Otter Tail Corporation Announces First Quarter Earnings; Increases 2018 Earnings Per Share Guidance Range from $1.80-$1.95 to $1.90-$2.05 Board of Directors Declared Quarterly Dividend on May 2, 2018
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FERGUS FALLS, Minn., May 07, 2018 (GLOBE NEWSWIRE) — Otter Tail Corporation (NASDAQ:OTTR) today announced financial results for the quarter ended March 31, 2018.
“Otter Tail Power Company filed a rate case with the North Dakota Public Service Commission in November 2017 to increase non-fuel rates by $13.1 million annually, or 8.7 percent. We implemented an interim rate increase on January 1, 2018 while the commission considers the request. In March 2018 we lowered our overall increase request to $7.1 million, or 4.8 percent, primarily due to lower federal income tax rates. We anticipate commission response in May and hearings in mid-July.
“On April 20, 2018 Otter Tail Power Company filed a request with the South Dakota Public Utilities Commission to increase non-fuel rates in South Dakota by approximately $3.3 million annually, or 10.1 percent, as the first step in a two-step request. We requested interim rates be effective May 21, 2018. This first step of our request reflects lower federal income tax rates resulting from tax reform, allowing for benefits of the lower tax rates to flow back to South Dakota customers. The second step in the request is an additional 1.7 percent increase in 2020 to recover costs for the Merricourt wind generation facility scheduled to be in service by the end of 2019. We are working with Minnesota regulators as well to bring the benefits of tax reform to our Minnesota customers.
“Incremental growth from capital investment also benefited the utility. The Big Stone South-Ellendale line, a 345-kilovolt regional transmission project Otter Tail Power Company is managing and co-owns with another utility, is on budget and, with 75 percent of the structures set, remains on schedule for completion in 2019. Our investment in this project is expected to be approximately $125 million. This is one of the projects the Midcontinent Independent System Operator (MISO) designated a Multi-Value Project, allowing cost recovery from all customers in MISO’s upper Midwest footprint. The line will improve transmission reliability and allow for the interconnection of significant wind and other generation resources.
“Overall, Otter Tail Power Company expects to invest $901 million in capital projects from 2018 through 2022, including the Big Stone South-Ellendale line and regulated investments in renewable and natural gas-fired generation. This will produce a projected compounded annual growth rate of 9.0 percent in utility rate base from 2017 through 2022 and will deliver value to customers and shareholders. The Merricourt wind and Astoria Station natural gas projects continue to advance through the MISO interconnection process.
“While all five operating companies improved net income, the PVC pipe companies, Vinyltech and Northern Pipe Products, drove the overall improvement. Customers accelerated orders to get ahead of forecasted increases in raw material costs. The sales volume, combined with federal tax reform benefits, resulted in a $4.4 million increase in Plastics segment net income quarter over quarter, and an $0.11 increase in earnings per share quarter over quarter. I applaud the management and employees of our Plastics segment for driving operational excellence and customer satisfaction while handling very strong demand.
“Our Manufacturing segment showed a $2.0 million net income improvement quarter-over-quarter. BTD, our custom metal fabricator, was up $0.04 per share compared with first quarter last year. Approximately $0.03 was due to improved sales volume and productivity gains at all BTD locations and $0.01 was due to the impact of tax reform legislation.
“Our strategic initiatives to grow our businesses, achieve operational and commercial excellence, and develop our talent are strengthening our position in the markets we serve. Overall positive results provide a foundation for increasing our 2018 diluted earnings per share guidance range from $1.80-$1.95 to $1.90-$2.05.”
On February 7, 2018, Otter Tail Power Company issued $100 million in privately placed 4.07% Senior Unsecured Notes due February 7, 2048. Proceeds from the issuance were used to pay down a portion of borrowings then outstanding under the Otter Tail Power Company Credit Agreement.
The following table presents the status of the corporation’s lines of credit:
The following table shows heating degree days as a percent of normal:
The following table summarizes the estimated effect on diluted earnings per share of the difference in retail mwh sales under actual weather conditions and expected retail mwh sales under normal weather conditions in the first quarters of 2018 and 2017 and between the quarters:
The $3.1 million increase in retail electric revenues includes:
Other electric revenues increased $1.2 million due to an increase in MISO transmission tariff revenue resulting from increased transmission system investments and higher usage of our transmission assets by others.
Production fuel costs increased $2.3 million, mainly due to a 31.4% increase in mwhs generated from our fuel burning plants to provide electricity for the increase in retail and wholesale demand driven by the colder weather in our service territory in the first quarter of 2018.
The cost of purchased power to serve retail customers increased $2.4 million due to a 14.2% increase in the cost per mwh purchased driven by higher market demand resulting from colder weather in the first quarter of 2018 compared with the first quarter of 2017.
Electric operating and maintenance expenses increased $2.2 million due to:
Depreciation expense increased $0.9 million mainly due to an increase in transmission project unitization and the Big Stone South-Brookings transmission line being placed in service in September 2017.
Other income increased $0.5 million in the Electric segment due to an increase in the allowance for equity funds used during construction (AFUDC) resulting from an increase in construction work in progress subject to AFUDC.
Income tax expense in the Electric segment decreased $4.0 million mainly due to the reduction in the federal income tax rate from 35% to 21% under the TCJA along with a $2.9 million decrease in Electric segment income before income taxes.
At BTD, a revenue increase of $9.6 million included increases in parts sales of $5.2 million to manufacturers of industrial and construction equipment, $2.1 million to manufacturers of lawn and garden and agricultural equipment and $1.8 million to manufacturers of recreational vehicles. The revenue increase also included a $0.5 million increase in revenue from scrap metal sales due to higher scrap volumes from increased production and a 12% increase in scrap metal pricing. Cost of products sold at BTD increased $6.4 million in relationship to the increased sales. The $3.2 million increase in gross margins on sales was partially offset by a $1.0 million increase in operating expenses due to a $0.5 million increase in incentives earned on higher sales and $0.5 million in increased computer and software, contracted services and other administrative and general expenses. Although income tax expense at BTD increased $0.3 million quarter over quarter due to higher sales volumes and improved margins, the impact of the reduction in the federal tax rate under the TCJA provided for a $0.6 million reduction in income tax expense at BTD.
At T.O. Plastics, revenues improved $0.7 million due to increased sales of horticultural containers across its customer base. The revenue increase was offset by a $0.6 million increase in cost of products sold related to the increase in sales and a $0.1 million increase in operating expenses. The reduction in the federal tax rate under the TCJA provided for a reduction in income tax expense and increase in net income of $0.2 million at T.O. Plastics.
Plastics segment revenues increased $12.5 million due to a 20.7% increase in polyvinyl-chloride (PVC) pipe prices and a 10.7% increase in pounds of PVC pipe sold. The increase in revenue was partially offset by a $6.5 million increase in cost of products sold due to the increase in sales volume and a 9.8% increase in costs per pound of pipe sold. The increase in pipe prices in excess of the increase in cost of products sold resulted in a $6.0 million increase in gross margin on pipe sold. Plastics segment operating expenses increased by $0.6 million due to an increase in incentives earned and commissions paid on higher sales. Although income tax expense in the Plastics segment increased $1.0 million quarter over quarter due to higher sales volumes and improved margins, the reduction in the federal tax rate under the TCJA provided for $1.3 million of the $4.4 million increase in segment net income.
Corporate costs net-of-tax increased $0.8 million between the quarters due to:
We are raising our consolidated diluted earnings per share guidance for 2018 to be in the range of $1.90 to $2.05 from our previously announced guidance range of $1.80 to $1.95. The revised guidance is the result of stronger-than-expected first quarter results from our Plastics segment and reflects strategies for improving future operating results. We have taken into consideration the cyclical nature of some of our businesses as well as current regulatory factors and economic challenges facing our Electric, Manufacturing and Plastics segments. We expect capital expenditures for 2018 to be $110 million compared with actual cash used for capital expenditures of $133 million in 2017. Our planned expenditures for 2018 include $33 million for the Big Stone South-Ellendale transmission line project, which positively impacts earnings by providing an immediate return on invested funds through rider recovery mechanisms.
Segment components of our 2018 earnings per share guidance range compared with 2017 actual earnings are as follows:
Contributing to our revised earnings guidance for 2018 are the following items:
• We expect 2018 Electric segment net income to be higher than 2017 segment net income based on:
• We expect 2018 net income from our Manufacturing segment to increase over 2017 based on the following:
• While we still expect 2018 net income from the Plastics segment to be lower than 2017, we are revising our earnings guidance for this segment upwards given strong first quarter results. Business conditions in the first quarter saw stronger-than-expected sales prices resulting in higher operating margins. While announced resin price increases are expected to lower operating margins through the remainder of the year, overall business conditions are expected to remain solid. Earnings in 2017 included an estimated impact of $0.09 per diluted share due to market reaction to hurricanes in the Gulf of Mexico. Plastics segment net income for 2018 will be positively affected by lower federal tax rates in the new tax law.
• Corporate costs, net of tax, are expected to be higher in 2018 than in 2017, when excluding the effect of revaluing deferred tax assets ($0.18 per share) related to tax reform on 2017 net losses. The higher net-of-tax costs expected in 2018 are due, in part, to the lower tax rate in effect in 2018. The change in the guidance range for corporate costs is due to an additional increase in employee benefit costs due to the increase in our overall guidance range.
The impact of 2017 tax reform legislation on future results is based on reasonable estimates and is subject to adjustment on obtaining additional information or to reflect any future legislation, rules, regulations or interpretations of the tax reform legislation. We will continue to analyze and assess the effects of the 2017 tax law changes on our future business projections.
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For a further discussion of other risk factors and cautionary statements, refer to reports we file with the Securities and Exchange Commission.
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