Otter Tail Corporation — Q3 2015 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2015. Otter Tail operates electric utility, manufacturing and plastics businesses. Results are seasonal and management cautions that interim earnings are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $200.0m | $196.5m | $591.0m | $605.9m |
| Operating income | $29.6m | $24.5m | $79.5m | $74.7m |
| Income from continuing operations | $15.7m | $13.2m | $43.1m | $42.8m |
| Net income, including discontinued operations | $15.4m | $15.8m | $44.8m | $47.2m |
| Diluted EPS, continuing operations | $0.42 | $0.36 | $1.15 | $1.17 |
| Total diluted EPS | $0.41 | $0.43 | $1.19 | $1.29 |
| Dividends declared per share | $0.3075 | $0.3025 | $0.9225 | $0.9075 |
Q3 operating margin was approximately 14.8%, versus 12.5% a year earlier; nine-month margin was approximately 13.4%, versus 12.3% (calculated from reported operating income and revenue). The nine-month effective tax rate on continuing operations was 25.3%, compared with 23.0%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $70.2m, compared with $47.0m in 2014; continuing-operations operating cash flow was $81.8m, versus $68.3m. The 2015 total includes $11.6m of cash used in discontinued operations.
- Capital expenditures were $115.3m. Continuing-operations investing cash outflow was $150.5m, including $30.8m for the Impulse acquisition. Dividends paid were $34.6m.
- At September 30, cash was $0.5m. Short-term debt was $87.0m and long-term debt, including current maturities, was approximately $498.6m; total debt was approximately $585.5m, up from $509.5m at year-end 2014.
- Revolving credit facilities totaled $320.0m, with $232.7m available after borrowings and letters of credit. The company reported covenant compliance; consolidated interest-bearing debt to total capitalization was 0.49.
- On October 29, 2015, after quarter-end, both revolving credit facilities were amended to extend their expiration dates to October 29, 2020.
Material changes and operating drivers
- Electric: Q3 revenue increased 12.5% to $100.6m and operating income rose 45.5% to $23.3m. Higher retail sales, environmental and conservation rider revenue, and transmission revenue helped; stronger retail demand reflected warmer weather. Lower generation availability drove higher purchased-power costs, partly offset by lower fuel costs. Big Stone was offline for extended maintenance in July, while Coyote operated at reduced load during repairs.
- Manufacturing: Q3 revenue fell 5.5% to $52.5m and operating income declined 28.4% to $3.5m. Lower agricultural and oil-and-gas equipment demand and scrap prices weighed on BTD; Impulse added $2.0m of September revenue. Nine-month operating income declined 32.6% to $9.9m.
- Plastics: Q3 revenue fell 8.9% to $47.0m, primarily from lower PVC resin-linked selling prices, but operating income increased 14.3% to $6.0m as product costs fell faster. For nine months, revenue was down 10.5% to $125.5m and operating income was essentially flat at $16.8m.
- Discontinued operations: Foley was sold in April and AEV in February 2015. Nine-month results included a $6.9m after-tax disposal gain, offset by $5.3m of operating losses and a $1.0m impairment charge. The filing also reports a $4.4m pretax charge at Foley from revised cost estimates on a construction job.
- Acquisition: BTD acquired Impulse Manufacturing for $30.8m cash on September 1. The preliminary allocation included $6.9m goodwill and $5.5m intangible assets. Impulse contributed a $0.3m net loss in September.
Outlook, risks and contingencies
- Management reaffirmed 2015 consolidated diluted EPS guidance of $1.50–$1.65, expecting results in the middle to upper end. Guidance reflects current tax law; a federal tax-law change before year-end could reduce EPS by $0.02–$0.04. Segment guidance was revised: manufacturing lower, plastics higher, and electric expected to improve versus prior guidance.
- The Big Stone air-quality-control project was projected to cost approximately $384m overall, including OTP’s 53.9% share of $207m; OTP had incurred $198.4m of its share by September 30. Commercial operation was expected in December 2015. Recovery depends on regulatory mechanisms and proceedings.
- Pending FERC complaints seek to reduce the MISO transmission return on equity from 12.38% to 9.15% or 8.67%. OTP recorded a $0.9m liability for its estimated net refund exposure through September 30; decisions were expected in 2016 and 2017.
- Coal combustion residual and carbon-emissions regulations remain subject to legal and legislative uncertainty. OTP identified future reclamation work at Big Stone and recorded an approximately $0.5m asset-retirement obligation. Management was assessing the potential impact of final carbon rules.
- OTP’s 35% share of Coyote Creek mine development costs was $46.8m. The filing says exposure could reach that amount if regulation or legislation makes coal burning cost-prohibitive and the related assets worthless.
- Management estimated known significant contingency losses could be as high as $2.4m. Other risks include plant outages and repair costs, pension obligations, commodity and resin-price changes, market access and borrowing costs, and potential warranty/remediation claims on previously sold businesses. The company reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Track whether electric generation availability improves and whether Big Stone returns to service on schedule and within the projected cost.
- Review regulatory recovery and outcomes of the MISO return-on-equity proceedings, including any changes to the $0.9m estimated refund liability.
- Assess whether manufacturing demand and backlog recover; management cited approximately $45m of 2015 manufacturing backlog versus $50m a year earlier.
- Monitor leverage, short-term borrowing and funding needs for planned electric investment; management anticipated equity or debt financing during 2015–2019.
- Reconcile full-year results with the reaffirmed $1.50–$1.65 EPS outlook, particularly discontinued-operation effects, tax-law exposure and segment performance.