Otter Tail Corp (OTTR) 2016 Q2 法說會逐字稿

Good morning, and welcome to Otter Tail Corporation's second-quarter 2016 earnings conference call. Today's call is being recorded.

(Operator Instructions)

I will now turn the call over to the Company.

Good morning, everyone, and welcome to our call. My name is Loren Hanson, and I manage the Investor Relations area at Otter Tail Corporation.

Last night, we announced our second-quarter 2016 results. Our complete earnings release and the slides accompanying this call are available on our website at www.OtterTail.com. A replay of the call will be available on our website later today. Commenting this morning will be Chuck MacFarlane, Otter Tail Corporation's President and Chief Executive Officer, and Kevin Moug, Otter Tail Corporation's Senior Vice President and Chief Financial Officer.

Before we begin today's call, I would like to remind you that during the course of the call, we will be making forward-looking statements. As noted on slide 2 of our presentation, these forward-looking statements represent our current judgment or opinion of what the future holds. These statements are subject to risks and uncertainties that may cause actual results to differ materially from forward-looking statements made today. So please be advised about placing undue reliance on any of these statements.

Our forward-looking statements are described in more detail in our filings with the Securities and Exchange Commission, which we encourage you to review. 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 our President and CEO, Mr. Chuck MacFarlane. Chuck?

Thanks, Loren. Good morning and thanks for joining our call. For the quarter, net income from continuing operations was $15.6 million or $0.41 a share. We are pleased with this result. It is stronger than the second quarter last year, and can be largely attributed to improving margins in our Manufacturing segment.

Accordingly, we are reaffirming our guidance for the remainder of 2016. To enhance long-term returns, our strategy continues to focus on maintaining a solid regulated electric utility, supplemented with a portfolio of manufacturing businesses.

Today, I will reaffirm our plans to grow rate base and review our recently filed Minnesota rate case. I will also update you on our manufacturing platform.

Slide 6 shows our planned rate base growth. It calls for capital investment of $858 million from 2016 through 2020. Side 7 shows our regulatory recovery mechanisms. We have positive regulatory constructs and relationships in each jurisdiction. Our rate-based growth plans include two large regional transmission projects, and several generation investments for a projected compound annual growth rate of 8% in utility rate base using 2014 as the base year.

We have discussed the two large transmission projects, Big Stone South to Brookings and Big Stone South to Ellendale, on past earnings calls. To recap, the Midcontinent Independent System Operator-approved both as multi-value projects, which means the costs will be allocated across all customers in MISO's 15-state Midwest footprint with limited rate increases to our retail customers.

The map on slide 8 shows the relative location and length of these lines. The first will run from Brookings, South Dakota, 70 miles north to a new substation near Big Stone plant. It is the next leg of the recently completed CapX2020 line from the Twin Cities to Brookings. Otter Tail Power is a 50% owner in the line portion of this project with Xcel Energy. Our investment is $97 million. Xcel began construction last year, and has the line on schedule to be in service in 2017.

The second line will run from a new substation near the plant 170 miles northwest to Ellendale, North Dakota, and it is scheduled to be in service in 2019. Otter Tail Power manages the project, and is a 50% owner in the line portion of this project with MDU. Our investment is $153 million.

Construction started in June. The steel tower vendor has begun producing transmission structures, and contractors have set 6% of the more than 700 pole foundations. We expect to be complete with the project in 2019.

Otter Tail Power filed an integrated resource plan with the Minnesota Public Utilities Commission on June 1, and filed copies with North Dakota and South Dakota Commissions in July. Slide 10 shows how our 2016 filing compares with our 2013 commission approved plan. The resource plan identifies the most cost-effective combination of resources for meeting our customers' needs for reliable service during the next 15 years.

Otter Tail Power selected its proposed plan based on reliability, affordability, and environmental responsibility. It includes adding 200 megawatts of wind resources, 100 megawatts in 2018 and 100 megawatts in 2020; and authorized to add another 100 megawatts at a later time.

Today, wind resources serve approximately 19% of Otter Tail Power customers' energy needs. If all three of the projects were put into service, wind would serve approximately 34% of our retail load. Our plans also include adding 30 megawatts of solar resources by 2020 to comply with Minnesota's solar energy standard.

With the exception of solar, our proposed resource plan is the lowest cost for our customers. But we anticipate the price of solar will continue to decline; and if it does, it should be part of a least-cost plan scenario in 2020.

The plan also includes adding 240 megawatt simple cycle natural gas plant in 2021. While we won't formally announce our preferred natural gas plant site or begin permitting until this fall, we can say it is in a close proximity to a high-voltage transmission line and a large natural gas pipeline within Otter Tail Power service area.

We expect a ruling on our resource plan in 2017. If the plan is approved, the natural gas combustion turbine and a portion of the additional wind energy would replace capacity from the Hoot Lake coal plant, which we plan to retire in 2021, as well as expiring long-term purchase power agreements.

I also want to mention that stakeholder engagement was an important step in our resource planning process, because Otter Tail Power service area stretches across three states with differing regulatory policies. It was important for us to meet with regulators and organizations in all three states to gain perspective. The meetings were helpful to all parties, and have led to a solid resource plan that balances needs and resources.

Turning to our rate case, as shown on slide 11, Otter Tail Power filed with the Minnesota Public Utilities Commission in February 2016, requesting a 9.8% rate increase or approximately $19.3 million annual. As we mentioned last quarter, this reflects a 10.4% return on equity and a 52.5% equity ratio. The PUC granted interim rates of 9.56%, which went into effect on April 16. They are subject to refund and will remain in place while the Commission considers the overall request. We expect to recognize 8.5 months of interim rates in 2016.

Intervenors will file testimony in mid-August, and the PUC will make a final determination in 2017. See slide 12 for a complete rate case timeline.

At the time of this call last quarter, we were halfway through a scheduled 10-week maintenance outage at Coyote Station. We were replacing the lower boiler walls, installing a separated over-fire air system to reduce NOx emissions, and tying into the new mine's coal conveyor system. This is a $35 million project. Our share is 35%.

Coyote came back online in June, and has been running well. In fact, because it is a low-cost unit, MISO has dispatched it to run nearly every hour of every day this summer.

Last quarter I also mentioned implementation of a new customer information system at Otter Tail Power. The well-staffed implementation team officially kicked off this $15 million project this spring. They completed the planning and analysis phase, and moved into the design phase at the end of July.

One more item you might be interested in is that two weeks ago, Otter Tail Power, working with the city of Bemidji and Bemidji State University in Minnesota, announced the installation of three electric vehicle charging stations in Bemidji. This was close on the heels of Otter Tail Power's July 1 implementation of a new rate for customers who charge plug-in vehicles in their garages at night. Today, electric vehicles make up only a small fraction of the cars on the road, about 3,000 in Minnesota.

Moving on to our manufacturing platform, BTD completed its $33 million facilities expansion in Detroit Lakes and Lakeville, Minnesota. The expansion increased capabilities including in-house painting and complex assembly services, reduced logistics costs, and enhanced margins. BTD also experienced increased sales at its Illinois plant, and continues to integrate the Georgia plant. BTD acquired the Georgia plant in late 2015 as part of a strategy to expand to the southeast to better serve customers.

Improved productivity across the Company translated into improved net income in the second quarter of 2016 compared to the second quarter of 2015. Northern Pipe Products and Vinyltech experienced a 19.2% increase in pipe sales quarter over quarter, which is a significant -- and is a tribute to our sales teams. But the narrowed spread between sales and raw material prices has reduced margins. We expect margins to be compressed for the remainder of the year. I will now turn it over to Kevin for a financial perspective.

Thanks, Chuck, and good morning. Please bear with me this morning as I do have a cold and my voice could be challenged as I speak with you on the results of the quarter.

Please refer to slides 13 and 14 as I discuss our second-quarter results. Our Electric segment net earnings increased $896,000 quarter over quarter. The key elements of this increase in earnings were an increase in retail revenue of $2.8 million related to a 9.56% interim rate increase that went into effect in April 2016. Those rates, which are subject to refund, are expected to be finalized in 2017.

Increased environmental and transmission cost recovery riders, increased conservation incentives, warmer weather in the second quarter compared to the second quarter of 2015 positively impacted earnings per share by [$0.01]. Weather was neutral for the quarter when compared to normal.

Also positively impacting earnings were increased sales to pipeline customers. These positive impacts to earnings were offset in part by higher operating and maintenance expenses, as well as higher depreciation expense due to increased rate base investments.

Our Manufacturing segment revenues and earnings increased quarter over quarter, primarily due to BTD's performance. Revenues increased $7.8 million quarter over quarter at BTD, due to the September 1, 2015, acquisition of Impulse Manufacturing located in Georgia. Impulse contributed $6.5 million in revenues.

Our Illinois plant had an increase in revenues of $3.8 million, driven by demand for wind tower components. These increases were offset by a $2.5 million decrease in sales at our Minnesota plants related to reduced volumes in agricultural, oil and gas, and recreational vehicle end markets.

The key drivers to BTD's improved quarter-over-quarter profitability is the increased volume in the Illinois plant, improved gross margins due to change in product mix, and improved productivity and cost reduction efforts in the Illinois and Minnesota plants. Our Georgia plant contributed a net loss during the quarter, and we continue to work on the integration process. T.O. Plastics experienced a decrease in revenues and net earnings quarter over quarter, primarily due to changes in their product mix, offset in part by increased sales of horticultural containers.

Our Plastics segment's revenues increased between the quarters as a result of a 19.2% increase in the amount of pounds sold, despite a 14% decrease in the price per pound of pipe sold. These increased sales came primarily from the western and southwestern regions of the United States where construction activity remains strong. Their earnings decreased $780,000 between the quarters due to compressed operating margins from declining PVC pipe prices resulting from lower raw material costs. And our corporate expenses, net of tax, decreased $700,000 as a result of receiving a $700,000 non-taxable benefit proceeds from corporate owned life insurance.

We are reaffirming our consolidated earnings per share guidance of $1.50 to $1.65 per share as shown on slide 16. Our 2016 guidance reflects our current mix of business and the overall challenges facing our respective platforms. As a result, we are updating our segment guidance.

We now expect 2016 Electric segment net income to be comparable with 2015. 2016 results are dependent upon a constructive outcome of the rate case we filed in Minnesota in February of 2016. We are currently receiving interim rates subject to refund. These rates are subject to review and determination by the Minnesota Public Utilities Commission.

Our ability to obtain final rates similar to interim rates and reasonable rates of return depends on regulatory action under applicable statutes and regulation. We cannot provide assurance our interim rates will become final and our requested ROE will ultimately be approved.

Other key factors I want to mention impacting 2016 compared with 2015 are: normalized weather for the remainder of the year, rider recovery increases, increase in forecasted sales to pipeline and commercial customers, offset by the effect of the 2015 adoption of bonus depreciation for income taxes which reduces our projected earnings per share by $0.06, and higher depreciation and property tax expense due to large CapEx projects being put into service.

The press release fully explains additional reasons driving 2016 expected results. We are increasing the expected earnings-per-share range for the Manufacturing segment by $0.02 a share on both ends of the range. This is based on positive year-to-date performance, and continued focus on improved productivity and cost reductions to address challenges with softening end markets at BTD Manufacturing.

Our backlog for the Manufacturing segment is $81 million for the remainder of the year. This compares with $85 million for the same time a year ago. We are maintaining our earnings-per-share guidance range for the Plastics segment, and we expect lower corporate costs than originally estimated for 2016 due to continued cost reduction efforts.

We remain focused on our strategic initiatives for the year, and are off to a strong start through the first half of 2016. Our year-to-date performance reflects the balance mix of earnings from our Electric and Manufacturing platforms. The remainder of 2016 presents opportunities and challenges as we continue to manage the Business.

Key initiatives we continue to focus on are: a constructive outcome of our Minnesota rate case, successful growth in sales at BTD from its new paint line, along with continued focus on operational improvements needed to improve our return on sales, as well as full integration of BTD Georgia to better serve our customers in the Southeast. These initiatives are especially important in light of the continued market softness in the agriculture, oil, gas, and recreational vehicle end markets that BTD serves. And we are well positioned for a rebound in end markets served by BTD with the strategic investments we have made over the last two years.

While the Plastics segment expected 2016 net earnings are currently down from 2015, this segment will still provide strong earnings, cash flows, and returns on invested capital in 2016. As we continue to execute on our strategies, we remain confident in the future ability of our two platforms, which further positions us to meet our long-term goal of 4% to 7% compounded growth rate and earnings per share using 2013's $1.50 a share as adjusted for the base year.

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

(Operator Instructions)

I am showing no questions at this time. I would now like to turn the call back over to Chuck MacFarlane for any further remarks.

Thank you. To summarize, we are pleased with the second-quarter results which reflect not only interim rates at Otter Tail Power but also operational improvement at BTD during 2016. Net earnings increased quarter over quarter from continuing operations, and we reaffirm our 2016 earnings guidance at $1.50 to $1.65 per share.

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, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.