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Otter Tail Corporation: Reaffirmed Guidance Leading To Next Dividend Bump

Otter Tail Corporation reported 2015 third quarter earnings on November 2, 2015. Guidance for the full year was reaffirmed. Recent events introduce both support and uncertainty for Otter Tail’s near-term future earnings. Otter Tail’s dividend growth history points to another increase in February 2016. Otter Tail Corporation (NASDAQ: OTTR ), a diversified electric utility, started the year a tad slow. In the first quarter, the company lowered its full-year guidance. The second quarter brought an unofficial bump in the full-year projections. On November 2nd, the company reported 2015 third quarter earnings and officially confirmed its unofficial guidance bump. Full-year earnings per share is still expected to be in the middle to upper half of the $1.50 to $1.65 range. In other words, EPS for 2015 is expected to be $1.57 to $1.65. The company’s overall target is for the utility segment to deliver 75% to 85% of total earnings while the manufacturing segment delivers 15% to 25%. Like many utility companies, Otter Tail pays an attractive dividend – $1.23 annually. Its strategy is to allocate the utility segment’s earnings in support of the dividend. Its manufacturing segment’s earnings are intended to cover corporate costs and drive share price appreciation. For the third quarter, the utility segment earned $0.34 per share exceeding the dividend payment of $0.3075. The manufacturing segment earned $0.15 per share exceeding the corporate costs of $0.07. Year-to-date, the utility segment has earned $0.91 per share trailing the year-to-date dividends of $0.9225. The manufacturing segment has earned $0.40 which is $0.24 ahead of corporate costs of $0.16. Third quarter results revealed both support and uncertainty for full-year projections and Otter Tail’s near-term future. In support of its long-term goals, on September 1st, Otter Tail acquired Impulse Manufacturing. Impulse is located in Dawsonville, Georgia. The metal fabricator will join Otter Tail’s BTD Manufacturing segment. The acquisition is expected to be accretive to earnings in 2016. In 2014, Impulse generated $27 million in revenue compared to BTD’s $219.6 million. On August 3rd, the EPA (Environmental Protection Agency) published its final Clean Power Plan. The fully-implemented plan is designed to reduce carbon dioxide in machines from power plants by 30% of 2005 levels. Otter Tail believes the final Section 111(d) rule was a major change from the proposed rule. Its initial analysis showed the impacts to Otter Tail were improved under the final rule as compared to the proposed rule. Compliance begins in 2022 and must be complete before 2030. States must submit plans for approval by September 2016 and must receive approval by September 2018. Otter Tail is working with South Dakota, North Dakota and Minnesota to determine a framework and plan for each state’s compliance. At this point, Otter Tail is encouraged regarding its plant in South Dakota, concerned regarding the required addition of renewable energy in North Dakota and expecting its planned retirement of a plant in Minnesota to aid in compliance. Overall, the company expects the legislation to create increases in the costs of generation for its customers. Regarding renewable energy, the plan establishes eligibility dates: “Incremental emission reduction measures, such as RE and demand-side EE, can be recognized as part of state plans, but only for the emission reductions they provide during a plan performance period. Specifically, this means that measures installed in any year after 2012 are considered eligible measures under this final rule, but only the quantified and verified MWh of electricity generation or electricity savings that they produce in 2022 and future years, may be applied toward adjusting a CO2 emission rate.” In North Dakota, Otter Tail expects the state to have to add a substantial amount of wind power. In 2013, South Dakota was producing more than 25% of its electricity from wind. Minnesota will require 25% of its electricity to be generated from wind by 2025. Finally, Otter Tail’s third quarter information mentions a potential impact to earnings before year-end. “Should the federal government change current tax law before the end of 2015, the corporation’s consolidated earnings guidance could be negatively impacted in the range of $0.02 to $0.04 per share.” Considering there are $0.08 in the range of $1.57 to $1.65, the potential negative impact could be absorbed and Otter Tail would still meet its own projections. The company has earned $1.15 per share in the first nine months of 2015. Therefore, Otter Tail’s fourth quarter must deliver $0.42 to $0.50 in EPS. Since Otter Tail is a “winter-peaking” utility, achieving full-year guidance should not be a problem. The company’s dividend yield is healthier than other diversified utility companies. With full-year guidance reaffirmed, the stability of Otter Tail’s dividend is also presumed. Prior to 2009, the company increased its dividend for 33 consecutive years. In February of both 2014 and 2015, Otter Tail reestablished the tradition. February, 2016 should yield yet another increase.

Otter Tail Corporation: Unofficially Nudging Forward

Otter Tail Corporation reported 2015 second quarter results on August 3rd. Based on its performance, the company unofficially increased its full-year EPS projection. Six months in, the company’s potential to cover both its annual dividend and corporate costs looks solid. Even considering Otter Tail traditionally pays a dividend exceeding the average of diversified utilities, the company’s share price is not yet out of fair value range. The allure of owning a diversified utility is the blend of a stable, healthy dividend and the potential of share price appreciation. Otter Tail Corporation (NASDAQ: OTTR ) operates as an electric utility in northern states in the Midwest and as a manufacturer of plastics, PVC pipe and metal fabrication. The company reported second quarter results on August 3rd. After a first quarter reset 9% to 10% downward of full-year estimates, the company unofficially raised full-year estimates in its second quarter reporting. The overall effect is still a decrease from the company’s original guidance. But, the bump now represents improvement over 2014 results which can be extrapolated into safety of the dividend and potential for share price improvement. Otter Tail’s first quarter results were mixed in its manufacturing segment, Varistar. The segment was unexpectedly tripped up by the downturn in the oil and gas industry. The second quarter performance still showed some impact but the company was better able to manage the challenges. The loss of sales to manufacturers of oil and gas equipment was partially offset by sales to manufacturers of lawn and garden equipment, recreational equipment and wind energy equipment. Year-over-year, the segment’s revenue in the quarter decreased 4%. On the bottom line, the segment’s operating income increased 8.6% year-over-year. The primary contributor to the difference was lower resin prices. Otter Tail sold more pounds of PVC pipe at lower prices but it cost the company much less to do so. Relative to its core business of being an electric utility, the company’s performance was favorable in the second quarter. The weather is, obviously, beyond the company’s control. To date, 2015 has offered milder seasons. In the 2014 second quarter, compared to “normal”, both the heating degree days and cooling degree days exceeded 100%. By comparison, in 2015, the heating degree days registered only 82.7% of normal and cooling degree days registered 78.9% of normal. Sales in the quarter were lower to both retail and wholesale customers. This loss was offset by ECR (environmental cost recovery) rider revenue related to the company’s ACQS (air quality control system) environmental upgrade project and higher transmission tariff revenue from MISO (Midcontinent Independent System Operator) related to increased investment in regional transmission lines. The slide below from the latest investor presentation depicts the regulated rate base capital expenditures for the next 5 years which will drive growth: (click to enlarge) Contributing directly to the segment’s bottom line, the company’s production fuel costs and maintenance expenses were lower in the quarter. Year-over-year, the segment’s operating income and net income increased over 50%. The second quarter delivered $0.36 in EPS from continuing operations, a 71% increase compared to the 2014 second quarter. Year-to-date, the EPS total of $0.73 is still lagging 2014 by 10%. In 2014, full-year EPS was $1.55. Otter Tail’s original guidance for 2015 was a range of $1.65 to $1.80. With the first quarter results, the range was adjusted to $1.50 to $1.65. In the second quarter press release, Otter Tail management stated it “now expects to be in the middle to upper end of the range”. The company did not formally adjust the range. But, the statement unofficially moves the guidance to $1.57 to $1.65. Based on the company’s strategy, the utility segment’s earnings are to support the dividend paid to shareholders. The 2015 EPS projection for the segment is $1.23 to $1.26. The company’s current annual dividend rate is $1.23. The Varistar segment’s earnings are intended to cover corporate costs and drive share price appreciation. The current full-year projection per share for this segment is $0.50 to $0.58. Corporate costs are projected in a range of $0.19 to $0.23 per share. Compared to 2014 where corporate costs totaled $0.22 per share for the full year, the company is currently operating at just 80% of the 2014 rate. An adjustment to full-year EPS warrants an adjustment in a buy point for Otter Tail. Using the unofficial full-year EPS range of $1.57 to $1.65 equates to a midpoint of $1.61. At a dividend rate of $1.23, the payout ratio based on the unofficial midpoint would be less than 80%. Acknowledging Otter Tail, at 4.4%, has consistently paid above the average yield for diversified utilities, any price up to $30.75 maintains a yield of 4%. As well, any price below $30.75 equates to a P/E ratio equal to the average P/E ratio of 19.09 for the Utilities sector. Disclosure: I am/we are long OTTR. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I belong to an investment club that owns shares in OTTR.