Otter Tail Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Otter Tail operates regulated Electric, Manufacturing and Plastics businesses. Comparisons are with the corresponding 2020 periods, when COVID-19 affected demand and operations, particularly in manufacturing and plastics.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $285.6 million | $192.8 million | $547.3 million | $427.5 million |
| Operating income | $59.8 million | $27.9 million | $104.0 million | $67.2 million |
| Net income | $42.1 million | $17.0 million | $72.4 million | $41.2 million |
| Diluted EPS | $1.01 | $0.42 | $1.73 | $1.02 |
| Operating margin | 21.0% | 14.5% | 19.0% | 15.7% |
| Net margin | 14.7% | 8.8% | 13.2% | 9.6% |
Q2 revenue rose 48.2% and net income rose 147.7%; first-half revenue rose 28.0% and net income rose 75.5%. Plastics and Manufacturing drove most of the improvement, while Electric earnings increased more modestly. Merricourt wind and Astoria Station entered service in late 2020 and early 2021, respectively, adding operating costs and depreciation while supporting generation and rate-base recovery. Merricourt production tax credits also lowered the effective tax rate.
- Electric: Q2 segment operating income was $23.6 million, up 4.6%. Retail kWh sales increased 5.2%; wholesale revenue benefited from higher volumes and prices. First-half Electric operating income rose 1.6% to $50.3 million.
- Manufacturing: Q2 operating income was $8.0 million versus $0.6 million; first-half operating income was $15.5 million versus $7.5 million. Higher BTD volumes and steel-cost pass-throughs contributed, alongside fixed-cost leverage. Steel shortages and higher labor and freight costs were headwinds.
- Plastics: Q2 operating income rose to $30.5 million from $7.1 million; first-half operating income was $43.1 million versus $14.6 million. Q2 PVC pipe prices increased 73.9% and volumes 12.4%; first-half prices increased 54.8% and volumes 6.9%. Selling-price increases outpaced resin-cost increases, expanding margins.
Cash flow, debt and liquidity
- First-half operating cash flow was $68.6 million, down from $73.9 million. Capital expenditures were $76.9 million, versus $119.8 million; operating cash flow less capital expenditures was negative $8.3 million.
- Cash was $1.5 million at June 30. Short-term debt was $128.0 million; long-term debt principal was $767.0 million, including $140.0 million classified as current maturities. Total capitalization was $1.54 billion.
- Credit lines totaled $340 million, with $199.4 million available after outstanding borrowings and letters of credit. The facilities mature October 2024. The company reported compliance with debt covenants.
- OTP agreed to issue $230 million of senior notes in two future fundings: $140 million in November 2021 and $90 million in May 2022. Proceeds were intended primarily to refinance debt maturing in December 2021 and August 2022, and for general corporate purposes.
- First-half dividends paid were $32.4 million, or $0.78 per share. Future dividends remain subject to board review, financial condition, cash flows, investment needs and subsidiary distribution restrictions.
Outlook, risks and contingencies
- Management expected steel and resin supply constraints and elevated prices to persist through 2021, with steel prices expected to begin subsiding in 2022. It cautioned that Plastics earnings in 2022 were not expected to remain at 2021 levels given unusually favorable current market dynamics. No specific consolidated earnings or EPS guidance is provided in the filing text.
- COVID-19 effects had begun to ease through Q2 2021, but management said future impacts remained uncertain. Results are seasonal and affected by weather; interim earnings should not be taken as indicative of full-year or future results.
- The Minnesota rate case remained pending. OTP reduced its requested annual revenue increase from $14.5 million to $8.2 million; an interim increase of $6.9 million, or 3.2%, had taken effect January 1, 2021. Final outcomes could differ.
- For the FERC transmission return-on-equity proceedings, the company recorded an estimated $3.5 million customer refund liability; the relevant order remained subject to judicial review.
- Potential Regional Haze Rule requirements for Coyote Station could require significant emissions-control investment or contribute to early retirement or sale. Costs and recoverability were uncertain and could be material.
- An arbitration involving Coyote Station co-owners seeks $5.5 million plus interest over alleged coal-purchase contract breaches; a hearing was anticipated in late 2021. The filing also describes long-term energy, coal, construction and land-easement commitments.
Most important facts for investors to verify
- Whether unusually high PVC pipe prices and margins persist, and the pace of normalization as resin supply recovers.
- Whether steel availability, cost pass-throughs, production levels and labor/freight costs sustain Manufacturing’s improved results.
- The final Minnesota rate-case decision, rider recovery, and any related customer refunds or cost-recovery changes.
- Funding and use of the planned $230 million note issuances, refinancing of upcoming maturities, and continued covenant and liquidity headroom.
- Developments in Coyote Station emissions requirements and the coal-contract arbitration, including potential cost, retirement and regulatory-recovery consequences.
- Working-capital demands: receivables and inventories increased as sales volumes and prices rose, while first-half operating cash flow declined despite higher earnings.