Otter Tail Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. Otter Tail operates Electric, Manufacturing and Plastics businesses. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance
| Metric | Three months 2016 | Three months 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $197.2 | $200.0 | $606.9 | $591.0 |
| Operating income | $27.3 | $29.6 | $81.9 | $79.5 |
| Operating margin | 13.8% | 14.8% | 13.5% | 13.4% |
| Net income | $14.6 | $15.4 | $44.8 | $44.8 |
| Diluted EPS, continuing operations | $0.37 | $0.42 | $1.16 | $1.15 |
| Total diluted EPS | $0.37 | $0.41 | $1.17 | $1.19 |
- Cash flow: Nine-month operating cash flow was $114.7 million, including $115.1 million from continuing operations, versus $70.2 million total in 2015. Investing used $123.4 million; financing provided $8.7 million. Capital expenditures were $125.9 million.
- Liquidity: Cash and cash equivalents were zero at September 30. Credit facilities totaled $320 million, with $282.8 million available at quarter-end. The company stated it believed liquidity and access to capital were adequate for operations and planned investment.
- Debt and equity: Short-term debt was $37.2 million; total short- and long-term debt, including current maturities, was $583.4 million, compared with $576.9 million at December 31, 2015. Debt to total capitalization was 0.47:1, and the company reported compliance with covenants. Common equity was $656.7 million. Nine-month dividends paid were $36.0 million; declared dividends were $0.9375 per share.
Changes versus the prior comparable period
- Third-quarter revenue declined 1.4%, operating income 7.9%, and continuing-operations diluted EPS fell from $0.42 to $0.37. Mild weather, lower fuel-cost-recovery revenue and reduced plastics pricing weighed on results.
- For nine months, revenue rose 2.7% and operating income 3.1%; continuing-operations diluted EPS increased slightly. Total net income was nearly unchanged, while total diluted EPS declined from $1.19 to $1.17. Prior-year results included gains from discontinued-business sales; 2016 did not.
- Electric nine-month operating income increased to $63.4 million from $61.4 million, supported by rates, riders and greater plant availability, partly offset by higher operating and depreciation costs. Manufacturing operating income rose to $12.0 million from $9.9 million, principally reflecting BTD-Georgia and improved product mix. Plastics operating income fell to $13.9 million from $16.8 million, mainly due to lower PVC pipe selling prices.
- Depreciation and amortization rose to $55.1 million for the nine months from $44.3 million, largely reflecting the Big Stone Plant air-quality project entering service and other plant additions.
Outlook, commentary and material risks
- Guidance: Management reaffirmed 2016 consolidated diluted EPS guidance of $1.50–$1.65 and expected capital expenditures of approximately $159 million. The 2016–2020 capital plan was approximately $858 million, with electric utility rate base projected to grow at an 8.0% compounded annual rate through 2020 using 2014 as the base year.
- Rate case: OTP’s Minnesota interim rate increase was 9.56%, subject to refund. The company recorded an estimated $2.3 million refund provision through September 30. Final rates and the requested return on equity remained subject to regulatory decisions.
- Debt financing: In September, the company agreed to issue $80 million of 3.55% senior notes due 2026, expected to close in December, with proceeds intended in part to repay $52.3 million of 9.00% notes due December 2016. On October 31, credit facilities were amended to extend maturity to 2021; the parent-company facility limit was reduced from $150 million to $130 million.
- Contingencies: OTP recorded a $2.4 million estimated refund liability related to a FERC decision reducing the MISO transmission return on equity. A second MISO ROE complaint remained pending. Exposure from litigation over MISO Revenue Sufficiency Guarantee charges could not be estimated and a reversal of relevant FERC decisions could materially affect results. Other identified contingencies, excluding RSG charges, could total up to $1.0 million if all resulted in liabilities.
- Long-term obligations: OTP’s share of unrecovered development costs, fees and capital charges under the Coyote Creek lignite agreement was $61.7 million; the filing states this could be its maximum loss exposure in specified coal-regulation or contract-termination circumstances. Construction and other purchase commitments were approximately $137.4 million.
- Operating and market risks: Management cited regulatory and environmental requirements, power-plant availability and operating costs, weather, interest rates and capital-market access. Manufacturing faced softness in agriculture, oil and gas, and recreational-vehicle markets; Plastics margins were exposed to PVC resin price movements and supply. The company also retained legacy product warranty obligations after prior business sales.
- Management noted earnings are seasonal and that interim results should not be taken as indicative of the remainder of the year. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Final Minnesota rate-case outcome, refund amount and approved return on equity.
- Results and potential refund exposure from the remaining MISO ROE complaint and RSG litigation.
- Completion and use of proceeds for the planned 2026 notes, repayment of the 9.00% notes, and updated credit-facility availability.
- Execution, funding and regulatory recovery of the substantial electric capital program, including transmission and generation projects.
- Whether manufacturing demand and PVC resin-to-selling-price spreads improve, and whether legacy warranty claims or coal-agreement obligations change materially.