Q4 2019 Earnings Call
Good morning, everyone.
Welcome to our call my name is largely outside that I manage our children Investor Relations area.
Right No start 2019 earnings results and our 2020 earnings per share guidance range.
Great earnings release slate.
Our available on our website otter tail.
Replay and called will be available on our website.
With me on the call today are Chuck Macfarlane Otter tail corporations, President and CEO and capital Otter tail corporations, Senior Vice President and Chief Financial Officer.
Before we begin and luxury mine.
Making statements. During this call noted on slide two these statements represent our current 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 spec.
Forward looking statements are described more detailed in our filings with the Securities Exchange Commission, which we encourage you to review.
Our kill Corporation disclaims any duty to update or revise our forward looking statements student information future events or developments or otherwise.
For opening remarks, I'll now turn the call over Otter tail corporations, President and CEO Mr. truck Carl.
Thank you Laura good morning, everyone.
Welcome to <unk>.
Easier on earnings.
Please refer to slide five.
Earnings per share $2 uncertainties.
Above the midpoint.
So.
Right.
$2.10 to $2 twice.
Operating revenues net income.
For sure all increased year over year.
Our electric segment earnings increased primarily due to the transmission costs and renewable resource rider recovery.
Well as filed rate increases in our South Dakota Rick.
Well manufacturing segment earnings were relatively flat, we saw improved performance at BTD driven by growth in parts right.
As anticipated plastic segment earnings were lower due to lower paying prices and lower operating margin.
Some of Otter tail powers 2019 accomplishments include.
Airport Wind Energy Center started station so the quota transmission reliability and so on transmission projects all begin construction.
Projected investment most projects totaled approximately 500 million.
But there is an area.
This represents approximately 43% workers.
$1.2 billion <unk>.
I'll touch briefly on a few of these projects.
On Slide 16, Americorp wind energy center remains on time and <unk>.
More than three thirds with all civil work and telephone nations are complete.
The project and received Minnesota renewable resource writer approval.
North Dakota grants the termination of Prudence.
And so raisin bran.
We estimate this broadly across approximately 258 million well generate enough and you are more than.
Okay.
This is the largest cabin project in market Argus Street.
We anticipate began commercial operation in the fourth quarter for what it's like.
On slide 17 stores station construction also remain.
<unk>.
We awarded the general work contract last quarter.
Story will be a highly efficient 245 megawatt gas combustion turbine.
It will complement our wind generation by providing reliable backstop rendition floor.
And it will have watchable operating options and well see or through a mission.
We expect to invest approximately 158 million and this project and anticipate it will be on line year to year end 20 Twond.
We completed the first the two phase transmission project group reliability for customers coming in the southern part of our service.
The first phase of a 15 mile hundred 50 kv transmission line connects the experiment on population.
For the new Wakeboard substation topical.
RSP began construction on the second piece of the project imported from 515 kv transmission line.
<unk>.
Base to engineering and 90% we.
We would take 99% of Friday <unk>.
We said approximately 18, although a 43 important milestone structures.
We expect to energize the line.
Let me 21.
As shown on slide 19.
We have the opportunity to add approximately 45 million rate base associated with new generator interconnection upgrades as proposed by the Minnesota MISO generator interconnection process cellphone.
You know election by the transmission owner in this case otter tail power.
The following the initial network upgrades associated with new generator and sections.
To date FERC has approved 8% will be service agreements or FSC.
Between interconnection customers Robert Apollo.
We have another seven aircrafts news filing with FERC and MISO is preparing an additional 12.
Otter tail upon an earn a return on it on return on capital cost. Some of these network upgrades over a 20 year period from the interconnection costs.
Minnesota Public Utilities Commission approved an extension until September 1st of 20.1.
We're filing of our next resource play.
To keep federal environmental regulation that may impact, our company or the regional haze rule and the proposed affordable clean energy.
Generation sources subject to route to the regional haze rule.
<unk> I am station will likely be required to undertake emission control measures reasonably consistent those required sources during my one.
Delaying our resource when filing will allow us to better understand the direction of environmental regulations and develop a more important plant.
I'd like to give special recognition to otter tail power company employers embark 2019 with the company's best Osha record on rate on record.
And continue to put safety first.
BTD her contract metal fabricator had an excellent year.
Increasing sales, 4% and then it Nadeem 14.
No Washington, El Norte plan, which are some production of parts views in the oil and gas Bracken industry continues to be impacted by the effects of the soft oil and gas work.
The company reduced employee counts that Illinois, and Detroit Lakes, Minnesota sites last year as part of its sales inventory and operation planning or Signup process.
They continue to balanced production output and inventory levels to ensure continued on time deliver.
They're Georgia facility significantly improved profitability as sales grew nearly 20% 29.
The company achieved this while reporting its lowest archery on record and its highest on time delivery.
And our plastic segment.
As part of our strategic succession planning northern pipe products about securing mental as company Fred.
And close been employed in the northern pipe racks for more than 12 years. His most recent rules were vice president sales and marketing.
She added back director of source.
In his role as President Nipple overseas Executive leadership team and continues the man rather than buying process the plastic.
We are confident that that is experiencing skills, coupled with strong team.
And momentum existing in northern pipe products will lead to continued achievement well standing customer service operational excellence and talent development.
Both companies are implementing continuous improvement projects to enhance efficiency after Pat.
A final no we continue to enhance our balanced generation mix, a showing back on slide six.
We anticipate that by 2022 Otter tail power customers were received 30% other energy from renewable resources.
Our carbon emissions will be at least 30% below 2005 levels.
Oh, well keeping average residential raised nearly 30% below the national lab.
We're growing investor concern about company generated more than 25% of revenues from thermal coal.
It's a sharing to know that otter tail corporations percentage of revenue from coal assets as well below that threshold.
As shown on slide 10 percentage of consolidated revenues from our core classes.
13.7% 2019.
<unk> declined to 11% by 2022.
I'll now turn it over to Kevin for the financial perspective.
Well, thanks, Chuck and good morning, everyone.
I'll cover the following <unk>.
Our 2019 full year financial results.
Details on the fourth quarter results are covered in our earnings release.
Our liquidity position shrink the balance sheet corporate credit ratings.
The increase in our 2020 indicate an annual dividend rate.
Our five year capital expenditure plan, and our 2020 business outlook.
2019 was another strong year for us financially.
We are $2.17 or share, which represents a 5.3% increase over 2018.
This increase was primarily driven by our electric segment supported in large part by our continued investments are growing very fast.
Our manufacturing segment earnings were flat year over year.
Btds earnings grew approximately 14%, but were offset by a disappointing year over year decline.
The T O plastics earnings of 54%.
And as expected our plastic segment earnings were down from our record year in 2018.
[noise], our 2019 return on equity was 11.6% on an equity ratio of 52.9%.
Our two platform strategy continues to deliver higher returns on equity on a higher equity layer compared to holding companies peers.
Let me I'll provide an overview of 2019 earnings by segment.
As shown on slide 20 425.
[noise] Electric segment net earnings increased $4.6 million.
Key drivers include.
Increased transmission cost recovery in Minnesota renewable resource rider revenues.
Increased retail revenues in South Dakota due to the final outcome of our 2018.
South Dakota rate case settlement.
Increased revenues from the establishment of a generation cost recovery writer in North Dakota in conjunction with the construction of the a story of station.
Increased Minnesota, Sip revenues slightly favorable year over year weather impact.
Other key items impacting electric segment earnings were a decrease in transmission service revenues and lower MISO tariff revenues and the impact of the November FERC ruling.
Related to the methodology used to determine the return on equity component of the transmission rate under the MISO tariff.
This ruling negatively impacted electric segment earnings by $1.4 billion.
A reduction in all of them expenses as explained in the earnings release.
And higher depreciation and property tax expense associated with rate base additions in 2019.
And increased income tax expense.
Net earnings for the manufacturing segment were basically flat year over year.
Key items impacting these changes were.
BTD net revenues increased nine and a half million dollars due to a 12.3 million dollar increase in parts sales to its major end markets, except for decreased sales to its energy end markets.
11.6 million of the increase relates to higher sales volumes.
With the balance representing higher material costs passed onto the customer.
The increase parts revenues were offset in part by 2.8 million dollar decrease in scrap rep should lower scrap metal prices.
[noise] higher cost of goods sold in material costs were partially offset.
Well the recovery of tooling costs from customers.
And the increase gross margins were partially offset by higher operating expense, resulting in a 1.4 million dollar increase in btds year over year earnings.
T O plastics revenues declined $700000 due to lower industrial and horticultural sales.
And a change in their sales mix due to a customer bringing more production house.
These were partially offset by increased sales and life science scrap materials.
[noise] higher cost of goods sold due to increased labor costs.
Increased operating expenses and lower operating margins due to the unfavorable sales mix resulted in a 1.4 billion dollar decrease in year over year earnings.
[noise] or plastic segment earnings decreased 3.2 million year over year due to a 4.2% decrease in post pipe Seoul.
And a 3.3% decrease in pipe sales prices.
The lower volume resulted from poor weather conditions across our sales territory last year.
Combined with lower demand for products.
In both the Midwest and West Coast States that we serve.
Cost of goods sold decreased $8.9 million decrease sales volumes.
1.9% decrease the cost per pound pipe sold.
The decrease in pipe prices net of the decreases in costs resulted in a 7.7% decrease in gross margins.
[noise] corporate costs net of tax decreased $3.1 million year over year, primarily due to.
There were no contributions made to otter tail corporations Foundation in 2019.
We experienced increases in the value of corporate owned life insurance benefits corporate costs allocated to our operating companies increased earnings from our captive insurance company and lower postretirement benefit costs.
These items were offset in part by higher employee benefit costs and higher interest expense.
We also had an increase in corporate income tax savings of $2.3 million.
Due to changes in uncertain tax positions state net operating loss valuation allowances and other tax adjustments.
Moving to slide 26.
Let me review, our financial condition that liquidity.
Our 2019 financing activity consists of.
175 million dollar.
[laughter] private placement of debt for Otter tail power company.
Slide 27 shows the transition crunches associated with the private placement.
Okay.
The first tranche was issued for $100 million in October 2019.
The remaining proceeds will be issued in 2020 through delayed draws from $35 million in February and $40 million in August.
We also issued $19.8 million, a new equity net of commissions during the fourth quarter last year.
We expect to issue additional equity in 2020 from our aftermarket dividend reinvestment and employee stock purchase programs.
Both the debt and equity are being issued in connection with our rate base growth projects utility.
Our two credit agreements are in place until October 31 of 2024.
Between expected cash flow generated from 2020 operating activities and these credit facilities, we have the appropriate levels of liquidity to support our businesses.
Yes, I want to shown on slide 28, the board of directors increased our indicated annualized dividend rate from $1.40 a share to $1.40 per share.
This 5.7% increase reflects our solid 2019 performance.
Our 2020 outlook.
The company's strong balance sheet liquidity cash generation profile and our commitment to enhancing shareholder returns.
We expect future dividend increases to be in line earnings growth rate, while maintaining a targeted payout ratio 60% to 70%.
And this will be the 81st year or 325 consecutive quarters, we have paid a dividend on our common stock.
Slide 29 highlights our capital expenditure plans for the 2020 through 2024 timeframe.
We expect capital expenditures for 2020 to be 385 billion, which 96% is earmarked for electric segment.
Plant expenditures for this year include 178 million for the Merit or wind project in $82 million for these stories station natural gas fired plant.
The five year capital expenditure plan calls for approximately $897 million in utility projects of which approximately 40% will be recovered through riders.
The plan also includes.
$87 million for manufacturing and plastic segments.
Moving on to our business outlook on slide 30.
Our 2020 diluted earnings per share guidance, $2 22 to $2.37 share.
The midpoint of the guidance reflects a 6% growth rate off 2019 diluted earnings per share.
Our guidance also reflects five cents of dilution associated with additional equity plan for this year.
In the guidance range equates to a return on equity range of 11% to 11.7% based on an estimated equity to total cap ratio 53%.
We expect our electric segment to provide 75% of our consolidated earnings in 2020.
With an increase over 2019 segment net income based on.
Increased revenues from capital spending on Americorp mist storage station rate based projects.
Increased revenues related to anticipated capital spending for the self funded generator interconnection agreements.
No plan plant outages for 2020.
These items are offset in part by normal weather.
Whether favorably impacted earnings per share by eight cents compared to normal in 2019.
Increased expenses in large part due to higher pension expense.
Discount rate for 2020 is 3.47% compared to 45% last year.
Each 25 basis point decline in the discount rate results and an increase of pension expense by about $1 million.
Also the long term rate of return for 2000, 26.88%.
Compared to seven than a quarter last year.
Each 25 basis point.
Decline in this rate resulted in approximately 700000 dollar increase in pension expense.
Higher property taxes depreciation expense due to large transmission projects put into service.
And increased interest expense on the $100 million of senior unsecured notes that were issued in October of 2019.
In interest on the 35 million dollar $40 million senior unsecured notes expected to be issued in February in August 2020.
We expect earnings from our manufacturing segment to be in line 2019 earnings due to.
Lower sales volumes and the recreational vehicle end markets served by BTD.
And continued softness in scrap metal revenues stemming from lower sales volumes, while schedule scrap prices are expected to stay flat between the years.
We expect higher earnings at T O plastics, mainly due to increased sales to our whole horticultural life science and industrial end markets.
And the backlog from this segment as approximately $179 million for 2020.
Compared with $211 million year ago.
Material price deflation is driving down backlog by 19 billion.
And the remaining 13 million decrease in backlog in spine.
We expect plastics 2020, net income to be lower than 2019, due to lower operating margins, resulting from lower sales prices stable resin prices on slightly higher volumes compared to last year.
And our corporate costs net of tax.
Expected to be higher in 2020, primarily higher short term borrowing costs at the corporate level.
Hi, or income tax expense.
Which are offset in part by lower employee benefit and health care costs.
Our strategic initiatives to grow our business and achieve operational and commercial excellence positions us to achieve a 5% to 7% compound annual growth rate earnings per share.
Using 2000, Nineteens $2 and 17 a share.
Key drivers in achieving our 2020 guidance for the utility include.
Continued execution of our mayor Kortman stories station capital projects.
Our compound annual growth rate in rate base is projected to be 8.2%.
For the 2019 through 2024 timeframe.
For BTD key drivers will be continued utilization of existing capacity and operational improvements across all patients to further improve our return on sales margins and returns on invested capital.
And our plastic segment is well positioned to provide another strong year interns and continues to provide strong cash flows to support our dividend returns on invested capital.
We're now ready to take your questions.
Ladies and gentlemen, a few of the question. Please press the star than the one key on your touched on telephone. If your question has been introduced them yourself from the Q. Please press the pound keep after the Q and HLC will return for a few closing remarks.
Our first question comes from Tate Sullivan with Maxim Group.
Hi, Thank you good morning on slide 19 on the self fund transmission projects are the can you just walk it what is included in your current Capex guidance just the ones that have received the FERC approval is that the case.
Good morning, Thanks Chuck.
Yeah.
The ones that are included are all the ones that we anticipate to interconnect.
In a 20 and 21 they include both ones that have approved.
For interconnection.
And anticipated ones, but one other thing if there's each project may have.
More than one.
For <unk>.
As I say that goes with it so we're.
Dissipating. So these are largely the projects that will.
Being put in service before the end the.
The ramp that all of the PTC for win.
Okay. Thank you for and then Kevin on Capex on the about on also on the Capex guidance.
Slight changes from your previous guidance I mean can you just comp was a timing related to I think you previously guided spending to 33. This year. He spent tools seven and then you increased bias lesser amount for the out years, but can you just get some context what changed please.
Yeah, I would say Oh, thanks, I mean, it's.
A fair amount of it's just timing in terms of the one the expenditures are coming through as to when we originally expected.
This is what's driving that kind of change.
And then maybe just.
Further clarify your first question, we have what's actually included self funded 45 million in our capital plan.
But we show on slide 14.
On slide 19.
Okay.
Thank you for that ill get back in line.
Yeah.
Our next question from Chris Ellinghaus Hubert.
Hey, guys how are you today.
Chris Good gross given that it's elaborate a little bit about your outlook.
And specifically sort of what you're thinking about the TV are good and how that might influence Georges performance also.
[noise] Yeah, Chris Let me this Kevin a word as we head into 20 and what we're seeing from our.
Customers in that recreational vehicle market, we're starting to see some softening in terms. The some of the demands that are coming from them and so our 2020.
Items for manufacturing of which Btds included is reflecting what we expect to see that.
Decline in volumes to be coming from thing army end market or specifically the customers within that end market.
Okay. So.
Yes.
The with the midpoint of the manufacturing guidance seems to be kind of in the flat range should we be generally expecting a little faster you de offset by your expectations for him.
[noise] you know in terms of cut off there little bit Chris, yes, but in terms of.
The guidance range of that.
31 to 35 from that midpoint.
Btds part of that is slightly lower now than where 2019 earnings came in and that like I said, that's really driven in large part by the softening in the RV end market.
Yeah, what I was saying was.
It looks like or and.
Inferring from the midpoint of the range being kind of flat.
Maybe btds is down a little bit, but that's picked up by slack.
From improvement you talked about expecting MTO.
That's correct.
And what is that what is your thought about.
I was outlook, that's better than 2019 at this point.
Sure you know.
Oh, yes kind of a handful of struggles in 2019, they were started out the year as a challenge with productivity.
Efficiency on the manufacturing side, they had some challenges related to of course, the the to the rough collapse in March that occurred and shut the warehouse down and had impact on.
Shipping for a while than we had a number of.
New hires.
In the man in the plant there was lots of transition and training and education that occurred with that and so our productivity and efficiency around.
The manufacturing process was certainly below our expectations and 19, we saw that continue into the December 19.
And as we head into 20, we.
Expect that those efficiencies and.
Productivity is with the inefficiencies I should say or.
Pretty much the behind us and so we would expect to see better productivity coming out of the plants and then given that some of the slowness that occurred in sales in the fourth quarter in December we expect to see a pickup from that as we head into 2020.
Okay, and as far as PV sees outlook.
Sort of address what your.
The kind of weakness that you saw.
Some of the demand.
And then also.
Can you elaborate on what the weather impact look like in 2019, a little bit.
Yes, we do expect we saw a weather impact in the second.
Part of the probably the Tailwinds in the first quarter into the second quarter and it was we talk about increased volumes in 2020, we expect that we're going to see some of that.
Come back to us in 2020 because of delays that were caused by by the heavy rains that occurred in our regions that we serve so that's the spot volume increase that we're talking about from 20 is in part driven by.
Getting that whether back or im sure the weather delays back.
Based on if you will have more normal weather.
Pattern for construction that we would expect to see.
In our regions.
Okay and in that.
General demand weakness that you sort of note is that.
Does that influence by the weather as well.
I haven't heard it certainly was yes.
And your.
What what kind of market.
And weakness in last year.
Outlook that are for this year.
Well we saw.
Weakness in parts of our Midwest in West Coast.
Service territories, if you will in 19.
We ended up we sold a fair amount of product into Texas as a part of softening in the Midwest and West Coast.
Based on this we we would expect to see in 2020.
Some strengthening back in that West coast in Midwest markets as we head into the year certainly.
I have some options around that in our guidance.
Yeah.
On the 19 or.
Or the ending up being lower margin due to the distance for transportation.
Yes.
Thanks, guys appreciate the color thanks, Chris.
Our next question comes from Brian Russo with Sidoti.
Hi, good morning.
Right right.
The the 158 million dollar total cost for the storia how much is allocated to Minnesota.
Okay.
Brian This is Chuck.
It's all of our generation and.
Transmission is based on.
Allocation water inflow that.
Certainly driven by our klinsmann peaks, so roughly 53%.
The total project for reallocated to Minnesota incomplete.
Okay, and that and that as well as any other accumulating rabies you'll file for recovery in late.
Yes.
20, with the 2021 last year.
We will.
I think it's important that in Minnesota.
Because we do have rider recovery in the decoders for the story of station in Minnesota, We have approval and our integrated resource plan over the gas plant and but we will need to file that were.
What the if you see at this point, but we will need to file we're not in our next general rate case, which is likely anticipated.
The end of 2024, a 2021 test year, yes.
Okay, great and remind us when the last rate case was finalized in Minnesota.
Thats 20, 710 27 pm.
I do not all of a month, we got a final order.
I was filed thing we filed the November 17.
And I think the final order was in the.
Okay.
Specific day was going to the.
Wait third quarter early fourth quarter 18.
Got it Okay, and then I think you said the this five cents dilution to the.
Aftermarket to add door dividend reinvestment plans in 2020 would you mind, just quantifying that on an absolute basis of how much equity might be needed.
Brian we're expecting the issue another 55 to 60 million of equity.
2020.
Okay, Great and then just on pension expense the incremental information was helpful. What what is the drag in 2020 over 29 team due to the lower interest rate and is that one time or is that.
Just kind of the new Levelized cost.
Going forward.
Yes, so that the impacts on the discount rate change.
Approximately $4 million year over year from the four five to the.
The new rate that we have for 2020 and then the drag on the long term rate of return changes about another million dollar source collectively about a 5 million dollar.
Year over year impact because of the change in the two rates that.
Is that an effect that's the impact for 2020, we reset those rates annually. So in December late December of 2020.
We will reset those rates based on.
Current interest rate conditions.
In place at the time using the methodology.
On matching.
Model to set our discount rate and then of course will look at what kind to actual returns we hadn't or pension plan.
What our asset allocation is amongst the plan assets to help set the long term return return for 2021.
Okay and is that.
Incremental pension expenses that included in the updated or included in the corporate.
Costs for 2020, or so does that fall somewhere else.
That is predominantly Brian in the utilities numbers.
Okay utility is where the pension plan since corporate house a slight.
Impact from that because there are a few corporate employees that are in the pension plan, but it's predominantly at utility.
Okay, Great and I think you mentioned in 2019, there was a six cents positive weather impact versus normal did you narrow that down to <unk>.
Quarter that occurred in.
It was eight cents, Brian was the impact in the the.
There would have been pretty healthy impact in the first quarter.
19.
Oh, that's where a fair amount of that came from.
Okay, Great and then lastly, the mix of business I think does you disclose in 2020 roughly 75% of.
Oh the earnings will be derived from the electric segment is that kind of the ideal mix 70, 525 or do you expect given what appears to be well above average.
Electric or regulated utility growth rate.
You know is offset by rather flat if not lower unregulated.
Segment earnings so if all else equal the regulated earnings.
Profile on a percentage basis should increase.
Through the other planning period.
Hi, Brad.
Sure.
Yeah, our target is 25 or.
<unk> percent manufacturing, 75% utility, we baton over the last couple of years.
I had a little bit higher percentage than probably 5% for manufacturing and our intent is to get a and 2020 because of the.
Generally investment to get back to this 20 575, and we project that will.
We want to maintain that give or take you know, it's going to vary a little bit year to year, but that is our target long term.
Okay, great. Thank you very much.
Good day, ladies and gentlemen couple of question or comment at this time. Please press Star then one key on your Touchtone telephone.
[noise] [noise] in a much going any further questions at this time I turn the call back with Chuck Macfarlane personal income.
[noise]. Thank you for your questions and your support Otter tail Corporation.
Continued execution on our utility growth projects, an emphasis on operational and commercial performance in our manufacturing companies, we remain confident in our ability to deliver shareholder value.
20 Twond anyway.
Turning to improve the profitability.
Further refine our long term strategy for northern pipe biotech the tier plastics.
Continue to execute otter tail powers major generation and transmission projects.
We believe this will allow us to deliver on our 2020 guidance two daughters, and 22 cents to $2, a 37 cents a share.
Thank you for joining our call. We appreciate your interest in order to Corporation and we look forward through a successful year.
Ladies and gentlemen. This concludes todays presentation you may now disconnect have a wonderful day.
[noise].