Otter Tail Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; it also provides unaudited quarterly information, including fourth-quarter results. The company operates Electric, Manufacturing and Plastics businesses and continued its strategy of shifting its portfolio toward the regulated electric utility.
Financial results
| Metric | 2014 | 2013 |
|---|---|---|
| Operating revenue | $799.3 million | $743.4 million |
| Operating income | $99.5 million | $94.2 million |
| Net income from continuing operations | $56.9 million | $48.6 million |
| Total net income | $57.7 million | $50.9 million |
| Diluted EPS, continuing operations | $1.55 | $1.33 |
| Diluted EPS, total | $1.57 | $1.39 |
| Operating cash flow, continuing operations | $125.8 million | $142.4 million |
| Capital expenditures, continuing operations | $163.6 million | $159.8 million |
| Long-term debt | $498.5 million | $389.6 million |
- Revenue rose 7.5%. Electric revenue increased 9%, Manufacturing 7%, and Plastics 4%. Operating margin was approximately 12.5%, versus 12.7% in 2013.
- Electric segment net income increased 14.2% to $43.7 million. Manufacturing net income fell 18.3% to $9.4 million, including a $1.7 million after-tax lease-abandonment loss. Plastics net income declined 12.5% to $12.1 million, as higher PVC resin costs compressed margins.
- Continuing-operations cash flow fell $16.6 million, reflecting higher working-capital use and pension contributions. Continuing-operations capital spending exceeded operating cash flow by about $37.8 million.
- Year-end short-term debt was $10.9 million; cash and cash equivalents were zero. Total debt including short-term debt was approximately $509.3 million. The company reported $308.3 million available across revolving credit facilities and compliance with debt covenants. Current assets were $307.1 million and current liabilities $201.7 million.
- The 2014 dividend was $1.21 per share, with a reported payout ratio of 77%. In February 2015, the board increased the quarterly dividend to $0.3075 per share.
Fourth-quarter information
Unaudited fourth-quarter 2014 continuing-operations revenue was $193.4 million, operating income was $24.9 million, and net income was $14.0 million. Discontinued operations recorded a $3.6 million loss, including the Foley goodwill impairment; total quarterly net income was $10.5 million. Diluted EPS was $0.38 from continuing operations and $0.28 in total. Quarterly figures reflect the year-end reclassification of Foley and Aevenia as discontinued operations.
Material changes, outlook and risks
- In 2014, OTP issued $150 million of long-term notes, including $60 million at 4.68% due 2029 and $90 million at 5.47% due 2044, using part of the proceeds to repay short-term and term debt and fund construction. Debt increased year over year.
- Foley and Aevenia were classified as discontinued operations and held for sale. Foley’s $5.6 million goodwill impairment reduced earnings by about $0.15 per share. Aevenia was sold in February 2015 for $25 million cash, subject to adjustments and closing conditions; Foley’s sale was expected to close in the first quarter of 2015.
- Management guided to 2015 diluted EPS of $1.65–$1.80 and capital expenditures of $183 million. The plan includes utility transmission and environmental projects. Electric earnings are expected to rise; Manufacturing earnings to improve; Plastics earnings to decline on tighter resin-to-sales spreads and higher labor and freight costs.
- Planned 2015–2019 capital expenditures total approximately $775 million, including $665 million for Electric. Major items include $238 million for MISO multi-value transmission projects, $105 million for natural-gas generation to replace Hoot Lake capacity, and $53 million for the remaining Big Stone AQCS work. The AQCS was projected to enter service in October 2015; OTP’s share of total project cost was estimated at $207 million.
- Key regulatory exposure includes a FERC proceeding challenging the 12.38% MISO transmission return on equity and seeking 9.15%; a decision was not expected before fall 2016. Environmental rules, including the Clean Power Plan, coal-ash requirements and air-quality standards, could require additional spending, with some impacts not yet estimable.
- Other notable exposures include a $2.5 million warranty reserve for products of previously sold businesses, potential additional remediation costs, a $21.6 million maximum exposure associated with the Coyote Creek mine agreement under specified termination circumstances, and pension/postretirement obligations. A $10 million discretionary pension contribution was made in January 2015; management expected 2015 funded-pension cost to rise to $7.1 million from $4.8 million.
- Operational and market risks include coal supply and rail dependence, generating-plant outages, volatile manufacturing inputs, and PVC resin supplier concentration: two suppliers represented approximately 98% of 2014 resin purchases. The filing also identifies cyber-security, financing, weather, and rate-recovery risks.
Most important facts for investors to verify
- Reconcile GAAP EPS and the company’s non-GAAP comparisons: management reported 2014 diluted EPS of $1.72 on a non-GAAP basis excluding specified items, versus $1.55 GAAP continuing-operations EPS and $1.57 total GAAP EPS.
- Track completion, cost, regulatory recovery and returns on the Big Stone AQCS and major transmission projects, alongside the projected capital-spending program.
- Confirm closing and final proceeds for Foley and Aevenia and any remaining sale-related liabilities or indemnities.
- Monitor debt and funding needs against cash generation, dividends and planned investment; year-end cash was zero and 2014 continuing-operations operating cash flow was below capital expenditures.
- Assess possible outcomes of the FERC transmission ROE case, environmental regulation, pension assumptions and legacy product-warranty claims.