Q2 2019 Earnings Call
Today's call is being recorded and will hold a question and answer session. After the prepared marks remarks, I will now turn the call over to the company for opening comments.
Last night, we announced our second quarter 2019 earnings results.
Our complete earnings release and slides accompanying this call are up but are available on our website at otter tail Dot com.
A replay of the call will be available on our website later today.
With me on the call today are Chuck Macfarlane Otter tail corporations, President and CEO and Kevin Moug Otter tail corporations, 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 current judgment or opinion of what the future holds.
They are subject to risks and uncertainties that may cause actual results to differ materially. So please be advised about placing undue reliance on any of these statements.
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 Mr. Chuck Macfarlane.
Thank you Lauren good morning, everyone.
Last night, we released our second quarter results. Please refer to slide five as I begin my comments.
Operating revenues increased slightly quarter over quarter, while net income and earnings per share decreased compared to second quarter 2018.
Our financial performance is in line with our expectations and we are reaffirming our 2019 guidance range of $2.10 to $2.25.
Our electric segment quarter over quarter earnings decreased mainly due to the planned outage at Coyote station.
Unexpected turbine repairs and our Hoot Lake plant.
And milder weather.
As anticipated our plastic segment second quarter results were lower than 2018 due to lower sales prices on slightly higher volumes.
We expect our financial performance for the second half of 2019 to remain in line with our forecast.
Recall the last half of 2018 included.
Planned outage at Big Stone plant.
Costs associated with the establishment of foundations and Otter tail Corporation and Otter tail power.
And the increased expense related to certain tax matters. We don't expect these costs to reoccur in the second half of 2019.
Let's take a closer look at otter tail power.
Investments on slide 11, including the Mayor Court Wind Energy Center and the stores station along with our South Dakota transmission reliability project will produce an annual rate base growth of 8.6% between 2018 and 2023.
In a constructive regulatory environment.
I'll touch briefly on a few of these projects.
On Slide 14, you will see the July 16th marked a significant milestone for the Mer Court wind energy center when Otter tail power closed on the purchase of development assets and issued a notice to proceed for construction.
The project has received Minnesota renewable resource writer and North Dakota advance determination of Prudence approvals.
We estimate the project will cost approximately $270 million and will generate enough energy to power more than 65000 homes.
This is the largest capital project in Otter tail power history.
Construction of a story of station began in May.
The 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 C O two emissions.
We will invest a $158 million in the project, which.
During the peak of its construction period will create approximately 70 construction jobs.
It is eligible for cost recovery in North Dakota, and South Dakota during construction.
We expect the story to station to be online in 2021.
You have the opportunity to add $30 million to $55 million of rate base associated with new generator interconnection upgrades as proposed by the MISO generator interconnection process.
Self fund is an election by the MISO transmission owner in this case otter tail power.
To fund the network upgrades associated with new generator interconnections.
If approved Otter tail will fund and earn a return on and return of the capital costs of the network upgrades over a 20 year period from these interconnection customers.
MISO submitted its tariff modifications to provide.
The self fund option the FERC last year after the DC Circuit Court of Appeals had vacated prior FERC orders, which had denied transmission owners the right.
To self fund certain interconnection network upgrades.
We anticipate this will create additional investment opportunity from generator interconnection projects over the long term.
In May the South Dakota Public Utilities Commission approved a return on equity of 8.75%.
And a revenue increase of approximately $2.6 million or about 7.7%.
Interim rates should begin been in place since October of 2018.
Because final rates, which began in August or less than interim rates customers will receive a refund in October .
Now turning to our manufacturing segment.
BTD or contract metal fabricator improved return on sales on a consolidated basis and again improved financial results at the Georgia facility.
Where we added stamping capability in Q2.
This was done to improve logistics and better serve existing and new customers in the southeast.
Quote volumes remained steady and operations continue to balance production output and cost to build the right level of inventory to ensure on time delivery remains strong.
BTD employee counts are mainly static for 2019 after a 15% increase in 2018.
T O plastics earnings remained essentially unchanged between the quarters.
In anticipation of the horticulture Q4, Q1 primary buying season.
Fuel plastics is strategically building product inventory.
In Q2, we experienced growth in the plug trays sales to certain horticulture markets and we expect we will increase production capacity in Q4 to serve those markets.
We continue to improve factory output despite tight labor markets at the outset, you go and Clearwater facilities.
And our plastic segment, northern pipe products, and Vinyltech had lower quarter over quarter results, primarily due to a lower sales price on slightly higher volumes.
We continue to monitor resin costs and evaluate potential volatility throughout the remainder of the year.
Hurricane Barry did not interrupt any of our resin supply.
Both companies are implementing continuous improvement projects to enhance efficiency and capacity.
And they continue to improve in the markets they serve by demonstrating responsiveness to customer needs.
On a final note we continue to enhance our balanced generation mix as shown on slide six.
We anticipate that by 2022 otter tail power customers will receive 30% of their energy from renewable resources.
And our carbon emissions will be at least 30% below 2005 levels.
All while keeping rates nearly 30% below the national average.
Meritor in the story, which I discussed earlier, our catalyst in these 30% trajectories.
I'll now turn it over to Kevin for the financial perspective.
Well, thanks, Chuck and good morning.
Consolidated earnings per share for the quarter were in line with our expectations. Despite the extended planned outage at Coyote station the unplanned outage at Hoot Lake plant.
And milder weather compared with the second quarter last year.
Our manufacturing segment had another solid quarter with net earnings up 11%.
And our plastic segment earnings were in line with expectations.
Please refer to slide 22, and 23 as I discuss our second quarter results.
Electric segment net earnings decreased $3 million quarter over quarter.
The key items, causing this decline were.
Higher OEM expenses, primarily related to the $2.6 million increase.
In maintenance and material costs associated with the extended outage at our Coyote station.
And an unplanned outage at our Hoot Lake plant related to turban repairs.
Lower revenues related to milder weather quarter over quarter.
Weather negatively impacted earnings by three cents a share compared.
To the second quarter of 2018.
When compared to normal weather had a positive impact of a penny a share.
Other items affecting the quarter, our increased retail revenues in Minnesota due to a reduction in expected refunds.
Associated with the tax cut and jobs Act the effect of lower tax expense recovery requirement was rolled into base rates starting in June of 19.
Interim rates net of estimated refunds associated with our South Dakota rate case that went into effect in October of 2018.
Increased renewable resource transmission and conservation improvement cost recovery revenues in Minnesota.
And increased revenues due to the jet due to the establishment of a generation cost recovery rider.
In North Dakota related to these stories station while under construction.
These items were offset in part by.
Increased property and depreciation expense and income tax expense increased.
Despite lower pre tax earnings due to the decrease in federal production tax credits, which expired in November of 2018.
Net earnings for the manufacturing segment increased 407000 or 11%.
At BTD net revenues increased $3.9 million.
This was driven by a four and a half million dollar increase in product sales.
To agricultural construction and recreational vehicle end markets.
$4.2 million of this increase relates to higher material costs passed through to customers with the balance.
To increase value added sales.
BTD scrap metal revenues decreased $600000, primarily due to lower scrap metal prices.
And the overall increase in revenues at BTD were offset in part.
The higher cost of goods sold and higher operating and income tax expenses, resulting in a $400000 increase in earnings.
TL plastics earnings were basically unchanged.
Increased revenues related to increased horticultural sales driven by an early order program offered to customers during the second quarter.
The catch up on shipments that were delayed due to income inclement weather during the first quarter of the year.
And growth of plug trays sales associated with certain horticulture end markets.
This was partially offset by lower sales of industrial products.
And also impacting earnings were increased cost of goods sold and higher operating expenses.
Our plastic segment earnings decreased $437000.
Due to a 3.6% decrease in pipe prices offset in part.
But a 2% increase in pounds of pipes sold.
Although we anticipate lower overall sales volumes in 2019 compared to 2018.
Quarter over quarter sales volumes were higher due to a stronger demand in the south central and south western regions of the United States.
Offset by lower sales volumes to certain customers.
In the northern region of our sales territory.
Cost of goods sold decreased despite the increased sales volumes due to a 2% decrease in cost per pound sold.
The impact of the lower pipe sales prices exceeded the decrease in the cost of pounds sold resulting in a 9% decrease in gross margins.
Our corporate pre tax expense and net of tax losses increased primarily due.
Increased employee benefit expense.
Slide 25 reflects an updated 2019 to 2023 capital expenditure plan from $1.07 billion to $1.1 billion based on the need for additional wind and other technology.
And transmission.
Investments.
We now expect capital expenditures to be 233 million for 2019, which includes $79 million for Americorp and $46 million for story.
With this revision our compounded annual growth rate in rate base is now projected to be 8.6% over the 2018 through 2023 timeframe.
These investments will continue to positively impact the corporations earnings and returns on capital.
Moving to our business outlook on slide 26.
We are reaffirming our 2019 consolidated earnings per share guidance of $2 intend to $2.25, which equates to a return on equity of 11.5% to 12.3%.
Based on an estimated equity to total cap ratio of 54%.
We expect a strong second half of 2019, driven in large part by increased earnings in our electric segment.
This is a result of the expected increase in revenues from South Dakota final rates being in place for the entire six months of 2019, compared with two and a half months of 2018.
Increased earnings from our planned capital projects, including our Mirror court in a storage station projects.
The story of station started construction in May.
In Mirror Court will begin construction in August .
Additional transmission investments related to our South Dakota transmission reliability project.
And decreased on M. expenses due to a decrease in pension medical workers compensation and retiree medical benefits.
Our discount rate for the pension plan increased in 2019% to 4.5% from 3.9%.
Driven by higher interest rates.
Also we incurred seven cents a share of costs in the last half of 2018 related to the planned Big stone plant outage in Q3 and Q4.
And the contribution to Otter tail powers Foundation, they are not expected to occur in the last half of 2019.
We expect increased earnings from our manufacturing segment in 2019, primarily driven by increased sales at BTD.
However, we have lowered both ends of the 2019 guidance range due to an expected decrease in scrap metal revenue and the remainder for the remainder of the year.
Resulting from lower scrap metal prices.
And as noted last quarter, we 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 ROE, which was damaged in March during a winter storm.
The backlog for this segment is approximately 115 million for 2019, compared with a $107 million a year ago.
We expect plastics 2019, net income to be lower than 2018, due to lower operating margins, resulting from increased resin prices on lower sales volumes.
And slightly lower sales prices compared to last year.
We have increased both ends of the 2019 guidance range for this segment.
As expected.
Price increases for resin have moderated.
In corporate costs net of tax are expected to be lower in 2019.
This is due in large part to an eight cents a share of expenses incurred in the fourth quarter of 2019.
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 last half of 2019.
And are highlighted on page 27 of the earnings call presentation.
Our second quarter earnings per share results are in line with our expectations and we are well positioned to achieve our 2019 earnings guidance as we enter the second half of the year.
As noted earlier the story has started construction in may.
In Maryport will start construction in August .
Otter tail power company continues to execute on major construction projects safely on time and within budget.
We remained well positioned to grow our rate base and supportive regulatory environments at 8.6% compounded annual growth rate over the next five years.
Over time, the electric utility will provide approximately 75% of our overall earnings.
The manufacturing and plastics segments continued to provide organic growth through new products and services market expansion and increased efficiencies.
Manufacturing and plastics segments are expected to provide around 25% of our earnings over time.
We expect to be able to deliver total shareholder return of 8% to 10%.
Our earnings per share are expected to increase at a 5% to 7% growth rate off 2018 results.
And our dividend yield is approximately 3%.
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 is on solid footing with strong balance sheet and corporate credit ratings.
We are now ready to take your questions.
Thank you.
Ladies and gentlemen at this time if you have a question. Please press Star then one on your Touchtone phone. If your question has been answered or you wish to remove yourself from the queue you may press the pound cake.
To prevent any background noise, we ask that you. Please limit your line on mute.
Once your question has since David.
Our first question comes from Tate Sullivan of Maxim Group. Your line is open.
Hi, Thank you. Thank you good morning, and thank you for those comments.
Real real quickly.
A couple of follow ups on the utility did Kevin I'm, sorry, if you went over a little earlier, the higher capex guidance for materials, what causes the estimate revision in that and I assume it'll rate based.
Yes. Thanks for the question the revision in the Capex is.
Additional wind related.
We have an option to purchase the Ashtabula wind farm.
That is now included in our 2022 timeframe of Capex Thats been moved forward from 2023.
And then also there is additional technology kind of related investments that we are looking at that have been.
Included in the revised Capex as well.
Okay. Thank you and then manufacturing did I hear you hear you earlier say that you added employees into Q or did it did I hear later that it was a stable head count in the Atlanta region facility and BTD.
In in BTD, the reference was the BTD.
And in 2018, we increased employee levels above 15%.
And that varies by location, but it was primarily the.
Georgia in one of the Minnesota locations.
And the comment was that in 19, we are at.
Sort of static employee levels, we have not increased or decreased employee levels.
Through the first half of 19.
Okay, and then and then I don't think I missed earlier I saw your comments and heard about the lower scrap prices and beat Steve what are the drivers behind that.
In general.
Yes, I mean, there has been lower.
You know steel pricing.
In the market.
Okay, and so then as a result, as those lower steel prices have come down and scrap metal prices have come down as well.
And is that dynamic still in place for this current quarter too.
The dynamic we expect the dynamic to be in place for the rest of the year like we said in our comments Sir.
It was in place in the second quarter, and we continue to expect and our guidance our forecasts reflect those lower scrap prices through the rest of the year.
Okay. Thank you and last for me on plastics, and the pricing versus the volumes and I understand is it consistent to how it how it has worked in the last couple of years was it was it a delay to factor in lower resin prices on the pricing side for the PTC. Please.
Sorry, maybe just to clarify are you referring to sales prices resin prices excuse me, yes, what drove the lower sales prices source.
Thanks Jessica.
There.
2018 was our record year for us in terms of.
Earnings and sales prices and operating margins and as we headed into 2019 Tate.
We based on where we expected resin prices to move up.
And we are seeing some softening in sales prices, we just didnt expect that.
The sales price levels in 18 could hold through all of 19 and Thats you've seen a softening in sales prices in the first six months of the year in there.
Slightly lower throughout 19 compared to 18.
On the resin price, we as we headed into the year, we expected that there were going to be increase resin prices coming from our suppliers and.
While we've seen some increases we now think that theres going to be moderation in those increases the rest of the year.
And so as a result, the uplift in the guidance from the first quarter and second quarter is being driven by that moderation and expected resin price increases.
Okay. Okay. Thanks, Thank you for that and have a good rest of the day.
Thanks.
Thank you and our next question comes from Chris Ellinghaus of Williams Capital. Your line is open.
Hey, guys good afternoon.
Kevin I appreciate slide 27 kind of ruined half my question.
The Brent.
Thank you Chris I knew you were.
[laughter], how do we think about the foundation and win and.
Sorry.
Future contribution timing.
Yeah, you know the.
We had a.
It was a 2 million dollar contribution to the parent company Foundation last year or two.
And to get it on good footing in establish it on a go forward basis.
We every year, we in our budget plans, we anticipate that we would contribute to the foundation and.
As we go throughout the year, we look at where we're at in terms of the foundation and how it's proceeding with its activities and its needs and so we will evaluate that on an annual basis. This year. We think we're in good shape with the.
The $2 million contribution that we made to it and don't see a need to put any additional funds into it this year.
Okay.
Chuck you were talking about the interconnection.
Opportunity.
Can you just make.
Clarify is there.
Is that money in the Capex now.
And it is a completely in the capex.
It would be in the 1.1 billion estimate this.
The range I gave of the 30.
The 55 is in there.
There could be future each time interconnection customer, which is generally not otter tail power and somebody else looking up a wind farm that interconnects or has.
Network upgrade implications.
Two.
Through our system.
Add to that so as renewables grow in our region. We anticipate there there could be more in future years, but we have not included anything other than knowing projects in the.
Okay 37 million dollar estimate that's on page 12 of the deck. Okay. So that that's your.
Yes.
Correct, yes.
Correct, but we anticipate there will be more short, but we don't you know some of these customers haven't even made interconnection request that could show up within the 2023 or 2018 to 2023 timeframe.
But we havent included anything on projects, where we.
Aren't aware of it I guess okay.
PVC plastic segment.
Guidance.
It is still suggesting that.
At a level that is consistent with.
Or slightly higher than 2017 was.
Got the Hurricane benefit is this sort of a year.
Process is 2019 sort of the new normal for the plastic segment.
This will be maybe the second best year ever.
Down from the Spike in 2008.
Is this the new normal.
You know Chris This is Kevin I think we're still not expecting that that call. It the 20 million range.
It might be on I'd say, the high end of the new normal.
I think we still as we look and see the dynamics in the industry.
A range of normal I would say is.
I'm going to say in that 16% to $20 million range.
Okay.
Hoot Lake outage can you give us a number for for what that cost.
It was a penny a share so roughly about little little over $300000.
And lastly.
With the court scheduled to start construction this month.
If you got any update or change in thought process on when you think it will be complete.
No real change we continue to believe it will be in the.
Late third or fourth quarter of 20.
The the it's a fully 100% PTC safe harbored project. So it has to be.
In an operational before the end of 2020.
Great.
Okay, great. Thanks for the details guys.
Thanks, Chris Thank you.
Again, ladies and gentlemen that star one to ask a question.
And at this time I am showing no other callers in the queue for questions I would like to turn the call back over to Mr. Macfarlane for closing remarks.
Thank you.
Our financial performance continues to demonstrate the value employee of employee actions to grow our business achieve operational and commercial excellence and develop talent. We are excited to have a storia and merrick toward projects moving to construction.
And we are reaffirming our 2019 earnings per share guidance range at $2.10 to $2.25.
Thank you for your continued interest in Otter tail Corporation. We appreciate you joining our call and we look forward to speaking with you next quarter.
Ladies and gentlemen, thank you for your participation in today's conference you May now disconnect everyone have a wonderful day.
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