Otter Tail Corporation — Q1 2021 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2021, compared with Q1 2020. Otter Tail operates regulated electric utility, manufacturing and PVC plastics businesses. Results are seasonal and management cautions that the quarter is not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Operating revenue | $261.7 million | $234.7 million |
| Operating income | $44.2 million | $39.3 million |
| Net income | $30.3 million | $24.3 million |
| Diluted EPS | $0.73 | $0.60 |
| Cash from operations | $15.3 million | $21.8 million |
| Capital expenditures | $50.1 million | $75.1 million |
- Revenue increased 11.5%; net income rose 25.0%. Operating margin was approximately 16.9%, versus 16.7% a year earlier; net margin was approximately 11.6%, versus 10.3%.
- Revenue growth was led by Plastics (+34.0%) and Manufacturing (+10.7%); Electric revenue increased about 3.2%. Segment net income was $17.6 million Electric, $5.4 million Manufacturing and $9.1 million Plastics; Corporate recorded a $1.8 million loss.
- Cash from operations declined despite higher earnings, primarily due to working-capital needs, including higher receivables, and a $10.0 million discretionary pension contribution. Management did not anticipate further discretionary pension contributions in 2021.
- At March 31, cash was $1.2 million; total assets were $2.62 billion. Short-term debt was $134.9 million. Long-term debt principal was $767.0 million, including $140.0 million maturing in December 2021. Credit facilities had $192.5 million available, and the company reported compliance with debt covenants.
- Quarterly dividends were $0.39 per share, compared with $0.37 in Q1 2020. The effective tax rate declined to 14.8% from 18.9%, primarily reflecting production tax credits from the Merricourt wind farm.
Material changes and drivers
- Plastics: Operating income rose 68.6%. PVC pipe revenue increased on a 34% higher average price and a 1.1% increase in pounds sold. Resin supply constraints and strong demand supported prices, while higher material costs partly offset the revenue growth.
- Manufacturing: Operating income increased 10.3%, with stronger recreational vehicle, agricultural, lawn-and-garden and construction demand, and higher material and scrap prices. Energy-market sales were weaker.
- Electric: Operating income edged down 0.9%. Retail kilowatt-hour sales fell 5.7%, reflecting milder weather and continued COVID-19 effects on commercial and industrial demand. Higher transmission and wholesale revenue—including elevated wholesale prices during February cold weather—partly offset the retail decline. Merricourt added operating costs and depreciation but also generated production tax credits.
- Lower electric-sector capital spending after completion of major Merricourt and Astoria Station construction reduced investing cash outflow year over year. The company increased net short-term borrowings by $53.9 million during the quarter.
Outlook, risks and contingencies
- No specific consolidated earnings guidance was provided. Management expects 2021 capital investment to focus primarily on Electric rate-base and transmission projects; debt or equity financing may be needed during 2021–2025. The company anticipated issuing long-term debt in 2021 to refinance the $140.0 million December maturity.
- COVID-19 effects had begun to ease, but management cited uncertainty around duration and financial impact, including possible effects on utility commercial and industrial demand, bad debts, and manufacturing and plastics customer demand.
- Otter Tail recorded a $3.7 million estimated refund liability related to FERC transmission return-on-equity proceedings; the relevant order remained subject to judicial review.
- Potential Regional Haze Rule requirements at the jointly owned Coyote Station could require significant emissions-control investment or contribute to early retirement or sale. Costs and customer recovery are uncertain and could be material.
- Other cited risks include weather and extreme events, energy and materials markets, regulation and environmental requirements, customer and counterparty risks, workforce availability, cybersecurity, capital-market access and changing macroeconomic conditions.
- On May 3, 2021, after quarter-end, the company filed a shelf registration and a registration statement covering up to 1.5 million shares for its dividend reinvestment and share purchase plan.
Important facts for investors to verify
- Progress and final outcome of the Minnesota rate case, including the revised $8.2 million annual revenue increase request and interim rates.
- Refinancing terms for the $140.0 million debt maturity and subsequent short-term borrowing, liquidity and covenant headroom.
- Whether PVC resin supply, pricing and elevated margins persist, and how input costs affect Plastics and Manufacturing profitability.
- Electric retail demand, wholesale market conditions, and potential costs or regulatory outcomes tied to Coyote Station and FERC proceedings.
- Cash conversion, working-capital requirements and planned capital spending relative to dividends and financing needs.