Otter Tail Corporation — Q2 2022 Form 10-Q
Business context and reporting period. Otter Tail is a diversified company with regulated electric utility, manufacturing and PVC pipe businesses. This unaudited filing covers the quarter and six months ended June 30, 2022; results may not indicate full-year performance because the businesses are seasonal.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $400.0 million | $285.6 million | $774.9 million | $547.3 million |
| Operating income | $121.1 million | $59.8 million | $219.4 million | $104.0 million |
| Net income | $85.9 million | $42.1 million | $157.9 million | $72.4 million |
| Diluted EPS | $2.05 | $1.01 | $3.77 | $1.73 |
| Operating margin | 30.3% | 20.9% | 28.3% | 19.0% |
Q2 revenue increased 40.1%, operating income 102.4% and net income 104.3% year over year. For the first half, revenue rose 41.6% and net income 118.2%. The margin figures are calculated as operating income divided by operating revenue.
- Segment results, Q2: Electric revenue was $130.9 million and operating income $26.9 million; Manufacturing revenue was $103.2 million and operating income $10.7 million; Plastics revenue was $165.9 million and operating income $86.6 million.
- Primary earnings driver: Plastics operating income rose $56.0 million in Q2 and $112.3 million in the first half, benefiting from sharply higher PVC pipe prices. Q2 pipe price per pound rose 86%, while sales volume fell 6%.
- Manufacturing: Higher steel costs passed through to customers lifted revenue, but higher input costs also increased cost of products sold. Q2 operating income increased 34.1%.
- Electric: Higher fuel recovery revenue, customer demand and interim rate revenue lifted sales. Increased purchased-power costs, including costs associated with a planned Coyote Station outage, partly offset the improvement.
Cash flow, debt and liquidity
- First-half operating cash flow was $175.6 million, compared with $68.6 million a year earlier. Capital expenditures were $70.8 million, versus $76.9 million.
- Cash and cash equivalents were $62.0 million at June 30, 2022, compared with $1.5 million at year-end 2021. Receivables increased to $225.8 million from $175.0 million.
- Long-term debt principal was $857.0 million, up from $767.0 million at year-end; short-term debt was zero at quarter-end. The company issued $90.0 million of 3.77% notes due 2052, partly to repay short-term borrowing and fund capital needs.
- Available capacity under credit agreements was $332.2 million, after letters of credit. The company reported compliance with debt covenants. Its OTC and OTP debt-to-capitalization ratios were 0.43 and 0.48, respectively, against a 0.60 maximum.
- First-half dividends paid were $34.4 million, or $0.825 per share. Future dividends remain subject to board review, financial performance, cash needs and restrictions.
Outlook, management commentary and risks
- Management expected Plastics earnings to remain elevated relative to historical levels through the end of 2022 and into 2023, with normalization beginning in 2024 as industry supply and demand conditions normalize. PVC resin prices were expected to start declining in the second half of 2022. These are expectations, not assured outcomes.
- Steel prices had begun declining near the end of Q2; management expected them to moderate but remain above historical levels through 2022. The company noted that steel, scrap metal, PVC resin and other input markets remain volatile.
- The Minnesota rate case final order set a $209.0 million revenue requirement, a 7.18% return on rate base and a 9.48% allowed return on equity. Final rates took effect July 1, 2022; interim rate refunds were expected to be applied to customer bills in Q3. The rate-case compliance filing produced a $4.1 million revenue increase in Q2.
- OTP exercised its option to acquire the 62.4 MW Ashtabula III wind farm for $49.7 million, subject to adjustments, customary closing conditions and regulatory approval. Closing was anticipated in January 2023.
- Potentially material uncertainty remains around Coyote Station. EPA comments questioned North Dakota’s draft plan to require no additional regional-haze controls; significant control investment, early retirement or sale could result, and cost recovery would require regulatory approval. OTP’s resource plan estimates $68.5 million of reasonably foreseeable costs for a possible 2028 withdrawal, subject to uncertainty and approval.
- Other disclosed risks include weather and extreme events, inflation and labor availability, fuel and energy-market costs, regulation and environmental requirements, access to capital, customer demand, cyber threats and manufacturing-facility risks. Management reported no material change in disclosed risk factors and no material change in market-risk disclosures.
- The effective tax rate rose to 23.2% in Q2 from 16.5%, and to 21.6% for the first half from 15.8%, largely because higher pretax income was not matched by proportional increases in tax credits and other tax benefits.
Important facts for investors to verify
- Whether unusually strong PVC pipe pricing and Plastics profitability persist, and how quickly margins normalize as supply and demand conditions change.
- Actual PVC resin, steel and scrap prices, production constraints, sales volumes and customer demand.
- Regulatory decisions and cost implications for Coyote Station, including regional-haze requirements and any future withdrawal or cost recovery.
- Completion, approval and financing of the Ashtabula III acquisition, and execution of planned capital expenditure and debt financing.
- Timing and customer-bill impact of Minnesota interim rate refunds, and realized effects of new rates and approved or pending riders.
- Working-capital movements, cash conversion, debt levels, covenant compliance and the capacity to sustain dividends while funding investment.