and depreciation expenses due to increased rate base investments and a full quarter of interest costs in the first quarter of 2015 associated with the new debt that we added at the end of February of 2014. These items were offset by an increase in environmental rider revenues related to our AQCS project at the Big Stone plant and additional increases in revenues from pipeline customers.

Our Manufacturing segment revenues were up modestly quarter-over-quarter. Increased demand from recreational and lawn and garden equipment markets at BTD and volume increases with industrial customers at T.O. Plastics were offset by lower tooling revenues and lower scrap metal sales due to declining scrap metal prices. Our earnings were down quarter-over-quarter due to lower gross margins on work performed, higher raw material costs, labor and freight costs at both BTD and T.O. Plastics.

Our Plastics segment's revenues and earnings were down between quarters, mainly attributable to a reduction in volume of 12 million pounds. This decline was impacted by weather and market conditions in Texas along with the uncertainty of resin and pipe prices entering into the year which led customers to delay purchases of pipe into the spring time frame.

Our corporate expenses increased $1.5 million quarter-over-quarter, primarily from higher employee benefit costs. The part of this increase that relates to long-term incentive awards is due to a change in the grant date from previous periods. These awards were granted in the first quarter of 2015 compared with the second quarter of 2014.

We are revising our earnings guidance, our earnings per share guidance, to $1.50 to $1.65 per share. Slide nine provides a reconciliation of the guidance changes by segment on an earnings per share basis. We are lowering our previous 2015 guidance for the electric segment, primarily from lower than expected first quarter earnings driven in part due to warmer than normal weather but also as a result of factors that will persist through the rest of the year.

We have additional costs associated with long-term disability plans due to higher claim costs and more plan participants. Increased coal plant reagent costs and SO2 allowances that were determined unrecoverable in the fuel clause in March, 2015 by the Minnesota Public Utilities Commission.

Increased depreciation expenses associated with increased investments in transmission generation, distribution and general plant placed in service in 2014 and 2015, higher than expected property tax expenses and lower transmission rider revenues associated with potential rate reductions granted by FERC under the MISO [terrorists].

We're also lowering our February, 2015 guidance for the manufacturing segment, primarily due to the challenges at BTD. For BTD there is reduced demand in agriculture, energy, mining and the oil and gas in markets.

Slide 10 highlights the changes that have occurred with certain crop commodity prices that are certainly affecting the reduced demand in the ag industry.

Lower scrap metal revenues as a result of a continued decline in scrap metal prices, as shown on slide 11, and lower operating margins due to operational productivity and increased severance costs. We are expecting an increase in earnings from T.O. Plastics as a result of higher than originally expected revenues in certain industrial end markets.

In our backlog for this segment is $106 million as of March 31, 2015 compared with $115 million a year ago.

We are increasing our February 2015 guidance for the Plastics segment due to stronger operating margins than originally anticipated. Sales volumes in 2015 are expected to be slightly lower compared to 2014.

And as indicated in our February 2015 guidance, our corporate costs are expected to be flat in 2015 compared with 2014.

Our first quarter results were lower than anticipated and we are experiencing additional headwinds at Otter Tail Power Company and BTD as previously discussed. We're taking steps to address this year's challenges and expect 2015 to be a successful year.

Our revised earnings guidance range shows expected returns on equity of 9.5% to 10.4%. And we remain confident we are in a position to achieve a 4% to 7% compounded growth rate in earnings per share using 2013 as adjusted for the base year. This is driven largely by the expected rate base investments at the utility and organic growth in our manufacturing businesses.

On May 1, 2015 our Board of Directors declared a quarterly common stock dividend of $0.3075 per share, or an indicated $1.23 per share on an annual basis. This represents the 306th consecutive quarter we have paid a common stock dividend.

We are now ready to take your questions and after the Q and A Chuck will return with a few closing remarks.

(Operator Instructions). Our first question is from Matt Tucker with KeyBanc Capital Markets.

This is Grier Buchanan on for Matt. I wanted to start with a quick question on your electric utility. Could you tell us the weather impact versus normal on our earnings in the first quarter?

Yes, Grier, this is Kevin. Weather first quarter compared to normal was 97% of normal.

And so could you -- are you able to quantify roughly the impact on earnings relative to normal weather? Or is that -- is it about 97%?

Yes I mean really, so the impact on the guidance year-over-year for weather is a penny a share so it was we were slightly below normal compared to normal for the quarter and then we're seeing as we look out to the rest of the year about a penny a share impact. We show that on slide nine of the revised guidance.

Right. Okay thanks and then switching over to the non-utility, how much of the change in guidance for 2015 is due to a 1Q results versus a shift in the rest of your outlook?

Yes BTD's first quarter results clearly were down compared to the same time last year but when we look out for the rest of the year we're seeing -- we showed on page nine the impact of the revenue declines and the scrap prices. A lot of that is really coming for the rest of the year impact, especially the scrap, we're down. We're showing $0.05 a share. That's about $3 million in volume from what we had originally planned and most of that is through the rest of this year versus first quarter.

Got it. Thanks, Kevin. That's great color and that I thought that was a very helpful slide. You guys did a nice job walking us through the change in guidance as well as the change in earnings versus last year. So does this -- looking at the slides you referenced, is this reflecting expectations for continued weakness or sort of a weaker environment that's already reflected sort of stabilizing throughout the rest of the year.

I guess specifically speaking to BTD, we do not anticipate a return of the oil and gas business and that the ag market will stay approximately where it is, not rebound, if you will.

Got it. And then I think that it looks -- I inferred from the press release and please correct me if I am wrong that the work force reductions were not part of the cost controls you had referenced in prior press releases when you had also announced facilities expansions at BTD and it sounds like -- again, please let me know if this is inaccurate but it sounds like you are moving forward with the facility's expansions and upgrades as planned. I wanted to know if there's -- if those will have any impact relative -- well, if those will have any impact in 2015.

Well, they continue to be in the forecast. We are continuing with the upgrades as planned. There's no change there. They're well underway. We anticipate they will, the paint and other items, will be beneficial in 2015. I mean at a very high level the Minnesota production is relatively close or actually above 2014 levels but we anticipated it would be higher.

Illinois is impacted more dramatically because they have a higher percentage of oil and gas and ag equipment so that particular facility has had a majority of the reductions in force.

Great, thanks for that color. I'll jump back in the queue.

(Operator Instructions). I am showing no further questions at this time. I would like to turn the call back over to Chuck MacFarlane for closing remarks.

Well thank you. I'll summarize by saying that we believe we are in the right markets for the long-term and we have plans in place to work through this year's challenges. We expect the utility will have a strong financial performance in the remaining quarters of 2015 and BTD will achieve work force targets at each of its locations and will reduce outsourcing costs when it starts operating the new paint line in Lakeville, Minnesota. The other companies are in good positions for the year.

Thank you for joining our call and for your interest in Otter Tail Corporation. We look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.