Otter Tail Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Otter Tail operates Electric, Manufacturing and Plastics businesses. Unless stated otherwise, dollar amounts below are in millions.
Financial results and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $234.7 | $246.0 | (4.6%) |
| Operating income | $39.3 | $39.6 | (0.7%) |
| Net income | $24.3 | $26.3 | (7.8%) |
| Diluted EPS | $0.60 | $0.66 | (9.1%) |
| Operating margin | 16.7% | 16.1% | +0.6 percentage points |
| Operating cash flow | $21.8 | $17.2 | +$4.6 |
| Capital expenditures | $75.1 | $24.7 | +$50.4 |
Revenue and EPS declined despite a slightly higher operating margin. Lower electric sales and Manufacturing revenue were partly offset by stronger Plastics results and lower fuel and purchased-power costs. Net cash used in investing was $75.1 million; financing provided $40.0 million. Cash fell to $7.9 million from $21.2 million at year-end.
At March 31, total assets were $2.306 billion and common equity was $800.0 million. Short-term debt was $19.9 million and long-term debt, net, was $724.3 million. Available capacity under credit lines was $306.0 million, net of outstanding letters of credit. The company reported compliance with debt covenants.
Segment performance and notable changes
- Electric: Revenue fell 6.4% to $119.9 million and operating income declined 11.5% to $26.9 million. Retail MWh sales fell 3.3%; heating degree days were 19.6% lower year over year. Management estimated weather reduced EPS by $0.09 versus Q1 2019. Lower fuel and purchased-power costs partly offset weaker demand and higher operating and depreciation expenses.
- Manufacturing: Revenue decreased 12.0% to $68.5 million, while operating income was nearly flat at $6.8 million. BTD sales were affected by weaker end-market demand, lower material costs passed through to customers, and COVID-related customer shutdowns late in March. T.O. Plastics revenue improved.
- Plastics: Revenue rose 15.8% to $46.4 million and operating income increased 45.2% to $7.5 million, reflecting an 18.0% increase in pounds sold and improved gross margin per pound.
Outlook, risks and unusual items
- On May 5, 2020, the company lowered and widened 2020 diluted EPS guidance to $2.00–$2.25, from $2.22–$2.37. The revised segment ranges are Electric $1.65–$1.70, Manufacturing $0.14–$0.23, Plastics $0.43–$0.47 and Corporate $(0.22)–$(0.15). Guidance assumes a difficult second quarter followed by gradual recovery; management cautions that pandemic conditions make forecasts uncertain.
- Management said COVID-19 had not materially affected Q1 results, financial position or liquidity, but demand weakened in Manufacturing late in March and was expected to remain reduced near term. The company implemented furloughs, shift and pay reductions, hiring and wage freezes, and other cost controls. It cited expected COVID-related Electric earnings effects of $0.08–$0.12 per share and lower Manufacturing expectations.
- Planned 2020 capital expenditures are $385 million, including $178 million for Merricourt wind and $81 million for Astoria Station. Merricourt completion before December 31, 2020 is important to retain federal production tax credits; COVID-related force majeure claims create schedule and cost risks. Astoria is expected online in late 2020 or early 2021.
- The company recorded a $3.0 million estimated liability for potential MISO transmission return-on-equity refunds. Otter Tail is pursuing recovery of approximately $2.6 million previously credited to Minnesota customers following a favorable state Supreme Court ruling; regulatory proceedings remain pending.
- A BTD goodwill impairment test found no impairment, but estimated fair value exceeded carrying value by approximately 20%; prolonged weak demand could change that assessment. Other risks include potential Coyote Station emissions-control costs or early retirement, and up to $1.1 million after-tax earnings impact from a pending depreciation-life dispute.
- OTP had approximately $250 million of contractual commitments at quarter-end, including major construction obligations. The company also highlighted customer concentration in certain manufacturing and plastics businesses and ongoing exposure to economic, weather, regulatory, commodity-price and financing risks.
Investor verification points
- Track quarterly results against the revised EPS range and management’s recovery assumptions, particularly demand trends in Manufacturing and Plastics.
- Confirm Merricourt and Astoria schedule, final costs, regulatory recovery and any effect on Merricourt tax-credit eligibility.
- Monitor available liquidity, planned debt and equity issuance, capital spending, and the effect of weaker conditions on borrowing and financing access.
- Follow resolution of the MISO refund appeals and Minnesota transmission cost-recovery proceedings.
- Reassess BTD goodwill impairment assumptions and the potential Coyote Station environmental and retirement exposure as developments become clearer.