Otter Tail (OTTR) - 2023 Q2 - Quarterly Report

Definitions The report uses various abbreviations and acronyms to streamline communication - The report uses various abbreviations and acronyms, such as AMDT (Advanced Meter and Distribution Technology), MISO (Midcontinent Independent System Operator, Inc.), OTC (Otter Tail Corporation), and OTP (Otter Tail Power Company), to streamline communication[5][6] Forward-Looking Information Forward-looking statements are subject to various risks including investments, regulations, and macroeconomic conditions - Forward-looking statements are identified by words like "anticipate," "believe," "expect," "plan," and "will," and are subject to risks including future investments, capital expenditures, rate base levels, weather patterns, credit risk, government regulation, climate change, and macroeconomic conditions[7] PART I. Financial Information ITEM 1. Financial Statements This section presents unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes Consolidated Balance Sheets This section provides a snapshot of the company's assets, liabilities, and equity at specific points in time Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Total Assets | $3,093,986 | $2,901,661 | $192,325 | 6.6% | | Total Current Assets | $524,112 | $452,752 | $71,360 | 15.8% | | Total Liabilities | $941,606 | $860,523 | $81,083 | 9.4% | | Total Shareholders' Equity | $1,328,439 | $1,217,317 | $111,122 | 9.1% | Consolidated Statements of Income This section details the company's revenues, expenses, and net income over specific reporting periods Consolidated Income Statement Highlights (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------- | :------- | :------- | :--------- | :--------- | | Total Operating Revenues | $337,716 | $400,040 | $(62,324) | (15.6)% | | Total Operating Expenses | $231,663 | $278,974 | $(47,311) | (17.0)% | | Operating Income | $106,053 | $121,066 | $(15,013) | (12.4)% | | Net Income | $81,969 | $85,937 | $(3,968) | (4.6)% | | Diluted EPS | $1.95 | $2.05 | $(0.10) | (4.9)% | Consolidated Income Statement Highlights (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------- | :------- | :------- | :--------- | :--------- | | Total Operating Revenues | $676,797 | $774,944 | $(98,147) | (12.7)% | | Total Operating Expenses | $490,074 | $555,578 | $(65,504) | (11.8)% | | Operating Income | $186,723 | $219,366 | $(32,643) | (14.9)% | | Net Income | $144,450 | $157,940 | $(13,490) | (8.5)% | | Diluted EPS | $3.44 | $3.77 | $(0.33) | (8.8)% | Consolidated Statements of Comprehensive Income This section presents net income and other comprehensive income components, reflecting total changes in equity Consolidated Comprehensive Income Highlights (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income | $81,969 | $85,937 | $144,450 | $157,940 | | Total Other Comprehensive Income (Loss) | $(88) | $32 | $(34) | $(389) | | Total Comprehensive Income | $81,881 | $85,969 | $144,416 | $157,551 | Consolidated Statements of Shareholders' Equity This section outlines changes in the company's equity, including common shares, retained earnings, and dividends Consolidated Shareholders' Equity Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :-------------------------- | :------------ | :---------------- | :--------- | :--------- | | Common Shares Outstanding | 41,710,521 | 41,631,113 | 79,408 | 0.2% | | Total Shareholders' Equity | $1,328,439 | $1,217,317 | $111,122 | 9.1% | | Retained Earnings (6 months) | $693,138 | $585,212 | $107,926 | 18.4% | | Common Dividends Paid (6 months) | $(36,524) | $(34,372) | $(2,152) | 6.3% | Consolidated Statements of Cash Flows This section reports cash generated and used by operating, investing, and financing activities Consolidated Cash Flow Highlights (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------------ | :------- | :------- | :--------- | :--------- | | Net Cash Provided by Operating Activities | $184,497 | $175,630 | $8,867 | 5.0% | | Net Cash Used in Investing Activities | $(153,625) | $(73,895) | $(79,730) | 107.9% | | Net Cash Provided by (Used in) Financing Activities | $710 | $(41,283) | $41,993 | (101.7)% | | Cash and Cash Equivalents at End of Period | $150,578 | $61,989 | $88,589 | 142.9% | Condensed Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements 1. Summary of Significant Accounting Policies This section outlines the key accounting principles and methods used in preparing the financial statements - Otter Tail Corporation operates in three segments: Electric (regulated utility), Manufacturing (metal fabrication, plastic products), and Plastics (PVC pipe)[14] - Interim financial statements are unaudited and do not include all GAAP information; results are not indicative of future full-year performance due to seasonality and other factors[15][16] 2. Segment Information This section provides financial data broken down by the company's operating segments: Electric, Manufacturing, and Plastics Segment Operating Revenue (Three Months Ended June 30, in thousands) | Segment | 2023 | 2022 | Change ($) | Change (%) | | :------------ | :------- | :------- | :--------- | :--------- | | Electric | $113,763 | $130,949 | $(17,186) | (13.1)% | | Manufacturing | $102,475 | $103,196 | $(721) | (0.7)% | | Plastics | $121,478 | $165,895 | $(44,417) | (26.8)% | | Total | $337,716 | $400,040 | $(62,324) | (15.6)% | Segment Net Income (Loss) (Three Months Ended June 30, in thousands) | Segment | 2023 | 2022 | Change ($) | Change (%) | | :------------ | :------- | :------- | :--------- | :--------- | | Electric | $19,634 | $18,858 | $776 | 4.1% | | Manufacturing | $5,969 | $7,555 | $(1,586) | (21.0)% | | Plastics | $55,392 | $63,959 | $(8,567) | (13.4)% | | Corporate | $974 | $(4,435) | $5,409 | (121.9)% | | Total | $81,969 | $85,937 | $(3,968) | (4.6)% | Identifiable Assets by Segment (in thousands) | Segment | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :------------ | :------------ | :---------------- | :--------- | :--------- | | Electric | $2,446,293 | $2,351,961 | $94,332 | 4.0% | | Manufacturing | $260,050 | $245,869 | $14,181 | 5.8% | | Plastics | $177,470 | $126,318 | $51,152 | 40.5% | | Corporate | $210,173 | $177,513 | $32,660 | 18.4% | | Total | $3,093,986 | $2,901,661 | $192,325 | 6.6% | 3. Revenue This section details the company's operating revenues, categorized by segment and source Operating Revenues by Segment and Source (Three Months Ended June 30, in thousands) | Revenue Source | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Electric Segment | $113,763 | $130,949 | $(17,186) | (13.1)% | | Retail | $93,715 | $113,603 | $(19,888) | (17.5)% | | Transmission | $14,829 | $11,697 | $3,132 | 26.8% | | Wholesale | $2,670 | $3,537 | $(867) | (24.5)% | | Manufacturing Segment | $102,475 | $103,196 | $(721) | (0.7)% | | Metal Parts and Tooling | $89,396 | $88,296 | $1,100 | 1.2% | | Plastics Segment (PVC Pipe) | $121,478 | $165,895 | $(44,417) | (26.8)% | | Total Operating Revenue | $337,716 | $400,040 | $(62,324) | (15.6)% | 4. Select Balance Sheet Information This section provides specific details on key balance sheet accounts, including receivables, inventories, and investments Receivables and Allowance for Credit Losses (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Total Receivables | $197,165 | $146,041 | $51,124 | 35.0% | | Allowance for Credit Losses | $2,214 | $1,648 | $566 | 34.3% | | Receivables, net | $194,951 | $144,393 | $50,558 | 35.0% | Inventories (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :-------------------------- | :------------ | :---------------- | :--------- | :--------- | | Raw Material, Fuel and Supplies | $73,314 | $70,374 | $2,940 | 4.2% | | Work in Process | $29,326 | $31,766 | $(2,440) | (7.7)% | | Finished Goods | $41,801 | $43,812 | $(2,011) | (4.6)% | | Total Inventories | $144,441 | $145,952 | $(1,511) | (1.0)% | Investments (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Corporate-Owned Life Insurance Policies | $39,352 | $38,991 | $361 | 0.9% | | Corporate and Government Debt Securities | $8,926 | $8,761 | $165 | 1.9% | | Money Market Funds | $4,069 | $1,560 | $2,509 | 160.8% | | Mutual Funds | $7,505 | $5,503 | $2,002 | 36.4% | | Total Investments | $59,882 | $54,845 | $5,037 | 9.2% | 5. Regulatory Matters This section details the company's regulatory assets and liabilities, reflecting the impact of regulatory decisions Regulatory Assets (in thousands) | Regulatory Asset | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Total Current Regulatory Assets | $19,058 | $24,999 | $(5,941) | (23.8)% | | Total Long-Term Regulatory Assets | $96,128 | $94,655 | $1,473 | 1.6% | Regulatory Liabilities (in thousands) | Regulatory Liability | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Total Current Regulatory Liabilities | $41,743 | $17,300 | $24,443 | 141.3% | | Total Long-Term Regulatory Liabilities | $245,935 | $244,497 | $1,438 | 0.6% | 6. Short-Term and Long-Term Borrowings This section outlines the company's debt structure, including short-term credit facilities and long-term obligations Short-Term Debt and Credit Facilities (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | OTP Credit Agreement Outstanding | $50,197 | $8,204 | $41,993 | 511.9% | | Total Borrowing Limit | $340,000 | $340,000 | $0 | 0.0% | | Total Amount Available | $280,230 | $322,223 | $(41,993) | (13.0)% | Long-Term Debt (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Total Long-Term Debt (Principal) | $827,000 | $827,000 | $0 | 0.0% | | Total Long-Term Debt, Net | $823,941 | $823,821 | $120 | 0.0% | - As of June 30, 2023, OTC and OTP were in compliance with all financial covenants, including maximum debt to total capitalization ratio (0.60 to 1.00), minimum interest and dividend coverage ratio (1.50 to 1.00), and maximum priority indebtedness[31] 7. Employee Postretirement Benefits This section details the costs and funding status of the company's pension and postretirement benefit plans Net Periodic Benefit Cost (Income) (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Pension Benefits (Pension Plan) | $(1,445) | $776 | $(2,221) | (286.2)% | | Pension Benefits (ESSRP) | $491 | $527 | $(36) | (6.8)% | | Postretirement Benefits | $(612) | $177 | $(789) | (445.8)% | - The company made no discretionary contributions to its Pension Plan during the six months ended June 30, 2023, compared to a $20.0 million contribution in the same period of 2022, due to the plan's funded status[33] 8. Income Taxes This section reconciles the company's effective tax rate, detailing the impact of various tax adjustments Effective Tax Rate Reconciliation (Three Months Ended June 30) | Metric | 2023 | 2022 | | :-------------------------------- | :------- | :------- | | Income Taxes at Federal Statutory Rate | 21.0% | 21.0% | | State Taxes on Income, Net of Federal Tax | 5.0% | 5.0% | | Production Tax Credits (PTCs) | (4.5)% | (4.2)% | | Corporate-Owned Life Insurance | (0.5)% | 0.8% | | Effective Tax Rate | 19.7% | 23.2% | Effective Tax Rate Reconciliation (Six Months Ended June 30) | Metric | 2023 | 2022 | | :-------------------------------- | :------- | :------- | | Income Taxes at Federal Statutory Rate | 21.0% | 21.0% | | State Taxes on Income, Net of Federal Tax | 5.0% | 5.0% | | Production Tax Credits (PTCs) | (5.2)% | (4.3)% | | Corporate-Owned Life Insurance | (0.5)% | 0.6% | | Effective Tax Rate | 18.8% | 21.6% | 9. Commitments and Contingencies This section discloses the company's contractual obligations, legal proceedings, and potential future liabilities - The company assumed 51 land easements with remaining payments of $4.1 million extending into 2034, related to the Ashtabula III wind farm purchase[35] - A FERC order on transmission rates' return on equity (ROE) was vacated, leading to a deferred refund liability of $2.7 million as of June 30, 2023, with significant uncertainty on the final outcome[36][37] - Compliance with the Regional Haze Rule for Coyote Station may require significant emission control investments or early retirement/sale of the plant, with uncertain but potentially material financial effects subject to regulatory approval[38][39][40] - Judicial remand on FERC's unilateral funding authority for transmission upgrades could impact OTP's financial results, as it has self-funded previous upgrades and recovers costs from generators[41][42] 10. Stockholders' Equity This section details changes in stockholders' equity, including share issuances, dividends, and regulatory restrictions - The company has a shelf registration statement (expires May 2024) for equity, debt, or other securities, and a second registration statement for up to 1,500,000 common shares under an Automatic Dividend Reinvestment and Share Purchase Plan[45][46] - Dividend payments are restricted by credit agreements (upon default) and MPUC requirements for OTP to maintain an equity-to-total-capitalization ratio between 47.5% and 58.0%; as of June 30, 2023, OTP's ratio was 53.8%[47][49] 11. Accumulated Other Comprehensive Income (Loss) This section presents the components of accumulated other comprehensive income, reflecting non-owner changes in equity Changes in Accumulated Other Comprehensive Income (Loss) (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Balance, Beginning of Period | $969 | $(6,945) | $915 | $(6,524) | | Total Other Comprehensive Income (Loss) | $(88) | $32 | $(34) | $(389) | | Balance, End of Period | $881 | $(6,913) | $881 | $(6,913) | 12. Share-Based Payments This section details the company's share-based compensation plans, including restricted stock and performance awards Stock Compensation Expense (in thousands) | Period | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Three Months Ended June 30 | $1,200 | $600 | $600 | 100.0% | | Six Months Ended June 30 | $6,500 | $5,500 | $1,000 | 18.2% | - Restricted stock awards vest ratably over three or four years or cliff vest after four years, with accelerated vesting in certain circumstances like retirement[52] - Stock performance awards for executive officers vest after a three-year performance period, with the number of shares awarded ranging from zero to 150% of the target based on total shareholder return relative to peers and return on equity[53] 13. Earnings Per Share This section presents basic and diluted earnings per share, reflecting profitability per common share Weighted-Average Common Shares Outstanding (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic | 41,678 | 41,597 | 41,655 | 41,573 | | Diluted | 42,053 | 41,944 | 42,035 | 41,907 | 14. Derivative Instruments This section describes the company's use of derivative instruments to manage market risks and their fair value - OTP uses derivative instruments (pay-fixed, receive-variable swap agreements) to manage market energy price variability, with an aggregate notional amount of 195,400 MWh of electricity outstanding as of June 30, 2023[58][59] Fair Value of Derivative Instruments (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Fair Value of Derivative Instruments | $1,728 | $7,130 | $(5,402) | (75.8)% | - Gains and losses from derivative settlements are recorded in electric purchased power and are returned to or recovered from electric customers through fuel recovery mechanisms[59] 15. Fair Value Measurements This section provides fair value measurements for assets and liabilities, categorized by valuation input levels Assets Measured at Fair Value (June 30, 2023, in thousands) | Asset | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :------- | :------- | :------- | | Money Market Funds | $4,069 | $— | $— | | Mutual Funds | $7,505 | $— | $— | | Corporate Debt Securities | $— | $1,456 | $— | | Government-Backed Debt Securities | $— | $7,470 | $— | | Total Assets | $11,574 | $8,926 | $— | Liabilities Measured at Fair Value (June 30, 2023, in thousands) | Liability | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :------- | :------- | :------- | | Derivative Instruments | $— | $1,728 | $— | | Total Liabilities | $— | $1,728 | $— | Carrying Value vs. Fair Value of Financial Instruments (June 30, 2023, in thousands) | Instrument | Carrying Amount | Fair Value | | :-------------------------------- | :-------------- | :--------- | | Cash and Cash Equivalents | $150,578 | $150,578 | | Short-Term Debt | $50,197 | $50,197 | | Long-Term Debt | $823,941 | $698,831 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial condition and operating results across segments, covering market conditions, regulatory matters, liquidity, and capital Overview of Business Segments and Market Conditions This section introduces the company's operating segments and discusses market factors influencing their performance - The company operates in three segments: Electric (regulated utility), Manufacturing (metal fabrication, plastic products), and Plastics (PVC pipe)[67] - The Plastics segment experienced extraordinary supply and demand conditions since 2021, leading to expanded operating margins, but demand softened in H2 2022 and H1 2023, with normalization expected in H2 2024[68][69][70] - The Manufacturing segment was impacted by steel price volatility; elevated prices in 2022 led to increased sales prices, while declining prices in H1 2023 affected comparative operating results[71] Results of Operations – Quarter to Date This section analyzes the company's consolidated and segment-specific financial performance for the three-month period Consolidated Results (Quarter to Date) This section provides an overview of the company's overall financial performance for the quarter Consolidated Operating Results (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | $ change | % change | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Operating Revenues | $337,716 | $400,040 | $(62,324) | (15.6)% | | Operating Expenses | $231,663 | $278,974 | $(47,311) | (17.0)% | | Operating Income | $106,053 | $121,066 | $(15,013) | (12.4)% | | Net Income | $81,969 | $85,937 | $(3,968) | (4.6)% | - Operating revenues decreased primarily due to lower sales volumes in Plastics, decreased fuel recovery revenues in Electric, and decreased steel prices in Manufacturing[74][76] - Nonservice Components of Postretirement Benefits improved by $1.7 million (222.4% increase) due to changes in actuarial assumptions (increased discount rate and expected return on assets)[74][78] - Other Income increased $4.1 million (465.9% increase) due to gains on corporate-owned life insurance policies and investment income on short-term cash equivalents[74][79] Electric Segment Results (Quarter to Date) This section details the financial performance of the Electric segment, including revenues and operating income Electric Segment Operating Results (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | $ change | % change | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Total Operating Revenues | $113,763 | $130,949 | $(17,186) | (13.1)% | | Retail Revenues | $93,715 | $113,603 | $(19,888) | (17.5)% | | Transmission Services Revenues | $14,829 | $11,697 | $3,132 | 26.8% | | Purchased Power | $5,212 | $24,162 | $(18,950) | (78.4)% | | Operating Income | $25,188 | $26,869 | $(1,681) | (6.3)% | Electric Segment Sales and Weather Data (Three Months Ended June 30) | Metric | 2023 | 2022 | Change | % change | | :-------------------------------- | :------- | :------- | :------- | :------- | | Retail kwh Sales (in thousands) | 1,345,830 | 1,286,419 | 59,411 | 4.6% | | Wholesale kwh Sales (in thousands) | 87,032 | 56,514 | 30,518 | 54.0% | | Heating Degree Days (% of normal) | 120.6% | 135.1% | (14.5)% | (10.7)% | | Cooling Degree Days (% of normal) | 215.3% | 129.4% | 85.9% | 66.4% | - Retail revenues decreased $19.9 million, primarily due to a $19.2 million decrease in fuel recovery revenues from lower purchased power costs and volumes, and a $4.1 million additional retail revenue in 2022 from a Minnesota rate case finalization[84] - Purchased power costs decreased $19.0 million due to a 72% decrease in price per kwh (lower market energy costs) and a 23% decrease in volume (Coyote Station outage in 2022, Ashtabula III acquisition in 2023)[85] Manufacturing Segment Results (Quarter to Date) This section analyzes the financial performance of the Manufacturing segment for the three-month period Manufacturing Segment Operating Results (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | $ change | % change | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Operating Revenues | $102,475 | $103,196 | $(721) | (0.7)% | | Cost of Products Sold (excl. depreciation) | $79,154 | $78,515 | $639 | 0.8% | | Operating Income | $8,320 | $10,700 | $(2,380) | (22.2)% | - Operating revenues decreased due to lower steel prices (15% decrease in material costs passed to customers) and decreased sales volumes at T.O. Plastics, partially offset by a 14% increase in sales volumes at BTD[87] - Cost of Products Sold increased due to higher sales volumes, largely offset by decreased material costs, but unfavorable cost absorption from increased labor costs and lower productivity impacted profit margins[88] Plastics Segment Results (Quarter to Date) This section reviews the financial performance of the Plastics segment, including revenues and cost of sales Plastics Segment Operating Results (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | $ change | % change | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Operating Revenues | $121,478 | $165,895 | $(44,417) | (26.8)% | | Cost of Products Sold (excl. depreciation) | $41,504 | $73,951 | $(32,447) | (43.9)% | | Operating Income | $75,035 | $86,561 | $(11,526) | (13.3)% | - Operating revenues decreased due to a 26% decrease in sales volumes, driven by general end market softness and distributors managing inventory levels, while sales prices declined 1% but remained elevated compared to pre-2021 levels[90] - Cost of Products Sold decreased due to lower sales volumes and a 37% decrease in PVC resin and other input material costs, as unique supply/demand conditions subsided[91] Corporate Costs (Quarter to Date) This section outlines the corporate-level operating expenses and overall operating loss for the quarter Corporate Operating Results (Three Months Ended June 30, in thousands) | Metric | 2023 | 2022 | $ change | % change | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Other Operating Expenses | $2,464 | $3,022 | $(558) | (18.5)% | | Operating Loss | $2,490 | $3,064 | $(574) | (18.7)% | Results of Operations – Year to Date This section analyzes the company's consolidated and segment-specific financial performance for the six-month period Consolidated Results (Year to Date) This section provides an overview of the company's overall financial performance for the year-to-date period Consolidated Operating Results (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | $ change | % change | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Operating Revenues | $676,797 | $774,944 | $(98,147) | (12.7)% | | Operating Expenses | $490,074 | $555,578 | $(65,504) | (11.8)% | | Operating Income | $186,723 | $219,366 | $(32,643) | (14.9)% | | Net Income | $144,450 | $157,940 | $(13,490) | (8.5)% | - Operating revenues decreased due to lower sales volumes in Plastics and decreased steel prices in Manufacturing, partially offset by increased sales volumes in Manufacturing and increased retail and transmission revenues in Electric[93] - Nonservice Components of Postretirement Benefits improved by $4.1 million (526.0% increase) due to changes in actuarial assumptions (increased discount rate and expected return on assets)[96] - Other Income increased $6.0 million (953.7% increase) due to gains on corporate-owned life insurance policies and investment income on short-term cash equivalents[97] Electric Segment Results (Year to Date) This section details the financial performance of the Electric segment for the six-month period Electric Segment Operating Results (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | $ change | % change | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Total Operating Revenues | $265,671 | $261,365 | $4,306 | 1.6% | | Retail Revenues | $230,168 | $227,242 | $2,926 | 1.3% | | Transmission Services Revenues | $26,936 | $24,254 | $2,682 | 11.1% | | Operating Income | $55,284 | $54,810 | $474 | 0.9% | Electric Segment Sales and Weather Data (Six Months Ended June 30) | Metric | 2023 | 2022 | Change | % change | | :-------------------------------- | :------- | :------- | :------- | :------- | | Retail kwh Sales (in thousands) | 2,981,076 | 2,801,716 | 179,360 | 6.4% | | Wholesale kwh Sales (in thousands) | 148,886 | 122,701 | 26,185 | 21.3% | | Heating Degree Days (% of normal) | 109.9% | 114.9% | (5.0)% | (4.4)% | | Cooling Degree Days (% of normal) | 215.3% | 129.4% | 85.9% | 66.4% | - Retail revenues increased $2.9 million due to a $4.3 million increase from commercial and industrial sales volumes and a $3.4 million increase in renewable resource rider revenue, partially offset by decreased fuel recovery revenues[101][103] - Operating and Maintenance Expense increased $4.4 million due to higher labor costs, maintenance at Big Stone Plant and wind farms (including Ashtabula III), increased vegetative management, and MISO tariff expenses[103] Manufacturing Segment Results (Year to Date) This section analyzes the financial performance of the Manufacturing segment for the six-month period Manufacturing Segment Operating Results (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | $ change | % change | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Operating Revenues | $209,257 | $208,154 | $1,103 | 0.5% | | Cost of Products Sold (excl. depreciation) | $161,381 | $164,676 | $(3,295) | (2.0)% | | Operating Income | $17,829 | $16,637 | $1,192 | 7.2% | - Operating revenues increased due to a 17% increase in sales volumes at BTD and sales price increases, largely offset by an 18% decrease in material costs (lower steel prices)[104] - Cost of Products Sold decreased due to lower material costs at BTD, but increased sales volumes and unfavorable cost absorption (higher labor costs, lower productivity) partially offset this[105] Plastics Segment Results (Year to Date) This section reviews the financial performance of the Plastics segment for the six-month period Plastics Segment Operating Results (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | $ change | % change | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Operating Revenues | $201,869 | $305,425 | $(103,556) | (33.9)% | | Cost of Products Sold (excl. depreciation) | $71,646 | $139,549 | $(67,903) | (48.7)% | | Operating Income | $120,718 | $155,422 | $(34,704) | (22.3)% | - Operating revenues decreased due to a 36% decrease in sales volumes, attributed to distributor inventory management amid uncertain market conditions, partially offset by a 3% increase in sales price per pound[107] - Cost of Products Sold decreased due to lower sales volumes and a 30% decrease in PVC resin and other input costs[108] Corporate Costs (Year to Date) This section outlines the corporate-level operating expenses and overall operating loss for the year-to-date period Corporate Operating Results (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | $ change | % change | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Other Operating Expenses | $7,056 | $7,417 | $(361) | (4.9)% | | Operating Loss | $7,108 | $7,503 | $(395) | (5.3)% | Regulatory Matters This section discusses key regulatory developments impacting the company's operations and financial outlook Rate Riders This section details approved and requested rate riders for cost recovery in various jurisdictions - Multiple rate riders were approved or requested across Minnesota, North Dakota, and South Dakota for cost recovery related to renewables (Hoot Lake Solar, Ashtabula III, Merricourt), energy conservation, and transmission projects[111] Selected Approved Rate Riders (in millions) | Recovery Mechanism | Jurisdiction | Amount | Effective Date | Description | | :----------------- | :----------- | :----- | :------------- | :---------- | | RRR - 2022 | MN | $17.5 | 07/01/23 | Recovery of Hoot Lake Solar, Ashtabula III costs, and PTC true-up | | CIP - 2022 | MN | $10.8 | 10/01/22 | Recovery of energy conservation costs and demand side management incentive | | RRR - 2023 | ND | $12.2 | 05/01/23 | Recovery of Merricourt, Ashtabula III, and other costs | | TCR - 2022 | ND | $7.5 | 01/01/23 | Recovery of transmission project costs | | PIR - 2022 | SD | $3.0 | 09/01/22 | Recovery of Ashtabula III, Merricourt, Astoria Station, Advanced Grid Infrastructure costs | Integrated Resource Plan This section outlines OTP's long-term energy generation and resource planning, including new projects and potential plant withdrawals - OTP's supplemental IRP proposes adding on-site liquefied natural gas fuel storage at Astoria Station (2026), approximately 200 MW of solar generation (2027-2028), and initial steps for 200 MW of wind generation (2029)[113] - The IRP includes a potential withdrawal from Coyote Station if major non-routine capital investment is required, with an estimated cost of $68.5 million by the end of 2028, subject to regulatory approval[113][114] Environmental Regulation This section discusses proposed EPA regulations on greenhouse gas emissions and their potential impact on power plants - EPA proposed new GHG regulations for fossil fuel-based EGUs, potentially requiring carbon capture and sequestration (CCS) for coal plants operating past 2039 (90% capture by 2030) or co-firing 40% natural gas for those retiring between 2032-2039[115][116][117] - Coyote Station and Big Stone Plant, the company's co-owned coal-fired power plants, would be within the scope of these proposed regulations, while combustion turbines are not expected to be impacted[120] Liquidity This section assesses the company's ability to meet short-term obligations, including cash, credit lines, and capital access Liquidity Overview This section provides a general assessment of the company's liquidity position and compliance with covenants - The company's liquidity is strong, supported by cash, operating cash flows, credit lines, and capital market access due to investment-grade credit ratings[121] - As of June 30, 2023, the company was in compliance with all financial covenants under its debt instruments[121] Lines of Credit Status (June 30, 2023, in thousands) | Credit Agreement | Borrowing Limit | Amount Outstanding | Letters of Credit | Amount Available | | :---------------- | :-------------- | :----------------- | :---------------- | :--------------- | | OTC | $170,000 | $— | $— | $170,000 | | OTP | $170,000 | $50,197 | $9,573 | $110,230 | | Total | $340,000 | $50,197 | $9,573 | $280,230 | Cash Flows This section summarizes cash generated and used by operating, investing, and financing activities Cash Flow Summary (Six Months Ended June 30, in thousands) | Activity | 2023 | 2022 | $ change | % change | | :------------------------------------ | :------- | :------- | :--------- | :--------- | | Net Cash Provided by Operating Activities | $184,497 | $175,630 | $8,867 | 5.0% | | Net Cash Used in Investing Activities | $(153,625) | $(73,895) | $(79,730) | 107.9% | | Net Cash Provided by (Used in) Financing Activities | $710 | $(41,283) | $41,993 | (101.7)% | - Operating cash flow increase was driven by no pension plan contribution in 2023 (vs. $20.0 million in 2022) and increased regulatory liabilities[123] - Investing cash outflow increased due to $50.6 million for Ashtabula III wind farm acquisition and $14.0 million for Manufacturing and Plastics segment equipment and facility expansion[124] Capital Requirements This section outlines anticipated capital expenditures and projected rate base growth for the Electric segment Total Capital Expenditures (in millions) | Year | Electric Segment | Manufacturing and Plastics Segments | Total Capital Expenditures | | :--- | :--------------- | :-------------------------------- | :------------------------- | | 2022 (Actual) | $148 | $23 | $171 | | 2023 (Anticipated) | $214 | $48 | $262 | | 2024 (Anticipated) | $247 | $53 | $300 | | 2025 (Anticipated) | $208 | $29 | $237 | | 2026 (Anticipated) | $239 | $25 | $264 | | 2027 (Anticipated) | $194 | $24 | $218 | | Total 2023-2027 | $1,102 | $179 | $1,281 | Electric Utility Average Rate Base and Growth (in millions) | Year | Average Rate Base | Annual Rate Base Growth | | :--- | :---------------- | :---------------------- | | 2022 | $1,624 | 3.1% | | 2023 | $1,748 | 7.6% | | 2024 | $1,851 | 5.9% | | 2025 | $1,990 | 7.5% | | 2026 | $2,111 | 6.1% | | 2027 | $2,230 | 5.6% | Contractual Obligations This section details the company's commitments, including debt, energy purchases, and postretirement benefits - Contractual obligations include principal and interest on debt, coal, energy, and capacity commitments, postretirement benefits, and land easements[129] - New land easements from the Ashtabula III wind farm purchase amount to $4.1 million in remaining payments, extending to 2034[130][131] Common Stock Dividends This section reports common stock dividends paid and factors influencing future dividend policy - Common stock dividends paid totaled $36.5 million, or $0.875 per share, in the first six months of 2023[132] - Future dividend payments are subject to financial condition, earnings, cash flows, capital expenditures, and statutory/regulatory/financing restrictions[132] Capital Resources This section describes the company's sources of funding, including cash flows, credit lines, and capital markets - Financial flexibility is provided by operating cash flows, unused credit lines, and capital market access, supported by strong financial coverages and investment-grade credit ratings[133] - Debt financing will be required from 2023-2028 to refinance maturing debt and fund capital investments[133] Registration Statements This section details active shelf registration statements for future equity, debt, and share purchase plans - A shelf registration statement allows for future offerings of equity, debt, or other securities (expires May 2024)[134] - A second registration statement for up to 1,500,000 common shares under an Automatic Dividend Reinvestment and Share Purchase Plan is active, with 1,194,682 shares available as of June 30, 2023 (expires May 2024)[135] Short-Term Debt This section outlines the company's short-term credit agreements, borrowing limits, and outstanding amounts Short-Term Credit Agreement Summary (June 30, 2023, in thousands) | Metric | OTC Credit Agreement | OTP Credit Agreement | | :-------------------------------- | :------------------- | :------------------- | | Borrowing Limit | $170,000 | $170,000 | | Amount Outstanding | $— | $50,197 | | Amount Available | $170,000 | $110,230 | | Interest Rate | 6.64% | 6.48% | | Maturity Date | October 29, 2027 | October 29, 2027 | - Both OTC and OTP credit agreements include accordion features, allowing borrowing limits to increase to $290 million and $250 million, respectively[122][136] Long-Term Debt This section describes the company's long-term debt, including principal outstanding and maturity profiles - As of June 30, 2023, $827.0 million in principal was outstanding under long-term debt, consisting of unsecured borrowings at fixed rates with maturities from 2026 to 2052[137] Financial Covenants This section details the company's compliance with financial covenants under its debt agreements Financial Covenant Compliance (June 30, 2023) | Covenant | OTC Requirement | OTC Actual | OTP Requirement | OTP Actual | | :-------------------------------- | :-------------- | :--------- | :-------------- | :--------- | | Max Debt to Total Capitalization | 0.60 to 1.00 | 0.40 to 1.00 | 0.60 to 1.00 | 0.46 to 1.00 | | Min Interest & Dividend Coverage | 1.50 to 1.00 | 10.18 to 1.00 | 1.50 to 1.00 | 3.65 to 1.00 | | Max Priority Indebtedness | 10% of Total Cap | None | 20% of Total Cap | None | Critical Accounting Policies Involving Significant Estimates This section confirms no material changes to critical accounting policies and estimates from the prior annual report - No material changes to critical accounting policies and estimates from the Annual Report on Form 10-K for the year ended December 31, 2022[140] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section confirms no material changes in market risk from the prior annual report on Form 10-K - No material changes in market risk from the Annual Report on Form 10-K for the year ended December 31, 2022[141] ITEM 4. Controls and Procedures Management evaluated disclosure controls and procedures as effective, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2023[142] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[143] PART II. Other Information ITEM 1. Legal Proceedings The company is involved in various legal and regulatory proceedings, with material details in Note 9 and MD&A - The company is party to litigation and regulatory matters in the normal course of business, recording liabilities when a loss is probable and estimable[144] - Material proceedings are detailed in Note 9 (Commitments and Contingencies) and the MD&A (Regulatory Matters)[144] ITEM 1A. Risk Factors This section confirms no material changes from the risk factors disclosed in the prior annual report on Form 10-K - No material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[145] ITEM 5. Other Information No directors or executive officers adopted, amended, or terminated Rule 10b5-1 trading plans during the quarter - No directors or executive officers adopted, amended, or terminated Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2023[146] ITEM 6. Exhibits This section lists exhibits filed with the report, including stock incentive plans, certifications, and XBRL documents - Exhibits include the 2023 Stock Incentive Plan, Form of 2023 Restricted Stock Award Agreement for Directors, Executive Annual Incentive Plan, CEO/CFO certifications (Sarbanes-Oxley Act), and Inline XBRL Taxonomy Extension documents[149] Signatures This section confirms the report's authorization and signing by the Chief Financial Officer on August 2, 2023 - The report was duly authorized and signed by Kevin G. Moug, Chief Financial Officer and Senior Vice President, on behalf of Otter Tail Corporation on August 2, 2023[151]