Otter Tail Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Otter Tail operates regulated Electric, Manufacturing, and Plastics businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $383.9 | $316.3 | $1,158.8 | $863.6 |
| Operating income | $116.1 | $74.5 | $335.5 | $178.5 |
| Net income | $84.2 | $52.8 | $242.2 | $125.2 |
| Diluted EPS | $2.01 | $1.26 | $5.78 | $2.99 |
| Operating margin | 30.3% | 23.6% | 28.9% | 20.7% |
| Net margin | 21.9% | 16.7% | 20.9% | 14.5% |
Margins are calculated as operating income or net income divided by revenue. Nine-month operating cash flow was $288.0 million, versus $154.8 million; capital expenditures were $123.2 million, versus $117.3 million. Operating cash flow less capital expenditures was $164.7 million, compared with $37.4 million.
- Q3 segment net income: Electric $24.8 million (up from $22.5 million); Manufacturing $6.2 million (up from $4.2 million); Plastics $56.0 million (up from $28.4 million); Corporate loss $2.8 million (versus $2.4 million).
- Balance sheet and liquidity: Cash was $73.0 million at September 30, compared with $1.5 million at year-end 2021. Current assets were $460.5 million and current liabilities $241.9 million. No short-term debt was outstanding; $330.1 million was available under credit facilities, net of letters of credit.
- Debt and equity: Long-term debt, net, was $823.8 million; principal outstanding was $827.0 million. Shareholders’ equity was $1,184.0 million. The company reported compliance with debt covenants.
- Dividends: $51.6 million, or $1.2375 per share, was paid in the first nine months.
Material changes and drivers
- Q3 revenue grew 21.4% and net income 59.7% year over year. For the first nine months, revenue grew 34.2% and net income 93.5%.
- Plastics was the principal earnings driver: Q3 revenue rose 32.4% and operating income 96.6%. PVC pipe prices were up 57%, while sales volume fell 15% as demand softened and customers worked through inventory.
- Manufacturing Q3 revenue increased 9.8% and operating income 42.7%, helped by higher BTD volumes and T.O. Plastics demand; lower steel and scrap prices affected revenue and material economics.
- Electric Q3 revenue increased 20.2% and operating income 11.0%. Higher fuel recovery revenue and commercial and industrial sales were partly offset by higher fuel, purchased power, maintenance, and transmission costs.
- Nine-month cash from operations increased primarily with higher earnings and lower working-capital needs. The company issued $90 million of long-term debt in May, repaid $30 million of maturing debt, and repaid $91.2 million of short-term borrowings on a net basis.
Outlook, risks, and unusual items
- Management expected Plastics earnings to remain elevated relative to historical levels through year-end 2022 and into 2023, with normalization expected beginning in 2024 as supply and demand conditions normalize. No specific full-year EPS guidance is provided in the supplied filing text.
- Steel and scrap prices were expected to decline modestly in Q4 2022 and approach historical levels by year-end. Management cautioned that Manufacturing and Plastics market conditions are fluid.
- The company anticipated $1.236 billion of capital expenditures across 2023–2027, including $1.057 billion in Electric. It reported estimated 2022 capital expenditures of $184 million. Plans were revised in light of market and regulatory changes.
- OTP exercised its option to acquire the 62.4 MW Ashtabula III wind farm for $49.7 million, subject to adjustments and closing conditions; closing was expected in January 2023.
- A court vacated a FERC transmission-return-on-equity order and remanded the matter. Otter Tail recorded an estimated $2.5 million refund liability; the ultimate outcome and timing remain uncertain.
- Potential Regional Haze Rule requirements at Coyote Station could require significant emissions-control investment, or contribute to early retirement or sale of the company’s interest. Cost recovery would require regulatory approval; the potential financial effect could be material and is not estimable.
- OTP’s resource plan includes proposed generation and transmission investments and a potential withdrawal from Coyote Station by year-end 2028. The company estimated foreseeable withdrawal costs of $68.5 million, subject to substantial uncertainty; updated resource modeling was planned for March 2023.
- On October 31, 2022, credit facilities were amended to extend maturity to October 29, 2027 and replace LIBOR with SOFR; management did not expect the benchmark change to materially affect results or cash flows.
- Management cited inflation, interest rates and capital access, weather, commodity and energy prices, supply constraints, regulation, environmental requirements, and operational risks among factors that could affect results. Interim earnings are seasonal and should not be treated as an indication of full-year results.
Important facts for investors to verify
- How much future earnings and cash generation depend on unusually strong PVC pipe pricing, and whether demand, prices, or margins normalize faster than management expects.
- Whether the $1.236 billion 2023–2027 capital program, including utility investments, is funded on acceptable terms and translates into approved rate-base recovery.
- Regulatory outcomes and potential costs for the FERC ROE remand, Coyote Station emissions requirements and resource-plan decisions, and the Ashtabula III acquisition.
- Whether higher purchased-power, fuel, labor, material, and financing costs can be recovered or offset without materially reducing margins or liquidity.
- That the company reported $330.1 million of available credit at quarter-end, covenant compliance, and no short-term borrowings at that date; also review the facilities’ post-quarter amendment terms.