Otter Tail (OTTR) - 2022 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Otter Tail Corporation's Q1 2022 net income surged to $72.0 million, with diluted EPS at $1.72, primarily due to strong Plastics segment performance Consolidated Financial Highlights (Q1 2022 vs Q1 2021) | Financial Metric (in thousands, except per-share data) | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Income Statement | | | | Total Operating Revenues | $374,904 | $261,710 | | Operating Income | $98,299 | $44,199 | | Net Income | $72,003 | $30,329 | | Diluted Earnings Per Share | $1.72 | $0.73 | | Balance Sheet (as of period end) | | | | Total Assets | $2,791,741 | $2,754,830 (as of Dec 31, 2021) | | Total Shareholders' Equity | $1,047,138 | $990,777 (as of Dec 31, 2021) | | Cash Flow Statement | | | | Net Cash Provided by Operating Activities | $45,416 | $15,270 | Condensed Notes to Consolidated Financial Statements Notes detail segment performance, especially Plastics' strong growth, regulatory contingencies, and debt compliance Segment Net Income (in thousands) | Segment | Q1 2022 Net Income | Q1 2021 Net Income | | :--- | :--- | :--- | | Electric | $19,233 | $17,587 | | Manufacturing | $4,084 | $5,385 | | Plastics | $50,846 | $9,147 | | Corporate (Loss) | ($2,160) | ($1,790) | | Total | $72,003 | $30,329 | - The company is subject to a FERC proceeding regarding transmission Return on Equity (ROE), with a recorded refund liability of $2.4 million as of March 31, 2022[37] - The Regional Haze Rule (RHR) could require significant emission control investments or lead to the early retirement of the Coyote Station coal-fired plant, with potential material financial effects[38][41] - A discretionary contribution of $20.0 million was made to the pension plan in February 2022[35] - As of March 31, 2022, both OTC and its subsidiary OTP were in compliance with all financial covenants required by their debt agreements[32] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q1 2022 performance to the Plastics segment, maintaining liquidity and advancing renewable energy investments Consolidated Results Consolidated operating revenues increased 43.3% to $374.9 million, with operating income up 122.4%, driven by higher segment prices Consolidated Results Summary (in thousands) | Metric | Q1 2022 | Q1 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | $374,904 | $261,710 | $113,194 | 43.3% | | Operating Income | $98,299 | $44,199 | $54,100 | 122.4% | | Net Income | $72,003 | $30,329 | $41,674 | 137.4% | - The increase in the effective tax rate from 14.8% to 19.7% was primarily driven by higher income before taxes, which diluted the impact of tax credits and other permanent differences[79] Segment Results The Plastics segment's operating income surged 447.1% due to price increases, while Electric grew 4.7%, and Manufacturing declined 21.3% Electric Segment Operating Income (in thousands) | Metric | Q1 2022 | Q1 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenues | $130,416 | $123,699 | $6,717 | 5.4% | | Operating Income | $27,942 | $26,676 | $1,266 | 4.7% | Manufacturing Segment Operating Income (in thousands) | Metric | Q1 2022 | Q1 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | $104,957 | $75,825 | $29,132 | 38.4% | | Operating Income | $5,935 | $7,545 | ($1,610) | (21.3)% | Plastics Segment Operating Income (in thousands) | Metric | Q1 2022 | Q1 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | $139,531 | $62,186 | $77,345 | 124.4% | | Operating Income | $68,862 | $12,586 | $56,276 | 447.1% | Regulatory Rate Matters Regulatory proceedings include the Minnesota Rate Case establishing a 9.48% ROE, and the IRP proposing renewable energy and Coyote Station withdrawal - The MPUC issued its order on the Minnesota Rate Case, authorizing a 9.48% return on equity on a 52.5% equity ratio and approving a revenue decoupling mechanism[101] - The 2022 Integrated Resource Plan (IRP) outlines a strategy to add significant renewable generation (150 MW solar and 100 MW wind) and to begin the process of withdrawing from the company's 35% ownership in the coal-fired Coyote Station by year-end 2028[104][105] Liquidity and Capital Resources The company maintains strong liquidity with operating cash flow increasing to $45.4 million and $234.4 million available from credit facilities Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $45,416 | $15,270 | | Net Cash Used in Investing Activities | ($31,449) | ($49,020) | | Net Cash (Used in) Provided by Financing Activities | ($14,133) | $33,799 | - As of March 31, 2022, the company had a total of $340 million in credit lines, with $97.8 million outstanding, leaving $234.4 million available after accounting for letters of credit[108] - Dividends of $0.4125 per share, totaling $17.2 million, were paid in the first three months of 2022[116] Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk have occurred since the disclosures in the 2021 Annual Report on Form 10-K - There have been no material changes in market risk since the last Annual Report on Form 10-K[127] Controls and Procedures Management concluded disclosure controls were effective as of March 31, 2022, with no material changes to internal controls - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[128] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[129] PART II - OTHER INFORMATION Legal Proceedings The company is involved in various legal and regulatory proceedings, recording liabilities for probable losses as detailed in Note 9 - The company is subject to various legal and regulatory proceedings in the ordinary course of business, with liabilities recorded when a loss is probable and estimable. Material proceedings are detailed in Note 9[130] Risk Factors No material changes have been made to the risk factors disclosed in the 2021 Annual Report on Form 10-K - No material changes have been made to the risk factors disclosed in the 2021 Annual Report on Form 10-K[131] Exhibits Exhibits filed with the Form 10-Q include CEO and CFO certifications and Inline XBRL financial data files - Exhibits filed with the report include CEO and CFO certifications pursuant to the Sarbanes-Oxley Act and Inline XBRL data files[133]