Otter Tail Corporation — Q3 2023 Form 10-Q
Business and period: Three and nine months ended September 30, 2023. Otter Tail operates regulated electric utility, manufacturing, and PVC plastics businesses. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $358.1 | $383.9 | $1,034.9 | $1,158.8 |
| Operating income | $121.1 | $116.1 | $307.8 | $335.5 |
| Net income | $92.0 | $84.2 | $236.4 | $242.2 |
| Diluted EPS | $2.19 | $2.01 | $5.63 | $5.78 |
| Operating margin | 33.8% | 30.3% | 29.7% | 29.0% |
| Net margin | 25.7% | 21.9% | 22.8% | 20.9% |
Quarterly comparison: Revenue fell 6.7%, while operating income rose 4.3% and net income rose 9.2%. Lower PVC resin and other input costs, lower utility fuel and purchased-power costs, improved postretirement benefit components, and higher investment income helped offset lower revenue.
Year-to-date comparison: Revenue declined 10.7%, operating income 8.2%, and net income 2.4%. Plastics revenue fell 26.5% and segment operating income fell 13.1%, mainly on lower sales volumes and prices. Electric operating income decreased 2.6%; Manufacturing operating income increased 6.6%. The nine-month effective tax rate was 19.7%, versus 21.5%, reflecting non-taxable life-insurance investment gains and higher production tax credits.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $318.5 million, versus $288.0 million. Capital expenditures were $229.8 million, versus $123.2 million; operating cash flow less capital expenditures was approximately $88.6 million, compared with $164.7 million.
- Cash and cash equivalents were $189.2 million at September 30, 2023, up from $119.0 million at year-end 2022. Current assets were $556.8 million and current liabilities $310.0 million.
- Long-term debt, net of issuance costs, was $824.0 million; short-term debt was $51.5 million. Cash less these debt balances was approximately $113.7 million of net debt. Short-term borrowing was at a 6.53% rate for OTP at quarter-end.
- Available revolving credit was $278.9 million, including $170.0 million under OTC and $108.9 million under OTP. The company reported compliance with debt covenants and investment-grade credit ratings.
- Dividends paid during the first nine months were $54.8 million, or $1.3125 per share. Capital expenditures were funded partly with $43.3 million of net short-term borrowings.
Material developments, outlook, and risks
- Management said PVC market conditions began stabilizing in Q3 after softer demand earlier in 2023. It expects Plastics earnings to remain elevated for the rest of 2023 and into 2024 compared with pre-2021 levels, while cautioning that market conditions remain fluid. Resin and PVC pipe prices have both declined, but pipe prices have declined more slowly, supporting margins.
- Management’s capital plan anticipates $300 million of 2023 capital expenditures and $1.319 billion for 2023–2027, including significant utility generation, transmission, and distribution investment. Projected electric utility average rate base grows from $1.746 billion in 2023 to $2.230 billion in 2027.
- On November 2, 2023, OTP filed a North Dakota general rate case requesting a $17.4 million annual revenue increase (8.4%) and interim rates of $12.4 million (6.0%); the requested interim rates were anticipated to begin January 1, 2024. This filing occurred after the September 30 reporting date.
- OTP’s resource-plan proposal includes LNG storage at Astoria Station, approximately 200 MW of solar in 2027–2028, and initial steps toward approximately 200 MW of wind in 2029. OTP also proposed withdrawing from its 35% interest in Coyote Station if a major, non-routine capital investment is required; estimated withdrawal costs were $68.5 million assuming withdrawal at year-end 2028, subject to uncertainty and regulatory approval.
- Environmental exposure includes proposed EPA greenhouse-gas rules that could affect the company’s jointly owned Coyote Station and Big Stone coal plants, and uncertainty over potential Regional Haze Rule controls at Coyote Station. Required investment, early retirement, cost recovery, or sale impacts could be material but were not estimable in the filing.
- FERC’s transmission return-on-equity proceedings remain unresolved; the company recorded a $2.7 million estimated refund liability. A separate FERC remand on transmission-upgrade self-funding could also affect results, with outcome and timing uncertain.
- A third-quarter amendment to the postretirement healthcare plan reduced the projected benefit obligation by $20.1 million. The filing states that $17.5 million of savings from the plan change will be recognized as an expense reduction over 4.8 years beginning October 2023.
- No specific consolidated EPS guidance was provided in the filing text. Management noted that seasonal conditions mean interim earnings should not be viewed as indicative of full-year or future results.
Important facts for investors to verify
- Whether PVC demand, selling prices, resin costs, and elevated segment margins continue to stabilize as management expects.
- Outcomes and timing of the North Dakota rate case, pending rider proceedings, and recovery of planned utility investment.
- Potential costs, regulatory recovery, and strategic implications of EPA emissions rules and the Coyote Station proceedings or possible withdrawal.
- Funding needs and borrowing costs as the company executes its capital plan; nine-month capital spending rose substantially year over year.
- Whether utility cash flows, subsidiary distribution restrictions, and covenant headroom support planned investment and future dividends.