Otter Tail (OTTR) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents Otter Tail Corporation's unaudited consolidated financial statements and accompanying notes for the periods ended June 30, 2021 Consolidated Balance Sheets Total assets increased to $2.67 billion as of June 30, 2021, from $2.58 billion at year-end 2020, with shareholders' equity growing to $915.1 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $304,901 | $234,832 | | Total Noncurrent Assets | $2,366,686 | $2,343,522 | | Total Assets | $2,671,587 | $2,578,354 | | Total Current Liabilities | $483,484 | $436,786 | | Total Noncurrent Liabilities | $648,440 | $646,170 | | Total Shareholders' Equity | $915,123 | $870,966 | | Total Liabilities and Shareholders' Equity | $2,671,587 | $2,578,354 | Consolidated Statements of Income Net income for the six months ended June 30, 2021, rose to $72.4 million from $41.2 million year-over-year, driven by increased operating revenues Consolidated Income Statement Highlights (in thousands, except per-share amounts) | Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenues | $285,608 | $192,756 | $547,318 | $427,503 | | Operating Income | $59,822 | $27,909 | $104,021 | $67,198 | | Net Income | $42,069 | $16,981 | $72,398 | $41,249 | | Diluted EPS | $1.01 | $0.42 | $1.73 | $1.02 | Consolidated Statements of Cash Flows Net cash from operating activities was $68.6 million for the six months ended June 30, 2021, with net cash used in investing activities decreasing to $76.4 million Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $68,574 | $73,901 | | Net Cash Used in Investing Activities | ($76,403) | ($121,005) | | Net Cash Provided by Financing Activities | $8,146 | $65,417 | | Net Change in Cash and Cash Equivalents | $317 | $18,313 | Condensed Notes to Consolidated Financial Statements The notes detail accounting policies and segment performance, highlighting significant net income growth in the Plastics and Manufacturing segments - The company is a diverse business with three segments: Electric (regulated utility), Manufacturing (metal fabrication, plastic products), and Plastics (PVC pipe)[16] Net Income by Segment - Six Months Ended June 30 (in thousands) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | Electric | $33,019 | $29,488 | | Manufacturing | $11,089 | $5,165 | | Plastics | $31,692 | $10,579 | | Corporate (Loss) | ($3,402) | ($3,983) | | Total Net Income | $72,398 | $41,249 | - On June 10, 2021, Otter Tail Power Company (OTP) entered an agreement to issue $230 million in senior unsecured notes in two tranches ($140 million in Nov 2021, $90 million in May 2022) to refinance existing debt[32] - The company is subject to a FERC ROE complaint, with a recorded refund liability of $3.5 million as of June 30, 2021, pending judicial review[41] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant financial performance improvement in Q2 and H1 2021, driven by strong results in the Manufacturing and Plastics segments, alongside the company's strong liquidity and debt covenant compliance - The impact of COVID-19 began to ease in Q1 2021, with the Manufacturing segment recovering and the Plastics segment seeing increased demand and margins, though uncertainty remains[70][71] - Supply shortages of steel and resin have led to significantly increased prices, with higher resin prices expanding gross profit margins in the Plastics segment, a dynamic not expected to persist at current levels into 2022[72][74] Results of Operations – Quarter to Date For Q2 2021, consolidated net income surged 147.7% to $42.1 million, driven by a 48.2% increase in operating revenues from the Plastics and Manufacturing segments Consolidated Results - Q2 2021 vs Q2 2020 (in thousands) | Metric | 2021 | 2020 | $ change | % change | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | $285,608 | $192,756 | $92,852 | 48.2% | | Operating Income | $59,822 | $27,909 | $31,913 | 114.3% | | Net Income | $42,069 | $16,981 | $25,088 | 147.7% | - Plastics segment operating revenues increased 95.5% in Q2 2021 due to a 73.9% increase in PVC pipe price per pound and a 12.4% increase in sales volumes, leading to a 330.6% increase in operating income[94] - Manufacturing segment operating revenues grew 83.4% in Q2 2021, driven by a 52.4% increase in sales volumes at BTD and the pass-through of $12.0 million in higher material costs[90] Results of Operations – Year to Date For the first six months of 2021, consolidated net income increased 75.5% to $72.4 million, primarily driven by the Plastics segment's operating income nearly tripling Consolidated Results - Six Months 2021 vs 2020 (in thousands) | Metric | 2021 | 2020 | $ change | % change | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | $547,318 | $427,503 | $119,815 | 28.0% | | Operating Income | $104,021 | $67,198 | $36,823 | 54.8% | | Net Income | $72,398 | $41,249 | $31,149 | 75.5% | - Plastics segment YTD operating revenues increased 65.5% due to a 54.8% increase in PVC pipe price per pound and a 6.9% increase in sales volumes, resulting in a 196.2% increase in operating income[115] - Manufacturing segment YTD operating revenues increased 39.9%, driven by a 21.7% increase in sales volumes and passing through $16.4 million in higher material costs, leading to a 108.0% increase in operating income[111] Regulatory Rate Matters The company is actively managing several regulatory filings, including a Minnesota rate case where OTP revised its requested annual revenue increase to $8.2 million - In its Minnesota rate case, OTP lowered its requested annual revenue increase from $14.5 million to $8.2 million, primarily due to lower depreciation expense and reduced postretirement benefit costs[119][121] - An interim annual rate increase of $6.9 million was approved in Minnesota, effective January 1, 2021[120] Liquidity and Capital Resources The company maintains a strong financial condition with $199.4 million available under its $340 million credit facilities and full compliance with all debt covenants Credit Facility Status as of June 30, 2021 (in thousands) | Facility | Line Limit | Amount Outstanding | Amount Available | | :--- | :--- | :--- | :--- | | OTC Credit Agreement | $170,000 | $59,245 | $110,755 | | OTP Credit Agreement | $170,000 | $68,712 | $88,617 | | Total | $340,000 | $127,957 | $199,372 | - Net cash from operating activities decreased by $5.3 million for H1 2021 compared to H1 2020, as an increase in net income was offset by higher working capital requirements in the Manufacturing and Plastics segments[128] - As of June 30, 2021, the company was in compliance with all financial covenants, including its Debt to Total Capitalization ratio (0.49 vs. 0.60 limit for OTC; 0.48 vs. 0.60 limit for OTP)[141][142] Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes in its market risk from the disclosures provided in its Annual Report on Form 10-K for the year ended December 31, 2020 - There have been no material changes in market risk since the year-end 2020 Form 10-K[145] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[146] - No material changes were made to internal control over financial reporting during the quarter ended June 30, 2021[147] PART II - OTHER INFORMATION Legal Proceedings The company is involved in various legal and regulatory proceedings in the ordinary course of business, with material matters described elsewhere in the report - The company is subject to various legal and regulatory proceedings in the ordinary course of business, with material matters described elsewhere in the report[148] Risk Factors There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - There have been no material changes to the risk factors disclosed in the 2020 Annual Report on Form 10-K[149] Exhibits This section lists the exhibits filed with the report, including a Note Purchase Agreement and certifications by the CEO and CFO - The report includes exhibits such as a Note Purchase Agreement dated June 10, 2021, and CEO/CFO certifications[151]