Business Context and Reporting Period
Otter Tail Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; it was filed August 9, 2017. The company operates Electric, Manufacturing, and Plastics businesses. Amounts below are in millions of dollars unless otherwise noted. Management cautions that seasonality means interim earnings should not be taken as indicative of the remainder of the year.
Financial Results and Position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $212.1 | $203.5 | $426.2 | $409.7 |
| Operating income | $29.6 | $27.1 | $62.4 | $54.7 |
| Net income | $16.8 | $15.7 | $36.4 | $30.2 |
| Diluted EPS | $0.42 | $0.41 | $0.92 | $0.79 |
| Operating margin | 14.0% | 13.3% | 14.6% | 13.3% |
For the six months, operating cash flow was $69.3 versus $64.2; capital expenditures were $56.4 versus $79.2. Cash and cash equivalents were reported as zero at both June 30, 2017 and December 31, 2016. At June 30, total debt, including short-term debt and current maturities, was approximately $590.7, compared with $581.4 at year-end. Available credit under revolving facilities was $241.6 of $300.0. Current assets were $220.6 and current liabilities $237.0. The company reported compliance with debt covenants.
Material Changes and Drivers
- First-half revenue rose 4.0% and net income rose 20.4% year over year. Electric operating income increased 16.1% for the half, supported by higher sales, fuel and purchased-power cost recovery, transmission revenues, and lower operating and maintenance costs. Coyote Station was fully operational in the first half of 2017 after a maintenance outage in 2016.
- Plastics operating income increased 18.9% for the half as higher PVC pipe prices and volumes more than offset higher resin costs. Manufacturing operating income declined 8.9%, with lower BTD revenue and weaker product costs/mix among the factors cited.
- In Q2, Plastics operating income increased 27.1%; Manufacturing operating income fell 13.0%. Electric Q2 revenue increased 4.4%, while milder weather reduced retail demand compared with the prior-year quarter.
- Interest expense decreased year over year, reflecting the prior refinancing of high-cost debt. Total diluted EPS rose less than net income in Q2 in part alongside a higher average share count.
Outlook, Commentary, and Risks
- Management raised 2017 diluted EPS guidance to $1.65–$1.80 from $1.60–$1.75. The August guidance increase primarily reflects stronger Plastics expectations; the company expects normal weather for the balance of the year. Planned 2017 capital expenditures are $149.
- The 2017–2021 capital plan totals $936, including significant electric investment in transmission, renewables, and generation. Projects include the Merricourt wind farm, subject to regulatory approvals, and a proposed natural-gas facility near Astoria. The company expects external equity or debt financing to be needed during 2017–2021.
- Minnesota’s 2016 rate case reduced OTP’s allowed return on equity from 10.74% to 9.41% and authorized a lower revenue increase than requested. Final rates were expected to take effect November 1, 2017; a $7.6 refund liability, including interest, was recorded for interim collections.
- Key uncertainties include regulatory outcomes and recovery of utility investment, power-plant availability and energy costs, interest rates and capital-market access, pension costs, and commodity prices and supply for manufacturing and PVC operations. A potential MISO Revenue Sufficiency Guarantee litigation exposure cannot be estimated; management said a reversal could materially affect results. Other known contingencies were estimated at up to $1.0, excluding that matter.
- OTP’s potential exposure under the Coyote lignite supply arrangement could be as high as $58.9 if specified termination conditions arise. The filing also discusses retained warranty obligations from discontinued businesses, including possible remediation costs.
Important Facts for Investors to Verify
- Whether the raised 2017 EPS guidance is achieved, particularly the Plastics contribution and assumptions for weather, rates, and costs.
- Final timing and customer impact of Minnesota rate changes and the interim-rate refund.
- Regulatory approvals, construction costs, schedules, and financing for the Merricourt, Astoria, and transmission projects.
- Developments in the MISO RSG proceedings and any change in the company’s currently unestimable exposure.
- Debt refinancing and liquidity needs, including the $33.0 of OTP notes due August 20, 2017, which management planned to repay using available credit.
- Whether PVC resin costs, manufacturing margins, or legacy warranty claims materially change subsequent results.