Otter Tail Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Otter Tail operates regulated electric utility, manufacturing, and PVC pipe businesses. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $337.7 | $400.0 | $676.8 | $774.9 |
| Operating income | $106.1 | $121.1 | $186.7 | $219.4 |
| Net income | $82.0 | $85.9 | $144.5 | $157.9 |
| Diluted EPS | $1.95 | $2.05 | $3.44 | $3.77 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $184.5 | $175.6 |
| Capital expenditures | Not provided quarterly | Not provided quarterly | $151.5 | $70.8 |
Q2 revenue fell 15.6%, operating income 12.4%, net income 4.6%, and diluted EPS 4.9% year over year. For the first half, revenue declined 12.7%, operating income 14.9%, net income 8.5%, and diluted EPS 8.8%. Higher nonservice pension and postretirement income, other income, and a lower effective tax rate partly offset weaker operating income.
Q2 segment operating income was $25.2 million for Electric, $8.3 million for Manufacturing, and $75.0 million for Plastics. For the first half, the respective amounts were $55.3 million, $17.8 million, and $120.7 million. Plastics remained the largest contributor, despite lower results.
Financial position and liquidity
- At June 30, cash and cash equivalents were $150.6 million, up from $119.0 million at year-end 2022. Total assets were $3.094 billion and shareholders’ equity was $1.328 billion.
- Long-term debt, net, was $823.9 million; short-term debt was $50.2 million. The company reported $280.2 million available under its credit facilities, including letters of credit.
- Operating cash flow increased $8.9 million year over year, helped by no pension contribution in 2023 (versus $20.0 million in 2022) and higher regulatory liabilities. Investing cash outflow rose to $153.6 million, largely reflecting higher capital spending and the Ashtabula III wind farm acquisition.
- The company paid $36.5 million in dividends, or $0.875 per share, during the first half. Management reported compliance with debt covenants at June 30.
Material changes and management commentary
- Plastics: First-half revenue fell 33.9% and operating income fell 22.3%. Q2 pipe volumes were down 26%; first-half volumes were down 36%. Resin and other input costs also declined. Management expects Plastics earnings to remain above pre-2021 levels in 2023, with normalization expected in the second half of 2024 as industry conditions normalize.
- Electric: First-half operating income was broadly stable, up 0.9%. Q2 revenue and operating income decreased, primarily reflecting lower fuel-recovery revenue and purchased-power costs, while transmission and rider revenues increased. The company acquired the 62.4 MW Ashtabula III wind farm for $50.6 million in January 2023.
- Manufacturing: First-half operating income rose 7.2% as higher BTD sales volumes and lower steel costs were partly offset by labor costs, lower productivity, and unfavorable cost absorption. Q2 operating income declined 22.2%.
- Management’s capital expenditure plan estimates $262 million for 2023 and $1.281 billion for 2023–2027. It projects electric utility average rate base increasing from $1.748 billion in 2023 to $2.230 billion in 2027.
- The filing provides no consolidated earnings or EPS guidance. Management cautions that seasonality means interim results should not be taken as an indication of full-year or future earnings.
Risks, contingencies, and unusual items
- The EPA proposed greenhouse-gas rules that could affect the jointly owned Coyote Station and Big Stone coal plants. Compliance investment, retirement, or cost recovery could have material effects; outcomes remain uncertain.
- Otter Tail Power’s supplemental resource plan proposes potential solar and wind additions and possible withdrawal from its 35% Coyote Station ownership if major non-routine capital investment is required. The company estimated withdrawal costs of $68.5 million assuming withdrawal at the end of 2028; actual costs may differ, and recovery would require regulatory approval.
- A FERC transmission-return-on-equity proceeding remains uncertain following a court remand. The company recorded a $2.7 million estimated refund liability. A separate remand concerning transmission upgrade funding authority could also affect results.
- For the second Regional Haze Rule period, North Dakota recommended no additional Coyote Station emission controls, while EPA had expressed disagreement. The eventual requirements and potential costs are uncertain.
- Short-term variable-rate borrowing increased and carried rates of 6.48%–6.64% at June 30; management identifies higher interest rates and constrained capital access as potential liquidity pressures.
Important facts for investors to verify
- Whether PVC pipe volumes, pricing, and margins stabilize as distributors reduce inventories and the market normalizes.
- Regulatory outcomes and cost-recovery treatment for Coyote Station, proposed EPA emissions rules, and the FERC proceedings.
- Execution and funding of the planned capital program, including the projected rate-base growth and reliance on future debt financing.
- Electric segment performance under changing weather, fuel and power prices, and customer demand; confirm that covenant compliance and available credit remain adequate.