Otter Tail Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited consolidated results. Otter Tail operates Electric, Manufacturing and Plastics businesses. Comparisons below are with 2019 unless noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $235.8M | $228.7M | $663.3M | $703.8M |
| Operating income | $52.7M | $37.3M | $119.9M | $103.6M |
| Net income | $35.9M | $24.7M | $77.2M | $66.5M |
| Diluted EPS | $0.87 | $0.62 | $1.89 | $1.67 |
| Operating margin | 22.4% | 16.3% | 18.1% | 14.7% |
- Q3 revenue rose 3.1%, while operating income increased 41.5% and net income increased 45.2%. Nine-month revenue declined 5.8%, but operating income rose 15.7% and net income rose 16.1%.
- Q3 segment operating income: Electric $37.4M versus $27.8M; Manufacturing $4.7M versus $4.0M; Plastics $14.1M versus $7.5M. For nine months, Electric operating income increased to $86.9M from $73.7M, Plastics to $28.7M from $20.6M, while Manufacturing fell to $12.2M from $16.6M.
- Nine-month operating cash flow was $141.3M, up from $105.1M. Capital expenditures were $220.6M, up from $149.7M; cash flow after capital expenditures was therefore approximately negative $79.4M. Cash at quarter-end was $44.9M.
- At September 30, total short- and long-term debt, including current maturities, was approximately $813.1M, versus $695.8M at year-end 2019. Short-term borrowings were $48.6M; long-term debt net of issuance costs was $764.3M. Available credit facilities totaled $283.7M. The company reported compliance with debt covenants; consolidated debt-to-capitalization was 0.49.
- Current assets were $274.9M and current liabilities $299.7M. The company reported total assets of $2.535B and common equity of $852.1M.
Material changes and drivers
- Q3 Plastics benefited from a 21.2% increase in PVC pipe volume, higher selling prices and lower unit input costs; segment revenue increased 25.0% and operating income 88.9%. Management cited distributor restocking, constrained resin supply and market demand.
- Manufacturing revenue remained below the prior year, but Q3 segment operating income improved 19.5% as costs fell faster than sales. For the first nine months, segment revenue decreased 19.7% and operating income 26.2%, reflecting COVID-related customer shutdowns and reduced orders. The company estimated COVID-19 reduced BTD earnings by about $0.08 per share in the nine-month period.
- Electric Q3 operating income increased 34.4%, supported by lower fuel costs, rider revenue and favorable weather, partly offset by lower commercial and industrial sales. Nine-month electric retail sales were down 3.3%; milder winter weather and COVID-related demand declines weighed on results. The Minnesota Supreme Court transmission-rider decision added an estimated $0.05 per share to 2020 earnings.
- COVID-related cost actions included furloughs, workforce reductions, shift and pay reductions, and hiring and wage freezes. Management said the pandemic had materially hurt Manufacturing results, affected Electric and Plastics to a lesser extent, and had not materially affected consolidated liquidity as of quarter-end.
- Capital spending and projects expanded substantially: nine-month capital expenditures were $220.6M, and construction work in progress reached $454.1M, versus $185.2M at year-end 2019. Merricourt had $231.1M of capitalized costs and Astoria Station $131.6M.
Guidance, outlook and risks
- On November 2, 2020, the company raised and narrowed 2020 diluted EPS guidance to $2.26–$2.36 from $2.10–$2.30. Management attributed the change mainly to stronger Plastics results and a smaller-than-expected COVID impact on Electric. Guidance includes $0.04 per share of dilution from actual and planned share issuances.
- Management expected 2020 capital additions of $380M, approximately 96% in Electric. Its June 2020 plan projected $982M of capital expenditures for 2020–2024, including $898M for Electric, and anticipated 8.6% electric utility rate-base growth over the period.
- Merricourt was expected to enter commercial operation by December 2020, and Astoria Station in Q1 2021. EDF asserted COVID-related force majeure claims involving timing and project consideration. A turbine-blade defect was identified during Merricourt testing in October; the company said delays or cost effects were possible but did not expect a material financial impact. Astoria was reported on budget.
- OTP filed a Minnesota general rate case on November 2 seeking an annual net increase of about $14.5M, or 6.77%; interim rates were expected in January 2021. Recovery and timing remain subject to regulatory decisions.
- Key exposures include continued COVID-related demand, credit losses and project disruption; PVC resin supply and price volatility; customer concentration in Manufacturing and Plastics; and regulatory and environmental requirements. A potential second-round Regional Haze Rule outcome could require significant Coyote Station controls or make early retirement necessary, with material costs and recovery subject to regulatory approval.
- Other notable exposures include a $2.8M estimated liability for possible refunds related to disputed MISO transmission returns, and up to approximately $50M of OTP exposure associated with early termination of the Coyote Station lignite supply agreement under specified conditions. Management stated ordinary-course litigation other than Regional Haze matters was not expected to have a material effect.
Important facts for investors to verify
- Whether the raised $2.26–$2.36 EPS guidance was achieved, and how much depended on Plastics pricing, resin availability and demand.
- Merricourt’s final commissioning date, turbine repairs, force majeure claims and ultimate project cost; and Astoria’s completion, cost and rate recovery.
- Progress and outcomes in OTP’s Minnesota rate case and other rider proceedings, including refund exposure and recovery of capital investments.
- COVID-19 effects on Manufacturing orders, Electric customer demand and receivables, along with the company’s working-capital and financing needs as capital spending continues.
- Potential Regional Haze requirements and the economic and regulatory consequences for Coyote Station.