Otter Tail Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; compared with the three months ended March 31, 2022 unless otherwise noted. Otter Tail operates regulated electric utility, manufacturing, and PVC plastics businesses. Management cautions that seasonal results should not be taken as indicative of full-year results.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $339.1 million | $374.9 million | Down 9.6% |
| Operating income | $80.7 million | $98.3 million | Down 17.9% |
| Net income | $62.5 million | $72.0 million | Down 13.2% |
| Diluted EPS | $1.49 | $1.72 | Down $0.23 |
| Operating cash flow | $55.6 million | $45.4 million | Up $10.1 million |
| Capital expenditures | $98.1 million | $28.7 million | Up substantially |
Revenue and earnings changes chiefly reflected lower PVC pipe volumes and lower manufacturing material prices. Electric segment revenue and operating income rose, while Manufacturing operating income improved and Plastics operating income declined.
Segment results
- Electric: Revenue $151.9 million, up 16.5%; operating income $30.1 million, up 7.7%. Retail kWh sales increased 7.9%. Purchased-power costs rose 103.7%, partly reflecting a Big Stone Plant outage and higher market prices and demand; fuel recovery revenue also increased.
- Manufacturing: Revenue $106.8 million, up 1.7%; operating income $9.5 million, up 60.2%. Higher BTD sales volumes and lower steel-related material costs contributed to the improvement.
- Plastics: Revenue $80.4 million, down 42.4%; operating income $45.7 million, down 33.7%. PVC pipe volumes fell 46% as customers reduced inventories; selling price per pound was up 7% year over year, while resin and other input costs were down 20%.
Cash, debt and liquidity
- Cash and equivalents were $104.1 million at March 31, 2023, down from $119.0 million at December 31, 2022.
- Net cash used in investing was $100.4 million, including capital spending and the $50.6 million purchase of the Ashtabula III wind farm. Net cash provided by financing was $29.9 million, including $52.7 million of net short-term borrowings and $18.3 million of dividends paid.
- Short-term debt was $60.9 million, versus $8.2 million at year-end; long-term debt, net of issuance costs, was $823.9 million. The filing reports $827.0 million of long-term debt principal outstanding.
- Credit facilities totaled $340 million, with $269.6 million available at quarter-end, including letters of credit. The company reported compliance with debt covenants and said it believes available liquidity and capital-market access are adequate.
- Quarterly dividend paid: $0.4375 per share. Future dividends remain subject to board review and regulatory, statutory, and financing restrictions.
Material changes and notable items
- Ashtabula III, a 62.4-MW wind farm, was acquired January 3 for $50.6 million. The company also assumed land easements with $4.2 million of remaining payments through terms extending to 2034.
- Nonservice postretirement benefit income was $2.4 million, versus $0.02 million in Q1 2022, benefiting net income. Management attributed the change primarily to actuarial assumptions, including a higher discount rate and expected-return assumption.
- The effective tax rate fell to 17.6% from 19.7%, primarily due to higher production tax credits from wind generation assets.
- Operating cash flow increased partly because there was no pension contribution in Q1 2023; Q1 2022 included a $20 million discretionary contribution.
Outlook, regulation and risks
- Management expects Plastics earnings to remain elevated in 2023 relative to pre-2021 levels, but expects normalization beginning in 2024 as industry supply and demand conditions normalize. PVC demand had softened through Q1 2023.
- The five-year 2023–2027 capital expenditure plan totals $1.281 billion, including $1.102 billion for Electric. The 2023 estimate is $262 million. Management increased the Electric five-year plan by about $45 million following its supplemental resource plan.
- The March 2023 supplemental resource plan proposes LNG storage at Astoria Station in 2026, about 200 MW of solar in 2027–2028, initial steps toward about 200 MW of wind in 2029, and possible withdrawal from the company’s 35% Coyote Station interest if a major non-routine capital investment is required. A modeled Coyote withdrawal cost was $68.5 million assuming withdrawal at end-2028; actual costs and regulatory recovery are uncertain.
- FERC proceedings concerning MISO transmission return on equity remain unresolved; the company recorded an estimated $2.6 million refund liability. The EPA’s response to North Dakota’s Regional Haze Rule plan could require significant Coyote Station emissions-control investment, or contribute to an uneconomic retirement or sale; effects are not estimable and could be material.
- Management identifies exposure to interest rates, capital access, weather, energy markets, input costs and inflation, customer demand, regulation, environmental requirements, operations, and cybersecurity. It reported no material changes to previously disclosed risk factors and no material changes in market-risk disclosures.
Important facts for investors to verify
- Whether PVC pipe volumes and margins follow the expected normalization path, particularly the expected 2024 earnings moderation.
- Progress, spending, and regulatory recovery for the capital plan and proposed generation additions.
- Developments in FERC’s ROE remand and EPA review of the Regional Haze Rule plan, including potential refunds, Coyote investment, retirement, or sale implications.
- Whether increased capital spending and short-term borrowing affect liquidity, financing costs, covenant headroom, or dividends.
- The extent to which Q1 earnings depended on postretirement actuarial gains and production tax credits, and whether those benefits recur.