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Otter Tail Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 9, 2011 10:38AM

Otter Tail Corp. (OTTR) filed Quarterly Report for the period ended 2011-09-30. Otter Tail Corp. has a market cap of $743.9 million; its shares were traded at around $20.63 with a P/E ratio of 30.8 and P/S ratio of 0.7. The dividend yield of Otter Tail Corp. stocks is 5.8%.



Highlight of Business Operations:

Consolidated operating revenues were $315.8 million for the three months ended September 30, 2011 compared with $259.7 million for the three months ended September 30, 2010. Operating income was $17.2 million for the three months ended September 30, 2011 compared with operating income of $12.0 million for the three months ended September 30, 2010. The Company recorded diluted earnings per share from continuing operations of $0.18 for the three months ended September 30, 2011 compared with $0.11 for the three months ended September 30, 2010 and total diluted earnings per share of $0.17 for the three months ended September 30, 2011 compared with $0.16 for the three months ended September 30, 2010.

Consolidated operating revenues were $914.1 million for the nine months ended September 30, 2011 compared with $754.0 million for the nine months ended September 30, 2010. Operating income was $47.7 million for the nine months ended September 30, 2011 compared with operating income of $11.1 million for the nine months ended September 30, 2010. The Company recorded diluted earnings per share from continuing operations of $0.50 for the nine months ended September 30, 2011 compared with $(0.26) for the nine months ended September 30, 2010 and total diluted earnings per share of $0.83 for the nine months ended September 30, 2011 compared with $(0.11) for the nine months ended September 30, 2010.

Revenues from scanning and other related services decreased $5.3 million due to a 11.3% decrease in scans performed, reflecting the planned discontinuance of portable x-ray services, partially offset by a 6.0% increase in revenue per scan. Revenues from equipment sales decreased $0.5 million. The decrease in cost of goods sold includes a $1.9 million reduction in materials, service labor and repairs and maintenance costs and an $8.6 million reduction in equipment rental costs directly related to efforts by the Health Services segment to right-size its fleet of imaging assets by exercising purchase options on productive imaging assets coming off lease and not renewing leases on underutilized imaging assets. The increase in operating expenses reflects a $0.7 million gain on the sale of fixed assets in the first nine months of 2010. No comparable gain was recorded in the first nine months of 2011. The increase in depreciation expense reflects an increase in owned equipment compared with a year ago.

We believe our financial condition is strong and our cash, other liquid assets, operating cash flows, existing lines of credit, access to capital markets and borrowing ability because of investment-grade credit ratings, when taken together, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to expansion of existing businesses and development of new projects. On May 11, 2009 we filed a shelf registration statement with the Securities and Exchange Commission under which we may offer for sale, from time to time, either separately or together in any combination, equity, debt or other securities described in the shelf registration statement. On March 17, 2010, we entered into a Distribution Agreement with J.P. Morgan Securities (JPMS) under which we may offer and sell our common shares from time to time through JPMS, as our distribution agent, up to an aggregate sales price of $75 million. Equity or debt financing will be required in the period 2011 through 2015 given the expansion plans related to our Electric segment to fund construction of new rate base investments, in the event we decide to reduce borrowings under our lines of credit or refund or retire early any of our presently outstanding debt or cumulative preferred shares, to complete acquisitions or for other corporate purposes. There can be no assurance that any additional required financing will be available through bank borrowings, debt or equity financing or otherwise, or that if such financing is available, it will be available on terms acceptable to us. If adequate funds are not available on acceptable terms, our businesses, results of operations and financial condition could be adversely affected. Also, our operating cash flow and access to capital markets can be impacted by macroeconomic factors outside our control. In addition, our borrowing costs can be impacted by changing interest rates on short-term and long-term debt and ratings assigned to us by independent rating agencies, which in part are based on certain credit measures such as interest coverage and leverage ratios. Our dividend payout ratio has exceeded 100% in each of the last three years. The determination of the amount of future cash dividends to be declared and paid will depend on, among other things, our financial condition, improvement in earnings per share to levels in excess of the indicated annual dividend per share of $1.19, cash flows from operations, the level of our capital expenditures, restrictions under our credit facilities and our future business prospects. The decision to declare a quarterly dividend is reviewed quarterly by the Board of Directors. DMI is party to a $40 million receivable sales agreement whereby designated customer accounts receivable may be sold to General Electric Capital Corporation on a revolving basis. The agreement is subject to renewal in March 2012. The current discount rate is 3-month LIBOR plus 4%. Accounts receivable totaling $48.8 million were sold in the first nine months of 2011. Discounts, fees and commissions charged to operating expense for the nine months ended September 30, 2011 and 2010 were $406,000 and $152,000, respectively. The balance of receivables sold that was outstanding to the buyer as of September 30, 2011 was $20.4 million. The sales of these accounts receivable are reflected as a reduction of accounts receivable in our consolidated balance sheets and the proceeds are included in the cash flows from operating activities in our consolidated statement of cash flows. Cash provided by operating activities from continuing operations was $78.0 million for the nine months ended September 30, 2011 compared with cash provided by operating activities from continuing operations of $56.9 million for the nine months ended September 30, 2010. Cash provided by operating activities from continuing operations was $21.1 million more in the nine months ended September 30, 2011 than in the nine months ended September 30, 2010 mainly as a result of the $20 million discretionary contribution made to our pension plan in September 2010. Net cash used in investing activities of continuing operations was $68.0 million for the nine months ended September 30, 2011 compared to $60.3 million for the nine months ended September 30, 2010. The $7.7 million increase in cash used for investing activities includes a $13.5 million increase in cash used for capital expenditures at OTP, offset by a $3.5 million reduction in capital expenditures at our nonelectric companies and a $1.9 million decrease in cash used for other investments between the periods. The increase in capital expenditures at OTP is mainly related to expenditures for the Bemidji to Grand Rapids and Fargo to St. Cloud CapX2020 transmission line construction projects. Net cash used in financing activities from continuing operations increased $80.3 million in the nine months ended September 30, 2011 compared with the nine months ended September 30, 2010 mainly due to a $82.9 million decrease in short-term borrowings and checks issued in excess of cash, net of a decrease in cash used to retire long-term debt between the periods. We paid $59.2 million to retire long-term debt in the first nine months of 2010 but increased short-term borrowings by $86.4 million over the same period. Cash used to repay short-term borrowings and checks written in excess of cash totaled $50.4 million in the first nine months of 2011. The cash used to pay down short-term debt in the first nine months of 2011 came from $84.3 million in net proceeds from the sale of IPH in May 2011. 43

On March 18, 2011 we borrowed $1.5 million under a Partnership in Assisting Community Expansion loan to finance capital investments at Northern Pipe Products, Inc. (NPP), our polyvinyl chloride (PVC) pipe manufacturing subsidiary located in Fargo, North Dakota. The ten-year unsecured note bears interest at 2.54% with monthly principal and interest payments through March 2021. On April 6, 2011 we borrowed $0.5 million under a North Dakota Development Fund loan to finance additional capital investments at NPP. The seven-year unsecured note bears interest at 3.95% with monthly principal and interest payments through April 1, 2018. On July 29, 2011, OTP entered into a Note Purchase Agreement (the 2011 Note Purchase Agreement) with the purchasers named therein, pursuant to which OTP has agreed to issue to the purchasers in a private placement transaction $140 million aggregate principal amount of OTP s 4.63% Senior Unsecured Notes due December 1, 2021 (the 2021 Notes). The 2021 Notes are expected to be issued on December 1, 2011, subject to the satisfaction of certain customary conditions to closing. OTP intends to use a portion of the proceeds of the 2021 Notes to retire $90 million aggregate principal amount of OTP s 6.63% Senior Notes due December 1, 2011 (the 2011 Notes) and $10.4 million aggregate principal amount of its pollution control refunding revenue bonds due December 1, 2012. The 2011 Notes remain classified as long-term debt because OTP has made arrangements to refinance this debt with borrowings under the 2011 Note Purchase Agreement. The note purchase agreement relating to the 2011 Notes, as amended (the 2001 Note Purchase Agreement), the note purchase agreement relating to our $50 million 8.89% senior note due November 30, 2017, as amended (the Cascade Note Purchase Agreement), the note purchase agreement relating to OTP s $155 million senior unsecured notes issued in four series consisting of $33 million aggregate principal amount of 5.95% Senior Unsecured Notes, Series A, due 2017; $30 million aggregate principal amount of 6.15% Senior Unsecured Notes, Series B, due 2022; $42 million aggregate principal amount of 6.37% Senior Unsecured Notes, Series C, due 2027; and $50 million aggregate principal amount of 6.47% Senior Unsecured Notes, Series D, due 2037, as amended (the 2007 Note Purchase Agreement) and the 2011 Note Purchase Agreement each states that the applicable obligor may prepay all or any part of the notes issued thereunder (in an amount not less than 10% of the aggregate principal amount of the notes then outstanding in the case of a partial prepayment) at 100% of the principal amount prepaid, together with accrued interest and a make-whole amount. Each of the Cascade Note Purchase Agreement, the 2001 Note Purchase Agreement and the 2011 Note Purchase Agreement states in the event of a transfer of utility assets put event, the noteholders thereunder have the right to require the applicable obligor to repurchase the notes held by them in full, together with accrued interest and a make-whole amount, on the terms and conditions specified in the respective note purchase agreements. The 2007 Note Purchase Agreement and the 2011 Note Purchase Agreement each also states that OTP must offer to prepay all of the outstanding notes issued thereunder at 100% of the principal amount together with unpaid accrued interest in the event of a change of control of OTP. The 2001 Note Purchase Agreement, the 2007 Note Purchase Agreement, the Cascade Note Purchase Agreement and the 2011 Note Purchase Agreement each contains a number of restrictions on the applicable obligor and its subsidiaries. These include restrictions on the obligor s ability and the ability of the obligor s subsidiaries to merge, sell assets, create or incur liens on assets, guarantee the obligations of any other party, and engage in transactions with related parties. Our obligations under the Cascade Note Purchase Agreement are guaranteed by certain of our material subsidiaries. Cascade owned approximately 9.6% of the Company s outstanding common stock as of December 31, 2010. On June 23, 2010 we entered into Amendment No. 3 to the Cascade Note Purchase Agreement. Amendment No. 3 amends certain covenants and related definitions contained in the Cascade Note Purchase Agreement to, among other things, provide us and our material subsidiaries with additional flexibility to incur certain customary liens, make certain investments, and give certain guaranties, in each case under the circumstances set forth in Amendment No. 3. On July 29, 2010 we entered into Amendment No. 4 to the Cascade Note Purchase Agreement, which was effective June 30, 2010. The amendments contained in Amendment No. 4 permit us to exclude impairment charges and write-offs of assets from the calculation of the interest charges coverage ratio required to be maintained under the Cascade Note Purchase Agreement. 45

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