Otter Tail Corporation — Q1 2022 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2022, compared with Q1 2021. Otter Tail operates regulated electric utility, manufacturing, and PVC pipe businesses. Management cautions that seasonality means quarterly earnings are not necessarily indicative of full-year results.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenue | $374.9 million | $261.7 million | +43.3% |
| Operating income | $98.3 million | $44.2 million | +122.4% |
| Net income | $72.0 million | $30.3 million | +137.4% |
| Diluted EPS | $1.72 | $0.73 | +$0.99 |
| Operating cash flow | $45.4 million | $15.3 million | +$30.1 million |
| Capital expenditures | $28.7 million | $50.1 million | -$21.4 million |
Calculated consolidated operating margin increased to approximately 26.2% from 16.9%; net margin increased to approximately 19.2% from 11.6%. Revenue growth was led by PVC pipe pricing and higher manufacturing sales prices reflecting material costs.
- Electric: Revenue rose 5.4% to $130.4 million; segment net income was $19.2 million versus $17.6 million. Colder-than-normal weather contributed to retail demand; heating degree days were 111.8% of normal.
- Manufacturing: Revenue increased 38.4% to $105.0 million, while operating income declined 21.3% to $5.9 million. Higher steel, labor, and freight costs, lower productivity, and a 5% volume decline pressured margins.
- Plastics: Revenue increased 124.4% to $139.5 million and operating income rose to $68.9 million from $12.6 million. Strong PVC pipe prices and constrained industry inventories lifted profitability; sales volumes were consistent with the prior-year quarter.
Liquidity, debt, and balance sheet
At March 31, 2022, cash was $1.4 million, current assets were $402.4 million, and current liabilities were $373.2 million. Short-term debt was $97.8 million; long-term debt, including current maturities, had a carrying amount of $764.1 million. Total debt carrying value was $861.8 million. The company had $234.4 million available under its $340 million revolving credit facilities. It reported compliance with debt covenants. Operating cash flow exceeded capital expenditures by approximately $16.7 million, before dividends and other investing or financing items.
Operating cash flow improved year over year with higher earnings, partly offset by increased working capital and a discretionary $20 million pension contribution, double the year-earlier contribution. Dividends paid were $17.2 million, or $0.4125 per share.
Material changes, outlook, and risks
- Q1 earnings growth was concentrated in Plastics, where PVC pipe selling prices rose 125%. Management expected favorable supply-demand dynamics to persist through Q2 2022, then begin to ease in the second half as resin prices were expected to decline and demand slow. If conditions persisted, Plastics results could exceed current expectations; no specific earnings guidance was provided.
- Management said steel costs remained historically high and expected them to moderate through 2022. PVC resin and other input costs, supply constraints, shipping, and demand could affect future segment margins. The Ukraine conflict contributed to higher energy feedstock costs and PVC resin pricing pressure.
- Minnesota regulators issued a rate-case order with a $209.0 million revenue requirement, a 7.18% return on rate base, and a 9.48% allowed ROE. Final rates were expected in mid-2022; the company’s compliance filing proposed an interim-rate calculation that, if approved, could increase interim revenues by about $4.0 million.
- The utility’s resource plan proposes solar and wind additions and beginning withdrawal from its 35% ownership interest in Coyote Station by the end of 2028. The company estimated reasonably foreseeable withdrawal costs at $68.5 million; recovery and regulatory approval remain uncertain.
- Potential Coyote Station emission-control requirements under the Regional Haze Rule could require significant investment or contribute to early retirement or sale. The financial effect could be material, but the company could not estimate it. A separate FERC transmission-ROE matter had a recorded estimated customer refund liability of $2.4 million, subject to further proceedings.
- OTP planned to issue $90 million of long-term notes in May 2022, subject to closing conditions, and expected to use part of the proceeds to repay $30 million of notes maturing in August 2022.
Important facts for investors to verify
- Whether PVC pricing, resin and additive availability, and demand evolved as management expected after Q1—and how that affected Plastics margins.
- Whether the Minnesota rate-case compliance filing and proposed interim revenue adjustment were approved and when final rates took effect.
- Regulatory decisions and cost-recovery prospects related to Coyote Station, including the Regional Haze Rule and planned withdrawal costs.
- Completion and terms of the planned $90 million note issuance, upcoming maturities, and continuing covenant and liquidity headroom.
- Whether working-capital requirements, pension contributions, and capital spending continue to support cash generation and dividend capacity.