Otter Tail Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Otter Tail operates electric utility, manufacturing, construction and plastics businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $229.8 | $215.3 | $660.1 | $646.6 |
| Operating income | $25.1 | $24.4 | $68.2 | $57.9 |
| Operating margin | 10.9% | 11.3% | 10.3% | 9.0% |
| Net income (loss) | $15.1 | $1.9 | $38.2 | ($8.2) |
| Diluted EPS from continuing operations | $0.41 | $0.13 | $1.02 | $0.59 |
| Total diluted EPS | $0.42 | $0.05 | $1.04 | ($0.24) |
Continuing operations generated $95.8 million of operating cash flow in the first nine months, versus $100.7 million in 2012. Total operating cash flow was $93.4 million versus $149.4 million, reflecting the absence of $48.7 million of cash provided by discontinued operations in 2012. Capital expenditures were $109.7 million, up from $93.7 million. Cash ended the period at $59.1 million.
At September 30, total debt including short-term borrowings and current maturities was approximately $477.8 million, up from $421.9 million at year-end 2012; long-term debt was $437.3 million and short-term debt $40.3 million. Total available revolving credit was $277.8 million. The company reported compliance with debt covenants. Current assets were $310.4 million and current liabilities $219.6 million.
Changes versus the prior period
- Q3 revenue rose 6.7%, but operating margin declined as electric operating income fell and plastics input costs pressured profitability. Construction and manufacturing operating income improved.
- For the first nine months, revenue increased 2.1% and operating income increased 17.8%. Electric segment operating income declined, while construction recovered substantially from prior-year project cost overruns and losses.
- Reported earnings comparisons are affected by discontinued businesses and unusual 2012 charges. 2012 included a $13.1 million pretax loss on early debt retirement and $45.6 million of discontinued-operations impairment charges; 2013 included a $0.7 million charge for discounting recoverable abandoned Big Stone II transmission costs.
- The company completed the sale of its waterfront equipment business in February 2013; wind tower manufacturing and other previously sold businesses are reported as discontinued operations. Q3 2013 discontinued-operations revenue was nil.
Outlook, commitments and risks
- Management narrowed 2013 continuing-operations EPS guidance to $1.38–$1.50 from $1.30–$1.50. Segment guidance was raised for manufacturing and plastics, and narrowed for electric and construction. Management cited productivity, stronger plastics sales and improved construction cost controls; manufacturing and construction backlogs were about $47 million and $34 million, respectively.
- Revised 2013 capital expenditure guidance was $165–$175 million. The estimated Otter Tail share of Big Stone Plant air-quality control system costs was reduced to $218 million. The company expects significant electric investment and rate-base growth over 2013–2017.
- OTP agreed to issue $150 million of long-term notes in February 2014, subject to closing conditions, with proceeds intended partly to retire its $40.9 million term loan and repay short-term debt. Revolving credit facilities were extended to October 2018 after quarter-end.
- Commitments under construction programs rose to $127.5 million, mainly due to the Big Stone air-quality project. A 25-year wind power purchase agreement and additional capacity purchases increased estimated capacity and energy commitments by $193.4 million.
- Key risks include environmental compliance costs and regulatory recovery timing; construction contract estimates and project execution; PVC resin availability and pricing; energy market and counterparty exposure; pension funding; and potential warranty/remediation costs on products of divested businesses. The warranty reserve was $3.4 million. Management estimated known significant environmental, litigation and open-tax contingencies could total up to $2.0 million if all resulted in liabilities, while warning that additional claims could be greater.
- The quarterly common dividend was $0.2975 per share, or $1.19 annualized. Management noted dividends have exceeded net income in each of the last five years and future dividends depend on earnings, cash flow, capital spending and other factors.
Investor verification points
- Confirm delivery, cost recovery and schedule for the Big Stone air-quality control system and major transmission projects.
- Track whether 2013 EPS guidance is achieved and whether segment margins, especially electric and plastics, develop as expected.
- Review financing and liquidity after the planned $150 million note issuance, including repayment of short-term debt and the term loan.
- Assess the sustainability of the dividend relative to earnings, cash flow and planned capital expenditures.
- Monitor construction contract estimates, legacy product warranty claims and regulatory approvals or recovery of utility investments.