Otter Tail Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; financial statements are unaudited. Otter Tail operates Electric, Manufacturing and Plastics businesses. COVID-19 affected all three segments, most severely Manufacturing.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $192.8 million | $229.2 million | $427.5 million | $475.2 million |
| Operating income | $27.9 million | $26.8 million | $67.2 million | $66.4 million |
| Net income | $17.0 million | $15.4 million | $41.2 million | $41.8 million |
| Diluted EPS | $0.42 | $0.39 | $1.02 | $1.05 |
- Q2 operating margin was approximately 14.5%, compared with 11.7% a year earlier; six-month operating margin was approximately 15.7%, versus 14.0%. Revenue fell 15.9% in Q2 and 10.0% year to date. Q2 net income increased 10.1%; first-half net income declined 1.2%.
- Segment trends, Q2: Electric operating income rose to $22.6 million from $15.5 million, aided by lower purchased-power and maintenance costs and renewable-project rider revenues. Manufacturing operating income fell to $0.6 million from $5.8 million as sales declined 37.5%. Plastics operating income decreased to $7.1 million from $8.0 million as sales volumes and prices fell.
- Cash flow, six months: Operating cash flow was $73.9 million, versus $69.3 million. Capital expenditures were $119.8 million, versus $54.0 million; operating cash flow less capital expenditures was negative $45.9 million. Investing cash outflow was $121.0 million. Financing provided $65.4 million, including debt and equity proceeds and short-term borrowing.
- Balance sheet, June 30: Cash was $39.5 million; total assets $2.39 billion; common equity $822.1 million. Short-term debt was $41.2 million and long-term debt, net, $724.4 million; total debt including current maturities was approximately $765.9 million. Debt was higher than year-end 2019, when total short- and long-term debt including current maturities was $695.8 million.
- Available credit under the two revolving facilities was $291.1 million, including $7.7 million reserved for letters of credit. The company reported compliance with debt covenants; consolidated interest-bearing debt to capitalization was 0.48 to 1.00. The quarterly dividend increased to $0.37 per share in February; $29.9 million was paid in the first half.
Changes, outlook and risks
- Management raised 2020 diluted EPS guidance on August 3 to $2.10–$2.30, from the May range of $2.00–$2.25. The stated drivers included stronger Plastics results and a less severe-than-expected Electric impact from COVID-19. Guidance assumes gradual recovery in Electric and Plastics and a slow Manufacturing recovery; management cautioned renewed COVID-19 spread could undermine those assumptions.
- Manufacturing demand weakened sharply after customer plant shutdowns. BTD reduced headcount by approximately 180 and had temporarily furloughed about 55% of employees; segment backlog was approximately $96 million, compared with $115 million a year earlier. Management estimated COVID-related BTD impacts of $0.08 per share in Q2 and $0.09 per share in the first half.
- Planned 2020 capital expenditures were $380 million; the five-year 2020–2024 plan totaled approximately $982 million. Merricourt wind and Astoria Station projects were major investments. Merricourt faced contractor force-majeure claims and COVID-related component delays, though completion before year-end was expected. Astoria was expected online in late 2020 or early 2021; 26 workers at its construction site had tested positive for COVID-19.
- The company expected to issue $40 million of Series 2020B notes in August, subject to customary closing conditions, and anticipated up to a further $28 million of equity issuance under existing programs. It cited possible financing-market, liquidity and borrowing-cost effects if economic conditions weakened.
- Key exposures include uncertain COVID-19 impacts, utility regulatory decisions and recovery of capital costs, weather and energy-market volatility, customer concentration in Manufacturing and Plastics, raw-material pricing and supply, and environmental requirements. Potential Regional Haze Rule controls at Coyote Station could require material spending or contribute to early retirement; cost recovery would require regulatory approval.
- Other notable items: a $2.9 million accrued liability for potential MISO transmission return-on-equity refunds remains subject to appeal; OTP’s potential exposure tied to the Coyote Creek mining agreement could be approximately $50 million in specified termination circumstances. A BTD goodwill impairment test found no impairment, with estimated fair value about 20% above carrying value; estimates remain sensitive to the duration and severity of demand weakness.
Investor verification priorities
- Track whether Manufacturing demand and backlog recover as assumed in the $2.10–$2.30 EPS outlook, and assess the Plastics segment’s volume, pricing and resin-cost trends.
- Verify completion timing and final costs for Merricourt and Astoria, including the impact of COVID-related delays, contractor claims and workforce disruptions.
- Review funding needs against the capital program, planned debt and equity issuance, available credit and covenant headroom.
- Monitor regulatory outcomes affecting rider recovery, Minnesota transmission costs, COVID-related relief requests and the $2.9 million potential MISO refund.
- Assess possible Coyote Station environmental-control costs, early-retirement risk and the mining-agreement exposure, as well as continued impairment sensitivity at BTD.