Otter Tail Corporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 15, 2023. The filing reports annual results, not a standalone fourth-quarter summary. Otter Tail operates regulated electric utility, manufacturing, and PVC pipe businesses.
Financial results
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Operating revenue | $1,460.2 million | $1,196.8 million | +22.0% |
| Operating income | $390.4 million | $249.7 million | +56.4% |
| Net income | $284.2 million | $176.8 million | +60.8% |
| Diluted EPS | $6.78 | $4.23 | +60.3% |
| Cash from operations | $389.3 million | $231.2 million | +$158.1 million |
| Capital expenditures | $171.1 million | $171.8 million | -$0.7 million |
| Cash and equivalents at year-end | $119.0 million | $1.5 million | +$117.5 million |
| Long-term debt, net | $823.8 million | $734.0 million | +$89.8 million |
Operating margin was approximately 26.7%, versus 20.9% in 2021; net margin was approximately 19.5%, versus 14.8%. Operating cash flow less capital expenditures was approximately $218.2 million. The company paid $1.65 per share in dividends for 2022, totaling $68.8 million. On February 3, 2023, the board raised the quarterly dividend from $0.4125 to $0.4375 per share.
Segment performance
- Electric: Revenue rose 14.4% to $549.7 million; operating income increased 5.8% to $113.1 million. Higher retail sales, fuel recovery, a new North Dakota commercial load, and favorable weather supported results. Higher purchased-power costs, including costs associated with plant outages, weighed on earnings.
- Manufacturing: Revenue rose 18.3% to $398.0 million; operating income increased 20.5% to $29.1 million. Higher volumes and pricing offset increased material, labor, and overhead costs.
- Plastics: Revenue rose 34.8% to $512.5 million; operating income nearly doubled to $264.6 million. PVC pipe selling prices rose 66%, while sales volume fell 19%. The segment generated $195.4 million of net income, compared with $97.8 million in 2021.
Material changes and financial position
- Record consolidated net income increased 60.8%; management attributed exceptional results principally to extraordinary PVC pipe market conditions, alongside growth in all three segments.
- Plastics’ unusually high earnings reflected resin supply constraints, strong demand, low industry inventories, and pipe price increases that outpaced resin cost increases. Conditions softened in the second half of 2022.
- Year-end cash rose sharply as operating cash flow increased and short-term borrowings were repaid. The company had $8.2 million of short-term debt and $823.8 million of long-term debt, net. Unused availability under its credit facilities was $322.2 million, subject to facility terms.
- 2022 financing included $90 million of new long-term debt, $30 million of debt repayment, and $83.0 million of net short-term debt repayments. Debt covenants were met at year-end; investment-grade ratings were reported with stable outlooks.
- Net regulatory assets were $119.7 million and regulatory liabilities were $261.8 million at year-end. Regulatory cost recovery and rate decisions are significant to the utility’s reported results.
Outlook, risks, and contingencies
- Management expects Plastics earnings to decline in 2023 but remain above historical levels, then normalize in 2024 as PVC industry supply and demand conditions normalize. Timing and degree of normalization are uncertain.
- The company targets annual EPS growth of 5%–7%, using 2024 as the base year. Management expects earnings mix to move toward approximately 65% Electric and 35% Manufacturing and Plastics beginning in 2024.
- Planned capital expenditures for 2023–2027 total approximately $1.236 billion, including $1.057 billion in Electric. Management projects average Electric rate base growth from $1.624 billion in 2022 to $2.210 billion in 2027.
- OTP’s updated 2022 Integrated Resource Plan was expected in March 2023. Updated resource modeling, including MISO’s seasonal resource adequacy requirements and Inflation Reduction Act provisions, could change investment plans and the potential plan to withdraw from its 35% interest in Coyote Station by the end of 2028. The filing estimates reasonably foreseeable withdrawal costs at $68.5 million, subject to uncertainty and regulatory recovery.
- Key risks include utility rate and cost-recovery decisions; environmental requirements at coal-fired Coyote Station, including EPA action on the Regional Haze Rule; weather and plant outages; inflation, labor and supply-chain pressures; concentration among certain segment customers; and commodity exposure, especially PVC resin. In 2022, all PVC resin needs were sourced from two vendors.
- Other notable matters include a $2.6 million estimated refund liability related to a contested FERC transmission return-on-equity proceeding, and OTP’s January 2023 purchase of the 62.4 MW Ashtabula III wind farm for $50.6 million. The Coyote coal supply agreement extends to 2040 and includes potential termination and mine-related obligations.
- The filing states the independent auditor found the financial statements fairly presented under U.S. GAAP and internal control over financial reporting effective. Rate regulation was identified as a critical audit matter because of management judgments about future cost recovery and customer refunds.
Important facts for investors to verify
- Whether PVC pipe prices, margins, volumes, and resin costs normalize as management expects, and how that affects 2023–2024 earnings and cash flows.
- Updated 2022 IRP decisions, regulatory approvals, and the investment and recovery implications of any Coyote Station withdrawal or continued operation.
- EPA action on the North Dakota Regional Haze plan and any resulting Coyote Station emissions-control spending, retirement risk, or rate recovery.
- Execution and regulatory recovery of the five-year capital program, including planned renewable generation and transmission investments.
- Customer concentration, labor and supply availability, and available liquidity and covenant headroom as market conditions change.