Otter Tail Corporation Announces First Quarter Earnings

Electric and Plastics Segments’ Guidance Ranges Remain Largely Unchanged; Revised 2020 Earnings Per Share Guidance Range driven by Coronavirus (COVID-19) Impacts on Manufacturing Segment

Board of Directors Declares Quarterly Dividend of $0.37 Per Share

FERGUS FALLS, Minn.–(BUSINESS WIRE)–Otter Tail Corporation (Nasdaq: OTTR) today announced financial results for the quarter ended March 31, 2020.

Summary:

  • Consolidated operating revenues decreased 4.6% to $234.7 million compared with $246.0 million for the first quarter of 2019.
  • Consolidated net income and diluted earnings per share were $24.3 million and $0.60 per share, respectively, compared with $26.3 million and $0.66 per share for the first quarter of 2019.
  • Milder weather during the quarter accounted for a $0.09 reduction in diluted earnings per share compared with the first quarter of 2019.
  • The corporation revises its 2020 earnings per share guidance range to $2.00-$2.25 from $2.22-$2.37.
  • The corporation maintains its long-term earnings per share growth rate of 5% to 7% off a 2019 base.

CEO Overview

As our country continues to address the many challenges presented by the COVID-19 pandemic, Otter Tail Corporation continues focusing on: maintaining the health and safety of our employees, customers and communities; ensuring continued electrical reliability and continuous delivery of products and implementation of counter measures to limit near-term negative financial impacts,” said President and CEO Chuck MacFarlane.

Based on recommendations from the Centers for Disease Control and Prevention and regional health organizations, the corporation is working to slow the spread of the virus. Some of the actions we have taken include:

  • Implementing policies for employees to exercise social distancing and installing physical barriers.
  • Increasing sanitization efforts across all operating companies.
  • Activating internal preparedness teams across all operating companies.
  • Encouraging employees to work from home where possible and shifting in-person meetings to technology-based meetings.
  • Requiring sick employees or those who have tested for the virus to stay home.
  • Providing and encouraging the use of face coverings where possible.
  • Requiring employees to self-quarantine if they have been out of the country, on a cruise or near a United States hot spot.
  • Maintaining appropriate staffing for all critical business functions and remaining open and available to serve customers.

We will remain diligent in our precautionary health and safety efforts. This is a rapidly evolving situation that could lead to an extended disruption of economic activity. We continue to monitor this dynamic event and how it is going to impact the economy and specifically our electric and manufacturing platforms.

Otter Tail Power Company has temporarily suspended disconnects for late payments and waived late-payment fees for residential and small business customers during this pandemic. We’re committed to working with our customers during these uncertain times.

Our Electric segment quarter-over-quarter earnings decreased $2.5 million largely due to milder weather between the quarters.

Our Manufacturing segment earnings were flat between the quarters. BTD’s revenues and earnings were impacted, in part, due to softening demand in the last half of March as we started to see the early impact of COVID-19 on volumes. This was offset by an increase in earnings from T.O. Plastics mostly related to the final insurance settlement related to its 2019 partial warehouse roof collapse.

Our Plastics segment’s first quarter results increased over 2019 first quarter results in large part due to stronger volumes of pipe sold. We did not experience any material negative impacts from COVID-19 in our Plastics segment during the first quarter.

To date, we have not had issues with supply chain in our manufacturing platform.

In the second quarter we anticipate reduced overall electric sales in the commercial and industrial segments. The primary reduction is due to anticipated lower oil pumping and ethanol production loads associated with low oil prices, demand reduction from COVID-19 and limited storage. We do not have decoupled rates or bad debt trackers but have made regulatory recovery filings in each of our jurisdictions.

Construction of the Merricourt Wind Energy Center remains on budget. More than two-thirds of all civil work and project foundations are complete. The project has received Minnesota and North Dakota renewable resource rider recovery and South Dakota phase-in rider recovery. We estimate this project will cost approximately $258 million and will generate enough energy to power more than 65,000 homes. This is the largest capital project in Otter Tail Power’s history. The Merricourt project is currently anticipated to be completed before December 31, 2020, but COVID-19-related disruptions have increased risks for the project and circumstances continue to evolve, which could result in a delay in completion and an increase in costs for the project.

Construction of the Astoria Station natural gas-fired combustion turbine generation project remains on time and on budget with added focus on mitigation efforts from COVID-19-related impacts. All major equipment is on site. Construction activities include completion of equipment foundations, continued build-out of the combustion turbine and generator auxiliaries, structural steel erection, completion of underground utilities, piping installation, power and control cable installation and beginning of gas-yard construction. Commissioning and start-up planning efforts will begin in the second quarter of 2020. Astoria, a 245-megawatt natural gas combustion turbine, will complement our wind generation by providing a reliable resource when the wind isn’t blowing. And, it will have flexible operating options and low CO2 emissions. We expect to invest approximately $158 million in this project—and anticipate it will be online in late 2020 or early 2021. The Astoria Station construction schedule has not been altered due to COVID-19. However, COVID-19-related disruptions have increased risks for the project workforce given, among other factors, that it involves more than one hundred construction workers on site.

Otter Tail Power Company continues to enhance its generation mix to the benefit of our customers and the environment. By 2022, carbon dioxide emissions from its generation resources will be approximately 30 percent lower than 2005 levels, and customers will receive 30 percent of their energy from renewable resources all while keeping average residential rates nearly 30 percent below the national average.

Otter Tail Power Company continues to benefit from strong rate base growth investments and expects to invest $897 million in capital projects from 2020 through 2024. These investments represent over 90 percent of our total capital spending over the next five years and include regulated investments in renewable and natural gas-fired generation, technology and infrastructure and transmission projects. This is expected to result in a projected compounded annual growth rate of approximately 8 percent in utility rate base from year-end 2019 through 2024 and to deliver value to customers and shareholders. We continue to make system investments to meet our customers’ expectations, enable us to work smarter, reduce emissions and improve reliability and safety.

In the Manufacturing segment, BTD has been and continues to be the most severely impacted of our operating companies by COVID-19. It continues to respond to customers near term plant shutdowns and declining demand.

While our short-term focus has shifted to the health and safety of our employees and mitigating COVID-19-related impacts, our long-term focus remains on executing our growth strategies that are expected to increase shareholder value. For the utility, our strategy is to continue to invest in rate base growth opportunities, which will lower our overall risk, create a more predictable earnings stream, maintain our credit quality and preserve our ability to pay dividends. Over time, we expect the electric utility business will provide approximately 75 percent of our overall earnings.

The utility is complemented by well-run, strategic manufacturing and plastic pipe businesses, which provide organic growth from new products and services, market expansion and increased efficiencies. We expect these companies will provide approximately 25 percent of our earnings over the long term.

This strategy is a result of our 2011-2014 portfolio realignment designed to reduce risk in our non-electric businesses resulting in less overall earnings cyclicality.

Employees across the organization have done an outstanding job of being responsive, flexible and determined while addressing all the challenges presented by COVID-19.

The recent COVID-19 outbreak has created much uncertainty in our business, and we are working hard to mitigate the impacts across our organization. Presently, we are revising our consolidated earnings per share guidance, in large part due to impacts on our manufacturing platform, to be in the range of $2.00 to $2.25 from our previous guidance of $2.22 to $2.37. We maintain our long-term earnings per share growth rate of 5% to 7% off a 2019 base.”

Board of Directors Declares Quarterly Dividend

On May 5, 2020 the corporation’s Board of Directors declared a quarterly common stock dividend of $0.37 per share. This dividend is payable June 10, 2020 to shareholders of record on May 15, 2020. In February, the Board of Directors announced a 5.7% increase in our 2020 indicated annual dividend rate to $1.48 per share.

Cash Flows and Liquidity

Our consolidated cash provided by operating activities for the quarter ended March 31, 2020 was $21.8 million compared with $17.2 million for the quarter ended March 31, 2019. The primary reason for the $4.6 million increase in cash provided by operations between the quarters was a $5.7 million decrease in cash used for working capital items between the quarters, which was partially offset by a $1.2 million increase in discretionary contributions to the corporation’s funded pension plan.

Net cash used in investing activities was $75.1 million for the quarter ended March 31, 2020 compared with $25.4 million for the quarter ended March 31, 2019. The $49.7 million increase is mainly due a $51.2 million increase in cash used for construction expenditures at Otter Tail Power Company from $20.0 million in the first quarter of 2019 to $71.2 million in the first quarter of 2020. The majority of the first quarter 2020 expenditures were related to the construction of Astoria Station and the Merricourt Wind Energy Center (Merricourt).

Net cash provided by financing activities was $40.0 million for the three months ended March 31, 2020 compared with $8.3 million for the three months ended March 31, 2019. Financing activities in the first quarter of 2020 included the issuance of $35.0 million in long-term debt at Otter Tail Power Company, $13.9 million borrowed under the Otter Tail Corporation Credit Agreement and raised $6.2 million from the issuance of common stock net of issuance costs and purchases of shares withheld for employee tax obligations. Proceeds from the debt and equity issuances were used to fund Otter Tail Power Company’s construction program expenditures. We also paid $14.9 million in common dividends in the first quarter of 2020. Financing activities in the first quarter of 2019 included $18.5 million borrowed under the Otter Tail Corporation Credit Agreement to provide working capital for our manufacturing companies and $6.5 million borrowed under the Otter Tail Power Company Credit Agreement to fund its capital expenditures. We paid $13.9 million in common dividends in the first quarter of 2019 and $2.7 million for the retirement of capital stock.

The following table presents the status of the corporation’s lines of credit:

(in thousands)

Line Limit

In Use On

March 31,

2020

Restricted due to

Outstanding

Letters of Credit

Available on

March 31,

2020

Available on

December 31,

2019

Otter Tail Corporation Credit Agreement

$

170,000

$

19,893

$

$

150,107

$

164,000

Otter Tail Power Company Credit Agreement

 

170,000

 

 

14,101

 

155,899

 

154,524

Total

$

340,000

$

19,893

$

14,101

$

306,006

$

318,524

As of May 4, 2020, the total amount available under both credit facilities was $284 million.

Both credit agreements are currently in place until October 31, 2024.

Our liquidity modeling indicates we have sufficient liquidity under our credit facilities based on current assumptions of how COVID-19 is expected to impact our business under different scenarios. We have a risk tolerance metric in place to maintain a minimum of $50 million of liquidity based on the current line limit of the Otter Tail Corporation Credit Agreement. The agreement also has an accordion feature to increase the amount available to $290 million subject to certain terms and conditions. The amount available under the Otter Tail Power Company Credit Agreement can be increased to $250 million subject to certain terms and conditions. The Otter Tail Corporation Credit Agreement was increased to $170 million in October 2019. We have no long-term debt maturities due until December 2021.

We issued $8.4 million of common equity under our At the Market offering program, Dividend Reinvestment and Employee Stock Purchase plans in the first quarter before the collapse of the equity markets related to COVID-19. We expect to issue an additional $40-$45 million in common equity under these programs in 2020 barring any further deteriorations of the capital markets from the COVID-19 pandemic.

2020 Segment Performance Summary

Electric

 

Three Months ended March 31,

 

 

($s in thousands)

2020

2019

Change

% Change

Retail Electric Revenues

$

106,603

$

113,906

$

(7,303

)

(6.4

)

Transmission Services Revenues

 

10,841

 

10,862

 

(21

)

(0.2

)

Wholesale Electric Revenues

 

876

 

1,527

 

(651

)

(42.6

)

Other Electric Revenues

 

1,556

 

1,814

 

(258

)

(14.2

)

Total Electric Revenues

$

119,876

$

128,109

$

(8,233

)

(6.4

)

Net Income

$

16,182

$

18,700

$

(2,518

)

(13.5

)

Retail Megawatt-hour Sales

 

1,429,910

 

1,478,139

 

(48,229

)

(3.3

)

Heating Degree Days

 

3,272

 

4,070

 

(798

)

(19.6

)

The following table shows heating degree days as a percent of normal.

 

Three Months ended March 31,

 

2020

2019

Heating Degree Days

95.6

%

119.5

%

The following table summarizes the estimated effect on diluted earnings per share of the difference in retail kilowatt-hour (kwh) sales under actual weather conditions and expected retail kwh sales under normal weather conditions in the first quarters of 2020 and 2019 and between quarters.

 

2020 vs Normal

2019 vs Normal

2020 vs 2019

Effect on Diluted Earnings Per Share

($0.02)

$ 0.07

($0.09)

The $7.3 million decrease in retail electric revenues includes:

  • A $7.8 million decrease in retail revenue related to the recovery of decreased fuel and purchased power costs to serve retail customers. Decreased demand caused by the milder weather contributed to a 24.6% decrease in kwhs generated for system use and a $4.8 million decrease in fuel costs. Purchased power costs decreased by $3.1 million.
  • A $5.1 million decrease in revenues related to decreased consumption due to milder weather in the first quarter of 2020 compared with the first quarter of 2019, evidenced by a 19.6% decrease in heating degree days between the quarters.
  • A $1.0 million decrease in retail revenue in South Dakota related to the first quarter 2019 reversal of a refund provision related to the 2017 Tax Cuts and Jobs Act accrued in 2018. The South Dakota rate case settlement agreement eliminated the refund requirement.

These decreases in revenue were partially offset by:

  • A $2.3 million increase in Minnesota and North Dakota renewable rider revenues related to earning a return on funds invested in Merricourt while the project is under construction.
  • A $2.2 million increase in revenue due to increased kwh sales to industrial and other customers, apart from the weather-related decrease in retail kwh sales.
  • A $0.7 million increase in revenues under the North Dakota Generation Cost Recovery (GCR) rider due to increasing investment in Astoria Station. The North Dakota GCR rider provides for a return on funds invested in Astoria Station while the generation project is under construction.
  • $0.6 million in revenues from the South Dakota Phase-In rider which went into effect in September 2019 to provide returns on funds invested in Astoria Station and Merricourt while the projects are under construction.
  • A $0.6 million increase in revenues related to sales mix.
  • A $0.1 million increase in conservation rider revenues related to the recovery of increased program spending in Minnesota and South Dakota in the first quarter of 2020.

Wholesale electric revenues decreased $0.7 million due to lower wholesale electric prices and a 1.0% decrease in wholesale kwh sales. The lower wholesale prices per kwh resulted in a $0.3 million decrease in margins on wholesale energy sales from Otter Tail Power Company’s generating units in the first quarter of 2020 compared with the first quarter of 2019.

Production fuel costs decreased $5.2 million due to a 28.4% decrease in kwhs generated from our fuel‑burning plants, slightly offset by a 1.4% increase in the cost of fuel per kwh generated. The decrease in generation resulted from a decrease in demand from retail customers due to milder weather and low market prices in the first quarter of 2020 compared with the first quarter on 2019.

The cost of purchased power to serve retail customers decreased $3.1 million, despite a 17.9% increase in kwhs purchased, due to a 27.2% decrease in purchased power prices resulting from a decrease in demand due to the milder regional weather between quarters.

Electric operating and maintenance expense increased $2.2 million, including:

  • A $3.1 million increase in labor and labor-related expenses and an increase in corporate allocations primarily related to employee stock compensation costs.

These items were partially offset by:

  • A $0.5 million decrease in Midcontinent Independent Transmission System Operator, Inc. transmission tariff costs.
  • A $0.4 million decrease in pollution control costs for fuel and ash treatment related to a 29% reduction in kwhs generated at Otter Tail Power Company’s coal-burning power plants.

Depreciation expense increased $1.2 million mainly due to 2019 capital additions for generation and transmission plant, the new customer information system that went into service during the first quarter of 2019 and new service vehicles.

Income tax expense in the Electric segment decreased $1.2 million, mainly as a result of a $3.5 million decrease in operating income combined with a $0.7 million increase in interest expense related to $135 million in debt issued in October of 2019 and February of 2020 under Otter Tail Power Company’s 2019 Note Purchase Agreement.

Manufacturing

 

Three Months ended March 31,

 

 

(in thousands)

2020

2019

Change

% Change

Operating Revenues

$

68,479

$

77,822

$

(9,343

)

(12.0

)

Net Income

 

4,927

 

4,842

 

85

 

1.8

 

BTD’s revenue decrease of $10.2 million included a reduction in parts revenue of $9.8 million related to decreased sales in recreational vehicle, lawn and garden, construction, agricultural, industrial and energy equipment end markets. Lower prices related to the pass through of lower material costs accounted for $7.1 million of the decrease in parts sales revenue and reduced sales volume accounted for $3.4 million of the decrease, of which approximately $2.5 million is due to COVID-19-related production curtailments by customers. These items were partially offset by a $0.7 million decrease in volume purchase rebates. In addition to the decrease in parts revenue, scrap revenue decreased $0.7 million due to a 20.1% decrease in scrap metal prices and a 15.0% decrease in scrap volume. The decreases in parts and scrap revenue were partially offset by a $0.3 million increase in tooling revenues.

A decrease in cost of products sold at BTD of $9.6 million resulted from both the decreased sales volume and the $7.1 million in lower material costs passed through to customers. The $0.6 million decrease in gross margins on sales was partially offset by a collective decrease of $0.4 million in operating, interest and income tax expenses, resulting in a $0.2 million decrease in BTD’s net income between quarters.

We estimate COVID-19 issues in the last of half of March impacted BTD’s first quarter earnings by approximately a $0.01 per share. This relates to reduced sales as customers started to invoke temporary plant shutdowns which caused lost labor productivity, and costs related to personal protective equipment and paying health care costs for furloughed employees.

At T.O. Plastics, revenues increased $0.8 million primarily due to a $1.1 million increase in sales of horticultural containers, partially offset by a $0.2 million decrease in industrial sales and a $0.1 million decrease in sales of scrap material. Challenging weather conditions were a factor in weaker sales in the northern region of the United States in the first quarter of 2019. Product availability in February 2019 and the partial collapse of a section of a warehouse roof in March 2019 due to heavy snow also contributed to a slow start in horticultural sales in 2019.

The revenue increase at T.O. Plastics was more than offset by a $1.0 million increase in cost of products sold related to the increase in sales volume and increased rental costs for more warehouse space. Operating expenses decreased by $0.6 million as a result of the receipt of insurance settlement proceeds in the first quarter of 2020 related to the March 2019 partial roof collapse. T.O. Plastics’ income before tax increased $0.4 million resulting in increases in income tax expense and net income of $0.1 million and $0.3 million, respectively.

Plastics

 

Three Months ended March 31,

 

 

(in thousands)

2020

2019

Change

% Change

Operating Revenues

$

46,397

$

40,058

$

6,339

15.8

Net Income

 

5,449

 

3,729

 

1,720

46.1

Plastics segment revenues and net income increased $6.3 million and $1.7 million, respectively, due to an 18.0% increase in pounds of pipe sold, slightly offset by a 1.8% decrease in polyvinyl chloride (PVC) pipe prices. Weather conditions across our sales territory negatively impacted first quarter 2019 sales. Cost of products sold increased $3.9 million (12.5%) due to the increase in sales volume. While pipe prices decreased slightly, the cost per pound of pipe sold decreased 4.7% and plant productivity was improved due to increased production. These items resulted in an 8.4% increase in gross margin per pound of PVC pipe sold. Operating income increased $2.3 million between the quarters.

Corporate

 

Three Months ended March 31,

 

 

(in thousands)

2020

2019

Change

% Change

Operating Losses

($

1,939

)

($

2,805

)

$

866

 

30.9

 

Interest Charges

 

(844

)

 

(1,304

)

 

460

 

35.3

 

Other (Losses) Income

 

(867

)

 

1,236

 

 

(2,103

)

(170.1

)

Losses before Income Taxes

($

3,650

)

 

(2,873

)

($

777

)

(27.0

)

Income Tax Savings

 

1,360

 

 

1,926

 

 

(566

)

(29.4

)

Net Loss

($

2,290

)

($

947

)

($

1,343

)

(141.8

)

Corporate pre-tax operating costs decreased $0.9 million mainly as a result of a $1.3 million increase in corporate costs allocated to Otter Tail Power Company, partially offset by a $0.5 million increase in employee stock compensation and incentive costs.

Corporate interest charges decreased $0.5 million between the quarters. Included in other losses is the impact from our corporate investments related to corporate owned life insurance policies and investments held at our captive insurance company.

Contacts

Media contact: Stephanie Hoff, Director of Corporate Communications, (218) 739-8535 or (218) 205-6179
Investor contact: Loren Hanson, Manager of Investor Relations, (218) 739-8481 or (800) 664-1259

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