Otter Tail Corporation (Nasdaq: OTTR) — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing. The company operates regulated electric utility, manufacturing, and PVC pipe businesses.
Financial results
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Operating revenue | $1,196.8 million | $890.1 million | +34.5% |
| Operating income | $249.7 million | $147.9 million | +68.9% |
| Net income | $176.8 million | $95.9 million | +84.4% |
| Diluted EPS | $4.23 | $2.34 | +80.8% |
| Net cash from operations | $231.2 million | $211.9 million | +$19.3 million |
| Capital expenditures | $171.8 million | $371.6 million | −$199.7 million |
Consolidated operating margin was approximately 20.9%, versus 16.6% in 2020; net margin was approximately 14.8%, versus 10.8%. The outsized improvement chiefly reflects exceptional PVC pipe industry conditions, not uniform growth across segments.
- Electric: Revenue rose 7.7% to $480.3 million, while operating income was essentially flat at $107.0 million. Segment net income increased 8.5% to $72.5 million. New generation investments and rate recovery supported revenue; higher fuel, operating, and depreciation costs offset gains.
- Manufacturing: Revenue increased 40.8% to $336.3 million and operating income rose 49.7% to $24.1 million, reflecting strong demand, higher sales volumes, and pass-through of higher steel costs. Higher labor, freight, and other costs were offsets.
- Plastics: Revenue increased 85.3% to $380.2 million; operating income reached $132.8 million versus $37.8 million. PVC pipe prices rose 82.1% per pound, faster than the 65.5% increase in resin and other input costs; pounds sold increased 1.7%. Segment net income was $97.8 million versus $27.6 million.
Financial position, cash flow, and capital
- Cash and equivalents were $1.5 million at year-end. Current assets were $369.4 million and current liabilities $387.7 million.
- Debt at year-end included $91.2 million of short-term borrowings and $767.0 million principal of long-term debt. Available capacity under revolving credit agreements was $235.7 million, including the effect of outstanding letters of credit. The company reported compliance with debt covenants.
- Operating cash flow increased despite working-capital use: receivables rose $61.0 million and inventory rose $54.3 million, partly offset by higher payables and liabilities.
- Dividends paid were $1.56 per share, totaling $64.9 million. In February 2022, the board raised the quarterly dividend from $0.39 to $0.4125 per share.
- Management forecast $1.13 billion of capital expenditures for 2022–2026, including $978 million for Electric. Average electric utility rate base was projected to grow from $1.575 billion in 2021 to $2.1 billion in 2026.
Material changes and notable items
- Net income rose $80.9 million year over year, led by the exceptional Plastics result and improved Manufacturing earnings. Electric operating income changed little.
- Merricourt wind entered commercial operation in December 2020 and Astoria natural-gas generation entered service in February 2021; together they represented approximately $420 million of investment. Hoot Lake coal plant retired in May 2021.
- The 2021 results benefited from constrained PVC resin and pipe supply combined with robust demand. Management expected these conditions to continue through the first quarter of 2022 and then begin to subside; the filing cautions that conditions are fluid.
- Operating cash flow improved, but liquidity remained exposed to working-capital demands from higher prices and inventory costs. Investing outflow declined substantially as major Electric construction projects neared completion.
Outlook, risks, and contingencies
- Management’s stated goal is annual EPS growth of 5%–7% over the next several years, using 2020 diluted EPS as the base. It expects long-term earnings mix of approximately 70% Electric and 30% Manufacturing and Plastics; 2021 mix was 41% Electric and 59% the other segments, reflecting unusually strong Plastics earnings.
- Electric transition goals include 30% renewable energy for customers by 2023, a 50% reduction in owned-generation carbon emissions by 2025, and a 97% reduction by 2050, each relative to the stated historical baselines. Planned resources include 49 MW Hoot Lake Solar, expected by the end of 2023, and proposed additional solar and wind generation. These plans and the proposed Coyote exit depend on regulatory approvals.
- OTP’s 2022 Integrated Resource Plan proposes beginning withdrawal from its 35% interest in Coyote Station by the end of 2028. The company estimated its share of reasonably foreseeable withdrawal costs at $68.5 million; actual costs and regulatory recovery are uncertain. The existing lignite supply agreement runs through 2040 and may involve additional termination obligations.
- EPA preliminary comments in January 2022 disagreed with North Dakota’s draft Regional Haze plan recommendation to forgo additional Coyote emissions controls. Required controls, early retirement, cost recovery, and related financial impacts remain uncertain.
- OTP’s Minnesota rate case order, issued February 1, 2022, set a $209.0 million revenue requirement and authorized a decoupling mechanism; final rates were expected in mid-2022 after compliance filings. Recovery of utility costs and returns remains subject to regulatory decisions.
- Key risks include volatile PVC resin and steel costs, reliance on two PVC resin suppliers, customer concentration within individual segments, supply-chain and labor constraints, weather, interest rates and capital-market access, cybersecurity, and environmental regulation. COVID-19 effects and possible workforce mandates remained uncertain.
- The company reported $2.5 million of estimated customer refunds related to FERC transmission return-on-equity proceedings. The Westmoreland arbitration was settled without a material 2021 impact. Other pending matters were not expected to be material, except that RHR outcomes could be material and were not estimable.
Most important facts for investors to verify
- Whether Plastics earnings and margins normalize as management expected after the extraordinary 2021 supply-demand imbalance.
- Actual 2022 earnings growth against the 5%–7% goal and the extent to which Electric rate-base returns offset cost inflation.
- Regulatory approvals, capital costs, and recovery treatment for the Minnesota rate case, renewable projects, and proposed Coyote withdrawal.
- Working-capital conversion and cash generation as receivables and inventory unwind, alongside planned capital spending and debt refinancing.
- Customer and supplier concentration, including the reliance on two PVC resin vendors and the substantial segment revenue shares from a limited number of customers.
The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2021.