May 5, 2015
Operator
Good morning, and welcome to Otter Tail Corporation's First Quarter 2015 Earnings Conference Call. Today's call is being recorded.
[Operator Instructions] I would now like to introduce Loren Hanson.
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.
Loren Hanson
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.
Loren Hanson
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.
Loren Hanson
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.
Loren Hanson
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.
Loren Hanson
For opening remarks, I would now like to turn the call over to Otter Tail Corporation's President and CEO, Mr. Chuck MacFarlane.
Chuck?
Chuck MacFarlane
Thanks, Loren. Good morning, and thank you for joining our call.
Chuck MacFarlane
First, I want to say thanks again to Jim McIntyre who retired as CEO in April. He's been an excellent leader.
During his 3 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.
Chuck MacFarlane
I also want to say I'm honored to step into the role of Chief Executive for the corporation. As President and Chief Operating Officer this past year, I gained additional perspective on each company unique opportunities and challenges.
I look forward to continuing the work with each of the companies, the board and the management team to provide solid returns for our shareholders.
Chuck MacFarlane
Before I turn my attention to first quarter performance, allow me to comment briefly on our sale of our construction companies. At the time of our last call, both sales were pending.
We've 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, wastewater and industrial construction contractor fully last week to Cincinnati-based, Enerfab, Inc.
This is the last step toward creating just 2 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 our organic growth and acquisition within both platforms.
Chuck MacFarlane
Now regarding the first quarter results. Clearly, we faced some challenges, but I'm confident in our organizational role and expect improvement and performance during the remaining quarters of this year.
Chuck MacFarlane
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.
Chuck MacFarlane
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 costs.
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 have also begun for cost to purchase SO2 allowances to comply with CSAPR, Cross-State 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 have not yet confirmed the timing of our next filing.
Chuck MacFarlane
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 slightly, which Kevin will address in his remarks.
Chuck MacFarlane
Utility net income continues to benefit from cost recovery riders for the environmental upgrade of Big Stone and major transmission projects.
Chuck MacFarlane
Just a quick update on the environmental project at Big Stone Plant. It is 97% complete, and workers continue without a single lost workday injury.
In February, we began the 4-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 advance determination of prudence proceeding. Our share is $207 million.
Chuck MacFarlane
As we discussed on the last 2 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 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.
Chuck MacFarlane
And a quick update on our transmission projects. Two CapX2020 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.
Chuck MacFarlane
We are also investing in 2 345 kV transmission lines that the Midcontinent Independent System Operator has deemed as multi-value projects. There, within 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.
Chuck MacFarlane
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.
Chuck MacFarlane
Slide 5 shows all of our current rate base projects and their percent of completion.
Chuck MacFarlane
Slide 6 shows the various cost recovery mechanisms we have for them in each of the states we serve.
Chuck MacFarlane
And Slide 7, similar to the prior earnings calls, indicates the utility's strong future rate base growth. 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.
Chuck MacFarlane
Now regarding first quarter performance of the 4 companies in our manufacturing platform. Three performed as anticipated.
The story really is BTD, our metal fabricating company. BTD has operations in Minnesota and Illinois.
Like many contract manufacturers 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.
Chuck MacFarlane
BTD continues to execute on its Minnesota optimization plan, which includes adding a state-of-the-art [indiscernible] facility, expanding and streamlining the Detroit Lakes and Lakeville production facilities and exiting the Otsego warehouse facility. All of these actions will reduce logistics costs and improve productivity.
Chuck MacFarlane
As an update on that plan, in Detroit Lakes, the precast concrete panels are erected, roof materials are installed and the concrete is poured. In Lakeville, construction of the new building is ahead of schedule, thanks to a mild winter.
The paint line components have arrived and are in the process of being installed.
Chuck MacFarlane
The PVC companies, Vinyltech and Northern Pipe Products, are in good positions, and we expect strong financial results from both companies for the year. Additionally, both companies have continued strong safety performance.
Vinyltech, for example, has had no lost time injuries during the past 5 years. This reflects strong employee focus and is a bellwether of good overall operational performance.
Chuck MacFarlane
During our last call, I introduced John Abbott, our new Varistar President. He and his team are working closely with the companies to improve operations, with primary focus on BTD at this time.
Chuck MacFarlane
Now I'll turn it over to Kevin for the financial perspective.
Kevin Moug
Thanks, Chuck, and good morning, everybody.
Please refer to Slide 8 that explains the quarterly variances on an 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, mild 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.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
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.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
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.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
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.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
We are revising our earnings guidance -- our earnings per share guidance to $1.50 to $1.65 per share. Slide 9 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 tariffs.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
We are 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 markets.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
Slide 10 highlights the changes that have occurred in certain crop commodity prices that are certainly affecting the reduced demand in the ag industry.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
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. And our backlog for this segment is $106 million as of March 31, 2015, compared with $115 million a year ago.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
We are increasing our February 2015 guidance for the Plastics segment due to stronger operating margins than originally anticipated.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
Sales volumes in 2015 are expected to be slightly lower compared to 2014.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
And as indicated in our February 2015 guidance, our corporate costs are expected to be flat in 2015 compared with 2014.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
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 are taking steps to address this year's challenges and expect 2015 to be a successful year.
A 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.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
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.
Please refer to Slide 8 that explains the quarterly variances on an earnings per share basis. The main reasons for decline in the net earnings for the Electric segments on a quarter-over-quarter basis were
We are now ready to take your questions, and after the Q&A, Chuck will return with a few closing remarks.
Operator
[Operator Instructions] Our first question is from Matt Tucker with KeyBanc Capital Markets.
Grier Buchanan
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?
Kevin Moug
Yes, Grier, this is Kevin. Weather, first quarter compared to normal, was 97% of normal.
Grier Buchanan
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%?
Kevin Moug
Yes. I mean, really, so the impact on the guidance year-over-year for weather is $0.01 a share.
So it was -- we are slightly below normal compared to normal for the quarter, and then we're seeing, as we look out to the rest of year, about $0.01 a share impact. That's -- we show that on Slide 9 of the revised guidance.
Grier Buchanan
Right. Okay.
And then switching over to nonutility, how much of the change in guidance for 2015 is due to 1Q results versus a shift in your rest of year outlook?
Kevin Moug
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've shown on Page 9 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 were 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.
Grier Buchanan
Got it. Kevin, that's great color.
And 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 that -- 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?
Chuck MacFarlane
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.
Grier Buchanan
Got it. And then I think that -- it looks -- inferred from the press release, and please correct me if I'm wrong, that the workforce 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 facilities expansions and upgrades as planned. Wanted to know if there's -- if you're still -- if those will have any impact relative -- well, if those will have any impact in 2015.
Chuck MacFarlane
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 -- 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 '14 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, of force.
Operator
[Operator Instructions] I'm showing no further questions at this time. I would like to turn the call back over to Chuck MacFarlane for closing remarks.
Chuck MacFarlane
Well, thank you. I'll summarize by saying that we believe we're 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 workforce targets at each of its locations and will reduce outsourcing costs when it starts operating a new paint line in Lakeville, Minnesota. The other companies are in good positions for the year.
Chuck MacFarlane
Thank you for joining our call, and for your interest in Otter Tail Corporation. We look forward to speaking with you next quarter.
Operator
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.