Otter Tail Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited. Otter Tail operates Electric, Manufacturing and Plastics businesses.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $216.5 million | $197.2 million | $642.7 million | $606.9 million |
| Operating income | $31.6 million | $27.3 million | $94.0 million | $81.9 million |
| Net income | $17.7 million | $14.6 million | $54.1 million | $44.8 million |
| Diluted EPS, continuing operations | $0.45 | $0.37 | $1.36 | $1.16 |
| Operating margin | 14.6% | 13.8% | 14.6% | 13.5% |
Q3 revenue rose 9.8% and operating income rose 15.9% year over year; nine-month revenue increased 5.9% and operating income 14.7%. Plastics drove much of the improvement, while Electric segment operating income declined in Q3. The nine-month effective tax rate was 26.3%, versus 26.1% a year earlier. Dividends declared were $0.32 per share in Q3, up from $0.3125.
- Segment trends: Q3 Plastics revenue increased 38.8% and operating income increased $5.9 million, supported by higher PVC pipe volume and prices. Manufacturing operating income increased 16.5%. Electric revenue rose 0.7%, but operating income fell 12.2%, reflecting lower retail sales and rate/rider true-ups, alongside higher fuel and purchased-power costs.
- Cash flow and investment: Nine-month operating cash flow was $114.1 million, essentially flat with $114.7 million in 2016. Capital expenditures were $94.5 million versus $125.9 million. Cash used in investing was $95.3 million; cash used in financing was $18.0 million. Working capital use increased, chiefly due to higher Plastics receivables after strong Q3 sales.
- Debt and liquidity: September 30 cash was $0.8 million. Short-term debt was $103.6 million and long-term debt, net, was $490.4 million; total debt including current maturities was $594.2 million, compared with $581.4 million at year-end 2016. Of $300 million in revolving credit facilities, $196.1 million was available. The company reported compliance with debt covenants. Both facilities were extended after quarter-end to October 31, 2022.
- Capital plans: Planned 2017 capital expenditures were approximately $149 million; the company’s 2017–2021 plan totals $936 million, including major electric-generation and transmission investments.
Outlook, material developments and risks
- Management raised 2017 diluted EPS guidance from $1.65–$1.80 to $1.75–$1.85, citing stronger-than-expected Plastics results. Guidance includes estimated Hurricane Harvey-related benefit of $0.08 per share at the low end of the Plastics segment outlook; the filing estimates Harvey contributed $2.8 million to operating income, or $0.04 per diluted share, through September. Management noted resin supply disruption and accelerated customer demand; those conditions may not persist.
- Planned projects include a 150-megawatt Merricourt wind project and a 250-megawatt natural-gas facility intended to help replace capacity and the planned 2021 retirement of Hoot Lake Plant. Regulatory approvals and other conditions remain relevant to project timing and recovery.
- Minnesota’s 2016 rate case reduced allowed return on equity to 9.41% and rate-base return to 7.5056%. Otter Tail accrued $8.5 million, including interest, for interim rate refunds as of September 30, plus amounts subject to refund under riders. It appealed the Minnesota commission’s treatment of certain transmission-project costs.
- Potential contingencies include unresolved FERC proceedings on MISO revenue-sufficiency-guarantee charges; the company cannot estimate possible exposure, which could materially affect results. Other identified contingencies were estimated at up to $1.0 million, excluding those charges. In a specified early-termination/regulatory scenario involving the Coyote Station coal-supply agreement, OTP’s exposure could be as high as $58.0 million.
- Other risks highlighted include regulation and environmental requirements, interest rates and capital-market access, pension costs, power-plant outages, weather, and availability and pricing of PVC resin and other raw materials. The filing says quarterly results should not be taken as indicative of the remainder of the year.
Important facts for investors to verify
- Whether full-year EPS reaches the raised $1.75–$1.85 range, and how much Plastics performance depends on temporary post-hurricane market conditions.
- Subsequent Minnesota rate-refund amounts, the outcome of Otter Tail’s appeal, and final treatment of transmission investments and rider recovery.
- FERC outcomes and any eventual estimate of MISO revenue-sufficiency-guarantee exposure.
- Regulatory approvals, timing, costs and financing needs for the Merricourt and Astoria Station projects, alongside the $936 million capital plan.
- Short-term borrowing, available credit, working-capital trends and the capacity to fund investment while maintaining dividends.