Otter Tail Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone Q4 report; unaudited quarterly results are noted separately below. The continuing businesses were Electric, Manufacturing, Construction and Plastics. The company continued to shift its portfolio toward its regulated electric utility through business sales.
Financial results and condition
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Operating revenue | $859.2 million | $840.2 million |
| Operating income | $82.0 million | $71.9 million |
| Continuing-operations net income | $39.0 million | $34.9 million |
| Net income (loss), including discontinued operations | ($5.3 million) | ($13.2 million) |
| Diluted EPS from continuing operations | $1.05 | $0.95 |
| Total diluted EPS | ($0.17) | ($0.40) |
| Operating cash flow, continuing operations | $169.0 million | $93.7 million |
| Capital expenditures, continuing operations | $115.8 million | $67.4 million |
| Long-term debt | $421.7 million | $471.9 million |
- Consolidated operating margin was approximately 9.5%, up from 8.6%. Continuing-operations net income increased about 12%; revenue increased 2.3%.
- At year-end, cash and cash equivalents were $52.4 million, versus $16.0 million. The company reported no revolver borrowings and $316.1 million of combined credit availability after letters of credit. Its debt-to-capitalization ratio was 0.44; management reported compliance with debt covenants.
- Common dividends remained $1.19 per share for the year. Management noted that dividends had exceeded net income or losses in each of the prior five years.
Material changes and segment performance
- Electric: Revenue rose to $350.8 million from $342.7 million, while segment earnings available for common shares declined slightly to $38.3 million from $38.9 million. Lower retail sales reflected milder heating weather; Coyote Station outages reduced generation and increased replacement-power purchases.
- Manufacturing: Revenue increased 10% to $209.0 million; segment earnings rose to $10.7 million from $8.2 million, mainly on higher customer demand and volume.
- Construction: Revenue fell 19% to $149.1 million. Segment loss widened to $7.7 million from $2.2 million, principally due to Foley project cost overruns. Foley recognized $14.9 million of estimated cost overruns in 2012, versus $7.0 million in 2011.
- Plastics: Revenue increased 22% to $150.5 million and segment earnings rose to $14.1 million from $5.8 million, supported by increased PVC pipe volume and higher selling prices.
- Discontinued operations generated a $44.2 million net loss, including substantial impairment charges. DMI’s impairment was $45.6 million before tax; ShoreMaster’s was $7.7 million before tax. DMI asset sales were completed in 2012, and ShoreMaster was sold in February 2013 for approximately $13 million cash, subject to a working-capital adjustment. DMS and Aviva were also sold in 2012.
- For unaudited Q4 2012, continuing net income was $17.1 million and net income including discontinued operations was $3.0 million, compared with $6.0 million and a $44.1 million net loss, respectively, in Q4 2011.
Outlook, risks and unusual items
- Management forecast 2013 diluted EPS of $1.30–$1.55 and capital expenditures of $200–$210 million. Its 2013–2017 capital plan totals approximately $906 million, including $811 million for Electric. The utility’s planned capital investment is expected to grow rate base and earnings.
- Management targeted annual EPS growth of 4%–7% over the next several years and expects Electric to contribute 75%–85% of overall earnings over time. It expected Construction earnings to improve after Foley’s troubled projects were substantially completed, while Plastics earnings were expected to decline from the strong 2012 result.
- The planned Big Stone Plant air-quality control system is a major capital commitment; the five-year plan includes $247 million for OTP’s share. Management also cited substantial transmission investment. Project costs, regulatory recovery and schedule remain important execution factors.
- On July 13, 2012, the company retired its $50 million 8.89% Cascade Note, paying a $12.5 million premium. The resulting $13.1 million pretax loss reduced diluted EPS by $0.22; management expects lower future interest expense.
- Key risks include environmental rules and compliance costs, utility rate and cost-recovery decisions, transmission cost-allocation litigation, generation outages and fuel supply, construction contract estimates, commodity and PVC resin pricing and availability, and potential warranty/remediation costs on products of divested DMI and ShoreMaster. Lower pension discount-rate assumptions also increase benefit costs; the company made a $10 million discretionary pension contribution in January 2013.
- The filing says currently pending legal matters are not expected to materially affect consolidated results. It estimates specified environmental, litigation and open-tax contingencies could total up to $2.0 million if all result in liabilities, while warning that unforeseen warranty claims could be larger. Deloitte issued an unqualified audit opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether Foley’s improved estimating and cost-control procedures prevent further project losses, and whether its backlog converts to profitable revenue.
- Actual Big Stone AQCS and transmission project costs, timing, regulatory approvals and recovery through rates or tariffs.
- Whether 2013 EPS guidance is achieved, particularly the expected Construction recovery and Plastics decline.
- Potential DMI and ShoreMaster warranty or remediation exposure after divestiture, and the final ShoreMaster working-capital adjustment.
- Dividend sustainability relative to earnings, the large capital program, pension funding needs and access to external financing.
- How regulatory and environmental developments—including emissions, water and coal-ash rules and MISO transmission cost allocation—affect future costs and returns.