Otter Tail Corporation — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; unaudited. Otter Tail is a diversified company with regulated electric operations and businesses in plastics, manufacturing, health services, food processing, and other operations.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $270.2 million | $246.9 million | $532.4 million | $524.1 million |
| Operating income (loss) | $(13.1) million | $6.2 million | $2.8 million | $14.8 million |
| Operating margin | (4.9)% | 2.5% | 0.5% | 2.8% |
| Net income (loss) | $(14.2) million | $2.7 million | $(9.5) million | $7.1 million |
| EPS, diluted | $(0.40) | $0.07 | $(0.28) | $0.19 |
| Dividends per common share | $0.2975 | $0.2975 | $0.5950 | $0.5950 |
Operating margin is calculated as operating income divided by operating revenue. Q2 and six-month 2010 results included a $19.7 million ShoreMaster impairment charge, with a reported after-tax earnings impact of $15.6 million, or $0.44 per share.
- Cash flow: First-half operating cash flow was $49.4 million, down from $90.3 million. Investing cash outflow was $38.4 million, versus $120.1 million; capital expenditures were $39.6 million, versus $57.9 million. Financing cash outflow was $15.6 million, compared with $31.6 million of inflow in 2009.
- Liquidity: Cash was nil at June 30, versus $4.4 million at year-end. Available revolving credit totaled $288.3 million, net of borrowings and letters of credit. Management stated the company was in compliance with debt covenants and believed liquidity was adequate.
- Debt: Short- and long-term debt, including current maturities, totaled approximately $504.2 million. Short-term debt rose to $67.6 million from $7.6 million at year-end; long-term debt, net of current maturities, was $435.9 million. The company reported $18.4 million of first-half interest expense, up from $12.9 million.
Changes and operating drivers
- Q2 revenue increased 9.5%, but the company swung to an operating loss, principally because of the ShoreMaster impairment and higher interest costs. Six-month revenue rose 1.6%, while operating income fell substantially and net income turned to a loss.
- Electric segment operating income improved in both the quarter and first half. Higher retail revenue and greater generation availability, including Coyote Station’s return from scheduled maintenance in 2009, supported results; fuel costs and depreciation also increased.
- Manufacturing revenue declined 5.7% for the first half and the segment recorded an $18.6 million operating loss, mainly reflecting the impairment and weaker ShoreMaster and DMI activity. Health Services revenue fell 13.4%, and Food Ingredient Processing revenue fell 8.6%.
- Plastics and Other Business Operations recorded higher first-half revenue. Plastics returned to operating income; Other Business Operations remained loss-making, with higher transportation and project activity contributing to both revenue and costs.
- A $42.3 million federal tax refund received in May related to carryback of 2009 tax losses. The company said most of the proceeds were used to repay OTP revolving-credit borrowings. Cash at period end was nevertheless zero.
Outlook, risks and contingencies
- 2010 EPS guidance: Revised adjusted diluted EPS range is $0.70–$1.00, excluding the $0.49-per-share impairment and $0.05-per-share healthcare-reform charge. GAAP guidance, including those charges, is $0.21–$0.51. Expected capital expenditures are $80–$90 million, compared with $177 million in 2009.
- Management cited economic weakness, soft wholesale power markets, higher employee benefit costs, lower DMI tower demand and delayed ShoreMaster recovery. Manufacturing backlog for the remainder of 2010 was approximately $114 million; construction-business backlog was $65 million.
- OTP’s Minnesota rate case requested an approximately 8% final increase ($10.6 million annual revenue); an interim increase of 3.8% took effect June 1, 2010. Final rates remained pending and interim collections may be refundable if final rates are lower.
- North Dakota regulators authorized recovery of $3.9 million of Big Stone II generation costs over 36 months beginning August 2010. A further $7.7 million of incurred project costs had not been approved for recovery; denial could require expense recognition. Some transmission-related costs are subject to future regulatory determinations.
- The Sierra Club’s Clean Air Act case concerning Big Stone was on appeal after dismissal by the district court; the company said the outcome could not be determined. The FERC approved a settlement terminating a separate interconnection complaint, with no material financial impact reported.
- Market and execution risks include economic conditions, regulation and environmental requirements, wholesale power prices and plant availability, interest rates and access to financing, commodity input prices, and demand in manufacturing and health services. The company disclosed no material change in its annual-report risk factors.
Important facts for investors to verify
- Whether ShoreMaster’s lower sales and cash-flow outlook, and the resulting impairment, indicate further pressure on results or assets.
- Progress and final outcomes of the Minnesota rate case, renewable-resource rider filings, and recovery requests for Big Stone II costs.
- Liquidity and covenant headroom, given zero reported cash, increased short-term borrowings, planned capital spending, and the stated financing needs for 2011–2014.
- Whether the revised 2010 EPS guidance and segment backlogs translate into expected earnings, particularly for DMI, ShoreMaster, and Health Services.
- Potential developments in the Sierra Club appeal and any other regulatory or legal matters; the filing does not quantify a probable loss for the appeal.