Otter Tail Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Amounts are in U.S. dollars; financial amounts below are in millions unless stated otherwise. The interim financial statements are unaudited. Otter Tail operates Electric, Manufacturing, Construction and Plastics businesses.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior balance |
|---|---|---|
| Operating revenue | $218.0 | $219.9 |
| Operating income | $27.2 | $18.3 |
| Operating margin | 12.5% | 8.3% |
| Continuing-operations income | $15.2 | $10.2 |
| Net income | $15.4 | $7.2 |
| Diluted EPS, continuing operations / total | $0.41 / $0.41 | $0.28 / $0.20 |
| Cash from operating activities | $7.8 total; $10.2 continuing operations | $7.9 total; $9.0 continuing operations |
| Capital expenditures | $23.3 | $35.5 |
| Cash and cash equivalents | $37.5 | $52.4 at Dec. 31, 2012 |
| Total debt, including current maturities and short-term debt | $438.9 | $421.9 at Dec. 31, 2012 |
| Total assets | $1,581.7 | $1,602.3 at Dec. 31, 2012 |
The operating margin percentages are calculated from reported operating income and revenue. Cash used in continuing-operations investing activities was $23.5 million; cash flow after capital expenditures was approximately negative $13.1 million using continuing-operations operating cash flow, or negative $15.5 million using consolidated operating cash flow. The declared common dividend was $0.2975 per share, unchanged from Q1 2012.
Available capacity under the two revolving credit facilities was $314.7 million at quarter-end, after $1.3 million drawn and $4.0 million restricted for letters of credit. The company reported consolidated interest-bearing debt to total capitalization of 0.45:1 and stated it was in compliance with debt covenants. The reported consolidated interest and dividend coverage ratio was 3.30:1.
Changes versus Q1 2012
- Revenue declined $1.9 million, but operating income increased $9.0 million and diluted EPS from continuing operations rose $0.13.
- Electric operating revenue increased 12.2% to $101.0 million and segment operating income rose 20.4% to $20.4 million. Colder weather drove retail electricity sales volume up 8.8%; higher fuel and purchased-power costs partly offset revenue gains. Coyote Station was shut down for generator repairs during the first seven weeks of 2013.
- Manufacturing revenue fell 10.5% to $53.2 million, primarily due to weaker BTD customer demand; segment operating income declined 5.3% to $6.3 million.
- Construction revenue fell 25.8% to $26.4 million, reflecting project timing, a harsher winter and the prior-year inclusion of a sold subsidiary. The segment’s operating loss narrowed to $1.7 million from $6.8 million, including lower costs from Foley project overruns.
- Plastics revenue rose 7.2% to $37.4 million and operating income increased 16.8% to $6.7 million, reflecting higher PVC pipe volumes and improved demand in southern and southwestern markets.
- Interest expense fell $1.6 million, mainly following the 2012 early redemption of high-coupon debt. The effective tax rate on continuing operations increased to 27.9% from 4.4%; the prior-year rate included a $0.7 million tax benefit from reversal of accrued interest on a tax audit issue.
- Prior-period discontinued-operations results were reclassified. Q1 2013 included a $0.2 million net gain on disposition, versus a $3.1 million net loss in Q1 2012, contributing to the increase in total net income.
Outlook, risks and unusual items
- Management reaffirmed 2013 continuing-operations EPS guidance of $1.30–$1.55. Segment guidance ranges: Electric $1.02–$1.07; Manufacturing $0.28–$0.33; Construction $0.06–$0.11; Plastics $0.25–$0.30; Corporate negative $0.31–$0.26.
- Expected 2013 capital expenditures were revised down to $165–$175 million from the initial $200–$210 million range. The company reduced its estimated share of the Big Stone Plant air-quality-control system cost from $265 million to $218 million, citing design changes, competitive bids and in-house project management. Management cited lower expected utility rider revenues and AFUDC earnings as factors in reducing Electric guidance.
- Management expects Manufacturing earnings to be flat in 2013 amid softer end-market orders and a key T.O. Plastics customer bringing work in-house. It expects improved Construction earnings based on better cost controls and selective bidding, and higher Plastics earnings following Q1 performance.
- On March 1, OTP drew a $40.9 million unsecured term loan due June 1, 2014 at LIBOR plus 0.875%. Proceeds funded redemption of $25.1 million of pollution-control bonds and an intercompany note associated with redemption of $15.5 million of preferred shares. The new loan increased near-term refinancing requirements.
- Q1 operating cash flow included a $10 million discretionary pension contribution; management said no further 2013 contribution was expected to be required. Pension and postretirement liabilities were $166.9 million combined at quarter-end.
- Construction commitments increased to $163.0 million from $79.4 million at year-end, mainly due to the Big Stone air-quality project. The company identified environmental regulation, construction execution and cost estimates, electric-plant outages, rate recovery, interest rates, pension funding, market conditions, PVC resin supply/pricing and retained product warranties as risks. Known significant contingencies, if all resulted in liabilities, could reach $3.5 million; this excludes potentially unknown claims.
- The company retained responsibility for DMI and ShoreMaster product warranty claims after their asset sales; the discontinued-operations warranty reserve was $4.5 million. Management warned that additional remediation costs could be substantial.
- A subsequent event disclosed OTP’s May 2013 agreement to buy output from a 62.4 MW wind facility for 25 years, with deliveries expected to begin in Q3 2013. OTP may owe payment for required output it curtails, subject to the agreement.
Key facts for investors to verify
- Whether the $1.30–$1.55 EPS guidance and revised capital plan remain achievable, particularly given lower Electric guidance and softer Manufacturing demand.
- Progress, final costs and regulatory recovery of the Big Stone air-quality-control system and major transmission projects.
- Cash generation, debt repayment or refinancing for the $40.9 million term loan due June 2014, and continued compliance with covenants.
- Foley project execution, Construction backlog and any remaining exposure to overruns or warranty/remediation claims from discontinued businesses.
- Actual pension funding needs, effects of assumptions on benefit costs, and the sustainability of dividends relative to earnings and capital requirements.
- Regulatory approvals and cost recovery for riders, and the economic terms and credit-support obligations under the new wind power purchase agreement.