Otter Tail Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Otter Tail operates Electric, Manufacturing and Plastics businesses. Management cautions that first-quarter earnings are seasonal and should not be treated as indicative of full-year results.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $241.3 million | $214.1 million |
| Operating income | $37.6 million | $34.2 million |
| Operating margin | 15.6% | 16.0% |
| Income before tax, continuing operations | $30.0 million | $25.9 million |
| Income tax expense / effective tax rate | $3.8 million / 12.6% | $6.4 million / 24.6% |
| Net income | $26.2 million | $19.6 million |
| Diluted EPS | $0.66 | $0.49 |
| Operating cash flow | $4.6 million | $21.2 million |
| Capital expenditures | $23.6 million | $30.1 million |
| Cash and cash equivalents, March 31 | $1.1 million | $16.2 million at Dec. 31, 2017 |
Revenue rose 12.7%, while operating income increased 10.0%; margin declined modestly. Manufacturing revenue increased 17.5% and operating income 56.9%. Plastics revenue increased 33.6% and operating income 136.1%, helped by higher PVC pipe prices and volumes. Electric revenue rose 3.7%, but Electric operating income fell 11.8% to $25.4 million as fuel, purchased power, operating and depreciation costs increased. The effective tax rate fell principally because of the federal corporate tax rate reduction under the Tax Cuts and Jobs Act (TCJA).
Operating cash flow fell $16.6 million, primarily reflecting a $20 million discretionary pension contribution, partly offset by higher earnings. Cash used in investing was $23.8 million; financing provided $4.1 million. Dividends paid were $13.3 million, and the declared quarterly dividend increased to $0.335 per share from $0.32.
Financial position and material changes
Total assets were $2.007 billion at March 31, 2018, versus $2.004 billion at year-end 2017. Total short- and long-term debt, including current maturities, was $620.4 million, compared with $602.9 million at year-end. Short-term borrowings declined to $30.3 million from $112.4 million, while long-term debt increased following issuance of $100 million of 4.07% senior unsecured notes due 2048. Proceeds repaid OTP credit-facility borrowings.
Revolving credit facilities totaled $300 million, with $269.4 million available at quarter-end. The company reported compliance with debt covenants; consolidated debt-to-capitalization was 0.47, and the parent’s interest and dividend coverage ratio was 4.62. Management said liquidity was adequate, citing cash flows, available credit, capital-market access and investment-grade ratings.
Outlook, commentary and risks
- 2018 EPS outlook: Raised consolidated diluted EPS guidance to $1.90–$2.05 from $1.80–$1.95, primarily because of stronger-than-expected Q1 Plastics results. Plastics guidance increased to $0.48–$0.52; management still expects Plastics earnings below 2017. Management expects higher Electric and Manufacturing earnings than in 2017.
- Capital program: Expected 2018 capital expenditures are $110 million. The 2018–2022 plan totals $973 million; management projects 9.0% compound annual electric rate-base growth from 2017 through 2022. Projects include the Merricourt 150-MW wind farm and Astoria Station, a proposed 250-MW gas-fired facility intended to replace Hoot Lake Plant when it retires in 2021.
- Regulation and rates: North Dakota interim rates were reduced after tax reform; the pending general rate request was revised to a $7.1 million annual increase. OTP filed for a South Dakota increase of about $3.3 million annually, with a further step proposed for 2020. Outcomes and final rates are uncertain. A Minnesota appeal concerning treatment of transmission-project costs was pending.
- Key operating pressures: Planned Big Stone maintenance, rising pension and employee-benefit costs, higher depreciation and property taxes, financing costs, and possible PVC resin price increases could affect results. Plastics margins are sensitive to resin costs, supply and demand.
- Contingencies: OTP recorded a $1.6 million estimated MISO transmission return-on-equity refund liability. Potential exposure relating to Coyote Creek Mining could reach $56.5 million under specified early-termination circumstances. Exposure from a separate MISO revenue-sufficiency-guarantee dispute could not be estimated. Other identified contingencies, excluding the recorded ROE liability and unestimable RSG exposure, could total up to $1.0 million if all resulted in losses.
- Other items: The company adopted revenue-recognition guidance without a material effect. It made a $20 million discretionary pension contribution. May 2018 shelf registrations and a prospective replacement at-the-market share program were disclosed after quarter-end.
Important facts for investors to verify
- Whether Plastics pricing and margins remain strong as management anticipates higher resin costs through the rest of 2018.
- Final outcomes and timing of the North Dakota, South Dakota and Minnesota regulatory proceedings, including tax-reform-related rate adjustments and refunds.
- Progress, cost and regulatory approvals for the Merricourt wind project, Astoria Station and the broader $973 million capital plan.
- Cash generation after the discretionary pension contribution, future pension funding needs, and financing requirements for planned investment.
- Developments in the MISO ROE and RSG proceedings and any change to the recorded refund liability or currently unestimable exposure.
- Whether the $1.90–$2.05 EPS guidance is achieved; first-quarter results are seasonal and management’s outlook depends on weather, regulatory outcomes, costs and business conditions.