Q3 2019 Earnings Call
The recorded and we will hold the question answer session. After their prepared remarks, I'll now turn the call over to the company for their opening comments.
My name is Loren Hanson and I manage otter tails Investor Relations area.
Last night, we announced our third quarter 2019 earnings results.
Our complete earnings release and slides accompanying this call RBL boerner website otter tail dot com.
A replay of the call will be available on our website later today.
With me on the call today, or Chuck Macfarlane Otter tail corporations, President and CEO .
Yeah, Kevin Mo Otter Tail Corporation, Senior Vice President and Chief Financial Officer.
Before we begin I want to remind you that we will be making forward looking statements. During this call as noted on slide two these statements represent our court judgment or opinion of what the future holds the are subject to risks and uncertainties that may cause actual results to differ materially.
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 due to new information future events developments or otherwise.
For opening remarks, I will now turn the call over to Otter tail corporations, President and CEO preferred apartment confirmed.
Thank you Lord good morning, everyone.
Last night, we released our third quarter results. Please refer to slide five as I begin my comments.
Operating revenues net income and diluted earnings per share increased compared with third quarter 2018.
Because we anticipate softness in the energy and agriculture end markets and low scrap metal prices will negatively impact fourth quarter results. We're narrowing our 2019 guidance range to $2.10 to $2.20 per share from the previously announced $2 intend to $2.25.
Our electric segment quarter over quarter earnings increased due to interim and final rate increases.
Increased kilowatt hour sales to commercial customers.
And increased revenue from investments in transmission projects.
Manufacturing segment third quarter earnings were up slightly quarter over quarter, driven by improved performance at Btds, Minnesota, and Georgia facilities.
Plastics segment earnings were lower quarter over quarter due to lower sales volume in combination with lower pipe prices.
We anticipated 2019 earnings from this segment.
Oh lower 2019 earnings from this segment in our outlook.
As mentioned last quarter, a fourth quarter 2018 results included a planned outage at our Big Stone plant.
Cost associated with the establishment of foundations are took corporation otter tail power company and increased tax expense of corporate.
We do not expect these costs to reoccur in the fourth quarter of 2019.
Let's take a closer look at otter tail power.
The forecast 1 billion of Capex on slide 11, well produce an annual rate base growth of 8.6% between 2008 team in 2023 in a constructive regulatory environment.
Mr. CT wind Energy Center, a story of station South Dakota transmission reliability and self fund transmission projects are all under construction.
Our projected investment in those projects totals over 500 million to put this in context. This represents approximately 45% where 2018 $1.1 billion rate base.
I'll touch briefly on a few of these projects.
On Slide 14, the Merit Court wind Energy Center remains on time and on budget.
We expect 90% of all civil work and foundations to be complete this month.
The project has received Minnesota renewable resource writer eligibility North Dakota advance determination of Prudence in South Dakota phase in rider approvals.
We estimate this project will cost approximately 258 million.
Generate enough energy to power more than 65000 homes.
This is the largest capital project in Otter tail power history, we anticipate the began commercial operation in late 2020.
Construction of a story of station began in May story will be a highly efficient 245 megawatt natural gas combustion turbine.
It will complement our wind generation by providing a reliable backstop when the wind isn't blowing.
And it will have flexible operating options and low shield to emissions.
I expect to invest approximately 158 million in this project, which during the peak of its 13 month construction period will create approximately 70 construction jobs.
The cost of this project is being recovered through the North Dakota generation writer in the South Dakota Faison writer.
Crews are working to finish major foundations.
Thanks, and water tanks this fall.
We expect the story of station to be on line in 2021.
In March we completed the first of a two phase transmission project improve reliability for customers, who live in the southern part of our service or.
The first phase was a new 15 mile hundred 15 kv transmission line that connects the expanded hetland substation to.
The new Lake Norden substation in South Dakota.
In August we began construction of a second phase of this project New 43 mile Hundred 15 kv transmission line. Unlike Norton to a story of South Dakota.
I used to easements or 90% attainment structures are being set.
We expect to energize the line in mid 2021.
Well the opportunity to add 35 to 45 million of rate base associated with new generator interconnection upgrades as proposed by the MISO generator interconnection process self fund.
Isn't election by the MISO transmission owner in this case otter tail power.
The following the initial network upgrades associated with new generator interconnection.
If approved Otter tail will fund and earn a return on a return of the capital costs of the network upgrades over 20 year period from these interconnection customers.
Now turning to our manufacturing segment.
BTD year contract metal fabricator.
Proved return on sales on a consolidated basis and again improved financial results at the Georgia facility, where we added steep stamping capability to improve logistics and better serve existing and new customers in the southeast.
Due to recent reduction in market demand, primarily in the oil and gas fracking industry.
The company reduced employee counts at its Washington, Illinois, and Detroit Lakes.
The sort of facilities as part of its sales inventory and operations planning or sale process.
Operations continue to balanced production output and inventory levels to ensure on time delivery remained strong.
Joe Plastics earnings remain essentially unchanged between quarters in anticipation of the upcoming horticulture selling season fuel plastics is strategically building product inventory over the Q4 Q1 timeframe.
We expect to increase production capacity in Q4 to serve various horticulture markets and we're continuing to improve factory output. Despite tight labor markets at the out so you go and Clearwater facilities.
In our plastics segment, northern pipe products, and Vinyltech had lower quarter over quarter results, primarily due to lower sales price on do decreased volumes attributed in large part to wet conditions in northern pipe product sales region.
Both companies are implementing continuous improvement projects to enhance efficiency and capacity and they continue to improve in the markets. They served by demonstrating responsiveness to customer needs.
On a final note, we continue to enhance our balanced generation mix.
As shown back on slide six we anticipate that by 2022 otter tail power customers will receive 30% other energy from renewable resources and our carbon emissions will be at least 30% below 2005 levels.
All while keeping average residential rates nearly 30% below the national average americorps, storia, which I discussed earlier, our catalyst to these 30% trajectory.
Now I'll turn it over to Kevin for the financial perspective.
Thanks, Chuck and good morning.
Our consolidated diluted earnings per share were up approximately 7% for the quarter driven mostly by increased earnings in our electric segment.
Please refer to slide 20 to 23, as I discuss or third quarter results.
Our electric segment net earnings increased $3.1 million quarter over quarter.
The press release describes all the items impacting our quarterly results, but key items worth discussing our.
The 2.8 million dollar increase in retail revenues, mainly from higher average electric rates due to interim and final rates in effect from our South Dakota rate case, and increased sales to customers and higher rate classifications.
Interim rates were implemented on October 18th of 2018 and final rates were implemented on August one of 2019.
Increase transmission cost recovery revenues in Minnesota renewable resource rider revenues.
And increased kilowatt hour sales to commercial customers.
These items were offset in part by.
Lower retail kilowatt hour sales related to milder weather.
Well most regions of the United States experienced warmer than normal weather during the quarter.
Our region experienced a 17% decrease and cooling degree days compared to normal.
This resulted in a negative impact of two cents a share.
Less favorable weather also negatively impacted earnings by two cents a share between the quarters.
And it is important to remember that we are a winter, peaking utility summer, peaking pool.
Lower transmission revenues due to decrease MISO tariff revenues and our own am expenses increased by $2 million.
Net earnings for the manufacturing segment increased $133000.
Key items impacting the change were.
At BTD net revenues increased $3.7 million, primarily from increased product sales to recreational vehicle end markets.
Offset in part by decrease sales to its energy and agricultural end markets.
BTD also had a 700000 dollar increase and its tooling revenues.
The increased revenues were more than offset by a $3.8 million decrease in revenues from material price changes pass through to customers.
And a million dollar reduction in scrap metal revenues due to a continued drop.
In scrap metal prices and lower scrap sales volume.
The decrease in revenues along with higher cost of goods sold.
Resulted in a decrease in gross margins.
Which was more than offset by lower operating and depreciation expenses.
And despite higher income before taxes.
Income tax expense was lower due to increased research and development tax credits.
Resulting in a 500000 dollar increase in earnings.
The increased R&D credits resulted from higher level of estimated credits related to qualifying technology improvement investments.
And T O plastics earnings decreased $400000 quarter over quarter.
Due to Laurel lower horticultural sales, primarily as a result of timing sales, which historically occur in the third quarter the year shifted to the second quarter of 2019.
Our plastic segments earnings decreased $1 million due to an 8.9% decrease in pounds of pipe sold.
Down to 3.5% decrease in pipe sales prices.
The lower volume.
Resulted from lower demand for product.
In both the Midwest and West Coast States that we serve.
And our corporate pre tax expense and net of tax losses increased primarily due to increased employee benefit expense.
Let me provide an update on our credit ratings in recent financing activities as highlighted on slides 25 and 26.
During the third quarter, both Fitch in Moody's reaffirmed their credit ratings for both Otter tail Corporation and Otter tail power company.
S&P global ratings raise otter tail powers long term issuer credit ratings and its senior unsecured debt to triple B plus from Triple B.
And revise the pause positive outlook to stable.
S&P also affirmed otter tail corporations issuer credit ratings triple B and revise the outlook from positive to stable.
We remain committed to maintaining investment grade credit ratings.
And we'll manage our operations to reflect that commitment.
Otter tail power company entered into a private plant private placement transaction.
September 12th of 2019 to issue a 175 million senior unsecured notes.
The use of the proceeds to fund capital expenditures for rate based projects.
Slide 26 shows the Traunches associated.
With the private placement.
And on October 10th of 2019, the first tranche was issued for $100 million to pay down on its line of credit and provide funds for capital expenditures.
The remaining proceeds will be drawn through delayed draws was 35 million in February in $40 million in August of 2020, respectively.
We also have amended and extended both our credit facilities by one year to October 31 of 2024.
The line of credit limit on the Otter tail Corporation credit agreement was increased to $170 million.
In anticipation of slowing economic conditions, and making sure we have the liquidity to manage our business in case of challenging economic times.
Moving on to our business outlook on slide 27.
We are narrowing our 2019 diluted earnings per share guidance to $2.10 to $2.20.
From $2.10 to $2.25.
This equates to a return on equity range of 11 I have to 12%.
Based on an estimated equity to total cap ratio of 54%.
We continue to expect increased earnings in our electric segment for 2019 over 2018 as discussed in our press release.
It is important to remember we incurred five cents a share of costs in the fourth quarter of 2018 related to the planned big stone plant outage.
And the contribution to Otter tail powers Foundation.
We're not expected to occur in the fourth quarter of 2019.
We now expect earnings from our manufacturing segment to be in line with 2018 earnings.
This revision is a result of softness in energy and agricultural end markets served by BTD due to concerns over a slowing economy.
And continued softness in scrap metal revenues stemming from lower scrap metal prices.
And we continue to expect lower earnings at T. O plastics, mainly due to first quarter volume softness and the expected impact.
On business operations from the partial collapse and replacement of the warehouse roof, which was damaged in March during the winter storm.
In the backlog for this segment as approximately $56 million.
For 2019, compared with $62 million year ago.
We continue to expect plastics 2019, net income to be lower than 2018, due to lower operating margins, resulting.
From lower sales volumes and lower sales prices compared to last year.
And corporate costs net of tax are expected to be lower in 2019.
This is due in large part to eight cents a share of expenses incurred in the fourth quarter of 2018 related to a contribution to establish the Otter tail Corporation Foundation.
In accruals related to certain tax matters.
These costs are not expected to occur in the fourth quarter of 2019.
Our third quarter results are in line with our financial plan.
We remain positioned to achieve our 2019 earnings guidance.
The utility continues to work on our large capital projects of the Storia and Mirror Court.
Which put us on track to have otter tail power customers received 30% other energy from renewable resources by 2022.
And our carbon emissions to be at least 30% below 2005 levels.
Both these projects will provide immediate returns for amounts invested while under construction.
These investments along with others position us to grow our rate base in support of regulatory environments at an 8.6% compounded annual growth rate over the next five years.
Over time, the electric utility will provide approximately 75% of our overall earnings.
Manufacturing and plastic segments continue to provide organic growth through new products and services market expansion and increased efficiencies.
In the manufacturing and plastic segments are expected to provide around 20%, 25% of our earnings over time.
We expect to be able to deliver total shareholder return of 8% to 10%.
Earnings per share are expected to.
The increase at a 5% to 7% growth rate off of 2018 results.
And our dividend yield is approximately 3%.
And looking forward, we would expect to grow the dividend in line with our earnings per share growth rate, while maintaining a dividend payout ratio of 60% to 70%.
And our company maintains a strong balance sheet and corporate credit ratings.
We're now ready to take your questions.
Ladies and gentlemen, if you have a question. Please press Star then one on your Touchtone telephone.
Your question Hudson answered your question move yourself from the Q. Please press the pound.
Once again, ladies and gentlemen, if your question. Please press Star then one on your telephone.
And our first question comes from Tate Sullivan with Maxim. Your line is now open.
Hi, Thank you sorry, if I Miss come more comments on the manufacturing exposure earlier, but are you comfortable with the current capacity of your manufacturing business, excluding the plot teal plastics part and how quickly can you see.
And come back from some of your customers. If there was a pause at the end of the year in that business usually please.
Yes, good morning, Tate this is Kevin.
Our capacity for the.
Both.
Companies in the manufacturing business, BTD, and teal plastics or we have.
Plenty of capacity in the business too.
Take on additional organic growth opportunities the.
The slowing that we started to see in the third quarter came in energy in AG market switches.
Looks to be a impacted because of this concerns in those end market industries relating to a slowing economy in some of the challenges.
Occurring in the AG market as well.
In terms of.
We'll give guidance and 22 point for 2020 in February .
I certainly as we sit here today in the slowing in AG and energy in the.
Revision of guidance.
For manufacturing to now be in line with.
Last years earnings per share.
I don't think we're going to expect to see any kind of turnaround in those end markets here as we finish up the year and certainly if there were changes we would look to discuss that in in 2020, but I think as we sit here today, we wouldn't expect to see any immediate changes into 2020.
Okay. Thank you and then and for for the plastics.
For the plastics guidance.
Yes, excuse me for plastic any and you and we feel you you consistently mentioned the difference resin prices in the pricing any change in the distribution for your PVC pipes in general I think there were some change in distributors in the last couple of months split.
Any fundamental changes in that market. Please.
Yes, Tait there's been no changes in terms of who are key distributors are.
Over the last a number of years, we continue to sell into our distributor base and then they in turn or selling to the end users of the pipe, but we've not seen any changes there.
Okay. Thanks. Thank you very much thanks for that detail kind of good rest of the day.
Two.
Once again, ladies and gentlemen, if you have a question at this time. Please press Star then one on your attached.
I'm not showing any further questions at this time I would now like to turn the call back to Chuck Macfarlane for any further remarks.
Our financial performance continues to demonstrate the value of employees actions to grow our business achieve operational and commercial excellence and develop talent.
We're pleased with the continued broad progress of our story and Merrick Court projects and we are narrowing our 2019 earnings per share guidance range to $2.10 to $2.20.
Thank you for your continued interest in Otter tail Corporation. We appreciate you joining the call and look forward to speaking with you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.