Otter Tail Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Although the request references 2016 Q4, this filing reports full-year results; fourth-quarter figures are identified separately where useful. Otter Tail operates Electric, Manufacturing and Plastics businesses, with the regulated utility contributing 80% of continuing-operations earnings in 2016.
Financial results and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $803.5 million | $779.8 million | +3.0% |
| Operating income | $111.1 million | $109.2 million | +1.7% |
| Net income from continuing operations | $62.0 million | $58.6 million | +5.9% |
| Total net income | $62.3 million | $59.3 million | +5.0% |
| Diluted EPS, continuing operations | $1.60 | $1.56 | +2.6% |
| Operating cash flow, continuing operations | $163.5 million | $131.5 million | +$32.0 million |
| Capital expenditures | $161.3 million | $160.1 million | +$1.2 million |
Consolidated operating margin was approximately 13.8% in 2016 versus 14.0% in 2015, calculated from reported operating income and revenue. The effective tax rate on continuing operations declined to 24.5% from 27.0%. Fourth-quarter 2016 revenue was $196.6 million, continuing-operations net income was $17.4 million and diluted continuing-operations EPS was $0.44; comparable 2015 figures were $188.8 million, $15.4 million and $0.41.
- Segment performance: Electric net income rose 3.0% to $49.8 million; Manufacturing increased 34.1% to $5.7 million; Plastics fell 12.2% to $10.6 million. Electric revenue rose 5.0%, Manufacturing 2.9%, while Plastics revenue declined 1.8%.
- Assets and debt: Total assets were $1.912 billion and common equity was $670.1 million at year-end. Long-term debt, net, was $505.3 million; short-term debt was $42.9 million and current long-term maturities were $33.2 million. The company reported interest-bearing debt to capitalization of 0.46 and compliance with debt covenants.
- Liquidity: Cash and cash equivalents were zero on the consolidated balance sheet. Available revolving credit was $257.1 million, including $127.1 million under OTP’s facility. Management said operating cash flow, credit lines and capital-market access provided adequate resources.
- Dividends: The 2016 declared dividend was $1.25 per share, with a 78% payout ratio. On February 2, 2017, the board raised the quarterly dividend from $0.3125 to $0.32 per share.
Material changes versus 2015
- Electric revenue growth reflected the Minnesota interim rate increase, rider recovery, transmission revenue and higher pipeline-customer sales. Stronger generation availability reduced purchased-power costs, while fuel, operating and depreciation expenses increased.
- Manufacturing earnings improved with a full year of BTD-Georgia operations, wind-tower component sales and better productivity at BTD’s Minnesota facilities. Backlog supporting 2017 revenue was about $118 million, down from $134 million a year earlier.
- Plastics sold 10.5% more pounds of pipe, but lower selling prices outpaced the reduction in raw-material costs and compressed margins.
- Operating cash flow increased, primarily due to improved working-capital movements. The company issued $130 million of long-term debt, retired or redeemed $87.5 million of debt, reduced short-term borrowings by $37.8 million, and raised net proceeds through share issuances.
- Year-end shares outstanding increased to 39.35 million from 37.86 million, principally reflecting the at-the-market offering and stock plans.
Outlook, risks and unusual items
- 2017 guidance: Diluted EPS from continuing operations of $1.60–$1.75. Management expects higher Electric earnings, Manufacturing improvement and Plastics earnings broadly similar to 2016. The outlook assumes normal weather and a constructive Minnesota rate-case outcome, among other factors.
- Investment plan: 2017 capital expenditures are estimated at $149 million; planned 2017–2021 spending is approximately $936 million, including $315 million for wind and solar, $147 million for natural-gas generation to replace Hoot Lake capacity, and $116 million for transmission projects. Management projects a 7.5% annual rate-base growth rate over 2015–2021.
- Rate and transmission proceedings: Minnesota’s 9.56% interim base-rate increase was subject to refund. Otter Tail accrued an estimated $3.6 million rate-case refund at year-end; a final commission decision was expected in 2017. Separately, OTP recorded a $2.7 million estimated liability tied to FERC challenges to MISO transmission returns.
- Unresolved contingency: Potential MISO Revenue Sufficiency Guarantee resettlement exposure cannot be estimated because relevant billing data and final appeal issues were unavailable. The filing says an adverse outcome could materially affect results.
- Regulatory and operational risks: Environmental compliance costs, uncertainty over federal carbon rules (the Clean Power Plan was stayed), utility rate recovery, generation outages and coal supply/transportation may affect results. Manufacturing faces cyclical end markets and raw-material cost pressure; Plastics is exposed to concentrated PVC-resin suppliers and volatile resin prices.
- Other exposures: Pension and postretirement costs depend on actuarial assumptions; the funded pension plan had a $60.3 million deficit. The company also retains warranty obligations from divested businesses; discontinued-operation warranty liabilities were $1.4 million at year-end. Other identified legal and environmental matters were not expected to be material, excluding the unestimable RSG matter.
- Unusual accounting and assurance: The company early adopted stock-compensation accounting guidance in 2016, recording a $0.6 million after-tax cumulative adjustment to retained earnings. Deloitte issued an unqualified audit opinion and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Final Minnesota rate-case order, including the allowed return, permanent rate increase and any refund beyond the $3.6 million accrual.
- FERC/MISO decisions on transmission ROE and RSG resettlement exposure, including any changes to recorded liabilities or recoveries.
- Execution, costs and regulatory recovery for the $936 million capital program, particularly the Merricourt wind project and replacement of Hoot Lake generation.
- Whether 2017 EPS guidance is achieved, given weather sensitivity, rate-case assumptions, lower Minnesota conservation incentives and rising depreciation and benefit costs.
- Manufacturing backlog conversion and Plastics pricing, volumes and resin-supply conditions; also monitor dividend funding and borrowing needs as capital spending accelerates.