Otter Tail Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statements are unaudited. Otter Tail operates Electric, Manufacturing and Plastics businesses; the electric utility serves Minnesota, North Dakota and South Dakota.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $228.7 million | $227.7 million | $703.8 million | $695.3 million |
| Operating income | $37.3 million | $38.3 million | $103.6 million | $106.0 million |
| Net income | $24.7 million | $23.3 million | $66.5 million | $68.2 million |
| Diluted EPS | $0.62 | $0.58 | $1.67 | $1.71 |
| Operating margin | 16.3% | 16.8% | 14.7% | 15.2% |
Cash flow, nine months: Operating cash flow was $105.1 million, versus $100.9 million. Capital expenditures were $149.7 million, compared with $74.5 million; investing cash outflow was $151.1 million. Financing provided $46.0 million, including $90.4 million of net short-term borrowings and $41.8 million of dividends paid. Cash ended the period at $0.9 million.
Debt and liquidity, September 30: Short-term debt was $109.0 million, up from $18.6 million at December 31, 2018; long-term debt, net, was $590.0 million. Total debt including current maturities was approximately $699.2 million, versus $608.8 million at year-end. Credit facilities had $174.4 million available, net of $16.6 million restricted for letters of credit. The company reported compliance with debt covenants; consolidated debt to total capitalization was 0.48, and interest and dividend coverage was 4.28x.
Balance sheet: Total assets were $2.18 billion, compared with $2.05 billion at year-end. Common equity was $756.5 million. The quarterly dividend was $0.35 per share; dividends declared for the first nine months totaled $1.05 per share.
Changes and operating drivers
- For Q3, revenue rose 0.4%, net income increased 6.3%, and diluted EPS increased from $0.58 to $0.62, while operating income declined 2.6%. A lower effective tax rate (16.6% versus 24.0%) supported quarterly net income.
- For the first nine months, revenue rose 1.2%, but operating income fell 2.2%, net income fell 2.5%, and diluted EPS declined from $1.71 to $1.67.
- Electric segment operating income increased 4.6% in both Q3 and the nine-month comparison. Retail revenue benefited from rate increases, fuel and purchased-power recovery, transmission investments and, year to date, a South Dakota tax-refund provision reversal. Plant maintenance outages and reduced generation raised purchased-power costs; lower wholesale sales and prices also weighed on revenue.
- Manufacturing segment revenue declined 1.9% and operating income declined 8.2% in Q3, but nine-month revenue and operating income rose 6.5% and 8.0%, respectively, largely reflecting higher BTD sales volumes. Management cited softer markets and scrap-metal revenue in its outlook.
- Plastics segment revenue and operating income fell 12.0% and 15.2% in Q3; for nine months they fell 10.8% and 22.7%. Lower PVC pipe volumes and prices reduced gross margin per pound.
Outlook, investments and notable items
- Management narrowed 2019 diluted EPS guidance to $2.10–$2.20 from $2.10–$2.25. Segment guidance reflects expected Electric growth, Manufacturing earnings broadly in line with 2018, lower Plastics earnings, and lower Corporate costs.
- 2019 capital expenditures were forecast at $233 million. The 2019–2023 capital plan was approximately $1.105 billion, with projected electric utility rate-base growth of 8.6% compounded annually from 2018 to 2023. Management said these investments are expected to support future utility earnings, while noting that external financing will be required.
- Major projects include the 150-MW Merricourt wind facility, expected to cost about $258 million and be completed in October 2020, and the 245-MW Astoria natural-gas facility, expected to cost about $158 million and be completed before the planned 2021 retirement of Hoot Lake. At September 30, capitalized project costs and AFUDC were $54.8 million for Merricourt and $36.8 million for Astoria.
- OTP had $138.9 million of construction and other nonlease purchase commitments at September 30, including $92.5 million of Astoria commitments for 2020. The filing also identifies approximately $10.4 million of future land-easement payments.
- After quarter-end, OTP issued $100 million of notes on October 10, using $69.9 million to repay credit-line borrowings and intending to use the remainder for capital expenditures and general purposes. A further $75 million of notes was scheduled for issuance in 2020, subject to closing conditions. On October 31, credit facilities were extended to October 2024 and the parent company facility limit was increased from $130 million to $170 million.
- Regulatory matters include a pending MISO transmission return-on-equity proceeding; OTP recorded a $1.6 million estimated refund liability. OTP’s share of potential loss associated with the Coyote Creek lignite supply agreement could be as high as $51.3 million in specified termination circumstances. Management said the resolution of pending litigation and other matters was not expected to have a material effect, but outcomes remain uncertain.
- Management cautioned that interim earnings should not be taken as indicative of full-year results because of seasonal and other factors. Risks include regulatory recovery and rate decisions, generating-plant outages and replacement-power costs, project execution and financing, weather and energy markets, raw-material pricing, and reliance on significant customers. The filing states there were no material changes to the previously disclosed risk factors.
Important facts for investors to verify
- Whether the narrowed $2.10–$2.20 EPS guidance and $233 million 2019 capex forecast were achieved, and how project costs and timelines evolved.
- How continued short-term borrowing, subsequent note issuance and planned capital spending affect leverage, interest costs and available liquidity.
- Whether electric rate riders and regulatory proceedings allow timely recovery of fuel, transmission and new-generation investments, including the MISO ROE refund estimate.
- Whether Plastics volumes and pricing stabilize and Manufacturing demand, backlog and customer concentration affect segment profitability.
- Developments in the Coyote Creek supply agreement exposure, plant reliability, environmental requirements and other contingencies.