Otter Tail Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Otter Tail operates regulated electric utility, manufacturing, and plastics businesses. Amounts below are in U.S. dollars; financial-statement amounts are generally in millions unless noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $316.3 | $235.8 | $863.6 | $663.3 |
| Operating income | $74.5 | $52.7 | $178.5 | $119.9 |
| Net income | $52.8 | $35.9 | $125.2 | $77.2 |
| Diluted EPS | $1.26 | $0.87 | $2.99 | $1.89 |
| Operating margin | 23.6% | 22.4% | 20.7% | 18.1% |
| Net margin | 16.7% | 15.2% | 14.5% | 11.6% |
| Operating cash flow | Not separately stated | Not separately stated | $154.8 | $141.3 |
| Capital expenditures | Not separately stated | Not separately stated | $117.3 | $220.6 |
Q3 revenue increased 34.2% and net income increased 46.8% year over year. For the nine months, revenue rose 30.2% and net income rose 62.1%. Results were led by PVC pipe pricing and strong manufacturing volumes and prices; electric segment operating income declined despite higher revenue.
Segments and principal drivers
- Electric: Q3 revenue increased 3.1% to $118.8 million, while operating income fell 13.4% to $32.4 million. Higher fuel, maintenance, and depreciation costs outweighed higher wholesale and transmission revenue. Nine-month operating income declined 4.9% to $82.7 million. Merricourt wind and Astoria Station entered service, and Hoot Lake Plant closed in May 2021.
- Manufacturing: Q3 revenue rose 50.3% to $90.0 million and operating income rose 23.8% to $5.9 million. Year-to-date operating income increased 75.3% to $21.4 million. Higher steel prices lifted sales prices, while labor, freight, and productivity pressures weighed on Q3 margins.
- Plastics: Q3 revenue increased 77.2% to $107.5 million and operating income increased 172.9% to $38.5 million. Year-to-date operating income rose 184.7% to $81.7 million. PVC pipe pricing increased sharply amid resin supply constraints and strong demand; Q3 pounds sold declined 13.0%.
Cash, debt, and liquidity
- Nine-month operating cash flow was $154.8 million, up $13.5 million. Higher earnings were partly offset by working-capital needs, including increased receivables and inventories. Cash and cash equivalents were $1.3 million at September 30.
- Cash used in investing was $117.1 million, down from $222.4 million in the prior-year period, principally because major electric generation construction spending had largely concluded. Financing used $37.6 million, including $48.6 million of dividends and a $16.9 million increase in short-term borrowings.
- Short-term debt was $97.9 million; current maturities of long-term debt were $170.0 million; and long-term debt, net of current maturities, was $594.6 million. Long-term debt principal outstanding was $767.0 million. The filing reports company and utility debt-to-capitalization ratios of 0.47, with covenants in compliance.
- Two revolving credit facilities total $340 million; $97.9 million was drawn and $229.0 million was available at September 30, excluding the effect of letters of credit as shown in the availability calculation. Their maturities were extended to September 30, 2026.
- OTP agreed to issue $230 million of senior notes in two tranches: $140 million expected in November 2021 and $90 million in May 2022, subject to closing conditions. The company intended to use proceeds partly to refinance debt maturing in 2021 and 2022.
Outlook, risks, and contingencies
- The filing provides no consolidated earnings guidance. Management expected elevated steel prices to continue through the rest of 2021 and into 2022. It expected PVC resin and pipe market pressures to persist through 2021 and the first half of 2022, with conditions potentially easing in the second half of 2022. These are market expectations, not guaranteed outcomes.
- Planned capital expenditures were approximately $153 million for 2021, including actual spending through September and an estimate for Q4. The company projected $1.131 billion of total capital expenditures for 2022–2026, including substantial electric generation, transmission, and distribution investment.
- OTP’s 2022 integrated resource plan proposes 150 MW of solar in 2025, 100 MW of wind in 2027, additional solar in 2033, dual-fuel capability at Astoria Station, and beginning withdrawal from its 35% Coyote Station ownership by December 31, 2028. The estimated cost of withdrawal at that date was $68.5 million; actual costs and regulatory recovery remain uncertain.
- OTP’s Minnesota rate case remained pending. Its revised request was an $8.2 million annual revenue increase; interim rates of $6.9 million annually took effect January 1, 2021. A written MPUC order was expected by the end of January 2022, with final rates anticipated by mid-2022.
- Contingencies include a recorded estimated $3.0 million liability for potential MISO transmission-rate refunds; a Westmoreland arbitration seeking $5.5 million plus interest, for which a liability was recorded but the filing text does not provide a clear value; and uncertainty over possible Coyote Station emissions-control costs or retirement. The North Dakota draft haze plan did not propose additional controls, but EPA action and final requirements were unresolved.
- Management identified uncertainty from COVID-19 and potential workforce vaccination requirements, labor availability, material shortages and inflation, customer demand, weather, regulation, energy markets, capital access, and environmental requirements. A planned Big Stone outage began in Q3 and was expected to be completed in Q4 2021.
Most important facts for investors to verify
- Whether plastics segment pricing and unusually strong margins persist as resin supply, inventories, and customer demand normalize.
- The final Minnesota rate-case outcome, timing of implementation, and any required refunds.
- Funding and refinancing of the $230 million note issuance and near-term debt maturities, alongside the large planned capital program.
- Regulatory approval, costs, and recoverability associated with the proposed Coyote Station withdrawal and future generation plans.
- Working-capital conversion and cash generation, given growth in receivables and inventories, and the outcome of the Westmoreland arbitration and other material contingencies.