FERGUS FALLS, Minn.--(BUSINESS WIRE)--Otter Tail Corporation (NASDAQ: OTTR) today announced financial results for the year ended December 31, 2019.

2019 Summary:

2019 Highlights

• Consolidated operating revenues increased to $919.5 million in 2019 compared to $916.4 million in 2018.
• Consolidated net income increased 5.5% to $86.8 million.
• Diluted earnings per share increased $0.11 or 5.3%.
• The corporation’s board of directors increased the quarterly common stock dividend to $0.37 per share, an indicated annual dividend rate of $1.48 per share and a 5.7% increase from $1.40 per share in 2019. The dividend is payable on March 10, 2020 to shareholders of record on February 14, 2020.
• The corporation expects 2020 diluted earnings per share to be in a range of $2.22 to $2.37.

CEO Overview
“Our team of employees once again achieved strong financial results in 2019, increasing diluted earnings per share to $2.17,” said President and CEO Chuck MacFarlane. “Our Electric segment led our increase in net income, which improved year-over-year earnings by $4.6 million. Manufacturing segment earnings were flat year over year and our Plastics segment experienced a $3.2 million decline in earnings due to lower volumes and lower operating margins. Corporate costs improved by $3.1 million.

“Construction of Otter Tail Power Company’s $258 million, 150-megawatt Merricourt Wind Energy Center in southeastern North Dakota began in August with completion anticipated in October 2020. The project is on budget and continues to have excellent safety performance with no recordable incidents. We project our customers will receive approximately 30 percent of their energy from renewable resources we own or secure through power-purchase agreements by 2021. Construction of our $158 million 245-megawatt Astoria Station natural gas-fired combustion turbine generation project continues to be on schedule and on budget with a commercial operation date expected in late 2020 or early 2021.

“Rate riders are in place or expected to be in place in 2020, providing returns on amounts invested in the Merricourt Wind Energy Center and Astoria Station projects while under construction. The exception is the Minnesota portion of the Astoria Station costs and we will continue to capitalize an allowance for funds used during construction (AFUDC) on the Minnesota share of Astoria Station costs until recovery under interim or general rates commences.

“Otter Tail Power Company has approximately $45 million in planned MISO self-fund transmission investments for generator interconnections in the 2019 through 2021 time period. 'Self-fund' is a transmission investment election made by transmission owners in MISO to fund the initial investment of transmission network upgrades required for generator interconnection and to recover and earn a return on the investment from the interconnection customer over 20 years. As of December 31, 2019, Otter Tail Power Company had Federal Energy Regulatory Commission (FERC) approval of several agreements providing for recovery on approximately $12 million in self-fund investments.

“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, including investments in renewable generation and Astoria Station. This results in a projected compounded annual growth rate of 8.2 percent in utility rate base from year-end 2019 through 2024 and is expected to deliver value to customers and shareholders. We continue to make system investments to meet our customers’ expectations and enable us to work smarter, reduce emissions and improve reliability and safety.

“Our strategic initiatives to grow our businesses, achieve operational and commercial excellence, and develop our talent are strengthening our position in the markets we serve. We remain confident in our ability to grow earnings per share in the range of 5 to 7 percent compounded annually from a base of $2.17 in 2019. And we are announcing our 2020 earnings per share guidance to be in the range of $2.22-$2.37.”

Cash Flows and Liquidity
Our consolidated cash provided by operating activities for the year ended December 31, 2019 was $185.0 million compared with $143.4 million for the year ended December 31, 2018. Primary reasons for the $41.6 million increase in net cash provided by operating activities between the periods were:

• A $23.1 million decrease in cash used for working capital items mainly due to significant changes in inventories, accounts payable and accounts receivable between the periods.
  • Inventory balances decreased by $8.4 million during 2019 compared to an increase of $18.2 million in 2018. This change is due to decreases in raw material costs, primarily steel, from 2018 to 2019 and lower sales volumes in the Plastics segment during 2019 compared to sales levels in 2018.
  • The level of increases in accounts receivable declined by $6.7 million from 2018 to 2019, primarily due to higher raw material costs reflected in customer billings in 2018 when compared with 2019. Our average collection period on a consolidated basis remained steady at approximately 31 days.
  • The reductions in cash used for inventories and accounts receivable between the years were partially offset by a $15.2 million reduction in cash from an increase in accounts payable and other current liabilities in 2018 compared with essentially no change in these items in 2019. The primary reason for the increase in accounts payable and other current liabilities in 2018 was due to the recording of refunds for the TCJA and interim rate refunds in North Dakota and South Dakota.
• An $11.2 million increase from changes in regulatory asset and liability balances related to fuel cost and Minnesota environmental cost recovery riders included in changes in deferred debits and other assets and changes in noncurrent liabilities and deferred credits.
• A $4.5 million increase in net income.
• A $3.4 million increase in depreciation and amortization expense.
• A $1.5 million increase in non-cash stock-based compensation expense in 2019.

These items were partially offset by:

• A $2.5 million increase in discretionary contributions to the corporation’s funded pension plan in 2019.

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

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

2019 Segment Performance Summary

Electric

Results of operations for the Electric segment are impacted by fluctuations in weather conditions and the resulting demand for electricity for heating and cooling. The following table shows heating and cooling degree days as a percent of normal.

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 2019 and 2018 and between the years.

Electric Revenue

The $18.2 million increase in retail electric revenue includes:

• A $10.4 million increase in transmission cost recovery revenues due to recent investments in transmission infrastructure and transmission costs not currently recovered in base rates.
• A $2.4 million increase in Minnesota Renewable Resource Adjustment (RRA) rider revenues due to increased cost recovery requirements resulting from the expiration of federal production tax credits (PTCs) in November 2018 on a company-owned wind farm.
• A $2.3 million increase in retail revenue related to the recovery of fuel and purchased power costs incurred to serve retail customers.
• A $1.9 million increase in retail revenue in South Dakota due to the reversal of a tax refund provision in connection with OTP's 2018 South Dakota rate case settlement agreement.
• A $1.4 million increase in average electric prices mainly related to interim and final rate increases in South Dakota.
• A $0.9 million increase in revenue related to the establishment of a generation cost recovery rider in North Dakota in 2019 to provide for a return on funds invested in Astoria Station during its construction phase.
• A $0.3 million increase in revenue related to the recovery of increased conservation improvement program expenditures in 2019.
• A $0.3 million increase in revenue mainly driven by a 4.9% increase in heating degree days in 2019 partially offset by a 30.9% decrease in cooling degree days between the years.

These items were partially offset by a $1.8 million decrease in retail revenue due to a decrease in kwh sales to residential customers.

Transmission services revenues decreased $6.4 million mainly due to a $5.0 million decrease associated with reductions in capital spending and collections through the Midcontinent Independent System Operator, Inc. (MISO) tariff. Otter Tail Power Company also recorded an additional $1.4 million estimated refund obligation due to a November 21, 2019 FERC ruling related to the methodology used to determine the Return on Equity (ROE) component of the transmission rate under the MISO tariff. This is mainly based on a reduced ROE from 10.82% to 10.38% for the period from September 28, 2016 through December 31, 2019. The reduced ROE is based on a newly established 9.88% ROE plus the 50-point Regional Transmission Organization adder granted by the FERC on January 5, 2015. The FERC ruling is subject to rehearing requests.

Wholesale electric revenues decreased $2.7 million resulting from a 27.0% decrease in wholesale kwh sales due to fewer opportunities for wholesale sales as Coyote Station was offline during the second quarter of 2019 due to an extended maintenance outage and Hoot Lake Plant Unit 2 was offline for maintenance and repairs in June and July 2019. The decrease in revenues also resulted from decreased regional market demand in the third quarter of 2019 due to cooler summer weather, which drove down wholesale electricity prices.

Electric Costs and Expenses

Production fuel costs decreased $7.6 million mainly as a result of a 16.4% decrease in kwhs generated from our fuel-burning plants due to the maintenance outage at Coyote Station and due to maintenance and repairs at Hoot Lake Plant as noted above. The decrease in fuel costs related to the decrease in generation was partially offset by a 6.1% increase in the cost of fuel per kwh generated at Otter Tail Power Company’s fuel-burning plants. The increased cost-per-kwh generated is mostly due to higher absorption of Coyote Creek Mining Company’s fixed coal mining costs on less delivered fuel to Coyote Station during its planned spring 2019 maintenance outage.

The cost of purchased power to serve retail customers increased $3.7 million due to a 23.1% increase in kwhs purchased as a result of purchasing replacement power during the maintenance outages at Coyote Station and Hoot Lake Plant. The increase in kwh purchases was partially offset by a 5.1% decrease in kwh purchases in the fourth quarter of 2019 related to Big Stone Plant’s availability during the fourth quarter of 2019 compared to the same period last year when the plant was down for scheduled maintenance. The increased costs due to the increase in kwhs purchased were partially mitigated by a 14.4% decrease in the cost per kwh purchased resulting from lower wholesale energy prices in 2019.

Electric operating and maintenance expenses decreased $2.0 million due to:

• A $3.3 million decrease in external service costs at Big Stone Plant primarily related to its fall 2018 maintenance outage.
• A $1.1 million decrease in expenses for vegetation and transmission line maintenance.
• A $0.8 million decrease in software support costs and regulatory filing fees.
• A $0.7 million reduction in employee benefits mainly related to decreased health insurance costs.
• A $0.5 million decrease in expense related to an increase in overhead cost capitalization due to increased capital spending in 2019.
• A $0.4 million decrease in pollution control expenses resulting from decreases in generation at both Coyote Station and Hoot Lake Plant during their 2019 maintenance outages.

These items were partially offset by:

• A $2.4 million increase in external service costs related to Coyote Station's 2019 extended maintenance outage.
• A $1.4 million increase in MISO transmission services expenses due to an increase in third-party multi-value projects in 2019.
• A $0.7 million increase in costs at Hoot Lake Plant due to 2019 turbine repairs
• A $0.3 million increase in conservation program expenditures in 2019.

Depreciation expense increased $4.1 million due to capital additions including the Big Stone South–Ellendale 345kV transmission line energized in February 2019, the new customer information system put in service in 2019 and other recent transmission plant upgrades.

Property tax expense increased $0.2 million due to capital additions, mainly transmission assets, in South Dakota and Minnesota.

Income tax expense increased $7.2 million mainly due to an $11.8 million increase in Electric segment income before income taxes and a $3.1 million reduction in federal PTCs related to the expiration of PTCs on Otter Tail Power Company’s Ashtabula wind farm in November of 2018.

Manufacturing

BTD Manufacturing

BTD’s revenues increased $9.5 million due to growth in parts revenue of $12.3 million from increased sales to customers in recreational vehicle, construction, industrial, agricultural, and lawn and garden end markets, partially offset by reduced sales in energy end markets. Included in the parts revenue increase is the pass through of higher material costs of $0.7 million, with the remaining increase due to $11.6 million in higher sales volume. The increase in parts revenue was partially offset by a $2.8 million (31.9%) decrease in revenue from scrap metal sales due to a 28.2% decrease in scrap metal prices.

Cost of products sold at BTD increased $8.4 million including $11.8 million in increased material costs with $11.1 million due to the increased sales volume and $0.7 million passed through to customers. The increase in material costs combined with a $0.7 million increase in overhead costs was partially offset by a $4.1 million increase in reimbursements of tooling costs from customers.

The $1.1 million increase in gross margins on sales was partially offset by a $0.1 million increase in operating expenses. BTD’s depreciation expenses decreased $0.4 million as a result of certain assets reaching the ends of their depreciable lives. BTD’s income before income tax increased $1.3 million and its income tax expense decreased by $0.1 million, resulting in a $1.4 million increase in BTD’s net income in 2019 compared with 2018.

T.O. Plastics

T.O. Plastics’ revenues decreased $0.7 million due to a $0.7 million reduction in extrusion and other industrial sales, a $0.6 million decrease in sales to a customer bringing more production in house and a $0.2 million reduction in sales of horticultural containers, partially offset by a $0.5 million increase in life science product sales and a $0.3 million increase in sales of scrap material.

Cost of products sold at T.O. Plastics increased $1.1 million mainly due to increased labor costs driven in part by increased production hours and in part by wage increases. T.O. Plastics’ gross margin percentage decreased from 2018 to 2019 as a result of a customer’s decision to bring more production in house. Operating expenses increased $0.1 million.

T.O. Plastics’ income before income tax decreased $1.9 million and its income tax expense decreased by $0.5 million, resulting in a $1.4 million decrease in net income in 2019 compared with 2018.

Plastics

Plastics revenues and net income decreased $14.6 million and $3.2 million, respectively, due to a 4.2% decrease in pounds of polyvinyl chloride (PVC) pipe sold and a 3.3% decrease in PVC pipe prices. Wet weather conditions across our sales territory negatively impacted 2019 sales along with lower demand in the Midwest and West Coast states.

Cost of products sold decreased $8.9 million due to the decrease in sales volume and a 1.9% decrease in the cost per pound of pipe sold. The decrease in pipe prices net of the decrease in costs resulted in a 7.7% decrease in gross margin per pound of PVC pipe sold. Plastics segment operating expenses decreased $0.9 million mainly due to a decrease in incentive compensation related to decreased operating income. Plastics segment depreciation expense decreased $0.3 million.

Segment income tax expense decreased $1.4 million resulting in the $3.2 million decrease in year-over-year net income in the Plastics segment.

Corporate

Corporate costs before taxes decreased $0.8 million in 2019 compared to 2018 due to:

• No contribution being made to the Otter Tail Corporation Foundation in 2019 as compared to a $2.0 million contribution commitment made at the end of 2018.
• A $1.1 million non-taxable increase in corporate-owned life insurance cash surrender value.
  
  Copyright © acrofan/Business Wire All Right Reserved